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STOCK EXCHANGE PRACTICES
HEARINGS
BEFORE THE
COMMITTEE ON BANKING AND CUBEENCY
UNITED STATES SENATE
SEVENTY-THIRD CONGRESS
SECOND 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
S. Res. 56 and S. Res. 97
(73d CONGRESS)
RESOLUTIONS TO INVESTIGATE THE MATTER OF BANKING
OPERATIONS AND PRACTICES, TRANSACTIONS RELATING TO
ANY SALE, EXCHANGE, PURCHASE, ACQUISITION, BORROWING, LENDING, FINANCING, ISSUING, DISTRIBUTING, OR
OTHER DISPOSITION OF, OR DEALING IN, SECURITIES OR
CREDIT BY ANY PERSON OR FIRM, PARTNERSHIP, COMPANY,
ASSOCIATION, CORPORATION, OR OTHER ENTITY, WITH A
VIEW TO RECOMMENDING NECESSARY LEGISLATION, UNDER
THE TAXING POWER OR OTHER FEDERAL POWERS
PART 4
Dillon, Read & Co.
OCTOBER 3 TO 13, 1933
Printed for the use of the Committee on Banking and Currency
175541
U N I T E D STATES
GOVERNMENT P R I N T I N G O F F I C E
WASHINGTON : 1933
COMMITTEE ON BANKING AND 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, JE., 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
SUBCOMMITTEE ON STOCK EXCHANGE INVESTIGATION
DUNCAN U. FLETCHER, Florida, Chairman
CARTER GLASS, Virginia
PETER NORBECK, South Dakota
ALBEN W. BARKLEY, Kentucky
JOHN G. TOWNSEND, JR., Delaware
EDWARD P. COSTIGAN, Colorado
JAMES COUZENS, Michigan
THOMAS P. GORE,1 Oklahoma
ALVA B. ADAMS,1 Colorado
PHILLIPS LEE GOLDSBOROUGH,1 Maryland
FREDERICK ^TEIWER,1 Oregon
1
Alternates, serving in the absence of Senators Barkley, Costigan, Norbeck, and
Couzens.
CONTENTS
Testimony of:
Christie, Robert E, jr. a member of the firm of Dillon, Read & Co—„ 1638,
1659, 1691
Dillon, Clarence, of Dillon, Read & Co., New York City
1535,
1573, 1617,1857, 2097
Forrestal, James V
2053
Hayward, Robert Otis, a member of the firm of Dillon, Read & Co._ 1891,
1900, 1949, 1993, 2122
Hopson, Howard C
2139
Hurley, Hon. Patrick J
1752
Kennedy, Leonard
2133
Knollenberg, Bernard
2076
Strieffler, Paul M
.
2088
Tracy, Ernest B
1707, 1719, 1781, 1821
Travis, Charles M
1756
in
STOCK EXCHANGE PBA0TI0B8
TUESDAY, OCTOBER 3, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,
^Washington, D.C.
The subcommittee met, pursuant to call of the chairman, as a resumption of the hearing recessed on July 6, 1933, 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), Adams (substitute for
Barkley and proxy for Costigan), Norbeck, Townsend, and Couzens.
Present also: Senator Goldsborough.
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver and David Saperstein, associate counsel to the committee;
and Frank J. Meehan, chief statistician to the committee; George S.
Franklin, Wallace P. Zachry, Warren Leslie, Walter G. Dunnington,
Clifton Murphy, John T. Cahill, and Bernhard Knollenberg, counsel
for Dillon, Eead & Co.; Boot, Clark, Buckner & Ballaritine, George
H. Murphy of counsel, counsel for United States & Foreign Securities
Corporation.
The CHAIRMAN. The subcommittee will please come to order. We
resume the hearings where we left off on July 6 last, and will proceed from that point on. Mr. Pecora, who is your first witness ?
Mr. PECORA. Mr. Clarence Dillon.
The CHAIRMAN. YOU will come forward to the committee table,
Mr. Dillon, 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. DILLON. I do.
The CHAIRMAN. YOU
may be seated, Mr. Dillon. And, Mr. Pe-
cora, you may proceed.
TESTIMONY OF CLABENCE DILLON, OF DILLON, EEAD & CO.,
NEW YOEK CITY
Mr. PECORA. Mr. Chairman and gentlemen of the committee, I
deem it only fair to the firm represented by the witness, Mr. Clarence
Dillon, to state to you that the members of the investigating staff
of this committee have received from Mr. Dillon and his associates
in that firm, from the very outset, the fullest possible measure of
cooperation, aid, and assistance that we have asked for in our investigation of various matters connected with their business. At no
1535
1536
STOCK EXCHANGE PRACTICES
time has there been the slightest hindrance or obstacle placed in
our path by their office; but on the contrary they have extended
every courtesy and accommodation, which has all contributed, to
facilitate our work of investigation. I think it only fair and just
to the witness and his firm that that statement be made by me on
the record, and I am very happy to make it.
The CHAIRMAN. The committe is very glad to hear that statement.
Mr. PECORA. Mr. Dillon, give your full name and address to the
committee reporter for the record, please.
Mr. DILLON. Clarence Dillon. My business address is 28 Nassau
Street, New York City. My residence is Bedminster, N.J.
Mr. PECORA. Will you just raise your voice. This is a large room
and the acoustics are not of the best.
Mr. DILLON. Yes,
sir.
Mr. PECORA. Mr. Dillon, are you connected with the firm or company known as Dillon, Eead & Co.?
Mr. DILLON. I am,
Mr. PECORA. HOW
sir.
long has that organization or firm been in ex-
istence?
Mr. DILLON. DO you mean the present firm or its predecessor firm?
Mr. PECORA. The present firm, the firm that is called Dillon, Eead
&Co.
Mr. DILLON. William A. Eead & Co., our immediate predecessor
firm, became Dillon, Eead & Co. in January, the 14th, I think, 1921.
Mr. PECORA. And has continued in existence under that firm name
and style of Dillon, Eead & Co. since that time to the present time?
Mr. DILLON. It has; yes, sir.
Mr. PECORA. What is the legal
form of that organization? Is
it a partnership or a corporation?
Mr. DILLON. It is a joint-stock association under the laws of New
York, and
Mr. PECORA (interposing). Has that firm
Mr. DILLON (continuing). Excuse me.
Mr. PECORA. GO right ahead.
Mr. DILLON. The joint stock association started October 11, 1922.
We were a copartnership until 1922.
Mr. PECORA. In 1922 it was organized under the laws of the State
of New York as a joint stock association, a corporation, was it?
Mr. DILLON. That is correct.
Mr. PECORA. And who are the stockholders or members of this
joint stock company known as Dillon, Eead & Co.
Mr. DILLON. I think we have a list.
Mr. PECORA. All right, if you wish to refer to it.
Mr. DILLON. I am the president. The following men are vice
presidents: W. M. L. Fiske, Eoland L. Taylor, Win. A. Phillips,
James V. Forrestal, Ealph H. Bollard, Dean Mathey, Wm. S.
Charnley, Eobert O. Hayward, Henry G. Eiter, 3rd, and Harry H.
Egly. Mr. Eobert E. Christie, Jr., is secretary and treasurer.
Mr. PECORA. Are those gentlemen all the holders of stock of this
joint stock company?
Mr. DILLON. I do not think all of them own stock. I can give
you that list of stockholders if you wish.
Mr. PECORA. If you please.
STOCK EXCHANGE PRACTICES
1537
Senator COUZENS.- Mr. Pecora, ask him the percentage that they
own.
Mr. PECORA. Senator Couzens suggests that you also state the percentage or proportions of stock of this joint stock corporation owned
by each of the stockholders.
Mr. DILLON. The stockholders are Clarence Dillon, Abbott Trading
Corporation, The Beekman Co., Ltd., E. J. Bermingham, Isabelle
Bollard, E. H. Bollard, W. M. S. Charnley, W. M. L. Fiske, W. M. A.
Phillips, Eoland L. Taylor. What was your question, Senator
Couzens ?
Senator COUZENS. The percentage of stock which each holds in that
corporation.
Mr. DILLON. Of stock?
Senator COUZENS. Yes.
Mr. DILLON. I have no objection to giving any information to this
committee that you feel will be helpful to you. But I am wondering
if a statement of the interests of the various members is something
you want me to tell publicly. If you feel it is going to help you in
your deliberations, that it be given publicly, I have no objection to
doing so; but I would appreciate it if you would consider whether
that is pertinent.
Senator COUZENS. SO far as I am concerned, if I know who controls the corporation I am satsified, speaking personally.
Mr. PECORA. I think similar consideration was requested by members of the firm of J. P. Morgan & Co. and that the committee at that
time accorded them that consideration, by not including in the public
record, or the record of the public hearings the apportionment of
interest among the various partners that composed the banking firm
of J. P. Morgan & Co. The information was given to the committee
as I recall it, however, in executive session.
Senator COUZENS. But we did get who controlled the firm of J. P.
Morgan & Co.
Mr. PECORA. Yes; insofar as that would be indicated by
Senator COUZENS (interposing). And we put in the record that
Mr. Morgan controlled absolutely the organization. I am asking
for the same information as to Dillon, Eead & Co.
Mr. PECORA. Well, perhaps
Senator COUZENS (continuing). And wasn't it put in the record
in detail later on ? I mean as to the holdings of J. P. Morgan.
Mr. PECORA. It was given to us in executive session, but not put
in the record. I mean as to their respective apportionments of
interest.
Senator GOLDSBOROUGH. It got to the public just the same, as I
recall.
Mr. PECORA. Well, perhaps Mr. Morgan gave an interview.
Senator GOLDSBOROUGH. I did not mean to intimate that.
Mr. PECORA. Mr. Dillon, who is the principal stockholder of Dillon, Eead & Co.?
Mr. DILLON. Mr. Pecora, if Senator Couzens and his associates
feel that that information is going to be helpful if given publicly,
I have no objection to giving it. But, naturally, I prefer not to
do so.
1538
STOCK EXCHANGE PRACTICES
The CHAIRMAN. If you have no objection to giving it I see no
reason why it should not go in our record.
Mr. DILLON. I have no objection, Mr. Chairman, to answering any
questions whatsoever, and I have no objection at all to answering
that question if you gentlemen decide it will help you in your deliberations. But, naturally, there are some things I prefer not to have
in the public record. But I am prepared to answer anything you
want.
Mr. PECORA. I think, perhaps, if you would give the information
Senator Couzens has indicated that he is especially desirous of
having as going to the control of this joint-stock association, that
would satisfy our immediate purpose.
Senator COUZENS. That would satisfy me, Mr. Pecora. I am not
attempting to speak for the other members of the subcommittee, but
if he will give that information that will be sufficient for our purposes at this time.
Mr. DILLON. I own the majority of the stock.
Senator COUZENS HOW much stock is out?
Mr. DILLON. HOW many shares?
Senator COUZENS. Yes.
Mr. DILLON. I haven^t the exact figures here. But there are
between 73,000 and 74,000 shares. I haven't just the exact figures
but can furnish them later.
Senator COUZENS. That is sufficient.
The CHAIRMAN. What is the par value of the stock?
Mr. DILLON. $1 par value.
Senator COUZENS. HOW many shares do you own, Mr. Dillon?
Mr. DILLON. We haven't that figure here but we can "get it for you.
Senator COUZENS. All right.
Mr. PECORA. Mr. Dillon, what is the business of Dillon, Read &
Co.?
Mr. DILLON. Dillon, Read & Co. in the investment banking business.
Mr. PECORA. When you say " investment banking business ", are
you seeking to draw a distinction in the use of that term between the
business of investment banking and the business, we would say, of a
private banker ?
Mr. DILLON. A private banker may be engaged in any banking
business. I was distinguishing rather between investment banking
and commercial banking. The field of investment banking as I am
trying to make clear would have more to do with long-term investments as opposed to short-term credits, which would be the proper
business, I feel, of commercial banking. I think the two fields are
distinct in their functions. The commercial banker makes shortterm credits more or less in the nature of self-liquidating credits, because he makes them largely with depositors' money, and the depositors may want that money on demand. He would be financing what
you might call " consumable goods," things which by their nature
would be consumed in a short time and the loan repaid. On the
other hand, the investment banker has to do with the financing of
credits which would not be immediately self-liquidating and short
term but would be devoted rather to durable goods than to consumable goods.
Mr. PECORA. Such as public improvements?
STOCK EXCHANGE PRACTICES
1539
Mr. DILLON. Yes. For road construction, I should say; the
building of factories; the building of bridges and tunnels, and
expenditures that in themselves and by their nature are not consumed but, rather, produce other things, the revenues from which
would in time liquidate such a loan.
Senator ADAMS. The disregard of that distinction has caused
a good deal of trouble in this country, hasn't it, Mr. Dillon ?
Mr. DILLON. I think so. That is why I am trying to make it
clear. I think those functions are distinct banking functions.
The CHAIRMAN. Mr. Dillon, do you receive deposits?
Mr. DILLON. I think, Senator Fletcher, we may have some small
amounts on deposit with us, which are in the nature of sinkingfund moneys, or moneys for payment of coupons. But we do not
solicit deposits simply to be held against checks.
Mr. PECOEA. Are the deposits to which you refer deposits that are
intrusted to your firm as fiscal agents for those making the deposits ?
Mr. DILLON. Those deposits are largely in the nature of deposits
to cover sinking fund and coupon payments.
Mr. PECORA. They are not the kind of deposits that are payable on
demand, and such as commercial banks carry ?
Mr. DILLON. NO. We do not take those deposits.
Mr. PECORA. YOU do not take deposits of that character ?
Mr. DILLON. NO, sir.
Senator COUZENS. May
I ask Mr. Dillon at this time to distinguish
between his house and the House of Morgan ?
Mr. PECORA. I think it would be very enlightening if Mr. Dillon
would undertake to do that for the subcommittee.
Mr. DILLON. I would be very glad to describe the business of our
firm, and
Senator COUZENS (interposing). What I am trying to get at is this:
You distinguish the nature of your business from that of the commercial banker. Now, J. P. Morgan & Co. are not commercial
bankers, are they?
Mr. DILLON. N O ; but
Senator COUZENS (interposing). They are private bankers ?
Mr. DILLON. Yes.
Senator COUZENS. And an investment house, both?
Mr. DILLON. Yes.
Senator COUZENS. Can you think of anything in the operations
of J. P. Morgan & Co. that is a distinguishing difference between
your operations and theirs, if any?
Senator ADAMS. Senator Couzens, might I interpose right there:
You say J. P. Morgan & Co. are not commercial bankers? Is that
correct?
Senator COUZENS. Yes; in the sense that they are not incorporated
as a commercial bank.
Mr. PECORA. But that they do what might be .regarded as a commercial banking business or something akin to it.
Senator COUZENS. Well, they are not under the law a commercial
bank. I think we understand the different factors connected with a
commercial bank and the house of Morgan.
Mr. PECORA. I think Mr. Dillon will be glad to make that distinction clear.
1540
STOCK EXCHANGE PEACTICES
Mr. DILLON. I will be glad to describe my own business. But I
think you gentlemen of the committee are more familiar with the
business of J. P. Morgan & Co. after your inquiry, probably, than
I am.
Senator COUZENS. Mr. Dillon, before you go into that let me make
myself clear. I want to know the difference between a private bank
and this business of yours. I understand that J. P. Morgan & Co.
were described as a private bank.
Mr. DILLON. Senator Couzens, I am not trying to fence with you
at all. But I hesitate to attempt to go into a detailed description
of the difference between my own business and some other business
I may not be familiar with. I understand that J. P. Morgan & Co.
do take deposits, which we do not. We do not take them because
we have no use for them in our business. It would be money that
we would have to pay back to some one on demand, and we have
no useful employment for that money in the investment banking
business as we conduct it.
Senator ADAMS. Doesn't the confusion come in the use of the term
" banking " in connection with your business ?
Mr. DILLON. I think so.
Senator ADAMS. Isn't there a misunderstanding when one applies
the term " banking " to your busines ?
Mr. DILLON. I think so That is why I call it dealing in investment securities.
Senator GOLDSBOROUGH. And isn't it a fact that J. P. Morgan &
Co. carry accounts subject to check, while you mean that your house
does not do so ?
Mr. DILLON. I understand that that is correct. We do not do so.
There are none subject to check as I understand. Isn't that true?
(Speaking to an associate.) I am told there may be two or three
accounts against which checks may have been drawn during past
years, but we do not make commercial loans, or issue letters of credit,
or deal in foreign exchange, or anything of that kind. Our business
is devoted to what I will describe to you if you like as the investment
security business. And I shall be glad to enlarge upon that subject
so that you may understand it if you wish.
Senator COUZENS. Aren't there three kinds of banks ? As I understand, you describe yours as an investment banking business
Mr. DILLON. Yes, sir.
Senator COUZENS. And
it is that kind of banking business which
does not accept, in the general .sense of the word, deposits.
Mr. DILLON. We do not.
Senator COUZENS. Nor doe,s it honor checks.
Mr. DILLON. N O ; we do not.
Senator COUZENS. Then there is the private
banker, like the
Morgan house. And then there is the incorporated bank, either
under a State or a i^ational charter. Isn't that so ? In other words,
aren't there three kinds of banks in the general acceptance of the
term "bank"?
Mr. DILLON. I would say two kinds. There is the commercial
bank, which I might say deals in short-term credits, and then there
is the investment bank, which we may briefly call a dealer in long
credits. I think tho(se are the distinct functions. Then you may
STOCK EXCHANGE PRACTICES
1541
have a house, a private bank, that combines those two things. But
I do not mean to describe it as a third function.
Senator COUZENS. In fact it is, isn't it?
Mr. DILLON. It is probably a combination of the other two.
Senator COTJZENS. In other words, you have a charter from the
State of New York?
Mr. DILLON. We?
Senator COTJZENS.
Mr. DILLON. Yes.
Senator COUZENS.
Yes; I mean you.
And J. P. Morgan & Co. does not as I understand it.
Mr. DILLON. AS I understand it that is a partnership.
Senator COUZENS. SO that is another distinction between the two
methods of operation. In other words, Morgan & Co. do not have
a limited liability, do they?
Mr. DILLON. I do not think so, but I do not know.
Mr. PECORA. N O ; as partners of course each partner is liable for
all of the obligations of the entire copartnership.
Senator COUZENS. And, Mr. Dillon, your company does have a
limited liability. The stockholders do have a limited liability, don't
they?
Mr. DILLON. NO.
Mr. PECORA. Senator
Couzens, in the case of a joint stock company under the laws of the State of New York the stockholders are
distinguished in that important respect. The stockholders have unlimited liability in the case of a joint stock association.
Senator COUZENS. Then what are the advantages, may I ask Mr.
Pecora, so I may have it clear, in having a joint-stock company
if there is no limiting of liability.
Mr. PECORA. AS I apprehend the principal advantage is that it
carries with it all the features of a copartnership, plus the additional
advantage, if it be considered an advantage, of a continuation of the
interest of a deceased partner, in the case of his estate, through stock
ownership.
Senator COUZENS. That is the chief advantage?
Mr. PECORA. That is what I consider the chief advantage- Mr. Dillon might speak for himself, but the withdrawal of a stockholder
would not necessitate the reconstitution of the firm, such as would
have to take place in the case of a copartnership.
Mr. DILLON. I think your counsel, Senator Couzens, has stated it
very clearly.
Senator COUZENS. All right.
Mr. PECORA. And Mr. Dillon is a good lawyer, too.
Senator COUZENS. That is a self-compliment. Mr. Pecora says
that Mr. Dillon is a good lawyer, too. [Laughter.]
Mr. PECORA. Well, perhaps that remark was a little immodest,
Senator Couzens.
Senator COUZENS. All right.
Mr. PECORA. Mr. Dillon, in your answer to one of the questions
previously put to you, you stated that Dillon, Eead & Co. do not
carry any deposit accounts, payable on demand. Has that always
been the case?
1542
STOCK EXCHANGE PRACTICES
Mr. DILLON. At times in the past, we have had substantial deposits
that were subject to withdrawal.
Mr. PECORA. And when did your firm—and I shall continue to
refer to Dillon, Read & Co. as a firm for the sake of convenience
rather than as a joint-stock corporation—when did your firm discontinue the practice of carrying deposit accounts payable on demand
for the account of customers ?
Mr. DILLON. That has been a gradual process. We take no new
accounts, and we have been eliminating our old opes during the last
3 or 4 years. Mr. Pecora, at this point I should like to state that we
do have another company, Dillon, Eead & Co., Inc., whkh is a
Maryland corporation, of which I own all the common stock. There
are some preferred stockholders. That was just formed last year,
and is not a very active company. We also have the Dillon Eead
Corporation, which is a Connecticut company, which conducts our
European business. But the former concern that has to do with the
period of your inquiry.
Mr. PECORA. Then when you speak of Dillon, Eead & Co. it is
understood that we have in mind this joint stock company organized under the laws of the State of New York.
Mr. DILLON. That is correct.
Mr. PECORA. And that has been in existence since some time in
1922.
Mr. DILLON. That is correct.
Mr. PECORA. All right. Now, Mr. Dillon, according to information that was furnished to us in answer to a questionnaire that we
submitted to your firm, at one time, and I refer specifically to the
end of the year 1927, your firm carried deposit accounts aggregating
$5,250,907.9<3, which were subject to withdrawal on demand, those
deposits being kept and maintained by various corporations doing
business in interstate commerce. So you will see from that, that
at one time, a few years ago, your firm did carry some deposit
accounts for customers of a rather substantial amount. Would you
tell this committee why in more recent times your firm has discontinued this practice of carrying deposit accounts for customers?
Mr. DILLON. In 1927 such deposits were in excess of $5,000,000, as
you have read. And there were 17 accounts. In 1928 there were
seven accounts with a million and a quarter dollars, roughly. In
1929 there were seven accounts with $3,100,000. In 1930 there was
one account with $123,000. And in 1931 there were no accounts of
that nature.
Mr. PECORA. And none in 1932?
Mr. DILLON. NO ; nothing except that I am informed there were a
few thousands of dollars someone left there.
Mr. PECORA. Will you tell the committee for what reason your
firm discontinued that portion of its business ?
Mr. DILLON. That deposit business grew up with no particular
solicitation on our part, just as a natural consequence of our business. After 1927 we discouraged that business, because those funds
were of no use to us. There was simply the responsibility of holding
them. We do not make commercial credits. We do not do foreign
exchange or issue letters of credit. We had no use for depositors'
money in our business. That was simply a responsibility, the keep
STOCK EXCHANGE PRACTICES
1543
ing of it, keeping it always liquid and ready to be paid out on demand. It served no useful purpose for us, and as time went on we
became more and more convinced that we did not want demand
deposits. As we went through such years as we have gone through
recently, we adopted the policy of carrying against deposits only cash
and short-time governments, so they were of no value to us. Therefore we have gradually discouraged that business, until today we
won't accept it. We do not want it.. We feel that it is an entirely
distinct business from our security business.
Mr. PECORA. NOW, Mr. Dillon, can you give the committee in a
general statement the principal features of the business conducted
by your firm?
Mr. DILLON. We are not versed in the commercial banking business as such, and we do not want those deposits, because we are not
commercial bankers ourselves. We are in the investment business.
The nature of our business is the financing as I said before, of the
durable industries of this,country; and you might be interested in a
rough picture of just what the relation of that sort of financing is to
commercial financing and short credits. I think I have some figures here which will show that. There was a report prepared by
A. B. Tebbutt, of the Harvard University Graduate School of Business Administration, and that material indicates that in this country
there was probably produced and distributed as great a volume of
consumption goods—that is, the sort of thing that you ordinarily
buy in stores—in the depression years of 1930, 1931, and 1932, as in
the prosperous years of 1927, 1928, and 1929.
The Federal Eeserve Board index of industrial production shows
that the consumption of such consumable goods declined about 15
percent in value from July 1929 to July 1933, which more or less
corroborates that, while the production of durable goods, which are
the goods that we would be financing, declined about 65 percent in
value from July 1929 to July 1933. These figures are all compiled,
I might say, by Leonard P. Ayres, who is a well-known economist.
The census report of manufactures for 1929 will show that the production of industries which the Federal Eeserve called durable was
equal to about $30,000,000,000, while the production of industries
which the Federal Eeserve would call consumable was equal to about
$30,000,000,000. In other words, the business of the country is about
equally divided between the sort of business which would be financed,
probably, by commercial credits, and the business which would be
financed by the investment banker, with the longer term credit.
Senator ADAMS. I S that even distribution prior to 1929 or subsequent to 1929?
Mr. DILLON. These are the 1929 figures. I have something here
which will help you in connection with subsequent figures. I just
read the percentages. You may not have heard
Senator ADAMS. I heard the percentages.
Mr. DILLON. The decline since 1929 has been 15 percent in consumable goods, and 65 percent in what we call durable goods. The
census report of manufactures shows that in 1929 there were employed in durable goods industries about 10,100,000, and in consumption goods industries about 3,900,000. By applying to these figures
the Federal Eeserve index of employment we can get an estimate of
1544
STOCK EXCHANGE PRACTICES
the present employment in these two groups of industries. This
estimate shows that in June 1933 those employed in the durable
goods industries were about 4,400,000, or a decrease of 5,700,000,
^whereas in the consumption goods industries the employment was
15,100,000, or a decrease of about 800,000. This shows that approximately 7 men out of 8 unemployed today belong to the durable goods
industries. Those figures may not be exact, but they will give you a
picture, I think, according to Mr. Ayres, of the field and the function
of the investment banker.
Today you have the business that is financed by the commercial
banks, in connection with consumable goods, functioning reasonably
well. The industries that would be financed by the investment
banker are functioning at only a fraction of their normal production.
Senator COUZENS. May I ask a question at that point?
Mr. DILLON. Yes, sir.
Senator COUZENS. When
you speak of enterprises financed by security bankers, do you make any division between those that you
finance from the ground up, new institutions, and those, that you just
buy out and sell the stock of?
Mr. DILLON. I do not know whether that would be included. I
would assume not, because those figures are made up from the census
of manufactures. I did not prepare those figures. Mr. Ayres prepared them, but I should think they would not include recapitalization, if that is what you mean.
Senator COUZENS. If you are going to submit figures, I wanted to
know the difference between the figures representing the amount of
money that was floating through these security ventures for refinancing institutions like the Dodge Brothers, and those which they
might float for an entirely new industry. In other words, a mere
change of ownership between one group and another is of no importance, except to the fellow who gets stung, or the fellow who profits,
whichever the case might be. The investment banker, as you have
described him, as I understood it, means a banker who floats a new
company, a new enterprise, and does something constructive, rather
than a mere change of ownership. I wondered if you had any
figures in connection with those two groups.
Mr. DILLON. I agree with what you say. Senator, to this extent.
I t does not necessarily have to be a new industry. The financing
of an existing industry, in order that it may expand or develop, is
equally as constructive as the financing of a new industry.
Senator COUZENS. Yes; but when you finance such an industry as
you have just described, it is assumed that they add capital goods.
Mr. DILLON. Yes, sir.
Senator COUZENS. YOU
do not finance them simply to increase their
consumptive goods, but rather to increase their facilities of a capital
nature. That is as I understand your description.
Mr. DILLON. I think that is correct.
Senator COUZENS. Then, what did the public gain, or what did the
industry gain by the mere exchanging of ownership of the Dodge
plant from one group to another?
Mr. DILLON. They gained this, as I see it, Senator Couzens. I
think that when a great industry in this country, owned by one man,
or by one family, reaches the proportions which some industries have
STOCK EXCHANGE PRACTICES
1545
reached it is probably better for the general community if that industry is owned by the public rather than being owned by one man or
one family, because too great a responsibility attaches to a very small
control.
Mr. PECORA. DO you think that might be attended with unhappy
social consequences?
Mr. DILLON. I t might be, Mr. Pecora, and, again, if that industry
needs additional capital for its expansion and development, it is
much easier to get that capital when the ownership is a public ownership. It is on a much sounder basis. I should think, from the
social point of view, the labor employed in that industry is on a
sounder basis if that great industry is owned by the public rather
than by one family. Does that answer your question, Senator
Couzens?
Senator COUZENS. That is very illuminating, but I wonder how you
would put the price that you pay for that into figures. Into what
classification would you put those figures—in the classification of
capital investment in a constructive enterprise, or what ?
Mr. DILLON. I should think those figures would not be in either of
these classifications.
The CHAIRMAN. IS it not true, Mr. Dillon, that what you call
ownership by the public is rather a myth, and that the actual, real
ownership continues in the hands of a few just the same?
Mr. DILLON. NO, Senator. The ownership goes with the stock,
and the stock is owned by the public.
The CHAIRMAN. I understand; but there is a certain controlling
interest in the stock that manages the industry just the same, even
though a great deal of the stock is owned by the public.
Mr. DILLON. I think the general practice is that the stockholders
send their proxies in, probably to a small group of people.
Mr. PECORA. Does not that practice really lead to control of the
industry, which is owned by a large body of stockholders, by a few
persons who receive the proxies and who exercise the actual management and operation of the corporation ?
Mr. DILLON. That is with the consent and approval of the stockholders. They send in their proxies to that group to vote their stock.
Mr. PECORA. I know that is the legal machinery by which the exercise of that control is manifested. What I would like to ask you
is, if it is not your knowledge and experience that the control of a
large corporation, whose stock is widely held among the public, is
very, very frequently vested in a few men, or a small group composed of a few individuals, whose actual combined stock ownership
might represent a very small minority of the stock.
Mr. DILLON. I think, as long as the management runs a company
to the satisfaction of its stockholders, the practice is that the stockholders leave the management of that company in the hands of those
men.
Mr. PECORA. DO we not have
Mr. DILLON. The stockholders always have the potential control,
and the power to remove the management if the company is not run
to their satisfaction.
Mr. PECORA. We know the naked legal power that ownership of
stock conveys or gives to the owners of the stock. But, as a matter
1546
STOCK EXCHANGE PRACTICES
of actual practice in operation, have you not found, in your experience in the financial world, so to speak, that large corporations whose
stock is very widely held among the public, are, in a majority of
instances, probably, controlled and managed by a small group of
individuals whose total stock ownership might comprise a very small
minority of the actual outstanding stock?
Mr. DILLON. The management of a company, the men actively
running the company, are generally, as you say, supported by the
stockholders, by the sending in of proxies, and they leave the control
of the company to that active management as long as that management is running it successfully. I think it is the exception where a
group of stockholders get together to dislodge an existing management, if I understand you correctly.
Mr. PECORA. Yes. That is one of the features I have in mind.
Mr. DILLON. That is unusual, and would only happen, I should
think, when the management was mismanaging the property.
Mr. PECORA. Or when something happened which aroused and
unified the public, or that portion of the public that owned most of
the outstanding stock, and caused them to take defensive measures.
Mr. DILLON. I did not follow that.
Mr. PECORA. The reporter will read it.
(The reporter read the pending question.)
Mr. DILLON. Was that a question? I did not follow it.
Mr. PECORA. I t is a sort of observation embodied in the form of a
question. I t was designed to elicit your opinion and judgment
upon it.
Mr. DILLON. That stockholders as a rule do not dislodge a management unless they are aroused, either by public opinion or by
mismanagement of the property?
Mr. PECORA. Yes. Let me give you a concrete case that came to
the notice of this committee in the course of hearings held by it last
May or June.
One of the witnesses, a Mr. Van Sweringen, testified that he and
his associaties sought to buy, and succeeded in buying, 15 percent of
the outstanding stock of a certain railroad corporation, because Mr.
Van Sweringen and his associates engaged in that transaction felt
that they could get a management control of that railroad company
through the ownership of this block of 15 percent of its outstanding common stock. Those instances of management control going
with the ownership of a block not exceeding 15 percent of the outstanding stock of a corporation are not rare and infrequent, are they ?
Mr. DILLON. AS I understand your question, the control of corporations is often exercised; that is, the working, nominal control
Mr. PECORA. The management control.
Mr. DILLON. The management control—by blocks of stock less than
the majority of the stock.
Mr. PECORA. Far less than the majority.
Mr. DILLON. I think that is correct.
Senator ADAMS. Mr. Dillon, would it not be almost an impossibility for a small stockholder to raise a successful insurrection in
great companies like the Steel Corporation, the A. T. & T., or the
Pennsylvania, so as to have a change in management, even though
there was dissatisfaction among the small stockholders ? You would
not want to undertake that kind of a revolt, would you ?
STOCK EXCHANGE PRACTICES
1547
Mr. DILLON. I should not like particularly the job of lining up
the small stockholders to try to oust the management of any of the
bigger corporations.
Senator ADAMS. YOU are confronted with this, are you not, in the
first instance, that the outside stockholder does not know who the
other stockholders are? You are combatting those in the citadel,
as it were, who have the list of stockholders.
Mr. DILLON. I think the lists of stockholders are available.
Senator ADAMS. Usually after bringing court proceedings to compel them to exhibit them. You remember we went through that in
the American Smelting & Refining Co. That was one of the last
revolts sought to be staged. Mr. Eilers and others sought to stage
a revolt against the Guggenheims.
Mr. DILLON. I was under the impression that you could get a list
of the stockholders by requesting it.
Mr. PECORA. It all depends upon the provisions of the law in the
several States, and sometimes it all depends on the personality of
the court.
Senator ADAMS. But, as a practical matter, it is tremendously
difficult in the case of a large, wide-spread corporation.
Mr. DILLON. I should think it would be difficult to cover the great
number of stockholders.
Senator ADAMS. There are 1,000,000 stockholders in one or two
of these corporations, are there not ? I have seen some of the statistics. It seems to me that the A.T.&T. list of stockholders runs up to
1,000,000 stockholders, does it not, Senator Couzens ?
Mr. DILLON. It seems to me I have seen somewhere that it has
about 700,000 stockholders.
Senator ADAMS. I know it is an enormous number.
Mr. PECORA. Where the stock of a corporation is widely held, that
is, held by a body of several hundred thousand stockholders, the
general body of the stockholders is disorganized, or rather unorganized, whereas the group having as much as 15 per cent of the
outstanding stock is a cohesive, united body, which usually has its
hands on the levers of control of the machinery of the corporation.
Are these not factors that make it extremely difficult, even in the
case of wide-spread dissatisfaction with the management of a corporation, for the unorganized stockholders to oust a small minority
that may be in control ?
Mr. DILLON. I should think that unless the criticism of the management was something very substantial, the minority stockholders
would have a difficult job organizing to oust an existing management.
Mr. PECORA. YOU mean the majority stockholders?
Mr. DILLON. NO ; the general public. I should think it would be a
difficult task to organize them unless there was something very
seriously wrong with the management, because I think investors buying stock, as a rule, buy it because they are satisfied with the management.
Mr. PECORA. Very often because they know nothing about the management.
Mr. DILLON. That is also true.
Senator COUZENS. If they did they would not buy it. May I
inject a question at this point? If this does not disclose any trade
175541—33—PT 4
2
1548
STOCK EXCHANGE PRACTICES
secrets, would you tell us how you go about bidding in a big corporation, to fix the purchase price ? To go back to some of these big corporations which you have purchased and refinanced, how do you go
about it to compute the value?
Mr. PECORA. Perhaps the Senator has in mind the Dodge Motor
•Co.
Senator COUZENS. Yes. I am just speaking from press reports.
I understand that there was some competition in my home town as
to who should get that company, and you were the successful bidder
for it. I was wondering how you went about finding out how much
you could afford to pay for that institution.
Mr. DILLON. That would be a very long story, because it
requires
Senator COUZENS. I mean the principles involved, if there are
any principles.
Mr. DILLON. The chief principle involved would be the earning
power I think, largely.
Senator COUZENS, The earning power would determine how much
you could afford to pay?
Mr. DILLON. Yes; very largely.
Senator ADAMS. Some of them are worth nothing now, then.
Senator COUZENS. We went through a great deal of consideration
of the excess-profits tax, and we always had difficulty in fixing the
ratio on which we collected the excess-profits tax—whether it
was 8 to 1, or 10 to 1, or 10 times the earning power, or 6 times
the earning power, or 4 times the earning power. What percentage
would you use when you go to fix the purchase price of a corporation such as that?
Mr. DILLON. We would consider their past record of earnings
and their present record of earnings, and our estimate of their future
earnings. On a combination of that picture, we would fix a price
that we thought was fair.
Senator COUZENS. Then you do not use any percentage, as we use
in the Government when we come to arrive at the excess-profits tax.
Mr. DILLON. A fixed percentage, you mean?
Senator COUZENS. Yes.
Mr. DILLON. NO.
Senator COUZENS. SO,
you could not give me1 a " tip " on how to
value a corporation which I wanted to buy.
Senator ADAMS. Or sell.
Senator COUZENS. Or sell.
Mr. DILLON. That would depend, Senator, very much on the
conditions that existed in the world at that time.
Senator ADAMS. The financial appetite of the public at the time,
I think, would have something to do with it.
The CHAIRMAN. Mr. Dillon, what was the purpose of forming
these two corporations, one in Maryland and one in Connecticut, of
very much the same name as yours ?
Mr. DILLON. The Connecticut corporation, Senator Fletcher, was
to control our business in Europe. That was the reason for its
formation.
The CHAIRMAN. I t is really a part of your parent organization,
but a branch, as it were, or a department of Dillon, Read & Co. ?
Mr. DILLON. Yes; you might so call it.
STOCK EXCHANGE PRACTICES
1549
Mr. PECORA. It was a separate legal entity, but composed of the
same individuals, virtually, is that correct?
Mr. DILLON. Virtually.
The CHAIRMAN. And the same as to Maryland. What was the
object in forming the Maryland corporation?
Mr. DILLON. The Maryland corporation was formed this last year.
Its exact uses are still to be demonstrated.
Senator ADAMS. In your Maryland company you own all the stock.
Is that true of the Connecticut company ?
Mr. DILLON. NO. The Connecticut company is owned similarly
to the association.
Senator ADAMS. It belongs to the association ?
Mr. DILLON. In the Maryland company I own all the common
stock. My associates in the business have arrangements by which
they participate in the profits, if there are any.
Senator ADAMS. YOU might sell them some of the stock.
Mr. DILLON. I do not sell stock, as a rule, in the companies in
which I am active.
Senator ADAMS. YOU would to your partners.
Mr. DILLON. I think they would be satisfied to let me keep it.
Mr. PECORA. DO any of the stockholders of Dillon, Head & Co.,
the joint-stock company that has been referred to, sit as members
of the board of directors of any commercial banks ?
Mr. DILLON. None of the members of Dillon, Head & Co.—I believe I am correct in stating that none of them sit on the boards of
any member banks.
Mr. PECORA. When you say " member banks" what are you referring to ?
Mr. DILLON. Members of the Federal Reserve System.
Mr. PECORA. I mean any commercial banks, whether members of
the Federal Eeserve System or not.
Mr. DILLON. Mr. Christie is on the board of a country bank in
Hartsdale, the town where he lives outside New York, a small bank
in that suburban town; and Mr. Mathey is on the board of a similar
bank in Princeton, N.J., a small bank in the town where he lives.
He is also on the board of the Empire Trust in New York. Aside
from that, none of the members of Dillon, Read & Co. sit on the
boards of any banks.
Mr. PECORA. YOU are speaking of conditions as of the present
time?
Mr. DILLON. AS of the present time.
Mr. PECORA. In recent years, have any of the members of Dillon,
Read & Co.—and when I say " members " I mean its partners—sat
on the boards of any commercial banks other than those you have
just mentioned?
Mr. DILLON. I, for a number of years, have been on the board of
directors and executive committee of the Central Hanover Bank &
Trust Co.; also on the board and executive committee of the Chase
National Bank. Mr. Phillips has been a member of the board and
executive committee, I believe, of the Chemical Bank. I do not recall at the moment any others. One moment and I will see. [After
conferring with an associate.] I think that is all.
Senator COUZENS. Are you still on these boards?
1550
STOCK EXCHANGE PRACTICES
Mr. DILLON. NO, Senator Couzens. When the banking bill
passed, requiring private bankers to resign from those boards, I
resigned at once rather than wait for the expiration of the time limit.
Senator COUZENS. What date was that?
Mr. DILLON. What date was the bill passed ?
Senator COUZENS. NO ; the date you resigned.
Mr. DILLON. I do not know. If you would like those dates, I can
get them. It was soon after the bill became law.
Mr. PECORA. Soon after the so-called " Glass-Steagall banking
bill " became law ?
Mr. DILLON. Yes.
Mr. PECORA. That was passed in 1933.
Mr. DILLON. That is correct.
Mr. PECORA. I understand the law became effective June
Mr. DILLON. It was subsequent to that that I resigned
16.
from the
Central Hanover. I am not sure of the date as to the Chase.
Mr. PECORA. Did you find, while you were a member of the board
of these two banks to which you have referred, namely, the Chase
National Bank and the Central Hanover National Bank & Trust Co.,.
that it was any advantage to the business of your firm for you to be
on the boards of those commercial banks, or did you find it to be a
disadvantage, or what did you find to be the effect upon your business,,
if any?
Mr. DILLON. We served on those boards at the invitation of those
companies, and I assume they asked us because they thought it would
help their business. As far as our business goes, we find it no advantage to us to sit on those boards.
Mr. PECORA. Considered from the broad standpoint of public policy, Mr. Dillon, would you care to give this committee your opinion
or judgment as to the advisability of private bankers or investment
bankers, while actively conducting such a business, sitting on the
boards of commercial banks?
Mr. DILLON. From our own point of view, we do not like to sit on
any boards. We are busy enough running our own business, and we
try to serve on as few boards as we can. Since the passage of the
Glass-Steagall bill, I think it is called—the banking bill—we were
glad enough of the opportunity of relieving ourselves of the responsibility of serving on bank boards. We serve on very few industrial
boards for the same reason. We feel that it takes all our time to
run our own business.
Mr. PECORA. Have members of your firm in the past sat on the
boards of industrial or general business corporations ?
Mr. DILLON. TO a limited extent they may have (after conferring
with an associate). Only to a limited extent.
Mr. PECORA. DO any of them sit on any such boards at the present
time?
Mr. DILLON (after conferring with an associate). Some of them
do, yes; a few.
Mr. PECORA. Are any of those boards the boards of companies
whose securities your firm has underwritten or issued or sold?
Mr. DILLON. Yes; some of them are.
Mr. PECORA. What would you say to this committee as your judgment or opinion concerning the advisability from the standpoint of
STOCK EXCHANGE PRACTICES
1551
public policy and general public welfare, of investment bankers,
such as your house is, sitting on the boards of industrial corporations or business corporations with whose securities they have been
identified ?
Mr. DILLON. Would you read the question please?
(The reporter read the pending question.)
Mr. DILLON. From our point of view as investment bankers, we
liave not felt it necessary to sit on boards for the purpose of protecting or looking after the securities which we have issued. We have
iound, either from contractual obligations with those companies, or
from our association with them, or both, that we are able to get all
the information that we require about their operations to properly
follow their business, and it has been our experience that we were
often in a better position to criticize the management or policy if
we were not members of the board, than if we were.
Senator COUZENS. May we have at this point the names of some
of the industrial corporations on whose boards you have been
represented ?
Mr. DILLON. Personally I am on no industrial boards.
Senator CouzEisrs. In the last 3 or 4 or 5 years, on the boards of
what industrial companies has your firm been represented ?
Mr. DILLON. I can give you that list.
Mr. PEOORA. Senator Couzens, one of the questions we submitted
t o Mr. Dillon's firm in our questionnaire calls for the specific information that you now ask for, and at the proper time I propose
to put their return to that question in our questionnaire in evidence.
I will do it now if it will serve your immediate purpose.
Senator COUZENS. AS long as it is coming out, I have no interest
in when it comes out. It seems to me appropriate at this time, as
long as you are determining the policy, or what Mr. Dillon thinks
should be the public policy. I think it would be of interest to the
committee to know, at this particular time, what corporations they
probably influenced or dictated to by virtue of their representation
on the boards.
Mr. PECORA. I will read to the witness from the information furnished by his, firm, in answer to our questionnaire, the names of
these corporations. The question was known as " Question No. 3 "
in our questionnaire, and called for the names of all corporations in
which any partner or representative of the firm of Dillon, Bead &
Co., or any of its agencies, is a director or officer. The answer listed
the following corporations:
Amerada Corporation; Beneficial Industrial Loan Corporation;
Brazilian Tractipn, Light & Power Co., Ltd.; Broadway Department Store, Inc.; Commercial Investment Trust Corporation; Consolidated Cigar Corporation; Educational Pictures, Inc.; Empire
Safe Deposit Co.; Equitable Office Building Corporation; Goodyear
Tire & Rubber Co.; Louisiana Geophysical Exploration Co.; Louisiana Land & Exploration Co.; Loew's, Incorporated; Nederlandsche
Crediet en Financiering Maatschappij; Panhandle Eastern Pipe
Line Co.; St. Louis-San Francisco Railway Co.; A. G. Spalding &
Bros.; Tubize Chattilon Corporation; United New Jersey Railroad
& Canal Co.; United States & Foreign Securities Corporation; United
States & International Securities Corporation; Union Oil Co. of
California; Victor Chemical Works; Warner Co.
1552
STOCK EXCHANGE PRACTICES
Do you recall any others, Mr. Dillon ?
Mr. DILLON. NO ; I do not.
Mr. PECORA. Does that, Senator Couzens, answer your question for
immediate purposes ?
Senator COUZENS. I think it does, because it will enlighten the
committee when Mr. Dillon gives his answer as to what relations
might be brought about by these corporations themselves through
interlocking directors.
Mr. PECORA. I think it might be timely, in view of this questioning, for me to offer in evidence at this time the answer made by5
Dillon, Eead & Co. to question 3 in our so-called " questionnaire. '
So for that purpose I will show Mr. Dillon this typewritten document. Will you kindly look at it and tell us if you can identify it as
the answer to question no. 3 of our questionnaire addressed to your
firm ?
Mr. DILLON. Mr. Pecora, do you want us to take the time to compare that? That is not the copy that we sent in to you. It is a
transcript that your office made. We assume it is a correct one, if
you would like that. Yes, Mr. Pecora; if there is any error in your
transcript, we can correct it later.
Mr. PECORA. YOU are assuming it is a correct copy ?
Mr. DILLON. Yes, sir. You have it there.
Mr. PECORA. Then, subject to correction, I offer it in evidence.
The CHAIRMAN. Let it be admitted into evidence.
(Dillon, Eead answer to question 3 was thereupon designated
" Committee Exhibit No. 1 " and is in the words and figures following:)
COMMITTEE EXHIBIT NO. 1, OCTOBEB 3, 1933
Question. Names of all corporations in which any partner or representative
of said firm or any of its agencies is a director or officer.
Answer. Names of corporations in which any director of Dillon, Head & Co.
or any of its agencies is a director or officer (see note below) :
Amerada Corporation; Beneficial Industrial Loan Corporation; Brazilian
Traction, Light & Power Co., Ltd.; Broadway Department Store, Inc.; Commercial Investment Trust Corporation; Consolidated Cigar Corporation; Educational Pictures, Inc.; Empire Safe Deposit Co.; Equitable Office Building
Corporation; Goodyear Tire & Rubber Co.; Louisiana Geophysical Exploration
Co.; Louisiana Land & Exploration Co.; Loew's Incorporated; Nederlandsche
Crediet en Financiering Maatschappij; Panhandle Eastern Pipe Line Co.; St.
Louis-San Francisco Railway Co.; A. G. Spalding & Bros.; Tubize Chattilon
Corporation; United New Jersey Railroad & Canal Co.; United States & Foreign
Securities Corporation; United States & International Securities Corporation;
Union Oil Co. of California; Victor Chemical Works; Warner Co.
Names of corporations in which any employee or representative
(other than a director) of Dillon, Eead & Co. or any of its agencies
is a director or officer (see note below) :
Ault-Wiborg, Ltd.; Ernesto Breda Co<.; Cespedes Sugar Co.; CommanderLarabee Corporation, 419-435 Flatbush Avenue Extension, Inc.; General Cable
Corporation; German Credit & Investment Corporation; International Printing Ink Corporation; International Water Co., Inc.; International Water
Corporation, South America; Layne-New York Co., Inc., of Delaware; National
Cash Register Co.; San Francisco Bridge Securities Corporation; Societe
<i'Electricite de la Region de Malmedy; Societe d'Etude d'Execution des Grands
Travaux.
NOTE.—The above lists do not include names of corporations the securities of
which were not offered or sold to the public, or names of corporations fron*
STOCK EXCHANGE PRACTICES
1553
which directors, employees or representatives of Dillon, Read & Co., or its
agencies have resigned, or names of corporations in which employees of Dillon,
Read & Co. or its agencies are directors or officers in a purely personal capacity.
Mr. PECORA. NOW, Mr. Dillon, in the answer you made to the
question just put to you a moment or two ago you indicated an
opinion that as I recall was somewhat in conflict with the opinion
expressed in answer to a similar question by a previous witness
before this committee, a member of the firm of J. P. Morgan & Co.?
who stated in his testimony that it was considered by them advisable
and of importance for a member of that firm to sit on the board of a
corporation whose securities it had handled, issued.
Mr. DILLON. That would be a question of personal judgment or
policy. I would not want to take issue with their opinion. They
may have found that desirable. It may be it is desirable. In our
experience we do not feel as strongfy.
Mr. PECORA. Among the corporations mentioned in your answer to
question 3 of our questionnaire is one called the United States and
Foreign Securities Corporation. Are you familiar with that corporation ?
Mr. DILLON. Yes, I am, sir.
Mr. PECORA. IS that corporation a so-called " investment trust" ?
Mr. DILLON. It is.
Mr. PECORA. And what are the distinguishing features of invest-
ment trusts?
Mr. DILLON. I have here a statement describing investment trusts.
It would take me probably 2 or 3 minutes to read it. If you would
like to have it, I would be glad to do it.
Mr. PECORA. I tell you what we will do in order to save time:
You have a typewritten statement defining investment trusts?
Mr. DILLON. The story of investment trusts and of this particular
one's organization. You might just put it in the record without
reading it.
Mr. PECORA. I would suggest, Mr. Chairman, to save time, we
receive that in evidence and then let the witness explain in his own
way, if he will, the principal features of an investment trust as
distinguished from other kinds of investment corporations.
Mr. DILLON. May we give you a clean copy of this after lunch?
Mr. PECORA. Yes.
The CHAIRMAN. Let
the copy be entered in the testimony and
you can proceed with any statement about it you care to make.
(The statement submitted by Mr. Dillon was marked " Committee
Exhibit 1A October 3,1933 ", see p. 1606.)
Mr. PECORA. NOW, please indicate to the committee in your own
language, Mr. Dillon, the distinguishing features of an investment
trust.
Mr. DILLON. I shall, and the reasons why we formed this one.
If you will go over the business we have done you will see that from
1919 down to today, we will say, the amount of business we did was
varied. The industrial business that we financed amounted to 28.78
percent roughly of our total. Public-utility business was 20.52 percent, steam railroads 6.18, investment companies 2.29, real estate 1.50,
1554
STOCK EXCHANGE PEACTICES
Canadian securities 17.25, municipals 1.45, European securities 14.26,
S,outh American securities 6.58, other foreign loans 1.19.
We had for some time considered the British and Scotch practice
of investment trusts. They were first formed in England about
1860, to give the investor a chance to make a diversified investment.
They have had a rather satisfactory, in fact popular, record in
England, until today the British investment trusts I think have a
total invested capital probably close to the equivalent of a thousand
million dollars. It is one of the popular and accepted forms of
investment.
In this country we first considered forming an investment trust
that would allow the investor to have a diversified investment in
bonds and other things of the nature that we ourselves were bringing
<out. But under the tax laws that existed here you could not form an
investment to buy bonds, because the company itself would be taxed
on its income from that interest, and then when it went to the investor in dividends the penalty was too great. I should like to see
that changed if it could be, because I believe it is to the advantage
of the small investor to be allowed to buy shares in an investment
trust that bought bonds.
So then we turned to consider an investment trust that would buy
stocks. The thing that moved us most in this consideration was the
fact that the small investor cannot get diversification. He can buy
a few shares of this or that, but he takes the risk in that one company, whereas if he bought stock in an investment trust he would
get a diversification. I think the investments in this particular
company that you are speaking of, United States and Foreign, must
number (after conferring with associate)—I haven't the number
here,'but there is a great variety of items, and the investor's risk is
spread over a large field. That was the particular advantage in
forming it.
The function of it was to invest this large sum of money at the
minimum of expense, because the expenses of administration would
be spread over a large fund, and to give the investor the advantage,
of a management, if I may say so with due modesty, persons skilled
in that particular line, and also to diversify his risk.
In addition to this, we went further and decided that we ourselves would put in money junior to the public's money as an additional protection. In fact, in forming this trust we gave the public
6 percent stock with a real doubt in our minds as to whether over a
period of time we could conveniently earn 6 percent on a diversified
investment.
Aside from the money we put in junior being an additional protection to that stock, it also would mean that an earning of 5 percent
the total assets would have been enough to pay the public 6 percent.
That company has been in operation now for about 8 years, I think
it is, and we feel very successfully.
Through these times, good and bad, we have paid the public on
their preferred stock a total of 6 percent per annum. The capitalization of that company was 25 million preferred stock, 5 million second
preferred. That company over the last 8 years has paid out in cash
dividends over 13 millions of dollars, 11 million-odd to the first
preferred and 2 million-odd to the second preferred.
STOCK EXCHANGE PRACTICES
1555
Mr. PECORA. NOW, I think, Mr. Dillon, I will go into the matter of
the organization of this investment trust and the issuance of its
securities and their sale to the public through the medium of definite
questions which I will ask you to answer.
When was the United States and Foreign Securities Corporation
organized ?
Mr. DILLON. October 1924.
Mr. PECOKA. And who caused it to be organized?
Mr. DILLON. The figures that I have been giving in connection
with this testimony are approximate. I would not want them to be
considered exact.
Mr. PECORA. I understand. Who caused the United States and
Foreign Securities Corporation to be organized in 1924?
Mr. DILLON. Dillon, Read & Co.
Mr. PECORA. And what was the set-up of the corporation at its
outset ?
Mr. DILLON. The set-up of the corporation was arrived at in this
fashion: There was 25,000,000 of first preferred stock that was to be
offered to the public. We, ourselves, were putting in junior money
for $5,000,000.
Mr. PECORA. And for that so-called " junior" money what did
you get?
Mr. DILLON. In our original consideration of that set-up we were
going to take common stock so that the public would get preferred
stock and we common .stock. During those discussions we determined to give the public something more, in case the company should
be prosperous beyond normal expectations, so that they would share
beyond the 6 percent dividend on their preferred stock, and in order
to do that we changed our set-up. Instead of taking common stock
ourselves, we created a second preferred stock which we took for
our $5,000,000.
Mr. PECORA. What was the total amount of first preferred stock
that was issued?
Mr. DILLON. Twenty-five millions.
Mr. PECORA. That was represented by 250,000 shares of no par
value, was it not ?
Mr. DILLON. That is correct.
Mr. PECORA. And the 6 percent dividend-paying stock?
Mr. DILLON. That is correct.
Mr. PECORA. With cumulative features?
Mr. DILLON. Correct.
Mr. PECORA. Was that $25,000,000, or rather the 250,000 shares of
first preferred 6 percent dividend-paying cumulative first preferred
stock, issued by your house to the public, sold to the public ?
Mr. DILLON. It
was.
Mr. PECORA. For how much?
Mr. DILLON. It was offered in the form of allotment certificates*
The total amount payable on those was $25,000,000.
Mr. PECORA. And what did these allotment certificates call for?
Mr. DILLON. That is as I was explaining before. In order to give
the first preferred something more than their 6 percent should
the profits exceed normal expectations, we then took for ourselves^,
1556
STOCK EXCHANGE PRACTICES
instead of taking all the common stock for our $5,000,000, a second
preferred stock and created a common stock of a million shares.
Mr. PECORA. HOW many shares of second preferred stock were
issued ?
Mr. DILLON. Five million dollars' worth. That is 50,000 shares.
Mr. PECORA. Having any par value?
Mr. DILLON. A hundred dollars (after conferring with associate)—no; no par value.
Mr. PECORA. Did the second preferred stock carry any dividend
rate?
Mr. DILLON. Six percent.
Mr. PECORA. Also cumulative?
Mr. DILLON. Yes; also cumulative, but it was subordinated to the
first preferred. The first preferred received their 6 percent first,
and then if there was anything further earned the second preferred
would get their 6 percent. In liquidation the first preferred would
get 100 percent plus accumulated dividends before the second preferred got anything.
Then we took that common stock.
Mr. PECORA. HOW many shares of common stock were provided
for in the original set-up of this investment trust?
Mr. DILLON. When we determined to give the first preferred stock
some interest in the equity which they would not have had had we
just bought $5,000,000 common for our junior money, as I say, then
we took $5,000,000 second preferred stock and created a million
shares of common stock of which a quarter was given to the first
preferred stock. With each share of their first preferred stock went
one share of common. The balance of that equity of a million
shares, 750,000 shares, went to the purchasers of the* second preferred
stock.
Mr. PECORA. The purchasers of the second preferred stock were
Dillon, Read & Co. ?
Mr. DILLON. Yes. My statement there is literally correct, but, as
a matter of fact, that second preferred stock and common was sold
in two blocks. You will develop that probably as you go along.
Mr. PECORA. Yes.
Senator COUZENS. Did this
Mr. DILLON. The preferred
preferred stock have votes?
stock did not have a vote when it was
issued, because it did not occur to us at the time. We gave a share of
common with each share of preferred, and the common voted.
Later those certificates were broken up. At the time of listing on
the New York Stock Exchange after that break-up we amended that
provision and gave the vote to the first preferred stock in the event
of default in the dividends.
Mr. PECORA. Dillon, fiead & Co. were the organizers or creators
of this investment trust?
Mr. DILLON. That is correct.
Mr. PECORA. And they caused to be issued and sold to the general
public 250,000 shares of first preferred stock carrying 6 percent
cumulative dividends; is that right?
Mr. DILLON. May I have that question again?
(The shorthand reporter read the last question of Mr. Pecora.)
Mr. DILLON. Well, it was issued and we did sell it; yes.
STOCK EXCHANGE PRACTICES
1557
Mr. PECORA. And those 250,000 shares of the first preferred stock
which had no $ar value were sold to the public for an aggregate of
25 million dollars; is that right?
Mr. DILLON. The 250,000 shares of preferred and 250,000 shares of
common were sold for 25 million dollars.
Mr. PECORA. I was coming to that, only I was going to put it in
this form: That the subscribers to the first preferred shares received an allotment certificate calling for one share of common stock
with each share of first preferred stock?
Mr. DILLON. Yes. The allotment certificate called for 1 share of
preferred and 1 share of common.
Mr. PECORA. That is the first preferred stock?
Mr. DILLON. Yes.
Mr. PECORA. SO that
these allotment certificates each calling for
1 share of first preferred and 1 share of common stock sold for $100
per certificate or at that rate ?
Mr. DILLON. Calling for a total payment of that.
Mr. PECORA. Yes, at that rate. Now, the common stock that was
authorized to be issued by this investment trust by its organizers
amount to 1,000,000, shares?
Mr. DILLON. That is correct.
Mr. PECORA. That is the so-called equity stock, isn't it? The
common stock is the so-called equity stock?
Mr. DILLON. Well, that is the stock that would be entitled to anything beyond the 6 percent on the preferred and the 6 percent on the
second preferred.
Mr. PECORA. This investment trust also sold to the organizers,
namely, Dillon, Read & Co., its 50,000 shares of second preferred 6
percent dividend cumulative stock?
Mr. DILLON. Yes.
Mr. PECORA. For $100 a share?
Mr. DILLON. Wait; I am not sure that is correct.
Mr. PECORA. That is, at that rate?
Mr. DILLON. There is the equity stock—that is, the second preferred and the common. I speak of both as equity stocks. They
are junior stocks rather. The 50,000 shares of second preferred were
:sold to Dillion, Eead with
Mr. PECORA (interposing). For a total of 5 million dollars ?
Mr. DILLON. With 250,000 shares of common, for a total of 5
million.
Mr. PECORA. I was coming to that. With that 50,000 shares of
second preferred stock Dillion, Bead & Co. acquired 250,000 shares
of the common stock, did not not?
Mr. DILLON. That is correct.
Mr. PECORA. SO that with each share of second preferred 6 percent
stock there went 5 shares of the common stock ?
Mr. DILLON. YOU can put it that way, but in reality with the
50,000 shares of second preferred, that is, for the 5 million dollars
went the whole 750,000 shares of common. The legal detail of the
way that was issued you probably will develop. That 250,000 went
with the 5 million dollars, and 500,000 went for $100,000. But the
actual substance of it was that the men who subscribed the junior
money—that is, the $5,100,000, received 750,000 shares of the common
rstock.
1558
STOCK EXCHANGE PRACTICES
Senator COUZENS. Then, in effect, that is complete control?
Mr. DILLON. That is complete control.
Senator COUZENS. In spite of the fact that they collected 25 million
from the public ?
Mr. DILLON. That is correct.
Senator COUZENS. They controlled it for 5 million?
Mr. DILLON. That is correct.
Mr. PECORA. They controlled it through the ownership of 75 percent of the common stock.
Senator COUZENS. Yes.
Mr. DILLON. Yes.
Mr. PECORA. Which went with the second preferred stock?
Mr. DILLON. They controlled it by the fact of putting up
5 million dollars junior money to the 25 million preferred stock.
Mr. PECORA. The common £tock was the only stock that had voting
power, wasn't it, at that time ?
Mr. DILLON. I think that is correct. (After conferring with
associate) : Yes, that is correct.
Mr. PECORA. And subsequently, about 1931 or 1932
Mr. DILLON. Thirty, it was, I think, 1930.
Mr. PECORA. The bylaws were amended so as to give the holders
of the first preferred stock a voting power at the rate of one voter
for each share of first preferred stock
Mr. DILLON. In the event of default.
Mr. PECORA. Which voting power, however, was only to be exercised in the case of any default ?
Mr. DILLON. That is correct.
Mr. PECORA. On the payment of dividends on the first preferred
stock?
Mr. DILLON. That is correct.
Senator COUZENS. Why was that change in the bylaws made?
What prompted it ?
Mr. DILLON. I think I explained that to the Senator a moment
ago. It was by a change in the charter and not the bylaws.
Senator COUZENS. Why did you change the charter so as to give
the first preferred the vote ? What prompted that ?
Mr. DILLON. When we originally sold the allotment certificates
under one share of common and one share of preferred went together
the allotment certificate. The share of common had a vote. Later
when the allotment certificate was fully paid, and it was divided,,
the common had the vote, the preferred had no vote, and we then
amended it so as that the preferred stockholders would have a vote
in the event of default.
Senator COUZENS. That was only because of what? I am sure I
do not get your answer yet as to the reason for changing it.
Mr. DILLON. That was the only reason, such as I have given ity
the only reason that I can think of now.
Mr. PECORA. YOU have indicated that in a practical sense Dillon,
Read & Co. purchased the entire issue for $5,000,000 or 50,000 shares
of second preferred stock, also received 750,000 shares of the common
stock in connection with that purchase.
Mr. DILLON. The group that put up that junior money of $5,000,000
for the second preferred and $100,000—$5,100,000 total—received the
second preferred stock and 75 percent of the common stock. Some
STOCK EXCHANGE PRACTICES
1559
of that second preferred went to the directors. When I say Dillon,
Kead put it all up, there was a small amount that went to the
directors.
Mr. PECORA. The actual transaction by which Dillon, Bead & Co.
purchased for the aggregate sum of $5,000,000 the entire issue of
50,000 shares of second preferred stock also enabled Dillon, Eead &
Co. to get 250,000 shares of the common stock, did it not?
Mr. DILLON. When you say Dillon, Eead bought it all, I would
simply want to correct it. I think some of the directors bought some
of that stock, but for the purpose of your discussion when you say
Dillon, Eead sold, including
Mr. PECORA (interposing). But the purchase was confined to various gentlemen who composed the firm or company of Dillon, Eead
& Co.?
Mr. DILLON. Plus, I think we will say, gentlemen who were on the
board of directors. I think they bought some of it.
Mr.
PECORA.
DILLON.
Mr. PECORA.
Mr. DILLON.
Mr. PECORA.
Mr. DILLON.
Mr. PECORA.
Mr.
Yes.
Didn't they?
Yes.
Some of the second preferred.
I will bring out all those details.
When I answered that, I just wanted to correct that.
Wasn't there a subsequent transaction whereby the
United States & Foreign Investment Corporation sold 500,000 shares
of its common capital stock for the sum of $100,000 ?
Mr. DILLON. NO, there was not.
Mr. PECORA. There was not?
Mr. DILLON. There was not. I think you will find that record
shows that 500,000 shares was sold by Olcott later to me and my
associates.
Mr. PECORA. Well now, Olcott was a mere dummy, wasn't he, for
Dillon, Eead & Co. in the transaction?
Mr. DILLON. I don't know what you mean by " dummy ". He is a
bookkeeper in our office through which the legal machinery of this
transaction was carried out.
Mr. PECORA. SO that when you refer to the interposition of this Mr.
Olcott in this transaction you are referring to a man who was a subordinate employee, namely, a bookkeeper, of Dillon, Eead & Co.,
who made the formal offer in writing to the United States & Foreign
Securities Corporation to purchase from it for the sum of $100,000
five hundred thousand shares of its common capital stock?
Mr. DILLON. NO, Mr. Pecora; that is not correct.
Mr. PECORA. IS it not?
Mr. DILLON. NO. He made no such offer to the Securities Co.
Will it help you, Mr. Pecora, if I state exactly what happened there?
Mr. PECORA. Well, you state it in your own way. Go ahead.
Mr. DILLON. The Securities Co. sold its first preferred stock for
$25,000,000, less $1,000,000 for expense of selling. They actually
received $24,000,000. Then Olcott bought the second preferred and
750,000 shares of common for $5,100,000. And the result of that
was that the corporation issued all of its capital stock and received
$29,100,000. That is the substance of it.
Senator GOLDSBOROUGH. $29,100,000?
Mr. DILLON.
Yes.
1560
STOCK EXCHANGE PRACTICES
Mr. PECORA. Have you produced here in response to a subpoena'
served upon your company a certain letter addressed to the United
States & Foreign Securities Corporation under date of October 10r
1924, signed by one J. Perry Olcott?
Mr. DILLON. Yes; we have.
Mr. PECORA. Will you produce it, please ?
Mr. DILLON. Certainly.
Mr. PECORA. SO that I may offer it in evidence.
Mr. DILLON. Yes. Will you use your copy, Mr. Pecora ? Ours is
bound in a file. We do not have a loose copy.
Mr. PECORA. Well, ours is similarly bound.
Mr. DILLON. Ours is simply a photostat. I think you have a xnorer
readable one.
Senator COUZENS. Who has got the original?
Mr. PECORA. They have the originals.
Mr. DILLON. It is in the files.
Mr. PECORA. But I have what purports to be a photostatic copy.
Mr. DILLON. I will be glad to identify that, Mr. Pecora.
Mr. PECORA. Mr. Dillon, I show you what purports to be a photostatic, copy of a letter dated New York, N.Y., October 10, 1924r
addressed to " United States & Foreign Securities Corporation, Baltimore, Md,", signed by one J. Perry Olcott. Will you be good
enough to look at this photostatic copy and tell us if you can identify
it as being a true and correct copy of such a letter which was written
by Mr. Olcott to the United States & Foreign Securities Corporation ?'
Mr. DILLON. I will concede it to be true, subject to any corrections, sir.
Senator COUZENS. If it is a photostatic copy, there cannot be any
corrections.
Mr. DILLON. NO, sir.
Mr. PECORA. I may say that this photo,static copy was furnished to
us by Dillon, Eead & Co.
Mr. DILLON. Then it is correct.
Mr. PECORA. It is correct?
Mr. DILLON. Yes.
Mr. PECORA. All right.
I ask that that letter be received in evidence and spread upon the record.
The CHAIRMAN. Let it be admitted and entered in the record.
(Letter dated New York, N.Y., October 10, 1924, addressed to
United States & Foreign Securities Corporation, Baltimore, Md.,
signed by J. Perry Olcott, was received in evidence and marked
" Committee Exhibit No. 2 of October 3, 1933.")
Mr. PECORA. Mr. Chairman, I will read this letter into the record,
because it is important that we should have the text of it in our
minds' as we go along. [Reading:]
COMMITTEE EXHIBIT NO. 2, OCTOBER 3, 1933
NEW YORK, N.Y., October 10,1924.
UNITED STATES & FOREIGN SECURITIES CORPORATION,
Baltimore, Maryland.
DEAR SIRS : I offer: 1. To cause Dillon, Read & Co., on or before October 21,
1924, to pay to your corporation the sum of $5,000,000 in cash, being an amount
equivalent to $100 per share for every share of the authorized amount
(50,000 shares) of your second preferred stock, on the condition that of such
STOCK EXCHANGE PRACTICES
1561
amount $50,000 or $1 per share for such stock shall be fixed and accepted
by you as the full consideration for the issuance of said second preferred stock
and credited to the capital stock of the corporation, and that the remaining
$4,950,000 of such amount shall be accepted by you as a contribution for, and
set aside as, a general reserve, under the terms of your charter.
2. To cause persons satisfactory to you, on or before November 3, 1924, to
make the initial payment of twenty-five percent (25%) of the allotment price
for 250,000 shares of your first preferred stock on the terms set forth in the form
of first preferred stock allotment certificates hereto attached; the sum of
$1,000,000 to be retained by Dillon, Read & Co. as my nominee from the initial
payment for the purpose of affecting the sale and distribution of the allotment
certificates referred to above.
3. To provide out of the common stock to be issued to me, all of the common
stock distributable to purchasers of first preferred stock in accordance with the
provisions of the allotment certificates referred to in item 2 above.
4. To pay or cause to be paid to your corporation the sum of $100,000 in
cash.
In consideration of (1) the execution and delivery by you of a letter to
Messrs. Dillon, Read & Co. in the form attached, a copy of my proposal to
Dillon, Read & Co. referred to in said form of letter also being attached hereto.
(2) The issuance and delivery by your corporation, in accordance with the
terms of said letter to Dillon, Read & Co., of first preferred stock allotment
certificates in the form hereto attached, for the 250,000 shares of your first
preferred stock and 250,000 shares of your common stock.
(3) The execution and delivery by you of a contract in the form attached to
this offer with the depositary named in said allotment certificates.
(4) The retaining by Dillon, Read & Co., as my nominee, out of the proceeds
of the initial payment on the allotment certificates above specified of the said
sum of $1,000,000.
(5) The issue to Dillon, Read & Co. or its nominee or nominees of 50,000
shares of your second preferred stock, being the entire amount of such stock
authorized by your charter, and 250,000 shares of your common stock.
(6) The issue to me or my nominee or nominees of 750,000 shares of your
common stock.
(7) The assumption by you of all liabilities incurred in the organization of
your corporation, and your agreement to pay all out-of-pocket expenses incident
to the issue of your stock and to the allotment certificates hereinbefore
referred to.
Upon your acceptance, the foregoing will constitute a contract between us.
Very truly yours,
J.
PERRY
OLOOTT.
Accepted, October 10, 1924.
UNITED STATES & FOREIGN SECURITIES
CORPORATION,
By ROBERT O. HAYWARD, Vice President.
Mr. PECORA. NOW, Mr. Dillon, the Robert O. Hayward whose
name is signed to this letter by way of acceptance of the terms and
conditions of the proposal embodied in this letter, is one of the
stockholders and associates of the joint-stock corporation called Dillon, Eead & Co., is he not?
Mr. DILLON. He is one of the directors and officers; yes.
Mr. PECORA. Yes. In other words, to put it colloquially, he is
one of the partners of Dillon, Eead & Co.
Mr. DILLON. Yes.
Mr. PECORA. NOW
you will notice from this agreement as expressed in this letter, and the acceptance thereof by the United
States & Foreign Securities Corporation of its terms, that 250,000
shares of the first preferred stock authorized to be issued by this
investment trust by its charter was to be sold to the public through
Dillon, Read & Co. for $25,000,000, and that the purchasers of that
first preferred stock were to get one share of common stock for each
1562
STOCK EXCHANGE PRACTICES
share of first preferred stock subscribed and paid for? That is
correct, is it not?
Mr. DILLON. Well, I do not recall that this letter says it will be
sold through Dillon, Eead or that it will be sold for $25^000,000.
Mr. PECORA. Well3 the fact of the matter is that this letter provides that $1,000,000 out of the proceeds of $25,000,000 for which
these 250,000 shares of first preferred stock were to be sold was to
be retained by Dillon, Eead & Co., presumably as a commission for
its sale of the first preferred stock to the public ?
Mr. DILLON. That presumption is correct; yes.
Mr. PECORA. And I based my statement or my assumption of fact
in my question to you with respect to that upon that provision of
this agreement. Now that is not a violent assumption, is it?
Mr. DILLON. But may I explain what happened here?
Mr. PECORA. Well, is that not what happened ?
Mr. DILLON. What?
Mr. PECORA. I S that not exactly what happened, namely, that the
United States & Foreign Securities Corporation accepted this proposal of J. Perry Olcott, who was a bookkeeper in the employ of
Dillon, Kead & Co. at the time, to cause to be issued 250,000 shares
of its first preferred stock to the public for $25,000,000, and that that
stock was to be sold through Dillon, Eead & Co., and that Dillon,
Eead & Co. were to receive $1,000,000 as its fee or commission
for making such sale to the public?
Mr. DILLON. Mr. Pecora, this letter does not say that they will be
sold for $25,000,000. At least I do not find it. But it is stated, they
tell me, in the allotment certificate, that $100 a share must be paid.
Mr. PECORA. Yes; but the allotment certificate is attached to this
letter and forms a part of the agreement embodied in this letter?
Mr. DILLON. That is correct.
Mr. PECORA. SO that it is part of the agreement.
Mr. DILLON. That is all right then.
Mr. PECORA. Yes. I t is so understood, is it not, by you?
Mr. DILLON. Well, I did not realize that it was attached to this
letter.
Mr. PECORA. Well, you see, Mr. Dillon, in assuming the facts that
I have embodied in my question to you I am attempting to reduce to
practical terms the provisions embodied in this contract between
J. Perry Olcott and the United States & Foreign Investment Corporation with respect to the issuance and sale of the 250,000 shares
of first preferred stock that the corporation was entitled to issue or
authorized to issue under its charter. Now have I correctly stated
the facts, stripping them of all legal verbiage ?
Mr. DILLON. AS I look through this letter, Mr. Pecora, to me it is
just a lot of legal phraseology and legal mechanics. What really
happened was that the United States & Foreign sold its first preferred stock under this offer to Olcott
Mr. PECORA. Offer by Olcott.
Mr. DILLON. Offer by Olcott
Senator COTTZENS. But now, at that point, was not Olcott really
Dillon, Eead & Co.?
Mr. DILLON (continuing).—or through some legal mechanics—he
was a bookkeeper in our office.
STOCK EXCHANGE PRACTICES
1563
Mr. PECORA. He was what is in the vernacular called a dummy for
Dillon, Eead & Co. in this transaction?
Mr. DILLON. NO. I do not really know why Dillon, Eead & Co.
did not sign this offer. I mean that was a legal formality. I see no
reason why it was done through a name like that. The substance of
it was that this company was formed, received the $29,100,000, and
issued against that $25,000,000 of preferred stock, $5,000,000 of
second preferred stock, and a million, shares of common.
Mr. PECORA. N O ; but let us get it down to its constituents' elements.
Mr. DILLON. I will do that. I am not trying to quibble. I am
trying to show what happened. The allotment certificates for
250,000 shares of first preferred stock and 250,000 shares of common—in this letter, as I read it, Mr. Olcott's offer to them was that if
they would issue those allotment certificates first just calling for
250,000 shares of preferred stock; if they would then issue to Dillon,
Kead 50,000 shares of the second preferred stock with 250,000 shares
Of common, and then issue to him the balance of 750,000 shares of
common, he agreed to provide out of that the 250,000 shares of common to go with the first preferred, and for all of that he would
cause to be paid them $5,000,000 and $100,000, and provide for public
subscribers for their allotment certificates $25,000,000, but $1,000,000
of that to be retained by Dillon, Eead & Co. Now that $1,000,000
was retained by Dillon, Eead & Co. to cover the cost of distributing
that stock.
Mr. PECORA. That is, the first preferred stock?
Mr. DILLON. That is right. Dillon, Eead & Co. made no charge
for organizing this company. That million dollars represented
the four points on that $25,000,000, and that was allowed to dealers
all over the United States. There were 380 dealers selling that
stock, and any one that sold it got that four points for selling it.
For what Dillon, Eead & Co. sold themselves they were paid the
same as any other of the three hundred-odd dealers. And Dillon,
Eead & Go's, own sales netted them three hundred thirty-nine thousand-odd dollars, as they retailed about ninety-four thousand-odd
shares. Is that clear ?
Mr. PECORA. NOW, Mr. Dillon, let us see if we cannot even digest
this meal one bite at the time.
Mr. DILLON. But do I not make that clear ? Is not that the picture
you were asking for?
Mr. PECORA. But I would rather take that step by step.
Mr. DILLON. Step by step suits me.
Mr. PECORA. NOW this corporation, this investment trust called the
United States & Foreign Investment Corporation, was organized
under the laws of the State of Maryland at the instance of Dillon,
Eead & Co., was it not?
Mr. DILLON. That is correct; yes.
Mr. PECORA. Its charter authorized it to issue 250,000 shares of
first preferred stock, having no par value, 50,000 shares of second
preferred stbck having no par value, and 1,000,000 shares of common
stock having no par value ?
Mr. DILLON. That is correct.
175541—33—PT 4
3
1564
STOCK EXCHANGE PRACTICES
Mr. PECORA. That is correct. Now, on October 10, 1924, which
was about the time of the incorporation and organization of the
United States & Foreign Securities Corporation, one J. Perry Olcott
submitted an offer in writing in the form of this letter that has been
received in evidence here to that investment corporation, and the
offer was accepted on the same date by the corporation, the signature
of the corporation having been affixed by one Robert O. Hayward
as its vice president. Is that correct ?
Mr. DILLON. That is correct.
Mr. PECORA. NOW, this J. Perry Olcott who made this offer was
at that time not a capitalist or a person possessed of independent
means, but a mere bookkeeper in the employ of Dillon, Read & Co. ?
Mr. DILLON. Whether or not he was a man of means was of no
importance, as he was simply a part of a legal step.
Mr. PECORA. A legal scheme or method ?
Mr. DILLON. Yes; method.
Mr. PECORA. And the machinery so employed, which involved,
among other things, the use of J. Perry Olcott for the purpose of
making this offer, was designed to enable Dillon, Read & Co. to fix
the terms upon which the securities of this investment trust which
Dillon, Read & Co. has caused to be organized to be issued and
disposed of, was it not ?
Mr. DILLON. When Dillon, Read &> Co. decided on the capital
set-up of this company, that was given to the lawyers, and then went
on to carry it out. Now, I am not a lawyer, Mr. Pecora, and the
detail of this use of Olcott or his letters or other letters is just a
legal procedure to carry out the capitalization which resulted finally
in the company receiving its full $29,100,000, for which it issued
$25,000,000 of first preferred stock, $5,000,000 of second preferred
stock, and the common stock.
Mr. PECORA. But again I want to remark that that is a little bit
too general a statement of the organization of this corporation and
the issuance and sale of its securities.
Mr. DILLON. I will try to help you.
Mr. PECORA. YOU know, there' is an old hymn that says " I do
not ask to see the distant scene. One step's enough for me." Let
us go one step at a time.
Mr. DILLON. All right. But when you get into this legal procedure, frankly, I cannot be of much help to you.
Senator ADAMS. I gather, Mr. Pecora, that Mr. Dillon does not
think very much of the legal mechanics or phraseology.
Mr. PECORA. That suggests a question, Senator Adams, that I will
now ask Mr. Dillon.
Mr. Dillon, whatever the legal steps and proceedings were that
were employed in this matter, they succeeded in effectuating the
objects and the purposes of the organizers of this investment trust?
Mr. DILLON. I think that is correct.
Mr. PECORA. All right. What were those purposes ?
The CHAIRMAN. A, process by which Dillon, Read & Co. made a
contract with Dillon, Read & Co. to do certain things ? To carry out
certain things?
Mr. DILLON. NO, Senator. Dillon, Read & Co. were causing to be
formed an investment trust.
The CHAIRMAN. Yes?
STOCK EXCHANGE PRACTICES
1565
Mr. DILLON. Normally you just pay in your money and the company is formed. The lawyers go through these legal steps, whieh5
frankly, I do not understand. I see no reason to employ J. Perry
Olcott.
Senator ADAMS. I do not like a reflection to be made upon us
lawyers, because that is the way we lawyers have to do. We have
got to do these things to keep the set-up.
Mr. DILLON. That is to make it seem strange.
Senator ADAMS. And really, as a matter of fact, Mr. Dillon seems
to feel that the lawyers are a sort of an impediment, if perhaps a
necessary impediment. Some of us really think that we are very
vital. As a matter of fact the lawyers are what make it possible for
Mr. Dillon to do the things that he does.
Senator COUZENS. Mr. Peroca admitted that Mr. Dillon was as
good a lawyer as he was.
Mr. PECOEA. I am afraid I was not paying Mr. Dillon a very high
compliment. Senator Couzens, when I said it.
Mr. DILLON. TO try to return an answer to your question, Mr,
Pecora.
Mr. PECORA. Yes.
Mr. DILLON. The
object which we wanted to accomplish, namely,
the issuance of $25,000,000 of first preferred stock, of $5,000,000 of
second preferred stock, and the issuance of a million shares of common stock, the company to receive for those $29,100,000, was accomplished by this procedure. Have I answered your question ?
Mr. PECORA. I am now going to ask you a series of questions to
bring out, step by step, this entire operation whereby the United
States & Foreign Investment Corporation was launched on the financial waters. Dillon, Eead & Co. caused this investment trust to be
organized in the first instance?
Mr. DILLON. That is correct.
Mr. PECORA. Dillon, Read & Co. had one of its employees, a bookkeeper by the name of J. Perry Olcott, make a written offer in the
form of this letter which has been received in evidence here to this
investment trust?
Mr. DILLON. Well, I do not know that Dillon-Read did that at
all. The lawyers did that.
Mr. PECORA. Well, the lawyers did it for the purpose of carrying
out the purposes and objects of Dillon, Read & Co., did they not!
Mr. DILLON. Yes. I mean they may have used Olcott or any man
in their office. That is what I understand.
Mr. PECORA. Who employed these lawyers to do this ?
Mr. DILLON. Dillon, Read.
Mr. PECORA. Who were the lawyers?
Mr. DILLON. Root, Clark, Buckner & Howland. I think that is
the name of the firm.
Mr. PECORA. Yes. And you felt that they fully carried out their
legal operations and purposes designed by the authors, namely,
Dillon, Read & Co. ?
Mr. DILLON. I trust the legal steps were all properly carried out.
The result was what we wanted.
Mr. PECORA. Yes.
Mr. DILLON. The result is correct.
1566
STOCK EXCHANGE PRACTICES
Mr. PECORA. NOW this employe of Dillon, Eead & Co. made this
offer in writing to the Investment Trust?
Mr. DILLON. That is right.
Mr. PECORA. Immediately upon its incorporation and organization,
did he not?
Mr. DHXON. Well, I do not know when that happened. If that is
true.
Mr. PECORA. It was in October 1924.
Mr. DILLON. Yes.
Mr. PECORA. That offer was accepted by the corporation through
its vice president, Mr, Hayward, one of the partners of Dillon, Eead
&Co.?
Mr. DILLON. That is correct.
Mr. PECORA. NOW, as a matter of fact, whose offer, or for whose
benefit did Mr. Olcott make his offer to that investment trust ? Not •
for his own benefit, did he ?
Mr. DILLON. NO. I do not know. Dillon, Eead were the ones
that were going to pay in the $5,000,000. Why the lawyers did not
make the document with Dillon, Eead I do not know, Mr. Pecora.
What these steps all mean or the object of them I do not know. It
accomplished what we wanted in the end, which was that we paid in
the $5,000,000 and received the $5,000,000 of second preferred.
Mr. PECORA. NOW, if it accomplished what you wanted in the end,
did it not accomplish the financing of this investment trust through
the sale to the general public of 250,000 shares of first preferred
stock, which carried with it 250,000 shares of the common stock, for
a total consideration of $25,000,000, $1,000,000 of which went to
Dillon, Eead & Co. as a fee or selling commission ?
Mr. DILLON. NOW, that $1,000,000 went to Dillon, Eead & Co.;
Dillon, Eead & Co. using that to pay the three hundred and odd distributors around the country for selling that stock.
Mr. PECORA. Yes. Dillon, Eead & Co. did not retain all of this
$1,000,000 fee or selling commission. It distributed that among the
various dealers?
Mr. DILLON. Who sold the stock.
Mr. PECORA. It distributed that among the various dealers who
aided Dillon, Eead & Co. in selling to the general public the allotment certificates for the first preferred stock?
Mr. DILLON. That is correct.
Mr. PECORA. Yes. Now of that $1,000,000 is it not a fact that
Dillon, Eead & Co. retained for its own part in that commission,
in that selling operation, something like $339,000 ?
Mr. DILLON. That $1,000,000 was equivalent to $4 a share on the
250,000 shares, and each of these three hundred-odd dealers received
$4 for each share that they sold. Dillon, Eead & Co. sold some
94,000
Senator COUZENS. He has already testified to that.
Mr. DILLON. Yes. Some ninety-four thousand and odd shares,
and received three hundred and thirty-nine thousand and odd dollars.
Mr. PECORA. Yes. Now by this same process Dillon, Eead & Co.
were enabled to acquire for a stated consideration, cash of $5,000,000,
the entire authorized issue of second preferred stock consisting of
50,000 shares thereof, and by the payment of a further sum of
STOCK EXCHANGE PRACTICES
1567
$100,000 the entire balance of the authorized issue of common stock,
amounting to 750,000 shares?
Mr. DILLON. I do not know what you mean by " this process ".
Mr. PECORA. By this legal process that Dillon, Read & Co., as you
said, engaged this well-known firm of lawyers to act?
Mr. DILLON. It carried out our intention of selling to the public
$25,000,000 of first preferred stock, with a quarter of the common,
and Dillon-Read putting in the $5,100,000 of their own money junior
to the first preferred stock—junior to the public's money and receiving three quarters of the common. That was accomplished.
Mr. PECORA. That was accomplished?
Mr. DILLON. Yes.
Mr. PECORA. SO that
by this means the general public purchased
for $25,000,000 the entire issue of first preferred stock and got with
it 250,000 shares of its common capital stock, or 25 percent of the common, and Dillon, Read & Co. and their associates for $5,000,000
Mr. DILLON. $5,100,000.
Mr. PECORA (continuing). $5,100,000, acquired the entire issue of
the second preferred stock, consisting of 50,000 shares, and 750,000
shares of the common stock ?
Mr. DILLON. That is correct.
Mr. PECORA. Yes. The common stock was the only stock that at
that time had any voting powers or rights ?
Mr. DILLON. That is correct.
Mr. PECORA. And the ownership of the equity of the company was
vested in the common stock, was it not ?
Mr. DILLON. And the second preferred was junior money. The
equity was the common.
Mr. PECORA. Yes.
The CHAIRMAN. This
trust started out in business with about
$30,000,000 cash?
Mr. DILLON. That is correct.
Mr. PECORA. Five million dollars of which came from Dillon, Read
& Co., and the other $25,000,000 from the public?
Mr. DILLON. Five million one hundred thousand dollars from
Dillon, Read &> Co. and $25,000,000 from the public.
The CHAIRMAN. What did it do with that capital ?
Mr. DILLON. It handled that capital, Senator, I am very happy
to tell you, in a very fortunate way. That capital has been invested
in diversified investments, and through these very uncertain times
that we have faced that capital remains intact. When this corporation was formed $116 roughly was the equity back of each share of
the first preferred that the public bought. Since that time this
company has paid out in excess of $13,000,000 cash in dividends, paying the first preferred 6 percent per annum from the time they
bought that stock. Today the equity back of that stock, instead of
being $116, is approximately $138. So that money has been very
fortunately handled.
Senator COUZENS. May I ask a question at that point ? When you
sold this stock——
Mr. DILLON. I want to add to the answer I have just given to the
chairman, if I may, Senator Couzens, that those of us that put up
the money for the second preferred stock and did not do any selling
1568
STOCK EXCHANGE PEACTICES
in the market but kept it as an investment—which I did, and which
many of our associates did—have not even had our 6 percent on our
second preferred, and we have had nothing on the common, whereas
the public have received their 6 percent interest. Excuse me, Senator
Couzens.
Senator COUZENS. IS there any prospectus that was issued at the
time the stock was sold ?
Mr. DILLON. Oh, yes.
Senator COUZENS. Have you got
Mr. DILLON. There is one there.
a copy of that ?
Does that answer your question,
Senator Fletcher?
The CHAIRMAN. Yes. I understand that the second preferred
stock and the common stock had not paid dividends?
Mr. DILLON. N O ; the second preferred paid dividends for a year
or two. I have forgotten just what. It paid dividends until 1931,
and it has been in arrears since 1931. I think that is correct.
The CHAIRMAN. There has been no dividend on the common stock ?
Mr. DILLON. NO dividend at all has been paid on the common stock.
Mr. PECORA. Mr. Dillon, following the acceptance on October 10,
1924, by the United States & Foreign Securities Corporation of
the offer made in the name of Mr. Olcott under date of October 10,
1924, did your firm receive from the same man, J. Perry Olcott, another letter dated October 10, 1924, addressed to Dillon, Eead & Co.,
a photostatic copy of which I now show you ? You had better look
at it and see.
Mr. DILLON (after examining paper). That is a photostatic copy.
Mr. PECORA. And that is a true copy of such letter which was received by your firm?
Mr. DILLON. Yes, sir.
Mr. PECORA. I offer it
in evidence and ask that it be spread on the
record.
The CHAIRMAN. It will be received in evidence and entered on the
record.
(The letter referred to, dated Oct. 10, 1924, from J. Perry Olcott
to Dillon, Eead & Co., was received in evidence, marked " Committee's
Exhibit No. 3, Oct. 3, 1933 ".)
Mr. PECORA. I shall read it for the present information of the
committee. You had better listen to the reading of the letter, Mr.
Dillon, because you are going to be asked about certain provisions
[Beading:]
COMMITTEE EXHIBIT NO. 3, OCTOBER 3,
NEW
DILLON, READ &
1933
YORK, N.Y.,
October 10, 192Jh
Co.,
28 Nassau Street, New York, N.Y.
DEAR SIRS: I hand you herewith:
(a) A copy of the certificate of incorporation of United States & Foreign
Securities Corporation.
(&) A copy of the bylaws of United States & Foreign Securities Corporation.
(o) A form of the first preferred stock allotment certificates of United
States & Foreign Securities Corporation.
(d) An offer by United States & Foreign Securities Corporation to you
relative to the issue upon your order of First Preferred Stock Allotment
Certificates in said form with respect to 250,000 shares of its first preferred
stock (each share of first preferred stock to carry one share of common
stock as provided in said form of allotment certificate), upon the receipt on or
before November 3, 1924, of the sum of $6,250,000 (the total 25 percent initial
STOCK EXCHANGE PRACTICES
1569
payment called for under said allotment certificates) plus such additional
amount as may be paid in under the terms of such certificates by the purchasers thereof, and less the sum of $1,000,000 which you are to retain as
nominee of J. Perry Olcott under his offer of even date therewith.
(e) A Copy of an offer by me to the United States & Foreign Securities
Corporation relative to the issue of its stock and first preferred stock allotment
certificates.
, If you will
(a) Pay to the United States & Foreign Securities Corporation the sum of
$5,000,000 on the terms set forth in said offer by me to said corporation, and
(&) Pay or cause to be paid to United States & Foreign Securities Corporation on or before November 3, 1924, the amount called for by clause (d) above
with respect to its said issue of first preferred allotment certificates concerning
250,000 shares of its said first preferred stock as above stated.
I will
(a) Cause to be issued and delivered to you or on your order, in accordance
with the terms of my said offer, the 50,000 shares of second preferred stock
of United States & Foreign Securities Corporation and 250,000 shares of common
stock of said corporation;
(&) Authorize you as my nominee to retain from the initial payments made
under said allotment certificates the sum of $1,000,000, to be applied for the
purpose of effecting the sale and distribution of said allotment certificates, this
letter when accepted by you to constitute such authority without the execution
of any further instrument; and
(c) Cause said corporation to pay all out of pocket expenses incident to the
issue of its stock and of the allotment certificates.
Very truly yours,
(Signed)
J. PERRY OLCOTT.
We accept the foregoing proposal.
(Signed)
DILLON, BEAD & COMPANY.
OCTOBER 10, 1924.
Mr. PECORA. NOW, accompanying this letter which has been marked
" Committee Exhibit 3 ", as of this date, and which is in evidence,
Mr. Olcott sent to your firm a copy of a letter addressed to Messrs.
Dillion, Eead & Co., dated New York, October 10, 1924, signed by
United States & Foreign Securities Corporation, by Robert O. Hayward, vice president. I show you a photostatic reproduction of that
last-mentioned letter, Mr. Dillon, and a,sk you if you can identify it
as being a true copy of such letter [handing paper to the witness] ?
Mr. DILLON. I identify it.
Mr. PECORA. I offer this letter in evidence and ask that it be spread
on the record.
Mr. DILLON. That is, with the exception of markings on it. I
notice you have some markings on it, your own marks.
Mr. PECORA. I am only going to read the photographic portion.
The CHAIRMAN. I t will be admitted as committee exhibit no. 4.
(The letter referred to, addressed to Dillon, Eead & Co., signed by
Robert O. Hayward, and dated Oct. 10, 1924, was received in evidence, marked " Committee Exhibit No. 4, Oct. 3, 1933.")
Mr. PECORA. This is the letter which accompanied Mr. Olcott's
letter, marked " Committee's Exhibit 4 " , which reads as follows
[reading] :
COMMITTEE EXHIBIT NO. 4, OCTOBER 3, 1933
NEW YORK, N.Y., October 10, 1924.
Messrs. DILLON, READ & Co.,
28 Nassau Street, New YorJc, N.Y.
DEAR SIRS : If you will accept the proposal dated October 10, 1924, made by
J. Perry Olcott to you, United States & Foreign Securities Corporation in consideration of such acceptance will:
1. Issue upon your order the first preferred stock allotment certificates, as
specified in said proposal, with respect to 250,000' shares of its first preferred
1570
STOCK EXCHANGE PRACTICES
stock upon receipt therefor on or before November 3, 1924, of the sum of
$6,250,000 (the total 25 percent initial payment called for under said allotment
certificates) plus such additional amount as may be paid in under the terms
of such certificates by the purchasers thereof, and less the sum of $1,000,000
which you are to retain, for the purpose of effecting the sale and distribution
of said allotment certificates, as nominee of J. Perry Olcott under his offer of
even date herewith.
2. Issue upon your order 50,000 shares of this corporation's second preferred*
stock and 250,000 shares of this corporation's common stock upon receipt of
$5,000,000 to be paid to this corporation on the terms and conditions stated in
paragraph 1 of an offer made to this corporation by J. Perry Olcott under date
of October 10, 1924, and referred to in his said proposal to you;
3. Subscribe for approximately 25 percent of the $10,800,000 initial issue
of capital stock of American and Continental Corporation.
4. Invest approximately $2,500,000 in the securities of the following companies : Brooklyn Edison Co., Continental & Commercial Trust & Savings Bank,
Chicago, General Electric Co., Central Union Trust Co. of New York, and
First National Bank of New York;
5. Cooperate with you in meeting the requirements of the Blue Sky laws^ so
called, of the various States in which the said first preferred stock allotment
certificates may be offered for sale by you;
6. Make application to the Boston Stock Exchange for listing the corporation's full paid and 25 percent paid first preferred stock allotment certificates
(separate full-paid allotment certificates to be issued if required for listing) ;
and
7. Upon your request, make application for listing said allotment certificates
and this corporation's first preferred stock and common stock on the New York
Stock Exchange.
Very truly yours,
UNITED STATES & FOREIGN SECURITIES CORPORATION,
ROBERT O. HAYWARD, Vice President.
Mr. PECOEA. NOW, Mr. Dillon, I want to call your attention to
specific provisions of exhibits 3 and 4, being the two letters last
read in evidence, relating to the payment by Dillon, Read & Co.
to the United States & Foreign Investment Corporation of the sum
of $5,000,000 in return for the issuance to Dillon, Eead & Co., or
its nominees or order, by the corporation, of 50,000 shares of second
preferred stock and 250,000 shares of the common stock of the
United States & Foreign Securities Corporation. Does not that
clearly indicate, Mr. Dillon, that for this $5,000,000 which Dillon,
Kead & Co. agreed to pay, and actually did pay, to this Securities
Corporation, this investment trust which it caused to be organized,
you received the entire issue of second preferred 6 percent cumulative dividend stock, amounting to 50,000 shares, and 250,000 shares
of the common capital stock ?
Mr. DILLON. If you take it that way, your statement might be
misunderstood. What happened to that $5,000,000
Mr. PECORA. If it is misunderstood, then the language employed
by this firm of attorneys who were retained to attend to the legal
machinery for this transaction is ambiguous; but I do not think
it is. The language is as follows, which is embodied in clause 2 of
this letter of the United States & Foreign Securities Co. to Dillon,
Kead & Co., which is marked in evidence as committee's exhibit 4
of this date—and I will read that clause to you again. [Reading:]
Issue upon your order 50,000 shares of this corporation's second preferred
stock and 250,000 shares of this corporation's common stock upon receipt of
$5,000,000 to be paid to this corporation on the terms and conditions stated
in paragraph 1 of an offer made to this corporation by J. Perry Olcott under
date of October 10, 1924
Mr. DILLON. If I might suggest, you are reading only from one
of a series of letters that completed this transaction.
Digitized forletter
FRASER
STOCK EXCHANGE PRACTICES
Mr. PECORA. I am reading
Mr. DILLON. Yes.
Mr. PECORA (continuing).
1571
from the last letter
Which was written with respect to
this transaction under date of October 10, 1924.
Mr. DILLON. There is another letter.
Mr. PECORA. What other letter are you referring to?
Mr. DILLON. Of a later date, where there is an offer to sell
Mr. PECORA. That is the letter of October 20, I have that before
me and I am coming to it; but as I said before, let us go step by step.
Mr. DILLON. The only danger in going step by step is that you
might not get a clear picture, because, as I said before, what happened was that we paid in $5,100,000 for which we received the
junior stock, $5,000,000 second preferred, and 750,000 shares of common. The public received the senior securities, that is, preferred
stock, and 250,000 shares of common. When you separate these
transactions it might look like for the $5,000,000 we received 50,000
shares of second preferred and 250,000 common, and for $100,000
received 500,000 shares of common. But it is the same parties, the
same interests paying both the $5,000,000 and the $100,000. So the
real picture is that for $5,100,000 there were $5,000,000 second preferred received
Mr. PECORA. But the reason that I am separating it is because the
transaction itself was separated into those steps or parts.
Mr. DILLON. It was.
Mr. PECORA. And the
separation was made originally not by me
or by any member of this committee, but by your own attorneys
who sought to effectuate their own purposes, I assume.
Mr. DILLON. They wrote those three or four different letters; and
I think, in fairness, they should all be read together.
Mr. PECORA. I cannot read them all at once, nor can I offer them
all in evidence at once.
Now, did you individually subsequently receive a letter from J.
Perry Olcott dated October 20, 1924, a photostatic copy of which I
now show you [handing a paper to the witness] ?
Mr. DILLON (after examining paper). I identify that. That is
all right, except for the notations on it.
Mr. PECORA. I S this photostatic copy, except for such lead-pencil
notations as appear thereon, a true copy of such a letter received by
you from Olcott?
Mr. DILLON. I t is.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. It will be received and spread on the record.
(The letter referred to, from J. Perry Olcott to Mr. Clarence
Dillon, dated October 20, 1924, was received in evidence, marked,
" Committee's Exhibit No. 5, October 3, 1933.")
Mr. PECORA. The letter reads as follows [reading] :
COMMITTEE EXHIBIT NO. 5, OCTOBER 3,
1933
NEW YORK, N.Y., October 20, 1924.
Mr. CLARENCE DILLON,
28 Nassau Street, New York, N.Y.
DEAR SIR: Referring to the United States & Foreign Securities Corporation
now in process of organization under the laws of the State of Maryland:
It is my understanding that you and your associates will through me pay
in $100,000 for one half the authorized common stock of the corporation. The
1572
STOCK EXCHANGE PRACTICES
disposition to be made of the stock to be used for the purpose of obtaining
the full capital of the corporation is indicated in my letter to United States
& Foreign Securities Corporation of this date, a copy of which is enclosed,
and my letter of this date to Dillon, Read & Co., a copy of which is also
enclosed.
I will advise you when the amount to be paid in for your stock will be called
for, which will be not later than November 3, 1924, and will expect you to
advise me as to how the stock certificates are to be made out.
Yours very truly,
J. PERRY OLCOTT.
Mr. PECORA. Did you accept or agree to the proposal embodied
in this letter addressed to you individually by Mr. Olcott under date
of October 20, 1924?
Mr. DILLON. Yes; I did.
Mr. PECORA. This proposal
relates solely to the issuance to you
and your associates of one half of the authorized common stock of
the United States & Foreign Securities Corporation, does it not?
Mr. DILLON. I t does, but it is a part of the whole transaction.
Mr. PECORA. I know it; but I mean, this particular portion relates
exclusively to the issue to you and your associates of one half of the
authorized common stock of this investment trust, namely, 500,000
shares ?
Mr. DILLON. That particular letter does.
Mr. PECORA. I am referring to this particular letter; and according to this particular letter, marked " Committee Exhibit 5 ", these
500,000 shares of the common stock of the investment trust were to
be issued to you and your associates for the sum of $100,000 to be
paid by you and your associates to the investment trust?
Mr. DILLON. That is correct; and that was bought in the same
proportions as the $5,000,000 for the second preferred stock.
The CHAIRMAN. That would mean 2(3 cents a share ?
Mr. DILLON. Yes, sir; if you figure it that way.
Senator ADAMS. What was the book value of it?
Mr. DILLON. Nothing—a million dollars less than nothing.
The CHAIRMAN. It was not on the market then ?
Mr. DILLON. When it was, it was a million dollars less than nothing. We used a million to pay the distribution expenses on the
first preferred.
Mr. PECORA. Instead of having a negative value, it had a minus
value ?
Mr. DILLON. That is right.
Mr. PECORA. This common stock, which had a minus value at the
time of its issuance in October 1924, by the end of 1928 or 1929
reached a market value on the New York Stock Exchange of as
high as $72 a share, did it not?
Mr. DILLON. That is correct, and had a book value at that time of
$30 or $40. I am not sure of the figures. The asset book value was
$48 I am told.
Senator ADAMS. When was it first listed on the stock exchange?
Mr. DILLON. I will give you the date, Senator.
Mr. PECORA. SO this infant which was born with practically no
life, assumed the lusty proportions of a 72-dollar stock within 4 years'
time?
STOCK EXCHANGE PRACTICES
1573
Mr. DILLON. And had a book value, they tell me, of $48. We do
not want to claim any magician's power. It was in that very rapidly
advancing market that those great profits accrued.
Senator ADAMS. Where is it now?
Mr. DILLON. The value?
Senator ADAMS. The common stock, the book value.
Mr. DILLON. I do not know exactly. It has a book value now of
three or four dollars.
Mr. PECORA. The market value is about $9 or $10 ?
Mr. DILLON. Yes, about that.
Mr. PECORA. I think we will go into the question of this common
stock in the open market, after recess. I suggest that it is now past
1 o'clock, and this would be an appropriate place to stop.
The CHAIRMAN. We will take a recess until 2 o'clock. We expect
to continue until 4 o'clock.
(Whereupon, at 1: 05 p.m., a recess was taken until 2 p.m.)
AFTER RECESS
The subcommittee resumed at 2 p.m. on the expiration of the
recess.
TESTIMONY KESTJMED OF CLAKEMJE DILLON, OF DILLON,
READ & CO.
The CHAIRMAN. The subcommittee will come to order. You may
proceed, Mr. Pecora.
Mr. PECORA. When we recessed we were on the question of the
letter of October 20, 1924, I believe.
Mr. DILLON. Yes.
Mr. PECORA. NOW, referring to that letter, addressed to you individually by J. Perry Olcott, under date of October 20, 1924, which
has been marked " Committee's Exhibit No. 5, October 3, 1933 ",
Will you tell this committee, Mr. Dillon, if you accepted, either in
writing or otherwise, the proposal embodied in this letter of Mr.
Olcott to you ?
Mr. DILLON. Yes, sir; I did.
Mr. PECORA. In what form was
your proposal evidenced ? Was it
in writing or by word of mouth ?
Mr. DILLON. There was no written acceptance, but I paid the
money.
Mr. PECORA. NOW, did your firm on the same date that you received this letter from Mr. Olcott, dated October 20, 1924, cause
to be addressed to the United States & Foreign Securities Corporation a letter of which this which I now hand you is a photostatic
reproduction ?
Mr. DILLON. Yes, sir; that is correct.
Mr. PECORA. IS that a true copy of such a letter ?
Mr. DILLON. That is a true copy.
Mr. PECORA. I offer it in evidence and ask that it may be spread
on the record, eliminating therefrom whatever lead pencil notations
appear on the face of this copy.
1574
STOCK EXCHANGE PRACTICES
The CHAIRMAN. It will be made a part of the record.
The letter was marked "Committee Exhibit No. 6, October 3,
1933 ", and was read by counsel as follows:
Mr. PECORA. The letter reads as follows:
OCTOBEB 20,1924.
UNITED STATES & FOREIGN SECURITIES CORPORATION,
Baltimore, Md.
DEAR SIRS : We hand you herewth our check in the sum of $5,000,000 payable
to your order. This payment is made to you pursuant to the terms of paragraph 1 of offer made October 10, 1924, to you by J. Perry Olcott, and accepted
by you October 20, 1924. A copy of the contract so made is annexed hereto.
Kindly confirm by acceptance below our understanding that the $5,000,000
above referred to is received by you on the terms and conditions stated in said
paragraph 1 of said contract.
Very truly yours,
DILLON, READ & Co.
Accepted" October 20, 1924.
UNITED STATES & FOREIGN SECURITIES CORPORATION,
By R. E. CHRISTIE, Jr., Treasurer.
Now, Mr. Dillon, is the R. E. Christie, Jr., whose name is signed
to this letter, or to the acceptance of the proposal of this letter, as
treasurer of the United States & Foreign Securities Corporation, one
of the associates or partners or stockholders of Dillon, Read & Co. ?
Mr. DILLON. He is, sir.
Mr. PECORA. NOW, isn't
it clear to you, Mr. Dillon, from the documentary evidence relating to the transactions surrounding the issuance of the stock of the United States & Foreign Securities Corporation, that the sum of $5,000,000, as a separate consideration, was paid
by Dillon, Bead & Co. to that securities corporation in return for
50,000 shares of its second preferred stock and 250,000 shares of its
capital common stock?
Mr. DILLON. Yes; if you will let me add that for the privilege of
that subscription the same parties obtained the right to buy the
500,000 shares for
Mr. PECORA (interposing). For $100,000?
Mr. DILLON. Yes.
Mr. PECORA. NOW, can you explain, in view of that, why the letter
of J. Perry Olcott of October 20, 1924, which is marked " Committee's Exhibit No. 5, October 3, 1933 ", and which relates to that portion of the transaction that covers the issuance of the 500,000 shares
of common stock for $100,000 is addressed to you individually and
not to the firm of Dillon, Read & Co.
Mr. DILLON. I do not recall any particular reason for that. The
people who bought that with me were the same people who were
interested in Dillon, Read & Co.; and why it was not done in one
transaction I do not remember. Excuse me a moment until I inquire. (Inquiring of an associate.) This letter refers to me and
my associates. Why it was not all done in one transaction—and
that was your question, Mr. Pecora, wasn't it ?
Mr. PECORA. NO. Why the letter of Olcott's referring to the issuance by the Securities Corporation of 500,000 shares of its capital
common stock for $100,000 was addressed to you individually and
not to the firm or company known as Dillon, Bead & Co.
Mr. DILLON. That particular part of the stock was bought, it says
here, " by me and my associates."
STOCK EXCHANGE FRACTIOUS
1575
Mr. PECORA. That is, as distinguished from the legal entity known
as Dillon, Eead & Co. ?
Mr. DILLON. Yes; although the interests were the same, there is a
distinction between them and the entity Dillon, Eead & Co.
Mr. PECORA. In other words, the legal entity known as Dillon,
Bead & Co. never undertook to acquire 500,000 shares of the common
stock of the United States & Foreign Securities Corporation for
$100,000, did it?
Mr. DILLON. NO ; but
Mr. PECORA (continuing). That undertaking was assumed by you
and your associates as individuals, separate and apart from the legal
entity called Dillon, Read & Co. ?
Mr. DILLON. That is correct.
Mr. PECORA. What was the reason for that?
Mr. DILLON. I don't remember any particular reason for that.
We were to subscribe $5,100,000 for that second preferred and that
common. Why it was not all done in one block I don't know. I
don't recall what difference it makes in doing it this way from the
other.
Mr. PECORA. I notice that upon the face of these exhibits that have
been put in evidence today, consisting of these various letters, that
they appear to have the same kind of typing. Would you say from
that that they were all prepared in the same office?
Mr. DILLON. Well, I don't know; but these letters were prepared
by the lawyers. Or I should assume at least that they might have
been prepared in the lawyer's office.
Mr. PECORA. YOU mean the firm of lawyers that Dillon, Read & Co.
retained to handle the legal machinery for the organization and
launching of this investment trust ?
Mr. DILLON. Yes, sir.
Mr. PECORA. And there
was only one firm that undertook that
legal work?
Mr. DILLON. Yes, sir; that is correct.
Mr. PECORA. NOW, as a matter of fact, in whose name were the
50,000 shares of second preferred stock acquired originally?
Mr. DILLON. Mr. Pecora, do you mean the original stock certificates, in whose name they were issued ?
Mr. PECORA. Yes.
Mr. DILLON. We will
have to get that for you. We do not have
it here.
Mr. PECORA. Well, to whom were those 50,000 shares originally
issued by the Securities Corporation ?
Mr. DILLON. YOU do not mean the 50,000 shares of common stock,
do you?
Mr. PECORA. NO. The 50,000 shares of second preferred stock.
Mr. DILLON. The directors bought some of that, the actual breakdown of the certificates we do not have here.
Mr. PECORA. They were originally issued to the legal entity known
as Dillon, Read & Co., were they npt?
Mr. DILLON, We think so, but we haven't got the actual information here.
Mr. PECORA. I want to show you what purports to be a photostatic
reproduction of a ledger account which was furnished to us by your
1576
STOCK EXCHANGE PRACTICES
firm and relating to the issuance of this second preferred stock of
the United States & Foreign Securities Corporation. Will you be
good enough to look at it and tell us if that serves to refresh your
recollection as to the identity of the person or persons or legal
entity to whom or to which those 50,000 shares of second preferred
stock were issued?
Mr. DILLON. From this, Mr. Pecora, the 50,000 shares were issued—well, the way the certificates were made out, just the names, I
cannot tell from this, but 500,000 shares went to Mr. F. H. Ecker
and 500,000 shares to John Sherwin
Mr. PECORA (interposing). You mean 50,000 shares and not
500,000 shares, don't you?
Mr. DILLON. NO, not 500,000 shares. But 500 shares were issued
to F. H. Ecker, 500 shares to John Sherwin, 500 shares to Robert S.
Schaffner, 500 shares to Herbert Fleischhacker, 500 shares of Anson
W. Burchard, 100 shares to George W. Wickersham, and the balance,
47,400 shares, to Dillon, Eead & Co.
Mr. PECORA. Exactly. Now, Dillon, Eead & Co. received originally the issue of 50,000 shares of the second preferred stock, comprising the entire authorized number of those shares, and in turn
caused to be issued to the six gentlemen whose names you have just
given us, certificates for the numbers of second preferred shares
which you have enumerated. There were six certificates.
Mr. DILLON. I think that is substantially correct.
Mr. PECORA. All told, these six gentlemen received certificates calling for 2,600 shares of the second preferred.
Mr. DILLON. Yes.
Mr. PECORA. The balance
of the 50,000 shares of that classification
of stock was retained by Dillon, Eead & Co. as a separate legal entity.
Mr. DILLON. That is correct.
Mr. PECORA. With these shares of second preferred stock that were
issued to these six gentlemen, were there also issued to them certificates for common stock of the Securities Corporation at the ratio of
five shares of common for one share of second preferred ?
Mr. DILLON. That is correct.
Mr. PECORA. What did these six gentlemen pay for these shares of
second preferred and common?
Mr. DILLON. The same as Dillon, Eead & Co., I think, $100 a share.
Mr. PECORA. That is for the second preferred.
Mr. DILLON. That is for the second preferred; and they were
given five shares of common with each share of preferred.
Mr. PECORA. Who were the original directors of this United States
and Foreign Securities Corporation?
Mr. DILLON. Just a second. We will get that from the minute
book. It is right here. Mr. Pecora, I assume you do not mean those
in the law firm that formed it as an original organization? You
mean the first operating organization?
Mr. PECORA. The board of directors that succeeded the directors
who attended to the formalities of the legal incorporation.
Mr. DILLON. We are getting that for you right now. Mr. Pecora,
I have here a statement of December 31, 1924, which I assume is
the original board.
Mr. PECORA. If you read off the names, I will check them against
my own data.
STOCK EXCHANGE PRACTICES
1577
Mr. DILLON. Anson W. Burchard; Clarence Dillon; Frederick H.
Ecker; Herbert Fleischhacker; John W. Hornor; William A. Phillips; Robert C. Schaffner; John Sherwin; Hon. George W. Wickersham; Harrison Williams; Edward G. Wilmer, chairman.
Mr. PECORA. That corresponds to .my data. When did these
gentlemen become the board of directors of this Securities Corporation ?
Mr. DILLON (after conferring with an associate). I am sorry for
the delay.
Mr. PECORA. Was it not within a very short time after the incorporation of the company in October 1924?
Mr. DILLON. Yes; I am sure of that.
Mr. PECORA. If your associates will be good enough to give you
the date later, we can put it into the record. This approximation
will serve for our present purposes.
Mr. DILLON. They will have it in just a moment.
Mr. PECORA. Mr. Dillon, who selected these gentlemen to serve as
directors of the corporation shortly after its organization?
Mr. DILLON. I assume the stockholders.
Mr. PECORA. The stockholders at that time, to the extent of at least
75 percent of-the common stock, were Dillon, Eead & Co. or their
associates, were they not ?
Mr. DILLON. Probably that board was simply made up by discussions in our office.
Mr. PECORA. I suppose you took part in those discussions, as the
senior partner of Dillon, Read & Co. ?
Mr. DILLON. Undoubtedly.
Mr. PECORA. Who is Mr. Fleischhacker?
Mr. DILLON. Mr. Fleischhacker lives in San Francisco. He is, I
think, the president or the chairman of the Anglo, London and Paris
Bank I think it is.
Mr. PECORA. He is known as a capitalist out in San Francisco,
is he not ?
Mr. DILLON. He is a banker out there.
Mr. PECORA. Hi,s home is there, and his principal office for the
transaction of business.
Mr. DILLON. Yes.
Mr. PECORA. When
he was selected as a member of the board of
directors of this United States & Foreign Securities Corporation,
was it expected reasonably that he would come across the continent
to attend board meetings?
Mr. DILLON. NO ; I should not ,say it was expected he would come
across for every board meeting. He was in New York occasionally,
at irregular intervals over the year. He was selected, as I remember it, so that we could have someone on the coast whom we could
call upon for advice in regard to investments we might make in that
part of the country.
Mr. PECORA. Then it was not reasonably expected that he would
fae physically able to attend meetings of the board.
Mr. DILLON. Ye,s, some of them; not every meeting; no.
Mr. PECORA. But he functioned as a director for a number of
years, did he? That is, he was carried on the board?
Mr. DILLON. I will find out in a moment.
1578
STOCK EXCHANGE PRACTICES
Mr. PECORA. Who is Mr. E. C. Schaffner; another one of the
directors ?
Mr. DILLON. E. C. Schaffner lives in Chicago. He is a banker
there. He has an office in New York, and he is in New York quite
often, and has been reasonably regular in attendance on the meetings.
Mr. PECORA. But his home is in Chicago and his principal office
was there ?
Mr. DILLON. I do not know which he calls his principal office. I
assume it would be there, because his home is there; but he has an
active office in New York.
Mr. PECORA. Who is Mr. J. Sherwin, of Cleveland, Ohio ?
Mr. DILLON. John Sherwin, I think, is retired now. At that time
he was either chairman or president of the Union Trust Co., I believe
it was.
Mr. PECORA. Of Cleveland?
Mr. DILLON. Yes.
Mr. PECORA. And lived in Cleveland ?
Mr. DILLON. And lived in Cleveland.
Mr. PECORA. He had his principal office
Mr. DILLON. He had his principal office
Mr. PECORA. Was it expected that he
»
there ?
there.
would be able to attend
with some regularity the meetings of the board of directors of this
investment trust?
Mr. DILLON. Yes; I should say with some regularity, because he
was in New York in those days quite often.
Mr. PECORA. Who is Mr. Anson W. Burchard? Where did he
live?
Mr. DILLON. Mr. Burchard was vice chairman of the board, I
believe, of the General Electric Co., and lived in New York.
Mr. PECORA. And hence was easily available for attendance upon
board meetings?
Mr. DILLON. Easily available.
Mr. PECORA. And Mr. Harrison Williams was on this board of
directors. Where did he live?
Mr. DILLON. He lives in New York, and has his principal office and
business there.
Mr. PECORA. Mr. Wilmer, former president of Dodge Brothers,
Inc.—where did he live?
Mr. DILLON. I am not sure whether he lived in New York at that
time, or just outside of Philadelphia. I do not remember.
Mr. PECORA. Mr. Phillips was a member of Dillon, Eead & Co. ?
Mr. DILLON. Yes.
Mr. PECORA. And you were a member
Mr. DILLON. Yes.
Mr. PECORA. Mr. J. W. Hornor was
of Dillon, Eead & Co. ?
a member of Dillon, Eead &
Co.?
Mr. DILLON. That is correct.
Mr. PECORA. And presumably all available for attendance at the
board meetings?
Mr. DILLON. Yes.
Mr. PECORA. AS was General Wickersham?
Mr. DILLON. Mr. Wickersham lived in New
available.
York, and was also
STOCK EXCHANGE PRACTICES
1579
Mr. PECORA. Mr. F. H. Ecker is the remaining member of the
board of directors of this Securities Corporation for its first year.
Is he the man who is also president of the Metropolitan Life Insurance Co.?
Mr. DILLON. That is correct.
Mr. PECORA. DO you know that Mr. Ecker at that time was a
member of a great many boards of directors of different corporations
engaged in business ?
Mr. DILLON. I do not know that to my own knowledge, but I
assume that is a correct statement.
Mr. PECORA. And as president of this Metropolitan Life Insurance
Co., he was the executive head of an organization that commanded
resources running into the billions of dollars.
Mr. DILLON. That is correct.
Mr. PECORA. Was it reasonably expected by you, in selecting or
assisting in the selection of Mr. Ecker to serve on the board of
directors of this Securities Corporation, that a man with the responsibilities attaching to Mr. Ecker's position as president of this life
insurance company, would find adequate time to give to the discharge
of his duties as a member of the board of directors of this investment
trust?
Mr. DILLON. Yes. Mr. Ecker was a very regular attendant at the
directors' meetings, and the mere fact that he is the head of this great
company, which has such large and varied investments, which he
follows, made him valuable to us, because of his knowledge of
investments.
Mr. PECORA. Was he also valuable, or did you think he might be
valuable to this investment trust because he was also the head of a
corporation commanding tremendous cash resources that might purchase securities that were in the portfolio of this investment trust
from time to time ?
Mr. DILLON. No; I do not think they have ever bought any securities from the investment trust portfolio.
Mr. PECORA. Were these directors paid a salary as directors, as
distinguished from a fee for attending meetings?
Mr. DILLON. Yes; at the beginning the directors were paid $5,000
a year.
Mr. PECORA. Each of them received a salary of $5,000 a year regardless of the number of meetings he attended ?
Mr. DILLON. Each director with the exception of myself. I did
not take that at the beginning, and I am informed that neither Mr.
Hornor nor Mr. Phillips took it.
Mr. PECORA. The other directors received a salary of $5,000 a year.
Mr. DILLON. That is correct.
Mr. PECORA. Eegardless of the number of meetings of the board
that they aittended ?
Mr. DILLON. That is correct; but obviously, if a man did not attend at all, he would not stay a director. I have just been informed
that at a later date Phillips, Hornor, and myself did take the compensation. From December 1924 to October 1926 we took no compensation. At that time we did take it, I suppose because the others
urged us to do so.
175541—33—PT 4
4
1580
STOCK EXCHANGE PRACTICES
Mr. PECOEA. HOW many meetings of the board of directors were
held during the first year of the corporate existence of this investment trust?
Mr. DILLON. We will look that up.
Mr. PECORA. While that is being looked up, perhaps you can tell
me from memory how many of those meetings were attended by
Mr. Fleischhacker, if any.
Mr. DILLON. I could not tell. That is 8 years ago. But we can
get it from the record for you. There was one date they were looking up. October 27, 1924, was when the board of directors was
elected.
Mr. PECORA. Yes.
Mr. DILLON. Mr. Fleischhacker resigned
Mr. PECORA. HOW many meetings of the
January 19, 1926.
board of directors did he
attend while he was a member of the board between October 1924
and January 1926?
Mr. DILLON. They are looking that up. That will take a little
time.
Senator COUZENS. Were these subscriptions to this preferred stock
paid on the installment plan ?
Mr. DILLON. The first preferred ?
Senator COUZENS. Yes.
Mr. DILLON. Yes. It was paid in four different installments.
Senator COUZENS. What periods?
Mr. DILLON. Just a moment. [To an associate.] Can you give
me the periods? [After ^conferring with an associate.,] The first
call was October 1, 1925, for payment November 2, 1925.
Mr. PECORA. 1924, wasn't it?
Mr. DILLON. NO. That was when they paid for the original quota,
when they bought the allotments. Senator Couzens is asking for
subsequent calls. March 26, 1926, for payment May 1, 1926; September 26, 1927, for payment November 1, 1927.
Senator COUZENS. SO, this money, after you got it in,, was invested after you got it in, and you did not have the investments at
the time they paid it.
Mr. DILLON. It might be possible, Senator Couzens, that at some
time we might have borrowed to make investments, and then made
calls to repay that.
Mr. PECORA. Mr. Dillon, at the present moment it appears quite
conclusively that 50,000 shares of second preferred stock were issued
by this investment trust to Dillon, Read & Co., that is, 47,400 were
issued to Dillon, Eead & Co. as a separate legal entity, and the other
2,600 shares were distributed among these six gentlemen who found
places on the board of directors.
Mr. DILLON. That is right.
Mr. PECORA. With regard to the 500,000 shares of the common
stock referred to in Mr. Olcott's letter to you of October 20, 1924,
and in which it is set forth, in substance, that these 500,000 shares
will be issued by the investment trust for the consideration of $100,000, were any of those shares of the common stock issued to the legal
entity known as Dillon, Eead & Co. ?
Mr. DILLON. May I correct you, Mr. Pecora? I do not think that
the investment trust issued those shares for $100,000. Olcott offered
to sell them to me and my associates for $100,000, but the investment
STOCK EXCHANGE PRACTICES
1581
company did not issue them for that. They issued them in consideration of the payment of $5,100,000. I think it is all together. There
is no reference in Olcott's proposal to the investment company that
they sell 500,000 shares for $100,000. That does not occur. Those
letters that were read this morning, I think you will find, state that
the investment company sold 50,000 shares of second preferred,
750,000 shares of common, and the allotment certificates, all for the
lump sum.
Mr. PECORA. According to the letter of Dillon, Read & Co. to
United States & Foreign Securities Co., dated October 20,1924, which
is marked " exhibit 6 " as of this date, Dillon, Read &' Co. sent its
check for $5,000,000 to the investment trust on that date, did it not ?
Mr. DILLON. Yes; that is correct.
Mr. PECORA. When was the $100,000 paid to the investment trust
by anybody?
Mr. DILLON. By Olcott, under the terms of his letter to the investment trust. He agreed, as I remember it, to pay them $5,000,000,
and to pay them $100,000, and to get subscriptions to the allotment
certificates, and for all of that they would issue to him the allotment
certificates plus the 50,000 shares of second preferred and 750,000
shares of common, and with that second preferred they would give
250,000 shares of common.
Mr. PECORA. Are you not referring to the letter marked as " Exhibit 5", written by Olcott to you individually, under date of
October 20, 1924?
Mr. DILLON. NO.
Mr. PECORA. Let
me remind you that in this letter Olcott says
to you:
It is my understanding that you and your associates will, through me, pay
in $100,000 for one half the authorized common stock of the corporation.
Mr.
DILLON.
Yes.
Mr. PECORA. Does not that read like a separate transaction, or a
separate proposal covering those 500,000 shares ?
Mr. DILLON. That is not a letter, Mr. Pecora, to the securities
company.
Mr. PECORA. I know it is not. I t is a letter by Olcott to you.
Mr. DILLON. That is correct.
Mr. PECORA. In which he says, referring to the United States &
Foreign Securities Corporation now in process of organization under
the laws of the State of Maryland.
It is my understanding that you and your associates will, through me, pay
in $100,000 for one half the authorized common stock of the corporation.
Mr.
DILLON. Yes,
but
Mr. PECORA. Just look at the language of that (handing a paper
to the witness). Does not that indicate, Mr. Dillon, that a separate
step in that transaction, whereby this investment trust was financed
at the outset, involved the issuance to you and your associates, as
distinct from the legal entity of Dillon, Eead & Co., of 500,000
shares of its common stock for a specific consideration of $100,000?
Mr. DILLON. I can not say yes to that, because, Mr. Olcott
Mr. PECORA. DO you say no to that?
Mr. DILLON. Yes. I say no, because the Securities Co. did not
issue anything to us. As I understand these letters, Mr. Olcott
1582
STOCK EXCHANGE PRACTICES
bought from the Securities Co. the allotment certificates, for
which he got the subscriptions. Then he agreed to get them a
purchaser for the second preferred, with 250,000 shares of common^
and they agreed to give him the 750,000 shares. Then Olcott sold
to me and my associates the 500,000 shares for the $100,000.
Mr. PECORA. Does not Olcott, in turn, say in that letter to you
that he was simply being used as the conduit whereby you and
your associates were to pay $100,000 to the investment trust for
500,000 shares of its capital common stock?
Mr. DILLON. We did not make any contract with the security company, as I read these letters. Olcott did. When he got the stock, he
sold it to me. I see no difference in it myself. I do not want to
say that I see what I do not see in this letter.
Mr. PECORA. DO you read anything in that letter other than what
its plain terms purport to set forth, namely, that it was the agreement or understanding that Clarence Dillon and his associates were,,
through Olcott, to pay to the investment trust $100,000 for 500,000
shares of its common capital stock ? Does that letter mean anything
other than that, in your opinion ?
Mr. DILLON. Mr. Pecora, I see no difference in that, but I must say
what happened, and what it was—this legal proceeding whereby Olcott got the stock. In substance, we bought the second preferred
and 750,000 shares of the common for $5,100,000.
Mr. PECORA. But not in one transaction, Mr. Dillon. We have
seen, from letters already received in evidence here, that your firm,
Dillon Eead & Co., sent its check for $5,000,000, not for $551OO,OOO>
but for $5,000,000, on October 20, 1924, to the United States and
Foreign Securities Corporation. That appears by committee's exhibit no. 6.
Mr. DILLON. The whole thing, Mr. Pecora, is really one transaction in these steps. The only reason I can see for these steps is that
for some reason this group, which was the Dillon, Eead & Co. group^
wanted the second preferred, with 250,000 shares of common issued
to the entity Dillon, Read & Co., and the 500,000 shares issued to
them as individuals.
Mr. PECORA. What was the reason for that ?
Mr. DILLON. AS I say, I see no reason, because it was the same
interests.
Mr. PECORA. Was there not a substantial difference between issuing to Dillon, Read & Co., as a separate legal entity, the 50,000 shares
of the second preferred stock and issuing, in various amounts, the
500,000 shares of the capital common stock of the company to individuals who composed partners in the entity known as Dillon,.
Read& Co.?
Mr. DILLON. In substance, no difference, because they took it in
the same proportions.
Mr. PECORA.In what proportions?
Mr. DILLON. They took
Mr. PECORA. In proportions commensurate with their proportionate interests in the firm of Dillon, Read & Co. ?
Mr. DILLON. That is correct.
Mr. PECORA. Who paicl over the $100,000 referred to in Olcott's
letter to you of October 20, 1924, or who paid that in to the investment trust?
STOCK EXCHANGE PRACTICES
1583
Mr. DILLON. I think, Mr. Pecora, the facts are that Mr. Hornor,
in the office, collected these amounts from the different individuals to
make up the total of $100,000, and then sent his check in for that
amount.
Mr. PECORA. The firm of Dillon, Eead & Co. did not send its check
for the $100,000?
Mr. DILLON. NO.
Mr. PECORA. And
the moneys that were repaid to Mr. Hornor for
the $100,000 payment that he made out of his personal funds to the
investment trust for these 500,000 shares were paid in by the individuals who composed the firm or stockholders, of Dillon, Eead & Co.
to Mr. Hornor ?
Mr. DILLON. That is correct. That is as I understand it.
Mr. PECORA. Can you explain the reason why that was done?
Mr. DILLON. NO ; I cannot.
Mr. PECORA. In other words, give the committee, if you can, the
reason why the second preferred stock, which was purchased by the
legal entity known as Dillon, Eead & Co., was issued to the firm of
Dillon, Eead & Co., and the common stock was issued, not to the firm,
nor paid for by the firm's funds, but issued to the various individuals
who happened to be members of the firm.
Mr. DILLON. That is right.
Mr. PECORA. Will you explain why that was done, if you can ?
Mr. DILLON. The 250,000 shares of common were issued, I think,
to Dillon, Eead & Co.
Mr. PECORA. The 250,000 that accompanied the purchase of the
50,000 shares of second preferred.
Mr. DILLON. Yes.
Mr. PECORA. NOW,
I am talking about the 500,000 shares of common for which you say Hornor gave his personal check to the investment trust for $100,000.
Mr. DILLON. I do not know any particular reason for having done
it that way at all.
Mr. PECORA. Did Mr. Forrestal have an interest equal to that of
Mr. Hornor in the legal entity known as Dillon, Eead & Co. ?
Mr. DILLON. I would assume so, if he bought the same amount of
that stock.
Mr. PECORA. That is just what I was coming to. He did not get
the same amount of stock, of these 500,000 shares of capital common
stock.
Mr. DILLON. Yes ?
Mr. PECORA. For which Mr. Hornor paid the investment trust, on
behalf of the purchasers thereof, his check for $100,000. According
to my data, Mr. Phillips received 47,500 shares, and Mr. Forrestal
only 7,500 shares, which would indicate that Mr. Forrestal had an
interest in the firm much less than Phillips' interest.
Mr. DILLON. Forrestal received 7,500 shares. And what was your
question, Mr. Pecora, now?
Mr. PECORA. And Mr. Phillips at that time received 47,500 shares
of this block of 500,000 shares of common stock, as did Mr. Hornor ?
Mr. DILLON. Well, without
Mr. PECORA (interposing). Does that represent the difference in
the proportionate interest of these gentlemen in the legal entity
known as Dillon, Eead & Co. ?
1584
STOCK EXCHANGE PRACTICES
Mr. DILLON. Mr. Peeora, may I check that up, because I still assume that that is correct, it represented that proportion of interest
at that time.
Mr. PECORA. Will you check it up ? I tell you what you do, Mr.
Dillon.
Mr. DILLON. Yes, sir.
Mr. PECORA. Or have
your associates do it between now and to-
morrow morning.
Mr. DILLON. Yes, sir.
Mr. PECORA. Determine
from your records the proportionate interests of the different members of the firm of Dillon, Kead & Co.
in October 1927, when this distribution of this block of
Mr. DILLON (interposing). 1924, isn't it?
Mr. PECORA. 1924—500,000 shares of the common stock was made
and see if it conforms to the proportions of this distribution of
stock. Will you?
Mr. DILLON. Yes, I will. I assume it does, but I will check it.
Mr. PECORA. And give that to us tomorrow morning.
Now, Mr. Dillon, some time.in the month of October 1924, the
firm of Dillon, Eead & Co. undertook to distribute and sell to the
public the 250,000 shares oi the first preferred stock, and you indicated in your testimony this forenoon that something like 300 other
dealers in investment securities assisted Dillon, Eead & Co. in the
making of this distribution and sale. Who invited these 300 dealers,
that being only an approximate number, to participate in this distribution ? Was it Dillon, Read & Co. ?
Mr. DILLON. Yes; Dillon, Eead & Co.
Mr. PECORA. And were these 300 dealers, dealers who were carried
along on the lists of Dillon, Eead & Co. as distributing agencies for
securities in which Dillon, Eead & Co. were interested? a
Mr. DILLON. I do not know just what you mean by carried on
the list." It was our regular list of dealers.
Mr. PECORA. Did you maintain a list that included these three
hundred odd dealers and invite them to participate in the distribution of other securities in which Dillon, Eead & Co. were interested ?
Mr. DILLON. I assume that is true in general. That is, there may
be a few exceptions, but that would be generally true, I should say.
Mr. PECORA. I show you a list entitled " 250,000 shares United
States & Foreign Securities Corporation first preferred stock allotment certificates—Syndicate." I ask you if that list shows the names
of all these dealers who assisted Dillon, Eead & Co. in the distribution
and sale of this first preferred stock.
Mr. DILLON. I assume that list is correct.
Mr. PECORA. It was furnished to us by your office.
Mr. DILLON. Well, if it is. I thought maybe it was a copy.
Mr. PECORA. It is a copy, I presume.
Mr. DILLON. Yes, sir. [After checking with associates] : Yes;
that is correct.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. It will be received and marked exhibit 7.
(List of dealers who assisted Dillon, Eead & Co. in sale and distribution of first preferred stock was thereupon designated " Committee
Exhibit 7, October 3, 1933 ", see p. 1611.)
STOCK EXCHANGE PRACTICES
1585
Mr. PECORA. NOW, Mr. Dillon, who determined the extent of the
participation of these various dealers in this syndicate that was
organized by Dillon, Eead & Co. to float those 250,000 shares of the
first preferred stock?
Mr. DILLON. I suppo.se our regular syndicate department that
ordinarily made up those lists. That would be true
Mr. PECORA (interposing). And determine the extent of the participation of the members of the syndicate ?
Mr. DILLON. That would be true as regards the general run and
file of the list. There may be exceptional cases where it was done
otherwise.
The CHAIRMAN. I understood these people got around 4 percent.
Mr. DILLON. Four percent selling commission; yes, sir.
Mr. PECORA. IS that the usual rate of commission allowed in
flotations of this character, Mr. Dillon ?
Mr. DILLON. It was at that time; yes. We could not have done
it any cheaper, though we should have been glad to do it, because
we were the equity holders in that company.
Mr. PECORA. YOU sought to pattern this investment trust in part;
at least on the form of investment trust incorporation that had been
in existence in England and Scotland for a period of more than a
half century ?
Mr. DILLON. NO. The theory of those trusts is what inspired us
to work this out.
Mr. PECORA. By the theory you mean the obtaining for the investor in the certificates or stock of an investment trust that diversity
of investment?
Mr. DILLON. That is right, under an active management.
Mr. PECORA. Dillon, Eead & Co. were the managers of this investment trust, were they not ?
Mr. DILLON. N O ; the investment trust was managed by its board
of directors.
Mr. PECORA. Who bought and sold the securities that from time
to time went into its portfolio ?
Mr. DILLON. The board of directors at its meeting approved them,
or the officers in between the meetings made up the lists which were
approved at the next board meeting.
Mr. PECORA. They made the determination of the investments to
be made and to be disposed of from time to time ?
Mr. DILLON. Yes.
Mr. PECORA. Who
actually made the purchases and sales for the
investment trust of the securities that from time to time found
their way into its portfolio ?
Mr. DILLON. I should think that was done by the ordinary brokers
on the street. Dillon, Kead probably executed, as intermediary^
some of those orders, but we are not members of the stock exchange,
so we could not have done the actual buying of the listed stocks.
Orders may have been placed through our office.
Mr. PECORA. Was any management fee paid to anybody by the
investment trust ?
Mr. DILLON. None that I know of.
Mr. PECORA. Who were the executive officers of this investment
trust at the time of its commencement of business in 1924?
1586
STOCK EXCHANGE PRACTICES
Mr. DILLON. October 27, 1924, the president was John W. Horner.
Mr. PECORA. One of the partners of Dillon, Read & Co.?
Mr. DILLON. That is correct. Hayward was at that time a vice
president.
Mr. PEOORA. Another partner of Dillon, Read & Co., wasn't he?
Mr. DILLON. Yes, sir.
Mr. PECORA. Mr. Christie was treasurer?
Mr. DILLON. Just a moment [conferring with
associates]. Christie
was treasurer on October 10, 1924, also. And the secretary at that
time was C. F. Stone. Do you want anything further, Mr. Pecora?
Mr. PECORA. NO. Who was the chairman of the board, do you
know?
Mr. DILLON. At that time Mr. Wilmer was chairman of the board.
Mr. PECORA. And who succeeded him as chairman of the board?
Mr. DILLON. Mr. Benjamin Joy in January 1926.
Mr. PECORA. In October 1924, Dillon, Read & Co. and the syndicate whose members are named in this list that has been offered in
evidence undertook to sell to the public the 250,000 shares of first
preferred stock and the 250,000 shares of common stock that went
with the allotment certificates?
Mr. DILLON. That is correct.
Senator COUZENS. Did the bonus, so-called bonus or common stock,
go with every share of preferred stock that you sold ?
Mr. DILLON. Yes; it was an allotment certificate that called for
one share of preferred and one share of common.
Mr. PECORA. I show you this document which purports to be a
photostatic copy of a prospectus or circular issued by Dillon, Read
& Co. under date of October 21, 1924, and I ask you if that is a true
copy of a circular or prospectus that your firm caused to be issued
to the public in making this offering of these allotment certificates
covering the first preferred shares.
Mr. DILLON. This is not a circular, Mr. Pecora; this is an advertisement.
Mr. PECORA. It is an advertisement published in the daily newspaper?
Mr. DILLON. That is correct.
Mr. PECORA. And the contents of that advertisement are exactly
the same as the contents of the circulars that were issued, are they
not, accompanying this offering?
Mr. DILLON. They are substantially the same, certainly.
Mr. PECORA. If not textually the same, they are substantially the
same ?
Mr. DILLON (addressing an associate). Is that correct? [After a
pause.] I am so informed.
Mr. PECORA. If you can produce a photostat copy of the circular
I will be very glad to have you do so, and then we will not rely upon
any speculation as to whether they are exactly the same or substantially the same.
Mr. DILLON. YOU have a copy, Mr. Pecora, they tell me.
Mr. PECORA. Not of this circular. We have copies of other circulars
issued in 1926 and 1927, but not the original.
Mr. DILLON. Our record shows the contrary, that you have.
Mr. PECORA. Well, it was lost in transit. I have never seen it. If
you have a copy there I will take it.
STOCK EXCHANGE PRACTICES
1587
Mr. DILLON. Yes; we have.
Mr. PECORA. My examiners inform me that they got the copy of
the advertisement and not of the circular, but I understand that they
do correspond.
Mr. DILLON. DO they? Well, here we have a record that shows
us that you did have that. [Mr. Dillon handed a document to Mr.
Pecora.] They inform me that our files are only made up of the
things that you have.
Mr. PECORA. Hurriedly reading over, Mr. Dillon, this copy of a
circular, I would say that it corresponds exactly to the contents of the
photostatic copy of the advertisement. I offer the advertisement in
evidence or the photostatic copy thereof.
The CHAIRMAN. It will be received and marked as an exhibit.
(Photostat of advertisement for sale of stock was thereupon designated " Committee Exhibit 8, Oct. 3,1933," and appears in the words
and figures following:)
COMMITTEE EXHIBIT NO. 8, OCTOBER 3, 1933
OCTOBER 21, 1924.
Two hundred and fifty thousand shares United States & Foreign Securities
Corporation First Preferred Stock. Cumulative dividends $6 per share per
annum. Shares without nominal or par value. Entitled to $100 per share and
accrued dividend in case of liquidation. Redeemable as a whole or in part on
any dividend date upon 60 days' notice at $105 per share and accrued dividend.
Dividends payable quarterly—February 1, May 1, August 1, and November 1.
Central Union Trust Co. of New York, transfer agent; Guaranty Trust Co. of
New York, registrar. Dividends free of the present Federal normal income tax.
Each share of first preferred stock will carry one share of common stock.
The United States & Foreign Securities Corporation has been formed to
buy, sell, underwrite, offer, and generally to deal in, corporation, governmental,
and other securities, both American and foreign, and, when desirable, to take
part in the organization and operation of corporations. The company will
afford to its stockholders the means to participate in diversified investment
and financial opportunities arising from time to time which would not be
available to them as individuals. The company may extend its operations by
issuing its own debentures. Mr. Edward G. Wilmer will be the chairman of
the board of directors, which is composed of representative bankers and
industralists.
CAPITALIZATION
The authorized and issued capitalization of the United States & Foreign
Securities Corporation will be as follows: First preferred stock ($6 cumulative dividend), 250,000 shares (now offered under allotment certificates). Second preferred stock ($6 cumulative dividend), 50,000 shares (purchased for
cash by Dillon, Read & Co. and associates). Common stock, 1,000,000 shares
(250,000 shares to go with first preferred; the balance to go with second preferred and to the organizers).
JUNIOR CAPITAL
The company has received $5,000,000, equivalent to $100 per share for the
second preferred stock, the entire amount having been paid in by Dillon, Read
& Co., excepting only such amounts as have been paid in by members of the
board of directors. The $5,000,000 so obtained will be used principally for the
establishment of a general reserve. The company will receive this $5,000,000,
and the proceeds from the sale of first preferred stock, free of any deductions
for originating charges by the organizers.
INVESTMENTS
The United States & Foreign Securities Corporation will subscribe for approximately 25 percent of the $10,800,000 initial issue of capital stock of the American
and Continental Corporation, which is being formed for the purpose of financing
1588
STOCK EXCHANGE PRACTICES
industrial and commercial companies in Europe. The balance of the stock of
the American and Continental Corporation is being acquired by American banking institutions and associates. The American and Continental Corporation
will begin its operations in Germany, where it has associated with it a group
of leading German banks.
The United States & Foreign Securities Corporation also will invest approximately $2,500,000 in the securities of the following companies: Brooklyn Edision
Co., Continental & Commercial National Bank, Chicago; General Electric Co.;
Central Union Trust Co. of New York; First National Bank, New York.
Earnings from the securities named above, together with income from the
unexpended amounts received on first preferred stock allotment certificates and
from the additional $5,000,000 paid in, should be sufficient to provide for initial
dividend requirements on the first preferred stock.
PEOVISIONS OF FIRST PREFERRED' STOCK
The first preferred stock has preference over the other classes of stock as to
dividends and as to assets in liquidation. It is entitled to dividends of $6 per
share per annum cumulative from November 1, 1924. The first preferred stock
is redeemable as a whole or in part on any dividend date on 60 days' notice at
$105 per share and accrued dividend.
PAYMENTS
With each share of first preferred stock there will be delivered one share
of common stock.
Payments will be called for as follows: 25 percent on delivery, subsequent calls to be made at intervals of not less than three months and
no single call to be for more than 25 percent of the allotment price named
below. Purchasers have the option, however, to make payment in full at
once or on any first preferred stock dividend payment date. Allotment
certificates of the company will be deliverable on or about November 3,
1924. Holders of these certificates will be entitled to receive currently dividends in proportion to payments made on the allotment price called for by
the certificates. Upon payment of the entire allotment price holders will be
entitled to subsequent dividends in full, and on November 1, 1926 (or earlier
at the option of the company), to receive certificates for the first preferred
stock called for by the allotment certificates, and for an equal number of
shares of common stock.
We offer this stoc^k in the form of allotment certificates, when, as, and
if issued, subject to approval of legal matters by counsel. Price, $100 per
share.
DIIXON, READ & Co.
Mr. PECORA. NOW, according to this advertisement these allotment
certificates entitling the subscriber to one share of first preferred
and one share of common were offered at $100 per share or certificate;
is that right?
Mr. DILLON. That is correct.
Mr. PECORA. And that is what they were actually sold for, weren't
they, subscribed for by the public ?
Mr. DILLON. At that rate, yes.
Mr. PECORA. NOW, in this advertisement appears the following
statement concerning the capitalization of the United States &
Foreign Securities Corporation:
The authorized and issued capitalization of the United States & Foreign
Securities Corporation will be as follows:
First preferred stock ($6 cumulative dividend), 250,000 shares (now offered
under allotment certificates).
Second preferred stock ($6 cumulative dividend), 50,000' shares (purchasedfor
cash by Dillon, Read & Co. and associates).
Common stock, 1,000,000 shares (250,000 shares to go with first preferred,
the balance to go with second preferred and to the organizers).
STOCK EXCHANGE PRACTICES
1589
Was there any practical difference in identity between subscribers
purchasing second preferred stock and the organizers ?
Mr. DILLON. Only to this extent: I should say that the directors
who purchased second preferred stock were not organizers.
Mr. PECORA. That is, those of the directors who purchased in the
aggregate 2,600 shares of the second preferred stock were not the
organizers ?
Mr. DILLON. NO.
Mr. PECORA. Or were not among the organizers.
Mr. DILLON. That is correct.
Mr. PECORA. The organizers were solely and distinctly the firm of
Dillon, Read & Co. or its members ?
Mr. DILLON. That is correct.
Mr. PECORA. NOW, this advertisement contains this further statement under the caption of "Junior capital ":
The company has received $5,000,000, equivalent to $100 per share for the second preferred stock, the entire amount having been paid in by Dillon, Read &
Co., excepting only such amounts as have been paid in by members of the board
of directors. The $5,000,000 so obtained will be used principally for the establishment of a general reserve. The company will receive this $5,000,000 and the
proceeds from £he sale of first preferred stork free of any deductions for originating charges by the organizers.
Well now, the company was not to receive $1,000,000 was it, out of
the total purchase price of $25,000,000 that was paid by the public
for the 250,000 first-preferred shares ?
Mr. DILLON. NO ; that is correct, but they were to receive the proceeds from the sale of the first-preferred stock, and the proceeds
of the sale according to the letter from Olcott were the $25,000,000
less the $1,000,000 which should be retained.
Mr. PECORA. But there is nothing in the advertisement that informs the public investor
Mr. DILLON. NO.
Mr. PECORA. Among
the body of the general public, that Dillon,
Read & Co. or anyone else was to receive $1,000,000 out of the total
consideration of $25,000,000 for which the first-preferred stock was
to be sold ?
Mr. DILLON. That is correct. I t would simply ordinarily be presumed that there would be a charge for selling, but there is nothing
here that states that.
Mr. P'ECORA. Well, there is no ordinary assumption as to the
amount of the charge, is there, in this circular ?
Mr. DILLON. NO.
Mr. PECORA. Nor as a matter of custom ?
Mr. DILLON. NO ; that varies.
Mr. PECORA. That varies. And in this case
it was at the rate of
4 percent?
Mr. DILLON. That is correct.
Mr. PECORA. DO you know any reason why that information was
withheld in the advertisement and the circular from the investing
public in the offering of this first preferred stock ?
Mr. DILLON. It was not withheld.
Mr. PECORA. What is that?
Mr. DILLON. I would not say it was withheld.
1590
STOCK EXCHANGE PRACTICES
Mr. PECOEA. Well, why wasn't it given ?
Mr. DILLON. I see no reason except the general practice had not
been to state what you are paying for the distribution and selling of
securities.
Mr. PECORA. NOW, as you look back upon that, Mr. Dillon, would
you say that that general practice was a sound one as a matter of
public policy?
Mr. DILLON. N O ; I should like to see those things all stated. I
should think that
Mr. PECORA (interposing). And the only reason it was not stated
back in 1924 by your firm at that time was because it was not the
general practice to do it ?
Mr. DILLON. That is the only reason.
Mr. PECORA. YOU know that under the Securities Act that was
passed by Congress at the special session this year such information
is specifically required to be given under penalties of the law?
Mr. DILLON. I think that is proper. I am glad to see that.
Mr. PECORA. YOU approve of the principle of that bill to that
extent?
Mr. DILLON. I do, sir. I think the maximum information you can
give of every nature is good.
Mr. PECORA. What was the answer ?
Mr. DILLON. I think the maximum information you can give of
any nature and every nature is desirable.
Mr. PECORA. YOU think as a matter of fairness the investing public is entitled to have information of that kind given to it upon the
offering to it of a security?
Mr. DILLON. If they want it I should think they would be entitled
to have it.
Mr. PECORA. YOU cannot determine whether they want it or not in
determining policy, can you?
Mr. DILLON. NO. I would see no objection to it.
Mr. PECORA. The public would not object to $ny such information
on any conceivable ground that you can think of, would it?
Mr. DILLON. NO ; and I think it is proper to put it in the circular.
Mr. PECORA. I take it, Mr. Dillon, that from the views you just
expressed, and those views are valuable as coming from a man of
your experience, that you are in hearty sympathy with those provisions of the Securities Act, so-called ?
Mr. DILLON. I am in hearty sympathy, Mr. Pecora, with any movement to give more publicity, more information to the investing public. We in investing the funds of the Securities Co., those of us
on the board, often feel the lack of proper information in our own
purchases, and anything that is done to give more information to
the public and more regular information I think is highly desirable.
Mr. PECORA. Mr. Dillon, we observed from the evidence introduced this morning that of the $5,000,000 paid in by Dillon, Eead &
Co. and its associates for the 50,000 shares of second preferred stock
$50,000 was to be set up on the books of the investment trust as the
consideration for that stock and $4,950,000 was to be set up as a
reserve, general reserve.
Mr. DILLON. That is correct.
Mr. PECORA. Why was that done ?
STOCK EXCHANGE PRACTICES
1591
Mr. DILLON. That was done in order to protect the first preferred
stock that was sold to the public, because from that reserve you
could charge losses, it could also be used for the payment of dividends, and a temporary decline in the market would not impair
your capital structure and stop the payment of dividends. It was
done for the protection of the first preferred. If you had had that
simply set up entirely as capitalization of the second preferred and
then there had been a decline in your portfolio, you would have had to
stop payments on your first preferred, as I understand it, under the
Maryland statute, because your capital was impaired—whereas if you
had that set up in this other way as your reserve, it could continue to
pay your dividends on your first preferred until the reserve is wiped
out. So it was set up that way as an additional protection for the
continuity of dividends on the first preferred stock.
Senator COUZENS. Did the common stock ever pay dividends ?
Mr. DILLON. NO.
Senator COUZENS. Has it had a market value at all?
Mr. DILLON. The common stock? As high as $72.
Mr. PECORA. I brought out this morning that the common
stock
reached on the New York Stock Exchange in the year 1929 as high
as $72 per share.
Senator COUZENS. Never paid a dividend, did it ?
Mr. DILLON. NO. Mr. Pecora developed that this morning.
Mr. PECORA. This last week the price of this common stock was
quoted on the New York Stock Exchange as $11.
Senator COUZENS. Have you any preferred stock, Mr. Dillon?
Mr. DILLON. Have I personally preferred stock? You mean the
first preferred stock that the public has ?
Senator COUZENS. Yes.
Mr. DILLON. Senator, I think so highly of that first preferred
stock that the public has as an investment that I have myself bought
for my family in the open market at an average cost of, I think
it is over $90 a share, 25,000 shares of that first preferred stock as
an investment. I think so highly of it that I bought that amount
for my family in the open market without any common stock bonus
at all, simply as an investment stock.
Mr. PECORA. NOW this reserve fund of $4,950,000 was really created
out of payments made to the investment trust for its second preferred
stock, wasn't it?
Mr. DILLON. That is correct.
Mr. PECORA. And to call it a reserve out of which dividends were
payable or could be paid to the holders of the first preferred stock
simply is a matter of the employment of bookkeeping terms, isn't it ?
Mr. DILLON. But bookkeeping is to comply with the statute. You
see, as I understand it, Mr. Pecora, if the capital structure is impaired,
that is, if your portfolio at any time in the market is worth less
than your capital structure, under the Maryland statute you would
have to stop payment of dividends, even though the money were
available. That reserve is set up that way so that the capital structure, instead of being $30,000,000, would be $25,050,000, or whatever
the figure is, and would leave that surplus set lip out of capital
available.
1592
STOCK EXCHANGE PRACTICES
Mr, PECORA. Did you by any chance have in mind at the time of
this establishment or set-up of this investment trust that by setting
aside out of the $5,000,000 which your firm paid for the 50,000 shares
of second preferred stock the sum of $4,950,000 as a general reserve,
and by pointing that out in the circular and advertisements offering
the first preferred stock to the investing public you were in substance
telling the investing public that aside from any actual earnings the
investment trust might make subsequently there was available a fund
of $4,950,000 for the payment of dividends on the first preferred
stock ?
Mr. DILLON. I don't know that we would tell them in substance it
was available for the payment of dividends, but we stated it was
set up out of capital, that reserve, and I suppose people that understand it would know that the reserve was available for losses without
impairing capital.
Mr. PECORA. In creating this setup of the company you had in
mind, didn't you, creating a situation whereby the public that was
invited to subscribe to the first preferred stock would learn of the
existence of a substantial fund, no earnings, which would constitute a fund from which dividends on the first preferred stock would
be paid, or could be paid?
Mr. DILLON. Not necessarily just dividends, but losses or anything
that might be charged against that.
Mr. PECORA, Well, as a matter of fact did you not in the circular
advertisement say as follows about that, under the caption " Investments " ?
Earnings from the securities named above, together with the income from
the unexpended amounts received on first preferred stock allotment certificates,
and from the additional $5,000,000 paid in, should be sufficient to provide for
initial dividend requirements on the first preferred stock."
Mr. DILLON. Yes. That would mean this. You see, thefirstpre-
ferred stock made their initial payment, which was a 25 percent
payment. It was about six and one quarter million dollars they
did pay. But you had that plus the $5,000,000 that we had paid in,
which made more than $11,000,000, so that the income of that $11,000,000 was more than sufficient to pay the requirement on their
$6,000,000. That is what that means.
Mr. PECORA. DO you know any particular reason why this investment trust was incorporated under the laws of the State of Maryland?
Mr. DILLON. No; I do not, Mr. Pecora.
Mr. PECORA. Was it because the corporation laws of the State of
Maryland contained provisions that enabled the corporation out of
a reserve that did not come from earnings to pay dividends on its
preferred stock?
Mr. DILLON. I do not know that. May I ask about that? [After
conferring with associates.] They say the State was simply selected
because it was a good State for incorporations.
Mr. PECORA. Well, was it a good State for the purpose of this particular incorporation in order to enable you legally and under the
laws of the State of Maryland to set up this reserve out df sums
received by the corporation from the sale of its second preferred
stock and to have those sums available for payment of dividends on
the
first preferred stock?
STOCK EXCHANGE PRACTICES
1593
Mr. DILLON. I do not think it was selected for that reason.
Mr. PECORA. DO you happen to know that under the laws of the
State of New York such a reserve could not have been created and
used for the payment of dividends on the first preferred stock?
Mr. DILLON. NO ; I do not.
Mr. PECORA. Who determined
that this investment trust should be
incorporated in the first instance under the laws of the State of
Maryland ?
Mr. DILLON. The attorneys who were handling it, I assume.
Mr. PECORA. And the attorneys were advised, I assume, also by
your firm, what set-up the firm desired to make and did make of this
corporate structure?
Mr. DILLON. Yes; I should assume that is correct.
Mr. PECORA. YOU have no doubt, have you, that the insertion of
that statement in the advertisement and in the circular offering to
the public the first preferred stock helped to influence investors in
purchasing the first preferred stock?
Mr. DILLON. The fact that a reserve was set up out of that ?
Mr. PECORA. Yes.
Mr. DILLON. I do not know that that would influence them. I do
not know that the ordinary purchaser would figure that out one way
or another.
Mr. PECORA. DO you not know that under the laws of the State of
New York dividends cannot be paid except out of earnings ?
Mr. DILLON. I would not know that without consulting the lawyers. If you say so I will gladly accept it.
Mr. PECORA. I would rather have your own lawyers advise you on
that.
Mr. DILLON. They say in general that is true, Mr. Pecora.
Senator COUZENS. When you purchased those securities for this
corporation did you purchase any of them from Dillon, Read & Co. ?
Mr. DILLON. NO.
Senator COUZENS.
Who did you purchase them from; on the
market or did you have any specified local dealer from whom you
purchased the certificates?
Mr. DILLON. They were purchased through Dillon, Read & Co.
They came from the open market or from people who had the certificates.
Senator COUZENS. Did you get a commission for purchasing these
for the corporation?
Mr. DILLON. On the first $14,000,000 that were purchased through
Dillon, Read & Co. they received a commission of about $5,700.
Mr. PECORA. NOW, I understand that there is a customer's account
on the books of Dillon, Read & Co. with this United States & Foreign Securities Corporation showing that between October 15, 1924,
and December 31, 1925, securities for the account of this investment
trust had been bought and sold to an aggregate amount of $46,436,233.96. Does that generally accord with your recollection?
Mr. DILLON. Yes; that generally accords.
Mr. PECORA. Does the fact of the purchase and sale of these securities for that aggregate amount over a period of about 14 months
indicate to you that these securities were purchased and sold by
Dillon, Read & Co. for the account of the investment trust ?
1594
STOCK EXCHANGE PRACTICES
Mr. DILLON. Yes; they were purchased through Dillon, Eead &
Co.
Mr. PECORA. Well, is it fair to assume that Dillon, Eead <& Co.
received commissions on those transactions according to the prevailing rates then current?
Mr. DILLON. I think it would have been fair to assume it, but I
do not think it is the fact. I do not think we did get the full commissions on those accounts. I think when it was a stock exchange
transaction that went through us we probably made no charge. Mr.
Pecora, to try to find out what that did amount to, on that $46,000,000,
we checked the first $14,000,000 of those transactions, and our total
commissions on that were about as I stated, $5,700, which was just' a
spot check to get about the average.
Mr. PECORA. NOW, in the year 1928 did your firm cause to be organized a second investment trust known hs the United States &>
International Investment Corporation?
Mr. DILLON. The United States & Foreign Securities Co. caused
that to be organized.
Mr. PECORA. Well, 75 percent of the control of voting stock was
owned by Dillon, Head & Co. ?
Mr. DILLON. Or their associates.
Mr. PECORA. Of that United States & Foreign Securities Corporation?
Mr. DILLON. Well, it may not have been just that. Some of it
may have been sold by some of them, but all my stock was intact,
and the stock that went to Dillon, Head & Co. was intact, so we
owned the control, if that is what you mean ?
Mr. PECORA. Yes. What was the set-up of that second investment
trust?
Mr. DILLON. That second investment trust had $50,000,000 of first
preferred stock, five-percent dividend, which was cumulative. That
was sold to the public.
Mr. PECORA. At $100 per share ?
Mr. DILLON. At $100 per share with one share of common in the
form of allotment certificates.
Mr. PECORA. Was that floated also by a syndicate headed by Dillon,
Eead& Co.?
Mr. DILLON. That is correct.
Mr. PECORA. GO ahead.
Mr. DILLON. And there was a second preferred stock there which
was paid, for at $100 a share, in the amount of $10,000,000, which
was put in junior to the public's money.
Mr. PECORA. Did Dillon, Eead & Co. as an entity buy any of the
first preferred or second preferred stock of this second investment
trust?
Mr. DILLON. AS an investment they bought none. The second preferred was all subscribed for by the United States & Foreign Securities Corporation which caused the United States & International
Investment Corporation to be formed.
Mr. PECORA. What common stock was authorized to be issued by
the second investment trust under its charter ?
Mr. DILLON. Three million shares.
Mr. PECORA. Having no par value ?
Mr. DILLON. NO par value.
STOCK EXCHANGE PRACTICES
1595
Mr. PECORA. Were any of those 3,000,000 shares given as a bonus
or otherwise to the purchasers of the first preferred stock and second
preferred stock of that company ?
Mr. DILLON. The first preferred stock received 500,000 shares.
Mr. PECORA. That is, one share of common for each share of first
preferred ?
Mr. DILLON. That is right. The entire balance of common went to
the purchasers of the second preferred.
Mr. PECORA. That is 2,500,000 shares?
Mr. DILLON. NO ; I am wrong.
Mr. PECORA. All right.
Mr. DILLON. They tell me 2,000,000 shares went to the purchasers
of the second preferred stock.
Mr. PECORA. NOW the second preferred stock was sold to the first
investment trust, namely, the United States & Foreign Securities
Corporation, for $10,000,000 cash?
Mr. DILLON. NO. That company at the organization bought it
direct from the United States & International Securities Corporation.
Mr. PECORA. That is what I said, the second preferred stock of the
United States & International Securities Corporation was sold
directly to the first investment trust, namely, the United States &
Foreign Securities Corporation, for $10,000,000 cash?
Mr. DILLON. Yes. And they received 2,000,000 shares of the
common stock.
Mr. PECORA. They received 2,000,000 shares of the common stock,
which represented two thirds of all the authorized common capital
stock ?
Mr. DILLON. That is right.
Mr. PECORA. Received that as a bonus ?
Mr. DILLON. Well, they paid $10,000,000 for the second preferred
and the common.
Mr. PECORA. The second preferred consisted of 100,000 shares, did
it not?
Mr. DILLON. That is correct. Five-percent dividend. We have
got 500,000 shares of common that is not accounted for here.
Mr. PECORA. We will account for it.
Mr. DILLON. Well, warrants were given with the first preferred
stock to subscribe for common stock.
Mr. PECORA. At what price ?
Mr. DILLON. 500,000 shares were just held for that.
Mr. PECORA. TO subscribe for the common stock at what price ?
Mr. DILLON. $25 a share.
Mr. PEOORA. At $25 a share ?
Mr. DILLON. Yes. So that was just set aside.
Mr. PECORA. And 500,000 shares of the capital stock of the secondinvestment trust were set apart to meet the requirements of those
option warrants ?
Mr. DILLON. That is right.
Mr. PECORA. That went to the purchasers of the first preferred
stock; is that right ?
Mr. DILLON. That is right. They received one share of first preferred and one share of common plus this option.
175541—33—PT 4
5
1596
STOCK EXCHANGE PRACTICES
Mr. PECORA. Plus this option ?
Mr. DILLON. Yes.
Senator COUZENS.
What was the purpose of organizing the second
trust?
Mr. DILLON. The United States & Foreign Securities Corporation
I suppose simply felt that it was good business to do it.
Mr. PECORA. Well, the United States & Foreign Securities Corporation really executed or consummated the judgment of Dillon,
Bead & Co., did it not?
Mr. DILLON. Well, of their stockholders—yes; you might say that,
yes.
Senator COUZENS. Why could you not have expanded the operations of the first investment company instead of organizing the
second one ? Was there more profit in organizing the second one ?
Mr, DILLON. May I answer Mr. Pecora's question, Senator ?
Mr. PECORA. Answer the question Senator Couzens asked first, Mr.
Dillon.
Mr. DILLON. The United States & Foreign Securities Corporation
had an independent board of directors. When you say that Dillon,
Read & Co., did own that stock, it is true if you include the stock
owned by individual members of the firm. The directors used independent judgment on the question. The directors were not made up
from my-office.
Mr. PECORA. Well, the independent judgment of those directors
who were not members of Dillon, Read & Co. in no way collided
with the independent judgment of those directors who were members
of Dillon, Read & Co., did it?
Mr. DILLON. NO ; I should not think it did.
Mr. PECORA. It is just merely a coincidence?
Mr. DILLON. Just merely a coincidence. At that time I think
there were only two Dillon, Read & Co. directors. The forming of
the United States & International Securities Corporation, they tell
me, was the idea of Mr. Tracy, who was the president. He brought it
up. But it coincided with our feelings. We did not object to it.
Mr. PECORA. Will you now answer Senator Couzens' question?
Mr. DILLON. Yes. What was the question?
Senator COUZENS. I asked you why you organized the second
investment trust ? You controlled the first one ?
Mr. DILLON. Yes.
Senator COUZENS.
And then you organized the second one. I
wondered why.
Mr. DILLON. Simply because in our judgment it was a desirable
thing to do. I do not know why.
Mr. PECORA. Why was it more desirable to go through all the
burden and expense of organizing a second investment trust with
a total capitalization of $60,000,000 when you already had an investment trust qualified and equipped to transact the same kind of
business that the second investment trust conducted and operated ?
Mr. DILLON. It was simply to expand the operations, to put them
on a little larger scale.
Mr. PECORA. Well, could you not expand, as Senator Couzens has
suggested, by the issuance and sale to the public of additional stock
by the original investment trust in the amount of $60,000,000?
STOCK EXCHANGE PRACTICES
1597
Mr. DILLON. I do not think you could have sold it. What sort of
stock would you have sold? What sort of security would you have
offered?
.
Senator COTTZENS. Just simply increased the authorized capital
stock.
Mr. PECORA. Simply increased the authorized capital stock; certainly.
Mr. DILLON. I do not think you could have sold it.
Mr. PECORA. Why not?
Mr. DILLON. Because this second investment trust was set up
with $10,000,000 junior to the public's money. Now you could not
do that again in the first one because you did not have such a ratio
probably.
Mr. PECORA. The ratio was identical to the ratio that was used
in the first investment trust, was it not?
Mr. DILLON. Yes; but if you would have sold $60,000,000 more,
what would you have sold? I do not quite follow what you mean.
I do not see how you could have expanded United States & Foreign
to that extent. I do not think the structure would carry it.
Mr. PECORA. Well, was the second investment trust organized to
conduct the same kind of business as the first investment trust was
organized to conduct and did conduct ?
Mr. DILLON. Yes; that is correct.
Mr. PECORA. Well, why could not an additional sum of $60,000,000
have been added to the capital structure of the first investment trust
through the issuance and sale of additional stock by an appropriate
amendment to its bylaws that would have authorized it to issue such
additional stock?
Mr. DILLON. Well, you might have worked out such a set-up. I
do not know.
Senator COUZENS. Would you not have saved money if you had
done it?
Mr. DILLON. I t would not have made any difference how you did it.
The CHAIRMAN. Was the second trust organized under the laws
of the State of Maryland just like the first trust?
Mr. DILLON. Yes; it was under the Maryland laws also.
Mr. PECORA. And were the legal formalities incident to its birth
and christening also attended to by the same law firm ?
Mr. DILLON. Yes. I do not think they used Mr. Olcott in this
case. I think they did it directly with the corporation.
Mr. PECORA. YOU had some other bookkeeper, or what ?
Mr, DILLON. I think they found that they did not need bookkeepers, and I think they did it straight with the United States &
Foreign Securities Corporation subscribing directly for the stock.
Mr. PECORA. Through the medium of the incorporation and organization of the second investment trust called the United States &
International Securities Corporation the public subscribed for its
first preferred shares $50,000,000, and the United States & Foreign
Securities Corporation subscribed for its $10,000,000 issue of second
preferred stock and got two thirds of its common stock ?
Mr. DILLON. That is correct.
Mr. PECORA. NOW that $10,000,000 was furnished by the first investment trust, was it not?
1598
STOCK EXCHANGE PRACTICES
Mr. DILLON. But, Mr. Pecora, it got more than two thirds of the
issue. It got 2 million out of 2y2 million.
Mr. PECORA. Out of a total authorized issue of 3,000,000 shares of
which 500,000 were held for the holders of the option warrants?
Mr. DILLON. That is correct. But out of the stock that was
issued—out of the 2y2 million they got 2 million, which really is 80
percent, is it not?
Mr. PECORA. Yes. Four fifths.
Mr. DILLON. Yes. 80 percent.
The CHAIRMAN. Did this first investment trust make any investments in foreign securities, or did they confine themselves to domestic
securities ?
Mr. DILLON. Senator, they have made certain investments in foreign securities from time to time.
The CHAIRMAN. And the second investment trust also ?
Mr. DILLON. Yes; and the second also. But the large bulk of their
investments—far and away the large part of it—are American
securities.
Mr. PECORA. NOW, by this method is it not a fact that Dillon, Read
& Co., through an original investment of $5,000,000 which it paid for
the second preferred stock of the first investment trust—the United
States & Foreign Securities Corporation—plus the $100,000 that was
paid for the block of 500,000 shares of the common stock of the first
investment trust, acquired a control measured by the ownership of a
large majority of the common stock of the first investment trust, and
through the medium of the first investment trust buying for $10,000,000 all of the authorized second preferred stock of the second investment trust, plus 2,000,000 shares of its 2,500,000 shares of common
stock actually issued and outstanding, were enabled to acquire control
of both of these investment trusts having a total capitalization of
$90,000,000?
Mr. DILLON. Was it $90,000,000?
Mr. PECORA. $30,000,000 of first; $60,000,000 of second.
Mr. DILLON. That is correct, but you are duplicating, because the
first trust took $10,000,000 of its own assets to put in junior to the
public's money in the second trust.
Mr. PECORA. All right. It made that contribution to the capital
of the second investment?
Mr. DILLON. That is correct.
Mr. PECORA. And that $10,000,000 which was paid by the first investment trust for the second preferred shares of the second investment trust was paid out of an earned surplus ?
Mr. DILLON. That is correct. It was paid out of the equity
money—money belonging to the common stock.
Mr. PECORA. SO that there was not necessarily this duplication of
$10,000,000 in the capitalization of both companies, was there ?
Mr. DILLON. N O ; you are correct.
Mr. PECORA. The $10,000,000 was paid out of earned surplus?
Mr. DILLON. YOU are correct.
Mr. PECORA. And paid into the treasury of the second investment
trust?
Mr. DILLON. That is correct.
Mr. PECORA. That leaves us upon the ground brought out by the
former question, that through this initial investment of $5,000,000
STOCK EXCHANGE PRACTICES
1599
Dillon, Bead & Co. acquired control represented by the ownership
of a majority of the capital stock of both of these investment trusts
which had a total capitalization of $90,000,000?
Mr. DILLON. That is correct; but it was not just by the $5,000,000.
Senator COUZENS. YOU mean, it was plus
Mr. PECORA. And minus the $1,000,000 received as commissions for
the sale of the preferred stock of the first investment trust.
Mr. DILLON. But it was after the first investment trust had made—
I don't know just what it was at that time. There was a total of
$10,000,000 earned surplus. It had a large amount of unrealized
profit there.
Mr. PECORA. It had a very prosperous record ?
Mr. DILLON. Up to that time.
The CHAIRMAN. YOU would have had money for dividends on the
common stock if you had not put that money into another investment in the second investment trust?
Mr. DILLON. We might have, but we never paid dividends on the
common stock.
The CHAIRMAN. I know; but you had it there. You had the
$10,000,000 there.
Mr. DILLON. We had the $10,000,000 there and we invested it in
the second company and lost that in protecting the public's money
that went into the second company. The public's money is still
practically intact. There is about ninety dollars-odd a share, I am
told by my associates, still there for the public* although our
$10 000,000 that was junior has been lost.
Mr. PECORA. YOU do not mean " our $10,000,000 ", do you?
Mr. DILLON. Yes. I thought you said $10,000,000 from the investment trust.
Mr. PECORA. That had been earned by the first investment trust?
Mr. DILLON. Yes.
Mr. PECORA. When you say " our $10,000,000 " you do not mean
$10,000,000 that came out of the pockets of Dillon, Eead & Co. or
its individual members ?
Mr. DILLON. Oh, no; I mean the earnings available for common
stock.
Senator COTJZENS. SO, as a matter of fact, the 250,000 shares that
went as bonus stock for tiie 250,000 shares of preferred was sacrificed
for the purpose of creating the second investment trust?
Mr. DILLON. NO, sir.
Senator COUZENS. Why,
certainly. In other words, if you had
not taken the $10,000,000 out of the first investment trust you could
perhaps have paid dividends on the common stock of the first trust;
but you did not do that, although you had distributed 250,000 shares
as bonus stock
Mr. DILLON. That is right; but we have never paid dividends on
the common stock.
Mr. PECORA. But you had earned enough to justify the payment of
dividends on the common stock.
Mr. DILLON. If you would pay your dividends out of capital appreciation. We did not, because we were working on the theory that
dividends on the common stock would be paid out of income; that is,
interest and dividends received. As the capital grew we did not use
that. We left that to protect the first preferred, and as the income
1600
STOCK EXCHANGE PRACTICES
from that capital would have become large enough to take care of
the first preferred and the second, and if there had been anything
left over, we would have paid dividends on the common.
Senator COUZENS. What constituted this $10,000,000 you took out
of the first trust to buy stock in the second trust ?
Mr. DILLON. Cash.
Mr. PECORA. Representing earned surplus?
Mr. DILLON. That is correct.
Senator COUZENS. Well, then, that was not appreciation of capital.
That was cash that you could have disbursed to the common stockholders of the first trust. I t was a realization; it was earnings.
Mr. DILLON. Yes, sir.
Mr. PECORA. A surplus made up of earnings.
Mr. DILLON. That is correct.
Senator COUZENS. SO you sacrificed the common-stock
holders of
the first trust to create a second truest by taking $10,000,000 of cash
out of the first trust to buy common stock in the second trust ?
Mr. DILLON. We could have taken that $10,000,000 and invested
it in something else, bue we invested it in this company, rather than
investing it in Steel common or anything else.
Senator COUZENS. I know you did not buy Steel common. You
bought something which you yourself controlled. So I do not think
it is quite comparable.
The CHAIRMAN. It enabled them to get control of $60,000,000
more.
Senator COUZENS. Certainly.
Mr. DILLON. TO manage for the public, Senator. It waks no
advantage to us. Our record has been that of the $5,000,000 which
we put in there junior we have not received full 6-percent dividends.
On our common stock we have never received anything. I have
worked for 8 years and have never received any salary or compensation of any kind. I have given it a large portion of my time. We
have been fortunate enough to continue to pay dividends to the
public on their money that was put in, and we have the assets of the
first trust today still intact, above the value of the first preferred
stock.
Senator ADAMS. YOU paid dividends on the first preferred stock
in the second company?
Mr. DILLON. For a brief time. They are in arrears now, Senator.
But we who put in this original$5,000,000 and have kept that stock,
kept our investment, have not even received 6 percent on our investment. We have received nothing on the common. I t is true
that these stocks have market value, but those of us, like myself,
who have been trying to do a serious work in running a company
like this for the public investors, have not even had full interest on
the money we invested junior.
Mr. PECORA. Let me say, to possibly save time, that for the time
being we will say no more about what profits or dividends were or
were not received by the associates of Dillon, Read & Co., because I
propose to go, on the subsequent examination of yourself and your
associates, into the matter of the receipt by these men, through the
sale of common stock of the shares of the first investment trust,
profits that represented much more than 6 percent dividends.
STOCK EXCHANGE PRACTICES
1601
Mr. DILLON. Very much; but, unfortunately, I was not a party
to that. I was not in that account. I was simply saying to the
Senator that I personally have not sold any of my stock and have
not even had interest on my second preferred.
Senator COUZENS. When was it organized?
Mr. PECORA. In 1928.
Senator COTJZENS. SO
it was much more desirable to get $60,000,000 of the public's money than it was to take 6 percent on $5,000,000 ?
Mr. DILLON. I do not quite follow you there, Senator.
Senator COUZENS. YOU say you did not even get your 6 percent on
the $5,000,000 invested, but in 1928 you sacrificed that so as to get
$60,000,000 of the public's money to further use in an investment.
Mr. DILLON. We did not use it except for the benefit of the public.
Mr. PECORA. But as owners of the majority of both the first and
second investment trusts you did have a considerable amount at stake;
did you not?
Mr. DILLON. We had all our junior money at stake, and our reputation in running it properly as far as we did. The board of directors
were functioning. Dillon, Read & Co., as I said, did not run these
companies. I gave them a great deal of my time, and I took a personal interest in it. I am deeply interested. I am a large holder
of what you call the " public's money."
Mr. PECORA. With regard to the issuance and sale to the public
of the $50,000,000 worth of the first preferred stock of the second
investment trust, you said that was sold through a syndicate headed
by Dillon, Read & Co.?
Mr. DILLON. That is correct.
Mr. PECORA. Were those sales made in very much the same general fashion as the $25,000,000 worth of first preferred stock of the
first investment trust?
Mr. DILLON. I should assume so.
Mr. PECORA. What commissions were received by Dillon, Read &
Co. and its participants in this selling syndicate upon the sale of
the $50,000,000 worth of first preferred stock of the United States &
International Securities Corporation?
Mr. DILLON. Dillon, Read & Co. received their originating fee of 1
percent on that stock, I think.
Mr. PECORA. $500,000?
Mr. DILLON. Yes.
Mr. PECORA. And
further, it received about a million dollars, did
it not, out of the commission paid by the investment trust, the United
States & International Securities Corporation, to the members of
this syndicate ?
Mr. DILLON. Whatever that was. There were 3 points allowed
there to the distributing syndicate.
Mr. PECORA. That is $150,000?
Mr. DILLON. Oh, no.
Mr. PECORA. $1,500,000?
Mr. DILLON. A million and a half.
Senator COUZENS. Why did you pay less on that than
Mr. DILLON. I t was the same. I t was 4 points, but
on the first?
we realized
at that time, I suppose, that we could sell it for 3 points, and we
took the 1 point for originating it, I suppose.
1602
STOCK EXCHANGE PEACTICES
Mr. PECOEA. AS a matter of fact, the second investment trust paid
a commission of 4 points, or 4 percent, for the selling of the first
preferred stock?
Mr. DILLON. We bought the stock less 4 points.
Mr. PECORA. SO the investment trust virtually paid 4 points commission for the flotation of that first preferred stock?
Mr. DILLON. That is right.
Mr. PECORA. Which amounted to $2,000,000?
Mr. DILLON. Yes.
Mr. PECORA. Of that
$2,000,000, $500,000 went immediately to
Dillon, Eead & Co. apart from other members of the syndicate?
Mr. DILLON. Yes.
Mr. PECORA. And the
balance was distributed among all the members of the selling syndicate, including Dillon, Eead & Co. ?
Mr. DILLON. On the basis of the stock they sold.
Mr. PECORA. Of that $1,500,000
Mr. DILLON. One moment. There was a banking group in between there.
Mr. PECORA. Of that $1,500,000 how much went to Dillon, Eead
& Co. as its share ?
Mr. DILLON. The commission on the stock that Dillon, Eead & Co.
sold amounted to $516,893.95. It was paid them on the same basis
as the other members of the syndicate—3 points.
Mr. PECORA. HOW much of that $1,500,000 was received by Dillon,
Eead & Co. as its share of the syndicate commission ?
Mr. DILLON. I think I just read you that figure.
Mr. PECORA. Oh.
Mr. DILLON. Here
is the total. Of the $2,000,000, Mr. Pecora,
there was a small amount off for expenses, some forty thousand odd.
That left $1,953,000. Of that Dillon, Eead & Co. received in the
original group originating this, $500,000. There was then a banking group formed, and in the total profits Dillon, Eead & Co. received $39,000; the Dillon Eead Corporation, $9,000; a total of about
$48,000, $161,0000 going to other participants. Then in the selling
syndicate Dillon, Eead & Co. received their commission on the stock
they sold amounting to $516,893.95. Dillon Eead Corporation,
$51,502.50; and the other participants in the business received
$675,321.10. That accounts for that $2,000,000.
Mr. PECORA. SO that, all together, Dillon, Eead & Co. received for
its participation in the sale of the first-preferred stock of the secondinvestment trust an aggregate of $1,016,000?
Senator ADAMS. $1,065,000.
Mr. PECORA. Yes; $1,065,000.
Mr. DILLON. That is approximately correct.
Mr. PECORA. It would not be doing violence to the facts to say
that this was about as handsome a return to Dillon, Eead & Co. as it
might have received if it received dividends at 6 percent on its second-preferred stock in the first-investment trust, would it ?
Mr. DILLON. I t is better, I should say. But, Mr. Pecora, may I
bring out here—I do not think I made it clear—this point? Senator
Couzens spoke of the $10,000,000 that was paid in the second preferred and that should have gone as dividends to the common stockholders. Had that been done, you realize that Dillon, Eead & Co.
would have received $7,500,000.
STOCK EXCHANGE PEACTICES
1603
Senator COUZENS. YOU would have made much more off that
$60,000,000 than on this $5,000,000, even if you had done that. But
the question is not how much you made. The point, I think, is that
it is rotten ethics to take $10,000,000 out, of an investment trust you
own, or which you control, rather, its ownership being in the public
hands, and put it in another investment trust to further augment
your own profits. I think that is reprehensible.
Mr. DILLON. Oh, that was not the fact.
Senator COUZENS. Certainly it augmented it, because you controlled this and the other $60,000,000 you sold to the public, and you
also had common stock from which you might have earned dividends.
Mr. DILLON. From which we might have. The public has been
taken care of.
Senator COUZENS. Yes; but, Mr. Dillon, you understand, of course,
that I am not attacking your good faith. I still insist that you were
speculating and using the stockholders' money in another corporation, which you had no right to do.
Mr. DILLON. But we were stockholders.
Senator COUZENS. YOU controlled them.
Mr. DILLON. Of this $10,000,000, $7,500,000 would have come to
us.
Mr. PECORA. Seventy-five percent of the capital stock of the first
investment trust?
Mr. DILLON. That is right.
Senator ADAMS. The theory of your first investment trust was the
investment in standard stocks; that is, you were taking those standard stocks?
Mr. DILLON. Yes.
Senator ADAMS. This
was a diversion of earnings of the first trust
into an investment that was not in that classification, was it?
Mr. DILLON. Except that it was a new trust. It was to buy the
same standard stocks as the first one did. I t was engaged in the
same sort of business.
Senator ADAMS. YOU did not invest it in first preferred; you invested it in the second ?
Mr. DILLON. Yes.
Senator ADAMS. YOU
did not invest in the same grade of securities?
Mr. DILLON. We invested it in the same grade of securities in this
way. That was money that belonged to the common stock of the
first trust.
Senator ADAMS. Are you sure it belonged to that ? In other words,
you had first preferred stock out to whom you owed a first obligation, didn't you?
Mr. DILLON. That is correct.
Senator ADAMS. SO it did not belong to the common stockholder
unless you were perfectly sure that your first preferred dividend was
secure, did it?
Mr. DILLON. Yes, sir; that is true.
Senator ADAMS. Then you had second preferred ahead of the
common stock?
Mr. DILLON. Yes, sir.
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STOCK EXCHANGE PEACTICES
Senator ADAMS. SO you cannot say that this all belonged to common stock?
Mr. DILLON. Well, it could have been declared as dividends on
the stock. It was available for that.
Senator ADAMS. It could have been done, do you say ?
Mr. DILLON. Yes, sir.
Senator ADAMS. But, as
wise managers you would not have cleaned
down the accumulations. You would not have cleaned them right
down, but you paid the first dividend, and then what was left you
would have paid out in that way ?
Mr. DILLON. Yes. That was why we did not pay that.
The CHAIRMAN. The second trust was a 5-percent stock instead
of a 6-percent stock, was it not ?
Mr. DILLON. Yes, sir. We have found that 6 percent is more than
you can reasonably expect to earn over a period of years in conservative investments. We wouldn't do that again—putting the
money that we had in that first trust in in that way. Some of these
individuals sold some of their jjommon stock, but those that have
held it, such as myself, have found that it has not been a profitable
investment.
Senator COTJZENS. Mr. Chairman, how much longer will you run
this afternoon?
The CHAIRMAN. Just a few moments. Mr. Dillon, can you sell 5
percent stock about as well as 6 percent stock ?
Mr. DILLON. At that time in the market it sold about as well.
Mr. PECORA. Mr. Dillon, just prior to the purchase by the first investment trust of $10,000,000 of second preferred stock of the second
investment trust in 1928, the first investment trust had in its treasury
more than $10,000,000 representing earned income, as surplus made
up of earnings. The fact that it had such a large amount of undistributed earnings in its treasury was reflected in the market value of
the common stock, wasn't it?
Mr. DILLON. Yes. I should think that that is a fair assumption.
That showed the asset value of the stock.
Mr. PECORA. And that would give an enhanced market value to
the common stock ?
Mr. DILLON. I would think so.
Mr. PECORA. Which would have been entitled to the ownership, we
will say, of the equity?
Mr. DILLON. I should think the equity of the company would
reflect the market value of its common stock.
Mr. PECORA. We have seen that around 75 percent of the common
stock of the first investment trust was owned by Dillon, Read & Co.
or its individual members.
Mr. DILLON. Yes.
Mr. PECORA. If that
money, those earnings, had been distributed by
way of dividends on that common stock, the market value of the
common stock would not have been enhanced, as it was, by the
accumulation in its treasury of those undistributed earnings,
would it ?
Mr. DILLON. Well, as to that I do not know.
STOCK EXCHANGE PRACTICES
1605
Mr. PECORA. Well, isn't that a fair inference to draw ?
Mr. DILLON. I do not know whether it is, because if you have common stock that is paying dividends whether that would sell higher
or lower in the case of that same common stock with the surplus
accumulated, I do not see how any man can say. You will have to
try it out on the market. Generally stock that pays dividends sells
better than one that does not.
Mr. PECORA. In 1928 the market value of securities was not determined on that basis, was it? On actual dividend payments, I
mean, was it ?
Mr. DILLON. In 1928 and 1929 I do not know what basis people
used.
Mr. PECORA. And it was in 1928 and 1929 that this common stock
of the first investment trust reached a high of $72 a share on the
New York Stock Exchange?
Mr. DILLON. That is correct. At that time it had an asset value
of about $48, they tell me.
Senator COTJZENS. Did they pay dividends on the second preferred
up to that time ?
Mr. DILLON. Yes, sir.
Senator COUZENS. SO
you got dividends for the $5,000,000 you
put in ?
Mr. DILLON. That is right, up until—well now, let me see when.
Mr. PECORA. Until 1931, wasn't it?
Mr. DILLON. Yes; I think so.
Senator COUZENS. SO when you were organizing your second investment trust you were just sacrificing dividends on a $100,000 investment for the other common shares ?
Mr. DILLON. YOU can put it that way if you like.
Senator COUZENS. Well, that is a fact, isn't it ?
Senator ADAMS. Mr. Dillon, as to those $10,000,000 accumulated
profits, did they have their origin in dividends upon stocks which
were held in the portfolio or was it partly due to profits upon the
sale of securities ?
Mr. DILLON. It was largely due to profits upon sales of securities,
because had it been income on securities in the portfolio, following
the policy we were then following we would have paid dividends.
Senator ADAMS. It was capital appreciation.
Mr. DILLON. Yes, sir. We were holding that hoping it would
accumulate so that on the basis of capital appreciation it might
some day justify dividends.
The CHAIRMAN. HOW about the second investment trust, have
dividends been paid on that preferred stock?
Mr. DILLON. They were paid up until 1930. They were passed in
1930.
The CHAIRMAN. On both the second and the first preferred ?
Mr. DILLON. They are looking that up for you now.
Mr. PECORA. Mr. Dillon, how much did you say was the asset or
book value of the common stock of the first investment trust in 1928,
prior to its purchase of the $10,000,000 of second preferred stock
of the second investment trust?
1606
STOCK EXCHANGE PEACTICES
Mr. DILLON. I will have to inquire here [speaking to some of
his associates]. They tell me it reached a high of $48, but I do not
know whether just then or not. No; it was around $28 at that time,
Mr. PECORA. At what time?
Mr. DILLON. In October of 1928 it was about $28.
Mr. PECOEA. And reached what?
Mr. DILLON. And reached $48 in August of 1929.
Senator GOLDSBOROTJGH. Was it $28 when you took the $10,000,000?
Mr. DILLON. About that.
Mr. PECORA. In the matter of the 750,000 shares
Mr. DILLON (continuing). Now, as to those figures, they are taking the market value of the assets at the time and figuring the value.
It was not realized value.
Mr. PECORA. I know. On the basis of the common stock of the
first investment trust in 1928 it reached a book or asset value of $48
per share, and 750,000 shares of the common stock of that first investment trust, which went to Dillon, Read & Co. and its associates
for $5,100,000, it had an asset or book value of $36,000,000, didn't it?
Mr.
DILLON.
Yes.
Mr. PECORA. And the market value was considerably in excess of
that $36,000,000, wasn't it?
Mr. DILLON. On the quotation at that time I assume it was, because all those investment stocks were selling much above their book
value. I think ours were probably—well, I have not the quotations
on the market at that time, but undoubtedly the quotation was above
that.
Mr. PECORA. Did any of your associates ever complain to you as
to an unwise investment that you made in this $5,000,000 of junior
money in first investment trust ?
Mr. DILLON. I have not heard of any such complaints. Well now,
wait. I believe I am wrong in stating that.
Mr. PECORA. There was some little complaining, was there ?
Mr. DILLON. Well, one of them complained and thought it was a
bad investment because you cannot afford to pay 6 percent on that
senior money and earn anything for yourself. And that has been
true. We have not been able to earn dividends on it.
Mr. PECORA. HOW many shares of common stock has that gentleman got in the first investment trust ?
Mr. DILLON. I do not know what he has now. He may have sold
some of it.
The CHAIRMAN. We will now take a recess until tomorrow morning
at 10 o'clock.
{Whereupon, at 4:10 p.m. Tuesday, Oct. 3, 1933, the subcommittee
adjourned until 10 o'clock the following morning.)
COMMITTEE EXHIBIT 1-A, OCTOBER 3, 1933
Dillon, Read & Co. was responsible for the organization of United States &
Foreign Securities Corporation and later offered to the public first preferred
and common stock of United States & International Securities Corporation.
These are both investment companies, of the type commonly termed " investment trusts." In view of the fact that the public is insufficiently aware of the
outstanding record of the well-managed investment companies and of the par-
STOCK EXCHANGE PKACTICES
1607
ticularly outstanding record of these two companies, it may be of interest if I
give a few facts as to the basis for their organization and the history of their
operations.
The investment trust is largely a creation of English and Scottish finance,
trusts of substantial size having been organized in England as early as 1865.
Since that time they have gone through periods of great prosperity, notably the
boom years 1887-90, during which large numbers of investment trusts were
organized with very considerable capital and through periods of prolonged depression. The losses incurred by English trusts during the years following the
Baring failure in 1890 brought them into popular disfavor for some time. However, as the persistently better-than-average investment record of the wellmanaged trusts became apparent, they a g a n returned to favor and came to
occupy an increasingly important place in British finance. At the present time
it is estimated that the capital of English investment trusts is in excess of
£200,000,000.
In this country, very little had been done with the investment trust up to 1924,
it being estimated that the total resources of such companies operating at that
time was less than $15,000,000.
In 1923 and 1924, the members of Dillon, Read & Co. gave considerable study
to the English investment trust idea as it applied to the general problem of
finding a form of investment which would provide the investor with security and
an adequate yield. Anyone familiar with investments realizes the difficulty
of investing funds so that they produce a yield to average better than 5 percent
per annum over a long period of years. To do so requires continuous and
expert supervision and a distribution of investment risks. The principle underlying the investment trust, that is, that it merges the funds of many investors
into one fund of sufficient size to permit intelligent diversification and the
maintenance of specialized management at a cost moderate in relation to the
size of the fund as a whole, appeared sound. The actual record of the English
trusts seemed to prove not only the soundness of the principle but also, when
intelligently handled, its success in actual practice over many years.
Still another principle became evident in studying the English and Scottish
trust. Almost without exception their capitalization other than funded debt
consisted of two or more classes of stock. One class was usually called preference stock, having priority as to assets in liquidation and priority as to a
fixed dividend, ranging in the case of different trusts from 4% to 5 percent,
but excluded from any further share in the earnings, the second being what
in England is called "ordinary or deferred stock", which is entitled to whatever additional earnings may be available for dividends after satisfying the
rights of the preference stock. In this way two types of investment were
provided, one enjoying a high degree of security and a limited but adequate
yield, while the other offered the possibility of greater yields but involved far
greater risks. In England ordinary or deferred stock of investment trusts is
held almost exclusively by those active in finance and able to assume the risks
involved.
With these principles in mind we approached the problem of adapting the
investment-trust idea to conditions in this country. The American people were
unfamiliar with investment trusts at that time. It would have been impossible to sell a straight preferred stock with a fixed dividend of 4% percent,
which about is the average dividend of English investment trust preference
stocks. On the other hand, it was felt that exceptional opportunities were
then available for the investment of funds and that, using what in our judgment was the best investment skill available, it might be possible to better
somewhat the record of 6 percent per annum earnings achieved in recent
years by the best English companies.
Accordingly, in 1924 we decided to organize United States & Foreign Securities;
Corporation. The following capitalization was authorized and issued: 250,000>
shares first preferred, 50,000 shares second preferred, 1,000,000 shares common.
The first preferred was to be similar to the preference stock of English and
Scottish trusts. It was provided that dividends of $6 per share per annum
should be payable on the first preferred stock before any payments were made
on the second preferred or common. Furthermore, that in the event of liquidation of the company the first preferred stock should be entitled to $100 pet
share before any payments were made on the second preferred. Not only wasthe dividend rate on the first preferred fixed at $6 per annum as against the
1608
STOCK EXCHANGE PRACTICES
substantially lower rate paid on English investment trust preference stocks, but
in addition it was decided to give the subscribers to the first preferred stock
an additional share in possible earnings.
Had the typical English capitalization for investment trusts been followed,
a single class of common stock junior to this first preferred stock would have
been created, all of which we would have purchased for cash. It was solely
for the purpose of giving the subscribers to the first preferred stock an additional share in possible earnings over and above 6 percent per annum that
the two classes were authorized, second preferred and common, instead of one
single class. It was felt that we should fairly receive 6 percent per annum
on the actual cash paid in by us before a share of the additional earnings
should accrue to the subscribers to the first preferred.
It was therefore provided that the second preferred should be entitled to
dividends of $6 per share per annum, but only after $6 per share per annum
had been paid on the first preferred; and that in the event of liquidation of
the company it should be entitled to $100 per share but only after all of the
outstanding first preferred had been paid $100 per share. The common stock
which represented the right to earnings over and above 6 percent per annum
on the subscribed capital, went one fourth to the subscribers to the first preferred and three fourths to us as subscribers to the second preferred.
Dillon, Read & Co. and our associates paid in $5,100,000 of our own funds
for 50,000 shares of second preferred and 750,000 shares of common. Of this
amount $4,950,000 was specifically set aside by the corporation as a general
reserve against which losses could be charged without jeopardizing the dividends payable on the first preferred.
This $5,100,000 has provided a cushion of protection to the money invested
by the public. If the assets of the corporation had been liquidated on June
30, 1932, when their indicated market value had reached its lowest level, this
$5,100,000 would have been wiped out and nothing would have been available
for the second preferred or common, but there would have been, based on such
market values, $87,64 available for distribution on every share of first preferred outstanding in the hands of the public.
The 250,000 shares of first preferred, with which went 250,000 shares of common stock, were offered to the public in the form of allotment certificates at
$100 per share and were fully subscribed for.
Subscriptions to these allotment certificates were received through the medium
of an underwriting syndicate formed for this purpose by Dillon, Read & Co.
The underwriting syndicate was paid a total of $1,000,000 being a sum equal
to $4 for each $100' of subscriptions so received. The syndicate was composed
of 380 participants. Dillon, Read & Co. made no charge for its services in
organizing the syndicate, our only compensation being as a participant in the
syndicate on the same terms as dealers throughout the country. Such compensation aggregated $339,461.64 arising from our syndicate participation of
82,455 shares and our retail sales of 94,858 shares. It should be noted that
this compensation is gross, no deduction having been made for selling or overhead expenses.
The total amount payable to the corporation from subscribers to the first
preferred and common stock and from the sale of the second preferred and
common, after deducting the payment to the underwriting syndicate, was* $29,100,000. As it seemed unwise to attempt to invest the entire capital of the
corporation at once, the 250,000 shares of first preferred and 250,000 shares of
common stock were offered in the form of allotment certificates, 25 percent
being payable upon issuance and the balance subject to call by the corporation.
Subsequently, the remaining amounts due from subscribers to the allotment
certificates were called by the corporation and were paid in full by the
subscribers.
At the outset it was recognized that the chief factor in the success or
failure of an investment company was the ability and conservatism of its
management.
All activities of United States & Foreign Securities Corporation have been
under the supervision and subject to the approval of its board of directors.
The original board consisted of Messrs. Anson W. Burchard, F. H. Ecker,
Herbert Fleishacker, J. W. Horner, William A. Phillips, Robert O. Schaffner,
John Sherwin, George W. Wickersham, Harrison Williams, Edward G. Wilmer,
and myself. The strength of the board has at all time been maintained. The
STOCK EXCHANGE PBACTICES
1609
present directors are B. J. Bermingham, F. H. Ecker, Charles S. McCain,
G. M. P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B. Tracy,
Edward G. Wilmer, and myself.
The members of Dillon, Read & Co., having been responsible for the formation of the corporation, have done everything in their power to assure its
success. In the early years of its activity, space in the offices of Dillon, Read
& Co., and the services of some of our employees were donated to the corporation free of charge. At a later date, as its activities became more extensive,
the corporation set up offices of its own.
The successful record of the original investments of the corporation reflects
the sound judgment with which they were made. The return received from
interest and dividends averaged approximately 6 percent in 1924 and 1925, and
this was supplemented substantially by earnings from participations in underwriting and syndicate accounts offered to the corporation by Dillon, Read & Co.
The extraordinary prosperity of the next few years not only resulted in substantial increases in the dividends paid on some of the securities in the portfolio of
the corporation, but also resulted in the increase of the quoted prices for
these securities to levels far beyond our expectations. From time to time the
corporation realized on a portion of this increment in the value of its portfolio.
In the annual reports to stockholders it was clearly stated that profits of this
type were of a special character and not to be confused with earnings from
interest and dividends. Owing to the realization by the directors that some
day losses of a similar nature might have to be met, these profits were never
used as a basis for making a distribution on the common stock of the
corporation.
During the unfortunate days of the depression, the corporation has suffered
along with others. In 1929, 1930, and 1931 the directors kept a large proportion of the company's funds in cash, call loans, and United States Government
securities, these items amounting to $19,688,000' on December 31, 1929, and
$22,440,000 on December 31, 1930, but the remaining assets of the corporation
suffered severe depreciation in common with those of other investors.
In the spring of this year the corporation invested the major portion of the
funds then held in the form of cash and governments. The subsequent appreciation in the market value of these investments has been large.
As one looks back over the record of the corporation from its organization
to the present day, one is again impressed with the soundness of the investment trust principle and of the management of this company. The corporation has paid $11,020,049.57 in dividends to the first preferred stockholders,
which is the full 6 percent per annum on their shares up to the present day.
Two million one hundred thousand dollars has been paid in dividends on
the second preferred stock, this being less than 6 percent per annum, dividends
on this stock being in arrears since November 1931. After these payments,
the books of the corporation as of August 31, 1933, show a surplus of $5,398,679.55. Taken at market prices on that day the assets of the corporation had
an indicated value of $29,319,000. This is more than $138 per share of first
preferred stock outstanding. After deducting an amount equal to $100 per
share of first preferred stock, and $100 per share of second preferred stock
outstanding, there remains a substantial liquidating value for the common
stock.
The attached charts show how the investments of United States & Foreign
Securities Corporation have fared since December 31, 1927, at which time it
had received all amounts due on its allotment certificates, as compared with
the action of the recognized stock averages since that time.
They indicate that $100 invested from that date as United States & Foreign
invested its assets would have had a value of $72 on June 30,1933. One hundred
dollars invested in the stocks: comprising the Dow Jones industrial average
would have declined in value to $49, the record of United States & Foreign
being better by 47 percent.
One hundred dollars invested in the securities comprising the Dow Jones
railroad average would have declined in value to $35, United States & Foreign's
record being better by 106 percent.
One hundred dollars invested in the securities comprising the Standard
Statistics bank stock average would have declined in value to $39, United States
& Foreign's record being better by 85 percent.
1610
STOCK EXCHANGE PRACTICES
By the fall of 1928 United States & Foreign Securities Corporation had
demonstrated the soundness of the principles on which it was organized. Mr.
Tracy, president of the company, thought that a second corporation organized
on the same basic principles and affiliated with it in management should be
organized. The same principle of junior money acting as a cushion of protection to the funds subscribed by the public was again employed. In this
instance United States & Foreign paid $10,000,000 for 100,000 shares of second
preferred, and 2,000,000 shares of common of the United States & International
Securities Corporation. Dillon, Read & Co. formed a syndicate which received
subscriptions to 500,000 shares of first preferred stock with which went a like
number of shares of common stock. This first preferred and common stock was
offered in the form of allotment certificates for the same reason that that procedure was adopted in the case of United States & Foreign.
In 1928 securities were selling at prices to yield considerably less than they
yielded in 1924. The dividend rate on the first preferred and second preferred
stocks was therefore fixed at $5 per share per annum.
At the time United States & Foreign Securities Corporation made its investment in the second preferred and common stock of United States & International
Securities Corporation, it had an earned surplus in excess of the amount of this
investment.
During much of the time United States & International Securities Corporation
was investing its funds, the prices of industrial securities, public utilities, and
bank stocks had risen to such a level that the current dividend yield on them was
small. The railroad stocks, as a class, offered more substantial yields and
seemed to offer as great, if not greater, security than other classes of stock.
After having several engineering reports made on individual railroads, United
States & International Securities Corporation invested a considerable portion
of its funds in railroad stocks. At the time these investments were made it was
recognized that.car loadings might drop 10 or 20 percent, as they had dropped
in previous depressions, but it never occurred to any of us that they might
drop 50 percent, as they subsequently did.
In the case of United States & International Securities Corporation the sound'
ness of the investent trust principle of diversification is very clearly portrayed.
In spite of serious depreciation suffered in railroad securities, other investments turned out to be profitable. As a result the actual investment record
of United States & International Securities Corporation between comparable
dates, as indicated by the attached charts, is superior even to that of United
States & Foreign Securities Corporation.
These charts compare the investment record of United States & International
Securities Corporation from December 31, 1930, at which time its allotment
certificates had become full paid, with the action of the recognized averages
since that time.
They indicate that $100 invested from that date as United States & International invested its assets would have had a value of $86 on June 30, 1933.
One hundred dollars invested in the securities comprising the Dow Jones
industrial average would have declined in value to $59, the record of United
States & International being better by 46 percent.
One hundred dollars invested in the securities comprising the Dow Jones
railroad average would have declined in value to $51, the record of United
States & International being better by 69 percent.
One hundred dollars invested in the stocks comprising the Standard Statistics
public utility average would have declined in value to $61, United States &
International's record being better by 41 percent.
One hundred dollars invested in the securities comprising the Standard
Statistics bank stock average would have declined in value to $43, United States
& International's record being better by 100 percent.
This record speaks for itself and makes perfectly clear the service rendered
investors by the conservatively managed investment company. There is no
doubt that as the splendid showing of such companies in the United States
during the past few years becomes more widely appreciated, their securities
will achieve a popularity with the American investing public comparable to
that of the English and Scottish trusts with the British public.
1611
STOCK EXCHANGE PRACTICES
COMMITTEE EXHIBIT* NO. 7, OCTOBER 3, 1933
250,000 shares United States & Foreign Securities Corporation First Preferred
Stock Allotment Certificates, Syndicate. Date offered, Oct. 21, 1924, checks
mailed to participants Dec. 21, 1924
Name of participant
Brown Bros. & Co
Bernhard, Schiffer &Co
Barney & Co., C D
Byllesby & Co. H. M.
Braderman Co., Inc., M.W
Barrett & Co., G. E
Barstow •& Co
_
Bauer, Pond & Vivian
Berwin & Co
Bogert, Beverly
,
Boland & Preim
Bortle & Co
Borden & Sampter
Bennett Coghill & Co_
Bronson & Co., Theo. L
Buell & Co..
Burr & Co., George H
Burchard, Anson W
Blake Bros
Callaway Fish & Co
Clark & Co., Richard W
Craig Colgate & Co
Crawford, Wm. C._
Danforth & Marshall
Dean, Onativia & Co
Debevoise, Foster
Dominick & Biominick
Dominion Securities CorporationDresser & Escher
Dederiek, Arnold & Co
Fiske & Sons, Harvey
_
__.
Glidden, Morris & Co
—
Greenshields, Wills & Co., Inc
Greer, Crane & Webb
Goodbody & Co
Horner, Mrs. Grace M
Hemphill, Noyes & Co
Hitt, Farwell & Co
-•_.
Howe, Snow & Bertles
1.
Hampton, Chas. H
Harris, Ayers & Co
Iselin & Co
Ingraham & DuBosque
Ittleson, Henry
Keech & Co., F. B
_..
Kissell, Kinnicutt & Co
Kelley, Drayton & Converse
Koch, Spencer B. & Co
Kennedy & Co., Leonard
Lage Bros. & Co
Lamport & Co., Inc
Love, Macomber & Co
McDonough & Sloan
Morgan, Livermore & Co
Mabon & Co.
Manufacturers Trust Co
Mathey & Co., L. A
Mayer & Co., R. O
Merrill, Lynch & Co
Millett, Roe & Co
Minsch, Monell & Co
Moore, Leonard & Lynch
Morris & Smith
Martin, R. W
Naumberg & Co., E
Noble & Corwin
Peabody, Houghteling & Co
Parker, Robinson & Co
Pogue & Willard
Phillips & Zoller
Public National Bank
Price & Co
175541—33—PT 4
6
Profit
Participa- and/or
comtion
mission
Shares
1,000
1,500
250
250
100
2,000
500
400
250
150
100
300
200
150
300
3,000
200
500
50
150
100
500
150
300
1,000
4,000
150
250
200
500
250
300
100
500
4,000
2,000
650
200
100
500
2,000
200
250
1,000
100
150
100
200
500
150
200
100
200
750
1,100
350
500
150
1,200
600
150
50
1,200
100
750
500
2,000
100
150
150
$3,838.33
5,757.50
959.58
959.58
383.83
7,496.67
1,919.17
1, 535.33
919.58
575.75
383.83
1,151.50
767. 67
575.75
1,151.50
1,427. 25
1,151.50
11, 515.00
767.67
1,919.17
191.92
575. 75
383.83
1, 609.17
575.75
1,151.50
3,838.33
15,353. 33
575. 75
959. 58
767.67
1,899.17
959. 58
1,151. 50
383.83
1,919.17
14,973.33
7,676. 67
2,494.92
767.67
383.83
1,919.17
7,676.67
767. 67
959.58
3,838.33
383.83
575. 75
383.83
767. 67
1,919.17
575. 75
767. 67
383.83
767.67
2,878.75
4, 222.16
1,343.42
1, 719.17
575.75
4,606.00
2,303.00
575.75
191.92
4,606.00
383.83
2,878. 75
1,919.17
7,076.67
383.83
575.75
525.75
1612
STOCK EXCHANGE PRACTICES
250,000 shares United States & Foreign Securities Corporation First Preferred
Stock Allotment Certificates, Syndicate. Date offered, Oct. 21, 19M, checks
mailed to participants Dec. 21, 1924—Continued
Name of participant
Prince & Whitely
Reinhart & Bennett
Roach, John J
_
Robjent, Maynard & Co
Robbins & Co,, Charles D
Russell, Miller & Carey
Russell, Faris R._
Redmond & Co_
_
Seasongood, Haas & MacDonald..
Shields & Co
Shore & Jolles
Simmonds & Slade
ScholleBros
Sutro, Lionel
-.
Sweet, Richards & Co
Tooker, Gilbert & Co._
Tracy, Ernest B
West & Co., Wm
Williams, Clark & Co
Wood, Low & Co
Williams & Co., H. D
O'Sullivan, T . C_.___
American Ex. Securities Co
OUT OP TOWN
Newton: Newton Trust Co
Newark:
Goldsmith. Meyer & Lobeell
Newark & Essex Security Co
Post & Flags—Standard Security Corporation of New JerseyMontclair-Essex Trust Co
Albany:
W. Vam A. Waterman Co., Inc
__
J. A. Ritchie & Co
George R. Cooley
_.
Charles E. McElroy
Schenectady:
Mohawk National Bank__
_.
Willis T. Hanson
_
_
Buffalo:
Baker, Mandeville & Co
_
A. L. Chambers & Co
Hayes & Collins
_
O'Brian, Potter & Co.
_
_.
Pistell, Trubee & Co., Inc
___
L. G. Ruth & Co
_
Edward N. Wilkes & Co
Young & Spaulding
Evers Rebers & Co
T. N. Pistell
_
Olean: J. H. VanBuren & Co., Inc
Geneseo: Livingston County Trust Co
Rochester:
Converse, Hough & Co., Inc
Sage, Wolcott & Steele
Willard J. Smith & Co__
Union Trust Co
Charles E. Mudge
Frank J. Little
Binghamton: Chittenden, Phelps & Co
Ithaca: Henry N. Hinckley
,
Syracuse:
E. G. Childs & Co___
Stone, Seymour & Co
_
_
Hudson & Eddy
_
_
XJtica: Mohawk Valley Investment Co
Scranton: Weissenfluh & Co
Wilkes-Barre:
W. D. Morris, Jr. & Co_
_
Booker Bros
Atlanta: Trust Co. of Georgia
Baltimore:
Atlantic Exchange Bank & Trust Co
Frank B. Cahn & Co
_
Continental Co_
_
aitlCipa"
tion
Profit
and/or commission
Shares
2,500
600
100
100
2,500
450
400
750
150
2,500
500
400
2,000
75
100
600
1,100
4,000
500
800
400
400
1,000
$9,415.83
2,303.00
383.83
383.83
9,595.83
1,587.25
1,535. 33
2,678.75
575.75
9,545.83
1,919.17
1,535.33
7,676.67
287.88
383.83
2,303.00
4,222.16
15,353.33
1,919.17
3,070.67
1,535.33
1,535.33
3,838.33
100
483.83
200
200
100
200
50
767.67
767.67
383.83
767.67
191.92
400
100
400
100
700
100
200
800
300
200
2,300
400
50
100
500
100
200
100
1,535.33
383.83
1, 535. 33
383.83
350
350
200
100
50
100
150
200
1,343.42
1,343.42
767.67
383.83
191.92
383.83
575.75
767.67
600
1,200
50
250
600
2,303.00
4,606.00
191.92
959.58
2,303.00
200
250
100
767.67
959. 58
383.83
250
400
100
959. 58
1,535.33
383. 83
2,686.83
383.83
767.67
3,070.67
1,129.50
767.67
8,828.17
1,535.33
191.92
303.83
1,919.17
383.83
567.67
383.83
1613
STOCK EXCHANGE PRACTICES
250,000 shares United States & Foreign Securities Corporation First Preferred
StocJc Allotment Certificates, Syndicate. Date offered, Oct. 12, 1924, checks
mailed to participants Dec. 21, 1924—Continued
Name of participant
OUT OF TOWN—continued
3 altimore—C ontinued
Gillet & Co.___
_
___
P. H. Goodwin & Co
John D. Howard & Co._
.
Birmingham: Marx & Co....
Greensboro: Atlantic Bank & Trust Co
_
Raleigh: Durfey & Marr
Wilmington: C. P. Bolles & Co._.
Washington: Henderson-Winder Co
Cleveland:
R. B. Keeler & Co
Otis & Co
Hosford, Harry W
Worthington Murfey & Co
Saunders Co., T. H
Murch Co., MaynardHStanley & Bissell
Collins Co., Philip H
Canfield & Co., G. B
Mid-Continent Sec. Co
Hord Curtiss & Co
W. K. Sadler & Co
Akron: Mayfield-Adams Co
Canton: United Security Co
—
Dayton: Thomas Ruttman
Toledo- Collin-Norton Co
Youngstown: Realty Guarantee & Trust Co.._
Pittsburgh:
J. H. Holmes & Co
Wells, Deane & Singer
Hill, Wright & Frew
__
Dinkey & Todd Co
Geo. C. Applegate
R. W. Evans & Co
Stout & Co_
___
!
Glover & MacGregor
_._
Peoples Savings & Trust Co
Zimmerman & Co
Finsthwait & Co_._
David R. Hill
Farrell: Colonial Trust Co
Erie: Chas. Messenkopf
_
Ambridge: Ambridge Savings & Trust Co
Altoona: Calahan & Co
Charleston: Kanawha Banking & Trust Co
Jamestown: Western Reserve Securities Corporation...
Warren:
C. Q. Calderwood & Co
E. H. Lampe__
_
Berkeley, Calif.: Security Bond & Finance Co
_•_.
Los Angeles:
G. Brashears & Co
Citizens National Co
A. H. Frank & Co.
_
Hunter, Dulin & Co
Howard G. Rath Co
Stevens, Page & Sterling
Oakland:
J. F. Hassler
Waite H. Stephenson & Co
Pasadena: Andrew W. Stewart & Co
_
San Diego:
Arthur Dewar__
R. K. Williams
• San Francisco:
Anglo California Tr. Co
.
Anglo-London-Paris Co
Bancitaly Corporation
J. Barth & Co
—
Bond & Goodwin & Tucker.
Bradford, Kimball & Co
,.
F. M. Brown & Co
Geo. H. Burr, Conrad & Broom
„
Carstens & Earles, Inc
Wm. Cavalier & Co
Paul W. De Fremery
_
A. H. Frank & Co
Profit
irncipa~ and/or comtion
mission
Shares
200
500
200
350
150
100
200
50
$767.67
1,919.17
767.67
1,343.42
575.75
383.83
767,67
191.92
100
250
750
250
500
150
250
200
100
4,000
400
300
100
750
50
500
50
183.83
959.58
2,878.75
• 959.58
1,919.17
575.75
959. 58
767. 67
383. 83
15,353.33
1,535. 33
1,151. 50
383. 83
2,878. 75
191.92
1,919.17
91.92
900
600
900
2,400
250
400
151
200
1,800
150
150
130
50
150
20
50
500
100
3,454.50
2,103. 00
3,454.50
9, 212.01
959. 58
1,435.33
575. 75
767. 67
6,909.00
575. 75
575.75
498.98
191.92
575. 75
76.77
191.92
1,919.17
383.83
200
400
50
767.67
1,535.33
191.92
200
100
150
100
400
400
767.67
383.83
575.75
383.83
1,535.33
1,535 33
50
100
100
191.92
383.83
383.83
250
50
959.58
191.92
500
919.17
3,838.33
1,919.17
383.83
3,838.33
383.83
$383.83
1,000
500
100
1,000
100
100
200
100
200
100
100
767.67
183.83
767.67
383.83
383.83
1614
STOCK EXCHANGE PRACTICES
250,000 shares United States & Foreign Securities Corporation First Preferred
Stock Allotment Certificates, Syndicate. Date offered, Oct. 21, 1924, checks
mailed to participants Dec. 21, 1924—Continued
Name of participant
OUT OF TOWN—continued
San Francisco—Continued
Geary, Meigs & Co
_
E. T. Harper & Co
±
_
Lieb, Keyston & Co
M. P. Lilienthal Co
__
Peirce, Fair & Co__
__
Edward Pollitz & Co
George D. Roberts & Co
Schwabacher & Co
Shingle, Brown & Co
Strassburger & Co
_
Chas. Sutro_-._
San Jose: Lewis Miller Co
Santa Barbara: Paul Bullis & Co___r
Colorado Springs, Colo.: Hazelhurst, Flannigan & Co.
Denver: Calvin Bullock
_
Chicago, 111.:
W. S. Aagard & Co
^
Ames, Emerich & Co
Alfred L. Baker & Co
_
Bard, Eseh & Co..
_
A. G. Becker & Co
_.
Belding, Boehmer & Co
Katherine C. Bermingham
_
_
__
Brokaw & Co
_
PaulBuhlig
_
Carman, Fox & Snider
Ralph Chapman & Co
J. L. Cooke & Co
,
F. A. Cuscaden
_
Dangler, Lapham & Co__
Paul H. Davis & Co
Dean, Onativia & Co
_
_
Eastern Corporation
C. E. Fauntleroy & Co
L. B. Ferguson & Co
Beulah R. Fiske
_
_
Folds, Buck & Co., Inc
Walter Freeman & Co
Ralph A. Bard
___
_
H. T. Holz & Co.
Hord, Fitzsimmons & Co
Howe, Quisenberry & Co
Lewis, Owens & Co
Merrill, Lynch & Co
Mitchell, Hutchins & Co
National Repub. Securities Co
Paine, Webber & Co
C. L. Schmidt & Co
Shapker, Stuart & Co
._.
Standard Trust & Savings Bank
L. Montefiore Stein
_
_
_
Stein Bros. Paige & Co
_
—
Averill, Tilden & Co—
Jacksonville: Dunlap, Russell & Co
Peoria: The Eugene Osborn Co
Springfield: Matheny, Dixon & Co
LaPorte, Ind.: H. W. Fox
.._
_._.
Ashland, Ky.: Ashland National Co
Lexington: Security Trust Co
Louisville:
Block, Fetter & Trost
_
__.
J. J. B. Hilliard & Son
W. L. Lyons & Co
_.
James C. Willson & Co
New Orleans, La.: Watson, Williams &Co
Grand Rapids, Mich.: Grand Rapids Trust Co
Duluth, Minn.:
Edward F. Chapin & Co
Duluth National Bank.
_
Stanley Yonce
___
_
Do
_
_
Philip L. Ray & Co
_
Minneapolis:
Gardner, Osburn & Co
Lane, Piper & Jaffray
Thayer-Beebe & Co
Profit
Participa- and/or
comtion
mission
Shares
800
150
100
50
500
100
100
200
100
250
100
150
100
50
100
$3,070.67
575.75
383.83
191.92
1,719.17
383.83
383.83
767.67
383.83
959. 58.
383.83
575. 75
383.83
191.92
383.85
400
1,000
1,000
500
2,500
300
500
2,000
100
200
100
100
20
100
100
100
250
200
200
500
750
200
50
750
150
750
150
750
2,500
1,000
100
250
250
200
100
100
100
50
100
150
150
50
150
1,435.33
3,838.3a
3,838.33
1,919.17
9,595.83
1,151. 50
1,919.17
7,676.67
383.83
767.67
383.83
383.83
76.77
283.83
333.83
383.83
959. 58
767.67
767.67
1,919.17
2,878.75
767. 67
191.92
2,918.75
575.75
2,878.75
575.75
2,778.75
9, 515. 83
3,838.33
383.83
959. 58
959.58
767. 67
383.83
383.83
383.83
191.92
383.83
275. 75
575. 75
191. 92
575. 75
150
350
250
500
100
50
575. 75
1,343.42
959. 58
1,919.17 *
383.83
191.92
150
50
100
300
100
575.75
191.92
383.83
1,151.50
383.83
50
750
100
391.92
2,878. 75
1615
STOCK EXCHANGE PRACTICES
250,000 shares United States & Foreign Beowities Corporation First Preferred
Stock Allotment Certificates, SynMcate. Date offered, Oct. 21, 1924, checks
mailed to participants Dec. 21, 1924—Continued
Name of participant
OUT OF TOWN—continued
St. Paul:
Xalman, Gates, White & Co
_.
Grubbs, Booraem & Co
Chas. H. F. Smith & Son
St. Louis, Mo.
Walker Hill, Jr. & Co
John R. Longmire
Potter, Kauffman & Co
___
Reinholdt & Co___
Smith, Moore & Co
Mark C. Steinberg & Co
Stix & Co
Chattanooga, Tenn.: First Trust & Savings Bank
Nashville:
American National Co
_
J. W. Jakes & Co
_
Joe B. Palmer & Co
_
_
Chas. Belson
___
Appleton, Wis.: First Trust Co
_
.._
Green Bay: Peoples Savings & Trust Co
Milwaukee:
Dahindan-Schmitz-Platner Co
First Wisconsin Co
_
Partridge-Patmythes Co
_
___
Second Ward Securities Co
_
R. H. Williams Co_
Neenah: The E. J. Lachmann Co
_
Boston, Mass.:
Blodget & Co
Coburn, Kittredge & Co
Collins, Spalding & Co
1
A. B. Conant & Co
Curtis & Sanger
Philip S. Davis & Co
Dowling, Swain & Shea, Inc
G. A. Fernald Co
_
_
Flint, Wellington & Co
___i._._
—
Long & Nash
__
Minot, Kendall & Co
_
_
Eugene F. O'Brien & Co
Parkinson & Burr
-.
Pearson, Erhard & Co.
Putnam & Storer__
Wm. A. Russell & Bro
Stone & Webster
Townsend, Anthony & Tyson
B. F. White & Co
Whitney & Elwell
Waterbury: R. F. Griggs Co
Providence:
Davis & Davis
Hutchinson & Co
Stephen E. Hopkins
C. A. Kilvert & Co
Richard S. Moore & Co
Pawtucket:
H. H. Brooks
Homer Gray___
_
Hartford: Tripp & Andrews
New Haven:
R. H. Hasset & Co
1 Chas. W. Scranton & Co
f £ Winslow, Day & Stoddard
Bridgeport:
Hincks Bros. & Co
C. H. Gilman & Co
—E. B. Merritt & Co
Portland: Porter, Erswell & Co.
—
Springfield: John Torrey Hawkins
Philadelphia:
Janney & Co
_
Biddle & Henry
Elkins, Morris & Co
—
West & Co
_
Harrison & Co
Harper & Turner
Fitch, Crossman & Co
-..
Profit
Participa- and/or
comtion
mission
Shares
100
150
150
$383.83
575. 75
575.75
100
200
200
100
1,000
350
350
50
383.83
767.67
767.67
383.83
4.338.33
1,343.42
1,343.42
191. 92
150
50
300
50
50
50
575.75
191.92
1,151.50
191.92
191.92
191.92
50
400
50
400
400
100
191.92
1, 535.33
191. 92
1,535. 33
1, 535. 33
383.83
200
500
200
300
500
75
200
750
300
300
200
600
2,200
900
200
500.
750
200
200
400
250
767.67
1,919.17
767.67
1,151. 50
1,919.17
287.88
767.67
2,878.75
1,151.50
1,151. 50
767.67
2, 303. 00
8.444.34
3,454.50
767.67
1,919.17
2,878.75
767. 67
767. 67
1, 535. 33
959. 58
200
350
75
500
450
767. 67
1, 343.42
287.88
1,919.17
1, 727.25
300
25
450
1,151.50
95.96
1,727.25
150
300
500
575.75
1,051.50
1,919.17
200
75
300
200
200
767.67
287.88
1,151.50
767.67
767.67
3,500
1,700
400
500
700
250
1,750
13,434.17
6.525.16
1,535.33
1.919.17
2, 686.83
959.58
6,697.08
1616
STOCK EXCHANGE PRACTICES
250,000 shares United States & Foreign Securities Corporation First Preferred
Stock Allotment Certificates, Syndicate. Date offered, Oct. 21, 1924, checks
mailed to participants Dec. 21, 1924—Continued
Name of participant
OUT OF TOWN—continued
Sam'l McCreery & Co
T.
Wister, Carter & Co
Frazier & Co
Nixon & Co., I n c .
Wm. G. Hopper & Co
Martin & Co
Paul & Co-__
Cadbury, Ellis & Haines
Lewis & Snyder
_
_
Reed A. Morgan & Co.
Rufus Waples & Co
Edw. C. Rose & Co
Stroud & Co..
_
M. F. Middleton & Co., Jr
Kennedy & Co
_
Wheeler & Co...
F. P. Ristine & Co
Wm. Marriott Canby
Parrish & Co_—
J. H. Crouse & Co
Roland L. Taylor.
Donald J. Smith & Co
Lloyd & Palmer
Walter Stokes & Co
Reid, McClure & Co
Drayton, Pennington & Colket.
Chas. T. Brown
JohnH. Mason
H. B. Hagy.
Wm. Jennings
±
__
Equitable Trust Co
Harry Bacharach
Abm. Barker Mellor
Total.
Dilon, Read & Co., New York:
Retail
_
Boston
Philadelphia
Philadelphia special
Chicago
Chicago special,
Pittsburgh
Total-
Profit
Participa- and/or
comtion
mission
Shares
1,000
500
400
100
1,000
350
250
100
250
100
100
100
1,800
100
50
100
100
100
50
250
1,000
100
100
150
100
250
100
150
250
100
1,500
400
100
1,919.17
1,535.33
383.83;
3,838.33
1, 343.42
959. 5&
383.83
939.58
383.83
383.83383.83
6,909.00191.92
383.8a
383.83
191.92*
959. 5&
3,838.33
383.83
383.8a
575.75
383.85
959.58
383.8a
575.75
959.58
383.8a
5,757.50
1, 535.33
383.83
637,951.49
22,472
6,724
17,881
1,100
20,000
8,430
5,848
93,833.00
28,100.94
74,971.18
2, 022.16
82,566. 67
33,217.14
24,750. 55
250,000
977,533.13
STOCK EXCHANGE PEACTICES
WEDNESDAY, OCTOBER 4, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE,
ON BANKING AND CURRENCY,
Washington, D.G.
The subcommittee met, pursuant to adjournment on yesterday, at
10 o'clock a.m. in the caucus room of the Senate Office Building,
Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Glass, Adams (substitute
for Barkley and proxy for Costigan), JSTorbeck, Townsend, and
Couzens.
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver and David Saperstein, associate counsel to the committee; and
Frank J. Meehan, chief statistician to the committee; George S.
Franklin, Wallace P. Zachry, Warren Leslie, Walter G. Dunnington,
Clifton Murphy, John T. Cahill, and Bernhard Knollenberg, counsel
for Dillon, Read Co.; Root, Clark, Buckner & Ballantine, George
H. Murphy of counsel, counsel for United States & Foreign Securities Corporation.
The CHAIRMAN. The subcommittee will come to order. You may
proceed, Mr. Pecora.
TESTIMONY BESUMED OF CLARENCE DILLON, OF DILLON, BEAD
&C0.
Mr. PECORA. Mr. Dillon, if you would like, you might come up a
little closer toward this end of the table.
Mr. DILLON. I should be glad to do so because by reason of the
unusual use of my voice on yesterday I am a little hoarse this
morning.
Mr. PECORA. All right. Did you have something you wanted to
say before we began with the hearing?
Mr. DILLON. Here arc some charts that were not physically attached to committee exhibit no. 2-A that we handed in on yesterday.
They were loose, and if I might hand them in now I should be glad
to do so. They are just charts referred to in that exhibit.
Mr. PECORA. All right. Let me see them.
Mr. DILLON. They are simply in connection with that exhibit, in
regard to the security companies operations. They show the fluctuations in the stock-exchange operations.
Mr. PECORA. Isn't that a fact made clear or alluded to in the
textual part of your statement that was offered to the subcommittee
on yesterday ?
Mr. DILLON. That is true, but that statement refers to the charts.
1617
1618
STOCK EXCHANGE PRACTICES
Mr. PECORA. It will be somewhat difficult to reproduce these graphs
or charts in the printed record. And there is no question being
raised as to the manner of operation of the portfolio of the investment trusts. So this would simply be, perhaps, a bit superfluous and
unnecessary and would encumber the record, unless there is some
special point you want to make with them. These charts are numerous, some 14 or 16 of them. You could tell the subcommittee
through the medium of your oral testimony the salient features if
you wanted to demonstrate them.
Mr. DILLON. There are no salient features, but there are certain
figures in that statement and reference is made in the statement to the
charts. There is nothing else.
The CHAIRMAN. YOU might say for the record orally what the
charts show.
Mr. DILLON. We are perfectly willing to drop that matter if you
prefer.
Mr. PECORA. I will look over these charts during the recess, and
perhaps I can bring out the important features that you want
brought out, by questions propounded to you.
Mr. DILLON. They only show the changes in stock market prices.
The management of the investment trust thinks there may be some
advantage to them to have them in the record rather than just the
averages.
The CHAIRMAN. It is very difficult for the Government Printing
Office to reproduce these graphs or charts.
Mr. DILLON. Well, we are perfectly willing to have you handle
them in any manner you like.
Mr. PECORA. I will look them over during the recess.
Mr. DILLON. All right.
Mr. PECORA. NOW, Mr. Dillon, in offering to the public for subscription the 250,000 shares of the first preferred stock of United
States & Foreign Securities Corporation, back in 1924: Who prepared or who caused to be prepared the circular or prospectus which
accompanied that public offering.
Mr. DILLON. That was prepared by Dillon, Eead & Co. No; I
am wrong about that. That was prepared by the security company, but Dillon, Read & Co. organized the security company.
Mr. PECORA. Which member was it who prepared it? In other
words, was it prepared by a member of the personnel of Dillon, Eead
& Co.
Mr. DILLON. May I ask for the details? I do not remember that
for it was nine years ago.
Mr. PECORA. All right.
Mr. DILLON. They will look that up and see if we have any records to show it. I do not think they are prepared by any one person.
Mr. PECORA. TO what extent was circulation given in connection
with this offer to the investing public of this prospectus or advertisement ?
Mr. DILLON. The advertisement was made in the newspaper. I
do not know which one, the New York Times, and
Mr. PECORA. The prospectus?
Mr. DILLON. The prospectus was used I think as prospectuses are
usually used.
STOCK EXCHANGE PRACTICES
1619
Mr. PECORA. Among whom were copies of the prospectus distributed?
Mr. DILLON. I shall have to inquire.
Mr. PECORA. All fight.
Mr. DILLON (after inquiring of associate). We have no record
of that. I .should say that they were distributed to that syndicate.
Mr. PECORA. That is, to the participants in the selling syndicate?
Mr. DILLON. I should assume that is so.
Mr. PECORA. And not distributed to the general public?
Mr. DILLON. By us, not to, the general public, no; excepting the
people that bought stock. They saw the circular.
Mr. PECORA. HOW can you say that the people who bought the
stock saw the circulars?
Mr. DILLON. Well, I would naturally assume that.
Mr. PECORA. If the circulars as printed by Dillon, Eead & Co. were
sent to the dealers, the 300 or more dealers who composed the selling
syndicate ?
Mr. DILLON. I assume that they used the circulars to sell the
stocks.
Mr. PECORA. YOU mean that they caused reprints to be made of the
circulars for distribution among their clients and customers ?
Mr. DILLON. That I don't know.
Mr. PECORA. That is what I am trying to get at now, Mr. Dillon,
what the general routine is by which these offerings are made to the
public.
Mr. DILLON (after conferring with associates). Mr. Pecora, I do
not believe that there is a reprint. I think as a general rule the
managers print a lot of these circulars and distribute them.
Mr. PECORA. TO the selling syndicate, to the dealers ?
Mr. DILLON. Yes.
Mr. PECORA. DO you
understand that to be the general routine or
custom by which these offerings are made to the public ?
Mr. DILLON. That is our general routine and custom.
Mr. PECORA. Does that correspond with the routine and custom
adopted by other investment bankers to your knowledge?
Mr. DILLON. AS far as I know; yes.
The CHAIRMAN. Was this advertisement published anywhere else
except in New York —New York Times, for instance? Does it go to
the other parts of the country?
Mr. DILLON. I should think so, Senator. I will inquire as to where
this particular one was. I think it was published in the principal
cities, like Chicago, and so forth.
Mr. PECORA. Published on more than one date?
Mr. DILLON. NO ; I should think the advertisement appears ,on one
day. It may have appeared on two days. Generally just once.
Sometimes it appears morning and evening and sometimes evening
and the following morning.
Mr. PECORA. DO you get any correspondence from prospective
purchasers based upon these published advertisements ?
Mr. DILLON (conferring with associate). Very rarely, they say.
Mr. PECORA. The advertisements and circulars are put out in the
name of Dillon, Read & Co., are they not?
Mr. DILLON. The circular; yes.
1620
STOCK EXCHANGE PRACTICES
Mr. PECORA. And the advertisement?
Mr/DILLON. The advertisement of that one.
Mr. PECORA. SO that if a prospective investor wanted to learn
something more about the security that you "are advertising and
offering, the only person with whom he could communicate directly
would be the dealer whose name appears on the circular or the
advertisement as making the offering, would it not ?
Mr. DILLON. N O ; on the circular I should think he would apply
to the man who was offering it to him, to the dealer who was offering
it. A person seeing an advertisement like that I should think would
not know a dealer and he would naturally apply to Dillon, Read & Co.
Mr. PECORA. From the fact that you had very little correspondMr. DILLON (interposing). As a rule, I should think a man would
be much more apt to apply to his own dealer or broker, even though
it was signed by Dillon, Read & Co.
Mr. PECORA. I S it fair to conclude from that that in making an
offering and distribution of a security of this kind or any other kind
where a selling syndicate is organized, formed, by the originating
group or issuer, that the actual retail sales are made to the public
through the medium of the selling syndicate or the members of the
selling syndicate?
Mr. DILLON. I do not quite follow the question, but I think I can
answer that in offering the security the sales are made through the
selling syndicate.
Mr. PECORA. And in this instance there has been introduced in
evidence the list of the participants in the selling syndicate, this list
of some three hundred or more dealers that was put in evidence
yesterday ?
Mr. DILLON. That is correct, the dealers, and in that list I think
there are probably others that are not dealers.
Mr. PECORA. Each one of those dealers, I presume, received a copy
of the circular or prospectus that was put in evidence here yesterday relating to this offering?
Mr. DILLON. I should assume so.
Mr. PECORA. Was the dealer given originally any other information concerning the issue that wa(s being offered ?
Mr. DILLON. That I don't know.
Mr. PECORA. What is the custom and practice in your house in
regard to that?
Mr. DILLON. It is to give them the circular and any additional
information that they may require or ask for.
Mr. PECORA. But the additional information is not given except
in response to questions or requests for such information coming
from the distributing dealers ?
Mr. DILLON. That is, information in excess of what we give them.
Additional information would only come at their request.
Mr. PECORA. When you organize a selling syndicate of the kind
that was organized in connection with this offering back in 1924, how
do you make up the membership of that selling syndicate ?
Mr. DILLON. That is made up by our syndicate department.
Mr. PECORA. By what process? What methods are used by them?
We want to get the machinery.
STOCK EXCHANGE PRACTICES
1621
Mr. DILLON. Yes. I am assuming this is the method because I am
not familiar with just how they do it, but I think they keep records of
dealers that we have done business with, and whenever we have a
syndicate to be formed they go over all records and offer participations to such dealers as in their judgment would be interested in that
particular security.
Mr. PECORA. And the issuing house or the originating syndicate or
group then determines the extent of participation that is given the
dealers who are invited to join the selling syndicate?
Mr. DILLON. Yes.
Mr. PECORA. Where a dealer declines to accept a participation
which has been offered him in one of these selling syndicates do you
continue to keep his name on your lists for future offerings?
Mr. DILLON. We do, Mr. Pecora. We allow a dealer to take what
he likes, and if he doesn't like it he says, " Well, that particular
security I don't like," or " I can't sell it," or " My market won't take
it." We then offer him the next one. If he again declines a similar
kind of security we probably realize that that kind of an issue he
cannot use, but we do not hold that in any way against that dealer.
Mr. PECORA. Does his name remain on your list of potential participants in other offerings ?
Mr. DILLON. I should think it would remain there unless he repeatedly declined and we felt he was out of business.
Mr. PECORA. DO you know what the general custom has been in
the investment banking field generally with regard to that?
Mr. DILLON. I don't know generally other than in our own business, but you do hear stories around that if a person does not take an
offering they are offered less the next time or else they are dropped
off, but I know of no instances of that.
Mr. PECORA. Have you heard such stories ?
Mr. DILLON. I have, sir.
Mr. PECORA. Over a period of years ?
Mr. DILLON. Yes, you hear that.
Mr. PECORA. DO you think that might be an instance of where
there is so much smoke there might be someflame?
Mr. DILLON. Possibly, but I don't know of any such instances
myself.
Mr. PECORA. Then the dealers who are invited to participate in
a selling group and do accept such invitation take the portion of
the offering that is allocated to them by the originating group ?
Mr. DILLON. Not always. Sometimes they ask for more and sometimes they take less.
Mr. PECORA. But as a rule they take the share that is allocated
to them ?
Mr. DILLON. They accept what they get.
Mr. PECORA. Yes.
Mr. DILLON. But very often they ask
Mr. PECORA. Yes; and they in turn
for more.
push the sale of those securities among their respective customers in their various communities?
Mr. DILLON. They endeavor to sell them to their customers, yes.
Mr. PECORA. Did you have much correspondence—when I say you,
of course I mean your firm—either with investors who purchased
1622
STOCK EXCHANGE PRACTICES
any of these first preferred shares in the United States & Foreign
Securities Corporation or with any of the dealers whose participation
in the selling syndicate you invited, with respect to this offering.?
Mr. DILLON, (after conferring with associates). Well, I could
not answer that without going back and looking up. I assume we
had such correspondence as one might have with an issue of this kind.
Mr. PECORA. AS a rule do you have much correspondence of
that sort in connection with a new offering?
Mr. DILLON, (after conferring with associates). I am trying to
find put what that practice is. We do have a certain amount of
correspondence with people from time to time, and they have questions to ask and want information.
Mr. PECORA. I assume that in the general operation of the business
ou have correspondence of that sort generally through the year;
ut what I am trying to get at is this: When you make an offering
of a new issue through the medium of organizing a selling syndicate
composed o$ dealers throughout tjhe country do you get many
requests either from the dealers or from prospective investors among
the public asking for more information concerning the issue that is
being offered than is contained in the prospectus or advertisement
which is published at the time of the offering ?
Mr. DILLON. I should think you would get some, but not a great
deal, that would be my guess, Mr. Pecora.
Mr. PECORA. NOW, from that fact is it a fair inference that the
eneral public buying the issue or subscribing to it is guided more
y advice or opinions expressed by the local dealer who might be a
participant in the selling syndicate?
Mr. DILLON. It would be hard for me to answer that categorically,,
but I should think that a local investor would have confidence in his
local dealer and would probably get such information as he wanted
from his local dealer, and if the local dealer didn't have it then he
would come to us for it.
Mr. PECORA. IS it your experience that these local dealers except
on rare occasions ask for additional information concerning an issue ?
Mr. DILLON. I think that—I would not know that definitely. (Addressing an associate.) Do they? We often, they tell me, do get
requests for additional information when it is a going business with
a record, and they ask for information that we might not have had
on the circular, but in a new company like this where there is no past
record we probably have less of that than we do in an issue of a
going concern.
Mr. PECORA. IS it fair then to infer that in putting out these issues,
distributing them among dealers, who in turn distribute to the public,
the dealers who are invited to participate in the selling syndicate
accept participation mainly because of their confidence in the issuing
house or the originating group?
Mr. DILLON. I think that is a fair assumption, I think that has a
considerable influence on the dealer.
Senator ADAMS. Mr. Dillon, in sending out offers, or rather per*
haps requests for offers, to your outside dealers, do you send tele-^
graphic inquiries or by mail generally ?
Mr. DILLON. We do both, Senator.
I
G
STOCK EXCHANGE PRACTICES
1623
Senator ADAMS. For instance, with big issues such as this, what
would be your practice, or what was your practice ?
Mr. DILLON. The practice is to send a long telegram with an outline of that relative information and then you follow that up by
mailing circulars and additional information.
Senator ADAMS. What do you do in the way of allowing time for
the local distributor to make up his mind to accept or reject your
offer?
Mr. DILLON. Sometimes he has very little time. We try to give
him as much time as we can.
Senator ADAMS. For instance, in an offer of this particular kind
how much time was given ?
Mr. DILLON. In this particular offer I should think he would have
had more time than he has in others, because in this we had probably
more time, as we were forming the company and the pressure was
not there. Again, when you are buying an issue of securities from
an outside company they do not like anything said about it until
the deal is consummated, because they do not want it rumored
that they are doing financing which they may not do. In those
oases you sometimes have tiken your commitment and you send your
telegrams out at once and want your answers right back.
Senator ADAMS. Really, the time limit is reasonably short; you do
not permit the dealer really to go out and find out whether he can
sell or make the sales, but he has to practically commit himself if he
cannot make a rather prompt sale ?
Mr. DILLON. They do, I think, see whether they can make sales.
I think that is their practice, probably. They do not have a great
deal of time, because securities in the market normally sell very fast,
that is the securities that we bring out. I mean we open our books in
the morning and they are sold during the day, so that a man does not
have a great deal of time. If an issue goes slowly then he has a
great deal of time.
Mr. PECORA. Those securities sell very fast principally because the
machinery that is employed to distribute and sell them is geared to
a high rate of speed ?
Mr. DILLON. I think there is some justification in that assumption.
When you use 360 dealers, for example, they do not have to take very
many shares each to absorb your issue.
Senator ADAMS. Mr. Pecora, I would not expect Mr. Dillpn to
acquiesce, but I gather frequently the impression that this is just a
last chance; this is the last thing; if you don't get right in you don't
get it.
Mr. PECORA. Mr. Dillon has answered some questions by me somewhat along that line suggesting some such thing, Senator Adams. I
asked him what the custom was with regard to extending invitations
to a dealer who has been invited to participate in one selling syndicate, if he has rejected that invitation whether he is invited to
participate in other offerings in the future.
Mr. DILLON. I think, Mr. Pecora, it would be desirable if you could
give more time. I should like to see more time given because I
should like to feel that the dealers around the country were more
thoroughly familiar with their securities.
1624
STOCK EXCHANGE PEACTICES
Senator ADAMS. But the speed with which the offerings are taken
up indicates that there is a rather high-class and expert salesmanship
at the issuing end ?
Mr. DILLON. YOU might say that; but I would say that the way
the business is done it is moved with great dispatch—the selling of it.
You offer a dealer over the telegraph wire a certain amount, and
you often say that the reply should be in by 12 o'clock noon the next
day. This man has so many shares or so many bonds available to
him until noon of the next day, and he must telegraph in by noon of
the next day if he wants them. Well, there is pressure there for this
man to answer, and it would be desirable if he could have more
time I should think, in many instances. Does that answer your
question, Senator?
Senator ADAMS. Yes.
Mr. PECORA. Unless a dealer who was invited to participate in a
selling syndicate asks for additional information does he get any
more information than that which appears in the prospectus or circular which has been sent to him, or which appears in the advertisement corresponding to the prospectus which might be published in
his local paper ?
Mr. DILLON. I think that is the information he gets as a rule,
unless he requests more. Sometimes we send supplemental data on
the industry as a whole. We sometimes have booklets or things of
that kind.
The CHAIRMAN. Dp you have many instances, Mr. Dillon, where
these agents or participants agree to take a certain allotment and
then fall down on that allotment, fail to keep up the payments?
Do you have many instances of that kind?
Mr. DILLON. Very rarely, Senator, very rarely. Because we know,
from experience the people with whom we are dealing. We know
their records over a period of time. When we know it has occurred,
as it sometimes does, then those people are eliminated from the list.
We generally know the standing and character of the people in the
lists we use, so that it is very rare that any one does not carry
through.
Mr. PECORA. In putting out a new issue, Mr. Dillon, how many
groups are organized as a rule to effect the distribution to the public
of the issue ?
Mr. DILLON. That varies. In certain securities that have a wellknown market, that sell very readily, you probably form the purchase group and then allow a selling commission on the sale. For
securities where the risk is greater or the market not so well established or so certain you form intermediate groups. There would
be the purchase group
Mr. PECORA. That is called the original terms group?
Mr. DILLON. The original terms group, yes. Then you would
form what is generally called the banking group. They would take
a commitment from the original group. Then you form after that
the selling group, which in turn takes the commitment from the
banking group. You often give the same men interests in the different groups; not always in the same amounts. If a man has a
large financial responsibility but does not use as many bonds in the
ultimate distribution you might give him a larger interest in the
STOCK EXCHANGE PRACTICES
1625
banking group than you give him in the sellng group, and if it is the
other way you sometimes give him a larger interest in the selling
group than you give him in the banking group.
Mr. PECORA. IS it usual in such operations for the banking house
which organizes the original terms group to also have an interest
in the subsequent groups between themselves and the purchasing
public ?
Mr. DILLON. Yes; they practically always have. The originating
house would have an interest in the originating group and the banking group and the selling group.
Mr. PECORA. Yes; so that the originating house participates in
the commissions derived by each group in the process of selling to
the general public?
Mr. DILLON. By performing service in each group.
Mr. PECORA. They act virtually as managers of the various groups,
do they not ?
Mr. DILLON. They usually act as the managers of the various
groups.
Mr. PECORA. Yes. Now, in passing the issue on from group to
group the price is stepped up, is it not?
Mr. DILLON. Yes.
Mr. PECORA. And when it finally reaches the investing public they
pay the highest price ?
Mr. DILLON. That is correct.
Mr. PECORA. What is the necessity, Mr. Dillon, for organizing so
many intermediate groups between the originating group and the
actual sale to the public, with all these different commissions that
accrue, arise, and obtain?
Mr. DILLON. Suppose that we are the originating group and we
take a large commitment. There is time and uncertainty between
that commitment and the ultimate distribution. We want to spread
that risk. We want others to come in and share that responsibility
with us. And we want to form that group quickly. So we go to
people whom we know, people that we are in close contact with, and
we say, " Here, we have this commitment. We will take a half a
point, a quarter of a point, an eighth of a point ", as the case may be,
" for originating profit, and now we are inviting you to come in and
share the financial responsibility in the interim between this time and
the time that we form our selling group or actually make the distribution ", and we pay them for taking that commitment, that payment depends upon the risk that they are taking. If it is something that moves more readily, we give them a smaller commission.
If it is something where their risk is greater, we give them a larger
commission. Does that answer your question ?
Mr. PECORA. I t does. If there is anything more you want to say
on that line, go ahead.
Mr. DILLON. NO. I was simply elaborating on that line, because
the size of the issues that a firm negotiates often exceeds the capital,
for example, of that firm, and in ordinary business caution they
would naturally want to form a group again to share that financial
responsibility in the interim when they are forming the selling
group.
1626
STOCK EXCHANGE PRACTICES
Mr. PECORA. When a banker underwrites an issue with a view of
passing it on either through his own immediate facilities or through
the organization of intermediate groups to the investing public, is
it the custom for the banker to actually underwrite the issue, that
is to say, obligate himself by contract to take the issue himself
until he has satisfied himself reasonably at least, that he can place
it in .the market or pass it on to the investing public ?
Mr. DILLON. If he did take such a commitment without knowing
that I should think that he was not a prudent banker.
Mr. PECORA. In other words, he would not be a prudent banker
if he took any more risk than he actually had to ?
Mr. DILLON. Yes; I think that is right.
Mr. PECORA. And he seeks to minimize the risk by making sure, or
making as sure as he possibly can in advance of his making his commitments that he can place the issue or dispose of it to the investing
public ?
Mr. DILLON. TO be just as sure as he possibly can under the circumstances. You are not at liberty often to go out and make a very
general canvass, because the borrower does not like that. If you
did go ahead and do that you would hurt his credit or his standing.
So you are often compelled to take commitments before you know,
as much as you would like to know
.
Mr. PECORA. A banker avoids that as much as possible ?
Mr. DILLON. AS much as possible. And that is the reason that
you keep your organization as well in touch with the markets as you
can, so that you can minimize that risk.
Mr. PECORA. NOW, of course, when the stage is reached where a
banker has underwritten an issue and obligated himself legally to
take the issue, the terms are fully agreed upon, of course?
Mr. DILLON. At the time he takes his commitment ?
Mr. PECORA. Yes.
Mr. DILLON. I should think the terms would be to his satisfaction.
Mr. PECORA. Yes. Are fully agreed upon?
Mr. DILLON. Well, he must be satisfied with the terms as far as
they have gone or the issue would not be taken.
Mr. PECORA. Yes. In other words, before he obligates himself he
knows what the spread is going to be—that has been fixed and determined by negotiation with the issuer—does he not?
Mr. DILLON. Well, generally speaking, yes.
Mr. PECORA. Yes?
Mr. DILLON. But you might say to a borrower whom you have
considered in high standing, " Yes, I will take the issue. Yes, I will
do that." Now, that is a commitment on your part, though you
might yet not have agreed definitely on just the price or on the exact
terms, that might happen.
Senator ADAMS. Mr. Dillon, in the case of issues such as your investment trusts of course you had no financial obligation, no commitment, because you were putting out an issue, you yourself were
originating. That is, there was no obligation on your part, so that
so far as they were commitments, you passed them out without
making them yourselves?
Mr. DILLON. NO ; that would not be correct, Senator, because if we
sold one share of stock, or if any dealer sold one share of stock to any
STOCK EXCHANGE PRACTICES
1627
one, that is sold on a prospectus with the complete set-up, and we are
committed to go through with that set-up.
Senator ADAMS. That is, you felt when you put out the $25,000,000
issue that you were obligated if you sold one share to take the
remainder yourselves?
Mr. DILLON. Oh certainly, certainly. You see we paid in the
junior money. Then if you offer the senior security you must go
through with it whether you sell it all or not. I mean, suppose you
sold part of that; you could not say, "Now, we are not going to take
all of this ", because you have represented to the men to whom you
have sold the part what the ultimate set-up of the capitalization is
going to be.
Senator ADAMS. The obligation then arose by reason of representation, implied or expressed, to those who were purchasers of part of
the issue ?
Mr. DILLON. N O ; we had contractual obligations with the securities company. The letters were read in the record yesterday.
Senator ADAMS. That is true, but, of course, the security company
was your company and entirely subject
Mr. DILLON (interposing). You mean might have been dissolved
or something ?
Senator ADAMS. Yes.
Mr. DILLON. Well, I suppose a thing like that might have been
possible if there had been no sales of securities; yes.
Mr. PECORA. Let us take a concrete case if we can, Mr. Dillon, with
a view of illustrating the routine employed by an underwriting
banker. Let us assume, for instance, that a foreign government
wants a loan. A banker loaning on that negotiates with the government to make the loan to it. The government agrees to issue
its bonds, we will say, long term bonds, for the amount of the
loan. Now, before the banker agrees to underwrite that issue he
knows as a rule, does he not, that he can place those bonds in his
market through the medium of bankers' groups and selling syndicates composed of dealers ?
Mr. DILLON. He may not know it actually, but certainly in his
judgment he feels convinced that he can.
Mr. PECORA. Well, does he not as a rule obtain commitments from
these distributing dealers before he actually commits himself to
underwrite or to buy the bonds from the foreign government that is
issuing them ?
Mr. DILLON. Not necessarily from the distributing dealers, but I
should think a prudent banker would from the banking group.
Mr. PECORA. Well, from the banking group, and they, in turn,
may get commitments from the members of the distributing syndicate?
Mr. DILLON. Not necessarily, because the manager of the originating group is the manager of the banking group, and always forms
the selling syndicate, and as a rule the banking group is formed before
the selling syndicate is formed.
Mr. PECORA. Well, conceivably no banker would underwrite a
foreign issue unless he felt quite certain that he could sell it in his
market?
175541—33—PT 4
7
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STOCK EXCHANGE PRACTICES
Mr. DILLON. I should not think he would underwrite any issue
unless he felt that, sir.
Mr. PECORA. All right. Now in many of these issues the underwriting banker gets a spread varying from 4 to 8 or 9 points ?
Mr. DILLON. From the price that you pay to the price that it goes
ultimately to the public?
Mr. PECORA. Yes.
Mr. DILLON. That varies I should think, in the range you suggest.
Mr. PECORA. From 4 to 8 or 9 points?
Mr. DILLON. Well, I think 8 or 9 points is usual. I t occurs, when
a security is new to the market probably. I should think as a rule
it is not as high as that.
Senator ADAMS. May I ask a question? The more risk that the
investor takes the larger the commission that the distributor takes,
I gather?
Mr. DILLON. I should think the commission is commensurate with
the risk.
Senator ADAMS. But it is the risk of the ultimate investor; the
ultimate investor takes the risk and the banker or distributor takes
a larger commission in the instance where the investor takes a larger
risk?
Mr. DILLON. Senator, the banker does not get the commission on
account of the risk or goodness of the loan. He gets his commission
on account of the risk in the selling of the loan. He may be stuck
with it and may not be able to sell it, and that is the basis for his
commission.
Senator ADAMS. But the fact is that the investor pays a larger
spread on the less secure investment that he makes than upon the
more secure investment?
Mr. DILLON. 1 should not say that. I do not think the spread
Senator ADAMS. Your 8 or 9 point spread is in the security which
is unseasoned?
Mr. DILLON. Yes; but it is, Senator, because of the uncertainty of
your being able to sell the security. I t is the risk you take in the
marketing. Not necessarily in the goodness of the security.
Senator ADAMS. But the uncertainty of the sale depends upon the
quality of the security itself, does it not?
Mr. DILLON. I did not hear what you said, Senator.
Senator ADAMS. I said that the question or the doubt, in greater
or less degree, which may exist as to the salability depends certainly
in part upon the quality of the security as having been seasoned or
being new, or having elements of hazard involved in it ?
Mr. DILLON. But the spread is not made on that basis. The spread
that you take is not on the risk of the goodness of the loan. Your
spread is based upon the work, upon the uncertainty, as to the ability
to sell it. Because if you had any question of the goodness of the
loan you would not make it at all; I mean a reputable banker would
not.
Senator ADAMS. There is a gradation in securities; some are
better than others, necessarily.
Mr. DILLON. Oh, yes; certainly.
Senator ADAMS. NOW, is it not true that there is a bigger spread
in those that are of the lower grade than those that are of the
higher grade when they are distributed ?
STOCK EXCHANGE PRACTICES
1629
Mr. DILLON. The difference in spread is in the salability rather
than in the goodness of the security.
Senator ADAMS. Yes; but there actually is the wider spread in the
less attractive and less desirable security?
Mr. DILLON. I do not like to keep saying it, but that is not the way
we make the spread.
Senator ADAMS. I know it is not the way you make the spread,
but that is the way it happens to be when it comes to the ultimate
purchaser ?
Mr. DILLON. NO, sir; because sometimes the securities sold with
the smallest spread prove to be the unhappiest investment.
Mr. PECORA. They are the exception rather than the rule, are they
not?
Mr. DILLON. I would not like to be specific, but I think some of
the greatest losses we have had in securities in the past few years
have been in what we call the high-grade securities having small
spread. There have been many disappointing investments in them.
Mr. PECORA. HOW is the amount of spread determined in the first
instance? That is to say, what factors are taken into consideration
by the negotiating parties in fixing the spread ?
Mr. DILLON. That is what the Senator is asking.
Senator ADAMS. Yes.
Mr. PECORA. Yes.
Mr. DILLON. It is
the risk we take in the selling of the security. We are buying that security. The risk we take in being
left with those securities on our hands, our inability to sell them,
that is how we fix our spread.
Senator ADAMS. We had a gentleman before use here earlier in
the year who illustrated some of his answers by reference to the
medical profession. I wonder if the same illustration would apply
here ? You know the surgeon is disposed to charge the patient more
because of the greater seriousness of the operation; that is, the more
hazard the patient takes the larger the surgeon's fee.
Mr. PECORA. IS that a fair analogy?
Mr. DILLON. NO; I should not say so, because if a banker were
conscious that there was a risk in the goodness of the security he was
selling to the ultimate investor, I do not think that banker ought to
sell that security, no matter what his spread might be.
Senator ADAMS. Of course, we are talking about the ones he is
willing to sell.
Mr. DILLON. If he thinks they are good, his spread is on the
risk he takes in making sales.
Senator ADAMS. But does not this follow, that there are other
houses that will sell less desirable securities, what we might call
second or third-grade securities, and you run into wider spreads in
those cases?
Mr. DILLON. I am glad you asked me that, Senator. Those of us
that deal in the more seasoned securities, those of us that deal in
securities of the higher qualities, as you might call it, are apt to be a
little smug; we are apt to think that, taking our total issues, our record of mistakes is very small, and we take that as a virtue unto ourselves. As a matter of fact, I am not at all sure that the courageous
financier who raises money for industries on securities such as we do
not buy, and who raises money for industries where there are real
1630
STOCK EXCHANGE PRACTICES
risks—I am not sure that he is not rendering just as great, if not a
greater, service to the community and to his country as the smug,
conservative bankers like ourselves.
Take, for example, the automobile industry in your lifetime and
in mine. We would have been " holier than thou " and would have
said, " We don't sell that; that is a new industry. It is too speculative. We do not handle those securities." If you had relied on
houses like ourselves you probably would not have had the automobile industry in this country. We would not have risked it, and
we would have taken it upon ourselves as a virtue. There were
men who would go out and take those risks and ask the public to give
their money to a new industry that was risky, with the result that
we do have a great industry grown up in this country which today,
I think, is probably our greatest industry, and which with its affiliated industries, gives employment to many, many people. And we,
the smug, conservative bankers, now are very pleased to handle
automobile securities.
Mr. PECORA. Once that safety has been established and the experimental stage passed?
Mr. DILLON. Exactly We must not, in fairness, criticize the
man who took the initial risks—although probably many went wrong.
He is rendering a great service. The one thing we must be sure of
is that when that security is offered, its nature is clearly stated, the
risk in it, the fact that the investor may have a greater reward the
greater the risk of loss. I, for one, am not willing to put on a lower
plane than ourselves that financier who does take those risks, provided he states frankly and openly to the investors the nature of the
investment, and I am not sure he is not rendering a greater national
service than the smug fellows who sell the city bonds, first mortgage
railroad bonds, and so forth.
Senator ADAMS. All those bonds on which there are no defaults?
Mr. DILLON. That is right. I do not think that is such a terrible
word, Senator, because if we did not take risks we would not have
had the country that we have. If there was not somebody who
would take a risk, we should not have the automobile industry. We
today are a bit smug. We would not handle airplane financing.
We might not handle radio financing. I t is a new industry; but if
every one took that attitude we should have no progress.
Senator ADAMS. I am thinking about a fellow like Senator Townsend. He is the fellow that puts the money up and buys the security—rather than the fellow that persuades him to do it. That goes
back to my illustration of the surgeon again. The banker is not
supposed to be operated on.
Mr. DILLON. That is another thing. In the selling of securities
by a house like ours, a large percentage of our sales do not go to individuals. The great bulk of them go to institutions who are professional investors, who have departments and organizations to pass
on investments—insurance companies, savings banks and institutions
of that nature. They are the large buyers of securities. They make
a research as they go into our indentures; they go very thoroughly
into the matter. That is the bulk of the buyers of our securities, I
should say—people of that nature. We are apt to think of the great
buyers as individual investors. The great buyers of securities are
STOCK EXCHANGE PRACTICES
1631
the institutions who are professional buyers. They get voluminous
information on all issues. They even go over a lot of the work we
have done ourselves.
Senator ADAMS. It is a little bit surprising, is it not, that very
frequently in recent years these careful buyers have made mistakes
and have accumulated bonds that are now in default ?
Mr. DILLON. I think they have gotten into the habit of relying on
the larger banks; and I think some of the larger banks have become
sellers of bonds rather than just advisers to the country banks.
Senator ADAMS. The country banks are fully advised of that. I
happen to be interested in a country bank.
Mr. DILLON. That is right. I think that was probably one of the
things that may have affected the advice that your correspondents
may have given you—the mere fact that they may have had an affiliate selling securities. I think it would have been a help to you if there
had been a statute requiring a bank each year to publish in detail
its portfolio of investments, rather than just saying, " bonds ", so
much, in the statement. If you had to publish the detail of what
your bonds were, just that mere fact probably would have made your
organization a bit more cautious, a bit more careful in scrutinizing
the portfolio. Don't you think so ?
Senator ADAMS. Of course, we have all accumulated a lot of experience. Unfortunately, my view of experience is that it is something that you get when it is too late to do you any good.
Mr. DILLON. But let us try to use it not to do the same thing again.
It is in that spiritSenator ADAMS. A lot of us have taken the pledge.
Mr. DILLON (continuing). It is in that spirit that I am very happy
to be here to answer your questions and to be of any help I can to see
that we do not make the same mistakes twice. We have probably
made as many as others have. I do not know anyone who has not
made any.
Mr. PECORA. With regard to the subject about which you last expressed your views, the advisability or desirability of banks publishing at regular intervals the contents of their portfolios, do you know
of that having been done at any time in the past by any bank ?
Mr. DILLON. NO ; I do not.
Senator ADAMS. Insurance companies do that, do they
Senator TOWNSEND. Some do; not all of them.
Mr. DILLON (after conferring with associates). I am
not?
informed
that the United States Trust Co. in New York does do that, but of
their own initiative. They are the only ones that I know of.
Mr. PECORA. DO you think that such a practice, if generally
adopted by banks, would be helpful ?
Mr. DILLON. I do.
Mr. PECORA. Because
it would serve to make banks and all others
more careful and circumspect in their investments ?
Mr. DILLON. I do. I think whoever is running that investment
account, naturally if he has to come up with this portfolio to his
president he would be a little more careful. If he has to go before
his board he is still more conscious; and if he has to go before
the public he naturally would use greater care, even though he thinks
1632
STOCK EXCHANGE PRACTICES
he is using the greatest of care all the time. I think that is the
ordinary human reaction.
Senator ADAMS. In your investment trust did you publish the
portfolio contents from time to time of the different trusts ?
Mr. DILLON. We do so fully, and have right from the start, Senator.
[After conferring with associates.] I am told that right in the
beginning we did not, but soon after that we did; and at the time
we did it there were certain suggestions that we, should not do it.
Mr. PECORA. Coming from whom?
Mr. DILLON. From various people; not only those interested in the
trust, but from outsiders.
Mr. PECORA. Can you give us an example?
Mr. DILLON. I can give you an example of the sort of things they
said; yes.
Mr. PECORA. All right.
Mr. DILLON. It was that if we published that portfolio it would
just lead to a lot of trouble and wrangling, because in 1 year we
might show we had stock of the X Y Bank or the X Y Company in
such and such amounts, and the next time we published our statement
it might show that the investment was materially reduced. Those
people said it would have a bad effect, because people would think,
" You are experts ", and if they saw you had gotten rid of a security
they held that that would reflect unfavorably on the company, and
we should have a lot of complaints and criticisms. As a matter of
fact, we did not have that experience except in rare instances.
Mr. PECORA. YOU think the sounder and safer policy from the
public standpoint is for full disclosure to be made from time to time
of investments contained in the portfolio, whether it be the portfolio of a bank or of an investment trust?
Mr. DILLON. I should think it would give the public the maximum of information. I think that is the way to reestablish confidence; and I think probably our entire profession, if I may call
it that, should feel that they should give the fullest information to the
public.
Mr. PECORA. When these suggestions, as you refer to them, were
made to you with respect to publication of your portfolio in your
reports to your stockholders, were they advanced to you with a view
of deterring your investment trust from making such a publication ?
Mr. DILLON. That might be the inference. They were certainly
advanced to us, that we should stop and reconsider
Mr. PECORA. Was it suggested that by your adopting that form of
procedure you were establishing a precedent that was regarded unfavorably by bankers?
Mr. DILLON. I should not want to say, by bankers; but we were
establishing a precedent that might not be a wise practice.
Mr. PECORA. Might not be wise for whom ?
Mr. DILLON. For the people who issued the statement, I should
think.
Mr. PECORA. Not that it might not be wise for the investing
public ?
Mr. DILLON. NO.
Mr. PECORA. AS a
matter of fact, your opinion seems to be, as I
have interpreted your words here, that such a thing is a wise and
beneficial thing for the enlightenment of the investing public?
STOCK EXCHANGE PRACTICES
Mr. DILLON. It is.
Mr. PECORA. Even
1633
though it might operate against the interests
of the banker?
Mr. DILLON. Personally I do not think it does operate against his
interests.
Mr. PECORA. But those were the suggestions made to you by
others ?
Mr. DILLON. That it might cause harm to the market in those
securities, if the public saw that you owned them 1 year and did
not own them the next.
Mr. PECORA. It has not been your experience in conection with the
publication of the portfolio of those investment trusts that those
things have happened?
Mr. DILLON. NO, sir; it has not. The result is that we have got a
large list of satisfied stockholders, because they do know everything
we do. They see a complete statement of our operations and a complete itemized list of our portfolio.
Mr. PECORA. HOW frequently do you make those reports to your
stockholders in the investment trust?
Mr. DILLON. I think that portfolio is published once annually.
I think the reports are made more often. The reports are semiannual, and the detailed portfolio annually. We are now considering giving the detailed portfolio quarterly, and we shall proceed to
do that, I think, from now on.
Mr. PECORA. While we are on that subject of making full disclosures of these facts to the stockholders, do you think that it would
be in the public interest for corporations generally whose securities
are distributed among the general public through listing and trading
on the stock exchanges to issue to their stockholders reports of as
complete a character as you have outlined here, at frequent intervals ?
Mr. DILLON. YOU understand I give a large part of my time to
those companies as well as to my firm. I am speaking now from the
point of view of those investment companies which are large investors.
There we often find that we cannot get sufficient of the right kind of
information to allow us to form an intelligent judgment on this, that,
or the other security. There are some securities that are even listed
on stock exchanges that are widely dealt in concerning which we are
unable to get the particular kind of information we want at the intervals that we would like to have it, in order to form a fair judgment.
Mr. PECORA. And you have sought such information as a large
stockholder in those corporations, have you?
Mr. DILLON (after conferring with associates). Yes. There are
specific instances where we have sought certain information, such as
the gross sales of a company, where they said they felt it was not
wise to give that out.
Senator ADAMS. There are certain large organizations in the
country that are so complicated and involved that no man has ever
felt that he knew the inside of the story, are there not ?
Mr. DILLON. We do not buy many of those securities.
Senator ADAMS. But I say, there are some of those on the market,
some stocks of that kind?
Mr. DILLON. Probably.
Senator ADAMS. YOU know that.
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STOCK EXCHANGE PRACTICES
Mr. DILLON. I have not devoted my attention to that kind particularly, Senator.
I think, Mr. Pecora, answering your question, that if corporations
were required to give much more regular, frequent, and more detailed
information, it would be highly desirable.
Mr. PECORA. More detailed information of what kind?
Mr. DILLON. Of every character. That would take some study,
to make up just the points.
Mr. PECORA. Just give us a comprehensive idea of what you have
in mind.
Mr. DILLON. I have in mind information of every nature—income
accounts broken down into such details that you can see and know
just where the income came from; gross sales in a way that you
would know where they were made, whether they were increasing—
every sort of information that you would have, practically, if you
were operating that company, if you were sitting in its management.
It would be a great help in forming your judgment. It would also
give you a chance to form a true picture of the value of that security.
You would not be so much affected by market quotations, by the
public reaction to this and to that if you always had complete information of recent date. If your information is 8 or 9 or 10 months'
old, you do not know what is going on; but if you can have that
information quarterly, or, certain parts of it even monthly, I think
it would be desirable.
Mr. PECORA. Desirable to the general public and for the public
interest ?
Mr. DILLON. Yes; to the investor.
Mr. PECORA. DO you think the dissemination of such information
at frequent intervals, like monthly, would give the general public
or that portion thereof which holds stock of corporations and whose
securities are listed on the public exchanges, a body of knowledge, a
mass of data, that would enable the investor to follow more accurately
and more in conformity with the actual facts the intransic value of
his investments ?
Mr. DILLON. I should think that the more information he had, and
the more regular the intervals, the better he would be able to form
that judgment.
My associates have just suggested that, of course, I do not mean
a chemical company should give out secret formulas. Of course, I
do not mean that.
Mr. PECORA. In the light of your experience, Mr. Dillon, would you
say that such a requirement imposed upon corporations whose securities are publicly listed would impose upon them any inconvenience
or hardship ?
Mr. DILLON. NO; I should not think it would. It might if you
required too detailed or too frequent information—monthly, for
example—but it certainly would not impose a hardship on them if it
was at fair intervals of time, because they should have that information for themselves, for their own guidance, and I see no reason why
it should not be given to the stockholders.
Mr. PECORA. A stockholder, by virtue of being a stockholder, is,
of course, a part owner of the corporation issuing the stock.
Mr. DILLON. That is correct.
STOCK EXCHANGE PRACTICES
1635
Mr. PECORA. And you think that the stockholders should have the
advantage of such information currently supplied to them at frequent
intervals.
Mr. DILLON. I do think that.
Mr. PECORA. What effect do you think that would have on market
quotations ?
Mr. DILLON. That is rather difficult to have an opinion on, but I
should certainly think it would tend to steady those quotations,
because if the investing public owning those securities had more
detailed knowledge of the operations of the company, its profits
and its progress, they would have fairer judgment themselves of
the value of that security, and I should think it would tend to prevent the violent fluctuations that we have in securities from time to
time. Whether it would prevent them I cannot say, but the tendency
I should think, would be in that direction.
Mr. PECORA. Would you say, as a matter of either observation or
experience, that these violent fluctuations in the stock market are
often the result of manipulation by pool operations ?
Mr. DILLON. I think that is a difficult thing to say. By " pool"
I suppose you mean a group of people buying and selling for profits,
or to affect the market.
Mr. PECORA.
Mr. DILLON.
Yes.
That is very difficult to say, because unless the market
is moving in the one direction or the other, it would be difficult, I
should think, for any group to affect it artificially. But if the
market is moving in one direction or another, I should think great
activity in one security probably might make it move out of line
with the market.
Mr. PECORA, And quotations might be stimulated up or down by the
operations of such a group.
Mr. DILLON. That is possible.
Mr. PECORA. Under existing conditions, so far as you know them,
is there any way by which the investor could ascertain whether or not
daily tradings in the stock of a corporation represent normal buying
and selling, in a free and open market, or whether they represent, in
part at least, the operations of a pool or syndicate?
Mr. DILLON. I think that practically all the buying and selling is
in a free and open market, but whether that buying and selling is
being done by just a general scattered public or by the concentrated
buying of a group, there is no way of knowing, that I know of.
Mr. PECORA. Under those circumstances, would you say that it is
possible for a group to manipulate prices, through their own buying
and selling operations, so as to influence the general public either to
buy or to sell at a given time ?
Mr. DILLON. I do not think that is an easy thing to do. I think
that has been done, and I think that is probably the object when
those accounts are formed, but when you are accumulating stock,
buying it, you have to have in mind always how you are going to sell
it, and unless the market is moving with you, and the public have
come in, I should think it would be a very difficult thing for that
group to dispose of that stock afterwards. But if the market is
moving in that direction, I should think a group like that might have
a successful operation.
1636
STOCK EXCHANGE PRACTICES
Mr. PECORA. DO not the operations of such a group have the effect,
frequently, of stimulating the movement of the market?
Mr. DILLON. In that particular security; yes.
Mr. PECORA. IS it not possible, by that process, to create, temporarily, at least, false values through the medium of these market
quotations ?
Mr. "DILLON. YOU might stimulate prices rather than values.
Mr. PECORA. By values I mean the values as represented in market
quotations. I recognize that there is a distinction between value and
market quotation.
Mr. DILLON. Yes.
Mr. PECORA. Mr. Dillon,
in the portfolio of the investment trust
called the United States and Foreign Securities Corporation, were
there entered from time to time securities of companies in the issuance of which your firm, at some time or other, had been identified?
Mr. DILLON. Yes. I think we bought some such securities from
time to time.
Mr. PECORA. Will you enumerate those securities as they occur
to you now ?
Mr. DILLON. I should have to look at the list (after conferring
with an associate). Mr. Pecora, they say they think Mr. S. C. Ross
of your staff has such a list that he made up, and I am willing to
accept that, if you have it there, to save time.
Mr. PSCORA. While they are looking that up, I will pass on to
another subject.
Mr. DILLON. Mr. Pecora, that would take a good deal of time,
unless we can use the list you have, if you have one.
Mr. PECORA. We can probably help you out with the information
in the return to the questionnaire.
The CHAIRMAN. Mr. Dillon, before you pass from this subject of
giving information, which you think ought to be collected by corporations and given to their stockholders, for the benefit of their
stockholders, largely, how about these organizations where the stockholders do not get a look-in, these trusts manipulated and managed
by trustees? The stockholders have nothing to do with the management of the corporation.
Mr. DILLON. I am not familiar with that sort of organization,
Senator. You mean not a corporation ?
The CHAIRMAN. Holding corporations, and corporations of that
kind, operating where stock has been sold, and there are a large
number of stockholders, but a few men, three or four, are the
trustees, and they have power, as trustees, to manage and control
the corporation without any regard to the stockholders.
Mr. PECORA. Voting trustees ?
The CHAIRMAN. Voting trustees.
Mr. DILLON. There may be some particular condition or circumstance that makes that desirable. As a general practice I should
think that would not be desirable.
Mr. PECORA. What special circumstances, for instance, would in
your opinion make that sort of thing desirable ? When I say " desirable " I mean from the standpoint of the investing public.
Mr. DILLON. I cannot think of any at the moment, but there might
be some particular situation where, xor a temporary period of time, it
STOCK EXCHANGE PRACTICES
1637
might be desirable to have the control of stock vested in voting
trustees for some particular reason at that time.
Mr. PECORA. Where voting trust certificates are resorted to, to
meet such special circumstances as you have in mind, do you think
it fair to the investing public that tho,se voting trust agreements
should be made for anything more that a short period of time ?
Mr. DILLON. I think that would vary with the necessity of the
situation. I do not think I could pass judgment Or express an
opinion generally, because I do not know what particular situation
they might be trying to handle, but I should not think they should be
made to run for a longer time than is necessary to take care of the
situation for which they were created.
Mr. PECORA. There was some evidence introduced before this committee at one of its earlier sessions, as I recall it now, concerning
a holding company which was organized, its stock issued and sold to
the public, and listed on the public exchanges, which holding company acquired blocks of stock, principally of railroad corporations.
The stock of this holding company, as I recall the evidence, was sold
to the public, tied up in voting trust certificates that deprived the
stockholder of any voice in the management of the company for a
period of. 15 years. Can you conceive of any situation, Mr. Dillon,
that would justify such a thing, from the standpoint of the investing
public ?
Mr. DILLON. I do not know the conditions surrounding the particular situation.
Mr. PECORA. The issue I have in mind is the stock of the Pennroad
Corporation. You are probably familiar with that in a general way.
Mr. DILLON. I am familiar, in a general way, with the fact that
the Pennsylvania Railroad did have such a company, but I was not
aware of the fact that it was tied up with voting trust certificates,
and I do not know the conditions which made that desirable. I am
not familiar enough with that, Mr. Pecora, to express an opinion.
Mr. PECORA. From the standpoint of your experience in the banking and investment field, can you conceive of any circumstances
that would justify such a condition?
Mr. DILLON. If I knew more about just what the Pennroad Corporation did, or why it was formed
Mr. PECORA. It is a holding company which has acquired for its
portfolio practically only railroad securities, and when it was
launched and its stock issued and sold to the public, what were sold
to the public were voting trust certificates.
Mr. DILLON. What was the object in that? I do not know the
detailed story or history of that company, so I hestitate to express
an opinion about a specific case.
Mr. PECORA. The object, perhaps, can best be told by those who
were responsible for the creation of that condition. I am merely
asking you, from the standpoint of your knowledge and experience
in the banking and investment field, if you at this time can conceive
of any circumstances that would justify a corporation in selling to
the public millions and millions of dollars of its stock, but depriving
the purchasers of that stock of any voice in the management or operation of the corporation for a period of perhaps 10 or 15 years.
1638
STOCK EXCHANGE PRACTICES
The CHAIRMAN. The object and purpose of that, as It was given,
was to centralize and concentrate the management in the hands of a
few people. I think they had three trustees.
Mr. PECORA. Three trustees, but they chose their own successors.
It was a self-perpetuating body.
The CHAIRMAN. A self-perpetuating body, to centralize the management of the corporation.
Mr. DILLON. Without knowing the particular thing they were trying to accomplish, I do not feel that I can express an opinion. It
sounds like an unusual arrangement.
Mr. PECORA. I am not asking you to express an opinion, but I am
asking you if you can conceive of any circumstances which, in your
mind, would justify the issuance and sale of that sort of security to
the investing public.
Mr. DILLON. N O ; I cannot say why they did it, without knowing
all the facts. Just as you ask me now, I see no reason for doing
that, unless they had some reason about which I do not know. To
have an opinion, I should have to know the whole subject, and what
they were trying to accomplish.
Mr. PECORA. Mr. Dillon, going back to the acquisition by Dillon,
liead & Co. of the common stock of the United States & Foreign
Securities Corporation, as brought out in the testimony yesterday,
do you know whether or not any of the members of Dillon, Read &
Co., subsequent to 1924, when this common stock was acquired, disposed of any portion of their holdings?
Mr. DILLON.
Ye,s.
Mr. PECORA. When did that happen ?
Mr. DILLON. There were some few sales in 1928, but I think the
ones you are referring to were in 1929.
Mr. PECORA. Did you have anything to do with any- of those
transactions personally ?
Mr. DILLON. NO ; I did not.
Mr. PECORA. DO you know which of your associates did have?
Mr. DILLON. Mr. Christie is familiar with it, as he handled the
question in our office.
Mr. PECORA. Then I will ask, Mr. Chairman, that we suspend the
examination of Mr. Dillon at this point and proceed with the examination of Mr. Christie. Mr. Dillon, however, is not excused thereby
from further attendance. I shall probably call you back to the stand
later.
The CHAIRMAN. IS Mr. Christie present?
Mr. CHRISTIE. Yes, sir.
The CHAIRMAN. YOU will
please be sworn. You solemnly swear
that you will tell the truth, the whole truth and nothing but the
truth, regarding the matters now under consideration by the committee, so help you God.
Mr. CHRISTIE. I do.
TESTIMONY OF ROBERT E. CHRISTIE, JR., A MEMBER OF THE
FIRM OF DILLON, READ & CO., NEW YORK CITY
Mr. PECORA. Mr. Christie, what is your full name and what is your
address ?
Mr. CHRISTIE. Robert E. Christie, Jr. My business address is 28
Nassau
Street.
STOCK EXCHANGE PRACTICES
1639
Mr. PECORA. Your residence?
Mr. CHRISTIE. My residence is at Scarsdale, N.Y.
Mr. PECORA. Are you a member of the joint stock company called
Dillon, Bead & Co.?
Mr. CHRISTIE. Yes, sir.
Mr. PECORA. HOW long have you been connected with it?
Mr. CHRISTIE. I have been connected with Dillon, Read & Co.,
and
its predecessor, William A. Eead & Co., since July 1919. I have
been a member of the association since January 1, 1927*
Mr. PECORA. Also a stockholder and as a member ?
Mr. CHRISTIE. NO, sir. I am not a stockholder. I have an interest
in the profits, but I am not charged with the losses, and in addition
to that I have a salary.
Mr. PECORA. YOU know a corporation called the United States &
Foreign Securities Corporation, do you not?
Mr. CHRISTIE. I do.
Mr. PECORA. YOU heard
the testimony given by Mr. Dillon, the
preceding witness, with respect to that corporation, its organizations
and operations, before this committee ?
Mr. CHRISTIE. Yes, sir.
Mr. PECORA. Are you an
officer of the United States & Foreign
Securities Corporation ?
Mr. CHRISTIE. Not now.
Mr. PECORA. Have you been
Mr. CHRISTIE. Yes, sir.
Mr. PECORA. What office or
in the past?
offices have you held in that corporation ?
Mr. CHRISTIE. I believe I held several at different times. I should
have to look at the dates in order to see. The testimony yesterday,
I believe, showed that I was the treasurer.
Mr. PECORA. At one time.
Mr. CHRISTIE. At one time; and probably the original treasurer.
I think I was the treasurer at the time the corporation was formed.
Mr. PECORA. What other offices have you held in that securities
corporation ?
Mr. CHRISTIE (after conferring with an associate). I was vice
president of the United States & Foreign Securities Corporation
from January 14, 1926, to December 10, 1930. I was treasurer from
October 10,1924, to May 12, 1925. I was also assistant treasurer for
a while, from May 12, 1925, to June 17,1926.
Mr. PECORA. Were you also a member of the board of directors of
that securities corporation at any time?
Mr. CHRISTIE. From May 28, 1925, to July 13, 1925, I was a
director, and again from March 2, 1927, to May 10, 1927. I believe
that is all.
Mr. PECORA. Are you familiar with the factual circumstances
under which the capital stock, consisting of first preferred, second
preferred and common stock of this United States & Foreign Securities Corporation, was issued and sold to the public?
Mr. CHRISTIE. I am familiar with that in a general way. I heard
Mr. Dillon's testimony yesterday, and according to that testimony
I took part in some of those papers that were put in evidence
yesterday. I am familiar with it in a general way; yes, sir.
1640
STOCK EXCHANGE PRACTICES
Mr. PECORA. Well, as a result of the transactions whereby the
capital stock of that Securities Corporation was disposed of, Dillon,
Read & Co. or its associates acquired a large block of this stock,
didn't they, the common stock?
Mr. CHRISTIE. That
is right.
Mr. PECORA. W e r e a n y °f those shares of common stock actually
acquired by you in the transaction ?
Mr. CHRISTIE. By me personally?
Mr. PECORA. Yes.
Mr. CHRISTIE. None
at that time. I did not acquire any stock in
that company until January of 1927.
Mr. PECORA. And when you acquired it in January of 1927, did
you acquire it in the open market, or how ?
Mr. CHRISTIE. NO, sir. I bought it from some of our associates.
Mr. PECORA. From associates of Dillon, Eead & Co. ?
Mr. CHRISTIE. Yes, sir.
Mr. PECORA. HOW many shares did you buy ?
Mr. CHRISTIE. Ten thousand shares—no; wait
a minute. I am
sorry. It was 5,000 shares.
Mr. PECORA. Was that sold to you by your associates composing
the legal entity of Dillon, Eead & Co., or by them as individuals?
Mr. CHRISTIE. By them as individuals.
Mr. PECORA. Did you or any of your associates in the firm of
Dillon, Bead & Co. thereafter sell any of those shares of common
stock in the open market?
Mr. CHRISTIE. Yes; I sold part of mine.
Mr. PECORA. Did you make that sale as a member of a joint or
syndicate account that was formed in order to effect those sales and
which was managed by the brokerage firm of Dominick & Dominick ?
Mr. CHRISTIE. Yes, sir. But I think your previous question, perhaps, I answered too quickly. I think you asked me if
Mr. PECORA (interposing). If you want to modify your answer^
you may do so.
Mr. CHRISTIE. I think you asked me if I sold in the open market,
or used some qualifying phrase. The sales were made through the
account that you now refer to, to Dominick & Dominick. There was
a group of ten or eleven of us, I think, that sold our stock to
Dominick & Dominick.
Mr. PECORA. Who composed that group of ten or eleven persons?
Were they all associates of Dillon, Read & Co. ?
Mr. CHRISTIE. Yes; they were all associates of Dillon, "Kead &
Co.
Mr. PECORA. Did they include all of the associates of Dillon, Read
& Co., or only some of them?
Mr. CHRISTIE. N O ; only some of them. My recollection is that
there were about seven, including Mr. Dillon and some others, who
did not sell any stock.
Mr. PECORA. Can you give me the names of those who did sell
through the medium of this joint or syndicate account that was
managed by Dominick & Dominick?
Mr. CHRISTIE. Yes,
sir.
Mr. PECORA. All right.
Mr. CHRISTIE. There were two accounts through which stock was
sold, both through Dominick. The names I have before me were
STOCK EXCHANGE PKACTICES
1641
people who sold stock through both. That is, I think they were in
both accounts, but of that I am not positive. Those names were Mr.
C. N. Miller, Mr. H. G. Biter, I I I , Mr. W. Wilcox, Jr., Mr. B. H.
Bollard, Mr. E. J. Bermingham, Mr. Deane Mathey, Mr. W. A.
Phillips, The Beekman Co., Ltd., Mr. B. 0. Hayward, W. A. Bead,
and myself.
The CHAIRMAN. Making how many shares?
Mr. CHRISTIE. The total number of shares that were sold through
these two accounts was—I am told that the total amount was 74,198
shares.
Mr. PEOORA. In both accounts?
Mr. CHRISTIE. That is right.
Mr. PECORA. Or in only one of them ?
Mr. CHRISTIE. That is the total number that were sold to Dominick & Dominick. This group of gentlemen sold slightly more than
that, but this is the amount sold to Dominick & Dominick.
The CHAIRMAN. What price did they get for it ?
Mr. CHRISTIE. The average price was 53.188.
Senator TOWNSEND. Was that the total number of shares the group
held?
Mr. CHRISTIE. NO, sir. That was just a part of what they held.
The CHAIRMAN. What had they paid for this stock?
Mr. CHRISTIE. Well, I am not sure what all of their costs were.
You had the cost of some of it in the testimony yesterday, and other
stock was acquired later on, andMr. PECORA (interposing). Was that the stock that was purchased
or acquired originally at 20 cents a share ?
Mr. CHRISTIE. I believe that some of that stock was the original
stock that had that nominal value or price placed upon it of 20
cents a share.
Mr. PECORA. Didn't all of it come out of the block of 500,000
shares that wer^Tso acquired by the associates of Dillon, Bead &
Co. in October of 1924?
Mr. CHRISTIE. I believe that all of this stock might be traceable
back to that block of 500,000 shares, because the other block of
250,000 was kept intact and is still kept intact. But I can only
speak for myself. I bought stock, as I have said, in 1927, and that
stock cost me $10 a share.
Mr. PECORA. YOU bought that stock from your associates?
Mr. CHRISTIE. That is right.
Mr. PECORA. Associates in the firm of Dillon, Bead & Co.?
Mr. CHRISTIE. That is right.
Mr. PECORA. NOW, the stock that went into this syndicate account
managed by Dominick &> Dominick was all stock that came from
the block of 500,000 shares which was sold by the United States
& Foreign Securities Corporation in 1924 upon its organization, to
associates of Dillon, Bead & Co. for an aggregate consideration of
$100,000, or 20 cents a share, wasn't it?
Mr. CHRISTIE. It was from the 500,000 shares which were a part
of the whole original operation of the issuance of the 750,000 shares
to Dillon, Bead & Co. and the individual associates of Dillon, Bead
&C
1642
STOCK EXCHANGE PRACTICES
Mr. PECORA. YOU say it was a part of the whole. Wasn't it a
separate part or a distinct part rather, or a step in the entire
transaction ?
Mr. CHRISTIE. The letters that you referred to yesterday, and
which went step by step, showed the mechanics of the way that was
carried out, that it was a separate step, although we naturally
considered the 750,000 shares of common and the second preferred
as one package, for which was paid $5,100,000.
Mr. PECORA. But the 500,000 shares that were specifically mentioned in one or more letters that were put in evidence here on
yesterday went not to Dillon, Kead & Co. as a separate legal entityy
but were distributed in various proportions among the different
associates of Dillon, Kead & Co., weren't they?
Mr. CHRISTIE. Correct.
Mr. PECORA. And it was that block of 500,000 shares that was separately paid for in the aggregate sum of $100,000 by the personal
check of Mr. Horner, one of Dillon, Kead & Co. associates, wasn't it ?
Mr. CHRISTIE. That is right.
The CHAIRMAN. HOW much of those 74,198 shares was yours?
Mr. CHRISTIE. TWO thousand nine hundred shares of it. That
2,900 shares is my part of a total of 81,552 shares rather than the
74,198 figure that you have, Senator Fletcher.
Mr. PECORA. Are you familiar with the circumstances under which
this joint or syndicate account was organized and formed some
time in 1928, with Dominick & Dominick as managers, to sell this
stock?
Mr. CHRISTIE. Well, in 1928, in the fall of that year, either November or December. So far as I know, it was no joint account; the
word has slipped me that you used to describe the account; but
that account Dillon, Read & Co. had no interest in. So that account
was not a joint account, nor did those individuals have a joint
account, except that they granted options to the firm of Dominick &
Dominick at the end of 1928.
Mr. PECORA. Some time at the end of 1928, you say, some options
were given by individual members of Dillon, Read & Co., who owned
portions of this 500,000-share block; is that right? That-some time
in the latter part of 1928 such options were given to Dominick &
Dominick.
Mr. CHRISTIE. Yes; previous to that, some time, as I say, in the
fall of 1928—I would not be sure of the month—Dominick &
Dominick came to us and told us that they had made a study of
various investment trusts
Mr. PECORA (interposing). When you say " they came to us",,
whom did they come to ?
Mr. CHRISTIE. They came to one of our partners.
Mr. PECORA. Were you present?
Mr. CHRISTIE. I do not remember whether I was present at the
original conversation or not, but
Mr. PECORA (interposing). Were you present at any of the conversations that led up to the formation or granting of this option?
Mr. CHRISTIE. I think I was.
Mr. PECORA. From your own personal knowledge, tell what you
know about the conversation that led to the granting of those options,
to Dominick & Dominick.
STOCK EXCHANGE PRACTICES
1643«
Mr. CHEISTIE. Well, my recollection is that Dominiek & Dominick came to us and said that they had made a study of various
investment trusts, and that they liked United States & Foreign
Securities Corporation; that they would like to be able to sell
stock of that corporation to their clients and, naturally, at the same
time they would like to be able to do it so that they could make
something out of it. And they wanted to know if we had any stock
that they could sell.
Mr. PECORA. Did they say how they expected to make some money
in any such transaction? Was it through earning the usual commissions by a broker, or was it through a participating interest?
Mr. CHRISTIE. I believe that their idea was that they would buy
a quantity of the stock at some price below the market.
Mr. PECORA. From whom?
Mr. CHRISTIE. Well, they wanted to know if they could buy it
from us. And that was done, I am quite clear, partly through me^.
at least I checked with our firm, and the firm had no stock for sale,
and we told them so. Neither did any company that was* associated with us. Some time later, how much later now I could
not recall, but I should imagine perhaps a week or so, they came
back and were still insistent, or quite desirous of being able to get
the stock to distribute, and asked us if we thought any individuals
would be willing to sell any stock. At that time, to the best of
my recollection, I personally checked with other members of the
firm, with the result, as I said a minute ago, that some 7 or 8
partners were not desirous of selling any stock; and those 10 or
11 names that I have read oft were willing to sell portions of their
stock. In my own case that stock represented a substantial amount
of what little I was worth, and for the sake of diversification I
was willing to sell a part of my stock. So that some time in December of 1928 options were given to the firm of Dominick & Dominick.
There was a series of options, the first part starting in December
of 1928, covered 30,000 shares of stock. As I remember it, the first
lot was 10,000 shares at 4 7 ^ , and the second lot was 10,000 shares
at 50, and the other lot was 10,000 shares at 55.
Mr. PECORA. What was the date of that option agreement?
Mr. CHRISTIE. What was what?
Mr. PECORA. The date of that option agreement.
Mr. CHRISTIE. The first option was dated December 20.
Mr. PECORA. December 20, 1928?
Mr. CHRISTIE. Yes.
Mr. PECORA. At that
time on what exchange were the shares of the
United States & Foreign Securities Corporation listed?
Mr. CHRISTIE. I believe they were listed on the New York Curb
Exchange. I think they may have been also listed in Boston, but
I am not sure about that.
Mr. PECORA. What period of time was consumed in the conversations that Dominick & Dominick had with you and your associates
that resulted in this option?
Mr. CHRISTIE. I should think several weeks.
Mr. PECORA. Several weeks. Dominick & Dominick was a firm of
stock brokers, members of the New York Stock Exchange and the
New York Curb Exchange?
175541—33—PT 4
8
1644
STOCK EXCHANGE PRACTICES
Mr. CHRISTIE. They are a well-known stock exchange firm,
Mr. PECORA. And you say that it was one of their representatives
that came to you initially or came to your associates initially and
.discussed with you the desirability of entering into a market operation involving purchase and sale of the common stock of this investment trust?
Mr. CHRISTIE. NO.; I didn't say that.
Mr. PECORA. IS that a fair statement to make ?
Mr. CHRISTIE. I do not think that is a fair statement, necessarily.
Mr. PECORA. Just what did Dominick & Dominick propose to
you and your associates that they would do or would like to do
with you?
Mr. CHRISTIE. I am clear that they came to us. Their approach
was naturally to see if they could get any stock or if they could
-get options on any stock. As I said, the first time that they did
that we told them that we had no stock, that there was no stock for
sale. Later on, on checking with individual members of the firm,
these options that you speak of materialized out of those conversations.
Mr. PECORA. Well now, you simply said they came to you and
asked you if you had stock for sale, you told them there was no stock
for sale, but later on you checked up and you found that some of
your associates would be willing to part with some of their individual holdings. That was not the substance of the conversations
that led to the granting of this option on December 20, 1928, was it?
Mr. CHRISTIE. Most of the balance of the conversation had to do
with their trying to convince us as individuals that they should be
allowed to have some stock to distribute to their customers, to sell
to their customers. They felt that our stock was selling out of line
with other investment trusts.
Mr. PECORA. By that do you mean that they said they thought this
common stock was selling below its value, its market value ?
Mr. CHRISTIE. Only in relation to other securities. This investment trust at that time, I don't remember the exact book value of it,
was selling at perhaps twice or less than twice its book value
whereas many other securities were selling at a much higher ratio,
perhaps two, three times their book values.
Mr. PECORA. Did you find as a result of those conferences with
Dominick & Dominick that they had a better knowledge of the
value of this stock of the corporation that your firm organized
and of which you were an officer?
Mr. CHRISTIE. A better knowledge than who?
Mr. PECORA. Than yourselves, than you had, for instance?
Mr. CHRISTIE. NO, sir.
Mr. PECORA. They didn't
tell you anything concerning the value
of your stock which you didn't really know, did they ?
Mr. CHRISTIE. NO.
Mr. PECORA. AS a matter of fact, didn't you feel you knew more
about it than they did ?
Mr. CHRISTIE. Probably.
Mr. PECORA. HOW do you account for Dominick & Dominick coming to you with such a proposition in the first instance ?
Mr. CHRISTIE. Well, I account for that by the fact that Dominick
& Dominick are a large firm, with a great many clients, and that
STOCK EXCHANGE PRACTICES
1645
they are continuously looking for securities which they can recommend to their clients. They study the merits of a particular security and its market price in relation to the price of similar securities
on the market, and in that field they probably know more than we
do. They were looking for a stock which they felt would be worth
more as time went on and which, at the same time, could be purchased
by them, partly, at least, in bulk, at a price slightly below the market.
They could offer such a stock to their clients at the market with
some profit to themselves and with confidence that their clients
would also make a profit.
Now, the stock of this company did not have a very broad distribution. Ordinarily, in my opinion, a better market condition exists—
I don't mean by that necessarily a, better market as to price—if a
.stock is held by a large number of people. A stock has a better
market if it is known favorably and people have had good experience with it over a period of years. This is of importance even to
the holder of a stock who may think he is never going to sell it,
because he cannot tell what circumstances may arise which would
cause him to change his mind.
Mr. PECORA. NOW, let's see if we understand you: Dominick &
Dominiek came to you in the first instance, said they had made a
study of the stock of this company, the United States & Foreign
Securities Corporation, felt that it was selling out of line in the
open market at that time by comparison with similar stock of other
investment trusts, and also said to you that they felt that they could
recommend it to their customers and that their customers if they
acted upon their recommendation would be entitled to make a profit.
Is that in substance what Dominick & Dominick told you ?
Mr. CHRISTIE. That is in substance my recollection of it; yes, sir.
Mr. PECORA. Dominick & Dominick does a commission business,
doesn't it, in the exchange ?
Mr. CHRISTIE. I believe so.
Mr. PECORA. Whatever sales they made of stock which was obtained
by them through the medium of this option that was given to them
following these conversations by you and your associates were made
on the exchange, weren't they?
Mr. CHRISTIE. That I don't know. I don't know what they did
with the stock, naturally.
Mr. PECORA. Didn't they sell in the open market and through
the medium of the exchange ?
Mr. CHRISTIE. That I don't know. I believe you have a record
of that.
Mr. PECORA. Can you tell us whether or not they did by the
charges they made ?
Mr. CHRISTIE. If I had bought the stock from them as an individual, or any individual had bought it from them, I could tell
from the slips whether or not Dominick & Dominick were acting
as agent or principal, and the commission would disclose whether
or not the stock had been bought on the exchange or direct.
Mr. PECORA. YOU know that Dominick & Dominick is a brokerage
firm and not dealers in securities ?
Mr. CHRISTIE. I know they are.
Mr, PECORA. They are commission brokers, aren't they?
1646
STOCK EXCHANGE PRACTICES'-
Mr. CHRISTIE. I believe that they are largely & stock exchange*
firm, but they have also done an investment business for years.
Mr. PECORA. Are you familiar with the ledger account on thebooks of Dominick &> Dominick covering this syndicate account inUnited States & Foreign Securities Corporation ?
Mr. CHRISTIE. The ledger account of Dominiek & Dominick's ?
Mr. PECORA. Yes.
Mr. CHRISTIE. NO, sir.
Mr. PECORA. I show you
this photostat copy of what purports tobe a letter addressed to Messrs. Dillon, Read & Co. by Dominick &
Dominick under date of December 20, 1928. Will you be good
enough to look at it and tell us if you recognize that as being a true
and correct copy of the option agreement that you have referred to ?
Mr. CHRISTIE (after examining document). Shall I give this to*
the reporter, Mr. Pecora?
Mr. PECORA. First answer the question as to whether you recognize
that and identify it as being a true and correct copy of the so-called:
" option " that you and your associates gave Dominick & Dominick.
Mr. CHRISTIE. That is right.
Mr. PECORA. I offer it in evidence and ask that it be spread on the
record.
The CHAIRMAN. It may be received in evidence and spread upon
the record.
(Option agreement between Dillon, Read & Co. and Dominick &:
Dominick, dated December 20, 1928, was?y thereupon designated
" Committee Exhibit No. 9, October 4, 1933 , see p. 1688.)
Mr. PECORA. The option agreement reads as follows: Dated December 20, 1928:
UNITED STATES & FOREIGN SECURITIES CORPORATION
COMMON STOCK (NO PAR VALTJEL)
Messrs. DILLON, READ & Co.,
28 Nassau Street, New York City.
DEAR SIRS : We wish to confirm that, in consideration of the formation by u»
of an account, of which we shall be the managers with full discretionary powers, you hereby extend to us for and on behalf of such account, options to purchase from you an aggregate of thirty thousand (30,000) shares of United States
& Foreign Securities Corporation common stock at prices and under conditions
as follows:
You will sell to us at any time or times, prior to the close1 of business February 20, 1929, all or any part of ten thousand (10,000) shares of the above
stock at $47.50 a share in such amounts and at such times as we may call it;
Provided we exercise our rights as managers to purchase all of the stock
optioned to us at $47.50 a share, you will thereupon immediately extend to us
the right to purchase from you, all or any part of ten thousand (10,000) shares
additional of such stock at $50 a share, in such amounts and at such times as
we may call it, within a period of 2 months from the date of the completion of
our call of the entire amount of stock optioned us at $50 a share.
Provided we exercise our right as managers to purchase all of the stock:
optioned to us at $50 a share, you will thereupon immediately extend to us
the right to purchase from you, all or any part of ten thousand (10,000) shares
additional of such stock at $55 a share, in such amounts and at such times as
we may call it, within a period of 2 months from the date of the completion of
our call of the entire amount of stock optioned us at $50f a share.
During the period in which these options exist you agree to loan us at our
call, all or any part of twenty thousand (20,000) shares- of stock, a t the then
prevailing market price.
STOCK EXCHANGE PRACTICES
1647
Stock borrowed ©r called by us shall be deliverable upon one day's notice
^against payment of the amount due.
It is understood that until all of these options have either been exercised
or have lapsed, you have the right to place stock privately but that you will
exercise your best efforts to prevent such stock from coming into the market.
If it should be necessary, however, for you to dispose of stock in the market,
_you agree to give .us 5 days notice before doing so.
If the above is in accordance with your understanding, please so confirm
by signing and returning to us the duplicate of this letter.
Very truly yours,
DOMINICK & DOMINICK.
Confirmed and agreed to:
DILLON, READ & 0®.
Now, as you heard me read this so-called " option agreement " Mr,
Christie, doesn't it strike you as being nothing more nor less than an
agreement under which a pool for the buying and selling of this
^common stock was formed and agreed to be operated and conducted
by Dominick & Dominick as managers thereof ?
Mr. CHRISTIE (after conferring with associates). In the first place,
I would like toMr. PECORA (interposing). Now, Mr. Christie, was it really necessary for you to get advice or confer with one of your associates
^before you can answer that question?
Mr. CHRISTIE. NO. I didn't start the conference.
Senator GLASS. I submit that the witness has a right to start a
conference just as much as you have to confer with your associates.
Mr. PECORA. I am not objecting to it; I am simply wondering if
it was necessary for this witness, in view of his experience.
Senator GLASS. Well, do you put it on the record, Mr. Pecora,
whether it is necessary for you to confer with your accountants here ?
Mr. PECORA. I do not think the situation is analogous, Senator
'Glass.
Senator GLASS. It makes a difference from whom it comes.
Mr. PECORA. All right, but if it is necessary for this witness with
his experience to get advice and assistance from anyone else in order
to answer that question I think the committee ought to know it.
Senator GLASS. YOU ought to get it if it is necessary, and if it is
necessary for you after 2 months of investigation to confer with your
.associates here, you should put that on the record just as much as
this. We ought to be fair all the way through.
Mr. PECORA. I do not think the position of counsel and that of
witnesses are analogous or comparable in any way.
Senator GLASS. I think the truth is the truth whether it comes
from a witness or whether it comes from your clients.
Mr. PECORA. I have not objected, Senator Glass, to the witness
getting the benefit of that assistance if he needs it, but I want to
find out if he needs it.
Senator GLASS. Well, the assumption is that he would not get it
if he did not need it, or that you would not get it if you did not
need it from your associates here.
Mr. PECORA. I need all the assistance I can possibly get, Senator
Glass, from my associates or any other persons, in the handling of
this task, and I am glad to get it at any time.
Senator GLASS. Well, I assume the witness is too.
The CHAIRMAN. Let us see what the question is. Do you object
to answering the question?
1648
STOCK EXCHANGE PRACTICES
Mr. CHRISTIE. Not at all, Senator.
The CHAIRMAN. Let us go on and answer it.
Mr. CHRISTIE. The question was, was it necessary
Senator GLASS (interposing). And get all the information you
want from your associates too. I shall insist upon that.
Mr. CHRISTIE. It was not necessary, Mr. Pecora, for me to confer
before answering your question. As I said a minute ago, I did not
turn for any help or for a conference, but I don't mind making it
clear on the record that the suggestion was that the fact that that
letter was addressed to Dillon, Head & Co. should be made clear
because of the fact that the options referred to covered stock that
belonged to these individuals. As a matter of convenience the transaction was handled in the name of Dillon, Eead & Co. We had a
memorandum account which your investigators have which shows the
detail of how all the transactions were carried on our books.
Mr. PECORA. Whose convenience was served by handling the transaction in the name of Dillon, Eead & Co., whereas it really was a
transaction involving individual interests of some of the associates
of Dillon, Eead & Co. ?
Mr. CHRISTIE. I should say it was the convenience of those individuals.
Mr. PECORA. Well, how was that convenience served by putting a
transaction on paper and in the agrements in the name of Dillony
Eead & Co. if it was not a Dillon, Eead & Co. transaction ?
Mr. CHRISTIE. The firm of Dominick & Dominick otherwise would
have had letters from 10 or 11 individuals covering their own
separate stock.
Mr. PECORA. They were dealing with the stock of these 10 or
11 separate individuals and not with the stock of Dillon, Eead &
Co. as an entity, weren't they ?
Mr. CHRISTIE. That is right.
Mr. PECORA. HOW was the convenience of anybody served them
by putting the transaction in the name of Dillon, Eead & Co.,, winch
actually was not a party to it?
Mr. CHRISTIE. It seemed to me much simpler to have one letter
cover it. It was easier to handle in our account.
Mr. PECORA. Was this account entered as a Dillon-Eead transaction on the books of Dillon, Eead & Co?
Mr. CHRISTIE. I do not believe so. You have the ledger account^
and I think you will find that it showed clearly what individuals put
the stock in and then the distribution of the proceeds later on.
Mr. PECORA. Who agreed to the proposal embodied in this option
agreement which has been offered in evidence and marked " Exhibit
9 " of this date in behalf of Dillon, Eead & Co. ? Look at the signature reading " Dillon, Eead & Co.," and tell us whose handwriting;
it is in.
Mr. CHRISTIE (after examining document). I am not sure nowy
Mr. Pecora, whose firm signature that is. It was one of sav
associates, one of our members.
Mr. PECORA. Don't you recognize the handwriting of that
signature ?
Mr. CHRISTIE (after showing document to associates and conferring). It is a signature 4 or 5 years old, and I am just not sure wha
STOCK EXCHANGE PRACTICES
1649
signed it. I am sure that some member of the association signed it.
It is a firm signature.
Mr. PECORA. YOU mean it is a signature of a member of thefirm?"
Mr. CHRISTIE. Yes.
Mr. PECORA. Or rather written by a member of thefirm?
Mr. CHRISTIE. That is right.
Mr. PECORA. YOU cannot tell us whose handwriting it is?
Mr. CHRISTIE. I am sorry, sir, I cannot.
Mr. PECORA. Will you pass it around among such of your
associates as are gathered about you and see if you can get some enlightenment on that from any one of them ?
Mr. CHRISTIE. Apparently it has been circulated.
(Exhibit 9 was thereupon circulated among various persons
present.)
Mr. CHRISTIE. Mr. Pecora, there is no question about disclaiming
that as the firm signature, but as to which of possibly 17 or 18 members at that time signed that name at this time—apparently a good
many of us have looked at it and nobody
Mr. PECORA. Nobody recognizes it as their handwriting?
Mr. CHRISTIE. NO one is willing to say whose it is.
Senator GLASS. Whether it is one member of the firm or another,.
it is the firm's responsible signature, isn't it ?
Mr. CHRISTIE. That is right, Senator; yes.
Senator GLASS. The firm is responsible for it?
Mr. CHRISTIE. Yes, sir.
Mr. PECORA. It was not
intended to make the firm responsible as
a party to this agreement, was it, by those who negotiated it?
Mr. CHRISTIE. It was clear to the firm just what was being done.
There were some members of the firm who were not willing to sell
any stock. When this was being done it was perfectly clear, as you
say—an obligation on the firm to carry that out, but it was done as
a matter of convenience to keep this account for these 10 or 11 men,
whatever it was, together in one account; that was done in correspondence in the name of Dillon, Read & Co.
Mr. PECORA. Tell us this, Mr. Christie, please. At the time that
Dominick & Dominick made this proposal to you and some of your
associates in Dillon, Eead & Co. to grant them this option, was the
matter discussed among all of the associates of Dillon, Read & Co.
with the view of finding out if the firm wanted to give such an
option ?
Mr. CHRISTIE. At the first instance when they first approached
us—you say whether it was taken up with all of the members ?
Mr. PECORA. Was it discussed as a proposition or proposal for
and on behalf of the firm?
Mr. CHRISTIE. Yes.
Mr. PECORA. By all of the members of thefirm?
Mr. CHRISTIE. That I could not say.
Mr. PECORA. Well, you said that 10 or 11 of the
members of the
firm were agreeable to granting an option of some kind to Dominick
& Dominick, and 7 or 8 of the others were not. Now was there a
discussion of the matter among the members of the firm when
Dominick & Dominick first came to you with this proposal for am
option?
1650
STOCK EXCHANGE PRACTICES
Mr. CHRISTIE. There were at least two distinct proposals. One,
that Dillon, Eead & Co. grant some options on some stock. That
was declined. To the best of my recollection this other idea that
some individuals might be willing to sell was not brought up or was
not thought of at that time. And at a later date when we were
approached again my recollection is that the suggestion came from
them as to whether or not there would not be individuals, or whether
"we knew or could find out where any stock might be obtained or for
sale. At that time a careful survey was made and different individuals were asked whether or not they individually cared to sell
;any stock. That consideration was entirely separate and distinct
from the first approach, which was as to the firm.
Mr. PECORA. Well now, when the first proposal which related to
the firm giving this option to Dominick & Dominick was first made
to you by Dominick & Dominick was it discussed by thefirm?
Mr. CHRISTIE. Yes.
Mr. PECORA. Were all the members of the firm consulted about it ?
Mr. CHRISTIE. That I could not say.
Mr. PECORA. When you say it was discussed by the firm do you
mean to indicate that all of the members of the firm discussed it,
considered it, and rejected it as a firm proposition?
Mr. CHRISTIE. N O ; because some were out of New York.
Mr. PECORA. At that time the firm of Dillon, Read & Co. as a
separate legal entity apart from its individual members, did have
250,000 shares of the common stock of this corporation, did it not?
Mr. CHRISTIE. Well, in round figures that is approximately correct,
Mr. PECORA. Yes. And Dominick & Dominick's proposal to get
an option from the firm of Dillon, Read & Co. covering 30,000
or more shares could have been agreed to by the firm as a separate
legal entity and the requirements of stock under the option made
by them from this block of 250,000 shares, could it not?
Mr. CHRISTIE. Well, to have given any options out of the 250,000
shares that you refer to naturally would have meant disposing of
some of the stock of those individuals who did not want to have their
own holdings reduced. I told you a few minutes ago that Mr. Dillon
and several other stockholders were not willing to sell any of their
stock.
Mr. PECORA. Was this discussed with Mr. Dillon at the time?
Mr. CHRISTIE. That I do not remember. I should imagine so.
Mr. PECORA. Can you not tell us whether or not it was ?
Mr. CHRISTIE. NO ; I can not.
Mr. PECORA. He is the head of thefirm?
Mr. CHRISTIE. Right.
Mr. PECORA. The firm of Dillon, Read & Co.
had 250,000 shares of
this stock, apart from the 500,000 shares that had been distributed
iiinong the individuals who composed the firm, did it not ?
Mr. CHRISTIE. That is right.
Mr. PECORA. And this request of Dominick & Dominick for an
option covering 30,000 shares of that stock could have been agreed
to by the firm of Dillon, Read & Co. out of the 2-50,000 shares that
it held?
Mr. CHRISTIE. It could have been.
Mr. PECORA. It could have been?
Mr. CHRISTIE.
Yes.
STOCK EXCHANGE PRACTICES
1651
Mr. PECORA. And Dominick & Dominick's original proposal to you
was that the firm of Dillon, Bead & Co. do that very thing, was it
not?
Mr. CHRISTIE. AS I remember it, it was.
Mr. PECORA. NOW, was that taken up by the members of the firm
and considered as a business proposition made to the firm and
disposed of accordingly?
Mr. CHRISTIE. That is my recollection; yes. You are asking me
about conversations and happenings of several years ago, so that
I am trying to be careful in my testimony, that I tell you that to
the best of my knowledge and recollection.
Mr. PECORA. Then to the best of your knowledge and recollection
the proposal of Dominick & Dominick was presented to the members
of the firm, considered by them as a firm, and rejected?
Mr. CHRISTIE. Eight.
Mr. PECORA. All right. Then Dominick & Dominick learned
somehow or other that 500,000 shares of this same common stock
were owned in various amounts and varying amounts by the individual members of the firm, or some of them ?
Mr. CHRISTIE. Well, I would not know whether they learned about
the 500,000 shares or not. They came back with the suggestion
that there might be individuals who would have stock, and would
they be willing to sell?
Mr. PECORA. Well now, was that taken up as a proposition of
the firm, or was it taken up among the various individual members ?
Mr. CHRISTIE. Among the various individual members.
Mr. PECORA. Who canvassed the situation among the various individual members at that time for the purpose of ascertaining how
many of them were willing to enter into such an option agreement
with Dominick & Dominick?
Mr. CHRISTIE. I think I did.
Mr. PECORA. Did you then speak to all of the members of the firm
about it?
Mr. CHKISTIE. I think so.
Mr. PECORA. Are you sure you did?
Mr. CHRISTIE. Well, I hope so. I think they all should have been
told of the suggestion that had been made and that they should
all have the same opportunity to either reject it or to go along
with any one who was selling stock. I have no tabulation or no*
record to show whether I overlooked one or not. I do not suppose
that I did.
Mr. PECORA. Did you overlook the head of the firm at that time r
do you think ?
Mr. CHRISTIE. Not if he were in New York.
Mr. PECORA. DO you recall whether or not you actually consulted the head of the firm ?
Mr. CHRISTIE. No; I do not recall.
Mr. PECORA. NOW, when the firm which, as you say met and considered the original proposal of Dominick & Dominick that the firm
of Dillon, Bead & Co. give to them an option agreement covering
30,000 shares of this stock, turned down the proposal, for what
reason did they turn it down as a firm ?
Mr. CHRISTIE. I think that the controlling reason was that we
considered the stock primarily as that 250,000 shares; in as much
1652
STOCK EXCHANGE PRACTICES
as the balance of the stock belonged to these individuals they were
free to do with that as they chose, and that the firm did not want
to sell any of that stock.
Mr. PECORA. But for what reason? What reason was advanced
upon which the firm's determination was eventually based not to
part with any of that block of 250,000 shares that was in the firm
name ?
Mr. CHRISTIE. In the first place some of the stockholders—or
rather, some of the members who had a very substantial interest in
that block were unwilling to sell any of their stock. That, in itself,
it preclude selling out of that block of stock, because, as I said, they
would reduce their holdings and their interest in that situation if
stock was sold out of that block.
Mr. PECORA. Were Dominick & Dominick told after the rejection of
the proposal which they made to the firm, that individiial members
of the firm had large holdings of this common stock in their individual capacity as distinguished from their position as members of
the firm of Dillon, Eead & Co. ?
Mr. CHRISTIE. Not as far as I know. They may or may not have
been told. But I do not recall telling them.
Mr. PECORA. The fact that these 500,000 shares were originally
acquired in various proportions by individual members of the firm
of Dillon, Eead & Co. back in October 1924 was not publicly known,
was it?
Mr. CHRISTIE. Well, it was publicly known that the 750,000 shares
had gone to Dillon, Eead & Co. and its associates. I think that was
very generally known.
Mr. PECORA. IS it not a fact that the circular and advertisement
which accompanied the offer of the first preferred stock to the public
merely said in that respect that Dillon, Eead & Co. had purchased
for $5,000,000 the 50,000 shares of the second preferred stock, and
that 750,000 shares of the common stock would go to Dillon, Eead &
Co. and to the organizers, without disclosing the identity of the organizers ?
Mr. CHRISTIE. Unless you want me to refer to the circular to testify
in some detail as to that language—as I recall it the circular we put
in evidence yeterday substantially had the description that you have
given.
The CHAIRMAN. Would it have made any difference to Dominick
& Dominick whether the stock that they were attempting to acquire
came out of the 250,000 shares that Dillon, Eead & Co. owned, or out
of the other 500,000 shares?
Mr. CHRISTIE. I should not think it would make the slightest
difference.
The CHAIRMAN. It would not have made any difference to them
whether it came out of the 250,000 shares or out of the 500,000 shares
that the individuals owned ?
Mr. CHRISTIE. I cannot see, Senator, what difference it would make
to them where the stock came from.
The CHAIRMAN. The fact is that the control of 750,000 shares, three
fourths of the shares issued, would give a great opportunity, would
it not, for manipulation in case one desired to do that ?
STOCK EXCHANGE PRACTICES
1653
Mr. CHRISTIE. I do not quite follow that, Senator. Do you mind
if I have the stenographer read that question ?
The CHAIRMAN. If one concern owns and controls three fourths of
the capital issue of the common stock of the corporation, does not
that ownership give a power for manipulation of the market that
otherwise would not exist ?
Mr. CHRISTIE. Well, rather indirectly, I think. Only because the
balance that is outstanding is perhaps relatively small. If they
want to buy stock and have it go up, they know exactly how much
they would" have to buy, if they have to buy at all, to put it up.
Whereas if it was the other way around, the threat of the majority
of the stock going on the market naturally is pretty indefinite as to
what might happen.
Senator ADAMS. Mr. Christie, in the letter which made up this
option there was an agreement to keep the stock, so far as they could,
off the market. That is, your group—whether it was Dillon, Read
& Co. or individual members of the group—Dillon, Eead & Co. signed
the option agreement to do their best to keep the stock off the market.
They reserved the right to make private sales, but agreed to not put
it upon the market, with the idea, of course, of protecting the market
for Dominick & Dommiek. So that the fact that Dillon-Kead held
the large block and agreed to keep it off was a very material circumstance in preserving that market ?
Mr. CHRISTIE. Quite. And that intention was expressed in that
letter.
The CHAIRMAN. In other words, only one quarter of the stock,
.25 percent of it, was in the hands of the public?
Mr. CHRISTIE. That is right.
The CHAIRMAN. All the rest of the stock was in your hands ?
Mr. CHRISTIE. Yes.
Senator ADAMS. But
the letter was intended to obligate Dillon,
Head, as a concern, to keep stock off the market, as well as the individuals, was it not?
Mr. CHRISTIE. That is right. But that was a very obvious and a
very easy intention to comply with inasmuch as those members who
were not included in this transaction did not want to sell any of their
«tock in any event, and to a large extent still hold that stock.
Senator ADAMS. At the same time, Mr. Christie, it did not require
the unanimous consent of the stockholders and associates of Dillon,
Read in order for your company to sell. That is, you formed a
joint stock association, and if your managing group, your officers,
saw fit to sell it would not make any difference that some stockholder
or some member did not want to sell; that would not preclude a sale.
You made the statement a while ago that the fact that some members
did not want to sell would preclude the company from making the
l
Mr. CHRISTIE. N O ; but when you have the situation where the head
of your firm and some of your principal executive officers are those
•who do not want to sell, that is rather controlling.
Senator ADAMS. But if Mr. Dillon had decided that he wanted to
sell, the fact that some other member did not want to sell, would not
have prevented the sale from being made ?
1654
STOCK EXCHANGE PRACTICES
Mr. CHRISTIE. Well, technically no. But I think that we try to
run our picture and we do run it so that if there is any great difference of opinion the stock would not be sold. I think Mr. Dillon:
would be very much influenced by
Senator ADAMS. But it does not require a unanimous verdict in
every case in order to do business?
Mr. CHRISTIE. It does not.
Mr. PECORA. Mr. Christie, do you recall what the market quotation was for this stock on the date of this option, namely, December
20,1928?
Mr. CHRISTIE. I can tell you I think in a minute. It was around
$54 a share, I am told.
Mr. PECORA. That was the open market quotation on the Exchange,
it then being listed on the New York Curb Exchange, was it not?
Mr. CHRISTIE. What is that ?
Mr. PECORA. Around $54?
Mr. CHRISTIE. Yes.
Mr. PECORA. In this
option agreement you and those of your
associates comprising ten or eleven in number who agreed, although
in the name of Dillon, Read & Co., to give this option to Dominick
& Dominick, undertook to deliver 10,000 shares of your holdings to
Dominick & Dominick at any time between December 20, 1928, and
February 20, 1929, at the price of $47.50 a share, which was considerably below the then market, did you not ?
Mr. CHRISTIE. On the first block of 10,000; shares at that price—
there were three
Mr. PECORA. But I will take them up one after the other.
Mr. CHRISTIE. The average of all of them was a little over 50.
Mr. PECORA. I am taking them up as the contract itself was made
out. You agreed, first, to sell Dominick & Dominick any or all of
10,000 shares between December 20, 1928, and February 20, 1929, at
the price of $47.50 a share, did you not ?
Mr. CHRISTIE. That is right.
Mr. PECORA. And when you made that agreement,, the public
market quotation was around $54 a share?
Mr. CHRISTIE. That is right.
Mr. PECORA. What prompted you and your associates who agreed
to this option to enter into it, in view of the fact that you could havesold such of your holdings as you wanted to sell on the open market
for considerably more than the option price to Dominick & Dominick?
Mr. CHRISTIE. YOU refer, and I have no objection to it, to taking
the option step by step. There are other factors, however. The
three options involved would total 30,000 shares at prices which I
believe averaged something a little over 50. They were a consideration. In other words, Dominick & Dominick were not talking about
taking an option of 10,000 shares at $47.50, and that is all. They
were talking about 30,000 shares, 10,000 shares at $47.50, which ran
for 2 months, with another option that they could take up or
which would run for 2 months beyond the time they exercised the*
first option, and then the third step, with another 10,000 shares at
$55 running 2 months beyond the exercise of the second option.
That is as I reqall that.
Mr. PECORA. This option was split up into three parts. On the
first part you agreed to sell to Dominick & Dominick 10,000 shares
STOCK EXCHANGE PRACTICES
1655
between December 20, 1928, and February 20, 1929, for $47.50 per
ishare. In the second part you agreed to deliver to Dominick &
Doininick on their call another 10,000 shares within the next 2
months period from February 20, 1929, to April 20, 1929, for $50
a share; and the third part of the option agreement called for your
delivering to Dominick & Dominick within the next 2 months period,
namely, from April 20, 1929, to June 20, 1929, another 10,000 shares
at $55 a share. That is correct, is it not ?
Mr. CHRISTIE. NO. I think that is only assuming that they did
mot exercise the options until the last day of each option.
Mr. PECORA. That is assuming that they exercised their options
within the prescribed periods of time ?
Mr. CHRISTIE. Well, at the maximum amount of the time.
Mr. PECORA. Yes.
Mr. CHRISTIE. I would
appreciate it if you would correct me, but
:as I remember that letter, if they exercised the first option on January 20 instead of on February 20, the period of the second option
would have been from January 20 to March 20 instead of the particular months that you put into your question.
Mr. PECORA. But the option gave them the right to call for the
;stock, for the first 10,000 allotment, gave them the right to call for
it, during all of the 2 months period?
Mr. CHRISTIE. That is right.
Mr. PECORA. And with regard to the second block of 10,000 shares,
the option likewise gave them the right to call for that and draw it
down from the associates who entered into this agreement, in another
two months time f rom the date of the exercise of the previous option ?
Mr. CHRISTIE. Eight.
Mr. PECORA. And the agreement with respect to the delivery to
them of the third block of 10,000 shares again gave Dominick &
Dominick .2 months' time within which to exercise that portion of
the option, did it not?
Mr. CHRISTIE. That is right.
Mr. PECORA. SO it was possible for Dominick & Dominick in exercising this option to draw down these 30,000 shares over a full period
of 6 months' time from the date of this option agreement ?
Mr. CHRISTIE. That is right.
Mr. PECORA. And you and your associates obligated yourselves by
this agreement to sell and deliver to Dominick & Dominick an aggregate of 30,000 shares over a period of possibly 6 full months' time
from December .20, 1928, at prices averaging below what was the
market price for this stock on the public exchange on December 20,
1928, when this agreement was entered into. Is not that correct?
Mr. CHRISTIE. The .average was slightly below the market at that
time; yes.
Mr. PECORA. It was several points below; not slightly below.
Mr. CHRISTIE. Three or four points below.
Mr. PECORA. That is not a slight difference, is it—3 or 4 points?
Where the security is selling for around $50, is that a slight
difference ?
Mr. CHRISTIE. With the stock selling around 50, it is 6 percent. I
do not know who is to decide whether it is slight or great. The
:stock was selling around about 54 at that time, and these options
averaged a little over 50.
1656
STOCK EXCHANGE PRACTICES'
Mr. PECORA. What were the considerations that prompted yon to
enter into this option agreement ?
Mr. CHRISTIE. The considerations that prompted me personally to
enter into it were that I had more of that particular stock than I
had of any other stock, and the stock was, I think, about one third
of the total amount that I had, and I thought that I would be willing
to sell a part of it for the sake of diversification.
Mr. PECORA. YOU could have sold it on the open market for your
own account?
Mr. CHRISTIE. I could have; but up to that time it had not occurred to me to do it. We got together with our associates and
talked it over. Those of us that did go in felt this was a perfectly
proper thing for us to do. It was our stock to do with as we pleased^
and we felt that, as a group, it was not harmful to any of our associates, and if we wanted to sell it to Dominick & Bominick by giving
them options slightly below the market, as you say
Mr. PECORA. NO ; I didn't say " slightly below the market." That
is what you said.
Mr. CHRISTIE. I beg your pardon.
Senator GLASS. AS a matter of fact, is not the plainer and shorter
answer that you wanted to make money ^ and that that is what all
of these things are done for ?
Mr. CHRISTIE. I wanted to sell that stock, Senator Glassv
Senator GLASS. YOU wanted to make money on it?
Mr. CHRISTIE. Not to make money on it. I had a profit in it at the
time; but the sale of the stock was more for the purpose of diversification than it was to register the profit that I had at that time.
Senator GLASS. YOU did not mind making money ont your diversification, did you?
Mr. CHRISTIE. I have never minded making money.
Mr. PECORA. HOW many shares of your own personal holdings- did
you put into this option agreement?
Mr. CHRISTIE. I think it was 2,900 shares.
Mr. PECORA. Mr. Christie, if you had wanted to sell for the purpose of making a profit these two thousand-odd shares of your1
personal holdings that you put into this option agreement, you
could have sold it at that time in the open market for a good deal
more than the price you were getting over a six months period of
time under this option agreement, could you not?'
Mr. CHRISTIE. It does not necessarily follow. I might have. The
fact that the stock, you say, was selling at 54 would indicate that
there were orders in the market to buy my stock, and if I wanted to
disregard my associates or sell ahead of them, perhaps 1 could have
gotten 54 for it; I cannot tell.
Mr. PECORA. Was there any understanding of an informal or other
character among the associates not to part with any of their individual holdings without the knowledge and consent or approval of
the others? Were you bound together by any such understandings
either express or implied?
Mr. CHRISTIE. NO. I think a few had sold previous to this time*
Mr. PECORA. Without consultation with the associates^
Mr. CHRISTIE. I think so.
STOCK EXCHANGE PRACTICES
1657
Mr. PECORA. They felt free to do it and they were free to do it,,
were they not ?
Mr. CHRISTIE. Yes; they were free to do as they pleased.
Mr. PECORA. And you were free, if you wanted to sell 2,000 shares
at a price on the open market that would have given you a profit, to
make such a sale, were you not ?
Mr. CHRISTIE. Yes.
Mr. PECORA. If you were willing to put these two thousand and
odd shares of yours into this syndicate arrangement in order to
make a profit, why didn't you sell them directly and individually
in the open market at the time when the stock was selling for
$54.50?
Mr. CHRISTIE. I don't know. Perhaps I should have.
Senator GLASS. I S it not a fact that when a pool handles stock
through a responsible stock brokerage concern they are more apt
to get a better price for it than otherwise ?
Mr. CHRISTIE. In this case our price was not dependent upon
what they did with the market. Our price was fixed by theses
options.
Senator GLASS. But they were willing to take that option because
they could operate a pool and sell the stock, were they not?
Mr. CHRISTIE. If we had made that kind of
Senator GLASS. I am asking questions now that I do not know
anything about, and there is scarcely a member of this committee,,
not more than one, that knows a thing in the world about what Mr.
Pecora wants to prove here—the thing which I have protested
against from the first. The committee ought to know exactly what
he is asking so that they may intelligently ask questions.
And while I am firing off now, I would like to ask Mr. Dillon if
he would feel that he could morally or legally repudiate that proposition [handing a paper to Mr. Dillon].
Mr. DILLON. NO ; that is an obligation of Dillon, Bead & Co.
Senator GLASS. Exactly. It doesn't make any difference who
signed it; it is Dillon, Eead & Co.
Mr. DILLON. It does not make any difference whose stock it was.
It is Dillon, Read & Co.'s obligation to deliver the stock to Dominick & Dominick under the terms of that letter.
Senator GLASS. SO far as I am concerned, it is not necessary for
me to put on record my opposition to pools. We long ago disclosed
the fact that many of them were conducted in a rascally way, that
they employed specialists, or when they did not employ specialists,
they employed the specialists' way, and they conduct them in a
rascally way, and I am opposed to pools. I would break them up
if I could do it; and I think I could if they would let me do it.
I do not mean, if the pools would let me $o it, but if Congress would
legislate sanely. But I would like to know what all this is about.
Mr. DILLON. This letter, Senator Glass
Senator GLASS. I do not want to come in here like an idle spectator
and sit around the table and not know what is going on, not know
what is attempted to be proved, and whether it is something that
might be corrected by legislation or that could not be corrected by
legislation.
1658
STOCK EXCHANGE PRACTICES
Mr. PECORA. Senator, I outlined to the members of the subcommittee in charge of this investigation, at an executive session which
was called by its chairman and which was attended by all of the
members, with the exception of yourself, yesterday morning, in
advance of the public hearing.
Senator GLASS. I was not in town yesterday morning, but I was
:in town on Monday.
Mr. PECORA. I was in town on Monday and I had a 2-hour talk
with the chairman of the committee.
Senator GLASS. YOU did not have it with me and did not have it
,at an executive meeting of the committee.
Mr. PECORA. That was held yesterday morning.
Senator GLASS. If you will examine the records of the committee
you will see that a textual resolution is there requiring that counsel
shall come beforehand and state to the members of the committee
what it is he proposes to prove, whether it is something that may be
corrected or not; and that ought to be done, Mr. Pecora. It ought
to be done in justice to the members of the committee. The members
of the committee ought not to sit around here in utter ignorance as
.any spectator here, as to what is going on and what you expect to
prove.
Mr. PECORA. I have on every occasion when I was so requested,
come on here and consulted with members of the committee and
apprised them of the work that the investigating staff was doing.
The CHAIRMAN. The meeting of the subcommittee was called on
yesterday morning for that purpose. Mr. Pecora was here and attempted to comply with the resolution. The Senator from Virginia
had an election in his State and could not be present, but the subcommittee was called regularly.
Senator GLASS. I asked my colleague on the right here, who is a
lawyer, if he knew what all this was, and he did not know.
Mr. PECORA. I did not understand that it was expected that I
was going to place before the executive meeting all of the evidence
that I had been collecting and was going to introduce at the public
hearing. That would have involved a duplication of time and
work.
Senator GLASS. YOU should not impute any such nonsense as that
to me, Mr. Pecora.
Mr. PECORA. YOU say you do not understand what the evidence is
that is being introduced. You could not have understood it in that
way unless I had given it all to you beforehand, which I do not think
you had in mind my doing.
Senator GLASS. My understanding is a little superior to your
•imagination. I could have understood if you had come before the
(Committee and told us just exactly what you proposed to do.
Mr. PECORA. I did that yesterday morning, sir, in executive session
called by the chairman of the committee, which I attended. I was
responsible for my own attendance at that executive session and for
no other individual's, and I accepted my responsibility.
The CHAIRMAN. Let us go on.
Senator GLASS. I intend to insist
upon carrying out the order of
the committee made at the largest meeting of it that has been held,
and that is that counsel shall explain to the committee in executive
session just what he proposes to adduce.
STOCK EXCHANGE PRACTICES
1659
Mr. PECORA. I did that yesterday morning, sir, and I placed some
emphasis on the very evidence that is now being adduced.
Senator GLASS. Yes. Well, I unfortunately was not there.
Mr. PECORA. I hope the Senator does not hold me responsible for
that.
The CHAIRMAN. It is -now 1 o'clock, and we will take a recess until
2 o'clock.
(Whereupon, at 1 p.m., a recess was taken until 2 p.m.)
AFTERNOON SESSION
The subcommittee reconvened at 2:10 p.m., Wednesday, October
4,1933, at the expiration of the noon recess.
The CHAIRMAN. The committee will come to order. Proceed, Mr.
Pecora.
TESTIMONY OF ROBERT E. CHRISTIE, JR., A MEMBER OP THE
FIRM OF DILLON, READ & CO., NEW YORK CITY—RESUMED
Mr. PECORA. Mr. Christie, you will probably recall that just prior
to the taking of recess today I asked you a series of questions with
a view to finding out from you why you did not sell your two
thousand-odd shares of the common stock of the United States &
Foreign Securities Corporation which you put into this option arrangement with Dominick & Domiftick in the open market, and
thereby have obtained a price for them higher than that which
you were to receive under this option agreement. , I do not recall
that you have as yet answered that question specifically. Will you
do so please?
Mr. CHRISTIE. Yes, sir. I remember you asked me that question,
and I think I said I might halve sold my own stock, if that were all
that had been involved, on the market at a higher price than the
option price, but this was a grouping of some associates of mine,
with a total of 30,000 shares, which obviously, if just thrown on the
market, would not have been sold, probably, at the quoted price at
that date.
Mr. PECORA. I think you did make one answer to the question, the
substance of which was that it did not occur to you to sell your
two thousand and odd shares in the open market. Was that the only
reason why you did not so dispose of them in the open market?
Mr. CHRISTIE. NO ; I meant by that that I had not been selling any
stock up to that time, and had not offered it 100 shares at a time,
or piecemeal, and that frankly I had not decided to sell any of it
until a number of us in this group decided to sell together.
Mr. PECORA. YOU know what is meant by the term " pool operation " as applied to stockmarket activities, do you not?
Mr. CHRISTIE. I do not know that I could give a very good definition of it.
Mr. PECORA. YOU know what is conveyed by the use of that term,
do you not?
Mr. CHRISTIE. TO me it sounds like some kind of a joint market
operation, buying and selling securities.
175541—33—PT 4
9
1660
STOCK EXCHANGE PRACTICES
Mr. PECORA. YOU have heard the term " pool activities " or " pool
operation" applied to stockmarket transactions, have you not?
Mr. CHRISTIE. Yes; I have.
Mr. PECORA. What do those terms convey to you—referring to what
kind of an operation ? Just tell us in your own way.
Mr. CHRISTIE. Well, I believe that they might work either with
the idea of distributing stock or of accumulating stock.
Mr. PECORA. And unloadiiig it at a higher price ?
Mr. CHRISTIE. Or distributing or selling it at a higher price.
Mr. PECORA. YOU have heard of pool manipulations, have you not?
Mr. CHRISTIE. Yes; I have heard of them. I am not familiar
enough with them, though, to describe them.
Mr. PECORA. AS one engaged in the business of investment banking,
I presume you frequently read the financial pages of the daily press.
Mr. CHRISTIE. Yes.
Mr. PECORA. Particularly in the city of New York,
Mr. CHRISTIE. Yes.
Mr. PECORA. Don't you come across, very, very frequently,
references to pool operations and pool manipulations in referring to stockmarket activities?
Mr. CHRISTIE. Yes.
Mr. PECORA. What
do those terms mean to you when you read
them?
Mr. CHRISTIE. AS a matter of
fact, they mean very little to me.
#
They do not interest me.
Mr. PECORA. DO you think the financial writers who employ them
are using terms that are enigmas to bankers ?
Mr. CHRISTIE. NO, sir. I do not have any reaction when I read
that in the newspaper at all.
Mr. PECORA. What do they mean to you when you read in the
financial pages of the press of the activities or operations of pools in
the stock market? For instance, you sometimes read, do you not,
that a pool is operating in the stock of the ABC Company, do you
not?
Mr. CHRISTIE, Yes.
Mr. PECORA. What does
Mr. CHRISTIE. It means
that me&n to you ?
that some group of individuals are buying
and selling that stock, and are active in the purchase and sale of it.
Mr. PECORA. Where such pool operations are so referred to, you
know, do you not, that those pool operations are usually conducted
by those who compose the pool, on the basis of their having for their
benefit in such operations an option agreement with the owners or
holders of large blocks of the stock that they are dealing in, so
that they know at any time during the pool operation that they can
depend upon the delivery to them of a certain number of shares of
that stock?
Mr. CHRISTIE. I am not at all familiar with the mechanics of any
pool operations. I should assume that they might either buy stock
and accumulate stock for the pool, or they might do it by way of an
option.
Mr. PECORA. They frequently do it by means of an option.
Mr. CHRISTIE. I assume so.
Mr. PECORA. Given to them by holders of sufficiently large blocks
of the stock to protect them in their pool operations.
STOCK EXCHANGE PRACTICES
1661
Mr. CHRISTIE. Very likely.
Mr. PECORA. Having in mind the letter which has been put in
evidence here, known as " Committee's Exhibit 9 ", and which constitutes the option agreement that was entered into by you and your
associates who were participants therein, with Dominick & Dominick5
would you say that this letter indicates that Dominick & Dominickhad formed a pool to buy and sell the common stock of the Unitedl
States &> Foreign Securities Corporation at the time this optiom
agreement was made?
Mr. CHRISTIE. N O ; I would not say that that indicated that they
were necessarily going to carry on any pool operation. In the conversation that led up to it, as I said this morning, a good deal of
emphasis was put on the fact that they had a large clientele that
they would like to distribute this kind of stock to. We were not—
that group of individuals were not participants in the account of
Dominick & Dominick. Our sole participation in that business waa
the granting of those options.
Mr. PECORA. Why were you willing to tie up your stock in this;
kind of an option agreement for a period of possibly 6 months ?
Mr. CHRISTIE. SO as to have a better opportunity of distributing
the total amount of 30,000 shares.
Mr. PECORA. But you at that time had not been especially anxious
to sell any of your holdings, as I understood your testimony this
morning.
Mr. CHRISTIE. That is right.
Mr. PECORA. What do you think the interest of Dominick & Dominick was in seeking to get you people to enter into this option agreement with them ? What do you think they were trying to do ?
Mr. CHRISTIE. SO that they could carry on a transaction profitably
to them.
Mr. PECORA. HOW would they be enabled to carry on such a transaction on a profitable basis, as distinguished from buying and selling;
or trading in the open market?
Mr. CHRISTIE. With these options they were protected at the price
of the options, so that any sales that they made at a price above that
would represent their profit.
Mr. PECORA. Did it not all indicate that they were managing or
conducting a pool operation?
Mr. CHRISTIE. On the basis of that letter, I do not think that that
necessarily indicates that they were, although whether they did or
not I do not know.
Mr. PECORA. Well, let us see. In the opening paragraph of the
letter they say to you as follows :
"We wish to confirm that in consideration of the formation by us of an
account of which we shall be the managers with full discretionary powers, yoj*
hereby extend to us, for and on behalf of such account, options to purchasefrom you an aggregate of 30,000 shares of United States & Foreign Securities
Corporation common stock at prices and under conditions as follows."
From that, am I justified in inferring that in the course of the
conversations which Dominick & Dominick had with you and your
associates preliminary to the making of this option agreement, they
informed you that they had formed or were going to form an account
of some kind, of which they were to be the managers with full
discretionary powers ?
1662
STOCK EXCHANGE PEACTICES
Mr. CHRISTIE. That is right. In the formation of that account, we
knew that they had other houses associated with them in the account.
Mr. PECORA. Did they tell you for whose benefit they were forming
and were going to operate this account ?
Mr. CHRISTIE. It would naturally be for their benefit.
Mr. PECORA. For whose benefit?
Mr. CHRISTIE. For the participants in their account.
Mr. PECORA. Did they tell you who those participants were ?
Mr. CHRISTIE. I don't believe so.
]\lr. PECORA. Was it of any interest to you to know who they were?
Mr. CHRISTIE. NO.
The CHAIRMAN. Did they have any other
Mr. CHRISTIE. That I do not know.
Mr. PECORA. YOU knew, did you not, as
stock in the corporation ?
an officer of the United
States & Foreign Securities Corporation at the time of the granting
of this option to Dominick & Dominick, that 250,000 shares of the
common stock of that corporation had been distributed to the general public back in October 1924 in connection with the purchase
by the public of the 250,000 shares of the first preferred stock of
this corporation?
Mr. CHRISTIE. I knew about the 250,000 shares that you speak of.
Whether the dates we had this morning regarding the time I was an
officer of the corporation coincided with the date of this option, I
do not remember. At the beginning of your statement you asked
me if I knew that, being an officer at the time the option was
granted. I am not sure whether I was an officer at that time or not.
Mr. PECORA. YOU had been an officer prior to December 20, 1928,
had you not ?
Mr. CHRISTIE. That is right.
Mr. PECORA. And you were familiar with all the facts and circumstances surrounding the organization and flotation of the stock
of the United States & Foreign Securities Corporation back in 1924.
Mr. CHRISTIE. Yes, sir.
Mr. PECOBA. And that information
included the information that
250,000 shares of the common stock had been issued to the public that
subscribed for the 250,000 shares of first preferred stock.
Mr. CHRISTIE. Eight.
Mr. PECORA. That made available for open-market operations a
substantial block of this common stock, did it not?
Mr. CHRISTIE. TWO hundred and fifty thousand shares.
Mr. PECORA. Yes. Do you know of any reason why Dominick &
Dominick could not have purchased the 30,000 shares that are covered by this option agreement in the open market, in view of this
.floating supply of 250,000 shares that was available?
Mr. CHRISTIE. N O ; no reason.
Mr. PECORA. From the fact that they came to you and your associates, comprising a small group of individuals, and sought this kind
of an arrangement to enable them to purchase at fixed prices, over a
period of 6 months, possibly, 30,000 shares of this stock, would you
not say that they were organizing a pool operation ?
Mr. CHRISTIE. I would say that if they were going to go in and
offer to buy the 30,000 shares in the market, they would not know
at what price they might be able to get it. They might get just a
STOCK EXCHANGE PRACTICES
1663
few thousand shares, not enough to distribute to their clients, and
they probably would not be interested in that sort of thing, so they
came to us to see if they could get a sizeable block of stock, which
was this 30,000 shares.
Mr. PECOKA. YOU see, from the terms of this option agreement, the
period of operation or management of this account referred to in
this letter was possibly 6 months.
Mr. CHRISTIE. That is right.
Mr. PECORA. That was a pretty substantial period of time to
accumulate in the open market 30,00 shares, was it not?
Mr. CHRISTIE. Oh, yes; but the 6 months' time was the time within
which they wanted to both buy and sell.
Mr. PECORA. Both accumulate and unload; is that right ?
Mr. CHRISTIE. And distribute.
Mr. PECORA. When you say "distribute" you are using it in the
same sense in which I am using the term " unload ", are you not ?
Mr. CHRISTIE. Very likely; to get out of it at a profit.
Mr. PECORA. Just a difference of terminology.
The CHAIRMAN. Was this stock listed on the New York Stock
Exchange at that time ?
Mr. CHRISTIE. It is now, Senator Fletcher.
Mr. PECORA. It was not then.
Mr. CHRISTIE. It was not then. It was listed some time the following year.
Mr. PECORA. It was listed on the Curb.
Senator ADAMS. May I ask if you can give me, in a very rough
way, what the requirements are for listing on the Curb Exchange?
I am thinking of the number of stock certificates and the number
of stockholders you have to have. What are those requirements,
generally ?
Mr. CHRISTIE. I am afraid I could not give you a very accurate
idea of it.
Mr. DILLON. I think it requires that a certain percentage of the
total issue of stock must be outstanding and distributed. For example, if I owned 100 percent of the stock, I could not list it on the
Curb. If I owned 90 percent, I probably could not. There is some
point there.
Senator ADAMS. What is the approximate figure ?
Mr. DILLON. I think the so-called Big Board, the regular stock
exchange, requires a broader distribution for listing than the Curb
does. I am not sure what the Curb requirement is. I know it cannot be more than 25 percent, because this was listed, and there was
only 25 percent in the hands of the public.
Senator ADAMS. Did your organization make the application for
listing ?
Mr. DILLON. NO. The company must make its own application.
The United States & Foreign made the application.
Mr. PECORA. Mr. Christie, can you tell us the reason for including
in this option agreement the following provision, which I will now
read to you therefrom:
" During the period in wliich these options exist you agree to loan us, at our
call, all or any part of 20,000 shares of stock at the then prevailing market
price."
1664
STOCK EXCHANGE PRACTICES
What was the reason for the inclusion of that ?
Mr. CHRISTIE. In this account that Dominick & Dominick had
with some other firms, if they were going to sell stock to their clients,
they would use the stock that they would borrow from us against
delivery of that stock. That, I believe, would be a protection to
them should the stock be sold back by their clients. If they bought
it back, or the sale was canceled, they would then not be long the stock,
because they used borrowed stock to make the delivery; and also, if
the stock, for any reason during the period during which they had itoptioned, might sell lower, they could buy the stock in the market and
make a larger profit, and return the borrowed stock to us.
Mr. PECORA. That is to say, it indicated to you that, among other
things, the managers of this account—we will abandon for the time
being the. word " pool "—contemplated making some short sales, and
in order to have stock available to cover those short sales without
making it necessary for them to go into the open market and cover,
they provided for this arrangement under which they could borrow
from you 20,000 shares for such covering purposes.
Mr. CHRISTIE. Yes, sir. It would be clear that they could do that,
and I think it was later extended to the whole 30,000.
Mr. PECORA. I S it not clear to you that that is what they had in
mind by the inclusion in this option agreement of these provisions to
which I have just called your attention?
Mr. CHRISTIE. I think that is a fair statement.
Senator ADAMS. They could have borrowed the stock and made
the sales without exercising any of the options.
Mr. CHRISTIE. Yes.
Senator ADAMS. If
it were just a matter of the disposal of this
option stock, why would it be necessary for them to have arrangements with other brokerage or stock-selling houses, which I understand they had?
Mr. CHRISTIE. Why they invited other people to join with them
in this ?
Senator ADAMS. YOU said there were others operating with them
when they came to you to get this option.
Mr. CHRISTIE. Yes; and the letter said that they were forming an
account of which they were to be the managers. Why it was necessary to do that, I am sure I do not know. It probably made a
broader operation. They probably had more people talking this
stock to their customers all at the same time than if they undertook it
alone.
Senator ADAMS. It would obviously indicate that it was not merely
to be sold on the market. That is, it involved the aid of other
institutions.
Mr. CHRISTIE. Yes, that is right.
Senator ADAMS. And possibly the other institutions were to buy
as well as to sell.
Mr. CHRISTIE. It might very well be. They do not say how many,
and the letter does not indicate how many people they had in their
account. At least they had other people associated with them.
Senator ADAMS. It would be possible for someone who had a
misunderstanding as to what a pool might be to think that a pool
was going to do a reasonable amount, not of manipulating, but of
buying and selling to maintain a market.
STOCK EXCHANGE PRACTICES
1665
Mr. CHRISTIE. That is right.
Mr. PECORA. Let one read this other provision to you from this
so-called " option " agreement.
It is understood that until all of these options have either been exercised
or have lapsed, you have the right to place stock privately, but that you will
exercise your best efforts to prevent such stock from coming into the market.
What would you say was the reason for the inclusion of that
particular provision in this option agreement ?
Mr. CHRISTIE. Well, if they were offering this stock to their customers at the then market price, which was slightly above this option
price, and if we were to offer a substantial amount of additional
stock on the market, it might naturally spoil that market, the supply
being greater than the demand, and knock it below the option price,
so that they could not do anything with this account.
Mr. PECORA. Then, by virtue of this provision that I have just
read to you, they were assuring themselves, so far as it was possible
for them so to do, that in their market operations which they were
going to manage for the benefit of this so-called " account", they were
not going to be disturbed by owners of the stock, such as yourself,
interfering with their market operations by putting your own stock
through the market.
Mr. CHRISTIE. That is right.
Mr. PECORA. In other words, to that extent they were seeking to
dam up the normal, natural flow of these securities in the public
market, were they not?
Mr. CHRISTIE. AS far as we were concerned, and this large block
of stock, that is what they were trying to do, obviously.
Mr. PECORA. And that is the purpose that is always sought to be
attained in the operation of pools, is it not ?
Mr. CHRISTIE. Well, that is a generalization. As I say, I hesitate
to comment on pool operations because I have never run one, and I
am not a specialist in pools. It would seem, however, to be a reasonable precaution that anyone would take if he wanted to work and
distribute a stock.
Mr. PECORA. AS a result of the conduct of operations by this account, or in behalf of this account, in the manner that was indicated
to you by the terms of this option agreement, that that account was
to be operated, do you, Mr. Christie, think it was fair to the general
investing public to enter into such an arrangement with the managers of this account?
Mr. CHRISTIE. Well, I think it was perfectly fair to the holders of
the other 250,000 shares of preferred stock to grant these options and
to be willing to hold the stock off the market, according to the provisions of that letter as they required of us.
Mr. PECORA. TO what extent did you bind yourselves by this agreement to withhold your stock from t l ^ market? Weren't you interfering with the operation of the normal law of supply and demand?
Mr. CHRISTIE. Not necessarily, Mr. Pecora. We were only binding
ourselves.
Senator ADAMS. Mr. Pecora, it was more a case where they were
taking unfair advantage of the law of supply and demand, wasn't it?
Senator GLASS. Well, do you know of anybody today in the Government who is not taking unfair advantage of the law of supply and
demand ?
1666
STOCK EXCHANGE PRACTICES
Mr. PECORA. Senator Glass, the reason I am asking these questions
is that I have read the testimony given before this committee, in hearings held last year, and it was contended that the stock exchange
affords a market for the free and open buying and selling of securities, and that usually the prices of securities are fixed in obedience
to the law of supply and demand. I t seems to me here we may have
some definite proof of circumstances, in regard to this transaction at
least, where somebody sought to interfere with that natural law of
supply and demand.
Senator GLASS. But what I asked you was: If you know of any
government official or agency which is not now undertaking to interfere with the law of supply and demand. [Laughter.]
Mr. PECORA. Well, Senator Glass
Senator ADAMS (interposing). Aren't they, rather, interfering
with the supply rather than interfering with the law ?
Mr. CHRISTIE. Our interest was only in the granting of these options. And the options were not harmful to us, and I could not see
that they would be harmful to the 250,000 shares that you spoke of as
being outstanding. If there was at all any interference with the law
of supply and demand it was on the side that I should think would
work to the benefit of the holders rather than in any way against
them.
Mr. PECORA. It might work to the benefit of the holders, but do
you think it would work to the benefit of an investor going into the
market at that time and purchasing this stock ? Wouldn't he be buying in a market where prices were fixed not in response to the natural
law of supply and demand but under circumstances where that price
is interfered with because of interference with the natural law of
supply and demand?
Mr. CHRISTIE. Well, it was only interfered with to the extent that
we were not going to dump any more of our stock on the market,
which we probably would not have done anyhow. Those 250,000
shares were still there, there was still an available supply there, and
if anything was added to it through these operations we did not take
away from any of the available supply that did exist.
Mr. PECORA. DO you know how many shares were actually traded
in by this account referred to in this option agreement of December
20, 1928?
Mr. CHRISTIE. NO ; I do not.
Mr. PECORA. Didn't you ever
learn from Dominick & Dominick
how many shares were actually traded in both on the buying and
the selling side?
Mr. CHRISTIE. NO, sir; I never learned that.
Mr. PECORA. Did you ever learn from them the profits realized by
the participants in that account as a result of that operation?
Mr. CHRISTIE. N O ; I never did.
Mr. PECORA. DO you know now long the operation of the account
lasted under this option agreement?
Mr. CHRISTIE. Well, I have the record of the date on which they
exercised their options, and I think there were some additional options granted, and they ran I suppose for several months. They
formed a second account along in June or July of 1929, and I think
this account ran right up to that account, and the second account went
on through.
STOCK EXCHANGE PRACTICES
1667
Mr. PECORA. This account was in operation for a period of about
6 months ?
Mr. CHRISTIE. Yes, sir.
Mr. PECORA. DO you know
the total number of shares of the
account traded in?
Mr. CHRISTIE. NO ; that information I do not have.
Mr. PECORA. Don't you know it was considerably more than 30,000
shares which were embodied in this option agreement ?
Mr. CHRISTIE. Well, we granted them additional options, and
they took down additional stock. So I know it was over 30,000
shares.
Mr. PECORA. What was the total amount of the shares which you
and your associates actually delivered to Dominick & Dominick
for the purpose of the operation of this account under this option
agreement or any supplemental agreements that followed?
Mr. CHRISTIE. By the use of the words " supplemental agreements ", do you still mean this first account?
Mr. PECORA. This first account; yes. This one based upon the
option agreement of December 20, 1928.
Mr. CHRISTIE. Mr. Pecora, I am told that during the first account
the total options granted to them was 40,000 shares, but that the
total amount they took down under those options in the first account
was 25,000 shares. Then they ran into the second account.
Mr. PECORA. DO you happen to know what the total volume was
of transactions on the New York Curb Exchange during the period
of time covered by the operation of this account; namely, from
December of 1928 to June of 1929?
Mr. CHRISTIE. NO.
Mr. PECORA. In the common shares of the United States & Foreign Securities Corporation?
Mr. CHRISTIE. NO ; I do not think I know that.
Mr. PECORA. Well, for your information and subject to correction by you if you wish to seek means of confirmation of this information, a compilation of statistics made by members of the investigating staff of the committee shows that the total volume of trading
during that period of time on the New York Curb Exchange in this
security was 145,800 shares, both on the buying and on the selling
side, and that the account operated by Dominick & Dominick was
responsible for trading to the extent of 129,650 shares in that period
of time, and that about 48 percent of the entire volume of the trading
on the New York Curb Exchange was by Dominick & Dominick.
Now, does that information, assuming it to be correct, accord with
your general recollection?
Mr. CHRISTIE. Well, I have no recollection of the activity in the
market at that time, but I am perfectly willing to accept those figures
compiled by your people.
Senator ADAMS. Mr. Pecora, you speak of trading on both the
buying and selling sides of the market.
Mr. PECORA. Yes; the total number of shares traded in.
Senator ADAMS. Well, let us say that there are 100 shares traded
in. You do not mean 100 shares bought and 100 shares sold, do
you?
Mr. PECORA. NO. 100 shares traded represents 100 shares bought
and sold.
1668
STOCK EXCHANGE PRACTICES
Senator ADAMS. Then if 100 shares are sold and bought it would
show up as 200 shares traded in.
Mr. PECORA. The figures would be shown on both the selling and
buying sides.
Senator ADAMS. Then in the case of a total of 145,000 shares
traded in, if this one concern had dealt in 129,000 shares, quite necessarily they had purchased a great many shares ?
Mr. PECORA. Yes.
Senator ADAMS. Because
there could have been only about seventyodd thousand shares sold.
Mr. PECORA. Unless they were doing both buying and selling
themselves.
Senator ADAMS. If their transactions represented 129,000 shares
out of a total of 145,000 shares traded in, it could be only half of
the 145,000 shares.
Senator GLASS. Mr. Chairman, it has been developed over and
over again in these hearings that that is exactly what they do. They
buy their own shares and they sell their own snares. All those pools
do that in order to control the market.
Mr. PECORA. Senator Glass, the reason I am trying to put on the
record through the medium of the testimony of this witness, plus
the documentary evidence that we have here, the information celled
for in the question, is to give a concrete example of the formation
and operation of such a pool account.
The CHAIRMAN. Well, of course, the manager of a pool will offer
certain stock and the price will go down as a result of such sale, and
then he will come in and buy and will push the price up.
Senator GLASS. Oh, well, you have abundant testimony of concrete
examples of that having been done over and over again.
The CHAIRMAN. Mr. Christie, did you sell all of your individual
holdings to Dominick & Dominick?
Mr. CHRISTIE. NO ; I did not.
The CHAIRMAN. YOU had some left?
Mr. CHRISTIE. Yes, sir.
The CHAIRMAN. YOU and your friends
and associates in this transaction with Dominick & Dominick did not dispose of all the stock
that you had as individuals ?
Mr. CHRISTIE. NO. The total of this first account that is under
discussion now was 25,000 shares, which they bought in that account.
And then they had a second account, which I imagine Mr. Pecora
will bring up in order to carry this complete story through, which
will come in. In the whole account we sold, I think, 74,000 shares,
the figure that you had this morning, to Dominick & Dominick.
This account which Dominick & Dominick ran we had no interest
in and had no first-hand knowledge of as to how they did it or
what the volume was. I take it that the tabulation which Mr. Pecora
has is the total of the daily sales as reported on the exchange.
Mr. PECORA. Yes; as reported on the exchange.
Mr. CHRISTIE. And then it is doubled so as to make purchases and
sales, and does not include the 25,000 shares that Dominick & Dominick bought from us.
The CHAIRMAN. It only refers to transactions on the exchange.
STOCK EXCHANGE PRACTICES
1669
Mr. PECORA. Those sales did not go through the exchange, did
they?
Mr. CHRISTIE. NO.
Mr. PECORA. That
is why they are not included in the volume of
trading. The volume of trading I am referring to is open market
trading.
Mr. CHRISTIE. But you also gave a figure—and I am not disputing
any of it but am only trying to get a clearer picture of what you
mean—of the account traded in, and I assume that included the
25,000 shares?
Mr. PECORA. NO.
Mr. CHRISTIE. It was without that, then.
Mr. PECORA. Yes.
Senator GLASS. Let me ask you this question
for my own particular
information, though any other member of the committee with nv)
consent may make use of it. What percentage of the people who
trade on the stock market actually know the true financial status of
your company or of any other company in the matter of the stocks
in which they trade?
Mr. CHRISTIE. Well, this particular stock was the stock of the
United States & Foreign Securities Corporation. It is an investment trust, and the testimony this morning—and I am saying this,
Senator Glass, because I am not sure that it was not before you
came in, and I think it was—this investment trust publishes annually
a complete list of its holdings, and a complete statement. It also
publishes semiannually a statement of its general operations and
income account. Mr. Dillon also testified this morning that
Senator GLASS (interposing). That I know. I am not suggesting
that you have been guilty of any concealment. I am trying to test
the intelligence of people who gamble in stocks on the stock exchange. [Laughter.]
Senator ADAMS. Senator Glass, let me cite a little experience of
my own—and I do not want this placed on the record.
(Thereupon there was some little discussion off the record.)
Senator GLASS. Four years ago I suggested putting a United
States Government tax on stocks that are clearly in the gambling
category rather than in an investment category, but everybody in
Congress got frightened to death because of the statements and
claims made by brokers and stock speculators. And Mr. Untermyer
tried the same thing in New York the other day, and the stock
exchange proposed to move the whole dad bum caboodle over to
New Jersey, and very likely they would have moved over to New
Jersey, but they bluffed him out of his position, and he recanted, and
there you are. But if they had done it here in Congress they would
not have had anywhere to move.
The CHAIRMAN. They might have gone to Canada, they say.
Senator GLASS. Well, I would rather they would be in Canada than
ruining all of us in this period of distress that we have had, and that
is what brought it on. And if Canada wants to be ruined, why, that
will be Canada's affair.
Mr. PECORA. AS I recall the testimony before this committee last
year the officials of the New York Stock Exchange disclaimed that
1670
STOCK EXCHANGE PRACTICES
responsibility, disclaimed any responsibility on the part of the exchange for gambling operations. I fully agree, Senator Glass, with
your views in respect to that. And in that connection I recall
testimony given here last June by Mr. Taplin, who stated, as I
remember it, that in his opinion not one investor in a thousand knew
anything at all about the security that he traded in.
The CHAIRMAN. Those are really not investment trades, but speculation and gambling.
Senator GLASS. Well, gentlemen, I am tired of making this hearing
interesting. I have to go to see a doctor.
The CHAIRMAN. We are sorry to see you go, Senator Glass.
Mr. PECORA. Mr. Christie, shortly after the completion oi the
operation of this first account that was managed by Dominick &
Dominick, a second option agreement was entered into with Dominick
& Dominick by you and your associates, was there not ?
Mr. CHRISTIE. Yes; that is right.
Mr. PECORA. And this second option agreement was dated June
22, 1929, wasn't it?
Mr. CHRISTIE. Well, I would have to see.
Mr. PECORA. I show you what purports to be a photostatic copy
of a letter addressed to Messrs. Dillon, Bead & Co. under date of
June 22, 1929, signed by Dominick & Dominick, and I ask you if
you recognize that as being a true and correct copy of a letter addressed to Dillon, Read & Co., by Dominick & Dominick on that
date.
Mr. CHRISTIE (after examining photostat). On June 22, 1929;
yes.
Mr, PECORA. I offer that letter in evidence and ask that it be
spread on the record of our hearings.
The CHAIRMAN. It will be received and made a part of the record
by the committee reporter.
(A photostat of a letter dated June 22, 1929, addressed to Dillon,
Read & Co., and signed by Dominick &> Dominick was marked " Committee Exhibit No. 10, Oct. 4,1933 ", and will be found where read by
committee counsel during the afternoon's hearing. (See p. 1675.)
Mr. PECORA. NOW, Mr. Christie, before I go into the details of
the account carried under this second option agreement, let me ask
you how much in the aggregate you and your associates received
from Dominick & Dominick for the 25,000 shares of stock that you
delivered to them under the terms of this first option agreement,
dated December 20, 1928.
Mr. CHRISTIE. I will have to look that figure up for you.
Mr. PECORA. All right.
The CHAIRMAN. While Mr. Christie is looking up that data, Mr.
Dillon, may I ask your judgment as to what proportion of a stock
ought to be offered to the public over and above what is controlled by
some one concern before it is listed on a stock exchange? What
would be your estimate about that?
Mr. DILLON. I think the New York Stock Exchange have a definite and adequate ruling on that, but I am not familiar with just
what the proportions are.
THE CHAIRMAN. I was trying to get your judgment about that
matter. For instance, it does not seem to me that the New York
STOCK EXCHANGE PRACTICES
1671
Stock Exchange ought to list this stock at all when only 25 percent
is held by the public and 75 percent by one interest. I do not know
what their rule is, but I was seeking to get your idea about a percentage that would be reasonable and fair.
Mr. DILLON. I think there is general distribution. I do not know
as they have that much, but I can find what the rule is and will be
glad to give you my opinion of their rule.
The CHAIRMAN. Very well.
Mr. CHRISTIE. Mr. Pecora, I seem to be delayed in order to get
the exact amount, but the average price of that 25,000 shares was
about 49. That would make it about $1,225,000 as the proceeds of
the 25,000 shares.
Mr. PECORA. NOW, the exact figure which I have and which we have
compiled from your own records is $1,229,125. That would seem to
be right, wouldn't it?
Mr. CHRISTIE. Yes, sir.
Mr. PECORA. And you are
willing to accept that figure subject ta
any correction that you may see fit to make subsequently ?
Mr. CHRISTIE. Right.
Mr. PECORA. That is, 25,000 shares that were sold by yoti and
your associates for an aggregate of $1,229,125 came out of the block
of 500,000 shares, and hence cost your associates upon their original
acquisition of these shares at the rate of 20 cents a share the aggregate sum of $5,000, didn't they ?
Mr. CHRISTIE. It cost my associates originally 20 cents, as you say.
It cost some of us, as I told you this morning, in my own casey
$10 a share.
Mr. PECORA. NOW, we will proceed to a consideration of the second
account under this option agreement of June 22, 1929, which has
been marked in evidence as exhibit 10. Prior to the making of this
option agreement of June 22, 1929, I assume there were further
conversations between Dominick & Dominick or their representatives
with you and your associates with respect to the subject matter of
this option agreement?
Mr. CHRISTIE. Yes, sir; that is right.
Mr. PECORA. What was the general substance of those conversations, please?
Mr. CHRISTIE. AS I recall it, the first account that had options
granted to the extent of 50,000 they had
Mr. DILLON. Forty.
Mr. CHRISTIE. Forty thousand I think was the maximum amount at
any one time, but there were some overlapping options. At any rate,
the maximum was 40,000 and they exercised 25,000. So there were
conversations about the options as they came due or were renewed
or changed, and the options on 15,000 shares expired, and then there
were preliminary conversations about the letter which is exhibit 10*Mr. PECORA. Well, is that all they said ?
Mr. CHRISTIE, This was a different account, in that Dillon, Ke&d
& Co. had a participation, a 25-percent interest in this account.
Mr. PECORA. In the course of the conversations that immediately
preceded and led up to this option agreement of June 22, 1929, were
any references made to the listing of this stock on the New York
Stock Exchange ?
1672
STOCK EXCHANGE PRACTICES
Mr. CHRISTIE. That I don't remember. There may well have been,
but I don't remember it.
Mr. PECORA. DO you recall when the common shares of the United
States & Foreign Securities Corporation were listed on the New York
Stock Exchange ?
Mr. CHRISTIE. Early in July 1929.
Mr. PECORA. July 5, 1929, wasn't it?
Mr. CHRISTIE. One of my associates says July 5 and the other one
says July 9. July 5.
Mr. PECORA. July 5,1929. Was anything said in the conversations
that preceded the making of this option agreement of June 22, 1929,
about having this stock listed on the New York Stock Exchange ?
' Mr. CHRISTIE. There may well have been, Mr. Pecora, but I do not
believe the conversations were had with me. I have no recollection
of them. They might have been with one of my associates.
Mr. PECORA. What prompted the United States & Foreign Securities Corporation to list its stock on July 5, 1929, on the New York
Stock Exchange ?
Mr. CHRISTIE. I do not believe I can answer that question. I don't
know.
Mr. PECORA. Who made the application for the listing?
Mr. CHRISTIE. I suppose that the company did. Who for the
company I do not know.
Mr. PECORA. Who attended to the formalities of it? Who actually
attended to the formalities of it ?
Mr. CHRISTIE. I think I could tell that by referring to the application for listing or asking the company to refer to the listing application, that might show that. I do not know.
Mr. PECORA. Who made the compilation of the statistical data
that was required by the New York Stock Exchange be inserted in
the listing application?
Mr. CHRISTIE. That I don't know.
Mr. PECORA. Wasn't it done in the office of Dillon, Eead & Co.,
Mr. Christie?
Mr. CHRISTIE. That I don't know. The company did it.
Mr. PECORA. DO you know who would know that? Now, you
were an officer of the investment trust. You were also an associate of
Dillon, Eead & Co. Can't you tell us?
Mr. CHRISTIE. I don't think I was an officer of the company on
this date. I might have been. I had been.
Mr. PECORA. YOU had been prior thereto one of its executive
officers ?
Mr. CHRISTIE. I had been; yes. I could find out, I should think,
yho made that application blank up if you would like to have that
information here.
Mr. PECORA. We know that the application must have been made
in the name of the United States & Foreign Securities Corporation.
Mr. CHRISTIE. That is right.
Mr. PECORA. Because the rules of the stock exchange required the
application to be made by the corporation seeking to list its securities
on that board?
Mr. CHRISTIE. Right.
STOCK EXCHANGE PRACTICES
1673
Mr. PECORA. NOW, who were the individuals, or from whose personnel did they come, who actually obtained and supplied to the
New York Stock Exchange the statistical information required to be
set forth in the application for listing ?
Mr. CHRISTIE. Well, the United States & Foreign Securities Corporation, and their accountants, I think, were Price, Waterhouse
& Co.
Senator ADAMS. Mr. Christie, did the United States & Foreign
Securities Corporation maintain an independent office of its own, or
were its affairs looked after on the part of the offices of Dillon, Read
& Co.?
Mr. CHRISTIE. At that time I think it had an independent office
at Newark.
Mr. PECORA. That was just a formal office, wasn't it?
Mr. CHRISTIE. Books and records were kept there.
Mr. PECORA. But the active operations of the company did not proceed from the Newark office, did they? The board meetings were
held there for technical purposes, weren't they?
Mr. CHRISTIE. I think that you will find from the dates that I
gave this morning that I was not officially connected with [addressing associates] was I? I didn't think that I was an officer of the
security company at that time. I didn't take any part in preparing
those listing applications.
Mr. PECORA. Will you be good enough to confer with your associates now and then inform us one of them among those present who
is better qualified to answer the questions along this line that I am
now addressing to you?
Mr. CHRISTIE. Regarding the listing application of the stock on
the stock exchange?
Mr. PECORA. Yes.
Mr. CHRISTIE (after
conferring with associates). Mr. Pecora, the
listing application was apparently prepared by the firm of Root,
Clark, Buckner & Howland.
Mr. PECORA. That is a firm of attorneys, isn't it?
Mr. CHRISTIE, For the United States & Foreign, and Price, Waterhouse & Co. prepared the financial statement and audit of the books,
so the counsel for the company tells me.
Mr. PECORA. Who furnished the statistical information or the data
from which the information was gathered and compiled by PriceWaterhouse & Co. do you know?
Mr. CHRISTIE. Counsel for the company say that the books were
furnished by Price, Waterhouse & Co. and that they compiled all
the information to fulfill the requirements from the records of the
company.
Mr. PECORA. Can you give us the reasons for causing this to be
listed on the New York Stock Exchange at this time ?
Mr. CHRISTIE. N O ; I could not do that, Mr. Pecora.
Mr. PECORA. The listing application, a copy of which I have before me, recites among other things that at that time you were vice
president of the United States & Foreign Securities Corporation.
Mr. CHRISTIE. Yes, sir.
Mr. PECORA. That does not
Mr. CHRISTIE. NO, sir.
conflict with your recollection, does it?
1674
STOCK EXCHANGE PEACTICES
Mr. PECORA. Well now, in view of the fact that you were vice
president, do you recall any discussion by the officers or board of the
United States & Foreign Securities Corporation at which there was
considered the question of listing its stock on the New York Stock
Exchange ?
Mr, CHRISTIE. N O ; I do not.
Mr. PECORA. DO you recall ever participating in any such discussion?
Mr. CHRISTIE. NO, sir. (Conferring with associates.) I am advised that there was a directors' meeting at which listing was taken
up and approved.
Mr. PECORA. Can you tell the committee what advantages, if any,
accrued to the corporation from having its securities listed on the
New York Stock Exchange?
Mr. CHRISTIE. Well, I think that it naturally gives a broader market to list it on the New York Stock Exchange. This also, I think,
was one of the first investment trusts that were admitted to the New
York Stock Exchange. I think that it was one of the first investment trusts to be listed on the stock exchange, and there was a
certain amount of distinction to have the listing committee go over
all that and pass on it and have it listed. That and the broader
market are the only things that occur to me at the moment.
Mr. PECORA. AS a matter of fact, the open market operations in
the stock of this company while it was listed on the stock exchange
were not of any large volume outside of the volume that evidenced
itself during the operation of this first account by Dominick &
Dominick?
Mr. CHRISTIE. Your figures of the volume on the New York Curb
Exchange for the 5 or 6 months preceding this showed a substantial
trading in substantially all of it.
Mr. PECORA. Forty-eight percent of which Dominick & Dominick
were responsible for, weren't they?
Mr. CHRISTIE. That is right, according to your figures, which I .
have accepted, with the exception that I have no knowledge of my
own of the Dominick volume.
Mr. PECORA. NOW, when this second option agreement wTas entered into were you informed by Dominick & Dominick who the
participants were in the account referred to in this second option
agreement?
Mr. CHRISTIE. I do not believe so, except that we were to have
25 percent interest. Who the other participants were I do not
recall.
Mr. PECORA. TO that extent this second option agreement differed
from the firist option agreement, didn't it ?
Mr. CHRISTIE. That is right.
Mr. PECORA. That under the second option agreement you and
your associates who were to supply 20,000 shares to Dominick &
Dominick under the terms of this second option agreement were to
have a participation of 25 percent in the profits of the account if
any accrued?
Mr. CHRISTIE. The participation of the 25 percent was taken as a
firm and the individuals that granted the option were the same
group of individuals that supplied stock in the first account.
STOCK EXCHANGE PEACTICES
1675
Mr. PECORA. I want to read for the information of the committee
the text of the second option agreement, on the letterhead of—
DOMINIOK & DOMINIGK,
115 Broadway, New York, June 22, 1929.
UNITED STATES & FOREIGN SECURITIES CORPORATION
COMMON STOCK (NO FAR! VALUE)—TRADING ACCOUNT
Messrs. DILLON, BEAD & Co.,
Nassau and Cedar Streets, New York City.
DEAR SIRS: We are forming an account on the basis of twenty thousand
(20,000) shares for the purpose of dealing in common stock of United States &
Foreign Securities Corporation (a Maryland corporation). We shall be the
managers of the account with full discretionary powers as such and shall
participate in it.
As managers, we have obtained, for and on behalf of the account, options
to purchase all or any part of nineteen thousand one hundred and ninety-eight
(19,198) shares of said common stock of the United States & Foreign Securities Corporation at $52 a share, such option to continue in full force and effect
for a period of 60 days from this date.
The account will terminate at the close of business August 21, 1929, but we
as managers reserve the right to extend it for a period of 60 days or to terminate it at any earlier date in our discretion.
As managers, we shall have the sole management and entire conduct of the
business and affairs of the account, with all the usual powers, including the
right on behalf of the account to make or procure loans and to pledge the
obligations of the account participants therefor, to pay all commissions and
expenses of every nature, and for the account to purchase, sell, sell short,
repurchase, resell, or hold shares of the common stock of the United States &
Foreign Securities Corporation, to such an amount, at such prices and in
such manner as we may deem advisable, and generally to act in all respects
as in our opinion may be to the best interests of the account; provided only
that the account shall at no time be short or own or be committed for an
amount of stock in excess of twenty thousand (20,000) shares.
Notwithstanding our relations as managers, we shall enjoy as participants
in this account—
I like the use of the verb " enjoy."
all the rights and benefits and be subject to all the liabilities hereby respectively granted to and imposed upon other participants. We shall in no way be
liable for any error of judgment or mistake of law on fact, or failure of any
party contracting with us to live up to his agreement, nor shall we be liable
except for our own failure to exercise good faith. The failure of any participant to adhere to the terms of this agreement shall in no respect relieve
the other participants from their account obligations. It is understood that
this agreement shall bind and benefit the several parties and their respective
heirs, executors, administrators and assigns.
At our option as managers, each participant shall take up and pay for in
full, or margin to our satisfaction his pro rata share of stock held by the
account and shall meet his other account obligations, if any, upon call by us.
Stock so taken up during the life of the account shall be for carrying purposes
only and shall be subject to call by the account managers at any time. No partnership relations shall arise herefrom.
At the expiration of the account, we as managers shall distribute the stock
and/or cash remaining in our hands among the participants pro rata in the
proportion which the number of shares of their respective participations bears
to twenty thousand (20,000) shares. The participants shall share pro rata in
the said shares and in the profits or losses of the account after allowing for
all expenses incurred by the managers, and the apportionment and distribution
of the said shares, profits or losses, shall be conclusive upon the participants.
As compensation for our services in forming and managing this account,
we shall receive a sum equivalent to 10% of the net profit. We shall also
receive the usual commissions on purchases and sales of stock made for the
account.
175541—33—PT 4
10
1676
STOCK EXCHANGE PKACTICES
In accordance with the understanding between us, we have reserved for you
in this account a, participation of 5,000 shares, or 25%.
Please confirm your acceptance of this participation by signing and returning
to us the enclosed duplicate of this letter.
Very truly yours,
DOMINICK & DOMINICK,
Managers.
Confirmed and accepted:
DILLON, READ & Co.
Mr. PECORA. I noticed, Mr. Christie, you were following me while
1 was reading this exhibit. I presume I read it correctly?
Mr. CHRISTIE. Yes.
Mr. PECORA. Did you
follow me by means of another photostatic
copy of this exhibit?
Mr. CHRISTIE. Yes.
Mr. PECORA. DO you
recognize the handwriting of the signature
reading " Dillon, Read & Co." at the lower left-hand corner of this
letter?
Mr. CHRISTIE. That letter was signed by Mr. E. M. Shedden.
Mr. PECORA. Who?
Mr. CHRISTIE. Mr. E. M. Shedden, who has the power to sign.
Mr. PECORA. E. M. Shedden?
Mr. CHRISTIE. Yes.
Mr. PECORA. I S he a member of the firm of Dillon, Eead
Mr. CHRISTIE. NO ; but he has the power to sign.
Mr. PECORA. Was this agreement actually entered into
& Co. ?
as a firm
transaction and obligation by the legal entity known as Dillon,
Eead & Co.?
Mr. CHRISTIE. Yes.
Mr. PECORA. Why did
Dillon, Eead & Co. as a legal entity go into
the second operation or option agreement when it was unwilling to go
into the first one as a legal entity ?
Mr. CHRISTIE. Well, the extent of their interest in this was the
25 percent interest in the account which they went into with the hope
of making a profit. The 19,198 shares—I think it is—that the
account as a whole got options on, is still the stock of those same individuals that sold the 25,000 shares in the first account.
Mr. PECORA. That is, the 19,198 shares referred to in this option
agreement were likewise shares owned by the various individuals who
went into the first option agreement?
Mr. CHRISTIE. That is correct.
Mr. PECORA. None of the shares in the name of the legal entity
known as Dillon, Eead & Co. went into this second option agreement?
Mr. CHRISTIE. None. That letter, as I read it, is not the option
agreement. You see, that is confirming really the formation of the
account and confirming the 25 percent interest in the account. There
is another letter that covers the option on the 19,198 shares.
Mr. PECORA. Have you got a copy of that letter?
Mr. CHRISTIE. I have a copy of it here if you like to have it.
Mr. PECORA. Will you kindly produce it?
Mr. CHRISTIE, This seems to be a very poor photostat. It is a
photostat of a carbon. The type was not very clear.
Mr. PECORA. What is that?
STOCK EXCHANGE PKACTICES
1677
Mr. CHRISTIE. I say it is a hard copy to read. It is a photostat
of a carbon copy, apparently made on a typewriter on which the
type was not very sharp.
Mr. PECOKA. Mr. Christie, I show you what purports to be the
photostatic copy of a letter addressed to Messrs. Dillon, Read &
Co. by Dominick & Dominick, under date of June 22, 1929. Will
you please look at it and then tell us if you can identify it as a
true and correct copy of such a letter, and then tell us whether that
letter constitutes the so-called " option " agreement that you have
just referred to?
Mr. CHRISTIE. Yes; that is right.
Mr. PECORA. I offer it in evidence and ask that it be spread on the
record.
The CHAIRMAN. It may be admitted in evidence as Committee
Exhibit No. 11 and spread on the record.
(Photostatic copy of letter from Dominick & Dominick to Dillon,
Read & Co., dated June 22,1929, was received in evidence and marked
" Committee Exhibit 11 of October 4, 1933.")
Mr. PECORA. It is on the letterhead of Dominick & Dominick, and
reads as follows:
NEW YORK, June 22, 1929,
UNITED STATES AND FOREIGN SECURITIES COLORATION COMMON STOCK (NO PAR
VALUE)
Messrs. DILLON, READ & Co.,
28 Nassau Street, New York City.
DEAR SIRS : We wish to confirm that, in consideration of the formation by us
of an account, of which we shall be the Managers with full discretionary powers, and in which we may participate, you hereby extend to us, for and on
behalf of such account, an option to purchasce from you all or any part of
nineteen thousand one hundred and ninety-eight (19,198) shares of common
stock of United States and Foreign Securities Corporation at $52 a share,
said option to remain in full force and effect for a period of 60 days from
this date.
During the existence of this option agreement, you agree to loan us, at our
call, from time to time all or any part of 19,198 shares of stock at the then
prevailing market price.
Stock called or borrowed by us shall be deliverable upon one day's notice
against payment of the amount due.
Please confirm that the above is in accordance with the understanding between us by signing and returning to us the duplicate of this letter.
Very truly yours,
DOMINICK & DOMINICK.
Confirmed and agreed t o :
DILLON, READ & Co.
Mr. PECORA. NOW, from the two documents that have last been
offered in evidence, namely, committee exhibits 10 and 11, would
you say that the account referred to in these two exhibits was a pool
account or a basis for a pool operation?
Mr. CHRISTIE. Both accounts were similar. I would not say that
they did not form the basis of a pool nor would I say that they
clearly were a pool. I mean that a " pool " is so vague—the term—
that I hesitate to make any definite statement about it.
Mr. PECORA. I notice that in connection with the documentary
evidence relating to the first option agreement the option agreement
1678
STOCK EXCHANGE PRACTICES
gave Dominick & Dominick the right to borrow from you and your
associates up to 20,000 shares, although the agreement gave them
the right to buy from you at the prices fixed in the agreement 30,000
shares. But I notice in this exhibit no. 11 that Dominick & Dominick are given the right to borrow the full amount of the shares
that you had agreed on the same day to deliver to them at $52 a
share, namely, 19,198 shares. What was the reason for that Mr.
Christie?
Mr. CHRISTIE. Well, I thought that the first option- that started
off with their right to borrow 20,000 shares out of the 30,000
was later amended so that they could borrow the entire amount of
the 30,000 shares.
Mr. PECORA. Well, from that circumstance would you say that it
was evidence of the fact that Dominick & Dominick in the operation of this account, either the first or the second one, were merely
going to conduct trading operations that might not necessarily
involve actual delivery of the sales?
Mr. CHRISTIE. Oh, well, any sales that they made they would have
to make delivery of. They were undoubtedly going to use the
borrowed stock to make delivery on sales that they made whether
they were what you call trading sales or any other kind of sales.
Mr. PECORA. I notice in the exhibit marked " Exhibit No. 10 "
which relates to this second option agreement, Dominick & Dominick
as managers of the account referred to therein are specifically given
the right, among other things, on behalf of the account to purchase
sell, sell short, shares of the common stock of this investment trust.
Was a similar right given to them in the first account ?
Mr. CHRISTIE. I do not remember that language in the first account.
However, the reason for that would be that we were not participants
in the first account so that we did not receive a letter corresponding
to that letter. That is a general trading account letter that gives the
managers very broad powers and relieves them of a lot of liability,
and defines how much your participation is and how much profit
they are going to take as managers of the account. And any other
general terms provided in the account.
Mr. PECORA. Well, in the light of the provisions embodied in the
agreements with respect to the second account—and I am referring
now particularly to exhibit no. 10—would you say that the trading
account to be conducted by Dominick & Dominick as managers, was
of the character that would stamp the transactions and the operation of such trading account as gambling transactions, using that
term as Senator Glass used it a few minutes ago ?
Mr. CHRISTIE. Senator Glass said a good deal about that. I
though that the exhibit was no. 11. Is that not the number of it ?
The trading account ?
Mr. PECORA. Exhibit no. 10.
Mr. CHRISTIE. But the one that confirms our participation in the
account.
Mr. PECORA. And establishes and fixes the rights, duties and privileges of Dominick & Dominick as managers of the account, and the
powers that they may exercise thereunder as such managers.
Mr. CHRISTIE. And gives the managers the power to make any
kind of a transaction that they want to.
STOCK EXCHANGE PRACTICES
1679
Mr. PECORA. Yes; whether to buy or to sell or to sell short.
Mr. CHRISTIE. Yes, sir. Broad trading
Mr. PECORA. Broad trading privileges, were they not, including
the conduct of transactions that might be characterized as gambling
transactions, as distinguished from investments ?
Mr. CHRISTIE. I suppose so.
Mr. PECORA. IS that a fair inference ?
Mr. CHRISTIE. I suppose so.
Senator COUZENS. Would you consider those operations as constructive ?
Mr. CHRISTIE. The history of this transaction, Senator, was that
this house and the other houses associated with it were going to
distribute this stock to their clients. -They claimed to have made a
thorough study of investment trusts, and they thought that they could
sell this stock to their clients, make some money themselves by doing
it, and they thought that the stock, in view of all the conditions, was
cheap and that they might make some money for their customers.
Senator COUZENS. Well, is that a constructive operation for a concern that is engaged in the investment trust business to diversify the
investments of small investors and protect their interests? Would
you call that a constructive job for a trustee such as you were, under
the circumstances?
Mr. CHRISTIE. Well, the trust was not involved in this. These
sales
Senator COUZENS, Oh, no. I do not like that quibbling about the
trust.
Mr. CHRISTIE. I do not mean to quibble with you, sir. But I
thought you were out when this started. These were sales that were
made by a group of 10 or 11 individuals of a part of their stock,
some of whom had acquired it in 1927, and it was their own
stock that they were selling this way. It was not stock offered or
new stock offered by the trust, nor was it the firm stock of Dillon,
Eead & Co.
Senator COUZENS. NO; but the same group of men was charged
with the very great responsibility of handling millions and millions
of the public's money and to invite small investors who were not
able to make their own investments or diversify their securities.
You were engaged in a speculative short selling operation, which
hardly seems the ethical thing for trustees to do.
Mr. CHRISTIE. Well, we were participants in this account and had
the power to do all these things that you say.
Senator COUZENS. And yet you were trustees for millions and
millions of the public's money.
Mr. CHRISTIE. But I do think you should note the distinction between this stock that belonged to these individuals who had bought
it some time ago and were free to do as they pleased with it. It
was not stock that was held together as a trust.
Senator COUZENS. Yes; and yet you went on and did not pay any
dividends on this stock at any time. You did not pay any dividends
then and have not paid any dividends since, as I understand it?
Mr. CHRISTIE. On the common stock?
Senator COUZENS. Yes.
1680
STOCK EXCHANGE PRACTICES
Mr. CHRISTIE. NO. It was the policy of the company only to pay
dividends on the common stock if the earnings from the capital invested was sufficient to pay the dividends on the first and second
preferred, and if anything was left over, and that had not been true.
Senator COUZENS. Well, you had that inside information. You
knew that you had accumulated $10,000,000 out of this undertaking
and then went and invested it in a second-class security in another
investment trust, and all this time you were posing to the public as
good trustees for some $90,000,000 of their money. What I am trying to bring out is whether that was what you men from Wall Street
think is good ethics.
Mr. CHRISTIE. Well, that $10,000,000 in the second trust—the
United States & International Investment Corporation—I think had
been put in slightly before this stock was sold. Had it not
[addressing his associates] ?
Mr. PECORA. The Senator's question was not directed specifically
to that phase of it. As I understand it, it was directed to getting
from you your opinion as to whether or not in view of the trusteeship that you occupied toward the shareholders of the common stock
of the investment trust you think it was ethical to participate in this
trading account, which included short selling ?
Mr. CHRISTIE. Well, I do not think that the participation in the
trading account had any effect on the handling of the funds of the
trust,
Mr. PECORA. Was it not calculated to have an effect on the public
market quotations for the common stock of the investment trust ?
Mr. CHRISTIE. Not to put it down. It was contemplated to distribute that stock, have more stockholders, and this firm of Dominick & Dominick, and probably people associated with them, had a
great many clients, and they thought that they were bringing to the
attention of those clients a good investment when they offered this
stock to them.
Mr. PECORA. Who were the clients that Dominick & Dominick were
seeking to serve in this account ? Do you know who they were ?
Mr. CHRISTIE. N O ; I do not. I know that they did have a big
clientele. Their primary interest was to run this account and make
some money, of course.
Senator COTJZENS. YOU admitted a while ago that it was not the
policy of the company to pay dividends on the common stock, and
yet you are unloading on the public the common stock at prices which
you hope eventually to still raise, knowing all of the time from the
inside as operators of this trust that it was not the policy to pay
any dividends. I do not care much about those legal ethics that you
lawyers keep talking about. I am talking about the general public,
which has a right, it seems to me, to rely upon men of integrity to
protect their trust and not to engage in these operations.
Mr. CHRISTIE. Well, this company had a policy of making available to its stockholders very complete information. That was available to the stockholders. There was no attempt to conceal it.
Senator COUZENS. When you created this pool and this short-selling arrangement, and all other tricks of the trade, you did not tell
the public, as I recall the testimony, that you had adopted a policy
of not paying any dividend on this common stock.
STOCK EXCHANGE PRACTICES
1681
Mr. CHRISTIE. NO. This operation was conducted by another firm
in which, it is true, we participated at this time, and it was in 1929,
and the trust was formed in 1924. A part of this common stock
had been distributed to some of the individuals as distinct from
Dillon, Eead & Co. Some of those individuals had that stock. If
they withdrew they either still had that stock or they could sell it.
But the obligation of the management of that fund was not affected
whether I have it or some other person has some of that common
stock, as far as I see it.
Senator COUZENS. That is where you and I see differently, because you had inside information as to the policy when you were
selling this stock.
Mr. CHRISTIE. I do not believe so.
Senator COUZENS. Well, you said the company had adopted a
policy of not paying any dividends on the common stock, and still
you were creating a market for it, knowing well there were no contemplated dividends to be paid upon it. That is the kind of thing
that I think the public ought to know about.
Mr. CHRISTIE. Most of these people, as far as I know—I feel fairly
sure that the people who sold the stock at that time only sold a
part of their stock. It was a very limited number of our associates
that did it. We did it as individuals and not as a firm.
Senator COUZENS. But still, individuals go to make up the firm.
You cannot segregate your responsibility, it seems to me, as a
member of the firm and as an individual. You are responsible for
the firm's conduct and its reputation. At least, I think the public
has a right to assume that, whether you do or not.
The CHAIRMAN. Why didn't you sell all the stock you had ? Did
Dominick & Dominick want to buy more than these agreements provided for, and were you unwilling to sell any more ?
Mr. CHRISTIE. I was unwilling to sell any more, Senator Fletcher.
The CHAIRMAN. What is the process of borrowing stock? I mean,
what actually takes place ? If Dominick & Dominick would come to
you and say, " I want to borrow 20,000 shares of stock ", what took
place? What did they give you in place of the stock?
Mr. CHRISTIE. When they borrow stock like that they pay whoever
lends the stock the market value of the stock at the time they borrow
it. In other words, they would give us a check equivalent to the
market value of the stock that they borrow at the time they borrow
it, and then when they return the stock we give them back an amount
equal to that.
The CHAIRMAN. What is the use of their borrowing stock if they
have got to give their check for it ? They could go out and buy it.
Mr. CHRISTIE. Because they can get their money back when they
return the stock; and if they bought it and any change takes place
in the market, they might lose.
Senator ADAMS. HOW much of a charge is made on the lending
of stock ?
Mr. CHRISTIE. On these transactions there was no charge at all.
Senator COUZENS. What is the ordinary charge ?
Mr. CHRISTIE. The charge varies. It is a market that we do not
ever take any part in. Sometimes stocks are loaned at a premium.
It depends on supply and demand pretty much.
1682
STOCK EXCHANGE PRACTICES
Senator ADAMS. Regardless of the ethics of the transaction, if
one were looking for an investment, you would suggest, for the firm
of Dillon, Eead & Co., that he had better inquire of those who sold
their stock rather than those that held it ?
Mr. DILLON. I should ,say so.
Mr. PECORA. YOU are a member of the Investment Bankers Association of America, are you not?
Mr. CHRISTIE. Yes,
sir.
Mr. PECORA. And an officer of it ?
Mr. CHRISTIE. I have been a governor of it for 3 years.
Mr. PECORA. And you are slated to be its next president, are you
not?
Mr. CHRISTIE. I have been nominated for the next presidency.
Mr. PECORA. By the regular nominating committee of the organization?
Mr. CHRISTIE. By the governors.
Mr. PECORA. The annual election is to be held some time next
month, is it not?
Mr. CHRISTIE. At the end of this month or the 1st of November.
Mr. PECORA. And you are the only candidate for the office of
pre,sident for the ensuing year ?
Mr. CHRISTIE. SO far I am; yes, sir.
Mr. PECORA. DO you anticipate any independent
Mr. CHRISTIE. NO.
Mr. PECORA. I take it from the circumstance that
candidacies?
this responsible
organization of bankers thinks enough of your capacity to make you
president of the organization for the coming year that you are not
entirely unsophisticated in the ways of Wall Street. That is not
a violent assumption, is it?
Mr. CHRISTIE. I think someone else should judge of that.
Mr. PECORA. We recognize your modesty.
When Dominick & Dominick formed this second account giving
25 percent participation therein to your firm and arranged with you
and your associates as individual owners of common stock of the
investment trust whicK was to be the subject of market operations of
this account, they also arranged, in addition to that, an option
through you and your associates to have these 19,198 shares delivered at a definite, fixed price set forth in the option agreement.
They were also to have the right to borrow all of that stock from
you and your associates for purposes of their market operation,
were they not?
Mr. CHRISTIE. Yes,
Mr. PECORA. Why
sir.
was it necessary to give them the right to borrow the stock which they had contracted to buy from you at $52 a
share ?
Mr. CHRISTIE. Well, those were the terms of their agreement, and
the same reasons applied to that as applied to the first account.
Mr. PECORA. In the face of those terms of this agreement, do you
still maintain that the primary purpose of Dominick & Dominick was
to acquire stock for distribution to their clients, or do you really
think that they were operating a pool account to manipulate the
prices of the security through the medium of their trade on the stock
exchange ?
STOCK EXCHANGE PRACTICES
1683
Mr. CHRISTIE. I think there was no question that their primary
object was to trade in the stock to make money.
Mr. PECORA. Apart from the question of distributing the stock to
their clients?
Mr. CHRISTIE, I know that they did anticipate, and I assume that
they did distribute stock to their clients in addition to whatever
trading they did.
Mr. PECORA. If they really wanted to apply 19,198 shares of stock
for distribution to their clients, what occasion was there for giving
them the right in this agreement to sell short up to the full amount
of the 19,198 shares that you and your associates agreed to deliver
to them ?
Mr. CHRISTIE. I think they had a right to sell short the whole
20,000 shares.
Mr. PECORA. Yes; I know that.
Mr. CHRISTIE. Not limited to the 19,000.
Mr. PECORA. There is such a small difference between the two
amounts
Mr. CHRISTIE. That was the usual provision in a trading account;
and in any event, Dominick & Dominick in that letter from them
to us—those are the provisions and the things they ask for.
Mr. PECORA. YOU agreed by affixing the signature of your firm by
way of confirmation and assent to their proposal and offer, did you
not?
Mr. CHRISTIE. Yes.
Mr. PECORA. SO thereby you would make it your contract as well ?
Mr. CHRISTIE. We had no objection to accepting that contract on
those terms, and thereby we did consent to their provisions.
Mr. PECORA. At the time you agreed to do this you were not only
a stockholder iii your individual right in this investment trust; you
were not only a member of the firm of Dillon, Read & Co. who were
the managers of this investment trust, but you were also an officer
of the investment trust, were you not?
(Witness confers with associates.)
Mr. PECORA. I will show you the list of July 1929, which recites
you as being its vice president.
Mr. CHRISTIE. Yes, sir.
Mr. PECORA. DO you think
it was fair or ethical for you, under
those circumstances and in view of these relations that you bore
to this investment trust, to lend yourself to an agreement with a
firm of brokers under which they could, in the exercise of their
sole discretion, sell the stock of this corporation short ? You agreed
to loan them the stock in the event that they needed it to cover
those short sales ?
Mr. CHRISTIE. This provision for short sales was the usual provision in a trading account.
Mr. PECORA. Whether it was the usual provision or not, the unqualified right was given to Dominick & Dominick as the managers
of this account, to sell short, if necessary, in the exercise of their
sole discretion, was it not?
Mr. CHRISTIE. Yes. [Conferring with associates.]
Mr. PECORA. May I interrupt just a moment? Mr. Christie, the
question that I have asked you calls for your individual judgment
1684
STOCK EXCHANGE PRACTICES
and opinion. I notice that you have been conferring with your
associates. I want to get your individual judgment or opinion on
this specific matter.
Mr. CHRISTIE. Yes; I appreciate that.
Mr. PECORA. Uninfluenced by the judgment or opinion of any of
your associates.
Mr. DIIXON. May I correct you ? I was not suggesting the answer.
Mr. PECORA. I was not accusing you, sir. Won't you, Mr. Christie,
give me your individual opinion about that?
Mr. CHRISTIE. I am trying to visualize whether or not I did participate, which I do not think I did. I participated individually only
to the extent of putting up the stock, the firm had the participation as
an identity in the trading account, the terms of which are general;
to have power to buy, sell, trade in and sell short, if necessary, and to
borrow stock. I do not assume that it was at all contemplated selling
the stock short. In any event, the participation account was one
thing which Dillon, Bead & Co. had, I as an individual only put up
part of the 19,198 shares, which was optioned to the account.
Senator COUZENS. May I ask you whether in your new capacity as
head of the Investment Bankers Association you will approve of
such practices as that among the investment bankers?
Mr. CHRISTIE. I am not head of it.
Senator COTTZENS. We assume that you are not going to have any
independent candidates, and that you will be. Let us say that you
do become head of the Investment Bankers Association; would you
as the leader of that association approve of this practice among
investment bankers?
Mr. CHRISTIE. YOU mean, the practice of having a trading account
at all?
Senator COUZENS. Selling short, the loaning of stock, and so on.
Mr. CHRISTIE. In the first place, of course, I would very much
prefer not to make any campaign or statements before I am elected
to that office, because I have not been, as yet; and ordinarily that
association acts after consultation with the board of governors, and
their opinions are not the opinions of just one individual, but they
are carefully considered opinions of a number of gentlemen in the
business.
Senator COUZENS. If you were head of it you would be influential,
I assume, in the policies of the association ?'
Mr. CHRISTIE. I hope that when I am head of it neither the association nor I individually will sponsor any policies that you or this
committee would consider unethical; and I should prefer not to
give
Senator COTJZENS. Assuming that I wanted to take the advice of
the Investment Bankers Association which you freely give out to
the public and to your investors, I should like to know whether I
should take that advice based on the hearings here as to what the
policy of the Investment Bankers Association has been or will be.
Mr. CHRISTIE. The Investment Bankers Association is concerned
primarily with the purely investment business. We are discussing
a trading account and stock listed on the stock exchange. I hardly
think it would be a proper subject that would come before the
Investment Bankers Association.
STOCK EXCHANGE PEACTICES
1685
Senator COUZENS. But if the members of the Investment Bankers
Association approve of this sort of policy which you have been
conducting here as an individual and as a member of Dillon, Read &
Co., I perhaps would hesitate to invest my money in anything you
recommended if you were going to play with it that way.
The CHAIRMAN. I S the Investment Bankers Association interested
very largely in opposing the Securities Act ?
Mr. CHRISTIE. In opposing it?
The CHAIRMAN. Yes.
Mr. CHRISTIE. NO ; I don't think so.
The CHAIRMAN. Have they not been opposing it?
Mr. CHRISTIE. Certainly not.
The CHAIRMAN. Did they not oppose the passage of the act?
Mr. CHRISTIE. They were interested and felt that some of the
provisions should have been made different; but I know that they are
heartily in accord with the principles of the bill and what is behind
it, and certainly we want to see the safeguards that that bill undertakes to set up for the investor
The CHAIRMAN. Are they trying now to promote amendments to
that act ?
Mr. CHRISTIE. NO.
Mr. PECORA. Mr. Christie,
all told, how many shares of common
stock of the United States & Foreign Securities Corporation were
traded in through the medium of these two accounts that were
managed by Dominick & Dominick ?
Mr. CHRISTIE. HOW many did Dominick & Dominick trade in ?
Mr. PECORA. Yes.
Mr. CHRISTIE. There, again, I
Mr. PECORA. Well, how many
would have to
of the shares traded in by Dominick
& Dominick for the purposes of those two accounts came from you
and your associates in Dillon, Read & Co. ?
Mr. CHRISTIE. That figure I have: 74,198. I spoke of that this
morning. Does that agree with your figures ?
Mr. PECORA. What was the total consideration that was received
by you and your associates for the stock which entered into these
two accounts?
Mr. CHRISTIE (after conferring with associates). It was about
$4,000,000, Mr. Pecora.
Mr. PECORA. And that was for 74,198 shares ?
Mr. CHRISTIE. That is right.
Mr. PECORA. And those 74,198 which were sold by you and your
associates through these two accounts for an aggregate of about
$4,000,000 were out of a block of 500,000 shares originally acquired
by individual members of Dillon, Bead & Co. for 20 cents a share, or
for a total of less than $15,000, in 1924?
Mr. CHRISTIE. Some of them had changed hands in between 1924
and 1929.
Mr. PECORA. But they had only changed hands among the associates of Dillon, Read & Co. ?
Mr. CHRISTIE. Yes; that is right.
Mr. PECORA. During the operation of these two accounts by Dominick & Dominick did you and your associates who were participants
1686
STOCK EXCHANGE PRACTICES
in those accounts also sell through your own facilities and agencies
other shares of this common stock?
Mr. CHRISTIE. Yes; there were some sales.
Mr. PECORA. During the period of time covered by the trading in
these two accounts what was the total number of shares of the common stock of the United States & Foreign Securities Corporation
which you and your associates disposed of either through the medium
of the two accounts or by sales in the open market ?
Mr. CHRISTIE. Up to what date would that be, Mr. Pecora?
Mr. PECORA. Well, up to—the first account ran from December
1928 to June 1929. The second account dated from June 22, 1929,
and continued for about 2 months.
Mr. CHRISTIE (after conferring with an associate). I am not sure,.
Mr. Pecora, that our figures coincide exactly with the same datesy
but the total
Mr. PECORA. Approximately what was the total in that approximate period of time?
Mr. CHRISTIE. The total amount that was sold during the period
of those two accounts and possibly a few days after—a month or so
afterward, perhaps
the grand total of that was about 120,000
shares, which includes these two accounts.
Mr. PECORA. Yes.
Mr. CHRISTIE, SO that I think there are about 50,000 shares outside of the Dominick & Dominick account—46,000 and some.
Mr. PECORA. The figures we have compiled from your records
would show that during this approximate period of* time covered
by the life of these two accounts, and perhaps a, month in addition
to that, you and your associates, who, as individuals, owned some
of this common stock for which the corporation originally received
20 cents a share, disposed of 120,552 shares.
Mr. CHRISTIE. That sounds right.
Mr. PECORA. That is about correct, is it ?
Mr. CHRISTIE. Yes.
Mr. PECORA. And 74,198
shares of that total were disposed of
through the medium of these two accounts operated by Dominick &
Dominick; is that correct?
Mr. CHRISTIE. And
Mr. PECORA. And the
balance, or a little less than 50,000 shares,
were disposed of by you and your associates in open-market transactions, is that correct?
Mr. CHRISTIE. That is right.
Mr. PECORA. What was the average price received by you and your
associates, or, rather, if you can give us the total consideration you
received for the sale of the 120,552 shares in this period.
Mr. CHRISTIE. The total consideration was somewhere around
$6,000,000. I have the exact figure here.
Mr. PECORA. It is nearer $7,000,000, is it not? Let me give you
the exact figure as we have compiled it—$6,843,380.66.
Mr. CHRISTIE. That is right, Mr. Pecora.
Mr. PECORA. That is about right, is it?
Mr. CHRISTIE. The average is around 56.
Mr. PECORA. If my calculations are correct, the 120,552 shares
which you and your associates individually sold in this manner dur
STOCK EXCHANGE PRACTICES
1687
ing this period of time were sold for an aggregate of $6,843,380.66,
and the corporation, this investment trust, received only $24,110.40
for the stock when it issued it in 1924. That is at the rate of 20
cents a share.
Mr. CHRISTIE. May I confer?
Mr. PECORA. Yes. Are my figures correct, Mr. Christie?
Mr. CHRISTIE. Yes. The figures, I think, are right, Mr. Pecora,
but, as you have said, I would like to be clear that this group of
individuals did not all have a cost of 20 cents a share. Some of them
had changed, and had a higher cost.
Mr. PECORA. I said it was stock that originally was issued by the
investment trust for 20 cents a share, and the persons to whom it was
originally issued were all associates of Dillon, Read & Co. That is
correct, is it not?
Mr. CHRISTIE. Yes. At the time that was issued, the stock was
worth less than 20 cents a share. That was the nominal price for
it.
Mr. PECORA. Are you trying to tell us now that the associates of
Dillon, Eead & Co. consciously paid more than they thought the
stock was worth when they bought it for 20 cents a share ?
Mr. CHRISTIE. I have not finished, Mr. Pecora. It was clear that
when they did take the stock at a cost of 20 cents, the company,
when it started, had no book value for that common stock. There
was the $1,000,000 that had come out of the first preferred
Mr. PECORA. YOU mean by that that the associates or the members of Dillon, Read & Co. in 1924, when they bought these 500,000
shares of this common stock for $100,000, or 20 cents a share, had
any misgivings as to whether or not they were taking a risk in buying that stock for 20 cents a share ?
Mr. CHRISTIE. NO ; I did not say that, Mr. Pecora. I just wanted
to make it clear
Mr. PECORA. I know you did not say that, but is that the thought
you mean to convey to the committee ?
Mr. CHRISTIE. NO; that is not the thought at all. I wanted to
convey that that stock was bought with the second preferred for the
$5,100,000, and actually the 20 cents is a mere nominal assigned valuation, Say it cost nothing, if you will, but in August 1929, which is
nearly 5 years later, the company had a book value back of that stock
of around $48 a share, so that the picture had changed, and this
stock that was sold at an average of 56 was quite a different stock in
value than it was 5 years earlier.
Mr. PECORA. We know that; but the figures which I embodied in my
previous question are correct, to the following effect, that the 120,552
shares which you and some of your associates in Dillon, Read & Co.
sold to the public through the medium of these two accounts conducted by Dominick & Dominick, as well as through the medium of
individual sales made in the open market for a total consideration
of $6,843,380, was stock which cost those associates, or those of them
who got the stock upon its original issue in October 1924, the sum of
$24,110.40, at the rate of 20 cents a share.
Mr. CHRISTIE. Up until just the very end—where you said that
some of those associates paid 20 cents a share, that was correct. Just
.at the very end of your statement, I think, where you say it cost
1688
STOCK EXCHANGE PRACTICES
those associates that total amount of 20 cents times that, that is not
technically correct, but I gather that what you mean is that that stock
goes back to the original stock that had this nominal valuation placed
upon it.
The CHAIRMAN. He means an original cost of 20 cents.
Mr. PECORA. Exactly. That is what I said.
Mr. CHRISTIE. Quite right.
Mr. PECORA. The cost when originally issued.
The CHAIRMAN. YOU paid as high as $10 for some of yours,
and sold it at 53.
Mr. CHRISTIE. That is right. I paid $10 for all of mine, Senator.
Mr. PECORA. All these sales were made after the stock was listed
on the New York Curb Exchange, were they not ?
Mr. CHRISTIE. Yes; that is right.
Mr. PECORA. The stock was not listed on the New York Curb Exchange until sometime in February 1928. Does that accord with
your recollection?
Mr. CHRISTIE. May I check that date?
Mr. PECORA. Yes.
Mr. CHRISTIE. I think
it was quite a little while before the account
was formed.
Mr. PECORA. The specific date being, as I have it, February 8, 1928.
Mr. CHRISTIE. I think that is correct.
Mr. PECORA. I think, Mr. Chairman, we might take a recess now
until tomorrow.
The CHAIRMAN. The committee will take a recess now until 10
o'clock tomorrow morning. We will continue the session tomorrow
until 1:30 tomorrow afternoon. We will not have any afternoon
session.
(Thereupon, at 4:10 p.m., Wednesday, October 4, 1933, the subcommittee adjourned until 10 o'clock the following morning.)
COMMITTEE EXHIBIT NO. 9, OCTOBER 4,
1933
UNITED STATES AND FOREIGN SECURITIES CORPORATION COMMON STOCK
(NO PAR VALUE)
DOMINICK & DOMINICK,
115 Broadway, New York, December 20, 1928.
Messrs. DILLON, READ & Co.,
28 Nassau Street, New York City,
We wish to confirm that, in consideration of the formation by us
of an account, of which we shall be the managers with full discretionary
powers, you hereby extend to us for and on behalf of such account, options
to purchase from you an aggregate of thirty thousand (30,000) shares of United
States and Foreign Securities Corporation Common stock at prices and under
conditions as follows:
You will sell to us at any time or times, prior to the close of business
February 20, 1929, all or any part of ten thousand (10,000) shares of the above
stock at $47.50 a share in such, amounts and at such times as we may call it;
Provided we exercise our right as managers to purchase all of the stock
optioned to us at $47.50 a share, you will thereupon immediately extend us
the right to purchase from you, all or any part of ten thousand (10,000) shares
additional of such stock at $50.00 a share, in such amounts and at such times
as we may call it, within a period of 2 months from the date of the completion
of our call of the entire amount of stock optioned us at $47.50 a share.
Provided we exercise our right as managers to purchase all of the stock
optioned to us at $50.00 a share, you will thereupon immediately extend us the
DEAR SIRS :
STOCK EXCHANGE PRACTICES
1689
right to purchase from you, all or any part of ten thousand (10,000) shares additional of such stock at $55.00 a share, in such amounts and at such times as
we may call it, within a period of 2 months from the date of the completion of
our call of the entire amount of stock optioned us at $50.00 a share.
During the period in which these options exist, you agree to loan us at
our call, all or any part of twenty thousand (20,000) shares of stock at the
then prevailing market price.
Stock borrowed or called by us shall be deliverable upon 1 day's notice against
payment of the amount due.
It is understood that until all of these options have either been exercised or
have lapsed, you have the right to place stock privately but that you will exercise your best efforts to prevent such stock from coming into the market. If it
should be necessary, however, for you to dispose of stock in the market, you
agree to give us 5 days' notice before doing so.
If the above is in accordance with your understanding, please so confirm by
signing and returning to us the duplicate of this letter.
Very truly yours,
DOMINIOK & DOMINIGK.
Confirmed and agreed t o :
DILLON, READ & Co.
STOCK EXCHANGE PEACTICES
THURSDAY, OCTOBER 5, 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 a.m. in the caucus room of the Senate Office Building, Senator
Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Adams (substitute for
Barkley and proxy for Costigan), Norbeck, and Goldsborough (substitute for Townsend).
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver and David Saperstein, associate counsel to the committee; and
Frank J. Meehan, chief statistician to the committee; George S.
Franklin, Wallace P. Zachry, Warren Leslie, Walter G. Dunnington,
Clifton Murphy, John T. Cahill, and Bernhard Knollenberg, counsel
for Dillon, Bead & Co.; Root, Clark, Buckner & Ballantine, George
H. Murphy of counsel, counsel for United States & Foreign Securities
Corporation.
The CHAIRMAN. The subcommittee will come to order. You may
proceed, Mr. Pecora.
Mr. PECORA. Mr. Christie, will you resuriie the stand ?
TESTIMONY OF ROBERT E. CHRISTIE, JR., A MEMBER OF THE
FIRM OF DILLON, READ & CO., NEW YORK CITY—Resumed
Mr. PECORA. In the course of your examination yesterday afternoon, Mr. Christie, you probably will recall that you testified, in
substance, that between December of 1928 and August or September of 1929, you and certain of your associates in the firm of D'.llon,
Bead & Co., through the medium of two market operations managed
by Dominick & Dominick, sold an aggregate of 74,198 shares of
the common stock of United States & Foreign Securities Corporation. Do you recall your testimony in that respect?
Mr.
CHRISTIE. Yes,
sir.
Mr. PECORA. YOU further testified, in substance, that in addition
to the sale of those shares of that stock, you and those same associates also sold through other channels than Dominick & Dominick
accounts, an aggregate of 46,354 shares of that same common stock.
Do you recall your testimony to that effect?
Mr.
CHRISTIE. Yes,
sir.
Mr. PECORA. NOW, I want to ask you, Mr. Christie, through what
channels you and your associates effected the sales of the 46,354
shares of that common stock.
175541—33—PT 4
11
1691
1692
STOCK EXCHANGE PRACTICES
Mr. CHRISTIE. That total of forty-six thousand and odd shares
was, I believe, all sold through Dillon, Read & Co.
Mr. PECORA. TO or through them?
Mr. CHRISTIE. Through them.
Mr. PECORA. Sold through Dillon, Eead & Co. as a separate legal
entity, or were they sold to Dillon, Eead & Co. as a separate legal
entity ?
Mr. CHRISTIE. I suppose technically they were probably sold to Dillon, Eead & Co. and by Dillon, Eead & Co. to others.
Mr. PECORA. HOW were the transactions involving the sale of
forty-six thousand and odd shares entered on the books of Dillon,
Eead & Co. ? As a sale through Dillon, Eead & Co. or as a sale to
Dillon, Eead & Co.?
Mr. CHRISTIE. I believe they were entered on this memorandum account that was kept for the group of individuals as going out of
that account and into the securities account on the books of Dillon,
Eead & Co., and from that account to the purchasers.
Mr. PECORA. DO you mean by the term " to purchasers " that they
were sold to customers of Dillon, Eead & Co. ?
Mr. CHRISTIE. Yes, sir.
Mr. PECORA. NOW, will
you please give the subcommittee in concise fashion the general course of that transaction, or of those transactions, that embodied the sale by you and your associates of those
forty-six thousand and odd shares ?
Mr. CHRISTIE. I believe that those sales took place toward the end
or during the period of the second account of Dominick & Dominick
that you discussed yesterday.
Mr. PECORA. That is, the account that was formed on June 22,
1929?
Mr. CHRISTIE. Yes; that is right. At that time, as you will recall,
there was a great activity in the stock market generally; a demand
for stocks, and our organization was receiving a good many requests
for United States & Foreign Securities Corporation stock. Our
Mr. PECORA (interposing). Just a moment. Do you attribute the
unusual increase in the activity of that common stock in the market to the operations of Dominick & Dominick as managers of the
first account ?
Mr. CHRISTIE. Well, I shouldn't think that it could be distinguished at that time from the general activity that was present in
all securities.
Mr. PECORA. But, Mr. Christie, we have seen from evidence that
was presented here on yesterday, the most of which came from you,
that during the course of the operation of the first account by
Dominick & Dominick, which commenced on or about December
20, 1928, and continued until some time in June of 1929, the total
trades in that stock on the public exchange amounted to around
145,000 shares, of which approximately 90 percent went through
Dominick & Dominick.
Mr. CHRISTIE. Yes; I recall that, sir.
Mr. PECORA. DO you think that that trading conducted by Dominick & Dominick for that first account was a material factor in
STOCK EXCHANGE PRACTICES
1693
producing or inducing this increased demand from the public for
the common stock of that investment trust ?
Mr. CHRISTIE. Well, that no doubt had some effect in creating more
interest in the stock.
Mr. PECORA. Yes. Now, will you go ahead and resume your naration of the general routine of the transactions by which you and
your associates during the life of those two accounts sold forty-six
thousand and odd shares of your stock ?
Mr. CHRISTIE. When I stopped I had said that our sales people
were receiving a good many requests for the stock, and at that time
we had had no stock that we could sell to them, although we were
having a good many requests from them for the privilege of confirming stock. I think perhaps they knew that people could buy the
stock from other investment houses, that possibly were in this other
account, but as to that I do not know. In any event we had those
requests and orders coming in, that we had not been filling up to that
time, and we just put them on the exchange. For that reason we
allowed the balance of those 120,000 shares, which is the forty-six
thousand and odd shares referred to, to be confirmed and sold on
those orders that we were receiving. And my opinion is that substantially more than the amount that was confirmed could have
been sold just on orders that came in at that time. That was all
during that period of the great activity in stocks generally.,
Mr. PECORA. The firm of Dillon, Read & Co. had no membership
on any public exchange, had it ?
Mr. CHRISTIE. NO.
Mr. PECORA. Nor
did any associate or member of the firm have
a membership on any stock exchange ?
Mr. CHRISTIE. NO.
The CHAIRMAN. At
what price did you sell these 46,000 shares—
average price?
Mr. CHRISTIE. I am not sure I have that readily, but it can be
easily figured out [conferring with associates].
Mr. PECORA. Mr. Christie, I do not want to interrupt you
Mr. CHRISTIE. I think they are trying to figure out that average
price.
Mr. PECORA. If you want to finish your conference, all right.
Mr. CHRISTIE. We have not that separately. If your investigators figured it separately, I should be glad to accept their figures.
Mr. PECORA. Mr. Christie, do I understand you correctly to this
effect, that during the life of these two accounts operated by Dominick & Dominick the firm of Dillon, Read & Co. received requests
from various customers to sell to them shares of the common stock
of this investment trust ?
Mr. CHRISTIE. That is correct; yes, sir.
Mr. PECORA. And that those requests in the aggregate required the
sale and delivery to those customers of Dillon, Read & Co. of shares
aggregating 46,354?
Mr. CHRISTIE. That is correct, sir; yes, sir.
Mr. PECORA. A S a matter of fact, were not those requests for those
shares from the customers of Dillon, Read & Co. for a much larger
amount than forty-six thousand and odd shares ?
1694
STOCK EXCHANGE PRACTICES
Mr. CHRISTIE. Yes. I meant to make that clear when I said that
I thought we could have confirmed a very much larger amount had
it been available, which, I think, answers your question. Orders
were in excess of that amount.
Mr. PECORA. DO you know the aggregate amount of shares that
were purchased from Dillon, Read & Co. during that time by its
own customers ? I mean shares of this common stock.
Mr. CHRISTIE. In addition to the 46,000 that might have been ?
Mr. PECORA. Yes.
Mr. CHRISTIE. I am not sure about that.
Mr. PECORA. It was something in excess
of 11,000 adidtional, was
it not?
Mr. CHRISTIE. Yes, sir; that is right.
Mr. PECORA. And from what sources did Dillon, Read & Co. obtain
the 11,000 addtional shares that were needed to fill the demands or
requests or transactions of its customers?
Mr. CHRISTIE. Those 11,000 shares were purchased from Dominick
& Dominick account—the second account of Dominick & Dominick.
Mr. PECORA. Can you tell the committee why that was done instead of having the associates who individually participated in the
Dominick & Dominick accounts supply that stock to Dillon, Read
& Co., out of their individual holdings?
Mr. CHRISTIE. Yes, I think I can. The 120,000 shares on our memorandum account that we kept for those individuals were really
divided into 2 accounts: 1 that covered the 2 Dominick accounts
and the other the balance of the stock. Participation by these associates in these two accounts varied. That is, for example, as to
some of the individuals, all of the stock they sold went through the
Dominick accounts, and the balance went through Dillon-Read,
and there were some individuals who decided to sell some of their
stock either towards the end of the second Dominick account or
after the Dominick account. Which, I am not quite clear. But
the reason for taking back 11,000 shares from Dominick & Dominick
was that at the time the 11,000 shares were purchased there was
not sufficient stock available from these individuals to confirm these
sales. Is that clear?
Mr. PECORA. Those individuals owned, among themselves, large
blocks of this common stock to an amount greatly exceeding 46,000
or 11,000 shares, did they not?
Mr. CHRISTIE. That is right; but it was not for sale.
Mr. PECORA. Was it held back from the market because of any
agreement on the part of these individual owners, either among
themselves or with Dominick & Dominick or any other entity ?
Mr. CHRISTIE. NO. It just was not for sale; that is all.
Mr. PECORA. Why was it not for sale ?
Mr. CHRISTIE. They did not want to sell it.
Mr. PECORA. YOU were one of the participants in that account,
were you not?
Mr. CHRISTIE. That is right.
Mr. PECORA. Why did you not want to sell more shares than your
holdings ?
Mr. CHRISTIE. The amount that I sold was all I wanted to sell,
and I have not sold any since. I do not know any other explanation
or reason to give you, sir.
STOCK EXCHANGE PRACTICES
1695
Mr. PECORA. The stock which was furnished to Dillon, Eead &
Co. as an entity by you and your associates to enable Dillon, Eead
& Co. to fill the orders they received from their customers was not
purchased through open market transactions, was it?
Mr. CHRISTIE. Our stock?
Mr. PECORA. Yes.
Mr. CHRISTIE. It came out of that original stock.
Mr. PECORA. I mean the transaction whereby Dillon,
Eead & Co.
acquired those forty-six thousand odd shares did not go over the
exchange ?
Mr. CHRISTIE. With the exception, I think, of some small amount,
2,700 shares, or some small block.
Mr. PECORA. But in general they were not negotiated through the
exchange ?
Mr. CHRISTIE. NO.
Mr. PECORA. They
were transactions had directly between those
individual associates of Dillon, Eead & Co. and their firm as an
entity?
Mr. CHRISTIE. Yes.
Mr. PECORA. Was there
any reason why those sales were not made
through the exchange?
Mr. CHRISTIE. Except that the orders came direct to us. We were
not members of the exchange, and they were confirmed directly to
customers.
Mr. PECORA. Your firm often receives orders from customers for
stock which your firm has to go out in the open market to buy, does it
not?
Mr. CHRISTIE. That is right.
Mr. PECORA. Was there anything to prevent your firm from filling
those orders through purchases which it could have made in the
open market?
Mr. CHRISTIE. NO.
Mr. PECORA. DO you know why that was not done in this instance ?
Mr. CHRISTIE. Because this stock was available for sale directly
to customers.
Mr. PECORA. SO were the 11,000 shares available if you cared to
part with them, were they not?
Mr. CHRISTIE. That is right. The 11,000 shares were a part of
the stock that had been optioned to Dominick, and we simply took
that back from Dominick.
Mr. PECORA. Was the acquisition of the 46,000 shares which Dillon, Eead & Co. made from its individual associates, including yourself, for the purpose of filling orders of their customers, made in the
fashion in which you have described, rather than in open market
transactions, in order not to interfere with the market activities
in the stock, at that time, of Dominick & Dominick?
Mr. CHRISTIE. NO, not at all. They were made largely after that
account was closed.
Mr. PECORA. DO you know for how many years you served as a
member of the board of directors of the United States & Foreign
Securities Corporation?
Mr. CHRISTIE. We had those dates yesterday, I believe.
Mr. PECORA. Are you a director of that corporation now ?
Mr. CHRISTIE. NO, sir.
1696
STOCK EXCHANGE PRACTICES
Mr. PECORA. HOW long is it since you ceased being a director ?
Mr. CHRISTIE. We are looking that data up, I have forgotten the
year.
Mr. PECORA. While your associates look up those dates, let me ask
you this. During the time, whether it was a short time or a long
time, that you were a director of this investment trust, did you
attend with regularity the meetings of its board of directors ?
Mr. CHRISTIE. I am sure the minutes would show.
Mr. PECORA. What is your personal recollection about it ?
Mr. CHRISTIE. My recollection is that I was a director for only a
very short time.
Mr. PECORA. Well, during that period of time did you attend with
regularity the meetings of its board of directors?
Mr. CHRISTIE. I think so. I think there were very few meetings.
Mr. PECORA. Did the board hold meetings at regular intervals ?
Mr. CHRISTIE. I was a director from March 8, 1925, to July 13,
1925—less than 2 months in the first case; and then I was on the
board again, from March 2, 1927, to May 10, 1927—another period of
about 2 months, Mr. Pecora.
Mr. PECORA. Was it customary for the board to hold meetings at
stated intervals or periods ?
Mr. CHRISTIE. I don't remember that, sir.
Mr. PECORA. DO you recall attending any meetings of the board of
directors ?
Mr. CHRISTIE. I remember attending directors' meetings; yes, sir.
Mr. PECORA. I am referring, of course, to this investment trust.
Mr. CHRISTIE. It seems to me that I attended directors' meetings,
but this was quite some time ago, and the records will show definitely
whether or not they had meetings during that 2 months and whether
I attended them.
Mr. PECORA. Upon whose judgment did this investment trust buy
securities for its portfolio ?
Mr. CHRISTIE. On the judgment of the board of directors.
Mr. PECORA. DO you recall at any meetings of the board of directors that you attended, participating in any discussions which led to
a decision respecting the making of investments for the portfolio of
the trust?
Mr. CHRISTIE. I am sorry, but I do not specifically remember any
meeting during that short time. I would be glad to refer to the
records and see if I did attend them or not. I am told I attended
one in each period of 2 months.
Mr. PECORA. DO you recall that at either of those meetings you
participated in any discussion with your fellow members of the
board at which decisions were arrived at respecting investments
for the portfolio of the investment trust ?
Mr. CHRISTIE. I have no recollection of the meetings at all.
Senator ADAMS. It is barely possible that the record itself would
not be conclusive that you were there. Minutes are frequently
written up in lawyers' offices reciting attendance, and then they are
signed.
Mr. CHRISTIE. NO ; I hardly think so. They would show, I think,
who was present and who was absent.
STOCK EXCHANGE PRACTICES
1697
Mr. PECORA. Was there any subcommittee of the board of directors
vested with special responsibility for determining the investments
to be made for the portfolio ?
Mr. CHRISTIE. I do not believe so; but that I do not remember.
The CHAIRMAN. Was there any resolution of the board of directors
on that subject? It seems to me you could supply that information
from your records.
Mr. CHRISTIE. Yes; we could, Senator. I should be glad to look
it up.
Mr. PECORA. Were investments for the portfolio of the investment
trust frequently made?
Mr. CHRISTIE. There, again, my position on that board for those
two short periods
Mr. PECORA. Perhaps you can tell us that from any knowledge you
gained by virtue of your having served for several years as vice president of the investment trust.
Mr. CHRISTIE. Well, your question was: Did they make investments frequently? I should certainly say they did, at times more
than others.
Mr. PECORA. DO you know whose judgment dictated the investments that were made, whether you would know it from sitting on
the board of directors or from your service as vice president of the
company?
Mr. CHRISTIE. Both from my service as an officer of the company
and the short time I was on the board, and from the general knowledge and impression that I have of the conduct of the trusts, I should
say that the board of directors were the controlling factor in the
investments that that company has made.
Mr. PECORA. Where were the meetings of the board of directors
of the company held ?
Mr. CHRISTIE. They have been held quite frequently at the office
of the president, a.t no. 1 Wall Street, and at times in our office.
Mr. PECORA. Where was the active office of the corporation ?
Mr. CHRISTIE. At the present time ?
Mr. PECORA. NO ; during the activities from 1924 to 1929 and 1930.
Mr. CHRISTIE. I think it has been changed several times. There
was a time that it was in Chicago, and then later on I think it moved
to Newark. Just when that took place I would have to look up, if
you wanted the details, or if there were any other changes; but at
the present time it is in Newark.
Mr. PECORA. The investments for the portfolio of the investment
trust were made from time to time and not at stated periods, were
they not ?
Mr. CHRISTIE. That is right; yes, sir.
Mr. PECORA. Whenever an investment was made it was not necessary to call together the board of directors for the purpose of having
their judgment recorded, was it?
Mr. CHRISTIE. Not always. The executive officers might make purchases, but the transactions were always reported to the next board
meeting, and if there were things that needed to be put up to the
board for consideration, I believe the custom was to have the board
then consider them.
1698
STOCK EXCHANGE PRACTICES
Mr. PECORA. The general routine was for the executive officers to
exercise their judgment with regard to the investments to be made
for the account of the portfolio and to report how they exercised that
judgment in that respect to the board of directors at following meetings ; is that correct ?
Mr. CHRISTIE. I would not say that that was generally the method.
I thought you asked me if that sometimes was the method. But the
records would show.
Mr. PECORA. Can you testify what the method generally followed
was?
Mr. CHRISTIE. A combination of both; the executive officers buying
between meetings of the board and the board coming to its decisions
at its own meetings.
Mr. PECORA. AS a vice president or the vice president of this investment trust, during the years you served as such did you recommend
to the investment trust any investments, which recommendations were
followed ?
Mr. CHRISTIE. I might very well have. I do not recall any specific
instances.
Mr. PECORA. YOU would not say that you were one of the executive
officers who, in the general routine of his duties, made investments
for the account of the portfolio ?
Mr. CHRISTIE. NO.
Mr. PECORA. Who
were the executive officers who ordinarily did
that?
Mr. CHRISTIE. Mr. Tracy has been the president, now, for quite
a few years.
Mr. PECORA. By mentioning his name in answer to my question
do you mean to imply that he was the executive officer who was most
active in that respect ?
Mr. CHRISTIE. I think so.
Mr. PECORA. Did you say Mr. Tracy's office was at no. 1 Wall
Street?
Mr. C&RISTIE. His personal office is at no. 1 Wall Street.
Mr. PECORA. The corporation did not have its offices there, did it ?
Mr. CHRISTIE. NO.
Mr. PECORA. Am I
correct, then, in assuming that Mr. Tracy was
engaged in business enterprises of his own, separate and distinct
from this investment trust of which he was president ?
Mr. CHRISTIE. AS far as I know, Mr. Tracy's entire activities have
to do with investments not only of this company, but he is interested
in one or two other investment funds. I do not know of any other
business that he carries on.
Mr. PECORA. What are the other companies in which he is interested? Can you mention one or two of them?
Mr. CHRISTIE. That I would have to ask him. The only one I
remember is called, I think, the American & European Securities
Co.
Mr. PECORA. HOW about the Louisiana Land Corporation?
Mr. CHRISTIE. Oh, yes; I think he is at present perhaps president
of that.
Mr. PECORA. DO you know anything about that company?
Mr. CHRISTIE. N O ; I know that there is such a company.
STOCK EXCHANGE PRACTICES
1699
Mr. PECORA. DO you happen to know that securities of that company were in the portfolio from time to time of this investment
trust?
Mr. CHRISTIE. Yes.
Mr. PECORA. Did you
as a director or vice president or other
officer of this investment trust ever give your approval to the purchase of those securities for the portfolio of the investment trust?
Mr. CHRISTIE. I do not recall that. I would have to look up the
record on that, sir.
Mr. PECORA. The witness who preceded you at these hearings before
the committee, Mr. Clarence Dillon, was interrogated, as I recall,
with respect to the formation of the second investment trust, some
time in 1928; the investment trust I refer to being called the United
States & International Securities Corporation. Did you hear the
testimony given by Mr. Dillon before this committee day before
yesterday on that subject?
Mr.
CHRISTIE. Yes,
sir.
Mr. PECORA. He was then asked, among other things, particularly,
as I recall it now, by Senator Couzens, what reason there was at
that time that Dillon, Read & Co. caused this second investment
trust to be organized with a capital of $60,000,000 to engage in the
same kind of business as the first investment trust which was still
functioning. Do you recall those questions?
Mr.
CHRISTIE. Yes.
Mr. PECORA. Can you give any reason, based upon your personal
knowledge, for the organization of that second investment trust by
United States & Foreign Securities Corporation ?
Mr. CHRISTIE. Well, as I remember it, Mr. Tracy, the president
of the United States & Foreign Securities Corporation, thought it
was a desirable thing to do and that the United States & Foreign
Securities Corporation could have further diversification through
that second trust; and my principal recollection is that Mr. Tracy
and the board thought it was a desirable thing to do.
Mr. PECORA. What reasons did they advance ?
Mr. CHRISTIE. That I do not recall. I don't believe I was a director
at that time.
Mr. PECORA. The formation of this second investment trust in 1928
was one of the major operations of your firm that year, was it not?
Mr. CHRISTIE. It was one of our issues in that year; that is right.
Mr. PECORA. And a rather important one, was it not ?
Mr. CHRISTIE. Yes.
Mr. PECORA. The organization
of an investment trust with a capitalization of $60,000,000 is not an everyday happening, even in your
firm, is it ?
Mr. CHRISTIE. Sixty millions?
Mr. PECORA. Yes.
Mr. CHRISTIE. Sixty millions is right, I
Mr. PECORA. That was not an everyday
am toljd.
occurrence, even for your
firm, was it ?
Mr. CHRISTIE. NO ; it was not.
Mr. PECORA. Can you recall what
reasons were advanced at any
conference among the members of the firm of Dillon, Read & Co.
which commended to their judgment the organization of this second
1700
STOCK EXCHANGE PRACTICES
investment trust in 1928 when they knew that the first investment
trust which they caused to be organized in 1924 was still actively
functioning?
Mr. CHRISTIE. The first investment trust at the time of the organization of the United States & International was making a very
splendid record. Its securities were advancing in value and its book
value was increasing, but it had 6 percent preferred stot^k. The
United States & International had 5 percent preferred stock available for the second preferred, and that seemed, at the time at least,
a safe margin. That excess income would be available for dividends
on the second preferred, together with the common that the United
States & Foreign had. They thought it was a good investment.
That the 5 percent preferred stock, like the 6 percent preferred of
the first investment trust, was a good investment to sell and to offer to
our clients.
Mr. PECORA. The first investment trust was conducted and operated for the benefit of its stockholders, was it not, primarily?
Mr. CHRISTIE. Yes, sir.
Mr. PECORA. The public
subscribed 25 to 30 million dollars with
which the first investment trust was launched, did it not?
Mr. CHRISTIE. Yes; and they were stockholders.
Mr. PECORA. DO you know of any reason why those stockholders
were not given the benefit of increased activities and operations
through the medium of additional capital?
Mr. CHRISTIE. Whatever benefit would come, would come to the
first trust and to its common stock by this investment in the
second. I do not quite follow you to see what other arrangement or
earnings or rights might have been given to stockholders that would
have been any more advantageous than this investment in the United
States & International.
Mr. PECORA. Under its charter the ftrst investment trust is empowered and authorized to conduct any or all kinds of business which
the second investment trust is authorized to conduct?
Mr- CHRISTIE. I believe so.
Mr. PECORA. These two investment trusts were practically operated
by the same individuals, were they not?
Mr. CHRISTIE. The directors were different in both companies. I
think Mr. Dillon was on both companies, and I think perhaps one
other—no; just Mr. Dillon. Otherwise the boards were different.
Mr. PECORA. Did not both companies have the same president ?
Mr. CHRISTIE. Mr. Tracy was president and a member of the board.
Mr. PECORA. Were there any directors of the two trusts in
common ?
Mr. CHRISTIE. I think, just Mr. Tracy and Mr. Dillon, as I
recall it.
Mr. PECORA. Were you ever an officer or director of the United
States & International Securities Corporation?
Mr. CHRISTIE. May I look that up ?
Mr. PECORA. Yes.
Mr. CHRISTIE (after
conferring with associates). According to this
record Mr. Pecora, I was never a director. I was^vice president
from October 29,1928, to December 8, 1930.
Mr. PECORA. I understand that the present directors of the United
States
& International Securities Corporation are as- follows:
STOCK EXCHANGE PRACTICES
1701
Matthew C. Brush, Clarence Dillon, Charles Hayden, J. H. Hillman,
Jr., Dean Mathey, Ernest B. Tracy, and Edward G. Wilmer. Does
that accord with your present knowledge, Mr. Christie?
Mr. CHRISTIE. I think that is right.
Mr. PECORA. Who is Matthew C. Brush, if you know?
Mr. CHRISTIE. I think he is president or chairman of the board of
American International Co..
Mr. PECORA. He is well known as a big stock-market operator, is
he not ?
Mr. CHRISTIE. I do not know that. He is a well-known man,
though.
Mr. PECORA. YOU do not know that among his major activities are
stock-market operations ?
Mr. CHRISTIE. This company of his is an investment company, the
American International.
Mr. PECORA. Don't you know that the testimony he gave before this
committee on that very subject during the year 1932
Mr. CHRISTIE. I never read his testimony, sir.
Mr. PECORA. If you will take my assurance for it, the testimony
shows his own admission to be that he is quite an operator on the
stock market.
Mr. CHRISTIE. All right.
Mr. PECORA. Who is Mr. Charles Hayden, another one of the
gentlemen on the board of directors of the United States & International Securities Corporation?
Mr. CHRISTIE, Mr. Charles Hayden is a member of the firm of
Hayden, Stone & Co.
Mr. PECORA. IS that a stock-brokerage firm ?
Mr. CHRISTIE. A member of the stock exchange and other exchanges; yes, sir.
Mr. PECORA. It is a very active stock-brokerage firm, is it not?
Mr. CHRISTIE. It is one of the large firms.
Mr. PECORA. And in addition to handling a stock-brokerage commission business they are also interested in the issuance of securities,
are they not ?
Mr. CHRISTIE. They have an investment department or division.
Mr. PECORA. Ariel the investment department or division of their
business is a very large department, is it not? It forms a large part
of their business?
Mr. CHRISTIE. I have no knowledge of what percentage it is, or
even relatively. Whether it is relatively large in their own organization or not, I would not have knowledge. I know from my knowledge of the investment banking business that Hayden, Stone & Co.
are substantial dealers in investment securities.
Mr. PECORA. During ordinary business hours you live and breathe
in the atmosphere of the financial district of New York City, do you
not?
Mr. CHRISTIE. That is right.
Mr. PECORA. Don't you know, from your years of habitation down
there, that Hayden, Stone & Co. have a very big and active securities
department ?
Mr. CHRISTIE. Yes; I know they have had a very fine one for a
number of years.
1702
STOCK EXCHANGE PRACTICES
Mr. PECORA. Mr. Hayden, as a member of this firm of Hayden,
Stone <& Co., was one of the gentlemen who, by virtue of his being
on the board of directors of this second investment trust, was in a
position to pass judgment on the investments to be made by that
trust for its portfolio, was he not?
Mr. CHRISTIE. That is right.
Mr. PECORA. SO was Mr. Brush.
Mr. CHRISTIE. That is right.
Mr. PECORA. AS an investment banker, Mr. Christie, do you think
that is an ethical practice ?
Mr. CHRISTIE. Absolutely. I think Mr. Hayden has very broad
knowledge of conditions generally. He serves on a great many
boards of directors, and is a very active, well-posted gentleman, and
I think that his knowledge and help are really very worth while.
Mr. PECORA. I am not disputing his knowledge; but it is a fact,
is it not, that as a member of the firm of Hayden, Stone & Co. he
frequently is very much interested in promoting enterprises in which
his firm has an active interest ?
Mr. CHRISTIE. Yes, he is.
Mr. PECORA. DO you think
that a member of the board of directors
of an investment trust which invests moneys obtained by it from
the investing public should be one who also, apart from his relationship to the investment trust, is interested in the flotation of
securities generally?
Mr. CHRISTIE. I think it depends largely on the individual situation. I feel sure, in the first place, that Mr. Hayden's firm
would be careful and use their best judgment in anything that they
originated; and in the second place I feel sure that Mr. Hayden
would not recommend the purchase of a security by an investment
trust on whose board of directors he served, just because his own
firm had originated the issue or was originating the issue.
Mr. PECORA. DO you recognize the existence of a temptation
dangling before a person in that position
Mr. CHRISTIE. In any event, his judgment would have to be
Mr. PECORA (continuing). To have the investment trust acquire
securities of an enterprise in which he might %be interested as a
promoter ?
Mr. CHRISTIE. In any event, if one director made such a recommendation his judgment would be subject to check by the other
directors, who would be capable of considering the suggestion on
its own merits, and in their own judgment.
Mr. PECORA. Did you ever hear of any controversies amongst
various members of the board of directors of either of these investment trusts with regard to the kind of investments they should
make ?
Senator ADAMS. Mr. Christie does not remember who sat on the
board of directors.
Mr. DILLON. He attended only two meetings.
Mr. CHRISTIE. I was only on the board of directors of the first
company for a few months, 5 or 6 years ago.
Senator ADAMS. I was commenting on the fact that the directors
apparently do not have a very clear recollection of what took place.
Mr. CHRISTIE. After 4 or 5 years
STOCK EXCHANGE PRACTICES
1703
Mr. PECORA. Let us see, Mr. Christie, just what the atmosphere
was that surrounded Mr. Hayden. As a director in this investment
trust he was charged with the duties and responsibilities of a trustee
toward the stockholders of the investment trust, to see that wise and
sound investments were made in securities with the moneys of the
stockholders poured into the investments.
Mr. CHRISTIE. That is right.
Mr. PECORA. AS a member of the firm of Hayden, Stone & Co.?
which had a large securities department, and which included the
business of issuing and selling securities, he was interested in furthering and facilitating the profitable conduct of the business of that
firm of Hayden, Stone & Co., was he not?
Mr. CHRISTIE. That is right, yes.
Mr. PECORA. Don't you think that that placed him, at times, under
a temptation—I am not suggesting that he yielded to it, but don't
you think at times that placed him under a temptation whereby his
judgment, as a trustee or director of the investment trust, might
unconsciously become warped, and he might be induced to favor
the purchase of securities sponsored by his private firm?
Mr. CHRISTIE. I think that that is a question of Mr. Hayden's
character.
Mr. PECORA. Apart from his character, apart from the personality involved, I am looking at the elements in the situation.
Mr. CHRISTIE. I really do not see any conflict there, when you
consider the man's experience and his ability to consider the problem
that he has before him in the light of his obligation and his duty.
I appreciate and grant that he has two interests, that of the investment trust and that of his own company.
Senator ADAMS. YOU would not see any impropriety in Mr. Hayden sitting on the board and recommending the purchase of securities which his firm was issuing ?
Mr. CHRISTIE. Not at all.
Senator ADAMS. The courts do not agree with you on that.
Mr. PECORA. I do not think the courts generally agree with
a
man filling such a dual role.
The CHAIRMAN. Your position is that the board of directors of
the investment trust would have to pass upon it; but suppose that the
board of directors of that trust were composed of men in a like situation to that of Mr. Hayden. Then they could trade among themselves as to what would be suitable, and what not, to the sacrifice of
the interests of the investment trust.
Mr. CHRISTIE. YOU might very well, I suppose, have a set-up
within a board that would work as you suggest, Senator Fletcher.
The other point, that Senator Adams brought out, was that I think
very often that a man in that position might really know all about
some situation, some company, some industry, because of some other
position that he might have.
Senator ADAMS. That is one of the objections to it.
Mr. CHRISTIE. It might work either way; but it also has possibilities for good. That is what I meant to say in answer to your question. I do not deny that it might work the other way.
Mr. PECORA. DO you happen to know whether or not, as a matter
of fact, the United States & International Securities Corporation did,
1704
STOCK EXCHANGE PRACTICES
at various times while Mr. Hayden was one of its directors, purchase
securities sponsored by his firm or issued by his firm ?
Mr. CHRISTIE. I do not know that. I would have to go through
their transactions, or have some one check them to find that out.
There, again, if your investigators have some particular case, I will
be glad to accept their finding.
Mr. PECORA. Who is Mr. J. H. Hillman, Jr., another one of the
gentlemen now on the board of directors of the United States &
International Securities Corporation?
Mr. CHRISTIE. Mr. J. H. Hillman is in Pittsburgh. I think he has
a company of his own, J. H. Hillman & Co.; he is also president
of one of the banks there, I think.
Mr. PECORA. Engaged in what kind of business ?
Mr. CHRISTIE. The J. H. Hillman Co. is a coal and coke company.
The proper name of the company, I am told, is the J. H. Hillman
Coal & Coke Co.
Mr. PECORA. Mr. Dean Mathey
Mr. CHRISTIE. Mr. Hillman is also chairman of the board of the
Peoples Trust & Savings Bank in Pittsburgh.
Mr. PECORA. Who ? Mr. Hillman ?
Mr. CHRISTIE. Mr. J. H. Hillman.
Mr. PECORA. Mr. Dean Mathey, another director of this investment trust at the present time, is one of the partners of Dillon,
Eead & Co.
Mr CHRISTIE. That is correct.
Mr. PECORA. Mr. Tracy is the same gentleman to whom you referred a little earlier in this hearing. He is the president of this
investment trust, as well as president of the first investment trust.
Mr. CHRISTIE. He is the president. Your mentioning Dean
Mathey reminds me that we found out that it was Dean Mathey
who signed the firm signature four or five years ago that could not
be recognized yesterday morning.
Mr. PECORA. On the option agreements given to Dominick & Dominick under date of December 20, 1928?
Mr. CHRISTIE. That is right.
Mr. PECORA. Who is Edward G. Wilmer, who now is a director
of the United States & International ?
Mr. CHRISTIE. Edward G. Wilmer is retired, not active in business.
Mr. PECORA. Did he have any affiliations at any time with Dillon,
Eead & Co.?
Mr. CHRISTIE. Yes. He was associated with us for a while. I do
not remember for how long a period, but for some time he was
associated with us.
Mr. PECORA. Can you tell this committee how the securities purchased by the United States & International Securities Corporation
were acquired for its portfolio account? I mean by that, upon whose
judgment were those securities purchased,
Mr. CHRISTIE. Exactly similar to the United States & Foreign;
the same kind of discussion and operation.
Mr. PECORA. May I ask that we suspend with the examination of
this witness at this time, so that we may call Mr. Tracy?
The CHAIRMAN. Mr. Christie, before you leave, did Dillon, Read
& Co, retain three fourths of the capital stock of this second trusty
as they did in the case of the first trust ?
STOCK EXCHANGE PRACTICES
1705
Mr. CHRISTIE. NO. Dillon, Read & Co., Senator Fletcher, had no
interest in the second trust at all. The first trust, the United States
& Foreign Securities Corporation, had the interest in the second
trust, not Dillon, Read & Co.
The CHAIRMAN. The first trust took three fourths of the common
stock of the second ?
Mr. CHRISTIE. The first trust, the United States & Foreign, put up
the $10,000,000 for the second preferred of the United States & International, and got the second preferred and two thirds of the authorized common stock of the United States and International.
Mr. PECORA. Let us get that set up correctly. The first trust was
the United States & Foreign Securities Corporation.
Mr. CHRISTIE. That is right.
Mr. PECORA. That was organized with a capital of $30,000,000,
which was raised by the sale of $25,000,000 worth of first preferred
stock to the public, and the sale to Dillon, Eead & Co. of $5,000,000
of second preferred stock. Is that right, Mr. Christie ?
Mr. CHRISTIE. The first trust had $25,000,000 first preferred, and
the $5,000,000 second preferred, and 1,000,000 common shares.
Mr. PECORA. The first preferred was purchased by the public for
$25,000,000, was it not?
Mr. CHRISTIE. In the form of allotment certificates that carried a
share of common stock with each share of preferred.
Senator ADAMS. May I ask a question right there ? In connection
with this allotment, I wish you would check this simple bit of mathematics. With each $100 that was invested in the first preferred went
one share of common stock.
Mr. CHRISTIE. That is right. A purchaser could not buy a share
of preferred alone. The original stock was issued in the form of
allotment certificates, as you say.
Senator ADAMS. But when a man put $100 in the first preferred,
he got one share of the common stock.
Mr. CHRISTIE. That is right.
Senator ADAMS. Accepting your theory that the entire 750,000
shares of common stock went for the $5,100,000, for each $100 that
was put into the second preferred, you got 15 shares. In other words,
$100 in second preferred got 15 times as much common stock as $100
in the first preferred.
Mr. CHRISTIE. That is right, because the $5,000,000 second preferred
was junior money to the first.
Senator ADAMS. If the second alternative were true, that the
500,000 shares of common were bought for $100,000, rather than as a
part of the general purchase, in that case $100 would have bought
500 shares of the common stock.
Mr. CHRISTIE. Well, but naturally no one was going to buy a share
of second preferred with one share of common and pay $100 for it,
the same price as a share of first preferred.
Senator ADAMS. I am merely trying to get the mathematics of
it. Fifteen times as big a share in the profits of the concern went
to $100 in second preferred as compared with $100 in the first
preferred.
Mr. CHRISTIE. After the first preferred got their dividends. In.
other words, the junior position must be kept in mind.
1706
STOCK EXCHANGE PRACTICES
Senator ADAMS. I am talking about the profits. There was 15
times as large a share of the profits of the concern that went to
$100 invested in second preferred, as compared with $100 invested
in first preferred.
Mr. CHRISTIE. I do not think that is the same way as
Senator ADAMS. I S that the fact?
Mr. CHRISTIE. I do not think so. Perhaps I do not quite follow
your mathematics, but after the dividends on the first and second
preferred, then anything after that goes 75 percent to the holders
of the second preferred, wo will say, and 25 percent to the first
preferred.
Senator ADAMS. I am getting back to the fellow who had $100,
and who bought first preferred. He got his 6 percent dividend, if it
was earned.
Mr. CHRISTIE. First.
Senator ADAMS. Then, if the second dividend was earned, he got
the share which one share of common stock gave him. For $100
invested in second preferred, when the preferred dividends of both
classes were paid, he had 15 shares of common stock, so that he got
15 times as much, in addition to his 6 percent.
Mr. CHRISTIE. I think that that is 15 times
Senator ADAMS. The second preferred put up one fifth as much
money, did it not, $5,000,000 as against $25,000,000?
Mr. CHRISTIE. That is right.
Mr. DILLON. May I clear this up for you ?
Senator ADAMS. There were 750,000 shares, on your theory, that
went to the second preferred, as against 250,000 to the first; in other
words, 15 times as much per dollar. If you put it on the basis Mr.
Pecora is disposed to contend, that the 500,000 of common stock was
bought for $100,000, in accordance with the literal interpretation of
your records, then the man who put $100 there got 500 times as much
m common value as the man who put his $100 into first preferred.
Mr. DILLON. Senator, may I clear it up for you ? I think I can,
Senator ADAMS. Certainly. It is quite clear.
Mr. DILLON. The set-up is this. The $25,000,000 of the first preferred was sold as first preferred stock, on which the holders got 6
percent interest, cumulative, each year it was earned.
Senator ADAMS. And all they had a chance to get back was the
6 percent and the profits on 250,000 shares of common. That was
their share in the general investment.
Mr. DILLON. May I just finish ?
Senator ADAMS. Yes.
Mr. DILLON. Then we represented to our clients that we were
going to be in control of this company and manage it, which I
think is the reason they bought the stock. I do not believe our
clients would put in $25,000,000 and buy first preferred stock in an
investment trust with just an investment trust set-up. The fact
that Dillon, Eead & Co. were going to take the responsibility was
an important factor. It showed on the prospectus that we were
sponsoring it, and that the control rested with us, and our clients
for that reason said " Yes; we would like to invest money at &
percent."
In addition to that, we said to our clients "We are going further. We will put in $5,000,000 of our own money, junior to you, so
STOCK EXCHANGE PRACTICES
1707
that if there is any loss in this company we will suffer it ourselves
for the first $5,000,000." Then if we had sold first preferred, which
was our original intention, and we had taken simply $5,000,000 of
common stock, there would have been no confusion whatever. As
to the $25,000,000 of the preferred which our customers took, we
represented that we were going to have the control of this company
and were going to manage it. We said " In addition, we are going
to put in $5,000,000 of our own money, junior to yours and we take
the junior position."
If that were all, then you would have had a simple thing, and we
should not even be discussing it. But in addition to that we thought
" if this thing is successful beyond our expectations, and we get better than 6 percent, let us give our clients something more than that.'*
So we changed the set-up, and we had $5,000,000 of second preferred.
We then created a common stock to represent the equity behind the
preferred stocks, and said: "All right. The first preferred fellows
are to get a quarter of that common, so that if we do better than we
expect, we shall give our clients not only six percent, but an additional 25 percent in whatever we do make over and above the 6
percent dividends on the 2 classes of preferred stock."
On our part, there were reservations as to whether we could earn
6 percent year in and year out on the preferred stock. It has not
been easy. It has required a great deal of attention and care, but we
have been able to do it, and that preferred stock money is still intact.
On our junior preferred stock money we have not had our full 6
percent dividends. With the market of 1929 running away, high
prices were reported for this common stock, which had no value
when we started. In fact, that stock was worth $1,000,000 less than
nothing.
Senator ADAMS. $900,000.
Mr. DILLON. $900,000 less than nothing. It is true that over a
period of a few years we had accumulated a surplus of some $48,000,000, which gave that common stock a value of $48,000,000 on
account of the way the market was running.
Senator ADAMS. I am not questioning that situation, that you put
your own money in, $5,000,000, as security behind the first preferred,
but I was merely reducing it to mathematics for my own information. You would also have 15 times as much in prospective profits
for that money, as compared with what the investor was getting.
Mr. DILLON. We could have taken 100 percent. We could have
taken all that profit. We could have bought all the common stock
for $5,000,000.
Senator ADAMS. DO you remember what Lord Clive said ? " When
I consider my opportunities I marvel at my moderation."
[Laughter.]
TESTIMONY OF ERNEST B. TEACY, NEW Y0KK CITY
The CHAIRMAN. YOU solemnly swear that you will tell the truth,
the whole truth, and nothing but the truth, regarding the matters
now under investigation by the committee. So help you God.
Mr. TRACY. I do.
175541—33—PT 4
\t
1708
STOCK EXCHANGE PRACTICES
Mr. PECORA. Mr. Tracy, if you have any difficulty hearing me, will
you be good enough to indicate it, and I will raise my voice. What
is your full name?
Mr. TRACY. Ernest B. Tracy.
Mr. PECORA. Where do you live ?
Mr. TRACY. My residence is 720 Park Avenue, New York.
Mr. PECORA. Where is your office or place of business?
Mr. TRACY. Number 1 Wall Street, New York.
Mr. PECORA. Are you engaged in any business for your own individual account at that address ?
Mr. TRACY. My business consists chiefly in the management of investment funds, and I also have been in the securities business.
Mr. PECORA. Are any of the investment funds to which you have
just referred the funds of corporations, or are they private funds?
Mr. TRACY. They are funds of corporations.
Mr. PECORA. HOW many such corporations do you manage?
Mr. TRACY. I am president of another company, aside from the
United States & Foreign, and the United States & International,
known as the American & European Securities Co.
Mr. PECORA. IS that an investment trust?
Mr. TRACY. Yes, sir; and I am on the board of several others.
Mr. PECORA. Investment trusts?
Mr. TRACY. Yes, sir.
Mr. PECORA. Are these
other investment trusts, upon the boards
of which you sit, in any way related with either the United States
& Foreign Securities Corporation or the United States & International Securities Corporation?
Mr. TRACY. In no way connected with them.
Mr. PECORA. And, as president or manager of those other investment trusts, I assume that you receive a salary commensurate with
your office and duties?
Mr. TRACY. NO. I have, stock in the American and European
Securities Co.
Mr. PECORA. Are you its principal stockholder ?
Mr. TRACY. N O ; I am not the principal stockholder, I believe. I
am a large, substantial stockholder.
Mr. PECORA. Are you at the present time the president of the
United States & Foreign Securities Corporation ?
Mr. TRACY. I am, sir.
Mr. PECORA. When did you become its president?
Mr. TRACY. The end of 1927, as I remember it..
Mr. PECORA. That corporation, as you probably know,
was organized in October 1924.
Mr. TRACY. Correct.
Mr. PECORA. Did you have any connection with that corporation^
either as an officer, director, or stockholder, prior to the time that
you became its president in 1927?
Mr. TRACY. Not to my recollection.
Mr. PECORA. At whose request did you become president of that
corporation in 1927 ?
Mr. TRACY. I was a director earlier in the year. I was elected
to the board in the spring of 1927.
STOCK EXCHANGE PRACTICES
1709
Mr. PECORA. When you were chosen president in 1927, of this
first investment trust, the United States & Foreign Securities Corporation, who first proposed to you that you become its president?
Mr. TRACY. AS I remember, it was discussed at- board meetings
and I was asked whether I would accept the presidency.
Mr. PECORA. By whom ?
Mr. TRACY. Mr. Dillon.
Mr. PECORA. Who preceded you as president ?
Mr. TRACY. Mr. Joy was chairman of the board. I will have to
look up and see who was president. [After conferring with associates.] E. J. Bermingham.
Mr. PECORA. Mr. Bermingham was a partner of the firm of Dillon,
Read & Co. at that time, was he not?
Mr. TRACY. I believe he was.
Mr. PECORA. Have you served continuously since 1927 as president
of the United States & Foreign Securities Corporation?
Mr. TRACY. I have.
Mr. PECORA. And have been a member of the board of directors
during all that time ?
Mr. TRACY. I have.
Mr. PECORA. Are you also connected, either as an officer or director, with the investment trust known as the United States & International Securities Corporation?
Mr. TRACY. Yes, sir. I am president and director.
Mr. PECORA. When did you become president of that corporation?
Mr. TRACY, Shortly after it was organized.
Mr. PECORA. It was organized in 1928.
Mr. TRACY. Yes.
Mr. PECORA. And
you have been its president continuously since
that time ?
Mr. TRACY. Continuously since that time.
Mr. PECORA. Are you also a stockholder of that corporation ?
Mr. TRACY. NO, sir.
Mr. PECORA. What did you say?
Mr. TRACY. A stockholder of the United States & International?
Mr. PECORA. Yes', sir.
Mr. TRACY. I am not.
Mr. PECORA. Have you ever been?
Mr. TRACY. I have not, to my knowledge.
Senator ADAMS. Are you a stockholder in
I do not think so.
the United States &
Foreign ? Are you a stockholder in the earlier company ?
Mr. TRACY. NO, sir; I am not.
The CHAIRMAN. DO the laws
permit a man who is not a stockholder in a corporation to be elected as its president? I presume
they do, but usually the requirement is that the president be a
stockholder.
Mr. TRACY. Yes, sir; the law permits it, but I have options on
some stock, Mr. Chairman.
Mr. PECORA. Mr. Tracy, during the times that you have been
president of the United States & Foreign Securities Corporation and
the United States & International Securities Corporation, I under-
1710
STOCK EXCHANGE PRACTICES
stand you have also been, and still are, either an officer or a directory,
or a large stockholder, in other investment trusts.
Mr. TRACY. Correct.
Mr. PECORA. Have you given us the names of all these other investment trusts?
Mr. TRACY. HOW many have I given?
Mr. PECORA. YOU have given us only one.
Mr. TRACY. I am told I have mentioned only the name of the
American & European. I am also a director of the Societe Financiere Franco Suisse.
Mr. PECORA. Any other financial corporation?
Mr. TRACY. The Illuminating & Power Securities Corporation.
Mr. PECORA. Any other?
Mr. TRACY. The Electrical Securities Corporation and the Public
Utilities Corporation.
Mr. PECORA. Will you continue the enumeration of such other corporations as you have been connected with during the times you have
been president of these two investment trusts the main subject of
the present inquiry?
Mr. TRACY. Investment corporations or
Mr. PECORA. Investment corporations, yes.
Mr. TRACY. Those are the only investment corporations that I
recall.
Mr. PECORA. HOW about the Commercial Investment Corporation?
Mr. TRACY. The what, sir?
Mr. PECORA. The Commercial Investment Trust Corporation?'
Mr. TRACY. I am not on that board.
Mr. PECORA. Are you a large stockholder in it ?
Mr. TRACY. Commercial Investment Trust?
Mr. PECORA. Yes.
Mr. TRACY. NO.
Mr. PECORA. Are you a stockholder of any size in it?
Mr. TRACY. In the Commercial Investment Trust?
Mr. PECORA. Yes.
Mr. TRACY. NO.
Mr. PECORA. Are you in any other investment corporation?
Mr. TRACY. DO you mean have I stock in any other investment
corporation ?
Mr.
PECORA. Yes,
sir.
Mr. TRACY. Yes. I have some stock in the Societe Financiere
Franco-Suisse. And I may have some stock in some others.
Mr. PECORA. Their names do not occur to you now ?
Mr. TRACY. I have some stock in the Atlas Corporation.
Mr. PECORA. That is an investment trust, is it not?
Mr. TRACY. Yes, sir.
Mr. PECORA. I presume
you receive a salary as president of the
United States & Foreign Securities Corporation?
Mr. TRACY. NO, sir; I do not.
Mr. PECORA. YOU never have?
Mr. TRACY. Never have.
Mr. PECORA. DO you receive a
salary as president of the United
States & International Securities Corporation?
Mr. TRACY. NO, sir; I do
not.
STOCK EXCHANGE PRACTICES
1711
Mr. PECORA. YOU never have?
Mr. TRAOY. NO. I have options.
Mr. PECORA. Sir.
Mr. TRACY. I have some options on stocJK.
Mr. PECORA. Well, what compensation do you receive in any form
whatsoever for the services: you render as the president of these two
investment trusts, the United States & Foreign Securities Corporation and the United States & International Investment Corporation?
Mr. TRACY. I expect to receive my compensation when the company makes money. When I exercise my warrants and receive an
income on them.
Senator ADAMS. These options are of somewhat indefinite) duration ?
Mr. TRACY. Why, the original option, Senator, was so much per
year cumulative to buy stock at $25 a share. And they ran for 5
years. And then they were extended for another 3 years.
Senator ADAMS. YOU did not exercise your options?
Mr. TRACY. NO, sir; I did not.
Mr. PECORA. The duties that you
discharge as president of both of
these investment trusts are of a highly responsible character, are
they not?
Mr. TRACY. Certainly.
Mr. PECORA. And they require a great deal of your time and attention to attend to ?
Mr. TRACY. I spend most of my time in these two companies'
affairs.
Mr. PECORA. DO you discharge those duties from your own office
at No, 1 Wall Street?
Mr. TRACY. Well, I would not say that; no.
Mr. PECORA. From what office or headquarters do you discharge
your responsible duties as president of these two investment trusts?
Mr. TRACY. The only office that the company has is in Newark.
Mr. PECORA. Well, that is only an office that is maintained for
nominal purposes, is it not ?
Mr. TRACY. NO ; that is the office of the company, Mr. Pecora. To
take care of all the details and operations of the company.
Mr. PECORA. HOW large a personnel does the United States &
Foreign Securities Corporation maintain at that Newark office?
Mr. TRACY. I think 10 or 12 employees. Something like that. I
do not know the number exactly.
Mr. PECORA. HOW frequently do you find it necessary to go to that
office in the discharge of your duties as president ?
Mr. TRACY. I have not kept a record of the number of times I have
been there.
Mr. PECORA. Well, without being exact about that, give us an
approximation.
Mr. TRACY. I go over there fairly frequently.
Mr. PECORA. What do you mean by that? Once a week?
Mr. TRACY. No; I go over when the occasion arises, when the need
arises.
Mr. PECORA. Do those occasions arise on an average of once a week?
Mr. TRACY. NO.
Mr. PECORA. Not
Mr. TRACY. NO.
as often as that?
1712
STOCK EXCHANGE PRACTICES
Mr. PECORA. Once a month?
Mr. TRACY. Well, I might go over there at times once a month.
Sometimes I might go over more frequently.
Mr. PFCORA. When were you last over there?
Mr. TRACY. I should say about 2 weeks ago.
Mr. PECORA. During the current year, will you tell us, approximately how many times you have found it necessary in the discharge
of your duties as president of the United States & Foreign Securities
Corporation to attend to its business affairs at its Newark office?
Mr. TRACY. Well, Mr. Pecora, I do not have to go over there to
form an opinion as to what securities we want to buy. Now, that
is my chief duty, to follow the investments of the company. I do
not have to go to Newark and sit down there to decide whether the
security is good or bad.
Mr. PECORA. DO you collaborate with other officers and directors
of that company in determining the investments that are made for
the account of that company ?
Mr. ^TRACY. Always.
Mr. PECORA. With whom do you so collaborate ?
Mr. TRACY. I collaborate with all of the directors. I get in touch
with them very frequently between meetings.
Mr. PECORA. DO the board of directors of that company have
meetings at regular or stated times ?
Mr. TRACY. AS a rule we have monthly meetings.
Mr. PECORA. Once a month?
Mr. TRACY. Yes, sir.
The CHAIRMAN. Where does the board meet ?
Mr. TRACY. AS a rule at 28 Nassau Street, Senator.
Mr. PECORA. DO you mean by that that the board of
directors as a
rule meets in the office of Dillon, Read & Co. ?
Mr. TRACY. AS a rule they meet there, yes. I t is the most convenient place for them to meet.
Mr. PECORA. Have you, during the current year, attended with
regularity the meetings of the board of directors of the United
States & Foreign Securities Corporation?
Mr. TRACY. I think I have with great regularity.
Mr. PECORA. Have those meetings always been attended with regularity by all the other directors?
Mr. TRACY. I think the directors attend with great regularity.
And I see them frequently between meetings; telephone them; get
their opinion on various investments.
Mr. PECORA. Whose opinion, as a rule, prevails with regard to the
selection of investments that are made for the account of this investment trust?
Mr. TRACY. The majority of the board.
Mr. PECORA. Which member of the board has made the most recommendations for such investments since you have been president
of it?
Mr. TRACY. Well, that would be pretty hard to say. I have made
a great many and the other directors have made a great many.
Mr. PECORA. DO you know any director that has made more than
you have?
Mr. TRACY. Well, I have not kept any record of that, Mr. Pecora.
STOCK EXCHANGE PRACTICES
1713
Mr. PECORA. I know that, but I mean from your general knowledge and recollection.
Mr. TRACY. At every meeting the directors are given the financial
statement of the company, the statement of cash, the securities owned.
They are asked to go over them and make any criticism or recommendations or suggestions for change in securities, and there is a
general discussion that everybody takes part in.
Mr. PECORA. Well, I know that that is the ordinary routine. I am
asking you particularly, however, with respect to the making of
recommendations for the investment of the funds of the investment
trust in securities. Now I asked you: Do you know of any director
or officer who has made more such recommendations than you have ?
Mr. TRACY. Well, I haven't any record. I do not keep a pencil
record of that.
Mr. PECORA. Will you please draw upon your general recollection
about that?
Mr. TRACY. I do not want to guess upon that thing, Mr. Pecora.
I think all of the directors have contributed to the success of this
company by their recommendations and judgment. They have all
been active.
Mr. PECORA. YOU know—because if I correctly understood your
testimony you have already so indicated to us—that you as president
have made many recommendations
Mr. TRACY. A great many, yes.
Mr. PECORA. (continuing). For the investment of the funds of
this investment trust, which were followed?
Mr. TRACY. Correct.
Mr. PECORA. DO you know any other officer or director of that
company since you have been its president who has made more such
recommendations than you have?
Mr. TRACY. Well, I do not want to guess as to whether any director
has made more. I have made a great many.
Mr. PECORA. Well, give us your best recollection on that.
Mr. TRACY. And other directors have made a great many recommendations, Mr. Pecora.
Mr. PECORA. Are you unwilling to give us your best recollection
as to whether or not any other officer or director has made more
recommendations than you have ?
Mr. TRACY. Mr. Pecora, I want to render you every service at my
command, and I want to do the same to the committee, but I cannot
be expected to guess at something of that kind.
Mr. PECORA. I am not asking you to guess. I am asking you to
give us your best recollection.
Mr. TRACY. I do not remember whether one of the directors made
more recommendations than the other ones. I know that they all
made recommendations.
Mr. PECORA. AS a matter of fact, the most of the investments that
are made and have been made in behalf of this investment trust
since you have been its president have been made not at meetings
of the board of directors but in an informal way, have they not?
Mr. TRACY. A great many of them.
Mr. PECORA. And those recommendations have been carried out
and afterward reported formally to the board of directors?
Mr. TRACY. A great many of them.
1714
STOCK EXCHANGE PRACTICES
Mr. PECORA. That has been the usual procedure, has it not?
Mr. TRACY. Well, the usual procedure—we would discuss various
industries and financial conditions. We discuss, for instance, the oil
industry and decide whether that offers a good field for investments
at that time. And then we decide to buy certain oil stocks. And
recommendations are made by the board, and then those orders are
executed, and they are reported at the next meeting.
Mr. PECORA. What is the largest single investment that has been
made for the portfolio of this investment trust upon your personal
recommendation ?
Mr. TRACY. I should say of our present holdings it would be the
American Gas & Electric Co.
Mr. PECORA. Well, do not confine yourself to your present holdings.
I am referring to the operations of this investment trust during the
time that you have been its president.
Mr. TRACY. Well, I should say American Gas & Electric Co., or
in the old days Consolidated Gas.
Mr. PECORA. Did I understand you to say in the earlier part of
your testimony that you were connected with the American Gas &
Electric Co. in, some capacity or other ?
Mr. TRACY. I did not say that, but I am a director of the American
Gas & Electric Co.
Mr. PECORA. Also a stockholder of it?
Mr, TRACY. Yes; I am a stockholder.
Mr. PECORA. I S that an industrial corporation or to investment
trust?
Mr. TRACY. NO, sir.
Mr. PECORA. Or is it a holding
Mr. TRACY. That is one of
company ?
the largest public-utility holding
companies.
Mr. PECORA. Are there any of the securities of the American Gas
& Electric Co. now in the portfolio of United States & Foreign
Securities Corporation?
Mr. TRACY. I will have to look that up. Excuse me a moment.
Mr. PECORA. Will you please do so.
Mr. TRACY. Yes.
Senator ADAMS. While
that is being looked up may I ask you a
question, Mr. Tracy? May I just recur to this option matter for
a moment, if you do not mind?
Mr. TRACY. Yes, sir.
Senator ADAMS. DO
you mind telling us the number of shares
covered by these yearly options?
Mr. TRACY. I have an option on 15,000 shares, Senator, at 25.
Senator ADAMS. That is for each of these years ?
Mr. TRACY. NO, that is the total amount. From the United States
& Foreign Securities Corporation 3,000 shares a year, at 25, over a
5-year period. Making a total of 15,000. I have the right to take
them up year by year if I wanted to, or they could accrue or accumulate over that 5-year period.
Senator ADAMS. From whom does that option run ?
Mr. TRACY. From the United States & Foreign Securities Corporation to me.
Senator ADAMS. The United States & Foreign Securities Co. does
not own any of the common stock, does it?
STOCK EXCHANGE PRACTICES
171 &
Mr. TRACY. Yes, sir. As I remember it, it bought it in the open
market and gave me an option on it.
Senator ADAMS. And the same general situation as to the International Securities Corporation?
Mr. TRACY. In the International I have an option on 5,000 shares
of United States & Foreign common stock. Making a total of 20,000
between the two companies, at $25.
Senator ADAMS. And that would increase from year to year as you
go on?
Mr. TRACY. NO, sir; it increased up through the 5-year period, and
then the directors extended it for another 3 years.
Senator ADAMS. SO that your opportunity to profit out of increased
price is the allurement that is held out to you for carrying this
burden ?
Mr. TRACY. That is right.
Senator ADAMS. But at the present time it is not an especially
profitable option?
Mr. TRACY. NO. And I never sold any of my options.
I find, Mr. Pecora, that we have 24,181 shares of American Gas &
Electric common stock in the United States & Foreign Securities.
Mr. PECORA. In the United States & Foreign Securities Corporation ?
Mr. TRACY. Yes, sir.
Mr. PECORA. HOW many
have you, if any, in the portfolio of the
United States & International Securities Corporation ?
Mr. TRACY. Twenty-one thousand one hundred and twenty nine.
Mr. PECORA. Mr. Tracy, I have before me what purports to be a
copy of the report and accounts of the United States & Foreign
Securities Corporation as of December 31, 1932, made by Price,
Waterhouse & Co.; and among other things it indicates that as of
that date there were in the portfolio of the United States & Foreign Securities Corporation 23,241 shares of the common stock of
American Gas & Electric Co., at a book value of $1,099,037.56. Does
that conform to your recollection of the fact ?
Mr. TRACY. I will have to check that. (After doing so.) That
is correct.
Mr. PECORA. Yes. What is meant by the term " book value " as
applied here?
Mr. TRACY. Cost.
Mr. PECORA. That is synonymous with cost?
Mr. TRACY. Yes.
Mr. PECORA. Cost price ?
Mr. TRACY. Cost price.
Mr. PECORA. The term " cost
price " is very often used to indicate
something other than book value, is it not ?
Mr. TRACY. Well, that is what we paid for the stock.
Mr. PECORA. That does not answer my question, Mr. Tracy.
Senator ADAMS. DO you continue to carry the book value of the
security at its original cost notwithstanding it may have very greatly
depreciated ?
Mr. TRACY. Yes; but in figuring up our balance we take market
or cost, whichever is lower. We give both figures in our report.
We give total market value and total cost.
1716
STOCK EXCHANGE PRACTICES
Mr. PECORA. I S it not a fact, Mr. Tracy, that in the terminology
of the financial world the term " book value " frequently refers to
something other than cost as applied to a security?
Mr. TRACY. I am not a bookkeeper, Mr. Pecora, or an accountant.
Mr. PECORA. I have not asked you bookkeeping phraseology, but
in the terminology of the financial world is not the term "book
value " very frequently used to denote something other than cost?
Mr. TRACY. Yes.
The CHAIRMAN. Have
not the earnings something to do with the
book value?
Mr. TRACY. Earnings ?
The CHAIRMAN. Yes.
Mr. TRACY. I do not think so, Senator.
Senator ADAMS. Book value is determined
by those who set up
the books—that is the company. The company might pay a thousand dollars for a security and they might put it down at a book
value of $900 or at a book value of $1,100. That is an arbitrary
value that the company or the owner puts on his own books.
Mr. TRACY. Yes.
Senator ADAMS.
The market value is determined by somebody
^Ise, and may be quite different, and the cost price may be different.
Mr. TRACY. Yes.
Senator ADAMS. If
you are buying securities from a fire insurance
company, for example, you would not merely take the statement of
that company and look at the book value. That does not answer
your question, does it, as to what it is worth ?
Mr. TRACY. It does not.
Mr. PECORA. Book value is a variable term or amount, is it not?
In other words the book value of a security changes from time to
time depending upon the earnings of the corporation issuing the
security, does it not? What is your answer?
Mr. TRACY. AS a general rule our book value is cost value, Mr.
Pecora.
Mr. PECORA. I know that. You have already told us that. But
I want to get from you a statement based upon your own knowledge
as to whether or not book value as commonly used denotes something
entirely different from cost when applied to securities.
Mr. TRACY. Not necessarily. I would not say that; no.
Mr. PECORA. The cost price of a security never changes, does it?
I mean if you have purchased for a certain amount a certain security
the price you pay is its cost price at all times regardless of its book
or market value, is it not ?
Mr. TRACY. The cost is cost; yes.
Mr. PECORA. Yes; you use the term in this report of the portfolio
of your investment trust of book value to indicate cost, do you not?
Mr. TRACY. Yes.
Mr. PECORA. IS that
not apt to convey a wrong impression to the
average analyst of these reports ?
Senator ADAMS. Permit me to interrupt just a moment, Mr. Chairman. I think we would be very glad to have these gentlemen who
are sitting behind the witness furnish information when it is requested, but their views or answers to questions asked of the witness
•as to his own judgment or opinion are not quite what we are seeking
STOCK EXCHANGE PRACTICES
1717
for. Any time we want information that these gentlemen have we
will put them on the stand and I know they will be very glad to
testify, but I think it is an annoyance to the witness to keep telling
him all the time what he knows about it when no one else can know
what he thinks. That is merely a suggestion.
Mr. PECORA. I will ask the reporter to read the pending question.
(Thereupon the following was read by the reporter as above
recorded:).
Mr. PEICOEA. * * * You use the term in this report of the portfolio of
your investment trust of book value to indicate cost, do you not?
Mr. TBAOY. Yes.
Mr. PEOOBA. IS that not apt to convey a wrong impression to the average
analyst of these reports?
Mr. TRACY. I think our report is very complete. I do not think
that it would mislead an analyst. I think they are very complete,
Mr. Pecora. It has always been a practice to publish everything we
own sincei I have been connected with the company.
Mr. PECORA. What do you ordinarily understand to be implied by
the term " book value " as applied to securities.
Mr. TRACY. Cost as a rule.
Mr. PECORA. Cost?
Mr. TRACY. Yes.
Mr. PECORA. DO you
think that cost and book value are synonymous terms generally and so understood by the public?
Mr. TRACY. I think in investment companies as a rule, yes. All
an analyst has to do is to take the list of securities and the market.
Mr. PECORA. The book value given in this report made by Price,
Waterhouse & Co. as of December 31, 1932, for the twenty-three
thousand odd shares of American Gas & Electric Co. common stock
which it had in its portfolio on that date, is $1,099,037.56, and I
notice that the market value of that stock as of that date is given as
$708,850.50. Do you know what the market value of that stock is ?
Mr. TRACY. Yes. The quotation in the market.
Mr. PECORA. Well, do you know what the market value of that
stock is today?
Mr. TRACY. I can find out for you approximately.
Mr. PECORA. All right.
Mr. TRACY. I am told it is around $23 or $24 a share, Mr. Pecora.
Mr. PECORA. That would bring this total of market value to considerably less than seven hundred and eight thousand odd dollars,
would it not ?
Mr. TRACY. I will accept your statement for that; yes.
The CHAIRMAN. DO you sell those securities, Mr. Tracy, yourself?
Mr. TRACY. NO, sir; I would not.
The CHAIRMAN. N O ; but does the company go on now from time
to time and sell those securities?
Mr. TRACY. Out of our portfolio?
The CHAIRMAN. Yes.
Mr. TRACY. I hope we
will keep the American Gas & Electric,
Mr. Chairman.
The CHAIRMAN. Yes; but you may from time to time, just as the
board of directors determine, sell securities?
Mr. TRACY. Oh, certainly.
1718
STOCK EXCHANGE PRACTICES
The CHAIRMAN. Or sell at any time ?
Mr. TRACY. Yes.
The CHAIRMAN. YOU are not obliged to
carry them for any definite
time?
Mr. TRACY. We are not obliged to carry anything.
Senator ADAMS. Mr. Tracy, the corporation holds 15,000 shares,
I see, of the United States & Foreign Securities Co. That was to
cover your option?
Mr. TRACY. Yes.
Senator ADAMS. That
is carried at a market value of a dollar, and
carried at a book value of $375,000.
Mr. TRACY. That is what it cost.
Senator GOLDSBOROTJGH. Mr. Pecora, as I understand your line of
questioning you think it is better that these statements should show
three columns: Cost, book, and market?
Mr. PECORA. I do not see the occasion for showing book value.
But it certainly ought to show cost and designate it as cost. Not
as book value, which in my opinion, despite the superior knowledge
and experience of the witness is somewhat misleading. The other
is a less misleading term.
Mr. TRACY. Mr. Pecora, I would like to submit our annual report
to the Senators here, and I think that would give you an idea of how
that is stated very clearly. It is not misleading as to what the difference between cost and market is.
Mr. PECORA. I was going to introduce that in evidence anyway at
the proper time.
Senator ADAMS. YOU do not need to have any certified public accountant tell us that these days.
Mr. TRACY. NO ; I know that, but we state it very clearly.
The CHAIRMAN. This seems to be a good place to take a recess
until tomorrow morning at 10 o'clock. I hope we will be prompt in
attendance so we can go ahead promptly at that time.
(Thereupon at 12 o'clock noon, Thursday, Oct. 5,1933, an adjournment was taken until 10 a.m. the next day, Friday, Oct. 6, 1933.)
STOCK EXCHANGE PEACTICES
FRIDAY, OCTOBER 6, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE
ON BANKING AND CURRENCY,
Washington, D.C.
The subcommitee met, pursuant to adjournment on yesterday, at
10 o'clock a.m., in the caucus room of the Senate Office Building,
Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Adams (substitute for
Barkley and proxy for Costigan), Norbeck, and Couzens.
Present also: Ferdinand Pecora, counsel to the commitee; Julius
Silver and David Saperstein, associate counsel to the commitee; and
Frank J. Meehan, chief statistician to the committee; George S.
Franklin, Wallace P. Zachry, Warren Leslie, Walter G. Dunnington,
Clifton Murphy, John T. Cahill, and Bernhard Knollenberg, counsel
for Dillon, Read & Co.; Koot, Clark, Buckner & Ballantine, George
H. Murphy of counsel, counsel for United States & Foreign Securities Corporation and United States & International Securities Corporation; Patrick J. Hurley and Charles M. Travis, counsel for
Associated Gas & Electric Co.
The CHAIRMAN. The subcommittee will come to order. Mr.
Pecora, you may proceed.
Mr. PECORA. Mr. Tracy will resume the stand.
TESTIMONY OF ERNEST B. TRACY—Resumed
Mr. PECORA. Mr. Tracy, will you tell us
Mr. TRACY (interposing). Mr. Pecora, for the record I have a list
of present and former directors of both of the investment companies,
with a list of all directors' meetings and the names of the directors
who attended those meetings. I should like to submit these to you.
Mr. PECORA. Very well. Let me see them.
Mr. DILLON. Mr. Pecora, before you start out on your examination might I say a word ?
Mr. PECORA. Certainly.
Mr. DILLON. The other day when we were discussing the advisability of banks publishing their portfolios of investment securities,
you were asking if I knew of any institution that did so, and I
mentioned one. This morning I received from Mr. Frew, chairman
of the Corn Exchange Bank Trust Co., New York City, his statement. His is a commercial bank, and is the only one I know of
than does it. I thought you and the gentlement of this subcommittee
might be interested in looking at his statement, because it does
cover the point you were discussing.
1719
1720
STOCK EXCHANGE PRACTICES
Mr. PECORA. I think it might be well to offer that in evidence for
the enlightenment of the subcommittee.
The CHAIRMAN. Let it be received and made a part of the record.
(The statement dated February 1, 1933, of the Corn Exchange
Bank Trust Co., was marked " Committee Exhibit No. 12, October
6, 1933," see p. 1764.)
Mr. PECORA. I also offer in evidence,, Mr. Chairman, the list of
present and former directors of the United States and International
Securities Corporation, which has just been produced by Mr. Tracy;
and also as a part of the same exhibit a compilation of the meetings of the board of directors of the United States and International
Securities Corporation, showing the dates thereof and the names of
the directors present at such meetings.
The CHAIRMAN. Let it be received and made a part of the record.
(A statement of present and former directors of United States
& International Securities Corporation was marked "Committee Exhibit No. 13, October 6, 1933," see p. 1769.)
Mr. PECORA. I also offer in evidence a list produced by Mr. Tracy,
purporting to show present and former directors of the United
States & Foreign Securities Corporation, together with a statement
showing the dates of the various meetings of the Board of directors
of that corporation, and with the names of the directors who attended such meetings.
The CHAIRMAN. Let it be received and made a part of the record.
(A statement of present and former directors of United States &
Foreign Securities Corporation was marked " Committee Exhibit
No. 14, October 6, 1933," see p. 1771.)
Mr. PECORA. Mr. Tracy, have you by any chance with you a copy
of the report and accounts of the United States & International
Securities Corporation as of December 31, 1932, purporting to have
been prepared by Price, Waterhouse & Co. ?
Mr. TRACY. I will have to see whether we have that. [After consulting an associate] Yes; I have a copy of that.
Mr. PECORA. Will you kindly turn to the tabulation at the end
of the report, which is entitled " United States & International
Securities Corporation, Securities Owned December 31, 1932."
Mr. TRACY. I have it before me.
Mr. PECORA. NOW, under the caption " Railroad stocks " of that
tabulation do you find an entry indicating that on December 31,
1932, there was an item in the portfolio of the United States & International Securities Corporation of 45,000 shares of the common
stock of the Chicago, Rock Island & Pacific Railway Company?
Mr. TRACY. I do.
Mr. PECORA. TO which
there was ascribed a book value in this
report of $5,566,366.99, and a market value of $151,875?
Mr. TRACY. I do.
Mr. PECORA. Are
you familiar with the transaction or transactions whereby this investment trust, of which you were the president, acquired those 45,000 shares of that railroad stock at what is
denominated in this report as a book value of over &y2 million
dollars, but which, according to your testimony on yesterday, means
the cost price to the investment trust?
STOCK EXCHANGE PRACTICES
1721
Mr. TRACY. Correct. We bought it in the open market.
Mr. PECORA. YOU bought it in the open market?
Mr. TRACT. TO the best of my recollection, yes. [After consulting an associate.] Well, some of it we bought from the United
States & Foreign Securities Corporation.
Mr. PECORA. And that is the other investment trust ?
Mr. TRACY. Correct.
Mr. PECORA. That had you as its president while you were president also of this United States & International Securities Corporation?
Mr. TRACY. That is right.
Mr. PECORA. Over what period of time were the transactions had
by which the United States & International Securities Corporation
acquired in the aggregate those 45,000 shares of the Chicago, Rock
Island & Pacific Railway Co. stock at a cost to it of over 5y2 million
dollars ?
Mr. TRACY. Well, I will have to look that up, Mr. Pecora. I do
not carry that in my mind.
Mr. PECORA. All right.
Mr. TRACY. I am sorry for the delay, but we have had so many
transactions that I cannot keep them in my mind.
Mr. PECORA. All right. You may look it up.
Senator COUZENS. While you are looking up that data let me ask:
What were the circumstances by which one of these investment
trusts bought Chicago, Rock Island & Pacific Railway Co. stock
from the other trusts?
Mr. TRACY. Well, I will have to look up that data for you.
Senator Couzens. I am getting that now.
Senator COUZENS. I was not asking the date but was wondering
what the circumstances were that induced one trust to buy that stock
from the other trust.
Mr. TRACY. Well, if you will permit me to get the data I may be
able to answer your question more intelligently.
Senator COUZENS. All right.
The CHAIRMAN. In other words, Senator Couzens, the two trusts
were practically doing the same kind and character of business;
and Dillon, Reed & Co., too, were doing the same kind of business.
Senator COUZENS. And Dillon, Read & Co. controlled both of them.
Mr. PECORA. And one was buying securities from the other.
Mr. TRACTS I am told that we purchased about half of that in
December of 1929.
Mr. PECORA. About half of the 45,000 shares of the Chicago, Rock
Island & Pacific Railway Co. in December of 1929 ?
Mr. TRACY. I am so informed.
Mr. PECORA. That was at a time when the stock market had generally undergone an upheaval and was still in the throes of it,
wasn't it ?
Mr. TRACY. I t had certainly undergone an upheaval, but I might
say that
Senator COUZENS (interposing). When was the other half purchased ?
Mr. PECORA. Yes. I was just going to ask that question.
1722
STOCK EXCHANGE PRACTICES
Mr. TRACY. Seventeen thousand shares, Senator Couzens, were
bought from the United States & Foreign Securities Corporation.
The balance of the stock was bought over a period of time. We will
have to go to our books in order to get all of that for you.
Senator COUZENS. When were the 17,000 shares bought from the
other trusts?
Mr. TRACY. In December of 1929.
Senator COUZENS. And at what price?
Mr. TRACY. I am told that they were purchased at a price of
$111.84, which was the market price of the date when they were
purchased.
Senator COUZENS. In other words, in December of 1929 that was
the market price ?
Mr. TRACY. That was the market price then.
Senator COUZENS. And do you recall the circumstances of the transfer or sale from one trust to the other of those shares ?
Mr. TRACY. Well, it is pretty hard, Senator Couzens, to recall the
reasons for either the sales or the purchases made. We have made a
great many hundreds of them. But as a rule
Senator COUZENS (interposing). Well, this was rather an intercompany sale, wasn't it?
Mr. TRACY (continuing). As a rule and practice, all purchases and
sales were passed on by the board of directors of the companies.
Mr. PECORA. But, Mr. Tracy, you attended the meetings of the
boards at which those sales and purchases were approved ?
Mr. TRACY. I attended meetings very regularly, but I would have
to look it up to see whether I attended those particular meetings or
not, but believe I did.
Mr. PECORA. Didn't you testify here on yesterday to the effect, in
substance, that the customary procedure followed by these two investment trusts for the making of those investments was for the
executive officer to make the purchase in the exercise of his best
judgment, and thereafter report it to the board of directors at its
ensuing meeting?
Mr. TRACY. Well, Mr. Pecora
Mr. PECORA (continuing). And then get a ratification and approval
of it by the board ?
Mr. TRACY. I think you misunderstood me, Mr. Pecora.
Mr. PECORA. Possibly I did, and if I have misunderstood you, I
want to get the fact correctly on the record in a way that there can be
no misunderstanding.
Mr. TRACY. That has been done frequently, but as a rule we discussed at board meetings the type of securities that we would buy,
and the type of industry in which we would invest. We would have
those looked into and would say: Let us invest so much money in the
oil industry and the rails, and would compare this railroad with
another one and would buy the one that looked cheapest.
Mr. PECORA. YOU say you would have them looked into. Who
would look into them ?
Mr. TRACY. A service corporation that we had
Mr. PECORA (interposing). What is the name of it?
Mr. TRACY. The Keswick Corporation.
STOCK EXCHANGE PRACTICES
1723
Mr. PECORA. DO you know anything about the Keswick Corporation ?
Mr. TEACY. I certainly do.
Mr. PECORA. I,sn't that a corporation wholly controlled by Dillon.
Eead & Co. ?
Mr. TRACY. It is not.
Mr. PECORA. Isn't it a
corporation with offices adjoining the offices
of Dillon, Eead & Co., and access to which may be had through an
inside door leading from the office of Dillon, Eead & Co.?
Mr. TRACY. Yes; the offices are in the same building as the offices
of Dillon, Eead & Co., and one can get through by going through an
outside passage to the offices of the Keswick Corporation. That is
true of a great many buildings.
Mr. PECORA. HOW familiar are you with the organization and
conduct of this Keswick Corporation ?
Mr. TRACY. The Keswick Corporation is a service corporation to
do our research work, look over statistical reports, make examinations for us, interview officials of companies and get figures that may
not have been published, if we want to get any very recent information about an industry, and they make their reports to us. They are
used generally as a convenience to the company in any way that I
can use them.
Senator COTJZENS. What company?
Mr. TRACY. The Keswick Corporation.
Senator COUZENS. But what company uses the Keswick Co.?
Mr. TRACY. United States & Foreign Securities Corporation and
United States & International Securities Corporation, for which I
may be acting.
Senator COUZENS. And also Dillon, Eead & Co. ?
Mr. TRACY. Not to my knowledge.
Senator COUZENS. YOU do not know that Dillon, Eead & Co. uses
this Keswick Corporation?
Mr. TRACY. Not to my knowledge.
Mr. PEOORA. When was this Keswick Corporation organized, if
you can tell us ?
Mr. TRACY. I will have to look up that date.
Mr. PECORA. Perhaps I can help you when I suggest the date
March 27,1930.
Mr. TRACY. That is correct.
Mr. PECORA. Did the Keswick Corporation, for the United States
& International Securities Corporation in December of 1929 make
research and investigation of the railroad security that we have
been discussing and which was purchased by the United States &
International to the extent of over 5y2 million dollars ?
Mr. TRACY. Yes, sir; it did.
Mr. PECORA. HOW could it have
done so if it was not incorporated
until March of 1930?
Mr. TRACY. Wait. What date did you say? December of 1929?
Mr. PECORA. Well, you told us that 41,000 of those 45,000 shares
had been acquired in December of 1929, if I correctly understood
your testimony.
Mr. TRACY. That is correct. The Keswick Corporation was not
formed then.
175541—33—PT 4
13
1724
STOCK EXCHANGE PEACTICES
Mr. PECORA. Who made the research at that time that guided
the directors of the investment trust in making those investments ?
Mr. TRACY. There was a very elaborate report made by Coverdale
& Colpitts, consulting engineers, who specialized in railroad work,
on the Chicago, Rock Island & Pacific Railroad. It was most favorable, I might say.
Senator COUZENS. Have you any record of how many times their
surveys have been wrong?
Mr. TRACY. Of how many times they have been wrong?
Senator COUZENS. Yes.
Mr. TRACY. I think anybody has been wrong who made predictions
in 1929. If there are any that were not I should like to meet them.
Senator COUZENS. I know something about Coverdale & Colpitts.
or whatever the name is, and how long have they been in business,
may I ask.
Mr. TRACY. That I would have to find out.
Senator COUZENS. For a great many years, haven't they?
Mr. TRACY. I think for a great many years.
Senator COUZENS. IS there a record as to their predictions of
earning power of corporations and how often or whether generally
they have been accurate?
Mr. TRACY. That I would not like to give you an opinion on offihand, but their estimates conform pretty well with the opinions of
the usual statistical services at that time. If you will go back you
will find that people like Moody were recommending Rock Island.
Standard Statistics were recommending Rock Island. Not that
we were taking their recommendations, but I just give you that as
a parallel. Everybody thought railroad securities were a good purchase in those days.
Senator COUZENS. Previous to that time, how long experience had
you had with this firm of Colpitts & Co. ?
Mr. TRACY. I think they had done work for—I don't know. I personally am not an expert on railroad securities.
Senator COUZENS. YOU do not know what the general record of
this company is, then?
Mr. TRACY. N O ; I do not, Senator, but I know that they have a
good reputation.
Senator COUZENS. Among whom?
Mr. TRACY. Among people that I know. I have never heard anybody say anything unfavorable about Colpitts & Co.
Senator COUZENS. Well, of course, you can have a good reputation
for making reports
Mr. TRACY (interposing). I am not talking about that; I am talking about being honest. I thought that was what you had in mind,
Senator COUZENS. About what?
Mr. TRACY. About being honest in their dealings.
Senator COUZENS. I have not made any charges that they were
dishonest; no.
The CHAIRMAN. Were the Van Sweringens interested in this Chicago, Rock Island & Pacific road ?
Mr. TRACY. I beg your pardon ?
The CHAIRMAN. Were the Van Sweringens interested in that road ?
Mr. TRACY. Not to my knowledge; no.
STOCK EXCHANGE PRACTICES
1725
Mr. PECORA. Before we leave the Keswick Corporation, Mr. Tracy,
do you know what its capital structure is ?
Mr. TRACY. I will have to look that up. It is merely a service
corporation. There is not any mystery about it.
Mr. PECORA. Who caused it to be organized ?
Mr. TRACY. We did.
Mr. PECORA. And who
were its officers? Are its officers former
employees and attaches of the two investment trusts of Dillon, Read
&Co.«
Mr. TRACY. Yes; they are.
Senator NORBECK. Pardon me, Mr. Chairman. I am confused. I
thought the witness testified they did not control them, and he is now
testifying that they did. Am I right or did I misunderstand you ?
Mr. TRACY. The Keswick Corporation ?
Senator NORBECK. Yes.
Mr. TRACY. NO ; we were responsible for the forming of the Keswick Corporation. We wanted them to be a statistical corporation
that could be used to look up things of that kind.
Senator NORBECK. I am referring now to an answer you made
previously. Did you deny that they were controlled by you or did
you not when you were asked the question ? I am trying to get the
facts here. If the witness testifies both ways it is pretty hard for
me to get them.
Mr. TRACY. I just want to have what the question is.
Senator NORBECK. I will waive it. Go ahead.
Mr. TRACY (after conferring with an associate). Oh, no; not controlled by Dillon, Read & Co. I misunderstood you. It was formed
by the investment company.
Mr. PECORA. YOU mean United States & Foreign Securities Corporation and the United States & International Securities Corporation?
Mr TRACY. Yes; they were responsible for forming it.
Mr. PECORA. They were responsible for forming it?
Mr. TRACY. Yes.
Mr. PECORA, Are its officers and directors, or do its officers and
directors, include former employees of the two investment trusts that
you have mentioned, as well as Dillon, Read & Co. ?
Mr. TRACY. They include, yes, former employees of the investment
trust, and I think former employees of Dillon-Read.
Mr. PECORA. And the office of this Keswick Corporation is at what
address ?
Mr. TRACY. It is on Cedar Street.
Mr. PECORA. What is the number ?
Mr. TRACY. I cannot give you the number, but I know how to get
there. It is the first door on the—I don't go by numbers on Wall
Street. I go by familiar signs.
Mr. PECORA. HOW does the public get there ?
Mr. TRACY. I should think they go through there
Mr. PECORA (interposing). Through the Cedar Street entrance to
the building ?
Mr. TRACY. I should think they would go through
Mr. PECORA (interposing). And when you get there how do you
reach the Keswick offices ? Do you go through this interior passageway running between the offices of Dillon, Read & Co. and the
Keswick Corporation ?
1726
STOCK EXCHANGE PRACTICES
Mr. TRACY. Why, I go whichever is the most convenient way for
me to go. If I am coming from Wall Street I would go into Cedar
Street. If I was coming over from Broadway or uptown I would
probably go through the office of Dillon-Read. Whichever is most
convenient, that is the way I go.
Mr. PECORA. Does this Keswick Corporation do any research to
any extent for others than these two investment trusts of which you
were president?
Mr. TRACY. Yes; I believe they do.
Mr. PECORA. TO any extent?
Mr. TRACY. Well, I don't know how much they do. I know they
do a great deal of work for us—the investment companies. I don't
know how much they do for other people.
Mr. PECORA. DO you know the capital structure of the Keswick
Corporation ?
Mr. TRACY. I can give it to you.
Mr. PECORA. If you will.
(Mr. Tracy conferred with associates and examined documents.)
Senator COTTZENS. While you are looking that up, may I ask what
is the basis of compensating this research corporation by these two
securities trusts?
Mr. TRACY. We own some stock in that. Senator, and we pay
them, I think—pay the monthly fee for it.
Senator COUZENS. Pay them a monthly fee?
Mr. TRACY. It is simply a convenience—research organization to
do the research work—take all the burden off me that I can put on
them.
Senator COTTZENS. Yes; but I am wondering why the investment
trusts do not employ these men themselves. I just don't get the
connection.
Mr. TRACY. With the thought that it is perhaps better to have a
separate organization.
Senator COUZENS. AS a matter of convenience ?
Mr. TRACY. For instance, we have two different boards, two different companies. Now, employing men in one company and employing the same men in the other company is not as satisfactory as putting them into a different organization as a matter of convenience,
for following records, accounting, the statistical services, the newspapers, and doing all that kind of work. For instance, we put some
men to work on the X company. Who are we going to charge that
to, this company or the other? It is just a matter of convenience.
It is purely a service company. It is not anything of any significance. It is to help us do our work intelligently, that is all. There
is no mystery about it at all.
Mr. PECORA. DO you know anything about the personnel of the
Keswick Corporation, this organization, that you and. your fellow
directors use to help you reach a judgment or conclusion about the
investments you should make for the investment trusts ?
Mr. TRACY. Yes; I do.
Mr. PECORA. What do you know about it?
Mr. TRACY. Well, I know them very well.
Mr. Frank I have
known, the president, known him for a number of years; and Mr.
Mtze. Those are the two gentlemen that I come in contact with
that
I use.
STOCK EXCHANGE PRACTICES
1727
Mr. PECORA. What position does Mr. Frank hold with the company?
Mr. TRACY. He is the president.
Mr. PECORA. And prior to his becoming president of the Keswick,
what was his relation, either to United States & Foreign. Securities
Corporation or the United States & International Securities Corporation or Dillon, Read & Co.?
Mr. TRACY. Why, he was in those companies.
Mr. PECORA. In what capacity?
Mr. TRAOY. In the statistical end, doing the same kind of work
he is doing now.
Mr. PECORA. When you say in the statistical end, do you mean
that he was in the accounting department or bookkeeping department?
Mr. TRACY. Research. For instance, here is Mr. Frank—I say,
" Mr. Frank, will you please try to get me all the information you
can get me about that oil corporation?"
Mr. PECORA. That simply represents statistical information that
he would collect from sources where such data -was to be found?
Mr. TRACY. He would have charge of getting that information.
He was also at that time a vice president of the United, States &
Foreign.
Mr. PECORA. NOW, have you informed yourself concerning the
capital structure of the Keswick Corporation?
Mr. TRACY. There are 500 shares of $100 par value, $50,000.
Mr. PECORA. HOW were those shares distributed ?
Mr. TRACY. I will just look that up for you.
Mr. PECORA. See if this statement which I will now embody in
my question refreshes your recollection concerning that: 125 of
these shares owned by the United States & International Securities
Corporation; 125 owned by United States & Foreign Securities Corporation; 50 shares held in the name of the Oakmont Corporation;
50 shares in the name of the New Eastern Corporation; 50 shares
in the name of the Surrey Corporation; 50 shares in the name of the
Brighton Corporation; and 50 shares in the name of the Bristol
Corporation ?
Mr. TRACY. That is correct.
Mr. PECORA. We see from those that the two investment trusts
that we are inquiring about owned half and do own half of the only
outstanding capital stock?
Mr. TRACY. That is right.
Mr. PECORA. And the other half is owned by five other corporations
in equal proportions of 50 shares apiece ?
Mr. TRACY. I am told that is right, yes.
Mr. PECORA. NOW, do you know anything about those five other
corporations, each of which owns 50 shares of this research institution ?
Mr. TRACY. I have heard about them frequently.
Mr. PECORA. Aren't they corporations that are virtually the personal property of certain individuals who are members of the firm of
Dillon, Read & Co.?
Mr. TRACY. I know they are connected with Dillon, Read & Co.
I don't know what the ownership is.
1728
STOCK EXCHANGE PRACTICES
Mr. PECORA. Well, it is a fair statement, isn't it, to say that half of
the capital stock of this Keswick Corporation is owned by the two
investment trusts and the other half is owned by the five corporations
who represent interests of Dillon, Read & Co. or their respective
or individual associates or partners?
Mr. TRACY. Yes; those companies are all identified with Dillon,
Read & Co. This company was not organized for that purpose. It
is simply a service corporation, a matter of convenience.
Mr. PECORA. NOW, let us get back to the report made by Price,
Waterhouse & Co. of the condition of the United States & International Securities Corporation as of December 31, 1932.
The CHAIRMAN. Before you get to that may I ask Mr. Tracey
what was the book value of this stock which one investment company sold to the other investment company in December 1929?
You sold it at 111, I believe. What was the book value?
Mr. TRACY. I will get that for you, Mr. Chairman.
Senator NORBECK. Mr. Chairman, may I ask a question about
something I do not understand. I just want to ask the witness.
The findings of this research corporation which has been discussed
here at length become part of the information given to the public
as to the value of these securities that you people offer for sale, do
they not?
Mr. TRACEY. We do not offer any securities. It supplies us with
certain information on which we base our judgment, whether we sell
or buy, whether we will buy or will not buy it or sell it.
Senator NORBECK. When you say sell it, you sell it to whom?
Mr. TRACY. Sell it on the market.
Senator NORBECK:. And then you say you don't offer anything to
the public. You know, you confuse me with your statements.
Mr. TRACY. It is in the open market.
Senator NORBECK. But when you sell it you sell to the public, don't
you?
Mr. TRACY. We sell on the stock exchange.
Senator NORBECK. Yes. Now, I am asking the question. You
evaded it entirely. I asked you whether the certification of this
research corporation which seems to be an instrument of your own—
they have certain findings, and are they used as a certification of
the value or condition of this stock when it is offered ?
Mr. TRACY. We do not offer it.
Senator NORBECK. YOU say " offer "—well, when it is sold.
Mr. TRACY. May I give you an illustration ?
Senator NORBECK. Yes; most certainly.
Mr. TRACY. For instance, they will come into us and say, "We
don't like the trend of the earnings of a certain railroad ", and we
will look those over and decide that they should be sold. For instance, Canadian Pacific Railroad; we will give an order to the
broker to sell that Canadian Pacific Railroad. We simply sell it on
the exchange. We do not offer it to the public. You understand
that, don't you, Mr. Pecora, the way that is done? That is all we
were doing.
Mr. PECORA. I don't think the Senator is addressing himself to
what you think he is.
Mr. TRACY. I beg your pardon.
STOCK EXCHANGE PRACTICES
1729
Mr. PECORA. I think Senator Nbrbeck and ISenator NORBECK (interposing). Are talking about two different
matters.
Mr. PECORA. Are talking at cross-purposes. You don't understand what the Senator has in mind.
Mr. TRACY. I don't think I do. I was trying to give an illustration of what I understood the Senator to mean.
Mr. PECORA. Let us get back to the portfolio of the United States
& International Securities Corporation as of December 31, 1932. It
appears from this report that on that date there were 45,000 shares
of the common stock of the Chicago, Eock Island & Pacific Eailway
Co. in the portfolio, doesn't it?
Mr. TRACY. The report of the United States & International Corporation of December 31, 1932?
Mr. PECORA. Yes.
Mr. TRACY. Forty-five thousand shares.
Mr. PECORA. And those shares cost the investment
trust five million five hundred and sixty-six thousand and odd dollars ?
Mr. TRACY. That is right.
Mr. PECORA. And that on December 31, 1932, those shares had a
market value of only $151,875?
Mr. TRACY. I am sorry to say that is correct.
Mr. PECORA. SO there was a depreciation there of very nearly
$5,400,000?
Mr. TRACY. Yes.
The CHAIRMAN. NOW
you can answer the question I put to you,
I take it?
Mr. TRACY. I have here the book value of the Rock Island on the
United States & Foreign Securities Corporation's books when it
was sold, which was $119.64, according to the information that I
have. I think that is correct.
Senator COUZENS. May I ask you at that point, where it is you
get that book value? Who did you get it from?
Mr. TRACY. That is cost.
Mr. PECORA. That is the term, Senator, that they use for " cost."
Senator COTTZENS. Yes; but I thought the chairman asked for the
book value of the stock on the books of the railroad.
The CHAIRMAN. NO ; I was talking about the cost.
Senator COUZENS. Oh, I misunderstood.
Mr. PECORA. The testimony yesterday shows that what has been
denominated as the book value was the cost price.
Senator COXJZENS. Yes; I understand now. I thought the chairman was trying to .find out what the book value of the stock was on
the books of the railroad company.
You don't have that, do you ? Did your investigators or research
men attempt to find out what the book value was on the books of
the railroad at the time this investigation was made?
Mr. TRACY. Yes. As I remember, the report of Coverdale &
Colpitts, it was considerably over $125 per share. I know that,
taking the Interstate Commerce Commission's valuations, it was
more than that. I don't know how much more, but that is my
recollection, Senator.
Mr. PECORA. What I want to find out is if these 45,000 shares of
the Chicago, Eock Island & Pacific Railroad were acquired during
1730
STOCK EXCHANGE PRACTICES
the year 1932 by this investment trust or whether the acquisition
of those 45,000 shares covered a much longer period of time.
Mr. TRACY. I will have to check that up. I hope you will excuse
me, but there have been so many of these transactions that I cannot
possibly keep them all in mind.
Mr. PECORA. I understood you to say a little while ago that more
than half of the 45,000 shares were purchased for the portfolio of
the United States & International Securities Corporation in December 1929.
Mr. TRACY. I think you misunderstood me, Mr. Pecora. There
were 17,000 shares purchased in December 1929.
Mr. PECORA. Was that the first time that that stock, any of that
stock, had been purchased for the portfolio of the United States
& International Securities Corporation?
Mr. TRACY. I would like to check that. [After conferring with
associates.] I think the balance of the stock, Mr. Pecora, was purchased from July 1929 on. I will have to look up the details of
the purchases for you. As I remember it, we began buying it in
July 1929.
Mr. PECORA. Have you before you a report that shows the portfolio of the United States & International Securities Corporation as
of December 31, 1929?
Mr. TRACY. I will see whether I can get one. [After a pause.]
I have before me the report of the United States & International
Securities Corporation securities owned December 31, 1929.
Mr. PECORA. DO you find any entry therein relating to the holding of any common stock of the Chicago, Rock Island & Pacific
by your investment trust as of December 31, 1929 ?
Mr. TRACY. Yes,
sir.
Mr. PECORA. HOW many shares?
Mr. TRACY. They owned 41,400 shares, at a cost of $5,186,946.99.
Mr. PECORA. NOW, were all of those 41,000-odd shares purchased between July 1929 and the end of that year ?
Mr. TRACY. NOW that I will have to look up for you again, Mr.
Pecora. I cannot remember the dates of purchases of all of these
transactions. We have thousands of them, and I hope you will
excuse delay in looking them up. [After conferring with associates.]
I am told that they haven't got them here. They will have to go
back and look it up on the ledgers for you—unless you have it.
Mr. PECORA. All right. Let me ask you: You gave some date in
July 1929 a few moments ago in one of your answers. Was that
date intended to indicate the date of the transaction whereby the
United States & International Securities Corporation acquired some
11,000 shares of the common stock of the Chicago Rock Island
& Pacific?
Mr. TRACY. I don't remember the circumstances under which I
gave that date.
Mr. PECORA. YOU recall that you did refer to a date in July 1929
a few minutes ago?
Mr. TRACY. I believe I did, but I don't know in what connection,
Mr. Pecora. If you will refresh my memory
Mr. PECORA. Were you the president of the United States & International Corporation in July 1929?
Mr. TRACY. Was I president of it ? Yes.
STOCK EXCHANGE PRACTICES
1731
Mr. PECORA. YOU were president practically at the inception of
that corporation in 1928?
Mr. TRACY. Yes.
Mr. PECORA. DO you recall what discussion you had with any of
your fellow directors on the board of the United States & International Securities Corporation leading to the decision to invest moneys
of that investment trust in common stock of this railroad company?
Mr. TRACY. There was a discussion practically at every directors'
meeting and at a lot of the officers' meetings with regard to the purchase of railroad securities, because at that time, Mr. Pecora, it
seemed to the board that they afforded the best opportunities for investment. Industrials were selling on a return basis of about 1 percent, utilities 2 percent, and railroads afforded the highest yield.
We had to get something that would give us a yield.
Mr. PECORA. NOW, Mr. Tracy, the fact is that according to your
testimony on December 31, 1929, there was in the portfolio of the
United States & International over $5,000,000 worth of the common
stock of the Chicago, Eock Island & Pacific Eailroad Co. ?
Mr. TRACY. That is right.
Mr. PECORA. That is, when I say over $5,000,000 worth I mean cost.
Mr. TRACY. Cost; yes.
Mr. PECORA. Costing that much ?
Mr. TRACY. That is right.
Mr. PECORA. That is a very large investment to make in a single
security, isn't it?
Mr. TRACY. It is a fairly large investment; yes.
Mr. PECORA. DO you recall any larger investment in any one
security that was made by this investment trust at any time?
Mr. TRACY. Well, now, I would have to go back and look that up.
Yes; I see one here that is larger.
Mr. PECORA. Well, we have looked into that. Perhaps I can
refresh your recollection, and I call
Mr. TRACY (interposing). I see one that is larger right here, the
St. Louis & San Francisco.
Mr. PECORA. Yes; the St. Louis & San Francisco Eailway Co.?
Mr. TRACY. That is correct.
Mr. PECORA. In the common stock of which your investment trust
invested $5,820,983.39 up to December 31, 1932; is that right?
Mr. TRACY. $5,820,983.39.
Mr. PECORA. These two securities, namely, the Chicago, Eock
Island & Pacific Eailway Co. common stock and the St. Louis & San
Francisco Eailway Co. common stock, are the two classes of securities in which your investment trust made its largest investments,
are they not ?
Mr. TRACY. Well, they were among the largest. If you have
looked it up, I will take your word for it.
Mr. PECORA. Won't you please run your eye now down the list
of the portfolio of the United States & International Securities
Corporation as of December 31, 1932?
Mr. TRACY. Yes; that was.
Mr. PECORA. They are the largest?
Mr. TRACY. Correct.
Mr. PECORA. And by far the largest, are they not ?
Mr. TRACY. Yes, they are by far the largest.
1732
STOCK EXCHANGE PRACTICES
Mr. PECORA. The next largest security in which you invested represented an investment of less than $2,000,000, didn't it ?
Mr. TRACY. That is correct.
Mr. PECORA. NOW, in view of the fact that your investment trust
invested over $5,566,000 in the common stock of the Chicago, Rock
Island & Pacific Railway Co. and over $5,820,000 in the common
stock of the St. Louis & San Francisco Railway Co., would you
say that you and your fellow members of the board on this investment trust gave any special attention to either of those securities
before you made these large investments therein ?
Mr. TRACY. Yes; I should say we did.
Mr. PECORA. Yes. Now, do you recall, in view of that fact, what
discussion you had with your fellow directors on the matter of
making those investments?
Mr. TRACY. Yes, sir; we had reports made on both those railroads
by Coverdale & Colpitts.
Mr. PECORA. Yes.
Mr. TRACY. Both of which were favorable.
Mr. PECORA. Yes.
Mr. TRACY. If you will look back even to
the service manual of
those days you will find that Moody recommended Frisco in October
1929.
Mr. PECORA. Yes.
Mr. TRACY. YOU will
find that the Standard Statistics and Moody's
both recommended the purchase of Rock Island throughout that
period.
Senator ADAMS. Mr. Tracy, may I ask you the question, you were
here the other day when Mr. Dillon was explaining the fundamentals
of the investment trust, were you not ?
Mr. TRACY. I have been here; yes.
Senator ADAMS. AS I recollect it, he said it was to afford the opportunity to the small investor to secure the diversification which he
could not secure in his own individual purchases. How do you
reconcile that theory of the operation of an investment trust where
you put 40 percent of the money contributed by the first preferred
stockholders into two stocks ?
Mr. TRACY. They were large investments, Senator, yes, but we
exercised
Senator ADAMS (interposing). They did not follow the principle
of diversification, did they ?
Mr. TRACY. We exercised great care, we thought, and investigated
those two companies thoroughly.
Senator ADAMS. But didn't you use as the basis for the formation
of the investment trust the very argument that any man might make
mistakes in one or another, so that the thing to do was to distribute
them ? I think that was Mr. Dillon's argument; so that a man might
make a mistake, but if you distributed it as widely as you could you
avoided that great hazard. Now you ran right into the hazard that
you organized the institution to avoid.
Mr. TRACY. We did run into that hazard, but it was not 40 percent,
Senator.
Senator ADAMS. Well, there was nearly $11,000,000, wasn't there,
in these two companies ?
STOCK EXCHANGE PRACTICES
1733
Mr. TRACY. Out of a 60,000,000 corporation.
Mr. PECORA. Over 11,000,000.
Senator ADAMS. This was not the Foreign Securities?
Mr. TRACY. International.
Senator ADAMS. International—then, I will have to reduce my
figures to 20 percent.
The CHAIRMAN. This was the second one.
Mr. PECORA. Thirty-three and one third would be more accurate,
Senator.
Senator ADAMS. It is still very liberal.
Mr. TRACY. Eleven million out of sixty.
Senator ADAMS. Are those two corporations allied in their operations, the Frisco and Rock Island?
Mr. TRACY. They have an interchange of freight and freight service and everything of that kind.
Senator ADAMS. They are not part of the same sort of allied railroad structure?
Mr. TRACY. NO ; not by any means. I think the Southern Pacific's
report of 1930 or '31 disclosed the fact that they had purchased
a lot of Frisco that cost them 130, which we did not know anything
about when we bought it. Apparently they thought well of it also
at that time.
Senator ADAMS. That is the real point.
Mr. TRACY. We believed it was a good investment. That is why
we went into it.
Senator ADAMS. But you were saying to the general public " You
are apt to make mistakes, and the thing to do is to secure diversification. Don't put too many of your eggs in one basket. We will take
care of that, and see that they are properly distributed."
Mr. TRACY. We had a lot of cash on hand, Senator. We had a
lot more money coming that was due on the allotment certificates.
I do not know whether you remember the yield that you could get on
investments in that period.
Senator ADAMS. Yes. I know.
Mr. TRACY. All the directors felt that railroads offered the best
yield, the best return commensurate with safety, which one could
put his money into at that time. We made a very intensive study
of the railroads. We had a number of reports on other railroads
that we did not go into.
Senator ADAMS. YOU yielded to the same temptation that Mr.
Dillon was speaking of the other day. I think he almost pictured
himself as a " mossback " in investment circles. He said that they
would not yield to the temptation to get high yields, and yet instead of avoiding that, you did yield to the temptation of high
yields.
Mr. TRACY. We had to invest our money to yield better than 5
percent, because that is what we had to pay our stockholders.
Senator ADAMS. But you were advising purchasers to avoid that
very thing.
Mr. TRACY. Our object was to look for safety first, Senator.
Senator NORBECK. They did not prove safe.
Mr, TRACY. NO.
Senator COUZENS.
May I ask
1734
STOCK EXCHANGE PRACTICES
Senator NORBECK. This advice you were giving turned out to be
rather unreliable, did it not?
Mr. TRACY. I do not think anybody foresaw the conditions.
Senator NORBECK. You have the faculty of answering some question that nobody asks you.
Mr. PECORA. Mr. Tracy, to follow up Senator Norbeck's inquiry
as to whether or not these two railroad stock investments proved
safe, let me ask if it is not a fact, according to your own portfolio
statement, that the 49,100 shares of the common stock of the St.
Louis & San Francisco Eailway Co. which were in the portfolio of
the United States & International Securities Corporation on December 31,1932, and which had been acquired at a cost to that investment
trust of $5,820,983.39, had, on December 31, 1932, a, market value
of only $42,962.50.
Mr. TRACY. I will accept your statement on that, without even
looking it up. Those railroads are both in receivership.
Mr. PECORA. DO not accept my statement. So long as you have
your own documents before you
Mr. TRACY. Of course, we have had a big loss in it.
Mr. PECORA. Are the figures I have quoted correct figures?
Mr. TRACY. We have a tremendous loss in those—a complete loss,
you might say. They are both in receivership.
Senator COTJZENS. May I ask the date of those Coverdale & Colpitt,s reports, when you used their reports as a guide in purchasing
those securities ? What are the dates of those reports ?
Mr. TRACY. I will have to rely on my memory, but they were some
time in the summer of 1929.
Mr. PECORA. Were they in July 1929 or thereabouts ?
Mr. TRACY. I know they were in the summer of 1929.
Mr. PECORA. DO you know, further, that in July 1929 Dillon, Eead
& Co. and the United States & International Securities Corporation
formed a pool or joint or syndicate account to trade in the common
stock of the Chicago, Rock Island & Jacific Eailway Co., on a 50-50
basis, as between these two participants?
Mr. TRACY. I am informed that we formed an account at that
time with Dillon, Eead & Co. to acquire stock in the market. That
was our object in going into it.
Mr. PECORA. Did you, at about the same time—and when I say
" you ", I mean the United States & International Securities Corporation—form a similar joint account with Dillon, Eead & Co., on
a 50-50 basis, to trade in the stock of the St. Louis & San Francisco
Eailway Co.?
Mr. TRACY. AS I recall, we formed an account to purchase stock
in the market; yes.
Mr. PECORA. Who were the managers of both those accounts?
Mr. TRACY. I will have to look that up for you.
Senator COUZENS. Some "wise guys" must have been unloading
on them all that time. There is no question about that.
Mr. TRACY. The joint railroad account, to purchase railroad securities, was formed in July 1929.
Mr. PECORA. Can you give the specific date?
Mr. TRACY. July 13.
Mr. PECORA. When were the operations of those two joint accounts
terminated ?
STOCK EXCHANGE PRACTICES
1735
Mr. TRACY. I am told on November 9,1929.
Mr. PECORA. Was it not November 12, 1929?
Mr. TRACY (after conferring with an associate). According to our
records, November 9,1 am told.
Mr. PECORA. Three days difference does not matter very much.
The CHAIRMAN. Who was the manager of these accounts ?
Mr. TRACY. It was a joint management.
Mr. PECORA. Are you sure it was a joint management?
Mr. TRACY. I am so informed. I will check it again (after conferring with an associate). Yes; I am told it was a joint management.
The CHAIRMAN. Who composed it?
Mr. PECORA. Dillon, Read & Co. and the investment trust, in equal
shares. Each had a 50 percent interest.
Mr. TRACY. We wanted to buy railroad securities. We formed
this account with Dillon, Eead & Co. to buy railroad securities.
They wanted to buy railroad securities also.
The CHAIRMAN. Had these roads, at that time, obtained loans
from the Reconstruction Finance Corporation, do you know ?
Mr. TRACY. I do not think the Reconstruction Finance Corporation was in existence.
Senator COUZENS. It was not organized until 1932, Senator.
Mr. PECORA. Let me, for your possible information, Mr. Tracy,
state that we submitted a questionnaire to Dillon, Read & Co. which,
among other things, called for information as to any pools, joint
accounts, syndicates, or trading accounts in stocks in which Dillon,
Read & Co., or its agencies or representatives participated, and of
which Dillon, Read & Co. were managers; and that in their answer
to that part of our questionnaire Dillon, Read & Co. informed us
in writing—and I have the specific writing before me—that this
joint account which was formed on July 13, 1929, and terminated
on November 12, 1929, to deal in the stock of the Chicago, Rock
Island & Pacific Railway Co., was one of the joint accounts which
they managed.
Mr. TRACY. According to my recollection, Mr. Pecora, no securities
could be bought in that joint account without the consent of both
Dillon, Read & Co. and the investment trust. They could not buy
anything in that account without our consent, and we could not buy
anything in the account without their consent.
Mr. PECORA. Who gave the consent on behalf of the investment
trust to any transactions for either one of those joint accounts?
Mr. TRACY. The board decided what we would buy.
Mr. PECORA. Did you, as president, have active participation in
the discussions that led to these transactions ?
Mr. TRACY. Indeed, I did. At a lot of the officers' meetings we
discussed that at great length.
Mr. PECORA. Was this an open-market trading account?
Mr. TRACY. It was to acquire stock in the open market.
Mr. PECORA. TO buy and sell?
Mr. TRACY. TO acquire stock. That was our object. It was to
acquire stock in railroads, to make investments in railroad securities.
Mr. PECORA. Let us confine ourselves, for the time being, to the
joint account that was formed between Dillon, Read & Co. and the
1736
STOCK EXCHANGE PRACTICES
United States & International Securities Corporation on July 13,
1929, to acquire common stock of the Chicago, Eock Island & Pacific
Kail way Co. Who put up the funds with which that joint account
was operated?
Mr. TRACY. The United States & International Securities Corporation, to the best of my information.
Mr. P:ECORA. Put up all the funds?
Mr. TRACY. Put up all the funds.
Mr. PECORA. And Dillon, Eead & Co. had a half interest in any
profits ?
Mr. TRACY. Correct; or losses.
Mr. PECORA. Or losses. Do you think that was a proper function
for an investment trust to undertake ?
Mr. TRACY. That is a very usual thing to do.
Mr. PECORA. DO you think it is a proper function, apart from its
being usual?
Mr. TRACY. I do not think there is any harm in it at all.
Mr. PECORA. DO investment trusts commonly advertise to the
investing public that among the transactions in which they engage
with the moneys subscribed by the investing public, are joint accounts
with others in market operations in securities ?
Mr. TRACY. I do not know that they advertise that, no; but that
is nothing unusual, to go into an account of that kind. I can explain
it to you if you would like to have me do so.
Mr. PECORA. I wish you would give me a complete explanation
of it.
Mr. TRACY. If my memory serves me correctly, we had at that time
something like $15,000,000 in cash, and about $22,000,000 that was
due on the allotment certificates. We were very long on cash, and
my recollection of the deal was that we said we would put up the
money, and we charged interest at the rate of 5% percent, which was
more than enough to cover our earnings on the preferred stock,
which were 5 percent. There is nothing unusual about that kind
of an operation, provided you know the credit of the people you are
doing business with. I would not think of going out and investing
our money on a joint account with somebody that did not have the
proper credit.
Senator COTJZENS. Why was a joint account necessary? Why
could you not do it yourself ?
Mr. TRACY. Dillon, Eead & Co. also wanted to buy railroad securities at that time. We discussed it at great length in the officers'
meetings and directors' meetings. We have officers' meetings once
a week, and sometimes more frequently, which all the directors are
invited to attend if they want to, at which we discuss things informally. Most of the directors turn up for those meetings if they can.
'Dillon, Eead & Co. wanted to buy railroad securities, also.
Senator COUZENS. Did they want to buy them for their own account ?
Mr. TRACY. For their own account; and we decided to do this thing
jointly, so that we would not compete with each other in the market.
Senator COUZENS. Did you yourself ever own any of the common
stock of either of those railroads ?
Mr. TRACY. NO, I did
not.
STOCK EXCHANGE PRACTICES
1737
Senator COUZENS. DO you know of any of your individual officers
or directors that owned any stock in the Eock Island or the Frisco ?
Mr. TRACY. I cannot give you a definite answer on that.
Senator COUZENS. I just asked you if you knew.
Mr. TRACY. I think that Charles Hayden was chairman of the
board of the Eock Island, if I remember correctly.
Mr. PECORA. Mr. Charles Hayden is one of the gentlemen whom
you mentioned yesterday as a director of this investment trust.
Mr. TRACY. Yes.
Senator COUZENS.
Let him complete his answer. I would like to
have him answer what he knows about that, first.
Mr. TRACY. I do not think any of the others were on the Rock
Island.
Senator COUZENS. Were any of them on the Frisco ?
Mr. TRACY. I think Mr. Ecker was on the Frisco.
Senator COUZENS. When you purchase these stocks and when they
are transferred to your name is there any means of finding the source
of the stocks, that is, from whom they were transferred
Mr. TRACY. I do not think so.
Senator COUZENS. I know nothing about these operations, so I
may be asking some very foolish questions. I was wondering if
there was any way of finding out who owned this stock that was
apparently unloaded on you.
Mr. TRACY. I am told the market went up after we bought these
securities.
Senator COUZENS. Obviously the seller of those stocks did not think
so much of them, or they would not be unloaded in such large quantities, would they?
Mr. TRACY. I do not know who you mean might have been unloading.
Senator COUZENS. Selling, if you like that word better.
Mr. TRACY. Somebody must have sold them if we bought them.
Senator COUZENS. Certainly. I wonder why they were selling, if
the outlook was so good. I was just trying to get the mental reaction of the man who would sell these stocks, and who would sell at
that time, when the reports were so good.
Mr. TRACY. If you go back and review Moody's and Standard Statistics, you would be very much surprised to see the records they
made in those days.
Mr. PECORA. Mr. Tracy, what individuals among the personnel of
the United States <S International Securities Corporation participated, in behalf of that corporation, in the management of this joint
account in the shares of the Chicago, Eock Island & Pacific Eailway Co.?
Mr. TRACY. The purchases were reported at the meetings as they
were made at our weekly meetings and directors' meetings.
Mr. PECORA. IS that the extent to which your investment trust
participated with Dillon, Eead & Co. in the management of this
account ?
Mr. TRACY. We followed the transactions and the purchases which
were made qn the stock exchange, Mr. Pecora.
Mr. PECORA. YOU have told me that this joint account was managed by Dillon, Eead <fc Co. and the investment trust.
1738
STOCK EXCHANGE PRACTICES
Mr. TRACY. Correct.
Mr. PECORA. The investment trust is a corporation and its acts are
committed through the medium of individuals who are officers,
directors, or employees. Who were those individuals who, in behalf
of this corporation, participated in the management of this joint
account with Dillon, Eead & Co. in 1929?
Mr. TRACY. I am told that th§ United States & International made
both those purchases, and Mr. Frank, who was then in the employ of
the company, attended and took care of most of those purchases.
Mr. PECORA. IS Mr. Frank here now ?
Mr. TRACY. I believe he is.
Mr. PECORA. Where is he ?
Mr. TRACY. There he is right there [indicating].
Mr. PECORA. If he will remain in attendance, we may call him as a
witness later.
When that joint account was terminated, on either November 9 or
November 12,1929, in the stock of the Chicago, Rock Island & Pacific
Railway Company, were there any profits or losses to the syndicate
managers ?
Mr. TRACY. There must have been losses, because the market went
down. I will get the exact figures.
Senator COTTZENS. Losses to whom?
Mr. TRACY. There must have been book losses, because the market
had quite a tumble between October 1 and November 9.
Senator COUZENS. Who suffered the losses, those in the joint
account?
Mr. TRACY. Yes; there must have been losses. I am just looking that up, Senator.
Senator COTTZENS, In the joint account?
Mr. TRACY. Yes.
Senator COTTZENS. We
know it was a loss to the investment trust,
but was there a loss in the joint account?
Mr. TRACY. Certainly. The account was formed to share the
profits equally, and the loss equally.
Senator COUZENS. If you went out and bought the stock, and
turned it in to the investment trust at the price you paid for it.
how would there be any profit or loss ? You must have been selling
and buying, and all that sort of thing.
Mr. PECORA. It was a trading account, was it not ?
Mr. TRACY. Mr. Pecora, when the account was terminated, I am
told that there was a loss of approximately $2,300,000, which was
shared equally between the two groups, the United States & International Securities Co. and Dillon, Read & Co.
Mr. PECORA. Those losses occurred as the result of market operations in the stock of the railroad companies.
Mr. TRACY. Yes, sir.
Mr. PECORA. HOW many shares
Mr. TRACY. They only bought stock,
Mr. PECORA. They only bought?
Mr. TRACY. Bought.
Senator COTTZENS. When they bought,
to whom did they turn it
over? When this joint operation bought stock, to Whom did they
deliver the stock?
STOCK EXCHANGE PRACTICES
1739
Mr. TRACY. It was delivered to the United States & International Securities Corporation for carrying purposes. We carried
it all, put up the money and carried it all, and all the securities
were delivered to us, at the market price.
Senator COUZENS. Will you explain to me how a loss occurred ?
Mr. TRACY. When the account was terminated, Senator, on November, we took the market prices as of that date, and the difference between the cost and market as of that date, showed a loss to
the joint account of $2,300,000. The account was terminated, and
each one took their proportionate share of the securities. Each took
half.
Senator COUZENS. They did not deliver them to each as they were
accumulated by the joint account?
Mr. TRACY. NO. The United States & International kept all the
securities. We were putting up all the money, and we kept all the
securities that were bought in the joint account.
Senator COUZENS. YOU delivered half of them in November to
Dillon, Bead & Co.?
Mr. TRACY. That is right; against cash.
Senator COUZENS. That loss was, then, the difference in the market
between the date of purchase and the date of settling up the account,
is that correct?
Mr. TRACY. YOU see, we put up all the money to buy these securities. Then we charged the account 5% percent interest. We kept
all the securities. When the account was terminated we delivered
half the securities to Dillon, Kead & Co., against which they paid
us cost.
Senator COUZENS. Cost at what time?
Mr. TRACY. Cost during the period in which the securities were
bought. We bought some in July, some in August, and some in
September, and when the account was terminated it showed a loss
of $2,300,000.
Senator COUZENS. What did the market price as of November 9,
when the account was terminated, have to do with it? What did
that have to do with it if you took them over at cost ?
Mr. TRACY. We took ours over, but we charged Dillon, Eead & Co.
their share of the cost, you see, of what they stood us in the account.
Senator COUZENS. YOU did not turn them over to Dillon, Read &
Co. at cost, then, did you? You turned them over to Dillon, Head
& Co. as of the market, November 9,?
Mr. TRACY. NO. We turned them over at cost to the account.
Senator COUZENS. I may be dumb. I do not see where there is
any profit or loss in it, if you turned them over at cost.
Mr. TRACY. That loss represents the difference between cost and
market at that time. We delivered the securities to Dillon, Eead
& Co.
Senator COUZENS. At what price?
Mr. TRACY. And they paid for them at the price they cost the
syndicate, you see?
Senator COUZENS. Yes.
Mr. TRACY. The securities at that time were worth $2,300,000
less than they had cost the syndicate>
175541—33—PT 4
14
1740
STOCK EXCHANGE PRACTICES
Senator COUZENS. Yes; but you have had no loss if you turned
them over at cost. You did not turn them over at the market. If
you turn a thing over at cost, how can there be a loss ?
Mr. TRACY. They paid us cost. It was an unrealized loss. We
gave them the securities.
Senator COUZENS. They did not pay you what they cost you?
Mr. TRACY. Yes. They paid us exactly what we paid for them.
Senator COUZENS. I may be dumb, but I do not see how there can
be a loss.
Mr. TRACY. There was an unrealized loss.
Senator COUZENS. What do you mean by an unrealized loss ?
Mr. TRACY. When the account was terminated we delivered half
the securities to Dillon, Bead & Co. at the cost of those securities to
the syndicate. At that time the market price of those securities
showed a loss of $2,300,000. The loss was there whether it was realized or not. You could have bought, at the market price, at $2,300.
000 less, as of the date of closing of the account, but that had been
bought during the period ahead of that.
Senator COUZENS. Yes; but you speculated on what the market
would be when the joint account was closed, did you not?
Mr. TRACY. We thought it was going up, naturally, or we would
not have gone into it.
Senator COUZENS. What became of this loss when it was not a
realizable loss? What did you do with the loss when it was not
realized ?
Mr. TRACY. We kept our securities.
Senator COUZENS. What difference did it make to Dillon, Eead
& Co., if they were to share in the cost price? If they were to pay
cost, where was the loss? There was a potential loss if you had
attempted to sell them, but, as you did not sell them
Mr. TRACY. We did not sell ours.
Senator COUZENS. SO, how was there a loss, if you did not sell
them?
Mr. TRACY. It is a potential loss for us, and would so show on
our annual report, that they cost us so much, and the market value
would be so much.
Senator COUZENS. What happened with that transaction of the
$2,300,000 potential loss? What did you do with that? How was
that potential loss handled ?
Mr. TRACY. Our share of the securities would go on our books
at cost to us.
Senator COUZENS. Yes.
Mr. TRACY. And in our annual report we would show those securities at cost. In the next column we would show the market value,
so that anybody taking that report would see that they cost us so
much, and they are worth so much, which is so much less.
Senator COUZENS. And so, in so far as your half is concerned,
you had a loss of $1,150,000.
Mr. TRACY. Half of $2,300,000.
Senator COUZENS. Between what you had paid for them and what
the then market was.
Mr. TRACY. Yes.
STOCK EXCHANGE PRACTICES
1741
Senator COUZENS. That $1,150,000 would be, I assume, a potential
loss to Dillon, Read & Co. Did you pay them for that loss?
Mr. TRACY. Certainly not.
Senator COUZENS. Where was the loss, then ?
Mr. TRACY. That was just a potential loss to Dillon, Read & Co.
That was a book loss.
Senator COUZENS. SO, there were no cash transactions with respect
.to that loss ?
Mr. TRACY. Not at the closing of the syndicate; no, sir.
Senator COUZENS. At any other time?
Mr. TRACY. Dillon, Read & Co. subsequently sold those securities,
I think, and then they must have registered an actual loss oh them.
Senator COUZENS. SO that there was only a potential loss, and not
a real loss.
Mr. TRACY. AS of the date of closing, if the market had gone up
again, there would not have been a loss.
The CHAIRMAN. The account was not terminated by the sale of
these securities, but by distribution.
Mr. TRACY. Distribution. Each took half of the securities.
The CHAIRMAN. There was not any actual sale of them.
Mr. TRACY. NO ; each took half the securities, and each paid half
the amount of the cost.
Senator COUZENS. When you entered into the trading arrangement,
you had an understanding that you were to share the profits and
losses ?
Mr. TRACY. Yes.
Senator COUZENS.
I still cannot get through my mind how there
was any profit or loss, if it was done at cost. You admit in your
testimony that it is only a potential loss, so there was no real profit
and loss in the transactions if it was all done on a cost basis.
Mr. TRACY. Not in that syndicate, Senator. If we had sold the
securities belonging to the syndicate, we would have shared the
actual loss.
Senator COUZENS. But the syndicate did not sell any.
Mr. TRACY. NO.
Senator COUZENS. The syndicate only bought.
Mr. TRACY. Yes.
Senator COUZENS. SO there was no real profit and
Mr. TRACY. NO ; a book loss.
Senator COUZENS. But you did contemplate, when
loss at all.
you entered into
the trading agreement, that you might sell as well as buy.
Mr. TRACY. There might be a loss.
Senator COUZENS. Through selling and buying.
Mr. TRACY. Yes.
Senator COUZENS. Did the trading arrangement sell short at all?
Mr. TRACY. NO.
Senator COUZENS. They did not sell at all, at any time?
Mr. TRACY. Not to my knowledge.
Senator COUZENS. They only bought.
Mr. TRACY. The simple purpose of forming it was to acquire the
railroad securities, that was all.
1742
STOCK EXCHANGE PEACTICES
Mr. PECCXRA. Have you the minute book of the United States &
International Securities Corporation covering the period between
July 1929 and the 1st of January 1930?
Mr. TRACY. December 1, 1930?
Mr. PECORA. January 1,, 1930.
Mr. TRACY (after conferring with associates). I have it here.
Mr. PECORA. Will you kindly look through the minute book for
that period of time and see if you find an;y entries therein relating ,
to the investment trust's going into this joint account with Dillon,
Bead & Co.?
Mr. TRACY. No; I do not find any reference to it, but I know it
was gone into at great length during the months of May and June
and up to the middle of July. I went away about the middle of July.
Mr. PECORA. DO you find any entries in the minutes of any meeting of the board of directors of your investment trust for the months
of May or June that relate to this joint-account venture? Incidentally, while you are looking at it you need not confine yourself to
any period of time. Look through the minute book and see if you
can point out any entries therein relating to this joint account.
Mr. TRACY. No; I do not see any until you get over to September 9.
Mr. PECORA. But this joint account, you say, was formed on
July 13?
Mr. TRACY. That is correct.
Mr. PECORA. And the decision then had been made on behalf of
your investment trust to go into this joint account some time before
July 13?
Mr. TRACY. Yes. It was discussed at all of the officers' meetings
held during that period.
Mr. PECORA. Did you not record in your minutes of the meetings
any references at all to decisions by which the investment trust
entered into a joint-account operation involving millions of dollars?
Mr. TRACY. Apparently it is not recorded.
Mr. PECORA. IS that the way these minutes were kept generally ?
Mr. TRACY. We never recorded sales until after they were made.
Mr. PECORA. What was the purpose of keeping minutes of meetings of the board of directors and failing to include any mention
in those minutes of discussions which led to the making of important
decisions by the board of directors?
Mr. TRACY. It is not customary in any companies that I am connected with to put into the minutes all the things you discuss, Mr.
Pecora.
Mr. PECORA. Even such important items of discussion as one
involving an investment of several millions of dollars?
Mr.
TRACY. NO.
Mr. PECORA. What are the minutes good for, then ?
Mr. TRACY. They record what you have done.
Mr. PECORA. After it has been done, some report is made to the
board of directors and such a report is entered in the minutes? Is
that the way these minutes were kept?
Mr. TRAQY. It is the usual thing to discuss what you are going
to do. When it is done, it is recorded in the minutes.
STOCK EXCHANGE PRACTICES
1743
Mr. PECORA. The decision to enter this joint account must have
been reached prior to July 13, 1929?
Mr. TRACY. Certainly.
Mr. PECORA. Was the .making of that decision, whenever it was
made, recorded in the minutes?
Mr. TRACY. We did not have any meeting in the summer of 1929.
I t was recorded at the first meeting held after that.
Mr. PECORA. At what meeting or meetings of the board of directors
of your investment trust did they reach the decision to enter into
this joint-account operation with Dillon, Read & Co. that involved an
investment of several millions of dollars on behalf of the investment
trust?
Mr. TRACY. It was probably decided at one of the officers' meetings.
Mr. PECORA. But not at a directors' meeting?
Mr. TRACY. It had been discussed, as I have told you, Mr. Pecora.
Mr. PECORA. I am not asking you now about an entry of a discussion in the minutes, but about the making of the decision.
Mr. TRACY. It is not recorded until the meeting that was held on
Septebmer 9.
Mr. PECORA. Will you produce the minutes of the meeting in
September 1929, in which you say that for the first time there is any
mention at all of this transaction ?
Mr. TRACY. I have them here. They are in the treasurer's report.
Mr. PECORA. Will you let me look at those minutes, please?
Mr. TRACY. Certainly [handing book to Mr. Pecora]. The
treasurer's reports are part of the minutes and attached to them.
Senator COUZENS. Eead them out loud so that we can all hear.
Mr. PECORA. Will you kindly show me where, in the minutes of the
board of directors of your investment trust, of the meeting held on
September 9, 1929, there is any reference to this joint account or to
any transactions had in its name ?
Mr. TBACY (reading) : The chairman presented to the meeting financial re-
ports of the treasurer of the corporation covering the transactions of the
corporation during the months of June, July, and August 1929.
Here [indicating] is the report of the transactions entered into by
the officers of the corporation, June 8 to June 30, 1929; the purchase
of the Chesapeake & Ohio Railway Co. stock
Mr. PECORA. Just get down to the transactions relating to this.
Mr. TRACY. All right. The last half of the month of July,
Florida Power & Light; International Telephone & Telegraph Co.,
Chicago, Rock Island & Pacific, 5,000 shares; 10,000, Pennsylvania;
30,000, Frisco; 10,000 Southern Pacific; 10,000, Southern Railway;
odd amounts of Seaboard bonds and notes.
Mr. PECORA. According to the minutes of the meeting of the
board of directors of your investment trust held on September 9,
1929, and to which you have directed my attention in answer to my
previous question, the directors present at that meeting were as follows : Clarence Dillon, Charles Hayden, Dean Mathey, J. W. McConnell, and Ernest B. Tracy. You acted as chairman of the meeting,
and Mr. Frank acted as secretary of the meeting and kept the minutes. Is that the Mr. Frank to whom you made reference earlier
1744
this morning?
poration ?
STOCK EXCHANGE PRACTICES
Is that the man connected with the Keswick Cor-
Mr. TRACT. Yes.
Mr. PECORA. Mr.
Mathey, whose name I have mentioned, is one of
the partners of Dillon, Read & Co., is he not?
Mr. TRACY. That is correct.
Mr. PECORA. NOW, you have called my attention to the following
entry appearing at page 161 of your minute book, relating to the
meeting of that date, September 9, 1929, which reads as follows:
The chairman presented to the meeting financial reports of the treasurer
of the corporation covering the transactions of the corporation during the
months of June, July, and August 1929. A discussion of these reports and
of the securities held by the corporation then ensued. Thereupon, on motion,
duly made and seconded, it was unanimously resolved that the reports of the
treasurer of the corporation covering the transactions of the corporation during
the months of June, July, and August 1929, copies of which have been submitted to this meeting, and all of the transactions set forth therein, hereby
are in all respects approved, ratified, and confirmed.
Embodied in the minutes of the meeting of September 9, 1929, you
called my attention to certain reports purporting to have been made
to the board by the treasurer of the investment trust and in which
mention is made that at certain times certain shares of the Chicago^
Eock Island & Pacific Railway Co. had been acquired ?
Mr. TRACY. That is right. If that is what it says there, that is
right.
Mr. PECORA. The references in those reports of the treasurer to the
acquisition of any securities of the Chicago, Rock Island & Pacific
Eailway Co., as far as I can find them, are contained at page 173
of this minute book, and show the acquisition of 5,000 shares of
Chicago, Eock Island & Pacific Eailway common stock at $135.23,
or a total of $676,137.50; and that those purchases were made
through G. N". P. Murphy & Co. Also at page 175 of the minute
book is a statement embodied in the report of the treasurer that
19,900 shares of the common stock of the Chicago, Eock Island &
Pacific had been acquired at $138.39, for a total of $2,753,962.50
Senator COTJZENS. From whom did they purchase those?
Mr. PECORA. It does not say, Senator.
Mr. TRACY. It was purchased through the account.
Mr. PECORA. In the first instance the information embodied in the
treasurer's report shows the firm of brokers through whom the 5,000
shares were acquired, but the entry relating to the acquisition of
the 19,900 shares does not appear to give the name of the broker
through whom the purchase was made.
Mr. TRACY. I think where it shows the broker's name is where it
is applied to the account. I think you will find it shows it.
Mr. PECORA. What did you say ?
Mr. TRACY. I believe you will find the purchase against the
broker's name there
Mr. PECORA. I have just found this reference now, Senator, and I
am going to read it. It appears at page 174 of the minute book and is
contained in one of the reports submitted by the treasurer, and it
reads as follows [reading] :
6. The United States & International Securities Corporation and Dillon,
Read & Co. entered into an agreement to establish a joint railroad securities
trading account, the funds for which to be provided for by the United States &
STOCK EXCHANGE PRACTICES
1745
International Securities Corporation, taking as reimbursement 5 ^ percent
interest on the daily balances, the profits or losses of this account to be shared
equally by each participant. As agreed upon, the following securities were
purchased, totaling $10,891,578.
Then in the list that follows that statement appear, among other
things, these entries, which I shall specifically read, because I propose
to make it the subject of further examination.
Nineteen thousand nine hundred shares Chicago, Rock Island & Pacific Railway Co. common at $138.39—$2,753,962.50.
Thirty thousand shares St. Louis & San Francisco Railway Co. common at
$130.58, a total of $3,917,525.
One hundred sixty-nine thousand shares of Seaboard Air Line Railway Co.
at 45.77—no; these are bonds, $169,000 par value.
Mr. TRACY. I think it is only fair to read the whole list, giving
all the securities, because that was the joint account and we were
buying railroad .securities at that time.
Senator COUZENS. Have we any copy of the joint agreement that
was entered into ?
Mr. PECORA. I am going to ask the witness for that as soon as I
get through examining him about this minute book, Senator.
Mr. TRACY. There are a lot of others contained in that; and I
think, in fairness, they all ought to be read.
Mr. PECORA. All right. I will read them all. I have already
referred to the Chicago, Rock Island & Pacific and the St. Louis
& San Francisco common. The entry further shows that there had
been purchased for this joint account—
Ten thousand shares of Pennsylvania Railroad Co. capital stock at 98.41, a
total of $984,000.
Ten thousand shares Southern Pacific Co. capital stock at 144.91, a total
of $1,449,000.
Ten thousand shares Southern Railway Co. at 159.77, a total of $1,597,000.
$169,000 par value of bonds of the Seaboard Air Lines Railway, 5 percents,
due in 1949, at $45.77, a total of $77,350.50.
$106,000 par value of Seaboard Air Line Railway 5 percent bonds maturing
in 1949 at $46.86, a total of $49,667.
$89,000 par value of Seaboard Air Line Railway Co. first and consolidated
6 percent bonds maturing in 1945, at $69.93, a total of $62,235.50.
The CHAIRMAN. HOW were those purchases made?
Mr. TRACY. In the open market, Mr. Chairman.
Mr. PECORA. YOU have heretofore, told us with respect to the acquisition, through the medium of this joint account, of common stock
of the Chicago, Rock Island & Pacific Eailway Co., that the joint
account in question was an account formed to acquire the stock—
am I correct in that?
Mr. TRACY. TO purchase railroad securities.
Mr. PECORA. And you have also told us in the course of your testimony this morning similarly with respect to the acquisition of the
shares of the common stock to the acquisition of the shares of the
Common stock of the St. Louis & San Francisco Railway Co. Am
I correct in that, too?
Mr. TRACY. I believe you are, sir.
Mr. PECORA. At page 174 of this minute book the reference, which
I have read into the record therefrom, is made to this joint account
as a joint railroad securities trading account. Was this joint railroad securities trading account that your investment trust entered
into with Dillon, Read & Co. a trading account in all that that
1746
STOCK EXCHANGE PRACTICES
term implies, or was it merely an account that was formed to enable
the participants simply to acquire railroad issues?
Mr. TRACY. The object of the account, Mr. Pecora, was to purchase
railroad securities.
Mr. PECORA. Why was it styled a trading account if that was the
object?
Mr. TRACY. At that time, I cannot tell you that; but the object
of the account was to buy railroad securities.
Mr. PECORA. Then the name given to that joint account, namely,
joint railroad securities trading account, was perhaps a misnomer?
Mr. TRACY. I do not think the words " trading account" had the
stigma attached to them at that time that has been developed since.
Mr. PECORA. Whether it had a stigma at that time, a trading
account in 1929 meant the same thing as a trading account in 1933,
did it not ?
Mr. TRACY. It was formed for the purpose of buying railroad
securities.
Mr. PECORA. We know that; you have told us that. But why was
it called a trading account if it was formed only for the purpose of
acquiring securities and not selling them.
Mr. TRACY. We might have decided to sell some securities.
Mr. PECORA. What was the decision that was reached pome time
prior to July 13, 1929, by the board of directors of your investment
trust with respect to going into any kind of a joint account with
Dillon, Read & Co. ?
Mr. TRACY. We wanted to buy railroad securities.
Mr. PECORA. Not to sell them?
Mr. TRACY. NO.
Mr. PECORA. Just to buy?
Mr. TRACY. Yes; we wanted to acquire them.
Mr. PECORA. When, in pursuance of that judgment
or decision,
your company went into a joint trading account with Dillon, Read
& Co., was there a departure, by so doing, from the decision that
the board had arrived at regarding the purposes of this account?
Mr. TRACY. None. The purpose of the officers was to acquire
railroad securities, and we acquired them.
The CHAIRMAN. When the account was terminated, Mr. Tracy,
how was the adjustment made? Did Dillon, Read & Co. take an
equal number of shares of this stock and the investment company
an equal number of the shares? How did you agree among yourselves as to the division of the stock that you had acquired?
Mr. TRACY. It was a 50-50 basis.
The CHAIRMAN. Each stock?
Mr. TRACY. Yes, sir.
Senator COUZENS. I think
the copy of the agreement entered into
is the best evidence.
Mr. PECORA. Will you produce the original or a true copy of the
agreement entered into between your investment trust and Dillon,
Read & Co. by which this joint account was created?
Mr. TRACY. I have before me one of the originals.
Mr. PECORA. Will you produce it, please?
(Witness produced a paper which he handed to Mr. Pecora.)
STOCK EXCHANGE
PRACTICES
1747
Mr. PECORA. YOU say it is one of the originals. Do you mean it is
a duplicate original?
Mr. TRACY. Yes.
Mr. PECORA. I offer
it in evidence and ask that it be spread upon
the record.
Mr. TRACY. I would rather not have it marked up, because it is
our file copy.
Mr. PECORA. The marking is not going to damage it, is it ? Putting an exhibit number on it will not damage it.
(The document referred to, dated July 13, 1929, headed "Thirty
Million Dollar Eailroad Securities Joint Account", was received in
evidence as Committee's exhibit no. 15.)
Mr. PECORA. The exhibit produced by the witness, which has been
marked " Committee Exhibit 15 ", of this date, is a carbon copy, is
it not?
Mr. TRACY. Yes.
Mr. PECORA. A typewritten carbon?
Mr. TRACY. Yes.
Mr. PECORA. And it reads as follows.
[Reading:]
THIRTY MILLION DOLLAR RAILROAD SECURITIES JOINT ACCOUNT,
My 13, 1929.
DILLON, READ & Co.,
New York, N.Y.
DEAR SIRS: Referring to the above account which is being formed today to
buy and/or sell and/or trade in the common and/or preferred stocks and/or
bonds of various railroads, subject to the condition that the account shall never
be committed at any one time in a net amount exceeding $30,000,000, long or
short, we beg to confirm the participation of $15,000,000 allotted to you in
this account.
The account is to terminate October 15, 1929, unless sooner dissolved by mutual agreement, and may be extended by mutual consent. The account shall
be under the joint management of Dillon, Read & Co. and the United States
& International Securities Corporation.
Purchases and/or sales for the account are to be approved by both parties.
Participants will share pro rata, that is, in the proportions which their respective participations bear to the total participations in the account in the profits,
losses and expenses of the account, and at the termination of the account will
be entitled to receive their respective pro rata shares of any ass'ets then remaining in the account in the form in which the same then exists, less their
respective pro rata shares of the charges to the account.
We will carry for the account all of such stock and/or bonds which the
account is long at an interest rate of 5% percent. If at some future time
all or part of any of the securities long in the account be turned over to a new
company, it is our understanding that you will be given an opportunity to make
an offering of the securities of such company and for doing so will be entitled to
reasonable compensation.
Kindly confirm your acceptance of the participation allotted you by signing
the attached copy of this letter and returning it to us.
Yours very truly,
UNITED STATES & INTERNATIONAL SECURITIES CORPORATION.
Then there is a blank, a space, and vice president. In the lower
left-hand corner is the word "Accepted ", and a signature reading
" Dillon, Bead & Co., July 13,1929."
Mr. PECORA. This agreement, or the agreement evidenced by this
letter, Mr. Tracy, relates to a pretty large account, does it not?
Mr. TRACY. I would call it a pretty large account.
Mr. PECORA. One to which your investment trust was committing
itself to the extent of as much as $15?000,000?
1748
STOCK EXCHANGE PEACTICES
Senator COTJZENS. Committed itself to $30,000,000 as a matter of
fact.
Mr. PECORA. Yes. Committed itself to $30,000,000; that is, committed itself to furnish the funds up to the amount of $30,000,000,
but its participation therein for its own account was not to exceed
$15,000,000.
As I have been examining you this morning, Mr. Tracy, along this
line, I noticed that almost in every instance before you answered
the question you had a whispered conference with a young man who
is now seated at your right. Who is that young man? I do not
recognize him.
Mr. TRACY. He is Paul Nitze.
Mr. PECORA. Who is he ? What is his relationship to your investment trust?
Mr. TRACY. He is vice president of the Keswick Corporation.
Mr. PECORA. I have no objection to your getting any information
or advices that you want to get from any of your associates to enable
you to answer any question that I put to you, but I do now want to
ask you Mr. Tracy—you are president of this investment comporation—if you need to confer with Mr. Nitze or anybody else in order
to enable you to answer my question ?
Mr. TRACY. Well, when I do, Mr. Pecora, I will ask that you be
kind enough to let me confer with him. There are questions of
details.
Mr. PECORA. There will be no objection to your conferring with
him.
Mr. TRACY. All right. If I need any information with regard to
specific purchases and sales and details that I cannot carry in my
head I will make the request of you, if you will be kind enough to
let me do it.
Mr. PECORA. NOW do you need any information from Mr. Nitze
or anybody else in order to enable you to answer questions relating
to the making of this joint account agreement of July 13, 1929?
Mr. TRACY. I will have to find out first what you are going to ask
me about it.
Mr. PECORA. I propose to ask you a number of questions with
respect to the making of this agreement. Do you feel that you have
sufficient personal knowledge of all the circumstances surrounding
the making of this agreement that you do not have to have advices
and information from any of your associates?
Mr. TRACY. I think I know a great deal about it; yes.
Mr. PECORA. Well, let us see how much you know about it first.
Mr. TRACY. YOU might ask me the question, Mr. Pecora, but I
may have to refresh my knowledge of it.
Mr. PECORA. Yes. Do you acknowledge that the making of this
agreement of July 13, 1929, by your investment trust with Dillon,
Bead & Co. involved a business transaction of considerable moment
and consequence to the investment trust ?
Mr. TRACY. It did. The operation was of large magnitude.
Mr. PECORA. DO you know any other single agreement touching
upon any of the business operations of your investment trust that
exceeded this agreement in magnitude ?
Mr. TRACY. I do not.
STOCK EXCHANGE PRACTICES
1749
Mr. PECORA. In view of that fact, Mr. Tracy, will you be good
enough to tell this committee if you can why there is absolutely no
mention in the minute book of your investment trust of the making
of this agreement at the time it was made or at the time the decision
to enter into it was made ?
Mr. TRACY. I think I told you before, Mr. Pecora, that this matter
was discussed at the directors' meetings, at officers' meetings; I discussed it outside of the meetings with different directors, and we
came to the conclusion—the board—that railroad securities offered
the best field for investment on earnings, market basis, on yield
basis, and we decided to look into the railroads. We spent money
on reports not only on the Eock Island, the Frisco, the Denver &
Rio Grande Western, the Chicago Great Western, but one or two
other roads, and as the result of all those deliberations we decided
to buy railroad securities. And that is the method that we employed. That is our usual form of reporting operations to the
board. But everyone on the board knew about that account. There
was not anybody that did not know it.
Mr. PECORA. What reason was there for not mentioning somewhere in the minute book of your board the fact that the board had
committed itself to a joint account involving a potential liability of
$30,000,000?
Mr. TRACY. I do not know. As I told you, everybody on the
board was familiar with that, and the details of it, and our reasons
for going into it. It was unanimous. We were not trying to hide
anything from anybody. Every director knew everything that we
were doing.
Mr. PECORA..I have not used any such term as " h i d e " anything.
I am simply trying to get from you some explanation of why it was
not mentioned. I t might have been an oversight for all I know.
I do not say that you were trying to hide something, but I am trying
to get your own reason or explanation for the absolute absence from
the record of the minutes of your board meetings held at any time
prior to and up to July 13, 1929, of any reference to this transaction
involving potentially a 30-million-dollar commitment by your company. That is what I am trying to find out.
Mr. TRACY. There was no reason that I know of. It was not
usual, for us to put those things in our minutes, Mr. Pecora. But I
come back and tell you again that all of them had hashed over this
thing, had discussed it ; had talked about it, had discussed railroads,
had reports made of it, and it was the unanimous opinion of the
board that railroad securities offered the best field for investment
at that time.
Mr. PECORA. What do you regard as the primary function served
by the keeping of minutes of meetings of boards of directors?
Mr. TRACY. TO record what you have done.
Mr. PECORA. Exactly.
Mr. TRACY. And I think everything is recorded in there. All the
purchases that we have made.
Mr. PECORA. Well, you made purchases after you made decisions
to purchase ?
Mr. TRACY. Yes.
1750
STOCK EXCHANGE PRACTICES
Mr. PECORA. The important thing is the making of the decision,
is it not, because without the decision the purchase does not subsequently follow ?
Mr. TRACY. NO; it does not.
Mr. PECORA. Why do you not put in your minutes, or cause to be
put there, the important decisions that the board makes with regard
to the contemplated purchase of securities?
Mr. TRACY. Well, it is not customary—I am on a number of
boards—to record any transactions until they are reported.
Mr. PECORA. If you were asked at any time and place to say, under
oath, at what meeting of the board of directors the final decision was
arrived at to enter into this joint-account agreement of July 13,.
1929, would you be able to answer on the basis of your personal
recollection ?
Mr. TRACY. NO.
Mr. PECORA. DO you know any of your fellow directors who would
be able to answer such a question on personal recollection?
Mr. TRACY. NO. But what I can tell you and what they could tell
you is that we had discussed this thing for months. We had gone
into the railroad securities, we had looked into railroads, we had
looked into everything else, and we decided to acquire railroad securities because
Mr. PECORA. YOU cannot tell us when you reached that decision
and when you actually embodied such a decision in a written agreement which bears a definite date? The fact of the making of that
written agreement at the time it was made is not mentioned in the
minutes anywhere ? Is that not the situation ?
Mr. TRACY. That is right. It is not. But the purchases are
recorded, and the amounts.
The CHAIRMAN. But the agreement contemplates not only acquiring securities but selling them.
Mr. TRACY. Well, that is the usual form, Mr. Chairman, when
that account was formed to purchase railroad securities.
Mr. PECORA. Then if it was formed solely to purchase railroad
securities for the benefit of the account, and it had only two participants, namely, Dillion, Read & Co. and your investment trust,
why was the agreement so drawn as to confer upon the managers of
this account the right not only to purchase but to sell; the right
not only to buy long but to sell short ?
Mr. TRACY. That is the usual form, Mr. Pecora.
Mr. PECORA. Who prepared this usual form? Do you find it in
any textbook on forms ?
Mr. TRACY. NO ; I do not think you do.
Mr. PECORA. Well, who prepared this usual form ?
Mr. TRACY. I will find out for you if you wish.
Mr. PECORA. Please.
Mr. TRACY (after conferring with his associates). I do not know
who wrote that, and they do not seem to be able to tell me. But
that is the usual form whenever an account is formed to buvJ and
sell.
Mr. PECORA. DO you know who signed that contract or that agreement of July 13, 1929, in behalf of your company?
STOCK EXCHANGE PRACTICES
1751
Mr. TRACT. NO. I will try to find out for you. Do you know
who signed it (addressing his associates) ? I will have to look
that up.
Mr. PECORA. All right. Now, Mr. Chairman, I notice the time is
12:15 p.m., and as I recall it, it was the purpose of the committee to
adjourn early today. In view of that, and in view of the fact that
I notice in this room the presence of Hon. Patrick J. Hurley who I
know desires to make some statement to the committee respecting a
matter that is before the committee or is to come before the committe, may I suggest that we suspend the examination of this witness
at this time and ask Mr, Hurley to address the committee if he desires to do so.
The CHAIRMAN. Will that be agreeable to you, Mr. Tracy ?
Mr. TRACY. Yes, sir.
The CHAIRMAN. We will
suspend the examination of Mr. Tracy,
then, for the present. Our purpose is to adjourn, when we do adjourn, until Tuesday. Then, Mr. Tracy, we will not resume with
you until 10 o'clock on Tuesday. We are going to adjourn now
until 10 o'clock next Tuesday.
Mr. PECORA. Mr. Chairman, will you request that all witnesses now
under subpena, whether they have already been called to testify or
not, return under that subpena on Tuesday morning ?
The CHAIRMAN. All witnesses who have been subpenaed will be
present Tuesday at 10 o'clock.
(Thereupon, the examination of Mr. Tracy was temporarily discontinued until 10 a.m. the following Tuesday, October 10, 1933.)
The CHAIRMAN. Before Mr. Hurley takes the stand I wish to make
this statement for the record. The committee wishes to express its
regret because of the illness of Senator Glass and his enforced
absence. I have just received this memorandum with reference to
Senator Glass' illness and I will ask that it be placed in the record at
this point.
(The memordandum referred to is as follows:)
OCTOBER 6,
1933.
Senator Glass wishes Senator Fletcher to know that he is confined to his
bed under the care of a physician and trained nurse, and that this illness has
prevented him from attending the sessions yesterday and today.
RixEfY SMITH, Secretary.
* The CHAIRMAN. We will now ask Mr. Hurley to take the stand.
You wanted to ask Mr. Hurley some questions, Mr. Pecora?
Mr. PECORA. NQ. I think Mr. Hurley has indicated to me that he
has some statement to make to this committee, or some application
to address to it.
The CHAIRMAN. Are you appearing as counsel, Mr. Hurley?
Mr. HURLEY. Yes, sir.
The CHAIRMAN. Not as a witness?
Mr. HURLEY. Not as a witness.
The CHAIRMAN. There is no need for
you to be sworn, then. You
may proceed with any statement you desire to make, Mr. Hurley.
1752
STOCK EXCHANGE PRACTICES
STATEMENT BY HON. PATRICK J. HURLEY I N BEHAIF OF THE
ASSOCIATED GAS & ELECTRIC CO.
Mr. HURLEY. Mr. Chairman and members of the committee, my
appearance before this committee in behalf of the Associated Gas
& Electric Co. is primarily for the protection of the rights of approximately 350,000 citizens throughout the country who have invested in its securities. As we understand it, the committee desires
to present to the public a true statement of the methods employed in
issuing the securities of the company. We feel that the best interests of the security holders will be promoted by the conducting
of the entire proceedings in public. With that in view, the company
has for itself and all its subsidiaries presented willingly all of its
records to Mr. Pecora and his agents. The books and records of the
company and its subsidiaries are and will continue to be available to
Mr. Pecora and this committee.
The affairs of the company have been fully investigated by the
Federal Trade Commission. That commission recently published a
report of its investigation (S. Doc. 92, pt. 45, 70th Cong., 1st sess.).
The frank cooperation of the corporation was commended by the
chief counsel for the Federal Trade Commission in the public record
referred to at page 837, as follows:
Mr. HEAI*Y. I think it appropriate for me to say at this time, at least, I
desire to say on behalf of myself and Dr. Walker, the chief economist, and
also on behalf of the Commission, that we appreciate the cooperation which
we have had from the Associated Gas & Electric Co. in our work and in Mr.
Nodder's work of preparing and presenting this report for the record.
I am moved to say that the company has not refused us any information
which the representatives of the Commission deemed material and pertinent
under the resolution and statute that we work under.
Commissioner MCCULLOCH. It is very appropriate that that acknowledgment
should be made on the record. Now, are you ready for adjournment?
The Associated Gas & Electric Co. is the largest independent
utility holding company in the United States. By that I mean that
it is controlled by its management and not by banks or banking connections generally referred to as Wall Street. There are undoubtedly large interests who would like to see this company dismembered, even though it were necessary to force it into receivership
to do so* Unquestionably a receivership would be destructive to
the best interests of hundreds of thousands of security holders
throughout the United States.
In addition to this, so-called " chiselers " have formed and attempted to form committees ostensibly to serve the security holders
but actually to profit by the distress that this can bring to the
security holders of this corporation. As evidence of this I would like
to call the attention of the committee to the fact that one of these
so-called " security protective committees " has attached to its circulars which have been sent out to dealers the following statement:
Until further notice the sum of $6, which is approximately 4 percent of the
current market value, will be allowed and paid to investment dealers who are
active, for each debenture deposited through them, to cover their cost of assisting debenture holders in depositing with this committee, the same to be payable
immediately upon satisfactory proof of deposit.
Necessarily this very high cost of procurement of depositors must
be charged together with all other expenses against the security
holders.
STOCK EXCHANGE PRACTICES
Senator COUZENS. DO you mind an interruption, Mr.
Mr. HURLEY. NO, sir.
Senator COUZENS. What is the purpose of collecting
1753
Hurley ?
these securities?
Mr. HURLEY. They state that they are collected by a protective
committee for the protection of the security holders. I have here
a complete "record of the advertising campaign conducted in the
papers and the advertisement itself.
Senator COUZENS. I would like to have that placed in the record.
The CHAIRMAN. It may be marked as an exhibit and spread upon
the record.
(Advertising matter of the Debenture Holders' Protective Committee was marked " Committee Exhibit No. 16, October 6, 1933,"
see p. 1775.)
Senator COUZENS. Why did they need protection? That is what I
wanted to know.
Mr. HURLEY. I think possibly that in the case of a company with
far-flung interest that is under investigation, in these times wheni
taxes have been increased, cost of operations increased, and the income on the commodity reduced, there is a chance to break the
company down.
Senator COUZENS. What do you mean by that? That they are in
default on their securities?
Mr. HURLEY. I mean to say that throughout the depression this
company has paid interest to date and is still paying interest.
Senator COUZENS. SO you have no securities in default?
Mr. HURLEY. AS I understand, there are none in default. I am
advised this morning that the interest is all paid to date.
Senator COUZENS. I want to get this straight, because it is not
usual to form bondholders committees or security holders committees until there is a default.
Mr. HURLEY. I am pointing to this, Senator, because it is very
unusual, and it is an attack upon what I conceive to be the fundamental rights of persons who have invested in these securities to
prepare for themselves a competence for illness or old age, and I
am calling it to the attention of the committee because it is an
attack upon the rights of these investors throughout the United
States.
May I proceed?
Senator COUZENS. Yes.
Mr. HURLEY. An investigation of this nature must necessarily
bring forth those who will attempt to profit by any distress caused
to the investors. I do not see that the committee can in any way
prevent this, but I do want to call attention to the fact that it is
taking place.
The press recently has carried quite generally a story to the
effect that Mr. Pecora has said that the Associated Gas & Electric
Co. is " a corporate labyrinth resembling the Insull group in structure and formation." No statement that has been made could be
more damaging to the welfare of the investors of this company.
The Insull situation has come to have a specific derogatory meaning
in the public mind. Without referring to questions of fraud or
mismanagement, it means a bankrupt situation. I feel certain
1754
STOCK EXCHANGE PRACTICES
that such a comparison would not have been made by Mr. Pecora
after he had completed this investigation.
Let us look for a moment to the differences between this situation
and the Insull situation, to which Mr. Pecora likens it. The Insull
holding company situation was built up largely on thin equities
with large amount of underlying securities held by the public.
These equities were freely pledged as collateral for the bank loans
which the companies were unable to pay, resulting in the foreclosure
of the loans. The earnings of the holding companies were in large
part based on intercompany profits on the sales of properties and
securities, which could not continue to be shown when the depression came. These are the things which caused the collapse of the
Insull structure. The policies of the Associated management have
been exactly the opposite. The Insull organization on the advent
of the depression was immediately unable to pay the interest upon
its securities; in contrast, the Associated Gas & Electric Co. has
continued to pay the interest on its securities throughout the
depression.
The condition of the company under the present investigations
and attacks from without together with increased taxes and the
increased cost of compliance with the provisions of the N.R.A. is
raising the cost of operation of the company at a time when rates
are actually being reduced. I agree with Mr. Pecora that there are
complexities in the corporate organization. That must necessarily
be so when it is understood that the company operates in 26 States
of the Union, in Canada, and in the Philippine Islands; but his
attention should also be called to the great strides the company has
made in simplifying the corporate structure. Since 1922, 216 corporations have been eliminated by the Associated System in simplifying its corporate structure. For the information of the committee,
I will hand Mr. Pecora, if he desires to have it, a statement of the
corporations actually eliminated from the system during this period.
The process of simplification is still going on.
As I said in the beginning, I am appearing here primarily in the
interest of the people throughout the country who have invested in
these securities, in a hope that we may be able to work constructively
together to save those investors.
I said also in the beginning that the books of the Associated and
its subsidiary companies are now and will continue to be at the
disposal of Mr. Pecora and this committee. Mr. Pecora has asked
for the private books of private concerns owned or controlled by
Mr. H. C. Hopson. I am not attorney for Mr. H. C. Hopson.
Senator COUZENS. Who is Mr. Hopson?
Mr. HURLEY. Mr. Hopson is executive vice president of the company.
Senator COUZEN. That is, the holding company?
Mr. HURLEY. Yes, sir.
The CHAIRMAN. He really has the management of the company?
Mr. HURLEY. Yes.
The CHAIRMAN. And its affairs?
Mr. HURLEY. Yes, sir.
Senator COUZENS. Has he been here right along during this
investigation ?
Mr. HURLEY. NO, sir.
STOCK EXCHANGE PRACTICES
1755
Mr. PECORA. I have never laid eyes on him, Senator Couzens.
Senator COUZENS. DO you know where he has been ?
Mr. HURLEY. I know where he is now.
Senator COUZENS. I S he here in the room?
Mr. HURLEY. NO. There is a vice president here in the room now.
Senator COUZENS. Where is Mr. Hopson?
Mr. HURLEY. Mr. Hopson is in Chicago.
Senator COUZENS. Has he been active in the affairs of the company
during this year?
Mr. HURLEY. NO, sir. He has been ill part of the time. I might
say this: There is some one here who will say to the committee that
Mr. Hopson is available, and when I finish this you will find that
he is available at any time the committee wants him, and has been
for any public hearing that was desired.
Mr. Pecora has asked for the private books of the private concerns
owned or controlled by Mr. H. C. Hopson. I am advised, however,
that the confidential records of clients and others, not concerned with
the Associated Gas & Electric Co., are in the H. C. Hopson & Co.
records. While Mr. Hopson has every desire to cooperate, yet he
feels that he should not be compelled to disclose the confidential records of disinterested parties. He has stated that he will submit himself and his books to this committee, but as a matter of protection for
himself it should be under proper subpena and with the understanding that he is not voluntarily divulging confidential records of others
which do not have a direct or indirect bearing on any matters pertaining to this investigation; and that he will be allowed to appear
before this committee in person, with his books.
As this committee probably knows, the Associated Gas & Electric
Co. is at present time undergoing recapitalization. Half truths
and rumors may become public before the true facts as stated by the
managers in public hearing to the committee, and in such event it
will be exceedingly damaging to the welfare of the security holders.
My purpose in appearing before you gentlemen is to get a statement before you of those salient facts, and to present ourselves so
far as the Associated Gas & Electric Co. is concerned without any
qualifications whatever, to this committee.
The CHAIRMAN. Has the Federal Trade Commission investigation
been completed, Mr. Hurley?
Mr. HURLEY. I understand so, although I think the question of
the findings is not fully agreed to by Mr. Pecora, However, he may
speak for himself on that. It was my understanding that it had
been completed, and here was the conclusion of the document thanking the company for its cooperation.
Mr. PECORA. Mr. Hurley, may I ask if you know what is the date
of the report of the Federal Trade Commission's examination ?
Mr. HURLEY. I haven't the date here, but it is Senate Document
92, part 45, Seventieth Congress, first session.
Mr. PECORA. Perhaps if you would confer with Mr. Travis, who
is a New York attorney and who I see is sitting alongside you, he
might confirm what I understand to be the fact, that this report
was made and dated as of some time in 1929.
Mr, TRAVIS. I believe it was December 31, 1929, and accountants
are now bringing it down to date.
15541—33—PT 4
15
1756
STOCK EXCHANGE PRACTICES
Mr. PECORA. And} the examination has been going on for some
time past on behalf of the Federal Trade Commission to bring that
down to date.
Mr. TRAVIS. Yes,
sir.
Mr. PECORA. But the report referred to by Mr. Hurley, in what
I believe was his prepared statement, as I noticed he read it, is one
that was made as of December of 1929. Is that correct, Mr. Travis ?
Mr. TRAVIS. That is the way I understand it.
Mr. PECORA. That is my understanding, too.
Mr. HURLEY. I say this to Mr. Pecora, that this morning, when
this was handed to me, I labored under the impression that that
was more recent and that it was the conclusion of the present hearing.
But we are in agreement on that now.
Mr. PECORA. I think, Mr. Hurley, I have what I understand to
be the facts, that your professional services were retained by your
client in this matter only last Sunday.
Mr. HURLEY. Yes,
sir.
Mr. PECORA. But, necessarily
Mr. HURLEY (interposing). In fact, later than that.
Mr. PECORA (continuing). But you could not have had what might
be regarded by any stretch of imagination a reasonable time in which
to inform yourself by your own processes, of the facts.
Mr. TRAVIS. Of course, I should like to say
Mr. PECORA (continuing). And you, Mr. Hurley, have had to rely,
quite necessarily in the circumstances, upon a statement of facts
given to you by others. I believe that is a correct statement, isn't it,
Mr. Hurley?
Mr. HURLEY. Of course, I have had very little time to examine the
records of the company. However, I believe that I have made to
the committee a correct statement of the situation as it now confronts you.
Mr. TRAVIS. Might I just say, in order to attempt to make this
matter perfectly clear
Mr. PECORA (interposing). You might just put your full name on
the record, and your relationship to the Associated Gas <& Electric Co.
STATEMENT OF CHARLES M. TRAVIS, OP THE LAW FIRM OF
TRAVIS, BROWNBACK & PAXSON, COUNSEL FOR THE ASSOCIATED
GAS & ELECTRIC CO.
Mr. TRAVIS. My name is Charles M. Travis, of the firm of Travis,
Brownback & Paxson, counsel for Associated Gas & Electric Co.
Senator COUZENS. Might this matter about chiselers be placed in
the record?
Mr. HURLEY. Yes. I don't know whether I gave it to you. And do
you want this in the record or not? This was connected with a
press release.
Senator COUZENS. I think he has already read that, Mr. Pecora.
Mr. PECORA. NO doubt that might go in, if Senator Couzens desires
it.
Senator COUZEN. Well, if that is a press release I don't know that
Mr. Pecora has seen that.
Mr. PEboRA. Then that has already been made public, through the
press, as you say it has been furnished to the press.
STOCK EXCHANGE PRACTICES
1757
Senator COUZENS. I should like an opportunity to look over those
papers that have to do with the so-called " chiselers."
Mr. PECORA. I believe the committee reporter has it and will hand
it over to Senator Couzens for his inspection.
Senator COUZENS. YOU may go right ahead, Mr. Pecora, so far as
I am concerned.
The CHAIRMAN. Mr. Travis, you may now proceed with your statement.
Mr. TRAVIS. I thought there might be a little misunderstanding in
regard to the Federal Trade Commission investigation. While the
accounting period for which the report was made ended December
31, 1929, the public hearings before the Commission are of a very
much more recent date, and the statement which Mr. Hurley quoted
was at a public hearing, I believe, within the past year.
The CHAIRMAN. DO you represent the Associated, Mr. Travis ?
Mr. TRAVIS. I represent the Associated Gas & Electric Co.
The CHAIRMAN. HOW long have you been representing them?
Mr. TRAVIS. I have been doing legal work for that company, I
suppose, for 10 years.
The CHAIRMAN. Proceed, Mr. Pecora.
Mr. PECORA. May I ask Mr. Travis if he will be good enough to
tell the committee from his personal knowledge when Mr. Hopson
left the New York offices of the Associated Gas & Electric Co.; when
he was last there ?
Mr. TRAVIS. Well, I went away from New York, I think it was, on
the 17th of August, for a short vacation. Mr. Hopson was there
at that time. I heard after I returned, which was a few days after
Labor Day, that he had left a few days after I went away, and I
have since been informed that he went away on the doctor's orders,
that he had high blood pressure, and while he was away in
Kentucky
Mr. PECORA (interposing). Where did he go, Mr. Travis?
Mr. TRAVIS. I could not tell you from my own knowledge where
he went.
Mr. PECORA. Well, from any information that you have where
did he go ?
Mr. TRAVIS. I understand that he started in to make a tour of some
of the properties.
Mr. PECORA. DO you mean an automobile tour ?
Mr. TRAVIS. Yes; an automobile tour.
Mr. PECORA. At a time when he was ill and suffering from high
blood pressure?
Mr. TRAVIS. Yes.
Mr. PECORA. Has
he returned to the office of the company in New
York at any time since he left some time in August?
Mr. TRAVIS. N O ; he has not.
Mr. PECORA. Have you been in
touch with him daily?
Mr. TRAyis. No.
Mr. PECORA. Since he left the New York office of the company on
this automobile tour?
Mr. TRAVIS. NO ; I have not, Mr. Pecora.
Mr. PECORA. Have you tried to get in touch with him daily or
frequently during that time?
1758
STOCK EXCHANGE PRACTICES
Mr. TRAVIS. I have not tried to get in touch with him frequently,
but I have tried to get in touch with him on several occasions.
Mr. PECORA. And were you able to do so?
Mr. TRAVIS. On several occasions I was able to do so.
Mr. PECORA. YOU know that representatives of the investigating
staff of this committee, since the middle of August, or, that is, from
a date somewhat prior to that time, have made very, very frequent
efforts by inquiring at the New York office of the Associated Gas &
Electric Co. for information concerning the whereabouts of Mr.
Hopson, to get in touch with him, and that they never were able
to get any such information?
Mr. TRAVIS. Well, I was not aware that they had made inquiries
as to his whereabouts until within the past 2 weeks or so.
Senator COTJZENS. Where did Mr. Hopson go after he made an
inspection of the plants?
Mr. PECORA. DO you know whether Mr. Hopson actually made an
inspection of the plants on this automobile tour?
Mr. TRAVIS. I understand that he was down in Bowling Green,
Ky., which is the center of the Kentucky-Tennessee properties; that
he was taken ill there with intestinal influenza and was ill for some
days. That as soon as he was able to get out he went to Chicago
to be there with his sister who was at that time in Chicago.
Senator COUZENS. Has he been there continuously since i
Mr. TRAVIS. He has been there 'continuously.
Mr. PECORA. HOW long has Mr. Hopson been in Chicago ?
Mr. TRAVIS. I do not think I am able to answer that question^ Mr.
Pecora.
Mr. PECORA. I had a conversation with you in the office of the
committee in New York a week ago today, didn't I, Mr. Travis ?
Mr. TRAVIS. Yes,
sir.
Mr. PECORA. At that time you came up to the office in response
to a telephone conversation or request from me, did you not?
Mr. TRAVIS. Yes, sir.
Mr. PECORA. Would you
mind giving the committee the substance
of the conversation you and I then had about Mr. Hopson's whereabouts and our inability to get in touch with him either directly
or through his office?
Mr. TRAVIS. The first or the second conversation ?
Mr. PECORA. Well, we only had one on Friday, didn't we, and we
had another one the next day, last Saturday. But I am referring
now to the first one, on Friday, and we only had one conversation on
Friday.
Mr. TRAVIS. Well, Mr. Pecora stated to me that he thought he had
been very patient with Mr. Hopson, that he had tried, or that Mr.
McEldowney had tried some time before that to get the books, or had
asked for the books of H. C. Hopson & Co., and that they had not
then been able to get the books; that Mr. Pecora thought there had
been unnecessary delay, that he thought Mr. Hopson was not cooperating in the matter, and that he was forced to insist that Mr.
Hopson either let Mr. McEldowney examine the books or be advised
where he was so that he might be served.
Mr. PECORA. Did I indicate how long I had been trying to establish contact with Mr. Hopson, either directly or through his office,
but had been unable to do so ?
STOCK EXCHANGE PRACTICES
1759
Mr. TRAVIS." I think you said about 4 weeks.
Mr. PECORA. I said it was at least 4 weeks, didn't I ?
Mr. TRAVIS. I think so.
Mr. PECORA. And did I also say to you, among other things, that
the day before our conversation Mr. McEldowney, who is one 01
the examiners on the staff of the investigators for the committee,
had reported to me that Mr. Shields, who I understand is a member
of the bar and an associate of yours, is he not?
Mr. TRAVIS. NO ; he is not an associate of mine.
Mr. PECORA. Well, he is a member of the bar and in your office, as
I understand.
Mr. TRAVIS. NO ; he was in Mr. Hopson's office at that time.
Mr. PECORA. Well, that Mr. Shields had said to Mr. McEldowney
the day before I had this conversation with you, last Friday, that he
(Mr. Shields) deplored very much the fact that we had been unable
to get in contact with Mr. Hopson, either directly or through his
office, because he (Mr. Shields) felt certain that if Mr. Hopson
knew that I wanted to get in communication with him that Mr.
Hopson would immediately make himself available. Do you remember my saying something like that to you in that conversation ?
Mr. TRAVIS. I remember your saying something about what Mr.
Shields had said but do not remember the details.
Mr. PECORA. DO you remember my further saying to you in our
conversation of last Friday, in substance, that Mr. Shields' statement seemed incredible to me, but that I was willing to give him
the benefit of any doubt that might exist in my mind concerning
its credibility, and hence in view of the fact that he said that Mr.
Hopson in his (Mr. Shields') opinion would make himself
available
to me if he only knew that I wanted to get in touch wTith him; and
in view of the further fact that it had been reported to me by the
persons in the office of the Associated Gas & Electric Co. that
they had tried, and tried in vain, to establish contact with Mr. Hopson, that within 24 hours after our conversation of last Friday I
would feel constrained to adopt some other method for informing
Mr. Hopson of the fact that I wanted to get in tuch with him for
the purposes of this investigation?
Mr. TRAVIS. Yes.
Mr. PECORA. And
I told you that that other method would consist
of a request to the press to publish the fact that I wanted to meet
Mr. Hopson in connection with this investigation because it had
been found impossible, or I had been unable through our own
resources or through the facilities of }^our office, to establish such
contact with him. Do you remember that I said that to you in
substance last Friday?
Mr. TRAVIS. I do not recall, Mr. Pecora, that you said you had
been trying to establish contact with him. But it may be your
language was somewhat similar to that.
Mr. PECORA. I see. Well, now
Mr. TRAVIS (continuing). I think you did say that you had been
trying to make service on him.
Mr. PECORA. Well, your office knew that before I stated that fact
to you last Friday, didn't it? Did not associates of yours in the
office know from the fact that a United States Marshal, or a Deputy
1760
STOCK EXCHANGE PRACTICES
United States Marshal had made inquiries concerning the whereabouts of Mr. Hopson at the office of the Associated Gas & Electric
Co.5 that I was trying to effect service in behalf of this committee
on Mr. Hopson, so that you knew that fact before I told you last
Friday, didn't you?
Mr. TRAVIS. I think I knew that on Thursday afternoon, that I
was informed of it. I was away the day before, out of town.
Mr. PECORA. IS it a fact so far as you can tell us that for about 4
weeks persons connected with the office of the Associated Gas &
Electric Co. had sought to get into communication, by telephone or
otherwise, with Mr. Hopson to inform him of my request, but had
been unable to do so?
Mr. TRAVIS. I did not know that, but at one time, and I believe
it was in the early part or middle of September, I learned that
they were unable to get in touch with Mr. Hopson, and were advised
that he was ill and unable to talk over the telephone.
Mr. PECORA. Who made that attempt to talk with Mr. Hopson
over the telephone ?
Mr. TRAVIS. I, myself, made the attempt.
Mr. PECORA. Well, you told me that on last Friday, didn't you ?
Mr. TRAVIS. Yes, sir.
Mr. PECORA. And that
was the first time you told me that. You
told me that about a week or 10 days prior to our conversation of
last Friday you had succeeded in locating Mr. Hopson by telephone
somewhere, but that when you asked to speak to him you were told
by the person at the other end of the telephone, wherever it was,
that Mr. Hopson was too sick to come to the telephone to talk to
you?
Mr. TRAVIS. Yes.
Mr. PECORA. And
do you remember that when you told me that on
last Friday I replied that I could not quite understand the ailment
from which Mr. Hopson was suffering, that he was so ill that he ^
could not come to the telephone to talk to you after you had located
him by telephone and yet reports or statements had been made to
my representative by persons in the office of the Associated Gas &
Electric Company that they had been absolutely unable to locate
Mr. Hopson anywhere because he was on an automobile tour and
that they did not know his itinerary. Didn't I say that to you, in
substance ?
Mr. TRAVIS. I think you did make that statement.
Mr. PECORA. And then didn't you indicate to me that you felt
you would be able within the following 24 hours to establish contact, by telephone or otherwise, with Mr. Hopson, and that you
would probably be able to get from him a definite statement as to
whether or not he was going to make available to the examiners
ipv this committee the books and records that had been withheld
from them for the previous several weeks?
Mr. TRAVIS. Yes.
Senator COUZENS.
Well, Mr. Pecora, I now understand that you
can get Mr. Hopson by means of a subpena properly served, and
also his books.
Mr. PECORA. I shall be very glad to avail myself of the information which is forthcoming to me now for the first time in several
weeks.
STOCK EXCHANGE PRACTICES
1761
Senator COUZENS. Can you locate Mr. Hopson now for the service of a proper subpena upon him to have him bring his books and
papers?
Mr. TRAVIS. I have his address in Chicago.
Senator COUZENS. Will you please furnish that address to Mr.
Pecora.
Mr. TRAVIS. It is 120 South La Salle Street, room 845. That is
the office of Eobinson & Co.
Senator COUZENS. Are they lawyers?
Mr. TRAVIS. NO ; they are investment dealers.
Senator COUZENS. And he has an office with them?
Mr. TRAVIS. He makes his headquarters with them and gets his
mail there.
Senator COUZENS. SO we can get a subpena on him at that place?
Mr. TRAVIS. I am informed he will not make any attempt to evade
service.
Senator COUZENS. Well, that is all on that, isn't it?
Mr. PECORA. Yes; that is all on that. Of cour(se, we have been
trying for the last 4 weeks to locate him.
The CHAIRMAN. DO you know whether Mr. Hopson is able to
attend the hearing now ?
Mr. TRAVIS. I understand that he is in poor health, in a very nervous condition.
The CHAIRMAN. But he is up and attending to business ?
Mr. TRAVIS. Well, as much as he can attend to. I do not know
how much that is.
The CHAIRMAN. Where are these books and records ?
Mr. TRAVIS. I believe they are in New York City.
Mr. PECORA. In whose custody?
Mr. TRAVIS. Well, as to that I cannot tell you, Mr. Pecora.
Mr. PECORA. Whereabouts in New York City?
Mr. TRAVIS. At the office of H. C. Hopson & Co.
Mr. PECORA. Where is that office?
Mr. TRAVIS. 61 Broadway, New York City.
Mr. PECORA. IS that the place where the American Gas & Electric
Co. also has its offices?
Mr. TRAVIS. The Associated Gas & Electric Co. has offices in that
building. But the office is provided by H. C. Hopson & Co.
Mr. PECORA. I want to say to the committee in answer to some of
the statements embodied in the
statement made by Mr. Hurley, that
we have been given access to! corporate books and records of companies connected or affiliated with the Associated Gas & Electric
Co., but we have, despite repeated requests therefor, been denied
access to the books of accounts and other records of what has been
referred to here as personal or private companies of Mr. Hopson.
That is in accordance with your understanding, isn't it, Mr. Hurley ?
Mr. HURLEY. I would correct that only in one way according to my
understanding. You understand that I have none of it by way of
personal information, but I have been advised that they have not
denied access to the books but that they wanted Mr. Hopson or someone whom he might designate or designated by you, to appear when
the books are examined, so that they might be examined in public and
no half truths gotten to the public by way of erroneous conclusions by
reason of lack of understanding of what they contain.
1762
STOCK EXCHANGE PRACTICES
Mr. PECORA. Mr. Hurley, I haven't the slightest doubt, of course,
that that information has been given to you, but I want to say it is
utterly at variance with the statements that they have made to my
representatives when they have sought access to those books.
The CHAIRMAN. Well, the committee's accountants and investigators do not give to the public, information which they are obtaining
in any case. That information is collected for this committee and
given through the committee here if it is given at all.
Mr. PECORA. NOW, the delay, as I have understood it, that we have
experienced in getting access to those books, which have been very
properly referred to here as books of companies owned by Mr. Hopson, has been due, so far as the reasons for the delay have been
vouchsafed to us, by individuals in the office of the Associated Gas
& Electric Co., to the fact that they wanted the specific authorization given to themselves from Mr. Hopson before making those records available to us. And it was for that reason that we have been
seeking to get in touch with Mr. Hopson, with a view to getting that
consent. And we have been utterly unable to do it, and the information given to this committee in the last few minutes as to Mr.
Hopson's whereabouts is the first information I have acquired in
any way, manner, or form concerning Mr. Hopson's specific whereabouts, except that on last Sunday, just prior to my leaving my
home for the train to come to Washington for the purposes of this
hearing, Mr. Hurley was kind enough to call me up on the longdistance phone and inform me he had just been consulted in connection with this matter, and asked me if I would not, in view of
that fact, not press for the time being, any steps that I contemplated
taking to enable us to get in touch with Mr. Hopson or have access
to those books.
Mr. HURLEY. I think, Mr. Pecora, I might add to that that I have
worked very expeditiously to try to throw this whole situation out
into the deadliest limelight of publicity. I did it just as quickly
as I could do it, because I am convinced that nothing short of accurate public information can save the 360,000 innocent people who
have invested in the securities of this corporation. My first opportunity after having gotten just a cursory knowledge of what is
involved in this case brought me, of my own solicitation, to this
committee at this time. Is that correct, Mr. Pecora?
Mr. PECORA. Yes, sir.
Senator COUZENS. I S that
Mr. PECORA. The books in
all, Mr. Chairman?
question belonging to those companies
that are alluded to as the companies of Mr. Hopson, in our opinion,
or in my opinion, at least, are necessary to an intelligent and complete investigation of the methods by which the securities of the
Associate Gas & Electric Co. and its subsidiaries and affiliates have
been issued and sold to the public in an aggregate value of hundreds
of millions of dollars. And, among other things, the books of a
company called Utility Accounting &' Tax Consultants, which, according to report made to me by my investigators, performed certain
service for the Associate Gas & Electric Co. and its subsidiaries,
charging them fees for such service which run into substantial
amounts, estimated to be between iy2 and 2 million dollars a year.
STOCK EXCHANGE PRACTICES
1763
Mr. HURLEY. Pardon me, Mr. Pecora. Would you mind if I interrupted you just a minute?
Mr. PECORA. I was through anyway.
Mr. HURLEY. I have no intention—and I hope you realize it—of
criticism. I have had, as I told you, just a cursory glance at this,
but I think that the statement that you have read is not correct and
does mislead the public. That is exactly the thing that we would like
to avoid. I would like to see Mr. Hopson on this stand with his
books. Now, the figure is given to me of much less than that, and if
I have the truth, the services rendered by that company were the
services that would have been rendered by some independent institution, and that company was able to give that service to the stockholders of the Associated at less cost than it would have cost otherwise, and the figures that have been given to me reach no such
proportions as you have stated.
Mr. PECORA. Without the books themselves, Mr. Hurley, before us,
neither you nor I could satisfactorily state what the figures are.
Mr. HURLEY. NO ; and that is the reason
Mr. PECORA (interposing). But I want to say this, that the sources
from which the information given to me has been obtained are sources
which, in my opinion, could be relied upon. Now, the best evidence
is the books themselves.
Mr. HURLEY. Yes.
Mr. PECORA. I have
been trying to, and my examiners have been
trying to, see them for several weeks.
Mr. HURLEY. That is exactly why I say to you, Mr. Pecora—this,
of course, is said in the best spirit—it would be better not to make
statements on what those books contain until the books themselves
have been presented, and then the public can get a correct statement,
not an estimate. Eeally, I believe that the very thing that you have
stated there represents one of the reasons for my wanting to get
into the public mind immediately the true facts, the books themselves.
Mr. PECORA. I will say this as far as Mr. Hurley is concerned:
In conferences I have had with him in the last 24 hours here in
Washington, to which he returned only a short time ago from Chicago, they have been, so far as Mr. Hurley and I are concerned, of
an extremely satisfactory and agreeable character, and Mr. Hurley
has evinced to me every willingness on his part, so far as he can
control the situation of the action of any one that he represents, to
cooperate with this committee to the fullest possible extent. But it
seems to me that the decision does not rest with any counsel; it rests
with Mr. Hopson. That has been the situation as I have understood
it for many weeks, and that is why I have sought to get in touch
with Mr. Hopson and have been unable to do so.
The CHAIRMAN. Mr. Hopson insists that he do not voluntarily
appear to produce these books, but that he be subpenaed to do so.
Mr, HURLEY. He wants to protect his rights in the matter.
The CHAIRMAN. He is exceedingly careful in that regard.
The committee will stand adjourned until Tuesday at 10 o'clock.
(Whereupon, at 1:03 o'clock p.m., the subcommittee adjourned
until the following Tuesday at 10 o'clock a.m.)
1764
STOCK EXCHANGE PRACTICES
COMMITTEE EXHIBIT NO*. 12,
OCTOBER 6,
1933
THE COBN EXCHANGE! BLANK, TRUST CO., NEW YORK CITY, N.Y.,
1853-1933
Statement, February 1, 1933
Officers: Walter E. Frew, chairman; Dunham B. Sherer, president; Henry A.
Patten, first vice president.
Vice presidents, Ralph Peters, Jr., Edward B. MacKenzie, Frederick T.
Martin, Calvert Brewer, Richard D. Brown, John S. Wheelan, Edward S.
Malmar, E. Herrick Low, John R. McWilliam, Theodore H. Spratt, John W.
Ross, Perry M. Rushmore.
Vice president and secretary, Frederick K. Lister.
Assistant vice president, William L. Cronin, Clarence W. Bird.
Assistant secretary, Robert F. Crowell.
Trust officers, Henry C. White, Charles D. Wheelock.
Directors, Walter E. Frew, Richard Whitney, Philip Lehman, Ethelbert Ide
Low, Robert A. Drisdale, Henry A. Patten, Warren B. Nash, Ralph Peters, Jr.,
D. Schnakenberg, John H. Phillips, Dunham B. Sherer, Clinton D. Burdick,
C. W. Nichols, George E. Turnure, Arthur A. Fowler, Percy S. Straus, Robert
Lehman, D. Stewart Iglehart, George Doubleday, Davide Wakeman.
To the Stockholders of Corn Exchange Bank Trust Co.:
There is submitted herewith statement of your company as of February 1.
1933, and for your information, there is included a list of the company's
securities.
All stocks have been reduced to market value as of December 31, 1932, and
all bonds which have failed to pay maturing coupons have been reduced to
$1 on our books.
The net earnings from operation during 1932 were $3,334,531.75. Branches
now number 72, and are well located in various parts of New York City.
Your company commenced business February 1, 1853, and you will note that
we have completed our eightieth year. The organization is composed of men
and women working conscientiously for the growth of your company.
We trust we will receive your support in our efforts to make 1933 one of the
most successful in our history.
Your very truly,
WALTER E.
FREW,
Chairman.
DUNHAM B.
SHEREE,
President.
STATEMENT
FEBRUARY 1,
1933.
Due individuals, firms, corporations, and banks
$220, 875, 730.97
To meet these deposits we have:
Cash in vaults and banks
53, 768, 248. 96
Checks on other banks
12,522,396.54
U.S. Government securities
68,946,076. 81
State, municipal, and tax-exempt bonds
20, 291,493.02
Railroad bonds
7, 341, 854. 76
Public-utility bonds
3, 859,476.06
Industrial and other bonds
8, 414,134.88
Foreign bonds
2, 302,370. 87
Preferred stocks
471, 372. 50
Common and other stocks
1,497, 707. 75
Secured demand loans
31, 369, 584. 26
Secured time loans
7, 662,693.10
Bills discounted
«
18, 282,219.34
First mortgages on real estate
21,659,711.47
Stock of Federal Reserve bank, Corn Exchange Safe
Deposit Co., and Discount Corporation of New York
2, 898, 780.00
Customers' liability on acceptances
923,085.69
Banking houses and lots
15, 291,262. 66
Other real estate
1,409, 361. 42
* Total to meet indebtedness
This leaves
260, 011, 830.09
40,036,099.12
STOCK EXCHANGE PRACTICES
Capital
Surplus and undivided profits
Reserves
1765
$15, 000,000.00
___ 22,145, 673.18
2, 890, 425.94
The Corn Exchange Bank Trust Co. can act as one of your executors or
trustees, issue letters of credit, travelers' checks and drafts on foreign countries, rent you a safe deposit box, and provide every banking and trust service.
LIST OF SECURITIES
UNITED STATES GOVERNMENT SECURITIES
$9,500,000 United States of America, fourth Liberty 4% percent, 1938-33.
$35,000,000 United States of America, treasury bonds 3% percent, 1943-41.
$2,000,000 United States of America, certificates of indebtedness 3% percent
March 15, 1933.
$500,000 United States of America, certificates of indebtedness 2 percent, May
2, 1933.
$974,700 United States of America, Treasury certificates 2 percent, March
15, 1933.
$400,000 United States of America, Treasury notes 3 percent May 2, 1934.
$500,000 United States of America, certificates of indebtedness, 1% percent,
June 15, 1933.
$1,900,000 United States of America Treasury notes, 3 percent, June 15,
1935.
$2,600,000 United States of America, Treasury notes, 3% percent, August 1,
1936.
$1,500,000 United States of America, Treasury notes 2% percent, August 1,
1934.
$9,300,000 United States of America, Treasury notes 3% percent, September 15,
1937.
$3,900,000 United States of America, Treasury notes 3 percent, April 15,
1937.
STATE, MUNICIPAL, AND TAX-EXEMPT SECURITIES
$150,000, State of Arkansas, highway, 5 percent, 1954.
$100,000, State of Arkansas, highway, 5 percent, 1960.
$250,000, State of Arkansas, highway, 4% percent, 1963.
$90,000, Bergen County, N.J., public works, 6 percent, 1935-37.
$160,000, Bergen County, N.J., improvement, 5% percent, 1934-37.
$100,000, Bloomfield, N.J., improvement, 5% percent, 1938-53.
$150,000, Camden, N.J., park and building, 6 percent, 1937.
$22,000, Columbia County, N.Y., funding, 6 percent, 1937.
$475,000, East Orange, N.J., tax revenue notes, 6 per cent, 1933.
$900,000, Federal farm-loan bonds, 4% percent, 1942r-33.
$100,000', Federal farm-loan bonds, 4% percent, 1943-33.
$35,000, Town of Hempstead, N.Y., school district no. 9, 6 percent, 1933.
$50,000, State of Louisiana, highway, 5 percent, 1942.
$50,000, State of Louisiana, highway, 5 percent, 1948.
$50,000, Monroe County, N.Y., tax anticipation notes, 4% percent, 1933.
$750,000, Montclair, N.J., tax revenue notes, 4% percent, 1933.
$472,000, Morristown, N.J., improvement, 6 percent, 1934-7.
$18,000, Mount Vernon, N.Y., public works, 5 percent, 1937.
$470,000, Nassau County, N.Y., relief, 4% persent, 1935-7.
$500,000, Nassau County, N.Y., tax anticipation notes, SV2 percent, 1933.
$525,000, Newark, N.Y., temporary loan, 6 percent, June 17, 1933.
$10,000, Borough of New Canaan, Conn., tax anticipation notes, 4% percent,
1933.
$100,000, New Haven, Conn., tax anticipation notes, 5 percent, 1933.
$78,000, New Rochelle, N.Y., sewer, 5% percent, 1936.
$50,000, New York City corporation stock, 3 percent, 1935.
$176,176,000 New York City serial, 4% percent, I960.
$10,000 New York City corporation stock, 4% percent, 1967.
$433,000, New York City certificate of indebtedness, 5% percent, 1933-35.
$400,000, New York City corporation stock, 6 percent, 1933.
$2,408,000, New York City revenue bills, 5 percent, 1933.
$2,169,000, New York City revenue bills, 5% percent, 1933.
1766
STOCK EXCHANGE PRACTICES
$4,223,500, New York City corporation stock, 6 percent, 1935-37.
$900,000, State of New York gold notes, 2% percent, 1933.
$10,000, State of New York World War, 4% percent, 1945,
$328,000, Port of New York Authority bridge, 4 percent, 1936-50.
$275,000, Port Chester, N.Y., street sewer, 5% percent, 1935.
$450,000, Rochester, N.Y., tax anticipation notes, 4% percent, 1933.
$25,000, Rochester, N.Y., general municipal, 6 percent, 1935.
$170,000, Salt Lake City, Utah, 4% percent refunding, 1934-36,
$150,000, Salt Lake County, Utah, tax anticipation notes, 2V2 percent, 1933.
$120,000, San Diego, Calif., improvement, 5 percent, 1934-37.
$210,000, Savings and Loan Bank, New York, 5 percent, 1933.
$100,000, State of South Carolina, highway, 4% percent, 1950'.
$250,000, Syracuse, N.Y., tax anticipation notes, 1.89 percent, 1933.
$25,000, Syracuse, N.Y., improvement, 4 percent, 1937.
$25,000, Suffolk County, N.Y., certificate of indebtedness, 4.4 percent, 1934.
$140,000, State of Tennessee, building, 5% percent, 1934.
$100,000, State of Tennessee, building, 4% percent, 1945.
$400,000, Union County, N.J., tax anticipation notes, 4% percent, 1933.
$150,000, Westchester County, N.Y., indebtedness, 3,7 percent, 1934-36.
$325,000, Yonkers, N.Y., notes, 4.85 percent, 1933.
$100,000, Yonkers, N.Y., certificate of indebtedness, 5% percent, 1933.
$50,000, Yonkers, N.Y., local improvement, 6 percent, 1936.
$250,000, Yonkers, N.Y., certificate of indebtedness, 5 percent, 1933.
$145,000, Yonkers, N.Y., local improvement, 5 percent, 1933.
$5,000, Yonkers, N.Y., local improvement, 4% percent, 1933.
RAILROAD BONDS
$250,000 Alleghany Corporation collateral trust convertible 5 percent, 1944.
$35,000 Alleghany Corporation collateral trust convertible 5 percent, 1949.
$50,000 Alleghany Corporation collateral trust convertible 5 percent, 1950.
$420,000 Baltimore & Ohio Railroad Co. convertible 4% percent, 1960.
$285,000 Boston & Maine Railroad first mortgage 5 percent, 1967.
$128,000 Carolina, Clinchfield & Ohio Railway Co. first consolidated 6 percent, 1952.
$489,000 Chesapeake Corporation convertible collateral trust 5 percent, 1947.
$250,000 Chesapeake & Ohio Railway Co. (B) refunding and improvement
4% percent, 1995.
$200,000 Chesapeake & Ohio Railway Co. notes 6 percent, 1934.
$553,000 Chicago, Milwaukee, St. Paul & Pacific Railroad Co. mortgage 5
percent, 1975.
$250,000 Chicago & Northwestern Railway Co. (A) convertible 4% percent,
1949.
$500,000 Chicago, Rock Island & Pacific Railway Co. (A) secured gold 4%
percent, 1952.
$25,000 Cincinnati Union Terminal Railway (A) first mortgage 4y2 percent,
2020.
$250,000 Cleveland Union Terminal Co. first mortgage sinking fund 4% percent, 1977.
$50,000 Cleveland, Cincinnati, Chicago & Si. Louis Railway refunding and
improvement 4% percent, 1977.
$50,000 Cleveland, Cincinnati, Chicago & St. Louis Railway refunding and
improvement 4% percent, 1977.
$40,000 Colorado & Southern Railway (A) general mortgage 4% percent,
1980r
$103,000 Delaware & Hudson Co., the, gold S1^ percent, 1937.
$31,000 Denver & Rio Grande Railroad Co. first consolidated 4 percent, 1936.
$200,000 Denver & Rio Grande Western Railroad Co. refunding and improvement (B) 5 percent, 1978.
$145,000 Erie Railroad Co. refunding and improvement 5 percent, 1975.
$40,000 Great Northern Railroad Co. general mortgage 4% percent, 1977.
$100,000 Illinois Central Railroad gold notes 4% percent, 1934.
$300,000 Louisville & Nashville Railroad Co. first and refunding 4% percent,
2003.
$44,000 Missouri Pacific Railroad first and refunding 5 percent, 1977.
STOCK EXCHANGE PEACTICES
1767
$150,000 Missouri Pacific Railroad Co. first and refunding mortgage 5 percent,
1981.
$102,000 Missouri Pacific Railroad Co. first and refunding mortgage 5 percent,,
1980.
$416,000 Missouri Pacific Railroad Co. first and refunding 5 percent, 1978.
$280,000 Morris & Essex Railroad Co. construction mortgage 4% percent,.
1955.
$20,000 Morris & Essex Railroad Co. construction mortgage 5 percent, 1955.
$150,000 New York Central Railroad Co. (A) refunding and improvement
4% percent, 2013.
$200,000 New York, Chicago & St. Louis Railroad refunding mortgage 4%
percent, 1978.
$300,000 New York, New Haven & Hartford Railroad first and refunding
4y2 percent, 1967.
$10,000 New York, New Haven & Hartford Railroad secured gold 6 percent,
1940.
$12,000 New York, Susquehanna & Western Railroad Co. general mortgage
5 percent, 1940.
$24,000 Oregon-Washington Railroad & Navigation Co. (A) first and refunding 4 percent, 1961.
$300,000 Pennsylvania Co. secured gold 4% percent, 1963.
$200,000 Pennsylvania Railroad Co. secured gold 5 percent, 1964.
$50,000 Pere Marquette Railway Co. first mortgage 4. y2 percent, 1980.
$48,000 Pittsburgh, McKeesport & Youghiogheny Railroad second mortgage 6
percent, 1934.
$50,000 Reading Co. (B) general and refunding mortgage, 4% percent, 1997.
£4,000 St. Paul, Minneapolis & Manitoba Railway Co. Pacific Extension 4
percent, 1940.
$250,000 Southern Pacific Co. gold with warrants 4V2 percent, 1969.
$250,000 Terminal Railroad Association of St. Louis general mortgage 4
percent, 1953.
$25,000 Texas & Pacific Railway Co. general and refunding 5 percent, 1980.
$50,000 Western Maryland Railway Co. first and refunding mortgage S1/^
percent, 1977.
$250,000 Western Pacific Railroad Co. first mortgage 5 percent, 1946.
PUBLIC-UTILITY BONDS
$100,000 American Power & Light Co. gold debentures, 6 percent, 2016.
$150,000 American Water Works & Electric Co., Inc., gold debentures, 6 percent, 1975.
$100,000 Bell Telephone Co. of Canada, first mortgage, 5 percent, 1955.
$200,000 Bell Telephone Co. of Canada, first mortgage, 5 percent, 1957.
$500,000 Brooklyn-Manhattan Transit Corporation, sinking fund gold, 6 percent, 1968.
$500,000 Brooklyn, Manhattan Transit, gold, 6 percent, 1934.
$20,000 Brooklyn, Queens County, and Suburban Railroad Co., first mortgage,
5 percent, 1941.
$110,000 Denver Gas & Electric Light Co., first and refunding, 5 percent, 1951.
$100,000 Detroit City Gas Co., first mortgage, 6 percent, 1947.
$250,000 Hudson & Manhattan Railroad Co., (A) first lien and refunding, 5
percent, 1957.
$20,000 International Hydro Electric System, convertible debentures, 6 percent, 1944.
$200,000 Interborough Rapid Transit Co., first and refunding, 5 percent, 1966.
$250,000 International Telegraph and Telephone Corporation, debentures, 5
percent, 1955.
$500,000 Massachusetts Gas Cos., sinking fund debentures, 5 percent, 1955.
$28,000 Montclair Water Co., gold, 5 percent, 1946.
$100,000 North American Edison Co., (B) 5% percent, 1963.
$200,000 Pacific Power & Light Co., first mortgage, power and light, 5 percent,
1955.
$150,000 Standard Gas & Electric Co., debentures, 6 percent, 1966.
$110,000 Standard Gas_& Electric Co., debentures, 6 percent, 1951.
$250,000 Western Union Telegraph Co., gold, 5 percent, 1960.
1768
STOCK EXCHANGE PRACTICES
INDUSTRIAL AND OTHER BONDS
$50,000 American & Continental Corporation, debenture, 5 percent, 1943.
$100,000 American International Corporation, convertible gold debenture, 5%
percent, 1949.
$1,000,000 American Metals Co., Ltd., gold notes, 5 ^ percent, 1934.
$800,000 American Securities Investment Corporation, debenture, 6 percent,
1937.
$54,000 American Type Founders Co., sinking-fund gold debenture, 6 percent,
1940.
$51,000 Associated Oil Co. notes, 6 percent, 1935,
$25,000 Atlantic Gulf & West Indies Steamship Line, collateral trust, 5 percent, 1959.
$1,000,000 Canadian International Paper Co., first mortgage, 6 percent, 1949.
$77,000 Consolidated Publishers, Inc., collateral trust sinking fund, 6%, 1936.
$500,000 General American Investors Co., Inc., debenture, 5 percent, 1952.
$160,000 General Rayon Co., Ltd., debenture, 6 percent, 1948.
$250,000 Gobel, Adolph, Inc., collateral trust notes with warrants, 6 ^ percent, 1935.
$250,000 Goodyear Tire & Rubber Co., first mortgage collateral trust, 5
percent, 1957.
$169,000 Gotham Silk Hosiery Co., Inc., sinking-fund debenture, 6 percent,
1936.
$800,000 Grace Steamship Co., notes, 6 percent, 1934-41.
$50,000 Gulf Oil Corporation of Pennsylvania, sinking-fund debenture, 5 percent, 1947.
$303,000 Hudson, J. L., Co., notes, 5 percent, 1933-36.
$200,000 Hudson Coal Co., The, first mortgage sinking fund, 5 percent, 1962.
$500,000 International Paper Co., refunding mortgage sinking fund, 6 percent,
1933
$100,000 Keith Corporation, B. F., first general refunding, 6 percent, 1946.
$100,000 Loew Theatre & Realty Corporation, first mortgage sinking fund,
6 percent, 1947.
$250,000 National Dairy Products Corporation debenture, 5% percent, 1948.
$100,000 Pennsylvania-Dixie Cement Corporation first mortgage sinking fund,
6 percent, 1941.
$214,000 Phillips Petroleum Co. sinking fund debenture, 5% percent, 1939.
$19,500 Prudence Bonds Corporation first mortgage collateral, 5% percent,
1932-35.
$250,000 Prudence Co., Inc., The, guaranteed collateral trust, 5% percent, 1961.
$55,000 Railway Express Agency, Inc., serial gold (A), 5 percent, 1933-48.
$250,000 St. Joseph Lead Co. convertible debenture, 5% percent, 1941.
$205,000 Saks Realty Corporation leasehold, 6 percent, 1933-46.
$116,000 School of Education Realty Corporation of New York University,
debenture, 6 percent, 1935.
$175,000 Schulco Co., Inc., (A) guaranteed mortgage sinking fund, 6% percent, 1946.
$440,000 Solvay American Investment Corporation notes, 5 percent, 1942.
$50,000 Smith A. O. Corporation first mortgage, 6V2 percent, 1933.
$250,000 United Drug Co. gold, 5 percent, 1953.
$100,000 United States Rubber Co. serial notes, .6% percent, 1933-40.
FOREIGN BONDS.
$249,000 Australia, Commonwealth of, extension loan of 1925, 5 percent, 1955.
$75,000 Australia, Commonwealth of, extension loan of 1928, 4% percent, 1956.
$32,100 Cuba, Republic of, extension sinking fund, 5% percent, 1953,
$90,400 Cuba, Republic of, internal 5 percent.
$25,000 Cuba, Republic of, serial gold 5% percent, 1933-37.
$57,800 Cuba, Republic of, sinking fund 5% percent, 1940.
$25,000 Dresden, Germany, city of, extension loan sinking fund 7 percent,
1945.
$605,000 German Government, gold 5% percent, 1965.
$125,000 Imperial Japanese Government, sinking fund gold 5% percent, 1965.
$76,000 Leipzig, Germany, city of, extension loan of 1926, 7 percent, 1947.
STOCK EXCHANGE PRACTICES
1769
$200,000' Newfoundland, Government of, bonds, 5 percent, 1952.
$300,000 New South Wales, Australia, State of, extension sinking fund,
5 percent, 1957.
$200,000 Province of Ontario, Canada, Treasury bills, 3% percent, 1933.
$100,000 Queensland, Australia, State of, extension sinking fund, 7 percent,
1941.
$180,000 Siemens Schukertwerke, 7 and 7% percent, 1933-35.
$50,000 Taiwan Electric Power Co., litd., sinking fund gold bonds, 5%
percent, 1971.
$100,000 Uruguay, Republic of, sinking fund external, 8 percent, 1946.
$250,000 Uruguay, Republic of, sinking fund external, 6 percent, 1960.
STOCKS
9,990 shares of Corn Exchange Safe Deposit Go.
2.499 shares of Discount Corporation of New York.
27,000 shares of Federal Reserve Bank of New York.
PREFERRED STOCKS
550 shares of Johns-Mansville Corporation.
2,100 shares of New York, New Haven & Hartford Railroad Co.
1,095 shares of Standard Gas & Electric Co., 7 percent.
10,000 United Corporation.
COMMON AND OTHER STOCKS
4,200 shares of Allied Chemical & Dye Corporation,
100 shares of Bank for International Settlements.
1,000 shares of Bond & Mortgage Guarantee Co.
400 shares of Consolidated Gas Co.
8,000 shares of General Motors Corporation.
3.500 shares of Glen Alden Coal Co.
4,100 shares of Great Northern Railway Co.
400 shares of Guaranty Trust Co.
1,172 shares of International Elevating Co.
5,000 shares of Kennecott Copper Co.
5,000 shares of New York Central Railroad Co.
2,300 shares of New York, New Haven & Hartford Railroad Co.
3,500 shares of Northern Pacific Railway Co.
5,000 shares of Public Service Corporation of New Jersey.
5,000 shares of Standard Brands, Inc.
1,000 shares of Title Guarantee & Trust Co.
19,000 shares of United Corporation.
Sundry stocks and bonds not included in the above list are carried on our
books at $1 with a quoted value on February 1, 1933, of $310,603.
COMMITTEE EXHIBIT NO. 13, OCTOBER 6,
1933
UNITED STATES & INTERNATIONAL SECURITIES CORPORATION
Present and former directors
Ernest B. Tracy, president United States & International Securities Corporation.
Clarence Dillon, Dillon, Read & Co.
Matthew C. Brush, president American International Corporation.
J. H. Hillman, Jr., president J. H. Hillman Coal & Coke Co.
Charles Hayden, Hayden, Stone & Co.
Dean Mathey, Dillon, Read & Co.
E. G. Wilmer, retired.
G. M. Moffett, president Corn Products Refining Co.
M. S. Sloan, formerly president New York Edison Co.
S. Z. Mitchell, formerly chairman of the board, Electric Bond & Share Co.
1770
STOCK EXCHANGE PRACTICES
UNITED STATES & INTERNATIONAL SECURITIES CORPORATION
Date of meeting and directors present
November 7, 1928: Messrs. Clarence Dillon, Charles Hayden, Dean Mathey,
George M. Moffett, Matthew S. Sloan, Ernest B. Tracy.
December 13, 1928: Clarence Dillon, Charles Hayden, Dean Mathey, S. Z.
Mitchell, Matthew S. Sloan, Ernest B. Tracy.
January 10, 1929: Messrs. Clarence Dillon, S. Z. Mitchell, G. M. Moffett,
Matthew S. Sloan, J. H. Hillman, Jr.
February 14, 1929: Clarence Dillon, Charles Hayden, Dean Mathey, S. Z.
Mitchell, G. M. Moffett, Matthew S. Sloan, Ernest B. Tracy.
March 15, 1929: Clarence Dillon, Dean Mathey, S. Z. Mitchell, Matthew S.
Sloan, Ernest B. Tracy.
April 8, 1929: Dean Mathey, S. Z. Mitchell, G. M. Moffett, Matthew S. Sloan,
Ernest B. Tracy, Charles Hayden.
June 27, 1929: Ernest B. Tracy, Clarence Dillon, Dean Mathey, S. Z. Mitchell.
September 9, 1929: Clarence Dillon, Charles Hayden, Dean Mathey, J. W.
McConnell, Ernest B. Tracy.
October 16, 1929: Clarence Dillon, Dean Mathey, Charles Hayden, S. Z.
Mitchell, George M. Moffett, Matthew S. Sloan.
November 11, 1929: Clarence Dillon, Dean Mathey, S. Z. Mitchell, G. M.
Moffett, Ernest B. Tracy.
November 22, 1929: Ernest B. Tracy, Clarence Dillon, Charles Hayden, J. H.
Hillman, Jr., Dean Mathey, S. Z. Mitchell, George M. Moffett.
December 9, 1929: Messrs. Clarence Dillon, Charles Hayden, Dean Mathey,
G. M. Moffett, M. S. Sloan, Ernest B. Tracy.
January 8, 1930: Clarence Dillon, Charles Hayden, Dean Mathey, S. Z.
Mitchell, George M. Moffett, Ernest B. Tracy.
February 13, 1930: Clarence Dillon, Dean Mathey, George M. Moffett, Ernest
B. Tracy, E. G. Wilmer.
March 10, 1930: Clarence Dillon, Charles Hayden, George M. Moffett, S. Z.
Mitchell, E. G. Wilmer, Ernest B. Tracy, M. S. Sloan.
April 14, 1930: Clarence Dillon, Charles Hayden, T. H. Hillman, Jr., Dean
Mathey, Matthew S. Sloan, E. G. Wilmer.
May 19, 1930: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean
Mathey, George M. Moffett, Matthew S. Sloan, E. B. Tracy, E. G. Wilmer.
June 9, 1930: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean
Mathey, Sidney Z. Mitchell, George M. Moffett, Matthew S. Sloan, E. G. Wilmer.
August 11, 1930: Messrs. Matthew C. Brush, Clarence Dillon, Charles
Hayden, Dean Mathey, George M. Moffett, Ernest B. Tracy, E. G. Wilmer.
September 8, 1930: Clarence Dillon, Charles Hayden, Dean Mathey, S. Z.
Mitchell, George M. Moffett, Matthew S. Sloan.
October 14, 1930: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean
Mathey, George M. Moffett, Matthew S. Sloan.
November 10,1930: Matthew G. Brush, Clarence Dillon, Charles Hayden, Dean
Mathey, S. Z Mitchell, Matthew S. Sloan.
December 8, 1930: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean
Mathey, Matthew S. Sloan, Ernest B. Tracy.
January 12, 1931: Matthew C. Brush, Clarence Dillon, Charles H. Hayden,
Dean Mathey, Sidney Z. Mitchell, George M. Moffett, Matthew S. Sloan, Ernest
B. Tracy.
February 9, 1931: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean
Mathey, Matthew S. Sloan, Ernest B. Tracy.
March 9, 1931: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey,
George M. Moffett, Matthew S. Sloan, Ernest B. Tracy.
April 13, 1931: Matthew C. Brush, Charles Hayden, Dean Mathey, S. Z.
Mitchell, George M. Moffett, Ernest B. Tracy, E. G. Wilmer.
May 11, 1931: Matthew C. Brush, Charles Hayden, S. Z. Mitchell, George M.
Moffett, Ernest B. Tracy, E. G. Wilmer.
June 8, 1931: Matthew C. Brush, Charles Hayden, Dean Mathey, Ernest B.
Tracy, E. G. Wilmer.
July 15, 1931: Matthew 0. Brush, -Clarence Dillon, Charles Hayden, Dean
Mathey, Ernest B. Tracy, E. G. Wilmer.
August 10,1931: Clarence Dillon, Matthew C. Brush, Charles Hayden, Ernest
B. Tracy. Sidney Z. Mitchell. Dean Mathey.
STOCK EXCHANGE PRACTICES
1771
September 14, 1931: Matthew C. Brush, Clarence Dillon, Charles Hayden,
Dean Mathey, Ernest B. Tracy.
October 19, 1931: Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean
Mathey, S. Z. Mitchell, Ernest B. Tracy.
November 9, 1931: Messrs. Matthew C, Brush, Charles Hayden, Dean Mathey,
S. Z. Mitchell, Ernest B. Tracy, E. G. Wilmer.
December 14, 1931: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey,
Ernest B. Tracy, E. G. Wilmer.
January 11, 1932: Messrs. Clarence Dillon, Charles Hayden, Dean Mathey,
Ernest B. Tracy, E. G. Wilmer.
February 8, 1932: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, S. Z. Mitchell, Ernest B. Tracy, E. G. Wilmer.
March 14, 1932: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden,
Dean Mathey, S. Z. Mitchell, Ernest B. Tracy, E. G. Wilmer.
April 11, 1932: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey,
Ernest B. Tracy, E. G. Wilmer.
May 9,1932: Messrs. Charles Hayden, Dean Mathey, S. Z. Mitchell, Ernest B.
Tracy, E. G. Wilmer.
June 15, 1932: Messrs. Charles Hayden, Dean Mathey, Ernest B. Tracy.
July 11, 1932: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey,
S. Z. Mitchell, Ernest B. Tracy.
August 8, 1932: Messrs. Clarence Dillon, Ernest B. Tracy, Dean Mathey.
September 12, 1932: Messrs. Matthew C. Brush, Clarence Dillon, Charles
Hayden, Dean Mathey, S. Z. Mitchell, Ernest B. Tracy.
October 10, 1982: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, Ernest B. Tracy, E. G. Wilmer.
November 14, 1932: Messrs. Matthew C. Brush, Charles Hayden, Dean
Mathey, Sidney Z. Mitchell, Ernest B. Tracy, E. G. Wilmer.
December 12, 1932: Messrs. Matthew C. Brush, Clarence Dillon, Charles
Hayden, Dean Mathey, Ernest B. Tracy.
January 9,1933: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden,
Dean Mathey, S. Z. Mitchell.
February 14, 1933: Messrs. Matthew C. Brush, Clarence Dillon, Charles Hayden, Dean Mathey, S. Z. Mitchell, Ernest B. Tracy.
March 13, 1933: Messrs. Matthew C. Brush, Clarence Dillon, Dean Mathey,
Ernest B. Tracy.
April 10, 1933: Messrs. Matthew 0. Brush, Clarence Hayden, Dean Mathey,
Ernest B. Tracy.
May 8, 1933: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey,
Ernest B. Tracy.
June 12, 1933: Messrs. Matthew C. Brush, Charles Hayden, Dean Mathey,
Ernest B. Tracy.
July 10, 1933: Messrs. Clarence Dillon, Charles Hayden, Dean Mathey, Ernest
B. Tracy.
September 11, 1933: Messrs. Clarence Dillon, Charles Hayden, Dean Mathey,
Ernest B. Tracy.
COMMITTEE EXHIBIT NO. 14, OCTOBER 6,
1933
UNITED STATES & FOREIGN SECURITIES CORPORATION
Present and former directors
Ernest B. Tracy, president United States & Foreign Securities Corporation.
Clarence Dillon, Dillon, Head & Co.
F. H. Ecker, president Metropolitan Life Insurance Co.
G. M.-P. Murphy, G. M.-P. Murphy & Co.
C. S. McCain, chairman of the board, Chase National Bank.
W. A. Phillips, Dillon, Read & Co.
R. C. Sehaffner, A. G. Becker & Co.
E. J. Bermingham, E. J. Bermingham & Co.
E. G. Wilmer, retiredPercy H. Johnston, chairman of the board, Chemical Bank & Trust Co.
John Sherwin, formerly chairman, Union Trust Co., Cleveland.
George W. Davison, chairman of the board, Central Hanover Bank & Trust Co.
Anson W. Burchard, formerly chairman of board, General Electric Co.
175541—33—PT 4
16
1772
STOCK EXCHANGE PRACTICES
J. W. Hornor, retired.
George W. Wiekersham, Cadwalader, Wickersham & Taft.
Harrison Williams.
Benjamin Joy, retired.
R. E. Christie, Jr., Dillon, Read & Co.
Daniel G. Wing, chairman of board, First National Bank, Boston.
Herbert Fleishhacker, president Anglo-California National Bank of San
Francisco.
Date of meeting and, directors present
December 10, 1924: Messrs. Clarence Dillon, G. W. Wickersham, John Sherwin, R. C. Sehaffner, E. G. Wilmer, J. W. Hornor, F. H. Ecker, A. W. Burchard,
W. A. Phillips.
April 13, 1925: F. H. Ecker, A. W. Burchard, C. Dillon, J. W. Hornor, H.
Williams, W. A. Phillips, J. Sherwin, R. C. Schaffner, E. G. Wilmer.
May 28, 1925: A. W. Burchard, J. W. Hornor, F. W. Ecker, W. A. Phillips,
R. C. Schaffner, E. G. Wilmer.
July 13, 1925: E. G. Wilmer, H. Williams, G. W. Wickersham, John Sherwin,
R. 0. Sehaffner, J. W. Hornor, R. E. Christie.
September 30, 1925: E. G. Wilmer, F. H. Ecker, G. W. Wickersham, H. Williams, J. W. Hornor, W. A. Phillips, Anson W. Burchard, C. Dillon.
January 19, 1926: Messrs. E. G. Wilmer, Herbert Fleishhacker, F. H. Ecker,
John Sherwin, Clarence Dillon, Anson W. Burchard, J. W. Hornor, William A.
Phillips.
June 17, 1926: Messrs. Benjamin Joy, R. C. Schaffner, John Sherwin, William
A Phillips, Anson W. Burchard.
October 4, 1926: Messrs. Benjamin Joy, Clarence Dillon, Frederick H. Ecker,
Anson W. Burchard, G. W. Wickersham.
January 5, 1927: Messrs. Clarence Dillon, G. W. Wickersham, Frederick H.
Ecker, John Sherwin, William A. Phillips, C. W. Davison, Benjamin Joy.
May 10, 1927: Messrs. George W. Davison, Frederick H. Ecker, Robert C.
Schaffner, William A. Phillips, Robert E. Christie, Jr.
September 20, 1927: Messrs. Clarence Dillon, F. H. Ecker, W. A. Phillips, R.
C. Sehaffner, E. B. Tracy.
December 22, 1927: Messrs. Clarence Dillon, G. W. Davison, F. H. Ecker,
G. M.-P. Murphy, R. C. Sehaffner, E. B. Tracy.
January 5, 1928: Messrs. G. W. Davison, Clarence Dillon,, P. H. Johnston,
G. M.-P. Murphy, W. A. Phillips, R. C. Sehaffner, E. B. Tracy.
February 8,1928: Messrs. Clarence Dillon, F. H. Ecker, P. H. Johnston, W. A.
Phillips, E. B. Tracy.
, March 14,1928: F. H. Ecker, P. H. Johnston, G. M.-P. Murphy, W. A. Phillips,
E. B. Tracy.
May 9, 1928: Clarence Dillon, F .H. Ecker, P. H. Johnston, G. M.-P. Murphy,
John Sherwin, E. B. Tracy.
June 13, 1928: G. W. Davison. Clarence Dillon, F. H. Ecker, P. H. Johnston,
G. M.-P. Murphy, W. A. Phillips, E. B. Tracy.
September 12, 1928: George W. Davison, Clarence Dillon, Percy H. Johnston,
William A. Phillips, Robert C. Sehaffner.
October 10, 1928: G. W. Davison, Clarence Dillon, P. H. Johnston, G. M.-P.
Murphy, W. A. Phillips, E. B. Tracy.
October 24, 1928: Clarence Dillon, George W. Davison, Frederick H. Ecker,
Percy H. Johnston, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy.
October 29, 1928: Clarence Dillon, George W. Davison, Frederick H. Ecker,
Percy H. Johnston, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy.
November 14, 1928: Messrs. Clarence Dillon, Frederick H. Ecker, Percy H.
Johnston, Grayson M.-P. Murphy, William A. Phillips, Robert O. Schaffner,
Ernest B. Tracy.
December 12, 1928: George W. Davison, Clarence Dillon, Frederick H. Ecker,
Percy H. Johnston, Robert C. Schaffner, John Sherwin, Ernest B. Tracy.
January 9, 1929: Frederick H. Ecker, Percy H. Johnston, Grayson M.-P.
Murphy, Robert C. Schaffner.
February 13, 1929: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston,
Grayson M.-P. Murphy, Robert C. Schaffner, Ernest B. Tracy.
March 13, 1929: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston,
Ernest B. Tracy, Daniel G. Wing.
STOCK EXCHANGE PRACTICES
1773
April 10, 1929: Frederick H. Ecker, Percy H. Johnston, Grayson M.-P.
Murphy, William A. Phillips, John Sherwin.
June 12, 1929: Clarence Dillon, Percy H. Johnston, William A. Phillips,
Ernest B. Tracy.
September 11, 1929: Clarence Dillon, Charles S. McCain, Grayson M.-P.
Murphy, William A. Phillips, Ernest B. Tracy.
October 9, 1929: Charles S. McCain, Grayson M.-P. Murphy, Percy H. Johnston, Daniel G. Wing.
November 13, 1929: Messrs. Clarence Dillon, Charles S. McCain, Grayson
M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Percy H. Johnston,
Frederick H. Ecker, Ernest B. Tracy.
November 22, 1929: Clarence Dillon, Percy H. Johnston, Charles S. McCain,
Grayson H.-P. Murphy, Robert C. Schaffner, William A. Phillips, Ernest B.
Tracy.
December 11, 1929: Clarence Dillon, Grayson M.-P. Murphy, William A.
Phillips, John Sherwin, Percy H. Johnston, Ernest B. Tracy.
January 8, 1930: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston,
Charles S. McCain, Grayson M.-P. Murphy, Robert C. Schaffner, Ernest B.
Tracy.
February 13, 1930: Clarence Dillon, Charles S. McCain, Grayson M.-Pi
Murphy, William A. Phillips, Ernest B. Tracy, S. G. Wilmer.
March 12, 1930: Clarence Dillon, Charles S. McCain, Grayson M.-P. Murphy,
William A. Phillips, Robert C. Schaffner, Ernest B. Tracy, E. G. Wilmer.
April 9, 1930: Clarence Dillon, Charles S. McCain, Grayson M.-P. Murphy,
William A. Phillips, Ernest B. Tracy, E. G. Wilmer.
May 21, 1930: Messrs. Clarence Dillon, Percy H. Johnston, Grayson M.-P.
Murphy, William A. Phillips, Ernest B. Tracy, E. G. Wilmer.
June 11, 1930: Clarence Dillon, Percy H. Johnston, Charles S. McCain; E. G.
Wilmer.
August 13, 1930: Frederick H. Ecker, Percy H. Johnston, Charles S. McCain,
William A. Phillips, Ernest B. Tracy, E. G. Wilmer.
September 10, 1930: Clarence Dillon, William A. Phillips.
September 11, 1930: Clarence Dillon, Percy H. Johnston, Charles S. McCain,
William A. Phillips, John Sherwin.
October 9, 1930: Clarence Dillon, William A. Phillips.
October 23, 1930: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston,
Grayson M.-P. Murphy, Robert C. Schaffner.
November 12, 1930: Messrs. Clarence Dillon, Frederick H. Ecker, Percy H.
Johnston, William A. Phillips, Ernest B. Tracy.
December 10, 1930: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy.
January 14, 1931: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston,
Grayson M.-P. Murphy, William A. Phillips, Ernest B, Tracy.
February 11, 1931: Clarence Dillon, Grayson M.-P. Murphy, Charles S.
McCain, William A. Phillips, Ernest B. Tracy.
March 11, 1931: Charles S. McCain, Percy H. Johnston, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy.
April 8,1931: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Charles
S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G.
Wilmer.
May 13, 1931: Frederick H. Ecker, Percy H. Johnston, Charles S. McCain,
Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G. Wilmer.
June 10, 1931: Messrs. Frederick H. Ecker, Percy H. Johnston, Charles S.
McCain, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner,
Ernest B. Tracy, E. G. Wilmer.
July 8, 1931: Clarence Dillon, Percy H. Johnston, Charles S. McCain, Ernest
<B. Tracy, E. G. Wilmer.
August 12, 1931: Clarence Dillon, Percy H. Johnston, Charles S. McCain,
William A. Phillips, Robert C. Schaffner, Ernest B. Tracy.
September 9, 1931: Clarence Dillon, Percy H. Johnston, William A. Phillips,
Ernest B. Tracy.
October 14, 1931: Clarence Dillon, Percy H. Johnston, Charles S. McCain,
Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy.
November 11, 1931: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston,
Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy,
E. G. Wilmer.
1774
STOCK EXCHANGE PRACTICES
December 9, 1931: Clarence Dillon, Frederick H. Ecker, Charles S. McCain,
Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B.
Tracy, E. G. Wilmer.
January 13, 1932: Messrs. Clarence Dillon, Frederick H. Ecker, Percy H.
Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips,
Robert C. Schaffner, Ernest B. Tracy, E. G. Wilmer.
February 10, 1932: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston,
Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy,
E. G. Wilmer.
March 9, 1932: Frederick H. Ecker, Percy H. Johnston, Charles S. McCain,
Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B.
Tracy.
April 13, 1932: Frederick H. Ecker, Percy H. Johnston, Charles S. McCain,
Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G. Wilmer.
April 20, 1932: William A. Phillips, Ernest B. Tracy.
April 27,1932: Percy H. Johonston, Charles S. McCain, Grayson M.-P. Murphy,
William A. Phillips, Ernest B. Tracy.
May 11, 1932: Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy.
William A. Phillips, Robert C. Schaffner, Ernest B. Tracy, E. G. Wilmer.
June 8, 1932: Messrs. Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest
B. Tracy, E. G. Wilmer.
July 13,1932: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston, Charles
S. McCain, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner,
Ernest B. Tracy.
August 10, 1932: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston,
Charles S. McCain, Grayson M.-P. Murphy, Ernest B. Tracy.
September 14, 1932: Clarence Dillon, Grayson M.-P. Murphy, William A.
Phillips, Robert C. Schaffner, Ernest B. Tracy.
October 13, 1932: Clarence Dillon, Frederick H. Ecker, Grayson M.-P. Murphy, William A. Phillips, Robert C. Schaffner, Ernest B, Tracy, E. G. Wilmer.
November 9, 1932: Frederick H. Ecker, Percy H. Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips, Ernest B. Tracy, E. G.
Wilmer.
December 14, 1932: Clarence Dillon, Frederick H. Ecker, Percy H. Johnston,
Charles S. McCain, William A. Phillips, Ernest B. Tracy.
January 11, 1933: Messrs. Clarence Dillon, Frederick H. Ecker, Percy H.
Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips,
Robert C. Schaffner, Ernest B. Tracy.
February 8, 1933: Messrs. Clarence Dillon, Frederick H. Ecker, Percy H.
Johnston, Charles S. McCain, Grayson M.-P. Murphy, William A. Phillips,
Ernest B. Tracy.
March 8, 1933: Messrs. Clarence Dillon, Frederick H. Ecker, Grayson M.-P.
Murphy, William A. Phillips, Ernest B. Tracy.
April 12, 1933: Messrs. Clarence Dillon, Frederick H. Ecker, Charles S.
McCain, William A. Phillips, Ernest B. Tracy.
May 10, 1933: Messrs. E. J. Bermingham, G. M.-P. Murphy, William A.
Phillips, Ernest B. Tracy, E. G. Wilmer.
May 22, 1933: Messrs. Frederick H. Ecker, Charles S. McCain, Grayson M.-P.
Murphy, Robert C. Schaffner, Ernest B. Tracy.
June 14, 1933: Messrs, Charles S. McCain, Grayson M.-P. Murphy, William A.
Phillips, Ernest B. Tracy.
July 12, 1933: Messrs. Clarence Dillon, Charles S. McCain, William A.
Phillips, Robert C. Schaffner, Ernest B. Tracy.
August 9, 1933: Messrs. Charles S. McCain, Grayson M.-P. Murphy, William
A. Phillips, Ernest B. Tracy.
September 13, 1933: Messrs. Clarence Dillon, Grayson M.-P. Murphy, William
A. Phillips, Robert C. Schaffner, Ernest B. Tracy.
(Committee Exhibit No. 16 of October 6, 1933, is here printed
in the record in full, as follows:)
(NOTE.—Committee Exhibit 16 appears only in the committee's
copy of today's proceedings.)
STOCK EXCHANGE PRACTICES
1775
COMMITTEE EXHIBIT NO. 16 OF OCTOBER 6, 1933.—GENERAL UTILITIES SECURITIES
INC., NEW YORK, N.Y.
TRAVIS, BROWNEACK & PAXSON,
New York City, October 5, 1933.
P. J. HURLEY
Esq.,
Washington, D.C.
MY DEAR MR. HURLEY : I am enclosing photostatic copies of the following
publicity of the so-called Associated Gas & Electric Co. Debenture Holders' Protective Committee headed by W. A. Nash:
1. Advertisement of the committee in the New York Times, June 2, 1933.
2. Advertisement of the committee in the New York Times, July 14, 1933.
3. Letter to debenture holders dated June 15, 1933, accompanied by a transmittal blank and slip offering commission to investment dealers.
Very truly yours,
CHARLES M. TRAVIS.
[From the New York Times, June 2, 1933]
ASSOCIATED GAS & ELECTRIC COMPANY
DEBEINTTJREI HOLDERS' PEOTECT1VE COMMITTEE
To All Debenture Holders of Associated Gas & Electric Co.:
On May 15th last, the Associated Gas & Electric Co. requested all debenture
holders to exchange their debentures under 1 and 3 options. These options,
apparently, are so adverse to the interests of debenture holders that many
holders feel that they should take steps to protect their rights. It has been
deemed advisable that a committee be formed for the protection of the debenture holders and the undersigned have been requested to and have agreed to act
as such committee.
Immediately upon the announcement by the company of the so-called " options ", the organization of this committee was commenced. The committee
feels that immediate concerted action is necessary and that you can best conserve your rights by depositing your debentures with this committee at the
earliest possible moment.
A deposit agreement has been prepared and is now on file with the depositary
and with the secretaries of the committee.
Debenture holders are invited to communicate promptly with the secretaries
or depositary of the committee or its counsel.
Counsel.—Battle, Levy, Van Tine & Flower, 37 Wall Street, New York, N.Y.;
Poland & Davis, 27 State Street, Boston, Mass.
Secretary.—John H. Galloway, Jr., 20 Broad Street, New York, N.Y., Rm.
1418. Tele. HAhover 2-2980.
Assistant secretary.—Roger R. Phillips, 2:7 State Street, Boston, Mass., Telephone CAPitol 0900.
Committee.—W. A. Nash, chairman, 27 State Street, Boston, Mass.; Rex
R. Thompson, 120 Broadway, New York, N.Y.; Ambrose W. Benkert, 52 Wall
Street, New York, N.Y.; E. G. Diefenbach, 44 Wall Street, New York, N.Y.
Depositary.—The Commercial National Bank & Trust Co. of New York, 56
Wall Street, New York, N.Y.
CocHepositary.—The National Rockland Bank of Boston, 30 Congress Street,
Boston, Mass.
[Prom the New York Times, Friday, July 14, 1933]
ASSOCIATED GAS & ELECTRIC CO. DEBENTURE HOLDERS' PROTECTIVE COMMITTEE
HOW CAN SUCH A PLAN BE ATTRACTIVE?
Associated Gas & Electric Co. is offering holders of its several issues of
debentures a so-called " Plan of rearrangement of debt capitalization " which
is, this committee believes, merely a plan to persuade debenture holders to
1776
STOCK EXCHANGE PRACTICES
surrender their just rights in order to maintain the company's present management in their positions of control, and to preserve their positions as stockholders
and the positions of other stockholders at the expense of the debenture holders.
Don't exchange 100 percent for SO percent.—To maintain their present senior
position, debenture holders should deposit their debentures with this committee.
In the event of a default of interest by the company and the inability to pay
the full face value of their securities, the debenture holders will then be in
a position to claim the assets of the company, which include all the stock of
Associated Gas & Electric Corporation, the subsidiary through which the company owns and controls the underlying utility properties which ultimately are
the assets behind the debentures.
The company's management seek to forestall the objective of this committee. Though great profits were theirs in prosperous years, they are now
entirely unwilling to make any sacrifice necessitated by the pressure of hard
times. They seek to cast the whole burden on the debenture holders in order
to protect the management and the stockholders. They ask debenture holders
to accept, under option 1, in exchange for their present holdings, half the
amount of their face value in fixed-rate debentures of the corporation; or,
under option 2, income debentures of the corporation yielding less interest, when,
as a matter of fact, all the stock of the corporation is owned by the company
and is therefore already security to the face amount of the present outstanding
debentures of the company. Thus, debenture holders are asked to give up half
their principal and income, or to take the chance of receiving lesser income
or no income, in exchange for their present right to enforce full payment of
both principal and interest upon default in either or both.
The function of the protective committee.—This committee's purpose is to
safeguard the debenture holders from being misled into surrendering their just
rights. Its entire efforts aim to prevent any steps tending to impair the security
they now have.
The committee's deposit agreement provides that all expenses shall not exceed
2% percent of the face value of the debentures deposited with it, viz., not more
than $25 per $1,000 debenture. This is relatively nominal when debenture
holders consider that upon the committee's achieving its objective they stand
to gain many times that amount.
In one of the company's recent advertisements nothing was said in answer
to the committee's objections to the so-called " plan " of the company. Instead,.
the major portion of the advertisement was devoted to an attack upon this
committee's policy of allowing security dealers $6 for each $1,000 debenture
deposited through them with the committee. This item is included in the 2%
percent maximum expenses of the committee and has been rendered necessary
by the fact that security dealers have been offered up to $7.50 for each debenture deposited with them under the company's, so-called "plan." This fact
has never been mentioned in the company's advertisements. Can it be that the
company's treasury, either directly or indirectly, is footing this expense and the
expense for advertising the management's own plan in the newspapers and
through the mails?
It is obvious that the interests of debenture holders can best be conserved
by immediate concerted action in depositing their holdings with this committee
in support of its efforts to protect and maintain the rights of debenture holders.
Literature of the committee may be obtained upon request from the secretary
or assistant secretary of this committee, or from its depositary or co-depositary.
W. A. NASH. Chairman,
REX R. THOMPSON,
AMBROSE W. BENKEUT,
F . G. DlEFENBACH,
Committee.
Counsel.—Battle, Levy, Van Tine & Fowler, New York; Poland & Davis,
Boston, Mass.
Secretary.—John H. Galloway, Jr., 20 Broad Street, New York, N.Y., Room
1418, telephone Hanover 2-2980.
Assistant secretary.—Roger R. Phillips, 27 State Street, Boston, Mass., telephone Capital 0900.
Depositary.-—The Commercial National Bank & Trust Company of New York,
56 Wall Street, New York, N.Y.
Codepositary.—The National Rockland Bank of Boston, 30 Congress Street,
Boston, Mass.
STOCK EXCHANGE PRACTICES
1777
Until further notice the sum of $6 (which is approximately 4 percent of
current market value) will be allowed and paid to investment dealers, who are
active, for each debenture deposited through them, to cover their cost of assisting debenture holders in depositing with this committee, the same to be payable
immediately upon satisfactory proof of deposit.
ASSOCIATED GAS & ELECTRIC CO.,
New York, N.Y., June 19, 193S.
To debenture holders of Associated Gas & Electric Co.:
In a letter dated May 15, 1933, the management of Associated Gas & Electric
Co. proposed to its debenture holders a plan of rearrangement of capitalization,
which, in the opinion of the undersigned committee, takes away from the
debenture holders the legal and moral rights to which they are entitled. The
p]an proposes an exchange of your debentures under any one of three different
options.
The committee is informed that, in connection with the sale of many of the
company's debentures in recent years, it was generally stated that the,debentures were a direct obligation of the company, but not secured by a mortgage or
pledge, and that the company agreed not to pledge any of its properties without
ratably securing the holders of the debentures except in the case of a purchasemoney mortgage and liens and except in the case of pledges in the usual course
of business as security for temporary loans maturing not more than 1 year
from the date of issue, or indemnity not exceeding 1 year.
Associated Gas & Electric Co. was organized under the laws of the State of
New York in 1906 as a holding company and became the owner and holder of
large amounts of the capital stock of various utility operating companies, upon
which stock, it is claimed, the debenture holders of Associated Gas & Electric
Co. had a first claim for the payment of principal and interest.
Associated Gas & Electric Corporation was formed early in 1932 (being
successor through change of name to Associated Utilities Investing Corporation,
a Delaware corporation, which was originally organized in 1922), and immediately issued a large amount of 8-year 8-percent gold bonds, which became a
first claim upon all of the assets, as we understand it, of Associated Gas &
Electric Corporation.
Associated Gas & Electric Co. now proposes to exchange its issued and
outstanding debentures under the terms of the options above referred to for
debentures of Associated Gas & Electric Corporation, which, as explained
above, is an intermediate holding company controlled directly by Associated
Gas & Electric Co., the latter controlling all subsidiaries through the former.
We further understand that Associated Gas & Electric Co., on February 25,
1932, made it known that the only assets held by Associated Gas & Electric Co.
were the entire outstanding shares of Associated Gas & Electric Corporation
vyhich, in turn, controls directly or indirectly all companies making up Associated Gas & Electric system.
.As the proposition now stands, debenture holders of Associated Gas & Electric Co. are requested to exchange the debentures of that company, under the
terms of which they have a first claim on the assets of the company, for
debentures of Associated Gas & Electric Corporation, which would be junior,
as we understand it, to a large amount of 8-year 8 percent gold bonds. The
substitution of the debentures of the corporation for the debentures of the
company as offered under option (1) materially nullifies the restrictions mentioned in paragraph 2 above. Although such action may or may not be legal,
it seems to us that this move very clearly approaches a breach of faith. An
exchange under option (1) involves the giving up of 50 percent of principal
and interest and a consequent loss of this amount, without any sacrifice on
the part of stockholders, preferred or common, who stand to benefit tremendously when prosperity returns.
Under option (2), the holder who exchanges receives an income bond with
less coupon rate for an obligation with fixed interest. The holder who exchanges surrenders his legal rights to fixed interest and his rights to all the
equities of the company for breach of contract. These equities, with return
of prosperity, may become exceedingly valuable. It is to retain these valuable
equity rights that the company is seeking to effect this plan of " rearrangement of capitalization."
Under option (3) the holder who exchanges receives a debenture which may
become an income debenture, i.e., a debenture on which interest is paid only
if earned. The slight additional income offered is inconsequential compensation for the present holder giving up his right to a fixed interest payment
1778
STOCK EXCHANGE PBACTICES
and his right to take over all the assets of the company in the event of default
of contract. Debentures issued under this option have the further serious
objection that they rank junior to the debentures issued under options (1)
and (2). When the debentures issued under this option become income debentures, they are in effect nonvoting cumulative preferred stock. This option
completely vitiates the security now held.
To many debenture holders, investment bankers and banks, the abovementioned plan of " rearrangement of capitalization " seems not only extremely
unfair to the debenture holders, but entirely unprecedented and unjust. It was,
therefore, deemed necessary that a committee be formed to represent the
debenture holders in order that this inequitable plan may be prevented from
being enacted and/or in order to represent the debenture holders in forming a
just and equitable plan of " rearrangement of capitalization."
The committee feels that Associated Gas & Electric Company, either directly
or indirectly, owns valuable properties which should be kept intact and the
committee will use its best efforts to do so. While we are not in sympathy
with the company's financing operations, we would have no quarrel with the
above proposition if all securities now junior to these debentures were also
called upon to make some proper sacrifice, but that is not the case. All equity
securities remain as they are, including of course that portion of the equity
owned by those active in the management, and all sacrifices made by the present
debenture holders will, in the long run, accrue directly to the benefit of the
equity holders. This seems to us to be far from equitable. The committee
feels that the sacrifices which the debenture holders are called upon to make
and which are not shared in by the equity holders, is contrary to all precedent
as, to the best of our knowledge, information, and belief, in all other " rearrangements of capitalization," the equity holders have been called upon to
bear the brunt and to make the greater sacrifice.
The aim of the committee is to so represent the debenture holders that, in
any financial reorganization, they will receive a more equitable and just
interest in the new set-up than is provided for in the company's plan. If the
company's position is so serious that it is imperative for its preservation that
sacrifices be made, then the committee proposes to use their best endeavors
to see that the sacrifices are made by the junior security holders and not by
the debenture holders who occupy the senior position. If it should prove necessary for the debenture holders to sacrifice either a part of their principal or
a part of their income, then we believe they should be compensated for this
sacrifice by a substantial interest in the equity securities in the form of a
bonus.
This committee has a definite and fixed purpose and, as stated above, it aims
to so represent the debenture holders as to secure to them a fair, equitable, and
just return for the debentures which they now hold. The committee shall
endeavor, if possible, to obtain an independent audit of the books of the
company and to cooperate with the management in an amicable manner in the
arrangement of a plan, if it is found that a "rearrangement of capitalization"
is necessary. The committee is very much averse at this time to receivership
or other legal proceedings, feeling that, in order to safeguard the rights of
the debenture holders, an amicable adjustment of matters is more desirable
than litigation. Nevertheless, if it is necessary, the committee will not hesitate
to take such action, whether at law or in equity, as its counsel may deem fit
and proper in order that the rights of the debenture holders may be maintained
to the fullest extent, even though such litigation would involve receivership
None of the members of this committee or its counsel have ever been and
none are now in any way directly or indirectly connected with the company
or its management. The committee's sole interest is to extend to the Debenture
holders the maximum protection at this time when the safety and security of
their investment is threatened.
No money is asked with the deposit of debentures with this committee and
there are three matters of interest to debenture holders to which the committee
calls particular attention: First, the cost to debenture holders for all services
of the committee under the terms of its deposit agreement cannot exceed a sum
equal to more than 2% percent; second, no personal liability for any debt of the
committee can possibly attach to depositing debenture holders; and, third,
interest accruing on all deposited debentures will be paid to the depositor or
his successor in title if, as, and when such interest has been collected and, in
receiving the payment of such interest, it will not be necessary for debenture
holders to surrender or exhibit their certificates of deposit.
1779
STOCK EXCHANGE PRACTICES
For the convenience of the debenture holders depositing with this committee,
the depositary banks will collect interest when, as, and if paid on debentures
deposited with them, and mail to the depositing debenture holders a check for
such interest.
The object in the organization of this committee is to create a responsible
agency through which the debenture holders, who are so widely scattered
through the United States, Canada, and in other foreign countries, may act in
concert for the protection of their rights and interests. It is essential that
every debenture holder wishing to protect his interests through this committee
deposit his debentures as quickly as possible, using the letter of transmittal
attached to this .notice and sending the same directly to the depositary, codepositary, or one of the agents. Deposits of debentures will be received and
held by the depositary or codepositary subject to the terms and conditions of
the deposit agreement, copies of which are on file with the depositary, codepositary and their agents. A copy of the deposit agreement may be obtained
upon request from the secretary or assistant secretary of this committee, or
from the depositary, codepositary, or any of their agents. The depositary or
codepositary will issue transferable certificates of deposit to each depositor.
If you wish to avail yourself of the protection afforded by this committee, it is
important that you indicate the same by filling out the transmittal letter attached and sending it, together with your debetures, to one of the depositary
banks, or one of the agents at once. All those who deposit their debentures
with this committee will be kept informed as to the progress which is made in
their behalf.
W. A. NASH, Chairman,
HEX It. THOMPSON,
AMBROSE! W. BENKERT,
E. G. DlEFENBACH,
JOHN H. GALLOWAY, Jr.,
Committee.
Secretary.
TBANSMITTAL BLANK FOR DEPOSITING REFUNDING, GOLD AND/OR CONVERTIBLE
DEBENTURES OF ASSOCIATED GAS & ELECTRIC CO.
Depositary.—The Commercial National Bank & Trust Co. of New York, 5(>
Wall Street, New York, N.Y.
Codepositary.—The National Rockland Bank of Boston, 30 Congress Street,
Boston, Mass.
To the depositary or codepositary by which this letter is received:
GENTLEMEN : The undersigned hereby deposits with you as agent and deposi
tary under the deposit agreement, between W. A. Nash, Rex R. Thompson,
Ambrose W. Benkert, and E. G. Diefenbach, as a committee, and such holders
of the refunding, gold and/or convertible debentures of Associated Gas & Electric Co. as may become parties to the agreement by depositing their debentures
thereunder, a copy of which agreement is on deposit with you.
The undersigned hereby assents to all the provisions of said agreement and
becomes a party thereto, depositing herewith the following described debentures
of Associated Gas & Electric Co., all of which debentures so deposited are
specifically indicated below:
Denomination
Serial numbers
Maturity
Eate of interest
Coupons attached
Total amount
Please issue your certificate(s) of deposit for said securities in the following
name:
Name
Address
(Please type or print, using full name)
City or town
Very truly yours,
State
Number
Street
(Signature of depositor)
Deposits may be sent to the depositary or codepositary or any one of their
agents.
(See instructions on back hereof.)
1780
STOCK EXCHANGE PRACTICES
INSTRUCTIONS
Please fill out one letter of transmittal for each party depositing. Debentures should be sent, together with letter of transmittal, by registered mail to
the depositary, codepositary, or any one of their agents. Additional letters
of transmittal may be procured from the secretary of the committee or the
depositary, codepositary, or any one of their agents.
Registered debentures should be accompanied by appropriate assignments
executed in blank by the registered owner, whose signature should be guaranteed by a bank or trust company having a principal office or a correspondent
in New York City, or by a brokerage firm having membership on the New
York Stock Exchange. Assignments executed by fiduciaries should be accompanied with proper evidence of their authority to execute such assignments.
Assignments executed in behalf of corporations should be accompanied by
appropriate resolution of the board of directors or other evidence of proper
authority for such assignment.
STOCK EXCHANGE PEACTICES
TUESDAY, OCTOBER 10, 1933
UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON
BANKING AND CURRENCY,
Washington, D.C.
The subcommittee met, pursuant to adjournment on Friday, October 6, 1933, at 10 o'clock a.m. in the caucus room of the Senate Office
Building, Senator Duncan U. Fletcher, presiding.
Present: Senators Fletcher ("chairman), Adams (substitute for
Barkley and proxy for Costigan), Norbeck, Townsend, and Couzens.
Present also: Senators Goldsborough and Kean.
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver and David Saperstein, associate counsel to the committee; and
Frank J. Meehan, chief statistician to the committee; George S.
Franklin, Wallace P. Zachry, Warren Leslie, Walter G. Dunnington,
Clifton Murphy, John T. Cahill, and Bernhard Knollenberg, counsel for Dillon, Read & Co.; Boot, Clark, Buckner & Ballantine,
George H. Murphy, of counsel, counsel for United States & Foreign
Securities Corporation; and United States & International Securities Corporation.
The CHAIRMAN. The subcommittee will come to order. You may
proceed, Mr. Pecora. I believe Mr. Tracy is on the stand.
TESTIMONY OF EENEST B. TKACY—Besnmed
Mr. PECORA. Mr. Tracy, when you were last on the stand you were
asked if you could state who signed in behalf of United States &
International Securities Corporation the letter of July 13, 1929, with
relation to the so-called " railroad joint trading account " with Dillon,
Eead & Co. You said you would look it up for the information of
the subcommittee this morning.
Mr. TRACY. We have that, I think. (After consulting an associate.) I am told that Dillon, Read & Co. were unable to find the
original of that letter. I t was signed by one of the officers of the
company. Mr. Frank thinks he signed it as an officer of the company.
Mr. PECORA. Who managed that joint account?
Mr. TRACY. Well, we could not buy any securities without consulting Dillon, Read & Co., and they could not buy any without our
consent.
Mr. PECORA. Then there was a matter of joint management?
Mr. TRACY. Yes; joint management.
Mr. PECORA. What individual or individuals connected with your
investment trust looked after the investments that were made for that
account?
1781
1782
STOCK EXCHANGE PRACTICES
Mr. TRACY. The purchases?
Mr. PECORA. The purchases and sales, if any.
Mr. TRACY. Mr. Frank.
Mr. PECORA. Mr. Frank did that?
Mr. TRACY. Yes. To the best of my recollection he had charge
of all purchases.
Mr. PECORA. DO you know how much experience he has had as a
trader ?
Mr. TRACY. Well, I know he always carried on the execution of
orders very satisfactorily.
Mr. PECORA. HOW much money was furnished by the United
States & International Securities Corporation for the purpose of
that account?
Mr. TRACY. I will have to get for you the exact amount. (Consulting an associate.) I am told it is $14,261,000.
Mr. PECORA. And how many shares of railroad stocks were acquired by this joint account?
Mr. TRACY. Well, I will have to get the exact figure for you because there were quite a lot of them. (After securing a paper from
an associate.) The following securities were purchased by that
joint account, Mr. Pecora:
Twenty-seven thousand four hundred shares of Rock Island common at an
average price of $138.36.
Ten thousand shares of Pennsylvania Railroad Co. at $98.98.
Thirty-two thousand St. Louis & San Francisco common at $130.39.
Ten thousand shares of Southern Pacific Co. at $145.73.
Fifteen thousand three hundred shares of Southern Railway common at
$159.76.
One million nine hundred and eighty-seven thousand dollars par value Seaboard Air Line Railroad Co. adjustment 5s of 1949 at an average cost of
$52.09.
Five hundred thousand dollars par value Seaboard Air Line Railway Co.
consolidated 6s, 1945, at an average price of $71.65.
Mr. PECORA. This account was terminated I believe you said on
last Friday, on November 9, 1929.
Mr. TRACT. That is correct.
Mr. PECORA. HOW many shares of Rock Island Co. stock had been
acquired by that time for the purpose of this joint account?
Mr. TRACY. Twenty-seven thousand four hundred shares.
Mr. PECORA. In whose name were the purchases of these shares
made?
Mr. TRACY. All securities were delivered to us. We bought the
securities and kept them for the joint account.
Mr. PECORA. Which means the securities were purchased in the
name of the United States & International Securities Corporation?
Mr. TRACY. They were purchased by us. We had charge of them,
and we kept them, and kept them in the account.
Mr. PECORA. When you say they were purchased by you, do you
mean to say that the transactions were put through in the name of
United States & International Securities Corporation ?
Mr. TRACY. I will have to ask for information about that question.
I did not handle the account personally. I mean that I did not do
the buying.
STOCK EXCHANGE PRACTICES
1783
Mr. PECORA. Well, didn't you determine, or help to determine, as
the president of this corporation, the policy that was to be pursued
with regard to the operation of this joint account?
Mr. TRACY. I do not believe I understood your question, Mr.
Pecora.
Mr. PECORA. Well, will the committee reporter please read the
question. [Which was done.]
Mr. TRACY. Yes, sir; I did.
Mr. PECORA. Well, can't you
tell the committee whether or not
that joint account purchased those railroad stocks in the name of
your investment trust?
Mr. TRACY. I will have to look that up.
Mr. PECORA. All right, then.
Senator ADAMS. While that information is being looked up let
me ask: Mr. Tracy, were the stocks transferred to the name of the
investment trust?
Mr. TRACY. Well, I am not sure whether they were or not? I
will have to look that up.
Senator ADAMS. Was it your custom in the purchase of stock to
put them in the name of the investment trust?
Mr. TRACY. We usually put them in the name of the nominee,
Senator Adams.
Senator COUZENS. Who was the nominee in this case ?
Mr. TRACY. I will have to inquire. [After consulting an associate.] Mr. Pecora, I am told that those stocks went through the
usual course. The Chase Bank had the custodianship of the account
of the company.
Mr. PECORA. What was that ?
Mr. TRACY. The Chase Bank had the custodianship of the account,
and all securities were delivered to them, and they kept them for
our account. They put the securities in the name of their nominee.
Senator COTJZENS. And do you know who that was?
Mr. TRACY. I am not sure, but we think it was done in the name
of Blass & Co.
Mr. PECORA. Well
Senator COUZENS (interposing). Why don't we put Mr. Frank on
the stand if the witness has to get all the information from him
anyway ?
Mr. PECORA. I naturally assumed that the executive head of the
company would be able to tell us the details of these important transactions. But, apparently, he must rely on the superior knowledge or
recollection of subordinates.
Mr. TRACY. The securities were bought for us, Mr, Pecora. We
paid for them, and we had the holding of the securities. These are
all details of operation. I do not know how to sit in the room and
execute orders. I never do that.
Senator COUZENS. A S a matter of fact, would anyone who would be
buying those securities know who was making these purchases ?
Mr. TRACY. Anyone delivering it ?
Senator COTTZENS. I mean that no one could tell from that
handling of the securities who was actually buying, could he ?
Mr. TRACY. I shouldn't think so.
1784
STOCK EXCHANGE PRACTICES
Senator COUZENS. It was all covered up in the process of the
purchaser, the nominee, and so forth. Let us have on the stand
one who knows about it.
Mr. TRACY. That is our usual practice. We do that with
everything.
Senator COUZENS. I am not talking about your usual practice.
That is what we are trying to get at, the usual practice, and are
trying to break it up.
Mr. TRACY. I think the amounts that we were going to buy of
Frisco and Rock Island would have meant that the market probably would have gone up, and we would not have gotten them as
cheaply as we did.
Senator COUZENS. Then, the market is influenced more by who
is buying and selling than the actual value of the securities; isn't
that so ?
Mr. TRACY. I wouldn't say that.
Mr. PECORA. Well, now
Senator COUZENS (continuing). Well, you have just said that.
Mr. TRACY. I say they might have gone up, if people knew we
were buying.
Senator COUZENS. Then, buyers and sellers have more influence
upon the handling of the market than the real value of the securities themselves?
Mr. TRACY. Well, no; but
Senator COUZENS (continuing). Well, your answer admits that
when you say that, if it were known you were buying, those stocks
might have gone up.
Mr. TRACY. They might have.
Senator COUZENS. Well, everybody knows that anyway, so I will
not proceed further along that line.
Mr. PECORA. Mr. Tracy, when this joint account was terminated
November 9, 1929, it had to its credit 27,400 shares of Chicago, Rock
Island & Pacific Railway Co. common stock, didn't it?
Mr. TRACY. That is right, sir.
Mr. PECORA. And how much had been paid for that stock during
the operation of this joint account ?
Mr. TRACY. $3,791,593.99.
Mr. PECORA. NOW, all that money was advanced by the investment
trust of which you were president?
Mr. TRACY. Correct.
Mr. PECORA. And the stocks were delivered to the investment
trust?
Mr. TRACY. Correct.
Mr. PECORA. Well, if that was the case—
Senator COUZENS (interposing). Just a minute, Mr. Pecora.
They were first delivered to the nominee of the Chase Bank, as I
understand.
Mr. PECORA. They were delivered in that way, and then—
Mr. TRACY (interposing). They were delivered to the Chase
Bank, and the Chase Bank put them in the name of the nominee.
Mr. PECORA. When this joint account was terminated what was
done with those 27,400 shares of Rock Island stock ?
STOCK EXCHANGE PRACTICES
1785
Mr. TRACY. The securities company took half of them, and half of
them were delivered to Dillon, Read & Co. against payment.
Mr. PECORA. What payment did they make for their half of those
shares ?
Mr. TRACY. Whatever was their cost at the time.
Mr. PECORA. That is, one half of this sum of $3,791,593.99?
Mr. TRACY. Correct.
Mr. PECORA. Did they actually make that payment, or was it made
through a transfer of credit on the books of account?
Mr. TRACY. Well, I know they paid us for it. Whether they paid
it through a transfer of credit or not I do not know. Let me find out.
Mr. PECORA. HOW do you know whether they paid if you do not
know about that ?
Mr. TRACY. I should have to look that up. There isn't any question
about it, but just exactly how it was done, whether through a transfer or credit or by check, I do not know.
Mr. PECORA. We would like to know how it was done. However,
we are sure of that one thing, I take it, that the investment trust
paid out the full sum of $3,791,593.99 represented by the purchase
of those 27,400 shares, didn't it ?
Mr. TRACY. Yes, sir.
Mr. PECORA. Out of its own funds?
Mr. TRACY. That is correct.
Mr. PECORA. And when the joint account
was terminated November 9, 1929, it had in its possession 27,400 shares of Eock Island
stock, one half of which were delivered to Dillon, Read & Co.
against payment.
Mr. TRACY. Yes.
Mr. PECORA. NOW,
you were going to look up and tell us, as I
understood, what form the payment therefor took.
Mr. TRACY. We will have to go to the ledgers in order to look
that up.
Mr. PECORA. Did you have anything at all to do with the operation of this joint trading account?
Mr. TRACY. Anything to do with it?
Mr. PECORA. Yes; anything whatsoever to do with it.
Mr. TRACY. NO. They were told to purchase securities within
certain limits, and those securities when purchased for the account
were reported to the officers and directors.
Mr. PECORA. What were the limits that you refer to?
Mr. TRACY. It was on an income basis as I remember it. We bought
those securities I think to yield approximately 5% percent.
Mr. PECORA. Can you ascertain from any of your associates here
present how payment was made by Dillon, Read & Co. for one half
of those 27,400 shares of Rosk Island Railroad Co. stock ?
Mr. TRACY. That is what I am having looked up from the ledger.
Mr. PECORA. HOW long will it take you?
Mr. TRACY. We will get it just as quickly as we can for you.
Mr. PECORA. But how long will it take, so I may determine whether
it is advisable to wait for the answer or proceed with further
examination.
Mr. TRACY. It will take at least 15 minutes.
1786
STOCK EXCHANGE PRACTICES
Mr. PECORA. Well, will you have it done, and meanwhile I will
continue my examination of you.
Mr. TRACY. All right.
Mr. PECORA. NOW, Mr. Tracy, do you recall that when this joint
account was terminated on or about November 9, 1929, those 27,400
shares of Eock Island stock had sustained a rather severe depreciation of market value?
Mr. TRACY. The market had gone off; yes.
Mr. PECORA. And can you tell the subcommittee about what loss
had been sustained on paper by reason of such depreciation?
Mr. TRACY. In the case of the Eock Island stock?
Mr. PECORA. Yes, sir.
Mr. TRACY. Let me get
what the price was. [After consulting an
associate.] They are trying to look up the market price as of that
date, Mr. Pecora.
Mr. PECORA. While they are looking that up I will resume my
examination.
Do you know what Dillon, Eead & Co. did with their half of the
27,400 shares of common stock of the Chicago, Eock Island & Pacific
Eailway Co. that were turned over to them on November 9, 1929 ?
Mr. TRACY. What did they do with it?
Mr. PECORA. Yes.
Mr. TRACY. Yes.
Mr. PECORA. What?
Mr. TRACY. I t was bought
by the United States & Foreign Securities Co.
Mr. PECORA. That is the other investment trust of which you were
then also the president?
Mr. TRACY. Surely.
Mr. PECORA. For what price?
Mr. TRACY (addressing one of his associates). Have you got the
price on that? It was 114%. I t was the market price.
Mr. PECORA. The market price as of what date?
Mr. TRACY. AS of the date of the transaction.
Mr. PECORA. Were you consulted, as president of the United States
& Foreign Securities Corporation, with regard to that transaction
before it was consummated?
Mr. TRACY. Was I? Of course I was.
Mr. PECORA. With whom did you confer about it?
Mr. TRACY. I conferred with practically all the directors that I
could reach at that time.
Mr. PECORA. Among those directors there were gentlemen who
were partners in the firm of Dillon, Eead & Co., were there not?
Mr. TRACY. We wanted to buy railroad securities and we saw an
opportunity of buying these blocks.
Mr. PECORA. YOU thought it was a good opportunity for the investment trust?
Mr. TRACY. Indeed I did; we all did.
Mr. PECORA. Have you got the minutes of the United States &
Foreign Securities Corporation; that is, the minute book of the
board of directors for the year 1929, and particularly that portion
of it that includes the month of November?
Mr. TRACY. I will get that right away for you.
STOCK EXCHANGE PRACTICES
1787
The CHAIRMAN. Were the shares of your second trust transferred over to the first trust?
Mr. TRACY. At that time?
The CHAIRMAN. Yes, sir.
Mr. TRACY. NO, sir.
The CHAIRMAN. What did you do with those
Mr. TRACY. We still have them.
Senator ADAMS. HOW did the price at which
shares?
Dillon, Kead & Co.
purchase its half of the stock compare with the price at which the
stock was turned over to the United States & Foreign Securities
Corporation ?
Mr. TRACY, We bought this block for the United States & Foreign Securities Corporation at 114^4. It had cost them about 138.
Senator ADAMS. There was a loss to Dillon, Eead & Co. on the
transaction ?.
Mr. TRACY. Evidently; yes.
Mr. PECORA. When was that transaction effected ?
Mr. TRACY (after conferring with associates). November 11.
Mr. PECORA. That was 2 days after the termination of the joint
trading account?
Mr. TRACY. Eight.
Mr. PECORA. Have you succeeded in finding the minute book of
the United States & Foreign Securities Corporation for the year
1929?
Mr. TRACY. Yes, sir; I have it here in front of me.
Mr. PECORA. May I look at it?
(The witness handed book to Mr. Pecora.)
The CHAIRMAN. HOW much would that loss of 24 points amount
to in dollars and cents, Mr. Tracy?
Mr. TRACY (after a calculation). I make it $328,800.
Mr. PECORA. Mr. Tracy, looking through the minute book of the
United States & Foreign Securities Corporation which you have
handed me—and the one which you have handed me is marked
•" Volume 3 "—I notice that a meeting of the board of directors of
that corporation was held, according to the minutes, on October 9,
1929, and that the next meeting of the board of directors was hfeld
on November 13, 1929. It would seem, therefore, that this transaction whereby the United States & Foreign Securities Corporation
acquired these shares of the Rock Island road from Dillon, Eead &
Co. at 114-plus was consummated between those two meetings, or
between the dates of those two meetings of the board of directors.
What consultation did you have with members of the board of directors about that transaction before it was consummated?
Mr. TRACY. I discussed it with all members of the board that I
could reach at that time.
Mr. PECORA. Whom did you reach?
Mr. TRACY. I do not remember, but it was my practice to get in
touch with as many members of the board on all transactions as I
could reach; and at that period it was pretty hard to get hold of
some people. I had to either get hold of them at night or early in
the morning, at breakfast—if you remember the period in question.
Mr. PECORA. Who were the most active directors of the company
at that time ?
175541—33—PT 4
17
1788
STOCK EXCHANGE PRACTICES
Mr. TRACY. The most active ?
Mr. PECORA. Yes.
Mr. TRACY. Mr. Dillon was very
active; I was very active; Mr.
Ecker was very active, and Mr. Murphy—they were all very active
in that period.
Mr. PECORA. Was Mr. Phillips very active ?
Mr. TRACY. Yes.
Senator ADAMS. That
was a period of rather rapidly declining
markets, was it not ?
Mr. TRACY. Yes. I think there was one low on November 15 when
everybody thought we had hit the bottom of the market.
Mr. PECORA. Who first proposed that the United States & Foreign Securities Corporation purchase these railroad shares from
Dillon, Read & Co. at that time ? What I am trying to get at, Mr.
Tracy, is to find out the course of the negotiations that culminated
in this transaction. Who initiated them, and who conducted them
on behalf of the contracting parties ?
Mr. TRACY. I do not know. I do know we all wanted to buy railroad securities.
Mr. PECORA. Even after the stock market collapsed in October
1929 you all wanted to buy railroad securities ?
Mr. TRACY. We wanted to buy railroad securities.
Mr. PECORA. In the open market?
Mr. TRACY. In the open market or in a block, if we could get them.
Mr. PECORA. Who proposed this particular transaction that was
had with Dillon, Read & Co. by* your investment corporation ?
Mr. TRACY. I do not remember who proposed it in particular.
I know I did a lot of talking about it.
Mr. PECORA. The idea started with somebody, didn't it?
Mr. TRACY. We wanted to buy railroad securities
Mr. PECORA. When you say " we ", whom are you referring to ?
Mr. TRACY. I am referring to the securities company.
Mr. PECORA. YOU are referring to certain individuals connected
with the securities company, are you not?
Mr. TRACY. I am referring to the directors of the securities company.
Mr. PECORA. With which of the directors did you discuss the matter of acquiring these .shares from Dillion, Reed & Co. ?
Mr. TRACY. I do not remember any particular one, but I undoubtedly consulted Mr. Murphy and Mr. Ecker, and whoever was
available. I always got in touch with every one of the directors
that I could reach.
Senator COUZENS. Then this evidently did not originate in the
mind of any of the directors that you had to call up?
Mr. TRACY. We wanted to buy railroad securities; we were looking
for them.
Senator COTTZENS. But this particular deal, before it went through,
must have originated, as Mr. Pecora says, in somebody's mind. It
could not have originated in the minds of those directors whom you
called up, otherwise you would not have had to call them up. I t
must have originated in yours, or somebody else's; otherwise you
would not have had to consult with those directors.
Mr. TRACY. YOU see, the directors of both companies, Senator^
knew that we had a joint account to purchase railroad securities.
STOCK EXCHANGE PRACTICES
1789
and it was discussed at the meeting of the United States & International Securities Corporation and also the meeting of the board
of the United States & Foreign Securities Corporation. They
both knew of that account, and we wanted to buy more railroad
securities. We discussed it among the officers; but I do not know
whether I suggested it originally, or who it was, to purchase those
two blocks from Dillon, Eead <& Co. Those were the only ones
we wanted—the Eock Island and the Frisco. As I told you the
last time I was on the stand, we had an exhaustive report made on
those two companies.
Senator COUZENS. Have you copies of those reports available!
Mr. TRACY. I have those two reports here; and I think you will
find them very complete and elaborate, and I would like to have
them made a part of the record.
Mr. PECORA. I was just wondering what this witness could tell
the committee in the course of his testimony
Senator COUZENS. May I suggest that these be left for the consideration of the committee as to whether we will put them in the
record or not?
Mr. PECORA. I would like to look at them.
The CHAIRMAN. Without objection, that will be the course
followed.
Mr. TRACY. They are voluminous and full of charts and figures.
The CHAIRMAN. The committee will take care of them, Mr. Tracy,
Mr. PECORA. Mr. Tracy, I have before me the minutes of the
regular meeting of the board of directors of the United States &
Foreign Securities Corporation which was held on November IS,
1929. That date was after the consummation of the transaction
whereby the United States & Foreign Securities Corporation acquired from Dillon, Eead & Co. their half of these Eock Island
shares that were purchased in the joint account; and in reading
through these minutes, Mr. Tracy, I find absolutely no mention
in any way, shape, or form of this important transaction that had
already been consummated prior to the holding of this meeting.
Can you account for that?
Mr. TRACY. Will you let me look through those ?
Mr. PECORA. Yes, sir [handing minute book to the witness].
Senator COUZENS. Mr. Pecora, do you recall when this trading
agreement was presented?
Mr. PECORA. July 13, 1929.
Senator COUZENS. I observe that the report of the St. Louis <&
San Francisco Eailroad Co. is dated September 6, 1929. That was
much later than the time the trading agreement was entered into.
Mr. TRACY. That was being made during the entire summer, and
we had reports on it from time to time.
Senator COUZENS. The report on the Eock Island was not made
until August 20, 1929, long after the trading agreement was entered
into.
The CHAIRMAN. What is the present market on the Eock Island
shares ?
Mr. TRACY. It is a nominal figure, Mr. Chairman, because the
road is in receivership.
Now, Mr. Pecora, I would like to read to you from the Trade and
Securities Service, Standard Statistics Co., dated October 4,1929
1790
STOCK EXCHANGE PRACTICES
Mr. PECORA. Before you read that will you answer the question
that I put to you concerning the reason for the absence of any mention in the •meeting of the board of directors held on November 13,
1929, of this important transaction whereby the United States &
Foreign Securities Corporation acquired thousands of shares of
Rock Island stock from Dillon, Eead & Co. ?
Mr. TRACY. The treasurer's report for the month of November,
which contains all that information, is in the directors' report for
the month of December. The transactions of the preceding month
are always reported at the meeting held in the following month.
That is our usual procedure.
Mr. PECORA. IS there anything in the minutes of any meeting of
the board held at any time after November 11, 1929, that contains
any reference to the negotiations whereby the United States & Foreign Securities Corporation acquired from Dillon, Eead & Co. these
railroad shares on November 11, 1929 ?
Mr. TRACY. NO ; there is simply the statement that we had bought
those securities in the usual way, our usual form of reporting it.
Mr. PECORA. IS there anything in the minute book, any mention
or a record of any authority having been given by the board of
directors to this corporation to enter into this transaction with
Dillon, Read & Co.?
Mr. TRACY. N O ; I do not think there is, and I do not think there
would be.
Mr. PECORA. Why don't you think there would be? Did you not
think the transactions were important enough to be brought specifically to the notice of the board of directors and their consent
obtained before the transactions were consummated ?
Mr. TRACY. We had all decided that we wanted to buy railroad
securities.
Mr. PECORA. When had you made that decision?
Mr. TRACY. All through the summer. That summer railroad securities were considered the best securities to buy.
Mr. PECORA. Did you adhere to that decision after October 1929?
Mr. TRACY. Yes, sir.
Mr. PECORA. Particularly
after the collapse of security values in
the stock market that that month brought about ?
Mr. TRACY. Yes. If you will permit me to read from this, which is
the opinion of Standard Statistics, who have a very high standing,
I think it will be of interest to you
Mr. PECORA. Just wait. We will get that into the record.
Mr. TRACY. I will give you the opinion of somebody else other
than ourselves.
Mr. PECORA. IS it an opinion that influenced your judgment?
Mr. TRACY. It did not.
Mr. PECORA. Then do not
give it to us. We want to know what
you acted upon, not what somebody else may have thought, independently of you.
Mr. TRACY. I simply want to show you what other people thought
of railroad securities at that time; and I think, in fairness, you ought
to let me quote this.
Mr. PECORA. If it did not influence you, it had nothing to do with
your transaction; and if you did not know of those opinions at that
time, they had nothing to do with it.
STOCK EXCHANGE PRACTICES
1791
Mr. TRACY. I did know of them at that time.
Mr. PECORA. I thought you said you did not.
Mr. TRACY. I said I did not think it influenced me; but I did know
of them.
Mr. PECORA. In your conferences with representatives of Dillon,
Eead & Co. did they indicate that the}^ had an opinion similar to
yours about the wisdom of acquiring railroad shares at that time?
Mr. TRACY. I know that they believed in railroad shares at that
time.
Mr. PECORA. If they believed in railroad shares at that time, will
you explain why they parted with their railroad shares at that time
to vour investment trust ?
Mr. TRACY. That I don't know.
Mr. PECORA. YOU thought they were gentlemen whose judgment
was worth something with regard to securities values, did you not?
Mr. TRACY. Their judgment was worth a good deal, which the
record shows.
Mr. PECORA. Did it strike you at any time during those transactions
back in November 1929 that it might be unwise for your investment
trust to take on these railroad shares, in view of the fact that Dillon,
Eead & Co., a company whose judgment you thought a great deal of,
held an opinion apparently to the effect that they ought to sell their
railroad shares?
Mr. TRACY. I do not know anything about their reasons at that
time. I know we had a lot of money that we wanted to invest, and
we thought those securities were good investments, and that is why
we purchased them.
Mr. PECORA. When you testified last week I asked, or Chairman
Fletcher asked, at page 502 of the reporter's minutes, referring to
this joint account, who composed it, and it was stated, Dillon, Read
& Co. and the investment trust in equal shares; each had a
50-percent interest, and you said, " We wanted to buy railroad
securities. We formed this account with Dillon, Eead & Co. to buy
railroad securities. They wanted to buy railroad securities also."
You meant Dillon, Eead & Co. when you used the pronoun " they "
in that answer, did you not ?
Mr. TRACY. Correct.
Mr. PECORA. SO that during the summer and fall of 1929 your
directors and Dillon, Eead & Co. were of one mind about the wisdom of buying railroad shares?
Mr. TRACY. Yes, sir; and a great many other people were, too.
Mr. PECORA. We are concerned now with the operation of your
mind, not that of a great many other people; and you can shorten
this examination by confining yourself to your own activities.
Mr. TRACY. I want to help you as much as I can.
Mr. PECORA. I think you will give us a real contribution in that
way, by confining yourself to your activities, not anyone else's.
Now, when did Dillon, Eead & Co. indicate that they had changed
their minds about the wisdom or the advisability of acquiring railroad shares?
Mr. TRACY. I don't know when it was. I know we wanted to buy
railroad securities. We knew that those blocks were owned by
Dillon, Eead & Co., and we asked them whether they would sell them
1792
STOCK EXCHANGE PRACTICES
to us. We only wanted the Rock Island and the Frisco; not the
others.
Mr. PECORA. TWO days after the distribution of the railroad shares
that had been accumulated for this joint account, somebody in your
company knowing that Dillon, Read & Co. had, through this joint
account, acquired these railroad shares, went to Dillon, Read & Co.,
and asked them if they wanted to sell?
Mr. TRACY. Yes; we wanted to acquire more railroad securities.
Mr. PECORA. With whom did you confer between November 9 and
November 11, 1929, with regard to buying these railroad shares from
Dillon, Read & Co. ? Can you not tell us ?
Mr. TRACY. NO; I do not remember whom we conferred with. I
might have conferred with any one of the partners of Dillon, Read
& Co.
Mr. PECORA. Whom did you confer with, as a matter of fact ?
Mr. TRACY. I do not remember. It does not make any difference,
as I see it, which one I conferred with.
Mr. PECORA. Did you make a proposal to them in writing to buy
several million dollars' worth of railroad shares from them ?
Mr. TRACY. NO ; I did not.
Mr. PECORA. What bargaining
did you do with them in the matter
of price, if anything?
Mr. TRACY. The price on the market.
Mr. PECORA. Whom did you take up negotiations with on behalf of
Dillon, Read & Co.?
Mr. TRACY. Who in Dillon, Read & Co.?
^
Mr. PECORA. Yes.
Mr. TRACY. I told
you I did not remember. It might have been
any one of the partners.
Mr. PECORA. Who took it up at your request with any one of the
partners ?
Mr. TRACY. I know I discussed it with some of them, and I called
up the directors and discussed it with them, and they were all of the
same opinion, that it was a good opportunity to acquire a block of
railroad securities. We did not want the other securities in the
account.
Mr. PECORA. YOU did not want the other railroad securities in the
account ?
Mr. TRACY. NO.
Mr. PECORA. Why not ?
Mr. TRACY. The directors did not want them; that
Mr. PECORA. Did they give any reason ?
Mr. TRACY. I cannot give you the reason.
Mr. PECORA. Apparently up to this time the directors
is all.
of your trust
were keen about acquiring railroad shares?
Mr. TRACY. We had been, but we thought it was best to have
those two.
Mr. PECORA. YOU did acquire a variety of shares of railroad stock
for the purposes of this joint account between July and November
1929, did you not?
Mr. TRACY. Correct.
Mr. PECORA. TWO days after the termination of the joint account
with the distribution of the acquired shares to the participants we
STOCK EXCHANGE PRACTICES
1793
see that your investment trust, the first one, United States & Foreign,
bought back from Dillon, Eead & Co. not all of the railroad shares
that had been the subject of the joint trading account, but only
two issues, the Chicago, Rock Island & Pacific and the St. Louis
& San Francisco?
Mr. TRACY. That is right.
Mr. PECORA. Why were not any of the other railroad shares purchased from Dillon, Read & Co. that had been acquired for the joint
account ?
Mr. TRACY. I believe we already owned a substantial amount of
securities.
Mr. PECORA. YOU already owned substantial blocks of these two
railroad securities, did you not?
Mr. TRACY. I would have to look up and see how much we had
in the United States & Foreign Securities Corporation.
Senator COUZENS. Was Mr. Hayden of your company one of those
consulted with respect to the purchase of the Rock Island shares
from Dillon, Read & Co. ?
Mr. TRACY. NO ; he is on the board of the United States & International Securities Corporation.
Senator COUZENS. He i(s not on the other board?
Mr. TRACY. NO, sir; he is not on the other board. I will have to
look that up, but I am pretty sure we did not have any Rock Island
or Frisco in the United States & Foreign Securities Corporation at
that time.
Mr. PECORA. Why did you not acquire the other railroad shares
from Dillon, Read & Co. if you thought it was an advisable and
wise thing for this investment trust in that market to buy large
blocks of railroad stock?
Mr. TRACY. I would have to look up our railroad list before I
could answer that.
Mr. PECORA. YOU seemed quite anxious to put into the record some
opinion expressed by somebody else, a printed copy of which you
have in your hands. What is that opinion ?
Mr. TRACY. This is the Industries Section of Standard Trade and
Securities Service, and it is
Senator COUZENS. Who compose that company?
Mr. TRACY. It is a very well known statistical service, Senator.
Senator COUZENS. Yes; but who runs it? Who owns it?
Mr. TRACY. Who owns it?
Senator COUZENS. Yes.
Mr. TRACY. I do not know who owns it.
Senator COUZENS. The title does not mean anything to me, unless
I know who the gentlemen are that operate the Standard Statistics.
Mr. TRACY. I cannot give you that information, but I can tell
you that this is a service that practically everybody in the financial
district subscribes to.
Senator COUZENS. That may be so.
Mr. PECORA. Who operate that service ? What persons operate it ?
Mr. TRACY. I do not know the people in the company.
Mr. PECORA. Then you are taking the judgment of someone whom
you do not even know, are you ?
1794
STOCK EXCHANGE PRACTICES
Mr. TRACY. I will tell you it is well known. It is an accepted
service, quoted in all the newspapers, and Mr. Ross and Mr. Meehan
will tell you it is as good as any service given in New York.
Mr. PECORA. Mr. Boss and Mr. Meehan are doing excellent work
as members of the investigating staff of this committee, but they are
not operating investment trusts, and I cannot ask them about these
transactions; they had nothing to do with them.
Senator COUZENS. It is important to know—and that is what the
committee is trying to get at—who influenced these opinions that you
are so anxious to quote. Just who are the men that make that up?
Mr. TRACY. I know nobody in the organization.
Senator GOUZENS. Then I want to say to the committee that that
opinion is not worth anything. If we do not know who makes up
the opinion, the opinion is not worth a thing to this committee.
Unless we know who makes up the opinion, the mere name of " Standard " does not mean anything. The men who influenced this opinion are the important facts for this committee to know. I do not
see what benefit it has if we do not know who makes up the opinion
and who influenced the opinion.
The CHAIRMAN. The committee can, of course, attach such importance to it as it sees fit, but I think there is no objection to
having it go into the record for what it is worth. I think he may
read it.
Mr. TRACY. Thank you, sir. It is dated October 4, 1929
Mr. PECORA. That was before the first big collapse in securities
values on the exchange, was it not ?
Mr. TRACY. Yes; the market had gone down considerably at that
time.
Mr. PECORA. But nothing compared with what happened after
October 4?
Mr.
TRACY. NO.
Mr. PECORA. GO ahead.
Mr. TRACY (reading) :
For the past two years the rail shares as a class have been priced at an
average basis of about twelve and a half times earnings. Seldom has the rail
price average deviated very far from such a valuation. The recent sharp
decline of these issues, however, in sympathy with the rest of the market
has greatly strengthened their price position. Beyond question more real
investment bargains can now be found among the rails than in any other
section of the list.
And further, in speaking of the Western Trunk Line rate increase, they point out the railroads that will profit by that, and in
their calculations they say:
Seven roads were found to lie wholly within the Western Trunk Line territory. The greatest benefit, however, accrues to those roads which, in relation
to their total stock outstanding, have the largest proportion of traffic moving
under class rates within that territory. The largest increase in revenues would
accrue to Burlington and Chicago & Northwestern, but when translated into
share earnings, other roads are found to fare better, as shown in the following
table:
On the basis of share earnings, Rock Island stockholders benefit most while
among the larger roads Chicago & Northwestern comes next.
Mr. PECORA. These two roads happen to be in bankruptcy or receivership, do they not, Mr. Tracy?
Mr. TRACY. Yes.
STOCK EXCHANGE PRACTICES
1795
Mr. PECORA. The Chicago, Eock Island & Pacific and the St. Louis
& San Francisco both happen to be in receivership today ?
Mr. TRACY. Yes, sir.
Mr. PECORA. And their stock has only a nominal value?
Mr. TRACY. That is correct.
Mr. PECORA. And those were the two stocks that you singled
out as
being primary railroad stocks to buy in November 192$?
Mr. TRACY. That is correct.
Mr. PECORA. YOU did not want the other railroad stocks that had
been acquired through this joint account with Dillon, Read & Co.?
Mr. TRACY. I told you, Mr. Pecora, that we would have to look
up to see what we owned of other railway stocks. I think we owned
a great many other railway stocks at that time.
Mr. PECORA. AS a matter of fact, do you not know that at that
very time your investment trust, the United States & Foreign
Securities Corporation, had a block of 4,000 shares of Chicago,
Rock Island & Pacific Railway Co. in its portfolio ?
Mr. TRACY. We may have had a small amount. I will have to
look that up.
Mr. PECORA. IS 4,000 shares a small amount?
Mr. TRACY. For a company of that size; yes.
Mr. PECORA. DO you remember what it had paid for those 4,000
shares ?
Mr. TRACY. I will have to look that up.
Mr. PECORA. Well, my men have looked it up for you, and the
amount is $552,500; and you consider that a small block, do you,
for an investment trust like the United States & Foreign Securities
Corporation ?
Mr. TRACY. That is not a small investment; no. Mr. Pecora, I
would like to point out to the committee, with your permission,
the range of the price of the stock of the Rock Island after we
purchased it, and the volume of sales.
Mr. PECORA. Over what period of time.
Mr. TRACY. I would like to give it any time up to April 18. I
have got it here.
Mr. PECORA. DO you mean beginning with November 11, 1929 ?
Mr. TRACY. Beginning with November 1, 1929.
Mr. PECORA. Can you not give us the range instead of giving
us the daily quotations?
Mr. TRACY. Beginning with November 9: High 115; low 101.
Mr. PECORA. NO ; can you not give us the range between high and
low over that period of time?
Mr. TRACY. Over this period of time from November 1 to April
18 the high was 125% in the week of February 8-14, and the low
was 101 on November 15, and the total sales were 117,000 shares.
Mr. PECORA. The first date that you mentioned was November
1, I believe, 1929?
Mr. TRACY. Yes.
Mr. PECORA. What was the range on that date in
Mr. TRACY. November 1 to November 8 was
Mr. PECORA. NO; on November 1. That one day.
Mr. TRACY. Well, I have not got it that one day.
the market?
1796
STOCK EXCHANGE PRACTICES
Mr. PECORA. What was the range for the week?
Mr. TRACY. The range for the week?
Mr. PECORA. Yes.
Mr. TRACY. High
is 125, and the low 112%, and the volume 16,000
shares.
Mr. PECORA. May I look at that sheet?
Mr. TRACY. Certainly. [Handling same to Mr. Pecora.]
Mr. PECORA. The range as I get it from the sheet that you have
given me for the week of November 9 to 15 was a low of 101 to a high
of 115; is that correct?
Mr. TRACY. Correct.
Mr. PECORA. That is a pretty substantial range, is it not, for a
week's time ?
Mr. TRAOY. Not in that week, Mr. Pecora.
Mr. PECORA. DO you mean by that that that week witnessed an
unusual amount and kind of trading among railroad stocks ?
Mr. TRACY. One thing that I remember very distinctly about that
week is that November 15 was a very bad day.
Mr. PECORA. DO you mean that at that particular period of time
security values were undergoing sharp fluctuations from day to day?
Mr. TRACY. Yes. Tremendous volume of sales.
Mr. PECORA. Yes. And did you think that under those circumstances it was wise for your investment trust to invest large sums of
money in securities that were undergoing these sharp fluctuations
from day to day ?
M. TRACY. Yes; we did. As I told you before, Mr. Pecora, we
wanted to buy railroad securities. And I want the committee to
know that the Rock Island earned $2.70 in the month of October of
that year, which we knew when we bought these securities.
Mr. PECORA. And we see that during the second week of that
month, and in fact during the very week in which you had this transaction with Dillon, Read & Co., the market ranged from 101 to 115
in this security.
Mr. TRACY. That is correct. And stibsequently sold at 125.
Mr. PECORA. And you thought it was wise at that time for an investment trust to put its funds in securities that were the subject
of such wild or sharp fluctuations ?
Mr. TRACY. We certainly did, as I told you, Mr. Pecora, and that
is why we bought it. And with your permission I would like to
make this price range and the volume of sales a part of the record.
Mr. PECORA. Yes. Put it in evidence.
The CHAIRMAN. Let it be received in evidence and spread upon
the record.
(Chart containing high and low, as well as volume of sales of
Chicago, Rock Island & Pacific common stock between November 1,
1929 and April 18, 1930, was received in evidence, marked " Committee Exhibit 17 of October 10, 1933," and is here printed in the record
in full as follows:)
1797
STOCK EXCHANGE PRACTICES
COMMITTEE EXHIBIT NO. 17, OCT. 10,
1929
Chicago, Rock Island & Pacific
Ry. Co., common:
Nov. 1-8
_.
Nov. 9-15
Nov. 16-22.,___
Nov. 23-29
Nov. 30-Dec. 6_
Dec. 7-13
Dec. 14-20
Dec. 21-27
Dec. 28-Jan. 3..
Jan. 4-10
Jan. 11-17
Jan. 18-24
High
125
115
11934
122
i2iy2
120H
H6M
II8J/2
118
Low
1123^
101
117
115%
1173^>
113
112
UV/s
114
1153^
1163^2
Volume
16,000
16,700
7,500
2,200
5,800
6,700
5,700
4,000
2,900
1,500
4,200
2,800
1930
Chicago, Rock Island & Pacific
Ry. Co., common—Continued.
Jan. 25-31
Feb. 1-7
Feb. 8-14
Feb. 15-21
Feb. 22-28
Mar. 1-7
Mar. 8-14
Mar. 15-21
Mar. 22-28
Mar. 29-Apr. 4_
Apr. 5-11
Apr. 12-18
1933
High
119%
120^1
125^
12134
Low
117
119%
120
115H
120
118
119H
H7M
017%
122
124
1243^
120
122
122
118^4
118K
Volume
3,200
4,800
8,300
1,800
1,600
3,600
1,600
6,800
3,200
1,500
3,800
8,000
117,000
Mr. PECORA. May I have that sheet that the witness just asked to
have spread on the record. First, let me ask you: Who compiled
the data shown on this sheet that has been marked " Committee
exhibit 17"?
Mr. TRACY. The Keswick Corporation.
Mr. PECORA. When?
Mr. TRACY. Yesterday, I would say.
Mr. PECORA. YOU observe that according to committee exhibit 17,
which was prepared yesterday by the Keswick Corporation, the
total week's volume of transactions in the open market in the common
shares of the Chicago, Rock Island & Pacific Railway Co., was
16,700 shares.
Mr. TRACY. I will accept your statement.
Mr. PECORA. And that the range at which they sold was from a
low of 101 to a high of 115; is that right ?
Mr. TRACY. That is correct.
Mr. PECORA. On November the 11th, which is included in this
week, your investment trust purchased 13,700 shares of this stock
from Dillon, Read & Co., did it not?
Mr. TRACY. Correct.
Mr. PECORA. At a price of 114 plus ?
Mr. TRACY. That was the average market price.
Mr. PECORA. And that happened to be pretty nearly the high for
that week?
Mr. TRACY. If that says so. But that was the market price on the
date the sale was made.
Mr. PECORA. But I am basing my conclusion on the assumption
that these figures compiled by the Keswick Corporation yesterday
are accurate. On that assumption the price at which your investment trust took over these 13,700 shares from Dillon, Read & Co.,
on November 11, happens to be very nearly the high for that week.
Mr. TRACY. That is correct.
Mr. PECORA. That is pure coincidence, of course, is it not?
Mr. TRACY. A S I remember it that was the low week in that particular panic.
1798
STOCK EXCHANGE PRACTICES
Mr. PECORA. Oh, was there a panic that week, too ?
Mr. TRACY. I think there was a panic going on all that time.
Mr. PECORA. Well, that.week it was especially violent?
Mr. TRACY. The latter part of the week was fairly violent, as I
remember it.
Mr. PECORA. And your judgment as a director and as president
of this investment trust was that it was a good thing to buy 13,700
shares of one railroad security during a panic week?
Mr. TRACY. Yes, sir.
Senator COTTZENS. Mr.
Pecora, may I draw your attention to the
report on the Rock Island Lines by Coverdale & Colpitts, page 121,
where it says:
We regard as an element of great strength to the company—
that is, the Rock Island—
the fact that its affairs are presided over by Mr. Charles Hayden as ciiairman
of the board, Mr. E. M. Brown as chairman of the executive committee, and
Mr. J. E. Gorman as president.
I should imagine that had some influence in their purchase of
these securities.
Mr. PECORA. Mr. Charles Hayden at that time was a director of the
United States & International Securities Corporation, was he not?
Mr. TRACY. Correct.
Senator COUZENS. But both investment trusts were controlled by
the Dillon, Read & Co. interests.
Mr. PECORA. Yes. The record is already replete with considerable
evidence on that.
Senator COUZENS. Yes.
Mr. TRACY. I think it would be fair, Mr. Pecora, to give the range
by weeks subsequent to that purchase, so that the gentlemen of the
committee will know
Mr. PECORA. Wait a minute, Mr. Tracy. You did not buy these
shares from Dillon, Read & Co. on November 11 because of what
you knew was going to happen in the weeks to follow, did you ?
Mr. TRACY. Because we believed they were a good purchase at the
time we purchased them.
Mr. PECORA. All right. You told us that. But that belief was
not based upon any preknowledge of what was going to happen in
the weeks to come ?
Mr. TRACY. NO. We do not profess to any preknowledge.
Mr. PECORA. Then there is no sense in putting that in.
Mr. TRACY. But the price of the stock went up; it did sell considerably higher after we had made that purchase.
Mr. PECORA. All right.
Mr. TRACY. Mr. Pecora, may I ask you something? You asked
me why we did not want to buy the other securities that were in
that account.
Mr. PECORA. The other railroad securities that were in the account.
Mr. TRACY. Yes. The list of railroad stocks that we had on that
day already in our portfolio included: 5,000 shares of Atchison,
Topeka & Santa Fe; 1,000,000 marks of Deutsche Reichsfyahn, 7 percent preferred stock; 10,000 shares of Pennsylvania Railroad; 1,000
shares of Pere Marquette; 10,000 shares of Southern Pacific Co.;
STOCK EXCHANGE PRACTICES
1799
10,000 shares of Southern Eailway Co.; and 8,000 shares of Union
Pacific Eailroad Co.
Mr. PECORA. While we are going back to the questioning of a few
minutes ago, have your associates succeeded in supplying you with
the definite information as to the form of payment that was made by
Dillon, Eead & Co. when this joint trading account was terminated
on November 9 ?
Mr. TRACY. They have not been able to get it yet, Mr. Pecora.
Mr. PECORA. Well, they were to get it in 15 mintues, and half an
hour has passed now.
Mr. TRACY. They said they thought they could get it in 15 minutes.
They have gone back to the hotel to get it for me, Mr. Pecora.
Mr. PECORA. All right. You regarded the funds of these two investment trusts of which you were president at that time as trust
funds?
Mr. TRACY. We were responsible to the stockholders for the investment of their money.
Mr. PECORA. And you regarded them in that sense as trust funds
committed to your care and custody for investment and reinvestment?
Mr. TRACY. Correct.
Mr. PECORA. And you regarded yourself as a trustee for the stockholders of these two investment trusts, did you not ?
Mr. TRACY. Certainly. I was responsible to the stockholders.
Mr. PECORA. And do you think that it was sound judgment to discharge that kind of responsibility by buying railroad shares during a
panic week in the stock market?
Mr. TRACY. I do.
Mr. PECORA. With
prices fluctuating as much as 14 points in 1
week ?
•
Mr. TRACY. I certainly do. We thought those securities were very
cheap, and that is why we purchased them.
Mr. PECORA. Did you happen at the same time to invest any of
your own personal moneys in these railroad shares ?
Mr. TRACY. I do not remember that I did in those particular ones..
Mr. PECORA. If they were good enough for the investment trust
they would be good enough for you, would they not ?
Mr. TRACY. Well, you see the security companies were long in cash.
I do not think that I was very long in cash at that time.
Mr. PECORA. Did Dillon, Read .& Co. give you any reason at that
time why they were willing to sell these railroad shares that you
thought were a mighty good purchase for the investment trust?
Mr. TRACY. NO ; Dillon, Eead & Co. gave me no reason.
Mr. PECORA. Did you have to argue with them to induce them to
sell their shares to you?
Mr. TRACY. I do not recall that there was any argument with
them.
Mr. PECORA. Did you have any difficulty in inducing them to sell
to you?
Mr. TRACY. Oh, we wanted to purchase those securities.
Mr. PECORA. And they readily agreed to sell, did they ?
Mr. TRACY. And they agreed to sell. I do not remember the discussions.
Mr. PECORA. Without much argument?
1800
STOCK EXCHANGE PRACTICES
Mr. TRACY. I do not remember the discussions. We had a lot of
money at that time, Mr. Pecora, to invest.
The CHAIRMAN. Mr. Hayden was one of your directors, was he?
Mr. TRACY. He was not a director of the United States & Foreign
Securities Corporation, Mr. Chairman. He was a director of the
United States & International Securities Corporation.
The CHAIRMAN. Were any of the directors in the United States
& Foreign Securities Corporation interested in the St. Louis & San
Francisco road?
Mr. TRACY. Yes. I believe Mr. Ecker was on the board of the
Frisco.
Mr. PECORA. Let me ask you this, Mr. Tracy. If Dillon, Read &
Co. had attempted to dispose of these 13,700 shares at that time in
the open market they would not have gotten anything like 114 and
a fraction, would they, where the high for the week was 115, and
the total volume of trading for the entire week was 16,700 shares ?
Mr. TRACY. I certainly think that Dillon-Read could have sold
them in the open market and probably realized a higher price ever
a period of a few weeks. I think the records will show——
Mr. PECORA. IS that not contrary to all stock market experience?
Mr. TRACY. I beg your pardon.
Mr. PECORA. IS that not contrary to all stock market experience,
which is that where the holder of a large block of shares of a certain
security disposes of them in the open market that the price goes down
instead of up ?
Mr. TRACY. If you had put on the market at that period 20,000
shares of Steel you would put Steel down—or any other active stock
at that time.
Mr. PECORA. YOU gave DiMon, Read & Co. the market price, which
happened to be 114 plus ?
Mr. TRACY. Correct.
Mr. PECORA. And when you did that did you not realize that if
Dillon, Read & Co. had attempted to dispose of their 13,700 shares
in the open market at that time they would have had to sell in a
declining market?
Mr. TRACY. I do not think I was thinking of Dillon, Read & Co.
I was thinking of the company. If we had gone out to purchase that
stock over a period of weeks we would have had to pay a higher
priceMr.. PECORA. But if Dillon, Read &r Co. had wanted to sell in the
open market they would have had to take a good deal less than 114,
would they not?
Mr. TRACY. If they had gone out and sold it at one fell swoop
and1 broken the market; but I do not think they would have done
that.
Mr. PECORA. SO Dillon, Read & Co. got all the benefit from the
transaction in that way?
Mr. TRACY. STO. I think, looking at it as we did, and as we still
do, I think we could not have gone out and purchased a block of
that size without putting the market up.
Mr. PECORA. And they could not have sold without putting the
market down?:
STOCK EXCHANGE PRACTICES
1801
Mr. TRACY. I do not think so on that day, but if they could have
sold it over a period of weeks, as the market transactions will show,
they probably would have averaged a higher price for it.
Mr. PEOORA. Did you discuss the acquisition of these shares for
the United States & Foreign Securities Corporation with Mr.
Charles Hayden?
Mr. TRACY. NO. I do not think I did. He was not on the board
of the United States & Foreign.
Mr. PECORA. He was on the board of the United States & International ?
Mr. TRACY. Correct.
Mr. PECORA. And there was a very close community of interest
between the two investment tru,sts?
Mr. TRACY. Yes.
Mr. PECORA. And he was also chairman of the board of the Rock
Island Railroad, was he not, at that very time?
Mr. TRACY. Yes; he was.
Mr. PECORA. Did you not think
his opinion at that time might have
been of some special value to you ?
Mr. TRACY. Well, we had these reports; we had the opinion of
all the directors, and they all thought very highly of the investment. If I met Hayden I would have probably spoken to him about
that. I often consulted him and a$ked his opinion about railroad
securities.
Mr. PECORA. DO you know that you talked with every member-of
the board of directors of the United States & Foreign Securities
Corporation before you concluded this purchase from Dillon, Read
&Co.?
Mr. TRACY. It is my practice to reach every director
Mr. PECORA. Did you in this particular case succeed in reaching
all the directors?
Mr. TRACY. I cannot remember in. this particular case. I say it is
my practice to try to get in touch with all the directors.
Mr. PECORA. It is your practice to try to get in touch with them,
but do you always succeed ?
Mr. TRACY. Not if they are out of town, if they are away.
Mr. PECORA. Did you succeed in this particular instance in reaching all the members?
Mr. TRACY. AS I remember, I reached most of them.
Mr. PECORA. HOW did you reach them? By telephone?
Mr. TRACY. By telephone.
Mr. PECORA. Then there never was a meeting of two or more of
the directors at which opinions pro and con were expressed on the
proposition, was there?
Mr. TRACY. We had discussed the Frisco Railroad and the Rock
Island.
Mr. PECORA. Can you not answer that question " yes " or " no " ?
Mr. TRACY. Dozens of times at officers' meetings and directors'
meetings.
Mr. PECORA. N O ; I am talking about this transaction.
Mr. TRACY. Not that particular transaction, except by telephone,
as I remember it. There may have been an officers' meeting, but I
do not recall it.
1802
STOCK EXCHANGE PRACTICES
Mr. PECORA. HOW many shares did this investment trust called
the United States & Foreign Securities Corporation purchase from
Dillon, Bead & Co., of the St. Louis & San Francisco Railroad Co. ?
Mr. TRACY. May I look that up ?
Mr. PECORA. Yes.
Mr. TRACY. We purchased from Dillon, Eead & Co., St. Louis &
San Francisco Railway Co. common stock 16,050 shares, at a cost of
$1,793,587.50.
Mr. PECORA. Was that the market price as of November 11, 1929?
Mr. TRACY. Yes, sir. That was the market.
Mr. PECORA. And those 16,050 shares were the 16,050 shares that
Dillon, Read & Co. acquired upon the termination of this joint
account on November 9, 1929, were they not ?
Mr. TRACY. That is correct.
Senator COTJZENS. I would like to ask Mr. Tracy if the fact that
these railroads were so closely related to each other, as shown in
these reports of Coverdale &»Colpitts, influenced you in selecting the
common stocks of these two railroads?
Mr. TRACY. NO, sir.
Senator COTJZENS. I
notice in reading the report that you received
on the Frisco from Coverdale & Colpitts on September the 6th
that it says:
The Frisco is fortunate in the fact that its affairs are presided over by eminent
railroad executives—Mr. E. N. Brown as chairman of the board and Mr. J. M.
Kurn as president.
In the report on the Eock Island Line from which I just read the
same Mr. E. N. Brown is referred to as chairman of the executive
committee. In other words, they are both operated by substantially
the same officials, and I wondered whether that influenced the trust
in selecting these two stocks.
Mr. TRACY. NO, sir. We had reports made on a number of railroads at that time that we did not go into.
Mr. PECORA. Who proposed that the United States & International
Securities Corporation acquire these large blocks of the bonds of the
Seaboard Air Line Railway Co. that were referred to in your examination last Friday?
Mr. TRACY. That was discussed as usual at the board meetings and
officers' meetings.
Mr. PECORA. IS there any reference to any such discussions in any
minutes of the meetings of the board that you canfind?
Mr. TRACY. I do not think those would have been. It would not
have been usual for us to have put it in the minutes of the meetings.
Mr. PECORA. AS a rule, what went into the minutes of the board
meetings ?
Mr. TRACY. At the board meetings?
Mr. PECORA. Yes.
Mr. TRACY. The purchase
and sale of securities. What we had
done; what actions we had taken. Our discussions were never written up in the minutes. I do not know of any board, Mr. Pecora,
where they are, myself
Mr. PECORA. Well, I do. I know of many boards where the minutes contain a fairly complete statement of the business transacted
at the meetings. Meetings of important corporations, too. You
STOCK EXCHANGE PRACTICES
1803
say you have never been connected with a corporation whose board5
kept minutes that fairly recorded the activities of the board?
Mr. TRACY. Our minutes record everything that we have done.
Mr. PECORA. Let me see if they did. Let me have that minute*
book of the United States & Foreign Securities Corporation again,,,
will you?
Mr. TRACY. I think you will find that all our transactions wererecorded.
Mr. PECORA. All right. As I understood your testimony last week:
the custom at bqard meetings was for a report to be made of transactions that had already been consummated by or on behalf of the
investment trust at the meeting held after the consummation of
such transaction. Is that right?
Mr. TRACY. That is right.
Mr. PECORA. Let us now turn to the minutes of the meeting of the
board of the United States & Foreign Securities Corporation held on
November 13,1929. These minutes are set forth at pages 490 and 491
of the minute book that you have handed me. The only business that
appears to have been transacted at that meeting was as follows—and
I am going to read it right from the record. After reciting the names
of those present who acted as officers the minutes read as follows:
The minutes of the last meeting of the board of directors held on October '9;.
1929, were presented to the meeting, and, on motion duly made and seconded,
were unanimously approved as recorded.
A financial report of the treasurer of the corporation for the month of October
1929, covering transactions during such month, was presented to the meeting,
and after discussion of this report and of the securities held by the corporation,,
the following resolution was, on motion duly made and seconded, unanimously,
adopted:
Resolved), That the report of the treasurer of the corporation covering transactions of the corporation during the month of October 1929, copies of which
have been submitted to this meeting, and all the transactions therein set forth,,
hereby are in all respects approved, ratified, and confirmed.
There being no further business to come before the meeting, it was, on motion;
duly made and seconded, unanimously resolved to adjourn.
•
You notice, do you not, from my reading of these minutes that on
November 13,1929, absolutely no mention was made, according to the
minutes, of thi(s transaction consummated on November 11, 1929,
through the medium of which millions of dollars of the funds of
the investment trust were invested in two railroad securities?
Mr. TRACY. Mr. Pecora, I think I testified already this morning
that the transactions of the month previous were always reported
at the meeting the following month. At the meeting the following
month all the transactions for that month were recorded.
Mr. PECORA. Well, now, let us see where we stand.
Senator COUZENS. Just a minute, Mr. Pecora. This minute book
that you just read approves of all of the activities of October without any reference to what the activities are.
Mr. PECORA. Except that they are set forth in the report which
is attached to the minutes.
Mr. TRACY. Attached as a part of the minutes.
The CHAIRMAN. That is the treasurer's report, isn't it?
Mr. PECORA. Treasurer's report.
175541—33—PT 4
18
1804
STOCK EXCHANGE PEACTICES
The CHAIRMAN. The treasurer's report is made a part of that
record.
Mr. TRACY. That is for the previous month, covering everything
jthat we have done in the way of purchases and sales.
Mx- PECORA. Apparently the next meeting that the board of directors of the United States & Foreign held was held on November .22,
1929, and that happens to be referred to as a special meeting.
Mr. TRACY. Special meeting.
Mr. PECORA. I S there anything in those minutes to show that the
^natjer of the acquisition of these shares of the Chicago, Rock
Island & Pacific and of the St. Louis & San Francisco Railway Co.
was brought to the attention of the board?
Mr. TRACY. In normal course of our business, it would not have
been recorded until the December meeting.
Mr. PECORA. All right; we will look at the December meeting.
Senator COUZENS. AS a matter of fact, Mr. Tracy, wouldn't it be
hard to rectify any error that might have been committed by the
officers when they just simply accept the treasurer's report? In
.other words, the directors just ratify rather than to authorize?
Mr. TRACY. If any one director objects to any securkry that has
been fought we dispose of it.
Senator COUZENS. Yes, but you may have to dispose of it at a
great loss.
Mr. TRACY. Yes, sir; but I think I testified that I got in touch
with all of the directors about this purchase.
Senator COUZENS. Of course, there is no record of that, is there?
Mr. TRACY. NO record of it.
Mr. PECORA. According to the minutes held on December 11, 1929,
a treasurer's report was made and ratified and approved by the
board covering the transactions of the corporation during the month
of November 1929, a*h'd the copy of such treasurer's report, which is
made part of the minutes of this meeting, states as follows with regard to these two particular railroad stock transactions:
Purchases as follows; in the amounts and at the prices indicated:
C. Chicago, Rock Island & Pacific Railroad Co. common, 13,700 shares at
$114.25, a total of $1,565,225, from Dillon, Read & Co.
D. St. Louis-San Francisco Railway common, 16,050 shares at $111.25, a total
,of $1,793,587.50, from Dillon, Read & Co.
That is the only mention I see in the treasurer's report with regard
to these two transactions. Am I to conclude that that is the only
mention that can be found in the minute book anywhere regarding
the action taken by the board of directors with regard to these two
transactions ?
Mr. TRAGY. I presume that is correct.
Mr. PECOEA. There is nowhere in the minutes any discussion, any
reference to a discussion having been had, among the directors and a
decision arrived at by them to buy these shares and to make this
investment of over three million and a quarter dollars to the benefit
of the trust, is there ?
Mr. TRACY. It is not recorded in the minute book; no. I t is not
usual for us to do it.
Mr. PECORA. It appeared from evidence submitted last Friday that
portfolio statement as of December 31, 1932, which was made by the
STOCK EXCHANGE PRACTICES
1805
United States & International Securities Corporation to its stockholders, showed that there had been a total shrinkage in value of
portfolio securities of $26,562,400 up to that date, December 31,1932,
and that of that total shrinkage $11,192,512 had occurred in the
securities of the Chicago, Eock Island & Pacific Railway and the St.
Louis & San Francisco Railway Co., or approximately 42 percent
of the entire loss represented by the depreciation in value of all the
securities in your portfolio was represented by the shrinkage in these
two particular issues.
Mr. TRACY. I have not figured out the exact percentage. I know
it was a very large amount. But in spite of that we still have a
value of $90 for every $100 the public put into that company.
Mr. PECORA. And you would have had a good deal more than $90
if you had not bought these shares of these two railroad companies
that were more or less under the supervision of a member of the
board of the United States & International Securities Corppration ?
Mr. TRACY. Yes; but we did not make that purchase on his recommendation.
Mr.. PECORA. Did you avoid Mr. Hayden's recommendation?
Mr. TRACY. NO ; I would not say that I avoided it. I would say
that I talked to him.
Mr. PECORA. YOU did not even seek it, did you?
Mr. TRACY. I think I talked to him a great deal about it.
Mr. PECORA. Well, did he recommend it ?
Mr. TRACY. He thought very highly of his road.
Mr. PECORA. Did he recommend these particular purchases?
Mr. TRACY. NO, not to my knowledge; he never recommended it.
Mr. PECORA. Did you think it advisable to seek his judgment about
:it at the time ?
Mr. TRACY. AS I said, Mr. Pecora, I talked to him at great length
.•about it.
Mr. PECORA. Did you seek his judgment with regard to these particular transactions at the time of the transaction?
Mr. TRACY. I don't remember doing that at all; no. I saw Mr.
Hayden frequently and always talked to him about the railroad.
The CHAIRMAN. Have you any idea, Mr. Tracy, what was operating
to cause a shrinkage in value of these particular stocks at that time?
Mr. TRACY. Between 1829 and 1932, Mr. Chairman?
The CHAIRMAN. Yies..
Mr. TRACY. All securities were going off tremendously in value.
The CHAIRMAN. I knotf, but these seem to have suffered most of all
apparently.
Mr. TRACY. Those particular railroads, unfortunately, happened
to be in receivership,.
The CHAIRMAN. Yes.
Mr. TRACY. But taking
our securities as a whole, our shrinkage
has been very small, and I think there were very few companies
formed at the time that company was formed, I don't think there is
*one, that can show the record we have in maintaining our assets in
the way we did, in spita of those losses.
The CHAIRMAN. 'But what were the elements or factors operating
with reference to these ?two railroads during that period of time that
• caused this ( l i i i i
1806
STOCK EXCHANGE PKACTICES
Mr. TRACY. I have some figures on railroads that I would like to
show you. I think it will enlighten you.
The CHAIRMAN. With particular reference to these particular
roads, that is all. Those are the ones we are concerned about, theseparticular roads.
Mr. TRACY. Mr. Chairman, I find that I have the figures here. All
class 1 railroads in 1929 had a gross of $6,279,000,000. The Rock:
Island had a gross of $147,000,000 and the Frisco of $89,000,000.
In 1932 all of the class 1 railroads had a gross of $3,126,000,000; or
about one half. The Eock Island had a? gross of $70,000,000, or just
a little less than a half of what it was in 29. The Frisco had a gross
of $42,600,000 against $89,100,000 in '29. In other words, their revenue went off about the same as the average for all class 1 railroads.
Mr. PECORA. Mr. Tracy, have your associates been able up to the
present moment to obtain the information as to how Dillon, Read
& Co. paid the United States & International for the railroad shares
that it had acquired on the termination of the joint account on November 9, 1929 ?#
Mr. TRACY. Dillon, Eead & Co. credited the account of the United
States & International Securities Corporation with $7,131,184.62.
Mr. PECORA. That is, they merely placed a credit on their books
to the account of the United States & International for one half
of the 14 odd million dollars that had been laid out by the United
States & International for the operation of the joint account; is that
right?
Mr. TRACY. That is right. Then on the order of the United Stateside International Securities Corporation Dillon, Kead & Co. paid part
of these funds to the Chase National Bank to the credit of the United
States & International Securities Corporation and part to the Central
Hanover Bank & Trust Co. for the credit of the United States &
Foreign Securities Corporation.
Mr. PECORA. Why was it done in that way, Mr. Tracy ?
Mr. TRACY. I don't remember the details of the transaction, but
I can get it for you. I am not familiar with the bookkeeping end
of it.
Mr. PECORA. NOW, these securities of the Chicago, Eock Island
& Pacific Eailroad and of the St. Louis-San Francisco Eailway
eventually found their way into the portfolio of the United States
& International Securities Corporation, didn't they?
Mr. TRACY. The ones owned by the
Mr. PECORA. The ones which the United States & Foreign Securities Corporation took over from Dillon, Eead & Co. on November
11, 1929.
Mr. TRACY. Eventually found their way into
Mr. PECORA. Into the portfolio of the United States & International Securities Corporation.
Mr. TRACY. I will have to check that up and find out. [After
conferring with associates:] Yes; that was sold in December 1929
to the United States & International Securities Corporation.
Mr. PECORA. What price ?
Mr. TRACY. I will have to look that up. [Conferring with associates:] They are looking up the market price, Mr. Pecora, what
the market was at that time.
STOCK EXCHANGE PRACTICES
1807
Mr. PECORA. DO you recall whether the market price was less than
the market price on November 11, 1929 ?
Mr. TRACY. I will have to look that up. [Addressing an associate:] Have you got that figure? [After a pause:] $111.84. We
paid $114.25 and sold it at the market, which was $111.84. So there
was a loss of
Mr. PECORA (interposing). You are referring now to the Rock
Island stock?
Mr. TRACY. Yes; Rock Island.
Mr. PECORA. NOW, the United States & Foreign paid Dillon, Read
& Co. on November 11 for these 13;700 shares $114.25 per share; is
that right?
Mr. TRACY. That is correct.
Mr. PECORA. And then in December—what was the specific date'
in December, by the way?
Mr. TRACY. December 31.
Mr. PECORA. And on December 31, the end of the fiscal year 1929,
the United States & Foreign Securities Corporation sold those
shares to the United States & International Securities Corporation
for 111 and a fraction?
Mr. TRACY. The market; yes.
Mr. PECORA. That was then the market?
Mr. TRACY. Then the market.
Senator COUZENS. Was the whole amount sold, the whole 13,700
shares sold?
Mr. TRACY. I will have to look that up. [After conference with
associates]. Yes; it was, Senator.
Mr. PECORA. And on the same date, December 31, 1929, did the
United States &> International Securities Corporation buy from the
United States & Foreign Securities Corporation the 16,050 shares of
the St. Louis-San Francisco Railway Co. stock?
Mr. TRACY. Yes; they did.
Mr. PECORA. At what price?
Mr. TRACY. $105.22.
Mr. PECORA. The United States & Foreign had paid Dillon, Read
.& Co. on November 11, 1929, $111.75 for that stock?
Mr. TRACY. That is correct.
Mr. PECORA. Yes.
Senator COUZENS. Was that done for the purpose of creating a loss
in making your income-tax return?
Mr. TRACY. That is done for the purpose, Senator, of offsetting—
partly offsetting—our profits, and to give a truer picture of the
year's operations.
Senator COUZENS. Well, but that'was not really the true picture,
because you were transferring from one investment trust you controlled to another investment trust you controlled, and you created
automatically a loss which you used to offset your profits?
Mr. TRACY. That is right.
Mr. PECORA. The preferred stockholders of the United States &
International Securities Corporation were not the same individuals
as constituted the preferred stockholders of the United States &
Foreign, were they?
Mr. TRACY. NO, sir; they were not.
1808
STOCK EXCHANGE PRACTICES
Mr. PECORA. But the two accounts were practically officered by
the same men, weren't they ?
Mr. TRACY. Well, I was president of both corporations.
Mr. PECORA. Yes; and they had members of the Board of Directors
in common; interlocking directors?
Mr. TRACY. I think Mr. Dillon and I were the only two members
in common on both boards.
Mr. PECORA. What decision, or rather what consideration,,
prompted the directors of the United States & Foreign in December,.
1929, from selling their railroad holdings they were so keen to»
acquire in November 1929?
Mr. TRACY. We sold them to offset profits.
Mr. PECORA. What do you mean by that?
Mr. TRACY. They were allowed under the Internal Revenue Act.
Mr. PECORA. What do you mean by that?
Mr. TRACY. Well, the loss was there, and we could not record it
unless we made a sale.
Mr. PECORA. All right. Did you think on December 31, 1929, that
railroad securities were still a good thing to acquire for an investment trust?
Mr. TRACY. I did.
Mr. PECORA. And
why didn't you give the stockholders of theUnited States & Foreign the benefit of that judgment by retaining
in its portfolio these railroad securities ?
Mr. TRACY. Because we wanted to sell them, as I told you, tooffset profits.
Mr. PECORA. Well, having sold them, you divested the stockholders
of the United States & Foreign of the right to make profits by an
improvement in the market, didn't you?
Mr. TRACY. NO, I won't admit that.
Mr. PECORA. Well, you still thought that the acquisition of railroad shares was a good thing for an investment trust on December
31, 1929, didn't you?
Mr. TRACY. Yes, I
Mr. PECORA. Why
did.
didn't you then exercise that judgment for the
benefit of the stockholders of the first investment trust which bought
these shares from Dillon, Read & Co., if they were a good thing for
an investment trust to hold ?
Mr. TRACY. Because we decided to sell them at that time to offset
profits.
Mr. PECORA. Well, did you thereafter reacquire them?
Mr. TRACY. I beg your pardon ?
Mr. PECORA. Did the first inyestment trust thereafter reacquire
these shares?
Mr. TRACY. I don't think so. Not to my recollection.
Mr. PECORA. If the object of this transfer by the United States &
Foreign to the United States & International was to offset profits for
the benefit of the United States & Foreign, that result was obtained
by that transaction at the end of the tax year, wasn't it ?
Mr. TRACY. AS I remember it, it was the end of the year; yes.
Mr. PECORA. All right then, why weren't the securities acquired
after the first of the year in 1930 by the United States & Foreign,
if that was the sole purpose of this transfer on December 31, 1929 ?
Mr. TRACY. I don't think I understood that. I am sorry.
STOCK EXCHANGE PRACTICES
1809
Mr. PECORA. Will you read the question ?
(The shorthand reporter read the last question of Mr. Pecora.)
Mr. TRACY. AS I remember it, we purchased the United States &
Foreign Securities at that time, the year end, purchased a substantial
amount of securities from the United States & International, which
also included a lot of railroad securities.
Mr. PECORA. Why weren't these securities acquired back again
after the first of the year by the United States & Foreign if the sole
purpose of transferring them on December 31, 1929, to the United
States & International was to enable the United States & Foreign to*
offset the shrinkage in market value against their profits for the tax
year 1929?
Mr. TRACT. I don't remember.
Mr. PECORA. DO you know ?
Mr. TRACY. I do remember that the United States & International
sold a substantial amount of railroad securities to the United States
& Foreign Securities Co.
Mr. PECORA. When ?
Mr. TRACY. Year end in 1929.
Mr. PECORA. Well, I am talking about the time subsequent to the
year end of 1929.
Mr. TRACY. Why the United States & Foreign did not buy them
back?
Mr. PECORA. Yes.
Mr. TRACY. Probably because the United States & International
did not want to sell them. I don't remember.
Mr. PECORA. YOU were the president of both. Don't you know
whether that was the reason ?
Mr. TRACY. I don't remember. I haven't any recollection of anything of that kind.
Mr. PECORA. Well, you have a distinct recollection that the sole
purpose of making the transfer on. December 31, 1929, to the United
States & International was to enable the United States & Foreign
to offset against its profits for the tax year 1929 the shrinkage in
the market value of those two securities ?
Mr. TRACY. That was the principal object of the sale.
Mr. PECORA. Was there any other object sought to be attained?
Mr. TRACY. Not as I remember, but I know that was the principal
object of the sale.
Mr. PECORA. Well, if that was the principal object of the sale,
that object was fully attained by this transfer on December 31, 1929,
wasn't it?
Mr. TRACY. It was.
Mr. PECORA. And if
you still thought that railroad securities were
a good thing for these investment trusts to acquire, why didn't the
United States & Foreign after January 1, 1930, buy back these
securities from the United States & International ?
Mr. TRACY. AS I remember it, we bought a good many before the
end of the—during the year end—we bought a lot more.
Mr. PECORA. Did you buy these particular two issues back?
Mr. TRACY. Not to my recollection.
Mr. PECORA. Well, why not? Can you give any reason why you
did not?
Mr. TRACY. NO; I cannot give you any reason.
1.810
STOCK EXCHANGE PRACTICES
The CHAIRMAN. AS I understand, the United States & International still owns these shares?
Mr. TRACY. Yes; that is right.
Mr. PECORA. NOW, can you explain, Mr. Tracy, why it is that in
the treasurer's report to the board of directors of the United States
& Foreign Securities Corporation covering the transactions for the
month of November 1929 no date is assigned specifically to these two
'-transactions which you say took place on November 11,1929, whereby
the United States & Foreign Securities Corporation bought these
two blocks of railroad shares from Dillon, Eead & Co. ?
Mr. TRACY. It was not customary to put the date on.
Mr. PECORA. Well, with prices fluctuating from day to day, wasn't
that an important thing to put on your records'(
Mr. TRACY. I don't think so.
Mr. PECORA. What evidence have you in documentary form of
any kind that these transactions took place on November 11, 1929?
Mr. TRACY. Well, they must be recorded on the books of the
company.
Mr. PECORA. Can you produce any documentary evidence of any
kind that establishes that as the date of these transactions?
Mr. TRACY. I will have to ask the people who keep the books and
accounts. [After conferring with associates.] Mr. Pecora, we can
do that, of course, but it will take a little time to get it. *
Mr. PECORA. NOW, Mr. Tracy, do you know of any mention anywhere in the minute book of the United States & International
Securities Corporation of the decision reached by the directors of
that company to take over these railroad securities from the United
States & Foreign Securities Corporation?
Mr. TRACY. It would be recorded in the treasurer's report for the
month, in which it was done, and we discussed it.
Mr. PECORA. That would be the only mention?
Mr. TRACY. That would be as usual.
Mr. PECORA. Have you before you all of the data necessary
to enable you to tell the committee precisely how Dillon, Eead &
Co. paid United States & International Securities Corporation for
the railroad shares that it acquired upon the termination of the
joint railroad trading account that terminated on November 9, 1929?
Mr. TRACY. Dillon, Eead & Co. credited the account of the United
States & International Securities Corporation with $7,131,184.62.
Then on the order of the United States & International Securities
Corporation, Dillon, Eead & Co. paid part of these funds to the
Chase National Bank.
Mr. PECORA. HOW much of these funds?
Mr. TRACY. For credit of the United States & International Securities Corporation.
Mr. PECORA. HOW much did it pay? You said it paid part of
the funds.
Mr. TRACY (addressing associate). How much? (After a pause.)
We haven't got a breakdown of it.
Mr. PECORA. What is that?
Mr. TRACY, We haven't a breakdown of it, but I can get it
for you.
Mr. PECORA. At what date did Dillon, Eead & Co. make part payment to Chase ?
STOCK EXCHANGE PRACTICES
1811
Mr. TRACY. I will have to get that for you, Mr. Pecora. But I
am told they paid out the entire amount almost immediately. I will
have to get those dates for you. It was on the same day, I am toldf,
that they paid out the entire amount.
Mr. PECORA. And what day wa,s it?
Mr. TRACY. On the day that the
Mr. PECORA (interposing). On November 11 ?
Mr. TRACY. On the date the securities were taken up. I will have*
to look that up on the books. I haven't the date of it here. But
it was paid out immediately.
Mr. PECORA. HOW about the acquisition of those large blocks of
bonds of the Seaboard Air Line Eailway Co. by the United States &
International Securities Corporation, who recommended their acquisition by the United States & International ?
Mr. TRACY. Who recommended them?
Mr, PECORA.
Mr. TRACY.
Yes.
Well, I wouldn't remember that offhand. But the
Seaboard Eailroad was the topic of discussion in a great many of
our meetings.
Mr. PECORA. Did Dillon, Eead & Co. have any special interest in
that railroad company at that time?
Mr. TRACY. They were the bankers for the Seaboard.
Mr. PECORA. They were the bankers for the Seaboard, and hence
were, presumably, in possession of complete knowledge of all facts
respecting its financial condition; isn't that so ?
Mr. TRACY. TO the best of my recollection a very complete report
was made on the Seaboard Air Line situation, and
Mr. PECORA (interposing). Well, that is not an answer to my
question, Mr. Tracy.
Mr. TRACY. Well, Mr. Pecora, if you will be kind enough to let
me finish
Mr. PECORA. GO ahead.
Mr. TRACY. And that gave all details about the Seaboard Air Line
Eailroad. So they must have been in possession of all facts.
Mr. PECORA. SO far as you know, were Dillon, Eead & Co., as
bankers for the Seaboard Air Line Eailway Co., in full possession of
all the facts relating to the financial condition of that railroad company at the time that the United States & International purchased
its bonds?
Mr. TRACY. I should think so.
Mr. PECORA. When the decision was arrived at by the United
States & International to buy those bonds, what directors and officersof the United States & International do you recall having consulted,
with before that decision was reached?
Mr. TRACY. Which purchase are you now referring to ?
Mr. PECORA. Of the Seaboard Air Line Eailway Co. bonds, all the
bonds that it acquired. Mr. Tracy, it strikes me you ought to be
able to answer the question based upon your own recollection, as to
whom you consulted.
Mr. TRACY. Mr. Pecora, there were some Seaboard bonds bought
long before I was connected with the company.
Mr. PECORA. But I am talking about the large block of bonds
bought while you were president.
1812
STOCK EXCHANGE PRACTICES
Mr. TRACY. If you will give me exactly what bonds they were, and
the date, I will refresh my memory about it.
Mr. PECORA. I gave them to you a while ago. Now, if you will
turn to the report as of December 31, 1932, of the portfolio of the
United States & International Securities Corporation, made by Price,
Waterhouse & Co., you will find, listed under the caption " Bonds "
a block of $746,500 face value of Seaboard Air Line Railway Company first and consolidated 6 percent mortgage bonds, due 1945,
won't you ?
Mr. TRACY. I am just getting that now, Mr. Pecora.
Mr. PECORA. All right.
Mr. TRACY. Mr. Pecora, according to the sheet I have in front of
me, on November 12 we got $250,000 par value from the joint railroad securities trading account, and on January 27 there were
$496,500 that we received on the exchange plan.
Mr. PECORA. What do you mean by that? Do you mean exchange
•of 6-percent bonds for the 5's?
Mr. TRACY. I don't remember the details of the plan. But in
general it was a plan to revamp the whole financial structure of the
Seaboard Air Line Railroad Co.
Mr. PECORA. YOU don't remember the details of it at all?
Mr. TRACY. I can give them to you, but
Mr. PECORA, (interposing). Well, give me the general terms of
the exchaange if you don't know the details. Do you know those ?
Mr. TRACY. I will have to get that for you. (After consulting an
associate.) I haven't got that here, but we will get it for you.
Mr. PECORA. NOW, can you tell us upon whose recommendation
the United States & International Securities Corporation acquired
for its portfolio those bonds of the Seaboard Air Line Railway Co. ?
Mr. TRACY. Well, I cannot tell you specifically on whose recommendation it was made. But I am quite sure it was not made by
any of the partners of Dillon, Read & Co. who might have been on
the board, because they never made recommendations of their own
securities.
Mr. PECORA. Did they ever oppose the acquisition of their own
•securities by the investment trust?
Mr. TRACY. Not to my recollection.
Mr. PECORA. Can you tell us who recommended specifically the
acquisition of those bonds?
Mr. TRACY. N O ; I could not possibly remember who specifically
did it. We have had thousands of transactions, Mr. Pecora, and to
try to remember who specifically recommended each transaction I
think is asking too much of anyone.
Mr. PECORA. Not even when the transactions are of the magnitude
of the Chicago, Rock Island & Pacific or the St. Louis-San Francisco?
Mr. TRACY. NO, sir.
Mr. PECORA. YOU cannot
Mr. TRACY. N O ; because
remember any of the details ?
these matters were discussed at so many
meetings.
Mr. PECORA. AS a matter of fact, didn't you tell us before that you
discussed them over the telephone with individual directors if not at
meetings ?
STOCK EXCHANGE PRACTICES
1813
Mr.
TRACY. Over the phone ?
Mr. PECORA. Yes.
Mr. TRACY. I am in constant touch with
Mr. PECORA. There were large blocks of
directors on the telephone.
securities, both stocks and
bonds, of a corporation called Louisiana Land & Exploration Co.
in the portfolio of United States & International Securities Corporation, were there not ?
Mr. TRACY. Louisiana Land & Explqration Co.?
Mr, PECORA. Yes; and they are still in the portfolio.
Mr. TRACY. Well, the original bonds were paid off at maturity,
Mr. Pecora.
Mr. PECORA. How about the stock? Is it still in the portfolio?
Mr. TRACY. AS to the stock, we have 100,000 shares, I believe, in
the International Securities Corporation.
Mr. PECORA. Have you any in the portfolio of the United States
& Foreign Securities Corporation?
Mr. TRACY. I do not think so.
Mr. PECORA. Did you ever have any?
Mr, TRACY. Yes; we did have.
Mr. PECORA. HOW large a block at any one time?
Mr. TRACY. AS I remember, and I have forgotten exactly, but I
think somewhere around. 80,000 or 90,000 shares.
Mr. PECORA. And they were disposed of by United States & Foreign Securities Corporation to no one other than the United States &
International Securities Corporation?
Mr. TRACY. I don't believe they were.
Mr. PECORA. Who recommended the acquisition of that issue by the
investment trust?
Mr. TRACY. The original bonds?
Mr. PECORA, The bonds and stock. This block of 100,000 shares of
stock, for instance, which is still in the portfolio of United States &
International Securities Corporation.
Mr. TRACY. I wouldn^t remember offhand,
Mr. PECORA. YOU were an officer of the Louisiana Land & Exploration Co., weren't you?
Mr. TRACY. I am, sir; yes.
Mr. PECORA. And particularly
well posted as to its financial condition and operation, aren't you?
Mr. TRACY. Correct.
Mr. PECORA. And were at the time of the acquisition of those
100,000 shares by your investment trust?
Mr. TRACY. Correct.
Mr. PECORA. Did you recommend the purchase of those shares of
the Louisiana Land <& Exploration Co. ?
Mr. TRACY* I don't remember, but don't think I would have done it
because it is not my custom to recommend securities of any company
of which I am on the board. I always give them information about
it, though.
Mr. PECORA. Well, apparently it was not the custom of any member of the board to recommend to the board of directors of the investment trust the purchase of any securities that that particular
director might have been interested in. Is that so ?
Mr. TRACY. AS a rule it was never done.
1814
STOCK EXCHANGE PRACTICES
Mr. PECORA. In other words, that was the custom ?
Mr. TRACY. Yes, sir.
Mr. PECORA. Nevertheless,
we find in the portfolio of that investment trust large blocks of securities issued by corporations in which
directors of the investment trust were interested.
Mr. TRACY. Oh, unquestionably. We would have to eliminate ai
great many good securities if we did not do that.
Mr. PECORA. YOU would have to eliminate, for instance,, such good
securities as Rock Island Railroad and San Francisco Railway,,
which brought a loss of over 11 million dollars to the portfolio.
Mr. TRACY. That is correct.
Mr. PECORA. YOU would have to eliminate those, too?
Mr. TRACY. We would have to eliminate those too; yes.
Mr. PECORA. And you would have to eliminate Louisiana Land &
Exploration Co., too?
Mr. TRACY. Well, that does not happen to be in receivership, but
we would have to eliminate it; yes.
Mr. PECORA. Well, it is not in receivership, but according to your
statement of December 31, 1932, those 100,000 shares of stock, although costing the investment trust $278,125, thgir market value'
as of December 31 last was $75,000.
Mr. TRACY. Yes; that shows that.
Mr. PECORA. HOW about Seaboard Airline Kail way Co., securities—and that railroad is in receivership, isn't it?'
Mr. TRACY. I t is.
Mr. PECORA. Will you please tell the subcommittee all the securities held in the portfolio of United States & International Securities
Corporation as of December 31, 1932, that were issued by corporations of which one or more directors and officers of the United
States
& International Securities Corporation or with which one5 or more
were identified?
Mr. TRACY. I would have to check that up, because I do not know
all of the directorships of Mr. Hayden, for instance, which may be
something like
Mr. PECORA (interposing). Could you check them up and give thesubcommittee that information this afternoon?
Mr. TRACY. I do not think I can because I do not have the book
here that gives directors. I would have to get that list, of Charles
Hayden and Mr. Burchard, of 35 or 40. And I wouldn't want to«
assert my own without going over them.
Mr. PECORA. HOW about Seaboard Air Line Railway Co. securities are in the portfolio of the United States & International Securities Corporation as of December 31, 1932, with which you had been*
identified in any way. Can you answer that now ?
Mr. TRACY. Yes, sir; I am ready now whenever yoii are.
Mr. PECORA. GO ahead.
Mr. TRACY. These are companies of which I am a director and in
which the United States & International Securities Corporation own
securities as of December 31, 1932.
Mr. PECORA. All right.
Mr. TRACY. The first one appearing on the list is Empire Trust
Co. The next one is American Gas & Electric Co.
Mr. PECORA (interposing). Well, let us see right there
STOCK EXCHANGE PRACTICES
1815
Mr. TRACY (continuing). And the next one is
Mr. PECORA (interposing). One minute. In the case of the American Gas & Electric Co., according to the portfolio report as of December 31, 1932, the investment made by the investment trust in that
security aggregated $1,321,683.08, didn't it?
Mr. TRACY. Correct.
Mr. PECORA. All right. You may proceed.
Senator GOLDSBOROTTGH. The witness did not hear you, Mr. Pecora.
Mr. PECORA. YOU may proceed, Mr. Tracy.
Mr. TRACY. The next one is American Power & Light Co.
Mr. PECORA. What is the aggregate amount of the investment made
by this investment trust in the securities of that company ?
Mr. TRACY. $265,000.
Mr. PECORA. Plus.
Mr. TRACY. Yes. It is $265,761.98.
Mr. PECORA. NOW, you may continue.
Mr. TRACY. The next one is National Power & Light Co.
Mr. PECORA. What was the aggregate amount of the investment
made by the investment trust in that security?
Mr. TRACY. That amount is—let me see.
Mr. PECORA. It is $95,175, isn't it?
Mr. TRACY. Yes,
sir.
Mr. PECORA. YOU may proceed.
Mr. TRACY. The next one is Amerada Corporation.
Mr. PECORA. What is the aggregate amount invested in the issues
of that corporation ?
Mr. TRACY. $887,502.
Mr. PECORA. NOW, continue, please.
Mr. TRACY. Louisiana Land & Exploration Co.
Mr. PECORA. And we have already got on the record the total
.amount invested of that security, namely, $278,125. Is that right ?
Mr. TRACY. That is right..
Mr. PECORA. NOW you may give us the next one.
Mr. TRACY. United States & Foreign Securities Corporation.
Mr. PECORA. First preferred stock of that company?
Mr. TRACY. First preferred stock, 8,745 shares and 5,000 shares of
common.
Mr. PECORA. For the respective sums of $859,371.50 and $225,000.
Is that correct?
Mr. TRACY. That is correct.
Mr. PECORA. All right. Now, are there any others?
Mr. TRACY. I am looking it over now, sir. That is all that I see
here.
Mr. PECORA. Mr. Tracy, have you with you a copy of the charter
of United States & International Securities Corporation?
Mr. TRACY. Yes, we have one.
Mr. PECORA. Will you produce it, please ?
Mr. TRACY. Certainly. I will get it for you.
The CHAIRMAN. Did those corporations pay dividends, I mean
the corporations that you have just mentioned ?
Mr. TRACY. Some of them did, sir, yes. I would have to go over
them in .order to give you the details.
1816
STOCK EXCHANGE PRACTICES
Mr. PECORA. Are you ready to answer my question now?
Mr. TRACY. I have the certificate of incorporation here now.
Mr. PECORA. May I have it, please?
Mr. TRACY. Yes, sir. Here it is.
Mr. PECORA. Have you also a copy of the charter of United States
& Foreign Securities Corporation ?
Mr. TRACY. Yes. We have it.
Mr. PECORA. Will you please produce that also ?
Mr. TRACY. Here it is.
Mr. PECORA. Thank you. Now, Mr. Tracy, isn't it a fact that the
original charter of United States & Foreign Securities Corporation
contains the following provision, among others:
8th. In case the corporation enters into contracts or transacts business with
one or more of its directors or with any firm of which one or more of its :
directors are members, or with any other corporation or association of which
one or more of its directors are stockholders, directors, or officers, such contract or transaction shall not be invalidated or in anywise affected by the fact
that such director or directors doing it may have interests therein which are
or might be adverse to the interests of this corporation, even though the
vote of the director or directors having such adverse interest shall have been
necessary to obligate the corporation upon such contract or transaction. No
such director or directors shall be liable to the corporation or to any stockholder or creditor thereof, or to any other person, for any loss incurred by it
under or by reason of such contract or transaction, nor shall such director or
directors be accountable for any gains or profits realized thereon.
Mr. TRACY. Yes, sir. I accept that.
Mr. PECORA. And was that article 8 of the original certificate of
incorporation in effect until this amendment, on or about March 12,
1930, when the original article was stricken out and the following
substituted therefor:
Senator ADAMS (interposing). Is that eighth article in the bylaws?
or in the certificate of incorporation?
Mr. PECORA. I t is in the certificate of incorporation of the
company.
*
Senator ADAMS. Very well. You said bylaws and I wanted the
record to be correct on that point.
Mr. PECORA. I meant in the charter. Now, that substitute is as
follows:
Any contract or other transaction between the corporation and any one or
more of its directors, or between the corporation and any firm of which one or
more of its directors are members or employees, or in which they are interested,
or between the corporation and any corporation or association of which one or
more of its directors are stockholders, members, directors, officers, or employees, or in which one or more directors of the corporation are interested,
shall be valid for all purposes notwithstanding the presence of such director
or directors at the meetings; of the board of directors which acts upon or in
reference to such contract or transaction, and notwithstanding his or their
participation in such action, if the fact of such interest shall be disclosed or
known to the board of directors and the board of directors shall authorize,
approve, or ratify such contract or transaction by the votes of a majority of
the directors present at a meeting of the board of directors at which a quorum
is present without counting the vote or votes of such interested director or
directors.
Such interested director or directors may be counted in determining whether
a quorum is present at such meeting. No director or directors interested in
such contract or transaction shall be liable to the corporation, or to any stockholder or creditor thereof, or to any person for any loss incurred by it under
or by reason of any such contract or transaction so authorized, approved, or
STOCK EXCHANGE PRACTICES
1817
ratified. Nor shall any director or directors be accountable for any gains
or profits realized therein. This article 8 shall not be construed to invalidate
any contract or other transaction which would otherwise be valid under the
common and statutory law applicable thereto.
Do you approve of the original provision of this charter that I
have read? Do you think it is a proper provision to put in the
charter of an investment trust whose securities are sold to the public ?
Mr. TRACY. I see no objection to it. Our directors are on so many
boards that if we eliminated the .securities of all companies with
which our directors are connected we would have had a very restricted list from which to make our investments.
Mr. PECORA. YOU see no objection to including in your charter a
provision which exempts officers and directors of this investment
trust from any liability whatsoever to the company, or to any of
its stockholders, for any losses incurred by the investment trust in
a transaction with another corporation in which a director of the
investment trust is interested, even though the vote of that director
was necessary to put the transaction through ?
Mr. TRACY. NO.
Mr. PECORA. DO you think
Mr. TRACY. Yes.
Mr. PECORA. Even though
that is fair?
the director thus exempt from liability
in casting his vote might have represented an adverse interest to the
investment trust ? You still think it is fair ?
Mr. TRACY. Well, wait a minute, Mr. Pecora. I do not think any
of our directors have ever done anything of that kind.
Mr. PECORA. Whether they ever did it or not, they could have
done that under the terms of this charter without being liable.
Mr. TRACY. Well, a board of directors are either honest or dishonest, and if they are honest they do not do things detrimental to
their stockholders. And ours have never done it.
Mr. PECORA. And if the Board of Directors had desired, by a
dishonest judgment, to commit the investment trust to a transaction with a corporation in which they had an adverse interest, the}?'
could have done it without being liable. And if you have a dishonest board in one of these companies the security holders are just
out of luck. And you think you do not put any temptation in the
directors by an article of this kind.
Mr. TRACY. I do not care, Mr. Pecora, what statute or article or
clause you may have, if your board is not honest it makes no difference, for in that.case they will not operate the company honestly.
On the other hand, if they are honest they will operate the company
honestly, as this company was operated.
Mr. PECORA. But nobody can guarantee the honesty of anybody.
Mr. TRACY. NO, but
Mr. PECORA (continuing).
And here you are exempting a director
who might have acted dishonestly, from any liability to your corporation by reason of any loss incurred as a result thereof, aren't
you?
Senator ADAMS. I do not believe this is an appropriate time for
you gentlemen to get into a huddle [referring to a whispered suggestion by an associate of the witness].
Mr. NITZE. Well, there is one provision of the charter which
says
1818
STOCK EXCHANGE PRACTICES
Senator ADAMS (interposing). But this is a matter of examination
<of the witness.
Mr. PECORA. I think you are right, Senator Adams.
Mr. NITZE. Well, there is one provision of the charter in which it
y
Senator ADAMS (interposing). But you are not being asked to
answer the question.
The CHAIRMAN. Mr. Pecora, when was this last language that you
read substituted for the other?
Mr. PECORA. On March 12, 1930, this other clause was substituted,
which also exempts them from liability.
The CHAIRMAN. Was that done by an act of the State legislature ?
Mr. PECORA. NO ; it was done by a mere adoption of an amendment by the stockholders at an annual meeting or somi meeting of
the stockholders. Isn't that so, Mr. Tracy ?
Mr. TRACY. Yes, sir.
PECORA. Then you say you approve
Mr. TRACY. I do.
Mr. PECORA. YOU think it is proper and
Mr.
of that sort of provision ?
essential to the best interests of the investment trust to have its directors and officers protected from liability in case of any dishonest exercise of judgment
by such a clause as this ? I mean in event that they should be guilty
-of such action.
Mr. TRACY. SO many of our directors are directors of other companies that I suppose the lawyers put that in. I think it is all right.
And our company has always been run honestly, as the results show.
Senator ADAMS. Mr. Tracy, aside from the question of honesty,
it is a question of good judgment. You recognize that almost all
human minds are influenced in their decisions by their personal interest. It may be an honest influence. This permits a man to participate in a transaction in which he has conflicting interests and
in which his honest judgment may be influenced by those interests.
Do you not think that that is an objectionable thing?
Mr. TRACY. I think it is, in a way, Senator; but with all the
directorships that a great many of our directors have we would
have had to eliminate some of the best securities that there were
available for investment.
Senator ADAMS. Oh, not at all, because this goes this far. For
instance, all Mr. Dillon has to do is to stay out and not participate
in the situation. But this goes so far that any member of your
board may participate and may vote upon a transaction dealing
with things in which he is interested. I am only discussing it
from the standpoint of the effect on his judgment. , You have demonstrated in your testimony that even your board of directors made
errors of judgment, I think, in some of these very purchases.
Mr. TRACY. Oh, yes.
Senator ADAMS. SO
you have seen fit in that to incorporate a
provision setting aside the law that has been established as a result
of a good deal of experience. That is, the courts in the absence
of this could say to you that a director might not participate in
passing upon a transaction in which he has an interest. The courts
have said that that is necessary, in their judgment, to protect against
these errors of judgment as well as against perhaps a violation of
STOCK EXCHANGE PRACTICES
1819
the fiduciary relation. It is a question of whether or not a corporation acting as an investment trust rather than as a fiduciary should
set itself up in conflict with the rule which equity courts have seen
fit to establish.
Mr. TRACY. Of course that was drawn up by counsel, Senator. I
am not a lawyer, but I do not think that anything we put in the
charter sets aside the statutes. That would not make any difference,
would it ? Even if we did that in our charter and the law did not
conform to that, it would not be worth anything, would it? I am
not a lawyer; I am just asking you
Senator ADAMS. We are discussing a question of ethics, partly, and
I am just merely a country lawyer. Morals and the law, we have
always thought, ought to run rather close together.
Mr. TRACY. And conform.
Senator ADAMS. And usually, if you find out what is the right
thing to do, you will find it is the legal thing to do also. So that Mr.
Tracy does not have to be a lawyer ordinarily to decide the law correctly if his ethics are sound.
Mr. TRACY. That is my opinion.
The CHAIRMAN. That provision would authorize you to serve two
masters.
Mr. PECORA. And if he served the other master on this investment
trust he is immune from liability to this trust or any of its stockholders. Is not that so ?
Mr. TRACY. I do not know that that has ever been the case.
Mr. PECORA. That is the effect of this provision, is it not ?
The CHAIRMAN. It does not require it, but authorizes it.
Mr. TRACY, I dp not think we can da anything that is not legal.
Mr. PECORA. If a director did anything under the law that was
not legal, he is exempted from liability by this clause.
Mr. TRACY. YOU know more about law than I do. I do not know
anything about law.
Mr. PECORA. But you still think this was a wise provision to insert
in the charter ?
Mr. TRACY. Our counsel did.
Mr. PECORA. Did you? You are the president of the corporation.
The counsel are mere hired servants.
Mr. TRACY. Yes; I think it is all right.
Mr. PECORA. YOU approved of it in principle ?
Mr. TRACY. I approved of it.
Mr. PECORA. Why was not a similar provision put in the charter
of the United States & International Securities Corporations when
it was organized in 1928 ?
Mr. TRACY. I don't know.
Mr. PECORA. If it was good in the first instance, why was it not
good for the second investment trust, in 1928 ?
Mr. TRACY. Counsel did not put it in; I cannot tell you.
Mr. PECORA. Who organized this corporation—counsel?
Mr. TRACY. NO, sir. They drew up the bylaws.
Mr. PECORA. This is in the charter. They carried out the wishes
of the organizers, did they not?
Mr. TRACY. Yes.
175541—33—PT 4
19
1820
STOCK EXCHANGE PRACTICES
Mr. PECORA. DO you recall the meeting of the stockholders held
on March 12, 1930, at which this clause 8, paragraph S] of the certificate of incorporation of the United States & Foreign Securities
Corporation was modified by the substitution of paragraph 8 that
I have read ?
Mr. TRACY. If it says so there, that was the date.
Mr. PECORA. Were you present at the meeting of the stockholders?
Mr. TRACY. NO, sir; I was not.
Mr. PECORA. Did you participate
as president and director of the
United States & Foreign Securities Corporation in any discussion
at which it was proposed to modify the provisions: of the original
paragraph 8 of the charter?
Mr. TRACY. Yes. I remember a discussion with the lawyers on
that. I don't remember the details of it.
Mr. PECORA. What was the reason for the change ?
Mr. TRACY. I don't remember.
Mr. PECORA. Did you ever know?
Mr. TRACY. Undoubtedly I did know. I have discussed it with
counsel.
Mr. PECORA. What discussion did you have with counsel about it?
Mr. TRACY. I don't remember the details of it.
Mr. PECORA. DO you know any reason for the change ? Just look
at the original paragraph and the substituted paragraph and see
if you now can give this committee any reason for the change that
was made on March 12, 1930.
Mr. TRACY. NO. I don't know of any specific reason.
Mr. PECORA. DO you know who proposed originally that such a
change be made in the charter?
Mr. TRACY. NO, I don't; I don't remember.
Mr. PECORA. Did you ever recognize any necessity for a change?
Mr. TRACY. I may have when I discussed it with counsel.
Mr. PECORA. DO you know now the change effected by the substitution of the present paragraph 8 for the original paragraph 8 ?
Mr. TRACY. I cannot say that I do.
Mr. PECORA. Did you agree, as president and stockholder and
officer, to a change the nature of which you did not understand?
Mr. TRACY. In a matter of this kind I would accept the advice of
counsel.
Mr. PECORA. What advice did counsel give in the matter that influenced you to agree to it ?
Mr. TRACY. He undoubtedly advised this change, and I agreed
to it.
Mr. PECORA. For what reason?
Mr. TRACY. I don't remember the reason.
Mr. PECORA. Can you tell us any reason now by comparing the
original paragraph 8 with the substituted paragraph 8?
Mr. TRACY. I don't remember any reason. I can ask counsel and
he can give it to you and save your time.
Mr. PECORA. DO you know whether or not, when the securities of
the United States & Foreign Securities Corporation were offered to
the public for subscription—I am referring, now, principally to the
$25,000,000 worth of first preferred stock—any publication was made
which apprised prospective purchasers of the first preferred stock
STOCK EXCHANGE PKACTICES
1821
that the charter of this company, $25,000,000 of the securities of
which they were being asked to buy, contained that provision
embodied in paragraph 8 of the charter ?
Mr. TRACY. I do not recall it; but I was not connected with the
company at that time.
Mr. PECORA. Mr. Chairman, I am suffering from a cold and
hoarseness, and I would ask that the committee take a recess at this
time until 2 o'clock.
The CHAIRMAN. We will take a recess until 2 o'clock.
(Whereupon, at 12:40 o'clock p.m., a recess was taken until 2
o'clock p.m.)
AFTERNOON SESSION
The subcommittee reconvened at 2 p.m., Tuesday, October 10,
1933, at the expiration of the noon recess.
TESTIMONY OF E&NEST B. TEACY—Resumed
The CHAIRMAN. The committee will come to order. Proceed, Mr.
Pecora.
Mr. PECORA. A S I recall your testimony this morning, you stated
for the record the date of the acquisition of the St. Louis & San
Francisco Railway stock by the United States & International Securities Corporation from Dillon, Eead & Co., and the price paid, on
November 11, 1929—no. It was transferred originally by Dillon,
Eead & Co. to the United States & Foreign.
Mr. TRACY. Yes.
Mr. PECORA. Will
you state the price at which that stock was
transferred on December 31, 1929, to the United States & International Securities Corporation?
Mr. TRACY. I will have to look that up [after examining papers].
$105.22, according to the market as of that date.
Mr. PECORA. Per share?
Mr. TRACY. Yes.
Mr. PECORA. DO
you have the total consideration in dollars and
cents? You will find it in the report of the meeting of the board
of directors of January 1930.
Mr. TRACY. $2,157,079.
Mr. PECORA. In your testimony this morning you indicated the
securities in the portfolio of the United States & International Securities Corporation as of December 31, 1932, which had been issued
by companies with which you were connected or affiliated. Can you
give us similar information with regard to the securities in that
portfolio as of the end of last year, which were issued by corporations in which other directors of the United States & International
Securities Corporation were members, or interested?
Mr. TRACY. I would have to get a directors' record to check that
up for you.
Mr. PECORA. Can you point to any securities on this portfolio
list as of December 31 last, which were issued by any corporation
or corporations with respect to which no director of the United
States & International Securities Corporation and no member of
the firm of Dillon, Kead & Co. was interested ?
1822
STOCK EXCHANGE PRACTICES
Mr. TRACY. I would be guessing at that. I would not take a
chance on saying what corporations Mr. Hayden was a director of,
or Mr. Brush, or Mr. Ecker. I have not a complete list of their
directorships.
Mr. PECORA. Calling attention to Price, Waterhouse & Co.'s report
of the United States & International as of December 31, 1932, there
were in its portfolio on that date, among other securities, 8,745 shares
of United States & Foreign Securities Corporation first preferred,
and 5,000 shares of United States & Foreign Securities Corporation
common stock.
Mr. TRACY. That is right.
Mr. PECORA. When did the United States' & International acquire
the 8,745 shares of first preferred stock of the United States &
Foreign Securities Corporation?
Mr. TRACY. I will have to look that up for you.
Mr. PECORA. What was the total consideration paid, while you
are looking up this other matter, for those 8,745 shares of the first
preferred stock of the United States & Foreign?
Mr. TRACY. $859,371.50.
Mr. PECORA. And what was the total consideration paid for the
5,000 shares of the common stock of the United States & Foreign
Securities ?
Mr. TRACY. $225,000.
Mr. PECORA. DO you know when the 5,000 shares of the common
stock were acquired?
Mr. TRACY. I will find out for you [after conferring with associates]. The preferred stock, Mr. Pecora, was acquired in October,
the end of October, and the first of November 1928.
Mr. PECORA. Yes.
Mr. TRACY. And the common on December 12, 1928.
Mr. PECORA. Were those issues purchased in the open market ?
Mr. TRACY. The preferred was purchased in the open market,
through Dillon, Read & Co., and the common was purchased from the
United States & Foreign Securities Corporation.
Mr. PECORA. DO you know whether the 8,745 shares of the first
preferred stock of the United States & Foreign that were acquired,
as you say, in October and November 1928 by the United States &
International, and which you say were acquired through Dillon,
Read & Co., were shares that were owned by Dillon, Read & Co. or
any of the individual members of that firm ?
Mr. TRACY. Not to my knowledge. They were purchased, as I
understand it, through Dillon, Read & Co. in the open market.
„ Mr. PECORA. What was the reason for the acquisition of the 5,000
shares of the common stock on December 12, 1928, of the United
States & Foreign Securities Corporation ?
Mr. TRACY. Those were shares that the company gave me an
option on.
Mr. PECORA. Under the terms of the option, what were you to pay
for those shares if you exercised the option ?
Mr. TRACY. $25 a share.
Mr. PECORA. $25 a share.
Mr. TRACY. And they sold up to $72.
STOCK EXCHANGE PRACTICES
1823
Mr. PECORA. They sold up to $72. The company bought them
at a little less than 50.
Mr. TRACY. I will look up the price.
Mr. PECORA. Say at 45.
Mr. TRACY. At 45.
Mr. PECORA. Five thousand
shares of common for $225,000
makes
!
a transaction on the basis of $45 a share; is that right ?
Mr. TRACY. Yes; that is the figure.
Mr. PECORA. Then, immediately upon the acquisition of those
5,000 shares at $45 a share, the company gave you an option to buy
them from it at $25 a share.
Mr. TRACY. That is right.
Mr. PECORA. What was the reason for that, Mr. Tracy ? Isn't that
an unusual transaction?
Mr. TRACY. Unusual?
Mr. PECORA. Yes.
Mr. TRACY. I would not call it unusual.
Mr. PECORA. Did you ever have any other transaction of that
sort?
Mr. TRACY. Any other of that sort?
Mr. PECORA. Yes; where a corporation of which you are president
buys in the open market, or buys from the issuing corporation, 5,000
shares of its stock at $45 a share, and immediately gives an option
to its president to repurchase those shares at $25 a share?
Mr. TRACY. The directors asked me what I wanted in the way
of compensation, and I told them I wanted options on stock. I did
not take part in their decision.
Mr. PECORA. I asked you if you knew of any other kind of transaction like that.
Mr. TRACY. I cannot recall any.
Mr. PECORA. Then it was unusual, was it not, even within your
own experience?
Mr. TRACY. It may have been. I had options on stock in other
companies, though.
Mr. PECORA. Under similar circumstances, where you were president, and where the company went out and bought the stock at a
much higher price for your benefit? Have you had those experiences ?
Mr. TRACY. They bought it at the then market.
Mr. PECORA. They bought it at the then market, which was $45,
and gave you an option to purchase it from them at $25 ?
Mr. TRACY. Correct.
Mr. PECORA. YOU have never had any other transaction of that
sort, have you ?
Mr. TRACY. Not to my recollection, but I did not exercise the
option.
Mr. PECORA. What is that?
Mr. TRACY. I did not exercise the option.
Mr. PECORA. YOU could have.
Mr. TRACY. I could have, but I did not.
Mr. PECORA. The company gave it to you for you to exercise if
you wished?
1824
STOCK EXCHANGE PRACTICES
Mr. TRACY. Correct. I asked them for an option on stock.
Mr. PECORA. Can you not tell this committee the reason why such
a transaction was had ?
Mr. TRACY. Well, I simply told the board that I wanted for my
remuneration options on stock; that I did not want a .salary.
Mr. PECORA. Were you asked if you wanted a salary for your
services &s president?
Mr. TRACY. I told them I did not want a salary.
Mr. PECORA. Were you asked if you wanted a salary?
Mr. TRACY. I believe I was.
Mr. PECORA. And you declined a salary?
Mr. TRACY. I declined a salary.
Mr. PECORA. Was any discussion had between you concerning the
question of salary they would be willing to offer you ?
Mr. TRACY. NO ; I did not want any salary. That is as far as it
went, as far as I was concerned.
Mr. PECORA. YOU preferred to take your compensation in the
form of this option?
Mr. TRACY. I preferred to take my compensation in the form of
an option.
Mr. PECORA. Why was that preferable to you, Mr. Tracy ?
Mr. TRACY. Because I felt that I would get my reward if the company was a success.
Mr. PECORA. HOW much of a reward did you expect to get ?
Mr. TRACY. Depending on how much of a success I made of the
company.
Mr. PECORA. What were the terms of the option ?
Mr. TRACY. I was to be allowed to take up, as I remember it, a
thousand shares per year over a period of 5 years, and I would take
it up, or it could accumulate, at $25 per share, with interest at the
rate of 6 percent.
Mr. PECORA. Was that option given in writing ?
Mr. TRACY. Yes.
Mr. PECORA. Have you a copy of the option agreement ?
Mr. TRACY. They are looking for it now.
Mr. PECORA. All right, sir. While they are looking that
up, let me
ask you if, when you became president of the United States & Foreign
Securities Corporation, you entered into a similar arrangement for
your compensation.
Mr, TRACY. Yes, sir.
Mr. PECORA. In lieu of a salary?
Mr. TRACY. That is right.
Mr. PECORA. Then, will you produce,
if you can, whatever option
agreement was given to you by the United States & Foreign Securities Corporation?
Mr. TRACY. Yes, sir. That is the agreement [handing paper to
Mr. Pecoral.
Mr. PECORA. Can you let us have this copy for the record?
Mr. TRACY. Yes, sir.
Mr. PECORA. I offer
in evidence the copy of the agreement produced by the witness, purporting to constitute the option agreement
entered into between him and the United States & International
STOCK EXCHANGE PRACTICES
1825
Securities Corporation for the purchase of 5,000 shares of the common stock of the United States & Foreign Securities Corporation,
which agreement is dated December 27, 1928, and is executed by the
United States & International Securities Corporation by E. A. Nellis,
treasurer, and by Ernest B. Tracy, this witness.
The CHAIRMAN. Let it be received and introduced into the record.
(The document referred to, option agreement between Tracy and
United States & International Securities Corporation, December 27,
1928, was received in evidence, marked " Committee's Exhibit No.
18 ", see p. 1853.)
Mr. PECORA. I offer in evidence a copy of the agreement produced
by the witness, purporting to be the option agreement between himself and United States & Foreign Securities Corporation, dated
December 26, 1928, executed on behalf of United States & Foreign
Securities Corporation by E. A. Nellis, its treasurer, and by the
witness, Ernest B. Tracy, in his individual capacity.
The CHAIRMAN. Let it be received and entered in the record.
(The document referred to, option agreement between Tracy and
United States & Foreign Securities Corporation, December 26, 1928,
was received in evidence, marked " Committee's Exhibit No. 19 ",
and will be found at the end of today's record.)
Mr. PECORA. The second option covered 15,000 shares.
Mr. TRACY. That is correct.
Senator COUZENS. Of the same stock ?
Mr. PECORA. Of the same stock.
Mr. TRACY. Yes.
The CHAIRMAN. TO
what extent have you exercised those options,
Mr. Tracy?
Mr. TRACY. I have not exercised them.
The CHAIRMAN. Either one?
Mr. TRACY. NO.
The CHAIRMAN. I understood 500 shares came from one of these.
Mr. TRACY. NO, sir. I have not exercised them.
Mr. PECORA. The option agreement between you and the United
States & Foreign Securities Corporation bears date December the
26th, 1928, and has been marked " Committee's Exhibit 19 " of this
date. I notice from this option agreement, Mr. Tracy, that it covers
15,000 shares of the common stock of the United States & Foreign
Securities Corporation, and that the option to you to purchase those
15,000 shares fixes a price of $25 per share.
Mr. TRACY. That is right.
Mr. PECORA. YOU are entitled to exercise this option in amounts
of not more than 3,000 shares on or before March 1, 1929, and a
similar number for each succeeding year thereafter, up to and including March 31, 1933. That is substantially correct, is it not?
Mr. TRACY. Whatever that says.
Mr. PECORA. Was this treasury stock that the United States & Foreign Securities Corporation agreed to sell you at $25 a share under
the terms of this option?
Mr. TRACY. My recollection is that it was bought in the market,
but I will have to check that to be sure.
Mr. PECORA. Will you please look into that and tell us ?
1826
STOCK EXCHANGE PRACTICES
Mr. TRACY. I am getting those figures for you, Mr. Pecora. Purchased throughout 1928.
Mr. PECORA. Can you tell us what the market value was of the
common stock of the United States & Foreign Securities Corporation
on December 26, 1928, the date of this option?
Mr. TRACY. I can get that for you. I have not any record.
Mr. PECORA. I t was considerably more than $25 a share, was it
not?
Mr. TRACY. Yes.
Mr. PECORA. And
the stock was listed at that time on the 'Sew
York Curb Exchange, was it not ?
Mr. TRACY. I believe it was.
Mr. PECORA. HOW long will it take you or your associates to get
the data which will enable you to tell the committee when the United
States & Foreign Securities Corporation purchased these 15,000
shares, and the price which it paid for them ?
Mr. TRACY. I have a note right here on that. We began buying
them on February 20, 1928, and the first 200 shares were bought at
$25.08. The next 100 shares
Mr. PECORA. DO not go through the whole list. Give the period
of time during which the company acquired these 15,000 shares of its
stock in the market and the total purchase price.
Mr. TRACY. From February 20 to October 31.
The CHAIRMAN. 1928?
Mr. TRACY. Yes.
Mr. PECORA. What was the total purchase price?
Mr. TRACY. I will have that totaled up for you, Mr.
Mr. PECORA. And then while they are totaling it
Pecora.
they can give
us the average price per share represented by these purchases. When
did you become the president of the United States & Foreign Securities Corporation?
Mr. TRACY. It was in the latter part of 1927, Mr. Pecora, and it
was at that time that it was agreed that I should receive options at
$25 per share.
Mr. PECORA. Was the agreement at that time reduced to writing?
Mr. TRACY. It was
not.
Mr. PECORA. It was only reduced to writing for the first time on
December 26, 1928 ?
Mr. TRACY. That is correct.
Mr. PECORA. About a year or more after the agreement you say
had actually been made?
Mr. TRACY. That is correct. There was a long delay, as I remember it, iii drafting the agreement.
Mr. PECORA. I t was a simple agreement to draft, was it not?
Mr. TRACY. It was a simple agreement to draft. I did not push
it. Their word was good enough for me.
Mr. PECORA. With whom did you make this agreement on behalf
of the United States & Foreign Securities Corporation? I mean
with what officers of that corporation did you have these negotiations
that culminated in this agreement providing for your compensation ?
Mr. TRACY. Mr. Dillon said there was a vacancy on the board of
directors and that he would like me to fill it. That was in the spring
of 1927. I said I would be very glad to do so. And in the fall of
STOCK EXCHANGE PRACTICES
1827
the year he asked me whether I would accept the presidency of the
company, and I said I would. And they asked me what compensation 1 wanted, and I told them I wanted option warrants.
They asked me if I wanted a salary and I said I did not; that I
would not assume the responsibility for a salary, that I preferred to
have option warrants. At that time the stock was selling, as I
remember it, around 25.
Mr. PECORA. It was not listed at that time, was it?
Mr. TRACY. I do not remember whether it was listed or not.
Mr. PECORA. Well, it was not listed, as I remember it, until February 1928 on the New York Curb Exchange.
Mr. TRACY. If that is the listing date, it was not listed at that
time.
Mr. PECORA. Can you explain the reason for the delay of a year
or more in the actual drafting and execution of this simple option
agreement ?
Mr. TRACY. NO ; I cannot.
Mr. PECORA. And you were not pushing it at all ?
Mr. TRACY. NO.
Mr. PECORA. Did
you have the advice of any lawyer that such*
an agreement could well rest on an oral understanding?
Mr. TRACY. I did not need the advice of a lawyer. Their word
was good enough for me, Mr. Pecora.
Mr. PECORA. Well, how about the ability of your estate in the
event of your death being able to enforce this agreement of which
there was no written evidence for more than a year ?
Mr. TRACY. Well, during that first year, you see, I could not
anyway have taken any of those options.
Mr. PECORA. That is because this option agreement was not made
until December 26, 1928, more than a year after ?
Mr. TRACY. That is right. And at the end of the year I was entitled to take up the option.
Mr. PECORA. Was there a similar lapse of time between the making
of the agreement by word of mouth between you and the United
States & International Securities Corporation and the actual execution of the agreement in writing?
Mr. TRACY. N O ; there was not, Mr. Pecora. I remember that
several drafts were drawn up and then changed by the lawyers, and
they said they would get it ready. I did not push them about it.
Mr. PECORA. Are you talking now about the agreement between
you and the United States & Foreign Securities Corporation?
Mr. TRACY. Yes.
Mr. PECORA. There were several
Mr. TRACY. Yes.
Mr. PECORA. Submitted to you?
Mr. TRACY. Yes.
Mr. PECORA. Did you object to
drafts drawn up by lawyers?
any of the provisions in those
various drafts that caused you to reject them?
Mr. TRACY. NO, sir; not that I remember.
Mr. PECORA. Why was not the first one of those agreements drafted
actually executed between the parties?
Mr. TRACY. I cannot remember the details. Of course I took my
draft and submitted it to my counsel and had him go over it. I
1828
STOCK EXCHANGE PRACTICES
do not even remember whether we made any changes, because in
substance what I was to get was an option on stock at 25.
Mr. PECORA. I thought a few moments ago you said you did not
have to consult a lawyer and did not consult a lawyer for your own
personal guidance.
Mr. TRACY. I do not think that was the question that you asked
me, Mr. Pecora.
Mr. PECORA. Well, what question did you think I asked you to
which you made answer that you did not find it necessary to consult
a lawyer.
Mr. TRACY. I would like to have it read to me, if I may.
Mr. PECORA. What transaction did you think I was questioning
you about when you answered that you did not find it necessary to
consult a lawyer?
Mr. TRACY. Well, I will have to find out what the question is
before I can answer that question, Mr. Pecora.
(Thereupon the following was read by the reporter, as above
recorded:)
•
Mr. PECOKA. Did you have the advice of any lawyer that such an agreement
could well rest on an oral understanding.
Mr. TRACY. I did not need the advice of a lawyer. Their word was good
enough for me, Mr. Pecora.
Mr. PECORA. The oral understanding
Mr. TRACY. I did not need the advice of a lawyer on the question
of the oral side of it. I said their word was good enough for me
that I was to get these options.
Mr. PECORA. DO you not recall why you rejected—if you did reject—any of the original drafts of this option agreement submitted
to you ?
Mr. TRACY. N O ; it was perfectly simple. I said these were the
terms on which I will be glad to accept the presidency of the company. I discussed it with the board and they said all right, and
that was all there was to it so far as I was concerened.
Mr. PECORA. Then for about a year or more the whole thing
got lost in the shuffle.
Mr. TRACY. Yes; for that at least. It was all during that period.
Mr. PECORA. On December 26, 1928, when this option agreement
was given to you by the United States & Foreign Securities Corporation, what was the market value of the stock?
Mr. TRACY. We have not got that here. We will have to look
it up in the Chronicle to get the market on that date.
Mr. PECORA. DO you not recall that it was around $45 a share?
Mr. TRACY. I t was around that, or higher, Mr. Pecora.
Mr. PECORA. Around that or higher?
Mr. TRACY. Yes.
Mr. PECORA. Under
this option agreement you had the right on or
before March 1, 1929, which was a period of only 2 months and a
few days after the date of this option agreement, to purchase 3,000
shares at $25 a share, did you not?
Mr. TRACY. In the United States & Foreign?
Mr. PECORA. In the United States & Foreign.
Mr. TRACY. Yes.
Mr. PECORA. If that
stock was worth in the market $45 or more
a
share
at
that
time,
and
you could have bought 3,000 shares on or
STOCK EXCHANGE PRACTICES
1829
before March 1st at $25 a share you could have taken in a profit of
$20 a share, or $60,000, within 2 months' time, could you not?^
Mr. TRACY. I assume your arithmetic is correct, but I did not
do it.
Mr. PECORA. Why did you not do it ? Did you not think that was
enough compensation for 2 months' work as the president of this
corporation ?
Mr. TRACY. NO, I had just been made president of the company
and I would not have sold my stock if I had owned it.
Mr. PECORA. Why did you not take it down under this option?
Mr. TRACY. Because the option could accrue. Why should I take
it down when the option accrued?
Mr. PECORA. SO you could make a profit on it by disposing of it in
the open market.
Mr. TRACY. But I told you I did not want to sell it.
Mr. PECORA. HOW did you expect to get any compensation if you
were not going to sell the stock ?
Mr. TRACY. Well, over a period of years I would have probably
taken up stock, as I expect to do eventually, and keep it.
Mr. PECORA. Have you exercised any of these options up to the
present time?
Mr. TRACY. I have not.
Senator ADAMS. Have any of those lapsed or are they all still
available to you ?
Mr. TRACY. They are all still available to me. They were
renewed.
Mr. PECORA. I was coming to that. They actually did lapse according to the tenor of their original terms, but their option periods
have been extended, have they not?
Mr. TRACY. Their option period has been extended because it was
agreed to be extended before the option expired.
Mr. PECORA. In the extension agreement were any of the terms
changed ?
Mr. TRACY. NO ; not a bit.
Mr. PECORA. DO you know of any reason why you did not exercise your rights under either of those two option agreements at
any time thereafter?
Mr. TRACY. Well, because I did not want to do it; that is why I
did not do it.
Mr. PECORA. What was the sense of having the options as your
form of compensation if you were not going to exercise your rights ?
Mr. TRACY. I had 5 years in which to take up those options.
Mr. PECORA. HOW did you intend toi profit by these options and
thereby be compensated for your years of service as president of
these two investment trusts?
Mr. TRACY. I intended to take them up eventually and hold the
stock and have a very valuable asset, which I still hope to do, and
receive dividends on that common stock.
Mr. PECORA. And when you had a chance to buy this stock at $25
a share at a time when market conditions would have enabled you
to realize a handsome profit you preferred for reasons of your own
not to exercise the option?
Mr. TRACY. YOU are quite right. I would not have sold out on
my company.
1830
STOCK EXCHANGE PRACTICES
Senator ADAMS. Mr. Pecora, you see he had a good deal of confidence in the president of the company. He thought maybe the president of the company would make it prosper.
Mr. TRACY. YOU are quite right, Senator. I did.
The CHAIRMAN. Have dividends been paid on the common stock?
Mr. TRACY. NO, sir.
Senator COTTZENS. When
did the stock go down below the option
price ? At what time ?
Mr. TRACY. I think it was in the spring of 1930, but I will have
to look it up to be exact.
Senator COTTZENS. YOU think in the spring of 1930 the price went
down below the option price?
Mr. TRACY. I think it did.
Senator COTJZENS. And therefore you would not want to exercise the option under those circumstances?
Mr. TRACY. I beg your pardon?
Senator COTTZENS. I say, you would not want to exercise the option
under those circumstances?
Mr. TRACY. NO. I would let the options accrue.
Senator ADAMS. YOU were really making a speculation and letting
the other fellow furnish the money against your services as long
as your option lasts ?
Mr. TRACY. That is the way I am getting my compensation.
Senator ADAMS. That is the way you are playing it?
Mr. TRACY. That is the way I am getting my compensation. If
I make a success of the company I will profit. If the company is
not successful I will not profit.
Senator ADAMS. YOU are betting your time and your services?
Mr. TRACY. My services and my efforts, yes; and my endeavors
to make a success of this company. If it is a success I will make a
profit out of it. If it is not a success I will not make any profit.
Senator ADAMS. But so far as the stock is concerned, heads you
come out at least even on that, and tails you win?
Mr. TRACY. Well, I devote time to it in which I might possibly
otherwise make money.
Senator ADAMS. In the past few years it has been much more
profitable for people to handle other people's money than their own
in investing it.
Mr. TRACY. I believe we have done well with this company. I
think we have done unusually well with it.
Mr. PECORA. Has the United States & Foreign Securities Corporation made investments for its portfolio in issues other than those
in which officers or directors of the United States & Foreign Securities Corporation have been interested?
Mr. TRACY. I will have to look up the list of all of the directorships of the officers and directors and check every investment that
they have made to be able to give you a correct answer on that, Mr.
Pecora. I have not the slightest idea of all the directorships of a
number of our directors.
Mr. PECORA. Have your associates completed their research into
the records for the purpose of giving us the total consideration paid
by the United States & Foreign Securities Corporation for the
15,000 shares that were covered by the option agreement with you?
STOCK EXCHANGE PRACTICES
1831
Mr. TRACY. The cost, Mr. Pecora, was $571,194.11. An average
price of $38.08 per share.
Mr. PECORA. When that company made this option agreement
with you to sell you this stock at $25 a share which it had bought
at $38 a share average, did it write down those shares in its portfolio to the $25 a share option price to you ?
Mr. TRACY. We carried it on our books here, of course.
Mr. PECORA. Not at the option price to you?
Mr. TRACY. On this statement that I have before me it is carried on the books*
Mr. PECORA. I say, it was never written down to the option price
to you?
Mr. TRACY. I will have to find out from the accountants.
Mr. PECORA. While they are looking that up will you let me look
at the minute book again, minute book of the investment trust?
Mr. TRACY. What period?
Mr. PECORA. 1929, those that we had this morning.
The CHAIRMAN. Those options are extended to 1936, Mr. Tracy?
Mr. TRACY. They were extended for 3 years, 1936.
Mr. PECORA. From which office did you principally conduct the
affairs of the United States & Foreign Securities Corporation as its
president ?
Mr. TRACY. AS its president?
Mr. PtecoRA. As its president, from which office did you direct or
conduct its affairs principally?
Mr. TRACY. From the directors' meetings. My job was to follow
the investments.
Mr. PECORA. From which office?
The CHAIRMAN. The location of the office?
Mr. TRACY. Why, the office of the company, the only office is in
Newark, N.J.
Mr. PECORA. I know that, but from which office did you, as president, actually conduct its operations and business ?
(Mr. Tracy started to confer with associates.)
Mr. PECORA. DO you have to have the advice of anybody to answer
that question?
Mr. TRACY. We have only got the one office, Mr. Pecora.
Mr. PECORA. I know, you are talking about the Newark office.
Mr. TRACY. Yes; that is the only office the company has.
Mr. PECORA. Did you as its president use that office for the conduct
of the operation of the company's business and affairs?
Mr. TRACY. All the details of the company are carried on in that
office, Mr. Pecora.
Mr. PECORA. Which office did you principally occupy in the daily
routine of the conduct of the company's business ?
Mr. TRACY. My office as far as running the investments of this
company, which is my job, is to follow the investments and the securities that we have, I can do it anywhere.
Mr. PECORA. From which office did you do it?
Mr. TRACY. Directors' meetings.
Mr. PECORA. From which office did you principally conduct your
direction of the company's business?
Mr. TRACY. The company has but one office and that is the Newark.
1832
STOCK EXCHANGE PRACTICES
Mr. PECORA. IS that the office that you occupied as a matter of
routine ?
Mr. TRACY. AS a matter of routine, I occupy an office at 1 Wall
Street.
Mr. PECORA. And did you use that office at No. 1 Wall Street principally in your business of directing the affairs of this company ?
Mr. TRACY. I did not.
Mr. PECORA. What other
Mr. TRACY. In directing
office did you use principally ?
the affairs of the company? The affairs
of the company are run by the directors. The purchase and sale of
securities, selection of their investments, are principally decided upon
at officers' meetings, which may be held in my office, may be held at
28 Nassau Street, as a matter of convenience.
Mr. PECORA. Where was the treasurer's office?
Mr. TRACY. The treasurer of the company? I t is in the office of
the company.
Mr. PECORA. Where?
Mr. TRACY. Newark.
Mr. PECORA. Who was the treasurer ?
Mr. TRACY. Mr. Nellis is the treasurer.
Mr. PECORA. What office did he occupy? What headquarters or
office did he occupy in the discharge of his duties as treasurer, or
from what office did he discharge his duties as treasurer ?
Mr. TRACY. From the only office that the company has in Newark.
Mr. PECORA. Then Mr. Nellis was always located at the Newark
office, was he, and no other office?
Mr. TRACY. TO my knowledge, that is where he always was.
Mr. PECORA. Who was the secretary of the corporation ?
Mr. TRACY. At what time, sir?
Mr. PECORA. In 1928 and 1929.
Mr. TRACY. Because there were certain changes.
Mr. PECORA. Well, in 1928 and 1929.
Mr. TRACY (after conferring with associates at length).
I am told
that Mr. Nellis was also secretary in 1928, Mr. Pecora.
Mr. PECORA. Did you go to the Newark office of the company every
business day?
Mr. TRACY. Indeed I don't.
Mr. PECORA. Did you go as often as once a week ?
Mr. TRACY. NO ; I wouldn't say that I went as often as once a week.
Mr. PECORA. Did you go as often as once a month ?
Mr. TRACY. I might have gone over there once a month.
Mr. PECORA. There is a possibility that you did ?
Mr. TRACY. Yes.
Mr. PECORA. NOW,
you certainly then could not have attended to
the current business of this company a(s its president on the occasions that might have been as frequently as once a month when you
went over to the Newark office, which you say is the only office?
Mr. TRACY. Only office. All the confirmation of securities, orders
placed, bookkeeping, and all the routine of the business o,f the company, is conducted in its only office at Newark. I do not have to go
there to think what .security I will buy.
Mr. PECORA. Your principal duties consisted of what?
Mr. TRACY. Presiding at the directors' meetings, keeping in touch
with the directors, and following all the investments that the com
STOCK EXCHANGE PRACTICES
1833
pany has, such as making suggestions for purchases and (sales and
keeping in contact constantly with all the directors.
Mr. PECORA. And from what office did you discharge those duties
principally ?
Mr, TRACY. I do it in New York.
Mr. PECORA. From what office, Mr. Tracy? Give us the address,
please.
Mr. TRACY. I may call them up from my office.
Mr. PECORA. Which office did you principally u,se ?
Mr. TRACY. I probably used my own office.
Mr. PECORA. Well, it has taken me 10 minutes to find that out.
Mr. TRACY. TO a large extent.
Mr. PECORA. NOW, do you want to qualify it any further ? First
you said "probably" and "to a large extent." Any other qualifications ?
Mr. TRACY. Undoubtedly I have seen the directors in their own
offices and talked to them. I have seen them at the directors' meetings and at officers' meetings.
Mr. PECORA. The directors' meetings as a rule were held at No. 28
Nassau Street, were they not?
Mr. TRACY. AS a rule they were held at 28 Nassau Street.
Mr. PECORA. And by 28 Nassau Street is meant the offices of Dillon, Bead & Co. ?
Mr. TRACY. Yes, sir; that is where they were held.
Mr. PECORA. And where were the officers' meetings held?
Mr. TRACY. They were held there, as a rule, also.
Mr. PECORA. At 28 Nassau Street, in the offices of Dillon, Read
&Co.?
Mr. TRACY. Yes, sir.
Mr. PECORA. And is that
also true of the United States & International Securities Corporation?
Mr. TRACY. It is, sir.
Mr. PECORA. That is,
that you attended principally to the discharge of your duties as its president from your own office at No. 1
Wall Street and that the meetings of its board were usually held at
28 Nassau Street, in the offices of Dillon, Read & Co. ?
Mr. TRACY. They were.
Mr. PECORA. And likewise the meetings of officers whenever they
occurred usually occurred at 28 Nassau Street?
Mr. TRACY. That is correct.
Mr. PECORA. Can you now supply us with the information as to
whether or not the United States & Foreign Securities Co. wrote
down the 15,000 shares of its common stock which it had purchased
for $38 plus to the option price of $25 to you ?
Mr. TRACY (after conference with associates and examining documents). It was carried at cost.
Mr. PECORA. Never marked down to the option price to you ?
Mr. TRACY. On our balance sheet. No, sir. On our annual report we stated that these 15,000 shares were under option, in two
places.
Mr. PECORA. In connection with the option agreement given to you
by the United States & International Securities Corporation covering 5,000 shares of the common stock of the United States & Foreign
1834
STOCK EXCHANGE PRACTICES
Securities Corporation, did the United States & International write
down on its books these 5,000 shares to the option price of $25 a
share to you?
Mr. TRACY. It was carried at cost.
Mr. PECORA. Did it ever write it down to the option price to you?
Mr. TRACY. It was always carried at cost. It was not written
down, Mr. Pecora.
Mr. PECORA. NOW, as a matter of mathematical calculation, the
cost to the United States & Foreign Securities Corporation of the
15,000 shares which it had given you an option to buy at $25 a share,,
and the 5,000 of the common stock of United States & Foreign which
the United States & International bought in order to option them
to you at $25 a share were purchased for a consideration, an aggregate consideration, of about $300,000 in excess of the aggregate option
price to you of those 20,000 shares ?
Mr. TRACY (after conferring with associates). I will accept those
figures, Mr. Pecora, without wasting time to check them.
Mr. PECORA. DO you think it was sound bookkeeping to continue
those shares on the books of these two investment trusts at their cost
price and not at the option price to you, which would represent a
difference of about $300,000?
Mr. TRACY. I think that would be something that would be up to
Price, Waterhouse & Co., the accountants.. There was no way of
telling whether I would exercise that option at 25.
Mr. PECORA. But so long as the option agreement was outstanding
those shares represented an actual value to the corporations of
$300,000 less than the price at which they were carried ?
Mr. TRACY. Correct.
Senator COUZENS. Did you testify previously, Mr. Tracy, that Mr.
Dillon selected you for the presidency of both of these investment
trust companies ?
Mr. TRACY. NO. The board of directors selected me as president..
Senator COUZENS. I thought I heard him say
Mr. PECORA (interposing). He did say that Mr. Dillon spoke to
him about it.
Mr. TRACY. He spoke to me about going on the board, Mr. Pecora.
That was in the spring of 1927. He told me there was a vacancy on
the board and the directors would like to have me join the board.
Senator COTTZENS. Who first suggested to you that you could become president of both of these investment trusts ?
Mr. TRACY. I think it was Mr. Dillon, although I remember one
or two of the other directors mentioned it.
Senator COUZENS. But he was the dominating character of both
the boards ?
Mr. TRACY. NO ; he was not the dominating character of both the
boards.
Senator COUZENS. AS a matter of fact, didn't Dillon, Read & Co.
control the common stock of both?
Mr. TRACY. They control the majority of the stock.
Mr. PECORA. NOW, can you tell the reason for the acquisition of
the 8,745 shares of the first preferred stock of the United States &
Foreign Securities Corporation by the United States & International ?
Mr. TRACY. Yes, sir. It was a good investment.
STOCK EXCHANGE PRACTICES
1835
Mr. PECOEA. When was that investment made?
Mr. TRACY. I will have to look that up for you, Mr. Pecora.
[After conference with associates:] From October the 29th, Mr.
Pecora, to and through November the 1st, 1928.
Mr. PECORA. That is in a period of 2 or 3 days' time?
Mr. TRACY. Yes.
The CHAIRMAN. What did it cost?
Mr. PECORA. $859,371.50.
The CHAIRMAN. YOU say it is a good investment. What is its
value now ? What is the price now ?
Mr. PECORA. According to the portfolio statement of December 31,,
1932, its market value on that date was $419,760. Is that correct ?
Mr. TRACY. That is right. We have received our 6 percent on
that investment, and the assets behind it today are about $138 for
every share of preferred.
The CHAIRMAN. That is figuring the assets at cost ?
Mr. TRACY. At market, sir.
Mr. PECORA. I wish you would make available to this committee,.
say, by tomorrow morning, Mr. Tracy, statement of any securities
purchased by the United States & International Securities Corporation which were in its portfolio as of the end of the year 1932
and which were issued by corporations other than those in which
any officer or director of your corporation or other than those in
which Dillon, Read & Co. or any of its partners had any interest.
Mr. TRACY. May I get a transcript of that afterwards so that I
will have that exactly ? There may be people out of town. I will
have to telephone to New York. I will have to get the list of
directors of the board and all the people that served on it.
Mr. PECORA. Perhaps you can tell us this: Do you know of a
single security purchased by either one of these investment trusts
now in their portfolios which were issued by corporations in which
no officer or director of either of these investment trusts or in which
Dillon, Read & Co. or none of its partners had any interest?
Mr. TRACY. AS I told you before, Mr. Pecora, I would have to
guess at that. I think Mr. Hayden is a member of 50 boards. I
don't know.
Mr. PECORA. What would your best guess be ?
Mr. TRACY. I would certainly think that we had a number of
them, yes, but I don't remember. I have no idea what boards Mr.
Burchard was on. I am told there were about 40 or 50, and I would
have to check every one of them. I don't know all the boards of all
the Dillon, Read & Co. members referred to this morning. I would
have to check that. And I don't know where I can get that information here. I will try to get it to the best of my ability.
Mr. PECORA. YOU could get that pretty quickly from the use of a
directory of directors, couldn't you?
Mr. TRACY. I could get the most of them, although the New York
Directory of Directors only gives directorships who are residents of
New York.
Mr. PECORA. NOW, will you place before you, for the purpose of
reference and in order to enable you to answer the questions which
I am now about to put to you, a copy of the portfolio statement of
175541—33—PT 4
20
1836
STOCK EXCHANGE PRACTICES
the United States & International Securities Corporation as of
December 31, 1932?
Mr. TRACY. All right.
Mr. PECORA. Have you got it before you now?
Mr. TRACY. Yes, sir.
Mr. PECORA. There was
put in evidence here last week, Mr. Tracy,
the answer to question no. 3 of the questionnaire that was submitted
by me to Dillon, Read & Co., which question called for the following
information:
The names of all corporations in which any partner or representative of the
firm of Dillon, Read & Co., or any of its agencies, is a director or officer.
The answer thereto indicated that the following corporations were
corporations in which a Dillon, Read & Co. member was a director
or officer: The Amerada Corporation. Now, I notice in the portfolio
of your investment trust there is a large block, 35,000 shares, of
the stock of the Amerada Corporation.
Mr. TRACY. Yes, sir.
Mr. PECORA. Beneficial
Industrial Loan Corporation. Are there
any securities issued by that corporation in the portfolio of your
investment trust?
Mr. TRACY. I do not see any here, Mr. Pecora.
Mr. PECORA. Brazilian Traction, Light & Power Co., Ltd. Are
there any securities of that corporation in the portfolio of your investment trust?
Mr. TRACY. I have the portfolio of the United States & International Securities Corporation in front of me, Mr. Pecora.
Mr. PECORA. Yes.
Mr. TRACY. NO. There
Mr. PECORA. Will you
are no Brazilian Traction securities here.
also make immediately available to you a
€opy of the portfolio statement of the United States & Foreign Securities Corporation as of December 31, 1932?
Mr. TRACY. Yes, sir. I now have it. We have Brazilian Traction,
Light & Power Co., Ltd., securities in the portfolio of the United
States & Foreign Securities Corporation.
Mr. PECORA. Broadway Department Store, Inc. That appears to
be another corporation according to the answer to question 3 of
our questionnaire addressed to Dillon, Kead & Co., of which a member of that firm was a director or officer.
Mr. TRACY. Yes, sir. We have 1,000 shares of common.
Mr. PECORA. NOW, Commercial Investment Trust Corporation
seems to be another corporation in which a member of Dillon, Read
«& Co. was a director or officer. Have you any issues of that company
in your portfolios ?
Mr. TRACY. Yes, sir; we have, both preferred and common.
Mr. PECORA. Consolidated Cigar Corporation appears to be another one of those corporations. Have you any of its securities in
your portfolios?
Mr. TRACY. I do not find the Consolidated Cigar.
Mr. PECORA. Neither do I. Educational Pictures, Inc., is another
one of those corporations of which a member of the firm of Dillon,
Read & Co. was an officer or director. Do you find any of its securities in your portfolios?
Mr. TRACY. No; I do not.
STOCK EXCHANGE PRACTICES
1837
Mr. PECORA. Equitable Office Building Corporation is another one
of those corporations. Are any of its securities in your portfolios ?
Mr. TRACY. Yes, sir; there are.
Mr. PECORA. In both investment trusts?
Mr. TRACY. NO, sir; in one of them.
Mr. PECORA. In the United States & International Securities Corporation, is it?
Mr. TRACY. In the United States & International; yes, sir.
Mr. PECORA. Goodyear Tire & Kubber Co. is another one of those
corporations. Do you find any of its securities in the portfolios of
either one of those investment trusts?
Mr. TRACY. JSTO ; I do not, sir.
Mr. PECORA. Louisiana Geophysical
one of
Mr.
Co.
Mr.
one of
Exploration Co. is another
those companies. Are any of its securities in the portfolios?
TRACY. N O : none of the Louisiana Geophysical Exploration
Louisiana Land & Exploration Co. is another
those corporations, isn't it?
PECORA. NOW,
Mr. TRACY. Yes,
Mr. PECORA. DO
sir.
you find any of its securities in either of those
portfolios ?
Mr. TRACY. Would you mind allowing the committee reporter to
repeat that question?
Mr. PECORA. The Louisiana Land & Exploration Co. Are any of
their securities in the portfolio of either of those two investment
trusts ?
Mr. TRACY. Yes, sir. We have 100,000 shares.
Mr. PECORA. In which portfolio?
Mr. TRACY. In the United States & International.
Senator COTTZENS. At what cost are those 100,000 shares carried?
Mr. TRACY. $278,000.
Mr. PECORA. It is $278,125, isn't it?
Mr. TRACY. Yes, sir—no; it is $125,000.
Mr. PECORA. That is the company that you are the president of ?
Mr. TRACY. I am happy to say I am the president of it.
Mr. PECORA. DO you get a salary from that company as its president, or is your compensation in the form of option agreements to
buy stock ?
Mr. TRACY. My compensation is in the form of option agreements.
Mr. PECORA. Loew's, Inc., seems to be another corporation in
which Dillon, Read & Co. was interested, or one or more of its
members is an officer or director. Do you own any of its securities
in your portfolios?
Mr. TRACY. Yes,
sir.
Mr. PECORA. In which ones?
Mr. TRACY. We have 1,000 shares of common stock, and it is in
the United States & International.
Mr. PECORA. NOW, there is a corporation called the Nederlandsche
Crediet en Financiering Maatschappij, as near as I can pronounce it.
Senator ADAMS. HOW do you spell it?
Mr. PECORA. I will have to " sneeze " it.
Mr. TRACY. We haven't any of that that I can find.
1838
STOCK EXCHANGE PRACTICES
Mr. PECORA. NOW, weren't you mistaken when you said in answer
to my previous question, there were no securities issued by Loew's
Inc., in the portfolio of either of these investment trusts?
Mr. TRACY. NO. I said we do have some.
Mr. PECORA. YOU had some also in the United States & Foreign
Securities Corporation, didn't you ?
Mr. TRACY. Yes, sir; 7,500 shares.
Mr. PECORA. NOW, how about the Panhandle Eastern Pipe Line
Co. ? Have you any of its securities in either of these portfolios ?
Mr. TRACY. NO; we haven't any.
Mr. PECORA. NOW, it seems that the St. Louis & San Francisco
Railway Co. is another corporation in which a partner of Dillon,
Read & Co. is a director or officer. We know the extent of the holdings of securities of that railroad corporation in these portfolios, I
believe.
Mr. TRACY. Yes, sir.
Mr. PECORA. HOW about
A. C. Spalding & Bros.? That is another corporation in which Dilon, Read & Co. or a partner is an
officer or director.
Mr. TRACY. We have nothing in Spalding Bros.
Mr. PECORA. HOW about the Tubize Chattilon Corporation ?
Mr. TRACY. We have none of that.
Mr. PECORA. Nothing in that ?
Mr. TRACY. NO, sir.
Mr. PECORA. HOW about United New Jersey Railroad & Canal Co. ? Mr. TRACY. Nothing in that.
Mr. PECORA. And how about Union Oil Co. of California.
Mr. TRACY. We have none of that.
Mr. PECORA. HOW about Victor Chemical Works ?
Mr. TRACY. We have none of that.
Mr. PECORA. NOW, in answer to question no. 3 of our question-
naire as it appears from the record before this committee, Dillon,
Read & Co. stated that the following-named corporations are corporations in which an employee or representative of Dillon, Read &
Co., other than a director, is an officer or director; and the companies
are as follows: Ault-Wiborg, Ltd., Ernesto Breda Co., Cespedes
Sugar Co., Commander-Larabee Corporation, 419-435 Flatbush Avenue Extension, Inc., General Cable Corporation, German Credit &
Investment Corporation.
Mr. TRACY. That is the only one we have so far on that list.
Mr. PECORA. Its securities are in the portfolios of both investment
trusts, aren't they ?
Mr. TRACY. Yes, sir; we have some in both.
Mr. PECORA. And next is the International Printing Ink Corporation.
Mr. TRACY. Yes; we have some of that.
Mr. PECORA. That is in both portfolios, isn't it ?
Mr. TRACY. Yes, sir.
Mr. PECORA. And International
Water Co., Inc., and International
Water Corporation, South America?
Mr. TRACY. NO.
Mr. PECORA. Layne-New York Co., Inc., of Delaware?
Mr. TRACY. NO.
STOCK EXCHANGE PRACTICES
1839
Mr. PECORA. National Cash Register Co.?
Mr. TRACY. NO ; we haven't got any of that.
Mr. PECORA. San Francisco Bridge Securities Corporation?
Mr. TRACY. NO.
Mr. PECORA. Societe d'Electricite de la Region de Malmedy?
Mr. TRACY. NO; we haven't any of that.
Mr. PECORA. And Societe d'Etude d'Execution des Grands Travaux ?
Mr. TRACY. NO ; we have none of that.
Mr. PECORA. AS I recall your testimony of a few minutes ago—
and you are the president of the Louisiana Land & Exploration Co.,
aren't you?
Mr. TRACY. Yes, sir.
Mr. PECORA. YOU said you got no salary from it as president?
Mr. TRACY. NO, sir.
Mr. PECORA: That the only form of compensation you receive
from it is through the medium of the exercise of options to purchase
its stock as granted you by the company.
Mr. TRACY. TO purchase the stock of the Louisiana Geophysical
Exploration Co., which is a subsidiary company.
Mr. PECORA. Have you exercised any of those options?
Mr. TRACY. NO, sir.
Mr. PECORA. SO that you have been serving these four corporations, two investment trusts, and the Louisiana Geophysical Exploration Co. and the Louisiana Land & Exploration Co., up to the present
time, without any actually realized compensation?
Mr. TRACY. Correct, aside from what I have received as directors'
fees, of course.
Mr. PECORA. NOW, the portfolio of the United States & Foreign
Securities Corporation as of December 31, 1932, among other things,
shows an investment of $1,250,000 in the securities of the German
Credit & Investment Corporation 6 percent preferred stock, 12,500
shares. That is correct, isn't it?
Mr. TRACY. That is correct.
Mr. PECORA. NOW, your portfolio report as of December 31, 1932,
gives the market value to that stock as of $1.
Mr. TRACY. That is correct. Anything that is not quoted we put
down at a nominal market value of $1.
Mr. PECORA. Who recommended the acquisition of those 12,500
shares of the German Credit & Investment Corporation 6 percent
second preferred stock?
Mr. TRACY. I assume that that was passed on by the board, Mr.
Pecora.
Mr. PECORA. What did you say ?
Mr. TRACY. I assume it was passed on by the board, but that was
purchased before I became the president of the company.
Mr. PECORA. And has it been retained in its portfolio during
periods when its market value was receding, during your term as
president ?
Mr. TIJACY. It has been in the portfolio in my term as president;
yes, sir.
Mr. PECORA. Are you familiar with that particular investment ?
Mr. TRACY. I beg your pardon ?
1840
STOCK EXCHANGE PRACTICES
Mr. PECORA. I say, are you familiar with that particular investment?
Mr. TRACY. I am fairly familiar with it; yes, sir.
Mr. PECORA. What do you know about it?
Mr. TRACY. I know that it has assets today, of cash and Government securities, equivalent to approximately—well, what is it [addressing an associate] ? Well, the securities that they own in this
country have a market value in excess of $25 per share, not counting
securities that they own in Germany, which are long-term investments, short-term investments, and loans to small investors.
Mr. PECORA. Why is this stock marked down to $1 ?
Mr. TRACY. Because there is no market quotation for it. And in
the case of a number of our securities, as you will see, on our annual
report it shows, in the absence of a market, where we cannot find a
market quotation, we give it a nominal value of $1.
Senator COTJZENS. DO you ever attempt to sell any of those securities?
Mr. TRACY. I beg your pardon?
Senator COTTZENS. Has any attempt been made to sell any of those
securities that you carry at $1 ?
Mr. TRACY. 1 do not think we have tried to sell any of them.
Mr. PECORA. NOW, tell the committee on whose recommendation—
I know I asked you this question before, but I do not know whether
you have had the information before—on whose recommendation
the bonds of the Seaboard Air Line Eailway Co. were acquired by
these investment trusts.
Mr. TRACY. The matter was discussed at .some of the meetings.
Mr. PECORA. What do you recall as having been urged at any of
these many meetings in favor of the acquisition of these bonds by
your investment trust?
Mr. TRACY. Of the Seaboard?
Mr. PECORA. Of the Seaboard.
Mr. TRACY. AS I remember the Seaboard situation, a plan of refinancing it was discus,sed at a number of the directors' meetings and
officers' meetings, and the development of the plan was followed.
Mr. PECORA. At the time of that discussion some of the bonds
had already been acquired by one or other of these two investment
trusts, had they not?
Mr. TRACY. I believe they had.
Mr. PECORA. What do you recall that anyone said in urging or
recommending these bond,s as a proper investment for either of
these two investment trusts?
Mr. TRACY. I do not remember any specific recommendation that
was made, because the Seaboard situation, as I remember clearly,
was discussed at a great many meetings.
Mr. PECORA. What was said specifically at all these meetings?
Apparently the security was frequently discussed. You surely ought
to be able to tell us some of the things that were urged in favor of
investing in that security.
Mr. TRACY. The general opinion was that the plan for refinancing
the company would improve the financial structure of the company
Mr. PECORA. Of which company—the Seaboard ?
STOCK EXCHANGE PRACTICES
1841
Mr. TRACY. Yes,.sir—that it would be a benefit to all the security
holders; and that plan was under discussion for a long time.
Mr. PECORA. Are you familiar with the financial history of the
Seaboard Air Line Railway for the past 15 years?
Mr. TRACY. I would not go back 15 years; no.
Mr. PECORA. Would you go back 10 years ?
Mr. TRACY. Since I have been familiar with the securities as we
have been buying them into the company; yes.
Mr. PECORA. HOW far would you have to go back ?
Mr. TRACY. I know that back in the old days there was a receivership, and then they borrowed imoney from the United States Treasury after the railroads were turned back by the Government in
1920, and then its earnings began to show an improvement. Mr. Warfield died, as I remember, somewhere along in 1927 or 1928, and at
that time I believed it was Dillon, Eead & Co. who suggested to the
management that they had a complete survey made for the road.
Mr. PECORA. When was that made by Dillon, Eead & Co. ?
Mr. TRACY. The report was made by Coverdale & Colpitts
Mr. PECORA. When?
Mr. TRACY. I think that report was in 1928.
Mr. PECORA. Had not Dillon, Read & Co., as bankers, undertaken
the reorganization of that road prior to that time ?
Mr. TRACY. I do not remember. I would have to check that up.
I would have to refresh my memory on that.
Mr. PECORA. Was your judgment, as the president and a director
in these two investment trusts, consulted about investing in Seaboard Air Line Kailway Co. bonds ?
Mr. TRACY. Certainly.
Mr. PECORA. Did you approve of the acquisition? Did you favor
the purchase of these bonds ?
Mr. TRACY. I certainly did.
Mr. PECORA. What were the factors that prompted you to favor
them?
Mr. TRACY. In the first place, the report of Coverdale & Colpitts
was very favorable
Senator ADAMS. I suppose that report wound up with commending the road for the high class of its management ? I notice in the
two reports here they are very commendatory of the management
of those roads.
Mr. TRACY. I think that is the usual courtesy that they put in at
the end of a report.
Senator ADAMS. I was wondering if that was customary.
Mr. TRACY. Yes; I think it is put in at the end of all reports.
Mr. PECORA. In other words, the operation of the road was successful, but the patient died ?
Mr. TRACY. Yes; the railroad is in receivership.
Mr. PECORA. DO you know that Coverdale & Colpitts were members of an underwriting syndicate managed by Dillon, Read & Co.
in connection with the reorganization of the Seaboard Air Line
Railway Co.?
Mr. TRACY. Yes. They took a substantial interest in it and in
the Pennsylvania Railroad. They took a very substantial interest
in the underwriting of the common stock.
1842
STOCK EXCHANGE PRACTICES
Mr. PECORA. DO you mean, the Pennsylvania Eailroad or the Penni-oad Corporation?
Mr. TRACY. The Pennroad Corporation.
Mr. PECORA. DO you happen to have read the testimony that was
given before this committee last June or July by the president of
the Pennroad Corporation with regard to the purchase by the Pennroad Corporation of large blocks of the shares or bonds of the Seaboard Air Line Kailway?
Mr. TRACY. NO, sir.
Mr. PECORA. DO you
remember that Mr. Lee, president of the
Pennroad Corporation, testified
Mr. TRACY. NO, sir; I did not read any of it.
Mr. PECORA (continuing). That the Pennroad Corporation acquired a much larger block of those securities than it had ever intended to acquire, and it was led to do so by some oversight in the
preparation of some agreement
Mr. TRACY. I did not read any of the testimony.
Mr. PECORA (continuing). Which pledged them, apparently, to
take over more than they had intended to take? It seems to me I
recall some such testimony having been given last summer.
Mr. TRACY. AS I remember—.and this is memory only, Mr.
Pecora—in Pennsylvania Railroad, the Pennroad Corporation,
agreed to take 25 percent of the stock that was not taken by the
stockholders, and I think the agreement with the Seaboard was
finally signed some time in October, and there was the usual delay
in getting the approval of the Interstate Commerce Commission.
That was obtained in the early part of the next year; and when the
stock was taken over, in the meantime there had been a very precipitous drop in the market, and very few stockholders subscribed, so
they very probably got their full amount.
Mr. PECORA. They took over more than 400,000 shares, whereas
they contemplated originally taking over only 125,000 shares. That
is my present recollection of Mr. Lee's testimony before this committee in the early summer of this year.
Mr. TRACY. I have not read the testimony, as I told you, Mr.
Pecora; but between the date of the closing of that agreement with
the Seaboard and the approval of the Interstate Commerce Commission, which I think was 2 or 3 months, there had been a panic,
as everyone knows, and very few of the stockholders to whom
the stock had to be offered took any stock, on account of the decline in the market. So that the Pennroad Corporation got their
full participation, as all the others did, because the stockholders
took very little. There was a decline in the market during that
time.
Mr. PECORA. According to Mr. Lee, they got more than their full
participation, more than they contemplated acquiring when they
entered into the underwriting agreement.
Mr. TRACY. I do not know anything about Mr. Lee's testimony;
but of course the market went down and they got 25 percent of
what the stockholders did not subscribe for. The market declined
and the stockholders did not subscribe to the stock which they would
have probably subscribed for if it had stayed up.
STOCK EXCHANGE PRACTICES
1843
Mr. PECOKA. When were the Seaboard Air Line Eailway Co.'s
stocks and bonds acquired by this investment trust of which you
were president?
Mr. TRACY (after conferring with associates). Those are the acquisitions of the United States & Foreign Securities Corporation
(handing papers to Mr. Pecora) ; and I will give you others shortly.
Mr. PECORA. I notice, for instance, in the portfolio statement of
the United States & International as of December 31,1932, that there
were in this portfolio at that time 131,908 shares of the common stock
of the Seaboard Air Line Eailway and 9,930 warrants for the purchase of common stock of that company, which stock and warrants
cost the United States & International a total of $1,478,675.79. Do
you find that to be correct, in the portfolio of the United States &
International as of December 31, 1932?
Mr. TRACY. $1,478,675.79.
Mr. PECORA. And do you also find that at the same time in this
portfolio were bonds of the Seaboard Air Line Eailway Co. which
cost the investment trust $506,847.13 ?
Mr. TRACY. That is correct, sir.
Mr. PECORA. There is a gross investment of very close to $2,000,000
in common stock and bonds of this railroad company. When was
that investment made?
Mr. TRACY. That was made in the fall of 1928—I find I am incorrect ; it was in the early part of 1930.
Mr. PECORA. That was after the stock market collapsed in October
and November, 1929, was it not?
Mr. TRACY. That is correct. I believe we signed the agreement
in October. If you will let me look it up
Mr. PECORA. It was after the stockholders of the Seaboard Air
Line Eailway Co. had failed in large numbers to subscribe for the
stock of the company under the reorganization plan?
Mr. TRACY. If my memory serves me correctly—I would like to
look this up to be exact and give you the accurate information—we
signed the agreement to go into that in October 1929. Then it had
to be submitted to the stockholders. They had to be given the right
to subscribe, the opportunity to subscribe, to the common stock.
After that had been ratified, it had to have the approval of the Interstate Commerce Commission; but we were permitted, as I remember,,
by the Interstate Commerce Commission
Mr. PECORA. YOU were committed by virtue of this agreement of
October 1929?
Mr. TRACY. We agreed to go into it.
Mr. PECORA. DO you know the date of that agreement ?
Mr. TRACY. If you will let me check it up I will give you accurate
information on it, but my distinct recollection is that the cause of
that delay was the delay in getting the machinery through and the
approval of the Interstate Commerce Commission. This was a long,,
big, constructive job to build up that railroad.
Mr. PECORA. TO build up a railroad that had had a bad record uj>
to that time. Up to that very time the Seaboard Air Line Eailway
had had a bad record ?
1844
STOCK EXCHANGE PRACTICES
Mr. TRACY. It had; but those are the kinds of things that you can
often make the most money out of.
Mr. PECORA. And you think investment trust funds are the kind
of funds to put into ventures of that sort ?
Mr. TRACY. We believed thoroughly
Mr. PECORA. Not " we." I want your individual opinion.
Mr. TRACY. I did, thoroughly.
Mr. PECORA. YOU think that would be a good investment for
moneys that this morning you said should be regarded as a trust
fund?
Mr. TRACY. It was money given to us by the stockholders. We
were responsible to our security holders. It was not in the nature
of a trust fund, as you might say, or trust estate, limited by law as
to what you can put funds into.
Mr. PECORA. The great virtue claimed for these investment trusts
is that they are managed and operated by persons of trained and
expert minds possessing a judgment superior to that of the ordinary
investor, whereby the ordinary investor is enabled in subscribing
for the shares of an investment trust to obtain a safe diversification
of investment?
Mr. TRACY. I think the fact that we have $138 a share on every
$100 of public money that has been paid into this company is proof
that this company has been well managed during this very trying
period.
Mr. PECORA. YOU do not happen to have $138 a share behind these
shares because of such investments as those you made in the Seaboard
Air Line Eailroad Co. or the Chicago, Kock Island & Pacific or the
St. Louis & San Francisco
Mr. TRACY. We do not profess to be infallible.
Mr. PECORA (continuing). Where your original investments have
been almost completely wiped out by depreciation.
Mr. TRACY. We do not pretend to be infallible.
Mr. PECORA. But you do think it is proper for the funds of an
investment trust to be invested in an enterprise having for its object
the rebuilding of a railroad corporation which had had a bad history
up to that time ? You think that is a proper investment for funds
of an investment trust ?
Mr. TRACY. When we made that investment we believed in it
thoroughly.
Senator ADAMS. Mr. Tracy, may I divert? In this schedule that
is on file here, showing the holdings of the Foreign Co., I see in
addition to the columns headed " Book value " and " Market value "
there is one headed " Dividends received in cash ", with a total at
the foot of that column of $129,000. Does that represent the dividends received during the year 1932 ?
Mr. TRACY. I will have to find out.
Senator ADAMS. It is exhibit I I I apparently.
The CHAIRMAN. I do not think it has been offered for the record.
Senator ADAMS. NO ; it is not one of the committee's exhibits. It
is marked " I I I " on one of these carbons.
Mr. TRACY. In the year 1932 the cash dividends received on
domestic stocks of corporations was $671,159, and on foreign corporations $9,221.
STOCK EXCHANGE PRACTICES
1845
Senator ADAMS. This is a tabulation headed " Securities on December 31, 1932."
Mr. TRACY. I am told those dividends were declared but not yet
paid, Senator, totaling $84,947.
Senator ADAMS, Totaling $129,000.
Mr. TRACY. YOU may have a different one. You have the other
company.
Senator ADAMS. This is the Foreign Securities.
Mr. TRACY. Yes, sir. Those were dividends that had been declared but not yet received.
Senator ADAMS. YOU have no list in here of the dividends paid,
on this tabulation?
Mr. TRACY. We have right here the dividends received during the
year, cash dividends received [indicating].
Senator ADAMS. $671,000.
Mr. TRACY. Yes.
Mr. PECORA. Mr.
Tracy, what experience had you had in the
investment market before you became president of these two investment trusts ?
Mr. TRACY. In the investment market?
Mr. PECORA. Yes.
Mr. TRACY. I am
on the board of a number of other investment
security companies.
Mr. PECORA. Before you became president of these two investment trusts, what experience had you had in the investment market?
Mr. TRACY. YOU mean you want to go back to my early history ?
Mr. PECORA. I want you to answer the question, narrating your
experience in the investment market up to the time that you became
president of these two investment trusts.
Mr. TRACY. I will be very glad to give it to you. I joined the
firm of William P. Bonbright & Co. in 1909 and I was with them
until the war broke out, when I went into the Army in 1917. I had
charge of all the foreign business in Bonbright &> Co., in the sale of
securities to the foreign correspondents. After the war I did not go
back with Bonbright, and I have been on my own since. I am on the
board, and I have been on the board since 1911, I think it is, of the
American & European Securities Co., and its predecessor company,
which is the securities company that was originally formed in
Geneva, Switzerland. I am on the board of the Societe Financiere
Franco Suisse, that was formed in 1892, with Swiss and French
bankers, and I have been on that board for a great many years. I
am on the board of the Electrical Securities Corporation, and have
been on that for a great many years. That was formed in 1905. I
am on the board of the Illuminating & Power Securities Corporation,
which was formed, if my memory is right, about 1911. I am on the
board of the Public Utility Corporation, which is another security
company which was formed, I think, in about 1904 or 1905; and for
the last 10 years my entire time has been given to the management
and supervision of investment funds.
Mr. PECORA. Investment funds of investment trust corporations?
Mr. TRACY. Of investment trust corporations; and I also advise
1846
STOCK EXCHANGE PRACTICES
Mr. PECORA. Have you served all these investment trust corporations without salary as president?
Mr. TRACY. N O ; I am not president. I am a director of most of
them. I am president of one, the American & European Securities
Co.; and in addition to that, if I may add, I acted in an advisory
capacity to a number of foreign bankers on American securities.
Mr. PECORA. At the time, in the early part of 1930, when the
United States & International Securities Corporation, of which you
were then president and director, invested nearly $2,000,000 of its
funds in the stock and bonds of the Seaboard Air Line Railway Co.,
did you make any personal investment in those securities for your
individual account?
Mr. TRACY. I believe I did buy some of the common stock of the
Seaboard.
Mr. PECORA. HOW much, in shares?
Mr. TRACY. I do not remember off-hand, but I know I sold it about
2 years afterward, and took a loss of $35,000 to $40,000 on it, or
.something like that.
Mr. PECORA. When this agreement was made in October 1929 by
the United States & International Securities Corporation, that obli;ated it to buy this large block of the common stock of the Seaoard Air Line Railway, with whom did it make that agreement?
Mr. TRACY. AS I remember it—I will check it up for you—Dillon,
Read & Co. headed that syndicate.
Mr. PECORA. YOU mean it made the agreement with Dillon, Read
& Co.?
Mr. TRACY. With whoever the syndicate managers were.
Mr. PECORA. The syndicate managers happened to be Dillon, Read
& Co.
Mr. TRACY. I believe they were Dillon, Read & Co. and Ladenburg-Thalman.
Mr. PECORA. Although the agreement was made in October 1929,
the investment was not actually made until January 1930.
Mr. TRACY. NO. It was because we had to wait until we got the
approval of the Interstate Commerce Commission.
Mr. PECORA. Meanwhile, had the price at which the common stock
was to be acquired by your investment trust been fixed in the October
1929 agreement?
Mr. TRACY. We agreed to take a certain percentage in the syndicate which was to take up the stock not subscribed by the stockholders, as I remember it.
Mr. PECORA. At what price were you to take that stock ?
Mr. TRACY. Would you mind my checking that? (After examining papers.) The underwriting price, Mr. Pecora, was $12, less $1,
which was the commission. Of course, the amount was not fixed,
because we did not know how much the stockholders might take.
The stock had to be offered to the stockholders first.
Mr. PECORA. DO you know the date of that agreement?
Mr. TRACY. October 11, 1929.
Mr. PECORA. Between that time, when you agreed to buy, in behalf of this investment trust, 131,000 shares, more or less, of the
common stock of the Seaboard Air Line Railway, and January 1930,
f
STOCK EXCHANGE PRACTICES
1847
when the transaction was consummated, there had been a very substantial decline in securities values in the stock market, had there not?
Mr. TRACY. Indeed there had.
' Mr. PECORA. And that decline affected the common stock of the
Seaboard.
Mr. TRACY. It also affected the amount we bought.
Mr. PECORA. And you had to take more than you originally
intended to take.
Mr. TRACY. More than we originally intended to take, because
the stockholders did not take any when the stock went down.
Mr. PECORA. HOW much of a depreciation had there been in the
market value of the common stock of the Seaboard Air Line between October 11, 1929, and the date in January 1930, when the
transaction was consummated?
Mr. TRACY. May I look that up for you ? [After conferring with
an associate.] We have not got the Financial Chronicle here, to
look that up.
Mr. PECORA. YOU recall the decline was quite a substantial one?
Mr. TRACY. Indeed, it was, in all securities, Mr. Pecora.
Mr. PECORA. Was any suggestion made by anybody in behalf of the
investment trust to anybody connected with Dillon, Read & Co.,
that the investment trust be released from this agreement?
Mr. TRACY. I do not remember any such suggestion. We had
signed an agreement.
Mr. PECORA. YOU signed an agreement with persons who, by virtue
of their stock ownership, were in control of the United States &
International Securities Corporation?
Mr. TRACY. They were managers of the syndicate.
Mr. PECORA. They were managers of the syndicate, and the principal participants in that syndicate, were they not ?
Mr. TRACY. Well, I will have to check that. I do not know. I
know they were participants in the syndicate, but I do not know offhand what the extent was.
Mr. PECORA. And this agreement, made early in October, had, to
use the vernacular, "turned sour" by January 1930, when it was
consummated; is that right ?
Mr. TRACY. A great many securities went down. It was a failure
because there was a break in the market, and the stockholders would
not take up more than a very small amount of stock.
Mr. PECORA. And nobody connected with your investment trust,
which, through stock ownership, was controlled by Dillon, Head &
Co., suggested to Dillon, Eead & Co. that the investment trust be
released from the fulfillment of this agreement?
Mr. TRACY. NO.
Mr. PECORA. SO,
through the enforcement of the agreement and
the fulfillment of its terms and obligations, whatever loss ensued between October 1929 and January 1930 fell on the investment trust.
Mr. TRACY. Of course. We fulfilled our agreement.
Senator GOLDSBOROTTGH. Mr. Pecora, may I ask this question, that
I may get the arithmetic of it straight ? As I understand it, in the
first investment trust there were $30,000,000. That trust had $26,000,000 losses, and that stock today, I understand, is worth $138. Is
that correct?
1848
STOCK EXCHANGE PRACTICES
Mr. TRACY. It has an asset value today of approximately $138 for
every share of first-preferred stock outstanding, and we have paid
up all the dividends to date.
Senator GOLDSBOROTJGH. Notwithstanding the original capital was
$30,000,000 and the losses were $26,000,000, it still has a value of
$138?
Mr. TRACY. Yes.
Mr. PECORA. But the market value is about 90, is it
Mr. TRACY. I will have to check that.
Senator GOLDSBOROUGH. That can only be accounted
not?
for by large
profits in other directions.
Mr. TRACY. Yes, sir. We have made very large profits.
Mr. PECORA. Senator, I am reminded that it was the United States
& International that had losses of $26,000,000, not the United States
& Foreign.
Mr. TRACY. I would have to check that, toi see the exact losses at
the end of different years. It was a very substantial amount.
The CHAIRMAN. The losses of the two trusts were about $26,000,000,
were they not?
Mr. PECORA. JSTO; only the International.
The CHAIRMAN. What was the other loss ?
Mr. TRACY. We still have the equivalent of over $90 a share in the
United States & International, which was formed at about the peak
of the market in 1928, which I think we should be proud of, and be
pardoned for being proud of.
The CHAIRMAN. The International had a capital of $60,000,000?
Mr. TRACY. Yes, sir.
Mr. PECORA. And losses of $26,000,000?
Mr. TRACY. At one time.
Mr. PECORA. And still its stock has an asset
Mr. TRACY. The United States & Foreign
value of $138 ?
has an asset value of
about $138. The United States & International today has about
$90 out of $100.
Mr. PECORA. Did not the United States & International retire,
through purchase in the open market, stock which had been sold to
the public for about $20,000,000, but which was purchased in the
open market by the United States & International for about
$10,000,000?
Mr. TRACY. We purchased a substantial amount. I will have to
check that figure for you.
Mr. PECORA. SO that $10,000,000 of the asset value of the stock
of the United States & International Corporation was created
through the retirement of $20,000,000 of its stock, that is, stock which
cost the public $20,000,000, and its retirement by purchase in the
market for $10,000,000 by the corporation?
Mr. TRACY. We retired a great deal of stock. I will have to check
those figures.
Mr. PECORA. YOU retired it at a loss to the original investing
public.
Mr. TRACY. We bought it in the market and retired it.
Mr. PECORA. But you retired it at a loss to the original investing
public.
Mr. TRACY. If a man sold it at a price below what he paid for it,
he naturally took a loss on it.
STOCK EXCHANGE PRACTICES
1849
Mr. PECORA. That loss was a loss of about 50 percent, was it not ?
Mr. TRACY. I do not know what the average was. I can get that
for you if you would like to have it.
Mr. PECORA. For the last few years you have been functioning as
president not only of these two investment trusts, but have also been
a director of two other investment corporations. Did I understand
you correctly to say that ?
Mr. TRACY. I have been a direcor of the American & European;
the Electrical Securities, Illuminating & Power, the Public Utility,
and the Societe Financiere Franco Suisse. And I might add, Mr.
Pecora, for the benefit of the committee here, that I, of course, have
information and access to all the information that all the other
directors have, and the benefit of their judgment and knowledge in
making investments for those other companies.
Mr. PECORA. And you have rendered all these services without any
compensation ?
Mr. TRACY. I expect to get substantial compensation.
Mr. PECORA. But up to the present time you have not received a
dollar of compensation.
Mr. TRACY. Except from my director's fees. But I expect to make
a good deal out of it in the future.
The CHAIRMAN. What are the director's fees?
Mr. TRACY. At the present time they are $50 a meeting.
Mr. PECORA. Did you sell, or was there sold to either of these
investment trusts, any of your personal holdings in the stock of the
Louisiana Land & Exploration Co.?
Mr. TRACY. NO, sir.
Mr. PECORA. Did you
ever participate in any joint account with
Dillon, Read & Co. in any of their operations ?
Mr. TRACY. I may have purchased some stock personally at the
same time they were buying some.
Senator COUZENS. Did you ever receive any salary from Dillon,
Read & Co. ?
Mr. TRACY. NO, sir.
Mr. PECORA. I think that is all
The CHAIRMAN. IS there any
of this witness.
particular reason, Mr. Tracy, for
having the officers of these trust companies in New Jersey ?
Mr. TRACY. It is much more economical to operate over there. Mr.
Chairman.
The CHAIRMAN. YOU save State income tax ?
Mr. TRACY. Yes; chiefly you save taxes, and rent is cheaper. You
can get much more space at a much lower rate of rental, and to
carry on all the routine bookkeeping and accounting, and everything of that kind, it is much more convenient.
The CHAIRMAN. With reference to these reports which you tendered for the record this morning, the committee feels that to print
those will unnecessarily encumber the record, but that if there are
any extracts from them that are material, you might select those and
we would be very glad to have those. To print those two reports
would make quite a volume, and the committee thinks it would be
unnecessary.
Mr. TRACY. Mr. Chairman, I believe Senator Couzens read them
over. I do not know whether any of the other members have. If I
1850
STOCK EXCHANGE PRACTICES
may, I will go through those reports, and if there is anything I
would like to suggest, may I do so in the morning ?
The
CHAIRMAN.
Yes.
Mr. PECORA. AS I recall it, Mr. Chairman, the testimony of this
witness this morning showed that the principal investments of these
two investment trusts in those railroad companies that are covered by
those surveys or reports of Coverdale & Colpitts were made in July
1929, whereas these reports appear to have been sometime subsequent
to that. So I do not think it could be fairly argued or contended
that these reports influenced the directors in the making of these
investments if the reports were made after the investments were
made.
Mr. TRACY. We knew exactly what was going on all the time in
those reports. We were getting advance reports from them before
they were finally turned in. We had proofs of the reports and we
knew about the principal findings long before that.
Senator COUZENS. Somebody had suggested that you knew what
the report was going to be before they started.
Mr. TRACY. I have not much respect for anybody who would suggest that kind of thing, because Cloverdale & Colpitts do not make
that kind of report, and I think that is entirely uncalled for.
Mr. PECORA. Why did you make the investments before their
reports were completed?
Mr. TRACY. Because we knew what was going to be in the reports.
Mr. PECORA. I am satisfied to rest with that answer.
Senator COTJZENS. That is just what I said.
Mr. TRACY. Let me make myself plain. We were in constant touch
with the engineers and knew their findings in advance of the publication of the report. The final reports came in. We got the proofs
of those reports and their primary findings as they went along.
And you will find that the statistical services advised the purchase
of those securities after we had made our purchases.
Mr. PECORA. I have before me, Mr. Tracy, printed copy of the
report to the stockholders of the United States & Foreign Securities
Corporation, as of December 31,1932. In its balance sheet under the
caption of " assets " on the last page I notice the investment of the
United States & Foreign Securities Corporation in 93,700 shares of
the second preferred stock and 1,987,653 shares of the common stock
of the United States & International Securities Corporation is carried at a nominal value of $1.
Mr. TRACY. Yes, sir; that is right.
Mr. PECORA. That item represented an investment of approximately $10,000,000, did it not?
Mr. TRACY. That is correct. I told you before, where there was
not an established market we put these things down as $1. At that
time that second preferred stock had no asset value—at that particular time.
Mr. PECORA. Has it now ?
Mr. TRACY. NO, sir; it has
Mr. PECORA. That is all.
not.
(Witness excused.)
Mr. PECORA. Mr. Chairman, Mr. Clarence Dillon has just submitted to me a typewritten statement with respect to the United
STOCK EXCHANGE PRACTICES
1851
States & Foreign Securities Corporation and the United States &
International Securities Corporation, which he would like to submit
for the record. I see no objection, and ask that it be put in evidence.
The CHAIRMAN. I t may be admitted in evidence and spread upon
the record.
(Statement presented by Mr. Clarence Dillon with reference to
the United States & Foreign Securities Corporation and the United
States & International Securities Corporation was received in evidence, marked " Committee Exhibit No. 20 of October 10, 1933 ",
and is here printed in the record in full as follows:)
COMMITTEE EXHIBIT NO. 20, OCTOBEE 10, 1933
As far as I know, United States & Foreign Securities Corporation was the
first investment company of substantial size organized in the United States.
At its formation in 1924 $25,000,000 of its 6 percent first preferred stock was
sold publicly. There were also issued a, million shares of common stock, of
which one quarter went to the public with the first preferred stock. The sum
of $5,100,000 was paid in by Dillon, Read & Co. and their associates for the
second preferred stock and three quarters of the common stock. The allocation of this common stock was clearly set forth in the advertisement and in
the circular.
In my opinion, the public bought this $25,000,000 of first preferred primarily
for two reasons. First, because Dillon, Read Co. put their names and reputation back of this company and took full responsibility for organizing a board
of directors which would manage these large funds competently. Secondly,
because Dillon, Read & Co. put up $5,100,000 behind the public's money where
it ran the risk of being entirely lost before the public would lose anything. This
turned out in fact to be a real risk, for at the low point in 1932 the company's assets had shrunk to a point where this investment no longer represented
any asset value whatsoever, though the first preferred stock then represented
assets with a market value of approximately $90 a share.
This company and United States & International Securities Corporation are
fundamentally different from any other investment companies which I know
of, in that they are the only companies into which large sums of money have
been paid by the organizers for the protection of the first preferred stocks.
Certain of the individual members of Dillon, Read & Co. thought so well of the
first preferred stock of United States & Foreign that they purchased for themselves and their families in the market as personal investments approximately
36,000 shares of his first preferred stock at an average cost of about $90 per
share. These purchasers represented an additional investment of approximately
$3,250,000. Dillon, Read & Co., certain of its individual members, and the members of the board of directors represent a total investment of over 96,000
shares in the first and second preferred stocks of the company, or approximately
37 percent of the company's present preferred capitalization.
For assuming the risk and responsibility referred to above Dillon, Read
& Co. and their associates upon payment by them of $5,100,000 received the
entire issue of second preferred stock and three quarters of the company's
common stock. Dillon, Read & Co. has never had any management control
with the company and the individual members of the firm who have served as
officers or directors from time to time have received no salaries as officers and
only the regular fees paid directors.
At the time the company was organized its entire common stock had an
asset value of $900,000 less than nothing and it was by no means clear that
it could ever be made valuable. By 1929, however, the company's original
assets of $29,100,000 had increased to approximately $78,000,000, and this
after full dividend payments on both classes of its preferred stock. The common stock thus came to represent an asset value of about $48,000,000, or $48 a
share, and it sold in the open market as high as $72 a share. None of the
common shares purchased by Dillon, Read & Co. have ever been sold except
shares sold to directors. I have never sold any of the stock which I purchased
at the formation of the company, but on the contrary, have actually added
to these holdings from time to time.
175541—33—PT 4
21
1852
STOCK EXCHANGE PKACTICES
In this same year, more than four years after the formation of the company,
some of the members of Dillon, Read & Co. sold a portion of their individual
holdings. These sales aggregated about 16 percent of the total common shares
originally acquired by Dillon, Read & Co. and their associates. The proceeds
from these sales, which were made at around $56 per share, amounted to about
$6,800,000. Had the first-preferred stockholders sold their 250,000' shares of
common stock at the same price at which certain members of Dillon, Read
& Co. sold some of their stock, they would have received about $14,000,000, all
of which was potential profit. Members of Dillon, Read & Co. were entirely
free to sell their individual holdings.
In the fall of 1928, the directors of United States & Foreign caused United
States & International Securities Corporation to be formed; $50,000,000 of its
5 percent first preferred stock was sold publicly, one share of common going with
each share of first preferred; $10,000,000 of its 5 percent second preferred
stock, with 2,000,000 shares of its common stock, was bought by United States
6 Foreign for $10,000,000.
In the fall of 1928, the investment of Dillon, Read & Co. and their associates
in the junior stocks of United States & Foreign had been profitable. It was
anticipated then that a similar investment by United States & Foreign in the
junior stocks of United States & International would also be profitable. This
anticipation was apparently being realized up to the time of the stock market
collapse in the fall of 1929, for in August of that year the assets of United
States & International had a market value which indicated an appreciation of
$3,700,000, or 37 percent on the $10,000,000 invested by United States & Foreign.
Should there be only a partial restoration at some future date of the former
level of security values, this expectation of a profitable investment by United
States & Foreign in the junior stocks of United States & International may
yet be realized.
Obviously Dillon, Read & Co. and its members on account of their large
investment in the*first and second preferred stocks of United States & Foreign,
if for no other reason, would not have sanctioned any investment in United
States & International or any other investment which they did not believe to
be in the best interest of all classes of stock of United States & Foreign. Furthermore, the majority of the board of directors of each of these two companies
has always been composed of men wholly unconnected with Dillon, Read & Co.
These directors are men of standing and integrity. They passed on all purchases and sales made by these two companies and regularly attended meetings
of the boards.
Considerable stress has been laid on the relations of these two companies
with Dillon, Read & Co. The fact is, however, that the companies figures show
that up to December 31, 1932, these two companies had made purchases of about
$393,000,000 of which approximately 7.8 percent, or $30,600,000 were issues
sponsored by Dillon, Read & Co. and purchased from them. The total net
profits of these two companies up to that date from sales of securities and
from participations in syndicates and trading accounts, after deducting realized
losses, amounted to $11,800,000, of which 10y2 percent, or $1,370,000 arose from
purchases from Dillon, Read & Co. of issues sponsored by them and from
participations in syndicates managed by them. For the purpose of this calculation unrealized losses on issues sponsored by Dillon, Read & Co. and purchased from them have been taken into account as actual losses.
The best way to understand the investment records of these two companies
is to look at these records as a whole. At the organization of United States
& Foreign in 1924 there was approximately $116 in assets back of each share of
first preferred stock. Since that time approximately $13,120,000 in cash has
been paid out in dividends on the preferred stocks, and on August 31, 1933, there
was approximately $138 in assets back of each share of first preferred stock.
In the case of United States & International, which received its money between
1928 and 1930, there still remains almost $90 in assets back of each share of
stock for which the investor paid $100. In view of the unparalleled decline in
security values in the past few years and in comparison with the average
prices of securities expressed in the Dow-Jones and Standard Statistics
averages this seems a creditable performance.
From December 31, 1927, at which time United States and Foreign had
received all amounts due on the subscriptions to first preferred stock, $100 invested as United States & Foreign invested its assets would have declined to
approximately $72 on June 30, 1933, while $100 invested in the stocks com
STOCK EXCHANGE PBACTICES
1853
prising the Dow-Jones Industrial Average would have shrunk to about $49;
the record of the United State & Foreign being better by 47 percent.
Similarly, $100 invested in the securities comprising the Standard Statistics
Bank Stock Average would have declined to $39, United States & Foreign's
record being better by 85 percent.
Similarly, $100 invested in the securities comprising the Dow-Jones Railroad
Average would have declined to $35, United States & Foreign's record being
better by 106 percent.
The record of United States & International is equally impressive. From
December 31, 1930, at which time the full amounts clue on subscriptions to its
first preferred stock became payable, to June 30, 1933, $100 invested as United
States & International invested its assets would have declined to approximately
$86. During the same period $100 invested in the securities comprising the
Dow-Jones Industrial and Railroad Averages and the Standard Statistical Bank
Stock Averages would have shrunk to about $52, United States & International's
record being better by 65 percent.
These records speak for themselves and show a real service rendered by
these carefully managed investment companies to their stockholders.
The CHAIRMAN. The committee will stand adjourned until 10
o'clock tomorrow morning.
(Thereupon at 4:15 p.m. Tuesday, Oct. 10, 1933, an adjournment
was taken until 10 a.m. the next day, Wednesday, Oct. 11, 1933.)
COMMITTEE EXHIBIT NO. 18,
OCTOBER 10,
1933
Agreement made this 27th day of December, 1928, between United States
& International Securities Corporation, a Maryland corporation (hereinafter
referred to as the company), party of the first part, and Ernest B. Tracy,
party of the second part, witnesseth:
Ernest B. Tracy is the president of the company, and the company desires
to provide that Tracy shall have an option to purchase, as herein provided,
5,000 shares of the common stock of United States & Foreign Securities Corporation, now in the treasury of the company (which corporation now owns
80 percent of the common stock of the company) ;
Now, therefore, in consideration of the sum of ten dollars ($10) to it paid
by said Tracy, and of other good and valuable considerations, receipt whereof
is hereby acknowledged, the company agrees to and with said Tracy as follows:
1. For the purpose of the option herein provided for the company has set
aside and deposited with its treasurer 5,000 shares of the common stock of
United States & Foreign Securities Corporation (hereinafter referred to ss
the corporation) and hereby grants to Tracy the option to purchase such stock
from time to time, at the price specified below, as follows and only as follows:
On or before March 1, 1929, Tracy may purchase amounts of such stock aggregating not more than 1,000 shares and on or before each successive March 1
thereafter, to and including March 1, 1933, Tracy may purchase additional
amounts of stock aggregating not more than 1,000 shares for any year of this
option, plus such number of shares as Tracy shall theretofore have had the
right to purchase and shall not have purchased, so that the aggregate of the
purchases under said option shall be at the rate of not exceeding 1,000 shares
a year for each year of the continuance of this option (treating the period up
to March 1, 1929, as a full year). The option price shall be $25 a share up to
and including March 1, 1929, but in the case of any and every exercise of the
option after that date the option price shall be $25 a share plus an additional
sum equivalent to interest on $25 a share at the rate of 6 percent per annum
from March 1, 1929, to the date of the exercise of the option, and less an
amount equivalent to the sum of all cash dividends which shall be paid on
the shares purchased on or after March 1, 1929, and before the date of purchase. The option price for each share of stock purchased hereunder shall
in the case of each such purchase be paid to the company in New York funds
against delivery of the shares.
Every exercise of the option hereby given shall be by notice in writing delivered to the treasurer of the company not less than 24 hours before the time set
in the notice for the purchase of stock hereunder, and all deliveries of stock
and payments therefor shall be made at the office of the treasurer of the
company.
1854
STOCK EXCHANGE PRACTICES
% Tracy shall not be entitled to make any exercise of the option hereby
granted unless at the time of such exercise he shall either (1) be president
of the company, and shall not then be physically incapacitated from COBtinuing to perform the duties of such office, or (2) shall have been ready and
willing to accept that office at the annual meeting of the directors preceding
the date of such exercise and shall have failed of such election: Provided,
however, That if said Tracy shall voluntarily cease to be president of the
company before the termination of this agreement, or shall die, he or hist
executors or administrators may at any time, or from time to time, within,
4 months thereafter, exercise the option with respect to such number of
shares of stock as said Tracy shall have had the right to purchase up to the
time of ceasing to be president, or death, and shall not have theretofore
purchased.
3. No change in the name or capitalization of the corporation shall affect
or annul this option. In case any dividend payable in stock shall have been
declared or paid upon the common stock of the corporation, before any particular exercise of the option, Tracy shall be entitled to receive with each share
purchased at the price herein specified, without additional cost to him, a number of additional shares corresponding to the dividend stock in respect to the
number of shares purchased, and the company shall provide and similarly
deposit with its treasurer such additional stock with respect to the stock1 deposited by the company for the purposes of the option. In case the shares of
common stock of the corporation shall be reclassified, the shares into which
said deposited common shares of the corporation shall be reclassified shall
replace the common shares deposited hereunder. In- case of any reorganization or merger, shares in any corporation shall be distributed by the corporation
in respect of the deposited shares without the surrender of such shares, shares
so distributed in respect of the common shares deposited with the treasurer
shall be held on deposit in addition to the deposited shares, and whenever said
Tracy shall make purchase of any deposited shares, he shall with the shares purchased, without payment other than as hereinabove specified, receive with each
share of the corporation purchased the share or shares so distributed by the
corporation in respect thereto. In case of any reorganization or merger of the
corporation, shares and/or other securities issued or exchanged for the common
shares of the corporation deposited hereunder shall replace such shares, and
thereafter the term "share " as used in this agreement shall be deemed to refer
to the share or shares and/or other securities issued or exchanged for a share
of common stock of the corporation in connection with such reorganization or
merger, and all the provisions of this agreement shall apply to the share or
shares and/or other securities so issued or exchanged. Tracy shall have no
interest in any dividends in cash distributed on any shares of the deposited
stock.
4. Except as hereinabove expressly provided, this agreement shall continue
in full force and effect until March 2, 1933, unless earlier terminated by mutual
agreement of Tracy and the company, or by the death of Tracy.
In witness whereof, United States & International Securities Corporation
has caused this agreement to be executed in its name and behalf by its
treasurer, thereunto duly .authorized, and said Ernest B. Tracy has hereunto
set his hand and seal, on the day and year first above written.
UNITED STATES & INTERNATIONAL SECURITIES CORPORATION,
By R. A. NELLIS, Treasurer.
ERNEST B. TRACY.
COMMITTEE EXHIBIT NO. 19,
[SEAL]
OCTOBER 10,
1933
Agreement made this 26th day of December 1928, between United States &
Foreign Securities Corporation, a Maryland corporation (hereinafter referred
to a& the company), party of the first part, and Ernest B. Tracy, party of the
•second part, witnesseth:
Ernest B. Tracy is the president of the company. The company through its
board of directors agreed in April 1928 to grant to him an option to purchase
common stock of the company and this agreement is to express such option.
STOCK EXCHANGE PRACTICES
1855
Now, therefore, in consideration of the foregoing and of other good and valuable considerations, receipt whereof is hereby acknowledged, the parties agree
as follows:
1. For the purposes of the option herein provided for the company has set
aside and deposited with its treasurer 15,000 shares of common stock of the
company, heretofore purchased by it, and hereby grants to Tracy the option to
purchase such shares from time to time, at the price specified below, as follows,
and only as follows: On or before March 1, 1929, Tracy may purchase amounts
of such stock aggregating not more than 3,000 shares and on or before each
successive March 1 thereafter, to and including March 1, 1933, Tracy may purchase additional amounts of stock aggregating not more than 3,000 shares for
any year of this option, plus such number of shares as Tracy shall theretofore
have had the right to purchase and shall not have purchased, so that the aggregate of the purchases under said option shall be at the rate of not exceeding
3,000 shares a year for each year of the continuance of this option (treating
the period up to March 1, 1929, as a full year). The option price shall be $25 a
share up to an including March 1, 1929, but in the case of any and every
exercise of the option after that date the option price shall be $25 a share plus
an additional sum equivalent to interest on $25 a share at the rate of 6 percent
per annum from March 1, 1929, to the date of the exercise of the option, and
less an amount equivalent to any cash dividends which would have been payable
to said Tracy after March 1, 1929, had he been the owner of such share from
that date to the date of the exercise of the option. The option price for each
share of stock purchased hereunder shall in the case of each such purchase be
paid to the company in New York funds against delivery of the shares.
Every exercise of the option hereby given shall be by notice in writing
delivered to the treasurer of the company not less than 24 hours before the
time set in the notice for the purchase of stock hereunder, and all deliveries of
stock and payments therefor shall be made at the office of the treasurer of the
company.
2. Tracy shall not be entitled to make any exercise of the option hereby
granted unless at the time of such exercise he shall either (1) be president of
the company and shall not then be physically incapacitated from continuing to
perform the duties of such office,, or (2) shall have been ready and willing to
accept that office at the annual meeting of the directors preceding the date of
such exercise and shall have failed of such election: Provided, however, That if
said Tracy shall voluntarily cease to be president of the company before the
termination of this agreement, or shall die, he or his executors or administrators
may at any time, or from time to time, within 4 months thereafter, exercise
the option with respect to such number of shares of stock as said Tracy shall
have had the right to purchase up to the time of ceasing to be president, or
death, and shall not have theretofore purchased.
3. No change in the name or capitalization of the company shall affect or
annul this option. In case any dividend payable in stock shall have been
declared or paid upon the common stock of the company, before any particular
exercise of the option, Tracy shall be entitled to receive with each share
purchased at the price herein specified, without additional cost to him, a number
of additional shares corresponding to the dividend stock in respect to the number of shares purchased, and the company shall provide and similarly deposit
with its treasurer such additional stock with respect to the stock provided by it
for the purposes of the option. In case the shares of common stock of the
company sjiall be reclassified, the shares into which said deposited common
shares of tine company shall be reclassified shall replace the common shares
deposited hereunder. In case upon any reorganization or merger shares in any
corporation shall be distributed by the company in respect of the deposited
shares without the surrender of such shares, shares so distributed in respect
of the common shares deposited with the treasurer shall be held on deposit in
addition to the deposited shares, and whenever said Tracy shall make purchase
of any deposited shares he shall with the shares purchased, without payment
other than as hereinabove specified, receive with each share of the company
purchased the share or shares so distributed by the company in respect thereto.
In case of any reorganization or merger of the company, shares and/or other
securities issued or exchanged for the common shares of the company deposited
hereunder shall replace such shares, and thereafter the term " share " as used
1856
STOCK EXCHANGE PRACTICES
in this agreement shall be deemed to refer to the share or shares and/or other
securities issued or exchanged for a share of common stock of the company in
connection with such reorganization or merger, and all the provisions of this
agreement shall apply to the share or shares and/or other securities so issued
or exchanged. Tracy shall have no interest in any dividends in cash distributed on any shares of the deposited stock.
4. Except as hereinabove expressly provided, this agreement shall continue
in full force and effect until March 2, 1933, unless earlier terminated by
mutual agreement of Tracy and the company, or by the death of Tracy.
In witness whereof, United States & Foreign Securities Corporation has
caused this agreement to be executed in its name and behalf by its treasurer,
thereunto duly authorized, and said Ernest B. Tracy has hereunto set his hand
and seal, on the day and year first above written.
UNITED STATES, & FOREIGN SECURITIES CORPORATION,
By R. A. NELLIS, Treasurer.
ERNEST B. TRACY.
[SEAL.]
STOCK EXCHANGE PRACTICES
WEDNESDAY, OCTOBER 11, 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 a.m. in the caucus room of the Senate Office Building, Senator
Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Adams (substitute for
Barkley and, proxy for Costigan), Norbeck, Townsend, and Couzens.
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee;
George S. Franklin, Wallace P. Zachry, Warren Leslie, Walter G.
Dunnington, Clifton Murphy, John T. Cahill, and Bernhard Knollenberg, counsel for Dillon, Bead & Co.; Boot, Clark, Buckner &
Ballantine, George H. Murphy of counsel, counsel for United States
& Foreign Securities Corporation and United States & International
Corporation.
The CHAIRMAN. The subcommittee will come to order. Mr. Dillon,
Mr. Pecora desires toi ask you some questions.
TESTIMONY OF CLARENCE DILLON, OF BILLON, EEAD & CO.—
Kesumed
Mr. PECORA. Mr. Dillon
Mr. DILLON (interposing). Mr. Pecora, may I, before you start
your examination, say that you asked on yesterday for us to prepare a list of some companies in the portfolio, which Mr. Tracy
could not give offhand. You asked us to prepare a list of corporations whose securities were held on December 31, 1932 in the portfolio of United States & Foreign Securities Corporation and on whose
boards there were no representatives from either the directors, officers, or employees of United States & Foreign Securities Corporation, United States & International Securities Corporation, the
Keswick Corporation, or Dillon, Eead & Co.; and, furthermore,
where Dillon, Eead <& Co. had not acted as bankers. Mr. Tracy replied that he could not name these companies offhand, without
checking. You asked us to prepare such a list. We did it last
night hurriedly and we find in the portfolio of United States &
Foreign Securities Corporation some 51 companies on whose boards
there are no such representatives and no such banking connection.
These companies are American Can Co., American Chicle Co., American Home Products Corporation, American Eadiator & Standard
1857
1858
STOCK EXCHANGE PRACTICES
Sanitary Corporation, American Smelting & Refining Co., American
Sugar Refining Co., American Telephone <& Telegraph Co., American Tobacco Co., Axton-Fisher Tobacco Co., Inc., Baltimore & Ohio
Railroad, Beatrice Creamery Co., Best & Co., Inc., Central Aguirre
Associates, Chesapeake & Ohio Railway, Citizens & Southern National Bank, Savannah—but do you care for me to read off this
entire list?
Mr. PECORA. NO. We will put the whole list in evidence, Mr.
Dillon.
Mr. DILLON. All right.
Mr. PECORA. I now offer in evidence the document produced by the
witness, purporting to give the names of companies whose securities
were purchased from time to time for the portfolio of United States
& Foreign Securities Corporation
Mr. DILLON (interposing). May I correct that
Mr. PECORA (continuing). And in connection with which companies no director of the investment trust nor any member of the
firm of Dillon, Read & Co., nor any agent or representative of such
firm, had any affiliation as officer, director, or otherwise.
Mr. DILLON. And for which we were not bankers.
Mr. PECORA. Yes.
Mr. DILLON. And
that was not as to purchases from time to time.
We thought your statement was that we should furnish
Mr. PECORA (interposing). Securities in the portfolio.
Mr. DILLON. Yes, on December 31, 1932.
Mr. PECORA. Well, I offer this statement in evidence and ask that
it may be spread on the record of the hearings of the subcommittee.
The CHAIRMAN. Let it be so received and made a part of the
hearings.
(The statement referred to was marked " Committee Exhibit No.
21, October 11, 1933 ", see p. 1937.)
Mr. PECORA. Mr. Dillon, would you say that a majority, or the
greater part in amount, of the funds of United States & International
Securities Corporation which were used in the purchase of securities
for its portfolio, were used in the purchase of securities issued by corporations other than those in which any director of United States &
International or any member of Dillon, Read & Co. had any affiliation
as officer, director, banker, or otherwise ?
Mr. DILLON. YOU are speaking now of United States & International Securities Corporation?
Mr. PECORA. Yes.
Mr. DILLON. YOU
asked on yesterday for United States & Foreign
Securities Corporation ?
Mr. PECORA. Yes.
Mr. DILLON. I should say, without having those figures before me
that the greater part were not that, but I haven't checked those
figures.
Mr. PECORA. That is, you believe that the greater part of the funds
invested by the United States & International Securities Corporation
were invested in the purchase of securities issued by corporations
with which some one or more of directors or officers of United States
& International Securities Corporation, or one or more members of
Dillon, Read & Co. had some affiliation?
STOCK EXCHANGE PRACTICES
1859
Mr. DILLON. Well, that was true in the case of the United States &
Foreign Securities Corporation figures. In the case of United States
& International Securities Corporation figures it may not be true on
account of the fact of Mr. Hayden being on the board of the Eock
Island Bailroad, and Mr. Ecker being on the board of the Frisco
[consulting an associate]. They say here that I haven't your question correctly.
Mr. PECORA. I think you did twist it around.
Mr. DILLON. May I have it read to me ?
Mr. PECORA. I will put it in another way: Referring now only to
investments made by the United States & International Securities
Corporation for its portfolio, is it your opinion or belief, based upon
your best recollection of the facts, that the greater part of those
investments were made in securities issued by corporations with
which an officer or director of the United States & International
Securities Corporation, or a member of the firm of Dillon, Eead &
Co., had some corporate connection?
Mr. DILLON. It would be very difficult for me to answer that question without checking, because that fact would never have entered
into consideration when buying the security. So it is not impressed
on my mind.
Mr. PECORA. I so understand, but I wondered if you could give the
subcommittee your best recollection or belief about that. Of course,
I take into account the fact that you have made no research for
the purpose of ascertaining the specific fact.
Mr. DILLON. When purchases were made that specific fact was
never brought up, because it was not of particular interest or concern to anyone. So it would be the wildest kind of guess if I should
make it now. We have no figures prepared like that. My guess
would be that it would be in about the same proportion in the case
of the two securities companies.
Mr. PECORA. Would you make a similar answer to a similar question as applied to investments on behalf of United States & Foreign
Securities Corporation ?
Mr. DILLON. I would have to make the same answer, certainly.
Mr. PECORA. NOW, you heard the testimony of Mr. Tracy during
the time when he was on the stand, last Friday, and again on yesterday, didn't you, Mr. Dillon ?
Mr. DILLON. I heard most of it. Some of it I could not get.
Mr. PECORA. DO you recall the testimony he gave with respect to
the joint railroad stock trading account that was entered into in July
of 1929 by the United States & International Securities Corporation
with Dillon, Eead & Co.?
Mr. DILLON. I think I heard most of it.
Mr. PECORA. Are you familiar with that joint trading account,
Mr. Dillon?
Mr. DILLON. In a general way, yes.
Mr. PECORA. Will you tell the subcommittee in a general way and
without traversing any ground that Mr. Tracy went over, the circumstances that surrounded the creation and formation of this joint
trading account?
Mr. DILLON. I am afraid
Mr. PECORA (continuing). As I understand it, and possibly to
shorten your answer, the joint trading account was entered into on,
1860
STOCK EXCHANGE PRACTICES
July 13, 1929, the terms and provisions under which the account
was to be operated being set forth in written form in the shape of a
letter which has been received in evidence here, and those terms and
provisions, in effect, were that there was to be equal participation
by Dillon, Read & Co. on the one hand and United States & International Securities Corporation on the other hand. That confirms
your recollection, does it not ?
Mr. DILLON. Yes, sir.
Mr. PECORA. NOW, who proposed
originally that such joint trading
account be created?
Mr. DILLON. I cannot say because I would not know. That matter
was discussed over a period of a good many weeks—that is, the
matter of buying railroad securities. It was discussed probably
for a longer time, in meetings of the Board, and by Dillon, Read &
Co. We also discussed the matter of railroad securities, and they
looked attractive to us at the time. But just how they should be
purchased, and how to the trading account was to be set up and so ony
and who discussed it, I don't know.
Mr. PECORA. Mr. Tracy said that, among other things, the purpose
of the account or its operation was simply to acquire railroad
company stocks, not to trade in them as that term is ordinarily
understood. Does that conform to your recollection ?
Mr. DILLON. My recollection was that we bought. But I do
not recall that that meant to enter into trading, buying, and selling
from day to day. I think it was simply accumulating stocks.
Mr. PECORA. That was Mr. Tracy's testimony. But the account
itself is headed, and the references to it in the minute book of
United States & International Securities Corporation describe it
as^a joint railroad stock trading account. And the letter indicating
the terms under which the account was created and was to be operated, gave authority to the managers of the account not only to
buy but to sell and resell and to sell short. You recall that, don't
you?
Mr. DILLON. May I look at the letter ?
Mr. PECORA. Yes.
Mr. DILLON. The letter does not call it a trading account. It says
"Joint Account."
Mr. PECORA. I said references in the minute book to the account
stated
Mr. DILLON (interposing). Oh.
Mr. PECORA (continuing). Are to the term " Joint Railroad Stock
Trading Account."
Mr. DILLON. And in this letter I do not see anything about selling
short.
Mr. PECORA. Perhaps I can point it out to you,
Mr. DILLON. All right. It might very well be put that way as it
might use the ordinary phrase, but I do not see it in that letter.
That letter does not say it, but it might probably have been
overlooked.
Mr. PECORA. Well, I call attention to the first paragraph of this
letter of July 13, 1929, which reads as follows, it being addressed by
the United States & International Securities Corporation to Dillon,
Read & Co.:
STOCK EXCHANGE PRACTICES
1861
SIRS : Referring to the above account which is being formed to
buy and/or sell and/or trade in the common and/or preferred stocks and/or
bonds of various railroads, subject to the condition that the account shall never
be committed at any one time in a net amount exceeding $30,000,000, long or
short, we beg to confirm the participation of the $15,000,000 allotted you in this
account."
Mr. DILLON. That is simply ordinary phraseology. It means nothing because we did not trade and we did not sell short, and did not
sell any stocks, and never intended to.
Mr. PECORA. Eegardless of what was actually done in connection
with this account, the fact is that the letter agreement gave the managers of the account the right to sell short. Now, you want to emphasize the fact, I presume, that while the managers had that power
yet they did not exercise it in the operation of this account. Is that
right?
Mr. DILLON. Yes. And why that phraseology is used I do not
know, other than it is just the general way of writing a letter of that
kind, to cover every possible thing, simply to protect the managers
of the account in anything that they might do.
Mr. PECORA. The operations in this account, or the transactions
that were had for the benefit of this account, were principally, so
far as the amounts involved were concerned, in the stocks of two
railroad companies, namely, the Chicago, Rock Island & Pacific and
the St. Louis & San Francisco, weren't they ?
Mr. DILLON. I think that is not correct. I think they bought a
series of stocks.
Mr. PECORA. I know that they bought other railroad stocks, but
the principal trades or the principal acquisitions in amount of money
involved was in the stock of those two companies.
Mr. DILLON. In the Eock Island it was, in round numbers,
$2,700,000, and in the Pennsylvania Eailroad about one million
dollars, and in the Frisco Eailroad about four million dollars, and
in the Southern Pacific about one and one-half million dollars, and
in the Southern Railway about two million dollars or perhaps two
and one-half million dollars, and in the Seaboard Air Line about one
million dollars. That is, roughly, the account, but the principal
items were those two.
Mr. PECORA. SO that the largest individual amounts invested were
in the stocks of the two railroad companies that I mentioned?
Mr. DILLON. That is correct.
Mr. PECORA. At that time and during the operation of this trading account, or this joint account rather—the reason I use the term
" trading account "
Mr. DILLON (interposing). I have no objection to "trading
account."
Mr. PECORA (continuing). Is because it is styled even in that letter,
if you see the caption of it, as a "joint trading account", isn't it?
Mr. DILLON (handing document to Mr. Pecora). No, it is not so
styled; but I am perfectly willing to call it a trading account. I
have no objection to it.
Mr. PECORA. N O ; it is "railroad securities joint account." I beg
your pardon.
Mr.
DILLON.
Yes.
1862
STOCK EXCHANGE PRACTICES
Mr. PECORA. I got the term " trading " from the minute book.
During the time of the existence and operation of this joint account
there were certain gentlemen who were directors of the United States
& International Securities Corporation who were connected with
those two railroad companies in some capacity or other, were they
not?
Mr. DILLON. That is correct.
Mr. PECORA. And who were those men?
Mr. DILLON. I must correct my statement. There was no one on
the board of United States & International that was connected with
the Frisco. Mr. Hayden is on the board of United States & International and he is chairman, or was chairman, of the Rock Island
Railroad. I think what has confused you, Mr. Ecker, who is on the
United States & Foreign board, was a director of the Frisco, but he
was not on the United States & International.
Mr. PECORA. Mr. Ecker as a director of the United States & Foreign Securities Corporation was in a position where his judgment
was available to the board of the United States & International, was
lie not?
Mr. DILLON. Well, he was available to Mr. Tracy as president
of the Foreign, who was also president of International.
Mr. PECORA. And also available to Mr. Tracy and members of the
board of United States & International, because the United States &
Foreign, on the board of which Mr. Ecker sat, had control through
ownership of common stock of the United States & International ?
Mr. DILLON. That is correct.
Mr. PECORA. DO you recall, Mr. Dillon, whether the advice, judgment, or opinion of Mr. Hayden and Mr. Ecker, or either of them,
was specifically sought before this joint account invested so much
money in the common stock of those two railroad companies?
Mr. DILLON. Well, I heard Mr. Tracy's testimony where he said
he telephoned to all the directors that were available. I can remember myself, in the meetings preceding this, the general discussion of
buying railroad stocks and the formation of an account to buy them.
Whether those two men were specifically consulted I do not remember myself.
Mr. PECORA. Well, apparently Mr. Tracy did not remember either,
because he was unable to testify specifically, as I remember his testimony here, as to whether or not he had any conversations with any
particular director or directors. He merely told us of his general
custom in telephoning people and conferring with them by that
means.
Mr. DILLON. I think we filed with you the other day a list of all
the meetings of the board and the men that attended in both companies. If just preceding these 6 weeks or so immediately preceding
the account those men were present as directors, I should feel sure
that it was discussed with them, because the matter was discussed
at that time.
Mr. PECORA. Did you have anything to do with the investments
that were made for this joint account?
Mr. DILLON. In what way do you mean ?
Mr. PECORA. Advising or counseling the kind of investments to
be made or the market operations by which the investments were
made.
STOCK EXCHANGE PRACTICES
1863
Mr. DILLON. Undoubtedly I discussed the different stocks we were
buying, railroad stocks, whether we were going to buy Rock Island
or Frisco or some other stock, Southern Pacific or Southern Railway.
Undoubtedly I discussed that, in the board and with Mr. Tracy.
Mr. PECORA. The agreement dated July 13, 1929, which created
this railroad securities joint account provided specifically that the
account was to terminate on October 13, 1929, unless sooner dissolved
by mutual agreement, and that it may be extended by mutual consent. Was it, as a matter of fact, terminated on October 13, 1929 ?
Mr. DILLON. I t was terminated on November 9.
Mr. PECORA. Apparently then the life of this account was extended
by mutual consent ?
Mr. DILLON. That is correct.
Mr. PECORA. Up to and including November 9; is that right ?
Mr. DILLON. I have a letter to that effect.
Mr. PECORA. I was just going to ask you if there was any written
evidence of such extension.
Mr. DILLON. Yes; there is a letter here of October 14, extending it.
Mr. PECORA. I offer in evidence the document produced by the
witness, purporting to be a copy of a letter addressed by the United
States & International Securities Corporation to Dillon, Read & Co.,
dated October 14, 1929. I will read it into the record—it is very
short—and I will give it to the reporter to mark.
The CHAIRMAN. The letter may go in the record.
(Letter and confirmation dated October 14, 1929, from UnitedStates & International Securities Corporation to Dillon, Read &
Co. was thereupon designated "Committee Exhibit 22, October
lly
v
1933.")
Mr. PECORA (reading):
DILLON, READ & Co.,
Nassau and Cedar Streets, New York, N.Y»
$30,000,000 RAILROAD SECURITIES JOINT ACCOUNT
GENTLEMEN : Referring to our letter to you of July 13, 1929, with reference
to the above account, this will confirm our understanding that the account is
to be extended to December 15, 1929, unless sooner dissolved by mutual consent, and that it may be further extended by mutual consent. Kindly acknowledge receipt of this letter by signing the attached copy and returning to us.
Very truly yours,
UNITED STATES & INTERNATIONAL SECURITIES CORPORATION.
Accepted: Dillon, Read & Co.
October 14, 1929.
Mr. DILLON. Mr. Pecora, a
moment ago you asked the companies
whose securities were held in the portfolio of International and with
which no representation on the board and for which we were not
bankers. I didn't know we had it. We have it if you care for itThere are some 29. [Handing document to Mr. Pecora.]
Mr. PECORA. NOW, after the extension of the life of this account
from October 15 to December 15, were market operations continued
for the account in the acquisition of railroad company stocks?
Mr. DILLON. AS well as I can remember, we stopped buying stocks
about the end of August, I should think it was, or the 1st of September. The security company, United States & Foreign, as I remember, was selling stocks from that point on, and from the 1st of
September until about the 1st of November they had sold some IS
1864
STOCK EXCHANGE PRACTICES
millon dollars worth of securities other than railroads. They
were keeping their railroad securities because they were a most attractive investment, in our judgment, but other things looked high and
they were being liquidated in the hope of investing later on when
the market should come down, if it did come down.
So that when we came to the 1st of November the United States
& Foreign had some 13 million dollars odd in cash ready to invest
on breaks in the market if they should come after that.
During that period the account was not buying stock. When I
say " not", maybe a few odd shares, but it was not active. I will
find that out for .sure. That is just my memory.
Mr. PECORA. Surely.
Mr. DILLON (after conferring). I think that is substantially
correct.
Mr. PECORA. What was deemed to be the necessity for extending
the life of this joint account from October 15 to December 15 ?
Mr. DILLON. Why, I think we were just marking time to decide
whether we wanted to buy more stock or not.
The CHAIRMAN. Did you invest the entire 30 million in railroad
certificates ?
Mr. DILLON. NO, Senator; I think we only invested about 14
million in that account.
Mr. PECORA. Between 14 and 15 million. Mr. Tracy gave the
specific figure. It was nearer 15 million than 14 million.
Mr. DILLON. I think I saw it here.
Mr. PECORA. Fourteen million seven hundred thousand?
Mr. DILLON. Fourteen million two hundred sixty-one thousand
and odd.
Mr. PECORA. About fourteen and a quarter?
Mr. DILLON. Yes.
Mr. PECORA. NOW,
the account was actually terminated on November 9, at which time the stocks had been acquired and distributed
in equal proportions between the two participants in the joint account, namely, Dillon, Read & Co. and the United States & International?
Mr. DILLON. That is correct.
Mr. PECORA. And at that time it became necessary for Dillon,
Read & Co. to pay to the United States & International for one half
of the securities that had been acquired for the benefit of this joint
account and which had been distributed and turned over to Dillon.
Read & Co. upon termination of the account ?
Mr. DILLON. That is correct.
Mr. PECORA. NOW, how was that payment made, if you can tell us ?
Mr. DILLON. I heard yesterday that it was just credited on the
books.
Mr. PECORA. Mr. Tracy gave some information about that, but I
wondered if you could give us more definite information.
Mr. DILLON (after conferring with associates). I am informed
that Dillon, Read & Co. made that payment of seven million one
hundred and thirty-one thousand and odd dollars by crediting United
States & International's accounts on Dillon, Read & Co.'s books with
that amount. On the same day on order from United States & International Securities Corporation Dillon, Read & Co. paid to the Chase
STOCK EXCHANGE PRACTICES
1865
National Bank for the credit of the United States & International
$3,300,000 and paid to the Central Hanover Bank & Trust Co. for
the account of the United States & Foreign $3,350,000.
Mr. PECORA. Why should payment have been made to the Central
Hanover Bank for the account of the United States & Foreign by way
of liquidating the indebtedness which Dillon, Read & Co. owed to
the United States & International on account of this railroad stock
joint account?
Mr. DILLON. Dillon, Bead & Co. credited the whole $7,000,000 to
United States & International and then paid it out on order of United
States & International. United States & International instructed
Dillon, Eead & Co. to pay $3,300,000 to the Chase bank and to pay
$3,350,000 to Central Hanover for the credit of the United States &
Foreign. We simply followed the instructions of the depositor.
Mr. PECORA. YOU were director of both of these investment trusts,
weren't you ?
Mr. DILLON. Yes; and active in both.
Mr. PECORA. Yes. Can you tell us, Mr. Dillon, what was the
nature of the account then existing between the Chase National
Bank and the United States & International?
Mr. DILLON. May I inquire? [After conferring with associates.]
I think, as I am informed here, that the United States & International simply transferred that to their account in the Chase, where
they had an active bank deposit.
Mr. PECORA. It was credited to their deposit account—is that what
you mean to tell us ?
Mr. DILLON. We are not sure, but we assume that.
Mr. PECORA. And do you know the nature of the account then
existing between the United States & Foreign Securities Corporation
and the Central Hanover Bank?
Mr. DILLON. United States & Foreign?
Mr. PECORA. Yes.
Mr. DILLON. They kept their active checking account, their active
banking account, with the Central Hanover Bank & Trust Co.
Mr. PECORA. What obligation at that time did the United States &
International owe to the United States & Foreign which it liquidated
either in whole or in part by means of the payment made by your
firm?
Mr. DILLON. I should think it would either be for the purchase of
securities or the payment of a loan or the making of a loan. I can
find out which. [After conferring.] United States & International
owed United States & Foreign money which they had borrowed.
Mr. PECORA. When this joint account was terminated on November 9, 1929
Mr. DILLON (interposing). That borrowing, Mr. Pecora, was in
anticipation of the subscriptions for the stock of United States &
International, I am informed. That was paid in in installments, and
they invested in anticipation of those installments and borrowed
against it, sometimes from the bank. At this time United States &
Foreign had money to loan, and they loaned it to International.
Mr. PECORA. When this joint railroad securities account was terminated on November 9 your firm received its half of the railroad
stocks that had been accumulated through the account and paid in
1866
STOCK EXCHANGE PRACTICES
the manner that you have just indicated for those securities an
aggregate sum of something like $7,100,000, and then the stock was
delivered to your firm?
Mr. DILLON. Well, I assume it was delivered. Yes; that is correct.
Mr. PECORA. TWO days later, according to the testimony of Mr.
Tracy, those shares of railroad company stock which your firm received upon the termination of this joint account, which consisted
of the shares of the Chicago, Kock Island & Pacific Railway and
of the St. Louis & San Francisco Railway, were sold by your firm
to the investment trust?
Mr. DILLON. The investment trust bought those shares from us.
Mr. PECORA. At the then market ?
Mr. DILLON. Yes; that was the United States & Foreign Securities
Corporation bought them.
Mr.
PECORA. Yes.
Mr. DILLON. At the then market ?
Mr. PECORA. At the then market. Up to that time did you think
that the acquisition of railroad stock was a good thing for the portfolio of either of these investment trusts?
Mr. DILLON. I did.
Mr. PECORA. Did you still think so
Mr. DILLON. I did, decidedly.
Mr. PECORA. If they were a good
on November 11, 1929 ?
investment for the investment
trusts' portfolios, weren't they equally as good an investment for
Dillon, Eead & Co.?
Mr. DILLON. Had Dillon, Read & Co. been desirous of making
investments at that time; yes.
Mr. PECORA. Well, your judgment that the acquisition of railroad
stocks for the portfolio of either or both of these investment trusts
was a good thing, was your judgment as a director of the investment
trusts ?
Mr. DILLON. That is correct.
Mr. PECORA. And it was actually your opinion and judgment at
the time, irrespective of any relationship you bore to anybody ?
Mr. DILLON. Exactly.
Mr. PECORA. And hence it was your opinion as a member of the
firm of Dillon, Read & Co., wasn't it? I mean, whatever opinion
you have is your individual opinion?
Mr. DILLON. That is correct.
Mr. PECORA. YOU may express it and you may render it and you
may act upon it in any other capacity than for your own individual
benefit, but it still remains your opinion—that is a constant thing ?
Mr. DILLON. That is correct.
Mr. PECORA. Yes.
Mr. DILLON. And
if I had money, for example, that I was not
using, I would say to buy Rock Island at that time was a good
thing to do. I would advise some other person differently if it meant
something different to him, I would say, " Don't you buy."
Mr. PECORA. Dillon, Read & Co. had entered into this joint account
with the United States & International to buy railroad stocks, and
acquired an equal interest in the joint account with the investment
trust, because they thought that such investments were sound and
valuable at that time.
Mr. DILLON. That is correct.
STOCK EXCHANGE PKACTICES
1867
Mr. PECORA. That being the case, what persuaded Dillon, Read &
Co., on November 11, 1929, to sell at the then market to the United
States & Foreign Securities Corporation the shares of these two
railroad companies that I have already mentioned, and which had
been acquired through the medium of this joint account?
Mr. DILLON. Dillon, Read & Co. went into this joint account to
accumulate this stock in the expectation and in the belief that the
stocks being so cheap and so attractive, would rise in price, and
could later be sold at a profit. Dillon, Read & Co. are interested
only in short-term investments. They do not make long-term investments. When it came to the termination of this account, it
looked as though to hold them profitably would mean a long-term
investment, which is not of interest to Dillon, Read & Co. Security
companies, on the other hand, are interested in long-term investments.
Mr. PECORA. AS well as short term ?
Mr. DILLON. AS well as short term. Those stocks were attractive^
and Dillon, Read & Co. made a poor sale when they sold them to the
security companies, because, had they held them a little longer, they
could have obtained better prices for them.
Mr. PECORA. Had they held them for a period of about 2 months.
The market went up somewhat from the price at which Dillon,
Read & Co. sold to the United States & Foreign, as I recall.
Mr. DILLON. The sale to the United States & Foreign was made
on November 11, 1929. The price paid by United States & Foreign
for Frisco stock was 111%; for Rock Island 114^4.
In every week thereafter to and including April 18, 1930—a
period of 5 months—Rock Island sold on the New York Stock Exchange for a price higher than that paid by United States & Foreign,
and only at times during 5 weeks of this 5 months' period did it sell
for as low a price as that paid by United States & Foreign. During
the 5 months' period it sold up to 125, and in 13 weeks of the 5 months'
period it sold for a price of 120 or better.
In the case of the Frisco stock, this stock sold on the New York
Stock Exchange in each of 15 weeks of the 5 months' period following the purchase by United States & Foreign at a price in excess of
that paid by United States & Foreign, reaching a high during the 5
months' period of 119. In only 7 weeks during the 5 months' period
did it fail to sell for as high a price as that paid by United States &
Foreign, and even during this 6 weeks' period the low price at which
it sold was less than 6 points below the price paid by United States &
Foreign.
Mr. PECORA. I recall, on that point, the testimony of Mr. Tracy
to the effect that between November 11, 1929, and December 31, 1929,
the market value of these railroad securities in question had depreciated to a point where, on December 31, 1929, the United States &
Foreign found it to its advantage to transfer the stocks to the United
States & International at the lower prices in order to offset the
consequent loss against their taxable profits for the year 1929. You
recall that testimony of Mr. Tracy ?
Mr. DILLON. Yes; I do. It might have been, on that particular
day, of that particular week, they were selling below the November
11, 1929, price, but that in no way contradicts the statements I have
just made.
175541—33—PT ~4
22
1868
STOCK EXCHANGE PRACTICES
Mr. PECORA. While we are on that particular point, Mr. Dillon,
could you tell this committee, out of the fullness of your experience
and knowledge of these things, whether or not a custom has developed in past years under which numerous transfers of securities
are made at about the end of the tax year in order to reduce taxable
profits made during the year, for income-tax purposes ?
Mr. DILLON. My general knowledge and impression is that that
is the case, that at the end of the year companies and people do
sell stocks in which they have losses, in order to ascertain their net
profit on which they should pay the income tax. I think that is a
general practice.
Mr. PECORA. Does not that kind of a selling movement have the
natural effect of temporarily depreciating the market value of securities, Mr. Dillon ?
Mr. DILLON. I should think, if it were general at that time, it
would.
Mr. PECORA. And you believe that it has been quite general, do you
not?
Mr. DILLON. I think the practice has been general.
Mr. PECORA. SO that the values established in the market for securities by means of these sales made for the purposes that you have
indicated are really artificial to a certain extent ?
Mr. DILLON. They might be very well, but that would mean that
the volume would have to far exceed the normal trading on the
Exchange. If it were a big market, it would affect it, naturally, very
much less. If it were a dull market, it might affect it very much
more.
Mr. PECORA. Mr. Dillon, the Seaboard Air Line Railway Co. is a
company that your firm became bankers for some years ago?
Mr. DILLON. That is correct; jointly with Ladenburg, Thalman
&Co.
Mr. PECORA. When did your firm and the banking firm of Ladenburg, Thalman & Co. undertake those banking relations to that railroad?
Mr. DILLON. 1924, they tell me.
Mr. PECORA. And sometime thereafter the bankers undertook a
financial readjustment or reorganization of the railroad company, did
they not?
Mr. DILLON. That is correct.
Mr. PECORA. When did they do that ?
Mr. DILLON (after conferring with an associate). That was at the
beginning of 1929.
Mr. PECORA. At the beginning, you say, of 1929 ?
Mr. DILLON. That is what I am told.
The CHAIRMAN. Was Mr. Warfield alive then ?
Mr. DILLON. N O ; Mr. Warfield was not alive at that time.
The CHAIRMAN. I thought it was a reorganization begun during
his lifetime.
Mr. DILLON. Mr. Warfield was the president of the railroad when
it first came into our office, and he was very much interested in the
development and extension of it through the South, particularly in
Florida. Mr. Warfield had great confidence in Florida and the
development of the State and the future traffic to come out of the
STOCK EXCHANGE PRACTICES
1869
State, and we did finance the Seaboard for building those extensions in Florida, but Mr. Warfield had died before this time. He
died in 1927.
Mr. PECORA. At the time of the undertaking of this reorganization
did your firm or your associates, Ladenburg, Thalman & Co., make
or cause to be made, a survey of the railroad company with a view of
ascertaining its value as a property and a going concern?
Mr. DILLON. At the time these discussions were going on the Seaboard Railroad itself had that report made, which was completed, I
am informed, in 1928.
Mr. PECORA. Who made that report for the railroad company?
Mr. DILLON. Coverdale & Colpitts.
Mr. PECORA. Had you, at any time since you became identified,
or your firm became identified with the Seaboard Air Line Railway
Co. as its bankers, made a study of that railroad company's history,
properties, and so forth?
Mr. DILLON. May I just hear the opening part of your question ?
(The reporter read the pending question.)
Mr. DILLON. Shortly after Mr. Warfield came in, in 1924, to
discuss the Seaboard situation with us, a Mr. Hooper, who was a
railroad expert in our office, went down and went over the property,
and made his report, and thereafter we relied on Coverdale & Colpitts for our information.
Mr. PECORA. When did Hooper make his report ?
Mr. DILLON (after conferring with an associate). I am told
probably in 1925.
Mr. PECORA. Was there much difference in general conclusions
regarding the value of the company's property, between Hooper
in his report and Coverdale & Colpitts in their report ?
Mr. DILLON. I am told that Mr. Hooper thought it was a fine
property with great prospects, if put in good financial condition.
Senator CotrzENS. Have you conveniently Mr. Hooper's report,
and Coverdale & Colpitts' report.
Mr. DILLON. We do not have them here.
Mr. PECORA. Did you personally read or analyze those two reports ?
Mr. DILLON. NO.
Mr. PECORA. Were
you aware of the fact that the Interstate Commerce Commission had caused a very complete survey and analysis
to be made of the Seaboard Air Line Railway Co., and had made its
findings public?
Mr. DILLON. Was I personally aware of that ? No; I do not think
I was [after conferring with an associate]. I am told that we did
know that the United States Treasury loaned the Seaboard Railroad
$17,000,000 with the approval of the Interstate Commerce Commission.
Mr. PECORA. That was during the war, or after the war ?
Mr. DILLON. NO ; it was afterwards, when the Government turned
the properties back.
Mr. PECORA. When was that loan made, Mr. Dillon ?
Mr. DILLON. 1920 or 1921, some such time.
Mr. PECORA. That was shortly after the Government returned the
management and operation of the railroads of this country, which the
Government had taken over during the World War, was it not ?
Mr. DILLON. I think that is correct.
1870
STOCK EXCHANGE PRACTICES
Mr. PECORA. By the way, was that loan of $17,000,000 ever repaid,
to the Government?
Mr. DILLON. NO. They tell me it was repaid in part.
Mr. PECORA. DO you know to what extent it was repaid ?
Mr. DILLON. NO. We have not those figures.
Mr. PECORA. The proportion of repayment was very small, was
it not?
Mr. DILLON. I do not know, but I think that is a fair assumption.
Senator ADAMS. Loans which the Government itself makes are
not often repaid.
Mr. PECORA. Did you know that the Interstate Commerce Commission, in its survey and analysis of the road, had reported publicly that as of the end of 1918 the road had outstanding a total par
value of $190,938,527.20 in stocks and long-term obligations, of which
$37,019,400 represented common stock, $23,931,400 preferred stock,
$129,884,166.60 funded debt unmatured,- and $103,560.54 non-negotiable debt to an affiliated company; and that as of the same time the
cost of reproduction new of the railroad company as a physical property was $125,468,154, and that its cost of reproduction at that time,
less depreciation, was $99,214,147, or something like $100,000,000 less
than the securities it had outstanding?
Mr. DILLON. I do not recall knowledge of that report. I may
have known it at the time. I do not recall the report at all.
Mr. PECORA. I am assuming that the figures of the Interstate
Commerce Commission are quite accurate.
Mr. DILLON. What is the date of the report, Mr. Pecora ?
Mr. PECORA. 1931. That is, the data that I have read are contained
in a report or pamphlet issued by the Interstate Commerce Commission in 1931, but this report and its findings had been furnished to
the railroad company at the time they were made, and as they were
being made, which was long prior to 1931.
Mr. DILLON. I misunderstood you in the beginning. I thought
that was some old report back in those years.
Mr. PECORA. The data embodied in this report were in the files of
the railroad company, which had received them from the Interstate
Commerce Commission long prior to 1931. Now, if it be
The CHAIRMAN. Was not that along about 1918 ?
Mr. PECORA. The date as of which these figures are ascertained was
sometime in 1918.
Senator COTJZENS. Have you any information as to when the railroad got that report?
Mr. PECORA. I understand it is the practice and custom for the
Interstate Commerce Commission to furnish railroad companies with
its reports and findings as they are made. This pamphlet of 1931,
which I now have before me, Senator, and from which I have read
the figures which I have embodied in the question to the witness, was
not published until 1931, but it is merely a compilation made in 1931
and embodied in this pamphlet of facts and figures which had been
ascertained long before, and copies of which it had given to the
railroad company.
Senator COTJZENS. I was interested to know when the copies were
given to the railroad. I do not presume you have that information.
Mr. PECORA. NOI. I can get that by inquiry at the Interstate Commerce Commission office. We will try to get that this afternoon.
STOCK EXCHANGE PRACTICES
1871
As a matter of fact, as I understand it, these figures were arrived
at from data furnished by the railroad company.
Mr. DILLON. Are those pre-war cost figures?
Mr. PECORA. These are the actual figures representing cost.
Mr. DILLON. At the time the road was built ?
Mr. PECORA. Less depreciation.
Mr. DILLON. That is probably pre-war, that is, when the road was
built. But that printed report was not available until after 1931, as
I understand it.
Mr. PECORA. But the information embodied in this report was available long before that. Much of this information was taken out of
the records of the railroad company itself, furnished to the Interstate
Commerce Commission.
Have you any report in your possession, or did you ever have a
report made, which indicated at any time, up to the time that you
became bankers for the road, or up to the time subsequently when
you undertook, as bankers, a reorganization of the finances of the
road, the outstanding obligations of the company, and also showed
the physical valuation of the company?
Mr. DILLON. We have a very complete report along those lines
made by Coverdale & Colpitts.
Mr. PECORA. DO you recall whether that very complete report of
Coverdale & Colpitts included the data embodied in this pamphlet
taken from the records of the railroad company as furnished to the
Interstate Commerce Commission?
Mr. DILLON. Those figures were prepared as of 1928 or 1927, and
probably they would not be the same as in 1918, although they may
have similar data. We go further than just the physical property
in determining the value of a railroad. We take its earning power
into consideration and its future prospects. In the case of the Seaboard we had great hopes and faith in its future earnings, because
we had faith in the territory that it was opening up.
In speaking of this report of the Interstate Commerce Commission,
of course you are aware that the Interstate Commerce Commission
.approved and passed on all the financing that we did for the Seaboard Air Line Railway. It was all done with their approval.
Mr. PECORA. I know that. I was just wondering what persuaded
your judgment as a banker to have something like $2,000,000 in
funds in either one or both of these two investment trusts to put
into securities, both stock and bonds, of this railroad company subsequent to 1928 and 1929.
Mr. DILLON. AS I said, we had faith in the future prospects of
that railroad. We had great faith in the territory that was opening
up. Mr. Warfield had a vision of developing the Southland, particularly the State of Florida.
He built these lines, which we financed, into the State, and we had
great hope of traffic from there; and I still think that that railroad
will be a valuable property and a prosperous railroad, because we
still have faith in that territory which it taps.
Mr. PECORA. DO you know how many other banking firms had
studied this railroad and its prospects besides yourselves? Do you
know that other banking firms had'(
1872
STOCK EXCHANGE PRACTICES
Mr. DILLON. Ladenburg, Thalman & Co. did, because they went
into it with us
Mr. PECORA. Besides yourselves ?
Mr. DILLON. I am informed that Ladenburg, Thalman & Co. had
been bankers for this road for many years before we came in.
Mr. PECORA. When you undertook the reorganization of the road,
in 1929—or was it 1928?
Mr. DILLON. 1929.
Mr. PECORA (continuing).
There was not much equity value in.
the stock, was there?
Mr. DILLON. In the common stock?
Mr. PECORA. Yes.
Mr. DILLON. The
common stock, at the time that the plan wasmade effective—I think that is a correct statement—was selling
around $16 a share; and the main part of that plan at that time was
to put more into the common stock and make the senior securities
better, and we agreed to furnish $20,000,000 for common stock. Common stock was offered to the stockholders and we underwrote the
offer.
Mr. PECORA. HOW much of that $20,000,000 was subscribed for by
these stockholders, as a matter of fact ?
Mr. DILLON. I do not know whether any was. [After conferring;
with associates:] Yes; some was, about 300,000 shares out of about.
2,000,000 shares. We underwrote that offer.
Mr. PECORA. That is about one seventh ?
Mr. DILLON. I am surprised it is that much. Under the rules of
the Interstate Commerce Commission we had to wait—I think it was
30 days or so—for their approval, and then beyond that there was
another 30 days for the stockholders to come in and say what they
would take. During that 60 days market conditions changed very
much, and we were very disappointed in the results, and we as underwriters had to take it up. When, as a matter of fact, when we
underwrote it for a small commission. It totaled $1 a share. We
assumed it would be taken by the stockholders and that it would be
a profitable underwriting.
Mr. PECORA. YOU encountered a very severe disappointment in the
reaction by the stockholders to this reorganization insofar
Mr. DILLON. NO.
Mr. PECORA. Wait
a minute—insofar as that was evidenced by
their failure to subscribe for more than one seventh of the new^
issue ?
Mr. DILLON. NO ; that is not a correct statement.
Mr. PECORA. Did you not expect the stockholders would take up a,
much larger proportion?
Mr. DILLON. Oh, we thought they would take it all; and they
would have done so* if general conditions in the stock market had
not changed. That is why they did not take it.
Mr. PECORA. And when they took only about one seventh, you were
disappointed ?
Mr. DILLON. We were disappointed in the stock market and the
general financial condition of the country that developed in those
60 days.
Mr. PECORA. But your firm, meanwhile, anticipating perhaps some
disappointment at the results that would be obtained in offering
STOCK EXCHANGE PRACTICES
1873
this stock to the stockholders, had organized a syndicate to take
over on some underwriting basis those shares of new issues which
were not subscribed for by the existing stockholders?
Mr. DILLON. NO. When we agreed to underwrite the stock offering we offered interests in the underwriting to friends. We thought
it would be profitable and that we were doing them a favor. We
kept a substantial portion of it for ourselves.
Mr. PECORA. But you did organize such an underwriting syndicate?
Mr. DILLON. That is correct.
Mr. PECORA. And the Pennroad Corporation was one of the participants in that syndicate, was it not ?
Mr. DILLON (after conferring with associates). Well, in effect it
was. I am told that its participation in that syndicate was in the
nature of a commitment to buy 25 percent of the stock that was
not subscribed for by the stockholders. So the Pennroad Corporation was in the syndicate in that way.
Mr. PECORA. The United States & International Securities Corporation was also a member of that syndicate, was it not ?
Mr. DILLON. I think it was. Yes; that is correct.
Mr. PECORA. That reorganization at that time of this railroad
company was largely in the nature of a business gamble, was it not?
Mr. DILLON. I do not know what you mean by "business gamble ", unless everything is that.
Mr. PECORA. Here was a road that up to that time had a very
weak history
Mr. DILLON. That is correct; but those roads, as a rule
Mr. PECORA (continuing). And it was your object as bankers for
the road to undertake a reorganization which was designed, to use
the vernacular, to " put it on its feet " ?
Mr. DILLON. Those have always been, in the history o,f this country, I think, the most profitable investments in railroads.
Mr. PECORA. That is, where they turn out successfully?
Mr. DILLON. Yes.
Mr. PECORA. And
they have been the most expensive and costly,
where they have turned out unsuccessfully?
Mr. DILLON. NO ; I should not 3ay so.
Mr. PECORA. They have been pretty expensive, have they not,
where they turned out unsuccessfully?
Mr. DILLON. I was thinking of an investment we have just been
discussing, where we bought a very prosperous railroad stock.
Mr. PECORA. I am talking about the Seaboard Air Line Eailway
investment. Is it doing violence to the situation to characterize the
reorganization that you attempted back in 1929 as involving more
or less of a business gamble ?
Mr. DILLON. YOU might so characterize it. I would call it just
an ordinary business transaction—the underwriting of stock.
Mr. PECORA. But the road was in poor shape. Its earnings did
not justify according any substantial equity value to the stock. It
needed, in your opinion, some 20,000,000 dollars' worth of new capital to help you to rehabilitate it; and to the extent that that $20,000,000 might not serve the purpose that you intended for it to serve, it
was a gamble, was it not?
1874
STOCK EXCHANGE PRACTICES
Mr. DILLON. NO. We thought this road had a great future.
Mr. PECORA. That is why I call it a gamble. You thought it had
n great future. There was nothing in the past up to that time which
gave any certainty to the reorganization. It was more or less of a
gamble, was it not?
Mr. DILLON. We thought it was an attractive investment to put
money into the junior position of that railroad, because we thought
that the future development of that railroad would make the investment exceedingly profitable; and the buying of that stock, Mr.
Pecora, was not an investment. We were underwriting it and offering it to stockholders, and if we had not had the disturbance in the
general security market, the stockholders would have taken that
;stock, and we would have been paid a commission as underwriters.
The reason we took the stock up was that general conditions were
such that the stockholders did not take the stock.
Senator COTTZENS. Was the Interstate Commerce Commission's
decision unanimous on this refinancing plan ?
Mr. DILLON. May I find that out ? I always assume Government
bodies to be unanimous.
Senator COTJZENS. Oh, no.
Mr. DILLON (after conferring with associates). We have no information or knowledge that that decision was other than unanimous.
Mr. PECORA. I will get that information from the Interstate Commerce Commission's office.
Senator COUZENS. I wish you would, because if it is unanimous
we ought to investigate the Interstate Commerce Commission.
Mr. DILLON. In regard to that report of 1931 which you have just
read, Mr. Pecora, I think the valuations you will find there were
for rate-making purposes, and that they were based on the 1914 costs
less depreciation.
Senator COUZENS. Plus additions, and so on?
Mr. DILLON. Yes, sir.
Mr. PECORA. They were
based on the 1918 estimates of cost of
reproduction.
Mr. DILLON. I think if you will read it you will probably find
something like this, that the Interstate Commerce Commission's
valuations were made for the purpose of determining comparative
rates. The figures given out by the Interstate Commerce Commission
were not actual costs, but costs of reproduction new, using for all
roads the same price basis; that is, pre-war, 1914 prices.
Mr. PECORA. In the statement that was put into the record at the
very end of the hearing yesterday afternoon, and which, I take it,
was prepared by you or at your request
Mr. DILLON. Yes.
Mr. PECORA (continuing).
And a copy of which I have before
me, you set forth that the United States & Foreign Securities Corporation was the first investment company of substantial size organized in the United States. Now, Mr. Dillon, was it your belief
that investment trusts were intended to furnish capital to new
enterprises or reorganizations of old enterprises, or was it your belief
that investment trusts were primarily designed to find investments
or to make investments of its funds in securities of established value
and with an established income-producing power?
STOCK EXCHANGE PRACTICES
1875
Mr. DILLON. My own conception of that is that they were organized for the profitable investments of the funds that had been
entrusted to the securities company to invest. I should not feel
that these companies were compelled to stay out of any profitable
field. I personally would have advocated going into any field that
seemed profitable. The prospectus stated the purpose, that it has
been formed to buy, sell, underwrite, offer, and generally deal in
corporation, government, and other securities, both American and
foreign, and when desirable to take part in the organization and
operation of corporations. So the purposes of the corporation were
very broad.
Mr. PECORA. I know the prospectus sets that forth, but I was
merely seeking to get your judgment or opinion as to whether or
not investment trusts were organized for the purpose of investing
the public's money in new enterprises or in reorganization or rehabilitation of old enterprises, rather than in the making of investments in securities that had an established value and an established
income-producing power.
Mr. DILLON. My own judgment would be—which, I suppose, is
what you want—to go into any field that is profitable, and I would
diversify investments in all those fields. I would do all the things
you have talked about. I would buy some seasoned securities, and
I think the record of those companies is that they have been in the
different fields. The United States & Foreign Securities Corporation
made a profit by participation in syndicates, after taking losses, of
over three and a half million dollars. So that is a profitable field.
The corporation is not limited simply to the investments in interestbearing securities. My feeling, Mr. Pecora, on that is that the corporation should go into any field that seems profitable, for a group
of experienced men should try to handle the investment of those
funds in the interest of the stockholders, to the best of their judgment, without being restricted. We have laws restricting investments of trust funds and other things.
Mr. PECORA. But those laws do not apply to the investment of
moneys belonging to an investment trust.
Mr. DILLON. This is not a trust at all; it is a corporation. You
call it an investment trust, but it is simply a corporation, a business
corporation. The law governing the investment of trust funds, I was
just going to say, does specify established earnings, and so forth.
Those securities, I think you will find over the past decade, have
suffered probably worse than any form of investment.
The CHAIRMAN. What proportion of the money going into these
investment trusts came from the public ?
Mr. DILLON. In the case of the United States & Foreign Securities
Corporation—by the public you mean, I suppose, the stock offered
to the public ?
The CHAIRMAN. Yes.
Mr. DILLON. The first preferred stock ?
The CHAIRMAN. Yes.
Mr. DILLON. There was originally 25 millions. There are now,
I think, 21 millions and odd outstanding. And that stock is what
you mean, Senator Fletcher?
The CHAIRMAN. Yes.
1876
STOCK EXCHANGE PRACTICES
Mr. DILLON. That, of course, would mean the public. Some of us,
ourselves, are the largest stockholders.
The CHAIRMAN. That is what I was trying to separate; what proportion came from the public and what proportion was put in by
those who organized it.
Mr. DILLON. Those who organized it put in $5,100,000 for the
second preferred and a part of the common. The first preferred was
$25,000,000.
Mr. PECORA. That is what the public subscribed ?
Mr. DILLON. If you call me the public, I own 25,000 shares of that
for my family as an investment.
Mr. PECORA. YOU bought that
Mr. DILLON. In the open market.
Mr. PECORA. I am talking about the original flotation of issues of
the $25,000,000 worth of first preferred stock. That was offered and
sold,to the public?
Mr. DILLON. That is correct, Mr. Pecora.
Senator ADAMS. Mr. Dillon
The CHAIRMAN. Let us go on with the other.
Senator ADAMS. May I just follow with one more question?
The CHAIRMAN. Yes.
Senator ADAMS. YOU
made the statement a moment ago, which
interested me, to the effect that the conservative investor had suffered
more heavily than the investor in the less conservative lines.
Mr. DILLON. When I say " more heavily ", maybe that is not exactly right; but he suffered very heavily. I do think it is more
heavily, but I would want to check that.
Senator ADAMS. Would you deduce from that that the investor
should avoid conservative investments?1
Mr. DILLON. NO. I think that investing to conserve money is a
most difficult thing. I know of nothing that is so difficult or uncertain as investments. I am not sure that the phrase "security " is not
a misnomer.
Senator ADAMS. Some of them might be called " insecurities " ?
Mr. DILLON. Well, you should call them investments, because if
you take the investments which we all considered to be the highest
grade—and I do not want to particularize—but take such investments
as you would have bought for trust funds, unfortunately you would
have suffered more if you had bought them than if you had bought
certain common stocks. It is very difficult to take over a period of
years any specific class of security and just tie to that blindly. I
think you have got to keep changing and rearranging your portfolio
constantly and almost from day to day. It is very difficult to look
into the future with respect to investments.
Senator ADAMS. It would not be very difficult now, with the information which you now have, to reach back and make safe investments
in 1928?
Mr. DILLON. Yes. Looking backward we should have done a lot
of things that we did not do.
Mr. PECORA. Mr. Dillon, another virtue claimed for investment
trusts—and by that I mean investment corporations like the United
States & Foreign and the United States & International—was that
the investor in the stock of such companies was enabled to obtain a
diversification ?
STOCK EXCHANGE PRACTICES
1877
Mr. DILLON. That is correct. I think that is one of the essences
of it.
Mr. PECORA. That is one of the important virtues claimed for
these so-called " investment companies "?
Mr. DILLON. That is correct.
Mr. PECORA. Yes. When the United States & Foreign Securities
Corporation on November 11, 1929, took over large blocks of the
shares of the railroad stocks which had been accumulated through
the medium of the joint account that we have already spoken about,
what proportion did the moneys that the United States & Foreign
Securities Corporation paid for those railroad stocks bear to the
then available cash resources of the United States & Foreign ?
Mr. DILLON. Well, the then available cash resources—all were
available resources really of a company like the United States &
Foreign Securities Corporation.
Mr. PECORA. TO the total resources.
Mr. DILLON. Yes; to the total resources. Just a second; if I can
get the portfolio at that time. [After consulting same:] Less than
7 percent. About 6 percent plus.
Mr. PEOORA. But subsequently that investment company had put
in over 11 million dollars, had it not, in the stock of the Chicago,
Kock Island & Pacific and of the St. Louis & San Francisco roads?
Mr. DILLON. Mr. Pecora, I think you are confusing the two
security companies. The one that bought the stock from Dillon,
Head & Co. w^as the United States & Foreign. The one that was
in the joint account was the United States & International.
Mr. PECORA. It has appeared from the evidence heretofore submitted that one of these two investment trusts had in its portfolio
stock of these two railroad companies that represented a total investment by the securities company of over 11 million dollars in the
stock of those two railroad companies. I have that definitely in mind.
Mr. DILLON. I think that was in the International Corporation.
Mr. PECORA. All right.
Mr. DILLON. YOU are now speaking of the International?
Mr. PECORA. Yes; the International.
Mr. DILLON. I think that is correct.
Mr. PECORA. Was that not a very large investment to make in the
stock of two railroad companies if diversification was one of the
things sought for?
Mr. DILLON. That is about 9 percent, roughly, is it not, of the assets
in each ? Supposing that investment was equally divided between the
two roads; say 5y2 million in each; that would be roughly about 9
percent of the assets, assuming that the corporation had 60 million
dollars, which, as I remember, is what it had.
Mr. PECORA. Eleven million dollars compared with a total of 60
million dollars is more than 9 percent.
Mr. DILLON. NO ; I say supposing that investment was equally divided between each of the two roads. Assuming that 11 million dollars is divided equally between the Rock Island and the Frisco.
Mr. PECORA. It would be 9 percent in each ?
Mr. DILLON. That is right.
Mr. PECORA. Approximately 18 percent in both of them?
Mr. DILLON. Yes. I see no reason to couple those any more than
any other investments in railroad securities.
1878
'
STOCK EXCHANGE PRACTICES
Mr. PECORA. Except that they were acquired as a part of the same
transaction and apparently were jointly considered.
Mr. DILLON. But I go further. I think 9 percent in one thing is
a large proportion.
Mr. PECORA. TOO large a proportion for safety, is it not ?
Mr. DILLON. N O ; I would not say that, because it would depend
on the circumstances. In this case it was an unfortunate investment.
It was a mistake that we did not sell it. There is a difference. I
think that these were good stocks when they were bought. In fact
the record that I have just introduced shows they were good purchases. The mistake that was made was that they were not sold
subsequently, say in the spring of the following year, when they
could have been sold.
Senator ADAMS. Probably the bonds of Carthage had a time when
they were very good.
Mr. DILLON. I did not know that Carthage had any bonds,,
Senator.
Mr. PECORA. According to our analysis of the portfolio statements
issued annually by the United States & International Securities
Corporation, the first time that it appears in the portfolio reports
that any substantial investment had been made in the stock of the
Seaboard Air Line Railway was during the year 1930, because it
appears in the portfolio report as of December 31, 1930, that 131,908
shares of the stock of the Seaboard Air Line was on that date in
the portfolio of the United States & International Securities Corporation, and those shares represented a cost of $1,478,675. Do you
know when those one hundred and thirty-one thousand and odd
shares were acquired during the year 1930?
Mr. DILLON. I am told in January 1930.
Mr. PECORA. That was in connection with the participation of the
United States & International in the syndicate agreement managed
by Dillon, Read & Co. in connection with the refinancing and reorganization of the road that was commenced in 1929?
Mr. DILLON. Most of them were.
Mr. PECORA. Yes. When did the Seaboard Air Line Railway go
into receivership ?
Mr. DILLON. In December 1930, I am told.
Mr. PECORA. That is 11 months after?
Mr. DILLON. Eleven months after.
Mr. PECORA. Your firm was one of the two bankers for the road ?
Mr. DILLON. Yes.
Mr. PECORA. And had been since 1924?
Mr. DILLON. Or thereabouts.
Mr. PECORA. Or thereabouts. And that
gave your firm exceptional opportunities to follow the course of the road, its values, and
so forth?
Mr. DILLON. Yes.
Mr. PECORA. And
its business prospects, as well as the actual
earnings of the company?
Mr. DILLON. I should think that was correct.
Mr. PECORA. Were you not cognizant of conditions in January
1930 which made it seem extremely probable that the reorganization
plan which you had undertaken would fail, and that a receivership
might be imminent?
STOCK EXCHANGE PRACTICES
1879
Mr. DILLON. Obviously not, because we would not have underwritten that common stock at $20,000,000 if we had any such feeling.
Our feeling was that this would go through and that would be all
that would be needed, and that the road would prosper.
Mr. PECORA. Eailroad receiverships are not projected overnight,
are they?
Mr. DILLON. Occasionally; yes.
Mr. PECORA. AS a matter of fact the conditions that culminate
in a receivership for a railroad company are conditions that accumulate over quite a long period of time before the receivership ?
Mr. DILLON. Oh, yes. You mean that the road simply grows
worse and worse?
Mr. PECORA. Yes.
Mr. DILLON. Yes; I
Mr. PECORA. When
should think that is generally a true statement.
for the first time were you able to observe as
one of the bankers for the road that conditions were getting so bad
that a receivership might be imminent within a year's time or thereabout ?
Mr. DILLON. Oh, I do not think we foresaw it for a year, Mr.
Pecora. We would not have underwritten that $20,000,000 of stock
if we had.
Mr. PECORA. When did you first begin-to feel that a receivership
or other serious embarrassment was imminent?
Mr. DILLON. Eight up to the time of the receivership we were
hoping that it would not be necessary, so they inform me.
Mr. PECORA. Would you then say that this was one of those receiverships that developed overnight?
Mr. DILLON. They say that in 1930, just refreshing my mind, the
business in the country disappeared very quickly, and from the
middle of 1930 on the railroad traffic was disappearing very fast, and
this receivership came on very quickly.
Mr. PECORA. And you saw the clouds gathering in the financial
skies along about the middle of 1930?
Mr. DILLON. I do not think it was financial skies. I think they
were talking ab*out actual traffic on the railroad disappearing.
Mr. PECORA. Well, those conditions are reflected in the financial
skies, are they not?1
Mr. DILLON. Yes; I should think they would be.
Mr. PECORA. Yes. Was anything done by the investment trust or
the people who operated it, so far as you know, to lessen the possible
loss to this investment trust through its holdings of the Seaboard
Air Line Co. stock by disposing of them before the crash
came—the crash signalized by the receivership in December 1930?
Mr. DILLON. NO ; because we felt that to hold them was the best
thing to do. That we would get more money by keeping them rather
than by selling them. That was a mistake. Our judgment is not
infallible, Mr. Pecora. I wish it were.
Mr. PECORA. And in the light of those conditions you still think
that funds of investment corporations, so-called " investment trusts ",
should be used as a matter of brains or as a matter of sound business
judgment in operations of this sort?
Mr. DILLON. Yes, I think that they should be so used, and I think
probably we would do the same thing again. Possibly
1880
STOCK EXCHANGE PKACTICES
Mr. PECORA. YOU would still take a gamble on the improvement
of a railroad company with funds of the public that had been put intoan investment trust on the claimed virtues of diversification and the
making of sound investments by experts of trained minds?
Mr. DILLON. But, Mr. Pecora, your assumption is not one in which
I concur.
Mr. PECORA. DO you mean by that that you do not concur in my
assumption that investments of investment trusts are made by persons of sound minds and trained judgment, expert judgments
Mr. DILLON. I think if you will look at the record as a whole we
may be excused pardonable pride when we think our minds were
sound. But if you take some specific things such as we are talking
about now—in those we may have made mistakes. But I think taking our record as a whole I doubt if there are any banks in the
country—certainly not many—which can show a record in the balance
sheet like these security companies show today.
Senator COTTZENS. AS a matter of fact if you had sold them the
person who would have bought them would have been of unsound
mind, would he not ?
Mr. DILLON. Possibly. We sold some. We were not right in
everything.
Mr. PECORA. I understand that the liquidating value of the first
preferred stock of the United States & International is around $60 a
share at the present time, according to its assets ?
Mr. DILLON. I am told it is around $90 a share.
Mr. PECORA. Of the United States & International Securities
Corporation ?
Mr. DILLON. Yes.
Senator COUZENS. That is what was testified to
Mr. PECORA. AS of what date ?
Mr. DILLON. September 30.
Mr. PECORA. Of this year?
Mr. DILLON. Yes. Just now.
Mr. PECORA. We were basing our estimates upon
yesterday.
an analysis of the
annual report as of December 31, 1932.
Mr. DILLON. There has been a decided appreciation since then.
Mr. PECORA. Because of the increase in value of the securities ?
Mr. DILLON. Yes.
Mr. PECORA. On December
31, 1932, the liquidating or asset value
of the first preferred stock was around $60 a share, was it not ?
Mr. DILLON. That I do not know. I t is $90 now. Do you want
me to look back and see what it was ?
Mr. PECORA. Yes.
Mr. DILLON. We do not have that.
Mr. PECORA. IS it not a fact that prior to December 31, 1932,
United States & International Securities Corporation retired about
200,000 shares of the first preferred stock ?
Mr. DILLON. I am not sure of the amount. They bought in the
market a considerable amount.
Mr. PECORA. They bought in the market a large amount ?
Mr. DILLON. Yes.
Mr. PECORA. Which I understand is about 200,000 shares ?
Mr. DILLON. That I do not know, but I am willing to assume that
it was a substantial amount.
STOCK EXCHANGE PRACTICES
1881
Mr. PECORA. I also understand—and you can affirm or correct it, if
you wish—that the United States & International Securities Corporation retired that stock by buying it in the open market at a cost
of about one half what that stock had originally been sold for to
the public.
Mr. DILLON. I do not know if that was the average price, but I
assume it was. But of course we cannot assume we were buying it
from the original purchasers. We do not know from whom we were
buying it.
Mr. PECORA. The company was able to improve or enhance the
liquidating value of the stock to the extent of about $10,000,000
by buying in and retiring these 200,000 shares—that is an approximation—of the first preferred stock, at a cost of about $10,000,000
less than the sum which the company received from the original subscribers for that stock ?
Mr. DILLON. I am not sure that is a correct statement. The correct
statement, I think, would be—and they may coincide—that you
increase your liquidating value by the difference in your cost and
your asset value, not the par value.
Mr. PECORA. I understand that that represented an improvement
in the company's asset position or liquidating value of the stock
of about 10 million dollars?
Mr. DILLON. If your assumption—and I am taking your assumption—is correct that the liquidating value was only $60, and your
assumption is correct that our purchase price was $50, then we
only improved the asset price by $10 a share; not by $50.
Mr. PECORA. I said by $10 a share.
Mr. DILLON. Yes; that is right.
Mr. PECORA. In other words, you improved the liquidating value
from $50 a share to $60 a share, representing an improvement of
about 10 million dollars?
Mr. DILLON. That would only be true if you bought 50 percent of
the stock.
Mr. PECORA. Yes; at about half the price which the company
received from the public upon its original issuance.
Mr. DILLON. Take our present asset value of stock, say, of $90.
Suppose we buy stock at $80. We are adding $10 to asset value. If
your asset value in 1932—and I am accepting your figure at that
time—was $60, and you bought it at $50 a share, you are adding $10
to your asset value on each share that you buy; not on the shares
that are left.
Mr. PECORA. YOU reduced the outstanding shares held by the public
by means of the retirement of the shares we have referred to through
the purchase in the open market by the company, did you not?
Mr. DILLON. That is true. But you took $50 a share out of your
assets in order to do that. So you have only improved your asset
value by $10 a share.
Mr. PECORA. One or two more questions, Mr. Dillon, and I will be
through with you.
The CHAIRMAN. One moment, Mr. Pecora.
Mr. PECORA. Certainly, Mr. Chairman.
The CHAIRMAN. What I am most concerned about, or am more
particularly concerned about, is how the investor came out. He is
1882
STOCK EXCHANGE PRACTICES
the chap I am interested in. How about the man who put his
money into these investment trusts ? How did he come out by reason of this transaction ?
Mr. DILLON. We will take the first trust first, Mr. Chairman—and
I take it you do not want my experience, because it has not been a
very good one. My investment has not paid as well as those who
bought the senior securities. You want the preferred stock, do you ?
Mr. PECORA. The first preferred.
Mr. DILLON. The man who bought that received one share of first
preferred and one share of common and paid $100. With the money
that was paid in for the second preferred stock the corporation
showed a value back of his preferred stock of about $116 a share.
Now, he has gone through this period of depression, and he has received in dividends $6 a year. The company has paid the total
sum of about $13,000,000 through dividends.
The CHAIRMAN. Six percent?
Mr. DILLON. Yes. And the investor has an asset value back of his
first preferred stock. Today the asset value back of his preferred
stock—and when I say today I mean at the time of our last calculation—is about $138 a share. Or, in other words, the asset value
of the stock is considerably more than when he started. In the
meantime he has received 6 percent per annum dividends. Does
that answer your question? I am assuming he did nothing with
his common stock but held it. He fared one way or the other according to what he did. But I am assuming that he did not sell it,
and that
The CHAIRMAN (interposing). Then notwithstanding the losses
suffered by the investment trust, the investor really has not lost
anything yet ?
Mr. DILLON. Oh, no. You are talking about losses in particular
terms. If you are looking at our operations as a whole they are
not losses but profits. We are here just going into some unfortunate
things that we did, where our judgment was not so good as in others.
But if you take our operations as a whole over the period of time,
they have been profitable. Does that answer your question, Senator Fletcher?
The
CHAIRMAN. Yes.
Mr. PECORA. Mr. Dillon, is it fair to say that the most of the losses
that were incurred by the investment trusts were by reason of investments made in securities of corporations with which members of
the board have been affiliated in some capacity or other, or associates
of Dillon, Head & Co. had likewise been so associated?
Mr. DILLON. I think when you put the question in that way I must
answer yes. But in making such answer I should like to qualify it.
Mr. PECORA. GO ahead.
Mr. DILLON. The fact that we bought Eock Island or Frisco stock
or Seaboard stock, or other things where we have had losses, wasn't
because Mr. Hayden and Mr. Ecker, or someone else, happened to
be on those boards, but simply because we thought those were good
investments.
Mr. PECORA. When you say " we " you mean directors who included Mr. Hayden and Mr. Ecker?
Mr. DILLON. That is true.
STOCK EXCHANGE PRACTICES
1883
Mr. PECORA. That brings me to a point I want to question yon
about briefly. You heard me read into the record on yesterday,
didn't you, the text of paragraph 8 of the charter of United States
& Foreign Securities Corporation?
Mr. DILLON. Yes. May I look at that? [After looking at the
paper.] Yes; I did.
Mr. PECORA. YOU know the contents of it, or the general substance
of it, do you not?
Mr. DILLON. I know the general substance of it.
Mr. PECORA. What was the reason for including or inserting that
provision in this charter ?
Mr. DILLON. I assume that that was done by the lawyers as a
general practice. Provisions similar to that are, I think, not unusual.
It is done in order to give protection to directors against, well, we
will say, unfair claims that might be made against them. It is to
protect them against that.
Mr. PECORA. It also goes further than that, and gives those directors protection against claims that might be fair because based upon
the exercise of judgment by directors where that judgment was not
exercised by them in good faith.
Mr. DILLON. If that were true, I think a clause like that should
not be placed in any certificate of incorporation, because I think a
director should be fully responsible, fully liable for the exercise of
good faith in all things.
Senator ADAMS. Then I gather if there is any fault any place it is
to be put upon the lawyers; that if anybody is to be made the
scapegoat it is the lawyers.
Mr. DILLON. If that is put in, or any other provision is put in a
charter, which would excuse a director for the exercise of bad faith,
then I certainly think it is their fault. I do not think any company
should do that.
Senator ADAMS. Don't most lawyers do what their clients ask them
to do? I am simply trying to present the lawyer's standpoint a
little bit. [Laughter,]
Mr. DILLON. I haven't found that to be so, because we do not ask
lawyers to do things. We ask them to tell us how things should be
done or shouldn't be done, and they draw the documents. But we
do not ask them
Mr. PECORA (interposing). Did you ask the lawyers in this instanqe to tell you how directors could be rendered immune for liability for acts committed in bad faith and which might prove a loss
to stockholders ?
Mr. DILLON. NO. This was simply put in by the lawyers themselves when they drew whatever this is.
Mr. PECORA. The charter ?
Mr. DILLON. Yes; the charter.
The CHAIRMAN. That is, the amendment to the charter ?
Mr. PECORA. That was amended on March 12, 1930. But I was
talking about the original charter for the time being.
Mr. DILLON. It is the certificate of incorporation.
Mr. PECORA. Which is another term for charter.
Mr. DILLON. Ye,s; but as I read it, it does not excuse directors ^br
bad faith or anything like that.
\
r
175541—33—PT 4 — 2 3
1884
STOCK EXCHANGE PRACTICES
Mr. PECORA. Well now, let me read it to you. Let us read the
original provision prior to its amendment on July 12, 1930:
In case the corporation enters into contracts or transacts business with one
or more of its directors, or with any firm of which one or more of its directors
are members, or with any other corporation or association of which one or
more of its directors are stockholders, directors, or officers, such contract or
transaction shall not be invalidated or in any wise affected by the fact that
such director or directors doing it may have interests therein which are or
might be adverse to the interests of this corporation, even though the vote of
the director or directors having such adverse interest shall have been necessary
to obligate the corporation upon such contract or transaction. No such director or directors shall be liable to the corporation, or to any stockholder or
creditor thereof, or to any other person, for any loss incurred by it under or
by reason of such contract or transaction, nor shall such director or directors
be accountable for any gain or profits realized thereon.
Mr. DILLON. Yes; but that does not excuse them for bad faith.
I think this clause is too broad, myself.
Mr. PECORA. So do I ; and that is why I think the text of it excuses them, the import of it is designed to exclude such director
from any liability.
Mr. DILLON. But not for fraud.
Mr. PECORA. Well, I think our courts of equity might intervene
there and not enforce this provision, but the presence or inclusion
of this clause in the charter, if it was calculated to serve any purpose at all, was calculated to protect the directors even from the
exercise of bad faith. Whether the courts would give effect to that
purpose is another thing.
Mr. DILLON. N O ; I shouldn't think that at all, because that was
simply put in by the lawyers in the drafting of the charter. It was
nothing that we had any interest in or were consulted about, because
the charter of the United States & International Securities Corporation hasn't that clause in it at all.
Mr. PECORA. I know that.
Mr. DILLON. And this has been amended since. But I think directors of any company should always be liable and responsible for
the exercise of good faith.
Senator ADAMS. DO lawyers get the share of profits commensurate
with the responsibility which they seem to bear? [Laughter.]
Senator COUZENS. Might I ask what brought about this amendment you refer to?
Mr. DILLON. I do not know. I suppose the lawyers suggested
the amendment, that they brought it in and then the directors
adopted it.
Senator COUZENS. SO the lawyers corrected their previous act ?
Mr. DILLON. I think that is probably true.
Mr. PECORA. Mr. Dillon, would you today approve in principle
the inclusion of any such provision in the charter of a company
whose securities are to be sold to the public ?
Mr. DILLON. We have a real problem there and it is difficult to
know how to handle it; not in this company, but I mean in general.
I think directors should be responsible for their acts, for the exercise
of care and diligence. They should be liable for any malfeasance
or bad faith, of course. On the other hand, directors receive as
compensation from $200 to probably $600 a year. You give some
sort of protection to a man of character and standing if you want
STOCK EXCHANGE PRACTICES
1885
him to do a public service by serving on a public company, where he
gets nothing out of it except the satisfaction of acting in the interests
of the stockholders.
Senator ADAMS. Well, now, a director is supposed to be a man who
is interested in the company. That is, he is there serving his own
interest. He does not go on a board because of his little director's
fee.
Mr. DILLON. He goes on the board to represent the stockholders.
Senator ADAMS. The law requires in some cases that he must be
a stockholder himself.
Mr. DILLON. But that can be fulfilled by owning 1 share or 10
shares.
Senator ADAMS. I know, but you do not hire directors like you
hire a manager.
Mr. DILLON. NO ; you try to get men to serve as directors who are
not for hire.
Senator ADAMS. Yes; but don't you do that because of the knowledge and understanding that the members of boards of directors are
really the principal owners of the business, and you hold out the
board of directors as representing—well, take a list of bank directors
and you draw the conclusion that they are the men who not only
control but own the concern generally, don't you?
Mr. DILLON. In our companies that is the fact.
Senator ADAMS. And it ought to be the fact, ought it not?
Mr. DILLON. The directors here are largely the people that own
the securities, that own the company so to speak. They own first
preferred and second preferred and common stock. But t am speaking now on a broader plane.
Senator ADAMS. But you ought not to window dress a company
with people as directors who are not substantially interested ?
Mr. DILLON. NO. YOU ought not to window dress anything.
Mr. PECORA. But that is frequently done, isn't it ?
Mr. DILLON. I think it has been done.
'
Mr. PECORA. And it has been quite a common practice to your
knowledge, has it not?
Mr. DILLON. Well, I have seen boards of directors that looked as
though the directors were just there lending their names; yes.
Mr. PECORA. YOU know of many instances where persons serving
on many corporations the securities of which are sold to the public,
and where those corporations represent a great diversity or variety
of business interests, so many in fact that the director has no adequate opportunity for really fulfilling the functions of a director
as those functions should be fulfilled.
Mr. DILLON. I think that may be true; but there are men that
serve on a great many boards, and you wouldn't think they would
have the time to do anything about their own companies. As a
matter of fact, some of those men are the most helpful directors. I
personally do not serve on any boards at all except these security
companies, and that takes all of my time. Other people probably
have greater capacity than I have and can serve on more boards.
But I think a director should take a real responsibility for the company and should be familiar with its management and operation.
1886
STOCK EXCHANGE PRACTICES
Mr. PECORA. Take a personality like one of the directors of United
States <fe Foreign Securities Corporation, Mr. Ecker.
Mr. DILLON. Yes, sir.
Mr. PECORA. He is the
president of a great life insurance company,
with billions of dollars of resources. Now, as the president of that
company, looking after the safety and the interests of policyholders
and the resources of the company, running into the billions of
dol
@FedFRASER