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STOCK EXCHANGE PRACTICES
HEARINGS
BEFORE THE
COMMITTEE ON BANKING AND CUREENCY
UNITED STATES SENATE
SEVENTY-THIRD CONGRESS
FIRST SESSION
OK
S.Res. 84
(72d CONGRESS)
A RESOLUTION TO INVESTIGATE PRACTICES OF STOCK
EXCHANGES WITH RESPECT TO THE BUYING AND
SELLING AND THE BORROWING AND LENDING
OF LISTED SECURITIES
AND
S.Res. 56
(73d CONGRESS)
A RESOLUTION TO INVESTIGATE THE MATTER OF BANKING OPERATIONS AND PRACTICES, THE ISSUANCE
AND SALE OF SECURITIES, AND THE TRADING
THEREIN
PART 7
CHASE SECURITIES CORPORATION
(Continued)
NOVEMBER 14 TO NOVEMBER 22
Printed for the use of the Committee on Banking and Currency
175541
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1934
COMMITTEE ON BANKING AND CURRENCY
DUNCAN U. FLETCHER, Florida, Chairman
CARTER GLASS, Virginia
PETER NORBECK, South Dakota
ROBERT F. WAGNER, New York
PHILLIPS LED GOLDSBOROUGH, Maryla nd
ALBEN W. BARKLEY, Kentucky
JOHN G. TOWNSEND, JR., Delaware
ROBERT J. BULKLEY, Ohio
FREDERIC C. WALCOTT, Connecticut
THOMAS P. GORE, Oklahoma
ROBERT D. CAREY, Wyoming
EDWARD P. COSTIGAN, Colorado
JAMES COUZENS, Michigan
ROBERT R. REYNOLDS, North Carolina FREDERICK STEIWER, Oregon
JAMES F. BYRNES, South Carolina
HAMILTON F. KEAN, New Jersey
JOHN H. BANKHEAD, Alahama
WILLIAM GIBBS McADOO, California
ALVA B. ADAMS, Colorado
WILLIAM L. HILL, Clerk
R. H. SPARKMAN, Acting Clerk
SUBCOMMITTEE ON STOCK EXCHANGE PRACTICES
DUNCAN U. FLETCHER, Florida, Chairman
CARTER GLASS, Virginia
ALBEN W. BARKLEY, Kentucky *
EDWARD P. COSTIGAN, Colorado 2
1
PETER NORBECK, South Dakota«
JOHN G. TOWNSEND, JR., Delaware
JAMES COUZENS, Michigan
Alternate, Thomas P. Gore, Oklahoma.
Alternate, Alva B. Adams, Colorado.
8
Alternate, Phillips Lee Goldsborough, Maryland.
2
CONTENTS
Testimony of—
Aldrich, Winthrop Williams, president and chairman of the governing board of the Chase National Bank, New York City
Burns, Samuel R., Jersey City, N.J., president of the International
Projector Corporation
Clarke. Harley L., Chicago, 111
Page
3616
3364
3377,
3413,3447, 3494, 3622, 3647,375^-3818, 3822, 3852
Cutler, Bertram, Rockefeller financial adviser
3349
Cutten, Ruloff E., New York City
3217
Dodge, Murray W
3462,3482,3503,3541,3578.3617,3789
Fitzpatrick, William Samuel, vice chairman of the executive committee of the Consolidated Oil Co
3306, 3357
Sinclair, Harry F., Great Neck, Long Island, N.Y
3260, 3299,3362
Walker, Elisha, a member of the firm of Kuhn, Loeb & Co
3323,3341
EXHIBITS
(Italics indicate page on which exhibit was admitted into the record; roman type, exhibit
printed)
Pa?*
130. Agreement dated Oct. 25, 1928, between Arthur W. Cutten and Blair
& Co., Chase Securities Corporation, Shermar Corporation, and
Harry F. Sinclair
131. " H . L. Clarke, by O. E. Koegel, attorney in fact", to Pynchon &
Co., the Shermar Corporation, West & Co., U. S. Hammons &
Co., and Halsey, Stuart & Co., Inc., dated July 9, 1929
132. Minute book, Board of Directors General Theatres Equipment, Inc.,
July 1929, 8899
133. General Theatres Equipment, Inc., Debenture Purchase Agreement
between H. L. Clarke & Chase Securities Corporation, Pynchon
& Co., West & Co., W. S. Hammons & Co., Halsey, Stuart & Co.,
Inc., dated July 9, 1929
134 Mitchell Camera Corporation balance sheet as of Dec. 31, 1928
135. Summary Chase loans, 8484
i
136. Agreement by and between Grandeur, Inc., and International Projector Corporation, dated June 24, 1929, 8466
137. Contract made by and between Grandeur, Inc., as licensor and the
Fox Theatres Corporation as licensee, 8466—
138. Prospectus of $6,000,000 General Theatres Equipment, Inc., 15-year
6-percent convertible gold debenture, dated July 1, 1929, and to
become due July 1. 1944, 81,90
139. Letter addressed to J. E. McAuley, Esq., dated June 30, 1929, signed
by H. L. Clarke, 8Wf
140. Agreement dated Apr. 27, 1929, between Clarence S. Ashcraft and
Mary C. Ashcraft, his wife, and H. E. Van Dyne, 8494
141. Letter dated July 14, 1929, from H. L. Clarke to Harry H. Strong,
8495
,
142. Agreement between Theodore Hall & Joseph Connolly, sellers, and
J. E. McAuley, buyer, 8495
143. Agreement between H. F. Bogart & George A. Mitchell as sellers,
and H. L. Clarke, buyer, dated June 6, 1929, 8495
144. Memorandum by Mr. Dodge to Mr. Wiggin, under date of July 18,
1929
145. Circular headed " General Theatres Equipment, Inc., Common Stock,
Voting Trust Certificates'*, 8512
146. Letter referred to dated New York, July 29, 1929. and signed by
Pynchon & Co
*
(*) Not printed because of length, or for reasons given in text.
m
3251
3394
3401
3417
3433
3438
3496
3497
3499
3564
3565
3566
3567
3570
350S
(•)
3514
IV
CONTENTS
147. Memorandum addressed to Mr. Wiggin, under date of July 9, 1929,
by Mr. Dodge
148. Letter dated July 9, 1929, addressed to Pynchon & Co. and others,
and signed by Harley L. Clarke
149. Memorandum addressed to Mr. Wiggin, dated September 19, 1929
150. Letter dated October 14, 1929, to Harley L. Clarke, from Murray
W. Dodge
151. Letter dated September 10, 1929, from the members of the syndicate to H. L. Clarke
152. Paper headed " General Theatres Equipment", 8541
153. Memorandum, January 6, 1931, Mr. Dodge to Mr. Wiggin
154. Memorandum, dated April 16, 1930, irom Mr. Dodge to Mr. Wiggin155. Memorandum, dated January 7,1391, from Mr. Dodge to Mr. Wiggin_
156. Memorandum, December 2, 1929
157. Telegram dated April 8, 1930, to Harley L. Clarke
158. Memorandum dated April 8, 1930, headed " Excerpts from conversation with H. L. C."
159. Prospectus, Chase Securities Corporation, in re $30,000,000 General
Theatres Equipment debentures, 3590
160. Statement entitled " Thirty Million Dollar General Theatres Equipment, Inc., 10-Year 6-Percent Convertible Gold Debentures, dated
.April 1, 1930, due April 1, 1940", 8594
161. Telegram from Harley Clarke to Murray W. Dodge, dated April
22, 1930
162. Telegram from Mr. Clarke to Mr. Murray W. Dodge, dated April
22, 1930
163. Original group agreement between Pynchon & Co., Chase Securities
Corporation, West & Co., W. S. Hammons & Co., Pynchon & Co.,
for others, Eric & Drevers, dated April 18, 1930
164. Summary of Chase interests in Fox Film General Theatres Equipment, and related companies, 3617
165. Memorandum February 7, 1931, Dodge to Wiggin
166. Letter, dated November 22, 1933, to Ferdinand Pecora from
H. L. Clarke
(*) Not printed because of length, or for reasons given in text.
Page
3517
3518
3525
3528
3538
3575
3543
3545
3547
3559
3580
3582
(*)
3643
3599
3601
3604
3644
3618
3623
STOCK EXCHANGE PEACTICE8
TUESDAY, NOVEMBER 14, 1933
UNITED STATES SENATE.
SUBCOMMITTEE OF THE COMMITTEE
ON BANKING AND CURRENCY,
Washington, D.G.
The subcommittee met at 10 a.m., pursuant to adjournment on
Friday, November 10, 1933, in the caucus room of the Senate Office
Building, Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Gore (substitute for
Barkley), Couzens, Townsend, and Goldsborough (substitute for
Norbeck).
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver, David Saperstein, and David Schenker, associate counsel to the committee; and Frank J. Meehan, statistician to the
committee; Alfred E. Mudge, Joseph B. Lynch, Julian L. Hagen,
and C. Horace Tuttle of Eushmore, Bisbee & Stern, and also
William Dean Embree and A. Donald MacKinnon, of Milbank,
Tweed, Hope & Webb, counsel representing the Chase National Bank
and the Chase Corporation; Martin Conboy, counsel for Albert H.
Wiggin; Millard F. Tompkins, counsel for Euloff E. Cutten; G. T.
Stanford, general counsel of the Sinclair Consolidated Oil Corporation.
The CHAIRMAN. The subcommittee will come to order, please. Mr.
Pecora, who will you have first ?
Mr. PECORA. Mr. Ruloff E. Cutten.
The CHAIRMAN. Mr. Cutten, please come forward, 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 the committee, so help you God,
Mr. CUTTEN. I do.
TESTIMONY OF RULOFF E. CUTTEN, NEW YORK CITY
Mr. PECORA. Mr. Cutten, will you give your full name and address?
Mr. CUTTEN. Ruloff E. Cutten, 61 Broadway, New York City.
Mr. PECORA. What is your business or profession ?
Mr. CUTTEN. I am a broker.
Mr. PECORA.. A stock broker?
Mr. CUTTEN. A stock broker.
Mr. PECORA. Are you a member of any firm ?
Mr. CUTTEN. I am a member of E. F. Hutton & Co.
Mr. PECORA. Where is your office or place of business ?
Mr. CUTTEN. 61 Broadway, New York City.
Mr. PECORA. That is, that is their office or place of business ?
Mr. CUTTEN.
Yes.
3217
3218
STOCK EXCHANGE PRACTICES
Mr. PECORA. Does that firm or any member thereof hold any membership or memberships on the New York Stock Exchange?
Mr. CUTTEN. We hold two memberships.
Mr. PECORA. Are you one of the floor members of the firm?
Mr. CUTTEN. I am one of the members of the New York Stock
Exchange.
Senator GORE. When did you become a member of the New York
Stock Exchange ?
Mr. CUTTEN. In May of 1925.
Mr. PECORA. Mr. Cutten, do you
recall a trading account or syndicate that was formed on or about October 25, 1928, to trade in the
common stock of the Sinclair Consolidated Oil Corporation?
Mr. CUTTEN. I do.
Mr. PECORA. Did you
have anything to do with the organization of
that account or syndicate ?
Mr. CUTTEN. The formation of the group, do you mean ?
Mr. PECORA. Yes, sir.
Mr. CUTTEN. And the participants?
Mr. PECORA. And the participants.
Mr. CUTTEN. NO, sir.
Mr. PECORA. By the way, let me ask
you: As a member of the New
York Stock Exchange are you one of its specialists?
Mr. CUTTEN. I am
not.
Mr. PECORA. Have you ever been?
Mr. CUTTEN. I never have.
Mr. PECORA. Are you familiar with the terms and provisions of
the agreement under which that trading account was formed ?
Mr. CUTTEN. I think I am; yes, sir.
Mr. PECORA. Did you sign that agreement on behalf of Mr. Arthur
W. Cutten?
Mr. CUTTEN. I did.
Mr. PECORA. Are you
familiar also with another syndicate known
as a purchasing syndicate, of which Arthur W. Cutten was a participant, that was formed on or about October 24, 1928, to purchase
1,130,000 shares of the common capital stock of the Sinclair Consolidated Oil Corporation from that corporation?
Mr. CUTTEN. I am.
Mr. PECORA. Did you
Mr. CUTTEN. NO, sir.
Mr. PECORA. What, if
have anything to do with that transaction?
anything, did you have to do with the trading account or syndicate that was formed on October 25, 1928?
Mr. CUTTEN. I received some of the participants, helped to form
the group. Are you referring to the million-share trading account?
Mr. PECORA. Yes.
Mr. CUTTEN. The
Mr. PECORA. Yes.
Mr. CUTTEN. Yes,
Mr. PECORA. YOU
secondary account?
sir.
said you " received " some of the participants.
What did you hiean?
Mr. CUTTEN. I allotted some of the stock to various participants,
Mr. PECORA. Who invited those various participants, to whom you
made allotments, to come into the account ?
Mr. CUTTEN. I
did.
STOCK EXCHANGE PRACTICES
3219
Mr. PECORA. YOU were not a member of the account yourself, were
you?
Mr. CUTTEN. No, sir.
Mr. PECORA. What authority
had you to invite persons to become
participants in that account?
Mr. COTTEN. They wanted to spread the liability.
Mr. PECORA. When you say " they wanted to spread the liability ",
whom are you referring to?
Mr. CUTTEN. TO the manager or the managers.
Mr. PECORA. Who was the manager, or who were the managers?
Mr. CUTTEN. Mr. Arthur W. Cutten was manager.
Mr. PECORA. Are you related to Mr. Arthur W. Cutten ?
Mr. CUTTEN. I am his cousin.
Mr. PECORA. Where was Mr. Arthur W. Cutten's office or place of
business at that time?
Mr. CUTTEN. NO. 231 South La Salle Street.
Mr. PECORA. In Chicago?
Mr. CUTTEN. Yes.
Mr. PECORA. And your
office or place of business was in New York
City, being the office of E. F. Hutton & Co. ?
Mr. CUTTEN. That is right, at 61 Broadway.
Mr. PECORA. Did you invite participants in the exercise of your
own judgment or discretion, or did you do so in furtherance of instructions given to you by Mr. Arthur W. Cutten ?
Mr. CUTTEN. I discussed them with him and with Blair & Co.
Mr. PECORA. What part did Blair & Co. have in the formation of
the trading syndicate ?
Mr. CUTTEN. TO the extent of those that they invited in.
Mr. PECORA. Were they original participants? Were they members of the original group ?
Mr. CUTTEN. They were. In other words, each of the original
four invited some people into the trading account.
Mr. PECORA. Who were the original four?
Mr. CUTTEN. AS I knew them they were Mr. Arthur W. Cutten,
Mr. Harry F. Sinclair, Blair & Co., and the Chase.
Mr. PECORA. Chase Securities Corporation ?
Mr. CUTTEN. Yes; Chase Securities.
Mr. PECORA. Did each have a 25-percent interest in the original
syndicate ?
Mr. CUTTEN. Well, that is the way it was referred to at first, until
agreements were made up of three twelfths for three of them, and
two twelfths for Chase Securities, and one twelfth for the Shermar.
Mr. PECORA. NOW, there has been put in evidence here the agreement in the form of a letter addressed to Mr. Arthur W. Cutten by
the Sinclair Consolidated Oil Corporation, setting forth the terms
under which that corporation agreed to sell to Mr. Arthur W. Cutten
and Mr. Arthur W. Cutten agreed to purchase from the corporation
1,130,000 shares of the capital stock of the corporation, for the price
ot $30 per share. Are you familiar with that agreement ?
Mr. CUTTEN. I believe I am; yes, sir.
Mr. PECORA. When was that matter, that transaction, first discussed
with you by anybody?
Mr. CUTTEN. In October of 1928.
3220
STOCK EXCHANGE PRACTICES
Mr. PECORA. That is, at the time when the agreement was entered
into?
Mr. CUTTEN. Before.
Mr. PECORA. HOW long before the date of the agreement itself,
which was October 24 ?
Mr. CUTTEN. Perhaps 3 weeks, or perhaps 2 weeks.
Mr. PECORA. With whom did you discuss it then?
Mr. CUTTEN. With Mr. Harry Sinclair, Mr. Fred Bartlett, Mr.
Arthur Cutton, and myself, we were present at the meeting.
Mr. PECORA. Where was that conference held for the purpose of
that discussion ? Was it held in New York City or in Chicago ?
Mr. CUTTEN. In New York City.
Mr. PECORA. And at that time were the terms and conditions of
the transaction, as eventually entered into on October 24, discussed
by the parties?
Mr. CUTTEN. No,
sir.
Mr. PECORA. What discussion was had at the outset?
Mr. CUTTEN. Just for the sale of of 1,130,000 shares of the stock,
by Mr. Sinclair.
Mr. PECORA. What was said about it?
Mr. CUTTEN. Mr. Sinclair wished to sell that amount of stock at
$30 a share for the company and wished to form a group to purchase
the stock.
Mr. PECORA. What did you say?
Mr. CUTTEN. Mr. Sinclair wished to sell that amount of stock at
$30 a share for the company, and he wished to form a group to purchase the stock.
Mr. PECORA. Did Mr. Sinclair say he wished to form a group to
purchase the stock?
Mr. CUTTEN. NO ; but
Mr. PECORA (continuing).
Or did he ask your cousin, Mr. Arthur
W. Cutten, to form such a group ?
Mr. CUTTEN. He asked Mr. Arthur Cutten to form such a group,
or wanted to know if he would be interested to head such a group.
Mr. PECORA. What was said by Mr. Sinclair, if anything, concerning the reason or reasons why he, on behalf of his corporation,
wanted to sell 1,130,000 shares to a group to be formed?
Mr. CUTTEN. TO raise additional working capital.
Mr. PECORA. For the corporation?
Mr. CUTTEN. For the corporation; yes, sir.
Mr. PECORA. Was there any discussion as to offering that stock
first to the then stockholders of record of the corporation?
Mr. CUTTEN. I do not think so.
Mr. PECORA. Did anyone suggest that that should be done ?
Mr. CUTTEN. I do not think so.
Mr. PECORA. Did Mr. Sinclair give any reason why he wanted
the stock sold on private terms or at private sale rather than in the
open market or to the stockholders of record?
Mr. CUTTEN. I don't think he did.
Mr. PECORA. Was that discussed in any way at all?* Was the question raised by anyone as to why the stock was not being disposed of
in that manner? That is, either by sale to the stockholders, by an
offer to the stockholders of record, or in the open market, rather
than at private sale?
STOCK EXCHANGE PRACTICES
3221
Mr. CUTTEN. Well, I believe he felt that the stockholders would
not subscribe for the stock at $30 a share, which at that time was
two points higher than the market. The element of time always
enters into that, because it takes 60 or 90 days before the company
would know whether the stockholders would exercise their rights to
subscribe to the stock. That is, you have to give the stockholders at
least 30 days, have to take a record of those that are stockholders
of the company, and then you send out warrants to them, and they
have at least 30 days, and sometimes longer, to exercise their rights
to subscribe to the stock. And I believe that the time element was
too long in that particular case.
Mr. PECORA. Was that advanced as a reason by anyone at that
conference why the offer of the stock was not made directly to the
stockholders?
Mr. CUTTEN. I do not think so.
Mr. PECORA. What makes you say, then, that that was the reason
why this stock was not disposed of by direct offer to the existing
stockholders ?
Mr. CUTTEN. That is only my personal reason, or
Mr. PECORA (interposing). As a matter of fact, don't you know
that the initial conferences with regard to the sale, or the proposition
to sell 1,130,000 shares were held in August of 1928, according to
testimony given before this subcommittee by Arthur W. Cutten?
Mr. CUTTEN. I know that they were held prior to the meeting
I attended. But I did not know that this was discussed until I returned from Europe, in October.
Mr. PECORA. SO the introduction of the subject was on the occasion
of this conference that you are telling us about, which was held
about 3 weeks prior to October 24?
Mr. CUTTEN. Exactly.
Mr. PECORA. DO you know what the market price for the stock
then was on the New York Stock Exchange ?
Mr. CUTTEN. Twenty-eight.
Mr. PECORA. Did you say 28 ?
Mr. CUTTEN. Yes, sir; 28 exactly
on the dav of the meeting,
or 28%.
Mr. PECORA. Did Mr. Sinclair indicate what the present need, if
any, was for haste in disposing of 1,130,000 shares of stock?
Mr. CUTTEN. None whatsoever.
Mr. PECORA. What was said by any of those present at that conference that you attended early in October, concerning the value of
the stock?
Mr. CUTTEN. I don't remember.
Mr. PECORA. Well, you do remember that the market quotation for
the stock at that time was 28, and that Mr. Sinclair stated that the
company would sell those 1,130,000 shares for $30 per share. So
that there must have been something said about the question of the
value of the stock.
Mr. CUTTEN. Well, if I recall it correctly, I believe Mr. Arthur
Cutten thought it was too high.
Mr. PECORA. Yes.
Mr. CUTTEN. And
Mr. Sinclair said
3222
STOCK EXCHANGE PRACTICES
Mr. PECORA (interposing). When he expressed himself to that
effect, what did Mr. Sinclair say ?
Mr. CUTTEN. He said he would not take less than $30 per share
for the stock.
Mr. PECORA. Did he say anything which was by way of justification for the price of $30 per share for the stock?
Mr. CUTTEN. He may have mentioned the oil industry as a whole,
and the increased earnings of the Consolidated Co.—the Sinclair
Co., I mean.
Senator COUZENS. When that conference was going on, did you
have any financial statement?
Mr. CUTTEN. Of the company, do you mean?
Senator COUZENS. Yes.
Mr. CUTTTEN. Not while the conference was in session; no, sir.
Senator COUZENS. When did you first see a financial statement of
the Sinclair Consolidated Oil Corporation ?
Mr. CUTTEN. After the conference, do you mean ?
Senator COUZENS. Yes.
Mr. CUTTEN. Immediately afterward.
Senator COUZENS. And what did it indicate the stock was worth,
by analysis of the statement?
Mr. CUTTEN. I believe it showed a book value as of the end of
1927 of fifty-some dollars a share.
Senator COUZENS. And how did you account for this stock selling
for 28 or 28*4 when the book value showed $50 plus per share ?
Mr. CUTTEN. I cannot account for that s sir.
The CHAIRMAN. Did you form any independent judgment as to
the real value of the stock, or did you just take Mr. Sinclair's arbitrary fixing of a value at $30 a share?
Mr. CUTTEN. NO, sir. I had my statistical department, or I mean
the statistical department of E. F. Hutton & Co., give me some figures on it. And I looked up Standard Statistics, Moody's, and various services that we have, and tried to form my own opinion, tried
to form my own judgment.
Senator COUZENS. Have you here with you a statement as of the
end of 1927 for the Sinclair Consolidated Oil Corporation, that you
have just referred to ?
Mr. CUTTEN. I believe we have.
Mr. TOMPKINS. I think we have, Senator.
Senator COUZENS. I should like to look at it, if you have it. And
you need not wait for me, Mr. Pecora.
Mr. TOMPKINS. I will try to furnish it to you, Senator Couzens,
as soon as I can find it here among my papers.
Senator COUZENS. All right.
Mr. PECORA. Mr. Cutten, were there any other conferences attended
by you, held between this one that you have testified about, and
October 24, 1928?
Mr. CUTTEN. There were.
Mr. PECORA. HOW many such other conferences did you attend in
that period?
Mr. CUTTEN. Perhaps half a dozen.
Mr. PECORA. What was the substance of the conversation or discussion with relation to this transaction at those half dozen conferences?
STOCK EXCHANGE PEACTICES
3223
Mr. CUTTEN. Still trying to get together on a price.
Mr. PECORA. Well, did Mr. Arthur W. Cutten remonstrate against
a price of $30 per share which was asked ?
Mr. CUTTEN. Only, as I recall, at the original conference that I
attended.
Mr. PECORA. Well, you said there were about half a dozen other
conferences. Now, in those about half a dozen other conferences,
the discussion had to do with the price ?
Mr. CUTTEN. And who would come in the group if the price was
determined; if it was determined to accept the offer of $30 per share.
Mr. PECORA. Were there any negotiations in those conferences
between Arthur W. Cutten on the one hand and Harry F. Sinclair
on the other, on the matter of price ?
Mr. CUTTEN. Not that I recall. I believe Mr. Cutten was in
Chicago.
Mr. PECORA. Well, did he attend those half dozen other conferences ?
Mr. CUTTEN. NO, sir.
Mr. PECORA. Did you attend them in his behalf ?
Mr. CUTTEN. I did.
Mr. PECORA. And represented
Mr. CUTTEN. I did.
Mr. PECORA. Did you have
his views at those conferences?
any advices from Mr. Arthur W.
Cutten that governed you in those conferences with regard to the
price he was willing to pay?
Mr. CUTTEN. I believe I did.
Mr. PECORA. And what was the nature of them ?
Mr. CUTTEN. If I recall, on the various telephone conversations
that I made to him, as I would do each and every day, he still believed that the price was too high.
Mr. PECORA. Well, what representations did you make along those
lines to Mr. Sinclair at those half dozen other conferences ?
Mr. CUTTEN. I told him so.
Mr. PECORA. Well, what representations did he make to justify
the $30 price?
Mr. CUTTEN. I believe all he said was that that was the lowest
price he would take for the shares.
Mr. PECORA. And finally you received instructions from your
cousin, Arthur W. Cutten, to close the transaction at $30 per share?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. Well, now,
in those half dozen other conferences that
you have referred to, what was said concerning the formation of a
purchasing group ?
Mr. CUTTEN. Mr. Sinclair said that he would take a certain participation, and Blair & Co. said they would take a certain participation, and Chase Securities said they would take a certain participation.
Mr. PECORA. Who represented Chase Securities Corporation in
those conferences?
Mr. CUTTEN. Mr. Callahan.
Mr. PECORA. He was then president or vice president of it ?
Mr. CUTTEN. I believe vice president.
Mr. PECORA. He is now dead, isn't he?
Mr. CUTTEN. Yes,
sir.
3224
STOCK EXCHANGE PEACTICES
Mr. PECORA. And who represented Blair & Co. in those conferences?
Mr. CUTTEN. Mr. Elisha Walker.
Mr. PECORA. He was the president of Blair & Co. ?
Mr. CUTTEN. He was the president.
Mr. PECORA. And Mr. Sinclair represented himself ?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. Were there any attorneys present at those conferences ?
Mr. CUTTEN. Perhaps at the final one, where the syndicate agree-
ment was drawn up. I doubt if there were before that.
Mr. PECORA. DO you know who invited Chase Securities Corporation to become a participant in this purchasing group ?
Mr. CUTTEN. I do not.
Mr. PECORA. DO you know
who invited Blair & Co. to become a
participant ?
Mr. CUTTEN. No; I do not.
Mr, PECORA. DO you know upon
whose suggestion they were made
participants ?
Mr. CUTTEN. N O ; I do not.
Mr. PECORA. DO you recall
that in your testimony here you said
that at the first conference you think you had with Mr. Sinclair
early in October, at which your cousin was present also, Mr. Sinclair said something to the effect that he would assist or would form
a purchasing group, and that he wanted Mr. Arthur W. Cutten to
be a participant? Dou you recall that statement?
Mr. CUTTEN. Yes,
sir.
Mr. PECORA. At that time did Mr. Sinclair indicate whom he
would invite to become members of the purchasing group?
Mr. CUTTEN. I do not recall that he did; no, sir.
Mr. PECORA. Well, when for the first time did you hear of the
Chase Securities Corporation becoming a member of the purchasing
group ?
Mr. CUTTEN. At the first meeting that I attended when they were
present, when the officer of the corporation was present.
Mr. PECORA. I S that true also with respect to Blair & Co.'s
participation ?
Mr. CUTTEN. It was.
Mr. PECORA. NOW, what
was said concerning the terms of payment that was to be made for the 1,130,000 shares by this purchasing group?
Mr. CUTTEN. The purchasing group, as I understand it, were to
have 30 days1 grace, and then upon written notice from the treasurer
of the Sinclair Consolidated Oil Corporation, they were to have 30
days more before they had to take up any of the shares, and from
November 24 they would pay the Sinclair Consolidated Oil Corporation 6 percent interest on the amount that they had not taken up.
Mr. PECORA. But they were not to make any payments for another
30 days thereafter ?
Mr. CUTTEN. They were not to make any payment from October
24 to November 24.
Senator COUZENS. And thereafter were to pay 6 percent ?
Mr. CUTTEN. And from then on were to pay 6 percent interest on
the debit balance.
STOCK EXCHANGE PRACTICES
3225
The CHAIRMAN. What was the course of the market Xrom the 24th
of October on ?
Mr. CUTTEN. Up.
Mr. PECORA. DO you know why there was a delay from the first
conference that you attended early in October until October 24 before your cousin made a firm commitment to buy the 1,130,000 shares
at $30 per share ?
Mr. CUTTEN. Well, it was under discussion, as I say, in any number of conferences which I undoubtedly attended, at least half a
dozen.
Mr. PECORA. But there was no firm commitment made to buy until
October 24, 1928, was there?
Mr. CUTTEN. Not until the papers were signed.
Mr. PECORA. Well, that was October 24, 1928; is that right?
Mr. CUTTEN. Yes; but I think it was understood that the purchase
would be made, perhaps 2 or 3, or even 4 days prior to that. The
papers had to be drawn up.
Mr. PECORA. Well, 2 or 3 or 4 days prior the parties agreed
informally ?
Mr. CUTTEN. Informally, correct.
Mr. PECORA. But the firm commitment was not made until
October 24?
Mr. CUTTEN. That is correct.
Mr. PECORA. Why was there a delay of about 3 weeks before
making the firm commitment to buy at $30 a share ?
Mr. CUTTEN. I am sure I don't know.
Mr. PECORA. NOW, meanwhile, during that interval of 3 weeks'
time, what was the course of the market with regard to that stock ?
Mr. CUTTEN. I believe it fluctuated from 28 to about 31 and a
fraction, or 32, and then back to 29 and up to 30.
Mr. PECORA. DO you know what it was on October 24?
Mr. CUTTEN. The closing on October 24 was 35%.
Mr. PECORA. What was it 4 days before that?
Mr. CUTTEN. Thirty.
Mr. PECORA. NOW, when that agreement of October 24 was entered
into by the Sinclair Consolidated Oil Corporation, on the one hand,
and Arthur W. Cutten, on the other, the form of the commitment
was for Arthur W. Cutten individually to buy the 1,130,000 shares
for $30 a share, wasn't it?
Mr. CUTTEN. That is right.
Mr. PECORA. But it was clearly understood among the participants
at conferences that had been held prior to October 24, that Mr.
Arthur
W. Cutten was making that commitment actually in behalf
o#f a purchasing group that was composed of himself, Harry F.
Sinclair, Blair & Co., and Chase Securities Corporation?
Mr. CUTTEN. Quite right.
Mr. PECORA. DO you know why the agreement was made by the
Sinclair Consolidated
Oil Corporation with Mr. Cutten individually
and not with all1 the four members of that purchasing group ?
Mr. CUTTEN. I do not.
Mr. PECORA. What discussion
was had at any of the conferences
prior to the making of that agreement on October 24, that led to the
3226
STOCK EXCHANGE PRACTICES
decision that the purchase agreement was to be made only with Mr.
Arthur W. Cutten as the purchaser ?
Mr. CXJTTEN. None that I can remember.
Mr. PECORA. NOW, you said before that you thought attorneys were
present at the time when the agreement was actually entered into on
October 24.
Mr. CUTTEN. Yes, sir.
Mr. PECORA. DO you recall
who those attorneys were, and whom
they represented respectively ?
Mr. CUTTEN. I think Mr. Moore was present.
Mr. PECORA. [Representing whom?
Mr. CUTTEN. Representing the firm of Cravath and
Mr. PECORA (interposing). He represented the firm of Cravath,
de Gersdorff, Swaine & Wood?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. Whom did they represent in the transaction?
Mr. CUTTEN. I do not know" whose counsel they were.
Mr. PECORA. Did thejr represent Arthur W. Cutten ?
Mr. CUTTEN. They did not.
Mr. PECORA. Did they represent Mr. Sinclair?
Mr. CUTTEN. I could not tell you.
Mr. PECORA. Did they represent Blair & Co.?
Mr. CUTTEN. I do not know.
Mr. PECORA. Did they represent Chase Securities Corporation?
Mr. CUTTEN. I do not know.
Mr. PECORA. Who prepared the agreement of October 24, 1928,
if
you know?
Mr. CUTTEN. I do not know.
Mr. PECORA. Were you present when it was signed?
Mr. CUTTEN. I was.
Mr. PECORA. Where was it signed?
Mr. CUTTEN. I believe in Mr. Sinclair's office.
Mr. PECORA. In New York?
Mr. CUTTEN. In New York; yes, sir. .
Mr. PECORA. That was the office of the Sinclair
Consolidated Oil
Corporation, was it ?
Mr. CUTTEN. That was what I meant, yes.
Mr. PECORA. Had you had any transactions prior to that date with
the Sinclair Consolidated Oil Corporation?
Mr. CUTTEN. I had not.
Mr. PECORA. Or with Mr. Sinclair individually?
Mr. CUTTEN. Transactions?
Mr. PECORA. Any kind of business transaction, yes.
Mr. CUTTEN. I had not.
Mr. PECORA. Were you an officer or director of the
Sinclair Con-
solidated Oil Corporation at that time ?
Mr. CUTTEN. I was not.
Mr. PECORA. Was your cousin, Arthur W.
Mr. CUTTEN. He was not.
Mr. PECORA. YOU knew Mr. Sinclair was
didn't you?
Mr. CUTTEN. I
did.
Cutten?
chairman of the board,
'
STOCK EXCHANGE PEACTICES
3227
Mr. PECORA. That fact developed and was made known to the
participants at those conferences, wasn't it?
Mr. CUTTEN. I t was.
Mr. PECORA. DO you
know whether a meeting of the board of
directors of the Sinclair Consolidated Oil Corporation was held on
that same day, namely, October 24, 1928, at the office of the corporation?
Mr. CUTTEN. I believe it was.
Mr. PECORA. Were you in the office, although not present at the
meeting of the board, at a time when that meeting was held?
Mr. CUTTEN. I do not think so.
Mr. PECORA. Well, had Mr. Sinclair said anything to you about
his ability to have that agreement approved by the board of directors,
I mean the agreement of October 24i
Mr. CUTTEN. He had not.
Mr. PECORA. Had anything
been said about obtaining the approval
of the board of directors of the Sinclair Consolidated Oil Corporation to the transaction?
Mr. CUTTEN. Not that I recall.
Mr. PECORA. Mr. Cutten, here was the corporation itself, making
this agreement to sell to Arthur W. Cutten these 1,130,000 shares at
$30 a share. You were attending half a dozen or more conferences
relating to that transaction before the transaction was consummated
by the agreement of October 24. Do you mean to say that at no
time was anything said by anybody in those conferences concerning the obtaining of the approval, or ratification of the transaction,
by the board of directors of the oil corporation?
Mr. CUTTEN. Not that I know of.
Mr. PECORA. Nobody never discussed that at all?
Mr. CUTTEN. Not that I know of.
Mr. PECORA. Did everyone take it for granted, then, that that
approval would be forthcoming without any question?
Mr. CUTTEN. NO ; it may have been disapproved.
Mr. PECORA. What was said about it at any time in these
conferences ?
Mr. CUTTEN. I do not not believe it was ever mentioned.
Mr. PECORA. YOU mean to say that your cousin and the other participants who, it was understood before October 24, were to become
members of the purchasing group, went ahead and entered into all
these negotiations, culminating in the making of a firm agreement,
without discussing the question of whether or not the corporation's
board of directors would approve or ratify the transaction?
Mr. CUTTEN. I believe that is right.
Mr. PECORA. Then, it must have been assumed by everybody that
the corporation's board would ratify it. That is a fair inference, is
it not?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. Without a word being said by anybody about it.
Mr. CUTTEN. Well, I do not recall that anything was said by any-
one.
Mr. PECORA. Did you, as a member of the stock exchange, execute
any orders relating to the buying or selling of the common stock
3228
STOCK EXCHANGE PRACTICES
of the Sinclair Consolidated Oil Corporation between the time of
the first conference which you attended early in October, and
October 24?
Mr. CUTTEN. I may have, for the customers of my firm.
Mr. PECORA. DO you recall whether the public trading in that
stock was at all active prior to the time that you had this first conference in the early part of October ?
Mr. CUTTEN. I believe it was.
Mr. PECORA. DO you recall whether it became more active after
you had that first conference?
Mr. CUTTEN. I believe it did. I would like to consult the records
as to the volume.
Senator GORE. I wish you would find the fluctuations on October
24 while you are looking at it.
Mr. TOMPKINS. I have a chart here, Senator, that Mr. Pecora
might like to put in the record, of the prices of Sinclair oil from
October 1 down to the time the syndicate was closed, and also the
prices of five other representative oil stocks, and it is surprising to
see how they more or less moved together.
Mr. PECORA. That is generally true, is it not, in an industry?
Mr. TOMPKINS. Yes.
Mr. PECORA. When the
stock of one particular concern in an industry moves with any degree of activity the stock of similar corporations in the same industry moves in sympathy with it.
Mr. TOMPKINS. That is generally so.
Mr. PECORA. SO that any excitation of trading in one of those securities would have its reflection in the trading in similar securities,
would it not?
Mr. TOMPKINS. I t might have; yes, Mr. Pecora.
Mr. PECORA. YOU know that is a fact, do you not, Mr. Cutten?
Mr. CUTTEN. That is so. On October 16 there were 128,000 shares
of Sinclair traded in. On the 17th there were 113,000 shares traded
in. Then it fell to 39,000 shares, 31,000, 25,000, and 33,000. On
October 23 there were 136,000. On October 24, from a low of 32
to a high of 35%, there were 500,700 shares traded in.
Mr. PECORA. DO you recall that day's transactions?
Mr. CUTTEN. I do not recall it; no, sir.
Mr. PECORA. DO you know of any other day prior to that time
when the trading in that common stock reached as high as 500,000
shares in a day's time?
Mr. CUTTEN. It may have. I will have to look back over the
records.
Senator GORE. HOW much was the next day?
Mr. CUTTEN. The next day there were 493,000 shares traded in.
The following day 178,000 shares traded in; then 70,000 shares
traded in.
Mr. PECORA. I want you to concentrate your recollection on October 24,1928, on the occasion of the signing of the agreement between
the Sinclair company and Arthur W. Cutten. You say that took
place at the office of the Sinclair company in New York?
Mr. CUTTEN. TO the best of my knowledge it did.
Mr. PECORA. YOU were present?
Mr. CUTTEN. I was present.
STOCK EXCHANGE PRACTICES
3229
Mr. PECORA. HOW long did the conference last that day before the
agreement was actually signed ?
Mr. CUTTEN. I could not tell.
Mr. PECORA. Was it in the forenoon or in the afternoon that it was
signed?
Mr. CUTTEN. TO the best of my recollection it was in the afternoon,
after 3 o'clock.
Mr. PECORA. After the market closed, or before ?
Mr. CUTTEN. I do not know positively. I could not say.
Mr. PECORA. Was Mr. Sinclair in and out of the room where
the conference was being held, at which the agreement was actually
signed ?
Mr. CUTTEN. Not that I remember; no.
Mr. PECORA. Was he present throughout the conference?
Mr. CUTTEN. I believe he was.
Mr. PECORA. DO you recall, at that conference, anything being
said by anyone whomsoever about the board of directors of the oil
corporation ratifying or approving the agreement?
Mr. CUTTEN. I do not think so.
Mr. PECORA. When was delivery of the 1,130,000 shares of the
stock made by the oil corporation?
Mr. CUTTEN. Five hundred thousand shares December 24, for
$15,000,000; 630,000 shares on December 31, for $18,900,000.
Mr. PECORA. Five hundred thousand shares on what date, did you
say—December 24 ?
Mr. CUTTEN. The 27th, it shows here. I thought it was the
24th—for $15,000,000. On December 31, 630,000 shares for
$18,900,000.
Mr. PECORA. Meanwhile the trading syndicate that you referred
to in the early part of your testimony as having been formed at
about the same time, or the following day, had some very active
market operations in the stock, had it not ?
Mr. CUTTEN. Up to and including the 31st of December, do you
mean?
Mr. PECORA. Up to the 27th of December, the date when delivery
was first made of any of the shares.
Mr. CUTTEN (after conferring with an associate). I t appears as
though they purchased two hundred thousand odd shares, and sold
two hundred thousand odd shares.
Mr. PECORA. That is, the trading syndicate ?
Mr. CUTTEN. The trading syndicate.
Mr. PECORA. Between October 25 and December 27?
Mr. CUTTEN. Between November 5 and December 21.
Mr. PECORA. Did not the trading syndicate have any trades in the
stock prior to November 5 ?
Mr. CUTTEN. The trading account did not. The initial transactions took place on November 5, 50,900 shares purchased.
Mr. PECORA. When was there for the first time, to your knowledge,
any discussion about the formation of a trading account?
Mr. CUTTEN. Simultaneously with the formation of the syndicate
account.
Mr. PECORA. That is, at all the times during which negotiations or
conferences were being held with relation to the purchase from the
175541—34—PT 7
2
3230
STOCK EXCHANGE PKACTICES
oil corporation of the 1,130,000 shares, discussion was also had by
the parties to those conferences about the formation of the trading
account?
Mr. CUTTEN. No, sir.
Mr. PECORA. When was the first discussion or conference about the
formation of a trading account?
Mr. CUTTEN. When the decision was reached to buy the 1,130,000
shares.
Mr. PECORA. YOU said that decision was informally reached about
3 or 4 days prior to October 24.
Mr. CUTTEN. Yes.
Mr. PECORA. Who
took part in the conferences with respect to the
formation of the trading account?
Mr. CUTTEN. I believe the same that were at the other conferences.
Mr. PECORA. That is, you and Mr. Sinclair
Mr. CUTTEN. Yes.
Mr. PECORA. The representatives of Blair & Co. ?
Mr. CUTTEN. Yes.
Mr. PECORA. The
representatives of the Chase Securities Cor-
poration ?
Mr. CUTTEN. Yes.
Mr. PECORA. Anyone else, or the representatives of anyone else?
Mr. CUTTEN. NO.
Mr. PECORA. When did the Shermar Corporation come into the
negotiations, either in connection with the formation of the purchasing group, or the formation of the trading account?
Mr. CUTTEN. I do not remember that.
Mr. PECORA. Who represented the Shermar Corporation at any
of those conferences ?
Mr. CUTTEN. I do not recall that anyone did.
Mr. PECORA. What is that?
Mr. CUTTEN. I do not recall that anyone did,
Mr. PECORA. Who indicated that the Shermar Corporation would
become a participant in the purchasing group? Was it Mr.
Callahan?
Mr. CUTTEN. I could not swear to it.
Mr. PECORA. But at no time was there a representative of the Shermar Corporation in any of the conferences ?
Mr. CUTTEN. Not to the best of my knowledge and belief.
Mr. PECORA. Did you know what kind of corporation the Shermar Corporation was at that time ?
Mr. CUTTEN. I had an idea; yes, sir.
Mr. PECORA. What was your idea ?
Mr. CUTTEN. That it was Mr. Wiggin's holding company.
Mr. PECORA. Was it something more than an idea that you had
along those lines?
Mr. CUTTEN. NO, sir.
Mr. PECORA. Had you heard
Mr. CUTTEN. Probably so.
Mr. PECORA. And had heard
to Mr. Wiggin ?
Mr. CUTTEN. Yes,
sir.
of it prior to these conferences?
of it as a private company belonging
STOCK EXCHANGE PRACTICES
3231
Mr. PECORA. YOU had never had any business transactions with it
before, had you?
Mr. CUTTEN. No, sir.
Mr. PECORA. HOW do
you account for the fact, Mr. Cutten, that
through all these conferences relating to the formation of the purchasing group, no one was present representing or speaking for the
Shermar Corporation.
Mr. CUTTEN. I cannot account for that.
Mr. PECORA. Who first indicated that the Shermar Corporation
was going to be a participant in the purchasing group ?
Mr. CUTTEN. I do not recall who it was that first indicated it.
Mr. PECORA. Then, it became a participant without any representative attending any of the conferences which led to the formation of the purchasing group, so far as you know?
Mr. CUTTEN. SO far as I Know, yes, sir.
Mr. PECORA. And is the same true with regard to the formation
of the trading account?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. Who indicated,
at these conferences, the extent of the
participation that the Shermar Corporation would take in the purchasing group ?
Mr. CUTTEN. I do not know that anyone did, sir.
Mr. PECORA. NOW, at any time up to the 27th of December 1928,
when the first delivery of any of this stock was made to the purchasing group—the delivery, you said, amounting to 500,000 shares,
for $15,000,000—was anything said about how that purchase was to
be financed?
Mr. CUTTEN. NO, sir.
Mr. PECORA. Well, when the $15,000,000 was paid on December
27,1928, do you know who paid it?
Mr. CUTTEN. E. F. Hutton & Co., my firm.
Mr. PECORA. From whom did E. F. Hutton & Co. obtain the money
with which to make such payment ?
Mr. CUTTEN. From the syndicate account.
Mr. PECORA. DO you know where the syndicate account got it?
Mr. CUTTEN. The syndicate account at that time had sold, on
balance, I believe, a couple of hundred thousand shares of stock,
about 200,000 shares of stock on balance, which represented a profit
on the 200,000 shares that had been sold.
Mr. PECORA. Of how much?
Mr. CUTTEN. What do you mean, " of how much "?
Mr. PECORA. Which represented a profit of how much?
Mr. CUTTEN. On the 200,000 shares that were sold.
Mr. PECORA. HOW much profit was realized on the sale of those
200,000 shares?
Mr. CUTTEN. Perhaps a little less than $2,000,000.
Mr. PECORA. That is about a 10-point profit,
Mr. CUTTEN. About a 10-point profit; perhaps less.
Mr. PECORA. That profit had been realized by sales in the open
market through the exchange?
Mr. CUTTEN. The 200,000 shares of stock, and the other 300,000
shares that were received in—the whole 500,000 shares were received
3232
STOCK EXCHANGE PRACTICES
at 30, so there was really a 25 percent margin on the balance of the
stock that the syndicate was long. The participants of the original
syndicate did not have to be called upon for margin to finance the
transaction for that reason.
Mr. PECORA. Was that in accordance with the original terms under
which the sale of the 1,130,000 shares was made to Arthur W.
Cutten?
Mr. CUTTEN. The receiving in of the stock in accordance with the
terms ?
Mr. PECORA. Payment of the stock in that fashion.
Mr. CUTTEN. Yes. We paid for the stock on the 27th, and paid
them interest at 6 percent from the 24th of November up to and
including the 27th of December.
Mr. PECORA. Meanwhile, where did the syndicate get the 200,000
shares from which it had sold ?
Mr. CUTTEN. Borrowed it.
Mr. PECORA. From whom?
Mr. CUTTEN. Various brokers.
Mr. PECORA. Then it was selling short.
Mr. CUTTEN. They were; to make delivery the following day to
people who had purchased the shares from them.
Mr. PECORA. DO you know why it was done in that fashion ?
Mr. CUTTEN. I do not.
Mr. PECORA. NOW, with
regard to the formation of the trading
account
Senator GORE. May I ask a question right there?
Mr. PECORA. Certainly.
Senator GORE. This syndicate agreement was signed on October
24, 1928; is that right?
Mr. CUTTEN. That is correct, sir.
Senator GORE. And it involved 1,130,000 shares?
Mr. CUTTEN. That is correct, sir.
Senator GORE. The price was $30?
Mr. CUTTEN. That is correct.
Senator GORE. The stock opened that day at 32; is that right ?
Mr. CUTTEN. That is correct.
Senator GORE. It closed that afternoon at 35%, did it not?
Mr. CUTTEN. That is right, or 35%.
Senator GORE. The value of that stock on the market at the close
that day, on 1,130,000 shares, was $6,000,000 more than they agreed to
pay for it that day, was it not, stipulated in the contract signed that
day to be paid ?
Mr. CUTTEN. Yes, sir.
Senator GORE. That was
a profit for each of the four participants
of $1,500,000 on the day the transaction was consummated.
Mr. CUTTEN. Based upon the closing price; yes, sir. But probably in the forenoon the directors had agreed to sell the stock. I
believe the directors' meetings were always held in the morning, at
11 or 11:30 in the morning. There was no telling whether the stock
would close at 35% that night, at 3 o'clock, or whether it would
close at 29%.
Senator GORE. I understand that. They had good luck.
Mr. PECORA. YOU say probably the directors' meeting of the Sinclair Consolidated Oil Corporation was held in the forenoon.
STOCK EXCHANGE PRACTICES
3233
Mr. CUTTEN. That is a matter of record, sir. You can find out.
Mr. PECORA. YOU just made the observation yourself, in answer to
Senator Gore's last question, that probably the board of directors'
meeting was held at 11 o'clock that morning.
Mr. CUTTEN. Yes, sir.
Senator COUZENS. YOU
had previously testified that you thought
it was concluded after the market had closed on that day.
Mr. CUTTEN. I meant the signing of the agreement.
Mr. PECORA. NO ; I asked you at that time about the meeting of
the board of directors.
Mr. CUTTEN. I did not understand your question. I am sorry.
Mr. PECORA. I asked you also at that time whether anything at
all was said at the conference at which the agreement of October 24
was signed, about any ratification by the board of directors of the
oil corporation, and you said nothing was said.
Mr. CUTTEN. I said I did not recall.
Mr. PECORA. Or that you could not recall. What was the opening
price on October 25, 1928?
Mr. CUTTEN. October 25? I do not know. I haven't it here. I
have the high and the low, and the close.
Mr. PECORA. What was the range on October 25 ?
Mr. CUTTEN. 35% low, 37% high, 363^ close.
Mr. PECORA. HOW many shares were traded in that day, October 25 ?
Mr. CUTTEN. 493,200.
Mr. PECORA. That compares with trading of upwards of 500,000
shares the preceding day.
Mr. CUTTEN. That is correct.
Mr. PECORA. What was said concerning the purposes for which
this trading account was to be formed, at the time it was first
discussed ?
Mr. CUTTEN. I t was to help maintain a market. If
Mr. PECORA. What do you understand by that term?
Mr. CUTTEN. TO be able to purchase shares when necessary if the
market should start to decline. In other words, if the syndicate ac-,
count had been unable to dispose of any shares in the open market,
the original agreement was so written that the syndicate account
could not have purchased 100 shares of stock. They were limited to
a commitment of 1,130,000 shares of stock, which they had made a
firm purchase on.
Senator GORE. HOW many shares w^re outstanding at that time ?
Mr. CCJTTEN. Four million some hundred thousand.
Senator GORE. And they were handling about a fourth of all?
Mr. CUTTEN. That is right.
The CHAIRMAN. That is the common stock?
Mr. CUTTEN. That is the common stock, Senator; yes, sir.
Mr. PECORA. Was it not understood by those who caused the trading account to be formed that one of the purposes of the formation
of the trading account was, as you put it, to maintain the market
and in order to enable the purchasing group to sell to the public at
a profit the 1,130,000 shares which they had agreed to buy at $30 per
share ?
Mr. CUTTEN. NO, sir.
3234
STOCK EXCHANGE PRACTICES
Senator GORE. It was not to lift the price above the purchase
price, but to keep it from falling below it. Was that the idea ?
Mr. CUTTEN. No, sir; not to keep it from falling below it.
Senator GORE. YOU said to maintain a market.
Mr. CUTTEN. TO maintain a market. They would have purchased
it on a scale down, as the market receded, just to maintain an orderly
market.
Mr. PECORA. Had the market been disorderly prior to October 24 ?
Mr. CUTTEN. NO, sir.
Mr. PECORA. What occasion was there to believe that the trading
syndicate or trading account was necessary in order to maintain an
orderly market, if there had been no disorderly market prior to
October 24?
Mr. CUTTEN. The only way I can answer that is that such groups
usually have buying power enough to maintain a market after such
syndicates are formed.
Mr. PECORA. That is, after the formation of purchasing syndicates
it is usual for them to cause to be formed a trading account or syndicate to maintain the market. That is the usual procedure, is it?
Mr. CUTTEN. If the original syndicate is not formed for a greater
amount of shares than they contract for privately, yes, sir; I believe
that a secondary account is formed.
Mr. PECORA. And that is a very frequent occurrence, is it not ?
Mr. CUTTEN. I have no other knowledge than this, sir.
Mr. PECORA. That is to say, these trading accounts as a rule go
hand in hand with purchasing groups, do they ?
Mr. CUTTEN. Yes, sir; to the extent that they try to maintain a
market with the syndicate.
Mr. PECORA. NOW, this purchasing group had no intention of
holding on to this block of stock, did it ?
Mr. CUTTEN. The original purchasers?
Mr. PECORA. Yes. I mean the purchasing group that was eventually composed of Arthur Cutten, Harry Sinclair, Blair & Co., the
Chase Securities Corporation, and the Shermar Corporation.
Mr. CUTTEN. Not if they could remarket it at a profit; no, sir.
Mr. PECORA. And that was their purpose and intent, was it not?
to remarket it at a profit ?
Mr. CUTTEN. Yes.
Mr. PECORA. In other
words, this purchasing group did not buy
the stock with a view of holding on to it for any long period of time
as an investment ?
Mr. CUTTEN. NO, sir; not unless they were forced to do so by
market conditions.
Mr. PECORA. And the trading account was formed in order that
they might not be forced to do so by market conditions, was it not?
Mr. CUTTEN. NO, sir; I cannot agree with you on that.
Mr. PECORA. DO you disagree with me on that?
Mr. CUTTEN. That the trading account was formed primarily to
enable the syndicate account to dispose of their shares ?
Mr. PECORA. At a profit; yes.
Mr. CUTTEN. At a profit.
Senator COUZENS. DO you agree with that?
Mr. CUTTEN. NO, sir; I do not agree with that.
STOCK EXCHANGE PRACTICES
3235
Mr. PECORA. DO you disagree with that ?
Mr. CUTTEN. I disagree with it.
Mr. PECORA. Entirely?
Mr. CUTTEN. You are putting the question, of course, in a different
way, differently than I have ever thought of the trading accouwt
before, as to the syndicate. As I say, the group had no purchasing
power whatsoever when the original syndicate was formed, and, the
second day after the contract was signed, had the stock gone down,
had there been a break in the general market, had the original syndicate been unable to dispose of 100 shares of stock, they could not
have bought 100 shares of stock, regardless of where the market went.
If the market went to $20 a share, they could not have purchased
100 shares of stock.
Senator GORE. Why did they enter intoi a syndicate of that sort,
and limit themselves in that way ? There was no necessity for such
limitation.
Mr. CUTTEN. NO, sir.
Senator GORE. Was it
not to create an occasion for this other
concern ?
Mr. CUTTEN. Will you repeat that, please?
Senator GORE. In other words, to have two concerns operating, so
that they could buy and sell to each other if they saw fit.
Mr. CUTTEN. Both of them could have been one, Senator.
Senator GORE. Yes.
Mr. CUTTEN. Had the original syndicate been drawn for 1,500,000
shares, or 2,000,000 shares of stock, and had only purchased privately 1,130,000 shares of stock, then they would have been able
to make purchases to maintain the market had the market started
to recede.
Senator GORE. And there might have been the situation of buying
and selling the same day?
Mr. CUTTEN. YOU mean as between the two accounts?
Senator GORE. N O ; the same concern or syndicate could buy and
sell the same day, if they had reserved that power, but that would
have shown up in a ratner worse light than to have the syndicate
limited in the amount it could buy and sell, and to have another
concern owned and operated by the same people, operating at the
other end of it, if necessary, or on the other side.
Mr. CUTTEN. NO, sir; I do not believe so, for this reason that the
two accounts could be combined. The trading account and the
syndicate could have been combined.
Senator GORE. Here is what I mean. The syndicate, we will say,
sold 100.000 shares one day.
Mr. CUTTEN. Yes, sir.
Senator GORE. And the
trading concern bought 100,000 shares
the same day. That would not look quite as bad as for the syndicate to sell 100,000 and buy 100,000 the same day itself. I do not
know that there would be any difference in effect. The books would
look a little worse in an investigation like this, if possible.
Senator COUZENS. That is not possible.
Mr. CUTTEN. Both of these accounts can be put together. You can
consider them as one account, and the syndicate account never sold
to the trading account, nor did the trading account ever sell to the
3236
STOCK EXCHANGE PEACTICES
syndicate account, except on the very last day, when the syndicate
account sold
Senator GORE (interposing). Well, of course, that would not make
any difference, Mr. Cutten, whether the syndicate when it sold the
stock sold it to them. It would not make any difference whether
the stock it sold was actually bought by the trading concern or not.
If the syndicate sold to John Doe and the trading account bought
from Kochard Roe the same amount, it would be the same thing as
if the syndicate had sold to the trading concern, would it not, so far
as the effect or reaction on the market is concerned ? It would be the
same thing, would it not?
Mr. CUTTEN. The same effect on the market?
Senator GORE. Yes.
Mr. CUTTEN. AS though they traded between themselves?
Senator GORE. Yes.
Mr. CUTTEN. The syndicate to the trading account?
Senator GORE. Yes, exactly; a sale to sale and a purchase to purchase, no matter who the parties are, and they would work in
concert?
Senator COUZENS. And undoubtedly did, according to the records
that we have.
Mr. CUTTEN. Well, that is wrong, Senator. They never did sell.
Senator COUZENS. The record was placed here last week indicating
perfectly clear to anybody that had any imagination at all that they
were wash sales, because the amounts were so balanced that no one
could conceive otherwise.
Mr. CUTTEN. Senator, there was never a wash sale made in either
one of these accounts. There has never been a wash sale in anything
that I ever had anything to do with or my firm ever had anything
to do with.
Senator GORE. Well, not in tho strict sense or strict definition of
the term, but would it not be the same thing? You take in the instance Senator Couzens referred to. The syndicate sold a thousand,
say, in 1 day—it was approximately that?
Mr. CUTTEN. Yes.
Senator GORE. The trading concern bought fifty-odd thousand?
Mr. CUTTEN. Yes, sir.
Senator GORE. NOW, did these two concerns exercise independent
judgment and act on their judgment ? That is, the syndicate thought
it was a good time to sell and the trading concern thought it was a
good time to buy, and the people who were manipulating the two
concerns were exactly the same people tonuing two judgments in
the opposite directions at the same moment?
Mr. CUTTEN. That is just about it, Senator, because the syndicate
sold on the scale-up and the purchasing account bought on the way
down.
Senator GORE. If the syndicate then had reserved the power to do
both, it would have been buying and selling at the same moment,
would it not?
Mr. CUTTEN. Not on the same moment; no sir.
Senator GORE. Well, approximately?
Mr. CUTTEN. Yes, approximately.
Senator GORE. If it had done that, that would have been a wash
sale, would it not?
STOCK EXCHANGE PRACTICES
3237
Mr. CUTTEN. No, sir; not unless they bought and sold
Senator GORE (interposing). Well, in substance—or a match sale,
whatever you call it?
Mr. CUTTEN. No, sir; it would not. For instance, in maintaining
a market, Senator, if I should bid 41% for a hundred shares of stock
and offer a hundred shares of stock at 41%, a broker may come to
the Sinclair post and sell me a hundred at 4114, and another broker
may walk up and buy two or three from me at 41%. That is what
I mean in maintaining a market. I always tried to maintain a market where the bidder announced quotations of a quarter of 1 percent
apart, so there would not be wide fluctuations between sales.
Senator GORE. Your idea is that a wash sale or a match sale involves exactly the same quotations or same price?
Mr. CUTTEN. I t has to be. That is a wash sale—no change of
ownership, a fictitious price printed on the New York Stock Exchange to influence the price of a security.
Now, on that November 5 that you refer to, Senator, of the hundred thousand shares of stock sold for one account and 50,000 shares
purchased for the other, that appears as though there is 150,000
shares of that stock traded out of the total volume of 210,000 shares
of stock.
Mr. PECORA. One moment, Mr. Cutten. Have you given all the
day's trades on that November 5 ?
Mr. CUTTEN. N O ; I am speaking of that one particular day, Mr.
Pecora.
Mr. PECORA. I am speaking of that one particular day, too.
Senator GORE. The total sales on that day aggregated how much?
Mr. CUTTEN. TWO hundred and ten thousand shares of stock.
Senator GORE. Have you the figures there at which the syndicate
sold that day and at which the trading concern bought ?
Mr. CUTTEN. Yes, sir. I wanted to bring this out, Senator, that
when this syndicate account sold a hundred thousand six hundred
shares of stock and the Sinclair trading account purchased 50,900
shares of stock, instead of that appearing to you gentlemen as
though that was one hundred and fifty-some thousand shares of stock
traded in out of the total of 210,000 shares of stock it really was
this—these figures are taken from our ledger date which happens
to be November 5, which was a Monday. The ledger date is the
date of trades made on Friday or Saturday, 2 days.
Mr. PECORA. IS it the date of clearance ?
Mr. CUTTEN. It is the date of clearance of those trades. So therefore, on Friday and Saturday: On Saturday, the 3d, there were
160,000 shares traded in, and on Friday the 2'd there were 548,000
shares traded in. So that was a total of 700,000 shares of stock
traded in in 2 days, and one account purchased 50,000 shares, and
the other sold 100,000 shares.
Senator GORE. On the 2 days ?
Mr. CUTTEN. In the 2 days; yes, sir. Now then, when I say 700,000
shares of stock were recorded on the New York Stock Exchange on
those 2 days, carried officially, and also in the paper, it really meant
that 1,400,000 shares of stock was traded in, because there has to be
a seller for every 100,000 shares of stock that is purchased, and one
3238
STOCK EXCHANGE PRACTICES
man sells to another man when that trade is established. So, in the
clearing house on Monday it meant that 1,400,000 shares of Sinclair
Oil changed hands.
Senator GORE. Oh, it does not mean that, does it ?
Mr. CUTTEN. Yes, sir. There has to be a seller for every 100
shares of stock purchased.
Senator GORE. I know that; but suppose you sell 10 horses; John
Doe sells 10 horses to Richard Roe. John Doe sold 10 horses to
Richard Roe and Richard Roe bought 10 horses from John Doe, but
there were not 20 horses. You sell 100,000 or 700,000 shares of stock.
Suppose John Doe sells 700,000 shares of Sinclair Oil stock and
Richard Roe buys 700,000 shares of stock. That is all there is to it,
Mr. CUTTEN. There are purchasers for the 700,000 shares.
Senator GORE. Oh, certainly.
Mr. CUTTEN. Because the various houses buy and sellers in the
various houses sell.
Senator GORE. Certainly.
Mr. CUTTEN. So in the clearing house it would show that the
transactions of Sinclair on those 2 days, according to the New York
Stock Exchange records, would be 1,400,000 shares of stock.
Senator GORE. When we see listed in the papers every day the
number of shares turned during
the day, does that mean that twice
as many turned as there were?1
Mr. CUTTEN. Yes, sir. There is a seller for every buyer.
Senator GORE. I know there is a seller for every buyer. I t takes
two to make a trade. But there is only one thing traded in. What
one sells the other buys.
Mr. CUTTEN. That is true, but
Senator GORE (interposing). Take one apple. If John Doe sells
one apple to Richard Roe, one sells and the other buys. I t takes the
two to make the participants in the trade, but there are not two
apples. I do not know how you keep your books. Now, I am not
challenging your statement about that. Certainly that is a revelation, if once 1 makes 2 after all.
Mr. CUTTEN. Well, there is a customer, of course, that has to sell
and a customer that has to buy the same, the same as you say with
the apples.
Senator GORE. Yes; but one sells and the other buys. One does
not sell one thing and the other buy something else.
Mr. CUTTEN. The number of shares traded in, yes, or 700,000
shares of stock.
Senator GORE. Yes.
Mr. CUTTEN. But the deliveries in the clearing house, there are
shares going in to 700,000 buyers and there are shares coming from
700,000 sellers.
Senator GORE. Yes; that is undoubtedly true.
Mr. CUTTEN. SO there really have been 700,000 shares of stock
delivered.
Senator GORE. Passed from one to the other. Certainly.
Mr. CUTTEN. Yes; that is true. Yes.
Senator GORE. IS the formation of these pools and syndicates a
common practice in the market, or is it rather unusual, exceptional?
Senator GOLDSBOROUGH. Are you asking if it " is " or it " was " ?
STOCK EXCHANGE PRACTICES
3239
Senator GORE. I will divide, get the past tense first, and then the
present.
Senator GOLDSBOROUGH. That is the way you did on these two
things that you are talking about; he is a buyer and he is a seller.
Senator GORE. IS it the practice, Mr. Cutten ?
Mr. CUTTEN. I don't think so; no, sir.
Senator GORE. Then what are the exceptional circumstances that
justify it as a sort of an exception? What is the motive and the
object back of the formation of a pool or syndicate?
Mr. CUTTEN. TO make some money.
Senator GORE. Incidentally?
Mr. CUTTEN. Incidentally.
Senator GORE. Yes, sir. Out of whom? [After a pause.] I get
your point and I know who is going to make the money. The people
who are operating the pools or syndicates.
Mr. CUTTEN. Not always.
Senator GORE. Well, but that is the object and the motive. Now
who are they going tofleece? If they make, not necessarily somebody
else loses.
Mr. CUTTEN. NO, sir.
Senator GORE. But somebody
else would have made more if they
had not operated in a particular transaction. What I am trying
to get at, Mr. Cutten, is this: Now you are a broker on the exchange.
Of course, I think an exchange as a place where people can sell bonds
and stocks and securities when they get ready and where they can
buy when they get ready to buy is indispensable. Yet I think the
abuses of the market are tempting people to destroy the whole
establishment, which would be a calamity. But I am trying to get
you to tell out of your experiences the abuses, so that we can operate
on the abuses and not on the market. If you do not help us to do
that, people may operate on the market itself. They may abolish
the exchange, when what we want to do is improve it, make it a
fair trading place where people can buy and sell in good faith and
get what they are buying, and not have somebody on the side that
is cheating them out of their money on the market, that they do
not know about. Now that is the point. If these pools and syndicates are formed to rig the market and run it up when there is not
a legitimate advance or running down when there is not any reason
for its decline, that is the sort of fellows we want to stop.
Mr. CUTTEN. Yes,
Senator GORE. If
sir.
we do not stop them, why, they may stop the
market, and that is a good deal like abolishing a red-light district,
which would make it worse instead of better. [Prolonged laughter.]
I am trying to find some way now to save you fellows' lives. You
are committing suicide and you don't know it. We are trying to
protect you against yourselves.
If you have any suggestions to make now or later on, I wish
you would submit them, because I am serious about this. I think
there are some abuses. The public undoubtedly thinks so. I think
the public is right about it, and I think the public may go too far
if we do not go some distance now in correcting real abuses.
Mr. TOMPKINS. May we submit them in writing, Senator?
Senator GORE. Yes.
Mr. TOMPKINS. We will be very glad to.
3240
STOCK EXCHANGE PRACTICES
Mr. PECORA. DO you know of any abuses of the kind that have
been referred to by Senator Gore, Mr. Cutten ?
Mr. CUTTEN. Of rigging the markets ?
Mr. PECORA. Yes.
Mr. CUTTEN. I believe,
Mr. Pecora, that markets cannot be rigged
when they are broad and active. Manipulation of a stock is marking a stock up or marking a stock down without a bonafide purchase or a bonafide sale, such as wash sales. The broader the
public market, the more active the public may be in that particular
market, the more impossible it is to really manipulate the market.
When manipulation starts you have to absorb nearly all the floating
supply of the stock before you can manipulate it. In that sense of
the word that is what " manipulate " means.
Mr. PECORA. AS a rule, what percentage of the outstanding stock
constitutes the floating supply?
Mr. CUTTEN. YOU would have to get the records of the company
to determine that.
Mr. PECORA. From your experience of many years as a broker ?
Mr. CUTTEN. I would not know. I would not know, sir. There
is no way of determining that. A company may have 30,000 stockholders or it may have 50,000 stockholders. It is usually the amount
of stock that is floating in Wall Street in brokers' hands.
Mr. PECORA. That is, the floating stock is usually the stock in
the hands of the brokers ?
Mr. CUTTEN. Yes, sir. In the hands of the brokers.
Mr. PECORA. Available for borrowing or lending and so forth ?
Mr. CUTTEN. That is correct. But you never can tell when an
investor will sell his own holdings if the stock goes too high. I have
not been in Wall Street many years.
Mr. PECORA. HOW many years have you been a member of the
exchange?
Mr. CUTTEN. Since 1925.
Mr. PECORA. That is 8 years?
Mr. CUTTEN. Eight years. There are only two that I remember
of, real manipulations in Wall Street. Those were the Stutz corner and Piggly Wiggly, and both of them ended disastrously.
Mr.' PECORA. YOU have referred to circumstances under which
rigging would be well-nigh impossible. Now under what circumstances is rigging possible, where there is no broad market?
Mr. CUTTEN. Only when there is no broad market, where the security may be quoted 50 bid, offered at 60. Then you could trade
with yourself some place between 50% and 59%. There would be
no change of ownership.
Mr. PECORA. Where there is a broad market in the stock it is not
necessary for a trading account to operate, is it?
Mr. OUTTEN. Where there is a broad market in the stock?
Mr. PECORA. Yes.
Mr. CUTTEN. Well, there should be, to maintain a market.
Mr. PECORA. If the market is broad it maintains itself, doesn't it ?
Mr. CUTTEN. AS a rule.
Mr. PECORA. SO there is no occasion in such instances for the operation of a trading account, is there ?
Mr. CUTTEN. Except to make money and except to maintain the
market. At times the public may come in and buy great quantities
STOCK EXCHANGE PRACTICES
3241
of the stock, and then they will cease. They may turn sellers within
a day or two. Some news may come out which causes a general
reaction. There may be a vacuum after the public's enthusiasm
wanes, and the stock starts going down immediately.
Mr. PECORA. And then the trading account starts to operate in
order to maintain the market?
Mr. CUTTEN. It supports it on the scale down.
Mr. PECORA. TO maintain it?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. TO keep prices from breaking?
Mr. CUTTEN. To maintain an orderly market on the doAvnside.
Mr. PECORA. And by that you mean to keep prices from breaking?
Mr. CUTTEN. NO, sir.
Mr. PECORA. What do you mean by " maintaining an orderly mar-
ket on the downside?"
Mr. CUTTEN. Bid at every quarter of a point down, so that if the
last sale is 39 and the best bid the specialist may have on his book
is 38, it does not break on 1 sale of stock 1 point between sales.
Mr. PECORA. That is to prevent the market from breaking, is it
not?
Mr. CUTTEN. Well, yes, the way you put it, yes, sir. But I may
buy only 2 or 3 hundred shares at 8% and 3 or 4 hundred at 8%, and
then probably a thousand shares at Sy2. I am backing away all the
time. I am not standing at a point and pegging the price. " That is
financial suicide. It always has been proven so.
Mr. PECORA. NOW, this purchasing syndicate commenced to buy
and sell this Sinclair Consolidated common stock as soon as it entered into this agreement on October 24, did it not ?
Mr. CUTTEN. The syndicate; yes, sir.
Mr. PECORA. Who handled those orders for the purchasing syndicate?
Mr. CUTTEN. I
did.
Mr. PECORA. Were they all handled by E. F. Hutton & Co., or were
any of them executed by other brokers ?
Mr. CUTTEN. Other brokers executed some of them.
The CHAIRMAN. Then the public did not know anything about this
1,130,000 shares being acquired by this syndicate?
Mr. CUTTEN. Yes; they did, sir.
The CHAIRMAN. HOW did they know about it?
Mr. CUTTEN. They knew it through the public press. The price
was not given. The amount of shares was not definitely given. I
believe one paper quoted a million shares of stock had been acquired,
and I believe another paper quoted that 1,300,000 shares of stock
had been acquired.
Mr. PECORA. But without mentioning the price?
Mr. CUTTEN. But did not mention the price; no, sir.
Mr. PECORA. SO that the public had no information at all concerning the essential fact that the sale was made for a certain figure?1
Mr. CUTTEN. NO, sir.
Senator GORE. When they delivered this 500,000 shares the company delivered that on December 27?
Mr. CUTTEN. Five hundred thousand shares; yes, sir.
Senator GORE. The company delivered that much stock?
3242
STOCK EXCHANGE PRAOIICES
Mr. CUTTEN. Yes, sir; we, E. F. Hutton & Co., drew a check for
$15,000,000 to the Sinclair Oil Co., and on December the 31st we
drew a check payable to the Sinclair Oil Co. for $18,900,000.
Senator GORE. This was treasury stock?
Mr. CUTTEN. NO, sir; it was not treasury stock; it was authorized
stock.
Mr. PECORA. If a purchaser or a purchasing syndicate had gone
into the market to buy in the open 1,130,000 shares of a security,
inevitably the price would have gone up, would it not?
Mr. CUTTEN. Yes, sir.
The CHAIRMAN. HOW
much of the stock had you sold at the time
this 500,000 shares was delivered to you ?
Mr. CUTTEN. I believe approximately 200,000 shares, Senator.
Mr. PECORA. What was the largest number of brokerage houses
that were used by E. F . Hutton & Co. at any one time in executing
the orders on behalf of the purchasing syndicate?
Mr. CUTTEN. In any one time during the day or the whole day,
you mean?
Mr. PECORA. Yes.
Mr. CUTTEN. Or just at one time during the day?
Mr. PECORA. Well, we will say the largest number on any
Mr. CUTTEN. The largest number on any one day ?
Mr. PECORA. Yes.
Mr. CUTTEN. I don't imagine more than 2, or probably
one day.
3 at the
most. That is, orders would have been given for the other broker
to clear the stock for E. F . Hutton & Co.
Mr. PECORA. Not to clear the stock alone; to actually execute the
orders ?
Mr. CUTTEN. Oh, perhaps dozens.
Mr. PECORA. Dozens?
Mr. CUTTEN. Perhaps dozens.
Mr. PECORA. And what is the reason for that, Mr. Cutten? Why
could not E. F. Hutton & Co. execute these orders itself?
Mr. CUTTEN. E. F. Hutton has about 20 brokers on the floor of
the New York Stock Exchange who trade for them.
Mr. PECORA. And in addition to that it employed dozens of other
houses to execute these orders?
Mr. CUTTEN. Not dozens of other houses; no, sir. Perhaps 3 or
4,1 said. Where the house would clear, where I would give a house
10,000 shares of stock to sell at a fixed price or at the market and
clear for E. F. Hutton & Co.
Mr. PECORA. HOW many floor members did E. F . Hutton & Co.
have?
Mr. CUTTEN. TWO until January 1,1929, and three thereafter.
The CHAIRMAN. Did each of these dozen brokers get a commission
on each transaction?
Mr. CUTTEN. Yes, sir; they get $2.50 a share, which is the floor
brokerage which is always paid.
The CHAIRMAN. And then you would get commission on top of
that?
Mr. CUTTEN. We would get $15 or $17.50 a hundred, whichever
the commission is. But we would pay the floor broker $2.50 out of
our commission.
STOCK EXCHANGE PRACTICES
3243
Mr. PECORA. NOW, on October 26, 1928, according to an exhibit in
evidence as exhibit no. 113, the syndicate, which is the purchasing
group, bought 2,400 shares of Consolidated Oil and sold 23/T00 shares.
Mr. CUTTEN. What group is that, sir ?
Mr. PECORA. The syndicate, the purchasing group.
Mr. CUTTEN. On what date?
Mr. PECORA. October 26, 1928.
Mr. CUTTEN. October 26; yes, sir.
Mr. PECORA. Are those figures correct ?
Mr. CUTTEN. Yes,
sir.
Mr. PECORA. Were those orders executed by E. F. Hutton & Co. ?
Mr. CUTTEN. I believe they were executed by me on the floor of
the stock exchange.
Mr. PECORA. Are you sure of that, entirely?
Mr. CUTTEN. I believe so. I would have to refer to records to
find out definitely.
Mr. PECORA. Why did the syndicate on that day both buy and
sell?
Mr. CUTTEN. Well, if I recall correctly, the syndicate did not sell
any shares under a certain price. I think the price was 36% or 3 6 ^ ,
if I remember correctly, and I think the purchases were all made
around S5y2 or 3 5 ^ or 35, however low it sold.
Mr. PECORA. Why did the syndicate buy and sell on this day ?
Mr. CUTTEN. It had sold first. It had to sell first, because the
trading account was not formed. It could not have bought first.
I t had to sell first.
Mr. PECORA. The trading account was formed on October 25, the
day before, was it not?
Mr. CUTTEN. I do not know the exact date. That did not become
operative until November 5.
Mr. PECORA. The trading account, according to the exhibit in evidence, was dated on October 25, 1928.
Mr. CUTTEN. It was not all signed up by that time, sir.
Mr. PECORA. There is nothing here that indicates to the contrary.
Mr. CUTTEN. Well, I doubt very much if all the participants, 32
participants, all signed in 1 day. It was agreed to form that account on the 25th, but probably all of the participants had not
signed for some days afterward.
Senator GORE. The stock that sold on the 26th—those were really
short sales; they borrowed the stock ?
Mr. CUTTEN. Yes, sir.
Senator GORE. Then, when
they got the 500,000 shares later on,
they returned the stocK that they had borrowed?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. NOW, I will
ask you again: Why did the purchasing
syndicate both buy and sell on that day?
Mr. CUTTEN. It had sold the 23,700 shares of stock at, say, 3 6 ^
or 36%, and then when the market receded it rather filled in and
purchased 2,400 shares of stock.
Mr. PECORA. Why did it do that—is the question. We know
that they did it. Now I want to know why it was done.
Mr. CUTTEN. Because it is the ordinary practice in maintaining a
market or in trying to maintain a market.
3244
STOCK EXCHANGE PRACTICES
Mr. PECORA. Was it to support the prices?
Mr. CUTTEN. It was to support the market at that time; yes.
Mr. PECORA. Was it to maintain the prices at the higher levels at
which the syndicate wanted to sell, so that it could reap a profit?
Mr. CUTTEN. It was purchasing at a lower level, sir, not a higher
level.
Mr. PECORA. Was it in order to maintain the market at the higher
levels so that the syndicate could sell its shares at a profit ?
Mr. CUTTEN. Not on that day; no, sir. It could not have been. I t
purchased at the low prices of the day. I t sold at the high prices
of the day.
Senator GORE. The record shows that, does it, Mr. Cutten ?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. NOW the following
day, the next trading day, October
29, 1928, it appears that the purchasing1 syndicate bought 34,100
shares but sold 37,800 shares. Were all those buying and selling
orders executed by E. F. Hutton & Co. ?
Mr. CUTTEN. Yes, sir; I think so.
Mr. PECORA. Or did it use other brokers ?
Mr. CUTTEN. It may have used other brokers. I would have to
check all my ledger sheets to find that out.
Mr. PECORA. I asked last week when I requested that you attend
here that those records be brought here.
Mr. CUTTEN. Mr. Pecora, that is a gigantic task. The New York
Stock Exchange have five men in our office. They have been there
now going on 2 weeks. I do not think they will complete their
investigation for another 10 days.
Mr. PECORA. It is not a gigantic task to bring the ledger accounts
here, is it?
Mr. CUTTEN. I have the ledger accounts. They came down. They
were brought down. But the outside brokers, I cannot
tell those
from the ledger sheets. The ledger sheets show all1 sales and the
purchases.
Mr. PECORA. Why was it necessary for this syndicate, the purchasing syndicate, to buy 34,100 shares on October 29 and to sell
37,800?
Mr. CUTTEN. TO maintain the market. That is the only reason
they bought the 34,000 shares.
Senator GORE. NOW then, the prices that ruled that day and along
about that time were the result of your efforts to maintain the market—in part that is true, is it not?
Mr. CUTTEN. Yes, sir; that is true as far as the purchasing is
concerned, but remember this: I sold the stock as the public showed
a demand for it.
Senator GORE. Yes, that is the point. The public was buying, of
course, rather in the dark, without knowing that this maintenance
was more or less artificial. Now then, in the course of a few months,
this syndicate sold out and closed out, this trading account sold out
and closed out, having existed and having operated to maintain a
market and to maintain a price. So was it Tom, Dick, and Harry
who bought during the existence of those two tries to maintain the
market. They were just honest-to-God buyers. They thought the
stock was selling for what it was worth. They did not know this
STOCK EXCHANGE PRACTICES
3245
syndicate was buying 34,000 shares in a day in order to maintain the
price they were paying. They were just buying because they
thought the stock of Sinclair was worth $36 a share. They could not
possibly have anticipated in the course of 3 or 4 months that there
was a market supported by an agency that would go out of existence.
What they were really doing was getting out when the getting out
was good and leaving the stock in the hands of Tom, Dick, and
Harry, with no artificial support. That looks to me like the vice
in this business, Mr. Cutten. It is really for you men who were
saving yourselves and, as you say, making money, and this Tom,
Dick, or Harry who was buying your stock thought he was going
to make money. He did not know you were going to get out and
leave him the bag to hold. Now, there is the abuse that I do not
know can be corrected. But there is where we want to operate if
we can.
Mr. CUTTEN. But in maintaining a market, Senator, that is fluctuating and that is as broad as this, this account is not the only
account that is really selling stock. Thousands of other stockholders
of Sinclair are selling stock.
Senator GORE. Surely.
Mr. CUTTEN. That market is maintained for their benefit as well
as it is for the benefit of the account.
Senator GORE. Yes. You said the syndicate had 3 or 4 different
brokers selling; that is true.
Mr. CUTTEN. NO, no, there must be others trading in it, of course.
Senator GORE. Oh, yes, but
Mr. CUTTEN. For instance, the day we mentioned, on November 5,
with one account selling 100,000 shares of stock out of 700,000 shares
traded in, some other people sold 600,000 shares that day.
Senator GORE. Yes; and when on the 24th of October it went from
32 to 35% the janitors and the waitresses, on such days, and in those
days were trading. They said, " Here, this Sinclair is moving up.
We had better get in before it goes any higher." They did not know
that this syndicate, that this trading business was putting it up.
Mr. CUTTEN. N O ; we were not on that day, Senator, or any other
day.
Senator GORE. It is just a coincidence that the day that it was
formed it ran up &y2 ?
Mr. CUTTEN. It was the public participation, Senator.
Senator GORE. Yes; and the public participation in that sort of a
market is that they watch it, and when a particular stock is active
and a good deal turning over and it goes up a little bit they say
"Here is the place to get in", and they get in. I know that is
where the suckers bite. That is when they get on the trout line.
Senator COUZENS. And they furnish the bait; that is the point.
Senator GORE. Yes. They were absorbing all those million shares.
When the thing is over with—the syndicate and the trading account
not thinking it was a good investment to hold permanently, sold
it to somebody who thought it was a good thing to buy—it is then
in that somebody's hands. And you say yourself that these agencies
were organized and operated to maintain the market and to maintain the price and keep it from going down and discouraging Tom,
Dick, and Harry and driving them out.
175541—34—PT 7
3
3246
STOCK EXCHANGE PRACTICES
Mr. PECORA. Mr. Cutten, on this day that I am speaking of,
namely, October 29, 1928, when the purchasing syndicate bought
34,100 shares but sold 37,800 shares, did they buy those 34,100 shares
because the market showed a tendency to drop and the purchasing
syndicate wanted to stop that tendency ?
Mr. CUTTEN. I believe so. It must have.
Mr. PECORA. AS those transactions go over the ticker there is
nothing to inform the public which reads the ticker in order to keep
abreast of the market that the purchase of these 34,100 shares was
made at the instance of a group that had 1,130,000 shares which it
wanted to sell to the public at a profit?
Mr. CUTTEN. No,
Mr. PECORA. TO
sir.
that extent the information conveyed by the
ticker of that day's transaction failed to inform the public that the
buying was not done by the public in a disinterested fashion, but
rather a substantial portion of it was done by a small group, the
existence of which was not known to the public, which small group
was actuated by the desire to maintain the price because it had a
large block of that stock for sale ?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. That is so, is it not ?
Mr. GOTTEN. Yes.
Mr. PECORA. And to that extent these
exchange transactions and
operations are not of a kind that could be called or designated as a
free and open market where the prices seek their own level or reach
their own level through the normal operation of the law of supply
and demand; is that not so, Mr. Cutten ?
Mr. CUTTEN. I quite agree with you, if this account did not have
the purchasing power that it had—because we had sold the 37,000
shares of stock and the 23,000 shares the day before—we did have
purchasing power of 60,000 shares of stock if the market went down,
because the secondary group had not become operative, and on the
29th you notice that the market broke from 39 down to 36%
Mr. PECORA. On what day?
Mr. CUTTEN. On the 29th that you are referring to.
Mr. PECORA. And in order to prevent the break from becoming
more violent
Mr. CUTTEN (interposing). More violent.
Mr. PECORA (continuing). This purchasing syndicate bought 34,100
shares ?
Mr. CUTTEN. That is correct; that is correct.
Senator GORE. They were really covering a short sale? That is
what it amounted to, did it not ?
Mr. CUTTEN. That is what it amounted to; yes, sir.
Mr. PECORA. Apparently, the market received that kind of support, because on October 30, the following day, according to exhibit
no. 113, the purchasing syndicate bought 10,000 shares but succeeded
in selling 43,900 shares. Is that so ?
Mr. CUTTEN. That is so; yes, sir.
Mr. PECORA. SO that the transactions in behalf of the purchasing
syndicate on the buying side of the day before were of a character
to enable the syndicate on the following day to sell 33,900 shares
more than it bought—presumably at a profit. Is that right ?
Mr. CUTTEN. In effect.
STOCK EXCHANGE PRACTICES
3247
Mr. PECORA. In effect. The following day, October 31, 1928,
according to exhibit no. 113, there must have been another tendency
for prices to drop, because the purchasing syndicate bought 23,600
shares and sold only 27,900 shares. Is that true ?
Mr. CUTTEN. Yes, sir.
Senator GORE. And the
syndicate, assuming that all purchases
and sales were made at those prices, made something like $50,000
that day on the stock ? And on the 29th they sold thirty-odd thousand shares at 39 and bought thirty-odd thousand shares back at
36. That would be a profit of $90,000 that day?
Mr. CUTTEN. Assuming that they could have been sold at the high
price, Senator, and purchased at the low price; yes, sir.
Senator GORE. Yes; how many members are there in your firm?
Mr. TOMPKTNS. I think there are 15, Senator.
Mr. CUTTEN. At that time there were 15.
Senator GORE. Will you put them in the record, and the membership now? I do not mean to call them out offhand. Just insert
them in the record.
Mr. CUTTEN. Yes.
(The following list of names of general partners and special
partners of E. F. Hutton & Co. as of April 1929 was furnished by
Mr. Tompkins for the record:)
APBH, 1929
General partners: George A. Ellis, Jr., Edward E. B. Adams, Warren EL
Spurge, Frank M. Dick, Dewees W. Dilworth, George B. Wagstaff, Theodore
A. Lauer, Robert E. Burns, Ruloff E. Cutten, William O. Van Antwerp, Gordon
B. Crary, Allan H. Crary, Thomas W. Durant.
•
Special partners: Edward F. Hutton, Franklyn L. Hutton.
PRESENT PARTNERS
General partners: George A. Ellis, Jr., Edward E. B. Adams, Warren EL
Spurge, George B. Wagstaff, Theodore A. Lauer, Robert E. Burns, Ruloff K
Cutten, William O. Van Antwerp, Gordon B. Orary, Allan H. Crary, Gerald M.
Loeb, Alan J. Lowry.
Special partners.: Edward F. Hutton, Frank M. Dick.
Mr. PECORA. I t appears that the total volume of trading on that
30th day of October was 179,800 shares.
Mr. CUTTEN. Yes, sir.
Mr. PECORA. Which, according
to the discussion between you and
Senator Gore a few minutes ago, does not mean that 179,800 shares
actually changed hands, does it?
Mr. CUTTEN. Yes. One hundred and seventy-nine thousand eight
hundred actually changed hands. There were 179,000 sold and l79 r
000 bought.
Mr. PECORA. And of that number 43,900 were sold by the purchasing syndicate?
Mr. CUTTEN. NO, sir.
Mr. PECORA. NOW, the
following day, November 1, 1928, the purchasing syndicate bought
Senator GOLDSBOROUGH. Give him a chance to answer the last
question.
Mr. PECORA. I thought he had answered it.
Senator GOLDSBOROUGH. NO.
3248
STOCK EXCHANGE PRACTICES
Mr. PECORA. Did you answer my last question?
Mr. TOMPKINS. I do not think he did.
Mr. CUTTEN. No, sir. I said " No " on that. I am trying to figure
the dates here. You asked me on October 31, did you not?
Mr. PECORA. Yes.
Mr. CUTTEN. Twenty-three
thousand purchased and twenty-seven
thousand sold?
Mr. PECORA. Yes.
Mr. CTTTTEN. On
che 31st—is that what you asked me—on the
81st?
Mr. PECORA. NO ; that was the 30th.
Mr. CUTTEN. On the 30th; yes.
Mr. PECORA. The 30th, 43,900 shares were sold by the purchasing
syndicate ?
Mr. CUTTEN. Well, that is our ledger date. That would be trades
of the 29th. Two hundred and fifty-six thousand shares were traded
in instead of 179,000 shares.
Mr. PECORA. NOW on November 1 there were bought by the purchasing syndicate 21,600 shares, but only 5,700 were sold by it ?
Mr. CUTTEN. Yes, sir.
Senator GORE. HOW much did they
Mr. PECORA. Twenty-one thousand
buy ?
and six hundred shares were
bought by the purchasing syndicate and 5,700 shares were sold by it.
Mr. CUTTEN. That was on the ledger
Mr. PECORA. What was the occasion for such heavy purchases?
Mr. CUTTEN. The market went down.
Mr. PECORA. The market went down on November 1 ?
Mr. OUTTEN. No; that is the ledger date of November 1. That is
the market date of October 31 when it went from 38 down to 37.
The low that day was 3 6 ^ . You have to look at the dates of the day
before.
Mr. PECORA. Yes.
Mr. CUTTEN. The
following day of November 2 you notice purchases of 6,400 shares. That probably took place when the market
was around 37% and when the market rallied to 42 and the account
sold 60,500
Mr. PECORA. I was coming to that.
Mr. CUTTEN. I beg your pardon.
Mr. PECORA. Will you please look at this exhibit marked " Committee's Exhibit No. 113 " in evidence and tell us if the transactions
shown thereon were had as of the dates which they bear, or do they
represent the clearings on the following date?
Mr. CUTTEN. These are the ledger dates taken from our ledger
sheets.
Mr. PECORA. And represent the clearings
Mr. CUTTEN. Of the day before.
Mr. PECORA. Of the transactions had the day before?
Mr. CUTEEN. Of the transactions had the day before; and if it is
a Monday it represents the transactions of Saturday and Friday
before the Monday.
Mr. PECORA. According to exhibit 113 there were cleared in behalf
of the purchasing syndicate on November 2 purchases at 6,400 shares,
but sales of 60,500 shares.
Mr. CUTTEN. That is correct.
STOCK EXCHANGE PRACTICES
3249
Mr. PECORA. Were these heavy selling transactions due to the
fact that on the day before the purchasing syndicate bought 21,600
shares as against selling 5,700 shares?
Mr. CUTTEN. At first glance I would not say so. I would say,
sir
Mr. PECORA. Well, give it a second glance, or third, if necessary.
Mr. CUTTEN. Well, I cannot remember distinctly 5 years ago, Mr.
Pecora. Here the stock went up 5 points on the day that you are
referring to, and the syndicate sold 60,000 shares of stock. It only
purchased 6,400 shares. I do not believe, with the public participation of 440,000 shares of stock being traded in on that particular
day, that the 6,400 shares of stock that I purchased during that
day had anything to do with the market going up.
Mr. PECORA. NO. I am referring to the transactions of the previous
day as paving the way for the transactions of the day when the
syndicate sold 60,500 shares as against a purchase of only 6,400. The
day preceding that the syndicate purchased 21,600 shares, but sold
only 5,700 shares. Did that have the tendency to make the market
bullish the following day so that the syndicate was able to dispose
of 54,000 shares more than it actually bought?
Mr. CUTTEN. No, sir. Not with the volume of trading in that
stock. No, sir.
Mr. PECORA. Then why did the syndicate buy 21,600 shares as
against the sale of 5,700 shares on the preceding day ?
Mr. CUTTEN. Trying to maintain a market, as I have said. Buying
it on a scale down. When the market turned and went up, naturally
we sold out rather than purchased. And more if it could. You wiu
find in the transactions in both of the accounts that they were purchased on the way down and they were sold on the way up always.
If the syndicate account, for instance, at the start of the account
had not sold 200,000 or 300,000 shares of stock, whichever the total
may be, the stock may have gone 10, may have gone 15 points higher
with the way the stock was being traded in by the public.
Mr. PECORA. Oh, as a matter of fact, Mr. Cutten, did not this purchasing syndicate, with few exceptions, sell more than it bought?
Mr. CUTTEN. Yes, sir. And if it had not, due to the public demand
for the stock, I believe that it would have gathered momentum and
gone considerably higher than it did.
Mr. PECORA. It would not have been particularly displeasing or
irksome to the purchasing syndicate that had these 1,100,000 shares
to sell at a pront, would it ?
Mr. CUTTEN. I t would not; no. But they sold.
Mr. PECORA. They sold.
Mr. CUTTEN. They sold.
Mr. PECORA. TO take advantage of the high prices ?
Mr. CUTTEN. If they had not sold, I say, I believe that the market
would have gathered momentum on the way up and probably gone
10 or 15 points higher.
Mr. PECORA. Did E. F. Hutton & Co. at that time send out any
market letters to its customers ?
Mr. CUTTEN. Not that I recall.
Mr. PECORA. Does it ever do that? Has it ever done that?
Mr. CUTTEN. Oh, yes, sir. We were sending market letters out to
our customers; yes.
3250
STOCK EXCHANGE PRACTICES
Mr. PECOEA. Yes; that is what I was asking.
Mr. CUTTEN. Daily market letters. Morning market letters and
afternoon market letters,
Mr. PECORA. And do you recall whether in its market letters any
reference was made to the Sinclair Consolidated Oil Corporation
stock?
Mr. CUTTEN. I do not.
Mr. PECORA. DO you know a man named Kodney—Earl Kodney ?
Mr. CUTTEN. I know the name. I do not think I ever met him.
% Mr. PECORA. What is his business?
Mr. CUTTEN. I think he is a broker.
Mr. PECORA. Can you produce from the files or records of your
office market letters that were sent out by E. F. Hutton & Co. or
by any of the brokerage houses that it used in the execution of any
of those orders to buy or sell Sinclair Consolidated Oil Corporation?
Mr. CUTTEN. I could produce mine, sir.
Mr. PECORA. Yes. When could you have them here?
Mr. CUTTEN. Probably tomorrow.
Mr. PECORA. I wish you would give the necessary instructions
to have them here tomorrow. And also at the same time, if you
can, get copies of the market letters sent out by the other brokerage
houses that you used in the execution of any of these orders to buy
and sell Sinclair Consolidated Oil Corporation.
Mr. CUTTEN. I will endeavor to do so; yes, sir.
Senator GORE. Has he named those?
Mr. PECORA. DO you know the names of any of those other brokerage houses that were so used by you in these operations?
Mr. CUTTEN. I believe I have used F. B. Keech & Co. I believe
Eastman-Dillon. Farroll Bros.
Mr. PECORA. I S that Farroll Bros. ?
Mr. CUTTEX. F-a-r o-l-l Bros. They are the only ones that I can
recall, Mr. Pecora.
Mr. PECORA. HOW about the firm of Bernheim, Herman & Co. ?
Mr. CUTTEN. NO, sir; I never gave them any clearance business
to my knowledge.
Mr. PECORA. HOW about Earl Rodney?
Mr. CUTTEN. I never gave him any clearance business to my knowledge. I will be very glad to submit a list.
Mr. PECORA. HOW about Jackson Bros., Boesol & Co.?
Mr. CUTTEN. I don't believe so. I would have to see a complete
list. All of that is a matter of record.
Mr. PECORA. YOU said before that the trading account which was
formed under an agreement dated October 25, 1928, was not actually
completed until some few days after that date. Is that right?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. I show you
what purports to be a photostatic copy
of the agreement dated October 25, 1928, made by and between
Arthur W. Cutten and Blair & Co., Chase Securities Corporation,
Shermar Corporation, and Harry F. Sinclair. Will you look at it
and tell us if it is a true and correct copy of the original agreement
under which the trading account or syndicate was formed? [Handing same to Mr. Cutten.]
Mr. CUTTEN. (after examining same). Yes, sir; it is.
STOCK EXCHANGE PRACTICES
3251
Mr. PECORA. I offer in evidence the agreement just identified by
the witness, being the one entered into on the 25th of October 1928,
between Arthur W. Cutten and the persons named, and ask that it
be spread upon the record.
The CHAIRMAN. It may be received in evidence and placed in the
record.
(Agreement dated Oct. 25, 1928, between Arthur W. Cutten
and Blair & Co., Chase Securities Corporation, Shermar Corporation, and Harry F. Sinclair, was received in evidence, marked " Committee Exhibit 130 of November 14, 1933 ", and is here printed in
the record in full as follows:)
COMMITTEE EXHIBIT NO. 130, NOVEMBER 14, 1933
Agreement made and entered into as of this 25th day of October 1928, by and
between Arthur W. Cutten of 209 Lake Shore Drive, Chicago, 111. (hereinafter
called the manager) party of the first part, and the subscribers hereto, severally (each of whom is hereinafter called the "subscribers") parties of the
second part, and all of whom together constitute the syndicate;
Whereas, the parties hereto desire to form a syndicate for the purpose of
buying and/or selling the shares of the common capital stock of the Sinclair
Consolidated Oil Corporation; now, therefore
In consideration of the premises and the sum of $1 by each to the other in
hand paid, the receipt whereof is hereby acknowledged, the subscribers hereby
agree with one another and with the manager as follows:
1. The subscribers hereby form a syndicate for the purpose above expressed,
and each subscriber for himself or itself, and not for any other, agrees to subscribe to an interest in said syndicate represented by the number of shares set
opposite his or its name, and authorizes the manager to purchase at private
sale, 1,130,000 shares of the common capital stock of the Sinclair Consolidated
Oil Corporation, at the price of $30 per share, and thereafter to purchase,
and/or sell for the syndicate account, from time to time, shares of the common
capital stock of said Sinclair Consolidated Oil Corporation, provided only that
the manager shall not have a nejt commitment at any one time for the syndicate
account exceeding in the aggregate (including the shares so to be purchased at
private sale) 1,130,000 shares of said stock.
All stock bought by the manager pursuant to the authority hereby given
shall be carried by him in a syndicate account which he shall open on his
books, or with any firm or firms, members of the New York Stock Exchange,
which the manager may select. Each subscriber hereto shall participate in
such purchases and/or sales, and in the profits and/or losses and reasonable
expenses of the syndicate, in the proportion that the number of shares subscribed for by him or it bears to the total of 1,130,000. The manager may
call upon the subscribers or any of them, from time to time, for payment of
their or its proportion of all or any part of the stock purchased for the
syndicate account, and each subscriber agrees to pay promptly the full amount
of such call or calls, up to but not exceeding in any event the full amount
of his or its individual liability as indicated by the interest in the syndicate
subscribed for by him hereunder. Each subscriber shall, at the request of the
manager, at any time, or from time to time, during or upon the termination
of the syndicate, take up and pay for in full at the cost thereof to the syndicate, his or its proportion of any stock held for the syndicate or for which
it may be committed, or at the option of the manager, shall margin to the
manager's satisfaction, his or its proportionate part of any such stock held by
the syndicate and shall meet his or its other syndicate obligations, if any,
upon call by the manager. Stocks so taken up by participants during the life
of the syndicate shall be for carrying purposes only and shall be subject to
recall by the manager at any time.
2. In case of the failure of any subscriber to make such payments as and
when called, the manager may sell the rights and interests of the defaulting
subscriber in and under this agreement, and any stock represented thereby at
public or private sale, at any time thereafter without advertisement or notice,
and after deducting all interest or other costs and expenses the residue shall
be applied on any liability or indebtedness of such defauting subscriber, and
3252
STOCK EXCHANGE PKACTICES
if there be any deficiency he or it shall pay and discharge the same. Any
overplus shall be paid over to such defaulting subscriber. The managers may
purchase on any such sale the rights and interests of any defaulting subscribers,
for the benefit of the nondefaulting subscribers and may call for and apportion
any assessment to pay for the same.
3. The manager shall have the sole direction, management, and entire control
of the business and transactions of the syndicate, and any stock purchased by
him for the syndicate account may, in his discretion, be loaned by him or by
any stock-exchange house carrying the syndicate account. He shall have full
power to buy and/or sell said stock at public or private sale, or upon the
New York Stock Exchange, for the account of the syndicate, in his uncontrolled discretion, but as above provided, he shall not have a net commitment
for the syndicate account at any one time exceeding 1,130,000 shares of said
stock, and shall not purchase, except on the floor of the New York Stock
Exchange, any shares of said stock at a price in excess of $30 per share. The
manager may become a subscriber to the syndicate, and in that event, his
share in the assets, profits, losses, and expenses thereof, shall be on the same
basis as any other member. He shall have the exclusive custody of the money
and assets of the syndicate, but may deposit the same with any firm or firms,
members of the New York Stock Exchange, or any national bank or trust
company selected by him, and he may use the same in the operations of the
syndicate. He may deal with any other group or syndicate of which he is a
member and/or manager for the syndicate account, and no contract with any
such group or syndicate shall be affected by reason of the fact that he is
manager thereof or a member or participant therein.
4. The manager may borrow for the syndicate account such amounts as he
may deem necessary not to exceed in the aggregate at any time the total
amount due and unpa'd from the syndicate subscribers, and may pledge all
or any portion of the stock so purchased, or this agreement and the several
payments to be made hereunder by the subscribers to secure any loan or loans
made for the syndicate account. He may, for and on behalf of the syndicate,,
contract with any bank and/or trust company for any loan or loans necessary
to carry on the operation of the syndicate, and may himself advance or loan
money to the syndicate, charging for such advances the current interest rate
charged by stock exchange firms to their customers.
5. As soon as subscriptions are obtained to the syndicate aggregating 1,130,000
shares of stock, the syndicate shall become operative without further notice.
6. The syndicate shall continue for a period of 180 days from the date hereof,
but the manager may in his discretion extend the same for a further period or
periods not exceeding in the aggregate 180 days. He may in his discretion
close the operation of the syndicate at any time. At the expiration of the syndicate the manager shall prepare a statement of the syndicate operations and
after paying all the costs and expenses of the syndicate, and settling all of its
obligations, any money and/or stock belonging to the syndicate remaining shall
be distributed pro rata among the various subscribers. The acceptance by the
subscribers of any statement rendered by the manager at the expiration of the
syndicate, together with any payment in either stock or money, or both, shown
to be due by said statement, shall operate as a full and complete release of the
manager from any and all liability hereunder.
7. The manager shall not be liable for any error in judgment or for any
mistake of law or fact nor shall he be liable save for his own gross negligence
or willful default, nor liable for any acts done or performed in good faith
under any of the provisions of this agreement.
8. Each subscriber ratifies, assents to, and agrees to be bound by any action
of the manager assumed to be taken under this agreement, and agrees to
perform his undertakings herein as stated in this agreement to the full extent
of the number of shares subscribed for as Ms participation herein, but in
no event or under no circumstances shall he be called upon to pay or be liable
for any amount beyond the interest in the syndicate subscr bed i'or by him
plus interest thereon. The failure of any subscriber to perform any of his
undertakings hereunder shall not affect or release any other subscriber.
9. Any notice which the manager or any lender may have occasion to
give to any subscriber shall be sufficient for all purposes if given in writing,
mailed postpaid to the address of such subscriber set opposite his signature
hereto.
10. Nothing contained in this agreement or otherwise shall constitute the
subscribers partners with or agents or one another or for the manager or
STOCK EXCHANGE PRACTICES
3253
render them liable to contribute in any event more than the interest in the
syndicate subscribed for by them, plus interest thereon.
11. In case of the resignation or incapacity to act of the manager, a successor or successors shall be appointed in writing by a majority in amount
of the subscribers.
12. This agreement shall be binding upon and enure to the benefit of the
heirs, executors, administrators, successors, and assigns of the parties hereto
and it may be executed in several counterparts each of which when so executed shall be deemed to be the original and such counterparts shall together
constitute but one and the same instrument.
In witness whereof, the manager, party of the first part, and the subscribers,
parties of the second part, have subscribed this agreement, as of the clay
and year first above written.
ARTHUR W. CUTTEN,
Manager,
By R. E.
CUTTEN.
Number
Subscribers:
of shares
Blair & Co., Inc., by Elisha Walker, president, 24 Board Street. 282, 500
Chase Securities Corporation, H. G. Freeman, president, 60
Cedar Street
188,333%
The Shermar Corporation, J. Wernersbach, treasurer, 18 Prince
Street
94,166%
Arthur W. Cutten
282,500
Harry F. Sinclair
282, 500
Mr. PECORA. According to exhibit no. 115 in evidence there were
altogether 32 participants in the trading account.
Mr. CUTTEN. Yes, sir.
Mr. PECORA. Will you look at committee's exhibit no. 115 and see
if that accords with your recollection of the fact? [Handing same
to Mr. Cutten.]
Mr. CUTTEN (after examining same). Yes, sir.
Mr. PECORA. When were all those participants given their subparticipations ?
Mr. CUTTEN. That I would not know and could not swear to it.
Mr. PECORA. Well, was it by November 5 ?
Mr. CUTTEN. I think they were.
Mr. PECORA. Will you look at the list of names embodied in that
exhibit and tell us which of those participants in the trading account
were invited to come in by you, either in the exercise of your own
discretion or under instructions from Arthur W. Cutten?
Mr. CUTTEX. I think Mr. H. E. Merselies was invited by Mr.
Arthur Cutten. Mr. Lawrence P. Fisher, by Mr. Cutten. Mr. W.
H. Eshbaugh, either by me or by Mr. Fisher. I know he is a friend
of Mr. Fisher's. Mr. Joseph Toplitsky, by me. The Continental
National—well, they were one of the originals. Mr. Bartlett was
a coparticipant with Mr. Cutten. Mr. Matthew C. Brush, I believe,
by me. Mr. P. H. O'Neil, by me.
Mr. PECORA. Who is P. H. O'Neil?
Mr. CUTTEN. Patrick H. O'Neil, of California.
Mr. PECORA. Who is he?
Mr. CUTTEN. He, I believe, was one of the large stockholders of the
California Petroleum Co., which since has merged with the Texas Oil
Co. I believe he is a substantial stockholder of the Texas Oil Co.
Trust Co. of Georgia by me. George Breen; he was a subparticipant
of Mr. Arthur Cutten's. Edwin Weisl & Co., I think by me. James
C. Wilson & Co., I think by Blair. Loew & Co., I think by Blair.
Guardian Detroit Co.—I do not know on that at all.
3254
STOCK EXCHANGE PRACTICES
Chase Securities Corporation—one of the originals. Shermar
Corporation—original. E. F. Hutton & Co., by myself. Kissell,
Kinnicutt & Co., I believe by Blair. J. & W. Seligman & Co., I believe by Blair. Janney & Co., I believe by Blair. Spencer, Trask
& Co., I believe by Blair. H. F. Sinclair—himself. Harry Payne
Whitney, by Mr. Sinclair. John H. Markham, Jr., by Mr. Sinclair.
Benjamin Lissberger, by Mr. Sinclair.
The Famoth Corporation and the Traywin Corporation were
originals. L. W. Hill & C. O. Kalman were originals. Joseph E.
Cutten, by myself.
Mr. PECORA. Who were the Famoth Corporation? What sort of
a corporation was that ?
Mr. CUTTEN. I believe it is Mr. Tinker's corporation.
Mr. PECORA. HOW about the Traywin corporation?
Mr. CUTTEN. I believe that is Mr. Tinker's corporation.
Mr. PECORA. Mr. Tinker was then connected with the Chase
Securities Corporation ?
Mr. CUTTEN. I do not think so.
Mr. PECORA. Was he connected with the Chase National Bank ?
Mr. CUTTEN. I do not think so. I think he had retired.
Mr. PECORA. Well, was he then with Blair & Co. ?
Mr. CUTTEN. I think he was retired. I do not think he was with
anyone in the Street.
Senator COUZENS. May I ask Mr. Cutten how it is that he remembers them all except the Guardian Detroit Co. ? Do you know anyone connected with them?
Mr. CUTTEN. NO ; I do not.
Senator COUZENS. YOU remembered
everybody else but them, and
I do not like to have the Guardian Detroit forgotten.
Mr. PECORA. This trading account was formed at the instance of
the original purchasing group participants, was it not?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. Were the
persons and corporations that were invited
to participate in the trading account told of the agreement under
which the purchasing group had acquired from the Sinclair Consolidated Oil Corporation 1,130,000 shares at $30 a share ?
Mr. CUTTEN. I believe they were. It was discussed with them.
Mr. PECORA. Were any of them given any interest in the profits
accruing to that original purchasing group ?
Mr. CUTTEN. Were any of these participants?
Mr. PECORA. Were any of the subparticipants in the trading account given or promised any interest in any profits that might accrue
to the purchasing group ?
Mr. CUTTEN. Not to my knowledge.
Mr. PECORA. NOW, one of the purposes of the formation of this
syndicate was to maintain a market so that the purchasing group
could sell at a profit the 1,130,000 shares which the purchasing group
had acquired from the Sinclair Consolidated Oil Corporation at $30
a share, wasn't it?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. DO you mean
to say that those gentlemen who became
subparticipants in the trading account, entered into that trading
account and assumed whatever risks were inherent in it, to enable
STOCK EXCHANGE PKACTICES
3255
the original purchasing group to dispose of their 1,130,000 shares at
a profit, without being given an interest in those profits?
Mr. CUTTEN. They were given no interest in the profits that I
know of.
Mr. PECORA. And they were told all about that transaction, whereby
the purchasing group got those shares at $30 a share?
Mr. CUTTEN. I believe they were.
Mr. PECORA. Did you tell them about it?
Mr. CUTTEN. I told all that I invited in, about it.
Mr. PECORA. Did you give them copies of the agreement?
Mr. CUTTEN. No, sir; I did not.
Mr. PECORA. Did you acquaint them
with the essential terms and
provisions of that agreement?
Mr. CUTTESN. No; I did not.
Mr. PECORA. Well, how were
they told? What were they told
about them by you?
Mr. CUTTEN. The groups were told that a syndicate had been
formed that had made a commitment to purchase 1,130,000 shares
at $30 a share, and that another group was being formed to maintain the market, to purchase shares to make a profit; and that the
original group wanted other participants in this secondary account
to spread around the liability. That is about the substance of it, sir.
Mr. PECORA. And those persons that went into the trading ac* count assumed the liabilities, knowing that the trading account was
formed for the purpose of enabling the purchasing group to market
those 1,130,000 shares at a profit?
Mr. CUTTEN. They all assumed the liability for anything that
they might acquire in the market, yes, knowing that if they made
a purchase in the market they were assuming that liability.
Mr. PECORA. And they voluntarily assumed that liability in connection with a trading account that was organized for the purpose
of enabling the purchasing group to market its 1,130,000 shares at
a profit without getting any snare of those profits ?
Mr. CUTTEN. Yes. I am positive they did not get any share of
those profits of the original group.
Mr. PECORA. And they were told all about the purchasing group,
I mean the trading account?
Mr. CUTTEN. I do not know that all of them were; no. But
those whom I invited into it were told. I know that.
The CHAIRMAN. This trading account seems to have been confined
to 1,000,000 shares.
Mr. CUTTEN. Yes, sir.
The CHAIRMAN. What about the other 130,000 shares?
Mr. CUTTEN. This is the second group. These people
could have
purchased another 1,000,000 shares of stock, and therefore this
account could have been long 1,000,000 shares of stock, and the other
account could have been long 1,130,000 shares of stock.
Mr. PECORA. This group we are talking about now dealt in
1,000,000 shares of stock?
Mr. CUTTEN. It was formed for 1,000,000 shares. This is the
trading account. It could have purchased 1,000,000 shares of stock.
Mr. PECORA. NOW, when were the trading operations of the purchasing group concluded?
3256
STOCK EXCHANGE PRACTICES
Mr. CUTTEN. I think in May, about a month after the operations
in the original syndicate.
Mr. PECORA. NO ; I am now talking about the original syndicate.
Mr. CUTTEN. I beg your pardon.
Mr. PECORA. It is the purchasing group.
Mr. CUTTEN. I t was in April—let me see
Mr. PECORA (interposing). April 16, 1929, was it not?
Mr. CUTTEN. Yes; April 16,1929.
Mr. PECORA. And when was the trading account closed?
Mr. CUTTEN. May 17,1929.
Mr. PECORA. NOW, during the life of the purchasing syndicate, how
many shares of Sinclair Consolidated Oil Corporation stock did it
buy, and how many did it sell on the open market?
Mr. CUTTEN. In the open market?
Mr. PECORA. Yes.
Mr. CUTTEN. I t purchased,
roughly, 700,000 shares, and. sold 1,700,000 shares, to be even.
Mr. PECORA. That is, it sold all of the 1,130,000 shares that it contracted to buy from the Sinclair Consolidated Oil Corporation at
$30 a share, plus 700,000 shares it bought in the open market for
the purpose of maintaining a market, as you say. Is that right?
Mr. CUTTEN. Yes,
sir.
Mr. PECORA. All those transactions resulted in a profit to the purchasing syndicate or group of 12 million dollars plus?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. NOW, how
many shares were bought, and how many
shares were sold by the trading syndicate during its life?
Mr. CUTTEN. There were 634,000 shares purchased, and 634,000
shares sold.
Mr. PECORA. And those transactions resulted in a gross profit to
the trading account of $464,870.60, or a net profit after deducting 10
percent commission to the syndicate manager, of $418,383.54. Is
that right?
Mr. CUTTEN. Yes,
sir.
Mr. PECORA. NOW, out of this gross profit, or out of this profit,
by the way, of 12 million dollars which accrued to the purchasing
syndicate, 2y2 percent thereof was paid to a man named Fitzpatrick, was there not?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. And why was that done?
Mr. CUTTEN. I don't know, sir.
Mr. PECORA. Who made that payment to Fitzpatrick?
Mr. CUTTEN. We did.
Mr. PECORA. When vou say " w e " do you mean E.
F. Hutton
&Co.?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. Upon whose authorization was it made by
Mr. CUTTEN. Of the manager.
Mr. PECORA. And who was the manager?
Mr. CUTTEN. Mr. Arthur W. Cutten.
Mr. PECORA. Mr. Arthur W. Cutten testified here last
you ?
week that
he did not know of any reason why Fitzpatrick was given 2% per
STOCK EXCHANGE PRACTICES
3257
cent of this 12 million dollars profit. Do you know of any reason
why that was done?
Mr. CUTTEN. I do not know personally; no, sir.
Mr. PECORA. Did you know who Fitzpatrick was at that time ?
Mr. CrTTEN. I did. But I had never met him.
Mr. PECORA. And who was he?
Mr. CUTTEN. President of the Prairie Oil & Gas Co., I believe.
Mr. PECORA. He was the executive officer of it, wasn't he ?
Mr. CUTTEN. I believe he was the president of the Prairie Oil
&
Gas Co.
Mr. PECORA. Was that company a competitor of the Sinclair Consolidated Oil Corporation?
Mr. CUTTEN. NOW, I believe the Prairie Co.—and, you understand, I am not an oil man, but I believe the Prairie Co. was primarily a producer of oil, and the Sinclair Co. is a producer and a
marketing company or distributing organization as well.
Mr. PECORA. TO the extent that the Sinclair Co. was a producing
company as well as a distributing company, was it a competitor of
the Prairie Oil & Gas Co.?
Mr. CUTTEN. I believe it was.
Mr. PECORA. Can you think of any reason why the executive head
of a competing company should have been given something like
$300,000 out of the profits of this purchasing syndicate in the Sinclair Co. stock?
Mr. CUTTEN. Except that his name was mentioned. I heard his
name as one of the participants, who was to get a portion of the 12
percent. You will recall in the original agreement that the original
four, or the original five, were to give up 12 percent. And that is
how I happened to hear this name mentioned. And I was instructed
by Blair & Co. to pay Mr. Fitzpatrick 2y2 percent. I telephoned
Mr. Cutten, and told him apparently he was the other man in making
up the approximately 12 percent, and he said to pay him. I always
conferred with him. He probably does not recall it, and there is
no.reason why he should. We sent our check drawn to the order
of Mr. Fitzpatrick, No. 24 Broad Street, care of Blair & Co. That is
all that I know about it.
Mr. PECORA. What 12 percent are you talking about now ?
Mr. CUTTEN. I believe in one of the original syndicates it says that
12 percent from the three twelfths, three twelfths, three twelfths,
two twelfths, and one twelfth is to be allotted to others, and then
Mr. PECORA (interposing). Who were the others? Was it
Fitzpatrick?
(A pause, without response).
Mr. PECORA. Was it Fitzpatrick?
Mr. CUTTEN. I always understood him toi be one of the others.
Mr. PECORA. Well, now. let me show you committee exhibit no.
114 in evidence, entitled, " List of Participants in Sinclair Purchasing Syndicate as Finally Constituted, With Percentages and Share
of Profits Received."
Will you look at it and tell us if you see Fitzpatrick's name anywhere there ?
Mr. CUTTEN. I do
not.
3258
STOCK EXCHANGE PRACTICES
Mr. PECORA. DO you see the names of persons and corporations
other than original participants in the original purchasing group?
Mr. CUTTEN. I do.
Mr. PECORA. Does that exhibit show a division of the entire 100
percent interest of this purchasing group ?
Mr. CUTTEN. It does.
Mr. PECORA. And it does not include Fitzpatrick?
Mr. CUTTEN. I t does not.
Mr. PECORA. HOW does that correspond with the statement you
have just made that you understand Fitzpatrick represented " those
others " who were given a subparticipation by the members of the
original or purchasing group ?
Mr. CUTTEN. Because the subparticipants, such as Continental
National Co., Arthur Reynolds, A. M. Andrews, the Famoth Corporation, the Traywin Corporation, and L. W. Hill & C. O. Kalman
did not total 12 percent.
Mr. PECORA. And the combined interests shown on that exhibit
total 100 percent of the participating interest.
Mr. CUTTEN. That is true.
Mr. PECORA. Where is there any room there for a payment of 2y2
percent to Fitzpatrick?
Mr. CUTTEN. There is none.
Mr. PECORA. Who got that 12 percent you are speaking of? Who
were the participants that got that subparticipation of 12 percent
out of the shares of the original participants in the original group ?
Mr. CUTTEN. It went to 1, 2, 3,4, 5, 6 of the
Mr. PECORA (interposing). But who were they?
Mr. CUTTEN. Continental National Co., Arthur Reynolds, A. M.
Andrews, the Famoth Corporation, the Traywin Corporation, L. W.
Hill & C. O. Kalman.
Mr. PECORA. Each one of these subparticipants received his proper
share of the profits in accordance with the interest each of these subparticipants had in the purchasing group, did they not ?
Mr. CUTTEN. Yes; they did.
Mr. PECORA. Well, then, where did the 2y2 percent come from that
went to Fitzpatrick?
Mr. CUTTEN. There was still a portion of the percentage to be
given to Mr. Fitzpatrick, apparently, because the percentages of the
Continental National, Arthur Reynolds, A. M. Andrews, the Famoth
Corporation, the Traywin Corporation, L. W. Hill & C. O. Kahnan,
did not total the 12 percent of the original amount, the 12 percent
that the original five had agreed to give up.
Mr. PECORA. HOW much do they total?
Mr. CUTTEN. These total 10 percent.
Mr. PECORA. Well, now, wasrrt Fitzpatrick's 2y2 percent deducted
from the entire profit, a pure gift to Fitzpatrick?
Mr. CUTTEN. It was, I suppose.
Mr. PECORA. DO you know of any reason why that was done?
Mr. CUTTEN. I do not.
Mr. PECORA. Have you
ever been given any reason for it by
anybody?
Mr. CUTTEN. I had
not.
Mr. PECORA. Did you ever question anybody about it?
Mr. CUTTEN. NO, sir.
STOCK EXCHANGE PRACTICES
3259
Mr. PECORA. NOW, in checking the operations, both on the buying
side and on the selling side, for the purchasing group, which as you
say bought in the open market about 700,000 shares and sold not
only the original 1,130,000 shares, but also those 700,000 shares, from
whom did you get the orders that were executed in connection with
those operations ? That is, by " order " I mean instructions.
Mr. CUTTEN. From Mr. Cutten.
Mr. PECORA. From Mr. Arthur W. Cutten?
Mr. CUTTEN. Yes,
Mr. PECORA. Did
sir.
you get them from him daily by long-distance
telephone?
Mr. CUTTEN. Not any specific orders; no, sir. I discussed with him
every day, the market. I used to call him every night, and sometimes I would call him before the opening if there was any news in
the papers which I thought might affect the market. Sometimes
I would call him half a dozen times during the day. I always
called him after the close and told him exactly what I had done.
He left it, of course, to my discretion, because I was on the floor the
most of the time, the floor of the New York Stock Exchange.
Mr. PECORA. Didn't he place certain limitations upon your discretion?
Mr. CUTTEN. He did, in a general way.
Mr. PECORA. NOW, who engaged other brokers that were used to
execute orders?
Mr. CUTTEN. I did.
Mr. PECORA. Why was
it necessary to engage other brokers to
execute those orders ?
Mr. CUTTEN. Well, it is the custom on the Street to give orders
out on a clearance basis to other brokers.
Mr. PECORA. HOW has that custom developed?
Mr. CUTTEN. Well, I might have sold 20,000 or 25,000 shares myself at the post, and I might have wanted to give an order to somebody else to sell 10,000 shares, so I would not appear all day long
as a seller, selling daily all the time. So I would tell somebody else
to -sell 10,000 shares for me and clear the stock.
Mr. PECORA. Then it is in order to disguise or screen the identity
of the party or parties selling and buying, is it not ?
Mr. CUTTEN. Quite right.
Mr. PECORA. And that is considered an essential thing to the success
of the operations of these trading accounts ?
Mr. CUTTEN. Not necessarily; no, sir.
Mr. PECORA. But it was done in this case because you considered
it advisable to do it ?
Mr. CUTTEN. Yes, sir.
The CHAIRMAN. What
was the market price of the stock on May
17,1929?
Mr. CUTTEN. On May 17, 1929, it closed at $38 a share.
The CHAIRMAN. And what is it today ?
Mr. CUTTEN. I think it is $12.
Mr. PECORA. NOW, in executing the orders, both on the buying and
on the selling side, for the trading account whose judgment controlled or dictated those transactions?
Mr. CUTTEN. Mine.
3260
STOCK EXCHANGE PRACTICES
Mr. PECORA. Exclusively yours or after daily telephone conversations with Arthur W. Cutten ?
Mr. CUTTEN. After telephone conversations with him. I had a
general idea of the amount of stock he wished to dispose of if the
stock reached a certain level. I had a general idea how much stock
he would be willing to acquire if it receded to a certain level.
Mr. PECORA. Well, you got that general idea from your daily
talks with him ?
Mr. CUTTEN. Certainly.
Mr. PECORA. And you were regulated in the exercise of your judgment and discretion by his views and wishes ?
Mr. CUTTEN. Yes,
Mr. PECORA. And
sir.
did you, in executing those orders, engage other
brokers ?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. And for
the same reasons you engaged such other
brokers in the case of transactions had in behalf of the purchasing
syndicate ?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. I S Mr. Sinclair here
Mr. STANFORD. N O ; he is not. I
now, Mr. Stanford ?
telephoned him, and he said he
was available, and would be here at 2 o'clock.
Mr. PECORA. Mr. Chairman, I do not want to take up any other
matters between now and the time of calling Mr. Sinclair to the
stand. It is now 25 minutes to 1, and I suggest that the subcommittee recess now until 2 o'clock. Mr. Sinclair will be here at 2
o'clock, I believe.
Mr. STANFORD. Yes.
The CHAIRMAN. The
subcommittee will now take a recess until 2
o'clock this afternoon.
(Whereupon, at 1:35 p.m. Tuesday, Nov. 14, 1933, the subcommittee recessed to meet at 2 o'clock the same day, in the same room.)
AFTERNOON SESSION
(The subcommittee reconvened at 2 p.m., Tuesday, November 14,
1933, at the expiration of the noon recess.)
The CHAIRMAN. The committee will come to order. Mr. Pecora.
Mr. PECORA. Mr. Sinclair.
TESTIMONY OF HARRY P. SINCLAIR, GREAT NECK, LONG
ISLAND, N.Y.
The CHAIRMAN. YOU solemnly swear that you will tell the truth,
the whole truth, and nothing but the truth, regarding the matters
now under investigation by the committee, so help you God ?
Mr. SINCLAIR. I do.
Mr. PECORA. Mr. Sinclair,
will you give your full name and address
to the reporter, for the record ?
Mr. SINCLAIR. H. F. Sinclair, Great Neck, Long Island, N.Y.
Mr. PECORA. What is your business or occupation ?
Mr. SINCLAIR. I am chairman of the executive committee of the
Consolidated Oil Corporation.
STOCK EXCHANGE PRACTICES
326 L
Mr. PECORA. Was the Consolidated Oil Corporation formerly
known as the " Sinclair Consolidated Oil Corporation? "
Mr. SINCLAIR. The name has been changed from the " Sinclair "
to the " Consolidated "; yes.
Mr. PECORA. In the year 1928 were you an officer and director of the
corporation then known as the Sinclair Consolidated Oil Corporation?
Mr. SINCLAIR. I was.
Mr. PECORA. What office did you hold ?
Mr. SINCLAIR. Chairman of the board.
Mr. PECORA. HOW long had you been chairman of the board?
Mr. SINCLAIR. I do not recollect the number of years.
Mr. PECORA. Some years prior to 1928 ?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. DO you recall, sometime during the summer of 1928,,
having a conference with a man by the name of Arthur W. Cutten
with respect to the sale by the Sinclair Consolidated Oil Corporation
of a large block of its capital common stock?
Mr. SINCLAIR. I had a consultation with him. I do not remember
whether it was early in the summer or not.
Mr. PECORA. HOW many such consultations did you have with Mr.
Cutten on that subject before any agreement was concluded with
respect to that subject?
Mr. SINCLAIR. I could not say. There were a number of them, Mr.
Pecora.
Mr. PECORA. I do not hear you.
Mr. SINCLAIR. I could not say. But there were a number of them.
Mr. PECORA. Over what period of time were they held?
Mr. SINCLAIR. TO the best of my recollection, in August.
Mr. PECORA. They commenced some time in August?
Mr. SINCLAIR. I would say so.
Mr. PECORA. Who took the initiative in the holding of those
conversations, you or Mr. Cutten?
Mr. SINCLAIR. I did.
Mr. PECORA. What was
the original plan proposed to Mr. Cutten
with respect to such sale of the capital common stock?
Mr. SINCLAIR. I do not understand your question.
Mr. PECORA. What was the substance of your first conversation
with him on that subject? I will put it that way.
Mr. SINCLAIR. I could not remember.
Mr. PECORA. When did you first conceive the idea of making to
Mr. Cutten or to any other person a proposed purchase from your
corporation a large block of its capital common stock?
Mr. SINCLAIR. It was about the time these conversations started.
Mr. PECORA. Did the idea originate with you ?
Mr. SINCLAIR. It originated with myself and my directors.
Mr. PECORA. Was it the subject of discussion at any meeting of
the board of directors prior to your first conference with Mr. Cutten
some time in August 1928 ?
Mr. SINCLAIR. I would say so, but I don't remember.
Mr. PECORA. Was it made the subject of discussion that would
appear on the minutes of the corporation ?
Mr. SINCLAIR. NO ; it was not—informal discussion.
175541—34—PT 7
4
3262
STOCK EXCHANGE PEACTICES
Mr. PECORA. At board meetings?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Will you tell
the committee how the idea originated,
either in your mind or in the minds of members of your board, that
led you to go to Mr. Cutten some time in August of that year with
the proposition that you discussed ?
Mr. SINCLAIR. I would say the idea originated with my directors
and myself to sell common shares to give us more working capital.
Mr. PECORA. TO give the company more working capital?
Mr. SINCLAIR. Yes,
Mr. PECORA. HOW
sir.
many shares of common stock was the company at that time authorized to issue?
Mr. SINCLAIR. I think something like 1,100,000 shares; something
of that sort.
Mr. PECORA. YOU probably misunderstood my question. How
many shares were authorized to be issued by the corporation at that
time ?
Mr. SINCLAIR. That were not issued?
Mr. PECORA. That were not issued.
Mr. SINCLAIR (after conferring with an associate). Will you ask
the question again, please?
Mr. PECORA. The reporter will read it.
(The reporter read the pending question.)
Mr. SINCLAIR. I do not understand the question.
Mr. PECORA. When was the company organized?
Mr. SINCLAIR. The Sinclair Co.?
Mr. PECORA. Yes, sir.
Mr. SINCLAIR. 1916.
Mr. PECORA. I understand it was in
Mr. SINCLAIR. The original Sinclair
September 1919. .
Co. was 1916, and there were
some consolidations, I think, later.
Mr. PECORA. The consolidation resulted in the organization of ?.
company called the Sinclair Consolidated Oil Corporation, did it
not?
Mr. SINCLAIR. I think so.
Mr. PECORA. When was the Sinclair Consolidated Oil Corporation
organized?
Mr. SINCLAIR. 1919.
Mr. PECORA. HOW many
shares of capital common stock was it
authorized to.issue at that time?
Mr. SINCLAIR. Five and a half million.
Mr. PECORA. Five and a half million shares. Of that number, how
many had actually been issued by August 1928 ?
Mr. SINCLAIR. I think all but 1,116,000 shares, or 1,115,000 shares.
Mr. PECORA. By August 1928 had you had any informal discussions with members of the board of directors of the Sinclair Concolidated Oil Corporation looking to the issuance of those 1,115,000odd shares?
Mr. SINCLAIR. My best recollection is that we did; yes, sir.
Mr. PECORA. AS a result of those informal discussions did you go
to Mr. Arthur W. Cutten in August of 1928 and discuss with him a
proposition which you advanced to him on behalf of your corporation, to buy from your corporation those shares ?
STOCK EXCHANGE PRACTICES
3263
Mr. SINCLAIR. I could not say what date it was, but I did go to him
along about that time.
Mr. PECORA. Had you received specific authority from the board
of directors of your corporation to make such a proposition at that
time to Mr. Cutten?
Mr. SINCLAIR. It was not a proposition. It was a tentative
discussion.
Mr. PECORA. Had you received any authorization from your board
of directors to discuss tentatively with him such a proposition ?
Mr. SINCLAIR. NO authorization that I would say was an authorization by any records or minutes of any meetings.
Mr. PECORA. Was it any other kind of an authorization?
Mr. SINCLAIR. I do not think so.
Mr. PECORA. What proposition did you originally make to Mr.
Cutten?
Mr. SINCLAIR. I did not make any original proposition. It was a
discussion.
Mr. PECORA. What proposition did you originally discuss with
him?
Mr. SINCLAIR. It was not a proposition, I say. It was a suggestion.
Mr. PECORA. What suggestion did you originally discuss with him
or make to him?
Mr. SINCLAIR. That we would like to sell.
Mr. PECORA. Sell what?
Mr. SINCLAIR. I think it was 1,100,000 shares.
Mr. PECORA. Did you ask him if he would like to buy ?
Mr.
SINCLAIR. I
did.
Mr. PECORA. What did he say?
Mr. SINCLAIR. We discussed it.
Mr. PECORA. Give the committee the substance of that discussion.
Mr. SINCLAIR. I t is pretty difficult for me to remember the sub*
stance of all the discussions we have had. I discussed this matter
with Mr. Cutten fully.
Mr. PECORA. Don't you recall anything more about it than the
fact that you discussed the subject with him in August?
Mr. SINCLAIR. I do not understand your question. I would likt
to answer it if I could. Naturally I discussed many things with him
when I was discussing the proposition of selling him that many
shares. I suppose we discussed the company, and we discussed the
oil business, and we discussed the market situation, and many things,
but I eannot recall or remember the full discussion.
Mr. PECORA. I have not asked you to recall the full discussion. I
have asked you to give us the substance of it.
Mr. SINCLAIR. I do not know that I can give you any more than
that.
Mr. PECORA. I did not get that answer.
Mr. SINCLAIR. I do not know that I can give you any more than
the substance. If you will refresh my memory about it——
Mr. PECORA. HOW can I refresh your memory, Mr. Sinclair, when
I had nothing to do with the transaction at that time?
Mr. SINCLAIR. I do not know what information you want.
Mr. PECOEA. I want all the information you can give the committee with regard to your proposing or suggesting to Mr. Cutten that
3264
STOCK EXCHANGE PRACTICES
he purchase from your company 1,130,000 shares of its capital common stock.
Mr. SINCLAIR. It would be pretty difficult for me to answer that
question. However, I was endeavoring to sell to Mr. Cutten those
shares, and I certainly gave him, as far as was possible, the best
that I could put forward in reference to the company.
Mr. PECORA. Had you learned, as a result of any informal discussions that you had had with members of the board of directors of
your company prior to your going to Mr. Cutten in August 1928,
that the directors were willing to sell or were anxious or wanted to
sell this block of 1,130,000 shares of the capital common stock of the
company?
Mr. SINCLAIR. I would say that that the directors had discussed,
the matter informally and my impression was that they would be
willing to sell.
Mr. PECORA. In the discussion you had, informally or otherwise,,
with members of your board, was there anything said concerning the
price at which the company would be willing to sell those shares?
Mr. SINCLAIR. NO* at that time.
Mr. PECORA. But you did gather, from those informal discussions,,
that the board would be willing to sell those shares, did you ?
Mr. SINCLAIR. I
did.
Mr. PECORA. Was there nothing said by you to Mr. Cutten whei*
you first suggested his buying those shares, as to the price ?
Mr. SINCLAIR. I do not think so, in the first discussion.
Mr. PECORA. HOW many conversations, all told, did you have with
Mr. Arthur W. Cutten between the first one, which you say was*
sometime in August 1928, and the 24th day of October 1928 ?
Mr. SINCLAIR. I could not say.
Mr. PECORA. More than one?
Mr. SINCLAIR. I would say so.
Mr. PECORA. Half a dozen?
Mr. SINCLAIR. Perhaps.
Mr. PECORA. Somewhere in the stage, or along in the course of
those conversations, there must have been some discussion of the
price, must there not?
Mr. SINCLAIR. The price was not discussed definitely. The price,
if you remember, at that time, was varying. In those transactions,,
as far as I can remember, the price usually terminates at the end of
the discussion, and not at the start. We all watch the market, and
endeavor to get as much as we can, and I think the purchaser is endeavoring to buy as cheap as he can.
Mr. PECORA. Did you refrain from discussing a price for those
shares with Mr. Cutten until about the end of the negotiations you
had with him?
Mr. SINCLAIR. I did not refrain.
Mr. PECORA. Did you discuss the price, or did you fail to discuss
the price, for any reason whatsoever until near the end of those
negotiations?
Mr. SINCLAIR. I cannot remember. We may have discussed price*.
Mr. PECORA. What price did you ever discuss with him?
Mr. SINCLAIR. The only price that I finally discussed with Mr..
Cutten was the price of $30 a share.
STOCK EXCHANGE PRACTICES
3265
Mr. PECORA. When, for the first time, do you now recall you mentioned that price to him?
The CHAIRMAN. Mr. Sinclair, would you mind sitting a little
closer to the table so that we can hear?
Mr. SINCLAIR. I am sorry. Your question again, please?
(The reporter read the pending question.)
Mr. SINCLAIR. Well, I could not say.
Mr. PECORA. Was it toward the end of the negotiations?
Mr. SINCLAIR. I would say so; perhaps several weeks before—
three weeks. I could not say.
Mr. PECORA. Did he demur to the price when you first mentioned
it to him ?
Mr. SINCLAIR. He demurred at the price before he signed the
contract.
Mr. PECORA. What did he say about it ?
Mr. SINCLAIR. He said it was too high.
Mr. PECORA. Did he make a counter proposal as to price?
Mr. SINCLAIR. He did
Mr. PECORA. Did you
not.
finally convince him that $80 a share was
fair and reasonable?
Mr. SINCLAIR. He accepted that price.
Mr. PECORA. Was it as a result of bargaining between you and
him?
Mr. SINCLAIR. Well, I could not say. He would have to answer
lhat question himself.
Mr. PECORA. YOU were a party to the conferences.
Mr. SINCLAIR. All the time trying to sell.
Mr. PECORA. At $30?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. What price,
other than $30, did he ever mention as
a price that would interest him?
Mr. SINCLAIR. That I could not say, but it was always below $30.
I will say that.
Mr. PECORA. Was regard given by you, in the course of these conferences, to the market quotations for the stock?
Mr. SINCLAIR. I did not get that question.
(The reporter read the pending question.)
Mr. SINCLAIR. Somewhat; yes, sir.
Mr. PECORA. HOW did the market quotations compare with the $30
-price that you were asking ?
Mr. SINCLAIR. I think the market was somewhat below $30.
Mr. PECORA. DO you recall what the book value of the stock was
during the course of these negotiations that you were conducting
with Mr. Cutten?
Mr. SINCLAIR. I think somewhere around "$50.
Mr. PECORA. Did the book value, in your opinion, reflect the true or
the intrinsic value of the stock?
Mr. SINCLAIR. I did not think so.
Mr. PECORA. What did you think was the intrinsic value of the
stock at that time ?
Mr. SINCLAIR. It depended largely upon the condition of the oil
business.
Mr. PECORA. Well, whatever that condition was, what did you think
was the intrinsic value of the stock at that time ?
3266
STOCK EXCHANGE PRACTICES
Mr. SINCLAIR. I thought $30 a share was a very good value or I
would not have sold them, or proposed to my directors to sell them
at $30 a share.
Mr. PECORA. Why was there that wide difference between what you
considered to be the intrinsic value of the stock and its book value ?
Mr. SINCLAIR. I could not say. It was only my opinion in reference to the value of oil properties.
Mr. PECORA. YOU were currently informed of the book value of
the stock of your company, were you not?
Mr. SINCLAIR. I was; certainly.
Mr. PECORA. Did you think, currently, that the book value was
out of line with its intrinsic value ?
Mr. SINCLAIR. I thought so.
Mr. PECORA. Due to what?
Mr. SINCLAIR. Due to the oil situation as it came about over a
period of years.
Mr. PECORA. What do you mean by the oil situation as it came
about ?
Mr. SINCLAIR. I mean properties were not as valuable as they were
before that time. They were selling at less. Oil was selling in
lesser amount, and so forth, and so on. Our profits were not as
they should have been.
The CHAIRMAN. May I ask, Mr. Sinclair, what do you mean by
" book value "? What is that based upon?
Mr. SINCLAIR. Senator, book value is usually based upon the price
that you pay for properties acquired, adding to that your surplus
earned, and so forth.
Mr. PECORA. In other words, the liquidating value?
Mr. SINCLAIR. Book value liquidating value ?
Mr. PECORA. Wouldn't it be under those circumstances ?
Mr. SINCLAIR. I don't think so.
Senator COTJZENS, Did you add to your book value a discoveryvalue ?
Mr. SINCLAIR. I think not, Senator.
Senator COTJZENS. YOU just figured actual cost in the book value?
Mr.
SINCLAIR. Yes.
Senator COTJZENS. I t was the practice in the oil industry in those
days, though, was it not, to add a discovery value to the properties?
Mr. SINCLAIR. Some companies did that, but I don't think we
did it. I don't recall that we did.
Mr. PECORA. What is this element of discovery value based upon?*
Mr. SINCLAIR. The element of discovery value ?
Mr. PECORA. This element that has been referred to as discoveryvalue.
Mr. SINCLAIR. I did not refer to it. We did not practice it.
Mr. PECORA. What is it based upon, whether you practiced it or
not?
Mr. SINCLAIR. I think some companies based it upon the fact that
they take a lease and make a producing property of it, and they
write up the value.
Mr. PECORA. Sort of a prospect value, is it ?
Mr. SINCLAIR. They pull themselves up by their own boot straps,,
in my opinion.
STOCK EXCHANGE PRACTICES
3267
Mr. PECORA. When you first went to Mr. Cutten and discussed
with him the propose! or suggestion that he buy these 1,130,000
shares, was it your purpose to sell to him individually and for his
own account that block of stock?
Mr. SINCLAIR. If possible.
Mr. PECORA. If possible. Did he indicate that he was prepared
to buy that large an amount of stock at that time ?
Mr. SINCLAIR. I don't think I discussed that matter with him.
Mr. PECORA. Did you have in mind at the time the organization
of a group or syndicate to purchase that amount of stock from your
company?
Mr. SINCLAIR. I t was my opinion that he would do that. That
was his business, not mine.
Mr. PECORA. Did you suggest that to him?
Mr. SINCLAIR. I do not remember that I did; it may have been
discussed.
Mr. PECORA. Have you no knowledge or recollection of that?
Mr. SINCLAIR. Not at that time.
Mr. PECORA. Eventually on October 24, 1928, negotiations between
you and Mr. Cutten had progressed to a point where a firm agreement
was entered into, dated October 24, 1928. Do you recall that?
Mr. SINCLAIR. Yes.
Mr. PECORA. Who prepared that agreement?
Mr. SINCLAIR. It was prepared, as I understand from my counsel,,
between our counsel and the counsel for the purchaser, Mr. Cravath'soffice.
Mr. PECORA. Was Mr. Cravath's office the counsel for the purchaser ?
Mr. SINCLAIR. I understand so.
Mr. PECORA. That is, he was counsel for Mr. Cutten?
Mr. SINCLAIR. I understand so—and his group.
Mr. PECORA. On October 24,1928, or by that date, had a group been?
formed, either by Mr. Cutten or by anyone else, to purchase thisblock of 1,130,000 shares?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Who formed that group?
Mr. SINCLAIR. Cutten.
Mr. PECORA. Did he take the initiative in that?
Mr. SINCLAIR. I would rather say he did; or
I was taking the*
initiative as much as possible.
Mr. PECORA. Did you suggest that a group be formed, to Mr.
Cutten, or did he suggest it to you ?
Mr. SINCLAIR. I do not know; perhaps both.
Mr. PECORA. Did you become a participant in that group?
Mr. SINCLAIR. I did.
Mr. PECORA. TO what extent, originally?
Mr. SINCLAIR. Originally, I think, one fourth.
Mr. PECORA. Who were the other participants in
the group, originally, the purchasing group?
Mr. SINCLAIR. Blair & Co.
Mr. PECORA. What was the extent originally of their participation ?
Mr. SINCLAIR. Blair & Co., 282,500 shares.
3268
STOCK EXCHANGE PKACTICES
Mr. PECORA. What percentage is that?
Mr. SINCLAIR. I have not a lead pencil.
Mr. PECORA. YOU have one right before you. If you do not
already know, I am afraid that you will have to make the calculation.
Mr. SINCLAIR (after a calculation by one of his associates).
Twenty-five percent.
Mr. PECORA. Did you not know when I asked that question that
it was a 25 percent participation, Mr. Sinclair?
Mr. SINCLAIR. I did not.
Mr. PECORA. Did you not
have that in mind, from your knowledge
and recollection of the facts pertaining to the formation of this
purchasing group ?
Mr. SINCLAIR. I had that in mind, but I certainly did not want to
answer the question unless I was quite sure about it.
Mr. PECORA. What was the extent of your participation originally ?
Mr. SINCLAIR. Twenty-five percent.
Mr. PECORA. Who were the other participants originally in the
purchasing group?
Mr. SINCLAIR. The Chase Securities Corporation, 188,333^ shares.
Mr. PECORA. Representing what percent?
Mr. SINCLAIR. TWO twelfths, I think.
Mr. PECORA. Who were the other participants originally ?
Mr. SINCLAIR. Shermar Corporation, 94,166% shares.
Mr. PECORA. Representing one twelfth?
Mr. SINCLAIR. I would say so; yes. Arthur W. Cutten, 282,500
•shares.
Mr. PECORA. Representing 25 percent?
Mr. SINCLAIR. Yes.
Mr. PECORA. DO you know who suggested the inclusion of the
•Chase Securities Corporation in this purchasing syndicate?
Mr. SINCLAIR. I do not know whether I did or* whether someone
else did.
Mr. PECORA. If you did, what prompted you to do it ?
Mr. SINCLAIR. I was endeavoring to get together a group to buy
these shares.
Mr. PECORA. Did you understand, prior to October 24, that it
would be necessary to form a group to buy these shares because Mr.
Cutten himself could not buy them all ?
Mr. SINCLAIR. NO ; I did not. I understood that Mr. Cutten was
perfectly able to buy them all.
Mr. PECORA. Then why was the group formed?
Mr. SINCLAIR. Because, as I remember it, it was suggested by perhaps myself or maybe him. As I said a while ago, I do not
remember.
Mr. PECORA. Had you had previous transactions with the Chase
Securities Corporation, of any kind?
Mr. SINCLAIR. Oh,
yes.
Mr. PECORA. Of a syndicate character?
Mr. SINCLAIR. Well, they have sold a great many securities for
our company.
Mr. PECORA. In syndicates or through syndicates?
Mr. SINCLAIR. They usually organized syndicates.
STOCK EXCHANGE PRACTICES
3269
Mr. PECORA. Who invited Blair & Co. to participate in this purchasing group ?
Mr. SINCLAIR. Perhaps I did; I do not remember.
Mr. PECORA. Had you had similar transactions prior to that time,,
with Blair & Co. ?
Mr. SINCLAIR. Not similar transactions.
Mr. PECORA. Had you had other business transactions involving:
the purchase or sale or both of securities, with Blair & Co. ?
Mr. SINCLAIR. Yes.
Mr. PECORA. And in which syndicates were formed ?
Mr. SINCLAIR. I imagine so.
Mr. PECORA. Who invited the Shermar Corporation
to participate1
in the purchasing syndicate ?
Mr. SINCLAIR. I could not say. Perhaps I did.
Senator GORE. Was that Mr. Wiggins' company ?
Mr. SINCLAIR. That was Mr. Wiggins' company, as I understood it.
Mr. PECORA. With whom did you discuss in behalf of the Shermar
Corporation the participation of that corporation in this purchasing
syndicate ?
Mr. SINCLAIR. I think it was discussed at the time Mr. Wiggin was
present, if I remember correctly.
Mr. PECORA. DO you mean you discussed it with Mr. Wiggin ?
Mr. SINCLAIR. I think Mr. Wiggin was present when the matter
was discussed.
Mr. PECORA. Was he present as a representative of the Shermar
Corporation or as a representative of the Chase Securities Corporation?
Mr. SINCLAIR. I could not testify to that. I imagine, both. I do<
not know.
Mr. PECORA. DO you remember meeting Mr. Callahan, who represented the Chase Securities Corporation, in any of the conferences'
that led to the formation of this purchasing group ?
Mr. SINCLAIR. I do.
Mr. PECORA. Callahan
represented the Chase Securities Corporation in those conferences, did he not ?
Mr. SINCLAIR. I could not say. I think Mr. Freeman was present.
Mr. PECORA. Representing the Chase Securities Corporation?
Mr. SINCLAIR. I could not say who they were representing.
Mr. PECORA. HOW much of a participation was the Chase Securities Corporation originally invited to take in this purchasing group ?
Mr. SINCLAIR. I could not answer that. Personally I should have
liked to have them take it all.
Mr. PECORA. Who could answer that ?
Mr. SINCLAIR. Perhaps, Mr. Cutten.
Mr. PECORA. Mr. Cutten referred us to you.
Mr. SINCLAIR. I am sorry.
Mr. PECORA. YOU want to refer us back to him?
Mr. SINCLAIR. What about the Chase Securities Co.? Cannot
they answer those questions ?
Mr. PECORA. They will be given a chance to. But Mr. Callahan is
dead, unfortunately.
.3270
STOCK EXCHANGE PRACTICES
Mr. SINCLAIR. I think there was a Mr. Freeman there representing
either the Chase Corporation or the Chase Bank. I do not know
who he represented.
Mr. PECORA. I thought, in view of the fact that you were one of
the original participants and you first proposed to Mr. Cutten the
transaction whereby your company was to sell this large block
of stock, that you would be in a position to tell us something about
the primary details of this purchasing group, how it was formed,
at whose invitations participations were given, and so forth.
Mr. SINCLAIR. I should be delighted to tell you any information
I might have, Mr. Pecora.
Mr. PECORA. Are you unable to tell us because you never knew, or
because you have a failure of recollection?
Mr. SINCLAIR. I will tell you what
Mr. PECORA. I am asking you about it.
Mr. SINCLAIR. What was the question?
Mr. PECORA. YOU have answered a series of questions, and the
formula that you have used was " I cannot tell you " or " I cannot
say " or " I do not know." Do you make those answers because you
never knew those things, or because you have at the present time a
failure of recollection about those things?
Mr. SINCLAIR. I do not know that I have a failure of recollection,
hut it is rather difficult to remember the details of transactions or
some 5 or 6 years ago.
Mr. PECORA. Did you ever have a larger transaction in dollars and
cents with regard to the stock of the Sinclair Consolidated Oil Corporation than this one that I am now asking you about?
Mr. SINCLAIR. I rather—I mean, yes. I do not remember whether
it was the Sinclair Consolidated Corporation or whether it was the
corporation before that. [After consulting with associates:] That
was the company that was organized, I believe, before the Sinclair
•Consolidated, the Sinclair Oil & Refining Corporation, or perhaps
it was the Sinclair Consolidated; I do not remember.
Mr. PECORA. Had you ever had any business transaction prior to
this time we are speaking of with the Shermar Corporation?
Mr. SINCLAIR. Directly?
Mr. PECORA. Directly or indirectly.
Mr. SINCLAIR. I could not say whether the Shermar Corporation
was a member of various syndicates in the sale of our securities or
not. I imagine they were. I do not know. Unless you participated in the syndicate you would not know the participants.
Senator GORE. Did your company own any stock in the Chase
National Bank?
Mr. SINCLAIR. NO, sir.
Mr. PECORA. HOW long
before October 24, 1928, did you and Mr.
dutten and other members of the purchasing group, "the original
purchasing group, reach an agreement on a price of $30 a share for
that stock ?
Mr. SINCLAIR. I could not say, but it was a few days before; it may
liave been a week or 10 days. That is, the agreement reached subject
to the approval of the directors of the company. I had no authority
to make a firm agreement with anyone unless approved by the
directors.
STOCK EXCHANGE PEACTICES
3271
Mr. PECORA. When for the first time was the firm agreement entered
Into?
Mr. SINCLAIR. October 24.
Mr. PECORA. 1928?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. At that time
the agreement was entered into between
the Sinclair Consolidated Oil Corporation as the seller and Arthur W.
Cutten individually as the buyer?
Mr. SINCLAIR. Yes.
Mr. PECORA. But you
knew that Arthur W. Cutten individually
was not going to be the buyer, did you not, at that time?
Mr. SINCLAIR. I did.
Mr. PECORA. YOU knew
that a purchasing group had been formed,
consisting of five units, namely, you, Cutten, Blair & Co., the Chase
Securities Corporation, and the Shermar Corporation?
Mr. SINCLAIR. Eight.
Mr. PECORA. Why was not the firm agreement made with those
members of the purchasing group instead of with Mr. Arthur Cutten
individually ?
Mr. SINCLAIR. I could not tell you.
Mr. PECORA. YOU were conducting these negotiations for your corporation, were you not?
Mr. SINCLAIR. Eight.
Mr. PECORA. Why can you not tell us why such an important agreement was made with Mr. Cutten individually instead of with the
persons that you knew were going to be the actual buyers ?
Mr. SINCLAIR. I cannot answer that question, because it did not
make any difference to me whether the contract was made with the
group or with Mr. Cutten.
Mr. PECORA. Why did it not make a difference ?
Mr. SINCLAIR. Because I was going to be a member of the group
immediately.
Mr. PECORA. Then, why did you you not have yourself included in
the agreement to purchase?
Mr. SINCLAIR. I do not know, unless my attorney might tell you,
or somebody's attorneys. I have no reason for its not being me
direct, or any reason for its not being made with Mr. Cutten.
Personally I did not care.
Mr. PECORA. I t was known that the actual purchasers were to be
five individuals or corporations, was it not ?
Mr. SINCLAIR. Yes.
Mr. PECORA. And despite
that known fact at that time the agreement was made with Mr. Cutten individually by your corporation,
was it not ?
Mr. SINCLAIR. I think so.
Mr. PECORA. That was advisedly done, was it not?
Mr. SINCLAIR. Not by me.
Mr. PECORA. By whom?
Mr. SINCLAIR. I do not know. I did not participate in the meeting; I do not know. But I am pretty sure that the directors of
the corporation understood who and what the group was going to
be. But why they made it in the name of Mr. Cutten I could not
say. It may be strange, but that is a fact. I had not any reason
3272
STOCK EXCHANGE PRACTICES
for its not being made with the group, and I had no reason for its.
not being made with Mr. Cutten.
Mr. PECORA. Why was the agreement made in a form that was at
variance with what was known to be the actual fact, namely, that
the purchaser was not to be Arthur W. Cutten in his own individual
right, but that the purchaser was to be this syndicate of five members?
Mr. SINCLAIR. I cannot tell.
Mr. PECORA. What?
Mr. SINCLAIR. I cannot tell you.
Mr. PECOBA. Who do you think could say?
Mr. SINCLAIR. I would suggest the attorneys.
Mr. PECORA. Who were the attorneys that advised that the agreement be made in that form?
Mr. SINCLAIR. I do not know whether they advised it or not. The
contract was certainly made that way.
Mr. PECORA. Who were the attorneys you had in mind when you
suggested that the attorneys could answer the question ?
Mr. SINCLAIR. Mr. Stanford was our general attorney at that
time. He is right here.
Mr. PECORA. Mr. Stanford has already been sworn, and I will ask
him if he can enlighten this committee as to the reason for that.
Mr. STANFORD. I do not know why the contract was made in the
name of Cutten rather than the group.
Mr. PECORA. DO you know anybody that does know ?
Mr. STANFORD. Allow me to answer the question.
Mr. PECORA. I thought you had when you said you did not know.
Mr. STANFORD. I will finish my answer, and then you can ask me*
another.
Mr. PECORA. All right.
Mr. STANFORD. I say, I do not know why the contract was made
individually with Mr. Cutten rather than the group, except that it
must have been at the request of the group it was made that way.
Mr. PECORA. Mr. Stanford, were you a participant in the discussions with the group in which the decision was made to have the contract made with Mr. Cutten individually ?
Mr. STANFORD. NO, I was not.
Mr. PECORA. Mr. Sinclair, I am
afraid that I will have to fall back
on you. I have adopted your suggestion of referring the matter to
Mr. Stanford. You have heard his answers which are that he does
not know, in substance. Do you know the reason why it was done?'
Mr. SINCLAIR. I have said that I did not.
Mr. PECORA. DO you know anybody that does know the reason
why it was done in that way ?
Mr. SINCLAIR. I do not. Perhaps some one in this group does;
but I do not.
Mr. PECORA. YOU were in the group.
Mr. SINCLAIR. I do not know everything that was done.
Mr. PECORA. Mr. Cutten last week did not seem to know, when he
testified last week before this committee.
Mr. SINCLAIR. Could you tell me what is the difference whether
it was made with the group or whether it was made with Mr. Cutten?
Mr. PECORA. That is what I want you to tell us.
Mr. SINCLAIR. I do not know.
Mr. PECORA. Why it was done that way.
STOCK EXCHANGE PRACTICES
3273
Mr. SINCLAIR. I do not know. I cannot answer. It was not a
secret at all.
Mr. PECORA. What is that ?
Mr. SINCLAIR. It was not a secret.
Mr. PECORA. It was not done by accident, was it?
Mr. SINCLAIR. Perhaps it might have been; I do not know.
Mr. PECORA. Are those things done by accident, Mr. Sinclair—a
deal involving $30,000,000? They are not done by accident, are they?
Mr. SINCLAIR. I would not think so.
Mr. PECORA. DO you not think it was done by design?
Mr. SINCLAIR. Well, I could not answer that question. Perhaps
you are right.
Mr. PECORA. Can you suggest any reason why it should have been
done by design in that way ?
Mr. SINCLAIR. I have said I could not.
Mr. PECORA. YOU could not even suggest a reason ?
Mr. SINCLAIR. NO, sir.
Mr. PECORA. NOW, do
you recall when the agreement was signed
by the Sinclair Consolidated Oil Corporation, this agreement of
October 24, 1928?
Mr. SINCLAIR (addressing an assistant). What is the date, please?
[After a pause.] October 24.
Mr. PECORA. I know; but when on that day, during the forenoon
or the afternoon?
Mr. SINCLAIR. I would say the afternoon. We usually have our
meetings around 1 o'clock.
Mr. PECORA. YOU mean meetings of the board?
Mr. SINCLAIR. Yes, sir; executive committee.
Mr. PECORA. Was there a meeting of the board of directors of the
Sinclair Consolidated Oil Corporation held on that day?
Mr. SINCLAIR (after conferring). It was an executive committee
meeting on the 24th. The contract was signed and I understand
that the directors' meeting was the next day, approving the contract.
Mr. PECORA. Was the meeting of the executive committee of the
board held before or after the agreement between the corporation
and Cutten was formally entered into ?
Mr. SINCLAIR. Eead that question, please.
(The shorthand reporter read the question of Mr. Pecora.)
Mr. SINCLAIR. I am trying to get your question correct in my
mind. Do I understand the question to be whether or not the contract was signed before the approval of the executive committee?
Was that the question?
Mr. PECORA. Yes, sir.
Mr. SINCLAIR. I do not think it was.
Mr. PECORA. Where was this agreement
company ?
Mr. SINCLAIR. Yes,
Mr. PECORA. Same
signed, at the office of the
sir.
place where the meeting of the executive com-
mittee was held?
Mr. SINCLAIR. I do not know whether in that same room or not.
Mr. PECORA. In the same offices?
Mr. SINCLAIR. In the same building; yes.
3274
STOCK EXCHANGE PKACTICES
Mr. PECORA. Well, in the offices of the Oil Corporation ?
Mr.
SINCLAIR. Yes.
Senator GORE. Mr. Sinclair
Mr. SINCLAIR. Yes, sir.
Senator GORE. What was
the object in making this sale of stock
and raising this money? Was it to buy new properties, to develop
old properties, to pay debts, or both? What was the immediate
object?
Mr. SINCLAIR. I would say, Senator, for both.
Senator GORE. What was done with the money after the sale
was made?
Mr. SINCLAIR. During '28 we expended some 20 million dollars
for capital expenditures; '29 I think over 40 million. Those moneys
were used in the regular course of business. I do not remember
whether there was any funded debt included in the expenditures or
not.
Senator GORE. DO you know whether you had definite commitments that you wanted to meet with the proceeds of the sale ?
Mr. SINCLAIR. N O ; we did not. Of course, we had quite some
funded debt, Senator, which is more or less definite.
Senator GORE. Maturing?
Mr. SINCLAIR. N O ; not at that moment. [After conferring.}
The first maturity was September 1930. I was going to say, Senator, that our competitors in the oil industry are usually rather busy
taking advantage of an opportunity to purchase, and I feel that
it is a very wise thing for any oil company to have plenty of money
in the treasury if it possibly can, whether you do use it or jou do not*
Senator GORE. YOU would not limit that to oil companies, would
you?
Mr. SINCLAIR. That is about all I know anything about, Senator*
Senator COTJZENS. Was the Prairie Oil Co. a competitor of yours
at that time ?
Mr. SINCLAIR. Yes, sir; in the producing business, Senator.
Mr. PECORA. Your company was a producing as well as a distributing company?
Mr. SINCLAIR. Yes.
Mr. PECORA. The Prairie
Pipe Line was the competitor, was it 7
Mr. Sinclair, in the pipe-line business ?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Mr. Sinclair,
reverting again to the fact that the
agreement by your corporation to sell its 1,130,000 shares was in
form made with Mr. Arthur W. Cutten individually, although at
the time you knew that a syndicate of which you were a 25 percent
member or participant was actually going to buy that block of stock,
the reason the contract was signed by Mr. Cutten individually was to
conceal your name from the record as a participant in the purchasing
group ?
Mr. SINCLAIR. It was not.
Senator COUZENS. Why wasn't
the stock offered to the stockholders ?
Mr. SINCLAIR. Senator, at the time these negotiations were being
had the shares of our company in the past 4 years before that
time had never sold as high as 30. I do not think that we would
STOCK EXCHANGE PRACTICES
3275
have been successful—that is my personal opinion—if the shareshad been sold to the stockholders. If they had been we would not
have received, in my opinion, as much as $30 a share for them, and
I doubt very much whether you could find a syndicate to underwrite
shares that "the stockholders do not wish to accept only at a very low
cost.
Senator COTJZENS. One of the reasons for that would have been
that you earned only 89 cents a share in 1927, and even at a capitalization of $30 a share it would have earned only about $2.65 per share.
It appears to me that it must be obvious to you that you could not
have sold them on any such earning power as that. Could you?
Mr. SINCLAIR. I doubt very much whether we could or not have
sold it to the stockholders, because it is rather difficult to get together
a syndicate to underwrite that which they do not know whether they
will accept except at a low figure.
Mr. PECORA. Was an opinion sought by you in behalf of your company from any attorney or attorneys concerning the necessity of
the company first offering this block of stock to its then existing
stockholders ?
Mr. SINCLAIR. Will you repeat that question, please?
(The shorthand reporter read the question of Mr. Pecora as above
recorded.)
Mr. SINCLAIR. Yes.
Mr. PECORA. And did
you get an opinion to the effect that it was
not obligatory or necessary for the corporation first to offer these
shares to its stockholders ?
Mr. SINCLAIR. I think so. However, the stockholders voted at one
time that it was not necessary. I quite understood that. I thought
I did, but I got an opinion from the attorney.
Mr. PECORA. NOW, on October 24, 1928 you said a meeting of the
executive committee of the board of your corporation was held.
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. At that time
was there presented to the committee for
its formal action a proposal to sell to Arthur W. Cutten this 1,130,000
shares for $30 a share ?
Mr. SINCLAIR. I understand, sir.
Mr. PECORA. Who presented that proposition to the committee ?
Mr. SINCLAIR. I do not remember.
Mr. PECORA. Did you?
Mr. SINCLAIR. I could not say. Perhaps I did, or my attorney.
Mr. PECORA. Had you previously told any members of the executive
committee that you would be interested with Mr. Cutten in that
purchase?
Mr. SINCLAIR. I think so.
Mr. PECORA. What is that?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Had you done
that at any meeting of the executive
committee, or had you done it through the medium of informal discussions with different members of the executive committee from time
to time?
Mr. SINCLAIR. Informal discussions. Until the meeting of the executive committee at the time the contract was to be approved I did
not vote, and the reason I did not vote was because I informed them
3276
STOCK EXCHANGE PRACTICES
.at that time that I would be interested in the syndicate. I left the
room.
Senator COUZENS. That is what the directors of the Keconstructfcion Finance Corporation do when they lend themselves money.
Mr. SINCLAIR. Are you comparing this, Senator, with the Reconstruction Finance Corporation?
Senator COTJZENS. I would not be competent to make a comparison,
Jbut I think that they all know the same tricks.
Mr. SINCLAIR. Well, do you agree that they are tricks ?
Senator COTJZENS. I think they are when they profit individually
from their actions as corporate officers.
Mr. SINCLAIR. I S the Reconstruction Finance Corporation a Government institution or a private corporation ?
Senator COTXZENS. Sometimes it looks as though it was a private
^corporation, but I assume that legally it is a public corporation.
Mr. SINCLAIR. I cannot answer for the Government, Senator.
Senator COTJZENS. I understand that. Neither can any of us.
Mr. PECORA. Mr. Sinclair, let me read to you from committee's
exhibit no. 20, which contains an excerpt from the minutes of a
regular meeting of the executive committee of said corporation,
then known as Sinclair Consolidated Oil Corporation, duly held on
October 2'4,1928 (reading):
Mr. Walker, at the request of the chairman, stated to the meeting that Arthur
W. Cutten and associates had made an offer to purchase at a price of $30 per
share all of the corporation's unissued authorized common stock, together with
14,481 shares of the same class of stock now held in the treasury of the corporation, a total of 1,130,000 shares, and further advised the meeting that Blair
& Co., Inc., Chase Securities Corporation, and Mr. H. F. Sinclair were interested parties to the transaction.
Do you recall that action taken at the meeting of the executive
committee? Is you recollection refreshed by my reading of that
excerpt from the minutes?
Mr. SINCLAIR. I think that is correct.
Mr. PECORA. Was it correct that Mr. Cutten and his associates had
made an offer to purchase those shares, or was it correct to say that
the Sinclair Corporation had made an offer to sell those shares to
Mr. Cutten and to his associates ?
Mr. SINCLAIR. I rather think the minds had met.
Mr. PECORA. Their minds met in an agreement. The meeting of
the minds was evidenced by an agreement, was it not?
Mr. SINCLAIR. Yes.
Mr. PECORA. But originally
the proposition consisted of an offer
made by you in behalf of your corporation to Mr. Cutten to sell to
Mm and to his associates ?
Mr. SINCLAIR. A tentative offer.
Mr. PECORA. Tentative offer—it was tentative until it was acted
upon?
Mr. SINCLAIR. Quite.
Mr. PECORA. Yes. Now, do you know why the matter was
brought to the notice of the executive committee on October 24,
1928, in the form in which it appears to have been brought to its
attention by this extract from its minutes that I have read to you ?
Mr. SINCLAIR. I do not understand your question Mr. Pecora.
Mr. PECORA. Let me put it in another way, then: Why were the
members of the executive committee told when this matter was first
STOCK EXCHANGE PRACTICES
3277
brought formally to their attention at this meeting of October 24,
1928, that Mr. Cutten and associates had made an offer to purchase
from the corporation at a price of $30 per share these 1,130,000
shares?
Mr. SINCLAIR. Those were the facts.
Mr. PECORA. Was it not the fact instead that the corporation
originally through you had offered to sell those shares for $30 a
share to Mr. Cutten?
Mr. SINCLAIR. I had not the authority to sell the shares at $30
a share.
Mr. PECORA. Whether or not you had the authority, you undertook to open negotiations with Mr. Cutten for the purpose of selling
in behalf of your corporation to him this 1,130,000 shares?
Mr. SINCLAIR. Very diligently.
Mr, PECORA. Very diligently?
Mr. SINCLAIR. Yes. I used every effort I had as a salesman to
do it.
Mr. PECORA. I don't hear you, Mr. Sinclair.
Mr. SINCLAIR. I say I used every effort possible as a salesman
to make the sale.
Mr. PECORA. Why would it not have been more correct, then, to
have stated at this meeting of the executive committee on October
24 that the corporation through you had offered to sell those
1,130,000 shares at $30 a share to Mr. Cutten and that Mr. Cutten
had agreed to buy them?
Mr. SINCLAIR. I don't understand your question.
Mr. PECORA. Mr. Reporter, will you read the question to him
again, please? Will you follow him closely, Mr. Sinclair, and if
there is a single word in that question that you do not know the
meaning of, tell me, please.
(The shorthand reporter read the original question of Mr. Pecora
as above recorded.)
Mr. SINCLAIR. I cannot answer the question, other than it did not
make any difference to me.
Mr. PECORA. Did it make a difference to you to have the facts
correctly set forth to the executive committee ?
Mr. SINCLAIR. I thought it would. I was endeavoring to do that.
Mr. PECORA. Was it strictly correct to say that Mr. Cutten had
made an offer to purchase these shares at $30 a share, or was it more
correct to say that Mr. Cutten had accepted an offer that you conveyed to him in behalf of your corporation to sell him those shares
at $30 a share?
Mr. SINCLAIR. Mr. Pecora, I cannot answer the question, because
you may feel it is correct doing it one way; some one else may feel it
is correct doing it the other way.
Mr. PECORA. I am asking you what your opinion is as to which
would have been more correct or which would have been more in
accordance with the known facts.
Mr. SINCLAIR. I t is my opinion that what was done was correct.
Mr. PECORA. And what was done was the making of a statement to
the executive committee that Mr. Cutten had made an offer to buy
those shares for $30 a share. The truth of the matter is that Mr.
Cutten never made any such offer until after you had proposed to
1 75541__34__ PT
7
5
3278
STOCK EXCHANGE PRACTICES
him in behalf of your corporation that your corporation would sell
him those shares?
Mr. SINCLAIR. Before this meeting ?
Mr. PECORA. Before that meeting; yes.
Mr. SINCLAIR. NO.
Mr. PECORA. What?
Mr. SINCLAIR. I have
said all the time it was a tentative offer that
1 made to Mr\ Cutten, which must be approved by my board. Now
whether Mr. Cutten said he would buy or I said I would sell or we
will sell subject to the approval of the board, 1 do not know, Mr.
Pecora.
Mr. PECORA. In what form was Mr. Cutten's offer submitted to the
corporation?
Mr. SINCLAIR (after conferring). It was in the form of a written
contract.
Mr. PECORA. Where is it?
Mr. SINCLAIR (after conferring). I think you have this information, Mr. Pecora.
Mr. PECORA. What is that?
Mr. SINCLAIR. I think you have this same information.
Mr. PECORA. I have no record of any offer made by Mr. Cutten
to the corporation, Mr. Sinclair. If you have, I would be very glad
to have you supply it or submit it.
Mr. SINCLAIR. There seems to be no written offer made by Mr.
Cutten. It must have been verbal.
Mr. PECORA. TO whom was it made?
Mr. SINCLAIR. Perhaps myself.
Mr. PECORA. Have you no recollection of it?
Mr. SINCLAIR. Well, I would not know. Some of the other directors might have been there at some of the former meetings.
Mr. PECORA. Well, this was the first time at which this matter
was entered on the records of any meeting of either the executive
committee or the board of directors of your company, was it not?
Mr. SINCLAIR. That was the first formal meeting.
Mr. PECORA. Let me read to you again, for the purpose of possibly
refreshing your recollection, tnis extract from committee's exhibit
no. 120, consisting of the excerpt from t^e minutes of the executive
committee meeting of your corporation of October 24,1928.
Mr. SINCLAIR. Beading from the first page?
Mr. PECORA. Reading from the first page. (Reading:)
Mr. Walker, at the request of the chairman, stated to the meeting that
Arthur W. Cutten and associates had made and offer to purchase, at a price
of $30 per share, all of the corporation's unissued authorized common stock
together with 14,481 shares of the same class of stock now held in the treasury
of the corporation, a total of 1,130,000 shares, and further advised the meeting
that Blair & Co., Inc., Chase Securities Corporation, and Mr. H. F. Sinclair
were interested parties to the transaction.
You then were an interested party to the transaction by virtue of
an agreement you had reached with Mr. Cutten, Blair & Co., and the
Chase Securities Corporation that the four of you would form this
purchasing syndicate ?
Mr. SINCLAIR. Tentative agreement; yes, sir.
Mr. PECORA. When you refer to that as a tentative agreement, why
do you designate it that way?
STOCK EXCHANGE PRACTICES
3279
Mr. SINCLAIR. I designate it that way, Mr. Pecora, on account of
the fact that if the executive committee of the board of directors had
not approved of the contract it would not have been a contract. We
would not have made it.
Mr. PECORA. But all the terms and conditions of the agreement
among the participating members of the purchasing syndicate had
been approved by those members and fully agreed upon ?
Mr. SINCLAIR. Approved, yes.
Mr. PECORA. The agreement was to be effective in the event that
the corporation sold those shares to Cutten and his associates for $30
a share?
Mr. SINCLAIR. Yes.
Mr. PECORA. NOW let
me read further from this extract from the
minutes of the meeting of the executive committee. I am reading
from committee's exhibit no. 120 again, second page:
Thereupon, Mr. Sinclair relinquished the chair to Mr. Watts, and, together
with Mr. Walker, retired from the meeting while said offer was being discussed
and acted upon.
Do you recall that occurrence ?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. And why did
Mr. SINCLAIR. Because we
Mr. PECORA. YOU were on
you and Mr. Walker leave the meeting?
were parties to the transaction.
both sides of the transaction, were you
not?
Mr. SINCLAIR. I was not on both sides. I was on the other side
when I left the meeting.
Mr. PECORA. Well, as the chairman of the board of the directors
of the corporation you were acting for the corporation, were you
not, om the one side ?
Mr. SINCLAIR. Not when I left the meeting.
Mr. PECORA. But up to that time——
Mr. SINCLAIR (interposing). Yes, sir.
Mr. PECORA (continuing). In the negotiations
Mr. SINCLAIR. Yes, sir.
Mr. PECORA (continuing).
You were representing the corporation,
were you not?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Did you state
to the members of the executive committee the extent of your interest in this purchase ?
Mr. SINCLAIR. I could not say. I rather imagine I did.
Mr. PECORA. I S there anything on any of the records of the corporation to show that you revealed to the members of the executive
committee the extent of the interest which you were going to take
with Mr. Cutten and other associates in this transaction?
Mr. SINCLAIR. NO.
Mr. PECORA. What?
Mr. SINCLAIR. NO.
Mr. PECORA. Would
that indicate that you did not disclose the
extent of your interest?
Mr. SINCLAIR. I do not think so. The extent of my interest in
the syndicate was not a secret, Mr. Pecora.
Mr. PECORA. Why was it not stated on the record at this meeting
of the executive committee?
Mr. SINCLAIR. I do not know.
3280
STOCK EXCHANGE PRACTICES
Mr. PECORA. What?
Mr. SINCLAIR. I do not know.
Mr. PECORA. DO you know whether or not you revealed the extent
of your interest?
Mr. SINCLAIR. I am quite sure that I revealed my interest to a
number of the directors informally. I am quite sure I did not at
this meeting.
Mr. PECORA. YOU did not at the meeting?
Mr. SINCLAIR I do not think so.
Mr. PECORA. And this meeting was the first meeting at which the
matter was formally considered by the executive committee, was it
not?
Mr. SINCLAIR. Eight.
Mr. PECORA. The Mr. Walker referred to in this extract from these
minutes was Mr. Elisha Walker who at that time was president of
Blair & Co. ?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. DO you recall
that Mr. Walker made known to the
executive committee at this meeting of October 24 the extent of the
interest of Blair & Co. in this purchasing group ?
Mr. SINCLAIR. I do not know whether he did or not. He did not
while I was in the meeting.
Mr. PECORA. HOW long did the discussion last before the executive
committee, before it agreed to make this agreement with Cutten?
Mr. SINCLAIR. I cannot say.
Mr. PECORA. HOW?
Mr. SINCLAIR. I cannot say.
Mr. PECORA. Was there any protracted discussion of it ?
Mr. SINCLAIR. I would imagine so.
Mr. PECORA. What is that?
Mr. SINCLAIR. I imagine so.
Mr. PECORA. Were you called in by the board to give
them any
further explanation of the transaction?
Mr. SINCLAIR. I was not.
Mr. PECORA. Or of the offer?
Mr. SINCLAIR. I was not.
Mr. PECORA. Was Mr. Walker?
Mr. SINCLAIR. I do not know.
Mr. PECORA. Well, who was at the
board meeting after you and
Mr. Walker retired from it to give the members of the executive
committee full and complete information?
Mr. SINCLAIR. If you will take the same exhibit—I think it is 120?
Mr. PECORA. Exhibit 120; yes, sir.
Mr. SINCLAIR. The executive committee at that time consisted of
15 members. Those present were J. W. Carnes, E. H. Clark, Mr.
Clarkson—B. L. Clarkson was a member, but not being present—
C. E. Crawley, J. F. Farrell, S. L. Fuller, W. H. Isom, W. P.
Philips, J. E. Simpson, E. W. Sinclair—E. W. Sinclair was not
there. I was a member of the board, but was not present when the
contract was executed. E. K. Tinker was a member, but not being
present. Elisha Walker was there, but left the meeting. A. E.
Watts was there and presided. Mr. H. P. Whitney was a member,
but not being there.
STOCK EXCHANGE PRACTICES
3281
Mr. PECOEA. Well, who was there after you and Mr. Walker retired from the room to give the members of the executive committee
complete information concerning this so-called " offer" from Mr.
Cutten to buy those shares?
Mr. SINCLAIR. Our counsel was there.
Mr. PECORA. Mr. Stanford?
Mr. SINCLAIR. Mr. Stanford.
Mr. PECORA. Did not Mr. Stanford become a subparticipant in
this purchasing group?
Mr. SINCLAIR. He became a subparticipant in my portion of the
group, yes.
Mr. PECORA. And to that extent became a subparticipant in the
purchasing group, is that right?
Mr. SINCLAIR. Yes.
Mr. PECORA. Who other
than Mr. Stanford was there qualified
and supplied with the necessary information to tell the executive
committee all about this proposition?
Mr. SINCLAIR. I will say J. W. Carnes, E. H. Clark, C. E. Crawley,
J. F. Farrell, S. L. Fuller, W. H. Isom, W. P. Philips, J. K. Simpson, A. E. Watts.
Mr. PECORA. Have you left out any names?
Mr. SINCLAIR. Only those who were not present.
Mr. PECORA. Yes. So that every one present was in possession
of complete information about this transaction?
Mr. SINCLAIR. I think so.
Mr. PECORA. Where did they get it from?
Mr. SINCLAIR. They got it from our attorneys. They got it from
the discussion that they had at this meeting.
Mr. PECORA. They got it from discussions that they had at this
meeting ?
Mr. SINCLAIR. Perhaps in meetings before in informal discussion.
Mr. PECORA. But there was no meeting before in which the matter
came in formal discussion?
Mr. SINCLAIR. I said " informal discussion."
Mr. PECORA. Informal discussion?
Mr. SINCLAIR. Yes.
Mr. PECORA. Would a matter of this sort be of such slight consequence that it would not be entered on the minutes of the meeting
when it was a matter of discussion at the meeting?
Mr. SINCLAIR. Yes.
Mr. PECORA. I t would ?
Mr. SINCLAIR. Yes. We
discussed many things that never
happened.
Mr. PECORA. NOW, Mr. Watts was given a subparticipation in this
purchasing group, was he not ?
Mr. SINCLAIR. He was, later.
Mr. PECORA. He was the vice chairman of the corporation at that
time?
Mr. SINCLAIR. He was.
Mr. PECORA. And one of
action ?
Mr. SINCLAIR. He
did.
those who voted to approve this trans-
3282
STOCK EXCHANGE PRACTICES
Mr. PECORA. And he got that subparticipation out of your original
interest, did he not?
Mr. SINCLAIR. He did.
Mr. PECORA. NOW, what
other officers or directors of the company
received a subparticipation in this original purchasing group from
you?
Mr. SINCLAIR. J. F . Farrell.
Mr. PECORA. J. F. Farrell. Who else?
Mr. SINCLAIR. J. H. Markham, Jr.; E. W. Sinclair; P. W. Thirtle;
A. E. Watts; H. P. Whitney.
Mr. PECORA. When were these various directors given these subparticipations in the purchasing group by you?
Mr. SINCLAIR. I would say 30 days. Sixty days. I could not
remember. [After conferring with an associate.] About 3 weeks I
understand.
Mr. PECORA. Did not Mr. F. W. Bartlett acquire a subparticipation ?
Mr. SINCLAIR. Not from me.
Mr. PECORA. Not from you?
Mr. SINCLAIR. NO, sir.
Mr. PECORA. Did he from
anyone else among the original participants ?
Mr. SINCLAIR. I do not know.
Mr. PECORA. Well, do you not know that Mr. Arthur W. Cutten
gave him a subparticipation out of his interest?
Mr. SINCLAIR. I do not know; no.
Mr. PECORA. YOU do not know?
Mr. SINCLAIR. NO.
Mr. PECORA. IS this the first time that you have heard of it?
Mr. SINCLAIR. Oh, I have heard of it, but I do not know.
Mr. PECORA. Bartlett was a director of the company, was he
not,
at the time he got this subparticipation in the original purchase?
Mr. SINCLAIR. Yes,
sir.
Mr. PECORA. NOW, do you recall any other officer or director who
either from you or through you, or from or through any other of
the original participants in the purchasing group received a subparticipation in the purchasing group?
Mr. SINCLAIR. Mr. W. L. Conley.
Mr. PECORA. Mr. W. L. Conley?
Mr. SINCLAIR. Yes.
Mr. PECORA. HOW did
Mr. SINCLAIR. He got
he get his participation ?
it from me. He was a vice president, but
not a director. He did not belong to the executive committee.
Mr. PECORA. Who else?
Mr. SINCLAIR. That is all I have a list of here. Those who got
subparticipation from these other men I know nothing about.
Mr. PECORA. DO you know of any reason why any of your officers
or directors should get subparticipations from any of the other original participants in the purchasing syndicate ?
Mr. SINCLAIR. I know of no reason; no.
The CHAIRMAN. Who was Mr. E. W. Sinclair ?
Mr. SINCLAIR. He was my brother. He was not present at this
meeting.
STOCK EXCHANGE PRACTICES
3283
Mr. PECORA. Did you ever learn of any friction at this meeting
of the executive committee that arose and manifested itself while they
were considering this offer of Cutten's on October 24?
Mr. SINCLAIR. I did not.
Mr. PECORA. AS far as you
know did the thing go through there
smoothly ?
Mr. SINCLAIR. It did not or did ?
Mr. PECORA. Did it?
Mr. SINCLAIR. I rather think so.
Mr. PECORA. Have you any doubt of it?
Mr. SINCLAIR. I have no reason to doubt it.
Mr. PECORA. NO. NOW at the time that this
agreement of Octuber 24 was entered into what was the market quotation for the stock?
Mr. SINCLAIR. I will have to refresh my memory. [After consulting with associates.] The range of the market of October 24
was from 32 to 35%- The range of the market on the 23rd was
29% to 32.
Mr. PECORA. I am talking about the 24th.
Senator COUZENS. That is all a matter of record, Mr. Pecora.
Mr. PECORA. I wanted to see if he knew it.
Senator COUZENS. He is getting it off of the same kind of a sheet
that the other witnesses did.
Mr. PECORA. Was the market price of the stock considered by tht,
board or the executive committee on that date when they agreed to
sell to Cutten for $30 a share?
Mr. SINCLAIR. I would think so. I was not in the meeting.
Mr. PECORA. Well, you were in the meeting part of the time?
Mr. SINCLAIR. Yes.
Mr. PECORA. Were you not?
Mr. SINCLAIR. Part of the time. A very short time. But I was
very sure that they would consider the market.
Mr. PECORA. NOW this purchasing syndicate from the inception
had in mind that it would sell those 1,130,000 shares to the public
at a profit as quickly as possible, did it not?
Mr. SINCLAIR. I think so.
Mr. PECORA. HOW ?
Mr. SINCLAIR. I would
say so. That is usually what a syndicate is
formed for.
Mr. PECORA. Yes. And that purpose was carried out by April
the 16th, 1929, was it not?
Mr. SINCLAIR. I S that correct? [Addressing his associates.]
Mr. PECORA. That is the date, according to the testimony here, that
the account was closed and that the syndicate's operation resulted
in a profit to it of about 12 million dollars. Now there has been
testimony given here that out of that 12 million dollars—-plus profit
that accrued to that purchasing syndicate—2y2 percent oi the profit
was given to a man named Fitzpatrick. Do you know anything
about that?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Who was Fitzpatrick?
Mr. SINCLAIR. President of the Prairie Oil & Gas
Mr. PECORA. Which is a competing company?
Co.
3284
STOCK EXCHANGE PKACTICES
Mr. SINCLAIR. It was a competing company as far as production
was concerned only.
Mr. PECORA. Wasn't it a competing company in the oil production
field?
Mr. SINCLAIR. In the production field; yes, if you call that a competing company. We did not so consider it.
Mr. PECORA. Who caused that 2y2 percent to be given to Fitzpatrick?
Mr. SINCLAIR. I understood that Blair & Co. did.
Mr. PECORA. Who?
Mr. SINCLAIR. Blair & Co.
Mr. PECORA. For what reason?
Mr. SINCLAIR. I don't know.
Mr. PECORA. Did you know Mr. Fitzpatrick then?
Mr. SINCLAIR. Very well.
Mr. PtecoRA. Did you ever have any business controversies with his
company in the competitive field?
Mr. SINCLAIR. Controversies?
Mr. PECORA. Yes.
Mr. SINCLAIR. We
have had quite some competition, but no controversies with him.
Mr. PECORA. When did you first hear of any proposal to present
to Mr. Fitzpatrick 2y2 percent of the profits 01 12 million dollars ?
Mr. SINCLAIR. Well. I should say it was very close to the time
that this transaction was made. I could not sajr whether it was a
month afterwards, or 6 weeks, or 3 weeks, or what it might have been.
Mr. PECORA. After what date?
Mr. SINCLAIR. After October 24.
Mr. PECORA. From whom did you first hear of the proposal to
give Mr. Fitzpatrick 2^-percent interest in the profits of the
syndicate ?
Mr. SINCLAIR. From Blair & Co., to the best of my knowledge.
Mr. PECORA. What reason did they advance for it to you?
Mr. SINCLAIR. They did not advance any reason for it to me.
Mr. PECORA. Did you offer any objection to it?
Mr. SINCLAIR. Not at all.
Mr. PECORA. Was the proposal
to include Fitzpatrick in the
profits ever reduced to written form?
Mr. SINCLAIR. I don't know. I t was not to my knowledge, but I
imagine it would be with Blair & Co. I was not the manger of this
syndicate.
' Mr. PECORA. I understand that. Were Blair & Co. the managers ?
Mr. SINCLAIR. Arthur W. Cutten was, as I understand it.
Mr. PECORA. Mr. Cutten told us that he was the manager, but
said that he did not know why Fitzpatrick got this 2y2 percent.
Now, he as the manager did not know, and you as an original participant did not know, Mr. Kuloff Cutten didn't know, although
his firm, E. F . Hutton & Co., paid out the profits. And you now
say that you first heard of it about a month or 6 weeks after the
purchasing syndicate was formed in October of 1928.
Mr. SINCLAIR. I wouuldn't say it was a month or 6 weeks, but
think it was shortly afterward. I t might have been 3 weeks or 2
weeks.
STOCK EXCHANGE PRACTICES
3285
Senator COUZENS. What did Mr. Fitzpatrick do for this money?
He was not a participant in the syndicate, and so what did he do
for it?
Mr. SINCLAIR. I don't know. He didn't do anything for me.
Mr. PECORA. SO that the first time you heard that Fitzpatrick
was being declared in on the profits to the extent of the percent
thereof was then, when you have stated?
Mr. SINCLAIR. Yes.
Mr. PECORA. And you offered no objection to
Mr. SINCLAIR. I did not.
Mr. PECORA. It meant a reduction in your
it?
share of the profits
correspondingly, didn't it?
Mr. SINCLAIR. Which I was very happy at that time to reduce.
Senator COUZENS. In spite of the fact that he was a competitor?
Mr. SINCLAIR. I t did not make any difference to me. His company
was a competitor in the way I have said, if you consider it that
way, Senator.
Mr. PECORA. Why were you happy to see it done?
Mr. SINCLAIR. Because I was promoting the interests of the corporation in trying to sell those shares, in trying to do that, and
not trying to make money. I would have been very happy to have
given all of my participation away. I came into it to help the corporation. I did not seek it.
Mr. PECORA. YOU say you did not seek it. Was it offered to you?
Mr. SINCLAIR. I might have suggested it in order to put the thing
over.
Mr. PECORA. Did Fitzpatrick play any part in the syndicate operations at all?
Mr. SINCLAIR. Not that I know of.
Mr. PECORA. Then why should he have gotten 2% percent of the
profits?
Mr. SINCLAIR. Mr. Pecora, you will have to ask him. I don't
know. You will have to get your information some place else.
Mr. PECORA. Well, I thought I was trying to get it from one of
the gentlemen who helped to pay that 2% percent. You are one of
those gentlemen.
Mr. SINCLAIR. I wish I could give it to you. I did not consider at
the time the participation was given to me, or I mean I did not know
whether there was going to be any pay or not. I was not as enthusiastic about the situation as I might have been.
Mr. PECORA. About what situation ?
Mr. SINCLAIR. About the future market situation. That is what
this was, really. We were taking a chance really on the market.
We made a firm contract for 34 million dollars.
Mr. PECORA. And the day you made the firm contract the market
was something like 5 points above the purchase price?
Mr. SINCLAIR. Which would not mean anything, for the next day
it might be down 10 points.
Mr. PECORA. But it so happened that the market was 5 points
above, wasn't it?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Did it ever
the purchasing syndicate?
go below 30 during the operations of
3286
STOCK EXCHANGE PRACTICES
Mr. SINCLAIR. I do not know, but do not think so. I t is my opinion if we had not had a syndicate it might have gone down much
lower than that.
Senator COTJZENS. And Mr. Fitzpatrick did not take any risk,
because he did not take the risk you are now referring to.
Mr. SINCLAIR. I don't think he did.
Mr. PECORA. Was this a gift to Mr. Fitzpatrick?
Mr. SINCLAIR. YOU may call it what you wish.
Mr. PECORA. What would you call it?
Mr. SINCLAIR. Well, it wasn't Christmas.
Mr. PECORA. What was that?
Mr. SINCLAIR. I t was not Christmas. I don't know what you
would call it, a gift or what.
Mr. PECORA. It was not Christmas, and so what would you call it ?
Mr. SINCLAIR. I call it a participation, and a relief, so far as I
was concerned, of that much.
Mr. PECORA. Did Blair & Co. have the right to give to anybody
any of your interest as a participant in this purchasing group without your consent ?
Mr. SINCLAIR. In the original agreement I think there was something like 10 or 12 percent set aside.
Mr. PECORA. And that 10 or 12 percent was taken up by the other
participants, wasn't it?
Mr. SINCLAIR. I don't think so.
Mr. PECORA. Well, let us see about that, Mr. Sinclair. Let me
show you committee exhibit no. 114, entitled: " List of Participants
in Sinclair Purchasing Syndicate as Finally Constituted, with Percentages and Share of Profits Eeceived."
Will you look at it and see if you recognize from it the names and
percentages, respectively, of all the participants in the group as
finally constituted?
Mr. SINCLAIR (after looking at exhibit 114 and some other papers).
This is the information I had at that time. [Handing a paper to
Mr. Pecora.]
Mr. EAGLAND. Mr. Sinclair handed you that paper by mistake, Mr.
Pecora. He intended to hand back to you the committee exhibit.
You already have a copy of that paper.
Mr. SINCLAIR. He may have a copy of that paper so far as I am
concerned.
Mr. PECORA. I will1 ask the committee reporter to read the question
back there.
(Thereupon the question was read as follows:)
Mr. PECORA. WeU, let us see about that, Mr. Sinclair. Let me show you
committee exhibit no. 114, entitled: " List of Participants in Sinclair Purchasing Syndicate as Finally Constituted, with Percentages and Share of Profits
Received."
Will you look at it and see if you recognize from it the names and percentages, respectively, of all the participants in the group as finally constituted?
Mr. SINCLAIR. I think that is correct.
Mr. PECORA. Well, now, if that is correct then apparently Fitz-
patrick assumed no liabilities at all although he received 2y2 percent
of the profits.
Mr. SINCLAIR. I understand that is correct.
STOCK EXCHANGE PRACTICES
3287
Senator COUZENS. Did you afterwards purchase the Prairie Oil &
Pipe Line Co. ?
Mr. SINCLAIR. The Prairie Oil & Pipe Line Co. and the Sinclair
Co. were consolidated.
Senator COUZENS. HOW soon after that?
Mr. SINCLAIR. Four years, I think. In March of 1932.
Mr. PECORA. About 3 years afterwards?
Mr. SINCLAIR. Yes, sir; about 3 ^ years afterwards.
Mr. PECORA. YOU know that this profit was distributed in April
of 1929, and the consolidation of your corporation with the Prairie
Oil & Gas Co. was effected in March of 1932, 3 years afterwards.
Mr. SINCLAIR. Three and a half years afterwards.
Mr. PECORA. A little less than 3 years afterwards as a matter of
fact.
Mr. SINCLAIR. Yes,
sir.
Mr. PECORA. When were the negotiations for that consolidation
first commenced?
Mr. SINCLAIR. Those negotiations were off and on, and started
perhaps 5 years before they were concluded.
Mr. PECORA. SO that while those negotiations were pending Fitzpatrick received this 2% percent of the 12 million dollars profit,
amounting to over $300,000?
Mr. SINCLAIR. I would say so.
Mr. PECORA. With your consent and knowledge ?
Mr. SINCLAIR. Yes. Now, the negotiations might have been off at
that moment. They were off and on.
Mr. PECORA. And he received this with your consent and knowledge, I say.
Mr. SINCLAIR. Yes.
Mr. PECORA. Did you
ask Messrs. Blair & Co. any questions at all
concerning the granting of this 2y2 percent of the profits of this
syndicate to Mr. Fitzpatrick?
Mr. SINCLAIR. I don't think I did.
Mr. PECORA. Were you surprised at the suggestion that the head
of a competing company at that time should receive upwards of
$300,000 out of the profits of a syndicate in which you were an
individual participant?
Mr. SINCLAIR. When he received the participation I did not know
that he was going to get $300,000. That came about later.
Mr. PECORA. Well, you knew that whatever the profit was to be
he was to get 2y2 percent.
Mr. SINCLAIR. If there was going to be any profit, yes.
Mr. PECORA. Was there ever any doubt during the life of that purchasing syndicate that its operations were going to result in a large
profit?
Mr. SINCLAIR. Well, I had my doubts about it.
Mr. PECORA. What were they based on, Mr. Sinclair ?
Mr. SINCLAIR. Based on the condition of the oil market, on the oil
industry, and the market generally. '
Mr. PECORA. Well, as a matter of fact, didn't the market itself
during that 6 months' period of time, between October of 1928 and
April of 1929, when this syndicate account was closed, show generally an upward trend?
Mr. SINCLAIR. I t
did.
3288
STOCK EXCHANGE PRACTICES
Mr. PECORA. NOW, a trading account
Mr. SINCLAIR (continuing). I wish I had known it was going to
do that, though.
Senator COUZENS. May I ask this question at that point: With
whom did you negotiate for the purchase or consolidation of the
Prairie Oil & Pipe Line Co.?
Mr. SINCLAIR. The negotiations were carried out by Blair & Co.
Senator COUZENS. With whom representing the Prairie Co. ?
Mr. SINCLAIR. Well, I could not answer that. I would imagine
Mr. Fitzpatrick was one of the gentlemen.
Senator COUZENS. Didn't you participate, being the head of the
Sinclair Co.?
* Mr. SINCLAIR. Did I do what ?
Senator COUZENS. Didn't you participate in the negotiations as
the head of the Sinclair Co.?
Mr. SINCLAIR. I did.
Senator COUZENS. Why
do you say Blair & Co. did it? What
authority did they have to complete the negotiations for the consolidation ?
Mr. SINCLAIR. They did not have authority to complete it. They
had authority to negotiate.
Senator COUZENS. Did you finally pass upon the terms of the
consolidation?
Mr. SINCLAIR. I did.
Senator COUZENS. And Mr.
Mr. SINCLAIR. Well, I could
Fitzpatrick for the Prairie Co.?
not say only Mr. Fitzpatrick, but Mr.
Fitzpatrick was the president of that company at that time. I
would say that he was interested in the negotiations.
Mr. PECORA. Mr. Sinclair, when did you first learn that your attendance before this committee was desired?
Mr. SINCLAIR (after consulting with his counsel). October 26.
Mr. PECORA. Well, that is a matter of about 2 weeks ago, or more
than 2 weeks ago.
#
Mr. SINCLAIR. Yes; I would say something like that. I don't know
just what day of the week it was.
Mr. PECORA. Have you made any efforts since that time to ascertain why this interest in the profits of the purchasing syndicate was
given to Mr. Fitzpatrick?
Mr. SINCLAIR. I asked Mr. Fitzpatrick.
Mr. PECORA. YOU did?
Mr. SINCLAIR. Yes.
Mr. PECORA. Well, when?
Mr. SINCLAIR. In the last 2 weeks.
Mr. PECORA. Where?
Mr. SINCLAIR. At Excelsior Springs, Mo.
Mr. PECORA. Were you in a sanitarium there at the time?
Mr. SINCLAIR. Not in a sanitarium. I was in a hotel, sick.
Mr. PECORA. Did you call over there Mr. Fitzpatrick for the
pur-
pose of such discussion?
Mr. SINCLAIR. NO ; I did not.
Mr. PECORA. Did he invite himself to your bedside ?
Mr. SINCLAIR. He went from Chicago with me.
Mr. PECORA. He went with you from Chicago to the
Mr.
SINCLAIR. Yes.
Springs?
STOCK EXCHANGE PRACTICES
3289
Mr. PECORA. Was he sick, too ?
Mr. SINCLAIR. NO, sir.
Mr. PECORA. Well, what
discussion did you have with Mr. Fitzpatrick about his receiving this 2y2 percent interest in the profits ?
Mr. SINCLAIR. He told me the story about it.
Mr. PECORA. What was the story that he told you?
Mr. SINCLAIR. The story that he told me was that Blair & Co. said
they were going to make him some money, and that it came up
through the Rockefellers, as I understood it.
Mr. PECORA. I S that all that he told you?
Mr. SINCLAIR. Well, that is about all that I can remember.
Mr. PECORA. He just simply said that Blair & Co. told him they
wanted to make him some money, and that it came up through the
Kockefellers. Is that all he told you ?
Mr. SINCLAIR. NO ; it is not.
Mr. PECORA. Did he go to the
Excelsior Springs, to which you were
repairing for your health, all the way from Chicago with you, just
to tell you that?
Mr. SINCLAIR. NO. He went because I was ill.
Mr. PECORA. Did he just go there and back?
Mr. SINCLAIR. N O ; he stayed 2 weeks. I learned it while he was
there.
Mr. PECORA. IS that all that he told you about it ?
Mr. SINCLAIR. NO.
Mr. PECORA. Well, tell us the whole story.
Mr. SINCLAIR. I was trying to remember the story. You want
hearsay evidence now, do you?
Mr. PECORA. Well, I want you to tell us
Senator GOLDSBOROUGH (interposing). Let me ask a question
right there: Mr. Sinclair, did he tell you who of Blair & Co. had
this talk with Mr. Fitzpatrick?
Mr. SINCLAIR. I think he said Hunter Marston. He might have
said Mr. Walker, and I don't want to be sure about that.
Mr. PECORA. Tell us the whole story as he gave it to you about
2 weeks ago.
Mr. SINCLAIR. The story that he gave me was that the Rockefellers
were selling some shares to Blair & Co., and that they had said they
were going to make him some money, and that he received this
money.
Mr. PECORA: Were selling what shares?
Mr. SINCLAIR. He did not say what shares. I think Prairie Oil
& Gas Co. shares.
Mr. PECORA. But these profits of 2y2 percent did not come out of
the sale of any Rockefeller shares, or of any shares of Prairie Oil
& Gas Co., did they?
Mr. SINCLAIR. NO, sir.
Mr. PECORA. They came
specifically out of the profits of 12 million
dollars that accrued to your purchasing syndicate?
Mr. SINCLAIR. Right.
Mr. PECORA. What did he say was the story about that?
Mr. SINCLAIR. The story that he told me was that Blair & Co.
had said they were going to make him some money.
Mr. PECORA. Without his assuming any risks or liabilities?
Mr. SINCLAIR. Yes, sir. He told me he did not take any risks.
3290
STOCK EXCHANGE PRACTICES
Mr. PECORA. Did he tell you why Blair & Co. were desirous of
making him some money without having him assume any risks or
liabilities?
Mr. SINCLAIR. He told me that it came through the Eockefeller
interests.
Mr. PECORA. Just tell us what he said to you about it. Give us
the details.
Mr. SINCLAIR. I cannot remember the details.
Mr. PECORA. YOU discussed it with him only 2 weeks ago?
Mr. SINCLAIR. Eight.
Mr. PECORA. I S your memory so poor?
Mr. SINCLAIR. NO; it is very good.
Mr. PECORA. I S that all he told you ?
Mr. SINCLAIR. I would say, about all. I mean, there is nothing
important that he told me other than that.
Mr. PECORA. I t might not be important to you
Mr. SINCLAIR. I t might take 10 minutes or 2 hours to tell it.
Mr. PECORA. HOW long did it take him to tell you the whole story?
Mr. SINCLAIR. Not very long?
Mr. PECORA. HOW long?
Mr. SINCLAIR. I did not have my watch.
Mr. PECORA. Approximately how long did it take ?
Mr. SINCLAIR. I would say, 5 or 10 minutes.
Mr. PECORA. In that 5 or 10 minutes he must have told you more
of the story than you have told us, because what you have told us
would take about 15 or 20 seconds. What else did he tell you?
Mr. SINCLAIR. I was trying to give you the important details of
the story.
Mr. PECORA. Give us the whole story as he gave it to you 2 weeks
ago.
Mr. SINCLAIR. Well, if I remember correctly, I was ill in bed; the
doctor would not allow me up. He was associated there with me.
He was the vice chairman of our company. He returned from Chicago over to Excelsior Springs with me because I was ill and wanted
somebody to go along. That is the reason. We discussed this 2y2
percent. If I remember correctly, I told him it was pretty soft for
him.
Mr. PECORA. I guess it was, wasn't it?
Mr. SINCLAIR. I thought so; I always did think so.
Mr. PECORA. GO ahead and tell us the story.
Mr. SINCLAIR. If I remember correctly, he told a story of how the
Rockefellers were going to be interested in making him some money.
He had been with them a great many years. Blair & Co. had assigned
to him its percentage.
Mr. PECORA. In order to enable the Rockefellers to make some
money for him?
Mr. SINCLAIR. That is what I understood.
Mr. PECORA. Did the Rockefellers have any interest in this purchasing group ?
Mr. SINCLAIR. NO ; but the Rockefellers, I understand, sold Blair &
Co. some shares in some other companies.
Mr. PECORA. But the profits out of which he got this " soft thing "
of $300,000 came out of the operations of this purchasing group of
STOCK EXCHANGE PEACTICES
3291
which you were a member and which dealt solely in the stock of your
company?
Mr. SINCLAIR. I conceded that a number of times this afternoon;
yes, sir.
Mr. PECORA. When Fitzpatrick told you 2 weeks ago the story of
how he came to get this 2ty> percent, he among other things told you
as part of the story that the Rockefellers were anxious or desirous of
making some money for him. Did it not occur to you that that
purpose was not effected by giving him 2y2 percent of the profits of
this transaction?
Mr. SINCLAIR. The latter part of your question, please?
(The part of the pending question referred to was read by the
reporter as above recorded.)
Mr. SINCLAIR. It did not.
Mr. PECORA. I t did not?
Mr. SINCLAIR. Certainty not. Did he not receive $300,000?
Mr. PECORA. Not from the Rockefellers.
Mr. SINCLAIR. From Blair & Co.
Mr. PECORA. Did he get it from Blair & Co. ?
Mr. SINCLAIR. I think he got it from the syndicate through
Blair
&Co.
Mr. PECORA. Of which you were a member?
Mr. SINCLAIR. Yes.
Mr. PECORA. And of which Blair & Co. were members ?
Mr. SINCLAIB. Yes.
Mr. PECORA. J nd Blair & Co. had no greater interest in
the syndi-
cate than you had originally ?
Mr. SINCLAIR. NO.
Mr. PECORA. And no greater interest than Cutten had originally?
Mr. SINCLAIR. Correct.
Mr. PECORA. SO that Blair & Co. were making him some money
at the expense of all the other syndicate participants?
Mr. SINCLAIR. There is no doubt about that.
Mr. PECORA. NO doubt about it at all?
Mr. SINCLAIR. NO, sir.
Mr. PECORA. SO that you
were one of the Santa Clauses? This
was a Santa Claus syndicate, so far as giving Fitzpatrick $300,000
was concerned?
Mr. SINCLAIR. It sounds a bit like it, doesn't it?
Mr. PECORA. Very much so.
The CHAIRMAN. HOW did the subject come up ? Did you ask him
about the 2% percent?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Did you know
they were hanging Santa Claus whis-
kers on you at that time?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. YOU itere willing to
Mr. SINCLAIR. I did.
Senator COUZENS. YOU did not
wear them ?
even get new dimes from the
Eockefellers ?
Mr. SINCLAIR. I never have yet. Of course, Senators and Mr.
Pecora, this is all hearsay with me. I t seems to me that Fitzpatrick
should tell this story, and not me.
3292
STOCK EXCHANGE PRACTICES
Mr. PECORA. I t would seem that, when he attempted to tell you
the story 2 weeks ago and told you, to your knowledge, things that
were not in accordance with the facts, you might have questioned
him about it.
Mr. SINCLAIR. I was questioning him about it.
Mr. PECORA. Why somebody gave away your money, among other
things
Mr. SINCLAIR. That is what I say.
Mr. PECORA (continuing). To a man who at the time was a competitor of your company.
Mr. SINCLAIR. That is what I say. He gave me his reasons.
Mr. PECORA. He told you that Blair & Co. wanted to make him
some money?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. He did not
tell you that Blair & Co. wanted to make
some money for him at your expense ?
Mr. SINCLAIR. I imagine they would if they could.
Mr. PECORA. But in this particular case they were very easily
able to do it because of your complete acquiescence?
Mr. SINCLAIR. That is right.
Mr. PECORA. Will you tell me why you acquiesced in that if you
did not know any of the facts at that time ?
Mr. SINCLAIR. The reason I acquiesced was because they made
the request.
Mr. PECORA. Did you ask them for the reason why they wanted
to declare Fitzpatrick in on this profit?
Mr. SINCLAIR. I did not.
Senator COUZENS. Mr. Pecora,
you live in New York; why don't
you apply to Blair & Co.?
Mr. PECORA. I am afraid they might treat me like a stepchild.
Were Blair & Co. at that time interested in the negotiations that
had been pending off and on for a period of 5 years prior to March
1932, to effect a consolidation between your company and the Prairie
Oil & Gas Co.?
Mr. SINCLAIR. I do not think so, at that time.
Mr. PECORA. Were Blair & Co. bankers for your company at that
time ?
Mr. SINCLAIR. Yes.
Mr. PECORA. AS bankers
for your company would they not naturally be interested in any pending negotiations to effect such a
consolidation?
Mr. SINCLAIR. Yes, they would, naturally; but I do not go to
Blair & Co. every time I start any negotiations.
Mr. PECORA. But in this particular instance did Blair & Co. take
any part in those negotiations with the Prairie Oil & Gas Co. or its
officers or directors?
Mr. SINCLAIR. Not at that time.
Mr. PECORA. When did they ?
Mr. SINCLAIR. I do not know; in the latter part of 1930, I think.
Mr. PECORA. When did Blair & Co. first become bankers for the
Sinclair Consolidated Oil Corporation or any of its predecessor
companies ?
Mr. SINCLAIR. A great number of years ago.
STOCK EXCHANGE PRACTICES
3293
Mr. PECORA. A number of years prior to 1928 ?
Mr. SINCLAIR. Yes,
Mr. PECORA. And
sir.
Mr. SINCLAIR. Yes,
sir.
had remained in the relationship of bankers
to your company and its predecessor corporations over a period of
years prior to 1928 ?
Mr. PECORA. Including 1928?
Mr. SINCLAIR. Yes,
sir.
Mr. PECORA. DO you know where Fitzpatrick is now ?
Mr. SINCLAIR. I think he is in New York.
Mr. PECORA. What is his office address?
Mr. SINCLAIR. 45 Nassau Street. He is vice chairman of our
company.
Mr. PECORA. He is vice chairman of your company ?
Mr. SINCLAIR. Yes,
sir.
Mr. PECORA. When did you arrive in Washington for the purpose
of attending this hearing?
Mr. SINCLAIR. Sunday at 1 o'clock—no; I arrived in Washington
last night about 8:30.
Mr. PECORA. Did you meet Mr. Rulofl Cutten last night?
Mr. SINCLAIR. NO.
Mr. PECORA. Did you see him today before you came here?
Mr. SINCLAIR. I did.
Mr. PECORA. Did you discuss this subject with him?
Mr. SINCLAIR. I did not.
Mr. PECORA. When did you meet him today before coming to
this
hearing?
Mr. SINCLAIR. When we were leaving the hotel.
Mr. PECORA. When was that?
Mr. SINCLAIR. Perhaps 10 minutes of 2, or 15 or 12 minutes of 2;
I do not know.
Mr. PECORA. YOU are still the chairman of the Consolidated Oil
Corporation?
Mr. SINCLAIR. I am chairman of the executive board.
Mr. PECORA. And as such, Mr. Fitzpatrick is your subordinate ?
Mr. SINCLAIR. Yes.
Mr. PECORA. Can you
arrange to have him here tomorrow morning?
Mr. SINCLAIR. I will endeavor to, yes. I cannot guarantee that,
but I will endeavor to.
Mr. PECORA. Have you any reason to doubt that he would comply
with a request from you to come here ?
Mr. SINCLAIR. I do not think so, if I can reach him.
Mr. PECORA. May I suggest that you ask one of your associates
here to get in touch with Mr. Fitzpatrick now and see if we can have
him here tomorrow morning.
(One of his associates left the hearing room at the suggestion of
Mr. Sinclair.)
Mr. PECORA. What prompted you, Mr. Sinclair, to give subparticipation in your interest in the purchasing syndicate to the person or
persons to whom you gave such subparticipation ?
Mr. SINCLAIR. The principal thing was that I would like to make
them some money; that is the principal thing—with the exception
175541—34—PT 7
6
3294
STOCK EXCHANGE PRACTICES
of Mr. Whitney. Mr. Whitney was a very large shareholder in the
Sinclair Co.
Mr. PECORA. His share of the profits was over half a million
dollars, was it not?
Mr. SINCLAIR. $517,790.
Mr. PECORA. Did he ask you for the subparticipation, or did you
grant it to him on your initiative?
Mr. SINCLAIR. He asked for it. I was very glad he took it at that
time.
Mr. PECORA. DO you know whether or not at any time after you
granted these subparticipations to any of these other directors or
officers of the Sinclair Consolidated Oil Corporation the fact was
made known at any meeting of the board of directors or of the
executive committee of that corporation of the granting of such subparticipations?
Mr. SINCLAIR. I do not. I have no recollection of it.
Mr. PECORA. Was any statement ever made to the stockholders of
the Sinclair Consolidated Oil Corporation concerning the interest
of any of these officers and directors of the corporation in this purchasing syndicate?
Mr. SINCLAIR. I do not think so.
Mr. PECORA. Mr. Sinclair, what individual connected with Blair
& Co. told you at the outset that Mr. Fitzpatrick had been declared
in on the profits of the purchasing syndicate?
Mr. SINCLAIR. If I remember correctly, I think it was Mr. Elisha
Walker.
Mr. PECORA. He is now a partner of Kuhn Loeb & Co. ?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Coincidentally
with the formation of this purchasing
syndicate a trading account or syndicate was formed at the instance
of the original participants in the purchasing syndicate?
Mr. SINCLAIR. Yes,
Mr. PECORA. For
sir.
what purpose was that trading syndicate or
account formed?
Mr. SINCLAIR. The purpose they told me was to trade in the
market.
Mr. PECORA. In the stock of your company ?
Mr. SINCLAIR. Yes,
sir.
Mr. PECORA. With a view of enabling the purchasing syndicate
to sell to the public at a profit these 1,130,000 shares?
Mr. SINCLAIR. I would say so.
Mr. PECORA. DO you know how that trading syndicate operated
for that purpose ?
Mr. SINCLAIR. I do not. I am a very poor market operator.
Mr. PECORA. YOU are not a neophyte in that respect, are you?
Mr. SINCLAIR. NO.
Mr. PECORA. YOU said
that the original purpose you had in mind
in seeking to sell for your corporation this block of 1,130,000 shares
was to raise additional working capital for your company?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Had your
company paid a dividend up to that time
to its common-stock holders ?
Mr. SINCLAIR. About 4 years before that.
STOCK EXCHANGE PRACTICES
3295
Mr. PECORA. Did it pay a dividend after this sale was effected?
Mr. SINCLAIR. I will try to get that information for you. [After
•consulting:] The first dividend was paid in February 1929, and
the last one on April 15,1931.
The CHAIRMAN. HOW much?
Mr. SINCLAIR. I t ranged from 25 to 50 cents a quarter.
Mr. Fitzpatrick reports that he will be here at 10 o'clock.
Mr. PECORA. Thank you. Did Mr. Fitzpatrick remain with you at
Sulphur Springs ?
Mr. SINCLAIR. At Excelsior Springs; yes. He came back to New
York with me.
Mr. PECORA. Have you had, since October 26 last, any conversation
with or communication with Arthur W. Cutten on the subject of
this transaction?
Mr. SINCLAIR. What transaction? You mean the syndicate or the
Fitzpatrick transaction?
Mr. PECORA. This purchase syndicate transaction.
Mr. SINCLAIR. I saw Mr. Cutten in Chicago.
Mr. PECORA. When?
Mr. SINCLAIR. Last Saturday.
Mr. PECORA. At his office?
Mr. SINCLAIR. NO ; he was at lunch.
Mr. PECORA. Did you discuss this transaction with him?
Mr. SINCLAIR. Not the transaction.
Mr. PECORA. Did you discuss his evidence with him ?
Mr. SINCLAIR. Some.
Mr. PECORA. Did you have any discussion with him at that time
•concerning the payment of this 2y2 percent to Fitzpatrick?
Mr. SINCLAIR. I do not think so. I do not remember it if I did.
I do not think so. I may have.
Mr. PECORA. I S your memory that poor, that you do not recall
a conversation you had last Saturday ?
Mr. SINCLAIR. I do not recall all the conversations I have every
day.
Mr. PECORA. HOW long were you with him last Saturday ?
Mr. SINCLAIR. I would say, an hour or two hours at lunch.
Mr. PECORA. HOW was that appointment made at lunch—at your
initiative or at his ?
Mr. SINCLAIR. Not at my initiative. It was made by Mr. Bartlett.
Mr. Bartlett invited me to lunch.
Mr. PECORA. He is a director in your company?
Mr. SINCLAIR. He is.
Mr. PECORA. Living in Chicago?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Did you suggest
to Mr. Bartlett that you would like
to meet Mr. Cutten for the purpose of discussing with Mr. Cutten
the testimony which Mr. Cutten had given before this committee
last week?
Mr. SINCLAIR. I did not.
Mr. PECORA. DO you know
why the appointment was made for
you by Mr. Bartlett?
Mr. SINCLAIR. I often go to lunch with him when I am in Chicago.
3296
STOCK EXCHANGE PKACTICES
Mr. PECORA. DO you know why this particular appointment was
made for you by Mr. Bartlett?
Mr. SINCLAIR. I do not.
Mr. PECORA. Did Mr. Cutten
acquaint you with the testimony he
had given last Saturday ?
Mr. SINCLAIR. He did not.
Mr. PECORA. Have you read of it?
Mr. SINCLAIR. Only in the newspapers.
Mr. PECORA. With what other members
of that syndicate, either
original members or subparticipants, have you discussed the matter
of the syndicate transaction since October 26 ?
Mr. SINCLAIR. Elisha Walker and Hunter Marston.
Mr. PECORA. Where did you meet them for that purpose?
. Mr. SINCLAIR. At my house.
Mr. PECORA. Great Neck, Long Island?
Mr. SINCLAIR. In New York.
Mr. PECORA. When ?
Mr. SINCLAIR. Last Sunday.
Mr. PECORA. Did you arrange for them to meet you there?
Mr. SINCLAIR. I
did.
Mr. PECORA. For the purpose of discussing this syndicate operation
or transaction?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Did you confer with both of them at the same time?
Mr. SINCLAIR. Yes; I think they were both there at the same time.
Mr. PECORA. Was anything then said about any reason why Mr.
Fitzpatrick was given this 2% percent profit?
Mr. SINCLAIR. NO, sir.
Mr. PECORA. If you were discussing the subject of this syndicate
operation with them, why was it not brought up for discussion among
them?
Mr. SINCLAIR. I do not know.
Mr. PECORA. YOU were anxious to find out, were you not, why
Fitzpatrick got that 2y2 percent a long time ago.
Mr. SINCLAIR. I was not. He got that 2^» percent a long time ago.
Mr. PECORA. But you were inquiring about the transaction last
Saturday and last Sunday 2 weeks ago with Mr. Fitzpatrick himself, among others.
Mr. SINCLAIR. Yes.
Mr. PECORA. Why did you discuss it with these gentlemen at all,,
in view of the fact, as you just said, he got that money a long time
ago?
Mr. SINCLAIR. I didn't discuss the 2% percent with these gentlemen.
Mr. PECORA. YOU did with Fitzpatrick?
Mr. SINCLAIR. Yes, he discussed it with me.
Mr. PECORA. And you may have discussed it with Cutten last Saturday?
Mr. SINCLAIR. I don't think so.
Mr. PECORA. Well, you said you don't know one way or the other.
You said you may have. You have no recollection whether you did'
or not ?
Mr. SINCLAIR. I have not. As a matter of fact, I am rather sure
I did not.
STOCK EXCHANGE PRACTICES
3297
Mr. PECORA. What did you discuss this transaction for with Mr.
Outten last Saturday ?
Mr. SINCLAIR. Why did I discuss it with him?
Mr. PECORA. Yes.
Mr. SINCLAIR. He
was at lunch at this party's house, and as a
matter of fact, I thought his testimony was a joke.
Mr. PECORA. Thought his testimony was what?
Mr. SINCLAIR. More or less of a joke.
Mr. PECORA. More or less of a what ?
Mr. SINCLAIR. Joke.
Mr. PECORA. Joke?
Mr. SINCLAIR. Uh,
huh.
Mr. PECORA. Did it seem that funny to you ?
Mr. SINCLAIR. I t did.
Mr. PECORA. What was there funny about it ?
Mr. SINCLAIR. The whole transaction was funny.
Mr. PECORA. Which transaction do you mean ?
Mr. SINCLAIR. I mean this investigation.
Mr. PECORA. Oh, this investigation is funny?
Mr. SINCLAIR. Yes.
Mr. PECORA. I S it still a subject of amusement to you?
Mr. SINCLAIR. Rather.
Mr. PECORA. Quite a joke?
Mr. SINCLAIR. A little.
Mr. PECORA. Are you testifying because you think
this whole
"thing is a joke?
Mr. SINCLAIR. I am not.
Mr. PECORA. Are you imbued
with the spirit that it is a joke in
giving your testimony?
Mr. SINCLAIR. I am not. I endeavor to give my testimony as I
remember it.
Mr. PECORA. DO you think it is a joke for this committee to inquire into an operation whereby a small group of men engaged in
stock market operations in the stock of a company in which some of
those men were interested as executive officers and directors and
whereby they made, in a period of 6 months' time, something like
$12,000,000 profit at the expense of the public? Do you think that
is a joke ?
Mr. SINCLAIR. I do not.
Mr. PECORA. Well, what
is there a joke about this whole thing, as
it seems to you?
Mr. SINCLAIR. It seems to me that the evidence as I read it in the
paper was perfectly simple and plain.
Mr. PECORA. What?
Mr. SINCLAIR. The evidence before the committee as I read it.
There are no facts that I know of that have been in any way
concealed.
Mr. PECORA. Well, so far has anybody revealed the reason why
Fitzpatrick got this 2y2 percent?
Mr. SINCLAIR. I have not been at your committee meeting.
Mr. PECORA. HOW?
Mr. SINCLAIR. I have not been here before.
Mr. PECORA. Well, so far as you have read ?
Mr. SINCLAIR. I have not read about it.
3298
STOCK EXCHANGE PRACTICES
Senator COUZENS. Well, if you have not been here, why do you
think it is a joke?
Mr. SINCLAIR. Siv?
Senator COTJZENS. Why do you think it is a joke if you have not
been here?
Mr. SINCLAIR. My idea of what I thought was a joke, Senator,
was Mr. Cutten's testimony, not your meeting. The statement that
Mr. Cutten made—that is all I saw.
Mr. PECORA. I thought you said when I asked you specifically if
the testimony of Mr. Cutten was a joke, you said no, the whole
investigation.
Mr. SINCLAIR. NO ; I did not mean that.
Senator COUZENS. That is what the record shows.
Mr. SINCLAIR. I would like to have it canceled from the record.
Mr. PECORA. Well, it better stand in the record, because we cannot
cancel it. But that is not what you meant then ?
Mr. SINCLAIR. That is not what I meant.
Senator COUZENS. A good many people thought Teapot Dome was
a joke at one time. I hope that they do not go through the same
sentiments during this investigation.
Mr. PECORA. It was a joke, but I do not know yet whom the joke
was on.
Senator COUZENS. I think the public do.
The CHAIRMAN. The committee will now take a recess until 10
o'clock tomorrow morning, and Mr. Sinclair will still be on the stand.
Mr. SINCLAIR. YOU want me at 10 o'clock in the morning ?
Mr. PECORA. Yes,
sir.
(Accordingly, at 4:15 p.m., the subcommittee was in recess until
10 a.m. of the following day.)
STOCK EXCHANGE PEACTICES
WEDNESDAY, NOVEMBER 15, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OP THE COMMITTEE
ON BANKING AND CURRENCY,
Washington, D.C.
The subcommittee met at 10 a.m., pursuant to adjournment on yesterday, in the caucus room of the Senate Office Building, Senator
Duncan TJ. Fletcher presiding.
Present: Senators Fletcher (chairman), Gore (substitute for
Barkley), Couzens, Townsend, and Goldsborough (substitute for
Norbeck) •
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver, David Saperstein, and David Schenker, associate counsel to
the committee; and Frank J. Meehan, statistician to the committee;
Alfred E. Mudge, Joseph B. Lynch, Julian L. Hagen, and C. Horace
Tuttle of Rushmore, Bisbee & Stern, and also Albert G. Milbank,
William Dean Embree and A. Donald MacKinnon, of Milbank,
Tweed, Hope & Webb, counsel representing the Chase National Bank
and the Cnase Corporation; Martin Conboy, counsel for Albert H.
Wiggin; Arthur M. Boal, counsel for Ruloff E. Cutten; G. T. Stanford, general counsel of the Sinclair Consolidated Oil Corporation;
R. W. Ragland, counsel for Mr. Harry F. Sinclair; M. T. Moore of
Cravath, de Gersdorff, Swaine & Wood, counsel for Mr. Elisha
Walker.
The CHAIRMAN. The subcommittee will come to order. I believe
Mr. Sinclair desired to make a statement this morning in connection
with his testimony of yesterday.
Mr. SINCLAIR. I thank you, very much.
The CHAIRMAN. YOU may proceed, Mr. Sinclair.
TESTIMONY OF HARRY F. SINCLAIR—Resumed
Mr. SINCLAIR. There are one or two matters in my testimony of
yesterday which I would like to correct. I was asked with what
participants other than Mr. Cutten, either original participants or
subparticipants, I have had any discussion in reference to the syndicate matter since October 26. In replying I had in mind only original participants or subparticipants and named Mr. Walker and Mr.
Marston, both of Blair & Co., Inc., and did not mention Mr. Stanford
and Mr. Ragland, who, as the record already showed
Mr. PECORA (interposing). Mr. Stanford and who else?
Mr. SINCLAIR. Mr. Ragland.
Mr. PECORA. All right.
3299
3300
STOCK EXCHANGE PRACTICES
Mr. SINCLAIR (continuing). Became subparticipants in my participation, and who were present at my apartment Sunday. In addition, at various times, there were present Mr. Fred Wood and Mr.
M. T. Moore, of the law firm of Cravath, de Gersdorff, Swaine &
Wood, which firm had represented the purchasing syndicate, Mr.
Pierce, Mr. Fitzpatrick, and Mr. B-uloff Cutten.
I suggested to Mr. Fitzpatrick that he relate what he had told me
at Excelsior Springs in reference to the 2y2 percent payment3 and
although I was not in the room all of the timea I believe he did so
to some or all of the persons named. When I was asked yesterday if
anything was said about any reason for that payment and replied
that there was not, I had in mind anything said about any reason,
in the conversations with Messrs. Walker and Marston referred to
in the previous question, which was, " Did you confer with both of
them at the same time ? " If the question was intended to mean, was
any reason given by anyone, the answer should be yes; that given by
Mr. Fitzpatrick.
Also, I desire to complete the record in reference to a matter that
was not fully developed yesterday. The directors to, whom I extended a subparticipation in my participation did not know that they
were to receive any such subparticipation from me until some time
after they voted as directors. I at no time prior to the meeting of
the executive committee or the meeting of the board of directors told
any director to whom I granted a subparticipation that I would grant
him a subparticipation, or directly or indirectly informed him that
I intended to extend to him any such subparticipation, or had any
discussion referring to the same.
Mr. PECORA. Mr. Sinclair, who is the Mr. Pierce to whom you
have referred in the statement which you have just read into the
record ?
Mr. SINCLAIR. Mr. Pierce is my assistant, Mr. Dan E. Pierce, and
his address is 49 Nassau Street.
Mr. PECORA. In this statement that you have just read into the
record you have stated as follows:
When I was asked yesterday if anything was said about any reason for that
payment
Referring to the 2y2 percent payment to Fitzpatrick—
and replied that there was not, I had in mind anything said about any reason
in the conversations with Messrs. Walker and Marston referred to in the
previous question, which was: " Did you confer with both of them at the same
time?" If the question was intended to mean, was any reason given by anyone, the answer should be yes, that given by Mr. Fitzpatrick.
Well, now, did Mr. Fitzpatrick give any reason, when he was at
your apartments in New York City last Sunday afternoon, for his
having received that 2X/2 percent of the profits of that purchasing
syndicate ?
Mr. SINCLAIR. I think he did. I am quite sure that he gave it to
those gentlemen.
Mr. PECORA. Did he give it to you?
Mr. SINCLAIR. I was not there. I was in and out, but I had heard
the same story at Excelsior Springs, as I told you.
Mr. PECORA. What makes you tnink that he discussed that matter
with Mr. Marston and with Mr. Walker, and with any of the other
STOCK EXCHANGE PRACTICES
3301
gentlemen you now say were present, the reason that he received
that 2y2 percent of the profits?
Mr. SINCLAIR. I suggested it to Mr. Fitzpatrick, that he tell those
gentlemen. But
Mr. PECORA (interposing). Well, now—but go ahead. I did not
mean to interrupt you.
Mr. SINCLAIR (coughing). I am sorry, but I have a very severe
cold.
Mr. PECORA. Have you finished your answer?
Mr. SINCLAIR. Yes.
Mr. PECORA. Was the
matter of his receiving this 2% percent of
•the profits one that came up in the discussion that you had last
Sunday afternoon with your friends ?
Mr. SINCLAIR. The discussion I had with Mr. Fitzpatrick originally was at Excelsior Springs, some 2 weeks ago.
Mr. PECORA. Did it come up again in any conversation that took
place at your home in New York City last Sunday afternoon?
Mr. SINCLAIR. I am quite sure that it did.
Mr. PECORA. Well, you were present?
Mr. SINCLAIR. A part of the time I was not in the room.
Mr. PECORA. Well, do you know what reason Mr. Fitzpatrick gave
to Mr. Walker and Mr. Marston and any of the other gentlemen
there present for his having received that money?
Mr. SINCLAIR. The only reason I know is what I endeavored to
tell you on yesterday, Mr. Pecora.
Mr. PECORA. And that was the reason that you told us yesterday
that Mr. Fitzpatrick gave to you at Excelsior Springs about 2 weeks
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Why didn't
you wait in the room for Mr. Fitzpatrick
last Sunday at your home when he told those gentlemen what the
reason was so that you might hear it?
Mr. SINCLAIR. I should have been very happy to do so, but I happened to be not very well and I was in and out of the room. I was
lying down quite a bit of the time.
Mr. PECORA. Well, did you reenter the room after that?
Mr. SINCLAIR (coughing). What was that? I beg pardon.
Mr. PECORA. Did you reenter the room after Mr. Fitzpatrick told
them the reason ?
Mr. SINCLAIR. I, perhaps, entered the room while he was telling
it, or after it, or during the time, but I did not listen to his explanation about the thing. I had heard it.
Mr. PECORA. Well, was the subject referred to again at any time
after that?
Mr. SINCLAIR. At my house?
Mr. PECORA. At your house; yes.
Mr. SINQLAIR. I don't know. Not to my knowledge. Those gentlemen would know more about that than I do.
Mr. PECORA. Are you merely assuming that the reason which Mr.
Fitzpatrick gave to those gentlemen at your home last Sunday was
the same one that he had given to you at Excelsior Springs ?
Mr. SINCLAIR. I assume so.
3302
STOCK EXCHANGE PEACTICES
Mr. PECORA. Well, the reason, as I recall your testimony given on
yesterday, that Mr. Fitzpatrick told you in Excelsior Springs 2
weeks ago for his having obtained that money, was because Blair &
Co. wanted to make some money for him, wasn't it?
Mr. SINCLAIR. I think that was my testimony.
Mr. PECORA. That is a fair summarization of your testimony, isn't
it?
Mr. SINCLAIR. Whatever the testimony was; yes.
Mr. PECORA. What occasion would there have been for Mr. Fitzpatrick telling Mr. Walker, who in 1929 was president of Blair &
Co., what reason there was for his getting that money from Blair
& Co., if, as a matter of fact, the reason was as he told you, that
Blair & Co. wanted to make some money for him ?
Mr. SINCLAIR. I suggested to Mr. Fitzpatrick that he do so, that
he tell those gentlemen.
Mr. PECORA. Can you tell us why you made that suggestion to Mr.
Fitzpatrick on Sunday last?
Mr. SINCLAIR. Well, it is a rather difficult question to give you a
reason for.
Mr. PECORA. I did not hear you, Mr. Sinclair.
Mr. SINCLAIR. I beg pardon, but I have a very severe cold which
interferes with my voice. I suppose I made it because I wanted
those gentlemen to know, and to near, what Mr. Fitzpatrick had to
say about it.
Mr. PECORA. Was it because you questioned Mr. Fitzpatrick's
statement to you made at Excelsior Springs?
Mr. SINCLAIR. It was not.
Mr. PECORA. YOU accepted
Mr. SINCLAIR. Yes.
Mr. PECORA. Well, what
that as a truthful statement, didn't you ?
reason was there for his telling Mr.
Walker, formerly of Blair & Co.?
Mr. SINCLAIR. There were other gentlemen there.
Mr. PECORA. What was that?
Mr. SINCLAIR. There were other gentlemen there, that I did wish
he would tell.
Mr. PECORA. The other gentlemen there were Mr. Marston, who
was also associated with Blair & Co. in 1928 and 1929, wasn't he?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. And Mr. Stanford
and Mr. Eagland, who are your
attorneys ?
Mr. SINCLAIR. What was that? I was coughing and did not hear
you.
Mr. PECORA. Also Mr. Stanford and Mr. Eagland, who are your
attorneys ?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. And Mr. Moore,
the attorney for the members of the
purchasing syndicate?
Mr. SINCLAIR. That is right.
Mr. PECORA. That included Mr. Walker's firm at that time ?
Mr. SINCLAIR. Mr. Moore is not with Mr. Walker's firm. He is
with
Mr. PECORA (interposing). No; but Mr. Walker at that time was
associated with Blair & Co., and Blair & Co. were participants in
the purchasing syndicate?
STOCK EXCHANGE PRACTICES
3303
Mr. SINCLAIR. That is right.
Mr. PECORA. SO that Mr. Moore was the attorney for Blair & Co.
-and the other participants in that purchasing syndicate back in
1928 and 1929.
Mr. SINCLAIR. Yes. [After talking to Mr. Eagland.] There has
'been called to my attention
Mr. PECORA (interposing). I do not hear you, Mr. Sinclair. I am
sorry.
Mr. SINCLAIR. I wish I could speak louder, but the very severe
cold I am suffering with interferes with my voice. There has been
called to my attention by Mr. Eagland at this moment that when I
suggested to Mr. Fitzpatrick to tell the story that he had told me
in Excelsior Springs, that the lawyers were there; and Mr. Ragland
also suggests that Mr. Walker or Mr. Marston was not there at that
moment.
Mr. PECORA. DO you mean that Mr. Marston and Mr. Walker
were not at your home on last Sunday afternoon?
Mr. SINCLAIR. NO ; but at that time, I mean, at the moment that
lie did it.
Mr. PECORA. At the time when Mr. Fitzpatrick told it, do you
mean?
Mr. SINCLAIR. At the time when I suggested that Mr. Fitzpatrick
tell it. Mr. Walker came along later, and Mr. Marston, I think,
•came after dinner.
Mr. PECORA. Well, had you sent for Mr. Walker and Mr. Marston
to come there Sunday afternoon?
Mr. SINCLAIR. I had not sent for them, but I had asked them
to come.
Mr. PECORA. All right. Were you desirous of discussing with
them on Sunday the testimony that had been given here in the past
week by Mr. Arthur W. Cutten with respect to the operations of
the purchasing syndicate and of the trading account?
Mr. SINCLAIR. I don't think that Mr. Cutten's testimony was discussed at the meeting at all.
Mr. PECORA. Well, was the subject of Mr. Cutten's testimony
discussed Sunday afternoon at your home ?
Mr. SINCLAIR. I don't think so, but it may have been.
Mr. PECORA. Well, what purpose did you have in mind in asking
Mr. Walker and Mr. Marston to come to your home last Sunday
afternoon, and also Mr. Fitzpatrick to come there?
Mr. SINCLAIR. It was quite natural as those gentlemen were interested in this syndicate, and
Mr. PECORA (interposing). Well, did you discuss—I beg pardon,
but you had paused and I thought you had completed your answer.
Mr. SINCLAIR. NO ; I was coughing.
Mr. PECORA. I beg pardon. You may proceed to complete your
answer.
Mr. SINCLAIR. I was desirous of discussing with them all about the
situation. I knew very little about it, anyway; all that I knew about
it was what I had read in the newspapers.
Mr. PECORA. Well, did you discuss the testimony with Mr. Cutten
on Saturday in Chicago?
3304
STOCK EXCHANGE PRACTICES
Mr. SINCLAIR. I think I testified that what I discussed with Mr.
Cutten—well, I testified to that on yesterday, and I will get my
testimony if you wish.
Mr. PECORA. NO. Don't you recall now, Mr. Sinclair, what you
discussed with Mr, Cutten last Saturday in Chicago at Mr. Bartlett's
home ?•
Mr. SINCLAIR. I will get the testimony.
Mr. PECORA. Don't you recall the testimony that you gave on
yesterday, Mr. Sinclair?
Mr. SINCLAIR. I will get the testimony.
Mr. PECORA. Mr. Sinclair, I am asking you a question, please:
Don't you recall now the testimony that you gave before this subcommittee yesterday with regard to the conversation you had with Mr.
Arthur W. Cutten in Chicago last Saturday ?
Mr. SINCLAIR. DO you wish me to repeat that testimony ?
Mr. PECORA. NO. I haven't asked you to repeat it. Do you
recall it?
Mr. SINCLAIR. I recall that I gave testimony on it on yesterday;
yes.
Mr. PECORA. DO you recall what testimony you gave on that
subject?
Mr. SINCLAIR. I could not say that I do.
Mr. PECORA. I S your memory that poor ?
Mr. SINCLAIR. Well, I shouldn't say that.
Mr. PECORA. Well, now, on yesterday you gave certain testimony
about a conversation you had on last Saturday with Mr. Cutten in
Chicago. Have you forgotten the details of the testimony you gave
yesterday on that subject?
Mr. SINCLAIR. Well, I can repeat the testimony by referring to it,,
but I could not repeat it otherwise. If you will ask me a question
and let me refresh my mind I will tell you exactly.
Mr. PECORA. Would you have to refer to the stenographic record
of your testimony given on yesterday in order to be able to recall
what you then said1
Mr. SINCLAIR. In order to repeat what I then said; yes.
Mr. PECORA. Not to repeat it. What do you mean by repeating
it; repeating it verbatim?
Mr. SINCLAIR. Yes. That is what I assume you wish, isn't it ?
Mr. PECORA. I haven't asked you anything about repeating that
testimony. I simply asked you if you recall it.
Mr. SINCLAIR. I recall testifying.
Mr. PECORA. DO you recall what testimony you then gave i
Mr. SINCLAIR. I will repeat it. [Turning to stenographic transscript.]
Mr. PECORA. N O ; my question is: Can you recall it without refreshing you recollection ?
Mr. SINCLAIR. I cannot.
Senator COUZENS. There is no necessity of his reading over what
he testified about on yesterday, is there, Mr. Pecora ?
Mr. PECORA. NO. NOW, Mr. Sinclair, what purpose did you have
in asking Mr. Walker and Mr. Marston to come to your home in
New York City last Sunday afternoon?
Mr. SINCLAIR. I wished to discuss this syndicate situation, m trying to refresh my mind about the details.
STOCK EXCHANGE PRACTICES
3305
Mr. PECORA. Was there any particular phase of it that you wanted
to refresh your mind about ?
Mr. SINCLAIR. Not any particular thing, but I wanted to refresh
my mind about the entire thing.
Mr. PECORA. Did you succeed in refreshing your mind about the
entire operations of the syndicates ?
Mr. SINCLAIR. I could not say that. I endeavored to refresh my
mind as much as possible.
Mr. PECORA. Did you refresh your mind by asking Mr. Walker
to tell you why he gave Mr. Fitzpatrick that 2y2 percent of the
profits ?
Mr. SINCLAIR. I did not.
Mr. PECORA. Didn't you think it was necessary to do it?
Mr. SINCLAIR. I suggested to Mr. Fitzpatrick that he repeat,
or
that he tell Mr. Walker what he had told me in Excelsior Springs.
Mr. PECORA. And when Mr. Fitzpatrick proceeded to do that, or
before he proceeded to do that, I mean to do that on your suggestion, you left the room while he did it ?
Mr. SINCLAIR. Well, I was in and out of the room.
Mr. PECORA. DO you say you left the room at that particular time ?
Mr. SINCLAIR. Perhaps not at that moment.
Mr. PECORA. At any rate, you were not in the room when Mr.
Fitzpatrick, acting upon your suggestion, repeated to Mr. Walker
the reason that he understood for his having been given that 2y2
percent of the profits ?
Mr. SINCLAIR. I don't think I was.
Mr. PECORA. NOW, you utterly failed to ask Mr. Walker for the
reason, didn't you?
Mr. SINCLAIR. I did not ask Mr. Walker for the reason.
Mr. PECORA. And he did not volunteer to give it to you ?
Mr. SINCLAIR. He did not.
Mr. PECORA. Have you since
had any communication with Mr.
Walker?
Mr. SINCLAIR. I have not.
Mr. PECORA. Or with Mr. Marston?
Mr. SINCLAIR. I have not.
Mr. PECORA. Or with Mr. Fitzpatrick?
Mr. SINCLAIR. I have not.
Mr. PECORA. NOW, I will ask if Mr. Fitzpatrick is present in the
hearing room. [A pause, without response.]
Mr. SINCLAIR. Just a moment. [After consulting with his counsel.] I spoke to Mr. Fitzpatrick last night; yes.
Mr. PECORA. What was that?
Mr. SINCLAIR. I talked to Mr. Fitzpatrick after he came in last
night.
Mr. PECORA. At your hotel here in Washington?
Mr. SINCLAIR. At his hotel; yes.
Mr. PECORA. Did these attorneys, namely, Mr. Stanford, Mr. Ragland, and Mr. Moore, come to your home on Sunday afternoon last
on their initiative or upon your request?
Mr. SINCLAIR. Upon my request.
Mr. PECORA. And what purpose did you have in asking them to
do that?
Mr. SINCLAIR. TO discuss this matter.
3306
STOCK EXCHANGE PKACTICES
Mr. PECORA. HOW long did your discussion with all these gentlemen last on Sunday afternoon?
Mr. SINCLAIR. These gentlemen were at my home, some of them
perhaps coming at 5 o'clock and perhaps leaving at 12 o'clock or 1
o'clock, and some of them left and came back, and some of them
left and did not come back.
Mr. PECORA. Did any of them say to you, Mr. Sinclair, that you
probably would be examined upon your appearance before this committee with respect to the money that was given to Fitzpatrick?
Mr. SINCLAIR. I do not think so.
Mr. PECORA. Was there a copy of the testimony that had previously
been given before this committee by other witnesses concerning these
two syndicates, the purchasing syndicate and the trading syndicate,
at your home last Sunday afternoon?
Mr. SINCLAIR. It was not. I understand Mr. Eagland to say he had
one, but I did not.
Mr. PECORA. At your home?
Mr. SINCLAIR. He says so.
Mr. PECORA. Were any references made to it in the course of any
conversations that were there held?
Mr. SINCLAIR. Not that I know of.
Mr. PECORA. I will ask that Mr. Fitzpatrick be called to the stand,,
and I will suspend temporarily with the examination of Mr. Sinclair.
Mr. SINCLAIR. Shall I retire, or shall I stay here?
Mr. PECORA. Just temporarily.
The CHAIRMAN. Just sit anywhere you like.
(The witness was temporarily excused.)
TESTIMONY OF WILLIAM SAMUEL FITZPATBICK, VICE CHAIRMAN OF THE EXECUTIVE COMMITTEE OF THE CONSOLIDATED*
OIL CO.
The CHAIRMAN. DO you, Mr. Fitzpatrick, solemnly swear that the
evidence you will give in this hearing will be the truth, the wholetruth, and nothing but the truth, so help you God?
Mr. FITZPATRICK. I doi.
Mr. PECORA. What is your full name, Mr. Fitzpatrick?
Mr. FITZPATRICK. William Samuel Fitzpatrick.
Mr. PECORA. What is your business?
Mr. FITZPATRICK. Well, I have been in the oil business for
a good,
many years.
Mr. JPECORA. What is your present business?
Mr. FITZPATRICK. My present position is vice chairman of theexecutive committee of the Consolidated Oil Co.
Mr. PECORA. When did you become the vice chairman of the executive committee of that company?
Mr. FITZPATRICK. Very soon after the 1st of April 1932.
Mr. PECORA. Was that shortly after there had been a consolidationeffected between the Sinclair Consolidated Oil Corporation and the
Prairie Oil & Gas Co.?
Mr. FITZPATRICK. Yes.
Mr. PECORA. At the time of that consolidation and for some time
prior thereto were you associated with the Prairie Oil & Gas Co.?'
STOCK EXCHANGE PRACTICES
3307
Mr. FITZPATRICK. I came to the Prairie Oil & Gas Co. in 1908,
and continued in one capacity or another with the Prairie Oil & Gas
Co. down to the time that it was taken over by the Consolidated.
Mr. PECORA. Were you during any part of that period an officer or
director of any other corporation engaged in any phase of the oil
business ?
Mr. FITZPATRICK. None except a few smaller concerns that were
largely owned or that the Prairie Oil & Gas Co. had a large
interest in.
Mr. PECORA. Was the Prairie Pipe Line Co. one of them?
Mr. FITZPATRICK. No.
Mr. PECORA. Were you connected
Mr. FITZPATRICK. Not officially.
Mr. PECORA. Were you through
with that corporation?
any community of interest between the corporations that you were connected with in that corporation?
Mr. FITZPATRICK. NO ; except that the owners of about 60 percent
of the stock in one company owned stock in the other; and in one
company, I don't know which one it was, it was 65 percent, about.
Senator COUZENS. Were the Rockefellers interested in the Prairie
Co.?
Mr. FITZPATRICK. Both companies.
Senator COTJZENS. Both the pipe line and the oil company?
Mr. FITZPATRICK. Yes, sir.
Senator COTJZENS. Did they have a
Mr. FITZPATRICK. NO, sir.
Senator COTJZENS. DO you know the
controlling interest?
percentage of interest which
they had?
Mr. FITZPATRICK. Only approximately- I think they had about
22 or 23 percent of the Oil and about 20 percent of the Pipe.
Mr. PECORA. Does not that represent a management control for
all practical purposes?
Mr. FITZPATRICK. I do not know what you mean by " practical
purposes ", Mr. Pecora.
Mr. PECORA. For purposes of operation of the company.
Mr. FITZPATRICK. The stock represented by the Rockefellers and
their friends, the trusts and people that had been formerly associated with the old gentleman in years gone by, or their relatives,
had, as I remember it, something like 40 or 42 percent.
Senator COTJZENS. Who represented the Rockefellers in the management ?
Mr. FITZPATRICK. Well, I don't know that anybody represented
the Rockefellers exactly. I came as near it, I presume, as anybody.
Senator COTJZENS. YOU were representing them on the board of
directors ?
Mr. FITZPATRICK. I was always elected on the board of director^
with the proxies that they sent in and the others.
Senator COTJZENS. SO you were always looked upon as a Rockefeller man ?
Mr. FITZPATRICK. I could not say how I was looked upon.
Senator COTJZENS. I mean, the testimony indicated yesterday that
you had been with the Rockefellers very many years.
3308
STOCK EXCHANGE PRACTICES
Mr. FITZPATRICK. I went with the Prairie Oil & Gas Co. in 1908.
I was first employed as an attorney in a suit that was pending in
Kansas, brought by the attorney general to forfeit the charter of
the Prairie Oil & Gas Co. and the Standard Oil Co. of Kansas, and
withdraw or cancel the permit of the Standard Oil Co. of Indiana
to do business in the State of Kansas under the antitrust laws of
that State. After some 6, maybe 9, months in the progress of that
case I was invited to devote my entire time to the Prairie Oil & Gas
Co. as its general counsel.
Mr. PECORA. In the midst of this litigation that had been instituted by the State ?
Mr. FITZPATRICK. Yes.
Mr. PECORA. And you prior to that time represented the State?
Mr. FITZPATRICK. NO.
Mr. PECORA. Oh. I misunderstood you.
Senator COUZENS. NO.
Mr. FITZPATRICK. I had never represented the State in any
capacity.
Mr. PECORA. I misunderstood you.
Mr. FITZPATRICK. I was a practicing attorney in a little country
town in Kansas. I was invited to take the position as general counsel for the Prairie Oil & Gas Co., and my service began on the 1st
day of August 1908. I continued in that capacity for several years.
In 1915 when the Prairie Pipe Line Co. was organized out of a
part of the assets of the Prairie Oil & Gas Co., and the stock issued
in the Prairie Pipe Line Co. was distributed to the different stockholders of the Prairie Oil & Gas Co. as a dividend, I became vice
president of the Prairie Oil & Gas Co. and continued as general
counsel for a year or two, until I was able to find somebody that I
wanted to take my place and turn the legal affairs of the company
over to.
From that time on I was entirely devoted to the business of the
Prairie Oil Co.; the Prairie Pipe Line Co. having been created out
of the assets of the Prairie Oil & Gas Co. due to a decision of the
Supreme Court requiring them to engage in the transportation business as a common carrier, which had not been the original plan or
practice, and we did not want the two accountings to get mixed up
and thought we had better operate the pipe line as a common carrier
in accordance with the law by a separate corporation, and that was
done. After that time, down to the close of its business, the Prairie
Oil & Gas Co. was by far the largest shipper over the Prairie Pipe
Line. They rented offices in our building and our contacts were daily.
Our relations were cordial and helpful, and if I had any influence or
anything to do with the Prairie Pipe Line Co. it was through those
relations, not in any official capacity.
Mr. PECORA. Mr. Fitzpatrick, it was testified to yesterday by Mr.
Sinclair that negotiations for the consolidation of the Sinclair Consolidated Oil Corporation and the Prairie Oil & Gas Co. had been
pending, on and off, for a period of about 5 years prior to their
consummation in March 1932. Does that accord with your recollection ?
Mr. FITZPATRICK. March 1932? My recollection is, and I am
quite sure it is correct, that early in 1928 some of the trusts to which
STOCK EXCHANGE PRACTICES
3309
Mr. Rockefeller had given stock in the Prairie Oil and Prairie
Pipe were about to be wound up, and Mr. Rockefeller's office force,
whoever was looking after it, I don't know, decided that it would
not be a proper thing for Mr. Rockefeller to acquire those stocks
from those trusts, and they sold or, as I understood, had arranged
to sell to Blair & Co. those stocks which amounted to about half of
what we called and regarded as the Rockefeller holdings in our
company.
Mr. PECORA. Were those trusts designated? What were the
names of those trusts ?
Mr. FITZPATRICK. Oh, the Rockefeller Foundation for Medical
Research—I don't remember the names of them; but there were 3
or 4 or 5 of them. They took about half of the Rockefeller influence
out of the stock ownership and passed it to hands that I had no
connection with, more than just a passing acquaintance with. I was
curious to know what it meant to me and to the boys that had
worked with me in building this company, more particularly on my
own account, because I was reaching an age under the plan for
retirement oi officers and employees of the company which was
adopted before I became an officer of the company or a director,
even.
Mr. PECORA. Did you feel that the disposal of those holdings by
the Rockefeller trusts imperiled your tenure as an officer of the
company?
Mr. FITZPATRICK. I was concerned, and I took the first opportunity—I don't remember when it was; I think it was in February
or March 1928—I took the first opportunity I had to inquire, and
was told in Mr. Rockefeller's office in New York that these people
would probably make a market or find a market for these shares.
They did not suppose, I think was the way he put it, that they
were permanently investing in those oil companies, and they had
arranged with those people to, as they called it, do something for
me.
The CHAIRMAN. What do you mean by "those people"? Blair
&Co.?
Mr. FITZPATRICK. I meant Mr. Cutler in Mr. Rockefeller's office.
Mr. PECORA. Who told you that somebody connected with the
Rockefellers had arranged to do something for you?
Mr. FITZPATRICK. Mr. Cutler told me.
Mr. PECORA. What was his relationship?
Mr. FITZPATRICK. He told me he had done it.
Mr. PECORA. Did he tell you how?
Mr. FITZPATRICK. N O ; he did not tell me how or what. They
were to give me some sort of an interest or a profit or participation
in the profits they made in handling this stock, is what I understood
it to be.
Mr. PECORA. Which stock are you referring to ?
Mr. FITZPATRICK. I am talking about the Prairie stock, the Prairie
Oil and the Prairie Pipe. At that time there was no thought, so
far as I knew, of a consolidation with Sinclair.
Mr. PECORA. AS you recall it, when, for the first time, was there
ever any discussion about consolidation with the Sinclair Co. ?
Mr. FITZPATRICK. Some months later.
175541—34—PT 7
7
3310
STOCK EXCHANGE PEACTICES
Mr. PECORA. In 1928?
Mr. FITZPATRICK. In the early part of 1928.
Mr. PECORA. Did the Rockefellers do something for you in the
manner that you have indicated Mr. Cutler said they would ?
Mr. FITZPATRICK. Later on I was talking to Mr. Marston, of Blair
& Co., and I don't know whether he brought the subject up or
whether I did, but one or the other of us—the subject was talked of
and I said, " What do you mean? " He says, " Carry you; have an
interest in the profits we make on whatever distribution we make of
this stock." Then I said, "What interest? How do you mean? "
I am quite sure I explained to him that I did not want to incur any
indebtedness; and he said, " No; carry you for a share of the profits."
I said, " What share? How? " He said, " I presume, about 10 percent." Then later on I was told, I think, by Mr. Cutler, that they
did not know whether the deal with Blair & Co. would go through
or not; that they were kind of wobbling on it. They thought they
had an understanding and a price fixed, but there was some misunderstanding about it, and that he told them to take it or not, if
they wanted to. Later on I learned that they did take it and at a
different figure.
Mr. PECORA. Out of what deal were those profits to be realized of
which you would be given a 10 percent share?
Mr. FITZPATRICK. Out of whatever share Blair & Co. got of the
stock they purchased from the Rockefeller trusts.
Mr. PECORA. Did you ever receive those profits ?
Mr. FITZPATRICK. Yes.
Mr. PECORA. From whom ?
Mr. FITZPATRICK. From Blair & Co.
Mr. PECORA. Amounting to how much ?
Mr. FITZPATRICK. I think the first payment
was $130,000 and the
next was nineteen something, a year or so later.
Mr. PECORA. Were those profits realized out of any transaction involving purchase by a syndicate of 1,130,000 shares of the capital
common stock of the Sinclair Consolidated Oil Corporation ?
Mr. FITZPATRICK. Not those.
Mr. PECORA. What is that?
Mr. FITZPATRICK. Not that $130,000.
Mr. PECORA. That was something wholly apart from any profits
you received from the operations of a syndicate that was formed to
purchase 1,130,000 shares of the Sinclair Co. ?
Mr. FITZPATRICK. Apart from the operations of the so-called
" Cutten syndicate."
Mr. PECORA. SO that the promise made to you by Mr. Cutler some
time in 1928, in the early part of that year, in behalf of the Rockefellers, was redeemed when they paid you these profits of around
$130,000 out of some deal involving stock of the Prairie Oil &
Gas Co.?
Mr. FITZPATRICK. The $130,000 was approximately 2y2 percent.
They had some settlement to make, and finally paid me a little more;
but it was approximately 2y2 percent of the profits that were made
on the shares of Prairie stock that was purchased by Blair & Co.
from the Rockefellers, instead of 10 percent. And the other participation in the Cutten syndicate was arranged without suggestion
STOCK EXCHANGE PRACTICES
3311
from me or without any knowledge on my part until I was asked if
I would be satisfied with it; if that would suit me. Now, why they
did it you will have to ask them. As far as I was concerned, it was
something that I thought Rockefellers had arranged for me in view
of the more than 20 years' service I had rendered the company in
maintaining its charter rights in the State. I had represented it
before every committee of Congress and every legislative or official body that it was attacked by—and it was being attacked.
Newspapers were just as good to it then as they are to me now in
this thing. The name " Kockefeller " and the name " Standard Oil"
were not real good in Kansas and Oklahoma at that time. But I
went along with it for over 20 years, and when we quit it was good;
and not only was it good, but we had taken the 10% million dollars originally invested in those two companies and made of it a
property that entitled us to 8 million out of the 14 million shares
of the Consolidated stock; and in the meantime we had paid to the
stockholders over $225,000,000 in cash dividends. I thought the
Rockefellers, knowing that I had helped them all and lived with it
day and night for those 20 years and attended to that business
and neglected my own to the point that if I were to drop dead my
family would not have more than 50 or 60 thousand dollars out of
the savings I had made out of my salary at that time, and they
wanted to do something for me. That is what they gave me to
understand, and that is the way I did understand it and the way I
understood it from Blair & Co.
Senator TOWNSEND. Whom do you mean by " they " ?
Mr. FITZPATRICK. The Rockefellers—some of them; I do know
who. Mr. Cutler was the man I knew.
Mr. PECORA. It is fair to assume that during the 20 years of service
you rendered to those oil interests in the Prairie companies that you
were compensated for those services currently ?
Mr. FITZPATRICK. I was compensated with a salary, sometimes a
pretty small salary. When it was disclosed here before some Senate
investigation, the salaries that other companies were paying—mine
was a mighty small salary compared to those.
Mr. PECORA. HOW small was it at its highest point?
Mr. FITZPATRICK. $60,000, finally. I t started at $4,800.
Mr. PECORA. And went up to $60,000?
Mr. FITZPATRICK. I t gradually grew to that, without my ever asking anybody for an advance in salary or a promotion.
Mr. PECORA. I S it also fair to assume that you might have had
interests as a stockholder during those 20 years from which you
received part of the two hundred and odd millions of dollars that you
say was paid out to stockholders ?
Mr. FITZPATRICK. Very small. I had a little stock. I didn't own a
share of stock until I was elected and went on the board of directors.
The company loaned me the money to buy the first two shares that I
bought to qualify me as a director.
The CHAIRMAN. What salary do you receive now as vice chairman ?
Mr. FITZPATRICK. $58,000.
The CHAIRMAN. What salary does Mr. Sinclair receive?
Mr. FITZPATRICK. I don't know.
3312
STOCK EXCHANGE PRACTICES
Mr. PECORA. Mr. Fitzpatrick, about when were negotiations first
commenced^ as nearly as you can recall it now, looking toward the
consolidation of the Sinclair Co. with the Prairie Co.?
Mr. FITZPATRICK. Some time in the late spring or early summer of
1928. Blair & Co., soon after they got, as I supposed, into it—the
stock was not transferred at the time on our records, but my understanding was fchat they had made arrangements to purchase or had
purchased it, but I did not know it. But the question was asked me
by either Blair & Co. or Mr. Rockefeller's office, I don't remember
which, what I thought of such a consolidation.
Mr. PECORA. Prior to the time when the Eockefeller interests, represented by these trusts, such as the Rockefeller Foundation for
Medical Research, disposed of their holdings in the Prairie Oil Co.,
did Blair & Co. have anything to do with the Prairie Oil & Gas Co.
or any of its affiliates ?
Mr. FITZPATRICK. NO.
Mr. PECORA. Did they have anything to do at that time with the
Sinclair Consolidated Oil Corporation; do you know?
Mr. FITZPATRICK. I don't know.
Mr. PECORA. I S it your understanding that Blair & Co., either on
behalf of themselves or for clients, purchased the holdings of the
Rockefeller trusts in the Prairie companies when those trusts
disposed of such holdings?
Mr. FITZPATRICK. I t is my understanding that they did, but I had
no connection with it other than conversations with the interested
parties; but it is my understanding that they did buy that stock.
Mr. PECORA. In other words, they bought the Rockefeller interests?
Mr. FITZPATRICK. Yes.
Mr. PECORA. In the Prairie company?
Mr. FITZPATRICK. Yes.
Mr. PECORA. And out of profits which
Blair & Co. made through
the purchase of that Prairie Oil stock did they pay you this sum
of about $130,000?
Mr. FITZPATRICK. That is my understanding.
Mr. PECORA. HOW did that operate? How was that any redempv
tion of the promise or assurance that Mr. Cutler had given you in
behalf of the Rockefellers that they, the Rockefellers, would do
something for you?
Mr. FITZPATRICK. NO ; it was never suggested that the Rockefellers
would do anything for me. I t was suggested only that the Rockefellers had asked or suggested or required—I don't know—but had
arranged with Blair & Cot. to do it.
Mr. PECORA. Did Mr. Cutler tell you that that had been done?
Mr. FITZPATRICK. Yes.
Mr. PECORA. DO you recall
anything about the formation of a
syndicate some time late in 1928 to purchase 1,130,000 shares of the
common stock of the Sinclair Consolidated Oil Corporation?
Mr. FITZPATRICK. I know nothing about it except that I heard these
gentlemen talking, that it had been done; that is all.
Mr. PECORA. When did you first learn that it had been done, Mr.
Fitzpatrick? For the purpose possibly of enabling you to recall the
time, let me say to you that from the evidence before this committee
the nrm agreement that was entered into between the Sinclair Con
STOCK EXCHANGE PRACTICES
3313
solidated Oil Corporation and that purchasing syndicate was made
on October 24,1928.
Mr. FITZPATRICK. Well, I know that I had heard about it at that
time or about that time. I think I had heard that such a thing was
probable, that it was practically arranged some days before it was
actually consummated.
Mr. PECORA. At that time, Mr. Fitzpatrick, was the Prairie Oil &
Gas Co., of which you were the executive head, as I understand it, a
competitor of the Sinclair Co. in the producing field of the oil
business?
Mr. FITZPATRICK. We both produced oil and we both sold oil.
Sinclair—I don't know whether he ever sold any oil or not, Mr.
Pecora, but he had a refinery that used the oil he produced. But
we were competitors in the sense of acquiring leases. Our men were
out after leases, and, really, I think that after that competition was
over there was very little real competition between our companies.
There was no community of interest, but Mr. Sinclair did not buy
oil from the same properties that we did, same producers, and he
did not sell oil or try to sell oil as far as I know to any of the companies that depended on us for supply.
Mr. PECORA. DO you recall in what manner and through what
channels you first learned of the negotiations that culminated in the
agreement of October 24, 1928, between the Sinclair Co. and this
purchasing group ?
Mr. FITZPATRICK. A S I remember it, Mr. Pecora, at that time we
had just begun to talk about our consolidation. We had agreed that
we would agree on a yardstick to measure our producing properties,
leases, and other properties that we had in the two companies, of the
same kind. For instance, the same value on leases in certain localities
that the Prairie had; where Sinclair had leases in the same locality,
the same yardstick should be used in determining the value of them.
The same was true of our producing properties, the production we
had; the same basis per barrel or per acre, or if any other basis should
be applied. They had refineries and we had none, and we had some
gas properties or interests in some gas properties, and they had none.
They had ships and we had none. Those things it was agreed should
be surveyed and appraised by competent persons employed by mutual
consent, and we were to accept their appraisals.
That was as far as it had gotten except to look over the book
accounts. I had had my men come to New York, and I think Mr.
Sinclair had had his men look at our books, the books of the company, our statement, to see what our book values of our stock were
and some information as to how they were arrived at. And this
proposition apparently did not affect that at all except there would
be $33,000,000 more in the till to operate the consolidated company
with when we got through with the consolidation, and in connection
with that and the effect that it might have on our future consolidation Mr. Sinclair told me that he was negotiating and expected to
make a sale of the unissued treasury stock of the Sinclair Co. and
get this money in lieu of it.
Now, that is all the way I knew about it, and that is how I came
to know about it and that is all I know about it.
3314
STOCK EXCHANGE PRACTICES
Mr. PECORA. Then was the source of your information Mr.
Sinclair ?
Mr. FITZPATRICK. I am quite sure it was Mr. Sinclair.
Mr. PECORA. Were you invited to become a participant in the
purchasing syndicate?
Mr. FITZPATRICK. NO ; nothing of the kind.
Mr. PECORA. Did Mr. Sinclair say to you in words or substance
that he would like to see you participate in any of the profits that
might be derived by the purchasing group ?
Mr. FITZPATRICK. Of the Cutten Syndicate? No; nor the other.
Mr. PECORA. He merely told you in connection with conversations
he had with you at that time about a prospective consolidation of
your companies, that an amount of working capital, an additional
amount of working capital was sought to be obtained about that
time by his company through the issuance and sale of unissued
treasury stock?
Mr. FITZPATRICK. Yes.
Mr. PECORA. TO an amount of about 33 million dollars?
Mr. FITZPATRICK. Yes.
Mr. PECORA. I S that right?
Mr. FITZPATRICK. That is right.
Mr. PECORA. Did he tell you anything at all about the details
of
the transaction whereby he in behalf of his company was to dispose
of those shares of stock?
Mr. FITZPATRICK. NO. The fact of the business is I do not think
I knew that he had done that until I read it in the newspapers out
at Excelsior Springs.
Mr. PECORA. YOU mean recently?
Mr. FITZPATRICK. Yes.
Mr. PECORA. It developed very recently?
Mr. FITZPATRICK. Yes; as it developed in the testimony.
Mr. PECORA. And did you read it by way of references to testimony which had been presented to this committee?
Mr. FITZPATRICK. I think Mr. Cutten's testimony gave a list of
some participants in that syndicate, and it was published in the
Kansas City papers or Chicago papers and I read it there, and that
is the first I knew that these other people connected with the Sinclair Co. had anything to do with it or who the actual participants
in the syndicate were.
The CHAIRMAN. What was your attitude as an officer of the
Prairie Co. toward the consolidation or proposed consolidation with
the Sinclair Co.?
Mr. FITZPATRICK. I was at all times favorable to the consolidation,
and I had what to me was a very good reason. I would be glad to
explain it to the committee if they would care to hear it.
Mr. PECORA. Well, I will come to that eventually. When did you
first hear that you were to receive any share of profits which were
made by that purchasing syndicate that you now know was formed
at that time to buy the 1,130,000 shares of the stock of the Sinclair Co.?
Mr. FITZPATRICK. Some 3 or 4 weeks or a month after the sale had
been made.
Mr. PECORA. And who first spoke to you on that subject at that
time?
STOCK EXCHANGE PRACTICES
3315
Mr. FITZPATRICK. I think it was Mr. Walker and Mr. Tinker.
Mr. PECORA. Mr. Elisha Walker was then the president of Blair
&Co.?
Mr. FITZPATRICK. Yes.
Mr. PECORA. And what
relation did Mr. Tinker bear to the transaction so far as you can recall ?
Mr. FITZPATRICK. I think he was a participant in the syndicate.
Mr. PECORA. Did they tell you at that time that they were participants in the syndicate that had been organized to purchase this
Sinclair stock?
Mr. FITZPATRICK. I am quite sure that they did. I don't remember
just what language they employed, but I was given in some way to
understand that they were participants in that syndicate—yes; and
that they—somebody—had arranged that I should have 2y2 percent,
along with the 2y2 percent in the other syndicate, in lieu of the 10
percent that had been talked of between Mr. Marston and me. Now,
how they arranged that I never asked. Nobody ever told me. Why
they passed that on to the other syndicate I do not know.
Frankly, gentlemen, I regarded the opportunity to share in those
profits as a very fine thing for the Rockefellers to do or arrange for
me on account of the services I had rendered, and I had no other idea
about it, and I did not care whether it was 300,000—I had no idea
it would be anything like that amount of money. I never dreamed
that it would be anything like that amount of money. And I did
not care how much it was or how it was divided or who got the rest of
it or anything about it. I was taking it and making very little
inquiry about it.
Mr. PECORA. Did you feel at that time that the Rockefeller interests were under some kind of obligation, moral or otherwise, to give
you something additional to the salary you had received ior your
20 years' service ?
Mr. FITZPATRICK. I did not. I knew that Mr. Rockefeller, according to the press, was giving millions of dollars away to this
thing and that thing, and I thought it was a very nice and lovely
thing for Mr. Rockefeller to remember a faithful employee, as he
seemed to be remembering me.
Mr. PECORA. NOW, when Mr. Blair and Mr. Tinker first spoke to
you about giving you something out of profits which they expected
to make as members of a purchasing syndicate to buy stock from the
Sinclair Co. did you consider that they were representing the
Rockefeller interests?
Mr. FITZPATRICK. NO.
Mr. PECORA. Did you consider that they owed you any obligation
whatsoever to give you any moneys, any share of moneys that they
made by way of profits or otherwise in any business transactions?
Mr. FITZPATRICK. None whatever, and the thought never occurred
to me that they were undertaking or had in mind the imposition
of any obligation on me.
Mr. PECORA. N O ; not an imposition of an obligation on you, but a
repayment of an obligation that they might have owed you, morally
otherwise.
Mr. FITZPATRICK. They did not owe me anything. That is one
ason why I was so careless, if you please, about inquiring into
3316
STOCK EXCHANGE PRACTICES
their business or how they made this money or where it came from
or what they did with this stock.
Mr. PECORA. Did you know of any reason whatsoever why Blair
& Co. or Mr. Walker and Mr. Tinker, who then were associated as I
recall it with Blair & Co., should have given you any participation
in any profits of any kind whatsoever that they had made or were
going to make?
Mr. FITZPATRICK. None whatever, except that Mr. Cutler and Mr.
Kockefeller's office had told me he had requested them to do that,
and Mr. Marston and Mr. Walker seemed to have consented to it and
were carrying that out.
Mr. PECORA. When did you get the final payment that went to
make up this sum of about $130,000 that you say you received from
Blair & Co. out of some profits they made in the purchase of Prairie
Oil stock?
Mr. FITZPATRICK. In 1930.
Mr. PECORA. In 1930?
Mr. FITZPATRICK. Yes; the last of 1930.
Mr. PECORA. When did you receive the first
payment out of those
profits?
Mr. FITZPATRICK. Some time in 1929.
Senator TOWNSEND. What position did Mr. Cutler occupy, Mr.
Fitzpatrick?
Mr. FITZPATRICK. Senator, I do not know what it was. If he had
any title I do not know what it is, but he is there and it was he who
always asked me how much cash we had and how our business was
getting along when I saw him.
Senator TOWNSEND. Does he still occupy the same position now?
Mr. FITZPATRICK. SO far as I know he does.
Mr. PECORA. When were these profits made by Blair & Co. out of
their transactions in Prairie Oil & Gas Co. stock?
Mr. FITZPATRICK. When were they made?
Mr. PECORA. Yes.
Mr. FITZPATRICK. I don't know.
Mr. PECORA. Your first conversation
on the subject was sometime
early in 1928, as I understood you before?
Mr. FITZPATRICK. Yes.
Mr. PECORA. And you did not receive any
Mr. FITZPATRICK (interposing). They must
have been made in '29
or the latter part or '28. I don't know when they were made. I
did not get it until early in the summer of 1929, and I know it was
early in the summer, because in August of that summer I took a long
trip through the western mountains and it was some time before I
started on that trip.
Mr. PECORA. Did you consider that the moneys that you then
received out of profits from the Prairie Oil stock transactions that
Blair & Co. had made were given to you in fulfillment of what Mr.
Cutler had told you in the early part of 1928 the ^Rockefellers would
'do for you?
Mr. FITZPATRICK. I certainly did.
Mr. PECORA. Did you thank the Eockefellers for it?
Mr. FITZPATRICK. I
did.
Mr. PECORA. By letter?
Mr. FITZPATRICK. NO.
STOCK EXCHANGE PRACTICES
3317
Mr. PECORA. Whom did you thank?
Mr. FITZPATRICK. Mr. Cutler.
Mr. PECORA. And did he accept the thanks in the supposition on
your part that he or the Rockefeller interests had plaid you those
moneys ?
Mr. FITZPATRICK. I gathered from the way he accepted my thanks
that he was very delighted, very glad that I was pleased with the
arrangement and that it was profitable to me.
Mr. PECORA. NOW tell us all that you recall concerning what
either Mr. Walker or Mr. Marston or Mr. Tinker said to you about
giving you a share of profits which they hoped to realize as members
of the purchasing syndicate by this large block of stock from the
Sinclair Co.
Mr. FITZPATRICK. Well, I don't remember any particular conversation, except that Mr. Walker always seemed to know, take that for
granted, seemed to understand that I was to have something out of
it. I had only two conversations with Mr. Marston that I have been
able to recall since this matter came up here. Once when we were
talking about his promising Mr. Cutler to take care of me, as they
called it, in which he said—and I asked him what he meant by
taking care of me and he said " Carry me for an interest", and I
said, "What interest? " and he said " 10 percent", as I remember
it. I am quite sure I am right about it.
And then I was told that I was to be carried for a 2% percent
interest in both the syndicates, and I met Mr. Marston one day in
his office and jokingly asked him how he came to cut it down from
10 to 2%, and he said, " Well, it gives me a better play", and I
think he used the word "play", because one syndicate might flop,
another syndicate might make some money, and that the 2 ^ in
the whole thing if it all went good was about what my participation
in the one would be.
Mr. PECORA. Did you understand from what Marston or Walker
or Tinker told you about the purchasing syndicate in the Sinclair
stock that the Kockefeller interests had anything to do with that
syndicate ?
Mr. FITZPATRICK. I understood they did not have anything to do
with the Sinclair syndicate.
Mr. PECORA. Then why did you think, or did you think that you
were morally or otherwise entitled to receive any share of the profits
that accrued to interests other than the Rockefeller interests from
the Sinclair purchasing syndicate?
Mr. FITZPATRICK. I did not consider that I was morally or otherwise entitled to participate in the Sinclair syndicate, but I supposed
that Blair & Co., in the keeping of their promise to Mr. Rockefeller's
representative, had decided to do it that way. There was no moral
obligation. There was no expectancy that I could see why I should
participate in the Sinclair syndicate, and I did not participate in it
except when Blair & Co. handed me the checks or the money for that
participation I took the $200,000 of it and went and paid a note and
left $100,000 of it on deposit with them.
Mr. PECORA. The amount you received was something over
$300,000, was it?
3318
STOCK EXCHANGE PRACTICES
Mr. FITZPATRICK. What is that?
Mr. PECORA. The amount you received out of the profits accruing
to the purchasing syndicate in the Sinclair stock was something
over $300,000?
Mr. FITZPATRICK. I think it was.
Mr. PECORA. It was slightly in excess of that?
Mr. FITZPATRICK. I think it was exactly 300. I am not quite sure,
but that is my recollection.
Mr. PECORA. Did any of those gentlemen tell you the nature of
the syndicate, the purchasing syndicate for the Sinclair stock, or
give you any of the details?
Mr. FITZPATRICK. NO.
Mr. PECORA. Give you any information at all about it?
Mr. FITZPATRICK. NO. I never got any information about the
details of it or the contract or anything that was in the contract
until several years later.
Mr. PECORA. YOU knew that the profits were going to be made in
transactions dealing with the Sinclair Co. stock?
Mr. FITZPATRICK. I understood that on the part of these people
the purpose of the purchase was to make some mone^.
Mr. RECORA. By trading in the stock of the Sinclair Co. ?
Mr. FITZPATRICK. Well, I presumed so. Nobody told me that, but
I presumed it. I did not Know much about trading. I never had
an account, a trading account with a broker, in my life. I never
had bought any stock that I did not want my banker to buy through
his broker, when I had money enough to pay for it.
Mr. PECORA. YOU mean to say that nobody told you that this purchasing syndicate was to deal in the stock of the Sinclair Co. when
you were first told by anybody that you were to receive a share of
the profits therefrom?
Mr. FITZPATRICK. Oh, there was—I don't mean to say nobody told
me that. My understanding was that they would, but I cannot say
that anybody told me that way.
Mr. PECORA. Was it your understanding that the profits were to
be realized out of transactions in the common stock of the Sinclair
Co.?
Mr. FITZPATRICK. Sure. Sure. So far as I knew, that was all
that was involved in the deal.
Mr. PECORA. YOU may or may not know it, but Mr. Sinclair yesterday referred to your receiving that $300,000 as a "pretty soft
thing." You would not dispute him in that respect, would you ?
Mr. FITZPATRICK. I certainly would not. [Laughter.] I so regarded it myself.
Mr. PECORA. Have any other " soft things " of that same character
come your way?
Mr. FITZPATRICK. Never have.
Mr. PECOKA. YOU accompanied Mr, Sinclair to Excelsior Springs
from Chicago some 2 or 3 weeks ago, didn't you ?
Mr. FITZPATRICK. Yes.
Mr. PECORA. And you
remained with him there for a period of
about 2 weeks?
Mr. FITZPATRICK. I remained with him there until he left. We got
in there on Saturday and we left Friday, I think.
STOCK EXCHANGE PRACTICES
3319
Mr. PECORA. The follow
Mr. FITZPATRICK. No; week from the following Friday.
Mr. PECORA. During that time did you discuss with him the testimony given by Mr. Arthur W. Cutten before this committee just
prior to your going to Excelsior Springs with Mr. Sinclair?
Mr. FITZPATRICK. I think I did. We talked about it. We had the
papers there and read about it, and then I think he told me that Mr.
Stanford, his attorney, called him up and told him that you folks
were raising hell about it. [Prolonged laughter.]
Mr. PECORA. Well now, after Mr. Stanford gave you that interesting bit of information did you get into a huddle with Mr. Sinclair
about Mr. Cutten's testimony and our hell-raising?
Mr. FITZPATRICK. NO. We did not get into a huddle. Mr. Sinclair
was a very sick man when he went there, and from day to day
I went to his room and we talked about it. No huddle on it at all.
We were there together, and when I learned that somebody was
raising hell about me I suggested that I get on the train and come
down here and see what it was all about, and Mr. Sinclair was
running a temperature at that time, the doctor said it would be
very dangerous for him to leave, and he says, " I will go to ", and I
said, " No, you can't go. You stay here and get well. Get yourself on your feet before you go." And I stayed with him.
Mr. PECORA. Did you indicate to anybody connected with the
committee that you would come in here to testify?
Mr. FITZPATRICK. NO ; I did not indicate to anybody. I arranged
to get dopy of Mr. Cutten's testimony and thought I would look that
over before I made up my mind that there was anything for me
to shoot about.
Mr. PECORA. Did Mr. Cutten's testimony enlighten you very much
about the transaction?
Mr. FITZPATRICK. I have not read it yet. [Laughter.]
Mr. PECORA. When did you get it?
Mr. FITZPATRICK. Well, it was to have reached my office yesterday, but when I got word to come over here it had not arrived.
Mr. PECORA. Did you discuss or did you tell Mr. Sinclair while
you were out at Excelsior Springs with him the circumstances under
which you understood you got that $300,000?
Mr. FITZPATRICK. I think I told Mr. Sinclair just exactly what I
told you gentlemen and every bit of it.
Mr. PECORA. About in the same detail as you told us this morning?
Mr. FITZPATRICK. About in the same detail and just about the
same amount.
Mr. PECORA. That is all, Mr. Fitzpatrick.
Mr. FITZPATRICK. NOW, I am not testifying by advice of counsel,
but Mr. Stanford called my attention to something he says is a discrepancy in my testimony. If it is I want to—this note is handed
me: " A t one place in your testimony you said that Rockefellers
were selling their interests in the Prairie Oil & Gas Co., and the
Prairie Pipe Line Co." Now, if I said that I meant that they were
selling these trusts that
Mr. PECORA (interposing). I think you made that clear.
Mr. FITZPATRICK. I meant that they were selling the shares that
were held by these trusts they were looking after and responsible
3320
STOCK EXCHANGE PRACTICES
for and created. The stock that Mr. Kockefeller held in the Prairie Oil & Gas Co., 254,000 shares at that time, was not disturbed at
all, and I was told at their office that they did not intend to dispose
of them.
The CHAIRMAN. That afterwards went into the Consolidated arrangement with the Sinclair ?
Mr. FITZPATRICK. Yes. That afterwards went into the Consolidated, along with some additional shares. I do not remember how
many.
The CHAIRMAN. HOW much stock do you own in the Consolidated ?
Mr. FITZPATRICK. HOW much stock do I own now, in the Consolidated Oil Co.?
The CHAIRMAN. Yes.
Mr. FITZPATRICK. Ten thousand shares.
Mr. PECORA. Mr. Fitzpatrick, when did you first become a stockholder of the Sinclair Consolidated Oil Corporation?
Mr. FITZPATRICK. About 1929. I arranged for some stock in the
Consolidated Oil Co. in 1928.
Mr. PECORA. TO what extent?
Mr. FITZPATRICK. I think it was about 9,000 shares.
Mr. PECORA. Did you acquire it in 1928 ?
Mr. FITZPATRICK. I bought it in 1928 from this syndicate.
Mr. PECORA. From which syndicate?
Mr. FITZPATRICK. From Mr. Walker and Mr. Tinker. I understood it was to be some of this syndicate stock.
Mr. PECORA. That is, some of the stock which the purchasing syndicate bought directly from the Sinclair Co. in 1928 ?
Mr. FITZPATRICK.
Yes.
Mr. PECORA. Some of this 1,130,000 share block?
Mr. FITZPATRICK. Yes.
Mr. PECORA. At what price
Mr. FITZPATRICK. $30.
Mr. PECORA. At $30?
Mr. FITZPATRTCK. Yes; and
did you acquire those 9,000 shares?
I paid for it with Prairie Oil & Gas
Co. stock at $50.
The CHAIRMAN. That had nothing to do with that $200,000 note?
Mr. FITZPATRICK. NO connection with it at all.
Mr. PECORA. Did you dispose of those 9,000 shares, if that was
the number of Sinclair Consolidated Oil Corporation stock, at any
time during the following year?
Mr. FITZPATRICK. NO. I bought more Sinclair during the following year, and did not dispose of any of it until 1930. I sold 4,000
shares in 1930 because I needed it. My income tax on this $400,000
was so very much I had to sell something to pay it.
Mr. PECORA. Did you have any controversy or contention with the
Internal Revenue department in 1929 concerning this transaction
whereby you acquired these 9,000 shares of the Sinclair Corporation?
Mr. FITZPATRICK. I have a case now pending before the Board of
Tax Appeals, where they insist that I owe the Government some
$6,000 to $8,000, because the stock that I arranged to buy in 1928
with Mr. Walker and Mr. Tinker was not actually delivered until
1929, and they claim that the Prairie stock which I traded for it—
they know what that cost me. They claim that I made a profit on
STOCK EXCHANGE PRACTICES
3321
the disposition of that Prairie stock because at the date that the
banker with whom my shares were deposited as collateral actually
accomplished the exchange, the stock was selling for $39 a share.
Mr. PECORA. That was the Sinclair stock?
Mr. FITZPATRICK. Yes. The Sinclair stock was selling for $39 a
share, and they say that was the market value of that stock in the
transaction dated that date, and it had no relation to the agreement in 1928, when the exchange was agreed on, and that, therefore,
I owe the Government some tax, and we are fighting about that.
Mr. PECORA. Was it $39 a share or $42 a share that the Internal
Revenue Bureau claimed the Sinclair stock was worth ?
Mr. FITZPATRICK. $39.
Mr. PECORA. Was it your
contention that that $39 was not its true
value, because that value and been created in the market by
manipulation ?
Mr. FITZPATRICK. My contention—my suspicion is very largely
that way.
Mr. PECORA. Did you so inform the authorities of the Internal
Revenue Department?
Mr. FITZPATRICK. I informed the authorities in the Internal Revenue Bureau that it was a firm price that I paid for that stock. I
am quite sure Mr. Walker and Mr. Tinker would have sold me this
stock at that price.
Mr. PECORA. At $30?
Mr. FITZPATRICK. At $30. But I did not have the money to pay
for it, and I did trade the Prairie stock for it on that basis, 3 shares
of Prairie for 5 shares of Sinclair.
Mr. PECORA. Consolidated?
Mr. FITZPATRICK. Sinclair, it was at that time—Sinclair Consolidated.
Mr. PECORA. HOW was this price of $30 a share fixed between you
and the gentlemen from whom you bought those 9,000 shares?
Mr. FITZPATRICK. They said that that is what they were paying
for it, and they would pass it on to me. I have contended with the
Internal Revenue Department that the sale of a block of 1,000,000
shares to a man who had the money and was willing to pay that
much for it, $30 a share for it—a sale made by a corporation and
approved by its board of directors, that knew all about the value of
its stock, was better evidence as to the value than the up and down
fluctuations on the market.
Mr. PECORA. I understood you in the course of your testimony
before to say that you did not learn any of the details of the purchase
of that block of 1,130,000 shares by the purchasing syndicate until
long after.
Mr. FITZPATRICK. My dear sir, I said in the beginning that I did
learn that $30 a share was the price at which that stock was sold,
because that entered into the question I was considering, and the
only question I was considering, as to how much money would be
in the Sinclair till when we got hooked up with them.
Mr. PECORA. Then the following year, 1929, when the exchange was
effected by the actual delivery to you of the Sinclair stock, the revenue authorities sought to assess a tax upon you on the theory that
you had made a profit upon that exchange of your Prairie Oil stock
3322
STOCK EXCHANGE PRACTICES
for the stock of the Sinclair Co., and that the Sinclair Co.'s stock
had a value of $39 a share instead of $30.
Mr. FITZPATRICK. That was their contention.
Mr. PECORA. That was their contention ?
Mr. FITZPATRICK. Yes.
Mr. PECORA. And your
reply, among other things, to that contention was that the $39 valuation was not a true valuation because it
had been established as a result of market manipulation, or words
to that effect.
Mr. FITZPATRICK. Of course, Mr. Pecora, I had no idea that this
was the trial of my tax case.
Mr. PECORA. But I am asking now what you told the Internal
Revenue authorities about the price of $39 a share being, not the
true value, but the result of market manipulation. This is specifically an inquiry into that, among other things.
Mr. FITZPATRICK. I told them that it was wrong. I told them,
in the first place, that the price at which I got that stock was fixed
just as firmly by the agreement between us as anything could be fixed.
The exchange could not be made at that particular day because I do
not know whether they had the stock. I do not know whether it
had been issued to them by Sinclair or not, but they did not have it
with them, and I did not have the stock with me that I was exchanging for it, and I had to go to my banker when I found out
where they wanted the exchange accomplished, and I was directed
to send my shares to Blair & Co., and they would effect the exchange.
I went over across the street to the bank and told my banker what I
had done, and that I wanted him to do it. He comes along on the
1st of February, as the record shows, with a letter to Blair & Co.
asking them to make the exchange as per my directions, and the
exchange was made, I think, on the 28th of February. In the meantime the market was going up and down, and I insisted, and am
insisting, and shall insist that the 1,000,000-share transaction, at the
time I was making my trade, is better evidence as to the value of that
stock than the way they handle things on the New York Stock
Exchange.
Mr. PECORA. But didn't you tell the revenue authorities specifically, and in substance, that the market valuation of $39 a share
which they assumed was the value of that Sinclair stock that you
received in exchange for your Prairie stock, was not to be accepted,
and should not be accepted as the actual value of the stock, because
that valuation, that market valuation of $39 a share, had been established by means of the Cutten pool and its market manipulations ?
Mr. FITZPATRICK. If I put that argument forward, it was an argument. I was not under oath.
Mr. PECORA. Did you make that argument?
Mr. FITZPATRICK. I don't know whether I did or not. I think
possibly I did.
Mr. PECORA. What prompted you to make that argument? Did
you believe that the market price of $39 a share was out of line with
the true value, and represented simply an artificial value created
or established by market manipulations? 1
Mr. FITZPATRICK. I have the impression,] as everybody does who
knows nothing about it, that stocks are rigged on the New York
Stock Exchange, but I do not know anything about it.
STOCK EXCHANGE PRACTICES
3323
Senator COUZENS. Haven't you learned something about it since
hearing about Mr. Cutten^s testimony?
Mr. FITZPATRICK. I don't believe everything I hear.
Senator COUZENS. Neither do we. Are the Rockefellers interested
in the Sinclair Oil ?
Mr. FITZPATRICK. It is my understanding that they are, when it
came to voting in the stockholders meetings of the Prairie Oil &
Gas Co. to approve this consolidation. I voted their shares for the
consolidation.
Senator COUZENS. Who votes their shares in the Consolidated Co. ?
Mr. FITZPATRICK. Whoever the committee happens to be. They
send out proxies, naming them in the proxies they send out.
Senator COUZENS. The Rockefellers send in their proxies to the
nominees fixed by the directors?
Mr. FITZPATRICK. They have. I have been there, I think, at one
or two meetings.
Mr. PECORA. That is all.
TESTIMONY OF ELISHA WALKER, A MEMBER OF THE FIRM OF
KTJHN, I0EB & CO.
The CHAIRMAN. Mr. Walker, you solemnly swear that you will tell
the truth, the whole truth, and nothing but the truth, regarding the
matters now under investigation by the committee, so help you God?
Mr. WALKER. I do.
Mr. PECORA. Will you please give us your full name, Mr. Walker?
Mr. WALKER. Elisha Walker.
Mr. PECORA. Your residence and business address ?
Mr. WALKER. 52 William Street, New York City, is my business
address; 33 East Sixty-ninth Street is my residence.
Mr. PECORA. What is your business, Mr. Walker ?
Mr. WALKER. Investment banking.
Mr. PECORA. Are you now a member of any investment banking
firm?
Mr. WALKER. I am a member of Kuhn, Loeb & Co. at present.
Mr. PECORA. HOW long have you been a member of that firm?
Mr. WALKER. Since the first of this year.
Mr. PECORA. Prior to that, were you connected with any other
banking firm or corporation?
Mr.. WALKER. With Blair & Co. and Blair & Co., Inc.
Mr. PECORA. In the year 1928, were you connected with Blair &
Co., Inc.
Mr. WALKER. Yes,
sir.
Mr. PECORA. In what capacity?
Mr. WALKER. AS president.
Mr. PECORA. They were bankers? That was a banking firm?
Mr. WALKER. Dealers in investment securities.
Mr. PECORA. Were you also in that year a director of a corporation
called the Sinclair Consolidated Oil Corporation?
Mr. WALKER. Yes, I believe so.
Mr. PECORA. HOW long had you been a director of that corporation?
Mr. WALKER. I would say several years.
3324
STOCK EXCHANGE PRACTICES
Mr. PECORA. Were you also in that year a member of the executive
committee of the board of directors of that corporation?
Mr. WALKER. Yes.
Mr. PECORA. D O you
recall a transaction whereby the Sinclair Consolidated Oil Corporation sold to a purchasing group a block of
1,130,000 shares of its capital common stock for $30 a share ?
Mr. WALKER. Yes.
Mr. PECORA. According
to evidence here, the agreement under
which that transaction was consummated was entered into on October 24,1928.
Mr. WALKER. Yes.
Mr. PECORA. Have you a recollection of that?
Mr. WALKER. I have.
Mr. PECORA. HOW long before that date did you first learn of any
negotiations having been instituted looking to the making of that
sale?
Mr. WALKER. If you mean preliminary talks, I would say possibly
a couple of months. If you mean definite negotiations, I would say
a comparatively short time before the final trade was made.
Mr. PECORA. Who undertook the preliminary negotiations?
Mr. WALKER. Mr. Sinclair; H. F. Sinclair.
Mr. PECORA. Were you cognizant of them currently?
Mr. WALKER. I presume I knew in general, as a director of the
corporation.
Mr. PECORA. Had the matter been discussed at a meeting of the directors of the corporation at that time ?
Mr. WALKER. I, presume it was discussed informally at the meetings.
Mr. PECORA. Along what lines? What was the substance of the
discussions ?
Mr. WALKER. Along the lines of the advisability of raising additional capital for the corporation through the sale of common stock.
At that time the company had substantial bond issues, and it was
spending a lot of money, and it was thought advisable to raise
additional capital to strengthen it.
Mr. PECORA. In those preliminary, or rather informal discussions,
was anything said by any of the officers or directors to you, or by
you to any of them, concerning the method that should be followed
in issuing and selling that stock for the purpose of getting additional
working capital?
Mr. WALKER. YOU mean the method of sale?
Mr. PECORA. Yes.
Mr. WALKER. Oh, yes; that was discussed.
Mr. PECORA. What was said on that?
Mr. WALKER. I t was considered—Mr. Sinclair
desired to get a
price of $30 for the stock. He was very insistent, as I remember it,
that $30 must be paid. The stock was not selling at $30. It was
selling under 30, and I can remember saying " You are going to have
a very hard job finding purchasers for it. He said, " I will find
them , and eventually this transaction resulted from that.
Mr. PECORA. Blair & Co., of which you were then the president,
proved eventually to be one of the purchasers at $30 a share?
Mr. WALKER. Yes.
STOCK EXCHANGE PEACTICES
3325
Mr. PECORA. In these informal preliminary discussions among the
directors, of which you were one, when Mr. Sinclair insisted that
the sale be made for the price of $30 a share, was it your opinion or
feeling that the price of $30 a share represented the true or intrinsic
value of the stock?
Mr. WALKER. When you talk about true or intrinsic value, it
depends upon whether you mean the price the public puts upon it,
which, after all, in my opinion is the value of a stock
Mr. PECORA. Any price the public puts on it represents the value
of a stock?
Mr. WALKER. In general.
Mr. PECORA. That is your opinion generally about securities
values?
Mr. WALKER. In general.
Mr. PECORA. Then you must have felt that if the price of the stock
fixed by the public in that manner was under $30 a share, that Mr.
Sinclair's estimate of the value of the stock was excessive.
Mr. WALKER. I did a,t the start, undoubtedly.
Mr. PECORA. When did you change your opinion about that, if you
did change it?
Mr. WALKER. The stock, as you know from the record, gradually
advanced over that period of time, and it got up to around $30 a
share, and Mr. Sinclair told me he had Mr. Cutten interested in
buying this block of stock, and he was very anxious to sell this
block of stock, but frankly, at the time I thought we were taking
a very great risk when we went in and bought as one of the participants that 1,130,000 shares of stock.
Mr. PECORA. YOU mean you thought you were taking a great risk
of losing because you were paying too much?
Mr. WALKER. I thought it was a very material risk in that
respect; yes.
The CHAIRMAN. YOU thought you could educate the public somewhat, and get the public estimate a little higher than it was, when
they found out you had gone in?
Mr. WALKER. I did not quite catch the first part of it.
The CHAIRMAN. YOU believed you could educate the public somewhat, did you not?
Mr. WALKER. N O ; I did not think I could educate the public
at all.
Mr. PECORA. Blair & Co., Inc., at that time was a stock corporation, was it not ?
Mr. WALKER. Yes; a business corporation.
Mr. PECORA. Feeling that you were taking a great risk in buying
that stock at $30 a share, your corporation, namely, Blair & Co.,
Inc., nevertheless committed itself to participate to the extent of
25 percent in the purchase of this block of 1,130,000 shares at $30
a share?
Mr. WALKER. Yes. Blair & Co., Inc., was a private corporation.
The owners of Blair & Co., Inc., that is, all of the common stock,
were active members of the firm.
Mr. PECORA. Who asked you, or Blair & Co., to become a participant in a purchasing syndicate to buy that stock?
Mr. WALKER. Mr. Sinclair.
175541—34—PT 7
8
3326
STOCK EXCHANGE PRACTICES
Mr. PECORA. YOU readily agreed to buy it in behalf of Blair & Co. ?
Mr. WALKER. I would not say I readily agreed, no. It was with a
great deal of hesitation that I agreed to.
Mr. PECORA. Finally you did agree ?
Mr. WALKER. Yes.
Mr. PECORA. And how
long before October 24, 1928, did you indicate to Mr. Sinclair that Blair & Co. would take 25 percent participation in that purchase ?
Mr. WALKER. I was hesitant up until the last day, almost—maybe
2 or 3 days. But that was my feeling in the matter at the time.
Mr. PECORA. Meanwhile, were you watching the public quotations
of the stock?
Mr. WALKER. I naturally was watching the market.
Mr. PECORA. And a few days before October 24, the value of the
stock, or what you deemed to be the value, namely, the public quotations, exceeded $30 a share, did it not?
Mr. WALKER. Just about that time. It was somewhere along
there. I would say between the 22d and the 24th, as I remember
the picture. I have not looked up the quotations lately.
Mr. PECORA. Did you have any conferences or discussions with
Mr. Arthur W. Cutten about Blair & Co. becoming a participant in
the purchasing syndicate?
Mr. WALKER. Yes.
Mr. PECORA. Did you write anybody to become a participant in that
syndicate ?
Mr. WALKER. The firm of Blair & Co., Inc., did ask one or two
people to come into the original account.
Mr. PECORA. Did they come in?
Mr. WALKER. Yes.
Mr. PECORA. Who were they?
Mr. WALKER. A S I remember
it, there was Mr. Hill and Mr. Kalman, a joint account. They had a participation.
Mr. PECORA. They had a participation of about one half of 1 percent?
Mr. WALKER. One half of 1 percent. There was 10 percent, as
you know, given away. I do not believe we asked the other participants. There were tne Continental Co. of Chicago, if I remember
rightly, and Mr. Arthur Reynolds, and Mr. Tinker's companies.
The only ones we actually asked in ourselves, I am sure, were for one
half of 1 percent for Mr. Hill and Mr. Kalman.
Mr. PECORA. Mr. Walker, originally was it proposed that this purchasing grouj) consist of more than the following participants:
Blair & Co., with a 25 percent interest; Arthur W. Cutten, 25 percent
interest; Harry F. Sinclair, 25 percent interest, and the Chase Securities Corporation, 25 percent interest ?
Mr. WALKER. I t was not Chase Securities Co. 25 percent. I t was
Chase Securities Co. one sixth, and the Shermar Corporation one
twelfth, with, of course, the provision and the definite understanding that 12 percent, or approximately 12 percent, was to be given
away to other participants.
Mr. PECORA. The.original purchasing group was to consist of the
four corporations and persons that I named, was it not ?
Mr. WALKER. A S I remember it, the Shermar Corporation made a
fifth.
STOCK EXCHANGE PRACTICES
3327
Mr. PECORA. Who invited the Shermar Corporation to come in?
Mr. WALKER. Why, Mr. Callahan represented the Chase interests
at those meetings, and, as I remember very distinctly, Mr. Callahan
always stated, from the start, that the Chase would take two thirds
of that participation and the Shermar Corporation would take the
other third of it.
Mr. PECORA. That is, the Chase Securities Corporation would take
two thirds of the 25 percent participation?
Mr. WALKER. Yes.
Mr. PECORA. Making 16% percent of the whole?
Mr. WALKER. Yes.
Mr. PECORA. And the Shermar Corporation would
take the other
one twelfth, making 8% percent?
Mr. WALKER. Yes.
Mr. PECORA. That came
through the suggestion of Mr. Callahan,
did it?
Mr. WALKER. Yes.
Mr. PECORA. Mr. Callahan
then was president of the Chase Securities Corporation, was he not?
Mr. WALKER. I do not believe so. I think Mr. Freeman probably
was.
Mr. PECORA. He was an executive officer of the Chase Securities
Corporation?
Mr. WALKER. He was an officer; oh, yes.
Mr. PECORA. IS that the way the Shermar Corporation eventually
came into the original group ?
Mr. WALKER. I would say, instead of coming into the original
group, they were part of the original group.
Mr. PECORA. Who invited them to become a part of the original
group ? Who invited the Shermar Corporation to become a part of
the original group ?
Mr. WALKER. I presume Mr. Callahan must have.
Mr. PECORA. Who took the lead in organizing this original purchasing group, as far as you know?
Mr. WALKER. Mr. Sinclair.
Mr. PECORA. Did he invite you to come in—that is, Blair & Co. ?
Mr. WALKER. Yes.
Mr. PECORA. DO you know that he invited Arthur W. Cutten to
come in ?
Mr. WALKER. That is my understanding.
Mr. PECORA. And do you know that he invited the Chase Securities Corporation to come in ?
Mr. WALKER. Yes.
Mr. PECORA. The agreement
of purchase for these 1,130,000 shares
at $30 a share was made by Arthur W. Cutten individually with
the Sinclair Consolidated Oil Corporation, was it not?
Mr. WALKER. Yes.
Mr. PECORA. At the
time that agreement was made, was there a
firm understanding or agreement between Blair & Co., Harry F .
Sinclair, Arthur W. Cutten, the Chase Securities Corporation, and
the Shermar Corporation that they would be associates of Mr. Cutten
in the proportions that you have already mentioned in this purchase?
Mr. WALKER. AS I remember it, there was a simultaneous agreement that they were to be interested on the ground-floor terms.
3328
STOCK EXCHANGE PEACTICES
Mr. PECORA. DO you know why the agreement was made by the
Sinclair Co. with Mr. Cutten individually and not with all the five
members of the original purchasing group, or, as you call it, the
" ground-floor group " ?
Mr. WALKER. I think the basis was that Mr. Sinclair had induced
Mr. Cutten to really head this thing. I frankly doubt very much
whether Mr. Sinclair could have arranged the sale of this stock if
he had not secured the cooperation of Mr. Cutten for such a large
amount, and Mr. Cutten further was to handle the syndicate, the
trading syndicate, as it was called, and therefore it was the natural
thing for Mr. Cutten to make this transaction with the company.
Mr. PECORA. NOW, at all those times you were a director of the
Sinclair Co. and a member of the executive committee ?
Mr. WALKER. Yes.
Mr. PECORA. Up to
that time, up to October 24, 1928, had there
been any formal discussion at any meeting of the board of directors
or the executive committee with regard to> the issuance and sale by
the corporation of this block of 1,130,000 shares ?
Mr. WALKER. I do not know how to distinguish between formal
and informal. I think you probably would call them informal discussions rather than formal discussions.
Mr. PECORA. Well, when for the first time was there anything of
a formal nature with regard to this proposition discussed either by
the executive committee or the board of directors?
Mr. WALKER. Well, frankly I do not know just what you mean
by " formal." I mean the matter was discussed certainly at executive
committee meetings about the sale of stock and how the company was
to be financed. Now, whether that got into the records I frankly
do not know. I mean the minutes will have to show that.
Mr. PECORA. Well, the minutes do not show that there was any
mention made at any time prior to October 24, 1928, so far as I
understand. Would that mark the distinction between a formal discussion and an informal discussion—the fact that mention is made
in the minutes of the discussion?'
Mr. WALKER. I do not know. I would not know how to answer
your question. I mean I know that the matter was discussed. Now
whether you call it formal or not seems to me is not material so long
as it was discussed at the executive committee meetings.
Mr. PECORA. At a meeting of the executive committee that was held
on October 24, 1928, it appears in evidence presented to this committee that an offer from Mr. Cutten to purchase from the Sinclair
Corporation 1,130,000 shares of its unissued common stock at $30 per
share was presented to the executive committee and approved or
accepted. Were you present at that meeting?
Mr. WALKER. I was present at the start of the meeting, and I
withdrew while the resolution was being discussed, because I mentioned that I was an interested party or probably an interested
party.
Mr. PECORA. Had Mr. Cutten made any formal offer for that stock
to the corporation ?
Mr. WALKER. I think you had better ask some officer of the corporation as to the formality of it. I understood that, as matters are so
often done in business down town, that an agreement was reached
STOCK EXCHANGE PRACTICES
3329
verbally. Now, whether it got into the state of a formal document
at that time I could not say.
Mr. PECORA. I will read you from the minutes, or what has been
furnished this committee as an excerpt of the minutes of the
executive committee meeting held on October 243 1928 [reading]:
Mr, Walker, at the request of the chairman, stated to the meeting that
Arthur W. Cutten and associates had made an offer to purchase, at a price
of $30 per share, all of the corporation's unissued authorized common stock
together with 14,481 shares of the same class of stock now held in the treasury of the corporation, a total of 1,130,000 shares, and further advised the
meeting that Blair & Co., Inc., Chase Securities Corporation, and Mr. H. F.
Sinclair were interested parties to the transaction.
Now according to that extract from the minutes you made that
statement to the executive committee at this meeting. Let me ask
you: In view of that fact had Mr. Cutten made any formal offer
to the corporation to buy at $30 per share those 1,130,000 shares
referred to?
Mr. WALKER. He had said that he would buy them.
Mr. PECORA. Had he made a formal offer which was submitted
to the executive committee by you at that time ?
Mr. WALKER. He had advised me and had advised Mr. Sinclair,
and this group had been formed that would take that block of stock,
and this in effect was the announcement of that offer to the executive
committee.
Mr. PECORA. YOU knew as a matter of fact from your own participation in conferences that led to the formation of this purchasing
group that the proposition did not originate as an offer from Mr.
Cutten, but rather as an offer made to Mr. Cutten by Mr. Sinclair,
did you not?
Mr. WALKER. I suppose it could be from the original conversations, if you go back to when they were first discussed with Mr.
Cutten—certainly Mr. Sinclair endeavored to interest Mr. Cutten,
and undoubtedly Mr. Sinclair tried to get him to pay a price of $30
for the stock.
Mr. PECORA. YOU knew all of that ?
Mr. WALKER. Oh, yes; I knew that.
Mr. PECORA. Why did you state to the meeting that an offer had
been made by Mr. Cutten?
Mr. WALKER. Because he had made an offer. I mean he had
agreed to buy that amount of stock.
Mr. PECORA. He had agreed to accept an offer to buy that amount
of stock, had he not, which was made to him by Mr. Sinclair on
behalf or the corporation?
Mr. WALKER. I do not imagine I was as technical as that at a
meeting. I mean I did not attempt to differentiate between saying
he had made an offer to buy or that he had made an agreement to
accept so much stock. To me it is practically one and the same as
a layman but may be not to you as a lawyer.
Mr. PECORA. YOU think it is one and the same thing?
Mr. WALKER. TO all intents and purposes. I mean I did not
write those minutes to start with.
Mr. PECORA. Did you then state in behalf of Blair & Co., as its
president, to your codirectors and comembers of the executive committee the extent of the interest which Blair & Co., the Chase Se
3330
STOCK EXCHANGE PRACTICES
curities Corporation, and Mr. H. F . Sinclair had in the proposed
transactions?
Mr. WALKER, DO you mean the exact percentages of each one ?
Mr. PECORA. The extent of the interest of each one; yes.
Mr. WALKER. I cannot say that definitely from recollection, but
I presume we did.
Mr. PECORA. Why do you presume you did?
Mr. WALKER. It is the most natural thing. There were only 4 or
5 people interested who were all told
Mr. PECORA. Was not that an important enough item to have made
you careful to see to it that you did state to your codirectors on the
executive committee the precise interest which you or your corporation, Blair & Co., had in this proposed transaction ?
Mr. WALKER. I do not place as much emphasis on that as evidently
you do, because after all we were investment bankers. We had
bought securities before from the Sinclair Co., and, very often, instead of having a 25-percent interest, we had a 50-percent interest.
Mr. PECORA. DO you not think, Mr. Walker, that where you as a
director of one corporation entered into a transaction in behalf of
that corporation with yourself as a director or officer of another
corporation, that all of the detailed facts regarding the transaction
should be placed right on the table face up ?
Mr. WALKER. Yes; I agree to that.
Mr, PECORA. Did you do it in this intance ?
Mr. WALKER. I presume I did. I cannot swear to it because I
haven't anything more to swear to it by.
Mr. PECORA. Well, a moment or two ago you did not seem to
attach any importance to your doing any such thing.
Mr. WALKER. I do not think I said that.
Mr. PECORA. YOU said you did not attach as much importance
to it as I seemed to.
Mr. WALKER. Yes.
Mr. PECORA. DO you
think the importance that I attach to it
is an exaggerated one?
Mr. WALKER. Why, not exaggerated; but my point was this, that
Blair & Co. were investment bankers. That it was not like any
outside interest at all. They were dealing with a corporation. Tlie
corporation knows they have a very substantial interest in any transaction. That is my point: As far as whether or not I actually mentioned that we had 25 percent interest or 22% percent interest^ I
did not think it was so very material. If we had been an outside
interest it might have been more material, but as bankers where we
would have 25, 50, 33%, sometimes 100 percent interest in transactions, that was our business. That is why.
Mr. PECORA. Can you point to anything in the records of the Sinclair Corporation that indicates that at any time the corporation had
knowledge of the extent of the interest which Blair & Co. had and
which Harry F. Sinclair had in this particular transaction ?
Mr. WALKER. NO.
Mr. PECORA. NOW
when were these original 25 percent interests
among these four participants changed? And the reason I say four
participants, Mr. Walker, is because, according to the minutes of the
meeting of the executive committee of the Sinclair Corporation, it
STOCK EXCHANGE PRACTICES
3331
appears that you made the statement to the executive committee
that associated with *Mr. Cutten in the purchase of these 1,130,000
shares were Blair & Co., Chase Securities Corporation, and Mr. H. F .
Sinclair. No mention there made of the Shermar Corporation.
Mr. WALKER. I t must have been practically simultaneous.
Mr. PECORA. That is, as soon as this offer of Cutten's, so-called,
was accepted, there was a shifting of the arrangements for the formation of this purchasing group so that the Shermar Corporation
and others were admitted!
Mr. WAITER. Of course, as I remember previous Sinclair transactions, that is transactions with the Sinclair Co., Shermar Corporation did have a part of the transaction. I have not looked this up,
but I would be quite sure of it—and I could check it, of course—that
whenever we bought bonds from the Sinclair Co. previous to this
Shermar had a certain relative interest to Chase Securities.
Mr. PECORA. But when you opened this meeting, or made this
statement to the meeting of the executive committee, apparently all
you had knowledge of was that the participants in this purchasing
syndicate were only four, and they excluded the Shermar Corporation?
Mr. WALKER. Well, frankly in discussions we only referred just to
four; to just Sinclair, and so forth. And in practice it was understood that Shermar would probably be interested. Now, that may
well be an error on my part at that time not to have mentioned the
Shermar Corporation. I mean I cannot see it in any other light,
because I must have known—I presume I knew that Shermar would
probably, if not actually, be interested in the transaction.
Mr. PECORA. HOW long after October 24 did Blair & Co. change
its participation from a 25 percent interest in this group to something less than that?
Mr. WALKER. DO you mean to the 22% percent level?
Mr. PECORA. TO anything less than the 25 percent originally contemplated and agreed upon.
Mr. WALKER. The original agreement was that we had the right
to give off up to 12 percent. Now, that was done almost immediately
to the extent of 10 percent.
Mr. PECORA. I snow you committee's exhibit no. 114 in evidence,
entitled "List of participants in Sinclair purchasing syndicate as
finally constituted, with percentages and share of profits received."
Will you look at that list and tell us if any of the participants therein
named were invited to come in by you or by anyone connected with
Blair & Co. to your knowledge ?
Mr. WALKER. Well, as I said before, I think the only ones here are
L. W. Hill and C. O. Kalman, one half of 1 percent.
Mr. PECORA. DO you know who invited the other participants
whose names appear on that exhibit other than the original
participants ?
Mr. WALKER. Of course, this is remembrance.
Mr. PECORA. Yes.
Mr. WALKER. I think that the Continental National Co. and Arthur
Reynolds were asked by the Chase Securities Corporation. I think
Mr. Andrews was asked by Mr. H. F. Sinclair. And the Famoth
3332
STOCK EXCHANGE PRACTICES
Corporation and the Traywin Corporation are corporations in which
Mr. E. R. Tinker is some way or other interested, and he was a
director and requested himself an interest in it.
Mr. PECORA. A director of what?
Mr. WALKER. Of the Sinclair Co. If I remember right.
The CHAIRMAN. What was the idea of giving away some of the
interests ?
Mr. WALKER. Some of the interests? To reduce one's commitment.
I t is a regular banking practice to cut your commitments down.
Mr. PECORA. Was it really considered important to reduce somebody's commitment by giving one half of 1 percent to Hill and
Kalman?
Mr. WALKER. Well, Hill and Kalman were friends of Blair & Co.,
Inc., and it may be that Mr. Kalman was in New York at the time
and heard of the transaction and requested the interest. I cannot
say.
Mr. PECORA. I S it not done ordinarily to enable participants or
some of the group to let friends in on the ground floor? I am using
the term " ground floor" now because you used that term before.
I am not familiar with that terminology. Is it not, Mr. Walker?
Mr. WALKER. If you mean it is human nature to invite one's
friends in, yes.
Mr. PECORA. TO let them in on the ground floor? Not to reduce
commitments, but to pass around a good thing.
Mr, WALKER. Oh, it is to reduce commitments and to consider
one's friends, both, when you do reduce commitments.
Mr. PECORA. Yes. Now, you know Mr. Fitzpatrick, do you not,
Mr. William Samuel Fitzpatrick?
Mr. WALKER. I do.
Mr. PECORA. Have you known him for many years?
Mr. WALKER. Well, many years now; yes.
Mr. PECORA. YOU know, do you not, that the original
or the purchasing syndicate that was organized to buy this 1,130,000-share
block of stock from the Sinclair Co. disposed of that stock by
various means and methods at a profit of about 12 million dollars?
Mr. WALKER. Yes.
Mr. PECORA. YOU know,
do you not, that 2y2 percent of that profit
was paid to Mr. Fitzpatrick?
Mr. WALKER. Yes.
Mr. PECORA. Who brought that about?
Mr. WALKER. I think I had better tell
you my recollection of the
story. We had been negotiating for the purchase of certain Prairie
Oil shares.
Mr. PECORA. When you say " we ", do you mean Blair & Co. ?
Mr. WALKER. Blair & Co., Inc., yes. Blair & Co., Inc., had been
negotiating for the purchase of certain shares of the Prairie Oil &
Gas Co. and Prairie Pipe Line Co. from certain of the Rockefeller
funds. Those negotiations to the best of my knowledge had started
early in 1928, and they were continued along for months. During
those negotiations we naturally saw considerable of Mr. Fitzpatrick5
because we had to study the company and determine our ideas as to
the value of the shares and as to whether in our opinion they could
be bought at a price which would enable them to be disposed of at a
reasonable profit. In the course of those negotiations the question
STOCK EXCHANGE PRACTICES
3333
evidently came up in discussions between Mr. Marston and Mr.
Fitzpatrick, and I presume. Mr. Cutler
Mr. PECORA (interposing). Was Mr. Marston then connected with
Blair & Co.?
Mr. WAiiKER. Yes; he was.
Mr. PECORA. And who was Mr. Cutler connected with?
Mr. WALKER. The Eockefeller people. What was the last I said
[addressing the shorthand reporter] ?
(Thereupon the last sentence referred to was read by the shorthand reporter as above recorded, as follows:)
In the course of those negotiations the question evidently came up in discussions between Mr. Marston and Mr. Fitzpatrick, and I presume Mr.
Cutler
Mr. WALKER (continuing). As to taking care of Mr. Fitzpatrick
in some form or other if we bought those shares. Mr. Fitzpatrick—
I happened to be here when he was testifying—said that he understood that there was some 10 percent understanding. Frankly I do
not remember what the percentage was.
Mr. PECORA. Ten percent understanding with whom? And 10
percent of what?
Mr. WALKER. Of the profits of the Prairie Oil & Gas Co. and
Prairie Pipe Line Co.—of any profits that might be made on the
sale of those stocks to the public.
Mr. PECORA. That might be made by whom?
Mr. WALKER. By Blair & Co.
Mr. PECORA. Well, you as president of Blair & Co. were under
no obligations nor was your company to Mr. Fitzpatrick to pay him
10 percent of any profits that your company might make from
any such transaction, were you?
Mr. WALKER. We were under absolutely no obligation. But there
are always business considerations. If we were going in to buy such
an important interest in the Prairie Oil & Gas and Prairie Pipe
Line Cos., we considered it important to have the management a
satisfied and pleased management. Now, this was nothing unusual.
It has been done in other transactions before of a similar nature.
Mr. PECORA. NOW, whom did you regard as the management ? Mr.
Fitzpatrick?
Mr. WALKER. Mr. Fitzpatrick; yes.
Mr. PECORA. He was the executive head?
Mr. WALKER. Yes.
Mr. PECORA. And the servant of the
Mr. WALKER. Yes.
Mr. PECORA. Why was it necessary
stockholders?
in your opinion as a banker
who contemplated buying shares owned by the Eockefeller Foundation in the stock of the Prairie Co. to see to it that the servant of
the corporation was
satisfied to have you become a stockholder ?
Mr. WALKER. We^5 just ordinary business of wanting—where you
undertake a very important transaction mounting into a great many
millions of dollars, that you want to be sure of the good will and
the ability to work agreeably in the situation, and this was entirely
agreeable to the seller, so there was not any objection so far as I
could see so long as both buyer and seller were agreeable to it.
3334
STOCK EXCHANGE PRACTICES
Mr. PECORA. Let me see if I understand you correctly. Your banking firm contemplated buying millions of dollars' worth of the stock
of the Prairie Oil & Gas Co., then owned by the Kockefeller Foundation, did you ?
Mr. WALKER. Yes.
Mr. PECORA. And
had you succeeded in making that purchase
your firm would have become a very large stockholder in the Prairie
Oil & Gas Co.?
Mr. WALKER. Yes.
Mr. PECORA. Hence
your firm would have become one of the masters or employers of Mr. Fitzpatrick, is that right ?
Mr. WALKER. Employer in that you are stockholder.
Mr. PECORA. Yes.
Mr. WALKER. But
after all we would have been minority stockholders in that picture.
Mr. PECORA. All right. And you wanted to make sure that the
servant was satisfied with his master?
Mr. WALKER. Wanted to have the good will for the benefit of the
corporation entirely.
Mr. PECORA. Did you not think it was more important for Mr.
Fitzpatrick to have the good will of yourself as one of his potential
masters?
Mr. WALKER. I think Mr. Fitzpatrick could well afford to be independent at that time.
Mr. PECORA. Well, that being the case, why did you think that on
these business considerations, as you have called them, it was necessary or advisable or proper or important foir Blair & Co. to have
arranged to give Mr. Fitzpatrick some portion—10 percent or any
any other percent—of any profits which Blair & Co. expected to
make from its purchase of Prairie Oil & Gas Co. stock?
Mr. WALKER. All I can say on that is that it was discussed with
the sellers of the stock. That we had made previous purchases of
other shares from the same interests. And in each case the same
question had arisen where certain privileges were granted to the
management to acquire shares.
Mr. PECORA. By " privileges " do you mean perquisites in the way
of interests in profits?
Mr. WALKER. Either the right to buy at the original price that
the stock was purchased at, or share in profits, or something of
that nature.
Mr. PECORA. Did I understand you before to say that that was
more or less of a common practice?
Mr. WALKER. In these particular transactions.
Mr. PECORA. GO head and tell us the rest of the circumstances
under which this 2y2 percent of the profits accruing to the purchasing group in the Sinclair deal was paid to Mr. Fitzpatrick.
Mr. WALKER. The Prairie deals were not concluded, as I have
intimated, for several months. Consequently there was no definite,
fixed participation arranged with Mr. Fitzpatrick. Then along came
this Sinclair transaction, which was completed before the Prairie
transactions were completed.
Mr. PECORA. But the Prairie transaction had not been called off?
Mr. WALKER. I t had been off and on and off and on.
Mr. PECORA. Well, go ahead.
STOCK EXCHANGE PRACTICES
3335
Mr. WALKER. SO that the question was just up for consideration as
to whether or not Mr. Fitzpatrick should have a larger interest in
one transaction or a smaller interest in two transactions.
Mr. PECORA. Well, now, when that question came up in connection with the Sinclair Oil stock deal, with whom did the question
tjome up ?
Mr. WALKER. I naturally discussed it with my partners, I presume.
Mr. PECORA. Did you discuss it then with Mr. Cutler?
Mr. WALKER. NO.
Mr. PECORA. He had nothing to do with that transaction,
Mr. WALKER. He had absolutely nothing to do with the
did he?
Sinclair
transaction.
Mr. PECORA. And the Rockefeller interests had nothing to do
with it?
Mr. WALKER. The Rockefeller interests had nothing to do with it
in any way, shape, or form.
Mr. PECORA. All right. Go ahead.
Mr. WALKER. SO then for the same reasons we decided that it
would be advisable to give Mr. Fitzpatrick 2 ^ percent interest in
the profits of this Sinclair trade.
Mr. PECORA. NOW, who made that decision, Mr. Walker ?
Mr. WALKER. In the first instance, do you mean?
Mr. PECORA. Whenever it was made.
Mr. WALKER. I t was agreed to of course by all the participants.
Mr. PECORA. When was that decision or agreement made ?
Mr. WALKER. Oh, practically at the time of the purchase of the
stock; of the 1,130,000 shares.
Mr. PECORA. Did you discuss it with the other participants at that
time ?
Mr. WALKER. I certainly discussed it with some of them.
Mr. PECORA. With whom?
Mr. WALKER. Well, I probably discussed it with all of them.
Mr. PECORA. That would include Mr. Arthur Cutten, Mr. Harry
F . Sinclair, the Shermar Corporation, and the Chase Securities Corporation, would it not ?
Mr. WALKER. It certainly includes everybody with the possible
-exception of Mr. Arthur Cutten, because Mr. Arthur Cutten was
only in New York so occasionally, and it may have been talked
with him on the telephone. But the others were in New York.
Mr. PECORA. And you say all of the participants agreed upon
your suggestion that Mr. Fitzpatrick receive 2y2 percent of whatever profits would accrue to that purchasing syndicate?
Mr. WALKER. Yes.
Mr. PECORA. From the Sinclair
Mr. WALKER. Yes.
Mr. PECORA. Did you give those
Oil stock transaction?
participants the reason why Blair
& Co. wanted to take care of Mr. Fitzpatrick in that way?
Mr. WALKER. Why, I must have.
Mr. PECORA. Well, what reason did you give them?
Mr. WALKER. The same as I have stated here. You see, this
was the same group that also purchased the Prairie stocks. I mean
practically the identical group. So that it affected
Mr. PECORA. Was Sinclair in that group ?
Mr. WALKER. AS I remember it.
3336
STOCK EXCHAKGE PRACTICES
Mr. PECORA. In the group that purchased the Prairie stock?
Mr. WALKER. A S I remember it.
Mr. PECORA. All right. Go ahead.
Mr. WALKER. SO that there was, practically, no difference between
giving a larger participation in one, and a smaller participation, in
that and the other.
Mr. PECORA, Well, now, the reason that obtained or that impelled
you to recognize the advisability of seeing to it that Mr. Fitzpatrick
as the management of the Prairie Oil Co., should be satisfied, was
not present m the transactions that involved the purchase of Sinclair Co. stock, was it? In other words, he was not the manager of
the Sinclair Co., was he?
Mr. WALKER. NO. He was not manager of the Sinclair Co., and
had nothing to do with the Sinclair Co.
Mr. PECORA. Well, the reason that impelled you to take care of
Mr. Fitzpatrick in the transaction in which Blair & Co. were to
acquire Prairie Oil & Gas Co. stock, as I understand your testimony,
was that you wanted to keep the management satisfied; is that right?
Mr. WALKER. Well, Mr. Fitzpatrick has stated that he wanted 10
percent in the one thing.
Mr. PECORA. Did he state that to you originally ?
Mr. WALKER. I cannot say whether he said 10 percent or any
other percentage.
Mr. PECORA. Why. Mr. Fitzpatrick stated here this morning that
he never sought this at all; that it was offered to him originally, or
was proposed to him by Mr. Cutler, and that Blair & Co. fell in line
with the idea for some reason or other. Does that surprise you?
Mr. WALKER. Let me have that question again, please.
Mr. PECORA. The committee reporter will read it to you. [Which
was done.]
Mr. WALKER. NO ; that does not surprise me.
Mr. PECORA. Well, then, do you recognize it to be the truth?
Mr. WALKER. I recognize that the suggestions were discussed at
No. 26 Broadway, as to taking care of Mr. Fitzpatrick in some form
or other. And I think that is in line with just what I have testified
here myself.
Mr. PECORA. I am afraid it is not, or else I cannot see the line that
you are looking at. Now, Mr. Walker, you stated that the interest
which Blair & Co. had, or the motive which Blair & Co. had in wanting to take care of Mr. Fitzpatrick out of any profits that Blair &
Co. would make through their acquisition of Prairie Oil & Gas Co.
stock was to keep him as the manager, or to keep the management of
the Prairie Oil & Gas Co., satisfied. That was an entree into the
ranks of the stockholders of that company, wasn't it?
Mr. WALKER. Yes.
Mr. PECORA. Well, that is one
Mr. WALKER. Yes.
Mr. PECORA. NOW, what part
definite motive or reason, isn't it ?
did that motive or reason play in
the negotiations or the transactions or the decision in which it was
arranged to give Mr. Fitzpatrick 2y2 percent of the profits accruing
to this purchasing syndicate of Sinclair Consolidated Oil Corporation stock?
Mr. WALKER. It had nothing to do with it directly. But, as I
say, Mr. Fitzpatrick was naturally associated with us at that time—
STOCK EXCHANGE PRACTICES
3337
and by " associated " I mean we were seeing one another in connection with this other transaction, and in a study of his company, and
the question had been discussed as to what participation, if, any, he
would take in that transaction.
Mr. PECORA. In which transaction?
Mr. WALKER. In the Prairie transaction. And when this one
came along it brought the matter to a head, and it was said: Well,
all right, let us give Mr. Fitzpatrick 2y2 percent in this end 2y2 in
the other.
Mr. PECORA. Who proposed that originally, you?
Mr. WALKER. I would not be surprised ii I did. I cannot say
definitely whether I did or whether it was talked over amongst my
partners, or how it was done.
Mr. PECORA. And you suggested to the other participants in that
Sinclair purchasing group, what?
Mr. WALKER. Yes, as I remember it, that they should give 2y2
percent in both of these accounts.
Mr. PECORA. Well, now, let me see about that. Mr. Wiggin of
the Shermar Corporation testified here that he never learned why
or how that 2y2 percent was paid to Mr. Fitzpatrick. And let me
say further that Mr. Sinclair testified here yesterday afternoon that
he did not learn until about 2 weeks ago why Mr. Fitzpatrick
received that 2y2 percent. Do you quarrel with their testimony?
Mr. WALKER. I cannot help what anybody else testifies.
Mr. PECORA. And let me remind you further that Mr. Arthur W.
Cutten testified before this subcommittee that he never knew why
that 2y2 percent was paid to Mr. Fitzpatrick. Do you quarrel with
Mr. Cutten's testimony?
Mr. WALKER. Some people have poor memories.
Mr. PECORA. Then the situation is this: The whole regiment is out
of step but you.
Mr. WALKER. I am trying to give you the best of my memory,
which is all that I can give you.
The CHAIRMAN. Mr. Walker, was there ever in your mind an^
amount of benefits or perquisites that should go to Mr. Fitzpatrick?
Mr. WALKER. HOW was that?
The CHAIRMAN. Did you have in mind any fixed amount that was
to go to him?
Mr. WALKER. DO you mean in dollars?
The CHAIRMAN. Yes.
Mr. WALKER. NO. Of
course, in this transaction the profits were
far, far beyond what anybody ever anticipated.
The CHAIRMAN. Well, you felt that $149,000 of benefits was not
enough ?
Mr. WALKER. NO. That came subsequently. You see, nobody
knew about the possible or probable profits when these transactions
were made. The Sinclair transaction was made at the end of October, at a price of $30. We would have been very happy, speaking
quite frankly, if we had made a couple of points on that transaction.
I mean that it would have been considered a good business operation.
The fact that it ended in something like a gain of 12 points was—
well, quite frankly, was amazing, beyond any of our wildest dreams.
Now
3338
STOCK EXCHANGE PRACTICES
Mr. PECORA (interposing). The public were very generous in fixing a value for that stock, then ?
Mr. WALKER. Surely they were.
Mr. PECORA. And generous one might say beyond all of your
expectations.
Mr. WALKER. And as to other stocks, too.
Mr. PECORA. We know that- And the public was aided in fixing
that generous value of Sinclair stock by the operations of a tradingsyndicate organized at the same time the purchasing syndicate was
organized, isn't that so ?
Mr. WALKER. I did not run the trading syndicate so I cannot say
about it.
Mr. PECORA. But you knew all about it, didn't you?
Mr. WALKER. NO.
Mr. PECORA. Well,
I will ask you some more in detail about that
this afternoon.
Mr. WALKER. Might I finish that answer?
Mr. PECORA. Certainly.
Mr. WALKER. Then the Sinclair syndicate was formed on October
24. The Prairie syndicate was formed about a month later, November 25 or 26, or somewhere along in there. Now, when the Prairie
syndicates were formed nobody had any idea what the profits would
be in either the Sinclair or the Prairie. Matters happened to work
out as they did due to market conditions at the time, in an
exceedingly large sum.
The CHAIRMAN. Mr. Walker, as I understand the situation, first
Mr. Fitzpatrick was paid $10,000, and then he was paid $19,000 in
the Prairie syndicate transaction.
Mr. WALKER. Well, that was only out of the profits of that as
and when the stocks were sold.
The CHAIRMAN. I understand, but you felt like those items would
not be enough benefit to Mr. Fitzpatrick, and therefore you gave
him 2y2 percent in Sinclair.
Mr. WALKER. NO ; he got the Sinclair participation first.
The CHAIRMAN. He got that first?
Mr. WALKER. Yes. He got the Sinclair participation on October
24, and he got the Prairie participation November 25 or 26, some time
later on.
The CHAIRMAN. And you practically fixed the amounts ?
Mr. WALKER. AS a result of discussion, undoubtedly.
Mr. PECORA. And the discussion has been completely forgotten by
all persons with whom you have claimed to have discussed it, according to you.
Mr. WALKER. Well, I am certain that I discussed it. I am not
that bad a business man that I would not tell my associates what
I am doing.
Mr. PECORA. Are you that good a business man that you reduced
this understanding to writing, about giving Fitzpatrick 2y2 percent?
Mr. WALKER. I suppose I am not, if you want to put it in that
form.
Mr. PECORA. I was trying to find out how good or how bad a
business man you are, Mr. Walker.
Mr. WALKER. Well, that is all right.
STOCK EXCHANGE PRACTICES
3339
Mr. PECORA. Apparently you were not that good a business man,
as to reduce to writing the understanding that you claim you arrived
at with your associates in this purchasing group, that involved
eventually a payment of $300,000 to somebody else. Is that a fair
statement?
Mr. WALKER. I was not the manager of this syndicate.
Mr. PECORA. YOU were the proposer of this plan to give Mr.
Fitzpatrick 2y2 percent, however?
Mr. WALKER. Yes. But I was not the manager of the syndicate,
and did not write letters to the syndicate members.
Mr. PECORA. A S the proposer of the plan were you a good enough
business man to put that in writing and have it subscribed by all
of the participants who were to make a contribution toward this
2y2 percent of the profits?
Mr. WALKER. I never put anything in writing on it, I will answer.
Mr. PECORA. Did you have any correspondence with anybody relating to this understanding that you say you arrived at with your
coparticipants in the original purchasing group ?
Mr. WALKER. NO.
Mr. PECORA. Did you dictate or make any memorandum of those
conferences ?
Mr. WALKER. I am not in the habit of making memoranda.
Mr. PECORA. NOW, the purpose of giving 2 ^ percent to Mr. Fitzpatrick was to satisfy some idea or notion of Blair & Co., wasn't
it?
Mr. WALKER. We were working with Mr. Fitzpatrick in connection with the ^purchase of those Prairie stocks, and that must have
been the reason and is the only reason I can offer.
Mr. PECORA. Well, if Blair & Co. found it expedient, advisable, or
necessary to take care of Mr. Fitzpatrick in that fashion, why, in
Heaven's name, did not Blair & Co. give Fitzpatrick that $300,000
out of their own share of the profits and not require all of the other
participants to contribute to it?
Mr. WALKER. Because they were equally interested in this purchase. There was no reason why Blair & Co. should have assumed
it. We were not the only purchaser of this stock. They had their
relative interests the same as we had ours. That was done in
everybody's interest.
Mr. PECORA. I can understand the reason you give, although I
may not approve of it. I can understand the reason you give for
wanting to take care of Mr. Fitzpatrick in a transaction in which
you were going to become a stockholder in his company, in the company of which he was the president. In other words, you wanted to
btand in with the managament. But I cannot understand why you
should have thought of Mr. Fitzpatrick in the other way, in a deal
that he was in no way connected with, in a company of which Mr.
Fitzpatrick was neither president nor manager. Can you enlighten
me on that ?
Mr. WALKER. We would not, except that the other deal was pending
at the time. That was all. The two deals were practically
simultaneous.
Mr. PECORA. But they had nothing in common.
Mr. WALKER. Nothing in common; absolutely not.
3340
STOCK EXCHANGE PRACTICES
The CHAIRMAN. YOU knew there was going to be a profit in the
first deal, didn't you ?
Mr. WALKER. YOU never know anything when you go into a deal.
Until the stock is sold you never know whether there is to be a
profit or a loss. If this had happened to be in the fall of 1929
instead of in the fall of 1928, we would have all taken a serious loss
instead of a profit.
Mr. PECORA. Mr. Walker, did you take up this participation, or
rather this desire of Blair & Co. to give Mr. Fitzpatrick something
out of the profits that would accrue to the purchasing syndicate, with
the Continental National Co. of Chicago?
Mr. WALKER. I do not think so.
Mr. PECORA. They were participants? They were permitted to
come in on the ground floor after the ground floor was first laid,
after the first 4 or 5 participants were in1
Mr. WALKER. I doubt whether any of the other participants were
advised, except Mr. Tinker.
Mr. PECORA. Weren't you, in effect, giving away some of their
money without consulting them?
Mr. WALKER. That group, as I say, was working in both propositions. They were interested practically simultaneously in both. So
that it did not affect them much one way or the other whether Mr.
Fitzpatrick got a larger interest in one or a smaller interest in the
two transactions.
Mr. PECORA. Were they interested in the Prairie Oil syndicate?
Mr. WALKER. AS I remember it; yes. Practically the same group,
with 1 or 2 small additions, were in the Prairie syndicate.
Mr. PECORA. Where did any desire of the Rockefeller interests
come into this picture, to take care of Mr. Fitzpatrick?
Mr. WALKER. I don't know. I didn't have any conversation with
the Rockefeller interests.
The CHAIRMAN. The upshot of the whole matter was that you
bought those 1,130,000 shares of Sinclair Consolidated Oil Corporation stock at $30 a share.
Mr. WALKER. Yes, sir.
The CHAIRMAN. And you
sold them at something like 38, and the
people who bought them at 38 have lost the difference between 38
and the present price of about 12, which means $26 a share. That
means that 26 million dollars have been lost. That is the upshot of
it, isn't it?
Mr. WALKER. I do not think that is a fair way to put it. If this
were the only stock that had declined I would answer, yes. But this
is not the only stock, as you know, to decline, for the whole market
has declined.
The CHAIRMAN. I know that.
Mr. WALKER. I happen to be a considerable stockholder in the
Sinclair Co., and have been for years, which stock I have held for
years, and I am relatively better off in that than I am in a great
many holdings that I have.
The CHAIRMAN. AS a matter of fact, the stock is now selling at $12
a share, and the people who paid $38 a share for it have lost $26 a
share.
STOCK EXCHANGE PRACTICES
3341
Mr. WALKER. If those same people hold it today, they are out-ofpocket to that extent as a paper proposition. But paper profits and
paper losses you cannot count.
The CHAIRMAN. Well, were all the losses in Wall Street paper
losses ?
Mr. WALKER. NO ; some of them
The CHAIRMAN (continuing). Is the depreciation in securities
simply a matter shown on paper ?
Mr. WALKER. NO. And some may come back, or at least we hope
they are coming back.
The CHAIRMAN. I suppose the fact that the public is out-of-pocket
26 million dollars on this stock is where the joke comes in. That is,
as a result of both transactions. Well, now, the subcommittee will
take a recess until 2 o'clock this afternoon.
Mr. PECORA. And you will return then, Mr. Walker?
Mr. WALKER. Yes,
sir.
(Thereupon at 1 p.m., Wednesday, Nov. 15,1933, the subcommittee
recessed to meet at 2 o'clock the same day at the same place.)
AFTERNOON SESSION
(The hearing was resumed at the expiration of the recess.)
The CHAIRMAN. The committee will come to order. Mr. Walker
will resume the stand.
TESTIMONY OP E1ISHA WALKER, A MEMBER OF THE FIRM OF
KUHN, LOEB & CO.r—Resumed
Mr. PECORA. Mr. Walker, of whom did the company called " Blair
& Co., Inc." consist in 1928?
Mr. WALKER. The so-called " partners ", as we termed them, were
Mr. Hunter Marston. Mr. Henry Lockhart, Jr., Mr. J. Cheever
Cowdin, Mr. George Armsby, Mr. G. N. Lindsay, Mr. E. F . Hayes,
Mr. Harry Bronner, Mr. Graham Youngs, and Mr. Clarence Lewis,
and myself.
Senator COUZENS. Was it a partnership ?
Mr. WALKER. It was a corporation formed under the business
laws of the State of New York, and also a separate partnership.
Senator COTTZENS. With limited liability?
Mr. WALKER. The corporation was a limited liability corporation,
and the partnership, of course
Senator COUZENS. Those names you have just mentioned—were
they in both the corporation and the limited partnership also ?
Mr. WALKER. I think they all were. It was a general partnership, not a limited partnership. The corporation was a limited corporation the same as any other corporation.
Senator COUZENS. But I understood you to say there were two;
there was a partnership and a corporation, both ?
Mr. WALKER. Yes.
Senator COUZENS. Were
the same group you have just mentioned
in the corporation organized under the laws of the State of New
York and the separate partnership ?
Mr. WALKER. Yes.
175541—34—PT 7
9
3342
STOCK EXCHANGE PRACTICES
Senator COUZENS. They were all in the same group ?
Mr. WALKER. Yes; they were all in the same group.
The CHAIRMAN. HOW was the business done with Blair & Co/<
Was that with the corporation or the partnership ?
Mr. WALKER. With the corporation.
Mr. PECORA. Mr. Walker, do you know any reason why the stockholders of the Sinclair Consolidated Oil Corporation were not giver
the opportunity to purchase this block of 1,130,000 shares?
Mr. WALKER. I think I know the underlying reason. I t was the
fact that the stock would have had to be offered to stockholders at a
price lower than the market, which presumably would have been
not over $25 a share. It would have then been necessary to pay
underwriting commissions to insure the success of the offering from
the standpoint of the company and that would have- netted the
company materially less than the $30 a share.
Mr. PECORA. Wiry was the trading account formed by the original
purchasing syndicate?
Mr. WALKER. In order to stabilize the market, I would say.
Mr. PECORA. This morning you said that the real value of the
stock that was listed on the exchange was to be measured by the
public quotations which you say are made by the public?
Mr. WALKER. Yes.
Mr. PECORA. Then why did you not let the public make the price
without any artificial stabilization by persons who had acquired a
very large block of the stock?
Mr. WALKER. I do not think the intent was artificial stabilization*
I think the intent was that on certain days there are more sellers
than buyers, and on other days there are more buyers than sellers
Mr. PECORA. And that is what helps fix the price ?
Mr. WALKER. This tends to stabilize the market. In other words,
if some man came one day to sell 50,000 shares and there had not
been a purchasing group, I mean this trading group, the chances
are it would have depressed the price maybe unduly; and vice versa,
if somebody had come in to buy 50,000 shares on the market and the
account was not there to sell the stock, it would have raised it.
Mr. PECORA. Does not that reasoning run counter to the philosophy you gave expression to this morning, that the real value of a
security is what the public fixes through market trading?
Mr. WALKER. I do not think necessarily so; no.
Mr. PECORA. Why do you not permit the public, then, to trade
in accordance with its own will, and not supply buying power to
give support to the market when prices go down?
Mr. WALKER. I think it is a very proper function to try to stabilize markets.
Mr. PECORA. Was it not really done to enable the purchasing
syndicate to dispose of its 1,130,000 shares at a profit?
Mr. WALKER. It was done to stabilize the market, I would say.
Mr. PECORA. Was it not done also to enable the purchasing syndicate to dispose of its 1,130,000 shares at a profit?
Mr. WALKER. It was done as a back-log to that situation.
Mr. PECORA. Can you not answer the question without any such
qualification?
STOCK EXCHANGE PRACTICES
3343
Mr. WALKER. NO, I really cannot, Mr. Pecora. I think it was
done in a sincere and honest effort to help and not to harm the
market in any way.
Mr. PECORA. TO help the market to whose advantage?
Mr. WALKER. TO everybody's advantage, to every stockholder's
advantage. We all know at times that big blocks of stock—and in
this particular case there were certain big blocks of stock—come into
the market, and if those blocks had been on the market it would
have been very detrimental to the stockholders of the corporation
if the market had declined unduly.
Senator COUZENS. Who put those la^rge blocks of stock on the
market? You said there were certain large blocks of stock that
came on the market. Who put them there ?
Mr. WALKER. If I remember rightly, H. P. Whitney sold a
substantial block of stock, for one.
Senator COUZENS. And at the same time he was in the syndicate ?
Mr. WALKER. At the same time he was in the syndicate.
Senator COUZENS. What other blocks came on the market at that
time?
Mr. WALKER. That is the one I was thinking of particularly.
Mr. PECORA. DO you know how large a block he put into the
market ?
Mr. WALKER. It was very big; I could not state definitely; but if I
remember rightly, it was in the hundreds of thousands of shares.
Mr. PECORA. DO you know that about the time of this agreement
of October 24, 1928, there were upwards of 500,000 shares of that
stock traded in on the New York Stock Exchange ?
Mr. WALKER. Pardon me. When was that traded in, you say?
Mr. PECORA. Around October 24, 1928.
Mr. WALKER. I do not remember just what was traded in on any
date.
Mr. PECORA. On October 24, 1928, the date when this agreement
was made between the Sinclair Co. and Arthur W. Cutten in behalf
of the purchasing syndicate, there appear to have been 500,700
shares of the stock traded in on the New York Stock Exchange.
Do you know whether that was the occasion when any of these large
blocks that you speak of were thrown into the market ?
Mr. WALKER. I could not remember the dates at all, but I think
Mr. Whitney's sales came later. I am not sure.
Mr. PECORA. DO you know that on that day the price of the stock
ranged from a low of 32 to a high of 35%, with a closing quotation
of 35%?
Mr. WALKER. Well, if you tell me so from the records, it must
be so.
Mr. PECORA. And that the following day, October 25, there were
453,200 shares of the stock traded in on the New York Stock Exchange, with low of 35% and high of 37^4 and a closing price of
3634?
Mr. WALKER. I haven't any records to show that.
Mr. PECORA. Hadn't there been a steady appreciation in the market
price of that stock for some time prior to October 24 ?
Mr. WALKER. AS I remember it, the stock was somewhere in the
low twenties earlier in the year and advanced up to around the 28
3344
STOCK EXCHANGE PRACTICES
level—of course, this is trying to remember without checking at all,
you understand—and fluctuated around that level until just before
this transaction it went througli 30.
Mr. PECORA. Can you, as the executive head of Blair & Co., Inc.,
one of the participants in this original purchasing group, tell us how
the purchasing group had arranged to finance this purchase of
1,130,000 shares from the Sinclair Corporation?
Mr. WALKER. A S I remember the contract, the group had the right
to pay for this stock
Senator COUZENS (interposing). That appears in the contract.
Mr. WALKER. Yes. The corporation had a right to call payment
any time on 30 days' notice.
Mr. PECORA. Any time after 30 days' notice ?
Mr. WALKER. Any time after 30 days they had the right to charge
6 percent interest. That is the way I remember it.
Mr. PECORA. What arrangements, if any, had been made by the
members of the purchasing group to finance the purchase ?
Mr. WALKER. At the start you mean ?
Mr. PECORA. Yes.
Mr. WALKER. I don't think any special arrangements had been
made. Each one was supposed to take care of his own participation.
Mr. PECORA. Was that actually done eventually, or was a loan negotiated to enable this participating group to finance the purchasing
of the stock ?
Mr. WALKER. A S I understand it, a loan was made for certain members of the group, but Blair & Co., Inc., I believe paid some three
million and odd dollars in December for their shares of the stock
taken up from the company.
Mr. PECORA. What loan was made to enable any of the members
to finance their participation in the purchase ?
Mr. WALKER. I heard that the Chase made a loan of $12,000,000.
Mr. PECORA. TO whom ?
Mr. WALKER. TO the syndicate manager.
Mr. PECORA. TO Mr. Cutten, as the manager of this purchasing
group, was it not?
Mr. WALKER. I would not be surprised, but I have not checked
those papers. Of course, syndicate agreements are made sometimes
where each one can finance his own, and then the other syndicate
agreements are pledged. I n this case, as I remember it, Blair & Co..
Inc., actually paid their share at the time.
Mr. PECORA. On December 27, 1928, the first deliveries of the
1,130,000 shares were made by the Oil Corporation to the purchasing
syndicate for a consideration of $15,000,000 ?
JVFV "\/\TA.LKER Y*es
Mr. PECORA. Did Blair & Co. pay $3,000,000 of that $15,000,000
out of its own resources ?
Mr. WALKER. I do not know whether it was 3 millions out of the
15, or 3 millions out of the 18. I think the first 500,000 shares
Mr. PECORA (interposing). Were delivered on December 27?
Mr. WALKER. And the others were delivered
Mr. PECORA (interposing). Against a payment of 15 million
dollars ?
Mr. WALKER. And the others were delivered right after that.
Mr. PECORA. HOW long after?
STOCK EXCHANGE PRACTICES
3345
Mr. WALKER. TWO days after, I think, against a payment of 18
million dollars. Which one we took up I cannot say. [After consulting an associate.] We paid three million three hundred and
some odd thousand dollars, I remember, and I cannot say whether
it was in connection with that 500,000 or whether it was in connection with the six hundred and odd thousand on one of those 2 days.
You see, the syndicate had already sold—Mr. Cutten had already
sold—part of this stock.
Mr. PECORA. DO you know through what medium payment was
made in behalf of the purchasing syndicate of that 15 million dollars to the oil corporation?
Mr. WALKER. I haven't
Mr. PECORA (interposing). Wasn't it through E. F . Hutton & Co.?
Mr. WALKER. Oh, to the oil corporation; yes.
Mr. PECORA. Through E. F. Hutton & Co.?
Mr. WALKER. Yes; E. F. Hutton & Co.
Mr. PPJOORA. E. F. Hutton & Co. were a firm of stockbrokers who
were engaged or employed by both the purchasing syndicate and the
trading syndicate of which the purchasing syndicate were members
to handle the market tradings in this stock, were they not?
Mr. WALKER. They handled it for Mr. Cutten as syndicate manager. I believe that is technically correct.
Mr. PECORA. And don't you know that E. F. Hutton & Co., in
order to enable them to make that 15-million-dollar payment to the
Oil Corporation, borrowed 12 million dollars from the Chase National
Bank?
Mr. WALKER. Well, I know that they borrowed—at least to the
best of my knowledge—they borrowed 12 million dollars of the Chase
National Bank, but I know that Blair & Co., Inc., in connection with
either that delivery of stock or the delivery on the 31st or whatever
it was of December, paid their proportion. I do not believe that
Blair were part of that loan at the Chase, because I remember well
we did pay money—we did not want to, frankly, pay the rate of
interest that banks were charging at that time. We had our own
money and we paid our own money.
Mr. PECORA. Have you told this committee everything you can
recall concerning the reasons for or the circumstances surrounding
the payment to Mr. Fitzpatrick of 2y2 percent of the profits that
accrued to that purchasing syndicate ?
Mr. WALKER. TO the best of my recollection.
Mr. PECORA. IS there anything that you can add to what you have
already told the committee on that subject without the necessity of
your being asked specific questions thereon?
Mr. WALKER. I do not think of anything that I could add. '
Mr. PECORA. YOU think that your recollection has been completely
searched out and exhausted by the questions that you have answered
thereon ?
Mr. WALKER. I think so.
Mr. PECORA. YOU still have a certain recollection of your having
discussed at the outset with the associates of Blair & Co. in the
original purchasing syndicate the desire of Blair & Co. to give to
Mr. Fitzpatrick 2% percent of the profits ?
Mr. WALKER. Yes.
3346
STOCK EXCHANGE PRACTICES
Mr. PECORA. YOU are firm in your recollection as to that?
Mr. WALKER. I am firm in my recollection.
Mr. PECORA. Despite the fact that all the other witnesses who represent participants in that original purchasing group have testified
here that they had no such knowledge at any time of the reason why
this 2y2 percent of the profits was given to Mr. Fitzpatrick?
Mr. WALKER. Notwithstanding their testimony, I still stand by
my recollection of it.
"Mr. PECORA. And in connection with their testimony let me say
to you that the transaction has been referred to in testimony before
this committee as a " Santa Claus gift to Mr. Fitzpatrick ", and you
have been referred to as the person who put the Santa Claus whiskers
on other members of the originating purchasing group. That is not
true, is it?
Mr. WALKER. I never put anything on any group. I mean they
all consented to it. No; I have not put any whiskers on anybody.
Mr. PECORA. Blair & Co., I think you said, were bankers for the
Prairie Oil at one time ?
Mr. WALKER. NO.
Mr. PECORA. Were they bankers for the Sinclair Corporation ?
Mr. WALKER. Yes.
Mr. PECORA. AS such
did you at any time have anything to do
with the negotiations that eventuated in the consolidation of the
Sinclair Consolidated Oil Corporation with the Prairie Gas & Oil
Co.?
• Mr. WALKER. I did at subsequent dates to this.
Mr. PECORA. What did Mr. Fitzpatrick have to do with any of
those negotiations ?
Mr. WALKER. I presume he was consulted by various people in
connection with it. I know I consulted him.
Mr. PECORA. And in your consultation with him what attitude did
he take with regard to the proposed consolidation ?
Mr. WALKER. He always wanted a much higher price than Mr. Sinclair was ready to give on his side of it.
Mr. PECORA. Did he get the higher price?
Mr. WALKER. The negotiations were long dragged out.
Mr. PECORA. But did he get the higher price ?
Mr. WALKER. I do not know whether you can say anybody got
either a higher or lower price, because conditions were rapidly
changing. Market conditions were getting worse. The Ajax Pipe
Line had been built, or was in course of being built, which affected
the Prairie Pipe Line seriously, and I think it was just purely a
matter of negotiation, and I think that the largest factor in the
ultimate decision was the Rockefeller interest.
Mr. PECORA. NOW, Mr. Walker, you said that Mr. Fitzpatrick
always wanted a higher price than Mr. Sinclair was willing to give.
Did he get that higher price ?
Mr. WALKER. I don't think that question can be answered just
with a yes or no, because it was a question of negotiation, and
naturally a man always negotiates to get a better price.
Mr. PECORA. AS a result of negotiations or anything else, did he
get the higher price that you have referred to as being what Fitzpatrick always wanted?
STOCK EXCHANGE PRACTICES
3347
Mr. WALKER. I think he got certainly a higher price than Mr.
Sinclair was willing to pay, at the end; yes.
Mr. PECORA. That consolidation was consummated in March 1932
and was effected by an exchange of stock, was it not ?
Mr. WALKER. Yes.
Mr. PECORA. And what
was the basis of exchange, the rsftio of
exchange?
Mr. WALKER. A S I remember, it was a share for share for Prairie
Oil & Gas and a 1.4 shares for Prairie Pipe. In other words, Prairie
Pipe
Mr. PECORA (interposing). 1.4 shares of consolidated for one share
of Prairie Pipe?
Mr. WALKER. For one share of Prairie Pipe; yes.
Mr. PECORA. NOW, Mr. Fitzpatrick testified that he was permitted
to acquire some 9,000 shares of the common stock of the Sinclair
Consolidated Oil Corporation from either the original purchasing
syndicate or one or more of the members of that original purchabing syndicate at the ground-floor price of $30 per share. Do you
know anything about that?
Mr. WALKER. AS I remember, it was exchanged on a basis of 5
shares for 3 shares.
Mr. PECORA. And the Sinclair shares were given a valuation of $30
per share in effecting that exchange ?
Mr. WALKEIR. I dont know what price he may have put on
his books, but the current market prices were approximately 5 to 3.
That was done on that basis as far as we were concerned. We were
concerned in getting the best prices we could for our shares.
Mr. PECORA. DO you know why he got 5 to 3, whereas the other
stockholders eventually received share for share ?
Mr. WALKER. I t was at the market at the time.
Mr. PECORA. Which participant in the original purchasing group
made that exchange with Mr. Fitzpatrick?
Mr. WALKER. I think probably the group as a whole did, but I
could not recollect that individual transaction.
Mr. PECORA. Are you sure it did not come out of the share of Blair
&Co.?
Mr. WALKER. I do not think so, because you see, Blair & Co., Inc.,
had no stock as such. They were members of the group, and this
trade was made probably through the intermediary of Blair with
the group.
Mr. PECORA. DO you know when that exchange was made with Mr.
Fitzpatrick?
Mr. WALKER. N No.
Mr. PECORA. Was it
before the closing of the purchasing syndicate
account ?
Mr. WALKER. I really could not say.
Mr. PECORA. Who initiated the negotiations for that exchange, Mr.
Fitzpatrick or the other parties?
Mr. WALKER. I imagine Mr. Fitzpatrick, but I could not say.
There is no reason why we should think of an odd amount like that.
Mr. PECORA. NOW, at that time, was the market value of the Sinclair
stock about 39 ?
3348
STOCK EXCHANGE PKACTICES
Mr. WALKER. I would have to know the date and the time of
the transaction to look it up. I mean I really could not remember.
If you could give me the date, we could look at those records and find
out.
Mr. PECORA. I heard of it for the first time when Mr. Fitzpatrick
told us this morning. Didn't you hear him give testimony to that
effect?
Mr. WALKER. Yes, I heard him give that this morning, but I
mean I haven't thought of the thing until I heard of it this morning. I t was just really a normal business transaction, practically
exchanging at market values. He wanted Sinclair stock instead of
Prairie stock.
Senator COTJZENS. When this consolidation was arranged what
amount did the Prairie Gas & Oil figure they got for their properties ?
Mr. WALKER. Well, they got share, for share.
Senator COUZENS. I understand, but what was the aggregate value
fixed?
Mr. WALKER. I really don't remember.
Mr. PECORA. DO you remember what the book values were respectively of the Sinclair stock and the Prairie Oil stock in March
1932 when the consolidation was effected?
Mr. WALKER. I would have to more or less guess at present, without looking it up, but I have the impression that before Sinclair
wrote down certain of their assets, it was around $44. I may be
entirely mistaken.
Mr. PECORA. For which stock?
Mr. WALKER. For the Consolidated Oil stock.
Mr. PECORA. What was the book value of the Prairie Oil stock?
Mr. WALKER. I really cannot remember that. I was not a director of Prairie then. I was a director of Sinclair.
Mr. PECORA. AS an officer or director of the Sinclair Co., were you
not interested in finding out whether or not an exchange was being
effected on a basis that was fair and equitable to the stockholders of
both companies, including your own?
Mr. WALKER. Absolutely; but book value has absolutely nothing
to do with it. I would not care what the books said. I would want
to know what the values were.
Mr. PECORA. HOW did you determine the values, then, for the
purpose of effecting that exchange?
Mr. WALKER. We studied documents and documents and documents, report after report, for months on that thing.
Mr. PECORA. Did you consider market quotations?
Mr. WALKER. N O ; not seriously. Of course, market quotations,
for some reason or other, gradually work around, because markets
more or less appraise current situations.
Mr. PECORA. That rather surprises me, Mr. Walker, in view of
what you testified to this morning, that in your opinion the thing
which controls the value, or gives the value to securities, is the price
the public pays for them in the open market.
Mr. WALKER. That is exactly what I thought I was saying now,
because I think, for some reason or other, the public have an intuition that appraises relative situations remarkably well. I have had
STOCK EXCHANGE PRACTICES
3349
so many experiences when I have seen the insiders marvel at the
way a stock is going down. They don't know why, and they will
wake up 6 months later and find the public was right, and the market
quotation was right.
Mr. PECORA. Have you found that the public has been right in the
market, as against the insiders ? Has that been your experience ?
Mr. WALKER. I think they have been just as right as the insiders.
There is nothing like inside information to break anybody.
Mr. PECORA. From all I have understood, the public has been invariably wrong.
Mr. WALKER. SO have the insiders.
Mr. PECORA. Who in the world has been right, then?
Mr. WALKER. The insiders have been just as wrong, Mr. Pecora.
Mr. PECORA. It is getting to be more of a mystery. That is all,
Mr. Walker, unless you have something you would like to say to
the committee.
Mr. WALKER. There is nothing I can think of. I have tried to
give you as clear a remembrance of this situation as I can.
Mr. PECORA. I will say for you that you have remembered things
that your associates seem to have been entirely ignorant of.
Mr. WALKER. I cannot help that. Thank you.
Mr. PECORA. I S Mr. Cutler here?
Mr. CUTLER. Yes, sir.
Mr. PECORA. Will you
be good enough to take the stand, Mr.
Cutler?
TESTIMONY OF BERTRAM CUTLER, ROCKEFELLER FINANCIAL
ADVISER
The CHAIRMAN. Mr. Cutler, you solemnly swear that you will tell
the truth, the whole truth, and nothing but the truth, regarding
the matters now under investigation by the committee, so help you
God?
Mr. CUTLER. I do.
Mr. PECORA. What is your full name, Mr. Cutler?
Mr. CUTLER. Bertram Cutler.
Mr. PECORA. What is your business or profession?
Mr. CUTLER. I have fceen associated with the Rockefellers
for a
good many years, I assume, as financial adviser. I have no title.
Mr. PECORA. For how many years have you been so associated?
Mr. CUTLER. Thirty-two.
Mr. PECORA. YOU are still associated with them?
Mr. CUTLER. Yes.
Mr. PECORA. AS a sort of financial adviser?
Mr. CUTLER. Yes, sir.
Mr. PECORA. Some testimony
has been presented to this committee today substantially to the effect that some time in 1928 the
Rockefeller interests, so-called, as represented in certain trusts or
foundations which had been created by the Rockefellers, sold some
large holdings of stock that those foundations owned at that time,
of the Prairie Oil & Gas Co. Do you know anything about those
sales ?
Mr. CUTLER. Yes,
sir.
3350
STOCK EXCHANGE PEACTICES
Mr. PECORA. When did they take place ?
Mr. CUTLER. I think sometime in November 1928.
Mr. PECORA. What volume or quantity of stock was so disposed
of then?
Mr. CUTLER. I think it was the entire amount owned by 3 or 4 of
the so-called " Eockefeller charitable funds."
Mr. PECORA. We do not know what amount that is.
Mr. CUTLER. Eoughly, it was $38,000,000 worth, at the prices that
have been testified to. I do not know the number of shares.
Mr. PECORA. Several hundred thousand shares?
Mr. CUTLER. Oh,
yes.
Mr. PECORA. DO you know to whom those shares were sold?
Mr. CUTLER. TO Blair & Co.
Mr. PECORA. Eepresenting themselves, or a syndicate?
Mr. CUTLER. Eepresenting themselves, to my best knowledge.
Mr. PECORA. Did you have anything to do with the negotiations
that resulted in that sale ?
Mr. CUTLER. I carried them on.
Mr. PECORA. When were they commenced? Having in mind that
they terminated in the sale in November 1928, when did the negotiations commence?
Mr. CUTLER. At least 6 months, I would say, ahead of that date.
I do not know the date.
Mr. PECORA. At any time during the pendency of those negotiations did you have any conversations with Mr. William S. Fitzpatrick who, according to the evidence here, was at that time the
president of the Prairie Oil & Gas Co. ?
Mr. CUTLER. I did.
Mr. PECORA. In those
conversations did you discuss with him, or
he with you, anything relating to the negotiations for the sale of
that stock?
Mr. CUTLER. I did.
Mr. PECORA. Was anything
said between you in any of those conversations in which you indicated a desire on the part of the Eockefellers to reward, or pay, or give Mr. Fitzpatrick something out of
profits that would accrue from the sale ?
Mr. CUTLER. I do not think I can answer the question just yes
or no.
Mr. PECORA. Answer it in any way you want to.
Mr. CUTLER. I believe the policy of our office has always been that
we like to see the management of the different companies substantial
stockholders in those companies. When the sale was consummated,
or being consummated, or talked about, to the best of my recollection
Mr. Fitzpatrick expressed to me a desire that if he had had more
time he would like to have bought some of the stock himself, and
to the best of my recollection I did say to him that I thought the
bankers would take him in the purchase.
Mr. PECORA. What prompted you to say that ? Had you discussed
it with the bankers ?
Mr. CUTLER. I had discussed it with the bankers. Whether before
or after that statement I do not know.
Mr. PECORA. When you made that statement to Mr. Fitzpatrick
had you had any discussion with the bankers with respect to taking
care of Mr. Fitzpatrick?
STOCK EXCHANGE PRACTICES
3351
Mr. CUTLER. The expression " taking care of " him I do not just
understand. This was one of a number of other sales that I had
made to these same bankers, and I believe in those sales, as I believe
Mr. Walker testified, in most instances the management of the company were given a chance to participate in the purchase of a large
amount of stocks, not by the Rockefellers, but by the bankers who
bought it. As a matter of policy, believing, as I said, that it was
a good thing for the corporations and the stockholders both to have
the management substantially interested in the stock, we were glad
enough to see them do it.
Mr. PECORA. Did Mr. Fitzpatrick come to you, in the course of
those negotiations, and indicate to you a desire on his part to be
permitted to participate in the purchase of those shares that were
held by the Rockefeller trusts ?
Mr.'CUTLER. I think he did.
Mr. PECORA. Did you refer him, then, to the bankers with whom
you were negotiating to sell the shares ?
Mr. CUTLER. I think I did.
Mr. PECORA. Did you say to Mr. Fitzpatrick at any time in words,
substance, or effect, that the Rockefeller interests would see to it
that he, Fitzpatrick, received something out of any profits that
would accrue to anybody from the purchase or sale of those shares
of the Prairie Oil & Gas Co. stock which the Rockefeller trusts then
had?
Mr. CUTLER. NO, sir, I don't believe so.
Mr. PECORA. DO you know whether Mr. Fitzpatrick acquired,
either through the bankers or through any other sources, or through
his own devices, any of the shares that were sold by the Rockefeller
trusts to Blair & Co.?
Mr. CUTLER. I do not know. I assume that he did. I do not know.
Mr. PECORA. HOW many times did you talk with Mr. Fitzpatrick
on that subject during the pendency oi those negotiations?
Mr. CUTLER. I could not tell.
Mr. PECORA. More than once?
Mr. CUTLER. Oh, yes.
Mr. PECORA. Did you eventually refer
Mr. CUTLER. I think I referred him to
Mr. PECORA. Before you did that, did
him to the bankers?
the bankers.
you yourself discuss with
the bankers the matter of permitting Mr. Fitzpatrick, through them,
to acquire some of this Prairie Oil stock that the trusts were about
to dispose of?
Mr. CUTLER. I doubt if I did it until the actual sale had taken
place.
Mr. PECORA. Have you any clear recollection about that, Mr.
Cutler?
Mr. CUTLER. I think it is pretty clear; yes.
Mr. PECORA. When the sale took place, did you have any talk with
the bankers about permitting Mr. Fitzpatrick to acquire some of
the stock?
Mr. CUTLER. Yes, I think I did.
Mr. PECORA. With whom?
Mr. CUTLER. I think it was with Mr. Hunter Marston.
Mr. PECORA. What was the substance of that talk ?
3352
STOCK EXCHANGE PRACTICES
Mr. CUTLER. I would say it was that I assumed that as they were
becoming large stockholders in the company, if Mr. Fitzpatrick
wanted an interest in it, we would be glad if they saw fit to give
him one, my idea being that he was going to be allowed to buy the
stock on the same basis they were buying, or about the same basis.
Mr. PECORA. Did Mr. Marston indicate that they would give that
privilege to Mr. Fitzpatrick?
Mr. CUTLER. I think he said they would be very glad to.
Mr. PECORA. Did you learn at any time since whether Mr. Fitzpatrick was permitted to acquire any of the stock on the original
terms of sale to Blair & Co. ?
Mr. CUTLER. NO, sir, I was practically through with it when that
happened.
Mr. PECORA. Did the Rockefeller interests, so far as you know, have
any desire, or express to anyone any desire to see Mr. Fitzpatrick
receive any share of profits that accrued to the bankers from the
purchase by them of this Prairie Oil stock from the Eockefeller
trusts ?
Mr. CUTLER. I S not that the same question? Will you repeat it?
(The reporter read the pending question.)
Mr. CUTLER. I thought I answered that before. My best recollection is that, knowing the attitude of our office, that it was a good
thing for the management of a company to be interested in the stock,
we hoped, or suggested, perhaps, or I suggested, that if Mr. Fitzpatrick wanted an interest in that stock, he should be allowed to have
it. I could not control it. I had nothing to say about it. If they did
not want him to, that was the end of it, but we would not object.
Mr. PECORA. Did you have any knowledge, in October or November of 1928, or any time subsequently, of the formation of a purchasing syndicate to buy 1,130,000 shares of the treasury stock from
the Sinclair Consolidated Oil Corporation ?
Mr. CUTLER. I knew nothing about it at all, except I guess it was
a common rumor around the street that there was what you call a
syndicate in the stock, but I knew nothing about it.
Mr. PECORA. Did you indicate to anyone at that time that you
or the Eockefeller interests would like to see Mr. Fitzpatrick obtain
a share of any profits that would accrue to any such syndicate from
its purchase and sale of these shares of stock of the Sinclair Co. ?
Mr. CUTLER. I did not even know there was a syndicate.
Mr. PECORA. At any time that you had any conversation with Mr.
Fitzpatrick in connection with the contemplated sale by the Rockefeller trusts to Blair & Co. of the Prairie Oil Co. stock, was anything
said about giving Mr. Fitzpatrick a 10 percent interest in anything?
Mr. CUTLER. 1 do not recall the 10 percent.
Mr. PECORA. DO you recall any specific amount of interest in
profit being discussed between you and Mr. Fitzpatrick?
Mr. CUTLER. I would have nothing to do with the percentage. All
I would have to do, as I said, was to tell them that as far as I was
concerned I would be glad to see, if he wanted an interest, that he
had it. I don't believe I said 10 percent, or 5 percent, or anything.
That was for them to decide.
Mr. PECORA. TO what did the 10 percent apply, in your mind ?
Mr. CUTLER. I do not know about any 10 percent.
STOCK EXCHANGE PKACTICES
3353
Mr. PECORA. Nothing was ever said to you about 10 percent by
Blair & Co., or by Mr. Fitzpatrick, or by anybody else?
Mr. CUTLER. TO the best of my knowledge no amount was fixed.
I did not negotiate anything with them, whether it would be 10
percent, or 5 percent, or any percentage.
Mr. PECORA. Did the Rockefeller interests own any shares of the
Sinclair Consolidated Oil Corporation in October 1928 ?
Mr. CUTLER. The so-called " charitable funds " that you are mentioning did not.
Mr. PECORA. Did any other interests known as the Rockefeller
interests, that might properly be so designated, have any such holdings of stock at that time ?
Mr. CUTLER. TO the best of my knowledge at that time they did
not. I would not be sure of that, though.
Mr. PECORA. DO they today hold any such stock?
Mr. CUTLER. A large amount.
Mr. PECORA. HOW large?
Mr. CUTLER. A very substantial amount. I cannot give you the
number. I t is the amount Mr. Rockefeller, Jr., might have received
for stock of the Prairie Co. that he owned.
Mr. PECORA. At the time of the consolidation in March 1932.
Mr. CUTLER. Yes.
Mr. PECORA. DO you
know how much of the Prairie Oil stock he
owned then ?
Mr. CUTLER. NO, but I would roughly guess that the whole thing is
1,000,000 shares, or around there.
Mr. PECORA. That is, at the present time ?
Mr. CUTLER. Yes.
Mr. PECORA. One million shares of the Consolidated Corporation ?
Mr. CUTLER. I assume so.
Mr. PECORA. Did you represent the Rockefeller interests in any
negotiations that led to that consolidation in March 1932?
Mr. CUTLER. I
did.
Mr. PECORA. What were those negotiations?
Mr. CUTLER. In 1932?
Mr. PECORA. Or at any time. I am referring to the negotiations
that culminated in the consolidation in March 1932. I am not fixing
that date as the date of the negotiations, but the date of the happening of the event which marked the culmination of the negotiations.
Mr. CUTLER. I cannot tell you the date that the first talks of the
consolidation of the Prairie Oil and the Prairie Pipe with the Sinclair Oil took place, but to the best of my knowledge it was not until
nearly early 1932.
Mr. PECORA. Not until when?
Mr. CUTLER. About the first of 1932.
Mr. PECORA. Had you heard of negotiations having been instituted long prior to 1932?
Mr. CUTLER. NO, sir.
Mr. PECORA. I t has been testified to here that those negotiations
progressed off and on over a period of 5 years prior to March 1932.
Mr. CUTLER. But I do not think testified that it was with me.
Mr. PECORA. N O ; but you first heard of it sometime in the early
part of 1932?
3354
STOCK EXCHANGE PEACTICES
Mr. CUTLER. They have all kinds of rumors around Wall Street,
but the first time we considered it at all, to the best of my knowledge,
would be probably the first of 1932, probably 6 or 8 months, at most,
before they were consummated.
Mr. PECORA. With whom did you have any conversations in behalf of Mr. Rockefeller with respect to the proposed consolidation?
Mr. CUTLER. With Mr. Fitzpatrick, with Mr. Hunter Marston,
with Mr. Henry Lockhart, with, associates of my own office, our
private counsel, with oil experts that we might have called in to see
if we could figure out what was a fair basis of the merger.
Mr. PECORA. What was the total number of shares outstanding at
that time of the Prairie Oil & Gas Co.?
Mr. CUTLER. I am sorry I cannot tell you.
Mr. PECORA. What proportion do you think the Rockefellers owned
of the outstanding stock?
Mr. CUTLER. At the time of the merger? I would have to guess.
Eleven, twelve, or fourteen percent, just as a guess. I do not know.
Maybe less.
Mr. PECORA. In your 30 years or so of experience as financial adviser to the Rockefellers, would you say that that proportion of stock
interest gave them a management control?
Mr. CUTLER. I would say that is a very much debated question as
to what gives control. Some people say 10 percent does. Some say
it takes 55. I do not know.
Mr. PECORA. I assume your opinion on that would be worth more
than the average man's, in view of your 30 years' experience as
financial adviser to the Rockefellers. Might I ask, then, your
opinion about it?
Mr. CUTLER. I would think 10 or 15 percent would have quite a
weight in the management of the company, but not control.
Senator COUZENS. I t would depend upon who organized the
proxies, would it not, as to who had control?
Mr. CUTLER. I t would depend on who voted the proxies, I guess.
Senator COUZENS. We have heard of experiences where the solicitors for the proxies usually voted for them. You mean, then, I understand, that if an owner of 14 or 15 percent of the stock attempted
to organize control by the solicitation of the proxies, he could probably get proxies; is that correct ?
Mr. CUTLER. It would depend upon who the owner of the 14 or 15
percent was.
Senator COUZENS. YOU testified a while ago that an owner of 14 or
15 percent would be a big factor in the control.
Mr. CUTLER. Yes, sir.
Senator COUZENS. At that time you did not make any discernment
as to who owned the stock. Now I understand you qualify your
answer by saying it would depend on who owned the stock, as to
whether they would be a big factor in getting control. Is that right?
Mr. CUTLER. I would think that the standing of the person who had
that much stock, in asking for proxies, would have great weight.
Senator COUZENS. That happened to be true in the case of the
Standard Oil Co. of Indiana, did it not?
Mr. CUTLER. That is just about the percentage there, I think.
STOCK EXCHANGE PRACTICES
3355
Mr. PECORA. Mr. Cutler, you learned eventually, did you not, that
Mr. Fitzpatrick had received something like $300,000?
Mr. CUTLER. Yes,
sir.
Mr. PECORA. Out of the profits that accrued to this purchasing
syndicate in the Sinclair Oil stock deal.
Mr. CUTLER. Yes, sir.
Mr. PECORA. When did you first learn of it ?
Mr. CUTLER. Yesterday.
Mr. PECORA. Never heard of it before that?
Mr. CUTLER. Never heard of it before. Yesterday
or the day
before.
Senator COUZENS. Was it a surprise?
Mr. CUTLER. Very much of a surprise; yes, sir.
Mr. PECORA. Had you learned of it at the time it happened would
you, as the financial adviser of interests that owned around 14 percent of the stock of the company of which Fitzpatrick was president,
have approved of it?
Mr. CUTLER. I do not think I could approve of it; no, sir.
Senator COUZENS. DO you know any reason for having kept it
secret for all these years ?
Mr. CUTLER. I know nothing about it.
Senator COUZENS. Can you conceive of any reason for keeping it
secret all this time?
Mr. CUTLER. NO. I cannot think of any reason for publishing it,
if that will answer the question.
Senator COUZENS. Well, that is a reverse answer. But apparently
there was an effort, was there not, to keep the payment secret ?
Mr. CUTLER. Well, now you are asking me something which I had
nothing to do with whatsoever. I did not even know there was a
syndicate. I did not even know there was a payment.
The CHAIRMAN. What would be your objection to his receiving
it? You said you would not have approved it, you think. What
would be your objection to his receiving this donation?
Mr. CUTLER. I don't know as I would have any objection if somebody wanted to give him $300,000.
Senator COUZENS. Would it not depend on who the giver was?
Mr. CUTLER. If it was my money that was given it might; yes.
If it was not
Senator COUZENS. If you were interested in a corporation and a
competitor came along and gave your management $300,000 would
you not be interested ?
Mr. CUTLER. I had not from reading the testimony understood
that the corporation gave him $300,000. I thought some banking
group gave it.
Mr. PECORA. Well, a banking group, or a purchasing group,
rather, that included the Chase Securities Corporation, one of the
officers of which, namely, Mr. Clarkson, was at that time a director
of the Sinclair Co.; that included Blair & Co., the president of
which at that time was also a director of the Sinclair Oil Corporation ; and that included Mr. Harry F. Sinclair, who at that time was
chairman of the board of directors of the Sinclair Oil Corporation—
with that knowledge would you have approved of it ?
3356
STOCK EXCHANGE PRACTICES
Mr. CUTLER. I do not see why I should be asked if I approve of it*
I do not know whether I follow your question. I do not see that
I am interested in it.
Mr. PECORA. Well, now, in answer to my question you said that
had you known at the time that payment was made to Fitzpatrick
that it was to be made you would not have approved of it. Following that, Senator Fletcher asked you why you would not have approved of it. I do not believe you have yet answered Senator
Fletcher's question.
Mr. CUTLER. The question being why would I not approve of it?
Mr. PECORA. Yes.
Mr. CUTLER. Well,
I do not just recall the question before that I
did answer. I thought I had—I do not see why I should be asked to
approve of it. I do not know just what you mean.
Mr. PECORA. Well, I asked you the question specifically to the
effect: Had you known at the time this payment was made to Mr.
Fitzpatrick of the making of such payment would you have approved
of it, and you answered no.
Mr. CUTLER. Well, had I been in the position of a lot of the
people making the payment, I certainly would not have approved of
it. Bat I was not a director of the Consolidated Oil or a member of
the Syndicate, or anything.
Mr. PECORA. YOU were the financial adviser of the owners of about
14 percent of the stock of the Prairie Oil Co., which was the company of which Mr. Fitzpatrick was president at that time ?
Mr. CUTLER. Yes.
Mr. PECORA. NOW, haying in mind that the Prairie Oil Co. at
that time was a competitor, to a certain extent, in the producing
field of the Sinclair Consolidated Oil Co., would you have approved
of the president of your company, meaning the Prairie Co.,
receiving
Mr. CUTLER (interposing). Now you are putting it in a different
way. No.
Mr. PECORA (continuing). Receiving from interests that included
executive officers and directors of the Sinclair Corporation or making of a payment by the latter to Mr. Fitzpatrick of $300,000, or
any sum?
Mr. CUTLER. The answer is, certainly " No ", if you put it that
way.
Mr. PECORA. For what reason? Now, I will ask Senator
Fletcher's question of you. For what reason would you have disapproved oi it?
Mr. CUTLER. Why, I would not think the president of my company had a right to take the payment from some other company.
Mr. PECORA. Well, that is an answer.
Senator COUZENS. That is what we expected, and it was a long
time getting it.
Mr. CUTLER. Well, Senator, I am sorry, but I did not understand
just what you were asking,
Mr. PECORA. I think that is all with Mr. Cutler.
The CHAIRMAN. Mr. Cutler, may I ask you if the interests that
you represented felt under any obligation or inclined in any way to
obtain or secure for Mr. Fitzpatrick some special reward on account
STOCK EXCHANGE PRACTICES
3357
of his long services and help in connection with the companies in
which you were interested?
Mr. CUTLER. I cannot say what they might have felt. I do not
ever remember it being expressed to me.
The CHAIRMAN. That question did not come up at all?
Mr. CUTLER. NO.
Mr. PECORA. I have no further questions
The CHAIRMAN. That is all, Mr. Cutler.
of Mr. Cutler.
(Thereupon Mr. Cutler left the witness stand.)
TESTIMONY OF WILLIAM SAMTTEIi FITZPATRICK, VICE CHAIRMAN OF THE EXECUTIVE COMMITTEE OF THE CONSOLIDATED
OIL CO.—Resumed
Mr. PECORA. Mr. Fitzpatrick, I see you rising to your feet as Mr.
Cutler leaves the stand.
Mr. FITZPATRICK.
Mr. PECORA, YOU
Mr. FITZPATRICK.
Yes.
wish toi say something to the committee?
I think I have a better recollection of some things
than Mr. Cutler seems to have.
Mr. PECORA. I have not heard what you said, but perhaps if you
take the witness stand again we may hear you.
The CHAIRMAN. DO you care to make any further statement, Mr.
Fitzpatrick?'
Mr. FITZPATRICK. Mr. Cutler is mistaken if he says he never heard
of the consolidation until 1932 with Sinclair. I talked to him myself
about it.
Mr. PECORA. When for the first time?
Mr. FITZPATRICK. Oh, when it first came up.
Mr. PECORA. Back in 1928?
Mr. FITZPATRICK. In 1928. Mr. Cutler's memory fails him if he
says he never heard of my participation in the profits of the Blair
syndicate.
Mr. PECORA. DO you mean by the Blair syndicate the original purchasing syndicate of the Sinclair stock?
Mr. FITZPATRICK. Blair. Because I remember distinctly telling
Mr. Cutler that these people had been very nice to me and I appreciated it—that they had managed to pay me more out of this than
my combined salary the twenty-some years I had been working
with the company.
Senator COUZENS. What did Mr. Cutler say when he found that
you had taken $300,000 from a competing organization?
Mr. FITZPATRICK. I did not take it from a competing organization. I took it from the bankers, and I thought, and I believe, and
I know that the suggestion that I get something—not 10 percent,
rot $300,000—1 do not believe anybody thought there was $300,000
in it, or anything like the amount of profit there was in it—but I
know that I got the idea from Mr. Cutler that I should have something out of it, or that they would give me something out of it. I
know that when I talked to Mr. Marston that Mr. Marston had talked
to Mr. Cutler about it or Mr. Cutler had talked to Mr. Marston
about it. I know that I would not have done that or anything else
and I did not do anything else in connection with this consolidation
until it was approved by Mr. Cutler.
175541—34—PT 7
10
3358
STOCK EXCHANGE PRACTICES
Senator COTTZENS. And yet Mr, Cutler testifies
Mr. FITZPATRICK (interposing). I do not care what Mr. Cutler
testifies about. I say I know Mr. Cutler's memory is not good.
Mr. PECORA. Mr. Fitzpatrick, according to your recollection when
did you tell Mr. Cutler for the first time that you had received this
$300,000 from that purchasing syndicate?
Mr. FITZPATRICK. Probably the first time I saw him after I had
received it.
Mr. PECORA. That was shortly after April 1929?
Mr. FITZPATRICK. NO. I went West, as I say, shortly after I received it, and was gone several weeks, and the first time I got back
to New York I went in to see Mr. Cutler.
Mr. PECORA. Well, within a month or two after you h&d received it?
Mr. FITZPATRICK. A few months after I received it. Some few
months afterwards.
Mr. PECORA. It would appear, Mr. Fitzpatrick, from the facts that
have been developed here that the Rockefeller interests had nothing
to do with the organization of that purchasing syndicate.
Mr. FITZPATRICK. I understand that is so.
Mr. PECORA. DO you know why Mr. Cutler then should have had
any part in any conversations that led to your receiving a share of
the profits of that syndicate ?
Mr. FITZPATRICK. At that time and up to that time everything that
had been said to me by Mr. Cutler or anybody else in Mr. Rockefeller's office, or by Mr. Rockefeller himself, indicated that they were
very friendly to me, and that everything I had done in connection
with the management of the Prairie Co. had their approval. Down
to this day there has only been one criticism, and I think that was
removed. Now, I believe, as I said this morning, that they were
very friendly to me. And I believe that they—I knew that they knew
something of my financial condition. And I believed that they
wanted these people to do something for my benefit. I wondered
then and have ever since why if they felt that way they asked somebody else to do it instead of doing it themselves.
Mr. PECORA. YOU have not found an answer to that ?
Mr. FITZPATRICK. I have not found an answer to it.
Senator COUZENS. YOU did not get an answer today, either, did
you?
Mr. FITZPATRICK. I did not get an answer today. And I am
astonished more than you gentlemen are.
Now, another proposition. I t has been intimated by this committee that this participation of mine was kept secret. I t was not
kept secret. It figured in my income taxes the year I received it.
It was talked over with my associates in the Prairie Oil & Gas Co.
and approved by them. They understood it then, they understand
it now, and at all times have understood it.
Senator COUZENS. HOW do you account for this conflicting testimony then?
Mr. FITZPATRICK. I am not able to account for it. If I could
account for it I would not be here disputing it.
Mr. PECORA. Mr. Fitzpatrick, how do you account for Mr. Arthur
W. Cutten, Mr. Harry F. Sinclair, and Mr. Albert H. Wiggiii having
apparently been ignorant of the reason why you received this $300,000
from the purchasing syndicate of which they were members?
STOCK EXCHANGE PRACTICES
3359
Mr. FITZPATRICK. I do not account for it. I never had any conversation with any of them about it, and I know nothing about it. I t
was fixed up by Blair & Co., and I supposed everything was fixed
up right and that everybody knew it and that it was satisfactory all
argund. I got the money from them. I did not ask them how much
it was. I never asked for an accounting. I never asked for a statement as to the operations of the syndicate. I never asked for anything. And I got it. ^.nd I got into this thing here at the suggestion of Mr. Cutler and Mr. Marston, and whatever you gentlemen see
fit to believe, whatever the public may believe, if it is to my detriment
it is too bad. But I am going to see that the truth is laid before you.
Mr. PECORA. That is all we want.
Mr. FITZPATRICK. I do not care who disputes it. Mr. Cutler is an
important man. Mr. Cutler represents perhaps the most powerful
influence in this country—possibly in the world. I served them for
twenty-some years, and I have never heard anything fall from the
lips oi anybody connected with the Rockefeller organization, until I
heard this testimony, that impaired my respect for or confidence in
them.
Now when I told Mr. Cutler that these people have been very good
to me and I appreciated it—in fact they had carried me in this
matter and made me more money than my combined salary, or approximately the amount of my combined salary for the years that I
have been with the Prairie Oil & Gas Co., I don't remember why it
was, but he said " I would not say anything about that." That is the
first intimation I ever had or the first time it ever occurred to me that
anybody might think there was anything wrong about my taking
that money irom Blair & Co.
Mr. PECORA. Who said to you you shouldn't say anything about it ?
Mr. FITZPATRICK. Mr. Cutler.
Mr. PECORA. That was when you first told him that you had received that money?
Mr. FITZPATRICK. Yes, sir. When I told him how much it was.
Mr. PECORA. NOW, when you were out in Excelsior Springs some 2
weeks ago with Mr. Sinclair were you surprised to know that he was
ignorant of the reasons why you got that $300,000 out of that purchasing syndicate's profits?
Mr. FITZPATRICK. I naturally was. Naturally was surprised.
Mr. PECORA. His ignorance of the fact seemed genuine to you,
did it?
Mr. FITZPATRICK. I t did. It did. I t did. Because I thought I
could understand how he might not have known all about it. He
said he did not. He asked me and I told him the story about Mr.
Cutler and my conversation with Mr. Cutler and Mr. Marston.
Mr. PECORA. NOW, Mr. Fitzpatrick, you exchanged your shares
of Prairie Oil & Gas Co. for shares of the Sinclair Co.
Mr. FITZPATRICK. Yes.
Mr. PECORA (continuing). Some time in 1929 ?
Mr. FITZPATRICK. 1928 we made the arrangement.
Mr. PECORA. And it was consummated in February 1929?
Mr. FITZPATRICK. Yes, sir.
Mr. PECORA. Did you at that time in your transaction part
all your holdings of Prairie Oil?
Mr. FITZPATRICK. NO.
with
3360
STOCK EXCHANGE PKACTICES
Mr. PECORA. A substantial part of them?
Mr. FITZPATRICK. A substantial part of them, yes.
Mr. PECORA. And you exchanged them for shares of the common
stock of the Sinclair Co. ?
Mr. FITZPATRICK. Yes.
Mr. PECORA. Which then
was more or less of a competing
company?
Mr. FITZPATRICK. Well, in a measure. But the general discussion
that was going on indicated that the Sinclair contemplated a dividend of $3 a share. I knew that that was all that the Prairie Oil
could pay, if they could pay that much. I knew that I would receive, pending the further negotiations for the consolidation, dividends on 5 shares at $3 a share instead of on 3 shares of Prairie at
$3 a share. I wanted those additional dividends. I got them. And
I paid my income tax on that additional income.
Senator COUZENS. Did Mr. Rockefeller know that you exchanged
the stock in a corporation in which he had a big interest for stock in
a competing company?
Mr. FITZPATRICK. I am quite sure Mr. Rockefeller did not know it.
Senator COTJZENS. Did Mr. Cutler know it?
Mr. FITZPATRICK. I am quite sure that Mr. Cutler did not know it.
I did not tell either one of them. I t never occurred to me that it
was any of their business.
Mr. PECORA. Did you tell any of the directors of the Prairie Oil
& Gas Co.?
Mr. FITZPATRICK. Oh, yes. I told the directors of the Prairie
Oil & Gas Co., and several of the boys in both companies made the
same exchange, at the same time and in the same way.
Mr. PECORA. Were the Rockefeller interests represented on the
board of directors of the Prairie Oil & Gas Co. at that time ?
Mr. FITZPATRICK. Well, they were represented; yes. I represented
the Rockefellers more thoroughly than I did anybody else, because
there was no question of policy that I remember ever having come
up that I did not try to find out whether they approved it or not.
Now, we had those negotiations with Mr. Sinclair and his people
all through 1929, and finally we broke up. In 1930 we were unable
to get together. And there were other complications. Mr. Sinclair
was about to sell or get rid of his interest in another pipe line. We
waited for that. He did it. After he did it and about the time he
did it we began to hear rumors of the building of the Ajax Pipe
Line, and the Ajax Pipe Line took away from us—and this acquisition of full ownership of the pipe line by the Indiana company, took
away from us about 70,000 to 75,000 barrels a day of business. The
building of the Ajax Pipe Line took away about 20,000 barrels a
day of the New Jersey company. And at the same time it took
away about 6,000 barrels as I remember it of the Pure Oil Co., that
went into the Ajax Pipe Line. And it took away about 40,000
barrels a day that was going to the Standard Oil Co. of Ohio
Senator COTJZENS (interposing). After you had made your exchange or purchase
Mr. FITZPATRICK (continuing). That made a difference in the setup, in the division or value of the property.
Mr. PECORA. At the time you effected that exchange of your holdings of Prairie Oil for shares of the Sinclair Company, on the basis
STOCK EXCHANGE PRACTICES
3361
of 5 shares of Sinclair stock for 3 shares of Prairie Oil stock, negotiations had already been in progress looking to a general consolidation of the two companies, had there not?
Mr. FITZPATRICK. They were in the preliminary stages.
Mr. PECORA. Yes. Now, at any time in those preliminary stages,
or particularly at the time when you effected the exchange of your
shares of Prairie Oil on the basis of 5 to 3 for shares of Sinclair .Oil,
did the Sinclair people indicate that they would be willing to make
the same kind of exchange with the other stockholders of the
Prairie Oil?
Mr. FITZPATRICK. Yes, with the other officers.
Mr. PECORA. Oh. Only with the officers, and not with the general
body of the stockholders ?
Mr. FITZPATRICK. NO ; and that was limited to 20,000 shares.
Mr. PECORA. And that offer was held out only to the officers of the
Prairie Oil & Gas Co.?
Mr. FITZPATRICK. Yes, sir.
Mr. PECORA. Did other officers
beside yourself avail themselves of
the offer?
Mr. FITZPATRICK. Yes; they did.
Mr. PECORA. All of them ?
Mr. FITZPATRICK. Not all of them.
Mr. PECORA. Which of them did so ?
Mr. FITZPATRICK. Mr. Moody, Mr. Kelsey, and I think Mr. Wilhelm. I am not sure whether Mr. Wilhelm did or not, but there
were several that did.
Mr. PECORA. Was the fact of such exchanges, made known by you
or any other officers of the Prairie Oil & Gas Co. to the stockholders
at the time that the negotiations were finally concluded on a sharefor-share basis?
Mr. FITZPATRICK. We didn't send out any letter to the stockholders; no.
Mr. PECORA. Well, did you indicate the fact to the stockholders
of the company in any form?
Mr. FITZPATRICK. But there was no effort on anybody's part so far
as I know to conceal it.
Mr. PECORA. But was the information given to the stockholders?
Mr. FITZPATRICK. I don't know.
Mr. PECORA. Was there anything affirmatively done, in other
words ?
Mr. FITZPATRICK. I don't know.
Mr. PECORA. I mean to inform the stockholders of the deal that
the officers had obtained for themselves.
Mr. FITZPATRICK. I don't know.
Mr. PECORA. What was that answer?
Mr. FITZPATRICK. I don't know.
Senator COUZENS. Doesn't it appear to you, Mr. Fitzpatrick, that
while doing this you were really scuttling your ship with the Prairie
Oil & Gas Co.?
Mr. FITZPATRICK. I t did not.
Senator COUZENS. I t would seem
to me that if I owned 15 percent
of a company and my officers were exchanging their stock for stock
of a competing company I would consider that my ship was being
scuttled.
3362
STOCK EXCHANGE PEACTICES
Mr. FITZPATRICK. I t was not being scuttled. No, it was not being
scuttled, and I am sorry that you gentlemen want to try a lawsuit
that is pending out in Kansas. But if you do we will just have to try
it here.
Senator COUZENS. I did not know there was a lawsuit pending out
there.
Mr. FITZPATRICK. Well, there is a lawsuit pending in Kansas.
Senator COUZENS. About what?
Mr. FITZPATRICK. A very few stockholders, something like 1 percent or 1% percent of the stockholders, are complaining that they
did not get as much as they should have gotten in this deal.
Now
The CHAIRMAN (interposing). Where does the Ajax pipe line run?
Mr. FITZPATRICK. I t runs from about the Cushing field
The CHAIRMAN (interposing). Where is that field?
Mr. FITZPATRICK. In Oklahoma, south and west of Tulsa some
fifty miles, to a point on the Mississippi River near Alton, 111.
The CHAIRMAN. Who were the people behind the Ajax pipe line,
I mean the principal people in it ?
Mr. FITZPATRICK. Who are the people?
The CHAIRMAN. Yes.
Mr. FITZPATRICK. My
understanding is, and it is only a general
understanding, that the Standard Oil Co. of New Jersey
The CHAIRMAN (interposing). What is that?
Mr. FITZPATRICK. The Standard Oil Co. of New Jersey, the
Standard Oil Co. of Ohio, and the Pure Oil Co. are the people.
The CHAIRMAN. Those companies are not antagonistic to the
Rockefeller interests, are they?
Mr. FITZPATRICK. I never suspected it, or thought of any
antagonism.
Senator COUZENS. Are you through with Mr. Fitzpatrick now,
Mr. Pecora?
Mr. PECORA. Yes, sir.
The CHAIRMAN. That
is all, Mr. Fitzpatrick.
(Thereupon the witness, Fitzpatrick, left the committee table.)
The CHAIRMAN. Who will you have next, Mr. Pecora?
Mr. PECORA. Mr. Sinclair, I wish to ask you just 2 or 3 questions,
TESTIMONY OF HARRY F. SINCLAIR—Resumed
Mr. PECORA. Mr. Sinclair, if my recollection of the evidence here
serves me right, there is some proof that in connection with the
formation of this purchasing syndicate relating to the 1,130,000
shares of the Sinclair Consolidated Oil Corporation stock, you agreed
to take down 130,000 shares of that block, is that correct?
Mr. SINCLAIR. That is correct.
Mr. PECORA. And did you take that block down ?
Mr. SINCLAIR. I did.
Mr. PECORA. At $30 a share?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Did that go to reduce,
or was that on account of your
original participating interest in the syndicate ?
Mr. SINCLAIR. I think not.
STOCK EXCHANGE PRACTICES
3363
Mr. PECORA. Then virtually the interest of the participants in that
syndicate was an interest in the purchase of 1,000,000 shares rather
than in the purchase of 1,130,000 shares of stock?
Mr. SINCLAIR. I cannot say. Is that correct [addressing his attorney, Mr. Ragland] ? Mr. Pecora, it was a part of the interest on
the whole, but I bought back or had the right to buy back 130,000
shares.
Mr. PECORA. Then that left an original interest of the participants undiminished ?
Mr. SINCLAIR. I would say their percentage of what was left was
the same.
Mr. PECORA. YOU say their percentage of what was left was the
same?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. But what was left was simply 1,000,000 shares?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. Why was that done ?
Mr. SINCLAIR. I asked the privilege of purchasing it.
Mr. PECORA. Well, for what reason?
Mr. SINCLAIR. For what reason ?
Mr. PECORA. Yes. There must have been some special purpose
in
your mind.
Mr. SINCLAIR. I wanted the shares.
Mr. PECORA. For what reason? And did you hold them?
Mr. SINCLAIR. I sold a part of them, and I held a part of them.
Mr. PECORA. TO whom did you sell a part of them ?
Mr. SINCLAIR (after consulting Mr. Ragland). I sold 75,000 of
those shares to a company of my own, the Hyva Corporation.
The CHAIRMAN. At what price ?
Mr. SINCLAIR. At the same price, $30 a share.
Senator COUZENS. I S that your private holding company?
Mr. SINCLAIR. Yes, sir.
Mr. PECORA. I have no other questions to ask Mr.
Mr. SINCLAIR. Shall I remain here, Mr. Pecora ?
The CHAIRMAN. Then you gave away quite a few
Sinclair.
of those shares
to different friends and associates ?
Mr. SINCLAIR. What was that question, Mr. Chairman?
The CHAIRMAN. YOU distributed quite a few of those shares to
others.
Mr. SINCLAIR. I did not give them away, but I gave some participations, for quite a number of the shares, I think about half or
something of that sort.
Shall I remain here tomorrow ?
Mr. PECORA. NO.
The CHAIRMAN. That
is all, then, Mr. Sinclair.
(Thereupon the witness, Sinclair, left the committee table.)
Mr. PECORA. Mr. Chairman, I do not think that we need Mr. Cutten in further attendance here, or the other witnesses on this phase.
I think this concludes the investigation of the so-called " Sinclair
Consolidated Oil Corporation syndicate."
The CHAIRMAN. All right. Who will you have next, Mr. Pecora ?
Mr. PECORA. I S Mr. S. R. Burns here ?
Mr. BURNS. Yes,
sir.
3364
STOCK EXCHANGE PRACTICES
The CHAIRMAN. Mr. Burns, 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 the committee, so help you God.
Mr. BURNS. I do.
TESTIMONY OF SAMUEL R. BURNS, JERSEY CITY, N.J., PRESIDENT
OF THE INTERNATIONAL PROJECTOR CORPORATION
Mr. PECORA. Mr. Burns, what is your full name?
Mr. BURNS. Samuel E. Burns.
Mr. PECORA. Talk a little louder.
Mr. BURNS. Samuel E. Burns.
Mr. PECORA. And what is your office or home address?
Mr. BURNS. Jersey City, N. J.; 100 Glenwood Avenue.
Mr. PECORA. Talk a little louder, please.
Mr. BURNS. I will try. I have quite a severe cold.
Mr. PECORA. What is your business or occupation ?
Mr. BURNS. I am president of the International Projector
Corporation.
Mr. PECORA. When did you become the president of that corporation ?
Mr. BURNS. Some time in March of 1932.
Mr. PECORA. At whose suggestion did you become its president?
Mr. BURNS. Well, I don't know at whose suggestion it was, but
it was by a vote of the board of directors.
Mr. PECORA. Who first spoke to you about becoming the president
of that corporation ?
Mr. BURNS. I do not believe anybody spoke to me about it.
Mr. PECORA. Had you been an officer of the corporation before
that time ?
Mr. BURNS. Yes, sir.
Mr. PECORA. What office did you hold in it?
Mr. BURNS. Vice president and secretary.
Mr. PECORA. Were you a stockholder of it?
Mr. BURNS. NO, sir. The General Theaters
Equipment Corporation is the owner of virtually 100 percent of the stock.
Mr. PECORA. YOU know Mr. Harley Clarke, don't you?
Mr. BURNS. Yes,
sir.
Mr. PECORA. HOW long have you known him?
Mr. BURNS. For over 10 years.
Mr. PECORA. DO you recall that sometime in 1925 the International
Projector Corporation, through moneys that it realized from the
issuance and sale of its securities, acquired the assets of a projector
company called "Nicholas Power Co., Inc.", for the sum of
$690,777.78?
Mr. BURNS. Yes, sir.
Mr. PECORA. Did you
have anything to do with that transaction,
Mr. Burns?
Mr. BURNS. Well, I was the nominee of the clearing house for that
transaction.
Mr. PECORA. At whose request did you become such nominee?
Mr. BURNS. I haven't the slightest idea.
STOCK EXCHANGE PRACTICES
3365
Mr. PECORA. What was your business or occupation at that time?
Mr. BURNS. I was president of the Nicholas Power Co., Inc.
Mr. PECORA. YOU were then the president of the Nicholas Power
Co., Inc.?
Mr. BURNS. Yes, sir.
Mr. PECORA. DO you
know at whose instance you became its
president?
Mr. BURNS. Well, I was made its president by virtue of the action
of the board of directors.
Mr. PECORA. We know that. I mean, you do not have to tell us
that. That is the legal effect of the thing. But who asked you, or
who was instrumental in having you made its president ?
Mr. BURNS. The largest stockholders.
Mr. PECORA. And wno were they?
Mr. BURNS. Well, one was Mrs. Frank H. Kichardson. She was
probably the largest stockholder.
Mr. PECORA. Yes; and who else ?
Mr. BURNS. Mrs. Stuart.
Mr. PECORA. Did you say Mrs. Stuart ?
Mr. BURNS. Yes; Mrs. S-t-u-a-r-t.
Mr. PECORA. Yes. Now, what other stockholders do you recall ?
Mr. BURNS. There were two others, two maiden ladies named
Griffith, G-r-i-f-f-i-t-h.
Mr. PECORA. And what was the name of the other maiden lady?
Mr. BURNS. They were both maiden ladies.
Mr. PECORA. But what was the name of the other one?
Mr. BURNS. They were sisters.
Mr. PECORA. Oh, they were sisters.
Mr. BURNS. Yes, sir.
Mr. PECORA. Were there
any other stockholders in this Nicholas
Power Co., Inc. ?
Mr. BURNS. Yes; Mrs. Rose Power, the widow of Nicholas Power.
Mr. PECORA. And do you recall any other stockholders ?
Mr. BURNS. NO—yes; there was one other that I recall, Mr.
Eichard T. Greene.
Mr. PECORA. Oh, that is a relief. How long had you been connected with the Nicholas Power Co., Inc., in any capacity whatsoever
prior to the acquisition of its assets by the International Projector
Corporation ?
Mr. BURNS. Approximately 10 years.
Mr. PECORA. NOW, how long had you been its president prior to
the sale of its assets to the International Projector Corporation?
Mr. BURNS. Perhaps a year and a half.
Mr. PECORA. What was that?
Mr. BURNS. Perhaps a year and a half.
Mr. PECORA. Were you ever a stockholder of it ?
Mr. BURNS. Yes.
Mr. PECORA. Did
you have anything more than the number of
shares necessary to qualify you ?
Mr. BURNS. Yes.
Mr. PECORA. HOW
Mr. BURNS. Fifty
many shares did you have?
shares.
3366
STOCK EXCHANGE PRACTICES
Mr. PECORA. Out of a total outstanding issue of how many ?
Mr. BURNS. Oh, 3,200 shares.
Mr. PECORA. When did you first meet Mr. Harley Clarke ?
Mr. BURNS. I cannot recall exactly, but somewhere between 1921
and 1923.
Mr. PECORA. That is, sometime prior to the time you became president of the Nicholas Power Co. ?
Mr. BURNS. Yes.
Mr. PECORA. AS president
of the Nicholas Power Co. at the time
of the sale of its assets to the International Projection Corporation,
did you enter into the negotiations that led to that sale ?
Mr. BURNS. NO, sir.
Mr. PECORA. Who
conducted them in behalf of the Nicholas
Power Co. ?
Mr. BURNS. Well, it was not a question of negotiations with the
company; it was negotiations with the stockholders.
Mr. PECORA. Who conducted the negotiations ?
Mr. BURNS. That I do not know either.
Mr. PECORA. YOU were president of the company that was selling
its assets ?
Mr. BURNS. Yes.
Mr. PECORA. Don't
you know anything about the sale or the negotiations that led to the sale ?
Mr. BURNS. Very little, except that there was a desire on the part
of a certain number of stockholders who had sufficient stock—who
owned sufficient stock—to control the company, to sell it.
Mr. PECORA. Who were those stockholders ?
Mr. BURNS. I named them a few minutes ago.
Mr. PECORA. The six that you named?
Mr. BURNS. Yes.
Mr. PECORA. Did
they among them own practically all of the
outstanding stock?
Mr. BURNS. NO, sir; more than sufficient to control the company.
Mr. PECORA. Does that mean that they owned more than a
majority of the outstanding stock?
Mr. BURNS. Yes.
The CHAIRMAN. What
was the business of the Nicholas Power
Co.?
Mr. BURNS. The manufacture of motion picture projection
machines and accessories.
Mr. PECORA. That was the same business that the International
Projector Corporation was engaged in at that time, was it not?
Mr. BURNS. The International Projector Corporation at that time
had not been formed.
Mr. PECORA. The International Projector Corporation was formed
at the time that the Nicholas Power Co. sold its assets to it, was it
not?
Mr. BURNS. Yes.
Mr. PECORA. And
who received from the International Projector
Corporation the six hundred and ninety thousand odd dollars that
the corporation paid for the assets of the Nicholas Power Co.?
Mr. BURNS. A check for that amount was given to me.
Mr. PECORA. Was it made to your order ?
Mr. BURNS. Yes,
sir.
STOCK EXCHANGE PRACTICES
3367
Mr. PECORA. Did you disburse the amount of the check or the sum
represented by that check?
Mr. BURNS. I drew several checks—just how many I do not recall—
lor the exact amount of that check.
Senator COUZENS. TO whom?
Mr. BURNS. I do not remember to whom.
Mr. PECORA. YOU do not remember to whom?
Mr. BURNS. NO, sir.
Mr. PECORA. DO you
have any records that would refresh your
recollection ?
Mr. BURNS. NO, I have not; but at the suggestion
Mr. PECORA. What has become of the records?
Mr. BURNS. At the suggestion of your associate, Mr. * Silver, I
believe, I telephoned the bank in New York for a transcript of the
record of that period.
Mr. PECORA. What transcript can the bank give you of the record?
Mr. BURNS. I do not know.
Mr. PECORA. Other than a transcript of the deposit account?
Mr. BURNS. I t will also give you the charges against that deposit,
will it not?
Senator TOWNSEND. Were those seven checks drawn to the stockholders ?
Mr. BURNS. I did not say seven; I said several. I do not know
how many there were.
Mr. PECORA. Where are the records of the Nicholas Power Co.?
Mr. BURNS. I do not know.
Mr. PECORA. What happened to them?
Mr. BURNS. I have not the slightest idea what has become of them.
I t is over 8 years ago.
Mr. PECORA. When did they last pass out of your knowledge as
to their whereabouts ?
Mr. BURNS. I do not remember having seen them for probably 8
years since the closing of that transaction.
Mr. PECORA. What did the records consist of? Did they consist of a stock certificate book, among other things, or books of
account ?
Mr. BURNS. Yes.
Mr. PECORA. DO yqu know what became of them?
Mr. BURNS. NO, sir.
Mr. PECORA. DO you
know who on behalf of the stockholders of
the Nicholas Power Co. negotiated the transaction which resulted
in the sale of the assets of that company to the International Projector Corporation for six hundred and ninety-odd thousand
dollars?
Mr. BURNS. NO. sir; I do not.
Mr. PECORA. YOU as president of
the company knew nothing about
it and know nothing about it today ?
Mr. BURNS. NO, sir.
Mr. PECORA. Other than the fact that a sale was effected ?
Mr. BURNS. That is all.
Mr. PECORA. DO you know why the check for six hundred and
ninety-odd thousand dollars was made to your order?
Mr. BURNS. NO, sir; I have not the slightest idea, except that they
had to use somebody, I suppose.
3368
STOCK EXCHANGE PRACTICES
Mr. PECORA. From whom did you get any instructions or guidance
of any kind that caused you to receive that check and to disburse the
amount that it represented ?
Mr. BURNS. Well, I was there at the closing, and other officers of
the company were there also.
Mr. PECORA. From whom did you get your instructions that
prompted you to receive a check for nearly $700,000 that you knew
represented the amount paid to your corporation for its assets ?
Mr. BURNS. I cannot say from whom I received any instructions;
I do not recall.
The CHAIRMAN. Somebody did not just walk into your office and
hand you a check for $690,000?
Mr. BURNS. NO, sir.
The CHAIRMAN. YOU
ought to know something about how it was
brought about.
Senator TOWNSEND. Did not your stockholders have certificatesshowing what they owned in the company?
Mr. BURNS. Yes; naturally.
Senator TOWNSEND. Did you have a board of directors?
Mr. BURNS. Yes,
sir.
Mr. PECORA. Were you on the board of directors ?
Mr. BURNS. Yes,
sir.
Mr. PECORA. Was the matter of the sale of the assets taken up by
the board of directors?
Mr. BURNS. Yes, sir.
Mr. PECORA. Did you
participate in any discussion that affected
the consideration of that matter?
Mr. BURNS. Yes, sir.
Mr. PECORA. Then what
do you recall having learned from any
such discussions concerning the sale ?
Mr. BURNS. Well, I only know that a proposition had been made
to purchase the assets.
Mr. PECORA. TO whom had the proposition been made ?
Mr. BURNS. TO the board of directors of the company.
Mr. PECORA. By whom ?
Mr. BURNS. I do not recall by whom.
Mr. PECORA. Were you the active president of the Nicholas Power
Co.?
Mr. BURNS. Yes, sir.
Mr. PECORA. It was a fairly substantial company, was it not ?
Mr. BURNS. Yes.
Mr. PECORA. If its assets sold for nearly $700,000 it was not a mere
babe in swaddling clothes, was it ?
Mr. BURNS. NO, sir.
Mr. PECORA. Did it have an earning power ?
Mr. BURNS. Yes.
Mr. PECORA. Of substantially how much ?
Mr. BURNS. I should say it was earning at that time probably at
least 50 percent or over on its capital.
Mr. PECORA. HOW much was that?
Mr. BURNS. $125,000.
Mr. PECORA. Fifty percent a year ?
Mr. BURNS. Yes; that particular year.
STOCK EXCHANGE PRACTICES
3369
Senator TOWNSEND. On what amount of capital stock?
Mr. BURNS. $3503000.
Mr. PECORA. When the proposition was submitted, by some one
whose identity you do not recall, to purchase the entire assets of the
company of which you were president, it received, I assume, mature
consideration at the hands 01 the members of the board, including
yourself ?
Mr. BURNS. Yes.
Mr. PECORA. Who represented the party making that offer?
Mr. BURNS. It may have been Mr. Clarke.
Mr. PECORA. YOU knew Mr. Harley Clarke before that time did
you not?
Mr. BURNS. Yes, sir.
Mr. PECORA. When you
say it may have been, is there any doubt
in your mind now that it was Mr. Clarke?
Mr. BURNS. Yes and
no.
Mr. PECORA. I wish you would tell me which it is. I can't believe
it is both yes and no.
Mr. BURNS. It may have been Mr. Clarke.
Mr. PECORA. Can you think of its having been anyone else ?
Mr. BURNS. Well, I am inclined to think there was a group
interested.
Mr. PECORA. Who was the group ?
Mr. BURNS. I do not know who they were.
Mr. PECORA. Did the persons making this offer go behind your
back to these stockholders in negotiating for the purchase ?
Mr. BURNS. Yes.
Mr. PECORA. Did you resent that?
Mr. BURNS. Well, I did not like it.
Mr. PECORA. Did you go to your friend Harley Clarke and tell
him so?
Mr. BURNS. NO, sir.
Mr. PECORA. What salary were you receiving then as president of
the Nicholas Power Co. ?
Mr. BURNS. $10,000.
Mr. PECORA. A year?
Mr. BURNS. Yes, sir.
Mr. PECORA. Did you
give your assent as a director to the trans-
action ?
Mr. BURNS. Yes,
sir.
Mr. PECORA. What consideration was given to the value of the
assets which were sold for six hundred and ninety-odd thousand
dollars ?
Mr. BURNS. Just what do you mean by " consideration given to
the value"?
Mr. PECORA. HOW did you arrive—how did you, as one of the directors of the company in voting to accept the offer, arrive at the
conclusion that that offer was a fair and reasonable offer for the
company's assets? That is to say, for your company's assets, the
company of which you were the president.
Mr. BURNS. By a competent appraisal.
Mr. PECORA. DO you recall the name of the appraiser?
Mr. BURNS. NO, sir.
3370
STOCK EXCHANGE PRACTICES
Mr. PECORA. Was the appraiser one who had been connected with
the business of manufacturing and selling projectors in the movingpicture business?
Mr. BURNS. I think not.
Mr. PECORA. What kind of an appraiser was he?
Mr. BURNS. He was an engineer.
Senator COUZENS. What was his name ?
Mr. BURNS. I do not know his name.
Mr. PECORA. Who called him in to make the appraisal?
Mr. BURNS. Those who were interested in purchasing the company.
Mr. PECORA. Did you take the appraisal that was made by the
purchasers in determining what would be a fair selling price?
Mr. BURNS. NO.
Mr. PECORA. What?
Mr. BURNS. I did not
understand that other question.
(The reporter read the question referred to as above recorded.)
Mr. BURNS. NO.
Mr. PECORA. I asked
you what consideration was given in fixing
the selling price to the question of the value of the company's assets,
and you said an appraiser was employed.
Mr. BURNS. Yes; that is correct.
Mr. PECORA. NOW it turns out that the appraiser that was employed was an appraiser employed by the purchaser.
Mr. BURNS. NO, it was not. I did not understand your question.
Mr. PECORA. Then I did not understand your answer. What is
the fact?
Mr. BURNS. The company employed the appraiser.
Mr. PECORA. What company ?
Mr. BURNS. The Nicholas Power Co.
Mr. PECORA. What did you mean when you said before that the
appraiser was employed by the purchaser?
Mr. BURNS. I told you that I did not understand your question.
Mr. PECORA. What question did you think I asked you when you
made that answer?
Mr. BURNS. I did not understand your question.
Mr. PECORA. What question did you think I asked you when you
made that answer to it ?
Mr. BURNS. I do not know what question was asked.
Mr. PECORA. Why did you make an answer to a question that you
did not understand? You made a pretty definite answer, did you
not?
Mr. BURNS. Yes.
Mr. PECORA. Why was not the check that was given in payment
for those assets made out to the corporation, to the Nicholas Power
Co.?
Mr. BURNS. I could not tell you.
Mr. PECORA. Who handled the details of the sale in behalf of the
Nicholas Power Co.? Did you?
Mr. BURNS. NO.
Mr. PECORA. Who did?
Senator COUZENS. Was it Mr. Harley Clarke?
Mr. BURNS. Mr. Clarke was interested in it.
Mr. PECORA. Did he handle the details for the
Co.?
Nicholas Power
STOCK EXCHANGE PRACTICES
3371
Mr. BURNS. Some of them; yes.
Senator TOWNSEND. Was he a stockholder ?
Mr. BURNS. Not to my knowledge; no.
Mr. PECORA. What relationship did he bear to the Nicholas Power
Co. that caused you, as president of the company, to permit him to
handle the details of the closing for your company ?
Mr. BURNS. I believe he was acting for others who controlled or
who had the controlling stock interest.
Mr. PECORA. In the Nicholas Power Co. ?
Mr. BURNS. Acting for others who had the controlling interest.
Mr. PECORA. Who were those others ?
Mr. BURNS. I do not know who they were.
Mr. PECORA. Were they the persons whose names you have given
us already as stockholders?
Mr. BURNS. NO.
Mr. PECORA. There were others?
Mr. BURNS. There were others, successors to those.
Mr. PECORA, Oh, I see. Then at the time of this sale
these stock-
holders had passed out as stockholders ?
Mr. BURNS. Yes.
Mr. PECORA. Who were their successors ?
Mr. BURNS. I do not know.
Mr. PECORA. Were they persons whom Mr.
Harley Clarke event-
ually represented at the closing of the sale?
Mr. BURNS. Yes.
Mr. PECORA. DO you not know who they were ?
Mr. BURNS. NO, sir; I do not.
Mr. PECORA. HOW long before the sale was consummated
did the
stockholders, whose names you have given us, sell or part with their
stock holdings to the persons that Mr. Clarke represented ?
Mr. BURNS. I do not know exactly. I t was some time prior to
the
Mr. PECORA. Was it any appreciable length of time prior?
Mr. BURNS. Probably several months.
Mr. PECORA. Were those women whose names you have given us as
majority stockholders in the aggregate women who held that stock
for their own benefit and right and interest ?
Mr. BURNS. Yes.
Mr. PECORA. DO you know
how much they got for their stock when
they sold to those whom 'Mr. Clarke represented at the closing ?
Mr. BURNS. Will you ask that question again ?
Mr. PECORA. The reporter will read it.
(The question referred to was read by the reporter as above
recorded.)
Mr. BURNS. I do not know of my own knowledge, but I understood that they had received $150 a share for their stock.
Mr. PECORA. $150 a share; and the total number of shares outstanding was 3,200, did you say ?
Mr. BURNS. I think so; yes. I am pretty certain.
Mr. PECORA. And they owned a majority of it, did they?
Mr. BURNS. Yes,
Mr. PECORA. AS
sir.
president of the company did you not sign the
certificates that were issued to the new stockholders who bought
from these stockholders whose names you have given us?
3372
STOCK EXCHANGE PRACTICES
Mr. BURNS. I do not believe there were any certificates issued to
replace those. I do not recall any having been issued.
Mr. PECORA. HOW did you know that a sale of the stock had taken
place in behalf of these stockholders whose names you have given
us?
Mr. BURNS. Because I had been informed by Mrs. Eichardson to
that effect.
Mr. PECORA. Did she inform you simply as to her own stock holdings having been sold ?
Mr. BURNS. Yes.
Mr. PECORA. HOW
did you know that Mrs. Stuart's stock was
sold?
Mr. BURNS. Because I knew that sufficient stock had been sold to
give the purchasers a majority interest.
Mr. PECORA. By " the purchasers " you mean those represented by
Mr. Harley Clarke eventually, do you not?
Mr. BURNS. Yes.
Mr. PECORA. SO that
by the time this sale was effected there had
been a change in the identity of the stockholders of your company
of a character that made Mr. Harley Clarke the representative of the
majority stockholders at the time of the sale; is that right?
Mr. BURNS. I believe so.
Mr. PECORA. Was it Mr. Harley Clarke who gave you whatever
instructions you received that enabled you to disburse among the
stockholders this six hundred and ninety odd thousand dollars that
was paid for the assets of the Nicholas Power Co. ?
Mr. BURNS. I won't be certain of it, but it may have been.
Mr. PECORA. DO you recall in what proportions you distributed
any of that six hundred and ninety odd thousand dollars ?
Mr. BURNS. I have a recollection of having drawn one check for a
substantial portion of it to some bank. I think it was the National
City Bank.
Mr. PECORA. What was the amount of the check ?
Mr. BURNS. Three hundred and some odd thousand dollars.
Mr. PECORA. That is very nearly one half, if not more than one
half?
Mr. BURNS. Yes; pretty nearly a half.
Mr. PECORA. Don't you recall the stockholder to whom you made
that check payable ?
Mr. BURNS. NO. I say it was probably drawn to the National
City Bank, not to any stockholder. It may have been to take up a
loan. I really do not know.
Mr. PECORA. Who had the loan there ?
Mr. BURNS. I do not know. I do not know that there was a loan.
I am only assuming that there was.
Mr. PECORA. Who gave you the instructions that prompted you to
drawn a check for that large amount ?
Mr. BURNS. I don't recall who it was. It may have been Mr.
Clarke, as I said before.
Mr. PECORA. DO you recall that anyone other than Mr. Clarke
was in possession of sufficient facts to enable you to properly disburse the amount received in payment for the assets of your
company ?
Mr. BURNS. NO.
STOCK EXCHANGE PEACTICES
3373
Mr. PECORA. Have you any doubt that it was Mr. Clarke from
whom you received your instructions at that time?
Mr. BURNS. NO. NO ; I don't think so.
Mr. PECORA. YOU mean that you have no doubt that it was Mr.
Clarke?
Mr. BURNS. I am inclined to think that it was he. I am not
certain.
Mr. PECORA. In view of the change that had been made in the
stockholders, the majority stockholders of your company, had there
been a corresponding change made in the board of directors of the
company?
Mr. BURNS. Yes, sir.
Mr. PECORA. Who were
the directors that represented the interests
that purchased that stock and who in the transaction were represented by Harley Clarke ?
Mr. BURNS. YOU are speaking now of the Nicholas Power Co.?
Mr. PECORA. Yes,
sir.
Mr. BURNS. I cannot recall a single name of an individual who
succeeded any of those—as a matter of fact, we had only five
directors, as I recall it.
Mr. PECORA. Who were they?
Mr. BURNS. I don't know.
(At this point Mr. Harley Clarke started to take a seat next to
Mr. Burns.)
Mr. PECORA. Mr. Clarke, would you kindly sit away from the
witness, please?
(The request was complied with.)
Mr. PECORA. GO ahead. Tell us.
Mr. BURNS. I don't recall who the new directors were, and I am
not certain that new ones were elected, but I think that they were.
Mr. PECORA. YOU say you are now the president of the International Projector Corporation?
Mr. BURNS. Yes.
Mr. PECORA. What
salary do you receive?
(The witness calculated on a pad.)
Mr. PECORA. DO you have to stop and figure that out?
Mr. BURNS. Yes, sir. [After a pause.] $11,250.
Mr. PECORA. What is that?
Mr. BURNS. $11,250.
Mr. PECORA. DO you receive any other form of compensation than
salary?
Mr. BURNS. NO, sir.
Mr. PECORA. DO you
know who the board of directors are of your
International Projector Corporation today?
Mr.
BURNS. Yes,
sir.
Mr. PECORA. Could you name all of them if I asked you to?
Mr. BURNS. I think so. Let's see [writing on pad] : Mr. Harley L.
Clarke, and Daniel O. Hastings, P. J. Haller, and S. E. Burns, and
there is one other that I am in doubt about.
Senator COUZENS. When did they meet last?
Mr. BURNS. More than 6 months ago.
Senator COUZENS. More than 6 months ago?
Mr. BURNS. I think so.
175541—34—PT 7
11
3374
STOCK EXCHANGE PRACTICES
Mr. PECORA. It took you about 2 minutes to think of 4 of the 5
names of the present board?
Mr. BURNS. Yes,
sir.
Mr. PECORA. I S your memory usually that slow?
Mr. BURNS. NO ; no, sir.
Mr. PECORA. Can't you think of the fifth director's name?
Mr. BURNS. Not at the moment; no.
The CHAIRMAN. YOU are not a director?
Mr. BURNS. Yes, sir; I am a director; I mentioned my name.
Mr. PECORA. When the assets of the Nicholas Power Co. were pur-
chased by the corporation of which you are now the president didn't
that corporation take over the books of account and other records of
the Nicholas Power Co., including its stock book?
Mr. BURNS. NO, sir. I t purchased only the physical assets of the
company.
Senator TOWNSEND. Did you value the goodwill?
Mr. BURNS. Approximately; yes.
Senator TOWNSEND. What did they appraise the goodwill at?
Mr. BURNS. I don't recall that.
Mr. PECORA. There was some arrangement made for the valuation
of the goodwill, was there not?
Mr. BURNS. There probably was.
Mr. PECORA. YOU don't recall what it was?
Mr. BURNS. NO, sir.
Mr. PECORA. Weren't
you, as president of the company at that
time, interested in seeing that your stockholders got a fair and
reasonable purchase price for the assets of the company?
Mr. BURNS. I believe they did.
Mr. PECORA. Well, so far as you had anything to do with the
negotiations that led to their getting what you now believe was a
fair and reasonable price, you had nothing to do with those negotiations, did you ?
Mr. BURNS. Very little.
Senator COUZENS. When were those directors elected whose names
you have just called off?
Mr. BURNS. Within the past year.
Senator COUZENS. Within the past year?
Mr. BURNS. Yes.
Mr. PECORA. DO you
know whether $150 a share was paid, actually
paid, to these women who were the majority stockholders before the
sale, some time before the sale of the Nicholas Power Co.'s assets?
Mr. BURNS. NO, sir.
Mr. PECORA. HOW do
you know that $150 a share was paid to any
of them?
Mr. BURNS. I don't know it.
Mr. PECORA. Why did you tell us that that was the price?
Mr. BURNS. I say I understood that that was the price. I believe
that that was the price that had been paid for it.
Mr. PECORA. From what sources did you derive that understanding
or information?
Mr. BURNS. From my contact with some of these stockholders.
Mr. PECORA. Several months after these stockholders parted with
their holdings for the price of what you think was $150 a share the
corporation's entire assets represented by 3,200 shares of stock were
STOCK EXCHANGE PRACTICES
3375
purchased by the International Projector for six hundred ninety
thousand and odd dollars?
Mr. BURNS. Yes, sir.
Mr. PECORA. Which is
considerably more than $150 per share; is
that right?
Mr. BURNS. Yes, sir.
Mr. PECORA. And that
price of considerably more than $150 a
share, then, went to the persons who were the stockholders of the
Nicholas Power Company at the time of the sale?
Mr. BURNS. Yes, sir.
Mr. PECORA. YOU believe
that those were persons represented by
Mr. Harley Clarke?
Mr. BURNS. Yes, sir.
Mr. PECORA. YOU don't know who those persons are?
Mr. BURNS. NO, sir.
Mr. PECORA. Did the Nicholas Power Co. have regular
meetings of
its stockholders when you were its president?
Mr. BURNS. Yes, sir.
Mr. PECORA. DO you know what became of the minute books?
Mr. BURNS. NO, sir.
Mr. PECORA. Were they taken over by the International ?
Mr. BURNS. NO, sir.
Mr. PECORA. HOW long have you been president of the Inter-
national ?
Mr. BURNS. Year and a half.
Mr. PECORA. Before that had you had any other connection with
the International Projector Corporation?
Mr. BURNS. Yes, sir.
Mr. PECORA. Vice president?
Mr. BURNS. Yes, sir.
Mr. PECORA. Isn't it a fact, Mr.
Burns, that you originally became
connected with the Nicholas Power Co. through the good offices of
Mr. Clarke?
Mr. BURNS. NO, sir.
Mr. PECORA. Well, through his influence or intervention or suggestion did you go into the Nicholas Power Co. originally?
Mr. BURNS. Through Edward Earl, who was the former president
of the Nicholas Power Co.
Mr. PECORA. Were you at one time in the jewelry business ?
Mr. BURNS. Yes, sir.
Mr. PECORA. Were you
in the jewelry business just prior to the
time that you transferred your business to the moving-picture
industry?
Mr. BURNS. NO, sir.
Mr. PECORA. Well, did you go into some other business in between?
Mr. BURNS. I have been in this business since 1914 or 1915.
Mr. PECORA. In which business?
Mr. BURNS. The moving-picture projector business.
Mr. PECORA. And prior to your becoming connected with the Nich-
olas Power Co. were you affiliated with Mr. Clarke in any respect
whatever?
Mr. BURNS. NO, sir; never knew him. I didn't kno*w him then.
I didn't know him before my connection with the projector company.
Senator COUZENS. What business were you in just prior to going
into the projector business?
3376
STOCK EXCHANGE PRACTICES
Mr. BURNS. Brick business.
Senator COUZENS. Manufacturing?
Mr. BURNS. Brick; yes.
Mr. PECORA. Are the minute books of the Nicholas Power Co. in
existence at this time, to your knowledge?1
Mr. BURNS. I haven't the slightest idea. I don't know where they
are.
Mr. PECORA. When did you last see them?
Mr. BURNS. Probably 8 years ago.
Mr. PECORA. Prior to this sale to the International ?
Mr. BURNS. Oh, no. Since the International. Since the formation
of the International.
Mr. PECORA. But I mean did you last see those minute books prior
to the sale to the International of the assets of the Nicholas Power
Co.?
Mr. BURNS. Yes, sir; just prior to the sale of the assets to the
International.
Mr. PECORA. Have you got here the minute books of the International Projector Corporation?
Mr. BURNS. Yes, sir.
Mr. PECORA. Here in Washington?
Mr. BURNS. Yes, sir.
Mr. PECORA. Are they in the room now ?
Mr. BURNS. Yes, sir.
Mr. PECORA. Won't you consult them and
see if you can tell us the
names of all the members of the board of directors?
Mr. BURNS. Yes,
sir.
(Thereupon Mr. Burns went to another part of the room and then
returned to the witness chair with two minute books.)
Mr. BURNS. NOW, what is the question?
Mr. PECORA. The names of all the members of the board of directors at the present time of the International Projector Corporation.
Mr. BURNS. D. O. Hastings, S. K. Burns, P . J. Haller, A. E.
ICoegel, and H. L. Clarke.
Mr. PECORA. NOW did you know of a corporation called the Precision Machine Co., Incorporated?
Mr. BURNS. Yes, sir.
Mr. PECORA. Were you connected
Mr. BURNS. Yes, sir.
Mr. PECORA. At the time of the
with that corporation?
acquisition of the assets of the
Nicholas Power Co. by the International do you know that the
International Co. also acquired the assets of the Precision Machine
Co.?
Mr. BURNS. Yes, sir.
Mr. PECORA. Hadn't you
ever heard of that Precision Machine Co.
prior to that time ?
Mr. BURNS. Certainly.
Mr. PECORA. Were they a competitor of the Nicholas Power Co. ?
Mr. BURNS. Yes,
The CHAIRMAN.
sir.
The committee will take a recess until 10 o'clock
tomorrow morning.
Mr. PECORA. YOU will be back, Mr. Burns, at that time.
(Whereupon, at 4:27 o'clock p.m., the subcommittee took a recess
until 10 o'clock a.m. of the following day.)
STOCK EXCHANGE PEACTICES
THURSDAY, NOVEMBER 16, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CTJRRENCY,
Washington, D.C.
The subcommittee met at 10 a.m. pursuant to adjournment on
yesterday, in the caucus room of the Senate Office Building, Senator
Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Gore (substitute for
Barkley), Couzens, Townsend, and Goldsborough (substitute for
Norbeck).
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver, David Saperstein, and David Schenker, associate counsel
to the committee; and Frank J. Meehan, statistician to the committee; Alfred E. Mudge, Joseph B. Lynch, Julian L. Hagen, and
C. Horace Tuttle of Eushmore, Bisbee & Stern; also William Dean
Embree and A. Donald MacKinnon, of Milbank, Tweed, Hope &
Webb, counsel representing The Chase National Bank and the Chase
Corporation; and Martin Conboy, counsel for Albert H. Wiggin.
The CHAIRMAN. The subcommittee will come to order. Whom will
you have first this morning, Mr. Pecora?
Mr. PECORA. I S Mr. Harley Clarke here?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Please come
around to the committee table.
TESTIMONY OP HARLEY L. CLARKE, 327 SOUTH LA SALLE STREET,
CHICAGO, ILL.—-Resumed
Mr. PECORA. Mr. Clarke, did you hear the testimony yesterday that
was given by Mr. S. R. Burns ?
Mr. CLARKE. Yes,
Mr. PECORA. YOU
sir.
heard him testify, then, didn't you, that in connection with the transaction whereby the International Projector
Corporation acquired the assets of the Nicholas Power Co. in 1925
for a total consideration of six hundred and ninety and odd thousand
dollars, you represented certain majority stockholders of the
Nicholas Power Co. in the closing of that transaction?
Mr. CLARKE. I recall the entire transaction, Mr. Pecora, and would
be very glad to state it to you. The stock of the Nicholas Power Co.
was acquired over a long period of time, and by " long " I mean
several months, and
Mr. PECORA (interposing). By whom?
Mr. CLARKE. By myself and representatives. All the stock having
been acquired at various times, it was paid for and put in the name
8877
3378
STOCK EXCHANGE PRACTICES
of my nominees. A meeting was then held and the assets of the
corporation were sold to the International Projector Corporation at,
as far as I know, the same figure that was paid for the stock, and
Mr. PECORA (interposing). Now, will you tell me why
Mr. CIARKE (continuing). The six hundred and ninety and odd
thousand dollars, however representing the additional value or the
amount that was paid for the equity of the building at nos. 90 and
92 Gold Street. In my testimony of last week I allocated that
expenditure to-——
Mr. PECORA (interposing). To the Cinema Co., didn't you?
Mr. CLARKE. I allocated that expenditure to the Precision financing, which I believe is an error. I am getting the exact figures
for you from New York.
Mr. PECORA. NOW, Mr. Clarke, when you testified last week with
regard to that transaction, do you recall my having asked you
specifically whether you had any interest in the stock of the Nicholas
Power Co.
Mr. CLARKE (interposing). I do, and
Mr. PECORA (continuing). At the time of the transaction with
the International Projector Corporation?
Mr. CLARKE. NO. I recall that you asked me if I had any prior
interest in the Nicholas Power Co. stock, and I said no. And I
did not, but I acquired the stock at that time. I had never been
a stockholder before.
Senator COUZENS. When you closed up the deal with the Nicholas
Power Co. how many minority stockholders were there outside of
what stock you had?
Mr. CLARKE. There were none.
Senator COUZENS. YOU had acquired it all?
Mr. CLARKE. Yes, sir; it had all been acquired individually.
Senator COUZENS. SO the names that Mr. Burns gave us yesterday
really meant nothing, because the stock had already been purchased
by you and your nominees.
Mr. CLARKE. Yes, sir. Mr. Burns stated, I believe, that there
were two sets of stockholders. There really were, but for the time
being only in order to sell the assets of the company.
Mr. PECORA. Had you or your nominees purchased any of the
stock of the Nicholas Power Co. at any time prior to the transfer of
its assets to the International Projector Corporation?
Mr. CLARKE. Oh, yes. The stock had been acquired over a period
of months.
Mr. PECORA. Over a period of months prior to the sale?
Mr. CLARKE. That is right.
Mr. PECORA. Let me remind you of the testimony which you gave
on that subject last week. I am reading from pages 2042 and 2043
of the stenographic transcript. No, I will start at page 2041, and I
will read it in question-and-answer form, although the questions
were propounded by me and the answers made by you:
Q. Was any sum of money paid by the International Projector Corporation
to the Nicholas Power Co., Inc.?—A. Yes, sir.
Q. How much and for what?—A. $690,777.78.
Q. What was that paid for?—A. It was paid to Mr. S.sR. Burns, who acted
as agent for certain of the stockholders controlling the company for the assets
of it, the Nicholas Power Co.
STOCK EXCHANGE PEACTICES
3379
I am not reading all of the testimony, but just those portions that
I want to recall to your mind now:
Q. What was the business of the Nicholas Power Co., Inc.?—A. Manufacturer of motion-picture machines.
And then further on down on page 2042:
Q. Now, the six hundred ninety thousand and odd dollars that were paid for
the assets of the Nicholas Power Co., (Inc.), you said were paid to a man
named S. R. Burns.—A. That is correct.
Q. Who represented the stockholders of the Nicholas Power Co.?
A. Yes, sir.
Q. Was there a large number of such stockholders?
A. I don't recall. A small number, 12 or 15.
Q. Were you the principal stockholder?
A. I was not.
Q. Were you one of them?
A. No; I was not.
Q. Did you have any interest whatever in the Nicholas Power Co. at the
time its assets were purchased for the International for 690,000-odd dollars?
And your answer to that question propounded by me, was:
No stock interest. I had made the company a small loan at one time.
don't recall whether it had been paid at that time or not.
I
Now, Mr. Clarke, was that testimony so given by you correct?
Mr. CLARKE. Why, yes, indeed; to my way of thinking it is absolutely correct.
Mr. PECORA. Don't you see
Mr. CLARKE (continuing). I understood you, Mr. Pecora, to
mean—and I have already told you that the assets had been acquired
through Mr. Burns, that he was the agent acting in the matter. I
understood you quite distinctly to mean had I an interest in this
stock, had I owned any of this stock before, was I a stockholder of
the Nicholas Power Co. I was, of course, when the thing was
acquired.
Mr. PECORA. Well, Mr. Clarke, I quite specifically asked you this
question, as shown on page 2043 of the stenographic transcript:
Did you have any interest whatever in the Nicholas Power Co. at the time
its assets were purchased by the International for 690,000-odd dollars.
Mr. CLARKE. Yes; I had all the stock, and
Mr. PECORA (interposing). You had what?
Mr. CLARKE. We had all of the stock.
Mr. PECORA. And then did you make this answer to that question,
as then propounded by me :
No stock interest. I had made the company a small loan at one time.
don't recall whether it had been paid at that time or not.
I
And then Senator Couzens asked you this question:
Not being a stockholder, why would you make them a loan?
And your answer was:
Because they needed the money and I was anxious to accommodate them,
because they were anxious to sell and it took a long time to get the corporation
in shape so they could sell.
Mr. CLARKE. That is right.
Mr. PECORA. SO you left, very definitely, the impression that you
were not a stockholder, and that you had no interest in the Nicholas
3380
STOCK EXCHANGE PEACTICES
Power Co. at the time when those assets were purchased by the
International Projector Corporation, did you not?
Mr. CLARKE. Well, I am sorry if I left any impression that
should not have been left. But I distinctly understood from your
line of questioning: Did I have a prior interest? That is what I
thought was the intent of your questions.
Mr. PECORA. HOW in the world could you have derived such an
understanding of my question when I specifically asked you if
you had any interest whatever at the time when tnose assets were
acquired for six hundred ninety thousand and odd dollars?
Mr. CLARKE. Well, you understand it now, don't you ?
Mr. PECORA. I have understood it all along, Mr. Clarke, but apparently you did not, or you did not want us to understand the facts.
Mr. CLARKE. Well, I was very glad to have you understand them.
Mr. PECORA. Why did you make that answer, then?
Mr. CLARKE. I am telling you now.
Mr. PECORA. I still fail to see the reason, when my question was
very simple in its terms, and very specifically asked as to the time
of the sale to the International Projector Corporation.
Mr. CLARKE. Well, I had not been a stockholder of the Nicholas
Power Co. up to the time when I began to acquire its stock for the
purchaser.
Mr. PECORA. HOW long did it take you to acquire the stock prior
to the sale of the Nicholas Power Co.'s assets to the International
Projector Corporation?
Mr. CLARKE. Well, the negotiations had been going on for a couple
of years, but as to actually getting any stock, from the time the first
stock was purchased to the end was over a period of a few months,
and I don't know exactly how many.
Mr. PECORA. All right. How much did you pay for that stock
that you so acquired?
Mr. CLARKE. I think the average price was a little over $150 a
share.
Mr. PECORA. For how many shares?
Mr. CLARKE. But I shall get the exact amount for you.
Mr. PECORA. HOW many shares did you buy ?
Mr. CLARKE. Three thousand two hundred shares.
Mr. PECORA. Then you bought the entire outstanding stock, did
you?
Mr. CLARKE. That is right.
Mr. PECORA. HOW long before the sale of the assets of the Nicholas
Power Co. to the International Projector Corporation did you complete those purchases of all the outstanding stock?
Mr. CLARKE. Well, it was a comparatively short time. A few
weeks I think elapsed.
Mr. PECORA. And when that sale was effected for six hundred and
ninety thousand and odd dollars, what price per share did that represent for all the capital stock of the Nicholas Power Co. ?
Mr. CLARKE. Well, say, $690,000 would represent—and as I told
you, I was in error in saying that that was in the Precision deal, in
the acquisition of the Cinema stock. I t was in this deal.
Mr. PECORA. Just please answer my question, will you?
Mr. CLARKE. I am answering it, am I not?
STOCK EXCHANGE PBACTICES
338i
Senator COTTZENS.- N O ; you are not answering it. All you would
have to do would be to divide 3,200 shares into six hundred and
ninety thousand and odd dollars.
Mr. CLARKE. I t paid for something else, too. I t paid for the
equity in the building.
Mr. PECORA. What building?
Mr. CLARKE. NOS. 90 and 92 Gold Street.
Mr. PECORA. When was that purchase effected?
Mr. CLARKE. Well, it was not completed even at that time. The
money was simply put up, and it took some time to complete it.
Mr. PECORA. Vyhy should the cost of the acquisition of the Gold
Street property in New York have been included in the check that
was drawn for six hundred and ninety thousand and odd dollars
which represented the purchase price of the assets of the Nicholas
Power Co. ?
Mr. CLARKE. I don't know, but
Mr. PECORA (interposing). Well, if you don't know, who in the
world does know why it was done in that way?
Mr. CLARKE. Well, I assume I could find out why it was done
that way. But I do not know at the moment why it was done
that way.
Mr. PECORA. YOU have testified very clearly and explicitly heretofore, and your testimony has been checked up, to the effect that the
price paid by the International Projector Corporation for the assets
of the Nicholas Power Co. was $690,777.78. You are now telling
us
Mr. CLARKE (interposing). That is correct. And I have corrected my testimony to say that I was in error, that the price for
the equity of that building wasn't included in the Precision deal
but rather in the Nicholas Power Co. deal. And I got that information last night.
Mr. PECORA. Did the Nicholas Power Co. have any interest in
that Gold Street property?
Mr. CLARKE. Well, they had had a lease on the property for
many many years, so it was rather natural to include it along
with their deal, I suppose.
Mr. PECORA. Where was the office or place of business of the
Nicholas Power Co. at the time ?
Mr. CLARKE. At 90 and 92 Gold Street.
Mr. PECORA. I S that the property you have referred to as having
been purchased?
Mr. CLARKE. Yes, sir.
Mr. PECORA. What interest
did it have in the property? Was it a
leasehold interest?
Mr. CLARKE. Not a leasehold interest, but just a lease on the property.
Mr. PECORA. A lease of the entire property?
Mr. CLARKE. NO ; it did not occupy all of the floors.
Mr. PECORA. What interest did it have in that property?
Mr. CLARKE. I t leased it.
Mr. PECORA. Leased all or what portion of it?
Mr. CLARKE. They simply had five floors.
3382
STOCK EXCHANGE PRACTICES
Mr. PECORA. What was the annual rental mentioned in that lease?
Mr. CLARKE. I wouldn't know without looking it up.
Mr. PECORA. What was the unexpired term of the lease at the
time you bought the assets of the Nicholas Power Co. ?
Mr. CLARKE. I couldn't tell you that without looking it up.
Mr. PECORA. Has that lease since expired?
Mr. CLARKE. Well, obviously, when the company bought the properties they were a part of the company and they did not need a lease.
The lease, of course, then expired.
Mr. PECORA. Who owned the property at that time on which the
Nicholas Power Co. had this lease ?
Mr. CLARKE. Well, I think, as I testified before, that it was owned
by the Healy estate. That is, the fee was; but I don't know the
details of that. It is easy to get them.
Mr. PECORA. Well, now
The CHAIRMAN (interposing). What was the amount of the loan
to the Nicholas Power Co. made by you, do you remember?
Mr. CLARKE. Well, it was less than $50,000. I t was $50,000 or
less, and I don't recall. I t was paid back.
The CHAIRMAN. It was paid back immediately before you acquired
their property ?
Mr. CLARKE. I t had been paid back before I acquired it.
The CHAIRMAN. YOU bought Burns' stock, did you?
Mr. CLARKE. Yes, sir.
The CHAIRMAN. HOW
long before the transaction you have referred to had Burns sold out his stock, do you remember?
Mr. CLARKE. I really don't recall, Senator. I think he had 50
shares of stock.
Senator TOWNSEND. Burns was acting as your agent, wasn't he?
Mr. CLARKE. That is right.
The CHAIRMAN. YOU paid him $150 a share?
Mr. CLARKE. Yes, sir.
The CHAIRMAN. AH right.
Mr. CLARKE. Mr. Pecora, I
have just had handed to me a photostatic copy of what I am told you have, which distinctly brings out
how this transaction was handled and that the $690,777.78 was
Mr. PECORA (interposing). What does it bring out ?
Mr. CLARKE. It brings out that this included the purchase of the
equity of the building.
Mr. PECORA. Where do you see that?
Mr. CLARKE. I will read it to you if you want me to.
Mr. PECORA. Let me show you what purports to be a photostatic
reproduction of a certain tabulation of figures and a statement of
transactions that those figures relate to. Will you look at it and
tell me if that was prepared by you?
Mr. CLARKE. Yes; that was prepared by us.
Mr. PECORA. That was prepared by you?
Mr. CLARKE. But we do not have those records.
Mr. PECORA. Who prepared that?
Mr. CLARKE. Mr. Keller, the auditor who sat here with me the
other day, and myself.
Mr. PECORA. Well, now, this was prepared for the purpose of
informing us of certain business transactions which the International
STOCK EXCHANGE PRACTICES
3383
Projector Corporation had, among other things, with the Nicholas
Power Co., Acme Motion Picture Projector Co., and the Precision
Machine Co., Inc., was it not?
Mr. CLARKE. Yes, sir.
Mr. PECORA. And you
y°
u?
gave it to us as a correct statement, didn't
Mr. CLARKE. Certainly. I was trying to give you correct information as to all these transactions.
Mr. PECORA. NOW, let me read to you from this statement that you
gave us as correct information, and referring to what disposition
was made of the proceeds amounting to $2,250,000, which the International Projector Corporation realized from the sale of its securities
at the time of its creation. The statement says:
Proceeds $2,250,000 used as follows:
Acme Motion Picture Projector Co.: Purchase of Acme Motion Picture Projector Co. bonds, $171,831.67. Payment of liabilities of Acme Motion Picture
Projector Co., $197,000. Nicholas Power Co., Inc.: Paid to S. It. Burns, acting
as agent, for assets of Nicholas Power Co., $690,777.78. Precision Machine Co.,
Inc.: Purchase of assets from stockholders, of Precision Machine Co., James A.
Stillman, $200,000, Adrian H. Larkin, $200,000. H. L. Clarke for Precision stock
acquired by him, $200,000. Paid to H. L. Clarke expended by him for property
of Cinema Building Corporation, $225,700.65.
Now, to what did this item of $225,700.65 relate?
Mr. CLARKE. It should have been included in the six ninety—not
in a duplicate item.
Mr. PECORA. HOW can you say it is a duplicate item when the total
of all those items, which specifically includes six hundred and ninety
thousand and odd dollars and the two hundred and twenty-five
thousand and odd dollars, exactly makes $2,250,000?
Mr. CLARKE. Mr. Pecora, this is not an audited statement and was
got up at the request of your own people to help you out in this investigation, and I did the best I could with the information
available. I am now going to the records to get the exact information, and you shall have it.
Mr. PECORA. If this $225,700.65, which is separately itemized here
as an item of disbursement of that two and a quarter million
dollars
Mr. CLARKE (interposing). Well, it was a part of
Mr. PECORA. Wait a minute—is included in $690,000, then that
total of $2,250,000 is shy $225,700, is it not?
Mr. CLARKE. That is correct. If the company had three hundred
and some thousand dollars' worth of cash when it started business,
T have no doubt that it would tally out exactly, because the auditors
checked it up at the time.
Mr. PECORA. I would like to find out when the exact tally is going
to be made and given to us. I thought it was going to be given to
us when you furnished us with this statement.
Mr. CLARKE. I thought this was correct, too. From my information it worked out about the figure. As as matter of fact, two million
two hundred and fifty is not the correct figure. Two million two
hundred and eighty-two is the correct figure, because the interest was
added in.
Mr. PECORA. Who prepared this statement that you gave us ?
3384
STOCK EXCHANGE PRACTICES
Mr. CLARKE. This statement was prepared by Mr. Keller and myself from the books of the Webster Securities Corporation that
owned the stock of the General Theatres, and our entries are not
in detail, because they naturally would not be. We are not keeping
the books of the company, and we did not go to the books of the
company to try to find out anything.
Mr. RECORA. I hope you did not prepare this very voluminous
detailed statement from memory.
Mr. CLARKE. Oh, we did not. I told you we prepared it from the
books of the Webster Securities Corporation.
Mr. PECORA. Were not those books correctly posted ?
Mr. CLARKE. Yes. This amount is correct that you have given
here for the Cinema Building stock. I t is correct. I t is put in the
wrong place, that is all.
Mr. JPECORA. Then it should not have been put here at all if it is
included in the item of $690,000?
Mr. CLARKE. N O ; the six hundred and ninety should have been
detailed with that out.
Mr. PECORA. Then where do you get the balance to make up the
two and a quarter million dollars total?
Mr. CLARKE. At the moment I cannot tell you, but I say I am
going to give it to you.
Mr. PECORA. When ?
Mr. CLARKE. AS soon as I can get it.
Mr. PECORA. What do you think that means?
Mr. CLARKE. I think within a day or so. It was too late to get
anyone on the phone last night, but I did this morning.
Mr. PECORA. NOW, Mr. Clarke, I want you to tell me something
more about this lease to which a value of $225,000 was ascribed.
Tell me all you know about it.
Mr. CLARKE. Are you referring to what was paid for the equity
of the property?
Mr. PECORA. I am referring to this item of $225,700.65 which you
now say was included in the total of $690,770 that was paid by the
International for the acquisition of all of the assets of the Nicholas
Power Co. Tell me all you recall about that lease.
Mr. CLARKE. Well, I told you I don't know what the rent amounted
to that was paid by the Nicholas Power Co. This was not a lease.
This was the acquisition
Mr. PECORA (interposing). Haven't you been calling it a lease all
along right up to the last few moments ?
Mr. CLARKE. NO ; I don't think so.
Mr. PECORA. HOW did you refer to it before?
Mr. CLARKE. I referred to it as an equity in the property.
Mr. PECORA. Didn't you refer to it as a lease ?
Mr. CLARKE. Why, yes. You spoke about the Nicholas Power
Co., the people that occupied this property at 90 and 92 Gold
Street—I informed you that they did occupy it a while, occupied it
for many years, that I thought they occupied about five floors.
Mr. PECORA. Under a lease?
Mr. CLARKE. Under a lease.
Mr. PECORA. Was this item of $225,700 paid for the Nicholas
Power Co.'s equity or rights under that lease ?
STOCK EXCHANGE PRACTICES
3385
Mr. CLARKE. NO ; it had nothing to do with their lease whatever.
I t was for the property—the property. They were in this property
as a tenant. Nothing to do with it.
Mr. PECORA. The only rights they had in the property were the
rights given to it by the lease ?
Mr. CLARKE. Yes; they leased the property; they rented it.
Mr. PECORA. What did this $225,700 represent then?
Mr. CLARKE. I t represented the amount paid for the equity in the
property at 90 and 92 Gold Street.
Mr. PECORA. What did that equity consist of?
Mr. CLARKE. Well, it was the ownership of the building, the
ground and the building.
Mr. PECORA. Did the Nicholas Power Co. own the building?
Mr. CLARKE. NO, sir; they leased four or five floors. Possibly it
was six.
Mr. PECORA. I asked you what that equity of the Nicholas Power
Co. in that property consisted of and you said the ownership of the
building, the ground. Is that correct?
Mr. CLARKE. I don't so recall any answer, Mr. Pecora.
Senator COUZENS. I understood the witness to say that that was
for the equity paid to the Healy estate, but I now fail to understand
why it was included in this sum of $690,000 to the Nicholas Power
Co. I wish Mr. Clarke would explain that.
Mr. CLARKE. Senator, Mr. Pecora has asked me to explain it. I t
could be set out as a separate item just as well as not, because it was
separate.
Senator COUZENS. Why was it paid to the Nicholas Power Co. ?
Mr. CLARKE. It was not. I t was paid to Mr. Burns.
Mr. PECORA. That is the first time you have said that, isn't it?
Senator COUZENS. Yes.
Mr. CLARKE. NO ; I have told you the whole $690,000 was paid to
Mr. Burns and Mr. Burns disbursed it.
Mr. PECORA. Did Mr. Burns own the Nicholas Power Co. ?
Mr. CLARKE. NO.
Mr. PECORA. Who
owned the Nicholas Power Co. at the time of
the sale of its assets?
Senator COUZENS. Mr. Clarke has testified that he did.
Mr. PECORA. I S that right?
Mr. CLARKE. That is correct.
Mr. PECORA. YOU owned it?
Mr. CLARKE. Yes.
Mr. PECORA. Why was it paid to Mr. Burns then?
Mr. CLARKE. Because we had to have a disbursing agent and somebody to take charge of selling the assets of the company to the International.
Mr. PECORA. Who were the stockholders at that time, your nominees?
Mr. CLARKE. That is right.
Mr. PECORA. Who were they?
Mr. CLARKE. Well, Mr. Burns was a nominee, Mr. Squire was a
nominee, and Mr. W, E. Green was a nominee, and some people in
the office. It was purely the mechanical means of the sale of the
assets of the property.
3386
STOCK EXCHANGE PEACTICES
Mr. PECORA. Did you say "purely the mechanical means"?
Mr. CLARKE. That is right.
Senator COTJZENS. I am afraid it was not very pure.
Mr. CLARKE. Well, we did not think we paid too much for the
property at the time, Senator, and we turned it over at the same
price we acquired it.
Senator COTJZENS. I am still unable to understand why you should
pay through Mr. Burns the equity the Healy estate had in the Gold
Street property, and you have not explained that to us.
Mr. CLARKE. My only explanation for it at the moment is that
that was the building occupied by this company that was bought,
namely, the Nicholas Power Co. They had been there for years,
and we decided that we would use that factory building to manufacture the Precision machine. The Precision Machine Co. was
located on Thirty-fourth Street. So it was a natural thing to do to
allocate that in the cost of the acquisition of the Nicholas Power Co.,
although it had absolutely nothing to do with the stockholders.
Senator COTJZENS. I am still too dumb to understand.
Mr. CLARKE. Well, there was a certain amount paid to the stockholders, Senator, for the stock.
Mr. PECORA. I don't think I am too dumb to understand it, but I
am too dumb to understand why this witness is testifying the way
he is about this and why he testified last week in the way he did
about it.
Senator COUZENS. I assume that the witness understands that he
is under oath and if he swears to a falsehood he can be charged with
contempt.
Mr. PECORA. With perjury.
Senator COTJZENS. That would be in contempt of the Senate,
though.
Mr. CLARKE. Well, Senator, I assume that it is permissible to
make an error, is it not ? I corrected it as soon as I found out.
Mr. PECORA. I t is not permissible to make errors; but when errors
are honestly made, of course it is permissible to correct them.
Mr. CLARKE. Yes, sir. That was honestly made.
Mr. PECORA. But I don't know how you could have made any error
when I asked you last week specifically if you had any stock interest
in the Nicholas Power Co. at the time it sold its assets to the International and you said, " None whatever, no stock interest"; that the
only interest you had was that you at one time had made the Nicholas
Power Co. a small loan, which you were not sure had been paid at
the time of this sale. Now that was the definite answer you made
to the very specific question that was designed to ascertain from
you what stock interest, if any, you had in the Nicholas Power Co.
at the time of its sale to the International.
Now, I still do not understand why you then did not inform the
committee that you practically were the sole stockholder of the
Nicholas Power Co. at that very time.
Mr. CLARKE. Mr. Pecora, wasn't one of my answers last week to
this effect, that I was not a stockholder of the Nicholas Power Co.
prior to my acquisition of the stock and the sale of its assets?
Mr. PECORA. HOW in the world could you have been a stockholder
prior to the acquisition of stock?
STOCK EXCHANGE PBAOTICES
3387
Mr. CLARKE. I could have been one of the stockholders.
Mr. PECORA. I did not ask you anything about that.
Mr. CLARKE. But I was not.
Mr. PECORA. I asked you if you had
Mr. CLARKE. That is right.
Mr. PECORA. In the Nicholas Power
any stock interest whatsoever.
Co. at the specific time that it
sold its assets to the International, and you said, " No stock interest.
I had made the company a small loan at one time, and I don't recall
whether it had been paid at that time or not."
And furthermore, Mr. Clarke, you said immediately prior to that
question and answer—you gave this testimony—I asked you, "Were
you the principal stockholder ? " And your answer was, " I was not."
Then I asked you, "Were you one of them? " And your answer
was, " No; I was not."
Mr. CLARKE. Well, you see, Mr. Pecora, I may be in error. I
understood the intent of your question was " Were you a stockholder
fo the Nicholas Power Co., and acquiring most of the stock from the
stockholders? " That was what I thought was the intent of the
question, so that I said to you that I was not a stockholder, meaning
that I had not been a stockholder of the Nicholas Power Co. prior
to the time of trying to acquire the assets.
Senator COUZENS. I do not think we need to spend any more time
on that, Mr. Pecora. We understand it.
Mr. PECORA. NOW, you as the sole stockholder, through your nominees of the Nicholas Power Co. at the time it sold its assets to the
International, must have received all of this purchase price of six
hundred and ninety thousand and odd dollars; is that correct?
Mr. CLARKE. Through my nominees?
Mr. PECORA. Yes.
Mr. CLARKE. That is correct.
Mr. PECORA. I t ultimately went to you, every penny of it, didn't it ?
Mr. CLARKE. NO ; every penny of it didn't go to me.
Mr. PECORA. HOW much of it went to anybody else?
Mr. CLARKE. I t went to pay for this stock which had been acquired
in various ways, on loans, and loans had been made against the
stock by the owners of it prior to that time.
Mr. PECORA. Had you paid for the stock before you received the
purchase price from the International?
Mr. CLARKE. NO.
Mr. PECORA. What
did you do—tie the stock up before the Inter-
national paid for it ?
Mr. CLARKE. W l l
Mr. PECORA. HOW did you acquire it?
Mr. CLARKE. I t was not all done in the
same way, you see. I t was
acquired from these individual stockholders.
Mr. PECORA. It was acquired from individual stockholders by you
through agents or nominees of yours?
Mr. CLARKE. That is correct.
Mr. PECORA. Did you pay a single penny for any of the stock that
you so acquired before you received or before the International company paid over this 690 thousand and odd dollars.
Mr. CLARKE. Oh,
yes.
3388
STOCK EXCHANGE PRACTICES
Mr. PECORA. HOW much did you pay out for acquisition of stock?
Mr. CLARKE. I don't recall.
Mr. PECORA. About how much?
Mr. CLARKE. Oh, I should imagine a couple hundred thousand
dollars.
Mr. PECORA. DO you recall to whom you paid that?
Mr. CLARKE. Yes; some of the money was put up for the Bell stock.
Some of it was put up for the Richardson stock, and several smaller
ones. I am trying to get you the detail as I knew it.
Mr. PECORA. HOW much, all told, do you recall you paid for all of
that stock of the Nicholas Power Co. when you bought it from its
Mr. CLARKE (interposing). Approximately a half million dollars.
Mr. PECORA. Well, now, you said you paid around $150 a share
for it a few minutes ago?
Mr. CLARKE. Well; there was 3,200 shares.
Mr. PECORA. All right.
Mr. CLARKE. At 150 would be what, $480,000, wouldn't it?
Mr. PECORA. Yes.
Mr. CLARKE. That is around a half a million.
Mr. PECORA. And then you got from the International $690,000?
Mr. CLARKE. That is correct—not for that stock.
Mr. PECORA. Well then, you got it for what the stock represented?
Mr. CLARKE. NO, sir.
Mr. PECORA. The assets of the company—didn't you?
Mr. CLARKE. NO, I did not.
Mr. PECORA. What did you get it for then?
Mr. CLARKE. I testified to you that the 200-odd thousand that was
paid out for the equity in the building at 90 and 92 Gold Street was
included in this amount of money.
Mr. PECORA. Who received that 200-odd thousand dollars?
Mr. CLARKE. I did, and I gave my check for the amount to the
estate for the property.
Mr. PECORA. TO whom?
Mr. CLARKE. The Healys. I have the canceled check, but I haven't
it with me.
Mr. PECORA. What did the International do, buy the property at
that time ?
Mr. CLARKE. The property was bought, yes; but I don't think the
title was cleared for some time, but the money was put up.
Mr. PECORA. I t was bought by the International ?
Mr. CLARKE. That is correct.
Mr. PECORA. Some time after the International bought the assets' of
the Nicholas Power Co. ?
Mr. CLARKE. I am not trying to withhold it from you, Mr. Pecora,
but the money was put up and the actual sale or transaction did not
take place until later, because there had to be a title quieted or something of that sort.
Mr. PECORA. But at the time
Mr. CLARKE (interposing). At the time it was bought under contract, yes; and the money put up.
Mr. PECORA. NOW, please don't answer my question till I finish.
At the time of the sale of the assets of the'power company to the
STOCK EXCHANGE PRACTICES
3389
International the power company did not have the title to that property on Gold Street, did it?
Mr. CLARKE. NO, sir; it never had it.
Mr. PECORA. I t was merely tendered under lease?
Mr. CLARKE. That is right. I t never had it.
Mr. PECORA. Never had it. The title to that property was acquired eventually by the International Projector Corporation, was it?
Mr. CLARKE. That is correct.
Mr. PECORA. But it did not so acquire that title until sometime
after the International had purchased the assets of the Nicholas
Power Co. for $690,000?
Mr. CLARKE. Yes, but it put up the money at the time, at the
time or prior, put up the money for the equity.
Mr. PECORA. It put up the money it paid eventually for the purchase of the Gold Street property ?
Mr. CLARKE. That is right.
Mr. PECORA. The International bought the fee of that property,
didn't it?
Mr. CLARKE. Yes, sir.
Mr. PECORA. YOU know what that means, don't you?
Mr. CLARKE. The fee?
Mr. PECORA. Yes.
Mr. CLARKE. Yes; I know what a fee is.
Mr. PECORA. I mean the fee of real estate.
Mr. CLARKE. Yes; I know what it means.
Mr. PECORA. Fee title to real property ?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Are you a lawyer ?
Mr. CLARKE. NO, sir.
Mr. PECORA. That is what I meant.
Mr. CLARKE. I know the difference between a leasehold and a fee.
Mr. PECORA. Yes; all right.
Mr. CLARKE. The exhibit that I had here, Mr. Pecora, on your
records, is 301-7, they tell me.
Mr. PECORA. I have that.
The CHAIRMAN. DO I understand the situation was that the title to
this Gold Street property was held by some estate and there was a
mortgage on the property?
Mr. CLARKE. Yes. sir.
The CHAIRMAN. And you
estimated the equity of the estate, that is,
the value of the property over and above the amount of the mortgage,
was 200 and some-odd thousand dollars?
Mr. CLARKE. That is correct. That is what we bought it for.
The CHAIRMAN. And you bought the property itself subject to this
mortgage?
Mr. CLARKE. That is right. There were two or three parcels in the
property.
The CHAIRMAN. That is what you call the equity?
Mr. CLARKE. Yes,
sir,
Mr. PECORA. NOW, will jrou be good enough to tell the committee
why the International Projector Corporation, before it had acquired
title to that Gold Street property, for which title it eventually paid
175541—34—PT 7
12
3390
STOCK EXCHANGE PEACTICES
245,000-odd dollars, paid in advance of such acquisition the full
purchase price?
Mr. CLARKE. I don't think the money was actually turned over,
Mr. Pecora. I think it was just put up.
Mr. PECORA. Put up with whom?
Mr. CLARKE. With a bank, whoever it was. I don't know, but I
am going to find out.
Mr. PECORA. When you find out, also find this out for the benefit
of the committee, unless you can tell us now: Why did the Nicholas
Power Co. receive in the purchase price that was paid to it for its
assets the sum of money which the International Co. eventually had
to pay or did pay for the purchase of the fee simple of that Gold
Street property?
Mr. CLARKE. Well, I don't know, but I imagine it may have been
contemplated at the time to let the Nicholas Power Co. own the
building. I t never did, but I say it may have been contemplated at
the time, because they were occupying a greater part of it.
Mr. PECORA. I don't want any speculation about it, Mr. Clarke.
Mr. CLARKE. Well, I know, but you asked me to tell you, and I
say that is a possibility. I don't know.
Mr. PECORA. At the time of this transaction between—I want you
to get the exact facts about that. Will you?
Mr. CLARKE. AS near as I can; yes, sir.
Mr. PECORA. DO you doubt your ability to get the exact facts?
Mr. CLARKE. Well, if you don't mind my saying so, Mr. Pecora
Mr. PECORA. I don't mind anything you say. You take all the
risk of anything you say. I don't.
Mr. CLARKE. I am only trying to be helpful, only trying to explain
the matter.
Mr. PECORA. I am still waiting.
Mr. CLARKE. SO much money was paid out for the stock of .the
company. So much money was paid out for the equity in this building. If it was included in one check and handled that way, I may
not be able to find the reason why, and if I cannot find it I cannot
give it to you, but if I can find I shall give it to you.
Mr. PECORA. What position did you occupy in the International
Projector Corporation at the time it purchased the Nicholas Power
Co.'s assets?
Mr. CLARKE. What position did I occupy in the International?
Mr. PECORA. Or what relation did you have toward it?
Mr. CLARKE. I controlled it.
Mr. PECORA. HOW?
Mr. CLARKE. I controlled it, was president
Mr. PECORA. And you also controlled the
of it.
Nicholas Power Co. at
the same time as the sole stockholder thereof?
Mr. CLARKE. Yes; I had acquired it in the interest of the International Projector Corporation.
Mr. PECORA. SO that you, as the owner and president—by owner I
mean the man who controlled its business and its operations—is that
what you mean by it?
Mr. CLARKE. Yes.
Mr. PECORA. All right.
Then you as the man who controlled the
International Projector Corporation sat down and did business with
STOCK EXCHANGE PRACTICES
3391
yourself as the man who owned the Nicholas Power Co., did you
not?
Mr. CLARKE. I should not state it that way if I were to state it.
Mr. PECORA. YOU probably would not want to state it that way, but
is it not the fact?
Mr. CLARKE. I should state* it this way—no; if I may answer
the question. As the president of the International Projector Corporation we sought ownership in the Nicholas Power Co.
Mr. PECORA. Please add the other element, " as the president of the
International and the man who controlled it." That was what you
said.
Mr. CLARKE. And as the man who controlled it—we sought to
acquire the assets of the Nicholas Power Co., and we set about to
•do it.
Mr. PECORA. And those assets were owned by you then?
Mr. CLARKE. And in the process of so doing I became the owner of
the assets.
Mr. PECORA. Of the Nicholas Power Co. ?
Mr. CLARKE. Or the stock—and I became the owner of the stock,
and then the assets were transferred to the International Projector
Corporation.
Mr. PECORA. Were those assets transferred to the International for
exactly the price that you had paid for them?
Mr. CLARKE. AS far as I know. There was no profit made out
of it by anyone that I know of.
Mr. PECORA. HOW did you pay for the stock of the Nicholas
Power Co., by your checks?
Mr. CLARKE. I did; and then loans were made, as I have testified.
Mr. PECORA. To whom?
Mr. CLARKE. TO myself, I believe, or to my agents, on the stock
as we were getting it together.
Mr. PECORA. Who made you those loans?
Mr. CLARKE. I have already testified that I am trying to get
the details of the whole transaction, which I will give you.
Mr. PECORA. Can't you recall now where you got the loans?
Mr. CLARKE. I know there was a loan of the New York Trust Co.
and I know there was a loan of the National City Bank. The
details I cannot give you.
Mr. PECORA. NOW, was the loan that you had received from the
New York Trust Co.. a loan of $300,000?
Mr. CLARKE. NO, sir; that does not refer to this.
Mr. PECORA. What does that $300,000 loan of the New York Trust
Co. refer to?
Mr. CLARKE. Mr. Pecora, when I give you this information I will
give it to you exactly and in detail. I will testify at the moment
that I have been informed that that was a loan of the Precision
Machine Co., but I tell you at the same time that I don't know it.
Mr. PECORA. D O you recall the testimony you gave last week before this committee regarding your having owned 600,000 shares of
the common stock of the International Projector Corporation?
Mr. CLARKE. Yes.
3392
STOCK EXCHANGE PRACTICES
Mr. PECORA. Did you own those 600,000 shares at the time the
General Theatres Equipment Co. took over the International on a
stock-exchange basis?
Mr. CLARKE. Yes, sir.
Mr. PECORA. DO you still
own the stock that you took over in exchange for those 600,000 shares?
Mr. CLARKE. Of General Theatres ? Yes, sir; unfortunately.
Mr. PECORA. Before I proceed to what I am going to eventually
ask you I want to recall to your mind the following testimony you
gave before the committee last week with regard to those 600,000*
shares, or rather with regard to the stock of the General Theatres
Equipment Co. which you received in exchange for those 600,000*
shares, and I am referring now to this testimony as it appears at
page 2136 of the stenographer's transcript :
QUESTION. YOU had something like 600,000 shares of this common stock at
that time, of the International Projector?
Mr. CLARKE. Yes, sir; and still have it; that is, the exchange stock.
Question by Senator COUZENS. YOU never sold any of it on the market at all?
Mr. CLARKE. NO, sir. Now, that is not quite true. I sold a few shares, but
all the money T got through it I put back into the company. It was a very
nominal amount.
Is that testimony true, Mr. Clarke ?
Mr. CLARKE. I believe it is.
Mr. PECORA. HOW ?
Mr. CLARKE. I believe it
Mr. PECORA. All right.
is.
Did you have a transaction involving a
sale of any of that stock some time in 1929 with Pynchon & Co., the
Shermar Corporation, West & Co., W. S. Hammons & Co., and
Halsey, Stuart & Co., Inc. ?
Mr. CLARKE. YOU are referring to General Theatres stock?
Mr. PECORA. Yes.
Mr. CLARKE. Mr.
Pecora, if you have the letter and exhibit there
it would refresh my mind. I cannot locate what you want. I probably would know about it.
Mr. PECORA. In order to enable you to answer that question would
you have to have your recollection refreshed ?
Mr. CLARKE. Yes, because you are tying a sale of that stock to my
own stock. Is that correct?
Mr. PECORA. Yes.
Mr. CLARKE. Then I would.
Mr. PECORA. Then you would have to have it refreshed?
Mr. CLARKE. Yes, sir.
Mr. PECORA. YOU would
have to have something to refresh your
recollection as to whether or not you sold or had any business
transaction involving the selling by you of your stock to the parties
whose names I have mentioned, to any of them?
Mr. CLARKE. Yes, I would.
Mr. PECORA. All right. If you don't recall your own stock transactions I will try to refresh your recollection. Will you be good
enough to look at what purports to be a photostatic copy or reproduction of a letter addressed by you under date .of July 9, 1929, to
Pynchon & Co., the Shermar Corporation, West & Co., W. S. Hammons & Co., and Halsey, Stuart & Co., Inc. [handing document to«
STOCK EXCHANGE PRACTICES
3393
Mr. Clarke] ? After looking at that photostatic copy tell me if you
recognize it to be a true and correct copy of a letter sent by you.
(Mr. Clarke perused the document.)
Mr. PECORA. Mr. Clarke, does it take you that long to be able to
identify that?
Mr. CLARKE. Yes; it takes me this long to read it. I t is signed by»
an attorney, not by myself.
Mr. PECORA. For your possible benefit let me say that that photostatic reproduction was furnished to us by the Shermar Corporation.
And I might further state for your possible guidance that the original
of that letter is in the files of the Shermar Corporation and was seen
by us.
(Mr. Clarke handed the document to Mr. Pecora.)
Mr. PECORA. NOW, what is the answer, Mr. Clarke ?
Mr. CLARKE. Well, that purports to be an option on stock of the
General Theatres.
Mr. PECORA. The question was, Is it a true copy of a letter that you
sent or caused to be sent to persons to whom it is addressed ?
Mr. CLARKE. I assume it is.
Mr. PECORA. Please don't assume it. Now I want you to testify
to the facts.
Mr. CLARKE. I don't recall the letter.
Mr. PECORA. Not even after having read it ?
Mr. CLARKE. NO ; I do not.
Mr. PECORA. Will you please
read it again and see if it refreshes
your recollection.
Mr. CLARKE. I read every line of it.
Mr. PECORA. DO you recall the transaction to which that letter
relates?
Mr. CLARKE. No; I do
not.
Mr. PECORA. DO you say that no such transaction was had?
Mr. CLARKE. Oh, no.
Mr. PECORA. DO you say that such a transaction was had by you?
Mr. CLARKE. NO.
Mr. PECORA. I S your mind a blank about it completely?
Mr. CLARKE. N O ; it is not a blank, but I am not going to answer
your questions unless I know exactly what I am saying, and I do
not have the details about that and I am not going to start answering
questions.
Mr. PECORA. DO you recall any transaction of the kind referred
to in that letter?
Mr. CLARKE. Yes; I think there was some such transaction, but I
•don't know what it was.
Mr. PECORA. NOW, this letter, as you noticed, is signed " H . L.
•Clarke by O. E. Koegel"—K-o-e-g-e-l—attorney in fact." Who is
Mr. Koegel?
Mr. CLARKE. Mr. Koegel was an attorney working for me at the
time.
Mr. PECORA. And do you recall having authorized him to send
this letter in your behalf?
Mr. CLARKE. NO ; I do not, but undoubtedly I did.
Mr. PECORA. I offer the letter in evidence, and ask that it be
spread on the record.
3394
STOCK EXCHANGE PRACTICES
The CHAIRMAN. Let it be admitted and spread on the record.
(Letter from " H. L. Clarke, by O. E. Koegel, attorney in fact",.
to Pynchon & Co., the Shermar Corporation, West & Co., W. S.
Hammons & Co., and Halsey, Stuart & Co., Inc., dated July 9, 1929^.
was thereupon designated " Committee Exhibit No. 131, Nov. 16,
1933.")
Mr. PECORA. Who is Mr. Koegel?
Mr. CLARKE. Mr. Koegel was an attorney.
Mr. PECORA. Connected with what firm?
Mr. CiiARKE. At that time he was working with me.
Mr. PECORA. What firm was he connected with, I asked you?
Mr. CLARKE. I said he was working for me.
Mr. PECORA. Was he a member of any firm?
Mr. CLARKE. N O ; not at that time. He is a member of the firm*
of Hughes, Schurman & Dwight at the present time.
Mr. PECORA. NOW, the letter marked in evidence as committee's
exhibit 131 reads as follows [reading]:
NEW YOEK, N.Y., July 9, 1929.
PYNCHON & Co.,
THE SHEBMAB COBPOBATION,
WEST & COMPANY,
W. S. HAMMONS & Co.,
HALSEY STTJABT & Co., INC.
DEAB SIBS: This will confirm the arrangements made between you and 1 heundersigned for the purchase by you from the undersigned of 50,000 shares-*
and the option to be granted to you to purchase 200,000 shares of the common
stock of General Theaters Equipment, Inc., a corporation to be organized by
the undersigned under the laws of the State of Delaware.
Contemporaneously with the execution of this agreement there has been,
entered into between you or some of you and the undersigned two other agreements, one relating to the purchase by some of you of $6,000,000 principal
amount of the 15-year convertible gold debentures of General Theaters Equipment, Inc., the other relating to the purchase by you of 300,000 shares of the
common stock without par value of said General Theaters Equipment, Inc.
Each and every of the representations and agreements to be performed by
the undersigned set forth in said two agreements herein above referred to are
representations and agreements to be performed by the undersigned as if such
representations and agreements were herein set forth in full. Subject to the
correctness of all representations and agreements herein above referred to, the
representations and agreements to be performed by the undersigned herein, and
subject to the approval of your counsel as to all legal matters pertaining to the
transactions herein referred to, you agree to purchase or cause to be purchased
from the undersigned, and the undersigned agrees to sell to you or to the purchasers designated by you, 50,000 shares of common stock without par value
of the General Theaters Equipment, Inc., said common stock to be fully paid
and nonassessable, at a price of $20 per share. Delivery of said shares shall be
made against payment therefor at the Chase National Bank at the city of New
York at its office, 18 Pine Street, or at the office of Pynchon & Co., I l l Broadway,
New'York City, at your option, on August 1, 1929.
The undersigned hereby grants to you an option to purchase from the undersigned and/or to require to be issued and delivered to you or to purchaser
or purchasers procured by you, all or any part of an additional 100,000 shares
of the common stock of General Theaters Equipment, Inc., at the price of $20
per share, such option to continue in force and to be subject to the exercise
by you at any time or from time to time during the period between July 15,
1929, and September 15, 1929.
In the event you exercise in full the aforesaid option given you to purchase
100,000 shares of such common stock, you shall have a further option to purchase and/or to require to be issued and delivered to you or a purchaser
or purchasers procured by you, all or any part of an additional 100,000
shares of such common stock, at a price of $20 per share, such option* to con
STOCK EXCHANGE PRACTICES
3395
tinue in force and to be subject to exercise by you at any time or from time to
time during the period of 90 days from and after July 15, 1929.
At the option of the undersigned any or all of the common stock of said General Theaters Equipment, Inc., may be deposited in a voting trust to be created
by an agreement satisfactory to you and your counsel and to be construed according to the laws of the State of New York. In case any of the shares of
common stock of said General Theaters Equipment, Inc., shall be deposited in
such voting trust, voting-trust certificates may be issued and delivered in lieu
of and as an equivalent of certificates for such common stock under any of the
provisions hereof. This instrument shall be construed according to the laws
of the State of New York.
If the foregoing is in accordance with your understanding, please sign your
acceptance in the space provided below.
Yours very truly,
H. L. CLABKE,
By O. E. KOEGEL,
Attorney in fact
Accepted: Pynchon & Co., by W. F. Ingold, a partner; Shermar Corporation,
by J. F.—
What is that name?
Mr. WIGGIN. Wernersbach.
Mr. PECORA. (Continuing.)
—Wernersbach, treasurer; West & Co., by Charles B. Wiggin, a partner; W. S,
Hammons & Co., by W. S. Hammons, president; Halsey, Stuart & Co., Inc., by
E. W. Niver, vice president.
Now, Mr. Clarke, you heard me read this letter into the record.
Did the reading of it by me refresh vour recollection concerning
the transaction referred to in the letter?
Mr. CLARKE. N O ; but Mr. Kellar has made some inquiry, and he
tells me that that option was given; that it was not exercised.
Mr. PECORA. HOW about the sale of the 50,000 shares that was
made firm by this agreement ?
Mr. CLARKE. That was sold.
Mr. PECORA. That was sold for a million dollars, wasn't it? Twenty
dollars a share ?
Mr. CLARKE. That is right.
Mr. PECORA. DO you recall that now? Do you recall the sale now?
Mr. CLARKE. I don't recall the sale; no.
Mr. PECORA. I S a million-dollar transaction by you of such negligible consequence that you easily forget it ?
Mr. CLARKE. Certainly not.
Mr. PECORA. Have you made many sales of stock for a million
dollars or more in your lifetime?
Mr. CLARKE. NO.
Mr. PECORA. HOW
do you account for the fact that you do not
recall even now, with your recollection refreshed by your own letter, by your own agreement—you do not recall even now a sale
involving as it did the sale by you for a million dollars of 50,000'
shares of stock?
Mr. CLARKE. For the simple reason that frequently options are
given and not exercised.
Mr. PECORA. I am not referring to an option now. I am referring
to a sale.
Mr. CLARKE. I want to be sure what I am testifying to before I
testify. You asked me if I recall that particular transaction, and I
tell you, no.
3396
STOCK EXCHANGE PRACTICES
Mr. PECORA. DO you now recall it?
Mr. CLARKE. I am told that such a transaction took place, and no
doubt it did. I know that I sold about $1,000,000 worth of stock
at one time, and probably that is the sale, because it is the only one
I made.
Mr. PECORA. Had you forgotten about it when you were questioned
about that by Senator Couzens last week?
Mr. CLARKE. I stated to you that I had all the stock, and more,
that I ever had in the first place, and that through any sale of stock
I had made, more money had been put back into the company by me,
and I think my transactions and statements will bear that out. I
now have
Mr. PECORA. I am not asking about what you now have, nor did
Senator Couzens ask you about what you now have when he asked
you last week if you had sold any of that stock. It now seems that
you did sell 50,000 shares of it and made your agreement to sell it
on the very day the General Theatres Equipment Co. came into
existence, and that you sold it for $1,000,000. Had you forgotten
all about that when you answered Senator Couzen's question last
week?
Mr. CLARKE. Yes.
Mr. PECORA. I S your
memory that defective that you forget a
$1,000,000 transaction?
Mr. CLARKE. I do not think my memory is too defective; no.
Mr. PECORA. DO you think it is good?
Mr. CLARKE. Yes.
Mr. PECORA. Mr. Clarke,
do you recall, in the course of the testimony you gave last week, having been asked a number of questions
concerning the arrangement that was made between the International Projector Corporation and the General Theatres Equipment
Co. to enable the latter company to acquire the stock of the former
company on an exchange basis?
Mr. CLARKE. Yes, sir.
Mr. PECORA. YOU remember
that in your testimony last week on
that subject you testified in substance that the exchange for the stock
of the International which you had was on the basis of 1*4 shares of
General Theatres Equipment Co. stock for each share of International Projector Corporation stock; do you recall that?
Mr. CLARKE. Yes.
Mr. PECORA. DO you recall having also testified last week on that
subject substantially to the effect that that same offer was made available to the other stockholders of International Projector Corporation ?
Mr. CLARKE. Yes.
Mr. PECORA. But
that such other stockholders, being the stockholders who came from the public, representing the general public,
did not choose to avail themselves of that offer, and subsequently had
to take share for share in exchange, instead of 1*4 shares tor 1 share.
Do you recall that testimony?
Mr. CLARKE. I recall that they were merely offered it. They did
not have to take it.
Mr. PECORA. What is that?
Mr. CLARKE. Nobody had to take it. It was an offer.
STOCK EXCHANGE PRACTICES
3397
Mr. PECORA. YOU do recall having testified that that offer was
made to the other stockholders of International at the same time
that it was made available to you?
Mr. CLARKE. I believe it was.
Mr. PECORA. The offer I am referring to is one whereby the General Theatres Equipment gave l1/^ shares of its capital common stock
in exchange for each share of the International JProjector Corporation common stock.
Mr. CLARKE. Yes.
Mr. PECORA. That is clear in your mind, is it not ?
Mr. CLARKE. Yes.
Mr. PECORA. I S it
the truth that at that time General Theatres
Equipment Co., or rather, that that offer of the General Theatres
Equipment Co. to exchange its shares for shares of the International
Projector Corporation on the basis of 1% for 1, was made available
to all the other stockholders of International Projector?
Mr. CLARKE. I believe it was. Otherwise I should not have so
testified.
Mr. PECORA. Have you got the minute book of General Theatres
Equipment, Inc. ?
Mr. CLARKE. Have I ?
Mr. PECORA. Yes.
Mr. CLARKE. NO, sir.
Mr. PECORA. YOU know Mr. Carroll, do you not?
Mr. CLARKE. Yes.
Mr. PECORA. I S he connected with General Theatres?
Mr. CLARKE. Yes.
Mr. PECORA. Mr. Carroll, have you got the minute book?
Mr. CARROLL. Yes; I have.
Mr. PECORA. Will you please bring me the minute book
of that
corporation for July 11, 1939?
(Mr. Carroll hands document to Mr. Pecora.)
Mr. PECORA. While those books are being looked up, I want to read
to you—and please follow me closely—the testimony that you gave
last week on this subject, as it is to be found at pages 2089, 2090,
and 2091, of the stenographic transcript [reading] :
Senator COUZENS. Why was it that some of these others at one?
Mr. CLARKE. For the reason that we wished to have control and
Senator COUZENS. Who wished to have control?
Mr. CLARKE. I did and my associates, and they received one and a quarter
shares. All of the others could have had the same had they come in on the
exchange, but they did not; and after we had control, we withdrew that offer
and made the other offer.
Senator COUZENS. And that was accepted?
Mr. CLARKE. Yes, finally; by most of them. Most of them bought this stock
at little or nothing, as you can see, and they would have made a big profit
out of it, anyway, had they sold it.
Mr. PECOKA. HOW many shares of the International Projector Corporation
stock were exchanged for shares of the General Theatres Equipment Co. on
a basis of one and a quarter shares of the latter for one share of the former?
Mr. CLARKE. Eight hundred thousand shares.
Mr. PECORA. And of that amount how many did you own at that time?
Mr. CLARKE. Something less than 600,000 shares.
Mr. PUCORA. How many shares were exchanged on a share-for-share basis?
Mr. CLARKE. TWO hundred thousand shares.
3398
STOCK EXCHANGE PRACTICES
Mr. PBOORA. Who owned those 200,000 shares—the public?
Mr. CLARKE. I would say so; yes.
Mr. PECOBA. Why was not the public given the same ratio of exchange that
you were?
Mr. CLABKH. Everyone had the same opportunity for a time.
Mr. PEOOBA. I am asking you why the public were not given the same ratio
•of exchange that you received?
Mr. CLARKEI. My answer is that they were given the same opportunity.
Mr. PECOBA. HOW was the opportunity afforded to them?
Mr. CLARKE. HOW was it given to them?
Mr. PECOBA. Yes.
Mr. CLARKE. Well, all the stockholders were told they could exchange their
shares on that basis and they did not all do it.
Senator GORE. When you got enough stock to control, then the exchange price
went down, did it not?
Mr. CLARKE. Yes, sir. We withdrew the offer and made it 1 share for 1
instead of one and a quarter for one.
Mr. PECOBA. When was that done, Mr. Clarke?
Mr. CLARKE. YOU mean, when was the offer withdrawn?
Mr. PECOBA. Yes; when was the offer originally made and when was the
offer as originally made withdrawn and a new one substituted?
Mr. CLARKE. The original offer was made in August 1929, but I don't know
the date; I think, about 60 or 90 days later as to the other.
Senator COUZENS. In what form was this offer made?
Mr. CLARKE. Advice to the stockholders by letter.
Senator COUZENS. By letter?
Mr. CLARKE. Yes, sir.
Mr. PECOBA. When did you say it was withdrawn?
Mr. CLARKE. I have not the date.
Mr. PECOBA. Can you not get it?
Mr. CLARKE. AS I recall it was 60 to 90 days later.
Mr. PECOBA. Who caused that offer to be withdrawn and a less favorable
•one substituted?
Mr. CLARKE. I believe I did.
Mr. PEOORA. DO you think that was fair to these other stockholders?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Why? Do you think it was fair for the general public stockholders to get share for share and you to get one and a quarter shares for one
share?
Mr. CLARKE. Yes, I do.
Mr. PECORA. Why was it fair?
Mr. CLARKE. They had the same opportunity that I had.
Now, let me ask you, Mr. Clarke, if that testimony so given by you
was true ?
Mr. CLARKE. SO far as I know.
Mr. PECORA. YOU caused the General Theatres Equipment, Inc., to
be organized, did you not?
Mr. CLARKE. Yes, sir.
Mr. PECORA. And you were its first president ?
Mr. CLARKE. Yes, sir.
Mr. PECORA. And you were its president at the time
that the General Theatres Equipment, Inc., exchanged its shares for the shares
of the stock of the International Projector Corporation, which you
then personally owned, on a basis of one and a quarter for one—is
that right?
Mr. CLARKE. Yes, sir.
Mr. PECORA. I want to
show you this book. Please look at it and
tell me if you can identify it as the original minute book of the board
of directors of the General Theatres Equipment, Inc., including the
period of July 1929 [handing document to the witness].
Mr. CLARKE. Yes. This is the minute book.
STOCK EXCHANGE PBACTICES
3399
Mr. PECORA. I ask that that minute book be offered in evidence, but
mot spread on the record in view of its voluminous character.
The CHAIRMAN. Let it be admitted and marked.
(The document referred to, minute book, Board of Directors, General Theatres Equipment, Inc., July 1929, was received in evidence
marked "•Committee's Exhibit No. 132, Nov. 16,1933 ", and the same
is printed in part on page 3401.)
Mr. PECORA. NOW, Mr. Clarke, will you be good enough to look
-at that minute book and show me anywhere in there the offer that
was made to the general stockholders by the General Theatres
^Equipment to exchange their shares on a basis of one and a quarter
shares of General Theatres Equipment Co. for one share of International Projector Corporation. Take your time and look through
the book.
Mr. CLARKE. I do not know that it is in the minute book. I imagine it is not, but if you wish me to look through it I will.
Mr. PECORA (after a pause). Mr. Clarke, in order to expedite this
examination, while you are looking at that minute book, see if you
can find in it the printed letter that actually was sent out to the
stockholders of International under date of July 15,1929, offering to
exchange stock of General Theatres Equipment for stock of the
International Projector Corporation on a share-for-share basis. For
that purpose I direct your attention to page 52 of the minute book.
Mr. CLARKE. I am getting into July now.
Mr. PECORA. Mr. Clarke, if you are looking for any offer to stockholders in that minute book on the basis of one and a quarter shares
for one, I will predict that you are going to waste your time.
Mr. CLARKE. Perhaps.
Mr. PECORA. But I think you will find, at page 52 of the minutes,
the offer on a share-for-share basis.
Mr. CLARKE. Yes. I have found that.
Mr. PECORA. YOU have not found the other, have you ?
Mr. CLARKE. NO.
Mr. PECORA. DO you expect to find the other?
Mr. CLARKE. Not after what you have just told me.
Mr. PECORA. What I have told you was based upon an ^examination of that minute book.
Mr. CLARKE. Surely.
Mr. PECORA. DO you still say that the General Theatres Equipment, Inc., gave to the stockholders coming from the general public
the same offer that it gave to you to exchange its stock for shares
of the International Projector Corporation on the basis of one and
a quarter shares for one?
Mr. CLARKE. That is my belief.
Mr. PECORA. I t is still your belief?
Mr. CLARKE. I t is still my belief, although I do not see any
letter here.
Mr. PECORA. Your belief has not in any way been demolished
by anything you have learned this morning or heretofore?
Mr. CLARKE. NO. In fact, I have been told within the last day
or so that practically all the stock was eventually exchanged on a
one-and-a-quarter basis, a lot of people having come in and claimed
3400
STOCK EXCHANGE PRACTICES
that they ought to have had the privilege, and it was given to them..
I do not know how much that was.
Mr. PECORA. Who told you that within the last day or so ?
Mr. CLARKE. Who told me that ?
Mr. PECORA. Yes.
Mr. CLARKE. I believe it was Mr. Ingold.
Mr. PECORA. He was one of the partners of Pynchon & Co.?
Mr. CLARKE. That is right. That matter could be easily verified.
Mr. PECORA. YOU said all the stockholders were given this op-
portunity at the same time you received it.
Mr. CLARKE. I believe that is true.
Mr. PECORA. Wait—to exchange their shares of International
stock on a basis of one and a quarter for one—one and a quarter
shares of General Theatres Equipment for one share of International. And you say that is still your belief?
Mr. CLARKE. Yes.
The CHAIRMAN. If
that was done by letter, if it was done at all,
it seems as though there ought to be in existence a copy of that letter somewhere.
Mr. CLARKE. I should think so.
The CHAIRMAN. YOU do not happen to have a copy of that?
Mr. CLARKE. NO, sir; I do not.
Mr. PECORA. What is the date of
the letter that was sent out to thestockholders offering to exchange shares of General Theatres Equipment for shares of the International on a share-for-share basis ?
Mr. CLARKE. The date of this letter in the record book is July 15.
Mr. PECORA. What year?
Mr. CLARKE. 1929.
Mr. PECORA. At what meeting of the board of directors of GeneraL
Theatres Equipment, Inc., was the proposition embodied in that
letter adopted?
Mr. CLARKE. I suppose at that time.
Mr. PECORA. What was the date of the meeting of the board? It
was July 11, was it not?
Mr. CLARKE. July 12, was it not? I do not see where any resolution was adopted to send this letter out, but it is probably here.
The CHAIRMAN. What was the date of the first meeting of the
board of directors of the General Theatres Equipment, Inc. ?
Mr. CLARKE. July 11, 1929.
Mr. PECORA. DO you find that printed form of letter dated July
15, 1929, embodied in the minutes of the meeting of the board held
on July 11?
Mr. CLARKE. The date on top of these pages here preceding this
letter is July 11.
Mr. PECORA. Yes.
Mr. CLARKE. I do
not find it included in the minutes. That is
why I am hesitating about the date.
Mr. PECORA. When was the General Theatres Equipment Corporation actually organized?
Mr. CLARKE. July 11, 1929.
Mr. PECORA. Will you let jne have that minute book, please?
(The witness handed a document to Mr. Pecora.)
STOCK EXCHANGE PRACTICES
3401
Mr. PECORA. At page 52 of the minute book which has been offered
in evidence as Committee's Exhibit No. 132, I wish to read into the
record the following excerpts froni that page [reading] :
General Theatres Equipment, Inc., to the holders of International Projector
Corporation common and preferred stocks.
General Theatres Equipment, Inc., hereby offers to exchange its common
stock voting trust certificates for common stock of International Projector Corporation on a share-for-share basis. * * *
It is expected that any holder of the above-mentioned common stocks and/or
preferred stocks and/or notes may take advantage of this offer by depositing
the same with the trust department of the Chase National Bank of the City
of New York, at 18 Pine Street, New York City, on or before the close of
business August 23, 1929.
It is expected that delivery of General Theatres Equipment, Inc., commonstock voting trust certificates will be made on or before August 5, 1929, in
exchange for common stock of International Projector Corporation and National Theatre Supply Co. deposited prior to that date. General Theatres
Equipment, Inc., common-stock voting trust certificates will be delivered in
exchange for common stock of International Projector Corporation and
National Theater Supply Co. deposited after August 5, 1929, as promptly as
the same can be prepared.
That is signed " General Theatres Equipment, Inc., bj H. L.
Clarke, president", dated July 15, 1929. Mr. Clarke, is it not a
fact that that was the only offer that was made to the general stockholders of International Projector Corporation at that time?
Mr. CLARKE. That is the only one in the book, but I still believe
that an offer was made to all the stockholders.
Mr. PECORA. This form of letter, embodying this offer, is in the
minute book containing the minutes of the meeting of the board of
the General Theaters Equipment Corporation held on July 11, 1929,
which is the date at which General Theatres Equipment, Inc., came
into existence.
Mr. CLARKE. That is right.
Mr. PECORA. HOW could there have been any offer other than
this one made at any time prior to the date when the company itself
was organized?
Mr. CLARKE. I agree that it does not look as though there could
have been.
Mr. PECORA. Are you now satisfied that no such offer was made
to the general stockholders ?
Mr. CLARKE. On the evidence as presented, I would think that was
correct, but I still have the belief that the same offer was made. I
do not know how it was made, or when, but that is my recollection,
Mr. PECORA. HOW could it have been made?
Mr. CLARKE. I say, on the evidence it would not look as though it
could. I am not trying to dispute the evidence.
Mr. PECORA. When was the offer made to you as a stockholder of
International Protector Corporation to exchange your shares for
shares of the General Theatres on a basis of one and a quarter shares
of the latter for one share of the former?
Mr. CLARKE. When the company was organized.
Mr. PECORA. That is July 11?
Mr. CLARKE. Yes. I t could not have been officially made before
that.
Mr. PECORA. I S it now apparent, even to you, that you, as the
owner of 600,000 of the outstanding 800,000 shares of the capital
3402
STOCK EXCHANGE PRACTICES
common stock of International Projector Corporation, received from
yourself, as the creator and controller and president of the General
Theatres Equipment, Inc., an offer of exchange of stock on a basis
that was 25 percent better than the one that the public received?
Mr. CLARKE. I have already testified that I received one and a
quarter shares, and also many other stockholders. I have testified
that there were about 800,000 shares that received one and a quarter.
I have also stated this morning that I have been told, and believe
that there were a lot of other stockholders that got one and a quarter,
so I was not the only one that got it.
Mr. PECORA. Will you tell me how those other stockholders could
have gotten it, in view of the evidence, the authenticity, and the force
of which you now recognize and admit, that the offer made to the
general stockholders was to exchange on a share-f or-share basis ?
Mr. CLARKE. HOW could they get it?
Mr. PECORA. Yes.
Mr. CLARKE. I suppose
they might complain that the offer had not
been held open long enough, and that it was not fair.
Mr. PECORA. There apparently was no offer made to the stockholders to exchange on the basis of one and a quarter for one, and
you were willing to admit that a moment ago.
Mr. CLARKE. I am willing to admit that the evidence was as it is,
but you are putting it this way, that I am the only one that received,
one and a quarter shares, and that is not true.
Mr. PECORA. Who else got it?
Mr. CLARKE. I do not know, but there were over 200,000 shares in<
addition that received it.
Mr. PECORA. Were not the other shareholders of International
Projector Corporation that received one and a quarter shares for
each share the stockholders who consisted of the bankers ?
Mr. CLARKE. Very likely.
Mr. PECORA. And their holdings were included in this block of
600,000, were they not?
Mr. CLARKE. Eight hundred thousand.
Mr. PECORA. Eight hundred thousand.
Mr. CLARKE. I think so.
Mr. PECORA. Was anyone other than yourself and the bankers
ever given this offer to exchange one and a quarter shares for one?
Mr. CLARKE. Mr. Pecora, as I have stated so many times, I believe
such an offer was made, but I say, on the evidence, I do not see how
it could have been.
Mr. PECORA. NOW, the National Theatre Supply Co. was anothercorporation that you testified heretofore you caused to be organized.
Mr. CLARKE. IL es, sir.
Mr. PECORA. Were you the president of it?
Mr. CLARKE. Yes, sir.
Mr. PECORA. And the principal stockholder?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Were the shares of that companv
General Theatres Equipment Co. in July 1929?
Mr. CLARKE. Yes, sir.
Mr. PECORA. On what basis of exchange?
Mr. CLARKE. On the basis of share for share.
taken over by the-
STOCK EXCHANGE PRACTICES
3403
Mr. PECORA. Share for share. That is, you received share for
share, did you not, for your shares of National Theatre Supply Co.?
Mr. CLARKE. Yes.
Mr. PECORA. What
did the stockholders of National Theater Supply who represented the general investing public get?
Mr. CLARKE. There was a total of 412,791 shares of National
Theater which received share for share of General Theatres common,
and there were 149,416 shares of National Theater receiving three
quarters of a share for each share.
Mr. PECORA. Who were the stockholders who received share for
share ?
Mr. CLARKE. I was the principal stockholder.
Mr. PECORA. YOU were the principal stockholder. And who were
the stockholders that received an exchange on the basis of three
quarters of a share of General Theatres Equipment for each share
of National Theatre Supply Co.? Were they the general public?
Mr. CLARKE. They were the other stockholders.
Mr. PECORA. By the other stockholders you mean the public, do
you not ?
Mr. CLARKE. Not necessarily.
Mr. PECORA. Whom do you mean ?
Mr. CLARKE. A good deal of this stock, I believe, was held by the
people from whom we had purchased and paid cash for their stores
selling motion-picture equipment, and various lamp companies. I
think most of that stock was held there.
Mr. PECORA. Why were these stockholders given only three quarters of a share of General Theatres for each share of National
Theatre Supply Co. that they owned, while you, the largest stockholder, received share for share ?
Mr. CLARKE. I would assign the same reason, the control, and also
the added reason, which I have never mentioned before in this connection, namely, that one of the great reasons for forming the General Theatres Equipment was to exploit the inventions that we had
perfected in the motion-picture art, and we believed they were going
to revolutionize the industry.
Mr. PECORA. In order to exploit that revolutionary thing was it
necessary for you to get share for share for your stock of National
Theatres and the other- stockholders to get only three quarters of a
share for each share ?
Mr. CLARKE. I only say that when this thing came about, these
things were of known value, we thought, and still think, and that no
doubt the value of the offer was the same, in our opinion, to those
who got three quarters of a share as to those who got one share.
Mr. PECORA. I am not sure that I understand that reasoning of
yours, Mr. Clarke.
Mr. CLARKE. Simply that there was an added value in there for
this stock.
Mr. PECORA. Why should you have received that added value and
not the other stockholders ?
Mr. CLARKE. Well, for control, for one thing.
Mr. PECORA. What is that?
Mr. CLARKE. Because of the control, for one thing.
Mr. PECORA. YOU already had control, did you not ?
3404
STOCK EXCHANGE PRACTICES
Mr. CLARKE. Yes; but that is why I am saying the control of the
company.
Mr. PECORA. Because you had control. Why was it necessary for
you to be treated differently from the other stockholders, and more
advantageously than they were treated?
Senator COUZENS. Just because he had the power to do it.
Mr. CLARKE. I said for the control of it, and I gave the other
reason which you just heard.
Mr. PECORA. Did you think it was fair to the other stockholders
for you to do that?
Mr. CLARKE. Evidently everybody thought it was fair at the time
it was done.
Mr. PECORA. Did the other stockholders know at the time that you
received share for share for your stock of National Theater Supply Co.?
Mr. CLARKE. Mr. Pecora, I have said time and again that I believe
all these stockholders of these companies had the same opportunity.
Mr. PECORA. Show me any evidence that the other stockholders
ever had that opportunity in the National Theater Supply Co.
Mr. CLARKE. I should like to do so if I can, and I will if I can.
Mr. PECORA. DO you still think you can?
Mr. CLARKE. Possibly.
Mr. PECORA. NOW let me call your attention to that same letter
from which I read before and which is page 52 of the minute book
of the General Theatres Equipment, Inc., offered in evidence. You
notice that that letter is addressed not only to the holders of International Projector Corporation, but also to the holders of National
Theater Supply Co. common and preferred stocks, and that the letter
contains the following statement which I did not read before
[reading] :
General Treatres Equipment, Inc., hereby offers to exchange its common
stock voting trust certificates for common stock of National Theater Supply
Co. on the following basis, namely, voting trust certificates, three quarters of
a share of common stock of General Theatres Equipment, Inc., for each share
of common stock of National Theatre Supply Co.
That offer was held open until August 5, 1929. Do you still say
that the other stockholders were given the same opportunity that
you gave to yourself?
Mr. CLARKE. I say that I believe they were.
Mr. PECORA. DO you still believe it?
Mr. CLARKE. I am not in a position to prove it to you.
Mr. PECORA. DO you still believe it?
Mr. CLARKE. Yes.
Mr. PECORA. Tour
belief, apparently, is stronger than your
memory.
Mr. CLARKE. When I have a belief, I cannot be blamed for sticking
to it. I still believe it.
Mr. PECORA. I am not blaming you for sticking to it. I t is commonly done.
The CHAIRMAN. Who composed this voting trust?
Mr. CLARKE. The voting trust of General Theatres?
The CHAIRMAN. Yes.
Mr. CLARKE. YOU mean
at the beginning?
STOCK EXCHANGE PRACTICES
3405
The CHAIRMAN. Yes. You refer to it here as the voting trust.
Mr. CLARKE. That is right—voting-trust certificates. There were
several voting trusts, Senator, and I would not like to answer without looking it up.
Mr. PECORA. Look it up.
Mr. CLARKE (after examining documents). I was a member of the
voting trust.
Mr. PECORA. Who else were voting trustees? Do you want the
book?
Mr. CLARKE.
Yes.
(Mr. Pecora hands book to the witness.)
Mr. CLARKE. The three voting trustees of General Theatres in the
beginning were myself, H. L. Clarke, Walter S. Hammons, and
W. F. Ingold.
Mr. PECORA. Walter S. Hammons was one of the members of the
firm of W. S. Hammons & Co., which was one of the bankers of this
corporation?
Mr. CLARKE. That is right.
Mr. PECORA. And Ingold was a partner of Pynchon & Co., which
is another one of the bankers of the banking syndicate of this
corporation ?
Mr. CLARKE.
Yes.
Mr. PECORA. West & Co. were another of the bankers in this banking syndicate?
jMr. CLARKE. Yes.
Mr. PECORA. DO you
know whether the Charles Wiggin, who was
a partner of West & Co., is related to Mr. Albert H. Wiggin?
Mr. CLARKE. Yes; I believe he is a relative.
Mr. PECORA. Mr. Wiggin, can you answer that specifically?
Mr. WIGGIN. His father and my father were cousins.
Mr. PECORA. Why were voting trust certificates issued at the outset of General Theatre Equipment, Inc., instead of the usual common
stock certificates?
Mr. CLARKE. I would say that during this period it was usual
to issue voting trust certificates—it was not unusual. Many corporations have voting trust certificates for their stock, to maintain
their management.
Mr. PECORA. Was it done to maintain their management?
Mr. CLARKE. Yes.
Mr. PECORA. HOW long did these voting trustees continue to serve ?
Mr. CLARKE. I think they continued to serve right up to the latter
part of 1930.
Mr. PECORA. When did the General Theatres Equipment, Inc., go
into receivership ?
Mr. CLARKE. Early in 1932; January, I believe. Do you have the
date ? [After conferring with an associate.] February 29, 1932.
Mr. PECORA. Did the common stockholders of the General Theatres
Equipment, Inc., ever receive anything but voting trust certificates?
Mr. CLARKE. YOU mean representing their stock?
Mr. PECORA. Yes.
Mr. CLARKE. I think not.
175541—34—PT 7
13
3406
STOCK EXCHANGE PRACTICES
Mr. PECORA. Mr. Clarke, who actually controlled General Theatres
Equipment, Inc., from the time of its organization in July of 1929 to
the time in 1932 when it went into receivership ?
Mr. CLARKE. I t was the voting trustees.
Mr. PECORA. The voting trustees at all times controlled it?
Mr. CLARKE. Yes, sir.
Mr. PECORA. And you
were one of the voting trustees at all times,
weren't you?
Mr. CLARKE. Yes,
sir.
Mr. PECORA. And the other voting trustees were representatives of
the banking syndicate ?
Mr. CLARKE. That is correct.
The CHAIRMAN. YOU stated a moment ago that the voting trustees
served until the latter part of 1931, didn't you?
Mr. PECORA. The latter part of 1930,1 think he said.
Mr. CLARKE. 1930; yes, sir.
The CHAIRMAN. Well, between that time on down.
Mr. CLARKE. Possibly they served right up to the
time of the receivership, but there was a change in there at some time, and I don't
know the date.
Mr. PECORA. The only change was a change in personnel, wasn't it?
Mr. CLARKE. Yes, sir.
Mr. PECORA. And they served on up to the end ?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Mr. Clarke, why don't you answer
the questions put
to you in a manner that would give the committee the information
that it seeks?
Mr. CLARKE. I am doing the best I can.
Mr. PECORA. Well, try to do a little better, if you please. Just try.
Mr. CLARKE. For my guidance, Mr. Pecora, would you mind telling me how I could have answered that question more clearly ?
The CHAIRMAN. YOU don't remember any changes in the voting
trustees, do you?
Mr. CLARKE. I don't remember the date.
Senator COTJZENS. But how about in the matter of personnel?
Mr. CLARKE. Yes; there was a change. Mr. Hammons resigned
and I do not know who was put in his place.
Mr. PECORA. NOW, Mr. Clarke, when the General Theatres Equipment took over in July of 1929, by an exchange of stock, the National Theatre Supply Co. what was the book value of the stock of
the National Theatre Supply Co.?
Mr. CLARKE. I don't know.
Mr. PECORA. Well, now, let me show you the application made to
the New York Stock Exchange to list the shares of General Theatres
Equipment, Inc., which has heretofore been marked in evidence as
" Committee Exhibit No. 125 ", as of November 10, 1933. Let me
call your attention to that page thereof which, in the upper righthand corner bears the number "A"—well, what is known as page 19
rather of this application. Isn't it a fact that as of June 30, 1929,
which was 2 weeks before the exchange was made, the total capital
and surplus of National Theatre Supply Co. was $4,199,459.70, of
which $3,540,419.93 represented capital stock, and $659,039.77 represented surplus. Is that right ?
Mr. CLARKE. Yes,
sir.
STOCK EXCHANGE PRACTICES
3407
Mr. PECORA. IS that right, now you have looked it over?
Mr. CLARKE. Yes, sir.
Mr. PECORA. NOW, among
the capital stock of the National Theatre
Supply Co. of that time was an issue of preferred stock callable at
107^, wasn't there?
Mr. CLARKE. Yes, sir.
Mr. PECORA. And the
callable value of that preferred stock was
$2,150,000.
Mr. CLARKE. Yes.
Mr. PECORA. There
was also outstanding at that time $235,800
principal amount of notes, callable at $105, were there not?
Mr. CLARKE. That is right.
Mr. PECORA. SO that the callable value of those notes at that
time was $247,590; is that right?
Mr. CLARKE. That is correct, if you have calculated it.
Mr. PECORA. What was that ?
Mr. CLARKE. I say, that is approximately correct, and is probably absolutely correct if you have calculated it, but I have not
figured it.
Mr. PECORA. There was also outstanding at that time 555,000
shares of common stock of no par value.
Mr. CLARKE. It is 554,000 shares, I believe.
Mr. PECORA. That gave a book value to the common stock ofv
about $3.22 a share as of June 30,1929, didn't it?
Mr. CLARKE. Isn't it $3.70 a share? Or maybe I misunderstood
your question.
Mr. PECORA. Well, it was between $3 and $4 a share. I will
give you a range of a whole dollar. I want to be generous this
morning.
Mr. CLARKE. Well, it is $3.70 and something. I think that is
what you said yourself, probably, but I don't remember.
Mr. PECORA. Well, $3.77, we will say, and I will accept your figure.
Now, at what valuation was that stock taken over by the General
Theatres Equipment Co.?
Mr. CLARKE. At a nominal value of $12,787,578.
Mr. PECORA. Did you say that figure was $12,787,578?
Mr. CLARKE. Yes, sir.
Senator COTJZENS. Why do you say " nominal" value?
Mr. CLARKE. Because I believe it is a term that is usually
used for a
value that is set up on the books of a holding company for stock
acquired. It really has no relationship to the assets. It is a purely
nominal figure, used, or calculated by the auditors and the people
in the company, to denote what they think that stock is going to be
worth.
Senator COTJZENS. Well, it is a speculative value rather than a
physical asset value?
Mr. CLARKE. Yes, sir.
Senator COTJZENS. Does it represent what you paid
Mr. CLARKE. NO, sir.
Senator COTJZENS. HOW about the computation of
for it?
it? How did
you compute it in this case?
Mr. CLARKE. Well, the same as it was in the case of the International Projector Corporation.
Mr. PECORA. I didn't hear you.
3408
STOCK EXCHANGE PRACTICES
Mr. CLARKE. I say, the same method was used in computing the
value of this stock that was used in the exchange for the International* Projector Corporation stock, namely, the potential earning
value, and actual earning value.
Senator COUZENS. May I ask, Mr. Pecora: Is there anything in
the statement you have before you to indicate how they arrived at
this figure of 12 million dollars? Or what was the earning power,
or what was it that would indicate that value?
Mr. PECORA. I have my own theory about it, and am perfectly
willing to express it. They adopted as a basis of value the market
quotation on the curb. Is that correct, Mr. Clarke?
Mr. CLARKE. I think that could be said to be a part of the basis.
But I think the basis also was the one I stated. But you say it was
that, and probably it figures out more correctly than my statement.
It is probably a more tangible statement.
Mr. PECORA. I did not say this was more correct than your statement. I t is an assumption of mine.
Mr. CLARKE. I think it is a correct assumption, too.
Senator COUZENS. Was that carried as the value at the time the
exchange was made?
Mr. PECORA. The book value of the outstanding shares of common
stock, Senator Couzens, was about $1,800,000. That was taken over
at this value of $12,787,000.
Senator COUZENS. And was that difference made up because of the
price of the stock on the curb exchange ?
Mr. PECORA. That is the only way I would explain it.
Senator COUZENS. Does that mathematically account for the
difference ?
Mr. PECORA. I t would approximate it.
Mr. CLARKE. Mr. Pecora, in your calculation you deducted the
notes, didn't you?
Mr. PECORA. I deducted both the notes and the preferred stock,
certainly, after getting the value of the common stock.
Mr. CLARKE. From the total of the capital stock and surplus?
Mr. PECORA. Yes.
Mr. KELLER. That
has already been deducted in arriving at that
figure, Mr. Pecora.
Mr. CLARKE. Which would make little difference.
Mr. PECORA. I t would make a little difference, do you say?
Mr. CLARKE. It would make little difference.
Mr. KELLER. It would make a difference of the amount of the
notes.
Mr. PECORA. Those notes were retired out of the cash provided
by General Theatres, weren't they?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Well, then,
there is a difference between the two
methods, but what is the actual difference?
Mr. CLARKE. If it were deducted prior to that time it would be
deducted twice.
Mr. KELLER. YOU are taking the capital stock and surplus as
shown by the balance sheet and deducting the preferred stock, and
also you are deducting the notes?
Mr. PECORA. Yes.
STOCK EXCHANGE PRACTICES
3409
Mr. KELLER. I think you are entitled only to deduct the preferred
stock.
Mr. PECORA. The notes were paid' by cash furnished by the
General Theatres Equipment.
Mr. KELLER. That has no relation to the balance sheet.
Mr. PECORA. But it has a relation to the price paid if they were
taken over by General Theatres Equipment. If General Theatres
Equipment, out of its treasury, supplied the cash for retiring the
notes, that would be so. It seems to me it is a difference between six
and half a dozen.
Mr. KELLER. It is a difference between computing book value and
the balance sheet of General Theatres Equipment.
Mr. PECORA. Giving you the benefit of the doubt we deducted
$247,590 on account of the notes. Let us add that to the $1,800,000,
which gives us by our method a resultant book value in stock of a
little over 2 million dollars. And that stock was entered by the
G.T.E., meaning General Theatres Equipment, at $12,787,000.
Mr. CLARKE. That is right.
Mr. PECORA. SO there was a mark-up there of over 10,000,000, of
over $10,700,000, wasn't there?
Mr. CLARKE. I beg pardon?
Mr. PECORA. Wasn't there such a mark-up ?
Mr. CLARKE. Let me see [figuring].
The CHAIRMAN. DO you call that water?
Mr. CLARKE. N O ; I don't. I would call it nominal value placed
on the books of the company for the stock.
Mr. PECORA. Isn't that what is usually called water, Mr. Clarke?
Mr. CLARKE. I should say that sometimes it is called water and
sometimes it is called what I call it, nominal value of the shares.
Mr. PECORA. Which would mean one and the same thing.
(Mr. Clarke merely shrugs his shoulders.)
Mr. PECORA. Mr. Clarke, please answer. That shrug of your
shoulders does not get on the record.
Mr. CLARKE. It depends, whether it means the same thing. But
that is too bad.
Mr. PECORA. NOW, prior to the creation of General Theatres
Equipment, Inc., according to the testimony you gave last week, you
caused to be acquired a company called J. E. McAuley Manufacturing Co., and one called Strong Electric Co., and another one called
Ashcraft Automatic Arc Co., and a concern called Hall & Connolly,
Inc. Do you remember that?
Mr. CLARKE. Yes, sir. [After a pause.] Mr. Pecora, may I correct that answer?
Mr. PECORA. Yes.
Mr. CLARKE. Did you say I testified to that last week?
Mr. PECORA. Well, you testified in substance that you
took those
companies over.
Mr. CLARKE. That we took over some companies.
Mr. PECORA. And those are the companies.
Mr. CLARKE. Yes; they are. I just wanted to be correct in my
answer to your question as propounded.
Mr. PECORA. The companies that you testified to last week.
Mr. CLARKE. We said lamp companies last week.
3410
STOCK EXCHANGE PRACTICES
Mr. PECORA. Are those the names of the lamp companies, or the
firms, that you referred to?
Mr. CLARKE. That is correct.
Mr. PECORA. DO you remember what they cost you?
Mr. CLARKE. Yes.
Mr. PECORA. What?
Mr. CLARKE. They cost a total of $3,232,422.95.
The CHAIRMAN. In cash or stock?
Mr. CLARKE. Cash.
The CHAIRMAN. Who paid that?
Mr. CLARKE. I paid for them.
Mr. PECORA. HOW much did you say you paid ?
Mr. CLARKE. It was $3,232,422.95.
Mr. PECORA. Whose funds or checks were used
in making such
payments ?
Mr. CLARKE. I think drafts were used.
Mr. PECORA. What was that?
Mr. CLARK. I think drafts were used, or certified checks.
Mr. PECORA. Out of whose funds?
Mr. CLARKE. Out of my funds, out of funds furnished by me.
Mr. PECORA. In whose name were those four firms or lamp companies taken over?
Mr. CLARKE. I think all the contracts were made by myself.
Mr. PECORA. Made by you individually?
Mr. CLARKE. By me individually, yes.
Mr. PECORA. And did you proceed to acquire those companies individually at first?
Mr. CLARKE. DO you mean separately by me?—Yes.
Mr. PECORA. Well, did you—let me see.
Senator COUZENS. He has answered your question; yes.
Mr. PECORA. HOW long before those companies or firms were acquired by General Theatres Equipment, Inc., did you acquire them?
Mr. CLARKE. Well, in the 6 months I should say preceding, or perhaps a shorter time.
Mr. PECORA. Did you acquire them by the same general method
that you used in acquiring all the outstanding capital stock of the
Nicholas Power Co.?
Mr. CLARKE. Well, the most of those companies were owned individually.
Mr. PECORA. Yes.
Mr. CLARKE. More
so than in the case of the others. In a few of
them we had to consider a number of stockholders, but only a few
of them.
Mr. PECORA. Before those companies were acquired by General
Theatres Equipment did you by the same general process that you
followed in the case of Nicholas Power Co. acquire the stock of those
firms or companies ?
Mr. CLARKE. I did not have as much difficulty in acquiring them.
Mr. PECORA. YOU did it the same, but not with as much difficulty,
is that it ?
Mr. CLARKE. Yes, sir. The most of the contracts, as I recall, were
option purchase contracts with small sums put up. The largest company, I think, had $25,000 for the option.
STOCK EXCHANGE PRACTICES
3411
Mr. PECORA. SO that these four companies and the Mitchell Camera
Co. were acquired by General Theatres Equipment, but General
Theatres Equipment virtually acquired them from YOU ?
Mr. CLARKE. That is correct; or I acquired them for the benefit of
General Theatres Equipment.
The CHAIRMAN. What did General Theatres Equipment pay you
for them?
Mr. CLARKE. The same amount that I paid out.
Mr. PECORA. HOW much was that ?
Mr. CLARKE. It was the total figure that I gave you, three million
two hundred thirty-two thousand and odd dollars.
Mr. PECORA. It was $3,232,422.95, wasn't it?
Mr. CLARKE. That is correct.
Mr. PECORA. I S that exactly what they had cost you?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Have you
got the agreements, or any of the agreements, that were entered into in connection with your acquisition
of the stock of those companies? I am referring now to J. E#
McAuley Manufacturing Co., Strong Electric Co., Ashcraft Automatic Arc Co., and Hall & Connolly, Inc.
Mr. CLARKE. Yes; but we haven't them here now.
Mr. PECORA. Will you let me have them during the luncheon
hour?
Mr. CLARKE. We have them at the hotel.
Mr. PECORA. Will you have them here at 2 o'clock?
Mr. CLARKE. Yes, sir.
Mr. PECORA. What was
the book value, the total book value, of
the J. E. McAuley Manufacturing Co., Strong Electric Co., Ashcraft Automatic Arc Co., and Hall & Connolly, Inc., at the time
General Theatres Equipment took them over for approximately 3
million dollars ?
Mr. CLARKE. Will you furnish us the stock listing application to
refer to ?
Mr. PECORA. Yes; here it is.
Mr. CLARKE. One minute. [After some figuring.]
The CHAIRMAN. Can you now give us an answer to that question ?
Mr. CLARKE. Yes, sir.
The CHAIRMAN. GO ahead.
Mr. CLARKE. The total book
value of the four lamp companies
was $484,114.08.
Mr. PECORA. I did not get that figure.
Mr. CLARKE. It is $484,114.08.
Mr. PECORA. And the General Theatres Equipment paid $3,232,422.95?
Mr. CLARKE. NO. That includes the Mitchell Camera Co. of
$1,475,000, which should be deducted from that figure you mention.
The total cost of the four lamp companies you mentioned was
$1,757,422.
Mr. PECORA. What was that figure?
Mr. CLARKE. It is $1,757,422.
Mr. PECORA. Of the four lamp companies?
Mr. CLARKE. Yes,
sir.
3412
STOCK EXCHANGE PRACTICES
Mr. PECORA. And what was the book value of the Mitchell Camera
Co. at the time it was taken over by General Theatres Equipment?
Mr. CLARKE. That is not shown here on the stock listing application, and we haven't got it. The Mitchell Camera Co. was not taken
over by General Theatres Equipment as such. It was taken over
through the medium of the Grandeur Co.
Mr. PECORA. Taken over by the Grandeur Co., which in turn was
taken over by General Theatres Equipment?
Mr. CLARKE. Yes,
sir.
Mr. PECORA. I will come to that presently. In other words, according to the testimony you have given this morning the book value of
the National Theatres Supply Co. at the time it was taken over by
General Theatres Equipment, was about $2,050,000. That is, without deducting the callable value of the notes, giving you the benefit
of that.
Mr. KELLER. We are entitled to it.
Mr. PECORA. And you are getting it. I don't know whether you
are entitled to it or not. It was taken over at a valuation of $12,787,578, or an excess of $10,737,000 above its book value. And the
four lamp companies were taken over at an excess of $1,273,000 over
and above their book value.
Mr. CLARKE. I beg pardon. They were taken over at cost, at what
they were purchased tor.
Mr. PECORA. NOW I ask you, was it not $1,273,000 over and above
their book value?
Mr. CLARKE. Yes.
Mr. PECORA. All right.
Mr. CLARKE. I say they were taken over at their cost.
Mr. PECORA. Well, I am asking you one question and
you want to
answer another. Just answer the one I am asking you, will you ?
Mr. CLARKE. What one is that?
Mr. PECORA. The four lamp companies, according to your testimony, were taken over by the General Theatres at a price of
$1,27 3,000, approximately, over and above their book value ?
Mr. CLARKE. That is correct.
Mr. PECORA. All right. The National Theatres Supply Co. was
taken over at a cost of $10,737,000, approximately, over and above
the book value?
Mr. CLARKE. That is correct.
Mr. PECORA. And last week you testified that the International
Projector Co. was taken over at $28,500,000 as against a book value
of $2,225,000, or in excess of $26,275,000, approximately. Do you
recall that?
Mr. CLARKE. I do.
Mr. PECORA. Which, according to my calculation, results approximately in the General Theatres having taken over these various subsidiaries at a valuation of some 38 million dollars over and above
their book value in July 1929.
Senator GOLDSBOROTJGH. DO you mean by that that they set up a
nominal value of 40 million dollars for something that actually cost
them only about $3,600,000, showing about 36 million dollars of what
might be termed " water " ?
Mr. PECORA. Nearly 38 million dollars of water; yes.
STOCK EXCHANGE PEAOTICES
3413
The CHAIRMAN. The committee will now take a recess until 2
o'clock.
(Thereupon, at 12:47 p.m., a recess was taken until 2 p.m., the
same day, Thursday, Nov. 16,1933.)
AFTERNOON SESSION
The subcommittee resumed at 2:25 p.m. on the expiration of the
recess.
The CHAIRMAN. The subcommittee will resume. You may proceed,
Mr. Pecora.
TESTIMONY OF HAEIEY I . CLARKE, CHICAGO, ILL.—Resumed
Mr. PECORA. Mr. Clarke, have you with you now the records that
you were asked to produce during your examination this afternoon?
Mr. CLARKE. Yes, sir. They will be here in a moment. We
brought the cases down. They are being unpacked. Mr. Keller
will have them here in a moment.
Mr. PECORA. Where are they ?
Mr. CLARKE. They are out in the room outside here. Mr. Keller
just came in with me now.
Mr. PECORA. Oh, they are unpacking them?
Mr. CLARKE. Yes.
Mr. PECORA. The papers
we want now are the papers with regard
to the acquisition of the four lamp companies.
Mr. CLARKE. Yes.
Mr. PECORA. And
anything that you might have bearing on that
Gold Street property.
Mr. CLARKE. Yes. I do not think we have any of those.
Mr. PECORA. DO you have any of those papers in Washington
at all?
Mr. CLARKE. NO ; I do not think we do.
Senator COUZENS. While we are waiting for those papers, Mr.
Clarke, you could perhaps elucidate what you mean as to the difference between nominal value of a stock as you have explained it this
morning, and where you say on a financial statement: Patents or
ood will, or something, $1. Just what is the difference there,
ecause in the latter case they explain it as a nominal value also ?
Mr. CLARKE. Well, the General Theatres did not acquire the assets
of any corporation. They acquired the stock. The stock of these
corporations was exchanged for General Theatres stock; and I believe
that it has always been customary for holding companies to set up
on their books the nominal value of the stock computed on a basis as
Mr. Pecora suggested this morning of the market. That is what I
mean by nominal value.
Now, in this case the exchange of the stock was made, as you perhaps recall, on a basis in the International, of 1 share of the
International for 1*4 shares of General Theatres to the extent of about 800,000 shares, and possibly more. Now, that exchange was made, and also the exchange on the basis of share for
share of the National Theatre Supply Co. for the General Theatres'
stock as a part consideration of the contract with the bankers in
f
3414
STOCK EXCHANGE PRACTICES
financing and in initiating the General Theatres Corporation. Of
course, these negotiations took some time.
Before the first meeting of the company could take place it had
to be formed, all these arrangements had to be made, contracts had
to be made in full, and that took several weeks anyway. So that at
the time the corporation was formed, already the control of these
companies had been secured, and that was a part of the consideration
of the contract in the financing, the initial financing. And while
the option was given on a lesser basis to other stockholders, as it
turned out they had nothing to lose by having that option, but everything to gain, because they could wait and see how that thing turned
out. As a matter of fact those people who kept their stock in the
International Projector Corporation and those people who kept their
stock in the National Theatre Supply—there are a few—have a
value today in their stock much greater than the General Theatres.
The General Theatres value has depreciated because of the lack of
earnings of the Fox Co. which it acquired. And these other companies which are constituent parts of the International Projector
Corporation and the National Theatre Supply Co. and the other
companies are not in receivership. They are still going concerns.
The CHAIRMAN. Those other companies are still doing business,
are they?
Mr. CLARKE. Yes.
Senator COTJZENS. Are they paying any dividends ?
Mr. CLARKE. NO, I do not think so.
Senator COUZENS. I still go back to the original question.
How
do you harmonize your use of the words " nominal value " in fixing
your books up, and in another case where they put in patents or goodwill for a dollar and call them nominal value? Just what is the
distinction ?
Mr. CLARKE. Well, I imagine if a patent was so valuable, Senator,
that it was taken in for stock that had a market value, that that
would be set up as the market value of that patent. Of course, these
holding companies have made a practice of that, I think you will
find generally, and I am not saying that it is a good practice. They
have made that a practice. And it is customary to put those values
on the books, call them nominal values, and treat them as investments and write them down if the securities go down in value.
Senator COUZENS. In fixing those nominal values do you take into
consideration the earning power in the past or prospective earning
power?
Mr. CLARKE. Well, I consider that both the actual earning power
of the company, and also the potential earning power would be taken
into consideration. That is, of course, what fixes the values of the
stock on the market.
The CHAIRMAN. What is the total number of shares of the General
Theatres?
Mr. CLARKE. The total number of shares exchanges was 1,840,766.
Senator TOWNSEND. That was the total number sold, do you mean?
Mr. CLARKE. The total number of shares issued.
Senator TOWNSEND. Issued.
Mr. CLARKE. Yes.
Senator COUZENS.
Mr. Pecora, are you later going into the subject
of the acquisition of Fox Films ?
STOCK EXCHANGE PRACTICES
3415
Mr. PECORA. Yes, sir. All that plays a very important part in
this whole injury as to the General Theatres Equipment.
The CHAIRMAN. 1,840,766 shares?
Mr. CLARKE. Yes. Mr. Pecora, I regret to tell you that Mr. Keller
tells me he is mistaken, and that he has not got those contracts here.
We did have them here and we took them up to New York last week,
but for some reason we do not have them here now. We can get
them for you tomorrow morning. I tell you we hope to get them
tomorrow morning. If we start now we can, probably.
Mr. PECORA. All right, then. Mr. Clarke, do you know what has
become of the minute books and other records of the Nicholas Power
Co.?
Mr. CLARKE. No; I do not. Mr. Burns tells me he cannot find
them.
Mr. PECORA. Have you made an effort to find them ?
Mr. CLARKE. NO, sir.
Mr. PECORA. Well, Mr. Burns, I understand, did make an effort
and simply cannot find them; does not know what became of them.
I wondered if you knew, inasmuch as you were the sole stockholder
of the Nicholas Power Co. at the time that your other corporation,
the International, acquired it.
Mr. CLARKE. Of course, the records must have been there at the
time. There was no occasion for using them, and I personally have
never sought to find them at any time, even prior to this investigation. And then, when Mr. Burns was requested to get. them, he
tells me he cannot find them. That is all that I can tell you about
it. Of course, you realize that I am not located at the company,
and only have a nominal connection with the company at the moment.
Mr. PECORA. What do you mean by nominal connection ?
Mr. CLARKE. Well, I mean I am a director in some of these companies, I am a director of the General Theatres; I am a director,
I believe, of the International.
Mr. PECORA. Were you not, as a matter of fact, the individual
that put S. R. Burns into the Nicholas Power Co. as president?
Mr. CLARKE. NO ; I did not have anything to do with it.
Mr. PECORA. Well, you knew Mr. Burns before he became
president ?
Mr. CLARKE. Yes. I heard him testify yesterday that he had been
with the company since 1914. I never got acquainted with anybody
in the company until 1921 or 1922.
The CHAIRMAN. The Nicholas Power Co. is not engaged in business now, is it ?
Mr. CLARKE. NO, sir.
Mr. PECORA. The General
Theatres Equipment, Inc., was organized to operate as a holding company, was it not?
Mr. CLARKE. Yes, sir.
Mr. PECORA. And was
that so organized in pursuance of your
ideas ?
Mr. CLARKE. Yes; I think so.
Mr. PECORA. In other words, what I want to ask you is: Were you
the moving spirit in the organization of the General Theatres Equipment, Inc. ?
Mr. CLARKE. I would say so; yes.
3416
STOCK EXCHANGE PKACTICES
Mr. PECORA. And the bankers who assisted you to organize and to
finance it were the Chase Securities Corporation, Pynchon & Co.,
West & Co., W. S. Hammons & Co., and Halsey, Stuart & Co., were
they not?
Mr. CLARKE. That is correct.
Mr. PECORA. And, as organized, the General Theatres Equipment
had an authorized capital stock of 5 million shares of no par value,
did it not?
Mr. CLARKE. Yes; that is correct.
Mr. PECORA. And of that amount how many shares were actually
issued?
Mr. CLARKE. TWO million eight hundred and forty thousand seven
hundred and sixty-six.
Mr. PECORA. There were actually issued 2,840,766 ?
Mr. CLARKE. That is correct.
The CHAIRMAN. He said one million before.
Mr. PECORA. That is what I thought he said—1,840,000.
Mr. CLARKE. Yes—840 thousand.
Mr. PECORA. One million or two million ?
Mr. CLARKE. TWO million.
Mr. PECORA. When you were asked off the record a question by
Senator Fletcher as to the number of shares of stock that this General Theatres Equipment Co. issued, the number as I recall you gave
it was 1,840,766.
Mr. CLARKE. NO. What I started to do was to give him the stock
which was exchanged. And then I asked him "The total?" And
he said " Yes ", and I gave him the total.
Mr. PECORA. What is the total?
Mr. CLARKE. TWO million eight hundred and forty thousand, the
figure I finally gave him.
Mr. PECORA. TWO million eight hundred and forty thousand seven
hundred and sixty-six?
Mr. CLARKE. Yes.
Mr. PECORA. HOW
much of that was issued at the time the company was launched?
Mr. CLARKE. The company was launched on July 11, and including
the stock sold to the bankers on August 1, which I take would be
included in the launching of the company, the total amount is
2,040,811.
Mr. PECORA. NOW, before the actual incorporation of General
Theatres Equipment on July 11,1929. did you not enter into a written
agreement with Chase Securities Corporation, Pynchon & Co., West
& Co., W. S. Hammons & Co., and Halsey, Stuart & Co., Inc., dated
July 9, 1929, under the terms and provisions of which the Greneral
Theatres Equipment, Inc., was organized?
Mr. CLARKE. Yes; I entered into a contract. I do not recall the
date.
Mr. PECORA. I show you what purports to be a photostatic reproduction of copy of such contract. Will you look at it and tell us if
you recognize it to be a true and correct copy thereof [handing
same to Mr. Clarke] ?
Mr. CLARKE (after examining same). Yes, sir.
STOCK EXCHANGE PRACTICES
3417
Mr. PECORA. I offer it in evidence and ask to have it spread upon
the record.
The CHAIRMAN. I t may be received in evidence and placed in the
record.
(General Theatres Equipment, Inc. Debenture Purchase Agreement between H. L. Clarke and Chase Securities Corporation, Pynchon & Co., West & Co., W. S. Hammons & Co., Halsey, Stuart &
Co., Inc., dated July 9. 1929, was received in evidence and marked
" Committee Exhibit No. 133 of Nov. 16,1933.")
Mr. PECORA. The document marked " Committee's Exhibit 133 "
in evidence is as follows. Dated New York, N.Y., July 9, 1929
[reading] :
CHASE SECUBITIES CORPORATION, PYNCHON & Co., WEST & Co., W. S. HAMMONS.
& Co., HALSEY STUART & Co., INC.
DEAR SIRS: This will confirm the arrangements made between you and the
undersigned for the purchase by you of $6,000,000 principal amount of debentures (hereinafter more fully described) of General Theatres Equipment, Inc.,
a corporation to be organized by the undersigned under the laws of the State
of Delaware.
General Theatres Equipment, Inc., when organized, will acquire the following: Fifty percent of the entire issued and outstanding capital stock of Grandeur, Inc., a corporation organized in 1929 and existing under the laws of the
State of New York; all of the issued and outstanding capital stock of Hall &
Connolly, Inc., a corporation organized and existing under the laws of the State
of New York; all of the issued and outstanding capital stock of a corporation
to be organized under the laws of the State of Delaware or Ohio under the
name of the Strong Electric Corporation, or a similar name, which new corporation will acquire all of the property, business, and assets of the Strong Electric Co., a corporation organized and existing under the laws of the State of
Ohio.
All of the issued and outstanding capital stock of a corporation to be organized under the laws of the State of Delaware or Illinois under the name of
J. E. McAuley Manufacturing Co., or a similar name, which new corporation
will acquire all of the property, business, and assets of J. E. McAuley Manufacturing Co., a corporation organized and existing under the laws of the
State of Illinois; all of the issued and outstanding capital stock of a corporation to be organized under the laws of the State of Delaware or California—
You were not playing any favorites, were you?
reading:]
[Continuing
under the name of Ashcraft Automatic Arc Co., or a similar name, which new
corporation will acquire all of the property, business, and assets of Ashcraft
Automatic Arc Co., a copartnership composed of Clarence S. Ashcraft and Mary
G. Ashcraft, both of Los Angeles, Calif.; all of the issued and outstanding
capital stock of Theatre Equipment Acceptance Corporation, a corporation
organized and existing under the laws of +he State of Delaware; 550,800 shares,
of the common stock, out of a total of 1,000,000 shares thereof issued and outstanding, of International Projector Corporation, a corporation organized and
existing under the laws of the State of Delaware; 294,421 shares of the common
stock, out of a totaj of 510,600 shares thereof, issued and outstanding, of
National Theatre Supply Co., a corporation organized and existing under the
laws of the State of Delaware.
Grandeur, Inc., a corporation of the State of New York, 50 percent of the
capital stock of which is to be acquired by General Theaters Equipment, Inc.,
will acquire all of the common stock of Mitchell Camera Corporation, a corporation to be organized under the laws of the State of Delaware, which latter
corporation will acquire all of the property, business, and assets of the Mitchell
Camera Co., a corporation organized and existing under the laws of the State
of California, together with the land in Los Angeles, Calif., that has been
acquired, the buildings being erected thereon, and the machinery and equipment to be installed therein, for the corporation to be organized, under the
laws of the State of Delaware as aforesaid.
3418
STOCK EXCHANGE PRACTICES
The Mitchell Camera Co. is engaged in the manufacture of the Mitchell
motion-picture camera; Hall & Connolly, Inc., the Strong Electric Co., J. E.
McAuley Manufacturing Co., and Ashcraft Automatic Arc Co. are respectively
engaged in the manufacture, distribution, and sale of electric arc lamps used
in theaters. Theater Equipment Acceptance Corporation is engaged in purchasing or otherwise acquiring and selling or otherwise disposing of, and in
trading and dealing in, chattel mortgages, conditional sales contracts, track*
acceptances, and other obligations and commercial paper executed and delivered in respect of the purchase price, or deferred payments upon the purchase
price, of theater equipment.
General Theatres Equipment, Inc., is to be incorporated under the laws of
the State of Delaware. It will have an authorized capital stock of 5,000,000
shares of common stock, all of which will be without par value. The proposed
certificate of incorporation of General Theatres Equipment, Inc., is marked
" Schedule A", and annexed hereto and made a part hereof. No changes in
said certificate of incorporation will be made, prior to the delivery to you of
the debentures to be purchased by you hereunder, without your consent.
The undersigned agrees: 1. To cause General Theatres Equipment, Inc., to
be organized and incorporated as aforesaid;
2. To cause said General Theatres Equipment, Inc., when organized and incorporated as aforesaid, to issue $6,000,000 principal amount of debentures substantially in accordance with the terms and provisions set forth in schedule B
hereof;
3. To deliver to said General Theatres Equipment, Inc., certificates for 550,800
fully paid and nonassessable shares of the common stock of said International
Projector Corporation, now owned or controlled by the undersigned, duly endorsed in blank for transfer or accompanied by instruments in writing, duly
authorizing the transfer thereof, or registered in the name of said General
Theatres Equipment, Inc., mid/or its nominee or nominees, in exchange for
688,500 shares of common stock of said General Theatres Equipment, Inc., to
be issued pursuant to the terms, conditions, and provisions set forth in the
proposed certificate of incorporation, schedule A hereof.
4. To deliver to said General Theatres Equipment, Inc., certificates for 294,421
fully paid and nonassessable shares of the common stock of said National
Theater Supply Co., now owned or controlled by the undersigned, duly endorsed
in blank for transfer or accompanied by instruments in writing, duly authorizing the transfer thereof, or registered in the name of said General Theatres
Equipment, Inc., and/or its nominee or nominees, in exchange for 294,421 shares
of common stock of said General Theatres Equipment, Inc., to be issued pursuant to the terms, conditions, and provisions set forth in the proposed certificate of incorporation, schedule A hereof.
5. To cause said General Theatres Equipment, Inc., to acquire 50 percent of
the entire issued and outstanding capital stock of said Grandeur, Inc., at a
cost of not to exceed $2,000,000.
6. To cause said General Theatres Equipment, Inc., to acquire the capital
stock of Hall & Connolly, Inc., and the capital stocks of the corporations to be
organized to acquire the property, business, and assets of the Strong Electric
Co., J. E. McAuley Manufacturing Co., and Ashcraft Automatic Arc Co., as
hereinabove set forth, at a cost of not to exceed $3,000,000.
7. To cause said General Theatres Equipment, Inc., to acquire all of the
common stock of said Theatre Equipment Acceptance Corporation in exchange
for 25,000 shares of the common stock of said General Theatres Equipment,
Inc., and to retire all of the preferred stock of said Theatre Equipment Acceptance Corporation at an expenditure of not to exceed $540,000.
8. To furnish to you, without expense to you, an opinion of a responsible
counsel (in a form satisfactory to your counsel) that the stocks of the above
corporations to be acquired by General Theatres Equipment, Inc., shall all be
fully paid and nonassessable and that the businesses and assets of the above
corporations to be acquired by said General Theatres Equipment, Inc., shall
be so acquired free and clear of liens and other encumbrances. Said responsible
counsel may be Messrs. Matthews & Koegel.
Reference is hereby made to an agreement of even date between the undersigned and some of yourselves covering the purchase by some of yourselves from
General Theatres Equipment, Inc., of 300,000 shares of its common stock with
out par value. Upon the completion of the purchase by you of the debentures,
which are the subject of this agreement, and of the common stock, which is the
STOCK EXCHANGE PRACTICES
3419
subject of the agreement referred to above in this paragraph, and the retirement of all the outstanding notes and preferred stock of National Theatre
Supply Co. and all the outstanding preferred stock of International Projector
Corporation and all the outstanding preferred stock of Theatre Equipment
Acceptance Corporation, the undersigned represents to you that the pro forma
balance sheet of General Theatres Equipment, Inc., attached hereto and marked
" Schedule C ", is a true statement of what the financial structure and condition of General Theatres Equipment, Inc., will then be.
The undersigned further represents that the balance sheet certified by F. W.
Lafrentz & Co., marked " Schedule D ", annexed hereto and made a part hereof,
correctly reflects what will be the condition of said Grandeur, Inc., after its
entire capital stock shall have been subscribed and paid for.
The undersigned hereby agrees to cause General Theatres Equipment, Inc.,
to make, as soon as practicable after the completion of the purchase by yourselves of said 300,000 shares of common stock of General Theatres Equipment, Inc., an offer for the purchase, at the call prices, of all the outstanding
notes and preferred stock of the National Theater Supply Co., and all the outstanding preferred stock of International Projector Corporation, and all the
outstanding preferred stock of Theater Equipment Acceptance Corporation.
Said cash offer shall remain open at least until January 1, 1930, and during
said period no alternative offer for the purchase of said stock and securities
shall be made by General Theatres Equipment, Inc.
The said 300,000 shares of common stock will be sold at the price of $20
per share and the $6,000,000 realized by such sale shall be placed in escrow
with the Chase National Bank of the City of New York under an escrow
agreement, satisfactory to our respective counsel, for the purpose of retiring the outstanding preferred stocks of the Theatre Equipment Acceptance
Corporation, National Theater Supply Co., and International Projector Corporation, and notes of the National Theatre Supply Co.
The undersigned further represents to you that the balance sheets of said Hall
& Connolly, Inc., Theatre Equipment Acceptance Corporation, International Projector Corporation, National Theatre Supply Co., the Strong Electric Co., J. E.
McAuley Manufacturing Co., (which will be furnished by July 15, 1929),
Mitchell Camera Co., and Ashcraft Automatic Arc Co., (a copartnership),
marked " Schedule E ", annexed hereto and made a part hereof, correctly reflect
the financial condition of the aforesaid corporations and copartnership, respectively, as of the respective dates of said balance sheets, and that no changes
in financial condition of the aforesaid corporations and copartnership, or
any of them, have occurred, except in the ordinary course of business since the
respective dates thereof.
The, undersigned further represents to you that the net profits, after depreciation but before taxes, from the business of said Hall & Connolly, Inc., Theater
Equipment Acceptance Corporation, International Projector Corporation, National Theatre Supply Co., the Strong Electric Co., J. E. McAuley Manufacturing Co., Mitchell Camera Co., and Ashcraft Automatic Arc Co. (a copartnership) were respectively as set forth in the statement marked " Schedule
F ", annexed hereto and made a part hereof. The undersigned also represents
to you that said net earnings, for the period from May 31, 1928, to May 31,
1929, have been not less than $2,200,000.
Subject to the correctness of all representations made by the undersigned
herein, and to the performance by the undersigned of all agreements herein
set forth to be performed by the undersigned, and subject to the approval
of your counsel as to all legal matters pertaining to the transactions herein
referred to, you agree to purchase or cause to be purchased from said General
Theatres Equipment, Inc., and the undersigned agrees to cause said General
Theatres Equipment, Inc., to sell to you, or to the purchasers designated by
you $6,000,000 principal amount of debentures of General Theatres Equipment,
Inc., substantially in accordance with the terms and provisions set forth in
schedule B hereof, at the price of $90 per $100 principal amount thereof, plus
accrued interest. Delivery of said debentures shall be made against payment
therefor at the Chase National Bank, of the city of New York, at its oifice,
18 Pine Street, New York City, or at the office of Pynchon & Co., I l l Broadway,
New York City, at your option, on August 1, 1929.
I agree that the certificates for 550,800 shares of common stock of International Projector Corporation and 294,421 shares of common stock of National
Theatre Supply Co. now owned or controlled by me, and to be delivered by me
3420
STOCK EXCHANGE PRACTICES
to said General Theatres Equipment, Inc., in exchange for shares of its common
stock, as hereinabove set forth, shall be so delivered prior to the delivery to you
of the $6,000,000 principal amount of debentures of General Theatres Equipment,
Inc. Unless and until I shall have delivered to said General Theatres Equipment, Inc., certificates for said shares of common stock of International Projector Corporation and National Theatre Supply Co., as hereinabove set forth,
you shall be under no obligation to accept delivery of and pay for said $6,000,000
principal amount of debentures.
The undersigned agrees to cause said General Theatres Equipment, Inc., at
no expense to you, to use its best efforts to qualify said debentures under the
so-called " blue-sky laws " of any State in which you may desire to offer said
debentures for sale, and to that end to furnish all information and documents
and to execute any and all papers which may be necessary or proper so to
qualify the same.
The undersigned agrees to furnish you with the usual letter or letters to be
attached to any circular which you may wish to use in connection with the
offering of said debentures to the public;—such letter or letters to contain such
information regarding the affairs of said General Theatres Equipment, Inc.,
as shall mutually be deemed advisable and to be signed by its president.
The reasonable fees and disbursements of your counsel in connection with
this transaction shall be paid by said General Theatres Equipment, Inc.
There shall be supplied to your counsel at no expense to you all documents
reasonably requested by them in connection with their examination of any
matters mentioned herein or arising hereunder.
The undersigned further represents to you that no agreements have been
made for the issue by said General Theatres Equipment, Inc., of any of its
bonds, debentures, notes, or other obligations in addition to the $6,000,000
principal amount of debentures to be purchased or caused to be purchased by
you, as herein provided.
The undersigned agrees to cause said General Theatres Equipment, Inc., to
make application, at its expense, to list said debentures on such stock exchange
or exchanges as you may designate and at such time or times as you may
designate.
The undersigned agrees to cause said General Theatres Equipment, Inc., to
furnish you monthly earnings statements and quarterly balance sheets thereof
as soon after the last day of each period as is reasonably practicable.
The undersigned agrees that he will cause said General Theatres Equipment,
Inc., to have its books audited once a year by certified public accountants in
good standing and to cause said General Theatres Equipment, Inc., to furnish
you with certified copies of such audits as soon as is reasonable after the close
of each fiscal year.
At the option-of the undersigned any or all of the common stock of said
General Theatres Equipment, Inc., may be deposited in a voting trust to be
created by an agreement satisfactory to you and your counsel and to be
construed according to the laws of the State of New York. In case any of
the shares of common stock of said General Theatres Equipment, Inc., shall
be deposited in such voting trust, voting trust certificates may be issued and
delivered in lieu of, and as the equivalent of, certificates for such common
stock under any of the provisions hereof.
The undersigned agrees that he will at any time at your request rote all
shares of stock of said General Theatres Equipment, Inc., which he owns or
controls, and which may not be represented by voting trust certificates, for
the election of any five persons whom you may designate as directors of said
General Theatres Equipment, Inc.
In the event that the said common stock is deposited in the voting trust
as hereinabove provided, I agree to cause the voting trustees to be H. L. Clarke,
Walter S. Hammons, and W. F. Ingold.
The undersigned agrees to cause said General Theatres Equipment, Inc., to
enter an agreement with you that said General Theatres Equipment, Inc., will
not issue any shares of its common stock in exchange for shares of common
stock of the aforesaid corporations at rates exceeding one and one quarter shares
of its common stock per share of common stock of International Projector Corporation and one share of its common stock per share of common stock of National
Theatre Supply Co. without your consent.
The undersigned further agrees to cause said General Theatres Equipment,
Inc., to give you so-called " preferential rights " with respect to the purchase of
STOCK EXCHANGE PRACTICES
3421
any additional and future issues of its bonds, debentures, notes, or other
obligations.
This instrument shall be construed according to the laws of the State of New
York.
If the foregoing is in accordance with your understanding, please sign your
acceptance in the space provided below.
Yours very truly,
H. L. CLARKE,
By O. E. KOEGEL,
Attorney in fact.
Accepted:
Chase Securities Corporation, by Murray W. Dodge, vice president;
Pynchon & Co., by W. F. Ingold, a partner; West & Co., by
Charles B. Wiggin, a partner; W. S. Hammons & Co.. by W. S.
Hammons, president; Halsey, Stuart & Co., Inc., by E. W. Niver,
vice president.
SCHEDULE B
The debentures to be issued by General Theatres Equipment, Inc., are to be
known as its "15-year 6-percent convertible gold debentures", and are to be
issued under an indenture to be executed by said General Theatres Equipment, Inc., and the Chase National Bank of the City of New York, as trustee,
which indenture shall contain, among others, the following terms and conditions:
1. The principal amount of debentures at any one time outstanding shall
not exceed $6,000,000.
2. The debentures shall be dated as of July 1, 1929, and shall mature July 1,
1944.
3. Interest on the debentures at the rate of 6 percent per annum shall be
payable semiannually, on the 1st day of January and the 1st day of July in
each year, at the principal office of the Chase National Bank of the City of
New York, and at the option of the holders thereof, at Continental Illinois Bank
& Trust Co., in Chicago, 111.
4. The debentures shall be convertible at the option of the holders thereof,
at any time on and after January 1, 1930, into the common stock of said General
Theatres Equipment, Inc., at the rate of $100 principal amount of debentures
for three shares of such common stock, or, in case such common stock shall
subsequently be reclassified or become exchangeable for, or convertible into,
any other class or classes of stock, then into the equivalent of such three
shares of common stock. In case of the declaration of any stock dividend,
the debenture holder shall at the time of conversion be entitled to and receive
the same or its equivalent as above provided. In case, while the debentures
are outstanding, the company shall offer any stock to holders of its outstanding
stock for subscription at a price less than $33% per share, it shall cause
notice of the offering to be published and the debenture holders shall have
the right during the period allowed for subscriptions by other stockholders
(but not less than 20 days after the first publication of such notice) to receive
stock upon conversion of their debentures to such number of shares as will
make the price thereof the same as that at which it is offered to holders of
outstanding stock.
5. The debentures shall be redeemable at the option of said General Theatres
Equipment, Inc., as a whole at any time after July 1, 1930, or in part from
time to time after July 1, 1930, or any interest date, upon not less than 40 days'
notice, at the rate of $110 per $100 principal amount of debentures, plus interest
to date of redemption. Said General Theatres Equipment, Inc., may also purchase debentures for retirement and cancellation at any time or from time to
time at a price or prices not exceeding the redemption price, plus interest to the
date of purchase thereof.
6. In case the debentures or any of them shall be called for redemption the
holders thereof may exercise the aforesaid right to convert the same into
common stock up to and including the tenth day preceding the date of redemption.
7. Beginning July 1, 1933, a sinking fund will be established for the purpose
of retiring the said debentures at the rate of $300,000 per year.
8. The company will covenant not to create or permit any lien upon its holdings of subsidiary companies or other assets without securing the debentures
175541—34—PT 7
14
3422
STOCK EXCHANGE PRACTICES
at least equally, except that this shall not apply to loans maturing not more
than 1 year after date secured by assets other than shares of common or
other voting stock of subsidiary and controlled companies. The company
will further covenant not to permit any subsidiary or controlled company to
issue additional shares of common or other voting stock, unless all thereof, or
at least the same proportion thereof as formerly owned, shall be acquired by
the company or another subsidiary. The company will also covenant to furnish
to the trustee annually financial statements, including balance sheets and
earning statements of itself and its subsidiary and controlled companies.
9. The company will covenant to refund the following taxes:
(a) Pennsylvania personal property taxes not exceeding 4 mills per annum
on each dollar of the taxable value or principal amount of such debenture;
(&) California personal property taxes not exceeding 5 mills per annum on
each dollar of the taxable value or principal amount of such debenture;
(c) Connecticut personal property taxes not exceeding 4 mills per annum
on each dollar taxable value or principal amount of such debenture;
(d) Maryland personal-property taxes not exceeding 4% mills per annum on
each dollar of the taxable value or principal amount of such debentures;
(e) Kentucky personal-property taxes not exceeding 5 mills per annum on
each dollar of the taxable value or principal amount of such debenture;
(f) Massachusetts income taxes not exceeding 6 percent on the interest
payable on such debenture;
(g) Maine personal-property taxes not exceeding 5 mills per annum on each
dollar of the taxable value or principal amount of such debenture, and/or
Maiiie income taxes not exceeding 6 percent per annum on the interest payable
on such debenture, which may hereafter from time to time be imposed by the
laws of said State; and
(h) New Hampshire income taxes not exceeding 3 percent per annum on
the interest payable on such debenture.
Mr. PECORA. For the information of the subcommittee, I might
say that I have read into the record the entire agreements with the
exception of the schedules that were annexed thereto and made a
part thereof.
The CHAIRMAN. Very well.
Mr. PECORA. NOW, Mr. Clarke, I assume that this agreement of
July 9, 1929, represents the conclusions that had been arrived at between you and the other parties to this agreement as the result of a
series of conferences that were held prior to July 9 ?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Over how long a period of time were those confer-
ences held that culminated in this agreement?
Mr. CLARKE. I would say several months, anyway.
Mr. PECORA. Then it took about 7 months
Mr. CLARKE (interposing). No. I said a couple of months, or
rather I used the term " several months."
Mr. PECORA. I thought you said 7 months.
Mr. CLARKE. NO. I said several months.
Mr. PECORA. Then it took 2 or more months to hatch this proposition; is that right?
Mr. CLARKE. That is correct.
Mr. PECORA. In those conferences did you discuss the proposal
with the gentlemen representing the various parties hereto, who
signed the agreement in behalf of their respective parties ? That is
to say, with Mr. Murray W. Dodge in behalf of Chase Securities
Corporation, and with Mr. William F. Ingold in behalf of Pynchon
& Co., and with Mr. Charles Wiggin in behalf of West & Co., and
with Mr. Hammons in behalf of W. S. Hammons & Co.
Mr. CLARKE. I discussed it with them, and others.
STOCK EXCHANGE PRACTICES
3423
Mr. PECORA. And with others?
Mr. CLARKE. In their organizations; yes? sir.
The CHAIRMAN. Were those debentures issued that are mentioned
in this agreement?
Mr. CLARKE. Yes,
sir.
Mr. PECORA. Practically all the terms and conditions embodied in
this agreement marked " Committee Exhibit No. 133 " were carried
out, were they?
Mr. CLARKE. Yes; I would say practically so.
Mr. PECORA. NOW, I notice that in this agreement provision was
made for the formation of different corporations which were designed
to take over the assets of the four so-called " lamp companies " that I
questioned you about this morning. That is true, isn't it ?
Mr. CLARKE. Yes.
Mr. PECORA. NOW,
some of those lamp companies were actually
in the form of existing corporations, were they not ?
Mr. CLARKE. That is correct.
Mr. PECORA. Prior to the making of this agreement?
Mr. CLARKE. That is right.
Mr. PECORA. Why were new corporations formed to take over those
existing corporations in such cases?
Mr. CLARKE. I think, perhaps, in order to comply with the bulk
sales law.
Mr. PECORA. And what were the features of the bulk sales law
that you wanted to comply with essentially by that manner?
Mr. CLARKE. All of them, I assume.
Mr. PECORA. Well, what were they as you had them in mind?
Mr. CLARKE. Well, I cannot give you a digest of the bulk sales
law. I know generally what it means, of course, but
Mr. PECORA (interposing). Well, now, tell us in your own way.
Mr. CLARKE. The bulk sales law, as I understand it, is a law designed to prevent combinations of sales of competing companies in
all States of the Union. Is that correct?
Mr. PECORA. Did a lawyer ever tell you that those were the salient
features of the bulk sales law ?
Mr. CLARKE. I told you I didn't know what they were.
Mr. PECORA. Aren't you now referring to the antimonopoly laws
instead of the bulk sales law?
Mr. CLARKE. No; I am referring to section (c) of the Clayton
Act. But, to be perfectly frank with you, I could not give you a
good digest of the bulk sales law.
Mr. PECORA. YOU had in mind that there was something to be
^complied with with regard to the bulk sales law that made it
necessary or advisable
Mr. CLARKE (interposing). I say, perhaps.
Mr. PECORA (continuing). To organize new corporations to take
over existing corporations.
Mr. CLARKE. I said, perhaps that was the reason.
Mr. PECORA. NOW, can you tell this subcommittee at what price,
or prices, those existing corporations or copartnerships that were
engaged in the business of lamp manufacture, were taken over by
the corporations that were organized especially under the terms
of this agreement to take them over?
3424
STOCK EXCHANGE PRACTICES
Mr. CLARKE. At the same prices that we paid the owners for them.
Mr. PECORA. YOU are sure of that, are you?
Mr. CLARKE. Yes; I feel quite sure of it, unless there was some
organization expense, or were some items of that kind.
Mr. PECORA. And you are going to make a further search for
the documents in connection with those matters?
Mr. CLARKE. I am going to give you an actual account of it.
Mr. PECORA. NOW, the 550,800 shares of common stock of the
International Projector Corporation which General Theatres Equipment, Inc., obligated itself to acquire under the terms of this agreement, were the shares that you then owned, weren't they ?
Mr. CLARKE. That is correct.
Mr. PECORA. Which did not include shares owned by SLUJ of the
other stockholders of the International Projector Corporation, did
it?
Mr. CLARKE. NO. I could not contract for any other stockholder.
Mr. PECORA. NOW, the 294,421 shares of common stock of General
Theatres Equipment, Inc., which under the terms of this agreement
General Theatres Equipment was obligated to acquire in exchange
for its own stock, were the shares of National Theatre Supply Co.
which you then owned; is that right ?
Mr. CLARKE. I believe so; yes, sir.
Mr. TPECORA. Reference is made in this agreement to the acquisition
of all the common stock of the Theatre Equipment Acceptance Corporation, in exchange for 25,000 shares of the common stock of
General Theatres Equipment, Inc. Who owned the common stock
of Theatre Equipment Acceptance Corporation referred to in this
agreement?
Mr. CLARKE. Webster Securities Corporation.
Mr. PECORA. And who owned the Webster Securities Corporation ?
Mr. CLARKE. I did.
Mr. PECORA. YOU did?
Mr. CLARKE. Yes, sir.
Mr. PECORA. HOW many
shares of the Theater Equipment Acceptance Corporation did you own through the Webster Securities
Corporation ?
Mr. CLARKE. Five thousand.
Mr. PECORA. YOU owned 5,000 shares?
Mr. CLARKE. Yes, sir.
Mr. PECORA. What did they cost you?
Mr. CLARKE. It was $50,000.
Mr. PECORA. And in return for them you
got 25,000 shares of the
common stock of General Theaters Equipment, Inc ?
Mr. CLARKE. That is correct.
Mr. PECORA. Which was the stock, or a part of the issue of stock
that the bankers themselves agreed to pay $20 a share for under this
agreement?
Mr. CLARKE. That is right.
Mr. PECORA. SO, giving that valuation of $20 a share to those
25,000 shares, and assuming that that valuation represented a fair
and reasonable value, you got the equivalent of $500,000 for stock of
the Theater Equipment Acceptance Corporation which cost you
$50,000; is that right?
Mr. CLARKE. That is correct.
STOCK EXCHANGE PRACTICES
3425
Mr. PECORA. HOW long before July of 1929 did you put that
$50,000 into the Theatre Equipment Acceptance Corporation ?
Mr. CLARKE. I will find it. [Looking through some papers.]
Mr. PECORA. Well, tell us approximately if you cannot tell us
exactly.
Mr. CLARKE. I think we have it. I will try to get it for you in a
minute.
Mr. PECORA. All right. [After a pause.] I t was about 2 years
before, wasn't it?
Mr. CLARKE. I t was about September of 1927.
Mr. PECORA. September of 1927, a little less than 2 years before.
Mr. CLARKE. Yes,
Mr. PECORA. And
sir.
as to that Theater Equipment Acceptance Corporation, it was a corporation which you caused to be organized,
wasn't it?
Mr. CLARKE. Yes, sir.
Mr. PECORA. And its
business consisted of extending credit to
purchasers or customers of the National Theatre Supply Co. and the
other companies that you had caused to be organized; is that right?
Mr. CLARKE. That is correct.
Mr. PECORA. NOW, there is a provision contained in this agreement,
which has been marked " Committee Exhibit No. 133 ", for the retirement by purchase by General Theatres Equipment, Inc., of all the
outstanding notes and preferred stock of both the National Theatre
Supply Co. and the International Projector Corporation, as well as
all of the outstanding preferred stock of Theater Equipment Acceptance Corporation; do you recall that?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Who held
the preferred stock and notes outstanding
of the National Theatre Supply Co. on July 9,1929 ?
Mr. CLARKE. I can tell you what I had in just a moment [looking
over some papers].
Mr. PECORA. All right.
Mr. CLARKE. I held 2,376 shares of preferred
Mr. PECORA (interposing). A little louder, please.
Mr. CLARKE. I held 2,376 shares of the preferred out of a total
of 20,000 shares issued.
Mr. PECORA. In which corporation, now?
Mr. CLARKE. In the National Theatre Supply Co.
Mr. PECORA. Who held the balance?
Mr. CLARKE. I don't know. I haven't a list of it.
Mr. PECORA. Did the bankers or any of them hold them?
Mr. CLARKE. Well, the bankers purchased, as you will recall,
and
Mr. PECORA (interposing). Were the bankers, then, the holders of
the other outstanding preferred shares?
Mr. CLARKE. Well, I think the public held the most of the shares.
Mr. PECORA. NOW
Mr. CLARKE (continuing).
I am getting you this International
data
Mr. PECORA (interposing). Well, I am asking you now about the
National Theatre Supply Co. preferred stock.
Mr. CLARKE. All right.
3426
STOCK EXCHANGE PRACTICES'.
Mr. PECORA. The callable price of that stock was 107%, wasn't it?
Mr. CLARKE. That is correct.
Mr. PECORA. And that is what you received under the terms of
this agreement, for your portion of the preferred stock of National
Theatre Supply Co.?
Mr. CLARKE. I did not sell it to the company.
Mr. PECORA. What was that answer ?
Mr. CLARKE. I did not sell it direct to the company. That was the
stock that I sold. That 3-3 purchase account, we had that, which I
think we called a trading account, but it really wasn't so, but was
a purchase account.
Mr. PECORA. Who were the two other parties to it ?
Mr. CLARKE. Mr. Murray W. Dodge and Mr. William F. Ingold.
Mr. PECORA. In their individual rights or in their representative
capacities ?
Mr. CLARKE. In their individual rights, I think.
Mr. PECORA. I want you to have available when I* call for it some1
time tomorrow the terms of that 3-3 account.
Mr. CLARKE. We haven't got it.
Mr. PECORA. Have you a copy of it, Mr. Dodge? [No response.]
Mr. CLARKE. I know what happened, though,, ins the account, and
what stock was purchased, and can tell you that now.
Mr. PECORA. I want to know, Mr. Clarke, and I thought you
were telling me when you answered my question to that effect before; I want to know now who were the holders of the preferred
stock of the National Theatre Supply Co. on July 9, 1929, when this
agreement, marked " Committee Exhibit No. 133 ", was entered into.
When I asked you that question before you said you owned 2,376
shares.
Mr. CLARKE. That is correct.
Mr. PECORA. I S that correct?
Mr. CLARKE. Yes.
Mr. PECORA. I thought you said it was in a 3-3 account.
Mr. CLARKE. I did. And you asked what I got in exchange,
and
I told you I sold it to this account.
Mr. PECORA. Prior to July 9?
Mr. CLARKE. N O ; I think afterwards, but I don't know the date.
Mr. PECORA. Have you been able yet from your documents
Mr. CLARKE (interposing). Just a moment, and perhaps we can
find it here.
Mr. PECORA. Very well.
Mr. CLARKE. According to our records it was turned over to this,
account September 18, 1929.
Mr. PECORA. NOW, Greneral Theatres Equipment, Inc., actually retired that stock by purchase at the call price, didn't it ? That is, it
bought it or purchased it at 107% ?
Mr. CLARKE. That is right, all of it.
Mr. PECORA. NOW, on July 9,1929, when the agreement in question
was entered into which provided that such purchase be made, what
was the market quotation for that preferred stock of the National
Theatre Supply Co.?
Mr. CLARKE. I don't know.
STOCK EXCHANGE PRACTICES
3427
Mr. PECORA. Was the stock listed on any public exchange at that
time?
Mr. CLARKE. I don't know, but I don't think it was.
Mr. PECORA. My information, Mr. Clarke, is to the effect substantially that during the months of June and July 1929 the preferred
stock of the National Theatre Supply Co. was quoted within the
following ranges: June, 79 bid, 90 asked; July, 71 bid, 81 asked.
Does that accord with your recollection, substantially?
Mr. CLARKE. I do not recall that it was listed, Mr. Pecora. It
may have been.
Mr. PECORA. Whether it was listed or not, it was dealt in over
the counter, was it not?
Mr. CLARKE. Oh, yes; I suppose so.
Mr. PECORA. Then these quotations would be the quotations in the
over-the-counter market ?
Mr. CLARKE. If you received those quotations from somewhere, I
do not doubt it; but I do not know what the price was.
Mr. PECORA. YOU do know this, that there were no public quotations for the stock at anything like 107% at any time during the
month of July 1929 or during the month of June 1929?
Mr. CLARKE. I imagine not. I do not know.
Mr. PECORA. Mr. Clarke, I notice on the face of the contract of
July 9, 1929, which has been marked in evidence as " Exhibit No.
133 ", that at various places in the contract containing provisions
for the purchase of the outstanding preferred stocks and notes or
bonds of the National Theatre Supply Co., the International Projector Corporation, and the Theatre Equipment Acceptance Corporation, as the agreement was originally drawn the provision was for
the retirement of those securities rather than the purchase of them
by the General Theatres Equipment, Inc.; and I observe that the
typewritten word " retirement" in those places where it occurs in
this agreement is deleted by the drawing of a pen line through the
word and the insertion of the word " purchase ", in handwriting,
over the word " retirement." Do you recognize the handwriting of
those changes [handing paper to the witness] ?
Mr. CLARKE. I t looks bad enough to be mine.
Mr. PECORA. It looks like your handwriting?
Mr. CLARKE. NO ; I did not say that. I said it looks bad enough to
be mine. [After examining paper with reading glass.] No; it is
too good. I t is not mine; it is not my handwriting.
Mr. PECORA. It is not?
Mr. CLARKE. It is not; no.
Mr. PECORA. DO you know whose handwriting that
Mr. CLARKE. I do not.
Mr. PECORA. Why was the change made from the
is ?
original intention of retiring those securities to the purchasing of them by the
General Theatres Equipment Co.?
Mr. CLARKE. I do not know.
Mr. PECORA. What?
Mr. CLARKE. I do not know.
Mr. PECORA. There is a difference between the retirement of them
and the purchase of them, is there not ?
Mr. CLARKE. Yes; I would say so.
3428
STOCK EXCHANGE PRACTICES
Mr. PECORA. Don't you know why that change was made? You
were 1 of the 2 sets of contracting parties to this agreement,
remember.
Mr. CLARKE. I say I do not recall. I probably knew at the time.
Mr. PECORA. Can you conceive of the reason for that change?
Mr. CLARKE. If the words were " purchase and call", I would see
a reason for it; but I do not see any reason for it. I do not see any
particular difference between the two words " retirement " and " purchase." Eetirement might mean the calling of them; I don't know.
Mr. PECORA. If they are retired, they cannot be issued again or
used as collateral or sold.
Mr. CLARKE. That is right.
Mr. PECORA. And if they are merely purchased they would be
available for use either as collateral or for selling purposes, would
they not?
Mr. CLARKE. Yes, of course.
Mr. PECORA. That is a substantial difference between the two then,
is it not?
Mr. CLARKE. If they were retired, they would be canceled.
Mr. PECORA. Exactly. But if they were purchased, they would
not have to be canceled; so they could be used as collateral or they
could be resold?
Mr. CLARKE. That is true.
Mr. PECORA. That is a substantial difference, is it not ?
Mr. CLARKE. Yes.
Mr. PECORA. A moment
ago you said you could not see any reason
for it.
Mr. CLARKE. YOU have called my attention to that difference, and
I see it.
Mr. PECORA. Was it necessary for me to call your attention to that
difference before you were made aware of it ?
Mr. CLARKE. Apparently.
Mr. PECORA. Despite all the experience you have had in the organization of corporations and the issuing and selling and marketing of
securities ?
Mr. CLARKE. YOU asked previously three times why the change
was made, and I told you I did not know, and I do not know now.
Mr. PECORA. Yes; but then you volunteered the statement yourself
that there was no difference between a plan to purchase and a plan
to retire those securities. Now you acknowledge there is a substantial
difference.
This contract of July 9,1929, also provides, in substance, that the
moneys that were to be paid to the General Theatres Equipment by
the bankers for the 6 million dollars principal amount of debentures
were to be held in escrow or, rather, that portion thereof was to be
held in escrow as would be necessary to purchase or retire these
other securities of the other corporation. Was that escrow agreement carried out?
Mr. CLARKE. I think so.
Mr. PECORA. Have you a copy of that escrow agreement?
Mr. CLARKE. NO ; I have not.
STOCK EXCHANGE PRACTICES
3429
Mr. PECORA. Who owned, on July 9, 1929, the outstanding notes,
the 5-year 6^-percent gold notes of the National Theatre Supply
Co.?
Mr. CLARKE. I do not know.
Mr. PECORA. That, according to this contract, exhibit no. 133.
were to be purchased or retired by the General Theatre Equipment?
Mr. CLARKE. We have no information as to who owned them.
Mr. PECORA. TO whom were they issued originally?
Mr. CLARKE. They were sold to the bankers.
Mr. PECORA. Did the bankers still own them when this agreement
of July 9, 1929, was entered into?
Mr. CLARKE. I do not believe they did.
Mr. PECORA. Who do you believe did own them at that time?
Mr. CLARKE. I have no notion of it.
Mr. PECORA. Under this contract of July 9, 1929, those notes were
callable at 105, were they not ?
Mr. CLARKE. Yes; they were callable at 105.
Mr. PECORA. What were they sold for when originally issued by
the National Theatre Supply Co. ?
Mr. CLARKE. Those debentures were sold at 90.
Mr. PECORA. At what?
Mr. CLARKE. They were sold at 90.
Mr. PECORA. DO you know when they were issued and sold?
Mr. CLARKE. In September 1926.
Mr. PECORA. And they were 6^-percent notes, were they not?
Mr. CLARKE. Yes; that is correct.
Mr. PECORA. And 3 years later they were called at 105?
Mr. CLARKE. That is correct. They were purchased or called,
whatever the term is.
Mr. PECORA. They were purchased at the callable price of 105, to
put it exactly. Who owned the outstanding preferred stock of the
International Projector Corporation on July 9, 1929? As I recall
it, there were 25,000 shares of such preferred stock issued and outstanding.
Mr. CLARKE. I owned 2,107 of those shares.
Mr. PECORA. Who owned the balance?
Mr. CLARKE. I do not know.
Mr. PECORA. The bankers?
Mr. CLARKE. NO ; I should think the public owned them.
The CHAIRMAN. What rate of interest did the debentures bear ?
Mr. CLARKE. Six percent.
The CHAIRMAN. They were sold to the public?
Mr. CLARKE. The debentures?
The CHAIRMAN. Yes.
Mr. CLARKE. Yes, sir.
Mr. PECORA. The Senator
asked you about the debentures. I am
asking you about the preferred stock.
Mr. CLARKE. Yes.
Mr. PECORA. Have
you no way of finding out who were the owners, of the balance of the 25,000 shares of the International Projector
Co.'s preferred stock on July 9, 1929?
3430
STOCK EXCHANGE PRACTICES
Mr. CLARKE. One would have to go to the company's records for
that.
Mr. PECORA. DO you know what the public quotation was for the
preferred stock of the International Projector Corporation on July
9,1929?
Mr. CLARKE. NO, sir; I do
not.
Mr. PECORA. Was the stock listed on any public exchange at that
time?
Mr. CLARKE. I do not think it was.
Mr. PECORA. It was traded in in the over-the-counter market ?
Mr. CLARKE. Yes; it would have to be.
Mr. PECORA. My information is that early in July 1929 that preferred stock was quoted at 95 bid and 100 asked. Does that accord
with your recollection ?
Mr. CLARKE. In July 1929?
Mr. PECORA. Yes.
Mr. CLARKE. I t was
undoubtedly much higher at that time than it
was 2 years previously.
Mr. PECORA. Would you say that my information is substantially
correct about the bid and asked quotations for the preferred stock of
International Projector?
Mr. CLARKE. I assume you have it from some place; yes, sir.
Mr. PECORA. YOU have already told us you owned all of the outstanding stock of the Theater Equipment Acceptance Corporation—
the common stock?
Mr. CLARKE. That is correct.
Mr. PECORA. Who owned the 3,000 shares of the Theater Equipment Acceptance Corporation's first preferred stock on July 9,1929 ?
Mr. CLARKE. I don't know who owned it.
Mr. PECORA. That preferred stock was callable at 110, was it not ?
Mr. CLARKE. I do not know. I will find out. [After conferring
with associate.] Yes; it was callable at 110.
Mr. PECORA. And the General Theatres Equipment Co., under this
contract of July 9, 1929, or in pursuance of its provisions, actually
acquired that preferred stock at 110, the callable price, did it not?
Mr. CLARKE. Yes; it did.
Mr. PECORA. DO you know
for what price the Theater Acceptance
Corporation had issued that preferred stock?
Mr. CLARKE. My impression is it was issued for par, because of
the sale being equal to parMr. PECORA. Was it not actually issued at
Mr. CLARKE. I do not think so. But I am not saying it was issued
at par. My impression is that it was.
Mr. PECORA. Don't you remember to whom those 3,000 shares of
preferred stock were originally issued?
Mr. CLARKE. I am sorry, but I do not.
Mr. PECORA. Was it not issued to Hammons & Co., one of the
members of this banking syndicate ?
Mr. CLARKE. It may have been.
Mr. PECORA. Was it not issued to them at 90 instead of at par ?
Mr. CLARKE. In the absence of any record here I cannot tell you.
STOCK EXCHANGE PRACTICES
3431
Mr. PECORA. I S it not a fact that Hammons & Co. at the time the
General Theatre Equipment Co. purchased that preferred stock
of the Theater Equipment Acceptance Corporation at 115, owned
all but 70 of the 3,000 shares ?
Mr. CLARKE. I do not know; otherwise I would have answered
the other question.
Mr. PECORA. Would not the records of the General Theatre Equipment Co. show that, whether or not it is a fact?
Mr. CLARKE. I suppose they would; but I must call your attention to the fact that I have not those records and I am only telling
you what I know.
Mr. PECORA. This agreement of July 9, 1929, further provides
for the purchase of 50 percent of the capital stock of the corporation called Grandeur, Inc. ?
Mr. CLARKE. Yes, sir.
Mr. PECORA. The total
outstanding capital stock consisted of
100,000 shares, did it not?
Mr. CLARKE. I believe that is correct
Mr. PECORA. Who owned the 50,000 shares which were taken over
by General Theaters Equipment, Inc. ?
Mr. CLARKE. Grandeur was organized at the same time for the
purpose of taking over the Mitchell Camera. It was simply organized for the purpose of taking over that camera company, and in
which Mr. Fox had a half interest, and later it was purchased
Mr. PECORA. I did not hear that.
Mr. CLARKE. I say the company was organized for the purpose of
taking over the Mitchell Camera Co., or the half interest in the
Mitchell Camera Co. And Mr. Fox's interest in that was a half
interest, and he was paid for his half interest. I do not believe
anybody held the stock or paid anything for that stock other than
just the corporation was formed to take over the Mitchell Camera.
Mr. PECORA. Well, now, let us see. Grandeur, Inc., was organized
solely for the purpose of taking over the assets of the Mitchell
Camera Co., which was an existing corporation?
Mr. CLARKE. That is right.
Mr. PECORA. And it did so take over the assets of the Mitchell
Camera Corporation, did it not?
Mr. CLARKE. Yes.
Mr. PECORA. And how did it pay for those assets ? In cash or by
an exchange of stock?
Mr. CLARKE. It paid in cash, because it paid out $1,475,000 for one
half interest, but it paid to Mr. Fox 2 million dollars for one half
of the Grandeur stock.
Mr. PECORA. That does not answer.
Mr. CLARKE. $2,000,000 was paid to Mr. Fox by myself.
Mr. PECORA. TO whom?
Mr. CLARKE. Mr.
Mr. PECORA. By
Mr. CLARKE. By
Fox.
whom?
myself. Of course it was out of this financing,
but I handled the transaction.
3432
STOCK EXCHANGE PRACTICES
Mr. PECORA. NOW let us see. Who owned the Mitchell Camera
Corporation at the time it was taken over by the Grandeur, Inc. ?
Mr. CLARKE. I owned it as an intermediary as I had owned these
lamp companies.
Mr. PECORA. YOU owned it as an intermediary?
Mr. CLARKE. Yes.
Mr. PECORA. AS an intermediary for whom?
Mr. CLARKE. For the General Theatres. I bought
these companies
and I turned them over at the price that I acquired them.
Mr. PECORA. NOW wait. You first acquired all of the assets of the
Mitchell Camera Co., and then turned those assets over to Grandeur,
Inc.?
Mr. CLARKE. That is right.
Mr. PECORA. And Grandeur, Inc., was organized for the express
purpose of taking over those assets ?
Mr. CLARKE. That is right. And Grandeur patents and so forth.
Mr. PECORA. Yes. Well, they were all included in the assets of
the Mitchell Camera Co., were they not?
Mr. CLARKE. N O ; they were not. Mr. Fox had an ownership
there.
Mr. PECORA. Did Mr. Fox have any interest in the Mitchell Camera
Corporation before you commenced to acquire its stock for the purpose of transferring its assets to the Grandeur, Inc. ?
Mr. CLARKE. NO. He had a contractual relation with them for
the manufacture of cameras.
Mr. PECORA. HOW much did you actually pay either in behalf of
yourself or the person or persons or interest for whom you made the
purchase for,the stock of the Mitchell Camera Corporation?
Mr. CLARKE. $1,475,000.
Mr. PECORA. $1,475,000?
Mr. CLARKE. Yes.
Mr. PECORA. What
was the capitalization of Grandeur, Inc., at the
time it took over all of the assets of the Mitchell Camera Corporation
which you meanwhile had acquired as an intermediary ?
Mr. CLARKE. I think it was just 100,000 shares of common stock.
Mr. PECORA. Of no par value ?
Mr. CLARKE. I think so. I do not know.
Mr. PECORA. NOW, for 50 percent of that stock General Theaters
Equipment, Inc., paid $2,000,000 under the provisions of this contract
of July 9, 1929, did it not?
Mr. CLARKE. It
did.
Mr. PECORA. That was more than you had paid for all of the
assets of the Mitchell Camera Corporation ?
Mr. CLARKE. That is correct.
Mr. PECORA. Let me show you photostatic reproduction of what
purports to be a balance sheet of the Mitchell Camera Corporation
as of December 31, 1928. Will you look at it and tell us if you
recognize it to be a true and correct copy of such balance sheet ?
Mr. CLARKE. This states that this is the balance sheet of the
Mitchell Camera Corporation as of December 31, 1928. You asked
me if I recall having seen this be fore $
STOCK EXCHANGE PRACTICES
3433
Mr. PECORA. DO you know it to be a true and correct copy of such
balance sheet?
Mr. CLARKE. N O ; I do not.
Mr. PECORA. Did you ever see it before?
Mr. CLARKE. No; I do not recall that
I did. But I have seen
balance sheets of the Mitchell Camera.
Mr. PECORA. When you bought for $1,475,000 the assets of the
Mitchell Camera Corporation did you do it without making any
inquiry as to its financial condition?
Mr. CLARKE. Most certainly not.
Mr. PECORA. Well, in connection with any inquiry that you made
for that purpose; that is, for the purpose of enabling you to determine what would be a fair price to pay for those assets, did you
among other things ask for a balance sheet?
Mr. CLARKE. Most certainly.
Mr. PECORA. AS of the last fiscal year ?
Mr. CLARKE. Certainly.
Mr. PECORA. YOU did?
Mr. CLARKE. Certainly.
Mr. PECORA. Well, is this the balance sheet that you saw?
Mr. CLARKE. I do not know.
Mr. PECORA. Or one like it?
Mr. CLARKE. I do not recall. I assume that these contracts will
show a balance sheet attached to them as exhibits.
Mr. PECORA. Well, for the time being I am going to suspend with
you.
Mr. Dodge, will you be good enough to look at this photostatic
copy of what purports to be a balance sheet of the Mitchell Camera
Corporation as of December 31, 1928, and which photostatic copy
was furnished to us by the Chase Corporation. Tell us if you know
it to be a true and correct copy of such balance sheet [handing same
to Mr. Dodge].
Mr. MURRAY W. DODGE (after examining same)*. I assume it is, if
it was taken from the Chase Corporation's files, Mr. Pecora. I do
not recall it.
Mr. PECORA. Does it not bear upon its face every evidence that it
came from the files of the Chase Corporation ?
Mr. DODGE. Yes, sir.
Mr. PECORA. YOU do
not doubt the authenticity of this photostatic
copy, do you, Mr. Dodge?
Mr. DODGE. NO. I do not see that it is certified.
Mr. PECORA. Well, whatever it is
Mr. DODGE. It is a copy of a balance sheet. How the Chase Securities Corporation got it or where from I do not know.
Mr. PECORA. Well, I am going to offer it in evidence for what it
is worth.
The CHAIRMAN. Let it be admitted and entered on the record.
(Mitchell Camera Corporation balance sheet as at Dec. 31, 1928,
was received in evidence marked " Committee Exhibit No. 134, of
Nov. 16,1933," and is here printed in the record in full as follows:)
3434
STOCK EXCHANGE PRACTICES
Mitchell Camera Corporation—Balance sheet as at Dee. 31, 1928
ASSETS
Current assets:
Cash:
In Bank
$56,258.10
In office
12. 89
Accounts receivable
93,241.52
Inventory, materials and work in process, estimated
42,332. 00
$191, 844.51
Fixed assets:
Land
Machinery and tools
Less reserve for depreciation
18,059. 39
$72,422.23
9,548.67
62,873.56
Furniture and
fixtures
Less reserve for depreciation
1,533.50
314.43
1,219.07
Patents
Less reserve for depreciation
89, 082.21
31,440.78
57,641.43
139,793.45
Deferred charges:
Unexpired insurance
322.29
Total assets
-
331,960.25
LIABILITIES
Current liabilities:
Accounts payable
Accrued pay roll
Capital stock
Surplus
Total liabilities and capital
Mr. PECORA. The exhibit marked
$967.59
512.16
1,479.7£
100,000.00
230,480. 50
331,960.25
" Committee Exhibit No. 134""
in evidence shows as of December 31, 1928, total assets of $331,960.25.
At how much did you say you sold to the Grandeur, Inc., the stock
of the Mitchell Camera Corporation which you say you bought for
$1,475,000?
Mr. CLARKE. HOW much of it did I sell? How much of it? All
of it.
Mr. PECORA. HOW much did you sell it for to the Grandeur Co. ?
Mr. CLARKE. Well, for $1,475,000.
Mr. PECORA. Did you furnish us with this photostatic copy of
statement of figures and data [handing same to Mr. Clarke] ?
Mr. CLARKE (after examining same). Yes; that is right.
Mr. PECORA. And you furnished that to us as a true and correct
statement of the matters that it relates to, did you not ?
Mr. CLARKE. Yes; as far as our records went.
Mr. PECORA. I offer it in evidence and ask to have it spread upon
the record.
The CHAIRMAN. It may be received and entered on the record.
(Statement concerning International Projector Corporation, National Theater Supply Co., Theater Equipment Acceptance Corporation, Lamp Companies and Grandeur, General Theatres Equipment,
Tnc, Fox Purchase, Fox Financing, Summary Chase loans was received in evidence, marked " Committee Exhibit No. 135, of Nov. 15,
1933 ", and is printed in the record in full on page 3438.
STOCK EXCHANGE PRACTICES
3435
Mr. PECORA. This document has been marked " Committee Exhibit
No. 135." I want to call your attention to page 2 thereof, which
under the caption " Lamp Companies and Grandeur " says as follows:
August 1929 Grandeur bought from H. L. Clarke stock of Mitchell Camera
for $3,100,000 cash.
Do you see that?
Mr. CLARKE. Yes; I see that.
Mr. PECORA. I S that a true statement?
Mr. CLARKE. Yes.
Mr. PECORA. Why
did you tell us just a moment or two ago that
you sold the stock of the Mitchell Camera Corporation to the
Grandeur for the same price which vou paid for that stock, namely,
$1,475,000?
Mr. CLARKE. I t is detailed down below to show how it happened;
how it was done. We had to pay Mr. Fox $2,000,000 for his interest
in the Grandeur.
Mr. PECORA. YOU had to pay him what ?
Mr. CLARKE. $2,000,000.
Mr. PECORA. Well, does that not bring the total cost of Grandeur
up to $6,100,000?
Mr. CLARKE. NO. I t would bring the total cost of Grandeur,
including the Mitchell Camera, up to $3,475,000.
Mr. PECORA. HOW much ?
Mr. CLARKE. $3,475,000.
Mr. PECORA. HOW do you get that figure ?
Mr. CLARKE. By adding the 2 million dollars and the $1,475,000.
Mr. PECORA. Well, what did you mean by the statement which I
read from this exhibit, and which reads as follows:
August 1929, Grandeur bought from H. L. Clarke stock of Mitchell Camera
for $3,100,000 cash.
Mr. CLARKE. Well, I meant just what I said. And then the detail
of it is just the way the transaction was handled, as shown completely
below.
Mr. PECORA. I wish you would make an analysis for the benefit of
this committee of that portion of exhibit no. 135 which appears on
page 2 under the caption of " Lamp Companies and Grandeur."
Mr. CLARKE. Well, what analysis do you wish me to make ?
Mr. PECORA. I want such an analysis as will intelligently give this
committee knowledge of how those lamp companies were acquired
and turned over to Grandeur. The prices, and so forth.
Mr. CLARKE. The lamp companies were not turned over to Grandeur. Just the Mitchell Camera Corporation.
The CHAIRMAN. The Camera Corporation and some Fox interest?
Mr. CLARKE. That is correct.
The CHAIRMAN. What the Fox interest was does not appear ?
Mr. CLARKE. I do not believe I can give you any more complete
detail than this.
Mr. PECORA. Well, now, I will go over this in detail with you.
You have before you, have you not, a copy of committee's exhibit
no. 135?
Mr. CLARKE. I have this.
3436
STOCK EXCHANGE PRACTICES
Mr. PECORA. Yes. Now turn to page 2 thereof. Do you see toward
the bottom of the page the caption "Lamp Companies and
Grandeur " ?
Mr. CLARKE. Surely.
Mr. PECORA. What did you intend to refer to under that caption
of "Lamp Companies and Grandeur"?
Mr. CLARKE. Just exactly what it says and what follows.
Mr. PECORA. Well now, what follows is this:
August 1929. GTE—
Which relates to the General Theatres Equipment—
bought from H. L. Clarke all stock of McAuley, Strong Electric, Ashcraft,
and Hall & Connolly for $3,000,000 cash.
August 1929. Grandeur bought from H. L. Clarke stock of Mitchell Camera
for $3,100,000 cash.
That makes a total of $6,100,000 cash, does it not?
Mr. CLARKE. Yes.
Mr. PECORA. That
you received from the General Theatres Equipment for the stock of the McAuley Co., the Strong Electric Co., the
Ashcraft Co., Hall & Connolly, Inc, and the Mitchell Camera
Corporation; is that correct?
Mr. CLARKE. Right.
Mr. PEOORA. NOW the cost to you, according to this exhibit 135,
of those assets of those five companies or units, and the disposition
by you of the $6,100,000 that you received for them, is set forth in
this exhibit 135 as follows:
Purchase price of assets
J. E. McAuley Manufacturing Co
Strong Electric Co
Ashcraft Automatic Arc Co
Hall & Connolly, Inc
Mitchell Camera Co
$1,131,422.98
316,000.00
150, 000.00
160,000.00
1,475,000.00
Making an aggregate, as appears on exhibit no. 135, for those
five items, of $3^32,422.93.
Mr. CLARKE. Yes.
Mr. PECORA. NOW,
according to exhibit 135, you paid William
Fox on August 1,1929, the sum of $2,000,000 to be used for the purchase of half of Grandeur stock, is that right?
Mr. CLARKE. That is right.
Mr. PECORA. YOU also gave William Fox, according to this exhibit
135, 25,000 shares of General Theatres Equipment at 30, with repurchase agreement which you list here at $750,000 ?
Mr. CLARKE. Well, it was repurchased at $750,000.
Mr. PECORA. Was it repurchased?
Mr. CLARKE. Correct.
Mr. PECORA. By whom ?
Mr. CLARKE. By me. Cash payment.
Mr. PECORA. There is also listed here commissions paid by you
to H. E. Van Duyne of $100,000.
Mr. CLARKE. Yes,
sir.
Mr. PECORA. Interest paid by you to the lamp companies, $14,627.58. Is that right?
Mr. CLARKE. Right.
STOCK EXCHANGE PRACTICES
3437
Mr. PECORA. Expenses incidental to acquisition, $2,949.49.
Mr. CLARKE.
Mr. PECORA.
Yes.
That makes a total of $6,100,000 that you received
in cash from General Theaters Equipment in connection with that
corporation's acquisition of the assets of those five lamp companies?
Mr. CLARKE. And a half of Grandeur of this stock.
Mr. PECORA. NOW which half of the Grandeur stock was sold to
the General Theatres Equipment? The half owned by Mr. William
Fox or the half not owned by him?
Mr. CLARKE. The half not owned by William Fox.
Mr. PECORA. HOW?
Mr. CLARKE. He still held his half.
Mr. PECORA. Well now, in this statement,
exhibit 135, you say
"Paid William Fox August 1, 1929, to be used for purchase of
half of Grandeur stock $2,000,000."
Mr. CLARKE. That is right.
Mr. PECORA. What did that payment represent?
Mr. CLARKE. Exactly what it says.
Mr. PECORA. Well, what did it represent?
Mr. CLARKE. It represents payment for the half interest in
Grandeur.
Mr. PECORA. YOU caused the Grandeur Co. to be organized, did
you not?
Mr. CLARKE. I provided him with the funds.
Mr. PECORA. YOU caused it to be organized, did you not?
Mr. CLARKE. Yes; I would say so.
Mr. PECORA. Yes. AH right. Now, you said before that you
caused it to be organized specifically to take over the assets of the
Mitchell Camera Corporation; is that right?
Mr. CLARKE. And to operate the Grandeur machines, and so forth.
We did not pay that $2,000,000 to Mr. Fox just for fun, you know.
Mr. PECORA. NOW, answer one question at a time, will you?
Mr. CLARKE. Yes.
Mr. PECORA. DO you
remember saying a few minutes ago that the
Grandeur Co. was organized to acquire the assets of the Mitchell
Camera Corporation?
Mr. CLARKE. I did.
Mr. PECORA. All right.
Now, you acquired as an intermediary for
the Grandeur the assets of the Mitchell Camera Corporation, and
you told us you paid for those assets $1,475,000; now, is that correct?
Mr. CLARKE, Yes.
Mr. PECORA. YOU also
say that the Grandeur bought from you the
stock of the Mitchell Camera Corporation for $3,100,000 cash?
Mr. CLARKE. Well, that is correct.
Mr. PECORA. And you also say that the Grandeur, or the General
Theatres Equipment, inpaying that $3,100,000 cash to you for the
stock of the Mitchell Camera Corporation paid what that stock
had cost you?
Mr. CLARKE. Yes; I do.
Mr. PECORA. Well, I wish
If, as a matter of fact
Mr. CLARKE. Well, if you
175541—34—PT 7
15
you would reconcile all those statements
3438
STOCK EXCHANGE PRACTICES
Mr. PECORA. Wait a minute. If, as a matter of fact, the stock
of the Mitchell Camera Corporation cost you $1,475,000, and you
turned that stock over to the Grandeur Company for that same price,
and then the General Theaters Equipment Co. bought the assets,
the stock of the Mitchell Camera Corporation for $3,100,000 cash,
please explain to my dense mind how it is that when you got
$3,100,000 cash for the stock of the Mitchell Camera Corporation,
which cost you $1,475,000, you received only what that stock cost you.
Mr. CiiAKKE. Mr. Pecora, I received a total of $6,100,000 from this
financing with which to clear these transactions which'are set forth,
which you read in detail. The total of these transactions is also
$6,100,000. I do not know how I can make it any plainer.
Mr. PECORA. DO you think you have made it clear?
Mr. CLARKE. Perhaps not, but it is set forth in detail there. You
read it out and it totals $6,100,000.
Mr. PECORA. Well, do you think that it clearly appears in detail
on exhibit no. 135 which was prepared by you as a true and correct
statement?
Mr. CLARKE. Mr. Pecora, Mr. Keller would like to come over and
talk to you.
Mr. KELLER. May I explain this to you off the record?
Mr. PECORA.
Yes.
(Thereupon there was some little discussion off the record.)
Mr. PECORA. Mr. Chairman, I think it is about time to take a recess
now, anyhow.
The CHAIRMAN. The subcommittee will stand in recess until 10:15
o'clock tomorrow morning.
(Thereupon, at 4:25 p.m., Thursday, Nov. 16, 1933, and adjournment was taken until 10:15 o'clock the next day, Friday, Nov. 17,
1933.)
(Committee Exhibit No. 135 of Nov. 16,1933, is here printed in the
record in full as follows:)
COMMITTEE EXHIBIT NO. 135, NOVEMBER 16,
1933
International Projector Corporation
September 17. 1925, organized as Cine Machinery Corporation.
November 23, 1925, name changed to International Projector Corporation.
Authorized capital: $7 dividend preferred stock, 50,000 shares; common
stock, 200,000 shares.
November 23, 1925, sold to Pynchon, West, Shermar & Hammons for
$2,250,000: Preferred stock, 25,000 shares; common stock, 75,000 shares (price
90 for preferred, common as bonus).
December 1, 1925, bankers offered allotment certificates one share preferred
and one share common for $100 plus accrued dividends on preferred.
Common stock was disposed of as follows:
To H. L. Clarke for net assets of Acme Motion Picture Projector
Co
shares— 150,000
Less: Stock donated back to International by H. L. Clarke
do
25,000
125,000
Sold to bankers (with 25,000 shares preferred for $2,250,000, as stated
above)
shares— 75,000
Total authorized
do
200,000
STOCK EXCHANGE PRACTICES
3439
Proceeds of $2,250,000 used as follows:
Acme Motion Picture Projector Co.:
Purchase of Acme Motion Picture Projector Co. bonds
$171,331.67
Payment of liabilities of Acme Motion Picture Projector Co._. 197,000.00
Nicholas Power Co., Inc.:
Paid to S. R. Burns (acting as agent) for assets of Nicholas
Power Co
$690,777.78
Precision Machine Co., Inc.:
Purchase of assets from stockholders of Precision
Machine Co.:
James A. Stillman
$200,000
Adrian H. Larkin
200,000
H. L. Clarke (for Precision stock acquired by
him)
200,000
$600,000. 00
Paid to H. L. Clarke (expended by him for property of Cinema
Building Corporation)
225, 700.65
Payment of note at New York Trust Co
300,000.00
Payment of note and interest at National City Bank
50,479.16
Paid on account of James A. Stillman
$50,251.22
Less: Account of Simplex Photo Products
35,540.48
14,710. 74
Total proceeds
2,250,000.00
Common stock reclassified 5 for 1 in 1929 making l%000,000 shares common,
25,000 shares preferred outstanding.
August 1, 1929, General Theatres common exchanged for International common 800,000 shares International received 1% for 1, 200,000 shares International received share for share.
National Theatre Supply Co.
September 1926, Capitalization Authorized and Issued (Incorporated
in Delaware) :
5-year sinking fund gold notes due Jan. 1, 1931
$1,500,000
$7 dividend preferred stock, no par
shares__
20, 000
Common stock, no par
do
500,000
Securities disposed of as follows:
$1,500,000 gold notes sold to bankers at 90
1,350,000
15,000 shares preferred sold to bankers at 80
1,200,000
5,000 shares preferred sold to H. L. Clarke at 80
400,000
120,000 shares common sold to bankers at 25 cents
30,000
380,000 shares common sold to H. L. Clarke for cash, ($2.42) __
921,179
Total proceeds
3, 901,179
Proceeds used to acquire from owners business and assets of some 30 theatre
supply companies.
August 1, 1929, General Theatres Equipment common exchanged for National
Theatres common: 412,791 shares National Theatres received share for share,
141,416 shares National Theatres received three-quarters share for one. (Common stock in excess of original 500,000 shares issued subsequently.)
Theatre Equipment Acceptance Corporation
August 1927, Capitalization Authorized and Issued (Incorporated in
Delaware) :
First preferred stock, no par, 3,000 shares
$300, 000
Second preferred stock, no par, 2,000 shares
200, 000
Common stock, no par, 5,000 shares
50,000
August 16, 1927, Webster loaned National Theatres $100,000, repaid March 16,
1928.
3440
STOCK EXCHANGE PRACTICES
December 12, 1927, Webster loaned Theatre Equipment Acceptance Corporation $100,000, repaid March 15, 1928.
September 1927, Theatre Equipment Acceptance Corporation erroneously
showed sale of 5,000 shares common stock to National Theatres for $100,000.
February 1928, Theatre Equipment Acceptance Corporation corrected original
entry by reversing, and recorded sale to Webster of 5,000 shares common for
$50,000 and 500 shares second preferred for $50,000.
August 1, 1929, Webster exchanged 5,000 Theatre Equipment Acceptance
Corporation common for 25,000 General Theatres Equipment common.
Lamp companies and Grandeur
August 1929, General Theatres Equipment bought from H. L. Clarke all stock
of McAuley, Strong Electric, Ashcraft, and Hall & Connolly for $3,000,000 cash.
August 1929, Grandeur bought from H. L. Clarke stock of Mitchell Camera for
$3,100,000 cash.
Cost to H. L. Clarke of above, and disposition of funds! as follows:
Purchase price of assets:
J. E. McAuley Manufacturing Co
$1,131,422.93
Strong Electric Co
^
316,000.00
Ashcraft Automatic Arc Co
150,000.00
Hall & Connolly, Inc
160,000.00
Mitchell Camera Co
1,475,000.00
$3,232,422. 93
Paid Wm. Fox Aug. 1, 1929, to be used for purchase of half of
Grandeur stock
2,000,000.00
•Given Wm. Fox, 25,000 shares General Theatres Equipment at 30,
with repurchase agreement
750,000.00
Commissions to H. E. Van Duyne
100,000.00
Interest paid by H. L. Clarke re lamp companies
14,627.58
Expenses incidental to acquisition
2,949.49
Total
6,100,000.00
General Theatres Equipment Inc.
TJuly It, 1929, incorporated in Delaware. Authorized 5,000,000 shares no par common. Common stock
issued, 2,840,786 shares]
Shares
To acquire common stocks of subsidiaries:
Aug. 29:
International Projector Corporation, 999,600 shares
National Theatre Supply Co., 664,207 shares
Theatre Equipment Acceptance Corporation, 5,000 shares
...
Sold to bankers Aug. 1,1929, at $20
Used for conversion of $6,QO04MO debentures on June 30,1930
Sold to bankers in April 1930 at $40 per share, less commission of $2.50 per share,
to net General Theatre Equipment $37.50 per share. (Of this amount $12.50
credited to capital surplus and $25 per share to capital stock)
Total
Less amount credited to capital surplus in original organization
Capital stock account at time of prior acquisition
,
Book value
1,199,933 $28,488,600.00
518,853 12,787,578.65
25,000
50,000.00
300,000 6,000,000.00
180,000 5,579,875.00
617,000
15,425,000.00
2,840,786
68,331,053.65
5,000,000.00
63,331,053.65
August 1, 1929, sold to Chase Securities, Pynchon, West, Hammons,
and Halsey, Stuart the following securities:
300,000 shares General Theatre Equipment, Inc., common at 20- $6,000,000
$6,000,000, 15-year 6 percent debentures at 90
5,400,000
Total
11,400,000
STOCK EXCHANGE PRACTICES
3441
The proceeds from these sales were used as follows:
International Projector Corporation, 25,000 shares preferred
stock at 115
National Theatre Supply Co.:
20,000 shares preferred stock at 107%
$235,800 5-year 6V2 sinking fund gold notes at 105
Theatre Equipment Acceptance Corporation:
3,000 shares $6 dividend preferred stock, at 110
2,000 shares $7 dividend preferred stock, at 105
Grandeur, Inc., 50,000 shares (501 percent) capital stock
J. E. McAuley Manufacturing Co. ]
The Strong Electric Corporation
\_ I
Ashcraft Automatic Arc
Co.1
f"
1
Hall & Connolly, Inc.
J
Cash for working capital
Total, as above
2,875,000
2,150,000
247,590
330,000
210,000
2,000,000
o AAA nnA
a,uuu,uuu
587,410
11,400,000
Fox Purchase
Apr. 7, 1930, purchased Fox Film and Fox Theatres class I> as
follows:
Cash payment to William Fox Apr. 7, 1930, for 50,101
shares Fox Film class B and 100,000 shares Fox Theatres
class B
$15, 000, 000.00
2,500 shares Fox Film class B purchased from Branch
Brook, Inc., on May 1, 1930
712, 500.00
Notes of General Theatres Equipment given William Fox on
Aug. 13, 1930, in order to secure the release of his claims
in connection with the original stock purchase, in settlement of certain claims of Fox in connection with the issue
of 1,600,000 additional shares Fox Film Corporation class
A stock in which Fox claimed a 20 percent participation
which was not provided him, and other claims under the
original purchase contract.
9 notes for $300,000 each, dated Aug. 13,
1930, due 1 year from date
$2. 700,000.00
1 note for $200,000 dated Aug. 13, 1930,
due 1 year from date
200,000.00
1 note for $100,000 dated Aug. 13, 1930, due
1 year from date
100,000.00
Total
3,000,000. 00
Less: Note turned back to General Theatres
Equipment by William Fox and canceled200,000.00
Note of General Theaters Equipment dated Aug. 13, 1930,
due in 60 days (and paid at maturity) given to Albert
M. Greenfield for his services in connection with the
settlement of claims of William Fox for $3,000,000 as
above stated
33,493 shares Fox Film Corporation class B VTC received
in exchange for 100,479 shares Fox Film Corporation
class A stock VTC (May 31, 1931)
2,800,000.00
250,000.00
3,094, 524.10
Total cost at Dec. 31, 1931, of 86,094 shares Fox Film Class
B and 100,000 shares Fox Theatres class B owned by
General Theatres Equipment
21,857,024.10
1
Entire capital stock of each of these companies purchased from H. L. Clarke for
&3,000,000.
3442
STOCK EXCHANGE PRACTICES
Fox Financing
Apr. 18, 1930, additional issue 1,600,000 shares Fox Film class A sold at 30;
440,000 shares taken by bankers, 1,160,000 shares by General Theatres Equipment. With subsequent purchases General Theatres Equipment investment
and Fox Film class A as follows:
Original participation in new issue, 1,000,000 shares
$30,000,000.00
Shares originally intended for William Fox purchased by
General Theatres Equipment, 160,000 shares
4,800,000.00
Purchased on open market during 1930, 176,600 shares
6,364,239.66
Totals December 31, 1930, 1,336,600 shares
Total of above 2 groups
Less: Duplication cost of 100,479 shares class A
41,164,239.66
63,021,263.76
3,094,524.10
Total cost: 1,336,600, Fox Film A; 86,094, Fox Film B;
100,000, Fox Theatres B
59,926,739.66
In order to purchase the first 2 blocks, totaling 1,160,000 shares,
General Theatres Equipment raised funds as follows:
Apr. 18, 1930, borrowed from Chase National Bank on
30-day note for $27,000,000, $15,000,000 used to pay note
dated Apr. 7, 1930, balance in connection with purchase
of A
12,000, 000. 00
Sold to Pynchon & Co., 350,000 shares General Theatres
Equipment common stock at $40 less commission of $2.50;
net, $37.50
13,125, 000.00
Sold to Halsey Stuart & Co., 133,500 shares General
Theatres Equipment common at $40 less commission of
$2.50 per share; net, $37.50
5, 006,250. 00
Sold to H. L. Clark 133,500 shares General Theatres Equipment common, at $37.50 net
5, 006, 250.00
Total
35,137,500.00
May 1, 1930, sold to Chase Securities, Pynchon, West, Hammons, and Halsey
Stuart $30,000,000, 10 year 6 percent debentures, dated April 1, 1930. Sold at
90, proceeds $27,000,000, used to pay note at Chase dated April 18, 1930.
Summary Chase loans
Borrowed
Paid off
Balance
owing
Apr. 7: Borrowed to make cash payment to Wm. Fox for Film and
Theaters, class B
$15,000,000
$15,000,000
Apr. 18: Borrowed to raise funds to pay for Fox class A and to retire
Apr. 7 loan
27,000,000 $15,000,000
27,000,000
Apr. 30: Borrowed from Chase Securities Corporation
2,000,000
29,000,000
May 1: Paid off Apr. 18 note with proceeds from sale of $30,000,000
debentures..
27,000,000
2,000,000
May 6: Borrowed from Chase National, paid off Apr. 30 loan from
2,500,000
2,000,000
Chase Securities
2,500,000
2,500,000
May 7: Borrowed from Chase National
5,000,000
May 16: Part payment on May 6 loan
1,000,000
Oct. 10: Borrowed to retire May 7 loan, balance of May 6 loan, and
10,000,000 4,000,000
to provide $6,000,000 new funds
10,000,000
1931
Apr. 14- Borrowed to purchase 100,000 shares Film Securities Cork poration preferred stock
9,700,000
19,700,000
The latter two large loans were secured as follows:
Ten million dollar loan of October 10, 1930: 800,000 shares Fox Film Corporation class A VTC: 19,769 shares National Theatres Supply Co. $7 preferred; 24,640 shares International Projector Corporation $7 preferred.
STOCK EXCHANGE PEACTICES
3443
Nine million seven hundred thousand dollar loan of April 14, 1931: 250,000
shares Fox Film Corporation class A VTO; 100,000 shares Film Securities
Corporation $7 preferred.
December 1,1930, stock of General Theatre Equipment reclassified; one third
share $3 preferred, and two thirds share new common given for each share
old common.
December 11, 1930, Webster Securities Corporation exchanged 258,877 shares
$3 preferred with syndicate managed by Pynchon (Syndicate agreement dated
Nov. 10, 1930), receiving 258,877 shares new common stock.
STOCK EXCHANGE PRACTICES
FRIDAY, NOVEMBER 17, 1933
U N I T E D STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE
ON B A N K I N G AND CURRENCY,
Washington, D.C
The subcommittee met at 10 a.m., pursuant to adjournment on
yesterday, in the caucus room of the Senate Office Building, Senator
Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Gore (substitute for
Barkley), Couzens, Townsend, and Goldsborough (substitute for
Norbeck).
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver, associate counsel to the committee; Alfred E. Mudge, Julian
L. Hagen, and C. Horace Tuttle of Rushmore, Bisbee & Stern, also
William Dean Embree and A. Donald MacKinnon, of Milbank,
Tweed, Hope & Webb, counsel representing the Chase National Bank
and The Chase Corporation; and Martin Conboy, counsel for Albert
H. Wiggin.
The CHAIRMAN. The subcommittee will come to order. Before we
proceed with the regular inquiry that is being made now, I should
like to have made a part of the record, in order that it may be preserved and considered, a communication from Mr. Henry Goldman,
Jr., of 29 Broadway, New York City, a member of the New York
Stock Exchange, who makes certain suggestions with regard to some
matters in connection with our study of the stock exchange. I think
it a very important contribution to the subject. He wrote me on
November 3,1933, and sent a copy of a letter which he had addressed
on the same date to Mr. Richard Whitney, who is the President of
the New York Stock Exchange. Inasmuch as I consider these suggestions he makes quite valuable to us in our study of the subject, I
wish the two letters made a part of the record.
HENRY GOLDMAN, Jr.,
November S, 1983.
Senator DUNCAN U. FLETCHER,
Chairman Committee on Banking and Currency,
United States Senate, Washington, D.C.
MY DEAE SIR : In addressing this letter to you, permit me to introduce myself
as a member of the New York Stock Exchange, and incidently a specialist on
that exchange operating for my own account. So that you may be a little more
familiar with who I am, let me say that my father was for many years the
senior member of the firm of Goldman, Sachs & Co., having retired and severed
all connections with that firm in 1917. And likewise I beg to state that I have
had no connection with that firm since 1917, when I was employed there as a
clerk.
3445
3446
STOCK EXCHANGE PRACTICES
The purpose of this letter is to be helpful to you and your committee in formulating a basis upon which the stock exchange of the country may operate
without the constant storm of criticism from the Government and the vast
public. At the same time let me say that my services are yours for the asking
In my opinion the banks and bankers and the stock exchange of the country
have lost the confidence of the public, and I believe that this confidence must be
restored as a part of the general program of recovery.
The Securities Act of 1933 is the direct outcome, in my opinion, of the acts
of the banks and the bankers. That reform was necessary, I agree 100 percent. And likewise I agree that a reform of stock exchange practices- is also
necessary.
Men that I have contact with in my business life consider you and your
committee the enemies of Wall Street. I, for one, do not.
Enclosed herewith I forward you a copy of a letter which I wrote today
to Mr. Richard Whitney, President of the New York Stock Exchange, which
speaks for itself, and is ample proof of what I stand for.
However, I believe that reform can be brought about without going through
many weeks and months of brokers' testimony, answering of questionnaires,
unpleasant articles appearing in the newspapers, and all the things which
contribute to further undermining confidence.
The method I propose is the following:
1. That the Federal Government appoint a board of six men, call this board
what you will, and give it the power to establish on the various stock exchanges
rules and regulations for trading in securities which are not only legal, but
fair and equitable to all concerned.
2. That this board shall be composed of the following:
Two members of the Committee on Banking and Currency of the United
States Senate.
Two members of leading stock exchanges.
Two business or financial men who are known to understand the technique
of stock-exchange business.
3. That the duties of this board further shall be to supervise, regulate, and
scrutinize the activities of stock exchanges, stock-exchange firms, and stockexchange members.
4. That the members of this board be appointed for periods of 2 years without
regard to their political affiliations.
I beg to remain.
Respectfully,
HENRY GOLDMAN, Jr.
HENBY GOLDMAN, Jr.,
New York, November 8, 1988.
Mr. RICHABD WHITNEY,
New York City.
On July 31 I wrote you a letter, the contents of which
you are familiar with, and your kind response made, me feel that you would
welcome constructive suggestions in regards stock exchange practices, hence
this communication.
Not a day has passed in the last few months but what I have felt more
and more that changes must be made in stock exchange practices, or the
Federal Government will step in and force these changes upon us. And I wish
to go on record as saying that unless we, the stock exchange members, initiate
and bring about these changes there is no tolling how far the Government
will go.
Therefore can we not have the courage to take the bull by the horns and
make the changes that are necessary to satisfy the Government as well as
the vast public?
I think you will agree with me when I say that both the banks and the
bankers have lost the confidence of the public, and in my opinion their
improprieties were the causes of the Securities Act of 1933.
Rightly or wrongly, I say the stock exchanges of the country have likewise
lost the confidence of the public, and I believe this confidence can be restored,
the more so if we, rather than the Government, initiate and bring about the
changes that are inevitable.
I am as much interested in doing business and making money as the other
1,374 members of the New York Stock Exchange. However, I feel that we are
confronted with a great problem, and each one of us must look at the situation
DEAR MB. WHITNEY :
STOCK EXCHANGE PRACTICES
3447
with broad vision, and not in the light of each one's selfish interests. I say
this in view of the recommendations I am about to make, which would vastly
affect the present set-up of many stock exchange firms and stock exchange
members, including specialists, of whom I am one.
Therefore, I propose the following:
1. That the membership of the New York Stock Exchange shall be divided
into two classes: (1) brokers, (2) dealers; and that each member shall be
registered with the exchange as broker or dealer.
2. That no member of the exchange shall be permitted to change from
broker to dealer, or vice versa, in less than 6 months.
3. That any member of the exchange who shall be a member of a firm, said
firm shall be regarded in the classification of its stock exchange member; and,
furthermore, firms having more than one exchange member, such members
must be registered in the same identical classification.
4. That dealers shall be allowed to buy and sell securities for their own
account only.
5. That brokers shall be allowed to buy and sell securities for the account
of others only; this to be regarded as commission business, and shall apply to
all classes of orders whether for nonmembers or for members.
6. That the odd-lot firms shall be registered as dealers and the associate
brokers of odd-lot firms shall be registered as brokers.
7. That no firm registered as broker or any member of such firm be permitted to trade directly or indirectly m securities for its or Irs own account.
8. That no member of the stock exchange be permitted to have an interest in
a joint account, pool, syndicate, or any such term as such an account might
be given.
9. That no member of the stock exchange be permitted to have an option, a
put, or a call on any listed security.
10. That the margin requirement on all accounts be maintained at the rate
of 50 percent.
11. That long accounts and short accounts shall be set up on the books of
all firms separately and that each such account shall be separately and individually margined.
12. That in the execution of orders on the stock exchange brokers only,
and not dealers, shall have the privilege of stopping stock.
13. That stop loss orders, both buy and sell, shall be eliminated from stock
exchange practice.
14. That the governing committee of the stock exchange be enlarged to
include: Two United States Senators, each to be a member of a different
political party, and at least one to be a member of the Committee on Banking and Currency of the United States Senate; two governors of the Federal
Reserve Board; two presidents of leading commercial banks; one president
of a leading life insurance company; one president of a leading fire insurance
company.
In conclusion, let me say that I believe it does us, the stock exchange members, no good and it does the securities business no good to be constantly under
a barrage of criticism, and at the same time to be looked upon by the 120
million people of the United States in a light of suspicion. Therefore, let us
settle the uncertain ground we are walking upon once and for all. At the
same time I believe that if a program along the lines I suggest were followed,
the Government, as well as the press would be more aggressive in leaving us
alone than in pursuing us as they now are.
This letter is not meant as a criticism of the New York Stock Exchange, of
which I am proud to be a member, but quite to the contrary, it is my earnest
desire to be helpful, and believe me to be
Very sincerely yours,
(Unsigned carbon copy enclosed to Sen. Fletcher by Mr. Henry Goldman, Jr.)
TESTIMONY OF HAELEY L. CIABKE—Resumed
Mr. PECORA. Mr. Clarke, have you any statement to make to the
committee ?
Mr. CLARKE. (Shakes his head.)
Mr. PECORA. Have you been able to produce here this morning the
documents or other written evidences that I asked you yesterday to
3448
STOCK EXCHANGE PRACTICES
produce here concerning transactions that you had whereby you
acquired as intermediary for General Theatres Equipment, or
others, the assets of the four lamp companies and of Mitchell Camera Corporation that were alluded to in your testimony yesterday?
Mr. CLARKE. Yes, sir. We have sent for them and they are supposed to reach here sometime during the morning.
Mr. PECORA. When do you expect them to arrive ?
Mr. CLARKE. Not later than 12 o'clock noon.
Mr. PECORA. All right. Now, Mr. Clarke, referring to a document
put in evidence yesterday as committee Exhibit No. 135, are you now
able to make any explanation, or reconcilement, of the statements and
figures incorporated in this exhibit under the caption " Lamp Companies and Grandeur ", on the second page thereof, with respect to
the transaction whereby, in the first instance, you acquired the stock
of the Mitchell Camera Co. and transferred that stock to Grandeur,
Inc.?
Mr. CLARKE. I shall be glad to do so.
Mr. PECORA. Well, go ahead; and you have had since yesterday
to ponder the subject.
Mr. CLARKE. It is only a matter of restating it, if I can, clearly.
Mr. PECORA. All right.
Mr. CLARKE. The statement of $3,100,000 cash paid to me for the
acquisition of certain properties, was made it is true, and the allocation of value given for the $1,475,000 paid for the Mitchell Camera
Co., plus a value given to the Grandeur interests, patents and so
forth, claimed by Mr. Fox and owned by him, that is a purely
arbitrary value as I see it, set up on the books of the Grandeur Co.,
and none of the items put together here will make that $3,100,000,
as far as I am able to see.
Mr. PECORA. Where originally did you get the information, or
what knowledge did you originally have of the fact which caused
you to say in this statement, and I refer to the paper marked " Committee Exhibit No. 135 ", that on August 1, 1929, Grandeur bought
from you the stock of the Mitchell Camera Co., for $3,100,000 cash?
Mr. CLARKE. AS I explained to you, Mr. Pecora, this memorandum
was made up at the request of Mr. Ross of your staff, for your
guidance and convenience, from information we had available. We
did the best we could, and we put down here what we had. We did
not take it from the books of the company, and in so far as any of
us knew, the statement was accurate. I find that it was not, as you
know in one other matter which I corrected as soon as I found it
out. This statement as to the allocation of this value, as far as we
know, is still correct. But I have not seen this on the Grandeur
books myself. But this was information taken from a memorandum
we had in our office, and we put it down just as we had it.
Mr. PECORA. Then you had some memorandum or other record indicating or tending to indicate that in August of 1929 you received
from Grandeur, Inc., the sum of $3,100,000 cash for the stock which
you had acquired in the Mitchell Camera Corporation?
Mr. CLARKE. And other things, yes; things that went along with
it were allocated to that value, and it was so intended when we
made this memorandum, breaking it up.
STOCK EXCHANGE PRACTICES
3449
Mr. PECORA. Did you receive the sum of $3,100,000 cash from the
Grandeur Co. in August of 1929 for something?
Mr. CLARKE. Yes, certainly.
Mr. PECORA. YOU did?
Mr. CLARKE. Yes, and I also received another
Mr. PECORA (interposing). That part of the statement is correct?
Mr. CLARKE. That is right.
Mr. PECORA. YOU did receive $3,100,000 cash from the Grandeur
Co. in August of 1929?
Mr. CLARKE. Yes.
Mr. PECORA. NOW,
what did you give to the Grandeur Co. for that
$3,100,000 cash?
Mr. CLARKE. We gave them the Mitchell Camera Co. and all of
the claims of Mr. Fox, everything that was in dispute with Mr. Fox
was given over to the Grandeur Co.
Mr. PECORA. What were those claims of Mr. Fox's that you are
speaking about now ?
Mr. CLARKE. Well, Mr. Fox claimed that he owned all of the
Grandeur Co. at one time, everything that had to do with Grandeur
patents, and so forth.
Mr. PECORA. Well, it strikes me that that is somewhat at variance
with the testimony you have heretofore given, that you caused the
Grandeur Co. to be organized for the express purpose of taking over
the assets of the Mitchell Camera Corporation.
Mr. CLARKE. NO, it is not at variance at all.
Mr. PECORA. What interest did Mr. Fox have?
Mr. CLARKE. Grandeur is the name of sound apparatus as well;
and two people could have sound patents, or many people could have,
and Grandeur is simply a name that was given to a certain development in the film business, of film pictures, including sound apparatus,
including special machines, including special cameras. And I can
best state it to* you how special it would be when I say it was estimated that it would cost the entire industry 150 million dollars to
replace their equipment with this equipment.
Mr. PECORA. I am afraid now you are talking about something I
am not inquiring about.
Mr. CLARKE. Well, I am trying to answer your question.
Mr. PECORA. Well, you answered questions yesterday to the effect
that Grandeur, Inc., was a corporation which you caused to be organized. Is that correct?
Mr. CLARKE. Yes, sir.
Mr. PECORA. NOW, you
also stated yesterday in the course of your
testimony that the reason why Grandeur, Inc., was organized by you,
was to take over the assets of the Mitchell Camera Co., which you
meanwhile had acquired from the Mitchell Camera Co. as an intermediary for Grandeur, Inc., which was about to be organized. Now,
was that testimony given by you correct?
Mr. CLARKE. Yes, sir.
Mr. PECORA. All right.
Then you acquired for $1,475,000, as such
intermediary for the Grandeur Co. about to be organized, all of the
assets of the^Mitchell Camera Co., didn't you?
Mr. CLARKE. Yes,
sir.
3450
STOCK EXCHANGE PRACTICES
Mr. PECORA. And then you turned those assets over to Grandeur,
Inc., upon its organization, didn't you?
Mr. CLARKE. Yes,
Mr. PECORA. And
sir.
what did you get from Grandeur, Inc., for those
assets ?
Mr. CLARKE. I got $3,100,000.
Mr. PECORA. Did you say $3,100,000?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Well, then,
you also testified yesterday, as I recall
it, that you received from Grandeur, Inc., tne same amount that
you had paid for the assets of the Mitchell Camera Co., which
amount you said was $1,475,000.
Mr. CLARKE. That is just one of the items. That is for the
Mitchell Camera Co.; yes.
Mr. PECORA. NOW, what other assets of the Mitchell Camera Co.
did you acquire that you turned over to Grandeur, Inc., but which
you have not already mentioned ?
Mr. CLARKE. Whatever claims Mr. Fox had. Mr. Fox claimed
a great many things, and he also claimed that he had an interest
in the Grandeur development made by the Mitchell Camera Co.
He made many, many claims. Now, all of those were settled, Mr.
Pecora, with Mr. Fox by paying him 2 million dollars, plus the
stock.
Mr. PECORA. Did Mr. Fox have any interest in the Mitchell
Camera Co. at the time you purchased its assets ?
Mr. CLARKE. NO. He had no interest that I know of. His claim
was on a development that he had made there in those Grandeur
cameras. Kindly distinguish between Grandeur as a product and
Grandeur as a name, just like a sound machine and sound as we
know it in the motion picture business. Grandeur, Inc., was a corporation, and when I have been speaking of Grandeur, perhaps, in
my statement heretofore this morning, I was talking of the product,
you see, of the products and patents and everything else relating
to the development of the Grandeur film.
Mr. PECORA. Did you have any attorney examine into the claims of
Mr. Fox, the claims that you have just mentioned ?
Mr. CLARKE. Oh, yes. There was plenty of examination.
Mr. PECORA. Who examined that matter ?
Mr. CLARKE. Principally Mr. Koegel.
Mr. PECORA. Were those claims of Mr. Fox's based upon patents?
Mr. CLARKE. Yes.
Mr. PECORA. And did Mr. Koegel inquire into the validity of Mr.
Fox's claim?
Mr. CLARKE. Of the claims, yes, but I don't know how much he
inquired into the validity of the patents.
Mr. PECORA. General'Theatres Equipment, Inc., was interested,
according to this contract of July 9, 1929, in pursuance of the terms
and provisions of which General Theatres Equipment, Inc., was
organized, only in acquiring the stock and assets of the Mitchell
Camera Co., wasn't it?
Mr. CLARKE. Did you say General Theatres?
Mr. PECORA. Yes.
STOCK EXCHANGE PRACTICES
3451
Mr. CLARKE. No. I t was interested in acquiring that, and was
interested in acquiring Grandeur, and much more in acquiring
Grandeur, and it was necessary to have Mitchell Camera Co. as well.
Mr. PECORA. Where is there anything in this agreement of July 9>
1929, which has been introduced in evidence as committee exhibit no.
133, which obligates General Theatres Equipment, Inc., to purchase
from Mr. Fox anything that he had of value by way of claims or
anything else ?
Mr. CLARKE. I do not k o w that there is anything in there.
Mr. PECORA. Just show it to me if you can (passing over to the
witness, Committee Exhibit No. 133).
Mr. CLARKE. I do not know that there is anything in there. I do
not imagine there is.
Mr. PECORA. Just look at it and see, and tell us.
Mr. CLARKE (after looking over the paper). There is nothing here
that mentions Mr. Fox.
Mr. PECORA. I S there anything there that mentions purchasing
from Mr. Fox or anybody else any claims of the amount of 2 million
dollars?
Mr. CLARKE. N O ; it just speaks of the acquisition of half of the
Grandeur stock for 2 million dollars.
Mr. PECORA. Where are the minute books of Grandeur, Inc.?
Mr. CLARKE. I don't know.
Mr. PECORA. Was there a written agreement of any kind entered
into between you and Grandeur, Lie, defining or setting forth the
terms and provisions and conditions under which you transferred to
Grandeur, Inc., the interests or assets of the Mitchell Camera Co.,
which you had acquired as intermediary?
Mr. CLARKE. I t was a settlement we made with Mr. Fox, and I
don't think there was any written agreement in advance at all. But
probably there was an agreement made at that time.
Mr. PECORA. NOW, I haven't asked you anything about Mr. Fox.
Mr. CLARKE. Well, then, I misunderstood you.
Mr. PECORA. YOU set out to acquire the assets and the stock of
the Mitchell Camera Co. originally with a view to turning those
assets over to a corporation to be organized by you for that purpose,
and which was eventually organized under the name of Grandeur,
Inc., didn't you?
Mr. CLARKE. Yes, sir.
Mr. PECORA. NOW, at the
time or before you transferred the stock
and assets of the Mitchell Camera Co. to Grandeur, Inc., was a
written agreement of any kind entered into between you or any
agent or representative of yours, with Grandeur, Inc., covering the
terms and conditions of the purchase by Grandeur, Inc., from you
of the assets of the Mitchell Camera Co.?
Mr. CLARKE. I don't recall.
Mr. PECORA. What was that answer?
Mr. CLARKE. I don't recall any such thing.
Mr. PECORA. Well, can you conceive of the possibility that a transaction of that importance, involving as it did about V/2 million
dollars or more, could have been carried out without some written
agreement defining the rights, interests, and obligations of the
parties to the transaction?
3452
STOCK EXCHANGE PRACTICES
Mr. CLARKE. Yes, I can; for the reason that through my efforts
Mitchell Camera Co. was acquired for the benefit of General
Theaters, and it was put into Grandeur, Inc., for the same reason.
Mr. PECORA. All right. But was all that done on an oral understanding or agreement ?
Mr. CLARKE. NO. There was a written agreement for the purchase
of Mitchell Camera Co.
Mr. PECORA. Was there a written contract for the purchase by
either Grandeur, Inc., or General Theatres Equipment, Inc., of the
assets of Mitchell Camera Co., which you had purchased?
Mr. CLARKE. I say to you that I don't recall.
Mr. PECORA. Well, I ask you, then, can you conceive of the possibility that such a transaction could have been consummated without
a written agreement defining the rights, interests, liabilities, and
obligations of the respective parties to that transaction ?
Mr. CLARKE. Certainly I can, because it was acquired for that
purpose and turned right over to them.
Mr. PECORA. Would you enter into a transaction of that magnitude
without a written agreement defining the rights and interests of the
Mr. CLARKE. There may be such an agreement. I don't recall one;
but I certainly would make such an agreement, and would consider
it a good business transaction, on the basis of the contract that was
made for the purchase in this case of the Mitchell Camera Co.
Mr. PECORA. When you turned over whatever you had acquired
of Mitchell Camera Co, to Grandeur, Inc., did you execute an instrument, deed, conveyance, assignment, bill of sale, or anything?
Mr. CLARKE. Of course, it was in my name, and the documents
had to be made.
Mr. PECORA. And were such documents prepared ?
Mr. CLARKE. Certainly.
Mr. PECORA. Who prepared them in your behalf?
Mr. CLARKE. I think they were probably prepared by the legal
advisors of the bankers.
Mr. PECORA. By the legal advisors of whom?
Mr. CLARKE. Of the bankers, and by Mr. Koegel on behalf of
myself.
Mr. PECORA. And by " the bankers " do you mean the syndicate
composed of Chase Securities Corporation, Shermar Corporation,
West & Co., Pynchon & Co., and W. S. Hammons & Co.?
Mr. CLARKE. Certainly.
Mr. PECORA. Who was their legal representatives?
Mr. CLARKE. Rushmore, Bisbee & Stern were their representatives.
Mr. PECORA. DO you recall which individual member or members
of that firm attended to those legal details ?
Mr. CLARKE. I do not, Mr. Pecora.
Mr. PECORA. Mr. Mudge, may I ask you off the record
(Thereupon Mr. Pecora made an inquiry of Mr. Mudge off the
record.)
Mr. PECORA. NOW, Mr. Clarke, did you have a written agreement
with Mr. Fox under which you paid him, as you claim, the sum of
2 million dollars?
Mr. CLARKE. I don't recall any.
STOCK EXCHANGE PRACTICES
3453
Mr. PECORA. HOW did you pay him, by check?
Mr. CLARKE. Yes,
Mr. PECORA. Was
sir.
the check drawn against your individual deposit
account?
Mr. CLARKE. The money was deposited, and the check was drawn,
yes, sir, against my account.
Mr. PECORA. And you drew it against a deposit account which
included this $3,100,000 cash that you had obtained from Grandeur,
Inc.?
Mr. CLARKE. Yes, sir.
Mr. PECORA. NOW, have
you a memorandum of the date or dates
of any such checks that you gave Fox?
Mr. CLARKE. Yes, sir.
Mr. PECORA. What are they?
Mr. CLARKE. There were two checks, both dated August 1. 1929.
Mr. PECORA. Well, go on.
Mr. CLARKE. One for $1,625,000, and one for $375,000.
Mr. PECORA. Both drawn by you?
Mr. CLARKE. Drawn by me, on the Chase National Bank of the
city of New York.
Mr. PECORA. TO the order of William Fox?
Mr. CLARKE. Yes, sir; and certified by the Chase National Bank
and given to him.
Mr. PECORA. Did you receive from Fox any instrument of assignment or otherwise transferring to you or to Grandeur, Inc., any
claims or property rights of any kind that he had for which you
paid him this sum of two million dollars ?
Mr. CLARKE. I assume that the proper documents were drawn
for the whole transaction.
Mr. PECORA. DO you recall whether any such documents were
drawn and delivered?
Mr. CLARKE. I do not recall the document; no, sir.
Mr. PECORA. DO you recall who drew any such documents?
Mr. CLARKE. I do not.
Mr. PECORA. What attorney
or attorneys acted for you in those
transactions ?
Mr. CLARKE. Mr. Koegel acted for me.
Mr. PECORA. Mr. Koegel?
Mr. CLARKE. Yes,
sir.
The CHAIRMAN. What were the dates of those checks ?
Mr. CLARKE. Both dated the same day, August 1, 1929.
Mr. PECORA. Was that date, August 1, 1929, the date upon which
you received the payment of $3,100,000 from Grandeur, Lie. ?
Mr. CLARKE. Probably so, but I don't know. All that I have is a
memorandum here that savs August of 1929, and this was August 1
that the checks were issued, and so I assume it was the same day.
Mr. PECORA. NOW, referring again to committee exhibit no. 135
in evidence, and to page 2 thereof, you will find on your copy thereof
the following item:
Paid William Fox August 1, 1929, to be used for the purchase of half of
Grandeur stock, $2,000,000.
Mr. CLARKE. I do find it.
175541—34—pi 7
16
3454
STOCK EXCHANGE PRACTICES
Mr. PECORA. And is that the item that relates to these two pay*
ments by check aggregating 2 million dollars?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Well, according
to that item, that was paid to Mr.
Fox not for anything that Mr. Fox turned over to you, as I understand the phraseology of this item, but it was paid to Mr. Fox to
be used by him for the purchase of half of the Grandeur, Inc., stock.
Mr. CLARKE. Yes, sir; that is correct.
Mr. PECORA. And that is correct?
Mr. CLARKE. Yes, sir; that is the way the deal was made.
Mr. PECORA. Well, was Mr. Fox to purchase that half of the
Grandeur stock for himself?
Mr. CLARKE. Yes.
Mr. PECORA. Well,
how in the world did Grandeur, Inc., get the
benefit of anything from Mr. Fox for that 2 million dollars ?
Mr. CLARKE. It is a part of the consideration, Mr. Pecora.
Mr. PECORA. What was that answer?
Mr. CLARKE. It was a part of the consideration for what was given
Mr. Fox.
Mr. PECORA. A part of the consideration for what ?
Mr. CLARKE. For Mr. Fox's interests and claims, and so forth,
and so forth. And he claimed nearly everything regarding Grandeur, and this settlement was made with him, and about that time
a contract was also made with him to acquire for all the 1,000 theaters
owned by Fox Theaters, and the Fox Films, the Grandeur apparatus
which I testified about last week.
Mr. PECORA. What benefits did Grandeur, Inc., or General Theatres Equipment, Inc., get for the 2 million dollars which it paid to
Fox, which according to the statement you have just made, was to
enable Fox to purchase half of Grandeur, Inc., stock?
Mr. CLARKE. We bought all of Mr. Fox's claims of every kind
in the Grandeur development. And it also assured us the business
of Fox Theaters and Fox Films for Grandeur apparatus.
Mr. PECORA. Who owned Grandeur, Inc., at the time that Fox
received the $2,000,000 to be used for the purchase by him of half
of its stock?
Mr. CLARKE. AS I testified, it was organized by General Theatres
to take over Mitchell Camera Co. and these other things that Mr.
Fox claimed, and other claims.
Mr. PECORA. If it was organized by General Theatres Equipment,
Inc., it was so organized in pursuance of the agreement and understanding that you had arrived at with the members of the banking
syndicate, wasn't it?
Mr. CLARKE. I would say so; yes.
Mr. PECORA. And that agreement was reduced to writing and
consists of Committee Exhibit No. 133 heretofore put in evidence,
doesn't it?
Mr. CLARKE. Yes.
Mr. PECORA. Why
wasn't there anything said in this agreement,
then^ concerning Mr. Fox and his interests, or as to what he was to
acquire in Grandeur, Inc., or what Grandeur, Inc., was to acquire
from him?
Mr. CLARKE. I don't know.
STOCK EXCHANGE PRACTICES
3455
The CHAIRMAN. Were half of the shares of Grandeur, Inc., actually issued to Mr. Fox ?
Mr. CLARKE. Yes, sir; either to Mr. Fox or his nominees.
The CHAIRMAN. That 2 million dollars was not absolutely given by
you to Mr. Fox, or loaned by you to Mr. Fox, but was in payment of
Mr. Fox's claims; is that it?
Mr. CLARKE. That is correct.
Mr. PECORA. NOW, what is meant by the item that appears also in
Committee Exhibit No. 135, on page 2 thereof, under the caption
" Lamp Companies and Grandeur ", and which reads as follows:
And gave William Fox 25,000 shares of GTE at $30, with repurchase agreement, $750,000.
What does that refer to?
Mr. CLARKE. The stock was also a part of the consideration, and
the stock was given to him to either keep or dispose of according to
that agreement to repurchase.
Mr. PECORA. Was that stock given to him in payment of those
claims of his ?
Mr. CLARKE. A part of the consideration; yes, sir.
Mr. PECORA. That is, stock worth $750,000 was given to him in
addition to the 2 million dollars in cash ?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Well, who
gave him those 25,000 shares of General
Theatres Equipment, Inc. ?
Mr. CLARKE. I don't know. I supopse General Theatres did, or I
loaned it to them. I gave it to them.
Mr. PECORA. YOU did what?
Mr. CLARKE. I gave it to them.
Mr. PECORA. Out of your holdings?
Mr. CLARKE. Yes, sir. Mr. Keller says out of my holdings.
Mr. PECORA. Who says so?
Mr. CLARKE. Mr. Keller advises me that it was given out of my
holdings.
Mr. PECORA. Did Mr. Keller, at the time you had this transaction
with Fox, represent you?
Mr. CLARKE. NO, unfortunately not. [Laughter.]
Mr. PECORA. Then whatever knowledge or information he has
about the matter is purely hearsay?
Mr. CLARKE. NO. He got that from the records. All this information was information secured from our own records and from other
sources, wherever we could get it.
Mr. PECORA. Then, so far as he is concerned, it is all hearsay, isn't
it?
Mr. CLARKE. W d l
Mr. PECORA. Did you know Mr. Keller in August of 1929?
Mi;. CLARKE. Oh, yes.
Mr. PECORA. Was he employed
by you in any capacity whatsoever
at that time?
Mr. CLARKE. Mr. Keller came with me April 1,1980.
Mr. PECORA. Did he have anything to do with the transaction that
you had in July and August of 1929 with Mr. Fox?
Mr. CLARKE. NO.
3456
STOCK EXCHANGE PRACTICES
Mr. PECORA. And you had to be reminded by Mr. Keller that you
were the one who turned over those 25,000 shares of General Theatres
Equipment, Inc., stock, worth $750,000, to Mr. Fox?
Mr. CLARKE. Mr. Pecora, I am trying to give you correct answers.
Mr. PECORA. But, I say, you had to be reminded by Mr. Keller that
j^ou were the person who gave that stock to Mr. Fox.
Mr. CLARKE. I was reminded of it; yes.
Mr. PECORA. YOU had not recalled it until Mr. Keller reminded you
of it, had you?
Mr. CLARKE. NO ; I believe not.
Mr. PECORA. Will you please tell this subcommittee why it was
necessary for you, out of your pocket so to speak, to turn over to
Mr. Fox, as part and parcel of this deal, $750,000 of stock? What
did you get for it from Mr. Fox or anybody else?
Mr. CLARKE. Well—(and witness ceases speaking while Mr. Keller
is whispering to him).
Mr. PECORA, Oh, Mr. Keller, let Mr. Clarke answer the question,
please.
Mr. KELLER. All right.
Mr. PECORA. If he cannot answer, let him say so; and if he wants
information from you the record will then show he has obtained it
from you. But don't whisper anything to him when I put a question to him.
Mr. KELLER. Very well.
Mr. PECORA. NOW, answer the question, Mr. Clarke.
Mr. CLARKE. May I have the question read to me, now?
Mr. PECORA. Certainly. The committee reporter will read the
question to you. [Which was done.]
Mr. CLARKE. The only consideration I got from it was a benefit
that I thought it would be to me for my other stock.
Mr. PECORA. What other stock do you refer to?
Mr. CLARKE. The stock that I owned in General Theatres.
Mr. PECORA. Well, that same benefit would have flowed to the
other stockholders, wouldn't it?
Mr. CLARKE. I t certainly would.
Mr. PECORA. Why should you, out of your personal shares, turn
over to Mr. Fox $750,000 for benefits that were not flowing to you
exclusively but which would flow to all of the stockholders of General
Theatres Equipment, Inc. ?
Mr. CLARKE. Well, I thought it would—well, I have done many
things in my life that would benefit all of the stockholders of a
company, and I did this in the same spirit.
Mr. PECORA. YOU say you did this in the same spirit?
Mr. CLARKE. Yes,
Mr. PECORA. In a
sir.
spirit of liberality and generosity toward your
fellow stockholders of General Theatres Equipment, Inc.?
Mr. CLARKE. I did not use those words.
Mr. PECORA. NO, but I as using them, and am asking you if that
is the fact.
Mr. CLARKE. Yes, it helped them.
Mr. PECORA. Well, we now have another Santa Claus in the
record. [Laughter.]
Mr. CLARKE. Thank vou.
STOCK EXCHANGE PRACTICES
3457
Mr. PECORA. NOW, in this statement, committee exhibit no. 135,
there appears this further item under "Lamp Companies and
Grandeur" which I will read:
Commissions to H. E. Van Duyne, $100,000.
Who paid those commissions?
Mr. CLARKE. Those commissions were to be paid by me, but they
are not paid yet. The amount is put in escrow because it is still
in dispute.
Mr. PECORA. When did you prepare the statement that has become
Committee Exhibit No. 135 for my guidance ?
Mr. CLARKE. I did not prepare it. Mr. Keller prepared it.
Mr. PECORA. When did you cause it to be prepared by Mr. Keller
or anyone else?
Mr. CLARKE. I don't know the date.
Mr. PECORA. Was it recently?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Within the last month?
Mr. CLARKE. Yes, sir. At the request
of Mr. Eoss out here in the
hall, I had it prepared to try to help you.
Mr. PECORA. Why did you include that item as a payment actually
made?
Mr. CLARKE. Because it is an item that has to be paid if we do
not settle it for less; and if it is settled for less the money will go
back to General Theatres Equipment, Inc.
Mr. PECORA. The money will go back where ?
Mr. CLARKE. TO the General Theatres.
Mr. PECORA. Did you say to General Sales ?
Mr. CLARKE. N O ; to General Theatres Equipment, Inc.
Mr. PECORA. Oh. When did you get this $100,000 to be paid to
Mr. Van. Duyne but which has not yet been paid?
Mr. CLARKE. I got it out of those funds.
Mr. PECORA. That is, back in August of 1929 ?
Mr. CLARKE. Yes, sir.
Mr. PECORA. And not
a penny of it has been paid to Mr. Van
Duyne as yet ?
Mr. CLARK j]. No, sir.
Mr. PECORA. I S this fund in escrow ?
Mr. CLARKE. Yes.
Mr. PECORA. Where?
Mr. CLARKE. In Chicago.
Mr. PECORA. In what account?
Mr. CLARKE. In my account.
Mr. PECORA. I S it a special account?
Mr. CLARKE. Yes, sir.
Mr. PECORA. I S it an escrow account ?
Mr. CLARKE. Yes, sir.
Mr. PECORA. When was that account established?
Mr. CLARKE. At that time.
Mr. PECORA. I S there litigation between you and
about this amount?
Mr. CLARKE. I t has never got into court; no, sir.
Mr. Van Duyne
3458
STOCK EXCHANGE PRACTICES
Mr. PECORA. Are there any disputes or controversies pending between you?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Involving the $100,000?
Mr. CLARKE. Yes, sir.
Mr. PECORA. But they have not gone into court yet?
Mr. CLARKE. NO, sir.
Mr. PECORA. What bank in Chicago carries this special account?
Mr. CLARKE. Either the Continental or the Central Trust, and
I don't know which.
Mr. PECORA. Don't you recall which bank it is in ?
Mr. CLARKE. NO. I t is just in my account, marked special for
Van Duyne.
Senator COTJZENS. I S there any escrow agreement?
Mr. CLARKE. There are some letters in existence between myself
and Mr. Van Duyne.
Senator COUZENS. SO there is no escrow agreement, as a matter
of fact?
Mr. CLARKE. But it is considered to be held in escrow for Mr.
Van Duyne.
Senator COTTZENS. What is there to prevent you from drawing
upon it?
Mr. CLARKE. Nothing.
Senator COUZENS. SO, in effect, it is not in escrow, if you can
draw upon it at any time?
Mr. CLARKE. NO.
Mr. PECORA. Did
you make an accounting of any kind—did you
render an accounting of any kind to General Theatres Equipment,
Inc., that made any mention at all of this $100,000 ?
Mr. CLARKE. Oh, yes.
Mr. PECORA. When?
Mr. CLARKE. At the time this deal was made.
Mr. PECORA. Was it in writing?
Mr. CLARKE. I assume it was.
Mr. PECORA. Have you a copy of it?
Mr. CLARKE. NO, sir.
Mr. PECORA. Did you ever have a copy of it?
Mr. CLARKE. I said I assumed such a thing
was done. And I
suppose it is in the records of General Theatres Equipment, Inc.
Mr. PECORA. I asked you if you ever had a copy of it.
Mr. CLARKE. Not to my knowledge.
Mr. PECORA. Have you any clear recollection that such a written
accounting was rendered by you?
Mr. CLARKE. I think it would be necessary, yes.
Mr. PECORA. Well
Mr. CLARKE (continuing). But I don't know.
Mr. PECORA. Well, you don't know. Is that the answer to my
question ?
Mr. CLARKE. Yes, sir.
Mr. PECORA. YOU said
it was in either one or the other of two
banks. What are the names of those banks, again, as I want to make
a note of them ?
Mr. CLARKE. It is either in the City National Bank or
STOCK EXCHANGE PRACTICES
3459
Mr. PECORA (interposing). Oh, then that is a third bank and you
had not mentioned it.
Mr. CLARKE. No. It is a new name for the bank, is all.
Mr. PECORA. Well, what is it?
Mr. CLARKE. NOW it is the City National Bank.
Mr. PECORA. DO you mean the City National Bank of Chicago ?
Mr. CLARKE. That is right.
Mr. PECORA. Or it is in what other bank?
Mr. CLARKE. The Continental Illinois Bank & Trust Co.
Mr. PECORA. That is in Chicago, too ?
Mr. CLARKE. Yes, sir; that is in Chicago, too.
Mr. PECORA. What is that, now?
Mr. CLARKE. The Continental Illinois National Bank & Trust Co.,
I believe is the name.
Mr. PECORA. YOU are sure the account is in your name as a special
account, in the name of Harley L. Clarke, as a special account I
mean, and not in the name of just Harley L. Clarke?
Mr. CLARKE. I say it is in my account marked as a special account
by me.
Mr. PECORA. Well, I do not quite understand that. Is it in a
general-deposit account that you maintain at either one or other of
these banks ?
Mr. CLARKE. Yes, sir.
Mr. PECORA. When you
say it is marked as a special account, what
do you mean by that? Where is it marked in that way?
Mr. CLARKE. It is marked in that way on my records.
Mr. PECORA. Where?
Mr. CLARKE. On my records.
Mr. PECORA. DO you say on your records?
Mr. CLARKE. Yes, sir.
Mr. PECORA. And not on the
Mr. CLARKE. NO, sir.
Mr. PECORA. Then the form
bank records ?
of the deposit itself is not a specialdeposit account, is it?
Mr. CLARKE. Well, I consider it special; yes.
Mr. PECORA. NO matter what you may consider it, what is it in
form ?
Mr. CLARKE. In form it is a general deposit.
Mr. PECORA. It is a general deposit?
Mr. CLARKE. Yes,
sir.
Mr. PECORA. Why didn't you tell me that before ?
Mr. CLARKE. I did tell you it was a special account held for the
benefit of Mr. Van Duyne.
Mr. PECORA. Didn't I ask you specifically if this money that you
said was being held in escrow was a deposit in a special account for
that purpose, and didn't you say yes in answer to that question, at
least in substance?
Mr. CLARKE. I said that, but on your further questioning
Mr. PECORA (interposing). No; not on my further questions, now,
but this question.
Mr. CLARKE. Oh, yes.
Mr. PECORA. TO this question
I am referring to didn't you answer
yes? Didn't you inform this subcommittee, in substance, when I
3460
STOCK EXCHANGE PBACTICES
put the question to you before as to this $100,000 which you said
was deposited in escrow, didn't you say it was in a special account?
[After a pause.] Didn't you say that, Mr. Clarke ?
Mr. CLARKE. I think so; yes.
Mr. PECORA. NOW, were you mistaken when you said that?
Mr. CLARKE. Yes.
Mr. PECORA. I S that
one of the mistakes you referred to on yesterday as of the nature one is permitted to make?
Mr. CLARKE. Well, Mr. Pecora, there was no intention on my
part of trying to mislead you in any way.
Mr. PECORA. Well, I am afraid you have, or else I am very stupid
in interpreting your testimony. Now, in this account that you say
you have marked on your private records as a special account but
which is in the form ox a general deposit account, have you a balance
today of as much as $100,000?
Mr. CLARKE. Yes; I think so.
Mr. PECORA. Have you always had a balance of $100,000 or more
in that account since you deposited that sum of money there?
Mr. CLARKE. I thinfe so.
Mr. PECORA. Have you more than one deposit account in the bank
in which this money was deposited by you? And I will tell you
frankly my purpose in asking this question; it is to enable me to
ascertain from the bank itself as quickly as possible any facts with
regard to such account.
Mr. CLARKE. N O ; I have not. I have only one account in this
bank.
Mr. PECORA. And that account is in your individual name, Harlev
L. Clarke?
Mr. CLARKE. That is right.
Mr. PECORA. Have you, or do you keep deposit accounts in both
of those banks?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Don't you
know clearly which one of the two it is in,
I mean this $100,000 that is on deposit?
Mr. CLARKE. I think it is in the Continental Illinois.
Mr. PECORA. Did you make this $100,000 deposit on August 1,
1929, or thereabouts?
Mr. CLARKE. Of course.
Mr. PECORA. DO you think that Mr. Keller would be able to enlighten us specifically as to which bank this deposit is carried in?
Mr. KELLER. I have no information on that, Mr. Pecora.
Mr. PECORA. Would it be possible for you to find out, Mr. Keller,
from any records available to you?
Mr. KELLER. NO, I do not have that. I do not believe I could
find that out.
Mr. PECORA. Mr. Clarke, is this account an active account of
yours?
Mr. CLARKE. Oh, yes.
Mr. PECORA. NOW, who is Mr. H. E. Van Duyne ?
Mr. CLARKE. H. E. Van Duyne lives in Los Angeles, Calif.
Mr. PECORA. Well, who is he ? [After a pause.] Who is he,
Mr.
Clarke?
Mr. CLARKE. He is a man who has been in the motion picture
equipment business for many years.
STOCK EXCHANGE PRACTICES
3461
Mr. PECORA. In business for himself in that field ?
Mr. CLARKE. He was; yes, for many, many years; but is not now*
Mr. PECORA. What did he do for this commission of $100,000!
What service did he render?
Mr. CLARKE. He negotiated for the acquisition of the Ashcraft
Automatic Arc Co. and the Mitchell Camera Co.
Mr. PECORA. At your request?
Mr. CLARKE. Yes. Mr. Van Duyne was formerly president and
owned the Pacific Amusement Co.
Mr. PECORA. Where is that located?
Mr. CLARKE. In Los Angeles.
Mr. PECORA. Has he always been in business there since you have
known him?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Where was the Mitchell Camera Co. located?
Mr. CLARKE. In Los Angeles.
Mr. PECORA. Where was the Ashcraft Automatic Arc Co. located!
Mr. CLARKE. At Los Angeles.
Mr. PECORA. Did you have any contract in writing with Mr. Van
Duyne whereby he ior a commission was to act as agent or broker
for you in the acquisition of the assets of the Ashcrait and Mitchell
companies ?
Mr. CLARKE. I had an exchange of letters with him for it.
Mr. PECORA. Did he render all the services that enabled you to
acquire the assets of those two companies?
Mr. CLARKE. NO ; he did
not.
Mr. PECORA. Did anyone assist him?
Mr. CLARKE. Yes.
Mr. PECORA. Who?
Mr. CLARKE. I forget
the man's name for the moment. He
claimed a commission, and was settled with for an amount which I
do not now remember either. That was the reason that there was a
dispute.
Mr. PECORA. For value received he claimed whatever commisions
he claimed, did he?
Mr. CLARKE. Yes; that is right—no; I don't know that he received
whatever he claimed.
Mr. PECORA. Well, he received whatever amount was arrived at by
way of adjustment of settlement of his claim, is that it?
Mr. CLARKE. Yes, sir.
Mr. PECORA. In the letters
that you have in the exchange of correspondence that you had with Mr. Van Duyne, was reference made
to the amount of commission that he was to receive from you for
his brokerage services?
Mr. CLARKE. Yes; in percentage, I think.
Mr. PECORA. What was the percentage rate?
Mr. CLARKE. I think it was based on if he obtained it at a certain
price that he was to get so much commission, and at another price it
was to be so much commission, but I don't recall.
Mr. PECORA. Was Mr. Van Duyne by any chance a stockholder
or other party in interest of the Mitchell Camera Co. ?
Mr. CLARKE. I think not.
3462
STOCK EXCHANGE PEACTICES
Mr. PECORA. Was he of the Ashcraft Co. ?
Mr. CLARKE. I think not.
Mr. PECORA. Was there any arrangement between you and Mr.
Van Duyne for any division of his brokerage fees or commissions
with you ?
Mr. CLARKE. NO, sir.
Mr. PECORA. NOW, have those records come here as yet?
Mr. CLARKE. I haven't been advised of it yet.
Mr. PECORA. Will you ascertain?
Mr. CLARKE. Mr. Keller has been advised that they are coming
down on a train due here at 11:50 a.m.
Mr. PECORA. All right. Meanwhile I will suspend the examination of this witness and ask Mr. Dodge to resume the stand. And,
Mr. Clarke, will you be good enough to let me know when those
records arrive?
Mr. CLARKE. Certainly.
(Thereupon the witness Clarke temporarily left the committee
table.)
The CHAIRMAN. Come around, Mr. Dodge.
TESTIMONY OF MURRAY W. DODGE—Resumed
The CHAIRMAN. YOU have heretofore been sworn, have you v Mr.
Dodge?
Mr. DODGE. Yes, sir.
Mr. PECORA. Mr. Dodge,
were you in attendance before the subcommittee on yesterday while Mr. Harley L. Clarke, the witness who
has just vacated the stand, gave testimony ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Did you
hear the testimony given by him here this
morning ?
Mr. DODGE. Yes, sir.
Mr. PECORA. And did
you hear his testimony given here on yes-
terday ?
Mr. DODGE. Yes,
sir.
Mr. PECORA. DO you recall that among other things Mr. Harley
Clarke testified yesterday, in substance, that the agreement dated
July 9,1929, which is in evidence as Committee Exhibit No. 133, was
arrived at between the parties thereto after a series of conferences
and negotiations which had lasted for a period of two or more
months ?
Mr. DODGE. Yes, sir; I heard that.
Mr. PECORA. NOW, as far as you know, was that testimony correct ?
Mr. DODGE. Not quite as long as that, I don't think.
Mr. PECORA. NOW, you at that time were connected in some capacity with Chase Securities Corporation, weren't you?
Mr. DODGE. Yes, sir.
Mr. PECORA. And in what capacity ?
Mr. DODGE. AS a vice president.
Mr. PECORA. And you are still connected with
Mr. DODGE. NO, sir.
Mr. PECORA. Well, you are connected with the
Mr. DODGE. NO, sir.
it ?
Chase Corporation?
STOCK EXCHANGE PRACTICES
3463
Mr. PECORA. When did you sever your relations with it ?
Mr. DODGE. In May of 1933.
Mr. PECORA. In May of this year ?
Mr. DODGE. Yes, sir.
Mr. PECORA. The Chase Securities
Corporation was one of the
parties to this agreement of July 9, 1929, to your knowledge?
Mr. DODGE. Yes,
Mr. PECORA. In
sir.
the conferences and the negotiations that led to
the making of this agreement did you participate as an officer or
representative of the Chase Securities Corporation?
Mr. DODGE. Yes, sir.
Mr. PECORA. Were there
any other officers or representatives of
the Chase Securities Corporation also present in those conferences
and negotiations?
Mr. DODGE. I do not believe so.
Mr. PECORA. DO you know anything concerning the facts and
circumstances under which, according to the testimony of Mr.
Clarke, he paid the sum of $2,000,000 to Mr. William Fox in connection with the acquisition of assets originally of the Mitchell
Camera Co.?
Mr. DODGE. My understanding at the time was that Mr. Fox was
to have a half interest in the Grandeur, Inc.
Mr. PECORA. Was he to pay for that half interest?
Mr. DODGE. I don't know how the arrangements were made. All
I know is that there was a certain amount of money to be paid
to the Grandeur, Inc., which in turn was to own the Mitchell
Camera Co.
Mr. PECORA. And all of those things were discussed in the conferences that preceded the execution of this contract on July 9, 1929 ?
Mr. DODGE. The value of the Grandeur, Inc., after it had acquired
the assets of the Mitchell Camera Co. and whatever rights and patents accrued from the International Projector Corporation and
whatever rights Mr. William Fox or whatever the patents he might
claim, were to be owned by the Grandeur, Inc.
Mr. PECORA. In those conferences was anything said concerning
anything that Mr. Fox owned which was to be acquired by the Grandeur Corporation for the ultimate benefit of the General Theatres
Equipment, Inc.?
Mr. DODGE. Mr. Pecora, I can only remember that in a general way.
I remember that there were discussions by Mr. Clarke; that Mr.
Fox had made certain claims both to the prior right to acquire
the Mitchell Camera Co., whether it was through an option or not
I do not know, and a general settlement had been arrived at by
Mr. Clarke; in addition to Mr. Clarke's having acquired this half
interest in Grandeur, Inc., there also was a contract entered into with
Mr-. Fox or with the Fox Film and the Fox Theatres Corporation to
purchase a considerable number of the new Grandeur projecting
machines.
Mr. PECORA. Have you a copy of that contract?
Mr. DODGE. I don't know whether we have or not. [After conferring with associate:] I am informed that there is a contract
between the Grandeur, Inc., and the Fox Theatres. [Aside to an
3464
STOCK EXCHANGE PEACTIOES
associate:] The Fox Film also?
Theatres—dated June 24.
Mr. PECORA. 1929?
[After a pause.] And the Fox
Mr. DODGE. 1929.
Mr. PECORA. What is the general substance of that contract?
Mr. DODGE. I have not read that contract, Mr. Pecora. I have
just received it. We just received that from New York.
Mr. PECORA. SO far as you were familiar or became familiar
through the medium of these conferences and negotiations that preceded the contract of July 9,1929, what was the Grandeur Co. or the
General Theatres Equipment, Inc., to acquire from Mr. Fox?
Mr. DODGE. Whatever rights he had or patents that he claimed to
have in either the Mitchell Camera Co. or the Grandeur, Inc.
Mr. PECORA. Was Mr. Fox a participant in any of those conferences and negotiations?
Mr. DODGE. NO, sir.
Mr. PECORA. Well, who
brought up the subject of Mr. Fox haying:
anything by way of rights, claims, property interests of any kind ?
Mr. DODGE. Mr. Clarke.
Mr. PECORA. Mr. Clarke did. What did he say about it?
Mr. DODGE. In a general way, as I say, he told us that it was very
essential to the business of the General Theatres Equipment that
they should own 50 percent of the Grandeur, Inc., because in turn
the Grandeur, Inc., would enter into a contract, with the approval
of Mr. Fox, with the Fox Theatres Co.—I thought it was with the
Fox Film also, but I am told it was not—the Fox Theatres Co. for the
purchase of these projecting machines, which had been patented by
the International Projector Corporation. That of course meant
business for the International Projector Corporation and additional
profits.
Mr. PECORA. Have you a copy of that contract here?
Mr. HAGEN. Which one do you mean?
Mr. PECORA. Made with Fox or any interest or representatives of
Fox.
Mr. HAGEN. Yes; I have a contract between Grandeur and Fox
Theatres.
Mr. PECORA. May I have it?
Mr. DODGE. I have not looked at it myself.
Mr. PEOORA. Will you look at it now while you have it in your
hand?
Mr. DODGE. Yes. Look at the whole of it or just a portion?
Mr. PECORA. Will you read enough of it to indicate whether it
represents the agreement or refers to the transaction that you told
us was discussed in these conferences with Mr. Clarke prior to July
9, 1929?
Mr. DODGE. I will try and do it as soon as I can.
(The witness proceeded to peruse the document.)
Mr. MUDGE. Mr* Pecora, do you want to look at this extra copy
[handing document to Mr. Pecora] ?
Mr. PECORA. Thank you, sir.
(The witness concluded perusal of the document.)
Mr. DODGE. I think that should be of great interest in connection
with this whole investigation. It is a long document, but it goes
STOCK EXCHANGE PEACTICES
3465
clearly into an agreement with Mr. Fox, both for the Fox Theatres
Co. and the Fox Film Co., in the purchase of the Grandeur
machinery.
Mr. PECORA. Mr. Mudge was kind enough to supply me with a
copy of it, which I am now reading.
Mr. DODGE. It goes into it.
The CHAIRMAN. Mr. Dodge, may I ask you as a matter of information and for this record what has happened to the General
Theatres?
Mr. DODGE. General Theatres is in the hands of a receiver.
The CHAIRMAN. What has happened to Pynchon & Co. ?
Mr. DODGE. They also went into the hands of the receiver.
The CHAIRMAN. What happened to West & Co. ?
Mr. DODGE. That also is in the hands of receivers.
The CHAIRMAN. What happened to Hammons?
Mr. DODGE. I understand that Hammons & Co. as formed at the
time that we were discussing here—I don't know whether they are
in liquidation or not.
The CHAIRMAN. And Fox Theatres and Fox Film?
Mr. DODGE. FOX Theatres, I understand, is in the hands of a
receiver. Fox Film is not.
The CHAIRMAN. There has been considerable wreckage all along
the line then?
Mr. DODGE. It seems to be so, sir.
Mr. MUDGE. Mr. Pecora, there is another agreement here that you
might like to look at.
Mr. PECORA. I would like to look at it. Go ahead and look at it.
Mr. DODGE. It is all right. [Handing document to Mr. Pecora.]
I t is between the Grandeur, Inc., and the International Projector
Corporation.
(Mr. Pecora perused the document handed to him.)
Mr. PECORA. NOW, Mr. Dodge, there have been handed to me in
the course of your examination what purports to be copies of two
certain contracts, one made by and between Grandeur, Inc., a Ne\*
York corporation, and International Projector Corporation, a Delaware Corporation, dated June 24, 1929, and the other one made by
and between Grandeur, Inc., a New York corporation, and Fox
Theatres Corporation, a New York corporation, also dated June
24, 1929.
Will you please look at them and tell me if these copies are true
and correct copies of such agreements or contracts ?
Mr. DODGE (after examining documents). This one I have before
me is an original, and I have no reason to believe that it is not
accurate.
Mr. PECORA. I do not care to assume responsibility for the original. If you will look at the copies and verify the copies, if you can,
as true and correct copies, that will satisfy our purposes.
Mr. DODGE. I have no reason to believe it is not a true copy. I t
-was supplied to us from the files of the International Projector
Corporation.
Mr. PECORA. Yes. Now I offer these two instruments in evidence.
The CHAIRMAN. Let them be admitted and entered on the record.
3466
STOCK EXCHANGE PRACTICES
Mr. PECORA. I ask that they be shown in the order in which I have
made reference to them; that is to say, the first one being a contract
by and between Grandeur, Inc. and International Projector Corporation, dated June 24, 1929, and the next one by and between
Grandeur, Inc., and Fox Theatres Corporation, bearing the same
date.
(Agreement by and between Grandeur, Inc. and International
Projector Corporation, dated June 24, 1929, was thereupon designated " Committee Exhibit No. 136, November 17,1933," and appears
in full on page 3496.)
(Agreement by and between Grandeur, Inc., and Fox Theatres
Corporation, dated June 24, 1929, was thereupon designated " Committee Exhibit No. 137, November 17, 1933," and the same appears
in full on page 3497.)
Mr. PECORA. Mr. Dodge, do you know why 2 million dollars was
paid to William Fox by Mr. Clarke, as he testified to such agreement
this morning and yesterday?
Mr. DODGE. My memory is, Mr. Pecora, that, as I said before, it
was paid in settlement of certain claims which Mr. Fox had or said
that he had in the ownership or the right to purchase the Mitchell
Camera Co., which was the only camera company which could manufacture the cameras to take these wide films which were to be manufactured by the Grandeur, Inc., and certain other patents for sound,
and included in that was this contract.
Mr. PECORA. By this contract do you mean the last two contracts
offered in evidence, Committee Exhibits Nos. 136 and 137 ?
Mr. DODGE. I should say the contract in particular between the
Fox Theatres and the Grandeur, Inc., in which they received not
entirely an exclusive contract, as you will notice from that, but
what might be called a preferential contract to purchase these machines. As I remember the story at the time, Mr. Fox felt that this
wide screen or wide picture
Mr. PECORA (Interposing). Wide film?
Mr. DODGE. Wide film—would be as revolutionary as sound, and
he was using every endeavor that he could to obtain the preferential
rights to take the pictures to supply the demand that he felt would
come from the showing, and this was a contract with the Grandeur,
Inc., of which he—my impression, if I might say; was that he did not
own personally the 50 percent. I thought that it was owned by the
Fox interests, but I found later that it was Mr. Fox himself, I believe,
that owned 50 percent. At any rate, he caused the contract to be
entered into with the Fox Theatres.
Mr. PECORA. In these conferences that preceded the making of the
contract of July 9, 1929, which is known as " Exhibit No. 135 " in
this investigation, Mr. Fox was represented by Clarke ?
Mr. DODGE. NO.
Mr. PECORA. Was he represented by anybody ?
Mr. DODGE. He had nobody there; no.
Mr. PECORA. And he was not a participant at the conferences in
any way, shape, or form?
Mr. DODGE. NO, sir.
Mr. PECORA. And not
a party in any way, shape, or form to the
agreement of July 9,1929?
Mr. DODGE. NO, sir.
STOCK EXCHANGE PRACTICES
3467
Mr. PECORA. Well, under what agreement was this $2,000,000 paid
to Fox?
Mr. DODGE. I don't know.
Mr. PECORA. YOU don't know?
Mr. DODGE. NO. It was between Mr. Clarke and Mr. Fox.
Mr. PECORA. But wasn't that money to come, ultimately, out of
the General Theatres Equipment?
Mr. DODGE. Yes, sir.
Mr. PECORA. And you
were the vice president of one of the
bankers in the banking syndicate that financed General Theatres
Equipment?
Mr. DODGE. All we were interested in under that contract was
that the General Theatres Equipment would own 50 percent of the
Grandeur, Inc., which in turn would own the Mitchell Camera Co.
and whatever patents or assignment of rights that there were;
and how that was obtained was up to the lawyers.
Mr. PECORA. At these conferences it was discussed and eventually
agreed upon that a corporation, to be called the General Theatres
Equipment, Inc., was to be organized as a holding company?
Mr. DODGE. Yes, sir.
Mr. PECORA. And that
corporation or, in other words, that holding company was designed to take over, among other things, the
stock of the International Projector Corporation, was it not?
Mr. DODGE. Yes, sir.
Mr. PECORA. Also to
take over 50 percent of the capital stock of
Grandeur, Inc. ?
Mr. DODGE. Yes,
sir.
Mr. PECORA. Wasn't it also agreed eventually, as a result of these
conferences, that the General Theatres Equipment or the interests
they had agreed would organize the General Theatres Equipment
was to also cause to be organized another corporation, called
Grandeur, Inc., for the purpose of enabling the latter corporation
to acquire the assets of another company, called the Mitchell
Camera Co.?
Mr. DODGE. Well, that is what I mean when I testify that the
General Theatres Equipment was to purchase a half interest in the
Grandeur, Inc., and I believe it was set out in that contract exactly
what the Grandeur, Inc., was to be, was it not? That is my memory.
Mr. PECORA. I will tell you what the contract sets out in that respect. I will read from Committee Exhibit No. 135 as follows
[reading] :
Grandeur, Inc., a corporation of the State of New York, 50 percent of the
capital stock of which is to be acquired by the General Theatres Equipment,
Inc., will acquire all of the common stock of Mitchell Camera Corporation, a
corporation to be organized under the laws of the State of Delaware, which
latter corporation will acquire all of the property, business, and assets of the
Mitchell Camera Co., a corporation organized and existing under the laws of
the State of California, together with the land in Los Angeles, Calif., that has
been acquired, the buildings being erected thereon, and the machinery and
equipment to be installed thereon, for the corporation to be organized under
the laws of the State of Delaware, as aforesaid.
Now, from that provision in this contract, Mr. Dodge, it would
seem that the sponsors or organizers of General Theatres Equipment, Inc., of which the Chase Securities Corporation was one, were
desirous of acquiring in some form or other all of the property,
3468
STOCK EXCHANGE PRACTICES
business, and assets of another company called the Mitchell
Camera Co., which was then organized and existing under the laws
of the State of California. Is that right?
Mr. DODGE. That would seem to be so.
Mr. PECORA. Yes. Now, in order to enable the General Theatres
Equipment, Inc., to acquire those interests <5f the Mitchell Camera
Co., the California corporation, apparently the sponsors of the General Theatres Equipment Co., devised this method of enabling them
to acquire those assets of the Mitchell Camera Co. First, there was
to be another company organized, to be called the Mitchell Camera
Corporation. That was to be organized under the laws of the State
of Delaware. That was the first step. Is that right?
Mr. DODGE. Yes.
Mr. PECORA. Then
the Mitchell Camera Corporation, the Delaware corporation, was to acquire all of the property, business, and
assets of the Mitchell Camera Co. of California. That was the
second step, wasn't it?
Mr. DODGE. I presume so.
Mr. PECORA. And then the next step was to be the incorporation
of another corporation to be called "Grandeur, Inc.", and which
was to be organized under the laws of the State of New York, and
Grandeur, Inc., was to acquire the common stock of the Mitchell
Camera Corporation after that corporation had acquired the assets
of the Mitchell Camera Co. of California. Is that right?
Mr. DODGE. I presume so, Mr. Pecora. That is all a question of
legality.
Mr. PECORA. Then the fourth step was to be for the General Theatres Equipment, Inc., to acquire 50 percent of the common capital
stock of the Grandeur, Inc. Is that ri^ht?
Mr. DODGE. That would seem to be right.
Mr. PECORA. Well, why was that circuitous route adopted to enable
the General Theatres Equipment to acquire any interest in the
Mitchell Camera Co.?
Mr. DODGE. I don't know, Mr. Pecora.
Mr. PECORA. NOW, you participated as an experienced banker in
the conferences that were had by and between the organizers of
General Theatres Equipment, did you not?
Mr. DODGE. Yes, sir.
Mr. PECORA. YOU were
a party, your corporation, the one that you
represented in these conferences, namely, the Chase Securities Corporation, was a party to this agreement of July 9,1929, under which
General Theatres Equipment was organized. Why don't you know
why the things that were done were done in that fashion ?
Mr. DODGE. I only know and only knew at the time that when
the General Theatres Equipment, Inc., was incorporated and before
any securities were purchased by the bank, that it was to own 50
percent of the Grandeur, Inc., which was to be formed, which in
turn would own the Mitchell Camera Co. Now, how that was to
be carried out legally, not being a lawyer, I did not know, but I
did want the opinion of my lawyers before we paid for them.
Mr. PECORA. NOW, you actually executed this agreement of July
9, 1929, in behalf of the Chase Securities Corporation as its vice
president, did you not?
Mr. DODGE, x es, sir.
STOCK EXCHANGE PRACTICES
3469
Mr. PECORA. I presume you were guided by legal advice furnished
bo you or to your company before you actually executed this agreement in behalf of the Chase Securities Corporation?
Mr. DODGE. Yes,
sir.
Mr. PECORA. And who gave you such legal guidance and advice?
Mr. DODGE. Messrs. Rushmore, Bisbee & Stern.
Mr. PECORA. Which particular individual or individuals of that
irm?
Mr. DODGE (after conferring with associates). I t was Mr. Van
Kress.
Mr. PECORA. Weren't you, at some time or other before you signed
:his agreement in behalf of the Chase Securities Corporation, informed or enlightened with regard to the substance 01 this agreenent, the contents of it?
Mr. DODGE. Certainly.
Mr. PECORA. On whose suggestion were these provisions incorporated in this agreement providing for this circuitous method by
which General Theatres Equipment, Inc., was to acquire any interest whatsoever in the Mitchell Camera Co. of California?
Mr. DODGE. I presume the lawyers, and I presume it was the lawyers for the General Theatres or for the International Projector or
Mr. Clarke's lawyers whoever it was that we were negotiating for
:he securities witli.
Mr. PECORA. DO you know any reason why the General Theatres
Equipment, Inc., could not have arranged in this agreement to
icquire directly from the Mitchell Camera Co. its property and
issets which it desired to acquire?
Mr. DODGE. I do not, Mr. Pecora.
Mr. PECORA. What reason was given by anybody for providing
and adopting the method which was adopted to enable the General
Theatres Equipment to acquire those assets?
Mr. DODGE. I haven't the slightest recollection of any such thing.
The CHAIRMAN. DO you know, Mr. Dodge, whether" the stock of
Jie Mitchell Camera, Inc., of California and the Mitchell Camera
Corporation and of the Grandeur Co., whether stock in these different organizations was offered and sold to the public?
Mr. DODGE. NO, sir, none of them were. They were acquired by
lie General Theatres Equipment.
The CHAIRMAN. And they all sold stock to the public?
Mr. DODGE. The General Theatres Equipment stock was offered to
he public; yes, sir.
Mr. PECORA. DO you know any reason why Grandeur, Inc., could
lot directly have acquired for the benefit of General Theatres Equipnent the stock, assets, and property of the Mitchell Camera Co.,
lirectly, without the intervention of another corporation to be organized under the laws of the State of Delaware and to be called the
Mitchell Camera Corporation?
Mr. DODGE. I do not even know whether the Mitchell Camera
Corporation of California was a partnership or what kind of a
corporation it was.
Mr. PECORA. There was no Mitchell Camera Corporation of Cali!
ornia. The California corporation was called the Mitchell Camera
Co., but the Mitchell Camera Corporation was to be organized ac175541—34—PT 7
17
3470
STOCK EXCHANGE PRACTICES
cording to this agreement under the laws of the State of Delaware
to acquire the assets and property of the Mitchell Camera Co. of
California, and then the Mitchell Camera Corporation of Delaware
in turn was to turn over those assets to the Grandeur, Inc., which in
turn was to sell 50 percent of its stock to General Theatres Equipment, Inc.
Mr. DODGE. I t would be a question for the lawyers to answer, Mr.
Pecora. I really do not know. All I was interested in, as I said,
as a banker, was that General Theatres acquired 50 percent of the
Grandeur, Inc., which in turn owned the Mitchell Camera Co.
Mr. PECORA. Yes. Now, was it the purpose of the General Theatres Equipment or its sponsors to acquire only a half interest in the
property and the assets of the Mitchell Camera Co., of California?
Mr. DODGE. NO, sir; a half interest in the Grandeur, Inc.
Mr. PECORA. But by acquiring a half interest in the Grandeur the
General Theatres Equipment really acquired only a half interest
or what was the equivalent of a half interest, in the Mitchell Camera
Co. of California, did it not?
Mr. DODGE. I don't so understand it.
Mr. PECORA. Well, all of the assets of the Mitchell Camera Co.
of California were first acquired by the Mitchell Camera Corporation of Delaware, which then turned them over to the Grandeur
Co. That put the Grandeur Co. in possession and.ownership of all
the assets of the Mitchell Camera Co. of California.
Mr. DODGE. That is right.
Mr. PECORA. By the General Theatres Equipment acquiring only
50 percent of the stock of Grandeur, it virtually only acquired the
equivalent of 50 percent of the assets of Grandeur, which consisted
originally of the assets of the Mitchell Camera Co., did it not?
Mr. DODGE. I would not think so, Mr. Pecora. I would think
as to that that they owned 50 percent of the company that owned
a 100 percent of the Mitchell Camera Co.
Mr. PECORA. Exactly, but that was in effect giving the General
Theatres Equipment an interest that amounted to 50 percent of
the Mitchell Camera Co.'s assets, original assets?
Mr. DODGE. It owned 50 percent of any of the assets which were
owned by the Grandeur, Inc., whether it was the Mitchell Camera
Co. or anything else.
Mr. PECORA. Was it the purpose of the sponsors of the General
Theatres Equipment not to acquire outright ail of the assets originally owned by the Mitchell Camera Co. of California?
Mr. DODGE. YOU mean the General Equipment to acquire that
direct ?
Mr. PECORA. Yes, or to acquire all of those assets, either directly
or indirectly?
Mr. DODGE. NO. AS I understand it, those assets were to be
owned by the Grandeur, Inc.
Mr. PECORA. And all of that was in the contemplation of the
sponsors of the General Theatres Equipment, Inc.?
Mr. DODGE. And those contracts will show that it was the
Grandeur, Inc., which entered into a contract with the International
Projector.
Mr. PECORA. NOW, the Grandeur, Inc., was to be organized by those
interested in organizing the General Theatres Equipment, Inc. ?
STOCK EXCHANGE PRACTICES
3471
Mr. DODGE. I didn't get that.
Mr. PECORA. Grandeur, Inc., was to be organized by the sponsors
or persons interested in creating or organizing the General Theatres
Equipment, Inc.?
Mr, DODGE. Well, it was to be organized by the General Theatres
Equipment.
Mr. PECORA. Yes. And was so done?
Mr. DODGE. Yes, sir.
Mr. PECORA. The contract
which has been marked " Committee's
Exhibit No. 136 " in evidence provides, among other things, as follows—it is rather short, so I am going to read the substance of it
to you [reading] :
Witnesseth:
Whereas International
(meaning International Projector Corporation)
lias for more than 7 years last past experimented with, and has now developed,
a special motion-picture projector, without lamp and lamp house, adapted for
use in connection with so-called " Grandeur films " (films wider than the regular 35 millimeters) ; and
Whereas Grandeur is desirous of securing the exclusive right of handling
and selling all such projectors manufactured by International adapted for use
in connection with Grandeur films, and International is willing to grant such
exclusive right, upon the terms and conditions hereinafter set forth;
Now, therefore, in consideration of the premises and of the mutual covenants
herein contained, it is agreed by and between the parties hereto as follows:
1. International agrees that Grandeur shall have the exclusive. distribution
and sale for all such projectors manufactured by International adapted to tbe
use of Grandeur films, and further agrees that during the period of this agreement it will not manufacture for. or sell, lease, license, or otherwise dispose of
to any other person, firm, or corporation, nor permit any other person, firm, or
corporation to sell, lease, license, or otherwise dispose of any such projectors
or any improvements thereof, or any modifications thereof, or any other projector designed to use films wider than 35 millimeters prescribed and/or developed either directly or indirectly by or under the supervision of or for the
benefit of International Projector Corporation, provided always that Grandeur
shall use its best efforts to promote the sale and distribution of such projectors.
2. International agrees to manufacture and sell to Grandeur and Grandeur
agrees to purchase from International all such projectors desired by Grandeur
zluring the lifetime o/ this agreement for sale to Fox Film Corporation, Fox
Theatres Corporation, and/or their subsidiary or affiliated companies or others
upon the terms and conditions set forth.
3. For the first 12 of such projectors Grandeur shall pay International the
mm of $6,000 for each of such projectors. For each projector in excess of tbe
said 12 projectors hereinabove mentioned, Grandeur shall pay International
&4,O0O for each projector.
Deliveries shall commence on or before or as soon after February 1. 1930,
is practicable.
4. This agreement shall remain in effect until June 1, 1939.
In witness whereof, the parties hereto have caused this agreement to be
dgned by their respective proper officers on the day and date first above written.
GRANDEUR. INC..
By JACK G. LEO, President.
INTERNATIONAL PROJECTOR CORPORATION,
By W. C. MICHEL, Vice President.
Now, you will observe, Mr. Dodge, from this agreement that I
lave just read that the International Projector was engaged in the
aisiness
of manufacturing special motion-picture projectors adapted
!
or use in connection with films having a width in excess cf the
egular width of films, which was then 35 millimeters.
Mr. DODGE. That is right.
3472
STOCK EXCHANGE PRACTICES
Mr. PECORA. And that by this contract the International Projector Corporation bound itself to give the Grandeur Corporation
the exclusive right to the distribution and sale of all such projectors
so manufactured by the International?
Mr. DODGE. That is right.
Mr. PECORA. And for that right Grandeur agreed to pay to the
International $6,000 for each of the first 12 of such projectors and
$4,000 for any of such projectors in excess of 12 in number that the
International manufactured and turned over to the Grandeur. Is
that right?
Mr. DODGE. Yes, sir.
Mr. PECORA. And this
contract was made for a period of about
10 years; that is to say, it was dated June 24, 1929, and it provided
that it should remain in effect until June 1, 1939?
Mr. DODOE. That is right.
Mr. PECORA. NOW, let me take up with you the second contract,
marked " Exhibit No. 137 ", which is dated also on June 24, 1929,
and which was made by and between Grandeur, Inc.; that is to say,
the corporation that received this exclusive right to distribute and
sell these special projectors in the contract that I have just read
from, as licensor, and Fox Theatres Corporation, a New York corporation, hereinafter called Fox, as licensee. Let me read the following provisions of this agreement, Committee Exhibit No. 137,
between the Grandeur Co. as licensor and the Fox Theatres Corporation as licensee (reading):
1. (a) Grandeur hereby grants to Fox a nonexclusive, nonassignable license
to use in the theaters owned, controlled and/or operated by Fox, Fox Film Corporation and their respective subsidiary and/or affiliated companies—
and so forth.
Mr. DODGE. May I interrupt there ? Does that refer to Fox Theatres or Fox personally?
Mr. PECORA. " Fox Theatres Corporation, a New York corporation, hereinafter called Fox."
Mr. DODGE. I beg your pardon. I did not get that.
Mr. PECORA. The word " Fox " is just simply an abbreviation for
purposes of convenience.
Mr. DODGE. Yes,
sir.
Mr. PECORA. Of the Fox Theatres Corporation, which was a New
York corporation.
Mr. DODGE. Yes, sir.
Mr. PECORA. I will read
it all. (Reading:)
1. (a) Grandeur here grants to Fox—meaning, of course, Fox Theatres
Corporation.
Mr. DODGE. Yes.
Mr. PECORA (continuing
reading):
A nonexclusive, nonassignable license to use in the theaters owned, controlled
and/or operated by Fox, Fox Film Corporation and their respective subsidiary
and/or affiliated companies (subject to all the terms, conditions, limitations, anc
agreements herein contained) special motion-picture projectors, without lamp oi
lamphouse, adapted for use in connection with so-called " Grandeur" films
(films wider than the regular 35 millimeter) in the quantities and at the time*
hereafter in this agreement provided and to employ and make use of (to th<
extent necessarily involved in such use of said projectors) any and all Unitec
States patents and applications for United States patents, relating to sai(
STOCK EXCHANGE PRACTICES
3473
projectors or to such use thereof, which are now owned or controlled, or which
may during the term of this agreement be owned or controlled by International
Projector Corporation, or in respect of which International Projector Corporation has or may hereafter, during the term of this agreement, have the right
to grant such licenses, Grandeur being the licensee of International Projector
Corporation, with the right to assign such use of such patents.
Under that clause, Mr. Dodge, you have observed, have you not, that
Grandeur, Inc., which was the corporation that the contract of July
9, 1929, provided was to be organized at the instance of and for the
benefit of the General Theatres Equipment, Inc.
Mr. DODGE (interposing). And Mr. Fox.
Mr. PECOKA. What?
Mr. DODGE. Mr. Fox owned 50 percent of the Grandeur, Inc.
Mr. PECORA. Well, there is nothing in the contract of July 9, 1929,
that relates in any way to Mr. Fox, is there ?
Mr. DODGE. NO, sir; but it does say that they will only own 50
percent.
Mr. PECORA. I have already alluded to that fact. Now I will go
back to my question: Under this contract, or clause l(a) of this
contract, known as " Exhibit No. 137 ", this Grandeur Co., which
had obtained on the same date from the International Projector Corporation under the agreement marked in evidence here as " Exhibit
No. 136 ", the exclusive right to handle and sell these special projectors being manufactured under patents by it, by the International
Projector Corporation, grants to the Fox Theatres Corporation a
nonexclusive, nonassignable license to use in theaters owned or controlled by the Fox Theatres Corporation these same special motionpicture projectors of the International Projector Corporation ?
Mr. DODGE. That is right, sir.
Mr. PECORA. NOW let me read clause 1 (b) of this exhibit no. 137
[reading] :
(b) Grandeur agrees to install in such theaters of Fox, Fox Film Corporation and/or their subsidiary or affiliated companies that Fox may from time
to time designate, 12 such special motion-picture projectors, for whicli Fox
shall pay Grandeur on installation thereof the sum of $6,000.
I presume that that $6,000 payment is for each one of these 12
projectors, although this agreement does not so say ?
Mr. DODGE. I would presume so.
Mr. PECORA. Further reading from clause 1 (b) :
Grandeur agrees to supply to Fox, and Fox agrees to accept or cause to be
accepted from Grandeur under the terms provided in th s agreement, during
the period commencing approximately February 1, 1930, but in any event as
soon as projectors shall be ready for delivery, and ending 10 years thereafter,
all motion-picture projectors using films wider than the regular 35 millimeter
that may be required or desired by Fox, Fox Film Corporation and/or their
subsidiary or affiliated companies during such period, it bo ng the agreement of
the parties hereto that Fox shall, during such period, use exclusively such
projectors as are manufactured by lnternat.onal Projector Corporation. Where
hereinafter referred to, Fox shall include not only Fox Theatres but also Fox
Film Corporation and/or their subsidiary or affiliated companies.
Grandeur agrees that Fox shall have the first call on any such projectors
that Grandeur is able to supply, and Grandeur agrees that so long as any
orders for such projectors from Fox are unfilled that no orders for such projectors from others than Fox will be accepted except on the condition that such
orders shall be accepted subject to prior deliveries for Fox as herein provided.
3474
STOCK EXCHANGE PRACTICES
Now you understand the general intendment of that provision,
don't you, Mr. Dodge? In substance, it provides that Grandeur
agrees to install and is to install in such theaters of Fox as Fox may
desire from time to time for a period of 10 years, which is a period
co-terminus with the period provided for in the exhibit no. 137 as
the life of that contract, these special motion-picture projectors,
which were being manufactured by International Projector Corporation, and Fox was to pay $6,000 each for the first 12 of those projectors, those machines, and it further provides in substance that
Fox shall have first call upon Grandeur for any of these special
projectors.
It further provides that so long as there are any unfilled orders
given by Fox to Grandeur, Grandeur shall not sell or supply or
deliver any of those special projectors to any other concern, doesn't
it?
Mr. DODGE. I would say so.
Mr. PECORA. Yes. Which may or may not be a monopolistic agreement. We won't say anything about that now.
The second clause of this agreement I will read to you, Mr. Dodge,
and you please follow me [reading] :
Fox agrees that it will use and employ the projectors only in theaters owned,
controlled, or operated by Fox, and that it will at all times during the period
of this license keep and maintain the projectors in good condition.
Well, that is easily understood. You understand that.
Third clause:
Grandeur agrees to make periodical inspection and minor adjustments in the
projectors after they shall have been installed. Grandeur may from time to
time install such spare and renewal parts as may, iu its opinion, be necessary
to the satisfactory operation and maintenance of the projectors.
4. For each such projector in excess of the twelve (12) projectors mentioned in paragraph 1 "(b) hereof, Fox agrees to pay to Grandeur .'n New
York Exchange an installation charge of four thousand dollars ($4,000) for
each such projector, payable upon the slnpmenr of each such projector
and the further payments hereinafter provided. In the event that the established installation charge made by Grandeur for snch projectors is less than
$4,000 at any time during the life of this contract. Fox sliall be given the
benefit of any such decreased charge from the effective date thereof.
There is no doubt as to the meaning of that in your mind, is there ?
Mr. DODGE. NO.
Mr. PECORA. NOW,
I want to call your attention especially to the
next clause, which is no. 5 in this contract, and which reads as
follows [reading] :
In addition to any other payments required to be made by Fox hereunder,
Fox agrees to pay to Grandeur throughout the term of the license hereby
granted, a monthly payment of $175,000 in advance.
Mr. MUDGE. $175.
Mr. HAGEN. $175 a month.
Mr. MUDGE. I t is zero one hundred, no cents.
^ Mr. PECORA. Well, as I see that in this copy,
the figures are dollar
sign one hundred seventy-five, comma
Mr. MUDGE. Zero.
Mr. PECORA. Three zeros, an oblique line, then 100.
Mr. HAGEN. The original contract shows $175 a month.
Mr. PECORA. Well, that one I don't know. $175,000—1 would so
read it. Wouldn't you, Senator Couzens?
STOCK EXCHANGE PRACTICES
3475
Mr. MTJDGE. Here is the original—monthly payment of dollar sign
175, zero, then two zeros and a line under it.
Senator COUZENS. YOU might take it either for 175,000 or
175,000,000.
Mr. PECORA. Certainly not $175.
Mr. MTTDGE. There is the original
Mr. DODGE. Mr. Pecora, I take it for granted that that was a
copy of this.
Mr. PECORA. YOU got me all excited.
Mr. MTTDGE. I am sorry, but we did not make the copy. You
better have that copy corrected if that is marked in evidence.
Mr. PECORA. The original clearly reads $175 in numerals, but the
copy you gave me, Mr. Mudge, just as clearly reads $175,000.
Mr. MUDGE. Well, I am very sorry.
Mr. PECORA. Only the difference of one cipher.
Mr. DODGE. We did not have time to look them over, Mr. Pecora.
They came in this morning.
The CHAIRMAN. Which is correct?
Mr. DODGE. The original is correct, Senator.
The CHAIRMAN. $175 per month ?
Mr. DODGE. Yes, sir.
Mr. PECORA. I do not
want to appear like a natural ignoramus.
Will you look at the copy that I was furnished with and see how
you would read that figure in clause 5. Just look at it, Mr. Dodge.
Mr. DODGE. I did see it, but I have not had time to read it over.
Mr. PECORA. Look at it now.
Mr. MUDGE. That could be almost anything.
Mr. PECORA. Oh, no; it could not be almost anything.
Senator GOLDSBOROUGH. That is more than 175,000, is it not ?
Mr. DODGE. Yes; that could be almost anything.
Mr. PECORA. AS you would read it, what would you say it was,
if you had no knowledge of the contents of the original?
Mr. DODGE. I would say exactly what you said, Mr. Pecora. I
would say $175,000 a monthly payment; yes. That is what it
would be.
Mr. PECORA. All right. I feel happier.
Mr. DODGE. Sorry.
Mr. PECORA. I had better leave that copy out of the way for the
time being and be guided by the original. Put it aside. I don't
want to make any more references to it. [Continues reading:]
" Such payments "—I am reading further from clause 5.
Senator COUZENS. Of the original this time?
Mr. PECORA. The original this time, or duplicate original.
Such payments shall continue for 120 months for each projector. Such
monthly payment to be made by Fox to Grandeur, however, shall never be in
excess of the amount in effect as the established monthly payment at the time
when .such monthly payment is due. The first six machines furnished, however,
shall be free from such monthly payment.
Was this monthly payment of $175 fixed for each projector furnislied to Fox by Grandeur?
Mr. DODGE. I understand so.
Mr. PECORA. The contract does not say definitely on that either.
Mr. DODGE. It is a service charge. I believe it is a service charge.
3476
STOCK EXCHANGE PRACTICES
The CHAIRMAN. It did not apply to the first six ?
Mr. DODGE. NO, sir; because I understand from that that the cost
of the first six was $6,000 and the others were $4,000.
Mr. PECORA. The International Projector Corporation, which
was a party to the contract marked " Exhibit No. 136 " in evidence
here, is also a corporation that was to be wholly owned or acquired
by General Theatres Equipment, according to the contemplation
of the sponsors or creators of General Theatres Equipment?
Mr. DODGE. Yes, sir.
Mr. PECORA. Why was
Grandeur, Inc., set up between the International Projector Corporation, which manufactured these special
motion-picture projectors, and any users or customers that might be
in the market for the use or purchase of those special projectors?
Mr. DODGE. If I understand your question correctly, Mr. Pecora.
I would answer it this way, that the General Theatres Equipment
was only to own 50 percent of Grandeur, Inc.
Mr. PECORA. But the General Theatres was to own all of International Projector Corporation?
Mr. DODGE. That is right.
Mr. PECORA. And the International Projector Corporation, under
patents that it had, were manufacturing these special projectors,
were they not?
Mr. DODGE. Yes.
Mr. PECORA. If the General Theatres Equipment was, in the contemplation of its organizers, to acquire all of the stock of International Projector Corporation, why did those same sponsors cause
to be created and set up the Grandeur, Inc., as a corporation to
acquire the exclusive right to sell and distribute these special projectors of International Projector Corporation ?
Mr. DODGE. The benefit of those contracts was to go to the International Projector Corporation, who were to manufacture and sell,
presumably at a profit, projecting machines. The projecting machines were of no value unless there was a camera which could take
the pictures, which would synchronize with the projecting machine,
and the Grandeur, Inc., purchased the Camera Co., which could
produce the cameras.
So that in that way they had all, or it was presumed they would
have all, of the company which was producing the projecting machine, and they would have a 50 percent interest in the Camera Co.
that was taking the pictures.
Mr. PECORA. But under this agreement marked " Exhibit No. 136 "
the International Projector Corporation granted to the Grandeur
Corporation the exclusive right for 10 years from June 1929 to
handle and sell all of these special projectors that were manufactured by the International ?
Mr. DODGE. That is right. They were to handle them; not to
manufacture, but to handle.
Mr. PECORA. The International reserved the right of manufacture
and had that right under its patent ?
Mr. DODGE. Yes.
Mr. PECORA. But
it gave the exclusive right to sell and handle
those projectors to the Grandeur Co. ?
STOCK EXCHANGE PRACTICES
3477
Mr. DODGE. Yes, sir.
Mr. PECORA. NOW the
Grandeur Co. was to sell only 50 percent of
its stock to the General Theatres Equipment?
Mr. DODGE. Yes,
sir.
Mr. PECORA. SO that any profits that accrued to the Grandeur Co.
from the exclusive right that it received under this contract marked
" Exhibit No. 136" would be divided equally between General
Theatres Equipment as owner of 50 percent of the stock and whoever owned the other 50 percent of Grandeur?
Mr. DODGE. That is correct.
Mr. PECORA. That is correct. All of that was in contemplation of
the sponsors of General Theatres Equipment?
Mr. DODGE. Yes, sir.
Mr. PECORA. NOW, this
right to the exclusive use and handling
and this right to the exclusive handling and sale of these special
projectors which Grandeur acquired directly from the International
Projector Corporation under this agreement marked " Exhibit No.
136" was a valuable right commercially, was it not?
Mr. DODGE. We thought so, sir, at the time.
Mr. PECORA. And it has proved to be, has it?
Mr. DODGE. NO, sir.
Mr. PECORA. But you
thought it wag going to be quite a valuable
right?
Mr. DODGE. Yes, sir.
Mr. PECORA. Well then,
if you thought so, and if the International
Projector, which had the patents to manufacture these projectors,
was to be acquired wholly by the General Theatres, why in the world
did the sponsors of the General Theatres Equipment devise an arrangement whereby only half of the profits would accrue from
the exclusive sale and handling of those projectors manufactured
by the International were to go to the stockholders of General
Theatres Equipment? Why was it done that way, Mr. Dodge?
Mr. DODGE. YOU have not yet brought into the testimony, if I
may be permitted to say it, the other owner.
Mr. PECORA. Who was the other owner?
Mr. DODGE. It was William Fox or his interest. William Fox
owned I don't know how many theaters; I think 500 possibly,
throughout the country.
Mr. PECORA. Yes.
Mr. DODGE. I think
he was the largest owner of theaters at the
time. The projecting machines were to be sold to theaters.
Mr. PECORA. Yes.
Mr. DODGE. And the
quickest way for the International Projector
Co. to get its projectors sold to the theaters was through somebody
who would be willing to buy them, and Mr. Fox was in control of
the company and was willing and anxious to buy them.
Mr. PECORA. In control of what company?
Mr. DODGE. Of the Fox Theatres.
Mr. PECORA. Of the Fox Co.?
Mr. DODGE. FOX Theatres, and
to buy at that time.
was willing to buy and was anxious
3478
STOCK EXCHANGE PRACTICES
Mr. PECORA. Well, if he was anxious to buy he was anxious, I
presume, because he regarded this special projector as a device far
in advance of anything that was in the field then to compete with it?
Mr. DODGE. Correct.
Mr. PECORA. Then shouldn't he have been willing to pay for that
advantage in behalf of his own theaters?
Mr. DODGE. Under this contract he was.
Mr. PECORA. Under any arrangement whereby he could acquire the
right to use that special projector?
Mr. DODGE. Under that contract I understand the theaters were
to pay.
Mr. PECORA. His theaters were to pay, but he acquired in Grandeur
Co. half of the stock in some way or other, did he not?
Mr. DODGE. Yes, sir.
Mr. PECORA. And the
Grandeur Co. got from the International the
exclusive right to sell and handle all of these projectors?
Mr. DODGE. Yes, sir.
Mr. PECORA. And by
Fox having a 50 percent interest in the
Grandeur Co., he was put in the position, or his company, Fox
Theatres Co., was put in the position where virtually they could have
handled the exclusive use of this special projector that marked an
advance over any other projector in thefield?
Mr. DODGE. Up to all they wanted; yes.
Mr. PECORA. Up to all they wanted, and he could continue to
want just enough to keep the International from supplying anybody
else, could he not, under this agreement ?
Mr. DODGE. Well, that is a question I don't know. But it was
what you would call a preferential contract. That is what I would
read from that.
Mr. PECORA. Well, that is rather a mild way of designating it, is
it not, a preferential contract?
Mr. DODGE. Well, I don't know. It states it is a nonexclusive
contract.
Mr. PECORA. Why was Fox permitted to acquire by the sponsors
of General Theaters Equipment a half interest in the Grandeur Co.,
which was in turn the company that received from the International
Projector the exclusive right to sell these special projectors? What
advantages, in other words, did you, as one of the sponsors of General Theatres Equipment, think would flow to the stockholders of
General Theatres Equipment from that arrangement with Grandeur
and with Fox?
Mr. DODGE. If my memory serves me correctly, Mr. Pecora, Mr.
Fox had heard about this projecting machine. He immediately set
about to get his foot in the door as far as the camera was concerned,
knowing
Mr. PECORA (interposing). With Harley Clarke's help?
Mr. DODGE. I don't know. I don't think so.
Mr. PECORA. Well, now, Mr. Clarke has been testifying here today
and testified yesterday that he set out to acquire the Mitchell Camera
Co. in behalf of the General Theatres.
Mr. DODGE. I think he found competition in Mr. Fox.
Mr. PECORA. Well, that is being said here for the first time, that
he found competition with Mr. Fox.
STOCK EXCHANGE PRACTICES
3479
Mr. DODGE. That is to the best of my memory he found competition with Mr. Fox.
Mr. PECORA. Who succeeded in this competition in acquiring the
Mitchell Camera Co. stock and assets?
Mr. DODGE. I should think they both did, because a settlement was
reached by which Mr. Fox owned 50 percent of the common stock.
Mr. PECORA. Of Grandeur?
Mr. DODGE. Of Grandeur.
Mr. PECORA. Were the sponsors of the General Theatres Equipment a party to any such agreement with Fox ?
Mr. DODGE. I don't think so.
Mr. PECORA. Doesn't it look to you, to use the vernacular, as
though somebody tried to get half of the so-called " gravy " for
themselves and keep it away from the stockholders, the ultimate
stockholders of the General Theatres Equipment?
Mr. DODGE. NO, sir. I may add there that I think, refreshing my
memory on that contract, that the so-called " gravy ", or the profits,
was going to go to the International Projector Co. from the sale of
the machines. Mr. Fox probably, or the theaters, would have gotten
some of it through using it.
Mr. PECORA. Just let us see if that is so. All that the International Projector Corporation was to get was what it was entitled to
receive from the contract marked "Exhibit No. 136", was it not?
Mr. DODGE. That is right.
Mr. PECORA. And that was simply $6,000 each for the first 12 projectors installed or which it sold to Grandeur, and $4,000 for all such
special projectors over and above 12 in number. But the Grandeur
Co., which got the exclusive right to sell and handle those machines
under this contract with Internationa], we find according to the contract marked " Exhibit No. 137" was to receive, those same units,
$6,000, $4,000, respectively, for these machines, plus a monthly payment of $175 for each machine used by anyone that it sold or granted
the right to the use of such machines to.
Mr. DODGE. It looks to me as though the only profit to the Grandeur Corporation would be in $175 a month.
Mr. PECORA. Which is not a mean profit, is it ?
Mr. DODGE. NO. sir.
Mr. PECORA. And that
profit, only half of that profit under the
agreement or arrangement which was effected here in July 1929,
was to go to the stockholders of General Theatres Equipment?
Mr. DODGE. Half of it.
Mr. PECORA. The other half was to go to those who owned the
capital stock of Grandeur?
Mr. DODGE. That is correct.
Mr. PECORA. And those owners of the other 50 percent of that
stock were who ?
Mr. DODGE. William Fox.
Mr. PECORA. Just William Fox—not Clarke ?
Mr. DODGE. NO, sir.' Not that I know of.
Mr. PECORA. And you, as one of the sponsors representing the
Chase Securities Corporation for General Theatres Equipment, according to the arrangement
Mr. DODGE. Yes,
sir.
3480
STOCK EXCHANGE PRACTICES
Mr. PECORA. Did you have any stock in Grandeur, Inc., at any
time?
Mr. DODGE. NO, sir.
Mr. PECORA. Did you have
any stock in the International Projector
Corporation ?
Mr. DODGE. Yes, sir.
Mr. PECORA. HOW much of it ?
Mr. DODGE. Oh, I think my holdings
at that time were between
20 and 25 thousand shares of the common stock.
Mr. PECORA. At the time that the stock of International Projector
Corporation was exchanged for the stock of the General Theatres
Equipment Co. I understand you owned 20,000 shares of the International Projector Corporation stock?
Mr. DODGE. At least that.
Mr. PECORA. And you received in exchange for that stock 25,000
shares of the General Theatres Equipment?
Mr. DODGE. Yes,
sir.
Mr. PECORA. Which would be on a ratio or basis of one and one
quarter shares of the latter for one share of the former?
Mr. DODGE. Right.
Mr. PECORA. HOW did you acquire those 20,000 shares of International Projector originally?
Mr. DODGE. Part of it was acquired at the formation of the company and part of it was acquired by personal investment in the
market.
Mr. PECORA. HOW much of it did you acquire at the time of the
formation of International Projector?
Mr. DODGE. I don't remember, Mr. Pecora. The Shermar Corporation had an interest in the original syndicate which put out the
International Projector, and I had an interest in that.
Mr. PECORA. What consideration did you pay for that stock or the
portion of it that you originally acquired?
Mr. DODGE. That was profit.
Mr. PECORA. That was what?
Mr. DODGE. A profit.
Mr. PECORA. DO you mean by that that you paid no consideratior
for it?
Mr. DODGE. Well, we originally paid for the commitment in the
preferred stock of the International Projector Corporation and a
certain amount of common stock.
Mr. PECORA. When you say " we ", are you referring to someone
other than yourself?
Mr. DODGE. I just testified that I had an interest with the Shermai
Corporation in that purchase.
Mr. PECORA. What interest did the Shermar Corporation have?
What was the extent of the Shermar Corporation's interest out oi
which you received the subparticipation?
Mr. DODGE. There were 25,000 shares of preferred stock of thai
company, as I remember it. [After conferring with associate.] Ii
had a 25 percent interest.
Mr. PECORA. The Shermar Corporation did?
Mr. DODGE. Yes.
STOCK EXCHANGE PRACTICES
3481
Mr. PECORA* In the purchase of the preferred stock issue of
International
Mr. DODGE. Projector, in 1925.
Mr. PECORA. NOW, the total number of shares of preferred stock
that International issued was 25,000, was it not ?
Mr. DODGE. Yes,
sir.
Mr. PECORA. And the Shermar had a 25-percent interest in that?*
Mr, DODGE. Yes, sir.
Mr. PECORA. And what
interest of the Shermar's interest did you
acquire ?
Mr. DODGE, Eighteen percent.
Mr. PECORA. YOU doirt mean 18 of the 25; you mean 18 percent
of whatever interest the Shermar Corporation had ?
Mr. DODGE. Eighteen of the 25 percent.
Mr. PECORA. Oh, 18 of the 25 percent?
Mr. DODGE. Yes.
Mr. PECORA. Not 18 percent of the whole ?
Mr. DODGE. NO, sir.
Mr. PECORA. Did you
pay that 18 percent interest to the Shermar
Corporation ?
Mr. DODGE. I signed an agreement to buy.
Mr. PECORA. That had reference to the preferred stock. I am
talking about the common stock. You had 20,000 shares of the
common stock of the International at the time it was taken over
on an exchange-of-stock basis by General Theatres. How did you
acquire that common stock ?
Mr. DODGE. AS I remember the transaction, Mr. Pecora, I think
I testified last Friday that the Shermar Corporation took an interest
in this because the Chase Securities Co. did not consider it seasoned
enough
Mr. PECORA. I remember.
Mr. DODGE. In the original syndicate there were 25,000 shares of
preferred stock and 75,000 shares of common stock.
Mr. PECORA. Was not that 75,000 shares of common really bonus
stock?
Mr. DODGE. They were purchased together.
Mr. PECORA. Was it not really bonus stock? Let us be specific
about it.
Mr. DODGE. If you want to call it that.
Mr. PECORA. I would call it that. Would you disagree with that
designation of it ?
Mr. DODGE. I do not think I should like to be allowed to put it
on my books that way for tax purposes.
Mr. PECORA. Regardless of your preferences in that respect
Mr. DODGE. It would not be my preference.
Mr. PECORA'. Let us get right down to the A, B, C of it. Was it
not bonus stock?
Mr. DODGE. I think it would be what you would call bonus stock.
Mr. PECORA. In order thai you may have no misgivings about that,
let me show you a photostatic copy of what purports to be a memorandum obtained by us from the office of Pynchon & Co., which,
3482
STOCK EXCHANGE PRACTICES
referring to the International Projector Corporation, says among
other things as follows—this is Committee's Exhibit No. 129 which
was put in evidence on November 10:
Terms: Will be sold in the form of allotment certificate which allotment
certificate will represent 1 share of preferred and 1 share of common. Balance
of common stock will go as bonus, 37,500 shares to purchase group and 12,500
shares to syndicate.
Suppose you look at that exhibit and see if it enlightens you or
refreshes your recollection in regard to< any of the matters set forth.
Mr. DODGE (after examining the paper referred to). Thank you.
Mr. Pecora, Pynchon & Co., from their records, evidently agree with
you as to what you would call it. I do not know whether there is
such a thing as bonus stock, but in common parlance I should think
it would probably be correct. But there was so much preferred and
so much common sold for so much money. The preferred and a
certain part of the common stock was sold for so much money and
the balance was a profit.
The CHAIRMAN. The committee will take a recess now until 2
.o'clock.
(Whereupon, at 1:05 p.m., a recess was taken until 2 o'clock of
the same day.)
AFTER RECESS
The subcommittee resumed at 2 p.m. on the expiration of the
recess.
The CHAIRMAN. The subcommittee will come to order. Mr.
Dodge, I believe, is on the stand.
TESTIMONY OF MTJEEAY W. DODGE—Resumed
Mr. PECORA. Mr. Dodge, I was questioning you just prior to the
recess today about the circumstances under which you had acquired
20,000 shares of the common stock of International Projector Corporation, which you owned when that stock was exchanged for
25,000 shares of General Theatres Equipment, Inc., stock. I do
not believe you had fully told us what consideration you paid for
those 20,000 shares, and how you acquired them.
Mr. DODGE. May I give it to you from memory ?
Mr. PECORA. Surely.
Mr. DODGE. I haven't my books here.
Mr. PECORA. Give it the best way you can.
Mr. DODGE. AS I was saying, the interest which the Shermar Corporation had in the original financing was 25 percent of 25,000
shares of stock
Mr. PECORA (interposing). Twenty-five thousand shares of preferred stock?
Mr. DODGE. Of preferred stock, yes; with which went 75,000 shares
of common, which, as I stated, was a purchase of two blocks together,
and which, you stated, as to the common stock, was a bonus; and I
aid not enter into any argument with you about it. [Smiling.]
Mr. PECORA. All right.
Mr. DODGE. At any rate, Mr. Pecora, the Shermar Corporation
was in that, not as a distributor of securities, as they had no way
STOCK EXCHANGE PRACTICES
3483
of distributing securities, and therefore did not join in the purchase
group, which purchased allotment certificates of preferred stock,
which was 1 share of preferred and 1 share of common stock, at 93.
The original purchase of preferred stock and the 75,000 shares of
common was at 90, as you will remember, and accrued dividends.
So that the profits to the Shermar Corporation were $3 a share in
cash on that 25 percent interest and 25 percent of
Mr. PECORA (interposing). Of 75,000 shares of common stock?
Mr. DODGE. NO ; of 50,000 shares of common—no; of 37,500 shares
of common. There were 25,000 shares in the allotment certificates,
and 12,500 shares—and I have refreshed my memory—were given
with the purchase syndicate at 93. So that the original group got
37,500 shares as a profit and 25 percent of that was 9,377 shares of
stock, I think. Is that correct ? And my share of that was 18 percent. So that, roughly speaking, I acquired of the whole amount
of stock of the International Projector Corporation 1,687 or 1,688
shares, whatever the amount was, of common stock as a profit.
Mr. PECORA. At the outset ?
Mr. DODGE. At the outset in 1925. And with the split-up of 5
to 1 that would have been equivalent to somewhere around 8,450
shares of International Projector stock. The balance of the stock I
purchased in the market at prices ranging, I imagine, from $10 to
$15 a share for the old stock. I don't remember just what the amount
was. It was done prior to 1928, as I remember, or prior to 1929.
Mr. PECORA. Did you actually pay anything for your participation of 18 percent in the interest which the Shermar Corporation
had in the original group ?
Mr. DODGE. The Shermar Corporation allotted to me an 18 percent interest through an exchange of letters, and I accepted the
liability.
Mr. PECORA. YOU accepted a liability which you were never called
upon to meet as events turned out?
Mr. DODGE. Correct; as events turned out.
Mr. PECORA. SO as a matter of actual fact those eight thousand
four hundred odd shares of common stock of International Projector
Corporation which you acquired as a result of the split-up were
acquired by you without the payment of a single dollar ?
Mr. DODGE. Well, I can say that
Mr. PECORA (interposing). Oh, you assumed a liability, but one
that you were never called upon to meet because it never arose.
Mr. DODGE. I consider that that is a fair way to put it, in the
circumstances, the way you have just put it. But I assumed a liability, which I considered the same thing as payment. An obligation to pay is the same thing as payment.
Mr. PECORA. Well, I wish every creditor thought so.
Mr. DODGE. Well, that is the way I have always felt.
Mr. PECORA. Then every debtor would have his debt discharged,
merely because the creditor feels that he is under obligation to pay.
But the fact of the matter is that you never paid anything for those
8400-odd shares of stock.
Mr. DODGE. The Shermar Corporation carried me for them.
Mr. PECORA. AS a matter of fact you never paid anything for those
8400-odd shares of stock, did you ?
3484
STOCK EXCHANGE PRACTICES
Mr. DODGE. NO ; I was never called upon to pay anything.
Mr. PECORA. When those conferences that resulted in the agreement of July 9, 1929, were being held, did Mr. Harley L. Clarke
report from time to time on the progress that he had met with or
had made in acquiring the assets or stock of the various other companies that were to be acquired in turn by the General Theatres
Equipment, Inc.?
Mr. DODGE. If my memory is correct, and I should like to say this
subject to checking it, that I think at the time we were having the
conferences he already had them in hand. That is, that he either
had them under option or had purchased them.
Mr. PECORA. Did he indicate that to you among the others present
at the time those conferences commenced ?
Mr. DODGE. I would think that he did, otherwise the conferences
would not have been of a serious character. He was discussing
with bankers about entering into a serious liability, and if he had
not been able to deliver it would not have accurred.
Mr. PECORA. Did he report at any of those conferences what consideration he had paid for the acquisition of those assets ?
Mr. DODGE. He reported exactly what was in the final contract.
Mr. PECORA. What do you mean by " the final contract " ? Which
contract are you referring to ?
Mr. DODGE. Well, the prices to be paid for the different lamp companies and the half interest in Granaeur, Inc.
Mr. PECORA. Are you referring to the contract of July 9, 1929 ?
Mr. DODGE. I think I am. [After conferring with an associate.]
That is the one, yes. Now, Mr. Pecora, did you mean to ask me if
he had told us what he had paid for the property ?
Mr. PECORA. Yes.
Mr. DODGE. I always
understood that they were going to be turned
in at cost to him.
Mr. PECORA. A few moments ago you stated that Mr. Clarke must
have acquired or placed under his control for such acquisition, all'
assets and property interests of the various other corporations that
General Theatres Equipment, Inc., in turn was to acquire, didn't
you?
Mr. DODGE. Yes, sir.
Mr. PECORA. YOU also
said that Mr. Harley L. Clarke must have
so acquired these rights and assets before those conferences
Mr. DODGE (interposing). Yes, sir.
Mr. PECORA (continuing). Were commenced that led to the making
of the agreement of July 9,1929 ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Well, if
that is so, didn't he report to the sponsors or
creators of General Theatres Equipment, Inc., what those assets
had cost him ?
Mr. DODGE. Unquestionably.
Mr. PECORA. What did he report that they had cost him ?
Mr. DODGE. I want to get this right, Mr. Pecora: Are the costs
shown in that contract?
Mr. PECORA. I do not think so. [After looking' at the contract]
No; they are not.
Mr. DODGE. May I take time to check this up?
Mr. PECORA. Surely,
STOCK EXCHANGE PRACTICES
Mr.
to, at
ment
Mr.
you.
Mr.
graph
3485
The contract of July 9, 1929, which you are referring
page 4, states that it is to cost General Theatres Equip-
DODGE.
PECORA
(interposing). A little louder, please. I cannot hear
I say, the contract of July 9, 1929, at page 4, para5, states:
DODGE.
to cause said General Theatres Equipment, Inc., to acquire 50 percent of the
entire issue of outstanding capital stock of said Grandeur, Inc., at a cost of
not to exceed $2,000,000.
Then under paragraph 6 it says:
To cause said General Theatres Equipment to acquire the capital stock of
Hall & Connolly, Inc., and the capital stocks of corporations to be organized
to acquire the property, business, and assets of The Strong Electric Co., and
J. E. McAuley Manufacturing Co., and Ashcraft Automatic Arc Co., as hereinbefore set forth, at a cost of not to exceed $3,000,000.
Mr. PECORA. Well, that merely states what General Theatres
Equipment was to pay for those assets.
Mr. DODGE. I understand that that was the cost to him.
Mr. PECORA. Did he tell you that?
Mr. DODGE. Yes.
Mr. PECORA. Did he put that in writing at any time?
Mr. DODGE. I don't think so.
Mr. PECORA. Did you as one of the executive officers of Chase Securities Corporation agree to pay those prices in behalf of General
Theatres Equipment without having had before you any proof, other
than Clarke's oral statement to you, of the amount he had paid for
those assets?
Mr. DODGE. I don't remember that we did.
Mr. PECORA. Would you be likely as a business man to do it in
that way?
Mr. DODGE. I absolutely had every confidence in Mr. Clarke.
Mr. PECORA. DO you still have that confidence in him?
Mr. DODGE. Yes, sir.
Mr. PECORA. NOW, Mr.
Clarke testified here that he received in
cash $3,100,000 for the stock of Mitchell Camera Co., which he
turned over to Grandeur, Inc. You heard that testimony, did you?
Mr. DODGE. Yes, sir.
Mr. PECORA. Was that
paid to him out of funds raised by the
General Theatres Equipment, Inc.. from a sale of its securities?
Mr. DODGE. I understood that Mr. Clarke testified that that was
the way he handled the transaction on his own books. The only tiling
that we were interested in was in the actual payment of the funds
according to the schedule, the proceeds of funds from the sale of
debentures, and from the sale of the stock, by the bankers. That
schedule I had. What Mr. Clarke did with the money, and how he
allocated it, I don't know. This is the first time I have seen this
statement (holding up a paper). I mean, the other day I saw a
copy of it.
Mr. PECORA. Well, apparently, according to the contract of July
9, 1929, all that General Theatres Equipment, Inc., was to pay
was 3 million dollars, or a sum not to exceed 3 million dollars, for
all the assets of Hall & Connolly, Inc., Strong Electric Co., J. E.
175541—34—PT 7
18
3486
STOCK EXCHAXGE PRACTICES
McAuley Manufacturing Co., and Ashcraft Automatic Arc Co.;
and a sum not to exceed 2 million dollars for 30 percent of the
stock of Grandeur, Incorporated.
Mr. DODGE. Yes, sir.
Mr. PECORA. According
to Mr. Clarke's testimony he received in
cash $6,100,000 for those combined assets, all told. Now, did he
receive more than 5 million dollars, or did the General Theatres
Equipment, Inc., pay out more than the 5 million dollars it was
obligated to pay under this agreement of July 9, 1929?
Mr. DODGE. Not to my knowledge.
Mr. PECORA. Where did Clarke get this $6,100,000 that he still
admits he received?
Mr. DODGE. I don't know. As a banker I was only interested in
seeing that the contract was carried through, and that the proper
sums of money were paid according to the contract.
Mr. PECORA. NOW, under the contracts marked in evidence today
as Committee Exhibits 1*36 and 137, Grandeur, Incorporated, was to
receive from the Fox Theatres Corporation, in addition to a sum
of $6,000 and $4,000 for the installation of special projector machines,
the sum of $175 per month for each projector so acquired from
Grandeur, Incorporated, by Fox Theatres.
Mr. DODGE. Yes,
sir.
Mr. PECOKA. HOW many Fox theaters did you say there were at
that time ? I think you said about 500, didn't you ?
Mr. DODGE. I think I said there were about 500. That is a generalization, and I don't know.
Mr. PECORA. Assuming that there were 500 Fox theaters at that
time, that meant that if every one of those Fox theaters used one
each of these special projectors, Grandeur, Inc., would have received by means of these monthly payments of $175 per machine,
around $1,050,000 a year for the use of them.
Mr. DODGE. That would be the minimum. Most theaters, as I
understand them, have to have at least two machines, and the larger
ones have to have three machines.
Mr. PECORA. Well, then, that is limiting the use of those machines
only to Fox theaters, and assuming that the number of Fox theaters
was 500 at that time.
Mr. DODGE. Yes, sir.
Mr. PECORA. Didn't you
consider as one of the sponsors of General Theatres Equipment, Inc., that that was a valuable business for
the Equipment Co. to control? I mean the business of leasing these
special projector machines that were manufactured by the International Projector Corporation.
Mr. DODGE. Well, as the story was told to me at the time, the
profits in the matter of volume of business of International Projector
Corporation was in the manufacture of projector machines; that
that was the most profitable end of the business.
Mr. PECORA. Which was the most profitable, the return from cost
of installation of machines or the rental of $175 per month?
Mr. DODGE. The manufacture of the machines.
Mr. PECORA. Then the rental of $175 per month was a byproduct,
or it could be so regarded ?
Mr. DODGE. As I explained this morning, Mr. Pecora, Grandeur,
In>\, owned the camera which was to take the picture. If th^v did
STOCK EXCHANGE PRACTICES
3487
not have the camera which would take the picture, then the projecting machine of course could not be sold, and there was competition
for the purchase of the Mitchell Camera Co. between William Fox
and Mr. Clarke. And the final settlement arrived at, if my memory serves me right, was that the Mitchell Camera Co. would be
purchased by Grandeur, Inc., and that General Theatres Equipment
would own 50 percent and Mr. Fox would own 50 percent. Now, I
also testified this morning that at the time I didn't know it was
Mr. Fox personally.
Mr. PECORA. When did you first learn that?
Mr. DODGE. Sometime afterwards.
Mr. PECORA. Well, when?
Mr. DODGE. I would say a month afterwards.
Mr. PECORA. Then you learned of it back in 1929 ?
Mr. DODGE. In 1929 or
Mr. PECORA. Did you
1930.
learn that before all of the financing was
done by the Chase National Bank for General Theatres Equipment,
I mean before that had been completed ?
Mr. DODGE. DO you mean in 1929 ?
Mr. PECORA. At any time, either in 1929 or in 1930.
Mr. DODGE. Yes,
sir.
Mr. PECORA. HOW many theaters did you think were in existence
in July of 1929 that could have used or might have been potential
users of this special projecting machine? Didn't you have some
information on that subject?
Mr. DODGE. If I have I will have to look it up. I could not answer
a question like that from memory. I t would only be a generalization.
I do not even know how many theaters there were in the country. I
do know this, that in the first instance the larger theaters would be
the only ones that could afford to pay for it, and then gradually the
smaller theaters.
Mr. PECORA (at 2:40 p.m.). Is Mr. Clarke here yet? (A pause,
without response.) Where is Mr. Clarke?
Mr. R. L. SMITH, Jr. Mr. Clarke went to his hotel, Mr. Pecora.
Mr. PECORA. But he said he would be about 15 minutes late. Is
he here yet?
Mr. SMITH. I have not seen him.
Mr. PECORA. HOW about the contracts and other documents that,
I understood, were available to us ?
Mr. SMITH. He had them this morning. I understood that he
showed them to Mr. Ross, of your staff, and Mr. Clarke had them.
Mr. PECORA. We have not seen them since recess. Mr. Clarke
promised to be back here at a quarter past 2 o'clock and make them
available to us. Are they here for that purpose now ?
Mr. SMITH. I assume that he has those with him. I will call and
make certain when he will be here, if you wish.
Mr. PECORA. Will you be good enough to call over the phone
and find out when Mr. Clarke will be here ?
Mr. SMITH. Certainly.
Mr. PECORA. Mr. Dodge, do you know whether or not Mr. Fox
paid anything for the 50 percent interest that he had in the stock
of Grandeur, Inc. ?
Mr. DODGE. I don't know.
3488
STOCK EXCHANGE PKACT1CES
Mr. PECORA. What was that answer ?
Mr. DODGE. I don't know, sir.
Mr. PECORA. We will wait a few minutes to hear from Mr. Clarke.
Mr. SMITH (at 2:50 p.m.). Mr. Clarke has left his hotel, some
time ago, and should be here now, Mr. Pecora.
Mr. PECORA. Well, I hope he will be here soon. Now, Mr. Dodge,
let us get down to the organization of General Theatres Equipment
an July 11, 1929. Were you one of the directors of that company
from its very inception ?
Mr. DODGE. I don't think I was at the time the actual transaction
took place. I was elected later, and what date I don't remember.
Mr. PECORA. DO you recall that there was a board of 11 directors
formed for the General Theatres Equipment Corporation?
Mr. DODGE. HOW was that?
Mr. PECORA. That its board consisted of 11 members.
Mr. DODGE. Ultimately; yes, I think it did.
Mr. PECORA. Weren't all those 11 members persons who were connected as partners or officers in the various members of the banking
syndicate that financed General Theatres Equipment, Inc.?
Mr. DODGE. I don't think so. There were the officers of the General
Theatres Equipment, Inc., and I don't know just how many banking
members there were.
Mr. PECORA. NOW, according to my information the president of
the corporation at the outset was Harley L. Clarke, and he was also
a member of the board.
Mr. DODGE. Yes, sir.
Mr. PECORA. The other
members of the board were yourself, Mr.
Ingold, Mr. Hammons, Mr. Niver, Mr. Watson, Mr. Michel, Mr.
Koegel, Mr. Higley, Mr. Green, and Mr. Burns. Does that accord
with your recollection?
Mr. DODGE. I think so.
Mr. PECORA. NOW, of those gentlemen, were not Mr. Ingold, Mr.
Hammons, Mr. Niver, Mr. Watson, and Mr. Higley, and yourself
representatives of members of the banking syndicate ?
Mr. DODGE. All but Mr. Higley. As I remember it, there were five
banking firms, and each one had a representative on the board.
Mr. PECORA. What was the amount of the capital stock the General
Theatres Equipment Corporation was authorized to issue under its
charter ?
Mr. DODGE. Five million shares.
Mr. PECORA. Did you say five million shares ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Of common stock?
Mr. DODGE. Of common stock.
Mr. PECORA. And any preferred stock?
Mr. DODGE. NO, sir.
Mr. PECORA. YOU have heretofore seen
this paper which has been
marked " Committee Exhibit No. 128 ", and which I again show you,
haven't you, this memorandum dated July 3, 1929, from you and
addressed to Mr. Wiggin?
Mr. DODGE. Yes,
sir.
Mr. PECORA. Wasn't it proposed originally to have General Theatres Equipment issue 60,000 shares of preferred stock, which was to
STOCK EXCHANGE PRACTICES
3489
have a conversion privilege of three shares of common for one of
preferred?
Mr. DODGE. That was Mr. Clarke's suggestion, yes.
Mr. PECORA. And that was the suggestion that you passed on to
Mr. Wiggin in this memorandum, committee exhibit no. 128.
Mr. DODGE. Yes,
sir.
Mr. PECORA. And that was never carried out, was it?
Mr. DODGE. NO, sir.
Mr. PECORA. Why was it abandoned ?
Mr. DODGE. I suggested to Mr. Wiggin that that was what Mr.
Clarke had proposed, and Mr. Wiggin took it up with the officers of
Chase Securities Corporation, and they decided that the preferred
stock was something it should not handle. We did not go into many
kinds of stock at that time; we handled obligations.
Mr. PECORA. Like bonds and debentures?
Mr. DODGE. Yes; bonds and debentures.
Mr. PECORA. HOW many of those 5,000,000 shares of common stock
that it was authorized to issue were actually issued ?
Mr. DODGE. Was that at the beginning?
Mr. PECORA. Yes; at the beginning.
Mr. DODGE. I t was 1,644,510 shares.
The CHAIRMAN. And later there were other shares issued?
Mr. DODGE. Yes, sir; other shares were issued later. Also reserved
as against conversion of the 6 million dollars of debentures, 180,000
shares; and an additional amount, I think, under the offers made to
some of the stockholders of subsidiary companies.
Mr. PECORA. NOW, in addition to the issuance of that stock the
company was authorized to issue and sell 6 million dollars par value
of 6 percent gold debenture bonds due in 1944, was it not?
Mr. DODGE. Yes, sir.
Mr. PECORA. And were those debentures issued ?
Mr. DODGE. Yes, sir.
Mr. PECORA. On what terms ?
Mr. DODGE. By the company.
Mr. PECORA. And to whom?
Mr. DODGE. The company received 90.
Mr. PECORA. YOU say the company received 90?
Mr. DODGE. Yes, sir.
Mr. PECORA. TO whom were they issued? To the bankers?
Mr. DODGE. TO the bankers.
Mr. PECORA. And the bankers in turn offered them to the public?
Mr. DODGE. Yes, sir.
Mr. PECORA. And distributed them among the public by sale ?
Mr. DODGE. Yes, sir.
Mr. PECORA. In connection with such issuance and sale of those
debentures by the bankers to the public, do you recognize the document which I now show you to be a true and correct copy of the
prospectus that accompanied the offering to the public ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Mr. Chairman,
I offer it in evidence, and ask that it
may be made a part of the hearing.
The CHAIRMAN. Let it be received and the committee reporter
will make it a part of the record.
3490
STOCK EXCHANGE PRACTICES
(A pliotostatic copy of a prospectus of $6,000,000 General Theatres
Equipment, Inc., 15-year 6 percent convertible gold debentures, dated
July 1, 1929, and to become due July 1, 1944, was marked " Committee Exhibit No. 138, November 17, 1933 ", and will be found on
page 3499.)
The CHAIRMAN. At what price were those debentures sold to the
public ?
Mr. DODGE. Ninety-nine.
Mr. PECOFA. There was a 9-point spread ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Did those debentures have any conversion privilege?
Mr. DODGE. Yes, sir; three shares of common stock.
Mr. PECORA. What was that?
Mr. DODGE. Thirty shares of common stock for each $1,000 deben-
ture.
Mr. PECORA. It was 33*4 shares, wasn't it ?
Mr. DODGE. NO ; 30 shares. That would be 180,000 shares of stock.
Mr. PECORA. Oh, all right. Now, what did you say was the reason
why the original proposal to have an issue of preferred stock as well
as an issue of common stock, was not carried out?
Mr. DODGE. Mr. Clarke was anxious to have Chase Securities
Corporation join in the undertaking, and
Mr. PECORA (interposing). Yes.
Mr. DODGE (continuing). Personally I was, too, because I thought
it was good business for Chase Securities Corporation.
Mr. PECORA. Yes.
Mr. DODGE. And I then suggested to Mr. Wiggin that if Mr. Clarke
would issue instead of preferred stock a debenture with a sinking
fund and convertible into common shares, that I felt it would be
a security that the Chase Securities Corporation could handle.
Mr. PECORA. But you did not think the Chase Securities Corporation could or should handle an issue of common stock ?
Mr. DODGE. NO ; this was preferred stock.
Mr. PECORA. Or of preferred stock ?
Mr. DODGE. Of preferred stock. You are now talking about the
six million dollars?
Mr. PECORA. I am now talking about the six million dollars of
debentures.
Mr. DODGE. Yes,
sir.
Mr. PECORA. In Committee Exhibit No. 128, which was offered in
evidence last week, and which consists of your memorandum to Mr.
Wiggin, under date of July 3, 1929, you say, among other things, as
follows:
As to the preferred stock, Mr. Clarke is very insistent that for the good of
the whole business the Chase Securities Corporation join in the purchase and
offering of this stock. Having in mind your object ons to appearance, and after
consultation with Halstead Freeman, I have suggested that this preferred
stock be changed into a convertible debenture; and Ingold of Pynchon & Co.
and Clarke had made up their minds to invite Halsey. Stuart into the picture.
What did you have in mind when you said in this memorandum to
Mr. Wiggin:
Having in mind your objections to appearance.
STOCK EXCHANGE PRACTICES
3491
Mr. DODGE. AS I testified before, I told Mr. Wiggin that MrClarke's plan involved 60,000 shares of preferred stock, and after
consultation we decided that Chase Securities Corporation, because
of appearance, would not purchase or, that is, make a public offering
of preferred stock.
Mr. PECORA. YOU thought that for the sake of appearances it would
be better if the Chase Securities Corporation were to join in this
financing, that instead of preferred stock being issued by GTE it
should issue debentures having the privilege of conversion into
common stock?
Mr. DODGE. Well, I meant by the word " appearance " there that
the debenture or obligation of the company, surrounded by certain
provisions which would protect, and which would be redeemable
through a sinking fund, would be a better security for the public to
buy than a preferred stock.
Mr. PECORA. Wasn't it really to avoid the appearance of Chase
Securities Corporation bringing out and offering to the public an
issue of stock that that change was made?
Mr. DODGE. NO, sir.
Mr. PECORA. DO you
know why Halsey Stuart were invited into
the picture?
Mr. DODGE. They were a banking house of national prominence
and we thought a wider distribution, a better distribution would be
obtained.
Mr. PECORA. I S my recollection correct that Halsey Stuart & Co.
are the company for which the " Old Counselor " appeared on the
radio every Monday night? That is the same concern, is it not?
Mr. DODGE. Yes.
Mr. PECORA. In
this memorandum that you addressed to Mr.
Wiggin on July 3, 1929, you wind up with the following statement:
As between Shermar and Chase Securities Corporation, if the latter take
the debentures, it might be fair to £ive (1!mse Seeur ties Corporation 50 percent
of Shermar's participation, without, however, prejudicing Shermar's position in
any future financing in the conirnoii stock, where no senior financing is involved.
What prompted you to make that suggestion to Mr. Wiggin?
Mr. DODGE. The Chase Securities Corporation had had no interest
whatsoever in the subsidiary companies, that is, the International
Projector Corporation or the National Theatre Supply. The risk of
the business there had been carried by the Shermar Corporation.
The Chase Securities Corporation sometimes went into commonstock syndicates.
It did not sell to the public common stocks, but sometimes went
into a syndicate; and it seemed to Mr. Freeman and myself, Mr.
Freeman being the president of the company, that this was a common stock which had merit and that the Chase Securities Corporation should have a position in it—not a large position in it, but
a position in it.
Mr. PECORA. Well, as a matter of fact, during all these conferences which you were having for the weeks preceding the contract
of July 9, 1929, you participated in those conferences as vice president of the Chase Securities Corporation, did you not ?
Mr. DODGE. Up to the time that the suggestion was made that the
Chase Securities Corporation should enter into the business I did not.
3492
STOCK EXCHANGE PKACTICES
Mr. PECORA. Prior to that time were you a participant in those
conferences as a representative of the Shermar Corporation or as a
representative of the Chase Securities?
Mr. DODGE. AS a representative of the Shermar Corporation.
Mr. PECORA. Were you an officer of the Shermar Corporation?
Mr. DODGE. NO, sir.
Mr. PECORA. YOU were
an officer of the Chase Securities Cor-
poration?
Mr. DODGE. Yes.
Mr. PECORA. What
were you doing in those conferences as a representative of the Shermar Corporation?
Mr. DODGE. Because the Shermar Corporation was initially in
1925 and 1926
Mr. PECORA. We know about that.
Mr. DODGE. I am explaining it.
Mr. PECORA. Was there any community of interest between the
Shermar Corporation and the Chase Securities Corporation?
Mr. DODGE. NO.
Mr. PECORA. None whatever, was there?
Mr. DODGE. NO, sir.
Mr. PECORA. The Shermar was the personal property of the
Wiggins family?
Mr. DODGE. Yes.
Mr. PECORA. And
Mr. DODGE. Yes.
Mr. PECORA. The
you knew that?
Chase Securities Co. was the property of the
stockholders of the Chase National Bank, was it not?
Mr. DODGE. Yes.
Mr. PECORA. Were
you devoting any of your time while you were
an executive officer of the Chase Securities Corporation and receiving a salary for your time and services from that corporation, to the
interests of the Shermar Corporation?
Mr. DODGE. Not much.
Mr. PECORA. Some?
Mr. DODGE. Some; yes. In this particular case; yes. I did devote
some time to it, because, as I explained last week, Mr. Pecora, the
Shermar Corporation went into this thing partly because and largely
because I thought that sometime this company might reach a stage
where the financing would be valuable to the Chase Securities Corporation. The Shermar Corporation took an interest in it, and I
went on the board of the International Projector Corporation as a
director.
Mr. PECORA. Representing the Shermar Corporation's interests ?
Mr. DODGE. Representing the Shermar Corporation's interests.
Mr. PECORA. SO that for 2 years you served as a director of the
International, while you were vice president of the Chase Securities
Corporation, for the Shermar Corporation?
Mr. DODGE. I would say so; yes.
Mr. PECORA. When you prepared this memorandum of July 3,
1929, that you addressed to Mr. Wiggin, at what point did you stop
looking out for the best interests of the Shermar Corporation and
commence looking out for the best interests of the Chase Securities
Corporation ?
STOCK EXCHANGE PRACTICES
3493
Mr. DODGE. The minute the Chase Securities Corporation became
interested in the business.
Mr. PECORA. Who brought the matter to the attention of the Chase
Securities Corporation?
Mr. DODGE. I did.
Mr. PECORA. YOU did?
Mr. DODGE. Yes.
Mr. PECORA. YOU did so
because at one time you reached the stage
where you thought the Chase Securities Corporation might profitably
participate in this financing ?
Mr. DODGE. Profitably; yes.
Mr. PECORA. Why did you not, as the vice president of the Chase
Securities Corporation, try to keep intact the interest which was
divided between the Chase Securities Corporation and the Shermar ?
Mr. DODGE. Didn't want it all.
Mr. PECORA. Who didn't want it all—you?
Mr. DODGE. The Chase Securities Corporation.
Mr. PECORA. Did you propose that they take it over ?
Mr. DODGE. Yes.
Mr. PECORA. And the directors turned that down?
Mr. DODGE. NO, sir; not the directors—the officers.
Mr. PECORA. Mr. Freeman ?
Mr. DODGE. Freeman, myself, and others. There was a 22% percent interest there, I think it would work out, and all the risk that
the Chase Securities Corporation was to take in it was 11^4 percent.
Mr. PECORA. Ultimately, before the General Theatres Equipment
went into receivership, can you tell this committee how much money
the Chase Bank or any of its security affiliates furnished by way
of loans or otherwise to the General Theatres Equipment or to any
syndicate trading in its securities, all told?
Mr. DODGE. I was not an officer of the Chase National Bank. If
you want me to get that from the Chase National Bank
Mr. PECORA. DO you know ?
Mr. DODGE. I do not know of my own knowledge, but I can get it.
Mr. PECORA. Have you not ever been told?
Mr. DODGE. I have seen memoranda; yes.
Mr. PECORA. According to whatever information you have derived, how much did the Chase Bank or its investment affiliates put
into the financing of General Theatres Equipment, all told?
Mr. DODGE. The gross amount or the net ?
Mr. PECORA. The gross amount. Give us that first.
Mr. DODGE. I do not think we have it here now. I can get it
for you.
Mr. PECORA. Can you not give us an approximation of the gross
amount ?
Mr. DODGE. NO, sir.
Mr. PECORA. HOW much do you think it was ?
Mr. DODGE. I do not think you should ask me to say how much I
think it was.
Senator COUZENS. What was on the memoranda you said you saw ?
Mr. DODGE. I have seen memoranda. I also read it in newspapers.
Mr. PECORA. What have you seen?
3494
STOCK EXCHANGE PRACTICES
Mr. DODGE. I am not an officer of the Chase National Bank, and
I do not wish to give you anything that is not the facts. Should
von ask me what I think and should I answer—I want to help you,
but I do not think I should give you an answer to that, when I can
get the facts.
Mr. PECORA. HOW long would it take you to get the facts ?
Mr. DODGE. I don't know, sir. Mr. Aldrich says I can say we
can supply those facts by Tuesday.
Mr. PECORA. In what proportions did the members of this banking
syndicate subscribe for these six million par value of debentures?
Mr. DODGE. Chase Securities Corporation, 20 percent; Pynchon &
Co., 28 percent; West & Co., 16 percent; W. S. Hammons & Co., 16
percent; Halsey Stuart & Co., 20 percent.
Mr. PECORA. Mr. Dodge, I want to suspend with you now. I see
that Mr. Clarke is in the room.
(Witness temporarily excused.)
TESTIMONY OF HAKLET I . CLAEKE—Resumed
Mr. PECORA. Mr. Clarke, have you now available the documents
and records relating to your acquisition of the stock, assets, and
property of the four so-called Lamp Companies and the Mitchell
Camera Co. ?
Mr. CLARKE. I have.
Mr. PECORA. Will you produce them?
Mr. CLARKE. Yes, sir [handing papers to Mr. Pecora]. I think I
have given you one you did not ask for.
Mr. PECORA. Which one is that?
Mr. CLARKE. The Mitchell Camera Co.
Mr. PECORA. Yes; I asked for that.
I offer in evidence the five documents produced by the witness.
The first one is in the form of a letter addressed to J. E. McAuley,
Esq., dated June 30,1929, signed by H. L. Clarke.
The CHAIRMAN. I t will be admitted.
(The letter referred to, dated June 30, 1929, addressed to J. E.
McAuley, Esq., and signed by H. L. Clarke, was received in evidence,
marked " Committee's Exhibit No. 139. Nov. 17, 1933 ", and will be
found on page 3564.)
Mr. PECORA. The second one produced by the witness consists of a
duplicate original of an agreement dated April 27, 1929, by and
between Clarence S. Ashcraft and Mary C. Ashcraft, his wife, and
H. E. Van Dyne.
The CHAIRMAN. Let it be admitted.
(The document referred to, being duplicate original of an agreement dated Apr. 27, 1929, between Clarence S. Ashcraft and Mary
C. Ashcraft, his wife, and H. E. Van Dyne, was received in evidence,
marked " Committee's Exhibit No. 140^ Nov. 17, 1933 ", and will be
found on page 3565.)
Mr. PECORA. The third document produced by the witness consists of a duplicate original of a letter addressed to Mr. Harry H.
Strong, dated July 14, 1929, signed by H. L. Clarke, accepted by
Harry H. Strong.
STOCK EXCHANGE PRACTICES
3495
The CHAIRMAN. Let it be admitted.
(The document referred to, being duplicate original of a letter
dated July 14, 1929, from H. L. Clarke to Harry H. Strong, was
received in evidence, marked " Committee Exhibit No. 141, Nov. 17,
1933 ", and will be found on page 3566.)
Mr. PECORA. The fourth document produced by the witness consists of an agreement made by and between Theodore Hall and
Joseph Connolly, called the sellers, and J. E. McAuley, of Chicago,
called the buyer, dated April 12, 1929.
The CHAIRMAN. Let it be admitted.
(The document referred to, being agreement between Theodore
Hall and Joseph Connolly, sellers, and J. E. McAuley, buyer, dated
Apr. 12, 1929, was received in evidence, marked "Committee's Exhibit No. 142, Nov. 17,1933 ", and will be found on page 3567.)
Mr. PECORA. The fifth document produced by the witness is what
purports to be a copy of an agreement made by and between H. F.
Bogart and George A. Mitchell, as sellers, and H. L. Clarke, buyer,
dated June 6, 1929.
The CHAIRMAN. Let it be admitted.
(The document referred to, being copy of an agreement between
H. F. Bogart and George A. Mitchell as sellers, and H. L. Clarke,
buyer, dated June 6, 1929, was received in evidence, marked " Committee's Exhibit No. 143, Nov. 17, 1933", and will be found on
page 3570.)
Mr. PECORA. These five documents just offered in evidence and
marked with exhibit numbers 139, 140, 141, 142, and 143 in evidence,
constitute all the documents evidencing the agreements under which
you acquired or under which there was acquired for the ultimate
use and benefit of the General Theatres Equipment Co., all the various properties and assets referred to ?
Mr. CLARKE. Yes, sir. I think one of them is a copy.
Mr. PECORA. Mr. Chairman, these documents have come to me now
for the first time, and before proceeding to further examine this
witness with respect to them I would like to have an opportunity of
familiarizing myself with their contents.
The CHAIRMAN. Very well.
Senator COUZENS. Let me ask the witness a few questions.
How long prior to the conception of the General Equipment, Inc.,
were those agreements entered into?
Mr. CLARKE. Before the General Theatres was formed?
Senator COUZENS. Yes; or before you conceived idea of forming.it?
Mr. CLARKE. I think the idea was conceived for a long time.
Senator COUZENS. It was conceived before these contracts were
entered into?
Mr. CLARKE. Yes.
Senator COUZENS. SO
you had in mind acting as agent for the
General Theatres Equipment company when you were making these
contracts ?
Mr. CLARKE. Yes, sir.
Mr. PECORA. Mr. Chairman,
we adjourn at this time.
it is about 3:30, and I suggest that
3496
STOCK EXCHANGE PRACTICES
The CHAIRMAN. The subcommittee will now take a recess until 10
o'clock next Tuesday morning.
(Whereupon, at 3:25 p.m., the subcommittee adjourned until Tuesday, Nov. 21,1933, at 10 a.m.)
COMMITTEE EXHIBIT NO. 136,
NOVEMBER 17,
1983
This agreement, made this 24th day of June 1929, by and between Grandeur,
Inc., a New York Corporation, first party hereto, hereinafter generally referred
to as " Grandeur", and International Projector Corporation, a Delaware
corporation, second party hereto, hereinafter generally referred to as
" International",
Witnesseth:
Whereas, International has for more than 7 years last past experimented
with, and has now developed a special motion-picture projector, without lamp
and lamp house, adapted for use in connection with so-called " Grandeur"
films (films wider than the regular 35 mm); and
Whereas, Grandeur is desirous of securing the exclusive right of handling
and selling all such projectors manufactured by International adapted for use
in connection with " Grandeur" films, and International is willing to grant
such exclusive right, upon the terms and conditions hereinafter set forth;
Now, therefore, in consideration of the premises and of the mutual covenants
herein contained, it is agreed by and between the parties hereto as follows:
1. International agrees that Grandeur shall lia\e the exclusive distribution
and sale for all such projectors manufactured by International adapted to
the use of " Grandeur" films, and further agrees that during the period of
this agreement it will not manufacture for, or sell, lease, license, or otherwise dispose of to any other person, firm, or corporation, nor permit any other
person, firm, or corporation, to sell, lease, license, or otherwise dispose of
any such projectors or any improvements thereof, or any modifications thereof,
or any other projector designed to use films wider than 35 mm prescribed
and/or developed either directly or indirectly by or under the supervis.on of
or for the benefit of International Projector Corporation, provided always
that Grandeur shall use its best efforts to promote the sale and distribution
of such projectors.
2. International agrees to manufacture and ^ell to Grandeur and Grandeur
agrees to purchase from International all such projectors desired by Grandeur
during the life of this agreement for sale to Fox Film Corporation, Fox
Theatres Corporation and/or their subsidiary or affiliated companies, or others
upon the terms and conditions hereinafter set forth.
3. For the first 12 of such projectors Grandeur shall pay International the
sum of $6,000 for each of such projectors. For each projector in excess of the
said 12 projectors hereinabove mentioned, Grandeur shall pay International
$4,000 for each projector.
Deliveries shall commence on or before or as soon after February 1, 1930,
as practicable.
4. This agreement shall remain in effect until June 1, 1939.
In witness whereof, the parties hereto have caused this agreement to be
signed by their respective proper officers on the clay and date first above
written.
GBANDEUK, INC.,
By JACK G. LEO.
President.
Attest:
O. S. LEVIN,
Assistant
Secretary.
[SEAL]
INTERNATIONAL PROJECTOR CORPORATION.
By W. C. MICHEI, Vice President.
Attest:
O. D. HABMSSEN,
Assistant
Secretary.
Vice Vresident.
STOCK EXCHANGE PRACTICES
3497
COMMITTEE EXHIBIT NO. 137, NOVEMBER 17, 1933
This agreement, made in triplicate in the City of New York, State of New
York, this 24th day of June, 1929, by and between Grandeur, Inc., a New
York corporation (hereinafter called "Grandeur"), licensor, and Fox Theatres
Corporation, a New York corporation (hereinafter called "Fox"), licensee,
Witnesseth that, for and in consideration of the covenants, stipulations and
representations herein set forth, the respective parties hereto agree as follows:
1. (a) Grandeur hereby grants to Fox a non-exclusive, non-assignable license
to use in the theaters owned, controlled and/or operated by Fox, Fox Film
Corporation and their respective subsidiary and/or affiliated companies (subject to all the terms, conditions, limitations and agreements herein contained)
special motion picture projectors, without lamp or lamphouse, adapted for use
in connection with so-called " Grandeur " films (films wider than the regular
B5 m.m. in the quantities and at the times hereafter in this agreement proTided and to employ and make use of (to the extent necessarily involved in
such use of said projectors) any and all United States patents and applications
for United States patents, relating to said projectors or to such use thereof,
which are now owned or controlled, or which may during the term of this
agreement be owned or controlled by International Projector Corporation,
or in respect of which International Projector Corporation has or may hereafter during the term of this agreement have the right to grant such licenses^
Grandeur being the licensee of International Projector Corporation, w ith
the right to assign such use of such patents.
(6) Grandeur agrees to install in such theaters of Fox, Fox Film Corporation, and/or their subsidiary or affiliated companies that Fox may from time
to time designate, 12 such' special motion-picture projectors, for which Fox
shall pay Grandeur on installation thereof the sum of $6,000.
Grandeur agrees to supply to Fox, and Fox agrees to accept or cause to be
accepted from Grandeur under the terms provided in this agreement, during
the period commencing approximately February 1, 1930, but in any event as
soon as projectors shall be ready for delivery, and ending 10 years thereafter,
all motion-picture projectors using films wider than the regular 35 mm that
may be required or desired by Fox, Fox Film Corporation, and/or their subsidiary or affiliated companies during such period, it being the agreement of
the parties hereto that Fox shall, during such period, use exclusively such
projectors as are manufactured by International Projector Corporation. Where
hereinafter referred to, Fox shall include not only Fox Theatres but also Fox
Film Corporation and/or their subsidiary or affiliated companies.
Grandeur agrees that Fox shall have the first call on any such projectors
that Grandeur is able to supply, and Grandeur agrees that so long as any
orders for such projectors from Fox are unfilled that no orders for such projectors from others than Fox will be accepted except on the condition that
such orders shall be accepted subject to prior deliveries for Fox as herein
provided.
2. Fox agrees that it will use and employ the projectors only in theaters
owned, controlled, or operated by Fox, and that it will at all times during
the period of this license keep and maintain the projectors in good condition.
3. Grandeur agrees to make periodical inspection and minor adjustments
in the projectors after they shall have been installed. Grandeur may from
time to time install such spare and renewal parts as may, in its opinion, be
necessary to the satisfactory operation and maintenance of the projectors.
4. For each such projector in excess of the 12 projectors mentioned in paragraph 1 (&) hereof, Fox agrees to pay to Grandeur in New York exchange an
installation charge of $4,000 for each such projector, payable upon the shipment of each such projector and the further payments hereinafter provided.
In the event that the established installation charge made by Grandeur for
such projectors is less than $4,000, at any time during the life of this contract,
Fox shall be given the benefit of any such decreased charge from the effective
date thereof.
5. In addition to any other payments required to be made by Fox hereunder,
Fox agrees to pay to Grandeur throughout the term of the license hereby
granted, a monthly payment of $175 in advance. Such payments shall continue
for 120 months for each projector. Such monthly payment to be made by Fox
fo Grandeur, however, shall never be in excess of the amount in effect as the
3498
STOCK EXCHANGE PRACTICES
established monthly payment at the time when such monthly payment is due.
The first six machines furnished, however, shall be free from such monthly
payment.
6. Fox agrees to pay the cost of transporting the projectors from the place of
shipment to the theater and to accept delivery thereof from the common carrier
and make payment directly to the common carrier of the charges thereon. Fox
will also arrange for any necessary loading, trucking, and unloading to put the
projectors down inside the theater, and will directly defray the cost thereof.
7. Fox agrees to comply with all local laws and ordinances relating to the use
and operation of the projectors and with any fire insurance underwriter's,
requirements.
8. Title to and ownership of any and all projectors at any time furnished
hereunder shall remain vested in Grandeur.
9. Fox shall bear and discharge promptly any and all personal property taxes
which may be charged or levied in connection with the projectors.
10. Fox will permit Grandeur, through its designated agents, engineers, and
mechanics, to have access to the theaters of Fox at all reasonable hours for
the purpose of installing and from time to time for the purpose of examining,
inspecting, and servicing the projectors, and will gram to Grandeur full opportunity to make such adjustments therein and repairs thereto as, in the opinion
of Grandeur, are necessary or desirable.
11. This agreement and the license hereby granted and/or to be granted
shall, at the option of Grandeur, terminate and come to an end upon the happening of auy of the following events, hereby designated to be events of
default, to wit:
(a) Upon the failure or refusal of Fox for any reason to pay any of the
sums herein agreed to be paid by Fox within 30 days after such sum is or
may become due.
(6) Upon a breach by Fox or any of the covenants herein contained relative to the use or maintenance of the projectors continued for more than 30
days after notice thereof by registered mail from Grandeur.
In the event of a default in any of the provisions of this agreement at any
time during the first 2 years of the term of this license, the entire balance
of monthly payments for the first 5 years shall be due and payable forthwith
at the option of Grandeur and whether or not it terminates this license or
removes the projectors as hereinafter provided. The license hereby granted
and all obligations imposed upon Grandeur by virtue of this agreement shall
be suspended during the continuance of any event of default.
12. Upon termination of or expiration of this license by lapse of time or
otherwise, Fox will surrender up and deliver possession of the projectors to
Grandeur in good order and condition, reasonable wear and tear and obsolescence due to proper use thereof only excepted, and Grandeur may repossess
the projectors and may, for the purpose of reducing the same to possession,
(inter the theaters of Fox or any other premises where said projectors may be
and, without any legal proceedings whatever, possess and remove said projectors, and Fox will cooperate in such removal. If this license shall be terminated by default Grandeur shall thereupon have the right without notice to
take immediate possession of said projectors, and for that purpose may pursue the same wherever they may be found and may take and seize the same
to its own proper use forever, free from any right of Fox under this agreement. Fox covenants that in any such event no claim will be made for dainapt*
on account of removal or otherwise and Fox further agrees that it will hold
and save harmless Grandeur from and against any and all claims for damages
by any parties whatsoever on account of such removal.
13. In the event of the partial or total destruction of a projector during the
term of this license by fire or any other cause, without fault or neglect
on the part of Fox, provided Fox shall not be in default under this agreement, and provided Fox shall continue to operate the theater or after any
necessary repairs to the theater shall resume its operation, Grandeur will at
its own expense repair the projector, or if in the sole judgment of Grandeur
such destruction is so extensive as to render the repair impracticable, Grandeur
will at its own expense install in the theater a projector as nearly similar as
possible to the one destroyed.
14. Grandeur agrees that subject to the provisions hereof it will, at its own
expense, defend any and all actions and suits which may during the term
STOCK EXCHANGE PRACTICES
3499
hereof be brought agaiust Fox for iuiringenient of patents by reason of the
use by Fox of projectors! furnished by Grandeur hereunder, and will pay or
satisfy all judgments and decrees for profits, damages and/or costs which may
be finally awarded against Fox by a court of last resort in any suca action
or suit on account of any such infringement provided that Fox shall give
Grandeur prompt notice of such action or suit, full information and all reasonable cooperation in connection therewith and full opportunity to defend the
same and provided further that this agreement shall not extend to any infringement or claim of infringement arising from the use of any projector
in combination with any sound apparatus or in combination with anything not
furnished by Grandeur, and that tue liability of Grandeur under this agreement shall in no case exceed the total amount paid hereunder by Fox to
Grandeur.
15. This agreement shall not be assigned by Fox without the written consent
of Grandeur. I t shall, however, subject to such restriction upon assignment by
Fox, be binding upon the parties and their respective successors, assigns, and
legal representatives and shall be interpreted according to the laws of the
State of New York.
10. These licenses to be granted hereunder in respect to each projector shall
be for a term of 10 years from the day upon which the installation of each
respective projector shall have been completed and the projector made available to Fox for use, the last term to expire 5 years from the date of installation
in 1939 of the last projector provided for in paragraph 1 of this agreement.
17. The parties hereto expressly stipulate that this agreement as herein set
forth contains the entire understanding of the respective parties with reference to the subject matter hereof, and that there is no other understanding,
agreement, or representation, expressed or implied, in any way limiting, extending, defining, or otherwise relating to rlie provisions ue/eof or any of the
matters to which the present agreement ielates. No waiver by either party,
whether express or implied, of any of the provisions of this agreement shall be
construed as constituting a waiver of anv otlie/ provision or provisions o r this
agreement or as estopping either party from its right to enforce any provision
or all provisions hereof.
In witness whereof, the parties hereto have caused these presents to be
executed by their duly authorized officers in their behalf the day and year
first above written.
[SEAL]
GRANDEUR, INC.,
By H. L. CLAKKE,
President.
Attest: S. II. BUKNS.
Secretary.
[SEAL]
FOX THEATRES. CORPORATION,
By AARON FOX, VWG President.
Attest:
C. S. LEVIN,
Secretary.
COMMITTEE EXHJBIT NO. 138, NOVEMBER 17, 1933
New issue
July 18, 1929
$6,000,000 General Theatres Equipment. Inc., 15-year, 6 percent convertible
gold debentures, to be dated July 1, 3929, to be due July 1, 1944
Interest payable semiannually January 1 and July 1, in New York or Chicago
without deduction for Federal income tax not exceeding 2 percent. New
Hampshire 3 percent tax on interest, Pennsylvania and Connecticut 4 mills
taxes, Maryland 4^-mills tax, California and Kentucky 5-mills taxes, Massachusetts 6-percent income tax on interest, and any similar taxes hereafter
imposed by Ma ne not exceeding T\ i-erc^iit personal-property t.Vv or i\ percent
income tax, refundable upon proper and timely application. Redeemable on
or after July 1, 1030, as a whole at «'nv tin:e or in part ou any inteiest date, on
40-days published notice, at 110 percent of their principal amount and accrued
interest. Coupon debentures in interchangeable denominations of $1,000 and
$500, resisterable as to principal only.
3500
STOCK EXCHANGE PRACTICES
THE CHASE NATIONAL BANK OF THE CITY OF NEW YORK, TUUSTEK
Convertibility: These debentures will be convertible at any time after January 1, 1930, at the option of the holders*, into the common stock of the company (or, at the option of the company, voting trust certificates therefor) on
the basis of 30 shares of such stock as now constituted for each $1,000 principal
amount of debentures. In the event of redemption of these debentures prior to
maturity, such conversion privilege may be exercised up to and including the
tenth day prior to the redemption date.
From his letter Mr. H. L. Clark, president of the General Theatres Equipment, Inc., summarizes as follows:
Organization and business.—General Theaters Equipment, Inc., a Delaware
corporation, will own in excess of 60 percent of the outstanding common stocks
of International Projector Corporation and National Theater Supply Co., and
all of the outstanding common stock of Theatre Equipment Acceptance Corporation. Upon acceptance of the exchange offers now being made, General
Theatres) Equipment, Inc., will own all of the outstanding common stocks of
these companies. The proceeds of present financing will provide funds with
which to acquire all of the outstanding funded debt and preferred stocks of
these companies. The company will also acquire 50 percent of the outstanding
capital stock of Grandeur, Inc., which will acquire through a wholly owned subsidiary, all of the business and assets of Mitchell Camera Co. General Theatres
Equipment, Inc., will also acquire all of the capital stock of Hall & Connolly,
Inc., and through wholly owned subsidiaries, the properties, businesses, and
assets of The Strong Electric Co., J. E. McAuley Manufacturing Co., and Ashcraft Automatic Arc Co.
International Projector Corporation manufactures in excess of 75 percent of
the motion-picture projectors used throughout the world, many of its products
also being used by churches, schools, and large industrial concerns. The company has adapted its products to the sound picture very successfully and has
developed new types of projector machines which are expected to revolutionize
the industry.
National Theatre Supply Co. maintains a nation-wide distributing organization which sells all types of equipment used in theatres. It operates 30 stores
and warehouses in principal cities of the United States, and has exclusive
selling arrangements for products of International Projector Corporation, except
those held by Grandeur, Inc.
Grandeur, Inc., was organized to distribute and service the new types of
motion-picture projectors which have been developed by International Projector
Corporation. It has entered into a contract under which Fox Theatres Corporation, or any affiliated company, agrees to lease from Grandeur, Inc., all
projecting equipment of the new type required by it or any subsidiary or
affiliated company.
Mitchell Camera Company manufactures professional cameras for both the
silent and sound pictures, its products being used by the foremost producers
of motion p-'cture films.
Theatre Equipment Acceptance Corporation finances commercial paper taken
for theater equipment and secured by contracts of conditional sale, chattel
mortgages, etc.
J. E. McAuley Manufacturing Co., Hall & Connolly, Inc., The Strong Electric
Co., and Ashcraft Automatic Arc Co. manufacture projection lamps used in
theaters. Sound and talking pictures require larger and more powerful light
sources resulting in a wide-spread demand for more of the efficient lamps of the
types manufactured by these companies.
General Theatres Equipment, Inc., will const*tute a complete unit for the
manufacture, distribution, installation and servicing of all types of equipment
and supplies used in the operation of motion picture and general theaters.
Capitalization.—(Upon completion of the present financing, and upon consummation of the exchanges of securities offered to stockholders.)
Authorized Outstanding
Fifteen year 6% convertible gold debentures due 1944 (this issue) .
Common stock, no par value shares
1
$6,000,000
5,000,000
Of this total 376,250 shares are reserved for exchange offers to stockholders.
$6,000,000
12.026,260
STOCK EXCHANGE PKACTICES
3501
Earnings.—For the twelve months period ended on May 31, 1929, the above
mentioned companies and businesses reported a combined net income before
Federal income taxes, of $2,283,530. The maximum annual interest requirements on this issue of $6,000,000 15-year 6-percent convertible gold debentures
are $360,000.
Sinking fund.—The indenture under which these debentures will be issued
will provide for an annual sinking fund of $300,000, beginning July 1, 1933.
Purpose of issue.—The proceeds of this issue of $6,000,000 15-year 6-percent
convertible gold debentures will provide funds for the purchase of businesses,
properties and/or stocks of Grandeur, Inc., and the projection lamp companies,
and for other corporate purposes.
All information given herein is from sources which we regard as reliable; but
in no event are the statements herein contained to be regarded as representations of the undersigned.
We offer these debentures, when as and if issued and accepted by us and
subject to the approval of our counsel, and to prior sale. Legal details in connection with the issuance of these debentures will be subject to the approval
of Messrs. Rushmore, Bisbee & Stern and Messrs. Davisson & Manice, New York
City, for the bankers and Messrs. Matthews & Koegel, Chicago, for the company.
It is expected that delivery of temporary debentures will be made on or about
August 1, 1929.
Price 99 and interest to yield over 6.10 percent.
CHASE SECUBITIES COEPOEATION.
PYNCHON & Co.
HALSEY, STUART & Co., INCORPORATED.
WEST & Co.
W. S. HAMMONS & Co.
175541—34—PT 7
19
STOCK EXCHANGE PEACTICES
TUESDAY, NOVEMBER 21, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,
Washington^ B.C.
The subcommittee met at 10 a.m., pursuant to adjournment on
Friday, November 17, 1933, in the caucus room of the Senate office
Building, Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Gore (substitute for
Barkley), Adams (proxy for Costigan), Couzens, Townsend, and
Goldsborough (substitute for Nor beck).
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver, David Saperstein, and David Schenker, associate counsel to
the committee; and Frank J. Meehan, statistician to the committee;
Alfred E. Mudge, Julian L. Hagen, and C. Horace Tuttle of Bushmore, Bisbee & Stern; also William Dean Embree, of Milbank,
Tweed, Hope & Webb, counsel representing The Chase National
Bank and The Chase Corporation.
The CHAIRMAN. The subcommittee will come to order. Mr.
Dodge, I believe you were on the stand.
TESTIMONY OF MURRAY W. DODGE—Resumed
Mr. PECORA. Mr. Dodge, you have already testified, in substance,
to the effect that as vice president of Chase Securities Corporation
you attended the various conferences that were held prior to July 9,
1929, among the members of the banking group that sponsored the
organization of General Theatres Equipment Corporation?
Mr. DODGE. Yes.
Mr. PECORA. Did
you make a study or examination of the assets
of the various subsidiary companies whose stock was acquired by
General Theatres Equipment Corporation upon its inception?
Mr. DODGE. I know, of course about the National Theatre Supply
Co., and also about the International Projector Corporation. As far
as a study goes of Grandeur, Inc., and the four lamp companies, I
should not want to say that there was a particular study made of
those, except that we were assured by the management that they
were necessary to the proper working out
Mr. PECORA (interposing). Will you speak a little louder, please?
Mr. DODGE (continuing). Of the Grandeur, Inc.
Mr. PECORA. Well, now, take for instance the International Projector Corporation, the common stock was taken over by the General
Theatres Equipment Corporation at a valuation for the 1,000,000
3504
STOCK EXCHANGE PKACTICES
shares
and I am speaking now of the common stock, you
will understand—of $28,500,000, which 1,000,000 shares of International Projector Corporation at that time had a book value of two
million two hundred forty-five thousand six hundred and odd dollars.
Did you approve of that valuation ?
Mr. DODGE. Yes, sir.
Mr. PECORA. On what basis?
Mr. DODGE. The International
Projector Corporation relied on
patents, not on the actual physical assets, and at that time, as has
been testified here, the International Projector Corporation had developed this new process of making wide films, and the contract
with Grandeur, Inc., was in process of being completed, or had been
completed at that time, I forget which; the contract with the Fox
Theatres had been made, and, you will understand, those things are
not kept secret, the public knew it, and the stock of the International
Projector Corporation at that time was selling in the market I think
at about $28.50. I think my memorandum to Mr. Wiggin, which is
in evidence here, will show that.
Mr. PECORA. Were you familiar with the marketing of that stock ?
Mr. DODGE. DO you mean later?
Mr. PECORA. NO, at that time. At the time when you say it
reached a quotation of $28.50 a share or thereabouts.
Mr. DODGE. I know that the stock had a rapid advance.
Mr. PECORA. On what exchange was it listed at that time ?
Mr. DODGE. I think on the curb.
Mr. PECORA. In the unlisted department of securities of the curb
exchange ?
Mr. DODGE. I don't know.
Mr. PECORA. YOU knew, didn't you, that the majority of that
stock, of all the outstanding common stock of the International
Projector Corporation, was owned by a few so-called " insiders '\
including Mr. Harley L. Clarke ?
Mr. DODGE. Yes,
sir.
Mr. PECORA. And would you say that under those circumstances
the market quotations could be accepted as a safe guide or criterion
of actual value ?
Mr. DODGE. Not only the market quotations, but also what we considered to be not only the sound value at the time but the prospective
value.
Mr. PECORA. HOW much of this valuation of 2 8 ^ million dollars
put upon the common stock of the International Projector Corporation by General Theatres Equipment Corporation, represented prospective value, so called ?
Mr. DODGE. That would be very difficult to differentiate.
Mr. PECORA. Well, there must have been some line of demarcation,
on one side of which were present values, and on the other side of
which were prospective values, if prospective values were taken in* o
account for it.
Mr. DODGE. The estimates which were made on the prospective
earnings, and the contract which was entered into with the Fox
Theatres on the new wide film, varied of course as to the number of
projecting machines which would be placed in the theaters, a? r e
discussed the other day. But as I remember it, the minimum amount
STOCK EXCHANGE PRACTICES
3505
that was discussed at that time was between two and three million
dollars a year.
Mr. PECOHA. NOW, the actual earnings that had accrued to the International Projector Corporation during the fiscal year immediately preceding this consolidation of the two companies, were at the
rate of 73 cents a share according to testimony heretofore given
before this committee.
Mr. DODGE. I heard that testimony. I do know this, that between
December and June the earnings of the International Projector Corporation from its old line of business, that is, from the ordinary
projector machines and accessories, had almost doubled, and were
continuing to do so.
Mr. PECORA. What do you think was a fair ratio between earnings
and value?
Mr. DODGE. Then?
Mr. PECORA. Yes.
Mr. DODGE. Well, it
was pretty well accepted that based on present
as well as future prospects—and that was in 1929, you will remember, that we are speaking now of 1929, which was an entirely different world from the present time—that it ranged anywhere irom 20
to 40 times earnings. That is, the public
Mr. PECORA (interposing). Do you mean that securities were generally sold on that basis of valuation ?
Mr. DODGE. NO ; but the public put that value on it at that time.
Mr. PECORA. YOU mean that the public paid that much?
Mr. DODGE. I don't know whether you would say that, but the
public were buying securities on that basis, yes.
Mr. PECORA. SO far as you know, were banks loaning money on
such a valuation, computed on that basis, I mean ?
Mr. DODGE. On stock exchange securities?
Mr. PECORA. Yes.
Mr. DODGE. SO far
as I know they probably were. You are referring now to stock exchange day-to-day loans, are you, Mr.
Pecora ?
Mr. PECORA. Yes.
Mr. DODGE. They probably were.
Mr. PECORA. NOW, at the outset of the incorporation of General
Theatres Equipment Corporation, it issued 6 million dollars of debentures, did it not?
Mr. DODGE. Yes, sir.
Mr. PECORA. And those debentures were acquired by the members
of the banking group in certain proportions?
Mr. DODGE. Yes, sir.
Mr. PECORA. I think the
testimony heretofore given is to the effect
that those bonds were sold to the banking group at 90.
Mr. DODGE. Yes,
sir.
Mr. PECORA. And the banking group then passed them on to the
public at 99?
Mr. DODGE. Yes, sir.
Mr. PECORA. The Chase
Securities Corporation was one of the
members of the banking group that took part in that purchase and
in that sale to the public1
Mr. DODGE. Yes, sir.
3506
STOCK EXCHANGE PRACTICES
Mr. PECORA. Those debentures were convertible into common
stock?
Mr. DODGE. Yes, sir.
Mr. PECORA. On the basis of 30 shares for $1,000 of
Mr. DODGE. Thirty shares; yes, sir.
Mr. PECORA. YOU recommended to Mr. Wiggin, in a
debentures?
memorandum
that has been introduced in evidence here as " Committee Exhibit
No. 128," that in view of Mr. Wiggin's objection to the appearance
of Chase Securities Corporation passing out an issue of common
stock to the public, that that appearance be avoided by the issuance
of those debentures, which carried this conversion privilege, did
you not?
Mr. DODGE. Mr. Pecora, it was the suggested issue of preferred
stock, not common stock.
Mr. PECORA. Oh, yes; of preferred stock.
Mr. DODGE. Yes, sir. And I think the word " appearance " in
common parlance among bankers was to have your name appear
on the circular as a recommendation. It did not mean for appearance sake. I just want to differentiate it there.
Mr. PECORA. And I wanted to find out what you meant. In your
memorandum, Committee Exhibit No. 128, you said to Mr. Wiggin:
As to the preferred stock, Mr. Clarke is very insistent that for the good of
the whole business the Chase Securities Corporation join in the purchasing and
offering of this stock. Having in mind your objections to appearance, and
after consultation with Halstead Freeman, I have suggested that this preferred
stock be changed into a convertible debenture, and Ingold of Pynchon & Company, and Clark had made up their minds to invite Halsey Stuart into the
picture.
Now, as a matter of fact, your suggestion was eventually carried
out by the General Theaters Equipment Corporation, was it not?
Mr. DODGE. Yes,
sir.
Mr. PECORA. And having in mind the objection which Mr. Wigin, according to your memorandum, had to the Chase Securities
Corporation appearing on an offer to the public of preferred stock,
don't you think that you had regard to the form rather than the
substance when on your recommendation General Theatres Equipment Corporation put out, in lieu of preferred stock, this issue of
debentures with a conversion privilege into the common stock of
the company?
Mr. DODGE. Both issues, either the preferred stock or the debentures, were to be convertible. The public at that time was not interested—and that was in 1929 you will understand—did not seem
to be interested in straight investment securities. They wanted some
speculative feature attached to them, and the conversion in the common stock gave that and made the debentures salable. Now, I testified I think last week that the reason for the Chase Securities
Corporation being more willing to appear on an obligation of a
company than a preferred stock was that the obligation had a
maturity, and if the interest was not paid the security holders could
protect themselves. In addition to that there was a sinking fund,
which would retire it. As to a preferred stock that would not be
true; if the dividends were stopped there was nothing to be done
about it.
STOCK EXCHANGE PRACTICES
3507
Mr. PEOORA. NOW, at the time of the purchase of those debentures
had a syndicate account been created or formed which was dealing
in the common stock of General Theatres Equipment Corporation?
Mr. DODGE. I testified last week, and I have been reading over my
testimony, that at the time of the formation of General Theatres 1
knew of no trading account. You asked me about a trading account,
and
Mr. PECORA (interposing). Yes, sir.
Mr. DODGE (continuing). In the common stock. I did not know
of it of my own knowledge, because I had no interest in it. And
Chase Securities Corporation and the Shermar Corporation had no
interest in it. I do find, however, upon refreshing my memory, that
there was a trading account at that time, which I think Pynchon &
Co. were handling.
Mr. PECORA. Who were the participants in that trading account?
Mr. DODGE. The papers which we have would show it was being
handled by Pynchon & Co. and Joseph Higgins.
Mr. PECORA. Well, now, wasn't the Shemar Corporation a participant in that account ?
Mr. DODGE. NO, sir.
Mr. PECORA. What was that answer?
Mr. DODGE. NO, sir.
Mr. PECORA. Are you sure of that?
Mr. DODGE. I am quite sure of it. That
was in International Projector Corporation and not in General Theatres Equipment Corporation. I thought you were asking me if
Mr. PECORA (interposing). I am asking about General Theatres
Equipment Corporation; yes, sir.
Mr. DODGE. Oh, I am sorry. I thought you referred to the International Projector Corporation.
Mr. PECORA. NO ; General Theatres Equipment Corporation.
Mr. DODGE. The purchase of the General Theatres Equipment Corporation common stock
Mr. PECORA (interposing). A block of 300,000 shares.
Mr. DODGE (continuing). And the trading account in connection
with that, occurred after the formation of the General Theatres
Equipment Corporation.
Mr. PECORA. The formation of the General Theatres Equipment
Corporation occurred in July of 1929, didn't it ?
Mr. DODGE. Yes, sir.
Mr. PECORA. When was
this trading account in the common stock
of the General Theatres Equipment Corporation formed?
Mr. DODGE. The actual contract, which has been placed in evidence,
I believe, was signed on the 9th of July.
Mr. PECORA. On the 9th of July? That was two days before the
actual incorporation of General Theatres Equipment Corporation ?
Mr. DODGE. I believe so.
Mr. PECORA. SO that the agreement under which the trading account was formed was actually entered into 2 days before the legal
incorporation of the company in whose common stock the trading
account was to deal.
3508
STOCK EXCHANGE PRACTICES
Mr. DODGE. Well, it was a part of the agreement between the
bankers to purchase 300,000 shares, or as a matter of fact, 350,000
shares between the bankers.
Mr. PECORA. There were 2 contracts, 1 for the purchase of 300,000
shares in a contract from the General Theatres Equipment Corporation, and then a separate agreement whereby Harley L. Clarke individually sold 50,000 shares?
Mr. DODGE. And gave an option on 200,000 shares.
Mr. PEOORA. Yes; and gave an option for 200,000 shares additional,
which option was never exercised, was it?
Mr. DODGE. Yes, sir.
Mr. PECORA. What was
the purpose of the formation of that trading account under this agreement of July 9,1929 ?
Mr. DODGE. I t was universally customary at that time that if a
group purchased a large block of common stock of a company, that
they should have a trading account which would enable them to buy
and sell the stock in the market.
Mr. PECORA. Was the stock listed on any exchange ?
Mr. DODGE. Not at that time.
Mr. PECORA. I t was being dealt in on the over-the-counter market?
Mr. DODGE. At the time when this actual contract was entered into,
the company was not formed.
Mr. PECORA. I know that.
Mr. DODGE. Are you referring to a time after the formation of the
company?
Mr. PECORA. The contract that was made on July 9,1929, was made
by a syndicate that was composed of Pynchon & Co., who also were
managers, West & Co., W. S. Hammons & Co., Halsey, Stuart & Co.,
and the Shermar Corporation, wasn't it?'
Mr. DODGE. Yes, sir.
Mr. PECORA. NOW, that
contract, which is in evidence here as committee exhibit no. 133, provided for the sale to that syndicate of
300,000 shares of the common stock of the General Theatres Equipment Corporation at $20 a share.
Mr. DODGE. Yes, sir.
Mr. PECORA. NOW, in the
original agreement the Shermar Corporation was not a party, but the Chase Securities Corporation was a
party. Do you recall that?
Mr. DODGE. YOU must have before you the contract for the purchase of the debentures.
Mr. PECORA. Oh, yes; that refers to the debentures. Where is the
stock contract ? Let me get that. I show you, Mr. Dodge, a photostatic reproduction of what purports to be a memorandum addressed
by you to Mr. Wiggin, under date of July 18,1929. Will you please
look at it and tell me if you recognize it as a true and correct copy
of such memorandum?
Mr. DODGE. Yes, sir.
Mr. PECORA. Mr. Chairman,
I offer it in evidence, and ask that it
may be made a part of the record.
The CHAIRMAN. Let it be admitted, and the committee reporter
will make it a part of the record.
(A memorandum by Mr. Dodge to Mr. Wiggin, under date of July
18, 1929, was marked " Committee Exhibit No. 144, Nov. 21, 1933 ",
and will be found immediately below where read by Mr. Pecora.)
STOCK EXCHANGE PRACTICES
3509
Mr. PECORA. The memorandum reads as follows:
JULY 18, 1929.
To Mr. WIGGIN. General Theatres Equipment debentures were oversubscribed,
and are selling at a premium. The campaign in the stock is going well. Harley
Clarke gave us privately information today which makes this very much better
even than he thought it before. I believe the distribution is going to be
accomplished, and should sell at higher prices.
You will be interested to know that we are entirely out of our commitment
on Utilities Power & Light common stock. The stock sold as high as 33 yesterday, and closed around 31% today.
Ingold is short about 50,000 snares in addition as against our options on
250,000 additional shares at $21.
He has done a splendid piece of work on this. As Jonas has probably
reported to you, the Canadian International Papers were practically all sold,
which is satisfactory except for the fact that we had to take $2,000,000 of
them here, and they will be slow getting out of.
But when we consider the benefits to the company and to the banks, the
results seem to be most successful.
Everything else is going along smoothly in matters in which I am particularly
interested.
Now, I want to call your attention specifically to the following
statement in this memorandum:
The campaign in the stock is going well. Harley Clarke gave us privately
information today which makes this very much better even than he thought
it before. I believe the distribution Ls going to be accomplished and should
sell at higher prices.
What did you mean by that?
Mr. DODGE. Exactly what it says, Mr. Pecora. Mr. Wiggin was
on his vacation. I t was a confidential memornndum from me to
him, keeping him advised as to how the different securities and operations in which I was interested were going on. As to the reference
to the General Theatres debentures, the offering had been made of
6 million dollars of them. They had been oversubscribed by the
public, and were selling at that time at a premium. Eventually I
think they went as high as 160
Mr. PECORA (interposing). I t went above that, didn't they?
Mr. DODGE. I don't know exactly.
Mr. PECORA. TO about 170, didn't they?
Mr. DODGE. Well, above 160, we will say, and the 350,000 shares
of common stock which we had subscribed for at that time—well,
I am getting a little ahead of my story if you want the full story.
Mr. PECORA. GO ahead.
Mr. DODGE. And they had been turned over to a secondary syndicate, of July 18, which was to offer 500,000 shares, and the stock—
well, as to those securities Pynchon & Co. were the syndicate
managers. Mr. Ingold was reporting to me from time to time that
a country-wide syndicate to join in the offering of the common stock
was being successfully accomplished. I believe that the actual
offering of the stock was not made to the public until August 1,
but as this was a new stock the operations were not on any exchange,
but was a distribution through a country-wide offering of bankers
and brokers. That was the business of Pynchon & Co. and not of
Chase Securities Corporation, as we did not offer the common stock.
Mr. PECORA. Well, now, Pynchon & Co. were handling that business as managers for the syndicate that included Chase Securities
Corporation.
3510
STOCK EXCHANGE PRACTICES
Mr. DODGE. Exactly, and they were reporting to us as to whether
or not they were successful in forming the group to offer the stock.
Mr. PECORA. Well, now, you said in this memorandum of July
18, 1929, that—
The campaign in the stock is going- well.
That referred to the common stock of the General Theatres Equipment Corporation, didn't it ?
Mr. DODGE. By "the campaign" I meant getting the group together, getting a country-wide group together to distribute the stock.
Mr. PECORA. Well, now, will you tell this subcommittee how that
group was formed, and how the distribution was effected ? In other
words, tell them about this campaign that on July 18, one week after
the incorporation of General Theatres Equipment Corporation
agreed to do certain things, and according to your report to Mr.
Wiggin, was going well.
Mr. DODGE. Well, as I understand a campaign of that kind,
Pynchon & Co., West & Co., W. S. Hammons & Co., and others, whose
business it was to distribute the common stock, were communicating
with a list of dealers in securities, from one end of the country to
the other. I presume they were telling them what the security was,
what the prospects were, and were asking them if they would join in
the distribution to their customers of those securities.
The CHAIRMAN. Did that include the banks?
Mr. DODGE. NO, sir; I would not presume so. A bank jnight have
an investment department, but I do not know who composed this
particular list, Senator Fletcher. So I do not know. I have a general idea that it was a pretty large syndicate group.
Mr. PECORA. At what price was this large syndicate group permitted to acquire the stock, or market it ?
Mr. DODGE. At $25 a share.
Mr. PECORA. That was the stock that the bankers had just contracted to pay $20 a share for?
Mr. DODGE. Well, the bankers contracted to buy on the 9th, and
they took the risk of the business.
Mr. PECORA. I know they took the risk. But we want to see just
how they handled that risk. Within a week after they took that
risk, or what you call a risk, they organized a campaign throughout
the country to distribute the stock, first to the distributing group, to
this large group that you refer to, at $25 a share, and then that
distributing group was to pass the stock on to the public at what
figure ?
Mr. DODGE. I think it would be fairer to state that what was
formed on the 18th was what we call the purchase group, which was
a new group that took the commitment to distribute—and the distributing group was a selling group, and they sold the stock to the
public less a commission.
Mr. PECORA. What was the original purchase group? Who composed it?
Mr. DODGE. Pynchon & Co., and they were also syndicate managers, West & Co., W. S. Hammons & Co., Shermar Corporation, and
Halsey, Stuart & Co. One half of the interest of the Shermar Corporation, as testified to, I think last week, was taken by the Chase
Securities Corporation.
STOCK EXCHANGE PRACTICES
3511
Mr. PECORA. Yes. Now, that purchasing group bought those
350,000 shares at $20 a share?
Mr. DODGE. Yes, sir.
Mr. PECORA. And immediately
caused to be organized another
group. What do you call that other group?
Mr. DODGE. The purchase group.
Mr. PECORA. YOU call that the purchase group ?
Mr. DODGE. Yes, sir.
Mr. PECORA. But the
first group was the original-terms purchase
group ?
Mr. DODGE. That would be called the original bankers group.
Mr. PECORA. Yes. Now this second group—the purchase group—
had the stock allotted to it at $25 a share ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Was the entire block of 350,000 shares
Mr. DODGE. The group of July 18 was enlarged to
so allotted ?
a 500,000-share
group.
Mr. PECORA. All right. But was this stock allotted to the purchase
group, the larger purchase group, at $25 a share completely ?
Mr. DODGE. Yes,
sir.
Mr. PECORA. By the original-terms group ?
Mr. DODGE. Yes, sir.
Mr. PECORA. When did
they accomplish that ? Within a few days
after July 9, wasn't it ?
Mr. DODGE. NO, sir.
Mr. PECORA. When?
Mr. DODGE. Oh, no, sir.
The difference between July 9 and July
18—could I refresh my memory on that ?
Mr. PECORA. Certainly. You may refresh your memory at any
time you think it is necessary.
Mr. DODGE. It is a little complicated.
Mr. PECORA. All right. Look up any data you wish.
Mr. DODGE (after looking at some papers). It is as I thought. On
July 18 Pynchon & Co. as syndicate managers started to form a
group.
Mr. PECORA. Yes.
Mr. DODGE. Nine
days after the original commitment was made.
And that group was actually formed between that date and the
public offering of the stock on August 1. Now, at what time it was
actually completed, and all this group was signed up, I don't know.
Mr. PECORA. Well, at any rate it was before August 1 ?
Mr. DODGE. Yes, sir.
Mr. PECORA. We will
give you that full latitude of time between
July 9 and August 1.
Mr. DODGE. Yes, sir.
Mr. PECORA. During
that time the original purchasing group,
which contracted to buy the 350,000 shares at $20 a share, allotted all
Lhat stock to this larger purchasing group at $25 a share.
Mr. DODGE. Yes, sir.
Mr. PECORA. And then
the larger purchasing group passed it on
:o the public through a distributing group at how much a share ?
Mr. DODGE. The public offering price was $32 a share.
Mr. PECORA. And when was that offering made to the public ?
Mr. DODGE. On the 1st of August.
3512
STOCK EXCHANGE PEACTICES
Mr. PECORA. SO that within 3 weeks' time the original purchasing
group composed of this syndicate of five members, which included
the bankers that sponsored General Theatres Equipment, took on this
risk as you call it of 350,000 shares at $20 a share, and succeeded in
passing that risk on to the public at $32 a share by August 1.
The CHAIRMAN. But an enlarged block of shares.
Mr. PECORA. Yes.
Mr. DODGE. And the
enlarged block was an offering of 500,000
shares, and the offering to the public was made August 1, but I don't
think they were successful in passing it on to the public on that day.
Mr. PECORA. HOW long did it take them to make that distribution?
Mr. DODGE. I think it took them some time, because the next records
we have are of a September 3 syndicate, and at that time all the stock
had not been sold.
Mr. PECORA. NOW, as early as July 18 this campaign to dispose of
those other 350.000 shares, which had been instituted bv the original
purchase group, was making good headway, or was "going well",
according to your report to Mr. Wiggin?
Mr. DODGE. The formation of the purchase group was going well.
Mr. PECORA. When the stock was offered to the public was any
circular issued making the offering?
Mr. DODGE. I understand that Pynchon & Co. issued a circular.
Mr. PECORA. Have you a copy of it?
Mr. DODGE. There was a public advertisement on that date I
believe. Yes; there was a circular.
Mr. PECORA. NOW, I show you what purports to be a printed copy
of such a circular. Will you be good enough to look at it and tell us
if this is the circular or advertisement that was issued for the offering to the public of the common stock of General Theatres Equipment
Corporation ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Mr. Chairman,
I offer it in evidence and ask that it
may be made a part of the record.
The CHAIRMAN. Let it be admitted, and the committee reporter
will make it a part of the record.
(A circular headed " General Theatres Equipment, Inc., Common
Stock, Voting Trust Certificates " was marked " Committee Exhibit
No. 145, Nov. 21, 1933."
The CHAIRMAN. What is the price of that stock today ?
Mr. DODGE. The company is in the hands of a receiver.
The CHAIRMAN. Has it any market at all?
Mr. DODGE. Practically none.
Mr. PECORA. DO you recall just when it went into receivership?
Mr. DODGE. Sometime the early part of 1932, was it not?
Mr. PECORA. DO you notice that this circular [indicating] is dated
July 13, 1929?
Mr. DODGE. July what ?
Mr. PECORA. July 13,1929.
Mr. DODGE. Yes: that is the date.
Mr. PECORA. Can you give this committee any reason why no
balance sheet of the company is included in this circular? Do you
know any reason why it was not included ?
STOCK EXCHANGE PRACTICES
3513
Mr. DODGE. I cannot tell you, except it was a new company, the
offer was still open at that time to the security holders of the International Projector. I think that did not expire until August 23.
Therefore it was not possible to say exactly what the assets of the
company were at that time, although I think it was stated that such
an offer was open; but I do not think at that time it was customary
for houses such as Pynchon & Co., who were offering common stocks,
to have a balance sheet attached to the circulars.
Mr. PECORA. Mr. Dodge, is it not a fact that this company was
organized as a holding company, and that at the time of its organization it was designed to take over certain specific securities of operating companies, such as the International Projector, the National
Theatre Supply Co., and these four lamp companies which have been
alluded to in the record so frequently ?
Mr. DODGE. Yes, sir.
Mr. PECORA. And those
operating companies had been in business
for some time ?•
Mr. DODGE. Yes, sir.
Mr. PECORA. And consolidated
balance sheets were available and
could have been included in this prospectus or advertising?
Mr. DODGE. On a pro forma basis?
Mr. PECORA. Yes, sir.
Mr. DODGE. Yes, sir.
Mr. PECORA. The testimony
last week that was elicited here from
Mr. Clarke was to the effect that at the time of the incorporation of
the General Theatres Equipment and the issuance of its securities
in exchange for the stock of these subsidiary operating companies
there was a mark-up of something like $36,000,000 to $38,000,000 over
the asset or book values of those subsidiary companies. Do you recall
Mr. Clarke's testimony to that effect?
Mr. DODGE. I recall that there was a good deal of testimony to that
effect.
Mr. PECORA. DO you recall that the testimonv was, in substance, to
the effect that this $36,000,000 to $38,000,000"was watered?
Mr. DODGE. I do not know who said it was water.
Mr. PECORA. I, for one, stated that, and Mr. Clarke finally admitted that it might be so regarded, as I remember his testimony.
But the record on that will speak for itself.
Let me ask you: Was it possibly for the reason that a consolidated balance sheet of these companies, if included in the public
offering or the advertising circular accompanying the public offering of this stock of General Theatres Equipment might have shown
the inclusion of all that water and it might have militated against
the public subscribing for the stock if such a consolidated balance
sheet was included?
Mr. DODGE. I do not believe that was so.
Mr. PECORA. Did you ever know of an instance where the condition shown by a balance sheet statement would have supported figures
and values, it was not given to the public ?
Mr. DODGE. Might I have that question again ?
(The question referred to was read by the reporter as above
recorded.)
Mr. DODGE. I still do not exactly get the question.
3514
STOCK EXCHANGE PRACTICES
Mr. PECORA. If you do not understand that question, I will not
press you to answer it.
Mr. DODGE. All right.
Mr. PECORA. When this distributing group was formed just prior
to August 1, 1929, by Pynchon & Co. as managers for the original
terms purchase group, do you know whether Pynchon & Co. caused
to be issued and distributed a letter inviting its dealers throughout
the country to join the distributing group?
Mr. DODGE. I should presume they did.
Mr. PECORA. I show you what purports to be a photostatic reproduction of such a letter. Will you please look at it and tell me if
you recognize it to be a true and correct copy thereof ?
Mr. DODGE. I do not remember having seen it, Mr. Pecora, but I
presume it is a correct copy.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and entered on the record.
(The photostatic copy of letter referred to, dated New York,
July 29, 1929, and signed by Pynchon & Co., was received in evidence, marked " Committee Exhibit No. 146, Nov. 21, 1933 ", and is
as follows:)
COMMITTEE EXHIBIT NO. 146
Pynchon & Co., I l l Broadway, New York. Distributing Group Managers.
300,000 Shares, General Theatres Equipment, Inc., Voting Trust Certificates
for Common Stock (no par value)
Distributing group
NEW YORK, July 29, 1929.
DEAR SIRS : We and our associates are forming a Distributing Group, which
we are pleased to invite you to join, to offer to the public such portion of 300,000
shares General Theatres Equipment, Inc., Voting Trust Certificates for Common
Stock as may not be required in connection with the offers of exchange made
by Pynchon & Co., as Syndicate Managers, to the holders of Preferred Stocks of
International Projector Corporation and National Theatre Supply Company and
holders of 6%% Gold Notes of National Theatre Supply Company. We are
enclosing a copy of a circular regarding this issue. Pynchon & Co. are to be
Managers of this Group, with full powers.
This stock will be offered for public subscription, subject to allotment, at $32
per share, when, as, and if issued and accepted by us and subject to the approval
of our Counsel. Our public advertisements of this issue will appear on Wednesday, July 31, 1929. Following our advertisements, Group Members may
advertise at their own expense. A reasonable supply of circulars will be
furnished if you will advise Pynchon & Co., I l l Broadway, New York City,
of your requirements.
Subscription books will be opened at our office, 111 Broadway, New York
City, on Thursday, August 1, 1929, at 10 o'clock A.M. Eastern Daylight Saving
Time, and may be closed at any time thereafter in our discretion without notice.
We reserve the right to reject any subscriptions in whole or in part, and to
allot in our uncontrolled discretion.
From the offering price a net selling commission of $2.00 per share will
be allowed on confirmed sales. The selling commission will not be paid with
respect to any shares repurchased or contracted for repurchase by the Managers during the life of the Group. As to any confirmed shares which may be
repurchased or contracted for repurchase by the Managers at, or below, the
offering price during the life of the Group, the Managers reserve the right
in lieu of canceling commissions to redeliver to members such shares at their
repurchase cost.
Temporary Voting Trust Certificates for Common Stock will be ready for
delivery in the first instance on or about August 8, 1929, at the office of
Pynchon & Co., I l l Broadway, New York City, against payment in New York
funds at $32 per share, the selling commission being payable following the
termination of this Group.
STOCK EXCHANGE PRACTICES
3515
The Group will terminate on September 30, 1929, but in the Managers discretion may be extended for an additional period, or periods not exceeding
sixty days in the aggregate. The Managers reserve the right to terminate this
Group at any time in their sole discretion.
The Managers will cause to be published a State notice respecting this stock
in the form required by Article 23-A of the General Business Law of the State
of New York.
The Managers shall not be under any liability in respect to the validity or
value of the shares or the form or the representations contained in, or the
validity of, any letter, circulars, or the voting trust certificates, agreement or
other instruments executed by the Company or by others, nor for the delivery
of voting trust certificates, nor for the performance by the Company or others
of any agreement on its or their part, nor shall they be liable under any of
the provisions of this agreement or in or for any matter connected therewith,
except want of good faith, and no obligation not expressly assumed by them
by this agreement shall be implied therefrom.
If you wish to join this Distributing Group under the terms and conditions
of this letter, please complete and sign in the place provided, the form at the
foot of the enclosed duplicate, stating the number of shares for which you
wish to subscribe, and send such duplicate to Pynchon & Co., Distributing
Group Managers, 111 Broadway, New York City, at your earliest convenience.
This original letter should be preserved for your records.
Yours very truly,
PYNCHON & Co.,
WEST & Co.,
W. S. HAMMONS & Co.,
BY PYNCHON & Co.
Distributing Group Managers.
JULY —, 1929.
PYNCHON & Co.,
Distributing Group Managers,
111 Broadway, New York, Neic York.
GENTLEMEN: The undersigned hereby subscribe for
shares General
Theatres Equipment, Inc., Voting Trust Certificates for Common Stock in the
Distributing Group which you are forming as set forth in your foregoing letter
to us, dated July 29, 1929, subject to the terms and conditions set forth in your
said letter, to which we agree. We agree to accept such lesser amount as you
may allot us.
Yours very truly,
Name
Address
(Address to which all notices should he sent.)
Mr. PECORA. NOW, the public was never told in any public offering of this stock that the original purchase group had acquired
stock at $20 a share by contract with the issuing company, was it?
Mr. DODGE. NO, sir.
Mr. PECORA. Nor was
the public ever told that the original purchase group had almost immediately caused to be formed a larger
purchase group which took over the stock at $25 a share, was it?
Mr. DODGE. I cannot find any record ?
Mr. PECORA. YOU know, as a matter of fact, no such thing was
ever done ?
Mr. DODGE. NO, sir; I do not think it was.
Mr. PECORA. The public was never told, was it, that even the members of this distributing group that was formed under the terms and
provisions of this letter of July 29,1929, were receiving a commission
of $2 a share upon any sales they made to the public of these shares
at $32 a share?
3516
STOCK EXCHANGE PRACTICES
Mr. DODGE. YOU mean, in the circular ?
Mr. PECORA. In anything.
Mr. DODGE. NO, sir.
Mr. PECORA. DO you
think, Mr. Dodge, it was fair to the investing
public to conceal from it those details ?
Mr. DODGE. I did at the time; yes, sir.
Mr. PECORA. DO you still think it was fair, looking at it in retrospect of the past 4 years ?
Mr. DODGE. A good deal of water has gone over the dam in the last
4 years, Mr. Pecora. I think that the general feeling at the present
time is that more disclosures should be made. 1 am in hearty accord
with that.
Mr. PECORA. The reason I asked you is because of the opposition
that has developed in certain quarters in the investment field and
among investment bankers' associations to certain provisions of the
Securities Act that Congress passed last March at the special session
of the Seventy-third Congress.
Mr. DODGE. I do not understand from, the talks that I have had
with the investment bankers, although I have been away a considerable time, that they have any general objection to the general publicity part of that act. I think that the Investment Bankers Association, as I understand it, and certainly all the investment bankers
that I have talked to, are heartily in accord with fuller publicity
than was customary 4 or 5 years ago or even 10 or 15 years ago.
Mr. PECORA. In the light of the experience you have had since 1929
you approve thoroughly of the principle of the Securities Act?
Mr. DODGE. AS to publicity; yes, sir.
Mr. PECORA. AS to publicity and the publicity required by the
terms of that act ?
Mr. DODGE. Yes,
sir.
Mr. PECORA. I S it not a fact, Mr. Dodge, that Pynchon & Co. were
made the managers of this selling syndicate because of the experience that that firm had had in handling market campaigns for
the securities of other corporations?
Mr. DODGE. Yes, sir.
Mr PECORA. And one
of those other corporations was the Utilities
Power & Light Co., which was a Harley Clarke company ?
Mr. DODGE. Yes,
sir.
Mr. PECORA. Mr. Ingold, who was a partner in the firm of
Pynchon & Co., was the person who in behalf of that firm as managers of the syndicate particularly handled the market operations
in the stock of the General Theatres Equipment Co., was he not?
Mr. DODGE. Yes.
Mr. PECORA. Did
not the members of the original purchase group,
this banking syndicate, have in mind from the very beginning when
they contracted to buy these 350,000 shares of the common stock at
$20 a share, marketing that stock through Pynchon & Co. in a
fashion that would enable them to dispose of it to the public at a
substantial profit and within a short period of time ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Did you
under date of July 9, 1929, address to Mr.
Wiggin a memorandum of which this is a photostatic reproduction,
which I now show you ?
STOCK EXCHANGE PEACTICES
3517
Mr. DODGE. I S that the one that is already in?
Mr. PECORA. NO ; that is another one. This is not in evidence yet.
Mr. DODGE. Yes, sir; I did.
Mr. PECORA. I offer that in evidence.
The CHAIRMAN. Let it be admitted.
(The photostatic copy referred to, addressed to Mr. Wiggin under
date of July 9,1929, by the witness, was received in evidence, marked
" Committee Exhibit No. 147, Nov. 21,1933.")
Mr. PECORA. The memorandum reads as follows [reading] :
MEMORANDUM
July 9, 1929.
To Mr. WIGGIN :
Re General Theatres Equipment, Inc.
Since you left, have pretty well straightened out the terms of this issue to
conform to the suggestions you made before leaving. Harley Clarke was
pretty stiff on the question of having any sinking fund, but I let him understand that it was a question of our appearing or not. As finally settled, it
has been changed from a 20-year to a 15-year debenture with sinking fund,
starting after three years, at the rate of $300,000, or 5% per year, retiring
60% at maturity. This seems to be thoroughly satisfactory to Halsey Stuart,
who have accepted their participation, as well as a 10% interest in the stock
of the syndicate. Chase Securities Corporation have a 20% interest in this
business, and will handle the books. Appearance will be as follows:
Top Line: Chase Securities Corporation, Pynchon & Company, & Halsey,
Stuart & Company.
2nd Line: West & Company and W. S. Hammons & Company.
As to the stock end of it, the group will purchase 350,000 shares at $20 a
share, of which 300,000 is from the company, to be paid for on or before August
23rd, and 50,000 shares is from Harley Clarke, who gave us also an option on
100,000 shares at 20 for 60 days, and 100,000 shares for 90 days. Pynchon &
Company will handle this syndicate. If Ingold handles the market on this
stock as well as he did on the Utilities Power & Light Common Stock, we
would probably not have to take up much stock by August 23rd. However,
Harley Clarke needs money the 15th of this month, and may make one of the
conditions of his options that we take up 50,000 shares at 20 on the 15th. If so,
would like your O.K. on making a syndicate loan for this amount at the Bank*
Shermar's percentage of this account is 11*4%, and Chase Securities Corporation's 11%%, or $111,250 apiece. The rest of the account is—
Pynchon & Company
31%%
Halsey Stuart
10%
West & Co
18%
W. S. Hammons & Co
18%
Contract for stock will be made in the name of The Shermar Corporation,
they in turn assigning a half interest to Chase Securities Corporation, in consideration of their taking the major financing.
If legally we find we cannot take up Clarke's stock (the 50,000 shares mentioned above) until we have paid for the debentures, August 1st, probably
Clarke will have to have a loan for 15 days, as the proceeds are to make payments due, in order to make the deal possible.
Just talked to Clarke. August 1 is payment date on 50,000 shares, and
will not need the money before that. Am hurrying this to get off with other
papers.
It is initialed " M.W.D.", and there is an inscription in handwriting at the foot of this typewritten memorandum, reading " O. K.—
A.H.W." A.H.W. are the initials of Mr. Wiggin?
Mr. DODGE. Yes.
Mr. PECORA. And M.W.D. are your initials?
Mr. DODGE. Yes, sir.
175541—34—rT 7
20
3518
STOCK EXCHANGE PEACTICES
Mr. PECORA. At the time of the incorporation of General Theatres
Equipment it was authorized to issue by its charter 5,000,000 shares
of common stock?
Mr. DODGE. Yes,
Mr. PECORA. I t
sir.
Mr.
sir.
actually only issued a little over 2,000,000 shares
at the outset; do you remember ?
Mr. DODGE. Yes, sir; and I would like at this point to say that in
reading over my testimony—you asked me, I think, last Friday, and
I think Senator Fletcher asked me, how much was the original
amount of stock issued, and I said one million, six hundred thousand,
and odd shares of stock. I find it was 1,900,000 shares, because in
the memorandum which I used to refresh my memory I did not include the 300,000 shares later sold for cash, or within a few days
sold for cash. It was actually a little over 1,900,000.
Mr. PECORA. Of that 1,900,000 shares something over a million
shares had been issued to Harley Clarke himself?
Mr. DODGE. Yes; about one million and five, I think.
Mr. PECORA. When this purchasing group was formed under the
original terms to purchase not only the 6 million dollars of debentures, but also 300,000 shares of the common stock at $20 a share,
which also made $6,000,000, was any arrangement effected with
Harley Clarke by this original terms group whereby Clarke agreed
not to put any of his common stock on the market until after this
syndicate had completed its market operations ?
DODGE. Yes,
Mr. PECORA. I show you what purports to be a photostatic copy
of a letter signed by Harley L. Clarke, dated July 9, 1929, addressed
to Pynchon & Co., the Shermar Corporation, West & Co., W. S.
Hammons & Co., and Halsey, Stuart & Co., Inc. Will you please
look at it and tell us if it constitutes a true and correct copy of such
letter or agreement on the part of Harley Clarke?
Mr. DODGE. I presume that is a true copy.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted and entered on the record.
(The photostatic copy of letter dated July 9, 1929, addressed to
Pynchon & Co., and others, and signed by Harley L. Clarke, was
received in evidence, marked " Committee Exhibit No. 148, Nov.
21, 1933.")
Mr. PECORA. The exhibit marked " 148 " in evidence reads as follows [reading] :
COMMITTEE EXHIBIT NO. 148
JULY 9, 1929.
PYNCHON & Co.
THE SHERMAR CORPORATION.
WEST & Co.
W. S. HAMMONS & Co.
HALSEY, STUART & Co., INC.
GENTLEMEN : In order to induce you to sign several contracts, dated July 9,
1929, including a contract for the purchase from me of 50,000 shares of the
common stock of General Theatres Equipment, Inc., I hereby agree that I
will not sell or otherwise dispose of, except to yourselves, any of the common
stock of General Theatre Equipment, Inc., which I may receive in exchange
for stock owned by me in exchange for «tock owned by me in International
Projector Corporation and National Theatre supply Company, or otherwise, in
such n manner that it will reach the hands of the public during the life of a
STOCK EXCHANGE PRACTICES
3519
Purchase Group Agreement formed by you in connection with the purchase of
300,000 shares of the said common stock, provided, however, that the life of
the said Purchase Group shall in no event extend beyond six months from
the date hereof.
If my said Common Stock of General Theatres Equipment, Inc., sold by me to
others than yourselves, shall be purchased or repurchased in the market by the
Managers of said syndicate during the life of the syndicate, I will repurchase
the stock from the said Managers at the net cost to the Managers.
Yours very truly,
(Signed) HARLEY L. CLARKE,
By O. E. KOEGEL,
Atty. in Fact.
Will you tell the committee, please, the reason for obtaining this
agreement from Clarke not to put any of his shares on the market
while the syndicate of which your company was a member was attempting to dispose of its 350,000 shares which it had bought at $20?
Mr. DODGE. NO bankers would sign an agreement to buy $7,000,000
worth of common stock knowing that somebody who owned a million shares of stock could at any time throw their stock on the market.
Mr. PEdoRA. Why not?
Mr. DODGE. Because it would be impossible to market the stock.
Mr. PECORA. If the stock that the bankers were buying at $20 a
share had an intrinsic value of that much, what risk were the bankers
taking?
Mr. DODGE. That the owner of the 1,000,000 shares of stock might
need the money, change his mind that it was worth to him less than
$20 a share, and throw it on the market at $15.
Mr. PECORA. Could you not have satisfied yourselves that Harley
Clarke was not in a position at that time that would tempt him to
do any such thing and sacrifice any of the stock in the market?
Mr. DODGE. I do not believe he wanted to sell a share of stock; in
fact, I felt that he did not want to sell it.
Mr. PECORA. Then why did you obligate him by formal agreement
in writing not to put any of his shares on the market during the life
of this syndicate that was to be formed by the original terms purchase
group ?
Mr. DODGE. Business precaution.
Mr. PECORA. A business precaution against what ?
Mr. DODGE. Against his selling his stock.
Mr. PECORA. HOW would the selling of his stock involve any potential loss or risk to this original terms group if they were paying full
value of $20 a share for the stock they agreed to buy ?
Mr. DODGE. They were not buying the stock for investment for
themselves.
Mr. PECORA. They were buying it to pass on to the public at a
higher price? .
Mr. DODGE. At a profit.
Mr. PECORA. And they were going to pass it on through a stockselling campaign. Is it not a fact that this purchasing group wanted
to control the public market during the time it was making the distribution of these 350,000 shares to the public?
Mr. DODGE. It was not possible to control the public market.
Mr. PECORA. I t was possible to the extent that the only shares
that would have been on the market would have been the shares,
3520
STOCK EXCHANGE PEACTICES
assuming that Clarke had agreed to keep his shares off the market,
that this group agreed to buy at $20 a share ?
Mr. DODGE. This was an original issue of stock. It was not going
to be offered on the stock exchange or through the stock exchange;
it was going to be offered through I don't know how many dealers
all over the country.
Mr. PECORA. I know that.
Mr. DODGE. And those dealers and their clients were entitled to
protection. In other words, if they offered the stock to their clients
at a certain price somebody might have thrown 500,000 or 1,000,000
shares on the market.
Mr. PECORA. I S it not a fact that the reason you wanted Harley
Clarke to tie up his stock by this kind of an agreement was to leave
the syndicate with a free hand to manipulate the market so that it
could dispose of its 350,000 shares at the price they wanted to sell
it for, which was ultimately $32 a share, to the public.
Mr. DODGE. I would agree with you in everything but the manipulation, Mr. Pecora.
Mr. PECORA. All right. Well, what word would you care to substitute for " manipulation "? I will let you dictate the terminology.
Mr. DODGE. The stock at this time was selling, I think, at $25 a
share; that would be at the equivalent of $25 in the exchange for the
old stock, and therefore I think that as conditions were in August
1929, and as a fact as those conditions were in effect it was a big
speculative market. The buying demand was greater than the selling
demand. Now, if Mr. Clarke would have been free to sell the stock
on the market, and he wanted to sell, there would have been more
sellers than buyers and the stock would have gone down. We
thought that the public at that time was buying a security which
had intrinsic merit and that would probably show them a profit. We
believed it would.
Mr. PECORA. HOW much of an intrinsic value did you think the
stock had at that time?
Mr. DODGE. At least $32 a share.
Mr. PECORA. At the time the bankers paid $20 a share it was worth
intrinsically $30 a share; is that right?
Mr. DODGE. NO ; that developed afterwards. At the time of July 9
we felt that it was worth at least $20 a share.
Mr. PECORA. And by August 1 you felt it was intrinsically worth
at least $32 a share ?
Mr. DODGE. Yes.
Mr. PECORA. What had happened between July 9 and August 1
that brought about that very substantial increase in intrinsic value
in your opinion?
Mr. DODGE. Well, I do not know as much about selling stocks as I
should know. I have had plenty of experience in the last 4 or 5
years. But the idea in 1929, in those times, was that the value of
the stock was what the public wanted to pay for them.
Mr. PECORA. Well, was the public given any option as to what it
wanted to pay for the stock when it was offered to them at $32 a
share on August 1 ? You are speaking of values as though the public
created them in a free $nd open market, are you not?
Mr. DODGE. I am speaking, I think, Mr. Pecora, of the value that
the public set upon a security or a commodity that was placed before
STOCK EXCHANGE PRACTICES
3521
them and saying, " Do you want to buy them at this price? " They
did want to buy it at that price.
Mr. PECORA. NOW you and I were referring to the intrinsic value
of this stock as being $20 a share on July 9.
Mr. DODGE. Yes,
Mr. PECORA. At
sir.
least. And $32 a share on August 1. Now, what
brought about that increase of over 50 percent in the intrinsic value
of the stock within a period of about 3 weeks time ?
Mr. DODGE. Well, we are talking of a difference of 12 points. On
July 9 certainly there would not have been a purchase of $7,000,000
worth of common stock at $20 a share if the purchasers had not felt
that the value was higher than $20 a share, because they naturally
wanted room for a profit.
Mr. PECORA. Well, that does not yet answer the question of what
had occurred between July 9 and August 1, 1929, that caused the
intrinsic value of this stock to increase from an intrinsic value of at
least $20 a share to one of $32 a share.
Mr. DODGE. A general rise in, all the stocks.
Mr. PECORA. Well, now, this stock was not listed at that time,
was it?
Mr. DODGE. NO. That would not naturally imply that it had to be
listed.
Mr. PECORA. Well, you said a general rise in all stocks. You had
particular reference to securities that were listed on the public
exchanges ?
Mr. DODGE. All stocks.
Mr. PECORA. Even the unlisted ones?
Mr. DODGE. The listed and the unlisted ones.
Mr. PECORA. Well, did that affect the intrinsic value ?
Mr. DODGE. It affected the value; yes. I t affected the value as
shown by what the public was willing to pay for stock.
Mr. PECORA. DO you recognize a difference between market value
and intrinsic value?
Mr. DODGE. I think that would take a very long argument, Mr.
Pecora, because my idea of values
Mr. PECORA. Well, do yau recognize that there is a difference between the so-called " market value " of a security and its so-called
" intrinsic " value ? In your opinion is there a difference between
the two sets of values ?
Mr. DODGE. I think the public pretty well settles that for themselves.
Mr. PECORA. Well, I want your individual judgment about that.
Mr. DODGE. That is my judgment. The public pretty well settles
that for themselves.
Mr. PECORA. What did the public at that time know about the
intrinsic value of this security when it was offered to them at $32 %
What was it permitted to know about it through the medium of any
circular that the public had issued to them, or any advertisement?
Mr. DODGE. This circular, I think, is the only thing that they had
at that time.
Mr. PECORA. And does that circular sajr anything at all about the
intrinsic value of the stock? Does it give any balance sheet, for
instance. Does it tell what the prospects of the company are? Does
it tell what the company has done?
3522
STOCK EXCHANGE PRACTICES
Mr. DODGE. It gives no balance sheet, Mr. Pecora. The stock was
offered to the public, Mr. Pecora, as a common stock, and it was
offered on an earning basis.
Mr. PECORA. On what?
Mr. DODGE. On an earning basis. I see from this circular that
Mr. PECORA. That was the earning basis you said justified a value
of 20 to 40 times the earnings ?
Mr. DODGE. That would seem so.
Mr. PECORA. YOU do not believe that today, do you?
Mr. DODGE. The public does not believe it.
Mr. PECORA. Well, do you believe it?
Mr. DODGE. I believe a great many securities that I have are worth
more than they are selling for—I hope that they are—that I have
left. May I suggest—here is a statement of the market as of June
29 on certain selected common stocks. It is very hard to get a comparison, but they do show that on June 29 the market value times
the earnings of the companies at that time was all the way from 12
to 45 times. I might read a few of them if it would be of any
interest. That is as supporting my statement that at that time the
public felt that equities were worth anywhere from 20 to 40 times
what they were earning.
Mr. PECORA. Well, now, when the bankers agreed to pay $20 a
share for this stock did they feel that the stock was worth from
20 to 40 times its earnings ?
Mr. DODGE. We would not have bought it; we would not have
taken a risk of buying
Mr. PECORA. YOU would not have bought it on any such basis,
but you were willing to pass it on to the public on that basis, and
you are now attempting to justify that offer to the public on that
basis, are you not?
Mr. DODGE. I think I am coupling that with the statement that
all stocks on the stock exchange had gone up at that time.
The CHAIRMAN. That is, a spirit of speculation and gambling was
rampant all over the country at that time.
Mr. DODGE. Looking back at it now, Senator Fletcher, it seems
crazy. The whole country seemed to be speculation mad.
Mr. PECORA. Ingold, one of the partners of Pynchon & Co., was
the active market manager for this stock, was he not, in the summer of 1929?
Mr. DODGE. Yes,
sir.
Mr. PECORA. Ingold was also one of the three voting trustees for
the stock, was he not?
Mr. DODGE. Yes,
sir.
Mr. PECORA. Why was this common stock embodied in the form of
voting trust certificates?
Mr. DODGE. TO preserve the management.
Mr. PECORA. And the management was preserved in the three
trustees who were, respectively, Harley Clarke, Mr. Ingold, and
Mr. Hammons?
Mr. DODGE. That was the method by which the management was
preserved.
Mr. PECORA. Well, they were the three voting trustees ?
Mr. DODGE. They were the ones that voted the stock for the
management.
STOCK EXCHANGE PRACTICES
Mr. PECORA. Yes. They were the three voting
Mr. DODGE. Yes, sir.
Mr. PECORA. NOW, did Pynchon know anything
3523
trustees?
about the movingpicture business?
Mr. DODGE. I do not know.
Mr. PECORA. Did Mr. Hammons, the other banker, know anything about the moving-picture business, so far as you know ?
Mr. DODGE. I do not know.
Mr. PECORA. Well, why were two men named as voting trustees
if you as one of the sponsors of the company did not know whether
or not they were competent to manage a moving-picture corporation?
Mr. DODGE. At that time, Mr. Pecora, I think it is fair to state
that this corporation was not a moving-picture company.
Mr. PECORA. Well, it was a holding company.
Mr. DODGE. NO ; it manufactured machines which were sold to the
moving-picture industry.
Mr. PECORA. All right. We will put it that way. Had Mr.
Ingold had any experience in business of that kind, to your
knowledge ?
Mr. DODGE. NO, sir.
Mr. PECORA. Had Mr. Hammons?
Mr. DODGE. Not that I know of.
Mr. PECORA. Well, why were 2 of the
3 voting trustees then chosen
from men who had no experience in the particular kind of business
that this corporation was designed to conduct ?
Mr. DODGE. Voting trustees are chosen as men who have judgment
of general business affairs and are able to judge as to whether the
management is performing well or not performing well. And the
stockholders agreed to put into their hands the performance of that
judgment.
Mr. PECORA. Did the stockholders ever agree to do that in this
case?
Mr. DODGE. Yes, sir; when they bought the securities.
Mr. PECORA. They bought the security that was tied up with such
an agreement?
Mr. DODGE. They bought voting trust certificates.
Mr. PECORA. Yes. But there was never any occasion or any instance when the stockholders as stockholders agreed to the creation
of a voting trust agreement ?
Mr. DODGE. If they did not agree to it, they- should not have bought
the stock.
Mr. PECORA. I know that.
Mr. DODGE. The minute they bought the stock—the voting trust
certificates—they agreed to it. That is what the certificates said.
Mr. PECORA. NO ; but the agreement creating the voting trust certificates was never made by the stockholders themselves at the outset,
was it ?
Mr. DODGE. Oh, no, sir.
Mr. PECORA. It was done by the
Mr. DODGE. That is right, sir.
Mr. PECORA. And the sponsors
sponsors of the company?
of the company selected two or
three men as voting trustees to preserve the management of the company, which two men had had no experience, to your knowledge, in
3524
STOCK EXCHANGE PRACTICES
the conduct of the kind of business the General Theatres Equipment
was incorporated to conduct ? Is that not a plain statement of fact ?
Mr. DODGE. I, as a banker, Mr. Pecora, who took an interest for
the Chase Securities Corporation in the offering of these securities to
the public, and took a responsibility, felt that others who were taking
the same responsibility would be better able to protect the investors
than some outsider, because they had that responsibility. Now both
Mr. Ingold and Mr. Hammons are connected with banking firms who
had joined in this offer, and they were more interested in protecting
the investors to whom they had sold securities in having good management than an outsider would be. I think that is the real answer
to your question.
Mr. PECORA. Well, now, as a matter of fact, was not Ingold chosen
because he had proven himself a very successful market operator?
Mr. DODGE. NO, sir. That was not the reason he was chosen.
Mr. PECORA. Why was he chosen as a voting trustee?
Mr. DODGE. He was chosen for the reason I say, that a market
operator or an investment banker has a responsibility after he has
sold the security. And he had more responsibility and more reason
to see that the management was a good management than some
outsider would have had.
Mr. PECORA. Well, how was he in a position to determine whether
a management was efficient or otherwise if he had had no experience
in the operation of the kind of business that General Theatres Equipment Co. was organized to conduct?
Mr. DODGE. A S much as anybody who has good sound business
sense.
The CHAIRMAN. Did these trustees constituting the voting trust
receive any compensation as such ?
Mr. DODGE. Not that I know of, Senator.
Mr. PECORA. NOW Mr. Dodge, do you know how long this trading
syndicate continued to operate in the common stock of G. T. E.?
Mr. DODGE. The trading syndicate, I am informed, which was
formed in connection with the original group, that is, on July 9,
did not perform. I t was passed on to the July 18 purchase group.
Mr. PECORA. All right.
Mr. DODGE. And that trading account—I do not know how long
it operated or what its operations were. Do you know ? [Addressing an associate.] I am informed that it terminated September 3.
Mr. PECORA. September 3. Well, then, when did the second syndicate commence operations?
Mr. DODGE. Which syndicate?
Mr. PECORA. Was there not a second trading syndicate formed?
Mr. DODGE. The July 18 one.
Mr. PECORA. Yes.
Mr. DODGE. That is the one I referred to.
Mr. PECORA. That terminated September 3 ?
Mr. DODGE. That terminated September 3.
Mr. PECORA. Well, was there not another one formed after that
in which Pynchon & Co. were also the managers?
Mr. DODGE. Well, there was a new syndicate formed on September 3.
Mr. PECORA. What is that?
STOCK EXCHANGE PRACTICES
3525
Mr. DODGE. There was a new syndicate formed on September 3.
Mr. PECORA. Who composed that syndicate ?
Mr. DODGE. This is information which I have gotten from others,
as the Chase Securities Corporation and Shermar Corporation had
no interest in the September 3 syndicate. Would you like me to give
you the information?
Mr. PECORA. Yes.
Mr. DODGE. W. H.
Eshbaugh & Co., 40,000 shares; W. S. Hammons & Co., 10,000 shares; J. E. Higgins, 30,000 shares; Tucker, Hunter Dulin & Co., Inc., 50,000 shares; Pynchon & Co., 50,000 shares;
or a total of 180,000 shares of stock.
Mr. PECORA. I S that the group or syndicate that was referred to
by you in a memorandum which you addressed to Mr. Wiggin under
date of September 19, 1929, what purports to be a photostatic copy
of which I now show you [handing same to Mr. Dodge] ?
Mr. DODGE (after examining same). That is not the same syndicate.
Mr. PECORA. DO you recall having sent the original of that memorandum to Mr. Wiggin ?
Mr. DODGE. Yes, sir.
Mr. PECORA. I oner that
in evidence and ask to have it spread upon
the record.
The CHAIRMAN. It may be received in evidence and placed in the
record.
(Memorandum addressed to Mr. Wiggin, dated Sept. 19, 1929,
was received in evidence and marked "Committee Exhibit 149 of
Nov. 21,1933.")
Mr. PECORA. The memorandum marked in evidence as " Committee
Exhibit No. 149 " reads as follows [reading] :
SEPTEMBER 19,
1929.
To ME. WIGGIN :
Pynchon & Co. are heading a group to buy approximately 215,000 shares
General Theaters Equipment stock at $50 a share. In the group with them are
Goldman Sachs, Hunter Dulin, Sutro, W. W. Crocker, Higgins, Eschbaugh, and
others. They are calling 25 percent margin and they desire a syndicate loan.
Total loan on this basis would be $8,000,000, of which they are asking if they
can have $5,000,000 from the Chase.
Pynchon are already borrowing $4,000,000 on General Theatre stock for the
whole syndicate. Stock is selling today at 65. They want the loan for 90
days or less. This will pay off the $4,000,000 loan.
M. W. D.
In addition at the foot of the memorandum reading as follows:
NOTE.—This was O.K.'d by A. H. W. and the original sent to Mr. Schmidlapp
9/19/29.
Mr. PECORA. Was that loan made to Pynchon & Co. the loan
referred to in this memorandum?
Mr. DODGE. I believe it was.
Mr. PECORA. And was that loan based upon a valuation of the
stock of $65 a share?
Mr. DODGE. NO, sir.
Mr. PECORA. On what basis was
Mr. DODGE. I understand from
the stock?
that memorandum that the stock
was purchased at 50. and they called 25 percent margin; that would
be $37.50.
3526
STOCK EXCHANGE PRACTICES
Mr. PECORA. NOW, jrou do know, do you not, that by September 19
this stock was selling in the market at $65 ?
Mr. DODGE. Yes, sir; from that memorandum.
Mr. PECORA. DO you remember what market that was? Was it
New York Curb Exchange?
Mr.^DODGE. Curb exchange.
Mr. PECORA. Was it among the unlisted securities traded in on the
floor of that exchange at that time ?
Mr. DODGE. Mr. Pecora, I do not know that. I will find it out for
you. I do not know whether it was listed or unlisted. Do you want
me to find that out?
Mr. PECORA. Yes.
Mr. DODGE (after
consulting with associates). We do not have it.
but we will try to obtain it.
Mr. PECORA. All right.
The CHAIRMAN. YOU say the syndicate bought it at 50?
Mr. DODGE. This particular syndicate bought the stock at 50.
Mr. PECORA. Whom did it buy it from, do you know ?
Mr. DODGE. I do not know, sir. I do know that part of it must
have been bought from the September 3 syndicate, but that is all
hearsay as far as I am concerned. We had no interest in it.
The CHAIRMAN. HOW long did that loan of $5,000,000 run, do you
know?
Mr. DODGE. I do not remember how long it was. I t was paid off.
The CHAIRMAN. Was it a short loan—30, 60, 90 days?
Mr. DODGE. It was a demand loan, I think. A demand loan which
was paid, I think, within 6 months, or something like that.
Mr. PECORA. I want to refer to committee's exhibit no. 147 in
evidence, which is the memorandum addressed by you to Mr. Wiggin
under date of July 9, 1929, in which you say in part as follows:
As to the stock end of it, the group will purchase 350,000 shares at 20 dollars
a share, of which 300,000 is from the company, to be paid for on or before
August 23, and 50,000 shares is from Mr. Harley Clarke, who gave us also an
option on 100,000 shares at 20 for 60 days and 100,000 shares for 90 days.
Now you notice that under this arrangement that was effected by
the members of this banking group with General Theaters Equipment Co. at the very outset it was not to pay for any of these 300,000
shares; not obligated to pay for it before August 23, 1929.
Mr. DODGE. Yes.
Mr. PECORA. Under
the plan of campaign that had been arranged
by the bankers' group to enable them to market those 350,000 shares
the group was to dispose of all of those shares at a profit before
August 23?
Mr. DODGE. If they could.
Mr. PECORA. If they could. Is that right?
Mr. DODGE. If they could.
Mr. PECORA. And they did?
Mr. DODGE. NO, sir.
Mr. PECORA. Did they
not pass it on to the second syndicate thai
was formed on July 18, of which Pynchon & Co. were managers ?
Mr. DODGE. Yes,
Mr. PECORA. At
Mr. DODGE. NO.
sir.
a profit of about 1% million dollars ?
Are you talking now about the original group'*
STOCK EXCHANGE PRACTICES
3527
Mr. PECORA. I am talking about the original purchase group, yes;
composed of five members.
Mr. DODGE. They passed it on to the July 18 syndicate.
Mr. PECORA. They passed it on to the July 18 syndicate group at a
profit of $1,750,000?
Mr. DODGE. Five points on 350,000 shares of stock.
Mr. PECORA. Yes. Well, that is $1,750,000.
Mr. DODGE. That would work out mathematically.
Mr. PECORA. Yes. Now, do you know by what process this common stock of General Theatres Equipment reached a selling price in
the market by September 18, 1929 of $65 a share? That is exactly
2 months after this second group headed by Pynchon & Co. purchased
in the first group the 350,000 shares at 25.
Mr. DODGE. I am trying to get into my mind exactly what you
mean by "process." The public at that time between July and
September 29, which I think was the high point of that wild-bull
market, were buying all stocks to an extent where they went up 50
or 100 percent, some of them.
Mr. PECORA. NOW, Mr. Dodge, frankly do you not think that the
market operations of this syndicate headed by Pynchon & Co. had
some responsibility for putting up the price to that astounding figure ?
And for the purpose of enabling you to answer that question and
giving us your candid opinion on that, Mr. Dodge, let me remind
you ot the following sequence of events that you have already testified to. General Theatres Co. was not actually legally incorporated
until July 11, 1929. Two days before that date its promoter, Harley
Clarke, entered into an agreement with the banking syndicate, of
which Chase Securities Corporation was one, to sell to the banking
syndicate 350,000 of the shares of common stock of G.T.E. for $20
a share, payment not to be made before August 23. On July 18 that
banking syndicate passed on that block of stock at $25 a share to a
second group of which Pynchon & Co. were the managers. Then
Pynchon & Co., through its market operator, Ingold, started the
public distribution of the stock, until by September 18, 2 months
later, it reached a market quotation of $65 a share. Now what was
the process, so far as you can tell this committee, by which that stock
reached that high quotation ?
Mr. DODGE. Public demand.
Mr. PECORA. Public demand. Between July 18 and September
18 had any information been given to the public by the promoters,
organizers, or bankers that informed the public of such a change in
the business of the corporation as justified an increase in the value
of its stock from $20 a share on July 9 to $65 a share on September 18?
Mr. DODGE. AS I remember those times, Mr. Pecora, the public was
not interested in information. All they wanted was profits. They
were buying stocks.
Mr. PECORA. They were buying stocks without regard to intrinsic
value ?
Mr. DODGE. Hoping they would go up.
Mr. PECORA. They were buying stocks without regard to intrinsic
value ?
Mr. DODGE. I do not think they knew.
3528
STOCK EXCHANGE PRACTICES
Mr. PECORA. YOU do not think they knew anything about them
in those hectic days, do you?
Mr. DODGE. I don't think so.
Mr. PECORA. What was this syndicate headed by Pynchon & Co.
doing in the market at that time with this stock?
Mr. DODGE. Selling stock, I presume.
Mr. PECORA. They had a pool account, didn't they?
Mr. DODGE. A trading account?
Mr. PECORA. Yes. Well, you call it a trading account; I will call
it a pool.
Mr. DODGE. They had a trading account in the September 3
syndicate.
Mr. PECORA. And that syndicate bought and sold at the same time,
did it not?
Mr. DODGE. I presume so. I don't know, sir. I had no interest
in it.
Mr. PECORA. Weren't you keeping in touch with the situation and
with the activities of Pynchon & Co. in the stock of this company?
Mr. DODGE. After September 3?
Mr. PECORA. Yes.
Mr. DODGE. NO, sir.
Mr. PECORA. When
was application made by General Theatres
Equipment to list its shares on the New York Stock Exchange?
Mr. DODGE (after consulting an associate). In January or February of 1930, I am informed.
Mr. PECORA. Had not application been made before then but action
thereon delayed by the stock listing committee of the New York
Stock Exchange?
Mr. DODGE. There was a preliminary application.
Mr. PECORA. And what happened to that preliminary application?
Mr. DODGE. I t was delayed.
Mr. PECORA. For a long time, wasn't it; several months?
Mr. DODGE. For some time.
Mr. PECORA. During the period of that delay did you write a letter
to Mr. Harley Clarke, of which the document that I now show you
is a photostatic copy?
Mr. DODGE (after examining document). Yes, sir.
Mr. PECORA. I offer that in evidence.
The CHAIRMAN. Let it be admitted and entered in the record.
(Letter dated Oct. 14, 1929, to Harley L. Clarke from Murray W.
Dodge was thereupon designated " Committee Exhibit No. 150,
Nov. 21, 1933.")
Mr. DODGE. Mr. Pecora, pardon me; we have no record as to why
that was delayed.
Mr. PECORA. The letter just offered in evidence, marked " Committee's Exhibit 150 ", reads as f ollows [reading] :
OCTOBER 14,
1929.
Mr. HARLEY L. CLARKE,
President, Utilities Power & Light Corporation,
Chicago, III.
DEAR HARLEY: Enclosed is the latest list of members of the stock exchange
committee on stock listing. Of course, I could be of assistance to you if
Charlie Sargent were here. He is on the board of directors of Chase Securities Corporation, and has been very helpful to us in the past. Unfortunately,
STOCK EXCHANGE PRACTICES
3529
however, he is abroad. He sails the end of this week and will not be back until
the end of next week. We may be able to do something with Ruxton of
Spencer Trask & Co., but I do not like to ask favors of them until we get
into a tough position. Frank Altschul of Lazard Freres is the one I called
up this morning. He will probably be back for next week's meeting, and I
think will be friendly and helpful. Gibson, the chairman, is the most important
one, but we do not know him very well. He is a hard nut to crack. I am
always fearful in cases like this that we would do more harm than good
pressing the matter too hard. I do feel that when the right time comes,
whether it is a week from today, or 2 weeks from today, after Charlie Sargent is back, that if you appear before them and I go with you we may be able
to push the matter over.
Enclosed find also memorandum given me by Tira Edwards. I think this is
the one you are working on. If so, do you want me to call Mahoney off, or can
we make use of him in some way? This conversation took place while I was
out West.
Sincerely yours,
M. W. D.
Now,Mr. Dodge
Mr. DODGE (interposing). May I say, Mr. Pecora, to interrupt a
minute, the last paragraph has nothing to do with the former.
Mr. PECORA. That is quite apparent. The last paragraph relates
to something in no way connected with the first paragraph.
Mr. DODGE. Yes.
Mr. PECORA. NOW,
Mr. Dodge, apparently from this letter the
application which had been made to the New York Stock Exchange
for listing stock of the General Theatres Equipment Corporation was
having pretty rough sailing at the time; is that correct ?
Mr. DODGE. I do not know whether there was any objection to it
specifically. I cannot remember that. Everybody was trying to list
iheir stocks on the New York Stock Exchange at that time.
Mr. PECORA. NOW, Mr. Dodge, from the reading of your memorandum to Mr. Clarke, is not your recollection refreshed that at that
time this application to list the stock was meeting with some opposition at the hands of the listing committee of the New York Stock
^Exchange?
Mr. DODGE. I t certainly was not proceeding rapidly.
Mr. PECORA. And it was not proceeding verj^ smoothly, was it?
Mr. DODGE. Evidently not.
Mr. PECORA. DO you recall what the objections were?
Mr. DODGE. NO, sir; I do
not.
Mr. PECORA. Haven't you any recollection?
Mr. DODGE. NO, sir; I do not. I have been trying to refresh my
recollection, I have nothing to show it here at all.
Mr. PECORA. Well, now, let me see if I can refresh your recollection a little bit. We have seen that this stock which was sold to the
insiders at $20 a share—and you. don't object to that term "insiders ", do you, when I refer to the banking group?
Mr. DODGE. I have had some very unfortunate experiences in being
an insider, I do not object to, it.
Mr. PECORA. YOU do not object to my using that term in the
present instance, do you?
Mr. DODGE. NO.
Mr. PECORA. Then
this stock which had been sold in July to the
insiders at $20 a share and which was being handled in the public
market by Pynchon & Co. so that by September 18 it reache 1 H
quotation of $65 a share on the New York Curb, had attracted the
3530
STOCK EXCHANGE PRACTICES
attention of the members of the listing committee of the New York
Stock Exchange, and because of those sudden rises did not they offer
objections to accepting this stock for listing?
Mr. DODGE. I do not know that that is true, any more than it would
be of any other stock, Radio Corporation, or any other listed stock
which had gone up—General Electric, United States Steel, anything
else, any other stocks that had gone up.
Mr. PECORA. NOW, let me say, possibly to refresh your memory
about that, that officials of the New York Stock Exchange informed
us yesterday in substance that the listing committee members had
objected because of the disparity of price between the market and
the original issuing prices.
Mr. DODGE. Well, if they gave you that information it is
undoubtedly true.
Mr. PECORA. Don't you recall it?
Mr. DODGE. NO, sir.
Mr. PECORA. AS a matter of your
Mr. DODGE. NO, sir.
Mr. PECORA. What do you recall
own recollection ?
was the objection that was being
met with?
Mr. DODGE. I just cannot recall it. I have been trying to find out
for the last week or two.
Mr. PECORA. Who is Charlie Sargent, whom you mentioned in this
letter to Mr. Clarke?
Mr. DODGE. Mr. Sargent at that time was a member of the stock
exchange.
Mr. PECORA. Was he on the listing committee?
Mr. DODGE. He was on the listing committee; yes, sir. I think
he was a member of the firm of Kidder, Peabody & Co.
Mr. PECORA. A personal friend of yours ?
Mr. DODGE. Yes, sir.
Mr. PECORA. And you
had found his presence on that committee
helpful in the past, had you ?
Mr. DODGE. Helpful in getting action if there was any delay.
Mr. PECORA. Getting the kind of action you wanted ?
Mr. DODGE. Not necessarily. I don't think we had any influence
with the members of the listing committee. I never found it was
possible to do so.
Senator COUZENS. YOU must have tried it, then?
Mr. DODGE. Yes, sir. No, we tried to get action. If we asked for
application to list and a syndicate was being formed, Senator, to
issue a stock and the company wanted to sell it and it was necessary
to get it listed within a week or ten days, or something of that kind.
Senator COTTZENS. In the course of those efforts, is it possible—I
am just asking for information—to change the form of application?
Mr. DODGE. Never, sir.
Senator COTJZENS. Never changed after the original filing?
Mr. DODGE. NO, sir; not that I know of. The secretary of the
committee might have asked for further explanations or further
data in connection with it.
Mr. PECORA. NOW let's see if I cannot refresh your recollection.
You say in this letter to Clarke:
STOCK EXCHANGE PRACTICES
3531
Of course, I could be of assistance to you if Charlie Sargent were here. He
is on the board of directors of Chase Securities Corporation and has been very
helpful to us in the past.
Now, that meant that he was helpful on similar matters ?
Mr. DODGE. I could not influence Mr. Sargent.
Mr. PECORA. HOW?
Mr. DODGE. I could not influence Mr. Sargent.
Mr. PECORA. Mr. Sargent was one of the board
of directors of
the Chase Securities Corporation?
Mr. DODGE. I could ask Mr. Sargent in a case like that if he could
find out why the application for listing was not being put through
and if it could not be expedited. As a friend he probably would
take an interest and see that it was expedited if he felt it was proper
to do so.
Mr. PECORA. YOU say " he has been very helpful to us in the past."
In what way?
Mr. DODGE. Exactly that way, in helping to expedite it.
Mr. PECORA. NOW you said:
We may be able to do something with Ruxton of Spencer, Trask & Co., but
I do not like to ask favors of them until we get into a tough position
Meaning what?
Mr. DODGE. I understand the " tough position " to mean delay.
Mr. PECORA. " Tough position " means delay ?
Mr. PECORA (reading) :
Mr. DODGE. Yes, sir.
Frank Altschul of Lazard Freres is the one I called up this morning. He
will probably be back for next week's meeting, and I think will be frieudly
and helpful.
Now that is another statement you made in this letter to Clarke.
Can you elaborate on that ?
Mr. DODGE. The same way; "Altschul will be helpful" meant to
expedite.
Mr. PECORA (reading):
Gibson, the chairman, is the most important one, but we do not know him
very well. He is a hard nut to crack.
Can you elaborate on that statement in this letter?
Mr. DODGE. NO, sir.
Mr. PECORA. HOW?
Mr. DODGE. NO, sir; I.could not elaborate on that.
Mr. PECORA. Why did you say that Gibson was a
"hard nut to
crack " then? Had you found him so in the past?
Mr. DODGE. That is what I understood. I did not know Mr,
Gibson. I understood that when Mr. Gibson wanted things to happen in their chronological order it was very difficult to get him to
expedite anything at all.
Mr. PECORA. Did you also understand that Mr. Gibson was rather
meticulous in acting on listing applications ?
Mr. DODGE. All members. I understand, were meticulous.
Mr. PECORA. Including Charlie Sargent?
Mr. DODGE. All of them, always.
Mr. PECORA. Did you think Charlie Sargent was a " hard nut to
crack " about those things, as Gibson was ?
3532
STOCK EXCHANGE PRACTICES
Mr. DODGE. I do not think he had the same responsibility as Mr.
Gibson.
Mr. PECORA. AS a member of the committee he had the same responsibility, didn't he?
Mr. DODGE. Yes. The information was passed on to him. I
think Mr. Gibson, as I remember it, was one of the ones who collected the data.
Mr. PECORA. NOW you make this statement in the letter:
I do feel that when the right time comes, whether it is a week from today
or two weeks from today, after Charlie Sargent is back, that if you appear
before them and I go with you we may be able to push the matter over.
Now what did you mean by that?
Mr. DODGE. The matter of listing was entirely between the company and the listing committee. The data was obtained by the
listing committee. Mr. Clarke as president of the company was the
proper one to appear before the listing committee. Now if I went
with him, they would ask me questions as one of the bankers of the
company.
Mr. PECORA. Yes.
Mr. DODGE. And if I could be of any assistance to them I would
naturally be very glad to do so.
Mr. PECORA. But did you feel you could be of assistance to them?
In fact, you felt you would be able to " push the matter over" if
Charlie Sargent were present, did you not?
Mr. DODGE. " Pushing the matter over "—I am afraid that memorandum is
Mr. PECORA (interposing). Is a bit frank? [Laughter.]
Mr. DODGE. I S a bit frank; yes. When you are working to accomplish something " pushing the matter over " means bringing it to a
conclusion.
Mr. PECORA. YOU were writing this memorandum to the man that
you knew was one of the promoters of the company of which the
Chase Securities Corporation was one of the bankers ?
Mr. DODGE. He was the president of the company.
Mr. PECORA. And you felt that you could talk very, very plainly,
and in fact confidentially, to him, did you not?
Mr. DODGE. I always did.
Mr. PECORA. And weren't you candidly stating the facts when you
wrote this letter to Clarke ?
Mr. DODGE. I think it is a very candid letter.
{
Mr. PECORA. And all of the implications that I have suggested as
flowing from it are pretty soiund implications, are they not?
Mr. DODGE. Except that if you imply that we could influence the
Listing Committee, or I could in any way, that would not be a sound
conclusion, because I have never found it possible to do that.
Mr. PECORA. Not even with Charlie Sargent around?
Mr. DODGE. NO, sir.
Senator GORE. Mr. Dodge,
there is a sentence in this letter about
whether the thing should come to a climax a week from now or a
month from now would be all right if Sargent was there. That does
not seem to relate so much to expedition as it does to the character
of the final action taken. Don't you think so ? That does not seem
to involve expedition. The turning point was whether Sargent was
STOCK EXCHANGE PRACTICES
3533
there or not, whatever the time was, whether it was immediate or
remote in the future.
Mr. DODGE. I think I would answer that question as I have before,
that if you have people who are friendly to you or
Senator GORE (interposing). It is better than to have those that
are unfriendly; that is obvious.
Mr. DODGE. Sometimes you can do better than if they are unfriendly; yes, sir.
Senator GORE. Yes, sir.
The CHAIRMAN. I think we have spent enough time on that letter.
The committee can draw its own conclusions from it, and we have
had enough explanations. Let us go on with something else.
Mr. PECORA. NOW, Mr. Dodge, it has already been developed in the
course of your testimony this morning that the original terms purchase group on the acquisition at $20 a share of its 350,000 shares
of the common stock of GTE made a profit of $1,750,000 within 9
days' time ?
Mr. DODGE. If they had taken it.
Mr. PECORA. Well, they took it?
Mr. DODGE. NO, sir.
Mr. PECORA. Didn't the second syndicate on July 18 take over
those 350,000 shares at $25?
Mr. DODGE. Yes, sir; but eventually that profit was taken in stock,
not in cash.
Mr. PECORA. But at that time that profit accrued, did it not ?
Mr. DODGE. If we demanded it; yes. But we went into the second syndicate, you know, also. We had a liability on that.
Mr. PECORA. I am coming to that second syndicate. What participation did the five original bankers have in the second syndicate ?
Mr. DODGE. I can give it to you in shares. We can work it out.
Mr. PECORA. Well, give it to us in shares.
Mr. DODGE. West & Co. had 65,677 shares out of 500,000 shares.
That would be 13 percent, would it not ?
Mr. PECORA. Well, go ahead.
Mr. DODGE. Pynchon & Co., 132,798 shares out of 500,000 shares.
W. S. Hammons & Co. 63,000 shares.
Halsey, Stuart & Co. 28,548 shares.
The Shermar Corporation 64,233 shares.
Mr. PECORA. That second syndicate was organized to trade in
500,000 shares, wasn't it?
Mr. DODGE. NO, sir; to purchase 500,000 shares.
Mr. PECORA. Well, to purchase 500,000 shares. Whom were they
to purchase 500,000 shares from?
Mr. DODGE. They purchased 350,000 shares from the July 9
syndicate.
Mr. PECORA. From the original syndicate ?
Mr. DODGE. They purchased
[conferring with associate].
The CHAIRMAN. One hundred and fifty thousand from Clarke, was
it not?
Mr. DODGE. I beg vour pardon, sir?
The CHAIRMAN. One hundred and fifty thousand from Clarke;
100,000 and 50,000 came from Clarke?
Mr. DODGE. N O ; 50,000 came from Clarke. Three hundred thousand from the company and 50,000 shares from Clarke.
175541—34—PT 7
21
3534
STOCK EXCHANGE PRACTICES
Mr. PECORA. Where Avere the other 150,000 shares purchased?
Mr. DODGE. J. E. Higgins, 142,906% shares.
Senator TOWNSEND. That does not make up the 500,000, quite.
Mr. DODGE. Four hundred and ninety two thousand five hundred
and six shares.
Mr. PECORA. The Higgins group was associated with the Pynchon
& Co., second syndicate; isn't that right?
Mr. DODGE. NO, sir.
Mr. PECORA. Well, which one ?
Mr. DODGE. I think that Higgins
had been associated with
Pynchon in International Projector Corporation stock, which it exchanged for General Theaters stock.
Mr. PECORA. HOW long did that second purchase syndicate last—
I mean its account ?
Mr. DODGE. TO September 3.
Mr. PECORA. And what was the profit that it made in the course
of its operations between July 18 and September 3 ?
Mr. DODGE. DO you want the aggregate of the syndicate?
Mr. PECORA. Yes; cash and stock both.
Mr. DODGE. Cash, $231,742.53; stock, 55,920 shares.
Mr. PECORA. Which at that time had a market value of how much ?
Mr. DODGE. Around $35 a share.
Mr. PECORA. What would that make in dollars and cents in valuation?
Mr. DODGE. YOU realize, Mr. Pecora, that was not a realized profit.
Mr. PECORA. It was a potential profit at that time, according to
market values which you have been attempting to justify throughout your testimony this morning?
Mr. DODGE. Potential profit, but not a realized profit.
Mr. PECORA. Simply because those who received that stock by way
of distribution of profits did not sell at that time ?
Mr. DODGE. That is correct.
Mr. PECORA. They held it for a further rise, I presume?
Mr. DODGE. NO ; 1 think they were in a position where they could
not sell that stock. I think they had agreed not to sell.
Mr. PECORA. Oh. Well, what was the market value of the stock
at the time it was distributed to them as profits ?
Mr. DODGE. I want to answer that question. I will give it to you.
$35 a share, I think; aproximately $35 a share. [After calculating.]
That would be approximately $1,925,000.
Mr. PECORA. Where do you get your $35 market valuation from?
Was that the market value at that time ? Bear in mind, Mr. Dodge,
that according to a memorandum that you sent to Mr. Wiggin
around September 18 the stock was then selling at $65 a share.
Mr. DODGE. September what?
Mr. PECORA. Around September 18. That was the date of your
memorandum.
Mr. DODGE. The only record I have here, Mr. Pecora, is of September 1, $35.25. I have a record of September 15, 46%, and September 23 I believe it sold for 66%.
Mr. PECORA. Yes.
Mr. DODGE. But on
September 1—now what it was selling at on
September 3 I haven't a record of, but I will be glad to try and get
it for you.
STOCK EXCHANGE PRACTICES
3535
Senator GORE. What is it worth now ?
Mr. PECORA. It is in receivership. I t has practically no value.
The witness has already testified to that.
Now let me see if this reckoning or calculation that we have made
is correct according to your recollection:
The original group received a profit of $5 a share on 350,000 shares
on July 18, 1929.
Mr. DODGE. They did not receive it on that date, sir.
Mr. PECORA. Well, from the transaction ?
Mr. DODGE. They passed it on.
Mr. PECORA. They passed it on—they passed on the 350,000 shares
which they were obligated to buy at $20 a share to the second group—
second purchasing group—at $25 a share ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Eesulting in a profit to them of $1,750,000?
Mr. DODGE. Yes, sir.
Mr. PECORA. NOW, the profit did not accrue to them in cash
but in
the distribution of stock, didn't it?
Mr. DODGE. That is true; yes, sir.
Mr. PECORA. That required a distribution of stock by way of
profits to this original group amounting to 58,333 shares ?
Mr. DODGE. Yes,
sir.
Mr. PECORA. NOW, didn't the original purchase group also receive
25,000 of the 40,000 shares given by Harley L. Clarke in order for
him to be released from his option agreements ?
Mr. DODGE. What Mr. Clarke did not want was the option exercised on his 200,000 shares of stock at $20 a share. After negotiation he paid 40,000 shares of stock in order to be released from that
option, and
Mr. PECORA (interposing). He gave that to the syndicate as a consideration for being released from his option agreement?
Mr. DODGE. That is correct.
Mr. PECORA. And 25,000 of those 40,000 shares were distributed to
the five members of the original group?
Mr. DODGE. That is right.
Mr. PECORA. NOW, that made a total of 83,333 shares which the
five members of the original purchasing group received by way of
profits?
Mr. DODGE. Right.
Mr. PECORA. I S that right?
Mr. DODGE. Yes, sir; that is right.
Mr. PECORA. NOW, giving a valuation of $30 a share to those
eighty-three thousand and odd shares, which is what the grcup did
receive from the selling group which was organized to sell to the
public at $32 a share and took $2 selling commission to themselves^
you will remember—gives a valuation of 2y2 million dollars to those
eighty-three thousand and odd shares.
Mr. DODGE. We were not giving that valuation.
Mr. PECORA. The syndicate got that?
Mr. DODGE. Yes. But you say giving a valuation. We were not
given that valuation, because we held the stock and eventually sold
it for very much less.
3536
STOCK EXCHANGE PRACTICES
Mr. PECORA. The distributing group took over the shares at $30 a
share to sell to the public at $32 a share, didn't it?
Mr. DODGE. The distributing group?
Mr. PECORA. Yes.
Mr. DODGE. NO ; they
sold at $32 a share less a 2 percent commission.
Senator COUZENS. YOU did not mean 2 percent but $2 a share
commission, didn't you?
Mr. DODGE. Yes.
Mr. PECORA. Well,
now, the first group got those eighty-three
thousand-odd shares as a profit?
Mr. DODGE. That is right.
Mr. PECORA. Pynchon & Co., as managers of that group by agreement among the members of the group, received 25 percent of the
profits for managing the operation ?
Mr. DODGE. That is correct.
Mr. PECORA. That made 20,833 shares which went to Pynchon &
Co. for their management, commission, and fees ?
Mr. DODGE. That is right.
Mr. PECORA. That left to be distributed to all the members of the
group 62,500 shares?
Mr. DODGE. That is right.
Mr. PECORA. And those shares were distributed to the members
of the original group in the following proportions were they not:
Shermar Corporation, 22% percent or 14,063 shares; Halsey, Stuart
& Co., 10 percent or 6,250 shares; West & Co., 18 percent, or 11,250
shares; Hammons & Co., 18 percent, or 11,250 shares; Pynchon &
Co., 31% percent or 19,687 shares.
That is right, isn't it?
Mr. DODGE. I do not have the breakdown, but I presume it is, if
those are the figures. I only have the Shermar Corporation, but I
think that is correct.
Mr. PECORA. YOU may if you wish go over these figures and correct
them if you see fit, but I think you will find them correct.
Mr. DODGE. If there was a correct accounting made it would be on
the percentages that each member of the group had made a commitment.
Mr. PECORA. Yes. This second syndicate was formed July 18, and
included in the larger membership the five members of the original
purchase group, did it not?
Mr. DODGE. Yes, sir.
Mr. PECORA. NOW, do
you know the profits that the second syndicate made?
Mr. DODGE. A cash profit of $231,742.53.
Mr. PECORA. And how much of a stock profit?
Mr. DODGE. It was 40,920 shares of unsold stock and 15,000 shares
out of the 40,000 shares which Mr. Clarke had paid to be released
from his option agreement.
Mr. PECORA. That made a total of 55,920 shares ?
Mr. DODGE. That is correct.
Mr. PECORA. And at $30 a share that would represent a profit in
addition to the $231,742.53 cash profit of $1,667,600, or a total in cash
and stock, valuing the stock at $30 a share, of $1,909,342.53. Hav<;
you got that calculation there ?
STOCK EXCHANGE PRACTICES
3537
Mr. DODGE. Your mathematics are correct.
Mr. PECORA. And when was that second syndicate terminated, on
September 3 ?
Mr. DODGE. Yes, sir. Well, Mr. Pecora, did you make me say then
whether it was terminated at that time or distributed ?
Mr. PECORA. Distributed.
Mr. DODGE. NO ; not distributed on September 3.
Mr. PECORA. When did the distribution take place ?
Mr. DODGE. It was terminated, but I think that was later.
Mr. PECORA. Around September 18, wasn't it?
Mr. DODGE. In October, probably.
Mr. PECORA. That makes a total of stock profits, with the stock
valued at $30 a share, of $4,409,342, according to my calculation,
which went to the members of the original bankers group and the
purchase syndicate.
Mr. DODGE. If you put a valuation of $30 a share on it that would
be correct. It would work out that way.
Mr. PECORA. Isn't that the valuation that the syndicate itself placed
on the stock ?
Mr. DODGE. That the syndicate put on it ?
Mr. PECORA. Yes.
Mr. DODGE. That
was the price at which the 180,000 shares were
sold to the new syndicate; yes.
Mr. PECORA. By the syndicate itself ?
Mr. DODGE. But the stock which was distributed to the members of
the syndicate was profit, and was ultimately realized on at a very
much smaller sum. I mean by that if you wish to put a valuation of
$30 a share on it, those are the figures. But. as a matter of fact
Mr. PECORA (interposing). Didn't the syndicate itself put a valuation of $30 a share on that profit stock in order to determine what
proportion of the profits were to be paid in cash ?
Mr. DODGE. The syndicate managers did; yes.
Mr. PECORA. All right.
Mr. DODGE. But I might add that the Chase Securities Corporation
The CHAIRMAN (interposing). You say that this stock was subsequently sold at a lower figure. What was that figure, do you know ?
Mr. DODGE. I think all this stock was sold eventually by the Chase
Securities Corporation based on the present market prices, of something like $40,000, or it was $42,000.
The CHAIRMAN. That was how much per share?
Mr. DODGE. I think that was figured at $4 a share.
Mr. PECORA. Mr. Dodge, I show you now what purports to be a
photostatic reproduction of a letter addressed to Mr. Clarke under
date of September 10,1929, signed by the five members of the original
purchasing group, namely, the Shermar Corporation, Pynchon &
Co., West & Co., Hammons & Co., and Halsey Stuart & Co. Will
you please look at it and tell us if you recognize it to be a true
and correct copy of such letter ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Mr. Chairman,
I offer it in evidence and ask that it
may be spread on our proceedings.
The CHAIRMAN. Let it be admitted, and the committee reporter
will make it a part of the record.
3538
STOCK EXCHANGE PRACTICES
(The letter, dated Sept. 10, 1929, from the members of the syndicate to H. L. Clarke was marked " Committee Exhibit No. 151, Nov.
521, 1933 ", and will be found immediately below where read by Mr.
Pecora.)
Mr. PECORA. The letter reads as follows:
SEPTEMBER 10,
1929.
JVIr. H. L. CLARKE,
New York City.
This will confiim the arrangement between you and the
undersigned, as follows:
By agreement between you and the undersigned, dated July 9, 1929, there
was granted by you to the undersigned options to purchase voting trust certificates representing 200,000 shares of common stock, without par value, of
General Theatres Equipment, Inc., at the times and on the conditions therein
stated. We hereby relinquish all our right and interest in and to said options
In consideration of the delivery by you to us or our nominees of voting trust
certificates representing 40,000 shares of common stock of General Theatres
Equipment, Inc.
The undersigned now owns or will presently acquire in the aggregate approximately 322,953 shares of said common stock voting trust certificates. The
undersigned agree that they shall not sell, or otherwise dispose of, all or any
part of said voting trust certificates at any time within 3 months from the
ilate hereof, it being the understanding between us that it is undesirable to
place such voting trust certificates on the market during said period. It is
further agreed that the undersigned shall not sell, or otherwise dispose of,
all or any part of said voting trust certificates within 9 months from the expiration of said 3-month period first hereinabove mentioned, except on the
following terms and conditions, viz:
In case any of us shall desire to dispose of all or any part of our respective
holdings in said voting trust certificates, notice of such desire shall be given
in writing to you, which notice shall state the amount of money, or the value
In money, of the consideration for which it is proposed to dispose of same,
pursuant to a bona fide offer received by any of us. At any time within 15
clays after the receipt of such notice you shall have the right to acquire the
holdings of any of us desiring to sell our holdings of said voting trust certificates upon the payment of the amount of money, or the value in money, of
the consideration set forth in such notice. If at the expiration of said 15 days,
you shall not exercise the aforesaid right, we, or any of us, shall be entitled
to dispose of our holdings of said voting trust certificates for the amount of
money or for the consideration set forth in such notice.
It is further agreed that in the event you shall dispose of your holdings, or
any corporation of which you are in control shall dispose of its holdings of
said voting trust certificates, you shall make, or cause to be made, provision
for the purchase from each of us of our respective holdings of such voting
trust certificates, upon the same terms and conditions as you, or any corporation of which you are in control, shall receive, or is entitled to receive, for
yourself or itself, for said voting trust certificates, should we, or any of us
desire to avail ourselves of such provision.
If the foregoing is acceptable to you, please indicate your acceptance in the
space below, which will constitute your acceptance.
Yours very truly,
The Shermar Corporation, by J. F. Wernersbach, treasurer, 21.246
shares; Pynchon & Co., by W. F. Ingold, a partner, 55,373 shares;
West & Co., by W. W. Watson, Jr., a partner, 18,595 shares;
W. F. Hammons & Co., by W. F. Hammons, president, 18,296
shares; Halsey, Stuart & Co., Inc., by B. W. Niver, vice president, 9,443 shares; total, 122,953 shares. Accepted, H. L. Clarke.
DEAR MR. CLARKE:
Now, Mr. Dodge, what did you mean by the statement in this
letter, or what was meant by the statement in this letter, reading
as follows:
The undersigned agree that they shall not sell, or otherwise dispose of, all or
any part of said voting trust certificates at any time within 3 months from
the date hereof, it being the understanding between us that it is undesirable
to place such voting trust certificates on the market during said period?
STOCK EXCHANGE PRACTICES
3539
Mr. DODGE. I can only speak for the interests of the Shermar
Corporation and the Chase Securities Corporation, the Chase Securities Corporation having their participation through the Shermar
Corporation, that an offer was made on September 3 by Pynchon
& Co. to take over from the July; 18 syndicate the 180,000 shares of
stock. Neither the Chase Securities Corporation nor the Shermar
Corporation was a distributor of common shares, and therefore if
Pynchon & Co. could get others to take the place of the Shermar
Corporation or the Chase Securities Corporation, or both, and close
the liability on both the July 9 and the July 18 syndicates, which
were formed at that time to purchase from the company certain
shares of stock and assist in the organization of the company, it was
satisfactory as far as the Chase Securities Corporation was concerned. The stock which they had received represented the profits
that
Mr. PECORA (interposing). That is. the one hundred and twentytwo thousand and odd shares ?
Mr. DODGE. Our proportion of the one hundred and twenty-two
thousand and odd shares. And it seemed eminently reasonable to
us that if any new group was to buy 180,000 shares of stock that
they would want to know that this stock, which had been received
at a profit in the former syndicates, would not come on the market.
Mr. PECORA. Why?
Mr. DODGE. During their disposition of same.
Mr. PECORA. Why?
Mr. DODGE. Because it would have certainly made it more difficult
for the group, to have bought the 180,000 shares, to dispose of their
holdings. I understand that they did not buy as an investment but
to resell.
Mr. PECORA. TO resell at a quick profit ?
Mr. DODGE. If possible.
Mr. PECORA. And in order to enable them to do it in the market it
was desirable to keep other shares off the market?
Mr. DODGE. This particular block that had been obtained.
Mr. PECORA. DO you think that makes for a free and open market,
where the public makes prices on a fair basis or in obedience to the
law of supply and demand?
Mr. DODGE. I am very much confused on that subject of supply
and demand. I really do not know. I should say that my answer
to the thing is the only correct one; that there was a large amount
of shares on the market at the time and free to be sold. This particular block of stock was kept off the market because these people
were buying 180,000 shares of stock, which made it possible to close
those syndicates, and therefore relieve others who did not go along
in the next syndicate, from their liability.
Mr. PECORA. YOU say the people who were buying the 180,000
shares were buying it not for a long-term investment but for the
purpose of reselling in the market at a quick profit ?
Mr. DODGE. Unquestionably.
Mr. PECORA. In order that their market operations might not be
unduly interfered with, it was considered desirable to agree that
•certain large blocks of that same stock should be kept off the market
3540
STOCK EXCHANGE PRACTICES
during the time that that syndicate was attempting to dispose of its
shares at a quick profit.
Mr. DODGE. Not only desirable, but I understood at the time it
was one of the conditions.
Mr. PECORA. Does that make for a free and open public market,
Mr. Dodge, in your opinion ?
Mr. DODGE. If this was all the stock that there was in the market
it would not, but there was a large amount of stock that was in the
hands of the public.
Mr. PECORA. Doesn't the tying up of any large block of stock
interfere with the law of supply and demand in a free and open
market ?
Mr. DODGE. Well, as to that
Senator GORE (interposing). What was the total amount outstanding, Mr. Pecora ?
Mr. PECORA. About 2,000,000 shares, but over 1,000,000 shares were
owned by Harley L. Clarke himself, who was the promoter of this
company.
Mr. DODGE. We are getting unduly into the realm of economics
there, Mr. Pecora, and I do not know how to answer your question.
Mr. PECORA. Well, many bankers have discussed the law o»f economics from that witness stand, and they sought to justify stockmarket quotations because, as they claimed, they represent the price
the public was willing to pay. And you yourself have so recognized
market quotations as being the price the public was willing to pay.
Now, what I am trying to find out from you is, whether an agree- ment of that kind, as mentioned in this letter of September 10, 1929,
is not of a character which places the public at a decided disadvantage.
Mr. DODGE. YOU must not forget that the public had purchased a
large amount of the shares from the syndicate of July 18, in which
the Chase Securities Corporation had an interest. It did no distributing but had a responsibility for those shares. Now, if the public
had purchased this stock at $32 a share, and the Chase Securities
Corporation had been free to sell their stock on the market, and it
had gone down by reason thereof, it would not have been, in my
judgment, a sporting proposition; I will put it that way.
Mr. PECORA. Well, that is a concession. Mr. Dodge, I show you
what purports to be a photostatic copy of a record furnished to us
by the Chase Corporation, and it contains at the end thereof a
stamped endorsement or memorandum reading "File M. W. D."
Look at it and tell us if you recognize it as a true and correct copy
of a memorandum in the files of the Chase Corporation relating to
General Theatres Equipment stock.
Mr. DODGE. Yes.
Mr. PECORA. What was that?
Mr. DODGE. It has come from the files of the Chase
Mr. PECORA. Yes.
Mr. DODGE. I imagine it is.
Mr. PECORA. DO you recognize it? What does the
Corporation?
stamp "File
M. W. D." refer to?
Mr. DODGE. This is a quotation of the stock of the General Theatres Equipment Corporation.
STOCK EXCHANGE PRACTICES
3541
Mr. PECORA. The public quotations at various dates as indicated
on the statement?
Mr. DODGE. That is right. And it was probably handed to me
by somebody and put into my files. It went into the files of the
Chase Securities Corporation.
Mr. PECORA. Mr. Chairman, I offer it in evidence and ask that it
may be spread on the record of the subcommittee's proceedings.
The CHAIRMAN. Let it be received, and the committee reporter
will make it a part of the record.
(A paper headed " General Theatres Equipment" was received
in evidence and marked " Committee Exhibit No. 152, Nov. 21,
1933 ", and will be found on page 3575.)
Mr. PECORA. This is entitled " General Theatres Equipment".
and purports to give dates and market quotations on the common
stock, as well as of the preferred stock, of that company, with dates
beginning July 15, 1929, and terminating on July 9, 1931.
The CHAIRMAN. Does it refer to the debentures?
Mr. PECORA. NO, sir; just to the stock. It shows the quotation on
July 15, 1929, of 32 for the General Theatres Equipment common
stock; of 34 on August 15, of 35% on September 1, of 46% on September 15, of 61 on October 1, of 58% on October 15, and then on
November 1 it dropped to 32%. It shows other quotations on other
dates as I have indicated, but I wanted merely to call that range of
quotations to the subcommittee's attention at this time.
Mr. DODGE. The panic intervened.
Mr. PECORA. Yes; we know that between October 15 and November
1 something happened.
Mr. DODGE. It certainly did.
Mr. PECORA. NOW, Mr. Chairman, I think it is about time for the
usual recess.
The CHAIRMAN. The subcommittee will now take a recess until
2 o'clock this afternoon.
(Thereupon, at 1 p.m., Tuesday, Nov. 21, 1933, the subcommittee
recessed until 2 p.m. the same day at the same place.)
AFTERNOON SESSION
(The subcommittee reconvened at the expiration of the recess at
2 p.m., Tuesday, Nov. 21, 1933.)
The CHAIRMAN. The committee will please come to order. Proceed, Mr. Pecora.
TESTIMONY OF MUEKAY W. DODGE—Resumed
Mr. PECORA. Mr. Dodge, I want to eliminate as many unnecessary
details as possible in your examination, so instead of going into details I will just refer to certain events and see if they accord with
Jour recollection. The Chase Bank made a loan of $1,250,000 on
uly 30, 1929, to Pynchon & Co. as managers of the syndicate, did
it not?
Mr. DODGE. Yes, sir.
Mr. PECORA. And then
2 days later, on August 1, 1929, it made a
further loan of $1,250,000 to Pynchon & Co. as syndicate managers.
Mr. DODGE. Yes, sir.
3542
STOCK EXCHANGE PRACTICES
Mr. PECORA. What was the purpose of those two loans ?
Mr. DODGE. Pynchon & Co. had taken up the stock, paid the company for the stock. That was on July what, Mr. Pecora?
Mr. PECORA. July 30 and August 1.
Mr. DODGE. Yes.
Senator COTJZENS.
The agreement read this morning stated that
the first payment was August 23.
Mr. PECORA. On or before August 23. These two loans, aggregating 2y2 million dollars, were made in order to enable the syndicate
to take up some of those 350,000 shares that the banking group, the
original group, had contracted to buy at $20 a share.
Mr. DODGE. Certain of the syndicate members
Mr. PECORA. What is that?
Mr. DODGE. The syndicate manager borrowed money for certain
of the syndicate managers. Others had the privilege of taking up
and carrying their own proportion.
Mr. PECORA. Then, on August 23, 1929, the Chase Bank made a
further loan of $4,000,000 to Pynchon & Co. as syndicate managers.
Do you recall that ?
Mr. DODGE. That is correct.
Mr. PECORA. What was the purpose of that loan ?
Mr. DODGE. The same.
Mr. PECORA. That did not relate to the same syndicate, did it?
Mr. DODGE. Yes, sir. That is the date of the clearance.
Mr. PECORA. The final clearance?
Mr. DODGE. Yes, sir.
Mr. PECORA. That was August 22 and 23 ?
Mr. DODGE. The 23d was the final date for payment.
Mr. PECORA. SO that the members of this purchasing
group, the
original purchasing group, virtually were able io finance their
operations through loans made to the syndicate manager by the
Chase.
Mr. DODGE. The total amount of liability was $6,000,000; yes.
Mr. PECORA. And the total amount of loans made between July
30,1929, and August 23 was $6,500,000?
Mr. DODGE. These loans were made for the account of the July
18 syndicate, I think. That was 500,000 shares at 25. That would
be a total of six and a quarter million dollars.
Mr. PECORA. NOW, the loan of August 23, 1929, of $4,000,000, was
made to Pynchon & Co. as managers of the syndicate that was formed
on July 18, or the syndicate that was formed on September 3 ?
Mr. DODGE. July 18.
Mr. PECORA. And that was the syndicate that took over from the
original syndicate or group the shares at 25 ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Was there
a fourth syndicate formed on or about
September 20, 1929, with Pynchon & Co. as managers?
Mr. DODGE. There was a syndicate formed then.
Mr. PECORA. What was the object of that syndicate? Was it to
purchase 280,000 shares at $50 a share?
Mr. DODGE. I will have to refresh my memory on that a moment.
We were not directly interested in that [after conferring with associates]. Yes. That was a syndicate formed, 1 am informed, to
buy 210,000 shares of stock.
STOCK. EXCHANGE PRACTICES
3543
Mr. PECORA. TWO hundred and ten thousand or two hundred and
eighty thousand?
Mr. DODGE. TWO hundred and ten thousand.
Mr. PECORA. At $50?
Mr. DODGE. At $50.
Mr. PECORA. Was that a trading syndicate ?
Mr. DODGE. Well, it was a syndicate which
was formed to buy
210,000 shares. I am sorry not to oive you an immediate answer^
Mr. Pecora.
Mr. PECORA. That is all right.
Mr. DODGE. I do not know this of my own knowledge. The syndicate on September 20 was formed for 210,000 shares. It had a large
number of participants who signed up for 280,000 shares, as you said.
Mr. PECORA. Yes.
Mr. DODGE. I presume
that that 210,000-share syndicate must have
taken up, or it did take up, an additional 100,000 shares, or it was
formed to take up an additional 100,000 shares from the trading
account.
Mr. PECORA. Was there a loan made by the Chase Bank to Pynchon & Co. in connection with this last syndicate?
Mr. DODGE. $5,000,000. That was referred to this morning.
Mr. PECORA. That is right.
Mr. DODGE. That paid off the $4,000,000 loan of the other syndicate.
Senator COUZENS. Who were the participants in the last syndicate?
Mr. DODGE. That is, in the 280,000-share syndicate, Senator ?
Senator COUZENS. Yes.
Mr. DODGE. There is quite a long list of them here. Would you
like to read them, or shall I read them?
Mr. PECORA. There were about 47 firms in it, were there not ?
Senator COUZENS. I will just look at the list. [Mr. Dodge hands
papers to Senator Couzens.]
Mr. PECORA. In connection with this last syndicate, did you, under
date of January 6, 1931, address a memorandum to Mr. Wiggin, a
photostatic copy of which I now show you [handing paper to the
witness] ?
Mr. DODGE. January 6, 1931; yes, sir.
Mr. PECORA. I offer that in evidence.
The CHAIRMAN. Let it be admitted and entered in the record.
(The document referred to, memorandum, Jan. 6, 1931, Dodge to
Wiggin, was received in evidence, marked " Committee's Exhibit
No. 153, Nov. 21, 1933, and was subsequently read into the record by
Mr. Pecora.)
Mr. PECORA. The memorandum marked " Committee's Exhibit
153 " in evidence reads as follows [reading] :
COMMITTEE'S EXHIBIT NO. 153
MEMORANDUM, JANUAKY 0, 1931
Re: Pynchon & Co. General Theatres Equipment, Inc. Syndicate of September 30, 1929—280,000 shares.
To Mr. WIGGIN :
This syndicate I refused to go into and it was formed largely by Tucker,
Hunter Dulin, Goldman Sachs, and Pynchon & Co. The syndicate originally,
3544
STOCK EXCHANGE PRACTICES
at $50 a share, with a cost much higher than present. Of 47 participants,
26 are good.
This is an extremely complicated one owing to the relations of Tucker,
Hunter Dulin with the Goldman Sachs Trading Corporation, the American
National Corporation and the loan which this group obtained at the American
Trust Co., San Francisco, also a subsidiary. Mudge and his partner, Hagen.
have given a great deal of time to this, resulting in an offer being made by
Goldman Sachs Trading Corporation to clean the whole matter up as far as
their interest is concerned. I have followed the matter carefully with Mudge
and the plan to clean up this syndicate in the manner suggested. As the matter
is very complicated, I would be glad if you will give Mudge and myself a few
minutes today to explain the matter and the effect it will have on the bank's
loan to Pynchon & Co. and on the whole General Theatres situation. I personally believe this effect will be beneficial. Goldman Sachs are pressing for
an answer as we have held the matter over a week until your arrival.
(Signed) M. W. D.
Mr. PECORA. From the statement in this memorandum of yours,
stating " this syndicate I refused to go into ", it is quite apparent, is
it not, that the Chase Securities Corporation was invited to become
a participant?
Mr. DODGE. That was written 2 years afterwards.
Mr. PECORA. Yes, but I say it is quite apparent, from the language
you used in this memorandum to Mr. Wiggin, that at the time of the
iormation of that syndicate, in September 1929, the Chase Securities
Corporation was invited to become a participant.
Mr. DODGE. Yes, sir. This was my memory of it at the time.
Mr. PECORA. And you refused in behalf of the Chase Securities
Corporation to go into it?
Mr. DODGE. Yes.
Mr. PECORA. What was the basis for your refusal ?
Mr. DODGE. We had already, as explained this morning,
withdrawn
from the syndicate—not withdrawn, but our liability had been
eliminated through the formation of the September 3 syndicate,
which was formed at $30 .a share. As I explained this morning, the
Chase Securities Corporation could be of no assistance in the distribution of common stock, and for that reason Pynchon & Co. and
the other syndicate members were seeking others to go into this
syndicate who could assist in the distribution of the common stock,
and from that time on—that is, September 3, and this syndicate—
we did not go in.
Mr. PECORA. Originally, when the Chase Securities Corporation
went into these syndicates, it did so with the view of assisting in the
distribution of the common stock that the syndicate purchased, did
it not?
Mr. DODGE. The first idea was that we were to go in and purchase
the stock from the company, in the formation of the new company,
and that would be part of the banker's business to do that. As soon
as that stock had been distributed, we felt that we had gone as far as
we could as bankers.
Mr. PECORA. Did not the Chase Bank, as a matter of fact, make a
loan to this syndicate—this syndicate of September 3, 1930 ?
Mr. DODGE. I understand The Chase National Bank made a certain
loan to them.
Mr. PECORA. A loan of $5,000,000, was it not?
Mr. DODGE. Yes.
Mr. PECORA. What
security did it get for that loan ?
STOCK EXCHANGE PKACTICES
3545
Mr. DODGE. YOU were talking about the loan made to the syndicate of September 20 ?
Mr. PECORA. September 20.
Mr. DODGE. That is right; September 20, sir.
Mr. PECORA. In this memorandum which is marked " Exhibit No.
153 " you refer to the syndicate as the syndicate of September 30,
1929.. That is an error, is it not? It should be September 20?
Mr. DODGE. That is an error. It should be September 20.
Mr. PECORA. In connection with this syndicate of September 20 a
loan of $5,000,000 was made by the Chase Bank to Pynchon & Co.
as managers of the syndicate?
Mr. DODGE. Yes,
sir.
Mr. PECORA. What security did the Chase Bank get for that loan?
Mr. DODGE. A hundred and twenty-five thousand shares of General Theatres voting trust certificates having a market value at the
time of seven and a half millions. Collateral was later increased
to 227,000 shares/ The loan was paid April 15, 1930. Of course
the syndicate agreements were also pledged; that is, the liabilities of
the syndicate members.
Mr. PECORA. What did you say was the date of the repayment
of that loan ?
Mr. DODGE. April 15,1930.
The CHAIRMAN. Was the interest on the loan 6 percent?
Mr. DODGE. Yes, sir; 6 percent; a demand loan.
Mr. PECORA. When this loan was paid on April 15, 1930, was it
paid out of the proceeds of another loan made by the Chase Bank?
Mr. DODGE. NO, sir.
Mr. PECORA. What was it paid out of ? Do you know ?
Mr. DODGE. Cash.
Senator COXJZENS. Did not Mr. Aldrich testify to the fact that
these loans had been charged off or wiped out?
Mr. PECORA. A number of them have been; yes, sir.
Senator COUZENS. I mean, the status o,f the loans in the Chase
National Bank at this time.
Mr. DODGE. I do not know that, Senator.
Mr. PECORA. NOW I show you what purports to be a photostatic
reproduction of a memorandum addressed by you to Mr. Wiggin
under date of April 16, 1930. Will you look at it and tell me if
you recognize it to be a true and correct copy of such a memorandum ?
Mr. DODGE. Yes, sir.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted
and entered on the record.
(The memorandum referred to, dated Apr. 16, 1930, from Mr.
Dodge to Mr. Wiggin, was received in evidence, marked " Committee Exhibit No. 154, Nov. 21, 1933.")
Mr. PECORA. The memorandum marked " Committee Exhibit No.
154" in evidence, dated April 16, 1930, to Mr. Wiggin, reads as
follows [reading]:
COMMITTEE EXHIBIT NO. 154
MEMORANDUM, APRIL 16, 1930
To Mr. WIGGIN : No; the General Theaters stock is not free. What happened
yas this: I was discussing with Bill Ingold the large amount of money that
vould have to be borrowed in the Fox Film transaction. In view of the fact
3546
STOCK EXCHANGE PRACTICES
that he told me that Pynchon & Co. were in very liquid condition, I suggested
to him that it might be a good time to clean up some of the loans secured by
slow-selling stuff, which have been running for a long time, and suggesting that
it would be good psychology for him to do it, as there might be considerable
borrowing to be done in connection with the Fox "A" stock and the new syndicate on General Theatres common. He evidently thought this suggestion was
a constructive one, and much to Leon Johnston's surprise and pleasure, cleaned
up all his old loans, including the General Theatres. The new syndicate, which
we will be in for 350,000 shares of General Theatres stock, will have to operate
before our stock is free, especially in view of the fact that the present syndicate
is mopping up a considerable amount of stock which is coming out at the
present time through conversions of the present debentures. There have been
about 40,000 shares of this stock absorbed in the last few weeks.
M. W. D.
What was the situation that existed at that time, Mr. Dodge, with
reference to which you prepared and sent this memorandum to. Mr.
Wiggin ?
Mr. DODGE. AS you remember, I testified this morning that all of
this stock that had been received in the July 9 and July 18 syndicates, under an agreement could not be sold for a period of 6 months;
and included in that was some of Mr. Wiggin's stock. He asked me
on April 16 if it was free to sell. I t was at that time that the Chase
Securities Corporation and others were in the middle of the 1930
financing in which the acquisition of the Fox Film Co. took place.
I spoke to Mr. Ingold in regard to the fact that probably, as Pynchon
& Co. would be syndicate managers of any of the new (jeneral
Theatres stock which was to be sold in that connection, that as syndicate managers they would probably have to borrow; that this syndicate loan which we referred to here of $5,000,000, or what remained
of it—I don't remember what remained of it—and other syndicate
loans which he had in the bank, should be paid off so that the bank
would not be in a position of loaning to him or his firm as syndicate
managers in the new proposition an additional amount of money.
He had told me, as I state here, that his firm was in a liquid position
and in position to pay it off and, I presumed, to carry the account
for the other members. That was the syndicate in which we were
not interested. That is what I meant to say, that this loan was paid
off in cash on April 15.
Senator COTJZENS. DO I understand that the stock that you are
talking about being free was collateral to these previous loans that
have been referred to ?
Mr. DODGE. NO, sir; that was the stock which the Chase Corporation and Shermar Corporation had taken down as profit on September 3 and had agreed with Mr. Clarke not to sell for a period of
6 months.
Senator COTJZENS. Yes; but as I understood you to say, this is
the stock that you had as collateral for this loan and it was not free
stock to be soldi; is that correct ?
Mr. DODGE. NO, sir.
Senator COTJZENS. I misunderstood,
Mr. PECORA. The stock referred to
then.
by the witness in this memorandum as not being free stock was stock which the Chase Securities
Corporation and the Shermar Corporation had acquired by way oi
profits out of the July 9 and July 18,1929, syndicates.
Mr. DODGE. That is right; that is correct, sir.
STOCK EXCHANGE PRACTICES
3547
Mr. PECORA. Why was that stock tied up from July 1929 to April
1930 so that when you referred to it on April 16, 1930, you referred
to it as stock which was not free ?
Mr. DODGE. There was an agreement entered into with Mr. Clarke
that was put in evidence this morning—it was September 10, was it
not?—by which 132,000 shares of stock—
Mr. PECORA. 122,000 shares.
Mr. DODGE. Yes. 122,000 shares of stock was not to be put on
the market for 6 months.
Mr. PECORA. Why was it not to be put on the market ? What was
the reason for it?
Mr. DODGE. I think I answered this morning
Senator COUZENS. Did he not explain that this morning?
Mr. PECORA. I think he explained in regard to another issue.
Mr. DODGE. NO ; this was the same stock.
Mr, PECORA. The same block?
Mr. DODGE. Part of this issue.
Mr. PECORA. I show you what purports to be a photostatic copy of
a memorandum addressed by you to Mr. Wiggin under date of
January 7, 1931. Will you look at it and tell me if that is a true
and correct copy of such a memorandum?
Mr. DODGE. Yes, sir.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted
and entered on the record.
(The memorandum referred to, dated Jan. 7, 1931, from the
witness to Mr. Wiggin, was received in evidence, marked " Committee Exhibit No. 155, Nov. 21, 1933.")
Mr. PECORA. The memorandum marked " Exhibit 155 " in evidence
is as follows [reading] :
COMMITTEE EXHIBIT NO. 155
MEMORANDUM, JANUARY 7, 1931
To Mr. WIGGIN :
Referring further to winding up of General Theatres Equipment Common
Stock Syndicate of September 20, 1929, of which Pynchon & Co. are syndicate
managers, at a conference today with organization of Pynclion & Co., Leon
Johnston, Hagen, and myself, we believe that it works out as follows:
The amount of this syndicate stock now pledged by Pynchon & Co.
in Chase Bank loans to Pynchon & Co. of $9,000,000, is 133,263
shares which, figured at present market, $13 a share, is
$1, 732,419
The syndicate will receive from Goldman Sachs group- $1,251,415
And will receive from sale of default list stock
1,043,364
Total
2, 294,779
Out of the money that has been gotten in, there will be
paid out to the American Trust Co
1,023,000
Leaving a balance of
Which will be paid to the Chase Bank on the Chase Bank loan by
Pynchon & Co., leaving a balance of
Pynchon & Co. receive from Harley Clarke
1,271,779
460,640
200, 000
Balance in loan
260,640
Bank makes another loan to Pynchon & Co. to enable them to
purchase 139.743 shares of Old Common Stock from default list
and from Goldman Sachs trade at $12 a share
1,676,916
Total of loan
1.937,556
3548
STOCK EXCHANGE PEACTICES
Or a gross increase over old loan of
Deliveries to Cook and others on " Good " list
$205,137
151,000
54,137
Collectible from others on " Good " list for share of losses
312,000
net decrease in loan
257, 863
If neither of the above two items are immediately collectible, although counsel believes they are valid claims, and figuring the old common stock at $13
collateral value, the collateral will be increased from 133,263 shares to 202,363
shares, or from a value of $1,732,419 to a value of $2,630,719; gain in collateral
equity, $898,300; increase in loan, $205,137; gain, $693,163.
In addition to this, Pynchon & Co. will have a receivable against Harley
Clarke for $452,134, against which they would have to deliver to him 93,162
shares of new common stock, leaving total loan of $1,485,422, against 67,454
shares new preferred at -4, $1,618,896, and 41,747 shares new common at 7,
$292,229; making a total of $1,911,125.
M. W. D.
Does it not appear from this memorandum of January 7,1931, that
the $5,000,000 loan which was made to Pynchon & Co. as managers
of the syndicate formed September 20, 1929, had not been repaid
on April 30, 1930?
Mr. DODGE. I do not so understand it, Mr. Pecora. This is a very
complicated memorandum, and I gratuitously say that I have tried
to go over it with Mr. Hagen and it gave me almost a headache because it is so complicated
Mr. PECORA. If it gave you a headache, and you prepared it, we
certainly need some enlightenment on it.
Mr. DODGE. AS I understand it, the actual syndicate loan was
paid on April 15, 1930. Later on in the year of 1930 Pynchon &
Co. borrowed additional money from the bank. That is what I
understand. I was not an official of the bank at the time. Certain
stock was pledged as collateral to that loan.
Mr. PECORA. Certain stock of the General Theatres Equipment Co. ?
Mr. DODGE. Yes; including this syndicate stock. Pynchon & Co.,
as I remember, wTere anxious to clear up that syndicate and have the
syndicate members pay. Some were willing to pay and some were
not. In the meantime, Goldman Sachs had purchased Tucker,
Hunter & Dulin, who were large participants in it. They had also, I
think, purchased the stock of the American National Co. and the
American Trust Co. of San Francisco. Goldman Sachs said
they were willing to pay the liability of $1,251,000 provided the
American Trust Co. loan, which the same syndicate had made,
was paid at the same time; and Pynchon & Co. were trying to work
out with myself and with Mr. Hagen—because I knew Mr. Ingold
and he came to me to try to work it out—whether or not the payment
of Goldman Sachs on that basis would be of benefit to Pynchon &
Co. and, through Pynchon & Co., to the collateral which was in the
bank at the time. It finally worked out, after this succession of
figures here, that the actual amount of the loan at the time was
increased to Pynchon & Co. by $200,000-odd, and the actual amount
of collateral in the loan was increased by $900,000. So that the loan
was strengthened to that amount. It was that that I wished to
discuss with Mr. Wiggin.
STOCK EXCHANGE PRACTICES
3549
Mr. PECORA. In this memorandum of January 7, 1931, you refer to
an aggregate amount of loans made by the Chase BanK to Pynchon
& Co. of $9,000,000.
Mr. DODGE. That is what I understood at that time, that the loan
was a loan to Pynchon by the Chase Bank. That was in January
1931.
Mr. PECORA. YOU meant a new loan of $9,000,000 had been made to
Pynchon & Co. as syndicate managers by the Chase Bank?
Mr. DODGE. This, I understand, was put on by the bank in the fall
of 1930 as a broker's loan, and part of the collateral was some of this
stock.
Mr. PECORA. NOW, let us understand this. The first loan was a
million and a quarter to Pynchon & Co. on July 20, 1929, and the
next one was made on August 1, 1929, also a million and a quarter.
That is correct, is it not ?
Mr. DODGE. Yes.
Mr. PECORA. Those two loans were paid off on August 9,1929 ?
Mr. DODGE. Yes.
Mr. PECORA. And
then on August 23 a new loan of $4,000,000 was
made to Pynchon & Co. just prior to the date when the original
syndicate was to take up the original block of stock?
Mr. DODGE. I don't know that. I testified this morning that two
and a half million dollars
Mr. PECORA. YOU did a little while ago, this afternoon.
Mr. DODGE. N O ; but I mean, you are speaking now of the first
$1,250,000 and the second $1,250,000.
Mr. PECORA. Making a total of two and a half millions.
Mr. DODGE. I am informed they were paid on August 9.
Mr. PECORA. Then on August 23 this loan of $4,000,000 was made
to Pynchon &Co.?
Mr. DODGE. Yes.
Mr. PECORA. That was paid off on September 25, 1929 ?
Mr. DODGE. When the $5,000,000 loan was made.
Mr. PECORA. The $5,000,000 loan was made around September 20?
Mr. DODGE. Twenty-third; yes.
Mr. PECORA. Was that loan of. $4,000,000 paid out of the proceeds
of the $5,000,000 loan?
Mr. DODGE. Yes.
Mr. PECORA. The
$5,000,000 loan was made for the account of the
syndicate that was formed on September 20, 1929 ?
Mr. DODGE. That is correct.
Mr. PECORA. YOU said before that that loan was fully paid off on
April 15, 1930?
Mr. DODGE. Yes, sir.
Mr. PECORA. In January
1931 you addressed this memorandum,
marked " Exhibit No. 155", to Mr. Wiggin, in which you refer to
this syndicate loan of September 20, 1929, apparently, because you
say in your memorandum—
Referring further to winding up of General Theatres Equipment common
stock syndicate of September 20, 1929, of which Pynchon & Co. are syndicate
managers, at a conference today with organization of Pynchon & Co., Leon
175541—34—PT 7
22
3550
STOCK EXCHANGE PRACTICES
Johnston, Hagen, and myself, we believe that it works out as follows: The
amount of this syndicate stock now pledged by Pynchon & Co. in Chase Bank
loans to Pynchon & Co. of $9,000,000, is 133,263 shares.
There must have been some loans aggregating $9,000,000 that were
made subsequent to the $4,000,000 loan of August 23, 1929?
Mr. DODGE. There was; but the loan of $9,000,000 made in November 1930 to Pynchon & Co. was a broker's loan, and in that broker's
loan were included 133,000 shares of this syndicate stock, so that the
loan of $9,000,000 was not solely made to the syndicate, as I understand it.
Mr. PECORA. Who was it made to ?
Mr. DODGE. I t was made to Pynchon & Co.
Senator COUZENS. HOW do you know that it was a broker's loan
with other collateral than the General Theatres ?
Mr. DODGE. Just what I have been told.
The CHAIRMAN. On those broker's loans, the interest was much
larger than 6 percent, was it not? I have understood that they paid
as high as 20 percent on broker's loan at about that time ?
Mr. DODGE. Not on this loan, Senator. I will find out for you
what the interest was on that $9,000,000 loan.
Senator TOWNSEND. The interest on broker's loans varies from day
to day as to the rates on the market.
Mr. DODGE. Yes. The loans of 1929 got pretty high. The usual
rate was, I think—well, I am not a banker; I am not connected with
the bank; but I should say a special loan would be 6 percent, and
probably a quick loan on marketable securities would be something
over the Eeserve bank rate—4 percent.
Mr. PECORA. DO you know the status of this $9,000,000 loan at the
present time?
Mr. DODGE. NO, sir.
Mr. PECORA. What was
its status at the last time you knew anything about it?
Mr. DODGE. I never knew very much about it, Mr. Pecora.
Mr. PECORA. DO you know whether that $9,000,000 loan has been
repaid in full?
Mr. DODGE. NO, sir; I do not. My impression is it was not.
Mr. PECORA. Can you find out the status of that loan from data
that is now available to you ?
Mr. MUDGE. I do not think we have the details, Mr. Pecora. But
the loan was never paid in full, and it was included in the claims
proved against Pynchon & Co. in bankruptcy. I cannot give you
the exact amount.
Mr. PECORA. DO you know how much of it was unpaid?
Mr. MUDGE. I cannot give you the exact amount.
Mr. PECORA. Well, approximately, Mr. Mudge; just give us a
general idea.
Mr. MUDGE. We may be able to get that in a minute from some
data. I do not know.
Senator TOWNSEND. All the loss in that loan has been charged off ?
Mr. ALDRICH. Yes.
Mr. PECORA. DO you know the amount?
Mr. ALDRICH. I am not sure that it is the same loan because I
have not looked at the details, but there was a loan, as you recall, in
STOCK EXCHAKGE PRACTICES
3551
the beginning of 1931, and the collateral was such that it could be
sold and bought in by the bank, and the loan has been written down
so that the value of it is simply the market value of the collateral
still held against it.
Senator TOWNSEND. In other words, the loss has been taken ?
Mr. ALDRICH. The loss has been taken.
Mr. PECORA. What is the amount, Mr. Mudge ?
Mr. MUDGE. The amount at which the claim was allowed in the
bankruptcy proceedings was slightly over $5,300,000.
Mr. PECORA. Then that much of the loan remained unpaid at the
time Pynchon & Co. went into bankruptcy, is that right?
Mr. MTJBGE. That is right.
Mr. ALDRICH. There was more.
Mr. PECORA. What is that?
Mr. ALDRICH. There was more. We can give you the exact figures.
There was more of it unpaid that has been written down.
Mr. PECORA. Yes. Now, Mr. Dodge, I want to call to your mind
the $6,000,000 of debenture bonds or notes that were issued by General Theatres Equipment at the outset of its incorporation, and which
was sold to the five members of the original purchase group, the
banking group, at 90. Those are the debentures that had a convertible privilege ?
Mr. DODGE. Yes, sir.
Mr. PECORA. A convertible
privilege entitling the holders to convert each $1,000 bond into 30 shares of the common capital stock of
General Theaters ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Was there
a syndicate formed by the bankers to trade
in those bonds after they acquired them?
Mr. DODGE. I understand there was a trading account formed at
the same time for 10 percent of the amount; that would be $600,000
par value of the bonds.
Mr. PECORA. And what was the purpose of that trading account?
Mr. DODGE. That was most usual, Mr. Pecora.
Mr. PECORA. TO support the market?
Mr. DODGE. TO support the market; or some time the bonds, the
$6,000,000, were over-sold; it gave a position in the market to support them.
Mr. PECORA. Who were the participants in that trading account ?
Mr. DODGE. The originals.
Mr. PECORA. The original five members?
Mr. DODGE. The original five members.
Mr. PECORA. The original five members of the original terms
group ?
Mr. DODGE. Yes; the original account.
Mr. PECORA. Those were the bonds sold to the public by this group
at 99 and interest?
Mr. DODGE. Yes.
Mr. PECORA. On July
Mr. DODGE. Yes, sir.
Mr. PECORA. NOW the
18, 1929?
General Theatres Equipment got from the
bankers $5,400,000 for these notes?
Mr. DODGE. And accrued interest.
3552
STOCK EXCHANGE PRACTICES
Mr. PECORA. And accrued interest. Is that the money that was
used to enable the General Theatres Equipment to purchase from
Harley Clarke those four lamp companies that he testified about
last week for an aggregate of $3,000,000 cash ?
Mr. DODGE. Part of it; yes.
Mr. PECORA. And was it out of that sum of five million four
hundred thousand and odd dollars that a payment of $2,000,000 in
cash was made to William Fox ?
Mr. DODGE. I presume so; yes, sir.
Mr. PECORA. Have you by any chance been able to learn since you
were on the stand last Friday the reason for that $2,000,000 payment
to Fox?
Mr. DODGE. NO, sir.
Mr. PECORA. YOU recall the testimony of Clarke last week to the
effect that that $2,000,000 was paid to Fox because Fox had acquired
some interest in the Mitchell Camera Co. which General Theatres
Equipment wanted to acquire ?
Mr. DODGE. Something to that effect.
Mr. PECORA. Well, you remember you yourself testified last Friday
afternoon that you had learned at the time of the formation of the
General Theatres Equipment that Fox and Harley Clarke had been
in competition with each other to acquire the assets of the Mitchell
Camera Co.?
Mr. DODGE. Yes, sir.
Mr. PECORA. I have sent
for certain exhibits which are now in the
Printing Office. Meanwhile I want to say that one of the exhibits
put in evidence last Friday afternoon, which have been produced
by Mr. Clarke, and which purported to consist of a duplicate original
of the agreement whereby the assets, the property of the Mitchell
Camera Co., were turned over for $1,475,000, shows that that
purchase was made by Harley L. Clarke and not by Fox. Did you
know that before ?
Mr. DODGE. I would not be surprised, but I did not know that
before, no. I have not got the true story of that, Mr. Pecora.
Mr. PECORA. Well, why didn't you get the true story of it when you.
sitting as a director of General Theatres Equipment Co., in July 1929,
voted to pay to Harley Clarke for the assets of the Mitchell Camera
Co. $3,100,000, which is what Harley Clarke says he got from the
General Theatres Equipment Co. for the assets of the Mitchell
Camera Co.?
Mr. DODGE. I think I testified last Friday that as the bankers we
were interested in seeing that the one half interest in the Grandeur,
Inc., was acquired for the $2,000,000, and that the four lamp companies were acquired for the $3,000,000. And that is as far as we
were concerned—that was all we wanted to know. Now, what Mi\
Clarke's transactions were with Mr. Fox, or what Mr. Clarke had
on his books showing how those results were accomplished I never
knew, and I do not know today. I have not seen Mr. Clarke since
then, or anybody else who could explain it.
Mr. PECORA. Mr. Clarke testified here Friday afternoon that when
he set out prior to the formation of General Theatres Co. to acquire
the assets of those four lamp companies and of the Mitchell CameraCo, of California, he did so as an agent of the General Theatres
STOCK EXCHANGE PRACTICES
3553
Equipment, or what was subsequently organized under the corporate name of the General Theatres Equipment. Do you recall that
testimony ?
The CHAIRMAN. AS I remember, Mr. Dodge, it was considered
important at that time to interest Mr. Fox because he controlled
some 500 theaters, and it was very important to get these machines
in use in these theaters. That was one reason for getting him in.
Mr. DODGE. The contract with Mr. Fox of the Fox Theatres Co.
was a very important item in the whole transaction.
Mr. PECORA. Well, until those exhibits are returned here I will
.•examine you on the trading syndicate that was formed in connection
with the $6,000,000 of debentures that the banking group purchased
at 90.
Mr. DODGE. All right, sir.
Mr. PECORA. NOW when was that first trading account terminated?
Did you give the date of the termination of that first trading account in the bonds ?
Mr. DODGE. On the same day that the purchase group of the General Theatres Equipment 6 million dollars, 15-year 6-percent gold
debentures was terminated. That is December 18, 1929.
Mr. PECORA. NOW on October 16, 1929, there was a second trading
account formed to deal in these debentures ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Who were the participants?
Mr. DODGE. Chase Securities Corporation,
Pynchon & Co., West &
Co., W. S. Hammons & Co., and Harley L. Clarke.
Mr. PECORA. What was the object of that second trading syndicate?
Mr. DODGE. At that time the debentures were selling I think
around 160 or 165, and it was in the early part of October. I think
I can be perfectly frank in answering that that syndicate was formed
to make money.
Mr. PECORA. Through trading operations in the market?
Mr. DODGE. NO, sir. Not to trade, but as a purchase syndicate to
make money. The debentures were selling then at 165. They had
a conversion privilege of 30 shares for every $1,000 bond, which
would mean that every point the stock went up why these debentures
went up 3 points. And I will be still more frank and say that I
think, when I say " to make money", that it was a speculative
account in that the group got together and decided and felt that
the debentures probably would go higher. The conversion privilege,
as I remember it, did not become available, until January 1.
Mr. PECORA. 1930?
Mr. DODGE. 1930. Six months after they were issued. And it
was not as though we were buying stock, because the loss was limited,
as we felt, at 100 or 110. If the stock went down our loss was
limited. If it went up, of course, the profit was unlimited. And,
frankly, that was the reason.
Mr. PECORA. And when that syndicate was formed on October 16,
1929, what was the common stock quoted at in the market?
Mr. DODGE. On the 15th it was quoted at 58%. If we say 59—
three times that would be—that made the parity on the debentures
177.
3554
STOCK EXCHANGE PRACTICES
Mr. PECORA. And do you know what the quotation was on these
debentures on October 15? I have it as being 170%.
Mr. DODGE. I believe that is correct.
The CHAIRMAN. The stock was quoted at what?
Mr. DODGE. 59. 58%-59.
Mr. PECORA. NOW, the prices of those debentures were influenced
primarily by the equities of the common stock?
Mr. DODGE. Yes, sir.
Mr. PECORA. And the
equities of the common stock in turn were
influenced by the operations of the syndicate that had been formed
under the management of Pynchon & Co.; were they not? Tell us
frankly, Mr. Dodge.
Mr. DODGE. I cannot get away from the idea that the market quotations were influenced primarily by the public demand. It was not
more than 2 weeks afterward that we ran into the panic, and
public demand ceased; in fact they turned around from buying
wildly and sold wildly, and General Theatres stock, I think, went
from 59 down to the low 30's in the panic. There was nothing that
the syndicate could have done to have maintained that market in
the face of what the public wanted to do.
Mr. PECORA. But prior to that panic did not the syndicate operations influence the market quotations of this stock?
Mr. DODGE. AS far as stabilizing the market; yes.
Mr. PECORA. I do not believe I have asked you for a definition of
the term " stabilizing the market", so I will ask you now what you
mean by that?
Mr. DODGE. SO many people have tried to answer.
Mr. PECORA. Well, just pay no attention to the answers anyone
else has made in the past. Give us your answer or the way in which
you used the term just a moment ago of " stabilizing the market."
Mr. DODGE. If as a banker I am offering securities to the public at
a given price, say, $100 a share, and a few days afterwards those
securities which I have valued as being worth to the public $100 a
share, having no support, sell at 95, $94 or $95 a share, the investor
who buys that security from me will think that I have tried to put
something over on him. He won't understand that there was no
support.
And therefore, in the sale of bonds, a block, say, of $5,000,000 of
bonds, it was customary with the bankers to have a trading account
of, say, 10 percent of the amount of the liability, and during the
period of distribution, which was done generally through a countrywide syndicate, that trading account bought bonds that came in the
market and stabilized the price until this distribution was effected.
I do not think that the law of supply and demand applies entirely when you are trying to sell securities. You are selling them
as a merchandizing proposition, until those securities are sold and
the people who have them know whether they want to buy or whether
they want to sell. It is a merchandising proposition.
Senator COUZENS. SO, while the merchandising proposition is going on it is not an open and free market and the public do not fix
the price, do they ?
Mr. DODGE. The public does not fix the price except as they have
the information placed before them and are asked whether they
want to buy the merchandise or not.
STOCK EXCHANGE PRACTICES
3555
Senator COUZENS. But you and other witnesses have testified that
we can rely upon the public, the public is usually good in fixing
the value of securities. In the face of what you have just said, that
cannot be so.
Mr. DODGE. The public, Senator, in this particular case, that is, the
investor, can always sell at anytime. As soon as he bought the securities he could turn around and resell them.
Senator COUZENS. Yes; but as long as you are standing by, as
you say, to pick up these shares and the shares are bought up by a
ring or a group, why, then it is not a free and open market, is it?
He does not take what the market gives; he takes what you are
willing to give to maintain the market ?
Mr. DODGE. I t is a free and open market to him.
Mr. PECORA. He thinks it is.
Senator COUZENS. He thinks it is.
Mr. DODGE. But he can sell if he wants.
Senator COUZENS. Only as long as you are willing to let him sell,
that is all, because when you withdraw your support, why then the
market can go anywhere.
Mr. DODGE. Up or down.
Senator COUZENS. Yes; but for the time being, while you are operating, it is not an open and free market. I do not care what the
testimony is here, you cannot convince this committee, I think, of
that as a fact.
Mr. PECORA. The operations of this second trading syndicate in
the debentures resulted unprofitably, did they not?
Mr. DODGE. Yes, sir.
Mr. PECORA. AS a result of the market collapse of
Mr. DODGE. Yes, sir.
Mr. PECORA. I S that right?
Mr. DODGE. Yes, sir.
Mr. PECORA. And after that market collapse were
October 1929?
the debentures
called for redemption by General Theaters Equipment?
Mr. DODGE. In the financing of April 1930 they were; yes, sir.
Mr. PECORA. And they were called at the call price of 110?
Mr. DODGE. Yes, sir.
Mr. PECORA. And they bore 6 percent interest, didn't they ?
Mr. DODGE. Yes, sir.
Mr. PECORA. NOW, these debentures were issued to the bankers
at
90 in July 1929?
Mr. DODGE. Yes, sir.
Mr. PECORA. They were called at 110 in April 1930?
Mr. DODGE. Yes, sir.
Mr. PECORA. And 6 percent interest on them was paid meanwhile?
Mr. DODGE. Yes, sir.
Mr. PECORA. SO that virtually the GTE, for that bit of financing,
$6,000,000, paid around 26 percent interest, did it not? I mean it
amounts to the same thing ?
Mr. DODGE. A large amount of the debentures were converted into
stock. The reason the debentures were called was to force conversion. In other words, if the stock was selling at a higher price than
the equivalent of 110 on the basis of 3 snares for 1, instead of
3556
STOCK EXCHANGE PRACTICES
waiting for $110 a share the debenture holder might have converted
and sold his stock instead.
But in the financing of 1930 it is all part of a very large piece of
financing. Thirty million dollars of additional debentures were
issued, and it wa$ necessary to have this six million called as part
of the cost of that financing, not really the cost of the original
financing.
Mr. PECORA. This piece of financing resulted in the GTE paying
to the bankers or selling to the bankers six millions of debentures
at 90, retiring them at 110 inside of a year, and paying meanwhile
6 percent interest ? Isn't that the way it worked out ?
Mr. DODGE. At the time the 6 millions of debentures were sold at
90 to the bankers there was no anticipation that they would be
called. It was only because the company ran into the larger deal
of 1930 that it was necessary to call them.
Mr. PECORA. The bankers still sat in April 1930 on the board of
directors of the GTE, did they not?
Mr. DODGE. Yes, sir.
Mr. PECORA. And it
was their decision which prompted the t calling of these debentures at 110 in April 1930?
Mr. DODGE. In connection with the issuance of 30 millions of debentures in 1930, which was in connection with the acquisition of
the Fox Film.
Mr. PECORA. NOW I have had returned to me from the printers in
the last few minutes the exhibits that were put in evidence last Friday afternoon upon their production here by Mr. Clarke. I want to
call your attention to one of them, the one marked "Exhibit No.
143," which is a copy, purports to be a copy, of an agreement made
on June 6, 1929, by and between H. F. Boeger and George A. Mitchell, called the sellers, and H. L. Clarke, called the buyer, under the
terms of which, generally speaking, the sellers agreed to sell to the
buyer for $1,475,000 cash all of the assets and property of the
Mitchell Camera Co. of California, including all patent rights and
claims that it had. Will you look at the exhibit ?
Mr. DODGE (after perusing the exhibit). I have read it.
Mr. PECORA. Does that refresh your recollection with regard to
any information you acquired at the time that you as one of the
directors of the General Theatres Equipment in July 1929 voted to
pay $3,100,000 for the Mitchell Camera Co-.'s property, including
these pamphlets that you speak of ?
Mr. DODGE. Did the minutes show that we voted to pay $3,100,000 ?
Mr. PECORA. Mr. Clarke's testimony was to that effect. The directors' minutes do not seem to show exactly what the situation was.
That is why I am asking you now as one of the directors.
Mr. DODGE. Well, at that time that contract was signed, the General Theatres Equipment was not formed, of course.
Mr. PECORA. Oh, no; but Mr. Clarke has testified that he went out
and acquired these properties as a representative of the corporation
which eventually was formed under the corporate name of General
Theatres Equipment, and you also testified that prior to July 11,
1929, which was the date of incorporation of the General Theatres
Equipment, you participated with others in a series of conferences
STOCK EXCHANGE PKACTICES
'3557
that lasted around 2 months or more, at which the plans were discussed and agreed upon for creating the General Theatres Equipment.
Mr. DODGE. Yes. I do not want to be technical, Mr. Pecora. Mr.
Clarke did not act as agent for the General Theatres Equipment, and
it was not formed. He could, however, purchase these assets under
an option agreement for the benefit of the new company to be formed
if it was formed.
Mr. PECORA. He testified that that was the fact, and so did you.
Mr. DODGE. I do not know anything about $3,100,000. All I know
is that the Grandeur Co. and its assets, one half of it was to be
bought for $2,000,000. Now that is the first time I have ever seen
that copy of that contract.
Mr. PECORA. Didn't Clarke produce before the directors the documents that showed what he had paid for these various assets, these
lamp companies and Mitchell Co., which General Theatres Equipment was formed to take over?
Mr. DODGE. I don't think so.
Mr. PECORA. YOU referred a few minutes ago to the issue of
$30,000,000 of debentures in connection with the 1930 financing of
General Theatres Equipment. Will you tell the committee in your
own way the facts with regard to that issue ?
Mr. DODGE. In December 1929, after the panic, Mr. Clarke told me
as a director of the General Theatres that he understood that Mr.
William Fox and his companies, or his company, were very much
extended.
Mr. PECORA. That is the Fox Film Co.?
Mr. DODGE. FOX Film Co., and the Fox Theatres also—through the
purchase of the control or a large amount of the stock of the Loew
Corporation and some English properties, that is, an interest in it.
Mr. PECORA. A little louder, please.
Mr. DODGE. An interest in the Gaumont Pictures Co. of Great
Britain; and that these purchases had been made on short time
credits which were coming due, and that unless Mr. Fox was able to
finance these obligations the Fox Co. would get into very serious
trouble.
Mr. Fox had discussed the matter with him evidently, or at least
his attorneys had. Halsey Stuart & Co. were the bankers for the
Fox Cos. at that time. They had what is called a preferential
agreement to do the financing for Mr. Fox. As a matter of fact, at
that time Halsey Stuart & Co. had issued to the public 12 millions
of notes which matured in the early part of 1930, the proceeds of
which were used as part payment for the block of Loew, Inc.
stock purchased from the Loew family. An additional $15,000,000
had been advanced by the Electrical Research Corporation, and those
notes would come due shortly.
But Fox had also, in addition to the original family holdings of
the Loew stock, bought in the open market over 200,000 shares of
Loew stock, which he was carrying through brokers, and in the
panic during the drop of the stock the brokers were very much
worried.
3558 "
STOCK EXCHANGE PRACTICES
Mr. Clarke told me at that time that he was worried about the
situation, because if the Fox Film Corporation failed it would
probably affect adversely the whole film industry; and, of course,
would then affect the General Theatres Equipment, which was selling equipment to the film industry, and especially it would affect
the General Theatres Equipment because the Fox Film Corporation
would then be unable to carry out its intention to purchase these
wide film projectors which were mentioned in the contracts which
were read last Friday.
He told me that he thought that the General Theatres should
have a very sympathetic view of the whole situation; as a matter
of fact, a$ked me if I would discuss the matter with Mr. Stuart o,f
Halsey, Stuart & Co., who was very much worried about the 12
million that was being carried.
At that time there was a suggested plan to solve some of the
problems of Mr. Fox. I think the General Theatres was figuring
on putting some 18 millions of dollars into it, and through senior
securities there was to be raised an additional 20 millions of dollars, which, together with the agreements reached with some of the
creditors, would have probably put the Fox Films Co. in a more
sound condition through the sale of a part of its capital assets.
The figures which we looked into at that time of the Fox Film Co.
led us to believe that the company over a period of 10 and 15 years
had been a successful and a profitable concern and that its troubles
at that time were caused only because it had capital obligations coming due which it could not meet, and these capital obligations of Fox
Film and the Fox Theatres combined amounted at that time to something around 90 million dollars. I think that was the sum, somewhere around 90 millions of dollars.
The suggestions which Mr. Clarke made, or the lawyers who were
then active for Mr. Clarke, I think the firm of Hughes, Schurman &
Dwight at that time, were not acceptable largely because it meant a
sale of some of this Loew stock at a price below cost, and
The CHAIRMAN (interposing). Do you mean by " l o w " stock,
miscellaneous stock—stock of various kinds and not of any particular
kind?
Mr. DODGE. NO ; I meant the stock of Loew's, Incorporated. The
suggestion was not acceptable, but a solution was supposed to have
been arrived at at that time by a control of the stock in the Fox
Film and the Fox Theatres, the B stock, so-called, which was owned
by Mr. Fox, being put into a voting trust, of which Mr. Fox was
to be one of the voting trustees, Mr. Harry Stuart, of Halsey, Stuart
& Co., was to be another trustee, and Mr. Otterson, of the Electrical
Research Corporation was to be another trustee. I understand that
that voting trust agreement was entered into, and in consideration
of that, Halsey, Stuart & Co., who were the bankers of the company,
and Mr. Otterson, who represented the Electrical Research Corporation, which was selling a large amount of sound equipment to the
industry, were willing to assist Mr. Fox.
That agreement, however, was repudiated by Mr. Fox, but afterwards I believe they effected a transfer of the Loew's stock from the
brokers' loans into some banks, so that it was a more permanent loan
and the brokers were not embarrassed.
STOCK EXCHANGE PRACTICES
3559
That precipitated a failure of Mr. Fox to live up to his agreement,
precipitated financial trouble, as the creditors wanted to be paid.
A large amount of those notes, big obligations, were7 coming due,
and Mr. Fox tried in his own way to raise funds to paj off the obligations, but failed to do so. And eventually, some time in January
or February, a receivership was asked for, in the United States
Circuit Court, I believe.
Mr. MUDGE. United States District Court.
Mr. DODGE. Well, in the United States District Court, under Judge
Coleman, I believe. Judge Coleman did not want to see such a
large, valuable, and prosperous enterprise go on the rocks if it could
be worked out, and I think he very wisely tried to see if he could
not straighten out the differences between Mr. Fox and his bankers.
In the meantime Chase Securities Corporation and General
Theatres Equipment—and the Chase Securities Corporation had
nothing to do with the business; and I find a memorandum, of which
I think you have a copy, to Mr. Wiggin, telling that we would not
be interested in the situation unless some comprehensive plan could
be worked out, for this whole situation involved $90,000,000, unless
it cou]d be finally worked out.
Mr. Fox engaged the services of Samuel Untermeyer, and refused
to have anything to do with his bankers, Halsey Stuart & Co., or
the Electrical Research Corporation. Mr. Untermeyer did succeed
in having Bancamerica-Blair Corporation, Dillon, Eeed & Co., and
Lehman Brothers make a proposition to finance the Fox Film Corporation. And at the same time Halsey Stuart & Co. under the
so-called trustee plan, as the stock was still deposited under the
permanent agreement, the voting agreement, also put forward a plan.
A meeting was held of the Fox Theatres stockholders. They approved the Bancamerica-Blair Corporation and Dillon & Reed plan,
but that was immediately attacked by the trustees. Both sides began attacking, and I think there were suits in almost every court in
New York City, and counter suits. Until finally in April the situation became such that both the bankers were willing to withdraw
because they could not come to any agreement. Now, we have
come up to
Mr. PECORA (interposing). To April of 1930.
Mr. DODGE. TO April 1, 1930.
Mr. PECORA. Before you proceed any further let me say: You
referred to a memorandum you sent to Mr. Wiggin. I show you
what purports to be a photostatic copy of a memorandum dated
December 2, 1929. Will you look at it and tell me if that is a true
and correct copy of the memorandum you referred to ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Mr. Chairman,
I offer it in evidence and ask that it
may be made a part of the subcommittee's proceedings.
The CHAIRMAN. Let it be admitted, and the committee reporter
will make it a part of the record.
(A paper headed " Memorandum, Dec. 2, 1929", was marked
" Committee Exhibit No. 156, Nov. 21,1933 ", and will be found immediately following where read by Mr. Pecora.)
3560
STOCK EXCHANGE PRACTICES
Mr. PECORA. The memorandum which has been marked " Committee Exhibit No. 156 " of this date, reads as follows [reading]:
MEMORANDUM, DECEMBER 2, 1929
To Mr. WIGGIN :
Referring to Fox Films, I understand that both Harley Clarke and Harry
Stuart called you up on Friday. I was in constant communication with Harley
Clarke. I have been constantly in touch with Halstead Freeman about this
matter and we have consistently refused to lake the leadership in any reorganization or to get into this mess in any way unless it was part of a comprehensive plan which looked as though it would succeed. We have all the
figures and knowledge on this situation here and studied them over the last
week. The only way we should be interested would be to endeavor to work
out something for the General Theatres Equipment. To this end, I worked out
a plan which I gave to Harley Clarke to use as his own. He is coming down
this morning and says he has a price on the Fox Film Co. and Fox Theatre
Co. " B " stocks, which are the controlling stocks. After I find out what is in
his mind, I will discuss the matter further with you. This is a most complicated and difficult situation and I am going to proceed very slowly on it.
M. W. D.
Now you may go ahead. You have reached the point in your
narrative about this 30 million dollars financing of April 1930,
which took you up to about the 1st of April. Will you resume at
that point and continue?
Mr. DODGE. Somewhere around the 1st of April it looked as though
it was inevitable that the Fox Film Co. and the Fox Theatres Co.
would go into the hands of receivers, at great loss to the stockholders,
and possibly a loss to the creditors. Mr. Clarke at that time had
conversations with Mr. Fox with a view of buying out his controlling
interest, so that Mr. Fox would stay out of the picture, and
Mr. PECORA (interposing). Which was the " B " stock?
Mr. DODGE. Yes.
Mr. PECORA. Which had the voting rights?
Mr. DODGE. Yes, sir.
Mr. PECORA. All right. You may continue.
Mr. DODGE. Those conversations were had with
him, and resulted
in the purchase from Mr. Fox of his interest in both of those companies, which was about 50 percent of the Fox Film " B " stock, and
about 100 percent of the Fox Theatres stock, for .$15,000,000.
Mr. PECORA. Which was bought by the GTE ?
Mr. DODGE. Which was bought by the GTE, yes.
Mr. PECORA. Have you before you the minute book of the Board
of Directors of the General Theatres Equipment Corporation, covering the month of April 1930?
Mr. DODGE. I believe they are here.
Mr. PECORA . Will you get the meeting of April 7, 1930, and refer
to page$ 91 and 92, my record shows ?
Mr. DODGE. DO you want me to read this ?
Mr. PECORA. Oh, no. It is too long a document to be read. With
the minutes of the meeting of the board of directors held April 7,
1930, before you, can you refresh your recollection and give this
subcommittee when that agreement was entered into between General Theatres Equipment and Fox?
Mr. DODGE. April 7, 1930.
Mr. PECORA. Under that agreement Fox agreed to sell to General Theatres Equipment 50,101 shares of Fox Film class B common
STOCK EXCHANGE PRACTICES
3561
stock, which was more than a majority of the outstanding common
stock, was it not?
Mr. DODGE. Yes, sir.
Mr. PECORA. And 100,000
shares of Fox Theatres class B common
stock, which were all of the shares outstanding, for $15,000,000?
Mr. DODGE. Yes, sir.
Mr. PECORA. And other
considerations that were to be paid or
granted by General Theatres Equipment to Mr. Fox. Do you
recall that there were other considerations besides the $15,000,000?
Mr. DODGE. Yes, sir.
Mr. PECORA. Can you
refer to them briefly? The agreement in
question, Mr. Dodge, as you know, is a very lengthy document.
Mr. DODGE. Yes; and I do not know that I could refer to them
briefly for that reason.
Mr. PECORA. NOW, let me see if this constitutes your recollection
as a fair and substantial summary of it: Under this agreement Fox,
as the vendor, was to deliver to General Theatres Equipment the
written resignations of seven directors. Do you recall that?
Mr. DODGE. Yes.
Mr. PECORA. And
certain licensing agreements then in existence
between the American Tri-Ergon Corporation, licensor, and Fox
Theatres, and so forth, as licensee. Do you recall that?
Mr. DODGE. I do not recall what they were, Mr. Pecora, but I
recall that there was something of that kind. And I see it here.
Mr. PECORA. And Fox agreed to hold his 50 percent of the capital
common stock of Grandeur, Incorporated, and to organize a new
company to hold that 50 percent of his stock, to indemnify the Fox
Film and the Fox Theatres Companies against 50 percent of the
amount of certain possible claims.
Mr. DODGE. I will have to refresh my memory on that. There was
something of that kind. Yes, that is right.
Mr. PECORA. And General Theatres Equipment agreed that the
Fox Theatres, Inc., would repurchase from the Bankers Securities
Corporation, and the Pennsylvania Corporation 87,000 shares of the
Fox Theatres class A stock at $25 and interest, or for about $2,320,000. Do you recall that phase of it ?
Mr. DODGE. Yes, sir.
Mr. PECORA. And the
payment for that was to be made by a
60-day collateral note dated April 7,1930.
Mr. DODGE. Yes, sir.
Mr. PECORA. And GTE
also agreed to purchase 150,500 shares of
Loew's, Inc., common stock, and an equity of 60 percent of $2,000,000
mortgage on the company's building in Philadelphia. No; that was
collateral for the 60-day note. GTE agreed that Fox would be
continued as a director of his companies for 5 years from May 1,
1930. Do you recall that provision?
Mr. DODGE. That is in the contract?
Mr. PECORA. Yes.
Mr. DODGE. Yes, sir.
Mr. PECORA. And GTE
agreed to procure for Fox an employment
contract with Fox Films, Inc., for five years at $500,000 a year, to be
paid even if Fox died. Do you recall that provision ?
Mr. DODGE. That is in the contract; as chairman of the Advisory
Committee.
3562
STOCK EXCHANGE PRACTICES
Mr. PECORA. And the GTE agreed to cause the Fox Film and
Fox Theatres Companies to pay the fees of Mr. Untermyer and 10
other lawyers. Do you recall that provision ?
Mr. DODGE. Yes, sir. That is in the contract.
Mr. PECORA. There is a further provision that G.T.E. would cause
Fox Films and Fox Theaters Cos. to employ for 3-year periods 10
persons to be named by William Fox, who were members of his
family, and so forth. Do you recall that? You will find that on
page 100 of the minute book.
Mr. DODGE. Page 9 says [reading] :
That the purchaser will procure Theatres and Films to offer to certain of their
employees, not exceeding 10 in number, to be designated by the vendor, contracts
of employment (for services now being performed by them and at salaries not
less than those they are now receiving) for a period of 3 years from May 1,1930.
That is in that contract. I do not know whether they were
relatives of Mr. Fox or not.
Mr. PECORA. DO you remember one Jack Leo, a brother-in-law of
Fox, who was included among those 10 persons ?
Mr. DODGE. NO, sir; I do not remember that.
Mr. PECORA. This agreement also provided that the name " Fox "
was to remain on all theaters of the Fox Film and Fox Theaters for
two periods of, respectively, 2 years and 3 years from May 1, 1930.
Mr. DODGE. Yes, sir. That is in the contract.
Mr. PECORA. And also provided that during those same two periods
all pictures made by Fox Film, Inc., were to be captioned " William
Fox presents."
Mr. DODGE. Yes, sir.
Mr. PECORA. And the
G.T.E. also agreed to pay William Fox
$3,000,000 for assignment of his claims for salary from the Fox
Films, such payment to be made by 12 notes, each for $250,000, dated
April 7,1930. Do you find that at pages 101 and 102 of the minutes ?
Mr. DODGE. That reads (reading) :
The vendor has received no compensation for acting as chief executive officer
of Theatres since its organization or for acting as chief executive officer of Film
for the past three years or more and the vendor has received no reimbursement
of expenses incurred by him during such periods respectively or for losses sustained in sales of securities owned by him to prevent the sacrifice of stock of
Loew's, Incorporated, owned by Theaters.
I do not think it refers solely to the salary which had not been
paid.
Mr. PECORA. That sum of $3,000,000 G.T.E. agreed to pay Fox in
addition to the $15,000,000 consideration which has already been
referred to, is that not true ?
Mr. DODGE. Yes; they agreed to reimburse him for his losses.
Mr. PECORA. It was not an agreement to reimburse him for his
losses. They agreed to pay him $3,000,000 on account of his claims
for back salary and losses.
Mr. DODGE. Yes.
Mr. PECORA. The
losses that he claimed to have sustained in the
sale of securities owned by him, to prevent, as the contract says, the
sacrifice of stock of Loew's, Inc., owned by Fox Theatres.
Mr. DODGE. Yes, sir.
Mr. PECORA. G.T.E.
also agreed to continue to pay the premiums
on $8,500,000 of life-insurance policies carried by Fox Film, Inc., on
Digitized forthe
FRASER
life of William Fox.
STOCK EXCHANGE PRACTICES
3563
Senator TOWNSEND. Was the policy assigned?
Mr. MUDGE. It was carried by Fox Theaters.
Mr. PECORA. The policies were pledged at the time.
Mr. DODGE. They were made payable to Fox Theatres or Fox Film,
not to Fox himself.
Mr. PECORA. Yes; and the G.T.E. agreed to cause the Fox Film
Co. and the Fox Theatres Co. to indemnify William Fox from all
liability and expenses under a suit brought by the United States
against the Fox Film, Fox Theatres, and William Fox, for alleged
violation of the Clayton Act.
Mr. DODGE. Yes, sir.
Mr. PECORA. NOW, as
part of this agreement, was not a letter sent
to William Fox under date of April 5, 1930, by General Theatres
Equipment, which you find at page 110 of the minute book?
Mr. DODGE. The minute book shows that a letter was sent to William Fox on April 5.
Mr. PECORA. And that letter was part of the consideration upon
which this agreement of April 5 was based, was it not ?
Mr. DODGE. An essential part of the understanding, it says.
Mr. PECORA. I will read that letter into the record from the copy
which I have of it, and you f OIIOAV me with the original and correct
me if I misread it. [Reading:]
APRIL 5, 1930.
WILLIAM FOX, Esq.,
270 Park Avenue, New York City.
DEAR SIR: Referring to the agreement bearing like date herewith, and
entered into between you and General Theatres Equipment, Inc., we recognize
that it is an essential part of the understanding on which you have sold your
shares to General Theatres Equipment, Inc., that you shall participate to the
extent of 10 percent in any purchase or underwriting by General Theatres
Equipment, Inc., or Harley L. Clarke of stock or stock warrants of any kind,
of Fox Film Corporation and/or Fox Theatres Corporation in connection with
the financing of those companies presently to be undertaken, and that we will
use our best efforts and endeavors to increase your said interest up to an
additional 10 percent.
This letter is to evidence the definite agreement of both the undersigned
that you are entitled to a participation as above set forth.
Very truly yours,
GENERAL THEATRES EQUIPMENT, INC.,
H. L. CLABKE, President.
Mr. DODGE. Yes, sir.
Mr. MUDGE. There is part
Mr. PECORA (reading):
of it that you left off.
Approved, H. L. Clarke.
Did not Fox receive $3,000,000 in lieu of this 10 percent interest
referred to in this letter of April 5, 1930, from General Theatres
Equipment ?
Mr. DODGE. Eventually, in August, I think.
Mr. PECORA. On August 13 ?
Mr. DODGE. My understanding at the time was that Mr. Fox was
entitled to 10 percent of 1,600,000 shares. Mr. Fox and Mr. Untermyer claimed that Mr. Fox was entitled to 20 percent, or 320,000
shares of the stock.
Senator COTJZENS. HOW did they arrive at that 10 or 20 percent,
do you know ?
Mr. DODGE. Under the terms of this agreement, they said they
were entitled to 20 percent. Meantime the stock had gone way up,
3564
STOCK EXCHANGE PRACTICES
and at the time that the other 90 percent of the stock was ready to
be paid for, Mr. Fox did not appear to take up his 10 percent, and
the other 10 percent was taken up for him.
Mr. PECORA. Who negotiated this contract, Mr. Clarke and Mr.
Fox?
Mr. DODGE. Mr. Clarke.
Mr. PECORA. YOU did not participate in the negotiation of this
contract ?
Mr. DODGE. NO, sir. I never met Mr. Fox.
Mr. PECORA. But you, as one of the directors, approved it.
Mr. DODGE. Yes, sir.
Mr. PECORA. Without having studied
Mr. DODGE. NO ; I would not say that.
it.
I was told all the important
facts about it.
Mr. PECORA. By Mr. Clarke?
Mr. DODGE. Yes.
The CHAIRMAN. The
committee will now take a recess until 10
o'clock tomorrow morning.
(Whereupon, at 4 p.m., Tuesday, Nov. 21, 1933, the subcommittee
adjourned until 10 o'clock the following morning.)
COMMITTEE EXHIBIT NO. 139,
NOVEMBER 17,
1933
CHICAGO, I I I . , June SO,
J. E. MOAULEY,
1929.
Esq.,
Chicago, III.
DEAR SIR: This will confirm the arrangement between us superseding all
previous agreements. You agree to sell or cause to be sold to the undersigned
and/or purchasers designated by the undersigned, all of the capital stock of
The J. E. McAuley Manufacturing Co., an Illinois corporation, at and for the
sum of $1,131,422.93 (subject to the reservation and deposit in escrow of
$150,000 thereof, as hereinafter stated. Contemporaneously with the payment
therefor you shall pay said corporation the sum of $16,352.05, owing by you
to said corporation.
It is further understood and agreed that any liabilities of said The J. E.
McAuley Manufacturing Co., at June 30, 1929, in excess of $28,575.87 shall be
paid and discharged by you.
It is further understood and agreed that the business of said The J. E.
McAuley Manufacturing Co. has since June 21, 1929, and will be after the date
thereof, conducted in the usual and ordinary manner and that no unusual
or extraordinary expense will be incurred and that no dividend has been
declared subsequent to June 21, 1929, and that no dividend will be declared
and/or paid after the date thereof, it being the intent hereof that the net
earnings of said corporation accruing after June 21, 1929, shall remain in the
corporation until the consummation of the purchase of the capital stock of
said corporation as herein provided.
It is further understood and agreed that the sum of $150,000 shall be withheld from the purchase price for said capital stock and that said sum of
$150,000 shall be invested in securities approved by the undersigned, which
securities shall be placed in escrow with the Continental Illinois Bank & Trust
Co., Chicago, 111., for a period of 6 years from the date of payment for said
capital stock, for the purpose of indemnifying the undersigned and/or his
assigns against any and all liabilities of said The J. E. McAuley Manufacturing Co. in excess of said sum of $28,575.87 hereinabove mentioned. Said
escrow agreement shall be in form mutually satisfactory to us.
If the foregoing is acceptable to you please indicate your acceptance by
signing below, which will constitute a contract between us.
H.
CLARKE.
Accepted.
(Signed)
J. E. MCAULEY.
STOCK EXCHANGE PRACTICES
COMMITTEE EXHIBIT NO. 140, NOVEMBER 17,
3565
1933
This agreement, made this 27th day of April 1929, hy and between Clarence
S. Ashcraft and Mary G. Ashcraft, his wife, both of Los Angeles, Calif., for
themselves jointly and severally, hereinafter called the sellers, and H. B.
Van Duyne, also of Los Angeles, Calif., hereinafter called the buyer.
WITNESSETH
1. The sellers hereby make the following representations and warranties,
which warranties shall survive the purchase if made hereunder:
(a) That they are copartners, trading under the name and style of Ashcraft
Automatic Arc Co., hereinafter sometimes referred to as the partnership; that
said copartnership owns a business of manufacturing and selling electric arc
lamps, located at Los Angeles, Calif.
(&) That the gross sales of the partnership for the year ended December 31,
1928, were not less than $131,385, and that the net earnings of the partnership,
after depreciation, taxes, income taxes, and other charges including salaries,
for the 12 months ended December 31, 1928, were approximately $35,479.
(c) That the accounts receivable and physical assets of the partnership, including in such physical assets furniture, fixtures, jigs, dies, tools, patterns,
machinery, and merchandise on hand at the date of the inspection thereof, as
hereinafter provided, and at the date of the consummation of the purchase of
the property, business, and assets of the partnership, as hereinafter provided,
will be approximately $85,200 and the liabilities approximately $24,000.
(d) That the partnership owns an assignable license to manufacture and
sell electric arc lamps under the following letters patent:
General Electric licenses.
Heinrich Beck No. 1,029,787, dated June 18, 1912.
Heinrich Beck No. 1,313,666, dated August 19, 1919.
Heinrich Beck No. 1,086,311, dated February 3, 1914.
These licenses are for motion picture purposes only.
Clarence S. Ashcraft Patent No. 1,684,655, dated September 18, 1928.
2. In consideration of the sum of $10,000, receipt whereof is hereby acknowledged by the sellers, the sellers hereby grant the buyer the right and option
to purchase at any time within 90 days from the date hereof, subject to the
verification of the buyer, as hereinafter provided, of the foregoing representations, and each of them, all of the property, business, and assets of every kind
and nature of the partnership, including therein all of the property described
in subparagraph (c) of paragraph 1 hereof, and all claims, insurance, securities,
contracts, agreements, leases, leasehold interests, licenses, books of account,
records, files, documents, trade marks, trade names, trade rights, patents,
patent rights, held, owned, possessed, or exercised by the sellers in connection with the business of the partnership, and the goodwill of said business
and the right to use the name of the partnership, or a similar name, as a
corporation or partnership by the buyer or his assigns for the purpose of
carrying on the business of manufacturing and selling electric arc lamps to be
used for motion picture purposes and/or motion-picture appliances of any nature.
The purchase price for said property, business, and assets shall be the sum of
$150,000.
3. The sellers shall grant permission to a reputable accountant or firm of
certified public accountants selected by the buyer to make an examination of
the properties, books of account, records, and papers of the partnership for the
purpose of verifying the' representations made herein and for the purpose of
determining the amount of the net earnings for the 4-year period ended
December 31, 1928. Said accountants shall be allowed ninety days from the
date hereof within which to complete their examination of the properties, books
of account, records, and papers of the partnership.
4. In the event the buyer exercises this option, the purchase price shall be
paid as follows: $25,000 cash upon delivery to the buyer of executed bills of
sale and/or other documents, including such other documents showing compliance with the bulk sales law of California, as are satisfactory to counsel
for the buyer. The balance of $125,000 shall be payable in five equal installments of $25,000 each, the first installment to be paid six months from the
date of the first payment of $25,000 and each of the remaining installments
shall be payable at intervals of six calendar months from the date of the
preceding installment. Each installment shall bear interest at the rate of
6 percent per annum.
175541—34—PT 7
23
3566
STOCK EXCHANGE PRACTICES
5. It is further agreed, in the event this option is exercised, that the sellers
shall cause to be executed a lease on those portions of the building now occupied by them for a period of 5 years at a rental of $200 per month.
6. It is further agreed, in the event said option shall be exercised, that Clarence S. Ashcraft shall, at his option, enter the employment of the buyer, or the
partnership or corporation wlrch shall acquire the business of the partnership,
as superintendent of the shop at a salary of $500 per month; said employment
shall, at the option of the said Clarence S. Ashcraft, continue for a period
not to exceed 5 years; and said Clarence S. Ashcraft shall agree during the
said period, and for a period of 5 years after the period of said employment,
not to engage or become interested directly or indirectly in any electric arclamp business for motion-picture studio and/or theater purposes or electric
arc-lamp parts business for said studio and/or theater picture purposes and/or
motion-picture appliances of any nature, other than with the buyer or his
assigns, in Los Angeles County, California, or in any State of the United States,
except the State of Montana.
7. This contract shall inure to the benefit of the personal representatives,
executors, administrators, and assigns of the part'es hereto.
(Signed) MARY G. ASHCRAFT.
CLARENCE S. ASHCRAFT.
STATE OF c u u r a n m ,
County of Los Angreles, ss:
H
-
a
V A N DUTNB
-
On this 6th day of May, A.D. 1929, before me, L. R. Vermille, a notary
public in and for said county and State, personally appeared Mary G. Ashcraft, Clarence S. Ashcraft, and H. E. Van Duyne, known to me to be the persons whose names are subscribed to the within instrument, and acknowledged
to me that they executed the same.
In witness whereof I have hereunto set my hand and affixed my official
seal the day and year in this certificate first above written.
[SEAL.]
L. R. VERMILLE,
Notary puolio m and for said county and State.
COMMITTEE! EXHIBIT No. 141, NOVEMBER 17, 1933
CHICAGO, I I I . , July
Mr. HARRY H.
Uh
1929.
STRONG,
Toledo, Ohio.
Dear SIR: This will confirm the arrangement between you and the undersigned as follows:
On April 29, 1921, an agreement was entered into between the Strong
Electric Co., an Ohio corporation, and Harry H. Strong, of Toledo, Ohio,
therein called the sellers, and J. E. McAuley, of Chicago, 111., therein called
the buyer, in and by which said agreement there was to be sold to the buyer
the property, business, and assets of the Strong Electric Co.
The undersigned is the assignee of J. E McAuley and of all right, title,
and interest in and to said agreement.
It has been agreed between you and the undersigned that said agreement
of April 29, 1929, shall be cancelled and that in consideration thereof you
shall sell, or cause to be sold, to the undersigned and/or his nominee, the
entire issued and outstanding capital stock of the Strong Electric Co., an Ohio
corporation, at and for the price of $416,000; it being further agreed that all
representations and warranties contained in said agreement of April 29, 1929,
are made herein as effectually as if incorporated herein in full.
It is further understood and agreed that you shall on or before December
1, 1929, deposit with Continental Illinois Bank & Trust Co., of Chicago, 111.,
$75,000 par value of United States Liberty bonds to be held in escrow by said
bank for the term of 6 years to indemnify the undersigned and/or a corporation to be organized by him to acquire the property, business, and assets of
the Strong Electric Co., an Ohio corporation, against any and all liabilities
of said the Strong Electric Co. that might accrue to said new corporation
and/or the undersigned.
If the foregoing is acceptable to you, please indicate your acceptance in the
space provided below, which shall constitute a contract between us.
Yours very truly,
H. CLARKE.
Accepted:
HARRY H. STRONG.
STOCK EXCHANGE PRACTICES
356T
COMMITTEE! EXHIBIT NO. 142
This agreement made this 12th day of April 1929, by and between Theodore
Hall and Joseph Connolly, of New York, N.Y., hereinafter called the sellers*
and J. E. McAuley, of Chicago, 111., hereinafter called the buyer.
Witnesseth: 1. The sellers hereby make the following representations an<f
warranties, which representations and warranties it is agreed shall survive the
consummation of the purchase herein contemplated to be made:
(a) That they own or control 305 shares, being the entire issued and outstanding capital stock of Hall & Connolly, Inc., a corporation of the State of
New York, hereinafter sometimes referred to as the corporation; that said,
capital stock is full paid and nonassessable.
(&) That the financial condition of the corporation is now and at the date?
of the consummation of the purchase herein contemplated to be made will be at
least as good as is reflected by the balance sheet of the corporation as of
December 31, 1928, a copy of which is annexed hereto, made a part hereof and
marked " Exhibit A."
(o) That the net earnings of the corporation after depreciation, obsolescence
but before the payment of Federal income taxes and before the payment of
salaries to Theodore Hall and Joseph Connolly, for the 12 months endedS
December 31, 1928, were not less than $30,000.
{d) That the cash, accounts receivable, and physical assets of the corporation including therein furniture, fixtures, jigs, dies, tools, patterns, machinery,
and merchandise on hand at the date of the inspection thereof, as hereinafter
provided, and at the date of the consummation of the purchase of the capital
stock of the corporation, as hereinafter provided, will be not less than $60,000.
(e) That the corporation or the sellers now own or will acquire and wilL'
assign to the buyer an exclusive assignable license, for the full life of the
patents hereinafter referred to, from Elmer A. Sperry and/or the Sperry Gyroscope Co., Inc. (formerly known as the Sperry Gyroscope Co.), to manufacture
and sell electric arc lamps under the following letters patent granted to
E. A. Sperry and/or Sperry Gyroscope Co., Inc.; Nos. 1,227,210, 1,328,311,
1.428,510, 1,357,827.
2. The sellers agree to sell or cause to be sold, and the buyer, subject to his
verification of the foregoing representations, as hereinafter provided, agrees tobuy, all the issued and outstanding capital stock of the corporation, at and for
the price of $160,000.
3. The buyer shall forthwith deposit with the Chase National Bank tite sumof $12,000, which said sum shall be held in escrow by said bank, as hereinafter
provided.
(a) The sellers shall cause permission to be granted to a reputable person
or firm of certified public accountants selected and paid by the buyer and satisfactory to the sellers to make an examination of the properties, books of account, records and papers of the corporation for the purpose of verifying therepresentations made herein. Said accountants shall be allowed from date
90 days within which to complete their examination of the properties, books of
account, records and papers of the corporation. Said accountants shall also
be granted permission to make an examination of the books of account of said
corporation for the 4 years ended December 31, 1928. The sellers shall also1
cause permission to be granted to counsel for the buyer to make an examination
of the corporate records and stock books of said corporation to determine the
authorized and outstanding capital stock of the corporation and whether the
same is full paid and nonassessable.
(&) In the event said accountants shall have verified the representations
and each of them herein made by the sellers, then the buyer shall complete
said purchase and shall pay to the sellers the additional sum of $128,000
on or before the expiration of said 90-day period, and said sum of $12,000*
hereinbefore provided for, shall be paid by said depository to the sellers,1
both of such payments to be made against the delivery to the buyer, of all
the issued and outstanding capital stock of the corporation duly indorsed
in blank, together with the resignations of the officers and directors of the-1
corporation, provided, however, that the buyer may elect not to consummate
said purchase, in which event it is agreed that the sum of $12,000% shall bepaid by said depository to the sellers as agreed and as liquidated damages,
said $12,000 to be accepted by the sellers as full satisfaction for all claims
hereunder.
(c) In the event said accountants are unable to verify the representations
and each of them of the sellers herein made, the said sum at $12,000 shall
3568
STOCK EXCHANGE PRACTICES
be returned by said depository to the buyer and the buyer shall be under no
further obligation under this agreement.
4. In the event that said purchase shall be consummated, it is agreed between
the parties hereto that the sum of $20,000, being the balance of the purchase
price, shall be deposited at the same time with the depository aforesaid by the
buyer, which said sum shall be held in escrow to indemnify the buyer against
any loss or liability on account of accounts receivable, bad debts, and for
liabilities not disclosed by the books of the corporation. Said amount of
$20,000 shall be paid to the sellers at the expiration of 9 months from the date
of consummation of said purchase less the amount of any uncollected accounts
and accounts receivable and less any amounts paid for any liabilities or obligations not disclosed by the books of the corporation at the date of the consummation of the purchase and which the corporation shall have paid subsequent to the
consummation of the purchase. Such sums or amounts so withheld or deducted
shall be paid by the said depository to the buyer and any such uncollected
accounts receivable shall be assigned by the buyer to the sellers.
5. The sellers agree that the business of the corporation shall continue to be
conducted in the ordinary course and that no unusual or extraordinary expenses
shall be incurred and that no dividend has been or will be declared between the
date hereof and the date of the consummation of the purchase herein contemplated to be made, it being understood that the net earnings of the corporation
from and after the date hereof shall accrue to the benefit of the buyer.
6. In the event that said purchase is consummated, the sellers agree that they
will promptly discharge and satisfy the accounts payable and all liabilities of
the corporation whatsoever.
7. It is further agreed that the sellers, and each of them, shall, in the event
of the consummation of said purchase, then contemporaneously at the request
of the buyer, cause to be executed a contract or contracts with the buyer and/or
the corporation by which the sellers and each of them shall obligate themselves,
respectively, for a period of 7 years after the consummation of such purchase,
not to engage or be or become interested, directly or indirectly, as individuals,
partners, stockholders, directors, officers, employees, or lenders of money, in or
to any electric arc lamp business or electric arc lamp parts business other than
with the buyer or the corporation to be organized by him within any State of
the United States, except the State of Montana.
8. This contract shall inure to the benefit of the personal representatives,
executors, administrators, and assigns of the parties hereto.
In witness whereof the parties hereto have hereunto set their hands and seals
the day and year first above written.
In the presence:
THEODOEE HALL.
JOSEPH J. CONNOLLY.
J. E. MCATJLEY.
Balance sheet of Hall & Connolly, Inc., per hooks Dec. 81, 1938
Assets:
Cash in banks
Petty cash
Accounts receivable
Notes receivable
Inventory
Machinery and equipment
Furniture and
Tools and dies
$7,281. 75
11.53
34, 894.90
1, 500.00
19,998. 08
fixtures
9,953. 70
2,672.73
3,356.33
Reserve for depreciation
15,982. 76
3, 716.45
Deposits
Bent prepaid
Total assets
705.00
500.00
77,157. 57
STOCK EXCHANGE PRACTICES
3569
Balance sheet of Hall & Connolly, Inc., per looks Dec. 31, 1933—Continued
Liabilities:
Accounts payable
Bills payable
„
Royalties payable
Commissions payable
Due to. J. J. Connolly
Due to Theodore Hall
$9,447. 50
4,000.00
45.00
108. 60
4.970.00
5,420. <X>
.-
Total liabilities
- 23,991.10
Capital:
Capital stock
Surplus Jan. 1, 1928
Net profit year ending Dec. 31, 1928
$4,630.88
15,535.59
33,000.00
Surplus Dec. 31, 1928
20,166.47
Capital and surplus
53,166.47
77,157.57
We hereby certify that the above financial statement represents, in our
opinion, the true financial condition of Hall & Connolly, Inc., as of December 33ir
1928.
The inventory was accepted as submitted to us and appears to be reasonably
stated. Accounts receivable past due items included herein amount to approximately $3>500.
Per
L. B. PROSNITZ & Co.,
LUDWIG B. PBOSNITZ, C.P.A*
APRIL 13,
1929,
T H E CHASES NATIONAL BANK OF THE CITY OF NEW YORK,
18 Pine Street, New York City.
The undersigned, J. E. McAuley, herewith deposits with you
the sum of $12,000 to be held by you in escrow according to the following terms
and conditions:
1. The said sum is to be released by you at any time upon the joint request
of the undersigned and Messrs. Theodore Hall and Joseph Connolly, the said
sum to be paid to such person or persons as the said joint request shall
designate.
2. In the event that you do not receive from the undersigned and Messrs.
Hall and Connolly a joint request for the disposition of said sum on or before
the expiration of 90 days from the date hereof, you are to pay the said sum
forthwith to Messrs. Hall and Connolly; provided, however, that if the undersigned so notify you within the said 90 days' period not to pay the said sum
to the said Messrs. Hall and Connolly, you shall continue to ho'd the same
until released by the joint request of the undersigned and the said Messrs,
Hall and Connolly regardless of the lapse of any time or until you are directed
to pay it over by order of a court of competent jurisdiction.
It is understood and agreed that you shall assume no responsibility in connection with the deposit of the said sum other than the safekeeping thereof, and
it is further understood that your expenses, if any, in connection with the said
deposit will be reimbursed and you shall have prior charge on said fund Jcor
such reimbursement. The bank's compensation for its services shall be the
interest earned on the sum deposited herewith.
GENTLEMEN:
The signatures of Messrs. Hall and Connolly are as follows:
The undersigned acknowledges receipt of check of J. E. McAuley on the Mid
City Trust & Savings Bank, of Chicago, 111., in the amount'of $12,000, the
proceeds of which upon collection are to be held by it pursuant to the terms
hereinbefore set forth.
In triplicate.
THE CHASE NATIONAL BANK OP THE CITY OF NEW YORK,
By J. R. KANE, Second Vice President.
3570
STOCK EXCHANGE PKACTICES
The J. E. MOAULEY MANUFACTURING CO.,
Chicago, III.
: Beg to confirm our offer made to you through your Mr. J. E.
McAuley, good for 30 days, which is as follows:
If you will agree within the above period to enter into a contract for the
purchase of our company for $160,000, payable within 45 days from the signing
ot the contract, we will agree that our gross for the year 1928 was no less than
-$170,000 and our net no less than $20,000, and the fiscal inventory $60,000.
You agree, on signing the contract, to deposit $12,000 with Manufacturers Trust
Co., Canal Street branch, New York City, as liquidated damages in case you
4o not carry out the contract.
The representations as to our gross and net are subject to audit and
verification by your auditors. The money to be deposited on the signing of
the contract to be returned to you in case it is found that the gross and net
are less than represented.
Very truly yours,
GENTLEMEN
HALL & CONNOLLY, INC.,
JOSEPH J. CONNOLLY,
Treasurer,
Accepted:
COMMITTEE EXHIBIT NO. 143, NOVEMBER 17,
1933
This agreement made this 6th day of June, 1929, by and between H. F.
Boeger and George A. Mitchell, both of Los Angeles, Calif., hereinafter called
the " sellers ", and H. L. Clarke, of Chicago, 111., hereinafter called the " buyer ".
WlTNESSETH
1. The sellers agree to sell or cause to be sold and the buyer agrees to purchase or cause to be purchased, as hereinafter provided, all of the property,
business and assets of every kind and nature of the Mitchell Camera Co., a
California corporation, hereinafter sometimes referred to as the corporation, including in such property, business and assets, furniture, fixtures, jigs, dies, tools,
patterns, machinery, merchandise on hand, claims, insurance, securities, choses
in action, contracts, agreements, leases, leasehold interests, L censes, trade
marks, trade names, trade rights, brands, patents, applications for patents,
patent rights, also all cash and accounts receivable received by or becoming due
to the corporation after June 30, 1929, and the good will of the business of the
corporation or a similar name by or in connection with a corporation to be
organized by the buyer to carry on a business similar to that carried on by the
•corporation. The sellers also agree to cause to be conveyed to the buyer free
and clear of all liens, claims and encumbrances the real estate and improvements
toeing constructed thereon, situated in West Hollywood, county of Los Angeles,
State of California, more particularly hereinafter described, being the proposed
•new manufacturing plant, offices and administration building of the corporation, said improvements to be fully completed in accordance with the existing
plans and specifications relating thereto, with equ pment and machinery to be
installed therein.
The description of said real estate is as follows:
tLots 36 and 38, Winetka tract, and lots 7 and 8 of tract no. 3585 of the
county of Los Angeles, State of California.
2. The sellers hereby represent and warrant that the corporation now owns
or will acquire all letters patent under which it manufactures its products,
said patents to be included in the assets to be sold to the buyer.
3. The purchase price of said property, business, and assets shall be the
•sum of $1,475,000, payable as herein provided.
4. The buyer shall forthwith deposit with Continental Illinois Bank & Trust
Co., Chicago, 111., the sum of $100,000, which said sum shall be held in
-escrow by said bank and applied on the purchase price as herein provided.
(a) The buyer shall forthwith proceed to cause to be organized a corporation to acquire the assets, business, and property of the corporation (hereinabove described) for convenience hereinafter called the "New Corporation."
STOCK EXCHANGE PRACTICES
3571
The details of the organization of the corporation and the charter provisions
shall be subject to the approval of counsel of the sellers and the buyer, said
organization to be completed on or before July 1, 1929. The corporation shall
have an authorized issue of preferred stock in the amount of $1,000,000, consisting of 10,000 shares of the par value of $100 per share, said preferred
stock to be cumulative as to dividends in the amount of 7 percent per annum.
Said preferred stock shall be fully paid and nonassessable. The charter of
the new corporation shall contain certain restrictions on corporate action as
set forth in Schedule A, annexed hereto and made a part hereof.
(&) On or before September 1, 1929, the buyer shall cause to be deposited
with said Continental Illinois Bank & Trust Go. an additional sum of $375,000,
and 10,000 shares of the preferred stock of the new corporation, together with
an agreement by the new corporation and H. L. Clarke jointly and severally
to purchase from the seller said 10,000 shares of preferred stock of said new
corporation at the par value thereof, $100 per share, plus accrued dividends
thereon at the rate of 7 percent per annum, to be taken up and paid for as
follows: One thousand shares to be so purchased on or before October 1, 1929;
and ] ,000 shares on the first day of each succeeding month thereafter until the
10,000 shares shall have been purchased and paid for, provided, however, that
the buyer may at his option purchase at any time all of said preferred stock
by paying the par value thereof plus accrued dividends thereon to the date of
purchase.
(c) Said $475,000 so deposited with said bank, together with the 10,000 shares
of the preferred stock of the new corporation and the agreement to purchase
the same as above provided, shall be delivered by said bank to the sellers or
their nominee against the delivery to said bank for the account of the buyer
or his nominee of all properly executed bills of sale and/or instruments of title
necessary to vest in the buyer or his nominee all right, title and interest in
and to the property, business, and assets of the corporation.
(d) Interest on said $475,000 shall be paid at the rate of 7 percent per annum
from July 1, 1929, and dividends on said preferred stock shall be cumulative
from July 1, 1929.
In the event that the buyer does not perform the terms and conditions hereof
as above set forth, then the said sum $100,000 first to be deposited with Continental Illinois Bank & Trust Co. shall be paid by said bank to the sellers and
same shall be retained by the sellers as consideration given to the buyer by the
sellers dated April 12, 1929, and as liquidated damages.
5. The sellers agree that the business of the corporation shall continue to be
conducted in the ordinary course and that no unusual or extraordinary expenditure shall be made and that no dividend, will be declared or paid after
June 30, 1929, it being the agreement of the parties hereto that all of the net
earnings of the corporation accruing from and after July 1, 1929, shall accrue
to and belong to the buyer.
6. It is further agreed that the sellers shall, contemporaneously with the
consummation of the purchase hereunder, cause to be executed a contract or
contracts with the new corporation by which the sellers shall obligate themselves for a period of 5 years after the consummation of such purchase not
to engage or to become interested, directly or indirectly, as an individual,
partner, or stockholder, (Ji^ctor or officer or employee in or to any motionpicture camera business, other than with the buyer or the new corporation.
7. The sellers and each of them further agree that at the request of the
buyer they shall become employed by the new corporation in the same capacities as they now serve with the corporation for a period of at least 1 year
and at a salary for each of them of $25,000 per annum, payable monthly,
beginning July 1, 1929.
8. The buyer and/or his assignee shall cooperate with the sellers in the
collection of any and all accounts receivable of the old corporation due and
owing to the corporation prior to July 1, 1929, and shall permit the collection
for the account of the sellers by the new corporation at the office of the new
corporation of said accounts.
9. The buyer hereby guarantees and indemnifies the sellers, and each of
them, from and against any and all stockholders' liability and/or any and all
other liability and/or obligations of any kinds, natures or descriptions, attaching to, or which may at any time attach to, the 10,000 shares of preferred
stock to be deposited with said bank for the sellers by the buyer.
3572
STOCK EXCHANGE PRACTICES
10. This contract shall inure to the benefit of the heirs, personal representatives, executors, administration, and assigns of the parties hereto.
In witness whereof the parties hereto have executed this agreement as of the
day and year first above written.
By
H. F. BOEGEB,
GEORGE A. MITCHELL,
H. F. BOEGEB, Attorney-in-fact.
Sellers.
H. L. CLARKE, Buyer.
Witness:
O. E. KOEGEL.
SCHEDULE A
The charter of the new corporation shall contain among the provisions relating to the 7 percent cumulative preferred stock, of which there shall be
authorized 10,000 shares of the par value of $100 per share, the following:
Unless with the affirmative vote or written consent of the holders of 100 percent of the shares of preferred stock at the time outstanding (in addition to
any other vote or consent at the time required by law), the corporation shall
not:
1. Authorize or issue any stock or class of stock having a priority or preference over the preferred stock as to earnings or assets; or
2. Increase the authorized amount of preferred stock; or
3. Amend the provisions of the charter so as to alter or change the preferences given to the preferred stock; or
4. Grant or assume any mortgage, lien, or other encumbrances upon any of
its property or assets, real, personal, or mixed; this provision, however, is
not to prohibit the giving of any purchase money mortgages or the purchasing
of property already subject to mortgages; or
5. By sale, lease, merger, consolidation or otherwise, dispose of a substantial part of the business and assets of the corporation, including any manufacturing plant now or hereafter held by the corporation, or any substantial
portion of such plant.
The charter of the new corporation shall also provide that the preferred
stock shall have full voting power for the election of directors and other
purposes, which voting power shall be cumulative.
CHICAGO, I I I . ,
June 6, 1929.
Mr. H. L. CLARKE,
DEAR SIR :
Chicago, III.
This will confirm the understanding between us as follows:
Of even date herewith there has been entered into between you and the
undersigned an agreement relating to the sale of the property, business and
assets of the Mitchell Camera Corporation, a California corporation.
It is understood and agreed that you shall have the right to have an accountant of your selection, and satisfactory to the undersigned, make an examination of the books of account and records of the Mitchell Camera Corporation, with a view of determining the assets and earnings of the corporation.
It is further understood and agreed that you shall have the right and
option, on or before July 10, 1929, by notice in writing to the undersigned, to
rescind the aforesaid agreement between us executed of even date and contemporaneously herewith. In the event you so elect to rescind, the $100,000
on deposit with the Continental Illinois Bank & Trust Co. shall be returned to
you and both you and the undersigned shall be released of all liability under
said agreement. In the event you do not give such notice on or before July
10, 1929, said agreement shall remain in full force and effect.
Very truly yours,
H. F. BOEGEB,
GEORGE A. MITCHELL,
By H. F. BOEGER,
Witness:
Attorney in Fact.
O. E. KOEGEL.
Accepted:
H. L. CLARKE.
(The printed circular of General Theatres Equipment common stock voting
trust certificates is inserted at this point in the record.)
3573
STOCK EXCHANGE PRACTICES
GENERAL THEATRES EQUIPMENT, INO.
COMMON STOCK, VOTING TBUST CERTIFICATES (WHEN, AS, AND IF ISSUED)
Pynchon & Co., members of the New York Stock Exchange, 111 Broadway,
New York. Uptown offices: Madison Avenue and Forty-third Street and
Savoy-Plaza Hotel. 112 West Adams Street, Chicago, 111. 408 Broadway,
Milwaukee, Wis. 1 Drapers Gardens, London. Exchange buildings, Liverpool.
25 Cross Street, Manchester. While the information contained herein is not
guaranteed, it has been obtained from official sources. July 13, 1929.
Capitalization
{Upon completion of the present financing, and upon consummation of the exchanges of securities offered tc
stockholders]
Authorized Outstanding
15-year 6 percent convertible gold debentures due 1944.
Common stock, no par value
_
$6,000,000
15,000,000
$6,000,000
i 2 2,026,250
i Shares.
J Of this total 376,250 shares are reserved for exchange offers to stockholders.
EARNINGS
The following earnings of the companies and businesses to be acquired (as
above set forth) are based upon actual operations for the 12-month period
ended on May 31, 1929, and for the calendar years 1929 and 1930 on estimates
as to contracts or commitments now at hand or presently to be acquired:
Year ended
May 31,
1929
Dec. 31,
1929
Net income before Federal income taxes -- $2,283,530 $4,465,000
Maximum annual interest requirements on $6,000,000. 15-year 6 percent convertible gold debentures due 1944
360,000
360,000
Total
. . .
Equivalent per share on 2,026,250 shares common stock
1,923,530
0.94
4,105,000
2.02
Dec. 31,
1930
$10,655,000
360,000
10,295,000
5.08
MANAGEMENT AND GENERAL
The motion-picture industry today is the fifth largest industry in the United
States, with a capital investment of approximately $1,750,000,000. There are
about 20,000 motion-picture theaters in the United States, with a seating
capacity of approximately 16,500,000, and a weekly attendance of over
100,000,000. It is conservatively estimated that the annual receipts of the
motion-picture houses total more than $800,000,000.
It occupies an impregnable position among the industries of the United States.
Its business is little affected by business depressions, due to the popular prices
of its programs, and with the favorable public relations which it enjoys, the
widespread appeal of the talking movie and the remarkable improvements in
the methods of projection and presentation, it appears that the motion-picture
industry now stands on the threshold of a new era of prosperity and expansion.
General Theatres. Equipment, Inc., will constitute a complete unit for the
manufacture, distribution, installation, and servicing of all types of equipment
and supplies used in the operation of motion-picture and general theatres.
The management of the corporation will continue to be vested in the hands of
those who have been responsible for the successful operation of the businesses
being acquired. In order to insure a continuity of the present successful management, all of the common stock will be placed under a voting trust agreement,
expiring July 1, 1939, under which Mr. H. L. Clarke, Mr. W. F. Ingold, and
Mr. W. S. Hammons will act as voting trustees.
3574
STOCK EXCHANGE PRACTICES
General Theatres Equipment, Inc., should be able to effect very substantial
economies in operation due to its large purchasing power and the benefits of
centralized operation and management of the businesses to be acquired.
The registrars for the common stock will be The Chase National Bank of the
city of New York and the Continental-Illinois Bank & Trust Co. of Chicago;
the transfer agents will be Commercial National Bank & Trust Co. cf New
York and the office of the corporation in Chicago.
Mr. H. L. Clarke, President of Cteneral Theatres Equipment, Inc., has furnished the following information regarding the company and its issue of
common stock:
ORGANIZATION AND BUSINESS
General Theatres Equipment, Inc., a Delaware corporation, will own in excess
of 60 percent of the outstanding common stocks of International Projector
Corporation and National Theatre Supply Co. and all of the outstanding common stock of Theatre Equipment Acceptance Corporation. Upon acceptance
of the exchange offers now being made, General Theatres Equipment, Inc.
will own all of the outstanding common stocks of these companies. The proceeds of present financing will provide funds with which to acquire all of the
outstanding funded debt and preferred stocks of these companies. The corporation will also acquire 50 percent of the outstanding capital stock of Grandeur,
Inc., which will acquire through a wholly-owned subsidiary all of the business
and assets of Mitchell Camera Co. General Theatres Equipment, Inc. will also
acquire all of the outstanding capital stock of Hall & Connolly, Inc. and through
wholly owned subsidiaries the properties, businesses and assets of The Strong
Electric Company, J. E. McAuley Manufacturing Co., and Ashcraft Arc Lamp
Co.
International Projector Corporation manufactures in excess of 75 percent
of the motion picture projectors used throughout the world, many of its products also being used by churches, schools, and large industrial concerns. International Projector Corporation has been in the fore-front in adapting its projection apparatus to the sound motion picture, and controls important patents in
sound projection equipment. During the past two years it has developed several
new types of motion p'cture machines which are expected to revolutionize the
industry. These machines have been perfected to a degree where the pictures
are projected in such manner that an illusion of a third dimension is given.
The corporation sells a large portion of its products to the Western Electric
Co., Radio Corporation of America, Loew's, Inc., Fox Film Corporation, Paramount-Famous Players-Lasky Corporation, and to other large users.
National Theatre Supply Co. maintains a nation-wide distributing
organization which sells all types of equipment used in theaters. I t
operates 30 stores and warehouses in principal cities of the United
States, and services booth equipment in over Y5 percent of all motionpicture theatres in the United States. The company has exclusive
selling arrangements for products of International Projector Corporation, except those held by Grandeur, Inc.
Grandeur, Inc., was organized to distribute and service the new
types of motion-picture projectors which have been developed by
International Projector Corporation. The new equipment will be
leased by Grandeur, Inc., on a rental basis for a period of 10 years
after installation. Grandeur, Inc., has entered into a contract under which Fox Theatres Corporation, or any affiliated company,,
agrees to lease all projecting equipment of the new type required by
it, or any subsidiary or affiliated company, on this basis.
Mitchell Camera Co. manufactures professional cameras for both
the silent and sound pictures, its products being used by the foremost producers of motion-picture films. The corporation has developed new types of equipment in connection with the production
of sound pictures, placing it in a most favorable position in this
growing branch of the industry.
3575
STOCK EXCHANGE PRACTICES
Theatre Equipment Acceptance Corporation finances commercial
paper taken for theater equipment and secured by contracts of conditional sale, chattel mortgages^ etc.
J. E. McAiiley Manufacturing Co., Hall & Connolly, Inc., the
Strong Electric Co., and Ashcraft Arc Lamp Co. manufacture projection lamps used in theaters. Sound and talking pictures require
larger and more powerful light sources resulting in a wide-spread
demand for more of the efficient lamps of the types manufactured
by these companies.
COMMITTEE! EXHIBIT No. 152, NOVEMBER 21, 1938
(The two-page photostatic reproduction of market quotations of General
Theaters Equipment stock will be found only in the chairman's copy.)
General Theatres Equipment
Date
Preferred
Common (new)
July 15,1929
Aug. 1, 1929
Aus. 15, 1929
Sept. 1,1929
Sept. 15,1929
Oct. 1,1929
Oct. 15,1929
Nov. 1 (Oct. 31), 1929..
Nov. 15, 1929
Dec. 2,1929
Dec. 16, 1929
Jan. 2,1930
Jan. 15,1930
Feb. 1,1930.
Feb. 15,1930
Mar. 1,1930
Mar. 15,1930
Apr. 1,1930
Apr. 15,1930—
May 1,1930
May 15,1930
June 2.1930
June 16, 1930
July 1,1930-.
July 15, 1930
Aug. 1,1930
Aus. 15, 1930
Sept. 2,1930
Sept. 15, 1930
Oct. 1, 1930
Oct. 15, 1930
Oct. 16 . . .
Nov. 1, 1930
Nov. 15, 1930
Dec. 1, 1930
Dec. 10
Dec. 11
Dec. 15,1930
Jan. 2,1931
Jan. 15,1931
Feb. 2,1931
Feb. 16,1931
Mar. 2,1931
Mar. 16,1931
Apr. 1,1931
Apr. 15,1931
May 1,1931
May 15,1931
June 1,1931
June 15,1931
July 1,1931
July 9,1931
1 New York Produce Exchange.
2 New York Curb Exchange,
a New York Stock Exchange.
Common (old)
32 i .
34 »_
34 2.
33
32
Listed,
^
3
Jan.
2
331/
Oct. 14, 35.1
Oct.l6,37M.»
19
S
2__
10%
34H-2
35.
27%.
24.
25.
Ik.
AM-
m
5
28.
20.
ny2.
9.
7. "•
3576
STOCK EXCHANGE PRACTICES
Fox
Date
July 15,1929
A u g . l , 1929
Aug. 15, 1929
Sept. 1,1929
Sept. 15, 1929
Oct. 1, 1929
Oct. 15,1929
Nov. 1 (Oct. 31), 1929.
^ o v . 15,1929
Dec. 2, 1929
Dec. 16,1929
Jan. 2,1930
Jan. 15,1930
Feb. 1,1930
Feb. 15,1930
Mar. 1,1930
Mar. 15,1930
Apr. 1,1930.
Apr. 15,1930
May 1,1930
May 15,1930
June 2,1930
June 16,1930.
July 1,1930
July 15,1930
8
New York Stock Exchange.
Film
Loew's,
Inc.,
commom
Date
Aug. 1,1930Aug. 15, 1930.
Sept. 2,1930..
Sept. 15,1930.
Oct. 1,1930__
Oct. 15,1930.
Nov. 1,1930..
Nov. 15,1930.
Dec. 1,1930—
Dec. 15,1930.
Jan. 2,1931..
Jan. 15,1931..
Feb. 2,1931Feb. 16,1931.
Mar. 2,1931..
Mar. 16,1931.
Apr. 1,1931Apr. 15,1931.
May 1,1931May 15,1931.
June 1,1931—
June 15,1931.
July 1,1931..
July 9,1931-
Fox
Film
"A"
Loew's,
Inc.,
common
STOCK EXCHANGE PEACTICES
WEDNESDAY, NOVEMBER 22, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE
COMMITTEE ON BANKING AND CURRENCY,
Washington, D.C.
The subcommittee met at 10 a.m., pursuant to adjournment on
yesterday, in room no. 301 of the Senate Office Building, SenatorDuncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Gore (substitute for
Barkley), Adams (proxy for Costigan), Couzens, Townsend, and
Goldsborough (substitute for Norbeck).
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver, David Saperstein, and David Schenker, associate counsel to
the committee; and Frank J. Meehan, statistician to the committee;
Alfred E. Mudge, Julian L. Hagen, and C. Horace Tuttle, of Eushmore, Bisbee & Stern, also William Dean Embree, of Milbank,
Tweed, Hope & Webb, counsel representing The Chase National
Bank and The Chase Corporation.
The CHAIRMAN. The subcommittee will come to order.
Senator TOWNSEND. Mr. Chairman, before you call your witness I
desire to make a suggestion: We do not seem to be able to get
started at 10 o'clock in the morning, and I make a motion that we
meet hereafter at 10:30 o'clock instead of 10 o'clock a.m., so that
we may start promptly at the time fixed.
The CHAIRMAN. DO you suggest that we meet at 10:30 a.m. and
run until 1:30 p.m., and then take a recess until 2:30 and run.
until 4:30?
Senator COUZENS. I do not agree with that. I think we better*
be on time. And 1:30 p.m. is pretty late to run at the noon timeSenator TOWNSEND. My suggestion is made for the reason that,
we do not seem to be able to reach here on time in order to, start"
at 10 o'clock, the time fixed.
Senator COUZENS. I think if you will check the record you will
find that I have been as much on time as has the Senator from*
Delaware.
Senator TOWNSEND. I am not at all criticizing the Senator fromi
Michigan, but
The CHAIRMAN (interposing). Senator Couzens, I might explain *
that Mr. Pecora is bothered by telephone calls, and all that sort of
thing, and that he has found it almost impossible to be here promptly *
for the meetings at 10 o'clock a.m. It is simply a matter of fixing
the time that will be most convenient, and I think, the. time.? suggested would work out all right,
3577'
3578
STOCK EXCHANGE PRACTICES
Mr. PECORA. Why not make it from 10:30 a.m. to 1 p.m., and then
recess until 2 o'clock p.m., and run until 4:30 p.m. ? You will then
add that half hour in the afternoon.
Senator COUZENS. That will be satisfactory to me.
The CHAIRMAN. If that is satisfactory it will be the order. Hereafter the subcommittee will meet at 10:30 a.m. and recess at 1 p.m.
until 2 p.m., and remain in session until 4:30 p.m. That will be the
order hereafter.
I believe Mr. Dodge was on the stand.
Mr. PECORA. Yes; Mr. Dodge.
TESTIMONY OF MURRAY W. DODGE—Resumed
Mr. PECORA. Mr. Dodge, at the conclusion of your testimony of
yesterday's hearing we had reached the point where the General
Theatres Equipment entered into a certain contract with William Fox
under the terms of which General Theatres Equipment, Inc., acquired
some shares of Fox Film Corporation and of Fox Theatres Corporation. Do you recall that?
Mr. DODGE. Yes, sir.
Mr. PECORA. And the
purchase price paid under that contract was
$15,000,000 and other considerations?
Mr. DODGE. Yes, sir.
Mr. PECORA. Among
the other considerations were payments of
various sums of money that aggregated eventually about $6,000,000,
did they not ?
Mr. DODGE. I have a bad cold, Mr. Pecora, and am sorry I cannot
talk very plainly. I am trying to talk so you can hear me, and
clear my throat now and then as you have no doubt heard.
Senator COUZENS. YOU are doing very well,
Mr. DODGE. I thank you. Now, Mr. Pecora, the original contract
at that time was for 15 million dollars, plus the taking over of certain claims which Mr. Fox had and which amounted to 3 million
dollars.
Mr. PECORA. Well, now
Mr. DODGE (continuing). I do not know what you refer to as the
additional 3 million dollars.
Mr. PECORA. Well, I merely took that as an approximation of the
aggregate of other items, like salary of $500,000 a year for five
years, which was to be paid to Fox's estate in event that he died
within the 5-year period. Do you recall that?
Mr. DODGE. Yes, sir.
Mr. PECORA. That involved a total amount of 2%
Mr. DODGE. Yes, sir.
Mr. PECORA. And then he was given the promise
million dollars.
of a 10 percent
participation in certain stock acquisitions, and then that was waived
by him for a consideration that was paid to him in cash. Do you
recall that?
Mr. DODGE. My recollection was, Mr. Pecora, that he agreed to
take, and then later did not take, 10 percent.
Mr. PECORA. But in lieu of that 10 percent he received a cash
consideration, didn't he?
STOCK EXCHANGE PRACTICES
3579
Mr. DODGE. There was a settlement made between him and Mr.
Clarke and General Theatres Equipment later. That was in August,
wasn't it?
Mr. PECORA. Yes, in August of 1930.
Mr. DODGE. Yes,
sir.
Mr. PECORA. And all under the agreement of April 1930?
Mr. DODGE. Yes, sir.
Mr. PECORA. From that
point on I want you to tell the subcommittee certain details with regard to the financing of that transaction
by General Theatres Equipment, Inc. Now, the $15,000,000 cash
consideration, and that is the agreement of April 7, 1930, required General Theatres Equipment, Inc., to pay to William Fox,
and it was so paid by General Theatres Equipment, Inc., through
the means of a loan made to it by the Chase National Bank, isn't
that a fact?
Mr. DODGE. That is correct.
Mr. PECORA. DO you recall what security was given for that loan ?
Mr. DODGE.*The 50,101 shares, isn't it? Or the fifty thousand and
odd shares of Fox Film B stock, and
Mr. PECORA (interposing). It was 50,101 shares of Fox Film class
B stock, and
Mr. DODGE (interposing). And was
Mr. PECORA (continuing). And 100,000 Fox Theaters class B stock.
Mr. DODGE. Yes; and 50,101 of class B stock of Fox Film Corporation.
Mr. PECORA. In other words, they put up as collateral for that
loan the two blocks of stock which they acquired from Fox Film
Corporation and Fox Theatres Corporation.
Mr. DODGE. N O ; they acquired the stock from Mr. Fox himself.
Mr. PECORA. Yes, and
Mr. DODGE (continuing). That was
Mr. PECORA. And the risks were
the stock that they put up.
taken by the bank in that
financing.
Mr. DODGE. NO, sir; the risks were taken by General Theatres
Equipment, because the loan was given on a note of General Theatres
Equipment, with these stocks as collateral.
Mr. PECORA. I mean the risk as to the cash that was furnished.
The deal was financed entirely by the Chase National Bank for
General Theatres Equipment.
Mr. DODGE. The Chase National Bank made the loan to General
Theatres Equipment, Inc.; yes, sir.
Mr. PECORA. NOW, as a matter of fact negotiations had been initiated several months before April of 1930 that led to that agreement
with Fox, had they not?
Mr. DODGE. I think, as I testified on yesterday, Mr. Pecora, negotiations, or tentative negotiations, had been discussed in the early
part of December 1929, but had ceased at that time. They were nol
renewed again until April.
Mr. PECORA. NOW, I am going to ask you to produce a telegram that
you sent to Mr. Harley Clarke under date of April 8, 1930.
Mr. DODGE. DO you ask me to produce it?
Mr. PECORA. Have you a copy of that telegram?
3580
STOCK EXCHANGE PRACTICES
Mr. MTJDGE. What is the number, please?
Mr. PECORA. The number is 65-12.
Mr. DODGE. I have that wire now, Mr. Pecora.
Mr. PECORA. I show you what purports to be a photostatic copy of
that telegram. Will you pl'ease look at it and tell me if it is a true
and correct copy.
Mr. DODGE. Yes, sir.
Mr. PECORA. Mr. Chairman,
I offer it in evidence, and ask that it
may be made a part of the record.
The CHAIRMAN. Let it be received, and the committee reporter will
make it a part of the record.
(A telegram dated Apr. 8, 1930, to Harley L. Clarke was marked
;' Committee Exhibit No. 157, November 22,1933 ", and will be found
immediately following where read by Mr. Pecora.)
Mr. PECORA. The paper which has been marked " Committee Exhibit No. 157 " reads as follows :
[Private wire]
APRIL 8,
1930.
HARLEY L. CLARKE,
Chicago.
Referring to telephone conversation: I want you to know that when I first
called H. S. on the phone yesterday my remark was: " I congratulate you,
Harry. It looks as though the ball was in your possession on the 2-yard line
on its first down."
At the opening of the conversation at my office I told him that both the
General Theatres and ourselves recognized that the film financing was his,
that the Chase asked for nothing in the matter whatever, nor had they in the
past; that you had asked me to represent you as the General Theatres because
we were the leading bankers in that company, and because I was thoroughly
conversant with all your negotiations; and that I wanted it plainly understood
that any suggestions that were made as to the financial plan were suggestions
only, as the hnal plan would have to be presented by him, but that we believed
the suggestion that I was making for the General Theatres was sound and constructive, and would make it possible to sell the securities immediately, and
would result in an absolutely clean slate for both the Film and Theatres company, and more profits for the bankers.
After making this remark I proceeded to give him our suggestions. I am
wiring you this as you told me over the phone that he seems to have the impression, after his talk with me, that the Chase was trying to run the whole show
and shove him aside.
MURRAY DODGE.
Now, to whom do the initials " H. S.", in the opening sentence in
this telegram, refer to?
Mr. DODGE. TO Harry Stuart, of Halsey Stuart & Co.
Mr. PECORA. Halsey Stuart & Co. had been the principal bankers
for the Fox interests prior to April of 1930?
Mr. DODGE. Yes, sir.
Mr. PECORA. And what
arrangement was made in this financing,
and the purchase by General Theatres Equipment from William Fox
of those two blocks of stock, Fox Film and Fox Theatres Corporations, respectively, with Halsey Stuart & Co., in view of their prior
arrangement for the financing of the Fox Film interests ?
Mr. DODGE. At the time of the acquisition of the B stock, which
was made on April 7, there was no plan of financing. That is, on
tlhat day.
Mr. PECORA. Yes.
STOCK EXCHANGE PRACTICES
3581
Mr. DODGE. Naturally, immediately afterwards it was necessary to
form some plan, to work out not only the $90,000,000 of obligations
which both the Fox Film Co. and the Fox Theaters Co. had, but
also the $15,000,000 which General Theaters Equipment had paid for
these stocks, making a total of somewhere around $100,000,000 to
$105,000,000. And the telegram referred to a conversation which
occurred on the day after the contract was consummated. It was
dated April 7, was it?
Mr. PECORA. Yes,
sir.
Mr. DODGE. And the consummation of the purchase from Mr. Fox
was on the 7th. The talk I had with Mr. Stuart was on the morning
of the 8th. Mr. Stuart read in the newspapers of this purchase from
Mr. Fox, which was done over Sunday. The 7th I believe was on
Monday. And he naturally wanted to know what the plans were
and where his firm was going to fit into the picture. I told him that
as far as Chase Securities was concerned, and I was sure I spoke
for my associates, the other bankers in the General Theatres Equipment financing, that we had no intention to do anything but recognize the preferential rights which his firm had with the Fox Film
Co.; and that therefore any financing which was done directly for
the Fox Film Co. would be done by Halsey, Stuart & Co., and
that we neither had had in the past nor would have in the future,
anything to ask in that respect.
Mr. PECORA. NOW, you had a conversation with Halsey, Stuart &
Co. some time on April 8, 1930 ?
Mr. DODGE. In the morning; yes, sir.
Mr. PECORA. And was that the conversation to which you referred
in this telegram to Harley Clarke that has just been offered in
evidence ?
Mr. DODGE. Yes, sir.
Mr. PECORA. Did you
make a memorandum for future reference
or for any other reason after your telephone conversation with
Stuart?
Mr. DODGE. I do not think so.
Mr. PECORA. Or rather after your telephone conversation with
Harley Clarke?
Mr. DODGE. I don't remember, but I think that is the only memorandum that I had.
Mr. PECORA. Will you refer to a document from the files of the
Chase Corporation, known as no. 65-8A. Have you got a memorandum bearing that identifying number ?
Mr. DODGE. Is it 65-8A?
Mr. PECORA. Yes.
Mr. DODGE. Yes, sir.
Mr. PECORA. I S that a
memorandum made by you of the conversation you had with Harley Clarke on the 8th of April 1930 ?
Mr. DODGE. NO, sir; it was not made by me. That was a telephone
conversation which Mr. Clarke had, or that somebody in his office
in New York had. I think it was Mr. Koegel, and was sent to me
for my information.
Mr. PECORA. By Mr. Clarke?
Mr. DODGE. AS I remember this, it was sent by Mr. Koegel from
Mr. Clarke's office in New York. Mr. Clarke was in Chicago.
175541—34—PT 7
24
3582
STOCK EXCHANGE PRACTICES
Mr. PECORA. Mr. Koegel was representing Clarke at that time?
Mr. DODGE. Yes, sir; and Mr. Clarke was in Chicago.
Mr. PECORA. I show you what purports to be a photostatic reproduction of that memorandum. Will you look at it and see if you can
identify it as a true and correct copy thereof?
Mr. DODGE. Yes, sir.
Mr. PECORA. Mr. Chairman,
I offer it in evidence, and ask that it
may be made a part of the subcommittee's proceedings.
The CHAIRMAN. Let it be admitted, and the committee reporter
will make it a part of the record.
(A memorandum dated Apr. 8,1930, headed " Excerpts from conversation with H. L. C", was marked " Committee Exhibit No. 158,
Nov. 22, 1933 ", and will be found immediately following where
read by Mr. Pecora.)
Mr. PECORA. The memorandum which has been marked " Committee Exhibit No. 158 ", of this date, reads as follows:
EXCERPTS FROM CONVERSATION OF H.O.L.—4/8/30
CLARKE. Stuart was in our office with Koegel, and he finally said that he
felt very bad, that he had been very badly treated, generally speaking. He
said, " Well, I went over to see Murray Dodge, and he tried to tell me what the
amount of debentures should be and the price and the conversion." I said,
"Did he ask you for any of the debentures? If he didn't ask you for any
of the debentures, he might have been giving you good advice * * *
naturally, because it might affect our financing, and if he made a suggestion,
it might have been a good one. Murray didn't want to inject himself into the
proposition." I said, " Harry, what have you got on your mind? " He said,
" Well, I won't tell to anyone until you come out." I said, " Well, I am not going
to leave here until tomorrow, so it is necessary that this thing go ahead.
As a matter of strategy, this matter ought to be handled his way, and I want to
get your consent to do it, if not now, later in the day. I want you to agree
that I do not have any preferential agreement with you or any of the other
bankers. They will try to drive me into one with you, and I won't be driven."
Stuart said, " Well, that might be the way to do it."
(Stuart said he was going to call me at 2 o'clock, but called back about 5
minutes later.)
Stuart said, "We can't settle this thing until you get here. You are tired
and want to get away."
(I told him I was going to Lake Geneva, but have since changed my mind.)
I said, " You have something on your mind. For God's sake spill it. Now,
look here, you and I went into this thing to see it through. If it had not
been for the Chase I could not have gotten the money. There is no one person
responsible, but they all are ready to claim credit. Even I may claim credit
for it 6 mxmths from now." Stuart said, "I think you have done as much
as anybody."
CLARKE. Maybe I have, but whatever I have contributed
STUART. Well, you're getting all the credit for it in the newspapers.
CLARKE. Well, what's wrong?
STUART. I have been put out on the end of a springboard and told to jump
off.
CLARKE. What do you mean?
STUART. Well, for one thing, Blumenthal and Greenfield, knew what was going
on, and I didn't.
CLARKE. Well, if they got any information, they didn't get it from me. If you
want to play ball with me, you tell me what you have on me, and if you have
anything on me, I will come clean with you. I have a reputation as well as you
have.
STUART. I don't think you ought to talk to me like that. I feel as though I
have been pushed out of the picture. Here's one thing that disturbed me very
much. Mr. Niver is a director of the General Theatres, and was not invited to
the meeting yesterday.
STOCK EXCHANGE PRACTICES
3583
(Koegel said none of the bankers were at the meeting. He said he was so
tousy watching those fellows that he didn't have time to pay any attention to it.)
CLAEKB. Then I took another tack. I said, "Well, Harry, my heart is too
full. I ought to be very happy today. Then I called you up, and all I got from
you was gloom. Find out what you have on your mind. Find out what you
want me to do, and call me up. You have said nothing but a lot of trash to me,
and I am more or less sick about it.
(Then I had a talk with John Otterson, and told John what I have just told
you. I told him that he could repeat it to Stuart if necessary.)
I said, I have nothing to do with the publicity. Sam Untermeyer is raising
hell right now because we are permitting publicity favorable to Halsey Stuart.
(The thing that raised particular hell was a headline in the Chicago Tribune,
something to the effect that he had whipped the bankers into line.)
If you talk to him, you might say that when I talked to you I was in just a
blue funk. * * * After everything I had done, it looked as though nothing
had been appreciated.
Now, Mr. Dodge, can you elaborate on this memorandum of the
^conversation that Clarke had on that day with Halsey, Stuart & Co. ?
Mr. DODGE. I cannot elaborate on the conversation which Mr.
Clarke had with Mr. Stuart. And I do not think it needs any
•elaboration.
Mr. PECORA. After the termination of this agreement, and this
negotiation, steps were taken in behalf of General Theatres Equipment to do some future financing of the Fox interests as required
by this transaction, by General Theatres Equipment, were there not ?
Mr. DODGE.
Yes.
Mr. PECORA. And those steps included a proposal for the issuance
of $55,000,000 par amount of 1-year 6 percent gold bonds ?
Mr. DODGE. That is what the financing eventually amounted to.
Mr. PECORA.
Yes.
Mr. DODGE. But between April 7 or April 8, in these discussions
that I had with Mr. Stuart, and the actual closing of the contract,
which involved all the financing, 10 days later, on the 17th, there
were a great many discussions as to exactly what that financing
would be.
Mr. PECORA. Who took part in those discussions with you, Mr.
Dodge?
Mr. DODGE. The discussions were almost entirely had between Mr.
Clarke and Mr. Stuart. Chase Securities Corporation, as I stated
in that memorandum which was put in evidence, that telegram to
Mr. Clarke, were entirely on the side lines in regard to that.
Mr. PECORA. Well, there had been some feeling, apparently, on
the part of Haleey, Stuart & Co. that they were being crowded out
of the picture with respect to future financing. Isn't that so ?
Mr. DODGE. I don't think that that was what he felt. During
the
Mr. PECORA (interposing). Isn't that the implication that flo
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