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STOCK EXCHANGE PRACTICES HEARINGS BEFOBB A SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY UNITED STATES SENATE SEVENTY-SECOND CONGRESS SECOND SESSION ON S. Res. 84 and S. Res. 239 RESOLUTIONS TO TH OROU GH LY IN VE STIG ATE PRACTICES OF STOCK E XCH AN GES W ITH RESPECT TO THE B U Y IN G AN D SELLING AND THE B ORRO W IN G AND L E N D IN G OF LISTE D SECURITIES THE VALUES OF SUCH SECURITIES AN D TH E EFFECTS OF SUCH PRACTICES PART 6 (NATIONAL CITY; CONTINUATION OF RICHARD WHITNEY TESTIMONY) FE B R U A R Y 21, 22, 23, 24, 27, 28, AND M ARCH 1 AN D 2, 1933 Printed for the use of the Committee on Banking and Currency U N IT E D S T A T E S 119862 G O V E R N M E N T P R I N T I N G O F F IC E W A S H IN G T O N : 193 3 / STOCK EXCHANGE PRACTICES HEARINGS BEFORE A SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY UNITED STATES SENATE SEVENTY-SECOND CONGRESS SECOND SESSION ON S. Res. 84 and S. Res. 239 RESOLUTIONS TO TH OROU GH LY IN VE STIG ATE PRACTICES OF STOCK EXCH AN GES W ITH RESPECT TO THE B U Y IN G AN D SELLING AND TH E B ORRO W IN G AND L E N D IN G OF LISTE D SECURITIES THE VALUES OF SUCH SECURITIES AN D THE EFFECTS OF SUCH PRACTICES PART 6 (NATIONAL CITY; CONTINUATION OF RICHARD WHITNEY TESTIMONY) F E B R U A R Y 21, 22, 23, 24, 27, 28, AND M ARCH 1 AND 2, 1933 Printed for the use of the Committee on Banking and Currency U N IT E D S T A T E S G O V E R N M E N T P R IN T IN G O F F IC E 119852 W A S H IN G T O N : 1933 C O M M IT T E E ON B AN K IN G A N D C U RR E N C Y P E T E R N O R B E C K , South Dakota, Chairman S M I T H W . B R O O K H A R T , Iowa. P H IL L IP S L E E G O L D S B O R O U G H , M aryland. J O H N G . T O W N S E N D , Ja., Delaware. F R E D E R I C C . W A L C O T T , Connecticut. J O H N J. B L A I N E , Wisconsin. R O B E R T D . C A R E Y , W yom ing. J A M E S E . W A T S O N , Indiana. J A M E S C O U ZE N S, Michigan. F R E D E R I C K S T E IW E R , Oregon. J u lia n D U N C A N U . F L E T C H E R , Florida. C A R T E R G L A SS, Virginia. R O B E R T F. W A G N E R , N ew Y ork. A L B E N W . B A R K L E Y , K entucky. R O B E R T J. B U L K L E Y , Ohio. T H O M A S P. G O R E , Oklahoma. E D W A R D P . C O S T IG A N , Colorado. C O R D E L L H U L L , Tennessee. R O B E R T R . R E Y N O L D S , N orth Carolina. W . B l o u n t , Clerk S u b c o m m itte e o n S e n a t e R e s o l u t i o n s 8 4 a n d 2 3 9 P E T E R N O R B E C K , South Dakota, Chairman J O H N O . T O W N S E N D , J r ., Delaware. J O H N J. B L A IN E , W isconsin. J A M E S C O U Z E N S , M ichigan. II D U N C A N U . F L E T C H E R , Florida. C A R T E R G LA S S , Virginia. E D W A R D P . C O S T IG A N , Colorado. CONTENTS Testimony of— Baker, Hugh B., president National City Co., New York City_________ Baker, Hugh B., president National City Co., New York City (re sum ed)_____________________________ 1911, 1926, 1965, 2006, 2047, 2060, Baldwin, Samuel W ., treasurer National City Co_____________________ Barrett, Edward F., a vice president, National City Co_______________ Brown, Edgar D., Pottsville, Pa_________________________________________ Byrnes, Ronald M., late a vice president of National City Co-------------Byrnes, Ronald M., late a vice president of National City Co. (re sumed) _________________________________________________________________ Calvin, C. W ., memorandum on the financing of the Peruvian Gov ernment__________________________________________________________________ Covington, J. H ., Washington, D.C., counsel for National City Bank, statement o f_____________________________________________________________ Davison, George W ., Greenwich, Conn., officer of Central Honover Bank & Trust Co., New York_________________________________________ Law, Harry S., secretary, National City Co____________________________ Law, Harry S., secretary, National City Co. (resum ed)--------------------Lehmann, Frederick W ., Solicitor General of the United States, opinion of_______________________________________________________________ Meehan, M. J., stock broker, New York City----------------------------------------Mitchell, Charles E., chairman of the board, National City Bank of New York and National City Co______________________________________ Mitchell, Charles E., chairman of the board, National City Bank of New York and National City Co. (resum ed)_________________________ 1827, 1887, 1982, 2026, 2044, Mitchell, W illiam D., Attorney General of the United States, letter of_ Rentschler, Gordon S., president National City Bank, New York City_ Ripley, Joseph P., a vice president of the National City Co__________ Roberts, Grace Van B., Highland, Ulster County, N. Y., additional statement of_____________________________________________________________ Robinson, Edwin S., Brooklyn, N.Y., formerly an employee of J. R. Schmeltzer & Co., brokers_____________________________________________ Russell, Stanley A., a vice president of the National City Co_________ Schoepperle, Victor, vice president, National City Co_________________ Schoepperle, Victor, vice president, National City Co. (resum ed)— Sylvester, Horace C., a vice president of the National City Co________ Train, George F., foreign department, National City Co______________ Train, George F., foreign department, National City Co. (resum ed). Whitney, Richard, president New York Stock Exchange______________ Whitney, Richard, president New York Stock Exchange (resum ed)— m Page 1889 2080 2141 2196 2170 2119 2298 2103 2043 1759 1900 2147 2030 2343 1762 1780, 2265 2044 1867 2324 1821 1998 2269 2059 2088 2183 2139 2151 2202 2227 STOCK EXCHANGE PRACTICES TUESDAY, FEBRUARY 21, 1933 U nited S tates S enate , S ubcommittee of C ommittee on B anking and C urrency, Washington, D. G. The subcommittee met, pursuant to adjournment on Friday, Febru ary 17,1933, at 10 a. m., in room 301, Senate Office Building, Senator Peter Norbeck presiding. < Present: Senators Norbeck (chairman), Couzens, Townsend, Glass, and Costigan. Present also: Senators Brookhart, Goldsborough, Walcott, Watson, Barkley, Bulkley, and Reynolds. Further present: Ferdinand Pecora, special counsel to the com mittee; Julius Silver and David Saperstein, associate counsel to the committee. The Chairm an. The subcommittee will come to order. Mr. Pecora, call your first witness. Mr. Pecora. W e will ask Mr. George W . Davison to come forward. Mr. Chairman, he is called as a witness in connection with the Insull matter and is anxious to get away. The Chairm an. Please stand, hold up your right hand, and be sworn: You solemnly swear that you will tell the truth, the whole truth, and nothing but the truth regarding the matter now under investigation by this committee, so help you God. Mr. Davison. I do. TESTIMONY OF GEORGE W. DAVISON, GREENWICH, CONN., AN OFFICER OF THE CENTRAL HANOVER BANK & TRUST CO., OF NEW YORK CITY Mr. Pecora. Mr. Davison, will you kindly give your full name, ad dress, and business? Mr. Davison. M y name is George W . Davison. M y residence is Greenwich, Conn. I am interested in banking and am an officer of the Central Hanover Bank & Trust Co. Senator Couzens. H ow long have you been in the banking business? Mr. Davison. Not quite 21 years. It will be 21 years in April. Senator Couzens. Are you also a lawyer as well as a banker ? Mr. Davison. Yes, I was. Senator Couzens. You were? Mr. Davison. I am. Mr. P ecora. W hat office do you hold in the Central Hanover Bank & Trust Co. ? 1759 1760 STOCK EXCHANGE PEACTICES Mr. Davison. Chairman of the board. Mr. Pecora. H ow long have you been identified with that bank in an official capacity? Mr. Davison. Twenty-one years on April 2. Mr. Pecora. Did your bank have a number of loans outstanding in favor of Insull Utility Investments, Inc., Corporation Securities Co. of Chicago, and other companies identified with the so-called Insull group of public-utility companies? Mr. Davison. W e had a loan to Insull Utilities and a loan to Corporation Securities Co., and one to National Public Service. M r. Pecora. W hat was the aggregate amount of those loans in December 1931? Mr. Davison. They were $12,500,000. Mr. Peoora. Were any of those loans reduced in that month? Mr. Davison. They were. M r. Pecora. B y what amount or amounts, and when? M r. Davison. The Insull Utilities loan was reduced $500,000, I think on the 24th of December, and the Corporation Securities loan was reduced $1,000,000,1 think, on the 28th of December. M r. P ecora. W hat was the aggregate amount of those loans? Mr. Davison. Each was for $5,000,000. Mr. P ecora. And at times subsequent to the making of the loans did your bank call upon the borrowers for additional collateral to secure the loans? Mr. Davison. W e did. Mr. P ecora. And received such collateral? Mr. D a v is o n . They d id . Mr. Pecora. And the collateral consisted for the most part of securities issued by one or more of the Insull Cos. ? Mr. Davison. The collateral were securities o f operating com panies, Commonwealth Edison, People’s Gas, Public Service of Northern Illinois, and some M id-W est utilities. Mr. Pecora. You know, do you not, that all those companies are in the so-called Insull group? Mr. Davison. Yes. Mr. P ecora. Between June and December of 1931 were you famil iar with certain debenture obligations which were then outstanding against Insull Utility Investments, Inc., and Corporation Securi ties Co. of Chicago? Mr. Davison. I was not. M r. P ecora. A t no time during that period were you familiar with those debenture obligations? Mr. Davison. At no time during that time. M r. Pecora. Did you have any conversations with Mr. Owen D . Young with regard to those loans at any time prior to the 1st o f January 1932? Mr. D avison. No. Mr. Pecora. Did you have any communication with him on the subject? Mr. D avison. No. M r. P ecora. D o you know whether any other officer of your bank had such conversation or communication? Mr. Davison. I am rather certain not, but am not positive. STOCK EXCHANGE PEACTICES 1761 Mr. Pecora. Did you have any such conversation or communica tion between the 1st of January and the 16th of April, 1932? Mr. D a v i s o n . Yes. Mr. Pecora. W ith whom? M r. Davison. M r. Young. Mr. P ecora. W hat was the general substance of the conversations ? Mr. Davison. Some time in February Mr. Young came in and talked about the Insull situation, and I think he asked our coopera tion. A n agreement had been made in December about not calling for additional collateral, but it had not been signed, I think, by anybody. Mr. P ecora. That is the so-called “ standstill agreement” ? Mr. D avison. It has been referred to in that way. W e were claiming that we had the right to go ahead, and I think that was the subject of Mr. Young’s conversation, that we should not do it, and that the Insull situation probably was not hopeless. Mr. P ecora. W ell, as a result of that conversation did your bank stand still? Mr. Davison. W e did. Mr. P ecora. And when did you first learn of those debenture obligations that I have referred to ? Mr. Davison. I think it was the end of February, 1932. Mr. P e c o r a . But that was not your first knowledge of these loans which your bank had made ? Mr. Davison. Oh, no. Mr. P e o o r a . Did you consult the files of your bank with regard to those loans at any time prior to February, 1932 ? Mr. Davison. I did not; no. Mr. P ecora. Did you at any time consult the files of your bank with regard to those loans ? Mr. Davison. N o. Mr. P ecora. Do you know now that among the files of your bank with regard to the loans there was a memorandum relating to those debenture obligations? Mr. D a v is o n . I do not. Mr. Pecora. Did you, at the outset, take any part in the confer ences that led to the making of the loans to those Insull companies originally ? Mr. Davison. Yes. Mr. P ecora. Did you take part in any subsequent conferences which led to the making of payments on account of those loans? Mr. Davison. Yes. Mr. P ecora. And which also led to the making of demand for additional collateral to secure the loans ? Mr. Davison. N o ; I did not have anything to do with that. Mr. Pecora. And at no time prior to February, 1932, did you learn of these debenture obligations? Mr. D avison. That is correct. Mr. Pecora. That is all. The C hairm an. Mr. Davison, you will be excused. Mr. Davison. Thank you. (Thereupon the witness was excused.) 1762 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Mr. Chairman, I now ask that Mr. Charles E . Mitchell be called. The C h a ir m a n . Y o u will stand, hold up your right hand and be sworn, Mr. Mitchell. Mr. P e c o r a . Mr. Chairman, Mr. Mitchell is simply recalled for further examination. H e has already been sworn in these hearings. The C h a ir m a n . Very well. TESTIMONY RESUMED OF CHARLES E. MITCHELL, CHAIRMAN OF THE BOARD, NATIONAL CITY BANK OF NEW YORE AND NATIONAL CITY CO. (The witness was sworn on his prior appearance before the committee.) Mr. P e c o r a . Mr. Mitchell, I believe you have heretofore been sworn as a witness before this committee. M r . M i t c h e l l . I have. . Mr. P e c o r a . And you are now being recalled for further exam ination. M r . M i t o h e l l . A ll r ig h t. Mr. P e c o r a . In your prior testimony you gave some testimony with respect to the organization of the National City Co. I believe you said it was organized in 1911. Mr. M i t o h e l l . I think that is correct. Mr. P e c o r a . Under the laws of which State was it incorporated? Mr. M i t c h e l l . O f New York State. Mr. P e c o r a . When did you first become connected with the National City Co.? M r . M i t o h e l l . In 1916. M r. P e c o r a . When did you first become connected with the National City Bank? M r . M i t c h e l l . In 1921. Mr. P e c o r a . That bank was organized in the year 1812, was it not? M r . M i t c h e l l . It w as. Mr. P ecora ,. And the National City Co. is regarded as the invest ment affiliate of the National City Bank of New York? M r . M i t c h e l l . I t is. Senator C o u z e n s . In fact, the National City Bank owns all of the stock of the National City Co., or their stockholders do: isn’t that true? Mr. M i t c h e l l . I think I explained that in my previous testimony, Senator Couzens. S e n a to r C o u z e n s . I th in k y o u d id . Mr. M i t c h e l l . The stock of the National City Co. is trusteed with three trustees for the benefit o f the shareholders o f the National City B ank; and a record of that beneficial interest, through the trustees, appears on the reverse side of the stock certificates of the National City Bank. Senator C o u z e n s . That was my understanding. Mr. P e c o r a . When was that trust agreement prepared and when did it become effective ? STOCK EXCHANGE PEACTICES 1763 Mr. M i t c h e l l . I assume that it did at the time of the organization, Mr. Pecora. I can not conceive it as being otherwise, but I would have to look it up. Mr. P e c o r a . You mean at the time of the organization of the National City Co. in 1911? M r. M i t c h e l l . Quite so. Mr. P e c o r a . W ho were the original trustees under that trust agree ment for the benefit of the shareholders of the National City Bank? M r. M it c h e l l . I h a v e n o t re fre sh e d m y m e m o r y o n th a t, a n d I w o u ld ra th e r lea v e it to th e re co rd . Mr. P ecora . H ow many trustees are there under this agreement ? Mr. M it c h e l l . Three, I think. Mr. P e c o r a . D o you know who the three trustees are today %• Mr. M i t c h e l l . I think the trustees today are Mr. Beekman W in- throp, Mr. Percy A . Kockefeller, and Mr. James A . Stillman. That is my recollection. That, again, I would prefer to leave to the record. Mr. P e c o r a . H o w were those trustees designated or chosen \ Mr. M i t c h e l l . That I cannot say. I have not refreshed my mem ory on that particular phase o f the situation, Mr. Pecora. Mr. P e c o r a . By the exercise of whose power are they subject to removal? Mr. M i t c h e l l . Again I should have to give the same answer there. I t is a matter of record, and if I were to be asked to state from memory I should say the board of directors of the National City Bank. But of that I am not wholly certain. Mr. P e c o r a . May I suggest, Mr. Mitchell, that a memorandum be made of these various matters with respect to which you want to inform yourself from the records? Mr. M it c h e l l . Certainly. Mr. P e c o r a . So that you may have an opportunity later of in forming the committee o f those items. Mr. M i t c h e l l . Certainly. I will give you a memorandum for the use of the committee with respect to them. Mr. P e c o r a . A ll right. Now, Mr. Mitchell, do you know whether the trustees at any time since their designation in 1911 have held any stated meetings ? Mr. M i t c h e l l . They have met from time to time, but what their procedure has been I do not know. Mr. P e c o r a . D o they have stated meetings or do they meet on rare occasions and in an informal fashion ? Mr. M i t c h e l l . I do not know how informal their meetings are, but they meet on occasion. Mr. P e c o r a . D o you know whether minutes or other records of the business transacted by them at their meetings are kept ? M r. M i t c h e l l . I do not know. Mr. bank? P ecora . Will you find out by reference to the records of the M r. M i t c h e l l . I w ill. Mr. P e c o r a . D o you know what powers are exercised by those trustees for the shareholders of the bank? Mr. M it c h e l l . They have all the powers incident to shareholder ownership. 1764 STOCK EXCHANGE PRACTICES Mr. P ecora . Do you mean that they vote the stock for the share holders at all meetings of the banks’ shareholders? Mr. M i t c h e l l . They vote as trustees all the National City Co. stock. M r. P e c o r a . W ell, they represent all shareholders of the bank, don’t they? M r . M i t c h e l l . They are acting as trustees of this stock for the benefit of the shareholders o f the bank. Mr. P e c o r a . W ell, do they vote the stock either of the bank or of the National City Co. at meetings of the shareholders of those organizations ? M r . M i t c h e l l . They vote all the stock o f the National City Co. Mr. P e c o r a . Now, sometime subsequent to 1911 did the National City Bank enter into an arrangement or agreement with the bank ing institution known as the Farmers Loan & Trust Co.? Mr. M i t c h e l l . Might I have a repetition of your question? Mr. P e c o r a . I will ask the committee reporter to read it to you [which was done]. M r. M i c h e l l . It entered into an agreement for the merging of the interests of those institutions, and the Farmers Loan & Trust Co. was merged with the National City Bank. M r. P e c o r a . When did that happen, Mr. Mitchell ? Mr. M i t c h e l l . I t happened in the spring of 1929. Mr. P e c o r a . A t that time was the capital stock of the National City Bank increased in order to effect that merger ? M r . M i t c h e l l . It w as. M r. P e c o r a . B y what amount? M r . M i t c h e l l . O f course, that is a matter o f record, M r . Pecora. I would have to again refresh my memory. I will give you a state ment of that if that is all right. Mr. P e c o r a . A ll right. Now, Mr. Mitchell, can you give the com mittee, in a general way, the terms upon which that merger was ef fected in 1929? Mr. M i t c h e l l . I cannot recall the exact ratio, but it was on a basis of so many shares of National City Bank stock for so many shares of Farmers Loan & Trust Co. stock. Mr. P e c o r a . Will you procure the details of that for subsequent testimony ? Mr. M i t c h e l l . I will give you that later. Mr. P e c o r a . The Farmers Loan & Trust Co. was a banking cor poration at that time, existing under the laws of the State of New York? Mr. M i t c h e l l . That is so. Mr. P e c o r a . And it had a large trust business? M r. M i t c h e l l . That is so. M r. P e c o r a . Its trust business was one of the attractive features of that institution which induced your bank to effect this merger? M r . M i t c h e l l . The particular advantage, over and above the vol ume of trust business which they had, which was large, was the fact that it was the oldest trust organization in the State o f New York, and the men connected with it had had unusual and long experience in trust work. STOCK EXCHANGE PRACTICES 1765 Mr. P e c o r a . A s a result of that merger the National City Bank; took over all the commercial banking business of the Farmers Loan & Trust Co., did it not ? Mr. M i t c h e l l . I t did. Mr. P e c o r a . And the Trust Co. took over all the trust business of the National City Bank? Mr. M i t c h e l l . It was unable to take it over in total, en bloc, but it supervised all the trust business. Mr. P e c o r a . In substance it took over all the trust business, but the title in some cases had to remain in the National City Bank of New York because of legal questions? M r. M i t c h e l l . Quite so. Mr. P e c o r a . The purpose of the incorporation of the National City Co. was to give the National City Bank an investment affiliate in connection with its business, was it not ? Mr. M i t c h e l l . I assume so. It ultimately developed so, at any rate. Mr. P e c o r a . D o you know that there is a provision in the charter of the National City Co. specifically providing, in substance, that transactions in which the National City Co. engages, even with officers of the company, are not to be invalidated for that reason? You are familiar with such a provision, aren’t you, Mr. Mitchell? Mr. M i t c h e l l . In the charter? Mr. P e c o r a . In the charter or in the by-laws of the National City Co. M r. M i t c h e l l . W ell, I should have to refresh my mind on that. Frankly, I do not recall the particular provision. Mr. P e c o r a . Since 1911, the National City Co. has entered into business transactions to which some of its officers were parties in their individual capacities, has it not? Mr. M i t c h e l l . W ell, do you mean that it has sold securities and bought securities from officers? Yes. Mr. P e c o r a . And it has done that rather frequently since 1911, hasn’t it ? That is, these incidents have not been rare occurrences. M r. M i t c h e l l . I assum e n ot. Mr. P e c o r a . N o w , the National City Co. was organized, among other things, to conduct the business of buying and selling securities to the general public, was it not? Mr. M i t c h e l l . W ell, that has been a large part o f its business. Mr. P e c o r a . That has been by far the greatest part of its busi ness, hasn’t it? M r. M i t c h e l l . Yes. Mr. P e c o r a . W hat is the governing board of the National City Co.— its board of directors? Mr. M i t c h e l l . Its board of directors. Mr. P e c o r a . H o w frequently does that board meet ? Mr. M i t c h e l l . Once each week. Mr. P e c o r a . Is there any subdivision of the board of directors, such as an executive committee, or a finance committee, or an invest ment committee, which functions between meetings o f the board o f directors ? Mr. M i t c h e l l . U p to 4 or 5 years ago, or perhaps 3 or 4 years ago, we had an executive committee, who met each week prior to the 1766 STOCK EXCHANGE PEACTICES board meeting. Latterly, and I should say for 2 or 3 years, the entire affairs of the company have been considered by the board itself acting as a whole, and I do not recall the functioning of the executive committee during this latter period. Mr. P e c o r a . W ell, when did this executive committee cease to function; in what year? Mr. M it c h e ll. A s I say, I should say 3 or 4 years ago. Mr. P e c o r a . W asn’t it prior to 1927? M r. M i t c h e l l . I would not think so. Mr. P e c o r a . You can verify the fact, can’t you? Mr. M i t c h e l l . I can. And I am advised here that it was prior to 1927. Mr. P e c o r a . H o w long prior to 1927? M r. M it c h e l l . T h a t I c a n n o t g iv e y o u . I w ill lo o k th a t u p f o r th e r e c o r d , i f y o u ch oose. Mr. P e c o r a . N o w , since the beginning of the year 1925 the N a tional City Co.’s transactions in the buying and selling of securities to the public increased tremendously m volume year by year, did they not? That is, up to the year 1931. M r. M i t c h e l l . W ell, they were more or less stable for several years. Mr. P e c o r a . Then they took a spurt in 1925. M r. M i t c h e l l . I think that was the large year. Mr. P e c o r a . And another spurt in 1926. Mr. M i t c h e l l . I should say, roughly, Mr. Pecora, from pure recol lection, that the sales of securities by the National City Co. had aver aged over a 10-year period a billion and a half dollars a year, and I think the high was about $2,000,000,000, and the low was just under a billion dollars. Mr. P e c o r a . W hen was the high reached— what year? M r. M i t c h e l l . I should say from memory that it was 1927 or 1928, but I should want to check it. It is a matter of record. Mr. P e c o r a . W hen was the low of that 10-year period ? Mr. M it c h e l l . This past year, I think. M r. P e c o r a . Can you find out now from any o f your associates sitting with you, Mr. Mitchell, in what year the executive committee of the board o f directors o f the National City Co. ceased to function? Mr. M i t c h e l l . I asked for that. M r. P e c o r a . Is any one of the gentlemen back o f you able to tell you? Mr. M i t c h e l l . In 1926, I am told. M r. P e c o r a . N o w , Mr. Mitchell, since 1926------Senator C o u z e n s (interposing). Before you go into that, may I ask why they ceased to function? Mr. M i t c h e l l . They ceased to function, Senator Couzens, because the executive committee constituted a large portion of the board, any way, and it seemed best, instead of having two meetings, to bring all matters that were brought to the executive committee to the attention o f the board as a whole. I think it meant the introduction of a com paratively small number o f additional men, and it seemed best to hold one meeting instead of two. Senator C o u z e n s (continuing). H ad anything gone wrong to cause you to decide to dispense with executive committee meetings ? STOCK EXCHANGE PRACTICES 1767 M r . M it c h e l l . N o th in g . Senator C o u z e n s . W h o is the executive officer of the National City Co. now? M r. M i t c h e l l . W e are made up, Senator Couzens, by my being chairman, which is the chief executive office. Senator C o u z e n s . Yes. But you do not operate in the National City Co.’s office all day, do you? M r. M it c h e l l . Oh, n o. Senator C o u z e n s . W ho is the executive officer who runs that office ? M r . M i t c h e l l . The president of the National City Co. is H . B. Baker. Senator C ou zen s. How long has he been that'? Mr. M i t c h e l l . He was made president early in 1929. Senator C o u z e n s . W hat was has occupation prior to that time ? M r. M i t c h e l l . He was a vice president of the National City Co. Senator C o u z e n s . W ho was the chief executive officer before Mr. Baker wTas made president of the National City Co. ? M r. M i t c h e l l . I was. Senator C o u z e n s . And you went from there to the National City Bank? Mr. M i t c h e l l . Yes. But I still held the presidency of the Na tional City Co. for a considerable period after I had been made president of the National City Bank. Senator C o u z e n s . Sometimes it is only theoretically that the pres ident is the chief executive officer. I mean, who managed the busi ness? I mean the everyday business without calling in the presi dent or the chairman of the board. Mr. M i t c h e l l . I attempted to attend the officers’ meetings every day. The officers, the vice presidents, constituted the operating man agement of the company. Senator C o u z e n s . Yes. But there was some one of them who was superior to the rest, was there not? Mr. M i t c h e l l . I was the superior officer, Senator Couzens. Senator C o u z e n s . In other words, all of the vice presidents were on the same basis. One had no more authority than another, do you mean? Mr. M i t c h e l l . One had no more authority than another, although each had his particular part of the business to handle, and all ques tions of policy, for instance, the taking on of any new issue, was con sidered in detail by the officers’ council, and you might say we main tained a practice similar to that of a general partnership— that no issue was taken on except by the unanimous approval of all the officers. Senator C o u z e n s . W ho decided the spread as between the price you paid and the price at which you sold a security ? Mr. M i t c h e l l . The necessities of a situation, of course, were con stantly under discussion in each particular issue. The officer in charge of the negotiations was the man who ultimately negotiated the spread. Senator C o u z e n s . And, then, I suppose you had different acqui sitions of securities, where the spread was small in one case, and larger in another case, and intermediate in another case. M r. M it c h e l l . Oh, q u ite so. 1768 STOCK EXCHANGE PRACTICES Senator C o u z e n s . Depending upon the gullibility of the public, or the ease with which the sale of the securities might be made, or the soundness of the securities, I suppose? M r. M i t c h e l l . I w o u ld n o t g r a n t y o u r e x p re ss io n , g u llib ilit y o f th e p u b lic. Senator C o u ze n s . Well. Mr. M i t c h e l l . I think you will grant very readily, Senator Couzens, that there is a great deal of difference between selling, for instance, a bond of the State of New York and selling a bond of the primest of our railroads. Sales requirements, methods of distribu tion, are very different, and different in their cost, and that is all represented in the spread. Senator C o u z e n s . In other words, you would get a bigger spread on an Insull security than you would on a prime railroad security. Mr. M i t c h e l l . W ell, I recall in the so-called “ Insull securities ” that bonds of the Commonwealth Edison Co. were regarded over a long period of years as among the primest of all public utility or corporate bonds in the United States, and their spread was very, very small. Senator C o u z e n s . I was not speaking of those underlying organi zations, operating organizations, so much as I was those that had the name Insull attached to them. Mr. M i t c h e l l . W ell, I have very little knowledge of that, because we were not active in that business, Senator Couzens. Senator C o u z e n s . That is all, Mr. Pecora. I did not want to interrupt your line of examination. Mr. P ecora . That is all right. Now, Mr. Mitchell, was there any particular reason for dispensing with the services o f the executive committee of the board of directors of the National City Co. in 1926? Mr. M i t c h e l l . I thought I had answered that. Senator C o u z e n s . Y es; he answered that to me. Mr. P e c o r a . There was no other reason than that embodied in your answer to Senator Couzens’ question? M r. M i t c h e l l . None, so far as I know. Mr. P e c o r a . Did this board of executive officers of the company keep a record of its activities and proceedings? M r. M it c h e l l . N o . Mr. P e c o r a . Had the executive committee during its existence kept such a record? Mr. M i t c h e l l . The executive committee meetings of the National City Co. were quite informal. Occasionally you would find a formal action taken by the executive committee, and that would be recorded. But their meetings were largely informal meetings that were held at luncheon as a matter of fact to save the time of everybody, and the discussion was general and informal. Mr. P e c o r a . Since 1926, decisions with respect to the nature and kind of securities that the company would buy for resale to the pub lic were made in this informal fashion by the executive officers of the company? M r. M i t c h e l l . That is quite true. Mr. P e c o r a . And the officers would meet daily, usually at luncheon, for that purpose? STOCK EXCHANGE PRACTICES 1769 Mr. M i t c h e l l . N o . The officers met daily in the board room of the National City Co., but their findings on various issues were re ported informally again to the executive committee when they met, so that the executive committee were quite familiar with the opera tions of the executive group, and with the new issues that were coming out or that were in contemplation from time to time. Mr. P e c o r a . But since 1926 there has been no executive committee? Mr. M i t o h e l l . W ell, business has been considered by the board as a whole. Mr. P e c o r a . W hich officers composed the group that since 1926 has acted in the place of the executive committee; I mean which officers of the company? Mr. M i t c h e l l . None have acted in place of the executive committee. M r . P e c o r a . W ell, they functioned in the fashion that you have d escrib ed . W ho were they? Mr. M i t c h e l l . A ll the vice presidents------Mr. P e c o r a (interposing). How many were there, or are there? M r . M i t c h e l l . Oh, I should say seven or eight. It is a matter of record that I should be glad to produce. Mr. P e c o r a . W hat other officers besides the vice presidents took part in those conferences that made those decisions ? Mr. M i t o h e l l . The president and myself. Mr. P e c o r a . And the president at the present time is Mr. Baker. M r . M it c h e l l . Y e s . Mr. P e c o r a . When did he become president? Mr. M i t c h e l l . In the early part of 1929. Mr. P e c o r a . W ho preceded him in that office ? M r . M i t c h e l l . I d id . Mr. P e c o r a . Y o u became president in what year? Mr. M i t c h e l l . 1916,1 should say; it might have been 1917. Mr. P e c o r a . And coincidentally you became president of the Na tional City Bank? Mr. M i t c h e l l . No. I became president of the National City Bank in May of 1921. Mr. P e c o r a . W ell, then, in 1929 you were made chairman both of the bank and the company ? Mr. M i t c h e l l . Chairman of the company, chairman of the bank, and chairman of the trust company. Mr. P e c o r a . The trust company to which you refer is now known as the City Bank Farmers Trust Co., isn’t it? Mr. M i t c h e l l . Yes, it is. Mr. P e c o r a . N o w , in the year 1927 was a management fund cre ated by action of the board of directors of the National City Co. ? Mr. M i t c h e l l . It was created many years before that. Mr. P e c o r a . But in 1927 was there any modification made in the management fund plan? Mr. M i t c h e l l . None that I can recall. Mr. P e c o r a . W hat was that management fund plan designed for? Mr. M i t c h e l l . You see, the National City Co. was an investment corporation, and it selected as its executives men who would normally be of the type to hold partnerships in private banking and invest ment companies. It was necessary to meet the competition of pri 1770 STOCK EXCHANGE PRACTICES vate partnerships, which partnerships were often extremely lucrative, by giving to the officers, who were the equivalent of partners in a private banking or investment firm, some share in the profits that they should make. M r. P e c o r a . W as that share beyond and in addition to their salaries ? M r. M i t c h e l l . Yes. Their salaries in the case of the National City Co. were held at what was regarded as a low figure, and all vice presidents and the president received the same base salary. Mr. P e c o r a . W hat was that in 1925 ? Mr. M i t c h e l l . It was $25,000 each. Mr. P e c o r a . How about the chairman? M r. M it c h e l l . I w as p re s id e n t at th a t tim e. Mr. P e c o r a . W ell, when you became chairman in 1929. Mr. M i t c h e l l . W ell, my recollection is that that was not changed, that all the so-called “ executive officers ” carried the same salary of $25,000. Then the plan of the management fund was this: The officers, looking at it as a group, and I think I can explain this so it will be understandable, and, say, this is the theory of it: They paid 8 per cent on the tools to start with, the tools being the capital and surplus and undivided profits as furnished by the shareholders. Those we can consider as the tools with which the officers were fur nished to operate. In setting up the management fund there was, first, allowed 8 per cent per annum on the tools— Senator B r o o k h a r t (interposing). On what stock was that, the National City Co.? M r. M i t c h e l l . This is not stock. It is represented by the stock of the National City Co., yes; and what the officers had to deal with, the tools that they had------Senator B r o o k h a r t (interposing). The stockholders of the N a tional City Co. were the same as of the National City Bank, and they were only to get 8 per cent out of it. Mr. M i t c h e l l . I shall have to go on, Senator Brookhart, to really make this picture clear, and i f I might just explain this briefly, and then if it is not clear I will go back to it. Senator B r o o k h a r t . A ll right. I will get it. M r . M i t c h e l l . This group first paid 8 per cent for the tools. Then they received, as a group, in the management fund 20 per cent of the profits of the year, current operating profits, after this deduc tion of 8 per cent on the capital, surplus, and undivided profits. Now, that fund was made up and divided among the officers, as follows: The officers were periodically asked to express themselves by vote to the executive committee as to what portion of that fund should go to the president, myself, and subsequently to the chairman. Having determined that, they were requested— well, I am getting too far------Mr. P e c o r a (interposing). Pardon me, Mr. Mitchell, but who de termined the apportionment of the management fund as between you, the president, and subsequently the chairman, and the others when that fund was created? Mr. M i t c h e l l . Let me just go back one moment, because I have neglected a rather vital point as to how this fund was distributed. The fund was theoretically divided into two parts, and at the outset STOCK EXCHANGE PRACTICES 1771 of the year the executive committee determined what portion each and every officer should have of one half of the fund that might accumulate during that year. That was what we called the forward look, because, of course, hardly any two men can be judged to be worth exactly the same amount, and they were all getting the same salary, and this differentiation in the value to the company of these various men was represented in the percentage of this first half of the management fund of which I speak. Senator B r o o k h a r t . Then they were to get all as among its officers ? Mr. M i t c h e l l . They were to get one half of the management fund to be created during the coming year on the basis of fixed percent ages, of which they were advised. And the differentiation of those percentages represented what would ordinarily be considered a dif ferentiation in their salaries. You understand that they start from an even salary basis, and then these differentiations were put in as to the first half of the fund. That was what we considered the forward look------Senator B r o o k h a r t (interposing). And this fund was made up of the earnings over and above that 8 per cent? Mr. M i t c h e l l . Twenty per cent of the earnings after 8 per cent had been deducted. Senator C o u z e n s . W hat did you do with the other half of the fund ? Mr. M i t c h e l l . The other half was determined usually twice a year, in July and in January. The officers who participated in this fund were generally asked at that time to submit a vote, which was not a signed vote and was not submitted to me but to some repre sentative of the executive committee, as to what------Senator C o u z e n s (interposing). W as it a secret vote? Mr. M i t c h e l l . It was a secret vote as to what portion should be mine. And then they were asked, having made that vote, for a signed vote as to what proportion each officer should get as to the balance, leaving themselves out of consideration. Those figures were presented to the executive committee, compiled for them by someone whom they might designate, and they deter mined then just what that distribution should be. Mr. P e c o r a . But since 1926 there has been no executive committee. M r . M i t c h e l l . Then it was referred to the board. The board acted instead of the executive committee. Mr. P e c o r a . In what year was the largest amount realized for that management fund of the National City Co.? Mr. M i t c h e l l . I should say, without having figures for reference, that it occurred in 1928, Mr. Pecora. Mr. P e c o r a . W hat was the amount of the management fund that year ? M r . M i t c h e l l . I should have to check again on that. Mr. P e c o r a . Can you check it now, while we are on the subject? Senator C o u z e n s . Is that practice being continued, Mr. Mitchell ? Mr. M i t c h e l l . N o . There was a provision, Senator Couzens, through all these management funds that they should apply only as the regular and customary dividend was maintained, and when, in 1929, we ran into losses all management funds were suspended. 119852— 33— p t 6------ 2 1772 STOCK EXCHANGE PEACTICES Senator C o u ze n s . Are they still suspended? M r. M it c h e l l . They are still suspended. Senator C o u ze n s . And, as you look at it in retrospect, do you think that was a good system to set up for a financial institution? Mr. M it c h e l l . Yes; I think so, and I would really feel quite strongly about that. I have seen it apply in the bank where it was established after I became president of the bank, and it establishes an esprit de corps and an interest in one officer in another officer’s work that is to me most noticeable. Senator C o u ze n s . Does it not also inspire a lack of care in th e handling and sale of securities to the public, because each individual officer has a split? M r. M it c h e l l . I can readily see, from your point of view, that that would seem so, and I must grant that it m,ust have some influence, Senator Couzens. At the same time, I do not recall seeing it operate in that way. Senator C o u ze n s . Y ou would not see it. Only the customers would see it after they had gotten the securities. May I ask you at that point—if you have not the figures convenient, you may furnish, them, perhaps, later—how many securities that you have sold are now in default? M r . M it c h e l l . That is a rather difficult figure. I carry in my mind these general figures, Senator Couzens. During a 10-year period, our total sales, which included Governments and States and Canadians and other things that perhaps are not in those first figures I gave you, were about $20,000,000,000, and I think that there has been difficulty of one sort and another—a good deal of it, of course, developing during this latter period of depression—with something under $1,000,000,000. Senator C o u ze n s . Did that include all your South Americans, and all? M r . M it c h e l l . Oh, yes. Senator C o u ze n s . And so, after counting in all of your sound State, municipal, and Government bonds, which aggregated $20,000,000,000, you say less than $1,000,000,000 are in default or trouble ? Mr. M it c h e l l . That is my recollection. I f I am wrong in regard to that, I would like to have the opportunity of correcting it. Senator B r o o k h a r t . Did you sell these securities through the stock exchange? M r. M it c h e l l . No, Senator Brookhart. O f course, the National City Co. has maintained offices throughout the United States, and in many foreign countries. Senator B ro o k h a r t . Y ou sell them direct, then? M r. M it c h e l l . We sell a great many securities direct. We also act as wholesalers, selling to dealers everywhere, who, in turn, are selling to their customers. Senator B r o o k h a r t . Y ou conduct no direct operations on the stock exchange? M r. M it c h e l l . N o ; n on e w h a tsoever. Senator B r o o k h a r t . Let me ask you a question or two about these salaries, before we leave that. What did these individual salaries amount to, after these commissions were added to the $25,000? STOCK EXCHANGE PEACTICES M r. M it c h e l l . I b e g your Senator B r o o k h a r t . Kead 1773 pardon? the question. (The reporter read the question.) M r. M it c h e l l . There have just been handed to me the figures on the management fund for the year 1927-28. The management fund for 1927 was $1,567,500. The management fund for 1928 was $2,240,938.98. Senator B r o o k h a r t . What is the portion of that that you got ? Mr. M it c h e l l . That, again, I should have to check. In 1927 my portion of the management fund was $527,000. Mr. P ecora . That is in addition to your salary ? Mr. M it c h e l l . Of $25,000; yes, sir. In 1928 my proportion of the management fund was $750,515.53. Mr. P ecora . Also in addition to your salary? Mr. M it c h e l l . Yes. Senator B r o o k h a r t . That in d ica te s a b ig in crea se in th e sa le of these inflated securities, does it not? M r . M it c h e l l . It indicates a larger profit in a legitimate business. Senator B r o o k h a r t . Compared to present price levels, practically all the securities you sold in 1928 were inflated, were they not? Mr. M it c h e l l . A great many of those securities have since been paid in one way or another. Of course there is scarcely a security, as you know, outside of possibly United States Government bonds and one or two of the primest States and municipals in the United States, which is worth in the market what it was selling for in the years 1928 and 1929. Senator B r o o k h a r t . Does not that big commission encourage the officers of a company like this to put off those securities on the public, regardless of their real soundness ? Mr. M it c h e l l . I think not, Senator Brookhart. Mr. P ecora . Mr. Mitchell, I observe from the figures you have given concerning your participation in the management fund for the years 1927 and 1928 that your participation amounted to about onethird of the management funds for those respective years. Was that the ratio that was followed in determining the amount of your participation in the management funds? Mr. M it c h e l l . I think it was changed almost every year, one way or the other. Mr. P ecora . Generally it was about one-third? M r . M it c h e l l . I sh o u ld sa y it w a s a b ou t a th ird . Mr. P ecora . Did not the National City Bank during these same years also have a management fund for the benefit of its senior executives ? M r. M it c h e l l . It did. Mr. P ecora . Can you tell the committee bow much you received, as either president or chairman of the National City Bank, from the bank’s management fund for the year 1927 ? Mr. M it c h e l l . May I* Mr. Pecora, just show the difference as to how that fund was set up? Mr. P ecora . I f you will answer this question now, it will be more orderly for you to give us the information you want to give us later. Senator C o u ze n s . Is Mr. Winston your attorney? 1774 STOCK EXCHANGE PRACTICES M r. M it c h e l l . He is Senator C o u ze n s . I s one of my counsel; yes. he attorney for the bank or just for you personally ? M r. M it c h e l l . N o . He is counsel for the institution. He is of the firm of Shearman & Sterling. Senator C o u ze n s . He is not attorney for the National City Bank or the National City Co.? Mr. M it c h e l l . He is counsel for the National City Bank, the Na tional City Co., and general counsel for the trust company. Senator C o u ze n s . I s he on a salary roll, per diem, or fee basis ? M r . M it c h e l l . The firm of Shearman & Sterling ? Senator C o u ze n s . Mr. Winston. Mr. M it c h e l l . Mr. Winston is not employed by us directly. Senator C o u ze n s . You say he is not? Mr. M it c h e l l . No, sir. Senator C o u ze n s . I thought if he was, he might take the witness stand himself, but as long as he is not we will not ask him to. Mr. P ecora . Can you answer my question, Mr. Mitchell, as to the amount you received from the management fund of the National City Bank for the year 1927 ? Mr. M it c h e l l . I can not, offhand, but I will be glad to produce that. Mr. P ecora . Was it as great as the amount you got from the National City Co. that year—that is, from its management fund? Mr. M it c h e l l . I can not answer that, quite frankly, Mr. Pecora. Mr. P ecora . H ow long would it take you to get the data to answer the question? Mr. M it c h e l l . I presume that we can get it in some of our papers. We have a volume of papers down here, and if it is not here I can get it certainly from New York quite promptly for you. Mr. P ecora . Mr. Mitchell, have you produced here, in response to the subpoena served upon you, the minute books of the board of direc tors of the National City Co. for the years 1927 to 1932, inclusive? M r. M it c h e l l . We have produced the minute books as called for by the subpoena. Mr. P ecora . The minute books called for by the subpoena included the minute books of the National City Co. for those years. Are those minute books here, do you know—the minute books of the National City Co.? Mr. G u y C a r y . The minute books we thought were here this morn ing. They have been sent for. They will be here this afternoon. The minute books of the bank covered by the subpoena are here. The oversight on the others was due to the fact that they understood you wanted certain statements from them, and not the books, so I have sent for the books and they will be here in a short time. Senator C o u ze n s . Mr. Mitchell, I understand you have quite a national reputation as a salesman and as a financier, both? Mr. M it c h e l l . I can not tell you what my popular reputation is, Senator. Senator C o u ze n s . We usually know, do we not? Mr. M it c h e l l . I do not know whether we do, or not. Senator C o u ze n s . Which are you, a better salesman or a better financier ? STOCK EXCHANGE PEACTICES 1775 Mr. M it c h e l l . Is that a fair question? Senator C o u ze n s . Yes. I would be able to answer that question if somebody asked me. Mr. M it c h e l l . I will say this, Senator Couzens: I have rarely seen an executive who had to do with the public and the management of a great corporation who was not inherently, by personality or other wise, in the class that might be called a good salesman. Senator C o u ze n s . That is what I understand; and from my obser vations of you here, and on numerous occasions, I should judge you to be a better salesman than a financier—and that is no disparagement on your financial ability at all. Mr. M it c h e l l . I thank you for the compliment. Mr. P ecora . Measured by the amount of compensation you re ceived, both by way of salary and by way of participation in the management funds of the National City Co. and the National City Bank for the years 1927 and 1928, would you say that your services as a salesman reaped a greater return for you than your services as a financier ? Mr. M it c h e l l . My services as rendered are not those of a sales man, Mr. Pecora. Mr. P ecora . The business of the National City Co. is that of selling securities to the public, is it not ? Mr. M it c h e l l . That is only one phase of it. Mr. P ecora . That is the most important phase of it, is it not ? M r. M it c h e l l . I sh o u ld ce r ta in ly sa y n ot. Mr. P ecora . Is not the greater part of its earnings derived from its sale of securities to the general public ? M r. M it c h e l l . That is where they show themselves, but where they are created is in the production end prior to the time that they ever go into the sales end. An analogy is the manufacturing con cern. We have a certain portion of our organization—and it amounts to a large force—devoting itself to the manufacture of long-term credits suitable for public distribution, and for the analysis of the production of other manufacturers, if I may continue to use the analogy-----Senator C o u ze n s . I think the word is unfortunate— manufactur ing securities. Mr. M it c h e l l . It may be in your mind, Senator Couzens. At the same time that has an analogy that I do not consider amiss. A large part of the business of the National City Co., and a large part of the executive brains, is devoted to the development of long-term credits suitable for public investment, and the organization in number would have a preponderance along the sales line, but the gray matter of the organization is certainly devoted in no small measure—and I should say in preponderance—to the production of long-term credits. Senator B r o o k h a r t . Does not that come up this way? Do not various enterprises apply to you for this credit, submit their propo sition, and you just check them? M r. M it c h e l l . They come up in various ways, Senator Brook hart. Of course, they come often by applications from corporations or States or municipalities and others who have need of long-term financing. 1776 STOCK EXCHANGE PRACTICES Senator B r o o k h a r t . They are the ones that originate the produc tion proposition, then? Mr. M it c h e l l . They are the ones who show the opportunity for it, but the study of it, the ways of developing to a suitable issue to give to the public, are a matter that takes considerable experience and a great deal of understanding. Mr. P ecora . Various propositions are presented to the National City Co.’s executives from time to time for the purpose of having your company consider the financing of those propositions ? Mr. M it c h e l l . Quite so. Mr. P ecora . Is that what you mean by the production end of the work, done by the National City Co. executives? Mr. M it c h e l l . No. It is not merely the primary consideration of that which comes in, because I think I scarcely need say that far more propositions are turned down than are accepted. Yet they all have to be studied. Then as we determine that something is accept able, or indications are that it may be acceptable, we have a great deal of work to do—engineers studying properties, accountants work ing over the figures, men versed in the make-up of these issues,, finding that which would be safe and proper to issue under the cir cumstances ; how the issues should be set u p; and ultimately, coming to the point where the price range and the spreads, and so forth, that you were interested in, Senator Couzens, are considered. That is the last thing that is considered in the production side of our businessMr. P ecora . But the earnings of the company are all reflected, or substantially reflected, from that end of its business which refers tothe sale of securities to the public? Mr. M it c h e l l . That is where you find it, just as you find, in a mercantile or manufacturing concern, that the sale of the product is the last thing that occurs, and the profit for the business shows itself there. Mr. P ecora . In the sale of those securities, or products, as you choose to call them, to the public, you do not mean to imply, do you, that the National City Co. creates that product, or makes that product, consisting of those securities ? M r . M it c h e l l . The product which it makes is the form of the issue. Of course, the obligor is always some debtor extraneous to the National City Co. Mr. P ecora . Exactly. The National City Co. is the vehicle by which the product is sometimes set up, and the vehicle by which it is sold to the public. M r . M it c h e l l . T h a t is t r u e ; yes. Mr. P ecora . And, according to the earnings it derives from those sales, the contributions or commissions or bonuses paid to its execu tive officers through the operation of the management fund are determined. Mr. M it c h e l l . That is so. Senator C o u ze n s . May I ask him to elaborate on the statement he made a while ago? I understood you to say that the sale o f these securities, or the production of them, was extraneous to the National City Co. Did you say that? STOCK EXCHANGE PEACTICES 1777 Mr. M i t c h e l l . No. I said that the obligation of these securities, the promise to pay—in other words, the debtor—is apart from the National City Co. itself. Senator C o u ze n s . But they may be a part of it through director ship or otherwise, may they not ? M r . M it c h e l l . No; I d o n o t re c a ll a n y case th a t I th in k w o u ld co m e u n d er y o u r ca te g o ry . Senator C o u ze n s . Y ou do not know of any director of the National City Bank or the National City Co. interested in selling any securi ties that were sold to your company ? Mr. M it c h e l l . Oh, I would not say that. There have been cases where the National City Co. has bought issues and distributed issues, where the obligor company on that issue had a director of our bank or our company on their board. Senator C o u ze n s . That is what I meant. Then, it is not quite cor rect to say that the obligor has no relation with the National City Co.? Mr. M it c h e l l . From that angle, I think you are correct, Senator Couzens. Senator C o u ze n s . And, so, as a matter of fact, the director, or the connection between the obligor on the security, and the National City Co., might be quite close, as a matter of fact? Mr. M it c h e l l . Yes; but the direct obligation was what I was referring to, Senator Couzens. Senator C o u ze n s . I understood, of course, that there was no obli gation of the National City Co., because if there had been, undoubt edly you would not have taken some of the chances that were taken, is that true? Mr. M it c h e l l . I do not think we would ever have started business. Senator C o u ze n s . In other words, you sold securities that you pos sibly would not want yourself, or would not want retained in the portfolio of the National City Co.? Mr. M it c h e l l . That does not seem to me quite fair. Senator C o u ze n s . I do not want to be unfair. Mr. M it c h e l l . I realize that. Senator C o u ze n s . I am trying to determine the difference between an investment-----Mr. M it c h e l l . We sell a large amount of United States Govern ment bonds, for instance. It is not that we are selling those bonds to the public because we do not think they are fit for our own portfolio. We are selling those Government bonds because a public is seeking to buy Government bonds. Senator C o u ze n s . Is that quite fair ? Is it not a fact that in the negotiations that take place between the officers and directors of the trust company or a bank or an investment house, that directors some times say, “ Well, I don’t like it very much. I would not want any of that in my portfolio, but I am willing to O.K. it for sale ” ? M r. M it c h e l l . I can conceive of that occurring very readily, be cause you might be sitting on such a board, and your judgment would be very good, but you might say, “ For my own box, I want only a certain class of securities. I realize that there are plenty of people who want a different class of security for their box, but I personally 1778 STOCK EXCHANGE PRACTICES do not want it, but, realizing the demand that there is for that class of security, I 6ertainly would approve this. It is not a security for my own box, but I realize that there is a public demand for it.” Senator C o u ze n s . That is what I am trying to get at. You being a supersalesman, of course, can sell that to your directors. You can sell them the idea. You do not always have to sell a security. Some times you can sell an idea. Mr. M it c h e l l . I think you compliment me unduly, Senator. Senator C o u ze n s . I do not think so. I have observed you very closely since you have been here. M r . M it c h e l l . I p resu m e I h a v e som e in flu en ce, b u t I c e r ta in ly th in k th a t w ith certa in o f th e h a r d h ead s th a t I a tte m p t to g a th e r a ro u n d m e, th e y are n o t o v e rin flu e n ce d b y w h a t y o u c a ll m y sa les m a n sh ip . Senator B r o o k h a r t . They give you a good deal bigger proportion of this fund than the others, do they not ? M r. M it c h e l l . They d o , sir. Mr. P ecora . Mr. Mitchell-----Senator B ro o k h a r t . Wait just a minute. I want to get some idea what your compensation was in the National City Bank. Mr. P ecora . We are getting that information. Mr. Mitchell, is it not a fact that for the year 1928, the total com pensation you received, from both the National City Bank and the National City Co., by way of salary and participations in the man agement fund, was $1,238,324.42? M r. M it c h e l l . I f you have the record there, M r . Pecora, it is doubtless taken from certain records that prove that your figure is accurate. Mr. P ecora . Will you jot that figure down, and afterwards see if you can confirm it? M r . M it c h e l l . What is the figure? ' Mr. P ecora . For the year 1928, $1,238,324.42. Mr. M it c h e l l . I will check it and confirm it. Senator C o u ze n s . Did not that amount make you envious of Mr. Grace, of the Bethlehem Steel Co., and Mr. Hill, of the Tobacco Co. ? Senator B r o o k h a r t . In view of that compensation, Congress is making a big noise about reducing the salaries of these $l,600-a-year Government employees. Would not it be a good idea for them to consider regulating the salaries of these national-bank presidents, first? Mr. M i t c h e l l . That is something you will have to answer your self. Mr. P ecora . Mr. Mitchell, is it not also the fact that for the year 1929 you received, by way of both salary and commissions, or par ticipations in the management fund of the National City Co. and the National City Bank, a sum aggregating $1,206,195.02? Mr. M it c h e l l . May I have that figure again, because I have to check it up ? Mr. P ecora . $1,206,195.02. M r . M i t c h e l l . I will be glad to check that figure, and confirm it, or question it. STOCK EXCHANGE PEACTICES 1779 Senator C o u ze n s . For the matter of the record, I want to say that this testimony is being elicited, not with the idea of going into the personal affairs of Mr. Mitchell, or the National City Co., but for the purpose of demonstrating publicly, if possible, that these unreason able salaries and these bonuses lead to unsound banking and unsound sales of securities. I, as temporary chairman, want to make it plain that this committee is going into that for that very purpose, and not for the purpose of headlines or for the purpose of delving into indi vidual people’s personal affairs. I personally dislike this sort of thing, but I think that the public should know what inspires some of these sales, and some of these securities being foisted on the public. When I say that, it does not mean any reflection on the National City Co. particularly, but it is quite general, that where there are excessive profits and bonuses to employees and officials, it has been very detrimental to the public interest. I thought I ought to say that, because I disapprove of some of the questions that have been asked of Mr. Mitchell, but I see no other way of getting at it. Mr. P ecora . I may say, Mr. Chairman, that one purpose I had in going into these items of evidence, was simply to establish what you have just given expression to, namely, that this sort of an arrange ment constitutes, either consciously or unconsciously, an incentive to perhaps unwise security selling methods, and unwise and unsound banking methods. Senator C o u ze n s . That is exactly what I said. I want to say that I would not have permitted some of these questions to be asked, if it had not been that they relate to the public interest. Mr. P ecora . Mr. Mitchell, was there an increase made in the cap ital stock of the National City Bank in the year 1927? Mr. M it c h e l l . There was. Mr. P ecora . And what was the amount of increase ? Mr. M it c h e l l . Let me see if I have that here. I can not recall the exact amount, that is my difficulty. (After examining papers.) I think I can give it to you here, through the annual report. I thought 1 might have it here, but I am just 1 year back. Senator C o u ze n s . What was the question? Mr. P ecora . About the increase of the capital stock of the bank in 1927. Mr. M it c h e l l . I s the amount essential? I can jot it down and bring that in here. Senator C o u ze n s . Mr. Mitchell has a number of questions to answer, and if the committee is in agreement, we will adjourn until 2 o’clock. (Whereupon, at 12 o’clock noon, a recess was taken until 2 o’clock p. m.) AFTER RECESS The subcommittee resumed at 2 o’clock p. m., on the expiration of the recess. The C h a i r m a n . I will ask Senator Fletcher to take the chair, and I will return in a few minutes. Senator F le tc h e r (presiding). You may proceed, Mr. Pecora. 1780 8TOOK EXCH AN SB PRACTICES TESTIMONY-RESUMED OF CHARLES E. MITCHELL, PRESIDENT OF THE NATIONAL CITY BANK, NATIONAL CITY CO., AND CITY BANK FARMERS TRUST CO., NEW YORK CITY Mr. P ecora . Mr. Mitchell, you made notations during your ex amination this forenoon of certain items with respect to which you wanted to obtain information or confirmation from the records of the bank and the company. Have you done so during the recess? Mr. M it c h e l l . I have, I think, covered the questions you asked, Mr. Pecora. Mr. P ecora . All right. You may proceed to answer them. Mr. M it c h e l l . Your first question had to do with the trustees under the National City Co. trusteeship. The first trustees were James Stillman, F. A. Vanderlip, and S. S. Palmer. Mr. P ecora . All right. Mr. M it c h e l l . Then you asked how these trustees are appointed. Under the agreement they are appointed by the members of the board, not by the board as a board, but by the members of the board delegated as individuals to sit for the election. Mr. P ecora . When you say “ by the board ” do you mean the board of the National City Bank? M r . M it c h e l l . Yes, sir; members of the board. Mr. P ecora . In other words, members of the board of directors of the National City Bank, select the three trustees, who act as trustees for the shareholders of the bank in connection with their ownership of the stock of the National City Co. M r . M it c h e l l . They act as trustees of the shareholders of the bank. Mr. P ecora . Ajid as vacancies occur among these trustees for the shareholders, how are those vacancies! filled. Mr. M it c h e l l . They are filled by an appointment that is made by the individuals sitting as a group, not as a board. Mr. P ecora . What individuals do you mean? Mr. M it c h e l l . The individuals who constitute the board of direc tors of the National City Bank. Mr. P ecora . And are any of those trustees removable by anyone other than the board of directors of the bank ? Mr. M it c h e l l . I think under the trustee agreement there is a dif ferentiation between the board of directors and those who are desig nated and delegated to the power of trustee reappointment and re moval. A majority of those individuals signing a paper may remove any trustee and may replace any trustee. Mr. P ecora . N o w , let me see, Mr. Mitchell, about this: How many constitute the full membership of the board of directors of the bank, how many individuals ? Mr. M it c h e l l . I think we have authority for 27 at the moment. Mr. P ecora . H o w many of that board compose the group that you speak of as having the power to designate the trustees? M r. M it c h e l l . Twenty-seven individual men. Mr. P ecora . Twenty-seven individual men. Mr. M it c h e l l . Yes. Mr. P e c o r a . D o you mean to say that when they act in any man ner involving the designation of a trustee, they disassociate them selves from their relationship to the bank as its directors ? STOCK EXCHANGE PEACTICES 1781 M r . M it c h e l l . Yes, sir. Mr. P e c o e a . I s that in pursuance of any provision of the original trust agreement that was made back in 1911 when the National City Co. was organized ? Mr. M it c h e l l . I so understand it. Mr. P ecora . Have you a copy of that trust agreement? Mr. M it c h e l l . I haven’t it here, and the information I have got ten has been received by telephone from New York. Mr. P ecora . Has any one of your associates or the other officers of the bank who are present a copy of that trust agreement, do you know? M r. M it c h e l l . I tried to get it, and we had to get this informa tion by telephone, so I think I can answer your question “ no.” But I will inquire. [After making inquiry of some of his associates.] I will say “ no.” Mr. P ecora . How is it possible for those 27 individuals who com pose the board of directors of the bank, to function not as directors but as individuals when they designate trustees for the shareholders of the bank to represent them as shareholders of the stock of the Na tional City Co.? Mr. M it c h e l l . I can only draw the assumption that when that agreement was drawn, the stockholders appointed a group of men to act for them, and they as individuals should be the individuals who constitute a board of directors of the National City Bank. Mr. P ecora . Was the identity of the members of that group coin cident with the identity of the members of the board of directors of the bank at that time? Mr. M it c h e l l . I cannot really give you anything more than I liave already given you. That comes from reading over the tele phone what that provision is. Mr. P ecora . Well, then, that leaves the situation in this fashion, does it not, namely, the persons who own all the capital stock of the National City Co. are the shareholders of the National City Bank? In substance is that correct? Mr. M it c h e l l . It seems to me you are asking something that might have a legal angle to it that I would not understand. I can state it very definitely: That these three trustees are the shareholders of all the stock of the National City Co., and under the agreement they hold that stock for the benefit of the shareholders of the Na tional' City Bank. Mr. P ecora . Yes; but those three trustees are in no way chosen today by the shareholders themselves, are they ? Mr. M i t c h e l l . No. This goes back to the original provision, and-----Mr. P ecora (interposing). And that provision was inserted in the trust agreement at the very outset of the existence of the National City Co. M r. M it c h e l l . I think that is true. Mr. P e c o r a . So that at no time since the National City Co. was organized have any of the shareholders had any voice in the designa tion of the trustees who hold their stock for them, is that correct ? Mr. M it c h e l l . I should say that is correct, except as they have the right to appoint the individuals as members of the board of di 1782 STOCK EXCHANGE PEACTICES rectors, and do so appoint them, and those individuals, year by year, whoever they may be, are the designating body o f the trustees. Mr. P ecora . Well, as a matter of fact, has there been at any time since you became the president of the National City Bank any action at the annual meetings of the shareholders which was attended in person by more than a few actual shareholders of the bank? Mr. M i t c h e l l . Y ou are speaking of shareholders now o f the bank? Mr. P ecora . Yes, sir. Mr. M it c h e l l . Oh well, we have a room two-thirds the size of this, which is crowded at every annual meeting. Mr. P ecora . And you have how many shareholders of record? Mr. M it c h e l l . Something over 85,000. Mr. P ecora . So that if they were to crowd that room, two thirds the size of this, to its utmost capacity, you wouldn’t have more than a very small fraction of 1 per cent of the shareholders actually attending meetings at which this group is chosen. Mr. M it c h e l l . Yes; as to the number of shareholders. But we have a very large percentage, of course, of the capital stock repre sented by shareholders who are present. Mr. P ecora . T o whom are the directors of the National City Co. accountable or responsible for their acts and for their administration of the company ? Mr. M it c h e l l . Accountable to the trustees, who are the share holders. Mr. P ecora . They are accountable to these three men who are chosen by a group of the directors of the bank, aren’t they, in fact? Mr. M it c h e l l . They are selected by a group of men who con stitute as individuals the board o f the National City Bank. Mr. P ecora . Whenever in pursuance of the laws of the State of New York, under which the National City Co. was organized, it is necessary to have a stockholders’ meeting of that company, the meet ing is confined to these three trustees ? Mr. M it c h e l l . That is so. Mr. P e c o r a . D o these three trustees ever make a report at a stock holders’ meeting, to the shareholders themselves? Mr. M i t c h e l l . N o. Mr. P ecora . Have you ever known them to do it ? Mr. M i t c h e l l . N o. Mr. P ecora . Have you ever known those trustees to keep any minutes or record of any proceedings that they have had as such trustees for the stockholders of the National City Co.? Mr. M i t c h e l l . Y ou asked me this morning if the trustees had meetings and if they kept minutes. I read from a memorandum o f the cashier o f our bank answering that question [reading] : Referring to your inquiry regarding minutes of proceedings of the trustees who hold the stock of the National City Co. I wish to advise that I am the custodian of the records of the trustees, which consists o f the trust agreement, documents relating to the appointment of present and former trustees, dividend orders executed by the trustees, powers o f attorney given by them to agents to indorse stock certificates, and incidental papers. There is no minute book or minutes o f proceedings o f the trustees in my possession. Action taken by the trustees has been recorded so far as my knowledge extends, which goes back a good many years, in the documents and standing orders and appointments above referred to. STOCK EXCHANGE PRACTICES 1783 Mr. P ecora . That means that they have never kept any minutes of any proceedings of theirs, doesn’t it ? Mr. M it c h e l l . I should think that that means that. Mr. P ecora . And to your knowledge have those trustees ever made any report to the stockholders of the company for whom they act as trustees ? M r. M it c h e l l . I think I answered “ no ” to that. Mr. P ecora . They have n ot. Mr. M i t c h e l l . No. Mr. P ecora . Has the National City Co. made any public report to the holders of its stock, of its corporate proceedings ? Mr. M it c h e l l . I do not understand just what you mean as to its corporate proceedings. Mr. P ecora . Let me put it this way: Does the National City Co. make any annual report of its business operations ? Mr- M i t c h e l l . A s chairman of the three institutions, we make a report to the shareholders at their annual meeting, and I report at that time on the operations of the National City Co. for the past year. Mr. P e c o r a . So that the report which you as the chairman of the three institutions make every year is an oral report, is it not ? Mr. M it c h e l l . It is printed and sent to every shareholder. Mr. P ecora . Insofar as that annual report alludes to the business of the National City Co., it is very general and sketchy, isn’t it? Mr. M it c h e l l . Well, I do not consider that it is more general and sketchy than with respect to the bank. It used to be that way; no report of earnings or the balance sheet of the National City Co. was furnished to our shareholders. Mr. P ecora . When for the first time did the National City Co. furnish that information to its shareholders ? Mr. M it c h e l l . I think two years ago. Mr. P ecora . Prior to that it never gave any such information even to its shareholders? Mr. M it c h e l l . It did not. Now, may I continue with the ques tions you asked this morning ? Mr. P ecora . I f you will. Mr. M it c h e l l . You asked me if I knew whether there was provi sion, either in the original charter or the by-laws, providing that no contract should be invalidated by the participation therein by a director. I find that that is a provision in the original charter of the company, in 1911. Now, do you care to have me answer the further questions you asked? Mr. P ecora . Yes, sir; whatever they are. I have not a note of them. Mr. M it c h e l l . You asked me regarding the management funds and my participation therein. You asked me particularly my par ticipation therein and gave me certain figures for 1928 and 1929 to corroborate. M r. P ecora . Yes. M r. M i t c h e l l . I ju d g e th a t the figu res y o u g a v e w ere th e am ou n ts th a t I receiv ed in 1928 a n d 1929. Now, I c a ll atten tion t o th e fa c t th a t the m an a g em en t fu n d o f a g iv e n y e a r is d istrib u te d in p a r t in the m id d le of th e y e a r an d in p a rt in the fo llo w in g year. So th a t 1784 STOCK EXCHANGE PRACTICES the amounts that you have that I received do not indicate the amounts that were subject to distribution for that particular year. In other words, my return would be different than the actual man agement fund and my participation therein. But I am now prepared to give you, if you desire, the amount of the management fund accrued during those years, and what proportion thereof I received. Mr. P ecora . Well, were the figures which I embodied in my ques tions this forenoon correct for the 12-month period on each occasion ? Mr. M it c h e l l . Well, I assume that the figures you used were the figures shown that I received as a result of the management fund during those periods. Mr. P ecora . And your salary ? Mr. M it c h e l l . And my salary. Now, I have not been able to check these. But I have the management funds for the two years and what part of the management funds I did receive, which I assume is what you were getting to, from the bank and the company during those years in question. Mr. P ecora . Well, give us your figures then. Take first the year 1928. Mr. M it c h e l l . Well, now, you see the figures for 1928 cover in large part the figures of the management fund for 192T, because the accumulations of 1927 were distributed in smaller part in July of 1927. The balance would have been distributed in 1928. But the fund would have been closed in 1927. So that what I received from the accumulation of the management fund of 1927 would have been received in part in 1927 and in part in 1928. Mr. P eoora . Can’t you make a computation or calculation which will give us the amount you received by way of salary and partici pation in the management funds of the National City Co. and the National City Bank for the year 1928? M r. M it c h e l l . Well, perhaps these figures which I have obtained from New York by telephone, will give you the figures you want. Mr. P ecora . All right. Go ahead. Mr. M it c h e l l . The accumulations of the management fund of the bank in the year 1927 were $1,356,999.53, of which I received $529,230, a part of it of course in 1927 and a part in 1928. But that was the proportion that I received of the 1927 management fund accum ulations of the bank for that year. The National City Co. accumulated in the 1927 management fund the sum of $1,988,000, of which my proportion was $527,000. There fore the total amount which I received from the management funds from the accumulations of that year was $1,056,230. In the year 1928 the accumulation in the management fund of the bank was $1,401,585.47, from which my proportion amounted to $566,634.19. Mr. P ecora . About one-third. Senator B r o o k h a r t . Oh, no. More than that. Mr. M it c h e l l . Over one-third. Mr. P ecora . Well. Go ahead. M r . M fdchell . The company accumulation in 1928 was $2,739,438.98, and the amount apportioned to me was $750,000. Mr. P ecora . H ow a b o u t 1929? STOCK EXCHANGE PEACTICES 1785 Mr. M it c h e l l . In 1929 the accumulation in the management fund of the bank was $1,725,177.96, of which the amount apportioned to me was $608,868. The accumulation in the management fund of the National City Co. was nil. Mr. P ecora . That is, for the year 1929 ? Mr. M it c h e l l . Yes; and the amount given to me was nil. As to the Trust Co.-----Mr. P ecora (interposing). For the entire year there were no accumulations in the management fund of the National City Co.? Mr. M it c h e l l . There was an accumulation in the first part of that year, but it was wiped out by losses in the latter parti of the year, so that the management fund at the end of the year had nothing in it. Mr. P ecora . But wasn’t there a distribution made at some time during the year of that portion of the management fund which had been accumulated up to that time ? Mr. M it c h e l l . A portion of the amount accumulated was dis tributed in July. Mr. P ecora . In July of 1929? Mr. M it c h e l l . Yes. But when we came to the end of the year we found the management fund as a whole was in the minus, and therefore provision was made that the amount should stand as advances to the officers, payable out of future accumulations in the management fund. Mr. P ecora . In other words, the officers did not refund at the end of the year that portion of the management fund which had accu mulated up to July of 1929 and had been distributed? Mr. M it c h e l l . There was a portion only of that distributed at that time. Mr. P ecora . But that portion which was distributed in July of 1929 was not refunded by the officers to whom it had been distributed, at the end of the year, was it ? M r . M it c h e l l . N o . Mr. P ecora . They were permitted to keep it as an advance against future accumulations in the management fund in subsequent years. M r . M it c h e l l . That is quite true. Then there was-----Mr. P ecora (interposing). And how much of that participation did you get for the first 6 months of 1929, of the National City Co.’s management fund, do you know? Mr. M it c h e l l . I do not recall the exact figure. Mr. P ecora . Can you tell us approximately? Mr. M it c h e l l . I carry in my mind the figure of—well, now, let me see. Mr. P ecora . Was it a figure around $500,000? Mr. M it c h e l l . I should think so. It is a matter of record, but I can not recall definitely. Quite frankly, I always felt that the officers could claim that as a final payment, because the original provision regarding the management fund was that the directors could distribute at any time during the year such proportion of the management fund then accumulated as seemed to them wise, and that was a payment of that character. But when the year ended there being nothing in that management fund it seemed wise to me and I recommended to the directors at the time, that the officers 1786 STOCK EXCHANGE PRACTICES should be willing to consider that purely as an advance upon future accumulations of the management fund, and it was so arranged. Mr. P ecora . Might it not have been more in the interest of the company if it had been then decided that the officers should refund, at the end of the year, the distributions that had been made to them out of the first half year’s accumulations in the management fund? M r. M it c h e l l . I th in k it w o u ld be fa ir e r fr o m th e officers’ sta n d p o in t i f th e y h a d , o n th e ir sid e, been in sisten t th a t it w a s an a ctu a l p a y m e n t to th em . Mr. P ecora . But I asked you if it would not have been fairer to the company for them to have made a refund. M r. M it c h e l l . I do not think so. Under the original provisions for distribution of the management fund I would not say so. Senator F l e t c h e r . And were there future accumulations? Mr. M i t c h e l l . Y ou see, from that time on the earnings have been comparatively small and the management fund has not been opera tive since that time. Mr. P ecora . N o w , as I have jotted down the figures you have just given, your total participation in the distribution of the manage ment fund of both the bank and the company, for the years that you have covered, namely, 1927,1928, and 1929, are $3,481,732. That is, estimating an approximate figure of $500,000 as your share of the management fund of the National City Co. for the first six months of 1929. Is there anything wrong with that calculation? M r. M it c h e l l . Except that I think the estimation is wrong, if that $500,000 which I am to return out of some future earnings, is included. Mr. P ecora . Well, you have not been called upon to return it. You actually have received it and still retain it. Mr. M it c h e l l . But on any reestablishment of the management fund there would be accruals from which that would have to be paid. In other words, that has to be paid out of future accruals in the management fund. Senator B r o o k h a r t . That cannot happen in the depression, can it ? Mr. M it c h e l l . It certainly cannot, I am sorry to say. Senator B r o o k h a r t . And the depression will not get over as long as the farmers cannot buy anything. Mr. P ecora . These compensations paid to you only have reference to compensations you have received by way of participation in the management funds of the bank and of the National City Co. for the period of time indicated. There has to be added to those figures whatever you received by way of salary, has there not ? Mr. M it c h e l l . Yes. Mr. P ecora . And there also has to be added whatever you received by way of salary and participation in the management fund of the City Bank Farmers Trust Co.? Mr. M it c h e l l . Yes, sir. Mr. P ecora . Which City Bank Farmers Trust Co. of course did not come into existence as a trust affiliate of the bank until 1929. Mr. M it c h e l l . No. I started to give you the management fund figures of the City Bank Farmers Trust Co. for the year 1929. Mr. P ecora . Well, you can give us the precise figures on that. STOCK EXCHANGE PRACTICES 1787 Mr. M it c h e l l . There was accumulated in that half year, from July to December 31, 1929, $283,497.38, in which I participated to the amount of $15,997.38. Mr. P ecoea . That is outside of the matter of salary. Mr. M it c h e l l . Yes. Mr. P ecora . Y ou are also chairman of the board of the City Bank Farmers Trust Co., are you not? Mr. M it c h e l l . I am chairman of the board of that company, the same position I occupy in the others. Mr. P ecora . And receive a salary for your services as chairman of the board of that institution ? Mr. M it c h e l l . No. I receive no salary there. Senator F l e t c h e r . H ow was this m a n a g em en t fu n d cre a te d ? Mr. P ecora . He discussed that this morning. Senator F l e t c h e r . Well, all right. Was it created out of profits? Mr. PticoRA. Out o f earnings. Mr. M it c h e l l . I was interrupted this morning I think in showing the difference in the method of distribution of management funds in the bank as against the company. I did not want to leave the impres sion that the same method of distribution obtains in the bank that obtains as in the company. In the bank twice a year, so long as the management fund prevailed under the old resolution, a vote is taken of all the officers, three ballots being cast: The first ballot is an unsigned ballot lodged in a ballot box with the cashier of the bank, as to what portion of the management fund accumulated I personally should receive. The second is a signed ballot as to how much of the management fund after the proportion which I receive is deducted, should be dis tributed to each other eligible officer, each man voting eliminating himself. The third ballot is a signed ballot indicating what men other than the eligible officers should be considered in the distribu tion of the fund, what men have contributed most effectively during the period under review to the advancement of the interests of the institution. Those ballots are presented by the cashier, after he has made a computation of their showing, to the executive committee, who, with myself absent, determine what proportion I shall receive. My only insistence to the executive committee of the bank has been that I shall never receive in excess of the proportion voted me by the officers. The other percentages are computed and tabulated by the cashier, and against those percentages amounts are set. Those are given to me by the executive committee to iron out what I consider unfairnesses that might have crept in. Then, with my recommendations, they determine how that portion of the fund shall be given. As far as employees who are not regularly eligible for the fund, we took those who received the highest recommendations, the greatest number of votes from the official staff, and those were reconsidered by the officers, and we selected from six to a dozen such men for special consideration in the management fund. That is done twice a year. And it is under that kind of provision, where, as you will see, I do the rather bold thing of placing myself on a pedestal where the officers can throw all the stones that they will at me without my 119852—33—pt 6----- 3 1788 STOCK EXCHANGE PRACTICES knowing from whom the stone comes, and I take their final net as the maximum which I will receive. Mr. P ecora . And those officials who can throw those stones at you are all subordinate officers, aren’t they, subordinate to you? Mr. M it c h e l l . They are, but their ballots are unsigned. Mr. P ecora . And you, in turn, have a voice in fixing the appor tionments to be given to them out of this management fund ? Mr. M it c h e l l . I do, but I do not know what their votes have been as to me. Senator F letch er , What portion of the earnings goes into this management fund ? M r. M l t o h e l l . T w e n ty p e r cen t o f th e n et ea rn in g s a fte r 8 p e r ce n t o f ca p ita l, su rp lu s, an d u n d iv id e d p ro fits h a v e been d e d u c te d fr o m th e n et o p e r a tin g ea rn in g s o f th e yea r. Mr. P ecora . N o w , may I ask you, Mr. Mitchell, if the minute books of the board of directors of the National City Co. have arrived here? Mr. M it c h e l l . I do not know. Mr. P ecora . Are they in New York, Mr. Carey? Mr. C a r e y . They are on the way now. Mr. P ecora . When do you expect them, later on this afternoon ? Mr. C a r e y . Yes. Mr. P ecora . In the absence of the minute books I will have to rely somewhat upon your recollection. Do you recall now that there was an increase of the capital stock both of the National City Co. and of the National City Bank in February of 1927? Mr. M it c h e l l . Yes, sir. Mr. P ecora . How much increase in the capital stock of the bank was effected at that time? Mr. M it c h e l l . There was an increase in the capital of the bank from $50,000,000 to $75,000,000. Mr. P ecora . H ow was that apportioned as between capital and surplus, if there was any such apportionment made ? Mr. M it c h e l l . There were issued to shareholders 250,000 shares of additional stock at $200 per share. The avails of that ran to an aggregate of $50,000,000, which was divided, $25,000,000 to the bank’s capital, $12,500,000 to the company’s capital, and $12,500,000 to the company’s surplus. Mr. P ecora . That is, the $50,000,000 raised through the issuance and sale of those 250,000 shares of stock of the bank, at $200 a share, were divided equally between the bank and the company ? Mr. M it c h e l l . That is true. Mr. P ecora . But the allotment of $25,000,000 that went to the company was divided equally between its capital and its surplus account. M r . M it c h e l l . T h a t is true. Mr. P ecora . N o w , coincidentally with that increase in the capital and surplus of $25,000,000 in the National City Co., did the National City Co. have any business transactions with a corporation called the General Sugar Corporation? Mr. M it c h e l l . In connection with this increase. Mr. P ecora . N o ; coincidentally with it. That is, at about the same time as this increase of $25,000,000, which was made to the capital and surplus account of the National City Co. ? STOCK EXCHANGE PRACTICES 1789 Mr. M it c h e l l . I can not remember the dates. I will get it. (After consulting with an associate.] The National City Co. pur chased on February 16, 1927, 1,500,000 shares of the General Sugar Co. for $25,000,000. Mr. P ecora . And the increase of capital and surplus of the Na tional City Co. was effected the day before that transaction, was it not ? M r. M it c h e l l . Y e s, sir. Mr. P ecora . In other words, on February 15, 1927. Mr. M it c h e l l . Yes, sir. Mr. P ecora . N o w , was there any relationship, other than that of time, between those two transactions ? Mr. M it c h e l l . Well, I should think probably, yes. I do not recall the situation directly, but I think one would have to realize what the stock of the General Sugar Co. was to see the relationship there. Mr. P ecora . But was there a relationship, other than that of time, between those two transactions, namely, between the issuance of the stock and-----Mr. M it c h e l l (interposing). I should think probably, yes. Mr. P ecora . Isn’t it fair to say that the primary reason for this increase in the capital and surplus of the National City Co. of $25,000,000 was to enable the National City Co. to take over with that specific sum $25,000,000 of the capital stock of a corporation called the General Sugar Corporation? Mr. M it c h e l l . Yes; I should think so. I think that is a fair assumption. Mr. P ecora . Now, this $25,000,000 that went into the capital and surplus account of the National City Co. on February 15, 1927, came from the shareholders of the bank and the company who purchased those 250,000 shares at $200 a share ? M r. M it c h e l l . That is right. Mr. P ecora . When was the General Sugar Corporation organized ? M r. M it c h e l l . I th in k it w a s o r g a n iz e d r ig h t th en . I w ill h a v e to in q u ire. Mr. P ecora . That is, at the same time. M r. M it c h e l l . Yes; the General Sugar Co. must have been formed just about that time. Mr. P ecora . Well, the General Sugar Co. is a different corporation from the General Sugar Corporation, isn’t it? M r. M it c h e l l . No. Mr. P e c o r a . Wasn’t 1927 ? there a General Sugar Co. formed prior to M r. M it c h e l l . Let me inquire. [After consulting an associate.] 1 here was a General Sugar Co. formed, as a management company, for the management of sugar properties in which the bank was interested. Mr. P ecora . That was formed in 1921 or 1922, wasn’t it? M r. M it c h e l l . It was not in 1921. I should say it must have been formed in late 1922 or early 1923. Mr. P ecora . Yes. Now, then, when you speak of the General Sugar Co. I want you to please bear in mind that that is the name of this corporation that was formed in 1922 or 1923. 1790 STOCK EXCHANGE PRACTICES Mr. M it c h e l l . That is right. Mr. P ecora . And when you speak of the G e n e ra l Sugar Corpora tion will you please bear in mind that that is the name of the com pany which was formed in February of 1927? Mr. M it c h e l l . Yes. Mr. P ecora . N o w , have you in mind, within your own recollection, Mr. Mitchell, the outstanding facts with regard to the formation of the General Sugar Corporation in 1927? M r. M it c h e l l . Yes. Mr. P ecora . So that you think you will be able to answer my ques tions concerning that company and its operations without seeking assistance from anyone else? Mr. M it c h e l l . I would not say so entirely. My associate, Mr. Rentschler, the president of the bank, is far better qualified to answer those questions directly than I would be, but I will be glad to do my best for you. Mr. P ecora . All right, sir. Senator F le t c h e r . What proportion of the total shares of the General Sugar Corporation did your company take over ? Mr. M it c h e l l . All of them. Senator F l e t c h e r . One and one half million shares? Mr. M it c h e l l . Yes, sir. Mr. P ecora . In other words, the $25,000,000 that the National City Co. obtained in February of 1927 through the sale o f 250,000 additional shares of the capital stock of both the bank and the company was immediately turned over to the General Sugar Cor poration in return for all of its capital stock? M r. M it c h e l l . Y e s , sir. Mr. P ecora . Now, the General Sugar Corporation had, just prior to that transaction, acquired all the capital stock of the General Sugar Co., which was organized in either 1922 or 1923 ? Mr. M it c h e l l . That is right. Mr. P ecora . N o w , then, when this General Sugar Co. was organ ized in 1922 or 1923, wasn’t it organized for the purpose of taking over the equities of four or five sugar-producing companies in Cuba ? Mr. M it c h e l l . I think that that was a management company. Mr. P ecora . It was a management company ? M r. M it c h e l l . Yes. Mr. P ecora . And as a management company didn’t it acquire the equities of the producing companies, which were some 4 or 5 in number, 1 of them being the Camaguey Sugar Co., and then 2 or 3 other companies generally referred to as the Orient© sugar group— do you recall those names? M r. M it c h e l l . Oh, yes. Mr. P ecora . N o w , this management company, called the “ General Sugar Co.’” was organized in 1922 or 1923 after you as the president of the National City Bank and as the president of the National City Co. had made a survey of the sugar industry down in Cuba, was it not ? M r. M it c h e l l . Yes. Mr. P ecora . And you were accompanied to Cuba on that occasion by Mr. Rentschler, whose name you just mentioned a few moments ago? STOCK EXCHANGE PRACTICES 1791 M r. M it c h e l l . Y e s , sir. Mr. P ecora . And this Mr. Rentschler is now the president of the National City Bank, is he not? M r. M it c h e l l . He is. Mr. P ecora . Was he an officer of the National City Bank when he accompanied you to Cuba in 1922 to survey the sugar industry there ? M r. M it c h e l l . He was n ot. Mr. P ecora . Was he connected with the sugar industry in Cuba at that time, in 1922 ? Mr. M it c h e l l . He had been a manufacturer, who, incidentally, produced a large quantity of sugar machinery, and his company had sold that sugar machinery over the island of Cuba for a long series of years, and he had been there and was acquainted very thoroughly with the sugar properties of the island, and the leading personali ties in the sugar business in Cuba. Mr. P ecora . He was acquainted with the sugar industry as a man ufacturer of machinery used in sugar production ? Mr. M it c h e l l . Yes. Mr. P e c o r a . He was not a banker at that time ? Mr. M it c h e l l . No. Mr. P ecora . When did he first become affiliated in any official capacity with the National City Bank? M r. M it c h e l l . H e becam e a d ire cto r. I sh o u ld n o t w a n t to c o m m it m y s e lf as to w h a t y ea r, b u t I sh o u ld say he becam e a d ire cto r ab ou t the y ea r 1924 or 1925. I t is a m atter o f reco rd . Mr. P ecora . Now, were you also accompanied on that trip to Cuba by a Colonel Deeds? M r. M it c h e l l , Yes. Mr. P ecora . Was Colonel Deeds at that time connected with either the National City Bank or the National City Co.? Mr. M it c h e l l . No, sir. Mr. P ecora . Y ou regarded him also as well posted on the sugar industry in Cuba at that time, did you ? Mr. M it c h e l l . Yes, sir. Mr. P ecora . What was his relationship at that time to the sugar industry in Cuba, if you can tell us ? M r. M it c h e l l . Colonel Deeds had been general manager of the National Cash Register Co. at one time. He had been a leading manufacturer of automotive apparatus, and a large owner in a prom inent company in that field which company he finally sold to the General Motors Co., and became a retired man. But Colonel Deeds is of that type that can never retire, he will die with his boots on. Mr. P ecora . And he still has his boots on, I assume ? Mr. M it c h e l l . Yes; he still has his boots on. He went to Cuba first I think, thinking it would be a good place for pastime or a holiday. And he immediately became interested in the sugar situa tion there. He is a business man of very substantial acumen, and has been a friend of our institution for many years, and finding him there with that time on his hands and with the business background that he had, we asked him if he would not look into our situation down there. And he did so, at an expenditure of a very large amount of time, and he spent that time most intelligently. 1792 STOCK EXCHANGE PRACTICES Mr. P ecora . Now, Colonel Deeds at that time was in no way con nected with the National City Bank or the National City Co., was he? M r. M it c h e l l . No, sir. Mr. P ecora . Did he thereafter become connected with either or both of those companies? Mr. M it c h e l l . He became a director of the National City Bank. Again reaching for a date out of my memory, I should say about 1928. Mr. P ecora . And he still is a director of that bank? M r. M it c h e l l . And still is a director. Mr. P ecora . N o w , you said a few minutes ago that you asked Colonel Deeds to accompany you to help look over your situation. That may not be the exact terminology you used, but it is the sub stance. What was that situation? Was it one in which the National City Bank had some loans outstanding amounting to millions of dollars which you had previously made to these sugar-producing companies whose management was taken over in 1922 or 1923 by the General Sugar Co.? M r . M it c h e l l . The National City Bank made some very large loans on the sugar business in Cuba. Mr. P ecora . Prior to 1922 ? Mr. M it c h e l l . Prior to 1922. This was in 1918, I think. It was before I was connected with the bank, Mr. Pecora. And as you will perhaps-----Mr. P ecora (interposing). Before you were connected with the bank? Mr. M it c h e l l . Before I was connected with the bank; these loans. Mr. P ecora . But it was while you were connected with the Na tional City Co.? M r. M it c h e l l . While I was connected with the National City Co., but I knew nothing of these operations. I f you will recall, sugar reached the price, I think, of about 28 cents a pound in Cuba in 1919 or 1920, and it had a collapse that was very sudden, dropping about 90 percent of that-----Senator B r o o k h a r t (interposing). Who was behind that manipu lation? I remember carloads of sugar coming on the track in the city of my State, and it sold five times right there on the track and a higher price every time, to keep up with the New York manipula tion. Mr. M it c h e l l . I do not know of New York manipulation. I can give you my impression of what happened, Senator Brookhart. As you know, during the war many of the European countries who had been large beet-sugar producers on their own account lost their beet fields in the war, and with men going away the beet factories were shut down and sugar became extremely valuable. At that time the facilities for producing sugar in Cuba were materially increased. Senator B r o o k h a r t . That offset this European trouble, didn’t it? M r. M it c h e l l . No| it did not offset it. The loss of production in Europe was very substantial, and following the war it took some time for these European fields and factories to get back into pro duction. In the meantime the high price had stimulated production all over the world. The Philippines, Puerto Rico, places that could not begin to approach Cuba’s cost of production, began to set up STOCK EXCHANGE PRACTICES 1793 their facilities for production very, very rapidly, and suddenly this production that had been started after the people began to recover themselves from the effects of the war came into the market and the Cuban sugar prices dropped precipitously. Of course, I imagine there must have been a great deal of speculation in it. It is a situa tion, as I say, that my associate, Mr. Rentschler, can talk on very much more intelligently than I. Mine is a recollection of it. But to get back to your question, Mr. Pecora: During the period of 1917 and 1918 and 1919, 1920 probably, the early part of it, our bank had been lending to sugar producers in Cuba. They were building new properties, and there was a good deal of activity there, and we had branches at that time in Habana and in all of the prin cipal cities. Senator B r o o k h a r t . D o you still have those interests in Cuba? Mr. M it c h e l l . Yes. We haven’t as many branches as we had, but we have a large branch in Habana and we have branches through the principal cities. Senator B ro o k h a r t . It is charged that the National City Bank is sustaining the Machado government. Mr. M it c h e l l . That is absolutely false, because the National City Bank, neither in Cuba, nor the United States, nor in any other part of the world, has anything to do with politics or the promotion of any regime or the maintenance of any regime in office; and I say that positively and am glad to have the opportunity to do it, because it is a thing that is often charged up against us and with absolute untruth. Mr. P ecora . N o w , Mr. Mitchell, what was the total amount of loans which the National City Bank had made to the sugar-producing companies prior to 1922 whose managament was shortly taken over by the General Sugar Co. ? Mr. M it c h e l l . I don’t think I can give you that exact amount. When I first started to look into the situation in Cuba I found that they had made many loans to individuals and to corporations and to properties, which, with the collapse that had taken place, were truly valueless, and those we did not attempt to do anything with except to start to write them off our books. There were certain properties that our examination showed as having a promise in one way or another. Mr. P ecora . What was the total amount of the loans that had been made and which were outstanding in 1922 to these sugar companies by the National City Bank? That was the question. M r. M it c h e l l . Well, I can not answer that without reference. Mr. P ecora . Was it around $30,000,000? M r. M it c h e l l . I should think it was at least that. Mr. P ecora . And did the bank continue to hold those loans up to 1927, when the General Sugar Corporation was organized? M r. M it c h e l l . M a n y o f them . Mr. P ecora . Did the bank transfer or assign those loans to anyone in 1927 after the incorporation of the General Sugar Corporation and the purchase of its stock for $25,000,000 cash by the National City Co.? Mr. M it c h e l l . Not as far as I know. When the General Sugar Corporation became holden of this money that had been put in by 1794 STOCK EXCHANGE PEACTICES the National City Co. they paid off a substantial amount of obliga tions of those various companies to the National City Bank. Mr. P ecoea . In other words, with the moneys realized from the sale of this additional capital stock in February, 1927, amounting to $25,000,000, the National City Co. paid off over $20,000,000 of those loans to the bank? Mr. M it c h e l l . I can not tell you just how much they paid off, but they paid off a substantial amount. You see-----M r. P ecora . I s there any one of your associates who can give us those figures? I am sorry you haven’t the minute books here, Mr. Mitchell, because I could get those figures, or you could get them, directly out of the minute book. M r. M it c h e l l . I am prompted to this effect: That at that time the General Sugar Corporation took over from the bank approximately $25,000,000. Mr. P e c o r a . Didn’t it take over from the bank approximately $ 3 1 ,0 0 0 ,0 0 0 in loans? M r. M i t c h e l l . N o ; n o t a t t h a t tim e . I t h in k a t t h a t t i m e i t t o o k o v e r a b o u t $ 2 5 ,0 0 0 ,0 0 0 , a n d it , f u r t h e r m o r e -------- Mr. P ecora (interposing). Mr. Carey, have you got the minute book of the board of the bank? Mr. C a r e y . Yes. M r. P ecora . Of 1927? (A minute book was produced.) Mr. M it c h e l l . I was just going to say in the meantime, Mr. Pecora-----Mr. P ecora . Let me finish this question, will you, please ? M r. M it c h e l l . Why, certainly. Mr. P e c o r a . .N ow , let me read to you, Mr. Mitchell, from the minute book of the board of directors of the National City Bank the following entry from its proceedings held on February 15, 1927, found at page 2 3 8 of the minute book: The president asks the particular attention of the board to the action taken by the executive committee to-day with reference to the investment by the National City Co. of the sum of $25,000,000 in the stock of General Sugar Corporation and sale by this bank to said General Sugar Corporation for approximately $20,893,198 in cash and $11,000,000 of 5-year 6 per cent secured notes, of all this bank’s interest in and loans to Cia. Azucarera Vertientes, Cia. Azucarera de Camaguey, and Cia. Azucarera San Cristobal, and the com panies grouped under the control of the Santa Clara Sugar Co., with the exception of bonds held for investment and of current loans to said group of companies on pignorated sugars and of such portion o f current unsecured loans o f producing companies as this bank is satisfied to retain. Does that entry refresh your recollection as to whether or not on February 15, 19 27 , that being the date when the National City Co. obtained $ 2 5 ,0 0 0 ,0 0 0 through the increase of capital stock of the company and the bank, that being the date on which the General Sugar Co. was organized, and that being the date referred to in the minute entry which I have just read to you? M r. M it c h e l l (interposing). Yes; it does. Mr. P ecora . Does that refresh your recollection as to the fact that on that date loans of the National City Bank which it had made in previous years to these various sugar-producing companies in Cuba, aggregating over $31,000,000, were taken over by the General STOCK EXCHANGE PRACTICES 1795 Sugar Corporation in return for nearly $21,000,000 in cash and $11,000,000 of 5-year notes ? M r. M it c h e l l . That is right. Mr. P ecora . And the General Sugar Corporation raised that twenty-odd million dollars in cash that same day by receiving $25,000,000 in cash from the National City Co. in return for the entire outstanding capital stock of the General Sugar Corporation? M r. M it c h e l l . That is correct. Mr. P ecora . H ow many of those 5-year 6 per cent secured notes for an aggregate of $11,000,000 have since been paid by the General Sugar Corporation to the National City Bank? Mr. M it c h e l l . Apparently 2,000,000 of them were retired, and there has since been written off of the books of the National City Bank a value so that they stand on the books of the National City Bank at a present value of $2,000,000. Mr. P ecora . S o that by this process the National City Bank was enabled to obtain something like $23,000,000 in cash for these loans ? M r. M it c h e l l . Yes. Mr. P ecora . And those loans at this time, in February, 1927, were in default, were they not, to the bank ? M r. M it c h e l l . They were short-term obligations. Mr. P ecora . As originally created. They were created away back prior to 1922 ? Mr. M it c h e l l . Yes. Mr. P ecora . And were being carried as bad loans by the bank in .February, 1927, were they not? M r. M it c h e l l . I th in k n o t a ll o f th em w ere crea ted p r io r t o th a t tim e, b u t th ey w ere th e resid u e o f loa n s cre a te d p r io r t o th a t tim e, p lu s som e a d d itio n s in th e w a y o f losses th a t h a d c r e p t in d u r in g th e subsequent years. Mr. P ecora . They were regarded as bad loans by the bank in the years between 1922 and 1927, were they not ? Mr. M it c h e l l . Well, they were regarded as certainly slow and doubtful, so long as the sugar industry remained in its existent state, and this was a process by which they were transferred from the bank, which we desire to keep as liquid as we possibly can, and were turned over to the National City Co. as a long-term invest ment. And now, as a matter of fact, the investment has depreciated by virtue of the tariff laws very largely, that we have not only in this country but elsewhere, which result in the production of un economic cost sugar, the sugar business in Cuba, as well as all Cuba economy, as everybody knows, has been very, very discouraging. So much so that the National City Co., with respect to that stock of the General Sugar Corporation which it accepted at that time, has wiped out through write-offs every dollar of it. Mr. P ecora . In other words, the National City Co. has written down to $1 this $25,000,000 investment that it made in 1927 in the stock of these sugar companies ? Mr. M it c h e l l . Yes, sir. Mr. P ecora . But the bank’s loans were paid through the process of raising $25,000,000 for the National City Co. by the issuance of 250,000 additional shares of the capital stock of the bank in February 1927? 1796 STOCK EXCHANGE PEACTICES Mr. M it c h e l l . That is one way to put it ; yes. Mr. P ecora . Is that what is known in the vernacular as a “ bailing out ” of the bank of a bad loan ? Mr. M it c h e l l . I don’t think you would call it that. It was a transfer at the time of a short-term questionable investment that the bank had, putting it into a long-term investment in the City Co., which, under any return of the sugar industry to normal would have been an excellent investment, because these properties that are owned by the General Sugar are the lowest-cost producers, or among the lowest-cost producers, on the entire island of Cuba, and Cuba in itself is the lowest-cost producer in the world. Mr. P ecora . Without going into all the details that you have given us of the sugar industry, I am confining myself to these loans. The bank succeeded in having the greater part of these $31,000,000 worth of slow and doubtful loans, as you call them, taken over by the National City Co., and the money, amounting to some $23,000,000, which the bank has received for those loans to the present time, was raised by this process of issuing 250,000 additional shares of capital stock of the bank and the company in 1927 and selling them to the shareholders for $50,000,000 ? Mr. M it c h e l l . I f I may put it in my own way, Mr. Pecora-----Mr. P ecora . I s that an unfair way of putting it, Mr. Mitchell ? Mr. M it c h e l l . Yes; without just one additional word, I am in clined to think it is, Mr. Pecora. Mr. P ecora . Will you add the additional word ? Mr. M it c h e l l . Yes; I will add the additional word if I may. This may be regarded as a contribution by shareholders in the light of the write-offs that have been taken since that date, a contribution by shareholders in cash to make up for losses which would other wise have affected the capital and surplus and undivided profits, the capital structure of the bank. It may be regarded in the light of the subsequent write-offs as a repairment of the condition of the institution. Mr. P ecora . With that additional word to the facts assumed in my question, have we a complete picture of the disposition made of these loans by the bank to the company ? Mr. M it c h e l l . I should say so; yes. Mr. P ecora . N o w , when the stockholders or shareholders of the bank in 1927 were asked to subscribe to these 250,000 shares of addi tional capital stock at $200, and when they did so by paying this $50,000,000 for that additional stock, were they told that they were going to make this sort of a reparation that you have just re ferred to? Mr. M it c h e l l . I called your attention to the fact that it was the transfer of a questionable short-term investment that the bank had into what we hoped was a good long-term investment, which we intended to permanently keep in the City Co. Mr. P ecora . But when the shareholders were asked to subscribe for those 250,000 additional shares, for $50,000,000, were they told that $25,000,000 of that money, of $23,000,000 of that sum, were going to be used to enable the National City Co. to take over these slow and doubtful loans of the bank? STOCK EXCHANGE PEACTICES 1797 Mr. M it c h e l l . I don’t think so, but the record would show it. Mr. P ecora . You have no recollection of any such thing being told the shareholders? Mr. M it c h e l l . N o ; I have not, Mr. Pecora. The C h a i r m a n . In other words, the bank had what had become a bad loan? The bank relieved itself by various processes, but the result of it was in the end that the public held long-time securities for it without having knowledge why these issues were made, but which afterwards turned out not to be so very good; is that it ? M r. M it c h e l l . This was not an issue that went to the public, Sen ator Norbeck. These transfers that have been discussed here were transfers that were made possible through the issuance of stock of the National City Bank. The C h a i r m a n . Yes; but somebody bought them without having information as to the loss that was being taken up by them? Mr. M it c h e l l . The loss did not exist at that time, Senator Nor beck. These were transferred as a long-term investment for the National City Co. The C h a i r m a n . But the National City Co. had relieved the bank of this slow and doubtful paper? M r. M it c h e l l . S h o r t-te r m loa n . The C h a i r m a n . Yes. Mr. M it c h e l l . The process was taking it out of short term and putting it into long term, and the stockholders when they got through it had exactly what they had before. Senator F le tc h e r . These 250,000 shares of the National City Bank were not offered to the public? Mr. M it c h e l l . By law any increase in capital stock has to be offered to the shareholders pro rata to their existent holdings. Senator F l e t c h e r . And that is the way they were disposed of ? Mr. M it c h e l l . Yes, sir. Senator F l e t c h e r . Not to the public generally? Mr. M it c h e l l . They were offered to our shareholders. Senator B r o o k h a r t . Listed on the stock exchange? Mr. M it c h e l l . No. Let’s see—well, that occurred in 1927. I think our stock was listed on the stock exchange then, but there were no dealings in it. Mr. P ecora . Now, Mr. Mitchell, as a matter of fact, in February 1927, when these transactions took place between the bank, the com pany, and the General Sugar Corporation, didn’t you and the other directors of the bank know that these loans which the bank then held, which it had made to these sugar companies, were bad loans and were not good investments, even as long-term investments? Mr. M it c h e l l . They were bad short-term loans, Mr. Pecora, and nothing but a turn in the tide would make them suitable for short term classification. Mr. P ecora . A s a matter of fact, don’t you recall that at the meet ing of the board of directors of the National City Co. on January 25, 1927, when action was taken with respect to the set-up of the man agement fund for that year, a resolution of the board with respect to the management fund, after reciting the manner in which that man 1798 STOCK EXCHANGE PRACTICES agement fund was to be derived out of current earnings, contained this language: Except that for the purpose o f computation— meaning the computation of the management fund from earnings— the stock of the General Sugar Corporation which it is intended to introduce into the balance sheet on or about February 15, 192T, in the amount o f $25,000,000, shall not be considered as a part o f capital surplus and undivided profits, and any dividends or returns thereon shall not be considered as a part of current earnings. Don’t you recall that resolution ? Mr. M it c h e l l . I recall it perfectly well, and I will tell you why it was put in. Mr. P ecora . Wasn’t it put in because the board at that time re garded these loans as bad loans ? Mr. M it c h e l l . No, sir. Mr. P ecora . Not merely slow or doubtful loans, but bad loans? Mr. M it c h e l l . No, sir; it was not, and I have just suggested you let me tell you why it was put in. Any profit that might come from that investment, any loss that might come from that investment, would be a profit or a loss for which no officer of the National City Co. who might participate in that management fund was in any way responsible. This was a transfer of assets for the convenience of the institution. The debt had been created by a long prior management in the bank. The introduction of that as an investment in the City Co. was not any thing that the management at that time had to do with, and if there was a profit or if there was a loss that group of men who were par ticipating in that management fund had nothing to do with it, and so it was eliminated from the computation of the management fund. And that was the sole reason for it to be handled in that way. Mr. P ecora . But if they had known that was going to be a loss to the company, that would be just the kind of action they would take in order to be fair to the company in the process of computing the management fund, would it not? Mr. M it c h e l l . I think very likely, but that is an assumption. I have given you the truth. Mr. P ecora . But it is not an unsound assumption or a violent one, is it? M r. M it c h e l l . No; I th in k it is qu ite a rea so n a b le a ssu m p tion , b u t it does n o t h a p p e n to b e th e p r o p e r on e. Mr. P ecora . Now, the sugar industry in Cuba collapsed after the war period, didn’t it? M r. M it c h e l l . Yes. Mr. P ecora . That is about in 1921 or 1922 ? M r. M it c h e l l . 1920. Mr. P ecora . And it has been in a state of collapse practically ever since, hasn’t it? M r. M it c h e l l . That is true. Mr. P ecora . And continuously since 1920 up to virtually the pres ent time? Mr. M it c h e l l . I think in 1923 or 1924, or 1925, there was a slight breath of hope that came into the situation for a brief period, but by and large your statement is deplorably correct. STOCK EXCHANGE PEACTICES P ecora . Y ou mean unfortunately correct? M r. M it c h e l l . Both. Mr. P ecora . Well, now, Mr. Mitchell, isn’t it 1799 Mr. a fact that in this period between 1920 and the present time the National City Co. sold to the public bonds of the Cuban Dominican Sugar Co. ? Mr. M it c h e l l . Yes. Mr. P ecora . At a price very nearly par? M r. M it c h e l l . Yes. I don’t recall when that issue was, but that is a fact. Mr. P ecora . It was about in 1928, wasn’t it, that some of those bonds were sold to the investing public by the National City Co., 1927 or 1928? M r. M it c h e l l . No; 1926, I should say. Mr. P ecora . And how large an issue did the National City Co. then put out of these sugar bonds? Mr. M it c h e l l . Again, on these specific questions, I really would appreciate it if you would ask one of my associates, Mr. Ripley, who is here and who knows the Cuban Dominican Sugar situation and the issuance of those securities from A to Izzard. I have not at tempted to refresh my mind on it, and I think really that you would be losing time with me, though I should be glad, Mr. Pecora, to give you anything that rests in my memory about it. Mr. P ecora . I will exhaust your memory, and then if that does not prove adequate to the presentation of the facts, why, I will call on Mr. Ripley. When these Cuban Dominican Sugar bonds were offered to the investing public by the National City Co. did you pass upon the wisdom of that offering? Mr. M it c h e l l . Yes. Mr. P ecora . As the chief executive officer of the company? M r. M it c h e l l . I passed on it with my associates; yes, sir. Mr. P ecora . You said this morning that these offerings had to meet the approval unanimously of all the officers of the company, who exercised their judgment about them before they were taken over by the National City Co.? Mr. M it c h e l l . Yes, sir. Mr. P ecora . So that that means that when these Cuban Dominican Sugar bonds were offered to the public in 1926 or 1927 by the Na tional City Co. the offering was made after you as one of the offi cers had approved of it? Mr. M it c h e l l . Yes; and I thought it was such a good investment that I went away behind the bonds myself and bought stock in the open market and put it away in my box, and it is there today. Mr. P ecora . And you gave that approval of this offering to the investing public here, despite the knowledge you then possessed of the collapse of the sugar industry, which you say took place in 1920 and has continued almost continuously from that year until the present time ? Mr. M it c h e l l . That is so. And bear in mind that Cuban Domini can has a portion of its assets only in Cuba, where these difficulties were occurring, and the properties that they had there were among the best, and the bonded debt, as I recall it, was exceedingly small. There had been wiped out in that organization of Cuban Dominican at that time very large values that had gone into those properties. 1800 STOCK EXCHANGE PRACTICES Senator F l e t c h e r . What was the bonded debt, do y o u re member ? Mr. M i t c h e l l . I can not recall that, Senator Fletcher. That is why I asked that Mr. Ripley be called. He has those figures all at his tongue’s end. Mr. P e c o r a . The offering price to the public of those bonds was $97.50, was it not, for each hundred dollar par value? Mr. M i t c h e l l . I can not remember that, but I should think it likely. Mr. P e c o r a . Let me refer you, Mr. Mitchell, for the purpose of possibly refreshing your recollection, to this table [handing docu ment to Mr. Mitchell]. See the notation I have made ? Mr. M i t c h e l l . Yes. Mr. P e c o r a . Does that refresh your recollection concerning the issue of Cuban Dominican Sugar bonds? Mr. M i t c h e l l . Yes. Mr. P e c o r a . That we are speaking about? Mr. M i t c h e l l . It does^ as to the amount offered, the date, and so forth. Mr. P e c o r a . What was the amount of the issue, total amount? Mr. M i t c h e l l . $15,000,000. M r . P e c o r a . And when was it made ? Mr. M i t c h e l l . October 23, 1924. Mr. P e c o r a . That was during this period in which the sugar industry was in a state of collapse? Mr. M i t c h e l l . It was in a period where the sugar industry was being reorganized under what was then considered to be a more normal period into which we were reaching. Mr. P e c o r a . A few minutes ago you referred to that period as being a slight flurry which was only a hope. Was it sufficient of a hope in 1924 to justify your company, in your opinion, in offering those bonds to the public at two and a half points below par ? Mr. M i t c h e l l . Distinctly so; yes. Senator B r o o k h a r t . How did you offer those, on the stock ex change ? Mr. M i t c h e l l . No; they were offered in the usual way, through dealers and through our own organization in one way and another. Senator B r o o k h a r t . Y o u d i d not sell them for any less? Mr. M i t c h e l l . N o. They were sold in the same way. I can not tell you exactly how the marketing was done. Senator B r o o k h a r t . What are they worth now? Mr. M i t c h e l l . The company has gone through another reorgani zation verv lately. Senator B r o o k h a r t . What did these bonds realize? Mr. M i t c h e l l . I can not tell you that. I f you will only get Mr. Ripley here on the stand he will give you anything you want on this, but I personally can give it only from memory. Senator F l e t c h e r . You sold the whole $15,000,000 to the public? Mr. M i t c h e l l . Well, apparently we had a participation. We must have had some partners in this deal. I don’t remember who they were, Senator Fletcher. We had a participation ourselves of a little over $11,000,000 in it, and we actually sold five million five of those bonds. STOCK EXCHANGE PRACTICES 1801 M r, P eco k a . Who sold the others? Were there any participants with the National City Co. in the offering? Mr. M i t c h e l l . Yes; I assume so. There must have been. And then, of course, we sold through dealers over the country and others. Our own sales are stated in this memorandum that you laid before me, which is a memorandum that I submitted before the Senate Finance Committee investigation at one time. Senator F l e t c h e r . Did you sell any stock in that company? M r. M it c h e l l . N o. Senator B r o o k h a r t . Eleven million dollars of this were your own bonds you were selling? Mr. M i t c h e l l . We participated in the purchase of those bonds apparently. Senator B r o o k h a r t . Who else participated with you? Mr. M i t c h e l l . Well, I cannot tell you without a further record. Senator B r o o k h a r t . Perhaps some other New York banks? Mr. M i t c h e l l . I cannot tell you who participated in that. Mr. P e c o r a . What was the spread to the National City Co. on this offering ? Mr. M i t c h e l l . I can only tell you by looking at this memoran dum. There was a gross spread in that business of 7% points. Mr. P e c o r a . That means the company got them at 90 and offered them at 97%? Mr. M i t c h e l l . Y o u mean the company sold them at 90. The Cuban Dominican Sugar Co. sold them-----Mr. P e c o r a . I mean the National City Co. got them at 90 and sold them at 97%. M r . M i t c h e l l . T h a t is c o r r e c t . Mr. P e c o r a . N o w , in any of its sales literature or circulars relat ing to this offering did the National City Co. indicate to the invest ing public the fact that these bonds had been taken over by the National City Co. at 90? Mr. M i t c h e l l . N o . And that, of course, is a practice that has never been followed in America in any issue that I can recall. It is an English practice, but it is not an American practice at all. Mr. P e c o r a . Well, the practice is made by the investment houses themselves, isn’t it ? Mr. M i t c h e l l . Yes; and the investment houses themselves, for all the years that I have known anything about the investment business, have never stated the spreads. Mr. P e c o r a . They made their own custom in that respect? Mr. M i t c h e l l . Yes. It is a custom that has grown up over the decades. Mr. P e c o r a . There never has been any law which prevented these companies from indicating to the investing public the prices at which they had acquired the issues that they were offering to the public? Mr. M i t c h e l l . No; nor any law that called upon them to do so. Mr. P e c o r a . And because of that custom of withholding that in formation from the investing public, the public has never been able to learn and has no means of ascertaining at the time it is asked to subscribe to an offering just what the financial interest is of the com pany or concern making the offer ? Mr. M i t c h e l l . Well, of course, Mr. Pecora, you are getting down to a fundamental of the business, and I myself am somewhat per 1802 STOCK EXCHANGE PEACTICES plexed about it. I f I go in and buy a pound of coffee there is no in dication as to what the grocer paid for it and what profit he got for it. It is not the custom that I know anywhere in America, whatever is sold, to show what it cost when it was sold to the consumer. Mr. P e c o r a . But when a person goes to a store to buy a pound of coffee he knows the merchandise that he is buying, doesn’t he ? Mr. M i t c h e l l . Well, from some of the coffee that I have drunk I wouldn’t think he did. Mr. P e c o r a . And that usually is the fact with regard to the aver age investor, isn’t it; he doesn’t know the offers except as to such information as is vouchsafed to him by the offering house ? M r . M i t c h e l l . That is correct. I do not know just exactly how pertinent the cost of that issue to the investment banking house is to the buyer. I f it is a desirable thing, then it is something that I feel very strongly should be regulated into our system. Mr. P e c o r a . D o y o u think it is a desirable thing? Mr. M i t c h e l l . I have been unable myself to really see the desir ability of it. I do think, Mr. Pecora, that in all of our American investment banking practice we ought to work toward giving addi tional information to the public. But whether that information is pertinent, whether it is something that would really aid a buyer to determine the true intrinsic merit of that which he buys, I must say I am very much in doubt. I think we ought to give them a lot more of information, but as to that particular information I do not know. Mr. P e c o r a . Would it not be an aid to the investor in determining the real value of a security which he is asked to buy if he knew how much of the price that he was paying for it was actually going to be turned into the treasury of the company issuing the security? Mr. M i t c h e l l . Well now, let’s see whether it would or not. I think we can conceive cases where it would hot. Supposing a com pany is being formed and you as an investment banker interested in its formation say, “ I will take a million dollars of bonds of your company when it is formed and I will pay you 85 for them.” The company goes on with its organization. It gets set up. This fa vorable thing or that favorable thing may happen, and by the time you get ready to issue that bond—you may have bought it with the idea that you could put it out at, say, 89 as a proper price to the public—at the time you get ready to offer it, that bond has assumed a very much better position, to the point where it has a worth of at least 95. Now, supposing you went to the public and said, “ Now, here is a bond. You can all recognize it to be a fine bond. And we offer it at 95. We paid 85 for it.” The public immediately stops, looks, and listens and says, “ This bond must be no good, because there is a 10-point spread in this bond.” Mr. P e c o r a . And frequently that would be a very fair conclusion, would it not? Mr. M i t c h e l l . Yes, sir; but in this particular case that I have mentioned it certainly would not. Mr. P e c o r a . Are you giving us the exceptional case, Mr. Mitchell, conjuring up an exceptional case? STOCK EXCHANGE PEACTICES 1803 Mr. M i t c h e l l . I am giving you an exceptional case, yes; because the exception in this particular phase of the investment banking business seems to me to be worth while to bring up. Senator B r o o k h a r t . It would not hurt the public any if they did buy it at a lower price, would it? Mr. M i t c h e l l . No. We are talking here about a bond that might have a 10-point spread in it, when as a matter of fact the normal spread would be really, say, 2 points. Senator B r o o k h a k t . I f the public had this information it might only have a 5-point spread; it would be 5 points better for the public if they knew about that, wouldn’t it? Mr. M i t c h e l l . Senator Brookhart, my only point is that the spread does not always indicate the merit classification of the bond. Mr. P e c o r a . It is a factor that always should be considered, isn’t it ? Doesn’t it enter into the real value of the bond ? Mr. M i t c h e l l . Not into the real value of the bond. There are certain bonds that can be put out to the public with ease because the public may know all about the company. There may be millions and millions of bonds outstanding of that company, and they may have a very good position and the spread may be justified of 2y2 points. You can find an equally meritorious bond, and with per haps as good or better background. But the public does not know about the debtor, and the difficulty of introducing this credit obli gation to the public and educating them regarding this bond may be far greater than in the first instance, and you may have to have it-----Mr. P e c o r a . Y o u do not mean to imply by that that it is better to keep the public in ignorance of that element of value ? Mr. M i t c h e l l . I do not think that the public is in a position to judge it, Mr. Pecora. Mr. P e c o r a . It has never had a chance to judge of that fact, has it, because of the custom you referred to before ? Mr. M i t c h e l l . I come back to what I said. I don’t see the advan tage, but if it will do any good, then let us regulate so that the investment companies will have to show the spreads. Senator B r o o k h a r t . Let me ask a question on that: I got the Federal Reserve Board to make me some charts of English stocks in comparison with American stocks. Of course, as you say, the information is given to the public much more fully there than ours is, and this up and down of stock speculation in the United States is eight or ten times more than it is in Great Britain. Mr. M i t c h e l l . Yes; it is-----Senator B r o o k h a r t . Doesn’t that information, then, help the pub lic somewhat to stabilize these prices and prevent these speculative profits which are really criminal ? Mr. M i t c h e l l . I do not think that this particular information does. I f it would stabilize the industry, if it would really be hon estly indicative to the investing public and to the buyer, I should be heartily in favor of it. Personally, I do not care whether it is done or not. I would be perfectly willing to put the cost price on all of our circulars if it would accomplish any good. 119852— 33— p t 6---------4 1804 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Mr. Mitchell, as you sit there now, are you attempt ing to justify the custom of the past which has hidden that knowl edge of the spread from the American investor ? Mr M i t c h e l l . Well, I didn’t say-----Mr. P e c o r a . Or are you merely calling attention to the fact that that has been the custom without attempting to justify it ? Mr. M i t c h e l l . I am taking the latter course, Mr. Pecora. Mr. P e c o r a . Y o u are not attempting to justify it, then? Mr. M i t c h e l l . I am questioning. I am giving you the reasons that are in my mind to question it. Mr. P e c o r a . Y ou have not given us any definite conclusion one way or the other that you may have reached, then, have you ? Mr. M i t c h e l l . I told you at the outset that here was a question that I was pondering-----Mr. P e c o r a . Y ou are still in doubt about what conclusion should be drawn from it ? Mr. M i t c h e l l . I can not yet convince myself that the American practice has been wrong. Senator F l e t c h e r . Let me ask you this: Isn’t there another side to that question? Suppose in the case of the Dominican Sugar Co. you stated that you paid 9 0 for these bonds; wouldn’t that persuade the public, wouldn’t that be more likely to cause them to buy in that case? Say, the National City pay 96 or 95 or 92, or say they buy at 90, and suppose I had bought a thousand dollar bond—you would not pay any attention to it unless it is a million, but a thousand is quite enough for me—suppose I had bought a thousand dollar bond at 90 , the same as you paid for it, and I was induced to do that because you had paid 90. What would be my situation with regard to that bond now? M r . M i t c h e l l . Y ou w o u l d b e ju s t in t h e p o s i t i o n t h a t a n y b o d y e ls e th a t b o u g h t i t a t 9 0 w o u l d b e. Senator F l e t c h e r . I am trying to find out what would be my posi tion now. Mr. M i t o h e l l . Y ou see, Senator, that this company h a s gone through a reorganization, and the fellow that held that bond is hold ing something else in place of it. And as I said before, Mr. Ripley can tell you just what chance that fellow has had from the time he bought his bond and the chance he has got now, and his chance for the future, and I would not pretend to give the answer on that. I only say this, that this company has been through a reorganization, which was examined by the court all the way through, and when the court finished up they complimented the reorganization committee as having had a very fair reorganization plan, and he approved it heartily. Now, just exactly what each one of these bondholders got in the reorganization is a matter that Mr. Ripley can tell1you about, and doubtless you will call him. Mr. P e c o r a . N o w , Mr. Mitchell, the obligation of the company that issues the bond is to pay that bond at maturity, isn’t it ? Mr. M i t c h e l l . Yes, sir. Mr. P e c o r a . Pay it in full ? Mr. M i t c h e l l . Yes. sir. Mr. P e c o r a . At par? STOCK EXCHANGE PRACTICES 1805 Mr. M i t c h e l l . Yes, sir. Mr. P e c o r a . I f a company putting out those obligations in the form of bonds actually receives for them 10 points under par, or, in other words, only 90 per cent of the par value, because it has made a deal of that kind with an underwriting syndicate or an underwriter of any kind, the company’s financial position to redeem that bond would not be nearly so good as if it had received par; isn’t that right ? M r . M i t c h e l l . N o; that is not particularly a fair-----Mr. P e c o r a . It would have that much less money in its treasury, wouldn’t it? Mr. M i t c h e l l . N o w let us take a. case again and see if it is right. Supposing a company has got a confirmed credit, an established credit in the market, for its long-term securities on a 5 per cent basis. It could put out then, tomorrow, blank dollars of additional bonds, 5 per cent bonds, at par. Now, let us assume that that company says, “ We don’t want 5 per cent coupons on our bonds over a period of years. Therefore, we want to issue blank dollars of new bonds, but we want to put them out as 3 per cent bonds on a 5 per cent basis to the public. You can see if you put out a 20-year 3 per cent bond on a 5 per cent basis to the public you must sell your bonds at a very large discount. T do not know just what that would figure, but I should think it would figure about—let’s see; two points for 20 years would be 40, wouldn’t it? That bond would be selling, I should say, at 78. Per haps some of my expert assistants could figure that. The C h a i r m a n . It would depend entirely on how long it had to run? Mr. M i t c h e l l . Yes; it would depend entirely on how long it had to run, Senator. That is right. The C h a i r m a n . Does that case illustrate your situation? Mr. M i t c h e l l . It illustrates this: I f that company came out with a bond at 78, let us say, would you forthwith question its standing or the worth of that bond ? That same company could have put out a bond that same day, a 5 per cent bond, at 100. T h e C h a i r m a n . I s t h a t a p a r a lle l ca se w it h th e o n e t h a t y o u a re b e in g q u e s t io n e d a b o u t ? Mr. M i t c h e l l . I think it is pertinent to Mr. Pecora’s question. Mr. P e c o r a . Look; see if this also is not pertinent: Let’s see whether this is not an analogy reduced to its simplest terms: I f I were to borrow a thousand dollars from you and you were to give me $900 in return for my obligation or note or bond to pay you a thou sand dollars, I would be thereby impaired to the extent of that $100 that I do not get from you in my ability to pay back that $1,000 when the note falls due, wouldn’t I? M r. M it c h e l l . No. Mr. P e c o r a . I have suffered an impairment to that extent, haven’t I? Mr. M i t c h e l l . N o . If it was payable to-morrow and you bor rowed that money from me, you would have me arrested overnight, so that you would not have to pay me, because it would be usury. But let us assume that it is a long-term obligation. What is the dif ference as to whether you amortize, let us say, over a 20-year period 1806 STOCK EXCHANGE PEACTICES a discount of 22 points or whether you pay yearly a higher interest rate, the difference between 3 and 5 per cent, on your obligation? That is the point I make. The C h a i r m a n . It all makes a difference who gets the money, whether the company or the broker gets the money or the bank gets the money. M r. M q u e s t io n . The C it c h e l l . W e ll, I f r a n k ly do n o t se e t h e p u rp o se of your h a i r m a n . If they only get 90 per cent, doesn’t it make a difference to them whether they get 90 per cent or 100 per cent of an issue ? M r . M i t c h e l l . You mean an issuing debtor? The C h a i r m a n . A company borrowing; whatever the commission is, they are minus that; if it is 10 per cent, they are that much short. M r . M i t c h e l l . I judge for the moment that we are not discussing the discount or commission. We are now discussing the price at which a bond is sold. Mr. P e c o r a . I am discussing in connection with that the matter of withholding information from the investing public to whom the bonds are ultimately sold concerning the spread which the offering house has in the issuing. That is what I am discussing. Mr. M i t c h e l l . Mr. Pecora, on that frankly I say that if I could be convinced, as you evidently are, that that is in the interest of the investor, nothing would stop me in forcing through our organiza tion a practice which would be contrary, 100 per cent contrary, to the usual practice of investment banking to publish the cost price of every issue. I frankly do not see that it is in the interest of the public that that should be, and I wish-----Mr. P e c o r a . I s it harmful to the public to have that information ? Mr. M i t c h e l l . No ; but it would not be harmful or beneficial as to whether the circular was printed on red paper or gray paper or yellow paper. Mr. P e c o r a . I am not discussing the best color. The color of the paper gives no information, does it, of the security to the public ? Mr. M i t c h e l l . And I do not consider that spread is pertinent in formation. Maybe it is. Mr. P e c o r a . Can you conceive of any harm that the giving of that information would do to the investing public? Mr. M i t c h e l l . I can not see, in the first case, in the illustration that I gave you, where it would be misleading. Mr. P e c o r a . D o you know of any instance where the giving of that information has proved misleading or detrimental to the British in vesting public, to whom that information is given because of the British practice? Mr. M i t c h e l l . I am not familiar enough to know whether there are cases or not, Mr. Pecora. Mr. P e c o r a . Y o u are familiar with the investment market all over the world, aren’t you ? Mr. M i t c h e l l . Yes. But to point out any particular case out of the hundreds and hundreds of British issues that are made, one would have to be in daily contact with that market and remember over a long period of years. I do not. STOCK EXCHANGE PRACTICES 1807 Mr. P e c o r a . Y o u have not heard the British investing public com plaining of this information that the law requires investment houses to give them, have you ? M r . M i t c h e l l . No; but I know of-----Mr. P e c o r a . And you have heard-----Senator B r o o k h a r t (interposing). Let me ask a question. The C h a i r m a n . Wait till the counsel completes his question. Senator B r o o k h a r t . It is right on that point that I want to ask this question: He said he had not heard the British public complain ing about it. As this committee adjourned at 12 o’clock to-day I was surrounded by a dozen people in this room who said they had lost all their life’s savings by buying securities in the National City Co. or the National City Bank, and they are complaining about this situ ation. There they are right here in this room. M r . M i t c h e l l . Yes. You see, the securities, whether issued by the National City Co. or other investment bankers, have gone down and caused enormous losses. Even last year, you know the United States issued 3 per cent bonds, and we bankers lost millions and millions and millions of dollars because of the price at which those bonds were offered. The C h a i r m a n . They will still be paid with interest? Mr. M i t c h e l l . They certainly will; and there are a lot of bonds that the National City Co. has issued that are down to-day that will be paid with interest. The C h a i r m a n . Well, of course, it depends on what is back of them. The United States Government is back of United States Gov ernment bonds, of course. But speaking of losses, you mean simply market losses, don’t you ? Mr. M i t c h e l l . Market losses. That is what exists to-day. The C h a i r m a n . In other words, if the Government issues a good deal, the market is liable to sag because there are not buyers for them ? M r . M i t c h e l l . Certainly. The C h a i r m a n . But it has not changed the security at all, has it ? Mr. M i t c h e l l . No; and it has not with a lot of the other issues; but, Senator Norbeck, just as long as men are human and judgment has the element of error in it, just so long there will be mistakes made by the National City Co. or any investment banking house that puts out securities. The C h a i r m a n . N o member of this committee will dispute that, but that does not go to the question of whether the public should have fuller information than they are getting. M r . M i t c h e l l . I think they should, Senator Norbeck, and I would be-----The C h a i r m a n . Aren’t other countries doing that? You have twice referred to the fact that in England full information is required. Mr. M i t c h e l l . Yes. The C h a i r m a n . Simply telling half the truth does not go. All of the truth has got to be told. Isn’t that true of other European countries ? M r . M i t c h e l l . Not to the extent---- 1808 STOCK EXCHANGE PBACTICES The C h a i r m a n . They do not go quite so far, but most of them go farther than we do, do they not ? M r . M i t c h e l l . I would not say that most did. The English law is very complete as to the first issuance of securities. The C h a i r m a n . Y o u remember the lord that was sent to prison-----Mr. P e c o r a . Lord Klysant. The C h a i r m a n . For a year, because he had failed to tell it all. The statement put out was truthful. Mr. M i t c h e l l . Yes. He had eliminated a very vital fact. The C h a i r m a n . Or he said it was to pay 6 per cent dividend. He failed to say in which way it was earned. Mr. M i t c h e l l . But I am heartily in favor of fuller information. I wish we could regulate it all through the investment banking business. Mr. P e c o r a . The National City Co. is the biggest investment house in the country isn’t it ? Do you know of any bigger ? M r . M i t c h e l l . Well, I think that it has a very large producing organization; that is, as an issuing house its own originations are large. I do not think they are as large perhaps in dollars as some others. The C h a i r m a n . He has previously testified to this committee that his bank is the largest bank in the world. Mr. P e c o r a . Yes; but isn’t the National City Co. the largest investment company selling securities to the public? Mr. M i t c h e l l . I should think probably; but I would not want to make any boast about that, Mr. Pecora. Mr. P e co r a . It would not have been unbecoming for the National City Co. to have taken the lead in bringing about a change in custom with regard to putting out fuller information to the public? Mr. M i t c h e l l . We are doing it every day. We are issuing to the public to-day more complete information regarding the condition of the companies that we finance than we ever have in our history, and we are trying to go a very long way. We are trying to blaze a trail with respect to that. Mr. P e c o r a . When did you commence to blaze that trial? Mr. M i t c h e l l . I should say a year and a half ago. We have learned much. We have all made mistakes, and a man that can not profit by it certainly is not very worthy. We are trying to blaze the way for investment finance into a higher ground than it has been. Mr. P e c o r a . But you have not yet blazed the trail to the point where you are giving the investing public information concerning the price at which the company acquires these securities that it offers to the public ? Mr. M i t c h e l l . And I have told you why. Mr. P e c o r a . I mean you have not yet reached that stage in the blazing of the trail ? M r . M i t c h e l l . No. Mr. P e c o r a . All right. Now, as originally organized and op erated for many years following its incorporation in 1911, what kind of securities did the National City Co. confine itself to ? Mr. M i t c h e l l . Fixed maturity securities. Mr. P e c o r a . Y o u mean by that, bonds? STOCK EXCHANGE PEACTICES 1809 Mr. M i t c h e l l . Bonds and notes. Mr. P e c o r a . Bonds and notes, debentures? Mr. M i t c h e l l . Bonds, notes, debentures, acceptances. Mr. P e c o r a . Not stocks ? Mr. M i t c h e l l . No, sir. Mr. P e c o r a . When for the first time did the National City Co. depart from that policy and include stock securities in its offerings to the public? Mr. M i t c h e l l . I think it was in 1927 or 1928—1927, I guess— might have been 1926, when we first offered Southern Kailway and Baltimore & Ohio stock. Mr. P e c o r a . That was 1927, wasn’t it? Mr. M i t c h e l l . Well, you probably have checked the offering. My recollection would have been 1926 or 1927, probably 1927. You are probably right. Mr. P e c o r a . But its operations along that line in 1927 consisted of an offering of common shares, shares of the common stock of the Southern Railway? Mr. M i t c h e l l . Yes. Mr. P e c o r a . T o the public ? Mr. M i t c h e l l . Yes. Mr. P e c o r a . Then in 1928 it enlarged upon that scheme, did it not, and offered to the public common stocks of several other corpo rations ? Mr. M i t c h e l l . I doubt if it was several. I am trying to think. I should think not over a half a dozen, but if you have the record arid have checked it you know. Mr. P e c o r a . Well, say a half dozen different issues of common stock ? Mr. M i t c h e l l . Yes. Mr. P e c o r a . Were acquired or accumulated by the National City Co. in 1928 for sale to the public ? Mr. M i t c h e l l . Yes. I would not think there were that many. Mr. P e c o r a . In 1929, up to October, 1929, the National City Co. accumulated common stock of still more corporations and sold them to the public ? Mr. M i t c h e l l . We did not sell through our organization. We accumulated quite a portfolio of common stocks, but very few, I would not say in more than two or three cases, were a part of those sold or offered to the public. Mr. P e c o r a . What were those that were offered to the public in 1928 and 1929, if you remember? Mr. M i t c h e l l . We offered Baltimore & Ohio, Anaconda Copper. Mr. P e c o r a . Penn Road? Mr. M i t c h e l l . N o. Mr. P e c o r a . Oliver Farm Equipment C o . ? Mr. M i t c h e l l . Preferred, I think. Mr. P e c o r a . Not the common? Mr. M i t c h e l l . A very small amount. Mr. P e c o r a . Any other companies that you can think of whose common stock or preferred stock you offered to the public in 1928 and 1929? 1810 STOCK EXCHANGE PRACTICES Mr. M i t c h e l l . I f you come to preferreds, I think there were sev eral. There was Cannon Mills. Mr. P e c o r a . United Aircraft? Mr. M i t c h e l l . We offered a unit of preferred stock and some common with it. Mr. P e c o r a . Of what corporation? Mr. M i t c h e l l . Of the United Aircraft. Grasselli Chemical Co. and Hershey Chocolate Co. Mr. P e c o r a . H o w about Wesson Oil and Snowdrift? Mr. M i t c h e l l . Preferred s t o c k . Mr. P e c o r a . Have the minutes arrived yet, Mr. Cary? (There was no audible response.) Mr. P e c o r a . Now, to go back for a moment to the $15,000,000 bond issue of the Cuban-Dominican Sugar Co. which the National City Co. offered to the public at 97% in 1924, do you recall whether the National City had any representation on the board of the Cuban-Dominican Co. at that time? Mr. M i t c h e l l . Mr. Ripley, our vice president, who is with the City Co., was a member of the board. Oh, Mr. Russell—excuse me— Mr. Stanley Russell. Mr. P e c o r a . Mr. Stanley A. Russell? Mr. M i t c h e l l . Yes; vice president. Mr. P e c o r a . And how about Mr. Gordon S. Rentschler, the present president of the National City Bank? Mr. M i t c h e l l . I should have to refresh my recollection, but I think very likely he was, because he was regarded as one who knew more about our sugar interests than anybody else. Mr. P e c o r a . How about Mr. Guy Cary ? Mr. M i t c h e l l . He did not represent us in any way. I think Mr. Guy Cary was counsel for the Cuban-Dominican Sugar. Mr. P e c o r a . He or his firm is counsel for the National City Co.? Mr. M i t c h e l l . That i s correct. Mr. P e c o r a . And also counsel for the National City Bank? Mr. M i t c h e l l . That is so. Mr. P e c o r a . And he is on the board of directors of the bank? Mr. M i t c h e l l . I am reminded that Mr. Cary or his firm were not counsel for the Cuban-Dominican. He went on that board rep resenting certain private interests, for which he was counsel, and those interests were not related to the National City Co. or bank. Mr. P e c o r a . By the way, in 1928 when you received those sums that you have testified to out of the management funds of the Na tional City Bank and the National City Co., how many other com panies were you an officer or director in ? Mr. M i t c h e l l . It is hard for me to remember dates or any par ticular year. I should say that—the list is a matter of record in the directory of directors, but I would assume in answer to your question that I was a director of perhaps 10 or a dozen companies. Mr. P e c o r a . Not any more than that? M r . M i t c h e l l . I w o u l d not s a y so. I f w e h a d a d i r e c t o r y of d i r e c t o r s it w o u ld g i v e t h a t c le a r ly . Mr. P e c o r a . D o you know just the number of different corpora tions of which you were an officer or director at any one time ? STOCK EXCHANGE PRACTICES 1811 M r . M i t c h e l l . No; I do not. But I think that would cover it quite completely, outside of the National City Bank, the National City Co., the City Bank Farmers Trust Co., and perhaps some com panies that were our own companies for one purpose or another. Senator B r o o k h a r t . H o w much stock did you own in the bank ? Mr. M i t c h e l l . At what time or what year ? Senator B r o o k h a r t . Say in 1927. M r . M i t c h e l l . Oh, I should think, and I have not the exact figure on that date and it is difficult to say, but in the neighborhood of 30,000 or 35,000 shares of stock. Senator B r o o k h a r t . Did you sell any of that stock ? Mr. M i t c h e l l . I bought, sir. Senator B r o o k h a r t . In what years did you buy ? M r . M i t c h e l l . I b o u g h t t h e l a r g e s t a m o u n t o f s t o c k i n 1929. Senator B r o o k h a r t . Before or after the collapse? M r . M i t c h e l l . In the midst o f the panic. Senator B r o o k h a r t . Trying to sustain the value of the stock ? Mr. M i t c h e l l . Yes, sir; trying to protect our shareholders. Senator B r o o k h a r t . Do you remember what price you paid? M r . M i t c h e l l . I c a n n o t t e ll y o u e x a c t l y , b u t i n t h e n e i g h b o r h o o d of $375 a s h a r e I s h o u l d t h i n k . Senator B r o o k h a r t . And it has been as high as $600 or $700 a share. Mr..M i t c h e l l . N o. I think its high was somewhere around $570 a share or something like that. Senator B r o o k h a r t . $576 a share? Mr. M i t c h e l l . Something of that sort. Senator B r o o k h a r t . All right. Mr. P e c o r a . Well, Mr. Mitchell, did you also sell during the year 1929 any substantial portion of your holdings of National City Bank stock ? i M r . M i t c h e l l . I held in the midst of the panic all the stock I had owned for a long, long time, and in order to keep the market from collapsing where it wrould be destructive to the interests of our shareholders I permitted the National City Co. to put into an ac count which I established for them of my own, stock which they might purchase from our shareholders to the tune of $12,000,000. In other words, I put all that I had back into this institution, and for its stability. Some of that stock was subsequently sold. There were personal transfers through the years. To-day I hold the largest amount of stock of the National City Bank that I have ever held. Mr. P e c o r a . N o ; I asked you this: You stated in answer to Sen ator Brookhart’s question that you bought the bank’s stock very ex tensively in 1929, and that a portion of that was embraced within the period of the stock-market collapse. Now, my question was: Have you also sold very extensively of your holdings in that period or before the end of that year ? M r . M i t c h e l l . Well, I bought 28,300 shares, which I had hoped to hold only temporarily. It was done in order to help the situation. Mr. P e c o r a . T o sustain the market? Mr. M i t c h e l l . Yes. O f that, 10,000 shares were sold, leaving me at that time the holder of 53,300 shares of stock. There were some personal transactions of a part of that holding in the latter part of 1812 STOCK EXCHANGE PEACTICES 1929, and since that time I have bought that stock back, so that to day I am the holder of that and a little more. Senator B r o o k h a r t . A little more than 53,000 shares? M r. M it c h e l l . Y e s , s ir . Senator B r o o k h a r t . At what price did you buy those back? Mr. M i t c h e l l . I paid for those 18,300 shares— I can not tell you offhand just what it would be, but I can give you an approximate figure. Let me see, at $375 or $380 a share-----Senator B r o o k h a r t (interposing). That was during the panic? M r. M it c h e l l . Y e s , s ir. Senator B r o o k h a r t . Then you sold 10,000 shares? Mr. M i t c h e l l . I am giving you the net of that 18,000 shares. I am counting that as this extra stock that I bought at that time, Sen ator Brookhart. Senator B r o o k h a r t . All right. Mr. M i t c h e l l . I should say roughly, and I do not recall exactly, but that the net price of the 18,300 shares of stock was about $375 to $380 a share, as a guess. Senator B r o o k h a r t . If I understood your statement, then, after wards you sold a part of that stock. M r . M i t c h e l l . I d id . Senator B r o o k h a r t . And then still later bought it in, recently. Mr. M i t c h e l l . I, frankly-----Senator B r o o k h a r t (interposing). How much did you buy in recently ? Mr. M i t c h e l l . I bought in all that I sold, and I bought a few shares more in the meantime. Senator B r o o k h a r t . What price did you pay for those last pur chases ? Mr. M i t c h e l l . I sold this stock, frankly, for tax purposes. Senator B r o o k h a r t . That was to avoid income tax? Mr. M i t c h e l l . Throwing my fortune into the breach as I did for the benefit of this institution, Senator Brookhart, in 1929, I had a definite loss in that stock which I was forced to take. Senator B r o o k h a r t . In other words, by making a sale of it that showed a loss in your income. Mr. M i t c h e l l . That certainly did. Senator B r o o k h a r t . And then you bought it back afterwards? M r. M it c h e l l . Y e s , s ir . Senator B r o o k h a r t . And, now, those are the prices I want to get, what you sold at and what you bought it back at. M r . M i t c h e l l . The prices are a matter of record, but the one to whom I sold this stock, a person of some means, had no ability to take the loss that existed in that stock and at the end of last year I bought the stock back at what had been paid for it. Senator B r o o k h a r t . At the same price ? Mr. M i t c h e l l . Yes, sir. Senator B r o o k h a r t . That sale was just really a sale of con venience, to reduce your income tax ? M r. M it c h e l l . Y ou c a n c a ll it t h a t i f y o u w ill. Senator B r o o k h a r t . Well, is that right? Mr. M i t c h e l l . Yes; it was a sale, frankly, for that purpose, where you hoped the buyer would be able to make a profit. And it was STOCK EXCHANGE PRACTICES 1813 bought with the idea of making a profit. But the accumulated loss was so great that I offered, and did buy, the stock back this year at what had been paid for it. Senator B r o o k h a r t . This buyer was a friend of yours, of course. He had favored you and you wanted to favor him. M r . M i t c h e l l . It was not that kind of negotiation. But I simply could not see that buyer take that loss. And I hold today that stock. Senator B r o o k h a r t . Y o u did not have a similar sympathy for all these buyers here in the room and buy that stock back, did you? Mr. M i t c h e l l . I f anybody here in the room, or anybody that you know, has suffered a loss in gross that I have in City Bank stock, then you know somebody that I do not. I, individually have suffered a greater loss from the market failure in National City Bank stock than any other individual in the United States. Senator B r o o k h a r t . Well, the real fact is, then, that neither yourself nor any of the big financial crowd realized that this thing was inflated beyond all reason in 1929 ? Mr. M i t c h e l l . I did not realize this, and I was looking over today-----Senator B r o o k h a r t (interposing). The fact is that the public cannot rely on the judgment of the big financial crowd in these financial matters at all. Mr. M i t c h e l l . With respect to the future and on market prices and on the economics of the situation, there are so many factors over which the men in finance have no control and really have com paratively little knowledge, that it is just as impossible for them to predict a definite future as it is for anybody else. Senator B r o o k h a r t . Then, shouldn’t they state that fact in every prospectus that they put out to the people ? Shouldn’t they state: We do not know and nobody can tell what will happen, and it is impossible to tell. Mr. M i t c h e l l . Well, I will tell you for all of them, myself included, that we are human, we are filled with error, and it does not matter how good our intention may be we are going to make mistakes at times. I only hope that we can learn something from all this and be able to reach that period when we can put into constructive effort the lessons that we have learned during this period. The C h a i r m a n . The committee will now-----Senator F l e t c h e r (interposing). Mr. Mitchell, what were your holdings in the National City Co. at this time? Mr. M i t c h e l l . Y o u see, the stock o f the National City Co., the investment affiliate, is not a stock that is owned by the public at all, Senator Fletcher. Senator F l e t c h e r . Yes. M r . M i t c h e l l . That is owned by these three trustees for the benefit of the shareholders of the National City Bank. So that every shareholder of the National City Bank has an interest ratably to his holdings as to the total of the assets and earnings of the National City Co. And that beneficial interest is evidenced by a stamp on the back of the shares of the National City Bank, so that the beneficial interest in the company goes along with the bank shares. 1814 STOCK EXCHANGE PRACTICES Senator reflected. F let c h er . And if there is a loss in the company that is . It is reflected in the bank shares. Mr. Mitchell, you spoke of a sale of thousands of shares of your bank stock in 1929 for tax purposes. How much loss did that sale enable you to show? Mr. M i t c h e l l . My recollection is $1,600,000 or $1,800,000. Mr. P e c o r a . It was nearly $3,000,000, wasn’t it? Mr. M i t c h e l l . No; I think not. It must have been about the difference between—let me see, I will take $870 and $380 a share— well, I should say, about $150 a share on 18,000 shares. That would be somewhere near it. Mr. P e c o r a . Wasn’t the amount nearer $2,800,000 as the loss that you were able to show for your tax purposes by that transaction ? Mr. M i t c h e l l . No; it could not have been. I should have said $150 a share on 18,000 shares. Senator B r o o k h a r t . Doesn’t that run pretty close to the figure Mr. Pecora mentioned ? Mr. M i t c h e l l . That was a figure of about $2,700,000? Mr. P e c o r a . That figure was about $2,800,000 ? Mr. M i t c h e l l . Yes; I think so. It would be a matter of record, but probably that. Mr. P e c o r a . And that enabled you to avoid an income tax pay ment for the year 1929 ? M r. M Mr. P it c h e l l ecora . M r . M i t c h e l l . Y e s . M y lo sse s h a d b e e n s u c h t h a t I d id n o t h a v e t o p a y it. Mr. P e c o r a . N o w , Mr. Mitchell, while we are discussing the stock panic of 1929, do you recall whether any action was taken by the directors of the National City Bank, early in November of 1929, whereby a fund of $2,000,000 was set aside by the bank to be used for the making of loans without interest or security to certain officers of the bank ? Do you recall that action ? M r . M i t c h e l l . I think it was not only to the officers, but to officers and employees of the bank. Yes; if you will amend your question to that extent. Mr. P e c o r a . By the way, that sale of this bank stock that you referred to in the latter part of 1929 was made to a member of your family, wasn’t it? Mr. M i t c h e l l . It was; yes, sir. Senator F l e t c h e r . Did you do anything to check this wild specu lation up to October of 1929 that occurred on the stock exchange ? Mr. M i t c h e l l . Did I do anythink to check it ? Senator F l e t c h e r . Yes. Mr. M i t c h e l l . Yes. Senator F l e t c h e r . Y o u did that? M r . M i t c h e l l . Oh, yes, Senator Fletcher. And if the committee would like to give me the opportunity I should be glad to go into a long discussion of that, but it is a subject by itself. Senator F l e t c h e r . Well, as I understand about that time brokers’ loans mounted to something like six to eight billion dollars, and call loans were paying somewhere near 20 per cent at the peak. STOCK EXCHANGE PRACTICES 1815 M r . M i t c h e l l . Yes. S en a to r F l e tc h e r . Y ou recognized th a t as an u n h ealth y situ a tio n , d id n ’t y o u ? Mr. M i t c h e l l . Most decid ed ly . Senator F le t c h e r . Could you briefly state what you did to stop it? Mr. M i t c h e l l . One of the greatest difficulties was, of course, loans for account of others, which very materially swelled the credit structure, and that was the very source from which came those large brokers’ loans. Bankers, in other words, did not have control of the money situation. It was in the control of the so-called “ others ”. And we did everything in our power to find a correction of that fundamental fault. Furthermore, I always myself felt that this tax on capital gains and losses was creating, in a period of inflation, a demand for securities which could only be corrected bv a change in the law. I largely wrote a bulletin which o«ir banK published in April of 1929, pointing that particular fact out, and pointing out what I believed to be true, that the situation could not be corrected by ordinary methods, that we needed to loosen up the stocks and make more stocks available, and then your prices would not have risen as they did. I think the prices of stocks rose largely as a result of what I regard as a defect in the law. Senator B r o o k h a r t. H o w much brokers’ loans did your bank make? Mr. M i t c h e l l. We always carried a certain amount of brokers’ loans, but we did not lean on the Federal Reserve Bank. Senator B r o o k h a r t. Didn’t you increase your brokers’ loans dur ing this very speculative period? Mr. M i t c h e l l. N o , sir. Our brokers’ loans were increased only as the demand of industry and commerce subsided. And, of course, after the break, and then all those people who had been lending on call for their own account and not through the banks rushed and took their money out; then every bank in New York was obliged to make up that deficiency and was forced to go to the Federal reserve bank for borrowings. So that following the period of the collapse the record will show that all New York banks leaned heavily on the Federal reserve credit, and that was the only thing that saved the situation at that time. But prior to that time and while this speculation was going on we did not lean on the Federal reserve bank credits at all, or for only a day or two here and there, to even our position up. Mr. P e c o r a . Mr. Mitchell, don’t you recall that it was in March of 1929 the Federal Reserve Board sounded a public warning with regard to this tremendous inflation of the credit structure? M r . M i t c h e l l. Yes, sir. Mr. P e c o r a . As represented by brokers’ loans and loans for -others? M r . M it c h e l l . Y e s , sir. Mr. P e c o r a . Loans that had up to that time reached an unprece dented amount? M r . M it c h e l l . Y e s; sir. Mr. DPecora. And, in order to apply a corrective to that inflation of prices, the Federal Reserve Board raised the rediscount rate in .'March olf 1929, didn’t it? 1816 STOCK EXCHANGE PRACTICES Mr. M i t c h e l l. Yes; but they were very slow in being permitted to do it. I can not tell you offhand just whether that occurred at that particular date or not. Mr. P e c o r a . Well, subject to confirmation of the date, do you recall the episode? Mr. M i t c h e l l. The episode you refer to? Mr. P e c o r a . Yes. Mr. M i t c h e l l. I think I understand it. Mr. P e c o r a . Do you recall that at the same time the National City Bank threw $25,000,000 into the call-loan money market at rates of 16 per cent and more? Mr. M i t c h e l l. Yes, sir. Mr. P e c o r a . And that that was regarded as a flaunt on the warn ing sounded by the Federal Reserve Board? Mr. M i t c h e l l. It was regarded as that in certain quarters; yes. Mr. P e c o r a . In certain responsible quarters? Mr. M i t c h e l l. Yes, sir. Mr. P e c o r a . In other words, at the time when the Federal Re serve Board was seeking to apply the brakes to this inflationary process the National City Bank was nullifying that to the extent that it threw this $25,000,000 into the call-loan money market. M r . M i t c h e l l. That I deny, Mr. Pecora. Mr. P e c o r a . Well, didn’t it have the opposite effect from that which was intended by the Federal Reserve Board in raising its rediscount rate at that time ? Mr. M i t c h e l l. I think not. Mr. P e c o r a . Didn’t it contribute to the opposite effect ? Mr. M i t c h e l l. I think not. What happened—and since the ques tion has been brought up I think I should be permitted to reply to it—was this: We had not been borrowing from the Federal re serve bank at all. The Federal Reserve Board’s warning was a warning against banks leaning on Federal reserve credit to support speculation. We were not leaning upon Federal reserve credit to support speculation. There developed in New York, at a time when we were not borrowing a penny from the Federal reserve bank, and not rediscounting, when we had plenty of Government bonds and eligible loans for discount at the Federal reserve bank—as I say, there developed one day at the money post on the exchange a period when there was no money to lend. The rate has gone up, I think, to 15 or 16 per cent. We stepped in there to allay what wag becoming a money panic, an inability of the legitimate borrower to borrow for his day contracts the money that was essential if they should be maintained. consider 16 per cent a legitimate Mr. M i t c h e l l. No. And of course that was not a renewal rate. But what we did at that time was to say: We are not prepared to support this situation by lending money at any rate that is posted, but if there are legitimate borrowers who have an honest need for this money overnight, we are prepared to lend $5,000,000, and I STOCK EXCHANGE PRACTICES 1817 think we offered to lend $5,000,000 at every few points of interest up. We did not want to lend it. Mr. P e c o r a . It was an increase of 1 point for every $5,000,000 of those $25,000,000, wasn’t it ? M r . M i t c h e l l . No; my r e c o l l e c t i o n i s i t w a s m o r e t h a n 1 p o i n t i n in t e r e s t . B u t p e r h a p s y o u a re r ig h t . Senator B r o o k h a r t . Who were those honest borrowers? Weren’t they speculators? M r . M i t c h e l l . No. Those were brokers who had to make good the contract that day, for overnight. We went in and loaned-----Senator B r o o k h a r t (interposing). That was a speculative contract. It was one of those gambling deals, wasn’t it? Mr. M i t c h e l l . This was not in support of the speculative market. This was to prevent a money panic, which was sudden, and developed overnight, and we went to the Federal reserve bank for two days only. I take the opportunity of asking if you will just let me read a paragraph from our bulletin? This pertains to what occurred in March of 1929. It won’t take but a moment. And four days later-----Mr. P e c o r a (interposing). Four days after what date? Mr. M i t c h e l l . After the date when we made these loans, which I think were about March 26 or 27, 1929. On the 1st day of April our monthly bulletin was issued, and I caused this paragraph to be put in : During the last week of March these large credit demands, including shifting of balances in connection with income-tax payments and in preparation of Quarterly disbursements of dividends and interest, combined with the substan tial withdrawal of funds from the New York call-loan market, resulted in a scarcity of call money that sent the rates up to 20 per cent and caused a sharp reaction in stock prices. Prompt action by New York City banks, however, in offering to provide funds to take care of the market’s requirements, served to avert any fears of a money panic. The National City Bank fully recognizes the dangers of overspeculation and endorses the desire of the Federal reserve authorities to restrain excessive credit expansion for this purpose. At the same time, the bank, business gener ally, and it may be assumed the Federal reserve banks, whose policies over the past year have been marked by moderation, wish to avoid a general collapse of the securities markets such as would have a disastrous effect on business. It is evident from the way money has acted here in the past few days that the crisis has passed and the incident is a closed book. At the same time it would be unfortunate that any action taken by this bank during the emergency should have created the thought that our views, again and again expressed, as to undue expansion of the credit structure have changed. That there has been a most unusual expansion in credit is a fact that is generally admitted and that the largest element in that expansion is so-called speculative loans must also be, and is, recognized. With this crisis passed, the people of the country would be generally well advised to bear in mind the condition of the credit structure and voluntarily see to it that in their loan accounts they maintain wider margins and lean less heavily on borrowed money. Mr. P e c o r a . Now, this expansion of the credit structure that is referred to in that bulletin, Mr. Mitchell, was due primarily, wasn’t it, to the unprecedented amount of speculation in the stock market over a period of two or three years prior to March of 1929 ? Mr. M i t c h e l l . It was the development of excessive speculation. 1818 STOCK EXCHANGE PRACTICES Senator B r o o k h a r t . I f you had let it collapse in March that would have saved hundreds of thousands of dollars to people who invested later on, prevented them from buying, and the collapse would not have suffered such purchases to mean a loss; is not that a fact ? Mr. M i t c h e l l . I do not believe that any man who has it within his power to stop a money panic is going to take the responsibility of seeing the money panic develop. Senator B r o o k h a r t . That is what is wrong with our financial system; nobody is going to stop this speculation. Mr. M i t c h e l l . I may be an inferior banker, but so long as I am in the banking business and can find a way to stop a money or a credit panic every bit of the weight I can put into the situation is going to be put in. Senator B r o o k h a r t . Y o u helped to inflate matters later and on up to the 25th of October, and you could not stop it then. Mr. M i t c h e l l . No; I beg pardon, Senator Brookhart. We stepped in in a critical moment, and we stopped the development of a panic at a critical moment. The warning of the Federal reserve bank was against the fostering of a speculative market by lending upon Federal reserve credit. Senator B r o o k h a r t . You did not take that as a general warning against speculation, then ? Mr. M i t c h e l l . It was the same kind of warning that we gave in what I just read you, that we gave through 1929 and prior thereto, again and again. Senator B r o o k h a r t . I do not think that any bank has any business at any time in working up an unnatural boom in stock prices or farm values whether in a critical moment or any other kind of moment. Senator F l e t c h e r . The depreciation in securities that resulted in October in a drop of some $25,000,000,000, as I recall, would not have been as great-----Senator B r o o k h a r t (interposing). Would not have been at all, would it ? Senator F l e t c h e r . Would not have been as great if this collapse had occurred in March, would it? I f that collapse had occurred in March 1929, what would have been the situation ? Mr. M i t c h e l l . The banker could not see a panic occurring because of a money squeeze that was minor in its character. Security prices were high, speculators and investors everywhere were borrowing more money than they should; that was a fact that we all appre ciated and that we were trying to preach against and educate the public in regard to. Senator B r o o k h a r t . And the way you did it was to lend them more money. That is what it means. M r . M i t c h e l l . W e ll, o f co u rse , y o u a re v ie w in g i t t h r o u g h d if fe r e n t e y e s t h a n I w o u l d v i e w it . I w o u ld v ie w i t p u r e l y a s a m o n e t a r y m o n e y sq ue eze , o n e t h a t a n y b a n k e r w h o h a s a r e s p o n s ib ilit y t o a p u b lic , i f i t is w it h in h i s p o w e r, s h o u ld a v e rt. Senator B r o o k h a r t . Y o u admit that the big financial minds did not foresee this October panic. B u t it was along about that time that I wrote an article in Plain Talk predicting that we were STOCK EXCHANGE PRACTICES 1819 headed into the greatest panic in the history of the world. And I did not see very far into it, either. Now, don’t you think the finan cial crowd had better begin to look at this thing from the standpoint of facts rather than from the standpoint of profit making? Mr. M i t c h e l l . I certainly think we have been looking at it from the standpoint of the facts. The C h a i r m a n . May I ask a couple of questions now? Mr. M i t c h e l l . Certainly. The C h a i r m a n . Mr. Mitchell, you have stated that you averted a shortage of money, and that as a result business went right on on the exchange. You have stated also that at that particular time you thought stocks were high. I f I may ask, how much higher did they go before they broke off—by three or four times, some of them, didn’t they? Mr. M i t c h e l l . Oh, I think not. The C h a i r m a n . Didn’t the big loss to the public take place be tween the period when you and the Federal Reserve Board disagreed on policy and the time when the breakdown came ? Mr. M i t c h e l l . We did not disagree on the policy, Senator Nor beck, fundamentally. I think there was a misunderstanding due to a quotation that had been put in a New York paper by a newspaper reporter who talked with me that evening, and it was regarded as a statement that I had given out. He had gone out and tried to re member what I had said as to our reasons for stepping in, and that was referred to as defiance of the Federal Reserve Board. I never issued any statement. The C h a i r m a n . It has been repeatedly interpreted by Senator Glass as your saying to the Federal Heserve Board to go to hell. Isn’t that so? Mr. M i t c h e l l . Senator Glass took that attitude at the time, and it was an exaggerated statement made as the result, not of any statement made by me, but as the result of the newspaper article. I was not-----The C h a i r m a n (interposing). Well, wasn’t the point that they were trying to get over, that of retrenchment, and you took the opposite view? M r, M it c h e l l . N o , s ir . The C h a i r m a n . Y o u say you found a shortage of money in the market. Didn’t the Federal Reserve Board take the view that there should be a restriction of credit? M r . M i t c h e l l . All banks were lending; not only banks but indi viduals were lending in the call market constantly. As a matter of fact, call loans were the most liquid of all the assets that we had. Now, we had an expansion in deposits and industry owing to the fact that industry had paid off large quantities of its debts through its ability to issue shares in the place of debts. That was not borrowing. So that there was a large amount of money resting in the banks, a large amount of credit that could be used only in| the call market. We are always operating in competition with the fellow who was lending his own money. And yet we were not lean ing on the Federal reserve bank at all. Of course, we had a cer119852— 33— pt 6------ 5 1820 STOCK EXCHANGE PEACTICES tain proportion of our assets in call loans, but we were maintaining an even position. We did not lend on call because we wanted to expand call loans but because they were the only available asset for us. This hap pened to be the situation when, with our position even, not leaning in any way on the Federal reserve bank, when this money squeeze developed and we stepped in. We were in the Federal reserve two days as a result. I will say that I submitted a chart of the rates and borrowings on the call market, in the New York market, and our own borrow ings from the Federal reserve bank, at my hearing before the Glass committee. And if you would like it in support of my statement in regard to this I should like very much indeed to introduce it and have it accompany this testimony, because it shows very clearly that the National City Bank was not throughout this period in any way leaning on Federal reserve credit for the support of the market during the so-called speculative era. The C h a i r m a n . I do not think it has been claimed that you did. But the Federal Reserve Board had sounded a warning, and you have said already that you found them short of money up there and you put more money in the market, and of course the boom went on. I do not think there is any disagreement about the facts. Mr. P e c o r a . It is simply one of motive. The C h a i r m a n . Well, I do not attempt to interpret motives. Mr. M i t c h e l l . It is one of method. I do not think anybody would say that an undesirable trend should be stopped by bringing about a collapse that would be the collapse not only of speculation but of industry too, which that would have meant. The C h a i r m a n . I am not trying to interpret that. We are trying to get at the facts as to conditions at that time, and they seem to be agreed upon here. You were a Class A director of the Federal reserve bank over there at the time, were you not ? M r . M i t c h e l l . Yes, sir. The C h a i r m a n . And as soon as the squeeze came they appealed to you for help and say you took the opposite course, and you deny that. Mr. M i t c h e l l . I doubt if the Federal Reserve Bank of New York would support that view at all, that what was done by our bank at the time was in violation of the spirit of what they were attempting, I mean attempting to get member banks to do in the conduct o f their affairs. The C h a i r m a n . I see that you have carefully selected your words. You do not say Federal Reserve Board but Federal Reserve Bank of New York. M r . M i t c h e l l . I cannot speak for the Federal Reserve Board. The C h a i r m a n . But the Federal Reserve Board is the only one whose action is referred to. No one has referred to the action of the Federal Reserve Bank of New York except you, and you say you doubt very much if they had that view. I say the Federal Re serve Board had a certain view. M r . M i t c h e l l . Yes, but they were bound to express their view through the Federal reserve bank controlling our district. We are STOCK EXCHANGE PRACTICES 1821 not in direct touch with the Federal Reserve Board, you will bear in mind. The C h a i r m a n . I know that the impression has grown that the Federal Reserve Board has been entirely subordinated to New York influences. I know that that influence has developed. Senator C o u z e n s . I s there anybody with the Federal Reserve Bank of New York whom this committee could call to substantiate your viewpoint ? Mr. M i t c h e l l . Governor Harrison is the governor of that bank. Senator C o u z e n s . Was he active at the time this incident occurred of which Senator Glass complained? Mr. M i t c h e l l . Yes, sir; he was the governor of the bank at that time. Mr. P e c o r a . D o you recall at that time saying this, either in words or substance, which was published in one of the papers: This question of stock prices is inextricably bound up with that expansion of credit, and this is one point that the Federal Reserve authorities apparently did not dare discuss. i t c h e l l . N o; I do not r e m e m b e r that. Mr. P e c o r a . D o you recall that you were quoted to that effect in the New York Times of March 30, 1929? Mr. M i t c h e l l . No; I do not. I might have been quoted that way, but I do not remember the interview of which you speak, or the article. The C h a i r m a n . Well, the committee will adjourn at this time until 10 o’clock tomorrow morning. Senator C o s t i g a n . Mr. Chairman, it is my understanding that Miss Grace van Braam Roberts, of Ulster County, New York, who has heretofore testified before this committee, has a brief supplemental statement which she desires to make. She has a written statement which she is willing to read, or if the committee prefers, she will submit it for the record. Senator C o u z e n s . I suggest that the statement be printed in the record at the request of the witness. The C h a i r m a n . Without objection that will be done. M r. M A d d it io n a l F S ta t em en t a r m s , H b y M is s G r a c e , U lster C ig h l a n d va n B. o u n t y R o berts, U , N ew Y ork lsterdo rp In order to clarify some points in a case which has already been considered by this committee, and which offers an interesting field for further investiga tion, I wish to place in the records of these hearings two documents, which are here attached. The first is a transcript of part of Mr. Richard Hoyt’s testimony for the defense in Miss Grace van Braam Roberts’s suit against Hayden, Stone & Co. This transcript includes Mr. and Mrs. Hoyt’s joint account in Atlantic, Gulf, and West Indies stock, his personal account for some of his dealings in the same stock, and the pool account. This pool, as was proved in court, was admitted by Mr. Hoyt, an officer of Hayden, Stone & Co., to have been formed to support Atlantic, Gulf, and West Indies stock. It operated during the six weeks from November 17 through December 31, 1920, while, as was afterwards disclosed, members of the firm of Hayden, Stone & Co. were secretly unloading their stock under cover of an active campaign by their customers’ men directed by Mr. Richard Hoyt, urging the stock as a splendid investment. The second document is a transcript of figures from the New York Times for part of the period covered by the suit, showing selling prices and amounts sold 1822 STOCK EXCHANGE PRACTICES daily of Atlantic, Gulf, and West Indies stock from October 1 through December 31, 1920. Excerpts from the testimony filed with the court (pp. 55, 63-65) : New Y o r k , May 28, 1925. Memorandum of transactions in common stock of Atkmtic, Gulf <6 W est Indies Steamship Lines by Richard F. H oyt from January 1, 1920, to December *tl, 1921 [S298 account in which M r. H oyt had one-half interest and M rs. H oyt one-half interestl Purchases Am ount 200............................................... 600 ................................. 100 ........................................... 100 ........................................... 100 ....................................... $148,895.00 32,440.00 87,920.00 14,970.00 17, 245.00 13,970.00 2,100........................................... 315,440.00 204 from joint account............ M argin from joint account— 14,885. 28 6,500.00 204 balance, $104.83.................. 21,385.28 T otal. 2 0 4 ............................................. 1920 23 8 Dec. 31 1921 Jan. 1 1920 Am ount Sales 200.............................................. 100........................ - ................... 100.............................................. 300.............................................. 100................. ............................ 100.............................................. 100............................ ................. 100............................... ............. 100................................... .......... 100............................ ................. 100.............................................. 100.............................................. 100.............................................. 100............................ ................. 100...........................................100.......................... .................... 200.............................................. ( 0 ............. - ................................ $30,002.00 15,476.00 15,926.00 46,728.00 16,476.00 17,226.00 16,376.00 10,381.00 10,281.00 10, 218. 50 10,231.00 10,581.00 10,481.00 10,381.00 10,281.00 10,181.00 19, 212.00 45,001.50 2,100........................................... 315,440.00 1921 Jan. 12 100,$72%.................................... Jan. 13 4,$74H..................................... D o — . 100, $75........................................ Jan. 31 0 ) ................................................ 7,256.00 295.84 7,481.00 6,352.44 21,385.28 204............................................... 21,385. 28 4.00 100,$29^..................................... 100,$32^..................................... 2,931.00 3,231.00 300, $26.81.................................. 8,043.00 Mar. 5 Mar. 16 Mar. 17 Apr. 7 June 1 Dec. 21 Dec. 23 D o .... D o .... Dec. 24 D o .... D o .— D o .... D o— . Dec. 29 N ov. 17 ON RICHARD F. HOYT ACCOUNT 1922 1921 300, $41.09.................................. 12,459.07 1922 Mar. 31 T otal. 300............................................... 12,459.07 ( 0 ................................................ 4,416.07 300.............................................. 12,459.07 ' Trading operation, losses. In account ivith Hayden, Stone & Co., New York, record of pool operations [Account N o. 418] Date, 1920 N ov . 17 Bought or received Sold or de livered 100 100 100 100 200 100 100 100 100 100 100 100 100 100 ........do___________ ___________ ___ ___ d o.................... ............... ............ 18 ___ d o______ ____ _________ ______ 100 19 Description ___ do................................. ................ ........d o ...................... ...................... ........do............. .................................. Price 114 115 114*4 110Yl 109 109 111 111^ 112 113 113^ 112^ m 'A 108 107 D ebit $11,415.50 11,515.00 11.440.00 11.065.00 21.830.00 10.915.00 11.115.00 11,165.00 11, 215.00 11,315.00 11.365.00 11.265.00 10.865.00 10.815.00 10, 715.00 Credit bal ance 1823 STOCK EXCHANGE PRACTICES In account with Hayden, Stone & Co., New York, record, of pool operations— Con. Date, 1920 Bought or received N ov . 10 22 Description ____ do...... ........ - ................- .......... ____ d o....... .............. ......................... ........d o ............... ..................... ........ ____ do......... .........................- .......... ___ d o _________ _____ __________ ____ do........... ..................... .............. 23 100 ____ do_................. - ................... ....... 100 100 100 26 100 100 100 100 100 100 200 100 100 100 100 100 100 100 100 100 100 100 d o_________________________ 100 100 100 ___________ 1____ d o ...... .............. ........... ............ 100 100 100 100 100 100 100 100 - _______ I____ do_. ___________ _________ 100 ___ do......... ............ ........ .................. 100 100 200 100 100 1,000 100 100 100 100 100 100 ____ do............................... ................ 100 ____ d o.................. - ______ _______ 100 100 100 100 100 ........d o............................................... 100 ____ do______ _______________ ___ 100 ____ d o .. ______________________ 100 ____ d o ______________ __________ 100 ____ do - .............. .............. .............. 100 ____ d o ..... ................................... 100 ____ d o .................. ................... ........ 100 ____ d o ________ _______ _______ _ 100 ____ d o............. ........ ....................... 100 100 ____ d o .................. .......................... 100 ____ d o ______________ __________ 100 ____ d o............................................ 100 ____ d o . ___________ __________ 100 ____ d o . . _______ _______________ 200 ........d o . ................ ........................... 100 ____ d o ....... ......................... .............. 29 Dec. 100 100 100 100 100 100 100 100 100 100 100 100 Sold or de livered 2 3 6 7 10 13 14 15 20 Price 1063^ 107^ 104 105% 105% 106 105% 104% 105 103% 105M m y2 110 n o y2 111J4 111 101M 103 m iA 101h 101% 102 102% 103% 104% 104 103 103% 105% 105% 10614 107 107}i 108 104^ 105 104% 106 m y2 102% 102 99% 99Vi 103 100% m y* 100 101% 101 100% 101^ 100 102% 102 108 111 m y2 U 2y2 112 114 114^ 113^ 113 108 108^ 10914 109 110 107J4 108 107 106K 105 105M 106 110 105 1044 10334 103 Debit Credit bal ance $10, 665. 00 10.765.00 10.415.00 10.540.00 10, 540.00 10.615.00 10.540.00 10.440.00 10, 515.00 10.390.00 10, 565. 00 10.465.00 $10,981.00 11.031.00 11.131.00 11.081.00 10.165.00 10.315.00 10.565.00 10.165.00 10.190.00 10,215. 00 20.480.00 10.340.00 10.440.00 10.415.00 10, 365. 00 10, 390.00 10.590.00 10, 540.00 10.665.00 10.715.00 10, 765.00 10,815. 00 10.465.00 10.515.00 10,490. 00 10, 615.00 10.265.00 10.240.00 10, 215. 00 9,977. 50 9,965.00 10.315.00 10.090.00 10,065. 00 10.015.00 10.190.00 20.230.00 10.040.00 10.165.00 100,150.00 10, 290.00 10.215.00 10.781.00 11.081.00 11.131.00 11.231.00 11.181.00 11.381.00 11.431.00 11.331.00 11.281.00 10.815. 00 10.865.00 10,905. 00 10, 915. 00 11.015.00 10, 765.00 10.815. 00 10.715.00 10.665.00 10, 515. 00 10, 565. 00 10.615.00 10,981.00 10, 515. 00 10,465.00 20,680. 00 10, 315.00 1824 STOCK EXCHANGE PRACTICES In account with Hayden, Stone & Co., 'New York, record* of pool operations— C o n . Date, 1920 Bought or received Dec. 22 Sold or de livered 100 100 100 100 100 100 100 100 100 100 100 100 23 Description Price Atlantic G ulf................................. ........ d o ..... ............ ............... ............ ____ d o ............................................... ____ d o . . _________ ______________ ____ d o........... .................................. . ____ d o ........................... _.................. ____ do ......................... .................... ____ do ________________ ______ ____ d o............................................... ____ do .......... .............................. 100 100 100 100 100 100 100 100 100 24 28 100 100 100^ io ih 100% 102 102H 09H 99 98 97M 9 8^ 9934 101 10014 100 104M 105^ 102*4 1033/i 10634 101% 97 Credit bal ance D ebit $10,015.00 10.065.00 10.165.00 10.090.00 10.215.00 10.265.00 9, 940. 00 9.915.00 9.815.00 9,765. 00 9.865. 00 9,940.00 $10,081.00 10.031.00 9,981. 00 10.431.00 10.531.00 10.231.00 10, 331.00 10, 631.00 10,156.00 9,715.00 ( S ig n e d ) R. F. H oyt. Account long 8,000 shares, delivered proportionately to partici pants against payment for same on December 31, 1920. Closing prices and amounts of daily sales of Atlantic, Gulf & West Indies stock, 1920 [T a k e n fro m th e N ew Y o r k T im e s] Closing price Date Oct. 1 .. Oct. 2__ Oct. 4 .. Oct. 5 .. Oct. 6 .. Oct. 7 .. Oct. 8 .. Oct. 9 .. Oct. 11. Oct. 13Oct. 14. Oct. 15Oct. 16. Oct. 18. Oct. 19. Oct. 20. Oct. 21. Oct. 22. Oct. 23. Oct. 25. O ct. 26. Oct. 27. Oct. 28. Oct. 29. Oct. 30. N ov. 1.. N ov. 3.. N ov. 4.. N ov. 5.. N ov. 6. N ov. 8_. N ov. 9.. N ov. 10. N ov. 11. N ov. 12 N ov. 13 N ov. 14. N ov. 15. Am ount sold 143 145M 700 1,000 150J^ 2,000 0) (2) 148 145 142 1411/3 146 144 146 144% 143^ 146 147J4 145 144! 145'% 145V2 144M 142% 142 142 142 143K 139^ 132% 131% 124% 123M 123 11834 113 114^ U3Vs 114 i B id 14534 asked 147. 600 700 1,200 700 400 100 700 200 300 600 2,600 300 2,200 2.300 2,800 800 1,100 5.700 1,100 300 100 1,100 2,200 9.500 4,600 10,200 7,100 8.300 21,000 19,600 4.700 7,900 5.500 Date Closing price no 107% 105% 107 HIM 110 102% 102% 104 105 106% 109% 111M 111 N ov. 17 N ov. 18 N ov. 19 N ov. 20 N ov. 22 N ov. 23 N ov. 24. N ov. 25 N ov. 27. N ov. 29. N ov. 30 D ec. 1 .. Dec. 2 .. Dec. 3 .. Dec. 4 .. Dec. 6 .. Dec. 7 .. Dec. 8 .. Dec. 9 .. Dec. 10. Dec. 11Dec. 13. Dec. 14. Dec. 15. Dec. 16. Dec. 17. Dec. 18. Dec. 20. Dec. 21. Dec. 22. Dec. 23. Dee. 24. Dec. 27. Dec. 28. Dec. 29. Dec. 30. Dec. 31. U4X 110 112J* uoy2 my2 my2 106^ 105^ 110 107M 108 107% 103^ 103% 101^ 100% my2 102 97% 93% 89% 75^ 7534 * B id 148, asked 150. Am ount sold 7,200 7,000 12,700 2,600 6,600 3,300 9,600 17,800 3,100 6,000 5,300 5,900 16,000 6,400 7,000 8,500 8,600 6,100 7,200 7,200 3,300 7,000 7,700 4,800 2,400 1,700 6,700 4,100 8,200 14,700 8,200 3,700 10,800 19,600 16,800 23,300 29,600 1825 STOCK EXCHANGE PEACTICES In connection with these records and with the testimony already given by me before this committee the following questions rise: (1) To what extent were members of Hayden, Stone & Co. and their families selling stock under their own names or through dummies while they were urg ing their customers to buy? (2) When the members of the firm contributed to the pool 17% per cent of its stock, did they buy this stock in the open market, or did they merely transfer some of their personal holdings? (3) When the pool relinquished considerably over 17% per cent of its stock during its lifetime, did this percentage include the stock belonging to Mr. Hayden and Mr. Stone, and did they then sell it before the expiration of the pool? (4) Did members of the firm or their families, while selling stock in their possession to customers whom they could persuade to hold that stock, at the same time sell short before the expiration of the pool and also from time to time in 1921, while they were still advising me to hold my stock? (5) While officers of the stock exchange, the most powerful institution in the world, have declared themselves unable to answer the foregoing questions, can investigators working under the direction of the Committee on Banking and Currency learn the answers? I wish to call attention, also, to the following paradoxical situation. The Supreme Court of New York judged Hayden, Stone & Co. guilty of fraud. Mr. Whitney has repeatedly asserted that he sees nothing worthy of censure in the firm’s conduct. Yet on October 28, 1930, Mr. Whitney said before an audi ence consisting of the junior league and their friends, “ W e endeavor to have righteous men as our members and to have their conduct of business done in a straightforward way.” The difference between the standards of the court and those of the stock exchange invites further investigation. Some light is thrown upon the attitude of bankers toward stock-exchange practices in letters from several of the most, influential New York banks, of which the following letter from Mr. J. P. Morgan’s office is typical: November 16, 1932. J. P. M o r g a n , Esq., New York City. My Dear Sir: I am venturing to send you under separate cover a copy of part 3 of the hearings before the Senate Banking and Currency Committee investigating stock-exchange practices, and to request that you read pages 1127 through 1144, including the correspondence between Senator Burton K. Wheeler and Mr. Richard Whitney, president of the New York Stock Exchange. I testified at that hearing with the understanding that the committee would take action if abuses were found. Senator Norbeck planned to have Mr. Whitney down to answer my charges and to have me return in surrebuttal. Just recently I have heard from another Senator that a group of bankers, headed by the chairman of one of the large city banks, is endeavoring to have the proceedings quashed on the plea that they are delaying business recovery, Mr. Whitney and an influential brokerage house are under fire. After you have read the above-mentioned evidence I hope that you will write me how you feel about allowing these dishonest groups to conspire to rob the public, the most contemptible and cruel form of robbery possible. Also, do you believe that recovery can be built on a rotten foundation? Sincerely yours, G. van B . R oberts. D ecem ber J. P. 12, 1932. M o r g a n , E sq ., New York City. S i r : I have received no acknowledgment of my letter to you of November 16, and feel that I must write again in order to make your attitude on the issue of stock-exchange connivance with fraud clear beyond question. Your great house cannot be afraid of Mr. Richard Whitney or of Mr. Charles Hayden; and if you refrain from censure of their acts, you will be understood to approve them. Hayden was adjudged a cheat, and did not appeal. Whitney is his defender, and says that the Supreme Court was wrong. I have sent you the evidence as printed by the Senate Banking and Currency Committee. My D ear 1826 STOCK EXCHANGE PRACTICES This is no trivial matter. I cannot allow this thieving to be covered up. Hayden, Stone & Co. not only has a large amount of my money but also is still cheating trusting clients. For the financial district to defend these cheats is to invite sweeping condemnation. If the members of this firm had cheated at cards or in a yacht race, they would have been expelled from their clubs. Why is stealing money from trusting customers more respectable? W ill Mr. Whitney's false statements tend to establish public confidence at a time when the stock exchange needs confidence? The law in England is very much more severe against one who recommends securities that he knows are unsound than it is here. The need for reform here is evident. I hope that you will write me that your house disapproves of the conduct of Mr. Whitney. Yours very truly, G. v a n B. R o b e r t s . N e w Y o ® k , January 27, 1938. B. R o b e r t s , Highland,, Ulster County, New York. D e a r M a d a m : Mr. Morgan directs me to acknowledge receipt of your letters of November 16 and December 12 and to say that he has the highest regard for both gentlemen you mention, and feels sure that you are misinformed. Yours very truly, V . A x t e n , Secretary. Miss G race, v a n J a n u a r y 29, 1933. Esq., New York City. My D e a r Si r : The most fitting comment on the letter that you requested Mr. Axten to write for you is, “ Whom the gods would destroy they first make mad.” When you hold in your hand a Supreme Court decision against them, can you deceive yourself into believing that adjudged cheats or tricksters— nay more, criminals, if I had handed the decision to the district attorney— can by the mere declaration of your faith in them be rehabilitated? W e shall not get the country back on an even keel by any such unsound policy. W e need sobriety, common sense, and honesty. Can you believe that your statement of Janu ary 27 will do more than serve public notice where you stand, to your own Undoing? The letter of January 27 is in reply to my letters of November 16 and December 12, and hence seems not to have been written in haste. This matter is very important. I urge you, if possible, to correct the unfor tunate impression made by your message. If, however, the letter really conveys the matured answer upon which you have determined in the months since my letters reached you, then, unless I hear from you to the contrary, I shall con sider that I have your permission to make that answer public. Very truly yours, G. v a i t B. R o b e r t s . Mr. J. P. M organ, The C h a i r m a n . The subcommittee will now stand adjourned until to-morrow morning at 10 o’clock. (Thereupon, at 4.40 o’clock p. m., Tuesday, February 21, 1933, the committee adjourned to meet at 10 o’clock on the following morning.) STOCK EXCHANGE PRACTICES WEDNESDAY, FEBRUARY 22 , 1933 U S u b c o m m it t e e of C o m m it t e e S tates S e n a t e , B a n k in g an d C u rren cy, n it e d on Washington, D. G. The subcommittee met, pursuant to adjournment on yesterday, at 10 o’clock a. m., in room 301 Senate Office Building, Senator Peter Norbeck presiding. Present: Senators Norbeck (chairman), Townsend, Costigan, and Fletcher. Present also: Ferdinand Pecora, special counsel to the committee; Julius Silver and David Saperstein, associate counsel to the com mittee. The C h a ir m a n . The subcommittee will come to order. Mr. Pe cora, you may rest ne with Mr. Mitchell. TESTIMONY REST MED OF CHARLES E. MITCHELL, CHAIRMAN NATIONAL CITl BANK OF NEW YORK, NATIONAL CITY CO., AND CITY BANK FA1 MERS TRUST CO. Mr. P e co ra . Mr Mitchell, are you an officer of the General Sugar Corporation ? M r . M i t c h e l l . ! am a director of the General Sugar Corpora tion. I do not thi .k that I am an officer—let me ask an associate— yes; I am a direct >r. Mr. P e c o r a . Have you been an officer of it, other than a director? Mr. M i t c h e l l . I think not. Mr. P e c o r a . Poor’s Manual of Directors lists you as chairman of that corporation. Do you know about that? Mr. M i t c h e l l . I may have been chairman of the board of di rectors but never an executive officer. Mr. P e c o r a . Who is the executive head of that corporation? Mr. M i t c h e l l . I think Col. E. A. Deeds is the president of it. Mr. P e c o r a . He is a director of the National City Bank? Mr. M i t c h e l l . He is, at the present time. Mr. P e c o r a . There was some testimony given yesterday by you concerning loans that the National City Bank had made over a period of years and which aggregated upwards of $30,000,000. Do you recall that testimony? Mr. M i t c h e l l . I recall that the question was raised; yes. Mr. P e c o r a . Now, were any other loans made to the sugar com panies that were taken over by the General Sugar Corporation, 1827 1828 STOCK EXCHANGE PRACTICES either since the transaction of February 15, 1927, that was referred, to in your testimony of yesterday or before that date ? M r . M i t c h e l l . Oh, yes. There were loans made to the integral companies, whose stock was held by General Sugar. Mr. P e c o r a . And those loans were made since February of 1927? M r . M i t c h e l l . Yes, s i r . Mr. P e c o r a . Are you familiar with those loans? Mr. M i t c h e l l . Not in detail; no, sir. Mr. P e c o r a . What is the aggregate amount of the loans that have been made since February of 1927? Mr. M i t c h e l l . I can not give you that without refreshment. Mr. P e c o r a . H o w many such loans have been made? Mr. M i t c h e l l . They have been made during the grinding season, large loans made constantly on pignorated sugar, and there have been some dead-season loans, if you understand those terms. Mr. P e c o r a . I do not. Mr. M i t c h e l l . Well, pignoration loans are loans that are made against sugar in warehouse, with the sugar securing the loan. Dead-season loans are loans that are made for preparing the crop in advance of the harvest; and under the Cuban laws they are well protected by a lien on the crop to be taken off. Mr. P e c o r a . And those loans have been made since and during this period of collapse in the sugar industry in Cuba? Mr. M i t c h e l l . With respect to the collapse of the sugar industry in Cuba, you questioned me yesterday when my mind had not been refreshed with regard to prices of sugar and the movements over a period of years. I wish you would give me an opportunity to correct some impressions that prevailed at that time, because overnight I have studied the situation and can now give you a very much clearer picture, and one that is very much fairer to this presentation. The C h a i r m a n . Well, Mr. Mitchell, if it is brief there could be no objection to it. But we do not want to get into a long statement or speech here this morning. M r . M i t c h e l l . I can understand that, Senator Norbeck. The C h a i r m a n . I f it is too long we can have some of it printed in the record. We would like to accommodate you, however, to clear up any wrong impression that might have been developed yesterday. Mr. M i t c h e l l . Quite so; and that is what I am asking now, Senator Norbeck. Mr. P e c o r a . First, Mr. Mitchell, will you answer the question I put to you, and then you may make a statement if you desire to make it. M r . M i t c h e l l . I a m n o t p r e p a r e d t o a d m it , a n d t h is p r e s e n t a t io n w i l l in d ic a t e it , t h a t t h e c o lla p s e o f t h e s u g a r i n d u s t r y w a s a c o n t i n u i n g t h i n g f r o m 1920 a n d 1921 t h r o u g h t h i s p e r i o d . I m e n t i o n e d y e s t e r d a y in m y t e s t im o n y t h a t th e m a r k e t h a d im p r o v e d a t v a r io u s t im e s . Mr. P e c o r a . Y o u mentioned it as of one period, and you placed it at about 1926. Mr. M i t c h e l l . Well, I was wrong about that. Mr. P e c o r a . When you stated there was only a slight flurry upward. M r . M i t c h e l l . Well, I was wrong about that, and that is what I desire now to correct. STOCK EXCHANGE PRACTICES 1829 Mr. P e co r a . Well, the chairman has indicated you may state it briefly. Senator F l e t c h e r . I think he has a right to correct it. Mr. P e c o r a . I s it merely a correction that you wish to make of your testimony on yesterday? Mr. M i t c h e l l . I wish to correct an impression that I gave on yesterday as to the conditions of the sugar industry over a period of years, my mind not then being fresh on the subject. It is vital to this question that you are asking. Mr. P e co ra . Well, if the statement will be a brief one the com mittee will hear it. Mr. M i t c h e l l . I have before me official statistical charts of sugar prices from 1920 to the close of 1932. The high price of sugar in 1922 was 22^ cents. It dropped to a low of approximately 3y2 cents per pound during that year. The following year, in 1921, Cuban sugar reached a high of 514 cents, and a low of approximately 2.41 cents. In 1922 sugar opened the year at a low of about 1.81 cents. It im proved throughout that year, and it was assumed that sugar was coming back into a position of stability. In the closing months of that year sugar reached 4 cents a pound, and closed the year at 3.71 cents a pound. It was during the last quarter of that year that the financing of the Yertientes and Camaguey companies, which you mentioned on yesterday, was done. Senator F l e t c h e r . Are those New York prices of sugar? Mr. M i t c h e l l . Those are f.o.b. Cuba. Mr. P eco ra . What you have just referred to as financing was in reality refinancing, wasn’t it ? Mr. M i t c h e l l . N o , sir. That was financing incident to the com pletion and rebuilding of those properties, which-----Mr. P e c o r a (interposing). The properties were in operation and had been producing, and' had been given certain loans by the National City Bank, and in 1922 the General Sugar Co. was organized to take over the management of those underlying producing companies, and it was the General Sugar Co. that was financed in 1922, is that correct ? Mr. M i t c h e l l . The General Sugar Co. was formed in 1922, and money was furnished through them for the development of the Yertientes and Camaguey companies, and the National City Co. made bond issues to which I referred on yesterday, at that time for the Yertientes company and for the Camaguey company. And I have before me the circulars that were issued with regard to those companies incident to the bond issues. The estimates, incidentally, showed that with sugar at 4 cents per pound, which it reached, where it was on November 25, 1922, that property would earn $4,130,000. And I have the range at lower prices. The year, as I say, closed at 3% cents. At Sy2 cents it was estimated the earnings would be $3,420,000 per annum. Mr. P e c o r a . Those are all estimated earnings, on which that cir cular was based, are they not? M r . M i t c h e l l . They are estimated earnings, and the balance sheet was given. This company had been in operation, and had been a profitable company. 1830 STOCK EXCHANGE PRACTICES Mr. P ecoka. Were those M r . M i t c h e l l . The cost earnings realized as a matter of fact? per pound of sugar produced at the Vertientes mill was less than was estimated, less than any estimate that was made. Mr. P e co r a . But the question I asked is: Were those estimated earnings actually realized that year? Mr. M i t c h e l l . They were realized on the basis of the price o^. sugar prevailing during that year and the following years. Mr. P e c o r a . But the question I asked you was: Did the company actually get those earnings? Did they realize those estimated earnings ? Mr. M itc h e ll. Y ou see, this plant was in process of building. Mr. P e c o r a . My question, Mr. Mitchell, was: Were the estimated earnings referred to in that circular actually realized in that year by the company? Mr. M i t c h e l l . They were not estimated for that year, Mr. Pecora. They were estimated for the years 1923, 1924, and 1925 in the cir cular, during which time the property was being completed. Mr. P e c o r a . Do you mean that in 1922, when that circular offer ing the bond issues of those sugar companies was put out, the value of the bonds was based upon estimated earnings for the next three years ? Mr. M i t c h e l l . It was in part on estimated earnings. But-----Mr. P e c o r a (interposing). For three years ahead? Mr. M i t c h e l l . For three years ahead; yes, sir. But-----Mr. P e c o r a (interposing). On a crop like sugar? M r . M it c h e l l . Y e s , sir. Mr. P e c o r a . Were those estimated earnings for those three years actually realized? Mr. M i t c h e l l . The estimates, as I recall them, were all under as to the production of the mill, the cost of sugar, and were, in accordance with various prices at which the earnings were estimated. This was not a new property. Mr. P e c o r a . The question is: Were the estimated earnings for those three years actually realized by the company ? Mr. M i t c h e l l . This estimate was made on the basis of certain production. I can not tell you, without further reference, exactly what the production was in those years. Mr. P e c o r a . Well, if you are going to give us a complete explana tion of these things, wouldn’t it be better to first fortify yourself as to the facts of actual earnings instead of taking merely estimated earnings ? Mr. M i t c h e l l . Mr. Pecora, I think you are very unfair to me. I stated to you yesterday in connection with this sugar matter, and in connection with certain other matters that you brought up, that there were associates of mine who were thoroughly familiar with every detail of these companies, and you have summoned them to appear here, and they are here. Mr. P e c o r a . Who were those associates? Mr. M i t c h e l l . The associates of mine that have to do or know about this far more in detail than I do, are Mr. Rentschler, who is now president of the National City Bank, and Mr. Russell and Mr. Ripley, both vice presidents of the National City Co. STOCK EXCHANGE PRACTICES 1831 Mr. P e c o r a . Were Mr. Russell and Mr. Ripley with you and Mr. Rentschler when you made this trip to Cuba in 1922 to survey the sugar industry there? Mr. M i t c h e l l . Mr. Rentschler was. Mr. P e co r a . I asked you if Mr. Russell and Mr. Ripley were. I know that Mr. Rentschler was, because that was brought out yes terday. Mr. M i t c h e l l . I think neither of them was. But they have been; and they are a part of our organization who have kept in daily touch with this sugar industry. Mr. P e co r a . And you think it is unfair for me to ask you about this sugar situation rather than Mr. Ripley and Mr. Russell, who did not go down to Cuba in 1922 to make the survey that you made ? Mr. M i t c h e l l . Mr. Rentschler has been very closely identified with our interests in sugar from the time that I came into the Na tional City Bank and started to make the study incident to the heavy loans which then existed. He made that study in detail, and he lived with it for several months. He is familiar, I think, with every step that has been taken in that matter, and, personally, I have relied very largely on him and the men he has gathered about him in connection with this phase of our work. Mr. P eco ra . I s Mr. Ripley an officer or director of the National City Bank? Mr. M i t c h e l l . N o, sir. Mr. P e co r a . You went down to Cuba not only as an officer of the bank but as an officer of the National City Co., both of which or ganizations were interested in those sugar loans; isn’t that so ? Mr. M i t c h e l l . The National City Co. at that time, I think, was not interested in it in any way. Mr. P e co r a . It became vitally interested in it in 1927, didn’t it ? M r . M i t c h e l l . It did. Mr. P eco ra . When it took those loans over from the bank. Mr. M i t c h e l l . It did. And I wish to correct your statement, or make a clear statement of what occurred on yesterday. Mr. P eco ra . By whom was the statement made of which you complain, you or me ? Mr. M i t c h e l l . I wish to clear up the statement that was made by you, which in the passage of testimony was slipped over and which left an incorrect impression. Mr. P e co r a . What was slipped over on yesterday ? M r . M i t c h e l l . The impression was slipped over to this effect: You spoke of these loans being “ unloaded” by the National City Co., and you indicated that they were no good as of the time they were turned over, and that we were misleading our shareholders with regard to that particular increase in stock which gave the National City Co. $25,000,000, to take these over. Mr. P e c o r a . Did I slip that over, or did you make answers to my questions which created that impression? Mr. M i t c h e l l . I remember distinctly your words “ unloading of these ” and the intimation of your questions was distinctly that this was the equivalent of something that was misleading and a fraud upon the stockholders, which it was not. 1832 STOCK EXCHANGE PEACTICES Mr. P e c o r a . Didn’t I ask you whether the turn that these trans actions took in 1927 was an unloading? M r . M i t c h e l l . You used the words-----Mr. P e c o r a (interposing). I used the words “ bailing out ” ? Mr. M i t c h e l l . Yes. Mr. P e c o r a . Wasn’t it you that made the answers to the questions that I put to you, that created whatever impression is in your mind concerning them? Mr. M i t c h e l l . I hardly think so, and I should like the oppor tunity to make clear the situation, as I have requested here, and if you would let me go on with this, then you could come back to your questioning. This would, it seems to me, clarify the situation. Mr. P e c o r a . Was there any limitation placed upon your answer ing the questions that you answered yesterday ? Mr. M i t c h e l l . No. But there was only this impression: I was asked at that time about these matters, and I stated there were men who were more familiar than I, and who were in this room, and I asked that they be permitted to testify on this. But you asked me to testify from memory, and I did the best I could, scratching my memory for things that happened years and years ago upon which I had not refreshed myself.' Since that time and overnight I have refreshed myself, and I am prepared to give the general situa tion in a very brief picture and that is what I have asked the chair man of this committee the privilege of doing. Mr. P e c o r a . I think, Mr. Chairman, it ought to be done, but not at this time. I do not think the examination of this witness should be interrupted by a statement which is going to concern other things besides the General Sugar Corporation, or that my examination should be diverted to allow the witness to make explanations which he had every chance to make in answer to the questions put to him by me yesterday and which he then answered. M r . M i t c h e l l . I c a ll y o u r a t t e n t io n to t h e f a c t t h a t y o u f o r c e d m e t o a n s w e r f r o m w h a t I s a i d a t t h e t im e w a s a v a g u e m e m o r y . The C h a i r m a n . Mr. Mitchell, you may proceed to make your explanations, with the understanding that they will be brief and you will keep to the point. I f there were mistakes made yesterday, correct those few mistakes, if you will, and then let counsel for the committee go on with his examination. Mr. M i t c h e l l . I presume, Senator Norbeck, your committee is after the facts, and not after the creation of a wrong impression in regard to these matters. Mr. P e c o r a . Whatever wrong impression was created yesterday was created by your testimony, because you were the only witness who testified yesterday, isn’t that a fact ? M r . M i t c h e l l . I t h i n k it w a s c re a te d b y th e q u e s t io n s a n d n o t p e r m i t t i n g m e ------Mr. P e c o r a (interposing). By the answers you made to my ques tions. I was not testifying. I was asking you questions, and cer tainly if anything that I assumed in my questions was incorrect you had every opportunity in answering those questions to point that out. Now, you want to point it out, after 24 hours. The C h a i r m a n . Mr. Mitchell, you may proceed. STOCK EXCHANGE PRACTICES 1833 Mr. P e c o r a . I resent the witness’ statement that the wrong impres sion was created by my questions rather than by his answers. The C h a i r m a n . You may proceed, Mr. Mitchell. Mr. M i t c h e l l . The point I desired to make clear was that there had been a very definite improvement in the sugar market. The market in 1922 advanced from 1.81 cents per pound to 4 cents per pound, and it was in the latter part of that year that the financing was done for the Yertientes and Camaguey companies. The first financing for Sugar Estates and Orientes was done at that time, and the General Sugar Co. came into being. Now in 1923, after some drop in the market, there was an advance in Cuban sugars to a high of 6.625 cents per pound, with a drop later in the year to 4 cents per pound, and the year closed, after going to 6 cents a pound, at 5.625 cents per pound. You will see that the industry had begun to stabilize itself markedly. The C h a i r m a n . That was in what year ? Mr. M i t c h e l l . It was in 1923. The following year the high was 5.625 cents per pound. In the middle of that year there was a drop in price to 3.2 cents, but in the latter part of that year sugar again stabilized itself around 4% cents, in January being as high as 4.375 cents. And at that time the Cuban-Dominican bonds spoken of yes terday were put out and a small additional issue of Orientes bonds. In the following year—1925—the price of sugar varied from 3.03 cents per pound to a low of 1.94 cents, but closed the year at 214 cents. In 1926 the year was bad at the start, the price of sugar running down to 2.19 cents per pound, and closed the year at 3.375 cents per pound. In 1927 sugar opened the year at 3y2 cents per pound, stabilized itself during the months of January and February at about 3.10 cents to 3.15 cents, and closed the year, never going below 2.69 cents per pound. It was in 1927, in the early months, January and February, when sugar was around a low of 3.06 cents per pound, and with a high oint during January and February of Sy2 cents, that the General ugar Corporation was formed, and these accounts which were in the bank and which I referred to on yesterday as slow and doubtful as current accounts, were taken from the bank and placed in the National City Co., where they could be held as a more permanent investment through the holding of the common stock of the Gen eral Sugar Co., and at that time the $25,000,000 was furnished by the shareholders which was used to purchase the common stock of the General Sugar Corporation. And it was estimated-----Mr. P e c o r a (interposing). One moment right there. You say the $25,000,000 was furnished by the shareholders. You do not mean by that that when the shareholders put up that $25,000,000 they knew it was going to be used to finance this sugar transaction, do you? M r . M i t c h e l l . They knew it was going to go into the National City Co. Mr. P e c o r a . But they did not know what the National City Co. did with that $25,000,000 the very day it was received, did they ? M r . M i t c h e l l . I h a r d l y t h i n k t h e r e w a s a n y n e c e s s i t y f o r it. § 1834 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Just answer my question: Did they or did they not know what was going to be done with it ? M r . M i t c h e l l . A s f a r a s I k n o w , t h e y d i d n o t. P e c o r a . All right. M r . M i t c h e l l . But at the time that went in, that Mr. investment was considered by the officers and directors a sound investment for the National City Co. And it was estimated that on the average of prices for sugar over a long period of years the General Sugar Co. would earn, as I recall, approximately $6,000,000 a year applicable to that $25,000,000 of stock which the National City Co. took over. Mr. P e c o r a . N o w , if the officers and directors of the National City Co. considered it was going to be such a fine transaction for the company, why didn’t they tell the stockholders who put up that money to purchase additional stock of the bank and the company, what was going to be done with $25,000,000 of that $50,000,000? Mr. M i t c h e l l . I have not been able to go over our records to see whether or not any indication was given to the shareholders at that time, but from time to time the shareholders, at their annual meet ings, have been advised of this investment, and it has been common knowledge that the National City Co. has had this investment in General Sugar. Mr. P e c o r a . And by the use of the term “ from time to time ” you mean after the investment was made? Mr. M i t c h e l l . X assume so; yes. Mr. P e c o r a . And not before ? M r . M it c h e l l . I c a n n o t a n s w e r o n th a t. Mr. P e c o r a . Can’t you answer whether or not the shareholders were notified that $25,000,000 of their money was going to be put into this sugar transaction ? Do you mean to say you can not answer that ? M r . M i t c h e l l . I can not; no. Mr. P e c o r a . Who prepared the circular announcing the addition to the capital stock effected in 1927 that was sent out to the share holders ? M r . M i t c h e l l . I f you ask who signed it, I think I did. Mr. P e c o r a . Was there anything said in that circular to the effect that $25,000,000 of the $50,000,000 was to go into the possession of the General Sugar Corporation ? Mr. M i t c h e l l . I would not have considered it necessary. That was not an investment of the shareholders of the bank that they did not already have. They had it in the form of obligations that were in the bank in one way and another, and it seemed advisable to the directors that that be taken out and put in the form of a more permanent investment, because it was not sufficiently liquid as a current account to be held in a commercial bank. Mr. P e c o r a . It was not sufficiently liquid because of the disturbed condition of the sugar industry all through those years? Mr. M i t c h e l l . Because the sugar industry was not earning enough to pay off the current loans that then existed. Mr. P e c o r a . And because the sugar industry was in a state o f collapse. Mr. M i t c h e l l . Oh, I hardly think you can say that, and especially----- STOCK EXCHANGE PRACTICES 1835 Mr. P e c o r a (interposing). Let me read your own language out of your minute book right on that. I am reading from page 283 of the minute book of the executive committee of the National City Bank: The collapse of the raw-sugar industry in Cuba, which occurred during the year 1921, and the banking crisis in the island which followed the collapse, left the National City Bank of New York with very large sums tied up in loans and credits to companies and individuals engaged in constructing and operating sugar estates. Do you recall that language of yours ? M r . M i t c h e l l . I t h in k I do. Mr. P e c o r a . All right. Go ahead. Mr. M i t c h e l l . That refers to the state of collapse resulting from 1920 and 1921 price drop. Mr. P e c o r a . But you were making this statement on February 8, 1927, with the advantage of all that had happened since 1921. Mr. M i t c h e l l . What was that resolution in connection with? Mr. P e c o r a . In connection with this sugar transaction, in con nection with this $25,000,000 bailing out. Mr. M i t c h e l l . This was a transfer. You speak of it as a “ bailing out ” and I am afraid again that that creates in the public mind an incorrect impression. That was the passage from the part of the institution where it is vital that liquidity prevail, of certain loans that were bound to be slow under the condition of the industry, and in the stockholders’ interest it seemed far better to carry those in the form of a permanent stock investment in the National City Co. And at that time it was estimated that under normal conditions in the sugar industry that company would earn, as I say, about $6,000,000 a year applicable to that stock. Mr. P e c o r a . N o w , Mr. Mitchell, were not the loans of those sugar companies with the bank the subject of frequent criticism by na tional bank examiners, to your personal knowledge? M r . M i t c h e l l . Yes, sir. Mr. P e c o r a . And that criticism was made year after year, wasn’t it? M r . M i t c h e l l . Yes, sir; and we granted, and I granted to you on yesterday, that they were not sufficiently quick in their possible liquidation f o r us to hold them there. Mr. P e c o r a . And so, in response to those criticisms and because of other considerations, in 1927 the bank was relieved of those loans to an amount agregating upwards of $30,000,000 through the process of the issuance of additional stock of the bank and of the National City Co., and the turning over of $25,000,000 of the moneys raised through the sale of that additional stock to the National City Bank, which thus received payment of those loans almost in full. Isn’t that a correct statement of what took place ? Mr. M i t c h e l l . I cannot support from my knowledge your exact figures. Mr. P e c o r a . Well, let us assume the figures are not quite exact, is that substantially the process followed in 1927 with regard to those loans ? Mr. M i t c h e l l . The process was to finance the National City Co. so that without a further leaning on their funds, in the matter of 119852— 33— PT 6------ 6 1836 STOCK EXCHANGE PRACTICES this particular investment, and we regarded it as an investment, that it would be worked out over the years and could be carried as a separate entity. Mr. P e c o r a . And do you still say that that process was not a bailing of the bank out of those loans ? Mr. M i t c h e l l . Your words “ bailing out ”-----Mr. P e c o r a . That is rather a harsh term, perhaps, but it is a term used on the street with reference to a situation such as this was. M r . M i t c h e l l . I t h i n k it i s u s e d to o o f t e n i n c o n n e c t io n w it h o t h e r s it u a t io n s n o t t o c re a te a w r o n g im p r e s s io n w h e n u s e d in c o n n e c t io n w i t h t h is . Now, in 1929 the market varied from 2 cents to 2y3 cents per pound for sugar. In 1930 it stood at a little over 2 cents per pound. At that time in my remarks to the shareholders, copies of which were mailed to each and every shareholder, I made this statement, and it is a brief statement: Occasional uninformed comment regarding our interest in Cuban sugar prop erties prompts a word with respect thereto. Since the post-war collapse of the sugar industry in 1921, which caused wide distress in Cuba and forced banking creditors to take over actual properties for the protection of their accounts, we have had proprietary interests in certain properties, which have been assembled in the General Sugar Corporation, the stock of which is owned by the National City Co. While these properties are among the best in the island, with thoroughly modern mills and production costs well below the average, their aggregate output is only a small factor in the industry, con trary to what has sometimes been supposed, being only about 6 per cent of the output of the island, as a whole. The post-war condition of world-wide over production has resulted in a period of abnormally low prices, from which pro ducers in all countries have suffered. The properties, inventories, and accounts in the balance sheet of the corporation reflect values based on a sugar price equal to 60 per cent of the average sugar prices ruling over a period of 30 years. The investment of the National City Co. is carried at about threefourths of the book value thus shown. Under these circumstances, we are prepared to support this investment until, with the inevitable turn of the agricultural cycle, a normal degree of prosperity asserts itself, and it can be disposed of to advantage. The 30-year average price for sugar was 3.39 cents per pound. The 20-year average was just under 4 cents per pound. We spoke here of the 30-year average and as if these properties were appraised on that basis. Sugar properties have to be appraised on three items: Their potential production, cost of operation, and selling price; and selling price of course reflects volume demand for sugar as well. But I call attention to the fact that on the basis of a 30-year average price and these other factors these properties were at that time appraised on the books of the National City Co. at 60 per cent of the value, and were then carried at $25,000,000, and we advised the shareholders that we were prepared to support the investment of $25,000,000 on that basis. Mr. P e c o r a . Mr. Mitchell, does that complete your explanation in order to clarify whatever confusion arose from the testimony of yesterday ? M r . M i t c h e l l . I t h i n k so . Mr. P e c o r a . Concerning the American Sugar Corporation? Mr. M i t c h e l l . I t h i n k s o , Mr. Pecora. Mr. P e c o r a . N o w , that explanation does not------ STOCK EXCHANGE PRACTICES 1837 Mr. M i t c h e l l (interposing). Except if I might be permitted to show what has happened since then. In 1930, before the year was done, sugar had gone to about 1.04 cents per pound. In 1931 it went to 1.09 cents per pound. In 1932, last year, it dropped at one time to about fifty-seven one hundredths of 1 cent per pound. Mr. P e c o r a . That is quite a toboggan slide. Mr. M i t c h e l l . That is a toboggan slide; yes; but a thing over which no man has control, so far as I know, and it represents what has happened in agricultural prices generally. Mr. P e c o r a . And knowing that that is what generally happens in agricultural prices, you continued to put out bond issues based on future estimated earnings of these perilous undertakings. Mr. M i t c h e l l . Excuse me, but the average price over a period of 30 years, as I have shown by the figures, was well over 3% cents per pound. And I think a 30-year average was a fair basis to take. Taking a 20-year average would certainly be considered fair, it seems to me, and that average was just under 4 cents per pound. Mr. P e c o r a . And this entire $25,000,000 investment at the end of the period covered by this explanation of yours simmered down to $1 of value, didn’t it? Mr. M i t c h e l l . It did, because we have attempted to make it the practice in our institution to keep our values in accordance with the condition of the times, regardless of what they are, and when we saw the price of sugar drop to approximately half a cent a pound it was perfectly obvious that, at that moment, that investment had no value. And it was written down accordingly on our books. Senator F l e t c h e r . What is the price to-day? M r. M it c h e l l Senatpr F . T h e p ric e o f s u g a r ? . Yes. letc h er M r . M i t c h e l l . About eight-tenths of a cent a pound. proved somewhat, Senator Fletcher. M r. P eco ra . N ow It has im ------- Mr. M i t c h e l l (interposing). The point I want to stress to the subcommittee is, and it is a point which I very strongly feel should be made clear, that it is unfair to look upon this as something that has been foisted on an unsuspecing public or that there is anything criticizable in this. I contend an examination of this entire matter from the time that we had that first collapse, where those loans were made on actual sugar, and those credits got into trouble, and we had to step into the situation, down to date, there is nothing which from the standpoint of the banker, in that which he has done, that is criticizable. I f there is, I can not find it. Mr. P e c o r a . The national-bank examiners found it criticizable every year since 1922, didn’t they ? Mr. M i t c h e l l . Mr. Pecora-----Mr. P e c o r a (interposing). Won’t you please answer the question? Mr. M i t c h e l l . I will not answer it by a yes or no. It is unfair. Mr. P e c o r a . Isn’t it susceptible of a yes-or-no answer? Mr. M i t c h e l l . It is not; no, sir. Mr. P e c o r a . Did not the national-bank examiners at your bank criticize all these sugar loans year after year since 1922? 1838 STOCK EXCHANGE PRACTICES Mr. M i t c h e l l . I refuse to answer that with a yes or no, but I will answer it this way: They criticized those loans as not being quickly liquidatable, and as a current asset for the bank they were subject to criticism. Mr. P e c o r a . Are you sure that is all they said about ? [There was a pause.] Are you sure that was all they said about it, Mr. Mitchell? Mr. M i t c h e l l . Well, Mr. Pecora, with the hundreds of thousands of questions and problems and papers that have passed over my desk in 10 years, I th,ink that I could not be expected to say that I am sure of an answer that I might give to your question. That is distinctly my impression. Mr. P e c o r a . D o you recall a criticism along these-lines: It is questionable whether or not the management is according stockholders and depositors the proper protection in continuing to operate these properties— meaning the sugar properties— at a loss of several millions each year. Mr. M i t c h e l l . I recall that we had various discussions. You will bear in mind that operating those properties during a low and unfa vorable market meant that as we had to make advances for dead season—that is, while the crop was being prepared—we were making loans that might by chance at the time the crop came in be impossible of liquidation, and those loans were very large. We were operating those properties through the General Sugar Co. and in the interest of the bank and in the interest of the shareholders. But what a bank examiner could know about the detail of operation of these great properties in Cuba was always a question in our mind. Mr. P e c o r a . Well, let us assume bank examiners do not know any thing. Mr. M i t c h e l l . That i s not true. Mr. P e c o r a . D o you recall, Mr. Mitchell, that particular criticism having been made within very recent years of these sugar loans? Mr. M i t c h e l l . I don’t remember that particular criticism; no, Mr. Pecora. Mr. P e c o r a . That is an answer to my question. Mr. M i t c h e l l . I am ready to take your word for it. Mr. P e c o r a . All right; that is an answer to m y question. Now, Mr. Mitchell, I believe toward the end o f your testimony o f yesterday afternoon’s session—I haven’t a transcript o f the minutes before me—you reached the point where you stated that it was in 1927 that the National City Co. departed from the policy it had theretofore followed of not accumulating and selling common stocks to the public. Do you recall that? Mr. M i t c h e l l . Yes, sir; not selling common stocks to the public. Mr. P e c o r a . Did you take part in any discussion between the officers and directors of the National City Co. at which it was deter mined to depart from that policy ? Mr. M i t c h e l l . I remember that we discussed very broadly, and I should say both in the officers’ meetings and in the meetings of the executive committee, or directors, the question as to whether the con ditions in Southern Railway stock were such that we could properly make an offering of that stock to the public. That was the first offer ing that was made. STOCK EXCHANGE PRACTICES 1839 Mr. P e c o r a . That was the time when your policy theretofore ob served was first departed from ? M r . M i t c h e l l . Yes. It was not departed from as a general rule. It was departed from in a particular case, consideration to which was specifically given. Mr. P e c o r a . After that original departure in that particular case which involved the common stock of the Southern Railway, were there many departures in many other particular cases ? M r . M i t c h e l l . Yes. We offered stock during 1928 and 1929; not many issues, but some. Mr. P e c o r a . Do you know how many common-stock issues were offered to the public ? Mr. M i t c h e l l . Y o u did ask me that, Mr. Pecora, but overnight I have not—I have been looking up other things, and that particular thing escaped my mind. I told you yesterday, I think. Mr. P e c o r a . Have you any way of ascertaining by conference with any of your associates in the company who are in the room now how many issues of common stock the company sold to the public in 1928 and 1929? M r . M i t c h e l l . I will be glad to confer. [After a pause.] That will be produced, M r . Pecora. Mr. P e c o r a . All right, sir. Was that policy the result of a confer ence and deliberation on the part of officers and directors of the National City Co.? Mr. M i t c h e l l . You mean at the time of the Southern Railway-----Mr. P e c o r a . Or subsequently, when it became more of a custom. Mr. M i t c h e l l . Oh, yes; it was always discussed. Mr. P e c o r a . Did you advocate the policy of the National City Co. engaging in the selling of common stock issues to the public, or did you oppose it? Mr. M i t c h e l l . No; I think I went along with the views of m y associates. Mr. P e c o r a . Who originated those views, you or some of your associates? Mr. M i t c h e l l . I cannot say. It seems to me immaterial; that we are talking about this, I assume this study is being made not as a personal matter but as a company matter. I am prepared to say for the company that my associates considered anything could not have been done if I had opposed it; it could not have been done if anybody else opposed it. Therefore, it was the unanimous view of our group that we should proceed. Mr. P e c o r a . D o you recall about when that decision was made ? Mr. M i t c h e l l . In connection with Southern Railway ? Mr. P e c o r a . No; in connection with the general policy which was thereafter adopted or followed of selling common stocks to the public. Mr. M i t c h e l l . I think I have made it clear in my testimony that it was not taken up as a general policy; it was taken up as a specific question in connection with the Southern Railway. It was taken up as a specific question in regard to each and every other issue that was made. Mr. P e c o r a . One of the issues that was most exclusively dealt in by the National City Co. during the year 1929 was the common stock of the Anaconda Copper Mining Co., was it not ? 1840 STOCK EXCHANGE PEACTICES Yes. Mr. P e c o r a . Were you a member of the board of directors at that time of the Anaconda Copper Mining Co. ? M r . M i t c h e l l. M r. M it c h e l l . N o , s ir ; I w a s n o t. Mr. P e c o r a . Were you ever a director of the Anaconda Copper Mining Co. ? Mr. M i t c h e l l . I became a director in May, 1929. Mr. P e c o r a . And how long did you continue serving as a director of that company thereafter ? Mr. M i t c h e l l . I am still a director. Mr. P e c o r a . When did the National City Co. commence the accu mulation and sale of common stock of Anaconda Copper ? Mr. M i t c h e l l . I have some Anaconda papers here. I may be able to answer. I think, Mr. Pecora, I ought to say with respect to Anaconda Copper Mining Co. I have been before this committee for an extensive investigation, drawn here in connection with Mr. Ryan, who died last week, and that investigation was so exhaustive I can not conceive of the committee having further interest in it. Mr. P e c o r a . Have you any further interest in it ? Mr. M i t c h e l l . In pursuing the Anaconda investigation here ? Mr. P e c o r a . Yes. Mr. M i t c h e l l . Most decidedly no. Mr. P e c o r a . N o . Well, I have just a little additional interest in following up certain lines that apparently were not pursued when you were before the committee last year. Now, let me ask you this: Did you ever, either individually or in behalf of the National City Co., take part in any pools or syndicate accounts in the common stock of Anaconda Copper Mining Co. or any of its subsidiary companies? M r. M Mr. P it c h e l l . N o, s ir . Did the National City Co. ever participate in any syndicate accounts trading in the common stock of any of the sub sidiaries of Anaconda Copper ? M r . M i t c h e l l . Of c o u r s e , I j u s t d o n ’t q u i t e — y o u m e a n a j o i n t s y n d ic a t e o r a p o o l ? I f I r e m e m b e r c o r r e c t l y , m y t e s t i m o n y -----Mr. P e c o r a (interposing). In my last question I referred to syndi cate accounts. Mr. M i t c h e l l . I f you are referring to what we generally know as pool accounts, and what the public understands as pool accounts, my answer is distinctly no. I think there were times when, as recorded in the previous testimony probably—and I state this from recollec tion—where there was some accumulation for one purpose or another in connection with some entity of Anaconda Copper Co. directly. But as far as pool operations, no. And it was assumed that there were several pools in the street, in none of which did we ever par ticipate in any way, shape, or manner, and none of our men, to my knowledge, except, as it appeared in the last investigation, there was one of our vice presidents who, much to my surprise at that time, and I didn’t know it, had a small interest in what was called a pool operation. I didn’t know it until it was produced before me on this stand. Mr. P e c o r a . I again ask you if the National City Co. ever par ticipated in any syndicate account which traded in the common stock of any Anaconda Copper Co. subsidiary? ecora . STOCK EXCHANGE PRACTICES 1841 Mr. M i t c h e l l . Well, as I understand what you mean by a syndi cate account, I should say no. Mr. P e c o r a . I simply used the term “ syndicate account,” Mr. Mitchell, in my question without any definition of it. I have simply used the phrase “ syndicate account,” haven’t I ? Mr. M i t c h e l l . Yes. Mr. P e c o r a . Now, will you please answer the question as to whether or not the National City Co. at any time participated in any syndicate account which traded in the common stock of any Anaconda Copper Co. subsidiary? M r . M i t c h e l l . I f it did, my previous testimony will make it per fectly clear. Mr. P e c o r a . Have you any present recollection of the subject ? Mr. M i t c h e l l . Not in what I would conceive to be a syndicate account, I should say no, Mr. Pecora. Mr. P e c o r a . Let me refer to it then as a joint account. Mr. M i t c h e l l . I think that there was a joint account which was discussed here at the last meeting when I appeared before this com mittee with respect to Anaconda Copper Co.; I think that there were perhaps two or three joint accounts. The C h a i r m a n . Perhaps, Mr. Mitchell, you may recall that the first time you were before this committee it was in connection with the banking bill, and while Anaconda Copper was mentioned, there was no mention as to trading in Anaconda Copper by your bank or your company or as to any syndicate or pool in which you might have been. The only thing which appears in that record is the fact that you did recommend it at a certain high figure. Mr. M i t c h e l l . That was before the banking-----The C h a i r m a n (interposing). That was the first time. Then there came a second hearing last summer. M r. M The C it c h e l l . Y e s. . But let us get down to the fact that there was only one hearing that this committee-----Mr. M i t c h e l l (interposing). Oh, yes, sir; the first hearing was before the Committee on Banking and Currency. The C h a i r m a n . But it was before another subcommittee than this one. M r . M i t c h e l l . The Glass committee. The C h a i r m a n . And these matters were not gone into except very incidentally at that time. Mr. M i t c h e l l . That i s correct. The C h a i r m a n . Y o u were not sent for to testify in that matter. h a ir m a n M r . M i t c h e l l . N o , s ir. The C h a i r m a n . S o that any reference to having been here twice is misleading. You have only been here once, at which time Mr. Gray, who was counsel for the committee, went into the Anaconda matter to some extent. Mr. M i t c h e l l . I f I said twice I was wrong about that. The only time that I was referring to, Senator Norbeck, was when I appeared here to discuss nothing but Anaconda, if I recall correctly. That was at least the only subject that was under discussion at the time. Mr. P e c o r a . D o you recall a joint account that was participated in by the National City Co. in the common stock of the Andes Cop per Mining Co. ? 1842 STOCK EXCHANGE PEACTICES M r . M i t c h e l l . There was some account—may I refer to the testi mony before this same investigating committee ? Mr. P e c o r a . Mr. Mitchell, can’t you refer to your own recollection of the facts? I f you have no recollection of the facts, and will indi cate that, I would then suggest that you refresh your recollection by anything that would serve to do it. Mr. M i t c h e l l . I think I really will have to do that* because that subject I had assumed to have been exhausted before; I remember that there was a joint account built up at the time of the conversion of Andes into Anaconda, and I should have to refresh my mind. My mind is not sufficiently refreshed at the moment to answer, Mr. Pecora, in regard to that in detail. I had assumed that that sub ject was exhausted. Mr. P e c o r a . Perhaps I can refresh it a little, Mr. Mitchell. Let me ask: Do you recall that on or about December 12, 1928, you in behalf of the National City Co. entered into an agreement with the Anaconda Copper Mining Co. to accumulate for joint account up to 200,000 shares of the common stock of Andes Copper Mining Co. on a 50-50 basis? Mr. M i t c h e l l (after referring to paper). Yes; my mind is re freshed in connection with this now. There was an arrangement made on December 13, 1928, between the Anaconda Copper Co. and the National City Co. for 200,000 shares of the common stock of the Andes copper, and under that agreement 151,045 shares were accu mulated qn our books, of which 127,945 shares were offered to the public and 23,100 shares were sold through brokers. The account was closed on January 18, 1929. That was the sale of Andes Copper stock. In July, 1929, an offer was made to exchange that stock for Anaconda stock. Mr. P e c o r a . Mr. Mitchell, are you now reading your answer from a statement prepared by you? M r . M i t c h e l l . I a m n o t. Mr. P e c o r a . Who prepared the statement from which you are reading your answer? Mr. M i t c h e l l . This was a memorandum that has been handed to me that happened to be in my files at the time that I appeared before this committee before and is not a statement at all. I am making it a running story from notes before me. Mr. P e c o r a . Who prepared the memorandum to which you are referring as you make your answers ? M r . M i t c h e l l . I should have to find out the handwriting of this. This was just in my files. Mr. P e c o r a . Who handed it to you ? M r . M i t c h e l l . It was handed to me by one of my counsel. Mr. P e c o r a . N o w , the trading in this joint account continued for about five weeks, didn’t it? Mr. M i t c h e l l . I haven’t the information. The account was made on December 13 and closed on January 18. Mr. P e c o r a . That is about five weeks? M r . M i t c h e l l . About five weeks; yes. Mr. P e c o r a . Who conducted the trading for this joint account or under whose direction was the trading conducted ? STOCK EXCHANGE PRACTICES 1843 Mr. M i t c h e l l . It was conducted in the trading department of the National City Co. It was doubtless prompted by my own examina tion of it and the examination of Mr. Baker from day to day. Whether any of the other officers had to do with the accumulation I can not say, but it is more than likely that it was under the dom inance of Mr. Baker and myself. Mr. P e co r a . The Mr. Baker you refer to is the gentleman who was then and is now the president of the National City Co.? Mr. M i t c h e l l . Yes. Mr. P e c o r a . D o you recall the joint-account agreement that you entered into on behalf of the National City Co. at that time with Mr. John D. Ryan as chairman of the board of the Anaconda Mining Co.? M r . M i t c h e l l . No ; I do not. Mr. P e co r a . Let me show you this paper, which purports to be a copy of a letter sent by you under date of December 12, 1928, to Mr. John D. Ryan, and also this paper which purports to be a copy of a letter addressed to you by Mr. John D. Ryan under date of De cember 13, 1928. Will you look at those papers and tell us if they are true copies of the correspondence that constituted the agreement with respect to this joint-account trading operation? Mr. M i t c h e l l . Yes; I should be willing to accept your statement that these were copies. Mr. P e co r a . I may say that those were given to me by the attor ney for the late John D. Ryan within the last two or three weeks. Mr. M i t c h e l l . I should be willing to accept them as valid. Mr. P e c o r a . I ask that they be spread on the record. The C h a ir m a n . Without objection, that will be done. (The two documents are as follows:) T h e N a t i o n a l C i t y C o ., N a t io n a l C i t y B a n k B u il d in g , New York, December 12, 1928. D. R y a n , Chairman Anaconda Copper Mining Co., 25 Broadway, New York. D e a r Ms . R y a n : This is to confirm that you, acting for the Anaconda Copper Mining Co., and I, for the National City Co., have agreed to accumulate up to 200,000 shares of the common stock of Andes Copper Mining Co. for joint account on a 50-50 basis. The National City Co. will run this account as you and I personally, from time to time, may deem wise. As stock is accumulated the National City Co. may deliver your share at the approximate cost basis and upon final liquidation, accounting will take into consideration cost-plus carrying charges and the two companies will share equally any profit or loss on the transaction. An acknowledgement will be appreciated. Sincerely y o u rs, C. E. M i t c h e l l . Mr. Jo h n D e c e m b e r 13, 1928. Mr. C. E. M i t c h e l l , President the National City Co., 55 Wall Street, New York. D e a r M r . M i t c h e l l : I beg to acknowledge receipt of yours of December 12 confirming our understanding that you, for the National City Co., and I, for the Anaconda Copper Mining Co., have agreed to accoumulate up to 200,000 shares of the common stock of Andes Copper Mining Co. for a joint account on a 50-50 basis, the account to be run by the National City Co. as stated. Very truly yours, J o h n D. R y a n . 1844 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Y o u will observe that under the agreement evidenced by these two letters that have just gone into the record you were to run this account. Mr. M i t c h e l l . Yes. Mr. P e c o r a . Do you recall how you ran it? Mr. M i t c h e l l . Not specifically. I recall in general the account, that I would be in touch with Mr. Ryan more or less constantly, and I would instruct our trading department the limitation of their buying for accumulation. Mr. P e c o r a . The Andes Copper Mining Co. referred to in that joint account correspondence is a subsidiary of the Anaconda Copper Mining Co. ? M r . M i t c h e l l . It is . Mr. P e c o r a . And it was back in 1928, also, was it not?Mr. M i t c h e l l . Yes. Mr. P e c o r a . What broker or brokers were employed in the opera tion or trading in this joint account ? Mr. M i t c h e l l . I could not answer that. Mr. P e c o r a . To what extent were purchases and sales in the com mon stock of Anaconda Copper Mining Co. made for the purposes of this joint account by the trading department of the National Mr. M i t c h e l l . May I have that question ? Mr. R a n d o l p h (shorthand reporter). To what extent were pur chases and sales in the common stock of Anaconda Copper Mining Co. made for the purposes of this joint account by the trading department of the National City Co.? Mr. M i t c h e l l . I should.say that they were made to the extent that resulted in this accumulation, Mr. Pecora, but I haven’t the detail of that before me. Mr. P e c o r a . D o you know the profit that accrued from this joint account ? Mr. M i t c h e l l . The memorandum before me indicates that there was a total profit in the account of $335,000. JV^r. P e c o r a . Was there any profit also not included in that sum which was represented by stock on hand at the time the account was closed ? Mr. M i t c h e l l . I see no indication of it whatsoever. The memo randum that I have here, which I will stand by as being authentic, is that there was a total profit in the account of $335,043.42, of which $167,521.22 was paid to the Anaconda Copper Co. and we retained an equal amount. In other words, the profit to the National City Co. was $167,000 plus. Mr. P e c o r a . The Andes Copper Mining Co.’s common stock at that time was listed on the New York Stock Exchange, wasn’t it? M r . M i t c h e l l . It w a s . Mr. P e c o r a . Were the tradings that were had for the purposes of this account made on the market ? Mr. M i t c h e l l . Undoubtedly, completely. Mr. P e c o r a . On the exchange? M r . M i t c h e l l . Completely, I should say. Mr. P e c o r a . And the effect of these trades in part at least, was to maintain certain market prices for the stock ? STOCK EXCHANGE PRACTICES M r. M Mr. P 1845 . Oh, I think not. Wasn’t that effect produced in any way, shape, or it c h e l l ecora . form? M r . M i t c h e l l . It might have been produced in some shape or form, but that was not the purpose of the account. Mr. P e c o r a . I did not ask you if that was the purpose; I asked you if that was one of the effects. Mr. M i t c h e l l . I can not say. I haven’t got the market range before me to indicate what the effect might have been. Mr. P e c o r a . Who f i n a n c e d the transactions in this joint account? Mr. M i t c h e l l . The letters that have passed and made a part of this record indicate that the National City Co. was to have the right, as it purchased stock, to deliver to the Anaconda Copper Mining Co. its portion of the stock. Am I not correct in that ? The letter says: As stock is accumulated the National City Co. may deliver your share at the approximate cost basis, and upon final liquidation accounting will take into consideration cost plus carrying charges, and the two companies will share equally any profit or loss on the transaction. Therefore, whether the City Co. carried the full burden and asked the Anaconda Copper Co. to pay its interest in accordance with this agreement, or whether it turned over its one-half approximately of the stock as accumulated to the Anaconda Copper Co., I can not say without further reference to records. Mr. P eco ra . Well, under that provision that you have just read-----Mr. M i t c h e l l (interposing). It might. Mr. P e c o r a . Who was called upon to finance it ? Mr. M i t c h e l l . The initial purchase the National City Co. ob viously, if they were to accumulate the amount, but they had the privilege as the stock was accumulated to deliver the share of the Anaconda Copper Co.’s proportion to it. Senator F l e t c h e r . The letter says your company was to “ run the account ” , whatever that means. Mr. M i t c h e l l . Yes; that means it was to accumulate the stock, but it goes on to say that as it is accumulated one-half of the amount accumulated may be turned over to the Anaconda Copper Co. Mr. P e c o r a . Does not that phraseology, that your “ Company will run this account,” mean something more than the fact that your company was to accumulate the stock? Doesn’t it mean that the tradings in the account were to be under the direction of the National City Co.? M r . M i t c h e l l . It says: The National City Co. will run this account as you and I personally from time to time may deem wise. That is Mr. Ryan and myself, I acting for the National City Co. and he acting for the Anaconda Copper Co. Mr. P e c o r a . Do you recall how this account was run? Mr. M i t c h e l l . No; I do not. Mr. P e c o r a . And what course the trading took under it ? Mr. M i t c h e l l . No; I do not, Mr. Pecora. Mr. P e c o r a . D o you know anyone that could tell us ? 1846 STOCK EXCHANGE PEACTICES Mr. M i t c h e l l . Not without reference to papers and to markets during that period. I think it would be surprising if we had any thing here that would indicate that. Mr. P e c o r a . The National City Co.’s capital and surplus were derived from the sale of stock of the National City Bank in the first instance, isn’t that correct? Mr. M i t c h e l l . Yes. Mr. P e c o r a . S o the National City Co.-----M r . M i t c h e l l (interposing). And as to surplus from its earnings as well. Mr. P e c o r a . Yes. So the National City Bank indirectly and through the use of its funds procured in the manner indicated through the sale of stock in the National City Co. was financing this joint account? M r . M i t c h e l l . The money came from the shareholders of the National City Bank, but you bear in mind that in one of our share increases there was set up, and announced to the shareholders there would be set up, and the stock was in part issued, in order that there might be set up a fund which could be used for the purchase and sale and holding of securities, shares, and so forth, on a term basis, the holding of which would inure to the benefit of the company and the bank. Mr. P e c o r a . Do you think, Mr. Mitchell, that it is a proper or a sound banking function for a national bank, either directly or indi rectly, to participate in joint stock-market accounts? Mr. M i t c h e l l . I f you ask me on the back-look I think this kind of an account that was set up by the shareholders’ money and with their full knowledge and consent, and through which particular accounts were operated, finding ourselves often in what would be termed stock-market operations, is unfortunate, and I would not do it again. As a matter of fact, I would rather look to the time when we would be completely out of that sort of thing. I do not believe that it is a thing that we should be doing, Mr. Pecora. Mr. P e c o r a . When did you first reach that conclusion ? M r . M i t c h e l l . Oh, a t t h e s a m e t im e t h a t m a n y o f u s b e g a n t o f e e l th e h e a d a c h e f r o m t h a t w h ic h h a d g o n e b e fo re . Mr. P e c o r a . Well, the headaches of some people have been so ex tensive they have forgotten when they commenced. Mr. M i t c h e l l . That is right. Mr. P e c o r a . What was the date when you reached the conclusion ? Mr. M i t c h e l l . Oh, I should say in recent months, Mr. Pecora. I would not be carried off my feet by any immediate movement of a market. The C h a i r m a n . What was the date on which it advanced those 25 million that you testified to yesterday ? I have forgotten. Mr. P e c o r a . That was in February, 1927—February 15, 1927. That is correct ? Mr. M i t c h e l l . Yes, but that is not the kind of account that I am referring to now and that we are discussing. The C h a i r m a n . No; but that was at the time the Federal Reserve Board was trying to slow down the boom. Mr. P e c o r a . No; that was 1929, Senator, March, 1929. STOCK EXCHANGE PRACTICES 1847 The C h a ir m a n . I know the banking committee here reported fa vorably on the resolution in the spring of 1928, forecasting a break down, and there were very few bankers on this committee, very few of them who had any expert knowledge. It came a year and a half later. Mr. P e c o r a . The $25,000,000 you referred to, Senator, was that the $25,000,000 thrown into the call loan money market ? The C h a ir m a n . Yes. Mr. P e c o r a . That was in March, 1929. The C h a ir m a n . That is what I thought. The boom was about to break and he testified yesterday that he found the market short of money. Mr. P e c o r a . That was March, 1929. The C h a ir m a n . And advanced them 25 million. And the boom went on. The break came in the fall of 1929. Mr. P e c o r a . Yes, sir. I thought, Mr. Chairman, you were re ferring to the $25,000,000 that went into General Sugar Corporation. Now, was there any other joint account in the common stock of the Anaconda Copper Mining Co. or any of its subsidiaries to which the National City Co. became a party in 1928 or 1929? Mr. M i t c h e l l . I find before me a memorandum similarly pre pared when I was before this committee before. Mr. P e c o r a . And likewise a memorandum not prepared by you ? Mr. M i t c h e l l . N o. It is some facts that were developed from the books. Mr. P e c o r a . But it is not a memorandum prepared by you ? Mr. M it c h e ll. N o, sir. Mr. P e c o r a . That is all I asked. Mr. M i t c h e l l . There was an agreement dated January 14, 1929, between Mr. John D. Ryan on the one part, Mr. Daniel and Harry Guggenheim, second, and the National City Co. third, for an account of 100,000 shares of common stock of Chile Copper Co., the account to be handled by Mr. John D. Ryan personally. That account was extended, and under the agreement 140,500 shares were purchased and 29,400 were sold. Mr. P e c o r a . 140,000 purchased and 29,000 sold? Mr. M i t c h e l l . 29,400, leaving 111,100 shares long, which were exchanged for 81,108 shares of Anaconda stock, of which 51,108 shares were sold, leaving on February 14, 1929, a long position of 30.000 shares. This is all in the testimony given before this particu lar subcommittee before. As a part of that operation we carried 78,840 shares, of which 68,840 shares were delivered on instruction of Mr. Ryan, leaving 10.000 in our investment account which we held. The stock of the Guggenheims was sold and a check given to them for that. The stock of Mr. Ryan’s, I recall he testified, went into his hands and continued in his personal account. Mr. P e c o r a . What were the total profits that flowed from that joint account? Mr. M i t c h e l l . A s I told you, there were 30 ,000 shares when they got through, and Mr. Ryan took his 10,000 shares and put them away in his box, and the National City Co. put 10,000 in its invest ment account, which it continued to hold and did still hold, I think, 1848 STOCK EXCHANGE PRACTICES at the time that I last testified here, and the only stock that was sold and showed a profit was the stock that was the Guggenheims’ share, and Mr. Daniel Guggenheim, now dead, and Harry Guggenheim, were the ones interested in that. From this I would judge that was $400,000, as the check that went to the Guggenheims was in that amount. Mr. Pecora.. They had a one-third interest in the profits of this account ? Mr. M i t c h e l l . They d i d . Mr. P e c o r a . That would indicate total profits of about $1,200,000? Mr. M i t c h e l l . It would if it had been sold, but as a matter of fact, it was taken by us for accumulation and went down, and to-day of course there would be a loss on it. Mr. P e c o r a . But if that stock had been liquidated, if the stock that remained over as a profit from this account had been liquidated, by the National City Co., as the Guggenheims liquidated their portion of the stock, the company also would have reaped a profit of about $400,000? Mr. M i t c h e l l . That would seem to be a fair conclusion from this statement. My testimony again I say was offered before this com mittee before. Mr. P e c o r a . Now, that joint account dealt in the common stock of the Chile Copper Co.? M r. M it c h e l l . Y e s , s ir. Mr. P e c o r a . Which was then and still is a subsidiary of the Ana conda Copper Mining Co.? Mr. M i t c h e l l . Yes. That was at the time, if I recall it, where a conversion was offered. I do not think that prior to that the Chile Copper Co. was a subsidiary of Anaconda. I think that was the time at which the control was exchanged for Anaconda stock. Mr. P e c o r a . Mr. Mitchell, was one of the effects of the operation of this joint account a maintenance or a support or an increase in the market value of that common stock during the period covered by the joint account? Mr. M i t c h e l l . My recollection, Mr. Pecora, is that it was an ac count established not in any sense to increase the price but to stabilize the price as between the Chile Copper stock and Anaconda stock during the period of offer of conversion. That is my recollection. Mr. P e c o r a . Then one of the purposes was to produce a certain effect on the market quotations of the stock during the period of the operations in the joint account? Mr. M i t c h e l l . The account was formed in order to facilitate the conversion. Now, what the effect was on the market I simply can not tell you. It may be in previous testimony there. Mr. P e c o r a . Was it not to facilitate conversion at a certain ratio of exchange? M r. M it c h e l l . Y e s , s ir . Mr. P e c o r a . And in order to facilitate that conversion was it not necessary to stabilize the market quotations? Mr. M i t c h e l l . It was necessary, as I would recall it, to maintain that ratio of exchange that was offered. Mr. P e c o r a . S o it is a fair inference or a fair assumption that one of the purposes of this joint account was to produce an effect on the market quotations of the stock traded in ? 1849 STOCK EXCHANGE PRACTICES Mr. M i t c h e l l . Well, I can not answer that. It was to facilitate the exchange, and that is the best I can say. Mr. P e c o r a . And one of the ways of facilitating the exchange was to maintain certain market prices for the stock during the period of the exchange? M r . M i t c h e l l . To m a i n t a i n a n e q u a l i t y o n t h e b a s i s of t h e r a t i o e s t a b lis h e d a s b e tw e e n th e tw o sto c ks, I t h in k w o u ld be a b e tte r e x p r e s s i o n o f it. Mr. P e c o r a . That produced a certain effect on the market quota tions, did it not, and it was designed to produce such an effect, was it not? M r . M i t c h e l l . No; it was not designed to produce—it was de signed to facilitate the conversions. Mr. P e c o r a . In order to facilitate the conversions, certain market values for the stock had to be maintained? Mr. M i t c h e l l . That is right. Mr. P e c o r a . And one of 'the purposes of this joint account was to help maintain those market values? Mr. M i t c h e l l . Correct, Mr. Pecora. Mr. P e c o r a . And that manifests itself in the effect on market values during the period of operations, doesn’t it ? Mr. M i t c h e l l . During the period of the conversions; yes, sir. Mr. P e c o r a . What is the difference between a joint account and syndicate account? Mr. M i t c h e l l . A syndicate account is scarcely a recognized term unless it is qualified. It may be a selling syndicate account or it may be a syndicate buying account or a syndicate holding account. But a syndicate to my mind at least carries with it a very large group of people who are entering into an agreement one with the other for a specific purpose. I do not think you can just say “ syndicate ac count ” and have it mean anything to the average man. It means nothing to me. Mr. P e c o r a . D o you mean that a syndicate account is the same as a joint account except that there are more participants than is usually found in what is called a joint account? M r . M i t c h e l l . I t h i n k so . Mr. P e c o r a . That just about represents the difference in prin ciple ? Mr. M i t c h e l l . I should say so; yes. Mr. P e c o r a . So there is really no difference in principle; it is simply in the number of participants ? M r . M i t c h e l l . I t h in k w h e n t w o p a r t ie s o r th re e p a rt ie s e n te r in t o a n a g re e m e n t f o r t h e ir j o in t v e n t u r e t h a t t h a t is d iffe re n t — y o u c a ll t h a t th e j o in t a cco u n t. I j u s t c a n n o t c o n c e iv e i n m y o w n m in d c a llin g t h a t a s y n d ic a t e a c c o u n t. Mr. P e c o r a . What is the difference between a joint account and a pool to trade in stocks—that is, as you understand the term “ pool ” ? Mr. M i t c h e l l . It is very difficult for m e to make a broad defi nition that I could be certain would stand without finding a loop hole in it. A pool indicates to me a blind operation entered into by a group with some one manager whom the group itself does not perhaps know of in a business way or have any contact with but is 1850 STOCK EXCHANGE PEACTICES the operator of the pool. It is a condition that has to do with stocks particularly and operations in stocks, and I am not familiar with these pools, because we have not been members of pools of this sort. Mr. P e c o r a . Well, don’t you know the difference between a joint account and a pool other than the one you have stated ? Mr. M i t c h e l l . N o; I do not. Mr. P e c o r a . Then, there is no difference with the exception of the difference that you have just called attention to? Mr. M i t c h e l l . I should want to sit down and work a couple of hours if I were to try to make a clean-cut definition and differentia tion between these terms in giving you again my impression of the differences, Mr. Pecora. Mr. P e c o r a . The principal impression I got of the difference, Mr. Mitchell—and if I got the wrong impression I wish you would clear it up—is that in a pool most of the members have nothing to do or say about the operation of it, and in the joint account all of the members know in advance the purposes and the operation. Does that summarize it ? Mr. M i t c h e l l . I think that under actual operation of business that that would be considered a fair differentiation; yes, Mr. Pecora. To make complete the record since you asked me a question, X will have to state one other account. Mr. P e c o r a . I was just coming to it—the one in Greene Cananea? Mr. M i t c h e l l . Yes. Mr. P e c o r a . In the early part of 1929 was there any other joint account trading in the common stock of the Anaconda Copper Co. or any of its subsidiaries to which the National City Co. was a party? M r . M i t c h e l l . This seems to say 1928, M r . Pecora; December 13, 1928. Does that check with your records ? Mr. P e c o r a . Yes, sir; December. How long did the operation in that pool—I beg your pardon—in that joint account continue? Mr. M i t c h e l l . It was cleared in March, 1929; March 21, 1929. Mr. P e c o r a . Commenced in December 4, 1928 ? Mr. M i t c h e l l . The agreement apparently, from the notes that I have here, is one that was made in December 13, 1928, between John D. Ryan et al. and the National City Bank. Mr. P e c o r a . The respective shares of the participants in that joint account were as follows, were they not: The National City Co., onehalf ; John D. Ryan, one-sixth; C. F. Kelley, one-sixth; W. D. Thorn ton, one-sixth ? Is that correct ? Mr. M i t c h e l l . I do not know that I personally knew of who Mr. Ryan had in his account and the amounts. I am sure that he did not tell me. I presume that that again was offered in the previous testi mony when the Anaconda accounts were under consideration by this committee. But so far as my information is concerned, it runs com pletely to John D. Ryan et al., and I presume that “ et al.” means some of his friends. I should have to see the agreement. Mr. P e c o r a . H o w many shares were involved in that joint account ? Mr. M i t c h e l l . This shows that the account was for 100,000 shares. The account was to be run by Mr. J. D. Ryan. Under the agree ment there were 226,000 purchased and 151,100 sold, leaving 75,000 STOCK EXCHANGE PRACTICES 1851 shares long in the account. Of that amount we took that half which we converted into Anaconda Copper Co. stock on the basis of one and a half shares of Anaconda for each share of Greene-Cananea. Mr. P e c o r a . Who financed that joint account? Mr. M i t c h e l l . Perhaps you have the agreement before you, Mr. Pecora. I f you have, I would be glad to accept it as authentic. I haven’t a copy of the agreement here. Mr. P e c o r a (handing paper to Mr. Mitchell). Let the record show I handed the witness a paper. M r . M it c h e l l . T h e a g re e m e n t p r o v id e d th a t M r . R y a n s h o u ld r u n t h e a c c o u n t a s h e a n d I p e r s o n a l l y f r o m t im e t o t im e m i g h t d e e m w is e ; t h a t a s th e s t o c k w a s a c c u m u la t e d h e m ig h t d e liv e r o u r s h a re a t t h e a p p r o x im a t e c o s t b a sis , a n d u p o n f in a l liq u id a t io n , a c c o u n t in g w o u ld ta k e in t o c o n s id e r a t io n co st p lu s c a r r y in g c h a rg e s , a n d o u r t w o in t e r e s t s w e re to s h a r e e q u a lly i n a n y p r o f it o r lo s s o n th e t r a n s a c t io n . Mr. P e c o r a . Do you recall who actually financed that joint account ? Mr. M i t c h e l l . No; I do not, Mr. Pecora. Mr. P e c o r a . Does the paper which I handed you a few moments ago embody the terms of this joint account? M r . M i t c h e l l . This paper that I have in my hand, you mean ? Mr. P e c o r a . Yes. Mr. M i t c h e l l . Yes. Mr. P e c o r a . I ask that it be spread in full on the record. The C h a i r m a n . I f there is no objection, it will be so ordered. (The document is as follows:) T h e N a t io n a l Ci t y B a n k , New York, January lJt, 1929. New York. D e a b M b . R y a n : This is to confirm that (1) you, acting for yourself and associates, and (2) Mr. Harry F. Guggenheim, and (3) I, acting for the National City Co., have agreed to accumulate up to 100,000 shares of the common stock of Chile Copper Co. for joint risk and profit, each of the afore said parties having a one-third interest in the account. You will be responsible for all purchases, sales, and accumulations of the account and for all accounting with relation thereto. As stock is accumulated you may deliver in blocks at an approximate cost basis to the National City Co., which in turn upon one day advance notice shall be privileged to deliver for carrying purposes approximately one third of any stock accumulated to each of the other parties to this joint account, but all such stock shall be at your call as manager. Any member of the account carrying stock shall be entitled to receive inter est at the rate of 6 per cent per annum. Upon final liquidation or dissolution of the account, your accounting will take into consideration cost plus carrying charges and the three parties to the account shall share equally any resulting profit or loss. This letter is sent to you in duplicate in order that you may lodge one copy with Mr. Guggenheim. An acknowledgment and an acceptance of the terms from yourself and from Mr. Guggenheim will be appreciated. Yours very truly, C. E. M i t c h e l l . Mr. Joh n D . R y a n , Mr. P e c o r a . I show you with respect to the joint account in Chile Copper Co. what purport to be copies of three letters signed respec tively by yourself, John D. Ryan, and Daniel Guggenheim. Are those the letters which embody the terms of the joint-account trans actions with respect to which you have testified ? 119852—83— PT 6-------7 1852 STOCK EXCHANGE PRACTICES Mr. M i t c h e l l . They seem to be, and on your statement that you have taken these eopies from our files I should say-----Mr. P e c o r a (interposing). No; I got those copies from an attorney for the late John D. Ryan * * * Mr. M i t c h e l l . I a m w i l l i n g t o a c c e p t t h e m . Mr. P e c o r a . * * * with Mr. Ryan’s knowledge and consent. M r . M it c h e l l . I a m re a d y to acce p t them . Mr. P e c o r a . I ask that those three letters be spread in full in the record. The C h a i r m a n . Without objection, it will be so ordered. (The three documents are as follows:) T Mr. John D. R yan, he N a t i o n a l C i t y C o ., New York, December 12, 1928. New York. : This is to confirm that you, acting for yourself and asso ciates, and I, for the National City Co., have agreed to accumulate up to 100,000 shares of the common stock of Greene Cananea Copper Co. for joint account on a 50-50 basis. You will run this account as you and I personally from time to time may deem wise. As stock is accumulated you may deliver our share at the approxi mate cost basis and upon final liquidation, accounting .will take into considera tion cost plus carrying charges and our two interests will share equally any profit or loss on the transaction. An acknowledgment will be appreciated. Sincerely yours, C. E. M i t c h e i l l . D e a b M b. R y a n J a n u a r y 14, 1929. C. E. M i t c h e l l , President National City Co., New York. D ear Mr. M itciheill: I am in receipt of your letter of January 14 confirming our verbal understanding covering the joint account in Chile Copper Co. stock, and I accept for myself and associates the terms as stated. Very truly yours, J o h n D. R y a n . M r. J a n u a k y 15, 1929. New York City. D e a r Mr. R y a n : This will acknowledge receipt of a copy of Mr. Charles E. Mitchell’s letter to you of January 14, and is an acceptance of its terms. In his letter he refers to (2) Mr. Harry F. Guggenheim. This should be for the joint account of Harry F. Guggenheim and myself. Yours faithfully, D a n i e l G u g g e n h e im . M r. J o h n D . R y a n , Mr. P e c o r a . N o w referring to this joint account in Greene Cananea common stock-----The C h a i r m a n . That was a copper company also, was it not? Mr. P e c o r a . Yes. Was that company a subsidiary of Anaconda Copper ? Mr. M i t c h e l l . No. Mr. P e c o r a . It is now, is it not ? Mr. M i t c h e l l . Yes. The Anaconda Copper Co. had a substantial interest, but it was the resulting conversion of Greene Cananea for Anaconda stock on the basis of one and a half shares of Anaconda for each share of Greene that resulted in Anaconda Co. getting its controlling position in Greene, which incidentally is the lowest cost producer at the moment, I think, that exists in the world. The C h a i r m a n . Located where? M r . M i t c h e l l . It is located in Mexico. Mr. P e c o r a . One of the purposes, if not the main purpose, of this joint account with the Greene Cananea stock was to maintain a market in that stock? STOCK EXCHANGE PRACTICES M r. M it c h e ll. H o ; Mr. P e c o r a . Was it 1853 not at all. to facilitate the exchange of Greene Cananea stock for Anaconda Copper Mining Co. stock? M r . M i t c h e l l . Yes. Mr. P e c o r a . And in order to facilitate that exchange the market had to be maintained, did it not? Mr. M i t c h e l l . No; I think that did not occur during that time, Mr. Pecora. This Greene Cananea stock was acquired between December 13,1928, and March 21, 1929. In July of 1929 a conver sion was worked out. This was very definitely an account to acquire stock which would give the base for a conversion in due course and permit the Anaconda Copper Co. to obtain control of this very valuable property, a property which even under the existing copper prices is profitable. Mr. P e c o r a . At the time the joint account in Greene Cananea was closed in what form were the profits distributed, in the form of cash or in the form of stock? Mr. M i t c h e l l . Well, from our standpoint we took our share o f the stock and we held it in our box and we ultimately converted it into Anaconda stock. I see a memorandum here that there wasdelivered to Mr. Kelley 12,500 shares for a cash payment. I do not know whether that had anything to do with this account, howeverMr. P e c o r a . I think you will find it did, because Mr. Kelley had one-sixth interest, taken out of Mr. Ryan’s one-half interest in this joint account. By the way, who is the Mr. Kelley to whom you have just referred? Mr. M i t c h e l l. Cornelius F. Kelley, the President of the Anaconda! Copper Co. Mr. P e c o r a . And Mr. Ryan was chairman of the board of the Anaconda Co.? Mr. M i t c h e l l . He was chairman of the board of the Anaconda Copper Co. Mr. P e c o r a . And you were a member of the board? Mr. M i t c h e l l. Not at that time; not until May of the following year. Mr. P e c o r a . N o w , do you find by your memorandum that Mr, W. D. Thornton had some of the profits of this joint account at the closing of it ? Mr. M i t c h e l l . No; I do not find that here. I am sure that Greene-Cananea was covered in the previous hearings here, and an examination of the testimony will develop any facts that you desire in connection with it; but I have not that information. Mr. P e c o r a . Well, what profit accrued in the operation of this joint account to the participants in it? Mr. M i t c h e l l. Well, we got some stock. Mr. P e c o r a . H o w m u ch sto ck ? Mr. M i t c h e l l. We got—you see, there were left 75,000 shares o f stock. Mr. P e c o r a . N o w , those 75,000 shares were 75,000 shares of GreeneCananea ; is that right ? Mr. M i t c h e l l. Yes; that was Greene-Cananea stock. 1854 STOCK EXCHANGE PRACTICES Mr. P e c o r a . And that Greene-Cananea, some 3 or 4 months after the closing of this account, was changed for a larger number of shares of Anaconda Copper? Mr. M i t c h e l l . No; less, I think. There was 1% shares of Ana conda given for each share of Greene-Cananea. Mr. P e c o r a . That is a larger number? M r . M it c h e l l . N o . Mr. P e c o r a . I f 1% shares-----Mr. M i t c h e l l (interposing). Yes; a larger number of shares. Mr. P e c o r a . That is what I asked y o u . Mr. M i t c h e l l. Yes, sir. That 75,000 shares, we took half of that and put it in our box. I see some shares were delivered to Mr. Kelley. I could not tell you from my papers here-----Mr. P e c o r a (interposing). At the market price for Anaconda Copper at the time you received this profit in the form of shares, what would have been the profit in dollars and cents from this joint account? Mr. M i t c h e l l. I do not see an indication here of that figure in my memorandum. I can say that that must have been in the previous testimony before this committee. Mr. P e c o ra . N o w , the common stock of the Anaconda Coppei Mining Co. was accumulated and sold to the investing public by the selling organization of the National City Co. during the year 1929 in very large amounts, was it not? Mr. M i t c h e l l. It was; yes, sir. Mr. P e co ra . D o you recall the'total number of shares of Anaconda Copper common stock which the National City Co. sold through its selling agencies throughout the country in 1929 ? M r . M i t c h e ll. I am re fe rrin g to th e testim on y b efore th is com m ittee, because I know th e questions w ere e x a ctly a lo n g th e sam e lin e , an d I th in k th a t we can-------The C h a irm a n (interposing). I want to say, Mr. Mitchell, if you had time to read that testimony, you would not be referring to it so many times, because there is not so much in that testimony. Mr. M i t c h e l l. The testimony was very complete. The C h a irm a n . Maybe on one or two things. On some things. The old testimony is not an alibi. Mr. M i t c h e l l. N o ; I am not attempting to establish an alibi; but I think every question that is asked me here was asked either of myself or Mr. Ryan in the previous appearance before this committee. Mr. P e c o r a . Well, do you remember that the total number of shares of Anaconda Copper common stock accumulated by the Na tional City Co. in 1929 and sold to the public was upward of 1,300,000 shares? Mr. M i t c h e l l. Yes; here I see the counsel said before: Do you know whether you sold, out of that lot 1,315,880 shares? Senator B r o o k h a r t. Did you sell it? Mr. P e c o r a . The Senator is asking whether that was sold. M r . M i t c h e l l. That stock w as so ld v ery la rg e ly th ro u g h o u r o rg a n iza tio n and th ro u gh dealers in th e CQuntry. Senator B r o o k h a r t. This 37,500 shares was your profit ? Mr. M i t c h e l l. No ----Senator B r o o k h a r t (interposing). That is what it is. sales STOCK EXCHANGE PRACTICES 1855 Oh, yes. am talking now about the general operations in Anaconda Copper stock. Senator B r o o k h a r t. Yes. Mr. P e c o ra . N o w , I believe you testified last year before this com mittee that most of those shares were accumulated at prices at j>ar around $100, and sold at prices around $130. Does that accord with your recollection ? I did not want to go into that. M r . M i t c h e l l. I th in k at th e first w e d id accum ulate stock, a n d M r . M i t c h e l l. Mr. P e co ra . I b o u gh t it in block fo r our perm an en t account. I rem em ber the fir s t block w as 50,000 purchased as a b lo ck , and th en w e a ccu m u lated , th ro u gh th e m ark et, an d b u ilt u p an in ven tory th ere, and I sh ou ld sa y ou r cost on th a t in v en tory w as som eth in g arou n d $1 0 0 a sh are. Mr. P e c o r a . And the sales to the public were made at prices rang ing about $130 a share ? Mr. M i t c h e l l. Well, we bought stock from time to time, and I think that when we made our initial offering to the public it was made around $120, and it followed the market up and down as we had stock to offer through our organization. Mr. P e c o r a . Now, you, as an officer of the National City Co., ap proved of your company selling this Anaconda stock to the public? M r . M it c h e l l . Y e s , sir. Mr. P e c o r a . You considered it a good investment stock-----Mr. M i t c h e l l (interposing). I did. Mr. P e c o ra (continuing). I believe, at the time. M r . M it c h e l l . Y e s , sir. Mr. P e c o r a . And your company was so advising prospective buy ers of it? Mr. M i t c h e l l . Undoubtedly. Mr. P e c o r a . Y o u considered the copper industry in a very stable condition that justified the view that the common stock was a good investment ? Mr. M i t c h e l l . Yes, sir. Mr. P e c o ra . Had you studied the copper industry at that time, Mr. Mitchell? M r . M i t c h e l l. Oh, yes. Mr. P e c o ra . Thoroughly? M r . M i t c h e l l. Perhaps not as thoroughly as someone else might have studied it, but we made it a subject of intensive study. Mr. P e c o r a . Mr. John D. Ryan, wno was then chairman of the board of Anaconda Copper, was also a member of the board of the National City Co. ? Mr. M i t c h e l l. Yes, sir. Mr. P e c o r a . And he had made a study of it ? Mr. M i t c h e l l. Yes, sir. Mr. P e c o r a . And approved it? Mr. M i t c h e l l . Most d e c id e d ly . Mr. P e c o r a . Do you know an organization called Copper Ex porters, Inc. ? M r . M i t c h e l l. Yes, sir. Mr. P e c o r a . Were you connected with that? M r . M i t c h e l l. N o, sir. Mr. P e c o r a . Was the Anaconda Mr. M i t c h e l l. Yes, sir. Copper Co. connected with it? 1856 STOCK EXCHANGE PRACTICES Mr. P e c o r a . And these subsidiaries were connected with it, nearly all-----Mr. M i t c h e l l (interposing). Several of the large subsidiaries. .■Several were not included. Mr. P e c o ra . I think the Greene-Cananea was not included. Mr. M i t c h e l l . I just cannot tell you, but I think there were 1 or 2 that were not. Mr. P e c o r a . N o w , this Copper Exporters, Inc., was sort of a pricefixing organization, was it not, for the copper metal ? Mr. M i t c h e l l. No, sir. Mr. P e c o r a . Was it not? M r . M it c h e l l . N o , sir. Mr. P e c o r a . Was it not a price-fixing organization for the export trade ? Mr. M i t c h e l l. Under the—what is the name of that law ? Mr. P e c o r a . The Webb-Pomerene law? Mr. M i t c h e l l. Yes. This is what is known as a Webb corporation. Mr. P e c o r a . Yes. Mr. M i t c h e l l. Formed with the full knowledge and consent of the Government and the operations were constantly a matter of open knowledge to the authorities, to the Washington authorities. It was an agency formed in order that these American copper ex porters could umte with respect to the foreign market-----Mr. P e co ra (interposing). That is just what I said. Mr. M i t c h e l l (continuing). And not compete with one another, but as a unit group face the foreign market, which is just what the Webb-Pomerene law had in contemplation. Mr. P e c o r a . In other words, this organization called Copper Ex porters (Inc.) was avowedly designed to enable the domestic copper producing companies that were represented in the organization to avoid competition with one another in the export trade of the copper metal. M r . M it c h e l l . Y e s , sir. Senator B r o o k h a r t. Were all the copper companies in that? M r . M i t c h e l l. Practically all the American companies were in it. Senator B r o o k h a r t. And by being combined in that way it gave you more power to ask and secure a price on the foreign market? Mr. M i t c h e l l. Yes; it made the foreign market a place where we could market in an orderly way. Senator B r o o k h a r t. D o you not think that sort of an organization would improve farm prices? Mr. M i t c h e l l. I think we ought to have a lot more of them, Sen ator Brookhart. Senator F le t c h e r . It enabled the corporation to be exempt from antitrust laws ? M r . M i t c h e l l. I beg you r p a rd on ? Senator F le t c h e r . It enabled the corporation to be exempt from antitrust laws? M r . M i t c h e l l. That is what the Webb-Pomerene bill did. Mr. P e c o ra . T o that extent this organization called Copper Ex porters (Inc.), had a very definite control over the price of copper for the export trade? M r . M i t c h e l l. Quite so. STOCK EXCHANGE PRACTICES 1857 Mr. P e c o ra . And do you think that that power which it had was reflected in the ability to peg the price for the copper metal even for domestic use or domestic sales? Mr. M it c h e l l . No, sir. Mr. P ecora . The office of Copper Exporters (Inc.) was in the same building as the Anaconda Copper Co. offices? Mr. M it c h e l l . I do not know. Mr. P ecora . Twenty-five Broadway % Mr. M it c h e l l . Twenty-five Broadway is the building where Ana conda offices are located. I was never in the offices of Copper Ex porters (Inc.). Mr. P ecora . Do you know of the action taken by Copper Ex porters (Inc.), in the latter part of the year 1928 with respect to the making of a world-wide announcement concerning the condition of the copper industry at that time? Mr. M it c h e l l . No. Mr. P ecora . That never came to your knowledge or notice? Mr. M it c h e l l . No ; not that I recall. Mr. P ecora . Y ou made a study of the copper industry for the pur pose of enabling you to determine whether or not the common stock of the Anaconda Copper Co., was a good investment security for your company to sell to the public ? M r . M it c h e l l . The study was made in the office; yes. Mr. P ecora . N o w , when you say it was made in the office, do you mean that some one other than yourself made it? Mr. M it c h e l l . Oh, yes; I mean that we had the benefit of the judgment of the group. Mr. P ecora . Did any member of your group call to your attention at the time the officers of the National City Co. were discussing the advisability of offering Anaconda Copper common stock to the pub lic, or ever say anything about this pronouncement of October 29, 1928, of the Copper Exporters (Inc.) ? Mr. M it c h e l l . Not that I recall, Mr. Pecora. Mr. P ecora . Let me read to you a document that I have, and that is over the signature of Mr. R. R. Eckert, manager of Copper Ex porters (Inc.), and addressed to Chadbourne, Stanchfield & Levy, 25 Broadway, New York City [reading] : G entlem en : The following is a true and accurate copy of the minutes of the meeting of the board of directors of Copper Exporters (Inc.) of October 29, 1928: “ In view of the continued exceptional demand for copper, the great volume of sales of Copper Exporters (Inc.) during the current and past month, and the belief that buyers are contracting in excess of their requirements, thereby creating a condition that might lead to an unstable and artificial situation in the industry, the following statement was authorized: “ Directors of Copper Exporters (Inc.) authorized the following statements: “ The urgent demand for copper has forced the Copper Exporters (Inc.) to raise the price of copper for export to 16% cents c. i. f. European ports. In the opinion of the producers and refiners forming the membership of Copper Exporters (Inc.) consumers are buying in excess of actual requirements, thereby creating the danger of a runaway market; they believe that the in creased mine production ( September 7,000 tons over August and 20,000 tons over January) will be sufficient to satisfy any reasonable demand. “ Unfilled orders on the books of producers and refiners, as shown by avail able statistics, were 353,000 tons at the end of September as compared with 257,000 at the end of August and have undoubtedly been further increased during this month. 1858 STOCK EXCHANGE PRACTICES “ It is believed that if buyers would confine their purchases to actual require ments, the situation should be relieved by increased mine production coming upon the market. “ The secretary was directed to cable this statement to Brussels with the request that they issue it to the press.” You never heard of that before? No ; this is the first time I ever heard that letter, or saw it. Mr. P e c o r a . I ask that this be marked, Mr. Chairman. It has al ready been spread on the record by my reading it. (The letter, on the letterhead of Copper Exporters (Inc.), 25 Broadway, New York, dated February 6, 1933, addressed to Chadbourne, Stanchfield & Levy, 25 Broadway, New York City, signed by R. R. Eckert, manager, was marked “ Mitchell Exhibit 10,” and is in the files of the committee.) Senator T o w n se n d . Did Copper Exporters (Inc.) get any profit by buying up the copper, or by payment of the companies that were a part of the organization? Mr. M i t c h e l l . Senator Townsend, I do not personally know. I never had anything to do with it. It was a joint venture of all of those companies, and this company, itself, never made any money except for the benefit of its own shareholders and those interested, who were the copper companies. Senator T o w n se n d . Well, it was a joint venture for some specific purpose, of course. Mr. M i t c h e l l . It was a joint venture in order to join the Ameri can producers as they faced the export market, so as to avoid a competition as between American consumers with the foreign market. Mr. P e c o r a . A s I understand it, Senator, it was simply an organi zation, around the council table of which sat the representatives of the big copper producing companies here, and through the medium of which they reached understandings in regard to the prices at which they would sell copper to the export trade. In other words, a price-fixing organization with the permission of the Webb-Pomerene Act to enable them to eliminate competition and control prices of copper for the export trade. That is correct,, is it not, Mr. Mitchell ? Mr. M i t c h e l l . I think that is a fair statement. Senator B r o o k h a r t . What effect did that have on the domestic prices ? M r . M i t c h e l l . I do not think it had any effect at all on the do mestic prices, Senator. The C h a ir m a n . What effect did it have on the foreign prices? M r . M i t c h e l l . It stabilized the prices. The C h a ir m a n . Those people joining controlled the foreign market ? Mr. M i t c h e l l . They met always the competition of the foreign producers wherever they were. It unified the American producers. Mr. P e c o r a . It eliminated competition ? Mr. M i t c h e l l . It unified the producers. Mr. P e c o r a . It unified them by eliminating competition ? Mr. M i t c h e l l . Yes, sir. Senator B r o o k h a r t . H o w many producers were selling abroad before this organization was formed ? M r. M i t c h e ll. STOCK EXCHANGE PRACTICES 1859 Mr. M i t c h e l l . I could not tell you exactly, but my recollection is there were possibly 35. Senator B r o o k h a r t. About as many as there are cotton exporters and competing with each other? Mr. M i t c h e l l. Yes, sir. The C h a i r m a n . Mr. Mitchell, it had the effect of raising and get ting a better price for the foreign metal, did it not? Mr. M i t c h e l l. Well, it had the effect of eliminating what might have been a destructive competition among American interests if they went into the export trade, Senator. The C h a irm a n . And that thing which you call elimination of destructive competition raised the price ? M r . M i t c h e l l. Yes; I th in k so. The C h a irm a n . In other words, it raised the price in foreign lands ? It must have, if it had the effect that you said it did. Mr. M i t c h e l l. These latter evidences are the reverse of this, it seems to me. In other words, if these consumers had been allowed to go on and take copper far in excess of their requirements and there had not been a set price put on it by this combination the American price might have advanced rather than gone down. The C h a irm a n . We are g o in g afield n ow . Mr. M i t c h e l l. Yes. The C h a irm a n . The purpose was to eliminate destructive competition? M r . M it c h e l l . Y e s , sir. The C h a irm a n . Which would have brought M r . M i t c h e l l. Yes; p ro b a b ly w ou ld . The C h a irm a n . Therefore, it was for the it to a lower price? purpose of getting a higher price, which you admit they got. M r . M it c h e l l . Y e s , sir. The C h a irm a n . Now did it not also have the effect of giving a somewhat higher level in the United States, as well as outside? Mr. M i t c h e l l. I expect if you had a level on the market you would get a steady and better condition for the amount left for dis tribution and consumption here. The C h a irm a n . What one would call a better condition, and an other man might call worse? Mr. M i t c h e l l. Yes, sir. The C h a irm a n . Is that not correct? M r . M it c h e l l . Y e s , sir. The C h a irm a n . The buyer might not call it a good condition, and the seller might think it was a good condition? Mr. M i t c h e l l. Yes, sir. The C h a ir m a n . The buyer in this case was the American public. M r . M i t c h e l l. The great advantage of this sort of thing is that you bring competitors to where they are forced to know one another, at least as they sit around the table. They would not have any commune regarding the domestic situation at all. But here is a point where they did reach-----The C h a irm a n (interposing). I think I understand that fully. You have answered it well. In other words, I think we get your idea of it. Now can you describe what this word “Anaconda” means today? What does it include; what properties ? 1860 STOCK EXCHANGE PEACTICES Mr. M i t c h e l l . It includes the Anaconda properties in Montana, especially at Butte. The C h a i r m e n . Yes. Mr. M i t c h e l l . It includes, I think, a principal ownership—not complete—of Inspiration Copper. The C h a i r m a n . Where i s that located? Mr. P e c o r a . The Senator wants to know where the mines are located which are owned by the Anaconda Mining Co. Is that it? The C h a i r m a n . Yes; where is that located? Senator F l e t c h e r . The Greene-Cananea is in Mexico. Mr. M i t c h e l l . Well, the principal properties o f the Anaconda are the group in Butte; the Inspiration Co., which is in Arizona; the Greene-Cananea Co., which is in Mexico, and the Chile and Andes Cos., which are in Chile. The C h a i r m a n . Have you property in Canada and Alaska, too ? M r . M it c h e l l . N o ; n eith er one. T h e C h a i r m a n . N o w w h at percentage o f th e p rod u ction w as th is w hen these w ere tak en o ver, w hich are th e b ig ones? Mr. M i t c h e l l . I thought your question had to do with where they produced copper. The C h a i r m a n . Yes. Mr. M i t c h e l l . Of course, they have a very large fabricating com pany-----The C h a i r m a n (interposing). No; you understood my question. M r . M i t c h e l l . I t h o u g h t I d id . The C h a i r m a n . At the time they were taken over, what was the production, say, at those mines, in percentage, or any other way ? Mr. M i t c h e l l . I would have to scratch my memory. I would be glad to get those figures up for you and give them to you. The C h a i r m a n . Could you confer with your associates who are sitting here ? I want to get at the percentage that was produced by those companies here or abroad. Mr. P e c o r a . I might say, Senator, that the late John D. Ryan told me, just a week or two before his recent death, that the Ajiaconda Copper Mining companies controlled or produced about 55 percent of the copper of this country and about 22 percent of the copper of the world. The C h a i r m a n . Well, with that statement, I am willing to pass it over, Mr. Mitchell. Mr. M i t c h e l l . Yes; it is a very large production. I am sure that I covered that in my previous testimony. The C h a i r m a n . The witness has repeatedly stated that copper produced in Mexico is produced so much cheaper than by any of the other companies; for instance, the Mexican company, the GreeneCananea Co., has the lowest production cost. What is the principal reason for that ? There may be more than one. Mr. M i t c h e l l . Principally, at the moment, because they are work ing on high-grade ores. That is a pocket property. The Anaconda, you know, is a deep-vein property. This is a different kind ox property. The C h a i r m a n . WTiat is the difference in wages at the Anaconda (Mont.) property and the Anaconda property, the Greene-Cananea property in Mexico ? STOCK EXCHANGE PRACTICES 1861 M r . M i t o h e l l . I c a n n o t g i v e y o u th o s e fig u r e s . C h a i r m a n . Who is there in your group that knows that? M r . M i t c h e l l . I d o n o t k n o w a n y o n e in m y g r o u p k n o w s i t in d e t a il. Senator F l e t c h e r . Generally, the labor cost in Mexico is lower ? M r . M i t c h e l l . Oh, generally, the labor cost in Mexico is lower. The In Chile the labor cost is very much cheaper; very much, indeed. Mr. P e c o r a . May I ask the name of the gentleman who just gave you some information ? M r . M i t c h e l l . Judge Covington. Mr. P e c o r a . I s he connected with any of the copper companies, the Anaconda ? Judge C o v in g t o n . I happen to know considerable about copper. Mr. P e c o r a . Are you connected with the Anaconda? Judge C o v in g t o n . No; not in the slightest degree. Senator F l e t c h e r . Are any of these mines closed down ? Mr. M i t c h e l l . They are not closed down, but ought to be, Senator. In other words, copper at this moment is selling very low. It is lower than it has been in the history of the decades, and these mines are constantly producing. They are kept open simply to give labor a chance to work. They are being operated at a loss day by day, and the copper industry would be very much better, and the com panies themselves would be very much better off if the mines could be definitely closed for a period. The C h a i r m a n . What percentage of the men have been laid off at the Anaconda? M r . M i t c h e l l . I could not give it to you on a percentage basis; but a good many men have been laid off, and they are dividing the work, Senator; they are giving part time to a great many men. The C h a i r m a n . Well, is your pay roll one-fifth of what it was when you were running full blast ? M r. M it c h e l l . N o ; I w o u l d n o t s a y so. The C h a i r m a n . One tenth? Mr. M i t c h e l l . Well, you are getting down to a figure that one of the management would have to give. The C h a i r m a n . That is all right. In the Greene-Cananea Co., what percentage of the men have you laid off there ? Mr. M i t c h e l l . I think there—the operation is not as great as it was. I cannot give you the figures. The C h a i r m a n . That is running pretty nearly full blast, is i t not? M r . M i t c h e l l . Oh, n o ; it is n o t r u n n i n g f u l l b la s t. The C h a i r m a n . How about the Inspiration? Mr. M i t c h e l l . That is in the same category as Butte. Senator B r o o k h a r t . Now the principal reasons the demand for copper has fallen off is that there are about 35,000,000 people on the farms that cannot buy anything at present prices; is that true ? Mr. M i t c h e l l . Well, they are not only on the farms, I am sorry to say. Senator B r o o k h a r t . But if the farmers could buy they would put these people to work, would they not, not only in copper, but many other things ? M r . M i t c h e l l . Yes, sir. 1862 STOCK EXCHANGE PRACTICES Senator B r o o k h a r t . These 12,000,000 people who are out of jobs cannot buy anything either, and that is what is deepening the de pression all around the ring. Mr. M i t c h e l l . That is quite true. Senator F l e t c h e r . The Anaconda stock is now about $7 a share? Mr. M i t c h e l l . I do not know what it is. Mr. P ecora . About seven. Mr. M i t c h e l l . It has been running between 7 and 10, something of that sort. Senator F l e t c h e r . At the peak it was 170? Mr. M i t c h e l l . Not far from that, according to my recollection. Very high. Mr. P e c o r a . N o w when this study was made of the copper in dustry by officers of the National City Co. which led to their decision to accumulate large blocks of Anaconda Copper common stock and sell it to the American investing public, was it learned that in March of 1929 the price of copper, the metal, was 24 cents a pound, and that within a month thereafter it dropped to 18 cents a pound ? Mr. M i t c h e l l . Of course, the facts were known to us. Mr. P e c o r a . Do you recall that particular fact ? Mr. M i t c h e l l . Well, I know that there was a big rise and subse quent dip there. But we never work on the top bulge price of that sort. We would work on a basis of long-term average. Mr. P e c o r a . N o ; but I mean, was it known to you----Mr. M i t c h e l l (interposing). Oh, yes; of course it was known. Mr. P e c o r a . In other words, the fact that the price of copper, the metal, slumped 33y$ percent in the world markets within a period of one month during the spring of 1929 was known to the officers of your company when they decided, in the early spring of 1929, to sell Anaconda Copper common stock to the public as an investment stock ? Mr. M i t c h e l l . I f you tell me that you have looked up those rec ords of the prices of copper, and that that was the price, I will accept that. When you say those were the prices of copper, and did our people know, of course we knew. But, I repeat, that we were not recommending Anaconda Copper Co. shares on the basis of 26 cents or an 18-cent price. Mr. P e c o r a . Y ou were talking about the profits that would be earned by Anaconda Copper on the basis of those prices, were you not? Mr. M i t c h e l l . We may have been. I do not know what they were talking about, but from my standpoint I was working on the basis of long-term averages of the price of copper, to determine the intrinsic value of those properties. Mr. P e c o r a . So the common stock of a company dealing in a commodity the price of which could slump in the world’s market by one third within a month’s period was the kind of stock that your company, through its officers, marketed as a good sound invest ment security? Mr. M i t c h e l l . Oh, I do not think that had anything to do with it, Mr. Pecora. I f one is working on the basis of a long-term average, why should one be concerned with violent fluctuations that are away above the base? STOCK EXCHANGE PRACTICES 1863 Mr. P ecor a . Because it would tend to indicate a tendency to instability in commodity prices, would it not? Mr. M it c h e l l . Instability at the moment, certainly. Mr. P ecora . Well, your decision to sell Anaconda common stock to the public was made very shortly after the fluctuations, and the price of copper had fallen from 24 cents a pound to 18 cents a. pound within a month; is that not so? Mr. M it c h e l l . I will take your word for that. It did not influ ence my judgment, I can assure you of that. Senator B r o o k h a r t . Were you selling your own stock then? Mr. M it c h e l l . Yes, sir. Senator B r o o k h a r t . Had you reached the conclusion that it was about time to get rid of it; is that the idea ? Mr. M it c h e l l . That is not the way----Senator B r o o k h a r t . That is the way you did it ? Mr. M it c h e l l . That is not the fair way to do it. Senator B r o o k h a r t . I admit it is not. Mr. P e c o r a . D o you know that the copper producing companies that were centered in Anaconda copper, when the slump of the price in the metal came, in March and April, 1929, pegged the price at 18 cents a pound in order to prevent its slipping further? Mr. M it c h e l l . Well, I do not know anything about pegging the price. I know that the copper companies are free agents within themselves. The bankers do not control that, and do not control the price of copper. Mr. P ecora . No; but the National City Co. made a decision* based upon a judgment that the common stock of a company dealing in a commodity which was subject in price to such violent fluctua tion, was a good investment stock. Mr. M it c h e l l . I think I have answered that. Mr. P ecora . Yes. Now this stock was sold through the medium, of salesmen? Mr. M it c h e l l . Yes, sir. Mr. P ecor a . Making almost house-to-house canvasses for cus tomers ? Mr. M it c h e l l . Well, we had salesmen located all’over this coun try and Europe. Large quantities were sold here and in Europe, and large quantities sold through other investment dealers wno were interested. Mr. P ecora . But the National City Co. itself had on its pay roll probably 1,500, or more, salesmen who were confining their selling activities to this country, did it not? Mr. M it c h e l l . Three hundred and fifty salesmen. Mr. P ecora . Three hundred and fifty salesmen? Mr. M it c h e l l . Yes, sir. Mr. P ecora . In this country? Mr. M it c h e l l . Yes, sir. Mr. P ecora . I s that all it had ? Mr. M it c h e l l . Yes, sir. Mr. P ecora . What was its total personnel? M r . M it c h e l l . Total personnel of 1,900. Mr. P ecora . And o f th at 1,900, only 300 were salesmen? Mr. M i t c h e l l . That is correct. The C h a i r m a n . Three hundred and fifty. 1864 STOCK EXCHANGE PEACTICES Mr. M it c h e l l . Three hundred and fifty. Mr. P ecora . Three hundred and fifty? Mr. M it c h e l l . Yes, sir. Mr. P ecora . What were the others? Mr. M it c h e l l . Well, I tried to explain to you yesterday that, just as in a manufacturing concern, the sales department is just the tail end of the funnel; that is where the goods finally leave your plant. Mr. P ecora . Well, the others were not turning out securities which were sold by the sales force, were they ? Mr. M it c h e l l . Mr. Pecora, a business like the National City Co. is an institution within itself with buyers, with engineers, with ac countants, with a large bookkeeping and clerical force, telephone operators, telegraph operators, office boys, policemen. You run the number of your personnel up very rapidly when you----Senator B r o o k h a r t (interposing). Let me ask you a question there: How long were you engaged in this operation of selling this stock ? Mr. M it c h e l l . I can not tell you, without referring----Mr. P ecora (interposing). Let me see if I can refresh your recol lection. Mr. M it c h e l l . Yes, sir. Mr. P ecora . Was it not from August 6, 1929, to October 1, 1929? Mr. M it c h e l l . Well, if you have looked it up I will take your word for it, Mr. Pecora. I could not tell. Mr. P ecora . Is there any one of your associates that can confirm that? They seem to nod their heads in approval. Mr. M it c h e l l . That is about it. Mr. P ecora . It was two months ? Mr. M it c h e l l . Yes, sir. Senator B r o o k h a r t . What did the stock market do during that operation of selling? Mr. M it c h e l l . What were the dates? Mr. P ecora . August 6, 1929, to October 1, 1929. Senator B r o o k h a r t . Did it go up, or down ? Mr. M it c h e l l . Has anybody got a record on it here? I have not. The C h a i r m a n . It was a rising market, was it not ? Mr. M it c h e l l . I just do not remember. Mr. P ecora . It reached a high of 178% some time in September, did it not ? Mr. M it c h e l l . No; on October 1—I have got those quotations in this previous testimony. Those same questions have come up before. Mr. P ecora . Not all of them, Mr. Mitchell. Mr. M it c h e l l . Let me repeat this (reading): The high during the first week in August was 122%. The high in the second week was 123%. The high in the third week was 122%. The high during the next week was 129. The high during the next week was 133. The high dur ing the next week was 133%. The high during the next week was 126%. And then the question: And on October 1, when you quit, it was back to 114 again? That is a question by counsel, and I answered: One hundred and fourteen low, 117 high. Mr. P ecora . Yes, sir. STOCK EXCHANGE PEACTICES 1865 Mr. M i t c h e l l . In other words, during that operation of selling the price had a comparatively small range and at the close of our selling was approximately back to where it was when we started. Mr. P e c o r a . Mr. Mitchell, in how many different cities did the National City Co. at that time, that is, in the late summer and early fall of 1929, maintain branch or district offices ? Mr. M i t c h e l l . Fifty-eight cities. Mr. P e c o r a . Were they connected with the head office in New York by any private wire service? Mr. M i t c h e l l . Not all of them. Some of them were. Mr. P e c o r a . H o w many private wire services did the National City Co. maintain at that time between its head offices and its branch or district offices throughout the country ? Mr. M i t c h e l l . I think we had a wire up and down the coast, and a wire across the continent, with loops to Minneapolis and St. Paul, and so forth. The principal cities of the country were cov ered by our offices, and the principal cities were connected by wire. Mr. P e c o r a . A private wire system? Mr. M i t c h e l l . A private wire system. Mr. P ecora . What was the extent o f it? Mr. M i t c h e l l . Well, I thought that I had just given that. Mr. P e c o r a . I m e a n , in m ile a g e . Mr. M i t c h e l l . I think it was 11,000 miles. Mr. P e c o r a . Was it 11,300 miles? Mr. M i t c h e l l . Well, I do not know. The figure given me was 11,000 miles. Mr. P e c o r a . Well, the figures I gave you in my questions are taken from the figures you gave at one of the anmial meetings. M r . M i t c h e l l . Yes; anything I said at those meetings I stand by. Mr. P e c o r a . Eleven thousand three hundred miles? M r. M it c h e l l . Y e s , sir. Senator B r o o k h a r t . Now that market was booming up about all the time you were selling that stock, and at the time you got through it was down again. How do you account for that? M r . M i t c h e l l . I f you will go back to those very hectic days, that was a comparatively mild fluctuation that occurred there, Senator. Senator B r o o k h a r t . Well, did you have any operations on the stock exchange yourself? Mr. M i t c h e l l . No; I think not, other than buying stock, which we were constantly doing. We found the investment demand for that stock very much greater than we had anticipated when we started selling. Senator B r o o k h a r t . So you were buying stock on the exchange at the same time your agencies were selling it? Mr. M i t c h e l l . That is correct, sir. You see----Senator B r o o k h a r t (interposing). You paid those higher prices to get that stock you bought ? Mr. M i t c h e l l . Yes; undoubtedly. Senator B r o o k h a r t . And how much did you buy in that way? Mr. M i t c h e l l . I cannot say. That has all been in the previous record of this committee. I could best refer you, if you would take time, Senator, to read it. I am sorry that you were not present 1866 STOCK EXCHANGE PRACTICES when I appeared before this committee discussing this Anaconda situation before the committee. Senator B r o o k h a r t . If you do not remember I will look in the record. M r. M i t c h e l l .. Senator M r. M B Y e s , s ir . You did not buy nearly as much as you sold? Oh, yes; we had to. Do you think we sold it rookhart. it c h e l l . short ? Senator B r o o k h a r t . Well, you had the stock of your own to sell through your agencies, as I understand it. Mr. M i t c h e l l . We had stock, but that was quickly distributed. Senator B r o o k h a r t . This was a sort of a syndicate operation then? Mr. M i t c h e l l . Oh, no, no, no. This was an operation of the National City Co. Senator B r o o k h a r t . All by yourselves? Mr. M i t c h e l l . Yes, sir. Senator B r o o k h a r t . A syndicate all by yourselves. M r . M i t c h e l l . I refer to that testimony, Senator, and I will just read these two or three sentences (reading) : But being bankers for the company, even though we promptly sold that 300,000 shares which we owned and had under option, it became our duty, or so we conceived it, so long as our customers viewed that stock as an invest ment stock, to buy in the market and to sell additional shares to them. Which we did. And thus it came about that we bought this very large amount of stock during August and September and distributed it through our organization. Senator W a l c o t t . In addition to the 300,000? M r . M i t c h e l l . In addition to the 300,000 shares. And we closed the account early in October. Senator B r o o k h a r t . That does not say how much. Mr. M i t c h e l l . I think we can probably pick that out. Senator F l e t c h e r . Mr. Mitchell, yesterday morning I had two committee engagements and I could not hear your testimony. I do not want to go over in detail this set-up that you had, but it is not quite clear in my mind about how the National City Co. was constituted. As I understand the shares in the National City Co. were held by three trustees; they controlled these shares, voted them, and so forth. Mr. M i t c h e l l . That is right. Senator F l e t c h e r . They did not have to do actively with the operation of the company—the trustees ? Mr. M i t c h e l l . No, sir. Senator F l e t c h e r . Did they elect the officers of the company? M r . M i t c h e l l . They elected the directors, and the directors elected the officers. Senator F l e t c h e r . I see. And that is the set-up that carries on the operations of the company, independent of the trustees ? M r . M i t c h e l l . That is q u it e c o r r e c t . Senator F l e t c h e r . H o w many directors do you have? Mr. M i t c h e l l . I think in the company we have nine directors. Senator F l e t c h e r . And who is the president of that company? Mr. M i t c h e l l . Mr. H. B. Baker is the president of the National City Co. STOCK EXCHANGE PEACTICES 1867 The C h a i r m a n . The committee will recess until 2.80 o’clock this afternoon. Those under subpoena will be here at that time. (Whereupon, at 12.50 o’clock p. m., a recess was taken until 2.30 o’clock p. m. of the same day.) a f t e r recess The subcommittee resumed at 2.30 p. m., on the expiration of the recess. The C h a i r m a n . The subcommittee will come to order. Who will you have, Mr. Pecora ? Mr. P e c o r a . Mr. Rentschler. In calling this gentleman now, Mr. Chairman, it is understood that the examination of Mr. Mitchell is simply being suspended for the time being. I am calling Mr. Rentschler out of turn in order to enable him to return to New York, where he feels he ought to be to-morrow for the purposes of his bank. Is that correct ? Mr. R e n t s c h l e r . That is quite correct. The C h a i r m a n . Y ou will stand, hold up your right hand, and be sworn: You solemnly swear that you will tell the truth, the whole truth, and nothing but the truth regarding the matter now under examination by this subcommittee, so help you God. Mr. R e n t s c h l e r . I d o . The C h a i r m a n . Y ou may proceed, Mr. Pecora. TESTIMONY OF GORDON S. RENTSCHLER, PRESIDENT OF THE NATIONAL CITY BANK, NEW YORK CITY Mr. P e c o r a . Mr. Rentschler, will you give your full name, address, and business or occupation, please ? Mr. R e n t s c h l e r . Gordon S. Rentschler, New York City-------Mr. P e c o r a (interposing). What is the address? Mr. R e n t s c h l e r . 933 Fifth Avenue, New York City. I am presi dent of the National City Bank of New York. Mr. P e c o r a . How long have you been president of the National City Bank? Mr. R e n t s c h l e r . Since April of 1929. Mr. P e c o r a . When did you first become connected in any official capacity with that bank? Mr. R e n t s c h l e r . In October of 1923. Mr. P e c o r a . In what capacity did you become affiliated with that bank then ? Mr. R e n t s c h l e r . As director. Mr. P e c o r a . And did you hold any office in the bank other than that of director? In other words, did you hold any office in the bank before you became its president in April of 1929 ? Mr. R e n t s c h l e r . Yes, sir; I was a vice president of the bank be ginning in January of 1925. Mr. P e c o r a . A s vice president of the bank at that time were you also assistant to the president? Mr. R e n t s c h l e r . Yes. Mr. P e c o r a . And you held the office of vice president and assistant to the president until you were made president in April of 1929? 119852— 33— PT 6------ 8 1868 STOCK EXCHANGE PRACTICES Mr. R e n t s c h l e r . Yes, sir. Mr. P e c o r a . Prior to your becoming a vice president and assistant to the president of the bank in 1925 had you been an officer of any other bank? Mr. R e n t s c h l e r . I h a d n o t b een . Mr. P e c o r a . What was your business or occupation before you became a vice president of the National City Bank ? Mr. R e n t s c h l e r . I was engaged in manufacturing. Mr. P e c o r a . What lin e ? Mr. R e n t s c h l e r . Heavy machinery, at Hamilton, Ohio, with the Hooven, Owens, Rentschler Co., of Hamilton, Ohio. Mr. P e c o r a . Y ou are also a director of the bank, of course? Mr. R e n t s c h l e r . Yes, sir; I have been a director since 1923. Mr. P e c o r a . D o you recall a meeting of the board of directors of the bank held on or about November 13, 1929, at which certain ac tion was taken with respect to setting aside a fund of $2,000,000 or more for the purpose of making loans to the officers of the bank ? Mr. R e n t s c h l e r . Yes, sir; I recall that meeting. Mr. P e c o r a . Y ou were present and took part in the discussion? Mr. R e n t s c h l e r . I am quite sure I did. Mr. P e c o r a . And the date was November 13, 1929 ? Mr. R e n t s c h l e r . I would have to check that before I would be sure of it. Mr. P e c o r a . At any rate, it was within about a fortnight after the first big break in the stock market at the end of October? Mr. R e n t s c h l e r . Yes, sir. Mr. P e c o r a . Who brought up that matter for discussion or con sideration ? Mr. R e n t s c h l e r . I do not recall just what individual brought it up. It was a matter that had been discussed by a great many of the directors informally prior to that meeting. So I would not re call exactly as to who brought it up. It might well have been Mr. Mitchell or myself who initiated the discussion. Mr. P e c o r a . I s it your best recollection that it was either you or Mr. Mitchell ? Mr. R e n t s c h l e r . It would be very likely that one or the other of us would bring it up in the way that we did our business. That would probably come through the executive committee first, and then to the board. Yes; I find that it was November 13, 1929, when this matter came up in the executive committee. Mr. P e c o r a . Have you before you now a copy of the resolution which was adopted by the board at that meeting with respect to this •$2,000,000 fund ? Mr. R e n t s c h l e r . Yes, sir; or rather I have a resolution adopted by the executive committee, and I think it is probably identical with the one that was later voted by the board. Mr. P e c o r a . I have before me the minute book of the board meet ing of that date. I f you will read the resolution you have I will hold mine and compare it with yours. Mr. R e n t s c h l e r . It reads: Resolved, That the proper officers are hereby authorized to advance to Eric P. Swenson and James H. Perkins, as trustees and not individually, upon their unsecured note or collateral loan agreement, signed by them as such trustees without personal responsibility, such sum or sums as such trustees STOCK EXCHANGE PRACTICES 1869 may call for, not exceeding a total of $2,000,000, and without interest, in order to enable such trustees to make loans or advances, either with or without security as in their complete discretion they may deem proper, to such officers of the bank and its affiliate corporations as they may deem proper, for the purpose of making loans to such officers in the present emergency, and thereby sustaining the morale of the organization. Mr. P e c o r a . Well, that reading corresponds to the resolution em bodied in the minute book of the board of directors. M r . R e n t s c h l e r . All r ig h t . Mr. P e c o r a . Now, as a matter of fact, was not more than $2,000,000 made available to Mr. Swenson and Mr. Perkins as trus tees, for the purpose set forth in the resolution? Mr. R e n t s c h l e r . Yes, sir. There were subsequent resolutions that permitted a total sum of something like $2,366,000 to be so loaned. Mr. P e c o r a . A s a matter of fact, wasn’t it $2,400,000? Mr. R e n t s c h l e r . I am trying to find the other resolution. It might have been. No; I do not have that here. I f you have that figure, all right. Mr. P e c o r a . N o w , the two men named as trustees in this resolu tion, Mr. Swenson and Mr. Perkins, were both directors of the National City Bank, were they not? Mr. R e n t s c h l e r . Yes, sir. Mr. P e c o r a . Mr. Perkins at the time was also president of the City Bank Farmers Trust Co.? Mr. R e n t s c h l e r . Yes, sir. Mr. P e c o r a . Which is the trust affiliate of the National City Bank? Mr. R e n t s c h l e r . Yes, sir. Mr. P e c o r a . What officers of the National City Bank and of its affiliates participated in the loans that were made from this fund? Mr. R e n t s c h l e r . There were probably 100 different men, men of various ranks in the organization. Mr. P e c o r a . What was the largest amount loaned to any one officer out of this fund? Mr. R e n t s c h l e r . I am sorry, but I have not got that information here. Mr. P e c o r a . Have any of your associates possession of it? Mr. R e n t s c h l e r . Y o u , Mr. Pecora, may have it. Mr. P e c o r a . I have the working sheets of our accountants. I will have it looked up. But in the meantime let me ask you: Those loans were all made without interest, weren’t they? Mr. R e n t s c h l e r . Yes, sir. Mr. P e c o r a . And they were made to those various officers without ;security ? Mr. R e n t s c h l e r . Some of them with a n d some without security. Mr. P e c o r a . Did any of the officers of the bank who participated in the distribution of the management funds also participate in the loans that were made out of this fund? Mr. R e n t s c h l e r . I would have to determine that by looking at the list. But I think there were some. There must have been some. Mr. P e c o r a . Have those loans been repaid to the bank ? Mr. R e n t s c h l e r . Some have and some bave not. Mr. P e c o r a . What proportion of them have been paid and what proportion have not been paid? 1870 STOCK EXCHANGE PRACTICES Mr. R e n t s c h l e r . Again, I would have to consult the record. Mr. P e c o r a . Will you please do so? Mr. R e n t s c h l e r . I should say not over 10 per cent, or perhaps not over 5 per cent has been repaid. Mr. P e c o r a . Not over 5 per cent of them have been repaid? Mr. R e n t s c h l e r . Yes; I think that is right. Of course, those loans were closed out as of December 15,1930. Mr. P e c o r a . By that do you mean they were written off and charged up against undivided profits? Mr. R e n t s c h l e r . Some were, and the balance were taken over on new loans made by the National City Co. Mr. P e c o r a . Those were then transferred to the National City Co.? Mr. R e n t s c h l e r . That is right. Mr. P e c o r a . Is that what you would call a bailing-out process o f the bank as regards the respective loans referred to? Mr. R e n t s c h l e r . No. But those loans that were at that time definitely determined not to be current, or not obligations which could be paid back within six months or a year, and therefore not a proper bank asset, were turned over to the National City Co. .where they could be on a long-time basis. Mr. P e c o r a . Well, would you say that the bank was bailed out of those loans under that process? Mr. R e n t s c h l e r . Whatever word you wish to use. The bank was relieved of those loans; yes, sir. Mr. P e c o r a . Y ou have heard that term used before, “ bailed out,” haven’t you? Mr. R e n t s c h l e r . Yes, sir. Mr. P e c o r a . Haven’t you heard that term used ? Mr. R e n t s c h l e r . Oh, y e s. Mr. P e c o r a . It is used in the common parlance of Wall Street, isn’t it? Mr. R e n t s c h l e r . Well, I suppose so. But I do not use it. Mr. P e c o r a . Y ou think it has a harsh sound to the ear, is that it? (Witness does not respond but simply smiles.) Mr. P e c o r a . Well, do you know any politer term for it? Mr. R e n t s c h l e r . Well, those loans were taken over by the National City Co., is the answer to your question. Mr. P e c o r a . Were any loans out of this fund which were made to those officers who had participated in the management fund dis tribution, repaid out of any interest of those officers in the manage ment fund? Mr. R e n t s c h l e r . Well, there has been practically no management fund since 1929. There was quite a small management fund, if I recall it correctly, and there I would have to get the exact figures, in the bank at the end of 1929, but there has been practically nothing since then. Mr. P e c o r a . In the resolution which sets forth the purpose for which this fund of $2,000,000 was set aside, it is stated that this was done— for the purpose of protecting such officers in the present emergency, and thereby sustaining the morale of the organization. Just what did you mean by that? STOCK EXCHANGE PRACTICES 1871 Mr. R e n t s c h l e r . That was the crash of the market of 1929, and the resultant confusion that came from it, which at that time was looked upon as a crisis and an emergency. Mr. P ecora . That is, a personal emergency to those officers? Mr. R e n t s c h l e r . Yes, sir. Mr. P ecora . Who benefited by borrowings from this fund because o f their own commitments in the stock market; is that right? Mr. R e n t s c h l e r . Well, they may have been bank loans or other market commitments, or personal obligations, which when incurred were incurred on the basis of a very reasonable margin, and on the basis where they could be looked upon as very safe borrowings. Mr. P ecora . N o w , at the time when the National City Bank set aside this fund of $2,400,000 to relieve those officers in their emer gency, was the bank selling out other customers, not officers of the bank, who had loans at the bank secured by collateral ? Mr. R e n t s c h l e r . That may well be, because it is the absolute rule of the bank to preserve its assets that are secured in any manner. Mr. P ecora . Did you consider that the bank was taking a step to preserve $2,400,000 of its assets when it made that sum available to officers who have not yet repaid 5 percent of it to the bank? Mr. R e n t s c h l e r . Yes. At the time when this loan was made it was made to men who had up to that time earning power and who had assets in one form or another, that made it look like their obli gations were good obligations to take. But now taking a hind look at it, it is a different picture. Mr. P ecora . In the three years or more which have elapsed since that time the responsibility of those men to the bank has not proven as good as you thought it would in November of 1929 ? Mr. R e n t s c h l e r . As a financial responsibility it has not proven so good, because their things have shrunk like everybody else’s. Mr. P ecora . Most of these officers are still officers of the bank ? Mr. R e n t s c h l e r . A great many of them are. Mr. P ecora . And of the affiliated companies ? Mr. R e n t s c h l e r . Yes, sir. Mr. P ecora . Did the bank have any legal opinion from anybody concerning the validity of those loans? Mr. R e n t s c h l e r . Yes. This was done under the guidance of the bank’s counsel. Mr. P ecora . Wlio? Mr. R e n t s c h l e r . Shearman and Sterling. Mr. P ecora . Did they submit a written opinion as to its legality to the bank’s officers, supporting this action? Mr. R e n t s c h l e r . I do not think so. It is not a regular custom usually for us to receive written opinions from them. But they were closely in touch with this situation. Mr. P ecora . A s the president of the National City Bank are you familiar with the essential provisions of the national banking act? Mr. R e n t s c h l e r . I th in k so. Mr. P ecora . Well, you are not guessing now, are you? Do you feel that you are familiar with the main features of the national banking act ? Mr. R e n t s c h l e r . Yes, sir. 1872 STOCK EXCHANGE PEACTICES Mr. P e c o r a . Do you know of any provision of the national banking: act which justifies loans that are unsecured to officers? Mr. R e n t s c h l e r . Well, these loans were made to the trustees. That was the way this matter was arranged, and we think it is en tirely within the provisions of the national banking act. Mr. P e c o r a . D o you think the adoption of the trustee form of these loans took it out of the operation of the provisions of the national banking act? Mr. R e n t s c h l e r . No. It could be considered a straight loan and then be a proper loan. Mr. P e c o r a . And which was a loan to its officers. M r. R entschler. Q u i t e so . Mr. P e c o r a . We might say that two of the officers were designated as trustees for the other officers who were to benefit by those loans ? Mr. R e n t s c h l e r . Quite right. Mr. P e c o r a . When were those loans taken out of the National City Bank and transferred to the National City Co. ? Mr. R e n t s c h l e r . In December of 1930. Mr. P e c o r a . Some time in 1927 a stock-purchase plan under which officers and employees of the National City Bank were permitted to subscribe for shares of the capital stock of the bank was put into effect, wasn’t it ? Mr. R e n t s c h l e r . A stock-purchase plan in 1927? Mr. P e c o r a . Y e s . Mr. R e n t s c h l e r . Yes ; February 15, 1927. Mr. P e c o r a . And a modification of that plan was put into effect in December of 1929, wasn’t it ? Mr. R e n t s c h l e r . Yes, sir. And I think I have a memorandum I could refresh my memory from and give you what you want. Mr. P e c o r a . D o you need that memorandum in order to refresh your recollection ? Mr. R e n t s c h l e r . Yes. Mr. P e c o r a . If you do I will say there is no objection, but I want the record to show it if you do. Mr. R e n t s c h l e r . Yes, sir; I should like to use it. Mr. P e c o r a . Did you prepare that memorandum ? Mr. R e n t s c h l e r . No. It was prepared by one of my associates. Mr. P e c o r a . Which one? Mr. R e n t s c h l e r . Mr. Lancaster. Mr. P e c o r a . And he is the cashier of the bank ? Mr. R e n t s c h l e r . This is a memorandum by Mr. Lancaster, one of our attorneys. Mr. P e c o r a . Is he an officer of the bank? Mr. R e n t s c h l e r . No, sir. He is an attorney associated with Shearman & Sterling. Mr. P e c o r a . N o w , under the modification of the stock-purchase plan which was put into effect in December of 1929, the scope of that plan or the benefits of it were enlarged so as to permit em ployees of the bank and of its affiliates, in the lower grades, down to clerks, to participate? Mr. R e n t s c h l e r . Quite so. Mr. P e c o r a . The general feature of the plan was, as modified in 1929, to enable those employees of the bank and of its affiliates to STOCK EXCHANGE PRACTICES 1873 subscribe for and purchase shares of the capital stock of the bank and to pay for them over a 4-year period in installments ? Mr. R e n t s c h l e r . Yes, sir. Mr. P e c o r a . With interest charged against them o n the u n p a id balances ? Mr. R e n t s c h l e r . Yes, sir. Mr. P e c o r a . Through the 4-year period? Mr. R e n t s c h l e r . Yes, sir. Mr. P e c o r a . H o w many shares of the bank’s s t o c k w e r e d is p o s e d of under this stock purchase arrangement on the installment plan? Mr. R e n t s c h l e r . Something between 40,000 and 50,000 shares. I think I can get it exactly for you. Mr. P e c o r a . Wasn’t it more than 100,000 shares? Mr. R e n t s c h l e r . No. Well, there were more than 100,000 shares applied for but not allotted. Mr. P e c o r a . Were not more than 100,000 shares subscribed for? Mr. R e n t s c h l e r . They were subscribed for but not allotted. I do not remember now the total of the subscriptions, but I can get it for you. Mr. P e c o r a . Weren’t they all allotted but many of the allotments thereafter canceled? Mr. R e n t s c h l e r . No, s ir. Mr. P e c o r a . Are you sure of that? Mr. R e n t s c h l e r . I am very sure of it, because those subscrip tions were all cut down on the basis of what we thought at that time would be a very prudent size subscription for these various employees to carry. Mr. P e c o r a . Let us see about that. Don’t you recall that some time after December of 1929, at a meeting of the board of directors of the bank, the chairman, Mr. Mitchell, made a statement to the effect that the shares had been oversubscribed—that more than 100,000 shares had been subscribed for? Mr. R e n t s c h l e r . Yes; but----Mr. P e c o r a (interposing). Pardon me until I conclude my ques tion. Mr. R e n t s c h l e r . Pardon m e . Mr. P e c o r a . And that it was necessary to allot another 10,000 shares under the plan in order to take care of all the subscriptions ? Do you recall that? Mr. R e n t s c h l e r . Yes; that is quite true, that there were 10,000 extra shares provided, but the whole 100,000 shares were not al lotted. Mr. P e c o r a . If the 100,000 shares were not allotted, why was it necessary to allot another 10,000 shares to take care of subscriptions ? Mr. R e n t s c h l e r . Because we had only provided in the first place a smaller number of shares, either 40,000 or 50,000 shares. But if you will give me an opportunity to go over this memorandum for a minute I think I can give that information to you absolutely exactly. Mr. P e c o r a . All right. Mr. R e n t s c h l e r . There was a total number of shares acquired by the stock-purchase plan of 50,000 which were offered to the employees for subscription. But there were subscriptions from the employees of 100,000 shares. And I do not see here just what that final allot 1874 STOCK EXCHANGE PRACTICES ment was, but I know it was not in excess of 50,000 shares, and possibly an additional 10,000 shares. Mr. P e c o r a . Do you think if you conferred with some of your associates here you might get more specific information on that ? Mr. R e n t s c h l e r . Yes. Here it is. There were total allotments of 60,000 shares. Mr. P e c o r a . What were the total subscriptions ? Mr. R e n t s c h l e r . Over 100,000 shares. But we provided 50,000 shares before subscriptions were offered, and then it was necessary to provide 10,000 additional shares to take care of the 60,000 shares. Mr. P e c o r a . At what price was the capital stock of the National City Bank made available to its employees under this installment purchase plan? Mr. R e n t s c h l e r . At $200 a share, and $220 a share. Mr. P e c o r a . And that was after the crash in October and Novem ber of 1929 ? Mr. R e n t s c h l e r . That is right. This was in December of 1929. Mr. P e c o r a . And the installment payments required to be made by the employees under this stock purchase plan were deducted from their monthly salary checks ? Mr. R e n t s c h l e r . Quite right. Mr. P e c o r a . Are employees still being held to the purchase price for their stock? Mr. R e n t s c h l e r . Yes, sir; they are still paying on these amounts. Mr. P e c o r a . What is the market for National City Bank stock now? Mr. R e n t s c h l e r . About $40 a share. Mr. P e c o r a . It has been below $100 a share for the greater part of the time since this stock purchase plan was effected in December of 1929, hasn’t it? Mr. R e n t s c h l e r . No. During 1930 it stood above $100 a share, and since then I think it has been below $100 a share the most of the time. Mr. P e c o r a . It has gone down to as low as $25 a share, hasn’t it? Mr. R e n t s c h l e r . I t h in k so. Mr. P e c o r a . And the National City Bank has not done anything to sustain the morale of its employees with regard to those stock commitments of theirs under this plan, has it ? Mr. R e n t s c h l e r . I think the employees are, far and wide, entirely well satisfied with the fact of their part in this plan. I think from the standpoint of the morale, Mr. Pecora, well, I doubt very much if there is an organization in this country where the morale has kept as strong and fine as in this institution. Mr. P e c o r a . A s a matter of fact, after paying their installments as they have fallen due since December of 1929 to date, most of the employees who subscribed for stock under this installment plan still owe more than the stock is worth in the market; isn’t that so ? Mr. R e n t s c h l e r . Yes, sir; more than the market value of the stock to-day. Mr. P e c o r a . And they are still content to pay it? Mr. R e n t s c h l e r . R i g h t . Mr. P e c o r a . And the only way they could be relieved of payments is by resigning their positions; isn’t that so ? STOCK EXCHANGE PRACTICES 1875 Mr. R e n t s c h l e r . Yes. Mr. P e c o r a . Now, as a matter of fact the morale of the officers in the emergency that confronted them in November of 1929 because of the stock market crash was due in large part to their own commit ments for shares of stock of the bank; isn’t that so ? Mr. R e n t s c h l e r . Quite right—oh, I beg pardon. I answered that question too quickly. It is due to their commitments for various things. It may have been bank stock or for their houses or for something else. Mr. P e c o r a . Don’t you know it was principally commitments in the stock of the bank ? Mr. R e n t s c h l e r . I think that was the principal item, perhaps; yes, sir. Mr. P e c o r a . Y ou know that to be a fact, don’t you? Mr. R e n t s c h l e r . I have not been over all these loans enough to say. Mr. P e c o r a . Isn’t that a fact which has been called to your atten tion as the president of the bank, through the examinations of the bank? Mr. R e n t s c h l e r . Yes. I think you are probably correct, that a majority of it represents stock; yes. Mr. P e c o r a . N o w , let us get back to the identity of the officers who received the largest loans----Mr. R e n t s c h l e r (interposing). In passing, I should like, if I may, to add to the statement about the stock-purchase plan and the reason I think the employees are so well satisfied with what happened, that this whole idea came from a committee of 13, which is a committee annually elected by the various departments of the bank and which represents the employees of the bank in dealing with the officers. This was their plan and suggestion. They pressed it very definitely as an opportunity, as they saw it, to get a bigger part in the bank. And at that time they stood ready to be committed to twice the amount that they are actually committed to at the present time. Mr. P e c o r a . Which officer of the bank received the largest indi vidual loan? Mr. R e n t s c h l e r . You have the record there, haven’t you? Mr. P e c o r a . Is there a man in your organization named Barrett, a vice president? Mr. R e n t s c h l e r . Yes. sir. Mr. P e c o r a . Do you know that he received a loan originally of $260,000 out of this fund, and thereafter two additional loans for $10,000 and $26,000, respectively? Mr. R e n t s c h l e r . Yes, sir; if you have that record there, I will say it is correct. Mr. P e c o r a . That would make a total of $296,000 ? Mr. R e n t s c h l e r . Correct. Mr. P e c o r a . Do you know how much of that loan he has paid back ? Mr. R e n t s c h l e r . No; I do not. Mr. P e c o r a . Wasn’t it $11,000? Mr. R e n t s c h l e r . I haven’t it here in my records. If you have it there, all right. Mr. P e c o r a . Consult your own records. Mr. R e n t s c h l e r . I have not a record of that. 1876 STOCK EXCHANGE PEACTICES Mr. P e c o r a . Somebody in your group must have a record o f that. Mr. R e n t s c h l e r . My associate says he gave these records to Mr. Pecora and we have none here. Mr. P e c o r a . We did not take your records. We made notations from your records. Mr. R e n t s c h l e r . Yes, sir; but you have a copy. Mr. P e c o r a . N o w , do you recall what was done with the remaining $285,000 of the loan made to Mr. Barrett out of this fund ? Mr. R e n t s c h l e r . No; unless that was taken over by the National City Co. in December of 1930. If you have the record and if I may use that I will be glad to testify from it. Mr. P e c o r a . According to the records made by our accountants from your records. Mr. R e n t s c h l e r . All right. Mr. P e c o r a . The unpaid balance of $285,000 was written down to $65,000 by the National City Co. Mr. R e n t s c h l e r . Yes; and is an obligation, of course, still re tained. Mr. P e c o r a . What was that? Mr. R e n t s c h l e r . Is an obligation, of course, still retained. Mr. P e c o r a . He has not been required to make any payments on account out of his salary as an officer, has he ? Mr. R e n t s c h l e r . That, again, I cannot answer. Mr. P e c o r a . Do you think that to have done so might have im paired his morale? Mr. R e n t s c h l e r . [Witness smiles without replying.] Mr. P e c o r a . I am asking that question seriously, Mr. Rentschler. Mr. R e n t s c h l e r . No. I do not know what other obligations he might be paying on. That would have to depend entirely on the conditions in order to give you a frank and complete answer as to his individual situation, of which I am not entirely familiar. Mr. P e c o r a . Who is the officer who received the next largest loan ? Mr. R e n t s c h l e r . I will be glad if you will tell me. Mr. P e c o r a . Was it Mr. Lee Olwell? Mr. R e n t s c h l e r . If your records show it. Mr. P e c o r a . That is what our record shows. That is, our nota tions from your records. Mr. R e n t s c h l e r . All right. Mr. P e c o r a . They show that he received $175,000 originally and then an additional amount of $170,272, making a total of $345,272, and that he has paid nothing back on account. Does that accord with your recollection? Mr. R e n t s c h l e r . Yes. Mr. P e c o r a . And that loan account of $345,000 was written off to $200,000 by the National City Co. after the transference of the loan to that company? Mr. R e n t s c h l e r . Yes; that is in accord with m y recollection. Mr. P e c o r a . He is no longer an officer of the bank ? Mr. R e n t s c h l e r . No; he is no longer an officer of the bank. Mr. P e c o r a . Have any proceedings been taken to enforce that obligation. Mr. R e n t s c h l e r . No, sir. Mr. P e c o r a . D o you think it was necessary to sustain the morale of the officers of your organization in this fashion, in view of the STOCK EXCHANGE PEACTICES 1877 fact that many of those officers had been permitted to participate in handsome bonuses out of the management fund ? Mr. R e n t s c h l e r . Well, I can answer that by saying that at the time we were dealing with this situation, in October of 1929, it was absolutely essential for the good of the bank and for the good of the enormous number of contacts that we had that every officer and every employee of that organization should be functioning at his very best, entirely leaving aside any of his personal interests. And I think the answer as to whether or not it was wise to do it is defi nitely shown in the way that those men, officers, and on down to the most casual employees, paid, day in and day out, did their job. And from that standpoint I will therefore answer your question yes. Mr. P e c o r a . The morale of the employees has been sustained with out relieving them of the burden of paying several times more than the market price of the stock even to-day. Mr. R e n t s c h l e r . The officers are a part of this plan just as much as the employees; I mean the officers just as much in proportion. A great many of the officers are in the stock-purchase plan and have had large amounts of the stock, and have exactly the same relative position to deal with as the employees. Mr. P e c o r a . But the employee was not given the benefit of un secured loans, borrowed with no interest, to tide him over the emer gency, in order to sustain his morale, was he ? Mr. R e n t s c h l e r . Well, I think the answer there is that the morale of our employees has been sustained, and we have been very careful to see that it is done. Mr. P e c o r a . Not by relieving them of the burden of these sub scriptions or commitments, however. Mr. R entsch ler. No. Mr. P e c o r a . And you admit it was necessary to do that in order to sustain the morale of the officers. Mr. R e n t s c h l e r . We did not relieve the officers of any of their stock purchase plan commitments. They were all treated exactly alike. Mr. P e c o r a . But the officers were relieved of their commitments, outside of the stock purchase plan, to the extent of $2,400,000, which the bank is still out. Mr. R e n t s c h l e r . That is right. Mr. P e c o r a . N o w , as of February of this year do you know how much is due from employees under this installment stock purchase plan? Mr. R e n t s c h l e r . Let me see if I have it here. No; I haven’t got that figure. If your accountants have it I will be glad to testify from their transcript. Mr. P e c o r a . I understand the amount due from employees as of February 18, 1983, according to an examination of your records by our accountants, is $5,303,276.96. Mr. R e n t s c h l e r . All right. Mr. P e c o r a . What was the total amount represented by the sub scriptions of employees under this stock purchase plan as modified in December of 1929 ? Mr. R e n t s c h l e r . Originally about $12,000,000. Mr. P e c o r a . So the employees have paid subscriptions down to date without having had any of their subscriptions marked off? 1878 STOCK EXCHANGE PRACTICES Mr. R e n t s c h l e r . Mr. Pecora, let me correct you there: The stock purchase plan is composed of officers and employees, of which about 20,000 shares have been subscribed for by employees without officer title, and the other is subscribed for by officers with title, and that burden is carred in that fashion. Mr. P ecora . By employees and officers alike ? Mr. R e n t s c h l e r . Yes; both alike. Senator F l e t c h e r . How many shares altogether? Mr. R e n t s c h l e r . Sixty thousand shares altogether. Senator F l e t c h e r . And the employees had 20,000 shares? Mr. R e n t s c h l e r . Yes; about 20,000 shares. Mr. P ecora . N o w , Mr. Rentschler, d id you as a vice presiden t o f the National City Bank participate in the distribution of this man agement fund in the year 1927 ? Mr. R e n t s c h l e r . Yes; I did. Mr. P ecora . To what extent? Mr. R e n t s c h l e r . I think I have a memorandum here, which I got over the telephone this morning, so I am not at all sure it is accurate. Will you check me with your memorandum? Mr. P ecora . My record shows $154,760.53. Mr. R e n t s c h l e r . Yes. Mr. P ecora . T o what extent did you participate in the manage ment fund of the bank for the following year ? Mr. R e n t s c h l e r . $125,000. Mr. P ecora . This was all in addition to your salary ? Mr. R e n t s c h l e r . Yes. Mr. P e c o r a . And what were your salaries for those 2 years ? Mr. R e n t s c h l e r . $50,000 each year. Mr. P ecora . By the way, Mr. Rentschler, are the moneys accru ing to this management fund kept on deposit in the National City Bank? Mr. R e n t s c h l e r . They are not separated from any other fund until the actual payment to the officers. It is just an accrual, in the bank month by month, and is finally determined at the end of 6 months, and then at the end of the next 6 months. Mr. P ecora . Where are the funds deposited during their accrual? Mr. R e n t s c h l e r . Just with the funds in the bank. Mr. P ecora . Are you sure of that? Mr. R e n t s c h l e r . Yes. Mr. P ecora . They are carried there up to the day of payment? Mr. R e n t s c h l e r . Yes, sir. Mr. P ecora . Are they paid out of the funds of the bank as repre sented by checks drawn against the bank ? Mr. R e n t s c h l e r . No. They are paid by checks drawn on other banks to which the funds have been transferred from the bank itself to the other bank. Mr. P ecora . What was the reason for that ? Mr. R e n t s c h l e r . All of our salary checks go through other banks rather than through our own employees, where the----Mr. P ecora (interposing). What is the reason for it? Mr. R e n t s c h l e r . Well, the same reason that any other pay roll or any other salary roll is kept in a confidential relationship in the organization. It has not been a custom of ours or of any other STOCK EXCHANGE PRACTICES 1879 business organization I know of, to discuss with each other in the •organization or outside the amount of our compensation. Mr. P e c o r a . T o boil it down to a sentence: Is the reason for it to avoid disclosure^----Mr. R e n t s c h l e r . Quite so. Mr. P e c o r a . T o employees and other officers of the bank, of the identity of the officers participating in the management fund and the extent of their respective participations? Mr. R e n t s c h l e r . That is the quite definite reason; yes, sir. Mr. P e c o r a . That is the reason ? Mr. R e n t s c h l e r . Quite definitely s o . Mr. P e c o r a . Mr. Rentschler, to what extent, generally speaking, has the bank financed the securities business of the National City Co.? Mr. R e n t s c h l e r . Financed the securities business of the National City Co. ? Mr. P e c o r a . Yes. Mr. R e n t s c h l e r . Not at all. The National City Co. has always stood absolutely on its own feet. Mr. P e c o r a . Does not the National City Co. at times borrow money from the National City Bank? Mr. R e n t s c h l e r . Well, the National City Co. has had the bank’s limit in unsecured loans, and has also had loans in addition to its limit secured by United States Government bonds. Mr. P e c o r a . What is the limit of unsecured loans available to the National City Co. ? Mr. R e n t s c h l e r . It would be 10 per cent of our capital and surplus at what they are from time to time. Mr. P e c o r a . In other words, they have a borrowing capacity or ■credit up to the legal limit ? Mr. R e n t s c h l e r . That is right. Mr. P e c o r a . How much is that in dollars and cents? Mr. R e n t s c h l e r . About $20,000,000, and I think I have the exact figure. Mr. P e c o r a . Well, that will do. Mr. R e n t s c h l e r . If they borrow more than that, they borrow against United States Government bonds issued up to 1917, and they get 15 per cent more. But that has not happened. Mr. P e c o r a . Has the National City Co. availed itself of this loan credit ? Mr. R e n t s c h l e r . Not often. Mr. P e c o r a . How frequently? Mr. R e n t s c h l e r . At the present time they owe nothing. At other times they will be using their entire amount for, say, a week or a month, depending upon what their needs may be. Mr. P e c o r a . Y ou know that in the year 1928 and in the year 1929 and in the year 1930, or in portions of those years, the National City Co. engaged in an intensive campaign for the sale of the capital stock o f the bank to the public, don’t you ? Mr. R e n t s c h l e r . Yes; they were selling stock right along. Mr. P e c o r a . D o you know how many shares of the bank’s stock were distributed to the public through the National City Co. ? Mr. R e n t s c h l e r . No; I do not. 1880 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Have you any idea of the amount ? Mr. R e n t s c h l e r . I have not seen those figures. Mr. P e c o r a . It is a very large amount, isn’t it ? Mr. R e n t s c h l e r . I should think it would be a very large amount. Mr. P e c o r a . What would strike you as a very large amount? Mr. R e n t s c h l e r . We may have those figures available and can get them rather than to be guessing. Maybe you have them. Mr. P e c o r a . I want to see how much you know about it. Mr. R e n t s c h l e r . I do not know, in the buying and selling, what it would run into. Mr. P e c o r a . Several hundred thousand shares? Mr. R e n t s c h l e r . At least that. Mr. P e c o r a . It would run into seven figures, as a matter of fact? Mr. R e n t s c h l e r . I should think so in taking all those years, with sales in and out as folks do in regard to bank shares, as well as other shares. During that period we went up from 10,000 or 15,000 stock holders to where we have now 86,000 stockholders. So it must have been quite a large figure. Mr. P e c o r a . For the Sy2 year period ending December 31, 1930, our accountants report as a result of an examination of the records of the National City Co. approximately 1,950,000 shares of the bank’s stock, at an approximate cost of $650,000,000, were sold to the public. Would that be in accord with your general knowledge? Mr. R e n t s c h l e r . Yes. If you have the figures I should say that is right, and I will testify to it. Senator B r o o k h a r t . What was the total number of shares of the bank? Mr. R e n t s c h l e r . 5,500,000 shares. Senator B r o o k h a r t . And those shares were owned by the bank itself ? Mr. R e n t s c h l e r . Not at all. The National City Bank has never owned a share of its own stock so far as I know. Senator B r o o k h a r t . Well, how did you happen to be selling them? Mr. R e n t s c h l e r . They were shares, so far as the National City Co. was concerned, that were bought from one person and sold to another. Senator B r o o k h a r t . It was not the bank making the sales? Mr. R e n t s c h l e r . No, sir. It was where the National City Co. sold to one stockholder, or rather sold for one stockholder who wanted to sell, to somebody else who wanted to become a stock holder, and the City Co. was the trading post past which those trades were made. Mr. P e c o r a . Don’t you know that the National City Co. always had a very extensive position during those three and a half years in the stock of the bank ? Mr. R e n t s c h l e r . I don’t know what you would call extensive. I think some figures were furnished to you showing exactly what the net amount of stock was at the end of each month or at the end of each week. Mr. P e c o r a . Don’t you know that the company had a long position at the end of 1930 of 99,227 shares of the capital stock of the bank? Mr. R e n t s c h l e r . Yes; that was one—well, I think that was the longest position we had probably had. STOCK EXCHANGE PEACTICES 1881 Mr. P e c o r a . That is a pretty extensive position, isn’t it? Mr. R e n t s c h l e r . That is a big position; yes, sir. Mr. P e c o r a . And that was at the end of the three and a half year selling campaign in which very nearly 2,000,000 shares were dis posed of. Mr. R e n t s c h l e r . Yes, sir; and in which we had a most unsettled world-wide market situation such as we had ever had to deal with. Mr. P e c o r a . Do you know that in 1929 alone the National City Co. acquired and disposed of approximately 1,355,000 shares of the bank’s stock? Mr. R e n t s c h l e r . If that is the figure that your accountants have taken from our records, all right. Mr. P e c o r a . Well, that knowledge does not surprise you, does it? Mr. R e n t s c h l e r . No. Mr. P e c o r a . And it accords with your general knowledge? Mr. R e n t s c h l e r . Yes; I knew it was a very large amount, because that was a period when there was a tremendous demand for bank stocks and a great deal was changing hands. Mr. P e c o r a . D o you know of any single person or group that has traded in the bank’s stock to any greater extent than the National City Co. during this period ? Mr. R e n t s c h l e r . Of my own knowledge I do not. Mr. P e c o r a . You know that a national bank may not buy or sell its own shares. Mr. R e n t s c h l e r . Yes, sir; I do. Mr. P e c o r a . D o you consider that those provisions of the national banking act were violated in spirit if not in letter through this medium of its investment affiliate, called the National City Co., engaging in those transactions ? Mr. R e n t s c h l e r . I do not think so, either in spirit or in letter. But I think from the experience of that period we determined some time last year not to have a long position or a short position in National City Bank stock so far as the National City Co. was con cerned, and to do nothing more with it than to simply fill orders as they come in, passing one customer’s order over to somebody else to execute it. Mr. P e c o r a . Don’t you know that the National City Co. during this period of time was going out in the byways and highways so liciting customers for the stock of the bank? Mr. R e n t s c h l e r . That may quite well be, because it seemed, look ing back, that it was a V ery desirable thing f o r us to broaden o u r contacts, that is, for the banking institution to broaden its contacts, to make it possible for more people to become stockholders in o u r bank. There were a great many collateral conditions flowing to the bank because of it, and it was prompted to let those shares be sold, and for a long while they proved to be one o f the best invest ments that folks had. And I do not question at all that there was v e r y broad selling of National City Bank shares. Mr. P e c o r a . By the National City Co.? Mr. R e n t s c h l e r . By the National City Co.; yes, sir. Mr. P e c o r a . Y ou do not regard that as in effect the selling or buy ing of bank shares by the bank itself ? Mr. R e n t s c h l e r . No, sir. 1882 STOCK EXCHANGE PEACTICES Mr. P e c o r a . Because in form at least it was done by the National City Co. Mr. R e n t s c h l e r . Right. But in the light of experience I am perfectly willing to say to you I prefer that the National City Co. not sell shares. Senator B r o o k h a r t . Why did you do that if it was all right? Mr. R e n t s c h l e r . I do not think any of us had foresight to see the great catastrophe that was coming across the world in this last two or three years, Senator Brookhart. I know I didn’t have. Senator B r o o k h a r t . In a speech back in 1925 Senator Shipstead reasoned it out quite clearly, even then. Mr. R e n t s c h l e r . Well, more power to him. Senator B r o o k h a r t . There was not apparently any power, because the financial crowd paid no attention to his good sense. Senator F l e t c h e r . What was the peak of the National City Bank stock? Mr. R e n t s c h l e r . How high did it go ? Senator F l e t c h e r . Yes. Mr. R e n t s c h l e r . Sometime in September or October there were relatively few shares sold at somewhere around 5T5 to 580. Senator F l e t c h e r . 1929? Mr. R e n t s c h l e r . 1929. There were the peak months where the stock went up. I think it was around $400 a share somewhere in early August. All of these things the peak was in August or Sep tember or early October, where we had this very violent run up, and then came down, and in the beginning of November again it was selling down around two hundred and some odd dollars a share, $200 or $220 a share. Mr. P e c o r a . Mr. Rentschler, what was the par value of the stock when it was selling at its peak of 578 or 579? Mr. R e n t s c h l e r . $20 par. Senator B r o o k h a r t . $20; and it was selling for 500----Mr. R e n t s c h l e r . $585; yes, sir. Senator B r o o k h a r t . It never could earn a return on that kind of price, could it? Mr. R e n t s c h l e r . No; looking back at it now, it could not have. Senator B r o o k h a r t . Then why didn’t you advise the poor people that were buying it of that fact ? Why didn’t you stop the sale of it at such exorbitant price as that? Mr. R e n t s c h l e r . It was not our stock they were buying, Senator Brookhart. They were buying stock from each other. They were making their own market. Mr. P e c o r a . When you say it was not your stock they were buying, what do you mean, Mr. Rentschler ? Mr. R e n t s c h l e r . If you have the figures there of what the Na tional City Co. had net long at the end of each day or the end of each week during those months under discussion, why, that would show what proportion of the stock actually was owned by the Na tional City Co. The balance of it, Mr. Pecora, would be the stock that was bought and sold during the day of the trading when one customer came to buy and the other customer came to sell. Mr. P e c o r a . Don’t you know something about the long or short position of the National City Co. in the stock of the bank, inasmuch as you yourself are president of the bank ? STOCK EXCHANGE PRACTICES 1883 Mr. R e n t s c h l e r . I don’t know it exactly, and I would have to re fresh my mind. Mr. P e c o r a . Well, don’t you know approximately? Mr. R e n t s c h l e r . Yes. The general policy was to keep within 5.000 shares one way or the other, but there were times when it went above that. I would not know without consulting the records again just how much it did go above that. Mr. P e c o r a . For instance, it does not surprise you to learn, does it, that at the end of 1930 the City Co. had a position of nearly a hun dred thousand shares of the stock % Mr. R e n t s c h l e r . Yes. As I explained to you, that was a very unusual situation that came as a result of the 1930 situation. Mr. P e c o r a . Do you know what its position is to-day in the stock ? Mr. R e n t s c h l e r . City Co. ? Mr. P e c o r a . Yes, sir. Mr. R e n t s c h l e r . Why, they do not have a share left at the end of each month. City Co. has no City Bank stock and has not had any City Bank stock since about January 1, 1932. From that day on the City Bank has been out of business of carrying any City Bank stock for its own account. Mr. P e c o r a . Why was it necessary for the National City Co. under any circumstances to be long of the stock if it was merely acting as a broker ? Mr. R e n t s c h l e r . They were long with what in comparison was a small amount. They really, as a matter of fact, should have had very little stock. It was the general policy for years to keep very little. Mr. P e c o r a . Do you mean to say that a long position on a hundreed thousand shares was----Mr. R e n t s c h l e r . Now, Mr. Pecora, the hundred thousand shares that you keep mentioning, sir, is the result of 1930, and if you will be good enough to take the figures that you have I will be glad to give that to you if I can. Mr. P e c o r a . Well, for- instance, prior to the break in the market in October, 1929, according to the examination by our accountants, the long position of the company in the stock of the bank on the 1st of February, 1929, reached as high as 77,000 shares. Mr. R e n t s c h l e r . Yes. Well, now, that----Mr. P e c o r a (interposing). That was months before this abnormal condition which was precipitated in October. Mr. R e n t s c h l e r . Yes. I will be glad to explain that to you, sir. That was at a time when a new issue of stock of the City Bank came out, in February, I think, of 1929. It was authorized at the stockholders’ meeting of January, 1929, and at that time, as at each other time when there was an increase in the shares of the bank, rights are traded in, and this represented the accumulation of rights during that period, and this stock again was disposed of as promptly as possible, and you will find here, if you consult these other figures— take, for instance, here when you come back to July of 1929, July the 5th, you get 9,500 shares, you go back to a comparative day in June, June 7, and there were 8,170 shares; for May 3, 7,811 shares; on April 25, 24,679 shares; on March 1, there were 23,607. That was the beginning of the run-off of the new rights. 119852— 33— pt 6------ 9 1884 STOCK EXCHANGE PRACTICES Senator B r o o k h a r t . Let me ask you there: Did this National City Co. buy stock of the bank at the same time it was selling these stocks ? Mr. R e n t s c h l e r . They were selling shares that had come by reason of rights. Yes; they would be buying and selling both, be cause they would be doing one thing for one customer and the other for the other customer. Senator B r o o k h a r t . As long as they had shares and tried to favor the customer, they did not need to buy any to supply the demand, did they ? Mr. R e n t s c h l e r . In the normal trading, Senator Brookhart, they would be doing something else. Senator B r o o k h a r t . That is, this trading to make a market or affect the price? Mr. R e n t s c h l e r . No, no. A man running a grain elevator, Sena tor Brookhart, will buy corn and bring it in and sell it, and someone else will buy it. Senator B r o o k h a r t . We haven’t any schemes like that in the corn business, among the farmers; I know that. Mr. R e n t s c h l e r . The same process goes on, because com comes into one side and goes out the other—you are buying and selling all the time, and that is exactly what takes place in every commodity. Senator B r o o k h a r t . Our corn does not get juggled until it gets in to the board of trade. Mr. P e c o r a . Mr. Rentschler, in this large volume of trade in the bank’s stock in which the City Co. was engaged, do you know whether it assumed the relationship of a broker or a principal to those trades ? Mr. R e n t s c h l e r . Oh, it was a principal in those trades, Mr. Pecora. Mr. P e c o r a . Did not charge brokerage? Mr. R e n t s c h l e r . N o w I don’t think so. Mr. P e c o r a . You don’t think s o ? Mr. R e n t s c h l e r . N o ; I don’t think so. Somebody here can tell me. Just a block or so. Senator F l e t c h e r . It was testified this morning that the National City Co. had some 350 branches of separate agents throughout the country. Mr. P e c o r a . No; salesmen. Mr. R e n t s c h l e r . No; 56 branches, Senator Fletcher, and there are 350 salesmen who work from those branches. Senator F l e t c h e r . Did they all work on commission ? Mr. R e n t s c h l e r . No; they worked on salary and commission both. Mr. P e c o r a . For a while during this 3%-year period that I have already mentioned, you know, don’t you, that the salesmen of the National City Co. were given an additional premium upon any sales of the bank’s stock which they made ? Mr. R e n t s c h l e r . I knew there were premiums for certain periods. I don’t know whether that was a general rule or not, Mr. Pecora. Mr. P e c o r a . At certain times----Mr. R e n t s c h l e r . That may b e w e ll so . Mr. P e c o r a . They were given a premium for effecting sales of the bank’s stock? Mr. R e n t s c h l e r . Part of their compensation was in premiums they received in the selling of all kinds of securities, and it may well STOCK EXCHANGE PEACTICES 1885 be that they might have received premiums on the City Bank’s stock, although as to that I have no immediate or personal recol lection. Mr. P e c o r a . Y ou are not an officer of the National City Co., are you? Mr. R e n t s c h l e r . No; I am not. Mr. P e c o r a . As president of the bank did you give any instruc tions or directions to the employees of the bank in any of its branches to sell stock of the bank for the account of the National City Co.? Mr. R e n t s c h l e r . Branch of the bank managers? No. Mr. P e c o r a . Are you quite sure of that, Mr. Rentschler ? Mr. R e n t s c h l e r . The managers or the bank officers themselves directly are not selling stock of any kind. It may be that there may be instances where a branch officer might find a customer who wanted to buy this or that and he would turn him over to a City Co. man to effect the sale. Mr. P e c o r a . Did he get a commission on those sales? Mr. R e n t s c h l e r . No, sir. Mr. P e c o r a . Are you sure of that ? Mr. R e n t s c h l e r . Absolutely. No bank officer would have any right so far as I know to get it. Senator F l e t c h e r . Has the National City Bank branches through out the country ? Mr. R e n t s c h l e r . No; the National City Bank has branches in the city of New York, as permitted under the national banking act. We have 75 branches in Greater New York now. In addition to that we have branches scattered around the world in various coun tries, as permitted under the Federal reserve act of 1913. Mr. P e c o r a . At annual meetings of the shareholders of the bank has it been the custom in recent years to submit to them a report of the operations of the National City Co., its investment affiliate? Mr. R e n t s c h l e r . Yes. Mr. Mitchell, the chairman, at each annual meeting for a number of years has given the shareholders the essen tial story of the operation of the City Co., and that has been incor porated and printed in the annual reports. To that extent the report has been made to them. Mr. P e c o r a . I have before me what is described as the annual report of the National City Co. and its subsidiary corporations for the year ended December 31, 1929, summarizing the operating results and various activities of the year, and on the last page thereof appears this statement: With the closing of our Jacksonville (Fla.) office 69 district and representative offices were in operation at the year end, all served either directly or indirectly by*our private-wire system of 11,386 miles. Sales facilities are also available at 26 of the bank’s Greater New York City branches, each connected with our home office by private line, telephone, or teletype service. Mr. R e n t s c h l e r . That was the end of 1929. Mr. P e c o r a . This is the report for the year 1929. Mr. R e n t s c h l e r . That has all been done away with. Mr. P e c o r a . I have not asked you about that. Mr. R e n t s c h l e r . Oh, I beg your pardon. Mr. P e c o r a . Let me read further. Mr. R e n t s c h l e r . I am sorry. 1886 Mr. STOCK EXCHANGE PRACTICES P ecora . Reading where you interrupted me: This makes a total of 95 points offering National Oity Co. facilities to in vestors through its own staff, proof of the excellent service rendered for our account by bank employees at offices where City Co. men are not yet located. Did you hear that report made? Mr. R e n t s c h l e r . Yes; I am familiar with that. Mr. P ecora . Did that bring home to you knowledge for the first time that the employees of the bank were supplementing the selling efforts of the sales force of the company in the sale of securities in which the company was engaged? Mr. R e n t s c h l e r . Yes; they would take orders for them, unques tionably. Mr. P ecora . I did not ask you if they would take orders; I asked you if you learned for the first time that that was being done. Mr. R e n t s c h l e r . N o . Mr. P ecora . Well, you knew of it currently, didn’t you? Mr. R e n t s c h l e r . Certainly. Mr. P ecora . Was that done with your consent and knowledge and approval as president of the bank? Mr. R e n t s c h l e r . Yes. I knew that was the practice. Mr. P ecor a . Y ou approved of it? Mr. R e n t s c h l e r . Surely. Mr. P ecora . And you knew that the National City Co. was paying commissions and bonuses and premiums to the employees of the bank----Mr. R e n t s c h l e r . No. Mr. P ecora . In so far as they rendered service for the City Co. in selling its securities to the public? Mr. R e n t s c h l e r . No. If there was any compensation given for that it was given to the credit of the bank and not to the credit of any individual. That is the reason I said that no officer of the bank was receiving compensation because of his sales of securities. Mr. P ecora . That is, the branch of the bank got the benefit of those commissions ? Mr. R e n t s c h l e r . Of those commissions. Mr. P ecora . If any were paid? Mr. R e n t s c h l e r . If any were paid. Mr. P ecora . And the branch accounted to the bank for them, is that it? Mr. R e n t s c h l e r . Exactly. There would be nothing to the indi vidual. Mr. P ecora . So that the bank profited through commissions on those sales? Mr. R e n t s c h l e r . I f there was any profit awarded to anybody*it would be to the bank, but I don’t know, I would have to look that up to see exactly how that was handled. Mr. P ecora . I think you were asked before by Senator Brook hart what was the capital of the National City Bank in 1929. Mr. R e n t s c h l e r . I answered that—5,500,000 shares. Mr. P ecora . With a par value of $110,000,000? Mr. R e n t s c h l e r . That is right, $110,000,000. Mr. P ecora . Do you know what the market value of those shares was in September, 1929? Mr. R e n t s c h l e r . It was a lot more than that. In September ? STOCK EXCHANGE PRACTICES 1887 Mr. P e c o r a . Yes. sir. \ Mr. R e n t s c h l e r . Roughly, $5(k) a share. Mr. P e c o r a . Yes, sir. That made a market value of around two and three-fourth billion? Mr. R e n t s c h l e r . Yes, sir. Mr. P e c o r a . What was the book value at that time ? Can you tell us? Mr. R e n t s c h l e r . Let me see—I would only have to guess at that. Mr. P e c o r a . Your best guess is what? Mr. R e n t s c h l e r . Not over $70 a share, $60 to $70 a share. Mr. P e c o r a . 60 or 70—around $70 a share? Mr. R e n t s c h l e r . Around $70 a share. So that the market was seven times book value if you want to put it that way. Senator B r o o k h a r t . Do you think it is right for the Government of the United States to charter a bank or permit a market that will kite its stock up to levels like that ? Mr. R e n t s c h l e r . Well, Senator Brookhart, it all depends on whether you say we permitted the market to go up. I can not answer that question. Senator B r o o k h a r t . You were, through your affiliates, part of the great organizations that were boosting all these prices of all these securities ? Mr. R e n t s c h l e r . Senator Brookhart, these prices of securities and of valueg all over the world were being boosted by the competition of men to get these things that somebody else had. It was away beyond the ability of anybody connected with the National City Bank. As a matter of fact, it was away beyond the ability of any body connected with the banking system of this country. We had no control over that. Senator B r o o k h a r t . Do you think it is right for the charter banks to assist in that kind of a performance? (No response.) Senator F l e t c h e r . What d iv id e n d s d i d th e bank pay? Mr. R e n t s c h l e r . $4 a share. Mr. P e c o r a . Mr. Rentschler, $70 a share, the highest figure you mentioned as the book value of the capital stock of the bank in September, 1929, would give us $385,000,000, and the market value then was upwards of $3,200,000,000? Mr. R e n t s c h l e r . Right. Mr. P e c o r a . I have no further questions to ask him, Mr. Chairman. The C h a i r m a n . You may be excused from further attendance. Mr. R e n t s c h l e r . Thank you very much. Mr. P e c o r a . Mr. Chairman, Senator Brookhart has asked that Mr. Mitchell resume the stand, as he wants to ask him two or three questions. The C h a i r m a n . Very well; Mr. Mitchell. After which we will probably recess till to-morrow. FURTHER TESTIMONY OF CHARLES E. MITCHELL, CHAIRMAN THE NATIONAL CO., THE NATIONAL CITY BANK OF NEW YORK, CITY BANK FARMERS TRUST CO., AND INTERNATIONAL BANKING CORPORATION, NEW YORK CITY Senator B r o o k h a r t . You stated, Mr. Mitchell, as I recollect, that the National City Co. handled some twenty billions of securities and 1888 STOCK EXCHANGE PRACTICES that only about 1,000,000,000 were in default or that you had trouble with or something of that kind? M r . M i t c h e l l . Yes. I have not attempted to get a clean check ing on that. In fact, I do not think we can do it until we get back, but in general----Senator B r o o k h a r t . You can not tell exactly. Mr. M i t c h e l l . No. That figure of $20,000,000,000 is apparently the figure of the originations and the participations by ourselves in these securities issued by others. Senator B r o o k h a r t . One billion of that, you say, has turned out bad? Mr. M i t c h e l l . It is something less than that. Senator B r o o k h a r t . How about the other nineteen billions? Haven’t they depreciated a third or half or more ? Mr. M i t c h e l l . Oh, no. A great deal of that has already been paid off. It is matured and paid. Senator B r o o k h a r t . Well, how about the stocks? M r . M i t c h e l l . Well, of course, the stocks----Senator B r o o k h a r t . They are included in that, aren’t they? M r . M i t c h e l l . They would be included in the total; yes. Senator B r o o k h a r t . And they have all depreciated enormously? M r . M i t o h e l l . Oh, y e s . Senator B r o o k h a r t . So that that 1,000,000,000 you mentioned would only be a little fraction of what the public has lost by dealing in these twenty billions? Mr. M i t c h e l l . A great deal of it, of course, that the public paid less for than the par value. It has been paid off at par value. A great deal of it has been called at premiums. Senator B r o o k h a r t . That would be bonds? M r . M i t c h e l l . Yes; that is bonds; and it applies to some extent to stocks, to preferred stocks, Senator Brookhart, that have been retired. I think of one case offhand where a stock I think was put out at 45 and several millions of it retired later at 55. Senator B r o o k h a r t . All of that portion that you have handled since 1929, that has been a loss to the people that purchased it? M r . M i t c h e l l . I d o n o t t h in k t h a t w e h a v e g e n e r a ll y o ffe r e d c o m m o n s t o c k s s in c e 1929. Senator B r o o k h a r t . I Mr. P e c o r a . Will the believe that is all. Chairman direct the witnesses still under subpoena to attend to-morrow morning? The C h a i r m a n . Mr. Mitchell, you are excused until to-morrow morning at 10 o’clock. All who are under subpoena will remain here until they are excused and will return here at 10 o’clock to-morrow morning. The committee will now adjourn until to-morrow morn ing at 10 o’clock. (Accordingly, at 3.57 o’clock p. m., the committee adjourned, to meet again at 10 o’clock a. m. of the next day, Thursday, Febru ary 23, 1933.) STOCK EXCHANGE PEACTICES THURSDAY, FEBRUARY 93, 1933 U S u b c o m m it t e e of C o m m it t e e S tates S e n a te , B a n k in g a n d C u r r e n c y, n it e d on Washington, D. C. The subcommittee met, pursuant to adjournment on yesterday, at 10 o’clock a. m., in room 301 Senate Office Building, Senator Peter Norbeck presiding. Present: Senators Norbeck (chairman), Townsend, Fletcher, and Costigan. Present also: Senator Brookhart. Further present: Ferdinand Pecora, special counsel to the com mittee; Julius Silver and David Saperstein, associate counsel to the committee. The C h a i r m a n . The subcommittee will come to order. Mr. Pecora, who will you have first this morning ? Mr. P e c o r a . Call Mr. Baker. The C h a i r m a n . Mr. Baker, please stand, hold up your right hand and be sworn. You solemnly swear that you will tell the truth, the whole truth, and nothing but the truth regarding the matters under investigation by this subcommittee, so help you God. Mr. B a k e r . I d o . TESTIMONY OF HUGH B. BAKER, NEW YORK CITY, PRESIDENT NATIONAL CITY CO. Mr. P e c o r a . Mr. Baker, will you kindly give your full name, residence, and business or occupation ? Mr. B a k e r . Hugh B. Baker, 834 Fifth Avenue, New York City; president National City Co. Mr. P e c o r a . How long h a v e you been president of the National City Co. ? Mr. B a k e r . Since April of 1929. Mr. P e c o r a . Before that were you connected with the National City Co. in any other capacity? M r . B a k e r . Well, I w a s v ic e p r e s id e n t . Mr. P e c o r a . H o w long had you been vice president? Mr. B a k e r . Well, for several years. I am not exactly sure of the year, but probably 1917 or 1918. Mr. P e c o r a . When you became a vice president of the National City Co., did you also become a member of its board of directors? Mr. B a k e r . No, sir. Mr. P e c o r a . When did you first become of directors? Mr. B a k e r . In 1929. a member of its board 1889 1890 STOCK EXCHANGE PRACTICES Mr. P e c o r a . What is the business generally of the National City Co.? Mr. B a k e r . Dealing in investment securities. Mr. P e c o r a . Y ou have heard the preceding witnesses testify this week? Mr. B a k e r . Yes, sir. Mr. P e c o r a . I ask you that in order to save time. The other witnesses whom you have heard testify have been questioned with regard to the business of the National City Co. and its affiliation with the National City Bank. Is there anything that you want to add to what those witnesses testified to on that subject? Mr. B a k e r . I think not, Mr. Pecora. Mr. P e c o r a . N o w , among the securities sold by the National City Co. was there included the capital stock of the National City Bank? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Did you hear the testimony of Mr. Gordon S. Rent schler, president of the National City Bank, yesterday afternoon? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Did you hear him testify, either in words or in sub stance, to the effect that the National City Co. in selling the capital shares of the National City Bank to the public, sold as principal instead of as broker? Mr. B a k e r . Well, I do not remember the exact statement he made, but I think in substance that is it. Mr. P e c o r a . In substance he testified that in connection with the selling of that stock the National City Co. went into the market and bought the stock which it had sold, or which it needed to fill the buying orders it had received from the public. Mr. B a k e r . That is right. Mr. P e c o r a . Was that testimony substantially correct? Mr. B a k e r . I t h in k s o . Mr. P e c o r a . In other words, whatever shares the National City Co. bought were bought for the purpose of meeting orders which it had received from customers for the stock. Mr. B a k e r . Well, do you mean received prior to the time it was bought? Mr. P e c o r a . Yes. Mr. B a k e r . N o ; t h a t is n o t q u it e it. Mr. P e c o r a . That is what I understood Mr. Rentschler’s testimony to mean. Do you ascribe a different meaning to that testimony of Mr. Rentschler’s? Mr. B a k e r . Well, I did not understand it that way, Mr. Pecora. That would mean that we had orders definitely in hand for any amount of stock that we might have purchased. Mr. P e c o r a . What do you understand was the fact in that respect? Mr. B a k e r . Well, I did not quite get the question, Mr. Pecora, as it relates to the former question. Mr. P e c o r a . Let me ask it in this way: How many shares, all told, of National City Bank stock were sold to the investing public by your company in the year 1929 ? Mr. B a k e r . Of the total number of shares sold I can not differ entiate as between the investment public and dealers. I do not know how those individual amounts might be, but the total amount sold to dealers, investors, and everybody, was 1,359,000 shares. STOCK EXCHANGE PEACTICES 1891 Mr. P e c o e a . N o w , at the time when your company made the sales which aggregated that total, did it have the stock on hand or did it go out into the market in turn and buy the stock with which to ful fill those sales? * Mr. B a k e r . We bought the stock. Senator B r o o k h a r t . Before or after the sales? Mr. B a k e r . Well, Senator, in some cases it might have been before—yes; always before, I should say. The exact balance of the buying orders may not have coincided exactly with the transaction. Senator B r o o k h a r t . You bought the stock and then went out to sell it, is that it? Mr. B a k e r . Well, the buying and selling was going on concur rently. Mr. P e c o r a . From the large volume of sales in that stock made by your company in 1929 I fancy that the sales it was making every business day during that year were quite large, is that correct? Mr. B a k e r . Well, I do not know about every business day, and of course I have not those sales by days. Senator F l e t c h e r . Did you buy and sell on the stock exchange? Mr. B a k e r . N o , sir. Those shares were not listed on the stock exchange. Mr. P e c o r a . They had been listed prior to 1929? That is to say, until January of 1928, hadn’t they? Mr. B a k e r . Yes, sir. Mr. P e c o r a . They had been listed for many years prior to Janu ary of 1928 on the New York Stock Exchange, hadn’t they? Mr. B a k e r . Well, I do not know for how many years, but I assume that is correct. Mr. P e c o r a . And they were taken from the listing on the exchange in January of 1928 after the National City Bank had requested that to be done. Do you know that to be a fact? Mr. B a k e r . Yes; that is approximately correct. Mr. P e c o r a . Do you know that the request of the National City Bank to remove its shares from the trading list of the New York Stock Exchange was made back in July of 1928 originally, and that the exchange authorities refused to accede to the request at first? Do you recall that, Mr. Baker? Mr. B a k e r . Well, I do not recall that date exactly, Mr. Pecora. I do not think that was the date, as a matter of fact. Mr. P e c o r a . It was several months prior to January of 1928 that the bank requested the exchange to strike its shares from the trading list. Mr. B a k e r . Yes; but I understood you to say in July of 1928. Of course I don’t remember that date. Mr. P e c o r a . If the date was not in July it was several months prior to January of 1928? Mr. B a k e r . Well, if so, I do not know about that. Mr. P e c o r a . Well, I will get the specific dates. Mr. B a k e r . All right. Mr. P e c o r a . Senator Fletcher asked you if your company bought through the exchange the shares of bank stock which it sold to the public in 1929, and your answer was that it was then not listed. Mr. B a k e r . That is right. 1892 STOCK EXCHANGE PRACTICES Mr. P ecora . Will you state how the National City Co. acquired the 1,359,000 shares of that stock which it sold in 1929? Mr. B a k e r . Well, I can only approximate it because I haven’t any records to show how much stock we may have purchased directly from holders of stock, because we were maintaining bid and asked, prices on the stock regularly, and whether the stock was offered to us for sale by dealers or whether it was offered by private individuals did not make any difference to us. Mr. P ecora . Well, what was the fact in relation to that? From whom did you buy it principally? Mr. B a k e r . From individuals and dealers. Mr. P ecor a . Did the company ever have or maintain a long posi tion in this stock during the year 1929 ? Mr. B a k e r . Yes. Mr. P ecora . Did it always maintain a long position in the stock during that year? Mr. B a k e r . Yes, sir. Mr. P ecora . Are you sure of that? Mr. B a k e r . Well, according to my records here I think that is right. Mr. P ecora . According to your records, what was the long posi tion of the company in the shares of the National City Bank at the end of January of 1929? Mr. B a k e r . Well, according to my figures that would be—I am not sure whether these figures are at the end of the month or at the first of the month, the figures that I have, but on February 1 they would show 21,500 shares. M r . P ecora . That you were long of ? Mr. B a k e r . Yes. Mr. P ecora . What was its long position on the 1st of March? Mr. B a k e r . 18,932 shares. Mr. P ecora . And the 1st of April. Mr. B a k e r . 7,704 shares. Mr. P ecora . The 1st o f May? Mr. B a k e r . 8,692 shares. Mr. P ecora . N o w , did the company ever go short of the stock at any time after the 1st of April, 1929? Mr. B a k e r . I think not, sir. Mr. P ecor a . Will you see if you can make certain of that? Mr. B a k e r . Well, in my records by the month we did not. Mr. P ecora . Did the company borrow any National City Bank stock in the month of April 1929, in order to cover a short posi tion in the stock? Mr. B a k e r . I have not any record here to show that. I don’t know. Mr. P ecora . Apart from having any record, have you any recol lection on that? Mr. B ak e ®. No; I have not any recollection on that at all, Mr. Pecora. There were times during, perhaps that year, and I am not sure whether it was that year or not, where there were rights for the stock and where we may not have actually had the definite certificates of stock, but we had the right which when converted would produce the definite certificates of stock. And in the mean STOCK EXCHANGE PRACTICES 1893 time to facilitate deliveries of that stock we would borrow some stock. Mr. P e c o r a . D o you recall whether the National City Co. bor rowed any shares of National City Bank stock during the month of April, 1929, from anybody ? Mr. B a k e r . No—Well, now, yes: I have a record here now which shows----Mr. P e c o r a (interposing). .Are you now answering on the basis of some paper that has been handed to you ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Since you started to answer my question in the neg ative ? Mr. B a k e r . That is right. Mr. P e c o r a . And the handing of that paper to you has served to refresh your recollection so that instead of making a negative answer to the question you are now about to make an affirmative answer, is that right? Mr. B a k e r . Well, in the first place, I answered you from my rec ollection. I did not know the answer to the question. According to this memorandum I am now trying to answer that question. M r. P e c o r a . And your answer will be as your recollection has been refreshed by that memorandum? Mr. B a k e r . Well, from this memorandum, and I am not depending upon my recollection now for this, you will understand. Mr. P e c o r a . Mr. Baker, is your recollection generally good or bad? Mr. B a k e r . Well, I would not boast about it. Mr. P e c o r a . Do you think your recollection generally is bad? Mr. B a k e r . Probably about the average. Mr. P e c o r a . I do not know what the average is. Mr. B a k e r . Neither do I. Mr. P e c o r a . I merely want to know the state of your recollection. Is it generally good or is it generally bad ? Mr. B a k e r . I d o not know how to answer that question, Mr. Pecora. Mr. P e c o r a . Y ou can not tell us whether you think you have a poor memory or a good one, is that it ? Mr. B a k e r . No; I can not answer that question. Mr. P e c o r a . What is the answer to the question as to whether or not the National City Co. borrowed any National City Bank stock in the month of April, 1929 ? Mr. B a k e r . According to this memorandum, on April 23 we bor rowed 15,000 shares of National City Bank stock. Mr. P e c o r a . Borrowed from whom? Mr. B a k e r . From Mr. Mitchell. Mr. P e c o r a . Was it Mr. Mitchell who refreshed your recollection a moment or two ago by handing you that written memorandum ? M r . B a k e r . N o . One o f m y a s s o c ia te s h e r e , w h o w a s b e h in d m e, a n d I d o n o t k n o w ju s t w h o h a n d e d i t t o m e. Mr. P e c o r a . Had you completely forgotten about that transaction when I asked you about it? Mr. B a k e r . Well, as to the records on any particular date, Mr. Pecora, yes. I did not know what the date was at all. 1894 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Had you completely forgotten that the National City Co. had borrowed any bank stock in 1929 regardless of the period of the year, when I asked you about borrowing stock ? Mr. B a k e r . Oh, I think I answered that question that we had. Mr. P e c o r a . Now, with your memory refreshed by the memo randum handed to you, are you ready to give this committee the de tails of the transaction and the circumstances under which the Na tional City Co. borrowed 15,000 shares of National City Bank stock from Mr. Mitchell in April, 1929 ?, Mr. B a k e r . I wanted to see about those rights. Are they in here ? [Apparently addressing the question to some associate.] Well, I do not find here the exact position of rights at that particular time. But there were rights which we had accumulated covering our sales entirely; and that is the time that we borrowed this stock from Mr. Mitchell. Senator B r o o k h a r t . What is the difference between that situation and what you would call a straight short sale ? Mr. B a k e r . Well, that we had purchased those rights which called for stock. Senator B r o o k h a r t . At the same time? Mr. B a k e r . At some specific date. Senator B r o o k h a r t . But here now I mean: At the particular time when you needed this stock for delivery ? Mr. B a k e r . That is right. Senator B r o o k h a r t . So you borrowed, and in fact at that partic ular moment you were short? Mr. B a k e r . I shouldn’t say so, because otherwise if we had bought in the open market the actual stock, and at the same time bought these rights, which is the equivalent of a certain number of shares of stock, we would have doubled up our investment. Senator B r o o k h a r t . But those rights could not be executed at once, so you borrowed this stock; otherwise you would not have borrowed this stock. Mr. B a k e r . No; but there was a specific date, within a compara tively short time. Senator B r o o k h a r t . In the future, so that at that particular time you were short, regardless of those rights ? Mr. B a k e r . It does not seem that way to me. Mr. P e c o r a . When were the rights issued to which you have just referred ? Mr. B a k e r . I cannot find that date. Mr. P e c o r a . They were issued January 12, 1929, weren’t they? Mr. B a k e r . Well, I just haven’t got that figure right here. Mr. P e c o r a . In other words, some three months or more before those 15,000 shares were borrowed. Mr. B a k e r . That may be entirely correct, Mr. Pecora, but I haven’t got the date of those rights. Mr. P e c o r a . And you say that the company had not obtained the stock in the exercise of those rights by April of 1929 ? Mr. B a k e r . Well, I am not trying to tie those dates together, be cause I do not recall the date when the rights were exercisable. Mr. P e c o r a . Can you refresh your recollection on that, Mr. Baker, by any records or data you might have here ? STOCK EXCHANGE PRACTICES 1895 Mr. B a k e r . I thought there were some papers here on that, but I do not seem able to find them. Senator F l e t c h e r . When were those 15,000 shares returned that you borrowed? Mr. B a k e r . They were returned July 10. Senator F l e t c h e r . July 10, 1929? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Have you now consulted any data ? Mr. B a k e r . Yes; but I have not got the date of that here, I am sorry to say. I can probably have it for you during the day. Mr. P e c o r a . Mr. Law, the secretary of the company, is here in attendance, isn’t he ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Can’t you ascertain from him the date when the rights were issued? Isn’t some officer of the company here who knows about that? Mr. B a k e r . Well, I don’t know. I just asked him and he did not give me the date. Mr. P e c o r a . Suppose you ask him now or ask some of those men who are right back of you. Mr. B a k e r . Well, as I understand that, the rights expired on February 15, but----Mr. P e c o r a (interposing). Well, now, when were the rights issued ? Mr. B a k e r . In January. Mr. P e c o r a . Let u s get it in chronological order. Mr. B a k e r . January 15. Mr. P e c o r a . January 15, 1929? Mr. B a k e r . I think I am right about that. Mr. P e c o r a . When did the right to exercise those rights expire? Mr. B a k e r . February 15, but----Mr. P e co ra (interposing). February 15, 1929? Mr. B a k e r . Y e s . Mr. P e c o r a . Did the National City Co. have any rights issued on January 15 which it had failed to exercise by February 15? Mr. B a k e r . Oh, yes; I think so. Mr. P e c o r a . How many shares were affected by failure to exercise those rights ? Mr. B a k e r . I am sorry to detain you in this way, but-------Mr. P e co r a (interposing). I did not hear that. Mr. B a k e r . I say I am sorry to delay you in this way, but as I understand that transaction we did exercise the rights, but we held the stock. Mr. P e c o r a . H o w is that ? Mr. B a k e r . But we held a certain amount of stock on account of delays from all over the world of people who had the right to exer cise or participate in those rights, we held it open for perhaps a couple of months or more. Mr. P e c o r a . When you say “ we held it open ” whom do you mean by “ we ? ” Mr. B a k e r . The National City Co. held this stock. Mr. P e c o r a . The National City Co. had the right to acquire cer tain shares of National City Bank stock under the rights that it owned, on January 15, 1929, didn’t it? 1896 STOCK EXCHANGE PRACTICES Mr. B a k e r . That is right. Mr. P ecoka . H o w many shares did it have the right to acquire in the exercise of those warrants? Mr. B a k e r . Well, I haven’t that figure, but I am assuming it cov ered this amount of stock which we bought. Mr. P ecora . We do not want any assumptions on that. I do not know why you can not give us exact figures. Your records would show the exact situation, wouldn’t they? Mr. B a k e r . Certainly. Mr. P ecora . And the records are here, aren’t they ? Mr. B a k e r . Well, I do not think they are on that particular point. The C h a i r m a n . If the records are not here, we will send for them. Mr. B a k e r . I will be glad to do that. The C h a i r m a n . We must first know whether they are here or not. And we have got to progress better with this examination than we are now doing. With all of you here, it would not seem to be a fact that nobody knows anything about it. And the records are here, and you say you can not find it from the records. If there is any thing missing, let us send for it. What is missing? Mr. B a k e r . Well, evidently the figures showing the exact amount of those rights that we had are missing. Mr. P ecora . Mr. Baker, will you say now that prior to April, 1929, the National City Co. had permitted any of its warrants or rights to lapse? Mr. B a k e r . No; I think not. Mr. P ecora . You stated before that the reason for borrowing those 15,000 shares from Mr. Mitchell in April, 1929, was in order to have that stock to take the place of stock which had not yet been issued to you in the exercise of your rights. Now, do you say that is not so? Mr. B a k e r . Well, I was incorrect in m y date on that. Mr. P ecora . All right. Then what was the real purpose for which the National City Co. borrowed 15,000 shares of the National City Bank stock from Mr. Mitchell in April of 1929 ? Mr. B a k e r . Well, that is the same as I said, in order to facilitate deliveries. Mr. P ecora . T o facilitate the delivery of what? Of shares the company had already sold? Mr. B a k e r . That is right, that were in the course of being sold day by day. Mr. P ecora . In other words, the company had sold shares of bank stock which it had not owned or did not own and did not have on hand to deliver. Is that right? Mr. B a k e r . I do not think that is correct. Mr. P ecora . Will you tell me what is correct? Mr. B a k e r . I have already said that we owned those rights cover ing a sufficient amount of stock to make those deliveries. Mr. P ecora . You said that the rights had all been exercised prior to February, 1929. Mr. B a k e r . No, February 15. Mr. P ecora . Yes, February 15,1929. And the stock you borrowed from Mr. Mitchell was borrowed on April 25, 1929, wasn’t it? Mr. B a k e r . Yes, sir. STOCK EXCHANGE PEACTICES 1897 Mr. P ecoka . Nearly two and a half months after your company had exercised its rights, is that correct? Mr. B a k e r . Well, that would seem to be correct. Mr. P ecoea . So that if those 15,000 shares which were borrowed near the end of April, 1929, were needed, as you say, to facilitate the making of deliveries by the National City Co. to customers to whom it had sold National City Bank stock, wouldn’t it be a fact that in making those sales the National City Co. had sold bank shares which it did not own and which it needed for delivery? Mr. B a k e r . No; I do not think so. Mr. P ecora . Then, why was the stock of Mr. Mitchell borrowed for the purpose of facilitating delivery? Mr. B a k e r . Because the stock that we acquired through the exer cise of rights were held for a substantial period in order to take care of stockholders’ rights from various parts of the world that were delayed in reaching New York. Mr. P ecora . Will you kindly produce a single record or book of your company which shows the amount of shares held in reserve for this purpose, for customers all over the world ? See if you can do it. Mr. B a k e r . Well, I am sure I haven’t those records here, but I can produce those records certainly. Mr. P ecora . Where are they, in New York? Mr. B a k e r . Yes, sir. Mr. L a w . No. I have them here. Mr. P ecora . Well, then, why didn’t you show those records to the committee’s accountants ? Mr. B a k e r . Well, I can not answer that. As I understand it, they had access to all these books. But I can not answer that. Mr. P ecora . They had access merely to whatever books they called for. Mr. L a w . Would I be permitted to answer that question? Mr. P ecora . I do not know why the president of the National City Co. can not answer it. Mr. B a k e r . Here seems to be a record of that. There were un subscribed shares at the close of that period, which was February 15, 1929, of 51,590 shares, which were delivered to the National City Co. against payment. Mr. P ecora . When? Mr. B a k e r . I presume at that particular time. Mr. P ecora . At what particular time? Mr. B a k e r . February 15. Mr. P ecora . February 15, 1929? Mr. B a k e r . Yes, sir. That was the date we made payment. Those were held pending delayed subscriptions on the part of stock holders. And the last one of those subscriptions was received May 3, 1929. Mr. P ecora . D o you mean received by the company or by the bank? Mr. B a k e r . Well, the company undertook in the interest of the stockholder who for one reason or another was delayed, or hap pened to be away, or did not get his rights in at just the proper time, to protect over a period of a reasonable time, two or three months. 1898 STOCK EXCHANGE PRACTICES Mr. P ecora . And that was done voluntarily by the company ? Mr. B a k e r . That is right. Mr. P ecora . And did it protect all stockholders in that way? Mr. B a k e r . I think any stockholder who was delayed. Mr. P ecora . With respect to those stockholders who, for any reason whatsoever, failed to exercise their rights—what happened? Did the National City Co. exercise the rights for them and get the stock? Mr. B a k e r . That is right. Mr. P ecora . And how many shares did the National City Co. get for itself in that fashion, Mr. Baker ? Mr. B a k e r . Well, at that time as I say there were delivered to us 51,590 shares. Mr. P ecora . N o w , let me see—those rights expired on February 15, 1929? Mr. B a k e r . That is right. Mr. P ecora . Those rights attached to all the outstanding shares of the capital stock of the National City Bank at that time; is that right? Mr. B a k e r . That is right. Mr. P ecora . And the holders of those shares were scattered all over the world; is that right ? Mr. B a k e r . That is right. Mr. P ecora . And the National City Co. gratuitously undertook to protect those shareholders in remote parts of the world for a certain period of time, without any request from those shareholders to do that for them; is that it ? Mr. B a k e r . That is right. Mr. P ecora . And in doing that the National City Co. was enabled to acquire thousands of shares under those rights belonging to other shareholders who had permitted them to lapse; is that right? Mr. B a k e r . That is not quite correct. Mr. P ecora . Well, in what way is it not quite correct? Give us a correct statement about that. Mr. B a k e r . The correct statement is, that at the expiration, at that time----Mr. P ecora (interposing). What time are you referring to? Mr. B a k e r . The last subscription was received May 3, 1929, and the balance left unsubscribed was 437 shares. Mr. P ecora . What happened then? Mr. B a k e r . They were purchased at the price. Mr. P ecora . And you purchased only 437 shares under the pref erential rights? Mr. B a k e r . That was the net result o f it. Mr. P ecora . And the other shares which you acquired were ac quired for the benefit and account of those shareholders all over the world? Mr. B a k e r . That is right. Mr. P ecora . H o w many shares were so acquired and held ? Mr. B a k e r . Well, it seems to me that gets back to the figure I gave you before. Mr. P ecora . And what figure is that ? Mr. B a k e r . 51,590 shares. STOCK EXCHANGE PRACTICES 1899 Mr. P ecora . Are you now testifying that that is the number of shares your company acquired and held in trust for those sharehold ers all over the world? Mr. B a k e r . I do not quite understand your term, “ held in trust.” We had the stock; yes. Mr. P ecora . Well, what were you holding them for? Did you hold them for the account of your company? Mr. B a k e r . We bought the stock and we held it to take care, as I say, of delayed subscriptions from stockholders. Senator B r o o k h a r t . Let me ask this question right there: Was the price of this stock greater or less at this period than those share holders had agreed to pay for them? Mr. B a k e r . The stock had advanced in price. Senator B r o o k h a r t . Above the agreement of the stockholder? Mr. B a k e r . That is right. Mr. P ecora . When did your company receive those 51,590 shares ? Mr. B a k e r . Well, we paid for them on February 15, 1929. Mr. P ecora . When did the company receive them? Mr. B a k e r . I suppose on the same day. Mr. P ecora . H o w long did the company hold those shares? Mr. B a k e r . Of course, they were not held as a whole until any specific date, because, as those rights came in, we were assigned that stock. Mr. P ecora . Wasn’t the company also using that stock for the purpose of filling orders which its salesmen had received for the purchase of National City Bank stock? Mr. B a k e r . Well, I do not know that the particular block of stock was segregated from any other stock. Mr. P ecora . What was the long position of the company in the stock of the bank on February 28,1929? Mr. B a k e r . Well, I can not give it to you on that date. Mr. P ecora . Well, give it to me on the 1st of March. Mr. B a k e r . On the 1st of March it was 26,781 shares, I think. Senator T o w n s e n d . Then you had sold a part of those 51,590 shares in that interim? Mr. B a k e r . Y ou see, these people had sent their rights in and we were delivering stock against those delayed rights. It was merely an accommodation to them, to protect them from losing their privilege. Senator T o w n s e n d . Were they given stock at the same price at which the rights were subscribed for? Mr. B a k e r . Yes. Mr. P ecora . Did the company keep a special account or record at that time of the shares it had acquired for the account of those shareholders all over the world who had failed to exercise their rights ? Mr. B a k e r . I do not know how we accounted for them on our books, whether it was kept in a special account or not, but we were prepared to deliver the stock. Mr. P ecora . Well, now, you just consulted Mr. Law, the secretary of the company. Mr. B a k e r . And he tells me it was held in a separate subscription account. 119852— 33— pt 6---------- 10 1900 STOCK EXCHANGE PRACTICES Mr. P ecora . Will you ask Mr. Law to give you a transcript of that subscription account so that you can testify with respect to it? Will you do that, Mr. Law ? Mr. L a w . I haven’t that with me, but will be glad to get it by telephone. Mr. P ecora . Have you any recollection of the account, Mr. Law? Mr. L a w . I know the account was opened and held open until the subscriptions were filled, some time in May, May 3. Mr. P ecora . Mr. Chairman, may I suspend the examination of Mr. Baker for the moment and put Mr. Law on the stand, to see •what evidence he can give us ? The C h a i r m a n . Yes. Mr. P ecora . Just change seats, Mr. Law. Senator F l e t c h e r . Mr. Law, please stand, hold up your right hand and be sworn: You solemnly swear that you will tell the truth, the whole truth, and nothing but the truth, regarding the matters now under investigation by this subcommittee, so help you God. Mr. L a w . I do. TESTIMONY OF HARRY S. LAW, SECRETARY NATIONAL CITY CO., NEW YORK CITY Mr. P eco r a . Mr. Law, please give your full name, address, and business or occupation. Mr. L a w . Harry S. Law, secretary, The National City Co., 55 Wall Street, New York City; residence, No. 28 Outlook Place, Glen Ridge, Mr. P ecora . What is your business? Mr. L a w .- Secretary of the National City Co. Mr. P ecora . H o w long have you been its secretary ? Mr. L a w . Since March, 1931. Mr. P ecora . Were you connepted with the company prior to March, 1931? Mr. L a w . I have been with the organization for 14 years. Mr. P ecora . What was your position in the organization immedi ately prior to March, 1931 ? Mr. L a w . Comptroller. Mr. P ecora . A s its comptroller did you have charge of its records and books of accounts? Mr. L a w . I did. Mr. P ecora . Y ou heard the testimony of Mr. Baker, the witness who preceded you? Mr. L a w . Yes, sir. Mr. P ecora . He referred in his testimony to certain subscription rights which the National City Co. exercised between January 15 and February 15, 1929, in connection with the capital stock of the National City Bank. Mr. L a w . Yes, sir. Mr. P ecora . Did you hear his testimony? Mr. L a w . Yes, sir. Mr. P ecora . Are you familiar with that subject ? Mr. L a w . Yes, sir. Mr. P ecora . Can you testify from your recollection concerning the extent to which the National City Co. exercised those rights, the STOCK EXCHANGE PRACTICES 1901 extent to “which it acquired stock by the exercise of those rights, and what it did with the stock so acquired ? Mr. L a w . In connection with each capital increase of National City Bank, the National City Co. underwrites the unsubscribed shares, which are held subject to subscriptions. Mr. P ecora . Talk a little louder. Mr. L a w . In connection with each capital increase of the National ‘City Bank, the National City Co. underwrites the unsubscribed shares and holds them subject to future subscriptions or delayed subscriptions of people who are abroad or ill or for some otner reason have failed to exercise on the expiration date. Mr. P e c o r a . That is done by the company gratuitously ? Mr. L a w . Yes, sir. Mr. P e c o r a . That is not done at the request of those shareholders who might be ill or in remote parts of the world, is it ? Mr. L a w . Indirectly; yes. Mr. P e c o r a . All right, go ahead and tell us about this subscription account. Mr. L a w . In addition to the shares taken over under that agree ment we are entitled to the rights on our own position in this stock at the time the rights are issued. Mr. P e c o r a . Yes; g o ahead. Mr. L a w . S o that the stock we received on the date of issue is a combination of the unsubscribed shares on the part of shareholders, and our own amount as represented by the stock in our inventory. W e acquired in connection with the unsubscribed shares, 51,590 ■shares. Mr. P e c o r a . H o w many? Mr. L aw\ 51,590 shares. Mr. P e c o r a . When did the National City Co. get those shares? Mr. L a w . February 15, 1929. Mr. P e c o r a . Yes. And how many of those shares did it get under its subscription for its own account? That is, upon shares of stock Ihat the National City Co. itself held? Mr. L aw\ Whatever we received, Mr. Pecora, would be in addition to the 51,590 shares. Those are shares not subscribed by stockhold ers other than the National City Co. in its capacity of dealer. I .mean by that that we were entitled to rights on the shares which we held in our own portfolio momentarily at the effective date. Mr. P e c o r a . H o w many shares was the National City Co. entitled to subscribe for, and how many shares did it subscribe for under the warrants or rights attaching to its own shares of capital stock of the ^National City Bank in January of 1929? Mr. L a w . I have not before me the number of rights issued, but we did have a balance on January—well, the nearest date is Janu ary 11, and I suppose our next day’s balance was not materially •changed—we did have 10,579 shares on which we would be entitled to rights to subscribe for the new stock.. Mr. P e c o r a . Well, to subscribe for how many shares of new stock? Mr. L a w . A s I say, I have not the ratio of exchange before me. Senator T o w n s e n d . You do not remember the number of rights given to each share? 1902 STOCK EXCHANGE PRACTICES Mr. L a w . No, sir; I do not. I am sorry, but, I will be glad to get that. Mr. P e c o r a . The ratio was 5 shares of the new stock, having a value of $20, for every 9 shares of the old stock having a par value of $100, was it not ? Mr. L a w . I think that is correct, Mr. Pecora, as I recall it. Mr. P e c o r a . So that if the company had 10,579 shares of the old stock on hand on January 15, how many shares of the new stock was it entitled to subscribe for under these rights? Mr. L a w . Five ninths. Mr. P e c o r a . Which at that rate would be five-ninths of 10,579 shares-----Mr. L a w . That is approximately it. Mr. P e c o r a . Something around 6,000 shares? Mr. L a w . Yes. Mr. P e c o r a . H o w many subscriptions did the National City Co. make and exercise on the rights attached to shares of stock held by others, sick or remote from the city of New York? Mr. L a w . Out of the 51,590 shares received for that particular purpose all but 437 shares were subscribed. Mr. P e c o r a . When were those shares received under those sub scriptions by your company? Mr. L a w . Y ou refer to the 51,590 shares? Mr. P e c o r a . Yes. Mr. L a w . They were received on February 15, 1929. Mr. P e c o r a . And what did the company do with those shares? Mr. L a w . They set up a special account entitled “ Subscription account,” which was held open until the last subscription was ac cepted in May 1929. Senator F l e t c h e r . Was the company dealing in the stock all this while outside of this fund? Mr. L a w . Yes, sir. Senator F l e t c h e r . Buying and selling ? Mr. L a w . We filled orders as they came to us, Senator Fletcher; yes- Senator T o w n s e n d . During this period you borrowed this 15,000 shares from Mr. Mitchell ? Mr. L a w . Yes, sir. Senator T o w n s e n d . If you had 51,000 shares delivered to you what was the necessity for borrowing 15,000 ? Mr. L a w . Senator, we know that there are always people who delay their subscriptions, and it would not be fair to them, if they are ill or abroad and not able to exercise their rights----Senator T o w n s e n d . Could you not have just as well delivered a portion of these shares ? Mr. L a w . Then we would have been unable to fill the subscriptions (from the people who were legitimately entitled to these particular shares. Senator B r o o k h a r t . Did you get those shares at a less price than they paid for them ? Mr. L a w . N o, sir; we took them at the subscription price. Senator B r o o k h a r t . They took them at the subscription price? Mr. L a w . They pass hands both ways, from the bank to us and from the National City Co. to the subscriber. STOCK EXCHANGE PEACTICES 1903 Senator B r o o k h a r t . Then you got them on the 15th of February, the 51,000, and they advanced after that, and you got that profit then? Mr. L a w . N o , Senator. They were delivered to the subscribers at the original subscription price. The National City Co. made no profit whatever from those unsubscribed shares. Senator B r o o k h a r t . Then that would be the market price on the 15th of February? M r . L a w . N o , s i r ; th a t w o u l d b e th e s u b s c r ip t io n p r ic e . Mr. P e c o r a . The subscription price was less than the market price, wasn’t it? Mr. L a w . It was $100 a share, as I recall it, Mr. Pecora. Mr. P e c o r a . And the market price was how much for the new shares at that time? Mr. L a w . On February 15 the market was 319 to 348. Senator B r o o k h a r t . And you let them have it at 100? Mr. L a w . They were subscribers, Senator, which was necessary under the original contract. Senator B r o o k h a r t . Did your company pay the price 300 and over on them? Mr. L a w . N o, sir. bank. W e paid the original subscription price to the Senator B r o o k h a r t . I do not understand how you got that stock from the holders of it then when it was worth three times that much ■and more. Mr. L a w . We got it directly from the bank, Senator, for the sub scription price, and merely held it----Senator B r o o k h a r t . Oh, you got it from the National City Bank itself ? Mr. L a w . At the subscription price and as a service to the----Senator B r o o k h a r t (interposing). Regardless of the market price ? Mr. L a w . Yes, sir; under the orginal agreement. It was a serv ice to holders who had not been able to subscribe for their shares due to illness or absence from the country or for some other cause. Mr. P e c o r a . N o w , Mr. Law, to make this thing clear: The holders of the $100 par value stock had the right on January 15, 1929, to subscribe for new stock which was to be issued on a $20 par value basis in this proportion; they had the right to subscribe for five shares of the new stock for every nine shares of the old stock they •owned. Is that correct? Mr. L a w . I think that is substantially correct, Mr. Pecora. Mr. P e c o r a . Yes. That did not mean that there was to be an ex change of the old shares for the new, but merely that by virtue of their ownership of the old shares they had the right to subscribe at $100 each for five shares of the new stock for every nine shares of the old stock which they owned on the date when subscriptions closed, which was January 16; is that correct? Mr. L a w . I think that is substantially correct, as I recall it. That was brought out, par $20. Mr. P e c o r a . At what price were they entitled to subscribe for the new shares if they elected to exercise their rights? M r. L aw . $100. 1904 STOCK EXCHANGE PBACTICES Mr. P ecoka . At $100 ? Mr. L a w . Yes, sir. Mr. P ecora . At that time what was the market value of the new shares for which the old shareholders were entitled to subscribe at $100 a share? Mr. L a w . The quotation I have here for February 15, which is taken from the New York Times, is 319 bid and 34 8 asked. Mr. P ecora . So that one in a position to exercise those rights could acquire for $100 a share, stock which had a market value of upwards of $300 a share. Is that correct ? Mr. L a w . Substantially. Mr. P ecora . N o w you say the National City Co. subscribed on be half of such shareholders as were ill, or as might be in remote places of the world, for these new shares at $100 apiece ? Mr. L a w . N o, Mr. Pecora. I said that the National City Co. had taken these up under an underwriting agreement and held them sub ject to subscription. We had no right to subscribe for holders whohad failed to exercise their own rights. Mr. P ecora . With whom was that underwriting agreement made? Mr. L a w . With the National City Bank. Mr. P ecora . H o w was the National City Co. to learn what share holders had failed to exercise their right to acquire this new stock at $100 a share which then had a market value of more than $300 a, share ? Mr. L a w . Through subscriptions which came in. Mr. P ecora . Came in to whom ? Mr. L a w . The National City Bank. Mr. P ecora . T o the bank. And the bank gave the benefit of that information to the National City Co.; is that correct? Mr. L a w . I believe the reason for that, Mr. Pecora----Mr. P ecora (interposing). No. Is that correct ? Is that what was done? Mr. L a w . I think it should be qualified. Mr. P ecora . Well, tell us what the fact is. Mr. L a w . The National City Bank has no right to hold its own stock after the subscription date, as I understand it. Mr. P ecora . Yes. Mr. L a w . Therefore, it is necessary to have the stock transferred^ Mr. P ecora . Yes. Mr. L a w . T o some other medium. Mr. P ecora . Yes. Mr. LjAw. At the time of the payment, the payment dated Feb ruary 15. Mr. P ecora . And the medium chosen was its affiliate, the Na tional City Co., is that right? Mr. L a w . Absolutely. Mr. P ecora . The deliveries of stock to subscribers closed on Feb ruary 15, 1929, is that correct? Mr. L a w . T o those who exercised their rights. Mr. P ecora . To those who exercised their rights, deliveries of the new stock were made at $100 a share, when it was worth more than $300 a share. Mr. L a w . Which is in accordance with the usual practice. STOCK EXCHANGE PRACTICES 1905 Mr. P ecora . Yes, I know that is the practice; but those deliveries were made by the bank on February 15 ? Mr. L a w . Correct. Mr. P ecora . On that date how many shares of the new stock sub scribed for at $100 a share were delivered by the bank to the Na tional City Co. on those rights which had not been exercised by the record holders of the old stock ? Mr. L a w . I think I answered the question before that the unsub scribed shares were 51,590 delivered to us against payment on Feb ruary 15, 1929. Mr. P ecora . And did the company make payment for those 51,000 shares on February 15? Mr. L a w . It d id . Mr. P ecora . Then what did the company do with those 51,000 and odd shares ? Mr. L a w . It segregated the shares in a subscription account, as I have previously testified, and held them until the last subscription came in. Mr. P ecora . And when did the last subscription come in? Mr. L a w . During May, 1929. Mr. P ecora . What date in May? Mr. L a w . The subscription was actually received on May 3. It always takes a few days to transfer the stock. I have not the exact date, but it was probably between the 3d and the 10th. Mr. P ecora . Was a separate record kept of these 51,000 and odd shares for this subscription account? Mr. L a w . The special subscription account was on the ledgers whidi your men examined. Mr. P ecora . And you haven’t this special subscription account with you, have you ? Mr. L a w . I am sorry, Mr. Pecora, but I was not asked to bring the books. Mr. P ecora . H o w many shares of that subscription stock, socalled, did the National City Co. have long on February 28, 1929,. if you can tell us. Mr. L a w . I am sorry; without the books I haven’t that, but I will be glad to get it if you wish, by telephone. Senator F l e t c h e r . Did not the company charge these subscrib ers—say the person who put in his subscription in May—did not your company charge him interest from February to May and take service charges also ? Mr. L a w . N o , Senator; these went directly to the subscribers at $100 a share. There was no profit or interest charge or carrrying charge of any kind to the National City Co., as far as I know. I would prefer to refresh my memory, but that is my recollection. Senator F l e t c h e r . Y ou were doing all this for the benefit of the shareholders. It would have been fair, would it not, to charge them interest for carrying them and service charges ? Mr. L aw . I am reminded that there may have been an interest charge. I would have to check. But we do perform a great many services without charge in our institution, which is usual in institu tions such as ours and any commercial bank. 1906 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Mr. Law, were these 51,590 shares acquired for this subscription account held intact by the company from February 15 until some time in May, 1929 ? Mr. L a w . The physical shares, Mr. Pecora, may have been merged with the regular shares of the organization. Mr. P e c o r a . And sold to the public? Mr. L a w . Undoubtedly used to fill orders, because simultaneously we had purchases coming from all over the world which would be used to replace these shares. Mr. P e c o r a . Then the company used shares which it had acquired under these subscription rights for persons other than itself in order to make deliveries of capital stock of the bank which it had sold to the general public; is that correct? Mr. L a w . We.were not under any contract rights to deliver this to anyone at the time it was taken over. Mr. P e c o r a . Will you please answer that question, Mr. Law ? Mr. L a w . It must be qualified, Mr. Pecora. Mr. P e c o r a . What must be qualified, the question, or your answer ? Mr. Law. My answer. Mr. P e c o r a . Well, answer the question without qualification first, and then qualify it if you want to. Mr. L a w . Will you please repeat the question ? Mr. R a n d o l p h (shorthand reporter). “ Then the company used shares which it had acquired under these subscription rights for per sons other than itself in order to make deliveries of capital stock of the bank which it had sold to the general public; is that correct? ” Mr. L a w . That can not be answered yes or no. Mr. P e c o r a . Why can’t that be answered yes or no ? It either did or did not do that. Mr. L a w . This was not acquired under subscription rights. It was acquired under an agreement to take the unsubscribed stock over. Mr. P e c o r a . I thought you said it was acquired on account of un subscribed rights. Mr. L a w . That is correct. Mr. P e c o r a . Held by stockholders who might be ill or in remote places of the world ? Mr. L a w . That is correct. Mr. P e c o r a . And whose rights the National City Co. wanted to protect? Mr. L a w . That is right. Mr. P ecora. Is that correct? Mr. L a w . But----Mr. P e c o r a (interposing). But after the City Co. acquired 51,000odd shares of stock in that manner, for the protection of those share holders as you say, did the National City Co. use any of that stock to make deliveries to those customers to whom it had sold National City Bank stock in the meantime ? Mr. L a w . It may have done so, but there was-— Mr. P e c o r a (interposing). Did it or did it not? Mr. L a w . I haven t the slightest recollection without referring to the inventory of stock in our boxes. Mr. P e c o r a . Can’t you answer that question yes or no after con sulting whatever records you have before you ? STOCK EXCHANGE PRACTICES 1907 Mr. L a w . The answer is yes, with the qualification that we had the right to use those shares because the subscribers had not exer cised their rights at the time, and we were able to secure other shares to meet their rights as they came in. Mr. P e c o r a . The shareholders for whose benefit the company ex ercised these subscription rights meanwhile were kept in ignorance of this gratuitous protection that the company was giving them, weren’t they? Mr. L a w . I would not say that, Mr. Pecora. They have done the same thing in every issue----Mr. P e c o r a (interposing). Whether they did it before or since, the question is, were they kept in ignorance of this gratuitous pro tection that your company was giving them ? Mr. L a w (after apparently conferring with associates). My asso ciates inform me that correspondence was carried on with these various stockholders who had not subscribed their rights in an en deavor to get them to subscribe during this period. Mr. P e o o r a . And you had to be told that by your associates be fore you learned it? Mr. L a w . These subscriptions, as you understand, were not----Mr. P e c o r a (interposing). Mr. Law, won’t you please answer the question put to you? Were you in ignorance of that up to the moment your associates gave you the information ? Mr. L a w . Not in complete ignorance, but I wanted confirmation of the thought that I had. The subscriptions came into the bank, which is what I started to tell you, but you just didn’t wait. Mr. P e c o r a . The subscriptions came into the bank? Mr. L a w . Absolutely. Mr. P e c o r a . The subscriptions on the rights which had already been exercised by the National City Co. came into the bank? Mr. L a w . For the stock taken over by the National City Co. The rights had not been exercised because they were still held by the stockholders. Mr. P e c o r a . The subscriptions which came into the bank after February 15, 1929, were the delayed subscriptions from these share holders of record ? Mr. L a w . That is true. Mr. P e c o r a . Other than the company? Mr. L a w . That is true. Mr. P e c o r a . Meanwhile the bank on February 15,1929, had issued to the company these 51,000-odd shares under the subscription which the City Co. had made for those shareholders in default of the exercise of their rights; is that right ? Mr. L a w . Not for the subscription, Mr. Pecora, but under the agreement we took the shares and were prepared to let them exercise their subscriptions. Mr. P e c o r a . When did the City Co. pay for those 51,000-odd shares ? Mr. L a w . On February 15, 1929. Mr. P e c o r a . And it paid how much then ? Mr. L a w . $5,159,000. Mr. P e c o r a . And what did it do with the 51,000 shares after that date? 1908 STOCK EXCHANGE PRACTICES Mr. L a w . Held them subject to subscriptions, which subscriptions were received and filled, leaving a residue of 437 shares in the hands o f the National City Co. representing unsubscribed shares. Mr. P ecora . When was that residue left there? Mr. L a w . A s of May 3. Mr. P ecora . N o w , how many of those shares did it have as of April 15? Mr. L a w . I haven’t that exact date before me, Mr. Pecora. Mr. P ecora . About? Mr. L a w . The nearest date that I have was April 12, then it had eighteen or twenty thousand shares, I should say, somewhere between eighteen and twenty thousand. Your men may have the exact figures. Mr. P ecor a . Is it the subscription account that you are talking about now? Mr. L a w . N o ; I am talking about the balance, the total amount of shares held by the company at that particular time. Mr. P ecora . The total amount of shares held by the company as of what date? Mr. L a w . The nearest date that I have is April 12. Mr. P ecora . What was that total amount on April 12? Mr. L a w . That was 18,000 in the box. M^. P ecora . Did that include shares which the company had re ceived from the bank on February 15 in exercise of those subscrip tion rights as to which the other shareholders had defaulted? Mr. L a w . It included those particular shares, but it did not in clude shares contracted for all over the world and which had not yet arrived in our box. Mr. P ecora . Then on April 12 the company had 18,000-odd shares all told of National City Bank stock? Mr. L a w . In its box. Mr. P ecora . In its box ? Mr. L a w . In its box in New York, without regard to what it owned and was coming into New York from various parts of the world. Mr. P ecora . How many shares did it have in its subscription account, if any, at that time? Mr. L a w . I haven’t that record with me, Mr. Pecora. As I say, the books were not requested and I haven’t them with me. Mr. P ecora . Wasn’t it about 492 shares? Mr. L a w . I would prefer not to say. I f your men have checked that I will be glad to take their word tor it. Mr. P ecora . Will you look at these work sheets taken from your records and see if they are correct ? Mr. L a w . I presume this is an exact ledger transcript? Mr. P ecora . Yes, sir. Mr. L a w . That appears to be right. Mr. P ecora . It appears to be right. So that on April 12 the total long position of the National City Co. in stock of the National City Bank was only 492 shares ? That is, on account of the subscription rights? Is that correct? Mr. L a w . Assuming that your men have copied the record cor rectly ; yes, sir. STOCK EXCHANGE PRACTICES 1909 Mr. P e c o r a . I am assured that that is what they have done, and you can send for your own records to check up. Now, have you the records of your own company showing its long position in its own holdings of the National City Bank stock on April 12, 1929? Mr. L a w . That figure is 492? Mr. P e c o r a . That other figure is 492. Mr. L a w . Exclusive of stock contracted for, which had not arrived in New York, we had in our box 17,818 shares. Mr. P e c o r a . Making a total of 18,310 shares with the 492 that were held in its subscription account? Mr. L a w . That is correct, exclusive of contracts again. Mr. P e c o r a . Now just forget for a moment those contracts and let us confine ourselves to the shares actually in its possession. All the shares actually in its possession, both for its own account and for this subscription account, were 18,398 shares on April 12, 1929 ? Mr. L a w . It is impossible to segregate the two factors. Mr. P e c o r a . I want to know the number of shares it actually had in its possession on April 12, 1929. Was it or was it not 18,398? Mr. L a w . In its possession, but not subject to its control; that is •correct. Mr. P e c o r a . But it had actually received into its possession 51,590 shares on February 15, 1929, by the exercise of these subscription rights for other shareholders, had it not? Mr. L a w . That is correct. Mr. P e c o r a . What had become of the difference between this 18.000 figure and the 51,000 figure ? What had become of the shares represented fey that difference ? Mr. L a w . Your transcript of the subscription account will show that those shares were used largely for the filling of subscribed rights between February 15 and the date to which you refer. Senator B r o o k h a r t . Just a minute. I don’t quite understand that. Had you used up all of this 51,000 except the 492 on the 12th -of April? Mr. L a w . Apparently, Senator; yes. Senator B r o o k h a r t . That had all been gone and this extra 17,000 were other shares that you had acquired from other sources? Mr. L a w . Yes, sir; that is correct, Senator. Senator B r o o k h a r t . This 492 was the same number you had on May 3 when that transaction was closed, was it not? Mr. L a w . The shares left on May 3 were about 437; that was just slightly under the 492. Senator B r o o k h a r t . Then on May 3 the 437 were turned back to the National City Bank? Mr. L a w . N o , Senator; they cannot hold their own stock. Senator B r o o k h a r t . Where was it? Mr. L a w . We had to retain those. Senator B r o o k h a r t . You retained those at the $100 price your self ? Mr. L a w . At the $100 price is correct. Mr. P ecora. D o you know on what date the company borrowed 15.000 shares of the stock of the bank from Mr. Mitchell ? Senator F l e t c h e r . April 29, he said. Mr. L a w . April 23, 15,000 shares. 1910 STOCK EXCHANGE PEACTICES Mr. P ecora . Why did it borrow those shares? (There was a pause.) Mr. P ecora . Why is it taking you such a long time to answer the question, Mr. Law? Mr. L a w . I am not familiar with the details of the borrowing,, except from a mechanical standpoint. Mr. P e c o r a . D o you know anyone who is familiar with the de tails of this transaction? Mr. Baker did not seem to know, and he is the president. You are the secretary. Can you refer us to* any other officer who knows more about it ? (There was another pause.) Mr. P ecora . Well, do you know anything about this transaction, Mr. Law? Mr. L a w . From the mechanical standpoint only. Mr. P ecora . D o you know anything about it otherwise ? Mr. L a w . Not a great deal. Mr. P ecora . Do you know anything about it other than the fact that the stock was borrowed ? (There was a pause.) Mr. P ecora . What is the answer, Mr. Law ? Mr. L a w . That is just what I am trying to get, Mr. Pecora. Mr. P ecora . I think the record should show the lapse of timethat this witness allows to ensue in answering the question. Who do you think knows about it, Mr. Law ? Mr. L a w . Why, I should say that Mr. Mitchell having loaned the stock probably should be able to. Mr. P eco r a . Would not anyone in the company know something about the transaction? The company, you know, was the other party to this transaction. Mr. L a w . That is the idea. Senator B r o o k h a r t . Let me ask a question or two there: Now, Mr. Baker testified, I believe, that this 15,000 loan was on account of the 51,000 obligations to these stockholders, those rights that had been acquired. There was only between 492 and 437 out on the 29th of April at the time this last loan was made, was there not? Mr. L a w . That I believe is correct, Senator. Senator B r o o k h a r t . Then it could not be on account of that obligation that this second 15,000 loan of shares was made by Mr. Mitchell to your company? Mr. L a w . I was not a party to the contract, Senator Brookhart. I was in charge of the records and recorded what came to me. I thought probably a brief study of this would give some indication. I am sorry that it does not. Mr. P ecora . Does your brief study of the records before you give any indication of the purpose for which these 15,000 shares were borrowed on April 23 from Mr. Mitchell. Mr. B a k e r . Mr. Pecora, I think probably----Mr. P ecora . What is the answer? Mr. L a w . It was to fill deliveries; there is no doubt in the world. Mr. P ecora . It has taken us a half hour to find that out. Mr. L a w . That is not an unusual street practice. Mr. P ecora . Whether it is usual or unusual, we want to find out what the fact is. STOCK EXCHANGE PRACTICES 1911 Mr. L a w . Well, naturally it was to fill deliveries. Mr. P e c o r a . It has taken us a half hour to ascertain that it was to fill deliveries of the stock which the company had already sold to other customers, has it not ? Mr. L a w . That is the purpose of the purchase or obtaining of any stock; yes, sir. Mr. P e c o r a . So that when it made those sales it was selling stock it did not have for delivery, is that right ? Mr. L a w . That it did not momentarily have for delivery, yes. Again you get into the question of the contracts outstanding which had not been delivered. Senator B r o o k h a r t . Mr. Chairman, I want to make one correc tion with reference to my question. I asked about this 15,000 loan -of stock as the second loan. It was the first loan, I am informed, Mr. Mitchell made to the company. However, there was a second one, I am informed, of the same amount later. Mr. L a w . 15,000 shares later; yes, sir. Mr. P e c o r a . I was going to ask Mr. Baker about that, yes. Now we will suspend with you, Mr. Law, and let Mr. Baker resume. TESTIMONY OF HUGH B. BAKER, PRESIDENT NATIONAL CITY CO., NEW YORK CITY— Resumed Mr. P e c o r a . N o w , Mr. Baker. Mr. B a k e r . Yes, sir. Mr. P e c o r a . Will you produce the letter which you wrote to Mr. Mitchell under date of April 23, 1929, relating to the borrowing of 15,000 shares of capital stock of the bank by your company from him? Mr. B a k e r . Yes, sir; I have that. Mr. P e c o r a . Let me have it. (A document was handed to Mr. Pecora.) Mr. P e c o r a . Who signed this letter in behalf of the company ? Mr. B a k e r . I think I probably did. (After examining docu ment.) Yes, sir. Mr. P e c o r a . Have you the original letter ? Mr. B a k e r . No; I haven’t that. That is a copy of it. Mr. P e c o r a . Have you any reply to that letter which the company received from Mr. Mitchell? Mr. B a k e r . No; I haven’t that. Mr. P e c o r a . What other letters have you in connection with this transaction? How about those letters Mr. Law just gave you? Mr. B a k e r . This is a later transaction, another letter. Mr. P e c o r a . I s that the transaction o f May ? Mr. B a k e r . Yes. Mr. P e c o r a . May I see those letters? (Mr. Baker handed a document to Mr. Pecora.) Mr. P e c o r a . Let me see them all, if you will. (Additional documents were handed to Mr. Pecora.) Mr. P e c o r a . N o w , let me have the first letter, the one of April 23. (Mr. Baker handed a document to Mr. Pecora.) Mr. P e c o r a . I ask that this letter, dated April 23, 1929, addressed to Mr. C. E. Mitchell, from the National City Co., by the witness as president, be spread upon the record. 1912 STOCK EXCHANGE PRACTICES- The C h a i r m a n . Without objection, it is so ordered.. Mr. P ecora . Shall I read the letter, Mr. Chairman.?. The C h a i r m a n . Yes. Mr. P ecora (reading): A p k i l 23, 1929'.. Mr. C. E. M i t c h e l l , 55 Wall Street, New York. D e a b M b . M i t c h e l l : W e desire to borrow from you 15,000 shares of the* National City Bank of New York stock from date hereof to July 10, 1929,. against which we will advance to you forthwith the sum of $380 per share as security for the return of the stock, stock in like number of shares to be returned by us to you on July 10, 1929, against reimbursement to us in the amount now advanced. We will hand you on July 10, 1929, our check for any cash dividend declarations on such stock in the interim. Pursuant to verbal agreement, in lieu of delivery of check to you in accord" ance with the above, we will credit your account on our books with the sum. of $5,700,000, which will be considered as a loan by you to us and upon such loan account we will pay you interest at the rate of 6 per cent per annum, you to be free, however, to withdraw any portion of this loan on demand, theunderstanding being, however, that such portion as is withdrawn will be repaid to us on July 10, 1929. Your acceptance of the foregoing proposal by initialing the carbon copy hereof and delivery of the said 15,000 shares of stock to us will completethe arrangement. Yours very truly, T h e N a t i o n a l C i t y Co., B y H u g h B . B a k e r , President. In the month of May, 1929, Mr. Baker, did your company borrow any additional shares of the National City Bank from Mr. Mitchell?' Mr. B a k e r . Yes, sir. Mr. P ecora . On what date and in what number 1 Mr. B a k e r . May 13 we borrowed 15,000 shares. Mr. P ecora . That is in addition to the 15,000 shares borrowed on April 23 ? Mr. B a k e r . That is right. Mr. P ecora . And you have produced here what purports to be a true copy of the letter addressed by you on behalf of the National City Co. to Mr. Mitchell with respect to this borrowing of 15,000* shares on May 13,1929 ? Mr. B a k e r . Yes, sir. Mr. P ecora . I ask that this be spread on the record. The C h a i r m a n . I f there is no objection, it will be spread on the record. Senator F l e t c h e r . Was this an individual transaction with Mr. Mitchell or Mr. Mitchell for the National City Bank? Mr. B a k e r . For Mr. Mitchell individually. Mr. P ecora . The letter is dated May 13, ,1929, and is as follows (reading): M a y 13, 1929. Mr. C. E. M i t c h e l l , 55 Wall Street, New York. D e a r M r . M i t c h e l l : We desire to borrow from you 15,000 shares theNational City Bank of New York stock from date hereof to July 10, 1929, against which we will advance to you forthwith the sum of $400 per shareas security for the return of the stock, stock in like number of shares to be returned by us to you on July 10, 1929, against reimbursement to us in theamount now advanced. W e will hand you on July 10, 1929, our check for any cash dividend declarations on such stock in the interim. Pursuant to verbal agreement, in lieu of delivery of cheek to you in accord ance with the above, we will credit your account on our books with the sum 1913 STOCK EXCHANGE PRACTICES of $6,000,000, which will be considered as a loan by you to us and upon such loan account we will pay you interest at the rate of 6 per cent per annum, you to be free, however, to withdraw any portion of this loan on demand, the understanding being, however, that such portion as is withdrawn will be repaid to us on July 10, 1929. Your acceptance of the foregoing proposal by initialing the carbon copy hereof and delivery of the said 15,000 shares of stock will completel the agreement. Yours very truly, T h e N a t i o n a l C i t y C o ., B y H u g h B . B a k e b , President. Now, when July 10, 1929, came around the National City Co. returned on account of these borrowings 30,000 shares of the capital stock of the bank to Mr. Mitchell, did it not ? Mr. B a k e r . That is right, July 10. Mr. P ecora . And accompanying the 30,000 shares of stock so returned did your company cause this letter to be sent to Mr. Mitchell [handing document to Mr. Baker] ? Mr. B a k e r . That is right. Mr. P ecora . I ask that that be spread on the record. The C h a i r m a n . There being no objection, it is so ordered. Mr. P ecora . The letter is as follows (reading): T h e N a t i o n a l C i t y C o ., July 10,1929. M r. C. E . M it o h e l l , 55 Wall Street , New York, N. Y. Mr. M i t c h e l l : With reference to our letters to you of April 23 and May 13 of this year, borrowing from you the aggregate of 30,000 shares of the capital stock of the National City Bank of New York, we take pleasure in handing you herewith, against receipt, 30,000 shares of this stock, registered in your name, represented by certificates No. E838 to No. E843, inclusive, in denominations of 5,000 shares each. We also enclose our check to your order for $128,850 as the interest due you, in addition to our check for $30,000, representing the July 1 dividend on this stock. D ear Y o u r s v e r y t r u ly , F . J. M a g u ir e , Assistant Treasurer. Is it or is it not the fact, Mr. Baker, that these 30,000 shares of the stock of the bank were borrowed by your company from Mr. Mitchell in order to enable it to make deliveries of that stock to customers to whom it had sold the bank stock, when as a matter of fact the City Co. did not have the stock for such delivery in its own account ? Mr. B a k e r . That is true to the extent that we did not have the stock in New York. Mr. P ecora . Did you have it anywhere else? Mr. B a k e r . I cannot answer. Mr. P ecora . Y ou cannot answer? Mr. B a k e r . Whether we had the stock en route to New York or not, in what amount. I am sorry I cannot give the exact answer to that. It is probable—possible that we did. We were buying Farm ers Loan and Trust stock at that time, which was converted into City Bank stock later. Mr. P ecora . Would you say that these shares of the stock of the bank sold by the company at this time, to deliver which it was neccessary for the bank to borrow 30,000 shares of that stock from Mr. 1914 STOCK EXCHANGE PEACTICES Mitchell, were short sales by the company of the bank stock at that time? Mr. B a k e r . Well, the answer would be “ no ” if we take into con sideration that we were accumulating Farmers Loan & Trust stock to be exchanged into City Bank stock, or that we had stock coming in on delivery of purchases that we had made throughout the United States. I f figured directly against our immediate holding at that moment, the answer would be “ yes.” Mr. P e c o r a . The answer would be “ yes ” under those circum stances ? Mr. B a k e r . Yes. Mr. P e c o r a . Now, as a matter of fact, wasn’t the company selling thousands of shares of the City Bank stock in excess of the number of those shares which it was buying ? Mr. B a k e r . Well, as to some specific time I would have to answer. Mr. P e c o r a . About the time these 30,000 shares were borrowed from Mr. Mitchell? Mr. B a k e r . Not when you take into consideration the purchase of Farmers Loan & Trust stock, Mr. Pecora. Mr. P e c o r a . Was the company selling thousands of shares of the bank stock to the public, between April 12 and May 13,1929, in excess of the number of shares it was buying ? Mr. B a k e r . Between April—well, that is best answered by our inventory figures. Mr. P e c o r a . I don’t care how it is answered. But what is the answer ? Mr. B a k e r . The answer is, in April that our balance of stock on hand was 7,704 shares. Mr. P e c o r a . That is including the 15,000 shares borrowed from Mr. Mitchell, isn’t it? Mr. B a k e r . That is including that, and this is giving consideration to the stock that we actually had in New York; and in May it was 8,692 shares. Mr. P e c o r a . And that includes the 30,000 which had been borrowed from Mr. Mitchell by that time? Mr. B a k e r . It probably does. That is May 13, that stock came in, and in June at the end of that-----Mr. P e c o r a (interposing). Now never mind June. I want to get down to this period covered by these borrowings. Senator B r o o k h a r t . Let us have June there. You still had the 30,000 during June up to about the 10th of June? Mr. B a k e r . June shows a balance on hand of 17,291. Senator F l e t c h e r . H o w much Farmers Loan & Trust Co. stock did you buy? Mr. B a k e r . I will get that b y telephone, Senator. Senator B r o o k h a r t . The fact is, Mr. Baker, you filled every order for this stock that came to you at a satisfactory price, whether you had the stock on hand or not? Mr. B a k e r . Whether we had it ready for delivery, probably, yes. Senator B r o o k h a r t . And then you borrowed this of Mr. Mitchell to cover that sort of transaction ? Mr. B a k e r . To be able, yes, to make those deliveries. Senator T o w n s e n d . Mr. Baker, would the 30,000 shares you bor rowed show on this side of the ledger as purchase stock? STOCK EXCHANGE PRACTICES 1915 Mr. B a k e r . I t h in k so. Mr. P e c o r a . Mr. Baker, you are familiar with the relationship that existed at all times between that company and the National City Bank since the National City Company was organized in 1911, aren’t you? Mr. B a k e r . Well, I was not, of course, with the company in 1911. Mr. P e c o r a . I know that. You are familiar with the relationship between the two institutions in so far as that relationship is indicated by the fact that all the shares of the National City Co.’s capital stock are owned by three trustees who represent all the shareholders of the National City Bank? Mr. B a k e r . That is right. Mr. P e c o r a . And that the bank and the company had various executive officers in common? Mr. B a k e r . Yes. Senator B r o o k h a r t . On that, so far as any beneficial interest was concerned in the buying and selling of this National City Bank stock by the National City Co., it all went to the stockholders of the National City Bank? Mr. B a k e r . Well, let me see if I get that just exactly, Senator Brookhart. May I have that repeated again? Senator B r o o k h a r t . So far as any beneficial interest arising now, coming out of the profits of dealing in this National City Bank stock----Mr. B a k e r . Yes. Senator B r o o k h a r t . It ultimately all goes back to the stock holders of the National City Bank? Mr. B a k e r . That is right. The C h a i r m a n . Then the bank was in effect selling its own stock short while the public was buying it ? Mr. B a k e r . I don’t think that. The C h a i r m a n . If you sell what you haven’t got, isn’t that selling it short? Mr. B a k e r . But we had it coming in from various parts of the world. The C h a i r m a n . Y ou had the money with which to get it? Mr. B a k e r . And it w a s en route for delivery. The C h a i r m a n . It was in existence somewhere? Mr. B a k e r . On th e w a y t o us. M r . P e c o r a . Y ou d id n o t k n o w w h a t w a s o n th e w a y t o y o u , d id you? Mr. B a k e r . Well, our figures show where we stood at the end of that period. Mr. P e c o r a . And your figures, as testified to by Mr. Law, show that on April 12, before the first borrowing of 15,000 shares from Mr. Mitchell, the company had received all but 492 shares on ac count of these subscriptions from all over the world ? Mr. B a k e r , I heard that; yes. Mr. P e c o r a . So that when this stock was borrowed there were only 492 shares of the new stock which might be coming eventually to the National City Co. from all over the world? Mr. B a k e r . Of that particular block of stock. Mr. P e c o r a . Of that particular lot; yes. So these 30,000 shares were all used, were they not, to enable your company to deliver to 119852— 33— PT 6-------- 11 1916 STOCK EXCHANGE PRACTICES the persons to whom it had previously sold National City Bank stock, the stock which it had sold ? Mr. B a k e r . I assume it is; yes, of course. Mr. P e c o r a . Do you know, Mr. Baker, the peak of the short position of the National City Co. in the National City Bank’s stock? Mr. B a k e r . No; I do not think there was any short position, Mr. Pecora. Mr. P e c o r a . You do not think there was a short position because the Company had borrowed 30,000 shares of the stock from Mr. Mitchell; isn’t that correct? Mr. B a k e r . And as I have said, because stock was en route to us. Mr. P e c o r a . But you had received all but 4 9 2 shares of that stock, had you not ? Mr. B ajker . We are talking about----Mr. P e c o r a . Prior to April 12, 1929. Mr. B a k e r . We are talking about two different things. On that particular subscription stock that is correct. Mr. P e c o r a . Well, now, what else are you bringing into the pic ture? What other stock? Mr. B a k e r . Only the stock that we had purchased in various places of the United States that had not as yet been delivered. Mr. P e c o r a . You were selling more than you were buying at that time anyway, wern’t you ? Mr. B a k e r . In the month of April----Mr. P e c o r a . In the month of April and in the month of May ? Mr. B a k e r . We d id . Mr. P e c o r a . Yes. So that what you were selling even currently at that time was more than what you were buying from people all over the United States, wasn’t it ? Mr. B a k e r . In that particular month our purchases were 92,000 and our sales 103,000. Mr. P e o o r a . So there was a short position there of 11,000 shares? Mr. B aker . But, of course, we had----Mr. P e c o r a (interposing). Taking into account all this stock which you had purchased all over the United States and which you say was on its way into your box, you still were 11,000 short, were you not? Mr. B a k e r . Of course, these are ledger figures that we are using. Mr. P e c o r a . Of course they are ledger figures we are using. But you would not have any other figures; you won’t tell that from memory. Mr. B a k e r . Oh, yes; but it would not show stock that is en route to us. These are shares that are in the box. Mr. P e c o r a . Don’t they show the number of shares you had pur chased even for future delivery ? Mr. B a k e r . Not on a specific date. That simply shows the stock that is delivered to us. Mr. P e c o r a . Doesn’t that show the stock purchased even against future delivery? Mr. B a k e r . No. Mr. P e c o r a . Are you sure of that? Mr. B a k e r . I am quite sure of that. (After a pause.) This shows the stock actually delivered to us and paid for. Yes, that is right. STOCK EXCHANGE PRACTICES 1917 Mr. P e c o r a . What is right? Mr. B a k e r . It does not show contracts on stocks that we have contracted to buy and have out that is en route to us. Mr. P e c o r a . Does it also show sales which vou have made and against which you have not yet made deliveries ? Mr. B a k e r . It shows deliveries. Mr. P e c o r a . What? Mr. B a k e r . That shows stock delivered out. Mr. P e c o r a . Have you a separate record of those purchases ? Ask Mr. Law if he has. Mr. B a k e r . This is our ledger acount. Mr. P e c o r a . That includes purchases which had been contracted for, does it not ? Mr. B a k e r . No, sir. Mr. P ecora. Doesn’t it, Mr. Law? Mr. L a w . N o, Mr. Pecora. Mr. P e c o r a . Have you any record of those transactions ? Mr. L a w . We have not, sir. That did not enter into the picture at the time we were asked to bring records. Mr. P e c o r a . Where did you get the 30,000 shares of stock which were returned to Mr. Mitchell on July 10, 1929 ? (Mr. Baker conferred with Mr. Law.) Mr. P e c o r a . Well, who is answering now, Mr. Baker or Mr. Law? Mr. L a w . I am, sir. Mr. P e c o r a . Mr. Baker, do you consider yourself qualified, as the president of the company, to answer these questions, or do you think that some one else can answer them more accurately ? Mr. B a k e r . Well, probably there are others who can answer better, but----Mr. P e c o r a (interposing). Is there anyone who knows more about the company’s transactions than you? Mr. B a k e r . I don’t think so. Mr. P e c o r a . Then suppose you answer these questions and not have Mr. Law whisper the answer in your ear. Will you ? Mr. B a k e r . Yes; I w i l l try to. Mr. P e c o r a . If you need Mr. Law’s help, say so on the record so the record will show that you need it. Mr. B a k e r . Very w e ll. Mr. P e c o r a . N o w g o a h e a d . Mr. B a k e r . Well now, what is the question? Mr. P e c o r a . The question is, Where did the company get the 30,000 shares of bank stock which it returned to Mr. Mitchell on July 10, 1929. Mr. B a k e r . From purchases in the market and from exchange of Farmers Loan & Trust stock into City Bank stock. Mr. P e c o r a . And does not that still prove that the company took a short position in the stock of the bank in April and May and June ? Mr. B a k e r . If you are unwilling to include in that that we had this other stock coming to us. Mr. P e c o r a . Y ou m e a n t h a t it w a s co m in g : t o v o u ? Mr. B a k e r . Yes. Mr. P e c o r a . Not that you had it in possession? Mr. B a k e r . That is probably right. 1918 STOCK EXCHANGE PRACTICES Senator F l e t c h e r . Mr. Baker, may I ask what was the profit or loss to the National City Co. on these operations? Mr. B a k e r . As pertains to what, this particular operation with Mr. Mitchell? Senator F l e t c h e r . Yes; with the bank stock. Mr. B a k e r . Over the whole period of time ? Senator F l e t c h e r . Well, take up to July. Mr. B a k e r . I have got that for the whole year here, Senator. Senator F l e t c h e r . State it then for the whole year. Mr. B a k e r . There was a loss for 1929 of $10,393,000. Senator B r o o k h a r t . That included the panic? Mr. B a k e r . Yes. Mr. P e c o r a . That is when the loss accrued, subsequent to October ? Mr. B a k e r . That is right. There was a profit up to the middle of the year. Senator F l e t c h e r . Of how much? Can you give that? Mr. B a k e r . I w i l l g e t t h a t for you. Senator B r o o k h a r t . Did you have a profit on this handling of this 30,000 shares of Mr. Mitchell? Mr. B a k e r . I assume so, Senator. Of course, that depends upon the general movement up and down in the market price of the stock. Senator B r o o k h a r t . Did you have to pay him any interest ? Mr. B a k e r . Yes; 6 per cent. Senator B r o o k h a r t . And had a profit over and above that that the market ran up to the 10th of July? Mr. B a k e r . Yes. That would depend upon the general market movement. Senator B r o o k h a r t . That means, then, that you were using Mr. Mitchell’s stock just as a matter of stock transactions as if it were your own, does it not? Mr. B a k e r . Yes; just the same as a loan to us. Mr. P e c o r a . In other words, you were using it to cover a short position ? Mr. B a k e r . Well----Mr. P e c o r a . That is what actually was done, wasn’t it? Mr. B a k e r . A short position as far as actual stock in the box to deliver; yes. Mr. P e c o r a . Yes; the actual, physical operation consisted of the borrowing and the use of that stock to cover a short position, did it not? Mr. B a k e r . Well, as I have just said. Senator F l e t c h e r . That borrowing is usually done for this pur pose on the exchange, isn’t it? Mr. B a k e r . Yes. But as I tried to explain, Senator, if we had no other stock coming in to offset that, I would readily admit that it would be a short sale. Senator B r o o k h a r t . Y o u mean you had contracts at some time in the future that would bring in other stock ? Mr. B a k e r . Yes. Senator B r o o k h a r t . But you did not pay any attention to those to see whether they amounted to the full amount of your sales or not, as long as you had this 30,000 share loan to cover sales, did you ? Mr. B a k e r . I think we probably knew exactly at that time. STOCK EXCHANGE PEACTICES 1919 Mr. P ecora . Why, as a matter of fact, you could not have known at that time, could you? Mr. B a k e r . Could not have—I don’t quite get the question. Mr. P e c o r a . Y ou undertook to pay Mr. Mitchell 6 per cent in terest, which amounted to $128,000, for these borrowings of 30,000 shares, didn’t you? Mr. B a k e r . Yes. Mr. P e c o r a . And you did that without knowing whether or not you would need that stock with which to make deliveries of the stock you had sold? Mr. B a k e r . I say we did need it to make delivery. Mr. P e c o r a . Of course you did. Now, Mr. Baker, was it the policy of the National City Co. to seek to exercise any control of the market in the shares of the bank ? Mr. B a k e r . We tried to keep the price of our bank stock, the City Co. did, in general line with other bank stock, the general market conditions. Mr. P e c o r a . Did you seek to control the market for that purpose ? Mr. B a k e r . Oh, no, I should not say so. Mr. P e c o r a . Wasn’t it the----Mr. B a k e r (interposing). We were prepared to make a bid for the stock as well as make an offering for the stock, at any time. Senator B r o o k h a r t . Was that advertised to the public? Mr. B a k e r . No, sir. Senator B rookhart. Did you make it in the stock exchange? Mr. B a k e r . No, sir. Mr. P e c o r a . Wasn’t it the studied purpose and policy of the com pany to try to control the market on City Bank stock? Mr. B a k e r . I don’t think so; no. We could not possibly. There were many, many dealers in bank stocks in New York. I don’t know how many thousand shares of bank stocks they were dealing in, but certainly we were only a very small part of the market. Mr. P e c o r a . Are you familiar with the circumstances under which the bank applied to the New York Stock Exchange in the fall of 1928 to take its stock from the trading list of the exchange ? Mr. B a k e r . Yes; somewhat. Mr. P e c o r a . What were those circumstances ? Mr. B a k e r . Mr. Mitchell was in Europe in the latter part of 1927, and there had been very little trading on the stock exchange in City Bank stock or any other bank stock until late in the fall of 1927 there were some arrangements made whereby the trading in bank stocks was begun, and we noticed these transactions, in fact I saw on one particular day sales in National City Bank stock rang ing five points difference between one transaction of 10 shares each. Mr. P e c o r a . What was the market quotation for the stock on the exchange at those times when you saw those 5-point differences ? Mr. B a k e r . 1927? Mr. P e c o r a . Yes; the fall of 1927. Mr. B a k e r . In the fall of 1927 the price of City Bank stock ranged from 668 in October to 747 in December. Senator B r o o k h a r t . That is for $20 par share? 1920 STOCK EXCHANGE PEACTICES Mr. B a k e r . No, that was the $100 par share. When I saw this activity in bank stocks I wired Mr. Mitchell. This is after discuss ing with others. And I said to him: City Bank stock and stocks of other large banks of New York, although listed on the New York Stock Exchange for many years, have infrequently, if at all been traded in. Last week they were transferred to one trading post in order to facilitate active trading. Trading principally our stock active, and Chase also traded in and quite active, with wide fluctuations, our stock indicating manipulation. Mr. Garver requests that we advise you that he regards this as distinctly disadvantageous, and probably at timesl might even be dangerous, and with your approval he proposes to discuss with the execu tive committee of the bank next Tuesday recommending to board to have steps taken to withdraw from listing if possible. Mr. P ecora . When was that communication sent by you to Mr. Mitchell ? Mr. B a k e r . September 23, 192T. Mr. P ecora . Was Mr. Mitchell then out of the city or the country? Mr. B a k e r . He was in Paris. Mr. P ecora . The fluctuations that you had observed were 5-point fluctuations in small lots? Mr. B a k e r . Yes. There were sales, I think five sales, one right after another. Mr. P eco r a . And what was the aggregate of those five sales? Mr. B a k e r . Fifty shares. Mr. P ecora . Fifty shares? Mr. B a k e r . Yes; 10 shares each. Mr. P ecora . And you thought that indicated manipulation of the stock on the floor of the exchange? Mr. B a k e r . It seemed to offer those possibilities, with a spread of five points in between each transaction on a small lot of 10 shares. Mr. P ecora . And what were the number of shares the bank had outstanding at that time ? That is in September, 1927 ? Mr. B a k e r . I think that is 750,000 shares, Mr. Pecora. Mr. L a w . 750,000. Mr. P ecora . And from a total volume of sales aggregating 50 shares on that date you thought there was a manipulation in the stock of the bank? Mr. B a k e r . Thought it was possible that there was. Mr. P ecora . Thought it was possible? Mr. B a k e r . Yes. Mr. P ecora . Did you complain to the exchange authorities about that manipulation? Mr. B a k e r . No; I did not. I had nothing more to do with that transaction other than to notify Mr. Mitchell. Mr. P ecora . After you made that suggestion and sent those ad vices to Mr. Mitchell, what followed? Mr. B a k e r . He replied, saying: I have been much disturbed regarding recent speculative movement of Na tional City Bank stock and believe activities on New York Stock Exchange only intensify speculative interest which can not be of any possible advantage to us. I therefore concur fully in Mr. Garver’s suggestion. Mr. P ecora . And that was what? To apply to the New York Stock Exchange-----Mr. B a k e r . Yes. Mr. P ecora . T o strike the stock from its trading list? Mr. B a k e r . That is right. STOCK EXCHANGE PRACTICES 1921 Mr. P e c o r a . And the Mr. Garver whom you have mentioned is an attorney at the head of the law firm of Shearman & Sterling? Mr. B a k e r . Yes. Mr. P e c o r a . The attorneys for the bank and also the National City Co.? Mr. B a k e r . That is right; yes. M r . P e c o r a . N o w , t h e r e a ft e r w a s f o r m a l a p p lic a t io n m a d e b y th e b a n k t o t h e e x c h a n g e t o s t r ik e its s t o c k f r o m th e lis t ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . When? Mr. B a k e r . Let me see if I can find a copy of the actual letter here. [After a pause.] I find a letter under date of January 11 from Mr. Simmons—copy of letter—who was then president of the stock exchange. Senator F l e t c h e r . 1928? Mr. B a k e r . Yes; January 11, 1928, stating: At a meeting of the governing committee of the New York Stock Exchange held to-day your letter of January 11, 1928, was presented, and after discussion the governing committee voted to remove from the list of securities dealt in on the exchange the stock of the National City Bank. Senator B r o o k h a r t . What date was that? Mr. B a k e r . That was January 11, 1928. Then there are various minutes here showing the action of the bank prior to that. Senator B r o o k h a r t . What was the price quotation of the stock at that time? Mr. B a k e r . January? Senator B r o o k h a r t . Yes. Mr. B a k e r . $780 a share on January 7. Senator B r o o k h a r t . That is sufficient for my purpose. That is on par at $100? Mr. B a k e r . $ 1 0 0 ; y e s , sir. Senator B r o o k h a r t . When was it changed to $20? Mr. P e c o r a . February, 1929. Mr. B a k e r . That was in 1929. Senator B r o o k h a r t . 1929? Mr. B a k e r . Yes. Senator B r o o k h a r t . After this 1928 transaction you took charge of the dealing of the National City Bank’s stocks in the National City Co. itself? Mr. B a k e r . Yes, sir; and the National City Bank----Senator B r o o k h a r t (interpofsing). And the exchange sold no more; they were not listed over there at all ? Mr. B a k e r . Yes. It was not traded in. Senator B r o o k h a r t . Then after you took charge in the National City Co. and after this change to $20 par, what did the stock go to ? Mr. B a k e r . Well, that price varied. In 1928 the price on January 7 was 780. Senator B r o o k h a r t . That would be 7.8 to 1; that is, 780 per cent of the par? Mr. P e c o r a . No; the par was $20. Mr. B a k e r . At this time the par in 1928 was $100 a share. Senator B r o o k h a r t . So it was 780 per cent at that time. Now, I want to get the percentage it went to after you took charge of it yourself in the National City Co. 1922 STOCK EXCHANGE PRACTICES Mr. B a k e r . Shall I run down a few of these here ? Senator B r o o k h a r t . Yes; run down to when-----Mr. B a k e r (interposing). January 14, 762; January 21, 760-----Senator B r o o k h a r t (interposing). I don’t care about the date along there. I want to know later. Mr. P ecora . The general rise. Senator B r o o k h a r t . The general rise in 1929. Mr. B a k e r . After the par value was reduced to $20, is that right, Senator ? Senator B r o o k h a r t . Yes. The C h a ir m a n . D o you want it immediately after it was reduced ? Senator B r o o k h a r t . No; it is all right immediately, but I wanted to find out which was the more efficient booming of this stock, the stock exchange or the National City Co. That is what I want to know. Mr. B a k e r . Well, let’s see—that exchange of old shares took place January 15,1 think it was, 1929. The C h a i r m a n . And you have given the market on that then. Mr. B a k e r . That is right. Senator B r o o k h a r t . What did it go to during the months before the panic ? Mr. B a k e r . It went as high as $580 a share. Senator B r o o k h a r t . On a $20 par? Mr. B a k e r . That is right. Senator B r o o k h a r t . That would be 2,500 per cent of the-----Mr. B a k e r (interposing). Yes; about that. Senator B r o o k h a r t . So your company was about five times as efficient as the exchange was in booming this stock? Mr. B a k e r . That with all other—with the whole general trend of the market. It moved right with it. Senator B r o o k h a r t . There were a lot of other companies organ ized doing something like that to assist the exchange along in this inflation period, weren’t there? Mr. B a k e r . Well, I don’t know about that. The C h a i r m a n . Then may I ask you: Prior to dividing the stock into five points what dividends had the company been paying? Mr. B a k e r . It has paid—the last year? The C h a i r m a n . Yes; the year before that. I f you don’t know, give us the average. Mr. B a k e r . The dividend on the old stock was $20 per share. The dividend on the new stock was-----The C h a i r m a n (interposing). On that $100 investment, was that earning $20 each year ? Or don’t I understand you ? Mr. B a k e r . No ; that was the dividend paid out of earnings. The C h a i r m a n . Twenty per cent? Mr. B a k e r . Yes; $20 per share. The C h a i r m a n . That is the common stock? Mr. B a k e r . That is the National City Bank stock. The C h a i r m a n . Then after it had been split into five parts what was the dividend after that ? Mr. B a k e r . $4 a share. Mr. P ecora . It was the same rate? Mr. B a k e r . Twenty per cent. STOCK EXCHANGE PRACTICES 1923 Mr. P e c o r a . On the new par value ? Mr. B a k e r . That is right. Mr. P e c o r a . And that went to 500 and what, did you say ? Mr. B a k e r . 580. Mr. P e c o r a . And went down to what ? Mr. B a k e r . 23. Mr. P e c o r a . And is what price now ? Mr. B a k e r . I think about 40. Mr. P e c o r a . And paying-----Mr. B a k e r . $2. Mr. P e c o r a . And paying $2 a share ? Mr. B a k e r . A share, yes. Senator B r o o k h a r t . A little correction: I mentioned your effi ciency as five times as great, but that was a lightening calculation, and I, on figuring it again, see it was only a little over three times as great. So I don’t want to advertise you too strongly. Mr. B a k e r . All right. Thank you. Mr. P e c o r a . The application to strike the stock from the list of the New York Stock Exchange was made by the bank on September 30, 1929, wasn’t it ? Mr. B a k e r . I thought it was a little later than that. Mr. P e c o r a . Look at a letter signed by Mr. Swenson, chairman of the board of the National City Bank of New York-----Mr. B a k e r . I haven’t that letter. Mr. P e c o r a . Addressed to the president of the New York Stock Exchange, dated September 30, 1927. Have you that letter? Mr. B a k e r . No, I don’t think I have. Just a moment. Mr. P e c o r a . There is a photostatic copy of it [handing document to Mr. Baker]. Mr. B a k e r . Yes. I haven’t that letter. That is September 30. Mr. P e c o r a . And what reply did the exchange make to that appli cation ? Mr. B a k e r . I haven’t a copy of the reply that they made to Mr. Swenson’s letter, but there were some complications about it ; that is, difficulties about it as to the method, and so forth, to have it removed. Mr. P e c o r a . Haven’t you the reply signed by Mr. Simmons, presi dent of the New York Stock Exchange, dated October 13, 1927? Isn’t that among your files there ? Mr. B a k e r . I don’t think I have that. N o; I haven’t that. This shows the discussion and the notice to the shareholders, and so forth. Mr. P e c o r a . See if that is not a photostatic copy of the stock ex change reply to the bank [handing document to Mr. Baker]. Mr. B a k e r . Of course, I never saw this reply, so I would not know whether it is or not. Mr. P e c o r a . Can you get from any of your associates the files of the correspondence between the bank and the New York Stock Ex change on this subject of striking the bank stock from the list? Mr. B a k e r . I don’t know whether we have such file here. [After conferring with associates.] I don’t know where these letters were. I am willing to accept this, Mr. Pecora. I haven’t a copy of it myself. Mr. P e c o r a . I ask there be spread upon the record letter dated September 30, 1927, addressed to Mr. E. H. H. Simmons, president of the New York Stock Exchange, by Mr. E. P.—is that Swenson? 1924 STOCK EXCHANGE PRACTICES Mr. B a k e r . That is right. Mr. P ecora . Swenson, chairman of the board of the National City Bank of New York, reading as follows [reading] : T h e N a t i o n a l C i t y B a n k of N e w Y o r k , New York, September SO, 1927. Mr. E. H. H. S im m o n s , President New York Stock Exchange, New York. D e a b Mr. S im m o n s : The directors of the National C it y Bank of New York have had under consideration the question of requesting the stock exchange to remove the stock of the bank from the exchange list. The subject came up again at the meeting of our board held Tuesday, Sep tember 27, and it was the sense of the board that such a request should be made. W ill you be so good as to advise me what steps, if any, other than this request, the bank should take to bring the matter formally to your attention? With assurances of our highest esteem, Very sincerely yours, E. P. S w e n s o n , Chairman of the Board. I also ask that there be spread upon the record the reply to this letter received from the stock exchange by the National City Bank, the letter reading as follows [reading] : O c to b er 13, 1927. Mr. E. P. S w e n s o n , Chairman Board of Directors, The National City Bank of New York, New York City. D e a r Mr. S w e n s o n : I beg to acknowledge receipt of your letter of September 30 requesting on behalf of the board of directors of the National City Bank, that the stock of the bank be removed from the list of the New York Stock Exchange, and asking me to advise you what steps, if any, other than such request, the bank should take to bring the matter formally to the attention of the exchange. While the stock exchange is most desirous of complying with the wishes of your board, it feels that it would not be justified in removing the stock of the National City Bank from its list upon the request of the board of directors alone, and without the sanction and approval of the stockholders of the bank. It appears that the stock of the National City Bank has been listed in the stock exchange for many years, and that, since the original listing of the stock, the bank has made applications from time to time for the listing of additional amounts of stock when the capital of the bank has been increased. Under these circumstances, the removing of the stock of the National City Bank from the list of the stock exchange would effect the rights of the stock holders of the bank, in that it would deprive them of a market for their stock which has existed for many years. The stock exchange, therefore, can not consider and act upon any request or application to remove the stock of the National City Bank from the list, unless such request or application be author ized by the stockholders of the bank at a special meeting at which no sub stantial number of the stockholders vote against the proposed action. Regretting very much that the stock exchange can not see its way clear to comply with the request contained in your letter, I am Very truly yours, ---------------------- , President. The stock was eventually stricken from the list by the exchange some time in January, 1928? Mr. B a k e r . That is right. Mr. P ecora . And thereafter it was traded in in so-called over-thecounter transactions ? Mr. B a k e r . That is right. Mr. P ecora . Mr. Baker, can you tell us the largest number of shares of bank stock which was sold by the National City Co. on any one day subsequent to January, 1928, or that date in January when it was stricken from the list of the exchange ? STOCK EXCHANGE PRACTICES 1925 Mr. B a k e r . Of course, there began to be—there was great in creased activity in all trading of all character as time went on there during 1928 and 1929, in the whole markets, bonds and stocks. Mr. P e c o r a . Yes; but what was the largest number of shares of the stock of the National City Bank sold by the National City Co. on any one day subsequent to January, 1928, when it was stricken from the exchange list? Mr. B a k e r . The highest number that I see—I have this only here by the week. I haven’t this by the day. Mr. P e c o r a . Can you tell us, Mr. Law ? Mr. L a w . I can not. I did not have that. Mr. B a k e r . I haven’t it by the day. Mr. P e c o r a . Were there days when the company sold tens of thou sands of shares of the bank stock in one day? Mr. B a k e r . I suppose there have been days where there was as much as perhaps thirty or forty thousand shares sold. Mr. P e c o r a . On single days? Mr. B a k e r . In one day. Senator T o w n s e n d . Y ou have it by the week there? Mr. B a k e r . I have it by the week; yes. Senator T o w n s e n d . That might give us what we are trying to get. Mr. P e c o r a . For instance, take the week commencing February 21, 1929, or the week ending February 21, 1929. Mr. B a k e r . All right. Mr. P e c o r a . The National City Co. alone sold 92,709 shares of the bank stock, didn’t it, according to your records ? Mr. B a k e r . According to my records. Mr. P e c o r a . In September, 1927, on September 23, 1927, to be ex act, you saw five sales of 10 shares each recorded on the Stock Ex change ticker, and you thought that indicated a manipulation of the stock, didn’t you ? Mr. B a k e r . I thought it merely showed that manipulation of the stock would be very easy. Mr. P e c o r a . Yes. And did you think that sales amounting to tens of thousands of shares a day might also be sales that would indicate manipulation of the price of the stock in over-the-counter trans actions ? Mr. B a k e r . I don’t think you can draw that conclusion necessarily, because the activity of markets generally had so tremendously in creased that it was difficult to find a basis of comparison. Senator B r o o k h a r t . Wasn’t that general activity due to manipu lation, to general manipulation of everything? Mr. B a k e r . Well, I don’t think so. I think the public was insist ing on buying things. Senator B r o o k h a r t . And they had been worked up to that state of mind by the manipulation in selling things ? Is that correct ? (There was no response.) The C h a i r m a n . How much money did you spend encouraging them ? How much did you spend monthly or by the year encourag ing them in that idea that it was a good time to buy ? Mr. B a k e r . Well, of course, we were dealing in investment securi ties, Senator, and we tried to-----The C h a i r m a n . In other words, you helped it along? Mr. B a k e r . I didn’t—I certainly was not trying to stop business. 1926 STOCK EXCHANGE PEACTICES Senator B r o o k h a r t . Y ou were interested in selling and not in pro tecting the public? Mr. B a k e r . I was interested in both. Senator B r o o k h a r t . What did you do to protect the public? I have not seen anything yet that was done to stop all this vast loss they have sustained as a result of all these transactions. Mr. B a k e r . Well, I haven’t any answer to that. There was not anything we could do that we did not do, as far as I know, to protect the public as regards its investments. Senator B r o o k h a r t . Were you going to excuse Mr. Baker, Mr. Chairman ? The C h a i r m a n . We were about to recess. Senator B r o o k h a r t . I wanted to ask a few questions on an en tirely different line. The C h a i r m a n . The committee will recess until 2.30. Those un der subpoena will appear here at that time. The witness will continue. (Accordingly, at 12.43 o’clock p. m., a recess was taken until 2.30 o’clock p. m., of the same day.) a f t e r r ec e ss The subcommittee resumed at 2.30 o’clock, on the expiration of the recess. The C h a i r m a n . The subcommittee will resume. Senator Brook hart desires to ask a few questions of Mr. Baker before counsel to the committee resumes his questions. TESTIMONY 0E HUGH B. BAKER, PRESIDENT THE NATIONAL CITY CO., NEW YORK CITY— Resumed Senator B r o o k h a r t . Mr. Baker, Mr. Mitchell testified that your company handled some $20,000,000,000 of securities altogether since its organization. That is about right, is it ? Mr. B a k e r . For the last 1 0 years. Senator B r o o k h a r t . And he said there was only about $1,000,000,000 of that that you had trouble with. Now, the things you handled were stocks and bonds both, were they not? Mr. B a k e r . Yes, sir. Senator B r o o k h a r t . Take those stocks that you handled: How does their value to-day compare with what you sold them at ? Mr. B a k e r . Oh, as to that-----Senator B r o o k h a r t (interposing). Just in a general way. I am not asking you to come down to any particular figures. I want to get a general view of the economic situation of the country. Mr. B a k e r . Well, I think they are in line with the general decline in the market as a whole. Senator B r o o k h a r t . But very much lower than the selling prices ? Mr. B a k e r . Yes; they are lower. Senator B r o o k h a r t . And yet I have a chart prepared by the Fed eral Reserve Board that shows they are still, I mean at the present time, on an average, higher than the level of 1914. Mr. B a k e r . That may be correct, but I do not know. STOCK EXCHANGE PRACTICES 1927 Senator B r o o k h a r t . Now, bonds have depreciated considerably, too, haven’t they? Mr. B a k e r . Some of them. Of course, a great many of those bonds, of that $20,000,000—— Senator B r o o k h a r t (interposing). He said $20,000,000,000. Mr. B a k e r . Yes; of the $20,000,000,000, have been paid. Senator B r o o k h a r t . I understand that, but in the prices they now represent, those that are outstanding, they are depreciated. In other words, all values are down now. Mr. B a k e r . Well, that is true in the case of certain bonds. That would not be true' as to anywhere near the total, because in that total are a great many municipal and State bonds. Senator B r o o k h a r t . They have held up better in value? Mr. B a k e r . Yes; they are better. Senator B r o o k h a r t . United States Government, State, and mu nicipal bonds have held up better ? Mr. B a k e r . Yes; and public-utility bonds. Senator B r o o k h a r t . But private business bonds are all depre ciated, or nearly all of them, to-day? Mr. B a k e r . Yes; they have declined, the most of them. Senator B r o o k h a r t . Now, what rate of interest do those bonds generally carry? Mr. B a k e r . Well, that varies, of course, considerably. Utility bonds would perhaps carry a 5 per cent coupon, and municipal bonds probably would carry 4 per cent coupons, or thereabout, and so on through the list. Senator B r o o k h a r t . D o they vary in that way? Mr. B a k e r . Yes, sir. Senator B r o o k h a r t . Take the stocks that you advertised and sold, what kind of return did your prospectuses indicate for those as a general thing? Mr. B a k e r . Well, of course that was in accord with the general dividend that was being paid on those stocks. Senator B r o o k h a r t . They all expected 6 or 7 or 8 or 9 per cent dividends, did they not? Mr. B a k e r . Well, it varies, of course. I just can’t recall any average. Senator B ro o k h a r t . What would be the low level of dividends that they would carry? That is, as to the prospectus and the idea you put out to the public to whom you sold them? Mr. B a k e r . As to the prospective dividends in the future, do you mean? Senator B ro o k h a r t . Yes. Mr. B a k e r . Well, of course we were quite in line with the earn ings and the earning prospects, and it looted to us as if the earnings were safe on the existing basis at the time. We felt that those dividends were justified and felt at the time that they would con tinue to be paid. Senator B r o o k h a r t . Well. I wasn’t interested in that proposition, but was interested in what tnose dividend levels might be. You did not advertise anything as low as 4 per cent, did you? Mr. B a k e r . Well, I am not sure just what the various dividends on the various issues might have been. 1928 STOCK EXCHANGE PRACTICES Senator B r o o k h a r t . The most of those stock issues were trying to get 5 per cent at least, or as much as 10 per cent and some of them even more, were they not? Mr. B a k e r . Well, not 10 per cent, but 5 per cent, or something like that. Senator B r o o k h a r t . I want to ask you whether you know what the general and capital earnings in the United States are, taking them over a period of years, and that covers prosperity as well as depression, cutting out the present worst of all depressions. Mr. B a k e r . All right. Senator B r o o k h a r t . D o you know what the average capital earn ing has been in the United States during its history ? Mr. B a k e r . No; I do not. Senator B r o o k h a r t . Y ou have never made any study of that basic proposition ? Mr. B a k e r . I h a v e n ’t th a t. Senator B r o o k h a r t . Well, suppose I said to you that the Census estimates, together with a scientific study made by Senator Howell, of Nebraska, show that throughout the entire history of the country the possibility of production has been less than 4 per cent a year, and then I ask you if that continues possible, but, of course, since 1929 it has not been that, has it? Mr. B a k e r . N o. Senator B r o o k h a r t . It has gone the other way ? Mr. B a k e r . Yes. Senator B r o o k h a r t . And would now be way below 4 per cent if we used these times as a level to go by. But to use a prosperity as well as a depression period, the American people have the ability to produce, say, 4 per cent, and that includes all value of new terri tory we acquired, all increases in values, and everything else, it has been less than 4 per cent a year, has it not ? Mr. B a k e r . Perhaps so. Senator B r o o k h a r t . I f that be true, isn’t it going to unsettle business in this country always if institutions like yours are out selling stocks and bonds at a price higher than the ability of the American people to produce ? Mr. B a k e r . Well, I should assume that it is because of that aver age rate of 4 per cent that you mention—I mean that is the result of some companies having a much higher rate than others, and per haps some having no dividend rate at all, or no earnings. Senator B r o o k h a r t . Your theory is that they should have a higher dividend rate if the risk is greater. Mr. B a k e r . No; I think the dividend rate should be in line gener ally with the earnings of the company. Senator B r o o k h a r t . Well, the earnings of the company should be greater when it has a greater risk to carry; is that it? Mr. B a k e r . Not always, because into that enters the question of efficiency of management. Senator B r o o k h a r t . Well, assuming that the management of all is good, and all the same, then as to an enterprise where there is a bigger risk or a bigger element of uncertainty, you would expect ultimately a bigger dividend, wouldn’t you? STOCK EXCHANGE PRACTICES 1929 Mr. B a k e r . Well, yes; if you assume that all management is equally able, and the profit possibilities in industry are equal, then I should say yes to that. Senator B r o o k h a r t . On that basis, then, agriculture would be entitled to the biggest dividend of anybody, wouldn’t it? Mr. B a k e r . Well, I would certainly like to see it get it. Senator B r o o k h a r t . But it never has yet that you know of, has it? Mr. B a k e r . Not that I know of. Senator B r o o k h a r t . Well, now, the thing I am getting at is this: We have investigated the stock exchanges, the New York Stock Exchange, and its operations of all sorts to boom stocks and bonds to extortionate levels. Then we get into your company, and you beat the stock exchange three or four times over in percentage. How can we ever have stable prosperity in this country as long as we permit that kind of business to go on in the big wholesale way you people conduct it ? Mr. B a k e r . Well, that is a big question. [Laughter in the room.] I am afraid it is too big for me to try to answer without any preparation. Senator B r o o k h a r t . Well, you are one of the big men in this game. Mr. B a k e r . I am not so sure of that. Senator B r o o k h a r t . In 1921 you people, through Mr. Mellon and his associates, got practically control of this Government, in the executive and legislative branches, and even the judicial branch, for you have had two-thirds at least of the Supreme Court all the time. The management of politics has been through the influence of those sources. And then the big economic affairs of the country have been managed by you people, and this is what you brought us to. Mr. B a k e r . Well, of course, I did not realize that that was the situation. Senator B r o o k h a r t . Y ou did not? Mr. B a k e r . No. Senator B r o o k h a r t . Y ou have been friendly with Mr. Mellon and his financial ideas all through those times, haven’t you? Mr. B a k e r . Well, I have known Mr. Mellon, but not at all intimately. Senator B r o o k h a r t . Well, of course, we have known that his in fluence has been paramount in every branch of the Government here since Harding became President. Mr. B a k e r . Well, I certainly had no influence with Mr. Mellon at all one way or other. Senator B r o o k h a r t . Well, you were friendly to his policies and his way of managing things, weren’t you ? Mr. B a k e r . Well, I could not say yes to that without saying that in so far as I regarded him as a conservative and a gentleman with ability; yes. Senator B r o o k h a r t . And you belong to the conservative class yourself. Mr. B a k e r . I want to be conservative; yes, sir. Senator B r o o k h a r t . Well, now, supposing that when this new administration comes in the Congress would enact a farm bill that 1930 STOCK EXCHANGE PEACTICES would reestablish farm prices—and you are aware of the fact that at the present time farm prices are fixed by the sale of the surplus in the free trade markets of the world. You are aware of that proposition, are you not? Mr. B a k e r . Yes, sir. Senator B r o o k h a r t . Suppose we were to enact a bill that would remove that surplus from having an influence on agricultural prod ucts in this country, and were to raise the price level up, as President Wilson did during and after the World War, to a cost-of-production level to farmers, which would restore their buying power, and that is a third or more of the buying power of the whole country, isn’t it? Mr. B a k e r . Yes. Senator B r o o k h a r t . And were to send that buying power into the channels of business. And then supposing the incoming admin istration would also put on public works to employ about one-third of the unemployed labor of this country—and I think agricultural prosperity would put a third of them to work; then with two-thirds going to work would put the other one-third to work. Now, sup posing some such arrangement were done by the new administra tion, wouldn’t that start immediately a gigantic stock boom again in New York? Mr. B a k e r . Well, I would doubt that. I f the unemployment sit uation of the country were reduced through the methods you sug gest, and business were improved, there is no doubt but that that would be reflected in an improvement of prices for securities. But as to that producing a boom beyond reasonable prices for existing securities, I do not know, and I doubt that very much. Senator B r o o k h a r t . With all your propaganda and selling ma chinery down there in New York, and in the stock exchange itself, wouldn’t you be able again to kite values up far above the earning capacity of the country, above this 4 per cent I am talking about? Mr. B a k e r . Well, I do not like to be put in the class of having kited those things up. I am not just exactly sure that I know what that means. Senator B r o o k h a r t . Well, when you increased your own stock 2,500 per cent beyond its fair value, that was a pretty high kite itself, wasn’t it? Mr. B a k e r . Of course, Senator Brookhart, after all it is the con sumption of the stock, the buying of a stock or issue of bonds, which controls the price. And in our particular case that you mentioned, we felt very strongly that the more stockholders that we had in the bank, the more contacts we would have and the better our business possibilities for the bank would be. Senator B r o o k h a r t . But you knew all the time that the bank could not earn on a 2,500 per cent increase of its par capital. Mr. B a k e r . Well, of course, with the general growth of the coun try, of business and industry generally, banking facilities must keep up with it; and the value of bank stocks, of this kind of bank, is determined not only from the current dividend earning, but from the increase in its capital requirements, which affect favorably the holder of stock. Senator B r o o k h a r t . Then the speculative fever and manipulation sent it very much higher still. STOCK EXCHANGE PRACTICES 1931 Mr. B a k e r . Well, I should hate to think that is the controlling factor in it. Senator B r o o k h a r t . N o w , if you would look at the history of the country, and study what the earning level had been through its prosperous periods, and if you had known that they were less than 4 per cent, then you would have known that there was no such increase possible as 2,500 per cent for conservative banks, or for a bank like your bank, isn’t that so? Mr. B a k e r . Well, I don’t quite see how you can measure the value of any particular industry, whether it is farming or banking or manufacturing, by an average. Senator B r o o k h a r t . Let us concede that you would not abso lutely follow the average. Yet when we charter corporations, when the law charters corporations to combine their capital and go out and earn against individuals, and when the Congress permits them to come into interstate commerce and into the mails and into the telegraphs and telephones and all those things, shouldn’t the Con gress have something to say, and shouldn’t the law have something to say about the profits they would charge people, when they have these great special privileges that the law gives them? Mr. B a k e r . Well, I certainly believe in proper regulation, if that is what you mean. Senator B r o o k h a r t . Well, is it proper regulation when the Con gress sits by and lets your stocks go up to 2,500 per cent of their par value? Mi B a k e r . Well, I think the public buying will control that of itself. Senator B r o o k h a r t . Now, there is this final question: Supposing when we start this prosperity in agriculture and of labor again, when we have them reemployed, and when that starts general pros perity, if all your affiliates, and all stock exchanges get busy again and put on another gigantic boom, and then when that bubble bursts, won’t we come back again into depression just as we did this time? Mr. B a k e r . Well, I hope not. Senator B r o o k h a r t . Y ou hope not, but that will be the fact if you go in the same way again, and if we leave you unrestrained to do things on the stock exchanges, and in the affiliates, won’t that have to be the result? Mr. B a k e r . Of course, I can not speak for the stock exchange at all because we are not members of the stock exchange, and have nothing whatever to do with its control or operation. Senator B r o o k h a r t . Yes; I see that you pulled out, but you thought they were not going fast enough to suit you then, didn’t you? Mr. B a k e r . I am sorry if you think that. Senator B r o o k h a r t . I believe that is all I have to ask. Mr. B a k e r . Mr. Pecora, before you resume, let me say: I tried to draw on my memory this morning in order to answer one of your questions, and I fear I did not do it very well. During the luncheon recess I telephoned to get the real situation that existed on our books as regards that period of time when we borrowed that stock from Mr. Mitchell. I did say to you that the Farmers Loan & Trust Co. 119852—33— 6----- 12 pt 1932 STOCK EXCHANGE PEACTICES was entering into that, but I did not have those dates before me. I now have the position that we had in the Farmers Loan & Trust Co. stock, which a few weeks later was to be converted into National City Bank stock. And if you would like for me, or will permit me to do it, I should like to give you those figures at this time. Mr. P ecora . When was that conversion to take place? Mr. B a k e r . The formal announcement to shareholders was made on April 1. Mr. P ecora . When was the exchange of stock or the conversion to take place? Mr. B a k e r . The actual exchange of stock took place on July 8. Mr. P ecora . On July 8 ? M r. B ak er. Y es. Mr. P ecora . Well, that was fully two and a half months after the first borrowing of 15,000 shares of stock from Mr. Mitchell, wasn’t it? Mr. B a k e r . Yes; but we had that stock at that time. Mr. P ecora . Y ou had what stock? Mr. B a k e r . We had the Farmers Loan & Trust Co. stock, which would be definitely exchanged for National City Bank stock. Mr. P ecora . The National City Co. had a number of shares of the old Farmers Loan & Trust Co. stock in April? Mr. B a k e r . Yes; on April 22 we had 3,569 shares. Mr. P ecora . Under the ratio of exchange that had been agreed upon, into how many shares of National City Bank stock would they be convertible? Mr. B a k e r . Seventeen thousand five hundred and odd shares. Mr. P ecora . N o w , as a matter of fact, how could you tell in April, 1929, that this merger of the Farmers Loan & Trust Co. with the National City Bank would receive the approval of the stockholders of both banks ? Mr. B a k e r . We could not, except that the principal stockholders had informally agreed to it. It had been approved by the boards of directors and the announcement was made. Mr. P ecora . And the stockholders of both institutions—that is, of the Farmers Loan & Trust Co. and of the National City Bank— were not called upon to approve or disapprove the merger until June 28,1929; isn’t that correct? Mr. B a k e r . The formal announcement went to the shareholders on April 1. Mr. P ecora . Not the announcement. You mean the proposal, dont’ you ? Mr. B a k e r . And then the ratification b y the stockholders was on June 28. Mr. P ecora . Was to be on June 28? Mr. B a k e r . That is right. Mr. P ecora . When was the proposed agreement of merger be tween the National City Bank and the Farmers Loan & Trust Co. actually made ? Mr. B a k e r . Well, the discussion of the thing was prior to that by a good many weeks. Mr. P ecora . And this was a discussion that was participated in by a handful of persons, wasn’t it, and not by this large army of STOCK EXCHANGE PRACTICES 1933 thousands of shareholders in all parts of the world to whom you referred this morning? Mr. B a k e r . Well, of course, the boards of directors of both insti tutions had approved it. Mr. P e c o r a . The directors of both institutions proposed to present a plan to the stockholders of both institutions some time in April, is that correct ? Mr. B a k e r . Well, they approved it before that, because on April 1 the formal announcement went out to stockholders. Mr. P ecora . All right. The actual agreement, or the proposed agreement calling for the merger of the two institutions, was not entered into until late in May of 19 29 , was it, or, to be specific, on May 2 8 , 1929 ? Mr. B a k e r . Y ou mean the actual formal approval by the stock holders ? Mr. P e c o r a . The actual merger, the proposed merger, the agree ment upon which the merger was to be effected. Mr. B a k e r . Yes. Mr. P e c o r a . Was not entered into until May 2 8 , 19 29 , was it? Mr. B a k e r . T o be approved by the stockholders? Mr. P e c o r a . N o; not by the stockholders. Mr. B a k e r . I am sorry, but I do not quite understand you. Mr. P e c o r a . The approval by the stockholders was not until June 28 , 19 29 , was it? Mr. B a k e r . June 2 8 ; yes. Mr. P e c o r a . N o w , about a month before that the terms of the proposed merger between the two banks were reduced to writing and signed by the officers of the two banks, isn’t that correct ? Mr. B a k e r . Well, I do not believe so, because on April 1 formal announcement of this proposal went to the stockholders. Mr. P ecora . When was the actual agreement signed? Mr. B a k e r . Well, May 3 then, as I understand i t now, was the formal announcement. Mr. P e c o r a . May 3 and not in April? Mr. B a k e r . Just let me check on that. Mr. P ecora . I thought you had checked on that during the recess. Mr. B a k e r . I thought I had this correct. Let me ask Mr. Law— well, the information I have on this is that April 1 the formlal announcement to shareholders was made. Mr. P e c o r a . What was the nature of that announcement ? Let us go one step at a time now. Mr. B a k e r . Of course, I telephoned to New York for this, and this was in the evening papers I think in New York on that day. Mr. P ecora . What was the nature of the announcement that was made on April 1? Mr. B a k e r . Outlining the exchange proposal and terms of it. Mr. P e c o r a . And then what was the next step ? Mr. B a k e r . Well, of course, then on June 2 8 was the actual vote by the stockholders. Mr. P ecora . Wasn’t there any step in the interim? Mr. B a k e r . I do not know what papers might have gone out in between April 1 and June 28. I haven’t those here. 1934 STOCK EXCHANGE PRACTICES Mr. P ecora . N o w , the situation was that the directors of the two institutions had had some sort of informal negotiations with each other. Mr. B a k e r . Yes; that had been taken. Mr. P ecora . Wait a minute. Sometime in the spring of 1929, is that right? Mr. B a k e r . That is right. Mr. P ecora . A s a result of those informal conferences and nego tiations between the officers and directors of those two banks, an announcement was caused to be made by advertisement in the news papers to the shareholders of both institutions concerning the pro posal for a merger of the two banks. Mr. B a k e r . That is right. Mr. P ecora . Did any of the directors or officers of the National City Co. participate in those preliminary conferences and negotia tions with the officers and directors of the Farmers Loan & Trust C o .? Mr. B a k e r . Well, the directors of the National City Bank were,, of course-----Mr. P ecora (interposing). I have asked about the National City Co. Just answer that question. Mr. B a k e r . The directors of the National City Co., who at that time were directors of the National City Bank, would naturally participate. Mr. P ecora . Were you one of those directors of the bank? Mr. B a k e r . I was elected a director of the bank during the month of April, but whether this was while that—no, that was April 1, I find. N o; I don’t know. Mr. P ecora . Y ou would answer in the affirmative the question as to whether any officers or directors of the National City Co. participated in those preliminary conferences and negotiations look ing to the merger of the two banks. Mr. B a k e r . Well, as officers or directors of the National City Co. as such, no. But those same individuals might have been directors in the National City Bank. Mr. P ecora . And there were some such individuals who were officers or directors of both the bank and the City Co. at the one time? Mr. B a k e r . That is right. Mr. P ecora . And they took part in those preliminary negotiations and conferences, did they ? Mr. B a k e r . That is right. Mr. P ecora . N o w , as a result of those conferences did those offi cers and directors assume that the stockholders of both institu tions—that is, the Farmers Loan & Trust Co. and the National City Bank—would ratify a proposal to merge the two institutions ? Mr. B a k e r . Yes. Mr. P ecora . They felt quite certain that that would follow, did they ? Mr. B a k e r . Yes. Both boards of directors had approved it. Mr. P ecora . And you know that to be the fact, do you? Mr. B a k e r . Yes. I just wanted to give you those facts. STOCK EXCHANGE PRACTICES 1935 Mr. P ecora . Did the National City Co. take a position in the market with regard to the stock of the National City Bank because o f that advance knowledge which they had? Mr. B a k e r . Well, we bought Fanners Loan & Trust Co. stock. Mr. P ecora . Because of that knowledge? Mr. B a k e r . We knew that that was to take place. Mr. P ecora . And you figured that if that merger took place it would-----Mr. B a k e r (interposing). Well, we----Mr. P ecora (interposing). Wait a minute until I finish. Mr. B a k e r . I b e g pardon. Mr. P ecora . Y ou figured that if that merger took place it would redound to the benefit—Mr. Law, let me ask this question of Mr. Baker, and don’t interrupt him. Mr. L aw . I beg pardon. Mr. P ecora . Y ou figured that if this merger took place it would redound to the benefit of the shareholders of both institutions, and for that reason the National Gty Co. started to acquire the stock o f the Farmers Loan & Trust Co. in order to be able to take advan tage of the proposed merger through exchange of stock? Mr. B a k e r . Not that at all. This announcement was on April 1, and our accumulation of stock there was April 22. Mr. P ecora . And that was before any agreement was actually arrived at for the merger, wasn’t it? Mr. B a k e r . Well, the stockholders had not formally approved, but the directors had, and we assumed that the stockholders would, which they did. Mr. P ecora . When was this matter of the proposed merger first discussed at any meeting of the board of directors of the bank, if you can tell me? Mr. B a k e r . I cannot tell you. I was not on the board of direc tors at that time. Mr. P ecora . N o w , the Farmers Loan & Trust Co. was a State bank, wasn’t it? Mr. B a k e r . Yes, sir. Mr. P ecora . It was not a national bank? Mr. B a k e r . That is right. Mr P ecora . And the National City Bank was a national bank ? Mr. B a k e r . That is right. Mr. P ecora . And the Farmers Loan & Trust Co., being a State bank, could only merge with another banking institution with the approval of the State superintendent of banks in New York; isn’t that so? Mr. B a k e r . Well, I assume that is true, that it would be through the regular procedure there, whatever it was. Mr. P ecora . Don’t you know that is a requirement of the law? Mr. B a k e r . I think that is right. Mr. P ecora . You are not guessing at it, are you? You are a di rector of the bank, aren’t you, Mr. Baker? Mr. B a k e r . Yes; I am entirely in accord with that, of course. Mr. P ecora . Did the directors and officers of the National City Co., before they started to accumulate the shares of the Farmers 1936 STOCK EXCHANGE PRACTICES Loan & Trust Co., in anticipation of this merger, know that the State superintendent of banks of New York would give his ap proval ? Mr. B a k e r . No; I do not know the answer to that. Mr. P ecora . Y ou did not feel that they were taking any risks, did you, in accumulating the stock of the Farmers Loan & Trust Co. in anticipation of the merger and the benefits that would thereby be acquired by your company as a stockholder ? Mr. B a k e r . No; I did not think there was any risk. My only reason for getting this information was merely that I wanted to clear up the point, which I could not give you the figures on this morning, because I was certain we were not short of National City Bank stock, and yet I had to have these figures. Mr. P ecora . Well, as a matter of fact, doesn’t that still leave you short of National City Bank stock in April and May, when you borrowed 30,000 shares from Mr. Mitchell to cover that position? Mr. B a k e r . On that technicality, yes. Mr. P ecor a . Isn’t it something more substantial than a mere tech nicality ? Mr. B a k e r . It does not seem so to me. Mr. P ecora . A s a matter of fact, you did not know and could not know until June 28, when the stockholders of the two banks acted upon the proposal to merge, that such a merger would in fact be effected, did you? Mr. B a k e r . N o ; we could not be absolutely certain. Mr. P ecora . So that-----Mr. B a k e r (continuing). But we were morally certain that that would be effected. Mr. P ecora . Y ou still say that your company’s selling of the capi tal stock of the National City Bank in April and May and June of 1929 was not of a character that required and compelled you to borrow 30,000 shares in order to protect a short position ? Mr. B a k e r . Oh, yes, because this stock we held of the Farmers Loan & Trust Co. was not converted into National City Bank stock until July 8. Mr. P ecora . Y ou could not know and did not know at any time prior to June 28 whether it would be effected by a merger or not? Mr. B a k e r . I say, I could not tell, but it seemed practically certain it would be ratified by the stockholders. Mr. P ecora . The number of shares your company could have obtained from that merger at the most was about 17,000 shares. Mr. B a k e r . At the date of April 22 that is what it would have been. On the date of the conversion, which was July 8, we had 5,446 shares. Mr. P ecora . When was the first public announcement made of the proposal to merge the two banks f Mr. B a k e r . April 1 ,1 think. Mr. P ecora . Are you sure of that? Mr. B a k e r . I am sure if this information given me from New York is correct and I think it is. Mr. P ecora . Isn’t it a fact that it was on April 1, 1929, that the subject was first discussed or proposed at a meeting of the direc tors-----Mr. B a k e r . N o, sir------- STOCK EXCHANGE PRACTICES 1937 Mr. P ecora (interposing). Let me finish. At a meeting of the directors of the National City Bank? Mr. B a k e r . No, sir. I am quite sure it was prior to that. Mr. P ecora . Will you look at the minutes of a special meeting of the board of directors—well, while I am having some records exam ined let me ask you this question: Your statement was that as a result of the certainty, or moral certainty, on the part of the officers and directors of the National City Co. in April, 1929, that a merger of the National City Bank with the Farmers Loan & Trust Co. would be ratified and become effective on June 28, 1929, your company accumulated several thousand shares of the stock of the Farmers Loan & Trust Co. ? Mr. B a k e r . That is right. Mr. P ecora . And that as a result of this accumulation, and through the ownership of this stock, your company would be enabled to acquire on some ratio of exchange about 17,000 shares of National City Bank stock when that merger became effective, is that right? Mr. B a k e r . That is right, on the basis of our purchases. Mr. P ecora . When did you buy those three or four thousand shares of Farmers Loan & Trust Co. stock? Mr. B a k e r . April 22. Mr. P ecora . Isn’t it a fact that on that date, April 22, the National City Co. was short over 25,000 shares of stock of the National City Bank which it had previously sold to customers throughout the country? Mr. B a k e r . No ; I am quite sure not. Mr. P ecora . Will you look at your records in verification of those figures ? Mr. B a k e r . I have not the records by days, Mr. Pecora. Mr. P ecora . Will you see if it was not short 25,181 shares at one time within that period? Mr. B a k e r . N o . My figures do not show a shortage at all at any time. Mr. P ecora . Your figures do not show a shortage because of the borrowing of those 30,000 shares from Mr. Mitchell ? Mr. B a k e r . Yes; but borrowing those and applying this conver sion of this stock into National City Bank stock eliminates any possibility of a short position. Mr. P ecora . Then you felt sure you could sell short 17,000 shares because you could cover by the merger of the two banks in the latter part of June; is that right ? Mr. B a k e r . In other words, by converting that into National City Bank stock we were not short. Mr. P ecora . And if the stockholders of either of the banks on June 28, 1929, had kicked those plans for a merger into the waste basket, your company would have been short 17,000 shares. Mr. B a k e r . We would have been short on that date in that event; yes. Mr. P ecora . And yet in April and in June you went ahead, as suming that the merger would take place on June 28, and sold shares of National City Bank stock which the City Co. did not have. Mr. B a k e r . That is right. Mr. P eco r a . Does that complete your explanation ? 1938 STOCK EXCHANGE PRACTICES Mr. B a k e r . That is all I wanted to say. I just wanted to get those figures to you. Mr. P ecora . N o w , Mr. Baker, in answer to one of Senator Brook hart’s questions in the last few minutes you stated, either in words or in substance, as follows: We, meaning the National City Co., felt very strongly that the more stockholders the bank had the more contacts we would have; do you recall that ? Mr. B a k e r . Yes. Mr. P ecora . What did you mean by that ? Mr. B a k e r . I meant the more business possibilities, the more people would be interested in our institution. Mr. P ecora . That is to say, you would have a larger army of prospective customers for the securities which the National City Co. was selling to the public; is that right? Mr. B a k e r . That, plus whatever facilities the bank had that could be used. Mr. P ecora . In other words, it would also enlarge the facilities which the National City Bank could place at the disposal of the National City Co. in the sale of the latter company’s securities to the public ? Mr. B a k e r . Oh, no; I didn’t have that in mind. Mr. P ecora . What did you have in mind by the addenda that you made ? Mr. B a k e r . It seemed to me that the more stockholders that the National City Bank had in the United States the more business op portunities there would be opened to the bank and the more people there would be interested in the business of the bank. Mr. P ecora . Well, why was that the concern of the National City Co. as the securities selling organization. Mr. B a k e r . Because those same people with whom we were doing business throughout the United States, and others, and we were con stantly increasing our business range, they would be prospective cus tomers of the bank and of the company and of any other facility we had in banking. Mr. P ecora . In other words, the stockholder of the bank would become a potential customer of the National City Co. for its securi ties. Mr. B a k e r . I f he were an investor; yes. Mr. P ecora . And that was the special desire of the National City Co. in enlarging the number of shareholders of the National City Bank, wasn’t it? Mr. B a k e r . Oh, no; not particularly. Mr. P ecora . It was one of them, wasn’t it? Mr. B a k e r . It was one, certainly. Mr. P ecora . And it was not an insignificant feature of its desire in that respect, was it? Mr. B a k e r . Not at all. Mr. P ecora . Was it in order to serve that purpose or to further that purpose in some fashion, that the National City Co., from the time when the National City Bank was taken off the trading list of the New York Stock Exchange, in January of 1928, embarked upon an intensive campaign to sell the stock of the National City Bank throughout the country? Mr. B a k e r . Will you let me have that question repeated ? STOCK EXCHANGE PRACTICES 1939 Mr. P ecora . The committee reporter will please repeat it. [Which was done.] Mr. B a k e r . Well, there are a good many different points in that question, I think. Mr. P eco r a . Was that one of the purposes that actuated or prompted your company to sell the stock of the bank throughout the country? Mr. B a k e r . One of the purposes, of course, was to increase the business in the National City-----Mr. P ecora (interposing). For whom? Mr. B a k e r . For the bank and the company. Mr. P ecora . Was the company engaged in increasing the business of the bank? Mr. B a k e r . No; but we were interested in promoting the interests of the bank in any way we could, of course. Mr. P ecora . Because you were an integral part of the bank, weren’t you, in substance if not in form? Mr. B a k e r . Because we were all stockholders, and we were all in terested in the general progress of the institution. Mr. P ecora . Well, the National City Bank was a national banking institution under its charter, and the National City Co. was an invest ment company under the charter given to it by the State of New York. They were two separate legal entities, but in truth and in fact they were inseparably interwoven with each other, weren’t they? Mr. B a k e r . Well, we certainly were a part of the same institution. Mr. P ecora . They were so inseparably interwoven with each other that it was not possible for anyone not a stockholder of the bank to have any interest in the stock of the company. Mr. B a k e r . That is correct. Mr. P ecora . And the bank was helping the company, and the company was helping the bank, all along the line, isn’t that the conclusion ? Mr. B a k e r . Actually helpful all the time. Mr. P ecora . For that reason, among other reasons, your company was desirous of enlarging the number of stockholders of the bank? Mr. B a k e r . That is right. Mr. P ecora . You know that a bank under the law can not trade in its own stock, don’t you ? Mr. B a k e r . Yes; that is right. Senator B r o o k h a r t . Where did you get this stock to enlarge the number of stockholders ? Mr. B a k e r . Of course, there is a general market prevailing on the stock in New York, quotations all the time, people wanting to sell and people wanting to buy. Senator B r o o k h a r t . You got it from other stockholders and thereby reduced the number, as you bought it, didn’t you ? Mr. B a k e r . But where some estate, for instance, had to be settled and out of that estate came, perhaps, a block of a few thousand shares of stock, that stock would be purchased and we would sell it. Senator B r o o k h a r t . H ow much did you increase the number of stockholders of the bank ? Mr. B a k e r . From 15,000 to 84,0000 or 85,000. Senator B r o o k h a r t . In how long a period of time ? Mr. B a k e r . In three and a half years or four years. 1940 STOCK EXCHANGE PRACTICES Senator B r o o k h a r t . And that increase all occurred before the stock broke down in price, didn’t it? Mr. B a k e r . N o . The number of stockholders in 1 9 2 7 was 15 ,854 . In 19 2 8 the number of stockholders was 1 8 ,4 0 2 . The number of stockholders in 1929 was 62 ,868 . The number of stockholders in 19 3 0 was 6 8 ,4 9 1 . The number of stockholders in 19 31 was 7 9 ,2 6 0 , and the number of stockholders in 1 9 3 2 was 84 ,892 . Senator B r o o k h a r t . But the price increased more rapidly, or I mean the number of stockholders increased more rapidly since the stock declined. Mr. B a k e r . Well, of course the largest increase was from the 1928 figures to the 1929 figures, and on account of the fact that the stock was split at that time. Mr. P ecora . Mr. Baker, in order to enable the company more easily to find new stockholders for the bank, wasn’t the par value of the stock of the bank reduced from $100 to $20 in February of 1929? Mr. B a k e r . It seemed to us that the price of the old stock was getting to such a high figure that the average investor could not afford to buy it. Mr. P ecora . Well, the stock was placed, wasn’t it? Mr. B a k e r . Yes; but-----Mr. P ecora (interposing). The bank did not own any of it and could not own any of it; isn’t that a fact? Mr. B a k e r . That is true. Mr. P ecora . The public had the stock when it was $100 in par value ? Mr. B a k e r . But the bank was growing and more stock was being issued from time to time. Mr. P ecora . And in order to increase the number of shareholders the stock of the bank was reduced in par value from $100 to $20 in February of 1929, wasn’t it? Mr. B a k e r . Yes, that is right. Mr. P ecora . All right. Now, Mr. Baker, are you reading some thing that helps you to answer any of my questions? Mr. B a k e r . I was just reading this paper to get the date and the announcement we made at the time the stock was split from $100 par value to $20 par value. I f I may read to you what the board said about that matter. Mr. P ecora . I know what the board said. I simply want the fact to appear in the record that there was a change in par value from $100 to $20 effective in February of 1929, and that one of the immediate effects of that change was to facilitate enlarging the number of shareholders of the bank. Mr. B a k e r . That is right, that it was then within the reach of the smaller investor. Mr. P ecora . And the larger the number of shareholders the greater the number of prospective customers the National City Co. had for its securities. Mr. B a k e r . That is right. Mr. P ecora . All right. Now I want to ask you: Did the National City Co. in the selling campaign which it instituted in the shares of the bank’s stock, after those shares were taken from the trading STOCK EXCHANGE PRACTICES 1941 list of the New York Stock Exchange, ever seek to control the market ? Mr. B a k e r . N o , except that there were times when the market would seem to be moving too fast one way or the other due to some extraordinary situation of the moment, and there we would under take to do it. Mr. P ecora . Let me ask you a few questions about the selling facilities and organization of the National City Co.: How many departments did it have to handle its securities, and by what names were they designated or known? Mr. B a k e r . You are not referring to the sales organization par ticularly, but to the entire organization? Mr. P ecora . T o the general setup and operation of the company in its business of buying and selling securities. Mr. B a k e r . Well, our buying work is in the hands and is the responsibility of vice presidents. For instance, there is a vice presi dent in charge of industrial work, and a vice president in charge of municipal work, and a vice president in charge of railroad work, and a vice president in charge of foreign work, and a vice president in charge of the selling organization. Mr. P ecora . And you had a vice president in charge of securities issued by industrial corporations? Mr. B a k e r . Yes. Mr. P ecora . And you had a vice president in charge of securities issued by railroad corporations? Mr. B a k e r . That is right. Mr. P ecora . And you had a vice president in charge of securities issued by foreign governments and by foreign corporations? Mr. B a k e r . That is right. Mr. P eoora. And you had a vice president in charge o f municipal issues ? Mr. B a k e r . That is right. Mr. P ecora . And also of State and Federal Government issues ? Mr. B a k e r . Well, that came under the same vice president. Mr. P eco r a . That would come under municipal issues generally ? Mr. B a k e r . That is right. Mr. P ecora . And you had a vice president in charge of securities issued by utility companies, didn’t you? Wasn’t that another sub division in charge of a vice president? Mr. B a k e r . That is right, but that particular vice president was also in the industrial end as well. Mr. P ecora . That is, utility securities came under the supervision of the vice president who had the industrial issues also in charge ? Mr. B a k e r . That is right. And I did not mention a vice presi dent in charge of accounting and treasury work. Mr. P ecora . How many branch offices or district offices did the National City Co. have at the end of 1927? Mr. B a k e r . We had fifty-some odd. Mr. P ecora . Can you get that information ? Mr. B a k e r . Yes. I find it is 67. Mr. P ecora . Y ou had 67 district and representative offices, is that right ? Mr. B a k e r . That is right. 1942 STOCK EXCHANGE PRACTICES Mr. P ecora . And they were linked up by 11,100 miles of private wire services, weren’t they ? Mr. B a k e r . That is correct. Mr. P eoora . That is exclusive, isn’t it, of service and sales facili ties which the company had at 10 of the metropolitan branches of the bank in the city of New York ? Mr. B a k e r . Yes, sir. I don’t remember exactly what the dates were when we had the representatives in those branch offices of the bank. We established in those offices—or the fact is that when the offices were determined upon for the bank we generally had facili ties, there, either a room of our own or a desk, and so forth, for the National City Co. Mr. P ecora . Mr. Baker, have you before you a copy of the annual report of the operations of the National City Co. and its subsidiary corporations for the fiscal year ending December 31, 1927, which was made by Mr. Mitchell as the then president of the company to its board of directors ? Mr. B a k e r . Yes, sir. Mr. P ecora . Turn to the last page of it, please. Mr. B a k e r . The chart page ? Mr. P ecora . N o , just ahead of the charts. Do you follow this statement concluding the textual portion of the report: Sales and service facilities have recently been established at 10 banks, metro politan branches, but as these are not yet ready as additional offices, the year closed with a total of 67 district and representative offices supplemented by 11,100 miles of private wire service. Mr. B a k e r . That is correct. Mr. P ecora . N o w , Mr. Baker, do you know that frequently de positors of a bank seek the advice of officers of their bank with respect to making investments? Mr. B a k e r . Yes, sir. Mr. P ecora . And in order for a bank to give that kind of advice disinterestedly it should not be interested in pushing any particular security, should it? Mr. B a k e r . Well, I think it is distinctly to the advantage of a bank if it has the benefit of the study of securities which our or ganization, we thought, was able to give. Mr. P ecora . Isn’t every well-organized and functioning bank pos sessed of certain facilities for informing its clients of security issues generally; I mean the soundness of security issues generally ? Mr. B a k e r . It is, but of course that is in the matter of degree. There is a tremendous amount of study and research work required in the development of issues of securities and then in following, their progress afterwards. Mr. P ecora . Mr. Baker, you would not hesitate to say, would you, that the advice which a bank gives to a depositor, in response to the depositor’s request for such advice concerning investments, should be wholly unselfish and disinterested on the part of the bank and should be designed to serve the depositor’s interests ? Mr. B a k e r . It should certainly serve the depositor’s interests all the time. Mr. P ecora . And do you think that a bank which has an affilia tion with an investment company, sponsoring its own issues or the STOCK EXCHANGE PRACTICES 1943 issues of others, is in a position to give that kind of unselfish and disinterested advice to a depositor seeking such advice? Mr. B a k e r . I think so. Mr. P ecora . Do you recognize that to such a bank and its officers and employees there is the temptation of favoring the securities in which its affiliate is interested? Mr. B a k e r . That may be true, but the-----Mr. P ecora (interposing). Well, it is true, isn’t it? Mr. B a k e r . But the point is, as I see it, that where the investment house has the facilities to determine the value of securities, that is a distinct advantage to have. Mr. P ecora . But the investment house has not given the same consideration to all securities offered to the public as it has to those in which it is particularly interested, has it ? Mr. B a k e r . That is right. Mr. P ecora . So that a bank with that kind of investment affiliate, functioning even through the bank’s own branches, is in the position of having the affiliate particularly interested in certain issues of which it has made a special study and of having the temptation always present to advise a depositor seeking its advice for investment purposes to invest in the securities which its investment affiliate is sponsoring. Mr. B a k e r . There is no doubt about that, and yet-----Mr. P ecora (interposing). And to that extent isn’t there always lurking the danger that the depositor seeking disinterested advice won’t get it? Mr. B a k e r . That depends upon the ability of the investment banking house in its research work, and in its investment in securi ties it recommends, to try to keep on hand a diversified list that will fit all classes of investors. Mr. P ecora . Mr. Baker, do you still think it is good banking practice for a bank to have itself so interwoven with an investment affiliate, as the National City Bank is with the National City Co.? Mr. B a k e r . Yes, sir. Mr. P ecora . Y ou do? Mr. B a k e r . Yes, sir. Mr. P ecora . D o you think it is good banking practice for a bank to have on its board interlocking directors? Mr. B a k e r . I do not see any objection to that. Mr. P ecora . All right. I simply wanted to get your views about it. Now let me take up-----Senator B r o o k h a r t (interposing). Mr. Baker, have you seen Senator Norris’s spiderweb of Wall Street interlocking directorates down here? Mr. B a k e r . No. Senator B r o o k h a r t . I think you better go down and study that. Mr. B a k e r . All right. Mr. P ecora . I will come back to the National City Bank stock matter later, but I want to take up something else for the moment: Mr. Baker, around the beginning of December, 1931, at which time you were a director of the National City Bank, and also president of the National City Co., did you purchase 1,500 shares of the stock of the bank ? 1944 STOCK EXCHANGE PRACTICES Mr. B a k e r . In 1931? Mr. P ecora . Yes. Mr. B a k e r . Y ou are referring, I assume, there to-----Mr. P ecora (interposing). I am referring to a transaction, or I am asking you about any transaction you might have had, involving the purchase by you of 1,500 shares of National City Bank stock. Mr. B a k e r . Yes. Mr. P ecora . N o w , have you in mind the transaction to which I have directed your attention? Mr. B a k e r . Yes. Mr. P ecora . H o w much did you pay for that stock ? Mr. B a k e r . I paid $50 a share, and-----Mr. P ecora (interposing). That means $75,000 for the 1,500-share block ? Mr. B a k e r . That is right, and-----Mr. P ecora (interposing). In order to enable you to make that purchase did you borrow the total purchase price, $75,000? Mr. B a k e r . Yes, that is correct. Mr. P ecora . From whom? Mr. B a k e r . From the Stock Purchase Corporation of our insti tution. Mr. P ecora . From whom? Mr. B a k e r . From the Stock Purchase Corporation. Mr. P ecora . Well, now, just what is that Stock Purchase Cor poration which you refer to ? Mr. B a k e r . Well, that is a corporation that was discussed here On yesterday, I think. Mr. P ecora . That was the corporation which was set up to enable the officers and employees of the bank and its affiliates-----Mr. B a k e r (interposing). Yes. Mr. P ecora (continuing). To buy the capital shares of the bank on the installment plan? Mr. B a k e r . Yes. Mr. P ecora . At what price was the stock made available to the officers and employees under that plan ? Mr. B a k e r . Well, that was in 1929, when the stock was selling at about $200 a share. And, later on, there were additional offerings I think, in there, at $80 a share. But if you will permit me to tell you what this transaction was that I had ? Mr. P ecora . I am going to permit you to tell us all about it. I will ask you a number of questions, and I want to bring out all the facts connected with it. Mr. B a k e r . All right. Mr. P ecora . N o w , when this stock plan was set up, to enable the officers and employees of the bank and its affiliates to purchase shares of the bank on the installment plan, those shares were to be purchased generally at the market, weren’t they ? Mr. B a k e r . Yes; about the market or a little below the market. Mr. P ecor a . That plan was set up originally some time in 1927, wasn’t it? Mr. B a k e r . Well, there was a plan in 1927. I am not particularly familiar with that. The first time that I knew about it, particularly, was the 1929 plan. STOCK EXCHANGE PRACTICES 1945 Mr. P ecora . The plan as originally set up in 1927 was not designed to include in its participation the lower-grade employees of the bank and its affiliates, was it ? Mr. B a k e r . I am not sure about that. Mr. P ecora . Well, the modification made in 1929 was intended to bring in the lower-grade employees, wasn’t it? Mr. B a k e r . Yes; anybody in the organization. Mr. P ecora . Then the inference is that prior to that time it was not possible, under this stock purchase plan, to admit to its benefits and participation the lower-grade employees. Mr. B a k e r . Well, that may be perfectly correct. Mr. P ecora . N o w , when it was modified in that way in 1929, the purpose was to enable officers and employees in the lower grades, get ting a salary of $ 1 ,6 0 0 a year or more, to participate in this plan and to purchase shares of the National City Bank stock on the in stallment plan over a period of four years; is that right ? Mr. B a k e r . That is right. Mr. P ecora . And it was also intended under that modification to enable them to get that stock at about the general market price, which in December of 1929 was around $200 to $220 a share ? Mr. B a k e r . That is right. Mr. P ecora . And all employees who subscribed to the purchase of stock under that modified plan had the stock allocated to them at prices of $200 to $220 a share; is that correct ? Mr. B a k e r . Yes. Mr. P ecora . N o w , in December of 1931 did something happen which enabled you to acquire 1,500 shares under this plan at $50 a share ? Mr. B a k e r . Well, now, that is what I want to answer. Mr. P ecora . First answer the question yes or no. Did something happen which had that effect? Mr. B a k e r . It had that effect. Mr. P ecora . Well, now, what happened? M r . B a k e r . W h a t h a p p e n e d w a s t h i s : I h a d lo a n e d 1,500 sh a r e s o f m y s t o c k -------Mr. P ecora (interposing). To w h o m ? Mr. B a k e r . T o my brother, and he used it to support a position as a partner in a stock exchange house. In the crash of 1929 he suffered serious losses, and this stock of mine of course was there supporting his-----Mr. P ecora (interposing). Supporting his margin account. Mr. B a k e r . Supporting his position as a partner in this firm. And I did not want to lose that stock. So that in reality I bought my own stock back again. And I could take my stock out only by putting in the amount of cash represented by the market value of the stock as of that day. Mr. P ecora . Was that the complete explanation of it? Mr. B a k e r . Yes, sir. Mr. P ecora . N o w , let us make sure that we understand you. At the time of the market crash in October, 1929, a brother of yours had a partnership interest in a stock brokerage house ? Mr. B a k e r . That is right. 1946 STOCK EXCHANGE PRACTICES Mr. P ecora . And in order to enable him to come through the emergency of that crash you loaned him 1,500 shares of capital stock in the National City Bank which you then had? Mr. B a k e r . No. I had loaned him 1,500 shares which represented his capital in that firm. Mr. P ecora . Did you have any beneficial interest in your brother’s interest in that firm ? Mr. B a k e r . Not at that time. Mr. P ecora . So you did that simply as an accommodation for your brother? Mr. B a k e r . That is right. Mr. P ecora . After the stock-market crash did you lose your 1,500 shares which you had loaned to your brother to support his position in his firm? Mr. B a k e r . No; but I would have lost it except that I took it up, as I said. Mr. P ecora . Y ou too k it u p ? Mr. B a k e r . I let the stock stay there, of course. Mr. P ecora . Yes? Mr. B a k e r . And as his own personal affairs were in the red, were at a loss, with losses on account of the capital account, my stock therefore was tied up in this situation, and I wanted to get the stock out, and the only way I could get it out was to put cash in in its place. Mr. P ecora . When did you get those 1,500 shares out of your brother’s firm? Mr. B a k e r . That was some time in 1931. I don’t remember the exact month. Mr. P ecora . And how did you get them out ? Mr. B a k e r . I arranged with the stock-purchase plan of our organ ization to take the stock up for me. Mr. P ecora . At $50 a share? Mr. B a k e r . That was the market at that time. Mr. P ecora . That was the market at that time? Mr. B a k e r . That is right. Mr. P ecora . None of the other officers or employees who had sub scribed for stock at $200 or $220 a share were ever permitted to replace that stock by stock which they could buy at $50 a share, were they ? Mr. B a k e r . No; but neither was I replacing the stock. I had paid for this stock once, you see. It was my own stock, which I had loaned. Mr. P ecora . But you had loaned it to your brother to support his position in his brokerage firm ? Mr. B a k e r . Yes; that is right. Mr. P ecora . And it was in danger there, wasn’t it? Mr. B a k e r . Well, I don’t know exactly that it was in danger, but I wanted to get the stock back, and the market price at that time was $50 a share, and I could get it back by putting up that additional amount. So, in effect, the $50 a share which I paid to get it back was $50 in addition to what I had originally paid for the stock years ago. Mr. P ecora . I still don’t understand it, Mr. Baker, and I do want to. STOCK EXCHANGE PRACTICES 1947 Mr. B a k e r . I am sorry. I did not make that very clear. Mr. P e c o r a . Let me see. Mr. B a k e r . I owned the stock, to begin with. I bought it some years ago. I loaned the stock to my brother. Mr. P e c o r a . Prior to the crash in 1929 ? Mr. B a k e r . Oh, yes. And when the crash came along and he ran into serious losses his account was in the red, in the vernacular, and there was no way, of course, that he could release my stock back to me. So that the holders of the stock at that time were willing to take the market value of the stock in cash instead of holding the stock, and I wanted the stock back in my possession, and therefore I wanted to take the stock up, which I did. Mr. P e c o r a . So you borrowed $75,000 from this stock-purchase plan in order to enable you to do that, didn’t you? Mr. B a k e r . That is right. Mr. P e c o r a . So it was not a purchase of stock under the install ment plan, as that plan was originally proposed and conducted? Mr. B a k e r . No. That is right. Mr. P e c o r a . Has that loan been repaid ? Mr. B a k e r . It is being paid monthly. Mr. P e c o r a . Is it secured, or otherwise ? Mr. B a k e r . Just with the stock itself. Mr. P e c o r a . It is not secured with stock that is now worth less than $50 a share, is it ? Mr. B a k e r . Of course, there have been payments every month since it was put in there, which have reduced the amount of it sub stantially. Senator B r o o k h a r t . You mean the bank accepts its own stock as security ? Mr. B a k e r . No. This is a separate corporation, Senator. Senator B r o o k h a r t . The stock is the bank stock, isn’t it ? Mr. B a k e r . Yes; that is right. Senator B r o o k h a r t . Is that what you put up for the security for this loan ? Mr. B a k e r . Yes; but the loan-----Senator B r o o k h a r t (interposing). To the corporation? Mr. B a k e r . To the corporation. Senator B r o o k h a r t . And not to the bank? Mr. B a k e r . That is right. Senator B r o o k h a r t . Of course, the bank furnished the money to the corporation? Mr. B a k e r . N o . That loan supplying that money is made outside; the stock purchase corporation. Senator B r o o k h a r t . I thought the bank set that corporation up. Mr. B a k e r . No. The City Co. advanced a certain amount of money, but the principal part of that loan is outside. Mr. P e c o r a . Mr. Baker, this merger of the bank with the Farmers Loan & Trust Co. that we discussed earlier this afternoon was pro posed in the spring of 1929 and became effective on June 2 8 , 1929, didn’t it ; that is, on that date it was ratified by the stockholders of both banks? Mr. B a k e r . Yes; that is right, June 28. 119852— 33— pt 6-------13 1948 STOCK EXCHANGE PEACTICES Mr. P ecora . And from the commencement of the negotiation you felt sure that that merger would receive the approval of the stock holders ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Later that year were similar negotiations undertaken by the bank with the officers and directors of another bank in New York for a merger? Mr. B a k e r . That is right. Mr. P e c o r a . That was with the Corn Exchange Bank, wasn’t it? Mr. B a k e r . That is right; yes, sir. Mr. P e c o r a . And when was that first proposed ? Mr. B a k e r . I do not know just when the discussion first began on that, but it must have been some time in the early part or tjhe middle of 1929. Mr. P eco r a . And were you just as sure at the outset of those nego tiations that that merger would be ratified ? Mr. B a k e r . Felt reasonably certain it would. Mr. P e c o r a . Yes; just as reasonably certain as you felt that the earlier one with the Farmers Loan & Trust Co. would be ratified; is that right? Mr. B a k e r . Yes. Mr. P e c o r a . A s a matter of fact-----(Mr. Law handed Mr. Baker a document.) Mr. P e c o r a . Did you ask Mr. Law while I was asking you a question to hand you any papers? Mr. B a k e r . Just n o w ? Mr. P e c o r a . Yes. Mr. B a k e r . N o , sir. Mr. P e c o r a . He did, didn’t he? Mr. B a k e r . Yes, sir. He handed me this paper. It is the history of the Com Exchange deal. Mr. P e c o r a . Was that proposed merger with the Corn Exchange Bank ratified by the stockholders of any other bank? Mr. B a k e r . N o; it was not. Mr. P e c o r a . So that in that instance your moral certainty was proved utterly unfounded by the action ox the stockholders ? Mr. B a k e r . That is right. Mr. P e c o r a . And you had no more reason to believe that that proposal to merge those two banks would be disapproved by the stockholders than you had to believe that the earlier proposal to merge with the Farmers Loan & Trust Co. would not be ratified, had you? Mr. B a k e r . Not at that time; no, sir. Mr. P e c o r a . Mr. Baker, did the National City Co. ever grant any one any option on a large block of National City Bank stock? Mr. B a k e r . Yes, sir. Mr. P e c o r a . On how many occasions did it do that? Mr. B a k e r . Well, once that I recall definitely. I don’t think of any other. Mr. P e c o r a . And to whom did it grant the option on the one occasion that you recall definitely? Mr. B a k e r . Dominick & Dominick. STOCK EXCHANGE PRACTICES 1949 Mr. P e c o r a . What is the business of Dominick & Dominick? Mr. B a k e r . They are members of the stock exchange and invest ment bankers. Mr. P e c o r a . Was a Mr. Dominick who is a member of that firm also a director of the bank or of the National City Co.? Mr. B a k e r . He is now a director of the bank. He was not at that time. Mr. P e c o r a . Was he a director of the company? Mr. B a k e r . No, sir. Mr. P e c o r a . At a n y time? Mr. B a k e r . Not at any time, nor is h e now. Mr. P e c o r a . When did he become a director of the bank? Mr. B a k e r . Some time in 1932. Mr. P e c o r a . When did you grant his firm the option? Mr. B a k e r . Well, let’s see what that date was. (Mr. Law handed document to Mr. Baker.) January 27,1930. Mr. P e c o r a . Have you the record, or rather the original cor respondence between your company and Dominick & Dominick? Mr. B a k e r . Yes, sir. Mr. P e c o r a . With respect to that option ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Will you produce it, please ? (Mr. Baker handed document to Mr. Pecora.) Mr. P e c o r a . N o w , the option which your company granted to Dominick & Dominick on January 27, 1930, extended to 30,000 shares of the stock of the bank, didn t it? Mr. B a k e r . That is right. Mr. P e c o r a . At prices which changed with each—well, I will say at the following prices: 5,000 shares at $212% a share; 5,000 shares at $215 a share; 5,000 shares at $217% per share; 5,000 shares at $220 per share; 3,000 shares at $225 a share; 3,000 shares at $230 a share; 3,000 at $235 a share; and 3,000 at $240 a share. This option has no time limit? Mr. B a k e r . Not at all; subject to cancellation. Mr. P e c o r a . Except that your company reserves the right to cancel on five days’ notice at any time? Mr. B a k e r . At once, I think it is. Mr. P e c o r a . No. Mr. B a k e r . Isn’t it ? Mr. P e c o r a . Upon five days’ written notice, isn’t it? Mr. B a k e r . Oh, yes. I am sorry. Senator B r o o k h a r t . What is the date of that? Mr. P e c o r a . January 27, 1930. Mr. B a k e r . Yes; that is right. Mr. P e c o r a . D o you know what the market value of the stock was on J anuary 27,1930 ? Mr. B a k e r . It was about $212 a share, I think, or $210. Mr. P e c o r a . Wasn’t it from 223% to 225% on that date? Mr. B a k e r . N o , not at the time that—no, I am quite sure not. Mr. P e c o r a . Have you the quotations for January 27,1930, b e f o r e you? Mr. B a k e r . No ; I have not. 1950 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Will you please get them and then see if my figures are correct? Mr. B a k e r . I don’t know that I have them exact. Their idea of this placement, you see-----Mr. P e c o r a (interposing). First I want to settle this one item and then we will get the idea. Mr. B a k e r . All right. The date of that is the 27th. Mr. P e c o r a . January 27,1930. Mr. B a k e r . I have got on the 24th-----Mr. P e c o r a (interposing). No, the 27th. Mr. B a k e r . Yes; but I haven’t quite got that. Mr. P e c o r a . What is the date that you have nearest to the 27th? Mr. B a k e r . The 24th. Mr. P e c o r a . And what were the quotations on that day? Mr. B a k e r . 213. Mr. P e c o r a . And what is the next date of which you have the quotations ? Mr. B a k e r . January 31, and i t is 223. Mr. P e c o r a . I see. Now, you would not be surprised to know that the actual quotation on January 27, the day this option was granted, was 223^ bid, 225^ asked, would you ? Mr. B a k e r . Well, I would be a little; but it might readily be. Mr. P e c o r a . It was 223 on the 30th? Mr. B a k e r . Yes; that might very readily be. Mr. P e c o r a . N o w , you started to tell us something about k n idea What was it? Mr. B a k e r . The idea only connected with that was that they re garded the stock at that time—there was a group of houses connected with that, I think five. Dominick was acting for 3 or 4 or 5 houses. Mr. P e c o r a . Y ou mean stock brokerage houses? Mr. B a k e r . Y es; investment houses. Mr. P e c o r a . Yes. Mr. B a k e r . And they wanted to offer the stock to their own cus tomers, and they had no stock, and they made this arrangement with me. Senator B r o o k h a r t . They never exercised that option ? Mr. B a k e r . Yes. Mr. P e c o r a . Yes, they did. Senator B r o o k h a r t . All of it? Mr. B a k e r . Yes; they exercised the full option. Mr. P e c o r a . N o w , do you know when Dominick & Dominick first drew upon the City Co. for stock under this option ? Mr. B a k e r . January 29; we delivered 15,100 shares to them. Mr. P e c o r a . 15,100 shares ? Mr. B a k e r . That is right. Mr. P e c o r a . At what prices ? Mr. B a k e r . I would have to refer to that. I haven’t fig u r e s to show that. Mr. P e c o r a . Wasn’t it 5,000 shares at 212*4, 5,000 shares at 215, 5,000 at 2171/2, and 100 at 220? Mr. B a k e r . Yes. That is in the confirmation. That is right. Mr. P e c o r a . And do you know what the market value of those shares was on January 29, 1930? STOCK EXCHANGE PRACTICES 1951 Mr. B a k e r . Well, let’s see if I have that. (After referring to paper.) January, 1930—January 31 shows, as I said a while ago, 223 on----Mr. P e c o r a (interposing). 223; is that the bid or the asked price? Mr. B a k e r . Yes, that was the bid, 223. Mr. P e c o r a . What is the asked price? The asked price is usually higher than the bid ? Mr. B a k e r . Yes. Mr. P e c o r a . Give us the range bid and asked and not just the lowest. Mr. B a k e r . 223 bid, 227 asked. Mr. P e c o r a . And that was January----Mr. B aker. That is for that week. Mr. P e c o r a . For t h a t w e e k ? Mr. B a k e r . Yes. Mr. P e c o r a . And it was when the range o f prices in the market for the stock was 223 bid and 227 asked that under this option 5,000 shares were delivered at 212%, 5,000 shares at 215, 5,000 shares at 217%, and 100 shares at 220? Mr. B a k e r . That is right. Mr. P e c o r a . The company was giving Dominick & Dominick quite a bargain then, wasn’t it? Mr. B aker . Yes, it was a bargain, of course, and a deal that I made, and I went through with it. The market moved up. Mr. P e c o r a . The market was considerably up beyond these prices of 212y 2 and 215 when you made the deal, wasn’t it? Mr. B aker. Just slightly above. M r. P e c o r a . D o you call a 10-point spread an insignificant spread? Mr. B a k e r . No. I haven’t that. My figure does not show that was a 10-point spread. Mr. P e c o r a . My figures show that the bid was 223% and the asked price 225,% on January 27, 1930. You would not dispute those figures would you? M r. B aker . N o. N o, I don’t care to dispute those figures. (Mr. Baker conferred with Mr. Law.) Mr. P e c o r a . Does Mr. Law know more about this transaction than you do, Mr. Baker? M r. B a k e r . N o. Mr. P e c o r a . Have you asked him to give you any assistance to answer this question? Mr. B aker. No; but I would like to have him where I could get these papers from time to time, if you don’t object. Mr. P ecora. I have no objection. Will the papers that he turned over to you help some? Mr. B a k e r . Not in this market price, because I haven’t that. Mr. P e c o r a . How much was lost to the National City Co. by giv ing this option at these prices to Dominick & Dominick, as com pared with the market prices ? Mr. B a k e r . I could not answer that, except as I had the exact price or figures each day and compared with the deliveries to them. Mr. P e c o r a . The amount was rather considerable, wasn’t it? Mr. B a k e r . I don’t think so, but I can not answer that. Mr. P e c o r a . Perhaps your idea of a considerable amount and mine would differ. 1952 Mr. Mr. Mr. Mr. STOCK EXCHANGE PRACTICES B a k e r . I don’t know. P e c o r a . What do you think was the loss ? I just don’t know. P e c o r a . Perhaps Mr. Law can help y o u . B aker. Mr. B a k e r . N o ; he does not know. Mr. P e c o r a . He does not know either? Mr. B a k e r . No. Mr. P e c o r a . Did you know when you gave this option that you were doing it upon terms that would represent a loss to the National City Co. as compared with the market prices? Mr. B a k e r . I thought the prices—of course, I am drawing on my memory again—I thought the prices were approximately the market prices. Mr. P e c o r a . Well, now, when you agreed on January 2 7 ,1 9 8 0 -------Mr. B a k e r . Yes. Mr. P e c o r a . To give Dominick & Dominick an option on 5,0 00 shares, the first 5,0 0 0 shares-----Mr. B a k e r . Yes. Mr. P e c o r a . At 212^ you could have found out the market price within 10 minutes, couldn’t you? Mr. B a k e r . Yes. I knew it then, of course. Mr. P e c o r a . What was it then? Mr. B a k e r . I say I knew it then. I don’t remember what it was on that day. Mr. P e c o r a . D o you now recall that 2 1 2 ^ was around 10 points below the market on that day? Mr. B a k e r . I don’t know that. Mr. P e c o r a . Did you ascertain what the market price was at the tii 1' ' " ° Mr. P e c o r a . S o that if the market was 10 points or more above this price in the option, you gave the option knowing that fact, did you? Mr. B a k e r . I f it were; yes. Mr. P e c o r a . Was it your purpose to give them an option at that much below the market? Did you do that advisedly, intentionally? Mr. B a k e r . I don’t recall, as I say, that there was that difference between the market and the option. Mr. P e c o r a . Well, assuming that there was that difference, you gave the option with knowledge of the difference, didn’t you? Mr. B a k e r . With a knowledge of the difference, certainly. Mr. P e c o r a . Did you know Christmas time had passed by a month when this option was given. Mr. B a k e r . Yes. Mr. P e c o r a . Did you intend to favor Dominick & Dominick to that extent? Mr. B a k e r . Why, no; of course not. They were interested in of fering this stock to their customers. Mr. P e c o r a . Y ou know that Dominick & Dominick-----Mr. B a k e r (interposing). I was delighted for them to do it. They were good customers. Mr. P e c o r a . Good customers to whom, to Dominick & Dominick or the National City Co.? Mr. B a k e r . Dominick & Dominick and Brown Bros. & Co. STOCK EXCHANGE PEACTICES 1953 Mr. P e c o r a . Was the National City Co. looking out for the cus tomers of another investment dealer? Mr. B a k e r . No; but they would become stockholders of the Na tional City Bank. Mr. P e c o r a . I f they did not become stockholders some one else would, wouldn’t they? Mr. B a k e r . Probably. Mr. P e c o r a . Did you know who the customers of Dominick & Dominick were? Mr. B a k e r . No. Mr. P e c o r a . Why did you think they would be good customers for your company? Mr. B a k e r . Because they are good houses. Mr. P e c o r a . Are you sure you did not know who were going to participate in the account which was maintained by Dominick & Dominick under this option? Mr. B a k e r . Y ou mean their customers? Mr. P e c o r a . Yes. Mr. B a k e r . Absolutely positive. Mr. P e c o r a . Y ou notice that in Dominick & Dominick’s letters to you with regard to this account, this option rather, they write as follows: We have formed an account, of which we are the managers, with full discretionary powers as such, including the right to terminate the account at any time, and in which account we will participate for the purpose of dealing in the capital stock of the National City Bank of New York. You noticed that language in their letter at the time, didn’t you? Mr. B a k e r . Yes, certainly. Mr. P e c o r a . Didn’t that language strike you as being a reference to a trading account and not an investment account? Mr. B a k e r . Not at all. Because we discussed that very point, Mr. Pecora, in this thing. Mr. P e c o r a . Who discussed it? Mr. B a k e r . I discussed it with some of the partners of Dominick. Mr. P e c o r a . After you received this letter? Mr. B a k e r . N o , n o , n o , n o , n o . Mr. P e c o r a . Before? Mr. B a k e r . Prior to that. Mr. P e c o r a . And in that discussion did you learn that these shares upon which you were giving an option to Dominick & Dominick at prices below the market were not going to be used in a trading account ? Mr. B a k e r . That is right. Mr. P e c o r a . When you got the letter did not the letter contain sufficient information to indicate to you that they were to be used in a trading account and not in an investment account ? Mr. B a k e r . No; because-----Mr. P e c o r a (interposing). Now look at the caption of the letter itself and read what it says. Mr. B a k e r . That is what the caption is, but I discussed-----Mr. P e c o r a . Read it. What is it? Mr. B a k e r . I had discussed this-----Mr. P e c o r a (interposing). Read the caption out loud so the record will show it. 1954 STOCK EXCHANGE PEACTICES Mr. B a k e r . “ National City Bank of New York Capital Stock Trading Account.” [Laughter.] Mr. P e c o r a . All right. Mr. B a k e r . That is because they have an investment department that is distributing securities, not through the stock exchange, but as permanent investors. Mr. P e c o r a . N o w they say: “ We are the managers of the account.” Mr. B a k e r . That is right. Mr. P e c o r a . They are not managing an investment account, are they? Mr. B a k e r . They have a group in this account of five houses, all with investment-distributing departments. Mr. P e c o r a . Despite the fact that their letter to you with respect to this option and confirming the option is headed “ National City Bank Trading Account ”-----Mr. B a k e r . Yes. Mr. P e c o r a . Y ou still say that when you received that letter you believed that these shares upon which you gave them an option were intended for investment purpose distribution? Mr. B a k e r . Yes, because I had that positive verbal understanding with Mr. Bellamy. Mr. P e c o r a . Well, that verbal understanding was shattered by that letter, wasn’t it? Mr. B a k e r . Not when their word is perfectly good. Mr. P e c o r a . The letter to the company conforms with the word, doesn’t it? Mr. B a k e r . That is the title that they put on there, but that did not mean more than that-----Mr. P e c o r a (interposing). They were not putting that title on there to deceive you, were they ? Mr. B a k e r . N o ; I don’t think so. Mr. P e c o r a . They put that title on there in order to tell you in so many words that they were operating a trading account in this stock, didn’t they ? Mr. B a k e r . I don’t think so. Mr. P e c o r a . That was what they said in the letter, didn’t they, in substance ? Mr. B a k e r . That is the heading they put on it ? Mr. P e c o r a . Yes. Now, about Dominick & Dominick drawing down stock from your company on this option; didn’t they always draw the stock down at the prices fixed by the option quotations, but on days when the market for the shares was way above the option prices? Mr. B a k e r . I don’t know that. Mr. P e c o r a . It would not surprise you to know that that was the fact, would it? Mr. B a k e r . No. Mr. P e c o r a . May I have the letter ? (Mr. Baker handed a document to Mr. Pecora.) Mr. P e c o r a . When was the last stock delivered to Dominick & Dominick under this option agreement? Mr. B a k e r . The actual delivery seems t o be March 2 4 , where the stock was actually delivered. STOCK EXCHANGE PRACTICES 1955 Mr. P e c o r a . Yes; and how many shares were delivered then? Mr. B a k e r . Seven thousand shares. Mr. P e c o r a . What was the market for the shares on March 24, 1930? Mr. B a k e r . March 21 1 have; 236 was bid and the high asked that day was 252. Mr. P e c o r a . 236 bid; 252 asked? Mr. B a k e r . That is right. Mr. P e c o r a . And on that day-----Mr. B a k e r . That is for the week. Mr. P e c o r a . That is for the week? Mr. B a k e r . Yes. Mr. P e c o r a . That is of March 21 ? Mr. B a k e r . Yes; March 21. Mr. P e c o r a . And you know that the prices rose from day to day thereafter for a period of at least several days ? Mr. B a k e r . Well, the following week the market was 240, with a high of 248, 247, 245, and 242. Now the market was dropping there a little. The market declined there the few weeks following. Mr. P e c o r a . Don’t you know that on March 24, 1930, the closing bid and asked prices for City Bank stock were 246 and 248, respec tively ? Mr. B a k e r . I do not, but that is probably correct. Mr. P e c o r a . And that was the day on which you delivered under this option 1,335 shares at 230, 5,000 shares at 235, and 500 shares at 240; is that right? Mr. B a k e r . That is probably right. I haven’t the exact figures here. I have the deliveries, but I haven’t the prices. You have them there. Mr. P e c o r a . Yes. Was anything paid by Dominick & Dominick to the City Co. for this option? Mr. B a k e r . N o; I think not. Mr. P e c o r a . D o you know what profit Dominick & Dominick made as managers of this trading account ? Mr. B a k e r . No. Mr. P e c o r a . Under this option? Mr. B a k e r . N o; I do not know. Mr. P e c o r a . Would it surprise you to know that it was $354,088.10? Mr. B a k e r . No; but I haven’t any idea. I didn’t know a thing about that. Mr. P e c o r a . And you do not know the participants in that trading account, do you? Mr. B a k e r . I know two of them, and I am not sure about the other two, but I am quite sure that one was Brown Bros., and another was Cassatt & Co., but I don’t know—recall who the others were. Mr. P e c o r a . Do you know of any other option that your company ever gave to anyone else under generally similar circumstances? Mr. B a k e r . No ; I do not. Mr. P e c o r a . I want to ask that the correspondence relating to this option between the National City Co. and Dominick & Dominick be spread on the record, sir. I have photostatic copies so that we will not have to have your------ 1956 STOCK EXCHANGE PEACTICES Mr. B a k e r (interposing). That is m y original. I f you do not need that I would like to have it. Mr. P ecora . Certainly. The C h a i r m a n . Without objection, it is so ordered. (The correspondence is as follows:) D o m in i c k & D o m i n i c k , New York, January 27,1980. T h e N a t io n a l C i t y B a n k op N e w Y o b k , C a p it a l S tock TKADING ACCOUNT T h e N a t io n a l C i t y C o., New York City. (Attention of H. B. Baker, Esq.) D ea b S i r s : We have formed an account of which we are the managers with full discretionary powers as such, including the right to terminate the account at any time, and in, which account we shall participate, for the pur pose of dealing in the capital stock of the National City Bank of New York. We beg to confirm that you have extended to us, for and on behalf of the account, the right to purchase from you, in whole or in part, capital stock of the National City Bank of New York as follows: Per sliare 5.000 shares at_____________________________________ ______________$212. 50 5.000 shares at----------------------- ------------------------------------------------------ 215.00 5.000 shares at___________________________________________________ 217.50 5.000 shares at___________________________________________________ 220.00 3.000 shares at------------------------------------------------------------------------------ 225.00 3.000 shares at___________________________________________________ 230.00 3.000 shares at___________________________________________________ 235.00 3.000 shares at___________________________________________________ 240.00 said options to be exercisable by us at any time and from time to time and to continue in full force and effect for the life of the account, subject, however, to the right on your part to cancel these options in whole or in part upon five days’ written notice to us. Please confirm that the above is in accordance with your understanding and is the agreement between us by signing and returning to us the inclosed duplicate of this letter. Very truly yours, Confirmed and agreed t o : T h e N a t i o n a l C i t y Co., H . B . B a k e r , President. J a n u a b y 28, 1930. t h e n a t io n a l c it y b a n k of n e w y o b k , c a p it a l sto ck T h e N a t io n a l C i t y Co., New York City. (Attention of Mr. H. B. Baker.) Sms: Confirming our telephone conversation of today, we have called from you, for delivery tomorrow, January 29, the following: D ea b Per share 5.000 shares at------------------------------------------------------------------------------ $212.50 5.000 shares at___________________________________________________ 215.00 5.000 shares at------------------------------------------------------------------------------- 217.50 100 shares at____________________________________________________ 220.00 representing a portion of the above stock which we have under option from you, as outlined in the agreement between us dated January 27, 1930. After exercising the above options there still remain under option to us a balance of 16,900 shares, at the following prices: 1957 STOCK EXCHANGE PRACTICES Per share 4,900 sliares at------------------------------------------------------------------------------$220.00 3.000 shares at___________________________________________________ 225.00 3.000 shares at------------------------------------------------------------------------------ 230.00 3.000 shares at____________________________________________________ 235. 00 3.000 shares at------------------------------------------------------------------------------ 240.00 as specified in the above-mentioned agreement. Very truly yours, F eb b u a b y The N a t io n a l C i t y Co., 10, 1930. New York City. (Attention of H. B. Baker, Esq., President.) Dbab Snss: Referring to the agreement dated January 27, 1930, between usr under the terms of which you ceded us as managers of an account, option to purchase from you all or any part of 32,000 shares of capital stock of the National City Bank of New York, at prices ranging from $212.50 to $240 a share, we now confirm the understanding between us, that our option to purchase 3,000 shares at $240 a share has been reduced to 500 shares at that price and the difference canceled. In all other respects the terms of the above contained agreemeut of January 27 continues in full force and effect Very truly yours, T h e N a t io n a l C it y B a n k , New York, February 11, 1980. D o m in ic k & D o m in i c k , New York, N. Y. (Attention of Mr. Beach.) G e n t l e m e n : Agreeable to your request over the telephone today relative to our delivery of 2,000 shares of National City bank stock, I wish to state that this stock was delivered at the following prices: Per share 200 shares at______________________________________________________ $251% 100 shares at______________________________________________________ 252*4 50 shares at---------------------------------------------------------------------------------- 252% 100 shares at---------------------------------------------------------------------------------- 252% 500 shares at______________________________________________________ 252% 200 shares at______________________________________________________ 252% 400 shares at______________________________________________ ________ 253% 25 shares at______________________________________________________ 253% 400 shares at---------------------------------------------------------------------------------- 253% 25 shares at---------------------------------------------------------------------------------- 253% In connection with this delivery, we have charged you transfer tax of $25.64. Very truly yours, R. O. B a l d w in , Treasurer. F eb b ua b y 11, 1930. T h e N a t io n a l C i t y B a n k of N e w Y o b k , C a p it a l S tock ac c o u n t T h e N a t io n a l C i t y Co., New York City. (Attention of Mr. Meyer.) D e a b S ir s : The participants in the above account, including ourselves, have to-day taken down a total of 7,565 shares of the above stock at $249 a share, for regular delivery. We have received your letter of this date confirming that you sold in the market yesterday, 2,000 additional shares at prices ranging from $251.75 to 1958 STOCK EXCHANGE PRACTICES $258.75 a share. As you have informed, us that you were unable to cover any of this stock to-day at or below the mutually agreed upon price of $250 a share, we will therefore call 2,000 shares under our options in addition to the 7,565 shares above mentioned, as follows: Per share 4,900 shares at_______________________________________________________ $220 5.000 shares at________________ _______________________________________ 225 1,665 shares at_______________________________________________________ 230 If agreeable to you, we will accept delivery of 7,565 shares on Thursday against payment of the amount due and will exchange checks with respect to the 2,000 shares. Very truly yours, ------------------- , Managers. The National City Co., March 21, 1930. New York City. Dear Sirs : Referring to the agreement of January 27, 1930, between us, we confirm having called from you all of the unexercised options to purchase capital stock of the National City Bank of New York, as follows: Pershare 1,335 shares at____________________________________________________ ___$230 3.000 shares at________________________________________________________ 235 500 shares at________________________________________________________ 240 for delivery to us on Monday, March 24, against payment of the amount due. We also confirm the understanding between Mr. H. B. Baker and Mr. Bellamy o f our firm, that you1have sold us for delivery on the same date, 2,165 shares of capital stock of the National City Bank of New York at $249 a share, in order to complete delivery of stock against withdrawals of participants in the account. Very truly yours, Mr. P eoora. And I also want to include in that request, Mr. Chairman, the copy of the statement of the account of Dominick & Dominick with respect to its trades under this option. Senator T ownsend . Does that give the participants in the pool? Mr. P ecora. Yes, sir. Senator B rookhart . Who are the participants? Mr. P ecora. The participants according to their statement of the account are Homblower & Weeks, Abbott, Hoppin & Co., Dominick & Dominick, C. D. Barney & Co., Cassatt & Co., Brown Bros. & Co. Senator B rookhart . Is that all? Mr. P ecora. Yes, sir. That is in the major trading account. The C h a ir m a n . Without objection, it is so ordered. (The accounts are as follows:) National City Bank trade account Date 1930 Jan. 29 29 29 29 30 31 Shares 5.000 5.000 5.000 100 100 Less tax A ccount option exercised, National City Co. ____do. ____do. ____d o ... ____d o ... Balance. A m ount $212.50 $1,062,500.00 215.00 1,075,000.00 217.50 1,087,500.00 22,000.00 220.00 22, 200. 00 222.00 59, 706. 64 D ate 1930 Jan. 29 29 29 29 29 29 29 29 29 29 29 29 29 29 29 29 29 30 Less tax Shares 500 2,000 500 2,000 1,000 2,000 2,000 500 500 1,000 100 500 500 500 500 500 500 100 D . D . Post________ ____d o_____________ Brown Bros. & C o. .do. Hornblower & W eeks, Cassatt & C o------------C. D. Barney & C o ... Cassatt & C o _________ Hornblower & W eeks. ____ do________________ D. D. Post___________ C. D. Barney <fe C o . . . Hornblower & W eeks. Cassatt & C o _________ Brown Bros. & C o ___ D. D. Post __________ C. D. Barney & C o . . . D. D. Post __________ $222.30 222. 30 222.30 222.30 222. 30 222.30 222. 30 222.30 222.30 222. 30 222.30 222.30 222.30 222.30 222.30 222.30 222.30 222. 30 3,328,906.64 Feb. 13 13 13 4,900 National C ity Co., account option exercised. 3,000 — d o......... .................................... ................... 1,665 ----- d o........ - .........- .............. - ............................ B a la n c e ..................... - .................................... 1,078,000. 675,000. 382,950. 289,312. 2,425,262.30 Am ount $109,493.64 437.974. 56 109.493. 64 437.974. 56 218.987. 28 437,974.56 437.974. 56 109.493.64 109.493.64 218.987. 28 21,898.72 109.493.64 109.493. 64 109.493. 64 109.493.64 109, 493. 64 109.493. 64 22,198. 72 3, 328, 906. 64 31 Feb. 13 13 13 13 13 13 13 13 13 13 13 200 100 850 825 25 1.500 1.500 1,515 1.500 60 1.500 Balance____ _______________________ As of Feb. 10, National C ity B ank. ____d o_____________________________ ------ d o_____________________________ ____d o_____________________________ ------ d o____ _________________________ C. D. Barney_____________________ D. D ____________________ _____ - Hornblower & W eeks_____________ Cassatt & C o ______________________ A bbott H oppin & C o______________ Brown Bros. & C o________________ 251. 75 252.25 252.75 253. 75 253. 75 249.30 249.30 249.30 249. 30 249.30 249.30 59, 706.64 50, 247.44 25,173.72 214,401. 66 208,508.23 6, 330.89 368.980.92 368.980.92 372, 670.68 368.980.92 12,299.36 368, 980.92 cc H O a H tel O H > tzS O tel hj w > G H M G tel m 2,425,262.30 CD Cn CD 1960 National City Bank trade account— Continued Date 1030 Shares 1,336 National C ity C o. 3,000 ........ d o..................... . 600 ____ d o ........... ......... 2,165 National C ity C o....................................... . State and Federal taxes on 7,000 shares. Balance_______________________________ Am ount Date $230.00 235.00 240.00 $307,050.00 705.000.00 1930 F eb. 28 M ar. 24 24 249.00 639,085.00 89.04 354,088.10 24 24 24 24 120.000.00 Shares 1.400 1.400 1.400 1.400 1.400 Less tax Balance...... .................... H ornblower & W eeks. Cassatt & C o _________ C. D . Barney & C o ......................................... D . D . P o s t ...____ _______________________ B rown Bros................................. ..................... D eposit National C ity Co. State and Fed eral taxes on 7,000 shares............................. 2,026,312.14 21 21 21 251. 251. 261. 347.182.16 347.182.16 347.182.16 89.04 Balance. 354,088.10 63.098.60 3,186.79 36,408.81 63.098.60 63.098.60 63,098.50 63.098.60 364,088.10 354,088.10 PRACTICES 21 $289,312.30 347.182.16 347.182.16 EXCHANGE 21 21 Check. Hornblower & W eeks, profit in participation of 19.8 percent_____________ Check, A bb ott H oppin & Co. profit on participation 1 percent................................. Check, D om inick & D om inick, 10 percent managers’ fee___ _______________________ Check, D om inick & D om inick, profit on participation 19.8 percent............................ Check, C . D . Barney & C o., profit on par ticipation, 19.8 percent................................. Check, Cassatt & C o., profit on participa tion, 19.8 percent...........- ................ .............. Check, Brown Bros. & C o., profit on par ticipation, 19.8 percent—.............................. $251. 251. 2,025,312.14 31 A pr. 21 A m ount STOCK Less tax National City Bank trade account of t>. t>. Past Date 1930 Jan. 29 29 29 29 30 31 Shares 500 2,000 100 500 100 Less tax Traded. ____ do_. -------d o .. ........ d o .. ____ d o .. Interest $222.00 222.00 222.00 222.00 222.00 5.50 Am ount $110,993.64 443,974. 56 22,198.72 110,993. 64 22,198. 72 15.17 Date 1930 Jan. Less tax Shares 100 5 500 4 5 10 10 20 50 100 100 50 5 25 25 125 50 100 100 100 100 500 300 200 100 100 100 100 Irving Slipka— ............................. ........ Frank Jalmel__________ _____________ B. S. P ., Inc., N o. 2............................... John O. Polak.............. ....................... . . R obert Haberman............................. . Paul Gurridge......................................... M a ry M . Sanford..........- ................... Alex Creekmore................. ..................... Auerbach, Pollack & Richardson....... H uicks____________ _________________ M rs. Delia W alker..................... . . ........ M . Lazarus_________________________ Charles Blumenthal________ ________ Andrew B axter. . ........ . . ....................... Andrew Baxter, Jr_______ __________ E dw . M . D ailey..................................... Geo. A . E a s le y -.......... . ......................... Samuel A .M a h lm a n ............................ M rs. Ethel Sugerman_______________ Gilbert W . K a h n ___________________ H . Hoffm an, Special___________ _____ Alfred L ubm an_____________________ Interstate Corporation................... ...... M rs. Delia W alker—.............................. Securities Management Corporation. Elizabeth Glendenning______________ P hilip Lewis_________ ______________ Irving Slifka________________________ Balance...... ......................- ...................... $222.00 222.00 222.30 222.00 222.00 222.00 222.00 222.00 222.00 222.20 222.00 222.00 222.00 222.00 222.00 222.00 222.00 222.00 222.00 222.00 222.00 222.00 222.00 222.00 222.00 222.00 222.00 222.00 28 Balance. 216 1,500 Interest- 49, 665.01 249.00 373,480.92 4.75 24.87 $22,198.72 1,109.88 109,493. 64 887.88 1,109.88 2,219.84 2, 219.84 4,439.72 11,099. 36 21,998. 72 22,198.72 11,099.36 1,109.88 5, 549. 64 5,549. 64 27,748.36 11,099. 36 22,198.72 22,198.72 22,198.72 22,198. 72 110,993.64 66, 596.16 44,397.44 22,198. 72 22,198.72 22,198.72 22,198.72 49,665.01 O O w M X a M > o a s o s o H 00 710,374.45 710, 374.45 31 31 Feb. 13 Am ount Feb. M iddleton R ose................................. B . Patterson, Jr.—................... ........ F . J. R einhart..... .............................. 100 R . C . L i_________________________ 150 Auerbach, Pollack & R ichardson. 125 M rs. Viola V . V . N . W ald ron ....... 100 H enry A . A rthur............................... 100 Interstate Corporation___________ 100 Joseph P rice........................................ 100 B ridgeport C ity C o .......................... 50 John B iro______________________. . . 50 ____d o ........... ........................................ 16 200 25 222.00 222.00 249.00 249.00 249.00 249.00 249.00 249.00 249.00 249.00 249.00 249.00 3,551.72 44,397.44 6,224.64 24,898. 72 37,348.08 31,123.36 24,898.72 24,898.72 24,898.72 24,898.72 12,449.36 12,449.36 CO o Date Shares Less tax Am ount Date Shares 1930 Feb. 28 200 40 Chas. A . Bauer_______________ Chatham Phenix Corporation. Bridgeport C ity C o __________ Philip Lew is................................ ___ d o . ........................... .............. M rs. Delia W alker..................... H ugo Lehm an............................. Balance................... ...................... $249.00 249.00 249.00 249.00 249.00 249.00 249.00 $423,170.80 25 1,400 25 50 B a la n c e ............ H alt, Hose & FosterT rade.............. - ............. J. R . Schmeltzer.......... R . W . P . Barnes........ Interest.......................... $25.00 251.00 251.00 251.00 4.25 1,740.96 6.275.00 351,382.16 6.275.00 12,550.00 165.12 10 10 100 100 50 25 25 50 50 15 John C. M acC arthy......................... Charles H . Base.......................... ...... N ob le & C orw in_________________ Auerbach, Pollack & Riehardson. Bank of South D a y to n ___________ R . H . Forschull_________ ________ Philip H a ll........................................ Geo. A . Earley................... ............... W . H . Jessup____________________ M . J. H am m er_____ _____________ Jos. G uli....................... .................... Chas. Samuel_________ __________ Auerback, P . R . . . ____ __________ Balance............................................... 251.00 251.00 250.00 251.00 251.00 251.00 251.00 251.00 251.00 251.00 251.00 251.00 251.00 2,509.84 2,509. 84 24,998. 72 25.098.72 12, 549.36 6,274.64 6,274. 64 12,549.36 12, 549. 36 3,764.76 25.098.72 25.098.72 25,098. 72 194,012.84 378,388. 24 V . V . N . W a ld ro n ................................... . D r. Geo. Seffers________ _________________ D ep. 10 per cent managers fee____________ D ep. $3 per share Selling Commission on 6,000 shares........ .................................... — Dep. .19.8 percent profit on participation in trade................................................ .......... Balance....................... .............. ............. 241.00 238. 60 12,049. 36 11,924.36 35.408.81 N . Fishman.......... J. K . R ice ............. Clinton G ilb e rt.. J. K . Rice, Jr___ Grannis & D o t y . J. R . Schmeltzer. J. R . Schmeltzer. J. R . Schmeltzer. 207.00 192.00 192.00 194.00 194.00 192.00 194.00 193.50 378,388.24 Apr. 765 30 Interest. 194,012.84 4.50 553.00 18,000.00 63,098. 50 54.084.81 194,565.84 A pr. 30 30 M a y 31 Balance- 54,084.81 605 Interest. Balance- 3.75 44.69 17,083.00 M ay 194,565.84 1,034.88 4.799.64 1,919.84 9.699.36 4.849.64 4,799. 64 4.849.64 9.674.36 PRACTICES 100 100 24 Balance. Shares............... $2,489.84 12,449.36 24.898.72 24,898.62 24.898.72 49,797.44 9,959.48 1740.96 423,170.80 M ar. 24 100 31 Am ount EXCHANGE M ar. 24 24 24 24 31 10 50 100 100 100 Less tax STOCK 1930 Feb. 13 13 13 13 13 13 13 28 1962 National City Bank trade account of D . D . Past— Continued 9 12 19 19 50 50 25 25 194.00 195.00 203.00 202.50 119852—33—pt 6-- 14 71,212. 50 71,212.50 31 June 23 30 300 30 Aug. 31 290 Shares-----------------------------------------------------Transferred to P. L. Invest. Department. Balance___________________________ 12,059.04 6,518.80 M a y 31 June 20 149. 50 10 6,818.80 6,518.80 300.00 30 July 1 6,818.80 6,818.80 290 Oct. Shares. Transferred to B . D . Inc. account............... Transferred to J. A . B . Special.................... Transferred to A . V . S., Sr. In c.____ _____ Transferred to B. S. P . I n c_______________ Ck National B ond & Share Corporation profit in participating— ............................. Transferred to P. L. Stock & Bond, 1930 1st half_______________________ _________ 750.44 750.44 750.44 750.44 1,500.87 45,764.83 50,267.46 17,083.00 1,494.84 18,577.84 18,577.84 Shares. Balance. 9.699.36 9.749.36 5,074.64 5,062.14 Aug. 31 Sept. 11 Oct. 11 11 11 20 25 25 20 25 173. 50 173.00 172. 50 174. 50 166. 50 1 2 75 100 135. 50 132.50 18 1 6,818.80 3,469.72 4,324. 64 4, 312.14 3,479. 72 4,162.14 290.00 10,161.58 13. 248. 72 50,267.46 02 H3 O Q w X O H > © tef hi S > a >-i Q H CO CO 05 GO 1964 STOCK EXCHANGE PRACTICES Mr. P ecora . N o w , th ose firm s th a t I h a v e ju s t m e n tio n e d y o u know t o b e b ro k e rs — b r o k e r a g e firm s ? Mr. B a k e r . Yes; I know most of them. Mr. P ecora . And they all had close business affiliations and deal ings with your company, did they not ? Mr. B a k e r . Well, some of them. Mr. P ecora . Throughout the years that it has been in business ? Mr. B a k e r . That is right. Senator T o w n s e n d . Was this stock you g a v e purchased from time to time ? Mr. B a k e r . Yes; that is right, sir. The C h a i r m a n . The committee will recess until 10 o’clock in the morning. All witnesses under subpoena will report here at that time. (Accordingly, at 4.17 o’clock p. m., the subcommittee adjourned until 10 o’clock a. m. of the next day, Friday, February 24, 1933.) STOCK EXCHANGE PRACTICE FRIDAY, EEBBTJABY 24, 1933 U nited S tates S e n a t e , SuBCOMMITEE OF COMMITTEE ON B A N K IN G AND CURRENCY, W ashington , D . 0 . The subcommittee met, pursuant to adjournment on yesterday, at 10 o’clock a.m., in room 301 Senate Office Building, Senator Peter Norbeck presiding. Present: Senators Norbeck (chairman), Couzens, Townsend, Fletcher, and Costigan. Present also: Senators Brookhart and Reynolds. Further present: Ferdinand Pecora, special counsel to the com mittee; Julius Silver and David Saperstein, associate counsel to the committee. The C h a i r m a n . The subcommittee will come to order. Mr. Pecora, who will you have this morning? Mr. P ecora . Mr. Baker will please resume his testimony. TESTIMONY OF HUGH B. BAKER, PRESIDENT NATIONAL CITY CO., NEW YORK CITY—Resumed Mr. P ecora . Mr. Baker, did you participate in the management fund distribution for the year 1929 of the National City Co.? Mr. B a k e r . Yes, sir. Mr. P e c o r a . T o what extent? Mr. B a k e r . Well, of course as to the year 1929 there really wasn’t a fund, you might say. Mr. P ecora . I d id n o t hear y o u . Mr. B a k e r . I sa y , in 1929 the fund entirely disappeared before the end of the y e a r. I don’t remember what the amount was. Mr. P ecora . Wasn’t there a distribution for the first six months of that year? Mr. B a k e r . Yes, sir. Mr. P ecora . And wasn’t the distribution a very substantial amount? Mr. B a k e r . Yes. Mr. P ecora . What was your participation in that fund? Mr. B a k e r . From memory, and I haven’t that figure before me, I think it was $225,000 or thereabouts. Mr. P ecora . For th e first six months? Mr. B a k e r . Yes. Mr. P ecora . What was the extent of your participation in the management fund of the National City Co. for the year 1928? Mr. B a k e r . It was $266,670.41. 1965 1966 STOCK EXCHANGE PRACTICES Mr. P ecora . And that was exclusive of your salary ? Mr. B a k e r . Yes, sir. Mr. P ecora . What was the extent of your participation in the management fund for the year 1927 of the National City Co.? Mr. B a k e r . It was $185,250. Senator F l e t c h e r . And what has been your salary ? Mr. B a k e r . Twenty-five. Mr. P ecora . What was that? Mr. B a k e r . Twenty-five. Mr. P ecora . For the year? Mr. B a k e r . Yes, sir. Senator C o st ig a n . When you said “ 25 ” , did you mean that your salary was $25,000? Mr. B a k e r . Yes, sir. Mr. P ecora . Did you say it was about $250,000 for the first 6 months ? Mr. B a k e r . I was guessing at the figure. I am not sure about it. Mr. P ecora . But was the figure that you guessed at $250,000? Mr. B a k e r . I guessed it was $225,000. Senator T o w n s e n d . Mr. Baker, you may have covered this here tofore, but how were the profits made that were included in this particular division? Mr. B a k e r . In this management fund? Senator T o w n s e n d . Yes. Mr. B a k e r . The earnings of the company first had deducted from them 8 per cent of the capital surplus and undivided profits, that was first deducted, and then of the balance the deductions were 80 per cent and 20 per cent, 20 per cent going into the management fund to be allotted to various executives. Senator T o w n s e n d . Y ou mean that a management fund was set up out of capital? Mr. B a k e r . No; it depends upon the current earnings of the company. Senator T o w n s e n d . And y o u say 8 per cent w a s w h a t? Mr. B a k e r . Before any management fund is figured at all there is allotted out of current earnings, capital, surplus and undivided profits, 8 per cent, and then of the balance 20 per cent goes into the management fund. Senator T o w n s e n d . O f the surplus of the National City Co.? Mr. B a k e r . Yes, sir. Senator T o w n s e n d . All right. Mr. P ecora . Mr. Baker, it has already been testified, either by you or one of the preceding witnesses, that during the year 1929 your company sold to the public upwards o f 1,300,000 shares of the capi tal stock of the National City Bank. Do you recall that testimony? Mr. B a k e r . Yes, sir. Mr. P ecora . It is correct, is it? Mr. B a k e r . Yes. Mr. P ecora . Mr. Bfaker, in effecting those sales, and in making purchases of stock that your company found it necessary to buy in order to make deliveries for those sales, did the National City Co. employ stock brokerage houses to accumulate stock for it? Mr. B a k e r . N o ; I should not say that. But we bought stock from brokers. STOCK EXCHANGE PRACTICES 1967 Mr. P ecora . T o what extent, in percentage? Mr. B a k e r . Well, that would only be an estimate, Mr. Pecora. I should estimate that to be, perhaps—oh, I should think 75 per cent. Mr. P ecora . H o w many brokerage firms did you have transac tions of that kind with? Mr. B a k e r . That would be quite a large number. Mr. P ecora . About how many, whether large or small? Mr. B a k e r . I should think 15 or 20, and probably 20. Mr. P ecora . With which firm, according to your best recollection now, did you have the largest number of such transactions in that year? Mr. B a k e r . Well, sir, I do not know that I can answer that. I have never studied the division of where those orders went, and through what brokers they were placed, to try to get that in my mind. It made no difference to me to what brokers they went. Mr. P ecora . D o you recall a brokerage firm known as J. R. Schmeltzer & Co. ? Mr. B a k e r . Yes; I know that name, but I do not know the indi vidual members of the firm. Mr. P ecora . Were they specialists in your bank stock? Mr. B a k e r . I think they were specialists in bank stocks gener ally but not in any one particular bank. Mr. P ecora . D o you recall that you had a large volume of trans actions with that brokerage firm in the stock of the National City Bank during the year 1929 particularly? Mr. B a k e r . Well, I do not know how large the volume amounted to. There were transactions with that firm and I think in sub stantial amount. Mr. P ecora . Now, Mr. Baker, was there any security of any kind whatsoever in which the National City Co. traded in the year 1929 to a greater volume than National City Bank stock—any other single security I mean ? Mr. B a k e r . Well, I can only answer that after referring to our records, Mr. P-ecora, and seeing just the amounts of the different issues, because during the year 1929 our total volume of business in all our different offerings ran into a very substantial volume. Mr. P ecora . It ran into a volume of over $2,000,000,000, didn’t it? Mr. B a k e r . Yes. Mr. P ecora . N o w , of that volume did you deal in any single issue or security to a greater extent than you dealt in the capital stock of the National City Bank? Mr. B a k e r . Well, I do not know. I would have to refer to our complete records on that to answer the question. Mr. P ecora . A s you sit there now, can you recall any other issue in which your dealings were greater than in the bank stock for that year? Mr. B a k e r . I do not recall any. Mr. P ecora . Did you have anything to do with the trading in National City Bank stock on behalf of your company in that year? Mr. B a k e r . Do you mean in the placing of orders? Mr. P ecora . Did you have anything whatsoever to do with it ? Mr. B a k e r . Oh, yes; certainly. Mr. P ecora . What did you have to do with it? 1968 STOCK EXCHANGE PRACTICES M r. B aker . W e ll, I was the president o f the com pany, and I w as interested in a ll o f our purchases and in a ll o f our sales. Mr. P ecora. And gave directions for the making o f purchases and sales? Mr. B a k e r. Yesf ; but not always in detail. In a general way I gave the directions controlling that. Mr. P ecora. Was the execution of your instructions or directions entrusted to the supervision of any particular individual? Mr. B a k e s. Yes, sir. Mr. P eco ra . To whom ? Mr. B a k e r. Mr. Morrison. Mr. P eco ra . And Mr. Morrison was the head of your trading department? M r. B a k e r . Yes; and a vice president o f the company. Mr. Pecora. And he is here under subpoena? Mr. B a k e r. Yes, sir. Mr. P eco ra . Did the National City Co. make the market for that stock? Mr. B a k eb . No; I would not say that at all. We were prepared to make quotations, either to buy or sell, at any time in exact line with the prevailing general market. Mr. P eco ra . D o you know of any other trader or dealer in securi ties who had anytmng like the volume of trading in National City Bank stock in the year 1929 that the National City Co. had? Mr. B a k e r . Well. I could not give you that, because I do not know the records 01 other houses. I do know that there were per haps 60 or more houses advertising in the newspapers as bank-stock specialists or dealers in bank stocks, and as to what the volume of their business may have been I have no way of knowing. But my estimate would be that our volume as it related to the entire volume of trading, would not exceed somewhere around perhaps 10 or 15 per cent. Mr. P e c o r a . No, my question was: Do you know o f any other dealer or trader who dealt in the stock of the National City Bank to as great an extent as the National City Co.? Have you knowledge of any such? Mr. B a k e r. No, I do not know that, because I do not know what the trading of any particular firm was. Mr. P e c o ra . Weren’t you in constant touch with the over-the counter market in the bank’s stock? Mr. B a k e r. Yes, sir. Mr. Pecora. Wouldn’t that enable you to learn whether there was any other single dealer or trader whose business compared with that of the National City Co. in that stock? Mr. B a k e r. N o ; I could not possibly know th at. Mr. P eco ra . You say you could not possibly know that? Mr. B a k e r . No. Mr. P ecora. You have no idea or information on that subject to-day? Mr. B a k e r. I, of course, knew that there were a great many people trading in bank stocks, our and other bank stocks, but as to the amount of their volume, I do not know that. STOCK EXCHANGE PRACTICES 1969 Mr. P ecora. Now, one day in September of 1927 you noticed th at five sales of 10 shares each of the National City Bank stock were made on the New York Stock Exchange? Mr. B a k e r. Yes, sir. Mr. P eco ra . And the spread between the bid and asking prices was 5 points, as I recall your testimony. Mr. B a k e r. That was between sales? Mr. P eco ra . Yes, between sales. Mr. B a k e r. Yes, sir. Mr. P ecora. And you thought that indicated a manipulation o f the stock on the floor of the exchange, didn’t you? Mr. B a k e r. No. I thought-----Mr. P ecora (interposing). Isn’t that what you testified to yesterday? Mr. B a k e r. Well, I don’t remember my exact words, but----Mr. P eco ra (interposing). Well, I do remember your exact words, and I think I have quoted them textually. Mr. B a k e r. Well, i f you will permit me to explain my thought on that, it is this: That it showed to me that a sudden order came on to the stock market without any particular stock there for sale at that same time, and that it would be a very easy thing if anyone wanted to do it to manipulate the stock. Mr. P ecora. You said yesterday that those five sales of 10 shares, each made on the Stock Exchange one day in September of 1927, so impressed you with the thought that they were the result or gave evidence of manipulation, that you sent a cable to Mr. Mitchell who was then in Paris. Mr. B a k e r. That is right. Mr. P ecora. And called his attention to the startling manipulation evidenced by five sales grossing 50 shares. Mr. B a k e r. The possibility of it. Mr. P ecora. The possibility of it? Mr. B a k e s. Yes, sir. Mr. P ecora. How many wires did you have in the trading depart ment of your company? Mr. B a k e r. Telephones connecting with brokers, do you m ean? Mr. P ecora. Yes. Mr. B a k e s. Well, I don’t know, probably 2 0 or 30. Mr. P ecora. Ana how many men did you have in the trading department? Mr. B a k e r. I should th in k about th at same num ber, 15 to 20. Mr. P ecora. Wouldn’t that indicate that the National City Co. in those days was engaged in a volume of trading in the bank’s stock far, far exceeding what alarmed you in September of 1927 when 50 shares gross were traded in on the Stock Exchange in 5 transactions? Mr. B a k e r. Mr. Pecora, I misunderstood your question just prior to this. I thought you meant how many telephone connections or wires there were with brokers generally for the conduct of our general business, our entire business. My reply was with that thought in mind. I do not think there was over one—well, I don’t know that there was any particular wire strictly confined to trading in National City Bank stock. I think that was just over any of our wires, of which we had perhaps 15 or 20. 1970 STOCK EXCHANGE PRACTICES Mr. P ecora. In other words, you made trades over your 20 wires connecting with different brokerage houses? Mr. B a k e r. Over any wire, with any broker. Mr. P ecora. Didn’t that indicate a volume and kind of trading that far exceeded the trading amounting to 50 shares in 1 day which alarmed you in September of 1927 when those 50 shares were dealt in on the New York Stock Exchange in 5 transactions of 10 shares each? Mr. B a k e r. Well, except of course, I repeat, that those wires were being used for the conduct of our general business. Mr. P ecora. They were being used extensively too for your trades in National City Bank stock? Mr. B a k e r. Any time we had trades to make they were made over the telephone. Mr. P ecora. And you sold as many as 90,000 shares in a single week, didn’t you, in 1929? Mr. B a k e r. N o , sir— yes, that is right, for the week of February 21. But that—let me see—but that was after the old stock had been exchanged on a 5-to-l basis. Mr. P ecora. Of course, that volume of trading did not indicate any manipulation of the market, did it? Mr. B a k e r. Not necessarily. Mr. P ecora. When does a volume of trading indicate manipula tion, and when doesn’t it? Mr. B a k e r. That is—I can not answer that, because I think each case there has to be studied in itself. There might be a great many buying orders received on any particular security, and selling orders on the same day, and that might not have any feature of manipula tion in it, but would simply be the execution of buying and selling orders. Mr. P ecora. Isn’t it easier to control the over-the-counter market for a security than the Stock Exchange market? Mr. B a k e r. That again depends upon its activity and how many buyers and sellers there may be. Mr. P ecora. Well, generally speaking isn’t it easier to control the over-the-counter market for a security than the Stock Exchange market? Mr. B a k e r. Well, there may be cases where that is true; yes. Mr. P ecora. Isn’t that true with bank shares particularly? Mr. B a k e r. I do n ot know w hy it should be. Mr. P ecora. W e ll, is it true? Mr. B a k e r. With outside dealers trading over the counter, traders in any volume at all, with anybody who is interested to buy and sell, there is a free and open market on it. Mr. P ecora. I am not inquiring into the why of it but whether or not it is a fact. Mr. B a k e r. It m ay be, but I don’t know. Mr. P ecora. Y o u are market wise, aren’t you? Mr. B a k e r. I don’t know th at I am . Mr. P eoora. D o you think you would be the president of the National City Co. if you were not a keen student and observer of the markets for securities, all markets ? STOCK EXCHANGE PRACTICES 1971 Mr. B a k e r. Well, I certainly don’t know the answer to that ques tion. That is somebody else’s decision to make. Mr. P ecora. It is not an unfair assumption that you were chosen for the chief executive position of this great investment company because you were market wise, is it? Mr. B a k e r. Well, I doubt if that was the consideration of it. I don’t think that was the idea, as to whether I was market wise or not. Senator B ro o k h a rt. That was one of the things, wasn’t it? Mr. B a k e r. I do not know, Senator. I was not there when the matter was being discussed. Mr. P ecora. Now, Mr. Baker, in the month of October, 1929, do you know the volume of transactions in National City Bank stock that your company had with J. R. Schmeltzer & Co. ? Mr. B a k e r. N o. Mr. P ecora. Have you any figures in mind that would indicate to 1 J 11 ° Mr. P ecora. None at all? Mr. B a k e r. N o, sir. Mr. P ecora. Y o u have no personal recollection of it? Mr. B a k e r. N o ; I have not at all, I am sorry to say. Mr. P ecora. Is your mind a blank on that point as you sit there now? Mr. B a k e r. Yes, sir. Mr. P ecora. An utter blank? Mr. B a k e r. So far as the amount of the transactions we had with Schmeltzer is concerned. Mr. P ecora. What was the general course of the transactions you had with J. R. Schmeltzer & Co. in the stock of the bank? Mr. B a k e r. Well, we gave them—we would buy stock or sell stock from them the same as we would any other dealer in bank stocks. As to whether or not the volume ran greater with any par ticular house than some other house I assume would depend entirely upon the character of service and so forth rendered by that house in that particular issue. Mr. P ecora. Would you give them orders to accumulate shares of National City Bank stock for you and have those paid for by the National City Bank? Mr. B a k e r. No, sir. Mr. P ecora. Did you do anything in the course of your transac tions in National City Bank stock with J. R. Schmeltzer & Co. that included the National City Bank in the process? Mr. B a k e r. Not to my knowledge. Mr. P ecora. Have you with you here the correspondence passing between J. R. Schmeltzer & Co. and the National City Bank? Mr. B a k e r. N o. Mr. P ecora. W ill you ascertain whether any of your associates has it? Mr. L aw . Your Mr. Saperstein has that, Mr. Pecora. Mr. P ecora. Let me read, for instance, what purports to be a copy of a letter addressed to the National City Bank by J. R. Schmeltzer & Co. under date of October 11,1929: 1972 STOCK EXCHANGE PRACTICES N a t io n a l C it y B a n k . (Attention of Mr. West) Dbab Sis : We baying to deliver to the National City Go. 2,100 shares of National City Bank stock, here'by ask you for an additional overcertification of $1,000,000. Thanking you for your courtesy, we are, Very truly yours, What does that letter indicate? Mr. B aker. Of course, I know nothing about that. It is the first time I have heard it. It is directly a bank matter in which I had no voice or knowledge. Mr. Pecora. Y ou know nothing about it? Mr. B aker. No. Mr. Pecora. Well, here J. R. Schmeltzer & Co. say that they have to deliver to your company 2,100 shares of National City Bank stock. Now, that stockliad to be paid for by your company? Mr. B aker. And would be as soon as delivered. Mr. P ecora. H ow would your company pay for it? Mr. B aker. We would pay with check. Mr. Pecora. With funds obtained from whom? Mr. B aker. Ourselves. Mr. Pecora. What would be the occasion for a letter of the kind I have just read to you, then? Mr. B a k e r . That would be a matter, Mr. Pecora, which was strictly a banking matter between the firm you mention and the National City Bank, in which the National City Co. would have nothing whatsoever to do. Mr. Pecora. What would be the occasion for a letter of this kind written by J. R. Schmeltzer & Co. to the bank in connection with a transaction in which they were to deliver shares of stock to your company? Mr. B aker. I have not the slightest idea. That is strictly a bank matter. Mr. Pecora. And you do not know the purpose of it? Mr. B aker. O f which I knew absolutely nothing. Mr. Pecora. And you do not know the purpose of it? Mr. B ak es. Of that letter to the National City Bank? 1Mb*. Pecora. Yes, sir; of the transaction indicated by this letter. Mr. B aker. Not the slightest. Mr. Pecora. This letter is utterly meaningless to you? Mr. B aker. It is absolutely a bank routine matter of which I know nothing. Mr. P ecora . And is utterly meaningless to you? Mr. B aker. Yes, sir; so far as any relation between J. R. Schmelt zer & Co. and the bank are concerned, I know absolutely nothing. Mr. Pecora. And the letter is utterly meaningless to you? That is, you do not know what it means. Mr. B a k e r. They are evidently applying for a loan, if that is what you mean. Mr. Pecora. I want to know what it means to you. What does it mean to you? Mr. B aker. Mr. Pecora, I am not in the bank. I am not in the Commercial Bank, and do not have anything to do with loans that STOCK EXCHANGE PRACTICES 1973 are made between brokers and the National City Bank. I would not know anything about it. Mr. P ecora. What does this particular letter I have read mean to you? Mr. B a k e r. May I read it, please? Mr. P ecora. Yes; here it is. Mr. B a k er . It would seem to me that they are applying for ac commodation for the day. Mr. P ecora. T o enable them to do what? Mr. B ak er . To enable them to conduct their regular business. Mr. P ecora. T o enable them to take up the 2,100 shares they were delivering or were going to deliver to your company; is that it? Mr. B aker . That would seem to be included m it. Mr. P ecoba. That is the most important part of the idea, isn’t it; not merely an incidental part? Mr. B a k er . That would seem to be included in it, but I don’t know what it was. Mr. P ecora. Despite the fact that your company is wound up in the transaction to which that letter refers, you don’t know anytning more about it than you are telling us now; is that what you mean to say? Mr. B aker . Not the slightest. May I say this: As far as our rela tions with dealers with whom we deal in buying and selling securi ties, that does not have any connection at afl with the method that they may use in facilitating deliveries to and from their offices in any particular day. We would not know anything about it. Mr. P ecora. You don’t think this letter indicates that the bank was extending accommodation to the brokerage house which was picking up shares of stock on behalf of the National City Co., do you? Mr. B a k er . It would seem so, yes; but I do not know anything about it. Mr. P ecora. Is this the first time you have heard of this kind of dealing between J. R. Schmeltzer & Co. and the National City Bank where the brokers take up stock of the bank for the National City Co.? M r. B aker . Yes; and it is perfectly natural it should be, because I haven’t any contact or knowledge of the loan arrangements made between brokers and the National City Bank. Mr. P e c o r a . Now, under date of October 1 5 ,1 9 2 9 , J. R. Schmeltzer & Co. wrote to the National City Bank, attention of Mr. West, as follows: D eab . S i b : We having to deliver to the National City Co. 1,600 shares of National City Bank stock, hereby ask you for an additional overcertification of $800,000. Thanking you for your courtesy, we are, Very truly yours, That indicates also that on that date, October 15,1929. the writers of this letter had picked up 1,600 shares of the bankas stoc^ for delivery to your company, and needed an accommodation or loan from the bank in the amount of $800,000 to enable them to pick up the stock and deliver it to your company, doesn’t it? 1974 STOCK EXCHANGE PRACTICES Mr. B a k e r . That would seem to be similar to the other trans action. Mr. P ecora. N ow , I have here another letter, written October 16, 1929, by the same firm of brokers to the National City Bank, atten tion of Mr. West: Doab Si b : We having to deliver to you the National! City Co. 1,547 shares of National City Bank stock, hereby ask you for an additional overcertification of $800,000. Thanking you for your courtesy, we are, Very truly yours, That is evidence of a similar transaction in which those brokers had picked up 1,547 shares of the bank’s stock for delivery to your company and needed an accommodation or loan in the sum of $800,000 from the bank to enable them to do so, is that right? Mr. B a k e r . Well, from some bank. Mr. P ecora. And this indicates that the National City Bank was the bank that was asked to extend the accommodation, which apparently it did. Mr. B a k e r. Evidently. And that is all I know about it. Mr. P ecora. You are learning about this for the first time, aren’t you? Mr. B a k e r . Yes. I have no contact with those deliveries at all. I do not know anything about it. We buy and when delivery is made to us we pay for it. Mr. P ecora. I thought you said you would give directions to the head of your particular department regarding these transactions. Mr. B ak e r . That is true, but that has nothing to do with that matter. Mr. P ecora. With the bank’s financing these transactions? Mr B a k e r . No. Mr. P ecora. Financing brokers that were picking up stock for your company? Mr. B a k e r . Not at all. Mr. P ecora. It is all news to you? Mr. B a k e r . Yes, sir. Mr. P ecora. That is being imparted to you for the first time in this fashion? Mr. B a k e r . Yes; we have nothing to do with that. Mr. P ecora. You have nothing to do with the bank either, have you? Mr. B a k er . N o, sir. Mr. P ecora. The only thing you have to do with the bank is that all your stockholders own the stock of the bank? Mr. B ak er . Yes, sir. Mr. P ecora. Through three trustees. Mr. B ak er . And that is----Mr. P ecora (interposing). And the fact that you do business under the same roof. M g . B a k e r . Well, just one minute there: It is just the reverse of that to which you referred. The stockholders o f the bank, through three trustees, own our stock. Mr. P ecora. That is what I meant to say. STOCK EXCHANGE PRACTICES 1975 Mr. B a k e r. Yes. Mr. P ecora. And that you do business under the same roof as the National City Bank. Mr. B a k e r. That is right. Mr. P ecora. And that you have among your officers and directors persons who hold executive offices and places on the board of direc tors of the bank? Mr. B a k e r. That is right. Mr. P ecora. Is that right, now? Mr. B a k e r. Yes, sir; that is right. Mr. P eoora. And a report is made to the bank every year, or every 6 months, of the operations of your company ? Mr. B a k e r. Yes. Mr. P ecora. Outside of that you have nothing to do with the bank? Mr. B a k e r. I have nothing to do w ith the current daily business operations o f the bank. Mr. P ecora. Now, I have here another Schmeltzer & Co. to the bank, attention letter addressed by J. R. of Mr. Rave, under date of October 28,1929, readings as follows: D e a b S ib : We having to deliver to the National City Co. 900 shares of National City Bank stock, we hereby ask you for an additional overcertification of $500,000. Thanking you for your courtesy, we are, Very truly yours, That is another one of these transactions, is it? Mr. B a k e r. Evidently; yes, sir. Mr. P ecora. And here is another letter, dated the same day, Oc tober 23, 1929, addressed to the National City Bank, attention of Mr. Rave, readings as follows: D e a b S ib : We having to deliver to the National City Co. 1,750 shares of National City Bank stock, we hereby ask you for an additional overcertification of $900,000. Thanking you for your courtesy, we are, Very truly ytfurs, That letter indicates a similar transaction, doesn’t it? Mr. B a k e r. Yes, sir. Mr. P ecora. Here is one dated the following day, October 24,1929, addressed to the National City Bank, and reading as follows: D e a b Sm: We having to deliver to the National City Co. 1,650 shares of National City Bank stock, hereby ask you for an additional overeertiflcation of $800,000. Thanking you for your courtesy, we are, Very truly yours, J. B. SCHMELTZEB & Co. That would indicate a similar transaction, wouldn’t it? Mr. B a k e r. Yes, sir. Mr. P ecora. Here is one dated October 25, 1929, addressed to the National City Bank, attention of Mr. Rave, reading as follows: D e a b Sm: We having to deliver to the National City Co. 8,100 shares of National City Bank stock, hereby ask you for an overcertiflcation of $3,500,000 additional. We believe, however, that it will not be necessary for us to ask for all the above overcertification as in all probability all of this stofck will 1976 STOCK EXCHANGE PRACTICES not be delivered to us, but we are asking at the moment for $1,000,000 additional. Thanking you for your courtesy, we are, Very truly yours, J. E . SCHMBLTZEB & GO. Now, you probably notice that the phraseology of this letter is somewhat different irom those which preceded it. What does this letter indicate to you ? Mr. B a k e r. Well, I do not know what it is. It does not mean a thing to me. As I said before, if we contracted to buy the stock and it is delivered we would pay for it. That is the only interest I would have in it. Mr. P ecora. What does this letter, which you say you are now learning about for the first time, mean to you? Mr. B a k e r. Just the same as the others prior to that. Mr. P eco ra . Oh, no. Doesn’t it depart from the others in a slight way, for instance----M r. B a k e r (interposing). The only departure I can see in it, from your reading o f it, would be that they probably did not expect all that stock in hand to deliver that particular day. That would be all I would understand about it. Mr. P eco ra . But that they had picked up 8,100 shares for which they had committed themselves. In other words, you had asked these brokers for your company to pick up 8,100 snares of National City Bank stock. They had picked them up, but were only going to deli ver----Mr. B a k e r (interposing). They had sold to us, and in the delayed purchases----Mr. P eco ra (interposing). They say, “ We believe, however, ,that it will not be necessary for us to ask lor all the above overcertifica tion ”, which was for 3y 2 million dollars, “ as in all probability all this stock will not be delivered to us.” What did they mean? Mr. B a k e r. I haven’t any idea. Mr. P eco ra . I s this m eaningless to you? Mr. B aker. Yes; it is. I f they had sold to us 8,100 shares of stock, or whatever the amount was that you mentioned, we would cer tainly expect delivery of the stock, and as delivered we would pay for it. Mr. P eco ra . It says, “ will not be delivered to us”—or, to get back, “ as in all probability all this stock will not be delivered to us.” Why should these brokers ask the bank for an overcertifica tion or loan to cover 3% million dollars for stock which they had picked up for the account of your company but which was not going to be delivered to them? Mr. B a k e r . I would not know what they meant by that, unless they meant that the stock might not be delivered that particular day. That would be the only explanation I could see to that. Mr. P eco ra . Is there any possibility that the other stock was to be delivered to the bank directly? Mr. B a k e r . Oh, absolutely not. Mr. P ecora. Or to the City Co., directly, by the brokers? Mr. B a k e r. I do not think so. But that is the first time I have ever heard of that and I don’t know. I can’t imagine that that would be the case. STOCK EXCHANGE PRACTICES 1977 Mr. P ecora. Y o u are hearing of other things about your company for the first time, aren’t you? Mr. B a k e r. These are a ll new to me. Mr. P ecora. Here is another letter, dated October 2 8, 1929? from J. R. Schmeltzer & Co. to the National City Bank, attention of Mr. Rave, reading as follows: D e ar S ib : Referring to our letter of October 25— And that is the one I have just read. we are asking for an additional overcertification of $1,000,000. Thanking you for your courtesy, we are, very truly yours. Now, that would indicate that they had to make deliveries to you which they had not expected to make the day before, or rather on October 25, wouldn’t it? Mr. B a k e r. Might I ask you the date of the first letter? Mr. P ecora. October 25, and the one I have just read is October 28. Mr. B a k e r. Well, I would not, or I could not understand what that meant there, only as I said a few moments ago, it was because the stock which they had purchased had been delayed in being delivered to them. Otherwise I can not see any reason for that. Mr. P ecora. Here is another letter, Mr. Baker. And I wish you would follow me while I read it. It is addressed by J. R. Schmeltzer & Co. to the National City Bank, attention of Mr. Rave, and is dated October 2 9 ,1 9 2 9 , and reads as follows: D r a b S i b : We having to deliver to National City Co., 20,000 shares of National City Bank stock, hereby ask you for an overcertification of $9,000,000 addi tional. We believe, however, that it will not be necessary for us to ask for all the above overcertification, as in all probability all of this stock will not be delivered to us, but we are asking at the moment for $2,000,000 additional. Thanking you for your courtesy, we are, Very truly yours, J. R. S c h m bltzeb & Co. What does that indicate to you ? Mr. B a k e r. I think the same as the former letter. Mr. P ecora. What? Mr. B a k e r. That all the stock they had sold to us would not be delivered to them on one particular day; in the course of a few days, possibly. Mr. P ecora. And that they needed $9,000,000 to finance those de liveries, that is, all deliveries, but in view of the fact that the deliver ies were not to be made all at one time, they only sought accommoda tion, called overcertification, to the extent of $2,000,000. M r. B ak er . W e ll, th at w ould seem to be the explanation o f it. Mr. P ecora. N ow , I have another letter here addressed by J. R. Schmeltzer & Co. to The National City Bank, attention of Mr. Rave, dated October 30,1929, and reading as follows: D b ab Sib: We having to deliver to the National City Co., 4,100 shares of National City Bank stock, hereby ask you for an overcertification of $1,500,000 additional. Referring to our letter of October 29, we will also ask you for an additional overcertification of $2,000,000. Thanking you for your courtesy, we are, Very truly yours. What does that mean to you? 1978 STOCK EXCHANGE PEACTICES Mr. B a k e r. I should think just as I have stated to you formerly. Mr. P eco ra . And w hat is th at? Mr. B a k e r. I want to make it clear that I am not an officer of the bank nor an employee of the bank. I haven’t anything to do with their loans or loan arrangements with brokers. I do not know any thing about that. Senator B ro o k h a rt. Were those stocks delivered to you as these letters indicate? Mr. B a k e r. Well, as they would deliver them to us we would pay for them. I just have not, of course, the records here o f the amounts of the delivery to us each day. But as they made deliveries w© would pay for them. Mr. P ecora. Well----Senator B r o o k h a r t (continuing). It is quite plain from this that the bank is financing directly the sale of its own stock, is it not? Mr. B a k e r. Well, that is a bank matter having to do with loans, and I do not know anything about that. Senator B ro o k h a rt. For purchases and sales. Mr. B a k e r. I say, that is a purely bank matter with which I have no contact at all. Mr. P eco ra . Mr Baker, have you ever had any banking affilia tion? I mean, have you ever been an officer or director of any bank? Mr. B a k e r. Yes; I am a director of the National City Bank. Mr. P ecora. Y o u are a director of the National City Bank? • Mr. B a k e r. Yes, sir. Mr. P ecora. H ow long have you been such director? Mr. B a k e r. Since 1929. Mr. P ecora. Since you became president of the National City Co.? Mr. B a k e r. Yes, sir. Mr. P ecora. I s that the extent of any banking experience you have had? Mr. B a k e r. That is right. Senator B r o o k h a rt. Were you a director at the time of these sales? Mr. B a k e r. Yes. Mr. P ecora. Y o u were a director when these letters were written, in October of 1929, by J. R. Schmeltzer & Co. ? Mr. B a k e r. That is correct. Mr. P ecora. And you were also the president of the National City Co. during this entire period? Mr. B a k e r. Yes, sir. Mr. P ecora. Here is another letter I want to read, under date of----Senator C ouzens (interposing). Prior to that let me ask: Mr. Baker, from your banking experience do you justify these prac tices? Mr. B a k e r. Well, Senator Couzens, I have just stated, before you came in and since, that as far as the general practice between brokers and their banks as to the accommodations which they have from day to day, it is something with which I have no contact at all, and know absolutely nothing about. I am not familiar with the practice on these things, and I do not know. STOCK EXCHANGE PRACTICES 1979 Senator C ouzens. I did not ask you that question. I asked you if in view of these developments, if you would indorse this prac tice? Mr. B a k e r. WelL I assume it is perfectly in accord with banking practice, and if so I would indorse it. Senator C otjzens. Y o u are too evasive. Perhaps I may have to ask you more pertinent questions as we do not seem to be able to get direct answers from you. I asked you whether you indorsed this practice or not. And I now ask you whether, regardless of banking practice or not, you indorse this practice? Mr. B a k e r. Y es, I think I w ould. Senator C ouzens. That is all right, now. That answers m y question. Mr. P ecora. In other words, Mr. Baker, you think it is sound banking practice? Mr. B a k e r. So far as I know, yes, I think so. Mr. P ecora. Y o u do not claim to be ignorant of sound banking practices, do you ? Mr. B a k e r. Well, perhaps not. I think that is all right. Mr. P ecora. All right. Now, here is another letter, dated October 31,1929, written by J. R. Schmeltzer & Co. to the National City Bank, attention of Mr. Rave, reading as follows: Dhab Sib : We having to deliver to the National City Co. 5,000 shares of National City Bank stock, hereby ask you for an additional overcertification of $2,000,000. Thanking you for your courtesy, we are, Very truly yours. That letter indicates the same sort of situation as the letters pre ceding it, doesn’t it ? Mr. B a k e r. Y es. Senator C ouzens. Mr. Baker, have you any information as to how many accounts you had on the books of the National City Bank? Mr. B a k e r. N o , sir. Mr. P ecora. Senator Couzens, he said in the earlier part of this examination that he thought his company had as many as 15 or 20 brokerage houses trading m National City Bank stock at that time, and this is only one of them. Senator C ouzens. Mr. Baker, may we assume that this practice was continued with all these brokerage firms? Mr. B a k e r. I would assume so, if they had banking relations with the bank. Senator B ro o k h a rt. Other accounts than with these deals for purchases and sales of National City Bank stock; other accounts than these deals were permitted and financed almost altogether by the National City Bank itself? Mr. B a k e r. Well, I do not know what proportion of that business that you have just read there is to the total business done. Senator B ro o k h a rt. Well, if all brokerage houses proceeded in the same way, then the answer to my question would be yes. Mr. B a k e r. It would be facilitating the delivery of securities. Mr. P ecora. It was more than the facilitating of the delivery of securities. It was facilitating the purchase of them in the first instance for the account of the company, wasn’t it? 119852—33—p t 6 ----- 15 1980 STOCK EXCHANGE PRACTICES M r. B a k e r. N o, sir; because our purchases were direct purchases and sales to us. Mr. P ecora. That is, you mean from the broker to you? Mr. B a k e r. That is right. Mr. P ecora. And the broker in picking up the stock to deliver to your company in fulfillment of the company’s orders, was borrowing money from the National City Bank through the medium of this so-called overcertification? Mr. B a k e r. According to those letters it would seem so, to some extent. Mr. P ecora. Isn’t that a species of transaction in which the bank is virtually trading in its own stock? Mr. B a k e r. W ell, it does not seem so to me. Mr, P e c o r a . And you say that in the light of the language of these letters, all of which indicates that the broker has to deliver shares of the capital stock of the bank to your company and is call ing upon the bank for a loan to enable the broker to pick up the shares to deliver to your company? Mr. B a k e r. It seems to me that is just the same transaction that any broker would have with his bank on the delivery o f any securi ties that he might have sold. M r. P ecora. But here the bank is put on notice by the broker, through the medium of these letters, that the transaction is one which he has with the National Gity Co. and involves the capital stock of the National City Bank; isn’t that a fact? Mr. B a k e r. T h a t w ould seem to be the case. Senator C ouzens. Mr. Baker, do you know if this was the general practice in New York banks during the time you were doing it? Mr. B a k e r. I do not. And again I apologize for, as you say, being evasive, but it is because I am not in contact with the banting end o f it at all. Senator C ou zens. Y o u were a director? Mr. B a k e r. Yes, sir; but, of course, this is routine or daily busi ness of the bank. Senator B r o o k h a rt. Did it ever come to the attention of the directors? Mr. B a k e r. Not specific transactions; no, sir. Senator Couzens. Did you ever have any banking experience be fore you went on the National City Bank board? Mr. B a k e r. N o , sir. Senator C ou zens. After you went on the National C ity Bank board did you ever come in contact with or associate with other bankers in New York, other big bankers? Mr. Baker. Yes; with quite a few. Senator C ou zens. And did you discuss at that time the general practices o f banks in those matters? Mr. B a k e r. Not at all as regards matters o f this kind, loans, and so forth, from brokers by the banks, or I mean by banks to brokers, and the way they conduct their daily business. I know nothing about that. Senator C ouzens. Did you hear or read any of Mr. Aldrich’s statement before the Finance Committee with relation to the bank ing situation, made a few days ago? Mr. B a k e r. I have not yet; no, sir. STOCK EXCHANGE PRACTICES 1981 Senator C ouzens. In the light of what we can now see back be hind us, do you approve of continuing those practices? Mr. B a k e r. Such as has been read nere, do you mean? Senator C ouzens. Yes. Mr. B a k e r. Well, I have not sufficient knowledge of commercial banking transactions to really have any very definite opinion on that. So long as it is the general banking practice in New York, or any other place, and in accordance with banking laws; yes, it is, I would say, but I don’t know. Senator C ouzens. Let us forget about that technical answer, and ask the question from a moral and ethical standpoint: Do you be lieve commercial banking should be continued in the future as it has been in the past, according to the testimony we have developed here? Mr. B a k e r. I do not see that the bank has taken the slightest risk. The sale has been made and upon delivery will be paid for. Senator C ou zens. In other words, as long as the bank does not take any risk you justify any conduct on its part, do you? Mr. B a k e r. Oh, no. Senator C ouzens. Y o u substantially stated that. Mr. B a k e r. Oh, no. We are talking about daily transactions be tween its customers and itself. Mr. P ecora. Mr. Baker, have you any reason to believe that the transactions evidenced by these letters were anything other than routine transactions, and that similar transactions were not had be tween the bank and other brokers whom your company was using to accumulate shares of the bank’s stock for you ? Mr. B a k e r. Well, Mr. Pecora, I absolutely have no knowledge of that at all. I do not know what the relations between brokers and the bank were. Mr. P ecora. Didn’t the bank, or anyone in the bank, ever call you up to find out whether it was proper to extend this credit to J. R. Schmeltzer & Co., amounting to millions of dollars in the course of a few days’ time? Mr. B a k e r. N o one called me. But I would not be surprised if they may have called to find out if we had made those purchases. M r. P ecora. Who would be called for that purpose, do you think? Mr. B a k e r. Well, I think that would be perhaps the treasurer of our company or the vice president in charge of its finances. Senator C ouzens. In one of the letters, dated October 11, 1929, addressed to the National City Bank, attention of Mr. West—who is Mr. West? Mr. B a k e r. He is one of the officers in the bank. Senator C ouzens. Is he still employed ? Mr. B a k e r. Yes. Senator C ouzens. And in view of the fact that this letter is ad dressed to his attention, I assume he had complete authority to do what was requested in the letter. Mr. B a k e r. I assume so, with his other associates in that par ticular department. Senator C ouzens. In the other letters I see here they are addressed to the attention of Mr. Rave. What is his position ? Mr. B a k e r . He is an officer. 1982 STOCK EXCHANGE PRACTICES Senator Couzens. Is he still with the company? Mr. B a k e r. D o you m ean w ith the bank? Senator C ou zens. Yes. Mr. B a k e r. I think so. Senator C ouzens. And he would have authority by himself ap parently to extend the accommodations requested in the letters? Mr. B a k e r. Well, I assume he has that authority. It has to come from the president of the bank to him. Senator C ouzens. Is there any evidence on the minutes of the board of directors giving him authority for this practice? Mr. B a k e r. I do not know that, Senator Couzens. Mr. P ecora. Mr. Baker, an overcertification by a bank is really an authorized overdraft, is it not? Mr. B a k e r. I must repeat to you that I do not know about those phases of banking operation. It is not my function. I have not had anything to do with it. I know nothing about it. Mr. P ecora. In order to save time, wifl you ask one of your associates from the bank who knows about it to give you the infor mation ? Mr. B a k e r. I do not know that there is anyone here that would know that. Mr. P ecora. Mr. Mitchell is here. Mr. Law is here. Senator B r o o k h a rt. Just for the record, let me state that I have totaled those shares handled in this way from October 10 to October 30,1929, and they are 46,749, $21,800,000. Mr. P ecora. May I just ask Mr. Mitchell a question? Have him recalled and suspend the examination of Mr. Baker. Stay right where you are, Mr. Baker. It will only be a question or two. TESTIMONY OF CHARLES E. MITCHELL, NEW YORK CITY, CHAIR MAN THE NATIONAL CITT BANE OF NEW YORK, CITY BANK FARMERS’ TRUST CO., INTERNATIONAL BANKING CORPORA TION, THE NATIONAL CITY CO., AND THE NATIONAL CITY CO. (LTD.), OF CANADA— Resumed Mr. P ecora. Mr. Mitchell, have you heard me read in the course of my examination of Mr. Baker, certain letters written in the month of October, 1929, by J. It. Schmeltzer & Co. to the National City Bank? M r. M it c h e ll. I have. Mr. P ecora. Are you familiar with the transactions referred to in these letters? Mr. M it c h e ll. Not the specific transactions, but I would be glad to explain. Mr. P ecora. Are you familiar with the nature of these transac tions? Mr. M it c h e ll. Oh, yes, indeed. Mr. P ecora. W ill you kindly tell the committee the nature of the transactions evidenced by these letters? Mr. M it c h e ll. Since the national bank act was adopted immedi ately following the Civil War there has been a practice among all banks of giving what we call day loans. They are clearance loans. When any dealer in securities or broker has securities to deliver to STOCK EXCHANGE PRACTICES 1983 some other he has to have temporary accommodation to make that delivery. All banks give lines to brokers for such accommodations. The lines are usually established—I know they are in our bank—for day loan accommodation, clearance day loans. Senator C ou zen s. D o you have any securities for those? M r. M i t c h e l l . None. No security but a day-loan contract that has become a set form, Senator Couzens, is in use, and the day loans given by banks, the day loan accommodations, are very large. They have to be. Senator C ou zen s. But in effect they are continuous, are they not? M r. M i t c h e l l . No. Senator C ou zen s. I mean if they go from one day. on to the next day and the next day, they amount in substance to a continuous loan almost? Mr. M i t c h e l l . Oh, no, they are paid off each day. They are paid off during the day. Senator C ou zen s. Yes; but they are renewed the next day so that in effect it is the same as a continuous loan? Mr. M i t c h e l l . They may, and they may not be, Senator Couzens. Senator C ou zen s. I notice in one of the reports I have here made by one of our examiners, and as I understand it this is substantially correct: Accordingly it appears that the aforesaid brokers had a credit of $500,000 for day-loan purposes with the National City Bank. Mr. M i t c h e l l . That is right. We give in our banks to recognized dealers, and especially stock exchange members, a day-loan line. In our bank we figure that line usually on the basis o f the cash po sition of the brokerage firm shown in his return to the stock ex change. That we require, in order to know the credit upon which we are extending that day line. Then if, as and when that broker has extraordinary calls upon him by virtue of the volume of securi ties under delivery, he advises us that he for that day will have to have or would like to have additional accommodations. It becomes a loan that is again good on the basis of the contract. Under such circumstances the bankers’ question is, Does the person to whom he is to deliver this security, another broker or investment house, recognize his contract to receive those securities, and if he does, those larger lines are often extended for the day. The loan is wiped out during the day. The New York Clearing House As sociation has a regular charge established at, I think, 1 per cent for those loans during the day. Now the loans are very large. We do in our bank a smaller amount of that business than a number of the other New York banks, but I presume that at times the clearance loans or day loans in New York banks, when markets are active, would run to three, four or five hundred million dollars perhaps. They are all wiped out during the day. Senator C ouzens. When you said 1 per cent, what do you mean by 1 per cent? Mr. M i t c h e l l . We charge 1 per cent for the accommodations. Senator B r o o k h a r t . One per cent a year? Mr. M i t c h e l l . At the rate of 1 per cent per annum. 1984 STOCK EXCHANGE PRACTICES Senator B r o o k h a r t . That is the way I understood it. Mr. M i t c h e l l . It is a pure accommodation based upon contracts. Senator C ouzens. Does this line that you speak about, a line of daily credit, have to be passed upon by your directors or any execu tive committee? Mr. M i t c h e l l . The lines are all approved, Senator Couzens. Senator C o u z e n s . And these officers to whom these letters are addressed do not have authority to exceed the lines approved by the board? Mr. M i t c h e l l . They do not have authority. The lines are set up, for instance, by a group of senior officers. Those are junior officers and operating officers to whom those letters have been ad dressed. We have one vice president in the bank who is responsi ble for what we call street loans of any kind, and this junior to whom these letters are addressed is an operating officer reporting to him. Senator C o u z e n s . In other words, this practice grew to great size during the boom, did it not? Mr. M i t c h e l l . It has always been of substantial size, but of course as markets become more active and there are more securities to be delivered and to be received by the Street, the necessity for increase in day loans becomes obvious. Senator C o u z e n s . But you never have any actual possession of the securities that are being transferred? Mr. M i t c h e l l . No, sir. The loan is based entirely upon the contracts. Senator C o u z e n s . In other words, it is this practice, as I u n d e r stand it, that Senator Glass has particularly objected to? Mr. M i t c h e l l . I have not known of Senator Glass objecting to this particular practice. He may have, Senator Couzens, but I don’t recall it. Senator C o u z e n s . What was the basis of his controversy with you, then, on that practice of lending money on these day loans? M r. M i t c h e l l . No. That had nothing to do with day loans. That controversy had to do with lending money to the loaning post on the New York Stock Exchange. That was for the carriage of secu rities over night, or for a day or two. Senator C o u z e n s . There is not much difference between these and those, is there? M r. M i t c h e l l . Oh, yes. This is a pure operating problem. The other is a loan-carrying problem. This has nothing to do with that, Senator. Senator C o u z e n s . No ; but I mean they are in the same category, because they have to do with stock-market activities. You may classify them as different. Mr. M i t c h e l l . Oh, if you put it in that class, yes; but I am quite certain that Senator Glass has never raised any question in regard to this class of loans. In fact, I never have heard a question on this class of loan raised in any investigating committee. Senator C o u z e n s . But it all contributes, however, to the diversion of capital from industry and commerce to stock-market transac tions, whether it be through this scheme or whether it be through the scheme which you stated Senator Glass specifically complained about. STOCK EXCHANGE PRACTICES 1985 M r. M i t c h e l l . Well, I would hardly say so. This class of loan is made on the basis of a contract between 2 people on the Street, 1 to receive and 1 to deliver. The risk is really a matter of a few moments, in the process of which the bank, lending itself to the facilitation of that operation, takes a risk that is, in part, meas ured by the capital strength of the broker, and, secondly, the strength of the contracts between the one to deliver and the one to receive. Senator C o u z e n s . S o when these requests were made for over drafts o f $2,000,000 you examined the purchaser to see if he was able to make good upon the purchase from the broker; is that not true? Mr. M i t c h e l l . That is what is ordinarily done. I can not tell you specifically in this case. I think it very likely that when that man received that letter he would call up the treasurer of the City Co. and say: “Are you prepared to receive so many shares of stock to-day from this particular firm and pay for it as it is delivered?” He said “ Yes.” All right, there is a good contract between two houses on the Street, and he makes that arrangement for a day loan and credits the amount requested to the broker, so that when he presents his checks for delivery of the stock to him for redelivery they can be certified against that amount so established. Senator C o u z e n s . D o you do that with every other broker the same way? M r. M it c h e l l . E v e r y b ro k e r. Senator C o u z e n s . Every one-----Mr. M i t c h e l l (interposing). Everyone that we have on our list. As I say, we do not have as much of this class of business as a great many banks. Some banks have made a great play at this. It is the safest kind of banking operation, as a matter of fact. Senator C o u z e n s . I s it what you would construe real banking business to facilitate the interchange of commerce and industry? M r . M i t c h e l l . Oh, yes, sir; I should say so, distinctly. It is facilitating exchanges on perfectly good contracts during a single day. Senator B r o o k h a r t . Speculative contracts the same as any other? Mr. M i t c h e l l . It may be ; we have this same arrangement be tween bond houses. The largest we have are in connection with dealers in United States Government bonds. You can realize that the transactions there are very, very heavy, and those dealers demand usually very heavy day loans. Senator C o u z e n s . What do you think, Mr. Mitchell, is the extent to which the Federal Government can go in selling their bonds or securities? You are the leading banker of New York, and you are not only that but a good salesman. We may have to have you to sell our Government securities before we get through. M r. M i t c h e l l . Senator Couzens, it all depends upon the credit of the United States Government, and if the United States Govern ment does that which everybody else is trying to do at the moment, balance its Budget, it can sell all of the bonds that it can possibly need for its requirements. Senator C o u z e n s . S o you have not fixed in your mind just what specifically we have got to do to issue a number of bonds without limit almost? I said that badly. In other words, you think that 1986 STOCK EXCHANGE PRACTICES if we did certain things here in Congress we could sell up to thirtyfive or forty billions of Government securities ? Mr. M i t c h e l l . Well, that is a pretty big order. Senator C o u z e n s . Well, I presume so. I am trying to get at it. I put it up big so as to get your sane judgment on it. Mr. M i t c h e l l . It can sell as many bonds as are required to meet what the investing public regard as sound and not as affecting the credit. What they are interested in is the strength of the credit. No concern can go on, whether it is a Government or a business, and continue to issue more evidences of debt, except as their basic principles are sound, and one of those principles, of course, must be the balancing of their day-to-day budget. These bonds cannot be issued, for instance, to pay for deficits. There we run immedi ately into a limitation, Senator Couzens. Senator C o u z e n s . I hope the committee will excuse me for asking extraneous questions. When you speak of balancing the budget and making up of deficits through the issuance of securities what do you include as budgetary items? Mr. M i t c h e l l . Well, of course— Senator C o u z e n s (interposing). Would you include your sugar loss and all of those things in one year’s budget and expect it to be paid out by earnings, so that you balance your budget. Mr. M i t c h e l l . No, but I think if that went on—let me put it another way: I f we are an operating concern and our yearly income and outgo shows in red, then our credit position is weak. I f we have got some losses—you speak of sugar losses, writeoff—if we have got writeoffs and we indefinitely continue those writeoffs, every writeoff we make is harmful, not only to the shareholders, but to our strength. There has got to be a limitation to that sort of thing. Senator C o u z e n s . Do the banks ever defer writeoffs or divide them up over the years ? M r. M i t c h e l l . Yes; but not-----Senator C o u z e n s (interposing). Don’t put any “ b u t” , but do they? Mr. M i t c h e l l . Oh, yes. Yes, indeed. Senator C o u z e n s . So you would not say now that the banks of the country had written off all they ought to have written off, would you, or that was possible to write off ? Mr. M i t c h e l l . No. Senator C o u z e n s . When we come to balancing the Federal Budget, do you assume that all of the bond buyers, all of the note buyers, of Government securities, differentiate between the $2,000,000,000 that we have borrowed practically for the It. F. C . —$125,000,000 for the Federal land banks, $125,000,000 for the home-loan banks— those are all outgoes ? M r. M i t c h e l l . Yes. Senator C o u z e n s . But they are not current outgoes, are they ? M r. M it c h e l l . N o , sir. Senator C o u z e n s . And do you assume that when a buyer of these bonds analyzes the Government’s accounts to know whether this ex cess of outgo over income is made up of items to which I have just referred, or whether they are made-up items of actual operating expenses of the Government ? STOCK EXCHANGE PRACTICES 1987 Mr. M it c h e ll. I think they differentiate. Senator C o uzens . Y ou d o? M r. M it c h e ll. Yes; I do. Senator C ou zens. All right; now we will take the figures of today. How many bonds that are in the market today that were issued for those items to which I have just referred and how many bonds are in the market for carrying operating expenses ? Mr. M it c h e ll. I would have to refresh my memory on that, Sen ator Couzens. Senator C ouzens. I do not imagine there is anybody in the room can answer that question. I f there is anybody in the room, I would ask the chairman to invite them to stand up and tell us. I only mention that because of the absurd discussion all the time about balancing the Budget when I venture to say there is not one man in a million knows what it means. Certainly they do not con template that you are going to take out of taxes in one year the $2,000,000,000 advanced by the R. F. C. ? M r. M itc h ell . N o, no. Senator C ouzens. Or the $500,000,000 handed to the Farm Loan ' Board? Mr. M it c h e ll. Certainly not. Senator C ouzens. Then what are you talking about when you are talking about balancing the Budget, and who knows what you mean by it when you are talking about balancing the Budget? Mr. M it c h e ll. Well, we know what are received from taxes, and we know what the revenues of the Government are. Senator C ouzens. Certainly. So do we all. M r. M it c h e ll. And we know what the current operating expenses are. Senator C ou zens. What are the current operating expenses of the Government for 1932? Mr. M it c h e ll. You mean what are they in character? Senator C ouzens. No; what are they in amount? Mr. M it c h e ll. I would have to refresh my memory on that. Senator C ou zens. So when the Treasury issues statements under its perfectly absurd bookkeeping system that they expended a billion dollars more than they received, that does not mean anything, does it? Mr. M it c h e ll. They paid out a billion dollars more than they received, you mean? Senator C ouzens. Yes. Mr. M it c h e ll. It does not, unless they say what it is for. Senator C ouzens. They do not say what it is for. Mr. M it c h e ll. Yes. Senator C ouzens. They show in their reports as published in the press from day to day that the Government paid out a billion dollars more than it took in, and immediately you great bankers and indus trialists and captains of industry assail the Government for spend ing so much more than they receive, and yet no consideration is given to the fact that billions are spent out for emergency purposes, which obviously cannot be balanced in a year. Mr. M i t c h e l l . That is certainly true. Senator C ouzens. Well, why doesn’t somebody explain that to the public? When you great bankers, like Mr. Aldrich and all of im STOCK EXCHANGE PRACTICES this group, appear before the Finance Committee and tell us poor dubs what we ought to do, they just nonchalantly say, “ Balance the budget.” I would like to know what in hell it means. They don’t tell us. [Laughter.] Now we have one of the greatest, I understand, and best bankers and salesmen in New York, and I would like to get the benefit of his advice. Mr. M it c h e ll. I think, Senator, that expenditures, that is, any outgo of the Treasury Department, has very definitely got to be analyzed before one can reach a conclusion as to whether it con tinues to be a sound one or not. Senator C o u z e n s . Y o u have got one of your advisors here, one o f the greatest Under Secretaries of the Treasury since Alexander Ham ilton had one. I think he ought to be able to tell you what we ought to do so that you in turn could tell us. [Laughter.] Mr. M it c h e ll. I will ask him and see if ne might give you the benefit of his advice, Senator Couzens. Senator B ro o k h a rt. Now I want to ask a question or two about x that. You say, let us assume that running expenses are greater than the revenues, without reference to these other items. How would you balance the Budget then? What kind of taxes would you levy to balance it? Mr. M it c h e ll. That is not a question it seems to me to be an swered definitely off hand. Senator B ro o k h a rt. That is what I supposed he would say. The sales tax is what you are for, is it not? M r. M it c h e ll. I am for whatever is necessary to get the revenue that is required, Senator. Senator B r o o k h a rt. I s that not the thing you think is necessary, the sales tax? M r. M it c h e ll. I am inclined to th in k th at before we g et through we m ay have to come to some sales ta x . Senator B ro o k h a rt. Well, now; then I propose that we levy the first sales tax on the sales of stocks and bonds. What do you say to that. Mr. M it c h e ll. I think that you have a sales tax there now. There is a tax. Senator B ro o k h a rt. Yes; but it is not enough to get a revenue. It is just nominal. You would not be in favor of that, would you? Mr. M it c h e ll. Well I think we have a tax there now. You may consider that you want to increase it, but I am sure that you would not be in favor of increasing it to a point where you would interrupt the proper financing of commerce and industry. Senator B ro o k h a rt. I would not want to interrupt the proper financing, but I would want to interrupt all this speculation. I would like to interrupt and stop all that. M r. M it c h e ll. I w ould n ot m ind i f you could find the w ay to do it , but as lon g as hum ans are hum ans, I do not think th a t can be stopped. Senator B r o o k h a rt. What do you say to this proposition: Sen ator Glass offered an amendment to the tax bill which levied a tax of 5 per cent on all sales on the stock exchange where they were STOCK EXCHANGE PRACTICES 1989 resold in 60 days. What would you say the effect of that would be on the speculation? M r. M it c h e ll. I think it w ould m aterially dam pen it. Senator B r o o k h a rt. So do I. Mr. M it c h e ll. Is that all, Mr. Pecora; Mr. P eco ra . No. Mr. Mitchell, let us get back to these Schmeltzer & Co. day-by-day loans and overcertifications as reflected in these letters that have been read in evidence this morning. Mr. M it c h e ll. Yes. Mr. P ecora. The overcertifications referred to in these letters are extensions of credit in excess of the day-by-day credit that J. R. Schmeltzer & Co. had been accorded by your bank, are they not? Mr. M it c h e ll. Apparently. Mr. P ecora. D o you know what the day-by-day credit of J. R. Schmeltzer & Co. at your bank was in October, 1929? Mr. M it c h e ll. I have been told that our day loan accomodation to them was $500,000. Mr. P ecora. That accords with my information. Mr. M it c h e ll. Yes. Mr. P ecora. These overcertifications are in effect a species of authorized overdrafts, are they not? Mr. M it c h e ll. No ; they are not overdrafts, and an overcertifica tion is not the proper word for that. Mr. P ecora. That is the word which has been used in the cor respondence passing between the bank and the broker. Mr. M it c h e ll. It has, and it is quite a general term on the Street, overcertification. As a matter of fact, the machinery is that a defi nite credit for that day is placed against the account of the one to whom the day loan is made and is----Senator B r o o k h a rt (interposing). Do you get any note or any evidence of that debt? Mr. M it c h e ll. We have what we call a day-loan contract which covers the amount of the application, Senator Brookhart. Senator B r o o k h a rt. I s there a contract signed for every day, or is that a general contract? Mr. M it c h e ll. That is a general day-loan contract, and where these special amounts, added amounts, are put onto the day loan, my recollection is that they are signed up for that additional amount. It is an arrangement by which that amount of money is placed to the credit of that concern against the checks which come in, and that those checks may be certified, but they are certified, as you will see, over and above the amount which the concern would ordinarily nave in the bank, and therefore you get this over certification. Senator B r o o k h a rt. This contract begins then by your making a contract with the broker that you will extend to him in day loans a limit of so much or for a period of time? M r. M it c h e ll. Each day a lim it. Senator B r o o k h a r t. Each day a limit? Mr. M it c h e ll. That is right. Senator B ro o k h a rt. And you have no note, no security, and no evidence of that except this contract? 1990 STOCK EXCHANGE PRACTICES Mr. M i t c h e l l . That is very true. It is a clearance loan. It is a loan made to facilitate clearances between the one who delivers it and the one who receives. Senator B r o o k h a r t . What is the basis for extending credit to these brokers ? What is the basis of your contract ? Mr. M itchell. The basis with us in establishing a day-loan limit, as I have told you, is a study of their own balance sheet. Now we have a rule------ Senator B r o o k h a r t (interposing). You mean of the amount of daily business that they transact ? Mr. M i t c h e l l . No, sir. The amount of their quick assets really. We take—and I don’t know the practice of other banks; I can only give you the practice of our bank—we take their return to the New York Stock Exchange of their position, which is submitted to us, and the rule in our bank is that the day loan line shall not exceed the cash and securities ready for delivery and government bonds that are in the balance sheet of that house. In other words, we do not give any credit for the value of their Stock Exchange member ship or real estate or furniture and fixtures, or anything else. We establish that day loan line on the basis of their quick assets. Senator B r o o k h a r t . It would not be possible for a farmer to get a loan on those terms at your bank then, would it ? Mr. M i t c h e l l . I am afraid not. The farmer’s loans ordinarily go beyond the day. Senator B r o o k h a r t . Yes, but for 50 years the farmer was the best security our banks had, and then we got you fellows and your speculation and your gambling and breaking up of all prices and o f everything, and now a farmer can not get a loan anywhere. Mr. M i t c h e l l . Yes; but I call your attention, in all fairness, Sena tor Brookhart, to the record of these day loans. Since I have had any connection with the National City Bank we have never lost a penny in all of our day loan accommodations. Mr. P e c o r a . Did you lose any during the stock market crash in 1929? Mr. M i t c h e l l . Not a p e n n y . Senator B r o o k h a r t . There are some fellows I have heard running poker games that could tell you the same thing as that. The fact that you succeed in a gambling operation does not make it any more desirable than if you failed. Mr. M i t c h e l l . I would not consider the day-loan operation, and I don’t think under any stretch of imagination you cauld call the day-loan system a form of speculation or gambling. It, of course, has inherent in it that which every transaction has that is made by a bank, which is a continuing risk of some sort or another. But I mentioned that record on day loans to indicate that perhaps there is no business done in Wall Street where the risk as far as the banker is concerned is as light as it is in day loans. Senator B r o o k h a r t . But conceding that it is still supporting and promoting a speculation in these stocks, and in this case in your own stock ? Mr. M i t c h e l l . It does not seem to me that it is supporting it any more than is our very presence there as a credit institution. We are there. We facilitate the making of deposits and the passage of checks. We facilitate the speculative markets, if you say so, by our STOCK EXCHANGE PRACTICES 1991 presence there, and usual regular operation, but we do not facilitate it to any substantially greater degree by this kind of an operation, which, as I say, has been the standard form of operation since the National Bank Act came into being in, if I recall right, 1865. Senator B r o o k h a rt. It seems to me it is a mighty convenient way of getting easy money. Senator R e y n o l d s . Mr. Chairman, I would like to ask Mr. Mitchell a question. The C h a irm a n . Senator Reynolds. Senator R ey n old s. Mr. Mitchell, speaking of these loans that are under discussion here, I understand that it has been brought out here in the testimony before this committee by Mr. Pecora that the vice presidents of your institution borrowed some $2,000,000 from the bank. Is that right ? Mr. M it c h e il. Not entirely. I think perhaps the impression was given by Mr. Rentschler’s testimony to that effect. The resolution of the board of directors out of which came those particular loans provided that the board authorized a loan initially of $2,000,000 tc members of that board acting as trustees. The provision was that there should be no interest charged against the trustees. Those trustees were authorized to make loans, not only to officers but to officers and employees, and the number of employees I think far exceeds the number of officers to whom those loans were made. Now they did make those loans to officers. The officers paid interest. Senator R ey n old s. What interest did they pay? Mr. M it c h e ll. I think 5 per cent. Senator R eyn old s. Five per cent? Mr. M it c h e ll. Y es. Senator R ey n old s. Have those loans been repaid ? Mr. M it c h e ll. N o. They have not been repaid. I think some ortion of them have been repaid. The far greater portion has not een repaid. Mr. P ecora. About 5 per cent has been repaid, according to Mr. Rentschler. Senator R ey n old s. Five per cent of the $2,000,000? Mr. P ecora. $2,400,000. Senator R ey n old s. Now, do you owe the bank anything? Mr. M itc h e ll . No, sir. Senator R ey n old s. Y o u do not owe the bank anything? E M r. M itc h e ll . N o , sir. Senator R ey n old s. I wanted to pursue that inquiry directed by Senator Couzens a moment ago, with your kind permission, gentle men. Speaking of balancing the Budget, suppose we do not balance it for the next two or three years. How many millions of dollars of bonds under the present conditions could we market with the Ameri can public? M r. M it c h e ll. Senator Reynolds, I am distinctly under the im pression that unless there is an honest attempt to balance the Budget by income or vice versa; that is, by cutting expenditures in the course of time—it may be six months and it may be five years; I can not be wise enough to state—but if this balancing process does not establish itself within a reasonable time, the public will lose confidence in the credit of the Government to a point where the amount of securities 1992 STOCK EXCHANGE PRACTICES that can be floated on a creditable basis to the Government will be restricted. Senator R e y n o ld s . Then you haven’t any definite idea as to the exact amount or the approximate amount that we might be able to market ? Mr. M i t c h e l l . No. The more we market from month to month the nearer we come to the end of the road. Senator R e y n o l d s . I see. That is all, Mr. Chairman. Senator B r o o k h a r t . On that proposition, if we would go directly to the people, as we did in financing the war and the campaigns, and cut out the investment companies and the stock exchange for the sale of bonds, there is not much limit to the amount of bonds the people would buy direct, is there ? M r. M i t c h e l l . That is what we are doing now in connection with Government bonds. The banker and the investment banker does not buy Government securities from the Government at one penny less than anybody else has the opportunity to do. Senator B r o o k h a r t . The amount of credit the Government could carry is limited by its taxing power only, isn’t it? Mr. M i t c h e l l . Its taxing power and the exercise thereof. Senator B r o o k h a r t . Yes. And if it wanted to float more bonds, and pay more interest, why it could levy higher taxes on the big upper brackets and get the money to pay that interest, could it not? M r. M i t c h e l l . Y o u w ill b e a r in m in d th a t th e m in u te y o u p a y h ig h e r in terest y o u d e p re cia te th e v a lu e in the m a rk e t o f th e se c u ri ties th a t are a lre a d y e x istin g , a n d co n tin u a lly fe e d in g a h ig h e r interest rate w ill be a r e d fla g to ------Senator B r o o k h a r t (interposing). I did not mean a higher inter est rate; I meant a greater amount of bonds. It may be a lower interest rate. M r . M i t c h e l l . The more bonds that you put out, whether the effect is momentary or not, sooner or later they will be reflected in the interest yield on the outstanding bonds, and the rate that must be paid by the Government on any new issues that it puts out. Senator B r o o k h a r t . N o w , as these new issues and this increase of indebtedness has come about through depreciation, the interest rate over in the Treasury has gone down all the time. Mr. M i t c h e l l . Yes; it has gone down, but you will bear in mind that for a long period now the Government has done its financing on the basis of short term. The short-term issues have, of course, been taken up by the banks of the country very largely because they did not find a demand from a good borrower in commerce and trade and agriculture, and banks have used their money to hold Government bonds. Senator B r o o k h a r t . I s not the specific reason why they have taken these Government loans coming from the fact that they had beei? loaded up on advice of the big banks, with private bonds, and the bank examiners, and all advised, that this list of bonds were good, and they have depreciated so much that nearly all the banks of the country are in trouble and they are buying the Government bonds to be safe? Mr. M i t c h e l l . Well, it is not altogether right to say that it is entirely bonds. Bonds have affected the situation adversely. There STOCK EXCHANGE PRACTICES 1993 is no question about that. But you bear in mind that we have had a great deal of trouble throughout the country with mortgages. We have had a slowing up in the power of debtors to pay their current obligations at banks. We have had as a result of this depression a tightening process all along the line. Senator B r o o k h a r t . I t was preceded by a swelling process where all these things were inflated enormously above any just level, every thing, land, and so forth, and the bubble burst and now we are getting the reaction that follows, due to the bad management of you people that are running the finances and Government of the United States. Mr. M i t c h e l l . I do not think that we acting in finance had any thing to do with the high price of agricultural commodities at a cer tain time, and the introduction of tariff barriers and the develop ment of uneconomic production of agricultural products in various parts of the world that affected agricultural price. Senator B r o o k h a r t . You are quite aware on that, are you not, that agricultural prices have not been high since 1920 and that they did not boom up with the boom of your stocks and bonds? Mr. M i t c h e l l . I realize that they-----Senator B r o o k h a r t (interposing). They stayed low all the way through. You reached a point where you thought you could be prosperous without the buying power of a prosperous agriculture. Mr. M i t c h e l l . You recall, Senator Brookhart, that we had quite a drop in wheat, if I recall, along in 1930, that was very disastrous to the farmers of the West. Senator B r o o k h a r t . That was after the panic. It not only hit other business but it hit agriculture another jolt, and sent it still lower, until now we are on the lowest price level that ever I can remember. Mr. M i t c h e l l . Or I can remember either. Senator B r o o k h a r t . Or you either. Now then, these agricul tural prices were held down in part by the raise of railroad rates of 60 per cent on agricultural products and railroad securities were sold on the value of seven or eight billion dollars higher than the market value at the time the valuation was fixed by the law. That in flated the railroad stuff. Then Insull came in and inflated his stuff two or three billion dollars, Morgan did, and then you got your bank stock up to, I said, 2,500 per cent, but it is over 2,800 per cent nearly 2,900 per cent, above its par, and everything was inflated in this country, in a country that in good times produces only about 4 per cent a year on an average, and that, of course, produced a result that when that burst, why, there was a general calamity in the whole country, and you are not offering us any way to get out of it. That is the worst part. You got us in, but how about getting us out? Mr. M i t c h e l l . Well, I think it is something that is going to take the cooperation of everybody in the system. Senator B r o o k h a r t . The fact is there is nobody with an organiza tion strong enough to do it but the Government of the United States itself, and it has got to do that by taking charge of this agri cultural surplus and employing these unemployed men instead of loans we have been talking about to do it. The C h a ir m a n . Senator Brookhart, I agree with you in so much of what you say, but I think I shall have to raise a point of order. 1994 STOCK EXCHANGE PRACTICES This is not the matter under investigation, and we will have to limit our time more closely to the matter that we are here for. So give us a chance part of the time anyway. Senator B r o o k h a r t . Very well; I am through. Mr. P e c o r a . Mr. Mitchell, just before you leave the stand, to get back to the Schmeltzer & Co. overcertifications of October, 1929, were you aware that those overcertifications were being granted to Schmeltzer & Co. at that time ? Mr. M i t c h e l l . I did not know anything about these particular transactions. They would not naturally come to my attention. They would not get beyond the attention of the vice president in charge of the street loan, Mr. Pecora. Mr. P e c o r a . Who was that vice president in October, 1929? Mr. M i t c h e l l . This would be a matter that would be attended to by either Mr. Brady or Mr. W. A. Simonson. Mr. P e c o r a . A s you heard these letters read, you caught the im plication of them, didn’t you ? M r. M i t c h e l l . Oh, yes. Mr. P e c o r a . And they indicated, did they not, that these brokers were buying large blocks of capital stock of the National City Bank for the account of the National City Co.? Mr. M i t c h e l l . They had sold to the National City Co. I do not believe that any of those brokers were commissioned to buy for the account. Mr. P e c o r a . Where the brokers were asking the bank for exten sions of their day-by-day line of credit, as these brokers were through these requests for overcertification, did not that fact indicate that they were acquiring these shares of stock for delivery to the National City Co. ? Mr. M i t c h e l l . I presume that there were many, many days pos sibly through that very period where the National City Co. was delivering stock to Schmeltzer. Schmeltzer is a broker. He would be buying and selling during the day, and they may have bought from the National City Co. so that the National City Co. had large deliveries to make to them. Mr. P e c o r a . All these letters refer to deliveries which the brokers were to make to the National City Co.? M r . M i t c h e l l . Yes. Mr. P e c o r a . Let us confine ourselves to the subject matter of these letters and the transactions indicated by these letters. M r. M i t c h e l l . They indicate that on the transactions of the day before this broker, Schmeltzer & Co., had sold to the National City Co. blank shares of stock which required a substantial amount of money, and their day loan would have to be increased that day in order to enable them to clear that transaction. Mr. P e c o r a . They would have to get money to clear the transac tion when they had the stock ? Mr. M i t c h e l l . They had to pick up the stock. Mr. P e c o r a . Exactly. These brokers had to pick up the stock for delivery to the National City Co.? M r . M i t c h e l l . Absolutely. Mr. P e c o r a . And the value of the stock which they had to pick up for delivery to the National City Co. was such that they required these loans in excess of their $500,000 daily credit ? STOCK EXCHANGE PRACTICES 1995 Mr. M it c h e ll. Their clearance was increased that day, so that had to be covered as an excess. Mr. P ecora. Does not that indicate, Mr. Mitchell, that where the bank granted those overcertifications to the broker, the bank was loaning money to enable that broker to acquire stock of the bank for delivery to the National City Co.? Mr. M it c h e ll. Yes; but they did it on the basis of the contract of the National City Co. to receive. Mr. P ecora. In other words, the bank gave these overcertifications to the broker because it knew the responsibility of the customer of the broker to whom the broker was to deliver the stock, the customer in these instances being the National City Co. ? Mr. M it c h e ll. They knew that there was a contract there that would be fulfilled. Mr. P ecora. Yes; exactly. Wasn’t that a species of trading by the bank in its own stock? Mr. M it c h e ll. I do not think you could conceive it to be that at all, Mr. Pecora. Mr. P ecora. Well, I realize that the delivery of the stock was to be made not to the bank, of course, but to the National City Co. Mr. M it c h e ll. Yes. Mr. P ecora. But the company is inseparably interwoven with the bank, is it not ? M r. M itc h e l_ . Yes, it is; but it would not----Mr. P ecora (interposing). It is like one body with two heads, isn’t it ? It has the same body; it has the same blood, meaning the capital derived from the sale of the capital stock of the bank to the bank’s, shareholders. But instead of having one head it has two heads, and the two heads seem to be the one head in your personality. You were the chairman of both institutions. But in form it had two heads,, didn’t it? M r. M it c h e ll. Yes. Mr. P ecora. Inseparably interwoven with the bank, virtually as one entity? Mr. M it c h e ll. One entity, institutional entity, yes. But, Mr. Pecora, I do not want to prolong this, but ordinarily a broker apply ing for a day loan would not state what this was for, and it was not at all necessary for him to state it there. Mr. P ecora. They did state it here? Mr. M it c h e ll. They did state it here, but what I am getting at is that the National Oity Bank when they received that letter un doubtedly paid no attention to the name of the security that was, involved. They were interested only in one thing. Here was a delivery to be made to the National City Co. of something against which-----Mr. P ecora. It was not of something; it was o f a specific thing set forth in the letters, was it not ? Mr. M it c h e ll. Yes; but these excess day loans are built up on the basis of the contract and not on the security. The banker that handled that paid no attention whatsoever to the security involved. He paid attention to the question, Is the contract good between his entity as a deliverer and this entity as a receiver ? 119852—33—PT6----- 16 1996 STOCK EXCHANGE PRACTICES Mr. P e c o r a . I know that to a certain extent this transaction did not depart from the routine of many other similar transactions. M r . M i t c h e l l . Yes. Mr. P e c o r a . But the transactions reflected by these letters are of particular interest now because the broker, either fortunately or unfortunately, specified the particular security, namely, the stock of the National City Bank, which he was delivering to the National City Co., and it is that feature which interests me. M r . M i t c h e l l . Yes. Mr. P e c o r a . When the bank got these letters the bank was in formed specifically that Schmeltzer & Co. were picking up stock of the National City Bank for delivery to the National City Co. to an amount that required an extension of credit in excess of the $500,000 daily line which the bank had accorded these brokers ? Mr. M i t c h e l l . That is correctly stated. Mr. P e c o r a . That is correct, is it not ? M r. M i t c h e l l . That is correctly stated. Mr. P e c o r a . N o w , in view of the knowledge which the bank there by acquired of the specific character of these transactions through many of these letters, did not the bank have notice that it was loan ing moneys or extending credits to the brokers to enable them to finance transactions for the benefit of themselves and the National City Co. in connection with the capital stock of the bank? Mr. M i t c h e l l . Well, there is no prohibition that I know in bank ing against lending to a broker or anybody else without collateral. Mr. P e c o r a . May a bank loan on its own stock as collateral ? Mr. M i t c h e l l . A bank may not loan on its own stock at all; no. Mr. P e c o r a . And in these transactions wasn’t that virtually what the bank was doing? M r . M i t c h e l l . I would not say so. I do not agree with you on that. I am sorry. I wish I could, M r. Pecora. [Laughter.] But I just can not. Mr. P e c o r a . Well, the bank was put on notice by these letters that the overcertification or extension of credit was required by the brok ers from the bank in order that the brokers might be enabled to make delivery to the National City Co. of large blocks of the capital stock of the bank? Mr. M i t c h e l l . That I have granted. That is clear from the-----Mr. P e c o r a (interposing). And those overcertifications or exten sions of credit were granted, were they not? Mr. M i t c h e l l . The day loan was increased by that amount. Mr. P e c o r a . And you still say that this was not an extension of credit or a loan made upon the bank’s own stock ? M r. M i t c h e l l . I do. Mr. P e c o r a . You would not have granted, or the bank would not have granted, an overextension or an overcertification to the amount of $9,000,000 to J. R. Schmeltzer & Co. without knowing something definite about the transaction, in view o f the fact that the amount is so far in excess of its daily line of $500,000 ? Mr. M i t c h e l l . I f J. R. Schmeltzer or any other sound broker that happens to be on our credit books would come and say, “ I have contracts for delivery of securities to-day to J. P. Morgan or the Na tional City Co., or any other house of sound credit and reputation STOCK EXCHANGE PRACTICES 1997 on the Street,” and we got word from the one that was to receive the securities that he was under agreement to receive them and would make payment upon receipt, we would have granted that just as readily as though it was on National City Bank stock. Mr. P ecora. But in these cases you knew, through the medium of letters, that the loans to the brokers were required to enable the brokers to finance their transactions with the National City Co. in the stock of the bank? Mr. M it c h e ll. Yes. The broker mentioned this specific security . in this case. I tell you it is not customary and that fact would be passed over immediately by an operating officer. Mr. P ecora. It was passed over by your bank’s operating officer in that case, was it not? M r. M it c h e ll. Yes; it was. Mr. P ecora. What is the difference in principle, Mr. Mitchell, between the granting of this certification to Schmeltzer & Co. and permitting Schmeltzer & Co. to draw overdrafts against their credit or against their account with the bank? Is there any difference in principle ? M r. M itc h ell . O h , yes. Mr. P ecora. What is the difference? Mr. M it c h e ll. In this particular case there is not an overdraft. The operation of the day loan is that when acceded to and it is known that it is to be used there is set up on the books of the bank a credit against which the checks are certified. It is not an overdraft; it is a form of loan. Senator B ro o k h a rt. Why isn’t that an overdraft until the other party pays for it or until it is paid back? Mr. M it c h e ll. Well, because in the meantime it is a loan to this concern. Senator B r o o k h a r t. The only thing I can see that protects it from being an overdraft is that contract you have there. M r. M itc h ell . T h at is righ t. Senator B ro o k h a rt. Supposing they did not pay it after you gave them that credit? Then what would you do? You would have to go back and sue on your original contract? Mr. M i t c h e l l . I f there was fraud and the amount was not forth coming and they went over at the end of the day with a part of that day loan unpaid, it would be a very unusual case, and the only way it could be covered then would be by that concern making a regular loan on its credit, either secured or unsecured, in some place or another. Of course, they could not borrow from us over----Senator B r o o k h a r t (interposing). Then the whole loan is in that same condition until it is paid after it goes on your books? Mr. M it c h e ll. Paid during the same day. Senator B r o o k h a rt. So far as the looks of the books are con cerned it is a straight overdraft then? M r. M it c h e ll. Well, we don’t----Senator B r o o k h a rt (interposing}. You do not call it that, but it would look just like an overdrart that you had allowed, would it not? Mr. M it o h e ll. It might. It might look that way to you, but (that is not the operation. 1998 STOCK EXCHANGE PRACTICES Mr. P ecora. I do not contend that it is an overdraft in form, but in principle or effect it is similar to an authorized overdraft, is it not? Mr. M it c h e ll. It has much the same effect, Mr. Pecora, certainlyMr. P ecora. Yes. Well, that is what I mean to indicate. The C h a irm a n . The committee will recess until 2 o’clock. All witnesses will be here again at 2 o’clock. (Whereupon, at 12.10 o’clock p. m., the subcommittee recessed until 2 o’clock p. m. of the same day.) AFTER RECESS The subcommittee resumed at 2 o’clock p. m. on the expiration o f the recess. The C h airm an . The subcommittee w ill come to order. Whom w ill you have, Mr. Pecora? Mr. P ecora. Mr. Robinson. Hie C h a irm a n . Please stand, hold up your right hand, and be sworn. You solemnly swear that you will tell the truth, the whole truth, and nothing but the truth regarding the matters now under investigation by this subcommittee, so help you God. Mr. R obin son . I do. TESTIMONY OF EDWIN S. ROBINSON, BROOKLYN, N. Y. Mr. P ecora. Mr. Robinson, will you give your full name, address, and business or occupation to the reporter? Mr. R obin son . Edwin S. Robinson, 9229 Shore Road, Brooklyn. N. Y. Mr. P ecora. And your occupation or business. Mr. R obin son . Stockbroker. Mr. P ecora. H ow long have you been connected with the stock brokerage business? Mr. R obin son . Oh, about 12 years. Mr. P ecora. With what office or firm in that business are you now connected ? Mr. R obinson.’ With Hardy & Co. Mr. P e c o r a . H o w l o n g h a v e y o u b e e n c o n n e c t e d w i t h t h a t firm? Mr. R obin son . Two years. Mr. P ecora. Immediately prior to that with what firm were you connected? Mr. R obin son . J. R . Schmeltzer & Co. Mr. P ecora. With J. R. Schmeltzer & Co. Mr. R obin son . Yes, sir. Mr. P ecora. Were you associated with the brokerage firm of J. R. Schmeltzer & Co. in the years 1928,1929, and until about September of 1930? Mr. R obin son . Yes, sir. Mr. P ecora. In what capacity? Mr. R obinson. Manager of the bank stock department. Mr. P ecora. Did ypu say manager o f the bank stock department ? Mr. R obin son . Yes. STOCK EXCHANGE PRACTICES 1999 Mr. P ecora. Bank stocks are usually dealt in on the over-the■counter markets, aren’t they, as distinguished from the exchange markets? Mr. R obin son . They are. Mr. P ecora. In January of 1928 the capital stock of The National City Bank was taken from the stock exchange trading list, as you know. Mr. R obin son . Yes, sir. Mr. P ecora. From that time until September of 1930 did you as a member of J. R. Schmeltzer & Co. handle any transactions in the capital stock of the National City Bank for and on behalf of the National City Co.? Mr. R obin son . I would have to correct you there. I was not a member of the firm but a salaried employee. Mr. P ecora. With that correction to my question, will you now make answer? Mr. R obinson. Well, that is, that I traded with the National City Co. Mr. P ecora. Yes. Mr. R obinson. I either sold stock to them or bought stock from them. Mr. P ecora. Y o u had transactions with them? Mr. R obinson. Yes, sir. Mr. P ecora. In the stock of the National City Bank? Mr. R obinson. That is correct. Mr. P ecora. You were known as the specialist in the over-thecounter market in the stock of the National City Bank during those times, weren’t you? Mr. R obinson. Commonly but not officially known. Mr. P ecora. I know. There is no such official designation. Mr. R obinson. That is what I am trying to bring out. Mr. P ecora. But that was the common report about you. Mr. R obinson. Yes. Mr. P ecora. That you were the specialist in that stock; is that right ? Mr. R obin son . That is correct. Mr. P ecora. Now, during the time I have mentioned did you have •daily transactions in the stock of the National City Bank with the National City Co.? Mr. R obinson. I presume I did. Mr. P ecora. Were they of an extensive character, would you say? Mr. R obin son . Well, no; I do not think so. They varied from time to time, with one day more with the National City Co. and another day more with somebody else. There was no steady volume so far as I could say. Mr. P ecora. But the total volume of those transactions in that period of time greatly exceeded the total volume of the transactions you had in any other bank stock, didn’t it? Mr. R obinson. Well, I was only specializing in National City Bank stock. Mr. P ecora. Y o u only had trades in that stock? Mr. R obinson. Oh, occasionally we did get orders in other stocks, but the most of it was done in National City Bank stock. 2000 STOCK EXCHANGE PEACTICES Mr. P e c o r a . Who was the gentleman in the National City Co. with whom you came most frequently in contact in connection with those transactions? Mr. R o b in s o n . That would be the manager of their bank stock department or trading department. Mr. P e c o r a . And w h o w a s h e? Mr. R o b in s o n . A man named Mr. Pritchard. Mr. P e c o r a . Mr. Pritchard? Mr. R o b in s o n . Yes, sir. Mr. P e c o r a . Do you know who Mr. Pritchard’s superior was ? Mr. R o b in s o n . I do not really know. I could imagine; but I don’t know. Mr. P e c o r a . Don’t you know it was Mr. Morrison? Mr. R o b in s o n . I believe it was Mr. Morrison. Mr. P e c o r a . D o you know where Mr. Pritchard is now? Mr. R o b in s o n . I do not. Mr. P e c o r a . When did you last have any contact with Mr. Pritchard ? Mr. R o b in s o n . Business or personal? Mr. P e c o r a . Of any kind. Mr. R o b in s o n . I had personal contact with him the day after you served the subpoena on me. Mr. P e c o r a . That is, to come to this hearing ? Mr. R o b in s o n . Yes, sir. Mr. P e c o r a . Was Mr. Pritchard then connected with the National City Co.? Mr. R o b in s o n . No, sir. Mr. P e c o r a . Did you know that he had severed his connection with the National City Co. several months ago? Mr. R o b in s o n . Yes, sir. Mr. P e c o r a . Did Mr. Pritchard then indicate to you that he was going to leave New York City for any extended stay? Mr. R o b in s o n . He told me that he planned to leave, a month or so ago. Mr. P e c o r a . And do you know whether he left? Mr. R o b in s o n . I imagine he did. I have not talked to him since that day. Mr. P e c o r a . Y o u have not seen nor heard from him since, have you? Mr. R o b in s o n . No, sir. Mr. P e c o r a . Will you describe generally but briefly for the com mittee the procedure that was followed in the transactions you had with the National City Co. in connection with stock of the National City Bank? Mr. R o b in s o n . Well, there would be various ways. One way would be that I either had some stock for sale for the firm’s account or one of their various customers, and I would offer that stock to the National City Co. at a set price and they would buy it. I f they did not buy it I would attempt to sell it elsewhere, or vice versa. Mr. P e c o r a . Would you go to the trading department of the National City Co. to find out the market they were making for the stock ? Mr. R o b in s o n . I would call them and attempt to find out if they were maintaining or quoting a market. STOCK EXCHANGE PRACTICES 2001 Mr. P ecora. Y o u would go or call on the telephone to find out if they were maintaining or quoting a market; is that right? Mr. R ob in son . Correct. Mr. P ecora. What do you mean by maintaining a market? Mr. R obin son . Well, maintaining and quoting are two different ways. You maintain a market by— Mr. P ecora (interposing). I am asking you now to talk about both ways. But first, about the meaning of the term “ maintaining a market.” Mr. R ob in son . T o maintain a market is to establish a bid and an offering price on stock. That would obligate you to trade with any one who called you. I f I make a price on a stock, at such and such a price you obligate me to trade. I f you quote a market you are not obligated to trade. I could quote you a price right now, but I am not obligated to trade with you. Mr. P eco ra . Y o u found it of exceeding value to you as a special ist in the stock of the National City Bank to know what market the National City Co. was maintaining or quoting, as the case may be? Mr. R obin son . Yes, sir; at times I did. Mr. P ecora. And their action in maintaining or quoting the mar ket had something to do with the daily quotations, didn’t it? Mr. R obin son . Through the day? Mr. P ecora. Yes. Mr. R obin son . Well, they would change. The market they were making would not necessarily mean that it was maintained during that day. There might be other houses making prices, and if they were----Mr. P ecora (interposing). How many times a day would you call upon the National City Co. to tell you what market it was maintaining, or what prices it was quoting, on the stock of the bank? Mr. R obinson. You are going back now three and one half years ago. This is from memory. There wasn’t a record kept of every conversation. Mr. P eco ra . I understand that; but all I expect of you is your general recollection of the matter. Mr. R obin son . Well, I would call very frequently, maybe every three or four minutes. Mr. P ecora. And you found it advisable to keep in touch with them to that extent during your day’s transactions, regarding the market they were maintaimng or quoting for the stock of the National City Bank, did you? Mr. R obin son . Yes, sir. Mr. P ecora. H ow would you communicate with them—through a direct wire that was available to your office and to the National City Co.’s office ? Mr. R obin son . Through a direct wire. Mr. P ecora. N ow , do you recall particularly the transactions you had with the National City Co. in the stock of the National City Bank during the month of October, 1929 ? Mr. R obin son . I believe I do. Mr. P ecora. Were your transactions with the National City Co. in that month much greater in volume than they were for other months during the penod from January, 1928, to September, 1930? 2002 STOCK EXCHANGE PEACTICES Mr. R o b in s o n . I believe in accordance with general business con ditions they were. Mr. P e c o r a . Were you in this hearing room this forenoon while letters written to the National City Bank in the month of October, 1929, by J. R. Schmeltzer & Co. were spread upon the record and were read aloud? Mr. R o b in s o n . Yes, sir. Mr. P e c o r a . Are you familiar with the transactions referred to in those letters ? Mr. R o b in s o n . Not in the least. Mr. P e c o r a . Not in the least? Mr. R o b in s o n . No, sir. Mr. P e c o r a . Do you know who in the organization of J. R. Schmeltzer & Co. was familiar with those letters ? Mr. R o b in s o n . I do not; but I imagine it would be under the partnership or one of the partners. Mr. P e c o r a . Mr. Robinson, did you know at any time that the National City Co. gave options for tens of thousands of shares at a substantial number of points below the market to others? Mr. R o b in s o n . Not until yesterday. Mr. P e c o r a . And the first time you learned of it was through the medium of testimony adduced at the hearing before this com mittee yesterday? Mr. R o b in s o n . That is correct. Mr. P e c o r a . I f you had known of those option prices at the time when an option was given and when the option was exercised by Dominick & Dominick, would it have made any difference in the open market on the question of the value, or the market value or quotations, for the National City Bank stock? Mr. R o b in s o n . That is a hard question, Mr. Pecora. It all de pends upon the market conditions at the time. For me to answer now would be guesswork. Mr. P e c o r a . Well, it would affect market values generally if it were known, wouldn’t it? Mr. R o b in s o n . It should. Mr. P e c o r a . With options covering 32,000 shares of stock given by the company to others at prices well below the market? Mr. R o b in s o n . Well, I have known of them to affect market prices on other options, but I have not known of the National City Bank. But it is not the rule. Mr. P e c o r a . But if knowledge of these options and the prices at which they were given, had become public property it would have affected prices, wouldn’t it? Mr. R o b in s o n . I believe it would. Mr. P e c o r a . So, in order not to affect prices by the granting of these options below the market, the options are secretly given, isn’t that right? Mr. R o b in s o n . I believe that is correct. Mr. P e c o r a . What was the daily line of credit awarded J. R. Schmeltzer & Co. by the National City Bank in October of 1929? 1929? Mr. R o b in s o n . It is impossible for roe to answer that. As a sal aried employee I would not know. STOCK EXCHANGE PRACTICES 2003 Mr. Pecoba. Y o u do not know ? Mr. R obin son . No, sir. Mr. P ecora. Was any other person connected with J. R. Schmelt zer & Co. in the month of October 1929 engaged in those transac tions in the bank’s stock with the National City Co. ? Mr. R obinson . No. Mr. P ecora. Did you handle all those transactions in the market? Mr. R obin son . Well, that is hard to answer, too. There were two private wire systems, and occasionally someone might be on a part of some trade. But on the whole I would say that I handled all the trades. We have an assistant who does the details o f the work. In the course of the business, for a part of the day, it might be handled by someone else. Mr. P ecora. Weren’t you to a considerable extent guided in your quotations for the stock by the advices you would receive every 3 or 4 minutes throughout the day from the National City Co. concern ing their prices for the stock? Mr. R obin son . Not as to the whole of the day. I might be mo mentarily for that, but not for the length of the day. Mr. P ecora. But your inquiries would generally be made through out the day, wouldn’t they? Mr. R obin son . That is correct. Mr. P ecora. And the information you received from them was of very considerable guidance to you in your market operations in the stock? Mr. R obin son . I would say to that, Mr. Pecora, no. Mr. P ecora. They were of some guidance to you? Mr. R obin son . They were of some guidance to me. Mr. P ecora. Do you know of any other dealer in that stock whose advices on that matter would have been of greater guidance to you? Mr. R obin son . Not greater in the long run but greater at that one moment. There were 30 or 40 other large exchange houses maintaining markets. Mr. P ecora. But in the long run the advices you received con cerning the position of the National City Co. were of more guidance to you than advices you received from any other dealer in that stock, weren’t they? Mr. R obin son . The position in the stock of the National City Bank bv the National City Co. was never revealed to me. Mr. P e c o r a . I am not asking about the position of the National City Co. but its market quotations for the stock. M r. R obinson . W ell., there were no advices received. I can not answer th at, because no one gave m e any advice. Mr. P ecora. I said “ advices.” I did not mean advice in the sense that some one was counseling you, but advices. The word “ advices ” was used by me as synonymous with information. Now, so understanding my question, will you answer it? Mr. R obin son . Advices, as you put it, did help me in trading at times. Mr. P ecora. Didn’t it always help you ? Mr. R obinson. No, sir. Mr. P ecora. Did you ever ignore it? Mr. R obin son . Yes, sir. 2004 STOCK EXCHANGE PRACTICES Mr. P e o o r a . Completely? Mr. R o b i n s o n . Well, it is a case of either ignoring it or not ignor ing it. Mr. P e c o r a . When you ignored it, do you mean that you ignored it completely ? Mr. R o b i n s o n . At that moment; yes, sir. Mr. P e c o r a . In the long run were the advices so given o f greater guidance to you than information received from any other dealer? Mr. R o b i n s o n . I would say their information or advices were of more help than others. Mr. P e c o r a . Yes. In order to be specific, Mr. Robinson, if you were bidding 250, we will say, at a given time for the stock of the National City Bank and you received advices or information that the National City Co. was bidding 240 for the stock, you wouldn’t continue to bid 250, would you ? Mr. R o b i n s o n . Not unless any other house or our connections were bidding250. Mr. P e c o r a . D o you remember having an interview with me in my office in New York, or in the office of this committee in New York, about three weeks ago? Mr. R o b i n s o n . I d o . Mr. P e c o r a . D o you recall telling me there, in words or substance, that as the specialist in the over-the-counter market in National City Bank stock you considered that you handled about 70 per cent of the volume of trades in that stock? Mr. R o b i n s o n . I r e m e m b e r th a t . Mr. P e c o r a . That was true, wasn’t it ? Mr. R o b i n s o n . It was true in the handling of 70 per cent, I think, of the stock over a length of 2 years, but not daily. Mr. P e c o r a . I mean over the period of time we are now dis cussing. Mr. R o b i n s o n . Which is mere guesswork. Mr. P e c o r a . That is your best estimate? Mr. R o b i n s o n . It is guesswork. Mr. P e c o r a . Y o u say it is guesswork? Mr. R o b i n s o n . Surely. Mr. P e c o r a . It is your best estimate, whether you call it g u e s s work or not, isn’t it ? ' Mr. R o b i n s o n . Right. Mr. P e c o r a . Since you first told me that you have not had a n y reason to revise that guess, have you ? Mr. R o b i n s o n . N o , sir. Mr. P e c o r a . And you do not want to revise it now, do you? Mr. R o b i n s o n . N o . But I don’t want to be guessing now. Mr. P e c o r a . I f you were asked to give us your best guess now, you would give that guess, wouldn’t you ? Mr. R o b i n s o n . Certainly. Mr. P e c o r a . A s the specialist who handled about 70 per cent of the over-the-counter trades in that stock, you found it necessary or advisable to keep in constant touch throughout the day with the National City Co. for the purpose of learning what they were doing to maintain the market or “ prices ” ; isn’t that right ? Mr. R o b i n s o n . That is right. STOCK EXCHANGE PEACTICES 2005 Mr. P e c o r a . Who handled the financial end of those trades on behalf of your firm in October of 1929 ? Mr. R o b i n s o n . The financial end of it would be handled by any one of the partners. M r . P e c o r a . Who is A. B. ? What person in the office had a name the initials of which were A. B.? Mr. R o b i n s o n . I believe, although I may be wrong on this, but I believe he was one of the clerks in the cage. Mr. P e c o r a . "V^as there any advice or instruction or direction giveii to you by anybody in the firm during that month concerning the extent to which you could commit the firm in transactions in National City bank stock with the National City Co.? Mr. R o b i n s o n . Only regarding their own position, that is, the position they wanted to be in over the night, was all. Mr. P e c o r a . Who gave you your directions or instructions in that respect ? Mr. R o b i n s o n . Mr. Clifford. Senator F l e t c h e r (presiding). Did Mr. Pritchard tell you why he was going away? Mr. R o b i n s o n . N o, sir. Mr. P e c o r a . In the over-the-counter market isn’t it true that the largest buyer and seller has a greater influence, or exercises a greater influence, on market quotations than anyone else ? Mr. R o b i n s o n . That would be natural in any market. Mr. P e c o r a . Yes. Mr. R o b i n s o n . Yes, sir. Mr. P e c o r a . And in connection with the market for National City Bank stock wasn’t the National City Co., by and large, through that period of time the largest buyer and the largest seller so far as you know? Mr. R o b i n s o n . S o far as I k n o w they were. Mr. P e c o r a . By what percentage did the volume of their trans actions exceed the next largest buyer and seller of that stock in that period of time? Mr. R o b i n s o n . I can not answer that without the record and I haven’t the record. Mr. P e c o r a . Give us the best answer you can make. We under stand that it is not to be accepted as mathematically correct, but I want the best approximation you can give us from memory. Mr. R o b i n s o n . I should say they bought from me about 30 to 40 per cent more. Mr. P e c o r a . Than any other individual buyer or seller, is that right ? Mr. R o b i n s o n . Yes, sir. Mr. P e c o r a . The National City Co. was your biggest customer for National City Bank stock? Mr. R o b i n s o n . That question was just answered. Mr. P e c o r a . N o further questions, Mr. Chairman. Senator F l e t c h e r (presiding). You may be excused. Is he to be excused entirely, Mr. Pecora? Mr. P e c o r a . Yes, sir. We are through with him. Senator F l e t c h e r (presiding). You need not return. (Thereupon the witness was excused from further attendance.) Mr. P e c o r a . Mr. Baker will resume the stand, please. 2006 STOCK EXCHANGE PRACTICES TESTIMONY OP HUGH B. BAKER, PRESIDENT NATIONAL CITY CO., NEW YORK CITY—Resumed Mr. P e c o r a . Mr. Baker, there was some reference in the testimony yesterday about the selling organization of the National City Co., and some witness testified that the number of salesmen directly employed by the National City Co. throughout the country in the sale of its securities to the public was about 350. Do you recall that ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Now, in addition to selling securities to the public through the instrumentalities of those 350 salesmen, I mean em ployed salesmen, the company used other agencies or facilities for selling and distributing its securities to the public, didn’t it ? Mr. B a k e r . Well, other dealers. Mr. P e c o r a . It referred to them as other instrumentalities or agencies. Did it or not? Mr. B a k e r . Yes. We did business with hundreds and hundreds of dealers. Mr. P e c o r a . Now, those hundreds and hundreds of dealers were scattered throughout the country, weren’t they? Mr. B a k e r . That is right. Mr. P e c o r a . And the radius of their respective operations was rather large? Mr. B a k e r . Oh, y e s. Mr. P e c o r a . So that in addition to your own selling force o f 350 salesmen, your company utilized the selling facilities of hundreds and hundreds o f dealers throughout the country. Mr. B a k e r . Well, of course we had no control over them. Mr. P e c o r a . Didn’t it-----Mr. B a k e r (continuing). Well, if I may explain that in this way: We had business relations with dealers all over the United States, perhaps not frequently, but when we had some new deal or some new issue we were then offering, we would then be in contact with dealers throughout the whole of the United States. So that when I say we did business with dealers throughout the country I mean it in that way. Mr. P e c o r a . That is to say, you proceeded to market your secur ities to the investing public not only through your own 350 salesmen, but also through the selling facilities of hundreds of dealers scat tered throughout the country. Mr. B a k e r . They were invited to participate in our deals. Mr. P e c o r a . And they did participate in them, hundreds of them. Mr. B a k e r . Many of them did; yes, sir. Mr. P e c o r a . N o w , throughout the years 1928 and 1929 your com pany maintained marked activity in the sale of the bank’s stock, didn’t it ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Not only through its own 350 salesmen but also through dealers and houses throughout the country. Mr. B a k e r . Well, of course in only those cases with dealers where they had actual orders for the stock. There was no commission of any kind that would justify any effort on their part. I f they had orders for the stock they might place the orders through us or some body else. STOCK EXCHANGE PBAOTICES 2007 Mr. P e c o r a . The National City Bank had correspondents or cor respondent banks in the interior of the country, didn’t it? Mr. B a k e r . Yes, ,«ir. Mr. P e c o r a . What was the number of those correspondent banks in the interior? Mr. B a k e r . I can not answer that. I do not know. Mr. P e c o r a . Many? Mr. B a k e r . Yes, many. Mr. P e c o r a . But the National City Co. also utilized the facilities o f those correspondent banks and distributed its securities through out the country? Mr. B a k e r . Well, some of those banks had bond departments, in vestment departments, and in those cases, many of them were in vited, but it did not necessarily correspond with the fact that they were correspondent banks. I f we regarded them as investment dealers probably they would be invited, the same as any other dealer. Mr. P e c o r a . What I want to get at are the facts as distinguished from probabilities. What are the facts in that respect? Mr. B aker. Those are the facts. Mr. P e c o r a . T o put it simply: Your company in distributing securities to the investing public not only utilized the services of its 350 salesmen and hundreds of dealers throughout the country, but also the facilities of those correspondent banks throughout the country? Mr. B a k e r . Only where they had bond departments or investment departments, and other banks. It did not make any difference to us whether they were correspondents of the National City Bank or any other bank, if they had investment departments. Mr. P e c o r a . And you found that most o f those banks had invest ment departments, didn’t you? Mr. B a k e r . I doubt if the most of them had, but quite a number. Mr. P e c o r a . A substantial number had? Mr. B a k e r . Yes. Mr. P e c o r a . N o w , at various times during those two years, in selling the stock of the bank through its various agencies and selling facilities, the National City Co. offered a premium to selling agents, did it not, on whatever sales they made of the stock of the bank? Mr. B a k e r . That was to our salesmen. And the same thing is true in all securities which were on our list, as a part of their com pensation. Mr. P e c o r a . D o you mean to say that you offered premiums on all sales they made? Mr. B a k e r . Not necessarily all. There might be so-called buying orders for some security which we did not have and which was executed merely as a service execution. Senator F l e t c h e r . Did you allot stock to your correspondents and signify to them that you desired they take that stock? Mr. B a k e r . N o , sir. Mr. P e c o r a . Did you give special discounts to the banks, the cor respondent banks or banks in the interior, which sold the stock of your bank? Mr. B a k e r . Not at all. Never. 2008 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Never? Mr. B a k e r . Not to my knowledge. Mr. P e c o r a . Well, did you get the same prices from them, or quote the same prices to them that you did to the general public? Mr. B a k e r . Yes. Mr. P e c o r a . Well, now, let us understand: How were your sales men compensated for their work? Mr. B aker. By salary and premiums; in other words, commissions. Mr. P e c o r a . Did every salesman get both a salary and a com mission ? Mr. B a k e r . Yes. Mr. P e c o r a . On the sales made by him for the company ? Mr. B a k e r . Yes. Mr. P e c o r a . N o w , in addition to the salary and commission there were occasions when they also got premiums, didn’t they? Mr. B a k e r . No. That word “ premium ” I am using with the same meaning as commission. Salary and premium, we call it. Mr. P e c o r a . What was the commission they got? Mr. B a k e r . It varied with different issues. Usually on bonds the premium would be anywhere from $1 to $2 or $3. Mr. P e c o r a . For how many shares? Mr. B a k e r . I said bonds. Mr. P e c o r a . Of what units? Mr. B a k e r . $1 ,000 . Mr. P e c o r a . H o w about stocks? Mr. B a k e r . As to stocks, that varied also. It might be anywhere from 10 cents a share to 50 cents a share. Mr. P e c o r a . Who fixed the amounts of those premiums or com missions ? Mr. B a k e r . Well, that was generally fixed by Mr. Beebe in our office. Mr. P e c o r a . What position did he have ? Mr. B a k e r . Assistant vice president. Mr. P e c o r a . And do you know what elements were considered by him in fixing the premiums within the range mentioned by you ? Mr. B a k e r . Well, of course, there were at times new issues, not so well known, credits, in which the demand was not so great, and it required expense of operation, and so forth. Mr. P e c o r a . The premiums were higher where the security was considered more difficult to sell, is that it ? Mr. B a k e r . At times; yes, sir. Mr. P e c o r a . At times ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . And the premiums were also higher when the com pany desired to accelerate sales of any particular issue, weren’t they? Mr. B a k e r . There were times when that was true; yes, sir. Mr. P e c o r a . Now, were any of those times reached during the years 1928 and 1929 with respect to the stock of the National City Bank? Mr. B a k e r . Well, I don’t know what the premium dates were on those. I haven’t it. Mr. P e c o r a . Can not you answer my question? Mr. B a k e r . No, sir. STOCK EXCHANGE PRACTICES 2009 Mr. P e c o r a . Can’t you answer the question now, as to whether or not during 1928 and 1929 there were occasions when your com pany offered a higher premium or commission to its salesmen for selling the stock of the bank ? Mr. B a k e r . Here is a paper which is now handed me which gives the premium lists of National City Bank stock from 1927, and it shows on the old stock 50 cents a share, and then when it was changed to the new stock, 20 cents a share. And then from April 2, 1929, until January 7, 1930, it was 50 cents a share. Mr. P e c o r a . Did you have to get that information from Mr. Law before you were able to answer my question ? M r. B a k e r . Yes. I did not have it with me. Mr. P e c o r a . In other words, until Mr. Law gave you some written memorandum which you consulted in making your reply, you were not able to answer the question as to whether or not during 1928 and 1929 there were occasions when your company raised the pre mium or commission which it gave to its salesmen for making sales of bank stock? Mr. B a k e r . I could not have answered it, because with our num bers of transactions, Mr. Pecora, through the National City Co. in the course of a year’s time, will run 600,000 or 700,000. I cannot remember exactly what premiums were given on this, that, or the other issue without referring to the records. Mr. P e c o r a . Did Mr. Beebe consult you on the matter of fixing the premiums for salesmen? Mr. B a k e r . Not always, but occasionally. Mr. P e c o r a . Did he have the right to exercise his own independent judgment on that? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Did you give him that right ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . And he is an assistant vice president ? Mr. B a k e r . That is right. Mr. P e c o r a . In selling your securities to the public through deal ers, were the dealers given instructions by your company to maintain offering prices except for special discounts to banks and other dealers ? Mr. B a k e r . Are you speaking now of general securities? Mr. P e c o r a . Yes. Mr. B a k e r . Yes, sir; that is correct, where it was a syndicate or a new deal. Mr. P e c o r a . So that they got those securities at prices lower than the prices at which they were offered to the general public? Mr. B a k e r . They were participating in the distribution of the issues, and were paid thereby. Mr. P e c o r a . Can not you answer aj simple question like that with a yes or a no ? Mr. B a k e r . I am trying to explain-----Mr. P e c o r a (interposing). They either were permitted to get those securities at prices less than the general public paid, or they were not. Now, were they? Answer yes or no. Mr. B a k e r . The reason I can not answer that yes or no, is because it does not apply the same to all issues of securities. 2010 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Whether it applies the same to all issues of securities or not in those instances where dealers were given these discounts, can’t you tell us whether or not they were permitted to get those securities at prices lower than the general public? Mr. B a k e r . Yes. In those cases; yes. Mr. P e c o r a . All right. Do you know what I mean by the term “ flashes ” as applied to the business of the National City Co. in selling its securities to the public? Mr. B a k e r . Yes, sir. Mr. P e c o r a . What are they? Mr. B a k e r . They are messages that we send to our organization, trying to keep them acquainted with information that we have at the head office, and to keep in touch with them regularly. Mr. P e c o r a . And who composes those flashes? Mr. B a k e r . Various people in our organization. They were directly under my supervision at that time. Mr. P e c o r a . Y o u are willing to assume the responsibility for those flashes, are you? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Did you compose any of them yourself? Mr. B a k e r . Some of them I did. Mr. P e c o r a . And did you generally supervise the flashes that were sent out to the sales force of the company ? Mr. B a k e r . Yes, sir. I should say yes to that, with this addition: That I did not see all of them, but, whether I saw them or not, the men who wrote them were men with whom I placed that responsi bility. Mr. P e c o r a . Now, in order to keep the salesmen up on their toes, sales contests were arranged by the company at times, isn’t that so? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Whose idea was that? Mr. B a k e r . Mine. Mr. P e c o r a . Describe those sales contests which were your idea, will you ? Mr. B a k e r . I suppose our sales organization is like all other sales organizations. There are times when they seem to slow down and are tired. In order to inject new life into the organization we would develop what we called sales contests, to add some competition. Mr. P e c o r a . Have you produced flashes which emanated from the main office of your company to its sales force generally through out the country ? Mr. B a k e r . Yes. But you asked for specific ones. Mr. P e c o r a . Have you the flash sent out under date of Septem ber 27,1929? Mr. B a k e r . On what subject? Mr. P e c o r a . On the Intercontrol Contest. Mr. B a k e r . I haven’t that right here before me, but it is here 1 know. Mr. P e c o r a . Perhaps Mr. Law can help you get it. And while Mr. Law is looking for that flash let me ask you this: Isn’t it a fact that many of these flashes were sent out to the general sales organi zation ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Who prepared the flashes so sent out? STOCK EXCHANGE PRACTICES 2011 Mr. B a k e r . They may have been prepared by any officer of the general sales organization. Mr. P e c o r a . And submitted to you for approval before being dispatched? Mr. B a k e r . Not necessarily submitted to me. But, as I said be fore, I assumed that responsibility anyway. Mr. P e c o r a . Now, Mr. Law, have you the September 27, 1929, flash, no. 5033 ? Mr. L a w . Here it is. Mr. P e c o r a . Now have you got it, Mr. Baker ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Well, please read the first paragraph there. Mr. B a k e r . It says: We are pleased to announce this morning the beginning of one of the greatest sales contests ever held by the National City Co. And there seems to have been written in here with pencil, and there is something scratched out, but the something written in is : We are pleased to announce this morning the beginning of one of the greatest sales contests ever held by the National City Co. Mr. P ecora . I s that the complete paragraph? Mr. B a k e r . Oh, I misunderstood you. sentence. Mr. Mr. P ecora . B a k er. I thought you said the first N o. It goes on to say: There will be liberal cash prizes for a large number of men in every part of the organization, and higher premium schedules. Contest will be organized and operated between control organizations and six contesting units, being terri tories controlled from San Francisco, Chicago, Philadelphia, Boston, New York metropolitan, and New York control offices outside New York City. Security issues with premium schedule and point ratings for prizes are as follows. Mr. P e c o r a . What were the security issues ? Mr. B a k e r . They were Beaux-Arts units; Cannon Mills, common; General Mills, common; Kendall Co., participating preferred; M. K. T., 7 per cent preferred; Oliver, prior preferred; Oliver, con vertible participating; Wesson, convertible preferred; Pirelli, com mon; Lautaro, 6’s; Minas Geraes, 6%’s; Finland Reserve Mortgage Bank, 6’s. Mr. P e c o r a . N o w , the premiums offered on the list, as to the last three securities were at the rate of $4 per thousand, weren’t they, and not $3 ? Mr. B a k e r . That is right. Mr. P e c o r a . And the issues to which these higher premiums re lated were all foreign issues, weren’t they ? Mr. B a k e r . That is right. Mr. P e c o r a . And the Lautaro 6’s are Chilean nitrate bonds, aren’t they? Mr. B a k e r . Yes, sir. Mr. P e c o r a . And the Minas Geraes 6i/2’s are bonds issued by the State of Minas Geraes of the Republic of Brazil ? Mr. B a k e r . That is right. Mr. P e c o r a . And the Finland bonds were, as the name indicates, Finnish securities? Mr. B a k e r . That is right. 119852— 33— pt 6------ 17 2012 STOCK EXCHANGE PRACTICES Mr. P e c o r a . The other issues were all either common or preferred stocks, weren’t they? Mr. B a k e r . Yes, sir. Mr. P e c o r a . N o w , the securities specified in that flash a r e a l l s e curities that were then owned by the National City Co., weren’t they? Mr. B a k e r . Yes, sir. Mr. P e c o r a . And the premiums on the common and preferred stocks referred to in this flash, range from 30 cents to 40 cents per share ? Mr. B a k e r . That is right. Mr. P e c o r a . Mr. Chairman, I ask that there be spread in full on the record the entire flash testified to by the witness, which is dated September 27, 1929, and known as “ Flash 5033 ” , signed “ General Sales.” Senator F l e t c h e r (presiding). Without objection, it is so ordered. F lash es on th e I ntercontbol C o n test FLASH 5033 S e p t e m b e r 27, 1929. W e are pleased to announce this morning the beginning of one of the greatest sales contests ever held by the National City Co. There will be liberal cash prizes for a large number of men in every part of the organization and higher premium schedules. Contest will be organized and operated between control organizations and six contesting units, being territories controlled ,from San Francisco, Chicago, Philadelphia, Boston, New York metropolitan, and New York control offices outside New York City. Security issue with premium schedule and point ratings for prizes are as follows: Security Beaux-Arts units........................ Cannon M ills, com m on............ General M ills, com m on______ Kendall C o., part, preferred... M . K . T ., 7 per cent, preferred. Oliver Prior, preferred.............. Oliver convertible, part............ Wesson convertible, pre ferred....................................... Premi ums Points Security Per share Per share $0.40 5 1 .30 1 .30 2 .40 4 .40 2 .40 1 .30 .30 2 Pirelli, com m on........................ Lautaro, 6 ’s............................... Minas Geraes, 6 % ’s................. Finland, Reserve Mortgage Bank 6 ’s................................ Premi ums Points P er share Per share $0.30 2 Per thou Per thou sand sand $4.00 25 4.00 40 4.00 40 This premium schedule will hold straight through entire contest. Total prize money for entire organization will be $25,000 divided among various controls in proportion to the work done and to be subsequently divided among the highest ranking men in the various controls according to rules set forth below. At the end of the contest each control organization will receive a percentage of the total prize fund calculated ratio between the total number of contest points reported by that control and total contest points for whole organization. In any particular control organization there will be first prizes of equal amount for the number of men representing one tenth of all the salesmen in the control. These first prize men will divide equally 60 per cent of the controls prize money. Second prizes in equal amounts will go to the next highest ranking men representing one fifth of all the Salesmen in the control organization who will divide equally the remaining 40 per cent of the controls prize fund. While this sounds quite complicated we believe it will work out simply in practice. For example, let us assume that our San Fran cisco control organization having 36 salesmen sells all of the issues in amounts as we will allot them the total for that control would be 37,245 points as com pared with total points for the whole organization of 347,500 points. Out of the $25,000 prize fund this would give San Francisco $2,690. One tenth of the 36 men to the nearest whole number would be 4 men who would divide 2013 STOCK EXCHANGE PRACTICES 60 per cent of the $2,690 giving each of the first prize men $403.50. Then the next highest 7 men representing one fifth of the total 36 would divide the remaining amount giving each of them a prize of $154. If, however, San Francisco should make more than 37,245 points, the prize fund for that control would be increased proportionately and the first and second prizes would be increased in corresponding amounts. In wires to follow we will advise each control of their proportionate share of the various issues included in the contract. General Sales. Mr. P e c o r a . Mr. Baker, I think I asked you yesterday if your company ever sought by its operations in the stock of the bank to control the market for those shares. Mr. B a k e r . Yes, you did. Mr. P e c o r a . And your answer was that it did not. Mr. B a k e r . That is right. But I qualified the answer, as I remember, by saying that it depends on whether—or it depends on the way that word is used. I f we had the stock we would try to prevent any wide move either way. Mr. P e c o r a . Now, Mr. Baker, can you produce flash No. 3765, dated February 1, 1929, entitled “ Strictly confidential to all man agers ? ” Mr. B a k e r . I t h in k so. Mr. L aw . Is it on National City Bank stock, Mr. Pecora? Mr. P e c o r a . Yes. Senator F l e t c h e r . While you are finding that let me ask: This flash No. 5033 does not state the amounts of these securities. Sup pose you had these numerous agents over the country and they sold your holdings, there is nothing here to indicate how many shares you have. Mr. B a k e r . No; and we would stop that immediately. We would take that one out. Senator F l e t c h e r . H o w often d i d you get reports ? Mr. B a k e r . Oh, right along during the day. Senator F l e t c h e r . Regularly? Mr. B a k e r . Yes, sir; regularly. Mr. P e c o r a . Now have you flash No. 3765? Mr. B a k e r . Yes, sir. Mr. P e c o r a . W ill you read that flash? Mr. B a k e r . It is as follows: ELASH NO. 3765 F ebruary 1, 1929. (Strictly confidential to all managers) In the course of the last few weeks through the purchase of rights and otherwise we have acquired a small block of the new shares of National City Bank. Market has been one of increasing strength, and in order to keep it orderly we have been forced to lose some of oar long position over the counter in the open market. This is defeating a plan which we had in mind of creating new stockholders who will be beneficial to the institution, as there is no doubt in our minds that perhaps a considerable part of the buying at present is speculative. We did not want to see the stock run up in price and then make a distribution through our organization to new customers. We therefore have decided very suddenly today that rather than lose any more of our stock in the open market we will ask your cooperation in the distribution of what we have left in small amounts and to holders who will be of definite value in the 2014 STOCK EXCHANGE PRACTICES future to this institution and only to those who intend to hold the stock. The amount which we can give any one office will be very limited, and we will expect you to see to it that this stock is placed in accordance with the above program. As a stockholder yourself you will readily see why we are stressing this distribution to new holders. The direct and indirect results of such placement will add materially to the business of this institution. W e have decided to make a very special price to such new holders of 5 points under the market. This is a very delicate distribution to handle, and we will require your utmost finesse to get the kind of placement we want without offending some of your present customers. A premium will be allowed, of course, as usual, and if you will give us your complete cooperation in this matter it will result in the addition of a substantial number of new business prospects for all of us. H. B. B akeb . Mr. P e c o r a . And that is signed by you. Mr. B a k e r . Yes, sir. Mr. P e o o r a . When you said at the very end of this flash of Feb ruary 1, 1929, “ if you will give us your complete cooperation in this matter it will result in the addition of a substantial number of new business prospects for all of us,” you meant to convey to your sales men that additional holders of the stock of the bank would be regarded as new prospects of your company to whom other securities sponsored by your company could be more readily sold; is that correct ? Mr. B a k e r . Absolutely. Mr. P e c o r a . And in order to create these new prospects for the other securities that your company was selling to the public you were, in this flash, instructing your sales department and its men in the field to sell the stock of the bank at 5 points under the market? Mr. B a k e r . That is right. Mr. P e c o r a . What did you mean when you said in this flash, “ This is a very delicate distribution to handle, and we will require your utmost finesse to get the kind of placement we want without offending some of your present customers ” ? Mr. B a k e r . I meant that the price being under the market—that is, under the quoted market—it would be difficult in that placement to avoid selling to people who would immediately sell it bacK into the market, and that was not what we were after. Mr. P e c o r a . In other words, you wanted this stock of the bank sold to persons who would keep it as a long-term investment? Mr. B a k e r . That is right. Mr. P e c o r a . Y o u did not want that stock coming back into the market, did you? Mr. B a k e r . That is right. Mr. P e c o r a . And you wanted the salesmen to be especially careful about offending old customers in offering the stock of the bank to new customers at 5 points under the market? Mr. B a k e r . That is right. Mr. P e c o r a . Your company at all times had access to the complete list of the stockholders of the bank, did it not ? Mr. B a k e r . I f we did I do not think it was ever used. I do not recall that we ever-----Mr. P e c o r a (interposing). Can’t you answer that question yes or no? Mr. B a k e r . A s I just said, I doubt if that was ever looked at by anybody in our organization. STOCK EXCHANGE PRACTICES 20 1 5 Mr. P e c o r a . I did not ask you whether it was ever looked at; I asked you whether you had access to it. Mr. B a k e r . I don’t remember the definite instructions as regards that, nor the restrictions, but I do know that the access to the stock holders books of the National City Bank is not open to the organiza tion of the National City Co. Mr. P e c o r a . Of course, I did not mean to suggest that it was open to everybody in the organization, but it was available to any of the executive officers, was it not ? Mr. B a k e r . I probably could have looked at it. Mr. P e c o r a . And other persons holding executive positions could probably have looked at it too, without any hindrance, could they not? Mr. B a k e r . Senior executives probably could have. Mr. P e c o r a . In connection with the marketing of its securities to the public, your company made it a business, did it not, to contin ually feed the names of prospective new customers to your selling force in the field ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . A s a rule, how many new names a year w ere sent out to the selling force by the main office of the company ? Mr. B a k e r . I h a v e n ’t th e slig h te st idea. Mr. P e c o r a . Y o u haven’t the slightest idea? Mr. B a k e r . Not in my mind; no, sir. Mr. P e c o r a . Are you familiar with the annual reports of your company. Mr. B a k e r . Yes, sir. Mr. P e c o r a . D o not those annual reports contain references to the number of new names sent out ? Mr. B a k e r . I think they probably do at times, but I don’t remem ber exactly whether that is in the annual report or not. I f it is there, why, that is the figure. Mr. P e c o r a . And until I suggested that it might be in those an nual reports you had absolutely no idea of the number of those cus tomers ? Mr. B a k e r . N o. Mr. P e c o r a . Of prospective customers whose names were sent out into the field? Mr. B a k e r . No. No; I would have to refer to that or some other file to know that. Mr. P e c o r a . Let us take the annual report for the year ending December 31,1927. I see the following statement: A summary of the department’s past year activities— the department referred to being called the New Business Depart ment. Mr. B a k e r . Yes. Mr. P e c o r a . “ Comprise the preparation and issuance of ”—then “ names distributed to district offices 47,447.” Is that the number that would indicate-----Mr. B a k e r (interposing). Yes; that is a ll right. Mr. P e c o r a . The number of names of prospective customers sent out by the head office to its agents in the field ? Mr. B a k e r . Yes; that is correct. 2016 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Do you know how many or approximately how many new names were sent out by the new business department to its men in the field for the year 1928? Look at page 19 of the annual report for 1928. Mr. B a k e r (referring to document). 1928, one hundred twentytwo thousand, three hundred and thirty-two. Mr. P e c o r a . That compares with 47,447 sent out during the pre ceding year ? Mr. B a k e r . That is right. Mr. P e c o r a . Now, during the year 1928 the company was ex tensively engaged in selling the stock of the bank, was it not? Mr. B a k e r . Yes. We sold quite a substantial amount. Mr. P e c o r a . And do you ascribe this very large increase of new names over the number sent out to your field agents for the year 1927 as in any way due to the increased number of holders of the bank stock which had developed during the year 1928? Mr. B a k e r . I doubt that very much, because the-----Mr. P e c o r a (interposing). Do you only doubt it? Mr. B a k e r . Well, I don’t understand. Mr. P e c o r a . Don’t you know one way or the other? Was any part of this increase due to the increase in the number of stockholders of the bank’s shares? Mr. B a k e r . I am trying to explain that, Mr. Pecora, if you will permit me to do it. The reason I said I doubted it is because the particular offices where new stockholders of the City Bank were developed would not need to have names sent to them, because they already have them. Mr. P e c o r a . Where did they get this large number of additional prospects over the year 1927 ? Mr. B a k e r . I can not explain just where those lists are gathered together from, but wherever we can get lists that seem to be investors we put those through a department who study those and finally sort them out and send them out, tax lists, automobile owners, and all that sort of thing. Mr. P e c o r a . It seems from the annual reports of your company for the years 1927 and 1928, respectively, that in 1927 forty-seven thousand new names were sent out to your field agents, and in 1928 approximately 75,000 more. Mr. B a k e r . Yes, sir; that is right. Mr. P e c o r a . 75,000 more than in 1927 were sent out. Mr. B a k e r . That is right. Mr. P e c o r a . That is a total of 122,000 new names ? Mr. B a k e r . That is right. Mr. P e c o r a . N o w don t you know where those names came from? Mr. B a k e r . A good many of them come from automobile registra tions, tax lists, and so forth. Mr. P e co r a . Who compiled these lists of new names for the com pany? Mr. B a k e r . We have a department—did have at that time—whose business was solely to develop names for the use of these offices. Mr. P e c o r a . That was the so-called “ new business department ” ? Mr. B a k e r . Yes; certainly. Mr. P e c o r a . H o w many new names were sent out to your field forces during the year 1929 by the new business department ? STOCK EXCHANGE PEACTICES 2017 Mr. Mr. Fifty-four thousand one hundred and seventeen. Those names were culled from similar sources ? Yes. When Mr. Rentschler was on the stand the day before yesterday he gave some testimony, which you doubtless heard, to the effect that in some of the bank’s metropolitan branches, where the National City Co. had no salesmen or representatives directly em ployed, the branch bank’s employees sold securities to the investing public on behalf of your company. Do you recall that testimony ? Mr. B a k e r . Yes. I do not remember the exact words in it, but I remember the sense of the statement. Mr. P e c o r a . Yes. And did those bank employees receive pre miums or commissions for those sales ? B ak er. P ecora. M r. B ak er. Mr. P e c o r a . M r . B a k e r . N o , sir. Mr. P e c o r a . Who d id ? Mr. B a k e r . That was a result of—that only lasted a very short time—I think 3 or 4 or 5 months. Mr. P e c o r a . In what year ? Mr. B a k e r . 1931. When we were beginning to retract our opera tions somewhat, and where we had no representatives left in an office, customers who would come in to inquire about securities would be directed to some particular window or somebody that would talk with them intelligently, and if they wanted to buy a security of any kind that was transmitted to the head office and handled from there. Eventually the bond would be sent back to that particular branch, where they made deliveries to the customer who came in and in quired. Mr. P eco ra . My question was not how these bank employees func tioned, but my question related to the payment of commissions on those sales. Were any commissions or premiums paid on those sales? Mr. B a k e r . N o, no. There was a service allowance that we made at the branch to compensate them for the time and effort spent. Mr. P eco ra . Who got that allowance? To whom was it distrib uted? Mr. B a k e r . The branch itse lf. Mr. P e c o r a . Well now, the branch itself is a part of the institu tion? Mr. B a k e r . That is right. Mr. P e co r a . The branch did not take the money and stow it away somewhere ? Mr. B a k e r . That is right. Mr. P e c o r a . It was given to employees, wasn’t it? Mr. B a k e r . N o, no, no, no. It was a part of the profit of that branch. Mr. P e c o r a . In other words, the bank then got those commissions ? Mr. B a k e r . It was a service charge paid by us for a service ren dered by that branch. Mr. P e co r a . And you say that only happened for a period of about four or five months in 1921 ? Mr. B a k e r . Yes. I will give you the exact time. Six months. Mr. P e c o r a . Will you look at the annual report of the National City Co. for the year 1928 ? Mr. B a k e r . What page? 20 1 8 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Page 20. Do you find there at the very end of the report the following statement: Sales facilities are now established in 20 of the bank’s branches in New York City, and this service will be further expanded during 1929. Mr. B a k e r . That is right. Mr. P e c o r a . Does that relate to promotion of sales by the bank’s employees ? Mr. B a k e r . Not at all. Mr. P e o o r a . Just to the salesmen of your company stationed in the bank’s branches? Mr. B a k e r . That is right. Mr. P e c o r a . Now, will you look at the report of your company for the year 1929 ? Mr. B a k e r . What page, please? Mr. P e c o r a . The last page, page 18. Do you find the following statement therein, referring to the sales facilities of the company during that year: This makes a total of 95 points offering National City Co. facilities to in vestors through its own staff, exclusive of the excellent service rendered for our account by bank employees at offices where City Co. men are not yet located. Mr. B a k e r . Yes, sir. Mr. P e c o r a . That relates to the year 1929, not 1931, does it? Mr. B a k e r . That is right; yes. Mr. P e c o r a . So that as far back as 1929 employees of the bank in various of its metropolitan branches were promoting the sale of securities by the company ? Mr. B a k e r . N o ; I do not so interpret that at all. What that means is that where there were opportunities for National City Co. business coming to the attention of the employees in the bank branch they would report that immediately to the nearest branch where there was direct City Co. representation. Mr. P e c o r a . And that does not relate to actual promotion of sales by the bank employees ? Mr. B a k e r . N o ; not at all. Now, there may have been orders from time to time that were transmitted that way, but there were no premiums, and it did not amount to anything. That refers really to leads sent to the other branches. Mr. P e c o r a . Were the lists of depositors of the bank and its vari ous branches used as a source from which your company gathered names of new prospects ? Mr. B a k e r . No, sir. Mr. P e c o r a . H o w d o y o u k n o w th a t? Mr. B a k e r . I know it because we would never have access to the names of depositors in the National City Bank. It is entirely pos sible that in some of the smaller branches there might be some dis cussion of that kind, in which the name might be given, but as far as a general policy of taking the names of the depositors of the National City Bank, so far as I can recall, that has never been done. Mr. P e c o r a . Y o u said yesterday you thought your memory w a s rather poor. Is it possible you have forgotten anything about that ? Mr. B a k e r . I t m ig h t be, b u t I d o n ’t th in k so. STOCK EXCHANGE PRACTICES 2019 Mr. P e c o b a . Do you know that many depositors of the bank who had never been customers of the company or buyers of its securities were approached directly by representatives of the company and their business solicited for the company? Mr. B a k e r . That might possibly be, but the way the name might have come to the attention of the salesmen does not necessarily follow that it comes merely because he is a depositor of the bank, Mr. Pecora. He has business interests, and it is the business of every new business department to find out wno the people are in the community who are investors, and so forth. Mr. P e c o r a . Would it surprise you to know that many of the bank’s depositors who never before had had any business with the company were approached directly by salesmen or representatives of the company and greeted with the remark that the salesman knew that they were depositors of the bank? Mr. B a k e r . Well, that could still be possible. I do not dispute that at all. But it was not from any general list of the depositors of the bank. Mr. P e c o r a . I f that could be possible, can you suggest any way by which the salesmen of your company were able to learn that these prospects upon whom they called were depositors of the bank----Mr. B a k e r (interposing). Oh, yes. Mr. P e c o r a . Except from the bank itself? Mr. B a k e r . Oh, yes; that could easily be, because-----Mr. P e c o r a (interposing). Do you think it is easy to find out in which bank one deposits ? Mr. B a k e r . A customer of the bank, let us say, in talking to some officer in the bank indicates that he is interested in making some in vestments. That would be transmitted to the National City Co., and that name would be called upon immediately. Mr. P e c o r a . So that when a depositor of the bank went to the bank seeking advice on matters of investments the name of that cus tomer or depositor would be transmitted by the bank’s representative to the company? Mr. B a k e r . The probabilities are that it would; yes, sir. Mr. P e c o r a . And that is the way the bank would advise such an inquirer on matters of investments? Mr. B a k e r . It all depends on the nature of the inquirer. Mr. P e c o r a . I f it was an inquiry for the making of investments that was the way he would be advised frequently? Mr. B a k e r . I think he would say that “ the investment part of this organization is the National City Co. and I would be glad to refer you to them,” some particular name. Mr. P e c o r a . And if that depositor or customer then followed up that suggestion by calling upon the National City Co. for advice as to his investments, it was not an unusual thing for the National City Co. to suggest investment in securities that the company was sponsor ing, was it? Mr. B a k e r . That is right. Mr. P e c o r a . In fact, it was the usual thing, wasn’t it? Mr. B a k e r . That is right. But he did not recommend----Mr. P e c o r a (interposing). And do you consider, as a director of the bank, that that was a disinterested and unselfish way for the 2020 STOCK EXCHANGE PRACTICES bank to advise a depositor concerning the making of investments generally ? Mr. B a k e r . Well, as I told you yesterday, Mr. Pecora, the reason I say I do feel that is the proper way to do is because of the facilities which we had in the National City Co. for a study of investments, and based upon that we made our recommendations. Mr. P e c o r a . D o you still think that is good banking practice ? Mr. B a k e r . Yes; I think that is good banking practice. Mr. P e c o r a . And you would approve of its continuation, would you? Mr. B a k e r . Yes, sir. Mr. P e c o r a . By the way, have you a sales letter dated February 6,1929, entitled “ Loaves from Crumbs ” ? Mr. B a k e r . Yes. Mr. P e c o r a . Who prepared that? Mr. B a k e r . I can not tell the specific author of it, but it was undoubtedly prepared in the general sales department. Mr. P e c o r a . Was it read over by you before it was sent out? Mr. B a k e r . I assume that it was, but whether it was or not, I take responsibility for it. Mr. P e c o r a . That letter reads as follows: February 6, 1929. LOAVES FROM CRUMBS It is the usual experience, when trading out one block of securities for another, to find that the client has a cash difference in his favor. More often than not these differences are too small to permit an immediate and satisfactory investment. As a consequence the cash balance goes into the customer’s bank account to be lost sight of or spent. The 5-to-l split-up of National City Bank stock provides an excellent way to take immediate care of these cash differences. Assuming that the client’s circumstances are such that he can afford a current rate of income as low as that on National City Bank stock (and very few can not, the small amount of cash considered), you should make it a point to see that the crumbs resulting from an exchange of securities go at once into one or more shares of the stock. If the amount is insufficient to buy one share you can have the customer put up the remaining cash. I f you will continue this practice it will not be long before each client and you will be agreeably surprised by the shares of National City Bank stock that he will have accumulated. These shares of National City Bank stock should not only prove a very satisfactory investment over a period of time, but, as you know from experience, their ownership ties the customer in closer than ever. By following the prac tice suggested you will be able to work in odd shares of City Bank stock in a great many places where it has never been before as well as increase the holdings of some of your present owners. Experience is admitted to be a trustworthy guide and your own experience indicates that National City Bank stock should be as desirable a medium as one can find for the investment of odd amounts. By using the crumbs of cash resulting from exchanges to buy the new stock of the National City Bank and continuing that practice as opportunity arises you will work these crumbs into a loaf of substantial size with consequent advantages to the client, the National City Co., and yourself. You assume responsibility for this letter? Mr. B a k e r . Yes, sir. Mr. P e c o r a . The date of it is February 6, 1929. I offer it in evidence. It has already been spread upon the record by my reading of it. When your salesmen were attempting to sell securities sponsored by your company, were they advising prospects to sell out securities STOCK EXCHANGE PRACTICES 2021 which they then, owned and use the proceeds of the sale to buy securities sponsored by the company? Mr. B a k e r . That might be, depending upon the securities held by the customer. Mr. P e c o r a . That was the common practice, was it not? Mr. B a k e b . Not necessarily a common practice; no, not at all, but it did occur frequently. Mr. P e c o r a . It occurred very frequently, did it not? Mr. B a k e r . I don’t know about “ very ’ , but frequently. Mr. P e c o r a . D o you know how frequently ? Mr. B a k e r . No, sir. Mr. P e c o r a . The practice was not discouraged, was it, by you? Mr. B a k e r . Not where the exchange, in the judgment of our ex perts, was a desirable exchange to make. Mr. P e c o r a . Who were the experts who exercised that judgment and gave the advice to the prospect—the field salesmen? Mr. B a k e r . We tried to maintain in New York control of that so that the judgment as to whether a security was desirable for a customer to hold as against some other security would be passed upon by some department in New York City in charge of that study, but it is true that exchanges were made from time to time. Whether on the recommendation of the salesman or whether at the suggestion of the holder of the security himself, I do not know. Mr. P e c o r a . Well, don’t you know that in many, many cases these exchanges were made on the advice and recommendation of your salesmen? Don’t you personally know that, Mr. Baker? Mr. B a k e r . I say that I know where exchanges of such character have been made, yes. Mr. P e c o r a . And don’t you have that knowledge because of the avalanche of letters that have come to you and to your company from customers all over the country who told you of that practice? Mr. B a k e r . I have had some letters of that kind sent directly to me, yes. Mr. P e c o r a . H o w many letters of that kind were sent directly to you and how many were sent to the company which were not addressed to you individually ? Mr. B a k e r . I don’t know. Mr. P e c o r a . Well, a large number, were there not? Mr. B a k e r . I don’t think a particularly large number, no. Mr. P e c o r a . What would strike you as a number of such letters large enough to make you characterize them as large in number? Mr. B a k e r . I d o n ’ t w a n t t o g u e s s o n th a t . Mr. P e c o r a . I am not asking for a guess; I am asking you for some estimate. Mr. B a k e r . Well, I don’t know. Mr. P e c o r a . What number would strike you as being a large number of such letters ? Mr. B a k e r . I don’t know. Mr. P e c o r a . So that when I say there was a large number why did you say “ not a large number ’ , if you don’t know what a large number would mean? Mr. B a k e r . I will withdraw that statement, then. Mr. P e c o r a . What statement are y o u withdrawing? 2022 STOCK EXCHANGE PRACTICES Mr. B a k e r . I am saying that what you mean by a large number I may not mean the same. I don’t know how many letters are re ceived of that kind. Mr. P e c o r a . Have you any reason to believe that the volume of those letters was kept from you by any of the employees of the company ? Mr. B a k e r . Why, n o; of course not. Mr. P e c o r a . Well, how many were addressed to you personally? Mr. B a k e r . Y o u are asking me to tell you how many letters I received? I can not answer that. Mr. P e c o r a . I am asking you for general information, Mr. Baker. I don’t expect you to give me a mathematically correct answer to a question like that. Mr. B a k e r . Why should you want me to guess at the number of letters I have received over the last year ? Mr. P e c o r a . Because you can guess better than anyone else as to the number of letters you received, and if I am going to find out from any one I can find out best from you, .can I not ? Mr. B a k e r . Yes. And the only way I can answer the question is to have my files gone over and determine the number and tell you. Mr. P e c o r a . Y o u could not give us an approximate idea without doing that? Mr. B a k e r . No; I would rather not. Mr. P e c o r a . Did those letters run into the thousands? Mr. B a k e r . No; not at all. Mr. P e c o r a . Into the hundreds? I mean those addressed to you personally ? Mr. B a k e r . Well, of course, that is a guess again. I don’t like to do it. Mr. P e c o r a . Now will you produce Flash No. 3873, dated February 27, 1929, relating to sales of the bank stock? Let me read that to you first, Mr. Baker: FLASH NO. 38T3 F e b r u a r y 27, 1929. In the past few days the market on City Bank stock has been very erratic. It has been some time since we have had a position in the stock which would give us any working control of this market, and we have there fore been obliged to place on the street the orders which have been sent in to us through our organization. This has served to accentuate the wide fluctua tions. Under these conditions you must realize there is little, if any, profit on these transactions, and we are therefore discontinuing premiums immediately. G eneral S a les. Were you familiar with this flash when it was sent out? Mr. B a k e r . Yes; I must have been. Mr. P e c o r a . In the face of the statement in this flash to the effect that “ It has been some time since we have had a position in the stock which would give us any working control of this market ” do you still say that the company never sought to control the market in the stock of the bank ? Mr. B a k e r . The way that word is used there in that flash is meant that the orders that we had had for stock were of such a substantial amount that we were unable to continue to fill those orders. I f we had a proposition that we were willing to sell to the point where STOCK EXCHANGE PRACTICES 2023 we would fill those orders rather than go into the market with the orders, it would prevent, of course, a move-up of the stock. And what was meant undoubtedly is the fact that we were not in a position at that time to avoid going into the market for the stock. We did not want to lose the position we had, and that shows, of course, that was the reason, because of the discontinuance of that premium. Mr. P e c o r a . But the flash alludes specifically to the policy of your company in seeking to maintain or have a working control of the market, does it not? Mr. B a k e r . Only to prevent these wide swings, as I said. Mr. P e c o r a . Well, the flash does not say that that was the pur pose, does it ? Mr. B a k e r . I think it very clearly says that we are not in a posi tion to supply stock and thus we can not control the movement of the stock up and down. Mr. P e c o r a . Don’t you actually say that in order to enable you to keep a working control of the market you do not want to throw your own stock into the market for the purpose of filling the selling orders, which your salesmen were getting all over the country? Mr. B a k e r . That is all right; yes. That is all right. Mr. P e c o r a . And the reason you did not want to part with any of your stock for that purpose was because to do so would have deprived the company of a working control of the market? Isn’t that the fair meaning of that? Mr. B a k e r . N o ; I don’t think it is. We just did not want to reduce our position at that time any lower than it was, and since we did not, with large orders coming into the market, there was no way—nothing we could do with them except to put them right into the market to buy the stock. Mr. P e c o r a . That is what you had in mind when this flash was sent? Mr. B a k e r . Yes. Mr. P e c o r a . And the language used by you in conveying that im pression was this language m the flash? Mr. B a k e r . That is right. I did not write it very well. Mr. P e c o r a . N o w , you notice the date of this flash, don’t you, February 27,1929 ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . That is just about two months before the time when your company found it necessary to borrow 15,000 shares of the bank’s stock from Mr. Mitchell, isn’t it? Mr. B a k e r . That was. Mr. P e c o r a . April the 23d ? Mr. B a k e r . Yes; that is right. Mr. P e c o r a . Do you remember sending out a sales letter to your salesmen over your own name which ended with this expression: “ Enough said. We will let your imagination do the rest.” Do you recall that? Mr. B a k e r . What is the number of that, please ? Mr. P e c o r a . N o ; before you go to your file, do you recall that? Mr. B a k e r . I just don’t recall it, but I certainly will if it is here. What is the number of it? 2024 STOCK EXCHANGE PRACTICES Mr. P e c o r a . The date of it is May 3, 1928. No, it is the letter of March 23, 1928; just after you sent flash No. 1912, March 23, 1928. Mr. B a k e r . I have it; yes. Mr. P e c o r a . Let me read it to you: FLASH NO. 1912 March 23, 1928. For your information we quote from letter which will go out to shareholders of National City Bank of New York to-night: “ You will And inclosed a formal notice of a special meeting of the stock holders to be held on April 24, 1928, for the purpose of acting upon the recom mendation of your board of directors that the capital stock at the bank ”------- That should be “ of the bank,” shouldn’t it? Mr. B a k e r . Yes. Mr. P e c o r a (reading): “ Be increased from $75,000,000 to $90,000,000, the surplus remaining at $50,000,000, and that the capital stock of the National Oity Co. be increased from $25,000,000 to $45,000,000 and its surplus from $25,000,000 to $50,000,000. “ It is proposed that each shareholder in the bank be given the right to sub scribe for one additional share of stock of the bank for every five shares registered in his name on the books of the bank at the close of business on April 28, 1928, upon the payment of $400 in respect of each share subscribed, of which $100 shall be applied to increasing the capital stock of the bank and $300 shall be applied to increasing the capital stock and surplus of the National City Co. in the amounts mentioned. “As regards the bank this increase of capital is in line with our traditional policy referred to on the occasion of the last previous increase of maintaining a larger ratio of capital and surplus to deposits than is dictated by general banking practice. As regards the National City Co. the board is. of the belief that these additional capital resources should be provided to permit the company to acquire from time to time for short or long investment ac count bonds, stocks, or other equity interests, the holding of which will facili tate the development of its regular business or generally inure to the benefit of the bank and the company, and that such resources can be thus profitably employed.” Enough said. W e will let your imagination do the rest. H. B. B aker. Do you recall that flash ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . N o w tell us what you meant by the expression after the quotes: “ Enough said. We will let your imagination do the rest.” Mr. B aejer. It was my opinion, with that move that was being made there, that it was addmg great value to the stock of the Na tional City Bank. Mr. P e c o r a . Was that in preparation for a selling campaign to be made by the company in the snares of the bank? Mr. B a k e r . No; no particular selling campaign. Simply I felt that that should be called to the attention of every stockholder and pointed out to him. Mr. P e c o r a . Why were you calling upon the salesmen to let their imagination do the rest? What conclusion did you expect their imaginations to reach from the information conveyed to them in this flash? Mr. B a k e r . I expected the conclusions to be very constructive on that, and that should be featured with every shareholder in their territory as distinctly desirable. STOCK EXCHANGE PRACTICES 20 2 5 Mr. P e c o r a . Do yon think the constructive conclusions would be reached by a lively working of the imagination? Mr. B a k e r . Yes, sir; that was all right. Mr. P e c o r a . The day following that flash there was another flash sent out over your signature numbered 1915. Have you that flash before you? Mr. B a k e r . Yes; I have. Mr. P e c o r a . Please follow me while I read it: FLASH NO. 1915 March 24, 1928. The program for City Bank City Co. as told you yesterday is featured on front pages of New York morning papers and is causing tremendous excite ment. W e are flooded with orders, some to sell but mostly to buy, and are unable as yet to determine which of these buy orders are speculative. W e necessarily will deal recklessly in executing orders------ Mr. B a k e r . “ Ruthlessly,” I said. Mr. P e c o r a . “ In executing orders.” Mr. B a k e r . I did not say “ recklessly.” Mr. P e c o r a . What did you say? Mr. B a k e r . “ Ruthlessly.” Mr. P e c o r a . “ Ruthlessly ” ? Mr. B a k e r . Yes. Mr. P e c o r a . We have it “ recklessly,” but we will adopt your term “ ruthless.” Mr. B a k e r . Yes. [Laughter.] Mr. P e c o r a . Thanks for the correction. Mr. B a k e r . I like that much better. Mr. P e c o r a . So do I. W e necessarily will deal ruthlessly in executing orders. You realize, of course, that we have none to sell and all orders will be executed in the street. It would be extremely unfair to our customers to throw all our buying orders into the street at one time, and we will therefore use our own judgment. We request you to assist us as far as possible by using the utmost care in the character of orders accepted. This market must be handled in as orderly a way as possible, and we do not want to permit prices to run above reasonable figures, resulting, therefore, in sudden drops or wild fluctuations. We ask your utmost cooperation. H. B. B a k e s . I have correctly read it? Mr. B a k e r . Yes, sir. Mr. P e c o r a . With the correction you made? Mr. B a k e r . That is right. Mr. P e c o r a . Now, the news referred to in this flash as having been featured on the front pages of New York morning papers and causing tremendous excitement was the news about the proposed increase of the capital stock both of the bank and your company ? Mr. B a k e r . Yes. Mr. P e c o r a . Which the last flash alluded to, the one prior to this? Mr. B a k e r . Yes. Mr. P e c o r a . The one on March the 23d? Mr. B a k e r . Yes. Mr. P e c o r a . In the light of the statement you made in this flash of March 24, 1928, do you still say that your sole purpose in com 2026 STOCK EXCHANGE PRACTICES municating the information embodied in the flash of March 23, 1928, to your salesmen was simply to inform them of the proposed increase, or would you rather say that the purpose of the flash of March 23 was to indicate to them the commencement of a selling campaign for the stock of the bank? Mr. B a k e r . Oh, no. I did not have that in mind. What I said before on that subject was that I thought it was distinctly desirable to call to the attention of our customers and stockholders that it would be of great added value to the National City Bank and the National City Co. Senator F l e t c h e r . Was this proposal on March 23, 1928, actually accomplished and carried out? Mr. B a k e r . Yes, sir. Senator F l e t c h e r . About the increase of capital? Mr. B a k e r . Yes, sir. Mr. P e c o r a . May I, Mr. Chairman, suspend with the witness at this point and ask that Mr. Mitchell be recalled ? The C h a ir m a n . It is so ordered. TESTIMONY OP CHARLES E. MITCHELL, NEW YORK CITY, CHAIR MAN THE NATIONAL CITY BANK OF NEW YORK, CITY BANKFARMERS’ TRUST CO., INTERNATIONAL BANKING CORPORATION, THE NATIONAL CITY CO., AND THE NATIONAL CITY CO., (LTD.), OF CANADA—Resumed Senator F l e t c h e r . Mr. Mitchell, while they are conferring about another matter I want to ask you, based on your experience and from your knowledge of the public and of conditions, could you offer any suggestion respecting legislation by Congress that might tend to protect and safeguard the interests of the public, either as to banks, investment companies, or stock-exchange operations? Mr. M i t c h e l l . I think there should very definitely be legislation enacted; yes, sir. Senator F l e t c h e r . Of what character? Now can you give us an idea about what should be done? Mr. M i t c h e l l . Well, take for instance, this matter of investment affiliates of banks: I have a feeling that the whole system should be revamped, that there should be in an institution some portion of it dealing with the long-term credit market. I subscribe to that. I think there must be that. But it is this contact with the public that disturbs me, cbming as it does through the investment affiliate, and I think we have got to find some different means of distribution. Furthermore, I think there should be added controls with respect to the character of securities handled. The investment affiliate is an established thing. It is handling apparently something over 50 per cent of the total volume of the long-term credit business. I do not think that you can eliminate it, certainly carelessly, without very definitely retarding any period of recovery, because there is a great deal of financing to be done and the machinery is there. I think the investment affiliate should be put under regulation and control, because that after all is the one place where the Government STOCK EXCHANGE PRACTICES 2027 has got a chance to regulate and control. If you take the invest ment affiliate and throw it out completely and say, “ Let all of this business develop through private agencies,” you have taken the long-term credit machinery away from the place where you can control it and put it in a place where you can not control it. Therefore, I think we ought to look for legislation and control of the long-term credit market, which is handled so largely by the investment affiliate, under stronger regulation. Senator F l e t c h e r . Do you think the investment affiliate should be separated from a commercial bank? Mr. M i t c h e l l . No ; I think that its methods of doing business should be regulated and controlled. Senator F l e t c h e r . As distinguished from the bank itself? Mr. M i t c h e l l . The control and regulation should be separate from the control and regulation of the bank itself, because they con stitute two different problems. But there is a vast amount of financ ing that must be done over such a period as we have been through. You take, for instance, the Insull properties that have been a matter for your study here. Those properties come into a period like this, where they have got to be financed on new lines. The banks who handle short credits for them and who have handled them in quan tity are going to get rid of those credits by putting them into per fectly sound long-term securities. Those banks really are the ones to do that. It means, perhaps, as it did in that case, actually carry ing a considerable quantity of new perfectly sound securities for some time awaiting a market, and it was largely the affiliates of banks who found the long-term market for those securities. We are trying in our company to-day, Senator, as a result of all these things that we have learned to be along the path of error, to find regulation for ourself, and I think we will find it little by lit tle, and as a matter of fact, I think we have got to go a long way further than we have. Answering your question directly, I do not believe in the elimina tion of the investment affiliate, but I do believe in legislation by Congress to put such companies under very definite regulation and control, which would be exactly the kind of regulation and control that we are trying to build up for ourselves at the present moment. Mr. P e c o r a . Mr. Mitchell, I have come right to a subject col lateral to that. Are you familiar with the opinion that was ren dered to the Attorney General of the United States in November, 1911, by Frederick W. Lehmann, at that time Solicitor General of the United States ? Mr. M i t c h e l l . I am not; no, sir. Mr. P e c o r a . Did you ever hear of that? Mr. M i t c h e l l . I have heard of that, and at one time I read it, but I don’t recall it now. It has been many, many years since I saw it. Mr. P e c o r a . Well, I happen to have a copy of it before me. M r . M p t c h e l l . Yes. Mr. P e c o r a . Let us see how far we can recall it. It is dated No vember 6, 1911, addressed to the Attorney General, and I will just read a few excerpts from it, Mr. Mitchell, and then, Mr. Chairman, 119852— 33— PT 6------ 18 2028 STOCK EXCHANGE PRACTICES I propose to have the entire opinion spread in full on the record here [reading] : N ovem ber The A ttorney 6, 1911. G eneral. S i r : You advise me that the President desires that there shall be submitted to him upon his return to Washington a fuller discussion of the question of the legality of the agreements and arrangements existing between the National City Bank of New York and the National City Co., a corporation of the State of New York. On August 1, 1911, I submitted to you an opinion, in which you concurred, that the agreements and arrangements in question were means of enabling the bank to carry on business and exercise powers prohibited to it by the national banking act. I have reconsidered the question with the care demanded by its importance, and have reached the conclusion that both the bank and the company, whether considered as affiliated or as unrelated, are in violation of the law. Now, there follows considerable matter after that which I have not the time to read but which relates to certain provisions of the national banking act and the United States Statutes. We come to this statement [reading] : In Logan County National Bank v, Townsend (139 U. S. 67, 1. c. 7S), the court, speaking through Mr. Justice Harlan, said: “ It is undoubtedly true, as contended by the defendant, that the national banking act is an enabling act for all associations organized under it, and that a national bank can, not rightfully exercise any powers except those ex pressly granted by that act, or such incidental powers as are necessary to carry on the business of banking for which it was established.’’ Then follows other matter. [reading] : Then I want to read this excerpt It follows that while a bank may take the stocks of another corporation as collateral to a loan, or take them in payment of a debt previously incurred, it can not deal in stocks. The limit of its powers in this respect is stated by Chief Justice Waite in First National Bank v. National Exchange Bank (92 U. S. 122, 128). Then follows other matter, and I come to this excerpt [reading] : The investment by national banks of their surplus funds in other national banks, situated, perhaps, in distant States, as in the present case, is plainly against the meaning and policy of the statutes from which they derive their powers, and evil consequences would be certain to ensue if such a course of conduct were countenanced as lawful. Then follows other matter and I now come to this excerpt [reading] : Another evil that might result, if large and wealthy banks were permitted to buy and hold the capital stock of other banks, would be that, in that way, the banking capital of a community might be concentrated in one concern, and business men be deprived of the advantages that attend competition between banks. Such accumulation of capital would be in disregard of the policy of the national banking law, as seen in its numerous provisions regulating the amount of the capital stock and the methods to be pursued in increasing or reducing it. The smaller banks, in such a case, would be in fact, though not in form, branches of the larger one. Then there is other matter and I come to this excerpt [reading] : Section 5201 may also be referred to as indicating the policy of this legis lation. This provision, forbidding a national bank to own and hold shares of its own capital stock, would, in effect, be defeated if one national bank were permitted to own and hold a controlling interest in the capital stock of another. STOCK EXCHANGE PRACTICES 2029 Then comes much other matter, and I reach this excerpt [reading] : From the history of the national banking act, from its terms and pro visions, and from the decisions of the Supreme Court construing it, these propositions are derived: I. The banks are local institutions and independent of each other, none the less that they are creatures of Federal power and subject to Federal super vision and control. II. A bank may in its by-laws regulate the manner in which its shares may be transferred, but it can not impair or limit the right of transfer. III. As to business operations, the bank has such powers as are expressly granted by the act and such as are properly incidental to those expressly granted, and none other, and so can engage only in the business of banking as that business is defined by the act. IV. It is neither banking nor an incident of banking to invest the funds of the bank in another business, in any manner or to any extent; and the bank has therefore no right to invest its funds in the stocks of another corporation, and especially not in the stocks of another national bank. V. The powers of a national banking association are and can be granted only by the United States, and as no grant of such powers is made by the act to any State corporation, they may not be exercised by such a corporation. These propositions relate to matters of substance, and so may be no more evaded than violated. Indirection, if it accomplishes the same purpose, stands upon the same footing with direction. Then I come, after much other matter that follows, to this excerpt [reading] : This, then, is the situation: The company was not independently organized, but was organized by the bank, its officers and shareholders acting as such. This, of course, refers to the National City Co. Only shareholders of the bank were permitted an interest in the company and these only in the proportion of their holdings in the bank. This consti tution of the interests of the company must continue to end, for no one can ever come into the company without coming into the bank, and no one can ever go out of the company without going out of the bank. The bank, by declaration of a dividend, furnished the entire capital of the company. No person can be an officer or director of the company unless he is an officer or director of the bank. This is not all. The company has no independence of action. It has no con trol or authority over its own affairs. It is to be remembered that all its stock is to be held by the trustees, and of course is to be voted by them. Plenary power over the company is therefore held by these trustees. Now, these trustees were not elected by the incorporators of the company, nor by its stockholders. They were nominated by the agreement between the bank, its officers and shareholders, made before the company was in existence. They can not be removed, nor can their successors be elected or determined by any power or interest of the company. The trustees, nominated by the agreement, perpetuate themselves. They appoint their own successors. The only power outside themselves which can make a change in their membership is the shareholding body of the bank. The shareholders by not continuing a trustee as an officer or director of the bank eliminate him as a trustee. The official organization of the company and the vesting of its powers are determined and can be determined only by the corporate action of the bank. Then follows, after much other matter, the following excerpt [reading] : And the National City Co., considered by itself and apart from its relations to the National City Bank, is also in violation of law. Its charter from the State of New York expressly prohibits it from the business of banking. And that charter could not confer the power to engage in the business of national banking. Such power cduld be conferred only by the laws of the United States. 20 3 0 STOCK EXCHANGE PRACTICES Then follows much other matter, and I come to this concluding paragraph [reading]: Here the National City Co. is not simply to control banks, but it may en gage in any business whatever, even that forbidden by its charter, if, despite its charter prohibition as to certain kinds of business, it may invest in the stocks of companies conducting such business. The other enterprise in which the company is engaged may stand in need of credit and of funds, and it is too much to expect that the company’s banks will deal simply as banks, equitably and impartially as between its own subsidiaries, and persons and corporations with whom it is not affiliated. The temptation to the specula tive use of the funds of the banks at opportune times will prove to be irre sistible. Examples are recent and significant of the peril to a bank, incident to the dual and diverse interests of its officers and directors. If many enter prises and many banks are brought and bound together in the nexus of a great holding corporation, the failure of one may involve all in a common disaster. And if the plan should prosper, it would mean a union of power in the same hands over industry, commerce, and finance, with a resulting power over public affairs, which was the gravamen of objection to the United States Bank. I conclude the National City Co. in its holding of national-bank stocks is in usurpation of Federal authority and in violation of Federal law. Respectfully submitted. F r e d e r i c k W . L e h m a n n , Solicitor General. Now, I may say, Mr. Chairman, that the Attorney General of the United States at the time when the Solicitor General rendered this opinion was the Hon. Charles W. Wickersham, and upon communi cation with his office, which communication I had for the purpose of requesting him or subpoenaing him to appear before this committee, I learned that he is now in Europe. I ask that this opinion be spread in full upon the record. The C h a ir m a n . There being no objection, it is so ordered. Mr. P e c o r a . What I am submitting is a carbon copy produced from the files of the Department of Justice. (The opinion is as follows:) D epartment op Justice , November 6, 1911. The A t t o r n e y G e n e r a l . Sir: Y o u advise me that the President desires that there shall be submitted to him upon his return to Washington a fuller discussion of the question of the legality of the agreements and arrangements existing between the National City Bank of New York and the National City Co., a corporation of the State of New York. On August 1, 1911, I submitted to you an opinion, in which you concurred, that the agreements and arrangements in question were means of enabling the bank to carry on business and exercise powers prohibited to it by the national banking act. I have reconsidered the question with the care demanded by its importance, and have reached the conclusion that both the bank and the company, whether considered as affiliated or as unrelated, are in violation of the law. At the outset it is well to consider the purposes which the framers of the national banking act had in view. The first, the paramount purpose was to secure a uniform national system of currency, and to do this without the creation of a great central institution like the old United States Bank. The opposition to such an institution was deep seated and widespread, and the sponsors of the various plans which took final shape in the national bank ing act were careful to point out that the objections to the United States Bank had been duly considered and had been avoided by them. In August 1861 O. B. Potter of New York submitted to the Secretary of the Treasury a scheme to permit State banks and bankers to issue notes secured by United States bonds, saying, “ None of the objections justly urged against a United States bank lie against this plan. It gives to the Govern ment no power to bestow favors and does not place a dollar in its hands to STOCK EXCHANGE PRACTICES 2031 lend. * * * It is impossible to see how such a system can be made use of for political ends.” (The origin of the national banking system, S. Doc. No. 582, pp. 46-48, 61st Cong., 2d sess.) Samuel Hooper, a member of the House from Massachusetts, was an active agent in the attainment of the end sought. In support of one of the early measures proposed, which, while it did not become a law, was a step in that direction, he said: “ Thus are secured all the benefits of the old United States Bank without many of those objectionable features which aroused opposition. It was affirmed that, by its favors, the Government enabled that bank to monopolize the busi ness of the country. Here no such system of favoritism exists. * * * It was affirmed that frequently great inconvenience and sometimes terrible disaster resulted to the trade and commerce of different localities by the mother bank of the United States arbitrarily interfering with the management of the branches by reducing suddenly their loans and sometimes withdrawing large amounts of their specie, for political effect Here each bank transacts its own business upon its own capital, and is subject to no demands except those of its own customers and its own business. It will be as if the Bank of the United States had been divided into many parts, and each part endowed with the life, motion, and similitude of the whole, revolving in its own orbit, man aged by its own board of directors, attending to the business interests of its own locality and yet to the bills of each will be given as wide a circulation and as fixed a value as were given to those of the Bank of the United States in its palmiest days.” (Cong. Globe, 37th Cong., 2d sess., part 1, p. 616.) In the national banking act as passed in 1863 it was believed that the desired result had been obtained. Mr. Hugh MeCtflloch, president of a leading bank at Indianapolis, and dis tinguished as a financier, was induced, at great sacrifice to himself, to accept the office of Comptroller of the Currency and inaugurate the new system. In a letter to a friend published in the Banker’s Magazine, Vol. XVIII, pages 8 and 9, he said: “ The national system of banking has been devised with a wisdom that re flects the highest credit upon its author, to furnish to the people of the United States a national-bank-note circulation without the agency of a national bank. It is not to be a mammoth corporation, with power to increase and diminish its discounts and circulation, at the will of its managers, thus enabling a board of directors to control the business and politics of the country. It can have no concentrated political power. Nor do I see how it can be diverted from its proper and legitimate objects for partisan purpo'ses. It will concentrate in the hands of no privileged persons a monopoly of banking. It simply author izes, under suitable and necessary restrictions, any number of persons, not less than five in number, in any of the States or Territories of the Union, to engage in the business of banking, while it prevents them from issuing a single dollar to circulate as money which is not secured by the stocks and resources of the Government. It is, therefore, in my judgment (as far as calculation is re garded), not only a perfectly safe system of banking, but it is one that is emi nently adapted to' the nature of our political institutions.” In his first report as Comptroller of the Currency, made November 28, 1863, he says: “ By the national currency act the principle is for the first time recognized and established, that the redemption of bank notes should be guaranteed by the Government authorizing their issue. The national currency will be as solvent as the Nation of which it represents the unity. The country has at last secured t<* it a permanent paper circulating medium of a uniform value, without the aid of a national bank. This national system confers no monopoly of banking, but opens its advantages equally to all. It interferes with no State rights. It meets both the necessities of the Government and the wants of the people. It needs modifications and may require others than those which are suggested in this report; but it is right in principle, and of its success there can, I think, be no reasonable doubt.” And again in his second report, made November 25,1864: “ This examination of the act, and the observation of the manner in which it is being administered, have resulted in the entering up of a popular judgment in favor of the national banking system; a judgment, not that the system is a perfect one, nor free from danger of abuse, but that it is a safer system, better adapted to the nature of our political institutions and to our commercial necessities, giving more strength to the Government, with less risk of its being 2032 STOCK EXCHANGE PRACTICES used by the Government against the just rights of the States or the rights of the people than any system which has yet been devised, and that by such amendments of the act as experience may show to be needful, it may be made as little objectionable, and as beneficial to the Government and the people, as any paper money banking system that wisdom and experience are likely to invent. It promises to give to the people that long-existing “ desideratum,” a national currency without a national bank, a bank-note circulation of uniform value without the creation of a moneyed power in a few hands over the poli tics and business of the country.” When in his letter and reports Mr. McCulloch speaks of “ a national bank note circulation without the agency of a national bank,” etc., he manifestly has reference to an institution national in the sense of being a central institu tion like the old Uinted States Bank, operating throughout the country by means of branches. The banks created by the national banking act were, and were designed to be, local institutions and independent of each other, but under national control and supervision. Nationalization without centralization was the keynote of the law. This is demonstrated by the structure of the banks provided for. Reference will be made to the national banking act as contained in the United States Compiled Statutes, 1901. It is title 62, and consists of four chapters. The first chapter deals with “ organization and powers,” the second with “ obtaining and issuing circulating notes,” the third with “ regulation of the banking business,” and the fourth with “ dissolution and receivership.” The entire act is too long for reproduction here, but pertinent sections will be set out in full, or in their substance. Section 5133— “ formation of national banking associations ”— provides: “Associations for carrying on the business of banking under this title may be formed by any number of natural persons, not less in any case than five. They shall enter into articles of association, which shall specify in general terms the object for which the association is formed, and may contain any other provisions, not inconsistent with law, which the association may see fit to adopt for the regulation of its business and the conduct of its affairs. These articles shall be signed by the persons uniting to form the association, and a copy of them shall be forwarded to the Comptroller of the Currency, to be filed and preserved in his office.” It should be noted in passing that only “ natural persons ” may engage in the formation of a bank. Section 5134— “ requisites of organization certificate ”— provides: “ The persons uniting to form such an association shall, under their hands, make an organization certificate, which shall specifically state: “ First. The name assumed by such association; which name shall be subject to the approval of the Comptroller of the Currency. “ Second. The place where its operations of discount and deposit are to be carried on, designating the State, Territory, or District, and the particular county and city, town, or village. “ Third. The amount of capital stock and the number of shares into which the same is to be divided. “ Fourth. The names and places of residence of the shareholders and the number of shares held by each of them. “ Fifth. The fact that the certificate is made to enable such persons to avail themselves of the advantages of this title.” By this section the bank is distinctly localized, for it requires that “ the place where its operations of discount and deposit are to be carried on ” shall be designated as to State, county, and city, town, or village; and it allows but one place. This is repeated in section 5190— “ place of business ”— which provides: “ The usual business of each national banking association shall be trans acted at an office or banking house located in the place specified in its organi zation certificate.” By an act of May 1, 1886 (ch. 73, 24 Stat. 18), a bank was authorized to change its location, but not to a place more than 30 miles distant, and the new location must be within the same State. No provision has ever been made for increasing the number of cities, towns, or villages in which a bank may do business. Section 5138— “ requisite amount of capital ”— provides : “ No association shall be organized with a less capital than $100,000, except that banks with a capital of not less than $50,000 may, with the approval of the STOCK EXCHANGE PEACTICES 20 3 3 Secretary of the Treasury, be organized in any place the population of which does not exceed 6,000 inhabitants, and except that banks with a capital of not less than $25,000 may, with the sanction of the Secretary of the Treasury, be organized in any place the population of which does not exceed 8,000 inhabi tants. No association shall be organized in a city the population of which exceeds 50,000 persons with a capital of less than $200,000.” This, because of the small amount of capital required in such ease, extends the facilities of national banking to the smallest communities. Section 5148—“ requisite qualifications of directors ”—provides: “ Every director must, during his whole term of service, be a citizen of the United States, and at least three-fourths of the directors must have resided in the State, Territory, or District in which the association is located, for at least one year immediately preceding their election, and must be residents therein during their continuance in office. Every director must own, in his own right, at least 10 shares of the capital stock of the association of which he is a director. Any director who ceases to be the owner of 10 shares of the stock, or who becomes in any other manner disqualified, shall thereby vacate his place.” Here the local character of the bank is secured. The directors must all be shareholders, they must all be citizens of the United States, and three-fourths of them must be residents of the State. The powers of the bank are conferred in general terms by section 5136, and they are: to have a seal, and perpetual succession, to make contracts, sue and be sued, elect officers and define their duties, and further----Sixth. To prescribe, by its board of directors, by-laws not inconsistent with law, regulating the manner in which its stock shall be transferred, its directors elected or appointed, its officers appointed, its property transferred, its general business conducted, and the privileges granted to it by law exercised and enjoyed. “ Seventh. To exercise by its board of directors, or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving de posits; by buying and selling exchange, coin, and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes according to the provisions of this title. “ But no association shall transact any business except such as is incidental and necessarily preliminary to its organization, until it has been authorized by the Comptroller of the Currency to commence the business of banking.” Section 5137 confers power to hold real property and limits it to such as may be necessary for “ its immediate accommodation in the transaction of its busi ness”, and such as it may acquire in the way of securing payment of debts previously contracted, but real estate so acquired can not be held for a longer period than five years. Section 5197 limits the rate of interest which may be taken to that “ allowed by the laws of the State, Territory, or District where the bank is located.” This again emphasizes the local character of the institution. Section 5201 prohibits a bank from loaning upon or purchasing its own shares. It has been repeatedly held that the powers of a national bank are limited to those expressly granted by the act and such as are properly incidental to those granted. In Logan County National Bank v. Townsend (139 U. S. 07,1. c. 73), the court, speaking through Mr. Justice Harlan, said: “ It is undoubtedly true, as contended by the defendant, that the national banking act is an enabling act for all associations organized under it, and that a national bank can not rightfully exercise any powers except those expressly granted by that act, or such incidental powers as are necessary to carry on the'business of banking for which it was established. The statute declares that a national banking institution shall have power to ‘ exercise, by its board of directors, or duly authorized officers or agents, subject to law, all such incidental powers as shall be necessary to carry on the business of banking; by discounting and negotiating promissory notes, drafts, bills of exchange, and other evidences of debt; by receiving deposits; by buying and selling exchange, coin and bullion; by loaning money on personal security; and by obtaining, issuing, and circulating notes according to the provisions’ of title 62 of the Hcviscd Statutes,” And in California Bank v. Kennedy (167 U. S. 362, 1. c. 366), the court, through Mr. Justice White, said: 20 3 4 STOCK EXCHANGE PRACTICES “ It is settled that the United States statutes relative to national banks constitute the measure of the authority of such corporations, and that they can not rightfully exercise any powers except those expressly granted, or which are incidental to carrying on the business for which they are established. Logan County Bank v. Townsend (139 U. S. 67, 73). No express power to acquire the stock of another corporation is conferred upon a national bank, but it has been held that, as incidental to the power to loan money on personal security, a bank may in the usual course of doing such business accept stock of another corporation as collateral, and by the enforcement of its rights as pledges it may become the owner of the collateral and be subject to liability as other stockholders. (National Bank v. Case, 99 U. S. 628). So, also, a national bank may be conceded to possess the incidental power to accept in good faith stock of another corporation as security for a previous indebted ness. It is clear, however, that a national bank does not possess the power to deal in stocks. The prohibition is implied from the failure to grant the power.” (First National Bank v. National Exchange Bank, 92 U. S. 122, 128.) The proposition is an elementary one in corporation law and needs no elaboration. It follows that while a bank may take the stocks of another corporation as collateral to a loan, or take them in payment of a debt previously incurred, it can not deal in stocks. The limit of its power in this respect is stated by Chief Justice Waite in First National Bank v. National Exchange Bank (92 U. S. 122, 128) : “ * * * In the honest exercise of the power to compromise a doubtful debt owing to a bank, it can hardly be doubted that stocks may be accepted in payment and satisfaction, with a view to their subsequent sale or conver sion into money so as to make good or reduce an anticipated loss. Such a transaction would not amount to a dealing in stocks.” In First National Bank v. Converse (200 U. S. 425), a manufacturing com pany had failed, and the creditors, among whom was the bank, organized a new corporation to purchase the stocks, evidences of debt, and assets of the old, and to continue in the manufacture of the same articles that had been manufactured by the old company. This transaction was held to be without the powers of the bank. The court, p. 439, said: “* * * To concede that a national bank has ordinarily the right to take stock in another corporation as collateral for a present loan or as security for a preexisting debt does not imply that because a national bank has lent money to a corporation it may become an organizer and take stock in a new and speculative venture; in other words, do the very thing which the previous decisions of this court have held can not be done.” As to acquiring the stocks of other national banks, the ruling of the court is very explicit. In Concord First National Bank v. Hawkins (174 U. S. 364), the Bank of Concord, N. H., had bought and held as an investment 100 shares of the stock of the Indianapolis National Bank. The last-named bank failed and Hawkins as receiver sued the Concord bank to recover the assessment which had been made upon the stock of the Indianapolis bank. The Concord bank denied liability upon the ground that it had no right to hold the stock. The court refused so much as to apply the doctrine df estoppel in favor of creditors. Referring to previous decisions of the court and to the distinction made by the Circuit Court between the acquisition of stocks in national banks and of stocks in other corporations, the court, p. 368, said: “ No reason is given by the learned judge in support of the solidity of such a distinction, and none occurs to us. Indeed, we think that the reasons which disqualify a national bank from investing its money in the stock of another corporation are quite as obvious when that other corporation is a national bank as in the case of other corporations. The investment by national banks of their surplus funds in other national banks, situated, perhaps, in distant States, as in the present case, is plainly against the meaning and policy of the statutes from which they derive their powers, and evil consequences would be certain to ensue if such a course of conduct were countenanced as lawful. Thus, it is enacted, in section 5146, that ‘ every director must, during his whole term of service, be a citizen of the United States, and at least threefourths of the directors must have resided in the State, Territory, or district in which the association is located for at least one year immediately preceding their election, and must be residents therein during their continuance in office’.” STOCK EXCHANGE PRACTICES 2035 One of the evident purposes of this enactment is to confine the management of each bank to persons who live in the neighborhood, and who may, for that reason, be supposed to know the trustworthiness of those who are to be appointed officers of the bank, and the character and financial ability of those who may seek to borrow its money. But if the funds of a bank in New Hampshire, instead of being retained in the custody and management of its directors are invested in the stock of a bank in Indiana, the policy of this wholesome provision of the statute would be frustrated. The property of the local stockholders, so far as thus invested, would not be managed by directors of their own selection, but by distant and unknown persons. Another evil that might result, if large and wealthy banks were permitted to buy and hold the capital stock of other banks, would be that, in that way, the banking capital of a community might be concentrated in one concern, and business men be deprived of the advantages that attend competition between banks. Such accumulation of capital would be in disregard of the policy of the national banking law, as seen in its numerous provisions regulating the amount of the capital stock and the methods to be pursued in increasing or reducing it. The smaller banks, in such a case, would be in fact, though not in form, branches of the larger one. Section 5201 may also be referred to as indicating the policy of this legisla tion. It is in the following terms: “ No association shall make any loan or discount on the security of the shares of its own capital stock, nor be the purchaser or holder of any such shares, unless such security or purchase shall be necessary to prevent loss upon a debt previously contracted in good faith; and stock so purchased or acquired shall, within six months from the time of its purchase, be sold or disposed of at public or private sale; or, in default thereof, a receiver may be appointed to close up the business of the association.” This provision, forbidding a national bank to own and hold shares of its own capital stock, would, in effect, be defeated if one national bank were permitted to own and hold a controlling interest in the capital stock of another. Here is an express recognition and assertion of the local and independent character of our national banks and the denial of any power which would tend to create what is in effect a central bank with branches. As to the transfer of its shares, a national bank has power only “ to pre scribe, by its board of directors, by-laws not inconsistent with law, regulating the manner in which its stock shall be transferred.” Manner relates to method or form and not to substance. So the by-laws may require a formal indorse ment of the outstanding certificates, the issuance of a new one, and a register of the transfer upon the books of the bank. But no condition can be imposed which limits or impairs the right of transfer. The national banking act as originally passed in 1863, by section 36, denied to the stockholder “ power to sell or transfer any share held in his own right so long as he shall be liable, either as principal debtor, surety, or otherwise, to the association for any debt which shall have become due and remains unpaid,” etc.; but this provision was repealed by the act of 1864, which, with amendments, is the act now upon the books. The purpose of the repeal was to make the shares more readily transferable. Banks thereafter, however, attempted to enforce the restrictions of the original act by means of by-laws, but these have been held always to be invalid. Speaking to this subject in Bank v. Lanier (11 Wall. 369, 1, c. 377-378), the court said: “ The power to transfer their stock is one of the most valuable franchises conferred by Congress on banking associations. Without this power it can readily be seen the value of the stock would be greatly lessened, and, obvi ously, whatever contributes to make the shares of the stock a safe mode of investment, and easily convertible, tends to enhance their value. It is no less the interest of the shareholder, than the public, that the certificate representing his stock should be in a form to secure public confidence, for without this he could not negotiate it to any advantage. “ It is in obedience to this requirement, that stock certificates of all kinds have been constructed in a way to invite the confidence of business men, so that they have become the basis of commercial transactions in all the large cities of the country, and are sold in open market the same as other securities. Although neither in form or character negotiable paper, they approximate to it as nearly as practicable. If we assume that the certificates in question are not different from those in general use by corporations, and the assumption is a safe one, it is easy to see why investments of this character are sought 20 3 6 STOCK EXCHANGE PRACTICES after and relied upon. No better form could be adopted to assure the pur chaser that he can buy with safety. He is told, under the seal of the corpo ration, that the shareholder is entitled to so much stock, which can be trans ferred on the books of the corporation, in person or by attorney, when the certificates are surrendered, but not otherwise. This is a notification to all persons interested to know, that whoever in good faith buys the stock, and produces to the corporation the certificates, regularly assigned, with power to transfer, is entitled to have the stock transferred to him. And the notifica tion goes further, for it assures the holder that the corporation will not transfer the stock to any one not in possession of the certificates.” This ruling holding the restrictive by-law to be invalid was repeated in Bullard v. National Eagle Bank (18 Wall. 504), Third National Bank v. Buffalo German Ins. Co. (193 U.S. 581) ; and in many cases on the circuit and in the State courts. I f the law was changed to permit a transfer, when to deny it was in the immediate interest of the bank, it surely never was the purpose to authorize a restriction upon transfer in behalf of any interest foreign to the bank, and with which it is forbidden that the bank as a bank may be identified. From the history of the national banking act, from its terms and provisions, and from the decisions of the Supreme Court construing it, these propositions are derived : I. The banks are local institutions and independent of each other, none the less that they are creatures of Federal power and subject to Federal super vision and control. II. A bank may in its by laws regulate the manner in which its shares may be transferred, but it cannot impair or limit the right of transfer. III. As to business operations, the bank has such powers as are expressly granted by the act, and such as are properly incidental to those expressly granted, and none other, and so can engage only in the business of banking as that business is defined by the act. IV. It is neither banking nor an incident of banking to invest the funds of the bank in another business, in any manner or to any extent; and the bank has therefore no right to invest its funds in the stocks of another corporation, and especially not in the stocks of another national bank. Y. The powers of a national banking association are and can be granted only by the United States, and as no grant of such powers is made by the act to any State corporation, they may not be exercised by such a corporation. These propositions relate to matters of substances, and so may be no more evaded than violated. Indirection, if it accomplishes the same purpose, stands upon the same footing with direction. Coming now to the case in hand, we have to consider what is the practical effect of the creation of the National City Co. and its affiliation with the National City Bank of New York. So far as concerns matters of form, it may be conceded that the National City Co. was incorporated as an independent institution. Still, its certificate of incorporation while not compelling dependence upon or interrelation with any other institution, does provide for it. Its business powers and capacities are very extensive. They authorize the acquisition of any kind of property and the conduct of any kind of business, and the doing of whatever may be incident thereto. (See article second of the certificate of association.) The only limitation upon its business activities is to be found in paragraph V III of article II, and this is: “ * * * but nothing herein contained shall be construed as authorizing the business of banking nor as including the business purpose or purposes of a money corporation or a corporation provided for by the banking, insurance, railroad, and the transportation corporations laws, or an educational institution or corporation which may be incorporated as provided in the education law, nor as authorizing or intending to authorize the performance at any time of any act or acts then unlawful.” As the business of banking, which must be taken to include the business of banking under the national banking laws, is expressly prohibited, the powers of the company as granted by its charter do not offend the Federal laws. The tenth article provides in its first paragraph that “ the directors of the company need not be stockholders ”, and in the second paragraph that— “ No transaction entered into by the company shall be affected by the fact that the directors of the company were personally interested in it, and every director of the company is hereby relieved from any disability that might STOCK EXCHANGE PRACTICES 20 3 7 otherwise prevent his contracting with the company for the benefit of himself or any firm, association, or corporation in which he may be in anywise interested.” These provisions in and of themselves violate no Federal statutes, but they give a facility for serving two masters, which is, to say the least, unusual; and they do permit the use of the company as a mere instrumentality or convenience of some other institution. The capital stock of the company is by the third article fixed at $10,000,000, but it is provided by paragraph 5 of article 10 that— “ The board of directors shall have absolute discretion in the declaration of dividends out of the surplus profits of the company, and they may accumu late such profits to such extent as they may deem advisable instead of dis tributing them among the stockholders, and may invest and reinvest the same in such manner as in their absolute discretion they may deem advisable.” Thus, while there is a limit placed upon the capital stock of the company, there is none upon the actual capital it may accumulate, and so none upon its possible financial power. These various provisions of the certificate of incorporation are important to be considered in view of the use which has been made of the company. The certificate is dated July 5, 1911, but prior to that date, on June 1, 1911, an agreement w’as entered into between the National City Bank of New York as the first party, James Stillman, Frank A. Vanderlip, and Stephen S. Palmer, trustees, as the second party, and Henry A. C. Taylor, Cleveland H. Dodge, William Rockefeller, Moses Taylor Pyne, J. Pierpont Morgan, and other sub scribers, “ who are shareholders of the said bank”, as parties of the third part. In the agreement these parties are designated, respectively, as “ the bank ”, “ the trustees ”, and “ the subscribers.” The trustees are all of them officers of the bank. Mr. Stillman is the chair man of the board of directors, Mr. Vanderlip is its president, and Mr. Palmer is a director. The agreement, then, is one between the bank, its officers, and its share holders, and, as will be seen, the officers and shareholders are dealt with not as individuals, but as officers and shareholders. The preamble recites that— “ Opportunities and facilities for making desirable investments, other than those which are possible in the ordinary course of the banking business, are, from time to time, presented to the officers of the bank, which they desire to make available to the shareholders of the bank.” Here is the declared purpose to do something, make investments, not within the scope of the bank’s powers. That the officers and shareholders of the bank as individuals may make such investments is conceded, but that the bank, or its officers or shareholders, as officers and shareholders, may do so, in other words, that the powers and facilities granted by the national banking act may be used for purposes outside the ordinary course of banking business, is denied. The first article of the agreement provides for the organization of an invest ing company. It is here called the United States Investing Co. It is, however, the National City Co. under a provisional name. It is not within the scope of the bank’s powers to have part or lot in such an agreement, for the simple reason that the formation of an investing com pany under State corporation laws is not the conduct of banking under na tional laws. And what is true of the bank is true of its officers and sharehold ers acting as such. The second article accords to each shareholder of the bank, as a right, a beneficial interest, through the trustees, in the capital stock of the investing company, to the extent of two-fifths of the par value of his capital stock in the bank, provided he exercises his right by executing the agreement or by having his bank stock stamped as thereafter provided in the agreement. If the shareholder does not exercise his right in time, the trustees may deter mine the conditions upon which he may do so thereafter. The par value of the capital stock of the bank is $25,000,000, and two-fifths of this is ten millions, which is the par value of the stock of the investment company. Every shareholder of the bank exercising his right, the stock of the company is fully provided for. It is contended that the shareholder of the bank is not required to take his allotted beneficial interest in the company, but manifestly he is under strong compulsion. The bank and the company, as will be seen from later 2038 STOCK EXCHANGE PRACTICES provisions of the agreement, are so closely bound together that the welfare of the company will always be the serious concern of the bank. For better or for worse the bank and the company are united. The shareholder, if he is not in the arrangement, must none the less hazard the worse and get none of the better, and so, inasmuch as against his will he is in for the worse, he will in self-protection go in further and entitle himself to the better. The third article provides that in order to facilitate participation by the shareholders of the bank in the beneficial interests in the company, the trustees will recommend to the directors of the bank the declaration of a special dividend of 40 per cent on the capital stock of the bank, which will amount to $10,000,000, or the exact amount of the capital stock of the company. The subscribers, shareholders of the bank, agree to apply the dividend to the pay ment of the stock of the company. The recommendation of the trustees, officers of the bank, assent to by the bank and by two-thirds of its shareholders, are sure to be adopted, but not even as against a dissenting or nonassenting minority, no matter how small that minority might be, was there a right to declare a dividend except as such declaration was made in the interest of the bank and its shareholders as such. And there is a larger interest, that of depositors and of the National Government, which requires that the bank shall be conducted as a bank pure and simple and not as a promoting agency of speculative investment companies. The fourth article requires that the subscribers at once assign the special dividend to the trustees in order to enable the trustees to organize the investing company. This only emphasizes the fact that the resources and facilities of the bank were utilized to create the investing company. The fifth article provides (1 that the stock of the investing company shall be issued to the trustees and shall be held by them and their successors in trust, and (2) that the beneficial interest cf the subscribers in this stock “ Shall not be transferable separately, but only by the transfer of the shares of stock of the bank held by them respectively; and every sale or transfer of stock of the bank by a subscriber or his successor shall include the beneficial interest of such, subscriber or his successor in the capital stock of the investing company attach ing to the shares of the bank so sold or transferred.” The first clause of this article limits the number of stockholders in the com pany to three, the three being the trustees and their successors in trust. Article 9 of the agreement provides: “ The number of trustees hereunder shall not be less than three. Any trustee may, at any time, resign. In case of any vacancy in the number of trustees, it shall be filled by the remaining trustees by the selection of someone who is an officer or a director of the bank; and any trustee who shall cease to be an officer or a director of the bank shall thereupon also cease to be a trustee here under; it being intended that only officers or directors of the bank shall act as trustees. “ No trustee shall be liable for the acts of any other trustee, but shall be Jiable only for his own willful misconduct. “ The trustees may act by a majority, either at a meeting or by writing with or without a meeting; and they may vote in person or by proxy.” Thus only officers or directors of the bank can ever be stockholders in the company, for the trustees held the stock and only officers and directors of the bank can be trustees. And the trustees are a self-perpetuating bcdy. Any vacancy is to be filled by the remaining trustees. By article 8 it is provided that the trustees and such other persons as they may designate, who shall be officers or directors of the bank, shall constitute the first board of directors of the company, and that no one shall ever be a director of the company who is not also an officer or director of the bank. The certificate of incorporation of the company provides for five directors, but it has only three stockholders; therefore, it was provided in the certificate that directors need not be stockholders. The second clause of article 5 prohibits transfer of beneficial interests in the company without a transfer of the corresponding shares of the bank, and, conversely, prohibits transfer of shares in the bank without a transfer of the corresponding beneficial interest in the company. Article 6 provides for certain indorsements upon the certificate of bank shares and upon the certificates of beneficial interest in the company. These indorsements are in aid of the plan and purpose of the agreement. STOCK EXCHANGE PRACTICES 2039 Article 7 requires payment of company dividends to be made to shareholders of the bank, whose certificates of bank shares are stamped or indorsed as pro vided in article 5. Payments of these dividends may be made by the trustees to the bank, and such payment will relieve the trustees from further liability on their account. Article 10 provides for the amendment, modification, or termination of the agreement. Any of these can be accomplished only “ with the written consent of the trustees and of two-thirds in interest of those for whom the capital stock of the investing company is then held by the trustees.” This, then is the situation. The company was not independently organized, but was organized by the bank, its officers and shareholders acting as such. Only shareholders of the bank wtere perinitted an interest in the company and these only in the proportion of their holdings in the bank. This consti tution of the interests of the company must continue to the end, for no one can ever come into the company without coming into the bank, and no one can ever go out of the company without going out of the bank. The bank, by declaration of a dividend, furnished the entire capital of the company. No person can be an officer or director of the company unless he is an officer! or director of the bank. This is not all. The company has no independence of action. It has no control or authority over its own affairs.! It is to be remembered that all its stock is to be held by the trustees and, of course, is to be voted by them. Plenary power over the company is therefore held by these trustees. Now, these trustees were not elected by the incorporators of the company nor by its stockholders. They were nominated by the agreement between the bank, its officers, and shareholders, made before the company was in existence. They can not be removed, nor can their successors be elected or determined by any power or interest of the company. The trustees, nominated by the agreement, perpetuate themselves. They appoint their own successors. The only power outside themselves which can make a change in their membership is the share holding body of the bank. The shareholders by not continuing a trustee as an officer or director of the bank eliminate him as a trustee. The official organi zation of the company and the vesting of its powers are determined and can be determined only by the corporate action of the bank. And the agreement which accomplishes all these things is beyond the scope of the legitimate action of the bank to change or terminate. Two-thirds of the shareholders of the bank and the trustees must agree before there can be a change in it or an end of it. In this matter, so material to the welfare of the bank, the shareholders and the directors have abdicated their powers and duties and abandoned them to a minority of their number and the three trustees. To facilitate the conduct of the business of the company by the officers of the bank, article 10 of the certificate of incorporation of the company pro vides that no transaction entered into by the company shall be affected by the fact that its officers or directors are contracting for their own benefit, or for the benefit of any firm, association, or corporation in which they may be inter ested in any wise. This arrangement between the bank and the company virtually consolidates them, unifies their every interest, and requires that all the powers and capac ities of both shall always be exerted in unison— or it does not. If we have two institutions, and not one, chartered as each one of them is by public authority, and by different sovereignties, then each has its own peculiar mission and its own distinctive rights and duties, powers, and obliga tions. The bank is not concerned with the company, except as it might be with any other possible borrower of its funds, and the company is not concerned with the bank except as it might be with any other institution whose funds it might wish to borrow. The bank will not be influenced to lend money in aid of any enterprise in which the company may be engaged, because of that fact, and the company will not, because of its relations with the bank, look to it the more readily for financial support. The business of each will be conducted with regard to its own distinctive advantage. If these institutions are twain in the substantial sense indicated, then the arrangement which places the control of the company so absolutely and irre vocably under trustees appointed by the bank, and subject to chan,are only by the corporate action of the bank, offends the fundamental law that “ no servant can serve two masters; for either he will hate the one and love the other or else he will hold to the one and despise the other.” This law is implied in every line of the charter of the bank, and the attempt to repeal it in the tenth article of incorporation of the company is vain and nugatory. 2040 STOCK EXCHANGE PRACTICES If, however, the mission of the bank and the mission of the company are alike and linked always in interest and welfare, if the rights and duties of the two are necessarily harmonious and reciprocal, if the bank at all times must cooperate with the company and the company with the bank, if the officers and directors of the bank who are also the officers and directors of the company can not come into the predicament of divided allegiance, and, indeed, are in the service of but one master, then the bank is involved, engaged, participating in, and conducting the business of the company, business beyond its chartered powers, business that is not national banking. Only the absolute unity and identity of interest between the two institutions would afford moral excuse for the fusion of their powers under one control, but that excuse can not justify transgression of the positive mandate of the national banking act, which, from considerations of public interest, has determined that national banking shall be a business apart to be conducted by institutions organized for that purpose and for no other. I am constrained to conclude that as to the bank the agreement violates the law, in its details, because it impairs and limits the right of transfer of shares, and because it assumes to bind the bank beyond the possibility of release by the majority action of its shareholders and directors, and in its general plan and scope, because it embarks the bank in business and ventures beyond its corporate powers. The operations under this agreement are proper to be considered, and what is said in this connection is based upon a letter of date July 26, 1911, from President Yanderlip to United States Attorney Wise. At that date $9,679,000 of the capital stock of the company had been paid up, showing that more than 96 per cent of the shareholders of the bank had come into the arrangement. The company had made investments in the shares of 16 different banks and trust companies, the aggregate number of shares being 29,178. The market value of these was not shown. In addition, approximately $3,200,000 had been invested in other companies of different character. Of the banks, nine were national banks. The number of shares held by the company and the total number of shares of the capital stock of the banks is as follows: Bank C om p any's holdings 10 Fourth Street National Bank of Philadelphia................... ............................... .......... National Shawmut Bank of B oston........ ..................- ........................................... ......... Riggs National Bank of W ashington........ .................................................... ................. National Butchers & Drovers Bank of N ew Y ork ________________ ______________ T/inr?n]n National Bunk of Nftw York National Bank of Commerce of N ew Y o r k ....................................- ............................... 167 250 500 1,000 2,240 3,000 4,324 9,800 Total num ber of shares of capital stock of bank 10,000 20,000 30.000 35.000 10.000 3,000 10,000 250,000 i N o such bank shown in the American Bank Reporter. Thus the company holds the entire capital stock of the National Butchers & Drovers Bank, not even deducting the shares, 10 each, which its 9 directors are by the law required to hold in their own right. This bank surely is not independent of the National City Bank in view of the relations of each to the company. The company wants but 677 shares to hold a majority of the capital stock of the Lincoln National Bank, and practically it may be said that when 4,324 out of 10,000 shares are held in one ownership the control of the corporation has been secured. If the National City Bank may extend its powers to the control of two other national banks, there is no limit to what it may do in that way. If the power exists, there is no restraint upon its exercise. By different methods and under ether forms the National City Bank is doing, and in larger measure, what the Supreme Court in Concord National Bank v. Hawkins, supra, declared to be in contravention of the national banking act. STOCK EXCHANGE PRACTICES 2041 And the National City Co., considered by itself and apart from its relations to the National City Bank, is also in violation of law. Its charter from the State of New York expressly prohibits it from the business of banking. And that charter could not confer the power to engage in the business of national banking. Such power could be conferred only by the laws of the United States. Section 5133, quoted above, confers the power to form a national banking association only upon “ natural persons.” Other sections of the law restrict the place of operations of the association to a single city, town, or village and require that the directors shall be natural persons, all of whom have a substantial interest in the bank and three-fourths of whom must be citizens and residents of the State in which the association operates. Then, too, as we have seen, the bank may not as an investment acquire the shares of another bank, or, indeed, of any other corporation. The purpose and the result are that each national bank must be a local, independent, institution, managed by natural persons, and not linked by proprietary interest with any other business than that of national banking. It is not necessary to consider whether the national banking act absolutely prohibits the holding of shares in a national bank by a State corporation to any extent or for any purpose, and it may be conceded that a State corporation may acquire such shares as an incident to securing payment of a debt and hold them to a convenient time for sale, or that an institution like a trust company may hold them in a fiduciary capacity, but certainly there can be no holding of such shares by any corporation when the result is to defeat the policy of the national banking a ct; that is, to destroy the local character of the bank, break down its independence, vest its control in another corporation, and link it in substantial proprietary interest with some other business than national banking. The National City Co. may embark in almost any business whatever, and in fact has made large investments in other enterprises than banking. It has acquired ownership of all the stock of the National Butchers & Drovers Bank, a virtually controlling interest in the Lincoln National Bank, and interests of magnitude in other national banks. The ownership of property implies duties as well as rights. As the company owns all the shares of the Butchers & Drovers Bank, it has a duty with respect to them. It must vote them at shoreholders’ meetings, it must elect the directors of the bank, and decide important questions of policy. If this is not conducting the business of a national bank how shall it be characterized? In Anglo-American Land Co. v. Lombard (132 Fed. Rep. 721, 1. c. 736), the Court of Appeals for the Eighth Circuit, in an opinion by Judge Van Devanter, now a justice of the Supreme Court, held that the acquisition by a Missouri company of the stock and control of a Kansas company was illegal. He said: “ * * * Where it is not otherwise provided, the implication in a grant of corporate power and life is that the corporation shall exercise its powers and carry on its business through its own officers and employees, and not indirectly, through another corporation operated under its control, and that it shall maintain an independent corporate existence, and not surrender the con trol of its affairs or the exercise of its powers in another corporation. Con ceding that a corporation of a private character, not charged with any public duties, may, in pursuance of appropriate action on the part of its stockholders, sell all of its property, wind up its affairs, and permanently retire from busi ness, still, in the absence of express authorization, neither the corporation nor its stockholders can, incidental to the sale of its property or otherwise, clothe another corporation with the right to maintain the corporate life or exercise the corporate powers. These views are sustained, and the reasons therefor are fully set forth in De La Vergne Co. v. German Savings Institution (175 U. S. 40, 54, 20 Sup. Ct. 20, 44 L. Ed. 66), Buckeye Marble & Freestone Co. v. Harvey (Term.) (20 S. W . 427, 18 L. R. A. 252, 36 Am. St. Rep. 71), Easum v. Buckeye Brewing Co. (C. C. 51 Fed. 156), and in the cases there cited. W e are dealing with corporations of a public character, with national banks, which have public duties to perform, and of these it is a peculiar obligation “ to maintain independent corporate existence and not surrender control of their affairs or the exercise of their powers to another corporation.” No authority is given by the Federal statutes to the national banking asso ciations for assigning their powers and delegating their duties to a corporation created by a State, and which, under its charter from the State, may engage in a business and exercise powers denied to the banking association by the law of its creation. 2042 STOCK EXCHANGE PBACTICES Here again it is to be observed that if the power in question exists, it exists without limit. The company may extend its power to the full control of all the banks into which it has made entrance. Nor need it stop with these. As it grows by what it feeds upon it may expand into a great central bank, with branches in every section of the country. It is, in incipient stage, a holding company of banks, with added power to hold whatever else it may find to be to its advantage. Where public law and public policy are involved, forms and fictions are dis regarded and the facts are dealt with as facts. In the Northern Securities Case (198 U. S. 197), the Securities Co. had acquired the majority of the shares of two great competing railway companies, and this was dealt with in effect as a consolidation of the railway companies. Judge Harlin, affirming the decree of the circuit court, said (p. 326) : The stockholders of these two competing companies disappeared, as such, for the moment, but immediately reappeared as stockholders for the holding company which was thereafter to guard the interests of both sets of stock holders as a unit, and to manage, or cause to be managed, both lines of railroad as if held in one ownership. Necessarily by this combination or arrangement the holding company in the fullest sense dominates the situation in the interest of those who were stockholders of the constituent companies; as much so, for every practical purpose, as if it had been itself a railroad corporation which had built, owned, and operated both lines for the exclusive benefit of its stock holders. Necessarily, also, the constituent companies ceased, under such a combination, to be in active competition for trade and commerce along their respective lines, and have become, practically, one powerful consolidated corporation, by the name of a holding corporation the principal, if not the sole, object for the formation of which was to carry out the purpose of the Original combination under which competition between the constitutent com panies would cease. So in the Standard Oil case (221 U. S. 1), and in the Tobacco case (221 U. S. 106), the holding of stocks by the principal companies in the various subsidiary companies was recognized and dealt with as engaging in, directing and control ling the business of the subsidiary companies. Here the National City Co. is not simply to control banks, but it may engage in any business whatever, even that forbidden by its charter, if, despite its charter prohibition as to certain kinds of business, it may invest in the stocks of companies conducting such business. The other enterprises in which the company is engaged may stand in need of credit and of funds, and it is too much to expect that the company’s banks will deal simply as banks, equitably and impartially as between its own subsidiaries, and persons and corporations with whom it is not affiliated. The temptation to the speculative use of the funds of the banks at opportune times will prove to be irresistible. Examples are recent and significant of the peril to a bank, incident to the dual and diverse interests of its officers and directors. If many enterprises and many banks are brought and bound together in the nexus of a great holding corpora tion, the failure of one may involve all in a common disaster. And if the plan should prosper it would mean a union of power in the same hands over industry, commerce, and finance, with a resulting power over public affairs, which was the gravamen of objection to the United States Bank. I conclude the National City Co. in its holding of national bank stocks is in usurpation of Federal authority and in violation of Federal law. Respectfully submitted. Solicitor General. Mr. C o v in g to n . Before you finish, Mr. Chairman, may I make a statement? I think I have a right so to do. Mr. P e c o r a . D o you have a right so to do? Mr, C o v in g to n . I think that I have, Mr. Pecora. I am quite ad vised of the rights of an investigating committee. Mr. P e c o r a . I will ask the chairman to determine whether or not he has any right to make a statement. Mr. C o v in g to n . I want to call attention to a pertinent fact in connection with that opinion, and I submit to the committee whether or not it should be permitted. STOCK EXCHANGE PRACTICES 2043 The C h a ir m a n . H o w long a statement? Mr. C o v in g to n . One minute. Mr. P eo o ra . All right; let us hear him. STATEMENT OF J. H. COVINGTON, WASHINGTON, D. 0., COUNSEL FOE THE NATIONAL CITY BANK The C h a ir m a n . Will you give your name on the record, Judge? Mr. C o v in g to n . J. H. Covington, counsel for the National City Bank. The C h a ir m a n . Where is your office, Judge Covington? Mr. C o v in g to n . The Union Trust Building in Washington. The Attorney General of the United States is charged with the responsibility of enforcing the law. This opinion was directed to him. This was simply the opinion of the Solictor General. The Attorney General qute obviously, in so high-minded a man as Mr. Wickersham, must have differed with it, for there has been no pro ceeding thereafter to undertake to charge the National City Bank with a violation of the law in conspiracy with the voting trustees and officers of the National City Co. Mr. P e c o r a . I submit that is a gratuitous assumption of the learned gentleman who made it. Mr. C o v in g to n . Not so much a gratuitous assumption as some that you have made from time to time. The C h a ir m a n . We want no more of that. Mr. C o v in g to n . But I want to call attention to the fact that if I heard it right Mr. Lehmann said that to the Attorney General, who was then Mr. Wickersham, and it was his opinion. Mr. P e c o r a . He said that he agreed with him, in an earlier opinion referred to in this opinion, dated August 1, 1911, and for the benefit of the learned gentleman who has just placed his observa tion on the record, Mr. Chairman, I will repeat-----Mr. C o v in g to n (interposing). I heard that, Mr. Pecora. Mr. P e c o r a . This language from the opinion now spread on the record. [Reading.] On August 1, 1911, I submitted to you an opinion in which you concurred that the agreements and arrangements in question were made to enable the bank to carry on business and exercise powers prohibited to it by the national banking act. Did you hear that, Judge Covington ? Mr. C o v in g to n . I heard that, Mr. Pecora. Mr. P e c o r a . And you still say that the Attorney General did not concur, do you? Mr. C o v in g to n . I did not say that he did not concur. Mr. P e co r a . Then I misunderstood you. Excuse me. Mr. C o v in g to n . I said the Attorney General was charged with the responsibility of enforcing the law and obviously came to that ultimate conclusion, because he did not undertake to proceed against the National City Bank in creating the organization with the Na tional City C o., and the fair presumption is that Mr. Wickersham always obeyed the law. Mr. P e co r a . I merely want to say, Mr. Chairman, that the only purpose I had in seeking to invite General Wickersham to a hearing before this committee was to have him state, not through an as 119852—33— PT 6------ 19 2044 STOCK EXCHANGE PRACTICES sumption by somebody else, but directly and upon his own respon sibility whether or not he concurred in the opinion of the Solicitor General of the Department of Justice who served under his admin istration of that department, and what proceedings, if any, were ever instituted or contemplated to be instituted based upon that opinion. The C h a i r m a n . The interesting thing to me is the observation made as to what would be the effect of it if it were done.. He seems to have been a prophet. Mr. P e c o r a . You mean Solicitor General Lehmann? The C h a i r m a n . Yes. TESTIMONY OF CHARLES E. MITCHELL, NEW YORK CITY, CHAIRMAN THE NATIONAL CITY BANK OF NEW YORK, CITY BANK FARMERS’ TRUST CO., INTERNATIONAL BANKING CORPORA, TION, THE NATIONAL CITY CO., AND THE NATIONAL CITY CO. (LTD.), OF CANADA—Resumed Mr. P e c o r a . Now, Mr. Mitchell, you said that you at one time had this opinion of the Solicitor General called to your attention. Did you give it any careful consideration? Mr. M i t c h e l l . I t was so many years ago, Mr. Pecora, that I just carry in mind that there was an opinion rendered. Mr. P e c o r a . W ell, have you any recollection of your having given that opinion serious consideration? Mr. M i t c h e l l . I understood, as Judge Covington has truly stated, that the opinion was not acted upon by the Attorney General. Mr. P e c o r a . For that reason did you give it no serious consider ation ? Mr. M i t c h e l l . That opinion has not had serious consideration by me. A t that time the subsequent line of development of the N a tional City Co. was not contemplated. W h at was contemplated, I think— of course, this was long before I ever came to the City Co. or had anything to do with it— was the accumulation of stocks of other banks, making the National City Co. somewhat like the present group banking company which is operating extensively m this country. Mr. P e c o r a . Mr. Chairman, according to a letter addressed to the chairman of this committee by the present Attorney General of the United States, bearing date o f February 20, 1933, only a carbon copy of the opinion of the Solicitor General of November, 1911, is submitted to this committee. Apparently the original is not to be found among the files of the Department of Justice. I will put in evidence the letter addressed to you by the Attorney Gen eral of the United States, dated February 20, 1933, on this subject, and ask that it be spread on the records. The C h a i r m a n . I f there is no objection, it will be so ordered. (The letter is as follows:) O f f ic e of t h e A ttorney G eneral, Washington, D. C., February 20, 1933. Hon. P ete ® N o r b e c k , Chairman Committee on Banking and Currency, United States Senate. M y D e a r S e n a t o r N o r b e c k : I have your letter of February 18 asking me for records of this department relating to the origin of the affiliate svstem in STOCK EXCHANGE PRACTICES 2045 connection with the affairs of the National City Bank of New York for the use of the subcommittee of the Senate Committee on Banking and Currency. I have caused a search to be made of the flies of this department to ascertain whether there is anything in them of the kind you describe. There is in the files a carbon copy of a memorandum prepared by Solicitor General Lehmann, addressed to the Attorney General (Wickersham), dated November 6, 1911, which deals with the legal question involved. I am inclos ing this document for the use of the committee. We have not had time to copy it, and I will ask you to please preserve it for return to our files. It relates to the situation of the National City Bank of New York. In May, 1932, a copy of this memorandum was handed to Senator Glass, and I believe it was published in the Congressional Record with the deletion of the name of the bank mentioned. It appears also from our files that under date of September 19, 1913, Attorney General McReynolds wrote the Hon. William G. McAdoo, Secretary of the Treasury, sending him a copy of Solicitor General Lehmann’s memorandum, saying: “ In compliance with your request I am sending you herewith a photographic copy of what seems to be a carbon copy of a memorandum prepared by the Solicitor General on this subject. A careful search of the files here fails to disclose any opinion by the Attorney General in this matter.” It is apparent from Solicitor General Lehmann’s memorandum that he had before him some information as to the situation of the National City Bank and National City Co., but there is nothing in the files of the department, that we have been able to find, showing how Mr. Lehmann obtained the infor mation referred to in his memorandum, and there are no documents in the file containing any statement of the facts or any information respecting the situation of the National City Bank and affiliated companies. The file opens with a letter from Solicitor General Lehmann to the Hon. Henry A, Wise, then the United States attorney for the southern district of New York, dated July 7, 1911, referring to an account appearing in the New York papers respecting the formation of corporations to hold shares of national banks, and requesting the United States attorney to ascertain the facts, and under date of July 10, 1911, a letter from the United States attor ney stating that he would have the matter thoroughly investigated and would report as soon as possible, but no such report is contained in the files, although it may be inferred that the facts set forth in Solicitor Lehmann’s memorandum may have been obtained from the United States attorney. In short, the only document or record in the department that throws any light whatever on the situation of the National City Bank and its affiliated companies is the memorandum of Solicitor General Lehmann which is in closed. I may add that there appears in the file a letter dated January 19, 1921, from the Comptroller of the Currency to Attorney General A. Mitchell Palmer requesting that the Comptroller of the Currency be furnished with a copy of the memorandum of November 6, 1911, prepared by Mr. Lehmann, and there is a notation on this letter as follows: “ Bequest granted, F. K. N.” The initials are apparently those of former Assistant Attorney General Nebeker. In that connection there appears in the files a copy of a letter dated Jan uary 26, 1921, to the Hon. John Skelton Williams, Comptroller of the Cur rency, which reads as follows: “ I have examined the files relating to the so-called opinion of Solicitor General Lehmann, dated November 6, 1911. The paper you handed me is unsigned. It purports to be a photographic copy of a letter addressed to the Attorney General and. intended for the signature of the Solicitor General. The original is not in the files. The copy bears an unsigned indorsement, dated April 24, 1913. to the effect that it is understood that Attorney General Wick ersham prepared a letter summarizing the attached opinion of the Solicitor General but to whom this letter is addressed does not appear, and no record of such a letter is found in the files. The only thing of interest I find in the files is a letter of Attorney General McReynolds, dated September 19, 1913, addressed to Secretary McAdoo, in which it is stated: “ In compliance wfth your request, I am sending you herewith a photo graphic copy of what seems to be a carbon copy of a memorandum prepared by the Solicitor General on this subject. A careful search of the files here fails to disclose any opinion by the Attorney General in this matter.” 2046 STOCK EXCHANGE PRACTICES Apparently what was sent to Secretary McAdoo at that time was a duplicate of the photographic copy which you have. The only thing in our files is what purports to be a photographic copy of an unsigned letter to the Attorney General, apparently intended for the sig nature of the Solicitor General; I find no record of what action was taken by the Attorney General or of any subsequent action except the sending of a copy to Secretary McAdoo and, for this reason, I do not feel justified in authorizing the publication of the memorandum. Respectfully yours, WrLUAM D. M i t c h e l l , A ttorney General. The Chairm an. The committee will recess until 10 o’clock Monday morning, and those under subpoena will appear at that time. (Accordingly, at 4.15 o’clock p. m., the subcommittee adjourned until 10 o’clock a. m. Monday, February 27, 1933.) STOCK EXCHANGE PEACTICES MONDAY, FEBRUARY 27, 1933 U S n it e d S tates u b c o m m it t e e o f t h e B a n k in g C S en a t e o m m it t e e a n d C , on , u r r en c y , Washington D. C. The subcommittee met, pursuant to adjournment on Friday, Feb ruary 24,1933, at 10 o’clock a. m., in room 301 Senate Office Building, Senator Peter Norbeck presiding. Present: Senators Norbeck (chairman), Couzens, Townsend, Fletcher, and Costigan. Present also: Senators Brookhart, Barkley, Gore, and Reynolds. Further present: Ferdinand Pecora, special counsel to the com mittee; Julius Silver and David Saperstein, associate counsel to the committee. The C h a i r m a n . The subcommittee will come to order. Mr. Pecora, whom will we have this morning? Mr. P e c o r a . Mr. Baker will please resume the stand. The C h a i r m a n . Mr. Baker will come around to the committee table. He has already been sworn. TESTIMONY OF HUGH B. BAKER, PRESIDENT THE NATIONAL CITY CO., NEW YORK CITY—Resumed Senator G o r e . Mr. Chairman, I want to go over to the Senate, and I should like permission to ask a question or two here, if I may. Senator C o u z e n s (presiding). Certainly. Senator G o r e . I do not want it to break in on questions propounded by counsel to the committee, who is developing his subject in a general way. I f these questions have already been answered by Mr. Mitchell I do not want them answered now, because I do not want to tread the same path again. But I was not here at the time the inquiry was being made as to the National City Co. carrying on the campaign to sell the stock of the bank in this country. Senator C o u z e n s (presiding). Go right along, Senator Gore. Senator G o r e . W as it also carrying on a campaign to sell its stock in foreign countries? Mr. B a k e r . There were offerings abroad, Senator Gore; yes. Senator G o r e . H o w many offices or branches have you abroad? Mr. B a k e r . W e have an office in London, and— do you mean the National City Co., Senator Gore? Senator G o r e . Yes, sir; or the bank, whichever it is, or both. Mr. B a k e r . W ell, the National City Co. has an office in London, and in Amsterdam, and in Geneva, and in Berlin. 2047 2048 STOCK EXCHANGE PEACTICES S e n a t o r G o r e . A n d th e n y o u h a v e c o rre sp o n d e n ts, I su p p o se , in o t h e r c o u n t rie s ? M r . B a k e r . O h , ye s. Senator G o r e . H o w many? Mr. B a k e r . W ell, I don’t know how many correspondents, but a large number, of course. Senator G o r e . And in South America as well as Europe ? Mr. B a k e r . Y e s . Senator G o r e . W ell, now, at that time did you cable your repre sentatives or offices in foreign countries to make offerings of your stock, of the National City Bank, I mean? Mr. B a k e r . W e quoted the markets to them frequently, and gave our impressions of general conditions as they existed. Senator G o r e . In a selling campaign of the stock, so to speak ? Mr. B a k e r . W ell, I would hardly call it a campaign, but they were offerings. Senator G o r e . Yes. Can you insert into the record of your testi mony some of those communications to your foreign correspondents % Mr. B a k e r . I have no doubt I can, but I would have to get those from the files in New York, Senator Gore. Senator G o r e . Y e s ; that is what I mean, about contemporaneously with the activity in this country to sell the stock of the bank. Mr. B a k e r . Yes. I can get that. Senator G o r e . Typical communications to European countries and to South American countries, for instance. Mr. B a k e r . Y es; I will be glad to do that. Senator G o r e . I have been informed that that is the case, and I wanted to get that information in the record. Mr. B a k e r . A ll right. A matter of two or three days would not make any difference on that, would it? Senator G o r e . N o . (The communications to correspondents in foreign countries reuested in foreign countries requested by Senator Gore will, when urnished by Mr. Baker, be inserted at this point in the original transcript for use of the Government Printing Office in printing the record. See page 2050.) Senator G o r e . A n amendment was included in the Glass bill, that recently passed the Senate but has not yet passed the House, making it unlawful for the officers of a bank to borrow from the bank of which they are officers, and unlawful for a bank to loan to its officers. Now, what is your judgment in regard to that? Mr. B a k e r . Senator Gore, I have to admit that I am not an expert on those things. M y function is the investment banking end of the work. Senator G o r e . W ell, I would not want you to answer if you do not feel qualified to do so. Mr. B a k e r . A ll r i g h t . Senator G o r e . That is all, Mr. Chairman. And I thank you for this opportunity. Senator C o u z e n s (presiding). That is certainly all right, Senator Gore. Senator K e y n o l d s . Mr. Chairman, I should like to ask one ques tion along that line, if I may. ? STOCK EXCHANGE PRACTICES 2049 Senator C o u z e n s (presiding). The Senator from North Carolina is recognized. Senator R e y n o l d s . Mr. Baker, what connection did Mr. Charles E. Mitchell have with the National City Co.? Mr. B a k e r . In these issues we were talking about in 1928 ? Senator R e y n o l d s . Yes. Mr. B a k e r . I am not sure just what time— yes, he was the presi dent of the National City Co at that time. Senator R e y n o l d s . When did Mr. Mitchell resign? Mr. B a k e r . W ell, he became chairman in 1929. Senator R e y n o l d s . He became chairman of the board of directors, do you mean? Mr. B a k e r . No. It is the office of chairman of the National City Co. That means the chief executive officer of the company. Senator R e y n o l d s . Does Mr. Mitchell owe the National City Co, any money? Mr. B a k e r . Not a cent, so far as I know. N o ; not a cent. Senator R e y n o l d s . A ll right. That is all, Mr. Chairman. Senator C o u z e n s (presiding). You may proceed, Mr. Pecora. Mr. P e c o r a . Mr. Baker, in the course of the testimony which you gave last week before this subcommittee you stated, among other things, that the National City Co., before sponsoring any security issues for sale to the public, held a conference of its executive officers, informal in character, at which the proposed issues were discussed. Do you recall that testimony? Mr. B a k e r . Yes. I am not sure that I recall those words, but that was the substance of it. Mr. P e c o r a . That was the substance of it? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Did that procedure also apply to issues of foreign bonds ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . W ill you please tell the subcommittee, generally but concisely and comprehensively, just what steps were taken by the executive officers of the company before they reached any judgment or conclusion with respect to the wisdom or advisability of offering a foreign issue to the investment public in this company? Mr. B a k e r . W ell, of course the general subject would be presented by the vice president in charge of that particular field. And he had made his studies, either through representatives of ours having been in that particular field, or through other contacts that we may have had there, so that he could present the important facts as re gards the credit situation in that country, its general economic con dition, history, and so forth ; and of course that, following his state ment, would be discussed, questions would be asked of various other executives, in which we tried to determine every important factor connected with that proposed loan. Mr. P e c o r a . In other words, it was sought to make an intensive study of economic and political conditions, that is, political in so far as they might involve the stability of the Government, is that right? Mr. B a k e r . Yes, sir; that is right. Mr. P e c o r a . For that purpose your company had representatives in various foreign countries. Mr. B a k e r . That is right. 2050 STOCK EXCHANGE PRACTICES M r. P ecora. A nd that applied, of course, to South American re publics ? Mr. B a k e r. Yes, sir. Mr. P ecora. W ho was the------Senator C ouzens (interposing). Let me ask a question at that point: Do you have any information as to how many South Amer ican bonds you sold during the years 1927, 1928, and 1929 ? Mr. B a k e r. I have not in my mind. I would have to refer to my records on that and compile them. I can easily do it for you, however. Senator C ouzens. D o you know the approximate amount, can you give us an approximate estimate? Mr. B a k e r. I should not like to guess at that. But I will supply you with that information this afternoon. Senator C ouzens. Thank you. W hat South American bonds are in default? Mr. B a k e r. That are now in default? Senator C ouzens. Yes. Mr. B a k e r. Peru, Chile, State o f Minas Geraes in Brazil, and— I think those are the principal ones. Senator C ouzens. Those are the only governmental agencies that you recall that are in default? Mr. B a k e r. Y es; they are all that I now recall. A nd I think that is right. Senator C ouzens. Are there any private or utility securities in default? Mr. B a k e r. The Lautaro Nitrate Co., which is an industrial corporation. Senator C ouzens. H ow soon could you get your information from your records as to the governmental agencies that are in default, and also the private or utility or industrial bonds that are in default? Mr. B a k e r. Do you mean in their entirety, or the ones we have been interested in? Senator C ouzens. The ones you are interested in. Mr. B a k e r. I can give you that by early afternoon. Senator C ouzens. I f you please. Mr. B a k e r. I think I can. (Thereafter the following letter was presented for the record:) T h e N a t i o n a l C i t y C o ., N ew York, March 9, 1938. H o n . P etek N o b b e o k , Chairman Subcommittee, Barikmg and Currency Committee, Senate Office Building, Washington, D . C. D e a b S e n a t o b N oe b e c k : In the examination of Mr. Baker at the hearing Monday, February 27, 1933, before your committee, Senator Gore asked for insertions in the testimony of typical communications from Mr. Baker to European countries and to South American countries in connection with the sale of National City Bank stock. The only general communications with reference to National City Bank stock were those delivered to counsel for the committee and from which he introduced in evidence certain communications. These communications were sent by telegraph or mail to local offices of the National City Co. in the United States but copies of them went by mail to European offices of the National City Co. and therefore represent the communi cations in which Senator Gore may have been interested. As the testimony discloses, such offices were in Europe and not in South America. At the same day’s hearing Senator Couzens inquired as to the South American bonds sold by the National City Co. which are in default. On the same page STOCK EXCHANGE PRACTICES 2051 Mr. Baker mentioned the Republic of Peru, Republic of Chile, State of Minas Geraes in Brazil and the Lautaro Nitrate Co. issues. I find that there should be added to that list certain issues of the United States of Brazil the Mortgage Bank of Chile, and the State of Rio Grande do Sul, in which we were interested as participants. Very truly yours, H. S. Law, Secretary. Senator C o u z e n s (presiding). You may proceed, Mr. Pecora. Mr. P e c o r a . W ho was the vice president of your company in charge particularly of South American loans during the years 1927 to 1930, inclusive. Mr. B a k e r . W ell, there were two, Mr. Pecora; Mr. Byrnes was a vice president of the company a part of that time and he gave atten tion to those things. And he has since retired from our organiza tion, but Mr. Schoepperle was also associated with him and carried on afterwards alone. Mr. P e c o r a . Mr. Byrnes severed his connection with your com pany about two years ago, didn’t he? Mr. B a k e r . Yes, sir; about that time. Mr. P e co ra . He has retired from business so far as you know, has he? Mr. B a k e r . Yes, sir. Mr. P e co r a . D o you know where he is now ? Mr. B a k e r . W ell, he is in this room. Mr. P eco ra . He is in this room now ? Mr. B a k e r . Yes, sir. Mr. P e co r a . That is Mr. Ronald Byrnes, isn’t it? Mr. B a k e r . Yes, sir. Mr. P eco ra . N o w , it required a unanimous opinion on the part of those executives of the company before an issue was sponsored, didn’t it? Mr. B a k e r . Y es; that is correct. It does not mean that we neces sarily took a vote on it, but if there were any objections to it we would not proceed. Mr. P eco ra . D o you recall an issue of------Senator G o re (interposing). That means that the issues that you did offer were agreed upon unanimously by those various executives ? Mr. B a k e r . Yes, sir. Senator G o re. A ll right. Mr. P e c o r a . Mr. Baker, do you recall an issue of $15,000,000 of 7 per cent sinking fund gold bonds, issued on March 1, 1927, by the Republic of Peru ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Commonly referred to as the Tobacco Loan? Mr. B a k e r . Yes, sir; I remember it. O f course, I know of the loan generally. Mr. P e c o r a . The National City Co. participated in the flotation of those bonds in this country, didn’t it ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . And, of course, it did so after the question of par ticipation in the flotation of that issue had been discussed by the executive officers and unanimously approved by them? Mr. B a k e r . I am quite sure that is correct. O f course, that is sometime ago, and I was not the president of the National City Co. at that time. 2052 STOCK EXCHANGE PRACTICES Senator C o u z e n s (presiding). W hat was your participation? Mr. B a k e r . That is March 16, 1927, did you say, Mr. Pecora? Mr. P e c o r a . There were issued on March 1,1927, 7 per cent bonds due in 1959. Mr. B a k e r . Yes. There were $15,000,000 of those bonds. Mr. P e o o r a . Yes. Mr. B a k e r . Yes, sir. And I beg pardon, Senator Couzens; what was your question to me? Senator C o u z e n s (presiding). Did you handle the whole of the issue? Mr. B a k e r . No. W e were not handling the entire issue. Senator C o u z e n s . W ho originated them? Mr. B a k e r. J. & W . Seligman & Co. Senator C o u z e n s . W ho were your associates in the distribution of those bonds? Mr. B a k e r . W ell, of course they handled the syndication of it in their office. W e had nothing to do with the development of that issue. The participants in the syndicate were J. & W . Seligman & Co. as managers; National City Co.; E . H . Rallins & Sons; Graham, Parsons & C o.; F . J. Lisman & Co., and Ames Emerich & Co. Mr. P e c o r a . W hat was your portion of the syndicate ? Mr. B a k e r. W e had an original position of $3,000,000. Mr. P e c o r a . And did you increase it or reduce it? Mr. B a k e r . W e increased it. Mr. P e c o r a . T o what extent? Mr. B a k e r . In the distributing group we had a position of $5,000,000. Mr. P e c o r a . And is that to be added to your original $3,000,000, or was that the aggregate amount ? Mr. B a k e r . No ; that was the total. Mr. P e c o r a . Those bonds were offered to the public at 9 6 ^ ? Mr. B a k e r . That is right. Mr. P e c o r a . W hat was the spread on that issue to the members of the syndicate ? Mr. B a k e r . Approximately 5 points, or I think it was 5.53, according to my figures— no, I mean 5.03 points. Mr. P e c o r a . Practically the entire issue was disposed of, wasn’t it ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Do you know the present market quotation on those bonds ? Mr. B a k e r . I do not, but I think it is about 10, or thereabouts. Mr. P e c o r a . It is between 7 and 8, isn’t it ? Mr. B a k e r . That may be. Mr. P e c o r a . N o w , did your company------Senator B a r k l e y (interposing). Is anybody buying them now? Mr. B a k e r . W ell, I don’t know. There is a transaction occa sionally. Senator B a r k l e y . You are not buying them, are you? Mr. B a k e r . No, sir. Mr. P e c o r a . Mr. Baker, your company generally had a repre sentative in Peru, who was referred to as an expert on South Ameri can issues and credits as far back as 1921, did it not? STOCK EXCHANGE PRACTICES 2053 Mr. B a k e r. I do not think we had anybody stationed there, Mr. Pecora. We had representatives from time to time who visited South America. Mr. P ecora. Well, do you recall a representative of your company by the name of Claude W. Calvin? Mr. B a k e r. I remember his name. I do not know him. Mr. P ecora. Have you produced here from the files of your com pany a letter from C. W. Calvin to J. T. Cosby, a vice president of the National City Bank, dated December 9, 1921, on the subject of a Peruvian loan ? Mr. B a k e r . Was that suppoenaed here? Mr. P ecora. Yes, sir. Mr. B a k e r. I do not know, but I suppose it is here, then. Mr. P ecora. Have you the letter in question now placed before you? Mr. B a k e r. Yes, sir; dated December 9. Mr. P ecora. December 9, 1921. Mr. B a k e r. Yes, sir. Mr. P ecora. J. T. Cosby at that time was a vice president of the National City Bank, wasn’t he? Mr. B a k e r. That is right. Mr. P ecora. I will read the letter into the record: Copy of letter from C. W. Calvin to J. T. Cosby, vice president, National City Bank of New York, N. Y. L i m a , P e r u , December 9, 1921. D eab M b. Co s b y : Proposed Peruvian loan by Guaranty Trust Co. You will doubtless be interested to have a word from us in regard to the doings of the committee sent to Peru by the Guaranty Trust Co. to make a report upon the proposed loan to the Peruvian Government. The committee has now been here about three weeks, and I understand have made a pre liminary report upon the matter, but they are continuing their investigation and have made no announcement of any sort. I have talked with the members of the commission and they speak in a very sophisticated manner with reference to conditions here, and appear to be very well informed. Their somewhat cynical comments in regard to the Gov ernment would ordinarily inspire doubt as to the seriousness of their inten tion, but this may be a cloak. No information is forthcoming as to when an announcement in regard to the proposed loan will be made, but I understand that the committee intends to make several trips into the interior of Peru. In the meantime the conditions of Government finances is positively dis tressing. Treasury obligations are almost impossible to collect. Government officials and employees are months in arrears in their salaries, and, as one business man expressed it, the government treasury is “ flat oti its back and gasping for breath.” With the export trade continuing small, customs revenues are not of a large amount, and, unless some sort of loan is forthcoming in the near future, I do not see how the government can continue functioning on the basis of its present income. Very truly yours, C. W . C a l v i n . Now, that letter has been in the files of the National City Co. since it was received in December of 1921, has it not? Mr. B a k e r. Yes, sir. Mr. P ecora. D o you recall whether or not the information em bodied in this letter concerning the financial and trade conditions in Peru, was discussed and considered by the executives of the com pany when they decided to participate in the flotation of this loan in 1927? 2054 STOCK EXCHANGE PEACTICES Mr. B a k e r . W ell, I do not remember specifically that this letter was read or discussed, but of course that was several years later, and there were as full discussions as we could have on the situation. Mr. Schoepperle and Mr. Byrnes, of course, would be thoroughly familiar with the answer to your question. Mr. P e c o r a . Yes. But you were one of the executives in 1927 that approved the flotation of this issue, were you not? Mr. B a k e r . Yes, sir. Mr. P e c o r a . D o you recall whether the committee, or rather the ' executive officers in their informal discussions and considerations had before them the contents o f the files of the company on Peruvian credits ? Mr. B a k e r . W ell, I do not recall that we had. But I think we must have undoubtedly had that. Mr. P e c o r a . Have you produced here in response to the subpoena served upon you on behalf of this committee, a memorandum dated April 2, 1923, written by this Mr. Schoepperle whose name you mentioned a few minutes ago, and captioned “ Memorandum re Peruvian Government Financing” ? Mr. B a k e r . Y e s; I have that. Mr. P e c o r a . N o w , will you follow me while I read the following extract from that memorandum------Senator G o r e (interposing). W hat is the date of that memo randum ? Mr. P e c o r a . April 2, 1923. Senator G o re . A ll right. Excuse me. Mr. P e c o r a . Oh, that is all right, Senator Gore. Now I read as follow s: EXTRACT FROM M EM ORANDUM DATED APRIL 2 , 1 9 2 3 , FROM VICTOR SCHOEPPERLE E N TITLED “ M EM ORANDUM RE PERUVIAN GOVERNMENT! FIN A N C IN G ” As reasons for our declining the business, we cited the history of Peruvian credit, the political situation in Peru, and our feeling that the moral risk was not satisfactory. Mr. Eakins asked whether there was any prejudice toward A. B. Leach & Co. in reaching our conclusion, and I assured him that this was not the case, and that we had considered the matter purely as a proposition between the Peruvian' Government and the National City Co. for purposes of reaching the conclusion which we had announced to him. Do you find that extract in the memorandum that you have before you? Mr. B a k e r . Yes, sir. Mr. P e c o r a . On the whole Mr. Schoepperle’s report as embodied in this memorandum was against financing any Peruvian credits, wasn’t it ? Mr. B a k e r . Yes, at that time. Mr. P e co r a . Because it was considered a bad risk; isn’t that so ? Mr. B a k e r . I assume that must have been his reason there. Mr. P e c o r a . D o you know whether that memorandum was con sidered by the executive officers of your company when in the early part of 1927 the company gave its consent to the flotation of this $15,000,000 issue? Mr. B a k e r . I am quite sure that that was discussed, although, as I say, the specific memorandum I do not recall. But certainly we went back into all those matters. STOCK EXCHANGE PRACTICES 2055 Mr. P e c o r a . W ell, now, if this memorandum was discussed there was nothing in it, was there, that encouraged the officers in floating this loan ? Mr. B a k e r . Certainly not at that particular time. Mr. P e c o r a . W ho is the Mr. Eakins whose name is mentioned in this memorandum? Mr. B a k e r . He evidently was at that time representing the firm of A . B . Leach & Co. Mr. P e c o r a . And they are an investment banking house, aren’t they? Mr. B a k e r . Yes, sir. Mr. P e c o r a . It is the practice among investment bankers and deal ers to exchange information from time to time with regard to these foreign credits particularly; isn’t that so ? Mr. B a k e r . Yes, sir; t h a t is so. Mr. P e c o r a . N o w , have you produced here from your files with regard to these Peruvian loans, a memorandum addressed to Mr. Cosby, a vice president of your company, from E. A . K ., and E. A . K . is Mr. Eakins, isn’t it? Mr. B a k e r . I am not sure about that. Mr. P e c o r a . W ell, anyway, it is signed by E. A . K . Mr. B a k e r . Yes, sir. Mr. P e c o r a . Have you that memorandum now before you ? Mr. B a k e r . Yes, sir; I have it. Mr. P e c o r a . D o you find the following extract, and will you follow me while I read i t : EXTRACT FROM MEMORANDUM FOR MR, COSBY FROM E. A . K ., M A Y 8, 1 9 2 3 , D UN SM U IB R A IL W A Y CONCESSION IN PERU As far as the attitude of the City Co. is concerned in connection with this financing, it may be mentioned that the history of Peruvian credit, the political situation in Peru, and the company’s feeling regarding the moral risk have hitherto caused them to avoid Peruvian financing. Moreover, while the to bacco monopoly may be profitable, it appears very doubtful whether the rail ways will be profitable for a long time to come, and the Government appears to be determined to use all the tobacco monopoly’s profits for railroad con struction. Do you find that? Mr. B a k e r . Yes, sir. Mr. P e c o r a . W hat is the date of this memorandum ? Mr. B a k e r . 1923, May 8. Mr. P e c o r a . It i s dated May 8, 1923 ? Mr. B a k e r . Yes. Mr. P e c o r a . D o you recall whether this memorandum was con sidered by the executive officers of the company when they decided to participate in this issue ? Mr. B a k e r . W h y, I answer that as I did the other, that I do not recall the specific memorandum, but I again say I have no doubt it was discussed. Mr. P e c o r a . Can you tell the subcommittee who the E. A . K . re ferred to is ? Mr. B a k e r . N o. I am sorry I cannot answer that, unless I con fer here. 2056 STOCK EXCHANGE PRACTICES Mr. P e c o r a . W ell, you may confer if that will enable you to answer. Mr. B a k e r . It is Mr. Kircher. Mr. P e c o r a . W hat was his relationship to the National City Co.? Mr. B a k e r . He was with Mr. Schoepperle, in his department. Mr. P e c o r a . That is, in the South American department? Mr. B a k e r . Y e s . Mr. P e c o r a . And this memorandum came from Mr. Kircher, in Peru at the time ? Mr. B a k e r . I do not know whether he was in Peru at the time or not. I can not tell from my memorandum that I have here. A p parently this was made in the office in New York. Mr. P e c o r a . N o w , who i s Mr. Dunham? Mr. B a k e r . H e is not with us, but he was with us also as somewhat of a student of conditions in various parts of the world. Mr. P e c o r a . Particularly in South America? Mr. B a k e r . Yes, I think his duties included South America among others. Mr. P e c o r a . Have you produced here from your files a memo randum signed by Mr. Dunham, addressed to Mr. Byrnes, whom you have referred to as a vice president of the company at that time, with respect to Peruvian credits, dated July 11, 1923? Mr. B a k e r . Yes. Mr. P e c o r a . Have you the original of that memorandum before you? Mr. B a k e r . Yes, sir; I have it. Mr. P e c o r a . N o w , let me read it for the purpose of the record: M EM ORANDUM FOB MB. BYBNE8 J u l y 11, 1923. Mr. Eakins, of A. B. Leach & Co., has approached us again with a repre sentative of the Foundation Co. in regard to a $6,000,000 Peruvian loan. Mr. Eakins says he had this business up with Mr. Schoepperle last April but on account of the little time available before a decision had to be made, we turned it down. In a memoradum dated April 2, in our files, Mr. Schoepperle says * * * on Thursday, March 29, we advised Messrs. Eakins and Swetsch that we did not care to enter into negotiations for this business. As reasons for our declining this tmsiness we cited the history of the Peruvian credit, the political situation in Peru, and our feeling that the moral risk was not satisfactory. I do not see any reason now to change our attitude. It is my feeling that, if we ever do go into Peruvian business, we ought to go in in a big way and not in these piecemeal propositions. W e can not go in in a big way without making a real investigation, perhaps somewhat along the lines that the Guar anty made, with the idea of having foreign control of the customs and certain internal revenues. I understand that most of the recommendations which the Guaranty made have not yet been put into force, except the establishment of a new bank of issue. Our information shows that conditions in Peru are improving; the political situation is better but is largely dependent upon the continuance of the present administration in power, and a good deal of opposition is met in Congress when reforms are proposed by the President. I have in mind to tell Mr. Eakins that we are not disposed to go into this business. D unham. (Note in ink at bottom of memorandum:) I notified Mr. Eakins that we would not be interested in this $6,000,000 prop osition— that our ideas have not changed. D unham . STOCK EXCHANGE PRACTICES 2057 Now there is nothing in that memorandum which would give en couragement to the financing of Peruvian credits in this country, is there ? Mr. B a k e r . N o , s i r ; n o t a s t o t h a t . Mr. P e c o r a . I s Mr. Dunham still employed by the National City Co.? Mr. B a k e r . N o , s i r . Mr. P e c o r a . H o w long ago was his connection with the company severed ? Mr. B a k e r . I should think probably 3 years ago, or, say, 2 or 3 years ago. Senator C o u z e n s (presiding). Your turnover seems to have been quite large. Mr. B a k e r . W e had quite a large organization, and it is very much reduced on account of economy. Mr. P e c o r a . N o w , Mr. Baker, have you produced from your files a letter addressed to Mr. T. A . Eakins, care of Messrs. A . B. Leach & Co., New York City, dated July 12, 1923, and signed by the man ager of your foreign department? Mr. B a k e r . Y e s ; I have that. Mr. P e c o r a . Have you got it before you now ? Mr. B a k e r . You said July 12? Mr. P e c o r a . July 12, 1923. Mr. B a k e r . That is right. Mr. P e c o r a . I will read the text of the letter: LETTER TO MR. T. A . E A K IN S . CARE OF MESSRS. A . B. LEACH & CO., N EW YORK CITY, N. Y . J u l y 12, 1923. : Confirming our telephone conversation of this afternoon with your office, we have received the following cable from Mr. Schoepperle in London: “ Convey following message collect to A. B. Leach & Co. in answer to their direct cable. July coupons Peru 5 per cent loan 1920 now in default. Various coupons have been in arrears recent years. Peru has defaulted on eariler loans according Corporation Foreign Bondholders. Peruvian corporations contract situation confused. No indications Peruvian loans under discussion London, England. Would not consider new loan good without specific ade quate pledge. Continuance of Cumberland in office subject entirely to wishes of Government, therefore much depends upon political situation even if ade quate pledges available; 5 per cent 1920 loan quoted London, England, 45, 50; 5y2 per cent loan 1909 quoted 94, 96. Recent 7% per cent guano loan 98 par.” Very truly yours, A. W . D u n h a m , D ear M r. E a k in s Manager, Foreign Department. By whom is that letter signed ? Mr. B a k e r . The initials are those of A . W . Dunham. Mr. P e c o r a . Now, in determining whether or not the foreign credits should be sponsored by your company to the investing public here, was the past record of the prospective debtor nation taken into account? Mr. B a k e r . Yes, sir. Mr. P e c o r a . The information embodied in this letter, which quotes a cable sent from London by the National City Co.’s representative, Mr. Schoepperle, called attention, did it not, to the fact that the 2058 STOCK EXCHANGE PRACTICES Peruvian Government in 1923 was in default on several of its prior issues ? Mr. B a k e r . That is right. Mr. P e c o r a . There was nothing in that situation which commended a Peruvian line of credit or a Peruvian loan, was there ? Mr. B a k e r . Not at that time; no, sir. Mr. P e c o r a . N o w , to get back to this Peruvian tobacco loan of March 1927: Have you produced here, Mr. Baker, the original memorandum to Mr. Dunham of your company, signed by C. M. Bishop, under date of July 12,1923 ? Mr. B a k e r . Yes, I have that here. Mr. P e c o r a . I want to read the following extract from that memo randum : Peru has been careless in the fulfillment of contractual obligations. City of Lima 5 per cent loan coupons, due January 1, 1922, were not paid until the following May, 1922. The Peruvian 5 per cent gold bonds of 1920, due in January, 1922, were paid in September, 1922, and those due in July, 1922, were paid in October of 1922. The London Times, in its issue of March SO, 1922, alluded to Peru’s “ frequent unobservance of her undertakings to the Peruvian Corporation, her broken pledges over the Chimbote concession, and her flagrant disregard of guarantees given to the North Western Railway of Peru.” C. M. B i s h o p . Now, who is Mr. Bishop? Mr. B a k e r . I ju s t d o n ’t k n o w th a t. Mr. P e c o r a . He was connected with the foreign department of the National City Co. in July, 1923, wasn’t he? Mr. B a k e r . May I ask Mr. Schoepperle who he was? Mr. P e c o r a . Surely. Mr. S c h o e p p e r l e . He was an employee. Mr. B a k e r . He was; yes sir. Mr. P e c o r a . Employed in the foreign department of the National City Co. in July, 1923 ? Mr. B a k e r . That is right. Mr. P e c o r a . There is nothing in that memorandum which would give encouragement to the flotation of Peruvian bonds ? Mr. B aker. No, sir. Mr. P e c o r a . Have you produced here in response to subpoena from the files of your company a paper marked “ Peruvian Study. A table of the revenues and expenditures of Peru for the years between 1915 and 1924” ? Mr. B a k e r . I suppose that is in this file. I think if you have no objection Mr. Schoepperle can produce that for us. Mr. P e c o r a . A ll right. Mr. Schoepperle can help you locate that? Mr. B a k e r . Mr. Schoepperle, can you help me locate that ? Mr. S c h o e p p e r l e . Yes (handing documents to Mr. Baker). Mr. B a k e r . Is this it? Mr. S c h o e p p e r l e . Yes. W e have a table here. I do not have the date. There is no date on it. Mr. P e c o r a . I suggest that Mr. Schoepperle be sworn, Mr. Chair man, so that I may question him about this. STOCK EXCHANGE PRACTICES 2059 TESTIMONY OF VICTOR SCHOEPPERLE, SHORT HILLS, MELBTJRN TOWNSHIP, ESSEX COUNTY, N. J., VICE PRESIDENT NATIONAL CITY CO. Senator C o u z e n s (presiding). Mr. Schoepperle, do you swear to tell the truth, the whole truth, and nothing else but the truth in this investigation, so help you God? Mr. S c h o e p p e r l e . I d o . Mr. P e c o r a . Mr. Schoepperle, will you kindly give your full name, address, and business or occupation to the reporter ? Mr. S c h o e p p e r l e . Victor Schoepperle; occupation, vice president of the National City Co.; address, Short Hills, Melburn Township, Essex County, N. J. Mr. P e c o r a . How long have you b een vice president of the Na tional City Co.? Mr. S c h o e p p e r l e . Since about May, 1927, April or May. Mr. P e c o r a . Prior to that time were you connected in any other capacity with the company? Mr. S c h o e p p e r l e . Prior to that time I was an assistant vice presi dent of the National City Co. Mr. P e c o r a . For what period of time? Mr. S c h o e p p e r l e . I think three or four years prior to 1927. Mr. P e c o r a . Did you have any connection with the company prior to that period? Mr. S c h o e p p e r l e . Prior to that period, yes; I had been connected with the company as an officer in a minor capacity from 1916 on. Mr. P e c o r a . Were you connected with any particular department of that company ? Mr. S c h o e p p e r l e . I was connected with the foreign department of the National City Co. from about 1919 on. Mr. P e c o r a . To the present time? Mr. S c h o e p p e r l e . To the present time; yes, sir. Mr. P e c o r a . So that since 1919 practically all your services have been in connection with foreign loans and credits participated in by the National City Co.? Mr. S c h o e p p e r l e . Practically speaking; yes. Mr. P e c o r a . For a period of time were you in charge of South American credits for the company? Mr. S c h o e p p e r l e . In a general sense; yes. Mr. P e c o r a . You have been present at this hearing this morning since the examination of Mr. Baker was resumed, haven’t you? Mr. S c h o e p p e r l e . I h a v e . Mr. P e c o r a . And have you heard the testimony he has given this morning ? Mr. S c h o e p p e r l e . Y es; I have. Mr. P e c o r a . You are the Mr. Schoepperle referred to in some of the communications that have been read either in whole or in part into the record this morning, are you not? Mr. S c h o e p p e r l e , I am; yes. Mr. P e c o r a . Now. I will ask you, because of your greater familiar ity with the files of your company with respect to Peruvian loans whether there has been produced here a table showing the revenues and expenditures of the Government of Peru for the years between 1915 and 1924. 119852—33—PT 6------ 20 2060 STOCK EXCHANGE PEACTICES Mr. S c h o e p p e r l e . There has been, sir. Mr. P e c o r a . W ill you look at that table and tell us if it is not the fact that during that period the Government of Peru had suc ceeded in balancing its budget only for 3 years; that is, on only three occasions during that 10-year period? Mr. S c h o e p p e r l e . Y es; that appears on the table of expenditures which goes with this file, table on revenues. Mr. P e c o r a . Y es; and that table shows that as a general rule the expenditures year by year exceeded the revenues by substantial amounts, does it not? Mr. S c h o e p p e r l e . W ell, would you mind if I were a little more specific ? Mr. P e c o r a . Yes. Mr. S c h o e p p e r l e . In 1915 there appears according to these tables to be a deficit of 157,000 Peruvian pounds. Mr. P e c o r a . A Peruvian pound is equivalent to what in American dollars? Mr. S c h o e p p e r l e . A t that time it was equivalent to the pound sterling, $4,867. Mr. P e c o r a . G o a h e a d . Mr. S c h o e p p e r l e . N o w , to continue------Mr. P e c o r a (interposing). W hat is the proportion of excess of the expenditures over the revenues for that year? I mean, give it to us approximately. Mr. S c h o e p p e r l e . Yes. I do not want to delay your proceedings at all, but I want to be fairly accurate; 2,829,000 divided into 157,000 [calculating]— for that year, 1915, under discussion, about 7 per cent. Mr. P e c o r a . W hat other detailed answer do you want to make to the general question whether the expenditures did not exceed the revenues almost eveiy year during that 10-year-period? Mr. S c h o e p p e r l e . I think I would prefer to accept the statement that you made in the first instance, that during three of those years there appears to have been, according to these tables, a surplus of revenues over the expenditures, and for the balance of the period under discussion there appears to have been a deficit. Mr. P e c o r a . Yes. Now, I will resume the examination of Mr. Baker. TESTIMONY OF HUGH B. BAKER, PRESIDENT THE NATIONAL CITY CO., NEW YORK CITY— Resumed Mr. P e c o r a . Mr. Baker, have you produced from the files of your company with respect to the Peruvian loan a report dated December 16,1925, signed by E . A . K . ? Mr. B a k e r . Is it signed by E. A . K . ? Mr. P e c o r a . E. A . K ., monographed by E. A . K . Mr. B a k e r . W ell, I am very sorry; I do not find that report. I will be verjr glad to take any transcript you may have of it. Mr. P e c o r a (handing document to Mr. Baker). Perhaps this will help you locate it. (Mr. Baker and Mr. Schoepperle perused documents.) Mr. S c h o e p p e r l e . Mr. Pecora, for the purpose of the record and not to delay the proceedings, I think Mr. Baker would accept this as a transcript from that report. W e will find it. STOCK EXCHANGE PRACTICES 2061 Mr. P e c o r a . I understand that a representative of the committee made that directly from your files. Mr. S c h o e p p e r l e . Yes. W e will find that in due course. Mr. P e c o r a . I want to read into the record from this memoran dum or report the following extracts : Apparently the internal debt of Pern has not yet been placed on a satisfac tory footing. The internal debt of 1918, which bears 7 per cent interest, had its 1922 and 1923 amortizations in arrears early in 1925, and apparently there are also some arrears in interest, causing this issue to sell around 54 to 56 per cent in Lima, which is almost as low as the amortizable debt of 1898, which bears no interest and sells around 50. The default in the 7 per cent issue of 1918 apparently is responsible for the failure of the holders of the vales de consoladacion issued in 1889 and bearing 1 per cent interest to convert the same into internal 7’s of 1918 at 14 per cent of their nominal value, which would secure approximately the same rate of return. And also the following extract: 1925 setbacks: The presidential speech made only slight reference to the flood damages which caused heavy losses to railway property and agricultural products, which are bound to have a reflex action upon the present year’s position. This year the government will have to find a considerable sum for repairs to railways, roads, and compensation to agricultural interests. Repairs to the Peruvian Corporations’ railway lines alone have entailed an outlay of about 220,000 Peruvian pounds, apart from the loss of receipts during the interruption of traffic. In February and March the decrease in gross receipts was about 100,000 Peruvian pounds, while normal traffic was not restored until June. Over 35,000 tons of guano along the shore were dissolved, involving a 75 per cent decrease in the total guano collection anticipated. This loss has been increased by a decrease in the nitrate content in the remaining deposits. This is particularly disappointing, since the state relies upon the profits of the guano industry to exceed the high mark set last year, when 280,584 Peruvian pounds were received. The improvement in the petroleum output, however, will help to counter balance this. The sugar industry has suffered from the decrease in prices, while exportable supply has been considerably reduced. Cotton also has suffered, and those engaged in sugar and cotton raising have sustained con siderable hardships. Unfavorable agricultural conditions here mentioned have resulted in several commercial failures, while bankers have curtailed credits to local retailers. The State has been more punctual in payments of liabilities and pensions, while stricter economies have been introduced in the various ministries. It is calculated, that the new import tax will more than correspond to the calcula tions upon which it was based, and that customs receipts will continue to show a healthy advance. Now, Mr. Baker, you do not consider there was anything in that report which was favorable to the flotation of Peruvian loans in this country, do you ? Mr. B a k e r . It was not particularly enthusiastic, certainly. Mr. P e c o r a . No. And do you know whether this report was dis cussed and considered by the executive officers of the company when they decided to participate in this Peruvian loan ? Mr. B a k e r . I assume it was. I have no doubt but that it was. Mr. P e c o r a . Have you produced from among your files a report addressed by Mr. Calvin to Mr. Byrnes, of your company, under date of November 3, 1925? Mr. B a k e r . November, you say? Mr. P e c o r a . November 3, 1925, Re Peruvian Government Financ ing. That is the title of it. Mr. B a k e r . M y date is December the 3. Are you sure that is right? 2062 STOCK EXCHANGE PEACTICES Mr. P e c o r a . Does that start with a statement: “ The general sit uation ” ?------Mr. B a k e r . Yes. Mr. P e c o r a . That is the one I mean, then. Mr. B a k e r . Yes. Mr. P e c o r a . You say that is dated December? Mr. B a k e r . Yes, December 3. Mr. P e c o r a . That is about one and a quarter years prior to the flotation of this tobacco loan in March, 1927, is it not ? Mr. B a k e r . Yes. Mr. P e c o r a . Do you find the following statements embodied in that memorandum: The general situation of the Peruvian Government has improved during the past two years to the extent that I feel renewed consideration should be given to the advisability of the National City organization interesting itself in Peruvian financing. The poor credit standing of the Peruvian Government has been due, in my opinion, in a considerable measure to causes which to many are not fully understood. Mr. B a k e r . Just a minute, Mr. Pecora. Mr. P e c o r a . These are just extracts. Mr. B a k e r . Oh, I see. Because you left out what they say there about the budget balance. Mr. P e c o r a . Yes. There follows a historical resume of Spanish colonies in South America and the increase in the tendencies toward stabilization, does there not? Mr. B a k e r . Y es; and he speaks about the stabilization. Mr. P e c o r a . Yes. I am just quoting extracts. Then to resume: The principal reason for Peru’s delay in showing a like improvement was the war with Chile in 1879 to 1883, which left the country prostrated, with currency depreciated to nothing, many of its wealthy families ruined, and the treasury empty, and made it impossible for the country to attend to the service of its foreign indebtedness contracted prior thereto, largely for public im provements. Under such conditions a turbulent political condition logically continued until the election of President Leguia in 1919. Then follows other matter I will not read into the record. I want to read this excerpt: Then Despite tlie unsatisfactory condition of this country’s finances and the con tinued hostility of most of the old aristocracy of the country, which has not been interested in building up and educating the lower classes, Leguia has made such progress that I feel the whole Peruvian situation merits renewed consideration by our institution. Then follows a discussion of natural resources, and now I will read this extract: In conclusion, attention is invited to the fact that the recent loan handled by White, W eld & Co. was put out at 7 % percent, as against the previous rate of 8 percent, which is a straw indicating the trend of affairs. I do not and would not suggest the consideration at this time of making loans to Peru upon the unsecured obligation of the Government, but with designated revenues specifically set aside to guarantee the service of loans affected and provisions whereby such revenues would be paid direct to the Lima branch of our institu tion by the collecting agencies, I feel that a Peruvian Government bond would offer no greater, if as much, risk as that involved in other issues which have been floated by the National City Co. I also feel that, when possible, within the limits of safe and conservative financing and without affecting unsound loans, efforts should be made to cooperate as much as possible in furthering the progress of the branches established abroad by the bank. Do you find those extracts correct? STOCK EXCHANGE PRACTICES 2063 Mr. B a k e r . Yes, sir. Mr. P e c o r a . Now, this Mr. Calvin, who sent that memorandum to Mr. Byrnes of your company in December 1925 was the gentle man who executed the Peruvian national loan agreement as attor ney in fact of your company, wasn’t he ? Mr. B a k e r . Mr. Schoepperle will have to answer that question, having negotiated that. Mr. S c h o e p p e r l e . Yes. Mr. P e c o r a . W as there anything in that memorandum which en couraged the flotation of this tobacco loan in the early part of 1927 ? Mr. B a k e r . The memorandum as a whole seems to show that progress was being made in the general situation in Peru. Mr. P e c o r a . It also showed a picture of general conditions still somewhat unsettled and disturbed? Mr. B a k e r . Yes. Mr. P e c o r a . Both economically and politically? Mr. Baker. But with a favorable trend. Mr. P e c o r a . W ith a favorable trend? Mr. B a k e r . Yes. In the early part there he speaks about the balancing of budget or nearly so. Mr. P e c o r a . W hat did you understand by this expression embodied in Mr. Calvin’s memorandum of December 3, 1925: I do not and would not suggest the consideration at this time of making loans to Peru upon the unsecured obligation of the Government, but with designated revenues specifically set aside to guarantee the service of loans affected and provisions whereby such revenues would be paid direct to the Lima branch of our institution by the collecting agencies, I feel that a Pei-uvian Government bond would offer no greater, if as much, risk as that involved in other issues which have been floated by the National City Co. Mr. B a k e r . W ell, that would seem to indicate that he felt that this credit was sound and if we protected the payment through some delivery through our branch, collection through the branch of our institution, so that there would be no possibility of the moneys being diverted into other channels than for the service of this loan, he felt that it would be a safe risk. Mr. P e c o r a . Did he feel it would be a safe risk, or did he feel that it would involve no greater risk than those assumed ordinarily in other loans floated by your company? Mr. B a k e r . I think his expression is a very general one, and cer tainly there is no possible way of covering our entire issues with one general expression, because there are so many different types. Muni cipal bonds of one State as compared with the municipal bonds of another cannot even be entirely------Mr. P e c o r a . You have observed that in the communications I have read into the record from your files on the Peruvian loan studies, hazards were pointed out and perils were referred to, making a Peruvian loan a risky and hazardous thing? You have recognized that, have you not? Mr. B a k e r . Y es; extending back there to the early days. Mr. P e c o r a . Also as late as 1925 ? Mr. B a k e r . Yes. There were some reports. Mr. P e c o r a . Less than two years before this tobacco loan was floated ? 2064 STOCK EXCHANGE PRACTICES Mr. B a k e r . Yes, that is right; but in this 1925 report here— isn’t that 1925? Y es; that was 1925, where he was indicating progress, and with proper direct support of that loan, specific rev enues pledged for it, he regarded it as a proper risk. Mr. P e o o r a . In putting out a foreign loan you said before that the executives considered the credit history? Mr. B a k e r . That is right. Mr. P e c o r a . O f the foreign government? Mr. B a k e r . That is correct. Mr. P ecora. As an important element to be considered? Mr. B a k e r . That is correct; yes. Mr. P e c o r a . And you have noticed that your files referring to the credit history of Peru show a pretty bad history ? Mr. B a k e r . That was a bad history, but, of course, we would take into consideration improvements that are being made during that period and approaching that period of this loan of 1927, which was two years later than this, that if the economic situation and the political situation and so forth in Peru had sufficiently improved, our opinion as to what we would regard a good credit in 1927 might have been an entirely different thing in 1923 or 1924 or 1925. Mr. P e c o r a . Do you think that a short period of three or four years is adequate upon which to revise a determination as to the risk and peril in a foreign loan------Mr. B a k e r . W ell, I think that that is------Mr. P e c o r a . When you consider the life of nations, do you think that an improvement that only manifests itself over a period of three or four years is sufficient to counterbalance a bad credit record for many years? Mr. B a k e r . I think that would require a very complete study of what those improvements are and how they have been developed. Mr. P e c o r a . W as that very complete study given to the question of this Peruvian loan in 1927 by the executives of your company ? Mr. B a k e r . I t h in k so. Mr. P e c o r a . W hat do you recall was ascertained about those im provements before you gave approval to it ? Mr. B a k e r . W ell, of course, I can not recall all of the detailed dis cussions that took place in those meetings at that particular time. But as they were discussed and presented to us by Mr. Schoepperle or Mr. Byrnes there was nothing in the conclusion with which I disagreed. Mr. P e c o r a . D o you recall the testimony o f Mr. Mitchell here last week, that among the factors which influenced the company in ac cumulating and selling to the public shares of the common stock of the Anaconda Copper Co., a 30 or 35 year period of earnings, and so forth, was taken into consideration? Mr. B a k e r . Y es; that is right. Mr. P e c o r a . Before the decision was arrived at? Mr. B a k e r . That is right. Y e s ; I remember that. Mr. P e c o r a . And that with respect to the putting out of sugar is sues in 1923, 1924, and 1925, the Cuban-Dominican sugar bonds that were the subject of inquiry last week here------Mr. B a k e r . Yes, sir. Mr. P e c o r a . Before the decision was arrived at? Mr. B a k e r . Yes. STOCK EXCHANGE PRACTICES 2065 Mr. P e c o r a . That a history of some 30 years of the sugar industry was taken into account? Mr. B a k e r . Yes, sir. Mr. P e c o r a . In connection with this Peruvian loan your judg ment in indorsing this loan seems to have been based on a resume of three or four years of great improvement as against many years of bad credit record; is that right ? Mr. B a k e r . W ell, that is not entirely correct, because those studies even back in the troublesome days of Peru would have to be gone into in a most careful and thorough way to see the causes of each one and the general trend of the economic situation in Peru. Mr. P e c o r a . Is there anything in your records— it seems there is nothing within your recollection at the moment— which will indi cate what these improvements were that you witnessed in the two years preceding this March 1927 loan that caused you to arrive at a judgment not warranted by the prior long bad-credit record of Peru? Mr. B a k e r . I think if you would permit those engaged in that study and negotiation to answer that question we could give you the details of that. Mr. P e c o r a . W ho are those persons ? Mr. B a k e r . Mr. Schoepperle. Mr. P e c o r a . You have no recollection about those improvements, the nature of them, et cetera, have you ? Mr. B a k e r . I have no recollection of the detailed discussion of that. Mr. P e c o r a . N o w , do you find among your files on the Peruvian loan study an unsigned memorandum containing the following notes: P e r u b a d -d e b t r e c o r d a d v e r s e m o r a l a n d p o lit ic a l r is k . B a d in te r n a l- d e b t s itu a tio n . B u d g e t a r y a n d t r a d e p o s itio n a b o u t a s s a t is f a c t o r y a s C h ile in p a s t t h r e e y e a r s . N a t u r a l re s o u rc e s m o re v a r ie d . On e co n o m y s h o w in g P e ru s h o u ld go a h e a d r a p id ly in n e x t 1 0 y e a r s . Do you find that among your files ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . In whose handwriting is that memorandum, if you know? Mr. B a k e r . I think that is Mr. Schoepperle’s handwriting. Mr. P e c o r a . W ill Mr. Schoepperle, please look at it and tell us. Mr. S c h o e p p e r l e . Y es; that is my memorandum. Mr. P e c o r a . That is your memorandum. Mr. Baker, do you know when that memorandum was made by Mr. Schoepperle? Mr. B a k e r . N o ; I do not. Mr. P e c o r a . Mr. Schoepperle, can you answer that question? Mr. S c h o e p p e r l e . N o; I cannot. There is no date on it and I haven’t much idea. Mr. P e c o r a . Perhaps its place of insertion in the file would have a tendency to fix the date. W ill you please look at it for that purpose? Mr. S c h o e p p e r l e . It stands i n the file between December 3 , 1 9 2 5 , and July 2 7 , 1 9 2 7 . Mr. P e c o r a . W ould that indicate to you that the memorandum was written by you somewhere between those two dates? Mr. S c h o e p p e r l e . Oh, certainly. I think it must have been. Mr. P e c o r a . That is between December, 1925, and March, 1927? Mr. S c h o e p p e r l e . I think s o . 2066 STOCK EXCHANGE PRACTICES Mr. P e c o r a . And in March, 1927, this loan was floated, this $15,000,000 tobacco loan? Mr. S c h o e p p e r l e . Tobacco loan; y e s . Mr. P e c o r a . N o w , Mr. Baker, do you know whether that memo randum of Mr. Schoepperle was discussed by the executive officers when they agreed to float this loan or to participate in it? Mr. B a k e r . I do not, because I never have seen it before. Mr. P e c o r a . Do you recall ever having had any discussion with your expert, Mr. Schoepperle, prior to giving your sanction to the notation of these bonds in March, 1927 ? Mr. B a k e r . A s I said, Mr. Pecora, in those meetings there were discussions that would last for days and hours at a time, in those days and, of course, I remember there were such discussions, but the specific points brought up in each one I can not remember. Mr. P e c o r a . D o you recall discussions by the executives with Mr. Schoepperle or in which Mr. Schoepperle’s advices and opinions were sought and obtained by the executives of the company? Mr. B a k e r . Oh, yes. Y e s ; certainly. Mr. P e c o r a . Do you recall that Mr. Schoepperle had stated in substance that his opinion about a Peruvian loan was that it was a bad— “ Peru had a bad debt record ” ; that “ it was an adverse moral and political risk ” ; that “ it had a bad internal debt situation ” , et cetera? Mr. B a k e r . O f course, those are headings for some memorandum that he evidently had prepared, or studies that he had made, in which he was getting the answer to some of those particular things himself, and one thing that I do know is that in these discussions every point that we could criticize during those discussions was brought up, and the man in charge of the study and the negotiation was relied upon to give us the answer to those questions. Mr. P e c o r a . W ho was the man in charge of these negotiations whose judgment and advices you relied upon ? Mr. B a k e r . That would be Mr. Schoepperle, and at that time Mr. Byrnes; Mr. Schoepperle and Mr. Byrnes. Mr. P e c o r a . Do you recall that Mr. Schoepperle approved the making of this loan ? Mr. B a k e r . I do not recall a specific vote by Mr. Schoepperle, but I can assume with positive assurance in my own mind that he did approve it or we would not have gone ahead with it. Mr. P e c o r a . Are you sure of that ? Mr. B a k e r . I would be sure of th at; yes, sir. Mr. P e c o r a . W ell, are you merely assuming that that was the case, or have you a present recollection that it happened? Mr. B a k e r . N o ; I can not recall definitely that M r. Schoepperle was at a specific meeting and said, “ Yes, I approve,” but I am sure that except as he did approve we would not have proceeded. Mr. P e c o r a . Are you sure, too, that before you reached your judg ment to approve this loan you had before you all the written data and memoranda that I have read into the record and that those vari ous reports and data were discussed ? Mr. B a k e r . N o ; I can not say for sure that they were, but I am positive that the vice presidents in charge of those negotiations and studies called them to our attention. STOCK EXCHANGE PRACTICES 2067 Mr. P e c o r a . N o w , have you produced from your files with regard to this Peruvian loan study a letter dated March 10,1926, addressed by Mr. R. M. Bishop, vice president, to Mr. Calvin, manager of the National City Bank of New York, in Lima, Peru? Mr. B a k e r . "Xes, sir. Mr. P e c o r a . I will read that letter into the record. The letter is written from Lima, Peru, is it not, or rather a letter addressed to Mr. Calvin in Lima, Peru? Mr. B a k e r . Yes. Mr. P e c o r a (reading): M a b c h , 10, 1926. M r. M . C. D . Calvin , Lima, Peru. The National City Bank of New York, D eab M b. Calvin : I a ck n ow led ge receip t o f y o u r le tte r o f F e b ru a ry 23 in clo s in g c o p y o f a le tte r o f th e sa m e d a te to M r. C osby. I re g re t t o sa y th ere h a s been n o su b sta n tia l m od ifica tion in th e a ttitu d e o f th e N a tion a l C ity Co. to w a r d Sou th A m erica n cre d its since y o u le ft h ere in D ecem ber. H ow ev er, I h o p e th is w ill n o t d e te r y o u fr o m sen d in g u s fr o m tim e t o tim e su ch au th en tic in fo rm a tio n a s you m a y h av e th a t w o u ld th row a p rop er lig h t on th e presen t a n d p ro sp e ctiv e econ om ic, finan cial, a n d p o litica l situ a tion in P eru. V e ry tr u ly you rs, R . M . B tb n e s , Vice President. You will notice from that letter, Mr. Baker, that up to March 10, 1926, which was just about one year before this loan was floated, the National City Co. had not modified its attitude, which was unfav orable toward a Peruvian loan. Mr. B a k e r . That is right. Mr. P e c o r a . N o w , do you find anything at all in your files with regard to these Peruvian loan studies subsequent to this letter of Mr. Byrnes’s that has just been read into the record dated March 10, 1926, and up to March, 1927, when this tobacco loan was approved and floated, that gives you more information concerning the sound ness of the proposed loan. Mr. B a k e r . I do not have it in this file, but again, as I say, that would be distinctly in the minds of the men who were making those studies week by week and month by month and keeping in constant touch with those situations. Mr. P e c o r a . When the National City Co. in March, 1927, par ticipated in the flotation of this $15,000,000 Peruvian loan it issued a circular or prospectus concerning the loan, did it not? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Have you a copy of the circular or prospectus before you ? Mr. B a k e r . Yes; I have it. Mr. P e c o r a . Do you find any mention in it whatsoever of the bad credit record of Peru which is embodied in the information I have read into the record from your files ? Mr. B a k e r . I should have to read this over, Mr. Pecora. [After perusing document.] No; I do not see anything. It is a secured loan. I do not see any statements in there. Mr. P e c o r a . No statement or information was given to the Ameri can investing public in your circular corresponding to the informa tion that your company possessed in writing among its files concern ing the bad debt record of Peru and its being a baa moral and polit ical risk? 2068 Mr. STOCK EXCHANGE PRACTICES B aker. No, sir. Mr. P e c o r a . W ho prepared that circular? Mr. B a k e r . I don’t know who prepared it in our shop. Seligman evidently prepared the circular. They managed the offerings. It was under their leadership. Mr. P e c o r a . But the National City Co. also approved the circular before it permitted its name to go on it with that of J. & W . Selig man & Co., did it not ? Mr. B a k e r . Y es; that is correct. Mr. P e c o r a . D o you recall what officer of the National City Co. approved that circular ? Mr. B a k e r . That would either have been Mr. Byrnes or Mr. Schoepperle. Mr. P e c o r a . Do you know any reason why no information was conveyed to the investing public on that circular------Mr. B a k e r . Not at all. Mr. P e c o r a . Concerning the bad debt record of Peru------Mr. B a k e r . N o ; I do not. Mr. P e c o r a . And its being a bad moral and political risk? Mr. B a k e r . I do not. Mr. P e c o r a . And the unsatisfactory internal condition of the country ? Mr. B a k e r . N o , sir. M r. P e c o r a . Do you think it was fair to the investing public, to withhold from it knowledge which the participating bankers had of this issue when they offered it to the public ? Mr. B a k e r . I f the conclusions were that that was a thing of the past and the conditions were proper supporting this loan, which they evidently were in our minds, or we would not have participated in the loan. Mr. P e c o r a . Y o u think it was fair to the public to withhold the information which you had or your company had, do you, merely because somebody in your company reached the conclusion that the loan would be a sound loan? Mr. B a k e r . I think it was fair to present the facts as they existed. Mr. P e c o r a . The facts as they existed included this bad-debt record, did they not? M r. B a k e r . I am speaking about the facts that were then currently existing. Mr. P e c o r a . Y o u mean you think it was fair to present a con clusion based upon facts which could not have been more than a year old as against a bad-debt record for many, many years prior thereto? Mr. B a k e r . I think it would have been better if the whole story perhaps were included, a description of it, and it is quite possible that there was some supplemental publication which went into the history of it. I do not know. Mr. P e c o r a . Can you produce any such supplemental publication that gave the whole history ? Mr. B a k e r . I can see if it is in the files. Mr. P e c o r a . D o you think if the circular that accompanies this offering in March, 1927, to the investing public had given this baddebt record of Peru which is embodied in the various memoranda read into the record from your files, that the American investing public would have subscribed at 96^ to those bonds? STOCK EXCHANGE P R A C T IC E S 2069 Mr. B a k e r . I f he saw sufficient income from this tobacco monopoly to support the loan, I think, yes; he would have taken the issue. Mr. P e c o r a . Despite the fact that much of that information showed the unsatisfactory agricultural condition, not only of tobacco but of cotton and sugar in Peru ? Mr. B a k e r . W ell, of course, I can not answer what the public’s opinion might have been. I do not know. Mr. P e c o r a . Under all the circumstances was not this a very highly speculative and risky loan to make? Tell us frankly, Mr. Baker. Mr. B a k e r . W ell, I can not answer that question, because, as I say, we have to get into the question of the support of this loan through this tobacco monopoly and just what those revenues were and what we expected them to be. There are so many elements that enter into that I can not answer that question in------Mr. P e c o r a . W ho was responsible for this printed inscription at the bottom of the first page of the printed circular which accom panied this offering: The above statements are based on information received partly by cable fro m . official and other sources. W hile not guaranteed, we believe them to be reliable, but they are in no event to be construed as representations by us. Mr. B a k e r . W hat was your question, please ? Mr. P e c o r a . W ho was responsible for the inclusion of that state ment in the circular ? Mr. B a k e r . That is a statement that I think, through general practice over a long period of years, as far as I know, is on all cir culars. Mr. P e c o r a . In other words, the National City Co. in putting out this circular was absolutely unwilling to hold itself responsible for the information embodied in it, and yet upon that information it was asking the public to subscribe for the bonds at 9 6 ^ ; is that right ? Mr. B a k e r . That statement that appears on this circulars is merely stating a fact that we have to the best of our judgment and ability determined these to be the facts. Mr. P e c o r a . And yet you serve notice on the public that you are not responsible for the statements ? Mr. B a k e r . That is right. That is what it does. Mr. P e c o r a . And you ask the public to be guided by these state ments, for which you disavow responsibility, in buying the bonds ? Mr. B aker. But which we do say to the best o f our ability and judgment are correct. Mr. P e c o r a . W ell, now, it did not take very long to sell the bonds of this $15,000,000 tobacco loan, did it? Mr. B a k e r . I do not think so. I think it was a very quick issue. Mr. P e c o r a . Quick issue. Quickly subscribed for? Mr. B a k e r . Quickly sold. Mr. P e c o r a . W as there a second Peruvian loan? Mr. B a k e r . Yes, sir. Mr. P e c o r a . That was floated by the National City Co. in partici pation with others in December, 1927? Mr. B a k e r . There was a— yes; there was another issue December 21, 1927, again under the leadership of J. & W . Seligman & Co. 2070 STOCK EXCHANGE PRACTICES Mr. P e c o r a . W hen you say “ under the leadership of J. & W . Seligman & Co ” , you do not mean to imply that the National City Co. participated in this issue merely because J. & W . Seligman took the leadership in it, do you ? Mr. B a k e r . N o. N o ; because of our own study, of course. Mr. P e c o r a . In other words, the participation of the National City Co. in this loan flotation was the result of its own independent judgment? Mr. B a k e r . That is right. Mr. P e c o r a . W hat was the amount of that issue in December, 1927? Mr. B a k e r . $50,000,000. Mr. P e c o r a . $50,000,000. And at what price were those bonds offered to the public ? Mr. B a k e r . Ninety-one and one-half. Mr. P e c o r a . W hat was the spread to the National City Co. in that underwriting? Mr. B a k e r . The total spread in the issue you are speaking of? Mr. P e c o r a . Y e s; gross spread. Mr. B a k e r . Five points. Mr. P e c o r a . The issue of March 1927, nine months earlier, was made at 96 y2, wasn’t it? Mr. B a k e r . Yes. Mr. P e c o r a . And this one of December, 1927, was made at 91% ? Mr. B a k e r . Yes. Mr. P e c o r a . A difference of 5 points? Mr. B a k e r . The issue of March 16, 1927, was a 7 per cent coupon, and this one is a 6. Mr. P e c o r a . N o w , do you recall the discussion among the officers, the executive officers, of the National City Co., in the course of which they reached the judgment that this $50,000,000 Peruvian loan was a sound issue to offer to the investing public here ? Mr. B a k e r . I recall that we discussed it; yes, sir. Mr. P e c o r a . D o you recall the general nature of the discussion and what facts were presented in that discussion? Mr. B a k e r . Not particularly. Mr. P e c o r a . W hich persuaded the judgment of the executives that this was a sound loan? Mr. B a k e r . Not particularly. I would have to go back through the files altogether and study that, which I have not. That again was under the negotiation of Mr. Schoepperle. Mr. P e c o r a . Have yOu produced from your files a letter dated July 27,1927, addressed to Mr. Charles E . Mitchell by J. H . Durrell, vice president and overseas manager of the National City Bank, formerly in charge of South America ? Mr. B a k e r . Y e s; I have that. Mr. P e c o r a . N o w , let me read that letter into the record and you follow me from the original. That is, I will read the following extracts from it: A s I se e it, t h e r e a r e t w o fa c t o r s t h a t w i ll lo n g r e t a r d t h e e c o n o m ic im p o r t a n c e o f P e ru . Mr. B a k e r . Just a minute. all right. I have got to find that. Oh, y e s ; STOCK EXCHANGE PRACTICES 2071 Mr. P e c o r a . The letter is dated July 27, 1927, is it not? Mr. B a k e r . Yes. Mr. P e c o r a . I will repeat: A s I see it, there are two factors that will long retard the economic impor tance of Peru. First, its population of 5,500,000 is largely Indian, two-thirds of whom reside east of the Andes, and a majority consume almost no manu factured products. Second, its principal sources of wealth, the mines and oil wells, are nearly all foreign-owned, and excepting for wages and taxes, no part of the value of their production remains in the country. Added to this, the sugar plantations are in the hands of a few families, a majority of whom reside and invest their profits abroad. Also, for political reasons, the present Government has deported some 400 prominent wealthy conservative families, but allows them to continue to receive and to make use of abroad the income from their Peruvian properties. A s a whole, I have no great faith in any material betterment of Peru’s economic condition in the near future. The country’s political situation is equally uncertain. President Leguia. while not having the absolute power possessed by General Gomez in Venezuela, is the last word in all things political, and usually the first word as well. He is a forceful character, reputed to be absolutely honest, though surrounded by a group of rascals, and is highly intelligent and well educated. He has the army and police well in hand, and it would probably be within his power to continue himself in office when his present term expires in 1929. Unfortu nately, his health is bad, and it is reported that he must undergo a serious operation soon. I discussed political possibilities in the event of his. death or retirement with many business and professional men during my stay in Lima. W hile some, including the United States ambassador, were optimistic, the majority, even the President’s political opponents and ill-wishers, believe a revolution or worse would result. Added to this uncertainty, the Tacna-Arica squabble is giving most of the business men no little concern, though they believe at last analysis the United States will refuse to permit open hostilities to break between Peru and Chile. Incidentally, there is a pronounced pro-American feeling in Peru, and officers of the American Navy are engaged in training that of Peru. Our business is a peanut proposition. W hile profits have steadily increased each year since the branch was established, the volume of its business is not much greater to-day than it was five years ago, and deposits at June 30 of this year were actually less than those of the corresponding date in 1922. Now, President Leguia’s administration did terminate a few years ago, didn’t it? Mr. B a k e r . Yes. I don’t know the exact date. Mr. P e c o r a . D o you recall the political conditions that followed? Mr. B a k e r . They were considerably disturbed, yes. Mr. P e c o r a . Just as Mr. Durrell in July, 1927, reported that they probably would be? Mr. B a k e r . Yes. Mr. P e c o r a . Now, these advices contained in this letter from Mr. Durrell, dated July 27,1927, came some four months after the March, 1927, loan was floated, did they not? Mr. B a k e r . Yes. Mr. P e c o r a . Were they not out of harmony with any advices you say had been received for the year prior to March, 1927, and which you say probably actuated the iuderment of the company in putting out the March, 1927, loan? Mr. B a k e r . There were certainly questions raised there on the question of exactly what procedure was followed by Mr. Schoep perle in charge of these studies in analyzing those questions and getting the answers to them. O f course, I can not answ°** that, and Mr. Schoepperle is here, who handled all those negotiations and all that study, and he can answer that. 2072 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Mr. Schoepperle was not one of the executives of the company in March, 1927, was he? Mr. B a k e r . Oh, yes; he was. He and Mr. Byrnes. You were vice president [addressing Mr. Schoepperle] ? Mr. S c h o e p p e r l e . I became a vice president in April or May, 1927, according to my recollection. Mr. B a k e r . And Mr. Byrnes. Mr. P e c o r a . But you are putting emphasis on Mr. Schoepperle. Was Mr. Schoepperle a vice president at the time your company approved this loan in March, 1927? Mr. B a k e r . I do not know whether he was or not, or an assistant vice president, but Mr. Byrnes was there in charge of that negotia tion and those studies, and he is prepared to discuss these things. Mr. P e c o r a . But these advices embodied in this letter of July 27, 1927, from Mr. Durrell to Mr. Mitchell would be seriously at variance with any reports that your company might have had between March, 1926, and March, 1927, which prompted you to float this loan ? Mr. B a k e r . And they would raise a very big question in our minds, I have no doubt, on those questions, and they would be gone into immediately by those men in that department. Mr. P e c o r a . Do you recall that they were gone into and discussed with you as one of the executives at that time ? Mr. B a k e r . I do not recall this specific letter. Mr. P e c o r a . Do you recall the advices contained in that letter? Mr. B a k e r . W ell, Mr. Pecora, what I recall are general discussions of Peru led by the officers in charge of those studies. Mr. P e c o r a . Do you recall the information embodied in Mr. Durrell’s letter being discussed at any time during the year 1927 ? Mr. B a k e r . Personally I do not remember the exact particular let ter shown to me. Mr. P e c o r a . W ell, now, some five months after that letter was sent by Mr. Durrell, the vice president and overseas manager of the National City Bank at that time, your company participated in the flotation of the $50,000,000 Peruvian loan, did it not? Mr. B a k e r . Yes, sir. Mr. P e c o r a . D o you recall upon what information or advices it concluded that the $50,000,000 loan in December, 1927, was a good risk to offer to the American investing public ? Mr. B a k e r . N o , I d o n o t ; b u t o u r o fficers in c h a r g e o f t h a t c a n a n s w e r t h a t q u e s tio n . Mr. P e c o r a . You can not answer it? Mr. B a k e r . N o ; I can not. Mr. P e c o r a . Do you recall any advices at variance with what Mr. Durrell wrote in July, 1927, which prompted the company to get behind a $50,000,000 loan in December, 1927? Mr. B a k e r . I do not recall the specific discussions on those, Mr. Pecora; no. Mr. P e c o r a . Now, that December loan of $50,000,000 was the loan with respect to which it was testified that a bribe of four hundredodd thousand dollars was paid to the son of President Leguia ? Do you recall that, Mr. Baker ? Mr. B a k e r . I do not recall any such word as that used in con nection with it. STOCK EXCHANGE PRACTICES 2073 Mr. P e c o r a . Well, what word do you recall was used in connection with it ? Gift, gratuity ? Mr. B a k e r . Again that is a question that I kntew absolutely noth ing about at the time. I was not the president of the company, and it is a question with which Mr. Schoepperle is familiar and has testi fied before a committee here in Washington on. Mr. P e c o r a . Testified about a year ago ? Mr. B a k e r . And I think he can answer. Mr. P e c o r a . That it was a bribe, didn’t he? Mr. B a k e r . I do not think he said that, but I am not sure what he said, but he can answer that question, because he knows about it. I do not. Mr. P e c o r a . Mr. Schoepperle testified that at the time of the pay ment of that sum of money, whether it was a bribe, a gift, a gratuity, whatever it was, he did not know of it? Mr. B a k e r . I think that is correct; yes. Mr. P e c o r a . But he also testified that he found out about it about 10 days before this $50,000,000 loan was floated ? Mr. B a k e r . Yes. Mr. P e c o r a . Do you recall his reporting to the executives of your company about the payment of that sum of money to the son of the then President of Peru? Mr. B a k e r . I do not recall just when he mentioned it in an officers’ meeting; no. I do not remember the date that he men tioned it. I do remember there was a discussion about it led by Mr. Schoepperle. Mr. P e c o r a . If any such sum of money was paid to that particular individual for no apparent reason, that would not be a circumstance which would make the loan sound, would it? It would not con tribute to the soundness of the loan or the risk, would it ? Mr. B a k e r . Why, no; of course not. Mr. S c h o e p p e r l e . May I make an observation on that point? Mr. P e c o r a . I am going to put you on the stand later and you can testify about that. The testimony that Mr. Schoepperle gave, Mr. Baker, was not given before this committee, you know that, don’t you ? Mr. B a k e r . Yes. Mr. P e c o r a . It was given before a subcommittee of the Senate Finance Committee? Mr. B a k e r . Yes; I know that. That is all right. Mr. P e c o r a . That held its hearings under Senator Hiram John son’s resolution authorizing the committee to make certain investi gation ? Mr. B a k e r . Yes; a l l right. Mr. P e c o r a . Upon the sale of foreign bonds and securities. In the course of your discussions with the other executive officers of the National City Co. concerning these Peruvian loans in 1927, did you have any conversation with a Mr. Dennis, connected with J. & W. Seligman & Co. ? Mr. B a k e r . I did not. Mr. P e c o r a . Do you recall having seen any correspondence or written communications of any kind with Mr. Dennis on the sub ject of these Peruvian loans ? Mr. B a k e r . I do not. 2074 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Haven’t you in your file a letter dated May 27, 1927, written from the Peru branch of J. & W . Seligman to Earl Bailie and J. & W . Seligman & Co. ? Mr. B a k e r . Y es; here it is. Mr. P e c o r a . Discussing conditions in Peru? Mr. B a k e r . May 27, 1927; yes, sir. Mr. P e c o r a . D o you find anything in that report or letter which indicates a Peruvian loan at that time to have been a sound invest ment? Mr. B a k e r . I have not studied this. I would like to read this over completely. [Examining document.] I would have to study that completely, except------Mr. P e c o r a . W ell, it is not so very long. Suppose you look at it Mr. B a k e r . A ll right. Mr. P e c o r a . Let me first ask y o u : Is this the first time that letter has been brought to your attention ? Mr. B a k e r . It is the first time that I recall it. It undoubtedly was------Mr. P e c o r a (interposing). You found it bound up in the files of your company relating to its study of the Peruvian loans, did you not? Mr. B a k e r . Yes. Mr. P e c o r a . G o ahead and read it. Mr. B a k e r (perusing documents). That seems to be a general study of the situation, Mr. Pecora, in which he is expressing his views. He raises various questions, and then he speaks about the currency system, which seems to be sound, he says. Mr. P e c o r a . H e does not express any optimistic or enthusiastic views about Peruvian finances, does he ? Mr. B a k e r . Not particularly, n o . Mr. P e c o r a . N o w , I believe you said that this $50,000,000 loan was floated in December 1927 at 9 1% ? Mr. B a k e r . 91 y2. Mr. P e c o r a . W hat was the market value? W hat is the market value of those bonds at the present time, do you know ? Mr. B a k e r . Five or six, I suppose— seven. Very low, almost noth ing. Mr. P e c o r a . Do you know that they were quoted last week— that is, on February 18, at 5y2% Mr. B a k e r . I assume so. Mr. P e c o r a . And that the low for this year was 4 y2 ? (There was no response.) Mr. P e c o r a . N o w , h a v e y o u b e f o r e y o u a c o p y o f th e c i r c u l a r o r p r o s p e c t u s t h a t w a s p u t o u t b y y o u r c o m p a n y a n d th e o t h e r p a r t i c ip a n t s o r u n d e r w r it e r s in th is lo a n in o f f e r i n g th e s e $50,000,000 w o r t h o f b o n d s t o th e American in v e s t in g p u b li c ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Is there a statement anywhere in that circular con cerning the bad-debt record of Peru for years past? Mr. B a k e r . I have not read this. I would have to read it entirely to answer that. But I do not know that there is anything. Mr. P e c c r a . Just look at it so that the record will have your answer based upon an actual examination of the circular which is STOCK EXCHANGE PRACTICES 2075 before you. See if you find any such reference to the Peru debt record. Mr. B a k e r (perusing documents). W ell, there is a complete story of the total amount of debts and all that, if you want to------Mr. P e c o r a . The total amount of debts without any statement that Peru was ever in default------Mr. B a k e r (interposing). No. Mr. P e c o r a . W as not informing the public of the bad-debt record of Peru, was it ? Mr. B a k e r . N o ; it is not. Mr. P e c o r a . A s a matter of fact, it might mislead the public into believing that it had always met its obligations in the past, might it not ? Mr. B a k e r . I don’t think so. Mr. P e c o r a . W hat was the purpose of mentioning its outstand ing indebtedness without also mentioning its debt record? Mr. B a k e r . I can not answer that. Mr. P ecora. Do you know anybody that can? Mr. B a k e r . I think my associate who did this negotiating and this study can answer it, as I said awhile ago. Mr. P e c o r a . W ell, now, none of your associates could have gone into this thing without unanimous approval of all the executives, including yourself, could they? Mr. B a k e r . O f course, his studies were made in his department, as I said this morning, at great length, and spending a great deal of time in detailed study, o± which a synopsis was given to all of us and discussed fully in our meetings. Mr. P e c o r a . In the circular that accompanied the offering of the $50,000,000 bond issue of December, 1927, there is the following statement, is there not, under the caption “ General ” : The Republic of Peru is the third largest country in South America, with an area of approximately 550,000 square miles------ Mr. B a k e r . Just a minute. Mr. P e o o r a . “ It has a population estimated at 6,000,000.” Mr. B a k e r . Just a minute, Mr. Pecora. I have a different cir cular there Oh, here is a paragraph on that. A ll right. Mr. P e c o r a . D o y o u see i t ? Mr. B a k e r . Yes. Mr. P e c o r a . “ I t has a population estimated at 6,000,000.” Now, as a matter of fact, when that circular was put out your company had in its files the letter dated July 27, 1927, from Mr. Durrell, its vice president and overseas manager, to Mr. Mitchell, in which, discussing the population of Peru, he said : As I see it, there are two factors that will long retard the economic impor tance of Peru: First, its population of 5,500,000 is largely Indian, two*thirds of whom reside east of the Andes, and a majority consume almost no manu factured products. W h y wasn’t that detailed information given in this circular along with the statement that the population of Peru was 6,000,000? Mr. B a k e r . I can not answer that. Mr. P e c o r a . Did you think it would have had a bad effect on the flotation of these bonds if the advices contained in Mr. Durrell’s 119852— 33— p t 6------- 21 2076 STOCK EXCHANGE PRACTICES letter of July 27, 1927, had been given to the investing public through the medium of a circular ? Mr. B a k e r . It might have; yes. Mr. P e c o r a . Y o u feel pretty sure it would have, don’t you? Mr. B a k e r . Depending upon the character of the remainder of that population. Mr. P e c o r a . Yes. Do you think that the public here would have subscribed at 91 for these bonds if they had been given the in formation that was given to your company by its overseas manager and vice president, that “ there are two factors that will long retard the economic importance of Peru ” ? Mr. B a k e r . You say, W ould the public have subscribed with that statement ? Mr. P e c o r a . Yes. Mr. B a k e r . I d o u b t i f t h e y w o u l d . Mr. P e c o r a . And do you think that the public would have sub scribed to these bonds at 91 if they had been told in the circular that Mr. Durrel in July, 1927, advised the company that “ Peru’s political situation is equally uncertain. I have no great faith in any material betterment of Peru’s economic condition in the near future? ” Mr. B a k e r . I doubt if they would. Mr. P e c o r a . D o you know why that information was not embodied in this circular? Mr. B a k e r . I do not. W e did not write the circular, but evi dently we did not altogether agree with some of the things. Mr. P e c o r a . You say you did not write the circular— but your name appears on it. Mr. B a k e r . Y es; it was approved by us. Mr. P e c o r a . And it was approved by your company ? Mr. B a k e r . That is right. Mr. P e c o r a . W hich makes your company just as responsible as though it had itself prepared the text of that circular ? Mr. B a k e r . W e were responsible for those statements, subject to those conditions; yes. W e believed them to be correct. Mr. P e c o r a . D o you know why this information was not given to the investing public in the circular ? y2 y2 Mr. B aker. No, sir. Mr. P e c o r a . D o you know upon whose judgment it was withheld from the investing public ? Mr. B aker. No, sir. Mr. P e c o r a . D o you think that it was fair to the investing public to withhold this information that your company had about Peru? Mr. B a k e r . W ell, I think it is fair to present the facts in refer ence to Peru, as we tried to do. I do not see any occasion to go into— going over all of these long studies that have been made in which the people were not altogether in accord, and in which generally there were changes taking place, and, as some of them said, the economic trend was improving and all that. You could write, of course, a whole book on the subject, giving various people’s opinions, but when we arrive at a conclusion it seems to me that a statement of the important facts connected with it is what is necessary and proper. STOCK EXCHANGE PEACTICES 2077 Mr. P e c o r a . And that statement of important facts should have included the statement of your vice president and overseas mana ger in July, 1927, to the effect that “ there are two factors that will long retard the economic importance of Peru. A s a whole, I have no great faith in any material betterment in Peru’s economic condi tion in the near future,” and “ the country’s political situation is equally uncertain? ” That would have been fair, would it not, to include that information? Mr. B a k e r . I f further study of that convinced those in the de partment that that was correct. Mr. P e c o r a . Have you any evidence before you that convinced you or any other official of your company at that time that Mr. Durrell’s information was not correct ? Mr. B a k e r . I haven’t it, but as I say— said before— those in charge of this negotiation can probably answer that question. Mr. P e c o r a . Were you exercising your judgment when you gave your approval to this issue, or were you just simply signing on the dotted line pursuant to somebody else’s judgment— some subor dinate ? Mr. B a k e r . A s I undertsood the facts given us by those in charge of those negotiations, I favored it. Mr. P e c o r a . Y o u do not recall what the facts were that prompted you to favor it, do you ? Mr. B a k e r . N o. Mr. P e c o r a . Y o u do not recall any facts that overthrow all the presumptions and implications of the written information and ad vices that you had in yotir files ? Mr. B a k e r . No. Mr. P e c o r a . A s you sit there now, can you recall specifically why you approved this bond issue ? Mr. B a k e r . W hy, no, Mr. Pecora. These were discussions had over days and days. I don’t remember the specific things that led up to that. Mr. S c h o e f f e r l e . I f you will permit me, I think I could answer that question in a general way. Mr. P e c o r a . You will be put on the stand, Mr. Schoepperle, I will examine you about this. [Laughter.] Now, there was a third Peruvian loan floated by your company in October, 1928, was there not ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . And what was the amount of that ? Mr. B a k e r . $25,000,000. Mr. P e c o r a . $25,000,000. Do you recall the facts and circum stances that persuaded you to approve the offering of those bonds to the American investing public? Mr. B a k e r . Same general discussion as we had on the others. Mr. P e c o r a . Y o u do not recall what they were? Mr. B a k e r . Not s p e c ific a lly . Mr. P e c o r a . Y o u do not recall now the specific information? Mr. B a k e r . N o . Mr. P e c o r a . Given to you that prompted you to------Mr. B a k e r . N o . Mr. P e c o r a . Approve the offering of those $25,000,000------ 2078 STOCK EXCHANGE PRACTICES Mr. B a k e r . I do not. Mr. P e c o r a . W orth of bonds? Mr. B a k e r . N o ; I do not. Mr. P e c o r a . In October, 1 9 2 8 ? Mr. B a k e r . N o. Mr. P e c o r a . W hat were those bonds offered at ? Mr. B a k e r . Ninety-one. Mr. P e c o r a . And what was the gross spread to your company under the underwriting agreement ? Mr. B a k e r . Five points. That is the total, gross. Mr. P e c o r a . Have you produced from the files of your company copy of a report forwarded under date of January 12,1928, by Ralph Dalton, vice president of the Foundation Co., to Victor Schoepperle, vice president of the National City Co? [A fter a pause.] Have you got that ? Mr. B a k e r . Y e s; I have it. Mr. P e c o r a . That is a photostatic copy of a report entitled “ Penny Report of 1926,” is it not? Mr. B a k e r . Y e s ; that is right. Mr. P e c o r a . Does that report contain the following statement? The present low value of Peruvian money is due primarily to the fact that the balance of international payments is unfavorable to Peru, although the commercial scales show a favorable balance, and this is apparent at a glance when one considers that metals and minerals, oils, bring into the country only a part of the real value as shown by the customhouse statistics, for the reason that the production of these articles is largely in the hands of foreign com panies which sell exchange only sufficient to cover their operating costs, and many other articles leave a part of their value abroad. Mr. B a k e r . Yes, sir. Mr. P e c o r a . That statement found its way into the possession and information of the National City Co. on January 12,1928, did it not? Mr. B a k e r . Yes, sir; evidently. Mr. P e c o r a . W ho is Ralph Dalton, the vice president of the Foundation Co. ? Mr. B a k e r . That is all I know about him. Mr. P e c o r a . Did you ever hear of him before ? Mr. B a k e r . I d o n ’t k n o w h im . Mr. P e c o r a . There is nothing in that statement which makes Pe ruvian loans a good investment, is there ? Mr. B a k e r . There is nothing in that statement that is particularly damaging either way or that is favorable. It is a general discussion of the situation as he sees it. Mr. P e c o r a . Don’t you think that a statement that— assuming the statement to be based upon facts— the “ present low value of Peru vian money is due primarily to the fact that the balance of interna tional payments is unfavorable to Peru,” and that “ metals and minerals, oils, bring into the country only a part of the real value as shown by the customhouse statistics, for the reason that the pro duction of these articles is largely in the hands of foreign companies which sell exchange only sufficient to cover their operation costs, and many other articles leave a part of their value abroad ”— don’t you think that is an unfavorable comment on the soundness of a Peruvian loan? STOCK EXCHANGE PRACTICES 2079 Mr. B a k e r . That would require a study of the whole situation that produces those conditions, which of course was done, and as to the details of that particular discussion I do not recall. Mr. P e c o r a . W as a circular put out by your company and other underwriters of this loan, to the American investing public in con nection with their offering of these bonds ? Mr. B a k e r . Yes. Mr. P e c o r a . Does the circular contain this unfavorable comment by Mr. Ralph Dalton? Mr. B a k e r . I don’t know. Mr. P e c o r a . W ell, look at it, will you? You have a copy of it before you, haven’t you ? Mr. B a k e r (after examining document). I do not see anything here that relates to it particularly. Mr. P e c o r a . D o you see any references in that circular to the previous bad debt record of Peru ? Mr. B a k e r . N o . Mr. P e c o r a . D o you see anything in that circular, any references to the factors that were mentioned by Mr. Dalton in his letter to your company of July 27, 1927 ? Mr. B a k e r . N o ; I do not. Mr. P e c o r a . W hich caused him to feel and to say that “ There are two factors that will long retard the economic importance of Peru,” and “ I have no great faith in any material betterment of Peru’s economic condition in the near future,” and that “ the coun try’s political situation is equally uncertain ” ? Do you ? Mr. B a k e r . N o . Mr. P ecora. Do you know why those things were left out? Mr. B a k e r . No, sir. Mr. P e c o r a . Y o u would not say that the omission o f these state ments or that information from the circular was purely accidental, would you? Mr. B a k e r . I don’t know why they were not in. Mr. P e c o r a . Now, you say these bonds were sold at 9 1 ? Mr. B a k e r . Yes, sir. Mr. P e c o r a . And a half— n o ; 91, I think. Mr. B a k e r . 91. Mr. P e c o r a . Do you know what their market value is today? Mr. B a k e r . Seven or eight, I think. Mr. P e c o r a . Don’t you know that on February 18 of this year they were quoted at 5 % , or rather at 5^4, and that the year’s low has been 4%? Mr. B a k e r . That is no doubt correct if you have those figures. Mr. P e c o r a . I s there any explanation you care to make other than you have already made, Mr. Baker, concerning the offering of these bonds to the American investing public in 1927 and 1928 ? Mr. B a k e r . Not if I understand you are going to ask Mr. Schoep perle about the technicalities and details of this. Mr. P e c o r a . N o ; I a m a s k in g y o u n o w . Mr. B a k e r . N o . Mr. P e c o r a . I f there is any explanation you would like to make. Mr. B a k e r . N o , sir. 2080 STOCK EXCHANGE PRACTICES Mr. P e c o r a . Other than you have already made in your testimony here this morning. Mr. B a k e r . N o, sir. Mr. P e c o r a . Is there any other information that you can give us concerning the making of these loans to the Peruvian Government and the selling of its bonds to the American public ? Mr. B aker. No, sir. Mr. P e c o r a . I suggest we take a recess until 2.30. The C h a i r m a n . The committee will take a recess until 2.30, when we will again meet in this room. Witnesses will appear at that time. (Accordingly, at 12.45 o’clock p. m., a recess was taken until 2.30 o’clock p. m. of the same day.) a f t e r recess The subcommittee resumed at 2 o’clock p. in. on the expiration of the recess. The C h a i r m a n . The subcommittee will come to order. W ho will you have first, Mr. Pecora? Mr. P e c o r a . Mr. Baker will take the stand again, please. The C h a i r m a n . He has already been sworn. TESTIMONY OF HUGH B. BAKER, PRESIDENT THE NATIONAL CITY CO., NEW YORK CITY—Resumed Mr. P e c o r a . Mr. Baker, do you know an organization called the Investment Bankers’ Association of America? Mr. B a k e r . Yes, sir. Mr. P e c o r a . Is the National City Co. a member o f that organization? Mr. B a k e r . Yes, sir. Mr. P e c o r a . O f whom does that organization consist, generally speaking? Mr. B a k e r . O f investment banks and dealers of the United States. Mr. P e c o r a . H o w long has the National City Co. been a member of it? Mr. B a k e r . W e were members a good many years ago for a con siderable time, and then withdrew, and became members again about a year ago, perhaps, or a year and a half ago. Mr. P e c o r a . When did the National City Co. withdraw? Mr. B a k e r . Three or four years previous to that. Mr. P e c o r a . Do you recall the circumstances of the withdrawal? Mr. B a k e r . Yes. Mr. P e c o r a . W hat were they? Mr. B a k e r . Principally these: Our objection was based upon the fact that the Investment Bankers’ Association of America as a national association divided itself up into so-called groups. In other words, there would be a branch located in various cities o f the United States, and those groups had authority to determine certain plans and programs of operation, and for us to have a representative member of that group meant that we had to give him authority to vote on the question of policy of the company as a whole, which we were unwilling to do. STOCK EXCHANGE PRACTICES 2081 Mr. P e c o r a . W asn’t some question *or issue raised at that time with regard to the unwillingness of the National City Co. to sub scribe to certain obligations that the association sought to insist upon from its members ? Mr. B a k e r . I think not. Mr. P e c o r a . Are you sure of that? Mr. B a k e r . There were occasionally disputes, not only with us but with other members of the association, as to questions of plan of procedure, and so forth, in the offering of securities. But that was not the determining factor. Mr. P e c o r a . W as any issue involving a question of ethics raised at that time which had to do with the withdrawal of the National City Co. from the association? Mr. B a k e r . I do not recall that that was the case. Mr. P e c o r a . W ould you say you are sure that that was not the case? Mr. B a k e r . W ell, I would say I am sure that that was not the case, except that there were, as I said, discussions in reference to matters of plan of procedure at various times, not only with us but with others of the association. Mr. P e c o r a . W hat do you understand by the expression “ beating the gun ” as applied to investment bankers’ transactions ? Mr. B a k e r . That, as I understand it, is an expression used to mean that offerings would be made prior to some stipulated time set for the offering. Mr. P e c o r a . W as the ethical question of indulging in the practice known as “ beating the gun ” raised at the time of the withdrawal of the National City Co. from this association? Mr. B a k e r . I do not think so. I am not positive on that. Mr. P e c o r a . Y o u are not positive about it? Mr. B aker. No. Mr. P e c o r a . D o you know who would be positive about it? Mr. B a k e r . N o; I do not. I would have to check that up. Mr. P e c o r a . Do you recall whether or not the National City Co. was formally accused at that time of having been guilty of this practice colloquially called “ beating the gun ” ? Mr. B a k e r . I do not know that there was any formal accusation. I think it is fairly general among distributing houses to question the time of offering by the other. Mr. P e c o r a . Do you mean by that answer that the practice of “ beating the gun ” was one that was generally indulged in ? M r. B a k e r . N o ; I do not think so. Mr. P e c o r a . H o w was that? Mr. B a k e r . N o ; I do not think so. But I think where one house failed to get an order because some other house had offered it prior, would lead to the statement sometimes, frequently, that the other house had offered the issue prior to the regular time for offering. Mr. P e c o r a . W as the withdrawal of your company from member ship in that association 3 or 4 years ago, brought about after a con ference and discussion of the matter on the part of the executive officers of the company? Mr. B a k e r . I think it was discussed. I don’t remember that there was any particularly formal discussion. Mr. P e c o r a . Did you take part in the discussion? 2082 STOCK EXCHANGE PEACTICES Mr. B a k e r . Yes. Mr. P e c o r a . Whether formal or informal? Mr. B a k e r . Y e s; I took part. In fact, I think I recommended that we withdraw. Mr. P e c o r a . Due to the fact that you now believe you recom mended the withdrawal, can you tell us whether or not the issue of “ beating the gun ” was raised against your company by other mem bers of the association? Mr. B a k e r . I think not in any specific way that I recall. M r. P e c o r a . W ell, was it done in any general way? Mr. B a k e r . I have just said, Mr. Pecora, that general statements of that kind were made from time to time. But I do not know that there was any specific case brought out or mentioned. Mr. P e c o r a . D o you know an organization calling itself the Insti tute of International Finance ? Mr. B a k e r . I just know that there is such an organization, yes. Mr. P e c o r a . W hat kind of organization is that? Mr. B a k e r . I think it is an organization principally for the study of securities generally. Mr. P e c o r a . O f foreign issues? Mr. B a k e r . Foreign issues, I think, specifically. Mr. P e c o r a . Principally that? Mr. B a k e r . Yes. Mr. P e c o r a . When was that so-called Institute o f International Finance organized? Mr. B a k e r . I don’t know. Mr. P e c o r a . H o w long has it been in existence ? Mr. B a k e r . I don’t know. Mr. P e c o r a . I s the National City Co. a member o f it or a con tributor to it? Mr. B a k e r . May I ask Mr. Schoepperle? I think we are, but he is more familiar with that than I am. Mr. P e c o r a . A ll right. Mr. S c h o e p p e r l e . A s members of the I . B . A ., out of whose budget there is appropriated a sum of money which supports the institute, which is supposed to be a joint organization, under the auspices of New York University and the I . B . A . Mr. B a k e r . In that way we contribute to the institute, through an appropriation made by the Investment Bankers Association of America. Mr. P e c o r a . W hat are the methods by which the Institute of International Finance functions? Mr. B a k e r . I would have to refer that to Mr. Schoepperle. Mr. P e c o r a . Don’t you know ? Mr. B a k e r . H e is in direct touch with it all the time. Mr. P e c o r a . W h o is the director o f that institute? Mr. B a k e r . Dean Madden, Mr. Schoepperle tells me. M r. P e c o r a . H e is the dean of what institution o f learning? Mr. B a k e r . O f New York University. Mr. P e c o r a . H o w is that institute supported— by the Investment Bankers’ Association of America? Mr. B a k e r . W ell, there is a contribution made to its support by the Investment Bankers’ Association of America. There may be other sources of income that I am not familiar with. STOCK EXCHANGE PRACTICES 2083 Mr. P e c o r a . Are you individually a member of the executive com mittee of the Investment Bankers’ Association of America? Mr. B aker. No, s ir ; I am not. Mr. P e c o r a . Are you familiar with the operations of the Institute of International Finance at all? Mr. B a k e r . Not at all, really. Mr. P e c o r a . Do you know of any instances where persons con nected with the institute have passed judgments or expressed opin ions on foreign issues ? Mr. B a k e r . W ell, I am not sufficiently familiar with that, Mr. Pecora, to answer. I think Mr. Schoepperle, who is in direct con tact with it, knows about that. Mr. P e c o r a . Are you a member of the executive committee or foreign securities committee of the Investment Bankers’ Association of America? Mr. B a k e r . Y e s ; I am a member of that committee. Mr. P e c o r a . Were you a member of that committee during the year 1932? Mr. B a k e r . Y e s; I think so. I am not sure whether I was during the entire year or ngt, but certainly for a portion of that year. Mr. P e c o r a . Does the National City Co. subscribe to their service? . Mr. B a k e r . I t h in k so, yes. Mr. P e c o r a . T o what extent ? Mr. B a k e r . I don’t know. Mr. P e c o r a . Do you know of instances where opinions that have been prepared after examination and survey of the facts by members of the Institute of International Finance, have been given to the Investment Bankers’ Association of America, or to any of its mem bers, and have thereafter been revised by banking houses or invest ment bankers who are members of the association ? Mr. B a k e r . N o ; I don’t know. Mr. P e c o r a . By the way, Mr. Baker, have you here the so-called prospectus file of your company with regard to Peruvian loans? Perhaps Mr. Schoepperle can help you answer that. Mr. S c h o e p p e r l e . I do not think we have anything called a pros pectus file, although we may. Are you referring to a file ox our prospectuses on Peru? Mr. P e c o r a . Yes, exactly. Mr. S c h o e p p e r l e . W ell, I can readily make one up for you. Mr. P e c o r a . Have you a file that contains them ? Mr. S c h o e p p e r l e . I think I have the whole business here. I have not a file that contains them, or I do not believe so. Mr. B a k e r . I s t h is w h a t you w a n t , Mr. Pecora? Mr. S c h o e p p e r l e . I f you have such a file, Mr. Pecora, I will be glad to identify it for the purposes of the inquiry. Mr. P e c o r a . Y o u have a file, as I understand, containing all pros pectuses in connection with Peruvian loans, and in that file are con tained letters submitting the prospectuses for the consideration of the company. Mr. S c h o e p p e r l e . I f you will permit me I will be very glad to have my assistant go back and look in the case of files and see if he can find anything which corresponds to that description. Mr. P e c o r a . Ask him to look for a letter from some member of the Institute of International Finance with respect to one of three 2084 STOCK EXCHANGE PRACTICES Peruvian loans that were the subject of testimony at this morning’s hearing, and a reply or replies to that letter from officers of your company. Mr. S c h o e p p e r l e . A ll right. M r. P e c o r a . N o w , Mr. Baker, among other purposes of the Insti tute of International Finance, do you recall that there was included the work of preparing articles to be published in magazines and other periodicals? Mr. B a k e r . I have understood so, but I am not familiar with any of the details of it. Mr. P e c o r a . And also the preparation of speeches to be broadcast over the radio ? Mr. B a k e r . I have heard that mentioned, but I do not know the fact. Mr. P e c o r a . Did you ever see the report made to the members of the executive committee— the annual report o f the director of the Institute of International Finance— in which, among other things, he stated as follow s: It is obvious that the director and the assistant director, under the customs of academic freedom, can express themselves more completely as individuals than they may in their official capacities as representatives of the institute. Mr. B a k e r . N o ; I don’t remember having seen that. I f I had seen it I would have sent it directly to the department in charge. Mr. P e c o r a . W hat would that language convey to you concerning the freedom of action of the director and the assistant director of the Institute of International Finance? Mr. B a k e r . May I read it again ? Mr. P e c o r a . Y es; the portion I have underlined. Mr. B a k e r . W ell, I hardly know, Mr. Pecora, what he has in mind in that statement, unless they were stating that they could do so in expressing their own views aside from the institute, without consult ing statistics, and so forth, that might be in the Institute. The C h a i r m a n . Speak a little louder, please. M r. B a k e r . I beg pardon, Mr. Chairman. I have not seen that statement before, Mr. Pecora, and I do not know just what they meant by that. Mr. P e c o r a . W ell, I understand this is taken from their annual report to the executive committee for the past year. Mr. B a k e r . Yes. Mr. P e c o r a . W asn’t that ever brought to your notice or attention? Mr. B a k e r . I t may have been given to me, and if so I would have immediately passed it over, as I say, to the department in our organization in direct charge, or directly interested in that matter. Mr. P e c o r a . Does it indicate to you that the director and the as sistant director of this institute felt that their freedom to express their opinions publicly in their capacities as director and assistant director, respectively, of this institute, was more or less trammeled? Mr. B a k e r . I do not think so. I can not imagine so, because, cer tainly, they would not have retained those positions i f they felt that they could not express their conclusions as they arrived at them. Mr. P e c o r a . W ell, what other meaning could possibly be attached to those words? Mr. B a k e r . I do not know. STOCK EXCHANGE P R A C T IC E S 2085 Mr. P e c o r a . They say here: It is obvious that the director and the assistant director, under the customs of academic freedom, can express themselves more completely as individuals than they may in their official capacities as representatives of the institute. Do you mean that they were free to express their opinions without reserve in academic cloisters, while they were not as the official representatives of the institute ? Mr. B a k e r , I am sure that I don’t know what they had in mind in making that statement. I have not the slightest idea, and have never seen the statement before, that I can recall. Mr. P e c o r a . Were not the pronouncements of this institute of interest to you as head of the National City Co., which was one of the members of the Investment Bankers’ Association of America, which in turn helped to support this institute ? Mr. B a k e r . They were; but, as I say, if they came to me directly they would go to the department having that in charge for analysis. Mr. P e c o r a . That is, without any perusal of their reports by you ? Mr. B a k e r . Very likely; yes. Mr. P e c o r a . W ell, in that way, how did you think you could exercise a well-informed judgment on matters of policy for your company in the putting out of foreign issues ? Mr. B a k e r . I f that message, or any other statement which they made, contained any information that should be called to my atten tion it would have been done by the department that studied it. Mr. P e c o r a . Then, it was left to the judgment of the subordinate officers of the company to call these things to your attention, al though in the first instance the communication was presented to you. Mr. B a k e r . It would have been left to the vice president in charge of that department. Mr. P e c o r a . And this particular portion of the report was never called to your attention so far as you can recall ? Mr. B a k e r . Not that I recall. I have never seen it, so far as I can recall. Mr. P e c o r a . Would you approve of the implications of this statement ? Mr. B a k e r . W ell, that depends upon what they are. Mr. P e c o r a . Is there any doubt in your mind as to what they are ? Mr. B a k e r . I say again, I haven’t any idea what the professor had in mind, and I should think the only way I could determine that would be to ask him. I don’t know what it was. Mr. P e c o r a . He has already expressed himself in the words I have called to your attention. Suppose you read them again and see what meaning you attach to them. Mr. B a k e r . I read it, and I told you I don’t know what he meant. Mr. P e c o r a . Y o u don’t know what .that language means? Mr. B a k e r . I don’t know what he meant. Mr. P e c o r a . Is there any word in that extract the meaning of which you do not understand ? Mr. B a k e r . I think not. Mr. P e c o r a . The words are all simple enough ? Mr. B a k e r . Yes. Mr. P e c o r a . The meaning is obvious, isn’t it ? Mr. B a k e r . Y es; I suppose so. 2086 STOCK EXCHANGE PRACTICES Mr. P e c o r a . W h y are you unable to understand what is meant by that phraseology then? Mr. B a k e r . W ell, I don’t know what the gentleman had in mind when he wrote that particular statement. Mr. P e c o r a . W ell, he had in mind exactly what he has publicly charged in that statement, hadn’t he ? Mr. B a k e r . I assume he had. Mr. P e c o r a . And those words are meaningless to you? Mr. B a k e r . W ell, they are meaningless if you ask me to interpret what w^s in his mind when he wrote it. I can not do that. Mr. P e c o r a . Do you think the English used there is so involved that the author did not make himself clear ? Mr. B a k e r . W ell, I don’t understand just what you are trying to get me to answer. Mr. P e c o r a . I am trying to find out if you attach any meaning at all to that sentence, or if those words are merely a meaningless jumble to you. Mr. B a k e r . W ell, they do not seem to particularly convey any thing to me. I don’t know what they meant. Mr. P e c o r a . Didn’t this statement mean specifically that the di rector and the assistant director of the institute felt that they had less freedom to express themselves in their official capacities as representatives of the institute, than they had as professors in their institution of learning? Mr. B a k e r . That might be implied, but I can not imagine those gentlemen retaining those positions if they felt they were not free to express their views. Mr. P e c o r a . N o w , the institute is supposed to function as an in dependent fact-finding body, with respect to foreign issues, is it not? Mr. B a k e r . I think so ; yes, sir. Mr. P e c o r a . And yet wasn’t it the custom of the director or the assistant director of the institute to send in advance of publica tion a draft of its views to the banking houses interested in the particular issue in order that they might express their views about it? Mr. B a k e r . I am not sure about that. But I think that is prob ably correct. I f it is correct our vice president in charge of foreign issues would know about that and can answer that question. Per sonally, I have never seen a suggested article that is to appear prior to its appearance. Mr. P e c o r a . Y o u would not say, though, that the practice alluded to in my former question was not the practice ? Mr. B a k e r . Not at all. It probably is. Mr. P e c o r a . Did the Investment Bankers’ Association of America by that process seek to trammel and fetter or qualify the otherwise independent judgment of the members of the institute? Mr. B a k e r . That is not my understanding of it at all. I think it was merely to assist in the presentation of the facts, that if there were additional facts, information, or figures, to supply them. That is my idea. I think that is what it was. Mr. P e c o r a . N o w , from the file that I called for a few minutes ago and which has just been turned over to me by Mr. Schoepperle of your company, I find the following letter on the letterhead of the 2087 STOCK EXCHANGE PRACTICES Institute of International Finance, conducted by the Investment Bankers’ Association of America in cooperation with New York University, dated August 11, 1928, reading as follows: M r . V ic t o b S c h o e p p e r l e , New York City. Mb. S c h o e p p e r l e : W e are inclosing a preliminary draft of the pro posed bulletin on the credit position of Peru. We shall greatly appreciate it if you will be good enough to review this draft and return it at your conven ience. As soon as we receive the draft with your suggestions the bulletin will be sent to press. Sincerely yours, J o h n T. M a d d e n , Director. D ear Does that letter indicate that the director was following the prac tice I alluded to a moment ago, and that it was the general practice ? Mr. B a k e r . O f conferring with houses generally interested in those issues ? Mr. P e c o r a . O f submitting their independent views before publi cation to the investment banking house interested in the issue. Mr. B a k e r . Y es; I t h in k t h a t w o u ld . Mr. P e c o r a . And of not presenting them to the public until after they had been revised by the house of issue or the offering house. Mr. B a k e r . W ell, I do not know that it means at all that it has been revised. It has been looked over I suppose to see if there are any errors or suggestions that could be made. I do not know that it necessarily means that it has been revised. Mr. P e c o r a . W ell, for instance, the concluding paragraph says: “As soon as we receive the draft with your suggestions the bulle tin will be sent to the press.” Mr. B a k e r . Y es; that is all right. Mr. P e c o r a . In this same file appears a copy of the following let ter, which apparently is a reply to Dean Madden’s letter of August 11, 1928, that I have just read. I will read this letter into the record: A D ean John T. M ugust 15, 1928. adden, New York. a d d e n : We have read over with great interest the prelimi nary draft of the proposed bulletin on the credit position of Peru which you sent us with your letter of August 11. We are returning this draft, together with memorandum which we trust may be of some help to you. Very truly yours, V i c t o r S c h o e p p e r l e , Vice President. D eab D octob M Does that letter also indicate that that was the practice? Mr. B a k e r . That we made suggestions? Mr. P e c o r a . Yes. Mr. B a k e r . Yes. M r4 P e c o r a . And that no bulletins were issued by the institute to the public until after they had been submitted for approval and suggestions or revision to the issuing house or the offering house. Mr. B a k e r . W ell, I cannot assume that. I do not know. As far as I know it may be the universal practice that it is submitted to the house interested, but I do not know about that. Mr. P e c o r a . That is all for this witness, Mr. Chairman. Mr. Baker, you will remain subject to further call. The C h a i r m a n . A ll right, Mr. Baker. Mr. P e c o r a . Mr. Schoepperle, will you resume the stand, please? 2088 STOCK EXCHANGE PRACTICES TESTIMONY OF VICTOR SCHOEPPERLE, SHORT HILLS, MELBURN TOWNSHIP, ESSEX COUNTY, N. J., VICE PRESIDENT NATIONAL CITY CO.—Resumed M r. P e c o r a . Mr. Schoepperle, have you before you copies of the prospectus of the National City Co. and other underwriters offering the $15,000,000 bond issue of the Republic of Peru in March, 1927, that was referred to in the examination of Mr. Baker today? Mr. S c h o e p p e r l e . I h a v e . Mr. P e c o r a . Have you also the prospectus issued by your com pany and the other underwriters offering to the public in December, 1927, the $50,000,000 bond issue of the Republic of Peru ? Mr. S c h o e p p e r l e . I have. Mr. P e c o r a . And also the circular relating to the issue in October 1928 of the $25,000,000 bond issue of the Republic of Peru? Mr. S c h o e p p e r l e . I have. Mr. P e c o r a . N o w , take those three prospectuses in their chrono logical order: The first prospectus purports to set forth the revenues of the Government of Peru for the year 1924, does it not? Mr. S c h o e p p e r l e . 1924 to 1926 inclusive; yes, sir. Mr. P e c o r a . I am confining myself first to the year 1924. M r. S c h o e p p e r l e . A ll right. M r. P e c o r a . W hat is the statement in that first prospectus as to what the revenues were in the year 1924 of the Government of Peru? Mr. S c h o e p p e r l e . This statement in this prospectus, signed by the Minister of Finance of the Republic o f Peru, reads as follow s: The revenue of the------Mr. P e c o r a (interposing). Just give the figure for the revenue in the year 1924. Mr. S c h o e p p e r l e . I t is $8,931,594. Mr. P e c o r a . $3,000,000, did you say? Mr. S c h o e p p e r l e . I t is $3,931,594. Mr. P e c o r a . No. You are reading the revenues from the pledged securities only, aren’t you? Mr. S c h o e p p e r l e . That is right. Mr. P e c o r a . Under the caption “ Currency and Finances ” what were the revenues set forth in that prospectus, as the entire revenues of the Government of Peru for the year 1924 ? Mr. S c h o e p p e r l e . For 1924— le t m e see-------Mr. P e c o r a . It is right there. Mr. S c h o e p p e r l e . The thing is put in doubled, 1924 and 1925 together. Mr. P e c o r a . Give us first the year 1924. Mr. S c h o e p p e r l e . It is $33,905,805. Mr. P e c o r a . Now, will you take up the second prospectus, the one relating to the $50,000,000 loan. Have you that? Mr. S c h o e p p e r l e . Yes. Mr. P e c o r a . N o w , under the caption “ Revenues and Expendi tures” what statement is contained there as to the total revenues of the Government of Peru for the year 1924? Mr. S c h o e p p e r l e . The statement here is $38,655,800. Mr. P e c o r a . That is a difference of over $5,000,000, isn’t it? Mr. S c h o e p p e r l e . That is true. STOCK EXCHANGE PEACTICES 2089 Mr. P e c o r a . Now, will you look at the third prospectus, the one relating to the $25,000,000 bond issue, of October, 1928. Have you that there ? Mr. S c h o e p p e r l e . Yes, sir; here it is. Mr. P e c o r a . W hat is stated there to be the total revenues of the Government of Peru for the year 1924 ? Mr. S c h o e p p e r l e . It is $37,691,325. Mr. P e c o r a . Now, you have three different amounts, haven’t you ? Mr. S c h o e p p e r l e . That is right. Mr. P e c o r a . W as that noticed by anybody in the foreign depart ment of the National City Co.? Mr. S c h o e p p e r l e . It did not need to be noticed. There was a perfectly clear explanation in the face of the prospectus, in rela tion to those discrepancies. Mr. P e c o r a . Isn’t it a fact that in each of those three prospectuses a different sum is stated as the total revenues of the Government of Peru for the year 1924 ? Mr. S c h o e p p e r l e . It is a fact, but you must remember that the revenues of the Government of Peru are received by the Government in Peruvian pounds, and the Peruvian pound has a fluctuating value when transferred into dollars, which depends upon the value of the currency at the time the calculation is made. Mr. P e c o r a . Is that explanation included in any one or all of the prospectuses ? Mr. S c h o e p p e r l e . Yes, sir; in a ll three o f these prospectuses. Mr. P e c o r a . Where? Mr. S c h o e p p e r l e . In the first prospectus, last paragraph, it says “ All conversions herein are made at $3.68 to the Peruvian pound.” In the second prospectus it says “A ll conversions are made at the rate of $3.94 per Peruvian pound.” And the last prospectus says “A ll conversions are made at the rate of $3.83 per Peruvian pound.” And it points out that the present value of the Peruvian pound is $4. I think, Mr. Pecora, if you will sharpen up a pencil we can determine that that is about the explanation. Mr. P e c o r a . That is about the explanation ? Mr. S c h o e p p e r l e . Yes, sir. Mr. P e c o r a . Now, Mr. Schoepperle, you were present this morn ing at the examination of Mr. Baker with respect to those three loans, weren’t you ? Mr. S c h o e p p e r l e . That is true. Mr. P e c o r a . And you heard all his testimony ? Mr. S c h o e p p e r l e . Yes, sir. Mr. P e c o r a . Y o u were for a number of years the so-called South American expert of the National City Co., weren’t you? Mr. S c h o e p p e r l e . I never qualified myself as an expert, although possibly some people may have considered me an expert. Mr. P e c o r a . N o w , Mr. Schoepperle, before I come to that I am going back to those three different figures set forth in those three prospectuses. Don’t those fluctuations in the value of the Peruvian pound indicate the instability of their currency ? Mr. S c h o e p p e r l e . They do. They represent instability in the Peruvian currency, and I should like to point out, in connection with those Peruvian negotiations and the work which we did as one of 2090 STOCK EXCHANGE PRACTICES the bankers in connection with the Peruvian loans, that one of the chief points for correction in the program for the reconstitution of Peruvian finance, was to get the Peruvian pound stabilized so that it would not be fluctuating from month to month and from year to year. M r. P e c o r a . So that one of the chief points that actuated the Na tional City Co. in putting out these three loans aggregating $90,000,000 was just that, was it? Mr. S c h o e p p e r l e . It was not the chief point. Mr. P e c o r a . I mean in the years 1927 and 1928 ? Mr. S c h o e p p e r l e . It w a s not the chief point. Mr. P e c o r a . W ell, was it one of them? Mr. S c h o e p p e r l e . It was a collateral point, and a point of very, very great importance. Mr. P e c o r a . W as that one of the important collateral points at least, to stabilize the currency of Peru? Mr. S c h o e p p e r l e . In our efforts to get Peru straightened out, that certainly was one of the collateral objectives. Mr. P e c o r a . And in your efforts to get Peru straightened out you sold $90,000,000 of Peruvian bonds to the American public? Mr. S c h o e p p e r l e . I should like, if you will permit me------Mr. P e c o r a (interposing). Is that right? You can answer that yes or no. Mr. S c h o e p p e r l e . I would say in the process of getting the Pe ruvian financial situation straightened out we sold those bonds; yes. Mr. P e c o r a . N o w , let us go to the first loan, of $15,000,000, in March of 1927. Mr. S c h o e p p e r l e . A ll right. Mr. P e c o r a . W as not a portion of the proceeds of that loan de voted to the retirement of existing indebtedness ? M r. S c h o e p p e r l e . I believe it was; yes, sir. That was one of them. Mr. P e c o r a . W ho held that indebtedness? Mr. S c h o e p p e r l e . W ell, you understand, Mr. Pecora, that there were five issues of Peruvian bonds outstanding in the American market, which had been sold in the market during the period 1921 to 1923 by investment houses other than ourselves. Mr. P e c o r a . Did the National City Co. have anything to do with those five issues between 1921 and 1923? Mr. S c h o e p p e r l e . No, sir. Mr. P e c o r a . Y o u know from the records and files of your com pany with regard to the Peruvian studies made during those years, or the greater part of those specific years, that the advices given to the company by its agents and officers, including yourself, were unfavorable to Peruvian loans, do you not ? Mr. S c h o e p p e r l e . I most decidedly do. Mr. P e c o r a . And then in 1927, knowing that one of the objects of the $15,000,000 flotation was to retire some indebtedness that had been put out during those years, did you sanction this loan or issue of $15,000,000 of bonds to the American public ? Mr. S c h o e p p e r l e . W e joined the firm of J. & W . Seligman & Co., who had arranged the negotiations for this loan, knowing what the proceedings were; yes, sir. STOCK EXCHANGE PRACTICES 2091 Mr. P e c o r a . Did you advise your company to participate in that offering? Mr. S c h o e p p e r l e . I personally? Mr. P e c o r a . Yes. Mr. S c h o e p p e r l e . You can see from----- Mr. P e c o r a (interposing). No. Did you? Answer yes or no. Mr. S c h o e p p e r l e . I want to put in the record------Mr. P e c o r a (interposing). W ell, first, put in your answer to that question. Mr. S c h o e p p e r l e . Yes, sir; I did. Mr. P e c o r a . A ll right. Mr. S c h o e p p e r l e . I should like in that connection to make a collateral statement. M r. P e c o r a . Do you want to explain why you did it? Mr. S c h o e p p e r l e . I certainly do. I think we all want to know how that happened. Mr. P e c o r a . But first, you specifically advised the company to do it ? Mr. S c h o e p p e r l e . I most certainly did. Mr. P e c o r a . In what form were your advices to the company submitted, in writing or orally? Mr. S c h o e p p e r l e . Orally. Mr. P e c o r a . To w h o m ? Mr. S c h o e p p e r l e . I just mentioned the fact that there is a memo randum in the files, which is the only thing I can find that in any way indicates the position I took at that time. And I have asked, or suggested, that I might refer to that memorandum, and one para graph thereof. Mr. P e c o r a . To whom did you make your suggestions or recom mendations, was my question. Mr. S c h o e p p e r l e . I concurred in the action that was being taken at the time when the subject was under discussion between Mr. Byrnes and the firm J. and W . Seligman & Co. I will take the responsibility for having reported my views to the executives, al though I do not remember the occasion on which I may have made such a report. Mr. P e c o r a . Do you recall when you made that oral report about the issue? Mr. S c h o e p p e r l e . I should say that was about February 11, 1927, or a little before that. Mr. P e c o r a . That was about a month or so before the actual offering to the public of those $15,000,000 of bonds, wasn’t it ? Mr. S c h o e p p e r l e . Yes. M r. P e c o r a . And you were the author of the memorandum spread upon the record from the files of your company this morning, reading as follows: Peru: Bad debt record, adverse moral and political risk, bad internal debt situation, trade situation about as satisfactory as that of Chile in the past three years. Natural resources more varied. On economic showing Peru should go ahead rapidly within the next 10 years. Mr. S c h o e p p e r l e . That is perfectly true. Mr. P e c o r a . W hat information did you have subsequent to the filing by you of that memorandum regarding Peru as having a bad 119852— 33— p t 6 -------22 2092 STOCK EXCHANGE P E A C T IC E S debt record and as being an adverse moral and political risk, with a bad internal debt situation, which caused you in February o f 1927 or thereabouts to recommend to your company participation in this $15,000,000 loan? Mr. S c h o e p p e r l e . A great many things had happened in the mean time. Mr. P e c o r a . When did they begin to happen ? Mr. S c h o e p p e r l e . They began to happen in February, 1925, which is the date of a memorandum from which you quoted in part this morning, signed by Mr. E. A . Kercher. Mr. P e c o r a . Yes. W hat happened then and thereafter? Mr. S c h o e p p e r l e . I am merely pointing out that in that memo randum there were— I would like to quote that if you are inter ested— some aspects of the Peruvian situation which were in some measure favorable to the progress that was being made by the Republic of Peru at that time. Mr. P e c o r a . W hat are they? Mr. S c h o e p p e r l e . I will have to read them. Mr. P e c o r a . Go a h e a d . Mr. S c h o e p p e r l e . This is from the same memorandum quoted this morning, February 16, 1925, E. A . Kercher. It states, in part: Under the competent leadership of President Leguia the Republic has made remarkable progress and appears to have entered upon an era of unusual and permanent prosperity. Mr. Mr. Mr. Mr. P e c o r a . “ Unusual and permanent S c h o e p p e r l e . That is what it says. P e c o r a . A ll right. S c h o e p p e r l e (reading) : prosperity,” did you say? The more important achievements of the Leguia administration during the last five years include— 1. Establishment of a central reserve bank. 2. Revision and improvement of the budget system. 3. Reorganization of customs department with American assistance. 4. Reorganization of educational system. 5. Placing experts from foreign nations in charge of several administrative departments. 6. Placing sanitation services under direction of American experts. 7. Contracting with American firms for construction of extensive sanitary works, modern roads, etc. 8. Marked progress in solving vital problems of irrigation, colonization, rail road construction, road building, and the development of water power, agri culture, and the mining and cattle industries. Under President Leguia progress has been made in settling disputes with neighboring States. A treaty has been signed with Ecuador, while the TacnaArica dispute is now being arbitrated under American supervision. The trouble with Colombia is also well along toward an amicable solution. FOREIGN CAPITAL INVESTM ENTS Because of its vast natural wealth, developed and undeveloped, the improve ment in its national finances and the present policy of developing natural resources with the aid of foreign capital, Peru is rapidly assuming increasing interest in the eyes of American investors. For generations the country has been a favorite field for the investment of European capital. And so on, and so forth. Mr. P e c o r a . So on and so forth. Did that overcome the implica tion of this statement in the report------Mr. S c h o e p p e r l e (interposing). You notice there------ STOCK EXCHANGE PEACTICES 2093 Mr. P e c o r a . W ait a minute. How did you know what statement I was going to read? Mr. S c h o e p p e r l e . Excuse me. Mr. P e c o r a . Y o u were ready to say it overcame any implication, weren’t you? Mr. S c h o e p p e r l e . I was ready to say that that had not influenced my previous judgment on the Peruvian situation. Mr. P e c o r a . W hat was your previous judgment on the Peruvian situation ? Mr. S c h o e p p e r l e . It is in the record. Mr. P e c o r a . W hat was it ? Tell us now. Mr. S c h o e p p e r l e . My previous judgment on the Peru situation was that Peru was an unsatisfactory political and moral risk, with a bad debt record, as you have alread quoted from my statement. Mr. P e c o r a . And what caused you to revise your opinion to that effect and to recommend in February, 1927, to your company its participation in this $15,000,000 loan? Mr. S c h o e p p e r l e . I have stated that a number of things did hap pen in that period, and I have only been able to cite one thus far. Mr. P e c o r a . Is that the one you have cited, the one you have just read from? Mr. S c h o e p p e r l e . That I just cited I said did not influence my judgment particularly. Mr. P e c o r a . W ell, then, give us something that did influence your judgment. Mr. S c h o e p p e r l e . Here is something that I believe must have influenced my judgment: This morning I think you read from a letter dated December 3,1925, from the manager of the------Mr. P e c o r a (interposing). From Mr. Calvin to Mr. Byrnes; yes. W hat was it in that letter or memorandum of Mr. Calvin to Mr. Byrnes that influenced your prior judgment, that Peru was a bad moral and political risk? Mr. S c h o e p p e r l e . Y o u put that letter in the record this morning, and without going back to it I simply refer to it to say that the gen eral terms of that letter were not altogether adverse to Peruvian credit. Nevertheless, I do not think it------Mr. P e c o r a (interposing). W as it favorable to Peruvian credit altogether ? Mr. S c h o e p p e r l e . Not altogether. Only in part. Mr. P e c o r a . N o w , tell us what caused you to revise the judgment that you had had about Peru being a bad moral and political risk. Mr. S c h o e p p e r l e . I just want to state that I do not think even that had any material influence on my judgment, Mr. P e c o r a . Then why did you mention it ? Mr. S c h o e p p e r l e . Because I think nevertheless it is a fact that should be taken into account, that in these excerpts that were put into the record this morning we ought to have perhaps the full record rather than that part of it that you had. Mr. P e c o r a . I am trying to get now from you the things------Mr. S c h o e p p e r l e . A ll right. Mr. P e c o r a . That influenced your judgment, and so far you have given us the things that did not influence your prior judgment that Peru was a bad moral and political risk. 2094 STOCK EXCHANGE PRACTICES Mr. S c h o e p p e r le . A ll right. Now, I come to the things that did influence my judgment, and I remember very distinctly that on July 13, 1927, Mr. Calvin wrote a letter to Mr. R. M. Byrnes in which he says that “ the tobacco loans under way ”— that “ the Rothschild peo ple in London are after this tobacco loan ”------Mr. P e c o r a . N o w , just a moment. You expressed your recom mendation in favor of the March 1927 loan. Y ou certainly could not have based any recommendation in favor of that loan upon some thing that developed in July 1927, could you ? Mr. S c h o e p p e r le . Quite right. Mr. P e c o r a . W ell, now, please answer the question with respect to the things that caused you, prior to March 1927, to recommend to your company participation in that $15,000,000 loan, in view of your prior opinion that Peru was a bad moral and political risk. Mr. S c h o e p p e r le . W e have already referred to a memorandum written and signed by me as assistant vice president, dated February 14, 1927. That memorandum details arrangements which were made in conversations with J. and W . Seligman & Co. between officers of the City Co. and members of that firm concerning this tobacco loan. I remember distinctly that I came back from Europe on or about February 11, 1927. This is the first time my name appears in the files of the City Co. for that year. Evidently I sat in a discussion of this whole question, those being present being Mr. Byrnes and Messrs. Strauss, senior partner of J. and W . Seligman & Co., Mr. W hite, and Mr. Breck. The last paragraph of that memorandum: Lastly, it is understood that the fundamental consideration underlying our decision to appear in this business is the expectation that we eventually shall take an active interest in Peruvian financing on a major scale, anticipating, as we do, some large-scale operations which will be necessary for refunding as well as other government purposes. Mr. P e c o r a . Please do not put that away. I want to see the entire memorandum. Mr. S c h o e p p e r le . Yes, sir; with pleasure [handing document to Mr. Pecora]. Now, let me tell you what happened at that time . (There was a pause.) Mr. P e c o r a . I s the concluding paragraph of this memorandum signed by you under date o f February 11, 1927, the most important consideration that was pointed out by you in this memorandum? Mr. S c h o e p p e r le . By no means. Mr. P e co r a . The reason I asked that is because it is the only portion of the memorandum which you quoted in full. Mr. S c h o e p p e r le . That is right. Mr. P e c o r a . And I thought you quoted from it because you con sidered it the most important element. Mr. S c h o e p p e r le . By no means. But it is important for the pur poses of this discussion, very important for the purposes of this dis cussion, because it refreshes my memory on the situation that existed at that time. Mr. P e c o r a . Yes. Now go ahead. Mr. S c h o e p p e r le . I knew and my associates knew that Peru had an unsatisfactory debt record. W e felt that Peru was not a good moral risk. There was evidence, however, that under the adminis tration of President Leguia from 1918 or 1919 to 1927 there had STOCK EXCHANGE P R A C T IC E S 2095 been great progress made in the constructive development of the Republic, its economics, its financial arrangements, and we had the information from Mr. Calvin that he thought that the position warranted our serious consideration of this business. Now, we never would have considered that business for one minute except as we were promised and assured that the President in his wish to complete his financial and economic reconstruction of the country, which had been in process for a period of 10 years, wished to cooperate with some major banking interests with a view to con solidation of his entire external debt, which had been, as said this morning, issued piecemeal; wished to effect a stabilization of his currency, which he felt sure he could do, because the Reserve Bank of Peru had a gold reserve then of about 88 per cent as against its outstanding currency; wished to effect the stabilization of the Budget; wished to embark upon a public works program which had been in process for a period of four or five years, and which had been financed by these various five issues of bonds which had pre viously, during 1921 to 1927, been floated in the New York market. The President was pointing out to the bankers that in his desire to complete this financial program it would be necessary to work in very close cooperation with the banking group and that with their assistance he was prepared to complete the work that he had been engaged in for the past 10 years. He felt that a constructive piece of work could be done. He was willing to leave this piecemeal financing that he had formerly been in. He wanted to effect the consolidation. And it was only, as we thought, that we could em bark on a program that would clear the financial position in Peru, stabilize the currency, establish a balanced condition in his budget, help him carry out the public works program already under way, which was showing increased taxing power and increased public revenues— it was only in that way that we were willing to embark upon the financing of Peru, and it was on the President’s assurance that we be given such an opportuinty that we went into that business. Mr. P e c o r a . So that your judgment, reached in February, 1927, or thereabouts, that Peru, theretofore regarded by you as a bad risk, was a good one, was more or less dependent upon the continuance in office of President Leguia, wasnt’ it ? Mr. S c h o e p p e r le . No, I don’t think so, Mr. Pecora. I think that consideration was very important, that Leguia, the strong man of Peru— and by the way, he was constitutionally elected and was hold ing his office upon a constitutional basis— the continuance of Leguia and his program— and he assured us when the question came up about his— the question of his continuance in office, that there were other constructive elements in that community that could be de pended on to carry out a constructive program; that it did not hinge entirely on his existence. But it did have an important bearing, of course, on our hope for getting, with the cooperation of the Presi dent of the Republic, a proper program that would put Peru’s financing on a sound basis. Mr. P e c o r a . And it was largely on the basis of those considera tions that you recommended offering to the public this loan of $15,000,000? Mr. S c h o e p p e r le . The loan of $15,000,000 was a secured loan, secured on the tobacco monopoly of Peru. 2096 STOCK EXCHANGE PRACTICES Mr. P e o o r a . It is a loan that has not been paid. Mr. S c h o e p p e r l e . That i s perfectly true. Mr. P e c o r a . That shows how well it was secured, does it not? Mr. S c h o e p p e r l e . The loan went into default subsequently. Mr. P e c o r a . I believe you said this morning it was some time be tween December 5, 1925, and March, 1927, that you wrote that memorandum? Mr. S c h o e p p e r l e . That is right. Mr. P e c o r a . It refers to Peru as having a bad debt record and as being an adverse moral and political risk and as having a bad internal debt situation? Mr. S c h o e p p e r l e . Yes, sir. That was sometime between 1925 a n d 1927. Mr. P e c o r a . Did this hope and expectation, based more or less on the continuation of President Leguia’s health, life, and government, remove the bad-debt record which Peru had? Mr. S c h o e p p e r l e . I t certainly did not. M r. P e c o r a . Did it remove the adverse moral and political risk that Peru had been, between December, 1925, and February, 1927? Mr. S c h o e p p e r l e . I don’t think so. Mr. P e c o r a . Did it make the bad internal debt situation any better ? Mr. S c h o e p p e r l e . W ell, this program that we embarked on made the bad internal debt situation very much better; yes, sir. Mr. P e c o r a . But as it turned out, it has made it much worse, has it not? Mr. S c h o e p p e r l e . I b e g your pardon? Mr. P e c o r a . A s it turned out, it is much worse than it was even then, is it not? Mr. S c h o e p p e r l e . I c a n n o t g o a l o n g w i t h y o u o n t h a t . Mr. P e c o r a . Do you think it was better then than it is now, or do you think it was worse then than it is now ? Which is it ? Mr. S c h o e p p e r l e . I am simply saying this, that what was done in Peru improved the situation for the Peruvian Government very considerably. And the position in Peru now is bad and worse than it was when Leguia was president, because the present government is a revolutionary government. Mr. P e c o r a . Give us some definite data or official records or figures, will you, Mr. Schoepperle, which show the extent of im provement that you say took place? That is, between December, 1925, and February, 1927? Mr. S c h o e p p e r l e . I have already testified the basis on which I joined in the undertaking to do the tobacco loan under the leadership of Seligman. Mr. P e c o r a . W h y do you continue to say “ under the leadership of Seligm an” ? Were you following in their wake or were you parallel with them? Mr. S c h o e p p e r l e . W ell, unfortunately, in the case of the tobacco loan we were following in their wake; yes, sir. Mr. P e c o r a . Do you mean that you adopted their judgment in stead of your own independent judgment in participating the loan? Mr. S c h o e p p e r l e . N o ; I don’t mean that. I am referring to a technical term that is used in W a ll Street when we speak of the STOCK EXCHANGE P R A C T IC E S 2097 “ leadership of a house ” in a given piece of business. W e mean by that that they carry the negotiations. Mr. P e c o r a . But your company made itself fully cognizant of all the internal conditions in Peru before it participated, did it not? Mr. S c h o e p p e r le . That is true. You can see from our files that we have a great deal of information. Mr. P e c o r a . Y o u had a great deal of adverse information, didn’t you? Mr. S c h o e p p e r le . That is true. Mr. P e c o r a . Mr. Schoepperle, did you recommend to your com pany its participation in the flotation of the $50,000,000 loan in December, 1927? Mr. S c h o e p p e r le . I was in accord with the judgment of the in stitution on that point. Mr. P e c o r a . W hat institution do you mean now ? Mr. S c h o e p p e r le . The judgment of the officers of the National City Co. on that point. And their reasons------Mr. P e c o r a (interposing). Mr. Baker this morning apparently had no judgment. He said he followed yours. Now which is it? Mr. S c h o e p p e r le . W ell, I say this, that Mr. Baker had judgment all right, Mr. Baker------Mr. P e c o r a (interposing). He has apparently forgotten about it, Mr. Schoepperle, and he referred to your judgment as having influenced his. Mr. S c h o e p p e r le . I regret to say that, while his memory may have failed him on this point, he did, as well as the other officers of the company, sit in or at the officers’ meetings where this matter was dis cussed. Mr. P e c o r a . He said that much, but he also said that he was guided by the judgment of the experts, and he mentioned you as one o f them. You recall his testimony this forenoon to that effect, do you not? Mr. S c h o e p p e r le . Y es; I recall it perfectly. Mr. P e c o r a . Do y o u t h in k h e w a s m ista k e n w h e n h e s a id t h a t ? Mr. S c h o e p p e r le . No ; I d o n ’t t h in k h e w a s. Mr. P e c o r a . Then he was guided by your judgment, was he not? Mr. S c h o e p p e r le . I f you will permit, I have a little difficulty in my mind and I will tell you what it is. You have the record there showing that in April or May of this year I went down to Chile. Mr. P e c o r a . In April or May of 1927? Mr. S c h o e p p e r le . That is right. Mr. P e c o r a . Yes. Mr. S c h o e p p e r le . In April or May of 1927. Mr. P e c o r a . Yes. Were you back in December? Mr. S c h o e p p e r le . Yes, I was. Mr. P e c o r a . Then was your judgment consulted by the officers of your company with respect to your company’s participation in the $50,000,000 loan that month? Mr. S c h o e p p e r le . Yes, it was consulted. Mr. P e c o r a . And did you recommend participation in that loan? Mr. S c h o e p p e r le . Yes, I definitely went along in the decision to participate in that loan. Mr. P e c o r a . Y o u say you “ definitely went along.” Did you def initely recommend it and was it your recommendation that was 2098 STOCK EXCHANGE PRACTICES adopted and caused the officers of your company to participate in this loan? Mr. S c h o e p p e r le . I will answer that by saying that I recom mended that we go into that business; yes, sir. Mr. P e c o r a . When you made that recommendation, did you feel that you had fully acquainted yourself with the situation in Peru up to date? Mr. S c h o e p p e r le . I had visited Lima, the capital of Peru, on my way down to Chile. Mr. P e c o r a . I s that the answer to the question? M y question was, whether you felt that you had fully informed yourself con cerning conditions in Peru up to that time. Your answer was that you had gojie to Lima, Peru, in May or June of 1927. Mr. S c h o e p p e r le . Yes. I stopped in Lima, Peru. I had a talk with the President. I went over with him the project which he had in his mind, which has been previously related in my testimony. He informed me of his desire to effect a relationship with bankers that could carry out a constructive program for the reconstruction of Peru’s finances and her economic situation. H e related to me the experience that he had had in the investment of the proceeds of these five loans to which I have previously referred in various public works; the fact that the taxing revenues of Peru had been greatly increased, the taxing resources of Peru had been increased; that public works were a profitable investment from his point of view. He cited the progress they had made up to that time. He cited me the figures. I can not remember them exactly, but they were im pressive, as to what revenues had been expended upon the public works enterprises that had been up to that time completed. Mr. P e co r a . Did you bring back those figures with you? Mr. S ch o epper le . No. Mr. P e co ra . Y o u say they were very impressive? Mr. S c h o e p p e r le . I did not bring back any figures. But I was there with him and talked the situation over, and was very defi nitely convinced that we were embarked on a program, on a con structive program for Peru, which would, and did, consolidate the Peruvian national debt and reduced the total amount of interest charges which the Peruvian Government was then paying on these five issues of bonds which were redeemed out of the proceeds o f these issues which we made. Sixty-eight per cent o f the proceeds o f the loans which we made went to refund other outstanding external loans of Peru. Mr. P e c o r a . W ho held those loans? Mr. S c h o e p p e r le . Public held the loans. Mr. P e c o r a . W hat public ? Mr. S c h o e p p e r le . The investing public. Mr. P e co r a . The American public? Mr. S c h o e p p e r le . In the United States------Mr. P e c o r a (interposing). The American public? Mr. S c h o e p p e r le . Y es; for the most part. Mr. P e co r a . O r foreign investors? Mr. S c h o e p p e r le . W ell, both. Mr. P e c o r a . H o w much of them were held abroad ? Mr. S c h o e p p e r le . W ell, now, I am sorry to say that is for me a difficult question. There were certain investments abroad------ STOCK EXCHANGE PRACTICES 2099 Mr. P e c o r a . W hat were you doing, then— asking the American public to subscribe to a large bond issue, among other reasons, in order that bondholders of prior issues might be paid ? Mr. S c h o e p p e r l e . No. Mr. P e c o r a . That is what you are mentioning, are you not, as a circumstance ? Mr. S c h o e p p e r l e . N o ; that was not the objective in itself, that we were making a loan so that bondholders of prior issues should be paid. The objective in this program was to reconstruct the finances of Peru and to consolidate its external debt, which is exactly what we are going to do here in the United States some day with a fund ing operation. M r. P e c o r a . Let us confine ourselves to what was done in Peru and not what is going to be done here in the futu
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