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STOCK EXCHANGE PRACTICES
HEARINGS
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVENTY-THIRD CONGRESS
FIRST SESSION
ON
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
Siles. 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 2
(J. P. Morgan & Co.; 0. P. Van Sweringen)
MAY 26, 31, JUNE 1, 2, 5, 6, 7, 8, and 9, 1933
Printed for the use of the Committee on Banking and Currency
UNITED STATES
GOVERNMENT PRINTING OFFICE
175541
WASHINGTON : 1934
COMMITTEE ON BANKING A\ J CURRENCY
DUNCAN U. FLETCHER, Florida, Chairman
CARTER GLASS, Virginia
PETER NORBECK, South Dakota
ROBERT F. WAGNER, New York
PHILLIPS LEE GOLDSBOROUGH, Maryland
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, Alabama
WILLIAM GIBBS McADOO, California
ALVA B< ADAMS, Colorado
WILLIAM L. HILL, Clerk
R. H. SPARKMAN, Acting Clerk
II
CONTENTS
Testimony of—
George H. Howard, 1001 Park Avenue, New York City, president
of United Corporation and president of New York United Corporation
307,359
Angell, Montgomery B
810
Ewing, William, member of the firm of J. P. Morgan & Co
801, 821
Keyes, L. A., manager J. P. Morgan & Co
^
459
Lamont, Thomas S., member of the firm of J. P. Morgan & Co___ 558, 779
Lamont, Thomas W., member of the firm of J. P. Morgan & Co
833
Morgan, J. P., head of J. P. Morgon & Co_..-.-_878
Murphy, John P
671
Stanley, Harold, partner in the firm of J. P. Morgan & Co
829
Van Sweringen, O. P., president of the Alleghany Corporation
563>
619,633, 657, 672, 679, 713, 746
Whitney, George, member of the firm of J. P. Morgan & Co
369,
444, 467, 477, 527, 822
m
STOCK EXCHANGE PEACTICE8
FBIDAY, MAY 26, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE,
ON BANKING AND CURRENCY,
Washington, D.C.
The^subcommittee met, pursuant to adjournment on yesterday, at
11 o'clock a.m. (at the conclusion of an executive session), in the
caucus room of the Senate Office Building, Senator Duncan U. Fletcher
presiding.
Present: Senators Fletcher (chairman), Glass, Barkley, Costigan,
Townsend, and Couzens.
Present also: Senators Bulkely, Gore, Byrnes, Bankhead, Adams,
Goldsborough, Kean, Steiwer, Caraway, and Byrd.
Present also: Ferdinand Pecora, counsel to the committee, Julius
Silver, David Saperstein, and James B. McDonough Jr., associate
counsel to the committee. John W. Davis, counsel for J. P. Morgan
& Co. Randall J. LeBoeuf, Jr., and Earle J. Machold, counsel for the
United Corporation and for George H. Howard, president of the
United Corporation.
The CHAIRMAN. Let there be quite in the room. The committee
will come to order. The first witness this morning will be Mr. George
H. Howard. Is Mr. Howard present?
Mr. HOWARD. Yes; Mr. Chairman.
The CHAIRMAN. Come around to the committee table, 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. HOWARD. I do.
The CHAIRMAN. Take
a seat.
TESTIMONY OF GEORGE H. HOWARD, 1001 PARK AVENUE, NEW
YORK CITY; PRESIDENT UNITED CORPORATION AND PRESIDENT OF NEW YORK UNITED CORPORATION
Mr. PECORA. Mr. Howard, will you give your full name and address
to the official committee reporter?
Mr. HOWARD. George H. Howard, 1001 Park Avenue, New York
City.
Mr. PECORA. What is your business or profession?
Mr. HOWARD. I am president of the United Corporation, and
president of the New York United Corporation.
Mr. PECORA. IS the New York United Corporation a subsidiary
of the United Corporation?
307
308
STOCK EXCHANGE PEACTICES
Mr. HOWARD. It is a wholly owned subsidiary of the United
Corporation.
Mr. PECORA. When did you become the president of these two
corporations, Mr. Howard?
Mr. HOWARD. I was elected president of the United Corporation
on the 26th of February 1929, effective on the 2d day of March.
And I was elected president of the New York United Corporation, as
I recall, some time iii the fall of 1929. I can find that exact date if
you would like it.
Mr. PECORA. When was the United Corporation organized?
Mr. HOWARD. On the 7th of January 1929.
Mr. PECORA. Under the laws of what State?
Mr. HOWARD. Of the State of Delaware.
Mr. PECORA. Are you familiar with the financial set-up of that
corporation at its inception?
Mr. HOWARD. I am familiar by having studied it, sir, in great
detail. I did not take an active part in the affairs of the corporation
generally until after I became president.
Mr. PECORA. Mr. Howard, I show you a printed document entitled a Certificate of Incorporation of United Corporation, Organized
Under the Laws of the State of Delaware", which has been furnished
to me by the firm of J. P. Morgan & Co. Will you kindly look at it
and tell us if you recognize it to be a true copy of the certificate of
incorporation of that company?
Mr. HOWARD. I do not know, Mr. Pecora, whether this is the
original or the amended. There have been some amendments of the
first articles.
Mr. PECORA. Look at it, please, and see how far you may be able
to identify it.
Mr. HOWARD. Well, I think it is the original.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. It will be received and made a part of the record
of our hearings.
(The certificate of incorporation of the United Corporation was
received in evidence and marked " Committee Exhibit No. 22, May
26, 1933 ", and will be found at the end of the day's proceedings.)
The CHAIRMAN. Mr. Howard, do you mean to say there have been
some amendments to that paper?
Mr. HOWARD. Why, the stock has been increased, Senator Fletcher,
since the original.
Mr. PECORA. Mr. Howard, by profession you are an attorney and
counsellor at law and admitted to practice in the courts of the State
of New York.
Mr. HOWARD. I am, sir.
Mr. PECORA. Will you tell
the committee as concisely as you can
what the original set-up was of this corporation?
Mr. HOWARD. Mr. Pecora, I can tell you that only by referring
to the records, if you would like for me to do that.
Mr. PECORA. All right, sir.
Mr. HOWARD. The United Corporation, as I have stated to you,
was incorporated on the 7th of January 1929. About the 11th of
January 1929 it acquired from J. P. Morgan & Co. 350,957 shares of
the common stock of the Mohawk Hudson Power Corporation,
62,360 shares of the second preferred stock of the Mohawk Hudson
STOCK EXCHANGE PEACTICES
309
Power Corporation, 124,740 option warrants of the Mohawk Hudson
Power Corporation, 130,565 shares of the common stock of the
United Gas Improvement Co., 59,500 shares of the common stock
of the Public Service Corporation of New Jersey, and $700,801.10
in cash. And the United Corporation issued in consideration of the
receipt of those shares and that cash, 600,000 shares of its $3 cumulative preference stock, and 800,000 shares of its common stock, and
714.200 option warrants. The second
Mr. PECORA (interposing). May I just interrupt you there?
Mr. HOWARD. Certainly.
Mr. PECORA. DO you know what the market value was at that time
of the securities which the United Corporation received from J. P,
Morgan & Co.?
Mr. HOWARD. I do not know the figure, but the market value of
the securities received from Morgan at such prices as were made to
the corporation, was about $12,000,000 above—no, I mean under their
market value at that time.
Mr. PECORA. Did I understand you to say that the market value
of the securities was $12,000,000 under their market value?
Mr. HOWARD. Yes, sir.
Mr. PECORA. I do not quite get that statement,
Mr. HOWARD. N O ; I beg pardon, Mr. Pecora.
Mr. Howard.
The market value
at the time those securties—well, the securities were turned in at a
price of about $12,000,000 less than their market at that time.
Mr. PECORA. What was their market value, sir?
Senator COUZENS. DO you mean per share or in the aggregate,
Mr. Pecora?
Mr. PECORA. NO ; in the aggregate.
Mr. HOWARD. May I ask an assistant to compute that figure for
you?
Mr. PECORA. YOU may refer to any document or data to enable
you to answer that question.
Mr. HOWARD. I thank you.
Mr. PECORA. Provided you are assured in your own mind that the
documents or data that you use to enable you to answer these questions are authentic and correct.
Mr. HOWARD. Oh, yes.
Senator COUZENS. Are you a Philadelphia lawyer?
Mr. HOWARD. NO, sir.
Senator GLASS. Well, I am sorry because if you were
I was going to
ask you what market value in January of 1929 amounted to. It was
not worth any more than the paper it was written on, was it?
Mr. HOWARD. I guess it proved subsequently to be so.
Senator COUZENS. Well, I had particular reference to that financial
set-up that you were just reading from, when I asked if you are a
Philadelphia lawyer.
Mr. HOWARD. NO; I am
Senator GLASS. Well, I
not.
had in mind as an intelligent lawyer if he
could discover what the market value of anything in 1929 was really
worth.
Mr. PECORA. I assume, Senator Glass, when this corporation received certain securities in exchange for its own securities, they knew
something about the market value of what they were receiving in
payment for their own securities.
310
STOCK EXCHANGE PRACTICES
Senator GLASS. They knew what market prices were, but they did
not know market values because market values collapsed soon
thereafter.
Mr. PECORA. I am speaking of market value as of the date of the
transaction.
Senator GLASS. YOU said market quotations.
Mr. PECORA. I said market values.
Senator GLASS. Well, I was thinking about market quotations.
There is no harm, is there, Mr. Pecora, to suggest that there was a
collapse of all market values in 1929?
Mr. PECORA. But not in January of 1929.
Senator GLASS. Would you concede that?
Mr. PECORA. NO, sir; not in January of 1929. I concede it to
have occurred later on in that year, but I am dealing now with January of 1929.
Senator GLASS. Of course, the country was exceedingly prosperous
on paper in January of 1929.
Senator COUZENS. Yes; and they didn't know what was coming.
The CHAIRMAN. Well, let us go ahead with the examination.
Mr. PECORA. Will you answer the question, Mr. Howard?
Mr. HOWARD. The market value of 130,565 shares of United Gas
Improvement stock on January 8, 1929, the date of the resolution of
the board, was $164 a share. The total market value for that stock
was $21,412,660.
Mr. PECORA. Mr. Howard, I have simply asked for the market
value in the aggregate of those securities in order to save time.
Mr. HOWARD. All right. I will get it.
Mr. PECORA. Very well.
The CHAIRMAN. Let us make that clear. What securities are you
referring to?
Mr. HOWARD. Did you say, to make it clear?
The CHAIRMAN. Let us make it clear what securities you are referring to.
Mr. HOWARD. Mr. Pecora, the market value on January 8, 1929,
is the figure I have here of a group of securities that I have just
mentioned to you, and is $55,566,644.63.
The CHAIRMAN. Those are the securities which you received?
Mr. HOWARD. Those were the securities, which we received, or
which were received by the United Corporation in this initial transaction.
Mr. PECORA. NOW, in exchange for those securities what, if anything, did the United Corporation issue or give to J. P. Morgan & Co.
in this initial transaction?
Mr. HOWARD. Six hundred thousand shares of its $3 cumulative
preference stock, 800,000 shares of its common stock, and 714,200
option warrants.
Mr. PECORA. Who caused the United Corporation to be formed?
Mr. HOWARD. I understand Morgan & Co., Drexel & Co., and
Bonbright & Co.
Mr. PECORA. IS the United Corporation a holding company?
Mr. HOWARD. Yes, sir.
Mr. PECORA. And as such
does it hold securities issued by publicutility corporations principally?
Mr. HOWARD. Principally; yes.
STOCK EXCHANGE PRACTICES
311
Mr. PECORA. And those securities that were received in this initial
transaction by the United Corporation were securities issued by
public-utility corporations?
Mr. HOWARD. Yes.
Mr. PECORA. What
was the original authorized stock plan of the
United Corporation? That is to say, what stock was it authorized
to issue?
Mr. HOWARD. May I see that paper that you just put in evidence?
Mr. PECORA. Certainly.
Senator TOWNSEND. Here it is.
Mr. HOWARD. I thank you very much.
Mr. PECORA. All right, you may go ahead with your answer.
Mr. HOWARD. The total number of shares of capital stock authorized, Mr. Pecora, was 13,000,000.
Mr. PECORA. And how divided?
Mr. HOWARD. One million shares of first preferred stock, 2,000,000
shares of preference stock, and 10,000,000 shares of common stock.
Mr. PECORA. Will you tell the committee, briefly, the respective
attributes and privileges of those different classes of stock?
Mr. HOWARD. NO first preferred stock has ever been issued.
Mr. PECORA. I beg pardon?
Mr. HOWARD. I say, no first preferred stock has ever been issued.
The $3 preference stock is entitled to dividends at the rate of $3 a
share a year, and $50 a share in liquidation if the company is liquidated.
And the common stock is ordinary common stock and is entitled only
to dividends in case dividends have been paid on the first preferred
stock, if issued, and upon the preference stock which has been issued.
Mr. PECORA. What voting rights attach to these classes of stock?
Mr. HOWARD. Each share of stock has 1 vote.
The CHAIRMAN. The stock has no par value?
Mr. HOWARD. Al] without par value.
Senator TOWNSEND. Both the preferred and the common?
Mr. HOWARD. Yes,
Mr. PECORA. YOU
sir.
have said that none of the first preferred stock
has ever been issued.
Mr. HOWARD. NO, sir.
Mr. PECORA. HOW much
of the 2,000,000 shares of $3 preferrence
stock was issued at' the outset?
Mr. HOWARD. In connection with this transaction which we have
been discussing, 600,000 shares.
Mr. PECORA. Yes, sir. And how many shares of the authorized
10,000,000 shares were issued initially, I mean of common stock?
Mr. HOWARD. In this transaction, 800,000 shares.
Mr. PECORA. And those are the shares that were issued to J. P.
Morgan & Co.?
Mr. HOWARD. In this transaction; yes.
Mr. PECORA. YOU stated that 714,200 option warrants were given
to J. P. Morgan & Co. as a part of this initial transaction. Now, will
you tell the committee what rights and privileges went with those
option warrants?
Mr. HOWARD. Each one of those option warrants entitled the holder
to subscribe at any time to one share of the common stock of the
corporation as it existed at that time, at $27.50 a share.
312
STOCK EXCHANGE PEAOTICES
Mr. PECORA. YOU say that the holders of those option warrants
were entitled to purchase a corresponding number of shares of common
stock at any time in the future, at $27.50 a share?
Mr. HOWARD. Yes, sir.
Senator COUZENS. Were
they a sufficient number of shares to have
given control?
Mr. HOWARD. Well, at this minute all those shares were issued to
Morgan & Co., Senator Couzens. Of course, they were all the shares
that were outstanding.
Senator COUZENS. What I am trying to get is this: Assuming that
they disposed of all but the option warrants, would they have given
them control if they exercised the option on the warrants?
Mr. HOWARD. Let me see.
Senator COUZENS. Your colleague
nods his head no, so I assume no
is the answer.
Mr. HOWARD. NO.
Mr. PECORA. Mr. Howard,
I show you what purports to be photostatic copies of certain letters passing between J. P. Morgan & Co.
and the United Corporation, dated, respectively, January 8, 1929,
January 9, 1929, and a second letter bearing date January 9, 1929,
and a further letter dated January 8, 1929. Will you please look at
these copies of letters and tell me if you recognize them to be the letters
setting forth the terms of the agreement or arrangement between the
United Corporation and J. P. Morgan & Co. at the time of the set-up
of this corporation and with respect to the financing of the corporation?
Mr. HOWARD. These, so far as I have examined the minutes book
and understand it, are true copies, except for some notations on them
that I do not know about.
Mr. PECORA. I offer the letters in evidence.
The CHAIRMAN. They may befreceived and printed as a part of the
record of our proceedings.
(The letters passing between J. P. Morgan & Co. and the United
Corporation were ordered made a part of the record, and were marked
"Committee Exhibit No. 23, May 26, 1933", and will be found at the
end of the day's proceedings.)
Mr. PECORA. Have you the minute book of the United Corporation
here, Mr. Howard?
Mr. HOWARD. Yes,
sir.
Mr. PECORA. Will you have them readily available before you so
that you may refer to them in answering questions?
Mr. HOWARD. They are right here and ready for you at any time
you may want them.
Senator COUZENS. May I draw Mr. Pecora's attention to the
request previously made of Mr. Howard with reference to the control
by Morgan & Co?
Mr. HOWARD. Senator Couzens asked me whether Morgan & Co.
would have had control only by the exercise of the 714,200 option
warrants; what would then be their situation with respect to the control of the company? With respect to the immediate first transaction,
they had 800,000 shares of common stock that would give them control. And if they had converted they would have gotten 714,000
more shares of common stock. So at that moment they had control.
STOCK EXCHANGE PEACTICES
313
Mr. PECORA. In other words, they had control without exercising
their right under any of these option warrants?
Mr. HOWARD. That is right.
Mr. PECORA. Who were the officers and directors of the United
Corporation upon its inception?
Mr. HOWARD. Mr. Pecora, Mr. George Koberts was president,
Mr. G. H. Sender, vice president. Pardon me. These are the
directors: Mr. George Roberts, Mr. G. H. Semler, Mr. Sherman
Ewing, Mr. Hay den M. Smith, Mr. James P. Hendrick.
Mr. PECORA. James P.
Mr. HOWARD. Hendrick, H-e-p-d-r-i-c-k.
Mr. PECORA. Who were the initial executive officers of the corporation?
Mr. HOWARD. I am sorry to take so long
Mr. PECORA. Well, Mr. Howard, are you riot familiar with these
things from your 4 years connection with this company as its president?
Mr. HOWARD. Mr. Pecora, I am familiar with these particular
transactions only as they appear in this record. Because, as I told
you, I did not become president of the company actively until the
1st of March 1929. Consequently the data I give you with respect
to these I must give you from these books.
Mr. PECORA. Well, you became president within two months
after the organization of the company?
Mr. HOWARD. I did.
Mr. PECORA. And have been its president ever since?
Mr. HOWARD. Yes.
Mr. PECORA. And haven't you as the result of your more
than four
years7 service as the president of this corporation acquired all this
knowledge heretofore?
Mr. HOWARD. I have examined all this detail, but I do not recall
who the officers are on organization work.
Mr. PECORA. While your associates are getting that information
for out of the. records, will you tell me this: Where are the books of
the United Corporation kept?
Mr. HOWARD. They are kept by J. P. Morgan & Co.
Mr. PECORA. TO this day?
Mr. HOWARD. TO this day.
Mr. PECORA. And have been since January 1929, when it was
incorporated?
Mr. HOWARD. Yes.
Mr. PECORA. Who
signs the checks drawn by this corporation
against its accounts?
Mr. HOWARD. The checks since the last annual meeting are signed
by me as president and by Mr. Ferguson, the treasurer.
Mr. PECORA. Well, when was the date of that last annual meeting
that you have just referred to?
Mr. HOWARD. In the first two weeks of February.
Mr. PECORA. Of this year?
Mr. HOWARD. Of this year.
Mr. PECORA. Prior to that time who signed them?
Mr. HOWARD. Prior to that time Mr. Keyes.
Mr. PECORA. Who is Mr. Keyes?
Mr. HOWARD. Mr. Keyes is, as I heard Mr. Morgan testify, his
office manager.
314
STOCK EXCHANGE PEACTICES
Mr. PECORA. That is, the office manager of J. P. Morgan & Co.?
Mr. HOWARD. Of J. P. Morgan & Co.; yes, sir.
Mr. PECORA. NOW, can you answer the question I put to you a few
minutes ago as to the executive officers of this corporation at the
outset?
Mr. HOWARD. Mr. George Roberts was president. Mr. Sherman
Ewing was vice president. Mr. Leonard A. Keyes was treasurer.
Mr. A. P. Taliaferro was assistant treasurer, and Mr. G. H. Semler
was secretary.
Mr. PECORA. Where is the office of the United Corporation?
Mr. HOWARD. At Wilmington, Del.
Mr. PECORA. Has it any office for the transaction of business at
any other place?
Mr. HOWARD. It is qualified to do business in New Jersey and in
Pennsylvania.
Mr. PECORA. Well, does it actually maintain any office for the
transaction of business any other place than Wilmington, Del.?
Mr. HOWARD. NO. Well, it has an office
Mr. PECORA. Where?
Mr. HOWARD (continuing). For the service of process at 80 Park
Place, Newark, N.J., and it is qualified to do business in Pennsylvania, too.
Mr. PECORA. In whose office are the business transactions of the
United Corporation actually carried on?
Mr. HOWARD. All of the meetings of the board of the United
Corporation, the Delaware corporation as distinguished from the
New York corporation are held, Mr. Pecora, at 80 Park Place,
Newark, N.J.
Mr. PECORA. In whose office are the business affairs of the
United Corporation actually carried on?
Mr. HOWARD. I have said that.
Mr. PECORA. YOU have told us where meetings of directors or
stockholders are held.
Mr. HOWARD. NO
Mr. PECORA. I did not ask you that
Mr. HOWARD. Well, all our business
question.
is transacted, Mr. Pecora, at
our directors' meetings.
Mr. PECORA. Where are those directors' meetings held?
Mr. HOWARD. At 80 Park Place, Newark, N.J.
Senator COUZENS. HOW much of a staff have you at that place?
Mr. HOWARD. An assistant secretary, Senator Couzens; that is all.
Senator COUZENS. SO all the business is done by an assistant
secretary in Newark?
Mr. HOWARD. I did not mean to say that we did not have discussions in New York.
Senator COUZENS. I do not think your answer to Mr. Pecora was
adequate, if you do not want this committee to understand that the
assistant secretary does all the business of the corporation in Newark.
Mr. HOWARD. Mr. Pecora, I did not intend to infer anything of
that kind. Of course we have discussions in New York. Mr. Whitney and Mr. Stanley, Mr. Thome, and Mr. Williams, and Mr. Carlisle, who are the directors of this company, are there, and I see them
frequently and often.
STOCK EXCHANGE PRACTICES
315
Mr. PECORA. In whose office do these discussions about the
business of the United Coloration take place?
Mr. HOWARD. Very often in my own office. Very often in Mr.
Whitney's office. Very often in Mr. Thome's office. Anywhere
where we happen to be.
Mr. PECORA. By Mr. Whitney's office do you mean the office of
J. P. Morgan & Co. at 23 Wall Street, New York City?
Mr. HOWARD. Yes; I do.
Senator BARKLEY. IS this a New Jersey corporation?
Mr. HOWARD. This is a Delaware corporation.
Senator COUZENS. IS your office in Mr. Morgan's office, too?
Mr. HOWARD. N O ; my office is at 15 Broad Street, Senator, Couz-
ens. I have my own office.
Mr. PECORA. Fifteen Broad Street immediately adjoins 23 Wall
Street, does it not?
Mr. HOWARD. I think it does.
Mr. PECORA. And is there an interior communication or passageway between the two buildings?
Mr. HOWARD. I think there is. But not between my office and
this.
Mr. PECORA. Where are the books of account of the United Corporation kept, Mr. Howard?
Mr. HOWARD. They have been kept up to this time under the supervision of Mr. Keyes at the office of J. P. Morgan & Co.
Mr. PECORA. And have they been kept there since the inception of
the corporation?
Mr. HOWARD. Yes; they have.
Mr. PECORA. What bookkeepers, accountants, or other class of
employees write up the entries in these books of account, or whose
bookkeepers do that?
Mr. HOWARD. The whole thing has been done under the supervision
of Mr. Keyes, and he is the only person with whom I have had any
contact ever about that matter.
Mr. PECORA. DO you as president for the last 4 years or more
personally know who made the entries in these books of account of
that corporation?
Mr. HOWARD. NO; I do not.
Mr. PECORA. YOU do not?
Mr. HOWARD. NO.
Senator KEAN. I would
just like to ask the witness one question.
In reference to this Broad Street office of yours, how many other
people have offices in that building? Would you say 10,000?
Mr. HOWARD. Well, I have no idea. No; I should not think
10,000, but a great many. I haven't any idea how many there are.
Mr. PECORA. I think it will be readily agreed that 15 Wall Street
is a very large office building in lower down town in New York City.
Mr. HOWARD. It is the old Equitable Trust Co. Building.
Senator KEAN. Xes.
Senator COUZENS. IS your office primarily maintained for a legal
business?
Mr. HOWARD. NO. I am entirely out of the law business, Senator
Couzens.
Senator COUZENS. Have you any partners in that office outside of
yourself?
318
STOCK EXCHANGE PEACTICES
Mr. HOWARD. Some of the offices of the Niagara Hudson Corporation are in that office. Mr. LeBoeuf's firm is in that office.
Mr. PECORA. IS Mr. LeBoeuPs firm the counsel for the United
Corporation?
Mr. HOWARD. NOW, yes.
Mr. PECORA. IS the Niagara
and Hudson Power Co. one of the
subsidiaries or affiliates of the United Corporation?
Mr. HOWARD. I think, Mr. Pecora, it is probably inaccurate to say
subsidiary or affiliate. It is a company in which the United Corporation has a large interest.
Senator COUZENS. A majority interest?
Mr.
HOWARD. NO.
Senator COUZENS. DO you control it?
Mr. HOWARD. I do not think we control any of these companies,
Senator Couzens. I am quite frank to say that I do think in Niagara
and Hudson and some of these other companies we have a great
influence.
Mr. PECORA. Yes; but you do not think you have great influence
with the Niagara Co. do you?
Mr. HOWARD. Yes; we do. I say we do.
Mr. PECORA. When you say you do not think
the United Corporation controls any other corporation, do you define control as represented by ownership of the majority stock?
Mr. HOWARD. I define legal control that way; yes.
Mr. PECORA. Well, you recognize that practical control in very
many instances may be and is effected by the ownership of much less
than a majority of the capital stock of the corporation so controlled,
do you not?
Mr. HOWARD. Yes. But may I add that my conception of the
United has been from the time I had anything to do with it, and is
now, that we do not want the control. And certainly I think we do
not control any of these companies in which we have shares, companies
like the Public Service, like Niagara Hudson, like United Gas Improvement, and they continue to have a complete and independent
way to go ahead themselves.
Senator BARKLEY. In the event a dispute should arise in the board
of directors over a question of policy, you do not have enough shares
to control, of yourselves, the result?
Mr. HOWARD. N O ; we do not.
Senator BARKLEY. YOU would have
to combine with somebody else
who owned a block of shares in order to make a majority if there were
a sharp division as to what was to be done about a given transaction?
Mr. HOWARD. That is true, Senator.
Senator BARKLEY. There are not such sharp divisions often I
Imagine. Are there?
Mr. HOWARD. There are none that I know of.
Senator BARKLEY. Everything moves smoothly and harmoniously?
Mr. HOWARD. Everything moves harmoniously.
Mr. PECORA. Mr. Howard, how large an office staff or personnel do
you maintain in your office in connection with the United Corporation?
Mr. HOWARD. I have, Mr. Pecora, a secretary and an office boy,
and in addition to that, Mr. Ferguson, who is a vice president of the
corporation; he is there too. Those are the only people active in my
office.
STOCK EXCHANGE PRACTICES
317
Mr. PECORA. Of how many corporations does the United Corporation own any stock? And also give the names of such corporations.
Mr. HOWARD. AS of the 15th of May, Mr. Pecora, the last balance
sheet I had, United Corporation owned 62,370 shares of the Mohawk
Hudson second preferred stock; 1,914,417 shares of Niagara Hudson
common stock.
Senator COTJZENS. While you are reading that, have you got the
percentage of control that is, which you can give at the same time?
Mr. HOWARD. I have the percentage of ownership in these companies.
Senator COTJZENS. Would it interfere with you, Mr. Pecora, if he
read that at the same time?
Mr. PECORA. NO.
Mr. HOWARD. All right. If yoij will just give me a moment.
Senator TOWNSEND. Are these the present holdings?
Mr. HOWARD. These are the present holdings; yes, sir.
The CHAIRMAN. Proceed, Mr. Howard.
Mr. HOWARD. Mr. Pecora, as to that first item, Mohawk Hudson
second preferred stock, 62,370 shares, I give you in this column percentages of the total owned. The percentage is 2.8 percent.
Niagara Hudson common stock, 1,914,417 shares; 21.9 percent.
Niagara Hudson Power Corporation A warrants, 250,819-%; 9
percent.
Niagara Hudson B warrants, 145,530; 29.3 percent.
Niagara Hudson Power Corporation C warrants, 300,000; 13.3
percent.
Common stock of the Public Service Corporation of New Jersey,
988,271 shares; 17.9 percent.
6,066,223 shares of the common stock of the United Gas Improvement Co.; 26.1 percent.
2,424,356 shares of the Columbia Gas & Electric Corporation
common stock; 20.9 percent.
Columbia Oil & Gasoline Corporation voting trust certificates, two
items, 49,053 shares and 35,716 shares; 3.6 percent.
38,183-4856/8000 of Columbia Gas & Electric Corporation $5 convertible preferred. I haven't that percentage.
Commonweatlh & Southern Corporation, 1,798,270 shares; 5.3 percent.
1,005,000 Commonwealth & Southern Corporation option warrants;
5.7 percent.
34,857-505/600 of the stock of Electric Bond & Share; 67/100 of 1
percent.
Mr. PECORA. That was Commonwealth & Southern?
Mr. HOWARD. NO. That is Electric Bond & Share Co.
Mr. PECORA. Well, what was the Commonwealth & Southern
Corporation option warrants percent? We have not got that.
Mr. HOWARD. Commonwealth & Southern Corporation common
stock, 5.3 percent.
Mr. PECORA. And then you mentioned option warrants?
Mr. HOWARD. 5.7 percent.
Societe Lyonnaise, 30,000 shares; 3.2 percent.
Mr. PECORA. IS that a foreign corporation?
Mr.fHowARD. Yes.
Mr.gPECORA. French corporation?
318
STOCK EXCHANGE PRACTICES
Mr. HOWARD. French corporation.
Mr. PECORA. In the utilities field?
Mr. HOWARD. In the utilities field. Instead of 30,000 shares of
that, there are 32,038 shares.
48,705 shares of Lehigh Coal & Navigation Co.; 2.5 percent.
203,900 shares of the Consolidated Gas Co. of New York; 1.8 percent.
63,002 shares of the common stock of American Waterworks;
3.6 percent.
33,175 shares of the Consolidated Gas Co. of Baltimore; 2.8 percent.
Senator COUZENS. HOW many companies is that all together?
Mr. HOWARD. Fourteen, I think.
Senator COSTIGAN. Mr. Howard, will you be good enough to
develop more definitely the distinction you draw between large
influence and legal control in corporate action?
Mr. HOWARD. My idea of the United Corporation has been that it
is a holding company, with interests in these various other utility
operating or holding companies, without management, without supervision, without engineering of any kind, deriving its income wholly
either from interest or dividends, whatever they might be, in connection with its investment. It is never building up any organization, leaving complete control in the separate and independent units.
Senator COSTIGAN. YOU used the expression, as I recall it, "large
influence" or "great influence." What did you mean by that expression, as distinguished from legal control?
Mr. HOWARD. Well, I meant this: Suppose, for example, we take
Niagara Hudson Power Corporation. Mr. Carlisle is the chairman
of that company. We have in it, as I pointed out to you, 21.9
percent. I believe that our relations with all the people in that are
such that any wise thing, always by conference or consultation, if it
were in the whole general interest, would be accomplished. On the
other hand, we have that percentage, and if the other shareholders
disagreed with us, they could throw us all out.
Senator COSTIGAN. In other words, by harmonious action you frequently develop corporate policies and proceed without reference to
the precise legal control of those who make the recommendations?
Mr. HOWARD. We try to consult and do consult as to the major
policies of these companies.
Senator COSTIGAN. And your advice, regardless of the particular
stockholding, is very likely to be followed, and is usually followed, is
it not?
Mr. HOWARD. Quite true.
Senator COUZENS. In the parlance of Wall Street, many of these
concerns are known as "Morgan companies", are they not?
Mr. HOWARD. I think so.
Mr. PECORA. Mr. Howard, I show you a map or survey containing
the following description: "Map to show the territories of the companies in which the United Corporation owns an interest", and bearing a date of July—it looks like July 9, 1929. I suppose that represents the 9th day of July 1929. Which was received by us from
among the files of your company. Do you recognize it as being such
a map or survey?
Mr. HOWARD. I never saw that before, and I do not know who
made it. Did it come from my files?
STOCK EXCHANGE PRACTICES
319
Mr. PECORA. Well, it came from the files of the United Corporation. Or from Morgan & Co. Is that disputed? [Addressing Mr.
Whitney.]
Mr. WHITNEY. That is not disputed, Mr. Pecora, but
Mr. HOWARD. Well, I have never seen it.
Mr. PECORA. Will you look at that, Mr. Whitney, and see if we
can agree on that?
Mr. WHITNEY. I would like to see it.
(Mr. Pecora handed the map to Mr. Whitney.)
Mr. WHITNEY. I personally never saw it, Mr. Pecora. There is
no identifying mark on it. I mean, it was not among the papers
photostated at the request of Mr. Pecora, in our office. So I could
not positively identify it, but I am perfectly ready to accept that it is.
I cannot identify it definitely.
Mr. PECORA. Well, is there any one among your associates, Mr.
Whitney, that can identify it?
The CHAIRMAN. Are there any initials on it? Are there no initials
on it that would indicate?
Mr. HOWARD. There are "R. P. H." on it. I have never seen this.
Mr. WHITNEY. Mr. Chairman, all the photostats that were requested by the investigators were stamped so that we would be able
to identify them. That has no such stamp, so we certainly did not
photostat it.
The CHAIRMAN. That is not photostated.
Mr. WHITNEY. IS it not?
Mr. PECORA. IS Mr. McCauliss here?
Mr. WHITNEY. He is right there. Just ask him.
Mr. MCCAULISS. I have no record that such a paper was photographed or taken from our files.
Mr. PECORA. IS it disputed by anybody that this is a map or
survey which represents what it purports to represent?
Mr. HOWARD. Well, I have great difficulty in understanding what
it purports to represent, Mr. Pecora, because very often people who
make maps of these electrical fields take some paint and cover all
these towns. If you want to determine this thing or if you really
want to know something about it—I do not mean you—but generally—you need to study density of population, you need to consider
towns, and not merely the marks which somebody makes on a map.
Mr. PECORA. Mr. Howard, are you familiar as president of the
United Corporation with any table which shows the proportion of
electrical energy in the eastern United States furnished by the group
of companies in which the United Corporation has an interest?
Mr. HOWARD. I may or may not be, Mr. Pecora. I have some
idea about that.
Mr. PECORA. Well, give us your idea about it.
Mr. HOWARD. If you take these companies in which we have
these larger interests, and if you take Consolidated Gas, notwithstanding our percentage in actual number of shares in Consolidated
Gas is small, leaving out American Waterworks and Electric Bond &
Share and Consolidated Gas of Baltimore, those companies in which
I think we have a smaller interest, I think perhaps those companies
at this minute have some 22 or 23 percent of the central station output
in the electric business, and perhaps in the gas business something like
22 percent.
175541—33—PT. 2
2
320
STOCK EXCHANGE PRACTICES
Senator COUZENS. In the United States, or where?
Mr. HOWARD. In the United States; yes.
Mr. PECORA. Why do you leave out Electric Bond & Share Co.
and the Consolidated Gas?
Mr. HOWARD. N O ; I did not leave Consolidated Gas of New York
out. Consolidated Gas of Baltimore.
Mr. PECORA. Are you acquainted with any estimate made by or for
the United Corporation showing the population that is served by the
companies in which the United Corporation has any interest?
Mr. HOWARD. I have had some figures of that kind made, but I
have not seen them for a long time.
Mr. PECORA. DO you know what those figures are?
Mr. HOWARD. N O ; I do not. I have given you generally now.
I do not remember what those figures are.
Mr. PECORA. What is your best recollection?
Mr. HOWARD. Well, I really haven't any recollection about it.
I have recollection about those percentages which I have given you,
but as to population and other things, I have no recollection.
Mr. PECORA. Well, the percentages that you gave us were given
by you from some records that you consulted, were they not?
Mr. HOWARD. N O ; those were percentages that I had in mind;
those two as to Central Station output at this time.
Mr. PECORA. Are you personally familiar with any records or files
of your corporation which would show that population?
Mr. HOWARD. I recall, as I have said to you, one memorandum
which some time ago I had made, and I
Mr. PECORA. HOW long ago did you have it made?
Mr. HOWARD. Well, I can not tell you. Probably more than a
year ago.
Mr. PECORA. IS that the only one you had made, for the purpose
of showing the populations served by the companies, the utility companies in which the United Corporation has a stock interest?
Mr. HOWARD. That is the only one.
Mr. PECORA. Don't you remember the figure?
Mr. HOWARD. I do not.
PECORA. What?
Mr. HOWARD. No; I do not.
Mr. PECORA. Oh, you don't?
Mr. HOWARD. N O ; I don't.
Mr. PECORA. I show you what
Mr.
purports to be a photostatic copy
designated as " Sheet 4, table to show the proportion of electrical
energy in the eastern United States produced by the group of companies in which United Corporation has an interest", together with
the proportion of the population served and the proportion of the
gross electricity received by these same companies, and which was
furnished to us by the photostat department of J. P. Morgan & Co.
Mr, HOWARD. Thank you, sir.
Mr. PECORA. Will you please look at it and tell us whether you
ever saw that or a copy of it before.
Mr. HOWARD. I have no recollection of ever having seen that.
Mr. PECORA. YOU have no recollection of ever having seen it?
Mr. HOWARD. I have none; no.
Mr. PECORA. IS it disputed that that was furnished to us by the
photostat department of J. P. Morgan & Co.?
STOCK EXCHANGE PRACTICES
321
Mr. DAVIS. Certainly not. It bears the stamp.
Mr. PECORA. Then I offer it in evidence.
The CHAIRMAN. It may be received.
Mr. PECORA. And ask that it be spread on the record.
Mr. DAVIS. I do not question the correctness of it, because I know
nothing about it. But I concede it is perfectly obvious that it is a
photostat.
Mr. LEBOEUF. Could the record state where it came from, not
from the files of the corporation?'
Mr. PECORA. Where did it come from?
Mr. LEBOEXJF. I don't know. I am asking you.
Mr. PECORA. It came from the photostatic department of J. P.
Morgan & Co., as appears upon the face of the exhibit.
Mr. DAVIS. Let me make a correction there, Mr. Pecora. We have
no photostat department in which documents of this sort are filed.
We have a photostat machine which from time to time photostats
documents that are brought forward by your investigation.
Mr. PECORA. I stand corrected.
Mr. DAVIS. It is perfectly apparent that that photostat was made
on our machine.
The CHAIRMAN. From records in your office?
Mr. DAVIS. Presumably so. I should accept that as a necessary
consequence. But as to the contents of the paper of course I have
no knowledge.
The CHAIRMAN. It may be spread upon the record.
(Table showing proportion of electrical energy produced by
United Corporation Cos. in Eastern United States, etc., was thereupon designated "Committee Exhibit No. 24," and the same appears
in the words and figures following:)
SHEET IV.—Table to show the proportion of electrical energy in the eastern United States furnished by the group of companies in which United
Corporation has an interest, together with the proportion of the population served, and the proportion of the gross electric revenue received
by these same companies
Production of electricity, in kilowatt-hours in thousands
Population served 1
New York
New Jersey
Connecticut
Pennsylvania
Delaware
Ohio
Michigan
Illinois
Tennessee
Mississippi
Alabama
Georgia
-
-
Total for the other States east of Mississippi in which United
Corporation has no interest or practically none
Total for United States east of Mississippi
Total for United States
1
13,034,850
2,084,361
1,268,375
7,541,190
102,349
5,940,397
4,346,402
6,964,345
50,580
1,694,550
979,130
1,406,259
438,891
2,401,658
95,113
1,966,176
1,102,278
228,647
730,061
2,666,209
97.9
44,963,527 17,425,378
38.7 55,272,000
16,280,040
61,243,567 17,425,378
87,802,946
11,423,000
3,749,000
1,636,000
9, 730,000
243,000
6,710,000
4,490,000
7,296,000
2,485,000
1,790,000
2,549,000
3,171,000
34.0
24,178,000
28.5
79,450,000
118,628,000
Populationfiguresmust be considered as approximate estimates.
NOTE.—Sheets I, II, and III of this series show further details from which thesefiguresare compiled.
Percent
28.1
3,211,000
82.7
3,100,000
74.6
1, 220,000
36.8
3, 586,800
97.0
240,000
20.9
1,405,000
33.9
1,525,000
3.4
250,000
15.1
375,000
13.9
250,000
66.6
1,700,000
61.0
1,935,000
18,797,800
Figures of National Electric
Light Association total estimated, 1928
$273,600,000
76,600,000
36,200,000
178,000,000
3,300,000
124,900,000
93,200,000
155,500,000
21,100,000
7,000,000
24,700,000
23,600,000
1,017,700,000
Percent
1928 received of electric
by United gross reCorporation ceived by
group from United
electric oper- Corporation
ations
group
Percent
$84,773,000
31.0
58,860,000
76.8
26.1
9,449,000
29.2
51,911,000
90.3
2,980,000
34.8
43,527,000
25.1
23,353,000
2.9
4, 527,000
47.6
10,058,000
46,259,000
83.7
335,697,000
32.9
335,697,000
24.4
356,200,000
18,797,800
8
Gross revenue from electric operations
Percent
Estiof total
Estimate mated
Produced produced
percent
served
by
by
United
Total proTotal esti- United served by
by
duced in Corpora- United
mated,
Corpora- United
1928
tion group, Corpo1927
tion group, Corpo1928
ration
ration
1928
group,
group
1928
Percent
49.0
67.5
34.6
31.8
92.9
33.1
25.4
3.3
76.3
CO
23.7
1,373,900,000
1,900,000,000
i
8
O
a
o
STOCK EXCHANGE PEACTICES
323
Senator COUZENS. I see Michigan is swallowed up in the group.
Mr. HOWARD. Mr. Dow is still there.
Senator COUZENS. Possibly he is still there, but according to the
yellow on the map it looks as though Michigan was yellow.
Mr. PECORA. Mr. Howard, from this table which has been marked
"Committee's Exhibit 24" of this date it appears that the population
served by these companies in which United Corporation has an
interest was 55,272,000, distributed through the following states:
New York, New Jersey, Connecticut, Pennsylvania, Delaware, Ohio,
Michigan, Illinois, Tennessee, Mississippi, Alabama, and Georgia.
Now I notice a date in the lower left-hand corner of this exhibit of
9-20-29, which I assume refers to the 20th of September, 1929. Did
you have a survey made or table prepared showing the population
served by these companies at any time since September 1929?
Mr. HOWARD. I said that at some time—and I cannot definitely
fix the time, but as we have discussed it my recollection is refreshed
somewhat—I think I asked Mr. Lynn, somebody in Bonbright &
Co.'s office, to make in tabulated form if he would statistical data
which really did show in some way these things. Now where that is
I don't know, and I haven't thought of it in a long time until this
morning.
Mr. PECORA. Did you have any particular reason for requesting
anyone connected with Bonbright & Co. to make that survey or
compilation or tabulation?
Mr. Howard. None at all except I thought he happened to be a
competent person to do it.
Mr. PECORA. There was no one in the office of the United Corporation that you thought was competent to do it, was there?
Mr. HOWARD. There really is not. I have told you, there is not
an engineer or a statistical man in my office.
Mr. PECORA. When you say your office, or "my office" you m£an
the office of United Corporation?
Mr. HOWARD. I mean the office of the New York United Corporation.
Mr. PECORA. When was the New York United Corporation formed?
Mr. HOWARD. The New York United Co. was formed—[addressing
associate] will you get that paper so I can get the correct date?—I
think about July 1929, and later in the year the name was changed
from the New York United Co., Inc. to the New York United Corporation.
Mr. PECORA. Can you produce here the last balance receipt issued
by the United Corporation or a copy of it?
Mr. HOWARD. I have it here, Mr. Pecora [handing document to
Mr. Pecora].
Mr. PECORA. The balance sheet is dated, which you have given
me, as of December 31, 1932?
Mr. HOWARD. Yes.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. It will be received and placed in the record.
324
STOCK EXCHANGE PEACTICES
(Balance sheet of United Corporation was designated " CommitteeExhibit No. 25/' and same is in the words and figures following:)
COMMITTEE EXHIBIT NO. 25
THE UNITED CORPORATION OF DELAWARE—REPORT TO STOCKHOLDERS FOR THE
YEAR ENDED DECEMBER 31, 1932
Board of Directors: Floyd L. Carlisle, B. C. Cobb, Philip G. Gossier, Edward
Hopkinson, Jr., George H. Howard, Alfred L. Loomis, Thomas N. McCarter,.
Harold Stanley, Landon K. Thorne, George Whitney, John E. Zimmerman,
THE UNITED CORPORATION,
Wilmington, Del., January 3, 1988\.
To the STOCKHOLDERS OF THE UNITED CORPORATION:
There is submitted herewith a consolidated balance sheet of your corporation
as of December 31, 1932, and a consolidated income statement of the corporation
for the 12 months ended December 31, 1932.
On December 31, 1932, the number of holders of common stock of the corporation was 102,100 as compared with 87,025 on December 31, 1931, and the number
of holders of $3 cumulative preference stock of the corporation was 20,485 as
compared with 18,127 on December 31, 1931.
By order of the Board of Directors:
GEORGE H. HOWARD, President.
Consolidated income, income charges, and surplus for the year ended Dec. 31, 1932''
Dividends 1 and interest
Interest paid
Current expenses and taxes
$566,767. 37
441, 962. 07
$14, 832, 916. 51
1, 008, 729. 44
Balance applicable to dividends
13, 824, 187. 07
Dividends paid (includes Jan. 3, 1933, dividend) on $3 cumulative preference stock
7, 465, 789. 50
6, 358, 397. 57'
Dividends paid (includes Jan. 3, 1933, dividend) on—
Common stock
5, 811, 467. 58
Balance for year
546, 929. 99
Add:
Balance of earned surplus at Dec. 31, 1931
7, 540, 549. 26
Earned surplus at Dec. 31, 1932
8, 087, 479. 25The United Corporation consolidated balance sheet, Dec. 31, 1932
ASSETS
Mohawk Hudson Power Corporation second
preferred
62,370
Niagara Hudson Power Corporation common __ 1, 914, 417
Niagara Hudson Power Corporation A option
warrants entitling holders to purchase the
following number of shares of common
stock, at $105 per share
250, 819%
Niagara Hudson Power Corporation B option
warrants entitling holders to purchase the
following number of shares of common stock
at an aggregate price of $50 for each 1%
shares
145, 530
Niagara Hudson Power Corporation C option
warrants entitling holders to purchase the
following number of units (unit consists of %
of 1 share of common stock and % class A
option warrant), at $25 per unit
300, 000
$6,673,590.00'
67? 908, 693. 66
i Exclusive of dividends received in stock in 1932, viz, 27,274 4/800 shares Columbia Gas & Electric Corporation convertible 5 percent cumulative preference. 1,985 324/600 shares Electric Bond & Share Co.
common.
STOCK EXCHANGE PKACTICES
325'
The United Corporation consolidated balance sheet, Dec. 31, 1932—Continued
ASSETS—Continued
Public Service Corporation of New Jersey
Shares
common
988, 271
$78, 461, 600. 00
The United Gas Improvement Co. common _ _ _ 6, 066, 223
214, 447, 419. 76*
Columbia Gas & Electric Corporation common
2, 424, 356
Columbia Gas & Electric Corporation convertible 5 percent cumulative preference
27, 274%0Q }141, 757, 285. 92
Columbia Oil & Gasoline Corporation common
voting trust certificates
84, 769
Commonwealth & Southern Corporation common
1, 798, 270
Commonwealth & Southern Corporation option warrants entitling holders to purchase
} 35, 990, 010. 21
the following number of shares of common
stock, at $30 per share
1, 005, 000
Consolidated Gas Co. of New York common...
103, 90042
24, 823, 554. 00
Electric Bond & Share Co. common
34, 342 %Oo 5, 969, 201. 22
Societe Lyonnaise des Eaux et de l'Eclairage
ordinary
32, 038
5, 179, 171. 91
The Lehigh Coal & Navigation Co. capital
stock
48, 705
2, 220, 945. 7&
American Water Works & Electric Co., Inc.,
common
63, 002
5, 982, 000. 28
Consolidated Gas Electric Light & Power Co.
of Baltimore common
33, 175
3, 782, 374. 25
Miscellaneous investments
26, 016. 66
Total cost or declared value of securities1
Cash on hand
592, 821, 863. 65
724, 672. 63
593, 546, 536. 28
LIABILITIES
Demand loan
$3 cumulative preference stock, no par value; 2
stated value $50 per share
2, 489, 064%
Common stock no par value; stated value $5
per share
14, 531, 197}£
Option warrants outstanding entitling holders
to purchase at any time without limit
3,732,059 shares of common stock, at $27.50
per share.
Capital surplus
Earned surplus
Reserve for taxes
11, 672, 000. 00
124, 453, 22. 34
72, 655, 987. 50
376, 630, 064. 37
8, 087, 479. 25
47, 771. 82
593, 546, 536. 28
REPORT OF AUDITORS
We have examined the books and accounts of the United Corporation and its
subsidiaries for the year ended December 31, 1932, and the consolidated balance
sheet and consolidated statement of income and income charges prepared therefrom. The securities owned by the corporations were verified by confirmations
obtained from the custodians thereof and the cash on hand was reconciled with
statements received from the corporations' bankers.
In our opinion, these statements correctly reflect the consolidated financial
position of the corporation at December 31, 1932, and the consolidated result
of its operations for the period then ended.
ARTHUR YOUNG & Co.
1
2
Total investments had an estimated market value on Dec. 31,1932, of $272,256,212.36.
Under the provisions of the charter the $3 cumulative preference stockholders upon any dissolution areentitled to receive $50 per share plus accrued dividends, or in case of call for redemption are entitled to
receive $55 per share plus accrued dividends.
326
STOCK EXCHANGE PRACTICES
Mr. HOWARD. The exact date, Mr. Pecora, of the incorporation of
the New York United Co. was July 13, 1929.
The CHAIRMAN. Does that take the place of the old original United
Corporation?
Mr. HOWARD. N O ; it does not at all, Senator Fletcher.
The CHAIRMAN. It is a different corporation?
Mr. HOWARD. It is a wholly owned subsidiary of the United
Corporation, the Delaware Corporation.
Senator BARKLEY. It is still in existence?
Mr. HOWARD. It is still in existence, is a New York corporation.
Senator BARKLEY. I mean both of them are still in existence?
Mr. HOWARD. Both of them are still in existence.
Mr. PECORA. Mr. Howard, in looking over the balance sheet statement marked "Committee's Exhibit No. 25," I note that the corporation has 11 directors.
Mr. HOWARD. Yes.
Mr. PECORA. Composing
its board. Do you know how many of
them are gentlemen who are partners of J. P. Morgan & Co. or Drexel
&Co.?
Mr, HOWARD. I do.
Mr. PECORA. HOW many?
Mr. HOWARD. Mr. Harold
Stanley and Mr. George Whitney and
Mr. Edward Hopkinson, Jr.
Mr. PECORA. Are any of these gentlemen on the boards connected
with Bonbright & Co.?
Mr. HOWARD. Mr. Alfred L. Loomis and Mr. Landon K. Thorne
are connected with Bonbright & Co.
Mr. PECORA. Originally did the bylaws of the corporation require
an attendance or representation of 50 percent of the stockholders in
order to constitute a quorum at its meetings?
Mr. HOWARD. I think they probably did.
Mr. PECORA. Can't you tell us definitely or don't you know?
Mr. HOWARD. Well, I know that subsequently—I don't know what
the exact provision of the bylaws was—I know subsequently that the
bylaws were amended to provide that four would be a quorum of
record.
Mr. PECORA. YOU are only referring apparently to the board of
directors, aren't you?
Mr. HOWARD. What did you ask me? Pardon me.
Mr. PECORA. Stockholders.
Mr. HOWARD. Oh. Certainly a majority was necessary to create
a quorum.
Mr. PECORA. HOW many are necessary now?
Mr. HOWARD. Twenty-five percent.
Mr. PECORA. When was that change made in the bylaws?
Mr. HOWARD. At the annual meeting on the 4th of February, 1930.
Senator BARKLEY. Why did you reduce the requirement?
Mr. HOWARD. Sometimes when there are a large number of stockholders it is a very difficult thing to get a quorum of proxies, and the
reduction was made wholly for that purpose and no other.
Senator KEAN. HOW many stockholders have you now?
Mr. HOWARD. May I see the balance sheet, which has the numbei
of stockholders?
(The exhibit was handed to Mr. Howard.)
STOCK EXCHANGE PRACTICES
327
At the end of last year the number of holders of common stock of
the corporation was 102,100 as compared with 87,025 on December
31, the previous year, and the number of holders of the $3 cumulative
preference stock was 20,485, as compared with 18,127.
Senator TOWNSEND. Both the preferred and common are entitled
to vote?
Mr. HOWARD. Both; and at every meeting of the stockholders
there has been more than a majority of the stock represented.
Mr. PECORA. Mr. Howard, you were president of this corporation
when this change was made in its bylaws requiring a quorum of
only 25 percent of its stockholders?
Mr. HOWARD. I
was.
Mr. PECORA. What was the reason for that change?
Mr. HOWARD. I have just expressed the reason.
Mr. PECORA. Pardon me; I was busy conferring. I am sorry.
Mr. HOWARD. Shall I state it again?
Mr. PECORA. NO'; it will not be necessary. Now, I notice the name
of Mr. J. E. Zimmerman as a gentleman now on the board of directors
of the United Corporation. Do you know that Mr. Zimmerman was
or has been connected as a director with the following corporations:
Mohawk-Hudson Power Co., Public Service Corporation of New
Jersey, United Gas & Improvement, Philadelphia Electric Co., United
Engineers & Constructors, Niagara Hudson Power, as well as United
Corporation?
Mr. HOWARD. Yes,
sir.
Mr. PECORA. NOW, of what public-utility companies are you a
director other than United Corporation, Mr. Howard? (After a
pause.) Do you have to refer to a record in order to tell us that?
Mr. HOWARD. Well, may I?
Mr. PECORA. DO you have to?
Mr. HOWARD. N O ; I do not have to.
Mr. PECORA. DO it from memory if you can. If you cannot, why,
refer to the record.
Mr. HOWARD. I am a director of the United Corporation, and of
the New York United Corporation, of United Gas Improvement Co.,
of the Public Service Corporation of New Jersey, of the MohawkHudson Power Corporation, Niagara Hudson Power Corporation,
Frontier Corporation, St. Lawrence Securities, the Electric Bond &
Share Co., New York Power & Light^Co., Atlas Corporation, Brooks
Bros.—that is not a utility company.
Mr. PECORA. N O ; just utility companies.
Mr. HOWARD. Well, Atlas is not either. Of the Commonwealth &
Southern Corporation, and the Columbia Gas & Electric Corporation,
and the Central Hudson Gas & Electric Corporation.
I think those ones. I am not very good at feats of memory.
Senator GLASS. YOU have an exceptionally good memory. Are
you a member of a golf club?
Mr. HOWARD. Yes; but I am a very poor player.
Senator BARKLEY. Does this corporation maintain an office in
Delaware?
Mr. HOWARD. Yes. That is its principal office—statutory office.
Senator BARKLEY. Statutory office?
Mr. HOWARD. Yes; statutory office.
Senator BARKLEY. YOU are required to maintain one there?
328
STOCK EXCHANGE PRACTICES
Mr. HOWARD. Yes; we are required.
Senator BARKLEY. Then you have one in Newark, N.J.?
Mr. HOWARD. Yes.
Senator BARKLEY. And your real
Mr. HOWARD. Yes. Technically
office is in New York?
the Delaware Corporation has no
office in New York. The New York United Corporation has an
office in New York.
Senator BARKLEY. What is its office maintained in Newark for
where you have this office force?
Mr. HOWARD. We are qualified to do business, and we do not want
to hold directors7 meetings of the Delaware corporation, do not want
to qualify the Delaware corporation to do business in New York, as
many of its securities are held outside of the State. Consequently
the qualifiers in New Jersey have an office in New Jersey and we hold
our directors7 meetings there.
Senator BARKLEY. Somewhat after the fashion of the meetings of
the Southern Pacific Railroad in Anchorage, outside of Louisville?
Mr. HOWARD. I don't know about those.
Mr. PECORA. HOW large a personnel has the United Corporation in
in its Newark (N.J.) office?
Mr. HOWARD. It has only an assistant secretary, Mr. Pecora.
Mr. PECORA. I am going to ask you if you will, Mr. Howard, to
tell us what the purpose was of the incorporation of the New York
United Corporation.
Mr. HOWARD. I expressed that purpose partly a moment ago. The
Delaware corporation—we did not wish to qualify to do business in
New York. For that reason the name of the New York United Co.
was changed to New York United Corporation. Substantial assets
were put in that corporation. That corporation then rented the
offices which I have, and that corporation actually does do business
in New York, and pays substantial taxes there, too.
Mr. PECORA. What was the purpose of the organization of the
New York United Co.?
Mr. HOWARD. When the Delaware corporation was incorporated,
as very often happens with this sort of a company, many people in
many States like to take the name, and in order to protect the name
not only in New York but in other States, for a time small companies
with the same or substantially the same name would take place.
Mr. PECORA. Well, if that was the only purpose of it, why did that
company acquire substantial blocks of securities?
Mr. HOWARD. I tell you that was the purpose upon the original
incorporation. When we concluded that we should do business in
New York the name was changed, and these assets were transferred
to it.
Mr. PECORA. HOW much cash did the United Corporation receive
from anybody in exchange for its capital stock in January 1929?
Mr. HOWARD. YOU mean the total?
Mr. PECORA. Yes, sir; the total.
Mr. HOWARD. Mr. Pecora, up to January 11, $20,700,801.10.
Mr. PECORA. And from whom did it receive that sum of money?
Mr. HOWARD. Well, I have testified already in this first transaction
which I went over with you as to $700,801.10. As to the other, 10
million dollars from J. P. Morgan & Co., and 10 million dollars from
Bonbright Electric Corporation.
STOCK EXCHANGE PRACTICES
329
Mr. PECORA. YOU have already told us what securities issued by
the United Corporation were received by J. P. Morgan & Co. for that
consideration?
Mr. HQWARD. NO. Only as to the securities. As to the 10 million
dollars in cash, J. P. Morgan & Co. received 400,000 shares.
Mr. PECORA. Did you give us those?
Mr. HOWARD. N O ; I did not give you those. We were talking
about only the stock transaction, not the cash transaction.
Mr. PECORA. Oh, yes.
Mr. HOWARD. AS to this
cash transaction, J. P. Morgan & Co.
received 400,000 shares of the common stock and 1,000,000 option
warrants of the United Corporation, and as to the 10 million dollars
which Bonbright Electric paid in at that time they received 400,000
shares of common stock and a million option warrants of the United
Corporation.
Mr. PECORA. DO you know the reason for the authorization and
issuance of these option warrants which entitle the holders thereof at
any time in the future to purchase from the company its common
stock at $27.50 per share?
Mr. HOWARD. I was not a director or officer of the company at
the time of these transactions. I don't know.
Mr. PECORA. YOU became its president 2 months thereafter?
Mr. HOWARD. Yes.
Mr. PECORA. Don't
you know now what the advantages were
considered to be of United Corporation
Mr. HOWARD (interposing). I thought you asked me the reason.
Mr. PECORA. Or the reason—do you know now?
Mr. HOWARD. Well, I have supposed, and it has been customary
in connection with the creation of the financial structure of companies
similar to this, to issue various option warrants as a class of security.
Mr. PECORA. DO you mean to say that it has been customary to
issue option warrants unlimited as to time?
Mr. HOWARD. Yes; it has been.
Mr. PECORA. HOW many other corporations did that prior to 1929?
Mr. HOWARD. Well, I don't know. But certainly there were
option warrants at that time.
Mr. PECORA. What do you conceive to be the advantages to a
corporation in issuing option warrants that are unlimited as to time?
Mr. HOWARD; I suppose that probably is some advantage to the
corporation to have those options in the hands of various people who,
if the company succeeds and the stock takes a price, pay tha°t much
cash into the company, converting their options and thereby giving
that company that much additional cash capital.
Mr. PECORA. If the company succeeds at any time after it is
launched, isn't that success sufficient inducement to the investing
public to buy its shares?
Mr. HOWARD. It may be.
Mr. PECORA. And under such
circumstances the public would buy
the shares at a figure that would correspond to value at the time?
Mr. HOWARD. They would.
Mr. PECORA. NOW, these option warrants entitle the holders at
&ny time in the future to purchase the common shares of the company for a fixed price of $27.50 regardless of how much more than
that the value of the stock might be?
330
STOCK EXCHANGE PRACTICES
Mr. HOWARD. That is true.
Mr. PECORA. What are the advantages to a corporation in having
option warrants issued of that character?
Mr. HOWARD. Only the advantage that I have suggested to you.
Mr. PECORA. DO you consider that an advantage?
Mr. HOWARD. I think it has been advantageous in many cases
where option warrants have been issued and the option warrant
holders have come in and converted those options into cash and have
given the corporation additional cash capital in any way.
Mr. PECORA. DO you know of any cases where that has happened
to the advantage of a corporation?
Mr. HOWARD. Well, I cannot enumerate to you now specific case&
where it has happened.
Senator BULKLEY. For what consideration were the option warrants issued?
Mr. HOWARD. The option warrants—the shares and the cash were
issued in each case here for the 10 million dollars in connection with
the other transaction for the shares. The options were carried in at
$1 an option.
Senator BULKLEY. AS part payment for the price of properties
acquired?
Mr. HOWARD. In some cases in part payment for shares of other
securities acquired, and in these other cases for the value.
Senator BARKLEY. What is the difference between these option
warrants and what are commonly called rights?
Mr. HOWARD. Well, I should think the distinction between rights
would be a case where a company conclude, for example, to issue now
or some time in the future, but rather immediately, some additional
shares of some kind, and in those circumstances rights would be given
to the stockholders to subscribe to those shares at a particular price.
Senator BARKLEY. And those rights are frequently put up for
public sale and listed on the stock markets and are sold and purchased
as if the stock had already been issued?
Mr. HOWARD. Yes.
Senator BARKLEY. Whoever
has one of those rights or a thousand of
them for which he is given a particular price enjoys the right to buy
the stock represented by those rights?
Mr. HOWARD. Yes, sir.
Senator BARKLEY. At a later date at a given price?
Mr. HOWARD. Yes.
Senator BARKLEY. Regardless of the fluctuation?
Senator ADAMS. May I ask a question just right
at this point?
I notice on your balance sheet, Mr. Howard, under your liabilities
you are carrying 14 million shares of common stock at a stated value
of $5 a share.
Mr. HOWARD. Yes.
Senator ADAMS. Some
Mr. HOWARD. Yes.
Senator ADAMS. Then
72,000,000 is the liability.
you carried these 3,700,000 option warrants.
You carry them at a listed figure of $27.50, and your option warrant
really represents a share of common stock, doesn't it? I am merely
asking as a matter of bookkeeping. I just don't understand it, and
I am not a bookkeeper.
STOCK EXCHANGE PRACTICES
331
Mr. HOWARD. I am not either. I am not sure I understand what
you paean. (After examining documents.) No; they are carried at
nothing. Option warrants outstanding entitling holder to purchase
at any time, without limit, three million seven hundred thirty-two
Senator ADAMS (interposing). You carry a liability item of 376
million against that.
Mr. HOWARD. NO ; that is the capital surplus [indicating on document]. See, this thing stops here. Capital surplus 360,630,000—
stock is right there, and this loan goes right over here.
Senator ADAMS. I see.
Mr. PECORA. Isn't it a fact that the company could not issue any
shares of common stock except at the request or option of the option
warrant holders for those option warrants?
Mr. HOWARD. Yes. I mean to procure a share of stock at $27.50
with respect to one of those options you must have an option warrant.
Mr. PECORA. Yes.
Mr. HOWARD. Yes.
Mr. PECORA. Let us
assume that the United Corporation's common shares at some time subsequent to January 1929 reached a market value of $50 a share. Anyone holding any of these option warrants could immediately demand the issuance to him by the company
of shares of that common stock having a market value of $50 a share
for $27.50 a share?
Mr. HOWARD. Yes,
sir.
Mr. PECORA. IS that right?
Mr. HOWARD. That is right.
Mr. PECORA. Then that is not an advantage to the corporation,
is it?
Mr. HOWARD. Well, suppose at that time, Mr. Pecora, that the
assets, the real asset value of that share, was $27.50 or something else.
I should think it would all depend upon what the real value of that
thing was at that time.
Mr. PECORA. It would depend on the market value, wouldn't it?
You would not expect the holder of a large block of option warrants
to come in and ask for the issuance of common stock in exchange for
those option warrants when the common stock was selling for
less than $27.50?
Mr. HOWARD. NO.
Mr. PECORA. An(d pay
$27.50 to the company for that stock, would
you?
Mr. HOWARD. NO.
Mr. PECORA. But it is easy to conceive that a large holder of these
option warrants would avail himself of his right under those option
warrants to have the common stock of the company issued to him at
$27.50 when it had reached a market value considerably in excess of
$27.50, is it not?
Mr. HOWARD. Quite true.
Mr. PECORA. SO all the advantages of that situation would inure
to the holder of the option warrants, would it not?
Senator GLASS. At the time the stock reached $50 a share, that
would be true; but when the company was in need of cash it was of
very material advantage to the company, was it not, to have these
warrants purchased at $27.50 a share?
332
STOCK EXCHANGE PRACTICES
Mr. HOWARD. I think one must go back to the original creation of
the corporate structure and must consider the option warrants at
that time.
Senator GLASS. That is what I am saying.
Mr. HOWARD. That is exactly what you are saying.
Senator GLASS. Yes.
Mr. HOWARD. But I believe there are many cases where it is an
advantage, Mr. Pecora and Senator Glass, to create and sell option
warrants in connection with the setting up of the company.
Mr. PECORA. Was the company called upon to issue common stock
in exchange for these option warrants to any holder of option warrants at any time when the common stock of the company had a
market value of less than $27.50?
Mr. HOWARD. NO.
The CHAIRMAN. Are
Senator GLASS. Not
all these stocks listed on the stock exchange?
unless the holder of the warrant was in dire
need of cash would he have been fool enough to do that.
Mr. PECORA. In such a case I apprehend the holder would be still
less willing to pay for common stock more than it was worth in the
market by the exercise of these option warrants.
Mr. HOWARD. YOU asked me, Senator Fletcher, whether these
stocks were listed on the exchange?
The CHAIRMAN. Yes.
Mr. HOWARD. Most of them are; some are not.
Senator GLASS. I beg your pardon, Mr. Chairman. j[ I did not know
you had asked a question.
Mr. PECORA. TO whom were any of these option warrants issued
by the United Corporation?
Mr. HOWARD. I have given you—would you like to have me read
the first
Mr. PECORA. YOU told me J. P. Morgan & Co. got a large block
of them, and the Bonbright Co.?
Mr. HOWARD. On the first transaction Morgan & Co. got 714,200.
On another transaction Morgan & Co. got a million of these and
Bonbright Electric Corporation a million.
Mr, PECORA. What did Morgan & Co. pay for those option warrants when it got the block of a million?
Mr. HOWARD. Morgan & Co. did not pay for them separately at
that time. Morgan & Co. paid to the corporation $10,000,000 in
cash and received 400,000 shares of common stock and a million
option warrants, and Bonbright Electric had a similar transaction.
Mr, PECORA. What were the common shares worth at that time
when Morgan & Co. received 400,000 of them in addition to the
million option warrants for $10,000,000?
Mr. HOWARD. I do not know. That was on the 11th of January,,
and I do not know whether the shares had sold at that time on the
market at all.
Mr. PECORA. Don't you know, now, Mr. Howard?
Mr. HOWARD. N O ; I do not Mr. Pecora.
Mr. PECORA. The transactions of the corporation with J. P.
Morgan & Co. and Bonbright Co. in connection with which each of
those firms received 1,000,000 option warrants were had at the
same time, were they not, or about the same^time, in the early part of
January 1929?
STOCK EXCHANGE PRACTICES
333
Mr. HOWARD, The 11th of January 1929; about that time.
Mr. PECORA. DO you know what the market value was of the
securities in the portfolio of United Corporation at that time?
Mr. HOWARD. I have given you the market value already.
Mr. PECORA. YOU gave us the market value of something like
$55,000,000, as I recall?
Mr. HOWARD. Yes; and those were the only securities up to the
11th of January which were in the portfolio of the United.
Mr. PECORA. Would that indicate to you what the market value
was of the common shares of United Corporation?
Mr. HOWARD. It is a fact; I do not know what the value was at
that time.
Mr. PECORA. Can you refer to any records showing the market
value of the common shares at that time, or the book value? I will
take the book value.
Mr. HOWARD. Mr. Pecora, you want the book value on the transactions of the securities which we first discussed this morning, and
of the cash?
Mr. PECORA. Yes; the twenty million cash received from Bonbright & Co. and J. P. Morgan & Co. Let me suggest, Mr. Howard,
that you turn to the minute book of the corporation, the minutes of the
special meeting of the board of directors of the United Corporation
held on the 9th of January 1929.
Mr. HOWARD. I have the minutes of the meeting of the board of
January 9, 1929.
Mr. PECORA. The special meeting of the board?
Mr. HOWARD. Minutes of the special meeting of the board; yes.
Mr. PECORA. Held at the office of Winthrop, Stimson, Putnam &
Roberts?
Mr. HOWARD. Held at the office of J. P. Morgan & Co.
Mr. PECORA. Will you let me look at that, please?
Mr. HOWARD. Yes, certainly [handing a volume to Mr. Pecora].
There may have been another meeting on that date; I do not know;
before it or after it, on the same date. That might account for
the
Mr. PECORA. Will you look at the pages upon which are recorded
the minutes of a special meeting of the board of directors of the
United Corporation held at the office of Winthrop, Stimson, Putnam
& Roberts, 32 Liberty Street, Borough of Manhattan, on January 9,
1929, at 10:30 o'clock, in the board room?
Mr. HOWARD. Yes.
Mr. PECORA. DO you
find entered in the minutes of that meeting
the receipt of a letter from J. P. Morgan & Co. to the United Corporation under date of January 9, 1929, reading as follows [reading]:
UNITED CORPORATION,
Wilmington, Del.
GENTLEMEN: We understand that you have been incorporated with an authorized capital consisting of 1,000,000 shares of first preferred stock, 2,000,000 shares
of preference stock and 10,000,000 shares of common stock. We further understand that of this authorized stock you have agreed to issue the amount shown
by a contract between yourselves and Messrs. J. P. Morgan & Co., a copy of
which is hereto annexed marked " Exhibit A."
We hereby offer on behalf of ourselves and our associates to purchase from
you 400,000 shares of your common stock and option warrants entitling the
holders thereto to purchase 1,000,000 shares of common stock and to pay you
for such purpose the sum of $10,000,000. We understand that the Bonbright
334
STOCK EXCHANGE PRACTICES
Electric Corporation has likewise offered to pay to you the sum of $10,000,000
against the issuance and delivery by you of the same amount of securities. We
agree to make payments to you for the above shares of common stock and option
warrants on the 15th day of January 1929, at which time you agree to issue and
deliver to us or our nominees temporary certificates for the common stock and
option warrants which are the subject of this purchase. We understand that of
the consideration to be received by you from us in payment of said common
stock and option warrants $22.50 shall constitute the consideration received
from the sale of each share of common stock, and $1 shall constitute the consideration received from the sale of each right represented by said option warrants to purchase 1 share of common stock at $27.50 per share, and that of the
consideration received for the sale of your common stock you will capitalize $5
per share and will credit the balance of the consideration received for the common
stock and the consideration received for the option warrants to surplus.
That offer was accepted, was it not, by the United Corporation?
Mr. HOWARD.
Yes.
Mr. PECORA. SO that on the 9th of January
The CHAIRMAN. By whom was that signed?
Mr. PECORA. J. P. Morgan & Co.
So that on the 9th of January 1929, J. P. Morgan & Co. were
enabled to purchase, under this agreement with the United Corporation, 1,000,000 of these option warrants, unlimited as to time, for a
consideration of $1 for each warrant?
Mr. HOWARD. Mr. Pecora, I do not understand the transaction in
that way, and I do not see how it is possible.
Mr. PECORA. Was not that the allocation of value made between the
common stock and these option warrants in the very offer of J. P.
Morgan & Co. as appears from the letter which I have just read?
Mr. HOWARD. Morgan & Co. paid $10,000,000 for two things, and
I understand that this language is to make technical compliance under
the statute of Delaware under which you receive and allocate your
consideration.
Mr. PECORA. That was the allocation of the consideration as between the common stock and the option warrants, was it not?
Mr. HOWARD. There was an allocation of $1.
Mr. PECORA. And a similar offer was made by Bonbright & Co., or,
to be specific, by Bonbright Electric Co., upon a similar allocation of
value?
Mr. HOWARD.
Yes.
Mr. PECORA. Were any option warrants at that time issued to
anybody other than J. P. Morgan & Co. and Bonbright & Co.?
Mr. HOWARD. On this date?
Mr. PECORA. Yes.
Mr. HOWARD. NO.
Mr. PECORA. Were
any option warrants ever thereafter issued to
anyone other than J. P. Morgan & Co. and Bonbright Electric Co.?
Mr. HOWARD. Yes.
Mr. PECORA. We will come to those transactions later.
Mr. HOWARD. All right.
Mr. PECORA. These, option warrants entitled the holders
to purchase
the common stock at $27.50 a share at any time in the future?
Mr. HOWARD.
Yes.
Mr. PECORA. HOW long after the 9th of January 1929, did the
common stock of United Corporation reach a market value in excess
of $27.50 per share?
Senator ADAMS. The United Corporation stock was listed, promptly
after incorporation, on the stock exchange?
STOCK EXCHANGE PEACTICES
335
Mr. HOWARD. N O ; it was some time after.
Mr. Pecora, in some data I have had prepared, which is all I know
about it, on the Philadelphia Stock Exchange, certain units of 1
share of common and 1 share of preferred having been sold, the
first notation that I find is on February 2.
Mr. PECORA. 1929?
Mr. HOWARD. 1929, when the common stock was quoted at 58}£,
56K, and 56}i On the 9th of May, after the stock had been listed
on the New York Stock Exchange, the corresponding prices were
67%, 66ft and 66-ft
Senator BYRNES. What date was that?
Mr. HOWARD. May 9, 1929.
Mr. PECORA. The public offering
of the shares of United Corporation initially made was in units, was it not?
Mr. HOWARD. Mr. Pecora, I know nothing about the details of that
offer personally. The offering was not made, as you know, by the corporation.
Mr. PECORA. The stock was issued in units, was it not?
Mr. HOWARD. It was issued in units of 1 share of common and
1 share of preferred.
Mr. PECORA. From your quotations before you have you any
quotations showing the market values for the preferred stock?
Mr. HOWARD. I have some unit figures, if you are interested in
those.
Mr. PECORA. Give me those, please.
Mr. HOWARD. On January 21, on the Philadelphia Stock Exchange,
the unit figure was 99.
Mr. PECORA. That is enough for my purposes now.
May I at this time withdraw this witness temporarily and ask Mr.
George Whitney to resume the stand?
Senator GLASS. Just wait a moment. Mr. Chairman, I am tired
of sitting around the table here in absolute ignorance of where we are
going or where we are being taken or what is expected to be adduced
from the examination of the witnesses. I think the members of the
committee are entitled to know some of these things so that they may
receive the testimony with some degree of appreciation of its significance, if it has any, and that they may themselves interrogate witnesses with some degree of intelligence. I do not know what all this
has meant this morning.
I want to ask the witness now if any of the transactions enumerated
have been, to his knowledge or belief, contrary to the law of any of
the States in which this company operates, or contrary to any Federal
statute.
Mr. HOWARD. NO, sir.
Senator GLASS. I note
from the chart presented here that this
company operates over a pretty wide territory. I do not know why
they should have given so much attention to the State of Michigan
and none to the State of Virginia; but is there any violation of any
Federal law, such as the Sherman antitrust law, or of any Federal
statute in your interstate activities?
Mr. HOWARD. NO, sir.
Senator GLASS. Well, I
175541—as—FP. 9
a
am still in doubt as to what it is all about.
336
STOCK EXCHANGE PRACTICES
Mr. HOWARD. May I say to you, Senator Glass—and with great
respect to you, Mr. Pecora—that all these transactions, as you probably know, have been examined in great detail by the Federal Trade
Commission. That may or may not have a bearing on your inquiry.
Mr. PECORA. I learned that for the first time a day or two ago from
the public press.
Senator GLASS. Has the Federal Trade Commission made any
criticism of your transactions, or has it on any occasion required the
company to change its practices as being dangerous to public policy?
Mr. HOWARD. This hearing under Senate resolution in reference to
utility holding companies and utility operating companies has been
going on for several years.
Senator GLASS. I say, has the Commission up to this time taken any
action of prohibition?
Mr. HOWARD. NO, sir.
Senator GLASS. Or of modification of your activities?
Mr. HOWARD. NO, sir.
Senator BARKLEY. The Commission has not made its
report yet,
has it?
Mr. HOWARD. I think it has, on United.
Senator BARKLEY. I mean, on the general investigation.
Mr. HOWARD. It has been making periodic reports from time to
time.
Senator BARKLEY. The complete report has not been made, has it?
Mr. HOWARD. NO, sir; the complete report has not been made.
Senator GLASS. At all events, up to within the period prior to
the beginning of the hearing has the Federal Trade Commission
interposed any objections to the activities of this company?
Mr. HOWARD. NO, sir.
Senator KEAN. It has
made its report on your company, has it
not?
Mr. HOWARD. I think it has.
Senator GLASS. Whether it has or not, I am talking about prior
to the beginning of that investigation.
Mr. HOWARD. NO, sir.
Senator GLASS. I do not
know how much the house of Morgan
made out of its transactions with your company, but if it made a
considerable sum was it in contravention of any law of the State of
Delaware, where you have your charter rights listed, or of the State
of New Jersey, where you have a suboffice, or of the State of New
York, where you seem to transact most of your business?
Mr. HOWARD. HOW much money they made, if any, by the sale of
the securities of this corporation, if they sold any, I do not know.
Senator Glass.
Senator GLASS. Well, I assume that they tried to make a reasonable
amount, did they not? Would you not assume that?
Mr. HOWARD. I assume they did; yes.
Senator GLASS. Sometimes I imagine, from a different point of
view, they tried to make an unreasonable amount; but that depends
altogether on the point of view; and the point of view depends upon
the risk taken and a multiplicity of other considerations. Is not that
so?
Mr. HOWARD. That is so.
Senator GLASS. I would just like to know what it is all about.
STOCK EXCHANGE PKACTICES
337
Senator KEAN. I would like to ask the witness whether it is not
quite customary to issue, and has been customary for a long number
of years, to issue convertible bonds?
Mr. HOWARD. It has been.
Senator KEAN. And the railroads have used convertible bonds
approved by the Interstate Commerce Commission; and a convertible
bond during the outstanding of the bond is a perpetual option to buy
the stock, is it not?
Mr. HOWARD. Exactly like this; and the same with respect to convertible preferred stock.
Senator ADAMS. HOW many of these warrants were turned in for
stock?
Mr. HOWARD. Converted?
Senator ADAMS. Yes.
Senator COUZENS. While they are looking that up, Mr. Chairman,
I wonder if we could get an answer to Senator Glass's question as to
what this is all about.
The CHAIRMAN. I do not see how we can anticipate what Mr.
Pecora expects to develop.
Senator GLASS. But, Mr. Chairman, we could have anticipated
if the committee had been told by counsel what he wanted to prove.
Mr. PECORA. I shall be very glad to comply with the Senator's
suggestion and answer as to what it is all about, or at least what, in
my humble opinion, it is all about.
The resolution under which this hearing is being held, Senate
Resolution 56, a copy of which I have before me, reads as follows,
in part:
Resolved, That the Committee on Banking and Currency, or any duly authorized subcommittee thereof, in addition to the authority granted under S.Res.
g4 * * * shall have authority and hereby is directed—
(1) To make a thorough and complete investigation of the operation by any
person, firm, copartnership, company, association, corporation, or other entity,
of the business of banking, financing, and extending credit; and of the business
of issuing, offering, or selling securities;
(2) To make a thorough and complete investigation of the business conduct
and practices of security exchanges and of the members thereof;
(3) To make a thorough and complete investigation of the business conduct
and practices of security exchanges and of the members thereof;
(3) To make a thorough and complete investigation of the practices with
respect to the buying and selling and the borrowing and lending of securities
which are traded in upon the various security exchanges, or on the over-thecounter market, or on any other market; and of the values of such securities; and
(4) To make a thorough and complete investigation of the effect of all such
business operations and practices upon interstate and foreign commerce, upon
the industrial and commercial credit structure of the United States, upon the
operation of the national banking system and the Federal Reserve System, and
upon the market for securities of the United States Government, and the desirability of the exercise of the taxing power of the United States with respect to
any such business and any such. securities, and the desirability of limiting or
prohibiting the use of the mails, the telegraph, the telephone, the radio, and any
other facilities of interstate commerce or communication with respect to any
such operations and practices deemed fraudulent or contrary to the public
interest.
There are other portions of the resolution which I have not read.
Senator COUZENS. May I ask the chairman to rule upon this question of the Senator from Virginia, as to whether we are proceeding
under the resolution?
33S
STOCK EXCHANGE PRACTICES
The CHAIRMAN. We are proceeding under the resolution, and following that resolution the committee met, the subcommittee, and
selected Mr. Pecora as their counsel and instructed him to proceed,
in accordance with that resolution, with this investigation.
Senator COUZENS. I ask the Chair if that is not a complete answer
to the Senator from Virginia.
Senator GLASS. N O ; it is not. The Senator from Virginia can
answer for himself, and not have the chairman or any other member
of this committee answer for him.
The CHAIRMAN. That is the authority under which we are acting
and that is the authority under which we are proceeding
Senator GLASS. Hold on. The Senator from Virginia is going to
express himself, and there is no authority in this committee to prevent
him from expressing himself.
I say that in compliance with this resolution Mr. Pecora and his
numerous investigators went to New York and made this preliminary
investigation, having had access to all of the books of this and perhaps other concerns—we do not know how many other concerns; he
obtained apparently complete information as to those things—and
I have said and I insist now that it was his duty to have come here to
Washington and have appeared before the subcommittee of which I
am a member and to have told us what he found, what significance
he attached to what he found, and what he proposed to establish by
the investigation before this committee, and not have to brought the
members of the committee here before a crowded assembly room without knowing one solitary thing about the meaning of all this. And
I say that is so, and other members of the committee agree with me.
Mr. PECORA. May I remind Senator Glass that after the enactment
Senator GLASS. SO far as that is concerned, now, since the Senator
from Michigan raises the issue, I have examined the minutes of the
various meetings of the subcommittee, and I do not find that at any
meeting of the subcommittee the employment of Mr. Pecora was
authorized.
The CHAIRMAN. The minutes have not been written up, then.
That is all I can say about that. I know he was employed, and the
subcommittee did it unanimously.
Senator COSTIGAN. I agree with what the chairman says, as a
member of the subcommittee. There can be no question, in my
judgment, about the employment of Mr. Pecora.
Senator GLASS. I have within the three last hours examined the
minutes in detail. It may have been that the employment was
authorized, but there is no record of it. That is immaterial, because
I think the committee is satisfied with Mr. Pecora's employment.
But the Senator from Michigan seems always willing to dig me
Senator COUZENS. I deny that.
Senator GLASS (continuing). And has undertaken to challenge my
right here to insist upon some knowledge beforehand of what we are
to sit around this table all day long to listen to.
Senator BYRNES. May I suggest this? Mr. Pecora, having read
the resolution, would it accomplish the purpose of the examination
if he could make a statement instead of propounding all these questions?
The CHAIRMAN. I think he has stated the new resolution and what
he has directed to be done.
STOCK EXCHANGE PRACTICES
339
Mr. PECORA. I was coming to that when I was interrupted
Senator COSTIGAN (interposing). Mr. Chairman, before Mr. Pecora
proceeds further I desire to say that I have just entered the room, and
I do not want to be recorded as committed to any of the statements
which have preceded my entrance. It was my understanding that one
statement was made to the effect that all members of the committee
were agreed on some course of procedure or on some view of the
evidence
Senator BYRNES (interposing). Oh, no; Senator Costigan.
Senator COSTIGAN. I did not hear precisely the purport of that
statement, and I speak now solely in order that I may have a chance
to examine the record before I appear to be committed.
Senator BYRNES. Senator'Costigan, I do not think any such statement was made.
Senator BARKLEY. I suggest that in executive session this morning
we agreed to recess at 1 o'clock today until next Wednesday. That
hour having arrived J wish to make a motion
The CHAIRMAN (interposing). Let Mr. Pecora make a statement
first.
Senator BARKLEY. I have no objection to his doing that.
Mr. PECORA. This particular line of examination, into the activities and operations of the issuance of securities of the United Corporation, is being conducted under that clause of the resolution
which empowers and directs the committee to make a thorough and
complete investigation, among other things, of the business of banking, financing, and extending credit, and of the business of issuing,
floating or selling securities. This United Corporation it has already
been shown, to the extent that I have been permitted to proceed up
to the present moment, is a corporation that has issued hundreds of
millions of dollars of securities to the investing public. And certainly its size and the area of its operations were deemed to be of
sufficient importance to merit the attention of this committee under
this resolution. It has already further been shown by the evidence
presented at this hearing, that 1,000,000 option warrants were issued
to J. P. Morgan & Co. for an allocated value or consideration of $1
each, and a similar amount for a similar valuation to the banking
house of Bonbright & Co.; that those option warrants are unlimited
as to time, and entitled the holders thereof to purchase for each
warrant a share of the common stock of the United Corporation at
$27.50. It has already been shown at this hearing that within a few
days after the issuance of those option warrants for that consideration of $1 each, the common stock of this company was traded i on
the public exchange in Philadelphia at prices doubling or more the
sum of $27.50.
Now, there was proof, and the proof on that has not yet been completed, gentlemen of the committee, that the securities of the United
Corporation were issued under circumstances and upon terms that
enabled a very small number or group of individuals to acquire, at
terms certainly against the interests of the corporation, those of its
securities that are called option warrants. Now, I want to pursue
the inquiry further, and I think the developments will throw considerable light on a certain phase of the business of issuing and floating
and selling securities.
340
STOCK EXCHANGE PRACTICES
Senator GLASS. NOW, let me ask Mr. Pecora if he did not ascertain
all these things by reason of his investigation in New York, and if he
could not have made to the subcommittee, prior to the meeting of the
general committee, just the statement that he has made here, that
he expected to develop those facts.
Mr. PECORA. Senator Glass, if I had to come to Washington to
consult the members of the subcommittee every time I had any
development to report
Senator GLASS (interposing). I did not ask you that.
Mr. PECORA (continuing). I would have been busy taking every
train between New York and Washington.
Senator GLASS. I did not ask you about every time you discovered
anything or had any development. What I wanted you to do was to
come here at some time after you completed your investigation and
given to us some idea of what you proposed to develop here, in order
that we might not waste our valuable time sitting around a table
here listening to questions propounded and answers given which
were of no significance to a man of ordinary intelligence, if I have
ordinary intelligence.
Mr. PECORA. Senator Glass will probably recall that in the latter
part of March, or shortly after the adoption of Senate Resolution 56,
under which this committee is functioning, I appeared before a
meeting of the Senate Banking and Currency Committee and outlined to the members thereof the general scope, the lines of inquiry
that I was about to undertake as counsel for the committee. I
specifically read to the members of the committee at that meeting
the draft of the "questionnaire", so-called, that has been alluded to in
the evidence here in the past few days, which I had sent to J. P. Morgan
& Co. and other private banking firms doing business in the city of
New York.
Now, that questionaire to a definite extent suggested quite fully I
think the lines and scope of the inquiry that I was undertaking to
pursue as counsel for the committee. Since that time I have received
not a single request from any Senator on the committee for any
further or more specfic advices or information concerning what I
was doing. In view of that I have been, with the exception of one
visit to Washington that I made about 3 weeks ago, spending my
time in the city of New York, from early morn until late at night,
engaged on this preliminary investigative work.
And I want to add that I did not seek this assignment as counsel to
the committee. I appreciated and I still appreciate the honor and
the dignity and opportunity for service in having been asked to serve
as committee counsel. I have been happy to render whatever service,
modestly I could render as counsel to the committee; and I want to
assure Senator Glass that the compensation of $255 a month which
I am receiving for these services certainty is no incentive to me to
render these services or to continue to render them. [Applause in the
room, on the part of spectators, loud and long continued.]
Senator GLASS. I will say to the counsel to the committee that
The CHAIRMAN (interposing). Let us have order in the room.
Order, please.
Senator GLASS. Oh, yes; that is what it is all about. We are having
a circus, and the only things lacking now are peanuts and colored
lemonade. [Laughter, and applause.]
STOCK EXCHANGE PRACTICES
341
The CHAIRMAN. Let us have order.
Senator GLASS. I want to say to the counsel to the committee that
the mere sending out of interrogations to bankers did not constitute
for the purpose of the committee evidence of data which should have
been submitted to the subcommittee.
As I have said and as I insist, so far as the compensation of counsel
to the committee is concerned, and I want to say this to the counsel
and to the committee, I was utterly opposed to an arrangement of
that sort. I do not think that this counsel or any other counsel ought
to be required to come here to Washington or to go to New York or
anywhere else and work for the United States Senate without adequate compensation. And I was in favor of giving whatever counsel
might be employed adequate compensation.
The CHAIRMAN. Senator Glass realizes, I am sure, that
Senator GLASS (continuing). And I do not imagine that counsel
for the committee is working just for the $255 a month. Far from it.
The CHAIRMAN. I am sure the Senator realizes that the statute on
that subject limits the amount which a Senate committee can pay.
Senator GLASS. And I realize that we could have passed a resolution through the United States Senate authorizing the employment of
counsel for this work. Now, I think counsel to the committee wants
to make a further statement before we adjourn.
Senator BYRNES. Mr. Chairman.
Senator KEAN. Mr. Chairman, I should like to ask the witness a
couple of questions before he leaves the committee table.
Senator COUZENS. Mr. Chairman, we agreed to adjourn at 1 o'clock
today.
The CHAIRMAN. I know, bat Senator Kean wants to ask a couple
of questions, and he may now do it.
Senator COSTIGAN. Mr. Chairman, before the questioning proceeds
I desire to say one word.
The CHAIRMAN. Very well, Senator Costigan.
Senator COSTIGAN. AS a member of the committee I wish to express
at this time my appreciation of the ability and the efficiency of
counsel for the committee. Also to state that in my judgment the
investigation thus far conducted has been relevant and material.
The CHAIRMAN. Senator Kean, do you want to ask a question?
Senator KEAN. Mr. Howard, I should like to know at what
price the stock of your company is selling at the present time.
Mr. HOWARD. I think about $8 or $9 a share. I do not know the
quotation today.
Senator KEAN. Then the people who had those options and have
exercised them at $27 and what was the price?
Mr. HOWARD. It was $27.50.
Senator KEAN. At the price of $27.50 a share, at the present time
they have made a real contribution to the company's capital, haven't
they?
Mr. HOWARD. They did.
The CHAIRMAN. If they held them?
Mr.
HOWARD. Yes.
Senator BYRNES. Mr. Chairman, I should like to ask: Is it the
desire of counsel to the committee to ask Mr. Whitney to return to the
stand for any specific purpose before this session is adjourned?
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STOCK EXCHANGE PRACTICES
Mr. PECORA. I think in view of the hour, if it be the pleasure of the
committee, that we might suspend the examination of witnesses at
this point.
Senator BYRNES. IS there anything more?
Mr. PECORA. I think I have reached the stage in this particular
line of examination that
Senator COSTIGAN (interposing). I hope the witness will not be
excused without an opportunity being afforded to members of the
committee to ask further questions.
Senator BYRNES. Counsel to the committee has called Mr. Whitney
to the stand for some purpose.
Senator COSTIGAN. And Mr. Howard will return?
Mr. HOWARD. That is what I want to know.
The CHAIRMAN. Mr. Pecora has another statement to make.
Mr. HOWARD. That will be next Wednesday?
Mr. PECORA. I believe so.
The CHAIRMAN. We will decide that, but I think it will be next
Wednesday.
Mr. PECORA. Mr. Chairman and Senators, my attention has been
called to certain publications in the press of today to the effect that
I had threatened to resign on last Tuesday and make a public statement unless the committee rendered a decision with regard to certain
matters that it considered in its executive session on the afternoon of
last Tuesday, which I thought was proper. I want to say that I never
made any threat of any such character. The members of the committee I am satisfied did not hear me make any such threat, and I
never made any statement to anybody, in or out of the committee
room, or anywhere else on this green earth, that I had made any such
threat to resign. Is that satisfactory, Senator Glass?
Senator GLASS. Entirely satisfactory, except that the statement
contains the vote in executive session.
Senator BYRNES. Well, Mr. Pecora has stated that he did not make
that statement.
Senator GLASS. I never cast a vote in my life in executive session
or anywhere else in the Congress of the United States in 32 years
that I objected to having published. When this committee has an
executive session the supposition is that it is a confidential meeting
of the committee, and that what occurs should not be revealed. And
in connection with the statement that Mr. Pecora threatened to
resign, which was absolutely untrue because I sat right beside him
in the committee and he made no such threat, we have published
accurately the vote that took place in the subcommittee. That may
go for what it is worth.
Mr. PECORA. AS to that may I also disclaim any measure of responsibility, for the publication of the vote.
The CHAIRMAN. And as chairman of the committee I say the same
thing. I never gave any such information to anybody.
Senator BARKLEY. Mr. Chairman, I should like to make just this
observation: I think it ought to be said that so far as the subcommittee or the general committee are concerned, according to my view
at least, Mr. Pecora's services in connection with this investigation
have been efficient and of value. And I frankly say that I was amazed
when I saw in a paper a day or two ago that he is only receiving the
compensation which he has this morning stated he is receiving. As
STOCK EXCHANGE PEACTICES
343
& matter of orderly procedure, however, I think it would have been
better if the subcommittee had been called and Mr. Pecora had been
asked to briefly outline what he proposed to prove. Whose fault it
was that the subcommittee did not meet, and that such preliminary
report was not made, I do not know. But I do not think the fact
that it was not called and that he did not make such report is to be
blamed upon anybody particularly, or that it ought to interfere with
the orderly procedure of this committee in continuing this investigation.
Senator BYRNES. Mr. Chairman, we will continue on next Wednes-day morning at 10 o'clock, I believe?
The CHAIRMAN. I want to say as chairman of the subcommittee
that I became chairman when this extra session was called on March
4. Prior to that time Senator Norbeck was the chairman of the
committee. And the subcommittee has continued the same as it was
under him. Senator Norbeck has not been a well man. He has not
been able to get together his own committee from time to time to hold
sessions if he desired to do so. When I became chairman, as Mr.
Pecora has stated, he came here at our instance and made his statement; in fact, we asked him to prepare this resolution. He prepared
the resolution, and I introduced it after the committee had seen it
and knew of it.
Senator GLASS. Why, I voted for it.
The CHAIRMAN. Absolutely. And this resolution was passed
unanimously. That is the authority under which we are acting, is
the direction under which we are acting. After that, as Mr. Pecora
has stated, he came here before the committee, outlined the plan and
purposes he had in ;view, and submitted the interrogatories he was
going to propose. That was all explained before the full committee,
not merely the subcommittee but the whole committee. They all
told him to go on. I have not asked him to come down here and
report to me from time to time because I knew he was busy with his
work. I have been in communication with him. He has told me
from time to time that he was going along with the work, that he had
so many people for this, that, and the other thing, and that he was
carrying out the purposes of the resolution. I have trusted him.
He was selected by the committee and I had no reason to doubt but
what he was acting in thorough good faith in carrying out this resolution, none in the world.
I have been very proud of the work that Mr. Pecora has done.
I think it has been quite efficient and thorough, so far as I have been
able to keep up with it. He has not been called down here to report
to us from time to time what he was doing in detail. The fact is -[Applause,] The fact is that he has been in touch with our office here.
He has had Mr. Marrinan here in connection with his work. He has
had him to come to New York to report from time to time, and has
instructed Jiim what to do here, and how to do it. And they have
been in communication, not only as respects themselves but with
regard to going into details in a general way with me. I have not
asked the committee to meet together to ask Mr. Pecora to come down
here and lay before them what he was doing, and how he was doing it,
and what it all meant or would lead to or what he supposed it would
mean. But he has been busy, and we have all been busy. He set
this date, May 23, himself, for the hearing. I have followed his
344
STOCK EXCHANGE PRACTICES
request about that, and the committee has, and we set that date for
the hearing. I supposed he would be here on Saturday before the
Tuesday, and I wanted to get the committee together to confer with
him before the meeting, but he was occupied and he could not get
here before the time set for the meeting. So that there has been
nothing that the subcommittee could do except to tell him as counsel
for the committee to proceed with this work and do it as the law
requires and as we expected it to be done.
Senator BYRNES. Mr. Chairman, I am not on the subcommittee,
but
Senator GLASS (interposing). Now, Mr. Chairman
Senator BYRNES (continuing). Mr. Chairman, there is no motion
before the whole committee with reference to the services of counsel.
We were to adjourn at 1 o'clock to meet next Wednesday, at which time
we expect Mr. Pecora to proceed with the investigation. And in
accordance with the agreement, I move that the committee do now
adjourn.
Senator GLASS. Mr. Chairman, I hope the Senator won't make that
motion. I do not intend to be put in an unreasonable attitude.
Senator BYRNES. Then I withhold my motion.
Senator GLASS. And I am perfectly indifferent to clamor or applause. I want that understood. I still say that it would have
facilitated the operations of this hearing, and would have enabled the
members of this committee to have come in session with some comprehension of what has been discovered by Mr. Pecora, and what he
expected to develop here, had he come to Washington and laid before
the subcommittee, briefly, the results of his examinations in New
York. I say that again. And member after member of the committee have agreed that that would have been the better course to
pursue. Now, I do not care anything about the house of Morgan.
The house of Morgan never loaned me a dollar in their lives and very
likely never would, in any way, shape or form
Senator COUZENS. Unless you were properly introduced.
Senator ADAMS. And they told Senator Fletcher that they would
not take a deposit from him.
Senator GLASS. I am not careful of the house of Morgan except
that I am careful of the dignity and orderly procedure of this committee. And as one member of this committee I do not intend to see
any injustice done to the house of Morgan or any other house, whether
it be of large consequence or of little consequence or of no consequence. That is my attitude, and it is the attitude I intend to
maintain to the end of these hearings. I am not afraid to do J. P.
Morgan & Co. justice, and if they have done anything they ought not
to have done I am not afraid to legislate accordingly. And I want to
call to the attention of this committee that the only sentence of
statutory legislation that has been put upon the books, that has been
offered in either branch of Congress, was framed by me; the only
solitary sentence of statutary law that would have corrected the
things that we have here talked about was framed by me and passed
under my management on the floor of the United States Senate.
Senator ADAMS. Mr. Chairman, might I make a suggestion?
The CHAIRMAN. Certainly, Senator Adams.
Senator ADAMS. These things that have transpired are things of
the past. I am not a member of the subcommittee, like Senator
STOCK EXCHANGE PKACTICES
345
Byrnes, but if the committee or the subcommittee feel that counsel
should make some statement to them in advance, I am satisfied that
in the future they would have no difficulty with counsel as to advice
in advance as to the prospects. But I do not believe we are getting
very far in going back over these things of the past. I am not a
member of the subcommittee but I would suggest
Senator BYRNES (interposing). Mr. Chairman, I renew my motion
to adjourn.
Senator GLASS. That does not alter my contention that it ought to
have been done in the past.
The CHAIRMAN. Senator Byrnes, your motion is to adjourn until
Wednesday, next, at 10 o'clock a.m.
Senator Byrnes. Yes, sir. At the hour stated, 10 o'clock a.m.
on next Wednesday.
The CHAIRMAN. Senator Byrnes has moved that the committee do
now adjourn until 10 o'clock next Wednesday, May 31, 1933. All in
favor of the motion make it known by saying aye. (A number of
ayes.) Those opposed will say no. (Silence.) The ayes have it.
All witnesses will be in attendance on next Wednesday. The committee will now stand adjourned until that time.
(Thereupon, at 1:25 p.m., Friday, May 26, 1933, the committee
adjourned until 10 a.m., Wednesday, May 31, 1933.)
COMMITTEE EXHIBIT NO. 22 OF MAY 26, 1933
CERTIFICATE OF INCORPORATION OF THE UNITED CORPORATION ORGANIZED UNDER
THE LAWS OF THE STATE OF DELAWARE
First. The name of the corporation (which is hereinafter referred to as the
corporation) is the United Corporation.
Second. The location of its principal office in the State of Delaware is no. 7
West Tenth Street, in the city of Wilmington, county of New Castle. The name
of the agent therein and in charge thereof is the Corporation Trust Co. of America,
of np. 7 West Tenth Street, Wilmington, Del.
Third. The nature of the business of the corporation or objects or purposes
proposed to be transacted, promoted, or carried on by it are:
1. To acquire and hold the securities of electric power and light and gas cqm r
panies and other public-utility companies and companies owning the stocks or
securities of public-utility companies.
2. To acquire and hold the securities of companies engaged in the business, of
managing or operating, or supervising the management or operation of publicsutility companies, and companies doing a general construction, engineering pr
contracting business with public utility and other companies.
3. To invest and deal with the moneys of the corporation in any manner, and
to acquire by purchase, by the exchange of stock, or other securities of the
corporation, by subscription or otherwise, and to invest in, to hold for investment, or for any other purpose, and to deal in and to use, sell, pledge, or otherwise dispose of any stocks, bonds, notes, debentures, and other securities and
obligations of any Government, State, municipality, or corporation or association, or partnership, domestic or foreign (including without prejudice to the
generality of the foregoing the companies described in pars. 1 and 2 above),
ctnd while owner of any such stocks, bonds, notes, debentures, or other securities
or obligations to exercise all the rights, powers, and privileges of ownership,
including among other things the right to vote thereon for any and all purposes.
4. Either directly or through subsidiary companies to engage in the business
of managing, operating, and/or supervising the management or operation of
public-utility .companies.
5. Either directly or through subsidiary companies to do a general construction and engineering business with public utility and other companies.
346
STOCK EXCHANGE PRACTICES
6. To act as financial or business and/or purchasing agent, general or special.
7. To aid in any lawful manner by loan, subsidy, guaranty, or otherwise, any
company whose stock, bonds, notes, debentures, or other securities or obligations
are held or controlled directly or indirectly by the corporation, and to do any
and all lawful acts or things necessary or advisable to protect, preserve, improve,
or enhance the value of any such stocks, bonds, notes, debentures, or other
securities or obligations.
8. To guarantee and to assume the payment of any dividends on any shares
of the capital stock of any company in which the corporation may either directly
or indirectly have an interest as stockholder or otherwise, and to assume and to
guarantee by endorsement or otherwise the payment of the principal of and the
interest on bonds, notes, or other obligations created or to be created by am
such company.
9. To acquire, to develop, to improve, to sell, to assign, to transfer, to convey,
to lease, to sublease, to pledge, and to otherwise alienate and dispose of and to
mortgage or otherwise encumber real property situate in any part of the world
and the fixtures and personal property incident thereto or connected therewith.
10. To develop and turn to account any land owned by the corporation or in
which it has an interest directly or indirectly, and among other things, to lay
out and prepare the same for building purposes and to construct, alter, and equip
buildings and let the same by lease or agreement or otherwise and to advance
money to and enter into contracts and arrangements of all kinds with b u i l d s
contractors, tenants, and others.
11. To purchase, to sell, to manufacture, and generally to deal in building
materials and goods, wares, and merchandise, and to carry on any other lawful
trade or business incidental to or proper or useful in connection with the purchase,
sale, ownership, construction, and equipment of its property.
12. To acquire, to hold, to own, to make, to dispose of, and generally to deal
in grants, concessions, franchises, rights of way, and contracts of every kind from
or with any person, firm, association, corporation, private, public, or municipal,
or body politic, and from or with the Government or public authorities of the
United States, or of any State, territory, possession or dependency thereof, or
from or with the District of Columbia, or from or with any foreign Government;
to cause to be formed, to promote, and to aid in any way in the formation of any
corporation or association, domestic or foreign.
13. To make and enter into all manner and kinds of contracts, agreements, and
obligations for the purchasing, acquiring, dealing in or selling of any and all kinds
of property, real and personal.
14. To borrow money, to issue bonds, debentures, notes or other obligations
secured or unsecured by the corporation; to secure the same by mortgage or
mortgages, or deed or deeds of trust, or pledge, or other lien upon any or all of the
property, rights, privileges, and franchises of the corporation wheresoever
situate, acquired, or to be acquired; to confer upon the holders of any debentures,
bonds, or other obligations of the corporation secured or unsecured the right to
convert the same into any class of stock of any series of the corporation now or
hereafter to be issued upon such terms as shall be fixed by the board of directors;
to sell, to pledge, and to otherwise dispose of any or all bonds, debentures, notes, or
other obligations of the corporation; to purchase and to otherwise acquire shares
of its own capital stock and to hold, to sell, to assign, to transfer, and to reissue any
or all of such shares.
15. To acquire, to hold, to use, to sell, to assign, to lease, to mortgage, and to
otherwise dispose of letters patent of the United States or of any other country,
patents, patent rights, copyrights, licenses, and privileges, inventions, improvements and processes, trade marks and trade names or pending applications
therefore, relating to or useful in connection with any business of the corporation
or of any other company or association in which the corporation may have an
interest directly or indirectly as a stockholder or otherwise.
16. To deal in stocks and securities either as an agent or broker, or otherwise;
to make advances or loans, upon the pledge of securities to be bought, sold, or
otherwise dealt in, or without security, so far as may be permitted by law.
17. To have and to exercise all the powers now or hereafter conferred by the
laws of the State of Delaware upon corporations organized under the laws under
which the corporation is organized and any and all acts amendatory thereof and
supplemental thereto.
18. To conduct business in the State of Delaware, other States, the District
of Columbia, the Territories and Colonies of the United States, and in foreign
countries, and to have one or more offices out of the State of Delaware, as well as
STOCK EXCHANGE PRACTICES
347
within said State, and to hold, purchase, mortgage, and convey real and persona
property out of the State of Delaware as well as within said State: Provided,
however, That nothing herein contained shall be deemed to authorize the corporation to construct, maintain, and/or to operate public utilities within the State
of Delaware.
19. Generally to carry on and undertake any other lawful business of the same
general nature, which may from time to time seem to the directors of the corporation capable of being conveniently carried on in connection with the above
objects, or calculated directly or indirectly to render valuable or enhance the
value of any of the corporation's properties, privileges, or rights.
20. Generally to perform any and all acts connected with, arising from or incidental to the business to be carried on by the corporation, and to. do all acts
proper and necessary for the purposes of its business.
The foregoing clauses shall be construed both as objects and powers; and the
foregoing enumeration of specific powers shall not be held to limit or restrict in
any manner the powers of the corporation.
Fourth. The total number of shares of capital stock authorized and which
may be issued by the corporation is 13,000,000 shares, all without nominal or par
value, of which 1,000,000 shares shall be first preferred stock, 2,000,000 shares
shall be preference stock, and 10,000,000 shares common stock.
A description of the different classes of stock of the corporation, a statement
of the relative rights of the holders of stock of such classes, a statement of the
limits of variation between each series of preference stock as to amount of preference upon distribution of assets, rate of dividends, premium ron redemption, conversion price or otherwise, and a statement of the voting pow ers and the designations, preferences, and relative, participating, optional or other special rights or
qualifications, limitations, or restrictions thereof of the various classes of stock
or series thereof, except so far as the board of directors is expressly authorized to
determine the same for the various series of the first preferred stock and of t h e
preference stock are as follows:
FIRST PREFERRED STOCK
(A) First preferred stock of the corporation may be issued in various series,
as may be determined from time to time by the board of directors, each of such
series of first preferred stock shall be alike in every particular and all series hereafter created shall rank equally and be identical in all respects, except as hereinafter in paragraphs (1) to (5), inclusive, of this clause A set forth:
(1) The dividend rate on the first preferred stock of each series shall be such
rate as may be determined by the board of directors of the corporation in the
resolutions providing for the issuance of the first preferred stock of such series
and as shall be stated in the certificate of stock therefor.
(2) The first preferred stock of any series may, but need not be, made redeemable at the option of the corporation at such price (not less than $100, nor more
than $115 per share, plus in each case an amount equal to all cumulative dividends on such share, both accrued up to the date fixed for redemption, whether
or not the same shall have been declared or earned, and in arrears) as may be
determined by the board of directors in the resolutions providing for the issuance of the first preferred stock of such series and as shall be stated in the certificates of stock therefor.
(3) The dates on which dividends, if declared, shall be payable in the case of
first preferred stock of each series, shall be such dates as may be fixed by the
board of directors in the resolutions providing for the issuance of the first preferred stock of such series and as shall be stated in the certificates of stock therefor. The periods between such dates, commencing on such dates, are herein
designated as "dividend periods".
(4) The board of directors may, in connection with the issue of any series of
first preferred stock, provide for a sinking fund for the first preferred stock of
such series, installments for which may be made payable in priority to any
dividends upon the preference stock and/or the common stock of the corporation^
to be applied to the purchase or redemption of shares of such series, the terms
and provisions governing the operation of any such sinking fund to be determined by the board of directors in the resolutions providing for the issuance of
the first preferred stock of such series and as shall be stated in the certificate of
stock therefor. The first preferred stock retired by the operation of any suclt
sinking fund shall not be reissued.
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STOCK EXCHANGE PRACTICES
(5) The board of directors may, in connection with the issue of any series of
first preferred stock, provide that the shares of such series may be convertible
into, or exchangeable for, shares of any other class or classes or of any other
series of the same or any other class or classes of stock of this corporation, at
such conversion price or prices or at such rates of exchange and with such adjustments as shall be stated and expressed by the board of directors in the resolutions providing for the issuance of the first preferred stock of such series and as
shall be stated in the certificates of stock therefor.
(B) The following provisions shall apply to all the first preferred stock of the
corporation irrespective of any variations between the first preferred stock oi the
different
series:
1
(1) The holders of the first preferred stock of each series shall be entitled to
receive dividends payable on such dates as may be determined for such series, when
arid as declared by the board of directors, at the rates determined for the respective series, from the first day of the current dividend period within which such
stock shall have been originally issued, before any dividend shall be declared or
paid upon or set apart for preference stock and/or the common stock of the
corporation and before any payments are made to any sinking fund created as
herein provided for any series of first preferred stock and/or preference stock.
Such dividends shall be cumulative, so that, if in any dividend period or periods
dividends shall not have been paid or declared and set apart for payment upon all
outstanding first preferred stock at the rates determined for the respective series,
the deficiency shall be fully paid, or declared and set apart for payment, before
any dividends shall be declared or paid upon or set apart for the preference stock
and/or the common stock of the corporation and before any payments are made
to any sinking fund created as herein provided for any series of first preferred
stock and/or preference stock. Dividends shall not be declared and paid on the
first preferred stock of any one series for any dividend period unless dividends
have been paid or declared and set apart for payment thereof a,t the same time on
the first preferred stock of all series, for all the dividend periods terminating on
the same or an earlier date,
(2) When full cumulative dividends as aforesaid upon the first preferred stock
of all series then outstanding for all part dividend periods and for the current
dividend periods shall have been paid or declared and set apart for payment, and
after complying with all provisions in respect of any sinking fund or funds for the
first preferred stock of any series entitled thereto, installments for which have
been made payable in priority to any dividends on, the preference stock and the
common stock of the corporation, the board of directors may, subject to the
provisions hereof in respect to the preference and common stock, declare dividends
on the preference stock and/or the common stock of the corporation, and no
holders of any series of the first preferred stock as such shall be entitled to share
therein.
(3) Upon any dissolution, liquidation or winding up of the corporation, whether
voluntary or involuntary, or upon any reduction of that portion of the capital
of the corporation that has been set up out of the consideration received for any
of the shares of the common stock of the corporation, followed presently by the
distribution to stockholders of assets of the corporation which have been constituted surplus by such reduction, the holders of the first preferred stock of every
series shall be entitled to receive out of the assets of the corporation $100 per share,
plus an amount equal to accrued dividends, before any distribution of the asset
to be distributed shall be made to the holders of preference and/or common stock
of the corporation; but they shall be entitled to no further participation in such
distribution.
After payment to the holders of the first preferred stock of the full preferential
amounts hereinbefore provided for, the holders of the first preferred stock as
such shall have no right or claim to any of the remaining assets of the corporation,
either upon any distribution of surplus assets or upon dissolution, liquidation,
or winding up. The remaining assets to be distributed, if any, upon a distribution of surplus assets or upon dissolution, liquidation, or winding up, shall be
distributed among the holders of the preference stock and/or the common stock
of the corporation. The sale of all the property of the corporation to, or the
merger or consolidation of the corporation with or into, any other corporation
shall not be or be deemed to be a distribution of assets or a dissolution, liquidation, or winding up for the purposes of this paragraph.
(4) At the option of the board of directors of the corporation, the corporation
may redeem any series of first preferred stock determined to be redeemable, or
any part of any series, at any time at the redemption price determined for such
STOCK EXCHANGE PKACTICES
349
series: Provided, however, That not less than 30 nor more than 60 days previous
to the date fixed for redemption a notice of the time and place thereof shall be
given to the holders of record of the first preferred stock so to be redeemed, by
mail or publication, in such manner as may be prescribed by the bylaws of the
corporation or by resolution of the board of directors: And provided, further, that
in every case of redemption of less than all of the outstanding shares of any one
series of first preferred stock, the shares of such series to be redeemed shall be
chosen by lot in such manner as may be prescribed by the board of directors.
At any time after notice of redemption has been given in the manner prescribed
by the bylaws of the corporation or by resolution of the board of directors, the
corporation may deposit, or may cause its nominee to deposit, the aggregate
redemption price, with some bank or trust company in the Borough of Manhattan,
the city of New York, named in such notice, payable on the date fixed for redemption as aforesaid and in the amounts aforesaid to the respective orders of
the holders of the shares so to be redeemed, on endorsement to the corporation
or its nominee, or otherwise, as may be required, and upon surrender of the
certificates for such shares. Upon the deposit of said money as aforesaid, or, if
no such deposit is made, upon said redemption date (unless the corporation
defaults in making payment of the redemption price as set forth in such notice),
such holders shall cease to be stockholders with respect to said shares, and from
and after the making of said deposit, or, if no such deposit is made after the
redemption date (the corporation not having defaulted in making payment of the
redemption price as set forth in such notice), the said holders shall have no
interest in or claim against the corporation, or its nominee, with respect to said
shares, but shall be entitled to receive said moneys on the date fixed for redemption
as aforesaid from said bank or trust company, or from the corporation, without
interest thereon, upon endorsement if required, and surrender of the certificates
as aforesaid.
If such deposit shall be made by a nominee of the corporation as aforesaid, such
nominee shall upon such deposit become the owner of the shares with respect to
which such deposit was made and certificates of stock may be issued to such
nominee in evidence of such ownership.
In case the holder of any such first preferred stock shall not, within 6 years
after said deposit, claim the amount deposited as above stated for the redemption thereof, the depositary shall upon demand pay over to the company such
amounts so deposited and the depositary shall thereupon be relieved from all
responsibility to the holder thereof..
Nothing herein contained shall limit any legal right of the corporation to
purchase any shares of the first preferred stock.
(5) At all meetings of the stockholders of the corporation the holders of the
first preferred stock shall be entitled to one vote for each share of such first
preferred stock held by them respectively.
(6) The term ''accrued dividends" and "dividends accrued and in arrears"
shall be deemed to mean in respect of any share of the first preferred stock of any
series, as of any given date, the amount, if any, by which the product of the rate
of, dividend per annum, determined upon the shares of such series, multiplied
by the number of years and/or parts thereof which shall have elapsed from the
date after which dividends on such stock became cumulative to such given date
exceeds the total dividends actually paid on such stock and/or declared and set
apart for payment. Accumulations of dividends shall not bear interest.
PREFERENCE STOCK
(A) The preference stock of the corporation may be issued in one or more
series as may be determined from time to time by the board of directors, each of
such series to be distinctly designated. All shares of any one series of preference
stock shallbe alike in every particular and all series hereafter created shall rank
equally and be identical in all respects except as hereinafter in paragraphs (1) to
(5), inclusive, in this clause (A) set forth:
(1) The dividend rate on the preference stock of each series shall be such rate
as may be determined by the board of directors of the corporation in the resolutions providing for the issuance of the preference stock of such series and as shall
be stated in the certificates of stock therefor.
(2) The preference stock of any series may, but need not be, made redeemable
at the option of the corporation at such price (not less than $50 nor more than
$60 per share plus in each case an amount equal to all cumulative dividends on
such share both accrued up to the date fixed for redemption, whether or not the
350
STOCK EXCHANGE PRACTICES
same shall have been declared or earned, and in arrears) as may be determined by
the board of directors in the resolutions providing for the issuance of the preference stock of such series and as shall be stated in the certificates of stock therefor.
(3) The dates on which dividends, if declared, shall be payable in the case of
preference stock of each series, shall be such dates as may be fixed by the board
of directors in the resolutions providing for the issuance of the preference stock
of such series and as shall be stated in the certificates of stock therefor. The
periods between such dates, commencing on such dates, are herein designated as
" dividend periods."
(4) The board of directors may, in connection with the issue of any series of
preference stock,'provide for a sinking fund for the preference stock of the corporation, to be applied to the purchase or redemption of the shares of such series,
the terms and provisions governing the operation of any such sinking fund to be
as determined by the board of directors in the resolutions providing for the
issuance of the preference stock of such series and as shall be stated in the certificates of stock therefor. The preference stock retired by the operation of any
such sinking fund shall not be reissued.
(5) The board of directors may, in connection with the issue of any series of
preference stock, provide that the shares of such series may be convertible into or
exchangeable for, shares of any other class or classes or of any other series of the
same or of any other class or classes of stock of this corporation, at such conversion
price or prices or at such rates of exchange and with such adjustments as shall
be stated and expressed by the board of directors in the resolutions providing for
the issuance of the preference stock of such series and as shall be stated in the
certificates of stock therefor.
(B) The following provisions shall apply to all the preference stock of the
corporation, irrespective of any variations between the preference stock of the
different series:
(1) The holders of the preference stock of each series shall be entitled to receive
dividends payable upon such dates as may be determined for such series, when as
declared by the board of directors, at the rates determined for the respective
series, from the first day of the current dividend period within which such stock
shall have been originally issued, before any dividends shall be declared or paid
upon or set apart for the common stock of the corporation and before any payments are made to any sinking fund created as herein provided for any series of
preference stock. Such dividends shall be cumulative, so that, if in any dividend
period or periods dividends shall not have been paid or declared and set apart for
payment upon all outstanding preference stock, at the rates determined for the
respective series, the deficiency shall be fully paid, or declared and set apart for
payment, before any dividends shall be declared or paid upon or set apart for the
Cpmmon stock of the corporation and before any payments are made to any
sinking fund created as herein provided for any series of preference stock. Dividends shall not be declared and paid on the preference stock of any one series for
any dividend period unless dividends have been paid or declared and set apart
for payment thereof at the same time on the preference stock of all series, for all
the dividend periods terminating on the same or an earlier date.
(2) When full cumulative dividends as aforesaid upon the preference stock of all
series then outstanding for all past dividend periods and for the current dividend
periods shall have been paid or declared and set apart for payment, and after
complying with all provisions in respect of any sinking fund or funds for the
preference stock of any series entitled thereto, installments for which have been
made payable in priority to any dividends on the common stock of the corporation, the board of directors may declare dividends on the common stock of the
corporation, and no holders of any series of the preference stock as such shall be
entitled to share therein.
(3) Upon any dissolution, liquidation or winding up of the corporation, whether
voluntary or involuntary, or upon any reduction of that portion of the capital of
the corporation that has been set up out of the consideration received for any of
the shares of the common stock of the corporation, followed presently by the
distribution to stockholders of assets of the corporation which have been constituted surplus by such reduction the holders of the preference stock of every
series shall be entitled to receive out of the assets of the corporation $50 per share,
plus an amount equal to accrued dividends, before any distribution of the assets
to be distributed shall be made to the holders of common stock of the corporation;
but they shall be entitled to no further participation in such distribution. After
payment to the holders of the preference stock of the full preferential amounts
hereinbefore provided for, the holders of the preference stock as such shall have
STOCK EXCHANGE PEACTICES
351
no right or claim to any of the remaining assets of the corporation, either upon
any distribution of surplus assets or upon dissolution, liquidation or winding up.
The remaining assets to be distributed, if any, upon a distribution of surplus
assets or upon dissolution, liquidation or winding up, shall be distributed among
the holders of the common stock of the corporation. The sale of all the property
of the corporation to, or the merger or consolidation of the corporation into or with,
any other corporation shall not be or be deemed to be a distribution of assets,
or a dissolution, liquidation or winding up for the purposes of this paragraph.
(4) At the option of the board of directors of the corporation, the corporation
may redeem any series of preference stock determined to be redeemable, or any
part of any series, at any time at the redemption price determined for such series:
Provided, however, That not less than 30 nor more than 60 days previous to the
date fixed for redemption a notice of the time and place thereof shall be given to
the holders of record of the preference stock so to be redeemed, by mail or publication, in such manner as may be prescribed by the bylaws of the corporation,
or by resolution of the board of directors: And provided jurther, That in every
case of redemption of less than all of the outstanding shares of any one series of
preference stock, the shares of such series to be redeemed shall be chosen by lot
in such manner as may be prescribed by resolution of the board of directors. At
any time after notice of redemption has been given in the manner prescribed by
the bylaws of the corporation or by resolution of the board of directors, the
corporation may deposit, or may cause its nominee to deposit, the aggregate
redemption price, with some bank or trust company in the Borough of Manhattan, the city of New York, named in such notice, payable on the date fixed
for redemption as aforesaid and in the amounts aforesaid to the respective orders
of the holders of the shares so to be redeemed, on endorsement to the corporation
or its nominee, or otherwise, as may be required, and upon surrender of the certificates for such shares. Upon the deposit of said money as aforesaid, or, if no
such deposit is made upon said redemption date (unless the corporation defaults
in making payments of the redemption price as set forth in such notice), such
holders shall cease to be stockholders with respect to such shares, and from and
after the making of said deposit, pr, if no such deposit is made, after the redemption date (the corporation not having defaulted ia making payment of the redemption price as set forth in such notice), the said holders shall have no interest in
or claim against the corporation, or its nominee, with respect to said shares, but
shall be entitled only to receive said monies on the date fixed for redemption as
afresaid from said bank or trust company, or from the corporation, without
interest thereon, upon endorsement, if required, and surrender of the certificates
as aforesaid.
If such deposit shall be made by a nominee of the corporation as aforesaid, such
nominee shall upon such deposit become the owner of the shares with respect to
which such deposit was made and certificates of stock may be issued to such
nominee in evidence of such ownership.
In case the holder of any such preference stock shall not, within 6 years after
said deposit, claim the amount deposited as above stated for the redemption thereof, the depositary shall upon demand pay over to the company such amounts so
deposited and the depositary shall thereupon be relieved from all responsibility
to the holder thereof.
Nothing herein contained shall limit any legal right of the corporation to purchase any shares of the preference stock.
(5) At all meetings of the stockholders of the corporation the holders of the
preference stock shall be entitled to one vote for each share of such preference
stock held by them respectively.
(6) The term "accrued dividends" and "dividends accrued and in arrears"
shall be deemed to mean in respect of any share of the preference stock of any
series, as of any given date, the amount, if any, by which the product of the rate
of dividend per annum, determined upon the snares of such series, multiplied by
the number of years and/or parts thereof which shall have elapsed from the date
after which dividends on such stock became cumulative to such given date exceeds
the total dividends actually paid pn such stock and/or declared and set apart for
payment. Accumulations of dividends shall not bear interest.
COMMON STOCK
None of the shares of the common stock shall be entitled to any preferences and
each share of common stock shall be equal to every other share of said stock in
every respect.
175541—33—PT. 2
4
352
STOCK EXCHANGE PEACTICES
Dividends: Out of any assets of this corporation available for dividends remaining after full cumulative dividends on all stock having priority over the
common stock shall have been paid or declared or set aside for payment and after
complying with all provisions in respect of any sinking fund or funds for the first
preferred stock and/or preference stock and after making such provisions, if any, as
the board of directors may deem necessary or advisable for working capital and
reserves, then, and not otherwise, dividends may be paid upon the common
stock but only when and as determined by the board of directors.
Distribution of assets in the event of any liquidation, dissolution or winding up
of this corporation or any other proceeding resulting in any distribution of its
assets to its stockholders, after there have been paid to or set aside for the holders
of all stock having priority over the common stock the full preferential amounts
to which they are respectively entitled, the holders of the common stock shall be
entitled to receive pro rata all of the remaining assets of this corporation available
for distribution to its stockholders. The board of directors, by vote of a majority
of the members thereof, may distribute in kind to the holders of the common
stock such remaining assets of this corporation, or may sell, transfer or otherwise
dispose of all of the remaining property or assets of this corporation to any other
corporation and receive payment therefor wholly or partly in cash and/or in
stock and/or in obligations of such corporation, and may sell all or any of the consideration received therefor and distribute the balance thereof in kind to the
holders of the common stock.
Voting power: At all meetings of the stockholders of the corporation the holders
of the common stock shall be entitled to one vote for each share of such common
stock held by them respectively.
OPTION WARRANTS
The board of directors shall have power at any time or from time to time
(without any action by the stockholders of this corporation) in the name and on
behalf of this corporation to grant rights or options to run for any period of time,
including an unlimited period of time to purchase from this corporation any
shares of its stock of any class or classes for any consideration (not less than par
if such shares have par value) and upon any terms and conditions and to create
and issue warrants or other instruments representing such rights or options in
any form; all as the board of directors may, in its sole discretion, determine.
GENERAL PROVISIONS
Consideration receivable for no par value stock: Shares of capital stock of this
corporation without nominal or par value of any class or classes, hereby or hereafter authorized, may be issued by this corporation from time to time for such
consideration as may be fixed from time to time by the board, of directors. Said
board shall have authority, as provided by statute, to determine that only a part
of the consideration, which shall be received by this corporation for any of the
shares of its capital stock which it shall issue from time to time, shall be capital.
AMOUNT OF CAPITAL WITH WHICH TO COMMENCE BUSINESS
The amount of capital with which the corporation shall commence business is
10 shares of said common stock without nominal or par value.
Fifth. The names and places of residence of each of the original subscribers to
the capital stock of the corporation and the number of shares of common stock
subscribed for by each are as follows:
A. V. Lane, Wilmington, Del
3
C. S. Peabbles, Wilmington, Del
3
L. E. Gray, Wilmington, Del
4
Sixth. The corporation is to have perpetual existence.
Seventh. The private property of the stockholders of the corporation shall not
be subject to the payment of corporate debts to any extent whatever.
Eighth. The number of directors of the corporation shall be fixed by the bylaws, and may be altered from time to time by amendment of such bylaws,
adopted by the board of directors or by the stockholders in the manner provided
therein, but such number shall never be less than five. Vacancies caused by an
increase in the number of directors or otherwise may be filled by the board of
directors in the manner provided in the bylaws. Directors need not be stockholders. Any director may be removed at any time with or without cause upon
STOCK EXCHANGE PRACTICES
353
the affirmative vote of the holders of a majority of the stock of the corporation at
that time entitled to vote for directors.
Ninth. The following additional provisions are inserted for the regulation of
the business and for the conduct of the affairs of this corporation and its directors
and stockholders:
(1) The board of directors shall have power from time to time to fix and
determine and to vary the amount to be reserved as a working capital of the
corporation and, before the payment of any dividends or making any distribution
of profits, it may set aside out of the net profits of the corporation such sum or
sums as it may from time to time in its absolute discretion think proper whether
as a reserve fund to meet contingencies or for the equalizing of dividends or for
repairing or maintaining any property of the corporation or for such corporate
purposes as the board shall think conducive to the interests of the corporation,
subject only to such limitations as the bylaws of the corporation may from time
to time impose.
(2) In the absence of fraud no contract or other transaction between this
corporation shall be affected by the fact that directors of this corporation are
directors of such other corporation, if such contract or transaction shall be approved or ratified by the affirmative vote of a majority of the directors present
at a meeting of the board of directors or the committee of this corporation having
authority in the premises, who are not so interested. Any director individually,
or any firm of which any director is a partner, may be a party to or may be interested in any contract or transaction of this corporation provided that such contract or transaction shall be approved or ratified by the affirmative vote of at
least a majority of the directors present at a meeting of the board of directors or
the committee of the corporation having authority in the premises, who are not
so interested. Nor shall any director be liable to account to this corporation for
any profit realized by him from or through any such transaction or contract of
this corporation, ratified or approved as aforesaid, by reason of his interest in
such transaction or contract.
Directors so interested may be counted when present at meetings of the board
of directors or of such committee for the purpose of determining the existence of a
quorum. Any director whose interest in any such contract or transaction arises
solely by reason of the fact that he is a stockholder, officer, or creditor of such
other company (or solely by reason of the fact that he is a director of such other
company or partner in such firm where such dealing, contract or arrangement is
made by officers or employees of the corporation or firm in the ordinary performance of their duties and without the actual participation of such director) shall
not be deemed interest in such contract or transaction under any of the provisions
of this paragraph, nor shall any contract or transaction be void or voidable
because of such interest, nor shall any director be liable to account because of
such interest, nor need any such interest be disclosed. Any contract or act that
shall be approved or ratified by the vote of the holders of a majority of the capital
stock of the corporation having voting powers which is represented in person or
by proxy at any annual meeting of the stockholders or at any special meeting
called for the purpose, among others, of considering the approval or ratification
of the acts of officers and/or directors (providing that a lawful quorum of stockholders be there represented in person or by proxy) shall be as valid and binding
upon the corporation and upon all its stockholders as though it had been approved
or ratified by every stockholder of the corporation.
(3) The board of directors shall also have power without the assent or vote
of the stockholders to make, alter, amend, and repeal the bylaws of the corporation; to fix the times for the declaration and payment of dividends; to authorize
and cause to be executed and delivered mortgages on and instruments of pledge,
or any other instruments creating liens on the real and personal property of the
corporation; to fix from time to time the consideration for which stock of the
corporation without nominal or par value may be issued and to determine what
part of such consideration shall be capital; to make and determine the use and
disposition of any surplus or net profits over and above the capital stock paid in,
and in its discretion the board of directors may use and apply any such surplus
or accumulated profits in purchasing or acquiring shares of its own capital stock
to such extent and in such manner and upon such terms as the board of directors
shall deem expedient; the shares of such capital stock so purchased or acquired
may be resold unless such shares shall have been retired for the purpose of decreasing the corporation's capital stock as provided by law.
(4) Subject to direction by resolution of a majority of the stockholders the
board of directors shall have the power from time to time to determine whether
354
STOCK EXCHANGE PRACTICES
and to what extent and at what times and places and under what conditions and
regulations the accounts and books of the corporation (other than the stock
ledger) or any of them, shall be open to the inspection of stockholders; and nostockholder shall have any right to inspect any account or book or document of
the corporation except as conferred by statute or authorized by the directors
or by a resolution of the stockholders.
(5) The board of directors shall have the power to appoint an executive committee from among their number, which committee, to the extent and in the
manner provided in the bylaws of the corporation, shall have and may exercise
all of the powers of the board of directors, so far as may be permitted by law, in
the management of the business and affairs of the corporation whenever the
board of directors is not in session. The fact that the executive committee
has acted shall be conclusive evidence that the board of directors was not in
session at the time of such action.
(6) The board of directors, in addition to the powers and authority expressly
conferred upon it hereinbefore and by statute and by the bylaws, is hereby empowered to exercise all such powers as may be exercised by the corporation;
subject, nevertheless, to the provisions of the statutes of the State of Delaware,
of this certificate of incorporation and to any regulations that may from time to
time be made by the stockholders, provided that no regulation so made shall
invalidate any provision of this certificate of incorporation or any prior act of the
directors which would have continued if such regulation had not been made.
' Tenth. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this corporation
and its stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this corporation or of any creditor or stockholder thereof, or on the application of any
receiver or receivers appointed for this corporation under the provisions of
section 3883 of the revised code of 1915 of said State, or on the application of
trustees in dissolution or of any receiver or receivers appointed for this corporation under the provisions of section 43 of this chapter, order a meeting of the
creditors or class of creditors, and/or of the stockholders or class of stockholders of
this corporation, as the case may be, to be summoned in such manner as the said
court directs. If a majority in number representing three fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of stockholders
of this corporation, as the case may be, agree to any compromise or arrangement
and to any reorganization of this corporation as consequence of such compromise
or arrangement, the said compromise or arrangement and the said organization
shall, if sanctioned by the court to which the said application" has been made, be
binding on all the creditors or class of creditors, and/or on all the stockholders
or class of stockholders, of this corporation, as the case may be, and also on this
corporation.
Eleventh. The corporation reserves the right to increase or decrease its authorized capital stock, or any class or series thereof, or to reclassify the same, and to
amend, alter, change, or repeal any provision contained in the certificate of
incorporation under which the corporation is organized or in any amendment
thereto, in the manner now or hereafter prescribed by law, and all the rights
conferred upon stockholders in said certificate of incorporation or any amendment
thereto are granted subject to this reservation; provided, however, that the corporation shall not decrease the amounts which any class or series of fires preferred
stock and/or preference stock shall be entitled to receive as dividends or upon
distribution of assets to any other class, or decrease the redemption price of such
class or series, unless the holders of all the first preferred stock and/or preference
stock of such class or series so affected adversely shall consent thereto.
Twelfth. No stockholder shall be entitled as a matter of right to subscribe for,
purchase, or receive any shares of the stop or option warrants of the corporation
which it may issue or sell, whether out of the number of shares authorized by this
certificate of incorporation or by amendment thereof or out of the shares of the
stock of the corporation acquired by it after the issuance thereof, nor shall any
stockholder be entitled as a matter of right to purchase or subscribe for or receive
any bonds, debentures, or other obligations which the corporation may issue or
sell that shall be convertible into or exchangeable for stock or to which shall
be attached or appertain any warrant or warrants or other instruments or instruments that shall confer upon the holder or owner of such obligation the right to
subscribe for or purchase from the corporation any shares of its capital stock.
But all such additional issues of stock, option warrants, or of bonds, debentures,
or other obligations confertible into or exchangeable for stock or to which war
STOCK EXCHANGE PRACTICES
355
rants shall be attached or appertain or which shall confer upon the holder the
right to subscribe for or purchase any shares of stock may be issued and disposed
of by the board of directors to such persons and upon such terms as in their absolute discretion they may deem advisable.
In witness whereof, we, the undersigned, being all the original subscribers to
the capital stock of said corporation and having respectively agreed to take the
shares of such stock stated in article fifth of this certificate of incorporation, have
hereunto set our respective hands and seals this 7th day of January 1929.
A. V. LANE
C. S. PEABBLES
L. E. GRAY
[SEAL]
[SEAL]
[SEAL]
Witness:
ALBERT L. MILLER.
STATE OF DELAWARE,
County of New Castle, ss:
Be it remembered that on this 7th day of January A.D. 1929, personally came
before me, Albert L. Miller, a notary public in and for the county and State
aforesaid, A. V. Lane, C. S. Peabbles, and L. E. Gray, parties to the foregoing
certificate of incorporation, known to me personally to be such, and I having
first made known to them and each of them the contents of said certificate, they
did each severally acknowledge that they signed, sealed, and delivered the same
as their voluntary act and deed, and each deposed that the facts therein stated
were truly set forth.
Given under my hand and seal of office the day and year aforesaid.
[SEAL]
ALBERT L. MILLER, Notary Public.
STATE OF DELAWARE,
Office of Secretary of State:
I, Charles H. Grantland, secretary of state of the State of Delaware, do hereby
certify that the above and foregoing is a true and correct copy of the certificate
of incorporation of ''The United Corporation", as received and filed in this office
the 7th day of January, A.D. 1929, at 3 p.m.
In testimony whereof I have hereunto set my hand and official seal at Dover,
this 7th day of January in the year of our Lord one thousand nine hundred and
twenty-nine.
[SEAL]
CHARLES H. GRANTLAND,
Secretary of State.
COMMITTEE EXHIBIT NO. 23, MAY 26, 1933
NEW
YORK, January 9f 1929.
The UNITED CORPORATION,
Wilmongton, Delaware.
DEAR SIRS: We understand that you have been incorporated with an authorized
capital consisting of 1,000,000 shares of first preferred stock, 2,000,000 shares of
preference stock, and 10,000,000 shares of common stock. We further understand
that, of this authorized stock, you have agreed to issue the amount shown by a
contract between yourselves and Messrs. J. P. Morgan & Co., a copy of which is
annexed hereto marked "Exhibit A."
We hereby offer, on behalf of ourselves and our associates, to purchase from you
400,000 shares of your common stock and option warrants entitling the holders
thereof to purchase 1,000,000 shares of common stock, and to pay you for such
purchase the sum of $10,000,000. We understand that Bonbright Electric Corporation has likewise offered to pay to you a sum of $10,000,000 against the issuance and delivery by you of the same amount of securities.
We agree to make payment to you for the above shares of common stock and
option warrants on the 15th day of January, 1929, at which time you agree to
issue and deliver to us, or our nominees, temporary certificates for the common
stock and option warrants, which are the subject of this purchase.
We understand that, of the consideration to be received by you from us in
payment of said common stock and option warrants, $22.50 shall constitute the
consideration received from the sale of each share of common stock and $1 shall
constitute the consideration received from the sale of each right represented by
said option warrants to purchase one share of common stock at $27.50 per share,
and that, of the consideration received for the sale of your common stock, you
356
STOCK EXCHANGE PRACTICES
will capitalize $5 per share and that you will credit the balance of the consideration received for the common stock and the consideration received for the option
warrants to surplus.
Upon your acceptance hereof, as provided below, this letter will constitute
a contract between us.
Very truly yours,
J. P. MORGAN &
Co.
EXHIBIT A
JANUARY 8,
1929.
The UNITED CORPORATION,
Wilmington, Del.
GENTLEMEN: AS a part of a plan of reorganization, you have been incorporated
with an authorized capital consisting of 1,000,000 snares of first preferred stock,
2,000,000 shares of preference stock and 10,000,000 shares of common stock,
none of which is issued, outstanding or subscribed for except 10 shares of common
stock subscribed for by the original incorporators.
We also understand that, in accordance with the terms of your charter, you
have created or are about to create a form of option warrant, entitling the holder
thereof to purchase at any time, without limit, shares of common stock of your
corporation, as such stock may be constituted at the time of such purchase, at
a price of $27.50 per share, subject to the terms and conditions stated therein
which form of option warrant we have examined.
In accordance with said plan of reorganization, we offer to transfer, or cause
to be transferrecd to you, jbhe following:
•1. 130,565 shares of the capital stock of the United Gas Improvement Co.
2. 59,500 shares of the common stock of Public Service Corporation of New
Jersey.
3. 62,360 shares of the preferred stock of Mohawk Hudson Power Corporation..
4. 358,957 shares of the common stock of Mohawk Hudson Power Corporation.
5. 124,740 option warrants of Mohawk Hudson Power Corporation, each of
such option warrants authorizing the holder thereof to purchase at any time
one share of common stock of that company at $50 per share.
6. Cash in the sum of $323,655.
In consideration thereof, you agree to issue to us, or to our nominee, 600,000s
shares of your $3 cumulative preference stock, 800,000 shares of your common
stock, and option warrants, in the form you have created, entitling holders thereof
to purchase at any time, without limit, 714,200 shares of your common stock at
a price of $27.50 per share. The original incorporators have assigned to us their
subscription rights to 10 shares of common stock of your corporation, which
shares are included in the above-mentioned shares.
We agree to pay you said cash and to deliver, or cause to be delivered and
transferred to you said securities on the 14th day of January, 1929, at which time
you agree to issue and deliver to us, or our nominees, temporary certificates for
the $3 cumulative preference stock and the common stock, and the option
warrants, as above provided.
We understand that, of the consideration to be received by you for the sale of
the aforementioned $3 cumulative preference stock, common stock, and optionwarrants, $50 shall constitute the consideration received for the sale of each share
of $3 cumulative preference stock, $1 shall constitute the consideration received
for the sale of each right represented by the abovementioned option warrants to
purchase 1 share of the common stock at $27.50 per share, and the balance of the
consideration shall be received for the sale of the above mentioned common stock,,
and that, of the consideration received for the sale of the $3 cumulative preference
stock, you will capitalize the entire consideration, i.e. $50 per share, and that, of
the consideration received for the sale of your common stock, you will capitalize
$5 per share and that you will credit the balance of the consideration received for
the common stock and the consideration received for the option warrants to
surplus.
Upon your acceptance hereof, as provided below, this letter will constitute a
contract between us.
Yours,very truly,'
Accepted, January —, 1929.
THE UNITED CORPORATION,
By
,
President.
STOCK EXCHANGE PEACTICES
NEW
357
YOEK, January 8, 1929.
THE UNITED CORPORATION,
Wilmington, Bel.
GENTLEMEN: AS a part of a plan of reorganization you have been incorporated
with an authorized capital consisting of 1,000,000 shares of first preferred stock,
2,000,000 shares of preference stock, and 10,000,000 shares of common stock,
none of which is issued, outstanding, or subscribed for except 10 shares of common
stock subscribed for by the original incorporators.
We also understand that, in accordance with the terms of your charter, you
have created or are about to create a form of option warrant, entitling the holder
thereof to purchase at any time, without limit, shares of common stock of your
corporation, as such stock may be constituted at the time of such purchase, at a
price of $27.50 per share, subject to the t@rms and conditions stated therein, which
form of option warrant we have examined.
In accordance with said plan of reorganization we offer to transfer, or cause to
be transferred to you, the following:
1. 130,565 shares of the capital stock of the United Gas Improvement Co.
2. 59,500 shares of the common stock of Public Service Corporation of New
Jersey.
3. 62,360 shares of the second preferred stock of Mohawk Hudson Power Corporation.
4. 359,957 shares of tke common stock of Mohawk Hudson Power Corporation.
5. 124,740 option warrants of Mohawk Hudson Power Corporation, each of such
option warrants authorizing the holder thereof to purchase at any time 1 share of
common stock of that company at $50 per share.
6. Cash in the sum of $323,655.
In consideration thereof, you agree to issue to us, or to our nominee, 600,000
shares of your $3 cumulative preference stock, 800,000 shares of your common
stock, and option warrants, in the form you have created, entitling holders thereof
to purchase at any time, without limit, 714,200 shares of your common stock at a
price of $27.50 per share. The original incorporators have assigned to us their
subscription rights to 10 shares of common stock of your corporation, which
shares are included in the above-mentioned shares.
We agree to pay you said cash and to deliver, or cause to be delivered and
transferred to you, said securities on the 14th day of January, 1929, at which
time you agree to issue and deliver to us, or our nominees, temporary certificates
for the $3 cumulative preference stock and the common stock, and the option
warrants, as above provided.
We understand that, of the consideration to be received by you for the sale of
the aforementioned $3 cumulative preference stock, common stock, and option
warrants, $50 shall constitute the consideration received for the sale of each share
of $3 cumulative preference stock, $1 shall constitute the consideration received
for the sale of each right represented by the above-mentioned option warrants
to purchase 1 share of the common stock at $27.50 per share, and the balance of
the consideration shall be received for the sale of the above-mentioned common
stock, and that, of the consideration received for the sale of the $3 cumulative
preference stock, you will capitalize the entire consideration, i. e., $50 per share,
and that, of the consideration received for the sale of your common stock, you
will capitalize $5 per share and that you will credit the balance of the consideration received for the common stock and the consideration received for the
option warrants to surplus.
Upon your acceptance hereof, as provided below, this letter will constitute a
contract between us.
Yours very truly,
J. P. MORGAN & Co.
Accepted, January 8, 1929.
[SEAL]
THE UNITED CORF ORATION,
By GEORGE ROBERTS, President.
NEW
The
YORK, January 9, 1929.
UNITED CORPORATION,
Wilmington, Del.
DEAR SIRS: Referring to the contract between us, as evidenced by letter dated
January 8, 1929, we hereby confirm that the number of'shares of Mohawk Hudson
Power Corporation common to be delivered by us is 358,957 instead of 359,957.
We will make a delivery and transfer to you of the securities covered by such
contract on Thursday, January 10, instead of Monday, January 14, 1929, and
358
STOCK EXCHANGE PRACTICES
the amount of cash payable bv us will be adjusted so that we will pay you the
sum of $371,025.76, instead of "the sum of $323,655.
We also confirm that under our contract with you, dated January 8, 1929,
we will make payment to you of the $10,000,000 which we have contracted to pay
for 400,000 shares of your common stock and your option warrants for 1,000,000
shares of common stock, and you will make delivery of the same on January 11,
1929, instead of January 15.
Kindly confirm the above understanding.
Yours very truly,
J. P. MORGAN & Co.
Above understanding is hereby confirmed, dated January 9, 1929.
Signed as accepted.
THE UNITED CORPORATION,
By L. K. THORNE.
LJ K. THORNE,
Of Bonbright & Company, I no
STOCK EXCHANGE PEACTICES
WEDNESDAY, MAY 31, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE
ON BANKING AND CURRENCY,
Washington, D.C
The subcommittee met, pursuant to adjournment on Friday, May
26, 1933, at 11 a.m. (at the conclusion of an executive session), in the caucus room of the Senate Office Building, Senator
Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Glass, Costigan, Townsend, and CouzensPresent also: Senators Bulkley, Gore, Reynolds, Goldsborough,
Kean, and Steiwer.
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver, David Saperstein, and James P. McDonough, associate counsel to the committee; John W. Davis, counsel for J. P. Morgan & Co.;
Eandall J. LeBoeuf, Jr., and Earle J. Machold, counsel for the
United Corporation and for George H. Howard, president of the
United Corporation.
The CHAIRMAN. Let us have order in the hearing room. The
committee will come to order. You may proceed, Mr. Pecora.
Mr. PECORA. Mr. Howard.
The CHAIRMAN. Mr. Howard will take the chair.
TESTIMONY OF GEORGE H. HOWAED, PRESIDENT OF THE UNITED
CORPORATION, AND PRESIDENT OF THE NEW YORK UNITED
CORPORATION—Resumed
Mr. PECORA. Mr. Howard, you were on the stand last Friday at the
time the recess was taken until this morning, and I believe at that
time you were being questioned concerning the members of the board
of directors of the United Corporation. I think you had told the
committee the corporate affiliations of yourself, that is, the names
of the corporations of which you were an officer or director, public
utility companies. Can you give us the same information with
respect to the corporations of which Mr. Floyd L. Carlisle is either
an officer or director? That is, the public utility companies.
Mr. HOWARD. I am not sure that I can give that information
perfectly. I can give you some of them.
Mr. PECORA. Well, will you please do so.
Mr. HOWARD. He is a director and chairman of the board of the
Consolidated Gas Co. of New York. He is chairman of the board
and director of the Niagara Hudson Co. He is director and a mem
359
360
STOCK EXCHANGE PRACTICES
ber of the executive committee of the Columbia Gas & Electric
Corporation. He is a director and member of the executive committee of the United Gas Improvement Co. He is a director, and I
cannot tell you whether he is an officer or not, of the Mohawk
Hudson, and I think of the New York Power & Light, That I
think, as far as my recollection goes, without having the formal
record, is it.
Mr. PECORA. Can you give us the same information with respect
to Mr. B. C. Cobb, who is also a member of the board of directors
of the United Corporation ?
Mr. HOWARD. Mr. B. C. Cobb is chairman and director of the
Commonwealth & Southern Corporation. He is a director of the
Columbia Gas & Electric Corporation. And I think he is a director
of the Mohawk Hudson Power Corporation, too. That is as far as
I can go from memory.
Mr. PECORA. HOW about being director and chairman of the board
of the Allied Power & Light Co. ?
Mr. HOWARD. The Allied Light & Power Co. I think had been
dissolved or merged with Commonwealth & Southern. He was
an officer of that company at one time, but I do not remembe:
what.
Mr. PECORA. What are the corporate affiliations of Mr. Philip G.
Gossler, one of the directors of the United Corporation ?
Mr. HOWARD. Well, the only boards that I know of he is on is
the United Corporation, New York United Corporation, and Columbia Gas & Electric Corporation.
Mr. PECORA. He is the president of the Columbia & Electric
Corporation, is he not?
Mr. HOWARD. Yes, sir; he is the president of the Columbia Gas
& Electric Corporation.
Mr. PECORA. HOW about Mr. Edward Hopkinson, Jr.? What
are his corporate affiliations?
Mr. HOWARD. He is a director of the United Corporation, and of
the New York United Corporation, and he is a director and I think
chairman of the executive committee of the United Gas Improvement Co.
Mr. PECORA. He is also a partner of J. P. Morgan & Co. ?
Mr. HOWARD. I think he is.
Mr. PECORA. Can you give us the corporate affiliations of Mr.
Alfred L. Loomis, one of the members of your board?
Mr. HOWARD. He is a director of the Commonwealth & Southern
Corporation, a director of the Public Service Corporation of New
Jersey, and I do not know his Bonbright affiliations.
Mr. PECORA. YOU know that he is connected with Bonbright &
Co.?
Mr. HOWARD.
Yes.
Mr. PECORA. What are the corporate affiliations of Mr. Thomas
N. McCarter.
Mr. HOWARD. Mr. McCarter is president of the Public Service
Co. of New Jersey, and a director and member of the executive
committee of the United Gas Improvement Co.
Mr. PECORA. Also a director of the Philadelphia Electric Corporation ?
STOCK EXCHANGE PRACTICES
361
Mr. HOWARD. He is a director of the Philadelphia Electric Corporation; yes.
Mr. PECORA. And of the United Engineers and Constructors, Inc. ?
Mr. HOWARD. Yes; I think so.
Mr. PECORA. What are the corporate affiliations of Mr. Harold
Stanley, one of your directors?
Mr. HOWARD. He is a director and member of the executive committee of the Columbia Gas & Electric Corporation. He is a director also of the Niagara Hudson, and of the Mohawk Hudson, and
of the New York United, I believe.
Mr. PECORA. Also of the United Gas Improvement Co.?
Mr. HOWAED. No. He is no longer a director of the United Gas
Improvement Co.
Mr. PECORA. But he was for a number of years ?
Mr. HOWARD. He was for some time; yes.
Mr. PECORA. He is also a partner of J. P. Morgan & Co.?
Mr. HOWARD. I think he is.
Mr. PECORA. NOW, can you give us the corporate affiliations of
Mr. Landon K. Thorne?
Mr. HOWARD. He is a director of Commonwealth & Southern, a
director and member of the executive committee of the Niagara
Hudson Power Corporation.
Mr. PECORA. And of the Mohawk Hudson Power ?
Mr. HOWARD. And I think of the Mohawk Hudson; yes.
Mr. PECOEA. And of the Public Service Corporation of New
Jersey ?
Mr. HOWARD. Yes, sir.
Mr. PECORA. And of the
Mr. HOWARD. NO. He is
United Gas Improvement Co.?
no longer a director of the Ujnited Gas
Improvement Co.
Mr. PECOPA. But he was.
Mr. HOWARD. He was.
Mr. PECORA. He was a director of the Allied Power & Light Co. ?
Mr. HOWARD. Well, I do not know about that.
Mr. PECORA. Isn't he also the president of Bonbright & Co.?
Mr. HOWARD. He is president, I think, of Bonbright & Co.
Mr. PECORA. We already have in the record here, I believe, the
corporate affiliations of Mr. George Whitney. Now, what are the
corporate affiliations of John E. Zimmermann, one of the members
of your board?
Mr. HOWARD. He is a director of the Niagara Hudson Power
Corporation and of the Mohawk Hudson Power. He is director
and president of the United Gas Improvement Co. and a director
of the Philadelphia Electric Co. and a director of the Public Service
Corporation of New Jersey and a member of the executive committee.
Mr. PECORA. Also of the United Engineers and Constructors, Inc. ?
Mr. HOWABD. Yes; I think so.
Mr. PECOEA. Mr. Howard, I believe you testified on last Friday
that you became the president of the United Corporation in March
of 1929, some time in March, did you not?
Mr. HOWARD. I was elected president on the 26th of March, 1929,
but my office became effective, I think—no, I was elected president
on the 26th of February, and my office became effective on the 2d
of March, 1929.
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STOCK EXCHANGE PRACTICES
Mr. PECORA. Were you a stockholder of the company prior to
that time ?
Mr. HOWARD. I was a stockholder—I think the stock was in my
name of record before that time; yes.
Mr. PECORA. HOW many shares?
Mr. HOWARD. Twenty thousand shares and 100,000 option
warrants.
Mr. PECORA. YOU purchased those shares and those warrants for a
total consideration of $500,000, did you not?
Mr. HOWARD. Yes;
Mr. PECORA. Did
I
did.
you purchase those for your own beneficial
interest, or were you acting as the nominee for someone else?
Mr. HOWARD. I had been a member of the firm of Simpson,
Thacher & Bartlett for a long time, and when I had conversations
about withdrawing from that firm, in which it happened that I
had at that time a percentage call, and at which time I had been
earning, I thought, substantially more than as an officer or otherwise I could earn, and if I had to withdraw I had to give up the
insurance privileges which had accrued for 18 years, it was arranged that if I should become the president of the United Corporation I should have in this company this $500,000 participation.
Mr. PECORA. YOU say it was arranged that you should have that
stock participation. Who entered into that arrangement ?
Mr. HOWARD. My conversations about that were with Mr. Thorne
and with Mr. Whitney.
Mr. PECORA. Mr. Thorne was then connected with Bonbright &
Co., and Mr. Whitney with J. P. Morgan & Co.?
Mr.
HOWARD.
Yes.
Mr. PECORA. DO you understand that those two firms were the
organizers of the United Corporation?
Mr. HOWARD. Well, I have understood, under their announcements made at that time, that Morgan & Co., Drexel & Co., and
Bonbright & Co. were the organizers of the United Corporation.
Mr. PECORA. Will you tell us what this arrangement was under
which you became the owner of those 20,000 shares of common stock
of the United Corporation and 100,000 option warrants, the arrangement that you have referred to?
Mr. HOWARD. The arrangement simply was that if I did become
the president I should have those shares and those warrants.
Senator STEIWER. What kind of an arrangement was it, oral or
written, Mr. Pecora?
Mr. PECORA. Was it an oral or a written arrangement?
Mr. HOWARD. Both.
Mr. PECORA. Did you personally provide the moneys out of your
own means with which this stock was purchased?
Mr. HOWARD. Personally, out of my own means.
Mr. PECORA. That is what I want to get.
Mr.
HOWARD.
Yes.
Mr. PECORA. Who asked you to become president of the United
Corporation, at that time?
Mr HOWARD. The first conversation which I ever had about this
matter was with Mr. Thorne and Mr. Loomis.
Mr. PECORA. Was that prior to January 7, 1929, which I believe
is the date of the incorporation of the United Corporation?
STOCK EXCHANGE PKACTICES
36b
Mr. HOWARD. It either was just before Christmas of 1928, or just
at the beginning of 1929, and I am not sure which.
Mr. PECORA. Will you be good enough to give the committee the
substance of that conversation?
Mr. HOWARD. Mr. Thorne and Mr. Loomis asked me to lunch
with them, whatever day this was. They said that the United
Corporation was about to be formed. They asked me whether, if
the offer should be made to me, I would care to withdraw from my
old law firm and become the president of it. I said I did not know,
because it was a very difficult thing for me to decide. As a matter
of fact, it was several weeks before I finally did conclude to withdraw from my law firm. But I did finally withdraw on the 1st of
March, and on the 2d of March undertook this job.
Mr. PECORA. Were you personally familiar with the acts and proceedings of the United Corporation from its incorporation on January 7, 1929, up to the time when you became its president, on
March 2, 1929?
Mr. HOWARD. In trying very carefully to refresh my recollection
about all of that period, I think I made only two suggestions in that
time. One was that I wished the corporation might buy some shares
of Electric Bond & Share Co., and that they might buy some shares
of Lehigh Coal & Navigation Co. As to all other transactions I had
no participation or part until after I became president.
Mr. PECORA. NOW, the initial set-up of the United Corporation
was, in substance, that the United Corporation, for a cash consideration of $10,000,000, issued certain of its securities to the firm of
J. P. Morgan & Co., and for a similar cash consideration of $10,000,000 issued others of its securities, other portions of its securities,
to Bonbright & Co.; is that correct ?
Mr. HOWARD. Well, having studied the record as carefully as I
could, I should think it was something more than that.
Mr. PECORA. Will you complete the story ?
Mr. HOWARD. Well, I should think there was the step which we
considered here on Friday. There was, then, the step of the $10,• 000,000 for Morgan & Co. and of the $10,000,000 from Bonbright
Electric Corporation, and then an almost simultaneous step, and
1 do not remember the exact date, under which the Public Electric
Holding Corporation merged witn the United Corporation, under
which additional shares of Public Service stock and additional shares
of United Gas Improvement Co. stock was acquired.
Mr. PECORA. The initial step consisted of an agreement between
Bonbright & Co. and the United Corporation, and J. P. Morgan &
Co. and the United Corporation, under the terms of which, substantially, the United Corporation sold certain of its securities for
$10,000,000 cash each to Morgan & Co. and Bonbright & Co., isn't
that correct?
Mr. HOWARD. In those initial steps, and I do not recall the exact
chronological order, that was one of the steps.
Mr. PECORA. NOW, let us confine ourselves for the time being to
that portion of the transaction which related to J. P. Morgan & Co.
and the United Corporation.
Mr. HOWARD. That m^ to the cash transaction?
Mr. PECORA. The cash transaction.
364
STOCK EXCHANGE PRACTICES
Mr. HOWARD. All right.
Mr. PECORA. NOW, in that transaction isn't it a fact that for that
$10,000,000 cash J. P. Morgan & Co. received 400,000 shares of the
common stock of the Uinited Corporation and 1,000,000 option
warrants ?
Mr. HOWARD. Yes.
Mr. PECORA. NOW,
I think you said on Friday that the issuance
of those option warrants, which had no time limit, was a common
or general practice. Did you understand it to be a common or general practice in January of 1929?
Mr. HOWARD. I think, Mr. Pecora, that we were to survey the history in the 7 or 8 years preceding the incorporation of the United
Corporation, and that in many of those companies there had been
issued similar option warrants.
Mr. PECORA. That is, without time limitation?
Mr. HOWARD. Yes; without time limitation.
Mr. PECORA. HOW many such instances dp you know of having
occurred prior to January of 1929?
Mr. HOWARD. Well, I cannot at this moment indicate to you a
single instance, but I think they had occurred.
Mr. PECORA. DO you know when the first statute was passed in
any State that authorized or permitted the issuance of option warrants without time limitation ?
Mr. HOWARD. NO ; I do not. I know that a statute was passed in
Delaware, but I do not know when it was.
Mr. PECORA. Don't you know that that statute, passed in Delaware,
was not enacted and did not become effective until March of 1929,
some 2 months after the incorporation of the United Corporation?
Mr. HOWARD. No; I do not recall.
Mr. PECORA. DO you know that at the time of the issuance of
those option warrants there was no statute that authorized their
issuance without a time limitation?
Mr. HOWARD. NO ; I did not know that.
Mr. PECORA. NOW, just briefly, and without desiring on my part
to go over any of the ground that was covered by your testimony'
on last Friday but solely for the purpose of summarizing and bringing it right up to the moment: Those option warrants entitled the
holders thereof at any time in the future to exchange them for
shares of the common stock of the United Corporation at $27.50
per share, did they not ?
Mr. HOWARD. Yes; exchange the option warrants at $27.50 per
share in cash.
Mr. PECORA. Each option warrant to be exchanged for one share
of the United Corporation stock,
Mr. HOWARD. Yes, sir.
Mr. PECORA. Upon the
payment of $27.50 per share to the corporation.
Mr. HOWARD. Yes. Mr. Pecora, might I say, going back for the
moment to your questioning of me as to whether there was any
statutory authority for those option warrants, that I have understood from very eminent counsel that those option warrants create
a contract, and that that sort of contract is perfectly good without a
statute.
Mr. PECORA. Who is the eminent counsel who has so advised you ?
STOCK EXCHANGE PEACTICES
365
Mr. HOWARD. I have discussed it with many. I have discussed
it with—well, I have discussed it with Mr. Roberts.
Mr. PECORA. Who was your predecessor as president of the United
Corporation ?
Mr. HOWARD. Yes, sir. And I discussed it with members of my
old law firm. I have discussed it with Mr. Eeed, of Mr. Davis' firm.
Mr. PECORA. YOU did not have those discussions in 1929, did you ?
Mr. HOWARD. NO, I did not; but
Mr. PECORA (continuing). You have
Mr. HOWARD. NO. I have had them
had them very recently?
over a long period of time,
because in the practice of law the question of option warrants was
very often being considered.
Mr. PECORA. NOW, as the president of the United Corporation
Senator COUZENS (interposing). Before you go on with that, Mr.
Pecora: Mr. Howard, did the stockholders in the United Corporation know of those warrants?
Mr. HOWARD. Yes.
Senator COUZENS. All of them ?
Mr. HOWARD. All of them.
Senator COUZENS. All those that
bought on the market understood
also that those option warrants were out ?
Mr. HOWARD. Yes; because a public announcement was made at
the time, I think, that there were option warrants out. I am not
certain of that, however.
Mr. PECORA. Were the terms of those option warrants made known
to the public in any public announcement that you know of?
Mr. HOWARD. Well, I think—but I should like to see it.
Mr. PECORA. SO would I.
Mr. HOWARD. Well, here is the announcement, if you would like
to see it.
Mr. PECORA. All right. Pass it up. [After looking the paper
over.] I offer in evidence
The CHAIRMAN (interposing). Mr. Howard, do you know of any
such warrants ever having been issued before without a time limit?
Was this the first of that character of warrant that you know of ?
Mr. HOWARD. I do not think so, Senator Fletcher, but I do not
know. I think perpetual option warrants had been issued before
that.
The CHAIRMAN. Without a time limit?
Mr. HOWARD. Without a time limit; yes.
Mr. PECORA. Mr. Chairman, I offer in evidence the printecj. document that the witness has handed to me in response to my question
calling for any such announcement as he referred to and ask that it
be made a part of the record.
The CHAIRMAN. I t will be received and entered on the record.
(The paper referred to was received and ordered made a part of
the record and was marked " Committee Exhibit No. 26, May 31,
1933," and is as follows:)
COMMITTEE EXHIBIT NO. 26
(For release to newspapers Friday, Jan. 11, 1929)
The United Corporation lias been organized under Delaware laws by Messrs.
J. P. Morgan & Co., Drexel & Co., and Bonbright & Co., Inc., and has made
arrangements to acquire certain minority interests in the United Gas Improve-
366
STOCK EXCHANGE PRACTICES
ment Co., the Public Service Corporation of New Jersey, and the Mohawk
Hudson Power Corporation held by the organizers and the American Superpower Corporation.
The capitalization of the corporation is as follows:
Authorized
First preferred stock.
Preference stock
Common stock
1
2
Shares
i 1,000,000
i 2,000,000
2 10,000,000
To be presently issued
Shares
None.
944,187
3,810,853
No par value.
4,000,000 shares will be reserved against exercise of option warrants.
There will also be presently issued adoption warrants entitling holders to
purchase at any time without limit not in excess of 4,000,000 shares of common
stock at $27.50 per share.
The preference stock presently to be issued will be known as $3 cumulative
preference stock; will be entitled to cumulative dividends at the rate of $3
per annum, payable quarterly; will be redeemable at the corporation's option
at $55 per share, and will be entitled, on liquidation, to $50 per share and
accrued dividends. Both common and preference shares, and, if and when
issued, the first preference stock, will have full voting powers.
There have been purchased by the organizers, for $20,000,000 cash, 800,000
shares of the common stock and option warrants for 2,000.000 shares of common stock. The balance to be presently issued of the common stock and
option warrants and the 944,197 shares $3 cumulative preference stock are
to be issued in exchange for securities. The prices at which securities have
been acquired by the corporation from the organizers are in excess of the cost
to them, but below the present quoted market.
The corporation's present assets will consist of the securities described,
which, on the basis of present market quotations, have an aggregate value in
excess of $130,000,000, and cash in excess of $20,000,000.
The balance of the authorized capital may, in the discretion of the directors
of the corporation, be issued for cash or property without offering to the
stockholders.
The directors of the corporation will be Messrs Thomas S. Gates, Alfred L.
Loomis, Landon K. Thorne, and George Wihitney.
Dated January 9, 1929.
Senator COUZENS. I find nothing in this press release which indicates that there was no limit to the option warrants.
Mr. DAVIS. Here it is, Senator Couzens.
Senator COUZENS. Oh, I beg pardon.
Senator TOWNSEND. I t says " Entitling holders to purchase at any
time without limit."
Mr. HOWARD. The language was
Mr. PECORA (interposing). I will read this. In parentheses it
says " For release to newspapers Friday, January 11, 1929 ", and
reads as follows: (Counsel then read the exhibit.) Do you know
whether or not this announcement, as you call it, was printed in full
in the newspapers on or about January 11,1929?
Mr. HOWARD. NO ; I do not know that.
Mr. PECORA. YOU do not know that?
Mr. HOWARD. NO. May I go back for one moment to the option
warrants and call attention to the provision in the charter about
them, which is here ?
Mr. PECORA. Very well, sir; will you read it?
Mr. HOWARD. I t says:
Option warrants: The board of directors shall have the power at any time
or from time to time without any action by the stockholders of this corporation,
STOCK EXCHANGE PRACTICES
367
in the name of and on behalf of this corporation, to grant rights or options, to
run for any period of time, including an unlimited period of time, to purchase
from this corporation any shares of its stock of any class or classes, for any
consideration, not less than par if such stock have a pur value, and upon any
ternas and conditions, and to create and issue warrants and other instruments
representing such rights or options, in any form, all as the board of directors
may in its sole discretion determine.
Mr. PECORA. What are you reading that from ?
Mr. HOWARD. From the certificate of incorporation.
Mr. PECORA. That was not made public other than through the
means of the filing of the certificate in the appropriate office of public records of the State officer, was it ?
Mr. HOWARD. NO. That is true.
Senator ADAMS. Mr. Howard, may I make an inquiry? I find
two of these printed circulars, the one which has been read, being a
release to newspapers, and one headed " Memorandum ", and there
is a variation in the figures. In the memorandum, which is dated
January 14, 1929, it says, " To be presently issued 1,004,621 shares."
And in the release it says, " To be presently issued 944,187 shares."
That is as to the preference stock. And in the memorandum of
January 14, 1929, it says of common stock to be presently issued
4,198,906 shares, while in the release it says 3,810,853 shares. I do
not mean to say that that is material, but there happens to be that
variation.
Senator COTTZENS. There is five days' difference in date there.
Mr. HOWARD. Yes; they are on different dates.
Senator ADAMS. The newspaper release dated January 9, 1929,
gives what I have said, and the memorandum is dated January 14,
1929.
Mr. HOWARD. I think a change had been made in the meanwhile.
The CHAIRMAN. That memorandum has not been offered in evidence.
Mr. PECORA. I had not seen that memorandum.
Mr. DAVIS. Might Mr. Whitney explain what that memorandum
is? I do not want that to stand without any explanation here.
The CHAIRMAN. I think that might be done.
Mr. WHITNEY. Mr. Chairman, the first paper given the commiti tee by Mr. Howard, which was a newspaper release for Friday,
January 11, 1929, was dated January 9, 1929. The second paper
was a memorandum we had prepared subsequently to the press release and delivered to each purchaser of the United Corporation, to
which Mr. Pecora referred on Friday. In other words, that was
not given out publicly any more than we sold stock publicly, but
everybody who made payment or purchase of United Corporation
units, which we sold and to which reference has been made, was
given at the time of payment for the certificates a copy of that
memorandum, so that each purchaser would have full knowledge of
the status of the corporation as of that date.
The CHAIRMAN. I think the memorandum ought to go in.
Mr. PECORA. Yes, sir.
Mr. WHITNEY. The reason
for the difference in figures, Senator
Adams, is a part of the general story of the United Corporation,
because there were certain subsequent transactions, which have not
175541—33—PT. 2
5
368
STOCK EXCHANGE PRACTICES
yet been introduced in evidence, transactions through the purchase
of other shares arranged long before those dates, because those dates
were merely a part of the legal steps in the formation of the United
Corporation, and it really brings in other steps agreed to while
the idea of the United Corporation was being discussed and determined upon. The real picture will show why there were these
differences in figures between January 9 and 14.
Mr. PECORA. Mr. Whitney, before you leave the stand
Senator ADAMS (interposing). Senator Reynolds and I were having difficulty following the testimony. We had a copy of the memorandum but we did not have a copy of the release, and we were
trying to get at the difference.
Mr. WHITNEY. I tried to catch your eye to give you the other
paper, but did not succeed in doing so.
Mr. PECORA. The memorandum you have referred to is this paper
which I now show you ?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. I offer the paper in evidence and ask that it be
spread on the record.
The CHAIRMAN. Let it be received and put on the record.
(The paper referred to was ordered placed on the record, being
marked " Committee Exhibit 27, May 31, 1933 ", and is as follows:)
COMMITTEE EXHIBIT NO. 27
MEMORANDUM
The United Corporation has been organized under Delaware laws by Messrs.
J. P. Morgan & Co., Drexel & Co., and Bonbright & Co., Inc., and has made
arrangements to acquire certain minority interests in the United das Improvement Co.; the Public Service Corporation of New Jersey; and the Mohawk
Hudson Power Corporation including the holdings of the organizers and of
others.
The capitalization of the corporation is as follows:
Authorized
First preferred stock.
Preference stock
Common stock
Shares
i 1,000,000
12,000,000
2
10,000,000
To be presently issued
Shares
None.
1,004,621
4,198,90&
*No par value.
4,000,000 shares will be reserved against exercise of option warrants.
2
There will also be presently issued option warrants entitling holders to
purchase at any time without limit not in excess of 4,000,000 shares of common stock at $27.50 per share.
The preference stock presently to be issued will be a series known as $3
cumulative preference stock, will be entitled to dividends at the rate of $3
per annum, payable quarterly; will be redeemable at the corporation's option
at $55 per share and accrued dividends, and will be entitled, on liquidation,
to $50 per share and accrued dividends. Both common and preference shares,
and, if and when issued, the first preferred stocks will have full voting powers.
There have been purchased by the organizers, for $20,000,000 cash, 800,000
shares of the common stock and option warrants for 2,000,000 shares of common stock. The balance to be presently issued of the common stock and option
warrants and the 1,004,621 shares of $3 cumulative preference stock have been
or are to be issued in exchange for securities and approximately $370,000 cash.
The prices at which securities have been acquired by the corporation from the
STOCK EXCHANGE PRACTICES
369
organizers are in excess of the cost to them, but below the present quoted
market prices.
The corporation's present assets are to consist of the securities described,,
representing a cost to the corporation of approximately $135,000,000, which
is substantially less than the value of these securities based upon present
market quotations, and cash in excess of $20,000,000.
Based on dividends from the above securities (including dividends upon the
common stock of the Public Service Corporation of New Jersey at the rate
of $2.60 per annum, and upon common stock of the United Gas Improvement
Go. at the rate of $4.50 per annum) and interest at 4 percent per annum upon
the above amount of cash, the income of the corporation will be in excess of
one and one-aalf times the dividend requirements of the preference stock
presently to be issued.
The balance of the authorized capital may at any time, in the discretion
of the directors of the corporation, be issued for cash or property without
offering to the stockholders. Additional shares of preference stock may be
issued as $3 cumulative preference stock, or may be issued as a different series
having such rate of dividend, redemption price, and other characteristics a&
may be determined by the directors, within the limitations provided by thecertificate of incorporation, at the time of the creation of any new series. In*
like manner the directors have power to determine the characteristics of theseries of first preferred stock at the time any such series is created.
Statements of the corporation will be published annually but will not necessarily include an itemized list of securities owned.
The directors of the corporation will be Messrs. Thomas S. Gates, Alfred lu
Loomis, Landon K. Thorne, and George Whitney.
January 14, 1929.
Mr. PECORA. Mr. Whitney, who prepared the memorandum last
offered in evidence ?
Mr. WHITNEY. Mr. Pecora, you are taxing my memory pretty
generally, but I should think the three partners who had the most
to do with it were Mr. Lamont, Mr. Stanley, and I.
Mr. PECORA. Mr. Thomas W. Lamont
Mr. WHITNEY. Yes, sir.
Mr. PECORA. Or Mr. Thomas S. Lamont ?
Mr. WHITNEY. NO.
Mr. PECORA. I would suggest, Mr. Chairman,
that Mr. Howard
be temporarily withdrawn from the stand and_Mr. Whitney be
asked to resume the stand for examination about this matter of
the United Corporation.
The CHAIRMAN. That may be done.
(Mr. Howard temporarily left the committee table.)
TESTIMONY OF GE0EGE WHITNEY, A MEMBER OF THE FIEM: OF
J. P. M0EGAN & CO.—Eesumed
Mr. PECORA. Mr. Whitney, you have stated that the memorandum
last offered in evidence was given or sent to each subscriber for the
stock of the United Corporation at the outset.
Mr. WHITNEY. It was delivered to each one; yes, sir.
Mr. PECORA. Who were those subscribers that you claim were
either subscribers as a result of a public offering or subscribers as a
result of a private offering?
Mr. WHITNEY. There was no public offering. As the result of a
private offering.
Mr. PECORA. NOW, Mr. Whitney, I show you this typewritten
document, and I ask you if it was prepared by your firm and furnished to me as a complete list of the names of the subscribers to*
whom you have just referred.
370
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. The subscribers to whom you have just referred,
Mr. Pecora—and you asked two questions there. It was furnished
to you as a complete list of purchases of United Corporation units.
The first half of your question, being directed to the point if prepared by us and furnished to you, the answer is yes, in conjunction
with Bonbright & Co., Inc. If I might be permitted, I should like
to explain a little bit about this offering, because the testimony, as
I have understood it, of Mr. Howard, leaves the United Corporation rather half formed, as it were.
Mr. PECORA. Just a moment. I will give you that opportunity
presently. I just want you now to identify that list, if you can,
as being the list furnished to me by J. P. Morgan & Co.
Mr. WHITNEY. That is the list furnished to you by J. P. Morgan
& Co.
Mr. PECORA. And is it a complete list of all subscribers who were
invited to subscribe for the units of the United Corporation in
January of 1929?
Mr. WHITNEY. AS far as I know; yes.
Mr. PECORA. I offer this list in evidence as a part of the hearing.
The CHAIRMAN. The list will be received and made a part of the
record.
(The list ordered made a part of the record was marked " Committee Exhibit No. 28, May 31, 1933 ", and is as follows:)
COMMITTEE EXHIBIT NO. 28, MAY 31,
1933
The United Corporation unit block interim
Name
Mrs. Helen B. Achelis
W. H. Aldridge
A. M. Anderson
Joseph Andrews
Mrs. Irma D. Ashmead
I. C. R. Atkin
The Atlantic-Merrill Oldham
Corporation
J. Howland Auchincloss
G. A. Austin
Mrs. Isabel Valle Austin
Gaspar G. Bacon and George
Whitney
Trustees under deed of trust
dated Nov. 13, 1914.
Mrs. Hope Norman Bacon
Priscilla T. Bacon, George
Whitney
And Gaspar G. Bacon, trustees under deed of trust for
benefit of Geo. F. Baker
Donald C. Bakewell
Bankers Co. of New York
Charles H. Barnes
Sosthenes Behn
Otto F. Behrend
C. J. Bennett
J. J. Bernet
Stephen Birch
C. N. Bliss
Blyth & Co
Amount
of units
300
1,000
2,000
100
50
100
receipts
Name
Amy W. Board
Bonbrisht & Co
Bonbright & Co
Nicholas F. Brady
Charles S. Brewer
Bradford Brinton
Brown Bros. & Co
1, 000 George F. Brownell
300 Matthew Brush
500 Roger H. Bullard
200 George Burgess
W. E. Burnet
500 Ward M. Canady
W. C. Cannon
1, 000
500
5,000
160
5, 000
30
1, 000
100
15
500
1, 000
2, 000
1, 500
George W . Carpenter
Mrs. Kathryn R. Carpenter
W . L. Carson
Amount
of units
25
81, 262
121,668
3, 000
1, 000
300
3, 000
200
1,000
50
50
200
1, 000
300
400
5
1Q0
Dr. Alfred H. Clark
500
E. H. Clark
500
Clark, Dodge & Co
5, 000
Leon R. Clausen
500
E. C. Congdon
160
Continental National Bank &
Trust Co
3, 000
Clinton H. Crane
500
S. M. Crocker
100
Mrs. P. E. Crowley
500
George Dahl
40
Arthur V. Davis
1,000
A. B. Davis
10
Henry G. Davis
100
STOCK EXCHANGE PKACTICES
Amount
Name
of units
John W. Davis
500
Norman H. Davis
250
Donald K. David
200
Lewis O. Dawes
300
D. Debevoise
10
Moroau Delane
1,000
¥ m . F. Delany
20
Edward Dibrell
250
D. J. Dimock
.
50
Dominick & Dominick
5,000
Camille Dreyfus
300
J. A. M. deSanchez
25
Drexel & Co
82, 000
Drexel & Co
5,000
W. Echtermeyer
10
F. H. Eeker
1, 000
Mrs. Cornelia Cousins Egan
200
Dean Emery
500
Robert W. Emmons, 3d
100
Miss Alwens G. Evans
5
Evans, Stillman & Co
500
Wm; Everdell
150
Geo. B. Everitt
_
500
J. V. Ewing Estate—
300
Wm. Ewing, special
100
G. Faccioli
80
Eliot Farley
1,000
Mildred Farwell
200
Dr. E. Ross Faulkner
500
William C. Finley
500
First Chicago Corporation
.. 2, 000
First National Corporation..-. 2,000
First Security Co
15, 000
Laurence P. Fisher—2, 000
Maj. Max C. Fleischmann
1,000
Carl Flach
.
.
50
H. A. Fortington
500
Albert Foster, J r
30
Terese Fowler
,
10
Harry Fraas
10
P. A. S. Franklin
1,000
W. E. Frew
1,000
Giovanni Fummi
500
G. L. Gagan
10
Mary B. Gammack
100
Thomas H. Gammack
200
George H. Gardiner .
.
500
Thomas Garrett, J r
100
Miss Lydia K. Garrison
20
Mrs. Philip McKim Garrison—
60
David L. George
100
P . Gibbons
10
Harvey D. Gibson
._ 1,000
Mrs. S. Parker Gilbert
._
250
J. GindorfC
10
Rudolph Goepel
100
Philip G. Gossler
2, 000
Guaranty Co. of New York— 5, 000
Guggenheim Bros
5, 000
T. S. Hallett
10
Hambleton & Co., Inc
500
Henry Hamill, J r
10
C. P. Hamilton
1,000
P. T. Hanscom
1,000
Mrs. Hebe Harris
500
371
Amount
Name
of units
Walter P. Haskell__
10
Chester W. Harkins
5
Charles Hayden
5, 000
R. C. Hill
250
William Hill-Wood
100
Charles D. Hilles
1,000
George C. Hitchcock
300
Hitt, Farwell & Co
500
William E. Holloway, Jr
10
George Holton
500
R. G. Hutchings
500
W. J. Hutchinson
500
Frederic Ewing
500
Old Coloney Corporation
2,000
John Oldham
200
Robert E. Olds___
500
General John J. Pershing
250
Harry Peters
500
Frank L. Polk
50O
W. Julius Polk
200
Daniel E. Pomeroy
250
W. C. Potter
7,000
John W. Prentiss
1, 000
Seward Prosser
7,000
Phillips Exeter Academy, trustees for the benefit of
500
Mrs. D. Y. Ranson, J r
300
John J. Raskob
2,500
Lansing P. Reed
500
S. W. Reyburn, Lord & Taylor.
500
Miss Ester S. Rich
5
Edgar Richard
400
Mrs. Rose M. Ricketts
10
J. Henry Roraback
1, 000
Charles S. Ruffner
1, 000
Salomon Bros. & Hutzler
1,000
A. H. Sanford
50
Herbert L. Satterlee
500
Franz Schneider
1,000
Schoellkopf, Hutton & Pomery,
Inc
1, 500
Mrs. Florence S. Schuette
1, 000
Robert Meridith Serale
1,000
Charles Seymour
160
Malcolm D. Simpson
25
A. P. Sloan, et al
3, 500
Matthew S. Sloan
1,000
Harvey H. Smith
40
F. S. Smithers & Co
1,000
N. L. Snow
200
Spencer Trask & Co
1,000
A. H. Springer
25
Mrs. Edith T. Stanley
400
Gilbert Stanley
1, 200
State Street Investment Corporation
2, 000
John A. Stephens, J r
250
Edward R. Stettinius
250
Mrs. E. R. Stettinius
1,000
Geo. D. Stewart
500
Stockholm Enskilda Bank
1,000
Cornelius J. Sullivan
500
J. J. Sullivan
25
E. S. S. Sunderland
400
Sutro Bros. & Co
1, 000
£72
STOCK EXCHANGE PRACTICES
Amount
Name
of units
Miss Katharine Taylor
20
Myron O. Taylor
5,000
Walter C. Teagle
1,500
Eldredge Thomas
100
George H. Townsend
300
Mrs. P. M. Trace
10
Mrs. Elizabeth S. Trippe
250
William H. Thurston
400
Union Trust Co
1,000
The Union Trust Co. of Pittsburgh
3, 000
O. P. Van Sweringen.
5,000
Edmund N. Wakelee
750
Miss Anna Walsh
10
Cornelius J. Walsh
10
Allen Wardwell
400
Mrs. Marie Watkins
100
N. A. Weathers
1,500
P . C. Weems
100
Hartland West
10
John D. Ryan
1,000
Arthur Curtis James
2,000
P . H. Johnston
1,000
Amount
Name
of units
Hall P. McCullough
200
R. B. Mellon :_
3, 000
T. F. Merseles
1,000
Stephen Merselis
100
Albert G. Milbank
500
Edward G. Miner
1,000
C. H. Miner
1, 000
Minsch, Monell & Co., Inc_____ 1, 000
Wm. A. Mitchell
100
Daniel J. Moran
500
Alexander Perry Morgan
100
D. M. Morgan
10
Morgan Grenfell & Co
15, 00O
H. S. Morgan, et al
500
J. J. Morgan
100
Morgan & Cie
12, 000
J. P. Morgan no. 2 account
1, 200
J. R. Morron
500
Hon. Dwight W. Morrow
2, 000
Frederick K. Morrow
1, 000
Charles Munroe
1,000
J. A. Murray
409
The National City Co
5,000
A. N. Jones
50 Newmont Mining Corporation. 10,000
W . J. Jones
10 Northern Trust Co
1,000
Kean, Taylor & Co
500 J. D. Northrup
50
Dr. John J. Honan Keating
200 Nosivad Corporation
3, 000
Daniel Kelleher
250 M. O'Connor
10
€ornelius F. Kelley
1,000 Miss Ruth Ogg
10
A. J. Kennedy
„
50 C. E. Mitchell
7, 000
:
Leonard A. Keyes
200 Robert White
500
Kidder, Peabody & Co
2,000 J. G. White & Co., Inc
1, 000
Roy Kinnier
10 White, Case & Co
2, 000
Kuhn, Loeb & Co
5, 000 George Whitney, agent
10,000
H. R. Kurrie
100 Martha B. Whitney
100
A. C. Lange
,
10 Trustees for Martha B. WhitLapondos Corporation
250
ney, Robert L. Bacon, GasAugustin Legoretta
500
par G. Bacon, and George
Lee, Higginson & Co
3,000
Whitney
400
Col. Charles A. Lindbergh
300 Margaret S. Whitney
200
Dr. Harley P. Lindsay
60 Richard Whitney & Co
20
Stoughton B. Lynd
100
Do
4, 200
Henry E. Machold
3, 000
Do
2, 000
C. H. Mackay
1,000 Ira Wight
1,000
€ , MacVeagh
25 A. H. Wilson
25
Mrs. Louis Pugh Macy
500 A. H. Wiggin
4,000
Manufacturers & Traders PeoT. R. Williams„
300
ples Trust Co
-—. 1, 000 Joseph Wilshire1, 000
E. H. Manville
1,000 Garrard Winston
500
1,000
Marine Trust Co
1,000 Wood, Low & Co
1, 500
Isabel S. Marsh
250 Wood Struthers & Co
1,000
€harles J. Martin
1,000 William Woodin
250
Dorothy Martin
100 A. H. Woods
1, 000
R, C. O. Matheny
100 Clarence M. Woolley
50
W. G. McAdoo
250 J. M. Young
750
T. N. McCarter
750 Percy S. Young
5, 000
Uxal H. McCarter
750 L. Edmund Zacher
.
200
J. J. McCloy
i
50 William Zeigler, J r
Mr. PECORA. NOW, Mr. Whitney, what do you mean when you say
this list was prepared jointly by J. P. Morgan & Co. and Bonbright & Co. ?
Mr. WHITNEY. I mean just that, Mr. Pecora. As has been stated
publicly at the time and was a matter of common knowledge, the
United Corporation was formed after many months, and even years,
STOCK EXCHANGE PRACTICES
373
of discussion by Messrs. Bonbright & Co., Drexel & Co., and J. P.
Morgan & Co. So when it came to the question of distributing those
units, which were quite a different type of operation than any of
these other stock transactions which you have introduced thus far,
Mr. Pecora, obviously we discussed the matter with Messrs. Bonbright & Co., who were associated with us in the whole undertaking.
So, many names that appear on this list were suggested by them.
Mr. PECORA. Can you point out the names suggested by Bonbright
& Co.?
Mr. WHITNEY. N O ; I cannot.
Mr. PECORA. Well, then, can you point out the names suggested by
J. P. Morgan & Co.?
Mr. WHITNEY. Well, I think if I run through the list I could suggest some that I am pretty sure were not suggested by J. P. Morgan
Mr. PECORA. Mr. Whitney, in order to save time, let me ask you if
you have a copy of this list.
Mr. WHITNEY. Yes, sir.
Mr. PECORA. Would you
be good enough during the next recess
period to go over your copy of the list with a view of identifying
those names that were put on the list on the recommendation of
J. P. Morgan & Co., and those which were not ?
Mr. WHITNEY. I will try to do so, but I do not know that we have
any records that will designate them.
Mr. PECORA. I notice in the list 87,000 units were allotted to Drexel
&Co.
Mr. WHITNEY. Yes,
Mr. PECORA. I have
sir.
asked for a break-down of those units, and up
to the present time I have not received any data or information.
Mr. WHITNEY. Well, if that is so I am sorry. I thought it had
been furnished. I knew you had asked for it.
Mr. PECORA. In other words, what I want is the names of the
persons who were invited to participate or subscribe for these 87,000
units that were allocated to Drexel & Co.
Mr. WHITNEY. Well, haven't you received it? I thought you
had. When did you make that request, Mr. Pecora; do you know?
Mr. PECORA. Within a day or two after we received this document,
which is the list which has been marked " Exhibit 28 " of this date.
Mr. DAVIS. That is an oversight on my part. Are you sure that
you asked for it?
Mr. PBCORA. We asked for it. And may we have it as soon as
you can get it together?
Mr. WHITNEY. Surely. /
Mr. PECORA. All right. On what terms were the persons shown on
this list, exhibit 28, invited to subscribe for the units of United Corporation ?
Mr. WHITNEY. That is a rather difficult question to answer very
briefly, Mr. Pecora. The actual technical terms on which they were
asked to offer was for one share of this $3 preference stock and one
share of common stock for $75.
Mr. PECORA. $75?
Mr. WHITNEY. Yes.
Mr. PECORA. That is, they were
Mr. WHITNEY. They were sold
sold in units ?
in units.
374
STOCK EXCHANGE PRACTICES
Mr. PECORA. And for $75 a unit?
Mr. WHITNEY. Yes.
Mr. PECORA. Each United
consisted of 1 share of $3 preference
stock and 1 share of common stock ?
Mr. WHITNEY. Yes. In other words, the $50 preference stock was
included in the unit at its liquidating value—it was a no-par stock—
at $50. The common stock was included at $25, which was the same
price that we had acquired the stock for cash.
Mr. PECORA. But in addition to acquiring that stock for cash you
also received—that is your firm received—1,000,000 option warrants ?
Mr. WHITNEY. For the $10,000,000.
Mr. PECORA. For the $10,000,000.
Mr. WHITNEY. Quite right.
Mr. PECORA. NOW, let us get that straight. The United Corporation was organized on January 7, 1929, with an authorized capital
stock of 1,000,000 shares of preferred stock of no-par value, 2,000,000
shares of $3 preference stock of no-par value, 10,000,000 of common
stock of no-par value, and an unlimited number of option warrants ?
Mr. WHITNEY. Oh, no, sir; 4,000,000.
Mr. PECORA. Well, 4,000,000 was the number that was actually
issued, but in the articles of incorporation, or in the certificate of
incorporation was there any express limitation of the number of
option warrants to be issued ?
Mr. WHITNEY. I really do not know. The 4,000,000 warrants were
never issued. A smaller number.
Mr. PECORA. Three million nine hundred thousand and odd were
actually issued.
r
Mr. WHITNEY. I do not know what the certificate of incorporation stated, but there was never any discussion of any kind of issuing more than 4,000,000 warrants. And all the public announcements covered that amount as the amount outstanding.
Mr. PECORA. NOW, on January the 10th or 11th J. P. Morgan
& Co. purchased for $10,000,000 in cash from the United Corporation 400,000 shares of the common stock and 1,000,000 option warrants. Is that correct?
Mr. WHITNEY. I should have thought that was the date we contracted to purchase. You see, Mr. Pecora, when ydu take these isolated technical steps in the formation of this corporation I, not
being a lawyer, do not quite follow. I am very familiar with the
organization of the corporation. I know exactly what was intended
to be done. But when it came to bring together the plans that had
been agreed upon by not only ourselves with Bonbrights, but also
many other people, I do not remember the details of it.
The net of the story is something like this, if it would be of interest to you. And it is really a very brief story. In the spring of
1928, after many discussions for a long time as to whether we,
J. P. Morgan & Co., should become interested in the general publicutility field, we, after discussion with certain groups of people interested at that time in the United Gas Improvement situation and
the Public Service of New Jersey Corporation brought some stock,
as we have already
Mr. PECORA. Mr. Whitney, I apprehend that in this statement
that you are going to make, your answer is going to give us in
STOCK EXCHANGE PRACTICES
375
one statement a rather considerable history of the forming of the
United Corporation, its genesis and operation.
Mr. WHITNEY. NO. I will, if you wish. But that was not my
intention.
Mr. PECORA. Well, no; I suggest that you just answer the question, and then at the conclusion of the examination if there is anything that has been omitted that you think ought to be brought
to the attention of the committee I should be glad to have you call
it to the attention of the committee. But first answer he question,
please.
Mr. WHITNEY. All right. Let me say this, then. I won't go back
at all. But when it was decided in the first part of January or
the latter part of December to form the United Corporation there
were certain blocks of securities which were definitely decided to be
included in the United Corporation. It was also decided at that
time that there should be certain securities issued for cash. These
steps to which you refer were detail steps set down by the lawyers
as the proper steps of bringing about the results which had been
determined upon. So it is, of course, true, as testified by Mr. Howard, that the first initial step in the transaction was the exchange
by J. P. Morgan & Co. and Drexel & Co. of this block of securities,
as he testified on Friday. Those at that time were taken in by the
company at a value of $50,000,000.
Mr. PECORA. I am going to come to that and bring all those details
out, Mr. Whitney.
Mr. WHITNEY. Well, now, you have, sir, have you not?
Mr. PECORA. Not altogether. There are certain features of that
that I have not questioned either you or Mr. Howard about.
Mr. WHITNEY. First rate. But you asked me a question, if on
January 10 we subscribed to 400,000 shares of United common and
a million warrants.
Mr. PECORA. For $10,000,000.
Mr. WHITNEY. For $10,000,000. I think that is actually the date
on which we made that contract with the United Corporation. I
think the actual payment was subsequent, because all these transactions were pulled in together to make the completed picture against
which we sold these United units. I do not carry the legal steps,
but what was intended to be done and which I am sure was done I
am pretty familiar with.
Mr. PECORA. Well, you recall that that part was done, do you ?
You offered $10,000,000 for 400,000 shares of common stock and
1,000,000 of option warrants?
Mr. WHITNEY. We and Bonbright & Co, made the same offer
simultaneously; yes, sir.
Mr. PECORA. And that offer was accepted ?
Mr. WHITNEY. It was.
Mr. PECORA. And the transaction
Mr. WHITNEY. It was.
Mr. PECORA. By the payment of
was actually consummated?
this $10,000,000 cash by J. P.
Morgan & Co. to the United Corporation and the delivery by the
United Corporation to J. P. Morgan & Co. of 400,000 shares of
common stock and 1,000,000 option warrants?
Mr. WHITNEY. Yes,
sir.
376
STOCK EXCHANGE PRACTICES
Mr. PECORA. And a similar transaction was Kad between the
United Corporation and Bonbright & Co. at the same time ?
Mr. WHITNEY. Yes.
Mr. PECORA. And that
provided the United Corporation with its
initial funds of $20,000,000?
Mr. WHITNEY. Initial cash plus the $700,000 that came in otherwise.
Mr. PECORA. Yes. Now, at about the same time, or very shortly
thereafter, there was another transaction between J. P. Morgan &
Co. and the United Corporation involving an exchange of certain
securities owned or controlled by J. P. Morgan & Co. for certain
securities of the United Corporation, was there not?
Mr. WHITNEY. Well, I would have thought that it was prior to
the cash transaction. Because the memorandum I have in front of
me says that was covered in the minute books of the United Corporation in the meeting on January the 8th, and that the sale of
the stock for cash was of January the 11th. No, wait a minute.
Wait a minute. Well, it was near—may I inquire of that from the
lawyers? [After conferring.] Well, the answer to your question,
Mr. Pecora, is that simultaneously there was this transaction, exchange, because they were both carried through. The cash transaction and the exchange of the securities both went through on the
11th of January 1929.
Mr. PECORA. AS the result of that second transaction involving
the exchange of securities J. P. Morgan & Co. received 800,000 shares
of common stock of United Corporation and 600,000 shares of the $3
preference stock and 714,200 option warrants, did it not?
Mr.
WHITNEY. Yes,
sir.
Mr. PECORA. Was it from those shares thereby acquired that J. P.
Morgan & Co. made a private offering of units of United Corporation $3 preference stock and common stock to the persons whose
names are shown on the list that has been put in evidence ?
Mr. WHITNEY. Well, it is very difficult to earmark shares. Because it is well known that we sold 600,000 units. So that the units
referred to—the preference shares referred to in your statement
were, of course, those that were sold because they were the only
preference shares we received.
Mr. PECORA. Yes. Well, as a matter of fact, when you invited
these various persons whose names appear on that list to subscribe
for these units at $75 per unit the only stock of United Corporation
which J. P. Morgan & Co. had were the 400,000 shares of common
acquired as part of the $10,000,000 transaction, 800,000 shares of
common acquired as part of the subsequent transaction involving
an exchange of securities, and the 600,000 shares of $3 preference
stock which also formed a part of the latter transaction ?
Mr. WHITNEY. That is right.
Mr. PECORA. That is correct, is it?
Mr. WHITNEY. That is quite correct.
Mr. PECORA. And that is not taking into account the 1,714,200
option warrants that were acquired by J. P. Morgan & Co. as the
result of those two transactions?
Mr. WHITNEY. I do not quite understand what you mean, " not
taken into account." They came in at the same time.
STOCK EXCHANGE PKACTICES
377
Mr. PECORA. J. P. Morgan & Co. acquired as the result of these
two transactions, in addition to the preference and common stock
that I have alluded to, a total of 1,714,200 option warrants?
Mr. WHITNEY. Yes; quite right.
Mr. PECORA. None of those option warrants was included in the
private offering to the subscribers whose names appear on that
list?
Mr. WHITNEY. Oh,
Mr. PECORA. NO.
no.
They were merely offered the right to subscribe for units of the United Corporation stock at $75 per unit,
each unit consisting of one share of $3 preference stock and one
share of common stock, is that correct?
Mr. WHITNEY. That is exactly correct.
Mr. PECORA. About when was that private offering made to the
individuals whose names appear on that list?
Mr. WHITNEY. Well, it was going on, I should think, from the
9th of January to about the 14th. The span of these dates of thesetwo memorandums which have been introduced in evidence would
about cover the time it was going on.
Mr. PECORA. Well, it would be fair to say that this private offering of these units at $75 per unit was made to these gentlemen
within a week of the incorporation of the United Corporation ?
Mr. WHITNEY. Oh, certainly.
Mr. PECORA. Yes. Now at that time—at the time of this private
offering at $75 per unit, had there been any trading in those units
on a when-issued basis?
Mr. WHITNEY. I do not think so.
Mr. PECORA. Well, had there been anv as early as January 16y
1929?
Mr. WHITNEY. There was testimony on Friday with reference
to that. And I am frank to say that I do not remember what it
was. May I take
Mr. PECORA. Well, as I recall the testimony of Mr. Howard I
think he said that there was trading in the over-the-counter market
at about $99 per unit for these units
Mr. WHITNEY. On January 21.
Mr. PECORA. That, I think was the date.
Mr. WHITNEY. SO, to answer your question, on January !(>,. or at
the time at which we were talking to these individuals who purchased
these units, there was no quoted market whatever.
Mr. PECORA. By the way, Mr. Whitney, do you know whether or
not that printed announcement that was put in evidence this morning, and which is dated January 9, 1929, was actually printed in
full by the newspapers on January 11, 1929, or thereafter?
Mr. WHITNEY. My recollection is very clear that it was given the
widest kind of publicity.
Mr. PECORA. By that you mean that it was printed according to
the text of the printed announcement that was offered in evidence
here ?
Mr. W H I T N E Y - Well, I have not checked it, Mr. Pecora, but my
recollection is that it was printed textually. Certainly in the newspapers in New York City.
Mr. PECORA. DO you know when the first public trading in these
units took place?
378
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. Well, Mr. Howard testified that according to his
records the first public trading took place on January 2i, and the
units, as far as our search—if I may answer approximately from
my recollection it is that it was quite a considerable time after the
public announcement of the formation of United Corporation before
there was any trading, because there was no indication of what
was to be available for sale.
Mr. PECORA. Well now, when you say that a considerable time
elapsed, how long a time have you in mind ?
Mr. WHITNEY. Well, a week or 10 days.
Mr. PECORA. After January 9?
Mr. WHITNEY. After the 11th.
Mr. PECORA, After the 11th?
Mr. WHITNEY. I have no knowledge—I have no definite recollection, Mr. Pecora, of my own, other than that which has been
refreshed by Mr. Howard's testimony which I just referred to,
which showed the first evidence of a public market was on January 21.
Mr. PECORA. Well now, let me show you what purports to be a
photostatic copy of a page of the New York Times bearing date
Thursday, January 17, 1929, entitled " United Corporation overthe-counter market. Heavy trading in shares of new utility holding
company at 92 bid, 94 asked." Will you look at it and see if that
refreshes your recollection as to whether or not there was any
public trading in these units on and as, if and when issued basis in
the over-the-counter market prior to January 21 ?
Mr. WHITNEY. It does not refresh my recollection at all, Mr.
Pecora, because in the financial parlance a counter market does not
mean anything anyway. I thought you meant an official market
when you said on a when-issued basis; the stock exchange or the
curb or some place where there was a listed quotation. I am not
questioning the veracity of this, because obviously if it was in the
Times it must be so, but I do not remember it.
Mr. PECORA. NOW you recall the testimony of Mr. Howard on
Friday to the effect that these units were actually traded in on a
when-issued basis on the Philadelphia Stock Exchange on January
21, 1929, at $99 per unit?
Mr. WHITNEY. I do, yes. Yes, I remember the testimony.
Mr. PECORA. YOU have no reason to doubt that that was the fact,
have you ?
Mr. WHITNEY. Oh, no; sir. I knew that to be the fact.
Mr. PECORA. NOW when did J. P. Morgan & Co., make this private
offering to the persons whose names are shown on the list that has
been offered in evidence to subscribe to these units at $75 per unit?
Mr. WHITNEY. When did we make the offer, or when did we complete the transaction?
Mr. PECORA. When did you make the offer, or when did you complete it—I do not care which.
Mr. WHITNEY. Well, we made offer, as I say, during the days beginning somewhere around January the 7th. It was not done in any
one day. Or any explicit date. But the best of my recollection is
that it would be somewhere around the 9th to the 14th.
Senator GLASS. Have you put in a preferred list, Mr. Whitney,
while
I was out ?
STOCK EXCHANGE PRACTICES
379
Mr. WHITNEY. Well, that was not the way it was introduced in
evidence, Senator Glass. There was a li^t put in evidence.
Senator GLASS. I wanted to inquire if my name was on it?
Mr. WHITNEY. I do not remember, sir. I do not think so.
Senator GLASS. A good many people have been induced to think so.
Mr. PECORA. By the way, Mr. Whitney, was that so-called announcement in the form of that printed document that was put in
evidence this morning published in the newspapers as an advertisement by J. P. Morgan & Co., or was it merely sent to the newspapers with the request that it be released for publication on January
11, 1929?
Mr. WHITNEY. DO you mean the .first one ?
Mr. PECORA. Yes.
Mr. WHITNEY. It
was not as an advertisement by J. P. Morgan
& Co. It was given out to the newspapers—to the reporters personally for release. There was no occasion for us to advertise anything. We were not advertising. We were not selling anything.
We were not offering anything to the public in any sense. We were
merely giving an announcement we thought would be of interest
to the public about the formation of a holding company in which
we were interested. Just a matter of news.
Mr. PECORA. NOW I show you a document that has been introduced in evidence in these hearings marked " Committee's Exhibit
15 as of May 25, 1933."
Mr. WHITNEY. What is the number, please, sir?
Mr. PECORA. It is in answer to question 9 of our original so-called
questionnaire. Will you look at the page thereof entitled " United
Corporation Units ", and by reference to the typewritten matter
shown on that page, which document was prepared by your office, or
at least furnished to me by your office, will you state as of what date
these units of United Corporation stock were sold for $75 per unit
to the persons listed on that list ?
Mr. WHITNEY. Well, this memorandum here shows that we actually sold—by that we mean the date that something is paid for—
on January 21. In other words, this establishes the date when actual
payment was made for these units as of January 21, 1929. But that,
of course, has no reference to the date on which we actually made
arrangements or contracts for the disposition of this stock, because
quite obviously we had to give the clients to whom it was sold an
opportunity to make payment, and, as is customary, there is always
an interval of time as between the date when actual payment is made
and the date of actual delivery.
Mr. PECORA. Did that figure of $75 per unit represent the cost to
J. P. Morgan & Co. of those units ?
Mr. WHITNEY. On our books; yes, sir.
Mr. PECORA. When you say " on our books " are you referring to
an arbitrary book figure or are you referring to the actual cost to
J. P. Morgan & Co. of these units ?
Mr. WHITNEY. I am referring to the actual cost to J. P. Morgan
& Co. and the basis on which we conducted this transaction. And
the books, of course, I refer to merely to prove that that is the way
it was carried. The units were set up on our books for no consideration on our books, and when they were sold or distributed, 3 as
you know they have been in part, the profit from no cost TTS*? fa? :*?*
380
STOCK EXCHANGE PRACTICES
up and returned in all our official returns for that year. I state
that, Mr. Pecora, perhaps anticipating a question, because Mr. Howard testified that they were set up on the books of the corporation
at $1, and there was a difference between the technical setting up
of that for consideration of a dollar and the way we considered
them for nothing. We just received them. And we charged the
account on our books for the common stock at $25 and the preferred
stock at $50.
Mr. PECORA. Well, then, according to the set-up of these securities
on your books, you treated these option warrants virtually as a
bonus ?
Mr. WHITNEY. Not at all, sir. But we did not think they were
a proper banking asset to be held by a firm when they involved the
payment—when to get any value from the warrants in the set-ug
of the corporation it would require the payment of $27.50, and
^therefore an option of that kind, which required the expenditure
of money to get any value, and so on, we did not think was a proper
Lasset to be carried on our books for any consideration of value.
Mr. PECORA. Well, they proved to be a very valuable asset, did
they not, eventually?
Mr. WHITNEY. Well, they went up in the market with everything
else.
Mr. PECORA. TO what figure?
Mr. WHITNEY. I do not remember. About 40. I cannot remember
the high. They went up with the stock and with the market generally.
Mr. PECORA. Didn't they actually go up to a figure of $47.50 in the
open market?
Mr. WHITNEY. Well, I just clo not remember, Mr. Pecora. I do
not remember. I do not deny it. They may have gone to anything
that year.
Mr. PECORA. NOW let me refer you to what purports to be a typewritten copy of a letter which was furnished by your office to me,
which bears date July 23, 1929, and is addressed to you. Signed
with the initials " T. S. L." Will you look at it and see if that does
not serve to refresh your recollection as to price at which these
warrants were traded in in the open market in July 1929.
Mr. WHITNEY. It does, yes, sir.
Mr. PECORA. And what is the price there set forth ?
Mr. WHITNEY. The highest price mentioned here is 46%.
Mr. PECORA. And who is " T. S. L." whose initials are signed to
that letter to you ?
Mr. WHITNEY. My partner, Mr. Thomas S. Lamont.
Mr. PECORA. I offer the copy of that letter in evidence. You do
not dispute that is a true copy of the letter, do you, Mr. Whitney,
that you received from Mr. Thomas S. Lamont?
Mr. WHITNEY. NO, I do not.
The CHAIRMAN. Let it be received
and entered on the record.
(Letter dated July 23, 1929, addressed to George Whitney, signed.
" T . S. L.", was marked "Committee Exhibit 29, of May 31, 1933."
Mr. PECORA. The body of the letter reads as follows:
DEAR GEORGE. Trading in United Corporation option warrants was started
yesterday. They started l 1 ^ points above parity of the.stock rather than 1
point, the figure which you discussed with me. Fifty-three thousand were sold,
STOCK EXCHANGE PRACTICES
381
as planned, every one y8 up, between 45% and 46%. They then continued selling and sold an additional 3,800 between 46% and 46%.
This morning the first sale was made, I understand, at 45%, and the market
now is
This letter being dated July 23, 1929.
Mr. DAVIS. I call your attention to a little slip in reading. You
said " every one y8 up." It should be " every % up."
Mr. PECORA. " Every one % up."
Mr. DAVIS. YOU read two " ones."
Mr. PECORA. NO ; " every one ", and then the fraction " y$ up."
Mr. WHITNEY. That is not the way it is in the letter. It is misquoted. " Every % up."
Mr. PECORA. Well, I read it from the copy. This is the copy that
you furnished us.
Mr. WHITNEY. Will you correct it then? It is an inaccurate copy.
« Every l/8 up."
Mr. PECORA. " Every % up " ?
Mr. WHITNEY. Yes.
Senator STEIWER. YOU
notice, Mr. Whitney, that the copy from
which counsel is reading reads " one % up."
Mr. WHITNEY. Quite. But I mean here is the actual carbon of the
letter from which that copy was made. There is our own copy, you
see, with the initials on it. It does not make any difference.
Mr. PECORA. I will show it to you. I read it just as it appears
there, and that is the very copy that we have.
Mr. WHITNEY. But it could be corrected on the record. Do you
want to see the copy ?
Mr. PECORA. NO ; I accept your record of it.
The CHAIRMAN. Very well then, strike out the " one."
Mr. PECORA. " Every % up."
Mr. WHITNEY.
Yes.
(Committee exhibit 29 of May 31, 1933, is here printed in the
record in full, as follows:)
REUNITED CORPOEATION DOMESTIC BONDS AND STOCKS IN $3 CUMULATED PREFERRED
File folder: United Corporation—Option warrants—Joint account
WHITNEY, Esq.,
J. P. MOEGAN & Co., July 23, 1929.
Cadwalader Cottage, Dark Harbor, Maine.
DEAR GEORGE: Trading in United Corporation option warrants was started
yesterday. They started^ one and one half points above parity of the stock
rather than one point, the figure which you discussed with me. Fifty-three
thousand were sold, as planned, every Vs up, between 45% and 45%. They
then continued selling and sold an additional 3,800 between 46% and 46%.
This morning the first sale was made, I understand, at 45%, and the market
now is 46%-%.
Sincerely yours,
T. S. L.
Mr. PECORA. NOW, Mr. Whitney, this letter to you says " 53,000
were sold, as planned." To what does that refer? To whose plan,
or what?
Mr. WHITNEY. Why, the arrangement had been made to sell some
of the warrants on the open market.
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STOCK EXCHANGE PRACTICES
Mr. PECORA. That is, arrangement made by J. P. Morgan & Co. to
sell some of these warrants?
Mr. WHITNEY. NO. If you will notice the date of this letter you
will notice that I was away on a holiday, and I had just left on a
holiday, and it was an arrangement made between the partners that
we would dispose of certain of the warrants, as you know. We have
already given you a detail of the fact we sold. This 53,000 I would
have to—I would like to look at that list of our sales of warrants
we furnished you—I mean the 200,000 warrants that you know we
sold during these months.
Mr. PECORA. Well, these 53,000 warrants were sold for the account
of J. P. Morgan & Co.?
Mr. WHITNEY. Well, that is what I am not quite clear upon.
Mr. PECORA. Or were they sold for the account of various individual partners?
Mr. WHITNEY. Oh, no. But I am not sure that this means that
we did sell. It says " were sold." And my recollection, if I may
look—well, I have got it right here. Mr. Pecora, by reference to
the answer to your question, as we have got it, 39, which was asking
us to cover all the disposition of United Shares, you inquired as to
the disposition of our United stock and warrants under date of
May 9, and in part answer to that question I find that we, the firm
of J. P. Morgan & Co., sold on July 23, which is the date of this
letter, 28,450 warrants at an average price of 45.9629. And subsequent sales making a total of 200,000 were sold through the next
2 or 3 months. The next 2 months.
Mr. PECORA. And what was the low for which any of those
200,000 warrants were sold in that period of time ?
Mr. WHITNEY. 40.5391. If you will remember, they followed
the course of the stock. The beginning of this letter refers to the
fact that they started at iy2 points above parity, which, of course,
means that this price reflected was in effect iy2 points above the
differential between the market for United common stock and the
subscription price of $27.50. In other words, people were prepared
to pay $1.50 for this option.
Mr. PECORA. What was the high at which they sold during that
period of time ?
Mr. WHITNEY. That we sold the stock?
Mr. PECORA. The warrants; the option warrants.
Mr. WHITNEY. I mean warrants?
Mr. PECORA. Yes.
Mr. WHITNEY. Well,
we sold 1,400 shares on the 25th of July at
47.017.
Mr. PFCORA. NOW these are the option warrants sold from a range
of 40.5391 to 47.017 which your firm acquired for a consideration
of $1 per warrant, are they not ?
Mr. WHITNEY. Which were issued by the corporation for the consideration of $1 per warrant; yes.
Mr. PECORA. The only other person to whom any of these warrants were issued was Bonbright & Co., who were associated with
J. P. Morgan & Co. in the financing of this corporation ?
Mr. WHITNEY. Oh, no; there were other warrants issued to others
subsequent to these few isolated beginning transactions to which
you referred.
STOCK EXCHANGE PRACTICES
383
Mr. PECORA. At the outset of the corporation the only persons to
whom option warrants were issued were J. P. Morgan & Co. and
Bonbright & Co., were they not?
Mr. WHITNEY. Yes, sir; if you restrict your question as definitely
as that I am bound to answer yes. But that question brings—I do
not think that the clear picture of what this corporation was has as
yet been presented to this committee. That is technically true.
Mr. PECORA. According to the calculation which we have made,
Mr. Whitney—I do not know whether you have made one also—
these 200,000 option warrants which were sold by J. P. Morgan &
Co. for its account between July 23, 1929, and September 20, 1929,
were sold for an aggregate of $8,490,045.74.
Mr. WHITNEY. What is that ?
Mr. PECORA. $8,490,000. Have you any calculation of the accuracy
of those sales ?
Mr. WHITNEY. It might be of interest to the committee to notice
further along in this same question that the remaining 1,514,200
warrants were distributed to the individual partners at $1 per share,
which was a dollar above the cost on our books, and, as you know
and as we have already answered one of your questions, we still
have them without exception.
Mr. PECORA. Well, that distribution was made on December 19,
1929, was it not?
Mr. WHITNEY. Eight. These were all of the firm account here.
Mr. PECORA. Yes. And there was no obligation on the part of
any of the individual partners to hold these option warrants and
not sell them, was there?
Mr. WHITNEY. NO.
Mr. PECORA. And that
for a long time after this distribution was
made to the partners of these 1,514,200 option warrants it remained
in the possession of J. P. Morgan & Co. after the sale of 200,000
warrants in the open market?
Mr. WHITNEY. Well, clearly, you have already had the date—
December 19.
Mr. PECORA. Yes. And so for a long time after December 19,
1929, these option warrants could have been disposed of in the open
market by the individual partners of J. P. Morgan & Co. at very
substantial prices? Could they not?
Mr. WHITNEY. Well, Mr. Pecora, when you get "could have
been "—we could have sold more in the summer.
Mr. PECORA. Yes.
Mr. WHITNEY. But
we did not and have not. Now whether or
not—it is a question of idle speculation, is it not, as to whether or
not we might have sold things that we own. I do not know the
market. I know today, for instance, the warrants are selling somewhere around $2. I know that they have consistently sold during
all the period of depression for something above their actual return
in value. Obviously today with the stock selling around $9 the
opportunity to pay $27.50 is not worth very much, but still for some
reason, which I have never understood, the public—there is still a
quoted market on the curb of something around $2 by people who
believe that privilege to purchase these warrants is worth that to
them. I do not understand it.
175541—33—PT. 2
6
384
STOCK EXCHANGE PRACTICES
Now, by the same token we might have sold at a profit. We still
could, if you want to put it that way. But we have not. That is
the net of it.
Mr. PECORA. YOU have not merely in the exercise of your own
judgment and discretion?
Mr. WHITNEY. Well, yes; certainly. And, of course, there has
not ever been anything iike a substantial market for the warrants.
Mr. PECORA. But these option warrants reached an open market
value in the summer and early fall of 1929 of $40 per warrant or
more, did they not ?
Mr. WHITNEY. Yes. I testified here, as shown by this list, that
they sold at $47. United common stock in that crazy market in
the summer of 1929 sold at 73. So that after all it is about $1.50
differential there on the conversion. These are nothing different
from any convertible privilege, if you want, except they are detachable, they are individual pieces of paper, but it is a curious thing
but the markets almost always pay for the privilege of an option,
particularly if it is a long option. In this case it is 47, which is
just running along with the price of the common stock.
I do not know whether we have ever answered this, but it is a
fact that something like 265,000 of these warrants were converted
into stock and the company received therefor something like $6,000,000 by people who exercised their conversion privilege during that
period or have during the life of the warrants.
Mr. PECORA. And they exercised those privileges at a time when
the common stock was selling for much more than $27.50 per share,
did they not?
Mr. WHITNEY. Oh, I assume it was done on an arbitrage basis.
Mr. PECORA. SO that the company in making those exchanges of
common stock for these option warrants to the extent of $6,000,000
worth, was issuing its common stock to the holders of these option
warrants at a price substantially below the then prevailing market
for those shares of common stock?
Mr. WHITNEY. Yes, Mr. Pecora. Obviously like any other conversion privilege. It is a rather unknown practice for a company
to just sit by and sell its stock in the open market. This was the
formation of the company. These warrants were created with full
publicity. Everybody who ever bought a share of United knew
about it. And that was a contract made by the company in this instance. The fact that the market went wild in the summer of 1929
and the stock went up does not really influence the question. You
would not suggest that, a company should sit by and just unload its
own stock out of its treasury into the market at any price that just
happened to come. And this is a straight conversion privilege
which everybody who bought a share of United was aware of. It
was publicly announced. It was deemed to the advantage of the
company when it was done. And the exercise of these 260;000 warrants was done, as you said, according to the individual judgment
of the holder of the warrants. I do not know why or when they
did it.
Senator COUZENS. May I ask if that was your first experience in
option warrants?
Mr. WHITNEY. Ours, sir ?
STOCK EXCHANGE PRACTICES
385
Senator COUZENS. Yes.
Mr. WHITNEY. Yes, Senator Couzens. We have had, of course, a
lot of experience with convertible bonds.
Senator COUZENS. Yes; but I was asking you about these option
warrants.
Mr. WHITNEY. It is; yes,
Senator COUZENS. What
sir.
inspired these option warrants? What
brought about the initiation of issuing option warrants? What suggested it, and what was your idea when you started to issue them ?
Mr. WHITNEY. Well, there were a good many motives, Senator
Couzens. You asked if this was our first experience. It was our
first. But there had been many other cases where other companies
had option warrants outstanding. It had been quite a customary
form of financing—equity financing in public utilities.
Senator COUZENS, Over how long a period ?
Mr. WHITNEY. Well, the only one that I can remember specifically
is the Mohawk Hudson Power Corporation, which had been formed
previously to the formation of the United Corporation. They had
option warrants. And that is the reason why there were option warrants in the Niagara Hudson.
Senator COUZENS. Were they unlimited as to time of the exercising of the options ?
Mr, WHITNEY. I am told that some were.
Senator COUZENS. Just what did you hope to gain by that, rather
than issuing limited option warrants? Limited as to time?
Mr. WHITNEY. Well, I think it is quite obvious, Senator Couzens,
that on the face of it a perpetual warrant, such as that kind, sounds
as if it were a more attractive piece of paper to have. I think that
experience since—not from the point of view as Mr. Pecora suggested, as to the disadvantage of the company—but I think that our
experience since as to a certain inflexibility that it brings about in
the future conduct of the company would probably make us, if we
had the decision to make again, not make it perpetual. But it would
not be because we believe that that company is in any way injured,
because it is always, year in and year out, a pretty good thing to
have the company get common stock in its equity. And you must
remember these warrants have certain disadvantages. In other
words, they do not get any right to share in the enlargement of the
common stock. They have no stock subscription privileges except
through the exercise. They are always a warrant for whatever the
common stock at that time may be. In other words, if the stock
buys other property at high prices, or if a large amount is offered
the stockholders, they still only have a right to buy a share whenever they subscribe for the common stock as at that time constituted.
And there are no dividends. If a company should be prosperous
and get large income and pay dividends they would not share in that
unless they elected to put up their $27.50.
Senator ADAMS. These warrants would affect the stockholder
rather than the company, would they not ? That is, the effect would
be upon the stockholder of the company rather than upon the company itself, if you could distinguish between the two ?
Mr. WHITNEY. Well, that would be the only person we ever considered could be affected. I never thought that there was a question
about their affecting the company. The question of the minority
386
STOCK EXCHANGE PRACTICES
stockholders having the right, at whatever the price of the stock
might be at the time, to come in and subscribe to a share at twentyseven and a half, the question might be raised. That is why we took
such infinite pains on every piece of paper that we brought out, everybody we talked to about it, we put them on notice of the fact that
those option rights were outstanding to the matter of 3,900,000'
shares of stock.
Senator ADAMS. But the fact that the distributed share of stock
was, say, $50 a share, if someone else holding an option warrant
could buy a share for twenty-seven and a half, why, other stockholders had a slight increase in value of their stock, did they not?
Mr. WHITNEY. It was always a question on these 3,900,000 shares^,
that they had the right to come in and share in the future stockholdings of the company. But on the other hand, everybody who*
bought a share of stock was fully on notice that that privilege
existed. So he has bought with the entire knowledge of the situation*
Of course, if today something could happen—during the average
period since the formation of this company, it would have been over
the average very much to the advantage of the stockholder, if everybody had exercised this privilege, but as Mr. Pecora pointed out the
other day, people are not apt to exercise such a privilege when the
stock is selling substantially below.
Senator COTJZENS. May I finish my question, Senator Adams ?
Senator ADAMS. I beg your pardon.
Senator COUZENS. I did not get from Mr. Whitney step by step
what the arguments were for issuing these option warrants for an
unlimited time. I would like to get that on the record, just what you
had in mind when you undertook that policy.
Mr. WHITNEY. Well, I will try to, Senator Couzens, as I have tried
once before, to lead up to that, and Mr. Pecora asked me to wait
till later.
Senator COUZENS, I beg your pardon.
Mr. WHITNEY. Not on this specific question, but that goes into the
theory of the organization of this company and all that it involved.
It was something that J. P. Morgan & Co. had never done before..
was to form a holding company of this kind.
We announced the fact, the first time we ever held ourselves forth
as the organizers of a company. We expected over a period of time
to take just as much interest in this company as that responsibility
warranted, and we felt that it was a perfectly justifiable thing to
have these warrants, which were announced at the time to be outstanding, which would take $27.50 per share, which was 10 percent
above the price of the stock which we sold, the only stock that we
ever sold on our own representation, and we believed that it was a
method of continuing interest in this company over the future.
Quite frankly, Bonbrights and ourselves took these million warrants and the others—I might say here, although I am getting ahead
of the story, that the other warrants were issued to the other people,
who came in subsequent to this initial formation, on exactly the same
basis as we received them.
So that the 71/1,000 warrants stand off by themselves, and the
million warrants that Bonbright and ourselves received, together
with 800,000 shares, or 400,000 shares, for $10,000,000, are in a
little
bit different classification, although the rights are the same.
STOCK EXCHANGE PKACTICES
387
Senator COUZENS. Did you have in contemplation any measure
of control by the exercising of those warrants?
" Mr. WHITNEY. NO, sir. The facts are that in the initial organization of United J. P. Morgan & Co. for a few months had about
8 percent of the stock. By the exercise of these warrants we held,
which involved the subscription of $47,000,000, we would have been
able at one time in the very early stages to have about 32 percent
of the company. Later on, I think it was in May or March—iMay,
I think—there were certain offers for other securities made by
the United Corporation which within 6 months of the formation
shrunk our possible control, if you want, or interest, percentage of
interest, by the exercise of these warrants that have been mentioned,
and the payment of $47,000,000, to something like 22 percent.
Senator COUZENS. When you and your partners talked it over
;and agreed to take
Mr. WHITNEY (interposing). That was not an argument. I mean
that was not an inducement, Senator Couzens.
Senator COUZENS. When you and your partners talked together
about taking these warrants individually, what gain did you expect
to make as a result?
Mr. WHITNEY. Well, the primary objective, Senator Couzens, in
distributing, thoseSenator CotfzENS (interposing). Now you are speaking for yourself, from an individual standpoint. I am not speaking from the
iirm standpoint, but your individual standpoint, when you took
the warrants, what did you have in mind as a benefit?
Mr. WHITNEY. Well, I was and am a great believer in the United,
and I believe that that option was a valuable option to sit down
with and keep, in the hope that some time the company, the affairs
•of the—general conditions and one thing and another—would make
it a very valuable option. I did not take them with the slightest
interest to turn and unload them in the market for a slight profit.
I believe that the privilege of this option, like any other conversion
option, was a very valuable one and would prove so by the years,
and I still think so.
Senator COUZENS. Did the issuing of these option warrants in any
ivay create a market for new stock that might be issued by the
United ? Did the fact that they were out do that ?
Mr. WHITNEY. NO, sir. There had been an offer of new stock to
the stockholders in May, I think, paid for in July, before that,
which had already, if you want it, increased the stock to $37.50 a
share. There had been an offer to the stockholders which had been
taken by the stockholders, so that
Senator COUZENS (interposing). Now, at that point, if the stockholders had not taken their full quota you could have come along
and exercised that option if you had got it for $27.50, could you not?
Mr. WHITNEY. Oh, quite. There would not have been on that
stock, because in the capitalization of the company, Senator Couzens,
there was 4,000,000 shares set aside—three million nine something—
but set aside definitely for the exercise of these options, and on increases in capital stock it increased sufficiently to still leave that
stock available under the authorized capital.
Senator COUZENS. What is the idea of leaving that available ?
388
STOCK EXCHANGE
PRACTICES
Mr. WHITNEY. Well, because the company has outstanding a contract with the holders of the option warrants, whereby the company agrees to deliver to him on the payment of $27.50 one share of
stock. He has got to come within his authorized capital; he has got
to have that stock available.
Senator COUZENS. SO that any time when this stock was up around
40 or 50 do I understand you individual partners of the Morgan
House could have drawn up those 4,000,000 shares at $27.50? You
said that they were held for that purpose.
Mr. WHITNEY. At that time, sir, they were held by the firm, not
by the individuals. Mr, Pecora has brought out they were not distributed to the partners till December 19, but during that summer
when they were selling at the prices you mentioned the answer is
" yes," we could have, by payment of $27.50 turned around and got
stock that might have been selling at 50 or wherever.
Senator COUZENS. Why ? Why didn't you ?
Mr. WHITNEY. Well, for the reason that we wanted to keep the
warrants, and we finally did sell some warrants, and I just testified
to that effect, to the extent of 200,000 warrants. Why didn't we
go
Senator COUZENS (interposing). Why didn't you. exercise your
right under those options when this stock was at a hi^h price and
the stock was available?
Mr. WHITNEY. I don't know, Senator Couzens. It is hard to
answer why we did things. It is even harder to say why we
didn't.
Senator COUZENS. That is what I am asking you, why you didn't.
Mr. WHITNEY. It is difficult today to see why, perhaps, we didn't
do it, but as I say, we still had a great belief in them. We did sell
:200,000 as a partial concession, to which your question is, but we
though that the option over a long period was valuable.
Senator COUZENS. If you had exercised the option with that payment of $27.50 that would have gone to the corporation?
Mr. WHITNEY. Oh, certainly.
Senator COUZENS. And increased their capital, working capital?
Mr. WHITNEY. Certainly, increased their cash capital.
Senator ADAMS. Mr. Whitney, what was the situation as to that
common stock as to dividends? Has that been a dividend-paying
stock?
• Mr. WHITNEY. Yes, sir. The situation on dividends is that these
gentlemen who bought the unit share of preferred and a share of
common have received from that day to this $3 on their preferred
stock, on the preferred share, which has meant a 4 percent return
on his $75 investment.
He has further received dividends at varying rates on the common
stock. I think the highest rate per annum was 75 cents, and the
current rate of dividends is at 40 cents per annum.
You will understand that this company's only income comes—
practically only income comes—from dividends accruing from the
stocks of the constituent companies, and it has very light expenses
of any kind. As Mr. Howard has testified, they only have a very
small staff there, and that perhaps might be the explanation of Mr.
Howard's testimony the \)ther day why the books were kept in our
STOCK EXCHANGE PKACTICES
389
office, because in the initial instance we were quite frank in stating
that we had organized the company with Bonbrights, and our desire
was to keep the expenses down, and both of us had some of our most
confidential people to assist so that it would not be necessary for this
corporation to hire and engage a lot of other help.
The CHAIRMAN. What salary did Mr. Howard receive ?
Mr. HOWARD. $75,000 a year, Senator Fletcher.
The CHAIRMAN. NOW, Mr. Whitney, let me ask you this: Is it not
true that this practice of issuing warrants in these circumstances is
of what we know as stocktype of watering stock?
may be so bold, that is just
what it isn't. That is one of the inducements of using warrants,
that Senator Couzens has already asked. There has been a great
deal of financing, stock financing, where there are managing contracts, managing stock, founders' shares, all those things, issuance
of shares for very much below value at the time of the organization,
and.that is one thing that the warrant definitely is not.
A warrant is a contract to issue a share of stock, in this case in
perpetuity and a definite amount of money is set forth in that
warrant. There is nothing watered about it, Senator Fletcher, because no share is issued until there is actual dollars, not securities
that may fluctuate, but dollars, $27.50 issued for every warrant.
So it is one of the chief, and we believe a very legitimate, reasons
for the use of warrants, is that it gets away from any possibility
of watering, because, after all, the assets of a corporation are not
dependent upon the market value at which securities fell. The value
of its assets is a constant value put on these warrants, and a man
to get any advantage from them whatever, from a warrant as a warrant holder, has to put up a certain fixed amount of money to get
that advantage in the way of dividends or rights given to stockholders whatever. And we think that it is one of the reasons why
the use of warrants is most justified, that it is certainly not watering.
Mr. PECORA. Mr. Whitney
Senator GLASS (interposing). Mr. Whitney, if I may venture to
ask you a question, I want one thing cleared up in my own mind
completely.
Mr. WHITNEY. Yes, sir.
Senator GLASS. Who controls
the various utility companies; who
owns and controls the various utility companies of which: this major
company of which you speak has holdings ?
Mr. WHITNEY. Senator Glass, if I may answer that question oil
generality, because I cannot speak from the book except insofar as
Mr. Howard has already testified
Senator GLASS (interposing). We have had the percentages stated
for the record, and what I want to know is the significance of those
percentages.
Mr. WHITNEY. May I take them by companies ?
Senator GLASS. In other words, take the companies in which your
holding company appeared to own sixty-seven one-hundredths of 1
percent of the common stock. Would you call that ownership or control?
Mr. WHITNEY. NO, sir.
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STOCK EXCHANGE PRACTICES
Senator GLASS. And if so, just in what way and by what device do
you own and control that company?
Mr. WHITNEY. Well, Senator Glass, we, of course, do not have any
measure of control of any kind in that particular instance, and to
answer your question generally, the controlling ownership is held by
the general public of all these companies.
It may be of interest and relating to your question that the
officers—the executive officers, executive staffs—of every one of these
companies which the United holds the principal amounts remain unchanged since before the formation of United. That is, there were
certain very minor qualifications to that, the fact that Mr. Zimmermann was not actually president; he was acting president at the
time; he became president afterward.
So that all that has happened through the formation of United
is the holding in one instrument, one corporate instrument, of these
minority interests. We have joined with the existing managements
in every instance of these corporations and have watched those
companies from the point of view of the substantial stockholder.
We have got no management contracts. We have never attempted
to inflict any question of management or anything other than general policy as a large stockholder on those companies.
If you go down, if you wish to, I can answer your question more
in detail.
Senator GLASS. Right there, if I may venture to ask you another
question, Do these option certificates enable you in any way to Ciontrol or coerce the management of these companies ?
Mr. WHITNEY. YOU mean the other companies, the constituent
companies ?
Senator GLASS. Yes.
Mr. WHITNEY. They have nothing to do with the other companies. No; the warrants have nothing to do with the other companies, Senator Glass, and if we exercised our warrants today we
would only have 23—well, I have already said that. They have
nothing to do with the constituent companies, Senator Glass.
Senator GLASS. If you were to exercise the warrants could you
acquire an interest thereby in all of these or any of these companies
that would enable you practically to own and control them?
Mr. WHITNEY. Certainly not. The only thing the warrant does
is to permit you to buy an interest in the equity owned by the
United Corporation in these constituent properties. It would not
change in any sense the percentage of ownership in the constituent
€ompanies.
Senator GLASS. NOW, it has been suggested that interlocking directorates would enable the United, which eventually would mean
Morgan, Drexel, and Bonbright, to control the policies of those
companies. Is that so?
Mr. WHITNEY. Well, in my judgment it is not so, Senator Glass,
because there is no question. It has been testified this morning and
it.has been a matter of public knowledge ever since the formation
of United that United had very large minority interests, substantial
interests but way minority. It has been a matter of public knowledge that certain individuals, such as the president of the United
Corporation, sits as a representative of a large stockholding interest
STOCK EXCHANGE PKACTICES
391
on the various constituent company boards. This morning Mr.
Pecora has brought forth by Mr. Howard's testimony what is also
a matter of public knowledge, that these various members of the
United Corporation boards are the executive heads of these properties of which we own a large interest, Messrs. Zimmermann,
Gossler, McCarter, Cobb—we own a very small interest in Mr,
Cobb's company. Frankly, that is the fact. There has never been
a question about it. We have announced it publicly ever since the
formation of the United, where our interests lay.
The interlocking directorate question to me—I think the answer
to your question is definitely " n o " ; that there is no interlocking directorate. Those companies operate in different States, in different
parts of the country. Every one of them is subject to State regulation of the State public utility commissions. They are operated
as entities in every possible sense. There is no question of interlocking control of any kind.
Senator GLASS. IS any one or more of these companies indebted
to the firm of J. P. Morgan & Co. to the extent that you might
exercise control over it or them ?
Mr. WHITNEY. Certainly not. That is part of this questionnaire,
upon the question of the ioans that have been made by the firm of
J. P. Morgan & Co. and Drexel & Co. But never at any time have
they owed us or both of us or either of us anything but a relatively
small amount of money.
Senator COSTIGAN. Mr. Whitney, some years ago the United States
Industrial Relations Commission held the hearings in this country,
and my recollection is that there was testimony given at the time
to the effect that the ownership of approximately 12 percent of the
common stock would enable the owners of that stock to direct the
policies of the corporations by which such stock was issued. I am
wondering whether your answers do not confuse stock ownership
and control of policies.
Mr. WHITNEY. Senator Costigan, Mr. Howard testified that on
questions of policy it might well be that the executive officers of
these various companies might ask to discuss the matters with the
United Corporation. The question of whether you could exert—
whether 20 percent or whatever would actually be effective control^
if there was any occasion to use it I do not have any idea. The only
point that I wished to make was that in actual fact in the 4 years
that the United Corporation has been in existence the same executive
people, the same executives officers, are controlling the destinies of
those constituent companies as they did when we first purchased an
interest in them and formed United.
So that whether—I would hate to express an opinion on a report
made by a commission of the kind you refer to, because it involves
a lot of theories and suppositions that I really am not competent
to talk about. But we have announced in our initial statement that
has been spread in the record here that it was a company holding
substantial minority interests, I think is the wording—" acquire
certain minority interests"—and there has never been any wish
or our part to exert control.
But I do not want to quibble at all with you on the question
of policy, because, obviously, as large stockholders we are inter
392
STOCK EXCHANGE PRACTICES
ested in the policies. But the policies of the public-utility companies are necessarily confined to the districts that they serve, in
which they are regulated by public-service bodies of various titles.
Their rates are controlled by those bodies, and therefore there is
an interchange of a certain amount of power. I don't know if that
answers your question.
Senator COSTIGAN. Have you ever known an instance in determining the policy of any of the corporations about which you have
been testifying in which Mr. Morgan's advice has been disregarded
if given ?
Mr. WHITNEY. May I—I think I do, but I would just like to
check. On a question of—I think I can remember several, Senator
Costigan, but I don't want to mean by that that there was a knockdown-drag-out fight about things, but we have often, often differed
with these operating heads on matters of policy.
Senator COSTIGAN. What you mean is that if Mr. Morgan gave
advice which you thought it wise not to adopt you discussed the
subject further with him and he agreed in the changed course which
was finally decided upon ?
Mr. WHITNEY. I don't
Senator COSTIGAN. DO you wish the question repeated?
Mr. WHITNEY. Yes; I would like to have that again.
The SHORTHAND REPORTER (Mr. RANDOLPH) :
What you mean is that if Mr. Morgan gave advice which you thought it
wise not to adopt you discussed the subject further with him and he agreed
in the changed course which was finally decided upon?
Mr. WHITNEY. YOU mean me individually, Senator ?
Senator COSTIGAN. I was referring rather to the directors of
th# corporation.
Mr. WHITNEY. Well, if a question of that kind came up, obviously, when our advice was asked we would give it the best way
we knew how, but in the final analysis, in many instances, the decision is left to the board and the executive management, and I am
sure that—I don't think there has ever been any question of principles we have ever differed on. Questions of detailed policy I
know of many instances, and we do come to an agreement together,
as sensible men try to do, but it has not always been J. P. Morgan
& Co.'s policies that have been adopted by a long shot.
Senator COSTIGAN. Whenever Mr. Morgan gave advice his advice
finally prevailed, did it not?
Mr. WHITNEY. Oh, no, sir.
Senator COSTIGAN. Will you give instances in which it
Mr. WHITNEY. Well, I could, Senator Costigan, but
did not?
it takes
going back in my memory of conversations. I have one very actively in mind, and if it is of any interest I will do it, but I would
a little rather not . It involves conversations——
Senator COSTIGAN (interposing). I thmk that the other members
of the committee desire that.
Mr. WHITNEY. I promise you that that is the case.
Senator ADAMS. Mr. Whitney, along the line of Senator Costigan's
interrogation, isn't it the fact that in the large business corporations
of the day the actual control is not exercised by the majority stockholders but by consolidated minority stockholders ? That is, the cor
STOCK EXCHANGE PRACTICES
393
porations are so large that it is financially impossible for single
groups to really have a majority stockholding? I have in mind, for
instance, a tabulation in the volume of Professor Burrell referring
to the United States Steel Corporation saying that tlie boards had
1.6 percent of the stock.
Mr. WHITNEY. Yes.
Senator ADAMS. That
is, an active, concentrated minority necessarily operate these companies?
Mr. WHITNEY. That is true, with the tremendous diversification
that has come through the last 5 years in the holdings of common
stock by the general public, the way the number of stockholders has
grown. You can take almost any industrial, public utility, or railroad corporation; there has been a, tremendous growth in the last
5 years in numbers. But I think it is fair to say that in almost every
instance that has become true, and there is no longer what you might
call a majority control, actual, technical majority. The management
has grown in increased numbers, representing generally large bodies
of stockholders as against even the minority stockholders.
Senator ADAMS. The individual stockholder across a period of
wide distribution has no method of organizing a substantial block
of stock?
Mr. WHITNEY. KTO.
Senator ADAMS. SO
I think it goes back in substance to what Senator Costigan pointed out, that a comparatively small percentage
really controls.
Now, I am wondering in these various cases you refer to having
18 to 20 to 22 percent, having that consolidated stock holding, isn't
that adequate for practical purposes to control these corporations?
Mr. WHITNEY. Why, you mean if it came down to a disagreement?
Senator ADAMS. Yes.
Mr. WHITNEY. It must be a very substantial sort of starting^-off
pla^ e, say, twenty-odd percent right off, from which you would only
have to gather the same amount, a little more, to have your actual
technical control. So obviously there is that much start against any
other stockholder starting from scratch, who would have that much
more of a job. That is obvious mathematically.
Senator ADAMS. And also having a practical working list of stockholders which is available to build up your proxies ?
Mr. WHITNEY. That has never—in our experience, Senator
Adams—that has not ever happened. So, again, we are dealing with
a—I would not deny that.
Senator GLASS. YOU would not undertake to say, would you, that
Mr. Morgan is not a right powerful and influential figure in investing
companies, would you?
Mr. WHITNEY. Well, you mean Mr. Morgan individually, or J. P.
Morgan & Co.?
Senator GLASS. I mean J. P. Morgan & Co.
Mr. WHITNEY. Why, no.
Senator GLASS. He is that, isn't he ?
Mr. WHITNEY. Yes, sir.
Senator GLASS. IS there anybody in
the country so ignorant as
not to know that?
Mr. WHITNEY. That is a very hard question for me to answer,
Senator Glass.
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STOCK EXCHANGE PRACTICES
Senator GLASS. Let me ask you this more pertinent question: Are
any of the executive officers who control these various companies held
by the United Co. personally—this is a very intimate question; I
don't know that it ought to be asked—are they personally indebted
to the house of Morgan ?
Mr. WHITNEY. I think, without exception, Senator Glass, the
answer is no.
Senator GLASS. Suppose now you go over for my information—it
may not afford any to other members of the committee—go over that
list of percentages put in the record the other day by Mr. Howard,
or, say several, as to the various companies, whether or not the
executive officers of these companies are indebted to the house of
Morgan or whether or not the house of Morgan controls the operations of these respective companies.
Mr. WHITNEY. Senator Glass, the first group of companies here is
the Niagara Hudson group. None of the executive officers are indebted to us in any way. The management of that company is in
the hands of the Messrs. Schoellkopf, who have been for several
generations identified with Niagara Falls Power in the western end
of the State. Its president is Paul Schoellkopf, and his brother
Alfred is ""ice president. Mr. Carlisle is chairman of the board.
Senator GLASS. What is the percentage there?
Mr. WHITNEY. The common stock of that company is 21.91, and
the Schoellkopfs have a very holding as a family themselves, I think
almost equal to this.
The next one is the Public Service Corporation of New Jersey, of
which United own 17.9 percent, and there is no officer of that company that is indebted to J P. Morgan & Co.
The United Gas Improvement, of which United owns 26.1 percent,.,
which is the largest of any, largest percentage of any; there is no
officer of that company that is—the question was raised whether my
last statement was accurate, Senator Glass. We will check it in a
minute, in other words, whether there was a loan to one of the officers.
We will know in just a second.
Mr. Zimmermann I find has a loan with Drexel & Co. I don't
know what amount, and if I may I would like to complete the record
by finding out the amount.
Senator GLASS. I wish you would.
Mr. WHITNEY. Next on the list is the Columbia Gas & Electric
Corporation, of which we, the United, own 20.9 percent, and there
none of the executive officers owe J. P. Morgan & Co. any money.
Commonwealth Southern, we own, United, 5.3, and there again
no executive officer is indebted to us in any way.
The Electric Bond & Share is the one to which you referred earlier, where we only own two thirds of 1 percent, and there again noexecutive officer or officers of the Electric Bond & Share is indebted
to us.
The French Co., the Societe Lyonnaise; while I haven't got the
records, I am perfectly confident that none of those officers owe us
anything. That is in France.
The Lehigh Navigation, of which we own 2.5; I just don't know
enough about the company to know who the officers are, so I cannot
tell you.
STOCK EXCHANGE PRACTICES
395
Consolidated Gas of New York, of which the United owns less
than 2 percent—1.8—no executive or other officer of the Consolidated
Gas Co. as of today does owe us any money. A loan came up the
iirst day, a gentleman who was formerly a director.
American Waterworks, of which we own 3.6, the same is true.
Consolidated Gas of Baltimore, of which the United owns 2.8, the
same is true.
So with the exception of Mr. Zimmermann—and I do not know
the details of that—there is none of the officers of any of the companies in which United has a stock interest that is indebted to the
firm of J. P. Morgan & Co. and Drexel.
Senator GLASS. Well, outside of the well-known and well-established influence of the House of Morgan as successful bankers, I
am curious to ascertain for the record just how you can manage
to control these companies.
Mr. WHITNEY. Senator Glass, I am afraid I cannot tell you that,
because I do not think we do. I know we do not, except—I am not
denying that our advice is asked—we sit on these boards as many
other people who have no connection with us do. We try to be
efficient and faithful directors in the sense of attendance, and take
an interest in the affairs of the company; but I cannot show you
how we control them, because I do not think we do.
* Mr. PECORA. Mr. Whitney, are any of the companies whose securities are owned by the United Corporation competing companies?
Mr. WHITNEY. I don't think so. I don't see how they can be.
Mr. PECORA. All of these companies whose securities are held by
United Corporation are represented on the board of directors of
the United Corporation, are they not ?
Mr. WHITNEY. Well, the ones where we have a major interest,
Magara Hudson and the U. G. I., the Public Service, the Columbia
Gas, and then Commonwealth Southern, which we have a very small
interest in, Mr. Cobb in that and on the United board.
Senator COUZENS. May I ask a question here: Going back to that
question of control, a memorandum has been handed to me to ask
whether or not the favor Morgan & Co. did to Mr. Sidney L.
Mitchell, president of the Electric Bond & Share Co., would not aid
the Morgan company in controlling the destinies of the Electric
Bond & Share Co.
Mr. WHITNEY. I didn't know we had ever made a loan to Mr.
Mitchell.
Senator COUZENS. I didn't say a loan; I said preference shares,
outside shares. If I used " loan ", I made a mistake.
Mr. PECORA. Senator Couzens, don't you mean Sidney Z. Mitchell
instead of S. L. ?
Senator COUZENS. Yes. The Electric Bond & Share Co. was permitted to buy 3,000 shares of Standard Brands below cost. In other
words, he was on the preferred list, and I ask if that inferentially
would not at least suggest to Mr. Mitchell that it might be well to
do what Mr. Morgan wanted?
Mr. WHITNEY. Senator Couzens, Standard Brands was offered to
Mr. Mitchell, it is true, to the extent of 3,000 shares. It was offered
to him on June 24 at what would be the equivalent of $32 a share.
The market at that time for Fleischmann, the equivalent market,
was something like $33. Mr. Mitchell took an undertaking with
396
STOCK EXCHANGE PKACTICES
(,
us, and the others in that list, to be ready to put up on September
5 $32 a share for 3,000 shares of stock. He took the full risk with
the course of the market. He took an ordinary underwriting risk,,
which a man of his large means and knowledge of affairs is entitled
to do with his money.
I t may have been that on the day—I think the price of Fleischmann, which is translated—the equivalent of Fleischmann—was 80.
I think the equivalent was 33*4 on June 24, the day that these contracts with these gentlemen were confirmed by us and Standard
Brands. They had a firm, definite commitment to pay 32 on September 5, over 60 days later.
Now, Mr. Mitchell, I think it is a well known fact, is a man of
very large means and a man with whom we have never had any
business relations of any kind.
Senator COTJZENS. I am only using that as an example, Mr. Whitney. I just wondered whether that spreading out of these favors
and these lovely gifts didn't
Mr. WHITNEY (interposing). No, sir.
Senator COUZENS. Didn't influence them to do what the Morgana
would like them to do?
Mr. WHITNEY. NO, sir. This word " preferred list " has been
Senator COUZENS (interposing). I didn't coin that; the newspapers coined that.
Mr. WHITNEY. NO, sir. I was not charging youSenator COUZENS (interposing). I would call it perhaps more
than that.
Mr. WHITNEY. May I take your question as a general question
on that subject?
Senator COUZENS. Yes; certainly.
Mr. WHITNEY. There are five of these lists that are going to be
discussed. Three of them have now been entered as evidence, namely,,
the Alleghany Corporation, Standard Brands, United Corporation
this morning, and Johns-Manville and Niagara Hudson are the other
two that Mr. Pecora mentioned the other day.
Now, all those operations have one thing in common, and in thi&
point I think is what destroys the idea of what has come to be
known as a " preferred list", because it is not a preference. It is.
a perfectly definite business transaction. Each one of those transactions, all five, although each one of them are quite different in
themselves, in their inception idea and degree of interest and one
thing and another, they all involve the question of underwriting
common stocks. This theory of having a list of underwriters toshare an equity risk with us, J. P. Morgan & Co., is not new. In fact,,
it is very old. It goes down, traditionally, ever since there has been
banking. As you probably know, in England they have underwriters as a part of their security distribution, for individuals, insurance companies, anybody who has got the money and who has
the substantial fortune to take the risk and has the knowledge to>
know the risk he is taking. This creation of these lists which we
have was used long before these boom times and is a theory of distributing a risk in equity, where we did not consider it was a proper
banking risk for the banking firm of J. P. Morgan to carry these
stocks in this volume. We did not believe either it was a proper
STOCK EXCHANGE PRACTICES
397
thing for us to sell those through any hullabaloo in the general
market to the general public. But we did believe that we knew
certain people who had the substantial wealth, the knowledge of
their securities, and the willingness to take a risk along with us
in the underwriting of these common stocks.
Now, on these lists, so-called " preferred lists ", there happened
to be a very large market afterward. It happened that certain of
these people we had had business relations with, friendly relations
with for many years. Some of them have become prominent since
1929, but
Senator COUZENS (interposing). Let me ask you a question right
at that point. Suppose your eminent counsel, Mr. Davis, for instance,
had got a letter offering him 3,000 shares at 60 percent of the market.
Could he have turned around and offered his friends to get in under
the same provisions, or would you have done it?
Mr. WHITNEY. YOU mean could he have introduced people to the
list?
Senator COUZENS. Yes.
Mr. WHITNEY. Well, Senator Couzens, you start with the supposition he was given something 60 percent below the market.
Senator COUZENS. Well, we will take Mr. Easkob, for instance.
He was very grateful for what you did for him, according to his
letter, and I undoubtedly would myself have been as grateful if I
had got a letter like that. But what I am trying to get at is whether
Mr. Raskob could have taken under that grateful tent of his a lot
of other friends?
Mr. WHITNEY. YOU mean could he have suggested others ?
Senator COUZENS. Yes.
Mr. WHITNEY. Well, he never did.
Senator COUZENS. N O ; but what would you say if he did? Supposing he suggested Mr. Durant and myself and some others; would
you let us in at the same basis ?
Mr. WHITNEY. That is a very hard question, because, I have known
Mr. Durant a good many years. I think if he asked you, probably.
Senator GLASS. It might be if the chairman of the Republican Na*
tional Committee, who was on the preferred list, had suggested
Senator Couzens, you would have let him in, wouldn't you?
Mr. WHITNEY. Mr. Raskob is a very
Senator COUZENS (interposing). I am quite sure you would let
Senator Glass in if Mr. Raskob had asked you.
Mr. WHITNEY. Mr. Raskob is a very—you, of course, know that
Raskob was in General Motors when they commenced.
Senator COUZENS. Oh, yes; I know.
Mr. WHITNEY. He went into public life rather unexpectedly.
Senator COUZENS. I do not want to go into personalities. I am
trying to get the scope of this thing. We are thinking about control,
Mr. WHITNEY. Yes, sir.
Senator COUZENS. And that is one of the things that concern
Mr. WHITNEY. Yes; quite.
Senator COUZENS. I have sat on boards of directors where 2
me,
and
3 percent of the stock dominated and controlled the policies of the
companies, not because they had a physical majority of the own-*
ership.
398
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. NO.
Senator COUZENS. But
because of their influence, and not necessarily their internal influence, but they have influence in the back
and strings to pull which make it necessary, if you please, for the
majority to do the wishes of the minority. I am just trying to
learn, and I am sorry that I. am annoying Senator Glass about this,
but I cannot help it. I am trying to get educated.
Mr. WHITNEY. Senator Couzens, I hope you do not think I am
trying to duck it either.
Senator COUZENS. N O ; I am just apologizing to Senator Glass, that
is all.
Mr. WHITNEY. I am really trying to explain to you that these
names have sort of grown up. Now, Mr. Easkob—I am not taking
him as an individual, but a lot of these other names
Senator COUZENS (interposing). Neither did I, but merely as an
illustration.
Mr. WHITNEY. That have been used, but he was a very good example. He is known to be a wealthy man. He is a man that we
had had very intimate relations with for a great many years. It
is true of practically everybody on that list except certain individual
personal friends and people not in business at all. Now, they are
the type of men that if we were—just as a matter of their financial
capacity; they have never taken any commitment in any of these
things which involved a strain on them, which involved going out
and borrowing money, if you please, which involved anything except
their taking a risk. There never was a hope of our friends going
out and taking a turn
Senator COUZENS (interposing). No; I understand.
Mr. WHITNEY. In other words, it was an opportunity for them to
come along with us in a perfectly legitimate bit of financing of
business, on a necessary bit of financing. The question of whether
they appreciated it and were grateful for it, if they made money I
assume that they were grateful for it; if they lost money I do not
quite know, if they thought about it at all, what their answer would
be.
But that was not where the list came up. Now, you take again
Mr. Raskob, or if you want to take Republicans, any of the names,
if we can speak
Senator COUZENS (interposing). At least they knew you were
remembering them, didn't they ?
Mr. WHITNEY. Quite. Quite. And I would not deny that for
the world. Certainly we were remembering them, and we thought
they were appropriate people because of their financial standing
and knowledge of circumstances and existing conditions, and people
who had the right to make up their own mind how they wanted
to use their own money, and we believed that it was a perfectly
proper, and still believe that it was a perfectly proper, method of
financing, and it was not the question of the preferred list we produced of the names of the people that have been used, that have
been given, we think—I think—a little angle of it that is not
really the case.
None of these were gentlemen in public life at the time this
happened. None of them were. A great many of them we never
STOCK EXCHANGE PRACTICES
399
even dreamed were going to be. They were people with whom we
had business and personal ^relations, so that we knew the condition
of their own affairs, knew they were competent, and knew they
were well able and desirous of using their money and taking an
equal risk with us.
Now, when you get into the motive, Senator Couzens, and how
they felt afterwards, I don't know the answer.
Senator COSTIGAN. Have you finished, Senator ?
Senator COUZENS. Yes.
Senator COSTIGAN. Mr. Whitney, on the list of the United Corporation I find the name of Edgar Eichard, or Eickard. Which
is it?
Mr. WHITNEY. Eickard, I think. Which list is that ?
Senator COSTIGAN. The United Corporation. Do you know the
name of this particular person?
Mr. WHITNEY. I know of it, certainly, He is an engineer in
New York.
j
Senator COSTIGAN. Formerly at Denver, Colo. ?
Mr. WHITNEY. I don't know him, Senator Costigan. I assume
that is the same man, I know he is an engineer.
Senator COSTIGAN. I S he one of the financially prominent persons
to whom you have just referred, or was there some other reason for
his selection ?
Mr. WHITNEY. Well, I don't know who selected him, Senator Costigan. I have got an idea that that is one of the list of names suggested to us. because we have never had any business relations to
my knowledge with Mr. Eickard in any way. I just don't know.
Senator COUZENS. Can you find out who suggested him? I say,
can you find out who suggested him ?
Mr. WHITNEY. I have been asked by Mr. Pecora to see if I can
segregate this list between ourselves and. Bonbright, and I will try,
but I don't know that I can. I don't personally know him.
Senator COSTIGAN. IS this the Mr. Eickard who is reputed to be
the representative of ex-President Hoover, if you know ?
Mr. WHITNEY. I don't know enough about him to know.
Senator BEYNOLDS./One question, please, Mr. Pecora: Mr. Whitney, do you know a gentleman by the name of F. Gibbons ?
Mr. WHITNEY. F. Gibbons?
Senator EEYNOLDS. F. Gibbons. I think that he is on your list.
Do you recall that ?
Mr. WHITNEY. On this list, Senator Eeynolds ?
Senator EEYNOLDS. Yes; the preferred list. He is of the preferred
list. You don't recall his name ?
Mr. WHITNEY. Not under that designation; no, sir. Let me see—
F. Gibbons, 10 shares.
Senator EEYNOLDS. DO you find his name there ?
Mr. WHITNEY. Yes, sir; 10 shares.
Senator EEYNOLDS. NOW, I believe that you stated a moment ago
that you made offerings of these various opportunities only to those
who were able financially to share the responsibility with you ?
Mr. WHITNEY. Yes. This is 10 shares.
Senator EEYNOLDS. Well, now, 10 shares—what amount of investment did that represent of the things that you offered ?
175541—33—PT. 2
7
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STOCK EXCHANGE PRACTICES
Mr. WHITNEY. $750.
Senator REYNOLDS. Well, now, why did you make such a smalt
offering to that man ?
Mr. WHITNEY. Senator Reynolds, I find he is one of our clerks.
Senator REYNOLDS. Oh. That is all.
Senator BARKLEY. He had not been a clerk long or he could have
taken more than that, couldn't he?
Senator REYNOLDS. What did you say?
Senator BARKLEY. I was just wise-cracking.
Senator REYNOLDS. Oh, excuse me.
Senator GLASS. Mr. Whitney, don't you think that you gentlemen
have manifested a very great degree of—or failed to manifest any
degree of alertness in not appealing to Mr. Raskob, the Chairman of
the National Democratic Committee, in the first place, to prevail
upon me as a Democratic Member of the Senate to omit from the
bank bill three provisions to which I am told your concern very
gravely objects, and weren't you derelict in appealing to Senator
Couzens' friend, the Republican chairman, not to come here and prevail upon, for instance, Senator Townsend, who is a Republican
member of the subcommittee drafting the bill, to omit these sections
from the bill which undertakes to divest your investment and deposit,
to differentiate your investment and deposit interests?
Mr. WHITNEY. It would appear that we had been from the newspapers ; yes, Senator Glass.
Senator GLASS. What on earth is the meaning of it? Can't you tell
us why you didn't do that? Mr. Raskob in his letter expressed the
desire to reciprocate your kindness. Why didn't you call on him to
do that andMr. WHITNEY (interposing). I am afraid
Senator GLASS. And inasmuch as now I am regarded as the paid
counsel of Morgan & Co., why didn't you get him after me?
Mr. WHITNEY. I am afraid, Senator Glass, we just never even
thought of it.
Senator GLASS. YOU were very derelict. You are poor business
men.
Mr. WHITNEY. We have often been charged with that.
Senator GLASS. I wonder how you made your money.
Senator COUZENS. May I ask the Senator from Virginia to whom
he referred as the Republican that was my friend ?
Senator GLASS. Well, there are so few Republicans now and they
are in such obscurity that I don't recall his name. [Laughter.] He
lived somewhere in Ohio.
Senator COUZENS. A Republican friend of mine in Ohio ?
Senator GLASS. Republican—chairman of the Republican National
Committee was on the list along with Raskob.
Senator COUZENS. Oh, you mean Mr. John R. Nutt?
Mr. PECORA. Joseph R. Nutt.
Senator COUZENS. Joseph.
Senator GLASS. Yes.
Senator COUZENS. I want it to go on the record that he is no friend
of mine.
Senator GLASS. He is treasurer of the national committee.
Senator GOLDSBOROUGH. He was not chairman; he was treasurer.
STOCK EXCHANGE PBACTIOES
401
Senator GLASS. He is one of your crowd.
Senator COTJZENS. NO one ever charged me with that before.
Mr. PECORA. Now, Mr, Whitney, in the course of your testimony
this morning you said in answer to a question put to you by one of
the Senators that these so-called " preference lists " were used long
before the boom times. What did you mean by that?
Mr. WHITNEY. Well, I mean historically, the method of distribution of securities in London, which is the oldest security market in
the world, this method of underwriting by means of individuals, has
been a current form of distribution of securities. You will, of course,
remember, Mr. Pecora, that this country changed from a debtor to
a creditor nation during the war. Prior to the war there was practically speaking no Security market, and the whole method of distributing securities has grown up, really was created, in the sale of
Liberty bonds during the war. The whole method of distribution oi
securities has been changed in the last few years, since 1920.
Mr. PECORA. Do you mean by that that these preference lists were
used by J. P. Morgan & Co. prior to the boom years of 1928 and
1929?
Mr. WHITNEY. I just do not go back far enough to know.
Mr. PECORA. YOU have been a member of that firm for a long
time?
Mr. WHITNEY. Oh, I thought you mean prior to that. There
have been instances where they have been used prior to 1927. Of
course, there is nothing prior to 1927 in that questionnaire, but there
have been minor instances and very few opportunities to finance
corporations by stock issues prior to 1927.
Again, Mr. Pecora, I do not want to quibble about this use of the
words " preference lists."
Senator Couzens quite rightly denies the authorship of that phrase,
but it has been given considerable prominence during the last week;
and every time you ask me anything about a preference list I sort
of gag, because we do not know it that way. We do not consider
it a preference list*
Mr. PECOIIA, I did not invent that term, either; but how would
you designate those lists in order accurately to portray the situation
represented by them?
Mr. WHITNEY. We have never attempted to define them. They
are a list of people, as I said before to Senator Couzens, whom we
know and whom we have had relations with, whom we know are competent financially and mentally to undertake the risks, whatever the
risk may be, in these various transactions we have offered them.
They take a risk of profit; they take a risk of loss. In either event
we believe that they are competent to take the risk, in whichever form
it may be, based upon their knowledge and their own opinion and
their own judgment. We have never considered them preference
lists, which implies, it seems to me, that there was some other consideration. There never has been any consideration other than %
purely carrying through of a business transaction with people who
knew what they were doing and were financially in a position to do
whatever they undertook to do.
Mr. PECORA. Mr. Whitney, you call them selected lists, do you not i
Mr. WHITNEY. I did not know it. That is a word that has been
used in your inquiries during the investigation. When you write
402
STOCI£ EXCHANGE PRACTICES
letters you use the words "selected list." I think that is where that
came from.
Mr. PECORA. These lists are made up of persons selected by J. P.
Morgan & Co. who are invited to subscribe for issues of stock that
were being underwritten or had been underwritten by J. P. Morgan
&Co.?
Mr. WHITNEY. Oh, certainly.
Mr. PECORA. These invitations were extended to those persons to
be selected prior to the making of any public offering of the stock;
1| jjpt that so ?
Mr. WHITNEY. Mr. Pecora, with two quite important qualifications, that is so. The first qualification is that I have already testified that many of these people on these lists, which were finally determined upon by the firm of J. P. Morgan & Co., were at the suggestion of others. I testified that in the case of Alleghany. I testified
ihis morning in the case of United units.
The second qualification I wish to make is that you said it was
T-ptior to a public offering; but in no case of any of these so-called
" lists " has there been any public offering.
Mr. PECORA. In any case, where these persons are selected to subscribe for any of these securities, were they requested to subscribe at
any time when the securities were selling at the market price?
Mr. WHITNEY. In certain instances they were offered before there
was any market?
Mr* PECORA. Let me put it this way, then
Mr. WHITNEY. In those cases you could not say they were selling
at the market price.
Mr. PECORA. On all occasions when these persons were invited to
subscribe at cost price to J. P. Morgan & Co., was not that cost price
substantially below the then prevailing market price?
, Mr. WHITNEY. The answer is the same as before, that in certain
pi those instances there was no public market on these securities at
the time the offer was made and in the cases where they ;were accepted. Your question, I think, leads to the whole theory of the
distribution of securities. J. P. Morgan & Co. obviously are merchants of securities. Like every other business, that depends on
whetlier you are right in your ability to distribute .the securities
tpjbuyers or not. Obviously our judgment would depend on whether
we believed they would be able to underwrite them, whether bonds
or stocks or whatever they were. It would be our judgment if the
price at which we had made our purchase and had underwriting
was the proper price or not. But, again—and I cannot reiterate it
too many times—it seems to me, with the possible exception of the
Johns Manville operation to which you have not officially brought
attention yet, the market was really nonexistent on the securities
offered
Mr. PECORA. From evidence already in this record, Mr. Whitney
Mr. WHITNEY. May I just finish just one thing? We asked people to take a 60-day commitment at a time when the market for the
stock was iy2 points above the price. Certainly for an underwriting
risk involving $32,000,000, or a little over $32,000,000, that could not
be considered a very material spread or margin, to take a commitment for something over 60 days.
STOCK EXCHANGE PEACTICES
403
Mr. PECORA. At the end of the 60-day period the market was $40
or more, was it not?
Mr. WHITNEY. Yes; but, if you will remember, the general course
of the stock market from June 24 to September 5, 1929, that was true
of every other security on the list.
Mr. PECORA. In the case of Alleghany Corporation, these gentlemen who were invited to subscribe at $20 a share for the common
stock of that company were so invited at a time when the market for
those shares was $35 to $37. Is not that so ?
Mr. WHITNEY. YOU have asked me that question three or four
times.
Mr. PECORA. I S it SO?
Mr. WHITNEY. It is not so.
Mr. PECORA. IS not that the
information that was found by members of the firm of J. P. Morgan
& Co. in letters which have been
put in evidence here and wThich were sent to some of the individuals
who were invited to subscribe at $20 per share ?
Mr. WHITNEY. Mr. Pecora, you have introduced two letters to
that effect out of a total of something like 220 people that were-—Mr. PECORA. YOU can produce all the other letters you want to
on that.
Mr. WHITNEY. I know it; but that does not really answer the
question, because I have already testified under oath that, in my
judgment, the great majority of those people were approached personally, through personal conversations; and at that time there was
no market for the Alleghany shares, as you know. You talk about
$37 and $35. On that same day, it has already been introduced in
evidence, the Guaranty Co. of New York sold 500,000 shares to the
public at $24 a share.
Mr. PECORA. I am coming to that transaction separately, Mr.
Whitney, when I put in the evidence with regard to the Alleghany
Corporation.
Mr. WHITNEY. I am sure.
The second point is that on the date, which is the date identified
by these two letters that have been produced, there were 14,000 shares
of stock traded in. The market opened at $37, and through the sale
'of 14,000 shares of stock it began at 32% and closed at 33; and at the
same time there was being offered through the Guaranty Co. 500,000
shares at $24 a share.
Now the question is, which was the real market ? People had no
need of involving themselves in a commitment to pay for them for
2 weeks. The other case was a definite offer where a mail took a
definite position. But the point, Mr. Pecora, on which you asked
me and which I am trying to answer, is that in our formation of
these lists, at the time we decided to sell the stock at $20, which was
our price, and to have these others share with us in the underwriting
of the risk to a total of $25,000,000, there existed no market upon
which any business man, or any sensible business man, would look
with any approval whatever.
Mr. PECORA. TO what market were your partners referring when
they wrote letters to some of the individuals who were invited to
subscribe for Alleghany shares at $20 a share ?
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STOCK EXCHANGE PRACTICES
Mr. WHITNEY. Undoubtedly a when-issued market on the New
York Stock Exchange; and undoubtedly, as stated in that letter,,
it did not mean anything.
Mr. PECOKA. It was a public market, was it not?
Mr. WHITNEY. It was a when-issued market on the New York
Stock Exchange.
Mr. PECORA. And that is a public market, is it not?
Mr. WHITNEY. On the New York Stock Exchange ?
Mr. PECORA. Yes.
Mr. WHITNEY. Certainly.
Mr. PECORA. When you invited
these various individuals, whose
names are on the United Corporation selected list, to subscribe for
the units of the company at $75 per unit, according to the testimony
of Mr. Howard, on January 21 those units were traded in on the
Philadelphia Stock Exchange at $99, were they not?
Mr. WHITNEY. Yes, Mr. Pecora.
Mr. PECORA. And on January 16, according to the photostatic
reproduction of the page of the New York Times dated January 17r
1929, those units were traded in on the open market, over the
counter, on a when-issued basis at 92 to 94, were they not?
Mr. WHITNEY. Were they not ? Aren't you saying that they were ?
Mr. PECORA. I am asking you if that is not your knowledge.
Mr. WHITNEY. NO ; it is not my knowledge. The first part is; but,
also, Mr. Pecora, it has been introduced in the testimony this morning that we made this offer to those people on the United Corporation
unit list somewhere between the 9th and the 14th of January, which
still remains 2 days earlier than the earliest date you have been able
to find any record of with reference to United units. The only official open-market quotation has been testified this morning as January
21. There was some kind of an over-the-counter market on January
16; and we had offered these units to these individuals referred to
between January 9 and January 14, as evidenced by this second
memorandum introduced today, which is dated January 14, and
this, as I say, was delivered to every person who purchased one of
the units of the United Corporation.
Senator BARKLEY. Did your firm have anything to do with the listing of these when-issued shares on the New York Stock Exchange?
Mr. WHITNEY. NO, sir. I am sure not. No; nothing.
Senator BARKLEY. When you took over the million and a quarter
shares of Alleghany Co.—-and this same question applies to all the
others—did you at that time know when they would be put on the
New York Stock Exchange for sale to the public ?
Mr. WHITNEY. N O ; but of course the Alleghany—I testified the
other day that an application was to be made for listing the Alleghany bonds, preferred stock and common stock, on the New York
Stock Exchange. That generally takes a couple of weeks. In the
case of United there was no question of listing that. I do not believe
it has been brought out here, but they were not listed until in May,
some 4 months later.
Does that answer your question?
Senator BARKLEY. Partially. What I am trying to get at is this.
Possibly I asked this question the other day and made this observation, that it would be one thing to agree in the financing or the set-up
STOCK EXCHANGE PRACTICES
405
of a new corporation like this, to underwrite a certain portion of
the capital stock regardless of what happened to that stock in the
future and distribute it among others who were willing and able to
buy. It would be quite another thing for you, as a part of that
process and that financial set-up, to know in advance or to help in
advance to manipulate tlie listing of that stock on the stock exchange
so that the pubic might rush in and buy it and run it up so it might
be used as an inducement for the concern to sell these shares which
you had turned over to this selected list which has been made public.
Mr. WHITNEY. Senator Barkley, I think I addressed my answer
to the wrong part of your question, perhaps. We had knowledge,
general knowledge, that these stocks would be listed, but I can say
definitely that the firm of J. P. Morgan & Co. had nothing to do with
any creation of a market or any purpose of manipulation of the
market in connection with any of these stocks at any time.
Does that answer your question?
Senator BARKLEY. Yes.
Mr. WHITNEY. We did know there was going to be a market—as
a matter of fact, there was no similar corporation to United listed
on the New York Stock Exchange. The stock exchange provided
no restrictions or regulations whereby such a corporation could be
permitted to list at the time of the organization of the United. In
the case of the Alleghany there were similar corporations, and in
that case we knew that the company was going to take steps to have
a listing which would make a public market.
Senator BARKLEY. All of these companies were in the books—I
mean, organized under the direction and supervision and with the
assistance of Morgan & Co., the standard brands being a consolidation of other companies and the Alleghany Corporation was a holding company to take over certain railroad stocks, and the United
Corporation, and so on?
Mr. WHITNEY. Right.
Senator BARKLEY. I presume that the firm of Morgan & Co., in
the very nature of things, knew that ultimately these stocks would
be listed on the New York Stock Exchange ?
Mr. WHITNEY. Oh, undoubtedly; yes, sir.
Senator BARKLEY. And at that time I think it might also be said
that the public generally regarded the Morgan Co., as they were
described, as being worth getting into; and it is probably true of a
lot of people who regarded the name of Morgan as behind a particular corporation as an'indication that it was going to be profitable
to rush into the market and help to put it up.
What I am trying to get at is whether Morgan & Co., in the financing of these organizations, had any doubts in determining when
those stocks would be put on the stock exchange; whether they
bought or sold for the purpose of running the price up or down in
connection with their handling of a particular share of the stock
which was to be distributed.
Mr. WHITNEY. The answer to the second half of your question,
Senator Barkley, is definitely no. If you say, did we have anything
to do with the subsequent listing, I cannot answer no, because the
cases are not all parallel. In the case of United we did have something to do with the listing. I remember that I personally appeared
406
STOCK EXCHANGE PRACTICES
before the listing committee of the New York Stock Exchange where
we were put through a cross-examination on the intention as to publicity and one thing and another before they consented. So I cannot say we knew nothing about that listing.
The second half of your question, as to our having anything to do
with the market, the creation of a market or the manipulation of the
market or the speculative end of the market, I can answer definitely
and explicitly, no.
Senator ADAMS. IS there any requirement of the stock exchange as
to a company having a certain number of stockholders before it can
be listed?
Mr. WHITNEY. Yes, sir. There has to be a certain distribution, a
certain percentage of distribution, which is their safeguard against
what they call corners. In other words, this distribution of United
in the first instance would not have been possible, and it would not
have been possible in Alleghany until after there had been a distribution of the shares. You have to certify that there has been a certain
number of stockholders. I do not remember what that number is.
Senator COUZENS. Was Mr. S. Parker Gilbert a member of your
firm when Mrs. Gilbert took those shares under the several lists ?
Mr. WHITNEY. NO, sir.
Senator COUZENS. What
was Mr. Gilbert's occupation at that
time?
Mr. WHITNEY. In 1929, Senator Couzens, he was agent, general, of
reparations under the Dawes' plan.
Senator COUZENS. Did she subscribe for those in New York herself?
Mr. WHITNEY. Yes, sir. She had an account with us for a great
many years, personally.
Senator COUZENS. That is all.
Senator GLASS. May I venture to ask whether J. P. Morgan & Co.
have a corps of salesmen—I might say, high-pressure salesmen—
such as was developed and described in a previous examination by
this subcommittee of the officers of the National City Bank
and which is very entertainingly described in a book called
"Scapegoats"?
Mr. WHITNEY. Senator Glass, I testified on Thursday that J. P.
Morgan & Co. has no salesmen, bond salesmen or other salesmen;
and we have never had. It is further stated in that statement which
I read that we have never employed any high-pressure salesmanship.
Senator GLASS. Therefore, then, I gather that you pick your own
clients ?
Mr. WHITNEY. We try to; yes, sir.
Senator GLASS. And with some degree
of human nature you pick
people who have money to invest; is that so ?
Mr. WHITNEY. Yes, sir.
Senator GLASS. And people
who will not, except that clerk in
your office, immediately find it necessary to throw their holdings
on the market and demoralize the market?
Mr. WHITNEY. Exactly. We believe they are substantial people in
every sense of the word.
Senator GLASS. Understand, Mr. Whitney, I am asking for information. I am not undertaking to act as counsel for Morgan & Co.
STOCK EXCHANGE PRACTICES
407
just yet, unless you dismiss Mr. Davis. Then I might qualify as a
lawyer before the courts
Mr. DAVIS. I should be delighted to have you for a colleague,
Senator Glass.
Senator GLASS. I am asking for information, as to whether that is
your method of procedure.
Mr. WHITNEY. Yes.
Senator GLASS. TO pick
the people to whom you want to sell your
stock ?
Mr. WHITNEY. Yes.
Senator GLASS. And
you exercise reasonable care in the selection of
these people?
Mr. WHITNEY. We have tried to.
Senator BARKLEY. There is no invidious implication carried by the
word " pick ", is there ?
Senator COTJZENS. YOU also said in your letter that the stock, in
the case of Alleghany, was selling 60 to 75 percent higher than the
offering, and that there was no string upon selling it ?
Mr. WHITNEY. And in that same letter we said the market meant
nothing.
Senator COUZENS. But you said there was no string upon them
whatever ?
Mr. WHITNEY. Yes.
Senator COUZENS. I
just wanted to show that they were perfectly
free to take any price at the time.
Mr. WHITNEY. Certainly.
Senator BARKLEY. It meant this, though, that if they wanted to
dispose of those shares they had to go to that market to do it ?
Mr. WHITNEY. Quite.
Mr. PECORA. IS it not a fact that the officers or directors of both
or either one of the utility companies whose securities are held by
the United Corporation are included in one or more of these socalled selected lists of persons who are invited to subscribe for stock
on the same terms or at cost to J. P. Morgan & Co. ?
Mr. WHITNEY. I have not checked the list, but I think it would
be the most natural thing in the world that they should be.
Senator COUZENS. May I suggest that we now recess until 2
o'clock?
The CHAIRMAN. Without objection, the committee will stand in
recess until 2: 30
Senator GLASS. Just a" moment. Mr. Chairman, I had proposed
today to make a statement and to introduce into the record quite a
bunch of letters, withholding some that are too vile and obscene to
appear in the public print, criticizing me in various terms as a crook
and as a defender of racketeers and threatening my life because of
that; but I will not right at this moment exercise that privilege. I
will later on. This is the bunch [indicating file of papers]; and I
may. if I can overcome the immodesty of doing such a thing, later
introduce into the record this other bunch of letters [indicating
another file] from gentlemen, and obviously from women of refinement, who were good enough to applaud my desire to be an investigator and not a spectator at this investigation. But I will exercise
that privilege a little later.
408
STOCK EXCHANGE PRACTICES
The CHAIRMAN. The committee stands in recess until 2:30.
(Whereupon, at 1:05 p.m., a recess was taken until 2:30 p.m.)
AFTERNOON SESSION
The committee reconvened at 2:50 p.m., Wednesday, May 31,
1933, at the expiration of the noon recess.
The CHAIRMAN. Let us have order, please. You may proceed, Mr.
Pecora.
TESTIMONY OF GEORGE WHITNEY—Resumed
Mr. PECORA. Mr. Whitney, you were a member of the board of
directors of the United Corporation from its inception, were you
not?
Mr. WHITNEY. Well, from very shortly after its inception. Not
in its creation, but very shortly thereafter. I have not got the exact
date. Very shortly thereafter.
Mr. PECORA. Originally the board was composed of four members,
two of whom were members of the firm of J. P. Morgan & Co. and
the other two of whom were mertibers of Bonbright & Co., is that
right?
Mr. WHITNEY. That is right.
Mr. PECORA. And the president of the company at the outset was
Mr. Roberts?
Mr. WHITNEY. At the very outset Mr. George Roberts.
Mr. PECORA. Mr. George Roberts was an attorney, was he not ?
Mr. WHITNEY. Yes.
Mr. PECORA. What law firm was he associated with ?
Mr. WHITNEY. Winthrop, Stimson.
Mr. PECORA. Stimson.
Mr. WHITNEY. Winthrop, Stimson, Putnam & Roberts.
Isn't that
the name of it?
Mr. PECORA. And did that firm attend to the legal formalities of
the incorporation of this company?
Mr. WHITNEY. That firm, with our counsel, Messrs. Davis, Polk,.
Wardwell, Gardiner & Reed.
Mr. PECORA. When were conferences first held that led to the incorporation or organization of United Corporation?
Mr. WHITNEY. I should think that the first date that you could fix
that that really began was back in October 1928. The consideration
of the idea—the actual formal conversations or more definite conversations took place during the month of December 1928.
Mr. PECORA. NOW, those conversations were had between members
of J. P. Morgan & Co. and of Bonbright & Co., were they not ?
Mr. WHITNEY. Yes. If you include, of course, with J. P. Morgan
& Co. Drexel & Co.
Mr. PECORA. Yes. And it was as the result of those conferences or
conversations that United Corporation was finally set up in January
1929 with authority to issue 4,000,000 option warrants unlimited as
to time?
Mr.
WHITNEY. Yes,
sir.
Mr. PECORA. Was the issuance of those option warrants a matter of
definite discussion among these gentlemen?
STOCK EXCHANGE PEACTICES
409
Mr. WHITNEY. Everything to do with the formation of United
was a matter of definite discussion among these men.
Mr. PECORA. And was the matter of the issuance of these option
warrants agreed upon from the start, or was there any dissent on
the part of any of the gentlemen who entered into these discussions?
Mr. WHITNEY. Well, I think, Mr. Pecora, the answer to that is
" no ", but I am not quite clear that I understand. In the first place,
just what do you mean by the beginning? Do you mean from
December ?
Mr. PECORA. From October. You said that the initial conversations were held about in October 1928.
Mr. WHITNEY. I did, but I further said that the definite discussions which led to the formation of the United Corporation in the
form that it finally was created did not get down to really talking
set-up, the financial set-up, until well on in December. The conversations in October were very much more general, and really that
was merely a date when the question of a corporation came up.
Nothing definite. Of course, discussions had been going on, as I
started to say this morning, for many months prior to that, that
culminated in that idea.
Mr. PECORA. Well, whether or not the conversations with respect
to the issuance of these option warrants were held in October or in
December initially, was there any dissent expressed by any of the
gentlemen who took part in those conversations about the proposition of issuing these option warrants when the corporation was
formed ?
Mr. WHITNEY. DO you mean about the theory of having
Mr. PECORA. About the theory, or practice, or custom, or whatever you want to call it.
Mr. WHITNEY. Why, no. Nothing that you could dignify by as
much of a word as " dissent." The reasons for them, the implications of them, of the different characteristics of warrants, was discuFsed very fully. As I answered Senator Couzens this morning,
this was our first personal experience with the use of warrants, and,
obviously, a departure of that kind would be a subject of greater discussion. Bonbright & Co. had been connected with corporations
which had used warrants before, so they were, naturally, more familiar with the use than we were.
Mr. PECORA. In those discussions about the option warrants was
any decision reached before the corporation was organized as to
who was to receive these option warrants from United Corporation ?
Mr, WHITNEY. Why, obviously, because the whole general financial set-up of the United Corporation was clearly determined prior
to any of these steps which I termed technical steps of organization
this morning, which involved not only these steps that have been
mentioned, but various subsequent steps where various others were
given the opportunity to exchange securities which they held for
securities of United on the same basis of exchange as the securities
held by J. P. Morgan & Co. and Drexel & Co. and American Superpower finally found their way.
Mr. PECORA. NOW, as the result of these discussions was there any
decision reached as to who these option warrants were to be issued to?
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STOCK EXCHANGE PEACTICES
Mr. WHITNEY. Well, a portion of them were to be issued in exchange for securities and a portion of them were to be issued against
the payment of cash by Messrs. Bonbright & Co. and ourselves, J. P.Morgan & Co.
Mr. PECORA. Then the answer in substance is that it was decided
to issue these option warrants to J. P. Morgan & Co. and to Bonbright
& Co.?
Mr. WHITNEY. With one exception. As Mr. Howard testified, at
the beginning, at the inception of the company, it was deemed in the
interest of the company to reserve a certain amount of stock and
option warrants for whoever might come to be president in order that
he might have an interest in the company, in the development of the
company, on the same basis as Bonbright & Co. and ourselves re-'
ceived warrants against payment of cash.
Mr. PECORA. NOW, the first public announcement that was made
by J. P. Morgan & Co. with respect to the organization of the United
Corporation consisted of this printed statement that was read into
the record this morning, that bears date January 9, 1929, and is
captioned, " For release to newspapers Friday, January 11, 1929 %
was it not?
Mr. WHITNEY. Yes, sir. That is the first.
Mr. PECORA. I S there anything in that so-called " announcement"
that informs the public as to the terms or price upon which those
option warrants were to be issued to J. P. Morgan & Co. and to
Bonbright & Co.?
Mr. WHITNEY. Well, it very clearly specifies the terms on which
they were to be issued to the organizers. If I may read
Mr. PECORA. If you will.
Mr. WHITNEY. It says:
There have been purchased by the organizers—
Namely, J. P. Morgan & Co. and Drexel & Co. and Bonbright
& Co., Inc.—
for $20,000,000 cash, 800,000 shares of the common stock and option warrants
for 2,000,000 shares of common stock. The balance to be presently issued of
the common stock and opt'.on warrants and the 944,197 scares $3 cumulative
preference stock are to be issued in exchange for securities.
Mr. PECORA. Well, is the price at which those option warrants were
to be issued to the organizers of the corporation set forth anywhere
in that announcement ?
Mr. WHITNEY. Well, the arithmetic is not given in detail, but it
is not a very difficult computation to figure the fact that—no; there
is no detail statement of value; no.
Mr. PECORA. Are there any figures given in that printed announcement from which one could sit down with pencil and paper and
determine on the basis of figures given in that announcement at what
price those option warrants were to be issued to the organizers of
this corporation?
Mr. WHITNEY. That was not what the transaction was, Mr.
Pecora. The answer to your question is no. Because the transaction did not involve any price for the option warrants. The fact is
exactly as set forth in this statement. Tlie organizers, namely, the
three firms mentioned, were to receive in consideration for $20,
STOCK EXCHANGE PRACTICES
411
000,000 in cash 800,000 shares of common stock and 2,000,000 option
warrants.
Mr. PECORA. Well, as a matter of fact, although the figures are not
embodied in that public announcement, these option warrants were
issued to the organizers for a consideration of $1 each, were they
not?
Mr. WHITNEY. That was the way that they were set up in the—
also, if you remember, the common stock was set up on the book a t
$5 and the balance was carried to surplus, so that unless you went
into a full explanation of how the books were going to be set up the*
$1 price that was set up on the books would have been a very misleading statement.
Mr. PECORA. AS a matter of fact, that is all that J. P. Morgan •&
Co. paid for these option warrants originally, is it not—a dollar
apiece ?
Mr. WHITNEY. I already testified this morning, Mr* Pecora, that
as far as we set up our books we paid $10,000,000 for these 400,000
shares of common stock and 1,000,000 of the warrants. And we
charged the account with $25 a share as cost of the common stock and
set up on our books the warrants at no cost, because we did not believe, as I testified this morning, that they were a proper asset to
carry of value on the books of a banking firm.
Mr, PECORA. AS a matter of fact, in the offer that was made formally under date of January 9, 1929, by J. P. Morgan & Co. to the
corporation, the offer I refer to being the one involving the purchase
by J. P. Morgan & Co. of 400,000 shares of common stock and 1,000,000 option warrants for $10,000,000—was not the value of $1 specifically allocated to those option warrants in the written offer that
was made by J. P. Morgan & Co. to the United Corporation ?
Mr. WHITNEY. If my recollection of that letter, or that contract,
is correct, Mr. Pecora, it said that we understood that the allocation
was to be made upon the books of the company.
Mr. PECORA. And when, on or about December 19, 1929, J. P.
Morgan & Co. distributed 1,514,720 of these option warrants that on
that date still remained in its possession among its individual partners the distribution was made on a basis of $1 per warrant to the
individual partners of J. P. Morgan & Co. ?
Mr. WHITNEY. It was. That $1,514,200 was taken into the firm's
books as a profit.
Mr. PECORA. And it was 200,000 of these option warrants that were
sold by J. P. Morgan & Co. on the New York Stock Exchange in
the period of time beginning on July 23, 1929, and ending on September 20, 1929, for a total of $400,000,000 and odd; is that right?
Mr. WHITNEY. That is right.
Mr. PECORA. And if J. P. Morgan & Co. had seen fit to sell in the
open market the balance of those option warrants which it then held
to the number of 1,514,720-—
Mr. WHITNEY (interrupting). Two hundred.
Mr. PECORA (continuing). 1,514,200, we will say at a minimum
market price of $40, which was the lowest figure reached in the
2-months' period, those warrants would have brought over $68,000,000 in the open market, would they not, on a basis of $40 a
warrant ?
412
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. Well, 15 times 40 is $60,000,000. But, of course,.
Mr. Pecora, if you speculate what might have been—if we had sold
the holdings that we turned in to United in January 1929 without
forming United it would have been a profit to us of something like
$58,000,000, without having to form United at all. But we did
not do that, and we did not sell the warrants. We might have
done a lot of things.
Mr. PECORA. Well, it was simply in the exercise of your own
judgment that you did not sell more than 200,000 of those option
warrants in the summer of 1929, was it not ?
Mr. WHITNEY. SO was it in the exercise of our own judgment
that we formed the United Corporation and did not hold the stocks
and sell them. I mean, if we begin speculating about what might
have been—if we had had better or worse judgment in the disposition of our assets what might have happened, my supposition is just
us real as yours. If you want to take the high price of the year
I think undoubtedly if you could have sold 1,514,200 warrants in
addition to the 200,000 we sold at a very substantial price, and if the
market had held, that undoubtedly by mere arithmetic, is the amount
of dollars that would have flowed from the transaction.
Mr. PECORA. What were the securities that J. P. Morgan & Co.
turned in to the United Corporation in January 1929 in return for a
certain number of its shares and option warrants ?
Mr. WHITNEY: We turned in 350,957 common shares of Mohawk
Hudson Power Corporation, 62,360 shares of Mohawk Hudson Power
Corporation second preferred stock, 124,740 option warrants of the
Mohawk Hudson Power Corporation; we turned in 130,565 shares of
the common stock of the United Gas Improvement Co., and 59,500
shares of the common stock of the Public Service Corporation of
New Jersey. Plus $700,000, approximately $700,000. To bring the
total
Mr. PECORA. $700,000 in cash?
Mr. WHITNEY. In cash. That $700,000 was the difference between
the stipulated prices and $50,000,000. So that there was the stated
value that was taken up on the United Corporation books of these
securities with the $700,000 that was placed at $50,000,000.
Senator COUZENS. Where did you get these shares, Mr. Whitney?
Mr. WHITNEY. What is that?
Senator COUZENS. Where did you get all these shares?
Mr. WHITNEY. Well, Senator Couzens, we got them various places.
I will be very glad to tell you.
Senator COUZENS. I asked that question primarily because I understood the Morgan house did not usually deal in common stock.
Mr. WHITNEY. Well, if I may, I would very much like to tell you
that story. If I may ?
Senator COUZENS. If it does not interfere with counsel.
Mr. PECORA. NO, sir.
Mr. WHITNEY. For a
great many years Drexel & Co., our Philadelphia house, had been bankers for and had been associated in
various ways with the United Gas Improvement Co. and the Public
Service Corporation of • New Jersey, and they had held shares—not
very large amounts, but shares in these companies for many years—I mean for several years. J. P. Morgan & Co., our New York firm*
STOCK EXCHANGE PRACTICES
413
as contrasted with the Philadelphia firm, purchased U.G.I, stock
and Public Service Corporation of New Jersey common stock during the year 1928, which was the result of some 2 years of consideration by us as to whether or not we wanted to enter in any way into
the public-utility field, because for some reason or other for many
years our New York office had not been associated with publicutility financing in any way.
Going back 50 years the senior Mr. Morgan had been one of Mr.
Thomas A. Edison's original associates in the building of what is
now known as the Pearl Street Station in New York City, which
is the original Edison plant. But since that time we had had very
little, if anything, to do with public-utility financing.
But from 1926 we gave a great deal of consideration to it, and
in the winter of 1928 we decided in New York that it would be
a perfectly responsible and practical thing for us to do to buy
certain public-utility stocks in the belief that they were a good
investment for our own portfolio, and we did buy approximately
81,000 shares of XJ.G.I. and about 25,000 shares of Public Service
Corporation. That was in the spring from March, say, to the first
part of June, in 1928.
In the summer of 1928 the executive officers of the General Electric Co. approached us stating that they had decided that it would
be in their best interest to dispose of their holdings of the Mohawk
Hudson common and preferred stock and the warrants which they
had held. That being the only public utility operating company
stock that the General Electric Co. still held, having, you remember,
disposed of their holdings in other operating companies to Electric
Bond & Share some years ago. The discussions with the General
Electric Co. started in June 1928, as I say, at which time the common stock was selling at about 40. Absence from town and various
other things carried those discussions along, and there was a final
definite arrangement for us to purchase their holdings of Mohawk
Hudson—these shares which I have mentioned—on December 5.
And that is the way that I identify the time that the formation of
the United first came to be definitely considered. Because it was
obvious to us that it would not be prudent banking for us to make
an additional investment in public utility operating companies to
the amount of approximately twenty-two or twenty-three million
dollars which the purchase of Mohawk Hudson involved. So after
this definite arrangement between ourselves and the General Electric, the formation of the United Corporation followed right behind that, and our contract called upon us to make payment during
January. And we turned in to United Corporation these securities
at cost to us, receiving in exchange in partial consideration for the
securities received, the United preference and common stock.
Senator COXTZENS. YOU say you turned them in at cost to you ?
Mr. WHITNEY. Exactly.
Senator COUZENS. Had you received any carrying charges ?
Mr. WHITNEY. NO. The arrangement we made with the General
Electric Co. was interest from June, the date we first began talking
about that. That was part of our contract entered on December 5.
So we turned the whole contract bodily over to the United and they
paid that same interest charge. After the formation of the United
414
STOCK EXCHANGE PRACTICES
we turned them over at an absolute net figure without any commissions or any consideration—whatever there was.
Senator COUZENS. When you started in with this did you have a
map before you to lay out a program of the extent to which you
would invest in public utilities ?
Mr. WHITNEY. Well, when we were giving consideration in our
office in New York as to the question of purchasing public utilities
at all it was a very natural thing that we should consider first the
companies with which our Philadelphia office had been associated
for a long time. That was even more brought to the front by the
fact that Bonbright & Co., who were very much interested in American Superpower, and who had been among those with whom we had
discussed the matter for the 2 years I referred to—they also had a
very large interest in the Public Service Corporation of New Jersey, and also a very substantial holding in the United Gas Improvement. So not only our historical, traditional connection was
with these two companies, but also the fact that Bonbright, with
whom we were associated, were interested in them. And upstate
New York came in through the General Electric.
Senator COUZENS. Did you later accumulate some other stocks?
As I remember, one of the stocks on one of the lists was Commonwealth & Southern, was it not ?
Mr. WHITNEY. Well, that Commonwealth & Southern was later.
A very small amount. That was thrc/ugh this Allied Power & Light
Co., which had other holdings and had other interest at that time.
Certain of the constituent parts, underlying properties, like the
Commonwealth Edison, the Penn Ohio, and the Southeastern Power
& Light and the Alabama Power, which were later merged into
the Commonwealth & Southern. And we got our interest—the
United—through an investment we had in Allied Power & Light ?
which was merged in Commonwealth & Southern, resulting in the
United getting that interest.
Senator COUZENS. Who were controlling the Commonwealth &
Southern at the time you got in it ?
Mr. WHITNEY. Well, Bonbright had been very much interested
in that particular corporation. Mr. B. C. Cobb, who was a director
of the United, was president then of many of these constituent
parts. And a large holding of Commonwealth & Southern—what
is now Commonwealth & Southern—is held through the American
Superpower Co., with which we had no connection whatever except
that Superpower is also a large stockholder in the United. And
J. P. Morgan & Co. as such had no connection whatever in the
American Superpower.
Senator COUZENS. What field does the Commonwealth & Southern
cover generally?
Mr. WHITNEY. Well, I am not very good at maps. But it is into
Michigan, as you know, outside of Detroit. And then it runs down
more or less from there southeast, going through Ohio, and then
it goes down, of course, through Alabama, and then it goes down
into Georgia, and the southeastern part of the United States. There
is the Georgia Power & Light Co., the Alabama Power & Light Co.y
the Southeastern Power & Light Co. I am speaking from memory.
Senator COUZENS. Yes.
STOCK EXCHANGE PRACTICES
415
Mr. WHITNEY. But that is generally scattered do^vn 'through
there.
Senator COTJZENS. They have had a very effective political organization, I understand, in Michigan for some years, and I was just
curious to know what the facts were.
Mr. WHITNEY. Well, I know very little about the Commonwealth
& Southern, We have never had anything to do with it. Never been
on the board. And, as I said, the United Corporation has got a
5-percent interest which came about through the merger of another
property that they acquired into Commonwealth & Southern. But
our firm, J. P. Morgan & Co., has never been in any way associated
with Commonwealth & Southern.
Senator COUZENS. Thank you, Mr. Whitney.
Senator REYNOLDS. Mr. Pecora, may I ask Mr. Whitney a question
in regard to my interpretation of his answer this morning to a question ? Mr. Whitney, did I understand you to say this morning as a
result of an inquiry by Mr. Pecora, I believe it was, that none of the
people whose names were on those preferred lists were public officials ?
Mr. WHITNEY. YOU did, Senator Eeynolds. And my attention has
been called during the luncheon interval that in one instance, or at
least one exception, I was mistaken. But, frankly, I have always
found it very hard, having been in business with him for so many
years, to think of him in public life, to distinguish that from his
being a partner of mine.
Senator EEYNOLDS. And whom have you in mind ?
Mr. WHITNEY. Mr. Dwight W. Morrow.
Senator REYNOLDS. Mr. Dwight W. Morrow. Now I should like
to ask you, Mr. Whitney, in further pursuance of that particular part
of this suoject if Mr. Charles Dawes was not a public official? And
I will endeavor to refresh your recollection at this time by making
mention of the fact that he was connected with the Reconstruction
Finance Corporation.
Mr. WHITNEY. Well, Senator Reynolds, not at the time. These
lists all go back to 1929 or before.
Senator REYNOLDS. Yes.
Mr. WHITNEY. And the Reconstruction Finance Corporation did
not come into being, did it, until about a year and a half ago ?
Senator REYNOLDS. But, anyway, Mr. Charles G. Dawes, later of
the Reconstruction Finance Corporation, was listed on your preferred carrying?
Mr. WHITNEY. Well, now that you raise the question, I do not
know whether he was Ambassador to Great Britain at that time or
not. But Mr. Dawes long before that had been president of the
Central Trust Co. of Illinois.
Senator REYNOLDS. Yes; but at that time was he not Ambassador
to the Court of St. James ?
Mr. WHITNEY. Well, I do not know.
Senator REYNOLDS. YOU do not know ?
Mr. WHITNEY. N O ; I say I do not know. I just assume it is a
fact.
Senator REYNOLDS. I believe you just stated that Mr. Dwight W.
Morrow was on your preferred list ?
175541—33—PT. 2
8
416
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. I do not think I said " preferred list", Senator
Reynolds. I said he was on these lists.
Senator REYNOLDS. Was he one of those who was favored ?
Mr. WHITNEY. Mr. Morrow, as you will remember undoubtedly,
retired from the firm of J. P. Morgan & Co. on September 30, 1927.
He had been a partner in the firm since, I think, July 1914; and as
I say, I think I did make that slip this morning, because it is very
hard for any of us to think of him as anything other than a partner
of ours.
Senator REYNOLDS. At that time was he Ambassador to Mexico ?
Mr. WHITNEY. Yes, sir.
Senator REYNOLDS. He was at that time?
Mr. WHITNEY. Yes, sir.
Senator REYNOLDS. YOU would, of course,
consider Mr. Morrow as
being a public official, in view of the fact that he was representing
this Government?
Mr. WHITNEY. Yes.
Senator REYNOLDS.
Mr. Adams, when he was about to enter the
Cabinet, as a matter of fact, or just about the time that considerable
talk was had concerning his entering the Cabinet, bought some of
this, did he not ?
Mr. WHITNEY. He did buy some, certainly; and you will remember
that the other day Mr. Pecora introduced a letter written by Mr.
Adams to his son-in-law in which he made a rather cryptic remark
which I was asked to guess if I knew what it was. So, evidently,
the facts are that he had accepted the invitation to subsequently
become a Cabinet officer. But my statement still stands, that at the
time he was offered it he was not a public official. He was the fatherin-law of one of the partners.
Senator REYNOLDS. At the time that this offer was made to him,
however, there was considerable speculation in reference to his
becoming a member of the Cabinet, was there not?
Mr. WHITNEY. I do not doubt it, but I never happened to see it.
I remember I heard of the fact that he was going to become a Cabinet
officer somewhere around the 28th of February.
Senator REYNOLDS. Mr. Nutt, who was treasurer of the Republican
National Committee, I believe, was on that list?
Mr. WHITNEY. Yes; he was on the Alleghany list.
Senator REYNOLDS. And Mr. Raskob likewise was on the list?
Mr. WHITNEY. He was.
Senator REYNOLDS. He
was then directing the Democratic Na-
tional Committee?
Mr. WHITNEY. Yes,
Senator REYNOLDS.
sir.
Would you not say, and are you not in accord
with me in the opinion, that Mr. Nutt, who was treasurer of the
National Republican Party, and Mr. Raskob, who was chairman of
the National Democratic Party, men who were actively engaged in
the forming of platforms and in the molding of public opinion—
would you not say, Mr. Whitney, that they most assuredly should
be considered as semipublic officials?
Mr. WHITNEY. I would not attempt to argue that with you, Senator. But the statement I made was " held public office." Of course,
it is true that Mr. Raskob was chairman of the National Democratic
STOCK EXCHANGE PRACTICES
417
Party—had been during the campaign that closed in the fall of 1928—
and I think you will also agree with me that for many years before
that he had not been identified in any way with political life.
Senator REYNOLDS. Yes.
Mr. WHITNEY. Mr. Nutt, frankly, as I testified the other day—I
had not realized that he was treasurer of the Republican National
Committee; and while I cannot pretend to say that people holding
those jobs have not got something to do with public life, my statement did not have to do with that, but as to whether they held public
office. Neither of them, I can only again assure you, Senator Reynolds, were included on this list because of their what you call semipublic character, but because they were both men of substance, both
men with whom we had had business relations Tfor many years, and
had no connection with political life in any w ay; and, as a matter
of fact, my recollection is that Mr. Nutt was on that particular list
at the suggestion of the Van Sweringens, with whom we had been
associated since the beginning of their real-estate development in the
city of Cleveland. Mr. Raskob, of course, was our own particular
friend during our association with General Motors when he had
been one of the people, back in 1920, representing the Du Pont interests who were well known to have a very substantial holding in General Motors and who invited us to come on the board. That was our
first acquaintance with Mr. Raskob.
Senator REYNOLDS. Mr. Coolidge was a member of the National
Transportation Committee, was he not?
Mr. WHITNEY. YOU mean, just before his death?
Senator REYNOLDS. Yes.
Mr. WHITNEY. Of course there was no suchf thing in 1929.
Senator REYNOLDS. And Mr. Olds was on some committee, was he
not—the Reparations Committee, Assistant Secretary of State?
Mr. WHITNEY. He had been. He was not at that time. He was
a partner at that time and personal representative in Paris of the
legal firm of Sullivan & Cromwell.
Senator REYNOLDS. Mr. Hilles was a member of the New York
National Committee, was he not?
Mr. WHITNEY. I think so, probably. I do not remember actually
as of that date.
Senator REYNOLDS. Thank you, Mr. Pecora.
Mr. WHITNEY. May I also say that Mr. Hilles, as you know, was
in the insurance business in New York and was a representative
of a certain company with which we had done business.
Senator REYNOLDS. One other thing, with your indulgence. General Pershing got in on this proposition, did he not?
Mr. WHITNEY. YOU mean by that, Senator Reynolds, that he was
on the list ?
Senator REYNOLDS. Well, he was one of those lucky fellows, was
he not?
Mr. WHITNEY. DO you want to hear the story about why General
Pershing happened to be on the list ?
Senator REYNOLDS. I should thing it would prove very interesting.
Mr. WHITNEY. Well, during the war, when General Pershing was
in charge of the American troops, there happened to be several of
our partners who became very close to him, notably Mr. Dwight W.
418
STOCK EXCHANGE PEACTICES
Morrow, who was connected with the Maritime Transport, and Mr.
Stetinius, who, if I remember correctly, was Assistant Secretary of
War during the war time. They in that way became very intimate
friends of General Pershing, aside from their official duties. After
the war General Pershirig asked one or either or both of those twogentlemen if they would assist him with his investments; that he did
not pretend to know very much about business. And so, after the
war was over, if my recollection is right, General Pershing deposited
his securities with us land asked us generally to look out for them.
As a result of which he was given the opportunity to participate
with us in these various underwritings, which he was fully capable
of doing, and fulfilled all the qualifications that I have attempted to
outline this morning.
Senator REYNOLDS. Mr. Whitney, are there any judges in the State
of Pennsylvania who happen to be on that list?
Mr. WHITNEY. I read so in the newspapers; yes.
Senator REYNOLDS. I S that true ?
Mr. WHITNEY. Well, I assume it must be true, because I do not
suppose they would have said so otherwise. I do not happen to
know their names.
Senator REYNOLDS. DO you happen to know their names?
Mr. WHITNEY. NO.
Senator REYNOLDS. DO
you know whether or not they were presiding on the bench or the benches, respectively, at the time that those
offers were made to them?
Mr. WHITNEY. N O ; I really don't, Senator Reynolds. I understand, as I say, from the newspapers—that is where I got my information first, and I am not questioning that there are judges; I justdo not know. But if there were, it was done through our Philadelphia office. I do know that those lists were made up by Drexel
on exactly the same basis as we made them up in New York, but I
am not familiar with the individuals who comprise the list.
Senator REYNOLDS. Thank you.
Senator COSTIGAN. Are you impressed, as Senator Reynolds appears to be, by the fact that these various gentlemen were prominent
and in positions to influence and perhaps shape public opinion ?
Mr. WHITNEY. Senator Costigan, I would never attempt to deny
that many of these people are prominent; but, on the other hand, a
man must be of some prominence or substance to be able to qualify
as a man who is in a position to underwrite these securities. I cannot be impressed, as Senator Reynolds apparently is, by the fact
that their inclusion in these lists involves a quid pro quo, because I
believe so thoroughly that they were taking a perfectly legitimate
business risk with their own money, knowing exactly what it involved. They happened to have the opportunity, after these particular transactions, to make money; but that was a part of the game
of underwriting, and that they took them perfectly definitely for
that reason. Therefore I cannot be impressed by the inference that
is drawn because these men happened to become or to have been
prominent.
Senator REYNOLDS. Just one other question, please, Mr. Whitney.
You just stated to Senator Costigan that these men to whom you
made these offers to purchase this stock at $20 a share were making
STOCK EXCHANGE PKACTICES
419
an investment and at the same time, of course, taking a risk, because, regardless of where you place your money, you are taking
some sort of a chance. Well, now, how can that be when it has
developed in the course of this investigation, according to your
own testimony, that at the time the stock was offered to these
respective individuals at $20 a share it was then selling on the market at $36 or $37? Could not they have bought the stock the very
day that you made this offer at $20 a share and on that same identical day made disposition of it at $36 a share, thereby creating for
themselves $16 profit upon each and every share; and that being
the case
Mr. WHITNEY. Senator Reynolds, may I answer it this way, that
in the first place I do not think that it has been shown by the testimony that when these gentlemen were offered and accepted this
Alleghany stock at $20 it was selling at $35 or $36.
Senator EEYNOLDS. What was it selling at at that time ?
Mr. WHITNEY. When the majority of them were offered this stock
there was no quotation. I t has been shown by two letters which
were dated on February 1—and, mind you, after all the investigating, those are the only two letters that Mr. Pecora's investigators have produced—showing on the date which has been shown
that there was a very narrow market on a when-issued basis on
the New York Stock Exchange. So, technically to answer your
question, if a few of them had been very quick on their feet, they
might have been able to sell the stock at the price you mention.
Senator REYNOLDS. At $35 ?
Mr. WHITNEY. Yes.
Senator EEYNOLDS. On the day
Mr. WHITNEY. The same day
you offered it at $20?
the 500,000—that is not what I
said. We did not offer it on the same day. We had offered it
prior to that.
Senator EEYNOLDS. At the time you offered that stock at $20 a
share was it quoted on the market?
Mr. WHITNEY. NO, sir. The first quotation was on February 1,
Senator EEYNOLDS. And when did you offer this?
Mr. WHITNEY. Prior to that.
Senator EEYNOLDS. But at the same time when this offer was made
you told them that you were selling it to them for much less than
the price it was worth at that time ?
Mr. WHITNEY. We did in one letter, yes; to a man who happened
to be away. I am meaning to answer your question directly, but I
think perhaps I can get my real answer over to you better indirectly.
J. P. Slorgan & Co. had undertaken to purchase from the Allegheny
Corporation 1,250,000 shares of this common stock at $20 a share,
which involved the commitment of $25,000,000. As I testified the
other day, that would have been an improper amount of common
stock to hold, for a banking firm with its obligations to its depositors. We, therefore, when we were arranging this transaction,
determined not to hold that amount as an asset of a banking firm.
We arranged with the Guaranty Co. to buy 500,000 shares at 24 less 4.
At the same time we determined to invite a certain number of individuals whom we considered competent, both from their knowledge
of the situation and their financial capacity, to join with us in the
underwriting.
420
STOCK EXCHANGE
PRACTICES
In any merchandising of securities we have to determine the price.
Having determined the price to one man or to the Guaranty Co., or
whoever we determined the price at $20, you cannot go ahead and
sell securities fluctuating your price every day, dependent upon the
market. But I did not seem to be able to make it clear to the committee that this was a transaction with three parts to it. The sale of
the common stock, or the underwriting of the common stock, approximating 25 million, was just as much a part of the whole transaction
as the sale of the 35 million of bonds or the sale of 25 million of preferred stock. When we determined upon the policy that has been
testified to here by me many times, that we were going to ask others
to join with us in the underwriting of that 25 million of common
stock, for reasons of ordinary prudence, for traditional reasons that
that is the proper way, in our judgment, to sell common stocks, we
determined that $20 was a fair value at which we bought it. You
must remember that we are dealing at arm's length with the organizers of this company. The Yan Sweringens had turned in and received in exchange for securities two and a quarter million dollars'
worth of shares of common stock. They had a very lively interest in
what actual cash consideration was to come in on the same level with
them. So this was not a trade with ourselves in any way; it was a
trade at arm's length with the other people of the company, and that
was determined to be a fair price at $20. We determined to get
underwriters on the same floor with us at the price we paid for it,
who should take the same risk. Obviously when we determined that
that was the proper price, the mere accident of an excited market
and a speculative running up of prices did not come into the situation at all. That is the point that I am afraid I am unable to make.
The Senators understand, and it is the fact, that this was a plan, a
definite procedure of underwriting it, and naturally the price was
fixed as a part of the plan, and the accident of market prices did not
affect our conduct at all.
Senator COTTZENS. May I ask this: Is it not usual that when you
solicit underwriters you generally solicit dealers and banks and
investment houses?
Mr. WHITNEY. It would depend, Senator Couzens, upon the character of the underwriting. If it was the underwriting of an investment security; yes. But, as I think I said the other day, we do
not think that that is the way to sell common stocks. If it had
been a convertible bond or preferred stock there is a certain transaction—I think Mr. Pecora mentioned General Motors preferred, that
will probably come up here. We underwrote the preferred stock,
but we formed a distributing syndicate. This is probably more
usual in our transactions, very much more usual.
Senator COUZENS. That is what I understand; but I was wondering why your dealers to whom you allotted these underwritings
would not have been delighted to have gotten these shares at $20.
Mr. WHITNEY. I do not doubt they would, sir; but the dealers,
by the same token as ourselves, would'not have wished to hold them
for their own investment. They would again have had to find ultimate buyers, which would involve the whole problem of distribution to the general public, which we were trying to protect against.
Senator BARKLEY. HOW many were distributing these shades?
STOCK EXCHANGE PEACTICES
421
Mr. WHITNEY. I could not answer that Senator Barkley. These
things sort of grow. I should have thought there had been discussion enough about the Alleghany, certainly, for
Senator BARKLEY. I am speaking of this. After you got possession of the million and a quarter which you were to distribute, over
what period of time did you engage in this personally, the writing,
solicitation, or allotment, whichever it may have been, and the calling of your friends' attention to the fact that you had this stock?
How many days would you say?
Mr. WHITNEY. Oh, it would cover a couple of hundred people,
such as there were in the Alleghany list of 227. I should think
that could be pretty much covered in a couple of days. The contract
with the Van Sweringens was the 28th of January. The contract
called for payment on the 15th of February. The theory of the
trade, in other words, would probably be drawn, and the lawyers
would put it into contractual form. I should guess, although I
cannot prove it, that we worked on this list for 2 or 3 days before
February.
Senator BARKLEY. TOU have testified, I think, that this value was
fixed and you started in to distribute this stock before it was actually listed?
Mr. WHITNEY. Yes, sir. That was the fact.
Senator BARKLEY. DO you remember on what date it was listed?
Have you testified to that ?
Mr. WHITNEY. The when-issued quotation was on February 1.
It was actually listed on February 15, the date it was paid for.
Senator BARKLEY. SO you had begun the process of distributing
this stock prior to its listing on the stock exchange, but you had
not finished it when the stock went up or when it was listed and
went up as the result ?
Mr. WHITNEY. Of course, these contracts we had with these individuals did not call for payment from them until February 15,
because we had no contract to take up. The underwriting did not
call for any payment until the 15th of February. Our contract with
these individuals called for payment the same date that we called
on them. The point—and I think this may answer your question,
Senator Barkley—is that in the construction or set-up of the Alleghany Corporation, it was determined through negotiation with
the Messrs. Van Sweringen that $20 was a fair price for the
Alleghan}^ Corporation to sell us the common stock of that corporation. That was what the other owners, the people who then had
two and a quarter million shares, determined was fair. We had
decided in these negotiations, naturally, as fairly prudent people,
what we were going to do with these securities which we were
buying. We knew that we could not sell 35 million of bonds through
our own endeavors. It was arranged with the Guaranty Co. to sell
the preferred stock, and, of course, we had also made arrangements
among ourselves as to what we were going to do with the common
stock; and the way we decided to do was to sell 500,000 shares, and
did arrange for the Guaranty Cq. to sell and secure underwritings
on the same basis with us. The price of $20 which we were going
to offer to these other individuals, I can say without fear of contradiction that that price was set long before, substantially before
422
STOCK EXCHANGE
PRACTICES
^February? 1; but when we made one price to one fellow, that
determined it for all the others.
Senator BARKLEY. Yes; I realize that. Is there any significance
tp be attached to the fact that you wrote this letter on February 1
referring to the fact that the stock was then selling for $35 or $36,
which happened to be the first date upon which it was listed or
opened up for public sale?
Mr. WHITNEY. I suppose the significance is that the gentleman
to whom that letter was written was away from New York, and I
assume, although I do not know just of my own knowledge, that we
had tried to reach him on the telephone and found he was not there.
He was on the list, and therefore at the price which had been fixed
for the others. So my partner, when he wrote him the letter, gave
him that as a piece of information when he knew he was not going
to get the letter for some time. I do not see that it has any other
significance, except stating a fact which, as you will remember, he
qualified by saying, " It doesn't mean anything."
Senator BARKLEY. We may assume that if this stock had not been
listed until the 2d day of February, that sentence would not have
been in that letter.
Mr. WHITNEY. YOU can assume that safely.
Mr. PECORA. IS it not a fact that trading in this Alleghany Corporation common stock commenced on a when-issued basis on the
New York Stock Exchange on February 1, and continued on that
basis daily thereafter until the stock was actually listed, on about
February 15?
Mr. WHITNEY. Certainly. I so testified the other day.
Mr. PECORA. And those quotations were made public from day to
day, were they not?
Mr. WHITNEY. Quite.
Mr. PECORA. And the tradings on the opening day, February 1, on
the New York Stock Exchange, ranged from about 32 to 37, did
they not?
Mr. WHITNEY. YOU have got your order just reversed. They
ranged from 37 to 32, and there was a total number of sales of 14,000
shares during the course of that day.
Mr. PECORA. Can you produce a single letter or copy of a letter
, from your files showing that any individual was invited to subscribe
for the shares of the Alleghany Co. at $20 per share prior to February 1, 1929?
Mr. WHITNEY. YOU asked me that question the other day and I
answered then that I could not, and I think the answer is fairly
obvious why I cannot—because if we had been talking to people on
, the telephone and found we were unable to reach them, obviously we
-would not get around to report to them until February 1. If we had
j covered the others by telephonic communication, of course, there
would have been no occasion for a letter.
Mr. PECORA. When you were examined last week before this committee with regard to these offers or invitations extended to these
persons whose names appear on the list in evidence to subscribe for
Alleghany cqmmon stock at $20 a share, did you at any time in the
course of your testimony last week before this committee refer to
rthose invitations as part of the underwriting game?
STOCK EXCHANGE PRACTICES
42$
Mr. WHITNEY. I think very probably I did not, for the simple
reason that last week when I was testifying I was not wise enough
to appreciate the impression that would be given about these lists,
and therefore as I have been given an opportunity to explain them
further I have tried to go into more details as to what they really
were.
Mr. PECORA. When did you first become wise to that impression ?
Mr. WHITNEY. When I first read in the newspapers about a preferred list.
Mr. PECORA. Well, you first read in the newspapers about a pre*
ferred list before you left the stand on last Friday, did you not?
Mr. WHITNEY. I do not remember.
Mr. PECORA. YOU know that the first testimony that you gave in
regard to the Alleghany Corporation stock was on Wednesday of
last week, was it not ?
Mr. WHITNEY. Yes; certainly.
Mr. PECORA. And you appeared before this committee not only on
that day and on Thursday but on Friday of last week and gave testimony on each of those days, did you not?
Mr. WHITNEY. That is quite true—not on Friday; ekcuse me. I
was not on the stand.
Mr. PECORA. YOU were in attendance on Friday ?
Mr. WHITNEY. Yes.
Senator COSTIGAN. Mr.
Whitney, in view of your emphasis on the
business aspects of the transaction, why was the expression used in
one of the letters, in substance, " We want you to know we are thinks
ing of you " ?
Mr. WHITNEY. Senator Costigan, we would have had to think of
him to put him on the list, would we not ?
Mr. PECORA. Can you produce a single letter or copy of a letter
from your files in which you invited any of the gentlemen whose
names appear on the Alleghany Corporation stock list who are asked
in the letter to become part of an underwriting syndicate for that
Alleghany common stock?
Mr. WHITNEY. Mr. Pecora, you have asked me that question a
great many times before, and each time I have told you that I have
not those files here with me, and I have not examined them for that
purpose.
Mr. PECORA. AS a matter of fact
Mr. WHITNEY. I have
Mr. PECORA. Pardon me.
Mr. WHITNEY. I have tried to explain the nature of this transaction and the others. I have not said we have not called it an underwriting. It was not in the form of an underwriting. It was a direct
purchase, as you know. I am explaining, or attempting to explain,
the purposes and the theories of these financial transactions to exemplify what I was trying to convey, and have used the word " underwriting." I have referred to the fact that it is a customary thing
to have individuals in various types of financing as underwriters.
There has never been any contention on my part that this transaction
or any of the others took the form of what is legally meant by an
underwriting. They have all been in the form of direct purchases.
424
STOCK EXCHANGE PRACTICES
Mr. PECORA. Then these transactions between your firm and these
gentlemen on these lists were not transactions that were part of an
underwriting arrangement, were they?
Mr. WHITNEY. I just said they were not, Mr. Pecora.
Mr. PECORA. I wanted to make that clear, because this afternoon
and this morning in your testimony for the first time you brought in
references to an underwriting game in connection with those transactions.
Mr. WHITNEY. Mr. Pecora, I think I can clear your mind up on
that. These transactions
Mr. PECORA. My mind does not need clearing on that.
Mr. WHITNEY. They were perfectly frankly in the form of a direct sale by J. P. Morgan & Co. to these various individuals.
Mr. PECORA. That is something entirely different from an underwriting proposition, is it not?
Mr. WHITNEY. In form, in legal form; yes.
Mr. PECORA. And in substance it is different from an underwriting proposition, is it not?
Mr. WHITNEY. Excuse me. It is different in a technical legal
form, from the point of view of J. P. Morgan & Co., who made the
offer. I understand that this line of questioning is to bring out why
all this was done. It was to divide our risk. We had a definite commitment to invest in this instance $25,000,000. I stated that that
would not be a prudent banking investment for any individual firm
to hold permanently. Therefore we decided it was prudent to and
determined to distribute that risk in various directions in what
would in effect be an underwriting of our risk. The form of it was
never contended to be anything but a straight sale by J. P. Morgan
& Co. to those individuals; but it certainly has, in the parlance of
financial people, the elements of an underwriting or distribution of
risk on our part. In other words, we underwrote through those sales
a portion of our risk.
Mr. PECORA. NOW, Mr. Whitney, a purchase-and-sale transaction
is one thing, and an underwriting agreement is another thing; isn't
that so?
Mr. WHITNEY. Certainly.
Mr. PECORA. NOW, what were those transactions between your
firm and those various persons—a purchase-and-sale transaction or
an underwriting agreement?
Mr. WHITNEY. They were perfectly definitely purchase-and-sale
transactions. But they had the same result as far as J. P. Morgan
& Co. were concerned as an underwriting agreement would have.
Mr. PECORA. NOW, a number of these purchase-and-sale transactions with respect to Alleghany Corporation common stock were
had with certain gentlemen in their representative capacity as
trustees of Phillips Exeter Academy, were they not ?
Mr. WHITNEY. Well, I have not the list in front of me.
Mr. PECORA. And also with gentlemen who acted as trustees in
these transactions for Andover Academy?
Mr. WHITNEY. Again I must say that I have not the list in front
of me.
Mr. PECORA. YOU did not undertake to ask the trustees of educational institutions to join J. P. Morgan & Co. in underwriting a
common-stock issue, did you?
STOCK EXCHANGE PRACTICES
425
Mr. WHITNEY. Who were the trustees, if you happen to have their
names before you ?
Mr. PECORA. Well, with regard to the United Corporation you will
find that in the case of the trustees for the benefit ot Phillips Exeter
Academy the names of the trustees are not given in the list.
Mr. WHITNEY. YOU are talking about the United Corporation
now ?
Mr. PECORA. Yes.
Mr. WHITNEY. Your
first question was about the Alleghany Corporation.
Mr. PECORA. The answer to question 24.
Mr. WHITNEY. The United Corporation is quite a different thing
from the Alleghany Corporation. There was preferred stock with
a definite investment flavor to it. As I testified this morning, what
we sold to this list in the case of the United Corporation was one
share of preference stock backed by $3 dividend, and one share of
common stock, so that the purchaser of a unit got a 4 percent return
on his investment, exclusive of any dividends or rights he might
have had on the common stock. And he has had that 4 percent
return from that day to this, as well as certain dividends and rights
in the common stock. And if the terms pf the trust permitted investments of that kind, I know of no reason why those trustees should
not have purchased it.
Mr. PECORA. NOW, Mr. Whitney, to get back to the United Corporation: At the time when there was a digression to transactions
in the stock of the Alleghany Corporation common stock you had
told the committee that in January of 1929 J. P. Morgan & Co.
obtained 800,000 shares of common stock of the United Corporation,
600,000 shares of the $3 preference stock of the United Corporation,
and 714,200 option warrants in return for three hundred and fifty
thousand and odd shares of the Mohawk Hudson Power Corporation
common stock, sixty-two thousand and odd shares of the Mohawk Hudson Power Corporation second preferred stock, 124,740 warrants for
Mohawk Hudson Power Corporation, one hundred and thirty thousand and odd shares of United Gas Improvement Co. common stock.
59,500 shares of Public Service of New Jersey common stock, and
cash in the amount of $700,801.10. I believe you started to tell the
committee in answer to some questions put to you by Senator
Couzens something about the method or the negotiations by which
J. P. Morgan &> Co, acquired the Mohawk Hudson Power Corporation common stock that entered into this exchange with the United
Corporation. Do you recall that?
Mr. WHITNEY. I thought I finished it.
Mr. PECORA. Well, now, you said that in June of 1928 there was
some discussion between J. P. Morgan & Co. and the General Electric Co., which then owned 350,000-odd shares of the Mohawk Hudson Power Corporation stock, about J. P. Morgan & Co. buying
that stock or acquiring it from the General Electric Co, Is that
correct ?
Mr. WHITNEY. It is. My idea
Mr. PECORA (interposing). Now, were those negotiations first undertaken in June of 1928 ?
Mr. WHITNEY, With us ?
426
STOCK EXCHANGE PEACTICES
Mr. PECORA. Yes, sir.
Mr. WHITNEY. Why, yes.
Mr. PECORA. And
Mr. WHITNEY (continuing).
That is, we gave you a memorandum
of it, which you no doubt have here.
Mr. PECORA. Yes. The memorandum I have before me bears the
caption "Answer to no. 32," and that was question 32 that I submitted to your firm prior to these hearings,
Mr. WHITNEY. And the question was " Date and price of Mohawk
Hudson stock purchased from General Electric Co., market value
at the time."
Mr. PECORA. And your answer, in part, reads as follows, that isy
the, answer of your firm to this question 32:
In June of 1928 the General Electric Co. offered an oral sale to J. P. Morgan
& Co. of the entire block of Mohawk Hudson securities then owned by the
General Electric Co. and the General Electric Employees Securities Co., setting
a price of $40 a share for the common, being approximately the market price
at the time, and the mean of high and low prices in 1928 up to that time.
Now, upon whose initiative were those conversations had with
respect to the purchase of this stock? Was it J. P. Morgan & Co.
or the General Electric Co.?
Mr. WHITNEY. It is my recollection that the first conversation in
which those discussions were initiated, were initiated by Mr. Gerard
Swope, the president of the General Electric Co., calling upon two
partners of J. P. Morgan & Co. and raising the question, making the
oral offer referred to here.
Mr. PECORA. Were you one of those two partners ?
Mr. WHITNEY. I was.
Mr. PECORA. Did J. P.
Morgan & Co. or any of its partners hold
that offer under consideration for any period of time ?
Mr. WHITNEY. If you would continue to read this answer
Mr. PECORA (interposing). No. I am going to bring this all out?
but I want to supplement it and augment it by this examination.
Mr. WHITNEY. Why, certainly we considered it.
Mr. PECORA. Did you reach a decision prior to the fall of 1928?
Mr. WHITNEY. We did not.
Mr. PECORA. Were the negotiations resumed
Mr. WHITNEY. They were.
Mr. PECORA. Was any definite offer to sell
in the fall of 1928 ?
those securities of the
Mohawk Hudson Power Co. made to J. P. Morgan & Co. in the fall
of 1928 by the General Electric Co.?
Mr. WHITNEY. Different from the one made in June ?
Mr. PECORA. Yes, sir.
Mr. WHITNEY. NO. That was the offer we closed on.
Mr. PECORA. When did you close on that offer ?
Mr. WHITNEY. The offer was accepted and the agreement
was embodied in memorandum form dated December 5, 1928, setting the
price of the common stock at $40, plus interest at 5 percent from
June 1, 1928, to date of payment therefor; and the second preferred
stock at a price of $107 flat, and the option warrants at a price of
$20 flat, and that meant that these last two prices were approximately
the market prices at that time.
Mr. PECORA. There was no formal acceptance of this thing by
J. P. Morgan & Co. until December 5, 1928, was there ?
STOCK EXCHANGE PKACTICES
427
Mr. WHITNEY. N O ; that is the date.
Senator COUZENS. Might I ask a question of Mr. Whitney right
there?
Mr. PECORA. Certainly.
Senator COUZENS. Mr. Whitney, was there any limitation to the
Mohawk option warrants; any limitation of a period for them?
Mr. WHITNEY. I think not. I get two answers, Senator Couzens,
from associates here. One, that there was none, and the other, that
there were two kinds. I will have to check it. I think that is the
answer, that there were two kinds.
Senator COUZENS. One with terminating period and one indefinite ?
Mr. WHITNEY. Yes, sir. I know that when we came to form the
Niagara Hudson we had to take care of both kinds. Mr. LeBoeuf
tells me they were perpetual.
Senator COUZENS. All of them were perpetual ?
Mr. WHITNEY. All of the Mohawk Hudson were perpetual.
Mr. PECORA. NOW, Mr. Whitney, the offer which was accepted on
December 5, 1928, by your firm was the same offer that was made
originally in June of 1928 to your firm orally by the General Electric Co., wasn't it?
Mr. WHITNEY. Substantially; yes, Mr. Pecora. In that it was the
same offer as to the common stock. There had been no price fixed
as to the preferred or the warrants in June. And, as I just read to
you, the price on December 5 was set at the approximate market
as of that date.
Mr. PECORA. What was the approximate market on that date for
all these Mohawk Hudson Power Co. securities?
Mr. WHITNEY. The market value of those securities on December
5, 1928. was $26,683,975.
Mr. PECORA. And was that the same market value that those
securities had in June of 1928, when the offer was made first to you
by the General Electric Co. ?
Mr. WHITNEY. I t does not say that. But as that was more than
the final market price, I assume the market price on December 5—
well, it was above the contract price, above the price of 40, in other
words. I have not got that figure here. I know that we did not—
well, the price that the United Corporation paid was less than
$26,000,000,
Mr. PECORA. Let US not discuss the price that the United Corporation paid until we reach the United Corporation. I am still confining myself to the negotiations between your firm and the General
Electric Co. for the purchase by your firm of these securities of the
Mohawk Hudson Power Co. which the General Electric Co. then
owned.
Mr. WHITNEY. L think I can answer that in just a second.
Mr. PECORA. All right. Suppose, Mr. Whitney, in order, possibly,
to help you out I have your refer to your copy of your firm's answer
to my question 32 in our questionnaire. You will find at the bottom
of the first page of that answer the following statement
Mr. WHITNEY (interposing). It is here. Excuse me.
Mr. PECORA. The market value of those securities on January 10,
1929, was $35,533,260, and the purchase price as aforesaid being
$23,634,120.
428
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. SO that the answer to your question is that the
market price on December 5 was approximately $3,000,000 more than
the price on which the offer in June was based.
Mr. PECORA. Yes. And the purchase price, or rather the market
price, of those securities when the offer was originally made in June
of 1928, in oral form, was $23,600,000-odd.
Mr. WHITNEY. That is correct.
Mr. PECORA. And when your firm accepted the offer on December
5, 1928, the market value of those securities was $26,683,975,
wasn't it?
Mr. WHITNEY. That is correct.
Mr. PECORA. NOW, which was the price that J. P. Morgan & Co.
paid to the General Electric Co. for those securities ? The market
price as of December 5, 1928, or the market price as of the date in
June of 1928 when the offer in oral form was first made to you?
Mr. WHITNEY. The price paid by J. P. Morgan & Co. was $23,634,120j which is the price agreed to on December 5, based on the
offer made to us in June by the General Electric Co. And, obviously,
it took into consideration the size of the block and all other considerations. But the answer to your question is that the price paid
by J. P. Morgan & Co. and the United Corporation was the price
based upon the value set in June of 1928.
Mr. PECORA. NOW, in what form did J. P. Morgan & Co. on December 5, 1928, indicate to the General Electric Co. its acceptance of
this oral offer that you say was first made in June of 1928 ?
Mr. WHITNEY. What date?
Mr. PECORA. In what form?
Mr. WHITNEY. But as of what date ?
Mr. PECORA. December 5, 1928.
Mr. WHITNEY. By memorandum form, of which you have a photostatic copy.
Mr. PECORA. Can you
produce the original ?
Mr. DAVIS. NO. W e have not got it, Mr. Pecora.
Mr. PECORA. All right. Now, Mr. Whitney, I show you what purports to be a photostatic copy of a memorandum bearing date December 5, 1928. I ask you if that is a photostatic copy which your
office furnished to me at my request.
Mr. WHITNEY. Yes, sir.
Mr. PECORA. IS that the
written acceptance of the offer I have just
referred to?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. I offer it in
evidence and ask that it be spread on the
record.
Mr. WHITNEY. But without the pencil notations.
Mr. PECORA. Yes, which were not a part of the memorandum.
The CHAIRMAN. It will be received and spread on the record.
(The paper referred to was ordered spread on the record, and was
marked "Committee Exhibit No. 30, May 31, 1933", and is an
follows:)
STOCK EXCHANGE PRACTICES
429
COMMITTEE EXHIBIT NO. 30
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,
New York, N.Y., May 11, 1933.
Hon. JOHN W. DAVIS,
New York, N.Y.
: Will you kindly have our examiners furnished with a copy
of the memorandum agreement dated December 5, 1928, between the General
Electric and General Electric Employees Securities and J. P. Morgan & Co.
made mention of in answer to question 32.
Yours very truly,
DEAR MR. DAVIS
FERDINAND PECORA,
By FRANK J. MEEHAN.
The General Electric Co. agrees to sell to J. P. Morgan & Co. its holdings
and the holdings of the General Electric Employees' Securities Co., after the
approval by the board, in the Mohawk Power Corporation on the following
terms:
(1) The common stock at the price of $40 plus interest at 5 percent from
June 1, 1928, to date of payment therefor; such date to be as J. P. Morgan &
Co. may elect between January 1 and January 15, 1929.
(2) The second preferred stock at a price of $107 flat, at the same date as
provided above.
(3) The option warrants at a price of $20 flat, payment similarly to be made
as above provided.
In making the purchase as described J. P. Morgan & Co. recognize the importance of preserving the good will of the Brady and up State interests in the
general power situation. J. P. Morgan & Co. plan to handle their holdings of
Mohawk Hudson shares in harmony with the interests as described, having no
present intention of divesting themselves of such shares to any so-called foreign
corporation or foreign interests and engaging not to do so without full consultation with such interests as described and with officials of the General Electric Co.
J. P. Morgan & Co. recognize the services that have been rendered to the
Mohawk Hudson Power Corporation by Charles Brewer as chairman of the
board and are prepared to continue the obligations and present relations of the
General Electric Co. to him.
J. P. M. & Co., G. S.
Mr. PECORA. I will read that photostatic copy. (Which was done,
as shown above.) Now, who initialed this memorandum in behalf
of J. P. Morgan & Co., do you know?
Mr. WHITNEY. Yes. Mr. T. W. Lamont.
Mr. PECORA. Mr. T. W. Lamont?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. Who initialed it in behalf of the General Electric
Co.?
Mr. WHITNEY. Mr. Gerard Swope.
Mr. DAVIS. Mr. Pecora, weren't you interrupted before you finished
reading the last paragraph?
Mr. PECORA. I think not.
Mr. DAVIS. Then I failed to get it.
Mr. PECORA. I will read the last paragraph again:
J. P. Morgan & Co. recognize the services that have been rendered to the
Mohawk Hudson Power Corporation by Charles Brewer, as chairman of the
board, and are prepared to continue the obligations and present relations of the
General Electric Co. to him.
I think that concludes it.
Mr. DAVIS. All right.
Mr. PECORA. Mr. Whitney, do you know who prepared that memorandum ?
43Q
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. Did I finish my answer?
Mr. PECORA. I think you said that Mr. Gerard Swope initialed it in
behalf of the General Electric Co.
Mr. WHITNEY. And he is the president of the company.
Mr. PECORA. Who prepared this memorandum, Mr. Whitney?
Mr. WHITNEY. I think that Mr. Swope did.
Mr. PECORA. Where was this transaction concluded, in whose
office?
Mr. WHITNEY. Again I will say, to the best of my recollection,
in ours.
Mr. PECORA. That is, in the office of J. P. Morgan & Co.?
Mr. WHITNEY. Yes,
sir.
Mr. PECORA. And are you quite sure that this memorandum agreement was prepared by Mr. Swope?
Mr. WHITNEY. Well, I qualified it by saying to the best of my
.recollection. I think it was; yes. Do you want me to confirm that,
to see if there is any different recollection here ?
Mr. PECORA. All right.
Mr. WHITNEY. I am pretty sure of that, sir.
Mr. PECORA. NOW, the number of shares of the stock of the
Mohawk Hudson Power Corporation I notice is not set forth in
this memorandum. Do you know of any reason for that?
Mr. WHITNEY. Well, one reason is that in June I think there was
a memorandum—that your investigators saw—a memorandum dated
June 11, when those preliminary discussions began, a memorandum
to us from Mr. Swope in which they outlined the number of shares
that they held.
: Mr. PECORA. Will you point out anywhere in this memorandum any
^language that indicates that J. P. Morgan & Co. agreed to buy those
shares from the General Electric Co. ?
Mr. WHITNEY. Well, I think, Mr. Pecora, the nearest thing that I
could get to that would be Mr. Lamont's initials at the bottom,
which would certainly be taken by us an an agreement to purchase
under this memorandum.
Mr. PECORA. This was a transaction that involved the purchase
of many millions of dollars' worth of securities by J. P. Morgan &
Co. wasn't it ?
Mr. WHITNEY. $23,000,000.
Mr. PECORA. And does your firm usually undertake in writing
agreements or make agreements to purchase large blocks of stock
for sums around 20-odd million dollars without a definite statement
in writing concerning the amount of securities it is going to buy at
any given price.
Mr. WHITNEY. We do have our lawyers advise us that it is an
equally binding contract; yes.
Mr. PECORA. Was the opinion of your lawyers consulted by you
in this transaction before this agreement was initiated by Mr.
Lamont?
Mr. WHITNEY. Unless there are any lawyers here that could say
definitely, I would assume it without question, because whenever
anything of this kind comes up it is always passed on by our lawyers.
That is all that I could answer on that.
STOCK EXCHANGE PEACTICES
431
Mr. PECORA. And this memorandum of December 5, 1928, is the
first thing reduced to writing with regard to those negotiations that
commenced back in June of 1928, is it not ?
Mr. WHITNEY. The first and only.
Mr. PECORA. The first and only?
Mr. WHITNEY. Yes. I think, Mr. Pecora, either you or I failed
to read the portions of this memorandum which, perhaps, shed a
little light on that.
Mr. PECORA. Which memorandum do you refer to? The one of
December 5, 1928?
Mr. WHITNEY. NO ; the answer to question 32. You will remember that you read the first part of it.
Mr. PECORA. I am going to go over it. But I want to go over it
step by step.
Mr. WHITNEY. All right.
Mr. PECORA. NOW, on what date did J. P. Morgan & Co. elect
to make payment for these securities of the Mohawk Hudson Power
Corporation that you say they agreed to buy on December 5, 1928,
from the General Electric Co. ?
Mr. WHITNEY. Will you excuse me while I refresh my memory,
because there Were a lot of dates in early January.
Mr. PECORA. Won't you find the answer on the first page ?
Mr. WHITNEY. It is in 32 ?
Mr. PECORA. Your answer to
question 32, right near the bottom of
the first page.
Mr. WHITNEY. The payment was made January 10, 1929.
Mr. PECORA. What was the market value of those shares of the
Mohawk Hudson Power Corporation on that date ?
Mr. WHITNEY. $35,533,260.
Mr. PECORA. And that was about $12,000,000 more than the price
which you paid them on that date for those securities, wasn't it?
Mr. WHITNEY. Very nearly.
Mr. PECORA. I S a member of your firm also a member of tha hoard
of directors of the General Electric Co. ?
Mr. WHITNEY. There is.
Mr. PECORA. Is there more than one member of your firm who is a
member of the board of directors of the General Electric Co. ?
Mr. WHITNEY. NO.
Mr. PECORA. Was a
partner of your firm a director of the General Electric Co. in the years 1928 and 1929 ?
Mr. WHITNEY. There was.
Mr. PECORA. Which partner?
Mr/WHITNEY. Mr. Cochran. But Mr. Cochran was not present
at the meeting at which this transaction was ratified, I will say for
your information.
Mr. PECORA. Have you seen the minute books of the General Electric Corporation with regard to this transaction?
Mr. WHITNEY. NO. I have never seen them.
Mr. PECORA. Did your attorneys advise you that this memorandum,
received in evidence as Committee Exhibit No. 30 on this date, was
an enforceable agreement oh the part of the General Electric Co.
to sell these shares to J. P. Morgan & Co., and on the-part of J. P.
Morgan & Co. to buy these shades from the General Electric Co. ?
175541—33—PT. 2
9
432
STOCK EXCHANGE PEACTICES
Mr. WHITNEY. Was your question: Do they or did they ?
Mr. PECORA. Did they?
Mr. WHITNEY. Well, I do not think they phrased it like that. We
probably were, and I assume they did. As I said a minute ago, I
cannot speak specifically but I assume we showed it to them, and
I assume that they said it was a satisfactory agreement or contract
for purchase and sale.
Mr. PECORA. Mr. Whitney, I would rather have the fact in lien
of an assumption if I can get the facts, although I am perfectly
willing for you to confer with any of your associates or partners
in order to develop what the fact was in that respect.
Mr. DAVIS. Might I say that a member of my firm would be naturally consulted on this matter. And while I am speaking, if I
might add, the test as to whether it was an enforceable agreement is
that it was enforced.
Mr. PECORA. Well, I should not think that J. P. Morgan & Co.
would have objected to its enforcement when they took securities on a
date and paid for them when the market value was $12,000,000 above
the price that they paid.
Mr; WHITNEY. It has already been testified that they went into
the United Corporation at the same price.
Mr. PECORA. NOW, Mr. Whitney, in order to save time I am going
to ask you to look at this document, entitled "Answer to no* 32 ",.
and it is headed "Date and price at which Mohawk Hudson stock
was purchased from General Electric Co.; market value at the time.'*
And I ask you if that was supplied to me by your firm in response
to my request for that information?
Mr. WHITNEY. That was. Do you only ask me to identify that
one page ?
Mr. PECORA. NO. Look at the whole thing—the entire document.
Mr. WHITNEY. Yes; it was.
Mr. PECORA. DO the contents
of this document constitute a complete and correct answer to the question which it purports to answer?
Mr. WHITNEY. TO the best of my knowledge and belief; yes.
Mr. PECORA. I offer it in evidence and ask that it may be spread
on the record.
Mr. WHITNEY. I do not want to qualify my answer, but wish to
say that this is one of the questions as to which we did not have a
written request from you and we have put our response as we have
understood it, at the top of the different forms, and my answer
stands on that basis. Of course, that might have the further qualification : The third part of your question, you know, that we did not
know how we could answer, quite.
The CHAIRMAN. That paper will be received and made a part of
the record.
(The paper was marked " Committee Exhibit No. 31, May 31,
1933 ", and is as follows:)
COMMITTEE EXHIBIT NO. 31
ANSWER TO QUESTION NO. 32
First: Date and price <tt which Mohawk Hudson stock was purchased from
General Electric Co.; market value at the time?
In June 1928, General Electric Co. offered orally to sell to J. P. Morgan &
Co. the entire block of Mohawk Hudson securities then owned by the General
STOCK EXCHANGE PRACTICES
433
Electric and General Electric Employees Securities Co. setting a price of $40 a
share for the common, being approximately the market price at the time and
the mean of the high and low price for the year 1928 up to that time. J. P.
Morgan & Co. not being prepared at that time to reach a final conclusion as to
the offer, it was left open for consideration after the summer. In the autumn
the matter was again taken up, J. P. Morgan & Co. endeavoring to obtain a
lower price because of the large block of securities involved. Mr. Young of the
General Electric Co', standing on the previous offer and stating that the purchase price should carry interest from June 1, 1928, on the common stock.
The offer was accepted and the agreement was embodied in memorandum form,
dated December 5, 1928, settling the price for the common stock at $40, plus
interest from June 1, 1928; and $197 flat for the second preferred and $20 flat
per warrant, these last two prices being in the approximate market prices at
that time. The market value of these securities on December 5, 1928, was
$26,683,975. The memorandum provided for payment on or before January 15,
1929. Payment was made on January 10, 1929. The market value of these
securities on January 10, 1929, was $35,533,260, the purchase price as aforesaid
being $23,634,120.
Second. List of all securities acquired by the corporation from the organizers,
showing the following:
1. Name or organizer.
2. Kind of security.
3. Cost price to organizer.
4. Price United Corporation paid for securities.
5. Market price at the time of sale.
J. P. Morgan & Co. and Drexel & Co. were among the organizers of the United
Corporation. So far as concerns J. P. Morgan & Co. and Drexel & Co. the
following facts are submitted:
SECURITIES EXCHANGED
On January 10, 1929, J. P. Morgan & Co. and Drexel & Co. delivered the following in exchange for securities of the United Corporation: 130,565 shares
United Gas Improvement Co. common at 160; 59,500 shares Public Service
Corporation of New Jersey common at 80; 350,957 shares Mohawk Hudson
Power Corporation common at $41.26; 62,360 shares Mohawk Hudson Power
Corporation second preferred at 107; and 124,740 shares Mohawk Hudson
Power Corporation warrants at 20.
These securities plus $700,801.10 in cash were valued by.the United Corporation on its books at $50,000,000 on January 11, 1929. On the date of delivery of
these securities by*J. P. Morgan & Co., namely, January 10, 1929, these assets
taken at market prices exceeded $64,000,000.
While the prices stated above were those at which these securities were
transferred to the United Corporation, J. P. Morgan & Co. and Drexel & Co.
received therefor from the United Corporation securities, not cash. Such securities received from the United Corporation on January 11, 1929, in exchange
for the above securities and $700 801.10 cash were as follows: 600,000 shares
preference stock, 800,000 shares common stock, and 714,200 warrants.
On January 23, 1929, Drexel & Co., in accordance with previous understanding, exchanged an additional amount of Public Service Corporation of New
Jersey stock, i.e. 4,510 shares, at prices on that date $40,000 under the market,,
and received in exchange 11,004 shares United Corporation common stock,
1,714 shares United Corporation preference stock, and 4,979 warrants.
All of the above-mentioned securities were minority interests in large and
important concerns.
As TO THE COST OF THE ABOVE SECURITIES TO J. P. MORGAN & Co. AND DREXEL
& Co.
DREXEL & CO.
On December 30, 1927, Drexel & Co.'s holdings were: 25,000 shares United
Gas Improvement Co. stock, 34,500 shares Public Service Corporation of New
Jersey stock, and 47,530 shares Philadelphia Electric Co. stock.
Shares of these companies (being shares actively dealt in on the Philadelphia
markets) had been acquired over a period of years, beginning in 1924, through
purchase for cash, exchange or other securities, exercise of rights of stockholders to subscribe for new stock, stock dividends, and stock split-ups.
434
STOCK EXCHANGE PEACTICES
On December 31, 1927, Drexel & Oo.'s holdings were transferred to a new
firm of that name created by the admission of a new partner. The prices at
which the new firm of Drexel & Co. acquired these securities on that date
were as follows: 112% for United Gas Improvement Co. stock, 41 for Public
Service Corporation of New Jersey stock, and 55% for Philadelphia Electric
Co. stock, being the market prices of the shares at that time.
During 1928 Drexel & Co. neither bought nor sold any of these securities,
but in February 1928 they exchanged their holdings of Philadelphia Electric
Co. stock for 23,765 shares of United Gas Improvement Co. stock. Therefore,
at the end of }928, their holdings were 48,765 shares United Gas Improvement
Co. stock and 34,500 shares Public Service Corporation of New Jersey stock.
On December 31, 1926, four new partners were admitted to Drexel & Co.
The new firm acquired the above securities at prices of $160 for United Gas
Improvement Co. and $80 for Public Service Corporation of New Jersey. These
were the prices at which these securities were exchanged for securities of the
United Corporation.
On December 31, 1928, the new firm of Drexel & Co. acquired $205,000 of
Public Service Corporation of New Jersey convertible 4%-percent debentures at
$180, these bonds being the portion remaining of a block which had been
purchased in January 1928 at 98. These bonds were converted according to
their terms, into 4,510 shares Public Service Corporation of New Jersey common
stock, which was received on January 2, 1929, and which, as above stated, was
exchanged for United Corporation securities on January 23, 1929.
J. P. MORGAN & Co.
On January 1, 1928, J. P. Morgan & Co. owned no securities of United Gas
Improvement Co., Public Service Corporation of New Jersey, or Mohawk Hudson Power Corporation, but between May 3, 1928, and June 20, 1928, the firm
made cash purchases of 81,000 shares of United Gas Improvement Co. stock
at an average cost of 114.3015 per share, or a total amount of $11,808,865.25 and
:25,000 shares of common stock of the Public Service Corporation of New Jersey
a t an average cost of 61.2625 per share, or a total amount of $1*531,562.50.
On December 31, 1928, new partners were admitted to the firm of J. P. Morgan & Co. The new firm acquired the United Gas Improvement Co. stock at
the price of $160 per share, and the Public Service Corporation of New Jersey
-stock at $80 per share. These were the prices at which these securities were
exchanged for securities of the United Corporation.
In January 1929, J. P. Morgan & Co., pursuant to previous arrangements
made payments for 350,957 shares of common stock; 62,360 shares of second
preferred stock, and 124,740 option warrants of Mohawk Hudson Power Corporation. For further reference to this transaction see the answer above to
41
First."
SECURITIES ACQUIRED FOE CASH
J. P. Morgan & Co., on January 11, 1929, subscribed $10,000,000 cash for
400,000 shares of the common stock of United Corporation and 1,000,000
warrants of the United Corporation.
On August 15, 1929, J. P. Morgan & Co. subscribed to 1,396 shares of United
Corporation common stock at $37.50 per share through the exercise of subscription rights which had been issued to all stockholders in connection with
an increase in the corporation's capital stock. On the same date and in the
same way Drexel & Co. subscribed for 2,022 shares of common stock at $37.50
per share.
SECURITIES SOLD FOB CASH
The following securities sold by J. P. Morgan & Co. to the United Corporation
for cash were sold at prevailing market prices. These securities were minority
interests in important concerns and were dealt in either on the New York
Stock Exchange or the Paris Bourse:
COLUMBIA GAS & ELECTRIC CORPORATION
J. P. Morgan & Co. had acquired 10,600 shares of common stock of the Columbia Gas & Electric Corporation between May 3 and July 18, 1928, at a cost
of $1,148,104.13. On December 31, 1928, those securities were transferred to the
new firm at $135 per share, or $1,431,000. On January 16, 1929, United Corporation accepted an offer of J. P. Morgan & Co. to sell this stock to it at the
STOCK EXCHANGE PEACTICES
435
day's closing price on the New York Stock Exchange, namely 145% per share, or
a total of $1,544,950.
INTERNATIONAL TELEPHONE & TELEGRAPH CORPORATION
In January 1929 United Corporation purchased 12,500 shares of International
Telephone & Telegraph Corporation at $195 per share. On this transaction
J. P. Morgan & Co. realized a profit of slightly under $17,500. On April 1,
1929, United Corporation sold the stock so purchased at a profit of $963,762.50,
SOCIETE LYONNAISB DES EAUX ET L'ECLAIKAGE
J. P. Morgan & Co. had acquired 10,000 shares of the Society Lyonnaise
des eaux l'eclairage on December 18, 1928, at a cost of $975,340.26. This stock
was and is traded in on the Paris Bourse. United Corporation on February
4, 1929, accepted an offer of J. P. Morgan & Co. to sell this stock to the
United Corporation at the closing price on the Paris Bourse on February 2,
1929; namely, $1,699,218.75, which transaction was consummated on February
9, 1929.
Third. The United Corporation acquired an interest in several companies
such as U. G. I., Niagara Hudson Power, etc. What were the prices of above
stocks when they were first put on the New York Stock Exchange and what
were their prices when the United Corporation acquired them as a holding:
company ?
The answer to this question would involve considerable time in order to*
give an intelligent reply. Some of these companies whose shares were acquired, such as Columbia Gas & Electric Co., Public Service Corporation of
New Jersey, were first listed on the New York Stock Exchange several years
ago. The prices at the time of such listing would mean little compared with
prices at the time of acquisition by United Corporation, as in certain instances
at least there have been split-ups of shares, stock dividends, additional stock
issued for cash or property or other changes in capitalization, and there may
have been consolidations with other companies. This information can be
obtained no doubt from the various manuals and the Commercial & Financial
Chronicle.
The stock of the United Corporation was first listed on the New York Stock
Exchange on May 9, 1929, the initial sales being 67% for the common and 45%
for the preference stock.
Mr. PECORA. NOW, I am going to read this to you, if you will follow me closely. I am reading now:
Exhibit no. 31. Answer to no. 32.
First. Date and price at which Mohawk Hudson stock was purchased from
General Electric Co.; market value at the time?
In June 1928 General Electric Co. offered orally to sell to J. P. Morgan & Co.
the entire block of Mohawk Hudson securities then owned by the General
Electric and General Electric Employees Securities Co., setting a price of $40
a share for the common, being approximately the market price at the time
and the mean of the high and low price for the year 1928 up to that time.
J. P. Morgan & Co., not being prepared at that time to reach a final conclusion as to the offer, it was left open for consideration after the summer. In
the autumn the matter was again taken up, J. P. Morgan & Co. endeavoring
to obtain a lower price because of the large block of securities involved, Mr.
Young ,of the General Electric Co., standing on the previous offer and stating
that the purchase price should carry interest from June 1, 1928, on the common stock. The offer was accepted and the agreement was embodied in memorandum form, dated December 5, 1928, settling the price for the common stock
at $40, plus interest from June 1, 1928, and $107 flat for the second preferred,
and $20 flat per warrant; these last two prices being the approximate market
prices at that time. The market value of these securities on December 5, 1928,
was $26,683,975. The memorandum provided for payment on or before January 15, 1929. Payment was made on January 10, 1929. The market value of
these securities on January 10, 1929, was $35,533,260, the purchase price as
aforesaid being $23,643,120.
Second. List of all securities acquired by the corporation from the organizers, showing the following:
1. Name or organizer.
436
STOCK EXCHANGE PKACTICES
2. Kind of security.
3. Cost price to organizer.
4. Price United Corporation paid for securities.
5. Market price at the time of sale.
J. P. Morgan & Co. and Drexel & Co. were among the organizers of the
United Corporation. So far as concerns J. P. Morgan & Co. and Drexel & Co.
i he following facts are submitted:
SECURITIES EXCHANGES
On January 10, 1929, J. P. Morgan & Co. and Drexel & Co. delivered the
following in exchange for securities of the United Corporation: 130,585 shares
United Gas Improvement Co. common at 160; 59,500 shares Public Service Corporation of New Jersey common at 80; 360,957 shares Mohawk Hudson Power
Corporation common at $41.26; 62,360 shares Mohawk Hudson Power Corporation second preferred at 107; 124,740 shares Mohawk Hudson Power Corporation warrants at 20.
These securities plus $700,801.10 in cash were valued by the United Corporation on its books at $50,000,000 on January 11, 1929. On the date of delivery
of these securities by J. P. Morgan & Co., namely, January 10, 1929, these
assets taken at market prices exceeded $64,000,000.
While the prices stated above were those at which these securities were
transferred to the United Corporation, J. P. Morgan & Co. and Drexel & Co.
received therefor from the United Corporation securities, not cash. Such
securities received from the United Corporation on January 11, 1929, in exchange for the above securities and $700,801.10 cash were as follows: 600,000
shares preference stock, 800,000 shares common stock, and 714,200 warrants.
On January 23, 1929, Drexel & Co., in accordance with previous understandings, exchanged an additional amount of Public Service Corporation of New
Jersey stock; i.e., 4,510 shares, at prices on that date $40,000 under the
market, and received in exchange: 11,004 shares United Corporation common
stock, 1,714 shares United Corporation preference stock, and 4,979 warrants.
All of the above-mentioned securities were minority interests in large and
important concerns.
As TO THE COST OF THE; ABOVE) SECURITIES TO* J. P. MOEGAN & Co, AND DREXEL
& Co.
DEEXEL & CO.
On December 30, 1927, Drexel & Co.'s holding were 25,000 shares United
Gas Improvement Co. stock, 34,500 shares Public Service Corporation of New
Jersey stock, 47,530 shares Philadelphia Electric Co. stock.
Shares of these companies (being shares actively dealt in on the Philadelphia
markets) had been acquired over a period of years beginning in .1924, through
purchase for cash, exchange, or other securities, exercise of rights of stockholders to subscribe for new stock, stock dividends, and stock split-ups.
On December 31, 1927, Drexel & Co.'s holdings were transferred to a new firm
of that name created by the admission of a new partner. The prices at which
the new firm of Drexel & Co. acquired these securities on that date were as
follows: 112^ for United Gas Improvement Co. stock, 41 for Public Service
Corporation of New Jersey stock, 55% for Philadelphia Electric Co. stock, being
the market prices of the shares at that time.
Let me stop reading at that point, Mr. Whitney, to ask this question of you with regard to the transfer of these last three blocks of
stock by Drexel & Co. on December 31, 1927. That was a transfer
virtually by the partners of Drexel & Co. to the reconstituted firm
of Drexel & Co., was it not?
Mr. WHITNEY. Sale by the old firm to the new firm.
Mr. PECORA. And the only change in the personnel of the two firms
was the admission, of a new partner, was it not ?
Mr. WHITNEY. I think it was, Senator, but
Mr. PECORA (interposing). I simply see here "to a new firm
created
by the admission of a new partner."
STOCK EXCHANGE PEACTICES
437
Mr. WHITNEY. YOU are right, then.
Mr. PECORA. NOW I resume the reading of the exhibit. [Reading: |
During 1928 Drexel & Co. neither bought nor sold any of those securities, but
in February 1928 they exchanged their holdings of Philadelphia Electric Co.
stock for 23,765 shares of United Gas Improvement Co. stock. Therefore at
the end of 1928 their holdings were 48/765 shares United Gas Improvement Co.
«tock, 34,500 shares Public Service Corporation of New Jersey stock.
On December 31, 1926, four new partners were admitted to Drexel & Co. The
new firms acquired the above securities at prices of $160! for United Gas
Improvement Co. and $80 for Public Service Corporation of New Jersey. These
were the prices at which these securities were exchanged for securities of the
United Corporation.
I will stop reading for another moment to ask you this question:
This transfer on December 31, 1928, of the securities was a transfer
made by the old firm of Drexel & Co. to the reconstituted firm, which
changed in personnel only by the admission of four new members,
is that right?
Mr. WHITNEY. That is right, as required by law.
Mr. PECORA. Yes. Now I resume the reading of the exhibit
[reading] :
On December 31, 1928, the new firm of Drexel & Co. also acquired $205,000
Public Service Corporation of New Jersey convertible 4%-percent debentures
&t $180. These bonds being the portion remaining of a block which had been
purchased in January 1928 at 98. These bonds were converted according to
their terms into 4,510 shares Public Service Corporation of New Jersey common stock, which was received on January 2, 1929, and which, as above stated,
was exchanged for United Corporation securities on January 23, 1929.
J. P. MORGAN & Co.
On January 1, 1928, J. P. Morgan & Co. owned no securities of United Gas
Improvement Co., Public Service Corporation of New Jersey, or Mohawk Hudson Power Corporation, but between May 3, 1928, and June 20, 1928, the firm
made cash purchases of 81,800 shares of United Gas Improvement Co. stock at
an average cost of $144.3015 per share, or a total amount of $11,803,865.25 and
25,000 shares of common stock of the Public Service Corporation of New Jersey
at an average cost of $61.2625 per share, or a total amount of $1,531,562.50.
On December 31, 1928, new partners were admitted to the firm of J. P.
Morgan & Co. The new firm acquired the United Gas Improvement Co. stock
at the price of $160 per share and the Public Service Corporation of New Jersey
stock at $80 per share. These were the prices at which these securities were
-exchanged for securities of the United Corporation.
I will stop reading there to ask you this question: That transaction
that I have just referred to was likewise a transaction in which the
partners of J. P. Morgan & Co. on December 31, 1928, sold to the
firm of J. P. Morgan & Co. as reconstituted on that date these blocks
of stock; is that right?
Mr. WHITNEY. Yes. Again as required by law.
Mr. PECORA. NOW I will resume the reading from the exhibit
[reading] :
In January 1929, J. P. Morgan & Co., pursuant to previous arrangements,
made payment*for 350,957 shares of common stock, 62,360 shares of second
preferred stock, and 124,740 option warrants of Mohawk Hudson Power Corporation. For further reference to this transaction see the answer above to
*' First."
SECTJBITTES ACQUIRED FOB CASH
J. P. Morgan & Co. on January 11, 1929, subscribed $10,000,000 cash for
400,000 shares of the common stock of United Corporation and 1,000,000 warrants of the United Corporation.
438
STOCK EXCHANGE PRACTICES
On August 15, 1929, J. P. Morgan & Co. subscribed to 1,396 shares of United
Corporation common stock at $37.50 per share through the exercise of subscription rights which had been issued to all stockholders in connection with
an increase in the corporation's capital stock. On the same date and in the
same way Drexel & Co. subscribed for 2,022 shares of common stock at $37.5Q
per share.
Now I will temporarily leave off reading the exhibit to ask you
this question: These 1,396 shares of United Corporation common
stock which your firm purchased on August 15, 1929, were not purchased or acquired in connection with any exchange of these option
warrants, were they?
Mr. WHITNEY. NO. Merely the exercise of rights offered to all
stockholders, as stated here, at $37.50 per share.
Mr. PECORA. Up to the time, up to that date, namely, August 15,
1929, had your firm exercised any of these option warrants %
Mr. WHITNEY. August 15?
Mr. PECORA. Up to August 15, 1929.
Mr. WHITNEY. NO.
Mr. PECORA. NOW, I will resume the reading from the exhibit
(reading):
SECURITIES SOLD FOR CASH
The following securities sold by J. P. Morgan & Co. to the United Corporation
for cash were sold at prevailing market prices. These securities were minority
interests in important concerns and were dealt in either on the New York Stock
Exchange or the Paris Bourse.
COLUMBIA GAS & ELECTRIC CORPORATION
J. P. Morgan & Co. had acquired 10,600 shares of common stock of the
Columbia Gas & Electric Corporation between May 3 and July 18, 1928, at a
cost of $1,148,104.13. On December 31, 1928, those securities were transferred
to the new firm at $135 per share, or $1,431,000. On January 16, 1929, United
Corporation accepted an offer of J. P. Morgan & Co. to sell this stock to it at
the day's closing price on the New York Stock Exchange, namely, 145% per
share, or a total of $1,544,950.
INTERNATIONAL TELEPHONE & TELEGRAPH CORPORATION
In January 1929 United Corporation purchased 12,500 shares of International
Telephone & Telegraph Corporation at $195 per share. On this transaction
J. P. Morgan & Co. realized a profit of slightly under $17,500. On April 1, 1929,
United Corporation sold the stock so purchased at a profit to it of $963,762.50.
SOOIEITE LYONNAISE DES EAUX ET L ' E C L A I R A G E
J. P. Morgan & Co. had acquired 10,000 shares of the Societe Lyonnaise
[as it now is here] des eaux et l'eclairage on December 18, 1928
Mr. DAVIS. Societe Lyonnaise is probably right.
Mr. PECORA. Well, I would rather say " chocolate eclair ", or something like that.
The CHAIRMAN. Or lyonnaise.
Mr. PECORA (continuing reading) :
On December 18, 1928, at a cost of $975,340.26. This stock was and is traded
in on the Paris Bourse. United Corporation on February 4, 1929, accepted an
offer of J. P. Morgan & Co. to sell this stock to the United Corporation at the
closing price on the Paris Bourse on February 2, 1929, namely $1,699,218.75,
which transaction was consummated on February 9, 1929.
Third. The United Corporation acquired an interest in several companies,
such as U.G.I.—
STOCK EXCHANGE PEACTICES
439
That is United Gas Improvement Co., isn't it?
Mr. WHITNEY. This is the question.
Mr. PECORA. That is the question. I am reading the entire document, exhibit no. 31.
Mr. WHITNEY. Yes; that is the question. Yes; U.G.I, is the
United Gas Improvement.
Mr. PECORA (resuming reading) :
Several companies, such as U.G.I., Niagara Hudson Power, etc. What were
the prices of the above stocks when they were first put on the New York;
Stock Exchange and what were their prices when the United Corporation
acquired them as a holding company?
The answer to this question would involve considerable time in order to
give an intelligible reply. Some of these companies whose shares were acquired, such as Columbia Gas & Electric Co., Public Service Corporation of
New Jersey, were first listed on the New York Stock Exchange several years
ago. The prices at the time of such listing would mean little compared with
prices at the time of acquisition by United Corporation, as in certain instances
at least there have been split-ups of shares, stock dividends, additional stock
issued for cash or property or other changes in capitalization, and there may
have been consolidations with other companies. This information can be
obtained, no doubt, from the various manuals and the Commercial & Financial
Chronicle.
The stock of the United Corporation was first listed on the New York Stodk
Exchange on May 9, 1929, the initial sales being 67% for the common and
45% for the preference stock.
That iVthe end of this document, exhibit 31 of this date.
Now, if you can tell us, Mr. Whitney, what was the total profit
accruing to your firm from these various transactions that it had with
the United Corporation involving the exchange of these securities
for the stock and option warrants of the United Corporation ? Will
you give us that answer ?
Mr. WHITNEY. Well, do you want it exact or do you want it
approximate ?
Mr. PECORA. I prefer it exact, of course; but if you cannot give it
exact, give us the best approximation you are able to give at the
moment.
(Mr. Whitney examined documents.)
Mr. PECORA. Can you give us the figure now, Mr. Whitney? If
you cannot, I will not press it. I will resume the questioning.
Mr. WHITNEY. I have it somewhere, but I haven't got it here. I
would rather give it to you exact. It shows some of these things,
which is a question of arithmetic, but I would rather give it exact.
I will give it ;to you.
The CHAIRMAN. While Mr. Pecora is looking up some data I may
read a statement by Senator Kean. He sends it over to be put in the
record. He says [reading]:
A newspaper reporter came in to see me last Thursday and said the name of
my firm, Kean, Taylor & Co., was on the list of Messrs. J. P. Morgan & Co.
I asked Mr. Pecora on Friday if this was so, and he said he would look it up.
When I was a young man, after starting the firm in 1892, I was able to
place a considerable number of bonds brought out by Messrs. J. P. Morgan &
Co. I asked the present Mr. Morgan's father for an interest in the bond
syndicates that they were bringing out, and Mr. Morgan, having a kind heart
and finding that I was reaidy to work, gave me a small interest from time
to time, on which amounts I made good. In other words, I sold more bonds
than my proportion of the syndicates, and I have taken interests in the Morgan
offerings ever since. At about the same time I obtained like interests in bond
syndicates originated by Messrs. Kuhn, Loeb & Co; Dillon, Read & Co., and
other issuing houses, because as a distributor I could be useful to them.
440
STOCK EXCHANGE PRACTICES
Since becoming a member of the Senate I have spent most of my time in
Washington, so that I am and have been out of touch with my office and the
business there.
Mr. WHITNEY. Mr. Pecora, before we adjourn, you asked me some
questions about profits or if we had sold, and I asked if I might
put this statement which I have in the record. I have put some of
our statisticians to work. You remember I got started and you
diverted me. May I put this statement in the record? This is the
substantiation of the statement I made that if we had not formed
United, if we had sold the securities which we turned into the
United in exchange for other securities at the high prices per share
during the year and had not formed United Corporation at all, we
could have made in all, above the prices at which we did turn that
in, $57,387,379. This is merely a memorandum which supports that
statement I made.
Mr. PECORA. Do you want to put that into the record?
Mr. WHITNEY. I would like to.
Mr. PECORA. All right, I have no objection.
The CHAIRMAN. Let that statement go in the record then.
(Statement submitted by Mr. Whitney is in the words and figures
following:)
Value of certain holdings at acquisition and at high market price for 1929
Cost
Mohawk Hudson common, 350,957, at 41.26.
Mohawk second preferred, 62,360, at 107
Mohawk warrants, 124,740, at 20
TJ.G.L common, 130,565, at 160
Public Service common, 59,500, at 80
$14,480,486
6,672, 520
2,494,800
20,890,400
4,760,000
High per High valuation
share
2 104%
3 88
Total.
$40,798,751
6, 532,21G
10,977,120
40,181,379
8,196,125
106,685, 585
* On the basis of market value of holdings into which Mohawk Hudson was exchanged, i.e., 3H shares
Niagara
Hudson common plus Y% class A option warrant. July 26.
2
Actual high 110 Jan. 11. All the other prices given above represent the highest price reached in 1929after July 1, which price was also the highest for the year. Aug. 2.
a July 24.
<Sept. 23.
Amount of increase by stocks
Mohawk:
Common
Second preferred
Warrants
U.G.I, common
Public service common
Total increase
P
* $26,
318, 265
2
140, 310
x
8, 482, 320
x
19, 290,979
X
3, 436,125
1
57,387, 379
The CHAIRMAN. These securities which you furnished were owned
by you at the time, or did you buy them afterward ?
Mr. WHITNEY. N O ; these are securities, Senator Fletcher, which
we referred to as having turned in at the origination of the United
Corporation in exchange for the $50,000,000 worth of preference
shares, common shares, and option warrants, 740 option warrants.
The CHAIRMAN. YOU did not go out and buy the securities ?
Mr. WHITNEY. Oh, no. Those are the ones that we already had.
1
Plus.
2
Minus.
STOCK EXCHANGE PBACTICES
441
Mr. PECORA. Mr. Whitney, I notice in the so-called preferred list
known as exhibit 28 of this date, constituting the names of persons
who were invited to subscribe to the units of United Corporation at
$75 per unit, appears the name George Whitney, agent. That refers,
to yourself, does it not ?
Mr. WHITNEY. Refers to me as agent.
Mr. PECORA. Agent for whom?
Mr. WHITNEY. Well, I am the individual that more or less collected that list, and that accounted for certain of my partners, some*
of my partners, and I don't know, except I know the partners in it.«
I had nothing whatever to do with it myself. It was purely am
agency account.
Mr. PECORA. Were not their allocations of these units at $75 per~
share made to some other partners directly ?
Mr. WHITNEY. Oh, yes, directly; but this is merely an agency
account or suspense account.
Mr. PECORA. Why was any resort had to this agency or suspense
account? What was the reason for it?
Mr. WHITNEY. Well, it was 10,000 shares that were not allotted!
anywhere else, and they were allotted to me as agent.
Mr. PECORA. AS agent for whom?
Mr. WHITNEY. Some of my partners.
Mr. PECORA. Well, why weren't these units reserved for your partners directly as they were in the case of the Alleghany Corporation ?
Mr. WHITNEY. I don't know, Mr. Pecora. The ones that were
allotted to them were allocated directly, and this is what we call
in the banking business a suspense account. There is no significance.
Mr. PECORA. I am trying to find out what reason there was for
not having made the allocation directly to your partners.
Mr. WHITNEY. Well, I could not tell you any particular reason.
That particular account was certain sales from it, and sometime—I
think it was last year—it was taken back into the firm account. I t
hung along for 3 or 4 years under that title, " George Whitney,
agent", and has now been restored to our own stock account.
Mr. PECORA. Who are the persons that had a beneficial interest in
those 10,000 units that were allocated to you as agent?
Mr. WHITNEY. Ultimately it came back in the firm.
Mr. PECORA. But before it came back, and during
Mr. WHITNEY (interposing). I don't know. As I tell you, it was
a suspense account. There is no significance to it one way or the
other. Ultimately there were certain sales made by it, and then it
ultimately was taken over. What was left in it was taken over by
the firm account; I think it was in December of last year.
Mr. PECORA. Well, now, to whom were the profits from any of those
sales out of this so-called suspense account distributed?
Mr. WHITNEY. I don't know, except they didn't come to me. I
suppose they went to the firm. I don't know. You would have to
ask Mr. Keyes. Mr. Keyes says to the firm.
The CHAIRMAN. Really that term " agent" meant agent for the
firm?
Mr. WHITNEY. It was a suspense account, Senator Fletcher. Ultimately the profits were taken by the firm, and ultimately that account was cleaned up, last year, and it just hung along in my name.
I t happened to be in my name because I happened to be the indi
442
STOCK EXCHANGE PEACTICES
vidual who pulled this list together, and it was just what we called
a suspense account. It might have been put in any other designated
account.
Mr. PECORA. DO you know how many units were sold out of the
10,000 that constituted the allotment?
Mr. WHITNEY. NO, sir; I do
not.
Mr. PECORA. Are all the sales that were made, if any, of the units
from this suspense account recorded in the books of J. P. Morgan
&Co.?
Mr. WHITNEY. Oh, they must be; and are accounted for, and any
profits which we have made, as all these other profits that were made
are fully accounted for, and all our income and tax and profits to the
firm.
Mr. PECORA. Have you got any transcript of that account here?
Mr. WHITNEY. NO. It is really a—it is just an ordinary suspense
account. Undoubtedly we could get it, but it is a matter of—there
is no significance to it at all. It might have been put in " Commissions executed." It might have been put in half a dozen titles of
similar character.
Mr. PECORA. DO you know anything about the Newmont Mining
Corporation.
Mr. WHITNEY. DO I know
Mr. PECORA (interposing). The name of which appears on this
list of subscribers to the units of United Corporation?
Mr. WHITNEY. DO I know anything about it ?
Mr.
PECORA.
Yes.
Mr. WHITNEY. Why, yes. I know what it is.
Mr. PECORA. Well, what is it?
Mr. WHITNEY. It is a holding company for shares of stock, largety
mining stocks, started originally by Col. William B. Thompson
many years ago before his death. It is publicly traded in. It is a
public company, traded in, I think, on the New York Curb, isn't it ?
Listed on the curb.
Mr. PECORA. Who is Lewis C. Dawes, whose name appears on this
list, exhibit 28?
Mr. WHITNEY. Lewis C. Dawes? He is a relative—Mr. Stanley
tells me he is a relative of his. I didn't know.
The CHAIRMAN. A number of Senators have to be on the floor,
and I suggest we now take a recess until tomorrow morning at 10
o'clock. We will take a recess until tomorrow morning at 10 o'clock.
(Accordingly, at 4:55 o'clock p.m., the committee took a recess
until 10 o'clock a.m. of the next day, Thursday, June 1, 1933.)
STOCK EXCHANGE PEACTICES
THURSDAY, JUNE 1, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE
ON BANKING AND CURRENCY,
Washington, D.O.
The subcommittee met, pursuant to adjournment on yesterday, at
11:30 a.m. (at the conclusion of an executive session), in the caucus
room of the Senate Office Building, Senator Duncan U. Fletcher
presiding.
Present: Senators Fletcher (chairman), Costigan, and Townsend.
Present also: Sbiiatbrs Steiwer and Adams.
Present also: Ferdinand Pecora, counsel to the .committee; Julius
Silver, David Saperstein, and James B. McDonough, Jr., associate
counsel to.the committee; John W. Davis, counsel for J. P. Morgan
& Co.; Randall J. LeBoeufy Jr., and Earle J. Machold, counsel for
the United Corporation and for George H. Howard, president of
the United Corporation.
The CHAIRMAN. The committee will come to order. Let us have
order in the room. I want to make this statement: While the committee was in executive session in the regular cpmmittee room this
morning I understand that some photographers had a sort of performance here when a certain picture was taken of Mr. Morgan
with some midget in his lap, or something of that kind. I consider
that wholly undignified, wholly unwarranted, and I am going to ask
the newspapers not to publish any such picture as that. I think it
was taking advantage of him under the circumstances. He is here
under the subpena of the committee. I do not know how he feels
about it, but as the chairman of this committee I feel it was an outrage and a shame, an undignified performance, and I am asking the
newspapers not to publish that picture or those pictures. I have
asked the people who took them not to use them, and have telegraphed to the newspapers not to use them. [Applause on the part
of the audience.] We have been rather generous with those people
who asked leave to take pictures at times when we were not in session, but that is the sort of thing that should not have occurred.
In fact, I think we shall do away entirely with the taking of pictures
from now on.
Now, Mr. Pecora, you may proceed.
Mr. PECORA. Will you resume the stand, Mr. Whitney?
Mr. DAVIS. Mr. Chairman, before Mr. Pecora begins, let me say
that Senator Gore and Senator McAdoo asked for certain figures,
which we have. We are willing to produce them now, but if you
443
444
STOCK EXCHANGE PEACTICES
think it would be more courteous to wait until the Senators are
present, we will withhold them.
Mr. PECORA. Suppose you wait until the Senators come in. Probably they had some special purpose in calling for them.
Mr. DAVIS. Very well.
The CHAIRMAN. Yes; I think we might wait until they come into
the hearing room.
TESTIMONY OF GEORGE WHITNEY, A PARTNER OF J. P. MORGAN
& CO.—Resumed
Mr. PECORA. Mr. Whitney, in looking over the stenographic transcript that I have here of the examination on the hearing held yesterday afternoon I notice at page 1096 of the typewritten transcript
a statement which you asked to have made a part of the record. I t
is captioned "Value of Certain Holdings at Acquisition and at
High Market Price for 1929." These figures purport to relate to the
valuation of those securities which were turned over by your firm
#0 the United Corporation in January of 1929 in exchange for certain
•stock and option warrants issued by the United Corporation, do they
mot?
Mx. WHITNEY. Yes, sir.
Mr. PECORA. And according
to these figures, if I properly understand them, had your firm not transferred those securities, which
consisted of securities of the Mohawk Hudson Power Co., United
Cras Improvement Co., and Public Service Corporation of New
Jersey, to the United Corporation in January of 1929, but had held
those securities until some time in July of 1929, or July, August, and
September of 1929, your firm could have sold those securities in
those summer months in the open market at prices representing the
liighest valuations reached in the open market that year, which
would have yielded to J. P. Morgan & Co. a profit equivalent to the
difference—well, a profit of $57,387,379. Am I correct in that interpretation of this statement?
Mr. WHITNEY. That is correct. I had introduced it, Mr. Pecora,
earlier, or these figures, and the reason I wanted to get it in the record
was because at that time I was being questioned on certain suppositious circumstances, and I had said that we had done some guessing
ourselves, or investigating, and if we had taken the high points, or the
high price at which each sold. And, of course, it is not practical but
a supposition, just as was the supposition you had questioned me
about, which had been totally impracticable. But that is a fact, in
answer to your question, that your definition of this statement is
exactly right.
Mr. PECORA. Have you, by any chance, prepared or caused to be
prepared, another statement which would indicate the profit which
-would have accrued to J. P. Morgan & Co. if it had sold in the open
market, in July, August, and September of 1929, the securities which
it had received from the United Corporation, not only in exchange
for these securities referred to in the statement appearing at page
1096 of the stenographic minutes of our hearings, but also the securities which your firm received on or about January 119 1929, for
:$10,000,000cash?
STOCK EXCHANGE PRACTICES
445
Mr. WHITNEY. Well, I do not think we have prepared them. You
asked me on yesterday, of course, a question about warrants, that
if we had sold them at 40 what we would have made. That was the
reason I answered that question, and you said $60,000,000.
Mr. PECORA. It was $68,000,000 plus.
Mr. WHITNEY. Well, $68,000,000.
Mr. PECORA. YOU did sell 200,000 warrants for an aggregate consideration of over $8,460,000, didn't you?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. And that left
your firm with 1,514,200 option warrants?
Mr. WHITNEY. Yes. In answer to your question about cash securities, the stock received for cash is rather a simple matter of arithmetic. There were 400,000 shares, and if you will tell me what the
high was, and I believe they sold at 73, didn't they? Can anybody
tell me what the high was ?
Mr. MCCANDLESS. I do not think we have the exact high. Here
is 6 8 ^ .
Mr. WHITNEY. The highest figure that we have any record of is
68%.
Mr. PECORA. That is on the common stock?
Mr. WHITNEY. On the common stock.
Mr. PECORA. 68%?
Mr. WHITNEY. Yes.
Mr. PECORA. And that
Mr. WHITNEY. Just to
high was reached on what date?
correct it I would say that that was the
high, that that is the highest on any date we have a record of.
Mr. PECORA. Well, I am willing to accept that as the basis for a
calculation of your, potential profits.
Mr. WHITNEY. The record here is that on June 29, 1929, it sold
at 68%, and on July 31, and on August 31, it sold on both of those
dates at 68%.
Mr. PECORA. Mr. Whitney, I am informed by a gentleman, who
has made research for me, that on September 23, 1929, sales of
United Corporation common stock were made at 75.
Mr. WHITNEY. Well, I said, Mr. Pecora, that our record and the
only record we have of the prices is on the 30th, the last day of the
month, during 1929. This is a memorandum prepared for another
purpose. I have no record with me to show. I do not deny that on
September 30th the stock was selling at 67%, but I just have no
records.
Mr. PECORA. According to information furnished to us by the
brokerage firm of Richard Whitney & Co., they sold on that date
at 69%, the common shares of the United Corporation.
Mr. WHITNEY. Are they the closing?
Mr. PECORA. For any sale price.
Mr. WHITNEY. On this paper it says "market price of common
stock, closing price New York Stock Exchange," on this date. That
would be the last sale, I mean on these dates.
Senator TOWNSEND. One figure would probably be high and another figure would be low for the day.
Mr. WHITNEY. I do not in any sense deny it, but do not have any
record to confirm it. As a matter of fact, Mr. Pecora, you will
remember, of course, that in the records we have already given to you
446
STOCK EXCHANGE PEACTICES
it is shown that 200,000 of those 400,000 shares were not bought by
the firm. They were bought for the account of the partners.
Mr. PECORA. Well, whether the profit accrued to the firm as an
entity or was divided with the individual partners, would not alter
the amount of the potential profit which might have been made on
those exchanges of securities with the United Corporation and upon
the purchase of those securities for $10,000,000 cash, would it?
Mr. WHITNEY. N O ; except that when we were sij^riiisiiig about
various things I thought it would be well to get the record accurate
as far as we could.
Mr. PECORA. I simply want to get a statement or your calculation
on the same basis as the one which you put into the record on yesterday afternoon, which would be designed to show the profit that
would have accrued to J. P. Morgan & Co. or its individual partners
had the firm sold the securities that it had acquired from the United
Corporation during the year 1929 in the open market. Now, let us
see: All told, your firm acquired from the United Corporation 800,000 shares of common stock and another block of 400,000 shares of
common, did it not?
Mr. WHITNEY. It
did.
Mr. PECORA. Which makes a total of 1,200,000 shares of common?
Mr. WHITNEY. Yes.
Mr. PECORA. Assuming
that those had been sold for $70 a share,
which is in between the price of 68 that you quoted and 75 which
according to our records was the high that that stock reached, that
would have given your firm $84,000,000 for those 1,200,000 shares of
common stock, would it not?
Mr. WHITNEY. YOU are assuming that we paid for them.
Mr. PECORA. I beg pardon ?
Mr. WHITNEY. YOU are assuming that we paid for them.
Mr. PECORA. I am assuming that who paid for them ?
Mr. WHITNEY. That is 45 points profit that you are speaking of%
Mr. PECORA. I am just taking the gross, $70 a share for 1,200,000°
shares.
Mr. WHITNEY. If we are going to surmise let me say that you do
not credit anything to the fact that we paid something for them.
Mr. PECORA. Oh, yes. I am going to do that. I am going to
complete the statement.
Mr. WHITNEY. That was not $84,000,000 profit, you understand.
Mr. PECORA. Oh, no.
Mr. WHITNEY. I just wanted to get that clear.
Mr. PECORA. I t was the price at which that common
stock could
have been sold, not the profit.
Mr. WHITNEY. All right.
Mr. PECORA. But the gross price?
Mr. WHITNEY. That is the gross, or I assume it is.
Mr. PECORA. And your firm also acquired in January of 1929 an
aggregate of 1,714,200 option warrants. Now, those option warrants
according to your own testimony reached a market valuation in
July, August, and Steptember of $40 a warrant and up, did they not?
Mr. WHITNEY. Yes.
Mr. PECORA. Just assuming
that those option warrants had been
sold at 40, not the price of 47, which they reached, that would have
STOCK EXCHANGE PEACTICES
447
resulted in a sale of those warrants for an aggregate of $68,568,000,
is that right?
Mr. WHITNEY. That is multiplying 40 by 1,714,200 warrants?
Mr. PECORA. Yes.
Mr. WHITNEY. Well, somebody
Mr. PECORA. That would make a
do this arithmetic for me.
total of $152,568,000 for the option
warrants and the common stock alone.
Mr. WHITNEY. YOU are not putting in the preferred when we are
doing this guessing?
Mr. PECORA. N O ; we are leaving the preferred
out of the picture
:
for the time being.
Mr. WHITNEY. All right.
Mr. PECORA. What did those 1,200,000 shares of common and the
1,714,200 option warrants cost J. P. Morgan & Co. ?
Mr. WHITNEY. YOU are still leaving out the preferred? That
is not of any interest to you ?
Mr. PECORA. Yes.
Mr. WHITNEY. The
fact that they were bought together or received together, does not interest you in this calculation?
Mr. PECORA. We will give the preferred stock a valuation if you
wish, which was $50, wasn't it?
Mr. WHITNEY. I do not really care. That was the cost, but I do
not think it really sold for $50 afterward. We will assume that
we will sell that at cost.
Mr. PECORA. It is not necessary to add cost at $50.
Mr. WHITNEY. I t did not sell at that afterwards.
Mr. PECORA. YOU can include them if you want to, and get the
valuation of each preferred share.
Mr. WHITNEY. I want to know what you are getting at. Didn't
we pay $25 a share for that common stock ? Isn't that what you
want me to say?
Mr. PECORA. I want you to say whatever the fact is.
Mr. WHITNEY. YOU see, we paid for those things in blocks and
exchanges. We received securities, and the $25 item is the figure
you are trying to get at. Say, $25 for 1,200,000 shares and it
would be $30,000,000.
Mr. PECORA. What does that $30,000,000 represent? The cost of
the preferred?
Mr. WHITNEY. That is again a matter of arithmetic. I may be
wrong, but 1,200,000 shares at $25 I think is $30,000,000.
Mr. PECORA. All right, $30,000,000. I have that figure now.
Senator TOWNSEND. What was the set-up there with the preferred
and the common?
.
Mr. WHITNEY. Why, Senator Townsend, we exchanged certain securities which have been introduced here, plus $700,000, for $50,000,000 worth of securities of the United Corporation. Those were
600,000 shares of $3 preferred stock, 800,000 shares common stock,
and 700,000 and something warrants. Then in a subsequent transaction we paid $10,000,000 for 400,000 shares of common stock and
1,000,000 warrants. So that is where the 1.200,000 shares of common stock comes in. The fact is that we immediately resold 600,000
shares of preference stock and 600,000 shares of common stock at
175541—33—PT. 2
10
448
STOCK EXCHANGE PRACTICES
$75 per unit, 1 share each, which was at no profit to us. So we
actually disposed of that many.
Mr. PECORA. The preferred was at 50 and the common at 25; isn't
that a fact?
Mr. WHITNEY. This is a discussion, as I understand it, of what we
might have done, although it is perfectly well known that we did not
do any of these things. It is known that we sold some United
Corporation warrants, and it is known that we sold some United
Corporation common stock. It is a speculation that if we had done
hone of the things that we did do, that we could have done the other.
Mr. PECOEA. Mr. Whitney, don't you recognize the fact that you
started that discussion by putting that statement in the record on
yesterday ?
Mr. WHITNEY. NO, sir. I did not start the discussion. You
started it, if I may refresh your recollection, by asking me if we
sold the remaining 1,500,000 warrants at $40 how much profit we
would have made. So I said if we did this
Mr. PECORA (interposing). Oh, no.
Mr. WHITNEY. I am perfectly willing to go on with this, you
understand ?
Mr; pEceRA. You put in this statement at page 1096 of the stenographic record of our hearings, did you not?
Mr. WHITNEY. Certainly.
Mr. PECORA. And in that statement you purported to show how
much profit J. P. Morgan & Co. would have made if instead of
exchanging the securities shown on this statement for securities of
the United Corporation you had sold those securities in the open
market at the highest prices reached during the year 1929.
Mr. WHITNEY. That is exactly right.
Mr. PECORA. And the statement which you put in the record tends
to show that had your firm done that your profit would have been
$57,387,000.
Mr. WHITNEY. That is exactly right.
Mr. PECORA. NOW, I want to show the other side of the picture.
That if you had sold the holdings or the stock, the securities, which
your firm received from the United Corporation in the open market,
not at the high reached during the year 1929 but at prices several
points less than the high that was reached, you would have reaped
profits aggregating $122,508,000.
Mr. WHITNEY. That exactly checks with my arithmetic.
Mr. PECORA. All right, sir.
The CHAIRMAN. Mr. Whitney, did the United Corporation make
the profits on those securities that you might, have made ?
Mr. WHITNEY. They did not sell them; no, sir. No; they did not
sell them. The only securities I remember their selling was the
stock, as stated here on yesterday, of the International Telephone &
Telegraph Co., which is not in this particular list of securities, in
which they made $900,000 profit. As far as I know, that was the
only sale.
The CHAIRMAN. When did you dispose of those warrants, Mr.
Whitney?
Mr. WHITNEY. TWO hundred thousand warrants?
The CHAIRMAN.
Yes.
STOCK EXCHANGE PEACTIOES
449
Mr. WHITNEY. I will just get the dates, i t was during the summer of 1929.
The CHAIRMAN. All'right.
Mr. WHITNEY. Senator Fletcher, we sold in the months of July,
August, and September, and the first date was July 23 and the last
date was September 20, that is, 200,000 then, and then the firm
distributed the remaining 1,514,200 warrants to the individual
partners on December 19, 1929.
Mr. PECORA. Mr. Whitney, didn't you actually sell 294,000 shares
of common stock in the market ?
Mr. WHITNEY. Senator Fletcher's question was about the warrants.
Mr. PECORA. I am asking in addition to them. You actually sold
294,000 shares of common stock in the market, didn't you?
Mr. WHITNEY. Well, that is right here somewhere. May I look?
Mr. PECORA. All right. That was out of the 400,000-share lot
which you received initially with 1,000,000 option warrants for
$10,000,000 cash.
Mr. WHITNEY. Of course, it would be impossible for me to identify which stock it came from.
Mr. PECORA. Look at this statement. Maybe it will help you.
Mr. WHITNEY. Mr. Pecora, in answer to your question, I will say,
yes; we have since that time and up to the present time we have sold
a total of 294,000 shares. Of course, some of that was in 1929. And
we purchased some in the time of the panic, and we sold some more.
But that is the whole record from that date to this. Then you will
also remember that we sold to the partners 200,000 shares.
Mr. PECORA. NOW, Mr. Whitney
The CHAIRMAN (interposing). Let me ask you what you got for
the warrants, and what you got for the stock; not in detail but just
the average.
Mr. WHITNEY. Well, Senator Fletcher, in the matter of the stock
in 1929 the prices we received ranged from—
Mr. PECORA (interposing). The Senator asked for the warrants.
What you got for the warrants.
Mr. WHITNEY. Excuse me. The high price I find was 47.017 and
the low price was 40.5391. Now, do you want the stock, too?
The
CHAIRMAN.
Yes.
Mr. WHITNEY. In 1929 the sales that were made ranged from a
high of 73% to a low of 67. That was in the summer of 1929. Then
we purchased certain stock in October of 1929. And we sold certain
stock in November of 1929. We purchased stock from a high of
47 down to 24%, and I do not know what the average was for the
whole amount. And we sold at about 35 or 36. And then in November again we purchased back 4,000 shares from 33 down to 27. Then
in 1930 we bought 3,100 shares at 22% and we sold 3,500 shares at
22%, about the same. In 1931 we sold stock at prices ranging from
31% down to 24. We bought a few shares in 1931. And then the
last/sale was in 1932 and we sold 300 shares at 9%. In January
of 1933 we sold 1,700 shares at 9%.
Mr. PECORA. Mr. Whitney, do you know how many sets of the
minutes of meetings of the board of directors of United Corporation are made ?
450
STOCK EXCHANGE PEACTICES
Mr. WHITNEY. HOW many what?
Mr. PECORA. HOW many sets or copies.
Mr. WHITNEY. I haven't any idea. Do you want me to ask?
Mr. PECORA. I S there a set of minutes or a copy of the minutes kept
in the offices of J. P. Morgan & Co. ?
Mr. WHITNEY. DO you mean located in the office?
Mr. PECORA, Yes.
Mr. WHITNEY. I really
do not know. But when Mr. Keyes was
treasurer of the company he very well might have. I do not know.
I am advised there is only one complete set.
Mr. PECORA. NOW, in the initial transaction involving the exchange of securities between J. P. Morgan & Co. and the United
Corporation, and I am referring to the one that was consummated
on or about January 11, 1929, what was the market value of the securities which were turned over by J. P. Morgan & Co. to the United
Corporation ?
Mr. WHITNEY. Mr. Pecora, in one of the exhibits on yesterday you
read a statement on the date of delivery of those securities by J. P,
Morgan & Co., namely, January 10, 1929. Those assets taken at the
market price exceeded $64,000,000. They were securities which together with the $700,000 cash, were set up in the United Corporation
books at $50,000,000.
Mr. PECORA. I was just coming to that. Those securities which you
say had a market value of $64,000,000, were set up on the books of
the United Corporation for $50,000,000.
Mr. WHITNEY. Yes, sir.
Mr. PECORA. Why was that done ?
Mr. WHITNEY. Why ?
Mr. PECORA. Why were these securities
carried on the books of the
United Corporation at $50,000,000 if in truth and in fact their
market value then was approximately $64,000,000 ?
Mr. WHITNEY. Well, for this quite simple reason, I think, Mr.
Pecora, that the United Corporation did not just spring into being
overnight. It had been discussed for a good while, long while, and
the prices at which these securities were to be taken in and the basis
of the exchange which was applicable not only to securities which
we turned in but also to the securities that were subsequently, almost
immediately subsequently, turned in by the—what is the name of
the
•
Mr. PECORA. American Super Power Co. ?
Mr. WHITNEY. Yes. Also, these other individuals who later on
turned them in. I refer to Mr. Zimmermann, and there is a list of
quite a lot of them, as you know. That all those calculations were
based on the price of 160 for the U.G.I., 80 for the Public Service,
and, of course, this is the only Mohawk Hudson that was turned in,
that price being determined by the fact that it was cost to us, and
they just took over that stock at the price we had paid General
Electric for it.
In other words, in the whole calculation of the formation of
United these prices were determined a way in advance, and, as a
matter of fact, the fact that they were selling above that was due
to the fact that there was quite an excited market just at this particular moment, and it could not
STOCK EXCHANGE PRACTICES
451
Mr. PECORA. HOW far in advance of January 10, 1929, were those
prices determined ?
Mr. WHITNEY. Well, of course, the price of the Mohawk Hudson
was determined back in December, as I testified yesterday, at the
time—it was always understood that when they were going in here
they were going in as cost. I could not speak from definite recollection, Mr. Pecora r on the date, but I should think it was probably a
couple of weeks before. Was it? [Addressing an associate.] I
really don't remember whether it was the end of December, 1928. I
think it was, though. I think it was in December, the latter part of
December, 1928. Did I answer that as fully as you wanted me to?
I just don't remember exactly, but my guess would be, or my impression would be, it was the last week in December, 1928.
Mr. PECORA. Did that figure of $50,000,000 purport to represent
the cost of those securities to the persons who turned them in to the
United Corporation?
Mr. WHITNEY. Purport to?
Mr. PECORA. Yes.
Mr. WHITNEY. Again I do not understand
Mr. PECORA. I am trying to find out the
you.
definite basis or reason
for carrying those securities on the books of United Corporation
which it received on January 10, 1929, at a figure of $50,000,000
instead of their then market value, which you say was then around
$64,000,000.
Mr. WHITNEY. Well, as I say, in the organization of the United
these securities were taken in; those prices were fixed in advance of
the formation of the company. The whole financial set-up was
predicated upon these prices.
Mr. PECORA. YOU mean by that, Mr. Whitney
Mr. WHITNEY (interposing). May I
Mr. PECORA (continuing). That $50,000,000 was the cost to the
United Corporation of those securities?
Mr. WHITNEY. They issued securities in exchange for these securities plus the cash, $700,000, which were valued as of $50,000,000. If
they had taken them at 64, we obviously would have received
$14,000,000 more of preferred and common stocks and new warrants,
and it having been determined in advance all the way down the
line—I mean the Super Power, these other gentlemen and ourselves,
would have obviously received additional securities when you, as we
did, determine the value of the preferred to be 50 and the common to
be 25. In other words, that would have been the only result.
I am trying to answer you fully. I don't quite understand the
question. The fact is they were set up at $50,000,000. Securities
were issued in exchange by United Corporation to us for $50,000,000.
In other words, 600,000 shares of the units of the preferred stock,
800,000 shares of the common stock, and 714,000 of the warrants
were taken to have a value of $25,000,000—of $50,000,000. That was
again supported by a listing statement. In May it was stated that
they were taken up.
Senator TOWNSEND. Did the fact that the stocks had advanced in
price during the negotiations change that figure ?
Mr. WHITNEY. NO. The arrangement between all the organizers,
every individual or corporation, to turn the securities in was ar
452
STOCK EXCHANGE PEACTICES
ranged in advance, and these prices were fixed as being proper prices,,
and did not fluctuate day to day in the market.
Mr. PECORA. Weren't your firm and Bonbright & Co. virtually
dealing with yourselves and among yourselves in this set-up ?
Mr. WHITNEY. Why, of course we were.
Mr. PECORA. YOU could have fixed any valuation you chose for
these securities on the books of United Corporation, is that right?
Mr. WHITNEY. Why, Mr. Pecora, I think I must have testified a
half a dozen times that Bonbrights and ourselves were the
organizers.
Mr. PECORA. I know. Now
Mr. WHITNEY (interposing). We fixed this price at a fair market
at the time it was fixed. It was a little bit below the market. We
did not figure eighths, and you will notice that these are round
figures, $160 and $80, which was slightly below the market at the
time they were fixed. As I say, the Mohawk was determined by cost.
This $41.26 is $40 plus interest from June. That is the way it comes
to $41.26. The others were fixed at round figures which were at the
time of their being fixed slightly below the market. I mean I think
it was 61.
Mr. PECORA. NOW, the United Corporation was organized as a
holding company to acquire securities of public utility companies,
wasn't it ?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. And it acquired
those securities from time to time,
made investments in public utility corporation securities from time
to time with its capital funds, didn't it?
Mr. WHITNEY. It
did.
Mr. PECORA. And the first investment it made
Mr. WHITNEY (interposing). With capital funds and exchange of
stock.
Mr. PECORA. Yes. And the first investment it made following the
sale of certain of its common stock and option warrants to your firm
and to Bonbright & Co. for an aggregate of $20,000,000 cash; was this
transaction of January 10, 1929, involving an exchange of securities,
wasn't it?
Mr. WHITNEY. That was the first transaction we had at all; yes.
Mr. PECORA. Yes. Now, the securities that you received, that
United Corporation received in that transaction were set up on the
books of United Corporation at $50,000,000, weren't they?
Mr. WHITNEY. Certainly.
Mr. PECORA. Was that figure intended to represent the cost of those
securities to the United Corporation?
Mr. WHITNEY. Certainly.
Mr. PECORA. All right. The market value of the securities at that
time was about $64,000,000, you said?
Mr. WHITNEY. SO I just read you.
Mr. PECORA. Yes. Now, as a matter of fact, a financial statement
put out by the United Corporation after this initial transaction
would have shown a profit to the United Corporation of some $14,000,000 as a result of setting up these securities having a market
value of $64,000,000 at $50,000,000, wpuldn't it?
Mr. WHITNEY. We never issued a statement where we called it
market
appreciation. The United never did. The answer to your
453
STOCK EXCHANGE PEACTICES
question is no, Mr. Pecora. No financial statement of United would
have shown a $14,000,000 profit merely because the market was there.
Mr. PECORA. Suppose a valuation had been made of its assets for
the purpose of showing its financial condition after this transaction
of January 10?
Mr. WHITNEY. Well, perhaps
Mr. PECORA (interposing). Wouldn't such a statement show a
profit of $14,000,000?
Mr. WHITNEY. I think I can answer that question very simply
for you, because the first statement that was ever made, public statement, by the United Corporation was in their application to list on
the New York Stock Exchange, which is dated May 8, 1929, and
which gives their financial statement right there at the close of
business April 23, and that will show these securities set up at that
price and not set up showing any profit resulting from any market
appreciation, if there was one of that day. Now, do you want me to
read that? It gives that and lots of other information, of course.
So I can answer your question definitely no, because they do not
show any profit through mere market appreciation.
Mr. PECORA. Does that listing application give the cost or the
market value of the securities that the corporation then had in its
portfolio ?
Mr. WHITNEY (after conferring with associates). Mr. Pecora, Mr.
Keyes confirms my own understanding that those prices show the
book value, namely, these securities here listed; again, as a matter
of arithmetic, but the prices at which these are set up are the prices
at which they were taken in, namely, these prices in all instances.
Mr. DAVIS. I think we would rather like that to go into the record,
Mr. Chairman, if there is no objection.
Mr. PECORA. I have no objection to its going in.
The CHAIRMAN. It may go in as a part of the record.
(Listing application of the United Corporation dated May 8,
1929, was marked " Exhibit 35 of June 1, 1933 ", made a part of
the record, and appears in the words and figures following:)
EXHIBIT 35
COMMITTEE ON STOCK LIST, NEW YOKK STOCK EXCHANGE
The United Corporation {a corporation organized under the laws of Delaware
Jan. 7, 1929) $3 cumulative preference stock, without par value {voting)
<W>d common stock, without par value {voting)
cumula- First preCommon $3
tive prefferred
stock
erence stock
stock
Original listing:
Authorized issue
_
Issued, and outstanding to Apr. 23, 1929
Additional shares to provide for exchanges of United Gas Improvement Co. shares
Eeserved against issued or authorized option warrant? entitling
the holders to purchase shares of common stock as hereinafter
described
_
.__
Applied for
Authorized by directors 1
No further authority required.
1
Beginning June 8, 1929, to date.
Shares
10,000,000
5,184,284
Shares
2,000,000
1,435,251
481, 626
321,084
4,000, 000
9,665,910
1, 756, 335
Shares
1,000,000
None.
None-
454
STOCK EXCHANGE PKACTICES
Capital securities
Number of
shares authorized for issuance upon
Authorized exercise of' To be pres- PrePar Authorized and issued options under ently issued viously
common
and outvalue by charter to Apr. 23,
stock option standing listed
1929
warrants and
to provide for
exchanges of
U.G.I, stock
First preferred stock
None
Preference stock
None
Common stock
None
Option warrants (entitling the
holders to purchase at any time
without limit 3,994,757 shares of
common stock at $27.50 per share) _
1,000,000
2,000,000
10,000,000
1,435,251
5,184,284
3,994,757
321,084
4,481,626
1,756,335
9,665,910
None
None
None
3,994,757
1
Authority to issue option warrants and to fix the terms and conditions is specifically conferred on the
board of directors by charter.
NEW YORK, April 2Jh 1929.
The United Corporation, a Delaware corporation (hereinafter referred to as
the company), hereby makes application for the listing on the New York Stock
Exchange of temporary certificates for the stock below described:
1,756,335 shares of the company's $3 cumulative preference stock (without
par value) as follows:
1,435,251 shares issued and outstanding;
32i,6^4fshares, on official notice of issuance in exchange for
shares of United Gas Improvement Go.;
9,665,910 shares of the companys' common stock (without par value) as
follows:
5,184,284 shares issued and outstanding;
481,626 shares, on official notice of issuance in exchange for
shares of United Gas Improvement Go.;
4,000,000 shares on official notice of issuance on the exercise of
option warrants as hereinafter described;
with authority to admit to the list, upon official notice of issuance, and in exchange for such temporary certificates, permanent engraved certificates of $3
cumulative preference stock, and permanent engraved certificats of common
stock.
i
All of said stock is, or will be when issued, fully paid and nonassessable, and
no personal liability attaches to the stockholders.
Of the above stock, for which application to list is hereby made, there was
issued for cash or in exchange for securities 1,435,251 shares of $3 cumulative
preference stock, 5,184,284 shares of common stock, and certain option warrants
entitling the holders to purchase at any time without limit 3,994,757 shares of
common stock at $27.50 per share.
On March 1, 1929, the company offered to receive tenders for the exchange of
not to exceed 500,000 shares of the capital stock of the United Gas Improvement Go. for shares of the $3 cumulative preference stock and common stock of
the United Corporation on the basis of 1 share of the United Gas Improvement
Co. capital stock for 1% shares of the $3 cumulative
preference stock entitled
to dividends accruing from April 1, 1929, and 21/4 shares of the common stock
of the United Corporation. The company reserved the right to withdraw the
offer at any time.
ORGANIZATION
The company was incorporated under the laws of the S^ate of Delaware on
January 7, 1929.
;While the company is possessed of the usual broad charter powers entitling
it to acquire, hold, or dispose of stocks of ther corporations, its principal
purposes are described as follows:
1. To acquire and hold the securities of electric power and light and gas
companies and other public-utility companies and companies owning the stocks
or securities of public-utility companies.
2. To acquire and hold the securities of companies engaged in the business
of managing or operating, or supervising the management or operation of
455
STOCK EXCHANGE PRACTICES
public-utility companies, and of companies doing a general construction, engineering, or contracting business with public utility and other companies.
While possessing the right to dispose of any such holdings, at such time as in
the opinion of its officers and directors may be deemed advisable, and also the
right to acquire additional securities beyond those with which it begins business,
it is not the present intention that the company shall engage in trading in
securities as a business.
The duration of the corporate existence is perpetual.
HISTORY OF THE COMPANY
The United Corporation was incorporated under the laws of the State of
Delaware on January 7, 1929. The amount of capital wth which the company
commenced business was 10 shares of its authorized common stock without
nominal or par value.
The Public Electric Holding Corporation was formed January 10, 1929 with
one class of authorized capital stock. The number of shares authorized was
10,000 and the par value $100 per share.
Pursuant to an agreement of merger and consolidation between the United
Corporation and the Public Electric Holding Corporation continuing the United
Corporation, dated January 11, 1929, the United Corporation exchanged shares
of its stock for the assets of the Public Electric Holding Corporation. It was
provided that each holder of the capital stock of the Public Electric Holding
Corporation upon surrender of certificates representing such stock should
receive $3 cumulative preference stock, common stock, and option warrants of
the United Corporation at the rate of 34.4187 shares of $3 cumulative preference
stock, 221.0853 shares of common stock and option warrants entitling the holder
to purchase 100 shares of common stock for each share of the capital stock
of the Public Electric Holding Corporation surrendered.
All shares of the capital stock of the Public Electric Holding Corporation
were surrendered under the agreement and the United Corporation continued
without change in its total authorized capitalization.
MANAGEMENT AND AFFILIATION
The management of the United Corporation is vested solely in its board of
directors who are elected from time to time by the stockholders. Each class
of stock is entitled to 1 vote per share.
The present directors are: George H. Howard, president of this corporation;
Thomas S. Gates, of Drexel & Co., Fifteenth and Walnut Streets, Philadelphia,
Pa.; Alfred L. Loomis, of Bonbright & Co., Inc., 25 Nassau Street, New York,
N.Y.; Landon K. Thorne, of Bonbright & Co., Inc., 25 Nassau Street, New York,
N.Y.; George Whitney, of J. P. Morgan & Co., 23 Wall Street, New York, N.Y.
DIVIDENDS
On April 1, 1929, an initial quarterly dividend of 75 cents per share was
paid on the $3 cumulative preference stock to holders of record at the close
of business March 11, 1929.
CAPITALIZATION
The company's capitalization is as follows:
Number of
shares authorized for issuance upon
Authorized exercise of To be pres- PrePar Authorized and issued options under ently issued viously
common
and outvalue by charter to Apr. 23,
1929
stock option standing listed
warrants and
to provide for
exchanges of
U.G.I, stock
None
First preferred stock
Preference stock
None
Common stock
None
Option warrants (entitling the
holders to purchase at any time
without limit 3,994,757 shares of
common stock at $27.50 per share).
1,000,000
2,000,000
10,000,000
1,435, 251
5,184, 284
0)
3,994,757
321,084
4,481,626
1, 756, 335
9,665,910
None
None
None
3,994,757
i Authority to issue option warrants and to fix the terms and conditions is specifically conferred on the
board of directors by charter.
The company has no funded indebtedness.
456
STOCK EXCHANGE PEACTICES
STOCK PROVISIONS
The company under its charter will have three classes of capital stock, viz,
first preferred stock, preference stock, and common stock, all without par value.
Of the first preferred stock none has yet been authorized for immediate
issuance by the directors of the company.
First preferred stock of the company may be issued under the following
provisions:
First preferred stock may be issued in various series, each series to be distinctly designated. The dividend rate of each series shall be determined by
the directors in the resolution providing for the issuance of such series. The
first preferred stock may, but need not be, made redeemable at the option of
the company at a price not less than $100 nor more than $115 per share, plus
all cumulative dividends on such share. The board of directors may provide
for a sinking fund for the first preferred stock of any series, installments for
which may be made payable in priority to any dividends upon the preference
stock and the common stock. The first preferred stock retired by the operation
of any such sinking fund shall not be reissued. The board of directors may
provide that the shares of any series of first preferred stock may be convertible
into shares of any other class or classes of stock of the company. The first
preferred stock shall be entitled to dividends in priority to the preference stock
and the common stock. Such dividends upon the first preferred stock shall be
cumulative. Upon dissolution, liquidation, or winding up of the company, the
holders of the first preferred stock shall be entitled to receive $100 per share,
plus accrued dividends and no more. The holders of first preferred stock shall
be entitled to one vote for each share held by them respectively.
Of the preference stock, 1,756,335 shares have been designated as $3 cumulative preference stock with the following provisions:
The $3 cumulative preference stock is entitled to cumulative dividends at the
rate of $3 per annum, payable quarterly on the first day of each January, April,
July, and October; and is redeemable as a whole or in part at the option of the
company at $55 per share and accrued dividends.
The directors may provide for the issuance of additional shares of preferred
stock, which may be issued as $3 cumulative preferred stock or may be issued
as a different series having such rate of dividend as may be determined by the
directors. Such additional shares of preference stock as may be issued may be
made redeemable, at the option of the company, at not less than $50 nor more
than $60 per share, plus all dividends accrued. The directors may provide for
a sinking fund for such shares, installments for which may be made payable
in priority to any dividends upon the common stock. The preference stock
retired by the operation of any such sinking fund shall not be reissued. The
board of directors may provide that the shares of such series may be convertible
into any shares of any other class or classes of stock of the company. The
preference stock of each series shall be entitled to dividends in priority to the
•common stock. Such dividends upon the preference stock shall be entitled to
receive $50 per share, plus accrued dividends and no more. The holders of
preference stock shall be entitled to 1 vote for each share held by them
respectively.
None of the shares of the common stock shall be entitled to any preference.
Out of any assets of the company available for dividends, after full cumulative
dividends on all stock having priority over the common stock have been paid,
and after complying with all provisions of any sinking funds, and making provision for working capital and reserves, then the directors may declare dividends upon the common stock. In the event of liquidation, after there have
been paid to the holders of all stock having priority over the common stock the
full amounts to which they are entitled, the holders of the common stock shall
be entitled to receive pro rata all of the remaining assets of the company. The
holders of the common stock shall be entitled to 1 vote for each share held by
them respectively.
OPTION WARRANTS
There are outstanding option warrants entitling the holders to purchase at
any time without limit 3,994,757 shares of common stock at the price of $27.50
per share. The option warrants were issued together with certain shares of
common stock, in exchange for securities and/or cash. Additional option
warrants may be issued by authority of the board of directors.
457
STOCK EXCHANGE PRACTICES
Financial statements of the United Corporation (Delaware corporation) close
of business, Apr. 23, 1929
Shares
Amount
ASSET3
Mohawk Hudson Power Co.:
Common stock
_
_
Second preferred stock
Option warrants, entitling holders to purchase the following number of
shares of common stock at $50 per share..Public Service Corporation of New Jersey common stock
The United Gas Improvement Co. capital stock
.
Allied Power & Light Corporation common stock
Columbia Gas & Electric Corporation common stock. _
Miscellaneous investments
Cash on hand
350,957
82,370
$14,481,478.90
6, 673, 590. 00
124,740
959, 682
525,470
340, 000
154,000
2,494,800. 00
76, 046, 220.00
88, 364,360.00
13, 770,000.00
8,401,825.00
11, 319,007.83
241,324. 95
221, 792, 606. 68
LIABILITIES
$3 cumulative preference stock
Common stock
Option warrants entitling holders to purchase at any time without limit
3,994,757 shares of common stock at $27.50 per share,
Paid-in surplus
$122,315,095.00
Less organization expenses and tax stamps
179,503.64
71, 762, 550.00
25, 921,420.00
1,435,251
5,184, 284
3,994, 757
Demand loans. _
_
_
Eeserve for taxes
__
_
Profit and loss, Jan. 8 to Apr. 23,1929, after payment of dividend Apr. 1,1929.
122,135, 591.36
596,000.00
135, 000.00
1, 242,045.32
221, 792, 606.68
Profit and loss statement, close of business, April 23, 1929
CREDITS
Dividends received
Interest received
Profit on securities sold
Underwriting commission
$1, 010, 046.19
58, 573.06
963, 762. 50
130, 900.00
Total
2,163, 281. 75
DEBITS
Interest paid
Current expenses
1, 912. 50
29, 572. 68
31, 485.18
Less reserve for Federal income taxes_
2,131, 796. 57
135, 000. 00
1, 996, 796. 57
Dividend paid Apr. 1, 1929, on $3 cumulative preference stock—
754, 751. 25
ESTIMATED EARNINGS AND DIVIDEND REQUIREMENTS
Estimated annual dividends receivable on the basis of current
dividends on stocks owned on Apr, 23, 1929
Annual dividend on $3 cumulative preference stock issued and
outstanding Apr. 23, 1929
Total-
5, 633, 257. 95
4, 305, 753. 00
1, 327, 504. 95
VALUATION OF SECURITIES
The basis of valuation of the securities held at the close of business April 23,
1929, as set forth in the foregoing balance sheet is the original cost where
securities were acquired for cash or the original agreed value at which securities were acquired in exchange for shares, or for shares and option warrants
of the United Corporation.
458
STOCK EXCHANGE PEACTICES
Certain securities were acquired from firms in which some of the directors
are interested.
Certain shares of Public Service Corporation of New Jersey were acquired by
the United Corporation at an agreed value of $80 per share.
Certain shares of the United Gas Improvement Co. were acquired at an agreed
value of $160 per share.
Mohawk Hudson Power Corporation securities were acquired from bankers
at prices representing exact cost and accrued interest to the said bankers.
Miscellaneous assets shown in the balance sheet at a cost of $11,319,007.83
have a market value at the closing sale prices on April 23 of $11,529,807.50.
The total cost of securities acquired and held by the United Corporation at
the close of business April 23, 1929, was $221,551,281.73. The market value of
the said securities computed, at the closing sale prices on April 23 amounted to
$242 503,651.75, showing an increase of market value over and above cost of
$20,952,370.02.
AGREEMENTS
The company agrees with the New York Stock Exchange as follows:
To notify the stock exchange in the event of a change in the character of its
business.
To notify the stock exchange in the event of any substantial change in the
management or affiliations of the company.
To publish statement of earnings semiannually.
To publish once in each year and submit to the stockholders, at least 15 days
in advance of the annual meeting of the corporation, a statement of its financial condition, an income account covering the previous fiscal year, and a balance sheet showing assets and liabilities at the end of the term.
To maintain, in accordance with the rules of the stock exchange, a transfer
office or agency in the Borough of Manhattan, city of New York, where all
listed securities shall be directly transferable, and the principle of all listed
securities with interest or dividends thereon shall be payable; also a registry
office in the Borough of Manhattan, city of New York, other than its transfer
office or agency in said city, where all listed securities shall be registered.
To notify the stock exchange 30 days in advance of the effective date of any
change in the authorized amounts of listed securities.
Not to make any change in listed securities, of a transfer agency or of a
registrar of its stock, without the approval of the committee on stock list.
To notify the* stock exchange in the event of the issuance or creation in
any form or manner of any rights to subscribe to, or to be allotted, its securities, or of any other rights or benefits pertaining to ownership in its securities,
so as to afford the holders of its securities a proper period within which to
record their "interests, and that all rights to subscribe or to receive allotments
and all other such rights and benefits shall be transferable; and shall be
transferable, payable and deliverable in the Borough of Manhattan, city of
New York.
To make application to the stock exchange for the listing of additional
amounts of listed securities prior to the issuance thereof.
To publish promptly to holders of stocks any action in respect to dividends
on shares, or allotment of rights for subscription to securities, notices thereof
to be sent to the stock exchange, and to give to the stock exchange at least
10 days' notice in advance of the closing of the transfer books or extensions,
or the taking of a record of holders for any purpose.
To have on hand at all times a sufficient supply of certificates to meet the
demands for transfer.
GENERAL
The fiscal year of the company will end on December 31 of each year.
The annual meeting of stockholders will be held at the office of the company
in the city of Wilmington, county of New Castle, State of Delaware, at 2 p.m.
on the first Tuesday in February in each year.
The directors are Thomas S. Gates, George H. Howard, Alfred L. Loomis,
Lanrion K. Thorne, and George Whitney.
The officers are George H. Howard, president; Leonhard A. Keyes, vice
president and treasurer; A. P. Taliaferro, vice president; Ernest G. Strand,
secretary.
The transfer agent of the preference and common stock is J. P. Morgan &
Co., of New York.
STOCK EXCHANGE FBACTICES
459
The registrar of the preference stock is First National Bank of the City of
Kew York.
The registrar of the common stock is Bankers Trust Co. of New York.
The transfer agent of the option warrants is J. P. Morgan & Co., of New York.
The registrar of the option warrants is Bankers Trust Co. of New York.
T H E UNITED CORPORATION,
By ERNEST G. STRAND, Secretary.
This committee recommends that the above-described temporary certificates
for 1,435,251 shares of $3 cumulative preference stock (without par value), and
5,184,284 shares of common stock (without par value) be admitted to the list,
with authority to add 321,084 shares of said $3 cumulative preference stock,
and 481,626 shares of said common stock, on official notice of issuance in exchange for shares of United Gas Improvement Co., and 4,000,000 shares of said
common stock on official notice of issuance on exercise of option warrants, with
further authority to admit permanent engraved certificates on official notice of
issuance in exchange for outstanding temporary certificates, all in accordance
with the terms of this application, making the total amounts authorized to be
listed: 1,756,335 shares of $3 cumulative preference stock (without par value)
and 9,665,901 shares of common stock (without par value).
ROBERT GIBSON, Chairman.
Adopted by the governing committee May 8, 1929.
ASHBEL GREEN,
Secretary.
Mr. PECORA. HOW were the option warrants set up on the, books of
the United Corporation at the outset.
Mr. WHITNEY. I am not much of a certified public accountant,
but I think I heard Mr. Howard say the other day they were set up
at a dollar [conferring with associates]. I am wrong. Mr. Pecora, may Mr. Keyes answer your question, because he has told me a
long story and I am afraid I won't do it accurately ?
Mr. PECORA. I have no objection, if he can answer it.
TESTIMONY OP L. A. KEYES, MANAGER J. P. MORGAN & CO.r-
Resumed
Mr. KEYES. I t is set up as a nonledger liability that always appeared in every public statement, as you will notice in the listing
application, and there are option warrants outstanding entitling the
holders to subscribe at any time without limit at $27.50, and giving
the amount of warrants outstanding.
Mr. PECORA. Were there any advantages accruing to the corporation from that kind of a set-up of these option warrants ?
Mr. DAVIS. Are you asking Mr. Keyes?
Mr. PECORA. Yes; I am asking Mr. Keyes.
Mr. KEYES. Would you mind repeating that?
Mr. PECORA. Yes; just read him the question.
The SHORTHAND REPORTER (Mr. Randolph). Were there any advantages accruing to the corporation from that kind of a set-up of these option warrants?
Mr. KEYES. What kind of advantages do you mean?
Mr. PECORA. Any at all. Are there any that you know ?
Mr. KEYES. AS a nonledger liability?
Mr. PECORA. Did any advantages accrue to the corporation, to the
stockholders, in setting up its option warrants on its books in the
manner in which you described?
Mr. KEYES. I don't know of any advantage to them.
Mr. PECORA. DO you recall receiving a letter from Mr. Roberts
under date of January 30,1929, Mr. Roberts then being the president
of United Corporation, in which he asked you to inform him of the
460
STOCK EXCHANGE PRACTICES
way in which these option warrants were entered on tha books of
United Corporation?
Mr. KEYES. I recall receiving a letter.
Mr. PECORA. Let me show you what purports to be a photostatic
copy of such a letter. Will you look at it and see if you can identify
it as a true copy of such a letter ?
Mr. KEYES. I es, sir.
(At this point Mr. Keyes took a seat ^t the committee table.)
Mr. PECORA. Did you answer the question about this letter?
Mr. KEYES. Yes; that is right.
Mr. PECORA. I offer it in evidence and ask it be spread on the
record.
The CHAIRMAN. Let it be spread on the record.
(Letter dated January 30, 1929, from George Roberts to L. A.
Keyes was thereupon designated " Committee Exhibit 32, June 1,
1933 ", and appears in the words and figures following:)
COMMITTEE EXHIBIT 32
WLNTHEOP, STIMSON, PUTNAM & ROBERTS,
NEW YORK CITY, January SO, 1929.
H A. KEYES, ESQ.,
J. P. Morgan & Go., Neiv York City.
'DEAE MR. KEYES: I would appreciate it if you would write me as to what
entries you have made on the books of the United Corporation in connection
with the issue of the option warrants. The practice seems to vary among
corporations as to how these should be entered, and I would like to examine
the entries of the United Corporation in this respect.
Very truly yours,
GEORGE ROBERTS.
[In handwriting]—Explained to Mr. Roberts February 1.
Mr. PECORA. NOW, did you reply to that letter of
Mr. Koberts',
Mr. Keyes?
Mr. KEYES. I explained it to him, I recall.
Mr. PECORA. Did you make any written reply to it?
Mr. KEYES. Not that I recall. I may have.
Mr. PECORA. I show you what purports to be a photostatic copy of
a memorandum dated January 31, 1929, entitled " Memorandum for
Mr. Roberts." Will you be good enough to look at it and see if
that refreshes your recollection as to whether or not you made a
written reply to Mr. Roberts' letter just offered in evidence?
Mr. KEYES (after examining document). That sounds familiar,
but I don't remember.
Mr. PECORA. Well, you mean to say the letter itself or its phraseology is familiar to you?
Mr. KEYES. Yes; that phraseology accurately sets forth the position
taken.
Mr. PECORA, NOW, I understand this was furnished to us by Mr.
LeBoeuf of the law firm and counsel for the United Corporation.
Is Mr. LeBoeuf here?
Mr. LEBOEUF. Yes; I am here.
Mr. PECORA. Will you look at that, Mr. LeBoeuf, please, just off
the record?
Mr. DAVIS. There is no question about its authenticity.
Mr. PECORA. All right. You need not bother with it. In view
of the fact that no question is raised as to the authenticity of this,
I offer that memorandum in evidence.
STOCK EXCHANGE PRACTICES
The
CHAIRMAN.
461
Let it be admitted and put in the record.
(Memorandum dated January 31, 1929, was thereupon designated " Committee Exhibit No. 33, June 1, 1933 ", and appears in the words and figures
following:)
JANUABY 31, 1929.
MEMORANDUM FOR MR. ROBERTS
Referring to your letter of January 30 concerning entries as to option
warrants, I am enclosing herewith a photostat copy of the United Corporation
ledger showing the entries.
In the various contracts it was recited that preference stock shall be capitalized at $50 per share, common stock at $5 per share, and the balance of the
consideration received for the common stock and the consideration received
for the option warrants shall be credited to surplus.
It will be noticed that no dollar values appear in the account. When and
as option warrants are exercised an entry will be made debiting cash at
$27.50 per share and this debit will also include a memorandum debit entry
to the option account for such warrants as are exercised. Credit would be
made for the common shares issued at $5 per share and the balance credited
to paid-in surplus.
The advantage of the bookkeping following the lines aforesaid is the fact
that the entire proceeds are credited to either capital or to paid-in surplus and
the paid-in surplus amount is thoroughly identified at all times.
Should it be necessary in the future to make a distribution to stockholders
out of paid-in surplus, such paid-in surplus may be distributed as a return of
capital to the stockholders and not as a taxable dividend.
I also believe that the method adopted correctly reflects the true position
of the option warrants at any time.
Mr. KETES. That is not a signed memorandum.
Mr. PECORA. DO you recognize it as a memorandum prepared by
you, Mr. Keyes?
Mr. KEYES. Yes; I did prepare one along those lines.
Mr. PECORA. I will read for the information of the committee the
exhibit 32 just offered in evidence, being the letter written to Mr.
Keyes by Mr. George Roberts on the letterhead of Winthrop, Stimson, Putnam & Roberts. [Reading :J
NEW YORK CITY, January 30, 1929.
L. A. KEYES, Esq.,
J. P. Morgan & Co., 23 Wall Street, New York City.
I would appreciate it if you would write me as to what
entries you have made on the books of the United Corporation in connection
with the issue of the option warrants. The practice seems to vary among corporations as to how these should be entered, and I would like to examine the
entries of the United Corporation in this respect.
Very truly yours,
"DEAR MR. KEYES:
GEORGE ROBERTS.
Exhibit 33, just offered in evidence, reads as follows.
[Reading:]
JANUARY 31, 1929.
Memorandum for Mr. Roberts.
Referring to your letter of January 30, concerning entries as to option warrants, I am enclosing herewith a photostat copy of the United Corporation
ledger showing the entries. In the various contracts it was recited that preferred stocks should be capitalized at $50 per share, common stock at $5 per
*share, and the balance of the consideration received for the common stock and
the consideration received for the option warrants shall be credited to surplus.
It will be noticed that no dollar values appear in the account. When and as
option warrants are exercised an entry will be made debiting cash at $27.50
per share, and this debit will also include a memorandum debit entry in the
option account for such warrants as are exercised. Credit would be made for
the common shares issued at $5 per share, and the balance credited to paid-in
surplus.
462
STOCK EXCHANGE PEACTICES
The advantage of the bookkeeping following the lines aforesaid is the fact
that the entire proceeds are credited to either capital or to paid-in surplus, and
the paid-in surplus amount is thoroughly identified at all times.
Should it be necessary in the future to make a distribution to stockholders
out of paid-in surplus, such paid-in surplus may be distributed as a return of
capital to the stockholders and not as a taxable dividend.
I also believe that the method adopted correctly reflects the true position of
the option warrants at any time.
Now, does this memorandum, Mr. Keyes, that I have just read,
set forth correctly your opinion of the advantages accruing to the
corporation and its stockholders from this method of setting up
the consideration received for the original issue of the capital stock
and option warrants of the United Corporation?
Mr. KEYES. Mr. Pecora, advantage or no advantage, that method
correctly sets forth my idea of the way it should have been get up.
Mr. PECORA. Well, you say " advantage or no advantage " ?
Mr. KEYES. Yes, sir.
Mr. PECORA. YOU refer to certain things
Mr. KEYES. Yes, sir.
Mr. PECORA. And one of the advantages
here as an " advantage."
was that it would enable
the corporation in the future to make a distribution to its stockholders out* of what was denominated as paid-in surplus, and that
such a distribution would be a return of capital and would not be
taxable as a dividend.
Mr. KEYES. That is correct, but that would have been the case
either way, any other way that they would have been set up.
Mr. PECORA. Why do you refer to it as an advantage by reason of
that set-up?
(At this point there was a short suspension of the proceedings.)
Mr. PECORA. Have you answered the question yet, Mr. Keyes?
Mr. KEYES. May I ask to have that question again ?
Mr. PECORA. Will you read it to him?
The shorthand reporter (Mr. RANDOLPH) (reading) :
Why do you refer to it as an advantage by reason of that set-up?
Mr. KEYES. Because the proper way to set it up, we believe, is the
advantageous way to set it up.
Mr. PECORA. Mr. Roberts in his letter to you indicated that there
were various way of setting that up, didn't he?
Mr. KEYES. He indicated that that
Mr. PECORA (interposing). He asked you what method you
adopted ?
Mr. KEYES. Yes.
Mr. PECORA. In behalf of the United Corporation, and in your written reply you said something about setting them up in a certain way
and called attention to certain " advantage " therefrom.
Senator GLASS. Mr. Keyes, as I read the Roberts request and your
memorandum, Mr. Pecora, if I may be permitted to ask a question,
was asking you to give him your bookkeeping arrangement, was
he not ?
Mr. KEYES. Yes, sir.
Senator GLASS. And you in
some detail in reply, as embraced in
your memorandum, were simply giving him your bookkeeping arrangement and the advantage to the company in keeping the books
accordingly ?
STOCK EXCHANGE PEACTICES
Mr. KEYES. Yes, sir.
Senator GLASS. IS that a correct statement of the case?
Mr. KEYES. That is correct.
Senator GLASS. Well, of what pecuniary advantage, if any,
463
to the
firm was your particular method of bookkeeping as contrasted with
the methods employed by various other concerns ?
Mr. KEYES. NO pecuniary advantage, Senator, that I know of,
because under the regulations the receipt of that $1 for the shares is
not taxable to the corporation. There was also the advantage that
Mr. Pecora gives, as centered in this: Some of the accountants would
credit that $1 to a capital account and have it appear as a liability
at $1, and others would say no, that that is not correct, because the
corporation owes that dollar to nobody. It came into it in the form
of a paid-in surplus, being received in connection with the issue of
securities, and any receipts by a corporation in connection with the
issue of a security is not a taxable income. So that, instead of
setting that
Senator GORE (interposing). Repeat that sentence.
Mr. KEYES. Any moneys that are received by a corporation from
the issuance of its securities is capital and not income.
Senator GORE. Yes.
Mr. KEYES. And the advantage that we had in mind at that time
was so as not to place that $1 into an account setting it up as a liability of the necessary amount of $4,000,000, because the corporation
did not owe that $4,000,000 to any one, and therefore it was credited
to paid-in surplus.
Mr. PECORA. Why was the common stock which, according to the
testimony of Mr. Howard, was sold at $25 a share, set up on the
books of the company at the outset at $5 per share and the balance
credited to surplus ?
Mr. KEYES. The common stock was a no-par value stock, and under
Delaware law you are permitted to declare a value on the mere
amount of the stock and the balance credited to paid-in surplus.
Mr. PECORA. If the common stock had been set up on the books of
the company at $25 instead of $5 as capital, then any distribution o l
that proportion of the assets of the company represented by the
common stock would have been taxable, would it not?
Mr. KEYES. NO, sir; it would not. I t would not have made any
difference as far as taxation goes. The amount credited to paid-in
surplus or to capital is an exempt fund, has nothing to do with tax
exemption.
Mr. PECORA. That distribution could have been made as distribution of capital in the way you set it up rather than as a distribution
of taxable dividends?
Mr. KEYES. YOU could not just credit it as a taxable dividend.
You could not. I t is paid-in capital or paid-in surplus, one or the
other.
Mr. PECORA. What was it, paid-in capital or paid-in surplus?
Mr. KEYES. Five dollars is paid-in capital and the balance is
paid-in surplus.
Mr. PECORA. That is an arbitrary determination, isn't it?
175541—-33—PT. 2
11
464
STOCK EXCHANGE PRACTICES
Mr. KEYES. Yes; it is. It is fixed, as permitted by the laws of
Delaware, by the board of directors.
The CHAIRMAN. Couldn't you declare dividends out of the surplus
but you could not declare dividends out of your capital?
Mr. KEYES. Senator Fletcher, you could not declare the dividends
out of a paid-in surplus. A paid-in surplus is a fund that is kept
separate by the department, and is continuously identified as
belonging to capital, and the distribution out of a paid-in surplus
in any return of the stockholder is not a taxable dividend.
Mr. PECORA. May Mr. Whitney resume the stand?
Senator GLASS. While Mr. Keyes is on the stand, may I ask him
some questions?
The CHAIRMAN. Certainly, Senator.
Senator GLASS. Can you approximate the amount of income, if
any, paid by the firm of J. P. Morgan & Co. in compliance with what
is known as the capital issues provision of the Internal Revenue
Act?
Mr. KEYES. I would have to compute that, Senator, because the
firm of J. P. Morgan & Co. as a partnership carries its partnership
income right into the individual returns.
Mr. PECORA. YOU mean by that, the firm itself pays no income
tax; it makes a return but pays no income tax?
Mr. KEYES. Pays no income tax.
Senator GLASS. I meant as to members of the concern, you dp not
know how much?
Mr. KEYES. NO, sir.
Senator GLASS. DO you
know, as I do, that the investment bankers
of the country, almost to a man, and many other persons, and practically all of the economists, protested against the passage of the
capital issues tax provision and from time to time begged Congress
to repeal it?
Mr. KEYES. Yes; I do know that.
Senator GLASS. DO you know that the Government in 7 years since
the passage of the act has collected $1,075,440,000 in taxes under that
provision of the law?
Mr. KEYES. I knew it was approximately that figure, Senator; I
did not know accurately.
Senator GLASS. I S it your opinion that if the Government has collected that immense amount of money, nearly a half billion dollars
in two years, 1928 and 1929, because of the capital issues tax, that
on the other end of the proposition the taxpayer should have the
right to write off his losses ?
Mr. KEYES. Out of otherwise taxable income!
Senator GLASS. Yes. In other words, if his holdings depreciate
in value. Is not that the purpose of the law ?
- Mr. KEYES. That is the purpose of the law now, Senator.
Senator GLASS. That is all.
Mr. DAVIS. May I ask you, Senator, whether your inquiry was
directed to the aggregate amount of taxes paid under this law, prior
to 1929?
Senator GLASS. Yes.
Mr. KEYES. For the year 1927, Senator Glass, the partners of J. P.
Morgan & Co. collectively paid out for income tax, both Federal and
STOCK EXCHANGE PRACTICES
465
State, $5,180,701.19. For the year 1928 they paid $6,172,693.70. For
the year 1929 they paid $10,990,876.58, and with an amount pending
of another $40,000 that will be paid, bringing it up to over $11,000,000.
The CHAIRMAN. Did they obtain any refund?
Mr. KEYES. Not in those years. I think there is one refund pending for the year 1926, amounting to about $30,000. There is a claim
for refund pending.
Senator GLASS. Suppose you had failed, if you please, to have
availed yourselves of the clear—if it is clear—the clear permission
of the law to write off $21,000,000 of losses under the capital-issues
provision of the revenue act and had paid income taxes that would
have been required, what would have been the difference in the
income tax paid under that provision of the law theretofore and the
income tax that you would have been required to pay that year had
not the law permitted you to write off ?
Mr. KEYES. I think, for 1929—now, this is just an estimate, Senator—the tax, instead of being $11,000,000, would have been seven or
eight million. In 1930 the tax would have been somewhere between
three and four millions.
Senator GLASS. I am not asking you to compare one year as
against another; I am asking you to compare the total of the years
in which you were required to pay taxes and the year in which you
wrote off your $21,000,000 of losses. In other words, I am trying to
derive for my own information and for the information of the committee and, if you please, for the information of the public interested
iii the matter, how much the firm of J. P. Morgan & Co. has saved
under the capital-issues provision of the revenue act.
Mr. KEYES. Senator, I do not think that it could be said we had
saved anything.
Senator ADAMS. YOU think the charging off of that $21,000,000
resulted in no saving of income taxes to J. P. Morgan & Co.
Mr. KEYES. That is right, because the $21,000,000, of course, would
have become a registered loss when those securities had been sold;
and then in the prior years, of course, there were amounts that were
increased and taxes paid on them.
Senator ADAMS. IS part or all of that $21,000,000 still flowing, in
a way, so that it can be still availed of?
Mr. KEYES. NO, sir. Of that $21,000,000 I do not think, now, there
would be a p&nny available one way or the other.
The CHAIRMAN. Why deduct it if you did not save anything?
Mr. KEYES. I thought the Senator meant on the carry-forward
provisions.
Senator ADAMS. I was interested in both aspects, whether or not
it was still available to offset against it.
Senator GLASS. What I am particularly interested in as a member
of this committee and as a legislator is to determine whether, in the
course of 7 years since the adoption of the capital issues provision of the revenue act the house of Morgan has saved money under
that provision of law or lost money; and I want to know that for
the reason that I see that in one branch of Congress, without any
consideration of the question at all, it is proposed now, after we
have been importuned for 7 years to repeal that provision of law,
466
STOCK EXCHANGE PRACTICES
to repeal it; and I want to know whether it is to the advantage of the
Government of the United States to repeal it, because the Government, under that provision of the revenue act, has collected $1,075,440,000 of the revenue in 7 years.
Mr. KEYES. Senator, may I ask, when you refer to the capital gain
and loss provision, Do you just have in mind that that levies a tax
of 12y2 percent on securities held for 2 years ?
Senator GLASS. Yes; under that provision of the revenue act.
Mr. KEYES. That provision was never availed of by J. P. Morgan
Co. as a firm.
Mr. DAVIS. The whole system of capital gains and losses as a
basis for taxation; is that correct ?
Senator GLASS. Yes.
Mr. DAVIS. The question which you put to Mr. Keyes was whether
that system, up to this time has increased or decreased the taxes paid
by J. P.Morgan & Co.?
Senator GLASS. That is right. I am afraid I am not acting as an
efficient counsel to the committee if the major counsel is going to
explain the matter so much more succinctly.
Mr. DAVIS. I thought the witness had not exactly understood your
question.
Senator GLASS. My whole purpose was to determine, as a legislator, whether it would be advantageous or disadvantageous to the
Government to repeal that clause of the revenue act.
Mr. KEYES. Senator, I think it would undoubtedly be advantageous to repeal it.
Senator GLASS. YOU say you doubt if it would be advantageous?
Mr. KEYES. NO ; I say I think it would be advantageous.
Senator GLASS. That is what you investment bankers have thought
all along, but some of us have not agreed with you.
The CHAIRMAN. Why do you say that, Mr. Keyes ?
Mr. KEYES. During the past 4 or 5 years there must have been
a shrinkage in securities all over the country, not only those who
had invested on exchanges, but every corporate stock, no matter
what business might be covered; and the drop in values has been
so great as to wipe out the basis for otherwise taxable income. I
venture to say that the securities on the New York market alone
probably shrank in value somewhere around $40,000,000,000 or $50,000,000,000, and in the hands of those persons who owned them,
by registering a sale or throwing those securities on the market and
selling them, they were able to wipe out otherwise taxable income.
Mr. DAVIS. May I ask Mr. Keyes a question, Mr. Chairman?
The CHAIRMAN. Certainly.
Mr. DAVIS. I note that he has a memorandum showing total income
taxes paid by the members of the firm of J. P. Morgan & Co. for the
years 1917 to 1929, and I would like to ask him to state that total.
The CHAIRMAN. 1917 to 1929?
Mr. DAVIS. 1917 to 1929, inclusive.
Mr. KEYES. The partners of J. P. Morgan & Co. collectively during
the time they were members of the firm paid a total income tax of
$51,538,074.75.
The CHAIRMAN. From 1917 inclusive of 1929?
Mr. KEYES. Yes, sir; both years inclusive.
STOCK EXCHANGE PRACTICES
467
Senator GORE. What year represented the largest income?
Mr. KEYES. 1929.
Senator GORE. What was it in 1919, for instance ?
Mr. KEYES. I do not recall, Senator.
Senator GORE. Oh. I thought you had it there.
Mr. KEYES. NO, sir; I just have the total.
Mr. PECORA. Have you in that memorandum the total taxable
income of J. P. Morgan & Co. and its respective partners for those
12 years ?
Mr. KEYES. NO, sir; I have not.
Mr. PECORA. DO you know what it is, approximately ?
Mr. KEYES. NO, sir.
Mr. PECORA. Have you
Mr. KEYES. NO, sir.
it for any one year in that 12-year period?
(Mr. Keyes temporarily left the committee table.)
TESTIMONY OF GEORGE WHITNEY, A MEMBER 01 THE FIRM OF
J. P. MORGAN & CO.—Resumed
Mr. PECORA. Mr. Whitney, you indicated to me yesterday that
you would furnish me with a copy of the list of persons to whom
Drexel & Co. extended invitations to subscribe to the units of United
Corporation in January 1929. Since then I have received this list
[indicating] as being a true copy of such a list. Can you identify
it as such ?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. It may be admitted
and placed in the record.
(The list referred to was received in evidence, marked " Exhibit
No. 34 ", and is here printed in full, as follows:)
EXHIBIT NO. 34
DREXEL & CO.—THE UNITED CORPORATION
Hiester S. Albright
Edgar Allegaert
J. Howard Arthur
Thomas G. Ashton
W. W. Atterbury
Charles T. Bach
George Barker
C. D. Barney & Co
Thaddeus R. Beal
Charles G. Berwind
Anthony J., Drexel Biddle_
Cordelia Bradley Biddle
Eugenia L. Biddle
Livingston L. Biddle
Thomas A. Biddle & Co
Bioren & Co
George H. Blake
Morris R. Bockius
William W. Bodine
Matthew R. Boylan
Francis B. Bracken
Henry G. Brengle
Sarah H. O. Bright
Units
100
100
25
300
2, 500
50
100
2, 500
1,000
200
100
100
100
100
2, 000
1,500
50
500
500
100
500
200
100
Clarence C. Brinton
Alex Brown & Sons
Edward Browning, J r
Robert J. Brunker
James R. Calhoun
Cassatt & Co
E. W. Clark & Co
John A. Clark
John L. Clawson
M. Worthington Clement—
Morris L. Clothier
B. Dawson Coleman
Thomas Conway, J r
J. Cooke
Albert J. County
D. Graham Craig
Anne L. Croasdill
Samuel M. Curwen
Agnew T. Dice
William .C. Dickerman
Emily P. Dickson
Anthony J. Drexel
Mary Thompson Drinker
Units
100
% 000
100
200
6
2,500
2, 000
100
100
100
1,000
300
300
2,000
100
100
30
300
300
5,000
50
400
50
468
STOCK EXCHANGE PEACTICES
Units
Sophie H. Drinker
John O. Dunn
Frederick W. Edmondson—
George D. Edwards
Elkins, Morris & Co
Eleanor Mayo Riverson
Florence L. Etting
Julian L. Eysmans
Edgar C. Felton
Philip H. Gadsden
John K. Garrigues—.
Jay Gates
Thomas S. Gates
C. H. Geist Securities Corporation
General Coal
Securities
Corporation
William P. Gest
Robert Glendinning & Co__
Gertrude C. Glover
Herbert W. Goodall
Graham, Parsons & Co
Alfred M. Gray
—
Albert M. Greenfield
John H. Gross
Harry J. Haas
—
T. Truxton Hare
Jonas S. Harley
Harrison & Co
Charles V. Henry
Wm. M. Hollanbach
John Hopkins
Edward Hopkinson, J r
Daniel Houseman
Thomas W. Hulme__»
George H. Huston
Fred S. Hutchings
James T. Hutchings
Charles E. Ingersoll
Albert A. Jackson
Janney & Co
Archibald T. Johnson
Arthur Jones
Edith Boiling Jones
Moorhead C. Kennedy
Reid Kennedy
Florence M. Kephart
John W. Kephart
Henry H. King
Leonad H. Kinnard
William T. Kirk
William W. Kitzmiller
Charles Z. Klauder
Louis J. Kolb
Walter D. Larzelere
William A. Law
Van Antwerp Lea
Edward B. Leisenring
Francis A. Lewis
Charles F. Lineaweaver
Horace P. Liversidge
Eleanor M. Lloyd
George F. Lloyd
H. G. Lloyd
H. G. Lloyd, J r
Stacy B. Lloyd
100
25
50
25
2,000
1, 000
25
100
200
300
100
400
1,000
Walter E. Long
Edward E. Loomis
Uzal H. McCarter
Edward McDonald
George H. McFadden &
Bros
William J. McGlinn
John W. McGregor
Andrew J. Maloney
Caroline F. Maloney
Donald Markle
John C. Martin
John H. Mason
Sidney Mason
2, 500 William Clark Mason
Joseph B. Mayer
.
.
100 John C. Miller
600 John W. Minds
2,100 Montgomery, Scott & Co__
25 C. Eldridge Morgan
200 E. Corliss Morgan
1, 500 William R. Morgan
100 Marshall S. Morgan
1,000 Effingham B. Morris
50 Effingham B. Morris, J r
^_
100 I. Wistar Morris
100 Arthur V. Morton
100 Catharine T. Munson
1,000 Jonathan C. Neff
100 A. E. Newbold, J r
200 W. H. Newbold's Son & Co_
100 C. Stevenson Newhall
1,000 Thomas Newhall
100 William A. Obdyke
100 Charles S. W. Packard
200 Joshua A. Pearson
100 George Wharton Pepper
100 Henry C. Place
500 Charles Raymond Potts
250 Francis X. Quinn
1,000 Evan Randolph
50 Catherine C. Rapley
25 Mary Thompson Heath
200 Edward B. Robinette
100 Alexander C. Robinson
50 Mary D. Robinson
100 Owen J. Roberts
200 Benjamin Rush
50 Fred J. Rutledge
200 Sylvester B. Sadler
100 Bernard J. Samuel
50 William I. Schaffer
200 Charles H. Schlacks
500 Frank C. Schroeder
100 Garfield Scott
300 Arthur W. Sewall
100 George Siefert, J r
100 J. Willison Smith
200 Harrison Smith & Co
200 Alfred G. B. Steel
200 Samuel J. Steele, J r
100 Stone, Webster & Blodget,
50
Inc
1,000 E. T. Stotesbury
250 Morris W. Stroud
300 Stroud & Co., Inc
Units
100
500
450
50
500
100
25
288
12
300
1,000
300
100
200
100
50
100
10O
200
200
100
100
5O0
500
200
200
300
100
500
1, 500
100
1, 000
500
200
200
200
100
100
200
200
25
50
2,000
50
200
100
300
200
200
25
500
200
25
200
200
25
100
1, 500
200
100
2, 000
1, 000
200
3, 000
STOCK EXCHANGE PRACTICES
Jeremiah J. Sullivan, J r
John J. Sullivan
Walter Lamar Talbot
Clyde C. Taylor _
Frank H. Taylor
William H. Taylor
Paul Thompson
John B. Townsend
Joseph B. Townsend
Townsend, Whelen & Co
Lewis H. Van Duzen _ _
T. Wilson Van Middlesworth
Alexander Van Rensselaer_
Sarah Drexel Van Rensselaer
Samuel M. Vauclain
_ _
Robert Von Moschzisker
C. D. Waddell
Edmund W. Wakele _
Charles C. Walbridge
Units
300
300
100
25
50
200
200
100
100
500
200
50
200
200
600
400
100
200
1, 000
Philip Wallis
Clarence A. W a r d e n William G. Warden
Samuel D. Warriner
Joseph Wayne, J r
Joseph W. Wear
John H. Weaver
West & Co
John L. Wilkie
James M. Willcox
Parker S. Williams
Asa S. Wing
Clement B. Wood
Wendell J. Wright
Frederick S. Wynn
Edward H. York, Jr__
Percy S. Young
Richard R. Young
Total.
469
Unit
25
1,000
1,000
600
1,000
500
300
1,000
1,000
300
300
50
200
50
200
100
200
100
90, 061
Senator GLASS. YOU do not object to my examining it, do you?
Mr. PECORA. Oh, no, Senator.
Senator REYNOLDS. Mr. Pecora, before you go into that, may I
ask Mr. Whitney a few questions ?
Mr. PECORA. Certainly, sir.
Senator REYNOLDS. Mr. Whitney, I should like to inquire as to
whether or not the House of Morgan has directly or indirectly any
utility interests in the Republic of Cuba.
Mr. WHITNEY. NO, sir. The answer is, " No," I think, except with
this possible qualification. We have an interest in the United Corporation. The United Corporation has a few shares, a relatively
few shares out of the total, of Electric Bond & Share Co., which, in
turn, owns the common stock of the American-Foreign Power Co.,
and that company has among its investments some public-utility
interests in Cuba. We have none except that as a sort of fourth
cousin.
Senator REYNOLDS. Then I take it from your answer that you have
investment interests in the Island?
Mr. WHITNEY. We have no investment interest as a firm at all,
except through that, four steps removed.
Senator REYNOLDS. But the company the name of which you mention has utility interests in Cuba ?
Mr. WHITNEY. I am so advised. I would like to be sure of that.
Senator REYNOLDS. Have you Mr. Guggenheim on your preferred
list?
Mr. WHITNEY. YOU mean, Harry, the Ambassador?
Senator REYNOLDS. The Ambassador to Cuba.
Mr. WHITNEY. I don't think so.
Senator REYNOLDS. I will ask you, Mr. Whitney
Mr. WHITNEY. It may be Guggenheim Bros.; but I do not think
he is a partner there. I am told he is not.
Senator REYNOLDS. I will ask you if Mr. Guggenheim, who is Ambassador to Cuba, was not on the preferred list of Standard Brands
to the extent of 5,000 shares which he was pffered and which he purchased^at 32 when the market at that particular time was 40 ?
470
STOCK EXCHANGE PEACTICES
Mr. WHITNEY. Guggenheim Bros., Senator Keynolds? I am
speaking from my memory, and to the best of my recollection Mr.
Harry F. Guggenheim is not a partner in that firm.
Senator REYNOLDS. What Guggenheim was on the " Santa Claus "
list?
Mr. WHITNEY. Well, I will accept the question, Senator, although
I do not accept the definition, Senator Eeynolds. But Guggenheim
Bros.
Senator REYNOLDS. What relation is Ambassador Guggenheim to
the brothers that you make mention of ?
Mr. WHITNEY. Mr. Harry F. Guggenheim is the son of Daniel
Guggenheim. I cannot remember whether Daniel Guggenheim was
alive in 1929 or not. Does anyone remember? [After conference.]
He is now dead. He was the senior partner of that firm at that time;
and Harry F. Guggenheim is his son.
Senator REYNOLDS. HOW many shares did they buy?
Mr. WHITNEY. Five thousand.
'
Senator REYNOLDS. At 32 ?
Mr. WHITNEY. Certainly.
Senator REYNOLDS. And at that time the market was 40 ?
Mr. WHITNEY. NO, sir—yes and no. They agreed to buy it, as I
explained yesterday, in response to a letter written to them on June
24, when the market of Fleischmann's, translated into Standard
Brands, was approximately 33. They stood ready to pay for it on
September 5, 1929. In other words, over 60 days, having had a
commitment for it over 60 days. The amount was, as has been
shown, 40, when they undertook to buy it. In other words, if I make
myself clear, when they undertook to buy it, when they confirmed the
purchase, the market was somewhere around 33.
Senator REYNOLDS. That, therefore, represented a profit, or you
might say a gift, of approximately $40,000, did it not? Eight times
5 is 40.
Mr. WHITNEY. Eight times 5 is 40
Senator REYNOLDS. IS 40, I believe.
Mr. WHITNEY. But it was in no sense a gift. I t was a potential
profit if they had sold it at 40. Having paid 32 for it, they would
have had a $40,000 profit. But may I again remind you, Senator,
that there was no possible semblance of a gift in it, because they
had had a commitment to purchase it for something over 60 days.
The day they made that commitment there was a 1-point profit.
They could not sell at that time. So, if you are getting down to
the question of when they made the commitment, they had one point.
Finally they had eight, if they had sold it at that date after a 60-day
commitment. There is no possible gift about that.
Senator REYNOLDS. In that connection I believe you stated that
the records show that the Guggenheim Bros, made purchases of
the stock?
Mr. WHITNEY. Yes, sir; they are a private firm.
Senator REYNOLDS. What relation are the Guggenheim Bros, to
Ambassador Guggenheim?
Mr. WHITNEY. One of the members of the firm of Guggenheim
Bros, is his father,, or was his father when he was living; and the
other three partners of the Guggenheims are his uncles.
Senator REYNOLDS. I see.
STOCK EXCHANGE PKACTICES
471
Mr. WHITNEY. YOU know, they are prettly largely a private firm
of long standing and largely connected with various metal industries.
Former Senator Simon Guggenheim was one of them.
Senator KEYNOLDS. Has the house of Morgan any other investment
in the Republic of Cuba ?
Mr. WHITNEY. NO, sir.
Senator EEYNOLDS. Has
the house of Morgan directly or indirectly
any public utility interests in Mexico?
Mr. PECORA. IIOW about railways?
Mr. WHITNEY. The answer is, Senator Reynolds——
Senator REYNOLDS. Any public utilities?
Mr. WHITNEY. NO. Any investments in Mexico?
Senator REYNOLDS. Have you any investments of any sort, directly
or indirectly, in Mexico?
Mr. WHITNEY. The only possible—it is a pretty hard question to
think of all the ramifications and state whether any companies in
which we have had an indirect interest may have any properties in
Mexico. I do not know of any, out of my memory.
Senator REYNOLDS. Has the house of Morgan any investments in
the Central American countries?
Mr. WHITNEY. NO, sir. Well, you mean—no; we have no investments.
Senator REYNOLDS. That is all, Mr. Chairman.
Mr. PECORA. Mr. Whitney, in exhibit no. 34 it appears that Drexel
& Co. distributed 90,061 units of United Corporation to the persons
named on that list. As I recall the list put in evidence yesterday
there was allocated to Drexel & Co. by J. P. Morgan & Co. a total
of 87,000 units in two lots of 82,000 and 5,000, respectively. How
do you account for the fact that units distributed by Drexel & Co.,
as shown by exhibit 34, total 90,061?
Mr. WHITNEY. I could not have explained it at all, except that
Mr. Keyes reminded me, as I testified yesterday, that on January
23 Drexel turned in certain additional securities, 4,541 shares of
Public Service Corporation, for which they received a certain number more shares of preferred and common stock; and I suppose the
discrepancy is accounted for by that amount.
Mr. PECORA. Mr. Whitney, at page 977 of the stenographer's minutes of this hearing, it appears that you were asked a question yesterday by Senator Glass reading as follows:
Is any one or more of these companies indebted to the firm of J. P. Morgan
& Co. to the extent that you might exercise control over it or them?
The companies apparently referred to by Senator Glass were the
companies whose securities were owned in whole or in part by the
United Corporation. Your answer to that question, according to
page 977 of the stenographer's minutes, is as follows:
Certainly not. That is part of this questionnaire upon the question of the
loans that have been made by the firm of J. P. Morgan & Co. and Drexel &
Co. But never at any time have they owed us or both of us or either of us
anything but a relatively small amount of money.
What was the amount of money that you called a relatively small
amount of money that these companies or any of them at any time
owed J. P. Morgan & Co. and Drexel & Co., or either of those firms?
472
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. I am giving facts here. " Relatively " refers to
the size of the company, not the number of dollars. They have owed
us various amounts. Which one did you wish to have ?
Mr. PECORA. Can you give us the amount of loans that were outstanding to J. P. Morgan & Co. from any of these companies in 1930,
say, at the end of the calendar year, 1930, December 31 ?
Mr. WHITNEY. The first one of the loans I think you must have
there in front of you is the Columbia Gas & Electric, in which we
had a temporary loan, a 90-day loan, and a total loan with us of
$30,000,000 in which we had a participation of half, which was in
anticipation of some financing that they had undertaken to do. The
Guaranty Co. had seven and a half million, and the Union Trust Co.
of Pittsburgh had seven and a half million. That loan was made on
October 22, 1930, and was paid off, plus certain other indebtedness.
They had a total loan—excuse me—of something over $32,000,000.
The full amount was paid off on January 22. That was a loan in
anticipation, as I said before, of certain financing which they had
arranged for.
Mr. PECORA. In order to abbreviate the answer, is it not a fact,
according to your own records, that on December 31, 1930, five of
these corporations that were embodied in United Corporation by
representation in the portfolio had outstanding loans that were due
and owing to J. P. Morgan & Co. and Drexel & Co. aggregating
$103,644,636.84?
Mr. WHITNEY. I would have to do some calculation, but I am
perfectly sure that that is not true. That is, on December 31, 1930?
Mr. PECORA. Yes.
Mr. WHITNEY. YOU
will see that our total loans at that time
amounted to only $158,000,000. I just want to confirm my recollection that never at any one time did J. P. Morgan & Co., and never
were we at any one time loaning these companies anything approximating $103,000,000. There are certain loans now outstanding.
There have been loans. It is a customary financial method when
these types of companies are going to do long-term borrowing for
them to borrow temporarily from their bankers. And that is what
these loans are. You will find a series of loans—if you are introducing this question, now, of loans—incurred by the United Gas Co.
They came along, and they have financed and paid them off. That
is a perfectly necessary thing. Senator Glass' question yesterday
was, " Were they ever indebted to us in a way to give us control?"
These were all perfectly normal business loans in anticipation of
financing. In such cases they have been paid off. They were relatively small as against the total assets of the company. The loans
were just a banking transaction they might have had with any
bank, and, as a matter of fact, in almost all of these larger ones we
had participants with us in the loan, so that the amounts here would
not appear—we have got several participants, so these are not the
totals.
Mr. PECORA. Who made the loans you have in mind to these various corporations that were opened on December 31, 1930? Was it
J. P. Morgan & Co. ?
Mr. WHITNEY. The one I have mentioned, we arranged the loan,
but we had some participants, so they were not owing us money.
STOCK EXCHANGE PRACTICES
473
Mr. PECORA. Who made the loans? Did J. P. Morgan & Co.
make the loans with money received in part from participants in the
making of the loans ?
Mr. WHITNEY. Well, Mr. Pecora, I am afraid I was not sufficiently
explicit because I was talking in banking language. The loan was
made by the corporation, arranged with us. It is a very customary
thing in the banking business to have other participants for the purpose of diversification so that you will not have so much. We arrange with these banks stating to them the terms of the loan, the
facts of the loan, and give them what is called a participation with
us, and that appears in their statements as a participation in a loan
to the Columbia Gas & Electric. We do not borrow, as you implied,
the money from the banks. They have the direct obligation of the
company, and the company owes them the money directly. We are
merely a vehicle through whom in an ordinary way banking loans
are made. That is one of the most customary ways of financing
large corporations in order to get the proper diversification of risks
with banks. Banks do it. It is a steady and normal practice.
Mr. PECORA. NOW in order to enable us to understand clearly, take
for instance this loan to the Columbia Gas & Electric Corporation.
I understand the loan was made on October 22, 1930, and the principal amount of the loan was $30,000,000.
Mr. WHITNEY. And it was paid on January 22, its due date.
Mr. PECORA. Yes. Now wno were the immediate parties to that
loan agreement?
Mr. WHITNEY. I have already said, Mr. Pecora, that the loan was
arranged by the Columbia Gas & Electric Co. with J. P. Morgan
& Co.
Mr. PECORA. DO you mean by that, that the loan in form was made
by J. P. Morgan & Co. to the Columbia Gas & Electric Corporation,
but that other entities had participated with J. P. Morgan & Co. in
the making of the loan or in the supplying of the funds which represented the aggregate of the loan?
Mr. WHITNEY. Well, I mean what I said before, that the loan was
made and probably the Columbia Gas & Electric issued 1 note for it.
Mr. PECORA. That is what I am trying to get at. Now, who was
the payee of the note?
Mr. WHITNEY. I am not yet finished. When the loan was made—
when it was being negotiated undoubtedly this matter was discussed
with these two other participants. These two other participants are
the general banking affiliations of the Columbia Gas & Electric Corporation and have been traditionally so.
Mr. PECORA. Who were the participants in this particular case?
Mr. WHITNEY. I have already read the Guaranty Trust Co. of
New York, and the Union Trust Co. of Pittsburgh. I say the loan
was arranged with them in conjunction with them, but it was cleared
through our office.
Mr. PECORA. Was the note evidencing the loan made payable to
J. P. Morgan & Co., or was it made payable jointly to J. P. Morgan
& Co., the Guaranty Trust Co. of New York, and the Union Trust
Co. of Pittsburgh?
Mr. WHITNEY. I have not got the remotest idea.
The CHAIRMAN. What rate of interest did you charge on that?
474
STOCK EXCHANGE PEACTICES
Mr. WHITNEY. I do not know, Senator, It would be the current
rate for 90 days, whatever the current rate was at that time. I do
not just remember.
Mr. PECORA. TO what extent did your firm participate in the
making of this $30,000,000 loan to the Columbia Gas & Electric
Corporation ?
Mr. WHITNEY. AS already testified, $15,000,000.
Mr. PECORA. NOW, I would suggest, Mr. Whitney, and I think we
will save time if during the recess you acquaint yourself with all
of the figures and facts with regard to the loans that were outstanding on December 31, 1930, in favor of J. P. Morgan & Co.
and Drexel & Co. to any of these corporations.
Mr. DAVIS. DO you mean the corporations in which the United
held shares?
Mr. PECORA. Yes; and also to the United Corporation itself. I
understand there were loans to the United Corporation itself that
were open on that date.
Senator GLASS. Mr. Whitney, if it does not interefere with Mr.
Pecora, let me ask you a question. When J. P. Morgan & Co., or
any banker, makes a loan it ordinarily is done with a view to making
money, is it not ?
Mr. WHITNEY. Well, it is for the purpose of investing your funds,
certainly, sir. Making an interest return.
Senator GLASS. DO you regard that as a favor to the borrower or
a plain business transaction ?
Mr. WHITNEY. A perfectly normal business transaction. What
the banking business is predicated on, as has been explained very
clearly recently. The banking function is to receive deposits and
to make loans to legitimate concerns for the conduct of business.
Their loans are all made simply for that. If the banks make good
loans, like these all are, it is for the purpose of expediting business.
And it is the perfectly proper, primary, normal function of the bank
to make loans to legitimate concerns for the conduct of their business.
And they have to loan them to business conducted in this country
or anywhere else, so that they may conduct their normal business.
There is no favor of any kind, sir. The most normal type or phase
of the banking business.
Senator GLASS. In short, if I should be worth one half a million
dollars or a million dollars, as I may be hereafter since my connection with the house of Morgan has been so firmly established, and I
should want to borrow with adequate collateral from Peoples National Bank in my town $10,000, would the bank consider that it was
doing me a favor to loan me $10,000 or would it be glad to get the
discount that would ensue upon the lending me of $10,000 ?
Mr. WHITNEY. I t would, of course, consider it was its normal
banking function and would be very glad to get a good loan such
as that.
Senator GLASS. That is my view of it.
Mr. PECORA. Let me show you what purports to be a photostat
copy of note of Columbia Gas & Electric Corporation payable on
demand to the order of J. P. Morgan & Co., dated October 22, 1930.
Will you look at it and tell us if that refreshes your recollection as
to whether or not the Columbia Gas & Electric Corporation made
STOCK EXCHANGE PEACTICES
475
the note evidencing this loan for $30,000,000 to the order of J. P.
Morgan & Co.?
Mr. WHITNEY. My memory did not need to be refreshed. I have
already said they had.
Mr. PECORA. I thought you said you did not know.
Mr. WHITNEY. I did not know what the note was made out to.
No; I said I knew perfectly well who made the loan, Mr. Pecora.
Mr. PECORA. I asked you if the note was made payable to J. P.
Morgan & Co.
Mr. WHITNEY. It says so here.
Mr. PECORA. Well, you did not know when I asked you before.
Mr. WHITNEY. I did not know, but I knew that we made the loan.
Mr. PECORA. Yes.
Mr. WHITNEY. Your question was different.
Mr. PECORA. Does that refresh your recollection?
Mr. WHITNEY. It does. You also note it is marked
Mr. PECORA. That is already in the record a half a
" Paid."
dozen times,
that it is marked " Paid."
Mr. WHITNEY. Certainly.
Mr. PECORA. NOW, the participation of J. P. Morgan & Co. in this
loan was $15,000,000, was it not?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. NOW, on the
date when that loan was made, did that
$15,000,000 exceed 10 percent of the net worth of the firm of J. P.
Morgan & Co.?
Mr. WHITNEY. I do not remember. It was a very good loan and
was paid off on January 22. Mr. Pecora, if I may just remind you—
probably unnecessarily—there is no law controlling the amount we
may lend.
Mr. PECORA. I know that.
Mr. WHITNEY. The question of loans is whether they are good
loans with us, and that was a good loan. It was a good loan to
permit them to carry through a transaction in the normal conduct
of their business. Whether or not it had a relation to our then
capital and surplus I do not know. You also know—although this
was not a secured loan—that this law, State law, permits New York
State banks lending 25 percent of their capital on security. You
are familiar with that. But that there is no law controlling, and
the only law is the law that Mr. Morgan spoke of the first day of
his testimony, is that we do good business, make good loans, and
the best proof of that as being a good loan, whatever relation it
may have had to our capital or our net worth as of that date, is the
fact that it was paid back when due on the 22d day of January.
Mr. PECORA. And in your zeal to make good loans, and only good
loans, you found it necessary, as developed in the testimony last
week, to take $18,000,000 from your net worth as a reserve against
bad loans?
Mr. WHITNEY. Absolutely. We made mistakes like everybody
else. Our zeal was just as strong even though that resulted, because
there has been quite a depression in values during the last 3 years.
Mr. PECORA. What security, if any, was back of this loan? This
loan of $30,000,000?
Mr. WHITNEY. YOU requested me a few minutes ago, Mr. Pecora,
to refresh my memory on these details. I will do so after lunch.
476
STOCK EXCHANGE PEACTICES
But I think that loan makes no reference to collateral, does it ? So
there probably was none.
Mr. PECORA. Look at the note and see if this refreshes your recollection so as to enable you to answer the question.
Mr. WHITNEY. I just looked at it.
Mr. PECORA. Was there any security?
Mr. WHITNEY. There was not. And the Columbia Gas & Electric
Corporation borrows currently in the ordinary course of its business
on the security and faith of its corporation. I do not know what the
balance sheet shows, but it is a very large company, as you are
aware. It always borrows on that basis.
Mr. PECORA. DO you know that this note of $30,000,000 was paid
out of the proceeds of a bond issue that was made by the Columbia
Gas & Electric Corporation?
Mr. WHITNEY. N O ; I do not. I wanted to correct that, because I
asked Mr. Stanley if he remembered whether they had a security
issue, but he does not. But that is one of the things that I want to
find out. Perhaps I was wrong on that. But it was paid, and I had
an idea that it was out of the proceeds of a bond issue. I will try to
find out about that.
Mr. PECORA. YOU will try to find out about that.
Mr. WHITNEY. We do not do their security business at all. That
is always done through the Guaranty Co.
Mr. PECORA. Are you not a member of the board of the Guaranty Co.?
Mr. WHITNEY. NO, sir.
Mr. PECORA. Mr. Thomas W. Lamont is?
Mr. WHITNEY. NO, sir.
Mr. PECORA. Of the Guaranty Trust Co. ?
Mr. WHITNEY. That is different.
Mr. PECORA. The Guaranty Co. is the investment affiliate of the
Guaranty Trust Co., is it not?
Mr. WHITNEY. The Guaranty Trust Co. owns all of the stock of
the Guaranty Co.
Mr. PECORA. I did not ask you that. I asked you if it was not the
fact that the Guaranty Co. was the investment affiliate of the Guaranty Trust Co.
Mr. WHITNEY. And I answered it that the Guaranty Trust Co.
owned the stock.
Mr. PECORA. YOU answered it that one company owned all the
stock of the other.
Mr. WHITNEY. Exactly.
Mr. PECORA. Well, as a matter of fact the Guaranty Trust Co.
does not own all of the stock of the Guaranty Co., does it?
Mr. WHITNEY. Yes, of course it does.
The CHAIRMAN. Which company does the banking business?
Mr. WHITNEY. The Guaranty Trust Co. Senator Fletcher, the
Guaranty Co. is a dealer in securities.
Senator ADAMS. Mr. Pecora, this application was offered as an
exhibit. I find no exhibit mark on it.
Mr. PECORA. Mr. Whitney produced it on his own volition. I did
not hand it to the stenographer. I have not even seen it. But it
should have been marked.
Senator ADAMS. It has not been marked.
STOCK EXCHANGE PRACTICES
477
Senator GLASS. It was put in the record by the consent of the
chairman and of Mr. Pecora.
Mr. PECORA. I did not know that it had not been marked. It ought
to be done right away.
(The application of the United Corporation for listing appears in
the record as exhibit 35, presented by Mr. Whitney June 1, 1933.)
Mr. PECORA. NOW, is it not a fact that on December 31, 1930, J. P.
Morgan & Co. had due and owing to it the sum oi $15,000,000 by the
United Corporation representing a loan your firm had made to that
corporation ?
Mr. WHITNEY. AS a matter of fact it had, as I read you—I put
that back now, but they had about $2,000,000 more than that, I think.
If you will read the thing that is in front of you. I thought you
said Columbia.
Mr. PECORA. The United Corporation.
Mr. WHITNEY. Oh, I have not got the record in front of me. Do
you want me to get it back ? Excuse me; I thought you were still
talking about the Columbia Gas.
Mr. PECORA. NO.
Mr. WHITNEY. Thirty-one, is it? Mr. Pecora, I would have to
make a footing here to get the date, because, as you know, these
things are answered in two columns. Do you want me to do it now ?
Mr. PECORA. NO.
The CHAIRMAN. The
members of the committee have to be on the
floor up to 3 o'clock. We will now take a recess until 3:15. Everybody will be ready to proceed at 3:15.
(Thereupon, at 1:20 p.m., a recess was taken until 3:15 p.m. the
same day, Thursday, June 1, 1933.)
AFTER RECESS
The subcommittee resumed at 3:30 p.m., pursuant to recess.
The CHAIRMAN. The committee will resume. I believe Mr. Whitney's testimony had not been concluded. You may proceed, Mr.
Pecora.
TESTIMONY OF GEOKGE WHITNEY, A MEMBEK OF THE FIBM OF
J. P. M0KGAN & CO.—Eesumed
Mr. PECORA. Mr. Whitney, I show you what purports to be a copy
of the articles of copartnership of the firm of J. P, Morgan & 0o.
and of Drexel & Co., which have been furnished to me on behalf
,of your firm. Will you kindly look at it and tell us whether or not
that is a true copy; these articles of copartnership, I mean.
Mr. WHITNEY. Let me inquire.
Mr. DAVIS. I am afraid that Mr. Whitney will have to take my
word for them.
Mr. WHITNEY. I will have to do that, Mr. Pecora.
Mr. DAVIS. I assume and believe that it is a true copy. If you
find any errors on comparison, we will have no trouble correcting
them.
Mr. PECORA. I offer this in evidence and ask that it bo, sDread upon
the record.
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STOCK EXCHANGE PRACTICES
The CHAIRMAN. Let it be admitted and made a part of the record.
(The articles of copartnership of the firm of J. P. Morgan & Co.
and of Drexel & Co. were ordered made a part of the record and
were marked " Committee Exhibit No. 36, June 1, 1933 ", and will
be found at the end of the day's proceedings.)
Mr. PECORA. Mr. Whitney, have you had an opportunity during
the last recess period of consulting your records with a view to
enabling you to tell this committee what loans were open and held
by J. P. Morgan & Co. or Drexel & Co. on December 31, 1930, which
had been made to the United Corporation, United Gas Improvement Co., Niagara Hudson Power Corporation, and Columbia Gas
& Electric Co.?
Mr. WHITNEY. I have; yes, sir.
Mr. PECORA. On that date what was the aggregate amount of those
loans ?
Mr. WHITNEY. The loans of those companies ?
Mr. PECORA. Yes, sir.
Mr. WHITNEY. Might I read from this paper ?
Mr. PECORA. Yes.
Mr. WHITNEY. On December 31, 1930, the Columbia
Gas & Electric Corporation had outstanding loans arranged with us, J. P.
Morgan & Co., amounting to $32,044,636.84. At the same time the
Niagara Hudson Power Corporation had a loan of $25,000,000.
The United Corporation has $15,000,000. The United Gas Improvement Co. had 2 loans, 1 of $9,600,000 and 1 of $10,000,000.
Of these loans there were with J. P. Morgan & Co. directly, or our
participations were: Columbia Gas & Electric Corporation, $17,044,636.84; Niagara Hudson Power Corporation, 6^4 million dollars;
The United Corporation, $15,000,000; United Gas Improvement Co.,
$9,600,000.
Drexel & Co. had a $1,000,000 participation in the $10,000,000 loan
to the United Gas Improvement Co.
In other words, there were a total of loans of $91,644,636.84, in
which our participation was $48,894,636.84.
I might also say, Mr. Pecora, that I have refreshed my memory
in another matter, or checked it, and it is so that the Columbia Gas
loan was paid, as I stated this morning, January 26, from the proceed
of $50,000,000 debenture issue sold in January, 30-year debentures.
Mr. PECORA. Who floated that issue?
Mr. WHITNEY. The Guaranty Co.
Mr. PECORA. Was the $15,000,000 loan to the United Corporation
a secured loan?
Mr. WHITNEY. NO, sir.
Mr. PECORA. Was the $19,600,000
loan to the United Gas Improvement Co. a secured loan?
Mr. WHITNEY. NO. None of the loans listed were secured. But I
might also point out that the United Gas Improvement Co. has no
other debts. Neither has the United Corporation. And neither has
the Niagara Hudson, although certain of the subsidiaries owned by
these companies, and these are all holding companies, have. And
the only debt, these two loans of United Gas Improvement, they
were the only debts of that company. And the same is true of the
United. The Niagara Hudson loan now is reduced to $11,000,000;
STOCK EXCHANGE PEACTICES
479
and the United Gas Improvement and the Columbia Gas both have
been paid off in January, just after the turn of the year.
Mr. PECORA. These other holding companies, namely, United Gas
Improvement Co., Niagara Hudson Power Corporation, and Columbia Gas & Electric Co., do they antedate the United Corporation?
Mr. WHITNEY. Oh, yes, sir; by a long time.
Mr. PECORA. The United Corporation holds in its portfolio, and
has had in its portfolio ever since its incorporation, securities of
these other holding companies, hasn't it?
Mr. WHITNEY. Well, it has had in its portfolio—well, I have
given
Mr. PECORA (interposing). Pretty nearly from its inception?
Mr. WHITNEY. I made a mistake in a former answer. The
Niagara Hudson was formed after the United Corporation.
Mr. PECORA. In August of 1929?
Mr. WHITNEY. Yes, sir; in the summer afterwards. The United
Corporation has held in its portfolio since its inception snares of
United Gas Improvement and Mohawk Hudson, not Niagara Hudson. And it did not hold from its inception Columbia Gas although
as I testified on yesterday they bought 10,000 shares and another
60,000 shares shortly after its inception.
Mr. PECORA. Will you tell the committee any useful public purpose that was served by the incorporation of the United Corporation as a holding company of securities of public-utility companies
or holding companies ?
Mr. WHITNEY. I think I can, Mr. Pecora, a good many.
Mr. PECORA. Will you do that, please ?
Mr. WHITNEY. Well, the initial purpose of the United Corporation, as I testified on yesterday, was to bring into common ownership
or in corporate form the holdings of certain groups. Those groups
consisted of Superpower, ourselves, Drexel, Bonbright, Messrs. Day
& Zimmermann who had previously some time sold certain holdings
they had in the public utility field to United Gas Improvement, the
interests of the Koppers Co. who held large blocks of United Gas
Improvement Co. And then Mr. Bodine, then chairman of the
board of U.G.I., had a certain amount. When we were considering
and before we purchased any shares of either of these two companies,
we had discussed the matter with the people who were then largely
interested and represented on the board of U.G.I.; as I say, before
we purchased or offered to buy, we asked if they wanted to purchase
with us, or how they would feel about our becoming substantial
stockholders. That was long before the idea of forming the United
Corporation.
The CHAIRMAN. And the members of these groups that you have
mentioned were holding companies? In other words, none was an
active operating company at all ? They were all holding companies ?
Mr. WHITNEY. Well, the United Gas Improvement Co. and the
Public Service Corporation are, in a way, both. The Public Service
Corporation of New Jersey is, technically speaking, a holding company, although it owns its subsidiaries 100 percent, the gas and electric companies and certain traction interests in New Jersey. It may
be technically correct to say that it is a holding company, but it is a
175541—33—PT 2
T>
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STOCK EXCHANGE PEACTICES
holding company that does operating through subsidiary corporations. In the case of the U.G.I. I think about 40 percent of their
total investments are in the form of a holding company, but they
practically own all of the Philadelphia Electric, and they own practically all of the Wilmington Gas. So, in effect, they are an operating company through subsidiaries owned by the holding company,
but obeying the statutes in different States. Obviously under the
law they keep the capital structure of the operating companies under
a different system. So the U.G.I, is both a holding company and an
operating company.
Mr. PECORA. Well now
The CHAIRMAN (interposing). That situation seems to lead to this:
What is the use of forming another holding company to take stock
in holding companies that already exist, in the form of another
holding company, when all that they were interested in were holding
companies ?
Mr. WHITNEY. Well, by the same token—or, perhaps, I can explain
it in this way: The Niagara Hudson, which ultimately was formed
by a consolidation of the different groups operating along the northern tier of New York State, is also in the form of a holding company,
but it holds practically 100 percent of practically all of the operating
companies, so that the Niagara Hudson is, in effect, an operating
company. To explain what I mean, take the Consolidated Gas
Co. of New York City, and it operates gas properties but owns electric properties in New York. The New York Edison Co. is owned
100 percent by Consolidated Gas, but just because of various provisions of the charters of operating companies they keep these entities alive. Consolidated Gas may be termed a holding company,
when in fact it is an operating and holding company. They have
the electric business separate from the other. The United Corporation is a different type of company.
The United Corporation is in no sense an operating company, was
never intended to be, and never has been in any sense an operating
company. What I said before was that the active thought in forming the corporation came in really because of the introduction into
the picture of Mohawk Hudson, because that involved an expenditure of something over 23 million dollars, and it was more than
would have been prudent for any private firm to purchase. Now, we
believed that the communities which were served in the beginning by
those constituent parts were all right there on the Atlantic seaboard.
We believed it gave investors an opportunity of diversification and of
good investment. But the first purpose was to put into one pocket,
if you want5 or one corporation, in one corporate form, the holdings
of these different groups to which I have referred, which were in
U. G. I. and Public Service. Mohawk Hudson was quite a new
element, in which these other people were not interested. All these
groups, as shown by papers not yet introduced in evidence, but called
for in the questionnaire, had the right, as you have seen it in the
organization of the United, all were given practically the same terms
and opportunities to come in, and all of them did that we discussed
it with.
We believe that it was in the public interest to form such a holding company for the purposes of diversification. Opportunities
STOCK EXCHANGE PRACTICES
481
were subsequently given to the holders of the U.G.I, and Columbia
Gas & Electric to bring in, exchange, their securities that they then
held for that diversified interest, and that we believe has served
and is serving a useful purpose in the public interest, to have such
a corporation with this minority interest in these different constituent parts.
Does that answer the question in part, Mr. Pecora?
Mr. PECORA. Well, when you say it was done, among other things,
for the purpose of bringing about holding of diversified interests,
does not it occur to you that these so-called " diversified interests "
were all public-utility interests ? There was not a diversification of
interests, simply a diversification of the holdings of different publicutility companies.
Mr. WHITNEY. Of different—oh, it was quite frankly announced
by us in the beginning, stressed, in fact, that it was a holding company to hold minority interests in public-utility properties. There
was never any other idea at all other than that it should be holdings
in public-utility companies. It was not in the sense of an investment trust where there was a wide diversification of investments
purely from the investment point of view. It was quite frankly and
deliberately a public-utility holding company.
Mr. PECORA. I recall that during the month of February this year
Mr. Owen D. Young testified before this committee, or its predecessor
in the Seventy-second Congress, and stated, among other things,
that, in his opinion, the creation of holding companies superimposed
upon holding companies was an unwise thing from the public standpoint. Do you recall reading anything about his testimony in that
respect ?
Mr. WHITNEY. Well, I remember the fact that Mr. Young did
testify before this committee. My recollection would have been that
that is only part of his testimony. I think, if I recollect correctly,
that he was testifying in connection with certain Insull holding
companies, wasn't he ?
Mr. PECORA. He was testifying in connection with utility combinations commonly called the Insull interests.
Mr. WHITNEY. Yes. And it had reference more particularly to
the question of bonds and fixed obligations put out on holding companies ; and, of course, I assume that any form of corporate finance
is subject to abuse if people want to. In that case, of course, it would
be very unfortunate through the incurring of very heavy fixed
charges upon equities, and based also upon very high prices upon
those equities; so that the shrinkage in prices of those loans brought
about a collapse. That is quite a different proposition from United,
which has had practically, except for this floating debt of $11,000,000,
no debt. No public money has been introduced as the basis of debt.
I didn't remember that Mr. Young had made the statement directly
criticizing the formation of holding companies, and I didn't know
that that was his opinion, because the whole matter of this formation
of United was discussed with Mr. Young for many years prior to its
inception. Of course, he was fully aware of our intentions in this
-connection, obviously, through his sale to us, and through the General Electric sale to us of the Mohawk. And at the time, I think
it is fair to say, I don't think I had as many talks as some of my
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STOCK EXCHANGE PRACTICES
partners on the matter with Mr. Young, but I had several, and it is
my very clear recollection that Mr. Young did think it was a wise
thing and in the public interest to form United Corporation. I think
Mr. Lamont could confirm that. Isn't that so (addressing Mr.
Lamont) ?
Mr. LAMONT. Yes.
Mr. PECORA. Mr. Young,
as I recall it stated as an abstract principle wholly apart from any question of creation of indebtednesses^
and so forth, that in his opinion with regard to public-utility companies the creation of any more than two holding companies with
respect to any group of operating companies seemed to him to be
not only unwise but wholly unnecessary from the public standpoint.
Mr. WHITNEY. Well, in this case, there is only one.
Mr. PECORA. In this case there is one holding company superimposed on top of several holding companies.
Mr. WHITNEY. Oh, I beg your pardon, Mr. Pecora. Again, if
we talk technicalities and legal set-ups, in that sense that is a correct
statement; but I do, not think, with the exception of the Public
Service Corporation of New Jersey or the Niagara Hudson or the
Consolidated Gas or even the U. G. I., would be considered among
people in the business as holding companies in the sense that
Mr. Young referred to. I do not actually remember Mr. Young's
testimony, because I have not read it. I remember reading it in the
papers at the time.
But the U. G. I. is the only one, which, as I say, I think as to
40 percent of its total assets, are what we would mean by a holding company. In other words, the U. G. I. has an interest in the
Niagara Hudson because of the fact that the U. G. I. sold to the
Mohawk Hudson, a company that owned Syracuse, it has got an
interest in Commonwealth Southern which it had through an interest it had in Southeastern Power & Light. It has a very substantial interest, but a minority interest, in the Public Service Corporation of New Jersey, but I think certainly over half of its assets
are companies where it has 100 percent interest and really is
an operating unit. I do not think, except for the technical fact of
a set-up in the form of a holding company, they can properly be
considered as holding companies in Mr. Young's sense of the word.
Senator COTJZENS. Have you got along better since the creation of
the holding companies than you did before their creation?
Mr. WHITNEY. Have we got along better ?
Senator COUZENS. I mean the utility companies. Have the utility
companies gotten along better since the creation of holding companies ?
Mr. PECORA. YOU mean the operating companies, Senator?
Senator COUZENS. Yes.
Mr. WHITNEY. Yes; I should think that the formation, certainly,
of these holding units, such as the U.G.I., has been very beneficial
to the operating companies. I t gives a—yes, I think it would be
fair to say they have. The reason for it is in a case like the Public
Service Corporation of New Jersey—take that as an example—the
fact that certain charters these operating companies have which they
would not want to merge them for the reason that they might forego
certain privileges that are in their charters. As a matter of fact,
STOCK EXCHANGE PEACTICES
483
in that particular case, there has been a lot of consideration given
to whether they would merge the electric companies in New York
City. It has never been done. It has never been proposed. But,
generally speaking, with the U.G.I., for example, and the Wilmington Gas that it owns a 100 percent of, and the Philadelphia Electric—now, it would be obviously imprudent to merge those things,
with one in the State of Delaware and one in the State of Pennsylvania.
Senator COUZENS. What would be the object of merging them
or creating a holding company ? What is the public interest in that
matter ?
Mr. WHITNEY. I do not think I understand. I am sorry.
Senator COUZENS. YOU stated that obviously you would not want
to consolidate, as I understand it, the Delaware Gas Co. and the
Philadelphia Kapid Transit.
Mr. WHITNEY. Yes.
Senator COUZENS. Well,
why would there be any reason or public
interest in having them either consolidated or held as a holding
company ?
Mr. WHITNEY. Oh, well, in many of these cases there is an interchange of power. They use certain facilities so that they can—for
instance, I don't know in that specific case, but they use the same
power over a whole system, so that if one corporation buys it from
another, they keep the corporate form of separate entities; but, as
a matter of fact, they are operated as one unit.
Now, the advantage to the public is, it would seem to me in
that case of an operating holding company, that you can keep your
costs down, which ultimately results in lower rates to the consumer.
Senator COUZENS. Did it keep the cost down ?
Mr. WHITNEY. Well, I think—yes, sir; I think it did. I think
that you will find that these properties, generally speaking—I don't
pretend to be a public-utility expert—it is my impression that the
properties within this so-called United group that we have been
talking about, generally speaking, have rates—their general rates
are among the lowest in this country. Now, Mr. Howard would
know better than I can, and I think you will find that the Niagara
Hudson, these other properties, have, generally speaking, lower
rates, and the rates tended to be lower as economies have been
effected.
Mr. PECORA. Might that not be due to the fact that these companies, the operating utility companies——
Mr. WHITNEY (interposing). I have been speaking of the operating utilities.
Mr. PECORA. Yes. Might that not be due to the fact that they
operate in heavily populated sections of the country here in the
East where cost of operation would be naturally cheaper?
Mr. WHITNEY. I am afraid, Mr. Pecora, that I am going to get
myself over my depth talking rates on public utilities, because I
don't pretend to know much about it. I suppose that is obviously
one of the factors that would come into the matter, and also the
question of the industrial commercial load. But I know I know
very little about this.
The CHAIRMAN. IS not the function really of the holding companies not so much for the public interest but for the interest of the
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STOCK EXCHANGE PBACTICES
operating companies? Do not the holding companies dispose of
stocks of operating companies, distribute the stocks, and furnish
capital ? Isn't that the real idea ?
Mr. WHITNEY. YOU mean those so-called operating holding companies?
The CHAIRMAN. Yes.
Mr. WHITNEY. Yes; they
do very greatly assist in the financing^
because they have various sources in getting the money. That is
another reason for keeping the separate entities. In very bad times,
such as we have been going through, it is possible for the operating
companies to borrow for the sake of—for the general good, where
you would not be able to do it by the other way. It gives you more
names to borrow with.
Of course, it must be obvious that any holding company, such as
the United, where its only income is a profit and its very existence
depends upon the proper conduct of these companies—now, whatever benefits the United as a large stockholder obviously benefits all
the other stockholders. I mean they only got it as a stockholder.
As Mr. Howard has testified, there are no management contracts
or no managerial connections at all. Now, I think it is fair to say
that all of the executive officers of these operating companies whose
stocks are owned by the United Corporation, every one of them believe that their job is to sell more and more of their product, which
obviously tends to reduce the cost, and it has been a definite policy
of all these companies within the United—this group of companies—
to try to reduce their rates, for the perfectly selfish reason, if you
want. In that way you increase the consumption of the power or the
gas or electricity. It is a plain business proposition that every time
you can reduce your rates you reach a wider circle of customers.
Senator COTTZENS. But I also find that in the regulation of the
railroads and in the regulation of the operating utilities by State
commissions they have great difficulty under the laws of the States
and of the Federal Government in reaching the holding companies to
get service and information, and it was testified in one of the hearings here, I remember, that obviously the holding companies at times
were created for the purpose of evading service either by the Federal
agencies or the State agencies.
Mr. WHITNEY. I think that has been true. That would not apply
to any of this group of companies now within the United.
Senator COTJZENS. That may be true. I was speaking in general
terms.
Mr. WHITNEY. I think that has been true; yes, sir.
Senator COUZENS. And in that case, of course, the holding companies are against public interest.
Mr. PECOEA. I have before me now the printed copy of the testimony that Mr. Young gave before this committee on February 16r
1933. Let me read just enough from it to inform you of the substance of Mr. Young's opinion.
Mr. WHITNEY. Will you read enough of it to get the context ?
Mr. PECORA. Yes; I will. [Eeading:]
Question. Mr. Young, would you say that the system of superimposition of
company upon company in a structure of that kind would easily lend itself to
overcapitalization of the various companies?
STOCK EXCHANGE PRACTICES
485
Answer. It would lend itself, I think, to overcapitalization, but it is not that
aspect, or not that so much, which disturbs me. It is this: If I am right in
thinking that Mr. Insull himself was not able ultimately to understand that
structure, how can the ordinary investor, buying shares or buying obligations,
especially of the last companies, on the top, how can they be expected to know,
or even to inform themselves, conscientious and able as they might be, really
as to the value of those securities?
Question. On that proposition, Mr. Young, isn't there some duty on the stock
exchange where those things are dealt in to protect the public from losses in
buying that sort of stock?
Answer. I am not casting reflections on those shares, Senator, at the moment,
or on any shares in these holding-company groups. All I am pointing out is
that I think it is unfortunate that we should have developed such a complicated financial structure.
Senator BBOOKHART. Well, is it right that those stocks and bonds should be
listed on stock exchanges and sold to the public at large without a duty or
any obligation of that kind?
Mr. YOUNG. Well, I think it would be better, stock exchange or no stock
exchange, to try and work toward the objective in this country of having these
structures simplified.
Mr. PECORA. HOW would you provide for that, if you care to give the committee your views and suggestions about it?
Mr. YOUNG. I should like to see us work toward the end of having not more
than one holding company superimposed on the operating companies in the
public-utility field.
Senator BRGOKHART. Why have any?
Mr. YOUNG. I think there is a very real reason, Senator, for having a holding company. A public-utility company, in the first place, has to be organized
in the State of its operation, and should be. It does, as Mr. Insull, Jr. said
this morning, a purely local business.
There is a great advantage, not only from the standpoint of connecting different units with transmission, but there is a great advantage on the technical side
in unifying those different operating companies, and there is also on the financial
side justification for it through diversifying the risk. If you take one operating
utility in an industrial community, and another operating utility in an agricultural section which produces cotton, and another operating utility in an agricultural section which produces wheat, and another operating utility perhaps
in the fruit district of California, I think you will find that the securities of
that holding company, in which all those utilities are grouped
Senator BROOKHABT (interposing). Why do you need to group them?
Mr. YOUNG. Excuse me. Is a safer investment than an investment in any one
of those operating companies. For instance, if the cotton crop fails your
utility earnings there may go down; if the fruit crop fails they may go down
there; if the industry of a particular town is paralyzed they may go down
there; but the general average, if you can create a situation where, through
holding company, the earnings of these utilities have something like the same
diversity that the country itself has, then you get in the security of the holding
company a better security through diversification, especially in the common
shares, than you would in any one Operating company.
Now, that testimony appears at pages 1516 and 1517 of the printed
copy of the minutes of the hearings before the subcommittee on
February 16, this year.
Mr. WHITNEY. Mr. Pecora, I think that if I had been testifying
with reference to the so-called " Insull properties ", which, as you
know better than I do, have a succession of holding companies and
holding companies, three or four tiers of them in some cases, I would
not have been able to express myself as well as Mr. Young did, but
I think I would have felt very much the same as he does.
Mr. PECORA. If you notice in this testimony, Mr. Young is addressing himself generally to the question of the wisdom or advisability
or necessity from the public standpoint of having more than one
holding company for a group of operating utility companies.
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STOCK EXCHANGE PRACTICES
Mr. WHITNEY. I fully appreciate the latter part of what you said.
He does address himself to that, and I still feel that the companies
in the United group or the United Corporation would still be exempt
from Mr. Young's testimony there as not breaking his rule of what
lie things is wise.
I still consider, in spite of the technical fact that the—I make the
•exception again so there will be no misunderstanding about it—that
the U.G.I, has got to the extent of a portion of its assets a purely
holding company aspect. With that exception I consider that still
the United is exempt from the criticism of Mr. Young's testimony
as being only one holding company superimposed upon what in effect
or actually are operating companies, although their technical, legal
form is that of holding companies.
Senator COUZENS. Let me ask this question.
Mr. WHITNEY. Yes, sir.
Senator COUZENS. Assuming,
for instance, that one holding company purchases 40 percent of an operating company and another
holding company purchases 20 percent of the same operating company, and another holding company purchases only 20 percent of the
same operating company.
Mr. WHITNEY. Yes, sir.
Senator COUZENS. Isn't there
likely to be considerable conflict in
a case of that sort ?
Mr. WHITNEY. Why, certainly. I t is susceptible of conflict if they
had divergent views as to what was the proper way that their investment was being handled. Certainly it is susceptible of conflict.
Senator COUZENS. NOW, let me ask this question: Assuming that
I was a prospective investor in the United Corporation and I wanted
to get at the real value of the stock and the possibilities of it. Would
I not have to take all those list of companies in which you had an
interest and analyze their operating costs and their earnings to get
at a true value of the investment?
Mr. WHITNEY. Yes, sir. That has always, of course, been true,
and it has been a full disclosure always by the United, so that you
as a prospective buyer, if you were, would know just where you
could look to find out the intrinsic value of the United Corporation,
because, obviously, it is based purely on the equities of these various
companies held in its portfolio.
Senator COUZENS. It would be some job, though to take all these
companies and analyze them before I invested in United, to know
Mr. WHITNEY (interposing). Yes, sir; it might be quite a job.
Senator COUZENS (continuing). Whether it is a good company.
Mr. WHITNEY. But if you were a prudent or careful investor
Senator COUZENS (interposing). I am. [Laughter.]
Mr. WHITNEY (continuing). You would not think that was too
much trouble to take before you invested your money.
Mr. PECORA. Isn't it possible, though, Mr. Whitney, through the
medium of holding companies superimposed, on other holding companies which in turn have operating companies underlying them, for
a group controlling the top holding company to virtually hold in its
hands the reins of the operation of all the underlying operating companies at a minimum investment? Does not this scheme of superimposition of holding company on top of holding companies lend
itself to that sort of thing ?
STOCK EXCHANGE PEACTICES
487
Mr. WHITNEY. Why, certainly. If you build up a supposition
case of holding companies upon holding companies until it pyramids
down, certainly it is possible. I do not pretend to argue with you
on that, because we know of instances where it has been done. We
have a public record of certain instances. One—well, no use talking
about them particularly, but there are cases where certainly it is
possible.
But that again is not applicable—my only contention is that that
possibility is not applicable to the United Corporation. We are not
charged or responsible for what other things might be done. We are
only responsible for what we do do.
Senator COUZENS. May I ask you in that connection if you believe
that it is possible from a legislative standpoint to correct those
evils which have grown up in the holding companies ?
Mr. WHITNEY. YOU mean by some regulation or control ?
Senator COUZENS. Yes.
Mr. WHITNEY. I should think so; yes, sir.
Senator COUZENS. DO you think it would be advisable ?
Mr. WHITNEY. Yes; certainly.
Mr. PECORA. DO you agree generally with the philosphy with
regard to these holding companies that is expressed by Mr. Young
in his testimony before this committee last February?
Mr. WHITNEY. I stated I did, Mr. Pecora, with the qualification
I made, yes.
Mr. PECORA. The qualification you make is such a qualification as
you say applies to the United Corporation ?
Mr. WHITNEY. That was not the qualification I made. The qualification I made, I agree with his philosophy in the first part of what
you read, and I still say that I think the United comes within the
scope of what he thinks is permissible or as much as he thinks is
permissible.
Mr. PECORA. What he thinks is permissible or should be permissible is one holding company.
Mr. WHITNEY. That is just what we have got, one holding company.
Mr. PECORA. The United is one holding company, but it holds the
securities, it invests in the securities of several other holding companies, which in turn have a number of operating companies underlying them. Isn't that the very thing that Mr. Young condemned?
Mr. WHITNEY. Mr. Pecora, if I am to answer strictly on the technical facts, I have already said that that is true, but my contention
is that the companies that form the holdings of the United Corporation, while their technical, legal purpose is that of holding companies, with the exception of United they are, in fact, operating
companies.
Mr. PECORA. Does the United Corporation—and I am asking you
this question, Mr. Whitney, because you have been on the board of
directors of that company almost from its inception till up to the
present moment—does the United Corporation attempt to influence
the operating companies, the conduct of their business?
Mr. WHITNEY. It does not.
Mr. PECORA. HOW then does it work, or has it sought to work toward the improvement of service to the public through the effecting of economies in operation, and so forth ?
488
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. Well, because, I suppose the answer to that is, that
it has worked in sympathy with the attitude of the managements
who were in these various companies before United Corporation was
formed, and it found, the United Corporation has found, that its
point of view toward the public relations end of these various companies is identical with that of the executive management who were
in office in those respective companies before United Corporation
was formed.
I don't know that this is an answer to your question, but it has
been raised 2 or 3 times here, and that is that working on a board of
directors is not a series of conflicts; it is a question that you are
there for the mutual advantage of everybody concerned, and you are
trying to do just as well for your company as you can.
That is what the duty of a board is. That is the duty of
the United.
As I said a few minutes ago in answer to Senator
Couzens5 question, we obviously want these companies that we hold
stocks of to prosper, and if they do prosper, obviously the United
benefits as a stockholder and all the other stockholders benefit. The
purpose of a board of directors is only, as far as I know, to watch
and see that the management of a corporation, of that particular
corporation, is efficient, effective, and
generally on the job. Now,
after that you leave it to the people1'"who know their business. It
is not constant criticism, but no outsider can know as much about
the operation of a company as the people who are running it, and
the theory, our theory at least, of J. P. Morgan & Co., has always
been to try to insure that the management is efficient and then to put
your confidence in the management; let them run each business, because they know a great deal more about it than we do.
Senator COUZENS. Did you ever have a battle of proxies like Mr.
Stewart and Mr. Rockefeller had?
Mr. WHITNEY. TO the best of my knowledge and belief we have
never been in a proxy fight. Is that true, Mr. Morgan?
Mr. MORGAN. Which one is this ?
Mr. PECORA. The Standard Oil Co. of Indiana.
Mr. WHITNEY. Have we ever had a proxy fight, Mr. Morgan ?
Mr. MORGAN. I never remember having any proxy fight at all,
except at times when we were reorganizing a railroad and had to
get the proxies to get the management changed, because the management obviously had to be changed.
Senator COUZENS. And in that event the management was trying
to get proxies also ?
Mr. MORGAN. I think so.
Senator COUZENS. YOU did have those contests for proxies ?
Mr. MORGAN. Well, we had to get proxies when we were asked to
reorganize the railroad and had to do it in that way.
Mr. WHITNEY. But I don't think in the normal conduct, certainly
not in the last 15 or 20 years, my recollection is, have we ever had
what you mean by a struggle for proxies against the management of
a going concern.
Mr. PECORA. What things have actually been done by the United
Corporation to effect an improvement of service of the operating
companies to the public, either through economies of operation or
any other way ?
STOCK EXCHANGE PEACTICES
489
Mr. WHITNEY. Oh, I would not know enough of my own knowledge to answer that question. You know, which I don't think
United deserves any credit for, that during these last hard times all
these companies have effected very material economies. I don't think
that the United per se can claim the credit for that as much as the
executive management. I am on only one of these companies, and
that is a very minor interest. Mr. Howard would be very much more
competent than I to talk on that subject. But there have been economies, I know that, very material ones, as their statements show. Of
course, equally obviously, the earnings of these companies, due to
falling off in general business, are not as good today as they were in
1928 and 1929, and during that process of tearing down, like all
other corporations in the country, they have had to look to their
knitting generally to keep their expenses down.
Mr. PECORA. The economies you speak of were made at the same
time that other business organizations throughout the country, in
the last 3 years, have found it necessary to institute in order to
adjust themselves to the trend of business?
Mr. WHITNEY. Certainly.
Mr. PECORA. Have those economies, to your knowledge, been reiflected in the rates to the consumer, reductions in rates commensurate
with those economies?
Mr. WHITNEY. I can think of two instances, at least since 1929
where there have been reductions in rates in the properties the stocks
of which were held by United. I am fairly confident that there are
a great many more. Unfortunately these companies, in common with
most all other companies in the country in the last 3 years—business
has fallen off a great deal faster than it has been possible to
economize.
Mr. PECORA. Have those reductions been made voluntarily, upon
the initiative of the operating companies, or are they reductions that
have been forced upon them by utility commissions or other
regulatory bodies ?
Mr. WHITNEY. The two cases which I remember specifically were
voluntary. One of them was in New York City, about 2 years ago,
where they made economies which they estimated would be a saving
to the consumers of about five and a half million dollars, but with the
result of declining business it actually saved the consumers, or lost
that company, about eight and a half million dollars. The other
case I specifically have reference to was a Philadelphia company.
Mr. Stanley reminds me it was electric rates in Philadelphia. They
were also voluntarily reduced. I am pretty sure, without knowledge,
that there have also been voluntary reductions in rates in various
towns up in New York State, on the Hudson but I do not remember
how many. They have all been voluntary, though, Mr. Pecora.
Senator COUZENS. DO you think this customer-ownership company
was a good scheme, where the companies go out and get their customers and stockholders and control them somewhat like the Detroit
Edison Co.?
Mr. WHITNEY. Senator Couzens, I think that is a very arguable
question. It used to be thought to be a fine scheme until the stock
market went down; and now it is not thought to be quite so good.
Senator COUZENS. Have you ever made any effort to get control
of the Detroit Edison Co.?"
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STOCK EXCHANGE PRACTICES
Mr. WHITNEY. NO, sir.
Senator COUZENS. DO you
think that the drop in the stock market
is the only reason that the customer-owner scheme is not regarded
so well?
Mr. WHITNEY. NO ; I do not. Insofar as I have an opinion on it,
I should think that it is one of those things that in theory is better
than in practice, because it does not seem to me, personally, that
there is any relation between a customer of a public-utility company
or of a telephone company and the fact of its investment policy, the
theory that it is going to make him more interested in using whatever he is buying from the company. I believe it is better to induce
him to use it \)j making fair rates and giving good service, and all
the rest of it, rather than by trying to combine the two theories as
to whether he happens to have an investment and is going to be
more interested. Personally I know of a lot of companies that
thought it was the thing to do, and have done it; namely, the telephone company which sold preferred stocks of various of their operating companies, but I do not think they think it has been a very
great success.
Senator COTJZENS. In that case, assuming you were able to distribute 60 or 70 percent of your stock among your customers, obviously that would leave a very small minority in control of the corporation would it not?
Mr. WHITNEY. YOU mean, if we did in this particular instance?
Senator COUZENS. In any particular case. Assuming that an
operating utility company sold its stock to its customers up to, say,.
60 or 70 percent, that would leave a very small minority in control
of the corporation, would it not?
Mr. WHITNEY. If you assume that the balance was held in some
concentrated hands?
Senator COUZENS. Yes.
Mr. WHITNEY. Yes, sir.
Senator COUZENS. That
does, in fact, almost perpetuate the management, does it not?
Mr. WHITNEY. It might have that effect, certainly. One of the
theories of this customer-ownership, of course, has been interesting
the people in rates and things of that kind, and better relations. I t
would certainly in the case you mention, Senator, perpetuate the
management.
Mr. PECORA. Mr. Whitney, do you recall a meeting of the board
of directors of United Corporation at which there was discussed a
proposal for the United Corporation to purchase from Mr. P. G»
Gossler, then the president of Columbia Gas & Electric Corporation, a certain quantity of stock of the Columbia Gas & Electric
Corporation ?
Mr. WHITNEY. Was I at the meeting? I remember the discussion
all right. I do not remember the meeting. I remember the fact
that it was discussed, but I have no knowledge of the specific meeting. Was I there? I suppose I was.
Mr. PECORA. Can you give the committee the substance of your
best recollection of that transaction ?
The meeting was held on the 4th of February 1929 at the office of
Messrs. J. P. Morgan & Co.
STOCK EXCHANGE PRACTICES
491
Mr. WHITNEY. My best recollection, of course, antedates that meeting by some—oh, over a month, because the discussion took place as
to the acquisition of these 50,000 shares you have reference to, back
in December, and we, as a matter of fact, as we have advised you,
with the approval of the organizers who ultimately became the
directors, purchased as agent on account of this company and agreed
to purchase 50,000 shares from Mr. Gossler on the 28th of December.
Mr. PECORA. 1928?
Mr. WHITNEY. Yes; on the 28th of December 1928 we, as agents,
with the approval of the Bonbrights and ourselves, who ultimately
became the directors, entered into this agency contract with Mr.
Oossler to purchase from United Investments, Inc., through Mr.
<jossler, this stock, with payment at some later date. So this meeting to which you actually refer was a formal ratification of the
purchase which had been agreed upon on December 28.
Mr. PECORA. For whom were you acting as agents?
Mr. WHITNEY. For a corporation in process of formation and
which actually was created in 9 days.
Mr. PECORA. Known as the United Corporation?
Mr. WHITNEY. Right.
Mr. PECORA. In connection with these negotiations which culminated in the actual purchase by the United Corporation of 50,000
shares of common stock of Columbia Gas & Electric Corporation
from Mr. Gossler, was any arrangement made whereby Mr. Gossler
was enabled to purchase some of the common stock of United Corporation at a price below the market price of that stock ?
Mr. WHITNEY. YOU mean at that time, on December 28 ?
Mr. PECORA. At any time.
Mr. WHITNEY. He did purchase the stock at $25 a share.
Mr. PECORA. When?
Mr. WHITNEY. Let me see if I have it down here [referring to
memoranda]. It was some time very shortly after the organization,
and it was determined that he should have that stock at $25 a share
at the time we were organizing but before we had organized the
United; but it had no connection, as far as he was concerned, whatever with this 50,000 shares purchased.
Mr. PECORA. Let us see if there was any connection between the
two. Let me read to you the following entry from the minutes of
a special meeting of the board of directors of the United Corporation held at the office of Messrs. J. P. Morgan & Co. on. the 4th day
of February, 1929, at 2:30 p.m. [Beading:]
Present: Messrs. George Whitney, Thomas Gates, Alfred L. Loomis, and
George Roberts. Absent: Mr. L. K. Thorne they being all the directors of the
corporation.
Mr. Whitney acted as chairman of the meeting and Mr. Roberts as secretary.
The chairman stated that in connection with the purchase for the United Corporation from P. G. Gossler, president of Columbia Gas & Electric Corporation, of stock of the Columbia Gas & Electric Corporation, an agreement had
been made, subject to the approval of the board, to sell to Mr. Gossler 5,000
shares of the common stock of the United Corporation at $25 per share. The
chairman stated that he thought a close relationship with Mr. Gossler would be
to the advantage of the United Corporation.
Thereupon, upon motion duly made and seconded and unanimously adopted,
it was resolved that the sale to Mr. Gossler of 5,000 shares of common stock of
the United Corporation at $25 per share be made, and hereby is ratified, approved, and confirmed.
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STOCK EXCHANGE PRACTICES
And it is further resolved that of the consideration received $5 per share be
deemed to be capital and the balance be added to the paid-in surplus of the
corporation.
Does not that entry indicate, Mr. Whitney, that the sale of those
5,000 shares of the common stock of the United Corporation at $25
per share to Mr. Gossler was connected with the negotiations or
transactions under which the United Corporation purchased 50,000<
shares of the common stock of Columbia Gas & Electric from Mr.,
Gossler ?
Mr. WHITNEY. It does, Mr. Pecora, and I apologize for my previous answer; and it shows the danger of answering from memory,,
without getting my papers so I could look at them. It clearly does.
My first answer was clearly wrong.
Mr. PECOKA. Why was it necessary in order to enable the United
Corporation to buy 50,000 shares of the common stock of the Columbia Gas & Electric from Mr. Gossler to make available and to sell
to Mr. Gossler 5,000 shares of the common stock of United Corporation at $25 a share ?
Mr. WHITNEY. There is nothing in that minute that you read that
showed it was necessary. It merely showed it was done. I could not
tell you. I am fairly sure there was no necessity. I think the connection is fairly obvious; that Mr. Gossler was the president of the
Columbia Gas & Electric. Mr. Gossler evidently tnought it would
be to the advantage of his company in some way. He still had a
great deal of stock remaining of the Columbia Gas & Electric. He
clearly thought it would be an advantage to his company in some way
to have the corporation formed, and I suppose he felt that he would
like to have an opportunity to come in on the basis of its organization. I think you said I stated that we believed it would be to the
interest of the United Corporation to have Mr. Gossler as a stockholder.
Mr. PECORA. AS it was stated by you, according to the minutes.
You stated that you thought a close relationship with Mr. Gossler
would be to the advantage of the United Corporation; but you alsa
stated previously, according to these minutes, that " in connection
with the purchase for the United Corporation from Mr. P. G. Gossler,,
president of Columbia Gas & Electric Corporation, of stock of the
Columbia Gas & Electric .Corporation, an agreement had been made
subject to the approval of the Board, to sell to Mr. Gossler 5,000
shares of the common stock of the United Corporation at $25 per
share."
Now, let me say that, according to my research, Mr. Whitney
Mr. WHITNEY. I do not deny that.
Mr. PECORA. According to my research, the market price of the
common stock of the United Corporation on the day when this sale
was consummated, namely, February 4, was not $25 per share, but
$55 a share.
Mr. WHITNEY. But you also read, Mr. Pecora, at the time, in that
very minute—it states that it was arranged to sell him stock in this
corporation on the date the sale by him to us as agent was made,,
which was December 28. So that, obviously, we had no knowledge
of what the market was going to be on the date it was consummated.
It was apparently agreed to sell him stock in the company, and
in the statement that you have read here it states that it was done
STOCK EXCHANGE PRACTICES
493
in connection with the purchase by us as agent on account of this
company, when, as, and if formed, to sell the stock of the company.
Senator COTJZENS. Whose 50,000 shares was that ?
Mr. WHITNEY. His own personal—or, rather, it was owned by the
company that I read here
Senator COUZENS. It was not stock that came out of the treasury
of the Columbia Co.?
Mr. WHITNEY. NO, sir.
Mr. PECORA. The 50,000
shares of the Columbia Gas that enters
into the transaction were owned by Mr. Gossler personally or by
some corporation?
Mr. WHITNEY. NO. May I just read what we said here? I did
not remember the name of the company. We as agents purchased
on January 8 for the United Corporation, from United Investments,
Inc., 50,000 shares of Columbia Gas, $6,762,000, with interest at
December 28. This stock was acquired in pursuance of an arrangement made with Phillip G. Gossler for its sale at the above price.
Senator COUZENS. HOW did Mr. Gossler come to have control of
the 50,000 shares of this investment company ?
Mr. WHITNEY. He owned all of the stock of this United Investment Co.
Senator COUZENS. SO he was selling the assets of his own company?
Mr. WHITNEY. Yes.
Mr. PECORA. YOU do
not dispute, do you, that on the date of the
consummation of this sale, namely, February 4, 1929, Mr. Gossler
received 5,000 shares of the common stock of United Corporation
at a total price of $150,000 below the market value of those shares
on that date ?
Mr. WHITNEY. Again, Mr. Pecora, I cannot do arithmetic in my
head as fast as you can.
Mr. PECORA. There were 5,000 shares that had a market value of
$55 a share that were sold to Mr. Gossler for $25 a share, or $30 a
share below market price—30 times 5,000.
Mr. WHITNEY. That yould be $150,000. I do not deny that at
all; but I again call your attention to the fact that that was the day
the arrangement was consummated, that had been entered into on
December 28 before the United was formed and before there was any
possible knowledge on our part as to what the market was to be.
Mr. PECORA. I S there any written evidence of the arrangement you
have referred to, the arrangement made between the organizers of
United Corporation—which, as I understand it, were J. P. Morgan
& Co. and Bonbright & Co.—and Mr. Gossler?
Mr. WHITNEY. Of course, there were no minutes or anything of
that kind.
Mr. PECORA. Was there any written agreement?
Mr. WHITNEY. I think that you have introduced the only written
testimony there is, namely, the minutes of the meeting, which apparently were satisfactory to all the members of the board that were
present, and also those at that time were members of the two firms
that organized the United. So it seems to me to be—I rather think
that is all the written evidence there is, because I know of no other.
Mr. PECORA. YOU do not point to these minutes as an agreement
made by the organizers of United Corporation with Mr. Gossler,
do you?
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STOCK EXCHANGE PEACTICES
Mr. WHITNEY. Certainly not.
Mr. PECORA. These minutes are simply self-serving declarations
that there was such an agreement made at some prior time, are
they not ?
Mr. WHITNEY. I think they might be reasonably interpreted, however, to be an acknowledgment of the fact by the directors of the
United that such an arrangement had been made, because that is a
recital.
Mr. PECORA. Was there ever any written agreement evidencing
that arrangement that was actually formally entered into between
the organizers of the United Corporation and Mr. Gossler ?
Mr. WHITNEY. May I just inquire of Mr. McCanliss?
[After conference.] I am advised by Mr. McCanliss, Mr. Pecora, that this particular question has never been raised before by
you or any of your investigators, and we have never had occasion
to check whether there was or not.
Mr. PECORA. Have you any recollection at this time of any such
agreements having been entered into in writing with Mr. Gossler?
Mr. WHITNEY. NO.
Mr. PECORA. Or with
any member of the corporation representing
Mr. Gossler?
Mr. WHITNEY. NO ; but that would not mean anything at all, because a great deal of the business done is done on the given word.
Senator COTTZENS. SO, in all probability, on December 28 you gave
your word ?
Mr. WHITNEY. We agreed to do it; yes. Whether it was confirmed
in writing I just do not know.
Senator COUZENS. What date was United organized?
Mr. WHITNEY. December 28.
Senator COUZENS. SO on that date there was no market value for
United?
Mr. WHITNEY. NO, sir. We just agreed to sell him the shares at
whatever price they were issued at.
Mr. PECORA. Mr. Whitney, let me call your attention to the minutes of a special meeting of the board of directors of the United Corporation held on the 16th day of January 1929 at 3:30 o'clock in the
afternoon, at which you were present, according to the minutes, and
acted as the presiding officer of the meeting. Have you the minutes
before you?
Mr. WHITNEY. N O ; I have not any minutes.
Mr. PECORA. I will read from the minutes, as follows:
Mr. Whitney stated that J. P. Morgan & Co. had recently purchased as agent
50,000 shares of the common stock of Columbia Gas & Electric Corporation at
$135 per share at an aggregate net cost, including interest and crediting dividends, of $6,711,125, and that the question of the ratification of this purchase
should be submitted to the meeting. Thereupon, on motion duly made and
seconded, Mr. Whitney not voting, it was unanimously resolved that this company ratify and adopt the purchase by J. P. Morgan & Co. of 50,000 shares of
common stock of Columbia Gas & Electric Corporation, and that the proper
officers of this company be, and they hereby are, instructed to reimburse J. P.
Morgan & Co. for the net cost of such purchase, or $6,711,125.
Does my reading of the minutes recall that transaction to you,
Mr. Whitney?
Mr. WHITNEY. Recall what transaction—the one we have just been
talking about?
STOCK EXCHANGE PEACTICES
495
Mr. PECORA. The one I have just read from the minutes.
Mr. WHITNEY. Why, certainly. I recalled it before.
Mr. PECORA. That is the same transaction that you testified to
when I questioned you about certain entries in the minutes of the
meeting of he board held on February 4, 1929 ?
Mr. WHITNEY. Yes. I, of course, remember it was ratified. I do
not remember the date. I remember the transaction was obviously
ratified by the board.
Mr. PECORA. I am reading from a photostatic copy of the minutes
that were obtained from your firm or through your firm
Mr. WHITNEY. Oh, certainly; I am sure of that. It didn't come
from our firm, because we did not have it.
Mr. PECORA. Then, through the United Corporation. Has not
your firm got a duplicate copy of thq minutes of the United Corporation board meetings, as a matter of fact?
Mr. WHITNEY. I think Mr. Keyes testified this morning that we
did not. He tells me that he had them as treasurer at one time, but
when he ceased to be treasurer he turned them over to the United.
Mr. PECORA. Well, I see no mention in the minutes of the meeting
of the board held on January 16, 1929, of this other portion of that
agreement that apparently was made with Mr. Gossler, namely,
that portion under which the United Corporation undertook to sell
as part of this transaction to Mr. Gossler 5,000 shares of the common
stock of United Corporation. Can you tell this committee why the
entire arrangement was not referred to by you at this meeting of
the board on January 16, 1929 ?
Mr. WHITNEY. I have not got the remotest recollection. I did not
write the minutes. I thought you just read some minutes of a later
date in which it was brought out.
Mr. PECORA. Of course I did; and that is why I am now asking
you why it was that you did not bring out the entire transaction
at the earlier meeting of January 16, 1929.
Mr. WHITNEY. I have not got the remotest recollection one way
or the other. You see this company that was just formed
Mr. PECORA. Are you now telling us something as th^e result of
some memorandum handed to you by Mr. McCanliss ?
Mr. WHITNEY. DO you want to see it?
Mr. PECORA. NO ; I am asking you.
Mr. WHITNEY. N O ; it is something that I have already testified
about. I was just going to repeat it, and that is the fact that the
directors of the United Corporation were 4 individuals, I think, at
that timeMr. PECORA. Five.
Mr. WHITNEY. Five?
Mr. PECORA. Four indicated as present, yourself, Mr. Loomis, Mr.
Thorne and Mr. Roberts, and Mr. Gates' absence is noted.
Mr. WHITNEY. I cannot remember Mr. Eoberts, but Messrs.
Thorne, Loomis, and myself, as has been testified here and was announced at the time, were among the organizers of the company.
They became directors of the company. All these matters that I
have been talking about in connection with this transaction were
fully known to the organizers.
175541—33—PT. 2
13
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STOCK EXCHANGE PRACTICES
Why it was not included in the minutes or why I did not bring it
up, or whether I brought it up and it was not included in the minutes, I just cannot answer, because I don't know; but it must be
remembered through all these initial steps of formal ratification of
transactions the same people or the same individuals were acting,
prior to the organization, as organizers, and after organization as
directors. So that why the minutes did not cover it I do not know.
Mr. PECORA. The minutes of the meeting on January 16, 1929,
appear to have been signed by George Roberts, who acted as secretary of the meeting. That is the same Roberts who is a member of
a well-known law firm, is it not?
Mr. WHITNEY. Mr. Roberts was the individual who looked after
the legal details of the formation of United anpl in behalf of Bonbright & Co. As I have said earlier, Messrs. Davis, Polk, Ward well,
Gardiner & Reed went over all the legal details of the formation of
the United in our behalf, and Mr. Roberts was a member of the
firm of Winthrop, Stimson, Putnam & Roberts, and a lawyer.
Mr. PECORA. Wasn't it customary at meetings of the board of directors to read the minutes of the preceding meeting?
Mr. WHITNEY. I cannot remember whether we did. Sometimes
they are dispensed with. There were meetings being held, as you
already have brought out, every day there. I suppose they read
them. I cannot remember that.
Mr. PECORA. I have not brought out that they were held every
day.
Mr. WHITNEY. YOU did with Mr. Howard. The 8th, the 9th, and
there were a lot of them along there. To my recollection, that is,
they were read; yes, but I could not swear to it.
The CHAIRMAN. Who kept the minutes, Mr. Whitney? Who
actually kept the minutes ?
Mr. WHITNEY. The physical possession of them ?
The CHAIRMAN. Wrote them down. Prepared them?
Mr. WHITNEY. Well, in that instance Mr. Pecora said that Mr.
Roberts signed them; acted as secretary.
The CHAIRMAN. My question was generally; not at that particular
time. But who generally kept the minutes of the meetings which
you held. Was it changed from time to time?
Mr. WHITNEY. Well, my recollection again, Senator Fletcher,
would be that during those preliminary days the lawyers—generally
Mr. Roberts—were always present, and I think they kept them.
Subsequently Mr. Howard will have to tell you, because I just don't
know. Who drew them? Mr. Roberts?
Mr. HOWARD. George Roberts and Semler.
Mr. PECORA. George Roberts or Mr. Semler ?
Mr. WHITNEY. Yes.
Mr. PECORA. Mr. Semler
is also an attorney connected with Mr.
Roberts' law firm, isn't he ?
Mr. WHITNEY. Right.
Mr. PECORA. IS it not a fact that Mr. Philip G. Gossler was one
of the gentlemen who was invited to subscribe for units of United
Corporation at $75 per unit during the month of January 1929?
Mr. WHITNEY. I will tell you in just a second. [After examining
record.] Yes, sir; 2,000 units.
STOCK EXCHANGE PRACTICES
497
Mr. PECORA. TWO thousand units. Was he not also invited to subscribe for 2,500 units of Standard Brands, Inc., at $32?
Mr. WHITNEY. DO you mean shares ?
Mr. PECORA. Shares, rather. Thank you. Two thousand five hundred shares of Standard Brands, Inc. ?
Mr. WHITNEY. I will look it up just to be sure, but I guess almost
certainly. [After examining record.] Yes, sir; 2,500 shares.
Mr. PECORA. Wasn't he also one of the gentlemen invited to subscribe for the common stock of the Alleghany Corporation in February 1929 at $20 a share to the extent of 1,000 shares ?
Mr. WHITNEY. Again let me look. But I assume that he was.
[After examining record.] Yes, sir; 1,000 shares.
Mr. PECORA. NOW, during the month of August 1929 did J. P .
Morgan & Co. purchase any of the units of the corporation called
the Niagara Hudson Power Corporation?
Mr. WHITNEY. It
did.
Mr. PECORA. What did those units consist of ?
Mr. WHITNEY. That is too complicated for me to try to remember
in my mind. (Mr. Whitney asked for a record.) While I am waiting, Mr. Pecora. Of course, units were sold, I think, at a total of
$50,000,000 worth, in order to place the property, the Niagara Hudson, which was being the result of a merger of three general groupings of companies in northern New York State, in cash. And the
units—I will have to wait until I can read what they were. What
the unit was of a share of stock.
The CHAIRMAN. This Mr. Gossler was president of the Columbia
Gas & Electric Corporation, was he?
Mr. WHITNEY. Yes, sir. I find I have no description here, Mr.
Pecora. But if you will
Mr. PECORA. Well, my memorandum indicates that each unit consisted of one share of common stock.
Mr. WHITNEY. Eight.
Mr. PECORA. One class A warrant and one 5-year class C warrant.
Mr. WHITNEY. Eight.
Mr. PECORA. And that Niagara Hudson Power Co., on August 193
1929, sold 2,000,000 of those units.
Mr. WHITNEY. At
$25.
Mr. PECORA. At $25 per unit.
Mr. WHITNEY. That is right. That is if my recollection is correct*
Mr. PECORA. And is it also your recollection that your firm purchased 200,000 of those units at $25 per unit?
Mr. WHITNEY. With Bonbright; yes.
Mr. PECORA. With Bonbright. In equal proportions with Bonbright?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. At the time
that your firm acquired those 100,000
units of Niagara Hudson Power Corporation at $25 per unit did
your firm invite various persons to subscribe for or to purchase those
units from it at the same price, to wit, $25 per unit?
Mr. WHITNEY. Well, to answer that question accurately, we and
Bonbright bought 200,000 units, and Bonbright and we offered a
certain number of units to the total of 56,500—no, 54,000 units—to
certain individuals.
Mr. PECORA. It is 54,000 or 56,500?
498
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. Well, it is 56,500, but the last item I see there is
2,500 to J. P. M. and Bonbright, so we offered them to ourselves, so
it makes the net 54,000.
Mr. PECORA. I show you the last 2 pages of this document which
was furnished to me by your firm, or in its b'ehalf, in answer to
so-called " question 37 " which sheets are entitled " Niagara Hudson
Power Corporation units." Will you please look at it and tell us
whether the names that appear on those last two sheets are the names
of the various persons who were invited by your firm and by Bonbright & Co. to sucribe for these units at the cost price to yourselves ?
Mr. WHITNEY. It is right.
Mr. PECORA. I offer that list in evidence and ask that it be spread
on the record. That is the last two pages of this document.
The CHAIRMAN. It may be admitted and placed on the record.
(List headed " Niagara Hudson Power Corporation Units " was
marked " Committee Exhibit 37 of June 1,1933 ", and is here printed
in the record in full, as follows:)
COMMITTEE EXHIBIT NO. 37
Niagara Hudson Poiver Corporation, units preferred
Thaddeus R. Beal
George T. Bishop
Samuel T. Bodine
Charles S. Brewer
Morris Clothier
B. C. Cobb
Harvey C. Couch
Arthur V. Davis
Charles Day
W. C. Dickerman
Samuel Ferguson
Philip G. Gossler
C. E. Grossbeck
George H. Howard
T. N. McCarter
Uzal H. McCarter
Mr. PECORA. DO
Units
1,000
1, 000
500
500
500
4, 000
500
2,000
1, 000
1, 000
500
1, 000
2,000
10,000
500
500
list
Units
H. C. McEldowney
1,500
R. B. Mellon
1,000
S. Z. Mitchell
3,000
E. B. Morris, jr
500
Wm. H. Putnam
500
J. Henry Eoraback
500
Charles S. Ruffner
500
R. P. Stevens
7,000
O. P. Van Sweringen
4,000
E. L. West
2, 000
John L. Wilkie
1,000
Owen D. Young
6,000
J. P. Morgan & Co. and Bonbright & Co
2,500
Total
56, 500
you know what the market price was for these
units on the date they were offered to these various persons at $25
per unit?
Mr. WHITNEY. I think I have got a paper here. Have you got
that paper [addressing an associate] ? No; I do not. I have not
got any figures here to refresh my memory, Mr. Pecora, but my
recollection is that there was a market for—had been a market for
Niagara Hudson when issued common stock since the announcement
had been made, and there was also a market for—I think it was the
A warrants, and my further recollection is that the combination of
those two was in excess of $25, but how much I do not remember.
And, of course, the same principle about cost applies here as I have
testified so many times before.
Mr. PECORA. Well, according to the Wall Street Journal, as I
understand it—-and I am subject to correction if you wish to make a
research yourself—the common stock of Niagara Hudson on August
19, 1929, was quoted at $27, and the class A warrants at 9%. With
no quotation for the class C warrants.
Mr. WHITNEY. Those A warrants were for the right to subscribe
to stock at 35.
STOCK EXCHANGE PRACTICES
Mr. PECORA. Yes;
Mr. WHITNEY. I
499
$35.
might say, Mr. Pecora, we tried to check this
price of Niagara Hudson so as to anticipate your question, but we
could not identify the securities that were traded in on a when
issued basis as the company that finally came off to be, so we gave up.
Mr. PECORA. I am sorry, but you have not anticipated my question.
Mr. WHITNEY. Well, you asked me if I knew where they were
selling. I have not been able to find any record.
[A sheet was handed to Mr. Whitney by an associate.]
Here is a paper or a photostat, I guess it is, of an agreement sent
out to the stockholders of the constituent companies which came to
be the Niagara Hudson, signed by the four gentlemen who were the
committee under this merger, which is dated June 19, so there was
knowledge of what these securities were going to be on, I suppose,
June 20. So that the date we took and paid for these things we made
the undertaking to do this in the general plan of this merger, to
apply this $50,000,000 of cash against these 2,000,000 units for $25,
and thus, of course, it is public knowledge. So I?think ypu will find
that there was some kind of a quotation from June 20 right on, and,
of course, this was the date that the agreement was made to buy it.
I think we in turn—I do not know when we sold these shares to these
people.
Mr. PECORA. DO you want that offered in evidence ?
Mr. WHITNEY. NO. It was just handed to me to refresh my
memory from the record.
Mr. PECORA. I am perfectly willing to have you put it in to complete the record.
Mr. WHITNEY. That is just a letter. That just refreshed my
memory as to the date when the transaction was made and agreed to.
The CHAIRMAN. What is the A. E. P. Co., Mr. Whitney, do you
know?
Mr. WHITNEY. Sir?
The CHAIRMAN. What is the A. E. P. Co.? A. E. P. Co.?
Mr. WHITNEY. A. E. P. Co. ?
Mr. PECORA. American Electric Power, is it? The A. E. P. Co.?
The CHAIRMAN. Stevens connected with it?
Mr. WHITNEY. I do not know, sir. Who was connected with it?
The CHAIRMAN. Stevens. R. P. Stevens.
Mr. WHITNEY. Ray P. Stevens. Well, he was a member of the
engineering firm of Stevens & Wood, and for a short time after the
organization of the Niagara Hudson I think he was executive vice
president. Was he not? [Addressing an associate.] I am told he
was the president.
The CHAIRMAN. R. P. Stevens. He had 7,000 units.
Mr. WHITNEY. Well, he was the president at that time, of the
Niagara Hudson.
Mr. PECORA. Mr. Whitney, let me show you a photostat that was
received by me from your firm. There is the inscription at the top
" Prepared by Bonbright & Co."
Total annual gross earnings of all United States power companies
$1, 900, 000, 000
Total annual gross earnings of all United States gas companies
800, 000,000
Total
2, 700, 000, 000
500
STOCK EXCHANGE PRACTICES
Kindly look at it and tell us if you recognize that as being a table
or statistics of the United Corporation group of utility companies
and a comparison of the assets of the United Corporation and its
constituent companies with other public-utility groups operating in
this country?
Mr. DAVIS. What is the date?
Mr. WHITNEY. It is undated.
Mr. PECORA. It is dated, I think, June 19.
Mr. WHITNEY. Mr. Pecora, I can identify this certainly as a statistical memorandum prepared by Bonbright which does group the
earnings of certain so-called groupings of companies, public-utility
companies, and in the form of a comparison, if you want to use it
for comparative purposes.
Mr. PECORA. I offer it in evidence and ask that it be spread on
the record.
Mr. WHITNEY. DO you offer the last page, too ?
Mr. PECORA. Just as it stands; yes. If you want to make any
statement about the last page in order to distinguish it in any way
I shall be glad to have you do so.
Mr. WHITNEY. The last page, of course, has nothing to do with it.
I t is not the same thing. It is entirely different. It is the equity
earnings of the holdings of United. There is nothing comparative
in that.
Mr. PECORA. N O ; I know that. Well, that appears upon the face
of the last page.
Mr. WHITNEY. Yes.
Mr. PECORA. That is,
the caption on the last page clearly sets forth
what the last page is.
Mr. WHITNEY. YOU want to introduce it all ?
Mr. PECORA. I want to introduce the whole thing as it stands, and
ask that it be spread on the record.
The CHAIRMAN. Let it be admitted and put on the record.
(Two sheets giving gross earnings of all United States power
companies and United States gas companies, and one sheet headed
" The United Corporation—Equity Earnings ", were marked " Committee Exhibit 38 of June 1, 1933 ", and are here printed in the
record in full, as follows:)
COMMITTEE EXHIBIT NO. 38
(Prepared by Bonbright & Co., June 1, 1933)
Total annual gross earnings of all United States power companies
$1, 900, 000,000
Total annual gross earnings of all United States gas companies800,000, 000
2, 700, 000, 000
Group I. United group:
Commonwealth & Southern (90 percent Georgia, 65 percent Alabama, 55 percent Tennessee, 45 percent Mississippi, 35 percent Michigan, 15 percent Ohio, 5 percent
Indiana, 4 percent Illinois)
Public Service (85 percent New Jersey)
United Gas Improvement (95 percent Delaware, 35 percent
Connecticut, 30 percent Pennsylmania)
Niagara Hudson (30 percent New York)
16.5 percent of whole
145,000,000
132,000,000
86,000,000
85,000,000
448,000,000
STOCK EXCHANGE PEACTICES
501
COMMITTEE EXHIBIT NO. 38—Continued
Group II. Harrison Williams-Emanuel-Langley group:
North American (100 percent District of Columbia, 70 percent Wisconsin, 30 percent Missouri, 20 percent Ohio,
12 percent California, 3 percent Illinois)
Standard Gas (65 percent Minnesota, 60 percent Oklahoma, 47 percent Kentucky, 15 percent Pennsylvania,
15 percent Colorado, 12 percent Wisconsin, 5 percent
California)
Associated Gas (7 percent Florida, 12 percent New York,
12 percent Pennsylvania, 10.percent Kentucky, 6 percent
North Carolina and South Carolina, 3 percent New Jersey)
American Water works (75 percent West Virginia, 16 percent Maryland)
16.5 of whole
16 percent of whole
90, 000, 000
51,000,000
214,000,000
108,000, 000
28, 000, 000
26,000,000
52,000,000
428,000,000
Group IV. Electric Bond & Share Group:
American Power & Light (95 percent Montana, 60 percent
Florida; 50 percent Arizona, 35 percent Washington and
Oregon, 30 percent Kansas, 30 percent Nebraska, 22
percent Texas, 15 percent Minnesota)
National (38 percent, Tennessee 35 percent, Alabama, 20
percent North Carolina and South Carolina; 16 percent
Pennsylvania, 8 percent Texas)
American Gas & Electric (45 percent Virginia, 20 percent
West Virginia; 15 percent Ohio, 15 percent Indiana, 5
percent New Jersey, 4 percent Pennsylvania)
American Foreign Power (all foreign)
Electric Power & Light (90 percent Louisiana, 95 percent
Utah; 85 percent Idaho, 45 percent Mississippi, 35 percent Arkansas, 5 percent Texas)
13 percent of whole
Group V. California group:
Pacific Gas & Electric (37 percent California)
Southern California, Edison (20 percent California)
Pacific Lighting Co. (15 percent California)
^
Group VI. Insull group (gross) :
Middle West (90 percent Maine, 65 percent New Hampshire and Vermont, 40 percent Oklahoma; 35 percent
Kentucky, 30 percent Arkansas, 20 percent Texas, 20
percent Pennsylvania, 15 percent Virginia, 7 percent
Newsey, 5 percent North Carolina, 25 percent Kansas,
20 percent Nebraska, 10 percent Florida, 16 percent Wisconsin, 9 percent Illinois, 5 percent Michigan)
Commonwealth Edison (40 percent Illinois)
Public Service of North Illinois (15 percent Illinois)
Midland United (60 percent Indiana)
Western United (4 percent Illinois)
Peoples Gas Light & Coke Co
165,000,000
442, 000, 000
Group III. Large independent eastern group:
Consolidated Gas of New York (55 percent New York)—
Columbia Gas & Electric
Edison Electric 111. of Boston (30 percent Massachusetts)Consolidated Gas of Baltimore (80 percent Maryland)—
Detroit Edison Co. (55 percent Michigan)
4.5 percent of whole
$136, 000, 000
84,200,000
80,000,000
68,000,000
65,000,000
55,600,000
353,000,000
62,000,000
31,000,000
22, 000, OOP
115, 000,000
150,000,000
77,000,000
30,000,000
47,000,000
8,000,000
42,000,000
354, 000, 000
502
STOCK EXCHANGE PRACTICES
COMMITTEE EXHIBIT NO. 38—Continued
Group VI. Insull group (gross)—Continued.
United group
Harrison Williams-Emanuel-Langley group
Large independent eastern group
Electric Bond & Share group
Insull group
California group
—
$448, 000, 000
442,000, 000
428, GOO, 000
353,300,000
354, 000, 000
115, 000, 000
The United Corporation, equity earnings {based on holdings of June 14, 1930,
after giving effect to acquisition of an additional 2,100,000 shares of common
stock of Columbia Gas & Electric Corporation)
Shares
62,370
Mohawk Hudson second preferred
Niagara Hudson:
Common
-_ - 1,673,250
752, 460
A warrants
436, 590
B warrants
- 300,000
C warrants
959,921
Public Service Corporation of New Jersey common __ _6,081,846
TJ.G.I. common
2, 345,263
Columbia Gas common
Commonwealth & Southern:
1,798,270
Common
1,005,000
Option warrants
88,776%oo
Electric Bond & Share common
30,000
Societe Lyonnaise des Eaux et de L'Eclairage
33,105
Lehigh Coal & Navigation
202,900
Consolidated Gas common
_ .
-Miscellaneous investments
Earnings
per share
Total
$7.00
$436,590-
.61
3i, 020,682
4.26
1.65
2.13
4,089,263
10, 035,045
4,995,410
.70
1,258,7891
1.97
2.25
1.54
4.75
174,88&
67,500
50,981
963,775
187,97fr
Total
Less 3 percent on demand loan of $650,000
23,280,89319,000
Less dividend at $3 on 2,479,367 preference shares
23,261,393
7,438,101
Total
15,823,292
Dividend amount 12,332,515 shares. This is equivalent to $1,283 per share.
Mr. WHITNEY. Of course, however, that is introduced as something which was prepared by Messrs. Bonbright & Co., with which
we had nothing to do. We just merely got it as a matter of information, that is all. I t said on the face that it was prepared by
Bonbright.
Mr. PECORA. Yes. I said that at the outset.
Mr. WHITNEY. Yes.
Mr. PECORA. NOW that appears to have been prepared some time
in June of 1930?
Mr. WHITNEY. NO, sir. There is no date on it.
Mr. PECORA. I think there is some date somewhere.
Mr. WHITNEY. Well, there is on the third page. That is what I
am calling your attention to. The two things are quite different.
On the Bonbright memorandum there is no date.
Senator ADAMS. Well, were all prepared by Bonbright?
Mr. WHITNEY. NO, sir. The second one was prepared by our own
statistical force.
Mr. PECORA. I might say the physical form of this exhibit is just
the way in which we received it from your firm, all clasped together.
Three sheets clasped together.
Mr. WHITNEY. I do not know about that. I mean as a matter of
fact, Mr. Pecora, the first two pages are prepared by Bonbright as
STOCK EXCHANGE PRACTICES
503
one memorandum. The second one prepared by someone, I think,
in our own office. Now I do not know how they happened to be tied
together. Do you?
An ASSOCIATE. It just happened.
Mr. PECORA. Have you any reason to question the figures shown
on this statistical statement?
Mr. WHITNEY. Oh, no; not the slightest. But I just want it to be
sure that the first one is Bonbright and the second one is ours.
Mr. PECORA. Yes.
Mr. WHITNEY. And
the date of the Bonbright is not on it, that is
all.
Senator ADAMS. IS this the memorandum that you mentioned the
other day you asked Bonbright to prepare? You said you asked
Bonbright to prepare some statistical data because they were better
equipped.
Mr. PECORA. I think it was Mr. Howard.
Mr. WHITNEY. I think it was Mr. Howard.
Senator ADAMS. Was that the same data ?
Mr. WHITNEY. Well, this is dollars. And that was kilowatt-hours.
But, Mr. Pecora, I remember that memorandum. I mean, there is
no question. I am not questioning it in any way at all. I just did
not want to have it all go in as Bonbright's. They might not like it.
Senator ADAMS. Are Bonbright & Co. bankers as well as security
dealers ?
Mr. WHITNEY. NO, sir. They do not do a banking business.
Purely a security firm.
Mr. HOWARD. Mr. Pecora, that is not the one that I had in mind.
I do not remember having seen that.
Mr. PECORA. NOW, according to exhibit no. 38 of this date, the
so-called " United group", which is the group represented by
United Corporation, of public-utility companies, is the largest
group in the country, is that not so? Why, these are the gross
earnings, aren't they?
Mr. WHITNEY. I suppose these refer to that—yes; it says that
they are gross earnings. Yes, sir; it shows $448,000,000 on these
figures, which I have no reason to question or to vouch for. I cannot possibly vouch for that—that they are the largest.
Mr. PECORA. Mr. Whitney, may I call your attention to a cablegram sent by J. P. Morgan & Co., to Morgan, Grenfell & Co., of London, under date of January 12, 1929, in which among other things it
is stated:
We are reserving for Morgan, Grenfell & Co., London partners and clients, a
total of 15,000 units, which is1 probably the maximum that we can set aside
for you as we are having to cut everyone. In case any additional units are
available, which we doubt, we will, if you advise "us definitely what amount
you desire, do our best to carry out your wishes.
Replying to your second paragraph, the total amount of warrants to be issued
now will be approximately 3,940,000, leaving approximately 60,000 warrants in
the company's treasury reserved for sale to executive officers. Two million of
the option warrants were issued to the organizers at a dollar per warrant, and
the balance, 1,940,000, were issued in part payment for substantial blocks of
securities previously owned by ourselves, American Superpower Co., and a
few other friends. We think that the warrants are an attractive speculation,
but we do not know whether they will be placed on the market for some time.
Was it understood or arranged by the organizers of United Corporation, namely, J. P. Morgan & Co. and Bonbright & Co., to re
504
STOCK EXCHANGE PRACTICES
serve 60,000 warrants of these option warrants unlimited as to time,
for sale to executive officers of the United Corporation ?
Mr. WHITNEY. Didn't you just read that?
Mr. PECORA. Yes. I mean was that a correct statement that I
read from this cablegram of the fact ? Of the fact that it purports to
state?
Mr. WHITNEY. Oh, yes, sir.
Mr. PECORA. HOW?
Mr. WHITNEY. Yes. It is a
correct statement if we made it. I
don't remember it now, but I don't think—there is no particular
reason for not thinking it a correct statement. They were not ever
issued, as a matter of fact, I think.
Mr. PECORA. Well, 100,000 of these option warrants were issued
to Mr. Howard, weren't they ?
Mr. WHITNEY. Well, but I think 3,940,000 are all there are outstanding now, aren't they? So that that must have been inclusive
of the 100,000 for Mr. Howard that we had definitely set aside.
Sixty thousand never have been issued, have they ?
Mr. PECORA. Well, apparantly 60,000, according to this cablegram,
were reserved for sale to executive officers.
Mr. WHITNEY. And still reserved.
Mr. PECORA. But they never were sold ?
Mr. WHITNEY. Well, I would just like to check it. How many are
there outstanding now? [Addressing Mr. LeBoeuf.] Two hundred
and sixty-five thousand have been used.
Mr. LEBOEUF. TWO hundred and sixty-five thousand have been
used.
Mr. WHITNEY. Mr. Pecora, of the warrants there have been accounted for, already issued, 2,714,200, 100,000 went to Mr. Howard,
as he testified. Then there were varying amounts that went to others.
A million warrants went to the Public Electric Holding Co. Then
the Koppers Gas & Coke got 45,000. Day & Zimmerman, 70,656*
Bodine got 4,416. Electric Investors got 55,328. And Drexel on that
subsequent transaction got 4,979. Now, there have been converted
262,698, so there have been issued a total maximum of 3,994,059. And
there are now outstanding 3,732,000.
This figure of 60,000 warrants in this cable does not mean anything to me at all, because—well, they were not issued to executive
officers, because the only issue for executive officers was the 100,000
that Mr. Howard has already testified to. So we misadvised our
partners.
Mr. PECORA. Well, the reason I called your attention to that is
that I thought it might have been the understanding or arrangement
at the time you sent this cable that 60,000 of these warrants were
to be reserved for sale to the executive officers. But that such sale
was not actually made.
Mr. WHITNEY. Well, I am sorry. I just
Mr. PECORA. Well, were any of these 3,900,000-odd option warrants issued to the public ?
Mr. WHITNEY. TO the public ?
Mr. PECORA.
Yes.
Mr. WHITNEY. NO ; I read off just now
Mr. PECORA. They were issued to these individuals, your firm, and
Bonbright & Co.?
STOCK EXCHANGE FBACTICES
505
Mr. WHITNEY. NO ; they were issued to all these other people that
I related earlier had a sort of an informal group, in the spring of
1928—Koppers, Electric Investors, Day & Zimmerman, Bodine; they
were issued on the same basis of exchange for U.G.I, or Public Service that they then turned in; they received the same basis of exchange, and that is where the balance of the warrants up to roughly
3,995,000 went to.
Senator ADAMS. I want to inquire a little bit about this exhibit
that was just put in the record. Mr. Whitney, just an inquiry about
thig tabulation prepared by Bonbright. I notice in these different
groups there are certain percentages of the power furnished in different States. And then at the bottom of each group is a statement—for instance, 16.5 percent of the whole. That means of the
amount furnished in the entire United States?
Mr. WHITNEY. May I look at it, Senator Adams?
Senator ADAMS. Yes. It seems to figure out that way.
Mr. WHITNEY. I just do not remember.
Senator ADAMS. Taking the figures at the top.
Mr. WHITNEY. I should think that would be a fair inference, but
I really do not know. Because take Public Service, for instance,
85 percent of New Jersey. That would sound—of course, these are
not kilowatt-hours. These are the gross money. Of course, Commonwealth & Southern, you know the United only has 5 percent
interest in that, so that is rather a stretch
Senator ADAMS. I am primarily interested in that statement at the
bottom of that tabulation where it says that is the percent of the
whole.
Mr. WHITNEY. That is right. I think Mr. Howard testified yesterday that of the kilowatt-hours, of this so-called group, these
slightly different constituent parts did approximate 22 percent,
and if they did—I do not know that that would mean 16.5 percent
of the gross total.
Senator ADAMS. It figures that against this first total which says
that the total is $2,700,000,000, and of this aggregate there it works
out that that is 1 6 ^ percent.
Mr. WHITNEY. I presume that is right; yes, sir.
Mr. PECORA. Apparently you received a reply to this cable from
which I have last read. I will call your attention to a cable from
Morgan, Grenfell & Co., London, to your firm, dated January 12,
1929, in which, among other things, the following is stated. I am
referring to what has been marked—well, you have not got our
exhibit number.
Mr. WHITNEY. This is the one that starts, " We thank you."
Mr. PECORA. " We thank you for your most interesting cable
2038."
Mr. WHITNEY. YOU did not read the whole cable.
Mr. PECORA. Oh, no.
Mr. WHITNEY. YOU only
read the first two paragraphs of it. Yes?
sir; I have got a copy of it.
Mr. PECORA. Let me read the following from that reply cable that
you received from Morgan Grenfell & Co.:
A point in cable 2038 which is not clear to us is that of options. In your
notice to press you state organizers get 2,000,000 option warrants presumably
as bonus and that the balance of option warrants, which we understand to be
506
STOCK EXCHANGE PRACTICES
E further 2,000,000 in number, are issued in exchange for securities. This
would seem to account for 4,000,000 option warrants. In your second paragraph subsequent to the newspaper announcement you state additional shares*
and warrants have been issued, bringing warrants total up to 3,940,000. Is
this correct, and on what basis are warrants allocated? We should like to
know if warrants will be the attractive speculative element and will they be
sold in the immediate future?
Mr. WHITNEY. Mr. Pecora, I would just like to correct one thing
for your information. The cable, a portion of which you read first,
is an answer to the cable you have just been reading. Not the other
way around. You see, you probably do not know—the way I know
that is because our cable refers to the number of the cable that you
have just read.
Mr. PECORA. Well, have you got the cable number 2038 which
your firm sent to Morgan, Grenfell & Co. ?
Mr. WHITNEY. NO; I have not. I have only—let me just look.
Yes; I have. You have too, sir. Because I have here the photostatic copies of the cables furnished you. The very long cable dated
January—yes; there is a cable of the press release. Can I read it
just to satisfy
Mr. PECORA. Oh, that is the cable dated January 11, 1929 ?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. Yes; I have it here.
Mr. WHITNEY. YOU see it starts—
I overlooked it before.
The following statement was issued to the press last night.
Mr. PECORA. Then the cable that I read first is a reply by J. P.
Morgan & Co. to Morgan, Grenfell & Co.'s cable from which I last
read?
Mr. WHITNEY. Yes, sir.
Mr. DAVIS. NO.
Mr. WHITNEY. Yes.
Mr. DAVIS. The cable you
last read was the reply, was it not, of
Morgan, Grenfell & Co. to that cable of the press release ?
Mr. PECORA. Yes.
Mr. DAVIS. And then the cable that you first read.
Mr. PECORA. But I did not read that cable of the press release.
Mr. DAVIS. And the cable you last read was the Morgan, Grenfell
& Co. reply to the press release cable, is that right?
Mr. WHITNEY. Yes.
Mr. PECORA. Yes. In other words, the cable that I first read
Mr. DAVIS. Was the last of the series.
Mr. PECORA (continuing). Was a reply by J. p . Morgan &
Co.
to the cable of Morgan Grenfell & Co. from which I last read.
Mr. DAVIS. Yes.
Mr. PECORA. I inverted their order.
Mr. DAVIS. That is right.
Senator ADAMS. That is clear.
Mr. DAVIS. The last shall be first and the first shall be last.
Mr. PECORA. Shall be last. Now, apparently Morgan Grenfell &
Co. got the impression from your cable of January 11, 1929, in which
you set forth the press release, so-called, that these option warrants
were being issued as a bonus. And they asked you for advices with
respect to that. Now, apparently the reply you made to their
inquiry
Mr. WHITNEY. I never answered your question.
STOCK EXCHANGE PEACTICES
507
Mr. PECORA. Well, go ahead and answer it.
Mr. WHITNEY. YOU read, of course, that they said " presumably " ?
Mr. PECORA. Yes; " presumably as bonus."
Mr. WHITNEY. Presumably they were mistaken, because it is perfectly clear in the press notice that the purchase by the organizers
for $20,000,000 cash was 800,000 shares of the common stock and
option warrants for 2,000,000 shares of common stock. It is just
as clear as it possibly can be that the organizer paid $20,000,000 for
800,000 shares of stock and 2,000,000 warrants. Now, Morgan Grenfell & Co. read that, and they come back to us and say " presumably
as a bonus ", but they were mistaken.
Mr. PECORA. They were mistaken. After reading your press notice
they were mistaken in the impression they got therefrom that these
option warrants were issued to the organizers as a bonus ?
Mr. WHITNEY. Apparently they were.
Mr. PECORA. Did you correct their misimpression in your reply
cable of January 12, 1929, on that score ?
Mr. WHITNEY. I should think that would correct that apprehension; yes.
Mr. PECORA. Did you correct it by the statement in your cable of
January 12, 1929, which is no. 2042, reading as follows:
Two million of the option warrants were issued to the organizers at $1
per warrant.
Is that the correction of the impression—of the wrong impression—that they got?
Mr. WHITNEY. Exactly; that corrects it entirely. And you have
got to remember that this is the cable to our partners who also talk
the same kind of financial language that we do. Bonus would mean
to us that it was issued without consideration by the company, and
this is correcting their impression; that it was issued by the company and put on their books, for the consideration of a dollar per
share; and that would be a complete correction in their minds of
any other impression that they might have received.
Mr. PECORA. Did your firm, Mr. Whitney, ever enter into any
market operation with Bonbright & Co. to stabilize the market on
these shares?
Mr. WHITNEY. In what shares ?
Mr. PECORA. United Corporation. Particularly in the $3-preference stock.
Mr. WHITNEY. We entered, as we advised you in answer to your
inquiry, Mr. Pecora, into an ordinary transaction for the merchandising of the preferred shares after the units had been split up to the
holders at a sh(are of preferred and a share of common. And we
acquired in the market with Bonbright & Co. a block of United
preferred stock, and then distributed those in the normal course of
business to investors as an investment stock through the use of dealers
and other purposes.
Your introductory remark about stabilizing. It was a merchandising transaction, a normal merchandising transaction, which is
a very customary thing in securities. At that time, if you remember,,
there had been two—in the first place the units had been split up>
and in the second place there had been an offer made shortly previous,
if my recollection is correct, to holders of United Gas Improvement
508
STOCK EXCHANGE PRACTICES
stock in which they had also received a certain amount of United
$3-preference shares. And we purchased in the market—we purchased a certain number of shares of United preferred—and then,
as I say, sold it through dealers all over the country to investors.
Just an ordinary merchandising proposition.
Mr. PECORA. Well, the reason I did not refer to it as a merchandising operation, but rather as a stabilizing operation is because that
is the language that your firm itself employed in a cable that was
sent to Mr. Thomas W. Lamont under date of April 16, 1929. Will
you look at your copy of the cable and follow me while I read
from it?
Mr. WHITNEY. Yes; if you will just let me correct you in one
instance. It was not sent by the firm.
Mr. PECORA. It was sent by you and by T. S. Lamont, both of
whom are members of the firm.
Mr. WHITNEY. Quite different; yes. Two partners sending to a
partner who was abroad. And again, if I may say so, we sometimes
talk, colloquial banking language which means different things to
us than perhaps it might to you.
Mr. PECORA. Well, we all are willing to learn, even though it be
the banking language. Let me read from that cable, and follow me
from your copy, if you will:
As you remember we have discussed with Bonbrights at various times the
question of stabilizing the market in the preference shares which have from
the inception of the company been rather weak, due perhaps to the sale of
large blocks of the preference stock by those who wish to hold only the common
stock in United.
Mr. WHITNEY. Mr. Pecora, wait a minute. You are not reading
the whole cable.
Mr. PECORA. NO. I am only reading a part of it.
Mr. WHITNEY. Yes.
Mr. PECORA. Yes.
Mr. WHITNEY. Well—yes.
Mr. PECORA. I said I was going to read from it.
Mr. WHITNEY. The first paragraph, of course, is
Not all of it.
rather important
to get the context of the cable. However, it does not make any
difference really.
Mr. PECORA. All right. Let me continue my reading from it.
Not of it entirely.
Up to the present we have made no attempt to stabilize this market, but now
we have decided to form a joint account with Bonbright & Co. to purchase
stock at approximately the present market with the hope of cleaning it up and
disposing of such stock as we may purchase at higher levels through the efforts
of dealers. We are hopeful we can do this because we believe that the present
level represents an attractive investment opportunity. Also we are now hopeful that both preference and common shares will be listed on the New York
Stock Exchange early in May, and the present time, therefore, seems to us an
opportune one to purchase shares at this level and start our stabilization
program.
Now, in that language were you referring to the merchandising
operations that you spoke of a few moments ago, or were you referring specifically to an operation jointly with Bonbright & Co.
designed to stabilize the market through purchases and sales of the
same security?
STOCK EXCHANGE PRACTICES
509
Mr. WHITNEY. I was referring to the operation that I mentioned
previously of a merchandising character. And, Mr. Pecora, this
cable was written, if I may explain to you, as the two paragraphs
which you did not read from it would have shown, because Mr. T. W.
Lamont had entrusted his son with the duty of watching certain of
his investments while he was abroad. This was sent to him because
it related to some United preferred shares that he had; both the
introductory paragraph and the last one, which you did not read.
This center paragraph which you did read, the middle paragraph,
has to do with and uses the word " stabilization." But we told him,
as I said before, it obviously would steady the market for us to go
and buy those shares. We did so buy those shares because of
the reason that I indicated before—there had been the split-up of
the units; there had been this offer to U.G.I, stockholders. There
were, as we knew, certain people desirous of disposing of their preferred shares and keeping the equity, particularly as the U.G.I, stock
that they turned in was purely an equity. And we and Bonbright
went into an ordinary merchandising proposition where we purchased
the stock in the open market from willing sellers and we then distributed, and I think that we made the gross profit of 2 percent,
which is an ordinary merchandising profit.
Mr. PECORA. Well now, what was your objective in that operation ? To dispose of your own shares in the open market ?
Mr. WHITNEY. We did not dispose of our own shares. The object
of it, Mr. Pecora, was one that is a very usual one in the security
business, that we wanted to get the shares of United preference in
the hands of investors purely. It was an investment stock. We
state in this cable, among the other words you read, that " we believe
that the present level represents an attractive investment opportunity." In other words, we felt that it was selling at a price and
it was the kind of a security that we would be able to induce the
dealers throughout the country to sell it for investment. This is
one of the most usual types of handling securities in any kind of a
security market. A dealer buys a block of bonds or a block of preferred stock, gets together a lot of them, and then engages the services either of his own salesmen, if he has them, or in our case
through dealers to go out and distribute those shares.
The CHAIRMAN. Buy them on the stock exchange ?
Mr. WHITNEY. Well, I think they were not listed.
Mr. PECORA. It was not listed then ?
Mr. WHITNEY. It was not listed. So there was an over-thecounter market or some kind of a market, a curb market—I can't
remember. But we just bought them as they came in, and then we
turned them out and distributed them.
Mr. PECORA. NOW, let me see, Mr. Whitney: On April 16, 1929,
which is the date of this cable which you and Mr. T. S. Lamont sent
to Mr. T. W. Lamont, had the market in the preference stock of
United Corporation been weak ?
Mr. WHITNEY. Did it say anywhere what the stock—in the answer
to that question about pool that you asked—this thing of joint account—it does not tell us, does it, what we paid for it?
Mr. PECORA. Yes; it does. It does in the last paragraph. Does1
not the last paragraph give a quotation? The last paragraph?
Mr. WHITNEY. Oh, yes; it does. Excuse me; 43*4.
510
STOCK EXCHANGE PRACTICES
Mr. PECORA. 43% bid and 43%
Mr. WHITNEY. Yes.
Mr. PECORA. That is, asked.
Mr. WHITNEY. YOU asked if it
offered.
had been weak. I have not got in
my mind what it had been ranging at. I just do not remember.
Have you got any quotations ? [Addressing an associate.]
Mr. PECORA. NOW, let me read again a portion of that middle
paragraph of this cable:
As you will remember, we have discussed with Bonbrights at various times
the question of stabilizing the market in the preference shares which have,
from the inception of the company, been rather weak due, perhaps, to the sale
of large blocks of the preference stock by those who wished to hold only the
common stock in United.
Now, when you cabled that to Mr. T. W. Lamont you were stating
the fact and what you knew to be the fact, were you not ?
Mr. WHITNEY. Certainly.
Mr. PECORA. Yes.
Mr. WHITNEY. That
refreshes my memory that they were. And
that is what I have said, Mr. Pecora, that because of the splitting
of the units it left in the hands of certain holders preferred and
common stocks, and they had been selling that, and that is a perfectly customary function in the merchandising of securities for the
bankers who have the responsibility for those securities to take an
interest in getting them placed with people who want them rather
than just have them on the market.
Mr. PECORA. Well, now, on April 16, 1929, was your firm arranging to have the preference and common shares of United Corporation listed on the New York Stock Exchange?
Mr. WHITNEY. Also we are now hopeful that both preference and
common shares will be listed on the New York Stock Exchange early
in May. And as the listing application I requested permission this
morning to insert in the record—was it May 9 or 8? May 8; as a
matter of fact, to answer your question, the directors of the corporation at that time—I think it was Mr. Thorne and I—did appear
before the listing committee of the New York Stock Exchange and
discussed all this financial set-up that you were questioning Mr.
Keyes on this morning, and it was then reviewed—the way these
warrants were set up in the books was reviewed by Price, Waterhouse with the accountants, and the method that they were carried
was approved by them, as it was subsequently by Arthur Young.
So if you ask if we were active, I think it is fair to say that we were
assisting the corporation in their application to list upon the New
York Stock Exchange.
Mr. PECORA. And that was in contemplation on April 16, 1929,
was it ?
Mr. WHITNEY. Well, clearly
Mr. PECORA. That is, to obtain an early listing of the preference
and common shares on the New York Stock Exchange ?
Mr. WHITNEY. Yes; it must have been. We say that we are now
hopeful that they will be.
Mr. PECORA. Yes. Now, at that time when you were saying that
to Mr. Lamont you also said that with the consciousness that the
preference shares were weak in the over-the-counter market that
STOCK EXCHANGE PEACTICES
511
existed and had existed from the inception of the company, didn't
you?
Mr. WHITNEY. Well, not that there is any relation between the two
thoughts, but we obviously were thinking both those thoughts because they are both mentioned in this cable.
Mr. PECOKA. Yes. You say in this cable: " The market is weak and
has been weak practically from the inception." " Up to the present
time we have done nothing "—I am paraphrasing this in my own
way—" we have done nothing to stabilize the market. But"
Mr. WHITNEY. YOU have stated that many times, but I have never
denied that you have read the cable accurately. We said that; yes>
sir.
Mr. PECORA. Yes. Now was it not your purpose at that time to
undertake a market operation with Bonbright & Co. which was designed to keep up the market price of the preference shares of United
common so that when those shares became listed on the New York
Stock Exchange, which you hoped would occur early in May, the
market would be in better shape for public trading in those preference shares?
Mr. WHITNEY. YOU ask so many questions in that one, Mr. Pecora,
that I cannot answer it except by degrees.
Mr. PECORA. All right.
Mr. WHITNEY. I have already testified—and there is no question
of doubt about it, because we reported to you on this joint account
that we were discussing with Bonbright the formation of a joint
account to purchase United preference shares. We were not discussing in any sense a market operation. We were discussing the
purchase of United preference shares at what we considered to be a
level at which they presented an attractive investment opportunity.
That is also so. The question that they were listed is obviously
also so. But the implication in your question that we were acquiring
stocks in the hope of making a turn in the market was not in our
minds, and as known by you we did not do it in a market operation^
as you call it, but we sold them through dealers for investments
throughout the country, paying the dealers, if I remember rightly >
1 percent for their services in that connection.
Mr. PECORA. The use of the verb " stabilize " or " stabilizing " in
this cablegram was just an unfortunate employment of terminology,
was it?
Mr. WHITNEY. I never said that, Mr. Pecora.
Mr. PECORA. I am asking you if that is a fact now.
Mr. WHITNEY. I do not think it was an unfortunate use of the
word; no.
Mr. PECORA. Well, was it an inaccurate use of the word to describe the thought you meant to convey to Mr. Lamont?
Mr. WHITNEY. Well, I do not believe that Mr. Lamont got any
impression from this use of language other than what I have said
was in our mind. Mr. Lamont knew of the transaction, and I do
not think it carried any erroneous implication to him, as it apparently has to you.
The CHAIRMAN. The effect was to stabilize, wasn't it?
Mr. WHITNEY. What, sir?
175541—33—PT. 2
14
512
STOCK EXCHANGE PRACTICES
The CHAIRMAN. The effect was to stabilize it ?
Mr. WHITNEY. Oh, the effect—if we bought 59,000 shares of stock
it would obviously—99,000 shares of stock—obviously would have,
I assume, some effect on the market if we were standing there ready
to buy it, particularly if it was over-the-counter market. Bonbright
purchased, I think, the stock. The purchase was made by Bonbright
& Co. And the word " stabilize ", as Senator Glass suggested the
other day, in the last 4 years has come to mean so many things and
is used in so many senses that the meaning it has today has got
rather a—I don't know quite what the meaning of it is today. But
it would have a stabilizing effect in that sense. Obviously, the
purchase of 99,000 shares.
Mr. PECORA. YOU are one of the authors of this cablegram. What
did you mean by your reference to stabilizing the market and to
attempt to stabilize this market in this cablegram ?
Mr. WHITNEY. Well, my only way I can answer that, Mr. Pecora,
is this, that I was also the individual who arranged this joint account
with Bonbright. So that I speak with complete knowledge of what
our intention was in forming the joint account. That was the reason
that I have already given to you. Whether my use of language did
not properly convey the thought I had in my mind at that time I do
not know, but I do know what we formed the joint account for, and
I don't think the language had any other effect than what we formed
it for, which is as I have stated.
Mr. PECORA. Well, according to the cablegram you formed it
Mr. WHITNEY (interposing). Further, Mr. Pecora, as I stated
before, this is a cable between partners where it was not written for
the purpose of a stranger who would read it with care. I t was
written between us, and I am sure that Mr. Lamont never got any
impression of anything except that we were going to do an ordinary
business, merchandising proposition.
Mr. PECORA. Well, because it was a communication between partners which probably at the time you did not expect anyone but
a partner would ever see, isn't it also quite likely that in phrasing
this cablegram you stated baldly just what was in your mind ?
Mr. WHITNEY. Well, I have just told you, Mr. Pecora, what was
in our mind, because I happened, as I said a minute ago, to be
the individual in our office who made this arrangement with Bonbright to enter into this merchandising proposition. So I know
what was in our mind clearly enough.
Senator ADAMS. Mr. Whitney, you are speaking of this as an
ordinary merchandising matter. Did I understand accurately in
the earlier stages of this inquiry that these stock purchases and
stock distributions were out of the ordinary for J. P. Morgon &> Co. ?
Mr. WHITNEY. Well, this, sir, was in the preference shares. There
was no public offering connected with this. Bonbright bought it
and then there were certain dealers. Bonbright have a retail organization for securities themselves, and they sold a very large
amount of stock. We sold it to clients. I do not think we sold any
stock on the board, at all. It was all done through dealers and gradually through their efforts largely, I mean the great bulk of it was
sold through their own retail organization to their own, clients.
Senator ADAMS. Did I get an incorrect impression of your earlier
statements
in reference to this so-called " preference list", one of the
STOCK EXCHANGE PRACTICES
513
reasons for it, it is something that you were not in the habit of
doing ?
Mr. WHITNEY. It is very unusual for us. We have done it. We
have sold preferred stocks over our own name. But this case did not
involve any what we would call a public issue, because it was not new
stock. We offered General Motors over our own name, and we have
offered certain preferred stocks over our own name, but very few of
them.
Mr. PECORA. NOW, Mr. Whitney, do you recall the transaction in
the early part of January 1929 between your firm and the United
Corporation involving an exchange of securities ? That is the transaction that included an exchange of the Mohawk and Hudson Power
Co. stock that has already been adverted to here. Do you recall
that?
Mr. WHITNEY. I certainly do.
Mr. PECORA. NOW, what other securities than those issued by the
Mohawk & Hudson Power Corporation were exchanged by your
firm, the United Corporation, in return for its stock and warrants ?
Mr. DAVIS. At the same time, or are you speaking of another time ?
Mr. PECORA. On that same transaction.
Mr. WHITNEY. At the same time, on January 10, Mr. Pecora—I
am reading now from the same document that I read yesterday—
J. P. Morgan & Co. and Drexel & Co. delivered the following exchange for securities to the United Corporation: 130,565 shares of
the United Gas Improvement common stock; 59,500 shares Public
Service Corporation of New Jersey common stock; and then the
Mohawk-Hudson Power Corporation common, second preferred, and
warrants.
Mr. PECORA. HOW did J. P. Morgan & Co. acquire those two blocks
of stock—that is, the United Gas Improvement Co. common and the
Public Service of New Jersey common stock?
Mr. WHITNEY. DO you want me to read this again ?
Mr. PECORA. HOW did it acquire them?
Mr. WHITNEY. Insofar as the 81,000, they were partly owned originally by Drexel and partly by us. That is a combination of the
figures that you have in answer to question 32 of your questionnaire.
I think I testified yesterday that as far as the 81,800 shares of U.G.I.
that we got we acquired them from May 3 to June 20 in the open
market, and we acquired the 25,000 shares of Public Service Corporation in the same way during the period.
The Drexel situation is: On December 30, 1927, Drexel & Co.'s
holdings were 25,000 shares U.G.I, stock, 34,500 Public Service Corporation stock, 47,550 shares of Philadelphia Electric. Shares of
these companies, being shares actively dealt in in the Philadelphia
market, had been acquired over a period of years beginning in 1924
through purchase for cash, exchange for other securities, exercise
of rights of stockholders to subscribe for new stock, stock dividends, and stock split-ups.
I should think that answered your question as well as I can, Mr.
Pecora.
Mr. PECORA. NOW, do you recall a transaction whereby the United
Corporation, on January 14, 1929, acquired all of the capital stock
of the Public Electric Holding Corporation from the American
Superpower Corporation ?
514
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. Will you read that again ?
The SHORTHAND EEPORTER (Mr. Randolph) :
Do you recall a transaction whereby the United Corporation on January
14, 1929, acquired all of the capital stock of the Public Electric Holding Corporation from the American Superpower Corporation V
Mr. WHITNEY. I do.
Mr. PECORA. What was the purpose of that transaction?
Mr. WHITNEY. TO acquire the assets of the Public Electric Cor-
poration, I suppose.
Mr. PECORA. And those assets consisted of a large block of shares
of the Public Service of New Jersey common stock, namely, 800,000
in number, and 53,000 shares of United Gas Improvement common
stock, did they not?
Mr. WHITNEY. I would just like to check that. Have you those
figures (addressing an associate) ? I don't remember the exact
amount of shares. I remember there was a large block of Public
Service Corporation stock and also a substantial block of U.G.I.,
but I don't remember the exact amount without checking it.
(After consultation with associates:) That is correct, Mr. Pecora;
800,000 shares of common stock of Public Service Corporation of
New Jersey and 53,000 shares of common stock of United Gas Improvement Co.
Mr. PECORA. NOW, do you know from whom the Public Electric
Holding Corporation acquired those two blocks of securities?
Mr. WHITNEY. DO I know?
Mr. PECORA. Wasn't it from the American Superpower Corporation ?
Mr. WHITNEY. I just don't—do I know from whom they acquired
them?
Mr. PECORA. Yes.
Mr. WHITNEY. I had
no connection with the Public Electric or the
American Superpower. I don't know about those companies at alL
Mr. PECORA. Don't you recall saying
Mr. WHITNEY (interposing). Well, Mr. Pecora, I am perfectly
ready to—I assume that one way or another they got it from the
American Superpower, because the original arrangement was made
with the Superpower that they would turn in their holdings of Public Service and U.G.I. The thing I am not quite clear on is whether
it all came from the American Superpower or not. I think the bulk
of it did, but I just—there was an arrangement. Of course, it was
part of the arrangement. I am not sure of the number of shares.
Mr. PECORA. NOW, let's see if this refreshes your recollection: I
will read from the minutes of a special meeting of the board of
directors of the United Corporation held on the 9th day of January,
1929, at 11:15 a.m., as follows—and according to the minutes, you
were 1 of the 4 directors who attended that meeting, the absent 1
being Mr. Sherman Ewing. (Reading:)
It was thereupon proposed that the following offer be made by this corporation to the American Superpower Corporation:
JANUASY 9,
1929.
The AMERICAN SUPERPOWER CORPORATION,
Dover, Del.
GENTLEMEN : The undersigned corporation has been organized under the law
of the State of Delaware with an authorized capital stock of 13,000,000 shares,
STOCK EXCHANGE PRACTICES
515
all without nominal or par value, of which 1,000,000 shares are to be first
preferred stock, 2,000,000 shares are to be preference stock, and 10,000,000
shares are to be common stock.
We enclose herewith certified copy of our certificate of incorporation.
We have created a $3 series of preference stock to be designated as $3
cumulative preference stock, which series is to have a definite rate of $3 per
share per annum. It is redeemable at the price of $55 per share, plus an
amount equal to accrued dividends. Dividends are to be payable, if declared, on
the first days of January, April, July, and October. We enclose a specimen
certificate of the $3 cumulative preference stock.
We have also created, in accordance with the terms of our charter, a form
of option warrant entitling the holder thereof to purchase at any time without
limit shares of common stock of our corporation as such stock may be constituted at the time of such purchase, at a price of $27.50 per share, subject to the
further terms and conditions therein stated.
We enclose herewith a specimen form of option warrant. We have issued
or contracted to issue and sell partially to J. P. Morgan & Co. and partially to
Bonbright Electric Corporation or their nominees an aggregate amount of
600,000 shares of our $3 cumulative preference stock, 1,600,000 shares of our
common stock, and option warrants in the form above described, entitling the
holders to purchase at any time without limit an aggregate amount of 2,714,200
shares of common stock at $27.50 per share.
In consideration for the issuance of such securities we have or are to receive
the following:
Cash in the sum of $20,371,025.76; 130,565 shares of the capital stock of the
United Gas Improvement Co.; 59,500 shares of common stock of Public Service
Corporation of New Jersey; 62,360 shares of the second preferred stock of
Mohawk-Hudson Power Corporation; 358,957 shares of the common stock of
Mohawk-Hudson Power Corporation; 124,740 option warrants of MohawkHudson Power Corporation, each of such option warrants authorizing the holder
thereof to purchase at any time one share of common stock of that company
at $50 per share.
We understand that you have under consideration the creation of a subsidiary corporation under the laws of the State of Delaware, to be known as
the Public Electric Holding Corporation, or by some other appropriate name,
which corporation is hereafter referred to as the subsidiary corporation, to
have an authorized capital stock of 10,000 shares with a par value oil $100 each
for the purpose of transferring and delivering to that corporation 300,000
shares of the common stock of Public Service Corporation of New Jersey and
53,000 shares of the common stock of the United Gas Improvement Co.. together with cash in the amount of $25 in consideration of the issuance and
delivery to you of the entire stock of that corporation.
Subject to the necessary approval of our stockholders, we hereby offer to
merge and consolidate said subsidiary corporation to be created by you into our
corporation, the consolidated corporation to be known as the United Corporation. The terms of the proposed merger and consolidation are contained in a
draft of agreement of merger and consolidation which we submit to you
herewith.
By the terms of this agreement of merger and consolidation you would receive 34.4187 shares of $3 cumulative preference stock, 221,853 shares of common stock, and option warrants entitling the holder to purchase 100 shares of
common stock of the consolidated corporation for each share of the capital
stock of the said subsidiary corporation held by you.
You will thus be entitled to receive in exchange for all of the capital stock
of the said subsidiary corporation held by you in the aggregate 344,187 shares
of $3 cumulative preference stock, 2,210,853 shares of common stock, and
option warrants entitling the holder thereof to purchase 1,000,000' shares of
common stock at $27.50.
It is understood that of the consideration to be received for the issuance of
the above shares of $3 cumulative preference stock, common stock, and option
warrants, $50 shall constitute the consideration for the issuance of each share
of $3 cumulative preference stock, $1 shall constitute the consideration for
the issuance of each right represented by the above option warrants to purchase one share of the common stock of the consolidated corporation at $27.50
per share, and the balance of the consideration shall constitute the consideration received for the issue of the above-mentioned common stock, and that of
.the consideration received for the issue of the $3 cumulative preference stock
516
STOCK EXCHANGE PEACTICES
the entire consideration, namely, $50, will be determined to be capital, and
that of the consideration received for the issuance of common stock $5 per
share will be determined to be capital and the balance of the consideration
received from the common stock and the entire consideration received for the
option warrants will be credited to paid-in surplus of the consolidated corporation.
By the terms of said agreement the holders of the stock and option warrants
of our corporation will be entitled to such stock and option warrants in the
merged corporation in the same amounts as their present holdings.
Then follow other provisions. Then this statement [reading] :
If this offer is acceptable to you, you will agree to proceed at once to
incorporate said subsidiary corporation and to take the necessary corporate
steps to complete the merger, and we agree forthwith to call th0 necessary
directors' and stockholders' meetings in regard thereto.
Now that offer was accepted, wasn't it, by the American Superpower Corporation?
Mr. WHITNEY. That letter is so long—was it written by United to
Superpower ?
Mr. PECORA. Yes, sir.
Mr. WHITNEY. Yes, sir; it was.
Mr. PECORA. Yes. And the whole
purpose of this was to enable
the United Corporation to acquire from the Superpower, the American Superpower Corporation, this block of 800,000 shares of the common stock of the Public Service Corporation of New Jersey and the
53,000 shares of the
Mr. WHITNEY. U.G.1.
Mr. PECORA. Common stock of the United Gas Improvement Co.,
wasn't it?
Mr. WHITNEY. Yes.
Mr. PECORA. Why wasn't
that exchange effected directly between
the United Corporation and the American Superpower Corporation ?
Mr. WHITNEY. That is a matter that rests with the American
Superpower. We had no—I don't know anything about it. We had
no connection with the American Superpower.
Mr. PECORA. Why, this offer is made to the American Superpower
Corporation by your corporation, the United, wasn't it?
Mr. WHITNEY. Why, certainly.
Mr. PECORA. And these terms and provisions are embodied in the
written offer that was made to the American Superpower Corporation by the United Corporation, wasn't it?
Mr. WHITNEY. Mr. Pecora, you asked me if the purpose of that
offer was not to acquire 800,000 shares of Public Service Corporation
common stock, 53,000 shares of United Gas Improvement common
stock, and I answered yes. Again
Mr. PECORA (interposing). Then, why wasn't the exchange effected
directly between the United Corporation and the American Superpower Corporation without any necessity for creating a third company called the Public Electric Holding Co. ?
Mr. WHITNEY. It is a matter of the arrangement. All those papers
were drawn by the lawyers, and I suppose it was done as a matter
of convenience or at the wish of the American Superpower, of which
I have no knowledge.
Mr. PECORA. Wouldn't it have been much more convenient for the
American Superpower Co. to turn over to the United Corporation
directly these shares of Public Service Corporation of New Jersey
STOCK EXCHANGE PRACTICES
517
and of United Gas Improvement Co. in exchange for the shares of
the United Corporation ?
Mr. WHITNEY. Again, I can only say that I don't know anything
about the American Superpower, but apparently it was not more
convenient, because this was the way it was done. But I just—I
had no—we have no—as I testified before, we had no relation then
or since with the American Superpower, and why the law is this
way I just don't know.
Mr. PECORA. Are you sure that you knew nothing about the American Superpower Corporation at that time, when this offer was made,
under date of
Mr. WHITNEY (interposing). Oh, I would not want to be taken to
mean that I did not know it existed, what the character of its holdings were, certainly, as a matter of general knowledge, but I was not,
nor was the firm, owners of any of the stock of the American Superpower. Of course, I knew of its existence obviously.
Mr. PECORA. NOW, as a matter of fact, Mr. Whitney, wasn't this
exchange of securities between the United Corporation on the one
hand and the American Superpower Corporation on the other hand
effected through the medium of a third company which was specially created for the purpose of this transaction in order to avoid
the payment of taxes on such a transfer or upon any profits accruing
to either company from such a transfer ?
Mr. WHITNEY. I just don't know, Mr. Pecora. Of course, the
first part of your question, it was effected through the formation of
a third corporation; that is obvious from that letter. But, as I say?
I cannot testify of any knowledge of my own as to what was the
motive that brought it about.
Mr. PECORA. Well, what advice was given to you as a director of
this company, this United Corporation, by any attorney or counsel
for the corporation
Mr. WHITNEY (interposing). Why, I
Mr. PECORA (continuing). Which prompted you as a director to
vote for the making of this offer to the American Superpower Corporation in the form embodied in this letter that is spread in the
minutes of the meeting that I have read from ?
Mr. WHITNEY. Why, I assume that I was advised by counsel that
the offer we made was a perfectly legal method of acquiring those
two blocks of shares that you mentioned, and if I was satisfied as to
the legality and tHe propriety of it I woulci have been satisfied to
make the offer that way.
Mr. PECORA. DO you know of any reason why the United Corpora^
tion could not have directly transferred its shares, its stock, to the
American Superpower Corporation in payment for these two blocks
of stock of the Public Service Corporation of New Jersey and the
United Gas Improvement which were owned by the American
Superpower Corporation?
Mr. WHITNEY. DO I know of any legal reason ?
Mr. PECORA. Any reason whatsoever, legal or based upon any practical consideration of convenience or otherwise.
Mr. WHITNEY. I have never given any thought to the subject.
Mr. PECORA. Well now, you are a director in many corporations,
aren't you ?
518
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. Yes.
Mr. PECORA. Haven't
you as a director in various corporations
frequently taken part in corporate action whereby exchanges of
securities were effected?
Mr. WHITNEY. I undoubtedly have, but I would not say frequently.
Mr. PECORA. Well now, as a matter of fact
Mr. WHITNEY (interposing). I am not a lawyer, you know, Mr.
Pecora. When these matters come up we follow our advice of
counsel as to the propriety and legality of the steps. The matter of
the—I just—you are asking me to testify to something that I have
told you I cannot testify on to my own knowledge. This was done
this way with the advice of eminent counsel, it was a satisfactory,
legal, and proper way to do it, and that was all that I was interested
in. The motives, why it was done, what the reasons that suited the
American Superpower better this way than any other, was a matter
that didn't concern me, and I was advised it was a proper transaction, that is all I know. I just am not able to testify from my own
knowledge of why it was done this way rather than directly, and I
cannot tell you more than that. If I could, I would be delighted
to tell you.
Mr. PECORA. Well now, Mr. Whitney, at about the same time that
this transaction was effected, your own firm had exchanged securities which it owned in certain utility companies
Mr. WHITNEY. Quite right.
Mr. PECORA. With the United Corporation in return for the United
Corporation's securities or stock, hadn't it?
Mr. WHITNEY. Certainly.
Mr. PECORA. And that exchange was effected directly between your
firm and the United Corporation without resort to the medium of
another corporation that was specially created for the purpose of
effecting the transfer, wasn't it ?
Mr. WHITNEY. Certainly.
Mr. PECORA. Did you ask anyone why this exchange referred to
in these minutes of January 9, 1929, could not have been made in
the same direct fashion?
Mr. WHITNEY. I may have.
Mr. PECORA. What answer was given to you ?
Mr. WHITNEY. I don't remember. Mr. Pecora, if I did remember
I would not have told you a minute ago that of my own knowledge
I would not be able to testify as to why it was done. I may have
asked a question. I may have received an answer. But I don't
remember now what the answer was. There is no—I am not trying
to deny in any way that this Public Electric Holding Corporation
was used. It was through that medium that these securities were
received from the superpower to the United Corporation, transferred. The motives were motives that must have been of some
interest to the American Superpower. There is no analogy between
our transaction, which was a sale by us of certain utility stocks that
we, J. P. Morgan, owned, to the United for the exchange of securities. This was done probably to suit, as I said before, I assume, the
convenience of the American Superpower, but beyond that I just
haven't got any knowledge.
STOCK EXCHANGE PEACTICES
The CHAIRMAN. Did this new company ever do any other business ?
Mr. WHITNEY. I don't think so; no, sir.
Mr. PECORA. It was merged, wasn't it; directly in connection with
this transaction it became merged with the United Corporation, and
thereby passed out of existence?
Mr. WHITNEY. Certainly. That is what the——
Mr. PECORA (interposing). Its only function, the only purpose for
which it was created, was to effect this transfer of securities between
American Superpower Co. and the United Corporation; isn't that so?
Mr. WHITNEY. And, of course, it did not affect the United Corporation one way or the other. It was no detriment to the United
Corporation and no advantage. It was a method which I assume,,
therefore, must have had some merit from the point of view of the
American Superpower, but I just don't know.
Mr. PECORA. YOU don't know what merit it has ?
Mr. WHITNEY. Of my knowledge I do not.
Mr. PECORA. Well, Mr. Whitney, how was it that the offer to the
American Superpower was made by the United Corporation upon
those terms ? Why didn't the offer come from the American Superpower Corporation to the United Corporation ?
Mr. WHITNEY. There again you will have to ask the lawyers.
Sometimes they write a letter in one direction and sometimes in another. That I do not know.
Mr. PECORA. It is all a mystery to you ?
Mr. WHITNEY. This is 4 years afterward. It is not a mystery.
There is no mystery about it. But why it was done I just don't
remember 4 years afterward, why it was done. The effect was the
same, wasn't it? You have already asked me a question which
brought the answer for the purpose of this. The only purpose that
the United Corporation was interested in was to acquire 80,000 shares
of Public Service stock and 53,000 shares of U.G.I, stock. This
transaction accomplished that purpose. It was the only thing that
I as a director of the United Corporation was interested in. Beyond that I did not ask questions about other things. We got perfectly satisfactorily
Mr. PECORA (interposing). Wasn't that transaction this: Assuming now that I am the American Superpower Corporation and that
you are the United Corporation. You want to give me your shares
of certain stock that I own as an exchange
Mr. WHITNEY (interposing). You are the United?
Mr. PECORA. I am the American Superpower Corporation and you
are the United Corporation.
Mr. WHITNEY. All right.
Mr. PECORA. Instead of giving them to me directly and I giving
you the stock that you want directly, we call in someone from out
of the room and we effect the exchange with each other through that
third person. Isn't that about what happened here ?
Mr. WHITNEY. We formed a corporation. Was anybody injured
by it, Mr. Pecora?
Mr. PECORA. I am asking you what the reason for it was.
Mr. WHITNEY. Well, I don't know, except that I
Mr. PECORA (interposing). You don't know, do you?
Mr. WHITNEY. I have answered that half a dozen times.
520
STOCK EXCHANGE PRACTICES
Mr. PECORA. I have asked you if it was a species of avoidance of
payment of taxes.
Mr. WHITNEY. Well
Mr. PECORA (continuing). You don't know anything about that?
Mr. DAVIS. That wasn't it.
Mr. PECORA. YOU wouldn't say that was the reason, would you?
Mr. WHITNEY. I wouldn't say it was the reason or wasn't the
reason. I say I don't know. I am perfectly willing to take your
assumption. You are a lawyer familiar with all these matters, and
if that is the diagnosis you make of it I am perfectly satisfied.
Mr. PECORA. I have not made any diagnosis. I am suggesting
something to see if you know anything about that.
Mr. WHITNEY. I am sorry that I cannot answer.
Mr. PECORA. Mr. Whitney, will you be good enough to look at
this photostatic copy of a letter addressed to Mr. Arthur M. Anderson under date of January 16, 1929, which we received from your
firm?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. DO you identify it as a true copy
Mr. WHITNEY. Yes, sir.
Mr. PECORA. I offer it in evidence and ask that
of such a letter ?
it be spread on the
record.
The CHAIRMAN. Let it be admitted and spread on the record.
(The letter referred to was marked "Committee Exhibit No. 39,
June 1, 1933," and is as follows:)
Mr. PECORA. For the information of the committee, may I read it?
It is on the letterhead of the New York, New Haven <& Hartford
Railroad Co., office of the chairman of the board:
JANUARY 16,
1929.
Personal.
Mr. ARTHUR M. ANDERSON,
23 Wall Street, New York City.
DEAR ARTHUR: I appreciate very much your telephone suggesting that I
subscribe for or purchase shares of the new corporation organized to acquire
a substantial interest in public-utility corporations furnishing electrical energy.
I understand that one of those corporations is the Connecticut Light & Power
Co., with which this company has a contract. We are about to open negotiations for future dealings with this company in regard to power requirements,
and I feel that I ought not at this time to consider any investment in its
securities or in securities of any corporation which may exercise a directing
influence.
This may seem to you leaning over backwards, but—excuse the paradox—I
ieel more comfortable in that posture. Just the same, I appreciate your
having brought this to my attention.
Yours very sincerely,
E. G. BUOKLAND.
Mr. PECORA. This is the Mr. Buckland who did accept your invitation to subscribe to a certain number of shares of the Alleghany
Corporation common stock and to a certain number of shares of
Standard Brands, Inc., is he not?
Mr. WHITNEY. That is the same gentleman.
The CHAIRMAN. NOW, gentlemen
Mr. WHITNEY. Mr. Pecora, would you be interested by any chance
in the reply to that letter, which your investigators did not take ?
Mr. PECORA. I am interested in anything you want to produce in
reference to any of these matters.
STOCK EXCHANGE PRACTICES
521
Mr. WHITNEY. That is such a fine point of view, as stated by Mr.
Buckland, that I should like to read this answer to him by Mr.
Anderson:
We quite understand your point of view about the stock of the United Corporation. As a matter of fact, it does not directly have any ownership in
Connecticut, but, of course, the United Gas Improvement Co., in which the
United Corporation has^a substantial though a minority interest, has important
Connecticut properties.
If the foregoing should change your point of view, please let me know, but
we would not for a moment want to suggest your doing anything about anything
which would run counter to any of your own views.
The CHAIRMAN. DO you want to put that in the record ?
Mr. WHITNEY. If you want it.
The CHAIRMAN. NOW, we will go on tomorrow morning at 10
o'clock. On Saturday we will not sit, I think. I t is not expected
that this inquiry will be completed before Monday and Tuesday.
I t will consume both Monday and Tuesday. Kuhn, Loeb & Co. are
cited to appear on Tuesday, but we won't finish this inquiry we are
now engaged in in time for that appearance. We estimate now that
by Tuesday night we will be through with this line of inquiry.
Mr. PECORA. Possibly by Monday, Senator Fletcher.
The CHAIRMAN. All right.
Mr. PECORA. I will make every endeavor to get through by Monday.
The CHAIRMAN. We won't be able to finish this inquiry this week.
We will go on tomorrow, and then will adjourn and go on on Monday
again.
Mr. WHITNEY. Can you tell us what train we will be able to get
home tomorrow night? What time will we be through tomorrow
night. There are quite a number of us and we would like to get
home for over Sunday.
The CHAIRMAN. I think we will adjourn tomorrow so as to get
you home in plenty of time for Sunday.
Mr. WHITNEY. We would rather sit late tomorrow if necessary in
order to be sure to be discharged on Tuesday.
The CHAIRMAN. All right. We will try to accommodate you if
we can. The committee will now adjourn until tomorrow morning
at 10 o'clock.
(Thereupon, at 6:20 p.m., Thursday, June 1, 1933, the subcommittee adjourned to meet at 10 o'clock the following morning.)
COMMITTEE EXHIBIT NO. 36
JUNE 1,
1933.
This agreement made the 31st day of March 1916 between John Pierpont
Morgan and others, witnesseth:
That the parties hereto have this day formed a partnership for the transaction of a general foreign and domestic banking business in the cities of
jtfew York and Philadelphia, upon the following terms and conditions:
First. The business shall be conducted in New York under the firm name
of " J. P. Morgan & Co.", and in Philadelphia under the firm name of " Drexei
& Co.", and shall commence on the 1st day of April 1916.
Second. The capital of the partnership shall be as follows: * * *
Third. The net profits and losses shall be divided and borne as follows: * * *
Fourth. Interest at the rate of 6 percent per annum shall be allowed oi
charged on all partners' accounts, including capital and undivided profits.
522
STOCK EXCHANGE PRACTICES
Fifth. No transaction shall be made which shall be objected to by any
memiber of the partnership.
Sixth. In case of a difference or dispute between members of the partnership, the same shall be submitted to the decision of Mr. John Pierpont Morgan,
which shall be final.
Seventh. The partnership may be dissolved at any time by Mr. John Pierpont Morgan, subject to the liquidation thereof; provided that partners
representing a majority in the interests in the profits of the partnership
shall consent to such dissolution.
Eighth. Any partner may withdraw from the partnership upon, giving 3
months' written notice of his intention so to do. In that event, the remaining
partners may continue the business and the shares of the profits or losses
of the withdrawing partner, or partners shall be divided thereafter among
the remaining partners, or otherwise disposed of, according to the decision of Mr. John Pierpont Morgan, who shall fix the valuation of the
assets, determine what portion of the assets, if any, shall be appropriated
as an offset to liabilities, and also be the judge of the amount due such
withdrawing partner or partners on account of capital undivided profits and
credit balances. The amount so due may be fixed by Mr. Morgan as of 3
months after the receipt of such notice, and the interest of such withdrawing
partner or partners shall continue at the risk of the business until the date
as adopted. The determination of Mr. Morgan as to the dates for fixing
the amount due such withdrawing partner or partners shall be communicated
in writing to him or them within 30 days after receipt of such notice of withdrawal. The amount so fixed shall be paid to such withdrawing partner or
partners within 3 months after the date as of which the value of his or
their interest shall have been fixed, except in the event that a liquidation of
the partnership shall have been entered upon prior to such date, in which
event, and notwithstanding the foregoing provisions, the interest of such
withdrawing partner or partners shall abide the results of liquidation and
shall be payable only as the liquidation proceeds. When Mr. Morgan shall
fix the amount as due any withdrawing partner, a schedule shall be furnished
showing the valuations at which the various assets of the partnership wer-a
appraised, and what portion of the assets, if any, have been appropriated
as an offset to liabilities. Any withdrawing partner, if required, shall take
his pro rata share of the assets not so appropriated to an extent covering
the amount so due him.
Ninth. It is further agreed that Mr. Morgan may, at any time, compel any
partner at once to withdraw and retire from the partnership, upon giving him
written notice to that effect, and in that event, the amount due such retiring*
partner shall be dealt with in the same manner as above provided for in the
case of a voluntary withdrawal by such partner.
Tenth. In case of the death of any partner, other than Mr. Morgan, isr
within 30 days after such partner's death, such of the surviving partners as
shall represent a majority in interest in the profits of the partnership (exclusive of the interest of such deceased partner therein) shall give to the persons
named in his will as executors, or to his administrators or other legal representatives, written notice that they desire an extension of the partnership for
a period specified in such notice not exceeding 3 years after the death of such
deceased partner, then and in that event the partnership shall continue for the
period not exceeding 3 years so indicated by them, and the capital and interests
hereunder of such deceased partner and his estate and his and its responsibility
and interests in the business as continued shall continue during such period
of extension. The interest of such deceased partner in the partnership shall
be ascertained and dealt with in the same manner as is hereinbefore in article
8 provided for in the case of voluntary withdrawal, and the date of the death
of such partner, or in the event that notice of extension of the partnership
shall have been given as hereinbefore in this article provided, then the date
of expiration of the extended period specified in such notice, shall stand in the
place of the date adopted for termination of his interest as required by said
article 8 in the case of a partner voluntarily withdrawing. If at any time
fixed by the provisions of said article 8 or of this present article for the
doing of any act or the making of any decision by Mr. Morgan with reference
to the interest of a withdrawing or deceased partner, Mr. Morgan shall not be
living, then such act may be performed by such of the continuing or surviving
partners as shall at such time represent a majority in interest in the profits
STOCK EXCHANGE PRACTICES
523
of the partnership (exclusive of the interest of Mr. Morgan therein) with the
same force and effect as if performed by Mr. Morgan.
Eleventh. In case of the death of Mr. John Pierpont Morgan, the partnership
shall be dissolved oh the 31st day of December next ensuing, unless his death
be within a period of 0 months prior to December 31 in any year, in which
event the partnership shall continue until the 31st day of December in the next
ensuing calendar year and shall then be dissolved. If, however, within 30 days
after Mr. Morgan's death such of the surviving partners as shall represent a
majority in interest in the profits of the partnership (exclusive of the interest of
Mr. Morgan therein) shall give to the persons named in his will as executors,
or to. his executors, or to his administrators or other legal representatives,
written notice that they desire an extension of the partnership for a period
-specified in such notice not exceeding 3 years after Mr. Morgan's death, and
then and in that event the partnership shall continue for the period not exceeding 3 years so indicated by them and shall then be dissolved; and the capital
and interests hereunder of Mr. Morgan and his estate and its responsibility and
interests in the business as continued during such period of extension shall
"Continue.
Twelfth. Upon the dissolution of the partnership following the death of Mr.
Morgan, the goodwill of the business and the right to use the firm names of
X P. Morgan & Co. and Drexel & Co. shall belong to the then surviving partners
who shall thereupon decide whether to continue the business, and, if continued,
upon what terms. In case such surviving partners who shall thereupon decide
whether to continue the business, and, if continued, upon what terms. In case
such surviving partners cannot agree either as to the continuance of the business or the terms and conditions of the new partnership, the surviving partners
representing a majority in interest in the profits of the old partnership (exclusive of the interest of Mr. Morgan therein) shall have the right to decide and
shall decide what shall be done in respect of continuing the business and the
terms and conditions of a new partnership, and their decision shall be conclusive
and binding on all the surviving partners.
In case such majority in interest shall decide to continue the business, such
majority shall determine the amount due Mr. Morgan's estate on account of Ms
capital, reserved profits, and net credit balances, and the interest of Mr.
Morgan's estate shall be dealt with in the same manner as hereinbefore in
article 8 provided for in the case of a voluntary withdrawal of a partner, except
that the powers vested in Mr. Morgan by article 8 shall in such case be vested
in such majority in interest. In case such majority in interest shall decide not
to continue the business, the responsibility and interests of Mr. Morgan's estate
shall be subject to the results of the liquidation of the partnership.
In case such majority in interest shall decide to continue the business, any
partner not desiring to remain in the partnership may withdraw therefrom in
the same manner and upon the same terms and conditions as provided in article
8 hereof; and in no event shall such withdrawing partner cr partners be entitled
to any interest in or allowance for either the good will of the business or the
use of the firm names; but such good will and firm names shall belong to the
remaining partners free from any claim whatever of such partner or partners so
withdrawing from the partnership.
If the business cr any portion thereof be continued under the same firm name
of J. P. Morgan & Co. and at any time there should cease to be any lineal male
descendant of Mr. J. Pierpont Morgan in the male line bearing the name of
Morgan, in the partnership, the right to use the firm name of J. P. Morgan & Co.
shall cease after 15 years from such time, unless before the expiration of such
15 years there should again be such a lineal descendant of Mr. J. Pierpont
Morgan in the partnership, in which case the right to use said firm name shall
continue unimpaired until 15 years after such time as there should again be
no such lineal descendant of Mr. J. Pierpont Morgan in the partnership.
In no event shall the good will of the business or the right to use the firm
names have any cash or money value either as between the existing partners
or as between the existing partners and any withdrawing or former partner or
the estate of any deceased partner or any descendant of Mr. J. Pierpont Morgan,
whether or not such descendant has ever been a partner in the partnership.
And each of the parties hereto hereby covenants with each of the others
that he will never become or be a partner in any partnership using, and that he
will never use, said firm name of J. P. Morgan & Co. in violation of the
provisions of this article.
524
STOCK EXCHANGE PRACTICES
Thirteenth. It is further agreed not only with respect to the partnership
hereby formed but also with respect to any successor partnership that upon the
death of any partner and the termination of his interest or that of his estate
in the partnership, or upon the voluntary or compulsory withdrawal of any
partner or partners, or upon the dissolution of the partnership and the formation of a successor partnership, the good will of the business and the right to
use the firm names shall belong to the surviving or continuing partners, and
that in no case shall any estimate ever be put upon the good will or right ta
use the firm names in ascertaining the amount due any withdrawing partner,,
whether such withdrawal be voluntary or compulsory, or the estate of any
deceased partner. The valuations, decisions, and determinations made by Mr.
Morgan or the majority in interest as hereinbefore provided shall in all cases
be final and conclusive against a withdrawing partner or the estate of a
deceased partner.
Fourteenth. The books of the partnership shall be settled on the 31st of
December in each year. One half of each partner's proportion of profits shall
be placed to his credit. The other half shall be set aside and kept as undivided
profits until such time as Mr. John Pierpont Morgan may consent to> its division
among the various parties in interest as provided in article 3. It is also understood that no partner shall draw from the partnership any money beyond the
amount placed to his credit, without the consent of the other parties hereto.
Fifteenth. It is understood and agreed that no partner shall engage in any
other business or be a general or special partner in any other firm.
Sixteenth. Speculation in stocks or anything else, by the individual members
of the^ partnership is prohibited; but this clause shall not be construed so as
to prohibit any partner from investing his private means in such way as he may
see fit.
Eighteenth. No member of the partnership shall become security or endorse,
except in the partnership business, without the consent of the parties thereto.
Nineteenth. The firms of J. P. Morgan & Co. and Drexel & Co. being partners
in the firms of Morgan, Grenfell & Co., of London, and Morgan, Harjes & Co.,
of Paris, their proportion of the capital thereof shall be supplied out of the
partnership capital mentioned in article 2 hereof, and the profit or loss therein
shall be included in the partnership accounts hereunder.
Witness our hands and seals the day and year first above written in the
presence of—
DECEMBER 31,
1916.
Thomas Cochran has this day become a partner in the firms of J. P. Morgan
& Co., and Drexel & Co., subject to all the terms of the foregoing agreement.
NEW YORK, December SI, 1919.
Junius Spencer Morgan, Jr., Elliot Cowdin Bacon, and George Whitney
have this day become partners in the firms of J. P. Morgan & Co., and Drexel
& Co., subject to all the terms and conditions of the foregoing agreement.
NEW YORK, December SI, 1920.
Arthur E. Newbcld's interest in the firms of J. P. Morgan & Co., and Drexel
& Co., having ceased this day and his contribution to the capital having been
repaid him. Thomas S. Gates has this day become a partner in the firms of
J. P. Morgan & Co., and Drexel & Co., subject to all the terms of the foregoing
agreement.
NEW YORK, December SI, 1921.
William Pierson Hamilton withdraws this date from the firms of J. P.
Morgan & Co., and Drexel & Co., and his contribution to capital has been
repaid him.
STOCK EXCHANGE PEACTICES
525
NEW YORK, December 31, 1922.
After settlement of the books on the 31st day of December 1922, and each
year thereafter, as provided in article fourteenth, the net balances then standing to any partner's credit shall be considered as capital, and such amounts
shall not be withdrawn without the consent of Mr. Morgan.
NEW YORK, December 31, 1922.
Henry P. Davison's interest in the firms of J. P. Morgan & Co., and Drexel
& Co., having ceased this day, his contribution to the capital has been repaid
to his executors.
NEW YORK, December 31, 1923.
Kussell Cornell Lefiingwell has this day become a partner in the firms of
J. P. Morgan & Co., and Drexel & Co., subject to all the terms of the foregoing
agreement.
NEW YORK, December 31, 1924.
Elliot Cowdin Bacon's interest in the firms of J. P. Morgan & Co. and Drexel &
Co. having ceased this day, his contribution to the capital has been repaid to
his executors.
NEW YOBK, December 31> 1925.
Edward R. Stettinius' interest in the firms of J. P. Morgan & Co. and Drexel &
Co. having ceased this day, his contribution to the capital has been repaid to
his executors.
NEW YOBK, December 31, 1926.
William H. Porter's interest in thefirmsof J. P. Morgan & Co. and Drexel &
Co. having ceased this day, his contribution to the capital has been repaid to
his executors.
Francis Dwight Bartow, Arthur Marvin Anderson, and William Ewing have
this day become partners in the firms of J. P. Morgan & Co. and Drexel & Co.,
subject to all the terms and conditions of the foregoing agreement.
NEW YORK, December 31, 1927.
Dwight W. Morrow having retired on September 30, 1927, his interest in the
firms of J. P. Morgan & Co. and Drexel & Co. ceased on that date, and his
contribution to the capital has been repaid to him.
Harold Stanley has this day become a partner in the firms of J. P. Morgan
& Co. and Drexel & Co., subject to all the terms and conditions of the foregoing agreement.
NEIW YORK, December 31, 1928.
Henry Sturgis Morgan, Thomas Stilwell Lamont, and Henry Pomeroy Davison have this day become partners in the firms of J. P. Morgan & Co. and
Drexel & Co., subject to all the terms and conditions of the foregoing agreement.
Thomas Newhall and Edward Hopkins, Jr., have this day become partners
in the firms of J. P. Morgan & Co. and Drexel & Co., subject to all the terms
and conditions of the foregoing agreement.
526
STOCK EXCHANGE PRACTICES
NEW YORK, June SO 1930,
Thomas S. Gates withdraws this date from the firms of J. P. Morgan & Co.
and Drexel & Co. His contribution to capital and his share in full to date of
profit and loss have been paid to him.
NEW YORK, January 2, 1931.
S. Parker Gilbert has this day become a partner in the firms of J. P. Morgan
& Co. and Drexel & Co., subject to all the terms and conditions of the foregoing agreement.
NEW YORK, January 2, 1932.
Charles Denston Dickey has this day become a partner in the firms of J. P.
Morgan & Co. and Drexel & Co., subject to all the terms and conditions of
the foregoing agreement.
STOCK EXCHANGE PRACTICES
FRIDAY, JUNE 2, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY,
Washington, D.C.
The subcommittee met, pursuant to adjournment on yesterday, at
10:30 o'clock a.m., in the caucus room of the Senate Office Building,
Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Couzens, and Townsend.
Present also: Senators Reynolds, Adams, and Steiwer.
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver, David Saperstein, and James B. McDonough, Jr., associate
counsel to the committee; John W. Davis, counsel for J. P. Morgan
& Co., Randall J. LeBoeuf, Jr., and Earle J. Machold, counsel for
the United Corporation and for George H. Howard, president of the
United Corporation.
The CHAIRMAN. The committee will come to order. Mr. Whitney,
you were still on the stand yesterday afternoon. I believe that Senator Reynolds wanted to ask Mr. Whitney some questions.
Senator REYNOLDS. If you please.
The CHAIRMAN. YOU may proceed.
TESTIMONY OF GEORGE WHITNEY, A MEMBER OF THE FIRM OF
J. P. MORGAN & CO.—Resumed
Senator REYNOLDS. Mr. Whitney, I believe that on yesterday, if
I am correctly informed, you testified before this committee to the
effect that 15,000 units—that is to say, consisting of one share of
common and one share of preferred stock of the United Corporationwere allotted to your British representatives, Grenfell & Co.
Mr. WHITNEY. Well, was that in the list? The firm is Morgan,
Grenfell & Co., and they are partners, not representatives.
Senator REYNOLDS. Yes. That is correct, is it?
Mr. WHITNEY. Well, I would want to get the list. I do not
remember the amount.
Senator REYNOLDS. All right.
Mr. WHITNEY. Yes, sir; to Morgan, Grenfell & Co., 15,000 units.
Senator REYNOLDS. And I believe that it was further revealed by
your testimony to the effect that that represented about $1,225,000
or $1,250,000.
Mr. WHITNEY. That would be $1,125,000.
Senator REYNOLDS. It is $1,125,000, is it?
Mr. WHITNEY. Yes. But I did not testify to that. It was $75
a unit.
175541—33—PT. 2
15
527
528
STOCK EXCHANGE PEACTICES
Senator REYNOLDS. Mr. Whitney, did your London office request
that allowment, or did you designate that particular amount to them
without a formal request on their part?
Mr. WHITNEY. I think, Senator Reynolds, that a cable was read
on yesterday afternoon by Mr. Pecora, or a portion of a cable, which
indicated that we had offered it to them. That is my best recollection.
I think we asked them what amount they wanted, and suggested
15,000 units. That would be the best of my recollection.
Senator REYNOLDS. Isn't it a fact that after that particular allotment was made to your London office that they, shortly thereafter or
immediately thereafter, requested an additional allotment of units?
Mr. WHITNEY. I do not remember, Senator Reynolds.
Senator REYNOLDS. NOW, Mr. Whitney, do you know what disposition was made of the 15,000 units by your London office?
Mr. WHITNEY. Might I inquire?
Senator REYNOLDS. Yes; certainly.
Mr. WHITNEY. Senator Reynolds, the first paragraph of one of the
cables which Mr. Pecora read on yesterday I think answers your first
question about whether we made the offer or they asked us.
Senator REYNOLDS. Yes, sir.
Mr. WHITNEY. Because it says:
We are reserving for Morgan, Grenfell & Co., London partners, and clients a
total of 15,000 units, which is probably the maximum that we can set aside for
you.
That shows that we made the offer.
Senator REYNOLDS. And did they request additional units?
Mr. WHITNEY. Well, the next sentence is:
In case any additional units are available, which we doubt, we will, if you
advise us definitely what amount you desire, do our best to carry out your
wishes.
I have no record to show what they did, but this shows clearly
that we did not allot more then. As to your question what they
did with them, our records do not show whether the individual
partners kept them or the firm kept them or they sold them to their
own clients over there.
Senator REYNOLDS. Have you made inquiry as to what disposition
was made of the units?
Mr. WHITNEY. NO, sir. We have never been asked the question
before, and we have had no occasion to make the inquiry.
Senator REYNOLDS. Were similar allotments made to your Paris
office to the extent of any units?
Mr. WHITNEY. TO the extent of 12,000 units; yes, sir.
Senator REYNOLDS. Did you allot them that or did they made
request on your firm?
Mr. WHITNEY. Well, I assume, Senator Reynolds, that we did it
in the same way with the Paris partners as we did with the London
partners.
Senator REYNOLDS. I see. Now, the London office was allotted
those 15,000 units at the cut-rate price, were they not? And likewise the Paris office?
Mr. WHITNEY. Might I have that question repeated, as my attention was on this paper for the moment.
STOCK EXCHANGE PRACTICES
529
Senator REYNOLDS. Certainly; the committee reporter will read the
question.
(The question was read.)
Mr. WHITNEY. Not at any cut-rate price, but at the same price,
namely, $75 a unit, which everybody bought it at.
Senator REYNOLDS. The same price that the preferred list of people
in this country secured the stock?
Mr. WHITNEY. The same price at which everybody who bought
units from us, bought; yes, sir.
Senator REYNOLDS. DO you know what disposition was made of
the units by your Paris representatives?
Mr. WHITNEY. Well, I see here a cable which shows, and it reads:
We have debited the account of each Paris partner as of January 11, $50,000—
No, that is another matter. That is common stock. Excuse me.
No; I haven't any more than the amount allotted to Morgan, Grenfell & Co.
Senator REYNOLDS. YOU haven't a partnership in Paris, have you?
Mr. WHITNEY. I, personally?
Senator REYNOLDS. I mean your company.
Mr. WHITNEY. Oh, yes, sir.
Senator REYNOLDS. Similar to the London organization?
Mr. WHITNEY. Well, as Mr. Morgan testified previously,
Senator
Reynolds, the arrangement is not quite the same. The London
partnership is in the form of an unlimited corporation. The Paris
partnership is a partnership under the French law, of which I think
the firm of J. P. Morgan & Co. is a partner.
Senator REYNOLDS. Have you in your New York offices a list of
the names of those who participated in the division of the 15,000
units in London?
Mr. WHITNEY. I am pretty sure that we have not. We would
have had no occasion to have it.
Senator REYNOLDS. Have you a list of the individuals who participated in the 12,000 unit allotment made to your Paris office?
Mr. WHITNEY. Might I inquire?
Senator REYNOLDS. Certainly. •
Mr. WHITNEY. Because, so far as I know we have not. [After
consulting some associate.] I am advised that we have not. I did
not think we had.
Senator REYNOLDS. Have you ever endeavored to secure a list
from the London office or from the Paris office?
Mr. WHITNEY. NO, sir. We have never had occasion to do so.
Senator REYNOLDS. Have you heard, Mr. Whitney, that the allotment made to the London office was distributed to some members of
royalty?
Mr. WHITNEY. I have never heard that suggestion made before.
Senator REYNOLDS. Have you heard that some of the allotment
which went to your Paris office were distributed to some politicians
in France?
Mr. WHITNEY. I have never heard any such suggestion made
before, and I am very confident that it is not so.
Senator REYNOLDS. Would you be willing to provide this committee with a list of those who participated in the division of 12,000
units in Paris, and those who participated in the distribution of the
15,000 units in London?
530
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. Why, certainly, Senator Keynolds, we will cable
if the committee wishes.
Mr. DAVIS. Might I interject right there?
Senator REYNOLDS. Certainly.
Mr. DAVIS. That involves certain gentlemen over there with whom
we are associated, and who may have their own ideas about it.
Senator REYNOLDS. Yes, sir.
Mr. WHITNEY. AS Mr. Morgan testified, both of those offices are
run as complete entities, and are managed by the resident partners,
Englishmen in London, and the French resident partners in Paris.
Senator REYNOLDS. Yes. Mr. Whitney, although you have not
at the present time knowledge as to the distribution of the 27,000
units in Great Britain and in France, don't you think, in view of
the turbulent conditions abroad, the conflict over the dollar and the
pound as to international values, and the other differences, that it is
unwise to give to Europeans stock under such conditions at this
particular time; and particularly in view of the fact that the House of
Morgan is interested in enormous investments both in the United
States and on the Continent?
Mr. WHITNEY. Senator Reynolds, of course as to this particular
lime—do you mean now?
Senator REYNOLDS. Well, then and now, because conditions were
somewhat similar.
Mr. WHITNEY. Not in 1929, no similarity existed.
Senator REYNOLDS. In 1929 isn't it true that the several countries
of Continental Europe were indebted to the United States in a sum
something like $11,000,000,000?
Mr. WHITNEY. Governments, certainly.
Senator REYNOLDS. Yes, sir. Well, conditions were about the same
then, weren't they?
Mr. WHITNEY. Well, I misunderstood your question. You speak
of the conflict of the dollar, and of the turmoil and the various other
definitions of conditions. Of course, in 1929 those conditions did not
exist. That is what I had reference to. Of course, the intergovernmental debt situation was the same. But those participations were
given to our own partners. It is true that in those two countries
there were individual allotments or allotments through the two firms.
Frankly, in 1929 I would not have thought there was the slightest
association of an extent of 27,000 units of the United Corporation, in
the investment business, such as we all carry on—I mean that I would
not have thought that conditions which you speak of should have
been taken into consideration. But conditions were very different
then from now. And I still think that today, that it is quite a different
situation.
Senator REYNOLDS. Well, by the allotment of those units in the
countries of Continental Europe
Mr. WHITNEY (interposing). Might I just interrupt you there?
Senator REYNOLDS. Certainly.
Mr. WHITNEY. YOU understand that the governments did not buy
them.
Senator REYNOLDS. NO. I understand that.
Mr. WHITNEY. It was their nationals.
Senator REYNOLDS. I am referring to your interests there. Don't
you believe it tends to line up favored Europeans behind projects in
STOCK EXCHANGE PRACTICES
531
which J. P. Morgan & Co. are interested to the detriment of American
public welfare whenever American and Morgan interests clash?
Mr. WHITNEY. I do not, sir. I do not think it would have the
slightest effect in any way detrimental to United States interests.
Senator REYNOLDS. Have you heard that King Albert of Belgium
participated in one of those allotments?
Mr. WHITNEY. I have not so heard, and I am very sure that he did
not.
Senator REYNOLDS. A portion of the allotment that went to your
Paris office?
Mr. WHITNEY. I never even heard it suggested before, Senator
Reynolds, and I am sure that it is not so.
Senator REYNOLDS. Have you heard that the family of King
George, or that King George himself, was one of the individuals who
participated in this allotment to London?
Mr. WHITNEY. I have never heard it suggested before your question
previously about the royal family, that he had any interest in this at
all. And I say again, I very seriously doubt it.
Senator REYNOLDS. Have you heard that the director of the Italian
Government, and I do not know how to pronounce his name. I sometimes call him Mussolini and I sometimes call him Mussoloni.
(Laughter.) I have never learned which it really is. But have you
heard that either Mussolini or Mussoloni participated in these allotments?
Mr. WHITNEY. NO, I have not heard, I am sure, anything of that
kind.
Senator REYNOLDS. SO, insofar as your information is concerned,
you have no definite information to the effect that any of the leading
politicians or any of the members of the royal families in countries
of Europe, have ever participated in any of the units of the United
Corporation?
Mr. WHITNEY. Senator Reynolds, you have extended that question
now a good deal. I have no definite knowledge that any of those
gentlemen referred to participated in the sale of those units. I would
be willing to state, however, without the slightest fear of contradiction
that they did not. Your question then goes on to ask as to whether
they ever bought them. To that portion of your question I answer:
Whether they ever bought any of them since, of course I do not know
anything about it.
Senator REYNOLDS. That is all, Mr. Chairman.
The CHAIRMAN. YOU may proceed, Mr. Pecora.
Mr. PECORA. Mr. Whitney, have you since the recess yesterday
afternoon attempted to obtain confirmation as to whether John W.
Kephart purchased from your firm at $20 a share the common stock
of the Alleghany Corporation in 1929? His name is shown on the list
referring to the Alleghany Corporation, as you will recall.
Mr. WHITNEY. Yes, sir; I have, and our records show that while
the allotment was made to him it was paid for by his wife.
Mr. PECORA. But the invitation to subscribe for those shares at $20
a share was extended to him, wasn't it?
Mr. WHITNEY. Yes,
Mr. PECORA. And
sir.
the acceptance was through his wife? The
acceptance of the invitation or the payment in acceptance of that
invitation, was made by his wife?
532
STOCK EXCHANGE PEACTICES
Mr.
Mr.
Mr.
Mr.
WHITNEY. Yes. The payment was made by his wife.
PECORA. TO whom was the stock issued, if you know?
WHITNEY. Oh, to his wife.
PECORA. TO his wife?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. NOW, I notice that John W. Kephart is also
one of
the gentlemen invited to subscribe to the units of the United Corporation at $75 a unit. Was that invitation accepted?
Mr. WHITNEY. Let me find out.
Senator COUZENS. While Mr. Whitney is looking that up, Mr.
Pecora, let me ask: Who is he?
Mr. PECORA. One of the judges of Pennsj^lvania. I am asking
these questions, Senator Couzens, because of a telegram received by
me from Governor Pinchot.
Mr. WHITNEY. I am advised, Mr. Pecora, that in the case of the
United Corporation units, the amount of which I do not know for
the moment but will check up in a minute or two; that that was also
issued and delivered to the Philadelphia Trust Co. for the account of
Mrs. Kephart, although the invitation, in the same way, was made
ito him. Whether the stock—well, apparently it was issued to him,
but was delivered and paid for for the account of his wife at the
Philadelphia Trust Co.
Mr. PECORA. Did your firm or the firm of Drexei & Co. receive
any communication from John W. Kephart informing or requesting
you to accept payment for those shares from his wife and to issue the
shares to her?
Mr. WHITNEY. Well, I assume so, but I do not know that. Mr.
Pecora, might I correct my last answer?
Mr. PECORA. Certainly.
Mr. WHITNEY. At the suggestion of Mr. Davis that we, of course,
do not know anything about it. I do not know that Drexei & Co.
did. But J. P. Morgan & Co. did not know.
Mr. PECORA. DO you know the name of his wife?
Mr.
WHITNEY. N O ; I do
not.
Mr. PECORA. I notice on the list that was put in evidence showing
the names of persons who were invited to subscribe for units of the
United Corporation at $75, not only the name of John W. Kephart
but also the name of Florence H. Kephart. Do you know whether
or not Florence H. Kephart is the wife of John W. Kephart?
Mr. WHITNEY. N O ; I do not. I only sought the information over
the telephone last night in response to your inquiry on yesterday after
the close of the day's hearing, and I did not go into the matter of his
wife's name.
Mr. PECORA. IS any partner of your firm or of the firm of Drexei &
Co., who is resident in Philadelphia, here in attendance and who might
know about this?
Mr. WHITNEY. NO resident of Philadelphia is present. But I
will be delighted to get you any information you want. But I just
do not know.
Mr. PECORA. I am interested in a telegram from Governor Pinchot,
of Pennsylvania, which reads as follows:
Justice John W. Kephart has denied in the papers that he accepted the offer and
purchased Allegheny Corporation stock on the preferred list. Would greatly
appreciate your giving me the facts. Hearty thanks for your help.
STOCK EXCHANGE PEACTICES
533
And the telegram is signed "Gifford Pinchot."
Mr. MCCANLISS. May I have that for a moment, Mr. Pecora?
Mr. PECORA. Certainly. Now, Mr. Whitney, I am desirous of
responding to Governor Pinchot's request as fulJy as possible, and
will be grateful to you if you will get me whatever confirmation, or
whatever you can get me, showing the exact facts with regard to the
invitations extended to John "W. Kephart to subscribe for Alleghany
Corporation common shares and for United Corporation units, and
what action was taken upon those invitations.
Mr. WHITNEY. Yes, sir. We will prepare a memorandum and
submit it. I did not appreciate on yesterday that you wanted any
such detail as that; that you just wanted me to check our list, and that
I did.
Mr. PECORA. All right. Now, Mr. Whitney, in the so-called "questionnaire" which I addressed to your firm several weeks ago, item
6 called for the names of officers and directors of any corporations to
whom either of said firms or any of their agents have made any personal loan or advance.
Mr. WHITNEY. Yes, sir.
Mr. PECORA. In response to that I have been furnished with this
document by your office. Will you kindly look at it and see if you
can identify it.
Mr. WHITNEY. It says:
Names of all officers and directors of any corporations to whom either of said
firms or any of their agents have made any personal loan or advance.
I answer yes, sir; with the qualification as noted on the document
itself.
Mr. PECORA. With the qualification as noted there in the document itself?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. DO the names appearing on that document represent
and include all such directors and officers of corporations to whom
loans were made during the period called for?
Mr. WHITNEY. TO the best of my knowledge and belief, yes, with
that qualification.
Mr. PECORA. And you believe it to be a complete and correct
answer to the question?
Mr. WHITNEY. I do, sir.
Mr. PECORA. I offer that
in evidence and ask that it be spread on
the record of our hearing.
The CHAIRMAN. It may be received and made a part of the record.
(Question 6 and the answer thereto were received in evidence, and
marked "Committee Exhibit No. 40, June 2, 1933/' and are as
follows:
COMMITTEE EXHIBIT NO. 40
Question 6. Names of all officers and directors of any corporations to whom
either of said firms or any of their agents have made personal loan or advance.
We have included those of whom we have actual knowledge or who are listed
in the Directory of Directors other than those listed in answer to question 5:
J. P. MORGAN & CO.
Andrews, Jr., Chas. E., paid off February 1, 1927.
Bacon, G. G., paid off January 4, 1929.
Bowdoin, Geo. T., paid off April 14, 1931.
534
STOCK EXCHANGE PKACTICES
Broome, Robert E., paid off August 25, 1932.
Brown, L. H.
Childs, Paul D., Jefferies, J. Amory and Bichols, William B., paid off December
19, 1930.
Clarke, Charles W., paid off December 19, 1930.
Clausen, L. R., paid off May 14, 1930.
Curran, Samuel H.
Davenport, R. S., paid off January 25, 1929.
David, Donald K.
Dawes, Daniel C, paid off January 2, 1931.
Farwell, Walter, paid off January 2, 1932.
Filsinger, Ernest B., paid off April 1, 1931.
Fleischmann, Paul W., paid off September 11, 1929.
Fortington, H. A.
Hodges, Charles H., paid off February 10, 1930.
Hodges, Wetmore.
Irvin, Richard, paid off December 19, 1930.
Keating, J. J., paid off April 9, 1930.
Klusmeyer, William.
Knight, Alfred, paid off September 11, 1929.
Lee, Joseph A., paid off September 11, 1929.
Lemkau, A. C.
Loree, L. F., paid off February 18, 1927.
Macauley, T. B., paid off February 17, 1931.
Markle, John, paid off May 2, 1927.
Marland, E. W. (through Guaranty Trust Co.), paid off November 6, 1930.
McCaughan, H. C, paid off June 13, 1930.
Monagle, A. C.
Moran, D. J., paid off September 29, 1932.
Murray-Graham, A. J. G., paid off January 24, 1930.
Newcomb, H. R., paid off September 13, 1932.
Nichols, George.
Noone, John B., paid off September 13, 1932.
Olds, R. E., paid off February 1, 1928.
Oswald, Hugo A., paid off September 10, 1929.
Ryan, Clendenin J., paid off February 5, 1932.
Scherer, Isidore, paid off November 14, 1930.
Sedlmayr, Theodore, paid off September 11, 1929.
Seigle, W. R.
Skelding, Henry T., paid off October 24, 1932.
Smith, Robert S., paid off October 27, 1930.
Smith, T. L.
Stanley, W. W.
Stearns, F. W., paid off May 2, 1930.
Stettinius, E. R. Jr., paid off January 3, 1930.
Suckley, Arthur R., paid off July 11, 1932.
Swearingen, E. L., paid off February 25, 1927.
Thornton, W. D., paid off May 4, 1931.
Trowbridge, James R., paid off April 1, 1929.
Voorhees, E. M., paid off April 3, 1931.
Wagner, E. C, paid off April 18, 1932.
White, T. J., paid off February 17, 1928.
Williams, S. A.
Wilshire, Joseph.
Winston, Gerrard B., paid off November 1, 1928.
^
Woods, Arthur, paid off December 21, 1931.
Woolley, Daniel P., paid off September 11, 1929.
Zanetti, J. E., paid off January 14, 1927.
DREXEL & CO.
Dr. Thomas G. Ashton, paid off November 21, 1931.
H. M. Atkinson, paid off July 16, 1931.
Charles T. Bach.
Richard L. Binder, paid off November 9, 1931.
Augustus S. Blagden, paid off May 26, 1931.
Gideon S. Borden.
Edwin M. Chance, paid off August 30, 1930.
STOCK EXCHANGE PRACTICES
535
Charles M. Coover, paid off February 9, 1928.
J. H. R. Cromwell, paid off September 23, 1931.
George W. Davis.
John C. Dunn, paid off August 5, 1931.
William duPont, Jr., paid off January 31, 1931.
Joseph Ewing.
Benjamin West Frazier.
John K. Garrigues, paid off December 29, 1927.
Chester I. Hall, paid off February 6, 1930.
Howard F. Hansell, Jr.
Charles S. Hebard.
Daniel L. Hebard.
Hermann M. Hessenbruch.
Charles E. Hires, Jr.
Edward Hopkins, Sr., paid off April 24, 1929.
Archibald T. Johnson, paid off.
Richard D. Leonard, paid off September 19, 1929.
Andrew J. Maloney, paid off September 19, 1929.
Donald Markle.
E. B. C. Markle.
John Markle,. 2d.
Orus J. Matthews, paid off August 18, 1931.
J. Kearsley Mitchell, paid off December 31, 1931.
Daniel A. Newhall, paid of October 2, 1931.
C. Lothrop Ritchie.
William I. Schaffer, paid off December 31, 1931.
Joseph T. Schlacks.
A. Homer Smith, paid off April 16, 1931.
Charles A. Smith.
Frank H. Taylor, paid off October 3, 1930.
A. C. Woodman, paid off January 4, 1929.
Mr. PECORA. Mr. Whitney, the document last offered in evidence
you will notice contains merely the names of the officers and directors
of corporations who received such loans. It does not show the corporations of which they were either officers or directors. Now, I
have had prepared a list of the corporations of which these gentlemen
were respectively officers or directors from published directories or
manuals.
Mr. WHITNEY. We stated in our answer that the list was made up
from the Directory of Directors.
Mr. PECORA. I will ask you to be good enough to look at that list,
and if you have the facilities for having it confirmed by any of your
associates or personnel, that you do so. I mean that you do not have
to do it now. Then I will offer it in evidence, after you have had an
opportunity to confirm or correct it. Will you be good enough to do
that?
Mr. WHITNEY. Yes, sir. It will probably take some time, because
we will have to go back and check. We took the list of the gentlemen
that we looked up.
Mr. PECORA. Any time between now and Monday will do.
Mr. WHITNEY. All right.
Mr. PECORA. NOW, Mr. Whitney, I want to refer to the document
known as "Committee Exhibit 16" of May 25,1933, which is an answer
to question no. 10 on the questionnaire which I sept to your firm several
weeks ago, which called for a list of all pools, joint accounts or syndicates in which either J. P. Morgan & Co. or Drexel & Co. participated,
giving the name of the security involved, names of all participants,
all details with respect to the amount of the participation, and profits
and losses thereunder. Have you a copy of this exhibit before you?
Mr. WHITNEY. Yes,
sir.
536
STOCK EXCHANGE PRACTICES
Mr. PECORA. NOW, will you turn to page 35 there?
Mr. WHITNEY. Will you give me the heading? Mine is not
similarly numbered.
Mr. PECORA. It is the special suspense account.
Mr. DAVIS. Mr. Pecora, I do not think we have it here in just that
same paging.
Mr. WHITNEY. It is the big stock pool.
Mr. PECORA. It is entitled "Special Suspense Account."
Mr. WHITNEY. Yes; that was the title on our books.
Mr. PECORA. NOW, what was the pool or syndicate account or
joint account?
Mr. WHITNEY. It is what we would call a divided joint account.
Mr. PECORA. A divided joint account?
Mr. WHITNEY. In other words, we bought jointly but the amount
was then taken up and paid for individually.
Mr. PECORA. Who managed the operations of this account?
Mr. WHITNEY. We did, Mr. Pecora. That is, of course, the operation was a transaction which was undertaken by those seven banks
and firms at the time of the stock-market crash in 1929.
Mr. PECORA. Who were the participants in this account?
Mr. WHITNEY. First Securities Co., Chase Securities Co., Guaranty
Co. of New York, National City Bank, Bankers Co., the Messrs.
Guggenheim, being Messrs. Daniel, Murray, S. R., and Simon Guggenheim, and ourselves.
Mr. PECORA. NOW, the First Securities Co. is the investment
affiliate of the First National Bank of New York, is it not?
Mr. WHITNEY. They are all securities companies associated with
the First National Bank, Chase National Bank, Guaranty Trust Co.
of New York, National City Bank, and Bankers Trust Co. of New
York. I think I can make this a little clearer to the committee if I
may be permitted to just say a word about the formation of it and the
circumstances surrounding it.
Mr. PECORA. GO ahead.
Mr. WHITNEY. Because you will all remember, I think, that very
uncertain condition in the stock market, the New York Stock Exchange, culminated on the 24th day of October 1929, in an extremely
chaotic condition, where there were no bids for stocks of any kind,
where the normal functioning of the stock exchange just seemed to be
stopped, with very heavy blocks for sale.
About noon of that day the president of the New York Stock
Exchange, or vice president he was then, called this matter to our
attention. And, practically simultaneously with that, the various
heads of these banks in New York called it also to our attention by
coming to our office to discuss what, if anything, should be done.
You will remember also that at that time there was a very large
amount of money being loaned on call in the New York Stock Exchange, which created a condition with a great deal of danger in it.
It was decided by the representatives of those banks and ourselves—
and the Messrs. Guggenheim were not present at that initial meeting—that in order to hope to preserve some order in the whole financial community, something very substantial should be done immediately.
Mr. PECORA. NOW, Mr. Whitney, I do not want to interrupt you
if I can avoid it, but I want to ask you at this point this question:
Who were the gentlemen who actually participated in this conference
STOCK EXCHANGE PRACTICES
537
that you have just alluded to? I mean the gentleman to whom you
referred as the then vice president of the New York Stock Exchange,
and the officers of these banks?
Mr. WHITNEY. Well, the then vice president of the New York Stock
Exchange was Mr. Richard Whitney.
Mr. PECORA. Your brother.
Mr. WHITNEY. My brother.
Mr. PECORA. He is now the president ot the New York Stock
Exchange.
Mr. WHITNEY. He is now the president of the New York Stock
Exchange.
Mr. PECORA. And has been since 1930.
Mr. WHITNEY. Yes. The then president of the New York Stock
Exchange was away as it happened. The gentlemen at that first
conference that morning were Mr. Potter, Mr. Prosser, Mr. Wiggin,
and Mr. Charles E. Mitchell. My recollection is that at the very
first meeting Mr. George F. Baker, Jr., was not present, not at the
first meeting, but was present at the one held that afternoon.
Mr. PECORA. Mr. Potter was the executive head of the Guaranty
Trust Co., wasn't he?
Mr. WHITNEY. He was then and is now the president of the Guaranty Trust Co.
Mr. PECORA. And Mr. Prosser was the executive head of the
Bankers Trust Co.?
Mr. WHITNEY. Yes,
sir.
Mr. PECORA. And Mr. Wiggin was the executive head of the Chase
National Bank?
Mr. WHITNEY. Yes.
Mr. PECORA. And Mr.
Mitchell was then the head of the National
City.Bank?
Mr. WHITNEY. Yes, sir; he was then the president of it.
Mr. PECORA. And the chairman of the bank?
Mr. WHITNEY. NO; then I think he was the president of the bankMr. PECORA. And Mr. George F. Baker was the executive head of
the First National Bank of New York?
Mr. WHITNEY. NO, sir; his father was then. But Mr. George F .
Baker, Jr., was vice chairman.
Mr. PECORA. What was the date of the first conference?
Mr. WHITNEY. About noon on Thursday, October 24.
Mr. PECORA. Was that on the day of the first crash in the stock
market, or do you remember?
Mr. WHITNEY. Well, it was the first day of chaos. My recollection
is that the market had been very weak the night before. But this was
the first day when there was a really very serious situation threatening.
Now, may I go on?
Mr. PECORA. Just in a few moments. Was this conference held in
the office of your firm?
Mr. WHITNEY. It was.
Mr. PECORA. Who called it together?
Mr. WHITNEY. It was not called. It just happened.
Mr. PECORA. And these various gentlemen just happened
to drop
in at your firm's office at practically the same time without prearrangement on that date?
Mr. WHITNEY. NO; and I can clear that up if you wish.
538
STOCK EXCHANGE PEACTICES
Mr. PECORA. All right.
Mr. WHITNEY. TO the best of my recollection, it was this: That
Mr. Richard Whitney came over to see us. I think the next person
heard from was Mr. Mitchell. I think the next person was by a
telephone conversation with Mr. Wiggin; and if I remember rightly,
then Mr. Prosser turned up. I think also I called up Mr. Potter,
suggesting that inasmuch as the others were there he might come
over. That would be to the best of my recollection how it happened.
Mr. PECORA. Who participated in the conference with those
gentlemen in behalf of your firm?
Mr. WHITNEY. Let me see. Mr. T. W. Lamont, I think, Mr.
Bartow and myself. I am not sure whether Mr. Bartow was there
at the first meeting or not, but he was there shortly afterwards.
Mr. PECORA. Will you be good enough to give the committee the
substance of the discussion that took place at the initial conference
on that date?
Mr. WHITNEY. Yes, sir. The substance, as I tried to indicate
before, was that the conditions on the New York Stock Exchange
were different from almost any time before in its history, as there was
absolutely no demand for securities at any level. As you will doubtless remember, the newspapers coined the phrase of "air pockets77 at
that time, which became used very extensively. And there were
very heavy blocks of stocks being offered for sale. And the only
object of this transaction from beginning to end was to try to restore
some kind of order to bring the situation out of chaos. There was
never the slightest attempt to hold prices at any level. I remember
on that first morning that we had to act pretty quickly, and this was
around noon, I should think, we put in certain orders with various
brokers to bid at the last sale. And that brought a very uncertain
level, because there had been sales all over. But that was the order
we gave, to make bids at the last sale, for relatively small amounts
of stock.
Mr. PECORA. Just a moment. What issues were enumerated in
those orders?
Mr. WHITNEY. Well, to show how quickly we were working, my
best recollection is that we all sat down and suggested issues that
seemed to be particularly weak. That will account for the fact, as
you will see on the next page, the photostatic copy, for some very
small amounts of stock. Some of those represented purchases on the
first day because the whole value of this transaction was rather
changed at a meeting after the close of the stock exchange that night.
Mr. PECORA. Well, do you recall the issues with respect to which
the first orders were given in pursuance of the judgment of that
conference?
Mr. WHITNEY. Well, as near as I can remember, and I haven't
brought memoranda of it I made at the time, but my recollection
would be that this whole list were the securities for which orders
were put in on that first day. The next day a great many of these
securities were eliminated from the list, and at that time we only
made an effort to steady—instead of the word " stabilize"—steady
the market on the leading issues.
Mr. PECORA. NOW, are the issues which you have referred to, those
issues on the photostatic reproduction attached to committee exhibit
no. 16 of May 25, 1933, which is entitled "Special suspense account,
1929 and 1930", and is headed by Alleghany Corporation?
STOCK EXCHANGE PBACTICES
539
Mr. WHITNEY. That is the one. That is the transcript of the
summary of the whole account. Alleghany Corporation is the first.
That is the one to which I referred that we bought 3,500 shares, and,
next, Allied Chemical & Dye Co., we bought 940 shares, and so on
down the list. But as I explained a minute ago, this whole transaction
really divides itself up into two parts, because there was no formal
undertaking to go into a transaction of this character at the morning
meeting. That morning meeting only dealt with the urgent emergency. At a subsequent meeting that afternoon, when we had more
time to know what it was all about and find out what had happened,
we really then decided to go into this whole transaction.
Mr. PECORA. Was the afternoon conference held before or after
the close of the market?
Mr. WHITNEY. I said after the close.
Senator COUZENS. What was the volume of the purchases, as
stated on that page?
Mr. WHITNEY. We purchased altogether 1,146,609 different shares
of stocks. The total cost of them was $137,752,705. We sold those
later on in 1930, when the account was closed, for $138,820,060.04,
which gave us a net gross profit of $1,067,355.04, which is exclusive
of interest. And that was the gross.
Senator COUZENS. Was that divided up among a number of firms?
Among all of those participating?
Mr. WHITNEY. Yes. The percentages in the group were: The five
banks and ourselves each had 4/25, and the Messrs. Guggenheim
had 1/25.
The CHAIRMAN. When did you sell?
Mr. WHITNEY. Well, we sold during the early months of 1930.
The CHAIRMAN. And in giving your orders to your brokers to buy
these stocks mentioned on the list you specified the amount of each,
the number of shares of each?
Mr. WHITNEY. Quite right. And when we got really organized to
go ahead following the second conference, to which I referred, we
gave very specific orders, just purely with the idea of trying to
steady it.
The CHAIRMAN.
Yes.
Mr. WHITNEY. With points apart—in some cases 5 points apart.
The CHAIRMAN. And you specified the number of shares of each?
Mr. WHITNEY. The amount and price.
The CHAIRMAN.
Yes.
Mr. WHITNEY. And that was a very definite and a very much
smaller list in its total.
The CHAIRMAN. Was there a strong bear movement on at that
time?
Mr. WHITNEY. Oh, it was not a bear movement. It was sheer
liquidation. There was no bear movement about it. It was just
stark fright and panic and liquidation.
Senator COUZENS. Why did you take such a large loss on Anaconda
Copper Co., the largest loss you took on any of your sales?
Mr. WHITNEY. Well, because when we started to liquidate it we
liquidated without very much reference to profit and loss. This was
never gone into with the slightest idea that we would do anything but
lose money. And at one time before we were able to liquidate it I
think we had about a $40,000,000 book loss.
540
STOCK EXCHANGE PEACTICES
Senator COUZENS. Well, you must have been a participant in this
sheer fear and stark fright when you sold it? Were you not?
Mr. WHITNEY. Well, if you remember, Senator Couzens, in the
winter of 1930 everything was much better.
Senator COUZENS. SO you did not participate in this stark fear
when you sold this Anaconda then?
Mr. WHITNEY. NO, sir. We were merely liquidating an account
that none of the banks and ourselves wanted to keep. And we only
went into it in a desperate effort to be of help in a very dangerous
situation.
The CHAIRMAN. There was a rise in the stock market up to October,
and then there was another collapse in October 1930?
Mr. WHITNEY. Oh, yes; there was a series of collapses after that.
This market transaction lasted about 3 weeks. My recollection is
that we decided it was safe to quit on about the 11th of November.
And then things from then on to the end of the year were still very
bad, and the first time there was any opportunity, when conditions
were such that it was possible to liquidate it, came after the turn of
the year. My recollection is that it would be about February we
started, and the market went up for some time after we finished the
liquidation of this account.
Mr. PECORA. DO I understand that all of the shares shown on this
photostat page which forms part of committee's exhibit 16 were
acquired on behalf of this pool?
Mr. WHITNEY. This what?
Mr. PECORA. This account, this suspense account.
Mr. WHITNEY. Yes, sir.
Mr. PECORA. Within a period
of about 3 weeks commencing with
October 24, 1929?
Mr. WHITNEY. Well, I would have to check up in my mind. I
remember the day it terminated, because we had had a very long
session that night before, and some of those present felt that the
market should not be opend the next day at all, it was going to be
so bad. It shows how wise we all are, because the next day the market
opened up and turned and went on up, and I think that was the 11 th
of November.
Mr. PECORA. And in that period this account—you apparently do
not want me to use the word "pool", do you?
Mr. WHITNEY. We are gun shy of certain words.
Mr. PECORA. The newspapers at that time referred to it as a
bankers' pool, did they not?
Mr. WHITNEY. They did. And we did our very best to make
them change, but they would not change.
Mr. PECORA. DO you recognize a substantial distinction between
the word "pool" and the term "suspense account"?
Mr. WHITNEY. In the sense that "pools" are colloquially used,
yes, Mr. Pecora, I think there is quite a different implication to it
in the use of the word "pool" as you use it, for instance.
Mr. PECORA. N O ; I simply used it as the newspapers used it.
Mr. WHITNEY. Four years ago?
Mr. PECORA. All the newspapers. Now during that period of
time from October 24 to about November 11, 1929, this account
purchased 1,146,609 shares of various issues for an aggregate of
$137,752,705?
STOCK EXCHANGE PEACTICES
541
Mr. WHITNEY. Yes. Do you think it would be of interest to read
the list?
Mr. PECORA. Well, I will come to that gradually. Now that is
correct though, is it not?
Mr. WHITNEY. Yes.
Mr. PECORA. NOW were
the moneys necessary to make these
purchases subscribed by the participants in this account, this suspense
account, on October the 24th?
Mr. WHITNEY. The money put up?
Mr. PECORA. Yes.
Mr. WHITNEY. Oh, no, sir.
Mr. PECORA. AS bought.
They were merely paid for as bought.
And was the scope of the transactions,
the extent of the transactions that were to be undertaken in behalf
of this suspense account agreed upon at the conferences held on October 24?
Mr. WHITNEY. They were.
Mr. PECORA. And were the respective participations agreed upon
at that time also?
Mr. WHITNEY. They were, with the exception that I think it was
the following day that
Mr. PECORA. That the Guggenheim Bros, came in?
Mr. WHITNEY. That two of the brothers Guggenheim came in and
offered to put up a certain share in it.
Mr. PECORA. Yes?
Mr. WHITNEY. And they never participate^ in the discussions.
The others all did daily, and there were sometimes twice a day discussions about this. But to the best of my knowledge the Guggenheims never participated in the discussions.
Mr. PECORA. Were the issues that were to be purchased in connection with this suspense account agreed upon by the participants
on October 24?
Mr. WHITNEY. NO, sir. They were not. That matter was left
in our charge subject, of course, as I say, to daily reports by us of
what were doing, and we invited the other participants to make any
suggestions they would. But the whole operation of the account
was left in our hands by the other participants, though it was against
our will.
Mr. PECORA. Who, for the firm of J. P. Morgan & Co., actively
managed and directed the operations of this account?
Mr. WHITNEY. Why, I guess that I or Mr. Bartow would have to
be designated as the two, under Mr. Lamont's supervision.
Mr. PECORA. Was any limitation agreed upon on October 24 by
the participants in this joint account or suspense account, as to the
amount of money that was to be employed for the purposes of this
account? That is, the maximum amount of money agreed upon?
Mr. WHITNEY. Well, as I stated, the first meeting there was no
question of amounts. It was a question of an immediate emergency.
If my recollection is right the amounts on the afternoon conference
were initially fixed, if necessary that we would all put up a total of
$120,000,000, that is, $20,000,000 a piece, on the general very wise
theory that if you start to do an operation like this with a lot of
ammunition you generally spend a great deal less than if you start
in any other way. Subsequently—and I cannot remember how
quickly—that amount was raised to $40,000,000 each from each
542
STOCK EXCHANGE PKACTICES
of the six banks, and $10,000,000 from the Messrs. Guggenheim,
which comes to 4/25 each of the six and 1/25 for the Guggenheims
for the total of $250,000,000 that we were prepared to invest.
Mr. PECORA. NOW there were some very violent fluctuations in the
market with regard to securities generally during that period commencing on October 24 and terminating on November 11, 1929, were
there not?
Mr. WHITNEY. Fluctuations is not exactly the word that I would
use, except in the sense that they fluctuated downward. They
steadied every now and then, and then went down. There was a
succession of breaks.
Mr. PECORA. Well then, we will say that there were a number of
precipitous drops in the market; is that what occurred?
Mr. WHITNEY. That is a very accurate description.
Mr. PECORA. And did this suspense account buy on those drops?
Mr. WHITNEY. The suspense account put in orders on what is called
a very wide scale in order to prevent or to try to prevent having what
the papers called air pockets. In other words, to have some bids—
some basis upon which these very large bodies of loans which were
then in existence and the loans by customers, would have some basis
on which to stand, and not have a perfectly empty no-bid market,
which is what existed periodically during this period.
If you remember, this was a Thursday. On Friday it rather looked
as if the market was in hand.
Saturday it looked pretty steady again. Monday, the 28th, opened
up very bad. Worse than any day before, and it continued bad, if
I remember, for 3 or 4 days, and then there would be a little breathing spell, and then the thing would start off again. It was a succession of breaks. And, of course, it was made worse by loans being
called, and one thing and another, which in the ordinary mechanism
of the stock market brings a second avalanche of sellers. We came
to look for the hours of 11:15 and 2:15 with a great deal of anxiety,
because those were the hours when margin calls have to be responded
to in the general practice of stock-exchange houses, so right after
that we would get the immediate reflection of that call.
Mr. PECORA. Can you tell us through what brokers these buying
orders were executed on behalf of this suspense account?
Mr. WHITNEY. The operation was handled for us. We made no
charge ourselves for any of this transaction, although it was all
cleared through us, because we did not want to make any profits in
the way of commissions, although we were entitled to them under
the stock-exchange practices, against our participation transactions. The placing of the orders was handled entirely by Mr.
Richard Whitney and Mr. Warren B. Nash, who were respectively,
two executive heads of the stock exchange at that time, Mr. Nash
being the treasurer and my brother being the vice president and was
in charge in the absence of the president. Those two. And they
distributed the orders in their discretion—entirely within their discretion, without any knowledge or designation by us. The only
thing we would do is every morning we would give them a list of
amounts and prices. That was always in our control. But the use
of brokers was entirely handled by these two executive heads of the
stock exchange.
STOCK EXCHANGE PEACTICES
543
Mr. PECORA. At the time of the organization or creation of this
suspense account were any partners of J. P. Morgan & Co. directors
of the First Securities Co.?
Mr. WHITNEY. Why, I think so.
Mr. PECORA. And were any of them directors of the Chase Securities Corporation?
Mr. WHITNEY. NO, sir.
Mr. PECORA. What was
Mr. WHITNEY. NO, sir.
Mr. PECORA. Were any
the answer?
of them directors of the Guaranty Co. of
New York?
Mr. WHITNEY. NO, sir.
Mr. PECORA. Or of the National City Co.?
Mr. WHITNEY. NO, sir.
Mr. PECC*RA. Or of the Bankers Co.?
Mr. WHITNEY. NO, sir.
Mr. PECORA. Were any of the partners of J. P. Morgan & Co. at
that time directors of the First National Bank of New York?
Mr. WHITNEY. NO, sir.
Mr. PECORA. Or of the Chase National Bank?
Mr. WHITNEY. NO, sir.
Mr. PECORA. Or of the Guaranty Trust Co.?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. Of the National City Bank?
Mr. WHITNEY. NO, sir.
Mr. PECORA. Of the Bankers Trust Co.?
Mr. WHITNEY. Yes, sir.
Mr. PECORA. Were any of the partners of J.
P. Morgan & Co.
directors of the City Bank Farmers Trust Co., which was the trust
affiliate of the National City Bank?
Mr. WHITNEY. NO, sir.
Mr. PECORA. Are you sure
Mr. WHITNEY. Absolutely.
of that?
Mr. Charles D. Dickey is now a partner of ours. He was then a partner of the firm oif Messrs. Brown
Brothers, Harriman & Co., or I guess it was Messrs. Brown Brothers
at that time—I think he was then a partner—but he was not a partner
of ours until January 2, 1932.
It has been suggested to me, Mr. Pecora, that there is one point
that might be of interest to the committee in this connection, and that
is about these loans that existed at that time, to which I made a very
brief reference. I think, if my recollection is right, there were about
$8,000,000,000 worth of loans on stock exchange collateral at that
time. The
vast bulk of that was for what is known as "for the account
of others.'7 The New York banks themselves had a practice which
we ourselves have never approved of, of lending for the account of
others for a commission.
The CHAIRMAN. Called brokers' loans?
Mr. WHITNEY. These are brokers' loans; yes, sir; but not for their
own account, but for the account of about evenly divided, as I recollect
it, between out of town banks and corporations and individuals. And
that involved the whole question not only of the New York banks who
did not and were not when this party started, this break, this panic
started, were not very deeply involved themselves, but as that panic
175541—33—PT. 2
16
544
STOCK EXCHANGE PRACTICES
started the others who had no responsibilities in the banking situation
at all began calling their loans, and it resulted in the New York banks
either calling the loans, which would have made an absolute disaster,
as they were instructed to do—they having no responsibility—and as
a matter of fact as further evidence of their cooperation the New York
banks in most instances took over the loans of others for their own
account in a further effort to try to assist in a very difficult situation.
It was that loans for others which really was the most dangerous
thing in all, because it w^as a practice which had crept up during the
speculative boom of 1928 and 1929, where there were very high rates,
and the out of town banks and individuals and corporations who had
no direct responsibility to the handling of the banking funds, thought
that was a fine opportunity to make this high rate. It was that
money flowing in and the existence of that condition which was one
of the most desperate—one of the most dangerous elements of the
situation. And I think that is an element in it that should be considered in the considerations of this situation.
In other words, the New York banks, these banks participating,
including ourselves, did not have themselves a large investment of
their own funds in the call-money market. We have never—not
never, but have always refused to loan money for others, because we
disapprove of it. There have been certain instances where for some
special reason we have done so. The otlier banks have done it,
and I think today they are not quite so sure that they will do it
again. But that was the practice at that time. So it was for their
own self-protection as much as it was for the general situation that
they felt that that call-money situation had to be given consideration
and handled in order to prevent the loss that might have been incurred
by us and others scattered all over the length and breadth of this
country.
Mr. PECORA. The participants in this suspense account assumed
a very serious risk, did they not, when they entered into the operations of this suspense account?
Mr. WHJTNEY. These institutions?
Mr. PECORA. Yes.
Mr. WHITNEY. Yes, sir.
But it was a risk that was, in the judgment of all of us—and, of course, a matter of such importance as this
was taken up, as far as any institutions of which I havu any knowledge,
by the boards of directors of the banks.
The CHAIRMAN. Did you have any relations with the Federal
Reserve banks?
Mr. WHITNEY. Sir?
The CHAIRMAN. Did you have any relations with them?
Mr. WHITNEY. DO you mean this transaction?
The CHAIRMAN. Yes.
Mr. WHITNEY. NO, sir; none whatever. As a matter of policy—and
I think it was held by every thoughtful person in New York, that if
some action such as this were not taken the losses to the banking
community not only in New York but elsewhere would be infinitely
greater than any risks that might be involved in going into this undertaking. As I stated earlier, there was not the slightest intention or
expectation of making money out of this. It wap not gone into on a
profit-making basis, as a profit-making transaction. It was purely
what is known as a rescue party in a situation which we all believed,
STOCK EXCHANGE PRACTICES
545
and I think the result of the transaction proved that it was a very
wise risk to take in preserving something that would have been
infinitely worse than the risk which we incurred or the loss we might
have made or risked in going into this transaction.
Mr. PECORA. DO you know what holdings the participants in this
suspense account had in the securities that the suspense account
traded in?
Mr. WHITNEY. NO, sir. I never inquired.
Mr. PECORA. YOU do not know an}^thing about that?
Mr. WHITNEY. DO you mean do I know if any of the participants
had any other stocks of these kinds?
Mr. PECORA. Yes. If they had holdings of these stocks?
Mr. WHITNEY. Well I certainly would not say—of course our ow^n
business is the only one I know about, and I do not remember, but
it is quite possible that we had stocks in certain of these companies
that were bought here.
Mr, PECORA. Which can you identify?
Mr. WHITNEY. I know, of course, Mr. Pecora, that we did not, and
I am very confident that no participant in this pool sold any stock
during this period. If that is the theory of your question.
Mr. PECORA. When you say "during this period" do you mean the
period between October 24 and November 11?
Mr. WHITNEY. Yes.
Mr. PECORA. DO you
know whether any of the participants sold
any of these stocks subsequent to November 11 and up to the time
in 1930 when the operations of this suspense account came to an end?
Mr. WHITNEY. I would not know.
Mr. PECORA. Would you know that with respect to your own firm?
Mr. WHITNEY. Well, I suppose I could look it up. I do know, as I
testified yesterday, that outside of this transaction we bought United
Corporation common stock during this period, and I do know as I
testified yesterday—I cannot remember the dates—but it is quite
possible we may have sold United Corporation. But I would have
to go back over our books to find out if we had any of them. Let me
see if I can find it.
Mr. PECORA. NOW, let us, go down the list right from the beginning.
Mr. WHITNEY. May I
Mr. PECORA. Your firm did have holdings of the securities of the
Alleghany Corporation, did it not?
Mr. WHITNEY. I should not think so at that time.
Mr. PECORA. Well, how about the individual partners of your
firm?
Mr. WHITNEY. Well, we may but I have already answered that
question, that that first day—the only day that there were any
operations in Alleghany was that first emergency minute. It was only
a matter of 3,500 shares. And as a matter of fact, sold at a profit.
But it was not a part of this general transaction. I have tried to differentiate as clearly as I could between that morning conference when
it was an immediate and very urgent emergency, and the formation
of this suspense account or this joint account between the banks.
That morning we did, as I say—my best recollection is they said,
"Well, what will we buy?" And there were suggestions made by the
people there, and we made a list and went and bought those securi
546
STOCK EXCHANGE PEACTICES
ties. It was a perfectly haphazard—there was no time to give consideration to exactly what we would buy. And that is where the
Alleghany was bought on the first day. And subsequently to that it
was not a part of this general operation in any sense. Now, whether
or not some of my—as I have already testified, I had some shares of
Alleghany at this time, and I guess the other partners did.
The CHAIRMAN. Did the United Corporation have any of the
Alleghany Corporation stock?
Mr. WHITNEY. Well, the United Corporation, sir, is not in this list.
The CHAIRMAN. N O ; but did they have Alleghany Corporation
stock?
Mr. WHITNEY. United Corporation?
The CHAIRMAN. Yes.
Mr. WHITNEY. NO, sir.
Mr. PECORA. The Senator
asked you if they had Alleghany Corporation.
Mr. WHITNEY. Yes; I understand.
Mr. PECORA. Prior to that time your firm had done considerable
financing for the Alleghany Corporation, had it not?
Mr. WHITNEY. Why certainly.
Mr. PECORA. Yes. Now how about Allied Chemical & Dye Co.?
Had your firm prior to that time ever done any business with them?
Mr. WHITNEY. Never done any business with it in any way. We
only bought 940 shares.
The CHAIRMAN. Before you pass from the Alleghany. I have,a
memorandum here that the Alleghany Corporation had outstanding
shares of 4,152,500. In 1929 the high was 56. The recent low 8.
Loss per share 48. Total traded there were $190,300,000. Do you
suppose that is correct?
Mr. WHITNEY. I do not know, sir. I think the amount of shares
you mentioned is correct, because there were rights offered the stockholders in the spring of 1929. There were the original three and onehalf million shares in the organization of the company, as has been1
testified here, and then there were rights offered so that four million
figure would very probably be right, I think. I do not know.
The CHAIRMAN. Well, it reached a high of 56, did it?
Mr. WHITNEY. I just do not know, sir.
The CHAIRMAN. YOU do not remember?
Mr. WHITNEY. I know it was sold somewhere in the 50's, but I do
not remember the exact figures.
The CHAIRMAN. DO you remember whether it went down to 8?
Mr. WHITNEY. I know it went down to less than 1.
Mr. PECORA. This year?
Mr. WHITNEY. The last year.
Mr. PECORA. NOW, had your firm ever done any financing for the
American Can Co.?
Mr. WHITNEY. NO, sir.
Mr. PECORA. Did it hold
Mr. WHITNEY. NO, sir.
Mr. PECORA. HOW about
any of its securities?
individual partners; do you know anything about that?
Mr. WHITNEY. I haven't any idea.
Mr. PECORA. HOW about American Smelting & Refining Co.?
Has your firm done any financing for that company?
STOCK EXCHANGE PRACTICES
547
Mr. WHITNEY. NO.
Mr. PECORA. Well, that
is the corporation with which the Guggenheim Brothers are particularly connected, is it not?
Mr. WHITNEY. NO, sir. One of them, Mr. Simon Guggenheim,
is chairman of the board, but the others have nothing to do with it.
Mr. PECORA. NOW how about American Telephone & Telegraph
Co.?
Mr. WHITNEY. Well, we, as is well known, have been bankers for
the American Telephone & Telegraph Co., but we did not hold any
of their stock.
Mr. PECORA. That is one of the corporations that maintains a
big deposit account with your firm, is it not?
Mr. WHITNEY. It has held deposits with us; yes.
Mr. PECORA. NOW, the next issue on this list is Anaconda Copper
Mining Co. Has your firm done any financing for that company?
Mr. WHITNEY. NO, sir.
Mr. PECORA. YOU know
that the National City Bank and its
affiliate had some close relations at that time with the Anaconda
Copper Mining Co., did you not?
Mr. WHITNEY. Everybody knew it.
Mr. PECORA. Yes. Now, how about the Atchison, Topeka &
Santa Fe Railway Co.?
Mr. WHITNEY. Well, we have at times in the past—we have been
bankers for them, and they have had deposit relations with us.
Mr. PECORA. HOW about Baltimore & Ohio Railroad Co.?
Mr. WHITNEY. We have had no stock of Atchison, if that is of
any interest to you. Now, the Baltimore & Ohio
Mr. PECORA. Did you ever do any financing for them?
Mr. WHITNEY. Oh, a great many years ago, but not for 25 years.
Mr. PECORA. HOW about Bethlehem Steel Corporation?
Mr. WHITNEY. NO, sir.
Mr. PECORA. Well now,
the Guaranty Trust Co. has on its board
some of the officers and directors of the Bethlehem Steel Corporation,
has it not?
Mr. WHITNEY. One. It is a matter of public knowledge that the
Guaranty Trust Co., or rather, the Guaranty Co., have financed the
Bethlehem Steel Corporation.
Mr. PECORA. Yes. And the Guaranty Co. was one of the participants in this suspense.account?
Mr. WHITNEY.
Yes.
Mr. PECORA. NOW, how about the Chesapeake Corporation?
Mr. WHITNEY. Well, that, as I have testified before, is a corporation that holds C. & O. common, the majority of whose shares are
owned by Alleghany Corporation. I do not think at this time that
we have a share of Chesapeake Corporation stock.
Mr. DAVIS. HOW many shares of Chesapeake?
Mr. WHITNEY. Well, again, it was only 1,000 shares. That was
again the first day.
Mr. PECORA. NOW, how about Columbia Gas & Electric Co.? Did
your firm have any connection with that corporation, directly or
indirectly?
Mr. WHITNEY. Well, of course, as has been testified at some length,
the United Corporation owned something like 60,000 shares, but we
have never had any banking relations with the Columbia Gas &
Electric; did not have at that time, and owned no shares of it ourselves.
548
STOCK EXCHANGE PRACTICES
Mr. PECORA. HOW about the Columbia Graphophone Co.?
Mr. WHITNEY. Well, I rather think—I think it is quite probable
that I may have had some shares in the Columbia Graphophone at
that time, personally.
Mr. PECORA. HOW about the firm?
Mr. WHITNEY. I should think not, to the best of my recollection.
Mr. PECORA. Has the firm done financing for it?
Mr. WHITNEY. I do not think so. I am advised, Mr. Pecora, that
in a certain reorganization we acted as depositary for them, and they
have had deposits with us. The American company.
Mr. PECORA. HOW about the Consolidated Gas Co. of New York?
Mr. WHITNEY. At that time we had absolutely no connection with
them.
Mr. PECORA. Well, the United Corporation owned some of the
stock of the Consolidated Gas Co. of New York, did it not?
Mr. WHITNEY. I do not think it did in 1929, did it?
Mr. PECORA. In October 1929?
Mr. WHITNEY. I do not think so. Let me check up. I cannot
remember. But we have never had any banking—to this day we
have never had any banking relations with the Consolidated Gas.
Mr. Pecora, I am advised that at that time the United Corporation
did not own any shares of Consolidated Gas.
Mr. PECORA. Did it own any shares of any holding company which
held securities of the Consolidated Gas Co.?
Mr. WHITNEY. YOU mean the New York unit?
Mr. PECORA. Any holdings.
Mr. WHITNEY. NO. My answer is complete.
Mr. PECORA. HOW about E. I. du Pont de Nemours & Co.?
Mr. WHITNEY. Well, we, of course, have had banking transactions—financial transactions with du Pont, but we own no stock
in their company.
Mr. PECORA. HOW about the General Electric Co.?
Mr. WHITNEY. I am pretty sure we own no stock as a firm, and
of course it is well known that we have been associated with them for
many years.
Mr. PECORA. HOW about the Great Northern Railway Co.?
Mr. WHITNEY. Well, we have been associated with the First
National Bank in financing Great Northern Railroad bonds in the
past. We own no stock of it, and I frankly do not know whether
they had a deposit with us at that time. You skipped General
Motors. Did you mean to?
Mr. PECORA. What is that?
Mr. WHITNEY. YOU skipped General Motors.
Mr. PECORA. Thanks for calling my attention to it.
Mr. WHITNEY. I think we probably had some stock in that company at that time, and it is more or less known that we have associations with them.
Mr. PECORA. HOW about the International Nickel Co.?
Mr. WHITNEY. None. I do not think any relations with them.
Mr. PECORA. DO you know whether or not any of the participants
in this suspense account had any relations at that time with the
International Nickel Co.?
Mr. WHITNEY. N O ; I do not. Just what I was hesitating about—
I got an idea I had some shares myself.
STOCK EXCHANGE PRACTICES
549
Mr. PECORA. HOW about International Telephone & Telegraph
Corporation?
Mr. WHITNEY. Well, we have sold securities for that company,
and whether we owned stock—I think we did. I am pretty sure.
Mr. PECORA. Johns-Manville Co.?
Mr. WHITNEY. Well, it is well known we own stock in that individually.
Mr. PECORA. Have you done financing for it?
Mr. WHITNEY. When the company was reorganized in December
1926 we arranged for the sale of certain of their preferred shares.
But that is the only financial transaction we have ever had with
Johns-Manville Corporation.
Mr. PECORA. One or more of the partners have been a director of
that company?
Mr. WHITNEY. TWO of us.
Mr. PECORA. HOW about the Kennecott Copper Corporation?
Mr. WHITNEY. Well, of course, as you know, three of us are on
that board. We had deposit relations with them, and I think it was
back about 16 or 17 years ago we sold some bonds for them,
but they have had no need to do any financing since then.
Mr. PECORA. Montgomery Ward & Co?
Mr. WHITNEY. I think we have done some security business for
them, and one of our partners is on that board. Whether we owned
any stock in that company at this time I don't just remember. We
may have.
Mr. PECORA. New York Central Railroad Co.
Mr. WHITNEY. Well known that we have sold securities for them
for many, many years. But we held no stock in that company.
Mr. PECORA. Any of your partners on its board of directors?
Mr. WHITNEY. We are not permitted to be under the law which
prevents bankers being on the boards of railroad companies for which
they act as bankers.
Mr. PECORA. HOW about the Pennsylvania Railroad Co?
Mr. WHITNEY. Well, the New York office has never had any
relations in a banking way with them, or in any other way. I do
not know whether Philadelphia has or not. They may have had a
deposit from them. I do not know. I do not think so at this time.
I am sure we did not own any stock in the Pennsylvania Railroad.
Mr. PECORA. The Public Service Corporation of New Jersey?
Mr. WHITNEY. Of which we bought 100 shares. Of course, United
Corporation owned stock. But we only bought 100 shares, you see.
Mr. PECORA. That is in connection with the operations of this
suspense account?
Mr. WHITNEY. Yes. We bought 100 shares, it says here, Public
Service Corporation.
Mr. PECORA. NOW, how about the Radio Corporation of America,
or if you prefer it, the Radio Corporation?
Mr. WHITNEY. The Radio. Why, I do not think we have ever
had any relations with them. I am sure the firm owns no shares of
stock. Of course, it is a matter of almost public knowledge that they
are associated in a degree with the General Electric.
Mr. DAVIS. Were.
Mr. WHITNEY. Were: excuse me. Were.
Mr. PECORA. Sears, Roebuck & Co.?
550
STOCK EXCHANGE PRACTICES
Mr. WHITNEY. NO, sir.
Mr. PECORA. DO you know
whether any of the participants in
this suspense account have had any relations with that corporation?
Mr. WHITNEY. Well, I happen to know that one of the participants, or, rather, the bank with which one of the participants associated, has banking relations with them, but I do not know anything
about the stock.
Mr. PECORA. Southern Pacific Co.?
Mr. WHITNEY. NO, sir. We have never had any relations with
them.
Mr. PECORA. DO you know the situation with regard to any of
your participants with regard to this suspense account?
Mr. WHITNEY. I think what I said before of certain of them is true
as far as banking relations, but I do not know anything about the
stock.
Mr. PECORA. Southern Railway Co.?
Mr. WHITNEY. We have acted as bankers in the distribution of
their bonds, and in the past, while the law permitted it, we have had
directors on that board. But we own none of their stock.
Mr. PECORA. DO you know whether any of the participants in the
suspense account had any stock holdings in the Southern Railway
Co.?
Mr. WHITNEY. Well, I do not. Not at that time; no, sir. I think
I have read at some of these previous hearings that one of the participants had some at one time.
Mr. PECORA. NOW the Standard Oil Co. of New Jersey is the next
on the list.
Mr. WHITNEY. Well, we were instrmnental as bankers in underwriting two issues of preferred stock, and also a bond issue, of the
Standard Oil Co. of New Jersey, and they have had a deposit relation
with us, but we own none of their stock and have never been on their
board.
Mr. PECORA. The Texas Corporation?
Mr. WHITNEY. Never done any business with the Texas Corporation at all.
Mr. PECORA. HOW about any of your participants?
Mr. WHITNEY. DO you mean on stock?
Mr. PECORA. On stock, or any relations with the Texas Co.
Mr. WHITNEY. I think probably several of the banks associated
with these security companies had deposit relations with them.
Mr. PECORA. NOW, the Union Pacific Railroad Co.?
Mr. WHITNEY. We have never had any relations with them.
Mr. PECORA. HOW about any of your participants in this suspense
account?
Mr. WHITNEY. I think that same answer probably would be true.
Mr. PECORA. What?
Mr. WHITNEY. Well, that some of the banks associated with these
security companies have banking relations with the Union Pacific.
Mr. PECORA. NOW, the United Aircraft & Transportation Co.?
Mr. WHITNEY. That, again, was a 1-day list. The first day. And
I think that I have heard that one of the participants had some relations to that stock.
Mr. PECORA. Did J. P. Morgan & Co. ever have?
Mr. WHITNEY. NO, sir.
STOCK EXCHANGE PRACTICES
551
Mr. PECORA. Or any of the partners of J. P. Morgan & Co.?
Mr. WHITNEY. Yes; some of the individuals owned some stock.
A very small amount of it.
Mr. PECORA. NOW, did not Mr. Bartow of your firm hold for the
firm a large block of the securities of stock of the United Aircraft &
Transportation Corporation at one time?
Mr. WHITNEY. NO, sir. Mr. Bartow merely cleared some stock as
an individual, which was immediately distributed to the individual
partners. The firm did not have anything to do with it.
Mr. PECORA. Then he cleared for the individual members of the
firm, as distinguished from the firm as an entity itself?
Mr. WHITNEY. I said the partners had stock, but he did not hold
it for account of the firm, which was your question.
Mr. PECORA. HOW about the United Gas Improvement of Philadelphia?
Mr. WHITNEY. Well that, again, was the first day only.
Mr. PECORA. That was one of the securities held by the United
Corporation?
Mr. WHITNEY. In the United; yes, certainly. But it was only
done the first day; 1,200 shares.
Mr. PECORA. Was it only done the first day because it was considered that that was all that was necessary to do with regard to this
particular issue?
Mr. WHITNEY. Well, Mr. Pecora, I have tried to explain as clearly
as I can, and apparently unsuccessfully, that the first day was just a
general list of names. We did not sit down and give any careful
consideration to it. Thereafter, when we decided to form this account,
the obvious purpose of forming the account was to deal in the active,
or what might be called the key stocks. They were selected with
no relation to anybody's affiliation with them. They were selected
purely and simply and merely for the reason that through the purchase of those particular stocks we believed—this joint account
believed—that we would be most effective in what we were trying to
do. And obviously the names that you have read, or have not quite
finished reading, generally speaking, are representative of that
classification, namely, they were prominent companies widely traded
in, sound companies, and were what you might call key stocks.
We did not attempt to cover the whole 485,1 think it is, stocks that
are listed, because it was obviously impossible. We did take a good
deal of pains to withdraw from any purchases in any of the companies
with which we, J. P. Morgan & Co., might be said to be very much
identified. That would obviously take in any of the securities held
by the United Corporation, any of the securities held by the Alleghany
Corporation, and they were traded in or purchased the first day, and
then as a matter of policy were deleted, and the stocks that were left
were the stocks which were the key stocks in the market, in which
such purchases as this joint account planned to make would most
effectively steady and reinstate an orderly market.
Mr. PECORA. NOW, the next issue on this list, the issues traded in
by the suspense account, was United States Steel Corporation.
Mr. WHITNEY. Yes; and that was, as was well known, a company
in which three partners of J. P. Morgan & Co. were on that board,
and we have been associated with the United States Steel Corporation
552
STOCK EXCHANGE PRACTICES
since its inception in 1901, and it also was far and away the most
active pivotal stock at that time.
Mr. PECORA. Western Union Telegraph Co. is the next issue.
Mr. WHITNEY. We have never had any relations with it, with that
company.
Mr. PECORA. HOW about any of your participants?
Mr. WHITNEY. Oh, I don't question that some of them may have.
I haven't any idea about that stock, but no doubt they were.
Mr. PECORA, NOW, the next and last
Mr. WHITNEY (interposing). It would be very unusual, Mr. Pecora,
if these large prominent companies did not have some banking relations with one of those participants, some one of them.
Mr. PECORA. NOW, the next and last is the Westinghouse Electric
& Manufacturing Co.
Mr. WHITNEY. We have never had any relations with that company at all.
Mr. PECORA. HOW about participants?
Mr. WHITNEY. Again, I would figure it would be very unusual if
some one of them did not have.
Mr. PECORA. NOW, at that time, in October 1929, there were very
nearly 500 different issues listed on the New York Stock Exchange,
were there not?
Mr. WHITNEY. Don't take my word a minute ago. I was just
guessing. There were an awful lot.
Mr. PECORA. I am taking the figure you mentioned, four hundred
and odd, nearly 500.
Mr. WHITNEY. There were a lot of them, several hundred.
Mr. PECORA. And the issues that were traded in in connection with
this suspense account number 37
Mr. WHITNEY (interposing). Yes; really very many less than that,
because I have repeatedly stated about 6 to 10 or a dozen of them
were only traded in for 1 day. My recollection is, as Mr. Bartow
and I have tried to refresh my memory
on this, is that there were
about 25 companies that we really wrent to work on.
Mr. PECORA. IS it fair to say, Mr. Whitney, that every one of those
25 companies, in fact every one of these 37 companies whose issues
were dealt in by this suspense account, were companies in which
either your firm or one or more of the participants in this suspense
account were interested, either through stockholdings or through
financing?
Mr. WHITNEY. I think that very possibly if you restrict it to the
25 which this transaction dealt with, I think that very probably
would be an accurate statement, but it would be a more accurate
statement if my answer was joined with the statement that the interests which any one or all of the participants might have had in any
one or all of these companies had nothing whatever to do with the
selection of these securities to be purchased by this joint account.
I have repeated it, and I repeat it as often as you wish, that these
securities were among the most prominent, most actively traded in,
securities in the New York Stock Exchange. It was obviously impossible to cover the whole list, and it was equally obvious that the
only way to make this account effective was by putting in some kind
of orders in what might be called the leading companies, and that is
what this is an attempt to do. We may have left out some, and it
STOCK EXCHANGE PRACTICES
553
was in our discretion, and they were selected purely and simply for
the reason that these companies' securities would be, I think if you
should find out—I remember that we checked at the time, but I
don't recall the figures—that they represented a tremendous majority
of the total trading, and they were also the securities that were most
in loans. In other words, they were the pivotal—what we call
pivotal or key stocks—and this operation was not conducted or
entered into with the slightest idea or relation to the associations
whatever that may have been between these participants and these
particular corporations. It was purely an effort to try to bring order
out of chaos and to try to make some base upon which the normal
conduct of business could proceed.
Mr. PECORA. The fact, then, that the participants in this suspense
account also had an interest in these 37 corporations represented by
this, by financing, loans, or by stock ownership, was purely a coincidence
Mr. WHITNEY (interposing). No, it is
Mr. PECORA (continuing). In the matter of their selection by the
managers of this suspense account whose stocks they would be using
for the purposes of this suspense account?
Mr. WHITNEY. I should not think the word "coincidence77, Mr.
Pecora, was a descriptive word at all. It would be rather unusual
that if you take a list of such prominent corporations as are included
here and none of them should have banking relations of some kind
with these five banks or the banks with which these securities companies are associated, any one of them. But it was not a matter of
coincidence. There was no effort made to only buy stocks with
which these banks had no possible relation. There was no effort
made to buy stocks with which they had any particular relation.
I repeat that that list was chosen for one simple reason, namely, that
the purchase of the shares of the corporations as listed here, the 25,
not the 37, was done purely as being a most effective way of conducting this operation in what was believed to be the general
interest of the situation.
Mr. PECORA. Mr. Whitney, how long did the operations of this
suspense account continue?
Mr. WHITNEY. YOU mean before
Mr. PECORA (interposing). Either on the buying side or the selling
side?
Mr. WHITNEY. Apparently the date is not here, but I am pretty
sure of the accuracy of my previous statement as to the period during which the purchases continued, and I can only speak from my
recollection that it was in the early months of 1930 that the liquidation
of the account took place, but when the date was we finally finished
I just don't remember, I mean the exact date.
Mr. PECORA. DO you remember the month in 1930 when the
liquidation ended?
Mr. WHITNEY. I just don't —I should have thought it was March,
but it may have been April. I don't remember.
(After consultation with associates:)
Their recollection confirms mine, that it was March.
Mr. PECORA. During that time were values maintained in the open
market fairly well?
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STOCK EXCHANGE PEACTICES
Mr, WHITNEY. They were maintained at the very low level;
yes, during a great deal of that time.
Mr. PECORA. That is, the sliding stopped during that time?
Mr. WHITNEY. The panic stopped; yes. Business resumed and
everybody felt very much better, if you remember, in 1930, the early
months of 1930.
Mr. PECORA. Would you say that this was in the nature of a stabilization process?
Mr. WHITNEY. In the proper and then use of the word I should
think that this might be almost called an effort to stabilize, which I
believe means to steady. I should think that the word could nearer
be used in the sense that it had then than any other time that you have
used the word since I have had the pleasure of being here.
Mr. PECORA. Mr. Whitney, the only other times I used it was when
I questioned you as to the cablegram in which you used that word.
Mr. WHITNEY. Quite, quite; exactly.
Mr. PECORA. During the period of liquidation which we will assume
ended some time in March 1930 did your firm sell any of its stock holdings apart from those in which it was interested as a member of this
suspense account?
Mr. WHITNEY. I think the correct answer would be—let me look
at this, may I? [After examining document:] I read yesterday that
we sold during November 1929 some of the United shares that we
bought in the earlier—as I read you yesterday, I think we began purchasing United Corporation for our own account on October 24, 1929.
We continued to purchase up to the 1st, through the 1st of November.
On the 4th there was evidently quite a—I don't understand these
figures at all. We sold some United stock on the 4th, and then we
purchased some more on the 6th, 7th and 8th.
Mr. PECORA. Mr. Whitney, I do not mean to have you give all the
details of any such transaction.
Mr. WHITNEY. Well, with the exception of that
Mr. PECORA (interposing). Can't you answer the question in a
general way?
Mr. WHITNEY. My general recollection is, Mr. Pecora, that we did
not dispose of any of our holdings of stocks which we might have had
at that time until after the liquidation of this account was completed. Whether that is a literally accurate statement—but as a
general answer, to the best of my knowledge and belief, as long as we
were charged with the responsibility of looking out for this account
we did not sell our own holdings of such stocks as we may have had.
That is to the best of my knowledge and belief.
The CHAIRMAN. When was the liquidation completed?
Mr. WHITNEY. I say, Senator Fletcher, I think in March 1930 of
this account.
Mr. PECORA. Would your firm have among its records any entries
which would indicate whether or not the firm liquidated any of its
holdings in any listed securities during this period between November
11, 1929, and March 30, 1930?
Mr. WHITNEY. Why, certainly it would, Mr. Pecora. If you want
me to make a strictly accurate statement, obviously I would want
to refer to the books. I have already answered you in the spirit of
your question, with the qualification that as to details as to whether
we may have sold a hundred shares of stock during that period T
STOCK EXCHANGE PRACTICES
555
don't know, but my answer was perfectly definite as a general proposition. We did not dispose of the securities which we held in our
own portfolio during the time that this, or prior to the time that this,
account here was liquidated. Is that your recollection (addressing
an associate]? Does anybody's recollection differ from mine on
that? Mr. Keyes tells me that is practically an accurate answer.
Mr. PECORA. Could you answer that question with respect to any
liquidation by any of the participants in this account?
Mr. WHITNEY. I have no knowledge, of course, of that.
Mr. PECORA. Of course ypu wouldn't. I wouldn't expect you to.
Shortly after the termination of the operations of this suspense
account market values began to drop again, did they not?
Mr. WHITNEY. Well, I think a couple of months later.
Mr. PECORA. And they dropped thereafter for many, many months;
it was rather continuous?
Mr. WHITNEY. Almost—very continuous.
Mr. PECORA. Almost an unbroken decline, very few landing platforms?
Mr. WHITNEY. A few levels, but downwards.
The CHAIRMAN. Mr. Whitney, may I ask you there, while Mr.
Pecora is arranging his data, quite a number of foreign governments
have maintained deposit accounts with the J. P. Morgan & Co. in
New York, haven't they?
Mr. WHITNEY. At one time and another; yes, sir; a few.
The CHAIRMAN. A few. I won't go into details about that, but
are those time deposits or demand deposits?
Mr. WHITNEY. Well, both.
The CHAIRMAN. IS there any objection to stating how many foreign
governments you act as fiscal agents for?
Mr. WHITNEY. We have already answered that in one of the questions, Senator Fletcher, and the answer is, with the exception of the
Belgian Government, where there was a so-called "fiscal agency arrangement" entered into with the Belgian Government and the
Guaranty Trust Co. and ourselves back some time before 1919, under
which it was terminable at 30 days' notice by either party, under
which we have not acted, I do not know, for a great many years, we
are fiscal agents for no foreign government.
Mr. PECORA. YOU referred in the course of your testimony this
morning to the provision of law which prohibits a banker from sitting
on the board of a railroad corporation.
Mr. WHITNEY. Why, that is not just what I said, Mr. Pecora. I
said it prevents a banker to sit on the board of a railroad corporation
if it is selling its securities.
Mr. PECORA. Yes. You consider that is a wise provision, don't
you?
Mr. WHITNEY. NO.
Mr. PECORA. YOU don't?
Mr. WHITNEY. NO.
Mr. PECORA. Then I presume
you consider it equally unwise for
Congress to enact any law which would contain a similar prohibition
with respect to utility companies?
Mr. WHITNEY. The reason for my answer is, Mr. Pecora, that a
banker that sells securities to the public, bonds particularly, such as
we do, has a very definite responsibility to the people who buy those
556
STOCK EXCHANGE PEACTICES
bonds, and it seems to me that it would not do any harm to anyone
if the bankers were permitted to sit on the boards as more or less
representative, if you want, of the interest of the security holders
to which they have sold securities.
If your question meant that we have any objection to the law, we
certainly have not, but I really think that the interests of the properties and of the security holders might well be as well served by
permitting the bankers who assume the responsibility of the distribution of the bonds to have a definite responsibility as directors.
Of course, the obvious objection to it is that they would be trading with
themselves in the purchases of securities. That is the obvious reason
for the law, and that is obviously a good provision. But from other
points of view I should think that the interests of all parties involved
would be well served by having represented in the management and
direction the people who are responsible to the public for the sale of
the securities.
The CHAIRMAN. Mr. Whitney, will you explain what you mean,
what is your conception of the definite responsibility of your firm
sellling bonds to the public, to the purchasers of the bonds? What is
your responsibility?
Mr. WHITNEY. The bonds that we sell are sold under certain very
definite representations by the company from whom we have purchased the bonds and are reselling to the public. We have always
endeavored, I think successfully, to have the greatest possible publicity in all matters connected with our security issues. In other words,
to make the fullest kind of disclosure to the public of the security,
the character of the company, the type of business they do, and all
those other matters which are of interest to a prospective buyer.
Now, the responsibility to which I refer is to see that the conditions
under which the bonds are issued are lived up to and fulfilled; in
other words, so that as far as it is possible, a man who buys a security
through our agency continues to have the same conditions met as
those under which he purchased his bonds.
The CHAIRMAN. The purchaser of the bonds could not hold you
responsible in any legal action?
Mr. WHITNEY. Oh, no, sir.
The CHAIRMAN. It is more of a moral responsibility?
Mr. WHITNEY. Not under the laws up till very recently.
I don't
know about the law now, the new—oh, no, there is no legal responsibility.
Mr. PECORA. One of the questions, Mr. Whitney, you probably
recall, that was included in the so-called questionnaire that your
firm received several weeks ago, which was known as question 11,
called for the names of all governments, States, municipalities and
corporations for which either J. P. Morgan & Co. or Drexel & Co.
has acted as fiscal agent during the 5-year period 1927 to 1931, both
inclusive, and a statement of the services rendered for each of the
same, and the data which was furnished in answer to that question
has been received in evidence here as committee's exhibit 18 of May
25, 1933.
Now I notice in that exhibit that there are a number of foreign
governments.
Mr. DAVIS. It is covered by the preamble.
Mr. PECORA.
Yes.
STOCK EXCHANGE PRACTICES
557
Mr. WHITNEY. May I read our answer to that question?
Mr. PECORA. There are a number of foreign governments for whom
you act not exactly as fiscal agents but for whose account you hold
moneys.
Mr. WHITNEY. If you remember, Mr. Pecora, when you asked me
to identify this particular answer I said that we had been at some
pains and perhaps overanswered the question. If I may read the
preamble, I think that answers your present question. We say:
With the exceptions below stated, neither J. P. Morgan & Co, nor Drexel & Co.
are not—are—are not fiscal agents for any governments, Staies, municipalities,
and corporations.
The first exception follows:
J. P. Morgan & Co. and the Guaranty Trust Co. jointly made an agreement
wherein they were appointed fiscal agents in the United States for the Belgian
Government. This agreement is dated September 11, 1919, and may be terminated by either party upon 30 days' notice.
No Belgian bonds were issued by the Government or publicly offered by the
fiscal agents during the period in question.
That is the first exception. The second is as follows, which has to
do with your present question, Mr. Pecora:
2. In certain instances indentures covering the bond issues which were offered
by the firm contained a paragraph stating with substantial uniformity that J. P.
Morgan & Co. or Drexel & Co. are appointed the fiscal agents of the obligor for
the service of a loan covered by the indentures. In other instances J. P. Morgan
Co. and another were jointly appointed.
The service of the loan included all routine details incident to the effective
issuing of the bonds in the first instance, and thereafter the payment of the
coupons when and as due and the payment of the bonds at maturity.
There is attached hereto, in answer to this question, a list of all governments
or corporations to which we paid coupons or dividends, acting not onlyjas sinking
fund agents but for which bonds have been paid during the period in question.
Now, it is true that under loan contracts with foreign governments,
under indentures securing corporate bonds, we are termed as fiscal
agents for the loan, and that is why we gave you this long list, because
we wanted to be gure to cover any possible
interpretation that could
be put upon the words " fiscal agents7\
Mr. PECORA. And there is a long list of foreign governments, states,
and municipalities?
Mr. WHITNEY. Oh,, yes.
Mr. PECORA. For which you render or have rendered such services?
Mr. WHITNEY. Yes,
sir.
Mr. PECORA. They are all shown in this document which has been
marked " committee's exhibit 18 " in evidence?
Mr. WHITNEY. That is right. But they are all merely chat technical paying agency of some kind or other or basis.
Mr. PECORA. NOW, Mr. Whitney, when your firm holds funds of
such a foreign government or state or municipality for any of the
purposes that are enumerated in committee's exhibit 18 does your
firm allow interest on those funds while they remain on deposit in
your hands?
Mr. WHITNEY. Well, it has already been testified, Mr. Pecora, that
we pay going.rates of interest on our deposits.
Mr. PECORA. Does that include these funds?
Mr. WHITNEY. Well, because the funds are held by us in this
capacity we have just referred to in accordance with the terms of the
contract or the document in question. In other words, let's assume
558
STOCK EXCHANGE PEACTICES
that a corporation has a general balance with us. Under the terms
of their contract they are required, say, 5 days before to deposit the
money with us, under the terms of the contract for payment of coupons, for instance, or sinking fund.
Now, my guess is—I wouldn't—my guess is that we pay interest
on the funds included here until the date that such payments are due,
when the money then does not any longer belong to the corporation
but belongs to the man who holds the coupons or maturing bonds.
But I again would want to check that.
Mr. PECORA. Don't you know that definitely one way or the other,
as to whether or not you allow interest on those bonds?
Mr. WHITNEY. Mr. Pecora, I don't—you mean during the period
they are held prior to maturity?
Mr. PECORA. Yes, sir.
Mr. WHITNEY. I have
said, Mr. Pecora, that my best recollection
is we do, but I frankly don't carry that detail in my head in order to
be answered with absolute certainty. If it is of any interest to you
at all to have a definite answer, I can check it up very easily.
Mr. PECORA. If you will, sir. I think that is all of Mr. Whitney at
this time.
The CHAIRMAN. Mr. Whitney, what do you regard as the functions of a fiscal agent? Is it merely to handle the bonds of a government, for instance?
Mr. WHITNEY. Well, sir, Senator Fletcher, there are two general
terms. This technical, legal phraseology with which we act is merely
in connection with certain definite operations. There is known to be
such things as fiscal agents, where they are general bankers for a
corporation or for a government. We do not act in that capacity. In
times past we have; I mean many years ago. We have not for many
years done so.
The CHAIRMAN. YOU made loans to foreign governments, did you
not?
Mr. WHITNEY. Yes; but under no prior—we have made them, but
under no prior arrangement whereby we have any—if you might
call preferred position. It is just because they decide to deal with us
and we make a negotiation and we issue the bonds. They might have
done it just as well with anybody else. A fiscal agency used in that
sense rather implies some exclusive position, and that relationship we
have with no one.
The CHAIRMAN. I think that is all with you, Mr. Whitney.
Mr. PECORA. Mr. Thomas S. Lamont.
TESTIMONY OF THOMAS S. LAMONT, A MEMBER OF THE FIRM
OF J. P. MORGAN & CO., NEW YORK CITY
The CHAIRMAN. Mr. Lamont, will you be sworn. You solemnly
swear that the evidence you will give in this hearing will be the truth,
the whole truth, and nothing but the truth, so help you God?
Mr. LAMONT. I do.
Mr. PECORA. Give your full name and address to the stenographer,
please.
Mr. LAMONT. Thomas S. Lamont; 101 East Seventy-second Street,
New York City.
STOCK EXCHANGE PRACTICES
559
Mr. PECORA. Are you a member of the firm or copartnership known
as J. P. Morgan & Co.?
Mr. LAMONT. I am.
Mr. PECORA. And also
of the firm or copartnership called Drexel
&Co.?
Mr. LAMONT. I am.
Mr. PECORA. And have been for how many years?
Mr. LAMONT. Since 1929, December 31, 1928.
Mr. PECORA. Mr. Lamont, do you recall that on or about
December
30, 1930, you sold various blocks of stock, which I will enumerate to
you, 1,500 shares of Continental Oil Co., 200 shares of Durium
Products preferred, 300 shares of Hall Electric Heating, 237 shares of
E. R. Mallory & Co., 1,000 shares of Shamrock Oil & Gas Co., 500
shares of State Street Investment Co., 350 shares of Investment
Corporation of Philadelphia, and 1,000 shares of Simms Petroleum.
Mr. DAVIS. One moment, Mr. Lamont. Mr. Chairman, I do not
follow this at all. We have been for sixty-odd days engaged in giving
information about the firm of J. P. Morgan & Co. We have been
given no notice of any inquiry into any transactions of any individual,
no opportunity to assemble any facts, and I submit it is not fair play.
If the committee wants the facts about anything, we should be given
notice what it is and an opportunity to assemble the facts.
Nor am I able easily to understand how the individual transactions
of any individual partner, Mr. T. S. Lamont or any other, enter into
the scope of the inquiry that the committee is conducting. I do not
think that is a fair approach.
The CHAIRMAN. What is the purpose, Mr. Pecora, of this examination, and what notice has been given, if any?
Mr. PECORA. Well, I don't know of any requirement that notice
should be given to any witness who is to be examined before this
committee, or before any Senate investigating committee for that
matter, of any of the matters with respect to which it is desired to
examine the witness. There is no recognized procedure of that sort
that I ever heard of or have learned of since I have been counsel to
this committee.
Mr. DAVIS. I venture to say that there is not a man in this room
who could be asked about his individual transactions of any sort and
give an accurate, correct, responsive, satisfactory reply, unless he had
been notified and an opportunity to advise himself.
Mr. PECORA. Well, if this witness cannot answer any of these
questions now and wants any time to inform himself, I have no
objection to his being given that time, but these are transactions, I
understand, of the witness himself. He may have a recollection of
them. I don't know. That can only develop by the witness
indicating whether he has or not.
Mr. DAVIS. That is another question. I am prepared to assert
to the committee that if it is going into the individual transactions of
20-odd men we will be here until the snow flies.
Mr. PECORA. N O ; we won't.
Mr. DAVIS. And I insist that it is not fair play to ask men about
their transactions unless they have been told what the transactions
are concerning which they are going to be inquired about.
175541—33—PT. 2
17
560
STOCK EXCHANGE PEACTICES
Mr. PECORA. I never heard
Mr. DAVIS (interposing). It would not have been fair play, Mr.
Pecora, to call down all the firm of J. P. Morgan & Co. and ask them
as to the multitudinous transactions that we have presented to you.
It was perfectly fair for you to give us questions, tell us the information you wanted, for us to assemble it and produce it, and that we
have done with a degree of thoroughness, of candor, of fullness,
which I submit no members appearing before a congressional committee or a court have ever exceeded. Now, we insist that the same
sort of fair play shall run the whole way down the line here.
Mr. PECORA. Does the witness claim that he can not answer this
question?
Mr. DAVIS. The witness is not called on to claim.
Mr. PECORA. Well, I think the witness is. I do not think you are
called upon, as a matter of fact, to represent this witness before this
committee with the standing of counsel that usually is accorded in a
court proceeding to a litigant.
Mr. DAVIS. I am perfectly within my rights, Mr. Pecora. I am
perfectly within my rights, which I know quite as well as you know,
and I am submitting that this is not an orderly procedure before this
committee.
Mr. PECORA. I cannot understand what there is about it that does
not make it an orderly proceeding. I have asked the witness a question that seems to me is simple. If the witness cannot answer it
because he desires to refresh his recollection, it is for the witness to
indicate that by his answer, and if he does so indicate it, I for one will
be glad to see that he is given any reasonable opportunity to inform
himself so that he may answer the question. There is nothing complicated about this question. It does not call for any extended
transaction.
The CHAIRMAN. There is no question but what Mr. Davis has a
right to object and state his reasons; no question but what counsel
for the committee has a right to state the reasons for offering this
testimony. It is for the Chair to rule whether the testimony will be
admitted or not. I think under the circumstances—I do not know
where this is going to lead to, but I cannot see any harm in answering
the question or in not answering it. So you can proceed with it.
Mr. PECORA. If the witness cannot answer the question, if he
wants to inform himself with regard to the subject of the question,
I have no objection to his being given a reasonable opportunity to
do it.
The CHAIRMAN. He understands that.
Mr. LAMONT. I have no recollection of that, Mr. Pecora.
Mr. PECORA. Very well, sir. Then I would suggest, Mr. Chairman,
that I suspend the examination of this witness at this point, and
would suggest to the witness that he inform himself with regard to the
subject matter of the question that has been asked here so that he
may be prepared to answer it fully at another session.
(There was a short consultation among committee members and
Mr. Pecora.)
Mr. PECORA. And I might also say at this time or suggest to
Mr. William Ewing—is Mr. Ewing present?
(Mr. Ewing rose.)
STOCK EXCHANGE PRACTICES
561
Mr. PECORA. This is off the record: Between now and Monday
inform yourself, the same as the witness, concerning the subject of
these questions.
(At this point there was further consultation in undertones.)
The CHAIRMAN. Mr. Pecora, you might state what witnesses you
will need. We do not want to keep all witnesses who have been under
subpoena here if we have no further use for them.
Mr. PECORA. Yes, sir.
The CHAIRMAN. If you
can state what witnesses may be excused,
I think perhaps that would suit their convenience.
Mr. PECORA. I will be very happy to. I think we will require the
testimony of Mr. Harold Stanley, of the witness Thomas S. Lamont,
Mr. William Ewing, and of Mr. Anderson, if Mr. Anderson has a
knowledge of the Alleghany Corporation negotiations which would
qualify him to inform the committee about those negotiations, and
transactions. And Mr. Bartow for Johns-Manville.
The CHAIRMAN. May the others be excused?
Mr. PECORA. And Mr. Thomas W. Lamont. I think the others
may be excused.
(There was further conference in undertones.)
The CHAIRMAN. We have no objection to any picture people who
want to take pictures now. We are going to adjourn. It does not
interfere with our business. If they want to take pictures they can
do so.
The committee will stand adjourned until Monday at 10 o'clock.
(Accordingly, at 12:30 p.m., the subcommittee adjourned until
10 a.m., Monday, June 5, 1933.)
STOCK EXCHANGE PEACTICE8
MONDAY, JUNE 5, 1933
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY;
Washington, D.O.
The committee met pursuant to adjournment on Friday, June 2,
1933, at 11:30 a.m. (following an executive session) in the caucus
room of the Senate Office Building, Senator Duncan U. Fletcher
presiding.
Present: Senators Fletcher (chairman), Costigan, Adams, Reynolds,
Byrnes, Goldsborough, Townsend, Walcott, and Kean.
Present also: Ferdirand Pecora, counsel to the committee; Julius
Silver, David Saperstein, and James B. McDonough, Jr., associate
counsel to the committee; and Frank J. Meehan, chief statistician;
John W. Davis, counsel for J. P. Morgan & Co.; Randall J. LeBoeuf,
Jr., and Earle J. Machold, counsel for the United Corporation and
for George H. Howard, president of the United Corporation.
The CHAIRMAN. NOW, before the committee is called to order, will
the photographers take the pictures of the Van Sweringen brothers as
quickly as possible so we may get along?
(After a number of flashes had been taken.)
Senator BYRNES. Mr. Chairman, if the photographers are now
through I move that the committee adjourn. If there is any business for us I should like to go on.
The CHAIRMAN. The committee will come to order. Mr. O. P.
Van Sweringen will be sworn. Please hold up your right hand: 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. O. P. VAN SWERINGEN. I do.
TESTIMONY OF 0. P. VAN SWERINGEN, PRESIDENT OF THE
ALLEGHANY CORPORATION, CLEVELAND, OHIO
Mr. PECORA. Mr. Van Sweringen, will you give your full name and
residence to the committee?
Mr. VAN SWERINGEN. O. P. Van Sweringen, Cleveland, Ohio.
The CHAIRMAN. Speak a little louder, please.
Mr. PECORA. Give your full residence, please.
Mr. VAN SWERINGEN. Cleveland, Ohio, and you might add Shaker
Heights.
Mr. PECORA. What is your business, occupation, or profession?
Mr. VAN SWERINGEN. I am president of the Alleghany Corporation.
Mr. PECORA. Where is the office or place of business of the Alleghany Corporation?
563
584
STOCK EXCHANGE PRACTICES
Mr. VAN SWERINGEN. At Cleveland, Ohio.
Mr. PECORA. Will you give the address, please?
Mr. VAN SWERINGEN. Terminal Tower.
Mr. PECORA. When did you become president of that corporation?
Mr. VAN SWERINGEN. Just following its incorporation. Let me
inquire. [After conferring with some associate.] The early part of
February 1929.
Mr. PECORA. And have you been its president continuously since
that date?
Mr. VAN SWERINGEN. I have.
Mr. PECORA. What is the general nature of the business conducted
by the Alleghany Corporation?
Mr. VAN SWERINGEN. In answer to your subpena I should like to
present to the committee a brief outline of our activities as connected
with the scope of this inquiry, if I may, in which that will be answered.
Mr. PECORA. I have no objection, Mr. Chairman.
The CHAIRMAN. YOU may proceed to do that.
Mr. VAN SWERINGEN. TO do this, I go back some 17 or 18 years
when, in connection with an undertaking to provide rapid transit to
some portions of Cleveland, we wanted to use a part of the Nickel
Plate—that railroad passing through Cleveland from east to west in
an ideal location for our purpose.
We had heard that the Nickel Plate stock control might be acquired—that is, that the New York Central interests might be willing
to dispose of it. We found this was so, and in 1916 we bought it.
We didn't have money enough to pay for it all. We arranged to defer
a portion of the purchase price and we gathered with us some friends
who invested along with us to make the purchase.
Having obtained the stock control of the railroad, it was only
natural that we should try to develop and make the most of it, and
it wasn't long before we found ourselves in the midst of the general
railroad problem. In 1920, the Transportation Act was passed and
the Congress declared it as a national policy that the railroads should
be put together into a limited number of systems. The Nickel Plate,
of course, was a part of one of those systems.
Dr. William Z. Ripley had been engaged in that work by the
Government, and others had made studies as to what these limited
systems should embrace. For the eastern region, all of the studies,
and the Interstate Commerce Commission's tentative plan, provided
for a greater number of groupings than our studies led us to believe
as ideal, if we were to consider balancing the system in accord with
public interest. Our studies convinced us that following the policy
laid down in the Transportation Act, there should not be more than
four systems in the eastern region, and that the one including the
Nickel Plate should also include the Lake Erie & Western, the Toledo,
St. Louis & Western, the Erie, Pere Marquette, Chesapeake & Ohio,
Hocking Valley, Wheeling & Lake Erie, Chicago & Eastern Illinois,
Virginian,, the Bessemer & Lake Erie or the Buffalo, Rochester &
Pittsburgh, as well as either the Lackawanna or the Lehigh Valley,
with some smaller lines and terminal properties.
If such a system were to be created, the plans embracing the
Pennsylvania had to be changed, and those of the New York Central
and Baltimore & Ohio also, and this all meant that the Interstate
Commerce Commission would have to be asked to reconsider their
STOCK EXCHANGE PEACTICES
565
groupings, and that there would be much negotiation necessary between the different carriers who were major in the territory.
Along about 1922 an opportunity arose to buy the stock control of
the Toledo, St. Louis & Western (commonly called the Clover Leaf),
and also of the Lake Erie & Western. These we purchased and consolidated with the Nickel Plate.
While we were studying and developing, we found that the Huntington interests in the Chesapeake & Ohio were for sale. We talked
with J. P. Morgan & Co., whom we regarded, as does the world, as
wise counsellors in matters of finance. They felt that it wasn't the
time for us to make the expenditure. We were going to have to have
some money if we bought it—some that we didn't ourselves have.
We took their advice and-postponed our activities in that direction,
keeping in touch with the Huntingtons, however.
In the meantime, the Nickel Plate was prospering and was accumulating money under the able management of M. J. J. Bernet,
whom we had engaged as president when we first acquired the Nickel
Plate, and a year or so after our first discussions about Chesapeake
& Ohio, we reached the place where we again thought we should purchase the interest of the Huntingtons. This time the Morgan firm
agreed with us and we closed the deal, the Nickel Plate buying 70,000
of the Huntington shares, the total of which was 73,000. The price
on all of the shares was more than the market, so we asked the Nickel
Plate to pay only a part of this purchase price, and my brother and I,
with our immediate associates, undertook to and did pay the difference (a considerable sum), all in the price of the extra shares which
we, instead of the Nickel Plate, purchased.
The Huntington interest, while dominating the property in the
sense that it had been seating the directors, was far from a majority
ownership. We wanted more of the stock. We thought it was cheap
as it was then selling. At that time the property was struggling somewhat because of capital necessities, but we were sure it could be made
to earn a lot more money and perform a much better service.
When we went into the management of it, we conferred with
Morgan & Co. as to those improvements we felt should be made, and
through their aid financed a large purchase of new equipment, which,
with other betterments, would provide President Harahan with the
tools to accomplish the constructive job of which he was capable. We
were correct in our belief. It is the one railroad that has earned and
paid its full dividend throughout the period of this depression that
we hope is now ending.
We were on our way with both the Nickel Plate and the Chesapeake
& Ohio under good management, showing signs of increasing earnings.
We then turned our attention to an analysis of the Erie Railroad.
Our studies convinced us that we could make it behave a lot better
than it was doing. It was one of the properties we felt was a necessary
part of the system we were trying to build.
That grand old gentleman, Mr. George F. Baker, now deceased,
was the outstanding personality in the ownership of the property, so
we talked with him as to our welcome as a participant in its ownership.
He heartily concurred, and said that if we decided to move into it,
he would be glad to increase his own investment, which he later did
to a very considerable extent. When we finished our buying, we, with
him, had about half of the common stock and a considerable portion
of its preferred shares.
566
STOCK EXCHANGE PRACTICES
At nearly the same time, we decided the Chesapeake & Ohio
should have additional outlets for its coal shippers. Industrial
Michigan seemed to fill the bill, and so we then bought into the Pere
Marquette.
With that done, we had very large, and in some cases, majority
interests in the Nickel Plate, the Chesapeake & Ohio (including its
subsidiary Hocking Valley), the Erie, and the Pere Marquette, and
it was then that we went to the Interest Commerce Commission in
what is generally known as the first Nickel Plate unification case.
This was in the forepart of 1925. In March 1926, the petition was
denied, though not to the complete destruction of the grouping.
One of the observations made in the Commission's decision indicated that the Chesapeake & Ohio was more logical as the backbone
of the system. Accordingly, the first thing that it seemed advisable
to do was to physically connect that property, and its subsidiary, by
the building of about 60 miles of doubletrack between the Chesapeake
& Oirio at Waverly, Ohio, and the Hocking Valley at Columbus,
Ohio. This we built, and then obtained Interstate Commerce Commission approval to consolidate the Chesapeake & Ohio, Hocking
Valley and this connecting link, to the end that the Chesapeake &
Ohio then had a continuous line from tidewater at Newport News, on
Hampton Roads, to Toledo, on the Great Lakes.
What this meant to transportation is illustrated by the fact that
in 11 months after the permission was received from the Interstate
Commerce Commission, this doubletrack line, with all grade crossings
eliminated, was constructed, and we were putting over it as high as
2,400 cars in a day, loaded with coal for the Lakes.
With this accomplished, it was necessary, as we saw it, that if the
Chesapeake & Ohio was to become the nucleus of a great system into
which the Nickel Plate should go, its position to that road should be
changed so that the Nickel Plate would not be an owner in part of
its prospective parent. This meant that the Chesapeake & Ohio
shares, which the Nickel Plate owned, should be taken out of it.
You now have the reason for the creation of Chesapeake Corporation.
To divest the Chesapeake & Ohio shares from Nickel Plate and at
the same time keep them compacted with the other similar shares
that our interests held, the Chesapeake Corporation was formed and
the shares of it that then came to the Nickel Plate by exchange for its
Chesapeake & Ohio shares were thus distributed to the stockholders
of Nickel Plate in effectuation of this divorcement of ownership. We,
of course, put our other Chesapeake & Ohio shares into Chesapeake
Corporation upon the same basis.
In order to accomplish all of these things, it was also necessary to
provide a considerable sum of money to more permanent!}7 fund a
portion of the investment and thus avoid the necessity for assessing
each shareholder of the Nickel Plate, as well as ourselves, to whom
the disbursement was being made. Chesapeake Corporation went to
J. P. Morgan & Co. for this financial aid, and realized it by the sale
to them in the spring of 1927 of $48,000,000 of 20-year 5-percent
bonds.
Still carrying on our efforts to unify the railroads under our control,
the Chesapeake & Ohio at about this same time applied to the Interstate Commerce Commission for authority to acquire stock control
of the Erie and Pere Marquette. We did not this time ask to include
STOCK EXCHANGE PRACTICES
567
the Nickel Plate because it seemed to us that we would progress our
undertakings more certainly by proceeding a step at a time. The
Commission allowed the Chesapeake & Ohio to have the Pere Marquette control, but withheld approval as to the Erie.
It was not clear that there was a definite need for a vehicle in which
to carry, insofar as was consistent, and to mobilize in the financial
sense, our activities looking toward the ultimate goal of final upbuilding of the Chesapeake & Ohio, or so-called fourth system for the eastern
region, that all through these years of effort had been the subject of
negotiation and discussion with the various parties in interest.
All of these efforts and activities could more readily be treated with
by a proprietary interest than otherwise, and to that end also we had
been accumulating and developing the separate parts of that ultimate
whole, as we saw that fourth system to be.
To meet the need to which we have just referred, early in 1929 we
brought Alleghany Corporation into being, to take over shares held
by us and to furnish a corporate instrumentality to provide funds for
carrying on. For each net dollar value of our investment that we
put into this corporation, we took in settlement junior, or common
shares, only.
In the summer of 1932 the Interstate Commerce Commission
handed down a plan for rearrangement of the railroad groupings
coinciding with the four system idea, and approving as constituent
parts of one of those systems all of the railroads east of the Mississippi Eiver, in which Alleghany now is interested.
We are still expecting to get these railroads together, physically
and financially speaking, in spite of the many difficulties we have
encountered.
Included in the investments acquired by Alleghany at its outset
was the control of the Buffalo, Rochester, & Pittsburgh Railway
which we had gotten a short time before, but as a result of the efforts
to reconcile differences in the eastern grouping, it was later decreed
that the Baltimore & Ohio should have it and Alleghany therefore
disposed of it to them at cost, taking from them (likewise at cost)
their interest in the Wheeling & Lake Erie, and at about the same
time also taking from the New York Central an interest they owned
in Wheeling & Lake Erie. These, with the holdings of Nickel Plate
in the same property, amounted to a majority of the Wheeling &
Lake Erie, and later, when Nickel Plate was able to do so, all of
these shares went over to Nickel Plate from Alleghany, again at
cost.
As we were putting these Eastern railroad investments together in
Alleghany, we became more and more conscious that we had a lot of
railroad investment that, like the average of all railroads of the
eastern region, had coal as the major commodity carried. About
one half of the tonnage and nearly as many dollars of revenue to the
railroads of the eastern region came from coal.
We felt that it would be better if we could have a little more diversity in this respect in our railroad holdings, and, again, we had the
time and the forces to direct, and the financial strength, as we thought,
to acquire and hold, more than just the eastern combination.
We had been studying for a couple of years in a general way the
growth of the country and became convinced of the certainty of development of the Southwest, and concluded that if we were to have
568
STOCK EXCHANGE PEACTICES
any more railroad investment we would prefer it in that location*
A study of the best railroad investment there—the one which afforded
the greatest opportunity for future growth, development, and expansion, and possessing the diversity of basic traffic that we were looking for—led clearly to the Missouri Pacific system.
In the early part of 1929 we began to accumulate its shares, and
in the spring of 1930 finished with a majority of them. Soon after
we had accomplished these purchases, the country was pitched headlong into the unforeseen depression, the worst the world has ever
known. This wrought its accompanying havoc to investments, and
its violence to Alleghany Corporation.
Missouri Pacific is now in the first stages of reorganization, and
when that is done that system will be one of the best and most prosperous in this country. We knew when we bought control that the
railroad needed some capital readjustments, but we also knew that
it was headed for some definite betterments that were under way and
others that could be put under way to improve its operating ratio.
We had expected that the lifting of the topheavy portion of its structure would be accomplished by putting more of the investment into
equity, or stock, by voluntary process rather than as it is finally
haying to be done. We see nothing to change our minds as to the
ultimate desirability of that investment and ownership.
Instead of coal, in the Southwest we haul oil and its products,
agricultural products, fruits and vegetables. Of course, there is a
goodly portion of manufactured articles in both regions.
While we are on this subject of diversity, a peculiar quirk of the
present economic situation, contrasting with the belief in that heretofore considered measure of stability, has happened. Our road that
is doing the best in the East is the Chesapeake & Ohid, with coal
making up 80 percent of its tonnage. In the Southwest, the road of
the Missouri Pacific system that is now showing up to the best
advantage is the International-Great Northern, majoring, if you will,
in oil, so that the wisdom of the past dictating diversity has these
striking examples at this time to the contrary, notwithstanding which
we are still of the opinion that, in ordinary times, diversity will be of
major importance.
Right here we would like to stress that there was no thought of
consolidating the Chesapeake & Ohio system of the East with the
Missouri Pacific system in the West, nor was our conception that of
a transcontinental railroad system.
We hope it is proper, in conclusion, to leave one more thought
with you. Upon the completion of the Missouri Pacific control
purchase, we had reached the place where Alleghany in a general
way had acquired the properties it was seeking to obtain. There
were still improvements and refinements to be made, as well as the
rounding out of each of these systems pursuant to the Interstate
Commerce Commission's plans for them.
We have carried forward in the spirit of the act of Congress of
1920, which decreed that these and all other carriers should unite
into a limited number of systems.
Our present aim is toward making these properties satisfy in the
highest degree the public need and service, and at the same time
produce a just return for the investors who have cast their lot with
us,
STOCK EXCHANGE PRACTICES
569
Mr. Pecora, I have given you an outline of the purpose of the
Alleghany Corporation as we saw it, and the nature of the other,
the Chesapeake Corporation, as we saw it, step by step, in a chronological way, and their general operation in a way that I thought might
be helpful to you.
Mr. PECORA. Mr. Van Sweringen, the purpose of the organization
of the Chesapeake Corporation, and also of the Alleghany Corporation, was essentially to acquire control through the medium of stock
ownership of various railroad lines.
Mr. VAN SWERINGEN. That is right, or portions of them in some
instances.
Mr. PECORA. NOW, according to this prepared statement that
you have just read into the record, you invaded the railroad field, so
to speak, back in the year 1916. Is that correct?
Mr. VAN SWERINGEN. Our first undertakings were in 1916.
Mr. PECORA. That was in connection with your acquisition of the
Nickel Plate Koad.
Mr. VAN SWERINGEN. That is true.
Mr. PECORA. Who was associated with you in that acquisition?
Mr. VAN SWERINGEN. My brother, Mr. C. L. Bradley, Mr. J. E.
Nutt, and quite a few local people there had portions of that investment.
Mr. PECORA. Let me digress for just a moment to ask you: Who
prepared this statement which you have read into the record?
Mr. VAN SWERINGEN. I did.
Mr. PECORA. Did you confer with any other individuals who
collaborated with you in the preparation of this statement?
Mr. VAN SWERINGEN. Oh, yes; I submitted it to our people, in our
office, to have it checked as to its accuracy, and had several thoughts
expressed to me, not all of which I followed. Frankly, I kept it
pretty much as I had it.
Mr. PECORA. TO whom did you submit it?
Mr. VAN SWERINGEN. TO our local counsel, and to Mr. Bradley
and others in our office who might have to do with various portions
of it.
Mr. PECORA. Can you mention the names of such others?
Mr. VAN SWERINGEN. I do not have anyone outstanding in that
matter in mind. Just the general discussion throughout the office.
Mr. PECORA. DO you mean that you cannot recall the names of any
other individuals with whom you conferred in connection with this
statement and before this statement was given final form?
Mr. VAN SWERINGEN. Only in a very general way did I do that,
make any inquiries.
Mr. PECORA. Will you give the names of all other individuals with
whom you say you conferred, or whom you consulted?
Mr. VAN SWERINGEN. Whom did I name, Mr. Bradley and Mr.
Nutt?
Mr. PECORA. Mr. Bradle}^ and Mr. Nutt.
Mr. VAN SWERINGEN. Yes, I named Mr. Bradley and Mr. Nutt.
Mr. PECORA. Yes. Anybody else?
Mr. VAN SWERINGEN. Mr. Murphy, Mr. Bernet, I had him verify
it.
Mr. PECORA. I did not hear you.
Mr. VAN SWERINGEN. Mr. Bernet, and Mr. Ginn and Mr. Barrett.
570
STOCK EXCHANGE PEACTICES
Mr. PECORA. Did you confer with any individual outside of your
immediate organization or association?
Mr. VAN SWERINGEN. DO you mean in its preparation?
Mr. PECORA. In any way with respect to this statement and the
contents of it.
Mr. VAN SWERINGEN. NO one but—do you mean, Mr. Pecora, did
anyone direct or participate in that way in its preparation?
Mr. PECORA. Well, did you
Mr. VAN SWERINGEN (continuing). Or with the idea of submitting
it here now?
Mr. PECORA. NOW let me see if I understand you correctly. You
have given the committee the names of all individuals with whom
you conferred in connection with the preparation of this statement?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. NOW, did you discuss this statement before presenting it to this committee this morning with any other individual or
individuals, either connected with your association or office, or outside of your immediate entourage?
Mr. VAN SWERINGEN. If you mean to discuss it; no. I may have
mentioned that I was going to make a statement before the committee.
Mr. PECORA. Did you discuss it in any way, shape, or form with
anyone connected with the office of J. P. Morgan & Co.?
Mr. VAN SWERINGEN. NO, sir; I did not. I think I told—well,
I am quite sure that I did tell one of their partners that I thought
I would make a statement. But I had no participation on their part
in the preparation of this statement, nor in its presentation in any
way. I think that that, perhaps, answers what you have in mind.
Mr. PECORA. Did you make any attempt to. get the views or
opinions of anyone connected with J. P. Morgan & Co. with respect
to the contents of this statement?
Mr. VAN SWERINGEN. NO ; I did not.
Mr. PECORA. Did you submit a copy of this
Mr. VAN SWERINGEN. NO, sir. I outlined it.
Mr. PECORA. What was that?
Mr. VAN SWERINGEN. I outlined, several days
statement to them?
ago, in a casual way
to one of them, Mr. Anderson, that I might make the statement.
Mr. PECORA. TO whom?
Mr. VAN SWERINGEN. But this statement has been materially
changed since I did that.
Mr. PECORA. TO whom did you outline it?
Mr. VAN SWERINGEN. TO Mr. Anderson, just in a casual way.
Mr. PECORA. By telephone?
Mr. VAN SWERINGEN. Yes, over the telephone. Yes, just in that
way. Really, that has no significance in this statement at all.
Mr. PECORA. NOW, will you let the committee have a copy of that
statement so that it may physically be offered in evidence and spread
on the record?
Mr. VAN SWERINGEN. Yes, sir. You may have the one that I used.
And there is a copy here for each member of the committee if you
wish.
Mr. PECORA. I now offer this statement and want it marked in
evidence.
The CHAIRMAN. That may be done.
STOCK EXCHANGE PRACTICES
571
(The statement just read by the witness was marked " Committee
Exhibit No. 41, June 5, 1933 ", and is not again reproduced here.)
Mr. PECORA. Mr. Van Sweringen, you say in this statement, as
follows—but, before that, let me ask you: Do you find it necessary to
confer with anyone else about you in order to enable you to answer
these questions?
Mr. VAN SWERINGEN. Oh, I am liable to do that. You must bear
in mind that I have had only a subpena to be here. I have no knowledge of the subjects about which I am to talk, and, naturally, I
cannot carry in my head, nor would I undertake to do so, all the transactions of years and try to be accurate. You will have to grant me.
the right to get information.
Mr. PECORA. Whenever you deem it necessary, or find it necessary,
to confer with any of your associates or with any other individuals in
order to enable you to answer any question put to you, will you be good
enough to say so in order that the record will show that before
answering the question you conferred with any particular individual
or individuals? Will you do that?
Mr. VAN SWERINGEN. DO you mean at the time that I do it?
Mr. PECORA. Yes.
Mr. VAN SWERINGEN. There is no objection to that.
Mr. PECORA. YOU say you did not know what you
were going to
be questioned about when you were subpenaed to attend before this
committee.
Mr. VAN SWERINGEN. That is true.
Mr. PECORA. Well, didn't you anticipate that you were going to be
questioned about the very matters that you have embodied in this
statement that you have read into the record?
Mr. VAN SWERINGEN. I anticipated that that might be so. But I
had no knowledge that it was so.
Mr. PECORA. Well, I might say to your credit that you had the
vision of a seer in that respect. [Laughter.] Of course, you have
anticipated it correctly. Now, you say in this prepared statement of
yours as follows:
We had heard that the Nickel Plate stock control might be acquired; that is,
that the New York Central interests might be willing to dispose of it.
When you say "we" in that respect, to whom do you refer?
Mr. VAN SWERINGEN. In that instance I would have to have in
mind my brother and myself and probably our immediate associates.
Mr. PECORA. Well, who are your immediate associates?
Mr. VAN SWERINGEN. Why, the men I have just named here;
Mr. Bradley and Mr. Nutt, at that time.
Mr. PECORA. Well, having heard that, you and your associates
then proceeded to make the necessary arrangements to acquire the
stock control of the Nickel Plate Road, is that right?
Mr. VAN SWERINGEN.. That is right.
Mr. PECORA. And upon what terms did you actually acquire that
stock control of that road?
Mr. VAN SWERINGEN. I will have to ask the secretary to get the
record. [After conferring with associates.] I cannot tell you without,
referring to the record as to the number of shares that were purchased,,
but it was a majority interest, as it was then, two kinds of preferred
and common stock.
Mr. PECORA. Well, have you the record with you?
572
STOCK EXCHANGE PRACTICES
Mr. VAN SWERINGEN. NO. It is in the Manual. You will find it
there.
Mr. PECORA. Have you your record with you in that respect?
Mr. VAN SWERINGEN. I am not sure, but I can give you the considerations.
Mr. PECORA. Well, you can use any record that you have, Mr. Van
Sweringen, to enable you to answer these questions.
Mr. VAN SWERINGEN. NOW, your question is: "What did we buy
and what did we pay for it, and how did we arrange the payment,"
is that it?
Mr. PECORA. Yes, sir.
Mr. VAN SWERINGEN.
Our purchases comprised 25,032 shares of
the then first preferred stock, 62,750 shares of the second preferred
stock, and 62,400 shares of the common stock. The purchase price
was $8,500,000.
Mr. PECORA. NOW, for that $8,500,000 you and your associates
were enabled to acquire and did acquire 25,032 first preferred shares,
62,750 second preferred shares, and 62,400 of the common stock of
the Nickel Plate Road?
Mr. VAN SWERINGEN. If those are the figures that I just read to
you.
Mr. PECORA. Yes. Now, from whom did you make that purchase?
Mr. VAN SWERINGEN. New York Central Railroad Co.
Mr. PECORA. HOWT was the consideration of $8,500,000- agreed to
be paid?
Mr. VAN SWERINGEN (after conferring with an associate). The
initial payment I am told was $2,000,000. And the deferred payments $6,500,000.
Mr. PECORA. Did you give notes for those deferred payments?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. In what amounts and what maturities?
Mr. VAN SWERINGEN (after conferring with associates).
I am told
that there were 10 notes of $650,000 each.
Mr. PECORA. Payable when?
Mr. VAN SWERINGEN. Annually. Over a period of 10 years.
Mr. PECORA. NOW, under the terms of this purchase of stock by
you from the New York Central, you were required to make a cash
payment of $2,000,000?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. On account of this total purchase price of 8K million
dollars?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. And you made that cash payment, I presume?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. Did you borrow the funds with which to make
that
initial cash payment?
Mr. VAN SWERINGEN (after conferring with associates). That
money was provided by the formation at that time of the Nickel
Plate Securities Corporation, and subscribed to in preferred and common stock of that latter corporation. [After further conference with
associates.] Now, the amounts of that I haven't here.
Mr. PECORA. AS a matter of fact, didn't you and your associates
obtain a loan of $2,100,000 from the Guardian Savings & Trust Co.
of Cleveland, in order to enable you to make that initial cash payment?
STOCK EXCHANGE PBACTICES
573
Mr. VAN SWERINGEN (after conferring with associates). I am told
here that what happened at that time was that we made an interim
loan—O. P. and M. J. made an interim loan while that corporation
was being organized, and then taken that way.
Mr. PECORA. YOU got that loan from the Guardian Savings &
Trust Co. of Cleveland, Ohio?
Mr. VAN SWERINGEN. IS that right? [addressing and conferring
with associates]. I do not like to give you this in this way. I prefer
not to. I will supply you the record if you wish, but you are getting
me into a place here where I do not see the supporting data for it,
and I am afraid to give testimony from recollection.
Mr. PECORA. Well, if you have any records to refresh your recollection you are at liberty to use them.
Mr. VAN SWERINGEN (after conferring with associates). I am told
that when you subpenaed pur records that you did not include in
that the Nickel Plate Securities Corporation. I would be very glad
to provide them for you.
Mr. PECORA. Mr. Van Sweringen, are you enabled to tell this committee how you and your associates got the $2,000,000 with which
you made the initial payment to the ,New York Central interests in
connection with this stock purchase or control of the Nickel Plate?
Mr. VAN SWERINGEN. I can do that in a general way.
Mr. PECORA. Well do that the best way that you can, will you,
please?
Mr. VAN SWERINGEN. But if you want the detail record and if you
are going to ask for that I would rather put it in for you, and take the
time for that.
Mr. PECORA. Have you the detail record with you?
Mr. VAN SWERINGEN. NO, sir.
Mr. PECORA. IS it here in the city of Washington?
Mr. VAN SWERINGEN. NO, sir; it is not.
Mr. PECORA. Well now, apparently you anticipated
that you were
going to be questioned before this committee about your control of
the Nickel Plate Railroad, because you have adverted to it in your
prepared statement. Why didn't you bring your records along then
to support any testimony you might give with regard to these
transactions?
Mr. VAN SWERINGEN. It depends upon the degree to which you
want to go for detail.
Mr. PECORA. Well, have you forgotten the details of this first
important transaction, railroad transaction, of yours?
Mr. VAN SWERINGEN. Forgotten the details—that is just what I
am afraid I may have done. I can give you general circumstances,
if that is what you want.
Mr. PECORA. Well now, perhaps I can refresh your recollection,
Mr. Van Sweringen.
Mr. VAN SWERINGEN. All right.
Mr. PECORA. DO you recall that you and your associates completed
the negotiations for the purchase from the New York Central Railroad of this control stock of the Nickel Plate Road on July 5, 1916?
Mr. VAN SWERINGEN. I would not have recalled that date; no.
Mr. PECORA. Well, does the mention of that date refresh your
recollection?
Mr. VAN SWERINGEN. NO, it does not.
574
STOCK EXCHANGE PRACTICES
Mr. PECORA. DO you think you could find out the date by conference with your associates gathered about you?
Mr. VAN SWERINGEN. If you have any record there it is probably
correct. [After conferring with associates.] What you have there
I am told was taken from our records, and that is better than my
memory.
Mr. PECORA. I have here a report titled "Regulation of Stock
Ownership in Railroads". This being part 2 thereof, submitted by
Mr. Parker, of the House of Representatives, pursuant to House
Resolution No. 114 on or about February 20, 1931. You have seen
that report, have you not, Mr. Van Sweringen?
Mr. VAN SWERINGEN. IS that the Splawn report?
Mr. PECORA. Yes.
Mr. VAN SWERINGEN. Yes, sir.
The CHAIRMAN. The question
was whether you borrowed this
money from the Guardian Trust Co. of Cleveland.
Mr. VAN SWERINGEN. Mr. Chairman, I think I answered that.
Mr. PECORA. Well, what is the answer?
Mr. VAN SWERINGEN. May I have it read, please?
•Mr. PECORA. Well, can you not give it over again just as quickly
as having the stenographer reail it?
Mr. VAN SWERINGEN. I do not think I can.
The CHAIRMAN. YOU said you got an interim loan, but you never
said from whom you got it.
Mr. VAN SWERINGEN. Was that what you wanted?
The CHAIRMAN. Yes.
Mr. VAN SWERINGEN. Guardian Savings & Trust Co.
The CHAIRMAN. That was the question.
Mr. PECORA. Let me read from this Splawn report:
(One of Mr. Van Sweringen 7s associates asked for the page number.)
Mr. PECORA. Page 839. If you have a copy of that report suppose
you give it to the witness so that he may follow. That will save time
and it will elucidate the record. Have you got the copy of the report
to which I am alluding?
Mr. VAN SWERINGEN. I have. Do you mean that which says:
"On July 3, 1916-7—"
Mr. PECORA. Will you kindly turn to page 839 of it?
Mr. VAN SWERINGEN. I am at that page.
Mr. PECORA. NOW, follow me as I read from that page:
On July 5, 1916, O. P. and M. J. Van Sweringen completed negotiations for the
purchase from the New York Central Railroad Co. of the following shares of
outstanding capital stock of the New York, Chicago & St. Louis Railroad Co.
Then follows an enumeration of the shares which you have
already referred to. Now, that is a correct statement, is it, Mr, Van
Sweringen?
Mr. VAN SWERINGEN (after conferring with associates). I am
told it was taken from our records.
Mr. PECORA. Well, if it was taken from your records would you
say it was a correct statement?
Mr. VAN SWERINGEN. I would.
Mr. PECORA. All right. Reading again from that page of this
report, as follows:
The consideration of the purchase was $8,500,000, of which $2,000,000 was
cash and the balance, $6,500,000, was covered by 10 promissory notes in the
amount of $650,000 each dated July 5, 1916, at Cleveland, Ohio, and signed by
STOCK EXCHANGE PEACTICES
575
Oris P. Van Sweringen and Mantis J. Van Sweringen. The first note was
payable on or before 5 years after date and the others at consecutive intervals of
1 year thereafter.
Now, does that refresh your recollection that those were the terms
of this purchase transaction?
Mr. VAN SWERINGEN. I had just given you that from my recollection and it coincides with this.
Mr. PECORA. All right. Now let me read further from that page:
Under the terms of an agreement of pledge dated July 5, 1916, between 0. P.
and M. J. Van Sweringen and the New York Central Railroad Co. all of the
stock referred to was pledged with the Guaranty Trust Co. of New York as
collateral security for the payment of the notes.
Do you recall that that was done?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. Did you answer?
Mr. VAN SWERINGEN. I beg your
pardon. I guess I did not say
it aloud. I recall that the pledge was made to the New York Central;
yes, sir.
Mr. PECORA. On the date specified in this report?
Mr. VAN SWERINGEN. I have no doubt that is the correct date.
Mr. PECORA. Yes. Now, let me read further from this report at
the same page, page 839:
On July 3, 1916, O. P. and M. J. Van Sweringen made the following application to the Guardian Savings & Trust Co., of Cleveland, Ohio, for a cash advance
of $2,100,000.
"The undersigned hereby apply for an advance of $2,100,000, payable on or
before 6 months from date, and bearing interest at the rate of 6 percent per
annum, payable quarterly.
" Should you grant this application, please hand us New York drafts payable
to our order for $2,000,000 and place the remaining $100,000 in a special account
to our credit, subject to withdrawal on approval of J. A. House and W. S.
Hay den."
Do you recall that that was done also, Mr. Van Sweringen?
Mr. VAN SWERINGEN. TO be perfectly frank with you, I had
forgotten that part of it.
Mr. PECORA. DO you now recall it after haying had your recollection refreshed, if it serves to refresh it by reading from this report?
Mr. VAN SWERINGEN. N O ; I do not. But I have no doubt that
we did it at that time. That was 16 or 17 years ago, as you recognize.
Mr. PECORA. Yes. Now, you obtained that loan did you riot?
You and your brother obtained that loan of $2,100,000 from the
Guardian Savings & Trust Co. of Cleveland 2 days before you concluded the negotiations with the New York Central Railroad for the
purchase of its stock interest in the Nickel Plate road? Did you not?
Mr. VAN SWERINGEN. Seemingly so; yes, sir.
Mr. PECORA. Yes. And $2,000,000 of that $2,100,000 was actually
used by you and your associates to make the cash payment in that
transaction with the New York Central Railroad for this stock interest
of the Nickel Plate Road? Did you?
Mr. VAN SWERINGEN That seems to be so.
Mr. PECORA. And you gave notes for the balance of the agreedupon purchase price payable over a period of as long as 10 years?
Mr. VAN SWERINGEN. That also seems true.
Mr. PECORA. Yes. And you pledged as collateral for those notes
and also as collateral for this loan of $2,100,000 the stock that you
175541—33—PT. 2
18
576
STOCK EXCHANGE PKACTICES
were purchasing and that you did purchase from the New York
Central lines, did you not?
Mr. VAN SWERINGEN. Seemingly.
Mr. PECORA. What is that?
Mr. VAN SWERINGEN. Read that again, please?
(Thereupon the last question was read by the reporter, as above
recorded.)
Mr. PECORA. That is to say, you either pledged that stock or your
equity in that stock?
Mr. VAN SWERINGEN (after conferring with associates). Mr. Pecora,
do you mean our interest in that stock as distinguished from the stock
itself?
Mr. PECORA. I said your interest in the stock, your equity in the
stock.
Mr. VAN SWERINGEN. Yes; we did.
Mr. PECORA. SO that in order to enable
you to conclude this transaction with the New York Central you borrowed every dollar of the
money that you had to pay?
Mr. VAN SWERINGEN. For the moment; yes.
Mr. PECORA. For the moment. You borrowed it for 6 months?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. NOW was that
loan repaid within the 6-month
period?
Mr. VAN SWERINGEN. I do not have the data here, but the impression here is that it was.
Mr. PECORA. Your recollection is that it was?
Mr. VAN SWERINGEN.
Yes.
Mr. PECORA. NOW from what sources did you obtain the funds
with which to repay that loan?
Mr. VAN SWERINGEN. By the sale of stock, preferred and common,
of the Nickel Plate Securities Corporation.
Mr. PECORA. Well, did you for that purpose cause this Nickel
Plate Securities Corporation to be organized?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. It was organized as a holding company, was it?
Mr. VAN SWERINGEN. Well, it did hold the Nickel Plate purchase.
I cannot recall all its charter purposes.
Mr. PECORA. YOU cannot recall all the what?
Mr. VAN SWERINGEN. I cannot recall all its charter purposes, but
it did hold the Nickel Plate purchase.
Mr. PECORA. Yes. Now when was the Nickel Plate Securities
Corporation organized?
Mr. VAN SWERINGEN (after conferring with associates). Will the
year suffice? During 1916.
Mr. PECORA. The month and the year would be preferable.
Mr. VAN SWERINGEN. Well, I cannot tell you the month, but
seemingly 1916.
Mr. PECORA. Well, now perhaps if you refer to page 840 of the
report that has already been referred to, you will find something
there that will refresh your recollection. Let me read therefrom as
follows:
At the first meeting of the board of directors of Nickel Plate Securities Corporation held in Cleveland, Ohio, on December 26, 1916, the following proposal of
O. P. and M. J. Van Sweringen was accepted by the corporation.
STOCK EXCHANGE PEACTICES
577
Now from the fact that the first meeting of the board of directors
of the Nickel Plate Securities Corporation was held on December
26, 1916, would you say that the corporation itself was organized
some time in December 1916?
Mr. VAN SWERINGEN. I cannot say as to that, but it was some
time in 1916.
Mr. PECORA. NOW this Nickel Plate Securities Corporation
issued certain capital shares, did it not?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. And sold them to the public?
Mr. VAN SWERINGEN. Not to the public——
Mr. PECORA. Well, to whom?
Mr. VAN SWERINGEN (continuing). In the general
sense of that
expression. We had some participants with us in that purchase.
Mr. PECORA. NOW, what assets did the Nickel Plate Securities
Corporation own at the time its stock was issued and sold either to
participants, as you call them, or to the public?
Mr. VAN SWERINGEN. Of course it had the thing that it bought,
subject to the balance that it agreed to pay, which was the Nickel
Plate, and my recollection is that it had some other assets—and I
think they are set out here—well, atxthe time the stock was sold.
(After conferring with associates.) There were some other holdings
that it had that seemingly were put in at the time the stock was
sold, and are set out—I cannot recall what was put in there. I will
supply you with that.
Mr. PECORA. Well now, Mr. Van Sweringen, won't you be good
enough to refresh your recollection by reading from pages 840 and 841
of this report the proposal which you and your brother made to the
Nickel Plate Securities Corporation at the first meeting of its board
of directors on December 26, 1916?
Mr. VAN SWERINGEN. DO you want this all read into the record?
Mr. PECORA. NO. Read it to yourself and see if that serves to
refresh your recollection as to what the capital assets w^ere of the
Nickel Plate Securities Corporation at the time it issued and sold its
stock.
Mr. VAN SWERINGEN (after reading to himself). Paragraph 3 sets
that out, doesn't it?
Mr. PECORA. Well, now, go ahead and tell us what the assets were.
Mr. VAN SWERINGEN. Paragraph 3 reads this way:
3. To transfer or cause to have transferred to you all stock of the Cleveland
Terminal Co. issued or to be issued by said Terminal Co. in the acquiring by it
of the common stock or property of the Cleveland & Youngstown Railroad Co.,
the Terminal Building Co., and the Terminal Hotels Co., and also the rights of
the Terminal Properties Co. to acquire the lands of the Glenville Syndicate.
Those seemingly went in.
Mr. PECORA. Well, were other assets turned in to the Nickel Plate
Securities Corporation at that time by you and your associates in
return for the capital stock of the Securities Corporation?
Mr. VAN SWERINGEN. What were the first words? « Were there
other assets, do you mean, than these? Than these that I have just
referred to?
Mr. PECORA. Yes, sir.
Mr. VAN SWERINGEN.
Mr. PECORA. Yes.
And the Nickel Plate purchase?
578
STOCK EXCHANGE PEACTICES
Mr. VAN SWERINGEN. Not that I recall.
Mr. PECORA. Well, did you not agree to assign and transfer to the
Nickel Plate Securities Corporation in return for the issuance to you
of its capital stock all your right, title, and interest in and to the agreement which you had entered into with the New York Central Railroad, this agreement of July 5, 1916, under the terms of which you
bought the stock control of the Nickel Plate Railroad from the New
York Central?
Mr. VAN SWERINGEN. My statement included that.
Mr. PECORA. Oh. How much did the Nickel Plate Securities
Corporation derive as a result of this proposal which you and your
brother made to it and which was acted upon at its meeting of
December 26, 1916?
Mr. VAN SWERINGEN. Your question, I do not believe, is complete. Is it?
Mr. PECORA. Probably not. Will you be good enough to read it,
Mr. Reporter?
(Thereupon the last question was read by the Reporter, as above
recorded.)
Mr. VAN SWERINGEN. That is not understandable to me. I do
not quite get the point that you have in mind.
Mr. PECORA. What did the Nickel Plate Securities Corporation
get in return for the stock which it issued to you and your brother in
pursuance of this proposal that you submitted to its board of directors
on December 26, 1916?
Mr. VAN SWERINGEN. It issued the stock for these assets that I
just described.
Mr. PECORA. And what stock did it issue to you and your brother
for those assets or securities?
Mr. VAN SWERINGEN. It issued generally. (After conferring with
associates.) It issued all of them.
Mr. PECORA. And what stock did it issue to you and your brother?
Mr. VAN SWERINGEN. I cannot give you that accurately. I can
give it to you in general terms, if that will give you the
Mr. PECORA (interposing). Now, look at page 840 of the printed
report, will you, bottom of the page?
Mr. VAN SWERINGEN. Where? [Perusing document.]
Mr. PECORA. The bottom.
(Mr. Van Sweringen conferred with associates and perused document.)
Mr. VAN SWERINGEN. Yes. All of the common stock was issued
at that time for those assets and the
Mr. PECORA (interposing). Now, that common stock had a par
value of $12,500,000, didn't it?
Mr. VAN SWERINGEN. I think that was no par, wasn't it [addressing
an associate]? (After conferring with associates.) Yes; it was.
Mr. PECORA. And in addition to issuing you all of its common stock
at a par value of $12,500,000, the Nickel Plate Securities Corporation
also delivered to you certificates for certain preferred stock issue?
Mr. VAN SWERINGEN. That is right
Mr. PECORA. IS that right?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. TO what amount?
Mr. VAN SWERINGEN. TWO million
and some-odd dollars.
STOCK EXCHANGE PEACTICES
579
Mr. PECORA. $2,075,000 par value, wasn't it?
Mr. VAN, SWERINGEN. There is a figure here of 2,074,785. That
cannot be right. Somewhere near 2,000,000; yes, sir.
Mr. PECORA. All right.
The CHAIRMAN. HOW many shares of each? How many shares of
common stock, how many of preferred?
Mr. VAN SWERINGEN. I don't know the par of those shares.
Mr. PECORA. Well now, the common stock that was issued to you
consisted of 250,000 shares, didn't it?
Mr. VAN SWERINGEN. Well, that is the point. I cannot recall
whether it was $50 par or $100 par.
Mr. PECORA. Well, suppose you refresh you recollection by reading
from page 841 of that report.
(Mr. Van Sweringen perused document.)
Mr. PECORA. See the second paragraph, Mr. Van Sweringen, the
reference to 250,000 shares common stock?
Mr. VAN SWERINGEN. Yes. Yes, sir; 250,000 shares.
Mr. PECORA. That would give it a par value of $50, wouldn't it?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA, NOW, in addition
to issuing all of its common stock
of a par value of 12 % million dollars, this securities corporation also
issued to you preferred stock of a par value of $2,075,000 and further
agreed to assume the indebtedness or obligation represented by your
note to the Guardian Savings & Trust Co. of Cleveland for this loan
of $2,100,000, did it not?
Mr. VAN SWERINGEN (conferring with associates). I think that is
about right. (Conferring further with associates.)
Mr. PECORA. NOW, Mr. Van Sweringen
Mr. VAN SWERINGEN (after conferring with associates). Your question was, Did we get the common stock and two million and odd of
preferred stock and the Nickel Plate Securities assume the Guardian
loan of
Mr. PECORA. Yes, sir.
Mr. VAN SWERINGEN. TWO million and odd
Mr. PECORA. Yes, sir.
Mr. VAN SWERINGEN. That is not right.
dollars?
(Mr. Van Sweringen conferred with associates.)
Mr. PECORA. Well now, Mr. Van Sweringen, let me suggestMr. VAN SWERINGEN (interposing). You are reading here from a
record that does not refer to the preferred. The preferred was used
for the payment of this two million and odd dollars. That is the
distinction that is troubling me. In other words, they did not assume
the $2,000,000 and issue the preferred to us also, except as one canceled the other. I cannot recall the detail of just how that was
done, but with the going out of the preferred the debt of two million, of course, went out also.
Mr. PECORA. Well, the preferred was turned over to you to sell to
the public, wasn't it?
Mr. VAN SWERINGEN. NO.
Mr. PECORA. YOU undertook to secure subscriptions for the purchase of that preferred stock, didn't you?
Mr. VAN SWERINGEN. And pay the $2,000,000 with it.
Mr. PECORA. All right. I am asking you specifically, in your agreement with the Nickel Plate Securities Corporation which was approved
580
STOCK EXCHANGE PRACTICES
by the board of directors of that corporation on December 26, 1916,
you agreed to turn over to that corporation your equity in the Nickel
Plate Road stock which you had purchased in July 1916 from the
New York Central Railroad Co. for $8,500,000, did you not?
Mr. VAN SWERINGEN. The equity; yes, sir.
Mr. PECORA. And you also agreed to turn over to the Securities
Corporation certain stock of the Cleveland Terminal Building issued
or to be issued by Cleveland Terminal Building Co., did you not?
Mr. VAN SWERINGEN. NO. No; it was not the Cleveland Terminal
Building Co.; it was the Cleveland Terminal Co.
Mr. PECORA. Cleveland Terminal Co.; all right, sir. Now, in
return for those securities or your equity in those securities, the
Nickel Plate Securities Corporation transferred to you all of its
common stock, having a par value of $12,500,000, did it not?
Mr. VAN SWERINGEN. That part is correct.
Mr. PECORA. Yes. And did not the Nickel Plate Securities
Corporation as part of the same agreement or transaction also assume
to pay and discharge this loan which you and your brother had obtained on July 3, 1916, from the Guardian Savings & Trust Co. in
the sum of $2,100,000?
Mr. VAN SWERINGEN. NOW, that is the point and the distinction
that I was making with you before. We did not get the preferred
and not pay the two million. If you will get that side of it, then we
are eye to eye.
Mr. PECORA. Well, the Securities Corporation agreed to pay and
discharge that loan which you and your brother had obtained from
the Guardian Savings & Trust Co., did it not? Look at the top of
page 841, please, Mr. Van Sweringen. I think that will make it clear.
Mr. VAN SWERINGEN. But I go back to your first statement, which
undertook to have us say that we had also been given the preferred
stock.
Mr. PECORA. NO; I corrected that.
Mr. VAN SWERINGEN. All right.
Mr. PECORA. I said you undertook to obtain subscriptions.
Mr. VAN SWERINGEN. Then we are under the same impression.
Mr. PECORA. NO, I said later on you undertook to obtain subscriptions for that preferred stock.
Mr. VAN SWERINGEN. Yes. That is all the difference between us.
Mr. PECORA. All right; that difference is passed now.
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. All right, then. Are
we now agreed that as part of
this exchange of securities which you and your brother made with
this Nickel Plate Securities Corporation in December 1916 the Securities Corporation assumed to pay and discharge the loan which you
and your brother had obtained in July 1916 from the Guardian
Savings & Trust Co. of Cleveland?
Mr. VAN SWERINGEN. With the proceeds of the preferred stock.
If you put it that way, the result is the same. I don't know as to the
mechanics of it.
Mr. PECORA. All right; let's have it that way—although you do
not find anything in the agreement itself, do you, that would indicate
that that loan is to be paid out of the proceeds of the sale of preferred stock?
Mr. VAN SWERINGEN. I have not read it carefully in that sense.
STOCK EXCHANGE PKACTICES
581
Mr. PECORA. Suppose you do.
Mr. VAN SWERINGEN (after conferring with associates and perusing
document). I expect so. This 2-million one was assumed.
Mr. PECORA. Yes, sir.
Mr. VAN SWERINGEN. But
the preferred offset it. You understand
that.
Mr. PECORA. It was assumed, but it was expected that the company would get the funds with which to repay that loan from the sale
of its preferred stock?
Mr. VAN SWERINGEN. Right.
Mr. PECORA. And you undertook to get the subscriptions for the
purchase of that preferred stock; is that right?
Mr. VAN SWERINGEN. Yes. I take it that that was the situation.
Mr. PECORA. NOW, as part and parcel of this same agreement, did
not the Nickel Plate Securities Corporation also assume and agree to
pay all the liabilities and obligations which you and your brother had
contracted under date of July 5, 1916, in connection with your transaction with the New York Central lines and which involved those 10
notes for an aggregate of $6,500,000?
Mr. VAN SWERINGEN. They did and should.
Mr. PECORA. They did and should?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. Very well, sir. So we
now have the transaction up to
the end of December 1916 somewhat in this fashion: That on July the
5th, 1916, you and your brother saw an opportunity to acquire stock
control of the Nickel Plate Railroad from the New York Central
Railroad Co., which owned enough shares to effectuate that stock
control; is that correct?
Mr. VAN SWERINGEN. Right.
Mr. PECORA. And you agreed to buy that stock and did buy it for
a total consideration of 8% million dollars, of which $2,000,000 was
paid in cash by you and the balance was represented by 10 notes each
for $650,000 payable at intervals over a period of 10 years?
Mr. VAN SWERINGEN. That is right.
Mr. PECORA. IS that right? And to enable you to finance that
transaction and to make the initial $2,000,000 payment thereunder
you and your brother on July 3, 1916, 2 days before you concluded
your negotiation with the New York Central Railroad Co., borrowed
$2,100,000 from the Guardian Savings & Trust Co., of Cleveland; is
that right?
Mr. VAN SWERINGEN. That seems to be correct.
Mr. PECORA. Then, in December 1916, you and your brother caused
this holding company called the Nickel Plate Securities Corporation
to be organized, didn't you?
Mr. VAN SWERINGEN. Yes, sir. The Nickel Plate Securities to be
organized.
Mr. PECORA. And you operated with that holding company, if you
please, under the terms of which the holding company assumed the
obligation of your loan from the Guardian Savings & Trust Co. and
also assumed the obligation to pay your 10 notes to the New York
Central Railroad Co., did it not?
Mr. VAN SWERINGEN. Those are the same questions I have just
answered.
582
STOCK EXCHANGE PRACTICES
Mr. PECORA. Yes; I am summarizing it. And also issued to you
and your brother all of its common stock, having a par value of 12 K
million dollars. Correct?
Mr. VAN SWERINGEN. I think that is right.
Mr. PECORA. And it was also arranged in connection with the set-up
of this Nickel Plate Securities Corporation that it was to issue and
sell to the public preferred stock having a par value of $2,075,000?
Mr. VAN SWERINGEN. NO. There I will have to differ with you a
little bit.
Mr. PECORA. All right.
Mr. VAN SWERINGEN. That was not a public offering.
Mr. PECORA. Well, then, it was to sell that preferred stock to
somebody?
Mr. VAN SWERINGEN. Yes; to sell it. If you strike the words "to
the public " you will have it.
Mr. PECORA. I will rephrase it. It was also arranged for that
holding company you caused to be organized to issue its preferred
stock to an aggregate par value of $2,075,000 to various persons for
cash?
Mr. VAN SWERINGEN. All right.
Mr. PECORA. IS that right?
Mr. VAN SWERINGEN.
Yes.
Mr. PECORA. And you and your brother undertook to get subscriptions to that preferred stock?
Mr. VAN SWERINGEN. Yes,
sir.
Mr. PECORA. Yes, sir. And it was intended and arranged that
from the sale of that preferred stock the holding company would
obtain the funds with which to pay back the $2,100,000 loan that
you had obtained from the Guardian Savings & Trust Co. of Cleveland in the preceding July?
(Mr. Van Sweringen nodded his head.)
Mr. PECORA. IS that right?
Mr. VAN SWERINGEN. That is the way it seems to be.
Mr. PECORA. NOW, the effect of that, among other things, was to
transfer to the stockholders of this holding company called the Nickel
Plate Securities Corporation the indebtedness which you and your
brother had contracted, aggregating $8,500,000, to enable you to buy
in the first instance the stock control of the Nickel Plate Railroad
from the New York Central Co.; is that right?
Mr. VAN SWERINGEN. That is right.
Mr. PECORA. IS that correct?
The CHAIRMAN. YOU will have to speak out, Mr. Van Sweringen.
The reporter cannot get the meaning when you shake your head.
Mr. VAN SWERINGEN. I said that is correct. Pardon me, Mr.
Chairman.
Mr. PECORA. That is correct. And that left you in this position,
that you and your brother acquired thereby all of the common stock
of this holding company, and it was the common stock only which had
voting power; is that correct?
Mr. VAN SWERINGEN. I think it is corect.
Mr. PECORA. The preferred stock that was
Mr. VAN SWERINGEN (interposing). But let me check it to make
certain.
Mr. PECORA. GO ahead.
STOCK EXCHANGE PRACTICES
583
Mr. VAN SWERINGEN (after conferring with associates). You are
distinguishing as between the voting preferred and common now?
Mr. PECORA. Whkt is that?
Mr. VAN SWERINGEN. May I ask?
Mr. PECORA. What is that?
Mr. VAN SWERINGEN. IS your point that the preferred stock did
not have a vote? Is that your
Mr. PECORA. That is what I am asking you to tell us, whether or
not
Mr. VAN SWERINGEN. I will have to check it to find out. I don't
recall. [After conferring with associates and examining document.]
The preferred had a limited vote. It did not vote except under
certain conditions.
Mr. PECORA. Have those conditions ever arisen?
Mr. VAN SWERINGEN. NO.
Mr. PECORA. N O ; but the common stock had an unqualified voting
power, voting right?
Mr. VAN SWERINGEN, The common did.
Mr. PECORA. Yes.
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. NOW, have we
now, Mr. Van Sweringen, so far as we
have proceeded, given the detail steps of the series of transactions that
marked your entry into the railroad field?
Mr. VAN SWERINGEN. I think it is in there three times, Mr.
Pecora.
Mr. PECORA. But I want to make sure that we have it all there.
Mr. VAN SWERINGEN. Except for one angle of it. Some of the
common stock, of course, was given by O. P. and M. J. with the preferred when we sold.
Mr. PECORA. Well, that was a matter of disposition on the part of
you and your brother, wasn't it? That was in the exercise of your
own discretion, but not in pursuance of any agreement that you had
with the Nickel Plate Securities Corporation?
Mr. VAN SWERINGEN. That may be, but the result was the same.
Mr. PECORA. But you still remained in control of the Securities
Corporation, which in turn had the stock which represented the
control of the Nickel Plate Railroad?
Mr. VAN SWERINGEN. Oh, yes.
Mr. PECORA. Yes.
Mr. VAN SWERINGEN. Oh, yes.
Just one minute. [Conferring
with associates.] You, of course understand that there were other
assets that went in there toward that capitalization.
Mr. PECORA. That is in the record.
Mr. VAN SWERINGEN. Yes,
sir.
Mr. PECORA. YOU were careful to put it in, and it is in there.
The CHAIRMAN. The preferred stock did not vote the directors?
Mr. VAN SWERINGEN. Not for directors, except in the instance of
default. I believe there is a provision in there that on the failure
to pay dividends. I was looking through that to see what that was.
My recollection is it elected a majority of the board in that instance,
if it did not pay the dividends.
The CHAIRMAN. Did all the common stock have voting power?
Mr. VAN SWERINGEN. Yes,
sir.
584
STOCK EXCHANGE PRACTICES
The CHAIRMAN. The committee will now take a recess until 2
o'clock.
(Accordingly, at 12:53 p.m., a recess was taken until 2 p.m. of the
same day.)
AFTERNOON SESSION
The hearing was resumed at the expiration of the recess.
The CHAIRMAN. The committee will come to order.
TESTIMONY OF 0. P. VAN SWERINGEN—Resumed
Mr. PECORA. Mr. Van Sweringen, in your prepared statement
which you read into the record this morning you stated as follows:
We had heard that the Nickel Plate stock control might be acquired.
What proportion of the total outstanding stock of the Nickel Plate
road did the New York Central Railroad Co. have which you agreed
to buy from it which represented your opinion of stock control of the
Nickel Plate Railroad?
Mr. VAN SWERINGEN. What percent?
Mr. PECORA. Yes,
sir.
Mr. VAN SWERINGEN. A little over half of it. What I am talking
about is the majority ownership, to speak more accurately.
Mr. PECORA. Were those shares of the Nickel Plate road which
you bought in July 1916, shares in amount of 50 percent or more of
the total outstanding stock of the Nickel Plate road?
Mr. VAN SWERINGEN. Yes,
sir.
Mr. PECORA. With whom did you have the negotiations with the
New York Central Railroad in the matter—with what individual or
individuals?
Mr. VAN SWERINGEN. The president, Mr. A. H. Smith, is the man
to whom I first talked. Of course, the closing of the transaction, as I
recall it, was with Mr. A. H. Harris, who was its vice president in
charge of finance, I believe.
Mr. PECORA. Did you in any stage of the negotiations that culminated in that transaction have any dealings or conferences with anyone connected with the firm of J. P. Morgan & Co. or Drexel & Co.?
Mr. VAN SWERINGEN. During the time we were making this
arrangement?
Mr. PECORA. Yes.
Mr. VAN SWERINGEN.
Mr. PECORA. Did you
Not that I recall. I feel sure I did not.
and your brother succeed in obtaining subscriptions for the $2,075,000 par value of preferred stock of the Nickel
Plate Securities Corporation?
Mr. VAN SWERINGEN. Including those that we ourselves subscribed
for, something over half a million or more, I believe.
Mr. PECORA. That is, about a half million dollars or more you and
your brother took?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. The rest were
sold to others as the result of private
offering, or was it as a result of public offerings?
Mr. VAN SWERINGEN. TO our associates—that is, in a large
measure—and then, some private interests.
Mr. PECORA. Were those preferred shares sold for cash?
Mr. VAN SWERINGEN. With a part of the common stock; yes, sir.
STOCK EXCHANGE PEACTICES
585
Mr. PECORA. What portion of the common stock went with the
preferred stock that you disposed of?
Mr. VAN SWERINGEN. A share of common with a share of preferred.
Mr, PECORA. And they were sold as units?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. At what price per unit?
Mr. VAN SWERINGEN. $100.
Mr. PECORA. From those sales did
the Nickel Plate Securities
Corporation realize enough cash to enable it to repay the loan to the
Guardian Savings & Trust Co. of $2,100,000?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. Eventually did the Nickel Plate Securities Corporation pay to the New York Central Railroad Co. the 10 notes, each
for $650,000, which were given in part payment of purchase price of
the stock of the Nickel Plate Road that you bought in July 1916?
Mr. VAN SWERINGEN. It did, most of them, quite a little ahead of
maturity.
Mr. PECORA. DO you know when those notes were paid finally?
Mr. VAN SWERINGEN. I can find out for you, I think. (After
conferring with associates.) The report to which you were referring
this morning, this congressional report, shows that those notes were
paid as follows: October '21, $650,000
Mr. PECORA. Of what year?
Mr. VAN SWERINGEN. 1921.
Mr. PECORA. I thought '21 represented the day of
Mr. VAN SWERINGEN. October 1921, $650,000;
the month.
January 1922,
$450,000; April 1922, $100,000; July 1922, $100,000; July 1923,
$650,000; and October 1923, $4,550,000.
Mr. PECORA. NOW, on or about February 13, 1922, was a supplemental agreement entered into between you and your brother, the
New York Central Railroad Co., and the Nickel Plate Securities Corporation, under the terms of which the last named company obtained
whatever rights and equities you had in the stock of the Nickel Plate
Railroad, under your contract of July 1916, with the New York
Central Railroad,Co.?
Mr. VAN SWERINGEN. YOU are reading from page 841, are you
not, of that same congressional report?
Mr. PECORA. Yes, sir.
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. Meanwhile, who
held the stock that you had agreed
to buy from the New York Central Railroad Co. pending the payment to the latter company of these 10 notes aggregating $6,500,000?
Mr. VAN SWERINGEN. From this report I discern that the Guaranty
Trust Co. was the trustee.
Mr. PECORA. That is, the Guaranty Trust Co. in New York City?
Mr. VAN SWERINGEN.
Yes.
Mr. PECORA. Can you tell us generally the nature of the provisions
of the trust agreement under which the Guaranty Trust Co. was
made such trustee?
Mr. VAN SWERINGEN. It seems to be set out on page 841. I will
read it, if you wish. Pardon me. This is somebody's else interpretation. Would it suit your purpose if we furnished you with a
copy of that agreement?
Mr. PECORA. If you have it here I would be very glad to have it.
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STOCK EXCHANGE PRACTICES
Mr. VAN SWERINGEN. We do not have it here. We will be glad to
get it for you. We will haye to put it into the record at a later date.
Mr. PECORA. Can you give the substance of it now from recollection?
Mr. VAN SWERINGEN. I am reluctant to do that. I should not be
here giving you sworn testimony by guesswork.
Mr. PECORA. The record shows that any testimony you give now
in response to this question will be given in accordance with and on
the basis of your best recollection.
Mr. VAN SWERINGEN. And that is very poor.
Mr. PECORA. Your recollection is poor?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. All right.
Mr. VAN SWERINGEN. On that
subject, particularly—-the details of
a trust agreement of 15 years ago.
Mr. PECORA. YOU state in the prepared statement which you read
into the record this morning, as follows:
Having obtained the stock control of the railroad—-
Meaning, of course, the Nickel Plate Railroad?
Mr. VAN SWERINGEN. Yes. sir.
Mr. PECORA (reading further):
It was only natural that we should try to develop and make the most of it.
What did you mean by that?
Mr. VAN SWERINGEN. Those words express it, I think, pretty
clearly; we wanted to make it a better railroad for service to the public
and a better railroad from the standpoint of the investor. Those are
not conflicting interests; they run hand in hand, as we see it.
Mr. PECORA. YOU say further in your statement:
And it was not long before we found ourselves in the midst of the general
railroad problem.
Let me ask you what were the distinguishing features or the main
features of the problem that you here refer to as the general railroad
problem?
Mr. VAN SWERINGEN. Congress had directed that the railroads
should be grouped into a limited number of systems, in the public
interest.
Mr. PECORA. That is, all the railroads of the country?
Mr. VAN SWERINGEN. Yes; and those groupings, as we saw them,
and as I stated this morning, we felt were too many in number for
the eastern region to be well balanced, with the two large ones that
were there, the New York Central and the Pennsylvania. So our
problem was to get those railroads regrouped so that there would be
not more than four systems which we thought could be reasonably
well balanced in service and size.
Mr. PECORA. HOW many systems at that time had Congress
declared the railroad lines should be grouped into?
Mr. VAN SWERINGEN. Dr. Ripley had been named by the Interstate Commerce Commission, and he had one idea. I believe the
Commission's plan was somewhat different. There were two or
three other plans, and all of them were for a greater number of systems
than four in the eastern region.
STOCK EXCHANGE PKACTICES
587
Mr. PECORA. YOU and your associates, in studying this general
railroad problem, had come to the conclusion that the best interests
of the public could be served by grouping the eastern railroads into
only four general systems?
Mr. VAN SWERINGEN. That is quite sov.
Mr. PECORA. And Congress had declared that those interests
could best be served by the grouping of the eastern lines into a
greater number of general systems?
Mr. VAN SWERINGEN. N O ; Congress did not declare it.
Mr. PECORA. The Interstate Commerce Commission?
Mr. VAN SWERINGEN. Congress directed that a plan or a study be
made of their grouping, and the groupings of the Interstate Commerce
Commission as made, and others to which I have referred, were tentative groupings for consideration and discussion. So that it was
quite proper for us to study that problem ourselves and try to find
the answer, as we saw it, from the standpoint of the railroads themselves.
Mr. PECORA. And all of the tentative groupings that had been
recommended by the governmental authority at that time exceeded
four in number?
Mr. VAN SWERINGEN. Yes, sir; for that region.
Mr. PECORA. Groupings into more than four general systems?
Mr. VAN SWERINGEN. Yes,
sir.
Mr. PECORA. YOU and your associates, in your study of the
problem, came to the conclusion that the best groupings in the public
interest would be into four systems?
Mr. VAN SWERINGEN. Well, not more than four; yes.
Mr. PECORA. And you felt that the one that should include the
Nickel Plate Road should also include certain other lines, namely,
the Lake Erie & Western, the Toledo, St. Louis & Western, the
Erie, the Pere Marquette, the Chesapeake & Ohio, the Hocking
Valley, the Wheeling & Lake Erie, the Chicago & Eastern Illinois,
the Virginian, the Bessemer & Lake Erie or the Buffalo, Rochester
& Pittsburgh, as well as either the Lackawanna or the Lehigh Valley,
with smaller lines?
Mr. VAN SWERINGEN. That is right.
Senator ADAMS. Mr. Van Sweringen, in your statement that was
offered this morning you mentioned the Missouri Pacific. It happens that my section of the country is very much interested in the
Missouri Pacific. I happen to live in a town that is on that railroad. Was that railroad to be added to this grouping, or was it
entirely independent?
Mr. VAN SWERINGEN. Entirely independent. I would be glad to
turn to my statement
Senator ADAMS. I recall what was in your statement, I think.
Mr. VAN SWERINGEN. We had no thought of ever trying to unite
those two systems as one—I mean, the Missouri Pacific system, on
the one hand, and the Chesapeake & Ohio, on the other; nor was
this so-called "transcontinental system" idea our thought. That
was not our purpose.
Senator ADAMS. The grouping that you favored did not involve
any transcontinental system?
Mr. VAN SWERINGEN. N O ; not as a transcontinental system.
It so happened that the Missouri Pacific, in the Commission's group
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STOCK EXCHANGE PRACTICES
ing, had been given an arm that reached to the west coast, that it
did not have in the rounding out of the Missouri Pacific sytem, and
nothing that we saw should disturb that. But the point I am making
is that we were not trying to build a coast-to-coast, if you will, railroad
system. What we were trying to do was just what I said this morning—to get that diversification of ownership in a territory that was
fast growing and was bound to grow, by a new railroad that we felt
was susceptible of material development and improvement.
The CHAIRMAN. The Missouri Pacific came up later, I understand?
Mr. VAN SWERINGEN.
The CHAIRMAN. That
Yes.
was not involved at the time you were dealing
with the Chesapeake & Ohio?
Mr. VAN SWERINGEN. NO, sir; not at all. It came about because
we saw we were short on a diversified investment and we had gotten
very large investments in Alleghany and we wanted to more or less
balance up by reason of the commodities that these carriers hauled;
to stabilize it, if you will.
Mr. PECORA. After you reached the conclusion, following the
enactment of the Transportation Act in 1920, that a proper grouping
of certain of the eastern lines would put your road, namely, the Nickel
Plate Road, in a system with these various other roads that I last
mentioned, beginning with the Lake Erie & Western and ending
with the Lackawanna & Lehigh Valley, did you and your associates
take any steps to acquire any control over those other railroad lines
for the purpose of effecting such a grouping in a practical way, if not
in another way?
Mr. VAN SWERINGEN. We took steps to acquire an interest that
resulted in being a majority interest in some of those properties.
Mr. PECORA. Which of those other railroad properties did you
acquire a majority interest in?
Mr. VAN SWERINGEN. Ultimately in the C. & O., which included
the Hocking Valley, and later the connecting link that we built of
60 miles over in Ohio to connect us from tidewater to the Great
Lakes, and the Lake Erie & Western and the so-called " Clover-Leaf ",
or Toledo, St. Louis & Western. Those latter two roads were consolidated with the Nickel Plate with the Commission's approval.
Mr. PECORA. When was that done, Mr. Van Sweringen?
Mr. VAN SWERINGEN. I am terribly weak on dates. [After conferring with associates.] In the beginning of 1922. I think it is set
up in my statement here this morning. Yes; in 1922. We acquired
the Buffalo, Rochester & Pittsburgh, and then as the groupings were
finally developed for the eastern region, and in reconciliation of those
groupings, the B. & O. became the one to which that road should go.
So we handed it over to them at our cost.
Mr. PECORA. YOU say in your prepared statement
Mr. VAN SWERINGEN. I do not believe I have finished my answer
to your question.
Mr. PECORA. Pardon me.
Mr. VAN SWERINGEN. We also, as the statement of this morning
shows, had a majority interest in the Wheeling & Lake Erie Railroad
and the Erie Road, a majority of the common stock and some of the
preferred; the Pere Marquette is a substantial interest. I will not
say it is a majority interest, but it is in the C. & O., now, with whom
it is grouped.
STOCK EXCHANGE PEACTICES
589
Mr. PECOEA. In your prepared statement this morning you said as
follows:
Along about 1922 an opportunity arose to buy the stock control of the Toledo,
St. Louis & Western, commonly called the Clover Leaf, and also the Lake Erie &
Western. These we purchased and consolidated with the Nickel Plate.
When you say you purchased them, you mean you purchased a
majority of the outstanding stock of those roads?
Mr. VAN SWERINGEN. Yes, sir; I think that is correct—a numerical
majority in each instance.
Mr. PECORA. And then, with the permission of the Interstate
Commerce Commission, you consolidated those two roads with the
Nickel Plate?
Mr. VAN SWERINGEN. That is right.
The CHAIRMAN. The Pere Marquette went to the Alleghany
Mr. VAN SWERINGEN. I think I need to modify that statement, I
am reminded here just now, in one particular, in order to be accurate*
The Commission approved the issuance of the securities for its accomplishment, but that consolidation was under State law.
Mr. PECORA. Just how was that consolidation effected?
Mr. VAN SWERINGEN. YOU are over my head when you get on that.
That is so much of a legal problem that I cannot tell you; but I know
it was done that way. *
Mr. PECORA. DO you recall the process by which it was done?
Mr. VAN SWERINGEN. TO a layman it did not seem much different
than the other way, but there undoubtedly was some legal distinction
that I do not know.
Mr. PECORA. DO you recall what the actual process was?
Mr. VAN SWERINGEN. N O ; I do not.
The CHAIRMAN. Was not the Pere Marquette acquired by the
Alleghany?
Mr. VAN SWERINGEN. Alleghany had a part of the Pere Marquette.
[After conferring with associates:] Part of those shares had been
acquired by the Nickel Plate when it was thought that the Nickel
Plate would be the main stem of this eastern grouping and before the
Commission had, as we saw it, rather hinted that it ought to be the
C. & O. that should be the backbone of the system; so that the C. & O.
got some of its shares from the Nickel Plate, some from the Alleghany
and, I guess, some out of the market, as I recollect it now; the Commission having approved those acquisitions.
The CHAIRMAN. I ^ot the understanding somehow that the Pere
Marquette was acquired by the Alleghany.
Mr. VAN SWERINGEN. I suspect that what you have in mind, Mr.
Chairman, is that Alleghany went to the Interestate Commerce
Commission—or, rather, the C. & O. went to the Interstate Commerce
Commission for approval of some shares they purchased from the
Nickel Plate, and at the same time they asked us for options on the
shares we had in Alleghany. [Addressing an associate:] Is that
right? [After conferring with associates:] In the Vaness Co, I think
there were some shares there.
Mr. PECORA. NOW, Mr. Van Sweringen, when you acquired stock
control of the Toledo, St. Louis & Western, how much actual cash
did you and.your associates put into that purchase?
Mr. VAN SWERINGEN. I do not recall. I can find out. I know this:
That the major part of that ownership was in Walter Ross, who was
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STOCK EXCHANGE PRACTICES
the then president and receiver of the Clover Leaf or Toledo, St. Louis
& Western Railroad. And what he wanted was an income basis of
payment rather than the money. So that it was a long-drawn-out
purchase agreement.
Mr. PECORA. Did it follow in its nature generally the manner in
which you originally acquired the Nickel Plate road?
Mr. VAN SWERINGEN. Yes, in some respects it had that semblance.
That is to say, that there was some payment and a lot of deferred
payments.
Mr. PECORA. And those deferred payments
Mr. VAN SWERINGEN (continuing). With a right or rather a restriction against prior payment.
Mr. PECORA. Well, now, for instance, Mr. Van Sweringen, you
said that the liquidation or payment of the ten notes each for $650,000
that were given by you and your brother to the New York Central
in the initial transaction, by which you acquired the Nickel Plate
road, was made between October of 1921 and October of 1923. Who
made those payments? Who paid those notes, in other words?
Mr. VAN SWERINGEN. I beg your pardon?
Mr. PECORA. I asked, who paid those notes? Was it the Nickel
Plate Securities Corporation?
Mr. VAN SWERINGEN. Let me inquire. (After conferring with an
associate.) The Nickel Plate Securities Corporation were the makers
of those notes, and therefore
Mr. PECORA (interposing). You were the makers of the notes,
weren't you?
Mr. VAN SWERINGEN. They tell me not. I thought we were, but
I just asked the question. (Again conferring). Let me correct that
statement.
Mr. PECORA. YOU and your brother made those notes?
Mr. VAN SWERINGEN. That is right. I thought he told me the
contrary and so I made that answei*, and that was a mistake.
Mr. PECORA. Who paid them? Was it the Nickel Plate Securities
Corporation?
Mr. VAN SWERINGEN. They afterwards acquired our interests and
consequently would pay the debt.
Mr. PECORA. The Nickel Plate Securities Corporation was the corporation which had issued all of its common stock to you and your
brother?
Mr. VAN SWERINGEN. NO. It went to my brother and to me and
to others who participated in providing those dollars.
Mr. PECORA. NO
Mr. VAN SWERINGEN
(continuing). The greater portion of it went
to my brother and to me.
Mr. PECORA. Did the Securities Corporation actually turn over to
you and your brother $12,500,000 of an issue of its common stock?
Mr. VAN SWERINGEN. It turned it over, but from us it went to
the
Mr. PECORA (interposing). I know, but I am asking you now only
about
Mr. VAN SWERINGEN (continuing). That is the mechanics side of
it. The practical side was that it went to all those who. participated
in putting up the money.
STOCK EXCHANGE PEACTICES
591
Mr. PECORA. I am only speaking now of that part of the transaction that concerned you and your brother, on the one hand, and the
Nickel Plate Securities Corporation on the other.
Mr. VAN .SWERINGEN. I realize that you are, but if I answer it in
just that way you do not get the whole picture.
Mr. PECORA. I get it very clearly.
Mr. VAN SWERINGEN. If you will pardon me, I want you to get
it all.
Mr. PECORA. Let me see if I get it. Under the agreement you
and your brother made with the Nickel Plate Securities Corporation
you turned over your equity in those stocks which you acquired
from the New York Central Railroad Co. in the Nickel Plate road,
and then certain other stock was issued or was to be issued by the
Cleveland Terminal Co.
Mr. VAN SWERINGEN. Those of which I testified and
Mr. PECORA (interposing). Wait a minute. To the Securities Corporation in return for all of its common capital stock, $12,500,000
par value, did you not?
Mr. VAN SWERINGEN. We took the stock for stock and equity;
yes, sir.
The CHAIRMAN. Mr. Van Sweringen, you spoke about those who
participated in putting up the cash. You did not put up any cash,
did you?
Mr. VAN SWERINGEN. Oh, yes.
The CHAIRMAN. HOW much?
Mr. VAN SWERINGEN. There had
to be an initial payment of
$2,000,000.
Mr. PECORA. But you borrowed that from the Guardian Savings
Bank, didn't you?
Mr. VAN SWERINGEN. Yes, sir; temporarily. But that money
was repaid to the bank through the sale of the stocks that I have just
described.
The CHAIRMAN. I understand that. But you didn't actually put
up any cash, did you?
Mr. VAN SWERINGEN. We used our own credit for the interim
dollars and our own collateral, pending the time when we distributed,
if you will, to those who had participated with us in the creation and
absorption of the Nickel Plate Securities stock.
Mr. PECORA. NOW, Mr. Van Sweringen, you have already stated
that between October of 1921 and October of 1923 the Nickel Plate
Securities Corporation paid to the New York Central 10 notes aggregating $6,500,000.
Mr. VAN SWERINGEN. Yes; I guess I have. Yes, sir; I have.
Mr. PECORA. NOW, do you know how the Nickel Plate Securities
Corporation raised the moneys that were used by it to pay those
notes?
Mr. VAN SWERINGEN. A part of it they earned. Let me see.
[Inquiring of an associate.] A part of it had been paid out of earnings.
Mr. PECORA. What part?
Mr. VAN SWERINGEN. I cannot tell you offhand.
Mr. PECORA. A minor part?
Mr. VAN SWERINGEN. I will be glad to give you
Mr. PECORA (interposing). Wasn't it just a minor part?
175541—33—PT. 2
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STOCK EXCHANGE PEACTICES
Mr. VAN SWERINGEN. Oh, yes; because the major part was
$4,550,000. The balance of it—well, in general terms I am going to
give you this, because I think it will portray it in better shape—was
paid at the time when we brought together the Lake Erie & Western,
the Clover Leaf, and the Nickel Plate in the reformed consolidated
Nickel Plate structure. And then we sold some preferred shares that
came out of that, and paid off the balance of the debt.
Mr. PECORA. In other words, in October of 1923, when the major
portion of the indebtedness represented by those 10 notes was paid
by the Nickel Plate Securities Corporation, that corporation acquired
either all or a substantial portion of that sum through the sale of
preferred stock?
Mr. VAN SWERINGEN. The Nickel Plate consolidated unit. In
other words, the Clover Leaf, Lake Erie & Western, and Nickel Plate
as it was prior to those two being added to it, were consolidated into
one unit and reformed in its capital structure.
Mr. PECORA. What was the name of that unit?
Mr. VAN SWERINGEN. Pardon me, and let me ask.
Mr. PECORA. All right.
Mr. VAN SWERINGEN. In the re-forming of that, of course, there
were those shares that accrued to the Nickel Plate Securities Corporation for their ownership. Some of those were preferred and some were
common. They sold some of their preferred shares of Nickel Plate
new and paid their debt.
Mr. PECORA. Sold them to the public?
Mr. VAN SWERINGEN. Those were sold to the public. And those
were authenticated by the Interstate Commerce Commission for value.
Mr. PECORA. NOW, further along in your prepared statement that
was read into the record this morning, you state as follows:
While we were studying and developing, we found that the Huntington interests in the Chesapeake & Ohio were for sale. We talked with J. P. Morgan & Co.,
whom we regarded, as does the world, as wise counselors in matters of finance.
In what year did you have those conferences or conversations with
J. P. Morgan & Co.?
Mr. VAN SWERINGEN. Oh, you now have me down to dates again,
and that is my weakness. [Laughter.] Let me look at that statement again. Well, when I said that was my weakness I meant it
was one of my weaknesses, if you will pardon me. I should say
that was in 1922.
Mr. PECORA. That was in 1922?
Mr. VAN SWERINGEN. Yes,
sir.
Mr. PECORA. NOW, just what were those so-called " Huntington
interests" in the Chesapeake & Ohio?
Mr. VAN SWERINGEN. The shares that I have mentioned, 73,000
in number, in the C. & O.
Mr. PECORA. Did those shares in your opinion represent control?
Mr. VAN SWERINGEN. Not majority ownership, but, as I stated
this morning, they were seating the directors.
Mr. PECORA. Did it represent that degree of control which enabled
them then to. elect the board of directors of the Chesapeake & Ohio
Railroad?
Mr. VAN SWERINGEN. Well, not technically so, but they were
Mr. PECORA (interposing). But practically so.
STOCK EXCHANGE PEACTICES
593
Mr. VAN SWERINGEN. It is true that they had their representatives
in that instance on the board.
Mr. PECORA. What proportion did those stock holdings of the
Huntington interests in the Chesapeake & Ohio represent of all the
outstanding capital stock of that railroad company at that time?
Mr. VAN SWERINGEN. I cannot tell you the percentage. It was
relatively small.
Mr. PECORA. Relatively small?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. Was it as much as 10 percent?
Mr. VAN SWERINGEN. I think a little more than that.
Mr. PECORA. Was it as much as 15 percent?
Mr. VAN SWERINGEN. I would guess it was somewhere
around
that, but I do not like to guess.
Mr. PECORA. NO; but the record will show when you are guessing
and when you are stating a thing as a matter of positive knowledge.
Mr. VAN SWERINGEN. I do not want to be put in that attitude, I
mean the attitude of guessing.
Mr. PECORA. SO that you felt back in 1922 that an undivided
ownership of around 15 percent of the outstanding capital stock of
the Chesapeake & Ohio Railroad represented, not technically but in a
practical sense, working control of that railroad?
Mr. VAN SWERINGEN. N O ; I did not. Pardon me, now, but
Mr. PECORA (interposing). What did it represent in your opinion?
Mr. VAN SWERINGEN. They had, as I stated this morning, been
seating the directors with that interest. At least, that was the interest
that they had at the time we made the purchase, or rather the shares
that they sold to us, which were I think all that they had. But——
Mr. PECORA (interposing). Well, if with that interest they were
able to seat the board of directors, weren't they thereby enabled
virtually to control the road through the board of directors?
Mr. VAN SWERINGEN. I think there is something to be said on that
score. I presume that those who allowed them to do that were content
with the operation of the railroad up to that time when they made
the trade with us. At any rate, we bought their interest, and then
proceeded to enlarge it as I stated before.
The CHAIRMAN. YOU say in your statement that the Huntington
interests were dominating the property.
Mr. VAN SWERINGEN. Yes, sir. The Huntington interests were
dominating the property, but whether by virtue of the 73,000 shares,
or by virtue of the 73,000 shares plus their reputation in the railroad
field, is another story. I do not want to attempt to draw that line.
Mr. PECORA. AS to that portion of the story, Mr. Van Sweringen,,
in your prepared statement it is stated by you as follows, and I am
reading from page 3 of that statement:
The Huntington interest, while dominating the property in the sense that it
had been seating the directors, was far from a majority ownership.
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. Well, now, with
which gentleman connected with
J. P. Morgan & Co. did you discuss the matter of your acquisition of
the Huntington interest in the Chesapeake & Ohio Railroad?
Mr. VAN SWERINGEN. I do not recall which one I talked with
about that matter. But I know I did just what I said I did.
Mr. PECORA. Isn't it possible now for you to recall?
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STOCK EXCHANGE PEACTICES
Mr. VAN SWERINGEN. I may have talked with more than one of
them.
Mr. PECORA. What was that?
Mr. VAN SWERINGEN. I say, I may have talked with more than
one of them, but just which one I don't recollect.
The CHAIRMAN. YOU conferred with them to finance you to purchase this
Mr. VAN SWERINGEN (interposing). I did not get that.
The CHAIRMAN. When it came to financing for equipment you
conferred with them?
Mr. VAN SWERINGEN. Yes, sir. But I had talked with them, as
I said before, as to the financial aspects as a purchase at that time,
and the wisdom of it. I went to them as bankers, just as I would go
to my doctor, or my lawyer, for advice, to them in financial matters;
and, as I said, believing that that was the best place I could get
financial advice. And I took the advice I got at that time.
Mr. PECORA. At the present time you do not recall which of the
financial doctors on the staff of J. P. Morgan & Co. }^ou consulted?
Mr. VAN SWERINGEN. N O ; I do not. I do not quite subscribe to
the term you use, but we will let it go at that.
Mr. PECORA. Well, you brought in the term "doctors".
Mr. VAN SWERINGEN.
Yes.
Mr. PECORA. YOU said you regarded them, that is, J. P. Morgan
& Co., as wise counsellors in the matter of finance. Did you also
regard them as equally wise counsellors in the matter of railroad consolidations and operations?
Mr. VAN SWERINGEN. N O ; I did not. And I did not try to have
their advice about that subject. And if I had tried I wouldn't have
gotten it, I feel sure.
Mr. PECORA. Well, what advice did you go to them for?
Mr. VAN SWERINGEN. Financial advice.
Mr. PECORA. That is, as to whether or not it was advisable for you
to acquire at that time the Huntington interest in the Chesapeake &
Ohio Railroad?
Mr. VAN SWERINGEN. N O ; that is not quite it, put in that way.
It is a little hard to describe, but I will try to do it.
Mr. PECORA. The reason I avsked you that question is because of
your statement on that subject in your prepared statement.
Mr. VAN SWERINGEN. I know what I said there.
Mr. PECORA. Which is as follows:
While we were studying and developing, we found that the Huntington
interests in the Chesapeake & Ohio were for sale. We talked with J. P. Morgan
& Co., whom we regarded, as does the world, as wise counselors in matters of
finance. They felt that it wasn't the time for us to make the expenditure.
Now, what expenditure is referred to there?
Mr. VAN SWERINGEN. The expenditure that we would have had
to make. In other words, to make the financial transaction as distinguished from the railroad transaction.
Mr. PECORA. Well, the financial expenditure involved in your
acquisition of the so-called "Huntington interests" in the Chesapeke
& Ohio?
Mr. VAN SWERINGEN. Oh, yes. That is what it referred to.
Mr. PECORA. And J. P. Morgan & Co. told you then that it
wasn't the time to make that expenditure. Or, in other words, if I
STOCK EXCHANGE PEACTICES
595
properly understand you, it wasn't then the time for you to buy the
Huntington interests in the Chesapeake & Ohio Railroad.
Mr. VAN SWERINGEN. Well, now, that is just the difference.
Mr. PECORA. Well, you can clear that up, if you will.
Mr. VAN SWERINGEN. When you said the last part of the question,
that is what makes the difference.
Mr. PECORA. Clear it up in your own way, then.
Mr. VAN SWERINGEN. AH right. We portrayed to them our financial situation in this matter. They knew that we had this Nickel
Plate, and what we had done there. We had some feeling of need
for counsel on the subject of whether we should incur further debt
at that time, and that comprehended our own circumstances, and it
comprehended the situation of the country, and of business in general.
Mr. PECORA. IS that your answer?
Mr. VAN SWERINGEN. But not as to the railroad, not the railroad
operating side.
The CHAIRMAN. Let me ask you this, Mr. Van Sweringen: In your
statement it appears that you placed Mr. Bernet in charge there as
president.
Mr. VAN SWERINGEN. Of the Nickel Plate?
The CHAIRMAN. Yes.
Mr. VAN SWERINGEN. Yes, sir.
The CHAIRMAN. That was Mr. Bernet?
Mr. VAN SWERINGEN. Yes, sir.
The CHAIRMAN. Prior to that was Mr. Harahan the president?
Mr. VAN SWERINGEN. Mr. Harahan was the president of the Chesa-
peake & Ohio when we acquired that road, and he remained there for
some time after our purchase.
The CHAIRMAN. YOU spoke about providing President Harahan
with tools for accomplishing the constructive job of which he was
capable.
Mr. VAN SWERINGEN. Yes, sir.
The CHAIRMAN. Did he have to
Mr. VAN SWERINGEN. NO, sir.
do with the Nickel Plate also?
He didn't have to do with the
Nickel Plate, just the C. & O., and the Hocking which it owned.
The CHAIRMAN. He had no stock in the Nickel Plate?
Mr. VAN SWERINGEN. NO; he had none. Mr. Harahan was the
president of the C. & O,, you understand.
The CHAIRMAN. He had stock in it?
Mr. VAN SWERINGEN. He had been placed there I think by the
Huntington interests in the earlier days.
The CHAIRMAN. And he had stock in the C. & O.?
Mr. VAN SWERINGEN. Well, he might have had; yes, sir.
Senator ADAMS. Mr. Van Sweringen, you do not happen to have
available a map of this system, do you? That is, simply to make it
a little clearer to us whose railroad geography is somewhat hazy?
Mr. VAN SWERINGEN. I will see if we have one here. (Conferring
with associates.) We will have one the next time we come in here.
Mr. PECORA. NOW, Mr. Van Sweringen, you say further along in
your prepared statement:
We were going to have to have some money if we bought it.
Meaning the Huntington interest in the Chesapeake & Ohio—
Some that we did not have ourselves.
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STOCK EXCHANGE PRACTICES
As I interpret that statement, and I am reading from page 2 of your
prepared statement, and about the center of the page.
Mr. VAN SWERINGEN. YOU must have an old copy of my statement
of this morning.
Mr. PECORA. I beg pardon. Do you say an old copy? I am reading from the copy furnished to me by your group this morning.
Mr. VAN SWERINGEN. All right. I just noticed a few words that
I knew had been changed.
Mr. PECORA. Well, the copy I am reading from says textually—
We were going to have to have some money if we bought it—some that we
didn't ourselves have.
What do you mean by that?
Mr. VAN SWERINGEN. Well, as it was finally—
We were going to have some money if we bought it.
We did not have it.
Mr. PECORA. DO you mean if you bought the stock of the Huntington interest in the Chesapeake & Ohio?
Mr. VAN SWERINGEN. Yes, sir; we would have to have some money.
Mr. PECORA. HOW much money would have been involved at that
time in that transaction if you had gone ahead and concluded it
instead of deferring it upon the advice of the wise counsellors in
matters of finance?
Mr. VAN SWERINGEN. Well, I would have to make an assumption
in order to answer that, because we did not progress with our trade
to the place at that time where we had the dollar figures determined.
Later on as we acquired it, a year or so later, acquired those interests—let me see (conferring with an associate) we paid par for the
block of shares. The Nickel Plate, however, paid 80, and we paid
the difference.
Mr. PECORA. If you had negotiated the purchase in 1922 of the
stock in the Chesapeake & Ohio Eailroad held by the Huntington
interests, how much would you have had to pay for them?
Mr. VAN SWERINGEN. I cannot answer that any differently than
I did, because we did not buy it in 1922, and we did not have a call
price on it at that time. I can only relate it to what we did in 1923.
Mr. PECORA. Well, was there much difference between the purchase price that was finally paid in 1923 and that which was discussed by you originally with the Huntington interests in 1922?
Mr. VAN SWERINGEN. We did not fix a price in 1922. That is
my difficulty in answering your question specifically.
Mr. PECORA. Well, did you go and consult J. P. Morgan & Co. in
1922 without having some idea of the moneys you were going to
require in order to conclude that purchase?
Mr. VAN SWERINGEN. I had a pretty clear idea of what we would
ourselves be willing to pay.
Mr. PECORA. NOW, you then say in your statement:
We took their advice—
Meaning J. P. Morgan & Co.'s advice—
and postponed our activities in that direction, keeping in touch with the Huntingtons, however.
By that do you mean that the negotiations were temporarily held
in abeyance and were resumed in the following year?
STOCK EXCHANGE PRACTICES
597
Mr. VAN SWERINGEN. Oh, I should say that might be a fair way to
put it. The effect of it, at any rate.
Mr. PECORA. Then you say in your prepared statement as follows:
In the meantime, the Nickel Plate was prospering and was accumulating money
under the able management of Mr. J. J. Bernet, whom we had engaged as president
when we first acquired the Nickel Plate * * *"
Whom do you mean by "we" in that part of your statement?
Mr. VAN SWERINGEN. Those interests that I have described.
Mr. PECORA. Who are they?
Mr. VAN SWERINGEN. The same ones that we have just talked
about here this morning.
Mr. PECORA. That is, you, your brother, Mr. Bradley, Mr. Nutt,
and other gentlemen whom you have not yet named?
Mr. VAN SWERINGEN. Yes; that is it.
Mr. PECORA. IS that right?
Mr. VAN SWERINGEN. That is right; yes.
Mr. PECORA. But you individuals did not then actually own the
stock of the Nickel Plate Road, did you?
Mr. VAN SWERINGEN. Individuals, did you say?
Mr. PECORA. That stock was then owned by the Nickel Plate
Securities Corporation, was it not?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. But you and your
associates, meaning the gentlemen
whom you have named, and some of whom you have not yet named,
controlled the Nickel Plate Securities Corporation, did you not?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. Through stock ownership? T
Mr. VAN SWERINGEN. Yes, sir. That is w hat
Mr. PECORA. That is what is meant by "we."
is meant by "we."
And you go on to
say in your prepared statement:
And a year or so after our first discussions about Chesapeake & Ohio, we reached
the place where we again thought we should purchase the interest of the Huntingtops. This time the Morgan firm agreed with us and we closed the deal, the
Nickel Plate buying 70,000 of the Huntington shares, the total of which was
73,000.
Do you recall now which gentleman connected with Morgan & Co.
you consulted in 1923 at which time you were advised to go ahead and
purchase the Huntington stock in the Chesapeake & Ohio?
Mr. VAN SWERINGEN. It may seem strange to you, but I do not
recall. I have been in the habit of talking to several of them—several
of the different partners there, and always assumed that when I had
the advice of one that I was pretty well
Mr. PECORA. Well, can you enumerate—can you give us the
names of any of those several?
Mr. VAN SWERINGEN. Yes; I would talk probably with Mr.
Anderson—it is hardly fair for me to say that, because I am not sure
about it. I think I had better not guess about it, as I reflect upon it.
Mr. PECORA. YOU are not sure at the present moment of the
Mr. VAN SWERINGEN. I think I talked to Mr. Laniont about it.
(After conferring with associates.) It was Mr. Lamont, they tell me.
Mr. PECORA. Which Mr. Lamont? There are two. Which do
you refer to?
Mr. VAN SWERINGEN. Mr. Thomas Lamont, Sr.
Mr. PECORA. Mr. Thomas W.?
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STOCK EXCHANGE PRACTICES
Mr. VAN SWERINGEN.
Yes.
Mr. PECORA. NOW had Morgan & Co. prior to the time when you
first discussed with them in 1922 your contemplated purchase of the
Huntington interests in Chesapeake & Ohio done any financing of any
kind for you and your associates?
Mr. VAN SWERINGEN. NO. (After conferring with associates.)
No; I think not. And they did not do any when we bought the
C. & O. at that time. I mean on that stock purchase.
Mr. PECORA. Well, now, when did you buy the 70,000 shares out
of the 73,000 which the Huntington interests owned in Chesapeake
& Ohio?
Mr. VAN SWERINGEN. That must have been 1923, or close to that
time.
Mr. PECORA. Who actually bought those 70,000 shares?
Mr. VAN SWERINGEN. I have got to check that. (After conferring
with associates.) Oh, pardon me. The Nickel Plate bought 70,000.
I testified to that this morning. And the other 3,000 we bought.
Mr. PECORA. That is, the Nickel Plate Securities Corporation?
Mr. VAN SWERINGEN. N O ; the Nickel Plate Railroad.
Mr. PECORA. The Nickel Plate Railroad bought the 70,000 shares
and you and your associates individually bought the remaining 3,000
shares of the Huntington interests? Is that right?
Mr. VAN SWERINGEN. (After conferring with associates.) The
Nickel Plate Securities bought the other three.
Mr. PECORA. Oh, the Nickel Plate Securities bought the other three.
The CHAIRMAN. When was the Chesapeake Corporation formed,
and why?
Mr. VAN SWERINGEN. That was formed sometime afterwards.
Now, I would like to clear one thing in the record, if I may. In
talking about this purchase of 73,000 shares and saying that Nickel
Plate bought 70,000, I want to again remind you that Nickel Plate
did not pay the price that we paid. Our price was $100 a share—our
cost. Their cost was $80 a share for the 70,000 shares they got, and
we took the other 3,000 shares at the $100 plus $20 on all the shares—
or $1,400,000 more we paid.
Mr. PECORA. NOW, let us go into that whole tranaction, if you
will, in a general way.
Mr. VAN SWERINGEN. Pardon me, Mr. Pecora, but the chairman
asked me a question.
Mr. PECORA. Yes. I will withdraw mine until you answer Senator
Fletcher's question.
Mr. VAN SWERINGEN. He has asked me as to a date. (After
conferring with associates.) May 19, 1927, I think is the answer to
the chairman's question.
Mr. PECORA. That is, that is the date of the incorporation of the
Chesapeake Corporation?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. NOW, the 73,000 shares
that the Huntington interests
owned in the stock of the Chesapeake & Ohio Railroad was bought by
your group, your associates, or your corporations, sometime in 1923.
Is that correct?
Mr. VAN SWERINGEN. That is correct.
Mr. PECORA. What was the consideration or purchase price paid by
those who directly bought those 73,000 shares from the Huntington
interests?
STOCK EXCHANGE PEACTICES
599
Mr. VAN SWERINGEN. $7,300,000.
Mr. PECORA. That is, they paid par?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. That is $100 a share?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. What was the market
value at that time of those
shares?
Mr. VAN SWERINGEN. It was quite a little less than that.
Mr. PECORA. HOW much less?
Mr. VAN SWERINGEN. Somewhere in the 70 range.
Mr. PECORA. Somewhere in the 70's.
Mr. VAN SWERINGEN. Illustrating that market value is not always
value.
Mr. PECORA. Sometimes market value is greater than actual value,
is it not?
Mr. VAN SWERINGEN. Oh, I think that is so, too.
Mr. PECORA. Yes. Who conducted the negotiations with the
Huntington interests whereby you and your associates acquired these
73,000 shares for $7,300,000?
Mr. VAN SWERINGEN. I did, principally.
Mr. PECORA. With whom did you have them?
Mr. VAN SWERINGEN. Mr. Henry E. Huntington.
Mr. PECORA. Was that a cash transaction?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. From what sources
was the cash obtained that was
paid to the Huntington interests for this block of stock?
Mr. VAN SWERINGEN. Give me the figures. (Addressing an associate.) I have got to keep you a minute before I answer that.
Mr. PECORA. That is all right, sir.
Mr. VAN SWERINGEN (After conferring with associates.) Now,
your question is where the $7,300,000 came from?
Mr. PECORA. Yes.
Mr. VAN SWERINGEN.
That had to come from two sources. The
Nickel Plate on the one hand and the Nickel Plate Securities interests
on the other hand.
Mr. PECORA. Well, did those two companies obtain those moneys
through the issuance and sale of any securities?
Mr. VAN SWERINGEN. Seventy thousand shares of C. & O. common
stock was purchased on January 29, 1923, at $80. The amount of
dollars being $5,600,000 paid for out of current cash. That is, of the
Nickel Plate Railroad. The cash was obtained through the sale of
$7,274,000 par value second improvement mortgage bonds.
Mr. PECORA. Then that cash came from the issuance and sale of
securities by the Nickel Plate road?
Mr. VAN SWERINGEN. Oh, yes.
Mr. PECORA. Yes; that is what I
Mr. VAN SWERINGEN. Railroads
asked.
have to get their money that way
to a considerable extent.
Mr. PECORA. Yes; and where did the balance of that total purchase
price come from?
Mr. VAN SWERINGEN. $1,700,000 paid by Nickel Plate Securities,
which were our interests, so-called, was obtained from the Vaness Co.
Mr. PECORA. Was obtained from the Vaness Co. That is, did
the Vaness Co. loan that money to the Nickel Plate Securities Corporation?
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STOCK EXCHANGE PRACTICES
Mr. VAN SWERINGEN. It was in the nature of a loan; yes, sir.
Mr PECORA. I did not hear you.
Mr. VAN SWERINGEN. A loan; yes, sir.
Mr. PECORA. A loan.
Mr. VAN SWERINGEN. Its subsidiary.
Mr. PECORA. NOW, tell us about this Vaness Co. When was the
Vaness Co. organized?
Mr. VAN SWERINGEN. I have got to get that. (After conferring
with associates.) The charter is dated January 9, 1922, I am told.
Mr. PECORA. Did you and your associates cause it to be organized?
Mr. VAN SWERINGEN. We did.
Mr. PECORA. Did you and your
associates own all of its capital
stock?
Mr. VAN SWERINGEN. All of its common stock. (After conferring
with associates.) All of its capital stock.
The CHAIRMAN. That was a holding company, was it?
Mr. VAN SWERINGEN. Well, it was a company which did hold it;
yes, sir. Hold these assets.
Mr. PECORA. YOU say it was organized in January 1922? Is that
the date, sir?
Mr. VAN SWERINGEN. That is what I was told here. (After conferring with associates.) That is the date of the charter.
Mr. PECORA. Yes. And all of its capital stock was issued to you
and your associates?
Mr. VAN SWERINGEN. That is the way it is in my mind.
Mr. PECORA. NOW, you only had two associates besides your
brother in that transaction, did you not? That is, Mr. J. E. Nutt
and Mr. C. L. Bradley?
Mr. VAN SWERINGEN. I think for a time we had two other associates whom we bought out.
Mr. PECORA. NOW, what kind of business was conducted or transacted by this Vaness Co.?
Mr. VAN SWERINGEN. It was originally formed to hold and to own
securities and other assets that principally surrounded the ownership
of O. P. and M. J. Van Sweringen.
The CHAIRMAN. HOW much capital stock?
Mr. VAN SWERINGEN. I do not recall.
Mr. PECORA. SO that all of the cash involved in the purchase of
these 73,000 shares of Chesapeake & Ohio which the Huntington
interests sold to you and your associates was raised first—or a large
portion of it—five million and some odd dollars by the issuance of
mortgage bonds by the Nickel Plate Railroad, which were sold to
the public, and the balance of one million seven hundred and odd
thousand dollars by means of a loan made to the Nickel Plate Securities Corporation by the Vaness Co., is that right?
Mr. VAN SWERINGEN. Those bonds, however, were issued for
other property than the shares bought. Having Been issued for other
expenditures made. So that it was the equivalent of treasury cash
all through that. It was reimbursement of treasury cash.
Mr. PECORA. Well, it was cash that was obtained from the investing public through the sale to it of securities by the Nickel Plate road,
was it not?
Mr. VAN SWERINGEN. Well, not entirely. And yet I have no
objection to the general statement. It was earnings in part that had
STOCK EXCHANGE PRACTICES
601
been invested in property and recognized in securities in the treasury—in the reimbursement.
Mr. PECORA. Well, by means of this transaction with the Huntington interests the Nickel Plate road and the Nickel Plate Securities Corporation, which was a holding company, acquired what you
called in your prepared statement, or what you referred to in your
prepared statement as an interest which dominated the property,
meaning the Chesapeake & Ohio in the sense that it had been seating
the directors? Is that correct?
Mr. VAN SWERINGEN. Just what I said there I think is correct,
yes.
Mr. PECORA. Yes. And those moneys, or the major part of them,
came from the investing public through the purchase of securities
consisting of these mortgage bonds issued by the Nickel Plate railroad, is that right?
Mr. VAN SWERINGEN. Were I to say that over again I—will you
read that question, please?
(Thereupon the last question was read by the reporter, as above
recorded.)
Mr. VAN SWERINGEN. Issued for other assets than the stock
purchased.
Mr. PECORA. Yes. All right. Well, the practical effect of those
transactions then to that point
Mr. VAN SWERINGEN. Perhaps I should have said the capitalization or other assets.
Mr. PECORA. All right. Was the practical effect of these transactions up to that point as follows: That through the control which
you and your associates had of the Nickel Plate Railroad by virtue
of your ownership of the common stock of the Nickel Plate Securities
Corporation you were able to acquire with moneys principally obtained from the investing public a dominating interest in the Chesapeake & Ohio Railroad Co.?
Mr. VAN SWERINGEN. That is true, subject—and the interlocking
relationship there was approved by the Government—the Interstate
Commerce Commission. After all, control, as you refer to it, is a
right to operate the properties in the interest of the stockholders.
Senator ADAMS. Mr. Van Sweringen, was the stock that you
purchased from the Huntington interests divided exactly in proportion to the contributions from the Nickel Plate Securities Corporation and the Nickel Plate Railroad? Perhaps I am in error in that,
but I gathered that there was $5,600,000 contributed by the railroad
company and $1,700,000 by your private companies.
Mr. VAN SWERINGEN. That is right; yes, sir.
Senator ADAMS. NOW, I am asking you whether or not of those
73,000 shares there was an opportionment exactly in proportion to
the relative contributions?
Mr. VAN SWERINGEN. NO, there was not. They got for their
$5,600,000, 70,000 shares, and we got for our $1,700,000, 3,000 shares
only. There was an instance of control, so-called, where the control
took the cost themselves rather than to put it for the added price
above $80 on the railroad that they were operating. It turned out
to have market values for considerably more than that.
Mr. PECORA. Well, Mr. Van Sweringen, will you be good enough
to tell us what the reason was for putting into the Nickel Plate Rail
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STOCK EXCHANGE PRACTICES
road 70,000 of these shares at $5,000,000-plus, and putting into the
Nickel Plate Securities Corporation only 3,000 shares at a cost of
approximately $1,700,000? Why that disparity of value?
Mr. VAN SWERINGEN. In the Nickel Plate one half of the shares
were owned by the general public. While we thought that these
C. & O. shares were worth all that we paid for them, we were conscious
that the market reflected a lower market price. And there was to be
expected that element of risk or gamble, if you want to put it that
way, in the higher price. As one experienced in the railroad side of
that undertaking we were confident that we could develop that property and to make it a much better property than it was. But we felt
that we should take that cost ourselves as to that so-called "holding
company interest", if you will, rather than to have the question arise
from the standpoint of the Nickel Plate stockholder who might think
that we had treated him unwisely or unfairly.
Mr. PEC OR A. Are you through?
Mr. VAN SWERINGEN. That is the best I can describe it.
Mr. PECORA. All right. Now, is it not a fact, Mr. Van Sweringen,
that the price of five million-odd dollars at which these 70,000 shares
of Chesapeake & Ohio wejre put into the Nickel Plate Railroad corresponded to the market pr ce at that time of those shares?
Mr. VAN SWERINGEN. N O ; it did not quite.
Mr. PECORA. HOW much of a disparity was there between the
market price and the price at which those 70,000 shares were put into
the Nickel Plate Road?
Mr. VAN SWERINGEN. I cannot answer you as to the disparity, but
I can tell you that, if my recollection serves me right, the $80 that
the Nickel Plate paid was just a little bit more than the market at
that time, or as the market reflected it, but there was a large block
of stock, and to have gathered it in the market would have meant
that it would have probably been at a different figure.
Mr. PECORA. Been what?
Mr. VAN SWERINGEN. It might have been at a different figure.
Mr. PECORA. And if the Huntington interests sought to sell in the
open market their 70,000 shares the price might have been also quite
different? The market might have gone down as the result of this
large block being offered? •
Mr. VAN SWERINGEN. Or it might have gone up. That is anybody's guess.
Mr. PECORA. Usually when a large block is thrown on the market
the price goes down, does it not?
Mr. VAN SWERINGEN. Oh, I do not pretend to be a market expert.
I do not think I ought to answer that. That depends upon how it is
done, I suppose, and when it is done.
Mr. PECORA. NOW, what was the financial set-up of the Vaness Co.
when it was organized in 1922?
Mr. VAN SWERINGEN. I might add right in there that it was originally designed as our own personal basket. It took a little different
form as time went on.
Mr. PECORA. It was designed as a personal corporation vehicle for
you and your associates; is that a fair statement?
Mr. VAN SWERINGEN. Yes; that is a very fair statement.
Mr. PECORA. Yes. Now, what was its capital structure?
STOCK EXCHANGE PRACTICES
603
Mr. VAN SWERINGEN (after conferring with associates). I am sorry
that I am having to keep you waiting here.
Mr. PECORA. That is all right.
Mr. VAN SWERINGEN. One hundred sixty-two thousand rive hundred shares of no par common stock and 50,000 shares of preferred
stock of a par value of $100. That is the authorized capital.
Mr. PECORA. HOW much of it was issued?
Mr. VAN SWERINGEN. All of the common. (After conferring with
associates.) My recollection is that it was a little more than 4,000,000
of the preferred out. Or that that has been issued.
Mr. PECORA. It is about 80 percent, a little more than 80 percent?
Mr. VAN SWERINGEN. I think so.
Mr. PECORA. Of the authorized preferred stock issued?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. NOW, was all of the
common stock of the Vaness Co,issued to you and your associates at the outset?
Mr. VAN SWERINGEN. It was; yes, sir.
Mr. PECORA. And were the preferred shares
that were issued also
issued to you and your associates at the oustet?
Mr. VAN SWERINGEN. That is my recollection; yes, sir.
Mr. PECORA. And what consideration was paid for that stock to
the Vaness Co?
Mr. VAN SWERINGEN. Someone will have to give me that. (Conferring with associates.)
Mr. PECORA. And, incidentally, you might tell us in what form
that consideration was paid.
Mr. VAN SWERINGEN. From the minutes I find this, dated January 10, 1922:
The Vaness Co.: We hereby propose to you as follows: 1. To transfer or
cause to have transferred to you 195,825 shares of the common capital stock of
the Nickel Plate Securities Corporation in tHe par amount of $9,791,250.
Mr. PECORA. I am sorry, Mr. Van Sweringen. Will you give me
that again. I do not hear you down here very well.
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. A little louder, please.
Mr. VAN SWERINGEN (reading):
1. To transfer or cause to have transferred to you 195,825 shares of the common
capital stock of the Nickel Plate Securities Corporation in the par amount of
$9,791,250.
2. To transfer or cause to have transferred to you 93 shares of the common
capital stock of The Traction Terminal Co."
Mr. PECORA. Of what company?
Mr. VAN SWERINGEN. Of the Traction Terminal.
Mr. PECORA. What is that?
Mr. VAN SWERINGEN. That is the Rapid Transit.
Mr. PECORA. I did not get the name of that security. The 93
shares. I will have to ask you to speak a little louder.
m
Mr. VAN SWERINGEN. Pardon me?
Mr. PECORA. I did not get the name of that security, the 93 shares.
Mr. VAN SWERINGEN. The Cleveland Traction Terminal Co.
That is all of the outstanding stock of that company except seven
qualifying shares.
Mr. PECORA. Ninety-three shares?
Mr. VAN SWERINGEN.
Yes.
604
STOCK EXCHANGE PEACTICES
Mr. PECORA. All right.
Mr. VAN SWERINGEN (reading):
and to deposit or cause to be deposited with you.
Those seven shares that I just described.
In consideration of payment for the foregoing, your company shall issue and
deliver to us or our order all the common capital stock of your company, amounting to 162,500 shares, without nominal or par value.
These were no-par shares.
pay to us the sum of $9,300 in cash.
The acceptance of this proposal by authority of your board of directors will
constitute and be the contract between your company and ourselves covering
the matters aforesaid as of January 10, 1922—
And signed
O. P. Van Sweringen and M. J. Van Sweringen.
Mr. PECORA. May I have that minute book here, please, from which
you have just read?
Mr. VAN SWERINGEN. We will give you a copy of that minute, if
you would like.
Mr. PECORA. Let me have the minute book.
Mr. JOHN P. MURPHY. Would you like to see it now, Mr. Pecora?
Mr. PECORA. If you don't mind.
(The minute book was passed to Mr. Pecora and he examined it.)
Now, upon the organization of the Vaness Co. in January 1922, you
and your brother proposed to that company to acquire all of its common stock to the number of 162,500 shares, having a par value—no,
without nominal par value—in return for 195,825 shares of the common stock of the Nickel Plate Securities Corporation, having a par
value of $9,791,250, and also 93 shares of the common capital stock of
the Cleveland Traction Terminals Co., which was all of the outstanding common capital stock of that company with the exception of seven
shares to qualify the directors of that company. That was the transaction, wasn't it?
Mr. VAN SWERINGEN. That is the transaction.
Mr. PECORA. SO that the capital assets acquired by the Vaness Co.
simply consisted of these shares of the common stock of the Nickel
Plate Securities Co. and the 93 shares of the common capital stock of
the Cleveland Traction Terminals Co.; is that correct?
Mr. VAN SWERINGEN. At that time.
Mr. PECORA. At that time. Now, subsequently, in 1923, the
Nickel Plate Securities Corporation purchased 3,000 shares of the
common stock of the Chesapeake & Ohio Railroad from the Huntington interests for a consideration of approximately $1,700,000, did it
not?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. And that money
was raised by the Nickel Plate
Securities Corporation by means of a loan that it obtained in 1923 from
the Vaness Co.; is that correct?
Mr. VAN SWERINGEN. Yes, sir; I believe it is. [After examining
document.] Yes, sir.
Mr. PECORA. Where did the Vaness Co. get that one million seven
hundred-odd thousand dollars—how did it get it—which it loaned
to the Nickel Plate Securities Corporation?
(Mr. Van Sweringen conferred with associates.)
STOCK EXCHANGE PEACTICES
605
Mr. MURPHY. YOU have the record. May I take it back?
Mr. PECORA. Surely. Certainly. [Handing minute book to Mr.
Murphy.]
Mr. VAN SWERINGEN. If I could have had your interrogatory I
might have saved a lot of time.
Mr. PECORA. That is all right; take whatever time you need.
Senator ADAMS. Mr. Van Sweringen, while they are looking that
up, I am w° n dering if you would check my figures. I have been a
little surprised at the apparent cost per share of the 3,000 shares of
Chesapeake & Ohio which the Chesapeake Securities Co. got; that is,
the price.
Mr. VAN SWERINGEN. YOU mean the Nickel Plate securities?
Senator ADAMS. Yes. The price reduces itself. How did you
figure that? I mean just a mere matter of verifying my mathematics.
Mr. VAN SWERINGEN. YOU mean the price per share?
Senator ADAMS. It looked like $550 per share to me, and I
Mr. VAN SWERINGEN (interposing). That is about right. Of
course, you have got in mind that the Nickel Plate Securities had the
residuary balance.
Senator ADAMS. Yes; I know, and I was just figuring out what it
resulted in.
Mr. VAN SWERINGEN. Yes, sir; it did.
Mr. PECORA. I had just made that calculation, Senator Adams.
Mr. VAN SWERINGEN. We did not hurt the Nickel Plate stock-
holder when we did that.
(Mr. Van Sweringen and his associates conferred and examined
documents.)
Mr. PECORA. While your associates are looking up the answer to
the last question that I put to you 7 I will ask you something else.
From your answers to Senator Adams question it would seem that the
3,000 shares acquired by the Nickel Plate Securities Corporation of
the Chesapeake & Ohio common stock which you bought from the
Huntington interests was paid for at the rate of about around $565 a
share.
Mr. VAN SWERINGEN. Our interest did; yes.
Mr. PECORA. Yes. Wherein the portion of 70,000 shares put into
the Nickel Plate road were put in at prices between $70 and $80 a
share?
Mr. VAN SWERINGEN. At $80.
Mr. PECORA. At $80. Now, Mr.
Van Sweringen, at that time who
held the capital stock of the Nickel Plate Securities Corporation?
Mr. VAN SWERINGEN. Our interests, as I have described them
heretofore.
Mr. PECORA. What is that?
Mr. VAN SWERINGEN. Our interests, as I have described them
heretofore.
Mr. PECORA. Well, by your interests whom do you mean?
Mr. VAN SWERINGEN. I mean my brother and myself and Mr.
Bradley and Mr. Nutt and a few other holders that were close.
Mr. PECORA. Were there any stockholders other than your own
immediate group or interest?
Mr. VAN SWERINGEN. In the small percent that I have just noted,
Mr. PECORA. In the small percent. Did you think it was fair upon
those other stockholders, those who were outside of your group, to
saddle upon them the purchase of these shares at $550 a share?
606
STOCK EXCHANGE PEACTICES
Mr. VAN SWEKINGEN. Yes; I did, or I would not have done it.
Mr. PECORA. Thought it was very fair, didn't you?
Mr. VAN SWERINGEN. They were our associates and men in business.
Mr. PECORA. I am speaking of those who were not your associates.
Mr. VAN SWERINGEN. This was not a public offering. It was a
number of people who had gathered around us, but we had, as I
recollect it, about 80 percent.
Mr. PECORA. Well, did you think it was fair to the other 20 percent
to do that?
Mr. VAN SWERINGEN. Certainly I did, or I would not have done it.
Mr. PECORA. Think it was fair to saddle upon them as such purchase at more than five times their market value, did you?
Mr. VAN SWERINGEN. I don't like your expression "saddle upon".
That is not what we did. What we did was to sell to the Nickel
Plate at $80 a share the shares that they got, but the Nickel Plate,
you must remember, was owned by the Nickel Plate Securities, and
that group who owned that interest paid the difference, put plainly
that way.
Mr. PECORA. But 20 percent of the owners in stock of the Nickel
Plate Securities Corporation were persons not represented by your
interests?
Mr. VAN SWERINGEN. Yes; they were. They came in as associates
with us.
Mr. PECORA. And they had to bear their proportion of this——
Mr. VAN SWERINGEN (interposing). They came in as our associates.
Mr. PECORA. And they had to bear their proportion of this transaction, didn't they?
Mr. VAN SWERINGEN. Oh, certainly. They were riding with us.
Mr. PECORA. "Biding with US"?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. And at that price
they would have paid more than
five times the market value of those 3,000 shares?
Senator ADAMS. More than seven.
Mr. PECORA. That was very fair, was it?
Mr. VAN SWERINGEN. Separated off that way; yes. Because they
had the residuary interest, you understand, the other way, the
Nickel Plate. That turned out to be a very fortunate transaction
all around.
Mr. PECORA. Would it have turned out to be a less fortunate
transaction for the 20 percent of those stockholders of the Nickel
Plate Securities Corporation if that corporation had acquired these
3,000 shares not at $565 but at $100 or at $80?
Mr. VAN SWERINGEN. They were our associates and would have
wanted to share with us in what we did> and they did share with us.
Mr. PECORA. Would it have been less fortunate for them if they
had paid $80 or $100 a share instead of $565 a share for those 3,000
shares?
Mr. VAN SWERINGEN. That is an academic question, of course,
and you can answer it as well as I can. It was not what was done.
Mr. PECORA. NOW, let's get down to 1923, when the Vaness Co.
loaned a million seven hundred thousand dollars to the Nickel Plate
Securities Co. to enable that company to buy these 3,000 shares at
$565 a share.
(Mr. Van Sweringen conferred with associates.)
STOCK EXCHANGE PRACTICES
607
Mr. PECORA. Where did the Y a n e s s Co. get the money that it
loaned to the Nickel Plate Securities Corporation in that transaction?
Mr. VAN SWERINGEN. It seems, Mr. Pecora, that we do not have
the detail that is necessary to answer that question. We will get it.
It will mean that we will have to communicate with Cleveland to
obtain it, and we will have it by night or morning.
The CHAIRMAN. Do you recall, Mr. Van Sweringen, whether you
sold stock, the Vaness Co. sold stock, with which to——
Mr. VAN SWERINGEN (interposing). No; I don't just recall.
The CHAIRMAN. They did not have the money in the treasury,
did they?
Mr. VAN SWERINGEN. It taxes my memory too much.
The CHAIRMAN. They did not have that money in the treasury,
did they?
Mr. VAN SWERINGEN. Well, if I knew that I could answer the
rest probably. The safest thing for me to do is know and answer
on my knowledge.
. The CHAIRMAN. The only capital they had was in shares of the
Nickel Plate Co.
Mr. PECORA. The Nickel Plate Securities Corporation.
Mr. VAN SWERINGEN. Mr. Chairman, the difficulty there is that
he has picked one date and then jumped over to a later date and then
selected another time, without the intervening happenings being
disclosed, and to set up those two things or those two periods will
leave with everybody a wrong impression.
Mr. PECORA. Well, I am asking you, and you can take all the time
you need, Mr. Van Sweringen
Mr. VAN SWERINGEN (interposing). Well, I will be glad to get it.
Mr. PECORA (continuing). To answer the question as to where the
Vaness Co. got the money that it loaned in 1923 to the Nickel Plate
Securities Co. to enable it to buy these 3,000 shares at $565 a share.
Mr. VAN SWERINGEN. Mr. Pecora, that is not difficult to answer
from the records, but I cannot answer it from memory back there at
that time.
Mr. PECORA. Haven't you the minute book of the Vaness Co. here
with you?
Mr. VAN SWERINGEN. NO, strangely enough, I do not have the
data sufficiently in form to answer you. It would be easier to answer
than not to answer if I did.
Mr. PECORA. Well, Mr. Van Sweringen, can't you find the data in
your minute book?
Mr. VAN SWERINGEN. I have answered that. I am sorry I cannot
give it before tonight or morning. That is not an account book, of
course.
Mr. PECORA. Well, between January 1922 and that date in 1923
when this transaction was had with the Huntingdon interests, did the
Vaness Co. issue and sell to the public any securities?
Mr. VAN SWERINGEN. The Vaness Co. have never issued or sold
to the public securities. I can answer that part of it.
Mr. PECORA. Did it issue and sell any securities to anybody?
Mr. VAN SWERINGEN. That is what I am trying to find out, what,
we did do, that will enable me to answer your question that you
have just asked. I cannot do that without reference to the accounts.
in Cleveland—the accounting records.
175541—33—PT. 2
20
608
STOCK EXCHANGE PEACTICES
Mr. PECORA. I understood you to say that this Vaness Co. was
sort of a personal corporate vehicle for your interests.
Mr. VAN SWERINGEN. Yes; I said that—that it started out that way.
That is correct. I am sorry I cannot give you what you want right
at this minute. I will get it for you. You may have it. Your assistants were out there and gathered the records that we presumed that
you wanted.
Mr. PECORA. The fact that we want it is best evidenced by the
fact that I am asking you these questions.
Mr. VAN SWERINGEN. I thought maybe you had it, too. However,
there is one way to get it.
Mr. PECORA. YOU don't mean to imply that the employees of this
committee that examined the books made an audit of the books, do
you?
Mr. VAN SWERINGEN. Oh, no.
Mr. PECORA. Yes.
Mr. VAN SWERINGEN. NO, I
thought perhaps you had it there,
and if you had it would refresh my mind.
Mr. PECORA. AS a matter of fact, were any of the books of accounts
of tlie Vaness Co. shown to our examiners?
Mr. VAN SWERINGEN. I don't know.
Mr. PECORA. I am informed they were not. Will you have that
information between now and the next session of the committee?
Mr. VAN SWERINGEN. Gladly. Gladly.
Mr. PECORA. Perhaps you can tell us this: Did you and your associates use any of your own cash in the transaction that enabled you to
get control or dominating operation through seating of the board of
directors of the Chesapeake & Ohio Kailroad through the acquisition
of these 73,000 shares?
Mr. VAN SWERINGEN (after conferring with associates). We
undoubtedly did.
Mr. PECORA. HOW much?
Mr. VAN SWERINGEN. I cannot tell you that without going through
the records to find out. We have explained the transaction here.
Mr. PECORA. I don't hear you.
Mr. VAN SWERINGEN. We have explained the transaction here*
Mr. PECORA. Well, the transaction, as I gather it from your explanation, was briefly this: That the Nickel Plate R.R. Co. purchased
70,000 of these shares for $5,600,000, which moneys it raised through
the sale of mortgage bonds to the public, and then the other 3,000
shares were purchased by the Nickel Plate Securities Corporation
for $1,700,000, which it obtained as a loan from the Vaness Co.
Wherein in that operation did you and your associates put up any of
your own cash?
Mr. VAN SWERINGEN. Through the Vaness Co. operation we
either had to put up collateral or cash before we got money at any
stage of the game, or credit, one or the other.
Mr. PECORA. Can you tell us
# Mr. VAN SWERINGEN (interposing). And we owned that corporation.
Mr. PECORA. YOU owned the Vaness Co.?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. The Vaness Co. in
its original set-up merely acquired
some shares of the Securities Co., the Nickel Plate Securities Co.) in
STOCK EXCHANGE PRACTICES
609
return for capital stock which you and your associates received; is
that right?
Mr. VAN SWERINGEN. NOW, you are back to the place where I
could not answer before, because you pick a date as to that transaction
and then skip over for more than a year without the intervening
transactions. It is as to those intervening transactions that I want
the information, and that is what I promise to give you when I can
get it.
Mr. PECORA. Can you now recall any moneys that you and your
associates actually took out of your pocket to enable the Nickel
Plate Kailroad and the Nickel Plate Securities Corporation to acquire
these 73,000 shares of the capital common stock of the Chesapeake
& Ohio?
Mr. VAN SWERINGEN. YOU are trying to have me answer without
the facts again, Mr. Pecora.
Mr. PECORA. I am trying to have you answer on the basis of your
best recollection.
Mr. VAN SWERINGEN. I haven't any best recollection. That is
my trouble. The record is the best thing I,can get you, and we will
have that in the morning or tonight.
Mr. PECORA. Have you any recollection at all of you and your
associates having furnished out of your own means any of this consideration of $7,300,000 for the 73,000 Chesapeake & Ohio shares?
Mr. VAN SWERINGEN. YOU will have that answer in the morning.
Mr. PECORA. All right. Now, continuing in your prepared statement of this morning, Mr. Van Sweringen, you say as follows [reading]:
At that time—
Referring to the time when you bought these 73,000 shares—
the property was struggling somewhat because of capital necessities, but we were
sure it could be made to earn a lot more money and perform a much better service.
Did the fact that the Chesapeake & Ohio Railroad was struggling
somewhat at that time because of capital necessities
Mr. VAN SWERINGEN (interposing). Yes, sir.
Mr. PECORA (continuing). Enter into your consideration that it was
fair and proper for the Nickel Plate Securities Corporation to buy
3,000 of its shares at about $565 a share?
Mr. VAN SWERINGEN. Oh, yes. We knew what we were doing.
Mr. PECORA. YOU then go on to say in your prepared statement as
follows [reading]:
When we went into the management of it we conferred with Morgan & Co.
as to those improvements we felt should be made and through their aid financed
a large purchase of new equipment, which, with other betterments, would provide
President Harahan with the tools to accomplish the constructive job of which
he was capable.
Now, when did you go into the management of the Chesapeake
& Ohio Railroad?
Mr. VAN SWERINGEN. When did we go in?
Mr. PECORA. Yes, sir.
Mr. VAN SWERINGEN. January 30, 1923.
Mr. PECORA. And with what gentlemen connected
with Morgan &
Co. did you then confer as to improvements to be made in that road?
Mr. VAN SWERINGEN. I don't recall which ones.
610
STOCK EXCHANGE PRACTICES
Mr. PECQRA. HOW much aid did you receive of a financial character
from J. P. Morgan & Co. that enabled you to purchase new
equipment
x
for the Chesapeake & Ohio road at that time?
Mr. VAN SWERINGEN. $7,875,000 of par amount of equipments in
the one instance.
Mr. PECORA. Will you talk a little louder? I can't hear you.
Mr. VAN SWERINGEN. Pardon me; $7,875,000 par amount of
equipments in the one instance, and $18,000,000 in par amount in
the other instance, and those two dates were March 20, 1923-—that i&
the authority of the boards at that time—and June 17, 1924.
Mr. PECORA. June 17, 1924.
Mr. PECORA. And you are quite unable to tell us with whom yon
conferred at J. P. Morgan & Co. concerning these loans?
Mr. VAN SWERINGEN. Yes; I am.
Mr. PECORA. Can you tell us from
whom this new equipment was,
purchased?
Mr. VAN SWERINGEN. N O ; I cannot. I can get the data if yoiii
wish. I do not have it here.
The CHAIRMAN. Were they secured by equipment notes?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. Further on in your
prepared statement of this morning you said as follows:
We then turned our attention to an analysis of the Erie Railroad. Our studies^
convinced us that we could make it behave a lot better than it was doing. It
was one of the properties we felt was a necessary part of the system we were
trying to build.
When did you turn your attention to the Erie Railroad?
Mr. VAN SWERINGEN. At the time stated there, following right
along in the chain of events.
Mr. PECORA. When was it—1924, 1923, 1925?
Mr. VAN SWERINGEN. It looks to me like it was 1924; but somewhere in that range—1924 or 1923; 1923, part of it.
Mr. PECORA. Can you give us the terms upon which you obtained
these two loans from J. P. Morgan & Co. that aggregate $25,855,000,
for new equipment?
Mr. VAN SWERINGEN. The ones of March 20, 1923—those equipments were 5 percent ones and were sold at 96.46. That was the
net to us.
Mr. PECORA. That was the net to the railroad?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. What was it?
Mr. VAN SWERINGEN. 96.46.
Those of June 1924, the eighteen^
millions, were 5's at 98 and netted the company 98.
Mr. PECORA. Sold at net 98 to the company?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. Are these loans still open?
Mr. VAN SWERINGEN. For the serial equipments
I will give you a
tabulation, if you wish to have it, of the outstanding amounts.
Mr. PECORA. Just confining yourself now to those two loans?
Mr. VAN SWERINGEN. Your question makes me answer you
specifically.
Mr. PECORA. Let us take the first loan, then, the one of March,
20, 1923, $7,875,000. Is that still open?
Mr. VAN SWERINGEN. I cannot tell you what amount of it is.
or whether any of it is out, from recollection.
Digitized for out,
FRASER
STOCK EXCHANGE PRACTICES
611
Mr. PECORA. AS a matter of fact, this transaction was one wherein
J. P. Morgan & Co. underwrote that issue of equipment bonds?
Mr. VAN SWERINGEN. It was.
Mr. PECORA. They bought them
direct from the Chesapeake &
Ohio?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. HOW about the $18,000,000
issue of June 1924? Did
they buy that, too?
Mr. VAN SWERINGEN. Yes, sir. Of course they were both approved
by the Interstate Commerce Commission.
Mr. PECORA. Are these bonds still outstanding?
Mr. VAN SWERINGEN. I cannot answer that. I am sorry, but I
cannot recollect. I will get you the data if you are interested in
going further with it.
Mr. PECORA. When you said in your prepared statement as follows:
"When we went into the management of it", you meant by that, the
management of the Chesapeake & Ohio Railway, did you not—on
page 3 of your prepared statement?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. And you were enabled
to go into the management of
it simply through the control and ownership of 73,000 shares of its
common stock, were you not?
Mr. VAN SWERINGEN. The Commission's opinion on this subject
will be of interest, maybe. [Reading:]
It is represented that the Nickel Plate will purchase additional equipment and
improve its facilities to provide for the contemplated increased traffic of the
C. & O., and that it will reciprocate in increased tonnage to the C. & O. The
Nickel Plate represents, however, that before making the contemplated expenditure it must have assurance that the C. & O. traffic will be given the Nickel Plate
without the opposition of the people who control the C. & O.
Mr. PECORA. Mr. Van Sweringen, I cannot hear you.
Mr. VAN SWERINGEN. I do not know where to go back to—
The Nickel Plate represents—
Mr. PECORA. Are you now trying to answer the last question I
asked you as to whether or not you were enabled to enter into the
management of the Chesapeake & Ohio Railway simply through your
ownership or control of 73,000 shares of its capital common stock?
Mr. VAN SWERINGEN. AS to that, I think you are right.
Mr. PECORA. That was my question.
Mr. VAN SWERINGEN. What I am not sure about is whether we
had any more shares ourselves at that time; but we did shortly thereafter, if we did not have then.
Mr. PECORA. Have you a notation that among other information
you are to obtain in order to enable you to give this committee the
benefit of it tomorrow, is that relating to the identity of the person
or company from whom the C. & O. purchased this equipment out of
the proceeds of these two bond issues totaling $25,875,000?
Mr. VAN SWERINGEN. The sellers of the equipment?
Mr. PECORA. Yes, sir.
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. YOU said, Mr. Van
Sweringen, according to your best
recollection, that in 1923 you and your associates turned your atten
612
STOCK EXCHANGE PEACTICES
tion to an analysis of the Erie Railroad with a view of acquiring some
interest in it. You go on further and say, in your prepared statement:
That grand old gentleman, Mr. George F. Baker, now deceased, was the outstanding personality in the ownership of the property. So we talked with him as
to our welcome as a participant in this ownership.
Did you deem it necessary, in order to enable you to buy stock in a
railroad company that you thought might be helpful to your interests,
to get anybody's permission?
Mr. VAN SWERINGEN. I thought it was courteous.
Mr. PECORA. HOW much of the stock then outstanding of the Erie
Railroad Co. did the late Mr. George F. Baker then have, if you
know?
Mr. VAN SWERINGEN. I do not know.
Mr. PECORA. YOU said he was the outstanding personality in the
ownership of the property. Why did you say that?
Mr. VAN SWERINGEN. Just because that is the way I would interpret it.
Mr. PECORA. IS that interpretation based in any way upon any
knowledge you had of the extent of his stock ownership of the Erie
Railroad?
Mr. VAN SWERINGEN. I said, the outstanding personality in the
ownership.
Mr. PECORA. I ask you if that statement was based in any way upon
any knowledge you had of the extent of his stock ownership?
Mr. VAN SWERINGEN. I do not recall; but it would not have to
have been to mean what I meant it to be when I said it in this statement.
Mr. PECORA. The late Mr. Baker's personality was an outstanding
one, regardless of any shares of stock he owned in any enterprise, was
it not?
Mr. VAN SWERINGEN. I would agree with every bit of that.
Mr. PECORA. Why did you think you owed him any courtesy in
the matter, before you went out and bought any stock in that road,
of first consulting him?
Mr. VAN SWERINGEN. It is difficult to tell why one feels that they
owe a man a courtesy to do anything. I don't know that I did owe
it to him; but I preferred to approach it that way, as the courteous
way.
.
.
.
'
.
Mr. PECORA. Why did you think it was necessary for you to do it
if you did not owe him any courtesy in the matter?
Mr. VAN SWERINGEN. Maybe I will have to put it on the grounds
of business judgment. I expect that is it.
The CHAIRMAN. Was he an officer of the road?
Mr. VAN SWERINGEN. Yes, sir. He was a director of the road;
I think that was all. I am not sure but what he was the chairman
(consulting associates). He was a director of it, I am sure. I would
expect that if you had been identified with it all those years and was
known in it in the way he was, I would talk to you in just that same
way.
Mr. PECORA. YOU would have wasted your time, I am afraid.
Can you give us the substance of the talk you had with the late
Mr. Baker on the subject of your buying into the Erie Railroad at
that time?
STOCK EXCHANGE PEACTICES
613
Mr. VAN SWERINGEN. I cannot do it any better than I have in
that statement. I just told him what we saw in the property and
that we would like to have an interest in it.
Mr. PECORA. If Mr. Baker had told you that you would not be
welcome as a participant in the ownership of the Erie Railroad Co.,
would you have accepted his decision and refrained from buying into
the road?
Mr. VAN SWERINGEN. I am inclined to think that I would have
paused before I would have done it. It was not my ambition to go
where I was not welcome.
Mr. PECORA. YOU recognize that the matter of wanting to buy
stock that is traded in in the open market and upon our public
exchanges is not in any way dependent upon some one else's wishes?
Mr. VAN SWERINGEN. NO.
Mr. PECORA. Or agreeableness?
Mr. VAN SWERINGEN. I don't know
that it is. I think if I were
going to try to compete in the management of a property with the
existing management, that would be one thing. If I was going to try
to join it in bringing about a result, that would be another; and that
is what I sought to do in this instance.
Mr. PECORA. In other words, you were anxious to avoid competing
with Mr. Baker in the management of the Erie Railroad; is that it?
Mr. VAN SWERINGEN. I do not think, as it developed, I would
have had to compete, because there was a desire to have us have an
interest.
Mr. PECORA. That is one of the things you were anxious to avoid
even the appearance of?
Mr. VAN SWERINGEN. What?
Mr. PECORA. Competing with Mr. Baker for the management of
the Erie Railroad.
Mr. VAN SWERINGEN. Oh, no; I cannot say that I wanted to avoid
the appearance of it, because that would have meant that I was going
to do it without feeling that I was going into it
The CHAIRMAN. HOW much did he increase the investment?
Mr. VAN SWERINGEN. Quite a lot.
The CHAIRMAN. Quite a lot? Can you not give us some sort of an
idea? "Quite a lot" is like the length of "a piece of string".
Mr. VAN SWERINGEN. Mr. Chairman, you do not expect me to
come down here
The CHAIRMAN. YOU can give us some idea. You said in your
paper, "a considerable extent." What did you mean by that?
Mr. VAN SWERINGEN. I will try to get some approximation of that
increased holding. I think I can do it. But I am not sure that I can.
You do not, of course, expect me to come down here, with the many
matters that we have, and without any interrogatory to know what
you want from me, expect me to answer down to shares and times and
dates and all these other things concerned with all the different
angles of the business that we have been in in the last 15 years. That
is not humanly possible. I will get the data for you as best I can.
The CHAIRMAN. But this is a rather important transaction, acquiring the Erie Railroad. That was a very important transaction.
Mr. VAN SWERINGEN. I have had several important transactions,
but I don't keep all the details in my head.
614
STOCK EXCHANGE PRACTICES
The CHAIRMAN. We do not expect you to do that, but you might
give us some idea about his investment and how much he increased it;
$200,000, maybe?
Mr. PECORA. AS I understood your testimony this morning, when
you prepared this statement that you read into the record, you
endeavored to anticipate the matters that you expected to be interrogated about before this committe.
Mr. VAN SWERINGEN. In a general sense.
Mr. PECORA. And we are questioning you on the basis of your own
prepared statement, made up in anticipation of what you were going
to be questioned about here. Now, what knowledge did you have of
the late Mr. Baker's ownership of Erie Railroad stock that caused you
to say in this prepared statement that he was the outstanding personality in the ownership of the property and that he later increased his
investment in it to a very considerable extent?
Mr. VAN SWERINGEN. I knew at or about that time as he increased
it. As a matter of fact, he went right along, just about the time we
were doing it, increasing his holdings. That I know; but I cannot
tell you the amounts nor the dates here. I may from our records be
able to tell some part of it; but it was a substantial amount.
Mr. PECORA. Did your interests buy any of the Erie Railroad stock
from the late Mr. Baker?
Mr. VAN SWERINGEN. N O ; not that I recall. He was enlarging his
holdings, rather than that.
Mr. PECORA. YOU then go on and say in your prepared statement:
When we finished our buying, we, with him—
Meaning the late George F. Baker?
Mr. VAN SWERINGEN. Yes, sir.
PECORA (continuing reading).
Had about half of the common stock and a considerable portion of its preferred
shares.
Mr.
Mr. VAN SWERINGEN. Yes,
sir.
Mr. PECORA. When did you finish that buying?
Mr. VAN SWERINGEN. It may sound strange to you that I cannot
answer as to dates like that, running back 10 years. [After conferring with associates.] If it is important I will try to get that later,
if you would like it to be furnished later.
Mr. PECORA. YOU cannot get it now, even approximately?
Mr. VAN SWERINGEN. N O ; I cannot. It would be guesswork.
Mr. PECORA. Give it to us as guesswork and then if the guess
happens to be bad, upon a check-up, you can correct it later.
Mr. VAN SWERINGEN. N O ; I would rather not do that.
Mr. PECORA. HOW long a period of time was covered by your purchases of the shares of the Erie Railroad Co.?
Mr. VAN SWERINGEN. That I do not know. It ran over quite a
period, of course.
Mr. PECORA. What do you mean by "quite a period"? That is a
relative term.
Mr. VAN SWERINGEN. Months, maybe a year, maybe more than a
year.
Mr. PECORA. Did you buy these shares in the open market?
Mr. VAN SWERINGEN. Yes, sir.
PECORA. Through whom?
Mr.
STOCK EXCHANGE PRACTICES
615
Mr. VAN SWERINGEN. I do not recall which brokers; maybe more
than one.
Mr. PECORA. Which brokers did you use?
Mr. VAN SWERINGEN. I can tell you one I am sure of: Paine,
Webber & Co.
Mr. PECORA. That brokerage firm handled a considerable part of
your open market operations, did they not?
Mr. VAN SWERINGEN. They handled a considerable portion; yes.
Mr. PECORA. Did they have an office in Cleveland as well as in
New York?
Mr. VAN SWERINGEN. They do; they do now. I am not sure
that they did at that time.
Mr. PECORA. YOU say that "we, with him"—meaning Mr.
Baker—"had about half of the common stock." How much of that
did you and your associates acquire?
Mr. VAN SWERINGEN (after conference with associates). We had in
May 1925—the Vaness Co. owned 387,000 common shares; 24,700
first preferred shares and 52,600 second preferred shares.
Mr. PECORA. Of the Erie Railroad?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. DO you know
what consideration in the aggregate
was paid for them?
Mr. VAN SWERINGEN. It was a total of 464,300 shares at that
time.
Mr. PECORA. That is, of both common and first and second
preferred, too?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. What was the total
consideration for purchase price
paid by the Vaness Co. for these blocks of stock?
Mr. VAN SWERINGEN. $11,200,000, about.
Mr. PECORA. DO those figures represent the peak of the holdings
of the Vaness Co. or the Van Sweringen interests in the stock of the
Erie Railroad?
Mr. VAN SWERINGEN. NO. If you will include the holdings that
the C. & O. have—the C. & O. have some of that, you know.
Mr. PECORA. Well, you mean that the Chesapeake & Ohio had
some of these shares that you have just told us the Vaness Co. had
in May 1925?
Mr. VAN SWERINGEN. I can not identify the shares. They have
some shares. I do not know whether they had some at that time or
not. I think it was afterwards.
Mr. PECORA. Let us leave out of our consideration for the time
being the shares of Erie which the Cheapeake & Ohio Railway had.
Have you given us, now, in the figures put by you into the record a
few moments ago, the maximum amount of holdings of the Vaness
Co. in the stock of the Erie Railroad?
Mr. VAN SWERINGEN. I cannot answer that. I will get that
answer for you. I cannot give it to you from here.
Mr. PECORA. HOW did the Vaness Co. raise the $11,200,000 that
represented the cost to it of these shares of the Erie Railroad?
Mr. VAN SWERINGEN (after conferring with associates). I imagine
you will have me here for a week answering that question; but we will
try to get the detail of it for you. I do not know whether I can give
you the detail by morning, however.
616
STOCK EXCHANGE PRACTICES
Mr. PECORA. Are these transactions set forth or referred to in the
minute book of the Vaness Co.?
Mr. VAN SWERINGEN. Everyone that ought to have been undoubtedly was. I expect they were, in a serial process. There probably
was a general minute in the minute book. But we will give you—
we will try to give you the answer to that question. Let me put it
that way.
Mr. PECORA. Let me suggest this, then, Mr. Van Sweringen, that
between now and tomorrow morning you consult your records of
these various corporations we have here, with a view to enabling you
to answer questions similar in their character to those that I have
asked you this morning and this afternoon, with respect to the balance
of the transactions referred to in your prepared statement. Will you
do that?
Mr. VAN SWERINGEN. I will not promise to do that. I will try to
have the data here for that kind of questions. I am not sure that I
can anticipate some of that character of questions.
Mr. PECORA. YOU can tell from the nature of the questions I have
already asked you regarding transactions set forth in your statement
that I have alreadj^ covered, what will be the general nature of the
questions that you will be asked concerning the balance of the transactions set forth in your prepared statement. Won't you please
verify
Mr. VAN SWERINGEN. I do not want to hold out any false hopes;
but I will try to. And as to tomorrow morning, I will try to have as
many of them by that time as I can.
Mr. PECORA. Which of the original records or books of these
various corporations are with you here in Washington?
Mr. VAN SWERINGEN. None of our books of account.
Mr. PECORA. YOU have your minute books, have you not?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. Will not the
minute books set forth these transactions?
Mr. VAN SWERINGEN. Oh, my gracious! No; not that way.
Mr. PECORA. Won't they set them forth in sufficient detail to give
us answers to such questions, for instance, as to how much any of
your corporations paid for certain stock acquisitions?
Mr. VAN SWERINGEN. Minute books are not books of account, as
you of course realize.
Mr. PECORA. I know that.
Mr. VAN SWERINGEN. SO if I could get it out of the minute books
you could have it this afternoon; but I cannot do that. I will have
to get them from the books of account, and it will take some time and
it will mean that some forces have to work tonight and it will mean
that I will have to be relieved here in time to set them at work.
Mr. PECORA. Mr. Van Sweringen, I am informed by one of my
associates that our representatives or examiners or auditors went to
the offices of your company out in Cleveland and asked permission
to see these books, and that permission was not accorded to them.
Mr. VAN SWERINGEN. I do not so understand.
Mr. PECORA. DO you know whether any of those books were shown
to them?
Mr. VAN SWERINGEN. Let me see.' [Conferring.] Our people tell
me that your people were advised that we would supply any informa
tion that they listed to be supplied, and that that was done.
STOCK EXCHANGE PEACTICES
617
Mr. PECORA. DO your people also tell you that our people requested
the privilege of looking at your books, examining your books?
Mr. VAN SWERINGEN. Suppose I ask them about that now.
Mr. PECORA. All right.
Mr. VAN SWERINGEN (after conferring). I am told that they do
not remember such a request.
Mr. MURPHY. I will stand on what your assistant says. Whatever
your assistant says is correct.
Mr. VAN SWERINGEN. I do not know about that.
Mr. MURPHY. Well, I will. I know it was that fellow right there
[indicating Mr. McDonough].
Mr. VAN SWERINGEN. Mr. Pecora, let me put it in another way:
We thought we were cooperating with your people, and we thought
we were giving them what they wanted, and we wanted to give them
what they wanted, realizing that they could have it whether we
wanted to give it or not. So we proceeded on that theory. Now, if
you haven't gotten what you wanted perhaps no one is to blame.
For instance, you have been asking a great many questions here about
dates and amounts that are, of course, hard for me to give you right
off the bat.
The CHAIRMAN. Mr. Van Sweringen, will you get what you can
by tomorrow morning?
Mr. VAN SWERINGEN. Yes, sir.
The CHAIRMAN. We will now take a recess until
Mr. VAN SWERINGEN (continuing). I want you
to know that we
want to get it for you.
The CHAIRMAN. We appreciate that. And I have no doubt you
will be able to get a lot of this data for us.
Mr. VAN SWERINGEN. Thank you very much.
The CHAIRMAN. The committee will now recess until tomorrow
morning at half past 10 o'clock.
(Thereupon, at 4:35 o'clock p.m., Monday, June 5, 1933, the committee recessed until 10:30 o'clock on the following morning.)
STOCK EXCHANGE PEACTICE8
TUESDAY, JUNE 6, 1933
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,
Washington, D.C.
The committee met pursuant to adjournment on yesterday at
12 :10 p.m. (following an executive session) in the caucus room of
the Senate Office Building, Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Barkley, Adams, and
Goldsborough.
Present also: Ferdinand Pecora, counsel to the committee, Julius
Silver, David Saperstein, and James B. McDonough, Jr., associate
counsel to the committee; and Frank Meehan, chief statistician;
John W. Davis, counsel for J. P. Morgan & Co.; Randall J. LeBoeuf,
Jr., and Earle J. Machold, counsel for the United Corporation and
for George H. Howard, president of the United Corporation; Frank
H. Ginn, attorney representing O. P. and M. J. Van Sweringen and
John Patrick Murphy.
The CHAIRMAN. The committee will come to order. The committee in executive session adopted a resolution, and I am authorized to
report it, as follows:
It is the sense of this committee that it should inquire into the practices of
buying and selling securities, as such practices may affect the taxing powers of
the Government; but inasmuch as the legal right of the committee to proceed
along this line of inquiry is challenged, the committee should proceed immediately
with railroad, public utility, and all other phases of the investigation and the
subcommittee charged with the investigation be directed to report a resolution
enlarging the powers of the committee as soon as possible, in such manner as
may be deemed necessary to enable it to inquire into the above practices.
We will proceed along the line that we were following on yesterday,
Mr. Van Sweringen will resume the stand.
Mr. PECORA. Mr. Van Sweringen, will you now resume the stand?
TESTIMONY OF 0. P. VAN SWERINGEN, PRESIDENT OF THE
ALLEGHANY CORPORATION, CLEVELAND, OHIO—Resumed
Mr. PECORA. Mr. Van Sweringen, in the course of your examination
on yesterday before this committee you were asked to produce a copy
of the original supplemental agreement dated September 13, 1922,
between you and your brother and New York Central Railroad Co.,
and the Nickel Plate Securities Corporation. And you answered:
We do not have it here. We will be glad to get it for you.
put into the record at a later date.
We will have it
I now ask you if you have that supplemental agreement here.
Mr. VAN SWERINGEN. NO ; we have not.
619
620
STOCK EXCHANGE PRACTICES
Mr. PECORA. When will you be able to procure a copy for submission to this committee?
Mr. VAN SWERINGEN. We hope tomorrow.
Mr. PECORA. Tomorrow?
Mr. VAN SWERINGEN. Yes,
Mr. PECORA. All right, sir.
sir.
Now, you were also asked on yesterday
if you had a map or survey showing the various railroad lines embodied in this so-called Van Sweringen System. Have you such a
map here now?
Mr. VAN SWERINGEN. On the table here, Mr. Pecora, is a map of
the eastern groupings, and underneath is a map of the western
groupings.
Mr. PECORA. I offer those in evidence.
The CHAIRMAN. Let them be received, and if it is practicable t h e j
will be made a part of the printed record.
(Exhibits nos. 42 and 43 are on file with the committee.)
Mr. VAN SWERINGEN. Perhaps I should point out as to the eastern
groupings, those were as we proposed them in 1929.
Mr. PECORA. Very well, sir. Does that appear on the face of the
map?
Mr. VAN SWERINGEN. I am not sure, but the point I make is that
the Interstate Commerce Commission made some changes. It was
made from those.
Mr. PECORA. Very well. Are there descriptions on the map to
make that clear?
Mr. VAN SWERINGEN. Yes. There is an exhibit number toidentify it.
Mr. PECORA. All right. Now, Mr. Van Sweringen, you were also
asked on yesterday to state how or from whpm the Vaness Co.
obtained the $1,700,000 which it loaned to the Nickel Plate Securities
Corporation in order to enable the latter corporation to purchase
therewith 3,000 shares of the common stock of the Chesapeake &
Ohio Railroad from the Huntington interests. Can you now give
the committee that information?
Mr. VAN SWERINGEN. Our records show that this sum was paid by
the Vaness Co. to the Nickel Plate Securities Corporation in reduction of open account existing between those companies.
Mr. PECORA. On yesterday you referred to the transaction as a
loan transaction. The answer you have just made would, indicate
that it was not a loan transaction but a transfer of funds out of open
account. Which is correct?
Mr. VAN SWERINGEN. The record, of course, would be correct.
Pardon me a moment until I look at it. (After conferring with
associates.) The record should have said, apparently, reduction
of that loan because it was a repayment of the advance.
Mr. PECORA. Talk a little louder, please.
The CHAIRMAN. We cannot hear you up here at this end of the
table, Mr. Van Sweringen.
Mr. VAN SWERINGEN. The record of yesterday's proceedings should
have said in reduction of open account existing between those companies.
Mr. PECORA. Well, now
Mr. VAN SWERINGEN (continuing). The difference was technical,,
I suppose.
STOCK EXCHANGE PRACTICES
621
Mr. PECORA. Your testimony of yesterday, as it appears on
pages 1493 and 1494 of the stenographic transcript thereof, is as
follows:
Q. And that money—
Eeferring to this $1,700,000—
was raised by the Nickel Plate Securities Corporation by means of a loan that it
obtained in 1923 from the Vaness Co.; is that correct?
And your answer is:
Yes, sir; I believe it is. (After examining document.)
Yes, sir.
Now, I want to ask you specifically: Did the Nickel Plate Securities Corporation obtain the $1,700,000 that it paid for the 3,000 shares
of common stock of Chesapeake & Ohio which it bought in 1923 from
the Huntington interests, from the Vaness Co. as a loan?
Mr. VAN SWERINGEN. In reduction of open account existing between those companies.
Mr. PECORA. Then it did not get the money as a loan from the
Vaness Co., did it?
Mr. VAN SWERINGEN. It did not.
Mr. PECORA. YOU say it did not?
Mr. VAN SWERINGEN. N O ; as it developed.
Mr. PECORA. NOW, when was this open account created?
Mr. VAN SWERINGEN. That I cannot tell you.
Mr. PECORA. HOW was it created?
Mr. VAN SWERINGEN. And that I cannot tell you.
Mr. PECORA. What obligations did the Vaness Co. owe the
Nickel
Plate Securities Corporation at the time it made this payment of
$1,700,000 on account of open account?
Mr. VAN SWERINGEN. That I do not know from what I have here.
Mr. PECORA. Have you any recollection at all about it?
Mr. VAN SWERINGEN. NO. I do not recall the transaction. The
record speaks for itself.
Mr. PECORA. Which record do you refer to as speaking for itself?
Mr. VAN SWERINGEN. The record of accounts of the company.
Mr. PECORA. Where is that record? Have you it with you?
Mr. VAN SWERINGEN. I do not have it.
Mr. PECORA. Where is it?
Mr. VAN SWERINGEN. In Cleveland.
Mr. PECORA. Have you no present recollection of the circumstances
of the creation of this open account that you speak of?
Mr. VAN SWERINGEN. I have a memorandum here from the
record, that that money was obtained in reduction of an open account,
which was the answer to the question that you asked me that I was to
provide.
Mr. PECORA. From what source was that memorandum from which
you now give that information, prepared or obtained?
Mr. VAN SWERINGEN. Our forces who are here communicated with
Cleveland on the long distance and handed me this bit of information
that I have just given to you.
Mr. PECORA. And is that the sole source of your information or
recollection?
Mr. VAN SWERINGEN. Yes,
sir.
622
STOCK EXCHANGE PEACTICES
Mr. PECORA. YOU have no other present recollection of this open
account?
Mr. VAN SWERINGEN. I do not have.
Mr. PECORA. Or of any of the items that enter into it?
Mr. VAN SWERINGEN. N O ; I do not have.
Mr. PECORA. Had you completely forgotten the existence of the
open account when you answered the question on yesterday with
respect to the obtaining of this sum of $1,700,000 by the Nickel
Plate Securities Corporation from the Vaness Co.?
Mr. VAN SWERINGEN. I did not have a recollection. Of course,
I cannot carry these matters in my head.
Mr. PECORA. Even an open account involving millions of dollars
between two corporations that are controlled by your interests, you
have completely forgotten about?
Mr. VAN SWERINGEN. I do not undertake to try to carry in my
head such data. That is what our records are for. I find it much
simpler than trying to remember it.
Mr. PECORA. Well, as to your recollection of particular items or
transactions, did the mere fact that you keep records for that purpose
cause you to lose all recollection of transactions in general?
Mr. VAN SWERINGEN. It is true that I do not charge my mind
with their recollection.
Mr. PECORA. DO you know how extensive the balances are in this
open account?
Mr. VAN SWERINGEN. No; I do not recall.
Mr. PECORA. YOU do not know a single thing at the present inoment
about the circumstances of the creation of the open account, do you?
Mr. VAN SWERINGEN. Well, that was in 1923.
Mr. PECORA. The open account was created in 1923?
Mr. VAN SWERINGEN. That transaction was back in 1923, 10 years
ago.
Mr. PECORA. I am asking you now about the open account.
Mr. VAN SWERINGEN. And I am talking about that.
Mr. PECORA. Well, have you absolutely no recollection at this time
of the creation of that open account?
Mr. VAN SWERINGEN. NO. The situation is just as I stated it.
I have not charged my mind with the transactions from day to day,
nor operations, where the records of the company are there for
reference.
Mr. PECORA. Mr. Van Sweringen, I do not think you have answered my question. My question specifically is this: Have you now
no recollection whatsoever of the circumstances that led to the creation of this open account between Nickel Plate Securities Corporation
and the Vaness Co.?
Mr. VAN SWERINGEN. I have not a recollection of it. I am sorry
that I did not get your question just like you asked it.
Mr. PECORA. NOW, I will ask you to produce it at a session of the
committee to be held tomorrow, the original books of account with
respect to this open account.
Mr. VAN SWERINGEN. All right, sir.
Mr. PECORA. NOW, at page 1499 of the stenographic minutes of
your testimony given on yesterday, you were asked the following
•question, to which you made the answer which I will now read:
STOCK EXCHANGE PRACTICES
623
Q. Where did the Vaness Co. get the money that it loaned to the Nickel Plate
Securities Corporation in that transaction?—A. It seems, Mr. Pecora, that we
do not have the detail that is necessary to answer that question. We will get it.
It will mean that we will have to communicate with Cleveland to obtain it,
and we will have it by night or morning.
Now, the money referred to was this sum of $1,700,000 that you
now say was not loaned by the Vaness Co. to the Nickel Plate Securities Corporation, but was paid on open account between the two
companies. Now, let me ask you specifically: Where did the Vaness
Co. get that money which it paid on what you now say was an open,
account?
Mr. VAN SWERINGEN. The Vaness Co. at about that time made a
loan from the Guaranty Trust Co. of $3,000,000.
Mr. PECORA. Then, again, those moneys that were used by your
companies in the purchase of shares of the Chesapeake &. Ohio, were
moneys that your companies borrowed for that purpose and not your
own moneys, is that it?
Mr. VAN SWERINGEN. It was money that was borrowed.
Mr. PECORA. NOW, in the course of your testimony on yesterday,
as appears at page 1504 of the stenographic minutes, you were asked
the following question, or questions, to which you made the following
answers:
Q. Can you now recall any moneys that you and your associates actually took
out of your pocket to enable the Nickel Plate Railroad and the Nickel Plate
Securities Corporation to acquire those 73,000 shares of the capital common
stock of the Chesapeake & Ohio?—A. You are trying to have me answer without
the facts again, Mr. Pecora.
Q. I am trying to have you answer on the basis of your best recollection.—A.
I haven't any best recollection. That is my trouble. The record is the best
thing I can get you, and we will have that in the morning or tonight.
Have you now the record which will enable you to answer that
question, Mr. Van Sweringen?
Mr. VAN SWERINGEN. That is the question I did answer on yesterday, except as to the possible statement that when the loan was
repaid that we made with the Guardian Trust Co., that it was done
out of the proceeds of the sale of preferred and common stock, and
that in that transaction we took one half million of that preferred
stock. I am not sure whether I testified to that full extent on yesterday, but think I did.
Mr. PECORA. Aren't you confused with respect to the moneys
that I am now inquiring about, Mr. Van Sweringen?
Mr. VAN SWERINGEN. I might be.
Mr. PECORA. Well, let me read this further question and answer,
from page 1504 of the stenographic minutes of your testimony given
on yesterday:
Q. Have you any recollection at all of you and your associates having furnished out of your own means any of this consideration of $7,300,000 for the
73,000 Chesapeake & Ohio shares?—-A. You will have that answer in the
morning?
Mr. VAN SWERINGEN. Pardon me, but I was answering you as to
the Nickel Plate, wasn't I?
Mr. PECORA. Perhaps so.
Mr. VAN SWERINGEN (after conferring). Mr. Pecora, that question
I did answer just ahead of this one. I was confused for the moment
175541—33—PT. 2
21
624
STOCK EXCHANGE PRACTICES
between the two transactions, but the $1,700,000, which was a part
of that purchase payment to the Huntingtons, is the item that you
are now referring to.
Mr. PECORA. NO. I am referring to the item of $7,300,000, not
the item of $1,700,000.
Mr. VAN SWERINGEN (after conferring). Well, I am still right.
The $7,300,000 is made up
Mr. PECORA (interposing). And so am I right.
Mr. VAN SWERINGEN. At least I think I am. Pardon me, but that
$7,300,000 item is made up of 2 parts, 1 of $5,600,000, that I have
heretofore explained, and the other of $1,700,000, and that item I told
you of in more detail earlier in this proceeding today.
Mr. PECORA. Well, now, I am going to put the question to you in
the specific language that I put to you on yesterday, as appears at
page 1504 of the stenographic transcript, in which you promised to
give your answer to us this morning. Now, see if you can give us an
answer to this:
Q. Have you any recollection at all of you and your associates having furnished
out of your own means any of this consideration of $7,300,000 for the 73,000
scares of Chesapeake & Ohio?
Mr. VAN SWERINGEN. We and our associates provided the
$1,700,000, and we personally took—well, that answers it.
Mr. PECORA. Didn't you say a few minutes ago that that $1,700,000
was obtained by the Vaness Co. out of a loan of $3,000,000 or thereabouts borrowed from the Guaranty Trust Co.?
Mr. VAN SWERINGEN. Certainly, but we provided it just the same.
Mr. PECORA. YOU provided it out of your means? Out of the
personal means of you and your associates?
Mr. VAN SWERINGEN. Yes. Ourselves and our associates were
the Vaness Co., and they borrowed that money and they put up the
collateral for those dollars.
Mr. PECORA. And did you consider that that money then represented your own means, or the proceeds of a loan obtained from the
Guaranty Trust Co.?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. Which?-^
Mr. VAN SWERINGEN. Our own means, but as the proceeds of a
loan obtained from the Guaranty.
Mr. PECORA. That is, you put the money into the Vaness Co.,
but you got the money in the name of the Vaness Co. by borrowing
$3,000,000 or more from the Guaranty Trust Co.?
Mr. VAN SWERINGEN. Just as I described.
Mr. PECORA. I mean, is that correct? Have I correctly interpreted
your answers?
Mr. VAN SWERINGEN. My answer is as I made it here. Yes.
Mr. PECORA. Did you and your associates-—by that I mean you,,
your brother, Mr. Bradley, Mr. Nutt, and any of your other associates
whose names you were unable to give us yesterday, furnish to the
Vaness Co. the $1,700,000 which you turned over to the Nickel
Plate Securities Corporation out of your own individual means?
Mr. VAN SWERINGEN. That is the same question again, and I am
forced to answer it
Mr. PECORA. Just answer the question as I put it now, Mr. Van
Sweringen.
STOCK EXCHANGE PRACTICES
625
Mr. VAN SWERINGEN. Well, if you will pardon me, I have got to
confine it to the facts, as I understand them^ and my answer is the
one that I just made.
Mr. PECORA. Well, please answer the question as I last put it to
you.
Mr. VAN SWERINGEN. Mr. Stenographer, if you will repeat in th#
record the answer that I just made it will have to be that answer.
Mr. PECORA. Will you kindly pay attention to the question which
I put to you and answer that question specifically if you can.
Mr. VAN SWERINGEN. That is the answer.
Mr. PECORA. Will you repeat my question to the witness, Mr.
Stenographer.
(Thereupon the question was read by the reporter as above
recorded, as follows:)
Mr. PECOKA. Did you and your associates—by that I mean you, your brother*
Mr. Bradley, Mr. Nutt, and any of your other associates whose names you were
unable to give us yesterday, furnish to the Vaness Co. the $1,700,000 which you
turned over to the Nickel Plate Securities Corporation out of your own individual
means?
Mr. VAN SWERINGEN. How did I answer that? (Addressing the
reporter.)
Mr. PECORA. NOW, please answer now, regardless of any answers
previously given to it.
Mr. VAN SWERINGEN. N O ; I want to be accurate about this, and
you want me to be accurate about this.
Mr. PECORA. Well, the best way you can be accurate about it is
by anwering the present question.
Mr. VAN SWERINGEN. Well, that is a matter of opinion, and I am
the one that is to be responsible for the answer.
Mr. PECORA. Well, please answer the question, Mr. Van Sweringen.
Mr. VAN SWERINGEN (addressing the reporter). Will you be good
enough to read the answer I just gave.
(Thereupon the following was read by the reporter, as above
recorded:)
Mr. VAN SWEEINGEN. That is the same question again, and I am forced to
answer it
Mr. VAN SWERINGEN. The one before that.
(Thereupon the reporter read the answer preceding th« one just
read, as above recorded, as follows:
Mr. VAN SWEEINGEN. My answer is as I made it here. Yes-
Mr. VAN SWERINGEN. N O ; before that.
(Thereupon the reporter read an answer previous to the one last
read, as above recorded, as follows:)
Mr. VAN SWERINGEN. Our own means, but as the proceeds of a loan obtained
from the Guaranty.
Mr. VAN SWERINGEN. That is it. Now, I will answer it again if
you wish. Our own means, but as the proceeds of the loan obtained
from the Guaranty Trust Co.
Mr. PECORA. Well, was it in your own means or was it the proceeds
of a loan?
Mr. VAN SWERINGEN. It was just what I there said,
Mr. PECORA. Well, which of the two was it? Your own means or
the proceeds of a loan?
626
STOCK EXCHANGE PRACTICES
Mr. VAN SWERINGEN. It was our own means obtained as the proceeds of a loan.
Senator BARKLEY (presiding). You mean after you borrowed it
it was yours?
Mr. VAN SWERINGEN. Yes, sir.
Senator BARKLEY. And you put it into the Vaness Co.?
Mr. PECORA. The Vaness Co. borrowed it.
Senator BARKLEY. I mean the Vaness Co. borrowed it
from the
Guaranty Co.?
Mr. VAN SWERINGEN. Yes.
Senator BARKLEY. Three million and some odd dollars?
Mr. VAN SWERINGEN. $3,000,000.
Senator BARKLEY. YOU have no interest in the Guaranty Trust Co.?
Mr. VAN SWERINGEN. None at all.
Senator BARKLEY. SO that the Vaness Co. is you and your brother
and others?
Mr. VAN SWERINGEN. Yes,
sir.
Senator BARKLEY. I do not yet quite understand all I know about it.
Mr. VAN SWERINGEN. YOU are right about it, Senator.
Senator BARKLEY. SO it was borrowed; no matter whether it came
through the Vaness Co. or the Van Sweringens, it was money borrowed
from the Guaranty Trust Co.?
Mr. VAN SWERINGEN. Yes. It had its origin in that loan.
Senator BARKLEY. And the Vaness Co. and the Van Sweringens
being more or less identical it was the same?
Mr. VAN SWERINGEN. Yes. But having been borrowed it was our
money and we did as I said.
Senator BARKLEY. YOU were responsible for the loan.
Mr. VAN SWERINGEN.
Yes.
Mr. PECORA. NOW when you say you were responsible for the loan
do you mean you individually, or the Vaness Co. as a corporate entity?
Mr. VAN SWERINGEN. I mean the Vaness Co. as a corporate
entity.
Mr. PECORA. In other words, the loan was made directly by the
Guaranty Trust Co. to the Vaness Co., was it not?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. NOW, you were asked
yesterday the following question, to which you made the answer which I will read, and I am
reading from page 1507 of the stenographer's minutes of your testimony:
Question. Can you tell us from whom this new equipment was purchased?
Answer. No; I cannot. I can get the data if you wish. I do not have it here.
Are you now able to tell us from whom the Chesapeake & Ohio
Railroad purchased the 25 million-odd dollars of new equipment?
Mr. VAN SWERINGEN. The equipment purchased under the 1923
issue consisted of 50 Mallet locomotives and 8 passenger locomotives,
purchased from the American Locomotive Co.; also 1,000 70-ton
steel hopper gondolas purchased from the Standard Steel Car Co.;
and a like amount of said gondolas purchased from the American
Car & Foundry Co.
The equipment purchased under the June 1924 issue consisted of a
variety of locomotives, rolling stock of different types, including dining
and express cars, and also locomotive cranes and other equipment.
STOCK EXCHANGE PRACTICES
627
The locomotives, cars, and other equipment were purchased from
the following vendors: Illinois Car & Manufacturing Co., Standard
Steel Car Co., American Car & Foundry Co., General American Car
Co., Newport News Shipbuilding Co., Rodger Ballast Car Co., Pressed
Steel Car Co., Brown Hoisting Machinery Co., and O. F. Jordan Co.
Mr. PECORA. NOW, on pages 1514 and 1515 of the stenographer's
minutes of your testimony of yesterday it appears that you were asked
the following questions, to which you made the answers which I will
now read:
Question (by the chairman). How much did he increase the investment?
Parenthetically that refers to the investment of the late Mr. George
F. Baker in his stockholdings of the Erie Railroad.
Answer. Quite a lot.
Question. Quite a lot? Can you not give us some sort of an idea? l' Quite a lot"
is like the length of a, piece of string.
Answer. Mr. Chairman, you do not expect me to come down here
The CHAIRMAN. YOU can give us some idea. You said in your paper, "A
considerable extent." What did you mean by that?
Answer. I will try to get some' approximation of that increased holding. I
think I can do it. But I am not sure that I can.
And so forth.
Can you now tell us to what extent the late Mr. Baker increased
his investment in Erie Railroad stock when you and your associates
bought into that road?
Mr. VAN SWERINGEN. Our books do not disclose how many shares
Mr. Baker had at the outset and, frankly, I do not know. Neither
do,our books disclose his purchases after we had begun to buy. But
I am confident that he was absorbing Erie stock along at the time
that we were buying. I had conferences with Mr. Baker from time
to time as we were buying, and I am very sure he knew about how
much Erie common we had bought, and I am also quite sure that he
and I both understood when we stopped buying that our holdings of
Erie—that is, the Baker holdings, so-called, and oars—were approximately one half of the common.
Mr. PECORA. Have you since your appearance on the stand yesterday obtained any information which would enable you to tell this
committee now how much additional investment Mr. Baker made in
the Erie Railroad?
Mr. VAN SWERINGEN, My answer to that, Mr. Pecora, will have
to be that one that I have just made.
Mr. PECORA. IS that the only answer that you can make to that
question?
Mr. VAN SWERINGEN. That is the only answer that I can make
to it,
Mr. PECORA. It is the most definite answer that you can make to
the question?
Mr. VAN SWERINGEN. It is the most definite answer that I can
make.
Mr. PECORA. Well, what prompted 3 ou to say, then, in your prepared statement that was read into the record yesterday as follows:
"He"—meaning Mr. Baker—"heartily concurred, and said that if we
decided to move into it, he would be glad to increase his own investment, which he later did to a very considerable extent."?
628
STOCK EXCHANGE PRACTICES
Mr. VAN SWERINGEN. That is in two parts. The first part is the
statement that I reported him as making to me. And the second part
is answered in the statement that I made just in front of this one.
Mr. PECORA. Well, have you any knowledge that Mr. Baker did
increase to any extent his holdings in Erie Railroad after you consulted
Mm or talked with him as to whether or not you would be welcome as
a participant in the ownership of the railroad?
Mr. VAN SWERINGEN. AS I said before, I am confident that he was
absorbing Erie stock along at the time we were. I had conferences
with him, as I also said before, from time to time as we were buying.
And I am very sure he knew about the Erie purchases that we had
made also.
Mr. PECORA. Have you any personal knowledge that you can give
this committee that the late Mr. Baker increased his holdings in Erie
Railroad after you had your conversation with him or talk with him
concerning your being welcome as a participant in the ownership of
the stock of that road?
Mr. VAN SWERINGEN. I am confident that he did.
Mr. PECORA. Have you any knowledge that he did?
Mr. VAN SWERINGEN. I feel sure that he did.
Mr. PECORA. Have you any knowledge, apart from a belief, that
he did?
Mr. VAN SWERINGEN. I think that my answer will have to rest.
Mr. PECORA. N O ; please answer this specific question: Apart from
any belief on your part, have you any knowledge that the late Mr.
Baker did increase his investment in Erie Eailroad stock?
Mr. VAN SWERINGEN (after consulting with associates). I suppose
the answer that I will have to make right here is that I talked with
Mm about it and I am confident that he did increase his holdings.
Mr. PECORA. Have you any knowledge that he did, apart from your
confidence that, he did?
Mr. VAN SWERINGEN. I talked with him about it, and I am confident that he did.
Mr. PECORA. Have you any knowledre that he did?
Mr. VAN SWERINGEN. I talked with him about it, and I am confident that he did.
Mr. PECORA. I submit, Mr. Chairman, this witness be directed to
answer the question.
Senator BARKLEY (presiding). Did he or not increase his holdings?
Mr. VAN SWERINGEN. I think he did. But our records do not disclose that. And, of course, you know he is no longer here. He died
some
Senator BARKLEY. I know, but there are records that would disclose that, aren't there?
Mr. VAN SWERINGEN. Not of ours.
Senator BARKLEY. Well, from the best information that you have
he did increase his holdings?
Mr. VAN SWERINGEN. Yes, sir; I thoroughly believe that.
Mr. PECORA. What is the basis of your belief?
Mr. VAN SWERINGEN. My talks with him.
Mr. PECORA. Did he say that he had?
Mr. VAN SWERINGEN. NOW, I am not going to put words in the
mouth of a man who has passed away.
STOCK EXCHANGE PRACTICES
629
Senator BARKLEY. Well, we are not trying a criminal case here,
Mr. Van Sweringen.
Mr. VAN SWERINGEN. NO, I understand
Senator BARKLEY. We are not limited here to the rules of evidence
that might apply to a conversation with a dead man. If you did
have such a conversation with him and from that conversation you got
the information and now believe that he did increase it, it is entirely
competent to say so.
Mr. VAN SWERINGEN. I have tried to do that to the best of my
ability. I thoroughly believe that he did. I am confident that he
did.
Senator BARKLEY. And you entertain that belief and that conviction from what he told you?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. Well, did he tell you
that he had increased his investment in Erie Kailroad stock?
Mr. VAN SWERINGEN. Again you are asking me to quote in a way
that I should not do.
Mr. PECORA. I am asking you to tell us what some one else told
you.
Mr. VAN SWERINGEN. That is all I can do, is to testify to the best
of my knowledge and belief, and I am doing that.
Senator BARKLEY. NOW, was this conversation with him before or
after he increased it?
Mr. VAN SWERINGEN. I was talking with him from time to time.
Senator BARKLEY. Well, did he tell you in those conversations
that he had increased them or that he was going to increase them?
Mr. VAN SWERINGEN. He told me at the outset that he would,
and I am confident that I compared notes with him from time to
time as to our buying, and I feel sure that I knew at the time what
he had, but I have no record of it.
Senator BARKLEY. Then he told you from time to time he was
intending to increase it?
Mr. VAN SWERINGEN. I am confident that he did increase, but I
cannot
Senator BARKLEY. And then later on from time to time he told
you he had increased it?
Mr. VAN SWERINGEN (continuing). But I have no records of it.
Senator BARKLEY. Then, after he told you that he intended to,
then later on did he tell you that he had?
Mr. VAN SWERINGEN. I don't think I should say just that. Because
Senator BARKLEY. Well, is it true, whether you should say it or
not?
Mr. VAN SWERINGEN. Well, that is—you can appreciate that.
What I am trying to say is that I feel sure he did.
Mr. PECORA. Mr. Chairman, may I remind you that yesterday
this witness immediately upon his being sworn asked for the privilege of reading into this record a statement which he stated had
been prepared by him. He was permitted to read that statement
into the record, and I hold a copy of it in my hand which the witness has furnished me. In that statement, among other things,
occurs the following: "He"-—meaning Mr. Baker—"heartily concurred, and said that if we decided to move into it, he would be
630
STOCK EXCHANGE PRACTICES
glad to increase his own investment, which he later did to a very
considerable extent."
Now, that statement "which he later did to a very considerable
extent" is an unqualified statement of fact. Now, what I am seeking to ascertain from this witness is if it really is the fact. Now
he says he is confident that he did, which is a far different thing
from saying that he knows that he did. Now, which is the fact?
That he knows that he did or that he believes that he did?
Senator BARKLEY. Of course, the Chair is at the disadvantage of
not having been at the hearing yesterday, but it strikes me that if
he made the positive statement yesterday that he did increase them,
that that knowledge would be imputed to Mr. Van Sweringen.
Mr. VAN SWERINGEN. It is my conviction that that statement is
correct, but since this point has arisen, if there is any doubt about it
my statement will have to stand, as modified by what I have said
here today. I am content that that is the fact as expressed there, as
I said it. If my statement needs to be modified in the light that I
have described here I will modify it.
Senator BARKLEY. Well, has your modification of that statement,
which seems to have been an unequivocal statement yesterday, been
induced by anything that has occurred since yesterday?
Mr. VAN SWERINGEN. I thought I could find from our books in
some way or other something that might reflect the transaction, but
our books will not reflect it.
Mr. PECORA. Well now, upon what information and what record
did you make the unequivocal statement yesterday that he had
increased his holdings?
Mr. VAN SWERINGEN. A conviction that it was so.
Senator BARKLEY. Then, at this time, as I understand you, it is
your recollection that he did increase it?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. Mr. Van Sewringen,
in the course of your examination yesterday you were asked the following question, to which you
made the answer which I will now read from page 1517 of the reporter's
minutes, at the top of that page:
When did you finish that biding?
That refers to the buying of stock of the Erie Railroad Co.
Mr. VAN SWERINGEN. it may sound strange to you that I cannot answer as
to dates like that, running back 10 years. (After conferring with associates.)
If it is important I will try to get that later, if you would like it to be furnished
later.
Mr. VAN SWERINGEN. This buying was started in November 1923,
and covered a period of about 15 months, to January 1925.
Mr. PECORA. DO you know how many shares you bought in that
period, of the Erie Railroad?
Mr. VAN SWERINGEN. Our holdings at the finish of that period
were 387,000 shares of common, 24,700 shares of first preferred,
52,600 shares of second preferred.
Mr. PECORA. I think you testified yesterday that those purchases
were made by or in the name of the Vaness Co.; is that correct?
Mr. VAN SWERINGEN. I do not recall as to that, but they were.
Mr. PECORA. And that the aggregate consideration was $11,200,000
about?
STOCK EXCHANGE PEACTICES
VAN SWERINGEN. That is right.
PECORA. IS that correct?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. Oh. I did not hear you.
631
Mr.
Mr.
At the top of page 1520
that figure reads $11,200. It should be $11,200,000.
I asked you yesterday in connection with your testimony about
these transactions, how the Vaiiess Co. raised the moneys to make
these purchases of Erie Railroad stock. You said you would try to
give us the detail by today. Can you do it?
Mr. VAN SWERINGEN (after conferring with associates). What is
troubling us is how to present the information. Of course it covered
a period of, say, 15 months, and a tremendous number of items.
How to present it along with its funding as it went from day to day
Mr. PECORA. I do not hear you.
Mr. VAN SWERINGEN. HOW to present it and show its funding
from day to day over that period involves a continuous record.
Mr. PECORA. Without giving us the itemized record, can you not
give us generally the manner or process in or by which the Vaness Co.
obtained the funds with which this $11,200,000 worth of stock was
bought?
Mr. VAN SWERINGEN (after conferring with associates). You want
from me a general statement as to how we did this; or do you want
a sort of transcript from the record as best as we can make it for the
purchases as they came over to us in lots from day to day?
Mr. PECORA. Give us a general statement, if you can, now.
Mr. VAN SWERINGEN. I will try to do that. It is a little difficult
to describe.
Senator BARKLEY. A little louder, please.
Mr. VAN SWERINGEN. In our day to day buying of these shares,
naturally it had to be done through brokers, members of the stock
exchange, and they would accumulate the shares, and every now and
then when they had a substantial block of them we would account to
them in payment for those shares. As I say, it went over a long
period. I do not know how many accountings of that kind there
were, and I am not prepared here to describe just how each one of
those was done at the time it was done; but that, in general, is an
illustration of how those shares were gathered, just as you, for instance,
would go to your broker, if you wanted 10,000 shares of New York
Central, and tell him to buy them. He might buy some of it today;
he might buy some of it day after tomorrow and some the next day;
and if you had an account with him, when he had it together you
would settle for it, or you might settle currently.
Mr. PECORA. That, it seems to me, describes merely the general
mechanics of the acquisition of the accumulation of these stocks.
The question particularly relates to the way in which the Vaness
Co. acquires the moneys with which it made payments for those
purchases aggregating $11,200,000.
Mr. VAN SWERINGEN. That I cannot give you from here. That
is a long record. I simply don't know.
Senator BARKLEY. Can you state whether it had the money on
hand with which to pay for it, or whether it borrowed it, and if so,
from whom?
632
STOCK EXCHANGE PEACTICES
Mr. VAN SWERINGEN. I cannot do that from my recollection. It
might have been both of those things. As I say, it was a 15 months
operation.
Mr. PECORA. Would you be good enough to confer with your associates who are grouped about you and see if any of them can give
you any information that you can convey to us?
Mr. VAN SWERINGEN. That is just what I have been trying to do.
Mr. PECORA. YOU have not succeeded.
Mr. VAN SWERINGEN. And that is the sort of information I gathered
from them in an effortr to give you the answer.
Mr. PECORA. But 3 ou have not yet told us, either on the basis of
your own knowledge or after having had the benefit of conference
with your associates, how the Vaness Co. obtained the moneys which
it paid for those shares of Erie Kailroad stock aggregating in amount
$11,200,000?
Mr. VAN SWERINGEN. N O ; I have not.
Mr. PECORA. That is what we want to know, particularly.
Mr. VAN SWERINGEN. Then that will have to be fished out of the
records, which will take some time. We will see what we can shape
up for you that is responsive to your request.
Mr. PECORA. YOU cannot do it at all from memory?
Mr. VAN SWERINGEN. Oh, that would be out of the question.
Mr. PECORA. YOU have among your records here on hand, I understood you to say yesterday, minute books of the Vaness Co. Would
the minute books enlighten you as to how the Vaness Co. got this
$11,200,000?
Mr. VAN SWERINGEN. NO.
Mr. PECORA. Have you looked at the minute books to see?
Mr. VAN SWERINGEN. I just know that they would not.
Mr. PECORA. Will you be good enough to consult the minute
books of that corporation? Perhaps they might.
Mr. VAN SWERINGEN. I will be glad to accommodate you by
doing that, but I can answer you now that that is not what the
minute book does. You want the book of accounts for that sort of
thing.
Mr. PECORA. Would not the minute books contain entries of corporate acts by the Vaness Co. by means of which it borrowed moneys or
obtained moneys through the sale of securities?
Mr. VAN SWERINGEN. Those things which were of course passed
upon and should be passed upon by the board of directors are recorded
in the minute books; but please bear in mind that the minute book is
not a book of accounts.
Mr. PECORA. I have not asked for the itemized accounts of payments. I have asked for the means or methods by which the Vaness
Co. obtained this aggregate of $11,200,000 which it paid for this Erie
Railroad stock.
Mr. VAN SWERINGEN. And I have answered you to the best of my
ability that I will try to get that assembled for you in presentable
form. How long it will take I do not know.
Mr. PECORA. I will ask you at this time to produce the minute
books of the Vaness Co.
Mr. VAN SWERINGEN. They are right here.
STOCK EXCHANGE PRACTICES
633
Mr. PECQRA (continuing). For the period including the time from
November 1923 to and including January 1925. Will you let us
have them?
Mr. VAN SWERINGEN. Bear in mind that I told you I would be glad
to do that
Mr. PECORA. We will relieve you of that task.
[Addressing one of the associates of the witness:] Will you give
them to the witness so that he may identify them?
Mr. VAN SWERINGEN (after, book had been handed to him by
one of his associates). You want me to identify this record?
Senator BARKLEY. Just identify it.
Mr. VAN SWERINGEN. The minute book of the Vaness Co.
Mr. PECORA. IS that minute book which you are now producing
the minute book, to your knowledge, of the Vaness Co. embracing
the period from November 1923 to January 1925, both months
inclusive?
Mr. VAN SWERINGEN. It is in two volumes and is here.
Mr. PECORA. Will you present the two volumes?
Mr. VAN SWERINGEN. I now do that [handing books to Mr.
Pecora].
Mr. PECORA. Thank you.
Senator BARKLEY. The committee will stand in recess until 2:3Ch
The witnesses will return at that time.
(Whereupon, at 1:17 p.m., a recess was taken until 2:30 p.m.)
AFTER RECESS
The committee reconvened at 2:30 p.m. on the expiration of the
recess.
Senator BARKLEY (presiding). The committee will come to order.
Mr. Pecora, you will proceed with Mr. Van Sweringen.
TESTIMONY OF 0. P. VAN SWERINGEN, PRESIDENT OF ALLEGHANY CORPORATION, CLEVELAND, OHIO—Resumed
* Mr. PECORA. Mr. Van Sweringen, I wish to ask you
Mr. VAN SWERINGEN (interposing). Mr. Pecora, somewhere along
in these proceedings you asked about a supplemental agreement with
the New York Central
Mr. PECORA (interposing). And Nickel Plate and yourself.
Mr. VAN SWERINGEN. Yes, sir. I find we have the original of that
supplemental agreement here. I did not know it. I will present it
to you for a photostat and return to us, if that is all right.
Mr. PECORA. All right, sir.
Mr. VAN SWERINGEN. It is dated the 15th day of February, 1922f
by and between Oris P. Van Sweringen and Mantis J. Van Sweringen^
parties of the first part, the New York Central Ralroad Co., party of
the second part, and Nickel Plate Securities Corporation, party of
the third part.
Mr. PECORA. I ask that that may be made a part of the record.
Senator BARKLEY. That will be done.
(The paper referred to, to be known as " Committee Exhibit N'o.
44, June 6, 1933/' will be made a part of the record below and the
original returned by the committee reporter to the witness.)
634
STOCK EXCHANGE PRACTICES
COMMITTEE EXHIBIT NO. 44
Supplemental agreement, made this 15th day of February 1922, by and between Oris P. Van Sweringen and Mantis J. Van Sweringen, parties of the first
part, the New York Central Railroad Co., party of the second part, and
Nickel Plate Securities Corporation, party of the third part, witnesseth:
Whereas under an agreement dated the 5th day of July 1916, between the
parties of the first and second parts hereto, the Guaranty Trust Co. of New York
holds common stock, second preferred stock, and first preferred stock of the
New York, Chicago & St. Louis Railroad Co., as therein stated, as security for
the payment of certain promissory notes of the parties of the first part made
and delivered to the party of the second part; and
Whereas by an instrument dated the 3d. day of January 1917 the parties of
the first part sold, assigned, and transferred to the party of the third part all
their right, title, equity, and interest in and to said agreement dated the 5th
day of July 1916 and in and to the shares of stock therein described; and
Whereas the party of the third part has requested the execution of this supplemental agreement:
Now, therefore, in consideration of the premises, it is agreed by and between
the parties hereto that the Guaranty Trust Co. of New York, trustee under said
agreement dated the 5th day of July 1916, may from time to time, at the request
of the party of the third part, surrender to it any or all of the shares of common
stock of the New York, Chicago & St. Louis Railroad Co. held under said agreement upon receiving, in substitution therefor, properly endorsed in blank for
transfer, an amount of first preferred stock or of second preferred stock of said
New York, Chicago & St. Louis Railroad Co. equal at par to the amount of common stock of said company so surrendered. It is further agreed by and between
the parties hereto that said first preferred stock or second preferred stock so
received in substitution for said common stock surrendered shall thereafter be
held by /the Guaranty Trust Co. of New York under said agreement dated the
5th day of July 1916, and under the terms thereof, as effectively to all intents and
purposes as though it had been therein recited and thereunder delivered to the
said trust company in place and instead of the common stock so surrendered.
In witness whereof the parties hereto have duly executed this supplemental
agreement, in triplicate, as of the day and year first above written.
ORIS P. VAN SWERINGEN.
MANTIS J. VAN SWERINGEN.
Signed and delivered in the presence of—
D. S. BARRETT, Jr.
H. J. WOODWORTH
v
THE NEW YORK CENTRAL RAILROAD CO.,
By A. H. SMITH, President.
[SEAL]
E. F. STEPHENSON, Secretary.
Attest:
Signed and delivered in the presence of—
EDW. C. CALHOUN.
W. E. WHEELER.
NICKEL PLATE SECURITIES CORPORATION,
By O. P. VAN SWERINGEN, President.
SEAL]
FRANK H. GINN, Secretary.
Attest:
Signed and delivered in the presence of—
D. S. BARRETT, Jr.
W. H. WENNEMAN.
STATE OF OHIO,
County of Cuyahoga, ss:
Before me, a notary public in and for said county and State, personally appeared the above-named Oris P. Van Sweringen and Mantis J. Van Sweringen
who acknowledged that they did sign the foregoing instrument, and that the same
is their free act and deed and the free act and deed of each of them.
In testimony whereof I have hereunto set my hand and official seal, at Cleveland, Ohio, this 20th day of February, A.D. 1922.
[SEAL]
D. S. BARRETT, Jr., Notary Public.
STOCK EXCHANGE PRACTICES
635
STATE OF N E W YORK,
County of New York, ss:
Before me, a notary public in and for said county and State, personally appeared the above-named A. H. Smith, president, and E. Stephenson, secretary, of
the New York Central Railroad Co., and acknowledged that they did sign the
foregong instrument for and on behalf of said corporation and that the same is
their free act and deed as such officers and the free act and deed of said corporation.
In testimony whereof I have hereunto set my hand and official seal at New
York, N.Y., this 27th day of February 1922.
[SEAL]
*
J. M. O'MAHONEY, Notary Public.
STATE OF OHIO,
County of Cuyahoga, ss:
Before me, a notary public in and for said county and State, personally
appeared the above-named O. P. Van Sweringen, president, and Frank H.
Ginn, secretary, of Nickel Plate Securities Corporation, and acknowledged that
they did sign the foregoing instrument for and on behalf of said corporation
and that the same is their free act and deed as such officers and the free act and
deed of said corporation.
In testimony whereof I have hereunto set my hand and official seal, at Cleveland, Ohio, this 21st day of February 1922.
[SEAL]
D. S. BARRETT, Jr., Notary Public.
Mr. PECORA. Mr. Van Sweringen, during the recess of the hearing
today I have caused an examination to be made of two volumes of
minute books that you produced just before the recess was ordered,
and I am told that between the dates of October 31, 1923, and
February 6, 1925, corporate actions were taken at various meetings
of the board of directors of the Vaness Co. authorizing the obtaining
of different loans from various banks, which loans aggregate in amount
the sum of $11,206,466.10. Assuming that that is correct, Mr. Van
Sweringen, would you say that those loans represented the moneys
that were employed or used by the Vaness Co. to purchase various
blocks of shares of the Erie Railroad that you testified this morning
had been purchased for an aggregate consideration of $11,200,000?
Mr. VAN SWERINGEN. I am not prepared to say, of course, because I cannot recall those transactions and the uses of those dollars.
But that is the statement that we are hoping to prepare for you, or
rather the statement that we are hoping to prepare for you may give
some light on that.
Mr. PECORA. Was Mr. J. Arthur House one of your associates
in these various Van Sweringen enterprises.
Mr. VAN SWERINGEN. Mr. House was a director of the Nickel
Plate. That is the only association that I recollect.
Mr. PECORA. When you say "The Nickel Plate" do you mean
the operating company, the railroad, or the Securities Co.?
Mr. VAN SWERINGEN. The Railroad Co.
Mr. PECORA. YOU mean the Railroad Co.
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. Was he also at the time the president of the Guardian
Savings & Trust Co. of Cleveland?
Mr. VAN SWERINGEN. Oh, yes; and for a great many years.
Mr. PECORA. Isn't it a fact that either the Nickel Plate Railroad
or the holding company known as the Nickel Plate Securities Corporation, and the Vaness Co. from time to time obtained large loans from
the Guardian Savings & Trust Co. of Cleveland?
636
STOCK EXCHANGE PRACTICES
Mr. VAN SWERINGEN. I cannot be quite as comprehensive as that,
but some of the companies with which we had to do did a banking
business there, and it might well be true that they borrowed money
from time to time. I know I testified about one loan that was made,
in the course of these proceedings.
Mr. PECORA. Have you any failure of recollection about the names
of the banks from whom your companies from time to time borrowed
moneys?
Mr. VAN SWERINGEN. That is very awkwardly put, if you don't
mind. [Laughter.] I wouldn't attempt from recollection to undertake to give you the transactions for loans of the different interests in
the different places. I think you will appreciate that that is difficult
to do.
Mr. PECORA. Did any of the companies with which you and your
associates were in any way identified, and which are commonly
referred to as the Van Sweringen interests, borrow moneys from
time to time from the Guardian Savings & Trust Co. of Cleveland?
Mr. VAN SWREINGEN. Yes. There is no doubt but what some of
them did. We did business there for a great many years, or some of
the companies did.
Mr. PECORA. Did some of the companies borrow money also from
time to time from the Union Trust Co. of Cleveland?
Mr. VAN SWERINGEN. They did.
Mr. PECORA. YOU have already told us that Mr. Joseph R. Nutt
was one of the gentlemen who was associated with you and your
brother in these various enterprises.
Mr. VAN SWERINGEN. Yes,
Mr. PECORA. He was one
sir.
of the group that you called your asso-
ciates, wasn't he?
Mr. VAN SWERINGEN. Yes; he was one of the stockholders of the
Vaness Co.
Mr. PECORA. And of other companies with which your interests
were identified.
Mr. VAN SWERINGEN. He undoubtedly was. But you might be
more comprehensible there.
Mr. PECORA. At the time of the obtaining of loans from the Union
Trust Co. of Cleveland was Mr. Joseph R. Nutt the president and
chairman of the board of that trust company?
Mr. VAN SWERINGEN. Pardon me, but I missed the first part of
that question.
Mr. PECORA. The committee reporter might read it to you.
(Which was done.)
Mr. VAN SWERINGEN. He might have been.
Mr. PECORA. Aren't you sure whether he was or not?
Mr. VAN SWERINGEN. Well, I would have to coordinate that with
the dates of the loans. That may have been altogether likely.
Mr. PECORA. Mr. Van Sweringen, you have appeared at various
times before the Interstate Commerce Commission, haven't you?
Mr. VAN SWERINGEN. Yes,
sir.
Mr. PECORA. And on those appearances you have given testimony
d made arguments before the Commission with regard to the Van
Sweringen railroad interests?
Mr. VAN SWERINGEN. Oh,
yes.
STOCK EXCHANGE PEACTICES
637
Mr. PECORA. And I understand that on a number of those occasions
members of the Commission publicly called attention to your marvelous memory. Do you recall any such instance?
Mr. VAN SWERINGEN. N O ; I do not. I understood somebody to
make that remark here this morning, but I do not recollect that
circumstance.
Mr. PECORA. YOU wouldn't agree with any such observation,
would you, that you have a marvelous memory?
Mr. VAN SWERINGEN. N O ; I would not.
Mr. PECORA. Would you prefer to say that yoursermemory is poor?
Mr. VAN SWERINGEN. I think that would be wi - But I might
elaborate just a wee bit there. I used to make it a practice to use
my mind as a memory tablet. And I have felt that that was a mistake, and I have gradually drifted away, no doubt, from the quality
of memory that I once had, and I say that very frankly.
Mr. PECORA. Isn't it a fact that your companies obtained the
most of those loans, in number if not in amount, from the Guardian
Savings & Trust Co. and the Union Trust Co., both of Cleveland?
Mr. VAN SWERINGEN. They have obtained loans from both of
them.
Mr. PECORA. The most of the loans that you have negotiated have
been obtained from those two banks, haven't they?
Mr. VAN SWERINGEN. I could not say either "yes" or "no" to
that with any degree of certainty.
Mr. PECORA. Can you mention any other bank from which you
obtained a larger number of loans than you obtained from the Guardian Savings & Trust Co. or the Union Trust Co., both of Cleveland?
Mr. VAN SWERINGEN. Mr. Pecora, if I could answer that question,
I could answer your first question. We did business, in the case of
many of our companies, with those two banks, and for many years.
Senator BARKLEY. Were your companies, or any of them, indebted
to those banks at the time when they closed?
Mr. VAN SWERINGEN. Yes, sir. And we also had money on deposit.
Mr. PECORA. Did your deposits exceed the amount of your loans
at the time when those banks were closed?
Mr. VAN SWERINGEN. They did not.
Mr. PECORA. DO you know by what amount the loans exceeded
the deposits at that time?
Mr. VAN SWERINGEN. N O ; I do not.
PECORA. YOU haven't any idea of that either?
VAN SWERINGEN. NO. It is a matter of record, of course.
PECORA. What was that?
VAN SWERINGEN. That is a matter of record.
PECORA. Haven't you any recollection of it?
Mr. VAN SWERINGEN. NO.
Mr. PECORA. Or any notion of the amount of the excess of loans
Mr.
Mr.
Mr.
Mr.
Mr.
over deposits in those closed banks?
Mr. VAN SWERINGEN. N O ; that would be guesswork.
Mr. PECORA. Does the excess run into the millions of dollars?
Mr. VAN SWERINGEN. That again would be guesswork.
Mr. PECORA. Would that be guesswork, too?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. YOU could not tell
or $10,000,000, could you?
whether the excess was $50,000
638
STOCK EXCHANGE PRACTICES
Mr. VAN SWERINGEN. I do not think it stands me in hand to be
guessing here. I am trying to give you information accurately in
response to all these questions.
Mr. PECORA. Whenever you transact any business with respect
to any of your companies do you always go to your corporate records
for the purpose of informing yourself with regard to your corporate
interests as they might be involved in any such business?
Mr. VAN SWERINGEN. I do not understand that question.
Mr. PECORA. In what way?
Mr. VAN SWERINGEN. In its application.
Mr. PECORA. In its application to what?
Mr. VAN SWERINGEN. TO the business.
Mr. PECORA. DO you know of any corporate purposes for which
those loans, aggregating $11,206,466.10, were obtained by the Vaness
Co. from various banks?
Mr. VAN SWERINGEN. YOU persist in trying to have me testify
on memory, and of course I frankly have tried to avoid testifying from
memory.
Mr. PECORA. Well, please rely as much as you can on your memory in the absence of your books of account, won't you?
Mr. VAN SWERINGEN. I would much prefer to have you tell me
what you want, and I will try to get that information for you accurately.
Mr. PECORA. Well, for the present will you please give us the
information from memory as best you can?
Mr. VAN SWERINGEN. I think it very unwise for me to do it.
Mr. PECORA. Will you do it, whether wise or unwise?
Mr. VAN SWERINGEN. I do not feel that I ought to be asked to do
the unwise thing.
Mr. PECORA. Will you please do it from memory, Mr. Van
Sweringen, as best you can?
Mr. VAN SWERINGEN. I prefer not to.
Mr. PECORA. NOW, I am going to ask you specifically, Mr. Van
Sweringen, to tell this committee from memory, or from any data
which you have and which may be used by you to refresh your
memory, any of the purposes for which the Vaness Co. borrowed
any part of these moneys, aggregating the sum of $11,206,466.10, between October of 1923 and February of 1925.
Mr. VAN SWERINGEN. From memory I cannot do that with any
degree of accuracy.
Mr. PECQRA. DO you mean by that to say that you have an utter
and complete failure of recollection with regard to any of those
purposes?
Mr. VAN SWERINGEN. Well, again you are back 8, 10, and 12
years ago, and we are perfectly willing to supply that recprd if you
wish to have it now.
Mr. PECORA. Have you a complete failure of memory or recollection concerning that?
Mr. VAN SWERINGEN. I have no recollection of it now.
Mr. PECORA. YOU cannot tell this committee of a single corporate
purpose for which it borrowed any of these moneys in the period of
time that I have mentioned?
Mr. VAN SWERINGEN. They are not fresh in my memory at all.
STOCK EXCHANGE PRACTICES
639
Mr. PECORA. DO you recall any of the purposes for which the
Vaness Co. at any time borrowed any moneys, whether 10 years
ago, 8 years ago, or day before yesterday?
Mr. VAN SWERINGEN (after conferring with associates). I testified
as to one borrowing here.
Mr. PECORA. Which was that?
Mr. VAN SWERINGEN. $2,100,000, I think. $2,100,000.
Mr. PECORA. N O ; that was not borrowed by the Vaness Co., was it?
Mr. VAN SWERINGEN. Pardon me. No.
Mr. PECORA. NO.
Mr. VAN SWERINGEN.
Well, there is the trouble with memory.
Now, I will supply you with the data, but I am not holding my
memory out here as an example for anybody's else use.
Mr. PECORA. Can you tell this committee any of the purposes for
which any loan was ever negotiated by the Vaness Co. at any time
in the past?
Mr. VAN SWERINGEN. NO; I do not recall them.
Mr. PECORA. AS a matter of fact, have you any recollection that
the Vaness Co. ever did borrow any money from anybody at any
time in the past?
Mr. VAN SWERINGEN. Oh, I think that is safe.
Mr. PECORA. YOU think you are safe in answering that?
Mr. VAN SWERINGEN.
Yes.
Mr. PECORA. What is your answer to that?
Mr. VAN SWERINGEN. Just that.
Mr. PECORA. What?
Mr. VAN SWERINGEN. That we undoubtedly had borrowed money
from time to time. But to tell you what we borrowed for and when
we borrowed it, and the amount of it, and from whom, and all the
circumstances surrounding it, I cannot undertake to do from memory.
Mr. PECORA. I have not asked you to give me all of those details.
I simply asked you to give this committee any of the purposes for
which the Vaness Co. at any time in the past borrowed any money
from anyone whatsoever; regardless of the time of the loan, the
person or institution that made it—anything else.
Mr. VAN SWERINGEN (after conferring with his associates). Is there
a question pending?
Mr. PECORA. I beg your pardon?
Mr. VAN SWERINGEN. What is the question?
(Thereupon the pending question was read by the reporter, as above
recorded.)
Mr. VAN SWERINGEN. I do not remember.
Mr. PECORA. IS there such a company known as the Vaness Co.
in existence, according to your memory?
Mr. VAN SWERINGEN. There is.
Mr. PECORA. There is. Did that company borrow moneys from
time to time for corporate purposes?
Mr. VAN SWERINGEN. I feel sure they did.
Mr. PECORA. YOU feel sure of that. Can you tell us any of the
purposes for which at any time it made such borrowings?
Mr. VAN SWERINGEN. NO.
Mr. PECORA. What purposes
could your company have had in
making these loans—in obtaining these loans?
175541—33—PT. 2
22
640
STOCK EXCHANGE PEACTICES
Mr. VAN SWERINGEN. They would have had to have been corporate purposes.
Mr. PECORA. Well, what are included in corporate purposes?
Mr. VAN SWERINGEN. Things necessary to the corporate operations.
Mr. PECORA. Such as what, for instance?
Mr. VAN SWERINGEN. I cannot tell you.
Mr. PECORA. YOU cannot tell me?
Mr. VAN SWERINGEN. NO.
Senator BARKLEY. DO you
know what they did with the money
after they borrowed it?
Mr. VAN SWERINGEN. I beg your pardon?
Senator BARKLEY. Qan you tell what was done with the money in
any case after it was borrowed?
Mr. VAN SWERINGEN. N O ; Mr. Chairman, I have said here, and I
say again—if there is any specific loan that you want to have enlightenment upon I will be very glad to supply that information.
I am not trying to withhold from you, but I am trying to avoid
guessing at things.
Senator BARKLEY. Well, now, you have stated that the minutes
that have been submitted here do not contain any information as to
purposes of any of these loans. If that be correct where would that
information be found of record?
Mr. VAN SWERINGEN. Senator, I do not think I said that quite.
Mr. PECOBA. I do not hear you, Mr. Van Sweringen.
Mr. VAN SWERINGEN. I do not know what the minutes say there.
Senator BARKLEY. I do not want to misquote you, but I understood you to say before we recessed that the minutes did not show
the purposes for which any loans might have been made.
Mr. VAN SWERINGEN. I suspect they do not.
Senator BARKLEY. NOW if they do not, what record is there that
does show for what purposes?
Mr. VAN SWERINGEN. The corporate records.
Senator BARKLEY. The corporate what?
Mr. VAN SWERINGEN. The books. That is, the books of account.
Senator BARKLEY. The books of account?
Mr. VAN SWERINGEN. Yes.
Senator BARKLEY. 'Well, the
books of account would show probably
the amount of money borrowed, but would they show the purposes
for which it was borrowed?
Mr. VAN SWERINGEN. Oh, yes,
yes.
Mr. PECORA. Mr. Van Sweringen, which of your associates are in
the hearing room at the present moment? You had better not trust
to memory. Just look around and see.
Mr. VAN SWERINGEN. That is all right. Be facetious if you wish,
but this is a serious business.
Senator BARKLEY. GO ahead.
Mr. VAN SWERINGEN. I did not take his question seriously. Do
you want that answered?
Mr. PECORA. I advanced it seriously. I press it.
Mr. VAN SWERINGEN. All right. Mr. Barrett has been identified
in our interests.
Senator BARKLEY. Mister who?
Mr. VAN SWERINGEN. Mr. Barrett. Mr. D. S.
Senator BARKLEY. What Barrett?
STOCK EXCHANGE PEACTICES
641
Mr. VAN SWERINGEN. Mr. D. S. Barrett, for a good many years.
Mr. PECORA. What is his identification with your interests?
Mr. VAN SWERINGEN. He has several in our interests.
Mr. PECORA. Well, what are they?
Mr. VAN SWERINGEN. Pardon me; I will give you some of them.
He is a director of several of our companies.
Mr. PECORA. Including the Vaness Co.?
Mr. VAN SWERINGEN. I think he is. (After conferring with
associates.) No; he is not.
Mr. PECORA. All right. Now continue the names of those of your
associates who are in the hearing room now.
Mr. VAN SWERINGEN. Mr. W. H. Wenneman has been with me
&s my secretary for a good many years.
Mr. PECORA. Who else?
Mr. VAN SWERINGEN. And Mr. J. P. Murphy.
Mr. PECORA. HOW is he identified with your companies?
Mr. VAN SWERINGEN. He is office counsel in many matters and
the secretary of several of these corporations.
Mr. PECORA. Including the Vaness Co.?
Mr. VAN SWERINGEN (after conferring with associates). He is
assistant secretary of that.
Mr. PECORA. Who else is here?
Mr. VAN SWERINGEN. My brother.
Mr. PECORA. Anyone else?
Mr. VAN SWERINGEN. I think that is all.
Mr. PECORA. Anyone else, Mr. Van Sweringen?
Mr. VAN SWERINGEN. That seems to be all.
Mr. PECORA. Are there any gentlemen here representing you as
counsel?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. Legal advisers?
Mr. VAN SWERINGEN. Mr. F. H. Ginn.
Senator BARKLEY. Will you raise your
voice a little, Mr. Van
Sweringen?
Mr. VAN SWERINGEN. And Mr. Thomas Jones.
Senator BARKLEY. YOU speak so low that I cannot hear what
you say.
Mr. VAN SWERINGEN. Pardon me. If I get in here probably I
will be heard.
Senator BARKLEY. Yes; get in closer.
Mr. VAN SWERINGEN. Yes. Mr. F. H. Ginn, and Mr. Thomas
H. Jones are here.
Mr. PECORA. Does that complete the enumeration?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. NOW, Mr. Van Sweringen,
will you ask each and
every one of those gentlemen, just to save time, if they can tell you
any of the corporate purposes for which the Vaness Co. borrowed
moneys at any time in the past, and let us have the result?
Mr. VAN SWERINGEN (after conferring with associates). Mr.
Murphy thinks that some of it was for buying securities.
Mr. PECORA. IS that the sum total of the information you gleaned
from your associates ?
Mr. VAN SWERINGEN. Up to the moment it is. I do not get much
added light on that subject. Somebody said perhaps there were
642
STOCK EXCHANGE PKACTICES
other purchases than shares. And that perhaps there were some
dollars that were used in payment of other things.
Mr. PECORA. I cannot hear you, Mr. Van Sweringen.
Mr. VAN SWERINGEN. Does that not carry here?
Mr. PECORA. What you say may not amount to very much, but
I would like to hear it anyway. Raise your voice please.
Mr. VAN SWERINGEN. Did you get it in the record? (Addressing
the reporter.)
(The reporter replied in the affirmative.)
Mr. VAN SWERINGEN. Would you mind reading it?
(Mr. Van Sweringen's answer was read by the reporter, as above,
recorded, as follows:
Mr. VAN SWERINGEN. Up to the moment it is. I do not get much added!
light on that subject. Somebody said perhaps there were other purchases than
shares. And that perhaps there were some dollars that were used in payment of
other things.)
Mr. PECORA. NOW, does that represent the sum total of the information you gleaned from your associates as the result of your
conferring with them now concerning corporate purposes for which
any of these loans were obtained by the Vaness Co. or any loans
were obtained by the Vaness Co.?
Mr. VAN SWERINGEN. On a guessing basis, yes.
Senator BARKLEY. When was the last loan that this company
obtained, Mr. Van Sweringen?
Mr. VAN SWERINGEN. I will be glad to supply that information
for you.
Senator BARKLEY. Have you any recollection now about it?
Mr. VAN SWERINGEN. NO, I have not.
Senator BARKLEY. Has there been within the last month?
Mr. VAN SWERINGEN. Not that I recall.
Senator BARKLEY. Within the last six months?
Mr. VAN SWERINGEN. Well, if I could tell you that, I could probably tell you the rest. I will get that information if you like it.
Senator BARKLEY. Well of course it is no answer to legitimate
and serious questions here for you to say that if you could give an
answer to one you could give an answer to all. As a matter of fact
you have given no answers to any so far.
Mr. VAN SWERINGEN. N O ; but they both bear on the same point,
and I simply can not
Senator BARKLEY (continuing). And, if I may say so, as acting
chairman for this committee, it seems incredible that any man of as
large affairs as you have could give as little information concerning
them as you seem to be able to give; or willing to give.
Mr. VAN SWERINGEN. By guess work.
Senator BARKLEY. If you transact all of your affairs by guess
work, that of course would be
Mr. VAN SWERINGEN (interposing). That is the important point,
I do not wish to.
Senator BARKLEY. N O ; go ahead.
Mr. PECORA. NOW you referred to a Mr. Ginn as counsel for you in
attendance at this hearing. Was not Mr. Ginn or his law firm the?
attorney for the Union Trust Co. of Cleveland at the time that the,
Vaness Co. and others of your companies obtained loans from that,
trust company?
STOCK EXCHANGE PRACTICES
643
Mr. GINN. May I answer that question, Mr. Chairman?
Mr. PECORA. I would rather have the witness answer it first.
Mr. GINN. I prefer to answer it first, if I may, Mr. Chairman.
Mr. PECORA. Let the witness answer it first, and if your recollection
varies from his answer you may state.
Mr. GINN. AS counsel
Senator ADAMS. IS this one of the counsel?
Senator BARKLEY. Let the witness give his recollection, and then
you can answer.
Mr. VAN SWERINGEN. Mr. Ginn, I think, can answer that better
than I can.
Senator BARKLEY. DO you know whether that is true?
Mr. VAN SWERINGEN. I think he had better answer that.
Mr. PECORA. DO you know whether it is the fact?
Mr. VAN SWERINGEN. I have understood he was counsel for them
in some matters.
Mr. PECORA. Counsel for the trust company?
Mr. VAN SWERINGEN. But he will have to confirm it.
TMr. PECORA. Counsel for the trust company?
Mr. VAN SWERINGEN. He will have to confirm that. I cannot.
Mr. PECORA. If Mr. Ginn wants to answer that, very well.
Senator BARKLEY. If Mr. Ginn desires to answer the chairman will
permit him to do so.
Mr. GINN. The witness has answered the question as I would
have answered it. At the time that you mentioned our firm was
counsel for the Union Trust Co. in certain matters. We had no
retainer of any kind or character from the Union Trust Co.
Senator BARKLEY. Well, why was there any hesitation about
giving that information at the start?
Mr. VAN SWERINGEN. I did not hesitate. I commented that I
thought he could answer for himself better than I could, being right
here.
Senator BARKLEY. Yes; but you
Mr. VAN SWERINGEN. And then when you asked me I told you that
I had understood that he had been counsel in several matters.
Senator BARKLEY. Your offer to let him answer it was after he had
arisen and asked that he might answer it. Until that time you
seemed to display no recollection on the subject.
Mr. VAN SWERINGEN. Pardon me; I think he arose rather quickly
idien the question was asked.
Mr. PECORA. Was Mr. Ginn or his law firm, or any law partner or
associate of his, counsel for the Vaness Co. at any time in the past?
(Mr. Van Sweringen conferred with his associates.)
(At this point there was some disturbance and laughter in the
Toom.)
Mr. VAN SWERINGEN (after conferring with associates). Many
times.
Senator BARKLEY. The congregation will please be in order.
Mr. VAN SWERINGEN. YOU got the answer to that?
Mr. PECORA. YOU think he was at many times?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. IS there any law
firm or lawyer that has been or is
the general counsel for the Vaness Co.?
644
STOCK EXCHANGE PRACTICES
Mr. VAN SWERINGEN (after conferring with associates). We have
not had a general counsel in that qualification. Mr. Murphy, of
course, has been office counsel.
Mr. PECORA. Mr. Murphy is a member of the bar of the State of
Ohio?
Mr. VAN SWERINGEN. Yes, sir.
Mr. PECORA. And Mr. Murphy
was unable to give you any more
information than you gave us when you conferred with him, respecting
any of the purposes for which the Vaness Co. borrowed moneys,
was he?
Mr. VAN SWERINGEN. I really—to the best I understood his words.
He is here to talk for himself if you will let him. May he do that?
Senator BARKLEY. Well I do not know about that now. Probably
a little later. He may testify. I do not know what the plan is.
Mr. PECORA. I notice in what is marked here as "Volume No. 1 of
the Minute Book of the Vaness Co.", being one of the two books you
produced this morning, that there was a meeting of the board of
directors of that company held on October 31, 1923, at which you as
president acted as chairman. And it appears that the only business
transacted at that meeting was the adoption of a resolution authorizing the company to borrow for its corporate purposes from the
Guardian Savings & Trust Co. of Cleveland the sum of $250,000.
Now have you any recollection of the purposes, the corporate purposes
for which that loan was obtained?
Mr. VAN SWERINGEN. NO. Beyond—I notice it says for corporate
purposes, and that is all.
Mr. PECORA. IS there anything in the minutes of that meeting
which would refresh your recollection concerning those corporate
purposes? [Handing the book to the witness.] Will you please look
at those minutes?
Mr. VAN SWERINGEN (after examining minute book). There is
nothing here to indicate.
Mr. PECORA. I know there is nothing in the minutes to indicate it,
but is there anything in the minutes that would refresh your recollection?
Mr. VAN SWERINGEN. NO. The minute does just what you say it
does. It authorizes the loan for corporate purposes.
Mr. PECORA. And who, according to the minutes, presented that
resolution for consideration and adoption?
Mr. VAN SWERINGEN. I did.
Mr. PECORA. YOU did?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. YOU now have
no recollection of the purposes for
which that loan was authorized to be obtained?
Mr. VAN SWERINGEN. NO. October 31, 1923
•
Mr. PECORA. Well, now, have you any recollection of any meeting
Mr. VAN SWERINGEN (interposing). I will get you this information
if you would like it, as best I can. Would you like it?
Mr. PECORA. I want first to exhaust your own recollection, if you
have any.
Mr. VAN SWERINGEN. Well, you have.
Mr, PECORA. I have?
Mr. VAN SWERINGEN.
Yes.
STOCK EXCHANGE PRACTICES
Mr.
Mr.
PECORA. And the net result is what?
VAN SWERINGEN. Zero.
Mr. PECORA. Yes.
Senator BARKLEY. While Mr. Pecora is
645
Zero?
looking at the minutes.
A while ago you replied, after conference with Mr. Murphy, that he
though that some of this $ll,000;000 was used to buy securities?
Mr. VAN SWERINGEN. Yes,
Senator BARKLEY. DO you
sir.
recall any securities that were bought
with any of this $11,000,000?
Mr. VAN SWERINGEN. It may well be that some of these Erie
shares were.
Senator BARKLEY. Well, do you know whether they were or not?
Mr. Van SWERINGEN. That is my difficulty. I am here to testify
as to the facts, and that is why I shy at doing anything else.
Senator BARKLEY. YOU say it may well be that some of this money
was used for that purpose.
Mr. VAN SWERINGEN.
Yes.
Senator BARKLEY. It might well be also that it was used for other
purposes—some of it?
Mr. VAN SWERINGEN. Yes.
Senator BARKLEY. TO purchase other securities?
Mr. VAN SWERINGEN. Yes; even that. You mean other than Erie?
Senator BARKLEY. Yes.
Mr. VAN SWERINGEN. Yes; that might be.
Senator BARKLEY. Well, when you speak of securities you speak of
railroad securities?
Mr. VAN SWERINGEN. Well, not necessarily, but presumably so.
Senator BARKLEY. YOU were engaged largely in the purchase of
railroad stocks?
Mr. VAN SWERINGEN. Yes, we were.
Senator BARKLEY. The object being to get as large a block of stocks
in any railroad as you could, which you desired to bring into your
system?
Mr. VAN SWERINGEN. AS large as we felt that we could; yes, sir.
Senator BARKLEY. Yes. Well, as you could. That carries with
it your ability to buy as well as the willingness of somebody to sell.
Mr. VAN SWERINGEN. Yes. That is probably a fair way to put it.
Senator BARKLEY. Yes. So that would you say that a large proportion of this $11,000,000 was used for that purpose?
Mr. VAN SWERINGEN. There is where I am troubled, Senator. I
really do not know, I cannot recall.
Senator BARKLEY. What other general purpose did the company
have in borrowing money?
Mr. VAN SWERINGEN. Well, that has been answered here just
now
Senator BARKLEY. Well, I will have to disagree with you.
Mr. VAN SWERINGEN. Except that we nrght have borrowed money
to loan to some of these subsidiaries that it had.
Senator BARKLEY. It might have been, but was it?
Mr. VAN SWERINGEN. N O ; I can not say that.
Senator BARKLEY. YOU do not know then what proportion of this
$11,000,000 that was borrowed by the Vaness Co. was used in buying railroad stocks
Mr. VAN SWERINGEN. No; I do
not.
646
STOCK EXCHANGE PRACTICES
Senator BARKLEY (continuing). In which the Van Sweringens were
interested?
Mr. VAN SWERINGEN. I am sorry, but I do not. But, as I say, I
will supply you with that information if you like.
Mr. PECORA. DO you know whether any of the moneys that were
used in the purchase of these Erie Railroad shares that you have
testified about, to an aggregate of $11,200,000, represented anything
other than loans which the Vaness Co. obtained for the purpose of
making those purchases?
Mr. VAN SWERINGEN. I do not.
No.
Mr. PECORA. What is that?
Mr. VAN SWERINGEN. I do not know.
Mr. PECORA. YOU do not know. Now
do you recall that on or
about October 31, 1930, the Vaness Co. borrowed the sum of $16,000,000?
Mr. VAN SWERINGEN. October—when was that?
Mr. PECORA. October 31, 1930. $16,000,000.
Mr. VAN SWERINGEN. (After conferring with associates.) Yes,
sir. That was a loan from J. P. Morgan & Co.
Mr. PECORA. Have you any recollection of the circumstances of
that loan?
Mr. VAN SWERINGEN. We needed the money.
Mr. PECORA. For what purposes?
Mr. VAN SWERINGEN. (After conferring with associates.) You
will have that.
Mr. PECORA. I am waiting for your answer.
Mr. VAN SWERINGEN. That Vaness Co. loan dated October 31,
1930, for $16,000,000 was used for this purpose—or rather, the
following purposes: For the purchase of $10,264,900.49 of United
States Government securities; $3,555,992.88 to pay an indebtedness
to Paine, Webber & Co.; $2,179,106.63 cash for general corporate
purposes.
Mr. PECORA. NOW you gave that answer from some memorandum
that you read from, did you not?
Mr. VAN SWERINGEN. I beg your pardon. That last?
Mr. PECORA. YOU gave that answer from some memorandum in
your hand that you read from, did you not?
Mr. VAN SWERINGEN. I did. And that information has heretofore been supplied to you.
Mr. PE^ORA. Without such memoranda would you have been
utterly unable to have answered the question about the purposes for
which this $16,000,000 was borrowed?
Mr. VAN SWERINGEN. Except in very general terms. For illustration, I would not have been able to divide it up as is shown here.
Mr. PECORA. NOW have you any recollection—I am referring now
to recollection—of a loan obtained on the same day, that is to say,
on October 31, 1930, from J. P. Morgan & Co. of $23,500,000 made
to the Cleveland Terminals Building Co.?
(Mr. Van Sweringen consulted with his associates.)
Mr. PECORA. NO, I am now asking you from recollection.
Mr. VAN SWERINGEN. I am testifying
Mr. PECORA. Please do not refer to any memorandum, Mr. Van
Sweringen, unless you have to do it. Please first tell us if 3^ou have
any recollection.
STOCK EXCHANGE PEACTICES
647
Mr. VAN SWERINGEN. Mr. Pecora, I am going to testify from
records whenever I can.
Mr. PECORA. Well, first tell us what your recollection is. Now
do not refer to any record.
Mr. VAN SWERINGEN. NO. This is not a guessing contest so far
as I am concerned.
Mr. PECORA. Well, Mr. Chairman, I ask that the witness be directed to answer the question.
Senator BARKLEY. The Chair thinks that that is a fair question,
and that the witness ought to answer it, whether independent of a
memorandum he has any recollection of borrowing $23,000,000.
Mr. VAN SWERINGEN. I am unable to do so.
Senator BARKLEY. YOU have no recollection of having borrowed
that money?
Mr. VAN SWERINGEN. Yes, I have, but I have it right before me.
Senator BARKLEY. YOU mean your recollection is before you?
Mr. VAN SWERINGEN. I have the figures—I have the facts right
before me.
Senator BARKLEY. Well, Mr. Pecora evidently in an effort to test
your memory on these matters has asked you if you have any recollection independent of any memorandum as to these $23,000,000.
Mr. VAN SWERINGEN. Yes, I understand.
Senator BARKLEY. Are you willing to say yes or no, that you have
a recollection or that you have not?
Mr. VAN SWERINGEN. I have the facts, and I will testify as to
those.
Mr. GINN. He wants to know whether you remember independently.
Mr. VAN SWERINGEN. I do not remember, independently.
Senator BARKLEY. All right.
Mr. PECORA. NOW, tell us about those loans from any data that
you have.
Mr. VAN SWERINGEN. All right. The loan of $23,500,000 is dated
October 31, 1930, also. That is the Cleveland Terminals Building
Co. loan. From J. P. Morgan & Co. And its proceeds in part
were used, in total, $5,000,000 for the purchase of 500,000 shares
of Allegheny Corporation common stock; $15,940,331.02 payment of
indebtedness to Paine, Webber & Co.; $2,500,000 cash for general
corporate purposes.
Senator BARKLEY. May I ask a question? Let me interrupt there.
Mr. PECORA. Yes.
Senator BARKLEY.
In your division of this previous loan from Mr.
Morgan's company of three million and some odd dollars in payment
of a debt to Paine, Webber & Co. They are brokers, I believe, are
they?
Mr. VAN SWERINGEN. Yes, sir.
Senator BARKLEY. What was the
occasion of this indebtedness of
$3,000,000?
Mr. VAN SWERINGEN. Securities that had been purchased.
Senator BARKLEY. Securities?
Mr. VAN SWERINGEN. Yes, sir.
Senator BARKLEY. In the companies
which you are interested in?
(Mr. Van Sweringen nodded his head.)
648
STOCK EXCHANGE PRACTICES
Senator BARKLEY. And this $15,000,000 indebtedness in this
additional loan out of the $23,000,000 which you say went to Paine
Webber & Co. was likewise in payment of securities they had bought
for you?
Mr. VAN SWERINGEN. Yes, sir.
Senator BARKLEY. In railroad properties?
;
Mr. VAN SWERINGEN. Yes, sir.
Senator BARKLEY. Are you able to tell what properties they were?
Mr. VAN SWERINGEN. I will undertake to supply you that data,
but I cannot recall it.
Senator BARKLEY. YOU cannot do it from memory? I see there
you used a part of this last loan for purchasing stock of the Alleghany
Corporation.
Mr. VAN SWERINGEN. Yes, sir..
Senator BARKLEY. HOW long
after its organization was that?
Five hundred thousand shares, I believe you said.
Mr. VAN SWERINGEN. Alleghany was organized—[conferring with
associates]—Alleghany was organized January 26, 1925—29.
Senator BARKLEY. Some year or so?
Mr. VAN SWERINGEN. Yes, a little over.
Senator BARKLEY. YOU had been instrumental, your company I
mean, your interests, had been instrumental in the organization of
the Alleghany Co., I believe?
Mr. VAN SWERINGEN. Yes, sir.
Senator BARKLEY. Prior to that?
Mr. VAN SWERINGEN. Yes, sir.
Senator BARKLEY. HOW much of the
stock of the company did you
own at the time you bought this additional 500,000 shares?
Mr. VAN SWERINGEN. These were shares that we, of course, had
but that were in the parent company, the Cleveland Building.
Senator BARKLEY. HOW is that?
Mr. VAN SWERINGEN. These were shares that were received by
the parent of the Cleveland Terminals Building Co.
Senator BARKLEY. What was the parent of the Cleveland Terminal?
Mr. VAN SWERINGEN. The Vaness Co.—Van Sweringen Corporation—pardon me.
Mr. PECORA. And who were the the organizers of the Vaness
Corporation.
Mr. VAN SWERINGEN. That is a Van Sweringen corporation.
Mr. PECORA. That also is a corporation that you and your associMr. VAN SWERINGEN (interposing). Yes, sir.
Mr. PECORA (continuing). Use as a corporate vehicle for your
transactions, isn't it?
Mr. VAN SWERINGEN. Yes.
Senator BARKLEY. The Alleghany Co. was a
Mr. VAN SWERINGEN. Yes, sir.
Senator BARKLEY. And the Vaness Co., was
holding company?
that a holding company?
Mr. VAN SWERINGEN. I have described the Alleghany in more complete sense, but I think that is near enough.
Senator BARKLEY. Was the Vaness Co. a holding company or an
investment company?
Mr. VAN SWERINGEN. The Van Sweringen Corp., you mean?
STOCK EXCHANGE PEACTICES
649
Senator
BARKLEY. NO, the Vaness Co.
Mr. VAN SWERINGEN. Yes.
Senator BARKLEY. The Van Sweringen Corporation, what
Mr. VAN SWERINGEN. That was organized by our interests
was it?
to furnish a corporate instrumentality to buy, sell, trade in or hold stocks
and securities or other properties and to enter into such other transactions as may from time to time be determined.
Senator BARKLEY. That was a holding company?
Mr. VAN SWERINGEN. Yes.
Senator BARKLEY. And the
Nickel Plate Co., was that a holding
company?
Mr. VAN SWERINGEN. YOU mean the Securities Corporation?
Senator BARKLEY. Yes; that was alsp
Mr. VAN SWERINGEN. That was extinguished.
Senator BARKLEY. And the Chesapeake Co., is that a similar corporation?
Mr. VAN SWERINGEN. The Chesapeake Corporation was composed
of the C. & O.
Senator BARKLEY (interposing). The C. & O. Railroad Co. was one
corporation, but the Chesapeake Corporation was a holding company?
Mr. VAN SWERINGEN. Yes, sir.
Senator BARKLEY. HOW many
holding companies did the Van
Sweringens organize?
Mr. VAN SWERINGEN. The Chesapeake Corporation, the Allegheny
Corporation, and the Van Sweringen Corporation are the outstanding
ones, where the interests are publicly held.
Senator BARKLEY. YOU had also the Nickel Plate Corporation?
Mr. VAN SWERINGEN. That was extinguished before these were
Senator BARKLEY (interposing). And the Vaness?
Mr. VAN SWERINGEN. That was a personal—not a publicly distributed corporation.
Senator BARKLEY. Well, I know it was the same type of corporation?
Mr. VAN SWERINGEN. It was a basket, if I might use that expression.
Senator BARKLEY. Sir?
Mr. VAN SWERINGEN. It was a personal basket, if I might use
that expression.
Senator BARKLEY. In other words, you did not have as many
people in it?
Mr. VAN SWERINGEN. NO.
Senator BARKLEY. It was a sort of a family affair?
Mr. VAN SWERINGEN. Yes.
Senator BARKLEY. The purposes were the same as
the others, as I
understand it.
Mr. VAN SWERINGEN. Identified with the interests of O. P. and
M. J. Van Sweringen.
Senator BARKLEY. It w a s organized under its charter to buy securities in any of these railroad companies?
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. YOU referred to
the Vaness Co. as a personal affair.
Didn't you say yesterday that 20 percent of its stock was held by
outsiders?
650
STOCK EXCHANGE PKACTICES
Mr. VAN SWERINGEN. Yes, but I said that it had its origin in a
personal basket, later expanded to the degree that I therein outlined.
Mr. PEC OR A. But when you said now in answer to Senator Barkley's questions that the Vaness Co. is a personal basket, did you
mean to convey the impression that all of its stock was held by you
and your immediate associates?
Mr. VAN SWERINGEN. N O ; because I modified it or defined to that
degree of exception.
Mr. PECORA. YOU said heretofore that the Guardian Savings &
Trust Co. of Cleveland and the Union Trust Co. of Cleveland had
been closed. Has either of those banks been reopened?
Mr. VAN SWERINGEN. They were right on the edge of opeDing, I
think, before I left. I am not sure.
Mr. PECORA. Before you left day before yesterday?
Mr. VAN SWERINGEN. Mr. Ginn tells me specifically no.
Mr. PECORA. And the loans that both of those banks held which
have been made to any of your companies still remain unpaid?
Mr. VAN SWERINGEN. Those that were held.
Mr. PECORA. Those that were open on the date of the closing of the
banks?
Mr. VAN SWERINGEN. Those that existed.
Mr. PECORA. Yes.
Mr. VAN SWERINGEN. Yes.
Mr. PECORA. NOW, after you
and your associates, through the
medium of any of these holding companies that you have referred to,
acquired stock of the Erie Eailroad Co., did it proceed to acquire
holdings of stock in any other railroad company?
Mr. VAN SWERINGEN. Yes; it did.
Mr. PECORA. What was the next road that you bought into?
Mr. VAN SWERINGEN. That is pretty well set out in my prepared
statement.
Mr. PECORA. While you are looking it up may I ask if, in order to
enable you to prepare this statement that you read into the record
yesterday, you consulted any of the records and books of account of
your various companies, or does this statement represent your recollection with respect to the matters embodied in it?
Mr. VAN SWERINGEN. I blocked this out on dictation.
Mr. PECORA. From memory?
Mr. VAN SWERINGEN. In general terms from memory.
Mr. PECORA. All right.
Mr. VAN SWERINGEN. Then had it checked as to sequence of
events and facts that it otherwise contains.
Mr. PECORA. NOW, what was the next railroad into which your
interests bought after the Erie?
Mr. VAN SWERINGEN. Pere Marquette.
Mr. PECORA. When were those purchases made?
Mr. VAN SWERINGEN. They began in April 1924.
Mr. PECORA. And terminated when?
Mr. VAN SWERINGEN (conferring with associates). When did they
terminate? I cannot tell you the time of the termination. I will
supply it for you.
Mr. PECORA. Was it a period of several months?
Mr. VAN SWERINGEN. I beg your pardon; I didn't hear that.
Mr. PECORA. Was it over a period of several months?
STOCK EXCHANGE PRACTICES
Mr. VAN SWERINGEN. Yes; it was.
Mr. PECORA. Six months, would you say?
Mr. VAN SWERINGEN. I would say all of that.
Mr. PECORA. A year?
Mr. VAN SWERINGEN. My judgment would be about a year.
Mr. PECORA. HOW many shares of the Pere Marquette road
651
did
your interests acquire in that period?
Mr. VAN SWERINGEN. They are assembling that for you. That
was some information you wanted yesterday.
Mr. PECORA. When will we have the result of that assembling
process?
Mr. VAN SWEHINGEN. The Nickel Plate will be here soon.
Mr. PECORA. I know, but when will we have this information you
said they are assemblnig?
Mr. VAN SWERINGEN. We can do that tomorrow.
Mr. PECORA. All right sir; will you?
Mr. VAN SWERINGEN. Gladly.
Mr. PECORA. NOW, can you tell us what percentage of the total
outstanding stock of the Pere Marquette your interests acquired in
this period of time?
Mr. VAN SWERINGEN. A good bit of the Pere Marquette belongs
to the C. & O. at this time. As I told you, the Commission approved
the right to control the Pere Marquette in the C. & O. And they
have now not a majority, approaching it. If I were to approximate it,
I would say somewhere near 40 percent of the common stock.
Mr. PECORA. YOU mean by that in the years 1924 and 1925
Mr. VAN SWERINGEN (interposing). I think I can give you the
number of shares here. Just a minute. (After conference with
associates.) They have 267,700 shares of common and 12,600 of
preferred, and 46,200 more of common in another block. The total
of that is 313,900 of common. That is more than a majority of the
common, but it is not more than a majority of all. Now, one more
block, 27,500 shares of common, are owned by the Chesapeake
Corporation.
Mr. PECORA. Were all of these shares of the common and preferred
stock of the Pere Marquette acquired by your interests in 1924 and
1925?
Mr, VAN SWERINGEN (after conferring with associates). They were
not. It was over a long period of time, but I will try to give you the
period if you wish.
Mr. PECORA. What I want to get at is about the proportion of the
stock of the Pere Marquette which your interests acquired in this
period of about 1 year commencing in April 1924, in order to get any
management control of it.
Mr. VAN SWERINGEN (after continued conference with a
@FedFRASER