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STOCK EXCHANGE PRACTICES
HEARINGS
BEFORE THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVENTY-THIKD CONGEESS
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 13
Alcohol Pools
FEBRUARY 14 TO FEBRUARY 20, 1934
Printed for the use of the Committee on Banking and Currency
175641
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON 1934
COMMITTEE ON BANKING AND CURRENCY
DUNCAN U FLETCHER, Flonda, Chairman
CARTER GLASS, Virginia
ROBERT F WAGNER, New York
ALBEN W BARKLEY, Kentucky
ROBERT J BULKLEY, Ohio
1HOMAS P GORE, Oklahoma
EDWARD P COSTIGAN, Coloiado
ROBERT R REYNOLDS, North Carolina
JAMES F BYRNES, South Carolina
JOHN H BANKHEAD, Alabama
WILLIAM GIBBS McADOO, California
ALVA B ADAMS, Colorado
PETER NORBECK, South Dakota
PHILLIPS LEE GOLDSBOROUGH, Maryland
JOHN G TOWNSEND, JB , Delaware
FREDERIC C WALCOTT, Connecticut
ROBERT D CAREY Wyoming
JAMES COUZENS, Michigan
FREDERICK STEIWER, Oregon
HAMILTON F KEAN, New Jersey
WILLIAM L HILL, Clerk
R H SPAEKMAN, Acting Clerk
SUBCOMMITTEE ON STOCK EXCHANGE PRACTICES
DUNCAN U FLETCHER, Florida, Chairman
CARTER GLASS, Virginia
ALBEN W BARKLEY, Kentucky *
EDWARD P COSTIGAN, Colorado
ALVA B ADAMS, Colorado
1
2
PETER NORBECK, South Dakota 2
JOHN G TOWNSEND, JB , Delaware
JAMES COUZENS, Michigan
Alternate, Thomas P Gore, Oklahoma
Alternate, Phillips Lee Goldsborough, Maryland
n
CONTENTS
Testimony of—
Page
Altschul, Prank, New York City, chairman of the committee on
stock list, New York Stock Exchange
5963,6007
Brown, Russell R, chairman of the board, American Commercial
Alcohol Corporation, New Yoik, NY
5851,,.
5885, 5911, 5919, 5954, 6027, 6065
Cutten, Ruloff E , member of the firm of E F. Hutton & Co
5895Foster, Charles N., Englewood, N J , partner in the firm of W. E.
Hutton & Co
6057
Quinn, Frank J, Westport, Conn
6069
Whanger, accountant, New York, N.Y
6046
Wright, Charles C, stock broker, New York, NY
6073,6119
EXHIBITS
(Italics indicate page on which exhibit was admitted into the record
indicates page on which exhibit is printed)
Roman type
Page
1. Statement presented by Mr Russell R Brown
2. Balance sheets of American Commercial Alcohol Corporation for years
1931 and 1932, 5*58
3. Three option agreements granted to Frank E. Bliss, the first dated
February 15,1932
4a Copy of option agreement, Brown to Prentice & Slepack, June 11,
1932
4b. Option agreement dated July 11, 1932, from R R Brown and Richard H. Grimm to Prentice & Slepack, 5870
4e. Option agreement dated July 22, 1932, from Russell R Brown and
R H Grimm to Prentice & Slepack, 5870
5 Option agreement dated August 9, 1932, from Russell Brown to
Stephen M Ames
6 a, b, c, and d Four option agreements between Russell R Brown and
Ruloff E Cutten, dated respectively September 12, 1932; September
12, 1932; December 12, 1932; and March 12, 1933
7 Copy of confidential report on American Commercial Alcohol Corporation, Coleman to Cutten
8. Copy of market letters, E. F. Hutton & Co, commencing with September 12, 1932
9 Copy of memorandum of agreement dated May 2, 1932, between Russell R Brown and Thomas E Bragg
10 Copy of report made by accounting department of the New York Stock
Exchange covering the period from May 15 to July 24,1933
11 Printed copy of listing application filed with the New York Stock
Exchange by American Commercial Alcohol Corporation for permission to list fifty-one-thousand-and-odd shares of capital common
stock of American Commercial Alcohol Corporation, 5944
12. Printed copy of listing application dated June 27, 1933, filed with the
New York Stock Exchange for permission to list 15,000 additional
shares of the capital common stock of the American Commercial
Alcohol Corporation, 5944
13. Copy of letter, dated July 1, 1933, Colby to committee on stock list,
New York Stock Exchange
* Not printed because of length or for reasons given m text
III
5856
(*)
5859
5870
5871
5871
5877
5884
5898
5900
5912
5916
5987
5995
5946
IV
CONTENTS
Page
14 Oiiginal minute book of the board of director and stockholders of the
American Commercial Alcohol Corporation, 5954
15 Memorandum dated June 7, 1983, from L Hasselbach to George
Tirrell
16 Memorandum dated June 12, 1983, with regard to additional listing
of 51,298 shares American Commercial Alcohol Corporation stock17. Memorandum dated July 10,1933, in regard to 15,000 shares American
Commercial Alcohol Corporation common stock
18 Two-page document dated July 5, 1933, and headed "Memorandum
for Mr. Tirrell in re American Commercial Alcohol Corporation"
etc, 5972
19 Letter dated July 1. 1933, from Cecil Page, secretary American Commercial Alcohol Corporation, to Mr. Louis Hasselbach
20 Questionnaire, June 2, 1933, American Commercial Alcohol Corporation to listing committee, New York Stock Exchange
21. First proof of printed application, 6018
22 Pro forma balance sheet of Noxon, Inc , dated June 27,1933, 6014
23 Letter dated July 1, 1933, signed by Mr. Colby and addressed to the
committee on stock list of the New York Stock Exchange, 6011
24 Proof no 3 of the application of the American Commercial Alcohol
Corporation, dated June 27, 1933, containing the pro forma balance sheet, 6018
25 Document showing list of data and information required by the
stock list committee, and which must be furnished by applicants
seeking listing, 6020
26 Agreement dated May 31, 1983, between American Commercial Alcohol Corporation, Thomas E Bragg, and syndicate participants
27 Pool agreement dated May 2, 1983, between Thomas E Bragg and
K B Phagan et al
28 Letter dated July 7, 1933, from B. E Smith to W E Hutton & Co
29. Letter dated July 31,1933, from B E Smith to W E Hutton & Co
30 Letter dated August 3, 1933, from B E Smith to W. E Hutton & Co31 Statement of account no 296, B E Smith-American Commercial Alcohol, with W. E Hutton & Co
32. Answer of Wright & Sexton to questionnaire, dated November 17,
1933
33 Printed questionnaire
34r-47 Photostatic copies of 14 optional agreements made during the year
1933, identified by the witness, 6106
48-51 Photostatic copies of four optional agreements made during the
calendar year 1932, identified by the witness, 6106
52-59 Photostatic copies of eight option agreements made dm ing the
calendar year 1931, identified by the witness, 6106
60 The option dated March 10, 1932, from Redmond & Co to Messrs.
Wright & Sexton
61 The option, dated May 6, 1932, from Redmond & Co to Messrs
Wright & Sexton
* |Jot printed because of length or for reasons given m text
(*)
5969
5970
5971
5973
5975
5983
(*)
6072
(*)
(*)
6033
6043
6059
6059
6059
6064
6076
6077
6150
6158
6161
6130
6130
STOCK EXCHANGE PEACTICE8
WEDNESDAY, FEBBXTABY 14, 1934
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,
WM
D.C.
The committee met-at 10:30 a.m., pursuant to call, in room 301 of
the Senate Office Building, Senator Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Bulkley, Gore, Costigan,
Adams, Byrnes, Goldsborough, Townsend, Walcott, and Kean.
Present also: Ferdinand Pecora, counsel to the committee; Julius
Silver and David Saperstem, associate counsel to the Committee;
and Frank J. Meehan, chief statistician to the committee; Millard
F. Tompkins, 116 John Street, New York City, attorney for Kuloff
E. Cutten.
The CHAIRMAN The committee will come to order, please Who
will you have first this morning, Mr. Pecora ?
Mr. PECORA. Mr. Russell R. Brown.
The CHAIRMAN. Please come forward to the committee table, stand,
hold up your right hand, and be sworn:
You solemnly swear that you will tell the truth, the whole truth,
and nothing but the truth, regarding the matters now under investigation by the committee So help you, God.
Mr. BROWN I do, sir.
The CHAIRMAN. Take
a seat right there opposite the microphone*
TESTIMONY OF BTTSSELL B. BBOWN, CHAIRMAN OF THE BOABD,
AMEBICAN COMMEECIAI ALCOHOL C0BP0BATI0N, NEW Y0BK
CITY
Mr. PECORA. Mr. Brown, will you give your full name, and address
to the committee reporter for the record.
Mr. BROWN. Russell R. Brown, 405 Lexington Avenue, New York
City, N.Y.
Mr. PECORA. What is your business or occupation ?
Mr. BROWN I am chairman of the board of the American Commercial Alcohol Corporation.
Mr. PECORA. HOW long have you been the chairman of the board
of that corporation 8
Mr. BROWN. Since April of 1931.
Mr. PECORA. Prior to your becoming chairman of the board were
you affiliated with the corporation in any other capacity ?
Mr. BROWN. NO.
Mr. PECORA. DO you know when
Mr. BROWN. In March of 1928.
the corporation was organized?
5851
5852
STOCK EXCHANGE PRACTICES
Mr. PECORA. And was it incorporated under the laws of the State
of Maryland ?
Mr. BROWN. I t was, sir.
Mr. PECORA. YOU were not
connected with the corporation m any
way at the time of its incorporation, were you?
Mr. BROWN. NO, except through an interest I had in the company.
Mr. PECORA. That is, as a stockholder?
Mr. BROWN. A S a stockholder, yes.
Mr. PECORA. NOW, when did you first become connected with the
company in any capacity whatsoever?
Mr. BROWN. On the date I have mentioned, in April of 1931.
Mr. PECORA. Will you give the day of the month, and the year
when you became chairman of the board?
Mr1. BROWN. I t was in April of 1931.
Mr. PECORA. Prior to your becoming chairman of the board of
the corporation, what was your business, occupation, or profession?
Mr. BROWN. 1 was president of the United States Industrial Alcohol Co.
Mr. PEOORA. At the present time, Mr. Brown, who ar*e the executive
officers of the corporation ?
Mr. BROWN. I am chairman of the board, Mr. Richard H. Grimm
is president, and Mr. Guy I. Colby is vice president and treasurer,
and Mr. Cecil Page is secretary, and Mr. Charles Beebe is auditor,
and Mr. William S. Kies is chairman of the executive committee.
Mr. PECORA. HOW many gentlemen compose the board of directors
of the corporation?
Mr. BROWN. If my memory serves me correctly, it is 15.
Mr. PECORA. Can you give the names of those directors either from
memory or by reference to any document available to you?
Mr. BROWN. Robert W. Atkins, Russell R. Brown, Marshall H.
Runk, James A. S. McMicken, Philip Publicker1, Robert L. Pond,
J. M. Kessler, S. M. Mayer, Walter E. Buck, J. M. Michell, W. S.
Kies. How many have I named now?
The COMMITTEE REPORTER (Mr. Hart). You have named 11.
Mr. PECORA. HOW about Guy I. Colby?
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Yes,
sir.
And how about Humphrey W. Chadbourne ?
Yes, sir.
HOW about
Yes, sir.
HOW about
Yes, sir.
Warren W. Foster?
Richard H. Grimm?
And how about Cecil Page ?
Yes, sir. I am sorry, but I could not recall all of
them offhand.
Mr. PECORA. HOW about Edward S. Paine?
Mr. BROWN. That is correct.
Mr. PECORA. And how about H. G. Atwood?
Mr. BROWN. He is no longer a director. He is out and Dr. J. M.
Michell came on the board after Mr. Atwood retired.
Mr. PECORA. At the time of the incorporation of the company,
what was its capital structure, Mr. Brown?
Mr. BROWN. Bonds, preferred stock, and common stock.
STOCK EXCHANGE PBACTICES
5853
Mr. PECORA. In what proportions and amounts?
Mr. BROWN. I think approximately $4,000,000 in bonds, and
$2,000,000 in preferred stock, and the balance in common stock.
Mr. PECORA. HOW many shares of stock was the corporation
authorized to issue, and what were the classifications of stock?
Mr. BROWN. That I do not remember.
Mr. PECORA. DO you know what the capital structure of the company was at the time you became chairman of the board in April of
1931?
Mr. BROWN. There was nothing but common stock outstanding
then.
Mr. PECORA. And how many shares?
Mr. BROWN. If my memory serves me correctly, 380,000 shares
of no-par value, which was subsequently changed to $10 par value,
and afterwards cut in half to 190,000 shares of $20 par value.
Mr. PECORA. When was the stock put on a $20 par value basis ?
Mr. BROWN. I think in 1932, if I am not mistaken.
Mr. PECORA. Will you tell the committee what the business is
generally of this corporation?
Mr. BROWN. The company has 4 plants, 1 located at Philadelphia,
Pa.; 1 at New Orleans, La.; 1 at Sausalito, Calif., across the bay
from San Francisco; and then an enormous grain plant at Pekin,
111. That has a capacity of approximately 100,000 gallons of whiskey
and beverage spirits per day.
Mr. PECORA. When did it acquire those plants ?
Mr. BROWN. All of these plants came in at the time of the organization of the corporation, with the exception of the California
plant, which was acquired at a subsequent date.
Mr. PECORA. When?
Mr. BROWN I think in 1929.
Mr. PECORA. Would you say generally that the business of the
company is the manufacture and sale of commercial alcohol?
Mr. BROWN. I should sajr, going on with the story about the
plants, that the plants at Philadelphia had been used for the manufacture of commercial alcohol as well as beverage spirits in the old
days. The plant at New Orleans, I think, was started in 1926 or
1927, and had been used exclusively for the manufacture of industrial alcohol, but today is being used for the manufacture of rum.
The plant at Sausalito, Calif., was originally built, as I understand
it, for a whisky plant and changed afterward to an industrialalcohol plant, which business has continued up to the present time,
and also devoted to the sale of beverage spirits. The plant at Pekin,
111., was originally a whisky plant, manufacturing gin and whisky
and other beverage liquors. After prohibition it liquidated a great
part of its stocks of whisky and then turned to the manufacture of
commercial alcohol as long as it was economically feasible, as manufactured either from grain or molasses, and while prices for commercial alcohol were at a sufficient level it was possible to continue the
operation of it as an industrial-alcohol plant. I t has also been
used for the manufacture of grain alcohol for sale to doctors, dentists, and druggists, and also to such concerns as still require grain
alcohol in the manufacture of their various industrial products
Mr. PECORA. What is the total
5854
STOCK EXCHANGE PRACTICES
Senator WALCOTT (interposing). Let me ask a question right
there: Did any of those plants formerly belong to the Walker
Distilling Co.?
Mr. BROWN. NO. They had nothing to do with them It was
the American Distilling Co., and the present American Distilling
Co., through which our beverage business is conducted, was owned
by the successor corporation to the old American Distilling Co.;
and that was owned by a family named Wilson in Pekm, 111.
Mr. PECORA. YOU have said that when you became chairman of
the board in April of 1931 this corporation had outstanding 380,000
shares of common capital stock of no-par value.
Mr. BROWN That is correct.
Mr. PECORA. And subsequently that stock was changed to $10 par
value basis.
Mr. BROWN. That is correct.
Mr. PECORA. And then thereafter the par value was increased to
$20 a share
Mr. BROWN. That is correct.
Mr. PECORA. NOW, since you became chairman of the board have
there been any additional issues of capital stock ?
Mr. BROWN. That is correct. There have been approximately
55,000 or rather 66,000 shares issued.
Mr. PECORA. When was that issue made ?
Mr. BROWN. In June or July, or at least in May, June, or July
of 1933.
Senator GORE. HOW much ?
Mr. BROWN. What was that?
The CHAIRMAN. Senator Gore wishes to know how many shares
were issued.
Mr. BROWN. Approximately 66,000 shares; of which 25,000 shares
were issued in exchange for other corporations, and forty-one thousand-odd shares issued for subscription by stockholders.
The CHAIRMAN. And did those shares have any par valued
Mr. BROWN. That all has a par value of $20 a share.
Mr. PECORA. NOW, Mr. Brown, the charter of this company requires that any additional issue of stock shall first be offered to the
existing stockholders of record, does it not?
Mr. BROWN "Not all of necessity. There is a provision in the
charter of the corporation which provides that stock may be issued
either for property, or for cash and property, and also issued to
stockholders.
Mr. PECORA. Under what circumstances must it first be offered to
the stockholders of record ?
Mr. BROWN. When it is offered for other than cash, or for cash and
property, or for property.
Mr. PECORA. That is, when it is issued except on an exchange
basis ?
Mr BROWN That is correct.
Mr. PECORA. Either for cash or property of any kind ?
Mr. BROWN Yes; that is correct.
Senator WALCOTT Did the directors have the right to decide that
matter ?
STOCK EXCHANGE PBACTICES
5855
Mr. BROWN. The directors have the right to decide that at their
discretion.
Mr. PECORA. NOW
Mr. BROWN (interposing).
With your permission, I have a statement which I should like to read.
Mr. PECORA. Have you a copy of it, Mr. Brown?
Mr. BROWN. I have just this one. I would be glad to submit it
to you if you would like to read it.
Mr. PECORA. May I see it, please ?
Mr. BROWN. Certainly. I think it will clarify the situation [handing to Mr. Pecora a two-page typewritten statement],
Mr. PECORA (after reading the statement). I have read this1 statement, Mr. Brown, and it seems to me to read like an apology in
advance for certain things that have not yet been brought out.
Mr. BROWN. I would not say it was an apology.
Mr. PECORA. I beg pardon?
Mr. BROWN. I say, I have not offered it in the sense of an apology.
Mr. PECORA. Well, you have indicated a desire to put it in the
record now, and I think it is untimely or premature at this stage
of the examination. Any statements you have embodied in this
paper you will have opportunity to put into the record through the
medium of answers to questions or as your own statement at the
proper time.
Mr. BROWN. All right.
Senator KEAN. Mr. Chairman, there is no objection to the witness
putting in the statement now if he wants to, is there?
The CHAIRMAN. There seems to be some objection to it, and it
can come m later when it is more in order, as I understand it.
Senator KEAN I ^suppose he has the right to put it in now if he
wants to, hasn't he?
The CHAIRMAN Well, Mr. Pecora thinks it is not in order now.
Mr. PECORA. I think it would be taking the matter up entirely out
of order. I have no objection to it except that it is not in accordance with the procedure of the presentation of evidence here
Senator KEAN. I haven't seen the statement at all, but it seems
to me that a man who goes on the witness stand has a right to put
in a statement.
Mr PECORA He has the right to put in a statement if the committee wants to accord him that right He 13 here as a witness,
and I have already indicated, after having read the statement for
the first time, upon the witness handing it to me a few minutes ago,
that it seems to me to be an apology in advance
Senator KEAN That may be, but if he chooses to put in a statement I cannot see why the committee ought to object to his doing it.
The CHAIRMAN Very well; let it go in.
Mr. PECORA. I have no objection to it, and only thought it ought
to go m in the regular order.
Mr BROWN. DO you want me to read it now ?
Mr. BROWN. Yes; that will make it all right.
Mr. PECORA. Let us have it marked in evidence and then I will
read it. Mr. Chairman, I ask that that may be done.
The CHAIRMAN. Let it be marked in evidence.
5856
STOCK EXCHANGE PRACTICES
(A 2-page prepared statement presented by Mr. Brown was
marked " Committee Exhibit No. 1, February 14, 1934 ", and will
be found immediately following where read by Mr. Pecora.)
Mr. PECORA. The statement produced by the witness has been
marked " Committee Exhibit No. 1 " as of this date, and reads as
follows:
Investigators for your committee have had tree access to the records and
papers of the American Commercial Alcohol Co for the purposes of this
inquiry.
Mr. BROWN. Might I interrupt you right there, Mr. Pecora, for an
explanation?
Mr. PECORA. Yes.
Mr. BROWN. The stenographer in copying that paper
wrote
" company " when it should be " corporation." I t is in there in that
way at several places.
Mr. PEICORA. Then we will understand that where the word " company " appears in this statement it should be " corporation."
Mr. PECORA. I will now resume the reading of the statement.
Whatever those recoids disclose with respect to the issuance and distribution
of the shares of stock of the corporation, you or your investigators are fully
familiar with
The validity of the issuance of the shares of the corporation was, of course,
passed upon by counsel The importance of what was done as reflected by
the records which have been examined by your investigators, consists primacdy in its purpose At the time, the American Commercial Alcohol Co
was a corporation with many stockholders, representing a fair value in excess
of $8,000,000 Although it had no funded debt, and there was a substantial
ratio between current assets and current liabilities, nevertheless, it had substantial bank loans, and its business required substantial further outlets for
its products if the then condition was to continue for even a short time
The banks were insistent that the loans be paid In order to protect the
stockholders of the company it was necessary that, not a month later, or 60
days later, but immediately, something should be done which would result in
expanded outlets for the company's products, and the payment of a substantial
amount of its bank debts
It is unnecessary to call to the attention of the committee the difficulty of
financing industrial corporations during the months of March, April, May,
and June of 1933 To obtain financing during those periods hi the ordinary
way, through banks or investment bankers, was wholly impossible, but unless
financing were obtained for the purposes above mentioned, a very serious
sacrifice of the value of the business was possible, with resultant loss to those
who had invested their money and effort in complete good faith in the enterprise
It was, therefore, with equal good faith and solely for the purpose of properly protecting the investments which had already been made, and for the
purpose of making it possible for the business to survive the most serious
interval of the depressed condition, that the steps with respect to the common
stock of the company, with which your investigators are fully familiar, were
taken
The risk of loss was assumed by the optionees, underwuters and offlceis
of the corporation, and with that risk went the opportunity for profit In
my particular case, as I view the matter, a loss was suffered rather than a
profit realized In other instances I am informed that profits were realized,
but whatever profit was realized, in my opinion, constituted small consideration for the service which at the time I and those associated with me deemed
necessary if the large investment in the business of the company, which I
have mentioned above, was not to be seriously impaired or perhaps destroyed
in part beyond any reasonably prompt recovery
Every conceivable method of handling the situation promptly was surveyed
by me and my associates, and the method pursued seemed at the time—and still
seems to me—to have been the only method which would fairly accomplish the
STOCK EXCHANGE PEACTICES
5857
result which was accomplished, namely, the protection of the stockholders of
the American Commercial Alcohol Corporation.
\The plan was my own undertaking, with the intention of aiding the company in its emergency, and in this I had the support of my associates in the
company For their acts in so cooperating I wish to assume full personal
responsibility I, with their help, and through maiket support, protected the
company and its stockholders in a grave emergency, more grave than the emergency of 1929, when, as has been said, undisclosed market support by companies
was not only justified but desirable.
The method employed was unusual and abnormal The emergency and the
abnormal time and no selfish motive created the necessity, and the present
excellent condition of the company is one of the best evidences of the justification of the steps that were taken.
After reading this statement it seems to me it emphasizes the
untimeliness of its introduction into the record at this point because,
standing by itself, it is meaningless. But I wish, Mr. Ohairman, to
examine the witness with a view to working out the detailed facts
that this statement in the main has general reference to.
The CHAIRMAN. All right. You may proceed to do that, Mr,
Pecora.
Mr. PECORA. Mr. Brown, before I leave this statement temporarily
let me ask you: Who prepared it?
Mr. BROWN. Iprepared it myself.
Mr. PECORA. When did you prepare it?
Mr. BROWN. I prepared it on yesterday, and then I corrected it
after it was written.
Mr. PECORA. YOU prepared it in anticipation of being asked a
number of questions witn regard to the stock issues that are referred
to in this statement, I presume?
Mr. BROWN. NO. I prepared it so as to have a definite statement
on the record of the committee that I assume full responsibility for
whatever was done.
Mr. PBOORA. Well, the transactions that you refer to here were
transactions that you anticipated you would be questioned about,
weren't they ?
Mr. BROWN. Yes, sir.
Mr. PECORA. And you
prepared this statement in anticipation of
such questions?
Mr. BROWN. Yes, sir.
Mr. PECORA. NOW, Mr.
Brown, have you the balance sheet of your
company for the year 1932?
Mr. BROWN. I have it here in the files.
Mr. PECORA. And also the balance sheet for the year 1931 ?
Mr. BROWN. I do not think I have it for 1931. I had the auditing
department get those papers together. I mean by that statement
that it was because I did not get the final subpena until about 4
o'clock yesterday afternoon, and then I had to gather together my
own papers, and we brought what papers were required from the
company, by my having the company's auditor bring them down
this morning.
Mr. PECORA. Will you produce the balance sheet for the company
for the year 1932?
Mr. BROWN (calling upon an associate to produce the paper). Yes,
sir; I have one here for December 31, 1931, and also I find here the
one for December 31,1932.
5858
STOCK EXCHANGE PRACTICES
Mr. PECORA. Embodied in the one statement?
Mr. BROWN. Yes, sir. They are embodied, apparently, m this
listing application that the secretary of the company just handed
to me.
Mr. PECORA. Will you let me have that paper?
Mr. BROWN. Yes; certainly [handing over a paper to Mr. Pecora].
Mr. PECORA. Mr. Chairman, I ask that this paper may now be
marked an exhibit for identification.
The CHAIRMAN. That will be done.
(The balance sheets of the American Commercial Alcohol Corporation for the years 1931 and 1932 were marked " Committee Exhibit
No. 2 for identification, Feb. 14, 1934 ", and will be found among the
papers of the committee.)
Mr PECORA. NOW, during the year 1932, while you were chairman
of the board, did you and other directors and officers of the company
give any options?
Mr. BROWN. Yes.
Mr. PECORA. Covering
the capital stock of the company to any
individual or individuals?
Mr. BROWN. Yes.
Mr. PECORA. Did you give more than one such option during that
year?
Mr. BROWN. Yes, sir.
Mr PECORA. HOW many did you give?
Mr. BROWN. I cannot tell you exactly.
I think the first one was
given to Mr. Frank E. Bliss, and I think the next one was given to
Ames Bros. The next one was given to a man named Goodwin.
Mr. PECORA. Will you talk a little louder? We cannot hear you
Mr. BROWN The next one was given to Goodwin, or to Prentice &
Slepack.
Mr. PECORA YOU will have to talk a little louder. We cannot
hear you.
Mr. BROWN. And finally a series of options was given to Mr.
Kuloff Cutten.
Mr. PECORA. What was the business of these optionees whose names
you have given to us ?
Mr. BROWN. Well, they were connected with the stock exchange
or
Mr. PEOORA (interposing). Do you mean the Now York Stock
Exchange ?
Mr. BROWN. Either with the exchange, or they worked down in
the Street there; yes, sir.
Mr. PECORA. That is
Mr. BROWN (continuing). All of them were connected with the
exchange, I believe.
Mr. PECORA. AS members?
Mr. BROWN. I think so.
Mr. PECORA. I now show you what purports to be a photostatic
reproduction of the so-called " option " given to Frank E. Bliss, who
is named by you as one of the parties, I believe.
Mr. BROWN. Yes, sir; that is correct.
Mr. PECORA. That is one of the names you have already given
to us.
STOCK EXCHANGE PRACTICES
5859
Mr BROWN Yes, sir.
Mr. PECORA. Will you look at it and tell me if it constitutes a
true and correct copy of the first one in point of time of those
options ?
Mr. BROWN. There was a series of options.
Mr. PECORA. Well, of the series of options given to Mr. Bliss.
Mr. BROWN (after looking at the photostats). These look all right
to me.
Mr. PECORA Mr. Chairman, I wish to offer them in evidence.
The CHAIRMAN. Let them be admitted.
Mr. PECORA. There are three option agreements pinned together
there, and I suggest that they be marked with the proper number
and then lettered A, B, and C.
(The three option agreements granted to Frank E. Bliss, the first
one dated Feb. 15, 1932, were marked " Committee Exhibit No. 3,
A, B, and C, Feb. 14, 1934 ", and will be found immediately following where read by Mr. Pecora.)
Mr. PECORA. The memorandum of agreement dated February 15,
1932, reads as follows:
Memorandum of agreement made this 15th day of February, 1932, between
RUSSELL R. BROWN, party of the first part, and FRANK E BLISS, party of the
second part
Whereas the party of the first part is the owner of American Commercial
Alcohol Common Voting Trust Certificates, and
"Whereas FRANK E BLISS desires an option upon such certificates on certain
terms,
Now, theietore, it is agieed by and between the parties hereto as foUows
(1) In consideiation of the sum of Ten Dollarsi ($10) paid by the party of
the second part, receipt whereof is hereby acknowledged, and the mutual promises herein contained, the party of the first part gives to the party of the
second part foi a penod of thirty (30) days from the date of this agreement,
an option to purchase all or any of American Commercial Alcohol Common
Voting Trust Certificates m the amount and at the prices herein below set
foith:
1500 shares at $7 00 per share
1500 shares at $8 00 per share
1500 shares at $9 00 per share
1500 shares at $9 50 per share
1500 shares at $10 00 per share
1500 shares at $1100 per share.
(2) The party of the first pait agrees to loan to the party of the second part
at any time duiing the option period, all or any part of such 6,000 certificates
then lemaming unsold under this option, such loans to be made according to
the usual Street custom, the party of the second part to deposit, upon borrowing such certificates, an amount equal to the market value thereof and keep
such deposit up to an amount equal to the market value thereof from time to
time thereafter, certificates so loaned not to be called for during the option
period except as necessary to fulfill delivery of purchases Deliveries of stock
will be made to the party of the second part upon one day's notice
(3) The party of the first part may buy and sell American Commercial Alcohol Common Voting Trust Certificates, but such orders will be given through
such Stock Exchange house as shall be named by the party of the second part,
and the party of the first part agrees not to buy or sell stock through any other
source
(4) The option herein granted may be assigned by the party of the second
part but the party of the second part and such assignee or assignees agree to
use all leasonable efforts to maintain an active and stable market for such
stock consistent with its value and with its earning possibilities
In witness whereof the party of the first part and the party of the second
part have hereunto set their hands this 15th day of February 19j32
(Signed)
(Signed)
RUSSELL R BROWN
FKANK E BUSS
5860
STOCK EXCHANGE PRACTICES
Exhibit no. 3-B is, I understand, in identical form with exhibit
no. 3-A, except that the parties are Philip Publicker, party of the
first part, the optioner, and Frank E. Bliss, party of the second
part, as the optionee. The number of shares and the option prices
in exhibit 3-B are as follows: 1,000 shares at $7 per share; 1,000
shares at $8 per share; 1,000 shares at $9 per share; 1,000 shares at
$9.50 per share; 1,000 shares at $10 per share; and 1,000 shares at
$11 per share.
Senator GOLDSBOROUGH. This was after the split-up, from 20 to 10?
Mr. PECORA. These were voting trust certificates.
Mr. BROWN. The equivalent value today would be just twice those
figures mentioned.
Mr. PECORA. Who is Philip Publicker?
Mr. BROWN. Mr. Publicker is one of the directors of the company.
Mr. PECORA. Was he a director of the company on the 15th day
of February 1932, which is the date of this option marked exhibit
3-B?
Mr. BROWN. Yes, sir.
Mr. PECORA. And he still is a director of the company?
Mr. BROWN. Yes, sir.
Mr. PECORA. And has been continuously since February 15, 1932?
Mr. BROWN. Yes; even before that.
Mr. PECORA. I beg your pardon?
Mr. BROWN. I came in at the time he was originally chairman of
the board, and I succeeded him as chairman of the board.
Mr. PECORA. He remained as a director from the time you came
in as chairman of the board, in April 1931 ?
Mr. BROWN. Yes. I t was at Mr. Publicker's request that I came
into the company.
Mr. PECORA. I notice that the option prices set forth in the '* Publicker option ", so called, are the same as the option prices set forth
in the option agreement which you gave Mr. Bliss on the same day.
Mr. BROWN. I think that is correct. I think they are all the same,
in varying quantities.
Mr. PECORA. The third option agreement offered in evidence here,
and which has been marked " Exhibit 3-C ", is also identical in form
with the one that has been read into evidence, the one marked " Exhibit 3-A." I t is the same date, but it is made by William S. Kies,
as party of the first part, and Frank E. Bliss, as party of the second
part. The shares and option prices fixed therein are as follows:
1,000 shares at $7 per share; 1,000 shares at $8 per share; 1,000
shares at $9 per share; 1,000 shares at $9.50 per share; 1,000 shares
at $10 per share; 1,000 shares at $11 per share. I t is also dated
February 15, 1932. I notice, Mr. Brown, that those option prices
are the same as those mentioned in the two previous option agreements that have already been referred to.
Mr. BROWN. Yes.
Mr. PECORA Who
is William S. Kies, the optioner on this agreement?
Mr. BROWN. Mr. Kies is a director of the company, and also
chairman of the executive committee.
Mr. PECORA. Was he a director of the company on February 15,
1932, when this option was given ?
STOCK EXCHANGE PBACTICES
5861
Mr. BROWN. Yes, sir.
Mr. PECORA. When did he first become a director of the company?
Mr, BROWN. At the time of its organization.
Mr. PECORA. That is, back in 1928?
Mr. BROWN. Yes.
Mr. PECORA. And has served continuously as a director ever since?
Mr. BROWN. That is correct.
Mr. PECORA. When did he become chairman of the executive com-
mittee of the board?
Mr. BROWN. I think at the time of the organization of the corporation.
Mr. PECORA. And has served in that capacity ever since?
Mr. BROWN. Yes, sir.
Mr. PECORA. The fourth
of these option agreements, marked in
evidence as " Exhibit 3-D ", is identical in form with exhibit 3-A>
except that the parties thereto are Richard H. Grimm, party of the
first part, and Frank E. Bliss, party of the second part. It bears
the same date, namely February 15, 1932, as the options already
discussed, and the stock and option prices provided for therein are
as follows: 1,500 shares at $7 per share; 1,500 shares at $8 per share;
1,500 shares at $9 per share; 1,500 shares at $9.50 per share; 1,500
shares at $10 per share; 1,500 shares at $11 per share.
Those option prices correspond to the option prices in the three
preceding options that have already been referred to, do they not?
Mr. BROWN. Yes,
sir.
Mr. PECORA. Who is Richard H. Grimm?
Mr. BROWN. He is the president of the company.
Mr. PECORA. Was he the president of the company on February
15,1932?
Mr. BROWN. Yes.
Mr. PECORA. Also a
Mr. BROWN. Yes.
Mr. PECORA. When
director, I presume.
did Mr. Grimm become president of the company?
Mr. BROWN. About the time of the organization of the company.
Mr. PECORA. Back in 1928.
Mr. BROWN. Yes, sir.
Mr. PECORA. And has served continuously in that office
Mr. BROWN. Yes, sir.
Mr. PECORA. And also as a director ?
Mr. BROWN. Yes, sir.
Mr. PECORA. At the time of the giving of these four
ever since?
options to
Mr. Bliss, was the stock of this company listed on any publicsecurities exchange ?
Mr. BROWN. On the New York Stock Exchange.
Mr. PECORA. When was it first listed there?
Mr. BROWN. If my memory serves me correctly, in 1928. I am
not sure.
Mr. PECORA. DO you recall what the market value of the stock was,
as evidenced by the quotations on the New York Stock Exchange,
on February 13,1932?
Mr. BROWN. Approximately those figures.
The CHAIRMAN. I did not get your last answer.
175541—34—PT 13
2
5862
STOCK EXCHANGE PEACTICES
Mr. BROWN. I say approximately those figures.
Mr. PECORA. These figure^ vary, Mr Brown, from $7 up to $11
Mr. BROWN. I do not remember. I really cannot recollect that.
Mr. PECORA. What is that?
Mr. BROWN I do not remember that, Mr Pecora; I have not the
least idea.
Mr PECORA. HOW many shares were listed at that time on the New
York Stock Exchange ?
Mr. BROWN I should say approximately 380,000 shares
Mr. PECORA. Three hundred and eighty thousand
Mr. BROWN. Yes
Senator TOWNSEND
Mr. PECORA. There
What was the amount of the options given?
was a total of 30,000 shares covered by these
four options.
Mr BROWN. Ye$. At the time the option was given, Mr. Bliss and
I met sometime before that. He is an outstanding figure on the
exchange; a man of splendid reputation, of real ability, and the
sole purpose in the giving of those options, as evidenced by the
discussion had with Mr. Bliss at the time the options were given,
was that we were not at all interested in having any of the stock
called. We purposely did not want the stock called. We simply
wanted him to look after the market for the stock, and we accordingly gave him the options.
Mr. PECORA. Who took the initiative in the negotiations which
led to the giving of these four options to Mr Bliss ?
Mr. BROWN. I have forgotten. I had met Mr. Bliss, I should say,
probably in 1930 or 1931. I have really forgotten. I do not
remember.
Mr. PECORA. Can you not possibly refresh your recollection on
that point, Mr. Brown?
Mr. BROWN. NO, sir; I cannot. I have not the least idea. The
initiative, I assume, came from my side of it. I think I sent for Mr.
Bliss.
Mr. PECORA. It is quite probable that it did come from your side?
Mr. BROWN. Yes.
Mr. PECORA. Because
you had certain definite purposes you wanted
to accomplish through the medium of these options.
Mr. BROWN. I simply wanted a stable market maintained in the
stock. That was the only desire.
Mr. PECORA. Had there been much activity in the trading of that
stock on the exchange prior to February 15, 1932?
Mr. BROWN. That I cannot tell you. I assume there had been
from time to time. I do not remember.
Senator GORE. What was the prevailing price at that time?
Mr. PECORA. I have asked the witness, and he says he does not
recall.
Senator GORE. I thought you asked him about the quantity.
Mr. PECORA. I asked him what the quotations were on February
13 or February 15.
Don't you recall what the quotation of that stock was on the New
York Stock Exchange on February 15, 1932?
Mr. BROWN. NO, sir.
STOCK EXCHANGE PRACTICES
5863
Mr. PECORA. Was it as high as $11, which is the highest option
price fixed in any of these options 8
Mr. BROWN. At th&t time^
Mr. PECORA. Yes.
Mr. BROWN. I cannot tell
Mr. PECORA. Was it lower
you. It might have been.
than $7, which is the lowest option price
mentioned in those four agreements ^
Mr. BROWN. It might have been.
Mr. PECORA. The stock covered by these options was at the time
owned by the parties who granted these options ?
Mr. BROWN. That is correct.
Mr. PECORA. And all four of these persons, namely, yourself, Mr
Grimm, Mr. Kies, and Mr. Publicker, were officers or directors of
the company
Mr BROWN. That is correct.
Mr PECORA. YOU were the chairman of the board; Mr. Grimm
was president and chairman of the executive committee
Mr. BROWN. NO ; president Mr Kies was chairman of the executive committee
Mr. PECORA. Mr. Grimm was president and a director
Mr BROWN Yes.
Mr PECORA. Mr. Kies
was director and chairman of the executive
committee, and Mr. Publicker was a director?
Mr. BROWN. That is correct.
Senator KEAN I would like to ask a question there. Were those
options submitted to the board and approved by the board 8
Mr. BROWN It was stock that was owned by us It did not belong
to the company.
Senator KEAN. I t was not submitted to the board at all ?
Mr. BROWN. It was not submitted to the board at all.
Senator KEAN. SO the board knew nothing about these options.
Mr. BROWN. N O ; except in informal conversation.
Mr. PECORA. According to records here of the public quotations
of that stock on February 13, which was two days before the granting of these options, the stock was quoted at a low of 6%, and a high
of 8, on February 13, 1932. Would that accord with your
recollection?
Mr. BROWN. I should say approximately those figures.
Mr. PECORA. YOU said a few moments ago, if I correctly understood your testimony, that you and the other optioners were not
desirous of having call made upon you for the stock covered by these
options ?
Mr. BROWN. That is correct.
Mr. PECORA. Why not?
Mr. BROWN. Because we believed in the company and felt that the
company had possibilities, because of its comparatively small setup,
the strategic location of its plants, and we were really vitally
interested in the company.
Mr. PEOORA. Then what was the real purpose of these four option
agreements that were given to Mr. Bliss at that time ?
Mr. BROWN. Because Mr. Bliss was a man of outstanding reputation on the exchange, and we felt that his being on the floor of the
5864
STOCK EXCHANGE PRACTICES
exchange, it would be possible for him to maintain a stable market
there.
Mr. PECORA. Was the market unstable?
Mr. BROWN. I t was a very thin market.
Mr. PECORA. Then you wanted to promote activity in the trading
of the stock, did you not?
Mr. BROWN. Not necessarily; but to have a man who was interested in the company and probably felt the same as we did about the
possibilities of the organization, and he would just watch the market
and prevent raiding, and so forth.
Mr. PECORA. HOW would you expect Mr. Bliss to be able to do that
without calling upon you and your associates for the stock that jo\k
had optioned to Bliss f
Mr. BROWN. I do not know how Mr. Bliss operates on the market
any more than I know how the other members of the exchange operate on the market.
Mr. PECORA. YOU knew that he had some method of operating the
market, did you not *
Mr. BROWN. I knew only by reputation.
Mr. PECORA And that reputation, you say, was excellent.
Mr. BROWN. Yes.
Mr. PECORA. Did you mean by that that he was a successful
operator ?
Mr. BROWN. No; not necessarily.
Mr. PECORA. What do you mean by that?
Mr. BROWN. I meant that he was a man of keen intelligence and
splendid reputation; that he had lots of friends on the floor; and if
they knew he was watching the market that the market might be
stable. I assumed that.
Mr. PECORA. HOW would the fact that he had lots of friends on
the floor help to attain the purposes that you and the other optioners
had in mind when you granted these options ?
Mr. BROWN. I did not know, when the stock was down at that
level, with nobody watching the market, but somebody might come in
and push the value of the stock down unnecessarily. That is the only
reason that this option was ever given to Mr. Bliss, or that any of
these options were ever given to anybody.
The CHAIRMAN. What do you mean by raiding the market, Mr.
Brown ?
Mr. BROWN. I do not mean to use the word " raiding ", but I mean,
for instance, if somebody came in and wanted to dump a few thousand shares of stock, and there was nobody there protecting the
market, it might go down.
Senator TOWNSEND. YOU mean selling the stock short ?
Mr. BROWN, NO ; just by offering it for sale.
Senator BARKLEY. YOU thought that his sponsorship of the stock
automatically would stiffen it up.
Mr. BROWN. NO ; not necessarily. My conversation with Mr. Bliss,
as I remember very distinctly, at the time the thing was discussed,
was that we told him that we were not interested in anything but
the maintenance of a stable market.
The CHAIRMAN. YOU spoke about the danger of raiding the
market.
STOCK EXCHANGE PEACTICES
5865
Mr. BROWN. I did not mean the word " raiding " because the stock
was down to a low level, and it would not have taken much to push
it all the way down.
The CHAIRMAN. Had there been any raiding of it at all?
Mr. BROWN. Not that I remember.
Mr. PECORA. The market had not shown any instability up to that
time, had it?
Mr. BROWN. I t certainly had not shown much firmness.
Mr. PECORA. Had it shown any instability?
Mr. BROWN. I think so; yes.
Mr. PECORA. When?
Mr. BROWN. Previous to that date.
Mr. PECORA. What were the evidences of it?
Mr. BROWN. The dropping of the prices.
Mr. PECORA. HOW much did they drop ?
Mr. BROWN. I cannot tell you because I don't remember exactly.
Mr. PECORA. Was it anything more than the drop in keeping with
the trend of the market generally?
Mr. BROWN That I cannot remember.
Mr. PECORA. YOU became chairman of the board of this company
in April 1931.
Mr. BROWN. Yes.
Mr. PECORA. And
some 10 months later you and associate officers
and directors of the company, in your individual capacities, gave
these options to a member ot the Exchange who, you said, had a
splendid reputation, had a lot of friends on the floor, and could
watch the stock and protect it.
Mr. BROWN. That is correct.
Mr. PECORA. And keep the market stable. No instability had
developed up to that time?
MJr. BROWN. I think the only instability was a constantly lowering
of quotations for the stock
Mr. PECORA. That was visible in the general trend of the market
all through that period of 10 months, was it not?
Mr. BROWN. With a low-priced stock such as this was at that time,
and with the possibilities that the company had, there was no reason
why it should go much further.
Mr. PECORA. What had happened prior to February 15, 1932, that
•caused you and your associates, in the granting of these options, to
•conceive the idea of giving these options to a member of the exchange
who had a lot of friends on the floor?
Mr. BROWN The only man who operates on the exchange is a man
who is a member of the exchange.
Mr. PECORA. What is that?
Mr. BROWN. The only man who operates on the exchange is a
member of the exchange.
Mr. PECORA. All right; but that does not answer my question.
The question was, What had happened prior to February 15, 1932,
that prompted you and your associates to give these options to that
member of the exchange?
Mr BROWN. Nothing that I remember specifically.
Senator TOWNSEND. What percentage of your holdings did these
options cover, Mr. Brown?
5866
STOCK EXCHANGE PBACTICES
Mr. BROWN. I have forgotten. I think at that time that I had
probably 24,000 shares.
Senator GORE. HOW much?
Mr. BROWN Around 24,000 shares, I think; maybe more—just
about that number.
Mr. PECORA. YOU did not want to part with any of the 9,000 shares
you optioned to Mr. Bliss, and which you then owned?
Mr. BROWN. NO.
Mr. PECORA. YOU
say at that time you owned approximately 24,000
of these shares.
Mr. BROWN. From 22,000 to 24,000, something like that.
Mr. PECORA. Would not that indicate that the real, or the primary
purpose you and your associates had in giving these options was to
excite the market in these shares?
Mr. BROWN. N O ; absolutely not.
Mr. PECORA. And to raise the quotations ?
Mr. BROWN. NO.
Mr. PECORA. Mr.
Bliss did not come to you and ask for these
options on his initiative.
Mr. BROWN. NO.
Mr. PECORA. HOW did you expect to profit if you did not expect
actually to part with any of your 9,000 shares that you optioned to
Mr. Bliss?
Mr. BROWN. I did not expect to profit.
Mr. PECORA. YOU did not expect to profit ?
Mr. BROWN. NO.
Mr. PECORA. YOU
would have profited if the market price of the
stock had gone up as a result of Mr. Bliss' operations, would you
not 3
Mr. BROWN. NO.
Mr. PECORA. NO?
Mr. BROWN. NO.
Mr. PECORA. YOU
mean it would have brought a loss to you if the
price had increased?
Mr. BROWN. It probably would, because I had 2,400 shares
Mr. PECORA. Twenty-four thousand ?
Mr. BROWN. In that particular lot of my holdings, I had 2,400
shares, I thmk, that cost me $40 a share.
Mr. PECORA. But at the time you gave the option, or withm 2 days
of that time, the stock was selling for between 634 and 8, and you
were optioning these shares to Mr. Bliss at unit prices ranging from
$7 a share to $11 a share.
Mr. BROWN. Mr. Pecora, I think that Mr Bliss could confirm to
you our conversation, in which I explained to him explicitly that
we simply wanted some market sponsorship for the stock, and did
not want the stock called.
Mr. PECORA Before giving these options to Mr Bliss, did you
confer with Mr. Publicker, Mr. Kies, and Mr. Grimm &
Mr. BROWN. Yes.
Mr. PECORA. And
reach an accord with them? Did their views
coincide with yours With regard to the desirability of giving these
options?
Mr. BROWN. Yes.
STOCK EXCHANGE PEACTICES
5867
Mr. PECORA. They had the same purposes in mind as you had?
Mr. BROWN. I assume so; yes.
Mr. PECORA. YOU know so from your conversations with them, do
you not?
Mr. BROWN. Yes.
Mr. PECORA. DO you
know what was the extent of Mr. Grimm's
holdings in the company stock at that time ?
Mr. BROWN. NO.
Mr. PECORA. DO you know what Mr. Kies' holdings were?
Mr. BROWN. NO.
Mr. PECORA. Mr. Publicker's^
Mr. BROWN. Mr. Publicker's, I think, were probably in excess of
30,000 shares.
Mr. PECORA. Why didn't you want to part with any of the shares
you optioned?
Mr. BROWN. Because we felt the company had possibilities, as evidenced by its present situation—not that we visualized anything like
the wonderful situation it is in now.
Mr. PECORA. Mr. Brown, I may be very dense, but I do not yet
understand what you had in mind when you say that you gave this
member of the exchange an option on 9,000 shares of your personal
holdings at prices ranging from $7 to $11 a share at a time when the
market was between 7 and 8 You did not want to let go of any of
your shares. What did you want Mr. Bliss to do under these options i
Mr. BROWN. Just maintain a stable market.
Mr. PECORA. But the market was stable up to that time, was it not ?
There had not been any untoward movement m the stock up to
that time, had there?
Mr. BROWN. Except a downward movement, that is all.
Mr. PECORA. Up and down, in keeping with the general trend ?
Mr. BROWN. I thought the valuation of the stock, when it was at
6%, was below what a person might reasonably expect it to sell at.
I did not expect any wild or violent movement from the stock, and
so told Mr. Bliss at the time the option was given to him.
Senator GORE. YOU had no purpose of selling your own stock?
Mr. BROWN. NO, Senator.
Senator GORE Then what was the point ^ Why were you concerned about stabilizing the price ?
Mr. BROWN. I was naturally interested, having the holdings in the
company I did, in having a stable market.
Senator BARKLEY What do you mean by a stable market? Do
you mean freedom from any fluctuations ?
Mr. BROWN. NO ; not freedom from any fluctuations, but the stock
had just gone down and down.
Senator BARKLEY. Gone down from what point, and in what
period ?
Mr. BROWN. Oh, I should say it had just about gone in half
within a very short period, which was a value way below what the
value of the properties was.
Senator BARKUBY. Then it went from 12 or 14 down to 6 or 7.
Mr. BROWN. I should say so, as my memory serves me
Senator KEAN YOU say you bought some of it at 42 2
Mr. BROWN. That was in 1929
5868
STOCK EXCHANGE PRACTICES
Senator BARKLEY. SO that you gave an option on 9,000 shares at
from 7 to 11.
Mr. BROWN. Yes.
Senator BARKLEY. YOU
thought the mere fact that Mr. Bliss possessed this stock, which was not to be sold, and the knowledge on the
floor that he possessed it, or an option on it, would automatically
stabilize the price without anybody buying any more ?
Mr. BROWN. Yes; that is true.
Senator GORE. Did you have any of your stock up as collateral?
Mr. BROWN. Yes; I assume I did.
Senator BARKLEY. Did you intend to buy any additional shares
that were being sold on the market as a result or this stabilization?
Mr. BROWN. NO.
Senator BARKLEY. Did you buy any?
Mr. BROWN. If I remember that particular
option, when the option
expired, much to my surprise, Mr. Bliss called the entire quantity,
all of it. Also, if my memory serves me correctly, I immediately
replaced all the stock that had been called by purchase in the open
market.
Senator BARKLEY. YOU mean he called all the 9,000 ?
Mr. BROWN. Yes
Senator BARKLEY. At less than 11 ?
Mr. BROWN. I called him, one day and
told him that we did not
want to renew the option.
Senator TOWNSEND. When did the option expire ?
Mr. BROWN. I have forgotten.
Mr. PECORA. I t was a 30-day option.
Senator GORE. Give us the history of what transpired.
Mr. BROWN. When the option expired—I do not know the range
of the stock during the time the option was out, but if my memory
serves me correctly, when I called Mr. Bliss and told him that we did
not desire to renew the option, he called all the stock. He apparently had disposed of the whole business, and that was very much
of a surprise to me, and I immediately went in the market and
replaced it.
Senator STEIWER. At what price?
Mr. BROWN. A price above this—around 11 or 12.
Senator BARKLEY. He called this stock, then, in violation of your
agreement with him?
Mr. BROWN. He had the option.
Senator BARKLEY. But the private understanding was that it was
not to be called.
Mr. BROWN. I told him what our desires were.
Senator BARKLEY. Was his reputation as high afterwards as it
had been when you turned it over to him?
Mr. BROWN. He is a very nice gentleman. I still like Mr. Bliss.
I think he was wrong in that.
Senator GORE. Was that the last option you placed with him?
Mr. BROWN That is the last option with Mr. Bliss; yes, sir.
Senator KEAN. In other words, Mr. Brown, you lost on this transaction between the average price and the price at which you had to
buy it back.
Mr. BROWN. Yes.
STOCK EXCHANGE PBACTICES
5869
Senator BARKLEY. Did you buy it back at a higher price?
Mr. BROWN. Yes.
Mr. BARKLEY. What did you pay for it ?
Mr. BROWN. If my memory serves me correctly it was around
12
or something like that.
Senator BARKLEY. DO you know what he called at ?
Mr. BROWN. He called at the prices in the option.
-Senator BARKLEY. I know; but had he already sold it, or did he
call it and hold it out for a higher price?
Mr. BROWN. I do not think he held it. I think he had a short
position in the market against this option.
Mr. PECORA. YOU know that Mr. Bliss both bought and sold during
the period of these options, do you not?
Mr. BROWN. Yes; I have no criticism at all. I like Mr. Bliss today,
the same as I ever did.
Mr. PECORA. Apart from your personal feelings and admiration
for Mr. Bliss, we want to find out what the facts were with regard
to market activities at that time.
Mr. BROWN. All I know is that when the option expired I bought
my stock back at more than I got for it under that option.
Mr. PECORA. Was that because the market had gone up?
Mr. BROWN. No; I do not know why it was. When I found out—
when it was called, and I was out 9,000 shares, I went into the market and replaced it, if I remember correctly, around 11 or 12.
Senator TOWNSEND. Then you really lost money by the transaction?
Mr. BROWN. Yes; I
Mr. PECORA. HOW
did.
much did you lose by virtue of this option
agreement, do you know ?
Mr. BROWN. I really do not know, Mr. Pecora.
Mr. PECORA. When you gave Bliss this option, although you knew
that the option, in terms, gave him the right to call upon you for
these 9,000 shares at the various prices set forth in the option, you
had a private understanding with him that he was not to call for
the stock?
Mr. BROWN. NO. In all fairness to Mr. Bliss, I would say that I
told him, at the time the options were given, that we did not want
any of the stock called. He made no commitment on his part.
Mr. PECORA. Did the same thing happen with regard to the other
three option agreements, those given by Mr. Kies, Mr. Publicker,
and Mr. Grimm, respectively ?
Mr. BROWN. I think they were all called.
Mr. PECORA. All 30,000 shares«
Mr. BROWN. I think so, and I think they were all replaced.
Mr. PECORA. During the period of these options, was the purpose
that you had in mind of stabilizing the market well served?
Mr. BROWN. Yes; except that it cost me money.
Mr. PECORA, YOU said you gave options to Prentice & Slepack?
Mr. BROWN. Yes.
Mr. PECORA. They are
Mr. BROWN. Yes, sir.
Mr. PECORA. Members
Mr. BROWN. Yes.
a stock brokerage firm?
of the New York Stock Exchange?
5870
STOCK EXCHANGE PEACTICES
Mr. PECORA. HOW many options were given to Prentice & Slepack?
Mr. BROWN. I do not remember.
Mr. PECORA. I show you what purports to be a copy of an option
agreement made by you with Prentice & Slepack, under date of
June 11, 1932. Will you look at it and tell us if that is one of the
option agreements that you made with Prentice & Slepack?
Mr. BROWN (after examining paper). Yes
Mr PECORA. I offer that in evidence
The CHAIRMAN. Let it be admitted.
(Copy of option agreement, Brown to Prentice & Slepack, June
11, 1932, was received in evidence, marked " Committee's Exhibit
No. 4-A," and the same was subsequently read into the record by
Mr. Pecora.)
Mr. PECORA. NOW, I show you what purports to be a copy of another option agreement given to Messrs. Prentice and Slepack by you
and Mr. Grimm under date of July 11, 1932. Will you look at it
and tell me if it is a true and correct copy of such an option agreement so given by you and Mr. Grimm on or about that date?
Mr. BROWN (after examining document). Yes, sir.
Mr. PECORA. I offer that in evidence and ask that it be marked
accordingly.
The CHAIRMAN. Let it be admitted.
(Option agreement dated July 11, 1932, from R. R. Brown and
Richard H. Grimm to Prentice and Slepack was thereupon designated " Committee Exhibit 4^-B, February 14, 1934 ", and appears in
the record following where read by Mr. Pecora.)
Mr. PECORA NOW, I show you what purports to be a copy of a
third option agreement given by you and Mr. Grimm to Messrs.
Prentice and Slepack on July 22, 1932. Will you look at it and tell
me if it is a true and correct copy of such an agreement given by
you and Mr. Grimm to Prentice and Slepack?
Mr. BROWN (after examining document). Yes, sir; that is correct.
Mr. PECORA. I offer it in evidence and ask that it be marked
" Exhibit 4-C.»
The CHAIRMAN. Let it be admitted.
(Option agreement dated July 22, 1932, from Russell R Brown
and R. H. Grimm to Prentice & Slepack was thereupon designated
" Committee Exhibit 4-C, Feb. 14, 1934 ", and appears in the record
following where read by Mr. Pecora.)
Mr. PECORA. The first of these exhibits, the one marked 4-A, reads
as follows [reading] :
NEW YORK, June 11, 1982
Messrs PKENTICE & SLEPAGK,
25 Broadway, New York City
GENTLEMEN I herewith give you an option to purchase fiom me foi a period
of 29 days, fiom Saturday, June 11th, 1932, to Saturday, July 9th, 1932, Six
Thousand (6,000) shares American Commercial Alcohol Corporation Common
Stock, or any part thereof, at the prices designated below
2000 shares at 12%, 2000 shares at 1SV2, 2000 shares at Uy2
Payments are to be made to me against delivery of stock to you I agree
to keep Two Thousand (2,000) shaies ot stock in my account in your office,
which will be free and can be used by Prentice & Slepack for the exeicise of
their option
Yours very truly,
(Signed)
RUSSELL R BROWN
STOCK EXCHANGE PRACTICES
5871
Exhibit 4r-B reads as follows [reading] :
NEW YORK, July 11, 19S2
Messrs PRENTICE & SLEPACOK,
25 Broadway, New York City
GENTLEMEN We herewith give you an option to purchase from us for a
penod of 32 days, from Monday, July 11th, 1982, to Thursday, August 11th,
1982, Five Thousand (5,000) shares American Commercial Alcohol Corporation
Common Stock, or any part thereof, at the prices designated below:
1,000 shares at 12% , 2,000 shares at 13% , 2,000 shares at 14%
Payments are to be made to us against delivery of stock to you We agree
to keep Two Thousand (2,000) shares of stock in our account in your office,
which will be free and can be used by Prentice & Slepack for the exercise of
their option
Very truly yours,
(Signed)
R R BROWN
RIOHABD H GRIMM
Senator GORE That ties in with the other ?
Mr. PECORA. Yes; it does. I t immediately follows the other.
The third option agreement, marked " Exhibit 4r-C ", is as follows
[reading] :
NEW YORK, July 22nd, 19S2
Me&MS PRENTICE & SLEPAOK,
25 Broadway, New York City
GENTLEMEN We herewith give you an option to purchase from us for a
period of 21 days, from Friday, July 22nd, 1982, to Thuisday, August 11th,
1932, an additional Two Thousand (2,000) shares American Commercial
Alcohol Coiporation Common Stock, in addition to the option issued to you on
July 11th, 1932, for Five Thousand (5,000) shares, making Seven Thousand
(7,000) shares for the entire option
The additional Two Thousand (2,000) shares are to be called at prices
designated below
1,000 shares at 1 3 % , 1,000 shares at 14y2
Payments aie to be made to us against delivery of stock to joii
Yours very truly,
(Signed)
RUSSELL R BROWN,
R H GRIMM
Were these options given upon the initiative of yourself and
Mr. Grimm?
Mr. BROWN. I think so, yes, if my memory serves me correctly.
Mr. PECORA. And Messrs. Prentice & Slepack are also well-known
members of the stock exchange?
Mr. BROWN. Yes, sir.
Mr. PECORA With an excellent reputation &
Mr. BROWN. Yes.
Mr. PECORA. Friends of yours?
Mr. BROWN. NO
Mr. PECORA. What was the purpose that you and Mr.
Grimm had
in granting these three options to Prentice & Slepack^
Mr. BROWN. I don't remember.
Mr. PECORA. What is that 2
Mr. BROWN. I don't remember.
Mr, PECORA. Well, now, isn't it rather singular that you recalled
with some clarity the reason
Mr. BROWN (interposing). Well, I assume
Mr. PECORA. Why you and Mr. Grimm and Mr. Kies and Mr.
Publicker gave the options in February 1932 to Mr. Bliss, and do
5872
STOCK EXCHANGE PEACTICES
not recall the reason why you gave these options in June and July
1932 to Prentice & Slepack?
Mr. BROWN. NO. I assume it is for the same purpose.
Mr. PECORA. The same purpose for which the options were given
in February 1932 to Bliss?
Mr. BROWN. HOW many shares was that?
Mr. PECORA. The first one was for 6,000, second for 5, and the
third for 2. That makes 13,000 shares.
Mr. BROWN. Yes. When did they all expire ?
Mr. PECORA. The first option, the one for 6,000 shares, expired
on July 9, 1932, and the other two options expired on August 11,
1932.
Mr. BROWN. Was that stock called?
Mr. PECORA. Well, I did not have these transactions with Prentice
& Slepack. Why do you ask me those questions, Mr. Brown?
Mr. BROWN. Well, I assume that you have the records. That is
the only reason.
Mr. rECORA. Well, if we have records we would have your records,
wouldn't we?
Mr. BROWN. Yes.
Mr. PECORA. Don't you know what the facts
Mr. BROWN. N O ; I really don't remember
are?
the thing. I didn't
write those options, because that is not the way I write options.
Mr. PECORA. Who wrote these options to Plentice & Slepack?
Mr. BROWN. I don't know. They must have been written, though,
in Prentice & Slepack's office.
Mr. PEOORA. Who wrote the four options given to Bliss in February ?
Mr. BROWN. I wrote them with him.
Mr. PECORA. YOU wrote them ?
Mr. BROWN. With him, yes.
Mr. PECORA. Which particular member of the firm or representative of Prentice & Slepack did you and Grimm have the negotiations
with that led to the granting of these three options ^
Mr. BROWN. I think it was Mr. Atkins.
Mr. PECORA. Mr. Atkins?
Mr. BROWN. Yes.
Mr. PECORA. IS he the floor member?
Mr. BROWN. NO. I only know that he
was a member of the firm.
He is also a director of the American Commercial Alcohol Co.
Mr. PECORA. DO you know a Mr. Goodwin?
Mr. BROWN. That is the
Mr. PECORA (interposing). That is the name, not Atkins ?
Mr. BROWN. Well, no; Atkins was the member of Prentice &
Slepack, with whom I did business. Goodwin was the man who
the option was given to, and I think Prentice & Slepack had the
option given directly to them. That is correct.
Mr. PECORA. What was the relationship between Goodwin and
Prentice & Slepack?
Mr. BROWN. Nothing that I know of.
Mr. PECORA. What is Goodwin's business?
Mr. BROWN. I don't know.
Mr. PECORA. YOU have met him, haven't you ?
STOCK EXCHANGE PRACTICES
5873
Mr. BROWN. I have met him; yes. I have met him several times.
H e came in originally and asked for an option on stock and said
that he would be able to maintain a stable market, and the option
was eventually given to him. Then those documents were worked
out apparently in Prentice & Slepack's office. For what reason I
don't know, but Goodwin was the man.
Mr. PECORA. What part did Goodwin play in connection with
these three options of Prentice & Slepack?
Mr. BROWN. Well, I don't know. He took something out of the
account down to Prentice & Slepack's office. That is all I know
about it, He had the account down in Prentice & Slepack's office.
Mr. PECORA. What account do you mean ?
Mr. BROWN. His own account. He traded in the market through
Prentice & Slepack.
Mr. PECORA. HOW did that give him any interest in these options
which were granted to Prentice & Slepack 2
Mr. BROWN. Goodwin came in and asked for the option, and instead of drawing the option to him, as long as the account was going
to be carried at Prentice & Slepack's, they said they wanted the
option drawn to them. Why, I don't know.
Mr. PECORA. T O whom did Goodwin go m the first instance to
ask for the options, to you?
Mr. BROWN. T O me; ves.
Mr. PECORA. TO you?
Mr. BROWN. Yes.
Mr. PECORA. And what did he say about
Mr. BROWN. He said that he would be
it at the time ?
able to maintain a stable
market.
Mr. PECORA. Did he volunteer to do it?
Mr. BROWN. Yes.
Mr. PECORA. I thought
you said that these options were given
under the same circumstances as the options to Bliss; that is, upon
your and Grimm's initiative.
Mr. BROWN. If I remember correctly on that, they were.
Mr. PEOORA. NOW, you say that Goodwin came m and said that
he could maintain the market.
Mr. BROWN. Well, I mean the same thing.
Mr. PECORA. Well, which is it?
Mr. BROWN. Well, Goodwin came in and said that he could maintain a market.
Mr. PECORA. Did you know Goodwin up to that time?
Mr. BROWN. NO.
Mr. PEOORA. HOW do you suppose Goodwin knew that you might
be interested in maintaining the market.
Mr. BROWN. I don't know.
Mr. PEOORA. YOU don't know? Had you heard of Goodwin before that time?
Mr. BROWN. NO. Not since, either.
Mr. PECORA. Did he identify himself as being engaged in any
particular kind of business?
Mr. BROWN. N O ; except that he was a market operator. That
is all.
Mr. PECORA. I S that what he said, that he was a market operator?
5874
STOCK EXCHANGE PBACTICES
Mr. BROWN. He gave that indication* I won't say that he used
that language, but that is what I gathered.
Mr. PECORA. That was the meaning that you attached to whatever he said ?
Mr. BROWN. Yes,
sir.
Mr. PECORA. Concerning his business?
Mr. BROWN. That is correct.
Mr. PECORA. YOU don't know that he was a member of any
exchange ?
Mr. BROWN. N O ; he is not a member of any exchange.
Mr. PECORA. He is an operator m the market executing his orders
through brokers?
Mr. BROWN. That is correct.
Mr. PECORA. And the brokers in this case were Prentice &
Slepack?
Mr. BROWN. That is correct.
Mr PECORA. Knowing those circumstances, for what reason were
the options given to the brokers and not to the operator himself
who came to you and said he thought he could stabilize your
market &
Mr. BROWN. I don't know. The brokers apparently have their
own reason for it. I don't know.
Senator GORE. Mr. Brown, you say the purpose of all these options
was to stabilize the market ?
Mr. BROWN. Yes; that was supposed to be it.
Senator GORE. The only way you could do that would be to buy
when the stock was too low and sell when the stock was too high,
wouldn't it?
Mr. BROWN. I suppose they did that; I didn't do it.
Senator GORE. Was that what you had in mind?
Mr. BROWN. However, they operate m the market. I assume that
that would be it.
Senator GORE. It was your idea that they would sell when the
price ran up too high 2
Mr. BROWN. That is correct. Yes, Senator.
Senator GORE. NOW, of course, I don't understand much about
this market businessMr. BROWN. Neither do I.
Senator GORE. But it seems to me that the only way they could
profit by these actions would be by some means to raise the price
in the market higher than the price you would stipulate in these
options, and then call the options at that higher price.
Mr. BROWN. I don't know.
Senator GORE. These options would not contemplate any sales, a&
I understand it, certainly not a sale under the price. They would
have no motive to sell this stock for less than what they were paying"
you for it?
Mr. BROWN. That I cannot say.
Senator GORE. And if they wanted to break the price or to depress
the price they could have sold short without having this stock on
hand?
Mr. BROWN I will say this to you, Senator: I found out more
about the market since I met Mr. Pecora than I thought I knew
before.
STOCK EXCHANGE PRACTICES
5875
Mr. PEOORA. Mr. Brown, our meeting was at a very, very, recent
date, wasn't it?
Mr. BROWN. That is correct.
Mr. PECORA. YOU did not find out anything about the market from
me, did you 2
Mr. BROWN. NO ; I say since I first came in contact with you.
Mr. PECORA. Because I know absolutely nothing about the market,
Mr. Brown.
Mr. BROWN. I don't think that is so, either.
Senator GORE. Nobody does when they are called upon to tell.
Mr. PECORA. Did Mr. Goodwin indicate to you what interest he had
at that time in stabilizing the market in the shares of your company's
stock?
Mr. BROWN. NO. I assume simply that he probably traded on that
option there and would be able to mantam a market
Mr. PECORA. He was not a stockholder of the company then, was
he?
Mr. BROWN. NO.
Mr. PECORA. He
would have no interest as a stockholder or an
officer of the company to stabilize the market, would he ?
Mr. BROWN. NO, sir.
Mr. PECORA. Didn't it
seem apparent to you that the purpose of
this market operator in seeking these options was to use the options
in his own market operations for his own profit?
Mr. BROWN. That is probably what he did. I don't know. I don't
think any more options were ever given Mr Goodwin.
Senator GORE The fact that Mr Bliss called the options contrary
to your wishes did not discourage you with reference to these subsequent options?
Mr. BROWN NO Subsequent options were given, Senator.
Senator GORE HOW 8
Mr. BROWN Subsequent options were given.
Senator GORE. Was your experience any more satisfactory with
Prentice ?
Mr. BROWN. N O ; I don't think any more options were given to
them.
Senator GORE That does not quite answer it. Was your experience with the Prentice firm any more $atisfactory than with Mr.
Bliss8 Did he call these options?
Mr BROWN. That I don't remember. I just cannot place that,
because I don't recall those options.
Mr. PECORA. When you and Mr. Grimm granted these options
to Prentice & Slepack did you also grant them with any mental reservation or hope that you would not be called upon to deliver the
stock covered by the options?
Mr. BROWN. Well, I assume so. I felt that way.
Mr. PECORA. Why did you assume 30, Mr. Brown ?
Mr. BROWN. I felt that way all along.
Mr. PECORA. Why did you give market operators and exchange
members options giving them the right to call upon you for the
stock at fixed prices, all the while with a mental reservation or hope
in your own mind that you would not be called upon to deliver the
stock under the options?
5876
STOCK EXCHANGE PRACTICES
Mr. BROWN. I can express it to you more clearly perhaps, if you
will permit me, in this way: That apparently we were always searching for someone who would be interested in the company and be
willing to maintain a stable market, as evidenced by the fact that
we finally felt quite happy when we established the connection with
Mr. Euloff Cutten.
Mr. PECORA. We are coming to Mr. Ruloff Cutten.
Mr. BROWN. Yes; I am explaining it to you that way. And he
sent his statistician up, made a study of the company, before he
would consider any kind of a deal.
Mr. PECORA. YOU are talking about Mr. Cutten ?
Mr. BROWN. I am talking about Mr. Cutten.
Mr. PECORA. Let us wait till we get to Mr. Cutten in due course.
I will promise you we will bring Mr. Cutten here.
Mr. BROWN. What I wanted to explain to you was that that wag
the way we felt really very happy, because he made a study of the
company before he would consider taking the options.
Mr. PECORA. All that antedated
Mr. BROWN. That is correct.
Mr. PECORA. The giving of these options to Prentice & Slepack?
Mr. BROWN. That is correct.
The CHAIRMAN. Were you really in hopes of increasing the quotation price, the market price of the stock?
Mr. BROWN. Not necessarily, Senator. I mean we felt that over a
period of time if we could ever get out of the doldrums in the business
the real value of the company would be reflected.
Senator GORE. What is the price of the stock today?
Mr. BROWN. The stock is selling at approximately $50 a share.
Mr. PECORA. What is the high that it reached at any time since
February 1932?
Mr. BROWN. 89-7/8.
Mr. PECORA. And when did it reach that?
Mr. BROWN. Some time in July 1933.
Mr. PECORA. DO you remember the date?
Mr. BROWN. About July 15 or thereabouts.
Mr. PECORA. Seventeenth?
Mr. BROWN. That might be it.
Mr. PECORA. DO you remember after it reached a high of 89-7/8
what happened to the stock?
Mr. BROWN. I certainly do.
Mr. PECORA. What? What happened?
Mr. BROWN. I t went down.
Mr. PECORA. TO what?
Mr. BROWN. I don't know. I t went down through the earth. I
don't know.
Mr. PECORA. DO you remember when it first began that toboggan
after it reached the high of 89-7/8?
Mr. BROWN. Well, July 17. Wasnt that the day?
Mr. PECORA. And do you recall within what period of time it slid
from 89-7/8 to some substantially lower figure?
Mr. BROWN. I don't know. I t seemed like 24 hours to me.
Mr. PECORA. I t was within an hour, wasn't it, on the morning of
July 18 last?
STOCK EXCHANGE PRACTICES
5877
Mr. BROWN. I t went from what? Will you repeat that?
Mr. PECORA. From a high of 89% to around 40.
Mr. BROWN. Oh, no.
Mr. PECORA. I t was not as precipitate as that?
Mr. BROWN. NO. It was bad enough, but it was not as bad as that.
Mr. PECORA. HOW bad was it, as you remember?
Mr. BROWN. I think when the market started to go off that morning—in fact, the first sale was at $69 a share.
Mr. PECORA. I have before me transcripts of the market quotations.
On July 18 the quotations ranged from a low of 77 to a high of 89%.
Senator GORE. That is the closing?
Mr. PECORA. Yes, sir; that was the closing, as I recall it; and
3 days later, July 21, the quotations ranged from a low of 29% to a
high of 44i/2.
Mr. BROWN. 29% was low.
Mr. PECORA. Yes; 29%.
The CHAIRMAN. On July 18 it was what?
Mr. PECORA. July 18 the range was from
a low of 77 to a high
of 89%.
The CHAIRMAN. What was the cause of that; do you know, Mr.
Brown?
Senator GORE. That was when the general break occurred.
Mr. PECORA. What is your present best recollection as to whether
or not Prentice and Slepack called upon you and Mr. Grimm for the
13,000 shares that were optioned to them under these three option
agreements that have been offered in evidence?
Mr. BROWN. That I don't remember.
Mr. PECORA. YOU also have mentioned heretofore that you gave
an option to Stephen M. Ames.
Mr. BROWN. Ames Brothers.
Mr. PECORA. Or Ames Brothers?
Mr. BROWN. That is correct.
Mr. PECORA. The option itself, according to the copj which you
furnished to us, runs directly to Stephen M. Ames, and in connection
therewith let me show you what purports to be a copy of such an
option dated August 9,1932. Will you look at it and tell me if you
recognize it to be a true and correct copy of such an option.
Senator GORE. That ties in with the other?
Mr. BROWN. Yes, this follows right along. (After examining
document) yes, that is right.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Option agreement dated Aug. 9, 1932, from Russell Brown to
Stephen M. Ames, was thereupon designated " Committee Exhibit
No. 5, Feb. 14,1934 ", and appears in the record immediately following, where read by Mr. Pecora.)
Mr. PECORA. Tne option marked in evidence as Exhibit No. 5
reads as follows [reading] :
NEW YOBK, August 9, 1982.
Mr
STEPHEN M. AMES,
c/o Prentice & Slepack,
25 Broadway, New York City
DBAE SIR • We herewith give you an option to purchase from us for a period
of 30 days, from Tuesday, August 9, 1932, to Wednesday, September 7th, 1932,
175541—-34—PT13
3
5878
STOCK EXCHANGE PEACTICES
Ten Thousand (10,000) shares American Commercial Alcohol Corpoiation Common Stock, or any part thereof, at the prices designated below.
1000 shares at 16%
1000 shares at 17
1000 shares at
1000 shares at 18
1000 shares at
1000 shares at 19
1000 shares at 19%
1000 shares at 20
1000 shares at 20%
1000 shares at 21
Payments are to be made to us against delivery of stock to you We agree
to keep Two thousand (2,000) shares of stock in our account with Prentice &
Slepack, which will be free and can be used by them for the exercise of your
option
Very truly yours,
(Signed)
RUSSELL BROWN.
Now, Mr. Brown, I notice that in the body of the option the plural
pronoun " we " is used.
Mr. BROWN. Yes.
Mr. PECORA. And
this appears to be signed only by you. Was
this opinion given by you individually, or was it given by you
jointly with anyone else whose name does not appear on it?
Mr. BROWN. I t was given possibly with Mr. Grimm, Mr. Publicker, and Mr. Kies.
Mr. PECORA. Given by Mr. Grimm, Mr. Publicker, Mr. Kies, and
yourself?
Mr. BROWN. That is correct.
Mr. PECORA. Why is it that your signature is the only one that
appears on this copy that you gave to us?
Mr. BROWN. YOU must have gotten that from the exchange, because I didn't have it. That is the reason. No; I didn't give you
that.
Mr. PECORA. Haven't you copies of these options?
Mr. BROWN. I have now. Yes; I got them.
Mr. PECORA. When did you get them?
Mr. BROWN. I just got them.
Mr. PECORA. When.
Mr. BROWN. I got Mr. Bliss' yesterday, and these other options.
I got copies of them last week.
Mr. PECORA. When were you first asked by representatives of
this committee, Mr. Brown, to produce copies of any options which
had been given by you or any of your fellow officers or directors
of this company to anybody else?
Mr. BROWN. On December 19, 1933, I was asked by Mr. Flynn
to get the copy of the option which was given to Mr. Bragg.
Mr. PECORA. TO Mr. Thomas E. Bragg?
Mr. BROWN. Thomas E. Bragg; yes, sir.
Mr. PECORA YOU were also asked to produce copies of other options given to anyone else ?
Mr. BROWN. Not at that time; no, sir.
Mr. PECORA. Did you at that time tell Mr. Flynn or Mr. Schlenker
that you had given any options to persons other than Mr. Bragg 2
Mr. BROWN. NO.
STOCK EXCHANGE PRACTICES
5879
Mr. PECORA. When did you first tell them or anybody connected
with the investigating staff of this committee that you had given
these other options ?
Mr. BROWN. I don't believe that I ever did.
Mr. PECORA. YOU were asked about options given by you, weren't
you?
Mr. BROWN. I don't think so; no, sir.
Mr. PECORA. And you had no copies of these options until very,
very recently; that is, until the last few days?
Mr. BROWN. I had copies of them, but as the transactions were
cleaned up I had torn them up and thrown them away. I never
kept the copies of the options.
Mr. PECORA. Did you go to the persons to whom you had given
these options to try to get copies?
Mr. BROWN. Yes.
Mr. PECORA. For the uses and purposes of this committee?
Mr. BROWN. Yes, sir.
Mr. PECORA. Did you succeed?
Mr. BROWN. Yes, sir.
Mr. PECORA. When did you succeed in getting any of these
copies
of options from those other persons?
Mr. BROWN. I think last week or the week before, and then I
got Mr. Bliss's this morning.
Mr. PECORA. Did it take you all that time to get it from those
gentlemen?
Mr. BROWN. I asked Mr. Bliss for it, and that was immediately
after I had been over to see Mr. Silver. Mr. McEldowney immediately put in a request for the options. I got a hold of Mr.
Bliss the end of that week and asked for it, and then I had to call
him again yesterday to get them.
Mr. PECORA. Who is Sir. Stephen M. Ames, to whom was given
this option of August 9, 1932, marked " Exhibit No. 5? "
Mr. BROWN. He was a member of the exchange at that time, a
member of the firm of Ames Bros. & Co.
Mr. PECORA. And on whose initiative was this option given to
Mr. Ames?
Mr. BROWN. On my own initiative.
Mr. PECORA. On yours ? And what were your purposes in giving
him this option?
Mr. BROWN. Some idea that prevailed before.
Mr. PECORA. That is, to stabilize the market?
Mr. BROWN. Yes, sir; if I remember correctly.
Mr. PECORA. Was the market then in need of stabilization ?
Mr. BROWN. We thought so.
Mr. PECORA. Had there been any violent movements in the
quotations?
Mr. BROWN. Not that I remember.
Mr. PECORA. I t had been pretty orderly from February 1932 when
you gave the first of these options'to Mr. Bliss, had it not?
Mr. BROWN. Well, I mean I really don't remember.
Mr. PECORA. Was not the stock steadily increasing in value on the
exchange from February 1932 after you gave the first of theso
options ?
5880
STOCK EXCHANGE PRACTICES
Mr. BROWN. Might have been; yes, sir.
Mr. PECORA. Was there any apparent need at the time you gave
this option to Mr. Ames of any stabilization of the market?
Mr. BROWN. Well, we felt so.
Mr. PECORA. Who felt so?
Mr. BROWN. I felt so, with my associates.
Mr. PECORA. What were the evidences showing the existence of
that need at this time, in August 1932 ?
Mr. BROWN. Well, I just don't remember.
Mr. PECORA. A S a matter of fact, the market had been steadily
going up, hadn't it?
Mr. BROWN. Well, apparently, from the prices at which these
options were given.
Mr. PECORA. Can you recall any circumstance that suggested to
you a need for stabilization which was effected through the medium
of this option to Ames?
Mr. BROWN. NO, sir.
Mr. PECORA. Ames had his own office as a stock broker, did he
not?
Mr. BROWN. Yes.
Mr. PECORA. Why
was this option addressed to him in care of
Prentice & Slepack, another firm of brokers ?
Mr. BROWN. That is something I don't know.
Mr. PECORA. Who drew up this option exhibit no. 5 to Ames ?
Mr. BROWN. I think it reads as though I drew it.
Mr. PECORA. YOU drew it up. Why did you address it to Ames
at Prentice & Slepack's office rather than at his own office 8
Mr. BROWN. I t must have been at his request.
Mr. PECORA. DO you recall that he made that request of you?
Mr. BROWN. NO, 1 don't; but I certainly would not have addressed
it to him there.
Mr. PECORA. Was it possibly because Prentice & Slepack were
to execute any of the market orders in behalf of Ames under this
option?
Mr. BROWN. It might have been, yes, sir.
Mr. PECORA. DO you know any reason why that should have been
done by Prentice & Slepack's office instead of by Ames's own office?
Mr. BROWN. NO, sir.
Mr. PECORA. Did Mr. Ames suggest to you any reason
Mr. BROWN. Not that I remember; no, sir.
Mr. PECORA. DO you know whether or not any other
for that?
person was
interested in this option that was given to Mr. Ames?
Mr. BROWN. NO, sir; that I don't know.
Mr. PECORA. DO you know a stock broker named Charles Wright?
Mr. BROWN. Yes, sir.
Mr. PECORA. I S he a member of the firm of Wright &
Mr. BROWN. Yes, sir.
Mr. PECORA. They are members of the New York
Sexton?
Stock Ex-
change?
Mr. BROWN. Yes, sir.
Mr. PECORA. YOU have
known Mr. Wright pretty well for some
time?
Mr. BROWN. NO. I should say maybe a year or so.
STOCK EXCHANGE PEACTICES
5881
Mr. PECORA. Did you see him in August 1932 when you gave this
option to Ames?
Mr. BROWN. I don't think so; no, sir.
Mr. PECORA. Who was the specialist that handled the stock of
the American Commercial Alcohol Corporation on the floor of the
New York Stock Exchange in 1932?
Mr. BROWN. Mr. Wright, I believe.
Mr. PECORA. A S the specialist in charge of the stock on the floor
of the exchange, you knew that any orders given under these options
by the optionees would go through Mr. Wright, either in whole or
in part?
Mr. BROWN. I knew nothing about it. I say I knew nothing
about it.
Mr. PECORA. Did you ever see Mr. Wright with Mr. Ames 2
Mr. BROWN. NO, sir; I don't think so.
Mr. PECORA. HOW did you come to pick out Mr. Ames as the person
through whom in August 1932 you desired to stabilize the market *
Mr. BROWN. That I don't remember.
Mr. PECORA. Had you known Mr. Ames prior to that time?
Mr. BROWN. I think I had met him sometime during the so-called
" Goodwin option."
Mr. PECORA. A S a friend of Mr. Goodwin ?
Mr. BROWN. NO. I have forgotten exactly how I met him, but at
that time there was a discussion of this question.
Mr. PECORA. HOW many of the 10,000 shares covered by this option
to Ames were drawn down by Ames under the option?
Mr. BROWN. I don't think any. I may be wrong, but I don't think
that any were drawn down. There might have been some, but I don't
think there were.
Mr. PECORA. Was it also your hope at the time you gave Ames this
option that you would not be called upon to deliver any of the stock
under it?
Mr. BROWN. I think that is correct; yes, sir.
Mr. PECORA. HOW could Mr. Ames profit then by taking this option
and then not calling upon you for any of the stock under it?
Mr. BROWN. That I don't know. I assume that he traded in 13ie
market and committed himself under the option.
Mr. PECORA. HOW did you come to pick out Mr. Ames as the
optionee in this transaction?
Mr. BROWN. Because he was an outstanding figure in the Street.
Mr. PECORA. NOW, you went to three different outstanding figures
at three different times, Bliss, Goodwin, and now Ames. You gave
them options covering tens of thousands of shares of the stock of
your company?
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Yes, sir.
TO be delivered
out of your personal holdings ?
And my associates; yes, sir.
YOU and your associates in the company ?
Yes,
sir.
And your purpose in giving these options and hope
was that the market in the stock would be stabilized ?
Mr. BROWN. That is correct.
Mr. PECORA. YOU cannot point to any specific circumstance that
indicated to you at the time that the market needed stabilization?
5882
STOCK EXCHANGE PBACTICES
Mr. BROWN. NO, sir.
Mr. PECORA. And you
hoped that they would not call upon you
for delivery of the stock under the options?
Mr. BROWN. Yes, sir.
Mr. PECORA. NOW, how
in the world did you expect these gentlemen, then, to profit by their activities under these options ?
Mr. BROWN. I assumed that they would trade under the options.
Mr. PECORA. YOU assumed that they would trade for their own
account?
Mr. BROWN. Yes.
Mr. PECORA. Couldn't they trade without the options ?
Mr. BROWN. Apparently not.
Mr. PECORA. Why not ?
Mr. BROWN. I don't know
Mr. PECORA. There is a provision in this option to Ames
which
reads as follows: "We''—meaning you and the other optionors?
Mr. BROWN. Yes, sir.
Mr. PECORA (continuing).
"Agree to keep 2,000 shares of stock
in our account with Prentice & Slepack, which will be free and can
be used by them for the exercise of your option."
What was the reason for including that provision in this option
agreement ?
Mr. BROWN. Why, I assume that that was down there m the event
that he was short of the market that would be available for him to
borrow. I assume that is the reason.
Mr. PECORA. YOU said you drew up this agreement. Can't you
tell us the specific reason?
Mr. BROWN. Well, I drew it up with Mr. Ames, and I assume that
provision was inserted there by him. It must have been at his
request, because I don't think that I ordinarily drew options in
that way.
Mr. PECORA. Were these 2,000 shares exclusive of the 10,000 shares
that were covered by the option agreements ?
Mr. BROWN. N O ; they were inclusive.
Mr. PECORA. Those 2,000 shares referred to specifically in the
form in which I have read it to you from the option agreement
were to be loaned if necessary to Mr. Ames in connection with his
market operations; is that it?
Mr. BROWN. That I assume is correct; yes, sir.
Mr. PECORA. What could be the occasion for his borrowing 2,000
shares in view of the fact that he had this option agreement calling
for the delivery to him at fixed prices specified in the option of
10,000 shares?
Mr. BROWN. That I don't know, unless the
Mr. PECORA (interposing). Then why did you draw the option
in that form?
Mr. BROWN. I was just going to add on, Mr. Pecora, that unless
he was short of the market and wanted to borrow that stock. That
is the only reason I can see for that provision there.
Mr. PECORA. This option agreement was drawn up in order to
effect the things that you and Ames had m mind, wasn't it ?
Mr. BROWN. Yes,
sir.
STOCK EXCHANGE PRACTICES
5883
Mr. PEOORA. Did Ames ask for the inclusion of that provision in
the agreement, or did you suggest it?
Mr. BROWN. He must have asked for it.
Mr. PECORA. I notice that there was a similar provision in the
option agreements given to Prentice & Slepaxjk.
Mr. BROWN. Yes.
Mr. PECORA. Was
that provision put in those three options at the
suggestion of Mr. Goodwin?
Mr. BROWN. Must have been at the suggestion of the optionees.
Mr. PECORA. Then he indicated that he might sell the stock short,
did he?
Mr. BROWN. He didn't indicate that at all; but he said, if I remember correctly, I assume that he said that he wanted some stock available for borrowing.
Mr. PECORA. Well, you said before in connection with Mr. Ames
that he might sell tne stock short and that he could then use these
borrowed shares for the purpose of making delivery.
Mr. BROWN. Frankly, I don't know enough about market operations to know what they did.
Mr. PECORA. YOU knew enough about them to participate in the
framing of these option agreements, didn't you ?
Mr. BROWN. Yes; and I
did.
Mr. PECORA. That indicated that you knew something about the
purposes of these market operators in wanting a provision in these
agreements giving them the right to call upon you for borrowed stock
in addition to the shares that you had optioned to them for sale and
•delivery?
Mr. BROWN. Yes; that is correct.
Mr. PECORA. They could only have occasion to borrow that stock
in the event that they sold short?
Mr. BROWN. I assume that is correct.
Mr. PEOORA. YOU knew that?
Mr. BROWN. Well, I assume that is correct.
Mr. PECORA. YOU knew enough about the market to know that,
didn't you?
Mr. BROWN. I know that now; yes.
Mr. PECORA. YOU didn't know it in 1932, when you signed these
option agreements containing those provisions?
Mr. BROWN. I won't say that I didn't.
Mr. PECORA. What is that?
Mr. BROWN. I won't say that I didn't.
Mr. PECORA. Well, now, realizing that you are under oath, you
won't say that you didn't. Would you say that you did?
Mr. BROWN. I might have; yes, sir.
Mr. PECORA. NOW, I notice that in the options to Mr. Bliss there
are provisions corresponding to these that I have specifically called
to your attention from the options to Ames and to Prentice and
Slepack, respectively.
Mr
BROWN. Yes,
sir.
Mr. PECORA. In other words, the Bliss options contain a clause
which
I will read to you from the option you personally gave Bliss:
a
The party of the first part"—meaning yourself—" agrees to loan
to the party of the second part at any time during the option period
5884
STOCK EXCHANGE PEAOTIOES
all or any part of such 6,000 certificates then remaining unsold
under this option, such loans to be made according to the usual
Street custom ", and so forth.
You observe that?
Mr. BROWN. Yes, sir.
Mr. PECORA. SO that in
all of these options, beginning with those
given to Bliss in February 1932, the discussion between you and the
optionees respectively contemplated short selling too, is that right?
Mr. BROWN. On their part; yes, sir.
Mr. PECORA. On their part, and that was part of the scheme to
stabilize the market, was it?
Mr. BROWN. I assume so.
Mr. PECORA. Was it?
Mr. BROWN. Yes, sir.
Mr. PECORA. NOW, you
have mentioned an old friend of these hearings, Mr. Kuloff Cutten. He has been here before. You have said
that you gave options to Mr. Kuloff E. Cutten.
Mr. BROWN. Yes, sir.
Mr. PECORA. In the stock of your company?
Mr. BROWN. Yes, sir.
Mr. PECORA. HOW many options did you give Mr. Cutten?
Mr. BROWN. I believe a series of three options.
Mr. PECORA. And did that commence, or rather were they
timed
to take effect immediately upon the close of the option period, the
option given to Ames?
Mr. BROWN. Yes, sir.
Mr. PECORA. NOW I show
you what purport to be copies of four
option agreements.
Mr. BROWN. Four?
Mr. PECORA. Four. [After examining papers.] Three, rather.
Mr. BROWN. Yes; three.
Mr. PECORA. Three option agreements, each made with Euloff E.
Cutten by you. Will you look at them and tell me if they constitute
true and correct copies of such option agreements given by you to
Euloff E. Cutten?
Mr. BROWN (after examining documents). Yes.
Mr. PECORA. And here is a copy of a fourth option agreement given
by you to Cutten. Will you look at it and tell me if that is a true and
correct copy of such an agreement?
Mr. BROWN. Yes.
Mr. PECORA. These are true and correct copies?
Mr. BROWN. I believe so; yes, sir.
Mr. PECORA. I offer all four of these copies of
agreements in evidence. I ask that they be marked as one exhibit, with one numeral,
and subdivisions A, B, C, and D thereof.
(Four option agreements between Russell E. Brown and Euloff E.
Cutten, dated respectively Sept. 12, 1932; Sept. 12, 1932; Dec. 12,
1932; and Mar. 12, 1933, were designated "Committee Exhibit No.
6-A-B-OD, Feb. 14, 1934 ", and appear in the record later where
read in whole or in part.)
The CHAIRMAN. There is a yea and nay vote on the floor of the
Senate and members have to be over there at this time. That will
probably take some time. So we will take a recess now until 2:30.
(Accordingly, at 12:45 p.m., a recess was taken until 2:30 p.m.)
STOCK EXCHANGE PRACTICES
5885
AFTER RECESS
The committee resumed its hearing at 2:30 p.m. on the expiration
of the recess.
The CHAIRMAN. I will ask Senator Adams to call the committee
to order and preside, as I must be absent for a short time.
Senator ADAMS (presiding). The committee will please come to
order. Mr. Pecora, I believe you had a witness on the $tand when
the committee recessed?
Mr. PECORA. Yes. The witness was Mr. Brown.
Senator ADAMS (presiding). Mr. Brown, will you please resume
the stand?
TESTIMONY OF RUSSELL B. BROWN—Resumed
Mr. PECORA. Mr. Brown, the option agreements made between
Russell E. Brown and Ruloff E. Cutten, marked, respectively,
" Committee Exhibits 6-A, 6-B, 6-C, and 6-D ", are as follows, and
I will read the one marked " 6-A" fir^t:
Memorandum of agreement made this 12th day of September, 1932, between
Russell R Brown, 405 Lexington Ave, New York, N.Y., party of the first part,
and Ruloff E Cutten, 61 Broadway, New York, N Y, party of the second part.
Whereas the party of the first part is the owner of American Commercial
Alcohol Corporation common stock and,
Wheeras Ruloff E. Cutten desires an option upon such stock on certain terms,
Now therefore it is agreed by and between the parties hereto as follows
1 In consideration of the sum of one dollar ($100) paid by the party of the
second part, receipt whereof is hereby acknowledged, and the mutual promises
herein contained, the party of the first part ghesi to the party of the second
part—
For a period of ninety (90) days from the date of this agreement, an option
to purchase all or any part of American Commercial Alcohol Corporation common stock in the amount and at the prices herein set forth below:
2500 shares at $22 00 per share
2500 shares at $23 00 per share
5000 shares at $24 00 per share
5000 shares at $25.00 per share
5000 shares at $2500 per share
2 The party of the first part agrees to have shares of American Commercial
Alcohol Corporation common stock available at C. B Welles & Co., 39 Broadway, New York, N Y , and/or Shearson Hammill & Co., 71 Broadway, New
York, N Y, up to the number of shares given in this option, for borrowing by
the party of the second part.
3 It is understood that the party of the second part will conduct transactions
under this option in an account known as American Commercial Alcohol Corporation Trading Account The party of the first part will be entitled to
receive twenty-five (25%) percent of t i e net profits of such account and will
not be required to participate in the losses of such account.
In witness whereof the party of the first part and the party of the second part
have hereunto set their hands this 12th day of September 1932
(Signed)
RUSSELL R BBOWN.
Mr. PECORA. The next is the option agreement which has been
marked " Committee Exhibit No. 6-B ", and which reads as follows:
Memorandum of agreement made this 12th day of September 1932 between
Russell R Brown, 405 Lexington Ave, New York, N Y., party of the first part,
and Ruloff B. Cutten, 61 Broadway, New York, N.Y., party of the second part.
Whereas the party of the first part is the owner of American Commercial
Alcohol Corporation common stock and,
Whereas Ruloff E Cutten desires an option upon such stock on certain
terms,
5886
STOCK EXCHANGE PRACTICES
1. In consideration of the sum of One Dollar ($100) paid by the party of the
second part, receipt whereof is hereby acknowledged and the mutual promises
herein contained the party of the first part gives to the party of the second
part—
For a period of ninety (90) days from the date of this agreement, an option
to purchase all or any part of American Commercial Alcohol Corporation common stock in the amount and at the prices herein set forth below:
2500 shares at $27 00 per share
2500 shares at $28 00 per share
2500 shares at $2900 per share
2500 shares at $3000 per share
2. The party of the first part agrees to have shares of American Commercial
Alcohol Corporation common stock available at C. E Welles & Co., 39 Broadway, New York, N.Y., and/or Shearson Hammill & Co, 71 Broadway, New
York, N Y , up to the number of shares given in this xoption, for borrowing by
the party of the second part
3. It is understood and agreed that the party of the second part will conduct
transactions under this option in an account known as American Commercial
Alcohol Corporation Trading Account. The party of the first part will be
entitled to receive twenty-five (25%) of the net profits of such account and
will not be required to participate in the losses of such account
In witness whereof the party of the first part and the party of the second
part have hereunto set their hands this 12th day of September 1982
(Signed)
RUSSELL R. BBOWN
Mr. PECORA. The option agreement known as " Exhibit 6-O " I
will only give the essential details of, Mr. Chairman, for the record*
Senator ADAMS (presiding). Very well.
Mr. PECORA. The agreement is dated December 12, 1932, made between Kussell R. Brown, party of the first part, and Ruloff E. Cutten, party of the second part. I t contains the same recitals as did
the two preceding agreements, in substance. The option period is
90 days from the date of the agreement, namely, 90 days from December 12, 1932. and the option covers the following amounts of
common stock or the American Commercial Alcohol Corporation:
2,500
2,500
2,500
2,500
5,000
5,000
5,000
shares
shares
shares
shares
shares
shares
shares
at
at
at
at
at
at
at
$20
$21
$22
$23
$24
$25
$26
a
a
a
a
a
a
a
share
share
share
share
share
share.
share.
A similar provision then follows, in substance the same as in the
two preceding agreements, with respect to theparty of the first part
making available at the office of either C. E. Welles & Co., or Shearson, Hammill & Co., the number of shares provided for in the option,
for borrowing by the party of the second part. There is a similar
provision with regard to the right of the party of the first part to
receive 25 percent of the net profits of the trading account, and
that he is not to be required to participate in the losses in said account. This agreement? however, contains the following additional
provision, not included in the two preceding agreements:
And it is further understood that the profits accumulated under the agreement of September 12th, 1982, between the above-named parties in a trading
account, win be carried along in this account mentioned below
The agreement is signed by Russell R. Brown.
Now, the fourth option agreement is marked " Committee Exhibit
No. 6-JD ", and seems to be similar in form to the one marked " Committee Exhibit ft-C." I t is dated March 12, 1933, made by Russell
STOCK EXCHANGE PBACTICES
5887
B. Brown, party of the first part, and Ruloff E. Cutten, party of
the second part. The option period is 60 days from the date of the
agreement, namely, 60 days from March 12, 1933, and covers the
following shares at the following prices:
2,000 shares at $16 a share.
2,000 shares at $17 a share
2,000 shares at $18 a share
2,000 shares at $19 a share.
2,000 shares at $20 a share
And there are similar provisions in all other respects to committee exhibit no. 6-C.
Now, Mr. Brown, did you have any associates in the granting of
these four options to Mr. Cutten?
Mr. BROWN. Yes; Mr. Grimm, Mr. Publicker, and Mr. Kies.
Mr. PECORA. Then why didn't they sign the agreements, or why
aren't they even set up as parties to the agreements ?
Mr. BROWN. Well, as to that I cannot explain it, except that it was
the practice for me to sign the various options, is all.
Mr. PECORA. Well, the practice originally was for each optioner
to execute a separate agreement in his name.
Mr. BROWN. Yes, sir.
Mr. PECORA. That was
the practice followed in the case of the four
options given to Mr. Bliss?
Mr. BROWN. Yes; that is correct.
Mr. PECORA. Who drew up these agreements with Mr. Cutten?
Mr. BROWN. I think I did.
Mr. PECORA. Was it your contemplation at the time you gave Mr.
Cutten these options that he would call upon you tor the stock
covered by the options?
Mr. BROWN. NO.
Mr. PECORA. YOU
agreed, however, to deliver such stock to him
upon call by him, at the prices named in the option agreements ?
Mr. BROWN. Yes, sir.
Mr. PECORA. Did Mr.
Cutten say to you at the time that these
option agreements were prepared and entered into that he would not
call upon you for any shares covered by the options ?
Mr. BROWN. N O ; he did not.
Mr. PECORA. Well, if you did
not expect to deliver any shares to
Jiim under the options, why did you make the agreements with him?
Mr. BROWN. Well, it comes down to this, as I explained to you
this morning: When I first met Mr. Cutten I told him that we were
interested in having a substantial sponsorship for the stock with a
good company, and his company representing a very fine house,
after discussion he said he would send his statistician up to make a
^study of the company; and there were several—well, I should say
a period of 2 weeks anyhow, that his statistician studied the company,
and he seemed to think it was all right, and then consented to take
the option.
Mr. PECORA. Who was the statistician that made that study?
Mr. BROWN. I think it was Mr. Coleman.
Mr. PECORA. What is his full name?
Mr. BROWN. I don't know.
Mr. PECORA. Did you get a copy of Mr. Coleman's report?
5888
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
STOCK EXCHANGE PRACTICES
NO.
DO you know whether or not he made
NO.
NOW, I notice that the first one of these
a report ?
options given
to Mr. Cutten is dated September 12, 1932, which coincides with
the expiration date of the option immediately preceding this one,
being the one that was given by you to Mr. Stephens E. Ames.
Mr. BROWN. Yes.
Mr. PEOORA. Did
you seek Mr. Cutten out for the purpose of
entering into these option agreements with you?
Mr. BROWN. Yes,
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. BROWN.
sir.
Or did he seek you out?
I sought him out.
What was his business at the time ?
A member of the New York Stock Exchange.
With what firm was he connected?
With E. P. Hutton & Co.
With E. F. Hutton & Co.«
Mr. BROWN. Yes,
Mr. PECORA. D O
sir.
you know whether or not Mr. Cutten had any
interest as a stockholder in the American Commercial Alcohol Corporation at that time?
Mr. BROWN. NO, sir.
Senator ADAMS (presiding).
By the negative answer just given,
does he mean that Mr. Cutten had no interest or that the witness
does not know whether or not Mr. Cutten had an interest ?
Mr. PECORA. When you say "no"* do you mean that you don't
know?
Mr. BROWN. I don't know.
Mr. PECORA. Did you ever learn that he had an interest?
Mr. BROWN. NO, sir.
Mr. PECORA. Was any
reference made by him at any time in any
conversation with you to the effect that he was a stockholder of
your company?
Mr. BROWN. Not that I know of; no, sir.
Mr. PECORA. I notice that the total number of shares covered by
these four options to Cutten is 65,000.
Mr. BROWN. Yes, sir.
Mr. PECORA. Did you
own those 65,000 shares covered by these
options?
Mr. BROWN. NO, sir.
Mr. PECORA. HOW many of them did you own?
Mr. BROWN. I think I owned around 11,000 shares.
Mr. PECORA. And who were the owners of the other
Mr. BROWN. Well, there were not 54,000 shares, I
54,000 shares?
think, in any
of those options running at one time. I do not think there was any
option as high as 65,000 shares at any time.
Mr. PECORA. N O ; but in the aggregate these four options covered
65,000 shares.
Mr. BROWN. That is true, but Mr. Publicker, Mr. Grimm, and
Mr. Kies owned the balance.
Mr. PECORA. Those four options covered periods of time commencing on September 12,1932, and terminating 60 days after March
12, 1933.
STOCK EXCHANGE PRACTICES
5889
Mr. BROWN. That is correct.
Mr. PECORA. That is, up to the 12th day of May 1933.
Mr. BROWN. That is correct.
Mr. PECORA. NOW, that is a period of 8 months.
Mr. BROWN. That is correct.
Mr. PECORA. And was it your purpose, and the purpose of your
associates whose names you have mentioned—Mr. Grimm, Mr. Kies,
and Mr. Publicker—to have Mr. Cutten stabilize the markets during
that 8 months' period.
Mr. BROWN. That is correct.
Mr. PECORA. At the time you went into these options, can you
point to any circumstance that indicated the market needed stabilization ?
Mr. BROWN. NO, sir.
Mi1. PECORA. I notice
that in these option agreements to Mr.
Cutten there is a provision which does not appear in any of the
preceding option agreements that have been put into the record
here today.
Mr. BROWN. That is true.
Mr. PECORA. Namely, a provision that entitled you to 25 percent
of the profits from a trading account which the optionee agrees to
maintain under these options.
Mr*. BROWN. That is correct.
Mr. PECORA. YOU are not called upon, by specific provision in
these agreements with Mr. Cutten, to bear any losses, however, if
there are any ?
Mr. BROWN. That is correct.
Mr. PECORA. What was the reason for the inclusion of that provision1 in these option agreements with Mr. Cutten ?
Mr . BROWN. I don't remember exactly, but I think it had been
suggested to me by some of my associates there, that in view of some
of the things that had happened, where some losses had been taken
in. previous options, that they did not want to go into any more
options of that kind; that they wanted the sponsorship of Mr. Cutten, but they felt if there was going to be any money made in it
they should participate in it.
Mr. PECORA. Well, what were the things that had happened which
had brought that about?
Mr. BROWN. Well, nothing particularly, but——
Mr. PECORA (interposing). You said something had happened.
Now, what was that something?
Mr. BROWN. I t was pointed out at the expiration of the Bliss
option, the stock was called, and so far as I was concerned and my
associates, we had to go back and buy the stock back at a higher
price.
Senator ADAMS. Had you had a declining market on this stock?
Mr. BROWN. NO ; but I think there was a declining market during
the period of these options.
Senator ADAMS. I notice that running from the option of the 12th
day of December to June 12, or rather down to the 12th day of
March, there is a substantial decline in the option prices.
Mr. BROWN. Yes, sir.
Senator ADAMS. Did that
Mr. BROWN. I believe so;
correspond with the market quotations?
yes, sir.
5890
STOCK EXCHANGE PEACTICES
Mr. PECORA. NOW, let us see about this: The first of these Cutten
options is dated September 12, 1932. And the week beginning
September 10 of that year, according to the statistics, the stock was
quoted on the New York Stock Exchange within a range of 19y2
low to 24% high; and that at the beginning of the following week,
commencing September 17, the quotations covered a range from 22
low to 26% high. But your option agreement of September 12,
1932, with Mr. Cutten is at prices ranging from 27 to 30, or substantially ablove the prevailing quotations. You notice that, do
you not?
Mr. BROWN. Well, I see that now. I didn't remember the occasion of that.
Mr. PECORA When you fixed the option prices for the purpose of
making these agreements with Cutten, did you give consideration
to the market quotations of the stock?
Mr. BROWN. Oh, yes; the option was in the neighborhood of the
market.
Mr. PECORA. The option was substantially above the market,
wasn't it?
Mr. BROWN. Well, I don't know. I cannot place it there. But I
am sure it was not substantially above the market. Every time an
option was given to anybody it certainly wasn't substantially above
the market I have never seen anybody take an option at figures substantially above the market. I think I am safe in saying therefore
that all of these options were given in the neighborhood of the
market at the time each one was given.
Mr. PECORA. I have pointed out to you that the low and the high
in the quotations for this stock on the New York Stock Exchange
for the week beginning September 10 were: 1 9 ^ low, 24% high
And the following week the low was 22 and the high was 26%
Now, your option prices in this contract of September 12 are from
27 to 30 per share.
Mr. BROWN. I think you will find there is another option there,
starting nearer the market.
Mr. PECORA. There were two agreements made as of September 12.
Mr. BROWN. Well, as to that I don't know. But if I remember
correctly, one was drawn and given to Mr. Cutten, and he said that
was not sufficient volume for him, and for that reason a second one
was written. But I am not sure of that.
Mr. PECORA. I am now going to show you the two option agreements dated September 12, 1932. Tell me which is the first one,
and which is the second one.
Mr. BROWN (after looking at the two papers). This is the fir^t
one, and this is the continuation.
Mr. PECORA. Which is the first one ?
Mr. BROWN. This one [holding up a paper].
Mr. PECORA. In other words, this paper which has been marked
" Committee Exhibit No. 6-A" is the first option agreement with Mr.
Cutten?
Mjr. BROWN. Yes, sir.
Mr. PECORA. And this
one which has been marked " Committee
Exhibit No. &-B " is the second option?
Mr. BROWN. Yes,
sir.
STOCK EXCHANGE PEACTICES
5891
Mr. PECORA. Well, then, aren't the unit prices under these two
option agreements of September 12, from 22 to 30 per share?
Mr. BROWN. That is correct.
Mr. PECORA. And the total number of shares covered by the two
option agreements of that date is 30,000 shares?
Mr. BROWN. That is correct.
Mr. PECORA. Well, doesn't that indicate prices substantially above
the market ?
Mr. BROWN. NO. It starts at 22.
Mr. PEOORA. But it ranges from $22 to $30 a share.
Mr. BROWN. That must have been the market at the time when the
option was given.
Mr. PECORA. Not according to the published quotations, Mr.
Brown, which run from a low of 1 9 ^ to a high of 26% between
September 10 and September 17.
Mr. BROWN. Well, I mean on September 12 it must have been
about $22 a share, because I am confident they were not taking
options above the market for the stock.
Mr. PECORA. Well, we will assume that on September 12 it was
$22 a share, and that on that day Mr. Cutten, who was a member
of the New York Stock Exchange, a member of the firm of E. F .
Hutton & Co., took these options and agreed to pay up to $30 a share.
Mr. BROWN. Yes,
sir.
Mr. PECORA. I S that correct, up to $30 a share?
Mr. BROWN. That is correct.
Mr. PECORA. Why was there included in these option contracts a
provision by which you bound yourself to loan to Mr. Cutten in
connection with his market-trading operations in this stock, the
number of shares that you agreed to sell to him under these options?
Mr. BROWN. I think, if my memory serves me correctly, he insisted
on having that provision in there, so as to protect him, because he
thought he would be able to maintain a good, stable, and orderly
market in the stock.
Mr. PECORA. Well, do you mean by that, that he wanted that borrowing provision in there in order that he might be protected
against short sales that he would make?
Mr. BROWN. I assume so; yes, sir.
Mr. PECORA. Did he draw down any of the stock called for by
those four options?
Mr. BROWN. Yes.
Mr. PECORA. All of them?
Mr. BROWN. NO.
Mr. PECORA. HOW many shares of the stock ?
Mr. BROWN. In the first option, which starts
from September, I
think none was called down on that; and that none was called down
on the December option. But as to the final option, which expired
on the 12th of May, he called the entire quantity.
Mr. PECORA. He did what?
Mr. BROWN. He called the entire quantity of 10,000 shares in
the final option.
Mr. PECORA. NOW, in this case also you sought out Mr. Cutten,
did you?
Mr. BROWN. That is correct.
5892
STOCK EXCHANGE PBACTICES
Mr. PECORA. And you interested him in market operations intended by you to stabilize the market in the shares of your company's stock?
Mr. BROWN. That is correct.
Mr. PECORA. And he agreed to do it under the terms of this
option and gave you 25 percent of any profits, but held you harmless from any losses that might accrue?
Mr. BROWN. That is correct
Mr. PECORA. Wasn't this intended to do something more than
merely stabilize the market?
Mr. BROWN. Not at all; no, sir.
Mr. PECORA. What was the purpose,
then, of providing for a
trading account in these options, out 01 which you were to receive
25 percent of the profits, but not to be responsible for losses, if any?
Mr. BROWN. Well, it was suggested in the negotiations with Mr.
Cutten, by one of my associates, that we should have a participation
in any profits that he might make, and he agreed to that. And in
agreeing to that he suggested that he would open an account called
the American Commercial Alcohol Trading Account, and handle the
account through it.
Mr. PECORA. Well, why was it deemed necessary to provide for the
maintenance of a trading account in which you were to have an
interest in the profits ?
Mr. BROWN. I assume so as to separate the trades in the account
from any other accounts that he might have there; so that he would
be able to give an accounting of the profits.
Mr. PECORA. Well, why couldn't that have been done without the
trading account provision?
Mr. BROWN. I assume it could have been done, but I don't know.
But that was suggested to me.
Mr. PECORA. That provision appeared for the first time in these
Cutten options?
Mr. BROWN. Yes, sir.
Mr. PECORA. I t had not
appeared in any of the previous option?
given to Bliss, Ames, or Prentice & Slepack.
Mr. BROWN. That is true. That was suggested at the time the
negotiations were had with Mr. Cutten, that a participation should
be had in the profits that he might make by reason of trading in the
account.
Mr. PECORA. Well, if Mr. Cutten under these options drew down
from you the shares covered by the option agreements, you would
make a profit from the sale thereof, wouldn't you?
Mr. BROWN. That is correct.
Mr. PECORA. NOW, Cutten readily agreed to give you this 25-percent interest in the profits of the trading account, did he ?
Mr. BROWN. That is correct; yes, sir.
Mr. PECORA. Was that 25-percent interest enjoyed entirely by you,,
or were you to share it with others ?
Mr. BROWN. I was to share it with my associates, who were participants in the options.
Mr. PECORA. In what proportions among the four of you 9
Mr. BROWN. I cannot remember the exact proportions, except that
on the delivery of 10,000 shares I delivered 4,000, and Mr. Grimm
STOCK EXCHANGE PRACTICES
5893
delivered 3,000, and Mr. Publicker delivered 2,000, and Mr. Kies
delivered 1,000 shares.
Mr. PECORA. At the time of thees options you were the chairman
of the board of the company?
Mr. BROWN. I was, sir.
Mr. PECORA. And Mr. Grimm was the president of the company ?
Mr. BROWN. Yes, sir.
Mr. PECORA. And Mr. Kies was a director and the chairman of the
executive committee of the board of directors of the company?
Mr. BROWN. That is correct.
Mr. PECORA. And Mr. Publicker was a director of the company?
Mr. BROWN. Yes, sir.
Mr. PECORA. And had
preceded you as the chairman of the board
of the company?
Mr. BROWN. That is correct.
Mr. PEOORA. DO you recall that the respective participations of
you, Grimm, Publicker, and Kies in this 25 percent interest in the
ronts of this trading account, were as follows: That you were to
ave 40 percent of the 25 percent interest; that Grimm was to have
oO percent; that Publicker was to have 20 percent, and that Kies
was to have 10 percent?
Mr. BROWN. Well, that is the way the stock was delivered.
Mr. PECORA. Which would represent participation proportionate
to the number of shares respectively agreed to be put up?
Mr. BROWN. Well, I have forgotten just how that was split up,
but tjiat is the way the deliveries were made. I don't remember how
the profits were to be split.
Mr. PECORA. YOU only owned, at the time you made these agreements in your name to deliver to Cutten a total of 30,000 shares,
something like 11,000 shares of stock, didn't you?
Mr. BROWN. That is all that I owned; yes, sir.
Mr. PECORA. And the rest was put up by Grimm, Kies, and Publicker.
Mr. BROWN. Yes, sir; that is correct.
Mr. PECORA. Why were not their names set forth in these agreements ?
Mr. BROWN. Just to simplify matters, was all.
Mr. PECORA. Did you have written agreements with your associates to protect you?
Mr. BROWN. NO. I had been associated with these gentlemen for
a long period of time. I had confidence in them and they had confidence in me. I had been in business with Mr. Publicker, Mr. Grimm,
and Mr. Kies.
Mr. PECORA. NOW, the period of time covered by the four Cutten
option agreements terminated on May 12,1933.
Mr. BROWN. That is correct.
Mr. PECORA. YOU and those same associates of yours had commenced to give options to stock-exchange members as far back as
February of 1932, a period of a year and a quarter.
Mr. BROWN. That is correct.
Mr. PECORA. During that time was any announcement made to the
stockholders of your company as to you and your fellow officers and
directors giving these options ?
E
175541—34—PT 13
4
5894
STOCK EXCHANGE PEACTICES
Mr. BROWN. NO.
Mr. PECORA. DO you
know who the other participants were in the
trading account that was provided to be maintained by Cutten under
these four option agreements?
Mr. BROWN. NO, sir.
Mr. PECORA. Did you ever learn who they were ?
Mr. BROWN. NO, sir.
Mr. PECORA. Well, would it surprise you to know
that they were as
follows:
Mrs. Augusta Edgerton, who, I understand, is the wife of a partner of the brokerage firm of Melady & Co.
Mitchell, Hutchins & Co., Chicago brokers.
Adrienne Ames, who was the wife of Stephen E. Ames, the broker
to whom you had given the preceding option.
First Chrold Corporation, which, I understand, is a trading company in the office of E. F . Hutton & Co.
Cutten & Co., Ltd., which we have heard of before in the hearings
before this committee, as a Canadian company organized for the
benefit of some of the brothers or sisters or relatives of Mr. Arthur
Cutten, who is a cousin of Ruloff Cutten.
Now, did you know that before?
Mr. BROWN. NO, sir.
Mr. PECORA. Well, in
view of the fact that you and your associates
had, among the four of you, a 25-percent interest in this trading
account, weren't you interested in knowing who the other participants were in that trading account?
Mr. BROWN. I never realized that there were other people in it.
I assumed that Mr. Cutten was taking that.
Mr. PECORA. Well, were there profits received by you and your
brother officers and directors of the company, from your participation in this trading account?
Mr. BROWN. Yes, sir.
Mr. PECORA. And you
received them after the 12th day of May
1933,1 presume?
Mr. BROWN. Yes,
Mr. PECORA. DO
sir.
you recall what the market quotations for the
stock of the company were on the termination of this last option
agreement with Cutten, namely, May 12,1933 ?
Mr. BROWN. N O ; but I should say something like $18 to $20 per
share, or something like that.
Mr. PECORA. I t ranged on May 12 from a low of 20% to a high
of 22%. Now, Mr. Cutten is here, and I think, Mr. Chairman, I will
examine Mr. Cutten about these options and will suspend temporarily with my examination of Mr. Brown.
Senator ADAMS (presiding). Very well.
Mr. PECORA. But, Mr. Brown, you will remain in attendance here
in the committee room.
Mr. BROWN. All right.
(Thereupon Mr. Srown temporarily left the committee table.)
STOCK EXCHANGE PRACTICES
5895
TESTIMONY OF RTJLOFF E. CTJTTEN, MEMBEE OF THE FIRM OF
E. F. HUTTON & CO.—Resumed
Mr. PECORA. YOU testified before in hearings held by this committee.
Mr. CUTTEN. Yes.
Mr. PECORA. Mr. Cutten,
I show you a copy of four option agreements which have been marked in evidence here as exhibits 6-A, 6-B,
6-C, and 6-D, made between Kussell K Brown, as party of the first
part, and Euloff E. Cutten as party of the second part. Will you
please look at them and tell us if you recognize them as being true
and correct copies of option agreements to which you were a party ?
Mr CUTTEN. They are; yes, sir.
Mr. PECORA. YOU are the Ruloff E. Cutten mentioned in these
option agreements &s the optionee ?
Mr. CUTTEN. I am.
Mr. PECORA. Will you
tell the committee what your business was
m the period between September 12, 1932, and May 12, 1933?
Mr. CUTTEN. I was a broker, a member of the New York Stock
Exchange, and a partner of E. F. Hutton & Co.
Mr. PECORA. Were you the floor member of the exchange?
Mr. CUTTEN. I owned a membership on the floor, sir, but I have
not been on the floor for some years.
Mr. PECORA. Will you tell the committee the circumstances under
which you obtained these option agreements from Mr. Brown?
Mr. CUTTEN. If I recall correctly, I met Mr. Brown at a prearranged luncheon. Mr. Grimm was present, and we discussed his
company. He wanted me to become interested m the shares
Mr. PECORA. Who did—Grimm or Brown?
Mr. CUTTEN. I believe Mr. Brown.
Mr. PECORA. What did he say to you along those lines?
Mr. CUTTEN. HOW good he thought business would be during the
year 1933, what he expected his company to do, and that he wanted
the
Mr. PECORA. Tell us what he said. You are giving us a sort of
conclusion. Give us the substance of what he said. How well did
he expect his company to do? What did he think business was going
to be? Give us the substance of what he said.
Mr CUTTEN. If I recall, he thought that the stock would earn somewhere around $3.50 per year in 1932, and that he wanted some sponsorship in that particular stock He asked me if I would be interested in forming an account m it and interest other people to do
something in it, and I said after I made some sort of an examination
of the company I would let him know. Subsequently I did make
the examination, or have one of our statisticians make the examination. He gave me a confidential report on the company, which I
believe is seven-odd pages long.
Mr. PECORA. Did you say seventy-odd or seven-odd ?
Mr. CUTTBN. Seven-odd. Then we got together on these various
prices.
Senator COUZENS Have you that report here?
Mr. CUTTEN. Yes; I have [producing paper].
5896
STOCK EXCHANGE PEACTICES
Mr. PECORA. Will you let me have a copy of it?
Mr. CUTTEN. That is the original, Mr. Pecora. That is the only
one we have [handing paper to Mr. Pecora].
Mr. PECORA. HOW long prior to September 12, 1932, which is the
date of the first of these four option agreements made with you, did
you have this conference with Mr. Brown and Mr. Grimm?
Mr. CUTTEN. Perhaps 2 weeks; perhaps 3. I do not recall, sir.
Mr. PECORA. Was the conference arranged for on the initiative of
Mr. Brown or yourself ?
Mr. CUTTEN. That I do not know. I was invited to go to lunch,
with a man by the name of Ames.
Mr. PECORA. I S that Stephen Ames ?
Mr. CUTTEN. Yes.
Mr. PECORA. YOU knew Stephen Ames as a fellow broker?
Mr. CUTTEN. I did.
Mr. PECORA. At that time, in that conference, was any discussion
had concerning the previous sponsorship of this same stock by
Stephen Ames?
Mr. CUTTEN I never knew a thing about it; no, sir.
Mr. PECORA. Did you ever know that Stephen Ames had previously sponsored the same stock, under the terms and provisions of
an option agreement, given to him by Mr. Brown and Mr. Brown's
associates in the company?
Mr. CUTTEN. I did not.
Mr. PECORA. Did you know
that previous to this conference with
you there had been another sponsorship of the same stock, under generally similar option agreements given by Mr. Brown and his associates to the brokerage firm of Prentice and Slepack.
Mr. CUTTEN. I did not.
Mr. PECORA. Did you know
that previous to that there had been
another sponsorship of the stock on the New York Stock Exchange
by a broker named Frank E. Bliss, under the terms of options given
to him by Brown and his associates ?
Mr. CUTTEN. I did not.
Mr. PECORA. YOU knew
Mr. Ames pretty well, didn't you, at the
time of this conference?
Mr. CUTTEN. I did.
Mr. PECORA. When
Mr. Brown asked you to sponsor the stock,
did you agree to do it?
Mr. CUTTEN. Not immediately; no, sir.
Mr. PECORA. YOU agreed eventually, after having had a survey
made for you by a statistician in the employ of your firm.
Mr. CUTTEN. That is correct.
Mr. PECORA. Did you give Mr. Brown the results of that report?
Mr. CUTTEN. I did
not.
Mr. PECORA. Or the substance of it?
Mr. CUTTEN. I did
Mr. PECORA. When
not.
you entered into these agreements, which have
been marked in evidence as exhibits 6-A, 6-B, 6-C, and 6-D, what
consideration did you give to the market quotations prevailing at
the time that you entered into those agreements?
Mr. CUTTEN Considerable
STOCK EXCHANGE PBACTICES
5897
Mr. PECORA. I notice that the option prices fixed in these four
agreements are above what was the prevailing market on the dates
of those agreements. Did you have that in mind?
Mr. CUTTJBN. The average, do you mean, sir, or do you mean the
very first option? If I recall, the first price of the first option was
perhaps at the market, or may have been a dollar under the market.
Mr. PECORA. A price of $22?
Mr. CTTTTEN. I believe so.
Mr. PECORA. On September 12?
Mr. CUTTEN. I believe so.
Mr. PECORA. On September 10, or the week ending September 10,
the low was 19y2 and the high 24%. For the week ending September 17 the low was 22 and the high 26%. Then on September 12
you bound yourself to purchase a total of 30,000 shares at prices
ranging from $22 to $30 a share.
Mr. CUTTEN. No, sir; I did not bind myself.
Mr. PECORA. YOU did not bind yourself, but you took these options ?
Mr. CUTTEN. Yes.
Mr. PECORA. YOU
could not have realized anv profits unless the
market prices went up to prices exceeding those fixed by the options.
Mr. CUTTEN. That is quite true.
Mr. PECORA. And that is what you hoped to accomplish, was it
not?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. HOW did
you hope to accomplish it, Mr. Cutten?
By what means?
Mr. CUTTEN. I thought that the earnings of the company would
warrant higher prices for it. The stock, as I recall, looking over
it, was most inactive. There were many times when there were wide
differences between the bid and the asked price, and I sold stock on
the scale up, and reentered the purchase on the scale down.
Mr. PECORA. That is, you bought to support the market on a scale
down and sold on a scale up ?
Mr. CUTTEN. Yes,
Mr. PECORA. Did
sir.
you call upon Mr. Brown and his associates for
any of these 30,000 shares covered by the two option agreements of
September 12,1932?
Mr. CUTTEN. NO, sir.
Mr. PECORA. Why not ?
Mr. CUTTEN. I had sold
stock, I think, and had a net short position, by two or three thousand shares, and then the market went into
a general reaction and receded, and I repurchased those, and had
long shares. By that time the expiration of the first 90 days happened, and then the second option was made, I believe, at a lower
figure, and about the same thing happened in that, and it was the
fourth option that averaged $18 a share, which was the only option
that was exercised—10,000 shares.
Mr. PECORA. At $18 a share average.
Mr. CUTTEN. $18 average. They started, I think, at 16, and went
to 20.
Mr. PECORA. I think I will offer in evidence, Mr. Chairman, the
copy of the so-called " Confidential report on American Commercial
Alcohol Corporation ", made to the witness by a statistician of E. F .
5898
STOCK EXCHANGE PRACTICES
Hutton & Co., referred to by him, namely, S. C. Coleman. I ask
that it be marked in evidence and not spread on the minutes. It is
rather long.
Senator ADAMS (presiding). I t may be admitted.
(Copy of confidential report on American Commercial Alcohol
Corporation, Coleman to Cutten, was received in evidence, marked
" Committee's Exhibit No. 7", Feb. 14, 1934, and the same is not
printed here for the reasons stated above.)
Mr. PECOBA. I want to read what appears in this confidential
report under the caption of " Summary " [reading] :
In summary I would say that American Commercial Alcohol occupies a good
competitive position in the alcohol industry, which is now showing a high
degree of stability. Indications are that the present profitable price structure will be maintained at least another year. The company has a relatively
clean balance sheet, and although its liquid position is not all that could be
desired, the officers have no intention of declaring any dividends, but are
planning to strengthen the treasury position by retaining all earnings Indications of earnings for the second half of 1982 are substantial On the
other hand, the company, since its inception in 1928, has not shown steady
earning power, and, marketwise the stock is very inactive, and it is my opinion
that the stock has been hurt as a result of apparently being shopped around
the street m the past year or two I think we can recommend the stock to
those people who want to follow a speculative situation that offers considerable
promise over the next six months to a year. I do not think it is suitable for
Investment in any sense of the word The exceedingly small capitalization,
coupled with the fact that over 50 percent of the stock is very closely held,
indicated that the stock could be established at higher levels without any large
amount of buying.
This is dated September 8,1932, and it is signed by S. C. Coleman.
What did Mr. Coleman's statement mean to you, where he said, in
conclusion here [reading]:
The exceedingly small capitalization, coupled with the fact that over 50 peicent of the stock is very closely held, indicates that the stock could be established at higher levels without any large amount of buying
Mr. CUTTEN. Just that, that a moderate amount of buying powei
probably would establish the stock at a 10-pomt price higher than
what it was selling, and keep it there, namely, in the thirties instead
of the twenties.
Mr. PECORA. In other words, the situation was one in which,
through the medium of market operations—we will not call it
manipulation—but market operations, which would involve only
a small amount of buying power, the quotations on this stock could
be pushed up very rapidly?
Mr. CUTTEN. I t could; if any one had come in to buy 5,000 shares
at the market, of course, it would have gone up most rapidly.
Mr. PECORA. I S not that what Mr. Coleman's report meant to
you?
Mr. CUTTEN. That it^would be influenced, of course, by any buying, naturally, because 50 percent of it was so closely held. There
were only 194,000 shares of the stock, as I recall, outstanding.
Mr. PECORA. And more than 50 percent of it, according to Mr.
Coleman's survey, was closely held?
Mr. CUTTEN. That is right.
Mr. PECORA. D O you know who held that proportion of the stock *
Mr. CUTTEN. N O ; I do
not.
STOCK EXCHANGE PEACTICES
5899
Mr. PECORA. I t was the officers and directors of the company,
was it not?
Mr. CUTTEN. I know that.
Mr. PECORA. Principal among them was Mr. Brown, chairman of
the board, Mr. Grimm, president, and Mr. Publicker and Mr. Kies,
and they were the four men who gave you these options, were
they not?
Mr. CUTTEN. I did not know it at the time; no.
Mr. PECORA. When did you first learn that anyone was associated
with Mr. Brown in these option agreements with you?
Mr. CUTTEN. I believe he told me some of his codirectors or associates were supplying some stocks as individuals.
Senator COUZENS. Did you make any profit on this transaction?
Mr. CUTTEN. Yes, sir. The account had a profit of some $16,000
at the expiration of the 8 months.
Mr. PECORA. I note this expression in Mr. Coleman's report to you,
which I have already read [reading] :
I think we can recommend the stock to those people who want to tollow
a speculative situation that offers considerable promise over the next 6 months
to a year I do not think it is suitable for investment in any sense of the word
Whom do you think Mr. Coleman had in mind as being the people
to whom he thought this stock could be recommended as a speculative situation?
Mr. CUTTEN. I have not any idea, sir. Neither would he have.
Mr. PECORA. What was the sense of his making that soit of report
to you, in which he says " I think we can recommend the stock to
those people who want to follow a speculative situation " and so
forth? To whom was he referring?
Mr. CUTTEN. I do not know that he was referring to anybody in
particular.
Mr. PECORA. N O ; apparently he is not referring to anybody in
particular. That is quite apparent from the language, but what
class of people was he referring to ?
Mr. CUTTEN. A person that wants to speculate.
Mr. PECORA. HOW would you make recommendations to those persons who wanted to speculate ?
Mr. CUTTEN. For instance, if somebody should say to me anything
about the alcohol stocks as a group, or as a whole, knowing something, or thinking that I knew something about the American Commercial Alcohol situation, I certainly would suggest the purchase
of that in preference to the purchase of other alcohol shares, if I
knew nothing about them.
Mr. PECORA. I notice that this report is on printed letterheads of
E. F Hutton & Co., members, New York Stock Exchange, 61 Broadway, New York City, statistical department.
Mr. CUTTEN. Yes.
Mr. PECORA. Mr. Coleman was a statistician
Mr. CUTTEN. Yes, sir.
Mr. PECORA. DO you suppose Mr. Coleman
in that department?
was referring, when
he said " I think we can recommend the stock to those people who
want to follow a speculative situation " to the customers of E. F*
Hutton & Co.?
Mr. CUTTEN. He was not.
5900
STOCK EXCHANGE PRACTICES
Mr. PECORA. He was not?
Mr. CUTTEN. He was not.
Mr. PECORA. TO whom was he referring, do you think?
Mr. CUTTEN. Anybody who wanted a speculative thing.
I t didn't
matter whether it was our customers or some one else's customers.
That is a confidential report, sir.
Mr. PECORA. I realize it is a confidential report, and that is probably why things are called by plain terms, because it is a confidential
report. You never intended that this should reach the eyes of the
public, did you?
Mr. CTJTTEN. I had it with me, didn't I?
Mr. PECORA. I say, you never intended, when you got this from
Mr. Coleman, that it should ever reach the eyes of the public?
Senator COUZENS. When you offered this stock for sale, did you
tell them it was speculative stock, as suggested by Mr. Coleman?
Mr. CUTTEN. We never offered it for sale, sir.
Mr. PECORA. Let us see about that. I have before me a document
prepared by E. F. Hutton & Co. and furnished to us at our request
or suggestion, that contains extracts from market letters of E. F.
Hutton & Co., commencing with the date of September 12, 1932.
Will you look at it and tell me if you recognize it to be such?
Mr. CUTTEN (after examining papers). Yes, sir.
Mr. PECORA. I offer it in evidence.
(Copy of market letters, E. F. Hutton & Co., commencing with
September 12, 1932, was marked "Committee's Exhibit No. 8",
Feb. 14, 1934, received in evidence, and portions of the same were
read into the record subsequently by Mr. Pecora.)
Mr. PECORA. The document, which has been marked " Committee's
Exhibit No. 8 " in evidence, reads as follows
Senator COTTZENS. Does it all refer to this particular stock ?
Mr. PECORA. Yes, sir. That is, there are references to this stock
in every extract that I will read.
Senator ADAMS. These are excerpts?
Mr. PECORA. Excerpts from various market letters, the date of
each one of which I will give as I read them.
From the market letter written September 12, 1932
Senator ADAMS. That is the date of the first option?
Mr. PECORA. That is the date of the first two options; yes, sir.
This is marked "Afternoon Market Letter, 4 p.m." I read the
following:
A few issues displayed unusually stubborn resistance to further decline, such
as Amrican Commercial Alcohol and Coca Cola The pronounced firmness in
the former issue in the face of weakness in U S Industrial Alcohol directs
attention to the comparative earning power of these two alcohol companies
this year. It is conservatively estimated that American Commercial Alcohol
will report net of $3 50 a share this year, while IT S Industrial Alcohol is not
expected to earn more than $2 50 to $3 on the common Some students of
comparative market values are predicting that American Commercial Alcohol
will cross U S Industrial Alcohol.
Some issues that we believe are in a favorable position to score a sharp
rally when the list turns are American Can, United Aircraft, North American,
American Commercial Alcohol, Southern Pacific, General American Tank, Kennicott, Chrysler, International Telephone, Continental Can, American Power
& Light, Atlantic Refining, Gillette, General Electric, Canadian Pacific, Union
Carbide
STOCK EXCHANGE PRACTICES
5901
Then, from the opening market letter, 9 a m., September 13, 1932r
I will read the following extract:
Some issues that we believe are in a fovorable position to score a sharp
rally when the list turns are American Can, United Aircraft, North American,
American Commercial Alcohol, Southern Pacific, General American Tank, Kennicott, Chrysler, International Telephone, Continental Can, American Power
& Light, Atlantic Refining, Gillette, General Electric, Canadian Pacific, and
Union Carbide.
From the morning market letter, 8:50 a.m., September 14, 1932,
the following [reading] :
Among stocks we like for trade turns are' American Can, Union Carbide,
General Electric, North American, New York Central, Southern Pacific, United
Aircraft, American Commercial Alcohol, Chrysler, Canadian Pacific, and Commercial Solvents.
From the afternoon market letter, 4 p.m., September 14, 1932
[reading]:
American Commercial Alcohol advanced to a new high for the year in the
morning's trading before encountering selling, when the list turned sharply
downward Some students of the alcohol industry who are impressed with
the favorable competitive position of this company predict that American Commercial Alcohol will cross U.S Industrial Alcohol in the not distant future
From the closing market letter, 4 p.m., October 4, 1932 [reading] :
Among individual issues B M.T., Aviation Corporation, the Mail Order Issues,
American Commercial Alcohol, and Continental Can gave a better than average
performance.
From the opening market letter, 8:40 a.m., written on October 6,
1932 [reading]:
Active stocks to watch include American Can, Consolidated Gas, International Telephone, Montgomery Ward, Union Carbide, United Aircraft, U S.
Steel, Aviation Corporation, and Westmghouse Electric Among less active
issues Continental Can and American Commercial Alcohol.
From the closing market letter, 4 p.m., written October 13, 1932
[reading] :
A cold winter would result m substantial sales of antifreeze mixtures by
the alcohol companies, swelling final quarter net It is estimated, in informed
quarters, that American Commercial Alcohol earned upwards of 85 cents m
the third quarter, bringing 9 months net to $210 a share It seems likely
that balance of income available for the common in the fourth quarter will
exceed $150, giving full year net of around $3 60
From the closing market letter, 4 p.m., October 28, 1932, I read
as follows:
The dribble of third quarter earnings statements continued with numerous
specialty issues such as Gillette and American Commercial Alcohol reflecting
encouragement over better operating results for the September quarter American Commercial Alcohol reported net for the first 9 months of $207 per share,
compared with a deficit of $135 per share for the corresponding period of
1931, adjusted to the present capitalization In line with normal seasonal
tendencies, American Commercials third quarter not was the largest quarter
so far this year, accounting for approximately 40 percent of net increase
for the 9 months. The fourth quarter should make an even better showing
than the! September quarter, which indicates that full year net for this company will be substantially in excess of $3.
From the closing market letter, 12:25 p.m., November 5, 1932,
which was a Saturday [reading]:
Stocks held well in today's short session, backing and filling on professional
transactions, and finally closing slightly up on the day. The market was quite
5902
STOCK EXCHANGE PEACTICES
narrow, with traders inclined to play the long side The alcohol shares,
Standard of N J and Beynolds Tobacco B weie the features of strength. The
spurt in American Commercial Alcohol and XJ S Industrial Alcohol accompanied reports of colder weather which usually is reflected in an increased
demand for anti-freeze mixtures, which are produced by these companies
From the closing market letter of December 16, 1932, I read-as
follows:
Although estimates of U S Industrial Alcohol's net earnings are being
revised downward to around $150 to $2, it is still expected in informed circles
that American Commercial Alcohol will earn approximately $3 per share for
1932 With no change in the alcohol price structure in the first quarter of 1933,
American Commercial Alcohol should better its earnings of 55 cents reported
in the first quarter of 1932
From the closing market letter written January 16, 1933,1 read as
follows:
American Commercial Alcohol's first quarter net is estimated at 60 cents
against 57 cents, United Carbon 10 cents against 8 cents
From the closing market letter January 26,1933,1 read as follows:
American Commercial Alcohol, on the other hand, showed quiet firmness on
the expectation that the 1932 annual report, which should be released within
the next day or so, will show earnings of slightly over $3 per share.
From the closing market letter written January 27, 1933, I read
as follows:
At the same time the release of the earnings figures of American Commercial
Alcohol for 1932 revealed net income, after all charges of $586,365, equivalent
to $3.01 per stare, compared with a loss of $597,651 in 1931. In the fourth
quarter of 1932 American Commercial Alcohol earned 98 cents per common
share, which will be seen to be substantially m excess of the estimated full-year
earnings of U.S. Industrial Alcohol In informed quarters it is estimated that
American Commercial Alcohol wiU earn more in the first quarter of 1933 than
it did in the corresponding quarter of 1932.
From the closing market letter written on May 26, 1933, I read as
follows:
Repeal stocks continued the rising trend of yesterday and featured during
most of today's session, with most issues in this group reaching new1 highs.
Alcohol stocks likewise continued the advance with U S. Industrial gaining
7% points and American Commercial Alcohol 4 points.
From the closing market letter written May 25, 1933, I read as
follows:
The repeal stocks continued the strength in evidence in the last few sessions
and made the best showing of the day National Distillers was up 8 points,
while gams of a point or more were shown by other stocks that will benefit
from repeal. Standard Brands was quite active and gained 1*4 points Alcohol
stocks joined in the advance, with both U S. Industrial and American Commercial Alcohol scoring sharp gams in new high ground.
Senator ADAMS. HOW are these market letters distributed, how
widely, and by what means?
Mr. GOTTEN. They are put over our wires,-sir. I t is a sheet of
paper about the size of that, commenting on how the market acted
on the particular day, and market letters are put out in the morning
commenting on the night news and mentioning stocks that acted
well or did not act so well the previous day.
Senator ADAMS. DO they go to all members of the exchange?
Mr. CUTTEN. Oh, no, sir.
Senator ADAMS. Just affiliated
brokers?
STOCK EXCHANGE PRACTICES
5903
Mr. GOTTEN. Those are just our own offices.
Senator ADAMS. They have no circulation among your customers,
other than among those who come and get them at your offices ?
Mr. CUTTEN. They put them on a pad, and they come m and read
them.
Mr. PECORA. They are available to all the customers of your office?
Mr. CUTTEN. Yes,
Mr. PECORA. And
sir.
very frequently are quoted in the public press,
are they not?
Mr CUTTEN. I believe they are. I do not think they ever mention
any particular stock. I believe they just mention the trend of the
market, whether the bioker is bullish on the market or bearish on
the market.
Mr. PECORA In the face of this evidence, do you still say that your
firm did not recommend American Commercial Alcohol to its customers during the times covered by these options?
Mr. CUTTEN. Of course, I look on the recommending of things to
a customer as putting out a prospectus and analyzing the individual
company to the customer, and suggesting that the customer purchase the shares of that company.
Mr PEOORA. Would you interpret any of these references to
American Commercial Alcohol that I have read from these market
letters as suggestions to your customers not to purchase American
•Commercial Alcohol?
Mr. CUTTEN. No; I would not.
Mr. PECORA. They were put in there to influence the customers in
purchasing the stock, weren't they&
Mr. CUTTEN. Well, it was to call that particular stock to their
attention; yes.
Mr. PECORA. And to call it to their attention in a favorable way,
so as to induce them to buy ?
Mr. CUTTEN. That is right.
Mr. PECORA. Yes. And that is ;not recommending a stock to them,
is it, according to your conception of the term?
Mr. CUTTEN. Perhaps it is. But no more so than any of the other
stocks that are mentioned there, though, sir.
Mr PECORA. When you recommended the stock in this way did
you tell your customers that you had an interest in the stock represented by these option agreements on 30,000 shares?
Mr. CUTTEN. NO ; I did not.
Mr PECORA. That is rather a
common factor, isn't it, Mr. Cutten,
among brokerage houses ?
Mr. CXJTTEN. That have options you mean9
Mr. PECORA. TO have options.
Mr. CUTTEN. Yes.
Mr. PECORA. And then
to stimulate the market by recommending
the stock in which they have options to customers ?
Mr. CUTTEN. I t has been; yes, sir.
Mr. PECORA. DO you think it is a good practice ?
Mr. CUTTEN. I do not.
Senator ADAMS. YOU say
past tense?
" it has been/' Why do you use that
5904
STOCK EXCHANGE PRACTICES
Mr. CUTTEN. Well, due to the rules and regulations that the New
York Stock Exchange has put into effect today, sir
Mr. PECORA. Oh, today?
Mr. CUTTEN. No; I don't mean today, not this morning or last
night, but in listing the various options of houses that may have
them or for their customers, they require information about anything that they may have knowledge of that an individual is doing
that is operating against an individual option, and that has undoubtedly curtailed a great deal of that kind of trading.
Mr. PECORA. When did you first reach the conclusion that this
was not a good, wholesome practice for a brokerage house having
options on stock to recommend that stock to its customers?
Mr. CUTTEN. Well, I for one, sir, have never been in favor of
doing that, recommending the stock to the customer, putting out
a prospectus on it and selling it. We today—and we did not because
we are not a house of issue—do not have any for sale.
Mr. PECORA. Did you evince that attitude to E. F. Hutton & Co.
in 1932 and 1933 while these market letters were going out?
Mr. CUTTEN. I don't know whether I did or not, sir; I know we
as a firm, E. F . Hutton & Co., have not had a participation in anything since 1929, not even in the underwriting.
Mr. PECORA. Well, the firm may not have had, but how about
individual members of the firm like yourself?
Mr. CUTTEN. I never had, sir.
Mr. PECORA. Didn't you have these options here ?
Mr. CUTTEN. They were made out to me, sir, but they did not
belong to me.
Mr. PECORA. Whom did they belong to ?
Mr. CUTTEN. I formed the group.
Mr. PECORA. Whom did they belong to? Who is the group that
you formed?
Mr. CUTTEN. The group of names that you called off a minute ago
here.
Mr. PECORA. The names that I called off to Mr. Brown ?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. Did you form that group, Mr. Cutten?
M^. CUTTEN. I did.
Mr. PECORA. Did I give correctly all the participants
in that
group ?
Mr. CUTTEN. I believe you did.
• Mr. PECORA. Well, now, let's see; 25-percent interest was given to
Mr. Brown and his three other directors and officers of the company—
that you know?
Mr. CUTTEN. I only know Mr. Brown, of course.
Mr. PECORA. Didn't you know Mr. Grimm was in it ?
Mr. CUTTEN. NO ; I didn't know Mr. Grimm was in it.
Mr. PECORA. I thought that at your first conference with Mr.
Brown, the negotiations that led to the granting of these four options
to you, Mr. Grimm was present.
Mr. CUTTEN. He
Mr. PECORA. He
was.
Mr. CUTTEN. Yes,
sir.
was introduced to you then as the president of
American Commercial Alcohol?
STOCK EXCHANGE PRACTICES
5905
Mr. PECORA. YOU invited Mrs. Augusta Edgerton to participate
in this group that you formed?
Mr. CTJTTEN. I invited her husband to.
Mr. PECORA. What is her husband's business ?
Mr. CTJTTEN. He is a broker.
Mr. PECORA. In New York City?
Mr. CTJTTEN. Yes,
sir.
Mr. PECORA. Partner in the firm of Melady & Co. ?
Mr. CTJTTEN. He was at that time, I believe; yes, sir.
Mr. PEOORA. Did you also invite Mitchell, Hutchins & Co into
the group ?
Mr. CTJTTEN. I
did.
Mr. PECORA. They are Chicago brokers, aren't they?
Mr. CTJTTEN. They are.
Mr. PECORA. With an office in New York?
Mr. CTJTTEN. I believe they have; yes, sir.
Mr. PECORA. Did you invite Adrienne Ames, the wife of Stephen
Ames, to participate?
Mr. CTJTTEN. I invited Mr. Stephen Ames; yes, sir.
Mr. PECORA. He was a broker?
Mr. CTJTTEN. He was. He introduced me to Mr. Brown.
Mr. PEOORA. Member of the New York Stock Exchange. Oh, he
introduced you to Mr. Brown ?
Mr. CTJTTEN. Yes, sir; Mr. Stephen Ames did.
Mr. PECORA. And he did not tell you at the time that you discussed these options with Mr Brown and Mr. Grimm, and in the
course of which, as I remember your testimony, Brown told you he
was through a broker to sponsor the stock that Ames had previously
sponsored, or under an option agreement to Brown ?
Mr. CUTTEN. He did
Mr. PECORA If you
not.
had known that, do you think it would have
influenced your mind in any way with regard to these option agreements?
Mr. OUTTEN. I don't know that it would; no, sir.
Mr. PECORA. Who is the First Chrold Corporation which was also
a participant in this group that you say you formed under these
options ?
Mr. CTJTTEN. That is a corporation that is managed by one of my
partners.
Mr. PECORA. I t IS a corporation connected with some of your
partners?
Mr. CTJTTEN. Managed by one.
Mr. PECORA. Managed by him?
Mr. CTJTTEN. Yes.
Mr. PECORA. Who is the beneficial owner of that company?
Mr. CTJTTEN (addressing Mr. Tompkins in a low voice). Do
you
know about that?
Mr. TOMPKINS. I think, Mr. Pecora, I can speak about that. Mr.
Lowe probably
Mr. PECORA (interposing). Just a minute. Wait a minute. Mr.
Cutten, you said that you formed this group. Now don't you know
who the First Chrold Corporation is, or who owns it, whom it
represents?
5906
STOCK EXCHANGE PBACTICES
Mr. CUTTEN. Well, yes.
Mr. PECORA. Who owns it?
Mr. CUTTEN. Mr. Walter Evan is the president of the company
and I believe the largest individual stockholder.
Mr. PECORA. And is he connected with the E. F. Hutton & Co. ?
Mr. CUTTEN. He is not; no. Mr. Gerald Lowe is my partner, and
is the manager of the Chrold Corporation, and also I believe a large
stockholder in the company.
Mr. PECORA. The Cutten Co., Ltd., who is the beneficial owner of
that company?
Mr. CUTTEN. Mr. Arthur W. Cutten's brothers and sisters.
Mr. PECORA. Those that live in Canada.
Mr. CUTTEN. Those that live in Canada.
Mr. PECORA. They were the same brothers and sisters that Mr.
Arthur W. Cutten testified about at a previous appearance that he
made before this committee at which you were present—do you
remember?
Mr. CUTTEN. Yes,
sir.
Mr. PECORA. Arthur W. Cutten is related to you?
Mr. CUTTBN. Yes,
sir.
Mr. PECORA. Your cousin, I believe?
Mr. CUTTEN. Yes,
Mr. PECORA. Did
sir.
you invite the Cutten Co., Ltd., of Canada to become a participant in this group or did you suggest it to your
cousin, Arthur W. ?
Mr. CUTTEN. I suggested it to him. I invited him in.
Senator ADAMS. What interest did you have in this group or
syndicate?
Mr. CUTTEN. None at all, sir.
Mr. PECORA. What is that?
Mr. CUTTEN. NO interest at all.
Senator ADAMS. What, if any, consideration did you get for forming it?
Mr CUTTEN. Not a thing except the brokerage commission.
Senator ADAMS. Through the purchase and sale of the stock?
Mr. CUTTEN. Purchase and sale of the stock; yes, sir.
Mr. PECORA. DO you recall the number of shares that you traded
in during the life of these four option agreements, that is, between
September 12,1932. and May 12,1933?
Mr. CUTTEN. Eoughly I would say a hundred thousand shares of
stock.
Mr. PECORA. That is, you both bought and sold?
Mr. CUTTEN. Bought and sold during the option period.
Mr. PECORA. At times you sold short?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. At times you had a long position ?
Mr. CUTTEN. Yes, sir.
Mr. PECORA. NOW, what consideration prompted
you to invite the
particular individuals that you did invite into this operating group ?
Mr. CUTTEN NO particular thing, sir.
Mr. PECORA. Well, I notice that all of the participants were persons that were connectced with market operations Isn't that so?
For instance, Mrs. Edgerton's husband is a partner in the brokerage
STOCK EXCHANGE PKACTICES
5907
firm of Melady & Co. Mitchell, Hutchins & Co. were Chicago stock
brokers. Mrs. Ardienne Ames is the wife of Stephen Ames, a member of the New York Stock Exchange and a friend of yours. The
-First Chrold Corporation was managed by one of your partners in
E. F. Hutton & Co., and the Cutten Co., Ltd., you invited them
through Arthur W. Cutten, who described himself here at a previous hearing as a market operator. Were you looking for market
operators in forming this group ?
Mr. CUTTEN. Well^ no; I wouldn't say that I was, sir; no.
Mr. PECORA. Was it then purely a coincidence that all of the persons and interests invited to participate in this group were connected
with market operators?
Mr. CUTTEN. I t is; because they all happened to be my friends.
Mr. PECORA. IS your circle of friends limited to market operators,
Mr. Cutten?
Mr. CUTTEN. NO ; it is not.
Mr. PECORA. Wasn't it your
desire in inviting persons of that
character or that type or classification into this group to invite persons who could stimulate market activities in this stock because of
their business?
Mr. CUTTEN. Well, if they had some friends that were willing to
speculate in a class of stocks such as this was, yes; that it was a good
business man's risk and a good business man's speculation, based on
the forecasts that the chairman of the board had made.
Senator COUZENS. YOU mean a good business man or a good risk,
which?
Mr. CUTTEN. Good risk.
Mr. PECORA. In trading to the extent that you say you traded in
this stock during the life of these options, what brokers did you use
to handle your trades?
Mr. CUTTEN. I think just $2 brokers on the floor of the New York
Stock Exchange.
Mr. PECORA. Who were they?
Mr. CUTTEN. I believe a man by the name of Smith was the
principal broker.
Mr. PECORA. Was that Ben Smith?
Mr. CUTTEN. NO, sir.
Mr. PECORA. What is his full name.
Mr. CUTTEN. Lyman B.
Mr. PECORA. Wnere is his office?
Mr. CUTTEN. E. F . Hutton & Co.
Mr. PECORA. That is your firm?
Mr. CUTTEN. Yes, sir*
Mr. PECORA. Who was the other broker jrou used?
Mr. CUTTEN. Well, I would have to look it up. I would not know
off hand.
Mr. PECORA. Who was the specialist in the stock on the floor of the
New York Stock Exchange?
Mr. CUTTEN. Charles Wright.
Mr. PECORA. Did you use him?
Mr. CUTTEN. Only limited orders reached him and registered in
his book.
Mr. PECORA. What do you mean by limited orders? That is a
term that we would like to have you define.
5908
STOCK EXCHANGE PEACTICES
Mr. CUTTEN. If the market in the stock is quoted at 22 and if
you put in an order to sell
500, 600, or 700 at 23, you cannot expect
a $2 broker on the floor1 of the New York Stock Exchange to carry
that order around with him all day long. He gives it to the man
that has the book, the specialist.
Mr. PECORA. In other words, the specialist?
Mr. CUTTEN. Yes; and he enters it in his book to sell it at the
limit price.
Mr. PECORA. Did you deal in any puts and calls in connection
with your activities in this stock?
Mr. CUTTEN. I believe I did; yes, sir.
Mr. PECORA. TO what extent?
Mr. CUTTEN. Well, I would have to look that up. I don't know.
Mr. PECORA. Can't you tell us even approximately?
Mr. CUTTEN. N O ; I would not know over a period of that time,
Mr. Pecora.
Mr. PEOORA. Why did you give puts and calls in the stock during
this period of your activity in it? What purpose was derived by it?
Mr. CUTTEN. On the put end, if a broker would be bullish on an
alcohol stock or bullish on the market and wanted to buy 2 or 3
hundred shares, sometimes he would call me up on the telephone
jand say he would buy 2 or 3 hundred shares of this particular stock
if I would give him a put on it, say a point under the price at which
he may have purchased it. I t is limiting their loss.
Mr. PECORA. I t is a limitation on the loss of the speculator?
Mr. CUTTBN. That is right.
Mr. PECORA. That is pure speculation, is it—or speculation, leaving
out the word " pure " ?
Mr. CUTTEN. Yes.
Mr. PECORA. Did you give any of these puts at the same price at
which the transaction was put through ?
Mr. CUTTEN. I may have. I would have to look it up. I would
not know.
Mr. PECORA. YOU don't recall that?
Mr. CUTTEN. N O ; I do not.
Mr. PECORA. What would be your purpose in
Mr. CUTTEN. TO give them a put at the same
doing that?
price that they may
have purchased the stock at ?
Mr. PECORA. Yes.
Mr. CUTTEN. Just so he would buy the stock, that is all.
Mr. PECORA. Isn't it also to guarantee him against loss?
Mr. CUTTEN. Oh, absolutely; of course. To limit his loss.
Mr. PECORA. In other words, it is a process whereby persons
might
be induced to buy the stock because they are assured of being protected against loss?
Mr. CUTTEN. Absolutely.
Mr. PECORA. What was the advantage to you or to the members of
your group in doing that, Mr. Cutten ?
Mr. CUTTEN. Well, I don't know in doing that, Mr. Pecora, whether
there was any direct advantage or not. It brings in some outsider,
of course, with maybe 100 shares or 200 shares or 500 shares of that
particular stock. That is what it does. It creates another interest.
Mr. PECORA. I t stimulates the market, doesn't it?
STOCK EXCHANGE PRACTICES
5909
Mr.
Mr.
COTTEN. Yes, in effect.
PECORA. And that is the purpose for which it is done, isn't it?
Mr. CUTTEN. Yes.
Mr. PECORA. TO sort of help churn the market, isn't it?
Mr. CUTTEN. Well, " churn " is a kind of a large word for an ac-
count about this size. I don't know whether you could churn 200
shares one day or 300 the next.
Mr. PECORA. YOU know it is churning just the same, isn't it?
Mr. CUTTEN. All right; call it that; yes, sir.
Mr. PECORA. We are not doing violence to the facts when we call it
that, are we ?
Mr. CUTTEN. Well, I don't know whether you are or not. You
may be in the minds of some people.
Mr. PECORA. In your own mind?
Mr. CUTTEN. NO ; not in my mind.
Mr. PECORA. I simply want your opinion, of course.
Mr. CUTTEN. NO ; not in my mind; no, sir.
Mr. PECORA. And is that a device, Mr. Cutten, that, from your experience* covering many years as a stockbroker, is often resorted to
to stimulate activity in the market of a stock?
Mr. CUTTEN. Sometimes; yes, sir.
Mr. PECORA. And the general effect is to inform the public that
there is an activity in the market for that stock without telling the
public how the activity is excited?
Mr. CUTTEN. That is quite so. They don't know. .Of course not.
In other words, the public or any individual could buy a hundred
or a thousand shares of that stock and then go out and buy puts
on it, and the rest of the people would not know that they had
purchased a put. I t limits the loss. There are people that are put
and call brokers that do that, sell puts and sell calls.
Mr. PECORA. NOW, will you give us your reasons for the feeling
or opinion you expressed a few minutes ago that it is unsound or
unethical or unfair, whatever term you want to use, for a stock
brokerage firm that has an option on a stock to recommend to the
public or its customers the purchase of that stock? Tell us why
you think it is not a sound practice.
Mr. CUTTEN. There are so many abuses. So often an individual,
we will say, that you know that has accumulated a block of shares
in the market due to the receding market, then says, " Yotl know
that I have purchased these shares at such-and-such a price. I would
like to resell them". And he does not know how to resell them,
remarket them, and so he goes to the brokerage firm and the brokerage firm accepts the options on the stock. They in turn send out
letters, prospectuses of the company, and suggest the purchase of it.
Mr. PECORA. Suggest or recommend?
Mr. CUTTEN. I am saying suggest the purchase of them. I don't
believe m that; no, sir.
Mr. PECORA. Why don't you believe in it?
Mr. CUTTEN. Because they have something on their shelves that
they wish to sell.
Mr.
PECORA.
Yes.
Mr. CUTTEN. And they may have the option at $20 a share and
the market may be 28 or 30, and they are making 8 points. So they
are making 10 points profit on it.
175541—34—PT 13
5
5910
STOCK EXCHANGE PBACTICES
Mr. PECORA. And you think the adoption of measures intended
absolutely to eliminate that practice would be in the public interest?
Mr. CUTTEN. In a marked degree; yes, sir. But I do believe, Mr.
Pecora, that some operations against options, when it is used to what
I call police an account, maintain a market, always be there and
offer stock if other people wish to buy it or be there to buy stock
if other people wish to sell it, is m a way constructive. There is a
better market there for the stockholders of the company if they care
to sell. But during a panicky day somebody is always there buying
the stock on the scale down. True, they may be covering nothing
but a short commitment. True, if you have options that run on a
scale above the present market, some outsider has to pass on the
stock at a lower average. The stock may be a great deal higher.
Mr. PECORA. I am seeing this confidential report that was made
to you by your statistician for the first time. I t is rather a voluminous document, so I want to look it over, and then I will probably
ask you some questions about it.
(Mr. Pecora perused the document.)
In Mr. Coleman's confidential report to which I refer'and from
which I will read the statement is made:
Both Mr. Brown and Mr. Grimm have a big stake in American Commercial
Alcohol and very large stockholdings. I understand that Mr. Brown and
Mr. Grimm and two other officers hold some 64,000 shares of stock, which is
about one third of the total capitalization. Mr. Russell Brown is by far the
largest stockholder. All the officers together control about 100,000 shares of
stock, which would leave some 94,748 shares outstanding in outside sources
and in floating supply
That information conveyed to you in this report was of considerable interest to you when you contemplated taking over these options?
Mr. CXTTTEN. I believe it was; yes, sir.
Mr. PECORA. And did you discuss those figures with Mr. Brown and
Mr. Grimm when you met them?
Mr. Cumasr. No; I do not. I had met them before I had this
confidential report.
Mr. PECORA. From the fact that four of the officers and directors
of the company owned more than half of the total outstanding common capital stock of the company, plus the fact that those officers
were the ones who granted these options, it was quite apparent to
you as an experienced market operator that this stock could be traded
in with a view of sending up its price levels on the exchange with
comparatively little effort?
Mr. CUTTEN. That is true.
Senator COTJZENS. Did these men indicate to you their willingness
to lose control of the company by selling below a 50-percent holding?
Mr. CUTTEN. No; they did not, Senator.
Mr. PECORA. Senator Couzens, on that may I say that in the testimony of Mr. Brown, who was the chairman of the board that gave
these options, stated that in all the options that he gave—and these
are only 4 of a series of 8 or more that he gave all told—he gave
the options with the hope and the mental reservation that he would
not be called upon to deliver the optionees any of the shares of the
options.
Senator COUZENS. DO I understand by that, then, that he intended
to keep control and get the shares from someone else ?
STOCK EXCHANGE PKACTICES
5911
Mr. PECORA. Well, I don't know, but it would seem to me as
though the whole thing was simply planned as a market operation
to send up the price.
Senator COTJZENS. Without intending
Mr. PECORA. Without intending to let go of any of his holdings.
Or Mr. Brown phrases it as desire on his part to stabilize the market, although he could not point to any circumstances that indicated
to him that the market needed stabilization.
That is correct; isn't it, Mr. Brown?
Mr. BROWN. That is correct; yes, sir.
Senator ADAMS. I just happened to be looking at one of these
quotations, and the Hutton batting average seems to be a little better
on these other recommendations as a whole than it was on this
American Commercial Alcohol.
Mr. CUTTEN. American Commercial Alcohol finally went up 60
points.
Senator ADAMS. And then?
Mr. CUTTEN. I t is still 30 points higher. It is 50 something now.
This was when the stock was 20.
Senator COUZENS. SO that is a good reason why we should take
your recommendation ?
Senator ADAMS. That is what I am trying to find out, just how
reliable it is.
Mr. PECORA. I think that is all, Mr. Cutten. Will you leave this
report with me?
Mr. CUTTEN. Yes.
Mi. PECORA. I will
see that it is returned to you. You say this
is the only copy you have.
Mr. CUTTEN. Only one I have. I saw it today for the first time
since September 12, or whatever it was.
Mr. PECORA. NOW, Mr. Brown, will you resume the stand, please 3
TESTIMONY OF BTJSSELL R. BROWN—Resumed
Mr. PECORA. YOU have heard the testimony of the preceding witness, Mr. Cutten, haven't you, Mr. Brown ?
Mr. BROWN. Yes, sir.
Mr. PECORA. Heard all
Mr. BROWN. Yes, sir.
Mr. PECORA. Anything
of it?
that he said that you would disagree with
or that collides with your recollection of the facts that he testified
about ?
Mr. BROWN. N O ; except as to the quantity of stock that is held
by the different people.
Mr. PECORA. Are you referring now to the quotation that I read
to him from Mr. Coleman's confidential report?
Mr. BROWN. Yes, sir.
Mr. PECORA. And m which
Mr. Coleman said as follows:
Both Mr Brown and Mr Grimm have a big stake in American Commercial
Alcohol and very large stockholdings I understand that Mr. Brown and Mi.
Grimm and two othei officers hold some 64,000 shares of stock, which is about
one third of the total capitalization. Mr Russell Brown is by far the largest
stockholder All the officers together control about 100,000 shares of stock,
which would leave some 94,748 shares outstanding in outside sources and in
floating supply.
5912
STOCK EXCHANGE PBACTICES
Is that the portion you think is not strictly in accordance with the
facts?
Mr. BROWN. Well, I am quite confident I did not indicate to him
that I was the largest stockholder, because Mr. Publicker is the largest
stockholder.
Mr. PECOEA. Was it correct for Mr. Coleman to say that all the
officers together—that is, all the officers of your company together—
control about 100,000 shares of stock, bearing m mind that this report
was written on September 8, 1932 ?
Mr. BROWN. I think that might be true; I mean in the neighborhood of those figures.
Mr. PECORA. With that sole exception, you have no fault to find
with any of the testimony given by Mr. Cutten ?
Mr. BROWN. NO.
Mr. PECORA. Subsequent to the giving of these four options to Mr.
Cutten did you give any options on the stock of your company to
anyone else 2
Mr. BROWN. On the 2d of May I gave an option to Thomas E.
Bragg.
Mr. PECORA. On the 2d of May of 1933?
Mr. BROWN. Yes, sir.
Mr. PECORA. And have you a copy
Mr. BROWN. Yes, sir
Mr. PECORA. Will you produce it?
of that option ?
(The witness produced and handed a document to Mr. Pecora.)
Mr. PECORA. I S this a duplicate original or is this the original ?
Mr. BROWN. That is a duplicate.
Mr. PECORA. I am going to offer in evidence the copy produced by
the witness.
Senator ADAMS (presiding). I t will be received.
(Copy of memorandum of agreement dated May 2, 1932, between
Russell
ell R. Brown and Thomas E. Bragg was received in evidence,
marked " Committee Exhibit No. 9, Feb. 14, 1934", and appears
in the record where read by Mr. Pecora.)
Mr. PECORA. The option agreement which has been received in
evidence as exhibit no. 9 reads as follows [reading] :
COMMITTEE EXHIBIT NO. 9
Memorandum of agreement made this 2nd day of May 1933 between Russell
R Brown, 405 Lexington Avenue, New York, N Y, party of the first part, and
Thomas E Bragg, Hotel Pierre, New York, N Y, party of the second part
Whereas the party of the first part is the owner of American Commercial
Alcohol Corporation Common Stock, and
Whereas, Thomas E Bragg desires an option upon such stock on certain
terms,
Now, therefore, it is agreed by and between the parties hereto as follows •
1 In consideration of the sum of One Dollar ($100) paid by the party of
the second part, receipt whereof is hereby acknowledged, and the mutual promises herein contained, the party of the first part gives to the party of the
second part—
For a period of ninety (90) days from the date of this agreement, an option
to purchase all or any part of American Commercial Alcohol Corporation common stock in the amount and at the prices herein set forth below
25,000 shares at $18 00 per share
2 The party of the first part agrees to have shares of American Commercial
Alcohol Corporation common stock available at C E Welles & Co, 39 Broadway, New York, N Y, and/or Shearson, Hammill & Co., 14 Wall Street, New
STOCK EXCHANGE PRACTICES
5913
York, N Y, and/or such other brokerage houses as may be designated by party
of the first part for borrowing by the party of the second part, less and except
such number of shares as may be sold and delivered under this option
3 It is understood and agreed between the parties of both parts that the
option will be extended for a further period of ninety (90) days it necessary
4 It is understood that this option is to be assigned to a syndicate to be
tormed by the party of the second part
In witness whereof the party of the first part and the party of the second
part have hereunto set their hands this 2d day of May 1933
(Signed)
RUSSELL R BKOWN
Now, Mr. Brown, is the signature on this document which has
been received in evidence as exhibit no. 9 in your handwriting ?
Mr. BROWN. Yes,
sir.
Mr. PECORA. When were you first asked by representatives of this
committee to produce a copy of this option agreement ?
Mr. BROWN. December 19,-1933.
Mr. PECORA. What did you say when you were first asked?
Mr. BROWN. I did not have a copy of the option agreement. I
looked for it and I found I did not have it.
Mr. PECORA. I cannot hear you.
Mr. BROWN. I looked for it, but found I did not have it.
Mr. PECORA. When did you succeed in getting this one that you
have produced here?
Mr. BROWN. January 27.
Mr. PECORA. That is about a month afterwards?
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Mr BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Yes,
sir.
Whom did you get it from ?
I t came in this envelop [indicating].
Whom did you get it from?
52 Wall Street; no name and address or anything else.
Don't you know who sent it to you?
NO, sir.
DO you know
anybody at 52 Wall Street?
I have seen Mr. Bragg down there,
IS his office there ?
Not that I know of. I have seen him there.
Where did you see him at 52 Wall Street—in whose
office?
Mr. BROWN. W. E. Hutton Co.
Mr. PECORA. I S that a firm of stockbrokers ?
Mr. BROWN. Yes, sir.
Mr. PECORA. DO you know where Mr. Bragg is now ?
Mr. BROWN. I understand he is m Honolulu.
Mr. PECORA. What was Mr. Bragg's business in May
1933, when
you gave him this option?
Mr. BROWN. Market operator.
Mr. PECORA. He is not a member of any exchange, is he ?
Mr. BROWN. NO, sir; not that I know of.
Mr. PECORA. By " market operator" you mean a stock-market
operator ?
Mr. BROWN. Yes, sir.
Mr. PECORA. Well known as
Mr. BROWN. Yes, sir.
Mr. PECORA. Following the
such?
making of the request upon you in
December last, on behalf of this committee, for a copy of this option
5914
STOCK EXCHANGE PEACTICES
or the original thereof, what efforts, if any, did you make to comply
with the request for a copy of it?
Mr. BROWN. I went all through my files.
Mr. PECORA. And you could not find it?
Mr. BROWN. I could not find it; no, sir.
Mr. PECORA. Then what steps did you take to obtain a copy of it ?
Mr. BROWN. I have forgotten—I think I tried to get in touch with
Mr. Bragg, and I think he was out of town.
Mr. PECORA. Where did you try to get in touch with him?
Mr. BROWN. I called him at Hutton's office.
Mr. PECORA. Did you succeed in establishing communication with
him?
Mr. BROWN. Not that I remember.
Senator COSTIGAN. Does your earlier reply indicate that this paper
was received from Mr. Bragg?
Mr. BROWN. I think it was received from someone in the office
down there, apparently.
Mr. PECORA. In the office of W. E. Hutton Co.?
Mr. BROWN. Yes ,sir.
Senator COSTIGAN. Why
did you specify Mr. Bragg in your earlier
testimony?
Mr. BROWN. I think it was two nights before this that I received
calls from Mr. McEldowney, of Mr. Pecora's office, and also from
Mr. Silver—and I had just left a board meeting of the company—
they insisted on the production of the option, and I again had a
search made through the files; and these calls came in with quite
some regularity
Mr. PECORA. And insistence?
Mr. BROWN. And much insistence, about every 15 minutes, until
during the course of the evening—I have forgotten who it was that
spoke to me, but I think it was Mr. Silver, and he asked me if I
knew where Mr. Bragg was. I told him I did not, but I understood
he was up in British Columbia at a gold mine, or something. They
asked me if I would like to know where he was. I said I would be
very happy to know, because I was perfectly willing to do what I
could to get this option; and they said he was at the mark Hopkins
Hotel, San Francisco, and that if I cared to I could call him on
the phone. I called him on the phone immediately and got him on
the phone and asked him where this option was. Apparently he
did not know where the option was when I talked to him, and I
tried to get it because I told him that there was no reason in the
world why the thing should not be turned in, and I just didn't have
it. I couldn't remember then what had happened to it. I came
down to Washington that night after having been served in the office
at half past 9 with a subpena by Mr. McEldowney, of Mr. Pecora's
office; and when I got back to my office the following morning from
Washington this was on the desk.
Mr. PECORA. Did it come by mail or by messenger ?
Mr. BROWN. It came by mail
Mr. PECORA. With no covering letter?
Mr. BROWN. NO covering letter.
Mr. PECORA. Or memorandum of any kind?
STOCK EXCHANGE PRACTICES
5915
Mr. BROWN. Nothing, except that document that you have here
was in the envelop. So apparently what had happened was that
I had sent, if my memory serves me correctly now—I had sent the
option down and he never had returned a signed duplicate to me; and
I also remember distinctly having asked him after the option was
given, to return the option to me, to return my copy, but I never
got it, and I had forgotten that at the time.
Mr. PECORA. DO you recall that during all these contacts you had
with Mr. Silver and Mr. McEldowney and Mr. Schenker of our
office in New York you were also asked to produce copies of these
other options made with
Mr. BROWN. I was never asked to produce copies of these other
options.
Mr. PECORA. Were you asked if there were such copies in existence?
Mr. BROWN. NO, sir; I never was.
Mr. PECORA. DO you have copies of these other options in your
possession ?
Mr. BROWN. Not until
Mr. PECORA. Not until very, very recently?
Mr. BROWN. I got these things here the other day from everybody.
Mr. PECORA. From the optionees ?
Mr. BROWN. Yes; and Mr. Bliss' received here this morning.
Mr. PECORA. When did you talk to Mr. Bragg last ?
Mr. BROWN The night that some one from your office there suggested that if I wanted to I could call him. I called him then.
Mr. PECORA. He was then out in San Francisco ?
Mr. BROWN. He was at the Mark Hopkins Hotel there.
Mr. PECORA. And you called him?
Mr. BROWN. Yes.
Mr. PECORA. YOU
told him we insisted on a copy of this option
being produced? In substance you said that to him?
Mr. BROWN. Yes.
Mr. PECORA. Did
you suggest t a him that his secretary turn over
the option to you so that we might get it?
Mr. BROWN. I did.
Mr. PECORA. Did he say in substance that he had no secretary?
Mr. BROWN. Yes.
Mr. PECORA. He has a secretary, has he not ?
Mr. BROWN. Not that I know of.
Mr. PECORA. DO you know a Mr. Quinn?
Mr. BROWN. Yes.
Mr. PECORA. Who is he?
Mr. BROWN. There he is, sitting back there [indicating].
Mr. PECORA. Who is he? Is he connected with Mr. Bragg?
Mr BROWN. I have seen him down in W. E. Hutton's office, but
I don't know whether he is connected with Mr. Bragg or not.
Mr. PECORA. Have you no idea at all as to the identity of the person who mailed you this option that has been offered in evidence and
received as exhibit no. 9 ?
Mr. BROWN. NO, sir; I have not.
5916
STOCK EXCHANGE PEACTICES
Mr. PEOORA. Let us get back to the option. Mr. Chairman, I think
I might make thi£ as a sort of preliminary statement before proceeding with the further examination of Mr. Brown. It will be
recalled that on about July 18, 1933, there was a very violent fluctuation downward of securities values on the New York Stock Exchange, and the movement was led, according to the current reports
of the time that I read, by the so-called "repeal stocks or alcohol
stocks ", one of which was the American Commercial Alcohol Corporation.
A few days after that date I called upon Mr. Eichard Whitney,
president of the New York Stock Exchange, and suggested to him
that he exercise the powers vested in him by the rules, regulations,
and bylaws of the New York Stock Exchange and make an inquiry
into the market trades in these alcohol stocks, so called, for a period
of 3 preceding months—that is, from May 15 to July 24, 1933—2
months or more. I told him that information had been conveyed to
me that these alcohol stocks had been traded in for pool accounts.
Mr. Whitney very gladly undertook to make the investigation and
said he would give me a report of the investigation when completed.
I received such a report from him under date of October 16, 1933,
and I have it before me now. I now offer it in evidence with the
accompanying letter. On account of the very voluminous character
of the document I merely ask that it be marked in evidence but not
spread in full on the record. I will make reference to it from time
to time.
Senator ADAMS (presiding). Let it be received.
(Copy of report made by accounting department of the New York
Stock Exchange covering the period from May 15 to July 24, 1933,
was received in evidence and marked " Committee Exhibit No. 10,
February 14, 1934.")
Mr. PECORA. I wish only to read the accompanying letter addressed
to me by Mr. Whitney. I t is on the letterhead of the New York
Stock Exchange, and reads as follows [reading]:
RICHARD WHITNEY, President
NEW YORK STOCK EXCHANGE,
Eleven Wall Street, October 16, 1938
FERDINAND PECORA, ESQ ,
Counsel, United States Senate Sub-Comjrmttee
on Banking and Currency,
285 Madison Avenue, New York, N Y
MY DEAR MR PECORA : As promised in my letter of even date, I enclose here
copy of the report made by our Accounting Department concerning the trading
in the so-called alcohol stocks during the period from May 15th to July 24th,
1933
Faithfully yours,
(Signed)
RICHARD WHITNEY,
President,
I also want to read into the record the letter transmitting the
report made by the accounting department of the New York Stock
Exchange to the Committee on Business Conduct of the New York
Stock Exchange. I t is dated October 1, 1933, and reads as follows
(reading):
STOCK EXCHANGE PBACTICES
5917
OCTOBER 1, 1933
COMMITTED ON BUSINESS CONDUCT, NEW YORK STOCK EXCHANGE
GENTLEMEN: In accordance with instructions, I have had examinations and
inquiries made in connection with trading and operations during the period
May 15, 1933 to July 24, 1933 in the following stocks:
American Commercial Alcohol
Commercial Solvents
Libbey-Owens-Ford Glass
National Distillers Products Corp.
Owens-Illinois Glass
U.S. Industrial Alcohol
Particular attention was directed toward the endeavor to ascertain whether
or not operations of a manipulative nature had occurred, especially the accumulation of large long positions by pools or syndicates causing a rise in price
and subsequent operations which might be construed as "unloading" by such
pools or syndicates
The examinations were based on information supplied by the Stock Clearing
Corporation as to firms having any substantial balances to receive or deliver in
the above stocks This was broadened as "clearances" for other firms were
observed
Various records of the firms in question were inspected in sufficient detail to
satisfy the examiner that all transactions for the period were exhibited in
each case
With the exception ot the situation disclosed at Lehman Bros and Kedmond
& Co, which situations also are reflected in a minor way in other firms used
as their brokers and the possible exception of the situation at W E Hutton &
Co, which is still under investigation, no material situation appears
While the limitations of time available for these examinations precluded a
detailed examination and " tie up " of every transaction, it is my opinion that
there were no material deliberate improprieties in connection with transactions
in these securities Although the "repeal" situation appears to have created
a public interest in these stocks great enough to account for their activity, each
examiner was directed to watch out for any evidence of " wash sales " or of
other activities which might have stimulated improperly the activity of these
stocks, yet none were reported
However that you may have the facts in detail, if desired, a separate
report on the examination made up at each of the 100 firms shown on list
herewith is respectfully submitted
(Signed)
JOHN DASSAU,
Accountcmt
It is my purpose, by proofs which I will subsequently offer, Mr.
Chairman, to leave it to the determination of this committee as to
whether or not in these market operations there were any material
deliberate inproprieties in connection with the transactions in these
alcohol stocks.
I t is now 4:30.
Senator ADAMS. The committee will stand adjourned until 10:30
tomorrow morning; and the witness will please return at that time.
(Whereupon, at 4:30 p.m., the committee adjourned until tomorrow, Thursday, Feb. 15,1934, at 10:30 a.m.)
STOCK EXCHANGE PEACTICES
THURSDAY, FEBRUARY 15, 1934
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,
Washington, D.C.
The committee met at 10:30 a.m., pursuant to adjournment on yesterday, in room 301 of the Senate Office Building, Senator Duncan
U. Fletcher presiding.
Present: Senators Fletcher (chairman), Bulkley, Costigan,
Adams, Goldsborough, 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.
The CHAIRMAN. The committee will come to order, please. Who
will you have first, Mr. Pecora?
Mr. PECORA. Mr. Brown will resume the stand.
TESTIMONY OP KXJSSEIL R. BROWN, CHAIRMAN OP THE BOARD,
AMERICAN ALCOHOL CORPORATION, NEW YORE CITY—
Resumed
Mr. PECORA. Mr. Brown, there was introduced in evidence toward
the conclusion of the hearing yesterday a copy of an option that you
gave to one Thomas E. Bragg, covering 25,000 shares of the capital
common stock of the American Commercial Alcohol Corporation at
$18 a share.
Mr.
BROWN. Yes, sir.
PECORA. That option
Mr. BROWN. Yes, sir.
Mr. PECORA. Let me ask
Mr.
is dated May 2, 1933, as you know.
you if anyone was associated with you
in the giving of this option.
Mr. BROWN. Mr. Kies, Mr. Publicker, and Mr. Grimm.
Mr. PECORA. The same three gentlemen who were
Mr. BROWN (interposing). Who have heretofore participated;
yes, sir.
Mr. PECORA (continuing). Associated with you in the giving of
the other options prior to May 2, 1933, is that right?
Mr. BROWN. That is correct.
Mr. PECCRA In what proportions were they interested in this
option ?
Mr. BROWN. Well, that was never discussed, I believe. They
agreed to join in the, whole situation for the purpose of relieving the
corporation's financial position. There was never any agreement as
to the proportion which each one would assume.
5919
5920
STOCK EXCHANGE PRACTICES
Mr. PECORA. I do not quite understand how, when you say that
the option was given to relieve the corporation's financial condition,
that would come about. What do you mean by that?
Mr. BROWN. Why
Mr. PECORA (interposing).
The reason I ask you that question is,
that this option is not given by the corporation.
Mr. BROWN. NO, sir.
Mr. PECORA. But is given in form at least by you ?
Mr. BROWN. Yes, sir.
Mr. PECORA. But in fact was given by you in behalf
of yourself,
Mr. Kies, Mr. Grimm, and Mr. Publicker, is that it?
Mr. BROWN. That is correct.
Mr. PECORA. Well, then, why did you say that this option was
given for the purpose of relieving the corporation's financial condition 9
Mr. BROWN. Because this option here, as evidenced by the minutes of the board of directors of the meetings of April 27, 1933, and
May 2,1933, and subsequent board minutes, is m line with the statement I submitted to you on yesterday in connection with the entire
transaction.
Mr. PECORA. Will you please tell us in your own way just what
you are referring to? Here we have an option given by you individually to Mr. Bragg covering 25,000 shares of the common stock
of your corporation at $18 a share.
Mr. BROWN. Yes, sir.
Mr. PECORA. The corporation isn't a party to the option.
Mr. BROWN. That is correct, sir.
Mr. PECORA. The corporation, according to the terms of
the option, had no interest in it.
Mr. BROWN. That is correct, sir, but
Senator TOWNSEND (interposing). What was the date of the option, Mr. Pecora ?
Mr. PECORA. It is dated May 2, 1933.
Senator TOWNSEND. All right.
Mr. PECORA. Mr. Brown, why was it necessary for the corporation's board of directors to adopt any resolutions at its meetings
of April 27 and May 2, 1933, with respect to this option?
Mr. BROWN. There was submitted to the board of directors at
a meeting on April 27, 1933, a verbal statement by me to the board,
indicating the financial situation of the company at that particular
time, and the board members were advised that methods were being
studied to bring into the corporation additional funds. As a result
of communications by the banks, as was indicated in my statement
of yesterday, such moneys as were owned to the banks, it was indicated in no uncertain terms, they wanted paid. And it was purely
in order to work out some method by which funds could be brought
into the corporation that this method, which was finally adopted,
was finally worked out.
Senator TOWNSEND. Have you a copy of the financial statement of
your corporation of that date?
Mr. BROWN. Here is one on March 31, which is the nearest statement that I have here. It indicates clearly the situation, which I
perhaps better explain. In this business, that is, as the business
STOCK EXCHANGE PRACTICES
5921
existed at that time, it was necessary to purchase very substantial
quantities of raw material, of molasses, in advance of its consumption, purchased out of the country, and commitments were made
6 months and sometimes a year in advance, so that the company
was always sure of a supply of its raw material, molasses.
Mr. PECORA. Well, now
Senator TOWNSEND (interposing). What was your indebtedness at
that time ?
Mr. BROWN. The indebtedness of the company at that time was
$836,500. But trade acceptances of the company at that time were
$539,612.97, or a total of $1,376,112.97, in notes and acceptances payable. Accounts payable of the corporation were $191,539.69, making
a total of current liabilities of the corporation $1,567,652.66, as compared to a total assets position of $2,866,761. That current assets
position included raw materials and supplies in the amount of $979,210.17, and advance payments on raw materials purchased of $238,907.06. I think it is safe to assume that that in general covers the
molasses picture, because in the operation of our main plant m
Pekm, 111., we usually ha^ve followed the policy of paying cash for
gram, buying and paying cash as the gram was required. That
molasses inventory was inventoried on December 31, 1932, at cost or
the market, whichever was lower at the time. That price, if I remember correctly, was approximately 4 cents a gallon. Those adjustments or inventory write-downs are made at the end of the year.
The inventory, as I remember it on December 31, 1932, was carried
at a price of approximately 4 cents per gallon for 0.50 sugar landed
in our tanks in this countiy. The sugar content of molasses varies.
I t runs sometimes as high as 0.70 sugars, and was for the purpose of
our inventories calculated and carried on the price of 4 cents, which
I have indicated to you is the base of 0.50 sugar.
Senator TOWNSEND. YOU had no bonded debt ?
Mr BROWN. There was no bonded debt at the time.
Senator TOWNSEND. And that was the total of your indebtedness ?
Mr. BROWN. Yes. But at that time all that total of $1,218,000
meant that there was approximately 20 million gallons of molasses
involved. I t might have been somewhat more, as indicated by the
advance payments on raw material purchased, which did not represent the total at that time, March 31, 1933. In the latter part of
February there was a very sudden and decided shrinkage in the
price of molasses. Transactions were had at, I should say, about 2y2
cents a gallon landed in the States. It is true that the situation
today is completely reversed. The company has very substantial
inventories of molasses at prices considerably below the price at
which it is being currently quoted. But in going over this entire
situation I was interrogated by one of the banks, and I pointed out
to them that inasmuch as the company, or that the commitments of
the company were known, and there were no other commitments
coming along, and in the normal course of business during the year
the inventories would be liquidated and the company would be in
position to reduce its liabilities as the material was sold; and that I
think started in—well, those discussions were some time in March*
Then in April the situation became somewhat worse, because m my
discussions with the bankers I pointed out that according to past
5922
STOCK EXCHANGE PRACTICES
practices for a great many years in the alcohol industry, substantial
quantities of antifreeze alcohol were sold during the months of May
and June, and that by going along until May or June it would be
possible, as we had found in all previous years, to move substantial
quantities of alcohol, probably a million or a million and a half
gallons, to the large consumers, and we would then also receive
additional cash in addition to the ordinary income of the business.
Then just at that time I learned that the larger companies in
the industry suddenly announced that they did not feel that the
alcohol companies, that the merchandising policies in the past had
been proper, and we felt it would be possible to develop a better
merchandising policy, and for that reason I indicated, or they indicated that their policy would be to dispose of their alcohol on a
certain basis. The result of that was that a substantial movement
in the alcohol industry would not take place until November or
December, when there was cold weather, and it was apparent that
the company would not have the ordinary receipts from the sale
of its merchandise, as it had theretofore had, which made the situation even more desperate than was apparent when the discussions
first started.
It then became necessary for us to make a complete study of the
situation, to bring funds into the company. I think TMr. Kies,
chairman of the executive committee, made a study of the whole
situation, made inquiries among friends of his, and of bankers, to
see whether or not at that time it would be possible to work out
anything by which an offering by underwriters to stockholders
could be secured, and by that means funds could be brought into
the company. I t was deemed that
Mr. PECORA (interposing). When did the directors or any of the
officers of the company first begin to give thought to the development
of that situation ?
Mr. BROWN. I should say that that came in in March.
Mr. PECORA. In March of 1933?
Mr. BROWN. I think that is so, because I remember that we had a
discussion of the whole situation after I came back from a visit to
one of the banks.
Mr. PECORA. Well, in March of 1933 the situation already had
developed and was visible on the horizon which made it necessary
for the company to obtain additional working capital, not only for
its business operations, but in order to meet bank loans that were
maturing, is that1 right?
Mr. BROWN. Yes, sir.
Mr. PECORA. When were those bank loans maturing?
Mr. BROWN. Currently.
Mr. PECORA. What was the aggregate of those maturing
in the
spring of 1933?
Mr. BROWN. They were all maturing at about the same date, because as I have just stated the thing had to be settled, and we
were
Mr. PECORA (interposing). What was the total of those loans, was
my question.
Mr. BROWN. I t was $1,376,112.
Mr. PECORA. Maturing when?
STOCK EXCHANGE PBACTICES
5923
Mr. BROWN. Maturing right along in that time.
Mr. PECORA. HOW many loans represented this aggregate of
$1,376,112?
Mr. BROWN. I should say five different banks. I will say further
to you, Mr. Pecora, that the bank we had the largest amount of money
from agreed to go along with the company also.
Senator TOWNSEND. Was raw material pledged as collateral for
those loans?
Mr. BROWN. Just a certain quantity at New Orleans, which was
pledged with the Whitney National Bank at New Orleans. And as
the price of molasses decreased they just wanted more molasses put
up all the time.
Mr. PECORA. NOW, Mr. Brown, do I understand you to say to this
committee that the option given to Bragg on May 2,1933, is in some
way directly related to the necessity which became apparent to the
officers of tne company in March of 1933, that it would have to raise
additional working capital?
Mr. BROWN. That is correct, sir.
Mr. PECORA. All right, for that. Now, in view of the fact that
this option is not given by the corporation, and does not provide for
the corporation receiving any part of the purchase price which the
optionee would be required to pay for the 25,000 shares optioned to
him at $18 per share, how did this option serve to provide your company with that increased or additional working capital?
Mr. BROWN. A S I have indicated to you, considerable thought was
given to the whole problem, to the necessities of the occasion. We
viewed the duties of the executives of the corporation as being there,
of their duty within all legal means possible to protect the interests
of the corporation and the interests of the stockholders. And so,
after making* a very complete survey of all the possibilities, and
realizing at tne time that it was absolutely impossible, as the most of
us know, to raise additional funds at that time, the study of the whole
situation was continued; and we at that time had under consideration, it having been brought to our attention in January, the possibility of securing an interest in an organization which had developed
a process for the manufacture of an agricultural spray, which, it was
represented, would use very substantial quantities of alcohol. And
a study was made of the whole situation by the executive officers of
the company, including Mr. Buck of San Francisco, one of the directors, who made a visit to the particular plant to study the whole
situation. At the time that this other situation developed it was
realized it was absolutely impossible to raise cash in order to carry
out this transaction, I mean in the usual way, and
Mr. PECORA (interposing). What transaction are you now referring to?
Mr. BROWN. For the acquisition of this item I have been talking
to you about, this agricultural spray.
Mr. PECORA. DO you mean the acquisition of a company that
manufactured some agricultural spray ?
Mr. BROWN. Yes, sir; and which was using very considerable
quantities of alcohol in the process.
Mr. PECORA. Are you telling us that thi^ option given to Bragg
is related in some way to the desire of the American Commercial
Alcohol Corporation in the spring of 1933
5924
STOCK EXCHANGE PRACTICES
Mr. BROWN (interposing). As I have said
Mr. PECORA (continuing). Pardon me a minute and let me finish
my question—to acquire some other interest that manufactured an
agricultural spray?
Mr. BROWN. AS I continue my story I will give you all of the
details of that.
Mr. PECORA. First, if you can answer this one question: You have
already made it quite clear to the committee that the reason for the
giving of this option to Bragg on May 2, 1933, was to enable your
company, the American Commercial Alcohol Corporation,
to obtain
additional working capital. Now, is that correct9
Mr. BROWN. That is correct.
Mr. PECORA. NOW, how in the world was your corporation to get
additional working capital through the sale by you individually and
three of your fellow officers and directors m the corporation, of
25,000 shares of the capital stock of the company that belonged, not
to the corporation, but to you and your three associates? That is
what I want to know.
Mr. BROWN. Well, if you will permit me to continue the story I
think it will be made perfectly clear to you. We realized that
Mr. PECORA (interposing). Well, the story I want to bring out if
I can is that
Mr. BROWN (interposing). And I am giving that to you.
Mr. PECORA (continuing). I want to bring out as directly as possible this point: How the money which Bragg was to pay for those
25,000 shares, covered by this option at $18 a share, and which
amounts to $450,000
Mr. BROWN (interposing). Yes, sir.
Mr*. PECORA (continuing). Was to be paid to the corporation in
view of the fact that the corporation was not a party to this option*
Mr. BROWN. I will indicate that to you very definitely and clearly
if I can go on with my story.
Mr. PECORA. Oh, well.
Mr. BROWN. It is possible for us under the Maryland charter to
issue the stock of the corporation for a profit. At the discussion
before the board on April 27, 1933, I indicated to the board that I
believed a method had been developed by which this transaction
could be accomplished and the finances of the consolidated organization very materially improved. That was, namely, this: There
were two propositions under consideration. One was through the
Maister Laboratories Co, and the other was Noxon, Inc. The
securities of these two companies could be acquired by the issuance
of additional common stock of our corporation. I pointed out
to the board in a general way that due to the financial necessities of the corporation I was perfectly willing to work out a transaction by which the results desired could be accomplished, feeling
that
Mr. PECORA (interposing). Why couldn't the results have been
accomplished by the issuance and sale of those additional shares of
capital stock
Mr. BROWN (interposing). As I have indicated to you
Mr. PECORA (continuing). To the existing stockholders of the corporation of record
STOCK EXCHANGE PRACTICES
5925
Mr. BROWN (interposing). As I have indicated to you
Mr. PECORA (continuing). And m that way an additional amount
of working capital would have been brought directly into the treasury of the corporation.
Mr. BROWN. Well, that could not have been accomplished in that
way, because it would not h%ve been possible, and it was not possible,
as was determined as the result of study, for the company to acquire
an underwriting for such stock as it might issue, assuring to the
company receipt of the funds from the sale of the stock into the
treasury of the company.
Mr. PECORA. All right. Go ahead. I am listening.
Mr. BROWN. Well, that is it.
The CHAIRMAN. HOW would the proceeds of the sale of this stock
get into the treasury of the company?
Mr. BROWN I will indicate that to you, Senator Fletcher, in this
way: It was, as I indicated in my statement on yesterday, a fact that
this transaction took place for the entire benefit of the corporation,
and at a financial sacrifice to me. And the results of the efforts
which were put forth by the management at that time, and handling
the transaction as it was handled, improved the financial condition
of the company. That is reflected in the condition of the company
today, in which the business is very substantial, and it would not have
been possible if funds had not been put into the company at that
time. The results were accomplished m this way
Mr. PECORA (interposing). Well, don't tell us about the results as
yet, but tell us
Mr. BROWN (interposing). I am telling you
Mr* PECORA (continuing). Why this option agreement with Bragg
was resorted to on May 2, 1933
Mr. BROWN (interposing). All right.
Mr. PECORA (continuing). In order to enable your corporation to
obtain additional working capital in the sum of $450,000. Now
Mr. BROWN (interposing). The plan was
Mr. PECORA (continuing). If the corporation had made this option
or agreement with Bragg to sell to him at the rate of $18 per share,
25,000 shares of the corporation, it would not be necessary to ask
you all these questions, Mr. Brown.
Mr. BROWN. I understand that.
Mr. PECORA. But the corporation did not give the option.
Mr. BROWN. I understand that.
Mr. PECORA. YOU and three of your fellow officers and directors
gave Bragg the option.
Mr. BROWN. That is correct.
Mr. PECORA. Out of your personal holdings the stock was to come.
Mr. BROWN. Yes, sir.
Mr. PECORA. And I am still trying to find out why
Mr. BROWN (interposing). All right.
Mr. PECORA (continuing). The corporation was expected
to obtain
$450,000 of additional working capital through a sale by you and
three of your fellow officers and directors, to Thomas E. Bragg, for
that sum of $18 per share, 25,000 shares of your personal holdings in
the company.
Mr. BROWN. I discussed the situation, and I evolved this plan
that I indicated to you in my statement of yesterday,
175541—34—PT 13
6
5926
STOCK EXCHANGE PRACTICES
Mr. PECORA. Well, I am still trying to find out
Mr. BROWN (interposing). And I am giving it to you right now.
Mr. PECORA. All right. Go ahead.
Mr. BROWN. I evolved this plan by which Mr. Phagan and Mr.
Capdevielle, who were friends of mine, and in whom I had confidence, and who had confidence in me, Mr. Phagan having originally
brought the Noxon, Inc., transaction to us—I say, I evolved this
plan to enter into an agreement. Mr. Phagan was to organize
Maister Laboratories Co. under the lays of the State of Maryland,
and he put in his note to that company, in exchange for the stock
of the Maister Laboratories Co., for $180,000. That note was endorsed by his wife, and we believed that the note was good.
Mr. PECORA. YOU say you believed that a note of Phagan's, endorsed by his wife, was good?
Mr. BROWN. Yes, sir.
Mr. PECORA. What basis did
Mr. BROWN. The statement
you have for that belief ?
I have given you, of having known
him for a period of years, and
Mr. PECORA (interposing). What did you know about his and
his wife's financial responsibility?
Mr. BROWN. I did not know definitely. I had to assume that it
was good.
Mr. PECORA. Oh! You had to assume that it was good.
Mr. BROWN. Yes, sir.
Mr. PECORA. On what
did you base that assumption, merely guessing at it from having known him for a number of years?
Mr. BROWN. From the statement he made to me.
Mr. PECORA. What statement did he make to you that indicated he
was good for that amount?
Mr. BROWN. That he was good for that amount, he and his wife.
Mr. PECORA. And you had known him for a number of years?
Mr. BROWN. Yes, sir.
Mr. PECORA. And you invited his cooperation in this plan, you say?
Mr. BROWN. Yes, sir.
Mr. PECORA. Why did you go to Phagan to invite his cooperation
in a plan which you say you evolved, and which plan involved his
giving a note for approximately $180,000?
Mr. BROWN. Because Mr. Phagan was a man in whom I had
confidence.
Mr. PECORA. What was Mr. Phagan's business?
Mr. BROWN. Certified public accountant.
Mr. PECORA. Did he ever do any work for you?
Mr. BROWN. From time to time; yes, sir.
Mr. PECORA. Did you ever have a financial statement from him?
Mr. BROWN. NO, sir.
Mr. PECORA. Did you
Mr. BRO^N. NO, sir.
Mr. PECORA. Did you
know anything at all about his income?
know anything at all about his property
worth?
Mr. BROWN. NO.
Mr. PECORA. And
merely because you had known him for a number
of years, and he had done some work for you as a certified public
accountant, you found he was good for $180,000; is that it?
STUCK EXCHANGE PRACTICES
5927
Mr. BROWN. That is correct.
Mr. PECORA. I S that the kind of business judgment which you
generally display in passing ujjon such important matters?
Mr. BROWN. Well, no; that is not correct. No; I do not display
that kind of business judgment generally.
Mr. PECORA. This was an exceptional case, then ?
Mr. BROWN. Yes, sir; this was exceptional.
Mr. PECORA. It was a departure from the usual judgment that you
display?
Mr. BROWN. Yes; it was a departure. As I indicated to you on
yesterday, it was done in this abnormal way, due entirely to the con*
ditions which existed at that time.
Mr. PECORA. Well, now that you have made that admission, tell
us what the plan was. Give us the details of the plan that you say
you evolved, and under which it was possible for the American
Commercial Alcohol Corporation to receive into its treasury $450,000
by virtue of this option given by you to Bragg, or given by you and
three of your associate officers in your individual capacities.
Mr BROWN. Mr. Phagan, under my direction, organized Maister
Laboratories Corporation, with 10,000 shares ox capital stock, and
having a value, in my opinion, even with the contracts which were
put into the corporation covering this process owned by Dr. Maister,
substantially in excess of any note that Phagan gave.
Mr. Pecora. Mr. Committee Keporter, will you please repeat to
me that last answer given by the witness?
(Thereupon the committee reporter read the answer, as follows:)
Mr. BEOWN. Mr. Phagan, under my direction, organized Maister Laboratories
Corporation, with 10,000 shares of capital stock, and having a value, in my
opinion, even with the contracts which were put into the corporation covering
this process owned by Dr. Maister, substantially in excess of any note that
Phagan gave.
Mr. PECORA. Mr. Brown, do you mean by that answer that when
you spoke to Phagan, and when you discussed with him the plan you
had evolved for the incorporation of Maister Laboratories Corporation, that that Maister Laboratories Corporation, a newly born corporation, at the very outset possessed assets worth at least $180,000?
Mr. BROWN. I believe it possessed assets substantially in excess of
that sum.
Mr. PECORA. What did those assets consist of?
Mr. BROWN. The assets consisted of a contract with Dr. Maister
and
Mr. PECORA (interposing). A contract made by whom with Dr.
Maister?
Mr. BROWN. Made by the corporation.
Mr. PECORA. DO you mean made by your corporation?
Mr. BROWN. N O ; made by Maister Laboratories, Inc.
Mr. PECORA. In other words, this corporation that you had arranged to create entered into a contract with Dr. Maister that gave to
the corporation assets worth at the outset at least $180,000; is mat it?
Mr. BROWN. In my opinion; yes, sir.
Mr. PECORA. What were those assets?
Mr. BROWN. They consisted of certain secret processes for the
manufacture of vitamin products which are sold today in very
substantial quantities at substantial profits to pharmaceutical houses.
5928
STOCK EXCHANGE PEACTICES
Mr. PECORA. Did Dr. Maister turn over those secret processes?
Mr. BROWN. Yes, sir.
Mr. PECORA. Who was Dr. Maister?
Mr. BROWN. He was a fermentologist from Germany, who came
to
the American Commercial Alcohol Corporation as a iermentologist.
Mr. PECORA. He was an employee of your corporation, was he, at
this time?
Mr. BROWN. He was m charge of this work. Our only understanding with Dr. Maister at the time of his employment, and we
had no rights over this process and knew nothing about the process,
was that he was purely a fermentologist in charge of our fermentological operations at the different plants.
Mr. PECORA. Was the Maister Corporation caused to be organized
or created by you?
Mr. BROWN. Yes,
sir.
Mr. PECORA. On what date ?
Mr. BROWN. Instructions were issued for the organization of it
about the 1st of May, I should say.
Mr. PECORA. Dr. Maister had been in the employ of the American
Commercial Alcohol Corporation for how long prior to the giving
of this option to Bragg on May 2,1933 ?
Mr. BROWN. Perhaps a period of 6 months.
Mr. PECORA. And he was a salaried employee ?
Mr. BROWN. He was purely a salaried employee in charge of the
fermentation of molasses at the distilleries.
Mr. PECORA. What compensation did he receive from the American Commercial Alcohol Co. for his services as a chemist at that
time?
Mr. BROWN. Approximately $5,000 per annum.
Mr. PECORA. $5,000 per annum?
Mr. BROWN. Yes.
Mr. PECORA. And
this man, $5,000 employee of your company,
had evolved secret formulas and processes
Mr. BROWN. Yes,
sir.
Mr. PECORA. For the manufacture of certain products ?
Mr. BROWN. Yes,
sir.
Mr. PECORA. Chemical products ?
Mr. BROWN. Yes, sir. Let me explain to you
Mr. PECORA (interposing). And he was going to turn over those
secret processes to the company called " the Maister Corporation " ?
Mr. BROWN. Maister Laboratories, Inc.
Mr. PECORA. Maister Laboratories, Inc., which you caused to be
organized ?
Mr. BROWN. That is correct, sir.
Mr. PECORA. In return for what?
Mr. BROWN. I have forgotten just what the details of the contract were.
Mr. PECORA. What, substantially, was the consideration that Dr.
Maister
Mr. BROWN (interposing). He received
Mr. PECORA. Wait a minute; let me finish my question. Substantially what was the consideration that Dr. Maister was to receive
from Maister Laboratories, Inc., for these highly valuable secret
processes
and formulas ?
STOCK EXCHANGE PEAOTICES
5929
Mr.
Mr.
Mr.
Mr.
Mr.
Mr.
BROWN. 1 think a royalty on the production.
PECORA. A royalty on the production?
BROWN. I believe so.
PECORA. HOW much has he received under that arrangement?
BROWN. He has not received anything as yet.
PECORA. Has not received anything?
Mr. BROWN. NO, sir.
Mr. PECORA. What is the matter? These valuable processes have
not established any commercial value yet ?
Mr. BROWN. N O ; that is not correct, Mr. Pecora. Immediately
upon the organization of this corporation
Mr. PECORA (interposing). You mean the Maister Laboratories?
Mr. BROWN. The Maister Laboratories—we took on additional
employees at our Philadelphia plant, where Dr. Maister was located. We went on, made additional tests at the University of
Wisconsin. We bought certain equipment at Philadelphia, and
niany hundreds of rats over there, which is the testing period. We
did work at the Philadelphia plant.
It was then determined that the product which he would turn
would be better produced at the Pekin, 111., plant. Due to the atmospheric conditions out there, better type of water supply, and
the use of gram rather than molasses as the base for the manufacture of these vitamin products, it was decided to make the change.
Dr. Maister was transferred, after these tests had been conducted
at the Philadelphia plant, to the Pekin plant for work out there, and
at that time it became necessary because of prohibition repeal to
effect certain changes. The plan was laid out at that time to use
one of the old buildings for Dr. Maister's operation, because it
requires a down flow of material, and we wanted to save money
rather than build a new building. We were having to spend some
amount of money on the distillery at Pekin to make it what Jt is
today, and m doing that we have eliminated from the operation
the building which is called the mill building, and in that Dr.
Maister's installation is to be made.
Mr. PECORA. All of this is part of your explanation, Mr. Brown,
as to how the American Commercial Alcohol Corporation was to
receive $450,000 which it needed for additional working capital in
May 1933 under this option given by you and your three fellow
officers to Bragg?
Mr. BROWN. That is correct, sir. I will go on and tell you how
the funds came into the corporation. A meeting was had on April
22 and another meeting on May 2, at both of which meetings the
members of the board agreed to support me in my efforts to financially rehabilitate the corporation, and the Maister thing was
organized. Phagan's note of $180,000 was put into the company.
He was also
Mr. PECORA (interposing). What is that?
Mr. BROWN. Mr. Phagan's note for $180,000.
Mr. PECORA. Oh, his note for $180,000 endorsed by his wife was
put into the company?
Mr. BROWN. That is correct; yes, sir. And the Maister contract
went into the organization also. He then was possessed of 10,000
shares of Maister stock.
5930
STOCK EXCHANGE PBACTICES
Senator TOWNSEND. Out of a total of how many?
Mr. BROWN. That is the total issue of stock.
Senator TOWNSEND. He owned it all?
Mr. BROWN. Yes. He was putting in this contract with Maister
and the $180,000 not, into the corporation.
Mr. PECORA. Phagan?
Mr. BROWN. Phagan. Phagan then acquired the 10,000 shares of
the Maister stock, and he immediately proceeded to organize that
corporation, and I think the contract was made on the 6th day of
May and the corporation organization, I think, was on the 8th of
May.
Senator TOWNSEND. Who were the owners of the stock?
Mr. BROWN. Mr. Phagan was the owner of the stock.
Then he offered a proposition to the company which was accepted
by the board of directors to receive 10,000 shares of American Commercial Alcohol stock in exchange for the 10,000 shares of Maister
stock, Maister thereby becoming a wholly-owned subsidiary of the
American Commercial Alcohol Corporation. That stock of Phagan's
was liquidated under this option at $18 a share. The cash was received into his account and we liquidated his note.
Mr. PECORA. Wait a minute; just a moment. You say the stock
of Phagan was liquidated under this option to Bragg?
Mr. BROWN. Yes.
Mr. PECORA. HOW?
Mr. BROWN. Delivered
to Bragg; either delivered directly to Bragg
or delivered to me in return for the option which I had previously
given.
Mr. PECORA. Will you go ahead then and continue your explanation of how the American Commercial Alcohol Co. was to get
$450,000 under this option agreement with Mr. Bragg?
Mr. BROWN. Yes, sir. Then at the same time steps were immediately taken in connection with the Noxon, Inc., Capdevielle
Mr. PECORA. When was the Noxon, Inc., organized ?
Mr. BROWN. I t was started immediately and I think the organization was completed some time in June.
Mr. PECORA. Of 1933?
Mr. BROWN. Yes.
Mr. PECORA. That is a month after the giving of this option ta
Bragg?
Mr. BROWN. That is correct, sir; yes.
Mr. PECORA. Who caused it toi be organized?
Mr. BROWN. I did.
Mr. PECORA. In behalf
of the American Commercial Alcohol
Corporation?
Mr. BROWN. That is correct, sir; for the benefit of the American
Commercial Alcohol Corporation.
Mr. PECORA. For the benefit of whom?
Mr. BROWN. American Commercial Alcohol Corporation Capdevielle organized that organization.
Mr. PECORA. What is that?
Mr. BROWN. Capdevielle organized that corporation.
Mr. PECORA. Capdevielle?
Mr. BROWN. Yes, sir; under my instructions.
STOCK EXCHANGE PBACTICES
5931
Mr. PECORA. A man named Capdevielle?
Mr. BROWN. Yes, sir.
Mr. PECORA. He organized it for you?
Mr. BROWN. That is correct; yes, sir.
Mr. PECORA. What is his business?
Mr. BROWN. A molasses broker.
Mr. PECORA. But he merely acted as your
instrumentality in that
enterprise, did he?
Mr. BROWN. Yes, sir; he acted under mv instructions.
Mr. PECORA. In other words, a dummy?
Mr. BROWN. He acted under my instructions.
Mr. PECORA. He was a dummy for you ?
Mr. BROWN. I don't think he is a dummy.
Mr. PECORA. I don't miean a dummy intellectually, but in the
transaction he filled the role of a dummy ?
Mr. BROWN. He was an intermediary; yes, sir.
Mr. PECORA. I S that right?
Mr. BROWN. Yes, sir; he was an intermediary.
Mr. PECORA. Just as Phagan had done in connection with the incorporation of Maister Laboratories; is that right?
Mr. BROWN. That is correct, sir.
Mr. PECORA. Yes. Now go ahead and give us the details of Noxon,
Inc. What was its business ?
Mr. BROWN. Noxon, Inc., acquired certain assets from a concern
called Noxon Chemical Products, Inc., of New Jersey, wiiich had
this agricultural spray which had been very carefully considered by
the directors earlier in the year.
Mr. PECORA. By which directors?
Mr. BROWN. Directors of American Commercial. And the same
procedure was followed in that.
Senator TOWNSEND. Did they have a plant?
Mr. BROWN. They had an operation over in Jersey City.
Mr. PECORA. That is the Noxon Chemical Co. ?
Mr. BROWN. The Noxon Chemical Products, Inc.
Mr. PECORA. That was an existing, going corporation ?
Mr. BROWN. That is correct, sir.
Mr. PECORA. But the corporation that you caused to be organized
was known as " Noxon, Inc." ?
Mr. BROWN. Noxon, Inc.; and that corporation acquired certain
assets of Noxon Chemical Products, Inc., which was a going concern
manufacturing nickel polish, insecticides, and this agricultural
spray, which we deemed to be of great value.
Mr. PECORA. What did Noxon, Inc., pay for those assets of Noxon
Chemical Co.?
Mr. BROWN. I have forgotton just what the details are in that. . I
should be happy to give them to you.
Mr. PECORA. Approximately what consideration did Noxon, Inc.,
pay for those assets of Noxon Chemical Co.?
Mr. BROWN. I just don't remember the details of it, but I will
outline what procedure was followed, and I will get to that
Mr. PECORA. NOW, just a moment before you get to that. Where
did Noxon, Inc., get any money with which to pay for those assets?
Mr. BROWN. Capdevielle's note for $270,000.
5932
Mr.
STOCK EXCHANGE PRACTICES
PECORA.
Capdevielle's jiote?
Mr. BROWN. For $270,000.
Mr. PECORA. For $270,000. That is the note of this molasses
broker who acted as the dummy in this transaction?
Mr. BROWN. Yes, sir.
Mr. PECORA. And was that endorsed by his wife, perchance?
Mr. BROWN. He is not married that I know of.
Mr. PECORA. Was Capdevielle good for that note?
Mr. BROWN. I believe that he could have made good on the note.
Mr. PECORA. YOU believe that he could have made good?
Mr. BROWN. Yes.
Mr. PECORA. Did you know anything about his property worth?
Mr. BROWN. NO. He said that if this transaction—I asked him
about the note to determine whether there was any real value in
it, and he said that if we did not want the company he was so sold
on the proposition he would take it himself. So I assumed that he
was worth $270,000, or had associates that would be able to support
it.
Mr. PIEOORA. But was he, to your knowledge, worth the amount
of that note?
Mr. BROWN. NO, sir.
Mr. PECORA. He was not ?
Mr. BROWN. I don't know.
Mr. PECORA. You don't know?
Mr. BROWN. I don't know.
Mr. PECORA. And yet you undertook
to get him to act as your
dummy in the transaction whereby a new corporation called Noxon,
Inc., was formed, and that corporation, having this note of $270,000
made by Capdevielle
Mr. BROWN. That is correct.
Mr. PECORA. Issued its capital stock to the American Commercial
Alcohol Corporation in return for its capital stock ?
Mr. BROWN. That same procedure was followed. In that case
15,000 shares of American Commercial Alcohol Corporation common
stock were issued and exchanged for the capital issue of Noxon, Inc.,
in which
Mr. PECORA (interposing). Now, wait a minute. When the American Commercial Alcohol Corporation issued 15,000 shares of its
common capital stock for the capital stock of Noxon, Inc., what
assets did Noxon, Inc., have 2
Mr. BROWN. Noxon, Inc., as I remember it, acquired physical
properties from Noxon Chemical Products.
Mr. PECORA. For what consideration?
Mr. BROWN. I have forgotten just what that was.
Mr. PECORA. Was that $80,000?
Mr. BROWN. $80,000; that is correct; yes.
Mr. PECORA. It had assets which it had paid $80,000 for; is that
right?
Mr. BROWN. That is correct; yes, sir.
Mr. PECORA. And those are the physical assets it obtained at that
time from the Noxon Chemical Co. ?
Mr. BROWN. Noxon Chemical Products; yes, sir.
STOCK EXCHANGE PBACTICES
5933
Mr. PECORA. What other assets did Noxon, Inc., have besides these
$80,000 worth of physical assets?
Mr. BROWN. It had the rights under this agricultural spray
process, in which substantial quantities of alcohol presumably would
be consumed.
Mr. PECORA. HOW did it acquire those rights ? Were they rights
covered by letters patent?
Mr. BROWN. NO.
Mr. PECORA. What were they?
Mr. BROWN. Secret processes.
Mr. PECORA. Another Maister secret process, was it?
Mr. BROWN. Well, I wouldn't say it was a secret process
to that
extent, because
Mr. PECORA. Whose secret process was it^
Mr. BROWN. It was agreed upon
Mr. PECORA. Where did it get it from?
Mr. BROWN. Belonged to the principal owners of Noxon Chemical
Products, as I remember it.
Mr. PECORA. Wasn't that the process that passed with the $80,000
worth of assets?
Mr. BROWN. Oh, no. Not that I member; no. Capdevielle had
his note m it, Mr. Pecora.
Mr. PECORA. What is that?
Mr. BROWN. Capdevielle's note was in there for $270,000.
Mr. PECORA. HOW much would you have given for that note?
Mr. BROWN. I didn't have anything to give then.
Mr. PECORA. HOW much would you, on the knowledge that you
had of Capdevielle's personal property worth?
Mr. BROWN. Well, I know Mr. Capdevielle. I know him as an
honorable man.
Mr. PECORA. An honorable man may not be able to meet an obligation represented by a note?
Mr. BROWN. I think he has friends of wealth who probably would
have assisted him if necessary to liquidate the note.
Mr. PECORA. I S that the value you attached to the note, namely,
that Capdevielle was an honorable man and had friends who might
assist him to pay it ?
Mr. BROWN. I attached a value of $270,000 to the note.
Mr. PECORA. What is that?
Mr. BROWN. I attached a value of $270,000 to the note.
Mr. PECORA. Based upon what?
Mr. BROWN. Based upon my experience with Capdevielle.
Mr. PECORA. What experience had you had with him that gave you
any insight at all as to his property worth?
Mr. BROWN. The business experience that I had had with him
over a period of a few yeais, and knowing a great many of his
friends who are people of wealth.
The CHAIRMAN. Where did this $80,000 come from that went into
the Noxon Co. ?
Mr. BROWN. The procedure, Senator, that was followed in this
Noxon case was that Capdevielle's note was in for $270,000, and there
were certain other arrangements with Noxon, Inc., and as a result of
that Capdevielle acquired certain securities of Noxon, Inc., which he
5934
STOCK EXCHANGE PRACTICES
in turn made a deal with us which had been orally and verbally
accepted in the early part of May 1933 for 15,000 shares of the company's stock, which was delivered under this option at $18 a share
and he received the cash; then, having liquidated American Commercial Alcohol stock, proceeded to liquidate his note for $270,000.
That then brought under the control of the American Commercial
Alcohol Corporation the $180,000 in the Maister organization, $270,000 in the Noxon organization, and there is your total of $450,000,
funds which were used to improve the financial situation of the
consolidated organization.
Mr. PECORA. I S that your explanation?
Mr. BROWN. That is correct; yes, sir.
Mr. PECORA. Well, it is a little bit hard to follow I am going to
see if I can put the pieces of the jig-saw puzzle together, in order
to get the form of the picture. As I understand it, sometime m the
early part of 1933 it became quite apparent to you and your fellow
directors of the American Commercial Alcohol Corporation that the
corporation would have to raise in the spring of 1933 $450,000 of
additional working capital in order to meet Dank loans that were
maturing ?
Mr. BROWN. And payment of which had been insisted upon.
Mr. PECORA. And payment of which the banks had insisted upon?
Mr. BROWN. That is correct.
Mr. PECORA. That is correct up to that point. Now, at that time
you and your three fellow officers and directors who had joined in
the giving of the various options which have been put in evidence
here were the owners of approximately a hundred thousand shares?
Mr. BROWN. N O ; that is not correct. They owned and their
friends over the country owned a total of 100,000 shares at that time.
Mr. PECORA. I understood yesterday afternoon that you testified
that substantially you and your three fellow directors, namely,
Kies, Grimm, and Publicker
Mr. BROWN. Yes, sir.
Mr. PECORA. Owned among
the 4 of you approximately 100,000
shares of the capital stock.
Mr. BROWN. That statement as you read it to me said " owned by
control." That is the way I so understood. I don't mean control in
the strict sense of the word, but I meant friends throughout the
country own it; also Mr. Buckaman in San Francisco, who, with his
family, owns something over 7,000 shares. I think that was correct,
Mr. Pecora. That was as I understood it.
Mr. PECORA. At that time the total outstanding common stock of
the American Commercial Alcohol was approximately 196,000
shares ?
Mr. BROWN. Approximately; yes, sir.
Mr. PECORA. The company had a Maryland charter which provided that any issue of additional common stock would first have to
be offered to the existing stockholders of record, is that right?
Mr. BROWN. That is not correct; no. As I indicated to you yesterday
Mr. PECORA (interposing). That is, unless the stock were issued
for the purpose of acquiring other properties.
Mr. BROWN. Yes. Stock can be issued in exchange for property.
STOCK EXCHANGE PRACTICES
5935
Mr. PECORA. For some reason or other you and your fellow officers
and directors of American Commercial Alcohol concluded that it
would be better to raise this additional working capital by issuance
of additional capital stock, which was not, however, to be offered and
sold to the existing stockholders of record?
Mr. BROWN. I indicate to you again that it was issued for property
in compliance with the Maryland law.
Mr. PECORA. And it was done in that way because you and your
fellow officers and directors decided to do it that way ?
Mr. BROWN. That is not correct. As I indicated to you
Mr. PECORA (interposing). What was there to prevent the corporation from issuing this 25,000 additional shares and offering them
directly to its stockholders of record 2
Mr. BROWN. Because, as I have said to yon before, we all realized
the impossibility of securing any underwriting under any such situation as prevailed in March, April, May, and June of 1933, and feeling
that it is encumbent upon the officers of the corporation and the
directors of the corporation to protect the rights of the stockholders,
and particularly here is a company with a $8,000,000 investment in
it, we feel, or felt at the time and still feel, that every possible means
at our disposal within the law should be followed in order to preserve
the investment of everyone m that company.
Mr. PECORA. Why didn't you issue the 25
Mr. BROWN (interposing). Because it was impossible to
Mr. PECORA (interposing). Won't you please let me finish my question? Please don't anticipate what I am going to ask you. You
might be able to do it in most instances, but once in a while you
might not.
Why didn't the officers and directors of American Commercial Alcohol adopt the very simple expedient, if it needed $450,000 of additional working capital, of issuing 25,000 shares additional of capital
stock and offering it and selling it directly to its stockholders?
Mr. BROWN. In the first place, it was not a simple expedient,
because the financial situation at that time rendered it absolutely
impossible of success, because there was no underwriting which could
be secured for it.
Mr. PECORA Did you try to get an underwriting for it ?
Mr. BROWN. At the first favorable opportunity.
Mr. PECORA. When?
Mr. BROWN. In June, I think it was.
Mr. PECORA. And did you succeed ?
Mr. BROWN. But the situation was radically different at that time.
Mr. PECORA. Did you succeed?
Mr. BROWN. The situation was radically different.
Mr. PECORA. Did you succeed?
Mr. BROWN. We did; yes,
sir.
Mr. PECORA. YOU did?
Mr. BROWN. Yes, sir.
Mr. PECORA. Did you
try in March or April or May to get such
an underwriting?
Mr. BROWN. I indicated to you that at that time Mr. Kies, the
chairman of the executive committee, who has had financial experi
5936
STOCK EXCHANGE PEACTICES
ence, made a survey of the situation and determined the impossibility
of it.
Mr. PECORA. Was any effort made to get an underwriting?
Mr. BROWN. He so reported to me; yes.
Mr. PECORA. He reported to you?
Mr. BROWN. Yes.
Mr. PECORA. What effort did
Mr. BROWN. He said he had
he report he had made?
made a study of the whole situation
with his banking friends and had inquired as to the possibility of
raising any funds through the issue of additional stock at that time.
Mr. PECORA. DO you know a single banking friend that he put the
proposition up to specifically?
Mr. BROWN. That I do not know; no, sir.
Mr. PECORA. All right. Now, on May 8 the corporation called
" Maister Laboratories, Inc." was organized at your instance through
the use of this man Phagan as a dummy?
Mr. BROWN. Yes, sir.
Mr. PECORA. The Maister
Corporation was organized with an
authorized capital stock issue of 10,000 shares ?
Mr. BROWN. That is correct; jres, sir.
Mr. PECORA. What par value, if any?
Mr. BROWN. I think $20 par value.
Mr. PECORA. The Maister Laboratories issued all of its 10,000
shares upon organization to the dummy, Phagan?
Mr. BROWN. Correct.
Mr. PECORA. And Phagan paid for that stock the sum of $180,000,
but did not pay for it in cash; he paid for it by his note endorsed
by his wife?
Mr. BROWN. That is correct, sir.
Mr. PECORA. And you had no knowledge at that time of Phagan
being financially responsible for any such amount as $180,000 ?
Mr. BROWN. I accepted his statement.
Mr. PECORA. What statement did he make to you on that ?
Mr. BROWN. That he could liquidate that note
Mr. PECORA. Despite your knowledge of him for a number of
years past, you merely accepted his statement?
Mr. BROWN. That is correct, sir.
Mr. PECORA. YOU had had no business experience of any kind with
him that caused to believe that he was worth any such sum or that
his wife was worth any such sum; is that right?
Mr. BROWN. That is correct.
Mr. PECORA. And you have already said that the business judgment displayed by you in that particular part of the transaction
was not of the kind that you ordinarily would display in determining
the credit of an individual ?
Mr. BROWN. That is correct, sir.
Mr. PECORA. All that Maister Laboratories, Inc., then had was
not $180,000 in cash but Phagan's note for that sum ?
Mr. BROWN. At the time of its incorporation; yes, sir.
Mr. PECORA. At the time of its incorporation. Did it acquire any
other assets at the time that the American Commercial Alcohol Corporation gave 10,000 shares of its capital stock to Phagan in ex
STOCK EXCHANGE PRACTICES
5937
change for the 10,000 shares of the Maister Laboratories capital stock
which Phagan got for his note?
Mr. BROWN. NO. It had the contract which I have spoken to you
about before, with Dr. Maister.
Mr. PEOORA. I t had a contract with a chemist, a $5,000-a-year
chemist in the employ of the American Commercial Alcohol Corporation ?
Mr. BROWN. That may be correct, $5,000 a year, Mr. Pecora, but
there is one thing that I want to point out to you, that this man is
probably one of the outstanding fermentologists of the country, a
man who was a doctor and engineer and was offered his professorship in Germany, but because of the situation m Germany he came
over to this country and was willing to accept compensation of
$5,000 per annum simply to supervise our fermentology operations.
He is an outstanding figure.
Mr. PECORA. I S he still a chemist in the employ of the American
Commercial Alcohol Corporation ?
Mr. BROWN. Yes, sir; he is.
Mr. PECORA. At what salary?
Mr. BROWN. Sixty-five hundred.
Mr. PECORA. This paragon is getting 65 hundred ?
Mr. BROWN AS soon as these operations in Maister
get going along
I am sure that there are royalties on the processes that will amount to
very substantial amounts.
Mr. PECORA. These royalties, however, are still in the future;
he has not yet received a cent under the contract which he made
back in May 1933?
Mr. BROWN. That is correct; yes, sir.
Mr. PECORA. What do you think was the fair reasonable value of
the 10,000 shares of American Commercial Alcohol Corporation
which it gave to Phagan for the capital stock of the Maister Laboratories, Inc. ?
Mr. BROWN. At that time $200,000 at least. I frankly feel that
the Maister investment, with our knowledge of the situation today,
is worth substantially in excess of that.
Mr. PECORA. Have you got a balance sheet of the Maister Laboratories, Inc.?
Mr. BROWN. N O ; I have the auditor of the company here now.
Mr. PECORA. Has this Dr. Maister, this eminent chemist and
engineer and what not, served the Maister Laboratories, Inc., in any
capacity since that incorporation was created in May 1933?
Mr. BROWN. Yes, sir.
Mr. PECORA. For what compensation?
Mr. BROWN. NO compensation.
Mr. PECORA. He is virtually devoting
all his time to the interests
of the American Commercial Alcohol Corporation for sixty-five
hundred a year?
Mr. BROWN. That is not correct.
Mr. PECORA. Well, correct me.
Mr. BROWN. I will correct you in this way, that he has devoted a
great deal of his time with the feeding of a lot of white rats on these
tests.
Mr. PECORA. Well, that is valuable.
5938
STOCK EXCHANGE PRACTICES
Mr. BROWN. I t is.
The CHAIRMAN. I
understand now there is no outstanding stock
of the Maister Corporation?
Mr. BROWN. All of the stock which is outstanding, Senator, the
10,000 shares, are owned in its entirety by the American Commercial
Alcohol Corporation.
The CHAIRMAN. That is the property of the American Commercial Alcohol Corporation that it got in exchange for its 10,000
shares?
Mr BROWN. That is correct.
Tiie CHAIRMAN. That went to Phagan?
Mr. BROWN. That went to Mr. Phagan, who was acting, as I said,
under my instructions.
The CHAIRMAN. And he disposed of that, I suppose?
Mr. BROWN. He disposed of that. I think part of it was returned
to me and to Mr. Grimm against deliveries which we had previously
made under the option. I think some of it was delivered directly to
The CHAIRMAN. SO that now there is no real outstanding stock of
that Maister Corporation?
Mr. BROWN. NO.
The CHAIRMAN. That has all been taken
Mr. BROWN. N O ; the organization of
out?
the company is wholly
owned by the American Commercial Alcohol Co.
Senator ADAMS. Mr. Brown, there was a sort of an abrupt termination of this white-rat story. I have to confess a little curiosity,
but is th^t work done pi*rely from the standpoint cf pests or for
scientific purposes?
Mr. BROWN. Scientific purposes.
Senator ADAMS. In what way?
Mr. BROWN. Those processes involve the manufacture of certain
\itamin products for which there is a very substantial demand m
the country at the present time, which are sold at substantial figures
and from which we would realize substantial profits.
In making these tests they take these white rats, breed them,
and then feed them, and they have a great multitude of these animals using, for instance, the Maister product and other products
in comparison. Then, they set up curves, which all of these pharmaceutical houses require before they buy the product, showing
the varying qualities of the different vitamin products which are
now produced; and in addition to tests conducted by Dr. Maister,
we also had an examination made at the University of Wisconsin.
There is currently a market for the products which we contemplate
manufacturing under the Maister processes.
Senator KEAN. I would like to ask some questions there. Which
viltamins are you trying to separate?
Mr. BROWN. These vitamins that are present in this particular
product are vitamin B - l - F and B-2-G. That does not mean anything to me, but those are the ones.
Senator KEAN. And you are trying to separate those and get them
concentrated in food products?
Mr. BROWN. Yes. This is also another fermentation operation,
and m the manufacture of it the material comes down through cen
STOCK EXCHANGE PKACTICES
5939
trifugals and the liquid is thrown off, the water is thrown off in the
centrifugals, and there is retained in the centrifugals a paste, and
the paste is then put in ovens and dried or something.
Mr. PECORA. All those new vitamins have not yet been manufactured?
Mr. BROWN. They have been manufactured on a very small scale,
thougk.
Mr. PECORA. On a small scale?
Mr. BROWN. Yes.
Mr. PECORA. They
have not yet become commercially valuable,
have they?
Mr. BROWN. AS I told you, the work was done at the Philadelphia
plant.
Mr. PECORA. NO, no; but have they become commercially valuable?
M?. BROWN. There is currently a demand for vitamin products of
this nature in a substantial quantity.
Mr. PECORA. Has the Maister Laboratories Co. manufactured any
vitamin products yet?
Mr. BROWN. Yes. I could have brought you a sample of it.
Mr. PECORA. I do not need it. Have the vitamin products so far
manufactured by the Maister Laboratories as result of its elaborate
experimentation on white rats, and so forth, been commercially
profitable?
Mr. BROWN. They have not been put out on a commercial scale
yet.
Mr. PECORA. They have not?
Mr. BROWN. NO.
Mr. PECORA. That
is what I have been trying to find out. Now,
after Maister Laboratories was incorporated who became its executive officers?
Mr. BROWN. I have forgotten—I think I am the chairman of it.
Mr. PECORA. Chairman of the board?
Mr. BROWN. I think so.
Mr. PECORA. Who are the other executives?
Mr. BROWN. I cannot give you the details. I think Mr. Grimm
was president, Dr. Maister vice president, or Dr. Maister president.
Mr. PECORA. They were persons connected with the American
Commercial Alcohol Corporation?
Mr. BROWN. That is correct; yes.
Mr. PECORA. SO far I think we understand that part of the process
whereby, under the plan evolved by you, the American Commercial
Alcohol Corporation was to obtain $450,000 of additional working
capital through the dummy, Phagan, selected by you, of the Maister
Laboratories, Inc., and the issuance of all of its capital stock to
Phagan in return for his promissory note of $180,000?
Mr. BROWN. That is correct.
Mr. PECORA. And then the making of an arrangement between
Phagan, as the owner of all of the capital stock of Maister Laboratories, and the American Commercial Alcohol Corporation to exchange those 10,000 shares of capital stock of Maister Laboratories
for 10,000 shares of the capital common stock of the American Commercial Alcohol Corporation?
Mr. BROWN. That is correct, sir.
5940
STOCK EXCHANGE PRACTICES
Mr. PECORA. Those 10,000 shares that your corporation issued to
Phagan formed part of the additional issue of capital stock {
Mr. BROWN. That is correct.
Mr. PECORA. NOW, the second step had to do with Noxon, Inc. ?
Mr. BROWN. Yes,
sir.
Mr. PECORA. When was Noxon incorporated or created?
Mr. BROWN. It was created—both companies were—either on the
1st of May or the 2d of May.
Mr. PECORA. I think you are a little bit mistaken.
Mr. BROWN. YOU mean the incorporation of it ?
Mr. PECORA. The incorporation of Noxon, Inc.
Mr. BROWN. The incorporation of Maister
Mr. PECORA. Not Maister.
Mr. BROWN. On the 8th of May.
Mr. PECORA. Yes; Maister was incorporated on May 8, 1982.
Mr. BROWN. Noxon was on June 19,1933.
Mr. PECORA. The dummy that you used for the purpose of creating
Noxon, Inc., was this broker named Capdevielle ?
Mr. BROWN. Yes, sir.
Mr. PECORA. And the
original set-up of Noxon, Inc., was as follows: It issued 2,700 shares of preferred stock and also issued to
him a block of its common stock?
Mr. BROWN. I think there were 6,000 shares of common.
Mr. PECORA. The capital stock of Noxon, Inc., was 2,700 shares of
preferred stock and 6,000 shares of common stock ?
Mr. BROWN. That is correct.
Mr. PECORA. Noxon, Inc., made an arrangement with the Noxon
Chemical Products Co. to purchase from it for $80,000 certain property and assets; is that right?
Mx. BROWN. Yes; and I think, in addition, there was an arrangement by which certain exclusive licenses were received by Noxon, Inc.
Mr. PECORA. Those were not licenses protected by any letters
patent, were they?
Mr. BROWN. NO.
Mr. PECORA. After
having acquired for $80,000 these physical
assets of the Noxon Chemical Products Co., Noxon, Inc., issued its
entire 2,700 shares of preferred stock and some 3,900 shares of its
common stock to the dummy, Capdevielle, for $270,000 ?
Mr. BROWN. That is correct.
Mr. PECORA. Which Capdevielle paid by his promissory note?
Mr. BROWN. That is correct, sir.
Mr. PECORA. Then Capdevielle made an arrangement with the
American Commercial Alcohol Corporation to transfer to it the
2,700 shares of preferred stock and the 3,900 shares of common stock
of Noxon, Inc., which he had acquired for his note?
Mr. BROWN. Yes.
Mr. PECORA. And
received in return for those shares 15,000 shares
of the capital common stock of American Commercial Alcohol Corporation ; is that right?
Mr. BROWN. That is correct; yes, sir.
Mr. PECORA. And it was necessary also for the American Commercial Alcohol Corporation to issue 15,000 additional shares?
Mr. BROWN. That is correct.
STOCK EXCHANGE PRACTICES
5941
Mr. PECORA. In order to carry out its part of that transaction?
Mr. BROWN. That is correct, sir.
Mr. PECORA. That plus the 10,000 shares it had had issued to
Phagan in exchange for the capital stock of Maister Laboratories,
Inc., made up 25,000 shares of additional capital stock which the
American Commercial Alcohol Corporation had to issue?
Mr. BROWN. That is correct, sir.
Mr. PECORA. In the spring of 1933?
Mr. BROWN. Yes.
Mr. PECORA. NOW,
that put the American Commercial Corporation in possession of all of the capital stock of Maister Laboratories,
Inc., and all of the preferred stock of Noxon, Inc., plus 3,900 shares
of the common stock of the latter corporation?
Mr. BROWN. That is correct.
Mr. PECORA, These 25,000 shares of capital stock of American
Commercial Alcohol Corporation at that time had a market value of
about $20 a share, did they not?
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Yes.
Or in the neighborhood of half a million dollars ?
Yes.
I t issued those shares and got in return these shares
of capital stock of those two companies, Maister Laboratories, and
Noxon, Inc. ?
Mr. BROWN.
Mr. PECORA.
Yes.
And the principal assets of those two companies were
the promissory notes, respectively, of the dummy, Phagan, for
$180,000, and the dummy, Capdevielle, for $270,000; is that right?
Mr. BROWN. Yes; plus.
Mr. PECORA. Plus what&
Mr. BROWN. Plus contracts which those companies had.
Mr. PECORA. Contracts with whom?
Mr. BROWN. With Dr. Maister in the Maister Laboratories.
Mr. PECORA. Those are contracts from which nothing has yet been
realized ?
Mr. BROWN. Due entirely to the situation that
Mr. PECORA. Whatever it is due to, the fact is that under those
contracts which have been in force now for—well, since last May—
nothing has as yet been realized by the two companies that hold
those valuable contracts. Is that right?
Mr. BROWN. That is right.
Mr. PECORA. HOW did you intend by that process to put into the
treasury of the American Commercial Alcohol Corporation $450,000
in cash?
Mr. BROWN. There then came in the control.
Mr. PECORA. Which you said you needed for the purpose of paying
bank loans.
Mr. PECORA. Maister came in 100 percent controlled and owned;
Noxon came in 65 percent controlled. Immediately funds were borrowed from both of those corporations by the American Commercial
Alcohol Corporation and payments were immediately made.
Mr. PECORA. Funds were borrowed from both of them, you say?
Mr. BROWN. Yes.
Mr. PECORA. By American
175541—34—PT 13
7
Commercial Alcohol Corporation ?
5942
STOCK EXCHANGE PEACTICES
Mr. BROWN. Yes.
Mr. PECORA. Both
of those corporations merely had promissory
notes.
Mr. BROWN. A S I indicated to you during my replies, these shares
of stock which were received by Capdevielle and by Phagan were
immediately put out by them at $18 a share. They were then in
possession of funds with which they liquidated their notes.
Mr. PECORA. TO whom did they jmt out capital stock of the American Commercial Alcohol Corporation?
Mr. BROWN. They either put it directly to Bragg or listed it for
Mr. Grimm and me.
Mr. PECORA. Which did they do?
Mr. BROWN. Half and half, I should say.
Mr. PECORA. In other words, they made deliveries under this
option to Bragg, the option which you gave to Bragg on May 2,1933?
Mr. BROWN. That is correct; yes.
Mr. PECORA. What interest did they have in this Bragg option that
you and your three fellow officers gave ?
Mr. BROWN. They had no interest in the option. As I have indicated before, they were people that indicated their confidence and
people who accepted my instruction, and they were doing this, as
we were, for the benefit of the corporation.
Mr. PECORA. But they had no beneficial interest in any of these
transactions, did they?
Mr. BROWN. They had a beneficial interest in the transaction in
the syndicate which was developed out of this option. Phagan had
a $5,000 interest and Capdevielle had a $1,000 interest.
Mr. PECORA. All that Phagan and Capdevielle did throughout
these transactions they did in furtherance of your instructions?
Mr. BROWN. That is correct, sir.
Mr. PECORA. They had no beneficial interest in the transaction by
which they got 25,000 shares of the capital stock of the American
Commercial Alcohol Corporation in the proportion of 10,000 shares
to Phagan, and 15,000 shares to Capdevielle?
Mr. BROWN. Outside of what I have indicated to you.
Mr. PECORA. SO that these men, in view of the fact that all they
were doing in the matter was being done in furtherance of said
instructions, had no compunction about giving their promissory notes
because they knew they never would be called upon to pay them?
Mr. BROWN. I don't think that is quite correct; but whatever
they did, they did in furtherance of my instructions.
Mr. PECORA. Was it intended that they should pay those notes out
of their own resources, out of their own independent resources ?
Mr. BROWN. It was intended that those notes should be paid, as
was evidenced by the fact that they were paid.
Mr. PECORA. And they were paid through the sale of the 25,000
shares to Bragg under this option?
Mr. BROWN. That is correct.
Mr. PECORA. And they had no interest in this option to Bragg?
Mr. BROWN. They were not signatories to it.
Mr. PECORA. And they had no interest in it?
Mr. BROWN. Outside of what I have said.
Mr. PECORA. That was an interest which they acquired subsequently in some syndicate?
STOCK EXCHANGE PRACTICES
5943
Mr. BROWN. Yes.
Mr. PECORA. The
real purpose of all of that was to enable the
American Commercial Alcohol Corporation to issue and sell 25,000
additional shares for $450,000, was it not?
Mr. BROWN. That is correct.
Mr. PECORA. Was it not necessary, or did not the American Commercial Alcohol Corporation, subsequent to the completion of these
transactions that involved the use of Phagan and Capdevielle as
dummies, make application to the New York Stock Exchange to list
those 25,000 additional shares?
Mr. BROWN. Yes, sir.
Mr. PECORA. Was the
New York Stock Exchange told, in the listing application that was filed with it in behalf of the American
Commercial Alcohol Corporation, that these 25,000 shares were
being issued to be sold for $450,000 cash for the purpose of providing the company with additional working capital of that amount?
Mr. BROWN. 1 do not know what was indicated to the stock exchange, but whatever was indicated was disclosed in the listing
application accompanied by counsel's opinion that the issues were
valid.
Mr. PECORA. What was indicated to the New York Stock Exchange in the listing application as the reason for or the purpose of
issuing these 25,000 additional shares?
Mr. BROWN. I do not remember, because this is the first time I
have looked at the listing application. I did not prepare it. I t
was prepared by the secretary of the corporation.
Mr. PECORA. The secretary of the corporation was Cecil Page?
Mr. BROWN. Yes,
Mr. PECORA. He
sir.
was the secretary, also, of Maister Laboratories,
Inc., and Noxon, Inc. ?
Mr. BROWN. That is correct.
Mr. PECORA. And who were the executive officers of Noxon, Inc.,
immediately upon its incorporation; who became its executive
officers?
Mr. BROWN. That I cannot answer.
Mr. PECORA. Were they not you and your fellow directors, some
of your fellow directors?
Mr. BROWN. Some of them might have served as officers temporarily. I think I am chairman oi the board at the present time.
Mr. PECORA. I show you what purports to be a printed copy of
the application filed with the New York Stock Exchange bjr and in
behalf of the American Commercial Alcohol Corporation to list these
additional 25,000 shares and certain other shares. Will you look
at it and state whether it is a true and correct copy of listing
application filed in behalf of that corporation with the New York
Stock Exchange for leave to list fifty-one thousand-and-odd additional shares of the capital common stock of the American Commercial Alcohol Corporation?
Mr. BROWN. Yes, sir.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Printed copy of listing application filed with the New York Stock
Exchange by American Commercial Alcohol Corporation for per
5944
STOCK EXCHANGE PEACTICES
mission to list fifty-one thousand-and-odd shares of capital common
stock of American Commercial Alcohol Corporation was received
in evidence, marked " Committee Exhibit No. 11, Feb. 15, 1934.")
Mr. PEOORA. This application is to list 51,293 additional shares
of the common stock of American Commercial Alcohol Corporation
and
The CHAIRMAN. Was the American Alcohol stock listed on the
New York Stock Exchange?
Mr. BROWN. At that time; yes, sir.
Mr. PECORA. I t is dated June 2, 1933. In the 51,293 additional
shares, to list which this application was made, were included the
10,000 shares given to Phagan in connection with the transaction
that you have so elaborately described..; is that right?
Mr. BROWN. Yes.
Mr. PECORA. And
to whom were the other 41,293 shares covered
by this application issued?
Mr. BROWN. I think that 40,949 shares were issued to stockholders
at $20 per share.
Mr. PECORA. That is, to the existing stockholders of record of
your corporation?
Mr. BROWN. That is correct; and the balance, I believe, has to do
with certain warrants that attach to the bond issue that the company had when it was originally organized.
Mr. PECORA. That is only a matter of about 200 shares?
Mr. BROWN. A few shares.
Mr. PECORA. This application was granted, was it not?
Mr. BROWN. Yes, sir.
Mr. PECORA. Subsequently,
did your corporation; that is to say,
the American Commercial Alcohol Corporation, make application
to the New York Stock Exchange to list 15,000 additional shares of
its capital oommon stock?
Mr. BROWN. Yes,
sir.
Mr. PECORA. I show you what purports to be a printed copy of
that application. Will you look at it and tell me if it is a true and
correct copy of the listing application so made on behalf of your
corporation?
Mr. BROWN. Yes, sir.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Printed copy of listing application dated June 27,1933, filed w^th
the New York Stock Exchange for permission to list 15,000 additional shares of the capital common stock of the American Commercial Alcohol Corporation, was received in evidence and marked
" Committee Exhibit No. 12, Feb. 15, 1934.")
Mr. PECORA. This application was granted, was it not?
Mr. BROWN. Yes.
Mr. PECORA. The application is received in evidence as exhibit 12
and is dated June 27,1933. The first application is marked in evidence as " Exhibit No. 1 1 " , which, as I have already remarked, is
dated June 2, 1933, and states the following to be the authority for
and the purpose of the issue of these additional shares amounting to
51,293 of the capital common stock [reading] :
STOCK EXCHANGE PKACTICES
5945
At a meeting held May 31, 1933, the board of directors authorized the issuance of 10,000 shares of the common stock of the Company of the par value of
$20 per share m exchange for 10,000 shares of the common stock of Maister
Laboratories, Incorporated, of the par value of $20 per share, which will then
be the only issued and outstanding stock of the latter Corporation Maister
Laboratories, Incorporated, a Maryland corporation, is the owner of valuable
processes acquired from Dr Harms Maister for the manufacture of vitamin
yeast and other products The directors of American Commercial Alcohol
Corporation at their said meeting valued this stock at more than $300,000
Reading further from exhibit no. 11, being the listing application
of June 2,1933, under the caption of "Authority for and Purpose of
Issue ", the application says as follows [reading] :
At said meeting the Board also authorized the offering to common-stock
holders of the Company of the right to subscribe for additional shares of the
authorized but unissued common stock of the Company at 'the price of $20 for
each share subscribed for, in the proportion of one additional share for each
five shares held by common-stock holders of record at the close of business- on
June 14, 1933, all subscriptions upon such offerings accompanied by payment
in full in New Yoik funds to be made at the office of the City Bank Farmers
Trust Company, 22 William Street, New York City, New York, on or before
3 p m , July 5, 1933 Said offering will be based on the 194,748 shares of
common stock outstanding, the 10,000 shares authorized for issuance in exchange for common stock of Maister Laboratories, Incorporated, and any additional shares which may be issued on or prior to June 14, 1933, pursuant to the
exercise of stock purchase warrants outstanding in connection with the original
bond issue of the company
'
The proceeds of the issue and sale of the said additional common stock
offered to stockholders are to be used for the purpose of paying off bank loans
and providing funds for working capital
Now, from the listing application marked in evidence as " E x hibit No. 12 ", which is dated June 27, 1933, and which refers to
an additional listing of 15,000 shares of common stock? I read as
follows from the application under the caption "Authority for and
Purpose of Issue " [reading] :
At a meeting held June 15, 1933, the board of directors authorized the
issuance of 15,000 shares of the common stock of the company of the par
value of $20 per share, in exchange for 2,700 shares of the six percent cumulative preferred stock of the par value of $100 a share, and 3,900 shares
of the common no par stock of Noxon, Inc, a Maryland corporation. The
total authorized capitalization of Noxon, Inc, is 3,000 shares of six percent
cumulative preferred stock of the par value of $100 per share and 6,000
shares of common stock without par value The 2,700 shares of preferred
stock is all the issued and outstanding preferred stock of the latter corporation All of the 6,000 shares of common stock have been issued, 3,900 shares
to the company as stated above, and 2,100 shares to other interests
Noxon, Inc., was organized on June 19, 1933, and has acquired certain
valuable formulae, processes, etc., for the manufacture of a certain cleaner
polish, floor waxes and a household insecticide, heretofore manufactured and
sold for many years under the trade name of "Noxon", and also certain
machinery, equipment, materials and other assets required for the manufacture of said products on an adequate commercial scale. Noxon, Inc, has
furthermore contracted with the company to purchase all of its requirements
for the manufacture of its products, which consist of alcohol, solvents, etc,
so far as they are manufactured or handled by the Company, at prevailing
market prices, for a period of ten years. The Company has also acquired
as a part of above transactions, exclusive rights to certain formulae and
processes for the manufacture of new agricultural and horticultural plant
sprays, which the company believes can be manufactured and sold on a
profitable basis These sprays consist of about 85 percent of alcohol.
By the way, in connection with the valuable secret processes and
formulas, and so forth, which Noxon, Inc., you say acquired from
5946
STOCK EXCHANGE PEACTICES
the Noxon Chemical Products Co., were there any that were owned
by a man named Nottebaum ?
Mr. BROWN. Yes; he was the controlling factor in the Noxon
Chemical1 Products, Inc.
Mr. PECORA. SO then the Noxon Co. did not own these secret processes; they were owned by some individual or groups of individuals
Mr. BROWN. I have forgotten just what the details of the thing
were. I think some rights came in to these processes, exclusive
rights, as I remember. I have forgotten all the details of the
contract.
Mr. PEOORA. I show you what purports to be a copy of a letter
addressed to the Committee on Stock List of the New York Stock
Exchange under date of July 1, 1933, referring to the application
dated June 27, 1933, to list the 15,000 additional shares, marked in
evidence as " Exhibit No. 12." Will you look at it and tell me if
you recognize it to be a true and correct copy of a letter sent to the
Stock Exchange Committee on Stock List by Mr. Guy I. Colby, vice
president and treasurer of the American Commercial Alcohol Corporation in behalf of that corporation?
Mr. BROWN (after examining paper). Yes.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Copy of letter, dated July 1, 1933, Colby to Committee on Stock
List, New York Stock Exchange,'was received in evidence, marked,
" Committee's Exhibit No. 13," February 15, 1934, and the same was
subsequently read into the record by Mr. Pecora.)
Mr. PECORA. This letter, marked " Committee Exhibit No. 13 ",
is on the letterhead of the American Commercial Alcohol Corporation, July 1, 1933, and reads as follows [reading] :
The COMMITTEE ON STOCK LIST,
New York Stock Exchange, 11 Wall Street, New York, N Y.
GENTLEMEN: Confirming certain oral statements made to your Mr. Hasselback with, reference to our application dated June 27th, 1983, for the listing
of 15,000 additional shares of our Common Stock of the par value of $20
each, the formulae of processes, etc, for the manufacture of the cleaner polish,
floor waxes, and household insecticides are the propeity of one Ralph Nottebaum, Sr, of Short Hills, New Jersey.
License to manufacture these products has heretofore been held by Noxon
Chemical Products Co, Inc, a New Jersey Corporation formed by said Nottebaum, and for a period of approximately 14 years these products have been
manufactured and sold by such Corporation
There are not available, however, certified financial statements of such
Corporation; and m fact American Commercial Alcohol Corporation has had
no dealings with the New Jersey Corporation and has made no investigation
of its affairs or history except such investigation as was necessary to verify
the statements made by Mr Nottebaum relative to the volume of the products
sold and the markets in which the sale of these products has been made
Necessarily in connection with our investigation tests of selling prices and
cost of the products have been made to satisfy us of the gross margin of
profit existing at the present time
Our negotiations have been entirely with Mr. Nottebaum and insofar as
the New Jersey Corporation is concerned our only care has been to see to it
that such Corporation is dissolved and any rights or privileges theretofore
granted by Nottebaum to it for the manufacture and sale of said products are
effectually canceled
Counsel for Mr Nottebaum has advised us that practically 100% stock ownership of said New Jersey Corporation vests in Mr. Nottebaum and that appropri
STOCK EXCHANGE PRACTICES
5947
ate proceedings will forthwith be instituted for the dissolution of said
Corporation.
If any further information is desired by the Committee we will be glad to
have appear before the Committee in person one ot our Officers to supply, if
possible, any information the Committee may desire
Very truly yours,
AMERICAN
COMMERCIAL AI*COHO:L CORPORATION,
By GUT I. Coiax, Y%ce Pres & Treas.
I notice, Mr. Brown, that the board of directors of the Anferican
Commercial Alcohol Corporation did not give its formal approval to
these various transactions under which 25,000 additional shares of
the common capital stock of that corporation were issued to Phagan
and Capdevielle, until late in May 1933. That is the fact, is it not?
Mr. BROWN. It gave its formal approval simply to approve a
verbal commitment that had been made by me either on the 1st or
the 2d of May 1933.
Mr. PECORA. I t was an absolutely necessary formal approval, was
it not, to enable the corporation to go ahead and issue those 25,000
additional shares ?
Mr. BROWN. There are certain legal mechanics that have to be
complied with.
Mr. PECORA. And it did not become legally effective until sometime late m May 1933. Do you know what that date was ?
Mr. BROWN. I have forgotten the date.
Mr. PECORA. I t was May 31, 1933, was it not?
Mr. BROWN. YOU mean the minutes of the board there?
Mr. PECORA. Yes.
Mr. BROWN. May
Hr. PECORA. May
29, is it not?
31, according to the application made to the
Stock Exchange.
Mr. BROWN. It was May 31.
Mr. PECORA. May 81, 1933.
Mr. BROWN. Yes.
Mr. PECORA. But this option to Bragg was made on May
Mr. BROWN. That is correct, after the board meeting of
2, 1933.
May 2,
1933.
Mr. PECORA. NOW, at the time, on May 31, 1933, that the board
of directors, by formal resolution, approved these transactions
Mr. BROWN. Which had previously been agreed to; yes.
Mr. PECORA. The board of directors also authorized the issue of
some 41,000 additional shares to be offered and sold directly to the
existing stockholders of record of the American Commercial Alcohol
Corporation, did it not?
Mr. BROWN. Yes,
sir.
Mr. PECORA. And those shares were all duly subscribed for by the
existing stockholders of record at $20 a share?
Mr. BROWN. That is correct, sir.
Mr. PECORA. And that proves, does it not, that if the corporation
had chosen to offer these other 25,000 shares to its stockholders of
record it could have sold them for cash to the stockholders of record
for $20 a share?
Mr. BROWN. It does not. The situation
Mr. PECORA. Does it prove the contrary?
Mr. BROWN. The answer is just this, that the situation changed,
and changed very materially, within a period of 30 days.
5948
STOCK EXCHANGE PBACTICES
Mr. PECORA. What 30-day period was that?
Mr. BROWN. The latter part of April until the end of May. The
situation then became apparent that it was possible to issue stock to
stockholders, and the management immediately took advantage of
it so as to put the company in an even stronger financial position.
Mr. PECORA. The situation changed before May 31, did it not ?
Mr. BROWN. At or about that times, yes.
Mr. PECORA. Up to that time, all that you had done in the furtherance of your plan to enable the corporation to issue 25,000 shares of
its capital stock without first offering them to the stockholders of
record was done through two dummies, Phagan and Capdevielle,
who were carrying out your instructions.
Mr. BROWN. That is correct, sir.
Mr. PECORA. In view of the fact that that situation developed before May 31,1933, why did not the board of directors give its existing stockholders of record the benefit of the right to subscribe to the
25,000 additional shares at $20 a share.
Mr. BROWN. Verbal commitments had already been made on it, in
accordance with the contracts which were finally worked out, and
which you have had here.
Mr. PEOORA. Those verbal commitments were made by your
dummies.
Mr. BROWN. Those verbal commitments were made by me, personally.
Mr. PECORA. By your dummies and by you, personally.
Mr. BROWN. That is correct.
Mr. PECORA. YOU were chairman of the board of the American
Commercial Alcohol Corporation, were you not?
Mr. BROWN. That is correct.
Mr. PECORA. And owed to the stockholders of that corporation the
duty of fair dealing to them.
Mr. BROWN. I owed the stockholders of that corporation fair dealing, and further than that, as I have indicated to you, the paramount
interest that the executives and officers and directors of that company had was the protection of the stockholders' interests and the
corporation's interest.
Mr. PECORA. Could not that paramount interest have been best
served by offering to the stockholders
Mr. BROWN. At the time
Mr. PECORA. Please let me finish my question. Could not that
paramount interest have been best served by offering to the stockholders these 25,000 shares?
Mr. BROWN. Not on the 2d of May; no, sir.
Mr. PECORA. I am talking about May 31, sir.
Mr. BROWN. I understand that.
Mr. PECORA. Which was the date when your board of directors
gave its necessary legal approval to the entire scheme you had
evolved?
Mr. BROWN. Gave its necessary legal approval to a verbal commitment which had been made by me on behalf of the corporation,
in my best judgment.
Mr. PECORA. What was that verbal commitment that you had made
in behalf of the corporation?
STOCK EXCHANGE PRACTICES
5949
Mr. BROWN. TO Capdevielle and Phagan.
Mr. PECORA. But you said they were simply your dummies in the
entire transaction, and that they had no beneficial interest in the
negotiations.
Sir. BROWN. They accepted my instructions. That is correct.
Mr. PECORA. D O you regard that as a verbal commitment?
Mr. BROWN. I certainly do.
Mr. PECORA. What commitment had you made to Capdevielle and
Phagan? You have told us repeatedly that they were simply your
dummies, acting in the furtherance of your infractions, selected
by you as instruments or agents to enable you to carry out some
plan you had evolved ?
Mr. BROWN. I had made the commitment to them to give 10,000
shares of the company's capital stock in exchange for 10,000 shares
of Maister, and also 15,000 shares of the company's capital stock in
exchange for 2,700 shares of the preferred stock of Noxon, Inc.,
and 3,900 shares of the common stock.
Mr. PECORA. YOU were dealing with yourself, because you were
dealing with your dummies in the making of that commitment.
Mr. BROWN. Not necessarily.
Mr. PECORA. Did Phagan and Capdevielle have any independent
interest in the matter?
Mr. BROWN. NO.
Mr. PECORA. NOW,
as a matter of fact, when these applications
were filed by your corporation with the New York Stock Exchange
to list these additional shares, the applications, as you notice, were
dated, respectively, on June 2 and on June 27,1933. You knew that
you had evolved this whole scheme for the purpose of putting
$450,000 cash into the treasury of the company through the issuance
of 25,000 additional shares.
Mr. BROWN. That is right.
Mr. PECORA. Which were not offered to the stockholders.
Mr. BROWN. That is correct.
Mr. PECORA. Why was not that statement or information given to
the New York Stock Exchange in these applications?
Mr. BROWN. That I do not know. I had nothing to do with the
preparation of those.
Mr. PECORA. Who had to do with the preparation and filing of
these listing applications?
Mr. BROWN. They were prepared by the secretary of the company.
Mr. PECORA. Mr. Page?
Mr. BROWN. Mr. Page; yes, sir.
Mr. PECORA. DO you know what the market value was on May 31,
1933, of the capital common stock of the American Commercial
Alcohol Corporation?
Mr. BROWN. NO, sir.
Mr. PECORA. For your
information, let me tell you that according
to the quotations of that stock on the New York Stock Exchange on
that day, May 31,1933, they ranged from a low of 30% to st high of
33%.
Mr. BROWN, What week is that?
Mr. PECORA. Not any week; on May 31, 1933, the date that your
board of directors adopted the resolution approving this scheme or
5950
STOCK EXCHANGE PRACTICES
plan that you had evolved for the issuance of 25,000 shares which
were eventually turned over to Bragg under this option agreement.
Mr. BROWN. And the funds for which came into the organization,
Mr. Pecora.
Mr. PECORA. At what price did they come into the organization?
Mr. BROWN. At $18 a share.
Mr. PECORA. At $18 a share, although on the date when your board
of directors approved of it the market was from $30 to $33 a share.
Mr. BROWN. The value on the date that the contracts were agreed
to and the arrangements made, on the 1st or 2d of May, was approximately $18 a share.
Mr. PECORA. And, according to the quotations of the stock on the
New York Stock Exchange on May 2, the value was between $20
and $21 a share.
Mr. BROWN. Yes, sir.
Mr. PECORA. But the
fact of the matter is that the corporation,
through this process that you evolved, sold for $18 a share to Bragg,
25,000 shares at a time, when the stock was worth in the market at
least 50 percent more than that.
Mr. BROWN. The commitment was made on the 2d of May.
Mr. PECORA. Who got the benefit of that profit ?
Mr. BROWN. I do not quite understand your question.
Mr. PECORA. I will reduce it to very simple terms. Bragg got
25,000 shares at $18 a share.
Mr. BROWN. That is correct.
Mr. PECORA. The 25,000 shares, however, were not authorized to be
issued by the directors of your corporation until May 31, 1933.
Mr. BROWN. That is correct. They were not issued until
Mr. PECORA. And they were not issued until subsequent to that
time.
Mr. BROWN. They were not issued until the legal requirements had
been complied with.
Mr. PECORA. That was May 31, 1933. At that time the market
value of the stock was between $30 and $33 a share; is that right?
Mr. BROWN. I assume so.
Mr. PECORA. That is the profit I refer to. Who got the benefit
of it?
Mr. BROWN. I do not know.
Mr. PECORA. Did you get any of it?
Mr. BROWN. I can answer your question in this way
Mr. PECORA. I want you to.
Mr. BROWN. At the time this whole situation arose,
and a proposition had to be evolved to
Mr. PECORA. N O ; can you not answer the question? Did you get
any of that profit?
Mr. BROWN. I will answer the question in this way
Mr. PECORA. I S it necessary to make a speech about this whole plan
again in order to answer that simple question?
Mr. BROWN. I t is not necessary to go through the whole plan, but
I will explain the transaction with Bragg, which answers your
question.
Mr. PECORA. First answer the question. Did you or did you not
participate in that profit?
STOCK EXCHANGE PRACTICES
5951
Mr. BROWN. I participated in a syndicate which underwrote the
issue of additional stock to stockholders. I participated in a pool.
I realized a profit of approximately $20,000. I sacrificed more than
that.
Mr. PECORA. We will put your sacrifices m another category and
we will come to them any time you want to elaborate on them before
the committee. At the present time I am asking you if you participated in the profit that accrued as a result of this plan which you
evolved ?
Mr. BROWN. That is correct.
Mr. PECORA. What other officers and directors of the American
Commercial Alcohol Corporation also participated in that ensuing
profit?
Mr. BROWN. Mr. Chadbourne, Mr. Grimm, Mr. Kies, and Mr.
Publicker.
The CHAIRMAN. YOU refer to a syndicate and also to a pool. Who
composed the syndicate to which you referred?
Mr. BROWN. Senator, after the verbal commitment had been made
to Phagan and Capdevielle to put the company in strong financial
shape the market situation changed materially, and further discussions were had, because apparently, as we assumed it to be, the fever
had hit the public for buying repeal stocks, and the officials took immediate advantage of the situation and promptly offered the stock
to the stockholders, arrangements having been made with Mr. Bragg
for an underwriting.
The CHAIRMAN. I simply asked the question, Who composed the
syndicate ?
Mr. BROWN. The gentlemen that I have just mentioned and some
others.
The CHAIRMAN. Then who composed the pool?
Mr. BROWN. The same people.
The CHAIRMAN. HOW many shares of stock were handled by this
pool?
Mr. BROWN. I think 65,000 shares was the total handled by the
pool and syndicate.
Mr. PECORA. Who managed that pool?
Mr. BROWN. Mr. Bragg.
Mr. PECORA. Mr. Bragg is this gentleman to whom you referred
yesterday as a market operator?
Mr. BROWN. Yes, sir.
Mr. PECORA. He is not a member of any exchange ?
Mr. BROWN. NO, sir.
Mr. PECORA. And you had known him for some time?
Mr. BROWN. Maybe a year or two. I have forgotten how long.
Mr. PECORA. DO you know what brokers were used in the execution
of the orders in behalf of that pool?
Mr. BROWN. NO ; I assume W. E. Hutton & Co.
Mr. PECORA. That is not Mr. Cutten's firm?
Mr. BROWN. N O ; that is E. F . Hutton. This is W. E. Hutton
&Co.
Mr. PECORA. DO you know what particular broker or brokers
actually executed the orders for the pool ?
5952
STOCK EXCHANGE PBAOTIOES
Mr. BROWN. NO, sir.
Mr. PECORA. None of them?
Mr. BROWN. I do not know who they were; no.
Mr. PECORA. YOU never did know, did you ?
Mr. BROWN. NO.
Mr. PECORA. Are you sure of that?
Mr. BROWN. Yes; I am telling you perfectly
frankly. I do not
know.
Mr. PECORA. If this plan that you claim the authorship of and
which you have described here this morning, had not been evolved,
those 25,000 shares would have been issued to the stockholders ot
the company and they would have made the profit resulting therefrom, would they not?
Mr. BROWN. The only answer I can make to you on that is that
if my foresight was as good as my hindsight, the situation might
have been different.
Mr. PECORA. But that is the fact, is it not, that they would have
made the profit which, instead, went to a small group of officers and
directors of the company?
Mr. BROWN. I made no money on the transaction.
Mr. PECORA. Mr. Bragg and such other persons as were associated
with you in this pool and this syndicate?
Mr. BROWN. I lost money as a result of this whole transaction.
Mr. PECORA. If that plan had not been evolved and if the 25,000
shares we have been discussing here had been offered and sold to
the existing stockholders of record at $20 a share at a time when
they were worth in the market between $30 and $33 a share, those
stockholders would have obtained the profits instead of you and
the other officers and directors of the company who were banded
together in this syndicate and in this pool, isn't that so ?
Mr. BROWN. We would have acted differently on May 31 than we
did on May 2.
Mr. PECORA. What was there to prevent the directors of your company, on May 31, when they knew that the stockholders would subscribe for these additional shares, or felt certain that the stockholders would subscribe for these additional shares, from making such a
provision?
Mr. BROWN. I do not believe I follow your question.
Mr. PECORA. What prevented
the board of directors of the American Commercial Alcohol1 Corporation when, on May 31, 1933, it
gave its formal and legal approval to the plan that you had evolved,
from discarding that plan and offering those 25,000 additional shares
to its stockholders of record?
Mr. BROWN. Because of the verbal commitment which had been
made by me.
Mr. PECORA. What you call a verbal commitment, made to your
dummies?
Mr. BROWN. That is correct.
Mr. PECORA. Who lent themselves to your plan?
Mr. BROWN. Yes.
The CHAIRMAN. When
was this pool operation terminated, do you
remember ?
Mr. BROWN. I do not remember, Senator; no, sir.
STOCK EXCHANGE PEACTICES
5953
The CHAIRMAN. DO you remember what the stock was worth at
that time?
Mr. BROWN. That I have forgotten, too.
Mr. PECORA. I am going into the pool, Mr. Chairman. I will be
able to do that #after recess.
You spoke of a syndicate. What was that syndicate organized for ?
Mr. BROWN. About the latter part of April, I had a discussion
with Mr. Bragg
Mr. PECORA. April 1933?
Mr. BROWN. April 1933—and asked him what, in his opinion,
could be done with American Commercial Alcohol stock. At the
time of my discussion with him no question was raised about the
banks or anything like that. He told me at that time
Mr. PECORA. One moment. I thought you said that back in March
1933 the banks had served notice on you that they wanted their loans
paid.
Mr. BROWN. Nothing was said to him, I said.
Mr. PECORA. Oh.
Mr. BROWN. He
at that time stated that he believed it would be
possible for him to do something in the market, because he felt that
repeal was coming along, and he said that he believed he would be
able to handle about 25,000 shares of stock, and I told him that I
would discuss the question and see what could be worked out. An
option was given to him on May 2, 1933, and he was not at that
time willing to make it an underwriting, but he felt that because
of his opinion that repeal was most certain to come, that he would
be able to dispose of the securities. The option was given to him at
that time. As the market improved a further discussion was had
with him as to the possibilities of securing an underwriting agreement to issue additional stock to the stockholders, and at that time
he indicated that he would make such an arrangement for a fee of
$2 per share, which afterwards was reduced to a fee of $1 per
share, upon the officers and directors whom I have previously mentioned participating in the group. We also said at the time that
the entire operation under the option, the underwriting, and so
forth, would be banded together and required various participants
to put up a total of $100,000, of which I contributed $10,000; Mr.
Grimm, $10,000; Mr. Phagan, $5,000; Mr. Kies, $10,000; Mr. Chadbourne, $5,000; Mr. Capdevielle, $1,000; my brother, H. S. Brown,
$2,000; M. M. Ewing, my secretary, $1,000; W. J. Butler, $1,000;
Philip Publicker, $5,000. The other participants, as I understand
it, were Mr. Carl C Conway, Mr. L. C. Young, Mr. John Bowen,
and Mr. Thomas Bragg, each of whom were presumably bound for
$12,500 each.
The CHAIRMAN. We will resume this after recess. At this time I
want to put into the record certain telegrams and letters which have
come to me with reference to the bill itself. I will ask that they be
inserted in the record without reading.
The first is a telegram from Arthur M. Wickwire.
Next is a letter from William A. Gordon, of Philadelphia.
Next is a letter from Dahlbender Co., of New York.
Next is a letter from George D. Hirst, of New York.
The next is a letter from I. K. Edmands, of Brookline, Mass.
5954
STOCK EXCHANGE PBACTICES
The next is a letter from K. B. Covington, of Jacksonville, Fla.
Most of the letters and telegrams coming to me are m praise of
the bill. Some make objections, and most of the objections appear
to apply to the provision for margins, which we will go into in more
detail later. Just at this moment I am asking to have these inserted
in the record.
(Communications in re S. 2693 will be found at the conclusion of
today's proceedings.)
The CHAIRMAN. We will adjourn now until half past two.
(Whereupon, at 1:05 p.m., Thursday, Feb. 15, 1934, a recess was
taken until 2:30 p.m. of the same day.)
AFTER RECESS
The committee resumed at 2:30 p.m., on the expiration of the
recess.
The CHAIRMAN. The committee will please come to order. Mr.
Brown will resume the stand.
TESTIMONY OF RUSSELL R. BROWN—Resumed
Mr. PECORA. Mr. Brown, in the course of your testimony yesterday
and today you referred to a certain meeting of the board of directors
of the American Commercial Alcohol Corporation held on April
27,1933.
Mr. BROWN. Yes,
sir.
Mr. PECORA. At which you said you presented your plan with
regard to the issuance of 25,000 additional shares of the capital
stock of the corporation for the purpose of raising additional working capital for the corporation.
Mr. BROWN I do not think I testified that I presented the plan.
I did not so intend, if I did.
Mr. PECORA. Then, for what purpose did you refer to the meeting
of the board of directors held on April 27,1933?
Mr. BROWN. I believe at that meeting I outlined to the board the
necessity for immediate action because of the financial condition in
which the company then was.
Mr. PECORA. That is, the necessity for immediate action toward
raising additional working capital?
Mr. BROWN. That is correct.
Mr. PECORA. I show you this book, which purports to be the minute
book of the board of directors and stockholders of the American
Commercial Alcohol Corporation, and ask you if you can identify
it as being the original minute book of that corporation?
Mr. BROWN (after looking at the book). Yes; I should say so.
Mr. PECORA. Mr. Chairman, I offer the book in evidence, and
merely ask that it be marked for identification, and not be spread
on the committee's record.
The CHAIRMAN. Let it be marked for identification.
(The original minute book of the board of directors and stockholders of the American Commercial Alcohol Corporation was
marked " Committee Exhibit No. 14 for identification, February 15,
1934", and only the excerpts read from the book by Mr. Pecora
are to be made a matter of record.)
STOCK EXCHANGE PKACTICES
5955
Mr. PECORA. NOW, Mr. Brown, this minute book has been marked
"Committee Exhibit No. 14 for identification." I want to read
therefrom certain extracts, from the minutes of the meeting of the
board of directors held on April 27,1933, as follows:
The organization meeting of the board of directors of the American Commercial Alcohol Corporation was held at the offices of the corporation, No. 405
Lexington Avenue, New York City, N.Y, on April 27, 1933, at 3-45 p.m,
this being the time and place of the regular monthly meeting of the board
as heretofore ordered by the board.
Piesent: Messrs. Atkins, Brown, Chadbourne, Colby, Foster, Kessler, Kies,
Paine, Pond, Publicker, and Runk, being a majority and a quorum of the Board.
Mr. Brown was unanimously chosen chairman of the Board, and Mr. Page,
secretary of the Corporation, acted as secretary.
Then I will skip some of the proceedings and go down to the
following:
The chairman presented to the Board the question of the advisability of
selling additional shares of the Company's common stock to provide further
working capital.
After a discussion of the* matter, Mr. Page was directed to investigate the
various legal questions and procedure involved, and to confer with Judge Foster
and Mr Paine, and to report their recommendations to a subsequent meeting
of the Board
The general affairs of the company were then discusssd, and there being no
further business the meeting adjourned.
And these minutes are signed by Cecil Page, secretary. Now, Mr.
Brown, is that the action that you referred to heretofore as having
been taken by the board of directors with respect to the necessity for
raising additional working capital?
Mr. BROWN. I think that may be it; yes, sir.
Mr. PECORA. Well, I fail to find any references in the minutes of
this meeting to any such element, other than that which I have read.
Do you think there are any other references in the minutes to that
subject?
Mr. BROWN. NO.
Mr. PECORA. What was your answer?
Mr. BROWN, NO.
Mr. PECORA. NOW, I note that Mr.
Page, the secretary, was
directed to investigate the various legal questions involved in the
plan, or involved in the question of selling additional shares of the
company's common stocK to provide working capital. And Mr.
Page was directed to confer with Judge Foster and Mr. Paine and
to report their recommendations to a subsequent meeting of the
board.
Mr. BROWN. Yes, sir.
Mr. PECORA. Judge Foster was an attorney, wasn't he ?
Mr. BROWN. Judge Foster is a director of the company.
Mr. PECORA. But he is an attorney as well, isn't he?
Mr. BROWN. I do not think he is a practicing attorney.
Mr. PECORA. But he is a lawyer, and has been admitted to the bar?
Mr. BROWN. That is correct.
Mr. PECORA. And for some years, a decade or two ago, he was the
judge of one of the criminal courts in New York, wasn't he?
Mr. BROWN. Yes,
sir.
Mr. PECORA. That is Judge Warren W. Foster, isn't it ?
Mr. BROWN. Yes,
sir.
5956
STOCK EXCHANGE PBACTICES
Mr. PEOORA. Was Mr. Paine also an attorney ?
Mr. BROWN. I believe so; yes, sir.
Mr. PECORA. Was Mr. Page also an attorney ?
Mr. BROWN. Yes,
sir.
Mr. PECORA. NOW, did these three gentlemen make any report or
recommendations at any subsequent meeting of the board on the
subject of raising additional working capital for the company?
Mr. BROWN. I think after that meeting was over a discussion was
had with those gentlemen on this whole problem, and I outlined to
that group the plan which I had in mind, and believe at that time it
was approved by the committee.
Mr. PECORA. Well, the plan which you then outlined to these three
gentlemen was the one that you have described here and which
involved the creation of Maister Laboratories, Inc., was it?
Mr. BROWN. That is correct.
Mr. PECORA, And Noxon, Inc.?
Mr. BROWN. That is correct.
Mr. PECORA. And the making of the agreements and the execution
of the transactions that you have testified to here ?
Mr. BROWN. That is correct.
Mr. PECORA. YOU had that plan all in mind on April 27, 1933, did
you?
Mr. BROWN. Yes, sir.
Mr. PEOORA. And you
outlined it in detail to those three members
of the board, all of whom were lawyers; is that right?
Mr. BROWN. Yes,
sir.
Mr. PECORA. Did they give you any opinion, or did they express
any judgment, upon the plan on April 27, 1933, after you had outlined the plan to them?
Mr. BROWN. I think they did, yes.
Mr. PECORA. Did they approve of it?
Mr. BROWN. I believe they did.
Mr. PECORA. A S a legal proposition they approved of it, did they?
Mr. BROWN. I believe they did.
Mr. PECORA. NOW, was there any formal report made by those
three directors, or by any one of them, to the board of directors ?
Mr. BROWN. AS to that I don't know, or don't remember.
Mr. PECORA. In regard to the legal questions involved in the execution of your plan, I mean.
Mr. BROWN. AS to that I don't remember.
Mr. PECORA. NOW, you also referred in your testimony heretofore
to a meeting of the board of directors of the American Commercial
Alcohol Corporation held on May 2,1933.
Mr. BROWN. That is correct.
Mr. PECORA. In reference to this plan.
Mr. BROWN. Yes,
sir.
Mr. PECORA. NOW, I will read to you what appears in the minutes
of the meeting of the board of directors held on May 2. 1933, from
the minute book of the company which has been marked " Committee
Exhibit No. 14 for identification." I t is as follows:
A special meeting of the Board of Directors of the American Commercial
Alcohol Corporation was held at the offices of the Corporation, No 405 Lexington Avenue, New York City, N Y , on Tuesday, May 2, 1933, at 3:30 pm.
STOCK EXCHANGE PRACTICES
5957
Present: Messrs. Atkins, Brown, Chadbourne, Colby, Foster, Grimm, Kessler, Kies, Paine, Page, Publicker, and Bunk, being a majority and a quorum
of the Board
Mr. Hersey Eggerton, of the firm of Larkm, Rathbone & Perry, counsel
to the Corporation, was also present
Mr. Brown, the chairman, presided, and Mr. Page acted as secretary of
the meeting.
The chairman stated to the Board that he believed there was an opportunity
to acquire certain new processes, some of which might be obtainable for the
manufacture of a dry yeast, having a very high and superior quality of
vitamin content, presenting large advantages over existing products, such
as non-deterioration and long life, for which it appeared there was a large
and profitable market.
It was believed, he said, that the process could be developed and the product
marketed at a very reasonable cost of operation, and made to yield profits
annually of at least $50,000, and that the process was worth at least $250,000.
He further said that it might be acquired by issuing the stock of this company
in exchange for the stock of a new company and the latter's agreement to purchase its supplies and needs from this company, and the giving to this company
of a note in an appropriate amount, and possibly with a satisfactory guarantee.
He further expressed the idea that the plan would involve the issuance of
the stock of this company m an amount to meet the value as found by this
boaid of the property to be received in exchange, including all the shares of the
yeast company, its contract for its supplies, and its note, and its other assets
He asked the board to consider the advisability of issuing not to exceed
25,000 shares of the common stock for this purpose.
He further said that if the stock were issued as proposed it would materially
strengthen and improve the company's asset position, which would be a decided
advantage during the distressing business and banking conditions now prevailing
The chairman further said that there appeared to be a trend in the alcohol
trade and industry toward doing the whole or the major part of this business
on a consignment basis, whereby the income from sales would be realized
seasonally, or in December of each year, against which there must be cash
available, and explained that this company might be affected by the general
banking restrictions in procuring the long-time credit extension necessary to
care for these consignment needs.
The chairman further said that these matters had been considered with
counsel, and he thereupon left the matter with the board, asking for an
expression of opinion.
After lengthy discussion it was, on motion, duly made and seconded, and
unanimously passed, duly resolved •
That the board finds the proposition generally acceptable, subject however
to the approval of counsel, and authorizes and directs the proper officers to
promptly negotiate with respect thereto, and in connection with counsel to
prepare proposals in definite form, including as to the yeast process a report
showing its merits, the market, and its possibilities, and its apparent value;
and also a report on the values of the other properties offered, all in further
consideration of this board, so as to enable them to make a determination of
the value of all the properties for which the common stock may be authorized
to be issued
There being no further business to come before the meeting, it was, on
motion duly made and seconded, unanimously passed for it to adjourn to
reconvene at the same place on Thursday, May 4, 1983
And these minutes are signed by Cecil Page as secretary. Now,
Mr. Brown, it appears that that was the only business transacted
at this special meeting of the board of directors held on May 2, 1933.
Mr.1 BROWN. That is correct.
Mr . PECORA. NOW, in presenting the proposition to the board that
is referred to in the minutes of the meeting of May 2 which I have
just read to you, it was the proposition that you originally outlined
in your discussion with the board at the meeting of April 27, 1933:
was it?
Mr. BROWN. That is correct.
175541—34—PT 18
8
5958
STOCK EXCHANGE PRACTICES
Mr. PECORA. And which you elaborated in detail in your discussion with Messrs. Foster, Page, and Paine after1 the meeting of the
board of directors on April 27, was it ?
Mr. BROWN. That is correct.
Mr. PECORA. And that proposition was to raise additional working capital for the company ?
Mr. BROWN. That is correct.
Mi*. PECORA. In order to enable it to meet its banking loans.
Mr. BROWN. Yes, sir.
Mr. PECORA. Which were maturing.
Mr. BROWN. Yes, sir.
Mr. PECORA. NOW, had you meanwhile—that
is, between April 27
and May 2, 1933—discussed the details of your plan with counsel
to the corporation, namely, Messrs. Larkm, Kathbone & Perry, or
any member or associate of that law firm?
Mr. BROWN. Yes, sir.
Mr. PEOORA. With whom?
Mr. BROWN. With Mr. Eggenton.
Mr. PEOORA. With Mr. Hersey Eggenton?
Mr. BROWN. Yes, sir.
Mr. PECORA. Was he specially requested to
be present at this meeting, I mean this special meeting, of the board of directors held on
May 2?
Mr. BROWN. Yes.
Mr. PECORA. NOW,
as a matter of fact, in this meeting of May 2
you stated to the board that it was your belief this process for the
manufacture of dry yeast, having a high and superior quality of
vitamin content, was worth at least $250,000?
Mr. BROWN. That is correct.
Mr. PECORA. And that was before the process had been patented.
Mr. BROWN. Yes; and it has not yet been patented.
Mr. PECORA. D O you say it has not yet been patented?
Mr. BROWN. I t has not been patented as yet.
Mr. PECORA. I t has not yet been patented ?
Mr. BROWN. NO, sir; and is not to be patented.
Mr. PECORA. And it was before anything had been done to exploit
the process ?
Mr. BROWN. Yes, sir; that is correct.
Mr. PECORA. That was before even the organization of the company that was to acquire this process?
Mr. BROWN. Well, it was after a study of the yeast process.
Mr. PECORA. NO ; that is not the point of my question. When on
May 2, 1933, you went before your board at a special meeting and
told them of this process, that it was worth, in your opinion, at least
$250,000, you gave that opinion at a time when the process had not
yet been commercially exploited; at a time when the process had not
been patented; at a time when the corporation which was to own the
process had not yet even come into existence, is that it ?
Mr. BROWN. That is correct. But at the same time, Mr. Pecora,
a product of that kind, to which this is superior, is sold in substantial quantities in the country at the present time.
Mr. PECORA. That is the same product that you referred to in your
testimony heretofore as being the creature of the brain of Dr. Maister,
is that right ?
STOCK EXCHANGE PEACTICES
5959
Mr. BROWN. That is correct.
Mr. PECORA. And that is the same thing that has not yet been
commercially exploited?
Mr. BROWN. That is correct.
The CHAIRMAN. Did that product require the use of alcohol ?
Mr. BROWN. NO.
The CHAIRMAN. What relation
Mr. BROWN. That comes in as a
has yeast to alcohol?
fermentation process, and the yeast
cultures through fermentation are developed, and, finally, after a
period of time, you get your yeast.
Mr. PECORA. By the way, Mr. Brown, is Maister Laboratories Corporation functioning today?
Mr. BROWN. DO you say Maister Laboratories Corporation?
Mr. PECORA. Yes.
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Yes, sir; I think so.
you know whether it is or not?
I assume it is.
I S it turning out any manufactured product?
DO
Mr. BROWN. Oh, not yet; no,
sir.
Mr. PECORA. YOU say not yet?
Mr. BROWN. NO, sir.
Mr. PECORA. And yet
you were expecting on May 2,1933, that this
process for the manufacture of this special dry yeast would yield
annual profits of at least $50,000?
Mr. BROWN. That is correct.
Mr. PECORA, Why has so much time been allowed to go by without
reaping or attempting to reap any part of this handsome profit?
Mr. BROWN. A S I explained to you this morning, it was necessary,
in spite of the time involved, in order to save money to the organization, that rather than put up a new building we tried it at Philadelphia, and after we developed that Philadelphia was not the proper
location for the plant, we then moved Dr. Maister to the Pekin plant;
and at that time, after he was moved, we started construction on an
addition to the Pekm plant. We are abandoning an integral part
of the plant that is there, called the mill building, and into that
building is to go the Maister process.
Mr. PECORA. And for that reason your company has not yet begun
to develop this process that you said promised a profit of at least
$50,000 a year, and that you solemnly told your board of directors on
May 2,1933, it was your belief would be received from it.
Mr. BROWN. That is correct.
Mr. PECORA. By the way, Mr. Brown, at this meeting of either
April 27 or May 2, 1933, did you inform the board of directors of
this option agreement given to Mr. Bragg?
Mr. BROWN. NO. At the board meeting I did not. But, informally, after the board meeting I told the various members that I
believed this deal could be worked out, that discussions had been
had with Bragg, and that he felt the proposition could be handled.
Mr. PECORA. Why was that told to the directors informally after
the meeting and not told to them formally at the meeting and a minute made of the discussion?
Mr. BROWN. Well, I suppose at that time we did not assume, as
long as I was giving the option and they had informally agreed to
5960
STOCK EXCHANGE PEACTICES
support me in that option, that it was necessary, and that it did not
go into the corporate procedure. That is, they informally agreed to
support me in that option.
Mr. PECORA. They agreed to support you informally, but not at
the meeting.
Mr. BROWN. Well, they informally agreed to support me in that
option.
Mr. PECORA. I notice that according to this minute book at the
next meeting of the board of directors, which was scheduled for May
4,1933, a meeting was not actually held because there was no quorum
present, the only director present being Mr. Page.
Mr. BROWN. That is correct.
Mr. PECORA. NOW, according to this minute book, the next meeting of the board of directors was held on May 25,1933.
Mr. BROWN. That is correct.
Mr. PECORA. And I notice reference in the minutes of that meeting to this plan of yours, which I will read to you from the minute
book:
A special meeting of the board of directors of the American Commercial
Alcohol Corporation was held at the offices of the corporation, no. 405 Lexington Avenue, New York City, N.Y., on Thursday, May 25, 1983, at 3:45 p.m.
Present* Messrs Atkins, Brown, Chadbourne, Colby, Foster, Grimm, Kies,
Paine, Page, Pond, Publicker, and Runk, being a majority and a quorum of
the board. And Mr. Hersey Bggenton, of the firm of Larkin, Rathbone &
Perry, who was present as special counsel for the corporation.
The chairman, Mr. Brown, presided, and Mr. Page acted as secretary of the
meeting.
Then I will skip what immediately follows—well, I see there is
here a list of the salaries of the elective officers of the corporation
for the current year as approved by the executive committee, which
was then presented and read to the meeting, and the same was approved and payments authorized in accordance therewith. What
were those salaries?
Mr. BROWN. It was $22,500 for Mr. Grimm, and $21,000 for me.
I don't remember the rest of them.
Mr. PECORA. Then I notice the following in the minutes of the
special meeting held on May 25,1933 [reading] :
The chairman reported progress in the negotiations with Mr. Ralph Nottebamn for the acquisition of an interest in his plant spray, and the principal
points of the contract that was being drawn
The chairman referred to the plan that had been considered by the board
and the executive committee for the acquisition of the stock of a corporation
that would be formed and which would take over certain processes, and so
forth, of Dr. Hans Maister, including his yeast product, in exchange for the
common stock of the company to be issued for that purpose; and also the
proposal that it might be advisable for the company to offer additional stock
to its stockholders in order to improve the company's asset position.
He said that the corporatiop referred to had been organized as Maister Laboratories, Inc, under the law& of Maryland.
Mr. Kies thereupon stated that he felt the board should approve the steps
taken by Mr. Brown.
A lengthy discussion ensued, and the directors all expressed approval of
what had been done.
There being no further business it was unanimously voted to adjourn to
reconvene at the same time and place on Wednesday, May 31, 1933
STOCK EXCHANGE PRACTICES
5961
These minutes are signed by Cecil Page, secretary.
Now, Mr. Brown, from that statement that you made to the conimittee at this meeting on May 25, 1933, it would appear that no
agreement had yet been made.
Mr. BROWN. Agreement with whom?
Mr. PECORA. I say, it would appear that no agreement had yet
been made.
Mr. BROWN. The directors, as I stated
Mr. PECORA (interposing). Wait a minute, and let me get an answer to that question.
Mr. BROWN. I am sorry.
Mr. PECORA. NO agreement had yet been made to take over these
processes of Dr. Maister, but the matter was simply referred to by
you here as [reading] :
The plan that had been considered by the board and the executive committee
for the acquisition of the stock of a corporation that would be formed and
which would take over certain processes of Dr. Hans Maister, including his
yeast product, in exchange for the common stock of the company to be issued
for that purpose.
Mr. BROWN. On the 2d of May, after the board meeting, I spoke
to the members of the board informally and told them of the situation with Mr. Bragg, and received their full approval, and told them
that I would now verbally contract with both Capdevielle and
Phagan
Mr. PECORA (interposing). When did you tell this to the board?
Mr. BROWN. I told this to the board informally after I had received their approval of
Mr. PECORA (interposing). When. I asked you.
Mr. BROWN. On the 2d of May, arter the board meeting.
Mr. PECORA. Didn't you say heretofore that you had not told the
board of directors anything about your option agreement with Mr.
Bragg ?
Mr. BROWN. I assumed that you were speaking about the formal
meeting of the board when I answered you in that way.
Mr. PECORA. Did I ask you if you had told them about it formally?
Didn't I ask you, on the other hand, if you had ever told the directors
about the execution of this option agreement with Bragg, and vou
s a i d " No"?
Mr. BROWN, Well, no; I don't think I answered you " No " there.
I think I told you at the time that I told the members informally of
the option agreement with Bragg. I think I answered you that way
just a moment ago.
Mr. PECORA. Just a moment ago you did, but when I asked you
on yesterday, and again this morning, my recollection is that you
said you had not told the directors an^hing about this option agreement that you, in behalf of yourself and your three associate officers
and directors, had made with Bragg.
Mr. BROWN. I think the secretary's minutes here [pointing across
the table to the committee reporter] will show that I told you I told
the board members about it informally.
Mr. PECORA. Our recollections differ on that, and we will let the
record speak for itself.
Mr. BROWN. All right.
5962
STOCK EXCHANGE PRACTICES
Mr. PECORA. The next meeting of the board of the American Commercial Alcohol Corporation appears to have been held, according
to this minute book of the company, on May SI, 1933. And still
according to the minute book there were present at that meeting:
Messrs. Atkins, Brown, Chadbourne, Colby, Foster, Grimm, Kessler,
Kies, Page, Bond, Publicker, and Eunk. Also Mr. Eggenton, counsel for the corporation. You presided and Mr. Page acted as secretary. The minutes then go on to recite, as follows:
Tlie chairman then presented to the meeting the form of agreement made
May 6,1933, between Mr. K B. Phagan and this corporation, providing, among
other things, for the sale to this corporation of 10,000 shares of the capital
stock of Maister Laboratories, Inc., in exchange for 10,000 shares of the common stock of this corporation, and requested that said contract, as made and
executed on May 6, 1933, be ratified and approved, and that agreement confirmatory of that contract be authorized.
Said agreement was ordered marked "Exhibit A" and attached to the
minutes of the meeting.
And then it appeared that a resolution was adopted by the board
by the unanimous vote of all present, authorizing the corporation
to enter into that proposed agreement with Mr. Phagan. The resolutions are rather lengthy and I won't take the time to read them.
I t then appears, according to the minutes, as follows:
The chairman then presented to the meeting the matter of providing additional cash for the corporate purposes by issuing and selling additional shares
of common stock of the corporation, of the pai value of $20 per share, and
offering to the common-stock holders the right to subscribe for such additional
shares, and presented to the meeting the forms of full share and fractional
share warrants representing the rights of the common-stock holders to subscribe as aforesaid, and also the form of scrip certificate for fractional interests in the common stock of the corporation.
Copies of said subscription warrants and certificates for fractional interests
are attached to these minutes
After full discussion, and on motion, duly seconded, the following resolutions
were then adopted by the affirmative vote of aU of the directors present at
the meeting aforesaid:
Resolved, that in order to provide additional cash for the proper corporate
purposes of this company, this company issue and sell 40,949 shares of its
common stock of the par value of $20 a share, at a price of $20 a share.
Further resolved, that this company offer to common-stock holders of record
at the close of business June 14, 1933, the right to subscribe prorata for such
additional shares, at the price of $20 per share, at the rate of 1 share of such
additional stock for each 5 shares held on such date.
And then follows other formal matter embodied in the resolutions,
intended to carry out the plan of issuing those 40,949 shares and of
offering them to the existing stockholders at $20 per share, with the
right to stockholders to subscribe for 1 share of the additional stock
for each 5 shares they then held.
Mr. BROWN. That is correct.
Mr. PECORA. And that resolution was unanimously adopted?
Mr. BROWN. That is correct.
Mr. PECORA. NOW, Mr. Brown, in view of the fact that the resolution to acquire from Mr. Phagan 10,000 shares of the capital stock
of Maister Laboratories, Inc., which he had acquired by giving his
promissory note therefor to Maister Laboratories, Inc., in return for
10,000 shares of the capital stock of the American Commercial Alcohol Corporation, and in view of the fact that that was not authorized
until this very meeting of May 31, why wasn't provision made to
offer those 10,000 shares also to your stockholders of record ?
STOCK EXCHANGE PRACTICES
5963
Mr. BROWN. Because, as I indicated to you before, first, that the
informal approval of the members of the board was given, and after
that was given I had made the commitment to Phagan and Capdevielle, and also made the commitment, which was purely a part of
the plan, for 25,000 shares to Bragg; and because neither Mr. Grimm,
nor Mr. Publicker, nor Mr. Kies, nor I wanted to lose any of that
stock, nor expected to be put in the position where we would have to
deliver that stock at the time—all these things, as I indicated to you,
meant that there were certain legal mechanics, apparently, that are
to be complied with, and after the informal discussion with the members of the board, and knowing the attitude of the board, and receiving their assurances of approval, I went ahead and made these
arrangements, all of which were a part of the plan.
Mr. PECORA. But, Mr. Brown, are you overlooking the fact that
this commitment that you are speaking of was not a commitment by
the corporation, but your individual commitment?
Mr. BROWN. That is correct.
Mr. PECORA. And the corporation was in no way bound to deprive
its stockholders of the right to subscribe for these 25,000 additional
shares at $20 a share merely because you individually had made an
individual commitment to somebody else, was it?
Mr. BROWN. I made the individual commitment with the full approval of the board, as I told you in this discussion.
Mr. PECORA. "Well, now, you cannot find a single thing in any
minutes of a meeting of your board that proves that as a fact, can
you?
Mr. BROWN. NO ; that is correct, except the testimony of the board
members.
Mr. PECORA. NOW, I want to suspend the examination of the witness for the purpose of examining Mr. Altschul.
TESTIMONY OP FRANK ALTSCHUL, NEW YORK CITY, CHAIRMAN
OP THE COMMITTEE ON STOCK LIST, NEW YORK STOCK
EXCHANGE
The CHAIRMAN. Mr. Altschul, will you come forward and be
sworn? You do solemnly swear that you will tell the truth, the
whole truth, and nothing but the truth regarding the matters now
under investigation by this committee, so help you God?
Mr. AiiTsoHuii. I do.
The CHAIRMAN. State your name and place of residence and
occupation.
Mr. ALTSCHUL. Frank Altschul, 550 Park Avenue, New York
City; banker.
The CHAIRMAN. What banking institution are you connected with,
Mr. Altschul?
Mr. AiiTSCUUL. Lazard Freres.
The CHAIRMAN. YOU are a member of the New York Stock Exchange?
Mr. ALTSCHUI.. Yes, sir.
The CHAIRMAN. HOW long
have you been a member?
Mr. AiiTSCHuii. I think since about 1924, sir.
The CHAIRMAN. Are you connected with any of its committees?
5964
STOCK EXCHANGE PRACTICES
Mr. ALTSCHUL. Yes, sir; I am a member of the governing committee; chairman of the committee on stock list. As chairman of
the committee on stock list I am a member of the conference committee ; also a member of the committee on wages.
Mr. PECORA. Mr. Altschul, how long have you been a member of
the New York Stock Exchange?
Mr. ALTSOHUL. Since 1924 or 1925.
Mr. PECORA. And how long have you been a member of the board
of governors of that exchange?
Mr. ALTSCHUL. Since October 21, 1925.
Mr. PECORA. And how long have you been a member of the stock
list committee of that exchange?
Mr. ALTSCHUL. Since November 2, 1925.
Mr. PECORA. And are you chairman of the latter committee ?
Mr. ALTSOHUL. Yes, sir.
PECORA. And have been
Mr.
Mr.
Mr.
at the
since 1925 ?
Ai/rsoHuii. Since May 14, 1930.
PECORA. Have you been in attendance before this committee
session which commenced this morning ?
Mr. ALTSCHUL. Yes, sir.
Mr. PECORA. Have you heard
substantially all of the testimony
given by the preceding witness, Mr. Russell R. Brown?
Mr. ALTSCHUL. I think I have heard a large part of it, sir.
Mr. PECORA. Have you heard enough of it to indicate to you in
your opinion that you became familiar through the medium of this
testimony with the general plan and purpose under which and for
which the American Commercial Alcohol Corporation made an additional issue of 25,000 shares of its capital common stock in May or
June of 1933?
Mr. AiiTSCHUii. I learned that from what I heard of the testimony
before this committee.
Mr. PECORA. I show you Committee's Exhibit No. 11 of this date
in evidence here and which is a printed copy of the application
made to the New York Stock Exchange by and on behalf of the
American Commercial Alcohol Corporation for leave to list 51,293
additional shares of its capital common stock. Will you look at it
and tell me if you recognize that application as a copy of the one
filed with the Stock List Committee of the New York Stock
Exchange?
Mr. ALTSCHUL (after examining paper). I do, sir.
Mr. PECORA. DO you recall the proceedings that were had and
the action that was taken by the Stock List Committee of the New
York Stock Exchange upon that application?
Mr. ALTSCHUL. My recollection is that this application—that in
the first instance the Committee on Stock List received from the
executive secretary of the committee a report covering this application ; that then later in the usual manner they received the application on a Friday afternoon, having an opportunity to go over it
before the committee on Monday morning.
The usual procedure was followed in this case: The members
went over the application. They saw the different things that were
set forth in the application and were prepared to act on it at the
meeting on Monday.
STOCK EXCHANGE PRACTICES
5965
In the case of an application of this sort, which is for an additional listing of stock, the questions that are asked by the committee
of the executive secretary, who has all of the documents in charge,
are to determine whether all of the papers have been placed on file,
whether the opinion of counsel is in order, whether the documents
that have been filed with us substantiate the printed material that is
in the listing application.
Having found nothing in the application that disturbed us in
any way, the application was thereupon acted on.
Mr. PECORA. YOU have through the medium of the testimony given
by Mr. Brown today and that you have heard, learned, or acquired
knowledge of many facts which you did not heretofore possess with
regard to this application, have you not?
Mr. ALTSCHUL. Yes, sir.
Mr. PECORA. NOW, if that
information and that knowledge of
those facts that you gained through hearing Mr. Brown's testimony
here today had been before your committee, had been in the possession of your committee or had been acquired by your committee
prior to its acting upon the application, do you think your committee would have granted the application?
Mr. ALTSCHUL. If the information, as we understand the information that has been developed here today, sir, had been before us,
it would have appeared that this stock was being issued for the
purpose of supplying the company with working capital, not for the
purpose of acquiring properties. Under those circumstances the
question of the preemptive right of stockholders would have been
immediately before us, and the application would have probably
been turned down on that ground, if upon no other.
Mr. PECORA. NOW I show you committee's exhibit no. 12 in evidence here, which purports to be a photostat copy of another application made to the New York Stock Exchange for an additional
listing of 15,000 shares of the common stock of the American Commercial Alcohol Corporation, which is dated June 27, 1923. Will
you look at it and tell me if you recall the filing of that application
or one similar in form to it with your committee in June 1933 ?
Mr. ALTSCHUL. I could not say that I recall that specifically, sir;
but I am sure that this application is an application that was filed
in the usual way and was acted upon in the manner that I have
indicated to you about the last.
Mr. PECORA. And that application also was granted, was it not,
by your committee and subsequently by the exchange, acting upon
the report of your committee ?
Mr. ALTSCHUL. Yes, sir.
Mr. PECORA. If you had
heard or if you had known that facts
that you have learned today with regard to the issuance of the 15,000
shares referred to in that application that has last been shown to
you, do you think your committee would have favorably acted upon
the application?
Mr. ALTSCHUL. We would have raised the same question, sir, and
taken the same action.
Mr. PECORA. What was the procedure followed by the stock listing
committee of the New York Stock Exchange with regard applications to list additional shares of capital stock of a corporation
whose shares had*previously been listed?
5966
STOCK EXCHANGE PEACTICES
Mr. ALTSCHUL. The usual procedure in a case of this sort—and
that was the procedure followed in these two instances—was to study
the application, to read the purposes of the issue as set forth there,
to satisfy ourselves as far as we can that that represents a legitimate
corporate purpose, to consider the legal opinion which supports the
application, and then m case there is nothing that has come to our
attention that puts us on notice of anything that we should inquire
further into to grant the application.
Mr. PECORA. Was any independent investigation made by or in
behalf of the stock list committee in order to determine whether or
not the representations and the matters set forth in those two applications were in accordance with the actual facts ?
Mr. Ai/rscHTjL. The opinion of counsel, which I think you have
in the records we left with you, was considered, and it was found to
be as far as we could see an unqualified approval by competent and
reliable counsel who were familiar with the facts. In cases of that
sort it has not been the practice of the stock exchange in the past to
go beyond the action of the board of directors assuming responsibility
toward their stockholders for acquisitions made in this manner and
supported by the opinion of qualified and responsible counsel.
Mr. PECORA. The counsel that you referred to in the answer that
you have just made was not counsel1 for the stock exchange, but
counsel for the American Commercial Alcohol Corporation?
Mr. ALTSCHUL. Quite right, sir.
Mr. PECORA. Was it the procedure or practice or custom for the
stock list committee in the past, or has it been in the past its custom,
practice, and procedure, to make no independent investigation of
the matters set forth in applications for listing additional shares of
stock?
Mr. ALTSCHUL. Beyond the investigations I have just described
to you in connection with the additional listings of stock, it has not
been the practice of the stock exchange to go further.
If you want me to amplify it: When we have before us for consideration an initial listing of stock where the question that is before
us is primarily the question of whether that is a stock that should
be made available for a public market place at all, the examination
is very thoroughgoing and exhaustive. When it comes to an additional listing of stock where a concern has passed the first test and
is on the list, simply applies for stock on the basis of a determination of the board of directors to issue the stock for certain corporate
purposes, it has not been the practice of the stock exchange to go on
the theory that they should examine into what the business judgment was or what other reasons led the board of directors to take
the steps they took, and this application as it was submitted to us,
there was nothing on the face of it that struck us as suggesting
that we ought to go further.
Mr. PECORA. The fact of the matter is then that the stock-list
committee virtually took for granted that the statements and representations made in the applications in question here, exhibits nos.
11 and 12, were truthful and accurate statements of fact?
Mr. AI/TSCHUL. In view of the fact that they were backed up by
opinion of reputable counsel confirming the authority of the board
to proceed in this matter, that is quite right.
STOCK EXCHANGE PRACTICES
5967
Mr. PECORA. DO you think tkat affords proper measure of protection to the public that might deal in those shares once they are
listed, those additional shares?
Mr. Ai/rscHTjL. I would like to answer that question this way, if
I may, Mr. Pecora: In this particular case, from the evidence that
we have heard here today I think that I would be only fair to the
stock-list committee to say that we had been misled as to the purposes of this thing. I further believe
Mr. PECORA (interposing). Don't you think that an independent
inquiry into the matters set forth in those two applications might
have prevented your committee from having been misled; that is,
an independent inquiry might have brought to light for the guidance
of the committee the facts that you have heard testified to here today
by Mr. Brown?
Mr. AiiTSOHUL. I would have to be prepared to admit that it
might have brought them to light in this particular case; yes, sir.
Mr. PECORA. By the procedure that it is customary to follow the
stock-list committee virtually precluded itself from making the kind
of inquiry that would have developed the true facts, the actual
facts; isn't that so?
Mr. Ai/rscHTJL. I prefer to deal with that rather more generally.
The alternative would be to inquire into the business judgment, the
business wisdom, the honesty, and propriety of every additional listing that is submitted to us with the approval of the board of directors. Now, we have never conceived that that was an obligation
that we could either properly discharge or that would be proper for
us to try to discharge, and the number of cases of this sort in the
course of a long experience that have come to our attention are
exceedingly few. We assume that the board of directors, by and
large, are acting in the interest of the stockholders. If they bring
us a statement covering an additional listing of some stock issue
for a corporate purpose, in general our experience has been that the
purpose set forth in the application is the purpose that actually
guided the board in making the decision. I can see that in this
case we have been misled.
Mr. PECORA. Were there not circumstances or allegations set forth
in those two applications which, in and of themselves, should have
operated to ]3ut the committee on notice that it ought to make an
independent inquiry and not assume that the directors were acting
in good faith with the stock exchange?
Mr. ALTSCHUL. Well, as I have read these applications over since
this matter came to our attention, I do not see just what there is
on the face of either one of them that should have led us to think
that the acquisitions of these properties were not quite within the
realm of the fair business judgment of the board of directors.
Mr. PECORA. There is a reference in those applications to an
exchange of stock to be issued for the stock of other companies that,
according to the face of the applications themselves, were companies
very recently organized.
Mr. ATSCHuii. They were companies very recently organized. In
one case it was a company that was supposed to have taken over the
business, I think, of a company that was previously organized. Isn't
that the fact ? And the other one it is quite true it was just recently
5968
STOCK EXCHANGE PEACTICES
organized ? In the case of the one that was just recently organized
the value of the stock in the opinion of the directors was set forth
in the application.
Mr. PECORA. AS how much, as being how much ?
Mr. ALTSCHUL. $300,000.
Mr. PECORA. Which company was that ?
Mr. ALTSCHUL. That is the Maister Laboratories.
Mr. PECORA. Yes. That company, according to the application
itself, had been only very recently organized ?
Mr. ALTSCHUL. 1 es.
Mr. PECORA. Well, was
it conceivable that it would have at the
very outset assets worth at least $300,000?
Mr. AiiTSCHUii. In our experience tnat happens every day. A business that may ha^ve been conducted in private form and something
new has been turned up, it is put into corporate form, and at the
time of the corporation it already has a substantial value.
Mr. PECORA. Isn't that a circumstance that in and of itself, in your
opinion now, should have put the stock list committee on notice and
caused it or prompted it to make an independent inquiry or investigation of the matters set forth in the application ?
Mr. ALTSOHUIJ. YOU mean the mere fact that these companies that
they acquired had been recently organized ?
Mr. PECORA. Yes.
Mr. ALTSCHUL. I would
say that in the light of what we have heard
today something could be said from that viewpoint, but as the thing
was before us at the time, the mere fact of its recent organization
was not a fact of such a nature that would put us on notice about
anything at all.
Mr. PECORA. Well now, you know a Mr. L. Hasselbach, do you not?
Mr. ALTSCHUL. Yes, sir. He is in our office, office of the committee
on stock list.
Mr. PECORA. What is he, an auditor ?
Mr. ALTSCHUL. He is an examiner.
Mr. PECORA. And his services are utilized to make investigations
or examinations of these applications for listings ?
Mr. ALTSCHUL. That is right.
Mr. PECORA. And he makes a report or recommendation to the
committee for its possible guidance?
Mr. ALTSCHUL. He makes his report to the executive assistant, who
afterward makes his own report to us.
Mr. PECORA. The executive assistant is Mr. George Tirrell, isn't it?
Mr. ALTSCHUL. NO ; Mr. Hoxsey. Mr. Tirrell is one of the expert
examining officers.
Mr. PECORA. I have here what purports to be a copy of a memorandum dated June 7, 1933, addressed to Mr. George Tirrell and
signed by L. Hasselbach. This copy was furnished to us by the stock
exchange at our request. Will you look at it and tell me if you
recognize it as a copy of a report or memorandum made to Mr.
Tirrell by Mr. Hasselbach for the use and guidance of the committee on stock list in connection with the application to list the
fifty-one-thousand-odd shares of the American Commercial Alcohol
Corporation?
Mr. ALTSCHUL. I do not recognize it. I have never seen it, but I
do not question it. It is a document that has every appearance of
STOCK EXCHANGE PEACTICES
5969
being the sort of communication that Mr. Hasselbach would have
addressed to Mr. Tirrell.
Mr. PECORA. I want to offer that in evidence.
The CHAIRMAN. Let it be admitted.
(Memorandum dated June 7, 1933, from L. Hasselbach to George
Tirrell, was thereupon designated " Committee Exhibit No. 15, February 15, 1934 ", and appears in the record immediately following,
where read by Mr. Pecora.)
Mr. PECORA. The exhibit marked " Committee Exhibit No. 15 " of
this date reads as follows [reading] :
JUNE 7, 1933
Memorandum to Mr. George Tirrell:
American,Commercial Alcohol Corporation Additional Common Stock
Application is presented by Mr. Page, Secretary of the company, 405 Lexington Avenue, Vanderbilt 3-7390.
Application is made to list 10,000 additional shares of common stock in
exchange for 10,000 shares of common stock of Maister Laboratories, Inc.,
and 41,293 additional shares pursuant to an offer to stockholders to subscribe.
Maister Laboratories, Inc., was recently organized to acquire certain
processes for the manufacture of vitamin yeast and other products from*
Dr. Hanns Maister American Commercial will acquire all of the issued
outstanding shares of the Maister Laboratories It is stated in the application that the directors of American Commercial Alcohol valued the stock of
Maister at more than $300,000
The company has also offered the common stockholders of the company
the right to subscribe to additional shares of common stock at $20 per share
(par value) on a basis of one additional share for each five shares held
10,000 shares to be issued for the Maister Company will also have the right
to subscribe.
There doesn't appear to be any relationship between the manufacture of
commercial alcohol and the manufacture of vitamin yeast and other products.
Apparently for that reason a new corporation is created to handle this line
of business The proceeds from the sale of the additional shares of common
stock will be used for paying off bank loans and providing funds for working
capital.
(Signed)
Mr. AJLTSCHTTL. Yes, sir.
Mr. PECORA. DO you recall
L HASSELBAOH
whether this memorandum was brought
to the notice of yourself and the other members of the stock-list
committee ?
Mr. ALTSCHUIJ. Why, probably it was not. I t would be a memorandum which would be one of the documents on the basis of which
Mr. Tirrell, who apparently was acting for Mr. Hasselbach in this
matter, would make his report to our committee.
Mr. PECORA. Was that in conformity with the general practice
and procedure of the stock-list committee in making these applications for additional listings?
Mr. Ai/rsoHuii. In accordance with the general practice and procedure, the juniors who will do the studying will file with one of the
executive assistants, and he may exchange memoranda with the executive assistants covering this point, and after the executive would
digest all this material he would make a report to us, which would
come to us at the time the application was passed on.
Mr. PEOORA. Have you tne report that was formally made to the
committee ?
Mr. ALTSOHUL. I think that was in the papers that we gave you
this morning. I have not seen it. I do not have it.
Mr. PECORA. I show you what purports to be a memoranda with
respect to the additional listing of 51,293 shares of common stock
5970
STOCK EXCHANGE PRACTICES
of the American Commercial Alcohol Corporation. Will you look
at it and tell me if that is the report that was formally made by
the examiners of the stock-list committee to the committee and
upon which the committee acted on an application for such listing?
Mr. ALTSCHTJIJ. This is the report that was made, sir, and upon
this report in connection with the listing application itself the committee acted.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Memorandum dated June 12, 1933, with regard to additional
listing of 51,293 shares American Commercial Alcohol Corporation
stock was thereupon designated " Committee Exhibit No. 16, Feb.
15, 1934", and appears in the record immediately following where
read by Mr. Pecora.)
Mr. PECORA. The memorandum in question has been marked in
evidence as " Committee's Exhibit No. 16", and reads as follows
[reading]:
MEETING OF JUNE 12, 1933—COMMENT BY MB TERRELL
American Commercial Alcohol Corporation common stock $20 par value (additional listing) 51,293 shares.
The stock covered in this application is to be issued as follows:
10,000 shares of common stock in exchange for 10,000 shares, the entire outstanding common stock, of Maister Laboratories, Inc, and
41,293 shares for subscription by stockholders, at $20 per share in the ratio
of one share for each five shares held as of June 14, 1933. The 10,000 shares to
be issued in exchange for Maister stock is included in the subscription offer.
The proceeds of the sale will be used for the purpose of paying off bank loans
and providing working capital.
The Maister Laboratories, Inc, was recently organized to acquire certain
patented processes for the manufacture of vitamin yeast and other similar
products from Dr. Hanns Maister. It is stated that American Commercial
Alcohol Corporation values the stock of the Maister Company at more than
$300,000.
Although the production relationship between vitamin yeast and commercial
alcohol is not entirely clear to me, it is stated that the company expects to
derive a large pront from the sale of the dietary yeast which will be produced
under the Maister processes
The common stock of the applicant company is quoted 32 to S2y2.
There is no objection to the listing requested.
And it was upon the data just presented in evidence, plus the
application itself, that your committee granted the application
in this case?
Mr. ALTSCHUL. That is correct.
Mr. PECORA. NOW, with regard to the application to list 15,000
additional shares dated June 27, 1933, which is before you, your
committee followed the same procedure as it followed on the application of June 2, 1933?
Mr. ALTSCHuii. Yes, sir.
Mr. PECORA. D O you know what data the committee had before
it other than the information set forth in the application itself that
prompted the committee to grant the application?
Mr. AiiTSCHuii. Whatever data the committee had before it beyond
what is in the application itself, sir, is filed with you now. I t is in
the general data covering this particular transaction, and it includes among other things the legal opinion of counsel.
STOCK EXCHANGE PEACTICES
5971
Mr. PECORA. Mr. Altschul, I show you what purports to be a
photostatic reproduction of a memorandum relating to the application for the additional listing of the 15,000 shares of the American
Commercial Alcohol Corporation common stock. Will you look at
it and tell me if you recognize it to be a true and correct copy of
a memorandum or report made by the examiners of the stock list
committee to the stock list committee ?
Mr. ALTSCHUII. I do recognize it, sir.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Memorandum dated July 10, 1933, in regard to 15,000 shares
American Commercial Alcohol Corporation common stock, was thereupon designated " Committee Exhibit No. 17, Feb. 15, 1934 ", and
appears in the record immediately following where read by Mr.
Pecora.)
Mr. PECORA. The document which has just been reecived in evidence is marked " Committee Exhibit No. 17 " of this date, and reads
as follows [reading]:
COMMITTEE EXHIBIT NO 17
Meeting of July 10, 1983—Comment by Mr Tirrell
AMERICAN COMMERCIAL ALCOHOL CORPORATION
Common Stock, $20 Par (Voting Additional Listing)
15,000 shares
The stock covered m this application will be issued in exchange for 2,700
shares of 6% Cumulative Preferred Stock, $100 Par, and 3,900 shares of the
Common Stock, no Par, of Noxon, Inc, a Maryland Corporation The total
authorized capitalization of Noxon, Inc is 3,000 shares of Preferred, and 6,000
shares of Common. The acquisition represents a controlling interest in the
Noxon Company
Noxon, Inc, is the owner of valuable formulae and processes for the manufacture of cleaner polish, floor waxes, household insecticides, etc, which are
the property of one Ralph Nottebaum, Sr, of Short Hills, New Jersey. He is
practically the sole owner of the Noxon Company
Because of the private nature of the business, no formal financial statements are available, but the assets to be acquired are regarded by the Directors of the applicant Company as of a value considerably greater than that
of the stock which is to be issued.
The applicant Company made application early in June for the listing of
additional shares The financial statements provided with the current application are the same as those submitted in the earlier one.
There is no objection to the listing requested.
Do you know whether there were any other data or facts submitted to your committee than this memorandum that has just
been read in evidence, and the listing application plus any opinion
of counsel, that prompted your committee to grant the application?
Mr. ALTSOHUL. I am perfectly satisfied that there was nothing
more than that submitted, sir.
Mr. PECORA. I assume that this memorandum marked " Committee Exhibit No. 17" was prepared by Mr. Tirrell?
Mr. Ai/rscHuii. I do not know, sir.
Mr. PEOORA. I judge so, from the fact that it bears the parenthetical statement reading " Comment by Mr. Tirrell."
Mr. AiiTSOHuii. Yes.
5972
STOCK EXCHANGE PRACTICES
Mr*. PECORA. Mr. Tirrell says that Noxon, Inc., is the owner of
valuable formulas and processes for the manufacture of cleaner
polishes, floor wax, household insecticides, and so forth, which are
the property of one Ralph Nottebaum, of Shorthills, N.J. Do you
know how Mr. Tirrell reached the conclusion that these formulas
and processes were valuable?
Mr. ALTSCHUL. He based that statement undoubtedly on information furnished in the listing application and such discussions as he
may have had with the company in preparation of it.
Mr. PECORA. YOU notice that in his memorandum report to your
committee Mr. Tirrell sajs also that because of the nature of the
business no formal financial statements are available, but that the
assets to be acquired are regarded by the directors of the applicant
company as of a value considerably greater than that of the stock
which is to be issued. In view of that comment or statement of Mr.
Tirrell, don't you think the stock-listing committee was put on
notice to make some independent inquiry as to the value 01 those
assets of the Noxon company?
Mr. ALTSCHUL. In a case of this sort, where the issue is relatively
small in relation to the total, while he would like to have had financial statements for the reasons advanced, as in this case here, if no
financial statement should be furnished we would not have considered
it essential. From what we have heard today we would be prepared
to draw the conclusion that we ought to make in every case an effort
to obtain financial statements of the vendor companies.
Mr. PECORA. But now, despite the fact that Mr. Tirrell said in this
memorandum or report to your committee, that no formal financial
statements are available, it would seem that there were financial
statements available; and in connection therewith let me call your
attention to the following memorandum for Mr. Tirrell dated July 5,
1933, signed by Mr. L. Hasselbach and attached to which is a socalled " pro forma " balance sheet of Noxon, Inc., as of June- 27,1933.
Do you recognize that memorandum of Hasselbach to Tirrell with
the accompanying pro forma balance sheet, as having been brought
to the notice of your committee?
Mr. AiiTSCHUii. I do not recognize it. I do not question it, but I
am sure it was never brought to the attention of the stock-listing
committee.
Mr. PECORA. We were furnished that copy of a memorandum, with
the accompanying pro forma balance sheet, by the stock exchange.
Mr. ALTSOHTJL. Quite right. I am sure it is a part of the records.
Mr. PECORA. I offer it in evidence as one exhibit.
The CHAIRMAN. Let it be admitted.
(A 2-page document dated July 5, 1933, and headed " Memorandum for Mr. Tirrell in re American Commercial Alcohol Corporation ", etc., was received in evidence, marked " Committee Exhibit
No. 18, Feb. 15,1934.")
Mr. PECORA. The document which has just been received in evidence as committee's exhibit no. 18, reads as follows [reading] :
STOCK EXCHANGE PRACTICES
5973
COMMITTEE EXHIBIT NO. 18
JULY 5,
1033.
Memorandum for Mr Tin ell.
In re American Commercial Alcohol Corporation Additional Common Stock.
Application presented by Mr. Cecil Page, Secretary; 405 Lexington Avenue;
telephone Vanderbilt 3-7390
Application is made to list 15,000 additional shares of common stock in
exchange for 2,700 shares of 6 percent preferred stock and 3,900 shares of
common stock of Noxon, Inc
Noxon, Inc. is a recently organized corporation which acquired formulae,
processes, etc, for the manufacture of cleaner polish, floor waxes, and a household insecticide, machinery and equipment, etc.
American Commercial has acquired all the outstanding preferred stock and
3,900 shares out of 6,000 shares of the outstanding common stock of Noxon.
Noxon products have been manufactured and sold for a number of years by
a predecessor corporation.
American Commercial made an application two or three weeks ago for the
listing of additional shares. The financial statements in this application are
identical with those published in the last application. I have requested the
company to furnish a pro forma balance sheet or a balance sheet of the Noxon
Company. Attached is a letter from the treasurer of the company giving reasons
why financial statements of the predecessor corporation are not available.
L. HASSELBACH.
Mr. PECORA. And the pro forma balance sheet of Noxon, Inc., as
of June 27,1933, shows the following:
Notes receivable
Inventory
Machinery and equipment «— —— - . „ — . —
Good will, licenses or processes
Total assets
—
$270,000
25,000
—. 25,000
380,000
$700,000
Liabilities:
Purchase contract payable
$80,000
Preferred; stock, $100 par, authorized, 300,000 shares, less unissued outstanding 30,000 shares
$270,000
Common stock, no par, 6,000 shares
$350,000
Total liabilities
$700,000
It says " Certified correct this 27th day of June 1933."
You say that this pro forma balance sheet was never brought to
the notice of the stock list committee?
Mr. ALTSOHUL. Surely not, sir.
Mr. PECORA. Can you give any reason why that was not done?
Mr. ALTSOHUII. There are only two reasons. One is that a mistake
was made in the office, and the other reason is that the balance sheet
only came to our hands long after the action had been taken. I do
not know the date of Mr. Hasselbach's first memorandum.
Mr. PECORA. July 5,1933.
Mr. ALTSCHTTL. The first one in which it was stated that no balance
sheet was available, the one which you read a photostatic copy of.
Mr. PECORA. That had reference to the Maister Laboratories situation.
Mr. ALTSCHTJL. I do not mean that; I mean the first comment you
read of Mr. Hasselbach in regard to
Mr. PECORA. It is here. It says [reading]:
I have requested the company to furnish a pro forma balance sheet or a
balance sheet of the Noxon Company. Attached is letter from the treasurer of
the company giving reasons why financial statement of the corporation are not
available
175541—-34—PT13
9
5974
STOCK EXCHANGE PEACTICES
Mr. ALTSCHUL. But there was an earlier comment that you read,
I am trying to find out where the slip up occurred—the comment of
Mr. Hasselbach in which he came to the conclusion that there was no
objection to the listing. I do not remember which one that was.
Mr. PECORA. That had reference to the Maister Laboratories.
Mr. ALTSCHUL. Did you not read a comment in regard to Noxon
from Hasselbach, an earlier one?
Mr. PECORA. NO.
Mr. ALTSCHUL. I thought there was one.
Mr. PECORA. The memorandum identified as exhibit no. 18 is a
memorandum addressed to Tirrell by Hasselbach. I t is dated July
5, 1933. The report by Mr. Tirrell to the committee on this application for the listing of the 15,000 additional shares is dated July
10, 1933, 5 days after the date of Hasselbach's memorandum to
Tirrell.
Mr. ALTSCHUL. AS I say, the only explanation that can possibly
be made is that either these reports that you have before you came
into our office at some subsequent date—we will try to trace that—
or if it was in there at the time, the memorandum to our executive
assistant was not complete, and the material that would have affected
our judgment was not in our hands.
Mr. PECORA. Let us assume that this pro forma balance sheet did
not come to the attention of any of the employees or attaches of
the stock-listing committee at the time that the committee acted
on the application, which was apparently on July 10, 1933. When
it was received, do you know why it then was not brought to the
notice of the stock-listing committee?
Mr. ALTSCHUL. I t should have been; there is no question about
that.
Mr. PECORA. Do you know why it was not?
Mr. ALTSCHUL. 1 do
not.
Mr. PECORA. This is the first time you have ever seen it?
Mr. ALTSCHUL. Yes, sir.
Mr. PECORA. Looking at
it now, would it excite your suspicion if
you had seen it before you acted ?
Mr. ALTSCHUL. Without the slightest question.
Mr. PECORA. What are the circumstances that would have aroused
your suspicion as you now look at this pro forma balance sheet?
Mr. ALTSCHUL. In view of the facts set forth in the application,
the bobbing up in this balance sheet of $270,000 of notes receivable
would have been the first thing that would have struck us. The second thing would be the item of purchase contracts payable, $80,000;
and the balance sheet as a whole would have put us on notice that
before there were a number of things that we would like to inquire
into.
Mr. PECORA. Would you not particularly have liked to inquire into
the valuation of $380,000 under the item of goodwill, licenses, and
processes?
Mr. ALTSCHUL. There is no question about that.
Mr. PECORA. YOU will note that in the memorandum of Hasselbach to Mr. Tirrell, dated July 5, 1933, and marked " Committee
Exhibit No. 18 " in evidence, the statement is made as follows:
Attached is a letter from the treasurer of the company giving reasons why
financial statements of the predecessor corporation are not available.
STOCK EXCHANGE PRACTICES
5975
And the letter apparently which was attached to this memorandum is the letter which I now show you [handing a j>aper to the
witness]. A copy of that letter was introduced in evidence here
this morning. Do you know whether or not you ever saw that letter
before?
Mr. ALTSCHUL. I know I did not. I have not had a chance to
read it. Are you going to read it to the committee ?
Mr. PECORA. I will read it for your benefit. I t is already in evidence. I t was put in this morning when you were not here.
I will read it, but you need not put it in the record, Mr. Reporter*
(Mr. Pecora then read committee exhibit no. 13)
Mr. PECORA (after reading exhibit no. 13). That you never saw before or never neard of before?
Mr. ALTSHUL. NO, sir; but I would assume, sir, that from the facts
we got the impression from the background that it was just a normal
business transaction, and therefore it was not drawn to our attention,
When this thing [indicating] came in I do not know.
Mr. PECORA. By " this thing" you mean the pro forma balance
sheet?
Mr. ALTSCHTJL. Yes. I t was enough to put anybody on notice*
Mr. PECORA. The letter which has just been read was marked in
evidence this morning as committee exhibit no. 13.
Now, I want to show you another letter that was addressed, under
date of July 1, 1933, to Mr. Louis Hasselbach, of the committee on
stock list, New York Stock Exchange, signed by Cecil Page, secretary of the American Commercial Alcohol Corporation, which has
been furnished to us as an original letter received by the New York
Stock Exchange. Did you ever see that before?
Mr. ALTSCHUL. NO, sir.
Mr. PECORA. DO you know whether or not that was ever brought
to the notice of your committee in passing on this application of
the American Commercial Alcohol Corporation?
Mr. ALTSCHUL. NO, sir.
Mr. PECORA. I offer the letter in evidence.
The CHAIRMAN. Let it be admitted.
(Letter dated July 1, 1933, from Cecil Page, secretary American:
Commercial Alcohol Corporation, to Mr. Louis Hasselbach, was received in evidence, marked " Committee Exhibit No. 19, February
15, 1934 ", and appears in the record where read by Mr. Pecora.)
Mr. PECORA. The letter is marked " Committee Exhibit 19 " and
reads as follows [reading] :
COMMITTEE! EXHIBIT N O 19
AMERICAN COMMERCIAL ALCOHOL CORPORATION,
New York, July 1, 198S.
Mr. Louis HASSELBACH,
The Committee on Stock List, New York Stock Exchange,
11 Wall Street, New York, N.Y.
BEAR MB. HASSELBACH : Mr. Colby and I tried to get you on the phone this
morning, but I understand you will be away until Monday.
We wanted to read to you, before mailing, the letter Mr. Colby was to
write, and I wanted to give you my suggestion as to the revision of the text
under Authority for and Purpose of Issue.
In order to save time I am enclosing Mr. Colby's letter as drafted, and also
my suggestions for your consideration.
5976
STOCK EXCHANGE PRACTICES
Will you kindly phone me at your convenience Monday morning and let me
know if you desire any changes.
Thanking you for your uniform courtesy and cooperation that you have
always shown us.
Sincerely yours,
(Signed) CtectEL PAGE), Secretary.
Bo the contents of this letter suggest anything to you, Mr. Altschul, with regard to the procedure followed oy Hasselbach in
behalf of the stock list committee?
Mr. ALTSCHUL. Quite frankly, it would suggest to me that he
was following his normal procedure of trying to bring the text of
the application into accord with the facts as he understood them;
and I think I would like to add, sir, that as a matter of routine of the
office this correspondence is only brought to our attention in exceptional cases where there seems to be something that requires special
note.
Mr. PECORA. DO you recall an application made to the Stock Exchange to list shares, that is, an original application for original
listing, of the shares of General Theatres?
Mr. ALTSCHUL. That takes me back a long time.
Mr. PECORA. Have you any present recollection of it?
Mr. AJ/TSOHUL. Yes; I have a recollection that there was such an
application. I recollect that there was quite a lot of discussion in
connection with it.
Mr. PECORA. Discussion where?
Mr. ALTSCHUL. In the committee. I t was a troublesome application, as I remember it.
Mr. PECORA. Before the stock list committee?
Mr. ALTSCHUL. Yes, sir.
Mr. PECORA. The application was granted eventually, was it not?
Mr. ALTSCHUL. A S I remember, it was, sir.
Mr. PECORA. Are you familiar with the testimony that was given
before this committee—I believe it was in November 1933—by Mr.
Harley L. Clarke?
Mr. ALTSCHUL. I am familiar with some sections. I t is rather a
voluminous document, and I have only gone through it very casually.
Mr. PECORA. Are you familiar with that portion of his testimony
in which he referred to that particular application for the listing
of shares of that company?
Mr. ALTSCHUL. NO, sir.
Mr. PECORA. Are you familiar
with the portion of his testimony
in which he admitted here, in words or in substance, that the asset
value of the company was marked up from $4,000,000 and a fraction
to upwards of $24,000,000?
Mr. ALTSCHUL. I remember there was something of that sort said,
but I am not familiar with the details.
Mr. PECORA. Original applications for listing I assume are given
the most thorough kind of investigation before the stock is listed?
Mr. ALTSCHUL. Yes.
Mr. PECORA. DO you
recall what investigation was given to that
particular application?
Mr. ALTSCHUL. I am very much handicapped, because I did not
have a chance to look this thing up to see what was done; but I
STOCK EXCHANGE PRACTICES
5977
am sure there was an appearance or several appearances, according
to my recollection, of Mr. Harley Clarke, and, of course, the affairs
of the company were discussed rather fully. But I did not realize
that that was going to be one of the topics of the day, and I am
not prepared.
Mr. PECORA. When did Mr. Clarke's testimony to that effect first
come to your notice?
Mr. ALTSCHUL. The testimony before the committee?
Mr. PECORA. Yes.
Mr. ALTSCHUL. My
recollection is that I saw a transcript of the
minutes of the meeting of the Committee on Banking and Currency
and had a chance to look through it rather hurriedly, some parts of
it, before it was in print. Since it was in print I have had a chance
to look through it again.
Mr. PECORA. DO you recall coming across that part of his testimony wherein he admitted that the assets had been marked up in
value from around $4,000,000 to $24,000,000, at the time they filed
their application for the original listing of their stock with the stock
list committee of the New York Stock Exchange ?
Mr. ALTSCHUL. I have a general recollection of it, but not very
detailed or completely satisfactory in order to answer any questions
about it.
Mr. PECORA. When that testimony of Clarke, which was given last
November, came, to your notice did it not arouse in you a desire to
find out, as chairman of the stock list committee, how it was that
your committee, after a thorough investigation of that application for
an original listing, approved it, although there had been a mark up
in asset value of from $4,000,000 to over $24,000,000?
Mr. ALTSCHUL. The general history of the Fox Film and General
Theatres Equipment Co. development was such that the committee
was misled
Mr. PECORA. Even when you learned through the testimony given
here by Mr. Clarke last November that your committee had been
misled into the approval of the application for the listing of the
stock of a company which in its application showed assets worth
$24,000,000 which in reality were worth only about $4,000,000, did
not that arouse in you an intense desire to find out how your committee had been misled in that fashion?
Mr. ALTSCHUL. Of course the committee is guided by its desire to
determine the facts in all these cases. I cannot say that this particular revelation had impressed us with any new desire to look into
that particular thing which was a matter of history; but a desire to
make our investigation more satisfactory in the future than in the
past. When the damage was done I am afraid we did not go into it.
Mr. PECORA. I t was a great American patriot who said that we
can only judge the future by the light of the experience of the past.
When through the medium of Clarke's testimony you learned that
your committee had been deceived in that case into the approval of
an original application for the listing of shares of a corporation
allegedly worth and having assets worth $24,000,000, when in reality
they were only $4,000,000, did you not seek to find out how you had
been misled, so that you could guard against such deceptions in the
future?
5978
STOCK EXCHANGE PRACTICES
Mr. ALTSCHUL. I can answer that I do not know of any positive
steps taken purely as a result of that revelation. We were constantly in process of trying to protect against misleading statements.
We have a few bad experiences in the course of a year which cause
us a great deal of concern.
Mr. PECORA. In connection with the testimony that this committee received last November with regard to that application for
original listing there was put in evidence here a memorandum prepared by Mr. Murray W. Dodge, who at that time was an officer
of one of the security affiliates of the Chase National Bank; and that
memorandum, or letter, appears at pages 3528 and 3529 of the
printed minutes of the hearings before this committee.
Mr Ai/rscHUL. Yes; I remember that.
Mr. PECORA. Let me read that letter to you. Do you recall the
letter?
Mr. ALTSCHUL. Yes; I remember that.
Mr. PECORA. Well, let me read it to you again. I t is dated
October 14,1929, and reads as follows [reading] :
Mr HARLOT It CIAKKB,
President UtiMtes Power & Light Corporation, Chicago, IM.
DEAR HARLEY Enclosed is the latest list of members of the stock exchange
committee on stock listing Of course, I could be of assistance to you if
Charlie Sargent were here He is on the board of directors of Chase Securities
Corporation, and has been very helpful to us in the past Unfortunately, however, he is abroad He sails the end of this week and will not be back until
the end of next week We may be able to do something with Ruxton of
Spencer Trask & Co, but I do not like to ask favors of them until we get into a
tough position Fiank Altschul of Lazard Freres is the one I called up this
morning He will probably be back for next week's meeting, and I think will
be friendly and helpful Gibson, the chairman, is the most important one, but
we do not know him veiy well He is a hard nut to crack I am always tearful
in cases like this that we would do more harm than good pressing the matter
too hard I do feel that when the right time comes, whether it is a week from
today, or 2 weeks from today, after Charlie Sargent is back, that if you appear
before them and I go with you we may be able to push the matter over
Enclosed find also memorandum given me by Tim Edwards. I think this is
the one you are working on If so, do you want me to call Mahoney off, oi
can we make use of him in some way? This conversation took place while I
was out West
Sincerely yours,
M. W. D.
Which are the initials of Murray W. Dodge.
The listing application, Mr. Altschul, to which this memorandum
refers, was that very listing application by which your committee
apparently was deceived as to the asset value of the company which
sought to list its shares.
Mr. ALTSCHUL. Mr. Pecora, may I interject something here? I
think my testimony would be unfair to the committee if I did not
say that Mr. Haskell, who is here, informs me that Mr. Hoxsey,
our executive assistant, has been making an exhaustive study of
the situation with regard to the General Theaters Equipment to
see what steps can be taken to guard against such things in the
future.
Mr. PECORA. Apparently Murray Dodge and Harley Clarke appeared before your committee back in October 1929, and, to borrow
the picturesque language of Mr. Dodge, pushed the matter over.
Is that so?
STOCK EXCHANGE PEACTICES
5979
Mr. Ai/rscHUii. The listing application was granted.
Mr. PECORA. The listing application was granted, so the
matter
was pushed over.
Mr. ALTSCHUL. I prefer not to indorse Mr. Murray Dodge's language in that regard.
g
Mr.
Uf
r. PPECORA. Unfortunately,
it is his language and it is in the
record, and I am bound by it. Apparently, from this memorandum
of Dodge, or letter of Dodge to Clarke, he had previously spoken
to you about this application. Do you recall whether he had or
not?
Mr. ALTSCHUL. I think it is quite possible he had.
Mr. PECORA. The reason I say that apparently he had is because
in this letter he says [reading] :
Frank Altschul, of Lazard Freres, Is the one I called up this morning. He
will probably be back for next week's meeting, and I think will be friendly and
helpful.
Do you recall what he said to you that caused him to tell Harley
Clarke in this letter that you probably would be friendly and helpful
to the granting of the application?
Mr. ALTSCHUL. I have no recollection of it at all. I take it for
granted that I was polite.
Mr. PECORA. What was it you said a moment or two ago that you
had just been informed, that the exchange had been looking into the
deception that was practiced on it in October 1929 by Harley Clarke?
Mr. ALTSCHUL. Mr. Haskell tells me that when this testimony was
made up Mr. Hoxsejr immediately undertook a study of the testimony
and was going over it and comparing it with our records to see what
lessons could be learned from the facts in the case. Mr. Hoxsey
would be here today, but he happens to be on his way to Kio de
Janeiro for a vacation, and will not be back for a few weeks.
Mr. PECORA. Mr. Clarke's testimony was given here last November,
or about 3 months ago. Has not that investigation been completed?
Mr. ALTSCHUL. I do not know when the printed record of it was
available. I do not know when Mr. Hoxsey was in a position to
start his study.
Mr. PECORA. AS I recall it, Mr. Altschul, one or more of the New
York newspapers published this testimony practically verbatim the
day after it was given here.
Mr. ALTSCHUL. What conclusions Mr. Hoxsey may have reached a&
a result of his study I am not in a position to inform you today.
Mr. PECORA. IS Mr. Hoxsey a member of the committee ?
Mr. ALTSCHUL. Mr. Hoxsey is the executive assistant. He is the
right hand of the committee.
Mr. PEOORA. NO report has been madei by him to you as yet, as
chairman of the committee, with regard to the investigation he
undertook to make after becoming familiar with Harley Clarke's
testimony?
Mr. ALTSCHUL. NO, sir.
Mr. PECORA. Are you acquainted with the fact that early last
August I personally asked Mr. Whitney, president of the New York
Stock Exchange, to make an inquiry, through the facilities and
authority of the exchange, into the trading that had taken place on
thefloorof the exchange on the so-called " alcohol stocks ", including
the American Commercial Alcohol Corporation issues?
5980
STOCK EXCHANGE PEACTICES
Mr. ALTSCHUI* Yes, sir, I am familiar with that fact.
Mr. PECORA. In connection with that inquiry which the exchange
made, didn't it occur to you, or to any other member of the stocklist committee, or to the board of governors of the exchange, to
inquire also into the applications for the listing of these additional
shares last year by the American Commercial Alcohol Corporation?
Mr. ALTSCHuii. We had no information as to what the purpose of
the investigation was. We assumed it was purely an investigation
of the speculative developments in the market, which is a matter
that comes up from time to time in various departments of the
market. We did not connect that with this application. We did
not know it had any bearing on it.
Mr. PECORA. The statement has been made in the past, I believe,
either in behalf of the stock exchange or its stock-list committee,
that the committee had also been deceived on the occasion of its
granting the application for the listing of the Krueger and Toll
stock on the exchange?
Mr. ALTSCHUI*. There is no question about that.
Mr. PECORA. DO you know how that deception was practiced?
Mr. Ai/rsoHuii. ITes; I do know, but it is a very long story. I do
not know whether it is necessary to take your time with it.
Mr. PECORA. Has the committee made a complete investigation
into that situation?
Mr. ALTSCHTJII. We have made a very complete investigation into
the Krueger and Toll situation. The basis for the deception in that
case was the outstanding personal reputation of Ivar Krueger, who
was considered all over the modern industrial world as one of the
outstanding constructive forces of the post-war world. Even after
his death the London Economist had laudatory articles about the
tragedy of Ivar Krueger, and how this great constructive force that
had been going on, and doing such wonderful things, had disappeared from the picture. Nobody had the remotest conception of
Ivar Krueger's real activities. I t was just one of those things that
occasionally happens in the world, unfortunately, but it occasionally
does.
Mr. PECORA. In other words, it is another one of those instances
where the exchange took for granted matters set forth in an application because of the identity of some great personality with the
security.
Mr. ALTSCHUII. In the case of Ivar Krueger we had before us
applications which, in the manner of applications for foreign companies, were unaudited in the case of Krueger and Toll. We have
drawn from that the very obvious conclusion that unaudited statements should no longer be accepted by the committee, and rules to
that effect have been incorporated in our procedure. Beyond that,
we had the case of International Match Co., which was another one
of the Krueger group where, curiously enough, statements were
audited by reputable American accountants.
In that case we investigated, and we found that the trouble had
come in that it was a holding-company audit that they submitted,
and that they had never gone in themselves and audited the subsidiaries of the holding company. Obviously, in that case we also
drew some important lessons for the future.
STOCK EXCHANGE PRACTICES
5981
Mr. PECORA. But none of those lessons were of a character that
caused your committee2 in June and July of last year, when it had
before it for its determination, judgment, and decision these applications for listings of additional shares 01 the American Commercial
Alcohol Corporation, to inquire into the situation wherenot even a
balance sheet of a corporation whose shares were to be acquired in
exchange of some of the new shares which the American Commercial Alcohol Corporation sought to list was inquired into?
Mr. ALTSCHUL. I am not trying to go into the American Commercial Alcohol case at the moment. The cases were not analogous, and
the lessons of the Krueger & Toll case would not be the lessons that
would be applicable in this particular instance. However, in this
particular instance I think there is a lesson to be drawn from it.
Mr. PECORA. What is that lesson, as you now see it?
Mr. ALTSCHUL. In connection with the additional application for
the acquisition of ownership of the stock of another corporation, the
balance sheet and the income account, if any, of the vendor corporation should be incorporated in the listing application. You have
drawn to my attention this document [indicating]. If this had been
in the listing application, the action on it would have been very different. The lesson is perfectly obvious.
Mr. PECORA. Mr. Altschul, that pro forma balance sheet you have
referred to was received by the stock exchange sometime, and was
never brought to the notice of the stock list committee. Do you
know the reason for that?
Mr. ALTSCHUL. NO, sir.
Mr. PECORA. Does not that
indicate a laxity or weakness in your
procedure somewhere along the line?
Mr. ALTSCHUL. AS I said before, that is capable of two explanations, neither of which is satisfactory. The first explanation would
be that this balance sheet reached us after the event, sometime after
the event, in which case it should still have been drawn to the attention of the committee. The other explanation is that the balance
sheet was actually in the hands of the staff at the time when a memorandum was prepared to the effect that no balance sheet was available, in which case a mistake was made. There is no question about
that.
Mr. PECORA. While we are on this subject of the deceptions that
have been practiced on the stock list committee in the past, let me
read to you a very brief extract from a speech delivered by Mr. Richard Whitney, president of the New YorK Stock Exchange, before the
Industrial Club of St. Louis and the Chamber of Commerce of St.
Louis and over the Nation-wide network of the National Broadcasting Co. on September 27, 1932, a printed copy of which I have
before me. Here is what he said [reading] :
I say, without fear of contradiction, that our listing requirements are the
most searching in the world.
Mr. ALTSCHUL. I think that is correct, sir.
Mr. PECOBA. DO you subscribe to that statement?
Mr. ALTSCHUL. Compared with the listing applications on the
London Stock Exchange, the Paris Stock Exchange, or the Berlin
Stock Exchange, which are the only three that come into play, there
5982
STOCK EXCHANGE PRACTICES
is no question that our listing requirements are the most searching in
the world.
Mr. PECORA. Did they apply these searching methods in connection
with the application to list the Krueger & Toll securities?
Mr. ALTSCHUL. Are you talking about the conditions abroad?
Mr. PECORA. NO ; on the New x ork Stock Exchange.
Mr. ALTSCHUL. They probably applied the methods they always
applied. I tell you in that case we were deceived. I have here, in
case it is of interest to you, a rather lengthy document, which I do
not think would be of very much interest, showing you the general
tightening up in our procedure from 1926 to 1933. It is constantly
in process of development, on the basis of experience. I do not
know of any experience in any field that is going to forearm you
against every new kind of deceit. With the enormous number of
applications acted upon when they are put on the floor, the cases of
deceit are rather few, and we try to improve our procedure every
time something new comes to our attention, but the trouble about
those things is that there is always somebody who is smart enough
to try something new, and if he tries something new that has never
been tried before, even with the most rigid requirements in the
world, he may find some way of fooling you. Whenever that happens, we try to profit by it. I think Mr. Whitney's statement that
our requirements go far beyond those of any other market place in
the world is unquestionably so.
Mr. PECORA. Last November your committee learned, in an informal way through the medium of Harley Clarke's testimony here,
the deception that had been practiced in October 1929 upon your
committee.
Mr. ALTSCHUL. Yes.
Mr. PECORA. It has
not yet found out how that deception was
practiced ?
Mr. ALTSOHUL. I am not familiar with the details.
Mr. PECORA. Although 3 months have elapsed since that time?
Mr. ALTSCHUL. I am not familiar with the details of Harley
Clarke's practice, but I understand Mr. Hoxsey is familiar with it.
Mr. Hoxsey is our expert on accounting matters, and whatever lessons
he has learned from that he is undoubtedly applying in his day's
work.
The CHAIRMAN. Are you familiar with the listing requirements
on the London, Berlin, and Paris exchanges?
Mr. ALTSCHUL. Yes, sir. They are very casual in nature. In
London, as far as I remember it, under the British companies act
a certificate has to be filed at Somerset House covering the major
particulars of the company in a very general and sketchy form.
The listing requirements in Paris really do not exist. The Agents
de Change get together and make up tneir minds that a security is
going to be put on the list or is not going to be put on the list. That
is about all there is to that. In Berlin, also, there is no printed
document that gives the information. Furthermore, in all the continental centers the audited report is almost an unknown instrument.
So that, while I am the last one to argue that we have reached the
end in developing our methods, we have gone very much further
than any other stock exchange has gone. I say tnat without the
slightest hesitation.
STOCK EXCHANGE PEACTICES
5983
Mr. PECORA. There was a third application filed by the American
Commercial Alcohol Corporation, which I have not time to inquire
about now.
Mr. ALTSCHXJL. I can tell you this much about it. That was an application the listing of which was authorized on official notice of
issuance. The procedure would be that when the stock was going to
be issued for the purposes covered by the application, the transfer
agent would inform us, and if we found that there were no impediments in the way of the issue, we would tell the registrar he could
register the stock. After hearing the evidence that was brought before you today, as you can imagine, we were much disturbed about
it, and we took steps to advise our office in New York that that permission should not be given, pending subsequent developments.
Mr. PECORA. I want to go into that tomorrow morning.
There is one more thing I want to call to your attention before we
adjourn. Is it part of the custom and procedure of the stock-list
committee, in passing upon applications for additional listings, to
require an officer of the company making the application to fill out a
questionnaire ?
Mr. ALTSCHIXL. I t is.
Mr. PECORA. I show
you what purports to be an original questionnaire filled out by tne American Commercial Alcohol Corporation, by Guy I. Colby, as its treasurer, dated June 2,1933. Will you
look at it and tell us if that was the questionnaire that your committee received as part of the application?
Mr. Ai/rscHuii (after examining paper). No doubt about it,
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Questionnaire June 2, 1933, American Commercial Alcohol Corporation to listing committee, New York Stock Exchange, was received in evidence, marked " Committee's Exhibit No. 20 ", Feb. 15,
1934, and portions thereof were subsequently read into the record by
Mr. Pecora.)
^ Mr. PECORA, There is just one question and answer on this questionnaire that I want to read to you. The questionnaire is marked
"Committee's Exhibit No. 20." Question no. 2 reads as follows
[reading]:
Are there within your knowledge any syndicate or concentrated holdings of
this security
The answer is " No."
Today Mr. Kussell R. Brown testified that there was a syndicate
formed on May 31,1933, and that there was a pool operation formed.
Mr. ALTSCHUL. Also that there were concentrated holdings.
Mr. PECORA. That there were concentrated holdings vested in
about four officers and directors of the company, amounting to approximately 50 percent of the total outstanding capital common
stock. So that it would appear that that answer was incorrect, if
Mr. Brown's testimony was correct.
Mr. ALTSCHUii. There is no doubt about it.
The CHAIRMAN. We will now take a recess until ^0:30 tomorrow
morning.
(Whereupon, at 4:40 p.m., Thursday, Feb. 15, 1934, an adjournment was taken until tomorrow, Friday, February 16, 1934, at
10:30 a.m.)
5984
STOCK EXCHANGE PRACTICES
COMMUNICATIONS IN B I S
2693
NEW YORK, N Y, February 10, 1934
Hon
DUNCAN U. FLET'OHER!,
Chairman Senate Committee on BanJcmg and Currency
The courage and constructive statesmanship of the highest order manifested
by you and your colleagues and counsel m inaugurating this epochal reform
merits the profound gratitude and enthusiastic acclaim of every right-thinking
citizen. I wish to express my sincere tribute
ARTHUR M WICKWIRB
Hon
DUNCAN U FLETCHER,
Chairman Committee on Banking and Currency, United States Senate,
Washington, D C
DEAR SENATOR FLETCHER: Congratulations to you and your conferees for the
good job done in the proposed " National Securities Act of 1934 " introduced by
you in the Senate last Friday
While the bill is broad in scope, there are two or three phases, in my judgment, which should be incorporated in any regulatory law controlling stock
exchanges and their member brokers
May I make the following suggestions
Mrst, incorporate in section 6 (B) provision that margins must be based on
the cost price of issue, so as to prohibit basing margin on amount of broker
loans, known as debit balance (I wrote you regarding this trick last
October 3 )
Second, prohibit marginal trading in all issues quoted under and at $10 a
share (This will protect the man whose capital resources are limited to a
few hundred dollars A case in point came to my knowledge last week A
man whose sole capital was $300, bought 100 shares Chicago & Northwestern
on margin at $6 The price dropped to 5% in 36 hours He was called for $125
additional margin Unable to produce, he was sold out Of course, he was
a fool But it is from the large army of fools totally ignorant of the odds
against them that certain types of member houses of the New York Stock
Exchange and other exchanges derive their largest income just as does the
gambling houses thrive off the " piker player."
Third, prohibit brokers from borrowing stocks, instead of actual buying for
the customer's account, and pocketing the larger share of the deposited margin,
after paying interest on the stock loan, which I suspect was done in the case
cited above
If the greatest number of our people who are inveigled into marginal trading
in stocks are to be protected against this most damnable and destructive form
of gambling, then the marginal requirements should be placed at the highest
limit, and issues selling at specified minimum price be restricted from marginal
trading
It is because of the rich pickings from margin trading that practically all
stock brokerage houses discourage outright buying orders from their customers,
because from those orders the broker gets only his commission
Unless the "margin player" has large available lesources for additional
marginal requirements, 7 out of every 10 margin traders are wiped out
By no stretch of the imagination or any logical reasoning can margin trading be defended as fair speculation. It is fundamentally gambling in its worst
phase
It is to be hoped that every national legislator will stand fast and fight for the
most drastic regulatory measure, despite the strenuous opposition which will
be leveled against its passage by the interests that profit the most from the
now most indefensible racket
With highest esteem and the hope you will, with others, make a herculean
fight to at least curb this form of racketeering,
Sincerely and cordially,
WHXIAM A GORDON.
FEBRUARY 12,1934.
STOCK EXCHANGE PRACTICES
DAHLHENDER
5985
CO ,
New York, February 10, 1934.
Hon.
Senator DUNCAN U. FLETCHER,
Chairman Senate Committee on Banking and Currency,
Washmffton, D C.
DBA SIB: More power to you and to the people back home who sent you to
Washington. Honest brokers certainly have nothing to fear from the anticipated stock market bill and the investors throughout the country have everything to gain. It does appear to me that Mr. Roosevelt is more interested in
those who do the investing than in those who merchandise the securities, and
this is as it should be I am a Wall Street man and make my livelihood here
in the Street trading for my clients in but one stock, namely, General Electrc
common, listed on the New York Stock Exchange I do believe that many
others on the Street, like myself, want to see the public get a square deal in
the market
I merely trade for my clients; I do not take part in any pools, do not match
any orders, do not wash any sales, do not give any market tips, do not manipulate any stocks, do not take any options on any stocks, do not use any stop
orders. All of my transactions are executed through New York Stock Exchange
houses with whom I have my accounts I am merely enclosing a copy of my
agreement with my clients so as you can see for yourself just what I do do
and what I don't do. This agreement was compiled for me by a very able
attorney, by name Mr Carl Ehlerman, of Ehlerman & Crawford, at 42 Broadway, New York City. Mr. Ehlerman is a friend and college classmate, I believe,
of our President, Mr. Roosevelt.
I shall be very happy to reveal the names of my clients if you wish and you
can see for yourself what we have accomplished under the present administration, and it could not have been accomplished under the previous administration
because the confidence was not there. I honestly believe that this bill wUl
restore even more confidence than ever To be certain, it will no doubt reduce
trading and turn over in the beginning, but in the long run it will bring more
money from the little fellow into American securities We little fellows just
hope and pray that God will spare this administration and keep them with us for
a long time. More power to you
Very respectfully yours,
GROVER C. DAHLBENDEB,
DAHLBENDER & Co, INC.,
42 Broadway, New York City.
DEAR SIRS: I authorize you to trade for me in the common stock of the
General Electric Company as follows:
1 Herewith I pay you the amount set opposite my name. Others have signed
or will sign, similar authorizations for varying amounts. All transactions are
for all, proportionately, on basis of amount signed for, with adjustment as to
earlier signatures, plus or minus, for transactions made before respective signature. The total signed for by all shall not exceed seventy-five thousand dollars
($75,000 )
2. You are to determine in your sole discretion, when to buy, and whether
outright or on margin, and when to sell, including short sales, and that when
any purchase is made on margin, or any short sale, the total margin including
previous margin transactions not completed, shall be at least 50%, though it
might later fall below that according to market fluctuations.
3 Trading will be in your name. You are to keep detailed accounts, to
exhibit them to me on request, to furnish daily statement of all transactions,
but collectively, for the day, for this and similar authorizations, and to render
a complete statement, collectively, at the end of each month. All securities
are to be held by you or Stock Exchange firms selected by you, but subject to
their customary terms, including usual right of such firm to hypothecate.
,4. Upon closing my account, (a) any loss shall be borne by me and none by
you, but I shall not be required to pay in more than the amount I am now
paying and, if the final accounting for my whole account, after deducting
profits paid me, shows a loss in excess of the amount I am paying in, you will
bear the excess; (b) net profits shall be divided 75% to me and 25% to you.
We pay our own office expenses, but transfer stamps and Stock Exchange com
5986
STOCK EXCHANGE PBACTICES
inissions and any loss through failure of a Stock Exchange firm, are expenses
or losses of the account, and are deductible before determining profits. Distribution of profits, from tune to time, is considered desirable but is not
required.
5. Profits include trading profits, dividends stock dividends, rights and all
other profits on my account, but any loss to me in a prior accounting under this
authorization shall first be deducted You receive your share in any partial
distribution of profit without responsibility to repay should there be a subsequent loss.
6. I may terminate my account on written notice to you and purchases and
'sales to close my account shall be made not later than the day of receipt of my
notice, plus one additional day on which the Exchange is open, such transactions
being for me (and not proportionally for all) You may also terminate all
accounts under this and similar letters any time. Upon any such closing, a
final account shall be promptly rendered me and payment and delivery made
-accordingly.
Yours very turly,
(Date)
(Name and address)
(Amount)
I approve the foregoing (1934).
We accept the foregoing and agree to its terms (1934).
DAHLBENDEB & COMPANY, INC.
By
.
752 WEST END AVENUE,
February 12, 1984.
MY DEAR SENATOR FLETCHER: Congratulations!
If anything, the proposed
stock-maiket legislation is not drastic enough.
The stock market has been and always will be (unless the stocketeers are
curbed) the greatest single source of misfortune and disaster in the history
of the American people. The professional gambler and his prostitute broker
perform no economic function, in spite of their rationalization about " making
a marker" and "minimizing fluctuations." Actually is it value that attracts
them? No; it is technical position, the possibilities for profit They exploit
an essential market place with the poker player's economic motive—profit
through disservice Indeed, they cannot profit except through the frailty of
human nature. They must have fools to work on or they cannot make a
living
Small wonder they are up in arms against this vital legislation. Are they
expected to go into honest toil? Are they to be compelled to work for a living?
Are they no longer to be permitted to get together and run a small issue up
and unload on pathetic suckers? Is the Government and "politics" going to
spoil that nice game they have been playing with impunity for so long?
Not if they know it. They have instructed all their help to write letters to
Washington complaining that they will lose their jobs if the bill goes through.
But do they ever think of the hundreds of thousands who have lost their small
pittances and savings through this degradation of an essential economic
function of security transfer?
Hew to the line, Senator. Put real teeth into this act. Let's have places
where we can buy and sell shares of stock as business men, not common crap
shooters. Let's prevent the country, my sons and daughters and yours, from
ever being drawn into the gambling vortex again. Let's back up the President
in his enunciation of caveat vendor. Let us forbid or tax away the fruits
of cupidity.
Don't be misled by the press which opposed the securities act because
it would curtail their financial advertising, and who now oppose this legislation because it may do the same. The great, vast, preponderant majority of
the people want this legislation. The sound, conservative, mature business man
wants it. The country wants it and expects it.
In closing, I am sorry that the dice-throwing floor trader was not covered
by a sliding scale of taxes depending upon the time interval in the consummation of trades. That would have been a splendid thing, but probably will be
considered later.
With kindest wishes,
Cordially yours,
GEORGE D. HIRST.
5987
STOCK EXCHANGE PRACTICES
Hon.
DUNCAN U. FLETCHER,
BBOOKUNE, MASS., February 12, 1934*
United mates Senate, Washington, D 0.
DEAR SIB: A S an owner and purchaser of securities and having no interest
in any brokerage or investment business, I wish to inform you of my convietionj>that the proposed clause in the Fletcher stock exchange regulation bill
requiring " 60 percent margin, etc.", will prove a mistake and will result in
the safety of investors being less secure than with the present regulation.
The proposed clause will limit the borrowing so materially that the tendency will be to buy much nearer the limit. This would result in distress
selling with smaller market fluctuations.
I would respectfully suggest the present margin regulation, 50 percent on
accounts under $5,000, and 30 percent over that figure.
Very truly,
I. B. EDMANDS.
COVINGTON Co.,
Hon. DUNCAN XJ. FLETCHER,
Jacksonville, Flo., February 12,1934.
Untied States Senate, Washington, D.C.
MY DEAR SENATOR FLETCHER : I have taken the liberty of sending you a night
message, copy of which is enclosed.
I am informed that when a member of the stock exchange, or broker, makes
a loan to a customer, they require the customer to give them written permission to hypothecate his securities to any extent that the member or broker
may see fit
The effect of this could be, to illustrate, a customer might borrow 25 percent
of the value of his securities and the broker could pledge such securities for
75 percent of their value, 50 percent of which would be for his own benefit. In
the event of the insolvency of the broker, the customer would lose his stock
unless it was so identified and so separated from the assets of the broker, and
the loan on same restricted to the amount of the loan to the customer, then
the customer could pay the amount of his loan and redeem his stock.
I am sure that you will understand exactly what I mean, and, if possible,
amend your bill so as to protect the customer as far as possible.
With kindest peisonal regaids, I am
Very truly yours,
R. V. COVINGTON.
COMMITTEE EXHIBIT N O . 11 FEBRUARY 15, 1934
Francis E. Fitch One), 138 Pearl St., New York.
COMMITTEE ON STOCK LIST
NEW YORK STOCK EXCHANGE
A-10073
AMERICAN COMMERCIAL ALCOHOL CORPORATION
(An operating and holding company organized under the laws of Maryland.
April 19, 1928)
COMMON STOCK ($20 PAR VALUE)
Application to list additional Common Stock:
Additional listing
Authorized by Charter
Previously authorized to be listed
Outstanding June 2nd
Total applied for
Authorized by Directors
Shares
51,293
375, 000
196,468
194, 748
247,761
— May 31, 1933
CAPITAL SECURITIES
Number of shares
Par
value
Stock
Class of stock*
7 % cumulative preferred stock
Common stock. . — . . .
—
...
$100
20
Author- Authorized by ized for
charter issuance
^16,024
375,000
None
247,761
Previously
listed
None
194,748
Outstanding
None
194,748
i Original authorization of Preferred Stock was 40 000 shares 23,976 were issued All retired on February 1st, 1980 whereby the authorized Preferred Stock was reduced by that amount.
Neither the Company nor its subsidiaries have any funded debt.
5988
STOCK EXCHANGE PRACTICES
NEW YORK, N.Y., June 2, 19SS.
Referring to their previous applications, and especially to A-9904, dated April
21, 1932, American Commercial Alcohol Corporation (hereinafter called the
"Company")* hereby makes application for the listing on the New York Stock
Exchange of
10,000 shares of the Common Stock of the Company of the par value of $20
per share, on official notice of issuance, in exchange for 10,000 shares of the
common stock of Maister Laboratories, Incorporated, of the par value of
$20 per share; with authority to add
41,293 * shares of the Common Stock of the Company of the par value of
$20 per share, upon official notice of issuance thereof pursuant to offer to
stockholders to subscribe to such additional stock; making the total
amount applied for
247,761 shares (of a total authorized issue of 375,000 shares).
All of said shares of the Common Stock will be, when issued, full paid and nonassessable, with no personal liability attaching to holders thereof.
AUTHORITY FOR AND PURPOSE OF ISSUE
At a meeting held May 31,1933, the Board of Directors authorized the issuance
of 10,000 shares of the Common Stock of the Company of the par value of $20
per share in exchange for 10,000 shares of the common stock of Maister Laboratories, Incorporated, of the par value of $20 per share, which will then be the only
issued and outstanding stock of the latter Corporation Maister Laboratories,
Incorporated, a Maryland corporation, is the owner of valuable processes acquired
from Dr Hanns Maister for the manufacture of vitamm yeast and other products.
The Directors of American Commercial Alcohol Corporation at their said meeting
valued this stock at more than $300,000
At said meeting the Board also authorized the offering to Common stockholders
of the Company of the right to subscribe for additional shares of the authorized
but unissued common stock of the Company at the price of $20 for each share
subscribed for, in the proportion of one additional share for each five shares held
by common stockholders of record at the close of business on June 14, 1933, all
subscriptions upon such offerings accompanied by payment in full m New York
funds to be made at the office of the City Bank Farmers Trust Company, 22
William Street, New York City, New York, on or before 3 P. M. July 5, 1933.
Said offering will be based on the 194,748 shares of Common Stock outstanding,
the 10,000 shares authorized for issuance in exchange for common stock of Maister
Laboratories, Incorporated, and any additional shares which may be issued
on or prior to June 14, 1933, pursuant to the exercise of stockpurchase warrants
outstanding in connection with the original bond issue of the Company.
The proceeds of the issue and sale of the said additional Common Stock offered
to stockholders, are to be used for the purpose of paying off bank loans, and providing funds for working capital.
To evidence such subscription rights, the Board of Directors at said meeting
authorized the issuance to Common stockholders of record at the close of business
June 14, 1933, of subscription warrants registered in the name of the stockholder
for the full number of shares to which his holdings at the close of business on
June 14, 1933, entitle him to subscribe, and fractional warrants representing any
fractional interest in his subscription rights. No fractional shares will be issued.
Fractional interests in the additional stock will be represented by Scrip Such
Scrip shall be non-dividend bearing, shall confer no voting rights, shall be exchangeable in round amounts for shares of the additional stock and shall be
void at 3 00 o'clock P.M. Daylight Saving Time, on July 5,1935
Subscription rights evidenced by the warrants issued to Common stockholders
will terminate at 3 o'clock P.M. on July 5, 1933 and warrants will become null
and void at that time.
Arrangements have been made for the underwriting of this offer, for the con*
sideration of $1 per share.
BUSINESS
The Company is, and its predecessors were, engaged in the business of manufacture and sale of alcohol for commercial purposes. Under a ruling by the
United States Treasury Department dated January 21, 1928, industrial alcohol is
now produced by the various manufacturers according to definite quantity allotments. The Company at the present time has permits (including permits held
1344 shares of this number are issuable on subscription to the extent that holders of stock purchase warrants, who are entitled to buy 1,720 shares of Common Stock, may purchase such stock on or before the close*
of business on June 14,1933.
STOCK EXCHANGE PRACTICES
5989
by American Commercial Alcohol Corporation of California) to produce 11.82%
of the gallons authorized under the allotment plan of the Treasury Department.
PLANTS AND PROPERTIES
The Company owns directly manufacturing plants at Pekm, 111., Philadelphia,
Pa., New Orleans, La, and, through its subsidiary, American Commercial
Alcohol Corporation of California, a manufacturing plant at Sausalito, Calif.
The Company also leases warehouses in strategic distribution centers throughout
the country. For a more extensive description of the properties of the Company
see Exhibit A, which is attached to application A-8723
SUBSIDIARY COMPANIES
The Company owns the entire issued and outstanding Capital Stock (except
necessary qualifying shares) of American Commercial Alcohol Corporation of
California and The Kessler Chemical Corporation For detailed information
with respect to the acquisition and organization of these companies reference is
made to applications A-8723 and A-8922.
EMPLOYEES
The Company and its subsidiaries, American Commercial Alcohol Corporation
of California and The Kessler Chemical Corporation, employed 242 persons on
June 2, 1933, exclusive of brokers and salesmen working entirely on commission.
DEPRECIATION POLICY
Since organization, depreciation amounts have been written off annually on
the basis of the Me of the property depreciated. An approximate table of depreciation percentages in accordance with the straight line method, which have
been written off each year follows
Percent
Buildings
2
Machinery
5
Equipment (depending upon its nature)
10-20
DIVIDENDS
Preferred Stock. At the rate of 7% per annum, declared and paid quarterly
from its issuance on April 25, 1928, until retired on February 1, 1930.
Common Stock: An initial dividend on the Common Stock of 40 cents in cash
and 3% in Common Stock was paid on July 15, 1929. Similar cash dividends
were paid quarterly up to and including April 15, 1930, at which time a dividend
of 2% payable m Voting Trust Certificates representing Common Stock was also
paid. Since the last mentioned date no dividends have been declared.
FINANCIAL STATEMENTS
The following financial statements as of December 31, 1931, December 31,
1932 and March 31, 1933, are set forth below m comparative columns:
(a) Condensed consolidated statements of income and profit and loss.
(b) Consolidated condensed statement of capital surplus as at December 31,
1931 and December 31, 1932.
(c) Consolidated Condensed General Balance Sheets.
The statements of December 31, 1931 and December 31, 1932 have been prepared by the Company's auditors, Messrs F. W. LaFrentz & Co. and certified
by them as follows:
To the Stockholders of American Commercial Alcohol Corporation:
We have examined the records and books of account of American Commercial
Alcohol Corporation and its Subsidiaries, for the years ending December 31,1931,
and December 31, 1932, and have prepared therefrom the following Exhibits
applicable to the year ending December 31, 1931, and to the year ending December 31, 1932; and
Hereby certify that the following Consolidated Condensed Greneral Balance
Sheets, and statements of Income and Profit and Loss, and Capital Surplus,
applicable to the year ending December 31, 1931 and the year ending December
31, 1932, compiled from our general reports, in our opinion, correctly reflect the
financial status of the Company, as at December 31, 1931 and December 31,
1932, and the results of its operations for these years
F. W. LAFRENTZ &
Co.,
Certified Pubhc Accountants.
175541—34—PT 13
10
5990
STOCK EXCHANGE PRACTICES
The'statements of March 31, 1933 have been prepared by the Company, and
are certified to by the Treasurer as follows.
/ hereby certify that the following Consolidated Condensed General Balance
Sheet, and Statement of Income and Profit and Loss, in my opinion, correctly
reflect the financial status of the Company, as at March 31, 1933, and the results
of its^operations for three months ended that date
AMERICAN COMMERCIAL ALCOHOL CORPORATION,
GUY I. COLBY, Vice President and Treasurer.
American Commercial Alcohol Corporation and its subsidiaries
(A) CONSOLIDATED CONDENSED STATEMENT OF INCOME A N D PROFIT A N D LOSS
Year 1931
Profit on sales before depreciation..
Interest received
Other income
Year 1932
$367,047 59 $1,449,829 67
10,056 13
4,00149
20,723 92
8,459 12
Total-.
397,827 64
Deductions*
Selling expenses
Administrative expenses...
Bad debts
Interest paid-.
Discount on sales
Depreciation..
365,781
298,113
55,817
17,116
31,777
226,873
Total
24
03
23
66
54
41
995,ff9 11
Profit'for the penod
Surplus beginning of period
Miscellaneous surplus adjustments
$224,410 09
1,903 21
1,462,290 28
330,577
227,968
30,356
56,237
26,670
204,041
32
81
32
90
24
30
52,173 37
29,829.38
8,007.11
7,709 54
3,970.73
49,876.82
875,851 89
151,566.95
597,651 47
46,483 93
25,144 87
Charged against capital surplus
First quarter
1933
76,771.43
586,438.39
244.56
1576,312 14
Balance earned surplus from December 31,1931..
662,965.26
*Loss.
(b) CONSOLIDATED CONDENSED STATEMENT OF CAPITAL SUBPLUS—AS AT DECEMBER 31, 1931
Amount of Capital Surplus determined and authorized by the stockholders at their meetmg of
November 24,1931, arising out of an apportionment of the amount shown on the Company's
books at that date, of $8,769,697 42, representing outstanding Common Stock to the number
of 389,495 shares of no par value This sum was apportioned in such manner as to show
$3,894,950 as representing the 389,495 shares of Common Stock at a par value of $10 each,
and the remainder as Capital Surplus, l e
$4,874,747.42
At the same meetmg the stockholders authorized the directors to charge the deficit m
Surplus Account against the Capital Surplus so created, and further authonzed the
Directors in their discretion, to set up reserves out of the Capital Surplus so created.
In accordance with this authonty, the directors have authorized and directed that the
following several sums be entered on the books of account, as of December 31,1931
Appropriation of Capital Surplus
Reduction of book value of treasury stock from $280,53111 to a par
value basis of $130,970 80.
$149,560 31
Reserve provided for excess cost of raw materials
267,493 19
Reserve provided for future contingencies
.
8,614 67
Extraordinary losses and adjustments
Reduction of inventory valuations, necessitated
by the purchase of molasses under contracts made
in prior years
$144,915 77
Losses due to trading m corn options
87,591 04
Reduction m valuations of fixed assets, based
upon appraisals and estimates made by the officials
of the Company.
156,635 82
Losses due to revaluations of containers
212,819 35
Organization expenses—Unamortized balance..-.-. 72,669 68
Provision for income tax assessments, applicable to
prior years
110,977 99
Miscellaneous items—
36,483 83
Total extraordinary losses and adjustments
Net deficit—December 31,1931—Charged to Capital Surplus
Total deductions from Capital Surplus
Balance—Capital Surplus December 31,1931
822,093 48
576,312 41
1,824,074.06
.
. . . . . $3,050,673.36
STOCK EXCHANGE
5991
PBACTIOES
American Commercial Alcohol Corporation and its subsidiaries—Continued
CONSOLIDATED CONDENSED STATEMENT 0 7 CAPITAL SURPLUS—AS AT DECEMBER 31, 1932
Capital surplus—Balance December 31,1931
$3,060,673.36
Add—Balance of reserves, December 31, 1931, which were created out of
Capital Surplus in 1931
Income taxes pnor years
. $112,391 76
Provision for Stock Warrants
8,663 30
Provision for raw material commitments
267,493 19
Provision for contingencies
8,614 67
397,152.92
Total
3,447,826 28
Deduct—Charges to Capital Surplus and Reserves.
Income taxes for pnor years and expenses m connection therewith
$54,412 41
Settlement of claim for liability m connection with Stock Warrants
7,000 00
Cost of molasses and gram consumed m manufacture
$1,161,239 55
Less—Charged to operations on basis of market price determined as at December 31,1931
905,839 09
Balance charged to reserve for raw material commitments provided
for at December 31,1931.
255,400 46
Salary due at December 31,1931, under a contract made at tune of organization of the Company with an executive who discontinued functioning as an officer of the Company—as at January 1,1932
39,798 59
Loss incurred through sale of Treasury Stock and extinguishment of
employes stock purchase agreements
46,478 91
Legal, printing and other expenses mcident to change of Capital Stock
from No Par Value to a Par Value of $10 00 per share, and from a Par
Value of $10 00 per share, to a Par Value of $20 per share
10,636 27
Portion of cost of moving Chemical Plant from Orange, N J , to Philadelphia, Pa
—— .
.....—. ..
.......
.....
3,676 20
Bonus to discharged employees and salary contract adjustment paid in
recognition of long term services
5,852 56
Expenses and adjustments applicable to pnor years
Allowances to customers and adjustment of claims
$16,063 70
Excess of allowances for and expenses mcident to reconditioning drums—in hands of customers December 31,1931—
over actual inventory value
10,592 87
Experimental expenses
3,566 43
Legal and auditmg expenses
6,139 21
w
Sundry other expenses
6,422,52
Total
$42,784 73
Less—Collection of freight claims and other credit adjustments
6,108 72
Balance of expenses and adjustment applicable to pnor years
36,676 01
Total of charges to Capital Surplus and Reserves
459,931 41
Balance
$2,987,894 87
Reserve for Stock Warrants—Balance remaining December 31,1932
$1,653 30
Reserve for contingencies—Authorized by Board of Directors at then* meeting
March 2,1933
400,000 00
401,653 30
Capital Surplus—Balance December 31,1932
$2,586,241.67
(c) CONSOLIDATED CONDENSED GENERAL BALANCE SHEET
March 31.
1933
December 31,
1931
December 31,
1932
$443,228 14
$251,961 24
$216,004 68
Notes and acceptances receivable—Trade
$47,452 97
$46,851 78
$45,839 14
Accounts receivable
Trade
Less: Reserve for doubtful accounts
$839,259 25
81,174 38
$601,826 55
70,927 61
$556,887 40
55,160 67
$758,084 87
13,222 90
14,677 55
$530,898 94
13,724 05
12,871.31
$601,726 73
8,669 89
12,500 00
$785,985 32
$557,494 30
$522,896 62
$513,775
431,168
52,758
54,489
$739,801
893,570
50,000
48,266
22
83
00
12
$781,402 08
979,210 17
238,907 06
82,501.29
Current assets
Cash
ASSETS
Balance
- Due from officers and employees
Miscellaneous accounts
.. « -
Total accounts receivable
Inventories (at the lower of cost or market)
Finished product
- —
.........
Raw materials and supplies
Advance payment on raw material purchased..
Containers
.
.
41
09
77
28
Total inventories
$1,052,191 55
$1,731,628 17
$2,082,020 60
Total current assets
$2,328,857 98
$2,687,935 49
$2,866,761 04
-
5992
STOCK EXCHANGE PEACTICES
American Commercial Alcohol Corporation and its subsidiaries—Continued
(c) CONSOLIDATED CONDENSED GENERAL BALANCE SHEET
Fixed assets
Land, buildings, machinery, etc (appraisal value
December 31,1927 plus additions at cost)
Less—Depreciation reserve
Construction work m progress
Total fixed assets
_. .
Cash m escrow—on account of contingent liability under
Property Purchase Agreement
Prepaid and deferred items
Cost of investment in Rossville Alcohol & Chemical
Corporation Syndicate.
.
....
Insurance and taxes prepaid
Miscellaneous expenses
Deferred expenses..
...
Total prepaid and deferred items
Goodwill trade marks formulae, etc
Total assets .
- -
December 31,
1931
December 31,
1932
March 31,
1933
$6,600,700 33
659,751 14
$6,679,519 40
827,998 27
$6,673,440 05
875,118 19
$5,940,949 19
5,781 90
$5,851,521 13
$5,798,321 86
39,349 5£
$5,946,731 09 . $5,851,521 13
$5,837,671 45
$94,668 96
$69,957 21
14,830 66
$284,006 87
42,089 66
42,597 91
$284,006 87
38,090 35
48,119.13
52,821 45
$84,787 87
$368,694 44
$423,038 30
$1 00
$1 00
$1 00
$8,455,046 90
$8,808,152 06
$9,127,471 79
LIABILITIES
Current liabilities
Notes payable to b a n k . . .
Trade acceptances
.
...
Accounts payable
Trade.
Others
—
.
-
...
....
.
Total accounts payable
^.
Total current liabilities
Sundry reserves
Provision for containers in customer's hands
Income tax prior years.
Provision for Stock Warrants
Provision for raw material commitments...
Provision for contingencies
Total sundry reserves...
Capital Stock and surplus
Capital Stock—Common
Authorized
Less—Unissued.
$400,000 00
i $794,739 16
»$836,500 00
$492,701 65
$290,302 62
$539,612.07
$286,706 97
45,465 30
$180,153 52
61,952 50
$145,384 35
46,155 34
$332,172 27
$242,106 02
$191,539 69
$1,224,873 92
$1,327,147 80
$1,567,652 66
$18,367 50
112,391.76
8,653.30
267,493 19
8,614 67
$11,721 00
$14,009.00
1,653 30
1,653 30
400,000 00
400,000.00
$415,520 42
$413,374 30
$415,662 30
$3,894,950 00
$3,894,950 00
1931
1932
par $10
par $20
Shares
Shares
750,000 00 375,000 00
360,505 00 180,252 50
Issued
Less m Treasury
389,495 00 194,747 50
13,097 08
$3,894,950 00
$130,970 80
Outstanding.
376,397 92 194,747 50
$3,763,979 20
$3,894,950 00
$3,894,950 00
$3,050,673 36
$2,586,241 57
586,438 39
$2,586,241 57
662,965 26
$6,814,652 56
$7,067,629 96
$7,144,156 83
$8,455,046 90
$8,808,152 06
$9,127,47179
Capital surplus _ . . . . . . . . . _
Earned surplus from December 31,1931
Total Capital Stock and surplus
Total liabilities
. .
NOTE —None of the 16,024 shares of Preferred Stock at present authorized, was outstanding at the above
Contingent liability as at December 31,1931 under property purchase agreement—$189,33104
i The Company is under agreement with the Whitney National Bank of New Orleans to retain on hand
at all times, sufficient molasses, which at inventory values will amount to 110% of the Company's unpaid
notes—$96,500 00 as at December 31,1932
STOCK EXCHANGE PRACTICES
5993
AGREEMENTS
American Commercial Alcohol Corporation, in consideration of the listing of
the securities covered by this application, agrees with the New York Stock
Exchange as follows
To notify the New York Stock Exchange promptly of any change in the general
character or nature of its business
To notify the New York Stock Exchange immediately if it or any subsidiary
or controlled company should dispose of any property or of any stock interest in
any of its subsidiary or controlled companies, when such disposal would impair
or materially affect its financial position or the nature or extent of its operations
as theretofore conducted
To publish periodical statements of earnings, as agreed upon with the Committee
To publish at least once in each year and submit to stockholders at least fifteen
days m advance of the annual meeting of the Corporation, but not later than
March 15th, a Balance Sheet, and Income Statement for the last fiscal year and
a Surplus statement of the applicant company as a separate corporate entity and
•of each corporation in which it holds directly or indirectly a majority of the equity
stock; or, in lieu thereof, eliminating all intercompany transactions:
A simfar set of consolidated financial statements. If any such consolidated
statements exclude any companies a majority of whose equity stock is owned,
(a) the caption will indicate the degree of consolidation; (b) the Income Account
"will reflect, either in a footnote or otherwise, the parent company's proportion of
the sum of or a difference between current earnings or losses and the dividends
of such unconsolidated subsidiaries for the period of report; and (c) the Balance
Sheet will reflect, in a footnote or otherwise, the extent to which the equity of
the parent company in such subsidiaries has been increased or diminished since
the date of acquisition as a result of profits, losses and distributions Appropriate reserves, in accordance with good accounting practice, will be made against
profits arising out of all transactions with unconsohdated subsidiaries, in either
parent company statements or consolidated statements
Such statements will reflect the existence of any default in interest, cumulative
dividend requirements, sinking fund or redemption fund requirements of any
controlled corporation whether consolidated or unconsolidated.
To publish all future annual financial statements of any character, in sub
stantially the form contained in the listing application and, in the publication of
reports of earnings for any period of less than a fiscal year, to show net profits in
the aggregate with the same degree of consolidation as in the annual report and
earnings per share after Depreciation, Depletion, Income Taxes and Interest,
estimating the proportionate amount of these items as accurately as may be if
not finally determined at date of publication
Not itself, and not to permit any subsidiary, directly or indirectly controlled,
to take up as Income stock dividends received at an amount greater than that
•charged against Earnings, Earned Surplus or both of them by the issuing Company in relation thereto
Not to make any change in depreciation policies as described in the application and not to make any substantial change in any percentages therein recited
as applicable to particular classes of property without notifying the Stock Exchange and without calling attention to such changes in the next succeeding
published report and, if this be an interim report, also m the next succeeding
annual report
To maintain, in accordance with the rules of the Stock Exchange, a transfer
office or agency in the Borough of Manhattan, City of New York, where all
listed securities shall be directly transferable, and the principal of all listed securities with interest or dividends thereon shall be payable; also a registry office
in the Borough of Manhattan, City of New York, south of Chambers Street,
other than its transfer office or agency in said city, where all listed securities shall
be registered If its transfer books should be permanently closed, to continue
to split up certificates of listed stock into smaller denominations in the same
name so long as such stock shall be retained upon its list by the New York Stock
Exchange If its transfer office or agency should be or should become located
north of Chambers Street, to arrange, at its own cost and expense that its registry
office will receive and re-deliver all securities deposited at such registry office
for the purpose of transfer.
Not to add to the number of its transfer agencies nor to make any change of a
transfer agency, or of a trustee, or fiscal agent of its listed bonds or securities,
without prior notice to the Committee on Stock List, and not to add to the num
5994
STOCK EXCHANGE PBACTICES
ber of registrars of its listed stock nor to change a registrar of its listed stock without the prior approval of the Committee on Stock List, nor to select an officer or
director of the Company as a trustee of its mortgages or other listed securities
unless such officer or director be a co-trustee for an issue having a corporate
trustee.
Not to make any change in the form or nature of its listed securities or in the
rights or privileges of the holders thereof, without having given twenty days'
prior notice to the Committee on Stock List of such proposed changes, and haying
made application for the listing of the securities as changed, if the Committee
on Stock List so requires
To notify the Stock Exchange in the event of the issuance or creation in any
form or manner of any rights to subscribe to, or to be allotted, its securities, or
of any other rights or benefits pertaining to ownership in its securities, and to
afford the holders of its listed securities a proper period within which to record
their interests and to exercise their rights, and to issue all such rights in form
approved by the Stock Exchange and to make the same transferable, payable
and deliverable in the Borough of Manhattan, City of New York
To notify the Stock Exchange promptly in the event of issuance of Options or
Warrants to purchase stock, otherwise than
(a) pro rata to stockholders,
(b) to officers and employees under general employees' stock purchase plan,
(c) firm offers of stock to be taken in a block within four months from the date
of such offer, of the number of shares covered by such Options, of their terms and
of the time withm which they may be exercised and of any subsequent changes
therein and thereafter to include this information together with like information
as to any Options in existence at the time of approval of this application so long^
as said Options are outstanding, in all annual financial reports furnished to stockholders and in all formal published reports
To make application to the Stock Exchange for the listing of additional amounts
of listed securities sufficiently prior to the issuance thereof to permit action in
due course upon such application.
To publish promptly to holders of listed stock any action in respect to dividendson shares, or allotments of rights for subscription to securities, notices thereof toN
be sent to the Stock Exchange, and to give to the Stock Exchange at least ten
days' notice in advance of the closing of the transfer books, or extensions, or of
the taking of a record of holders for any purpose.
To forward to the Stock Exchange copies of all notices mailed to stockholders
looking toward Charter amendments, and to file with the Stock Exchange two
copies of amended Charter, or Resolutions of Directors in the nature of amendments (one of which must be certified) as soon as such amendments or resolutions
have become effective
Not to purchase listed Preferred Stock for retirement at a price in excess of
that at which the stock purchased might then be obtained in the open market
and not to select Preferred Stock for redemption otherwise than pro rata or by
lot; to notify the Stock Exchange immediately and at least fifteen (15) days m
advance of any such redemption, and to furnish to the Stock Exchange any information requested in reference to such redemption
To notify the Stock Exchange immediately of any change or removal of collateral deposited under any of its mortgage or trust indentures under which
listed securities are outstanding.
To have on hand at all tunes a sufficient supply of certificates to meet the demands for transfer.
If at any time the stock certificates of the Company do not recite the preferences
of all classes of stock the Company agrees with the Exchange that it will furnish
stockholders, upon request and without charge, with a printed copy of the
preferences of all classes of stock.
To furnish the New York Stock Exchange, on demand, such reasonable information concerning the Company as may be required
GENERAL
The fiscal year of the Company ends December 31st.
The annual stockholders meeting of the Company is held on the first Tuesday
in April in each year, but if that be a legal holiday, on the next succeeding day
not a legal holiday. All stockholders meetings of the Company are held at the
statutory office of the Company, 10 Light Street, Baltimore, Md.
The principal executive office of the Company is located in the Chrysler Building, 405 Lexington Avenue, New York, N. Y. The Company also has offices
at each plant and sales offices throughout the country.
5995
STOCK EXCHANGE PRACTICES
The Directors (elected annually) are Robert W. Atkins, Russell R. Brown,
Guy I. Colby, Humphrey W. Chadbourne, Warren W. Foster, Richard H.
Grimm, J. M. Kessler, W. S Kies, Cecil Page, Edward S Paine, Robert L.
Pond and Marshall H Runk, all of New York City, N. Y.; H. G. Atwood, Chicago, 111; Walter E Buck, San Francisco, Calif.; James A. S. MacMeekm and
Philip Pubhcker, Philadelphia, Pa ; S M Mayer, Gretna, La
The Elective Officers (elected annually, but the Board of Directors may elect
for a period not exceeding five years) are* Russell R. Brown, Chairman of the
Board; Richard H. Grimm, President; Walter E. Buck, Guy I. Colby, Samuel M.
Mayer and A. L. Opper, Vice-Presidents, Guy I. Colby, Treasurer; and Cecil
Page, Secretary.
The Transfer Agent for 7% Cumulative Preferred Stock and for Common
Stock of the Company is City Bank Farmers Trust Company, New York, N. Y.
The Registrar of the 7% Cumulative Preferred Stock and for Common Stock
of the Company is The National City Bank of New York, N. Y.
AMERICAN COMMERCIAL ALCOHOL CORPORATION,
By CECIL PAGE, Secretary.
This Committee recommends that the above-mentioned
10,000 shares of Common Stock ($20 Par Value) be added to the list on
official notice of issuance in exchange for a like number of shares of the
Common Stock of Maister Laboratories, Incorporated, with authority
to add
41,293 shares of said Common Stock on official notice of issuance pursuant
to an offer to stockholders to subscribe to such additional stock, in
accordance with the terms of this application,
making the total amount authorized to be listed:
247,761 shares of Common Stock ($20 Par Value).
FRANK ALTSCHUL, Chairman.
J. M. B. HOXSEY,
Executive Assistant to the
Committee on Stock List.
Adopted by the Governing Committee, June H, 1938.
ASHBEL GREEN, Secretary.
COMMITTEE EXHIBIT N O 12, FEBRUARY 15,
Francis E. Fitch (Inc), 138 Pearl St, New York
1934
COMMITTEE ON STOCK LIST
NEW YORK STOCK EXCHANGE
A-10102
AMERICAN COMMERCIAL ALCOHOL
CORPORATION
(An operating and holding company organized under the laws of Maryland,
April 19, 1928)
COMMON STOCK ($20 PAR VALUE)
Additional listing
Authorized by Charter
Previously authorized to be listed
Outstanding June 2nd
Total applied for
Authorized by Directors
_
_
_
Shares
15,000
375,000
247,761
204, 953
262, 761
June 15,1933
Capital securities
Number of shares
Stock
Class of stock
7% Cumulative preferred stock
Common stock
Par
value
$100
20
Authorized Authorized Previously
authorized Outstanding
by charter for issuance to
be listed
U6 t 024
375,000
None
262,761
None
247,761
None
204.95S
i Original authorization of Preferred Stock was 40,000 shares. 23,976 were issued All retired on February 1st, 1930 whereby the authorized Preferred Stock was reduced by that amount.
Neither the Company nor its subsidiaries have any funded debt.
5996
STOCK EXCHANGE PEACTICES
NEW YORK, N.Y., June 27,19SS.
Referring to their previous applications, and especially to A-10073, dated June
2, 1933, American Commercial Alcohol Corporation (hereinafter called the
"Company")* hereby makes application for the listing on the New York Stock
Exchange of
15,000 additional shares of the Common Stock of the Company of the par
value of $20 per share, on official notice of issuance, in exchange for 2,700
shares of the 6% Cumulative Preferred Stock of the par value of $100 per
share, and 3,900 shares of Common Stock without par value of Noxon,
Inc.; making the total amount applied for
262,761 shares (of a total authorized issue of 375,000 shares)
All of said shares of the Common Stock will be, when issued, full paid and nonassessable, with no personal liability attacking to holders thereof
AUTHORITY FOR AND PURPOSE OF ISSUE
At a meeting held June 15,1933, the Board of Directors authorized the issuance
of 15,000 shares of the Common Stock of the Company of the par value of $20
per share, in exchange for 2,700 shares of the 6% Cumulative Preferred Stock of
the par value of $100 a share, and 3,900 shares of the Common no par Stock of
Noxon, Inc., a Maryland Corporation The total authorized capitalization of
Noxon, Inc , is 3,000 shares of 6% Cumulative Preferred Stock of the par value
of $100 per share and 6,000 shares of Common Stock without par value The
2,700 shares of Preferred Stock is all the issued and outstanding Preferred Stock
of the latter Corporation All the 6,000 shares of Common Stock have been
issued, 3,900 shares to the Company as stated above, and 2,100 shares to other
interests.
Noxon, Inc , was organized on June 19, 1933 and has acquired certain valuable
formulae, processes, etc, for the manufacture of a certain cleaner polish, floor
waxes, and a household insecticide, heretofore manufactured and sold for many
years under the trade name of "Noxon," and also certain machinery, equipment,
materials and other assets required for the manufacture of said products on an
adequate commercial scale Noxon, Inc has furthermore contracted with the
Company to purchase all of its requirements for the manufacture of its products,
which consist of alcohol, solvents, etc , so far as they are manufactured or handled
by the Company, at prevailing market prices, for a period of ten years. The
Company has also acquired as a part of above transactions, exclusive rights to
certain formulae and processes for the manufacture of new agricultural and horticultural plant sprays, which the Company believes can be manufactured and sold
on a profitable basis These sprays consist of about 85% of Alcohol.
BUSINESS
The Company is, and its predecessors were, engaged in the business of manufacture and sale of alcohol for commercial purposes Under a ruling by the United
States Treasury Department dated January 21, 1928, industrial alcohol is now
produced by the various manufacturers according to definite quantity allotments.
The Company at the present time has permits (including permits held by American Commercial Alcohol Corporation of California) to produce 11 82% of the
gallons authorized under the allotment plan of the Treasury Department.
PLANTS AND PROPERTIES
The Company owns directly manufacturing plants at Pekm, 111, Philadelphia,
Pa , New Orleans, La , and, through its subsidiary, American Commercial Alcohol Corporation of California, a manufacturing plant at Sausahto, Calif The
Company also leases warehouses in strategic distribution centers throughout the
country. For a more extensive description of the properties of the Company
see Exhibit A, which is attached to application A-8723.
SUBSIDIARY COMPANIES
The Company owns the entire issued and outstanding Capital Stock (except
necessary qualifying shares) of American Commercial Alcohol Corporation of
California, The Kessler Chemical Corporation, and Maister Laboratories Incorporated. For detailed information with respect to the acquisition and
organization of these companies reference is made to applications A-8723,
A-8922, and A-10073.
STOCK EXCHANGE PRACTICES
5997
EMPLOYEES
The Company and its subsidiaries, American Commercial Alcohol Corporation of California, The Kessler Chemical Corporation, and Maister Laboratories
Incorporated, employed 242 persons on June 2, 1933, exclusive of brokers and
salesmen working entirely on commission
DEPRECIATION POLICY
Since organization, depreciation amounts have been written off annually on
the basis of the life of the property depreciated. An approximate table of
depreciation percentages in accordancevwith the straight line method, which have
been written off each year follows
Percent
Buildings
2
Machinery
5
Equipment (depending upon its nature)
10-20
DIVIDENDS
Preferred Stock. At the rate of 7% per annum, declared and paid quarterly
from its issuance on April 25, 1928, until retired on February 1, 1930.
Common Stock An initial dividend on the Common Stock of 40 cents in
cash and 3% in Common Stock was paid on July 15, 1929. Similar cash dividends were paid quarterly up to and including April 15, 1930, at which time a
dividend of 2% payable in Voting Trust Certificates representing Common
Stock was also paid Since the last mentioned date no dividends have been
declared.
FINANCIAL STATEMENTS
The following financial statements as of December 31, 1931, December 31
1932 and March 31, 1933, are set forth below in comparative columns*
(a) Condensed consolidated statements of income and profit and loss.
(b) Consolidated condensed statement of capital surplus as at December
31, 1931 and December 31, 1932.
(c) Consolidated Condensed General Balance Sheets
The statements of December 31, 1931 and December 31, 1932 have been prepared by the Company's auditors, Messrs F. W. LaFrentz & Co. and certified
by them as follows
To the Stockholders of American Commercial Alcohol Corporation.
We have examined the records and books of account of American Commercial
Alcohol Corporation and its Subsidiaries, for the years ending December 31,
1931, and December 31,1932, and have prepared therefrom the following Exhibits
applicable to the year ending December 31, 1931, and to the year endmg December 31, 1932; and
Hereby certify that the following Consolidated Condensed General Balance
Sheets, and statements of Income and Profit and Loss, and Capita] Surplus,
applicable to the year ending December 31, 1931 and the year endmg December
31, 1932, compiled from our general reports, in our opinion, correctly reflect thefinancial status of the Company, as at December 31, 1931 and December 31,
1932, and the results of its operations for these years
F. W LAFRENTZ & CO.,
Certified Public Accountants.
The statements of March 31, 1933 have been prepared by the Company, and
are certified to by the Treasurer as follows
I hereby certify that the following Consolidated Condensed General Balance
Sheet, and Statement of Income and Profit and Loss, in my opimon, correctly
reflect the financial status of the Company, as at March 31, 1933, and the results
of its operations for three months ended that date.
AMERICAN COMMERCIAL ALCOHOL CORPORATION,
GUY I. COLBY, Vice-President and Treasurer
5998
STOCK EXCHANGE PRACTICES
American Commercial Alcohol Corporation and its subsidiaries (a) consolidated
condensed statement of income and profit and loss
Year 1931
Profit on sales before depreciation.
Interest received
....
Other income
TotalDeductions*
Selling expenses
.,
Administrative expenses
Bad debts
Interest paid
Discount on sales
Depreciation._..
.,
Total...
Profit for the penod
Surplus beginning of penod..
Miscellaneous surplus adjustments.
Charged against capital surplus
Year 1932
1st quarter
1933
$367,047.59 $1,449,829 67 $224,410.09
10,056 13
4,00149
1,903 21
20,723 92
8,459 12
2,025 08
397,827 64
1,462,290 28
365,781 24
298,113 03
55,817.23
17,116 66
31,777 54
226,873 41
330,577
227,968
30,356
56,237
26,670
204,041
32
81
32
90
24
30
52,173 37
29,829 38
8,007.11
7,709 54
3,970 73
49,876.82
995,479 11
875,851 89
151,566 95
i 597,651 47
46,483 93
125,144 87
586,438 39
76,771 43
586,438 39
1244 56
i 576,312 41
662,965 26
Balance earned surplus from December 31,1931 .
lLoss
<6) Consolidated condensed statement of capital surplus—as at December 81, 1981
Amount of Capital Surplus determined and authorized by the stockholders at their meetmg of
November 24,1931, arising out of an apportionment of the amount shown on the Company's
books at that date, of $8,769,697 42, representing outstanding Common Stock to the number
of 389,495 shares of no par value This sum was apportioned in such manner as to show
$3,894,950 as representing the 389,495 shares of Common Stock at a par value of $10 each, and
the remainder as Capital Surplus, I e
$4,874,747.4&
At the same meeting the stockholders authorized the directors to charge the deficit in
Surplus Account against the Capital Surplus so created, and further authorized the
Directors in their discretion, to set up reserves out of the Capital Surplus so created
In accordance with this authority, the director have authorized and directed that the
following several sums be entered on the books of account, as of December 31,1931
Appropriation of Capital Surplus
Reduction of book value of treasury stock from $280,53111 to a par
value basis of $130,970 80
$149,560 31
Reserve provided for excess cost of raw materials
267,493 19
Reserve provided for future contingencies
8,614 67
Extraordinary losses and adjustments
Reduction of mventory valuations, necessitated by
the purchase of molasses under contracts made in
prior years
$144,915 77
Losses due to trading m corn options
—
87,591 04
Reduction in valuations of fixed assets, based upon
appraisals and estimates made by the officials of
the Company
156,635 82
Losses due to revaluations of containers
212,819 35
Organization expenses—Unamortized balance
72,669 68
Provision for income tax assessments, applicable to
pnor years
110,977 99
Miscellaneous items
36,488 83
Total extraordinary losses and adjustments.
Net deficit—December 31,1931—Charged to Capital Surplus
Total deductions from Capital Surplus
Balance—Capital Surplus December 31,1931
822,093 48
576,812 41
1,824,074 06
$3,050.673 86
5999
STOCK EXCHANGE PBAOTICES
Consolidated condensed statement of capital surplus—as at December 819 1982
Oapital surplus—Balance December 31,193L$3,060,673 36
Add—Balance of reserves, December 31,1931, which were cnated out of Capital
Surplus m 1931
Income taxes prior years..
$112,391 76
Provision for Stock Warrants.
8,663 30
Provision for raw material commitments.—
—.267,493 19
Provision for contingencies
8,614 67
397,162 92
Total
_
$3,447,826 28
Deduct—Charges to Capital Surplus and Reserves
Income taxes for prior years and expenses in connection therewith
$64,412 41
Settlement of claim for liability in connection with Stock Warrants
7,000 00
Cost of molasses and gram consumed in manufacture
$1,161,239 65
Less—Charged to operations on basis of market price
determined as at December 31,1931
906,839 09
Balance charged to reserve for raw material commitments provided
for at December 31,1931
265,400 46
Salary due at December 31, 1931 under a contract made at tune of organization of the Company with an executive who discontinued functioning as an officer of the Company—as at January 1,1932
Loss incurred through sale of Treasury Stock and extinguishment of
employees stock purchase agreements
46,478 91
Legal, printing and other expenses mcident to change of Capital Stock
fiom No Par Value to a Par Value of $10 00 per share, and from a Par
Value of $10 00 per share, to a Par Value of $20 per share
10,636 27
Portion of cost of moving Chemical Plant from Orange,N J to Philadelphia, Pa
3,676 20
Bonus to discharged employees and salary contract adjustment paid m
recognition of long term services.
5,852 56
Expenses and adjustments applicable to prior years
Allowances to customers and adjustment of claims
$16,063 70
Excess of allowances for and expenses mcident to reconditioning drums—in hands of customers December 31,1931—over
actual inventory value
10,592 87
Experimental expenses
3,666 43
Legal and auditing expenses
6,139 21
Sundry other expenses
6,422 52
Total
$42,784 73
Less—Collection of freight claims and other credit adjustments
6,108 72
Balance of expenses and adjustment applicable to pnor years
-
36,676 01
Total of charges to Capital Surplus and Beserves
469,931 41
Balance
_
_
$2,987,894 87
Reserve for Stock Warrants—Balance remaining December 31,1932
$1,653 30
Reserve for contingencies—Authorized by Board of Directors at their meeting
March 2,1933
400,000 00
401,653 30
Capital Surplus—Balance December 31,1932
$2,586,241 57
American Commercial Alcohol Corporation and its subsidiaries
(C) CONSOLIDATED CONDENSED GENERAL BALANCE SHEET.
ASSBTS
Current assets
Cash
Notes and acceptances receivable—Trade
Accounts receivable
Trade
Less Reserve for doubtful accounts.
Balance
Due from officers and employees
Miscellaneous accounts
Total accounts receivable
Inventories (-it the lower of cost or market)
Finished product
Raw materials aid supplies
Advance payment on raw material purchased..
Containers
Totaljnventones._.._....................—_.
Total current assets.. . . . . . . . . . . . . . — . . . . . - —
December 31,
1931
December 31,
1932
March 31,1933
$443,228 Id
$47,452 97
$251,961 24
$46,851 78
$216,004 68
$45 839 14
$839,259 25
81,174 38
$758,0*4 87
13,222 90
H, 677 55
$785,985 32
$601,826
70,927
$530,898
13,724
12,871
$557,494
55
61
94
05
31
30
$556,887 40
55,160 67
$501,726 73
8,669 89
12,500 00
$522,896 62
$513,775 41
431, *68 09
52,768 77
54,489 2$
$1,062,191 55
$2,328,867 98
$739,801
893,570
50,000
48,256
$1,731,628
$2,687,935
22
83
00
12
17
49
$781,402
979,210
238,907
82,501
$2,082,020
$2,866,761
08
17
06
29
60
04
6000
STOCK EXCHANGE PBACTICES
American Commercial Alcohol Corporation and its subsidiaries—Continued
(C) CONSOLIDATED CONDENSED GENERAL BALANCE SHEET
December 31,
1931
December 31,
1932
March 31,193&
$6,600,700 33
659,751 14
$6,674,519 4®
827,998 27
$6,673,440 05
875,118 19
$5,940,944 19
5,78190
$5r851,521 13
$5,798.32186
39,349 59
$5,946,731 09
$5,851,521.13
^5,837,671 45
$69,957 21
14,830 66
$284,006 78
42,089 66
42,597 91
$284,006 87
38,090 8548,119 13
52,821 45
$84,787 87
$368,694 44
$423,038 30
$1 00
$1 00
$1 00
$8,455,046 90
$8,808,152 06
$9,127,471 79
Current liabilities
Notes payable to bank
$400,000 00
i $794,739 16
i $836,500 00*
Trade acceptances
$492,701 65
$290,302 62
$539,612 97
$286,706 97
45,465 30
$180,153,52
61,952 50
$145,384 35
46,155 34
Fixed assets
Land, buildings, machinery, etc (appraisal value
December 31,1927 plus additions at cost)
Less—Depreciation reserve
Construction work m progress
Total fixed assets
-
,.*.«—•..—
Cash in escrow—on account of contingent liability under
Property Purchase Agreement—
_
Prepaid and deferred items
Cost of investment in Rossville Alcohol & Chemical
Corporation Syndicate
Insurance and taxes prepaid
_
.
Miscellaneous expenses...
—
Deferred expenses
..
Total prepaid and deferred items
Goodwill trade marks formulae, etc
Total assets
— —
$94,668 96
LIABILITIES
Accounts payable
Trade
Others
-
Total accounts payable
Total current liabilities
Sundry reserves
Provision for containers in customer's hands
Income tax pnoi years
Provision for Stock Warrants
Provision for raw material commitments
Provision for contengencies
Total sundry reserves
Capital Stock and surplus
Capital Stock—Common
Authorized
Less—Unissued
$332,172 27
$242,106 02
$191,539 69
$1,224,873 92
$1,327,147 80
$1,567,652 66
$18,367 50
112,391 76
8,653 30
267,493 19
8,614 67
$11,721 00
$14,009 00
1,653,30
1,653 30
400,000 00
400,000 00
$415,520 42
$413,374 30
$415,662 30
1931
1932
par $10
par $20
Shares
Shares
750,000 00 375,000 00
360,505 00 180,252.50
Issued
Less in Treasury
389,495 00 194,747 50
13,097 08
$3,894,950 00
$130,970 80
$3,894,950 00
$3,894,950 00
Outstanding
376,397 92 194,747 50
$3,763,979 20
$3,894,950 00
$3,894,950 00
$3,050,673 36
$2,586,241 57
586,438 39
$2,586,241 57
662,965 26
$6,814,652 56
$7,067,629 96
$7,144,156 83
$8,455,046 90
$8,808,152 06
$9,127,471 7t
Capital surplus
Earned surplus from December 31,1931
Total Capital Stock and surplus
Total liabilities
.....
...
...
._ . .
NOTES —None of the 16,024 shares of Preferred Stock at present authorized, was outstanding at the
above dates
Contmgent liability as at December 31,1931 under property purchase agreement—$189,331 04
i The Company is under agreement with the Whitney National Bank of New Orleans to retain on hand
at all times, sufficient molasses, which at inventory values will amount to 110% of the Company's unpaid
notes—$96,500 00 as at December 31,1932
STOCK EXCHANGE PBAOTIOES
6001
Noxon, Inc., pro forma balance sheet June 27, 1988
ASSETS
Notes receivable
Inventory
Machinery and equipment
Good will, licenses and processes
—
- . $270, 000. 00
25, 000. 00
25, 000. 00
380, 000. 00
Total assets
$700, 000. 00
LIABILITIES
Purchase contract payable.
Preferred Stock $100 par
Authorized 300,000 shares
Less unissued outstanding—30,000 shares
Common Stock, No Par—6,000 shares
Total liabilities
-
$80,000 00
270, 000. 00
350, 000. 00
$700,000. 00
AGREEMENTS
American Commercial Alcohol Corporation, in consideration of the listing of
the securities covered by this application, agrees with the New York Stock
Exchange as follows.
To notify the New York Stock Exchange promptly of any change m the general
character or nature of its business.
To notify the New York Stock Exchange immediately if it or any subsidiary
or controlled company should dispose of any property or of any stock interest
in any of its subsidiary or controlled companies, when such disposal would
impair or materially affect its financial position or the nature or extent of its
operations as theretofore conducted.
To publish periodical statements of earnings, as agreed upon with the Committee
To publish at least once in each year and submit to stockholders at least fifteen days in advance of the annual meeting of the Corporation, but not later
than March 15th, a Balance Sheet, and Income Statement for the last fiscal year
and a Surplus statement of the applicant company as a separate corporate entity
and of each corporation in which it holds directly or indirectly a majority of the
equity stock; or, in lieu thereof, eliminating all intercompany transactions*
A similar set of consolidated financial statements. If any such consolidated
statements exclude any companies a majority of whose equity stock is owned,
(a) the caption will indicate the degree of consolidation; (b) the Income Account
will reflect, either in a footnote or otherwise, the parent company's proportion
of the sum of or difference between current earnings or losses and the dividends
of such unconsolidated subsidiaries for the period of report; and (c) the Balance
Sheet will reflect, in a footnote or otherwise, the extent to which the equity of the
parent company in such subsidiaries has been increased or diminished since the
date of acquisition as a result of profits, losses and distributions. Appropriate
reserves, in accordance with good accounting practice, will be made against
profits arising out of all transactions with unconsolidated subsidiaries, in either
parent company statements or consolidated statements.
Such statements will reflect the existence of any default in interest, cumulative
dividend requirements, sinking fund or redemption fund requirements of any
controlled corporation whether consolidated or unconsolidated.
To publish all future annual financial statements of any character, in substantially the form contained in the listing application and, in the publication
of reports of earnings for any period of less than a fiscal year, to show net profits
in the aggregate with the same degree of consolidation as in the annual report
and earnings per share after Depreciation, Depletion, Income Taxes and Interest, estimating the proportionate amount of these items as accurately as may be
if not finally determined at date of publication.
Not itself, and not to permit any subsidiary, directly or indirectly controlled
to take up as Income stock dividends received at an amount greater than that
charged against Earnings, Earned Surplus or both of them by the issuing Company in relation thereto.
Not to make any change in depreciation policies as described in the application and not to make any substantial change in any percentages therein recited
as applicable to particular classes of property without notifying the Stock Ex
6002
STOCK EXCHANGE PEACTICES
change and without calling attention to such changes in the next succeeding:
published report and, if this be an interim report, also in the next succeeding
annual report.
To maintain, in accordance with the rules of the Stock Exchange, a transfer
office or agency in the Borough of Manhattan, City of New York, where all listed
securities shall be directly transferable, and the principal of all listed securities
with interest or dividends thereon shall be payable; also a registry office in the
Borough of Manhattan, City of New York, south of Chambers Street, other than
its transfer office ar agency m said city, where all listed securities shall be registered. If its transfer books should be permanently closed, to continue to split
up certificates of listed stock into smaller denominations in the same name so
long as such stock shall be retamed upon its list by the New York Stock Exchange*
If its transfer office or agency should be or should become located north of Chambers Street, to arrange, at its own cost and expense that its registry office will
receive and re-dehver all securities deposited at such registry office for the purpose
of transfer.
Not to add to the number of its transfer agencies nor to make any change of
a transfer agency, or of a trustee, or fiscal agent of its listed bonds or securities,
without prior notice to the Committee on Stock List, and not to add to the number
of registrars of its listed stock nor to change a registrar of its listed stock without
the prior approval of the Committee on Stock List, nor to select an officer or
director of the Company as a trustee of its mortgages or other listed securities
unless such officer or director be a co-trustee for an issue havmg a corporate
trustee.
Not to make any change in the form or nature of its listed securities or in the
rights or privileges of the holders thereof, without havmg given twenty days'
prior notice to the Committee on Stock List of such proposed changes, and having
made application for the listing of the securities as changed, if the Committee on
Stock List so requires
To notify the Stock Exchange in the event of the issuance or creation in any
form or manner of any rights to subscribe to, or to be allotted, its securities, or
of any other rights or benefits pertaining to ownership in its securities, and to
afford the holders of its listed securities a proper period within which to record
their interests and to exercise their rights, and to issue all such rights in form
approved by the Stock Exchange and to make the same transferable, payable
and deliverable in the Borough of Manhattan, City of New York.
To notify the Stock Exchange promptly in the event of issuance of Options or
Warrants to purchase stock, otherwise than
(a) pro rata to stockholders,
(b) to officers and employees under general employees' stock purchase plan.
(c) firm offers of stock to be taken m a block within four months from the
date of such offer, of the number of shares covered by such Options, of their
terms and of the time within which they may be exercised and of any subsequent
changes therein and thereafter to include this information together with like
information as to any Options in existence at the time of approval of this application so long as said Options are outstanding, in all annual financial reports
furnished to stockholders and in all formal published reports.
To make application to the Stock Exchange for the listing of additional
amounts of hsted securities sufficiently prior to the issuance thereof to permit
action in due course upon such application.
To publish promptly to holders of listed stock any action in respect to dividends
on shares, or allotments of rights for subscription to securities, notices thereof to
be sent to the Stock Exchange, and to give to the Stock Exchange at least ten
days' notice in advance of the closmg of the transfer books, or extensions, or of
the taking of a record of holders for any purpose.
To forward to the Stock Exchange copies of all notices mailed to stockholders
looking toward Charter amendments, and to file with the Stock Exchange two
copies of amended Charter, or Resolutions of Directors in the nature of amendments (one of which must be certified) as soon as such amendments or resolutions
have become effective.
Not to purchase hsted Preferred Stock for retirement at a price in excess of that
at which at which the stock purchased might then be obtained in the open
market and not to select Preferred Stock for redemption otherwise than pro rata
or by lot; to notify the Stock Exchange immediately and at least fifteen (15)
STOCK EXCHANGE PBACTICES
6003
days in advance of any such redemption, and to furnish to the Stock Exchange
any information requested in reference to such redemption.
To notify the Stock Exchange immediately of any change or removal of
collateral deposited under any of its mortgage or trust indentures under which
listed securities are outstanding.
To have on hand at all times a sufficient supply of certificates to meet the
demands for transfer.
If at any time the stock certificates of the Company do not recite the preferences
of all classes of stock the Company agrees with the Exchange that it will furnish
stockholders, upon request and without charge, with a printed copy of the
preferences of all classes of stock.
To furnish the New York Stock Exchange, on demand, such reasonable information concerning the Company as may be required.
GENERAL
Thefiscalyear of the Company ends December 31st.
The annual stockholders meeting of the Company is held on the first Tuesday
in April in each year, but if that be a legal holiday, on the next succeeding day
not a legal holiday. All stockholders meetings of the Company are held at the
statutory office of the Company, 10 Light Street, Baltimore, Md
The principal executive office of the Company is located in the Chrysler Building, 405 Lexington Avenue, New York, N.Y. The Company also has offices at
each plant and sales offices throughout the country.
The Directors (elected annually) are: Robert W. Atkins, Russell R. Brown,
Guy I. Colby, Humphrey W. Chadbourne, Warren W. Foster, Richard H.
Grimm, J. M. Kessler, W. S. Kies, Cecil Page, Edward S. Paine, Robert L. Pond
and Marshall H. Runk, all of New York City, N.Y.; H. G. Atwood, Chicago, 111.;
Walter E. Buck, San Francisco, Calif.; James A. S. MacMeekin and Philip
Publicker, Philadelphia, Pa ; S. M. Mayer, Gretna, La.
The Elective Officers (elected annually, but the Board of Directors may elect
for a period not exceeding five years) are: Russell R. Brown, Chairman of the
Board; Richard H. Grimm, President; Walter E. Buck, Guy I. Colby and Samuel
M. Mayer, Vice-Presidents; Guy I. Colby, Treasurer; and Cecil Page, Secretary.
The Transfer Agent for 7% Cumulative Preferred Stock and for Common
Stock of the Company is City Bank Farmers Trust Company, New York, N.Y.
The Registrar of the 7% Cumulative Preferred Stock and for Common Stock
of the Company is The National City Bank of New York, N.Y.
AMERICAN COMMERCIAL ALCOHOL CORPORATION
By CECIL PAGE, Secretary.
This Committee recommends that the above-mentioned
15,000 shares of Common Stock ($20 Par Value) be added to theTist
on official notice of issuance in exchange for shares of 6% Cumulative Preferred Stock and Common Stock of Noxon, Inc., in accordance with the terms of this application,
making the total amount authorized to be listed 262,761 shares.
J. M. B. HOXSEY,
FRANK ALTSCHUL, CHAIBMAN.
EXECUTIVE ASSISTANT TO THE
COMMITTEE ON STOCK LIST.
Adopted by the Governing Committee, July 12> 1988.
ASHBEL GREEN, SECRETARY.
6004
STOCK EXCHANGE PRACTICES
QUESTIONNAIRE
(To be signed by an officer of the company)
JUNE 2,
1933.
This questionnaire accompanies application of the AMERICAN COMMERCIAL ALCOHOL CORPORATION for the listing of 51,293 additional shares
of its $20 par common stock.
1—Is the management control of the Company held by any other Company
through either stock ownership, lease or contract? No.
2—Are there withm your knowledge any syndicate or concentrated holdings of
this security? No
3—Is there any restraint on any portion of the security? No
4—What dividends (if any), are in arrears on the preferred stocks either of the
Company or of any of its subsidiaries? Kessler Chemical Corp (wholly
owned subsidiary) pfd. stk
5—What dividends (if any) have been declared (and not paid) since the date of
this application? None.
6—What rights (if any) to subscribe to any present securities or new securities
remain unsettled as of the date of this application? None except present
offering to stockholders
7—Are the trans/er books to be closed or a record of stockholders to be taken in
the near future for any purpose? Record on June 14, 1933 of stockholders
entitled to subscribe on the new offering
8—Has there been any change in your Charter or By-Laws since previous filing
with the Committee? No.
9—Will you agree to publish quarterly statements of earnings based upon the
same degree of consolidation as shown in annual reports and transmit copies
of such statement to the Committee on Stock List? Yes.
10—If it is legal under your Charter will you agree to take a record of stockholders for dividends and meetings instead of closing your books? Yes
11—To avoid the congestion caused by the fact that numerous corporations have
adopted the same date of record of stockholders for payment of dividends,
will you agree to make your record date of stockholders for such purpose
some date other than the 15th of March, June, September and December?
Yes.
12—In case the securities to be listed are in temporary form, will you agree that
orders for permanent engraved securities to replace them shall be placed
within thirty days and that, when ready for delivery, a notice will be sent
to stockholders asking that temporary certificates be exchanged immediately
for permanent and calling attention to the fact that it is the practice of the
New York Stock Exchange to strike temporaries from the list ten days after
the admission of permanents? Not applicable.
13—When and by whom was the last audit of your books prepared? Dec. 31,
1932 by F. W. Lafrentz & Co.
14—What accountant or accounting firm audits the books and accounts of the
company? F W. Lafrentz & Co.
15—Wul you inform the Stock Exchange immediately if there is a change? Yes.
16—Has any member or employee of the accounting firm any official relation
with the applicant company? No. Describe relationship
.
17—Will you make copies of the audits of your books available to the Committee
on request? Yes.
18—Have any other reports of a financial, accounting or engineering nature been
made either on your behalf or on behalf of any banker or underwriting or
banking group withm the past three years? No. If so, please indicate the
character of these leports and state whether they will be made available for
the inspection of this Committee upon request?
19—Is there any litigation pending or threatened that would affect the Company's
income from, title to, or possession of any of its property? No.
20—The Committee m order to facilitate the business of the Exchange, desires
that the transfer agent of your Company be directed to sign the Stock Transfer Department receipts for all stock submitted by the Stock Clearing Corporation for transfer Will you so agree? Yes
21—Will you agree to issue new certificates replacing lost ones forthwith upon
notification of loss and receipt of proper indemnity, making any changes
which may be necessary in your Charter or By-Laws to permit this to be done?
Yes.
STOCK EXCHANGE PBACTIOES
6005
22—Will you agree that m the event of the issuance of any duplicate bond to
replace a bond which has been alleged to be lost, stolen or destroyed, and the
subsequent appearance of the original bond in the hands of an innocent bondholder, you will take up either the original or duplicate and replace the bond
taken up by another bond theretofore issued and outstanding? Not applicable
23—Will you agree that all calls for redemption (Foreign Bonds) pubished abroad
will be published on the same day or days m a newspaper of general circulation published in the Borough of Manhattan, City of New York? Not
applicable
24—The Committee desires to be kept informed as to any diminution in the
supply of stock available tor the market occasioned by deposit of stock under
Voting Trust Agreements or other deposit agreements If knowledge of any
such actual or proposed deposits should come to the official knowledge of the
officers or directors of the Company, will you agree promptly to notify the
Exchange giving the names and addresses of the Deposit Committee and, if
known to the Company, the amount or number of shares so deposited? Yes.
25—If action on your application is favorable how many copies of the application
do you require printed for you at your expense? 100.
26—In the event any additional papers should be required for the Committee's
files, will you agree to furnish same on request? Yes.
AMERICAN COMMERCIAL ALCOHOL CORPORATION,
GUY I COLBY, Treasurer.
11
By
175541—34—W!13
STOCK EXCHANGE PEACTICE8
ERIDAY FEBRUARY 16, 1934
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,
Washington, D.C.
The committee met at 10:30 a.m., pursuant to adjournment on
yesterday, in room 301 of the Senate Office Building, Senator Duncan
U. Fletcher presiding.
President: Senators Fletcher (chairman), Adams, Couzens, 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.
The CHAIRMAN. The committee will come to order, please. You
may proceed, Mr. Pecora.
Mr. PECORA. Mr. Altschul will resume the stand.
TESTIMONY OF FRANK ALTSCHUL, NEW YORK CITY, CHAIRMAN OF THE COMMITTEE ON STOCK LIST, NEW YORK STOCK
EXCHANGE—Resumed
Mr PECORA. Mr. Altschul, you weie questioned yesterday afternoon in some detail with respect to the action taken by the stock
list committee of your stock exchange, of which you are chairman,
on the applications that were filed with it last summer in behalf
of the American Commercial Alcohol Corporation, for permission
to list additional shares of its capital common stock.
Mr. ALTSCHTJL. Yes, sir.
Mr. PECORA. YOU will recall
that there were two such applications
filed, one under date af June 2, 1933, requesting the listing of some
51,000 additional shares, and the second application was dated June
27, 1933, and applied for the listing of 15,000 additional shares.
Mr. AI/TSCHUIJ. Yes,
Mr. PECORA. NOW, I
sir.
Mr. ALTSCHUL. Yes,
sir.
want to call your attention again this morning
to the second one of these applications, being the one covering the
15,000 additional shares.
Mr. AiiTSCHUL. All right.
Mr. PECORA. YOU will recall that I showed you a typewritten copy
of
a so-called "proforma balance sheet" of the corporation called
u
Noxon, Inc.", which was the corporation whose shares were to be
acquired by the American Commercial Alcohol Corporation on an
exchange of stock basis.
6007
6008
STOCK EXCHANGE PRACTICES
Mr. PECORA. And you stated that that pro forma balance sheet
had never been submitted to your committee in connection with that
application.
Mr. ALTSCHUL. That is correct. And I so state again.
Mr. PECORA. Yes; you then stated that, and you so state again.
Mr. ALTSCHUL. Yes, sir.
Mr. PECORA. And you also
stated that if that proforma balance
sheet had been brought to the notice of the committee on stock list,
that the commitee undoubtedly would not have approved the application.
Mr. ALTSCHUL. That is correct.
Mr. PECORA. YOU say that is correct.
Mr. ALTSCHXJL. Yes,
sir.
Mr. PECORA. In other words, the statements contained in that pro
forma balance sheet would have put the committee on notice, and
would have prompted it to make inquiry which would have revealed undoubtedly the facts that were testified to here on yesterday
by-Mr. Brown within your hearing.
Mr. ALTSCHXJL. It would have put us on notice, and have caused
us to make inquiry.
Mr. PECORA. And if the inquiry had developed the facts testified
to by Mr. Brown, your committee would have undoubtedly rejected
or denied the application.
Mr. ALTSCHUL. That is correct.
Mr. PECORA. Have you a copy of the printed application in question?
Mr. AI/TSCHTJL. I have.
Mr. PECORA. Will you look at it and see if it is not a fact that
that pro forma balance sheet was actually a part of the application.
Mr. ALTSCHUL. Mr. Pecora, in the printed application that you
have in your hand it is a fact that it is a part of the application.
On the other hand, I think the situation was one that, apparently,
has not been made quite clear to you. The committee does not act
on the basis of this printed application. In your files that are subpenaed here you will find, I think, a complete file of the proofs of
this application.
First, you will find proof no. 1, which is the proof on which the
committee acted and which was before the committee. The balance
sheet which you point out as being a part of the printed application was not in the proof that was before the committee at the time,
as I think the files in your hands will evidence. Then there was a
second proof which was considered, and in which this balance sheet
does not appear. And then, some time between the action of the
governing committee, as it seems to us, and the time when this final
application was printed, apparently an additional item of information that had been sought in the office, came to the office, being the
one that you showed me on yesterday and which I was surprised
to see; and which I told you I could not understand, as to its not
having been brought to our attention. Some time between the final
action of the committee and this final printed application, this thing
came into our office, and then, according to our uniform custom or
practice of making available to the public anything that seemed
advisable or proper, that seems to have been done. The office, ap-
STOCK EXCHANGE PEACTICES
6009
parently, sent this thing over, and it was put into the third revised
copy, so as to get the thing complete, and they got the final applicaion, which you have today.
Mr. PECORA. Then am I to understand that the final printed
application is the one the committee acted upon?
Mr. AiiTSCHuii. No, sir. The committee acted upon the proof.
Mr. PECORA. Was there any difference between the printed final
application and the proof that you have spoken of ?
Mr. ALTSCHTJL. Yes, sir. The proof was of an earlier date. The
committee met on a Monday, let us say, and on Monday a proof of
the application which represented the work of examiners in cooperation with the representatives of the company, a proof which represented a crystallization of that work, was submitted to the committee. In that application all the information available at that time,
which had been dug out up to that time, was made available to the
committee; and you will remember that in connection with that information there was comment to the effect that because of the circumstances which they outlined, there was no balance sheet of this
company available. Now, that was what the committee had before
it at that particular time. Subsequently there was a second proof,
which contained some minor modifications, but which, again, did
not have that balance sheet, because apparently that balance sheet
was not there at that time, the same reasons undoubtedly having been
given. Those were the only documents that were beiore the committee on stock list, and this information was not available to the
stock list committee. Then some time between the time when the
committee acted, as is very often the case, I mean sometime between
when the committee acted and the time when this was finally
printed
Mr. PECORA (interposing). By word "this", as there used, do
you mean the final application?
Mr. AxTSCHuii. The final document. You see, after the approval
has been passed upon, and after the governing committee has acted,
then the final document, which bears the stamp "Adopted by the
governing committee ", is printed. Between the time of action and
the time of printing, in order to correct any minor matters it is
possible to correct, in order to add any changes that may have been
suggested, sometimes there are a few days' delay. In this instance
sometime between the time when this thing was acted upon and
the time when it was finally printed—and we are not in position
to tell you exactly the date when that happened, although we might
find out—this document which you surprised me with on yesterday,
reached the committee. The office of the committee sent that document on, apparently, and made it a part of the complete record, as
I have said, in line with the general policy of the committee of
making publicly available any information that seems to be of
interest to the stockholders, that reaches the committee. But that
was not before the committee.
Mr. PECORA. When did the committee on stock list of the New
York Stock Exchange act on this application?
Mr. ALTSCHOT*. D O you mean the actual date?
Mr. PECORA. Yes.
6010
STOCK EXCHANGE PEACTICES
Mr. ALTSCHUL. I think I have that information here some place.
Just a second. [Witness looking through his papers.] By the way,
have you the minute books ?
Mr. PECORA. Yes; I think so.
Mr. ALTSCHUL. Well, the proofs will tell you, I think. I haven't
the date here before me. And the minute book will tell you. You
have the most of our papers, I am afraid, and, therefore, I cannot
look it up, but would you care to look for it, or Mr. Haskell will
help you find it if you wish him to do so.
Mr. PECORA. All right. [Mr. Haskell begins to look through the
minute book.]
Mr. PECORA. NOW, have you that date?
Mr. ALTSCHUL. They are looking it up. But, Mr. Pecora, if you
care to have me do so, while they are looking up that date I will
be glad to clarify matters and possibly make it easier for all of you
to understand the situation, if I may, by giving you a short summary
of the way these things go forward in the office.
Mr. PECORA. I thought you gave us on yesterday the procedure
followed by the committee on stock list of the New York Stock Exchange in passing upon applications of this character, but if you
want to add anything to it, I will be glad to have you now do so.
Mr. ALTSCHUL. I think I should like to read from a memorandum
I have here, which might help to clairfy that matter in your mind.
Mr PECORA. Very well. You may proceed.
Mr. ALTSCHUL. Usually the company applying to list shares for
the first time, or to list additional securities, has a representative
call to discuss general aspects of the listing, character of the company and its officers and directors, and any unusual features known
in advance to be involved. Such conferences are usually held with
the executive assistant or the chief examiner. Should points initially raised, such as the size of the company, the distribution of its
securities, or the character of its management make it appear advisable for the coommittee to give a preliminary consideration of the
matter, the executive assistant or chief examiner submits the question
to the committee to determine whether it will receive an application
from the company to be considered on its merits.
Should the executive assistant or chief examiner, in the first
instance, determine that the application was in proper form to be
submitted in the usual way, or should the committee, after preliminary consideration, have indicated that it would be ready to receive
and consider on its merits an application, the representative of the
applicant is referred to a specially designated examiner. With the
examiner's advice as to technical points, the applicant then prepares
a printed draft of a listing application—and that is the thing I
referred to a minute ago in this particular case—and the various
documents which are to be submitted in support of the application.
Simultaneously, the company, or more usually the bank note company which engraves the company's securities
Senator ADAMS (interposing). That statement to which you refer,
is it after the examiner prepares a form, or is it the final work?
Mr. ALTSCHUL. I mean it is our official working in cooperation
with the company which prepares it.
Senator ADAMS. All right.
STOCK EXCHANGE PKACTICES
6011
Mr. AI/TSCHUL. Simultaneously the company, or more usually the
bank note company which engraves the company's securities, submits specimens of these to an examination by the Committee on
Stock List's specialist. The actual bonds or stock certificates to
be listed are examined to see if they meet the standards of the
Exchange with respect to workmanship and engraving, with particular reference as to whether or not they are prepared in such
manner as to make forgery difficult.
At the same time, the specimens are examined to see that, in
the case of stock, full description of the various preferences and
rights of the various classes of securities are described on the certificate. In the case of bonds, certificates of deposit, and other
instruments, specimens are examined to see that the description of
the security is accurate, that the terms are made clear, and that
provisions for negotiability are satisfactorily met.
The examiner handling an application examines not only the
application submitted by the company, but also the supporting
documents, such as the character of the company, its bylaws, opinions of counsel, and the financial statements.
Now, I do not want to make too long a statement here, and you are
certainly being very patient with me.
Mr. PECORA. GO ahead.
Mr. ALTSCHUL. Financial statements are separately referred to
another examiner who specializes on such statements, for further
examination. Should examination disclose any unusual provisions
as may be contrary to the requirements of the committee in documents such as the charter, bylaws, mortgages, indentures, and so
forth, the matter is submitted to counsel for the exchange for
scrutiny. Should any important question of accounting arise, this
is taken up with the chief examiner and executive assistant, and, if
necessary; referred to the consulting accountants for the exchange.
This period of general examinatioin usually covers from 1 to 2
weeks, and usually involves numerous conferences between the representatives of the committee on stock list and officers, counsel, and
accountants for the applicant company.
When the printed form of listing application is ready, preliminary
points ironed out—and, you will understand, this is one of the two
torms we were discussing a moment ago—and required documents
filed or made available, the executive assistant or chief examiner
then prepares a detailed written comment which is sent individually
to the members of the committee—and that is of the sort I showed
you on yesterday—that is sent to the committee for individual consideration several days prior to the meeting at which the committee
will consider the application—and, of course, that is one of the early
proofs of the application.
The committee, together with its executive assistant, chief examiner, and representative of its own counsel and consulting accountants
when required, then meet to consider action to be taken with respect
to the application. If the applicant is applying to list securities
for the first time, or if any special points have not been satisfactorily
resolved by the committee's staff, or if for any other reason the
committee desires discussion with representatives of the applicant,
an appearance of such representative is arranged.
6012
STOCK EXCHANGE PEACTICES
Now, after being satisfied that the application itself is in order
the committee considers the request of the company for listing in
the light of all this information. Now, then, I just want to briefly
say that then these things come up at a hearing of the committee,
and the documents that are submitted are gone into on a hearing
by the committee, and the committee's action is either to recommend
for listing or not recommend for listing, and then from the committee it goes to the governing committee.
Now, I think that ties in our procedure to the extent of the question you are asking me, and I think there is a misunderstanding
between us, which is one that is quite natural to arise, and I am
sorry I did not notice it on yesterday, for, if I had, I would have
drawn it to your attention. But the point is that this statement
was put out for the first time in the public printed draft of the
listing application which is made available, and it was not available
when the committee on stock list acted. If the examiner had come
across this little bit of information, which he in a routine way
would incorporate in order that the public should have everything
that we had, h
ld h
i d " Thi i
thi I ill h
t
take
before.
pp
p p ,
particular bearing, and this will simply give the public information."
Mr. PECORA. When you described the procedure in more detailed
than you testified on yesterday, did you read it from any manuscript?
Mr. ALTSCHUL. Do you mean just now ?
Mr. PEOORA. Yes.
Mr. AiiTSCETuii. I have a very rough outline of the procedure, something that I thought you might want.
Mr. PECORA. Would you care to make it a part of our record?
Mr. ALTSCHUL. I would be very glad to make it a part of the
record. My only question is, I am wondering if it is to be a part of
the record, if you wouldn't prefer to have a morefinishedjob. This
is very sketchy and is not a finished document. It only gives a very
broad outline of the procedure.
Mr. PECORA. I thought it was quite detailed instead of being very
sketchy. We would like to have it for the record.
Mr. ALTSCHUL. This was quickly put together, and we will go
over it and see if we cannot put it in better shape.
Mr. PECORA. Mr. Committee Reporter, I assume you took down
what the witness was reading?
The COMMITTEE REPORTER (Mr. Hart). Oh, yes; for I could not
tell when he was reading and when he was interpolating explanations
and comments.
Mr. PECORA. Well, we will have that in the record, Mr. Altschul,
and if there is anything additional you can give it to us.
Mr. ALTSCHUL. All right.
Mr. PECORA. NOW, Mr. Altschul, have you found out on what date
the committee on stock list of the New York Stock Exchange acted
upon this application?
Mr. ALTSCHUL. Have you found it, Mr. Haskell?
Mr. HASKELL. Here it is. [And he lays the minute book before
the witness.]
STOCK EXCHANGE PBACTICES
6013
Mr. ALTSCHUL. The meeting of the committee on stock list was
held on July 10 At that meeting the application was recommended.
Mr. PECORA At what hour of the day was the meeting held?
Mr. ALTSCHUL. That meeting would take place about 3:10 or
3:20 m the afternoon, and I think we would reach a conclusion at
about 4 o'clock or 5:30 o'clock.
Mr. PECORA. NOW, at that time what did the committee have
before it?
Mr. ALTSCHUL. It had what I think you will find in your files, the
first proof.
Mr. PECORA. IS this it? [Holding up a paper.]
Mr. ALTSCHUL. I think I can identify it better by seeing what is in
it rather than by seeing what is not in it. [Looking at the paper.]
I think this is it.
Mr. PECORA. It is designated as no. 1 in the upper left-hand corner.
Mr. ALTSCHUL. That is it.
Mr. PECORA. Mr. Chairman, I offer this in evidence, but it need
not be spread in full on the record.
The CHAIRMAN. Let it be admitted with that understanding.
(The first proof of the printed application was thereupon marked
" Committee Exhibit No. 21, Feb. 16, 1934 ", but will not be spread
in full on the record of the hearing but kept among the committee's
papers.)
Mr. PECORA. Mr. Altschul, look at that first proof and tell us if it
contains a pro forma balance sheet, the one that has been under discussion here, or if it contains any reference thereto.
Mr. ALTSCHUL (after casually glancing at the paper). I t does not
contain a pro forma balance sheet. [Continuing to look at the
paper.] And so far as I can see in a hasty examination it contains
no reference to such a balance sheet.
Mr. PECORA. DO you notice the lead pencil notations across the
face of the first page of that first proof, at the top of the page?
Mr. ALTSCHUL. Yes.
Mr. PECORA. HOW does that pencil notation read?
Mr. ALTSCHUL. That pencil notation reads [turning to Mr.
Haskell] : Whose handwriting is that?
Mr. HASKELL. I don't know.
Mr. ALTSCHUL. The pencil notation reads: " Get pro forma B. S.
Noxon."
Mr. PECORA. The abbreviations " B.S." meant to get a pro forma
balance sheet, I take it?
Mr. ALTSCHUL. Oh,
yes.
Mr. PECORA. Of Noxon, Incorporated?
Mr. ALTSCHUL, Yes, sir.
Mr. PECORA. DO you know
the handwriting of that pencil notation?
Mr. ALTSCHUL. No; I do not. And at the bottom of the second
sheet—and the reason I was hesitating was because I was looking at
the printed matter—you will find in the same handwriting the statement " Pro forma or opening balance sheet of Noxon."
Mr. PECORA. NOW, do you know whether or not those lead pencil
notations were on the first proof at the time your committee acted on
the application?
6014
STOCK EXCHANGE PEACTICES
Mr. ALTSCHUL. The proof that was before the committee bore no
pencil notations whatever. These were just pulls of the proof similar to this. This, apparently, is the working paper of the examiner.
Mr. PECORA. DO you mean the examiner of the committee on stock
list?
Mr. Ai/rscHUL. Yes, sir. I would assume—if you want me to try
to interpret what this probably means ?
Mr. PECORA. Yes; please do so.
Mr. ALTSCHUL. I would assume that in developing his final form
this matter came up and he put this notation on there, so that when
he got the proforma balance sheet, which came into the office at some
subsequent date, it would be interpolated in that listing application.
In other words, this was the work sheet of the examiner.
Mr. PECORA. NOW, I show you another document which was produced from the records of the New York Stock Exchange, and it
bears the serial stamp number, no. 10102. I t is entitled "Noxon,
Inc., Proforma Balance Sheet, June 27, 1933 ", and bears upon it
a stamp which reads a$ follows: "Keceived committee on stock
list, July 10, 1933, 11:54 a.m." Will you look at it and tell me if
you recognize it as one of the records of the New York Stock
Exchange.
Mr. ALTSCHUL. Yes; there is no doubt about that. That is one
of the records of the New York Stock Exchange.
Mr. PECORA. Mr. Chairman, I offer it in evidence.
The CHAIRMAN. Let it be admitted!
(The pro forma balance sheet of Noxon, Inc., dated June 27,1933,
was marked " Committee Exhibit No. 22, February 16, 1934 ", and
will be found at the end of the day's proceedings.)
Mr. PECORA. NOW, Mr. Altschul, you will notice that this proforma balance sheet that bears the receipt stamp of the committee
on stock list as of 11:54 a.m., July 10, 1933, is identical in form to
the copy of this pro forma balance sheet which was put in evidence
here on yesterday.
Mr. AUTSCHUL. Yes, sir; I would say it is the same document.
Mr. PECORA. NOW, the committee on stock list met and passed on
this application with the first proof before it, some time after 3 p.m.,
on July 10, 1933.
Mr. ALTSCHUL. That is correct.
Mr. PECORA. This last exhibit 'indicates that shortly before noon
on that day this original pro forma balance sheet in question was
received by the committee on stock list.
Mr. ALTSCHUL. Yes, sir; it was received in the office of the committee on stock list.
Mr. PECORA. Well, it was not brought to the attention of the committee on stock list when it met that afternoon and considered this
application, you say.
Mr. ALTSCHUL. It not only was not brought to the notice of the
committee on stock list, but you will remember in the comments we
had before us at that time the statement was made that, because of
the fact that this company had formerly been privately owneji or
something like that, it was said no balance sheet was available. That
is my recollection of what was in that comment. Isn't that correct,
Mr. Silver ? So it was quite clear. We were puzzled about that on
STOCK EXCHANGE PRACTICES
6015
yesterday, and I wondered if it had a time stamp on it, for I wondered when it got into the office. Apparently, from what you show
as today, that was in the office at the time the committee on stock
list was considering the listing application, but there was no reference made to it. On yesterday there was some question about it, but
now there can be no question about it at all; and the document
should have been drawn to the attention of the committee but was
not drawn to the attention of the committee.
Mr. PECORA. NOW, following the action taken by the committee on
stock list on an application of this character, what further, under
the rules, regulations, or procedure of the stock exchange, is necessary to be done before the application is finally granted or denied?
Mr. ALTSCHUL The action of the committee on stock list is to
recommend the listing; they recommend listing to the governing committee in a case such as this.
Mr. PECORA. All right.
Mr. ALTSCHUL. Then 24 hours before the next meeting of the governing committee copies of printed applications which are to be
recommended by the committee on stock list, are circulated and put
in the hands of the governors.
Mr. PECORA. That is, the final form of application?
Mr. ALTSCHUL. NO ; that is still a proof.
Mr PECORA. I t is still a proof?
Mr. ALTSCHUL Yes; on the basis of that final proof, which is a
much more finished proof. It does not look like a printer's proof
but it in fact not the final form. I t may turn out afterward,
and very frequently does, that the form in which the thing was acted
on in the governing committee is printed unchanged in the final
document, but it also happens with a great deal of frequency that
small modifications are made in the thing before the stamp " approved by the governing committee " is put at the bottom and it
is printed and made available for general circulation.
In this particular case the application went to the governing committee, and, as I say, in the ordinary course of events it is something
which may in the end turn out to be the final form, or sometimes
it may be modified It goes to the governing committee 24 hours
before their Wednesday afternoon meeting, either Wednesday right
after Monday, or the second Wednesday thereafter, and it is then
acted upon by the governing committee. After that action by the
governing committee then the thing goes back to be gotten in shape
for final printing, and if there are any small changes in the document
they are made before the document is finally set up and released.
Now, if you ask me at what particular moment this balance sheet
got into the printed form, I cannot tell you, except that I tell you
it was not there when it was before the committee on stock list.
Mr. PECORA. Was it before the governing committee?
Mr. ALTSCHUL. I do not know.
Mr. PECORA. DO you know when the governing committee acted
upon it after the committee on stock list had approved it?
Mr. ALTSCHUL. On July 12. And the final application came
from the printer, after all the final revisions, about—well, it went
to the printer on the 13th, and was available for distribution on
6016
STOCK EXCHANGE PEACTICES
the 17th of July. Some time between the time when the committee
on stock list acted and the time when this thing was available for
distribution in its final form, the proforma balance sheet was inserted. (Mr. Haskell then held a whispered conversation with the
witness.)
The question before us just now was that Mr. Haskell was trying
to help me answer as to whether or not the proof that went to the
governing committee had already been corrected to the extent of
including this or not, but I am not prepared to answer that question
because I am not absolutely sure. I think it very likely but I am
not absolutely sure, and therefore I cannot make a statement of that
kind.
Mr. PECORA. DO you know whether the original proforma balance
sheet that was marked in evidence this morning and which was received by the committee on stock list at 11:54 a.m. July 10, was
before the governing committee when it considered this application
on July 12?
Mr. ALTSCHUL. DO I know that?
Mr. PECORA. Yes.
Mr. ALTSCHUL. What was that question, again?
Mr. PECORA. DO you know whether the original pro forma balance
sheet of this company which was marked in evidence this morning
and which was received by the committee on stock list at 11:54 a.m.
on July 10 was before the governing committee?
Mr. ALTSCHUL. NO ; that surely was not.
Mr. PECORA. HOW do you know it was not?
Mr. ALTSCHUL. Oh! I misunderstood your question. I was just
trying to see whether that was in the proof that went to the printer
or not.
Mr. PECORA. DO you mean whether the document itself was?
Mr, ALTSCHUL. I t was not.
Mr. PECORA. HOW do you know that?
Mr. ALTSCHUL. Because the governing
committee does not get
these documents. The governing committee gets the printed application with the recommendation of the committee on stock list at
the bottom. I t does not get any supporting documents that are with
the committee. Do you understand the point?
Mr. PECORA. Yes; I think I do. Now, Mr. Altschul, there was put
in evidence here a letter addressed to Mr. Hasselbach who is connected with your committee on stock list.
Mr. ALTSCHUL. Yes, sir.
Mr. PECORA. A letter addressed
by Cecil Page, secretary of the
American Commercial Alcohol Corporation, dated July 1, 1933.
Mr. ALTSCHUL. Yes.
Mr. PECORA. In the body
of this letter Mr. Page stated as follows
to Mr. Hasselbach:
We wanted to read to you befoie mailing the letter Mr Colby was to
write, and we wanted to give youi my suggestion as to the revision of the
text under "Authority for and puipose of issue "
Do you know what that letter refers to?
Mr. ALTSCHUL. N O ; I do not, offhand. I understand that
Mr. PECORA (interposing). Is Mr. Hasselbach here&
Mr. ALTSCHUL. NO, sir; he is not. But if you want to see whether
we can find out from Mr. Hasselbach what that had reference to
STOCK EXCHANGE PEACTICES
6017
and see whether his memory serves him on that point, we will be
very glad to call him up and find out for you.
The CHAIRMAN. There was a letter put into the record on yesterday from Mr. Colby Could you refer to that, Mr. Pecora?
Mr. PECORA. I was going to produce that, Mr. Chairman. Now,
Mr. Altschul; that letter addressed to Mr. Hasselbach, which was
marked in evidence yesterday as " Committee Exhibit No. 19 ", bears
the stamped endorsement reading as follows:
Received, committee on stock li^st, July 5,1933, 9: 02 a m
And I have here a letter addressed to the committee on stock list,
dated July 1, 1933, signed by Mr. Colby as the vice president and
treasurer of the American Commercial Alcohol Corporation, which
also bears a stamp reading:
Received, committee on stock list, July 5,1933, 9:02 a m
Mr. ALTSCHUL. Yes.
Mr. PECORA. I show you the letter in question.
(Mr. Altschul looking at the letter.)
Mr. PECORA. IS there any doubt that it was a letter received at
9:02 a.m. by your committee on stock list on July 5,1933 ?
Mr. ALTSCHUL. There is no doubt about it.
Mr. PECORA. Mr. Chairman, I offer it in evidence, but
Mr. ALTSCHUL (interposing). I do not know just what is in evidence, but as to
Mr. PECORA (continuing). It might be marked for identification
and not be spread in full on the record
The CHAIRMAN. Let it be so received and marked.
(A letter dated July 1, 1933, signed by Mr. Colby and addressed
to the committee on stock list of the New York Stock Exchange,
was marked " Committee Exhibit No. 23, for identification, February
16,1934 ", and will not be made a part oi the record.)
Mr. PECORA. Mr. Altschul, do you know whether that document,
being the letter of Mr. Colby under date of July 1, 1933? was before
the committee on stock list when it passed on this application?
Mr. ALTSCHUL. That letter was not before the committee on stock
list.
Mr. PECORA. Although it was received 5 days before the meeting.
Mr. ALTSCHUL. It would not normally go before the committee on
stock list.
Mr. PECORA. What goes before the committee on stock list?
Merely the proof of the application and none of the supporting
schedules or documents that might have been filed with the committee?
Mr. ALTSCHUL. NO, sir. The file that you have subpenaed here
is always in the room, and the application is before the committee,
and beyond the application there is the detailed comment of the
executive assistant, and insofar as there is anything in the application that seems to require a study by the committee itself of any of
the supporting papers, they are there available to us. And that isn't
entirely the complete answer, because beyond the application itself,
in cases of bond issues, for instance, the indenture, and documents oi
that sort, come along to the committee as a matter of routine. But
the office correspondence, unless there is something in it that the
6018
STOCK EXCHANGE PRACTICES
executive assistant feels is of such importance or has such bearing
on the matter that it should be specifically brought to the attention
of the committee, the office correspondence in the routine handling
of the matter would not be placed before the committee.
Mr. PECORA. Doesn't it appear to you that somebody connected
with the committee on stock list, perhaps the examiner, when he
had before him the first proof that has been marked in evidence
here this morning, saw the necessity for obtaining a pro forma
balance sheet of Noxon, Inc., and wrote the lead pencil notation
that appears on the face of the first proof of the application?
Mr. ALTSCHUL. Well, the evidence that has been presented here
is, first of all, consistent with that theory, and it may be the correct
theory. It would appear to me, however, that what very likely
happened was that when this proof was drawn to the attention of
Mr. Tirrell or Mr. Hoxsey, they said: Well, it would be a good
thing if we could get a pro forma balance sheet. And they just put
that note on there.
Mr. PECORA. Well, in due course the pro forma balance sheet came
into the possession of the committee on stock list, did it?
Mr. AiiTSCHUL. Right.
Mr. PECORA. Several hours
before the committee on stock list
acted upon and approved the granting of the application.
Mr. ALTSCHUL. That is correct. There is no doubt about that.
Mr. PECORA. NOW, Mr. Altschul, I show you what is entitled
" Proof No. 3 " of this application for listing, dated June 27, 1933,
which bears upon its face a stamp reading:
Received, committee on stock list, July 12, 1933, 10:35 a.m
Will you kindly look at it and tell us if you recognize it to be the
so-called " final proof " or the final form ot the printed application.
Mr. ALTSCHUL (after looking at the paper). This is proof no. 3,
and it may or may not be the final form. There may have been some
modifications but I could only answer that by
Mr. PECORA (interposing). Does it contain the pro forma balance
sheet?
Mr. ALTSCHUL. Yes; it does.
Mr. PECORA. Mr. Chairman, I ask that it be marked in evidence,
but it need not be spread on the record.
^
The CHAIRMAN. Let it be received and appropriately marked but
it will be understood it will not be spread on the record of the
committee's hearing.
(Proof no. 3 of the application of the American Commercial
Alcohol Corporation, dated June 27, 1933, containing the pro forma
balance sheet, was marked "Committee Exhibit No. 24, February
16, 1934 ", but it will not be spread on the record, being retained in
the committee's files.)
Mr. PECORA. This proof no. 3 was received at 10:35 a.m. on the
day when the governing committee passed upon the action of the
stock list committee on this application?
Mr. ALTSCHUL. That time stamp helps me to answer your question.
I can now say to you that the listing application which contains the
pro forma balance sheet was not in the hands of the governing
committee at the time it acted.
Mr. PECORA. Why not? When does the governing committee act?
STOCK EXCHANGE PBACTICES
6019
Mr. AiiTSCHUii. I t meets on Wednesday, and the proof goes to
the governing committee on the Monday night preceding.
Mr. PECORA. W h a t hour of the day on Wednesday does the governing committee meet?
Mr. A14TSCHUL. 3 : 1 0 ; and they have in their hands the applications that were sent to them on the Monday preceding
Mr. PECORA. Mr. Altschul
Mr. ALTSCHUL. NOW, wait
just a minute. I do not want to make
any statement that is open to the slightest misconstruction. The
proof is sent to the governing committee on Monday night so they
may have an opportunity to familiarize themselves with the thing
before the meeting on Wednesday. The j>roof went to the governing committee in that form on Monday night so t h a t the members
could have an apportunity to familiarize themselves with the documents they were going to act on, and they did not have this pro
forma balance sheet. Beyond that there is a general folder of
printed applications that are coming u p for action on the desk of
each member at the time they meet. I n respect to that particular
folder I am not in position to tell you on the basis of what I have
seen so far whether this was one of the documents that was in their
hands.
Mr. PECORA. By " t h i s " you mean proof no. 3, which has just
been marked in evidence as exhibit no. 24, and which contains in
printed form this balance sheet?
Mr. AiiTSCHUii. Yes; I am unable to tell you positively whether
the sheaf of papers which they found on their desks when they got
in to the meeting contained proof no. 3 or not. I t is possible it may
have been there, but if it was it would not have made any deep
impression, because the thing t h a t they act on really is the paper
they had in their hands before and which they have had a chance
to study.
Mr. PECORA. W h a t is the necessity, then, for all these revisions
of the application if the revision and the new matter included in
subsequent revisions is never brought to the attention either of the
stock-list committee or the governing committee ?
Mr. ALTSCHUL. The revisions in general are immaterial—matters
of typography and matters of that kind; and all I can say about
this is that really an important new item was introduced and was
drawn to nobody's attention. I t was just a clear oversight in the
office, and a mistake was made. T h a t is the first time I have ever
known of anything of t h a t kind happening. I cannot explain it
away on any other ground than that i t was a mistake.
Mx. PECORA. I n this particular instance there was new matter put
into proof no. 3 which had not appeared in the first proof?
Mr. ALTSCHTJL. O r the second.
Mr. PECORA^ A n d that consisted, in part, of this pro forma balance
sheet of Nbxon, Inc. ?
Mr. ALTSCHUL. Yes.
Mr. PECORA. And this balance sheet which you testified to yesterday would have caused the committee, in all probability, to have
rejected the application if the balance sheet had been before it in
committee at the time i t acted.
Mr. ALTSCHUL. Correct.
6020
STOCK EXCHANGE PRACTICES
Mr. PECOKA. That balance sheet was in proof no. 3 of the printed
form, and that proof no. 3 was received by the stock list committee
at 10:35 a.m. oi the day when the board of governors subsequently,
at 3 p.m. that day, approved the application?
Mr. ALTSCHUL. That is right, sir
Mr. PECOKA. Have you any knowledge, Mr. Altschul, of just what
inquiry or examination was made for the stock list committee by
its own examiners in passing upon this application ?
Mr. ALTSCHUL. Apart from the general examination and discussion that is the routine examination m the office
Mr. PECORA. Tell us what you understand to be the routine method
employed by the examiners of the stock list committee in passing
upon applications of this character.
Mr. ALTSOHUL. Most of that you will find in the statement which
I filed with you and which I read
Mr. PECORA. The one you read from this morning?
Mr. ALTSCHUL. Yes; I think that will give you a fair picture of
it. I may have something else here that would bear on that. I
would like to submit, although I think you probably have this
already, a list of the papers we have had submitted with applications.
The examiner will check those papers and see if there are any points
that seem to him important, and he will discuss them with the proper
party [handing a paper to Mr. Pecora].
Mr. PECORA. I am glad you gave me this document, and I offer
it in evidence.
The CHAIRMAN. It will be received.
(Document showing list of data and information required by the
Stock List Committee and which must be furnished by applicants
seeking listing was received in evidence, marked " Committee Exhibit No. 25, Feb. 16, 1934 ", and will be found in full at the end
of today's record.)
Mr. PECORA. The paper which you have produced has been marked
in evidence as "Committee Exhibit No. 2 5 " of this date; and it
is a list of the data and information which is required by the stock
list committee or which must be furnished by applicants seeking
listing. Is that it?
Mr. ALTSCHUL. Yes, sir. You will understand that this document
is designed primarily to cover all the information that we want
to get at the time oi the initial listing and any additional listing.
It may be that our files already have a great many of those documents, and in that case they do not ask for the same old things
over again that the initial listing has rendered unnecessary.
Mr. PECORA. I S it fair to assume that the stock list committee
depends primarily upon the examination made by its examiner of
these applications?
Mr. ALTSCHUL. I would say that it depends largely on the examination. Let us put it this w a y it depends upon the examination
made by its examiners m the first instance. The result of their
examination is in the second instance discussed with Mr. Hoxsey,
Mr. Tirrell, or Mr. Haskell, here, m order that any doubtful points
may be clarified and in order to assure themselves that they are
going ahead as wisely as they can. After that is done the committee depends beyond that on their own personal study of these docu
STOCK EXCHANGE PRACTICES
6021
ments and the listing application, or either of them, and upon
their discussion with the representatives of the company in connection with the initial application.
Mr. PECORA. YOU said yesterday that this pro forma balance sheet
contained items which, in and of themselves, had they been brought
to your notice as chairman of the Stock List Committee would have
caused you to reject the application.
Mr. ALTSCHUL. I do not want to quarrel about words. Maybe
those are the words that were used; but my opinion yesterday was
that just the balance sheet itself, with the conspicuous items of accounts receivable and goodwill value and processes and such things
would have suggested something to us that we would have wanted to
inquire about.
Mr. PECORA. YOU notice that the balance sheet shows total assets
of $700,000, and that of that total the sum of $380,000 represents the
items of goodwill, licenses, and processes?
Mr. ALTSCHUL. Yes, sir; I remember that.
Mr. PECORA. In other words, more than half of the claimed total
assets are represented by the valuation placed upon goodwill,
licenses, and processes?
Mr. ALTSCHUL. Yes, sir.
Mr. PECORA. And that was
one of the items that you said yesterday would have excited your suspicion?
Mr. ALTSCHUL. I t would have excited our curiosity. I do not
want to be misunderstood. There is nothing in that balance sheet,
as it stands, that would necessarily have left us at the end of our investigation with the feeling that it proved that the thing was improper, because it is conceivable that the company had presented
proper justification for it. But certainly if we had investigated and
developed the facts that you developed yesterday it would have
certainly put us upon notice to investigate.
Mr. PECORA. Such an investigation would undoubtedly have led
to the offices of the American Commercial Alcohol Corporation, the
applicant, would it not?
Mr. AI/TSCHUL. Yes, sir; without any question.
Mr. PECORA. DO you know whether or not anybody representing
the stock list committee ever went to the American Commercial
Alcohol Corporation and sought any amplification of detail or information concerning this application?
Mr, ALTSCHUL. My impression would be that the pro forma balance sheet which did not come to the attention of the committee came
to the office of the committee as a result of the attempts of our
organization to get additional information.
Mr. PECORA. DO you know whether or not the examiners for the
committee looked at the minute book of the American Commercial
Alcohol Corporation in respect to this application?
Mr. ALTSCHUL. All I can say with a fair degree of certainty, sir,
is that they did not, because that would not be one of the steps that
would be a part of our investigation.
Mr. PECORA. I S that never one of the steps forming a part of your
investigation?
Mr. ALTSCHUL. The copies of resolutions of the board authorizing
the issue of the stock would be submitted, and they would be called
175541—34—PT 13
12
6022
STOCK EXCHANGE PBACTICES
for as part of our requirements. But to go to the minute books of
corporations in connection with those issues of additional stocks is
not a part of our procedure.
Mr. PECORA. Did you ever know that a pro forma balance sheet
of Nbxon, Inc., this very corporation, was spread in full on the minute book of the American Commercial Alcohol Corporation in connection with minutes of the meeting of the board of directors of
that corporation held on June 15, 1933, and that that pro forma
balance sheet, which is dated May 8, 1933, shows total assets not of
$700,000, but of $350,000, and that among those assets the item of
good will, licenses, and processes is carried at $30,000 instead of at
$380,000?
Mr. ALTSCHUL. NO, sir; I have never had any access to the minute books of the corporation; and as a practical matter we have no
access to minute books of most corporations.
Mr. PECORA. And among the liabilities on the pro forma balance
sheet shown in proof no. 3 of the application filed with the Stock
List Committee, the item of common stock, 6,000 shares, no par
value, is carried at $350,000, whereas the item of common stock
m the pro forma balance sheet in the minute book of the corporation, 6,000 shares, no par value, is given no value at all.
Mr. ALTSCHTJL. No, sir; we knew nothing about that, to the best
of my knowledge and belief.
Mr. PECORA. Yesterday afternoon you testified as follows—and I
am reading from the stenographic transcript of the minutes of the
hearing held yesterday, at pages 265 and 266 thereof. The question put to you was as follows [reading] :
Were there not circumstances or allegations set forth in those two applications
which, in and of themselves, should have operated to put the committee on
notice that it ought to make an independent inquiry and not
assume that the
directors were acting in good faith with the stock exchange9
To which you made the following answer [reading] :
Well, as I have read these applications over since this matter came to our
attention, I do not see just what there is on the face of either one of them
that should have led us to think that the acquisitions of these properties
were not quite within the realm of the fair business judgment of the board of
directors.
Prior to your making that answer you had looked, while you were
on the witness stand, at the final printed form of the application
which was put in evidence yesterday afternoon and which contains
this pro forma balance sheet in question?
Mr. ALTSCHUL. Yes, sir. That was at the very end of the figures.
I had not come across that and did not come across it until I went
over it last night again to make sure that I answered your question
correctly.
Mr. J?ECORA. While you were on the stand yesterday you overlooked the fact that the pro forma balance sheet was printed as a
part of the application?
Mr. ALTSCHUL. Yes. I was looking not at the figures—I did not
go into the figures at all; I was just looking at the statements. Will
you read that question again?
Mr. PECORA. The question was [reading] :
Were there not circumstances or allegations set forth in those two applications which, in and of themselves, should have operated to put the committee
STOCK EXCHANGE PBAOTICES
6023
on notice that it ought to make an independent inquiry and not assume that
the directors were acting in good faith with the stock exchange?
Mr. Ai/rscHUii. When I looked at this document which was presented to me I looked for allegations and circumstances. I read the
authority for and purpose of issue and saw the business plans and
propositions and saw nothing that would have aroused my suspicion.
I did not go through the figures presented or the agreements or the
other general matters.
Mr. PECORA. Then this pro forma balance sheet was overlooked
both by the Stock List Committee and by the governing committee,
because you say that by some circumstances it was not brought to
their attention ?
Mr. ALTSCHUL. I do not say that it wsts overlooked by them; I say
it was never drawn to their attention.
Mr. PECORA. I say, it was overlooked by them because it was not
brought to their attention ?
Mr. AiiTscHuii. They did not see it.
Mr. PECORA. And it was not brought to their attention, because of
the dereliction or laxity of somebody connected with the exchange?
Mr. Ai/rscHuii. There was a mistake in the office of the Stock List
Cjommittee; there is no question about that.
Mr. PECORA. After these applications are granted many copies are
printed of the final form of the application, are they not?
Mr ALTSCHUL. Yes, sir.
Mr. PECORA. And they are distributed widely?
Mr. ALTSCHUL. Widely, and made available to the general
Mr. PECORA. TO whom?
Mr. ALTSCHUL. They are distributed in the first instance to
memloers of the exchange.
Mr. PECORA. TO all the members?
Mr. ALTSCHUL. To all the members of the exchange. Beyond that
we have a large list of regular subscribers who get these things as
a matter of routine, and then we have countless requests for them
from all sorts of interested people. They are available to the public
generally. The newspapers get them, in the first instance. Right
after the committee has acted, the newspapers get them. They are
sent to all members on the regular mailing list and are made available on request to anybody that wants them.
Mr. PECORA. Then upon the distribution of the final form of the
application which contains this pro forma balance sheet, a copy
of which was received by every member of the stock exchange, not
a single member had his suspicions excited by the extraordinary pro
forma balance sheet that wa$ part of the application, so far as you
know?
Mr. ALTSCHUL. SO far as I know, curiously; but I assume neither
the stock exchange nor the great American public made the slightest
comment about it.
Senator KEAN. I would like to ask a question right there. As a
rule, members of the stock exchange get these in a formal way and
they are filed in a book in their office, and, as a rule, the members
of the stock exchange do not read these things, do they?
Mr. ALTSCHUL. Oh, I think they may look through them to see if
they refer to companies in which they have some particular interest,
6024
STOCK EXCHANGE PEAOTIOES
and then they are apt to read them very carefully. But I do not
think they read all the different applications as they come along.
Mr. PECORA. This was part of the process by which, according to
the extract from Mr. Whitney's speech which was read into the
record yesterday, the Stock Exchange prides itself on making the
most searching investigation in the world of these applications for
listing?
Mr. ALTSCHXTL. I do not remember Mr. Whitney's speech, but my
recollection of it was that he said we had the most searching requirements of any stock exchange in the world. As I said yesterday,
that is undoubtedly correct. But, Mr. Pecora, in all fairness to the
Stock Exchange, I think you would probably be willing to admit
that the mere fact that there is one instance 01 this sort of a mistake
that occurred in the office it would hardly invalidate Mr. Whitney's
general statement.
Mr. PECORA. I do not know that this is simply one instance. We
have not examined all of the applications filed with the New York
Stock Exchange for the purpose of determining in what way the
committee on stock list acted on those applications.
Mr. ALTSCHUL. Right.
Mr. PECORA. This was only picked up at random.
Mr. ALTSCHUL. Yes; and in this instance
Mr. PECORA. And the one connected with General Theatres Equipment Co. which I questioned you about yesterday afternoon, and
which indicated that back in October 1929, Mr. Harley L. Clarke,
who was the promoter of the company, in the last application filed
with the New York Stock Exchange marked up the asset values from
$4,000,000 to $24,000,000, approximately; and that was also another one picked up at random. The Kruger & Toll instance was
another one.
Mr. ALTSCHUL. Over a period of years we are perfectly prepared
to admit that there are instances of this sort; and these instances
we would think were in no way inconsistent with the general statement that we do make a very thorough and painstaking and careful
attempt to do whatever we can to protect the public in the matter
of listing. We are trying to improve our procedure by some of the
things that have been brought out in this meeting, and to suggest
additional points by which it can be further improved. In connection with the American Commercial Alcohol Corporation, this was
a clerical error that occurs in offices and occurs in everfoffice of
private individuals who are running their own affairs. We try to
prevent their recurring too frequently. It is hard to explain it.
Mr. PECORA. Do you think that is all it is—a mere clerical error?
Mr. ALTSCHUL. In this case^
Mr. PECORA. Yes.
Mr. ALTSCHUL. Oh, yes. I do not know what the alternative is
that suggests itself to you, but as far as I can see there is nothing
Mr. PECORA. The general policy of the stock-list committee in
passing upon these applications without having any balance sheet
before it of the vendor corporation; that is, the corporation that is
to be acquired through the issuance of the additional shares for the
listing or which the application is made—that is not a mere clerical
error, is it ? That is a matter of policy.
STOCK EXCHANGE PEACTICES
6025
Mr. ALTSCHUL. YOU mean, requiring a balance sheet?
Mr. PECORA. Yes.
Mr. AiiTscHijii. Well, that is a matter of policy, but it seems to us
i t has a certain basis in reason, although it is quite possible that we
ought to revise our thinking about it. The way things function normally, boards of directors have very broad powers to work with the
affairs of their corporations, and they have the right to issue their
stock for property, for cash, or to use the corporation's cash for the
acquisition of property, or in whatever way their business judgment
dictates. The boards of directors are responsible to the stockholders
for the honest discharge of their functions. When boards of directors are directing the American corporation, acting within their
rights and according to the custom of American business life—suppose that they have used some stock for the purchase of property;
we have not felt that the function of the stock exchange was to try to
supervise or inquire into the business judgments of boards of directors or the honesty of boards of directors generally.
We can see, from what has been brought out here, that there
are some points that we might want to consider, arising in future;
but that has not been any oversight as far as the committee on
stock list is concerned. We are perfectly prepared to admit that
in some instances things like these come to your attention or to
ours that show that boards of directors have done things, from
evidence brought forth here today, that look to us, on the iace of
them, to be very questionable. But by and large American business
seems to function honestly, and the actions of boards of directors
in disposing of stock for property are generally based upon business
considerations that are before them; and we have not felt that they
go behind the action of the board of directors which the law itself
does not go behind except in cases where there is an allegation of
unfair dealing.
Mr. PEOORA. Let us see what the policy of the stock list committee
is, then. Where a corporation that already has listed its stock on
the exchange wishes to make a listing of additional stock, it makes
application to the exchange for that privilege, does it not?
Mr. ALTSCHUL. Yes, sir.
Mr. PECORA. And if that
additional stock is to be issued for .
the acquisition of the stock of another company, that fact is required
to be set forth in the application?
Mr. ALTSCHTJL. The facts are required to be stated; yes, sir.
Mr. PECORA. And does the stock list committee as a matter of pro<jedure or policy pay no attention to the information so given to it
where the additional stock sought to be listed is to be given in exchange for the stock of another corporation?
Mr. ALTSCHUL. Oh, no, sir; they do pay attention to that.
Mr. PECORA. They do?
Mr. ALTSCHUL. Yes.
Mr. PECORA. Why do
they pay attention to it? What do they hope
to find out by paying attention to it?
Mr. ALTSCHUL. They hope to get information for the benefit of the
stock exchange, in the first instance, and for the benefit of the
public
Mr. PECORA. Exactly. But in this case the original application
and the first proof thereof which came before your committee set
6026
STOCK EXCHANGE PRACTICES
forth in precise terms that the 15,000 shares which were to be issued
and for which listing was sought were to be given in exchange for the
stock of another corporation, called Noxon, Inc. Is that right?
Mr. ALTSCHUL. Yes, sir.
Mr. PECORA. And there
was no balance sheet of Noxon, Inc., in
the application when it came before your committee and when it was
acted upon by your committee?
Mr. ALTSCHUL. That is right.
Mr. PECORA. Then how in the world did your committee expect to
find out whether or not the exchange of stock that was contemplated
was one that would be fair or one that would be fraudulent or
unfair?
Mr. ALTSCHUL. YOU are asking a very large question, Mr. Pecoraf
and I do not know just how to start to answer it, but my first point
would probably be that the committee on stock list does not claim
to be in a position to pass upon the fairness of the transactions of
boards of directors, who are primarily occupied with the business
of the corporation. If the board of directors tell us that they are
going to issue stock for the purchase of this company, one of two
things may happen. If the thing is substantial, we may try to get
some information as to just what it is that they are doing, so that
the stockholders may know, in general, what they got. But suppose
we get that information. Excepting in a case like this one, where
there was something in the balance sheet that put us on notice that
we should carry the investigation further, we would hardly be in a
position to decide on the business wisdom of the transactions of the
board of directors. We would get the information as best we could,
for the benefit of those it might concern, but the directors are responsible to the stockholders for their business judgment. We would not
know.
Mr. PECORA. Then the stock list committee takes it for granted, m
passing on these applications, that the board of directors of the
corporation making the application is acting in good faith.
Mr. ALTSCHUL. Yes; and applications which are supported by the
opinion of reputable counsel in every instance, and which have supporting papers, would lead us to the assumption—barring something
that put us on specific notice—and which I frankly admit we would
have had in this particular case—we would go on the assumption
that the board of directors are acting in good faith.
Mr. PECORA. That is a policy of the stock-list committee, and has
been in the past, with regard to applications of this character?
Mr. ALTSCHUL. Yes.
Mr. PECORA. TO assume
that boards of directors of applicant corporations have acted, or proposed to act, in honesty, equity, and
good faith.
Mr. ALTSCHUL. Yes.
Mr. PECORA. Not only
toward their own stockholders, but toward
the public.
Mr. ALTSCHUL. Oh, yes. We would consider them, in other words,
innocent until we had some reason for considering them guilty.
Mr. PECORA. If corporations in general know that that is the
policy of the stock-list committee, I venture to say an examination
of your applications might disclose many more instances of that
STOCK EXCHANGE PEACTICES
6027
sort. Is it possible for you to find out, by communication with any
of your associates, who put the lead-pencil notations on the first proof
of this application, about getting a balance sheet of Noxon, Inc.?
Mr. AiiTscHuii. I will ask Mr. Haskell. He would be the only
one that would know. I do not recognize the handwriting. Do you
recognize the handwriting, Mr. Haskell ?
Mr. HASKELL. I do not.
Mr. ALTSCHUL. I think
we can very easily find out by telephone*
There are 10 examiners. It might have been any one of them.
Mr. PECORA. I will suspend the examination of Mr. Altschul at
this point and resume the examination of Mr. Russell R. Brown.
I wish you would not leave the hearing room. I would like to have
you hear some other testimony which I expect to elicit from Mr,
Brown.
The CHAIRMAN. YOU mhj be excused for the moment, Mr.
Altschul, and Mr. Brown will take the stand.
TESTIMONY OP EXTSSELL E. BEOWN—Eesumed
Mr. PECORA. Mr. Brown, when you were on the stand yesterday
your attention was called to certain action taken by the board of
directors of the American Commercial Alcohol Corporation at its
meeting held, I believe, on May 25, 1933, at which the salaries
of the executive officers of the corporation were fixed for the then
current year. Do you recall that ?
Mr. BROWN. Yes.
Mr. PECORA. The
question was then asked by Senator Fletcher
what those salaries were. Do you recall that?
Mr. BROWN. NO. A S I remember it, you, in reading the minutes,
mentioned or read that off and said to me, " What were those salaries? "
Mr. PECORA. Senator Fletcher really asked the* question, although
the record here attributes the question to me. You answered that
your salary was fixed at $21,000.
Mr. BROWN. That is correct.
Mr. PECORA. I S that your salary ?
Mr. BROWN. NO, sir.
Mr. PECORA. What is it?
Mr. BROWN. $50,000.
Mr. PECORA. Why didn't you tell
Mr. BROWN. YOU were carrying
that to the committee yesterday?
along the examination, reading
those minutes, and spoke to me, and said, "What were those salaries? "
Mr. PECORA. The salaries fixed for the current year
Mr. BROWN. Yes.
Mr. PECORA. And
you said $21,000. When was your salary raised
to $50,000?
Mr. BROWN. It was fixed at the end of the year.
Mr. PECORA. That is, in December 1933?
Mr. BROWN. Yes, sir.
The CHAIRMAN. Was
it then understood that the salary was to
relate back?
Mr. BROWN. That is correct, sir.
6028
STOCK EXCHANGE PHACTICES
The CHAIRMAN. TO cover the whole year?
Mr. BROWN. Yes, sir.
Mr. PECORA. I want to
read from the minutes of the board of
directors' meeting held on December 28, 1933. as contained in the
minute book marked in evidence yesterday as " Committee's Exhibit
No. 14 ", as follows [reading]:
At this point Mr Brown left the room and Mr Kies took the chair. Mr.
Kies, as chairman of the executive committee, reported for the committee that
in view of the fact that Mr. Russell R Brown's salary had never been definitely
fixed for the current year, the amounts heretofore paid him being tentative,
and the determination of the total compensation being subject to revision at
the close of the year when the results of his direction of the company's business
could be more definitely determined, he felt that as a result of the extremely
satisfactory earnings of the corporation during the year, as explained by the
treasurer, Mr Brown was entitled to a very substantial salary After a discussion of the matter, on motion duly made by Mr Atkins and seconded by
Judge Foster, the following1 preamble and resolutions wfere unanimously
Whereas the salary of Mi Russell R Brown, chairman of the board, as
reported by the executive committee, was to be subject to revision at the
close of the year,
Resolved that the salary of Mr. Russell R. Brown, as chairman of the
board, for the year 1983 be, and is hereby fixed at the sum of $50,000, and
the treasurer be, and he hereby is, authorized and directed to pay same.
* Further resolved that the salary of Mr. Russell R Brown for the current
year be, apportioned between this corporation and the American Distilling
Company in such manner as may be negotiated between the two companies and
be authorized by the executive committee.
Mr. Brown thereupon reentered the room and took the chair
And also, I suppose, took the salary.
When I read the extract to you yesterday from the minutes of the
meeting held on May 25,1933, did it seem to you, from the language
of the extract which I read, that the salary which you said was
$21,000 a year, fixed for you for the current year, was only a tentative salary?
Mr. BROWN. I answered the question as you read it, Mr. Pecora.
The understanding at the time, both on the part of Mr. Grimm and
myself—Mr. Grimm's compensation has not yet been adjusted—
the understanding at the time was we all felt in the board that the
matter of compensation for the active executive officers should await
the results as shown by the year.
Mr. PECORA. YOU all felt that in May 1933?
Mr. BROWN. That is correct. We also felt, at the same time, that
we might have to take lesser compensation, too.
Mr. JPECORA. Then, why didn't you say yesterday afternoon, when
you were questioned about the action of the executive committee
of the board on the matter of fixing salaries for the year 1933—you
said your salary then fixed was $21,000. Why didn't you say it was
in reality $50,000, because the $21,000 was purely tentative and subject to revision upward or downward?
Mr. BROWN. Simply because you were reading along there very
rapidly, and then turned quickly to me and said, " What were those
salaries?" and I just answered you quickly, assuming that you had
seen the minute books and knew what the situation was at the time.
That is my understanding. There was no intention to give you an
incorrect answer.
The CHAIRMAN. What were the other salaries?
STOCK EXCHANGE PBACTICES
6029
Mr. BROWN. Mr. Grimm, $22,500.
Mr. PECORA. Was his revised upward or downward in December?
Mr. BROWN. It has not been as yet.
Mr. PECORA. That is still tentative, is it?
Mr. BROWN. That is correct.
The CHAIRMAN. Any others?
Mr. PECORA. Does Mr. Kies, as chairman of the executive committee, draw a salary?
Mr. BROWN. NO.
Mr. PECORA. Mr.
Kies was one of the men associated with you in
making these individual options that were put in evidence yesterday?
Mr. BROWN. Yes.
Senator COUZENS.
When you got the increase from $21,000 to
$50,000, did you get it in a lump sum?
Mr. BROWN. Yes.
Senator COUZENS. Did you report it in your income-tax returns?
Mr. BROWN. It is to be reported in March of this year for Decem-
ber last year.
Mr. PECORA. I want to call your attention to the minutes of the
meeting of the board of directors of the American Commercial Alcohol Corporation, held on June 15,1933, as they are contained in the
minute book marked " Exhibit No. 14." I want to read to you from
those minutes the following extract. Before I read it, let me note
who were present at that meeting [reading] :
Messrs. Atkins, Brown, Oolby, Foster, Kessler, Page, Paine, Publicker, and
Bunk, being a majority and quorum of the board. Mr. Hersey Eggmton, counsel
for the corporation, was also present at the request of the board. The chairman,
Mr Brown, presided, and Mr. Page acted as secretary of the meeting
There was then presented to the meeting the form of agreement made May
8, 1933, between Clarence O Capdevielle and the corporation, providing, among
other things, for the formation of a corporation and for the sale to this corporation of 2,700 shares of the preferred stock of the value of $100 per share,
and 3,900 shares of the no-par common stock of Noxon, Incorporated, in exchange
for 15,000 shares of the common stock of this corporation Said form of agreement was ordered marked Exhibit A and attached to the minutes
On motion duly made, seconded and unanimously passed by the affirmative
vote of all the directors present at the meeting, it was resolved that this
corporation confirm the agreement with Mr C C Capdevielle upon the terms
and conditions set forth in said letter dated May 8, 1933, addressed to this
corporation by said C. C Capdevielle, and submitted to this meeting, the terms
and provisions of which, as then made and presented, are hereby ratified,
approved and confirmed.
I have read the entire resolution, but just that portion of it. That
letter of Mr. Capdevielle, dated May 8,1933, referred to in that resolution, is annexed to the minutes for this meeting of June 15, 1933,
duly marked " Exhibit A." It is addressed to the American Commercial Alcohol Corporation, and in it he says, in part, as follows
[reading!:
GENTLEMEN : I am proceeding to organize Noxon, Inc, under the laws of the
State of Maryland, and will cause it to at once acquire certain assets as per
pro forma balance sheet, as follows:
Notes receivable, $270,000
Inventory, $25,000
Machinery and Equipment, $25,000.
Good will, licenses and processes, $30,000.
Total assets, $350,000.
Liabilities • Purchase contract payable, $80,000.
6030
STOCK EXCHANGE PEACTICES
Preferred stock, authorized, $300,000, less unissued $30,000, outstanding,
$270,000
Common stock, no par value, 6,000 shares, no value
Total liabilities, $350,000.
It appears, Mr. Brown, from evidence before this committee, that
a pro forma balance sheet of this company, known as Noxon, Inc.,
as of June 27, 1933, 12 days after this resolution was adopted
by the board of directors of your corporation, shows total assets, not
of $350,000, but of $700,000, of which the principal item is one of
$380,000 ascribed to good will, licenses, and processes. That item
in this pro forma balance sheet of that corporation presented to your
board on June 15,1933, is written down at $30,000 instead of $380,000.
How do you explain that?
Mr. BROWN. I have no explanation to make of the item. I spoke
to the auditor when I heard Mr. Altschul's testimony here, and he
said that he did not understand it, because ever since the books
of Noxon, Inc., have been opened the item of $380,000 in good will
appears on the books. He says it has been on the books ever since*
Mr. PECORA. When were those books opened?
Mr. BROWN. At the time of the acquisition of the company.
Mr. PECORA. At the time of the acquisition of Noxon, Inc., by
your corporation, on this exchange of stock basis, the books of
Noxon, Inc., were opened and attributed a value of $380,000 to the
good will, licenses, and processes of the company.
Mr. BROWN. SO I understand.
Mr. PECORA. And yet on June 15, 1933, 12 days before, the pro
forma balance sheet of that corporation showed that item to be
$380,000 instead of $30,000. The board of directors of your corporation acted upon Capdevielle's offer with knowledge that the assets
of Noxon, Inc., were worth a total of $350,000.
Mr. BROWN. I do not keep the books. I have no explantion to
make of it. I just do not understand. Of course, the balance sheet
of Noxon will not appear in the consolidated balance sheet of the
American Commercial Alcohol Corporation.
Mr. PECORA. I am not talking about whether it will appear in any
consolidated balance sheet. I am talking about the fact that on
June 15, 1933, when you presented this offer on behalf of Capdevielle—who, you said yesterday, was your dummy
Mr. BROWN. Yes.
Mr. PECORA (continuing).
To exchange the preferred stock of
Noxon, Inc., and 65 percent of its common stock for 15,000 shares
of the stock of your corporation, the information given to your board
was that Noxon, Inc., had total assets of $350,000, and not of $700,000.
Mr. BROWN. I do not know just what information was given to
the board in addition to that balance sheet there, and what may be
in the balance of the minutes, Mr. Pecora.
Mr. PECORA. YOU do not know what information was given to
your board ? You presided at the meeting.
Mr. BROWN. Certainly I know what information was given to the
board, but I mean, on a detail like that, I just have no answer for it.
Mr. PECORA. YOU mean you cannot explain it?
Mr. BROWN. I cannot explain why that balance sheet is in the
minutes there, and why the books of account of Noxon, Inc., carry
the item of intangibles at $380,000. I have not any idea what it is.
STOCK EXCHANGE PRACTICES
6031
Mr. PECORA. Didn't you ever know that this was m the minute
book?
Mr. BROWN. I do not read the mmute books at the meetings. I
just do not remember those things.
Mr. PECORA.. Didn't you ever know that this pro forma balance
sheet of Noxon, Inc., was m your minute book?
Mr. BROWN. I probably knew at the time; yes, sir.
Mr. PECORA. Mr. Cecil Page, you say, was the secretary of your
corporation, the American Commercial Alcohol Corporation?
Mr. BROWN. That is correct.
Mr. PECORA. He is still the secretary?
Mr. BROWN. Yes,
sir.
Mr. PECORA. And he is a lawyer?
Mr.
BROWN. Yes.
Mr. PECORA. Mr. Page, as secretary, signed the application to
the stock exchange for permission to list the 15,000 additional shares
of stock that were to be issued in exchange for the stock of Noxon,
Inc., did he not?
Mr. BROWN. That is correct; yes, sir.
Mr. PECORA. Mr. Page signed these minutes of the board of directors?
Mr. BROWN. Yes,
Mr. PECORA. Mr.
sir.
Page, according to these minutes, was present at
the meeting on June 15, 1933?
Mr. BROWN. Yes, sir.
PECORA. And acted as secretary of
BROWN. That is correct.
PECORA. I S this the first time that
Mr.
Mr.
Mr.
called
the meeting?
this discrepancy has been
to your attention, Mr. Brown?
Mr. BROWN. Yes,
sir.
Mr. PECORA. Did you ever read the application for listing these
additional 15,000 shares, filed with the New York Stock Exchange?
Mr. BROWN. NO, sir.
Mr. PECORA. DO you know who prepared it?
Mr. BROWN. I saw that Mr. Page signed it,
so I assume it was
prepared by him or someone in the accounting department.
Mr. PECORA. In view of the fact that Mr. Capdevielle, who signed
the offer embodied in this exhibit A, forming part of the minutes
of the meeting of your board on June 15, 1933, was your dummy,
how can you escape responsibility for the statements made by Mr.
Capdevielle in his offer to your company ?
Mr. BROWN. I am not seeking to escape any responsibility.
Mr. PECORA. Did you know that on May 8, 1933, the good will,
licenses, and processes of Noxon, Inc., were estimated to be worth
only $30,000?
Mr. BROWN. My only answer to you on that, in consideration of
the whole proposition, is that the only thing with which I concerned
myself was, assuming that an interest m this organization was acquired by American Commercial Alcohol Corporation, what were
the possibilities, based on continuation of the type of business which
was being taken over, including the nickel polish, the proposed agricultural spray, and items which we felt would work in well with
6032
STOCK EXCHANGE PRACTICES
the alcohol business. That is the one thing that I wanted to concern
myself with.
Mr. PECORA. YOU knew all those things on June 15, 1933, did you
not?
Mr. BROWN. Considerable discussion was had of the entire Noxon
purchase. It originally was taken up in January 1933.
Mr. PECORA. But you knew, on June 15, 1933, what Noxon, Inc.,
was intended for.
Mr. BROWN. I do not know just what you mean.
Mr. PECORA. YOU knew that it was intended to take over certain
licenses and processes of the Noxon Chemical Products Co.
Mr. BROWN. That is correct.
Mr. PECORA. That was owned substantially by one individual, a
Mr. Nottebaum.
Mr. BROWN. Yes; I think there were probably about 12 or 15
other stockholders.
Mr. PECORA. And you knew that all those processes and licenses
involved the manufacture of these insecticides, and these other products that you have already testified about?
Mr. BROWN. Yes, sir.
Mr. PECORA. And you
knew, on June 15, 1933, that all those licenses and processes, plus the good will of Noxon, Inc., which you
testified yesterday you caused to be organized
Mr. BROWN, x es, sir.
Mr. PECORA (continuing). Were worth only $30,000.
Mr. BROWN. I did not say it was worth only $30,000.
Mr. PECORA. When your dummy, Capdevielle, submitted
this letter
of offer to the directors of your company on June 15, 1933, that is
exactly what he said it was worth; is it not &
Mr. BROWN. That is correct.
Mr. PECORA. And when Capdevielle says that is what ]t is worth,,
in reality, you are saying that is what it is worth, because he was
your chosen dummy; is not that right ?
Mr. BROWN. From that angle you are correct.
Mr. PECORA. I want to read this letter of Capdevielle, which forms
part of the minutes of the meeting of the board of the American
Commercial Alcohol Corporation on June 15, 1933, into the record,,
because I think it is important, and we will not have the minute book
as a permanent record of the committee. The letter reads as follows
MAY
8, 1933.
AMERICAN COMMERCIAL ALCOHOL CORPORATION,
405 Lemngton Avenue, New York, N Y
GENTLEMEN . I am proceeding to organize Noxon, Incorporated, under the laws
of the State of Maryland, and will cause it to at once acquire certain assets as
per pro forma balance sheet, as follows
Notes receivable, $270,000
Inventory, $25,000.
Machinery and Equipment, $25,000
Goodwill, licenses, and processes, $30,000
Total assets, $350,000.
Liabilities: Purchase contract payable, $80,000.
Preferred stock, authorized, $300,000, less unissued, $30,000; outstanding,
$270,000.
Common stock, no par value, 6,000 shares, no value.
Total liabilities, $350,000
Noxon, Inc, will have an exclusive license agreement running from Mr.
Ralph Nottebaum, for the manufacture of cleaner polish, floor wax, and house
STOCK EXCHANGE PEACTICES
6033
Jbiold
insecticides now being marketed tinder the registered trade name of
4
* Noxon." It will also possess certain options from Mr. Nottebaum in connection with a plant spray to be manufactured or developed under the trade
name of "Toxon" Copy of the contract with said Nottebaum covering the
plant spray is attached hereto and made a part hereof.
The preferred stock will be $100 par value, six percent cumulative, non-voting,
callable at 105 atl the option of the company Of the 6,000 shares of no par
common voting stock 3,900 shares will be in my possession and 2,100 in the
possession of Nottebaum and/or his nominees or assignees The stock issued
to Nottebaum m connection with a certain royalty arrangement, copy of the
contiact covering said royalty arrangement being attached hereto and made a
part hereof goes to said Nottebaum in full payment for the licenses, processes,
et cetera
I offer to exchange the said 3,900 shares of no par common stock of Noxon,
Inc, and the 2,700 shares of said preferred stock of Noxon, Inc, for 15,000
shares of $20 par value common stock of American Commercial Alcohol Corporation and further offer to cause said Noxon, Inc, to enter into a contract
for ten yeais with American Commercial Alcohol Corporation for the purchase
of its supplies, materials, et cetera, as per copy herewith, and to assign to
American Commercial Alcohol Corporation all rights and interest of Noxon,
Inc., and myself in said plant spray.
Very truly ypurs,
(Signed)
C C CAPDEVIELLE,
Accepted May 8,1933
AMERICAN COMMERCIAL CORPORATION,
By (Signed) R H GRIMM, President
Senator COUZENS. Did your directors know that this man was your
dummy when this was read?
Mr. BROWN. Yes. They knew the arrangement.
Mr. PECORA. The directors knew it because, as you said yesterday,
you had told them so informally but not at any formal meeting of
the board?
Mr. BROWN. That is correct, sir.
Mr. PECORA. Now, you testified yesterday that a syndicate was
formed on or about May 31,1933, to underwrite the forty thousandodd shares of additional common stock of American Commercial
Alcohol Corporation which was to be offered to the stockholders in
the markets of their preemptive rights.
Mr. BROWN. Yes, sir.
Mr. PECORA. I show you what
purports to be a photostatic reproduction of that syndicate agreement. Will you look at it and tell
me if you recognize it to be a true and correct copy thereof ?
Mr. BROWN (after examining document). Yes; it is.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Agreement dated May 31, 1933, between American Commercial
Alcohol Corporation, Thomas E. Bragg, and syndicate participants,
was thereupon designated " Committee Exhibit No. 26, February 16,
1934 ", and the same appears in full in the record immediately following, where read by Mr. Pecora.)
Mr. PECORA. The syndicate agreement in question, marked " Committee's Exhibit No. 26 " of this date, reads as follows [reading] :
AGREEMENT, dated as of the 31st day of May, 1933, between AMERICAN
COMMERCIAL ALCOHOL CORPORATION, a Maryland Corporation (hereinafter called
the Company), party of the first part; THOMAS E BRAGG,, as Syndicate Manager (hereinafter called the Syndicate Manager), party of the second part;
and the SYNDICATE PARTICIPANTS who may become parties hereto m the manner
hereinafter provided (hereinafter called the Syndicate Participants (or the
Syndicate)), parties of the third part, every such Syndicate Participant being
6034
STOCK EXCHANGE PBACTICES
bound only to the extent of his or its own subscription, and not for any subscriber or subscription.
1 The Syndicate Manager agrees to form a syndicate upon the terms hereinafter set forth within twenty-four hours after the offer to stockholders specified in paragraph Second of this Agreement has been mailed When the Syndicate Manager has formed such syndicate, notice thereof in writing shall be
given by the Syndicate Manager to the Company and not later than three
o'clock PM., Daylight Saving Time, on June 7, 1933, and after the Syndicate
Manager shall have given such notice the Syndicate Manager shall be obligated
at any time thereafter, upon the request of the Company, to furnish it with a
list of Participants in the Syndicate and with the amounts of their respective
participations After the Syndicate Manager has given such notice to the
Company, the Syndicate Manager shall have no iuither obligation to the Company hereunder except to the extent that the Syndicate Manager may be a
Syndicate Participant.
2 The Company agrees to pay the Syndicate Manager, as compensation tor
his services in forming such Syndicate, the sum of $100 per share upon each
of the 40,949 shares of the Common Stock of the Company of the par value of
$20, each to be underwritten by the Syndicate as hereinafter provided.
The terms of the agreement of the Company with the Syndicate are as
tollows.
FIRST. Thomas E Bragg is to be the Syndicate Manager
SECOND: The Company agrees to offer not later than three o'clock P.M_
Daylight Saving Time, June 6, 1933, to the holders of its Common Stock the
light to subscube at $20 per share to 40,949 shares of its Common Stock of
the par value of $20 per share, pro iota in proportion to the number ot shares
of said Common Stock held by each stockholder of record at three o'clock P.M.
Daylight Saving Time, on June 14, 1933, such right to subscribe to be exercised
on or before three o'clock P M Daylight Saving Time, on July 5, 1933, and to
be evidenced by transferable warrants The Company agrees to deliver to the
Syndicate Manager not later than six o'clock P M Daylight Saving Time, June
6, 1933, an affidavit sworn to by an officer of its Transfer Agent certifying that
a copy of said offer has been mailed prior to three o'clock P M Daylight Saving Time on June 6, 1963, to each stockholder of record
THIRD The Company agrees to give the Syndicate Manager notice on or
before July 7, 1933, of the number of shaies out of the 40,949< hereinbefore mentioned which have not been subscribed for by the holders of subscription
warrants
FOURTH. The Syndicate Participants agree to purchase, subject to the
teims and conditions herein contained and pro rata to the amounts of their
lespective participations, such part or all of such 40,949 shares of the Common
Stock of the Company as shall be stated in the notice provided for in paragraph THIRD hereof as not having been subscribed for by the holders of
subscription warrants, and to pay therefor the price of $20 per share, and the
Company agrees to sell to the Syndicate Participants said stock for such price.
Payment is to be made by the Sjndicate Participants to the Company of
the purchase price against dehveiy to the Syndicate Manager at the time
hereinafter specified of permanent certificates for shares of the said Common
Stock of the Company The certificates for such stock shall be issued m such
name or names and in such denominations as the Syndicate Manager shall
lequest If the notice provided for in paragraph THIRD hereof shall state
that the entire 40,949 shares of said Common Stock of the Company have been
subscribed for by the holders of the Common Stock of the Company, then the
Company agrees that the compensation payable to the Syndicate Manager pursuant to the provisions of this paragraph will be paid to the Syndicate Manager simultaneously with the delivery of such notice
FIFTH If the notice provided for in paiagiaph THIRD hereof shall state
that less than 40,949 shares of said Common Stock of the Company have been
subscribed for by the holders of the Common Stock of the Company, the Syndicate Manager agrees to give at least two days' notice to the Company of the
date upon which the Syndicate Participants will take delivery of the shares
they are obligated to purchase pursuant to paragraph FOURTH hereof, which
date shall be not later than three o'clock PM Daylight Saving Time July 10r
1933 The place of delivery shall be at the office of the Syndicate Manager,
No. 52 Wall Street, Borough of Manhattan, New York City
SIXTH: The obligation of the Syndicate Participants hereunder 19 subject
to the following conditions, and the Company warrants and represents to the
Syndicate Participants:
STOCK EXCHANGE PEACTICES
6035
That the stock to be purchased by the Syndicate Participants is validly issued
and fully paid and non-assessable, and has been listed on the New York Stock
Exchange, and that the Company has perfoimed all of the obligations on its
part then to be performed hereunder
SEVENTH • The Syndicate Managei may, without the consent of the Syndicate Participants, modify or amend this agreement with the consent of the
Company
EIGHTH* Notices under this agreement shall be in writing and if to the
Company shall be sufficient in all respects li delivered in person or sent by
registered mail to the Chryslei Building, No 405 Lexington Avenue, Borough
of Manhattan, City of New York
NINTH I t is further understood that the liability of the Syndicate Paiticipants hereunder shall be limited to the extent of their respective participation
in said Syndicate.
TENTH: Failure of any Syndicate Participant to pertorm any of his or its*
undertakings under this agreement will not affect or release any other Syndicate Participant, and upon such failure the Syndicate Manager shall have the
right to exclude such failing Syndicate Participant from further interest and
participation in the Syndicate and to forfeit any payment he may have made
The Syndicate Participants may hold such Syndicate Participant liable for any
damages on account of such failure
ELEVENTH: The Syndicate Manager shall not be liable under any of the
provisions of this Agreement, or for any matter connected therewith except
in each instance for good faith and the exercise of reasonable diligence The
Syndicate Manager may become a Syndicate Participant hereto and in that
event he shall be liable for his participation in the Syndicate and shall
participate in the profits and losses of the Syndicate in the same way as and
ratably with other Syndicate Participants All expenses of the Syndicate
Manager, including counsel fees, brokers5 commissions, etc, shall be charged
to the Syndicate Participants
TWELFTH Each and every party heieto, upon leasonable request, will
from time to time execute, deliver and perform all further written agreements
necessary or appropriate to carry this agreement into effect
THIRTEENTH: The respective Syndicate Participants on signing this Agreement shall set opposite their respective names the amount of their respective
participations and shall be liable ratably only for the amount of their respective participations. Anything herein contained or otherwise shall not constitute the Syndicate Participants partners with the Syndicate Manager or
with one another, or render them liable to contribute moie than such ratable
amounts as aforesaid
IN WITNESS WHEREOF, the Company has caused this Agreement to be
executed in its name and upon its behalf by its President or one of its VicePresidents, attested under its corporate seal by its Secretary or one of its
Assistant Secretaries, and this Agreement has been executed by the Syndicate
Manager and the Syndicate Participants have each subscribed one of said
originals or a counterpart thereof as of the day and year first above written
AMERICAN COMMERCIAL ALCOHOL CORPORATION,
B y R H GRIMM, President
ATTEST
Cecil Page,
Secretary
T E Bragg, Syndicate Manager.
And then the participants and the amount of their subscriptions
respectively, as follows [reading] :
T E. Bragg, 52 Wall St $102,370 00
K B Phagan, 25 W 43rd St 204745 00
C C Capdevielle, 12 W 44th St 81,898 0O
Now, Mr. Brown, the Mr. Phagan and Mr. Capdevielle who were
subscribers or participants to this syndicate agreement were the
same men that you selected as your two dummies in the transactions
you have already testified about?
Mr. BROWN. That is correct, sir.
Mr. PECORA. Were they acting as your dummies also in this syndicate agreement?
6036
STOCK EXCHANGE PBACTICES
Mr. BROWN. Not entirely, no.
Mr. PECORA. Not entirely?
Mr. BROWN. NO.
Mr. PECORA. TO what extent did
Mr. BROWN. My participation in
Mr. PECORA. Your participation
they?
there was 10 percent.
in this syndicate agreement was
10 percent?
Mr. BROWN. Yes.
Mr. PECORA. And in whose name was that participation concealed?
Mr. BROWN. Mr. Phagan's, I believe.
Mr. PECORA. Mr. Phagan?
Mr. BROWN. Yes.
Mr. PECORA. What other officers and directors of the American
Commercial Alcohol Corporation had a hidden interest in this syndicate agreement?
Mr. BROWN. The same names as I gave you yesterday, I believe.
Mr. PECORA. What?
Mr. BROWN. The same names and the same proportions ^s I gave
you yesterday.
Mr. PECORA. The same names and the same proportions that you
gave me yesterday. Well, who are they, in addition to yourself—
Mr. Grimm?
Mr. BROWN. DO you want just the officers and directors?
Mr, PECORA. Among the officers and directors.
Mr. BROWN. YOU want the split-up of those names, don't you?
Mr. PECORA. Yes.
Mr. BROWN. Mr. Phagan had 5,000 for himself.
Mr* PECORA. Mr. Phagan had 5,000 for himself?
Mr. BROWN. That is correct.
Mr. PECORA. Although his subscription is for 25 percent of the
total issue of 15,000 shares?
Mr. BROWN. That is correct.
Mr. PECORA. What else?
Mr. BROWN. Mr. Grimm, 10,000.
Mr. PECORA. Mr. Grimm, 10,000. That was the president of your
company?
Mr. BROWN. That is correct, sir.
Mr. PECORA. That gave this option?
Mr. BROWN. That is correct.
Mr. PECORA. That made this syndicate agreement?
Mr. BROWN. That is correct.
Mr. PECORA. Yes.
Mr. BROWN. I was down for 10 percent, too.
Mr. PECORA. YOU had 10 percent?
Mr. BROWN. Yes.
Mr. PECORA. That makes the 25 percent interest
of Phagan,
doesn't it?
*
Mr. BROWN. That is right.
Mr. PECORA. That is, Phagan's 25 percent interest represented
only 5 percent for himself, 10 percent for you, 10 percent for Grimm?
Mr. BROWN. That is correct.
Mr. PECORA. Capdevielle's interest, or the extent of his participation in this syndicate, was 10 percent, wasn't it?
STOCK EXCHANGE PBACTICES
Mr.
6037
BROWN. Yes.
Mr. PECORA, And who were represented in that 10-percent interest of Capdevielle?
Mr. BROWN. Mr. Philip Publicker 5 percent.
Mr. PECORA. Mr. Publicker had 5 of the 10 percent?
Mr. BROWN. Yes.
Mr. PECORA. He is
one of the directors of American Commercial
Alcohol?
Mr. BROWN. That is correct, sir. I will have to get those others.
Mr. PECORA. Well now, didn't you have a 4-percent interest, too?
Mr. BROWN. NO.
NO, sir.
Mr. PECORA. HOW much of the 10 percent did Capdevielle have?
Mr. BROWN. Capdevielle had 1 percent.
Mr. PECORA. Who had the other 4?
Mr. BROWN. Mrs. Ewing, my secretary, had 1 percent.
Mr. PECORA. In her beneficial right?
Mr. BROWN. Yes; and so retained it and put up the money. W. J.
Butler 1,000.
Mr. PECORA. One thousand what; dollars?
Mr. BROWN. Yes; $l>000.
Mr. PECORA. Would that represent 1 percent?
Mr. BROWN. Yes,
sir.
Mr. PECORA. Who is Butler?
Mr. BROWN. Butler is a member of C. E. Welles & Co.
Mr. PECORA. That is a stock brokerage firm?
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Mr. BROWN.
Mr. PECORA.
Yes,
sir.
Were they your brokers?
Yes, sir.
I S your brother
Yes, sir.
a partner of that firm?
All right.
And then H. S. Brown, my brother, had 2 percent.
Yes; that makes up 10 percent; that was taken in
Capdevielle's name?
Mr. BROWN. That is correct.
Mr. PECORA. What other persons had hidden or concealed interests
in this syndicate?
Mr. BROWN. Humphrey W. Chadbourne, 5,000.
Mr. PECORA. He is a director of the American Commercial
Alcohol ?
Mr. BROWN. Director.
Mr. PECORA. Yes. How about Mr. Kies ?
Mr. BROWN. W. S. Kies, 10 percent.
Mr. PECORA. He is chairman of the executive committee of the
American Commercial Alcohol?
Mr. BROWN. Yes.
Mr. PECORA What was the extent of his interest ^
Mr. BROWN Ten percent.
Mr. PECORA. All right Who else?
Mr. BROWN. I guess that covers it, then.
Mr. PECORA. HOW about a Mr. L. B. Manning &
Mr BROWN. I never knew anything about Mr L. B. Manning
until, I think, some of your gentlemen advised me.
175541—34—PT 13
13
6038
STOCK EXCHANGE PKACTICES
Mr. PECORA. That is, you never knew it until we found it out
for you?
Mr. BROWN. That is correct; yes.
Mr. PECORA. DO you know who L. B. Manning is?
Mr BROWN. I think he is an associate of Mr. Cord's.
Mr. PECORA. Of Mr. who?
Mr. BROWN. Of Mr. Cord.
Mr. PECORA. E. L. Cord?
Mr. BROWN. Yes.
Mr. PECORA. What is Mr. Manning's business ?
Mr. BROWN. I don't know. I don't know the man.
Mr. PECORA. He is a market operator, too, isn't he?
Mr. BROWN. Not that I know of
Mr. PECORA. Who else had a hidden interest in this
syndicate or
in the profits of this syndicate?
Mr. BROWN. I don't know.
Mr. PECORA. HOW about J. W. Bower?
Mr BROWN. I don't know who he is.
Mr. PECORA. YOU have heard of his having an interest, a hidden
interest, in this?
Mr. BROWN. Yes; I saw his name there. I don't know who he is.
Mr. PECORA. HOW about L. Young? Who is L. Young?
Mr. BROWN. I don't know. That was the one that you just said
was Mr. Manning, wasn't it?
Mr. PECORA. Yes; Manning's interest was covered by L. Young, in
L. Young's name.
Mr. BROWN. I don't know that.
Mr. PECORA. Who is C. C. Conway?
Mr. BROWN. President of the Continental Can Corporation.
Mr. PECORA. Did he have an interest in this syndicate ?
Mr. BROWN. Yes, sir.
Mr. PECORA. In the profits of it ?
Mr. BROWN. Yes, sir.
Mr. PECORA. We know that Thomas
E Bragg had an interest and
he was the syndicate manager. Now, how about J. L. Kauffman?
Mr. BROWN. That is Mr. Kies.
Mr. PECORA. That is, Mr. Kies' hidden interest was further hidden
in the name of Kauffman; is that right ?
Mr. BROWN. That is correct; yes.
The CHAIRMAN. Was there nothing in writing regarding these
secret or hidden interests?
Mr. BROWN. NO. I have no correspondence as far as I was
concerned.
Mr. PECORA. What is Mr. J. L. Kauffman's business?
Mr. BROWN. I think he is a lawyer.
Mr. PECORA. What was the interest that a Mr. Whanger had?
Mr. BROWN. I don't know the man.
Mr. PECORA. YOU don't know the man?
Mr. BROWN. NO, sir.
Mr. PECORA. Didn't you ever hear of
Mr. BROWN. NO, sir.
Mr. PECORA. This is the first time you
Mr. BROWN. Yes, sir.
him?
have heard of Mr. Whanger?
STOCK EXCHANGE PEACTICES
6039
Mr. PECORA. I S Mr. Whanger in the hearing room?
(A man rose in the body of the hearing room.)
Mr. PECORA. DO you recognize Mr. Whanger, the gentleman who
has just arisen?
Mr. BROWN NO, sir.
Mr. PECORA* Thank you,
Mr. Whanger. Now, you said yesterdaythat this underwriting syndicate was formed and originally was to*
receive $2 a share commission.
Mr. BROWN. That was the basis of the original discussion with
Mr. Bragg; yes, sir.
Mr. PECORA. The syndicate agreement that I have just read m
evidence provides for a commission of $1 a share.
Mr. BROWN. That is correct.
Mr. PECORA. When was the change made?
Mr. BROWN. During the course of the negotiations.
Mr. PECORA. This agreement is dated May 31, 1933. How long
before that had the negotiations which culminated in this underwriting agreement been initiated?
Mr. BROWN. Just several days before.
Mr. PECORA. On May 31,1933, as I recall the quotations that were
read into the record yesterday, the common stock of American Commercial Alcohol Corporation was quoted in trades on the New York
Stock Exchange at prices ranging from a low of about 30 to a high
of 33.
Mr. BROWN. Yes.
Mr. PECORA. YOU recall that?
Mr. BROWN. I believe that is correct; yes, sir.
Mr. PECORA. NOW, it was when the market price
of this stock was
from 30 to 33 dollars a share that this underwriting agreement was?
made with Thomas E. Bragg as syndicate manager?
Mr BROWN. That is correct.
Mr. PECORA. TO distribute the 40,949 shares provided foi in this
agreement at $20 a share to the stockholders of record who cared to
subscribe for it^
Mr. BROWN. That is correct; yes, sir.
Mr. PECORA. Well, in view of the fact that the stockholders of
record were to have the privilege of subscribing for this common
stock at $20 a share at a time when it was selling in the market for
from 30 to 33 dollars a shares, was there any doubt at all in your
mind that the stockholders would absorb the entire issue of 40-odd
thousand shares?
Mr. BROWN. That I cannot answer, except that I can say that at
that time apparently people felt that repeal was going to come
along and
Mr. PECORA. That would make this stock more valuable, wouldn't
it?
Mr. BROWN. That might go along.
Mr. PECORA. Yes. And was there the slightest
Mr. BROWN (interposing). Oh, certainly.
Mr. PECORA. Mr. Brown, tell us frankly, was there the slightest
vestige of doubt in your mind on May 31, 1933, when this underwriting agreement was made, but that the stockholders of record
would subscribe eagerly at $20 a share for all of these 40/,000-odd
shares ?
6040
STOCK EXCHANGE PRACTICES
Mr. BROWN. Yes; but I think there is a period of time which thoserights would extend over. I do not think anyone with any certainty
could forecast the action of the market for the next 30 days or
whatever the period might be. I at least hoped that it would go
over, because those additional funds would come in very handy in
the corporation.
Mr. DECORA. HOW many of the stockholders of record actually did
avail themselves of their preemptive right to subscribe for these
40,000-odd shares?
Mr. BROWN. I think all except about 700 shares.
Mr. PECORA. All but about 700 shares?
Mr. BROWN. That is right.
Mr. PECORA. Was subscribed for by the stockholders?
Mr. BROWN. That is correct.
Mr. PECORA. YOU subscribed for your full share?
Mr. BROWN. Yes, sir.
Mr. PECORA. AS one of the stockholders of record at that time?
Mr. BROWN. Yes, sir.
Mr. PECORA. SO did Mr. Kies?
Mr. BROWN. I believe so.
Mr. PECORA. I presume, and all the other officers and directors?
Mr. BROWN. I presume so. I don't know.
The CHAIRMAN. Then this syndicate handled only 700 shares?
Mr. BROWN. I t only had to take up approximately 700 shares.
I think some stockholders came in afterward, some delays, and they
might have picked up a hundred additional shares after the expiration date.
Mr. PECORA. Mr. Brown, did you ever tell the directors of your
company about tlie secret interest you had in this underwriting
agreement?
Mr. BROWN. I spoke to them all individually and told them.
Mr. PECORA. Eventually?
Mr. BROWN. Individually.
Mr. PECORA. Oh, individually?
Mr. BROWN. And told them of it; yes.
Mr. PECORA. And they all approved of it?
Mr. BROWN. Yes, sir.
Mr. PECORA. Thought
it was very fair practice, did they; good
ethical conduct?
Mr. BROWN. That they did not say.
Mr. PECORA. HOW?
Mr. BROWN. That they did not say.
Mr. PECORA. Not one of them criticized you for it?
Mr. BBOWN. NO.
Mr. PECORA. Did
you tell them after the agreement had been executed!
Mr. BROWN. I believe I told them afterwards, or about that time.
I cannot tell what time I told them.
Mr PECORA. Were the stockholders ever told of your secret interest
in this underwriting agreement?
Mr. BROWN. Plenty of stockholders have been told about it. I
mean friends of mine.
Mr PECCRA. I imagine all the stockholders will be told about it
now.
STOCK EXCHANGE PBACTICES
6041
Mr. BROWN. Probably. [Laughter.]
Mr. PECORA. But did you tell any stockholders or did you cause
any announcement or statement to be conveyed to your stockholders?
Mr. BROWN. I did not.
Mr. PECORA. Of the fact
that you and other officers and directors
of the corporation had a secret and concealed interest in this underwriting agreement?
Mr. BROWN. I issued no statement or no announcement to that
effect. I called people who were larger stockholders in the company.
Mr. PECORA. The larger stockholders sat with you on the board of
directors ?
Mr. BROWN. Oh, no; not necessarily.
Mr. PECORA. NO?
Mr. BROWN. Not necessarily.
Mr. PECORA. And did they all approve of it, too?
Mr. BROWN. There was no objection as far as I know.
Mr. PECORA. Did you tell them after May 31 or before ?
Mr. BROWN. There was no objection recorded by any
of them,
Mr. Pecora, that I spoke to, because, as I have pointed out to you
before, the financial necessities of the corporation were such that it
was important that this money be brought into the company.
Mr. PECORA. The financial necessities of the corporation were not
important enough to justify your obtaining a secret profit as a secret
participant in this underwriting agreement, were they ?
Mr. BROWN. I still maintain, as I indicated to you before, that this
entire transaction instead of netting me a profit resulted in a loss.
Mr. PECORA. I am not asking you about that; I am asking you
about this particular thing.
Mr. BROWN. I did not catch that question.
Mr. PECORA. Read the question to him.
The SHORTHAND REPORTER (Mr. Randolph) [reading] :
The financial difficulties of the corporation were not important enough to>
justify your obtaining a secret profit as a secret participant in this underwriting agreement, were they?
Mr. BROWN. It might have been handled in a different way; yesy
sir.
Mr. PECORA. NOW, Mr. Brown, whose idea was it originally to form
this underwriting syndicate ?
Mr. BROWN. I think it came—as I remember the situation, it developed out of this: In discussions with Mr. Bragg he felt that
some of the larger stockholders in the company should go along^
in order to show their good faith, and that was the basis of my
entering into it.
Mr. PECORA. And those large stockholders included you?
Mr. BROWN. Yes,
sir.
Mr. PECORA. And the other officers?
Mr. BROWN. Yes, sir.
Mr. PECORA. NOW, Mr.
Brown, in view of the fact that you say
you told all the directors individually of your secret interest in this
underwriting agreement, in view of what you have just said concerning the judgment of Mr. Bragg with respect to the formation of this
underwriting syndicate, why didn't you openly become a member
of the syndicate and obligate yourself by your signature to its terms,
and provisions and liabilities, if any ?
6042
STOCK EXCHANGE PRACTICES
Mr. BROWN. I perhaps should have done that.
Mr. PECORA. But why didn't j^ou? I think perhaps you should
have done it too, if you were going to do it at all. But that was
not the question; the question was, why didn't you ?
Mr. BROWN. Phagan was acting as my nominee.
Mr. PECORA. What is that?
Mr. BROWN. Phagan was acting as my nominee.
Mr. PECORA. And Capdevielle also?
Mr. BROWN. Not for me; no.
Mr, PECORA. Phagan assumed
the liabilities, if any were to accrue
under this agreement, didn't he?
Mr. BROWN. That is correct, but he certainly understood that 1
assumed my proportion.
Mr. PECORA. Assumed you would make good?
Mr. BROWN. That is correct, my proportion.
Mr. PECORA. Under this underwriting agreement, the corporation,
your corporation, obligated itself to pay approximately $40,000 as
a commission to this syndicate ?
Mr. BROWN. That is correct.
Mr. PECORA. Syndicate Manager Bragg?
Mr. BROWN. That is correct.
Mr. PECORA. And it did pay it?
Mr. BROWN. Yes, sir.
Mr, PECORA. And you shared in that $40,000?
Mr. BROWN. I shared in the result of the operation.
Mr. PECORA. Did you agree with Bragg that it was
necessary or
would be advisable to organize an underwriting syndicate that would
obligate itself to take over at $20 a share such shares as were not
subscribed for by the stockholders of record, in view of the fact
that at the time the stockholders were invited to subscribe at $20 a
share the stock was selling in the open market for from $30 to $33
a share?
Mr. BROWN. Yes; but I had seen the stock
Mr. PECORA (interposing). Do you think it was fair to subject
your corporation to that additional expense of $40,000 under those
circumstances?
Mr. BROWN. I think it is fair under these circumstances, because
after all, I felt that the charge was purely nominal. I think it was
absolutely necessary.
Mr. PECORA. A dollar a share represented 5 percent of the par
value of the stock and 5 percent of the subscription price to the
stockholders, didn't it?
Mr. BROWN. That is correct, sir.
Mr. PECORA. And that is purely nominal, is it?
Mr. BROWN. In my opinion; yes, sir.
Mr. PECORA. What benefits did you think your corporation would
get under this underwriting agreement?
Mr. BROWN. I thought that the company would be placed in a
splendid financial position, and my judgment in that connection I
think is evidenced by the situation in which the company finds itself
today
Mr. PECORA. What benefits did you think would accrue to your
corporation, not from the issuance of these 40-odd thousand shares
STOCK EXCHANGE PRACTICES
6043
to its stockholders at a price substantially below the market, but from
this underwriting agreement under which your corporation obligated
itself to pay a commission of 5 percent?
Mr. BROWN. I thought that I was assisting in assuring the company of the success of the underwriting.
Mr. PECORA. That is, you want to assure that all of the shares
would be subscribed for at $20 a share?
Mr. BROWN. I wanted to be sure that all of the money could come
into the corporation.
Mr. PECORA. Yes, and the money would come in only through the
sale of the 40,000-odd shares covered by this underwriting agreement; isn't that so?
Mr. BROWN. Such stock as was not subscribed for.
Mr. PECORA. Would have to be taken back by the underwriters ?
Mr. BROWN. Yes, sir.
Mr. PECORA. And two
of the three underwriters were dummies as
to whose financial responsibility you gave us some evidence yesterday?
Mr. BROWN. Yes, sir.
Mr. PECORA. YOU said
yesterday while you were on the stand that
there was a pool agreement also entered into ?
Mr. BROWN. Yes, sir.
Mr. PECORA. When?
Mr. BROWN. Approximately the same time.
Mr. PECORA. Same time as this underwriting agreement?
Mr. BROWN. The same, approximately.
Mr. PECORA. I show you a document which appears to be or
purports to be an original agreement. Will you look at it and tell me
if that is the agreement under which this pool was formed?
Mr. BROWN. That is correct.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Pool agreement dated May 2, 1933, between Thomas E. Bragg
and K. B. Phagan et al., was thereupon designated "Committee
Exhibit No. 27, Feb. 16, 1934 ", and appears in the record immediately following, where read by Mr. Pecora.)
Mr. PECORA. The agreement has been marked in evidence as " Committee's Exhibit No. 27 " and is dated May 2, 1933, and is made
" by and between Thomas E. Bragg, hereinafter called the manager,
party of the first part, and the persons other than the manager who
shall subscribe their names hereto, parties of the second part, each
of said persons hereinafter called the subscriber ", and the subscribers
and signers are as follows:
T E Bragg, manager
Subscribers
K B Phagan
John C Brennon
J L Kauffman
C O Capdevielle
T E Bragg
L Young
Carle O Conway
$25,000
5,000
10,00O
10,000
12,500
12,500
12,500
6044
STOCK EXCHANGE PEACTICES
(Committee Exhibit No. 27 is as follows:)
Private and confidential
AMERICAN COMMERCIAL ALCOHOL CORPORATION
COMMON STOCK
Agreement made and entered into this 2d day of May 1933 by and between
Thomas E Bragg (hereinafter called the manager), party of the first part,
and the persons other than the manager who shall subscribe their names
hereto, parties of the second part (each of the persons last named being
hereafter called a subscriber, all of such persons being hereinafter called the
subscribers, and the subscribers, together with the manager, being hereinafter
called the syndicate),
Whereas the parties hereto desire to torm a syndicate for the purpose of
buying and selling common stock of American Commercial Alcohol Corporation;
Now, therefore
In consideration of the premises and of the sum of one dollar ($1) by each
party to the other in hand paid, the receipt whereof is hereby acknowledged,
the subscribers hereto agree with one another and with the manager as follows.
First. The subscribers and the manager hereby torm a syndicate for the
purposes above expressed, and each subscriber, for himself, but not for any
other subscriber, hereby has paid to the manager, receipt whereof is hereby
acknowledged, the sum set opposite his subscription hereto The interest of
each subscriber in each transaction had by the syndicate shall be that proportion of the total results of such transaction which the sum hereby subscribed to the syndicate by such subscriber shall bear to the total sum so
subscribed at the time such transaction is had The subscribers hereby
authorize the manager with the proceeds of the funds subscribed to the
syndicate, to buy, sell, and generally trade m common stock of American
Commercial Alcohol Corporation, either for long or short account, at such
times and prices as the manager, in his sole discretion, shall deem for the
best interests of the syndicate; provided, however, that the commitment
of the syndicate, either for long or short account, shall not at any one time
exceed twenty-five thousand (25,000) shares.
All stock bought by the manager pursuant to the authority hereby given
shall be carried by the manager in the syndicate account.
Any subscriber may, at his election, and with the consent of the manager,
take up against payment for carrying purposes only, his proportion of any
shares of stock then in the hands of the manager for this syndicate The
manager may, at his election, upon 2 days' notice, require any participant to
take up against payment for carrying purposes only his proportion ot any
shares of stock then held by him for the syndicate
Second The manager shall have the sole direction and management and
the entire conduct of the business and transactions of the syndicate He shall
have power to buy and sell said stock for the account of the syndicate in his
uncontrolled discretion, and, in this connection, to hire and employ such
brokers and agents as he, in his sole discretion, may deem desirable, and all
commissions, fees, charges, and expenses whatsoever in connection therewith
shall be deemed to be an expense of the syndicate All transactions for the
syndicate shall be in accordance with and subject to the constitution, bylaws
rules, regulations, requirements and customs of the New York Stock Exchange,
as well as of the governing committees, boards of governors, other governing
bodies, committees, and officials theieof The manager may borrow for the
syndicate account, either from himself or others, such amounts as he may
deem, necessary, and may pledge all or any of the stock so purchased, or this
agreement, to secure any loan or loans made by him for the syndicate account,
he may become a subscriber to the syndicate He shall have exclusive custody
of the funds collected from the subscribers, and may deposit the same in any
bank or banks, or with any New Yerk Stock Exchange firm selected by him,
and may use the said funds in the operation of the syndicate
The manager shall receive five (5%) percent of the net profits of the
trading account as and for his services to the rendered herein, said payment
to be made prior to the distribution of the profits of the syndicate among
the subscribers.
STOCK EXCHANGE PBACTICES
6045
Third As soon as subscribers aggregating one hundred thousand dollars
($100,000 00) are obtained by the syndicate, the manager shall notify the subscribers that the syndicate is operative
Fourth The syndicate shall continue for a period of ninety (90) days from
the time when it is declared to be operative, as hereinabove provided, but
the manager may, in his discretion and without notice, close the operation of
the syndicate at any tune prior to the expiration of said period, or may extend
it for a further period of 90 days At the expiration of said syndicate, the
manager shall prepare a statement of the syndicate operations, and after
paying all the costs and expenses of the syndicate, including proper and reasonable charges for legal services incurred in the drafting of this agreement and
in carrying out the terms and provisions thereof and settling all of its obligations, all stock and money belonging to the syndicate remaining shall be distributed pro rata among the various subscribers. The acceptance by the subscribers of any statement rendered by the manager at the expiration of the
syndicate, together with any payment in stock or money, shall operate as a
full and complete release of the manager from any and all liability hereunder.
Fifth Russell R Brown has, under instrument dated May 2nd, 1983, given
and granted to the manager, in his individual capacity, an option to purchase
twenty-five thousand (25,000) shares of common stock of said American Commercial Alcohol Corporation, on the terms and conditions specified in such
option, which option is made a part hereof as though more fully set forth. The
manager has simultaneously herewith set over, transferred and assigned to
himself, as manager, for the purposes of this syndicate, all his right, title, and
interest in and to said option
Sixth The manager shall not be liable under any of the provisions of this
agreement or for any matter in connection therewith, or for the exercise of
his judgment and discretion in the management of the syndicate except for
want of good faith
Seventh The manager shall not buy or sell any shares of the common stock
of American Commercial Alcohol Corporation during the term of the syndicate
except through the syndicate, under the direction of the manager and for the
joint benefit of the subscribers
Eighth Each subscriber hereby ratifies, consents to, and agrees to be bound
by any action of the manager assumed to be taken under this agreement, and
agrees to perform his undertakings herein as stated in this agreement, but,
in no event or under no circumstances shall he be called upon to pay or be
liable for any amount beyond the amount subscribed for by him.
Ninth Any notice which the manager or any lender may have occasion to
give to any subscriber shall be sufficient for all purposes if given in writing,
mailed postpaid to the address of such subscriber set opposite his signature
hereto
Tenth. Nothing contained in this agreement or otherwise shall constitute
the subscribers partners with or agents for one another or for the manager,
or render them liable to contribute, in any event, more than the interest in
the syndicate subscribed for by them This agreement shall be binding upon
and inure to the benefit of the heirs, executors, administrators, and assigns of
the parties hereto
Eleventh In case of the death, resignation or incapacity to act as manager,
a successor or successors shall be appointed in writing by a majority in amount
of the remaining subscribers
Twelfth This agreement may be executed in several counterparts, each of
which so executed shall be deemed to be an original, all of which, taken together, shall constitute one and the same instrument
In witness whereof, the manager, the party of the first part, and the subscribers, parties of the second part, have subscribed this agreement on and after
the day and year first above written
T E BRAGG, Manager
Amount
K B Phagan, 24 West Forty-third
Jno C Brennon, 29 Broadway
J L Kauffman, 72 Wall Street
C O. Capdevielle, 12 West Forty-fourth
T E Bragg
J. W Bowen, 283 Parkside Drive, Brooklyn, N Y
L Young, 105 West Adams Street, Chicago, 111
Carle C. Conway 122 East Forty-second
$25,000
5,000
10,000
10,000
12,500
12,500
12,500
12,500
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STOCK EXCHANGE PRACTICES
Now, Mr. Brown, you had an interest in this pool agreement,
didn't you ?
Mr. BROWN. Yes, sir.
Mr. PECORA. And in whose name was your
Mr. BROWN. Mr. Phagan's.
Mr. PECORA. Which of the other officers
interest concealed?
and directors of the
American Commercial Alcohol Corporation also had a hidden or
concealed interest in this pool agreement?
Mr. BROWN. The same gentlemen that I—same participation as
I gave you.
Mr. DECORA. That is, the same gentlemen as you testified in connection with the underwriting agreement?
Mr. BROWN. That is correct.
Mr. PECORA. Had an interest?
Mr. BROWN. Yes.
Mr. PECORA. And
concealed in the same way as in that under-
writing agreement?
Mr. BROWN. Yes, sir.
Mr. PEOORA. And in the same proportions or percentages?
Mr. BROWN. Yes, sir.
Mr. PECORA. I suggest we take a recess now, Mr. Chairman.
The CHAIRMAN. We will take a recess now until 2:15.
(Accordingly, at 1:05 p.m., a recess was taken until 2:15 p.m.
of the same day.)
AFTER RECESS
The committee resumed at 2:15 p.m. at the expiration of the
recess.
The CHAIRMAN. The committee will resume. Mr. Pecora, you
may proceed.
Mr. PECORA. IS Mr. Whanger here?
Mr. WHANGER. Yes,
sir.
Mr. PECORA. Please come forward.
The CHAIRMAN. Mr. Whanger, please stand, hold up your right
hand, and be sworn:
You solemnly swear that you will tell the truth, the whole truth,
and nothing but the truth regarding the matters now under investigation by the committee. So help you God.
Mr. WHANGER. I do.
The CHAIRMAN. Take
a seat opposite the microphone there at
the committee table.
TESTIMONY OF J. K. WHANGEB, ACCOUNTANT, NEW YOKE CITY
The CHAIRMAN. Please state your name, residence, and business or
occupation.
Mr. WHANGER. My name is J. K. Whanger, accountant. My office
is No. 90 John Street, New York City, and my residence is No 4
West Fifty-third Street, New York City.
Mr. PECORA. Mr. Whanger, how long have you been an accountant?
Mr. WHANGER. For some 10 years.
Mr. PECORA. Are you in business for yourself ?
STOCK EXCHANGE PEACTICES
6047
Mr. WHANGER. Yes, sir.
Mr. PECORA. Are you a certified public accountant?
Mr. WHANGER. I am not.
Mr. PECORA. DO you know Mr. J. W. Bowen ?
Mr. WHANGER. I do.
Mr. PECORA. Testimony has been given before this committee
during the present week with regard to the formation of an underwriting agreement, or a syndicate that underwrote an issue of forty
thousand-and-odd shares of the capital common stock of the American Commercial Alcohol Corporation, under date of May 31, 1933.
Did you have any beneficial interest in that syndicate ?
Mr. WHANGER. I received a check for $25,000 that I understand
was a participation in the syndicate.
Mr. PECORA. Were you a participant in the syndicate ?
Mr. WHANGER. I received the check.
Mr. PECORA. I asked you the question: Were you a participant
in that syndicate ?
Mr. WHANGER. I wouldn't say I was a participant in that syndicate,
in that I had anything to do with the formation of that arrangement.
Mr. PEOORA. Did you receive a check representing profits in the
syndicate?
Mr. WHANGER. I t was represented to me as a payment for financial
advice and accounting services rendered to Mr. T. E. Bragg.
Mr. PECORA. Rendered by whom?
Mr. WHANGER. By me.
Mr. PECORA. In connection with that syndicate?
Mr. WHANGER. NO, sir.
Mr. PECORA. Did you render any accounting services
to Mr. Bragg
in connection with that syndicate ?
Mr. WHANGER. I did
not.
Mr. PECORA. Did you know the syndicate to which I refer 2
Mr. WHANGER. Not until I heard of this agreement this morning.
Mr. PECORA. Not until you heard it referred to in the course of
the examination of Mr. Brown this morning?
Mr. WHANGER. That is, I never heard of this agreement until this
morning.
Mr. PECORA. But you had heard of the syndicate before this
morning?
Mr. WHANGER. Yes, sir.
Mr. PECORA. Did you render any services in connection with the
operations of that syndicate?
Mr. WHANGER. I did not.
Mr. PECORA. When did you
render the accounting services for
which you say you received a check out of the funds of that syndicate?
Mr. WHANGER. I t covers a period of some 3 or 4 years, I should
say.
Mr. PECORA. And did that check represent payment for your services rendered during that entire period of 3 to 4 years for Mr. Bragg?
Mr. WHANGER. D O you mean this one check?
Mr. PECORA. Yes.
6048
STOCK EXCHANGE PRACTICES
Mr. WHANGER. NO, sir.
Mr PECORA. Well, what
did that particular check that you refer
to represent ?
Mr. WHANGER. I should say partial payment for services rendered.
Mr. PECORA. Had you submitted a bill to Mr. Bragg for those
services at any time in the past?
MY. WHANGER. I had not.
Mr. PECORA. YOU say you had not?
Mr. WHANGER. NO, sir; and I have not
.Mr. PECORA. And you have not as yet,
as yet.
although you have received
payment.
Mr. WHANGER. That is correct.
Mr. PECORA. And have you received other checks at the instance
of Mr. Bragg for accounting services rendered by you for his benefit?
Mr. WHANGER. That is right. But I wouldn't only say accounting
services. I would include in that statement financial advices
Mr. PECORA. Are you the financial adviser to Mr. Bragg?
Mr. WHANGER. Well, he asked my opinions on certain matters.
Mr. PECORA. Are you the financial adviser to Mr. Bragg? You
say you also received payment for financial advices. Now, I ask
you, are you the financial adviser to Mr. Bragg?
Mr. WHANGER. I wouldn't consider myself as his sole financial
adviser, although I have given him financial advice.
Mr. PECORA. Are you a financial adviser to Mr. Bragg?
Mr. WHANGER. I hardly know just what you are getting at. I
liave given Mr. Bragg financial advice.
Mr. PECORA. What I am getting at is just exactly this: You
stated you received, among others, at Mr. Bragg's instance, a check
for $25,000 that came out of the tunds of this underwriting syndicate. And you said that that check was for services as accountant
and for the giving of financial advice to Mr. Bragg.
Mr. WHANGER. That is right.
Mr. PECORA. YOU understand that part of it clearly now, do you
not?
Mr. WHANGER. Yes, sir.
Mr. PECORA. NOW I ask
you again: Are you financial adviser to
Mr. Bragg?
Mr. WHANGER. In that sense I am.
Mr. PECORA. In what sense do you mean ? I have not limited the
term in any way.
Mr. WHANGER. In the sense that you ask the question, I would say
that I am financial adviser to Mr. Bragg. He has asked my advice
on certain matters, and I have given it to him. If you consider
that is financial adviser, I am that.
Mr. PECORA. NO. YOU used the term originally that you received
payment from Mr. Bragg for giving him financial advice. Now, I
ask you: In what sense did jou use that term?
Mr. WHANGER. In the sense that I had given him financial advice.
Mr. PEOORA. Then are you a financial adviser to Mr. Bragg?
Mr. WHANGER. Yes, sir; I
am.
Mr. PECORA. For how many years have you been a financial adviser
to him?
STOCK EXCHANGE PRACTICES
6049
Mr. WHANGER. Well, I have known him for some 4 years, I should
say, and it is in consideration of advice I have -given him over that
period.
Mr. PECORA. NOW, how many payments all told have you received
from Mr. Bragg, or at his instance, either for accounting services
rendered, or for services rendered by way of giving him financial
advice during that 8- to 4-year period that you have spoken of?
Mr. WHANGER. Three.
Mr. PECORA. And what is the aggregate of those three checks
or payments ?
Mr. WHANGER. Approximately $65,000.
Mr. PECORA. And when did you receive them?
Mr. WHANGER. In December of 1933.
Mr. PECORA. All of them last December?
Mr. WHANGER. All of them in December of 1933.
Mr. PECORA. Although you had been rendering those services for
some 3 to 4 years before that, and you had never given him any
bill, last December he gave you three checks totaling $65,000 for
that kind of service ?
Mr. WHANGER. That is correct.
The CHAIRMAN. HOW much of it was accounting service and howmuch of it financial advice?
Mr. WHANGER. There is no way of apportioning it, in my opinionMr. PECORA. HOW was that amount of $65,000 ever arrived at, if
you know ?
Mr. WHANGER. I don't know.
Mr. PECORA. YOU say you don't know?
Mr. WHANGER. I t was never decided what Mr. Bragg would pay
me. He always told me he would do something for me, and I
left the matter entirely to his judgment. If it had been half of
that amount I would have accepted, and if it had been twice a&
much I would likewise have accepted it.
Mr. PECORA. And if it had been a quarter of that amount you»
would likewise have accepted it?
Mr. WHANGER. I probably would.
The CHAIRMAN. Why did you call the $25,000 a partial payment?
Mr. WHANGER. Because I received two other payments in addition
to the $25,000.
Mr. PECORA. Did you receive the three payments aggregating
$65,000 at one time last December, or by way of three different
payments?
Mr. WHANGER. I received them at different times, I believe:
Mr. PECORA. What was that?
Mr. WHANGER. I received them at different times, I believe.
Mr. PECORA. What were the respective amounts of the three checks
that made up that total?
Mr. WHANGER. One was for the alcohol thing, so, L am told,
and
Mr. PECORA (interposing). What alcohol thing?'
Mr. WHANGER. The check that came out of this thing.
Mr. PECORA. DO you mean out of the American Commercial Alcohol Corporation underwriting syndicate?
Mr. WHANGER. That is right. That was the $25,166; I believe.
6050
STOCK EXCHANGE PEACTICES
Mr. PECORA. I t was for $25,161.74, wasn't it?
Mr. WHANGER. L don't remember the exact amount. And another
one was for $15,000.
Mr. PECORA. Another one was what?
Mr. WHANGER. I t was for $15,000.
Mr. PECORA. Wasn't it in fact for $15,922.23?
Mr. WHANGER. It might have been. I don't remember the exact
amount.
Mr. PECORA. Well, it wasn't for $15,000 exactly, was it?
Mr. WHANGER. Oh, no; but approximately $15,000.
Mr. PECORA. What was the third check?
Mr. WHANGER. I t was for slightly less than $25,000.
Mr. PECORA. I t was for $24,743.32, wasn't it?
Mr. WHANGER. I wouldn't say whether that is just right or not,
Mr. PECORA. For a total of $65,827.29.
Mr. WHANGER. I believe so.
Mr. PECORA. DO you know how the compensation for those services over 3 or 4 years was fixed at that exact amount, $65,827.29?
Mr. WHANGER. No; I do not. All that I know is that Mr, Bragg
told me in the late spring or early summer of 1933 that he was going
to do something for me, that he was going to make some deals for
me. Then m September or October he told me he had made for
me $50,000 or $60,000.
Mr. PECORA. That was in September or October of last year?
Mr. WHANGER Of 1933.
Mr. PECORA. He told you
he had made for you something like
$50,000 or $60,000?
Mr. WHANGER. Yes, sir.
Mr. PECORA. Without any investment on your part?
Mr. WHANGER Yes, sir.
Mr. PECORA. Did he tell you how he had made it?
Mr. WHANGER. He might have said, but I don't
remember that
part of it distinctly.
Mr. PECORA. Wouldn't you be likely to remember what he said
to you as to how he had made this fairly substantial sum pf money
for you?
Mr. WHANGER. NO ; I had no necessary reason that I should remember it.
Mr. PECORA. What was that answer?
Mr. WHANGER. There was no necessary reason why I should
remember it if he said so at the time.
Mr PECORA. Those payments aggregating $65,827.29 you received
last December were probably the highest income you received in any
one year, weren't they?
Mr WHANGER. They were.
Mr PECORA. Or what would you say was the highest income you
had received for your services as accountant and financial adviser
in any other year 2
Mr. WHANGER. I would say from $6,000 to $8,000.
Mr PECORA. Around $6,000 to $8,000 in a year?
Mr. WHANGER. Yes,
Mr. PECORA. Well,
sir.
now, were those three checks payments for
services, or were they pronts that Mr. Bragg made for you with no
investment on your part?
STOCK EXCHANGE PRACTICES
6051
Mr. WHANGER. TO me they represented earned income, payment
to me in return for services rendered. To Mr. Bragg it might represent participation in various market operations, but I don't know.
Mr. JPECORA. What makes you think it might have represented
participation in some market operations?
Mr. WHANGER. Because he told me that he was going to do something for me, make a turn for me in the market.
Mr. PECORA. I S this the first time he made any payments to you
representing " turns " that he made in the market for you?
Mr. WHANGER. DO you mean these three checks ?
Mr. PECORA. Yes.
Mr. WHANGER. Yes, sir.
Mr. PECORA. Did you keep
an office record of the accounting services rendered by you for Mr. Bragg during this 3- to 4-year period
you have spoken about?
Mr. WHANGER. I did not.
Mr. PECORA. Did you keep
any office record of the financial advice
you had given to Mr. Bragg during this 3- to 4-year period?
Mr. WHANGER. NO ; I don't believe I have.
Mr. PECORA. NOW, this man who made deals for you in the market
that brought you profits without any investment on your part of
$50,000 to $60,000, you say was seeking financial advice from you ?
Mr. WHANGER. Yes, sir; that is right.
Mr. PECORA. Are you still a financial adviser to Mr. Bragg?
Mr. WHANGER. If he were around no doubt I would discuss financial situations with him; yes.
Mr. PECORA. Well, discussing financial situations with him and
giving him financial advice are two different things, aren't they?
Mr. WHANGER. NO ; I would say they are all bound up together.
Mr. PECORA. Oh, well, then, was the kind of financial advice you
had given to him in the past, merely by way of discussion of financial matters ?
Mr. WHANGER. Largely that; yes.
Mr. PECORA. He did not seek your advice for the purpose of his
making investments or conducting market operations, did he ?
Mr. WHANGER. Not specifically.
Mr. PECORA. It wasn't that kind of financial advice that you gave
him, was it ?
Mr. WHANGER. NO, sir.
Mr. PECORA. Give us a
sample of the financial advice that you
gave him, or the kind of financial advice you gave him.
Mr. WHANGER. AH right, sir; late in 1931, as I remember it at
this time, commodity prices kept going off, and unemployment was
still increasing. I t seemed to me at that time that the decline in
prices would continue, and, necessarily, corporate profits. I t occurred
to me at that time that gold would be quite an advisable thing to buy.
So, instead of going short of commodities or stocks whose market
fluctuations are m proportion to commodity prices, it would be the
wise thing to do to invest in gold, or in gold stocks. I discussed that
thing with Mr. Bragg at considerable length.
Mr. PECORA. Well, did he suggest that to you, or did you suggest
that to him?
6052
STOCK EXCHANGE PBACTICES
Mr. WHANGER. I don't remember just how the thing came up
originally. The whole thing was part and parcel of a very deep
and fundamental problem.
Mr. PECORA. When those discussions were had between you, would
he come to you and seek your advice, judgment, or opinion about
those financial aspects, or would you go to him and give him your
advice, judgment, or opinion?
Mr. WHANGER. I usually saw him at his office, and he would bring
up the question himself, or I would possibly.
Mr. PECORA. YOU would go around to see him at his office and he
would bring up those questions?
Mr. WHANGER. Or I might even bring them up myself.
Mr. PECORA. That is, he did not invite your financial counsel or
advice, did he ?
Mr. WHANGER. Yes, sir.
Mr. PECORA. YOU say he did ?
Mr. WHANGER. Yes, sir.
Mr. PECORA. DO you know whether he acted on it when
Mr. WHANGER. That I do not know definitely.
Mr. PECORA. And had you intended to charge him for
he got it?
that kind
of advice?
Mr. WHANGER. Ultimately I expected some compensation, else I
would never have devoted to him as much time as I have.
Mr. PECORA. Have you other clients of the same kind ?
Mr. WHANGER. NO.
Mr. PECORA. TO whom you render similar service?
Mr. WHANGER. I have other clients for whom I render
accounting
service; yes.
Mr. PECORA. But no service by way of financial advice?
Mr. WHANGER. Not the same as to Mr. Bragg; no.
Mr. PECORA. What is Mr. Braggs' business?
Mr. WHANGER. I would say as speculator.
Mr. PECORA. Speculator in the stock market?
Mr. WHANGER. That is right.
Mr. PEOORA. He is a fairly well known speculator, isn't he?
Mr. WHANGER. He is.
Mr. PECORA. And one who
speculates on a pretty large and active
scale ?
Mr. WHANGER. I would say so; yes, sir.
Mr. PECORA. DO you know where he makes his office ?
Mr. WHANGER. NO. 52 Wall Street.
Mr. PECORA. Has he an office of his own there, or does he frequent
somebody else's office?
Mr. WHANGER. There is an office there that he occupies. Whether
he pays the rent on it or not I don't know.
Mr. PEOORA. I S it his office or is it a room or suite of rooms, or is
it a room in a suite occupied by somebody else?
Mr. WHANGER. I could not say, because I have seen Mr. Bragg there
and others as well.
Mr. PECORA. DO you know whose name is on the door of the
office?
Mr. WHANGER. I do not think there is any name on the door.
Mr. PECORA. NO name at all?
STOCK EXCHANGE PRACTICES
6053
Mr. WHANGER. I don't think so. I t is a part of a general suite.
Mr. PECORA. D O you know any of his office staff or personnel ?
Mr. WHANGER. I have seen quite a few people around there
Mr. PECORA. DO you know any of them?
Mar. WHANGER. Yes; I know them.
Mr. PEOORA. DO you know the brokerage firm of E. R Button
&Co.?
Mr. WHANGER. E. F. Hutton?
Mr. PECORA. Yes.
Mr. WHANGER. Yes, sir.
Mr. PECORA. I meant W. E. Hutton & Co.
Mr. WHANGER. Yes, sir.
Mr. PECORA. Where is their office?
Mr. WHANGER. At No. 52 Wall Street.
Mr. PECORA. I S Mr. Bragg's office in the same
place occupied by
W. E. Hutton & Co.?
Mr. WHANGER. I would say so; yes.
Mr. PECORA. Isn't the name W. E. Hutton & Co. on the entrance
to that suite?
Mr. WHANGER. W. E. Hutton & Co. have the whole floor.
Mr. PECORA. And Bragg has a room in that suite?
Mr. WHANGER. YOU walk into a corridor and Mr. Bragg's offices
are in the front.
Mr. PECORA. DO you know the name of his secretary?
Mr. WHANGER. I didn't know he had a secretary.
Mr. PECORA. Who is J. W. Bowen?
Mr. WHANGER. He is a man I saw about his office quite often.
Mr. PECORA. About Bragg's office?
Mr. WHANGER. Yes, sir.
Mr. PECORA. D O you know
what his relationship is to Bragg, his,
business or otherwise?
Mr. WHANGER. N O ; I don't.
Mr. PECORA. Whose check did you get when you got these three
checks last December aggregating $65,000 plus ?
Mr. WHANGER. DO you mean the drawer of the checks?
Mr. PECORA. Yes.
Mr. WHANGER. W. E. Hutton & Co., I believe.
Mr. PECORA. W. E. Hutton & Co.?
Mr. WHANGER. I believe so.
Mr. PECORA. HOW do you know that those checks
were given to you
for the account of Mr. Bragg?
Mr. WHANGER. Because Mr. Bragg gave them to me.
Mr. PECORA. NOW, when he gave them to you what did he say?
Mr. WHANGER. He said, " Here is a play I made for you."
Mr. PECORA. But he did not say, " Here is compensation for your
financial advice and accountancy services"?
Mr. WHANGER. NO ; but it was generally understood that that was
what it was.
Mr. PECORA. NOW, you have reason to believe that one of these
checks, the one for $25,161.74, came out of the funds of this underwriting syndicate that we have talked about.
Mr. WHANGER. Yes.
175541—34—PT 13
14
6054
STOCK EXCHANGE PBACTICES
Mr. PECORA. Out of what funds or syndicates did the other two
checks come from?
Mr. WHANGER. I think the largest one came from an operation in
Union Oil.
Mr. PECORA. In Union Oil?
Mr. WHANGER. Yes,
sir.
Mr. PECORA. A stock-market operation?
Mr. WHANGER. I presume so, but I don't know.
Mr. PECORA. That was the check for $24,743.32?
Mr. WHANGER. Yes,
sir.
Mr. PECORA. Where did the check for $15,922.23 come from?
Mr. WHANGER. I think from General Foods.
Mr. PECORA. What was that?
Mr. WHANGER. From General Foods.
Mr. PECORA. Another operation in the stock market?
Mr. WHANGER. I presume so.
Mr. PECORA. Did you have anything to do with any one of those
three operations?
Mr. WHANGER. I did
not.
Mr. PECORA. Did you know they were being conducted?
Mr. WHANGER. Not as such. I didn't know that until just
recently.
Mr PECORA. DO you mean that you have learned of it since you
got the checks?
Mr. WHANGER. I don't know whether I knew it at that time or
learned since that time. I don't remember that point.
Mr PECORA. What is the general nature of the accounting services
you have rendered for Mr. Bragg in the last 3 or 4 years?
Mr. WHANGER. Interpretation of balance sheets, computing earnings, and things of that nature.
Mr. PECORA. DO you mean that he submits some corporation's
balance sheet statement to you. and you interpret it for him?
Mr. WHANGER. That is right. I look it over and tell him what
it looks like to me.
Mr. PECORA. YOU didn't do any accounting work for him by way
of keeping or auditing his own accounts, did you?
Mr. WHANGER. NO, sir.
Mr. PECORA. HOW about
doing any tax accounting work for him;
have you done any of that ?
Mr. WHANGER. I have not.
Mr. PECORA. NOW, Mr. Whanger, did you understand, and do you
now believe, that those three payments made to you last December,
one of which came from the funds of this particular underwriting
syndicate that has been testified here today in your hearing, were
made to you solely for your beneficial right and interest?
Mr. WHANGER. That is correct.
Mr. PECORA. NO one else had any interest in those checks?
Mr. WHANGER. They did not.
Mr. PECORA Or the proceeds of those checks &
Mr. WHANGER NO ; that is correct.
Mr PECORA. NOW, you deposited them, didn't you, as soon as you
got them?
Mr. WHA^GER Well, I didn't have them long anyway, but I don't
remember
it.
STOCK EXCHANGE PRACTICES
6055
Mr. PECORA. YOU recall that you did deposit them, do you?
Mr. WHANGFR. Oh, yes; I did deposit them.
Mr. PECORA. TO the credit of your own account ?
Mr. WHANGER. Yes, sir.
Mr. PECORA. In the Chase
National Bank of the City of New
York?
*Mr. WHANGER. Yes, sir.
Mr. PECORA. Did any person
other than yourself have any beneficial right or interest in that account?
Mr. WHANGER. They did not.
Mr. PECORA. Did you open that account specially for the purpose of making a deposit of those threfc checks ?
Mr. WHANGER. I
did.
Mr. PECORA. YOU say you did?
Mr. WHANGER. Yes, sir.
Mr. PECORA. YOU had not
before that time had an account with
the Chase National Bank?
Mr. WHANGER. That is right.
Mr. PECORA. DO you recall that you withdrew $55,000 out of the
aggregate of the deposits represented by those checks within a very
few days after the deposits were made?
Mr. WHANGER. I did.
Mr. PECORA. And that
those withdrawals were made in the form
of two checks, one for $20,000 and the other for $35,000, were they
not?
Mr. WHANGER. That is correct.
Mr. PECORA. And they were drawn to the order of J. E. Williston
<&Co.?
Mr. WHANGER. Yes, sir.
Mr. PECORA. I S that a firm of stockbrokers?
Mr. WHANGER. They are.
Mr. PECORA. Did you have an account with that firm?
Mr. WHANGER. I did; yes, sir.
Mr. PECORA. Did you have an account prior to the time
that you
saw these checks?
Mr. WHANGER. I did
not.
Mr. PECORA. Have you got it there still?
Mr. WHANGER. Still have it.
Mr. PECORA. Has anyone got any beneficial interest of any kind
in that account?
Mr. WHANGER. They have not.
Mr. PECORA. DO you know a Mr. Ben Smith ?
Mr. WHANGER. I do.
Mr. PECORA. What is his business?
Mr. WHANGER. Similar to Mr. Bragg's.
Mr. PECORA. That is a market operator and speculator?
Mr. WHANGER. I would say so.
Mr PECORA. He is also a member of the New York Stock
Exchange, isn't he?
Mr. WHANGER. I believe he is. I don't know that.
Mr. PECORA. Mr. Bragg is not?
Mr. WHANGER. I don't think he is.
Mr. PECORA. Did you ever render any accounting or financial
service of any kind for the benefit of Mr. Smith?
6056
STOCK EXCHANGE PRACTICES
Mr. WHANGER. I discussed m Mr. Smith's presence with Mr. Bragg
various things, but I did not consider Mr. Smith primarily.
Mr PECORA. Was Mr. Smith also present on various occasions
when you interpreted balance-sheet statements for Mr. Bragg?
Mr WHANGER He may have been. I don't know.
Mr PECORA. For whose benefit is this account at Williston & Qo.
maintained and operated ?
Mr WHANGER. For my own personally.
Mr. PECORA. Your own exclusively ?
Mr. WHANGER. All right, title, and interest in the account is
vested m me.
Mr. PECORA. Did you give Mr. Bragg a receipt in full for services
you have rendered for his benefit in the last 3 or 4 years when you
got these checks ?
Mr. WHANGER. I did not.
Mr. PECORA. Did you give him any receipt at all?
Mr. WHANGER. NO, sir.
Mr. PECORA. A S a matter of fact, the $55,000 you
withdrew from
this account that you opened last December in the Chase National
Bank was used by you for the purchase of certain securities,
wasn't it?
Mr. WHANGER. That is correct.
Mr. PECORA. Stock of the New York Shipbuilding Co. ?
Mr. WHANGER. That is right.
Mr. PECORA. All of it used for that purpose ?
Mr. WHANGER. Yes, sir.
Mr. PECORA. Was that investment
made on your own judgment or
initiative, or upon the advice of Mr. Bragg or Mr. Smith ?
Mr. WHANGER. Mr. Bragg suggested that I invest in this New
York Shipbuilding Co.
Mr. PECORA. He has no interest in that account, has he?
Mr. WHANGER. Mr. Bragg? No, sir; he has not. It is all mine.
I can sell that stock at this minute if I wanted to.
Mr. PECORA. YOU have told the committee now in answer to these
questions the whole story about the checks given to you last December by Mr. Bragg ?
Mr. WHANGER. Yes, sir.
Mr. PECORA. There is nothing you want to add to it?
Mr. WHANGER. NO, sir.
Mr. PECORA. Nothing you want to qualify in connection with it?
Mr. WHANGER. NO, sir.
Mr. PECORA. When did you last hear from Mr. Bragg ?
Mr. WHANGER. Around the first of the year, I believe.
Mr. PECORA. When did you last have any communication with or
from him?
Mr. WHANGER. Not since that time.
Mr. PECORA. Not since the first of this year?
Mr. WHANGER. NO, sir.
Mr. PECORA. YOU did
not see him prior to his departure for
Honolulu during the latter part of January this year, did you?
#
Mr. WHANGER. I did not.
Mr. PECORA. Did you know he was going there?
Mr. WHANGER. NO ; I did not know he was going
to Honolulu.
STOCK EXCHANGE PRACTICES
6057
The CHAIRMAN. Where was he when you heard from him?
Mr. WHANGER. I have not heard from him since he left New York.
The last time I saw him was in his office at 52 Wall Street.
Mr. PECORA. About how frequently in the last 3 or 4 years past
did you interpret balance sheets for Mr. Bragg?
Mr. WHANGER. That is rather difficult to say, Mr. Pecora.
Mr. PECORA. I t was not a daily service, was it?
Mr. WHANGER. NO, sir.
Mr. PECORA. Was not a weekly service ?
Mr. WHANGER. NO set time. I would drop
in his office probably
to look at the stock ticker and he would call me in and I would
walk in.
Mr. PECORA. YOU know that there are accountants in the office of
W. E. Hutton & Co., don't you?
Mr. WHANGER. NO, sir; I do not.
Mr. PECORA. YOU don't? Don't you
think there are any in stockbrokers' offices?
Mr. WHANGER. They probably have bookkeepers.
Mr. PECORA. That could interpret balance sheets?
Mr. WHANGER. Probably it was confidential. Probably there were
reasons why he did not care to have bookkeepers and accountants
from Hutton, if such there be, to interpret balance sheets for him.
Mr. PECORA. Thank you, Mr. Whanger.
The CHAIRMAN. YOU will be excused.
Mr. PECORA. Mr. Foster, please.
TESTIMONY OF CHARLES S. FOSTER, ENGLEWOOD, N.J., PARTNER
IN THE FIRM OF W. E. HUTTON & CO.
Mr. PECORA. What is your business or occupation, Mr. Foster?
Mr. FOSTER. I am a partner of W. E. Hutton & Co.
Mr. PECORA. And what is their business ?
Mr. FOSTER Stock brokers.
Mr. PECORA. Where is their office?
Mr. FOSTER. Fifty-two Wall Street.
Mr. PECORA. DO you know Mr. Thomas E. Bragg?
Mr. FOSTER. I do.
Mr. PECORA. Does
he make his office in the office of W. E. Hutton
<&Co.?
Mr. FOSTER. NO, sir.
Mr. PECORA. Has he
Mr. FOSTER. NO, sir.
Mr. PEOORA. W. E.
a room ?
Hutton & Co. occupy the entire floor at 52
Wall Street in which their office is located, do they not?
Mr. FOSTER. The fifteenth floor and part of the fourteenth floor.
Mr. PECORA. Fifteenth and part of the fourteenth?
Mr. FOSTER. Yes, sir.
Mr. PECORA. Well, Mr.
Whanger, who immediately preceded you
on the witness stand, gave testimony which you doubtlessly heard?
Mr. FOSTER. I did.
Mr. PECORA. YOU heard
him testify that Mr. Bragg's office was
at 52 Wall Street. Did) he occupy any part of the space used by
and rented by W. E. Hutton & Co.?
6058
STOCK EXCHANGE PEACTICES
Mr. FOSTER. NO, sir.
Mr. PECORA. YOU know Mr. Bragg, don't you?
Mr. FOSTER. I do; yes, sir.
Mr. PECORA. Does he carry an account with your firm?
Mr. FOSTER. NO.
Mr. PEOORA. DO you know Mr. Smith, Ben Smith?
Mr. FOSTER. I do.
Mr. PECORA. Does he carry an account with your firm?
Mr. FOSTER. Yes, sir.
Mr. PECORA. DO you know an account known as no. 296?
Mr. FOSTER. I do.
Mr. PECORA. For whose benefit is that account operated?
Mr. FOSTER. From the testimony here, it was evidently Mr.
Bragg.
I t was one of Mr. Smith's customers.
Mr. PECORA. What is that?
Mr. FOSTER. I t was one of Mr. Smith's customers.
Mr. PECORA. Who opened the account with your firm?
Mr. FOSTER. Mr. Smith.
Mr. PECORA. Mr. Smith opened it?
Mr. FOSTER. Yes, sir.
Mr. PECORA. But you
say it is operated or conducted by Mr.
Bragg?
Mr. FOSTER. I don't know.
Mr. PECORA. Have you got any authorization cards relating to
this account no. 296?
Mr. FOSTER. NO.
Mr. PECORA. What
Mr. FOSTER. NO.
Mr. PECORA. Have
is that?
you any authorizations by way of letters or in
any other written form referring to account no. 296 ?
Mr. FOSTER. Yes, sir. We have an arrangement with Mr. Smith
whereby we carry accounts for him on our books.
Mr. PECORA. Under this account no. 296, then—or was this account no. 296 one of the accounts that you carried on your books
under this arrangement with Mr. Smith ?
Mr. FOSTER. re§, sir.
Mr. PECORA. Mr. Smith is a stockbroker himself, isn't he?
Mr. FOSTER. Yes, sir.
Mr. PECORA. And a member of the New York Stock Exchange?
Mr. FOSTER. Yes, sir.
Mr. PECORA. Does he make his office with your firm ?
Mr. FOSTER. He does.
Mr. PECORA. What is the authorization you have regarding this
account?
Mr. FOSTER. The closing of the account.—the checks drawn.
Mr. PECORA. May I see it?
Mr. FOSTER. Yes, sir.
(Mr. Foster thereupon handed documents to Mr. Pecora.)
Mr. PECORA. I offer in evidence thci three documents produced by
the witness, and I ask that they be marked in chronological order.
One of them is dated July 7, 1933, second one is dated July 81,
1933, and the third is dated August 3,1933.
STOCK EXCHANGE PRACTICES
6059
The CHAIRMAN. Let them be admitted.
(Letter dated July 7, 1933 from B. E. Smith to W. E. Hutton &
Co. was thereupon designated " Committee Exhibit No. 28, February
16,1934," and the same appears in full immediately following, where
i*f*9CM b v ^iT* I^eoorfli )
(Letter dated July 31, 1933, from B. E. Smith to W. E. Hutton &
Co. was thereupon designated " Committee Exhibit No. 29, February
16, 1934," and the same appears in the record m full immediately
following, where read by Mr. Pecora.)
(Letter dated Aug. 3, 1933, from B. E. Smith to W. E. Hutton &
Co. was thereupon designated " Committee Exhibit No. 30, February
16, 1934," and the same appears in the record in full immediately
following, where read by Mr. Pecora.)
Mr. PECORA. The three documents have been received and marked
"Exhibits Nos. 28, 29, and 30." Exhibit no. 28 reads as follows
[reading] :
JULY 7, 1933
W. E. HUTTON & Co,
New York, N.Y.
GENTLEMEN. Please receive from the City Bank Farmers Trust Company
793 5 shares of American Commercial Alcohol, and pay them $15,870
Please deposit to Account #296, Mr T. E. Bragg's check $40,936 90
Yours very truly,
(Signed)
B E SMITH
Second letter, marked " Exhibit No. 29 ", is as follows [reading];
JULY 31, 1983.
W. E HUTTON & Co,
New York City.
GENTLEMEN Kindly let me have checks drawn to the following names and
for the following amounts, and charge Account No. 296
K B Phagan
$50,323 47
J C Brennen
10,064 69
J L Kauffman
„
20,129 39
C C Capdevielle
20,129 39
L Young
25,161 74
C C Conway
25,161 74
Yours very truly,
(Signed)
B. E. SMITH
The third letter, marked " Exhibit No. 30 ", is as follows [reading] :
AUGUST 3, 1933
W E HUTTON & COMPANY,
52 Wall Street, New York City.
GENTLEMEN: Kindly have the bank stop payment on check issued on July
31st to the order of It Young for $25,16174, and charged to Account No 296.
After you have been notified by the bank that payment has been stopped on
the above, you will then draw a check to the order of L B Manning for
$25,16174 and charge Account No. 296.
Yours very truly,
(Signed)
B. E. SMITH.
Mr. CHAIRMAN. I think it might be observed now that this amount
$25,161.74 referred to in exhibit no. 30 coincides exactly with check
that the preceding witness, Mr. Whanger, testified he received trom
Mr. Bragg, which he said came out of this pool account, or syndicate
account. All these checks were drawn in pursuance of the direction
of those letters, were they not, Mr. Foster?
Mr. FOSTER. Yes, sir.
6060
STOCK EXCHANGE PRACTICES
Mr.
Mr.
Mr.
Mr.
Mr.
PECORA. And to whom were they given?
FOSTER. TO Mr. Quinn.
PECORA. Who is Mr. Quinn ?
FOSTER. Mr. Smith's secretary ?
PECORA. Mr. Smith's secretary?
Mr. FOSTER. Yes, sir.
Mr. PECORA. I S he m the office of W. E. Hutton & Co.?
Mr. FOSTER. In Mr. Smith's.
Mr. PECORA. In Mr. Smith's room in the office of W. E.
Hutton
•& Co., is that right ?
Mr. FOSTER, x es, sir.
Mr. PECORA. And you
do not know what disposition he made of
those checks?
Mr. FOSTER. NO, I do not.
Mr. PECORA. YOU know that the checks were all cleared?
Mr. FOSTER. Oh, yes.
Yes.
The CHAIRMAN. Was payment stopped on the Young check?
Mr. FOSTER. Yes, sir.
The CHAIRMAN. And then it was drawn to Manning?
Mr. FOSTER. I t was.
Mr. PECORA. If you recall, I think Mr. Brown this morning testi-
fied that Manning was a speculator who acted for E. L. Cord. Is
that right, Mr. Brown?
Mr. BROWN. NO ; I did not say that.
Mr. PECORA. Whom did Manning represent?
Mr. BROWN. I think my reply was that I understood he was a
friend of Mr. Cord's.
Mr. PECORA. Oh, yes; that is what it was, a friend of his. Now,
is there a gentleman named Mr. B. J. Harriman associated with
the firm of W. E. Hutton & Co., Mr. Foster?
Mr. FOSTER. B. J. Harriman? #No, sir.
Mr. PECORA. DO you recall that at any time since last August representatives of the New York Stock Exchange called at the office of
W. E. Hutton & Co. and made certain inquiries with regard to trading operations in stock of the American Commercial Alcohol Corporation?
Mr. FOSTER. Yes, sir.
Mr. PECORA. Who were
the representatives that called at your
office for that purpose?
Mr. FOSTER. I have forgotten now.
Mr. PECORA. Did they confer with you ?
Mr. FOSTER. Yes, sir.
Mr. PECORA. And did
you answer the inquiries that were addressed
to you?
Mr. FOSTER. I did.
Mr. PECORA. And
what were those inquiries about? In other
words, what information were you asked to give?
Mr. FOSTER. I was asked to produce this 296 account.
Mr. PECORA. And was it produced ?
Mr. FOSTER. I t was.
Mr. PECORA. Were you
asked if it was a pool account or syndicate
account?
Mr. FOSTER. I don't think so; no.
Mr. PECORA. Did you regard it as a pool or syndicate account?
STOCK EXCHANGE PRACTICES
6061
Mr. FOSTER. Well, it looked that way; yes. I should say it would
be regarded; yes.
Mr. PECORA. I t looked that way; it had all the external appearance
of it?
Mr. FOSTER. I t did; yes.
Mr. PECORA. Who is Mr.
J. C. Duncan?
Mr. FOSTER.*He is a partner of W. E. Hutton & Co.
Mr. PECORA. DO you know whether he was interviewed also by
the representative or representatives of the New York Stock Exchange at the time these inquiries were made?
Mr. FOSTER. I don't think so. I think they saw me only. I am
not sure about that.
Mr. PECORA. NOW, for your possible information, what purports
to be a copy of a letter or report addressed to the committee on business conduct of the New York Stock Exchange dated September 21,
1933, signed by B. J. Harriman of the accounting department of the
New York Stock Exchange, is produced.
Mr. FOSTER. I told you I did not know B. J. Harriman. I do
know Harriman, the accountant for the stock exchange. I did not
know his initials. I do know Mr. Harriman.
Mr. PECORA. NOW I am going to read this letter to you, Mr. Foster
[reading]:
September 21, 1983
COMMITTEE ON BUSINESS CONDUCT,
New York Stocfo Exchange
GENTLEMEN. At your request, a visit was made to the New York office of
Messrs W E Hutton & Co to determine the accounts which contained material
transactions during the period from May 15th, 1933 to July 24th, 1933 m the
following stocks American Commercial Alcohol, Commercial Solvents, Libbey
Owens Ford Glass, National Distillers Prod Corp, Owens Illinois Glass, U.S
Industrial Alcohol
Inspection of the security record and daily take off of trades disclosed transactions in American Commercial Alcohol for B E Smith #296 account, schedule
of which is annexed hereto
I was informed that this account is in reality the account of T E. Bragg and
associates as follows:
Percent
K B Phagan
25
J C. Brennan
5
J. L Kaufman
10
C. C Coperderville
10
T E Bragg
J. W. Bowen
L B Manning
%
C C Conway
12%
10O
From May 3rd, 1933 to July 24th, 1933 approximately 29,000 shares of American Commercial Alcohol stock were purchased and approximately 44,000 shares
sold for the B E Smith #296 account.
25,794 shares of this stock were taken down from the following •
Shares
24,000
1,000
793
1
Received from
O E Welles & Co
Shearson, Hammill & Oo
City Bank Farmers Trust Co_.
a/c Subscription
25,794
$18 per share
18 per share
6062
STOCK EXCHANGE PBAOTICES
I was informed that these shares had been acquired from several of the
largest stockholders of the company.
Additional transactions in American Commercial Alcohol follow: #130 (B. B.
Smith) Member N.Y.S.E.
Date
May 15
May 16
May 26
May 29
June 28
Bought
_
•_
Sold
800
2,700
1,100
2,200
1,000
800
2,700
1,100
2,200
1,000
7^800
7,800
No other accounts were noted which contained material transactions in the
stocks under review.
Mr J O. Duncan, a partner, stated that during the period under review
the firm did not have any pool or syndicate accounts on its books containing
transactions in the stocks above mentioned nor did they hold or issue any
options for their own or the account of customers
Respectfully submitted.
(Signed) B J. HABBIMAN.
Accounting Department.
After having heard that letter read, Mr. Foster, let me ask you
if the information conveyed by Mr. Harriman to the committee
on business conduct of the stock exchange through the medium of
this letter was accurate information which he obtained from you
or any one of your associates in the W. E. Hutton Co.
Mr. FOSTER. The information is accurate, but that is Mr. Smith's
customer, not W. E. Hutton & Co.
Mr. PECORA. What is that?
Mr. FOSTER. I say 296 is Mr. B. E. Smith's customer. It is his
account for his customer. I t is not W. E. Hutton & Co.'s customer.
We were simply carrying this account, this and others, for Mr. B. E.
Smith, and we had no knowledge of any pool or option.
Mr. PECORA. YOU just said in answer to a question put to you before I read this letter that this looked to you like a pool operation
or pool account or syndicate account.
Mr. FOSTER. Yes; but I could not prove it. I didn't know anything about it. I had no knowledge of any options. No member of
the firm had any knowledge of any options.
Mr. PECORA. Are you familiar with the tradings in that account?
Mr. FOSTER. Yes, sir.
Mr. PECORA. Did you
notice that at times deliveries were made
a t prices under the market?
Mr. FOSTER. Yes.
Mr. PECORA. Did that indicate a pool
Mr. FOSTER. It might; it might mean
operation?
just an option, a man using
an option.
Mr. PECORA. All right; it might mean an option?
Mr. FOSTER. Yes.
Mr. PECORA. What
did Mr. Duncan have in mind when he stated:
According to Mr. Harriman's letter, during the period under review the firm
of W. E. Hutton & Co. did not have any pool or syndicate accounts on its
books containing transactions in the stocks above mentioned—
which included American Commercial Alcohol—
nor did they hold or
issue any options for their own or the account of customers.
STOCK EXCHANGE PBACTtCES
6063
Mr. FOSTER. His information must have come from Mr. Smith
of Mr. Smith's representative on those accounts. We had no knowledge ourselves.
Mr. PECORA. YOU knew that the representative of the stock exchange came around to inquire of your firm whether or not it had
any pool accounts in these stocks which included American Commercial Alcohol, didn't you?
Mr. FOSTER. He did; he examined the account.
Mr. PECORA. And at that time did it seem to you that this account
represented a pool operation?
Mr. FOSTER. I had no knowledge of it; no.
Mr. PECORA. Well, you had as much knowledge of it then as you
have now, didn't you ?
Mr. FOSTER. ISTo; because I have heard this testimony for the last
2 or S' days.
Mr. PECORA. Oh, it is only what you have heard here that indicated it was a pool account?
Mr. FOSTER. Well, yes.
Mr. PECORA. NOW, as a matter of fact, Mr. Foster, I have not yet
presented any evidence to this committee with regard to the operation of this particular account, have I ?
Mr. FOSTER. I have heard the testimony here that people were interested in that account that I did not know before.
Mr. PECORA. YOU have heard testimony here that certain peoplo
were interested in an account, but the testimony did not indicate tnat
it was account 296 on the books of your firm, did it?
Mr. FOSTER. I know, but it represented that account, identified that
account, because that is the only account we had on the books of that
American Alcohol of that amount.
Mr. PECORA. In view of the fact that you knew that in the operation of this account or the execution of orders and trades under it
deliveries were made at prices below the market, that suggested a
pool operation to you ?
Mr. FOSTER. I t would naturally; yes.
Mr. PECORA. When Mr. Harnman, of the stock exchange, came
around to inquire specifically whether your firm carried any pool or
syndicate accounts in any of these stocks, why didn't you tell him
that perhaps this account might represent a pool account, in view
of the circumstance known to you at the time that some deliveries
were made under the market price?
Mr. FOSTER. I don't think he asked me that question.
Mr. PECORA. He did not ask it in any such form, perhaps, but
didn't he indicate he wanted to know whether there were any pool
<or syndicate accounts carried by your firm?
Mr. FOSTER. He asked about alcohol accounts.
Mr. PECORA. And this was one of them?
Mr. FOSTER. This was one of them; yes, sir.
Mr. PECORA. Well, now, Mr. Harnman specifically reports to the
business conduct committee of the exchange in this letter that Mr.
J. C. Duncan, one of your partners, stated that during the period
under review the firm did not have any pool or syndicate accounts
on its books containing transactions in any of those alcohol stocks.
JSo, Mr. Harriman must have specifically asked about it ?
6064
STOCK EXCHAHGE PEACTIOES
Mr, FOSTER, He must have asked Mr. Duncan.
Mr. PEOORA. He did not ask you, then?
Mr. FOSTER. NO ; I don't remember that he did.
Mr. PECORA. A transcript of that account no 296 was given to Mr.
Harriman, was it not, by your firm for the stock exchange ?
Mr. FOSTER. They copied it off themselves.
Mr. PECORA. Oh, they copied that off themselves?
Mr. FOSTER. Yes, sir.
Mr. PECORA. I have here
what purports to be a copy of the account as given to the business-conduct committee by Mr. Harriman.
Will you look at it and tell me if you would say it is a true and
correct statement of the account?
Mr. FOSTER (after examining document). Did Mi\ Harriman take
this off?
Mr. PECORA. Yes. We get that from the stock exchange.
Mr. FOSTER. I think so; yes.
Mr. PECORA. I will offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Statement of account no. 296-B. E. Smith-American Commercial Alcohol, with W. E. Hutton & Co. was thereupon designated
"Committee Exhibit No. 31, February 16, 1934", and appears in
the record immediately following, where read by Mr. Pecora.)
Mr. PECORA. The paper received in evidence is marked " Committee's Exhibit No. 3 1 " and is entitled " W. E. Hutton & Co., account
no. 296, B. E. Smith, American Commercial Alcohol", and it shows
the various operations in that account on both the buying and selling side, and the receiving and delivery side from May 3, 1933,
down to and including July 24, 1933, and that the account bought
during that period 54,894 shares and sold 53,403 shares, leaving
it long on July 24, 1933, 1,491 shares of American Commercial
Alcohol.
(The committee exhibit no. 31 is as follows:)
Date
May
May
May
May
May
May
May
May
May
1933
3
4.
5
8
9
10.
11
12
15
May 16. _.
May
May
May
May
May
May
19.
22
24
25
26
29
Bought
600
500
900
200
700
500
200
600
600
300
8,200
JiiTift 1
June 2
June 6fi .
June
June 7
200
Jrnift 12
June 13 _
June 14
June 16
i Delivered
100
500
Sold
3,700
Received
Delivered
4,000
1,000
1,000
300
1,100
900
1,600
3,300
500
3,400
1,500
4,800
800
1,100
1,900
1,100
l,0C0
1,000
4,000
1,000
1,000
2,000
2,555
2,500
2,500
3,000
Date
1933
June 19
June 26
June 27
June 28
June 29
June 30
July 3
July 5
July 7
July 10
July 13
July 14
July 17
July 18
July 19
July 20
July 21
July 24
Bought
Sold
ReDeceived livered
1,100
*"""700" 1,500
3,100
1,500
""""io5" 2,800
600
600
2,000
300
1,100
3,600
300
2,600
„
5,000
300
4,700
793
1,700
800
1,200
1 600
2,500
500
1
29,100 44,200 25,794
Recd- 25,794 19,203
54,894 53,403
53,403
July 24, long
1,491
200t
3
1,000
9,203
STOCK EXCHANGE PRACTICES
6065
Mr. PECORA. During the time covered by this account, namely,
from May 3, 1933, up to and including July 24, 1933, there was considerable activity in that stock, wasn't there?
Mr. FOSTER. A S I remember; yes.
Mr. PECORA. And the price within that period ranged from around
$20 a share in the early part of May to a high of 89% on July 18,
didn't it?
Mr. FOSTER. I think so. I am not sure.
Mr. PECORA. And then by July 21 it had gone down to around 29 ?
Mr. FOSTER. Something like that; yes.
Mr. PECORA. From a high of 89% 3 days before. There was a
sort of a debacle of security values on the exchange on July 18 last,
wasn't there? Do you remember?
Mr. FOSTER. I don't remember the date, but I guess that is right.
Mr. PECORA. And the movement was led by the so-called " repeal "
•or " alcohol " stocks?
Mr. FOSTER. Yes, sir.
Mr. PECORA. According
to exhibit no. 29, which was one of the
letters of instruction which your firm received from B. E. Smith, and
which is dated July 31, 1933, wasn't it quite apparent that this account no. 296 was a pool or syndicate account?
Mr. FOSTER. I should say so; yes.
Mr. PEOORA. And you had this letter of July 31, 1933, in your
files and had acted in pursuance of its instructions, had you not 2
Mr. FOSTER. Yes.
Mr. PECORA. And
you had it in your files and had taken action
under it pursuant to its instructions before Mr. Harriman came
around and made his inquiries of your firm for pool accounts in any
«of those stocks?
Mr. FOSTER. I don't remember the date of Mr. Harriman's visit.
Mr. PECORA. Well, I can tell you that it was around the first week
in August that I asked Mr Richard Whitney, president of the New
York Stock Exchange, to make this kind of an inquiry of the
brokers that were members of his exchange. I am just wondering,
Mr. Fostei, why it was that no one told Mr. Harriman, the stock
exchange's representative, that this was a pool or syndicate account.
Mr. FOSTER. I for one do not think he asked me. I don't remember
that he asked me.
Mr. PECORA. Well, he didn't ask you, but he apparently asked Mr.
Duncan.
Mr. FOSTER. Certainly. That letter shows it.
Mr. PECORA. That is all of this witness.
The CHAIRMAN. YOU may be excused, Mr. Foster.
Mr. PECORA. Mr. Brown.
TESTIMONY OF RUSSELL R. BROWIJ—Resumed
Mr. PECORA. Mr. Brown, there was introduced in evidence at about
the end of your examination just prior to recess this noon the original pool agreement marked in evidence as "Exhibit No. 27", to
which you said you were a party, although your interest was concealed in the name of K. B. Phagan?
Mr. BROWN. That is correct, sir.
6066
STOCK EXCHANGE PRACTICES
Mr. PECORA. HOW long did the pool formed under this agreement
operate in the common stock of American Commercial Alcohol ?
Mr. BROWN. That I cannot tell you.
Mr. PECORA. What were the profits that the pool made as a result
of its operation?
Mr. BROWN. Total of something less than $210,000, the pool and
the underwriting combined.
Mr, PECORA. And you received 10 percent of that?
Mr, BROWN, Yes, sir.
Mr. PECORA. Of that profit?
Mr. BROWN. That is correct, sit.
Mr. PECORA. Because you had a
10-percent interest in both the
pool and the underwriting syndicate?
Mr. BROWN. That is correct, sir.
Mr. PECORA. DO you recall when you received that distribution
of profit?
Mr. BROWN. I think it was some time in August?
The CHAIRMAN. Did the corporation pay a dividend in 1933?
Mr. BROWN NO, sir. I t had substantial earnings, but it has not
paid a dividend as yet.
Mr. PECORA. Under the pool agreement which is in evidence here
and constituted Thomas E. Bragg as the manager, the manager was
given the sole direction and management in the entire conduct of the
business and transactions of the syndicate, but he was also given
power to buy and sell^
Mr. BROWN. Coirect, sir.
Mr. PECORA The stock of the American Commercial Alcohol Corporation for the account of the syndicate m his uncontrolled discretion?
Mr. BROWN. Correct
Mr. PECORA. And he was also given the power to hire and employ
such brokers and agents as he in his sole discretion might deem
desirable, and so forth—you know that, too 2
Mr. BROWN. Yes, sir.
Mr. PECORA. NOW, what
was the purpose of the formation of this
pool agreement and this pool account?
Mr. BROWN. At the time there was discussed with Mr. Bragg the
matter of the underwriting he suggested, and as I remember insisted,
that the principal interests in American Commercial should join
with him m the underwriting, and at that time the discussion came
up about the fee of $2, which was eventually reduced to $1 after we
had agreed to join with him, and at the same time we joined in the
whole group As I remember it, there are three or four documents
in connection with this transaction, the agreement of May 2.
Mr. PECORA. Well, the agreement of May 2 is the pool agreement ?
Mr. BROWN. Yes.
Mr. PECORA. What
was the purpose of the formation of this pool ?
What was the pool to do ?
Mr. BROWN. TO operate in the market.
Mr PECORA. For what purpose?
Mr. BROWN, For the purpose of bringing into the company the
cash from the sale of the securities covered there.
STOCK EXCHANGE PEACTICES
6067
Mr. PEOORA. Well now, will you be good enough to tell this committee how the operation of this pool account would serve the purpose of bringing cash into the treasury of the corporation?
Mr. BROWN. It enabled the liquidation of the securities acquired
by Capdevielle and Phagan, the payment of their notes, and the
bringing in of those funds.
Mr. PECORA. HOW was the pool account necessary to do that?
What was it considered necessary to do that? Why was it considered
necessary to have this pool formed to do that?
Mr. BROWN. That I cannot tell you, except that all of those things
were joined together at the same tine, and the documents were
drawn about the end of May 1933 and all joined together at one time.
Mr. PECORA. Oh, no; this document was drawn and dated May 2,
1933.
Mr. BROWN. I think you will find in your files, Mr. Pecora, another
document.
Mr. PECORA. There is the underwriting agreement that is in
evidence here, of course.
Mr. BROWN. I believe there are other documents besides that in
which it is indicated very clearly that—I think the 31st of May—
or speaks of pool agreement which had heretofore been drawn up
as of May 2, 1933. There is another document there.
Mr. PECORA. This pool agreement specifically states that the purpose of the agreement is as follows:
Whereas the parties hereto desire to form a syndicate for the purpose of
buying and selling common stock of American Commercial Alcohol Corporation
Mr. BROWN. That is correct; yes, sir.
Mr. PECORA. NOW, do you know when this pool started to trade?
Mr. BROWN. That I don't know. The money was put into the
pool, I think, on the 7th of June.
Mr. PECORA. On the 7th of June?
Mr.
BROWN.
Yes.
Mr. PECORA. But when did it start to trade?
Mr. BROWN. I never have seen the account. I have never had a
report of the account. I never knew anything about the account.
Mr. PECORA. There is not any doubt in your mind that the account
known as "No. 296" carried on the books of W. E. Hutton & Co.
is the account through which this pool operated, is there?
Mr. BROWN. I assume so from this testimony; yes, sir.
Mr. PECORA. From the testimony you heard Mr. Foster give?
Mr. BROWN. Yes.
Mr. PECORA. YOU assume that that is
Mr. BROWN. That is correct; yes, sir.
Mr. PECORA. NOW, according to that
so ?
evidence, the first trades in
that account were made on May 3, 1933, and the last trades on July
24,1933.
Mr. BROWN. I think that is correct.
Mr. PECORA. And yet you say the first moneys were put up some
time in June?
Mr. BROWN. Yes; around the 5th of June the first call was made
on the participants in the syndicate to put up the funds.
Mr. PECORA. Where did the stock come from from which deliveries were made for the accounts of this pool?
igO68
STOCK EXCHANGE PBACTICES
Mr. BROWN. Part of them came from me, part of them from Mr.
Grimm, and, if I remember correctly, some from Mr. Publicker;
also from Capdevielle and Phagan.
Mr. PECORA. Capdevielle and Phagan were your two dummies?
Mr. BROWN. That is correct.
Mr. PECORA. Any stock they put up they put up for your account?
Mr. BROWN. They put up in accordance with the contracts which
were entered into; yes.
Mr. PECORA. They put up for your account, representing your
interest.
Mr. BROWN. I simply advanced, as you can appreciate, for the
benefit of the company, certain stocks. Some of the deliveries into
the Hutton account were made directly from Phagan, and some directly from Capdevielle, as I understand it. Mr. Grimm and I made
the initial advances. We had returned to us such advances as we
had made, so that ultimately, as far as the option was concerned,
we were in the same position as we were before.
Mr. PECORA. During the period from May 3.1933, to July 18,1933,
ihe stock of American Commercial Alcohol Corporation went steadily up from around the lower 20's to a high of 89%, did it not?
Mr. BROWN. Yes, sir.
Mr. PECORA. What contribution
do you think the operations of
this pool made to that price movement ?
Mr. BROWN. I assume that the pool made some contribution to it,
but it is my understanding, from what Mr. Bragg told me, that
after it passed 35 he was not interested; that the general public came
jin and took the market
Mr. PECORA. When did it pass 35 ?
Mr. BROWN. I have forgotten.
Mr. PECORA. We will show you. [After examining papers:] I t
reached 35 on June 26. The pool account was not closed on that
4ate, was it ?
Mr. BROWN. From what I have heard here, I find out the details
of the account for the first time. This is the first I have ever known
of what the details of the account were.
Mr. PECORA. From June 26 on, the price went up until, on July
18, it reached 89%'s.
Mr. BROWN. Yes, sir.
Mr. PECORA. Did you
do any trading in the market in this stock
on your individual account, apart from your interest in this pool?
Mr. BROWN Very slight.
Mr PECORA. Very slight.
Mr. BROWN. I find myself in about the same position so far as
holdings of American Commercial Alcohol stock are concerned today
as I was a few years ago.
Mr. PECORA. That is, you never really let go of any of your holdings ? You preserved your position ?
Mr. BROWN. At quite some expense to myself; because originally,
as you will appreciate, the E. F. Hutton option did not expire until
the 12th of May, and in line with what I have pointed out to you
before, I called Mr. Cutten on the phone and told him that he had
better wind the account up, and for the first time he called on the
balance of the stock, so that I was put in the position right then and
fhere of delivering 4,000 in advance of any deliveries +o Bragg.
STOCK EXCHANGE PRACTICES
6069
Mr. PECORA. From all of the evidence presented here, the greaW
part of which has been given by you, it is true, is it not, that from
February 1932, up to the termination of the pool account that was
formed on May 2, 1933, the pool operations m the stock had been
maintained continuously?
Mr. BROWN. I should not say pool accounts, because I think you
understand that our only idea was to have an orderly market in the
stock, each time an option was given.
Mr. PECORA. I know what you say the idea was, yes; but the fact
is that the pool accounts were in operation, under options furnished
by you and your associates in the company.
Mr. BROWN. That is correct.
Mr. PECORA. From February 1932, up to at least the 24th of
July 1933.
Mr. BROWN. I think that is correct; yes, sir.
Mr. PECORA. Are there any options outstanding at the present
time?
Mr. BROWN. NO, sir.
Mr. PECORA. Have any
options been given since the one given to
Mr. BROWN. NO, sir; and there are not going to be any more
given by me, either.
Mr. rECORA. Is that a promise?
Mr. BROWN.
Mr. PECORA.
Yes.
Can you give this committee the name of any broker
or brokers who executed any of the orders under any of these options,
or for this pool of May 2,1933?
Mr. BROWN. NO, sir; unless it be Mr. Wright.
Mr. PECORA. Who?
Mr. BROWN. Unless it be Mr. Wright.
Mr. PECORA. Mr. Wright is under subpena here, and I am going
to call him as the next witness.
Mr. CHAIRMAN. I notice the train time has about arrived. Is Mr.
Quinn here ?
Mr. QUINN. Yes,
sir.
TESTIMONY OF FEANK J. QUINN, WESTPOBT, CONN.
The CHAIRMAN. Mr. Quinn, 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. QUINN. I do.
Mr. PECORA. Give
me your full name and address, please, Mr.
Quinn.
Mr. QUINN. Frank J. Quinn, Westport, Conn.
Mr. PECORA. What is your business or occupation?
Mr. QUINN. I am a clerk employed at W. E. Hutton & Co., for
the purpose of acting as secretary to Mr. B. E. Smith.
Mr. PECORA. YOU are employed by W. E. Hutton & Co., as secretary to Mr. B. E. Smith?
Mr. QUINN. Yes.
Mr. PECORA. Your
salary or compensation is received from Mr.
Smith, or from W. E. Hutton & Co.?
175541—34—PT 13
15
6070
STOCK EXCHANGE PRACTICES
Mr. QUINN. From W. E. Hutton & Co.
Mr. PECORA. DO you take care of Mr. Smith's business matters?
Mr. QUINN. Yes, sir; quite a lot of it; yes, sir.
Mr. PECORA. Does Mr. Smith make his office with W. E. Hutton
&Co.?
Mr. QUINN. Yes,
sir.
Mr. PECORA. HOW long has he done that?
Mr. QUINN. Since about the middle of July 1929. Previous to
that he was a member.
Mr. PECORA. Previous to that what ?
Mr. QUINN. Previous to that he was a member of W. E. Hutton
&Co.
Mr. PECORA. Did he withdraw from the firm in July 1929?
Mr. QUINN. Yes, sir.
iMr. PECORA. But continued
making his headquarters in their
offices?
Mr. QUINN. Yes.
Mr. PECORA. He
is a member of the New York Stock Exchange,
is he not?
Mr. QUINN. Yes, sir.
PECORA. Where is he at the present time?
QUINN. He is on a cruise with his family.
PECORA. When did he start on that cruise?
QUINN. Shortly after Labor Day 1933.
PECORA. Since last September?
Mr. QUINN. Yes, sir.
Mr. PECORA. When is he expected to return?
Mr. QUINN. That is indefinite. I would say possibly
Mr.
Mr.
Mr.
Mr.
Mr.
3 or 4 months.
I am not sure.
Senator COUZENS. After this committee is through, I suppose.
[Laughter.]
Mr. PECORA. The answer is a wink. Who handles his business
affairs in his absence on this cruise ?
Mr. QUINN. Well, I believe a lot of them pass through my hands—
most of them.
Mr. PECORA. Have you handled actively his business affairs since
last September?
Mr. QUINN. I would say yes, sir.
Mr. PECORA. Have they been active?
Mr. Q
QuiNsr. No.
Mr. PECORA. DO you know anything about this account no. 296,
carried on the books of W. E. Hutton & Co. as a B. E. Smith account?
Mr. QUINN. Oh, yes.
Mr. PECORA. Are you
familiar with the transactions that were had
in that account between May 3,1933, and July 24,1933?
Mr. QUINN. I would be familiar with part of them; yes, sir.
Mr. PECORA. DO you know what broker or brokers executed the
orders for that account?
Mr. QUINN. NO ; I would not have any means of knowing that.
Mr. PECORA. DO you know who gave the orders for the account?
Mr. QUINN. I have given orders, but not made any decisions.
Mr. PECORA. When you gave orders, upon whose instructions were
your orders given ?
STOCK EXCHANGE PRACTICES
6071
Mr. QUINN. Mr. Bragg.
Mr. PECORA. Mr. Thomas E. Bragg?
M^. QUINN. Yes, sir.
Mr. PECORA. Would you
say from that that he actively had charge
of the operations in that account in the stock of American Commercial Alcohol?
Mr. QUINN. Yes, sir.
Mr. PECORA. DO you know where Mr. Bragg is now ?
Mr. QUINN. In Honolulu.
Mr. PECORA. With his family?
Mr. QUINN. Yes, sir.
Mr. PECORA. DO you know whether Mr. Smith has caught
up with
him in Honolulu—or perhaps it is vice versa.
Mr. QUINN. NO, sir. Mr. Smith at the moment, I believe, is somewhere down around Melbourne, Australia.
Mr. PEOORA. Mr. Quinn, do you recall that since last October a
questionnaire was addressed to Mr. Smith at the instance of this
committee?
Mr. QUINN. I seem to recall something about it; yes, sir.
Mr. PECORA. That questionnaire was similar in form to one sent
to all members of the New York Stock Exchange and other stock
exchanges throughout the country.
Mr. QUINN. That would be correct; yes, sir.
Mr. PECORA. Who made out the returns to that questionnaire?
Mr. QUINN. I believe I must have. I do not recall, but I must
have possibly made it out.
Mr. PECORA. Are the answers that were made to the questions on
that questionnaire complete?
Mr. QUINN. I believe they are, and I hope they are.
Mr. PECORA. Did you attempt to make complete answers to them?
Mr. QUINN. Yes,
Mr. PECORA. DO
sir.
you recall what answers you made to the questions about whether or not Mr. Smith was a member of or managed
any pool or syndicate operation?
Mr. QUINN. I think I recall that; yes, sir.
Mr. PECORA. What answer do you think you made?
Mr. QUINN. That he was not a member of it.
Mr. PECORA. That he was not a member of it ?
Mr. QUINN. Yes, sir.
Mr. PECORA. Not a member of
Mr. QUINN. That is correct.
Mr. PECORA. And you say that
any pool or syndicate operation?
is a complete and accurate answer
to that question ?
Mr. QUINN. Yes, sir; except insofar as the account was handled
at W. E. Hutton & Co., more or less under an arrangement that he
has as a member of the Exchange, with W. E. Hutton & Co.
Mr. PECORA. That questionnaire, which, by the way, was signed
by you
Mr. QUINN. Yes, sir.
Mr. PECORA (continuing).
Will be brought to the notice of this
committee at some future time, Mr. Quinn. I may want you to come
down here again.
Mr. QUINN. I will be glad to.
6072
STOCK EXCHANGE PEACTICES
Mr. PECORA. YOU are not going to Australia, are you?
Mr. QUINN. Not until tonight [laughter].
The CHAIRMAN. The committee will now take a recess until Tuesday at 10 o'clock.
Mr. PECORA. The only witnesses, Mr. Chairman, of those under
subpena now, that we will require are Mr. Brown, Mr. Wright, and
Mr. Grimm.
(Whereupon, at 3:45 p.m., Friday, Feb. 16, 1934, an adjournment was taken until Tuesday, Feb. 20,1934, at 10 a.m.)
COMMITTEE EXHIBIT NO. 22—FEBRUARY 16, 1934
[10102]
Noxon, Inc., Pro Forma Balance Sheet, June 27, 1983
Notes reecivable
Inventory
Machinery and equipment
Good will, licenses, and processes
Total assets
$270,000.00
25,000.00
25,000.00
380,000.00
700,000.00
Purchase contract payable
80,000.00
Preferred stock, $100 par, authorized, 300,000 shares; less unissued, 30,000 shares
270,000.00
Common stock, no par, 6,000 shares
350,000.00
Total liabilities
Certified correct this 27th day of June 1933.
700,000.00
CHARLES D. BEEBE,
Assistant Treasurer.
Received, Committee on Stocklist July 10, 1933, 11:54 a.m.
STOCK-EXCHANGE PRACTICES
TUESDAY, FEBRUARY 20, 1934
UNITED STATES SENATE,
COMMITTEE ON BANKING AND CURRENCY,
Washington, D.C.
The committee met at 10 a.m., pursuant to adjournment on Friday,
February 16,1934, in room 301 of the Senate Office Building, Senator
Duncan U. Fletcher presiding.
Present: Senators Fletcher (chairman), Adams, Townsend, Couzens, Steiwer, 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.
The CHAIRMAN. The committee will come to order, please.
Mr. PECORA. Mr. Wright, will you take the stand, please?
TESTIMONY OF CHARLES C. WEIGHT, STOCK BROKER, NEW
YORK CITY
The CHAIRMAN. Mr. Wright, you do slomenly swear that the testimony you are about to give in the matters under investigation by this
committee will be the truth, the whole truth, and nothing but the
truth. So help you God.
Mr. WRIGHT. I do.
Mr. PECORA. Mr. Wright,
will you give your full name and address for the record?
Mr. WRIGHT. My name is Charles C. Wright; age 46; residence,
1040 Fifth Avenue, New York City.
Mr. PECORA. What is your business or occupation, Mr. Wright?
Mr. WRIGHT. Broker.
Mr. PECORA. Stock broker?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. HOW long have you been in that business?
Mr. WRIGHT. Since 1901.
Mr. PECORA. Since 1901, continuously?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Are you a member of any firm?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Engaged in that business?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And what is the name of the firm?
Mr. WRIGHT. Wright & Sexton.
Mr. PECORA. Who are the other members of that firm?
6073
6074
STOCK EXCHANGE PBACTICES
Mr. WRIGHT Jere A. Sexton, George S. Simpson, and Alexander
V. Doyle.
Mr. PECORA. Are you a member of the New York Stock Exchange?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. HOW long have you been a member of it?
Mr. WRIGHT. Seven years.
Mr. PECORA. Are any other of your partners connected
with that
exchange or any other exchange?
Mr. WRIGHT. Mr. Doyle and Mr. Simpson are both members of
the stock exchange.
Mr. PECORA. DO you or any of your partners hold memberships
in any other securities exchange^ than the New York Stock Exchange ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. What other exchanges?
Mr. WRIGHT. We are members of the
New York Curb, Chicago
Stock Exchange, Philadelphia Stock Exchange, Commodity Exchange, Produce Exchange, and Chicago Board 01 Trade.
Senator ADAMS It might be easier to ask him which onesi he is
not a member of.
Mr. PECORA. Are you a member of any of the standing committees
of the New York IStoek Exchange?
Mr. WRIGHT. NO, sir.
Mr. PECORA. IS any of your partners?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Are any of your partners
or yourself a member of
any committee of any other stock exchange than the New York
Stock Exchange?
Mr. WRTGHT. NO, sir.
Mr. PECORA. Are you
one of the so-called " specialists " among
the members of the New York Stock Exchange, Mr. Wright?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. For what
stocks are you the specialist on the floor of
that exchange?
Mr. WRIGHT. On the stock exchange?
Mr. PECORA Yes.
Mr. WRIGHT. American Commercial Alcohol.
Mr. PECORA. Any other securities?
Mr. WRIGHT. Eaton Axle, Foundation Co. Those
three principal ones.
Mr. PECORA. Foundation Co
ones?
Mr. WRIGHT. Yes,
are about the
You say those are the principal
sir.
Mr. PECORA. Are there any others?
Mr. WRIGHT. There are other books at my post which we alternate
and take. If one man is busy with one of his books they pitch in and
help him. Those are the three stocks that I devote my time to.
Mr. PECORA. The stock for which a member of the New York Stock
Exchange is appointed a specialist is referred to as the book?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
how long have you held the book in American
Commercial Alcohol?
Mr. WRIGHT. Three years.
STOCK EXCHANGE PBACTICES
6075
Mr. PECORA. HOW long have you had the book in Eaton Axle?
Mr. WRIGHT. Probably 6 years.
Mr. PECORA. And the Foundation Co. ?
Mr. WRIGHT. Six years.
Senator ADAMS. There is a single specialist in a particular stock
on a stock exchange ?
Mr. WRIGHT. Sometimes there are 3 or 4. There are rival books.
In my particular case I am the only specialist in those stocks.
Senator COTJZENS. What do you mean by " rival books ? " Do you
mean you compete to get the business ?
Mr. WRIGHT. Yes, sir.
Senator COTJZENS. DO you work on a commission basis or a
Mr. WRIGHT. We work on a commission basis prescribed
salary?
by the
rules of the stock exchange.
Senator COTJZENS. YOU are not employed by any particular broker
or agency?
Mr. WRIGHT. NO, sir.
Senator COTJZENS. HOW
do you get to be a specialist in these particular stocks that you have just enumerated ?
Mr. WRIGHT Well, there is no particular set rule about how you
get them. The exchange does not appoint you a specialist. You
just seem to drift into it over a period of time. As a general rule,
a man starts out helping a specialist in a stock and gradually he
works his wav in until he is a specialist.
Senator COTJZENS. HOW did you happen to be a specialist in those
particular stocks that you have just enumerated?
Mr. WRIGHT. I don't know how I could answer that, Senator.
Senator COTJZENS. YOU don't know how you can answer it?
Mr^ WRIGHT. NO ; I just kind of drifted into them, I guess.
Senator COTJZENS. Did you drive the other fellows out, or were
there any ahead of you^
Mr. WRIGHT. I never had any rival specialists.
Senator COTJZENS. YOU never had any rival specialists in any of
your books ?
Mr. WRIGHT. NO, sir.
Senator ADAMS. I S there
any difference in the commission which
the specialist gets and that which the ordinary floor broker gets?
Mr. WRIGHT. Exactly the same.
Senator ADAMS. And is there anj requirement in the transactions
in which the stock in which a particular man is a specialist whereby
it must go through him or his book?
Mr. WRIGHT. NO, sir.
Senator ADAMS. They
can be transactions on the floor just the
same?
Mr. WRIGHT. Yes, sir.
Senator COTJZENS. In other
words, you get to be known as a specialist for this alcohol stock the same as a Senator may get to be
known as a motor Senator or sugar Senator or power Senator, or
what-not; is that it?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. Mr. Wright, I show you document typewritten and
signed " Wright & Sexton " and which purports to be the answers
6076
STOCK EXCHANGE PEACTICES
to a questionnaire which was addressed to your firm last November
in behalf of this committee. Will you look at it and tell me if you
recognize it to be the original return to that questionnaire made in
behalf of your firm?
Mr, WRIGHT. Yes, sir. I was in Europe at the time the return
was made by my office.
Mr. PECORA. 1 offer it in evidence.
The CHAIRMAN. Let it be admitted.
(Answer of Wright & Sexton to questionnaire, dated Nov. 17,
1933, was thereupon designated " Committtee Exhibit No. 32, February 20,1934 ", and is as follows:)
COMMITTEE! EXHIBIT NO 32, FEBRUARY 20, 1934
WRIGHT & SEXTON, MEMBERS N Y
STOCK EXCHANGE, MEMBERS NY.
EXCHANGE
CUBB
ONE WAIX STREET, NEW YORK
NOVEMBER 17, 1933.
Mr. FERDINAND PECORA,
Counsel, U.8. Senate Subcommittee on Banking and Currency,
285 Madison Avenue, New York City,
DEAR SIR: We wish to submit the following answers to the Questionnaire
which you sent us as- a member form of the New York Stock Exchange.
Question 1:
(a) No.
(b) No.
(o) Charles O Wright, Specialist
(d) George S Simpson, Specialist on New York Curb Exchange
Question 2:
Charles C. Wright, Specialist in the following: American Commercial Alcohol,
Eaton Manufacturing Company, Foundation Company, Indian Helming Co., Inc.,
Panhandle Producing & Refining, Timken-Detroit Axle Co
Question 3 :
(a) None.
(b) None.
Question 4:
(a) Purchases 411,872 shares—Sold 416,051 shares
(b) Charles C Wright—Purchased 8,750 shares—sold 2,000 shares
Question 5:
None
Question 6 *
(a) Yes (Copies of options attached)
(b) Yes (Copies of options attached)
Question 7:
(a) Yes (See answer to Question 6).
(b) Yes (See answer to Question 6).
(c) No.
Question 8
(a) No.
(b) No
Question 9*
(a) No.
(b) No.
Question 10:
Statement of Receipts & Disbursements attached.
Question 11:
(a) Not engaged in odd lot business.
(b) Not engaged in odd lot business.
Trusting this is the information you desire, we remain,
Very truly yours,
WRIGHT SEXTON.
STOCK EXCHANGE PBACTICES
6077
Mr. PECORA. I think in order to make the record intelligible, it
would also be well to offer in evidence the printed part of this
exhibit, the printed form of the questionnaire to which the exhibit
itself is a reply. That would be necessary, in view of the fact that
the replies to the questionnaire cjto^ ^ot state what the questions
are. The printed form of questionnaire will be just what the
questions are.
The CHAIRMAN. Let it be admitted.
(Printed questionnaire was thereupon designated " Committee
Exhibit No. 33, Feb. 20, 1934 ", and the same appears in the record
in full, as follows:)
COMMITTEE EXHIBIT N O 3|3n-FEBRUARY 20, 1934
COMMITTEE ON BANKING AND CURRENCY, UNITED STATES SENATE
QUESTIONNAIRE
MEMBER FIRMS OF THE NEW YORK STOCK EXCHANGE
1 Furnish the information requested below as of July 31, 1928; July 31,
1929; December 31, 19 J9, December 31, 1930, December 31, 19(31; December 31,
1932; and September 30, 1933 •
(a) Did any member partner of your firm, on or about the above dates act
primarily as a floor trader in stocks'? If so, furnish the name or names of
such member partner or member partners and set forth upon which of said
dates each acted in such capacity.
(&) Did any member partner of your film on or about the above dates act
primarily as a floor broker in stocks? If so, furnish the name or names of
such member partner or member partners and set forth upon which of said
dates each acted in such capacity.
(o) If the answers to (a.) and (&) are negative, furnish the name or names
of your member partners who were active on the floor of the exchange on or
about the above dates, and in what capacity
(d) Furnish list of all member partners not included in (a), (&) or (o),
describing the duties of each on or about the above dates.
2 If any of the member partners of your firm were specialists in listed stocks
on the floor of the New York Stock Exchange on July 1, 1933, furnish as to
each, a list of such stocks
3. Submit the following information for the whole year 1929 and for the
period fram January 1, 1933, to September 1, 1933.
(a) Approximate total number of customers (persons, partnerships, and/or
corporations) who bought or sold any securities through your firm.
(&) Approximate total number of the above whose transactions were of a
cash character.
4 (a) State total numbers of shares bought and total number of shares sold
on the New York Stock Exchange for the account of your firm for the month
of July 1933, excluding transactions m error accounts.
(fc) Submit on behalf of each member and nonmember partner (whether
active or inactive) a statement showing the approximate total number of
shares bought and the approximate total number of shares sold on the New
York Stock Exchange for their respective personal accounts for the month of
July 1933 (odd lot houses need not answer question 5).
5 State the approximate total number of accounts on the firm's books having
debit balances as of December 31, 1928, July 31, 1929, December 31, 19291;
December 31, 1930, December 31, 1931, December 31, 1932, and June 30, 1933.
6 (a) State whether your firm held any option or had a participation in
any option, exceeding 10,000 shares of any single security during the years
1929 to 1933, inclusive If answer is in the affirmative and firm held the original option or acted for the optionee or optionees, furnish a photostatic copy
of each of such options
6078
STOCK EXCHANGE PBACTICES
(&) State whether any partner of your firm or any person acting on behalf
of your firm or any partner thereof, held any option or had a participation in
any option, exceeding 10,000 shares of any single security during the years
1929 to 1933, inclusive. If answer is in the affirmative, furnish the name or
names of such person or persons, and if such person or persons held the original
option or acted for the optionee, or optionees, furnish a photostatic copy of
each such options
7. (a) State whether your firm participated m the profits and/or losses in
any syndicate, pool, and/or joint account during the years 1929 to 1933, inclusive If the answer is in the affirmative and your firm was manager or
acted for the manager or managers for such accounts, furnish a photostatic
copy of each of said syndicate, pool and/or joint account agreements
(&) State whether any partner of your firm or any person acting for or on
behalf of your firm or of any partner thereof, participated in the profits and/or
losses in any syndicate, pool and/or joint account during the years 1929 to 1933,
inclusive If the answer is in the affirmative, furnish the names of all such
partners or persons, and if such partners or persons were the managers or
acted for the managers for such accounts, furnish a photostatic copy of each
of such syndicate, pool and/or joint account agreements
(c) State whether any joint syndicate and/or pool accounts have been maintained on the firm books during the years 1929 to 1933 inclusive, in which the
firm or any partner thereof had no proprietary interest If answer is in the
affirmative and the firm was the manager or acted for the manager or managers for such accounts, furnish photostatic copies of each of syndicate, pool
and/or joint account agreements.
NOTE—For the purposes of this questionnaire a syndicate, pool, or joint account shall
be deemed to be an account in which two or more parties participated for the purpose of
trading actively in a single security listed on the New York Stock Exchange and in
which account more than 10,000 shares were bought and sold
8 (a) Has firm during the years 1929 to 1933, inclusive underwritten or
has it participated in the underwriting of any securities which were subsequently offered for public sale? Give separate answer as to each year.
(&) Has firm during the years 1929 to 1933, inclusive made any public offering of securities or has it participated with others in a public offering of securities? Give separate answer as to each year
9. (a) Has firm acted as promoter, organizer, or manager under contract of
any investment trust of the management type dm ing the period 1929 to 1933,
inclusive ? If the answer is in the affirmative, furnish name of such investment
trust or trusts and describe the relationship existing between form and such
trust or trusts, giving in each case the period of such relationship
(&) Has any partner of the firm or agent thereof acted as promoter, organizer, officer, director or manager under contract of any investment trust of the
management type during the period 1929 to 1933, inclusive? If the answer is in
the affirmative, furnish name or names of such investment trust or trusts, the
names of any partners of the firm or agents thereof, having any of the said
lelationshipe thereto; a description of the relationship ot such partners or
agents and the period of such relationship
10 Furnish on behalf of the firm for each year from 1928 to 1932, inclusive,
and for the period January 1, 1933 to September 1, 1933, inclusive, a detailed
annual income statement of receipts and disbursements by classification Such
statement should clearly specify the net commissions and net interests
11 The following information ib to be furnished only by firms engaging in
the odd-lot business:
(a) State the total number of shares bought by your fiim in odd lots during the periods from January 2, 1929 to December 31, 1929, inclusive, and from
April 1, 1933 to July 31, 1933, inclusive
(&) State the total number of shares sold by your firm in odd lots during
the periods fiom January 2, 1929 to December 31, 1929, inclusive, and from
April 1, 1933 to July 31, 1933, inclusive.
Mr. PECORA. The questionnaire has been marked " Exhibit No. 33."
The answer to this questionnaire made in behalf of the firm of
Wright & Sexton and identified by the witness is marked " Exhibit
No. 32."
Now, Mr. Wright, I want to call your attention to question no. 2
on the questionnaire, in which your firm was asked if any of the
STOCK EXCHANGE PEACTICES
6079
member partners of your firm were specialists in listed stocks on
the floor of the New York Stock Exchange on July 1, 1933—" furnish as to each a list of such stocks." In answer to that question
your return, marked ? Exhibit No. 32 ", lists the following stocks
as those in which you were the specialist: American Commercial
Alcohol, Eaton Manufacturing Co., Foundation Co., Indian Refining
Co., Inc., Panhandle Producing & Eefining, Timken-Detroit Axle
Co. In your answer here this morning you have mentioned only
3 of those 6 stocks or issues.
Are you also the specialist in the other three, namely, Indian
Refining Co., Inc., Panhandle Producing & Refining Co., TimkenDetroit Axle Co.?
Mr. WRIGHT. Mr. Arthur J. Vogel is the specialist in those stocks,
but the stocks are considered my books. He is not a member of
the firm. He is an associate that works on the floor with me. He
handles the cheaper class of stocks that we have as specialties.
Mr. PECORA. When you say the books in those three stocks are
considered (your books, although someone else is the specialist, just
what do you mean by that?
Mr. WRIGHT. Well, you see, Mr. Pecora, it would be impossible for
one man to handle all those books1; so Mr. Vogel, who is a member
of the exchange, takes a certain group of the books on one side of
the post and we take a certain group on the other side. If he gets
busy at any time we jump in and help him, and if I get busy he
jumps in and helps me. He is not associated with me.
" r . PECORA. DO you consider yourself a specialist in those three
Mr. WRIGHT. Yes, sir; American Commercial Alcohol, Foundation
Co., and Eaton Axle.
Mr. PECORA. And also Indian Refining Co., Panhandle Producing
& Refining, and Timken-Detroit Axle Co. ?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Then why
was the return to the questionnaire so
drawn as to show that you were the specialist in those three issues
as well?
Mr. WRIGHT. That I don't know anything about. But on my pads,
on my report pads which are sent out to brokers on the execution of
an order, all these various stocks are given, and they copy that from
my report pads. Sometimes those report pads are kept 4 or 5 years.
Mr. PECORA. I S it at all necessary or has it been the practice or
custom for members of the New York Stock Exchange who want to
become specialists in a stock traded in on the floor of that exchange
to obtain the approval of the governing authorities of the stock
exchange in order to become such a specialist?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Isn't there a practice or custom under which the governing authorities of the exchange may take away a book from a
specialist and give it to another broker?
Mr. WRIGHT. If he is unable to handle it; yes, sir.
Mr. PECORA. Well, isn't there a rule, practice, or custom under
which the stock exchange
may for any other reason take a book
away from the so-called u specialist" and give it to another member?
Mr. WRIGHT. I never heard of it, Mr. Pecora.
6080
STOCK EXCHANGE PRACTICES
Senator COUZENS. What is the commision fixed by the New York
Stock Exchange?
Mr. WRIGHT. Stocks under $10, a dollar and a quarter a hundred;
stocks over $10, two and a half a hundred.
Senator ADAMS. That is an increase over the former schedule,
isn't it?
Mr. WRIGHT. Yes; it is about a 25-cent increase over the dollar
rate and a 50-cent increase over what used to be $2.
The CHAIRMAN. Who fixes that?
Mr. WRIGHT. The stock exchange.
The CHAIRMAN. Has that been stabilized at that price for some^
years past?
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. HOW long; do you know?
Mr. WRIGHT. I should say 5 or 6 years.
The CHAIRMAN. They can change it at any time they
Mr. WRIGHT. I do not know in exactly what form it
like?
would go
through the exchange, but it would be in the hands of only one, and
as long as I have been in the Street I have not known it to be
changed.
The CHAIRMAN. What other expense is there in connection with
an operation of that kind? I mean, is there anything more than
the commission that you have mentioned?
Mr. WRIGHT. What other expense?
The CHAIRMAN. Yes. What other deductions are made in the
transaction as against a customer?
Mr. WRIGHT. Nothing at all.
Senator ADAMS. Well, you have a tax deduction.
Mr. WRIGHT. N O ; I have not.
Senator KEAIST. YOU have stamps on a transaction.
Mr. WRIGHT. If you are trading, do you mean?
Senator KEAN. NO. But you have to attach stamps to the sale
ticket.
Mr. WRIGHT. NO, sir. The original party attaches the stamps
to it.
Senator KEAN. Well, you are the original party.
Mr. WRIGHT. NO, sir. If you are acting as a specialist you are
acting for other people, and they attach the stamps.
Senator KEAN. But the customer has to pay for the stamps.
Mr. WRIGHT. Yes, sir. And he is the principal.
Senator KEAN. That is the thing I am getting at. The customer
has to pay for the stamps.
Mr. WRIGHT. Yes; but I am acting
Senator KEAN (interposing). But you are nothing but the broker.
You are executing orders for other people, in other words.
Mr. WRIGHT. Yes, sir.
Senator COUZENS. And
you have to be a member of the stock
exchange?
Mr. WRIGHT. Yes, sir.
Senator KEAN. But you
are executing orders, and in this case not
for the customer but for brokers.
Mr. WRIGHT. Yes, sir; that is right.
Senator KEAN. And therefore your responsibility ceases with the
order,
and you only get a small commission
STOCK EXCHANGE PRACTICES
6081
Mr. WRIGHT. That is right.
Senator KEAN. But as far as th© customer is concerned, he not only
has to pay that commission, I mean a commission which is different
from what you stated here.
Mr. WRIGHT. Yes, sir.
Senator KEAN. Well, now, what commission does he have to
Mr. WRIGHT. According to the price of the stock.
Senator KEAN. GO ahead and give it to us for the record.
Mr. WRIGHT. I do not know the exact rates. I haven't got a
pay?
commission card here with me. I t runs from $6 25 to stocks under $5—
and this is only as far as my memory goes; and I believe from $10 to>
$20 it is about $10.50, and then it runs into the $15 class for stocks
selling higher.
Senator KEAN. That is practically a quarter of 1 percent.
Mr. WRIGHT. That is graded according to the prices.
Senator KEAN. And in addition to that the customer has to pay
the stamp tax.
Mr. WRIGHT. On the sale of the securities; yes.
Senator KEAN. That was what you wanted, Mr. Chairman, I
believe.
The CHAIRMAN. Yes. I wanted to get at what the customer has to
pay, as well as the commission to theHbroker. The broker pays you,
I suppose?
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. And he then charges it against the customer?
Mr. WRIGHT. Yes, sir.
Senator KEAN. But, as far as this particular commission we have
been talking about, the customer pays you nothing.
Mr. WRIGHT. Yes he does. He pays me $2.50.
Senator KEAN. N O ; the broker pays you.
Mr. WRIGHT. I beg pardon, Senator Kean, but that comes out of
the commission. If the commission is $12.50, he pays me $2.50 out
of it.
Senator KEAN. But, as far as the customer goes, he pays you
nothing. The broker who hires you pays you $2.50.
Mr. WRIGHT. Yes; out of the customers commission.
Senator KEAN. That may be, or out of his own commission, or out
of his own pocket if he is trading for himself. So that so far as
the customer is concerned he pays nothing himself to the broker.
Mr. WRIGHT. Yes, sir.
Senator ADAMS. I t makes
no difference to the customer whether
the transaction is made on the floor or goes through your hands.
Mr. WRIGHT. Ye$, sir.
Senator ADAMS. But the
broker gets a little less if it goes through
your hands, because he pays you a part of his commission.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Mr. Wright,
as a specialist, did you execute orders
for the account of customers principally, or orders given to you by
other brokers for the account of their own customers?
Mr. WRIGHT. For brokers, for the account of their customers.
Mr. PECORA. I S that exclusively the kind of orders you execute?
Mr. WRIGHT. NO, sir.
6082
STOCK EXCHANGE PRACTICES
Mr. PECORA. YOU also execute orders for the account of your own
customers, then?
Mr. WRIGHT. I have no customers.
Mr. PECORA. Question no. 3 of the questionnaire which has been
marked in evidence " Committee Exhibit No. 33 ", reads as follows:
Submit the following information for the whole year 1929, and for the
period from January 1, 1933, to September 1, 1933
(a) The approximate total number of customers, persons, partnerships and/or
corporations who bought or sold any securities through your firm
(&) The aproximate total numbei of above whose transactions were not,
and/or their character
In reply to that questionnaire your answer to subdivision (a) of
question no. 3 is "None." And your answer to subdivision (&) of
question no. 3, likewise is " None." That indicates that the orders
executed by you were practically all for the account of your firm.
Mr. WRIGHT. Orders executed by me were practically all for the
account of other brokers.
Mr. PECORA. Well, then, the answer " None " to the question that
you were to give the approximate number of customers, persons,
partnerships, and/or corporations who bought or sold any securities
through your firm for the year 1929 and for the period from January 1,1933, to September 1, 1933, was so given for what reason?
Mr. WRIGHT. Because we give up the other side of the business
immediately on the transaction of the particular order. I have no
customers, carry no margin account^ whatsoever, and the answer
would be " None."
The CHAIRMAN. Are you now referring to yourself or to your
firm or to both?
Mr. WRIGHT. I am referring to my firm.
Senator ADAMS. The term "customer" as you understand it does
not include the broker who deals as you do at your post.
Mr. WRIGHT. NO, sir; a customer is a client you have in your
office. We do not count brokers as customers.
Mr. PECORA. Have you ever participated in any pool account
trading in the stock of any listed security?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. NOW, what do you understand by the term " pool"
or " pool account", Mr. Wright?
Mr. WRIGHT. I do not understand those terms, Mr. Pecora. I
liave never been able to understand them.
Mr. PECORA. Well, you stated that you had participated in pool
accounts, and then you say you do not understand what a pool
account is. How do you know you have been a participant in such
an account ?
Mr. WRIGHT. Well, from the subscribing to the other members of
the exchange or firms or individuals, where we have bought a block
of stock and where we have redistributed that stock. Whether that
comes under the reference to " a pool operation " I don't know.
Mr. PECORA. Well, you have held a membership in the New York
Stock Exchange for a period of 7 years, I believe you said.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Prior to that
time were you a broker without holding a seat on the stock exchange?
Mr. WRIGHT. NO. sir; I was a broker on the curb.
STOCK EXCHANGE PBACTICES
6083
Mr. PECORA. For how many years prior to the time when you
bought a seat on the New York Stock Exchange were you a member
of the curb ?
Mr. WRIGHT. For 12 to 15 years.
Mr. PECORA. SO that you have been a stock broker actively engaged in the business of buying and selling securities for a period
of around 20 years ?
Mr. WRIGHT. Yes, sir,
Mr. PECORA. And still
you say you do not know what a pool
account is ?
Mr. WRIGHT. I will swear to you, Mr. Pecora, that I could not
answer what a pool account is.
Mr. PECORA. Well, you have often heard the term, have you not?
Mr WRIGHT. I have often heard it, and have tried to define it,
but I cannot answer the question. There are some pools that are
put together for the apparent purpose of buying, and for the apparent purpose of selling, and some for distributing stocks, and for
the purpose of making a market in stocks, and some for this purpose,
that purpose, and the other purpose. I just have no way of denning
the term.
Mr. PECORA. Well, let us take a pool organized for the purpose
of making a market in a stock. ITou have been a participant in
such pools in the past, I take it ?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. HOW do such pools operate? Will you tell the committee from your familiarity with the activities of such a pool
account, how it is operated ?
Mr. WRIGHT. Some pool accounts operate on options, that is, some
by way of direct purchase of stock and redistribute it, and others
may be accumulation pools where they accumulate stocks that somebody desires. Each one is in a different group.
Mr. PECORA. Well, let us take a pool account organized for the
purpose of making a market in a stock.
Mr. WRIGHT. All right.
Mr. PECORA. In which an account is organized to trade in the
stock.
Mr. WRIGHT. All right.
Mr. PECORA. HOW does such a pool actually operate in the market?
How does it make a market ?
Mr. WRIGHT. By creating activity.
Mr. PECORA. And how does it do that?
Mr. WRIGHT. By trading in the stock.
Mr. PECORA. That is, the pool buys and sells the stock.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. For its own account.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And frequently, if not
invariably, such a pool has an
option covering the stock in which it trades.
Mr. WRIGHT. That is right.
Mr. PECORA. And it gets that option as a rule from what kind of
persons ?
Mr. WRIGHT. Sometimes from individuals, and sometimes from
officers of the company, and sometimes from large stockholders, and
6084
STOCK EXCHANGE PRACTICES
sometimes from the corporation which might hold a good block of
stock and which wanted to get rid of it.
Mr. PECORA. And as a rule what is the object sought to be accomplished by those persons who organize a pool account in order to
make a market in the stock?
Mr. WEIGHT. Will you put that question again, please?
Mr. PECORA. The committee reporter will read it to you.
(Thereupon the committee reporter read the last question.)
Mr. WRIGHT. TO redistribute the stock at a higher price if possible.
Mr. PECORA. That is, to raise the price level of the stock as much as
possible.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. SO that they
may distribute whatever accumulation
of stock they have at a higher price and at a profit.
Mr. WRIGHT. But it does not often work out at a profit.
The CHAIRMAN. In short, you are trying to make money? That is
the idea, isn't it?
Mr. WRIGHT. Trying to make money; yes.
Senator ADAMS. I t is quite possible and not at all unknown to
have a syndicate or pool account trying to run the price of the stock
down some, isn't that true?
Mr. WRIGHT. I never heard of that.
Senator COUZENS. DO you say you never heard of that ?
Mr. WRIGHT. I have never heard of a pool to depress stocks; no,
sir.
Senator KEAN. Well, you have certainly heard of a pool trying to
accumulate stocks in the market, I take it?
Mr. WRIGHT. Yes, sir.
Senator KEAN. With the
object in view that they wanted to buy
them.
Mr. WRIGHT. Yes, sir.
Senator KEAN. And trying to keep the
Mr. WRIGHT. Yes, sir; I have heard of
Senator KEAN. SO that any stocks that
market steady.
those.
came in on the market they
would accumulate, without putting up the price.
Mr. WRIGHT. Well, I have heard of them.
Mr. PECORA. Mr. Wright, where a pool is organized for the purpose indicated by Senator Kean in the question just propounded to
you, such a pool would not operate under an option, would it?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Because, having an option to purchase stock at prices
fixed in the option, it would not be necessary for such persons to go
into the market to buy the stock, would it?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. What was that answer?
Mr. WRIGHT. Yes ,sir.
Mr. PECORA. DO you say it would be necessary?
Mr. WRIGHT. Yes, sir.
Mr. PEOORA. Where they have an option on stock?
Mr. WRIGHT. Yes. Frequently where you have an
option on stock
you have to step into the market and buy stocks to put the stock up.
Mr. PECORA. Well, what is the advantage of that to the person
who merely wants to accumulate stock?
STOCK EXCHANGE PBACTICES
6085
Mr. WRIGHT. Well, Mr. Pecora, you and I are a little bit confused
on the issue, I think.
Mr. PECORA. Well, perhaps I am confused.
Mr. WRIGHT. N O ; l a m . Where there is an option it is one thing,
and where it is just a matter of accumulation it is another thing.
We are not working on that thing right, I am afraid. An accumulation is just a desire to buy for one group, or one person, or syndicate, an amount of that company's stock. He tries to buy it at as
cheap a price as possible. Then, when you have an option it is
different. When you have an option on stock the only way you
can create activity in the stock is by buying it. I t frequently happens when you have an option that you have to step into the market
and buy a great deal of the stock in order to create activity.
Mr. PECORA. Well, that is where the person having the option to
buy stock, in addition to acquiring that stock under the option, wants
to sell it through his market operations at higher prices, or at a
profit.
Mr. WRIGHT. That is right.
Mr. PECORA. Well, I was talking about the kind of pool that I
understood Senator Kean was questioning you about when he asked
you about a pool being organized to accumulate stock. If the purpose of a pool be only to accumulate stock, such a pool would not
operate under that option, would it?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Because it would not be necessary for it to go into
the market to buy stock if its sole purpose was to acquire or accumulate stock when as a matter of fact the pool had an option.
Mr. WRIGHT. That is right.
Mr. PECORA. SO that where a pool operates under an option, the
fact that it has such an option is a sure indication that the purpose
of the pool, or at least one of the purposes of the pool, is to distribute
the stock covered by the option at higher prices.
Mr. WRIGHT. That is right.
Mr. PECORA. And in order to do that they operate, of course,
through brokers who are members of exchanges where the stock is
listed.
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
frequently members of exchanges who execute
orders for such pools of participants in the pools themselves.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And that has been your experience, hasn't it?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. AS a matter of fact, when you stated that your
firm
had no customers at all, did you mean to indicate that the business
of your firm is principally the executing of orders for other brokers
and not buying and selling for its own account ?
Mr. WRIGHT. That is right.
Senator KEAHT. I should like to ask Mr. Wright a question or
two about pools: A pool, of course, as a rule, or options held by a
pool as a rule are bases, say, on so many shares at a little below the
market, and so many shares at the market, and so many shares at
so much above the market, and so many shares above that price.
Mr. WRIGHT. That is generally so.
175541—34—PT 13
16
6086
STOCK EXCHANGE PEACTICES
Senator KEAN. Therefore, if you are going to operate for that
pool you have to create a market or else vou wouldn't exercise the
option to buy at the prices given about a point or two, or at something higher than the market at the time you take the option?
Mr. WRIGHT. That is right.
Senator KEAN. IS that a fact?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. NOW, Mr.
Wright, take the case of a pool that is
organized to distribute stock which it has under option, at higher
prices than the market price.
Mr. WRIGHT. All right.
Mr. PECORA YOU have handled many such pool accounts, have
you?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir,
you have participated in many such pool ac-
counts ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. NOW, you
have stated before that such a pool goes
into the market, buys and sells for its own account in order to create
activity in the stock.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. NOW, that
activity, as trades are made for that pool
account, are recorded on the ticfeer, but they do not appear on the
ticker as an activity that is engendered or fomented simply by the
members of the pool as distinguished from the general trading public, do they?
Mr. WRIGHT. NO, sir.
Mr. PECORA NOW, Mr.
Wright, by such processes or activties on
behalf of pool accounts, especially where trading for such pool accounts is done by brokers who are also members of the pool or participants m it, isn't it a fact that the public get a false notion ot the
activity in the stock?
Mr. WRIGHT. I would have to think for a second before I try to
answer that question.
Mr. PECORA. Surely. You may do that.
Mr. WRIGHT (after a pause of a few moments). Do you want me
to talk freely and frankly on this?
Mr. PECORA. Yes, very frankly indeed.
Mr. WRIGHT. Because the public will not trade in stocks that are
not active. Naturally when you make a stock active the public will
trade in that stock. And many times you are successful and many
times you are unsuccessful in such an effort in any particular stock;
and if you are running a pool and they do not trade in the stock,
that is your hard luck.
Mr. PECORA. Then activities engendered by pools that are organized to distribute stocks that they hold under option, or which they
have already accumulated, at prices which would represent profits
to themselves, are activities designed primarily to induce the public
to come in and buy, so that distribution may be effected at higher
levels?
Mr. WRIGHT. Yes, sir; which is just the same as distributing groceries or any other commodities.
Senator ADAMS. In other words, it is just like anybody going
fishing, he wants to fish where the other fellows are.
STOCK EXCHANGE PRACTICES
6087
Mr. WRIGHT. Yes, sir. In many cases, Mr. Pecora, prices of stocks
go far beyond what anybody had in mind. I think the history of
almost every stock downtown is that some days it goes far beyond
any dream that anybody had.
Mr. PECORA. In other words, these pool operations are sometimes
organized to distribute stocks held by pool members, or stocks which
they have under option, and they succeed beyond the original expectations of the pool participants.
Mr. WRIGHT. Yes, sir. It is like m the case of the American Commercial Alcohol Corporation and
Mr. PECORA (interposing). That succeeded beyond the expectations of the participants, did it?
Mr. WRIGHT. Yes, sir. I think the price shuffled up so far—well,
I shiver every time I think of it, of the price at which the stock was
distributed and the price which it went to.
Mr. PECORA. YOU do what?
Mr. WRIGHT. I either shiver or laugh every time I think of the
difference there.
Mr. PECORA. And I suppose the laugh is on the investing public
as to its going to the higher prices.
Mr. WRIGHT. Well, the investing public got the stock at the lower
prices.
Mr. PERORA. And who got the stock at the higher prices?
Mr. WRIGHT. Well, there was no operation in American Commercial Alcohol Corporation stock after the original 25,000 shares
had been distributed, and then the stock went up 50 points beyond
that. I t was carried up purely and simply by the grace of the
people who wanted to invest in whisky stocks.
Mr. PECORA. And that was a course that was engendered at first
by the pool operations in that stock?
Mr. WRIGHT. The pool operations in that stock were small. They
just simply executed orders. That particular stock was carried
up by the rise in National Distillers and United States Industrial
Alcohol and Hiram Walker, and all the so-called " whisky " stocks.
As to that particular stock there was no attempted manipulation,
no, but just simply execution of orders in the stock.
Mr. PECORA. Don't you know that the pool that was organized
and managed by Thomas E. Bragg, under the option that he received from Russell R. Brown and others associated with him who
were officers and directors of the American Commercial Alcohol
Corporation, carried on trading operations for the account of the
pool up to and including the 24th of July last, beginning with the
3d of May, last?
Mr. WRIGHT. Well, now, I have some records here which I should
like to read to you. In the month of May I received from W. E.
Hutton & Co., where Mr. Bragg makes his office, $1,270 of commissions in American Commercial Alcohol, and in the month of June
that went down to $533, and the month of July it was $203, which
^ould look to me as if that pool's activities faded at the end of
May.
Mr. PECORA. Well, it was admitted by a member of the firm of
W. E. Hutton & Co. who testified before this committee last week
that the operations of that so-called "Bragg'* pool in American
6088
STOCK EXCHANGE PEACTICES
Commercial Alcohol Corporation stock, commenced on May 2, 1933,
which was tlie date on which the option was given to Bragg, and
terminated on July 31. Don't you know that?
Mr. WRIGHT. Well, Mr. Bragg went to Europe in the early part
of June, or in the middle of June, and from then on my knowledge
of the operations of the pool, outside of the testimony I heard here*
were nothing.
Senator ADAMS. I S Mr. Bragg quite a traveler ?
Mr. WRIGHT. He is a great traveler.
Mr. PECORA. And he is a great market operator.
Mr. WRIGHT. The cleanest in the the Street.
Mr. PECORA. And during his travels who gives his orders in his
market operations?
Mr. WRIGHT. Well, I would imagine, Mr. Pecora, what he did was
to telephone his orders in to his own office, at W. E. Hutton & Co.,
and that they were distributed from there.
Mr. PECORA. D O you know that this pool account which was carried on the books of W. E. Hutton & Co. as account no. 296, traded in
American Commercial Alcohol stock from May 2,1933, up to and including July 31, 1933?
Mr. WRIGHT. I know it simply because I heard the testimony hereMr. PECORA. Did you handle those trades for that account?
Mr. WRIGHT. I handled them in May and for a part of June.
Mr. PECORA. DO you know who handled them after that?
Mr. WRIGHT. NO, sir.
Mr. PECORA. And do you
recall when the high price for that stock
was reached, last summer?
Mr. WRIGHT. I will never forget it!
Mr. PECORA. What date was it?
Mr. WRIGHT. The 18th of July.
Mr. PECORA. And what was the high price of the stock?
Mr. WRIGHT. I t was 89%.
Mr. PECORA. And, according
to the testimony of Mr. Foster, of
the firm of W. E. Hutton & Co., this pool was operating on that
date, and from that date to the end of July, and you heard that testimony given here last week, didn't you ?
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. YOU say
the public were not buying or dealingin this stock at all in July ?
Mr. WRIGHT. Yes; they were buying it and selling. They d—n
near ruined me, I know. [Laughter.] That thing got to be a
nightmare with me.
The CHAIRMAN. HOW did it affect you? Were you in the stock?
Mr. WRIGHT. NO, sir; I was the specialist in that stock, and I was
held responsible for every stop order, for the execution of every
order in that stock. And I want to say that there was never any
complaint filed with the New York Stock Exchange as to my handling of that particular stock. I was only the specialist, who stood
by and took all the stop orders during the terrific break in liquor
stocks.
The CHAIRMAN. Well, as I understand, you did not have any
monejr at stake. You were either making commissions or not making
commissions.
STOCK EXCHANGE PEACTICES
6089
Mr. WRIGHT. Well, one day it cost me between $45,000 and $50,000,
and I wouldn't like to tell you what it cost me on other days in
making the market and keeping it, and keeping on with it. I was
the specialist and the only man to come to for the market.
The CHAIRMAN. But you did not have anything at stake. You
ere simply the specialist in the stock, as I understand you.
Mr. WRIGHT. I was the specialist in the stock, and it was also my
privilege to trade in the stock.
The CHAIRMAN. Then you lost money trading in the stock and
not as a specialist, but as a trader. A specialist, as I understand,
executes orders for other people, while a trader executes his own
orders.
Mr. WRIGHT. Well, Senator Fletcher, there were times in that
stock when there wasn't even a single bid for it, when the break
•came, at a time as I remember distinctly that I bought 11,000 shares
of the stock at a price some 11 points down from the last sale, in
an effort to make a market in that stock. And then it broke 30
points more Yes, it was a nightmare to me. And m these fluctuations in stocks the specialist suffers a nightmare, because he is the
one held responsible for the execution of every stop order, and has
charge of every order brought in to the post.
Senator COUZENS. DO you think that a specialist should have the
privilege of trading m stock?
Mr. WRIGHT. Well, if you take away that privilege you take
away 75 percent of the liquidity of the stock market.
Senator ADAMS. DO you mean that as a specialist that is really a
part of his duty?
Mr. WRIGHT. He is the man who supports and keeps the market
stable to the best of his ability. And 75 percent of the liquidity
of the market in a stock would be lost if you stepped the specialist
from trading.
Senator ADAMS. Then a specialist isn't merely a broker?
Mr. WRIGHT. NO, sir.
Senator ADAMS. He is a dealer in the stock.
Mr. WRIGHT. He is a dealer in the securities,
and is held responsible for the gyrations of that security by the governors of the
exchange.
Senator TOWNSBND. Then the specialist is the most important man,
according to your testimony?
Mr. WRIGHT. NO, sir; but in that class of stocks he is.
Senator TOWNSEND. In what class of stocks ?
Mr. WRIGHT. Well, there are 3 or 4 different classes of stocks
on the exchange—and, Mr. Pecora, do you want me to continue along
that line?
Mr. PEOORA. Yes; go ahead and explain it.
Mr. WRIGHT. There is a class of stocks, like United States Steel,
General Motors, and so on, and for that class of stocks the market is
automatically made. In other words, there are always bids and
offers. But in the case of a stock like American Commercial Alcohol,
United States Distillers, and others, the market is not made, and as
to them there may be a tremendous vacuum. These breaks would
not occur in the case of United States Steel or General Motors, because for such stocks a market is automatically made. Those are
6090
STOCK EXCHANGE PRACTICES
volume stocks and are stabilized. But these other stocks are not
stabilized stocks.
Mr. PECORA. YOU mean the alcohol stocks ?
Mr. WRIGHT. Yes, sir; they are fairly stable now, but they were
not in those days.
Mr. PECORA. Mr. Wright, I have before me data that was furnished
to the committee on business conduct of the New York Stock Exchange in connection with an inquiry or investigation which the stock
exchange caused to be made last summer at my suggestion, into the
activities of the so-called " alcohol stocks ", for the period between
May 3 and the end of July 1933. And bearing on your statement
made here a few minutes ago, that you did not trade in the stock of
American Commercial Alcohol after June, I want to call your attention to the fact that the data furnished us by the stock exchange
shows trades executed by you generally throughout the month of
July 1933.
Mr. WRIGHT. Well, when I made that statement to you, Mr. Pecora,
I made the statement that I had not traded for Mr. Bragg, that I
had received no orders from him. But I have traded in tne stock
up to this morning.
Mr. PECORA. Well, you executed orders for W. E. Hutton & Co.,.
didn't you, during June and July of 1933 ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And weren't they for the Bragg account?
Mr. WRIGHT. A S to that I don't know. W. E. Hutton
& Co. are
rather a large firm, and who they were trading for then I don't
know, who their customers were I don't know.
Mr. PECORA. What orders did you have?
Mr. WRIGHT. I can show you the orders. I have brought everything down here with me so that I can show you everything you
may want. W. E. Hutton & Co. might have a thousand customers.
The particular orders I had for Bragg were through the month of
May and the early part of June, and then he went to Europe. Now,
when Hutton sends me any orders I don't know who their customers
are. The particular orders I got from Bragg I got over the telephone.
Mr. PECORA. YOU got certain orders in American Commercial Alcohol stock during the life of his option, from Bragg?
Mr. WRIGHT. Directly from his office to the floor.
Mr. PECORA. And his office was in the office of W. E. Hutton & Co. ?
Mr. WRIGHT. Yes,
Mr. PECORA. Did
sir.
you get any of those orders also from B. W.
Smith?
Mr. WRIGHT. NO, sir.
Mr. PECORA I meant from B E. Smith.
Mr. WRIGHT NO, sir.
Senator TOWNSEND IS Thomas E Bragg
a member of the New
York Stock Exchange?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Did you get
any orders from Mr. Quinn, who testified
last week with respect to his association with B. E. Smith?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Well, those
weren't they?
orders were for the account of Smith,
STOCK EXCHANGE PBACTICES
6091
Mr. WRIGHT. For the account of Bragg so far as I can understand.
I heard the testimony given here.
Senator TOWNSEND. Can you receive orders from anyone who is
not a member of the exchange?
Mr. WRIGHT. Well, you see, Senator Townsend, the form of procedure is that when I get orders over the telephone from W. E.
Hutton & Co., or from any individual in the office, I hold W. E.
Hutton & Co. responsible for the delivery of those orders to me. We
consider that the order is executed for the account of W. E. Hutton
& Co., not for the account of Thomas E. Bragg.
Senator TOWNSEND. Although they might be given by Bragg?
Mr. WRIGHT. Although they might be orders given by Bragg.
We receive those orders at the regular specialist's commission of
$2.50 on each 100 shares of stock.
Mr. PECORA. Why did you say before that the higher prices paid
m American Commercial Alcohol stock toward the middle of July
1933 were not prices paid by the public?
Mr. WRIGHT. I did not say they were not prices paid by the public.
Mr. PECORA. I understood you to say that the prices were not made
by the public.
Mr. WRIGHT. YOU see, Mr. Pecora, I never have any means of
knowing who is buying or selling the stock, except for the firms. I
do not know the individuals. Naturally it was the public, or whoever was trading in the stock. I t was trading m the stock that put
the stock up. The operations of the pool in that stock did not put
the price up. That was carried up by the tremendous uprise in
National Distillers and United States Industrial Alcohol, and so on*
Mr. PECORA. And weren't pools working in those stocks ?
Mr. WRIGHT. AS to that I don't know.
Mr. PECORA. Well, you knew that the Bragg pool was working
in it, didn't you?
Mr. WRIGHT. In American Commercial Alcohol; yes, sir. But I
did not know anything about National Distillers, or United States
Industrial Alcohol, or Commercial Solvents, which were advancing
very rapidly at the same time.
Mr. PECORA. Didn't you notice externally indications that pools
were operating in those stocks, too ?
Mr. WRIGHT. I did not have any change to see about those stocks.
Mr. PECORA. NOW, when you were executing orders, whether conveyed to you by Bragg or by W. E. Hutton & Co., or by Quinn,
in American Commercial Alcohol Corporation stock, between the
beginning of May and the end of July of last year, were any of them
limited orders, so-called ?
Mr. WRIGHT. Why,
Mr. PECORA. NOW,
yes.
will you describe to the committee what is
meant by the term " limited orders " ?
Mr. WRIGHT. A limited order is where a man says to you: Sell
2,000 American Commercial Alcohol at 30. That is a limited order,
because he has fixed the price at which he wants to sell the stock.
Mr. PECORA. At 30 or better?
Mr. WRIGHT. Yes,
Mr. PECORA. That
sir.
is, he gives you that selling order at the minimum price for which he wants to sell the stock ?
6092
Mr. WRIGHT. Yes,
Mr. PECORA. And
STOCK EXCHANGE PRACTICES
sir.
if you can get a better price, so much the better
for him?
Mr. WRIGHT. Yes, sir; then whoever the customer may be he
benefits.
Mr. PECORA. And where an order is a buying order he also gives
a minimum order ?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. Or maximum order rather, the price which he will
pay.
Mr. WRIGHT. Yes,
Mr. PECORA. But
sir.
in his case you have discretion to execute the
order at a lower price for his account?
Mr. WRIGHT. If I can; yes, sir.
Mr. PECORA. And that is known as a limited order ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And what does the term "market order" denote?
Mr. WRIGHT. A man will say: Sell 2,000 American Commercial
Alcohol at the market, which may be 27%; and he wants you to
sell it at the market and doesn't limit the price. If you sell the
stock at 26, it is all right. And if it is a buy order, it switches
around to the other side in the same way.
Mr. PECORA. That is the broker might execute the order at the
market?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. The broker is allowed a certain latitude, although the
time itself may be very brief, in the execution of the order.
Mr. WRIGHT. Sometimes he is so allowed, and sometimes he is
not allowed.
Mr. PECORA. All depending upon market conditions ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. YOU understand
the term "discretionary order",
do you ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. When is such
an order given to a broker, or I mean
when such an order is given to a broker, what is understood by
that term?
Mr. WRIGHT. He simply gives you an order and puts discretion
on executing that order into your hands.
Mr. PECORA. That is both as to price and as to time of execution?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Those elements
are left entirely to the discretion of
the broker ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. NOW, as the
specialist in American Commercial Alcohol Corporation stock, did you execute many discretionary orders
last summer?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. Between May and the end of July?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And for whose account principally?
Mr. WRIGHT In May for the account of Bragg, and
as to the rest,
any order, for the account of any man who had a buying or selling
STOCK EXCHANGE PBACTICES
6093
order, and because they are all smart enough that whenever they
have a market order and the stock is gyrating or fluctuating violently, they are smart enough to pass it on to the specialist for execution, because then the specialist is held responsible for the execution of the order, as to time, price, and everything else, and not the
broker.
Mr. PECORA. DO you know how the volume of orders executed by
you directly on the order of Bragg in American Commercial Alcohol
was in June and July of last year?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. Give us the totals.
Mr. WRIGHT. I can give you the totals, but I can give you that by
way of only the amounts for days. Mention any day and I will show
you the original orders from the specialist's sheets for that day, and
the purchases and sales.
Mr. PECORA. Give us that information for May 2,1933.
Mr. WRIGHT. Here they are. [Pointing to a book.] On May 2
there were 1, 2, 4, 5, 7, 800 shares bought for the account of various
firms. You will see there: Of whom purchased, description of stock,
price, for whose account purchased. I t shows the whole thing. But
the trading was very small that day.
Mr. PECORA. YOU mean trading was very inactive in that stock that
day?
Mr. WRIGHT. Yes,
sir.
Mr. PEOORA. That was the date when the Bragg syndicate commenced operations?
Mr. WRIGHT. Yes, sir. If you will look here, I will show you if
I did any business for W.
E. Hutton & Co. on that day. [Looks
over the pages of a book.1] No; nothing was done by me for W. E.
Hutton & Co. on that day.
Mr. PECORA. HOW about on May 3, either for W E Hutton &
Co. or for Bragg?
Mr. WRIGHT. I wouldn't know whether it was for Bragg or for
Hutton.
Mr. PECORA. Well, you would know if you got the order directly
from Bragg, wouldn't you, because you would enter it on your boofe
as an order received from Bragg?
Mr. WRIGHT. NO.
Mr. PECORA. In that case would you enter it up as from W. E.
Hutton & Co.?
Mr. WRIGHT. Yes, sir; W. E. Hutton & Co. is my principal. If
you will pick out one principal day I will show you what orders I
received, and from what firm.
Mr. PEOORA. One minute. What were the public quotations of
American Alcohol stock on May 2,1933 ?
Mr. WRIGHT. The high was 21 and the low was 20. There was
very little activity.
Mr. PECORA. There was considerable activity the following day,
May 3, was there not?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
did you execute orders on May 3 for the account
of W . E . Hutton & Co.?
Mr. BRAGG (looking at his book of record). Practically nothing.
6094
STOCK EXCHANGE PRACTICES
Mr. PECORA. Well, from whom were your principal orders on
May 3?
Mr. WRIGHT. For these people [holding up a package of tickets].
Mr. PECORA. Can you give their names?
Mr. WRIGHT. YOU will find practically every name on the stock
exchange, in here. If you want to look through them you can see.
Suppose you look through them and then let me read them off from
this book.
Mr. PECORA All right.
Mr. WRIGHT. Here are the original orders received on that day.
Mr. PECORA. All right.
Senator ADAMS. That is, your orders came in on those slips, do
you mean?
Mr. WRIGHT. These are the original orders. I keep everything for
1 year. And here is my specialist book on that day.
Senator ADAMS. Then do you put them on those ledger figures
there?
Mr. WRIGHT. Yes, sir.
Senator ADAMS. And then
you transfer them into your permanent
book?
Mr. WRIGHT. Yes, sir.
Senator ADAMS. Then you have three entries?
Mr. WRIGHT. Yes, sir. This is the specialist
book kept in this
way; this is the way we run our books.
Senator ADAMS. And here are your prices.
Mr. WRIGHT. Yes, sir. Here are 22, 22%, 22%, and 23. Here
are the orders to buy, and here are the orders to sell, at these figures.
The CHAIRMAN. A S a specialist you have orders to pay a certain
price, and you have orders to sell at a certain price.
Mr.
WRIGHT. Yes,
sir.
The CHAIRMAN. And as a trader you can operate between the two
prices for you own benefit, can't you ?
Mr. WRIGHT. Yes, sir. But sometimes it is not to my own benefit
as it turns out. Would you like to see, Mr. Pecora, the orders on
that terrific day, the day of the. big break?
Mr. PECORA. Yes; was that July 18 ?
Mr. WRIGHT. Yes, sir. I will have my assistant get the specialist
sheet.
Mr. PECORA. I do not see it here in this book.
Mr. WRIGHT. I will get the other book for you. On July 18, the
day of the big break in the market for American Commercial
Alcohol, the volume was 43,600 shares.
Mr. PECORA. And the stock ranged between 77 and 89% on that
date, didn't it?
Mr. WRIGHT. NO, sir—well, here is 89%; yes, sir; that is right.
Mr. PECORA. In other words, from a low or 77 to a high of 89%,
Mr. WRIGHT. Yes, sir. The next day it was a little bit worse.
I t went dqwn 29 points the next day.
Senator ADAMS. YOU only had 11,000 shares that day yourself?
Mr. WRIGHT. Yes, sir.
Senator TOWNSEND. And
on July 12 there were 65,000 shares
dealt in.
Mr. WRIGHT. That was the run-up market.
STOCK EXCHANGE PRACTICES
6095
Mr. PECORA. That was what?
Mr. WRIGHT. The market was running up. Here, I will give you
an idea of the situation from this book, as to the total number of
shares traded in in that stock. Here are my specialist's sheets. But
I will get the original orders. You can see that on this date what
a tremendous amount of orders there were in that stock.
Mr. PECORA. On what date ?
Mr. WRIGHT. July 18.
Mr. PECORA. We nave it in the book, I believe.
Mr. WRIGHT. This only shows orders executed. This other shows
the amount of orders given, and a great many of the orders possibly
were not executed.
Mr. PECORA. Were there any other specialists in the stock of American Commercial Alcohol in May, June, and July 6f 1933 ?
Mr. WRIGHT. Well, as I am telling you, in July it does not help
me out, because I was being swamped with stocks. During July
many brokers came in to help me out, owing to the violent fluctuations in the stock, and owing to the impossibility of getting orders
in my books, and so forth.
Senator ADAMS. When people came in to help you the commissions
went to them, did they?
Mr. WRIGHT. Yes, sir. Whatever men worked on that day they
got paid for it.
Senator ADAMS. And they carry whatever responsibility goes with
it?
Mr. WRIGHT. Oh, no. The responsibility is all mine.
Senator ADAMS. Then they left that with you?
Mr. WRIGHT. Yes, sir. When a man comes in to help, you do not
ask him to assume any responsibility. You assume it all yourself.
Now, this is the other side to look at, Mr. Pecora.
Mr. PECORA. What is that?
Mr. WRIGHT. This is the other side, the other interesting thing to
look at. This will show where the stock broke. Would you like to
look at it?
Mr. PECORA. Yes.
Mr. WRIGHT. Here
are the original books of that day when we
were getting orders. And these are the selling orders that night.
The reason why the stock broke you will see from that that there
were no bids.
Mr. PECORA. AS of the date July 18 ?
Mr. WRIGHT. Yes, sir. This is the buy side and this is the sell
side. You will notice nothing but selling orders, with no bids. That
is the explanation why the stock broke. You will see that we were
getting few bids in here, and only a few any day right along there.
Mr. PECORA. What you have referred to are a few sheets of paper
loosely bound together, which constitute what is called the book, is
that it?
Mr. WRIGHT. That constitutes the market in the stock.
Mr. PECORA. AS of July 18,1933?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And in this
book there are entered both the buying
and the selling orders, at various prices at which trades were made
on that day, from your book, isn't it?
6096
STOCK EXCHANGE PRACTICES
Mr. WRIGHT. Yes, sir.
Senator COUZENS. And
the reason the market broke was because
there were no buying orders?
Mr. WRIGHT. Because the selling orders outnumbered the buying
orders.
Mr. PECORA. l^hat is, when the stock got to a level of around 8S>
the public would not buy any more at those figures, and then those
who had the stock wanted to sell.
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. And get the benefit of those high levels.
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. And that produced an avalanche of selling orders,
with practically no buying orders at all ?
Mr. WRIGHT. That is correct.
Senator TOWNSEND. What is the stock bringing now, Mr. Pecora ?
Mr. PECORA. It is around 49 now. Or, Mr. Wright, what is it
quoted at now ?
Mr. WRIGHT. At about 49.
The CHAIRMAN. And it went down to around what point ?
Mr. WRIGHT. It went from 89% to 29%
Mr. PECORA. Within 3 days' time.
Mr. WRIGHT. Yes, sir; within 3 or 4 days.
Mr. PECORA. Between July 18 and July 21.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. The pools
did not do any buying at the higher levels
from July 18 and for a few days thereafter, did they?
Mr. WRIGHT. What pools &
Mr. PECORA. Whatever pools were in existence.
Mr. WRIGHT. I don't know about that.
Mr. PECORA. Don't you really know, Mr. Wright, what pools were
in existence?
Mr. WRIGHT. Sure. I bought some when pools were dealing m the
stock, and I got mine.
Mr. PECORA. HOW many pools were in existence at that time?
Mr. WRIGHT. I don't know.
Mr. PECORA. I mean at the time when the break came.
Mr. WRIGHT. Well, as to that I don't know.
Mr. PECORA. Would you, for the benefit of the committee, describe
the mechanics of the handling of a book by a floor specialist of the
New York Stock Exchange ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Assume,
now, that we know nothing about the mechanics of the operation, and that you are going to give us a complete education of the process of handling the book.
Mr. WRIGHT. Tell me what date you want, and you can pick out
any date.
Mr. PECORA. Well, I will leave that to you.
Mr. WRIGHT. Well, I will pick this one [pointing to a book]. This
was on the 11th of July.
Mr. PECORA. Well, that was a pretty active date, when 52,700 shares,
were traded in,
Mr. WRIGHT. That is a good day to work on.
Mr. PECORA. All right. You may go ahead.
STOCK EXCHANGE PBACTICES
6097
Mr. WEIGHT. Here are my two books. I run in that what we call
the odd orders, and here is the even book; that is, we will say when
the stock is at 88, and the odd book we will say is when the stock is at
87. Is that much now plain to you?
Mr. PECORA. Yes; I think so.
Senator ADAMS. Why is it helpful to you to handle it in that
manner ?
Mr. WRIGHT. Well, because when we have two books it means that
when I got through with the odd book I can grab that even book
from the man who has been writing it up In that way I always
have a book in my hand. On this particular day there was a price
range of what? Do you have it there, Mr. Pecora ?
Mr. PECORA. My record shows a low of 43% and a high of 53.
Mr. WRIGHT. AS I receive orders from the various firms, which
constitute all of the firms on the stock exchange, those orders are
handed to me. Here are the orders I received from the various firms
on the stock exchange that day [holding up a bunch of what appeared to be tickets]. As an order is brought in to me, either by a
broker or the boy
The CHAIRMAN (interposing). Head one of the orders to us.
Mr. WRIGHT. This says: Buy 100 A.C. at 46i/2. That means
American Commercial Alcohol.
Senator COTJZENS. Order given by whom?
Mr. WRIGHT. By Harris, Upham & Co. That order is immediately entered in my book. Here is the price, at the top here. We
run each page one half a point. This is a page from 46% to 46%.
Here is the other side, I mean on that day, being the selling side.
Here is an order from Jackson Bros., Boesel & Co. entered on my
book. We usually abbreviate the names and all sorts of things in
order to save time in the execution of the order.
Now, is there anything else that I can explain to you about it?
Mr. PECORA. GO ahead.
Mr. WRIGHT. AS the stocks are sold at these prices I write alongside here who I bought it from and who I sold it to. Well, I cannot read my own writing myself at times. As that stock is bought
or sold a report is immediately sent to the firm for whose account I
received the order. I am, as specialist, held responsible for every
order in that book.
The CHAIRMAN. Where is the stock in the meantime ? Where are
the actual shares of stock?
Mr. WRIGHT. Well, they are around in the offices.
The CHAIRMAN. YOU do not handle them?
Mr. WRIGHT. I have nothing to do with them.
Senator ADAMS. TO what extent does the specialist have an obligation to take stock that is offered in case there are no purchase orders?
Mr. WRIGHT. That is a matter of pride and judgment. The way
you figure that out, or the way I figure it out, and I will explain it
to you fully if you would like.
Senator ADAMS. I wish you would.
Mr. WRIGHT. Well, I got my business for a number of years while
specializing in that stock. Then when the break came I felt that I
could not take the responsibility of refusing to take all those market
orders, so I just took all the market orders as they came. And, as
6098
STOCK EXCHANGE PRACTICES
I have already said, there was not one complaint on the part of the
exchange over the execution of any order either during the upward
rise or the downward swing. I stood responsible for the execution
of every order that came, and it cost me as high as $50,000 on one
day.
Senator COUZENS. Tell us what would have happened if you had
not assumed the responsibility for that order.
Mr. WRIGHT. I don't know.
Senator COUZENS. Well, let us assume a case where a specialist
did not assume that responsibility.
Mr. WRIGHT. Well, during the last of July it was suspended from
1 to 2 hours' time trying to get bids.
Senator COUZENS. That is, the specialist was trying to get bids?
Mr. WRIGHT. We suspended trading when we did not have bids.
The way that is: We call a governor over and tell him the situation.
In my particular case as I say I had 11,000 or 12,000 shares to sell
at the market, and he says: What do you want me to do about it?
I says: I will bid such a price for it. And if he says O.K. then,
all right. But in this case that took place, because one sale was
touching off another, one stock was touching off another stock.
Mr. PECORA. DO you think that is an evil ?
Mr. WRIGHT. Yes.
Mr. PECORA. Why?
Mr. WRIGHT. Because of these terriffic breaks in stocks.
Mr. PECORA. And because of that would you recommend the abolition of stop-loss orders by customers ?
Mr. WRIGHT. I am in no position to recommend anything. But
stop-loss orders are an evil in such a case, I mean in a stock like
that. That is because it differs from the case of General Motors or
United States Steel, because in the case of those stock there are
orders to take care of sales. But in the case of these stocks they
are an evil.
Senator ADAMS. HOW do you define a stop-loss order ?
Mr. WRIGHT. Well, we will pick out 1 day. The way it runs in
the case of a stock like this: We will say that a man wants to sell 100
shares at 47 or 48, and the stock may be selling at 50. You, as the
specialist, are held responsible, and the minute that stock sells at 48
that becomes a market order for execution, and you are held responsible for the next sale. That is true no matter what it is you are
holding. If you have no buyers you have to purchase that stock
yourself.
Mr. PECORA. At the stop-loss price?
Mr. WRIGHT. Then at the market.
Senator TOWNSEND. And if it goes below that price, what then?
Mr. WRIGHT. I have seen some purchases 3 or 4 points beyond.
And on the sell side I have seen them as low as 3 or 4 points below.
Mr. PECORA. I S there any obligation imposed upon the specialist
by the rules of the New York Stock Exchange to take orders whether
there are any public orders or not?
Mr. WRIGHT. NO, sir.
Mr. PECORA. SO that when a specialist does that he does it of Ms
own initiative or discretion?
Mr. WRIGHT. Yes,
sir.
STOCK EXCHANGE PRACTICES
6099
Mr. PECORA. Or his own moral sense of responsibility ?
Mr. WRIGHT. Yes, sir; in his own moral sense, judgment, or
discretion, whichever you want to call it.
Senator ADAMS. Was there a suspension of trading in this stock?
Mr. WRIGHT. Yes, sir; of 1 hour. I believe the stock had sold at
89%, and then I believe the next sale was at 79%. We suspended
trading for 1 hour, and during the suspension of trading for 1 hour
selling orders kept pouring in until they became a nightmare.
Mr. PECORA. And buying orders were scarce?
Mr. WRIGHT. There were none.
Mr. PECORA. And did you then buy in order to give support to the
stock?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. TO what extent?
Mr. WRIGHT. I think 11,000 shares of stock that
Mr. PECORA. DO you recall the range of prices at
were for sale.
which you bought
those 11,000 shares?
Mr. WRIGHT. I think I bought all of the stock at—the price range
that day was from 79 to—let me see. [Looking over some records.]
Mr. PECORA. I t was from 77, or at 77, down from 89%.
Mr. WRIGHT. That was it.
Senator COUZENS. When you did that were you confident in your
own mind that you would stand a loss ?
Mr. WRIGHT. N O ; I was praying.
Senator COTTZENS. Praying that you would not stand a loss?
Mr. WRIGHT. Yes, sir.
Senator COUZENS. Was that all that you had to rely on; prayer?
Mr. WRIGHT. Yes, sir; that was all.
Senator ADAMS. I S that rather helpful on the stock exchange?
Mr. WRIGHT. NO, sir. [Laughter.]
Mr. PECORA. Mr. Wright, have you answered my question?
Mr. WRIGHT. Yes. I have shown that the stop-loss orders were
Mr. PECORA (interposing). No. The question I asked you was,
At what range did you buy those 11,000 shares when the break in
the market came?
Mr. WRIGHT. From 85y2 down to as low as 77.
Mr. PECORA. Were you short of the market at that time?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Were you
ever short of the market during the movement of this stock between May and the 1st of August of last year?
Mr. WRIGHT. NO, sir. And I have my daily position here, which
will answer that question right away.
Mr. PEOORA. All right; but your statement is sufficient.
Mr. WRIGHT. What date do you want to know about? Here is
one date where I was short 600 shares, but I do not know what
happened that day.
Mr. PECORA. What day was that?
Mr. WRIGHT. The
19th.
Mr. PEOORA. The 19th of July?
Mr. WRIGSLT. Yes. And here is another day, the 27th, when I
was short 300 shares.
Senator TOWNSEND. HOW were you short 600 shares on the 19th
of July? I mean, when you had made such heavy purchases as
11,000 shares.
6100
STOCK EXCHANGE PRACTICES
Mr. WRIGHT. I sold it all out. On the 18th I bought 9,800 shares
and sold 10,900 shares for my own account. On the 17th I was long
1,700 shares, and I bought 8,200 shares and sold 8^800 shares, running
out at the end of the day 8,900 shares long. When we see these
things coming we keep as near even as possible.
Senator ADAMS. There must have been some purchasers available
in order for you to make those sales, which do not seem to be indicated on your books as I see them.
Mr. WRIGHT. They come in. They will always come in when a
stock has had a drastic break.
Mr. PECORA. Did you trade actively for your own account or for
your firm's account in American Commercial Alcohol during the
months of May, June, and July of last year?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
at the end of July did your trades show a net
profit or a loss for the 3 months' period from May to July?
Mr. WRIGHT. A profit.
Mr. PECORA. It showed a profit, do you say?
Mr. WRIGHT. Yes, sir. I t showed a profit of $138,000.
Mr. PECORA. SO that when the nightmare was over it was not so
bad after all?
Mr. WRIGHT. Yes, sir; it was very bad.
Mr. PECORA. Well, how much would you have to make in order to
avoid a nightmare ? [Laughter.]
The CHAIRMAN. Mr. Wright, you spoke about your losses a while
ago. I t seems that the ultimate result was fairly good for you,
wasn't it?
Mr. WRIGHT. I t was fairly good, but I had some very severe days.
Senator ADAMS. Well, if we might speak of a fellow who was
murdered, you were a pretty live corpse.
Mr. WRIGHT. Well, that is my business.
Mr. PECORA. And it is fair to say that you know your business.
The CHAIRMAN. Did I understand you to say that you think stoploss orders ought to be abolished?
Mr. WRIGHT. Well, I am, unfortunately, a member of the exchange, and I can make no public comment on that.
Mr. JPECORA. I S there any rule which prohibits a member of the
exchange from making any comments or recommendations with
regard to the market?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Well, then,
why do you say-that in answer to the
chairman's question?
Mr. WRIGHT. Well, I told you a few minutes ago what I thought
of stop-loss orders, that in this class of stock they are a detriment
to the market. I told you that a few moments ago.
The CHAIRMAN. HOW about the customer or trader or man dealing in stocks—isn't it a good thing for him to have a stop-loss order
in order to protect himself, so that he can sleep nights?
Mr. WRIGHT. They seem to feel that way about it.
Mr. PECORA. I am a little bit interested in the answer you made
a moment ago to Senator Fletcher's question, when he asked you
something about stop-loss orders. You said you were a member
of the exchange so that you could not make any comment.
STOCK EXCHANGE PRACTICES
6101
Mr. WRIGHT. I did not mean it that way. I meant that I would
rather not make public comment on it.
Senator COTJZENS. In other words, it hurts your good will, doesn't
it, if you run contrary to your customers' wishes?
Mr. WRIGHT. Well
Mr. PECORA (interposing). Or the wishes of the authorities of the
exchange, perhaps.
Mr. WRIGHT. NO. They have expressed no wish of any kind.
Any man can say anything he feels like, about what he may think
is wrong.
Mr. PECORA. NOW, to what extent did you, as the specialist handling American Commercial Alcohol stock, buy and sell that stock
for your own account and the account of your firm during the months
of May, June, and July 1933, which resulted in this profit for that
period amounting to $138,000?
Mr. WRIGHT. In May I bought 52,600 shares and sold 52,000 shares.
Senator TOWNSEND. Out of a total of what amount?
Mr. WRIGHT. I do not know the volume. I have only learned in
the last 2 days that the volume was 209,000 shares from the 23d to
the 31st.
Senator TOWNSEND. Have you the volume in the early part of
May?
Mr. WRIGHT. Mr. Pecora has that.
Mr. PECORA. I will give you the volume for the first week of May,
Senator Townsend: On May 1 it was 7,400 shares; on May 2 it was
2,800 shares; on May 3 it was 29,000 shares; on May 4 it was 8,500
shares; on May 5 it was 3,800 shares; and on May 6 it was 1,600
shares. That is the first week in May.
Senator ADAMS. What was the number of outstanding shares?
Mr. PECORA. Approximately 290,000 shares.
Mr. WRIGHT I would say, Senator, that the stock had been turned
over at least 2 for 1 for the entire capitalization that month.
Mr. PECORA. YOU gave us the trades you made for your own or
your firm's account during the month of May as 52,600 shares
bought and 52,600 shares sold. What were your figures for Juue?
Mr. WRIGHT. 74,900 bought; 75,000 sold.
Mr. PECORA. For the month of July to what extent did you trade
on your own or your firm's account in that stock?
Mr. WRIGHT. Bought 120,200; sold 120,300. That was pretty
close trading.
Mr. PECORA. YOU kept a pretty even position all during those
3 months?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Totaling the
figures which you have just given us, it
would appear that in the months of May, June, and July, 1933, you
bought for your own account 247,700 shares of American Commercial Alcohol stock and sold in that same period 247,300 shares. Do
you know what the total capital stock outstanding then was?
Mr. WRIGHT. About 200,000 shares.
Mr. PECORA. A little less than 200,000 shares?
Mr. WRIGHT. Yes.
Mr. PECORA. DO you
know what the total trading in volume in
that stock was from May 15 to July 22, last?
175541—34—PT 13
17
6102
STOCK EXCHANGE PEACTICES
Mr. WRIGHT. In the month of June it was 349,000; in the month
of July it was 638,000; in the month of May I would not—I lack
some figures that you have; but in the month of May, in the last 7
trading days, there were 209,000 shares of the stock traded in.
Mr. PECORA. Our figure here is that the total trading in that stock
on the exchange in the period between May 15 and July 22,1933, was
1,145,100 shares.
Mr. WRIGHT. That is about right.
Mr. PECORA. SO that you handled for your own account more than
one fifth of t t e total volume of trading?
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. What was the total amount of stock outstanding?
Mr. WRIGHT. TWO hundred and sixty-five thousand shares in June
and 200,000 shares previous to that.
The CHAIRMAN. That was the total stock outstanding?
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. Of the corporation?
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. What was the total issue?
Mr. WRIGHT. TWO hundred thousand shares
up to June ana
265,000 shares after June, when the capital was raised.
Mr. PECORA. During the time that you executed orders for the
account of the Bragg syndicate, which orders you received directly
from Bragg, what were they—oral or written orders ?
Mr. WRIGHT. Oral orders.
Mr. PECORA. Were any of them of the discretionary kind ?
Mr. WRIGHT Yes, sir.
Mr. PECORA. Were most of them of the discretionary
Mr. WRIGHT. Yes, sir.
Mr. PECORA. HOW would those orders be transmitted
kind?
to you in
such instances?
Mr. WRIGHT. By telephone.
Mr. PECORA. Did he call you up on the telephone?
Mr. WRIGHT. He would call me up or send over a written order,
one of the two.
Mr. PECORA. At that time would he ask you what the condition of
the book was on the stock?
Mr. WRIGHT. The condition of the book on the stock, Mr. Pecora,
was that anybody that bought stock would be insane, because the
book was full of selling orders, and any man that bought stock would
look like he was insane. Pick out any date in May—pick out
May
Mr. PECORA. Then the condition of the book was what he asked you
to tell him when he called you up on the phone to give you those
discretionary orders ?
Mr. WRIGHT. The orders in the book take precedence over Mr.
Bragg's orders.
Mr. PECORA. Would he ask you what the condition of the book
was when he called you up ?
Mr. WRIGHT. Yes, sir. He would get the same answer all the
time—"very heavy."
Mr. PECORA. Would you give him any more detailed answer than
that«
STOCK EXCHANGE PBACTICES
6103
Mr, WRIGHT. NO, sir. When I have any stock orders or any
orders I refuse to divulge my book to anybody.
Mr. PECORA. HOW would you know that an order on your books
was a stock-list order?
Mr, WRIGHT. I t is sent to me written out, a stock order.
Mr. PECORA. By the broker who turned the order over to you?
Mr, WRIGHT, x es, sir,
Mr. PECORA. When you
exercised your discretion in response to
Bragg's verbal orders, how would you exercise it? What interest
did you seek to serve ?
Mr. WRIGHT. Will you put that question to me again ?
Mr PECORA. The reporter will read it to you.
(The question referred to was read by the reporter as above
recorded.)
Mr. WRIGHT The interest I sought to serve was to do the best I
could in the execution of the order.
Mr. PECORA. Did you know at the time you executed these discretionary orders that Bragg had this option?
Mr. WRIGHT. I did not hear the details of this late lamented
option until I came hero.
Mr. PECORA. Did you know then that he had ai option, whether
you kftew the details of it or not?
Mr WRIGHT. I suspected he had an option.
Mr. PECORA. What caused you to suspect it in the absence of
specific knowledge?
Mr. WRIGHT. Because of his desire to sell stock.
Mr. PECORA. That indicated to you that he was conducting a pool
operation ?
Mr. WRIGHT. I thought he had bought a big block of stock or had
an option.
Mr. PECORA. And 'wanted to dispose of the stock at a profit ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Well, you
could not tell that merely from the fact
that he gave you selling orders, could you ?
Mr. WRIGHT. Mr. Pecora, I tell a great deal from instinct.
Mr. PECORA. That is an instinct which is acquired through years
of experience ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. In addition
to getting discretionary orders to sell, did
you also get during that period of time discretionary verbal orders
from Bragg to buy?
Mr. WRIGHT. Yes.
Mr. PECORA. And it
was a combination of both that gave you the
impression that he was running a pool in the stock?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. Could you tell the committee from your recollection,
or, if not from your recollection, from any records available now,
what was, the largest discretionary order either to buy or to sell
American Commercial Alcohol stock that Bragg gave you during
the operation of that pool?
Mr. WRIGHT. I am under oath, so I could not answer it correctly.
I would say that about the largest I remember was 5,000 shares.
6104
STOCK EXCHANGE PBACTICES
Mr. PECORA. In executing a discretionary order for that large
amount of shares, how would you exercise your discretion? You
would not buy or sell the entire 5,000 shares at one time, would you 2
Mr. WRIGHT. At that time I was exercising my discretion by
watching the gyrations of United States Industrial Alcohol and
National Distillers. If that stock got strong I would sell, because
it would get strong with others.
Mr. PECORA. SO you held it for a better price?
Mr. WRIGHT. Yes, sir; for which I received $2.50 per hundred
shares.
Mr. PECORA. And when you got an order from the buying side?
Mr. WRIGHT. It would work the same way. If those stocks got
weak I would have his stock to support the market. Exactly the
same way, only reversed.
Mr. PECORA. YOU would not execute the entire order afc one time,
would you?
Mr. WRIGHT. NO, sir.
Mr. PECORA. I presume
you frequently, during that period, got
orders to both buy and sell from Bragg on the same date?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. During the
year 1933, the whole calendar year, how
many options did you or your firm have on stock listed and traded
in on the New York Stock Exchange ?
Mr. WRIGHT. IS that answered in the questionnaire ?
Mr. PECORA. Yes Before I come to the detail of those options,
let me ask you if, when you told the committee a few minutes ago,
that the total profits that you or your firm netted in trading for
its own account during May, June, and July of last year in the
stock of American Commercial Alcohol were $138,000, whether that
was inclusive of the commissions?
Mr. WRIGHT. NO, sir.
Mr. PECORA. HOW much
would the commissions add to that sum
<of $138,000?
Mr. WRIGHT. I could not answer that without counting them up.
Mr. PECORA. Suppose you have one of your assistants estimate it
and give us an answer while I continue with the examination.
Mr. WRIGHT. DO you want the commissions on just the American
Commercial Alcohol?
Mr PECORA. Just the American Commercial Alcohol stock.
Mr. WRIGHT. For 3 months?
Mr. PECORA. For those 3 months.
When Bragg would give you a discretionary order to buy for his
account, during the operation of the pool last summer, you believed
from your instinct that he was buying in order to put the market up;
you exercised that discretion for the purpose of putting the market
up*
Mr. WRIGHT. Mr. Bragg does not work that way. When he gave
me buying orders he gave me orders so that there would only be support m that stock. He didn't buy it up.
Mr. PECORA. HOW would the higher levels be attained ?
Mr. WRIGHT. By the natural desire of people at that particulai
time to trade m whisky stocks. There was no so-called " manipulation " in this stock.
STOCK EXCHANGE PBACTICES
6105
Mr. PECORA. N O ; I meant, how are those higher levels attained
enerally in a pool operation undertaken by persons who either
ave accumulated stock or have an option on stock and
Mr. WRIGHT. In this particular stock the stock wasj carried up by
the speculation that was going on in the other whisky stocks.
Mr. PECORA. That still does not answer my question. I have not
asked you to tell us how it was done in this particular case, but how
is it done generally ?
Mr. WRIGHT. I am afraid, Mr. Pecora, that every incident is a
different one. I t would take a month to tell you.
Mr. PECORA. There are so many different ways, you mean?
g
Mr. WRIGHT. Yes.
The CHAIRMAN. In
executing orders you made your commission
whether it was a sale or a purchase ?
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. YOU
would get $2.50 when you sold and $2.50*
when you bought?
Mr. WRIGHT. Yes.
The CHAIRMAN. SO
that as far as your commission was concernedr
it made no difference to you whether the market was going one way
or the other, did it?
Mr. WRIGHT. Except for my position in the stock, whatever it
might be at that particular time.
Mr. PECORA. The position you take is one that you voluntarily take
for your own account?
Mr. WRIGHT. Yes.
Mr. PECORA. The orders you execute for customers you execute
automatically ?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
as the Senator has indicated in his question of
you, your commission for a buying or selling order does not affect
your own position?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Question No. 6 in the questionnaire sent to you, which
has been marked in evidence as " Exhibit No. 33 ", calls for the following information [reading]:
6 (a) State whether your firm held any option or had participation in any
option exceeding 10,000 shares of any single security during the years 1921>
to 1933, inclusive If answer is in the affirmative and firm held the original
option or acted for the optionee or optionees, furnish a photostatic copy of
each of such options
In making your answer to that question you submitted to us
photostatic copies of certain option agreements, which I will now
show to you, for the year 1933. I will arrange them in chronological order. I show you 13 photostatic reproductions of as many
different options. Will you look at them and tell us if you recognize them to be true and correct copies of options held by you
or your firm during the year 1933 on securities listed on the New
York Stock Exchange?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Here is
look at the other one?
another one. That makes 14. Will you
6106
STOCK EXCHANGE PRACTICES
Mr. WRIGHT. Yes. sir.
Mr. PECORA. I offer them
in evidence and ask that they be separately marked in chronological order.
(Photostatic copies of 14 optional agreements made during the
year 1933, identified by the witness, were received in evidence and
marked as " Committee Exhibits Nos. 34 to 47, inclusive, Feb.
20, 1934," and will be found printed in full at the end of today's
record.)
Mr. PECORA. Also in answer to that same question, 6(a), in the
questionnaire, did you submit to us as copies of options held by you
or your firm during the calendar year 1932 these documents which I
now show you and which are four m number ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Are those
documents true and correct photostatic reproductions of all the options held by you or your firm during the
year 1932?
Mr. WRIGHT1. AS far as we have been able to find by going over
the records and looking through all the files.
Mr. PECORA I offer these in evidence and ask that each document
be marked separately.
The CHAIRMAN. Let them be admitted.
(Photostatic copies of four optional agreements made during the
calendar year 1932, identified by the witness, were received in evidence and marked as " Committee's Exhibits Nos. 48 to 51, inclusive,
Feb. 20,1934," and will be found printed in full at the end of today's
record.)
Mr. PECORA I now show you, Mr. Wright, eight photostatic reproductions of as many different options. Will you look at them
and tell us if they constitute true and correct copies of all the option
agreements held by you or your firm during the calendar year 1931 ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. I offer them
The CHAIRMAN. Let them
m evidence as separate exhibits.
be admitted.
(Photostatic copies of eight option agreements made during the
calendar year 1931, identified by the witness, were received in evidence as committee exhibits nos. 52 to 59, inclusive, Feb. 20, 1934,
and will be found printed in full at the end of today's record)
Mr. PECORA. Did your firm hold any options, or did any member
of the firm hold any options, on any listed security during the
calendar year 1930 ?
Mr. WRIGHT. I don't think I worked in 1930.
Mr. PECORA. Your firm was in existence and worked that year,
Mr. WRIGHT Yes; but the firm had nothing to do with my particular work. When I am not there it doesn't take place. When I
go back to New York I will look it up, and if there are any I will
send them to you.
Mr. PECORA. The questionnaire called for copies of options for the
calender years 1929 to 1933, both inclusive.
Mr. WRIGHT. I don't think I had any in 1929.
Mr. PECORA. Can you make sure of that?
Mr. WRIGHT. Yes; by going through my records; yes, sir. We
don't, as a general rule, keep those things for that period of time.
If we have them, they are in the storage warehouse.
STOCK EXCHANGE PEACTICES
6107
Mr. PECORA. The year 1929 was an especially active years m the
stock market, was it not?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Would that
circumstance tend to refresh your recollection as to whether or not you or your firm or any partner in your
firm had any options that year ?
Mr. WRIGHT. In that particular year I was too busy taking care
of my own affairs to be bothered about options.
Mr. PECORA. Does that indicate that you had no options during
that year at all ?
Mr. WRIGHT. TO the best of my recollection I did not have any.
Mr. PECORA. HOW about the year 1930?
Mr. WRIGHT. There may have been one or two. That I will have
to look up when I get back to my records, because I didn't work that
whole year.
Mr. PECORA. DO you recall during the year 1932 having a joint
account with Ames Bros., a firm of brokers, in American Commercial Alcohol stock?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
is Stephen M. Ames a member of the firm of
Ames Bros.?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Did not that
joint account operate under an option
which ran to Stephen M. Ames from Russell R. Brown, covering
10,000 shares of American Commercial Alcohol stock?
Mr. WRIGHT. I don't remember the amount, Mr. Pecora, but I
believe there was an option from Russell R. Brown.
Mr. PECORA. And that was an option under which your joint
account with Ames Bros, was conducted?
Mr. WRIGHT. I had gone away at that time and I don't remember
what Ames Bros.—I never saw the original option. I don't remember what it was and I have no record of it.
Mr. PECORA. If you had a joint account with Ames Bros which
operated under that option, would not your records show the fact?
Mr. WRIGHT. Here it is, right here [indicating].
Mr. PECORA. Then you have one?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. In making
your return to our questionnaire it does
not appear that any mention was made of that joint account.
Mr. WRIGHT. It was not done intentionally, Mr. Pecora
Mr. PECORA. N O ; I appreciate that.
Mr. WRIGHT. If it was done, it was because it slipped by us, because I was in Europe when this answer was filed. There was no
stock called, Mr. Pecora, according to the record here—there was no
stock called on the option. It was simply a trading account and
was unsuccessful.
Mr. PECORA. It was a trading account conducted under this option
for 10,000 shares, was it not?
Mr. WRIGHT. If that is the amount; yes, sir. We had no copy of
the option m our office at all.
Mr. PECORA. In addition to the options, copies of which have been
put m evidence, which your firm had during the years 1931, 1932,
and 1933, did you during those same years have any verbal options as
distinguished from written options on any listed securities ?
6108
STOCK EXCHANGE PRACTICES
Mr. WRIGHT. Not that I remember, Mr. Pecora
Mr. PECORA. This memorandum [indicating] was given to us by
your office under the caption of " Verbal Options ", covering American Water Works certificates, General American Tank, GrahamPaige Motor Corporation, National Bellas Hess, Pacific Lighting
Corporation, Pullman, Inc., National Distillers, and Zonite Products.
Does that refresh your recollection?
Mr. WRIGHT. Yes, sir; I remember we had, now.
Mr. PECORA. That you had oral options on the securities which
I have just named?
Mr. WRIGHT. Yes, sir; I remember them all, now.
Mr. PECORA. Have you the details of those oral options?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Have you
any records from which you could get the
details of those oral options?
Mr. WRIGHT. Yes,
Mr. PECORA. Are
sir.
they with you? Have you got those records
with you?
Mr. WRIGHT. We have no record of the original options. We
could only tell you what we did. I will draw up a transcript of tho
accounts, of those particular accounts, and send it to you.
(After consulting with an associate) I am told that you have it,
that it was taken off in New York by one of your men.
Mr. PECORA. When you got this oral option in National Distillers
were you the specialist in that stock?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Are you now the specialist in that stock?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Were you ever the specialist in that stock?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Will you look at this document which I
now show
you, which purports to be a copy of a letter addressed to the firm
of Wright & Sexton by Kedmond & Co., under date of May 6, 1932,
and tell us if that relates to what has been referred to as the oral
option in National Distillers Co. stock?
Mr. WRIGHT. I would have to look it up, Mr. Pecora, before I
could answer that.
Mr. PECORA. Can you look it up during the recess, if you have
your records of it here?
Mr. WRIGHT (after consulting with associates). I can call up New
York by long distance 'phone and try to find out for you.
Mr. PECORA. Cannot any of your office attaches identify that document as a copy of a letter addressed to you by Kedmond & Co.,
or addressed to your firm, giving you an option on stock of the
National Distillers Co., in writing?
Mr. WRIGHT. I think this account was carried with Eedmond. I
would have to call up Eedmond and verify it, and I could not
answer it until I did that.
Mr. PECORA. All right. Now, Mr. Wright, you have said before
that as a specialist you bought and sold securities for whieh you
held the book. What were the advantages that you as the specialist
had in making such trades for your own account which an ordinary
broker or operator would not have?
STOCK EXCHANGE PEACTICES
6109
Mr. WRIGHT. None.
Mr. PECORA. None?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Would you
not have the advantage of the knowledge
of the buying and selling orders on the books?
Mr. WRIGHT. I would have that knowledge; yes, sir.
Mr. PEOORA. I S not that an advantage?
Mr. WRIGHT. NO, sir.
Mr. PECORA. I S it a disadvantage?
Mr. WRIGHT. The general trend runs against the book. In other
words, if the stock was going up you would find a preponderance
of selling orders, and if it was going down you would find a preponderance of buying orders. I t works automatically, the opposite
of what it should. In other words, I might have, for instance, in
American Commercial Alcohol—I can show you where I had 5 or
10 thousand shares to sell. I was long on the stock; and if I had any
knowledge I would have been short and not long.
Mr. PECORA. A S a specialist, you get buying and selling orders for
the stock, do you not?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And with
that information are you not in a better
position to determine what the trend of the market is going to be?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Why does
not that information give you that
advantage?
Mr. WRIGHT. I just told you.
Mr. PECORA. Because the trend of the market is the other way?
Mr. WRIGHT. Because the trend of the market is opposite to what
the book is.
Mr. PECORA. Does not that give you knowledge of the trend of
the market if it runs opposite from the
trading indicated by the buying and selling orders on your book?
Mr. WRIGHT. Yes; you could say it did.
Mr. PECORA. IS not that an advantage?
Mr. WRIGHT. Sometimes; sometimes not.
Mr. PECORA. When is it an advantage and when is it a disadvantage &
Mr. WRIGHT. That I cannot answer. I would have to have a
book in actual operation to be able to tell you.
Mr. PECORA. From your general knowledge and experience can
you not tell us without having a concrete case before you?
Mr. WRIGHT. NO, sir; I could not describe it.
Mr. PECORA. It is an advantage to one trading in the market to
know what the trend of the market is likely to be, is it not?
Mr. WRIGHT. I t certainly is.
Mr. PECORA. That is always an advantage, is it not ?
Mr. WRIGHT. Yes.
Mr. PECORA. YOU always
have that advantage from the knowledge
you have as a specialist, do you not?
Mr. WRIGHT. If I always had that advantage, I would not ever
lose money; and I very frequently lose money.
Mr. PECORA. I t might not be an advantage which conclusively
would enable you to make money every time on a trade, but it is
always an advantage, is it not, to have that knowledge ?
6110
STOCK EXCHANGE PBACTICES
Mr. WEIGHT. Yes, sir; if you have it.
Mr. PECORA. And the specialist has got it?
Mr. WRIGHT. At times.
Mr. PECORA. Has he not always got it ?
Mr. WRIGHT. NO, sir. Lots of times your books will be bare and
you don't have bids and offers on the stock. What advantage is the
book then?
Mr. PECORA. Then he probably would not trade; is not that so?
Mr. WRIGHT. Yes.
Mr. PECORA. Are there
times when, due to market conditions, a
specialist makes the market for the stock ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Under what
circumstances is the specialist called
upon to do that?
Mr. WRIGHT. When there are no bids or no offers of stock.
Mr. PECORA. HOW does the specialist make the market in that
situation?
Mr. WRIGHT. He does it under the supervision of a governor of
the exchange.
Mr. PECORA. HOW does he do it? What are the mechanics of it?
Mr. WRIGHT. A buyer comes in and there might be no sellers, and
the specialist will say, " I have no sellers. I will sell you that block
of stock at this price. You go back to your client and try to get a
limit on it and I will not permit any trading until you get the limit.
I will sell you this " or " buy this stock from you at a certain price."
If that is agreeable to the customer, the order is executed.
Mr. PECORA. Are there governors of the New York Stock Exchange
who are also specialists ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Are there
times when the specialist is called upon to
open the market on his stock?
Mr. WRIGHT. Every morning.
Mr. PECORA. I mean, to make the price himself, where there are
no orders?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
how does the specialist do it in those circum-
stances ?
Mr. WRIGHT. By the method I told you—send him back to the
people to get limits; if there is a preponderance of buying orders,
to try to get limits on it, and explain the situation, that there is no
stock offered and on the selling side there are no bids.
Mr. PECORA. In those circumstances does the specialist get in touch
with men or interests that are known to be sponsors for the stock?
Mr. WRIGHT. If he can; yes.
Mr. PECORA. And he very frequently can?
Mr. WRIGHT. And he very frequently cannot,
principally when
there is trouble around. Insiders are notoriously absent when there
is trouble around. They are always absent.
Mr. PECORA. They are always traveling?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. They run away from the stock which they are sponsoring, in times of trouble?
Mr. WRIGHT. Yes. I have never run away from one in my life.
STOCK EXCHANGE PEACTICES
6111
Mr. PECORA. I am not referring to you. I mean sponsors.
Mr. WRIGHT.
Mr. PECORA.
Yes.
And you have been a specialist and have had that
difficulty?
Mr. WRIGHT. Many times.
Mr. PECORA. In establishing contact with sponsors at a time of
stress when you want their support ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. DO you know the brokerage firm of Eric & Drevers?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Have you ever been a participant with them in any
pool or joint account m listed securities ?
Mr. WRIGHT. I am told that one of the men from your office was
up there and got that record.
Mr. PECORA. Got it from Eric & Drevers ?
Mr. WRIGHT. One of your men. I don't remember what it was.
If you can tell me the name of the stock, it might refresh my memory.
Mr. PECORA. I will give you the name of a number of stocks that
are reported to us by Eric & Drevers. I understand these options
and joint accounts were not reported by your firm.
Mr WRIGHT. I do not ever remember having a joint account. I
think that statement is wrong.
Mr. PECORA. The statement they gave is that they had a joint account with you in the following securities: General American Tank,
Pullman, Inc., McKeesport Tin Plate
Mr. WRIGHT. Oh. I beg your pardon. We did not have a joint
account. The accounts were carried in their office.
Mr. PECORA. Did you have a participation in the accounts with
them?
Mr. WRIGHT. Yes, sir. Here it is, right here [handing a paper to
Mr. Pecora]. Eric <& Drevers were merely the brokers.
Mr PECORA. On the return which you made of the verbal options,
so called, hj which you mean oral options, you indicated that you
had oral options in 8 different securities, did you not ?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. Which are as follows:
American Water Works certificates, General Tank, Giaham-Paige Motors
Corporation, Pacific Lighting Corporation, Pullman Co, National Distilleis,
Zonite Products
Do you recall having any oral options in any other security ?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Or any participation ?
Mr. WRIGHT. I would like to check it up and be sure.
Mr. PECORA. Then let me read to you this list of issues
in which,
according to the report made to us by Eric & Drevers, you had a joint
account with them [reading] :
General American Tank, Pullman, Inc, McKeesport Tin Plate, National
Bellas Hess, Pioneei Gold, Zonite Products, American Water Woiks certificates,
Beldmg Hennnway, Curtiss-Wright, Giandby Consolidated Mining, SmeKing &
Power
Mr. WRIGHT. They are all listed there, Mr. Pecora.
Mr. PECORA (continuing reading):
Standard Silver-Lead, Giaham-Paige, Gotham Hosiery, International Salt,
Molybdenum Corporation, Truscon Steel, United Biscuit, Pacific Lighting
6112
STOCK EXCHANGE PRACTICES
Mr. WRIGHT. YOU are getting into some curb stocks.
Mr. PECORA. Some are curb stocks and some are on the big board ?
Mr. WRIGHT. Yes. I never had a joint account in them that I
remember. Eric & Drevers carried those accounts for me. I had
better check this up.
Mr. PECORA. Will you take this document and try to verify the
information shown?
Mr. WRIGHT. General Tank is answered there. Pullman is answered there. National Bellas Hess is a curb stock McKeesport Tin
Plate
Mr. PECORA. That is not answered here.
Mr. WRIGHT. Pioneer Gold is a curb security. Beldmg Heminway—that is answered there. Curtiss-Wright, Grranby Consolidated
Mining, Smelting & Power. There has not been any option on
Standard Silver-Lead. That was a direct purchase. Graham-Page
is answered there. Gotham Hosiery, International Salt, Molybdenum Corporation, Truscon Steel. Molybdenum is a curb stock.
So they are all answered there except McKeesport Tin Plate. That
is the only thing I will have to clear up.
Mr. PECORA. HOW does it happen, Mr. Wright, that during the
calendar year 1933, according to the returns made by your firm to
»our questionnaire, you had more options on securities listed on the
New York Stock Exchange than you had m any other year?
Mr. WRIGHT. We had a rush of gold during the months of May,
June, and July, and people were anxious to get rid of stocks that
had been frozen over the period from 1929 to 1933.
Mr PECORA Does that mean that you thought conditions were
more propitious for market operations in those stocks9
Mr
WRIGHT. Yes,
sir.
Mr. PECORA During the year 1933.
Mr WRIGHT. Yes, sir.
Mr. PECORA. The first one
of the options which you had m the year
1933, in chronological order, was the one that has been marked in
evidence here as exhibit no 34, and was an option granted to you
by the firm of Hornblower & Weeks covering 25,000 shares of Timken Detroit Axle common stock, dated April 25, 1933, the option
period expiring on May 24, 1933. Did you exercise that option?
Mr. WRIGHT. Yes, sir.
Mr. PECORA IS that one
of the securities in which the book was in
your name 2
Mr. WRIGHT NO, sir; it was not at that date. I can put this letter
in evidence to prove it [producing paper]. The book at that time
was in the hands of Peter J. Maloney & Co. Previous to getting that
option, I think he carried the book until about July.
Mr. PECORA. When was the book registered in your name m that
issue ?
Mr. WRIGHT. I do not know.
Mr. PECORA. Was it during the year 1933 ?
Mr. WBIGHT. I had not been working in the early part of 1933, Mr.
Pecora. I was South.
Mr PECORA. Was it at any time during the year 1933 registered in
your name?
STOCK EXCHANGE PEACTICES
6113
Mr WRIGHT. That I would have to find out from the exchange, but
that letter was sent in at the time, at the time I had the option, and
it said there would be no question that the book was registered in my
name through the stock exchange.
Mr. PECORA. There is no signature to this letter. Who was the
author of this letter that you have given me ?
Mr. WRIGHT, Myself,
Mr. PECORA. The initials in the corner are " C. W."
Mr. WRIGHT. Yes,
Mr. PECORA. The letter
produced by the witness is a carbon copy
of a letter reading as follows [reading] :
APKIL 25,
1933
COMMITTEE ON ODD LOTS AND SPECIALISTS,
New York Stock Exchange,
11 Wall Street, New -Yotk, N Y
GENTLEMEN Will you kmdly register Arthur J Vogel as the specialist mi
TDX instead of the undersigned,
Yours very truly
And it was signed by you ?
Mr. WEIGHT. Yes, sir
Mr. PECORA. TDX is
the ticker symbol of Timken Detroit Axle
Co., is it not ?
Mr. WEIGHT. Yes.
Mr. PECORA. From
this letter it would appear that you had been
registered on the date of the writing of this letter as the specialist
in that stock, would it not?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Does that
refresh your recollection now, that you1
were the registered specialist for that stock on April 25, 1933, and
prior thereto?
Mr WEIGHT. That letter was sent in as a precaution, so that if I
was, I wanted to lose the book, because I had not traded in that
stock over a period of a year, and the book went to Mr. Peter J.
Maloney. He had the book previous to that. He was one of the
governors of the Stock Exchange, and he kept the book, I believe,
through the months of April, May, June, and, I think, up to July.
Mr. PECORA. Of 1933?
Mr. WRIGHT. Yes, sir. We could not handle it, could not touch it.
Mr. PECORA. The date when you wrote this letter to the committee
on odd lots and specialists of the New York Stock Exchange coincides with the date of the option given to you on 25,000 shares of
Timken Detroit Axle common stock by Hornblower & Weeks. Do*
you notice that?
Mr. WRIGHT. Yes.
Mr. PECORA. Was it
because you got this option that you wrote
this letter to the specialist committee of the New York Stock
Exchange ?
Mr. WRIGHT. NO, sir; as I explained, Mr. Pecora, I had not
traded in the stock. I had not been around for about a year previous to that.
Mr. PECORA. YOU obtained four options, all told, during the year
1933, from Hornblower & Weeks on the shares of common stock of
Timken Detroit Axle Co., did you not?
6114
STOCK EXCHANGE PRACTICES
Mr. WRIGHT. If you will let me look at that, I can verify that.
[After examining papers.] Yes, sir.
Mr. PECORA. Copies of all four of those options have been marked
in evidence here as exhibit no. 34, because they are bound together.
The second option on Timken Detroit Axle common stock is dated
May 16, 1933, and covers another 25,000 shares, also from Hornblower & Weeks. The third option is dated June 2,1933, and covers
30,000 shares of that stock, also granted by Hornblower & Weeks.
The fourth option is dated June 6, 1933, and covers 16,000 shares of
Timken Detroit Axle Co. stock, also granted by Hornblower &
Weeks. Hornblower & Weeks, in each of those option agreements
or letters, say that they give you the option in behalf of a client.
Do you know who the client was?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Did you
ask for these options from Hornblower &
Weeks, or did they offer them to you on their initiative ?
Mr. WRIGHT. I t is my recollection, Mr. Pecora, that some third
party came to me and asked me would I be interested m it, and 1
said "Yes."
Mr. PECORA. Did you have any participant in these options %
Mr. WRIGHT. NO, sir.
Mr. PECORA. YOU acquired
these options with a view of conducting
market operations that would enable you to distribute the thousands
of shares covered by these four options at prices higher than the
option prices to you.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Did you succeed in effecting that
Mr. WRIGHT. Yes, sir.
Mr. PECORA. I notice that the lowest option
operation ?
price for that stock
in any of these four options is $2.50 per share, granted in the option
of April 25, 1933, and the highest one is $7 per share, referred to
in the options dated June 2, 1933, and June 6, 1933. Would that
indicate, Mr. Wright, that between April 25, 1933, and June 6, 1933,
the exchange quotations on that stock went from around $2.50 per
shares to $7 or more a share ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. The total
number of shares that these options called
for is 101,000, and, according to the data given by your firm to us,
you took down 87,000 shares under these options. Does that conform
to your recollection ?
Mr. WRIGHT. If that is the record, yes, sir.
Mr. PECORA. And you would say that this was a successful distribution?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. During the
period of the trading that you engaged
in under these options you both bought and sold this stock, did
you not ?
Mr. WRIGHT. Yes, sir; in large amounts.
Mr. PECORA. And by that process were able to distribute at
increasingly higher levels.
Mr. WRIGHT. And it is still selling at those higher levels.
Mr. PECORA. Exhibit no. 35 received in evidence consists of a
copy of the option granted to your firm by Melvin E. Sawin, and
STOCK EXCHANGE PBACTICES
6115
covers 40,000 shares of the common stock of United Biscuit Co., the
prices ranging from 20 to 25. Was this option granted to you on
the initiative of Mr. Sawm or did you initiate the negotiations under
which you got this option ?
Mr. WRIGHT. I initiated them.
Mr. PECORA. This also was an option you obtained for the purpose of making a distribution of the stock covered by the option at
higher levels?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. That was a successful operation, was it
Mr. WRIGHT. Fifty percent successful.
Mr. PECORA. What is that?
Mr. WRIGHT. Fifty percent successful.
Mr. PECORA. But you made a net profit on it.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. The next option, in point of time, that
not?
you obtained during the year 1933 is the one dated May 18, 1933, and
given to you by H. W. Blumenthal ?
Mr. WRIGHT. Yes.
Mr. PECORA. And
covers 30,000 shares of stock of Gotham Silk
Hosiery Co., Inc., at prices ranging from $12 to $14 per share. Did
you ask for this option or was it given to you upon the initiative
of the optioner ?
Mr. WRIGHT. I t was brought to me by a third party.
Mr. PECORA. Was this option acquired by you also for the same
urpose of enabling you to make a distribution of the stock covered
>y the option at higher levels than the option prices ?
i.
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
the operations you conducted under this option
also resulted in a profit to you^
Mr. WRIGHT. Yes, sir.
Mr. PECORA. In the trading
that you did under this option, you
both bought and sold from time to time ?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. The next option for the year 1933 that you obtained,
in point of time, was dated May 22, 1933, marked " Committee's Exhibit No. 37 ", and covers 25,000 shares of Granby Consolidated Mining, Smelting & Power Co., Ltd. The option prices range from
$10.50 to $15. Did you ask for this option, or was it given to you
on the initiative of the optioner, which appears to be the firm of
Shuman & Co., members of the New York Stock Exchange?
Mr. WRIGHT. It was brought to me by a third party, Mr. Pecora.
Mr. PECORA. YOU took this option with a view to undertaking
market operations that would enable you to distribute the stock
covered by the option at higher prices than the option prices?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. I believe that resulted in a small profit to
Mr. WRIGHT. Yes, sir.
Mr. PECORA. I notice in this option agreement, exhibit
you also.
no. 37, covering this Granby Consolidated stock, the following paragraph,
which I will read therefrom [reading] :
It is to be further understood that George Douglass, at Abbott, Hoppm & Co,
and associates, for their cooperation in furthering the distribution of this stock
by creating the necessary purchasing power are to receive from you 17^
6116
STOCK EXCHANGE PRACTICES
percent of the net profits, and that Shuman & Co are in no way obligated to
Mr. Douglass.
What was the reason for the inclusion of that paragraph in this
option agreement?
Mr. WRIGHT. The origination of the option.
Mr. PECORA. That means that George Douglass brought the transaction to you?
Mr. WRIGHT. I never met Mr. Douglass, but it was brought to me
through Mr. Douglass.
Mr. PECORA. Through Mr. Douglass. The statement in the option
agreement is that George Douglass, of Abbott, Hoppm & Co., and
associates were to receive 17% percent of the net profits from your
trading in this stock for their cooperation in furthering the distribution of the stock by creating the necessary purchasing power. So,
apparently, according to the terms of this option agreement, George
Douglass and his associates were to do something to assist you in
distributing the stock at higher levels. Isn't tthat quite apparent
from a reading of this option agreement?
Mr. WRIGHT. Quite apparent, yes.
Mr. PECORA. What were they to do?
Mr. WRIGHT. I do not know. I never met the man. I never
heard of him doing anything.
Mr. PECORA. What is meant by the expression in this option agreement " creating the necessary purchasing power " as an aid in the
distribution of the stock?
Mr. WRIGHT. Creating buying power in the stock.
Mr. PECORA. HOW was that done, usually?
Mr. WRIGHT. I do not know.
Mr. PECORA. What is that?
Mr. WRIGHT. I do not know how he did it, or if he ever did it.
Mr. PECORA. HOW was it generally done?
Mr. WRIGHT. Well, by telling his clients, and so forth, that the
company is a good company, and that there would be a move in the
stock, and he thought the stock ought to be bought. That would
be my natural assumption.
Mr. PECORA. In other words, by recommending the stock?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. SO that the public would buy?
Mr. WRIGHT. Yes.
The CHAIRMAN. Did he advertise the stock in the newspapers?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Would they make the recommendations by word of
mouth as well as by market letters ?
Mr. WRIGHT. I do not know how they do it, Mr. Pecora. I am
not up on that end of the business.
Mr. PECORA. I S it fair to refer to it as a means or species of
touting?
Mr. WRIGHT. I would say it would come under that head, sure.
Mx. PECORA. The next option agreement for the year 1933, m point
of time, has been marked in evidence as " Committee's Exhibit No.
38 ", and is dated June 1, 1933. I t was granted to your firm by
Eedmond & Co. It covers 80,000 shares of the stock of the LibbyOwens-Ford Glass Co., at prices ranging from $27.50 per share to
STOCK EXCHANGE PRACTICES
6117
$30.50 per share. Is the firm of Redmond & Co. a stock-brokerage
firm?
Mr. WEIGHT. Yes, sir.
Mr. PECORA. DO you know
whether any partner holds a seat on the
New York Stock Exchange?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. I S Mr. Mason
Day a partner of the firm of Redmond
&Co.?
Mr. WRIGHT. Yes,
Mr. PECORA. Did
sir.
you seek this option, or did you take it when it
was brought to you on the initiative of Redmond & Co. or another
person?
Mr. WRIGHT. I was one of a group in it, Mr. Pecora. I believe
I had five sixty-fifths, to be exact, of the whole thing.
Mr. PECORA. That is right. Tne option agreement shows that you
were merely a participant.
Mr. WRIGHT. That is right.
Mr. PECORA. And that the extent of your participation was 5,000
shares.
Mr. WRIGHT. Yes, sir.
Mr PECORA. Out of a total of 65,000.
The CHAIRMAN. Who was the specialist in that stock?
Mr. WRIGHT. A boy by the name of Limburn.
Mr. PECORA. Who organized this syndicate account?
Mr. WRIGHT. I would imagine that Mr. Mason Day organized
it,
because he is the one that asked me to participate in it.
Mr. PECORA. DO you know who the other participants in this
account were ?
Mr. WRIGHT. I never inquired; no, sir.
Mr. PECORA. Did you execute any of the orders for the syndicate
that operated under this option?
Mr. WRIGHT. Plenty.
Mr. PECORA. This Mason Day was formerly connected with an oil
company, with Mr. Harry F. Sinclair, was he not '*
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Who was
the manager of this syndicate account in
Libby-Owens-Ford Glass Co.?
Mr. WRIGHT. I do not know, Mr. Pecora.
Mr. PECORA. Did that syndicate account make a profit?
Mr. WRIGHT. Yes, sir; and the stock is also selling today $15
higher than when I started it.
Mr. PECORA. The next option in the year 1933, in point of time,
that you or your firm had, is marked in evidence as " Committee's
exhibit no. 39 ", and is dated June 7, 1933, and covers 28,824 shares
of the common stock of the Consolidated Cigar Corporation. The
option prices to you range from $16 to $19 per share. Did you seek
this option, or was it offered to you on someone else's initiative *
Mr. WRIGHT. Brought to me on someone else's initiative.
Mr. PECORA. Did you have any associates in the account under this
option?
Mr. WRIGHT. I did, but I took it all myself when I realized what
a foolish deal I had made.
Mr. PECORA. YOU did not lose any money on this, did you ?
175541—34—PT 13
18
6118
STOCK EXCHANGE PEACTICES
Mr. WRIGHT. Well, I did not make any.
Mr. PECORA. YOU about broke even?
Mr. WRIGHT. About broke even?
Mr. PECORA. But with a very slight profit of $107.90, according
to your records.
Mr. WRIGHT. It was a pretty small profit after buying 20,000
shares of the stock 3 points above what it was selling for in the
market.
Mr. PECORA. YOU bought it 3 points above the market price at the
time you took this option?
Mr. WRIGHT. Yes, sir. I bought it at $15, and it was selling
at $12.
Mr. PECORA. N O ; you bought it at $16 to $19.
Mr. WRIGHT. I bought 20,000 shares at $15, and the option was
additional, besides the 20,000 shares I bought at $15. I made an
investment m that of $300,000 before I started.
Mr. PECORA. This was one of those instances where the profits did
not exceed your expectations, or did not even come up to them ?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. Through no fault of yours, though.
Mr. WRIGHT. NO ; I tried hard.
Mr. PECORA. The next option obtained by you, in point of time,
during the year 1933, has been marked in evidence as " Committee
Exhibit No. 40 ", and is dated June 1, 1933. I t was given by Louis
H. Ingraham, but I notice that the option itself is addressed to
Arlington W. Porter. Did he assign this option to you ?
Mr. WRIGHT. Yes,
sir.
Mr. PIBCORA. You assumed all the rights and all the liabilities thereunder ?
Mr. WRIGHT. Whatever his participation was, he assumed that
end of it. I think it was a third.
Mr. PECORA. I S LOUIS H. Ingraham a broker?
Mr. WRIGHT. I do not know him, Mr. Pecora. I do not think he
is a broker.
Mr. PECORA. This option covers 17,000 shares of common stock of
the American Seating Co. at the following option prices: 4,000 shares
at $3; 7,000 shares at $4; 6,000 shares at $5. You took this option,
or acquired an interest m it with Mr. Porter, for the same purposes
as you took the other options that you have already been examined
about ?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
Mr. WRIGHT. Yes,
sir.
in this particular instance your market operations under this option resulted in profits ?
Mr. PECORA. And in the course of those market operations you
both bought and sold the stock?
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. The committee
will now take a recess until 2:15.
(Whereupon, at 1:15 p.m., Tuesday, Feb. 20, 1934, a recess was
taken until 2:15 p.m. of the same day.)
STOCK EXCHANGE PRACTICES
6119
AFTERNOON SESSION
Upon the expiration of the noon recess the committee resumed the
hearing at 2:40 p.m.
The CHAIRMAN. The committee will come to order. Mr. Wright,
you may resume the stand.
TESTIMONY OF CHAELES C. WRIGHT—Resumed
Mr. PECORA. Mr. Wright, the next option acquired by you and
your 'firm in 1933 in point of time is marked " Exhibit No. 4 1 " in
evidence and is dated June 19, 1933 and is addressed to your firm
by E. G. Allyn, president of the Second National Bank of New
Haven, Conn., m which he grants your firm an option on 40,000
shares of Pennsylvania Coal & Coke Corporation at $5 per share.
Did you take the initiative in obtaining this option, or was it ottered
to you on somebody else's initiative?
Mr. WRIGHT. Offered on somebody else's initiative.
Mr. PECORA. And this option also was taken by you with a view
of making a distribution at a profit of the stock covered by the
option?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Through the medium of
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And in the trading that
market operations?
you did under this option
did you both buy and sell as the occasion required ?
Mr. WRIGHT. Yes,
Mr PECORA. YOU
sir.
did not draw down all of the shares covered
by this option, did you?
Mr. WRIGHT. NO, sir.
Mr. PECORA. YOU draw down only 16,000 of them?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. IS that because the trading operation
you conducted
under it so far as you had gone showed a loss?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. According
to the data you have given us your loss
on this was $922.83.
Mr. WRIGHT. I have seven or eight or nine thousand shares of the
stock still.
The CHAIRMAN. In any of these stock transactions, Mr. Wright,
did you trouble to look after the operations of the company issuing
the stock, whether it was a successful enterprise or not, what capital
they had, what assets, what liabilities?
Mr. WRIGHT. AS a general rule, we did, Senator.
The CHAIRMAN. Did you have an estimate of the actual value of
the stock at all?
Mr. WRIGHT. In some instances.
Mr. PECORA. NOW, your next option in 1933 was marked in evidence as " Committee's Exhibit No. 42 " and covers certain shares
of Douglas Aircraft Co., Inc. The option agreement is dated June
20, 1933, is addressed to Mr. Sam Pass, care of Messrs. Mr. C. E.
Welles & Co., 39 Broadway, New York City, and is signed by E. A.
6120
STOCK EXCHANGE PEAOTICES
Pierce & Go. and by Bancamerica Blair Corporation.
recall that?
Do you
Mr. WRIGHT. Yes, sir.
Mr. PECORA. I S this a participation that was given to you in that
account ?
Mr. WRIGHT. It was assigned to me by Mr. Pass.
Mr. PECORA. Who is Mr. Pass?
Mr. WRIGHT. I don't know him very well. I know who he is. In
what way do you want me to describe him?
Mr. PECORA. Well, what business is he m, for instance?
Mr. WRIGHT. He is in the promotion business.
Mr. PECORA. I S he a member of any stock broker's office?
Mr. WRIGHT. NO, sir.
Mr. PECORA. I notice that this letter is addressed to him care of
Messrs. C. E. Welles & Co., 35 Broadway. C. E. Welles & Co., ib a
stock brokerage firm, is it not?
Mr. WRIGHT. I believe he was a customer of that firm.
Mr. PECORA. Did Mr. Pass assign to you his entire option?
Mr. WRIGHT (after conferring with associate). I called 13,000
shares at $16 a share. From then on he assigned it to me.
Mr. PECORA. Who called the 13,000 shares under the option?
Mr. WRIGHT. I did.
Mr. PECORA. I want to read this option letter to you and then I
want to ask you about certain of the paragraphs in it. The option
letter is written on the letterhead of the Bancamerica Blair Corporation, 44 Wall Street, dated New York, June 20,1933 [reading] :
DOUGLAS AIRCBAFT CO , INC , CAPITAL STOCK
Mr SAM PASS,
Care of Messrs. C. E "Welles & Co,
$9 Broadway, New York City
DEAR SIB The undersigned and associates hold an option to purchase fiom
Douglas Aircraft Co, Inc, certain shares of its no-par value stock We
hereby confirm the sale to you today of 20,000 shares Douglas Aircraft Co,
"Inc, capital stock at'$15 per sha-e, subject, however, to our being able to
obtain delivery of said shares puisuant to the aforementioned option
Delivery of and payment for said shares is to be made at the office of
Bancamerica Blair Corporation, 44 Wall Street, New York City, on Wednesday,
June the 21st, 1933, subject to receipt of said shares from Douglas Aircraft
Co, Inc After effecting delivery and receiving payment for the above 20,000
shares at $15 per share the unexercised balance of the aforementioned option
will be 47,969 shares, and we hereby confirm our understanding with you
regarding the same as foUows
We hereby give you an order to sell for account of ourselves and associates
all or anv pait of 24,000 shares of said stock at market prices, but m no
event at less than $16 per share net to us, and also give you an order to
sell for account of ourselves and associates all oi any part of the additional
23,969 shares of said stock at market puces, but in no event at less than
$17 per share net to us
The above ordeis are good for a period of 30 days fiom date heieof, oi until
3 pm Thuisday, July 20, 1933
It is understood that in the event that you have been successful in disposing
of the first block of 24,000 shares at $16 per share or bettei, we agree to extend
the order on 23,969 shares at $17 per share or better for an additional penod
of 30 days from July 20, 1933
It is also understood that the shares covered by the above orders shall be
disposed of by you la the market and not en bloc
It is understood that during the life of this anangement you are not to
take a long position in the above stock for this account, but you may repur-
STOCK EXCHANGE PRACTICES
6121
cha&e stock previously sold for the puipose of covering your shoit position,
which short position shall not exceed at any one time 5,000 shares nor in any
case more than the unexecuted balance of the above orders
In the event that your short position exceeds 5,000 shares of stock, you are
to take up from us and pay tor at clearance prices heiemafter referred to the
number of shares equal to your short position in excess of 5,000 shaies
During the life of these orders you are not to trade in the capital stock of
Douglas Aircraft Co , Inc, except in the interest o$ the account as herein statel
You agree to inform us daily upon our request as to your net position in this
stock, together with the average price of said position
It i& also agieed that your operations hereunder shall be conducted in
aecoi dance with the rules of the New York Stock Exchange and within the
State of New York
Duimg the life ot these orders, ceitificates foi these shares in good delivery
form as lequned by the rules of the New York Stcck Exchange will be delivered to >ou or ycur nominee upon demand on us giving us two da\s' notice m
writing, and upon payment of a clearance price to be agreed upon trom time
to time, but such clearance price shall not be less than the minimum prices
specified on the above orders, namely $16 and $17 per share, at the office of
Bancamerica Blair Corporation, 44 Wall Street, New York City
At the close of the account you agiee to furnish us with a statement of your
account and to pay to us the difference between the clearance prices at> which
shares are delivered to you and the net proceeds received therefrom, less
•expenses
All your transactions hereunder or in any way connected with the sale by
you of the above shares are to be conducted HI compliance with the Federal
Securities Act of 1933
It is understood that after deducting expenses any amount received in excess
of the prices herein stated from the sale of all or any part of the 67,969 shares
-covered by this transaction shall be drvided 50 per cent to you and 50 per cent
to us and our associates
We assume no obligation hereunder except to deliver stock to you as provided
herein, and we shall not be liable for any loss arising out of this transaction
Kindly acknowledge or confirm that the foregoing is m accordance with your
understanding by signing and returning to Bancamerica Blair Coiporation the
enclosed copy of this letter
Yours very truly,
E A PIERCE & Co,
BANCAMERICA BLAIR COBPORATTON
What sort of a trading operation, Mr. Wright, do you understand
to be contemplated by this agreement ?
Mr. WRIGHT. That was simply sent to you, Mr. Pecora, as the
original option I had nothing to do with any of the conditions in
there. I assumed the option on the stock at 16 and 17 without any
of those obligations in there, because the people who were operating m the stock were not operating successfully, and I took it over
from Mr Pass and I had no partners in it.
Mr. PECORA. What was the kind of operation referred to m this
option agreement?
Mr. WRIGHT. I had nothing to do with that option.
Mr. PECORA. I know you had not, but you understand the kind of
trading that is referred to here ?
Mr. WRIGHT. I suppose the usual kuid of trading.
Mr. PECORA. What do you mean by that, when you say " the usual
kind of trading"?
Mr. WRIGHT. Creating activity in the stock and rise in prices.
Mr. PEOORA. That is by churning the market?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Buying and selling among themselves?
Mr. WRIGHT. Not amongst themselves. It is against the rules of
the sf/>ck exchange to buy and sell amongst yourselves. That con
6122
STOCK EXCHANGE PEACTICES
stitutes " washing " and is not permitted by the laws and not indulged
in by any members of the exchange.
Mr. PECORA. That is as far as you know ?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. In this letter you notice that they gave an option or
held an option to purchase; that is to say, Bancamerica-Blair Corporation and E. A. Pierce & Co. held an option to purchase from
Douglas Aircraft Co., Inc., certain shares of its capital stock, and
they sold out of the number of shares covered by that option a block
of 20,000 shares at $15 per share to Mr. Pass. That is quite apparent
to you from this letter, isn't it ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Then it is
agreed that Pass is to sell for the account
of Bancamerica-Blair Corporation and E. A. Pierce & Co. as the
holders of this option up to 24,000 shares at not less than $16 per
share net, and also to sell for their account an additional 23,969
shares at a price of not less than $17 per share net; and there is this
provision that vou have heard me read, that any profits accruing
from the sale or these shares over and above the prices mentioned in
the option are to be divided equally between Mr. Pass and E A.
Pierce & Co. and Bancamerica-Blair Co. ?
Mr. WRIGHT. Yes, sir; but I was no party to that at all.
Mr. PECORA. I know it. You have told us you were not a party
to it.
Mr. WRIGHT. If there was a profit, I did not divide it.
Mr. PECORA. What sort of an arrangement is that, Mr. Wright ?
Mr. WRIGHT. That one there ?
Mr. PECORA. Yes.
Mr. WRIGHT. It looks
like as though the Bancamerica-Blair and
E. A. Pierce had an option and also wanted to cut themselves m on
50 percent of the profits.
Mr. PECORA. Exactly.
Mr. WRIGHT. Without any risk.
Mr. PECORA. Without any risk of loss. There is a reference here
in this letter that—
During the life of these orders you—
Meaning Pass—
are not to trade in the capital stock of Douglas Aircraft Co except in the
interest of the account as herein stated
What does that indicate to you ?
Mr. WRIGHT. That would indicate to me that they would want to
prevent whoever had the option trading for their own account.
Mr. PECORA. YOU mean whoever had the option given by Bancamerica-Blair Corporation and E. A. Pierce & Co. ?
Mr. WRIGHT. Yes,
sir.
Mr. PECCRA. From trading for their own account?
Mr. WRIGHT. Yes, sir. Only trading for the syndicate.
Mr. PECORA. Only trading for the account of the optioner ?
Mr. WRIGHT. That is right. But, as I tell you, Mr. Pecora, I had
nothing to do with that arrangement.
Mr. PECORA. Yes; I know that.
Mr. WRIGHT. It was simply assigned to me and that was an arrangement made between Pass and Pierce & Co. and Baneamerica
STOCK EXCHANGE PBACTICES
6123
Blair, and subsequently that option was just handed to me as an
evidence of the good faith that I had the option, none of the terms
of which were to be lived up to by me.
Mr. PECORA. What purpose do you suppose would be served by
the optioners in limiting the optionee, Pass, to trading only in the
interest of the option account ?
Mr. WRIGHT. Probably to keep Pass honest.
Mr. PECORA. Meaning so he could not play the market against it ?
Mr. WRIGHT. Exactly.
Mr. PECORA. I S Pass a well-known operator ?
Mr. WRIGHT. NO, sir.
Mr. PECORA. E. A. Pierce & Co. is a stock-exchange house, isn't it?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Members of the New York Stock Exchange ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA NOW, your next option in 1933 in point of time is
marked in evidence as " Exhibit No. 43 " and is addressed to your
firm by Hayden Stone & Co., dated July 11, 1933, and covers 54,796
shares of the common stock of Youngstown Sheet & Tube Co. at
prices ranging from 32% to 3 4 ^ . Did you seek this option, Mr.
Wright, or was it offered to you ?
Mr. WRIGHT. It was offered to me by a third party.
Mr. PECORA. A third party. By " third party " you mean someone other than Hayden Stone & Co. ?
Mr. WRIGHT. Yes,
sir.
Mr. PEOORA. Hayden Stone & Co. is a stock brokerage firm with a
membership in the New York Stock Exchange, is it not ?
Mr. WRIGHT. Yes, sir. I believe that was offered for a client of
theirs, not the firm of Hayden Stone.
Mr. PEOORA. This option letter is not very long, and so I will read
its text. I t is addressed to Messrs. Wright <& Sexton [reading] :
DEAR SIB We hereby give and giant to you the right and option to puichase
54,976 shares of the common stock of Youngstown Sheet & Tube Co in lots
and at prices and expiring on or before the close of business on dates as
follows, but all subject to the terms and conditions hereinafter stated, namely—
Then follows the expiration dates of the options, the number of
shares, and the price per share.
If we or our client should be enjoined or restrained t*y any court or judge
from selling or disposing of said stock, upon notice by us, either oral or in
writing or by telephone or mail to you in your office, 1 Wall Street, New York
City, of such fact, we shall not be bound to recognize any calls bj& you hereunder nor to make any delivery of stock, and all of our obligations hereunder,
including the options herein granted, shall immediately cease and determine.
Title to said stock shall not pass until you pay for the same and the stock is
actually delivered to you If you fail to take up and pay for any lot of stock
withm the period of time mentioned as aforesaid, all of your rights hereunder
shall immediately cease and determine
This option shall not be assigned without our written consent
Very truly yours,
HAYDEN STONE & Co
Do you know who the client is that Hayden Stone & Co. acted
for in the granting of this option ?
Mr. WRIGHT. NO, sir; but I would imagine it would have been
either bank or bankers who were in trouble.
Mr. PECORA. And this was part of the liquidation ?
6124
STOCK EXCHANGE PRACTICES
Mr. WRIGHT. That was part of the liquidation; yes, sir.
The CHAIRMAN. DO you know anything about the Youngstown
Sheet & Tube Co.?
Mr. WRIGHT. I do know quite a good deal about it, Senator.
The CHAIRMAN. About their business?
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. And what they are
Mr. WRIGHT. Yes, sir.
Mr. PECORA. YOU conducted trading
doing ?
operations under this option,
did you ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And that
Mr. WRIGHT. Yes, sir.
Mr. PECORA. YOU did
resulted in a substantial profit?
not draw down all of the 54,796 shares
covered by this option, did you?
Mr. WRIGHT. BTO, sir.
Mr. PECORA. YOU drew
down so far as we have a record of it
34,796 of those shares?
Mr. WRIGHT. That is it.
Mr. PECORA. And the market operations conducted by you under
this option were of the same general character as those that you
conducted under the options that were put in evidence today?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. That is, you both bought and sold ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And were
enabled thereby to distribute the stock
covered by the option and which you drew down at higher levels ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. During the
period of your trading operations under
this option do you know whether or not Hayden Stone & Co. notified
you that they had been enjoined or restrained from selling or disposing of any of the stock?
Mr. WRIGHT. NO, sir
Mr. PECORA. Proceedings
were subsequently brought, were they
not, to—no; I withdraw that.
Mr. WRIGHT. NO ; they were not brought on that.
Mr. PECORA. The next option agreement you received in 1933 in
point of time is marked in evidence as " Exhibit No. 44 " and was
given to your firm by the firm of L. F . Rothschild & Co., under date
of July 17, 1933, covering 10,000 shares of Eobert Eeis & Co. common stock at $3 per share, 6,500 shares at $4 per share. The optionor
in this case is also a stock brokerage firm, is it not, L. F. Rothschild
&Co.?
Mr. WRIGHT. Yes, sir; I believe they were acting for a client.
Mr. PECORA. There is nothing in tne option that so indicates, is
there ?
Mr. WRIGHT. I understand they were acting for a client.
Mr. PECORA. DO you know who the client was ?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Are L. F.
Rothschild & Co. members of the New York
Stock Exchange?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Did you seek
this option or was it offered to you ?
STOCK EXCHANGE PBACTICES
6125
Mr. WRIGHT. It was offered to me.
Mr. PECORA. Through a third party?
Mr. WRIGHT. Yes.
Mr. PECORA. And did
you take it with a view of conducting trading
operations under it of a kind that would enable you to distribute the
stock to the public at higher levels than the option prices ?
Mr. WRIGHT. Yes, sir. The date on that was the 17th of July, Mr.
Pecora. The market broke on the 18th.
Mr. PECORA. This is July 17, 1933; that is right. You only drew
down 2,000 shares under this option, didn't you?
Mr. WRIGHT. Yes,
Mr. PECORA. But
sir.
Mr. WRIGHT. Yes,
sir.
in your market operations you bought 5,800
shares and sold 5,500; is that right?
Mr. WRIGHT. That includes the 2,000 I took down.
Mr. PECORA. And your transactions resulted in a profit?
Mr. PECORA. And in the course of that trading you both bought
and sold?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. NOW, your
next option in 1933 is marked in evidence
as Committee Exhibit No. 45 and also was granted to your firm by
the firm, of L. F Rothschild & Co. under date of August 25, 1933.
I t covers 8,000 shares of Robert Reis common stock at $3.
Mr. WRIGHT. That is a continuation of the previous option, Mr.
Pecora. I t expired, and the letter which you have in your hand is
a continuation of it.
Mr. PECORA. Oh, I see. Oh, it is not an additional option?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Did you
draw down any of the stock covered by this
option?
Mr WRIGHT. NO, sir
Mr. PECORA. Did you
find that trading operations were not likely
to be successful?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. And for that reason did not draw down any of the
stock?
Mr WRIGHT. Yes, sir.
Mr. PECORA. Your next
option in 1933 was received in evidence as
exhibit no. 46 and was granted to you by the Bancamenca-Blair Corporation, under date of September 13 and covers 135,000 shares of
the capital stock of Superior Oil Corporation at prices ranging* from
$2.75 net to $4 50 net. The option was granted for the period of
about one month, and this option is addressed to you individually.
Do you recall the option in question ?
Mr. WRIGHT Yes,
sir.
Mr. PECORA. And do you recall the trading that you did under it?
Mr. WRIGHT. Yes, sir. Small loss.
Mr. PECORA. Small loss. And you only drew down—oh, you did
not drawn down any of the shares under it ?
Mr. WRIGHT. Times were getting very bad then, Mr. Attorney.
Mr. PECORA. That is the advantage of an option, isn't it?
Mr. WRIGHT. Yes,
Mr. PECORA. But
sir.
in your market operations after you acquired
this option you purchased 9,000 shares and sold 8,000?
6126
STOCK EXCHANGE PEACTICES
Mr. WRIGHT. Yes, sir.
Mr. PECORA. NOW I notice
that this option agreement is somewhat
different in form from most of the others that have already been
put in evidence today, and the option is really in the form of an
order to you to sell for the account of the Bancamenca-Blair Corporation all or any part of the 135,000 shares of the stock Superior Oil
Corporation m amounts and prices fixed in the letter. That meant
that any profits that would accrue from the sale of all or any part
of those 135,000 shares that you might succeed in making at prices in
excess of the net prices fixed in this letter were to go to you as your
profits?
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. What was the business of this corporation?
Mr. WRIGHT. It is an oil company, recently out of the hands of
a
receiver and being reorganized.
The CHAIRMAN. Operating where ?
Mr. WRIGHT (after consulting an associate). Oklahoma and Texas.
The CHAIRMAN. And subsequently went into the hands of a
receiver?
Mr. WRIGHT. NO, sir.
Mr. PECORA. I t had
only recently been in the hands of the
receiver.
Mr. WRIGHT. Had been in the hands of the receiver and was out
by then.
Mr. PECORA. And they were trying to rehabilitate the stock in the
market, weren't they?
Mr. WRIGHT. I don't know. I don't know where the stock came
from, to tell you the honest truth, Mr. Pecora. I mean I don't
know who the owner of the stock was.
Mr. PECORA. Apparently Bancamerica-Blair Corporation were
giving you an order to sell up to 135,000 shares for their account?
Mr. WRIGHT. I don't know whether they owned it or whether they
were acting for a client or not. That I don't know.
Mr. PECORA. I notice in this option letter a paragraph somewhat
similar to one that was in the option given to Samuel Pass by
Bancamerica-Blair Corporation, covering stock of the Douglas Aircraft Co., and that paragraph reads as follows [reading]:
During the life of these ordeis you are not to trade in the capital stock of
Superior Oil Corporation except in the interest of the account as herein stated.
Why was that put in there, do you know ?
Mr. WRIGHT. Keeping me honest.
The CHAIRMAN. That was unnecessary, wasn't it ?
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. AS a broker
and specialist and all that, suppose
some man should write to you and ask you to sell him stock m a
concern that was in the hands of a receiver, maybe not listed on the
stock exchange, maybe on the curb, quoted on the curb, would you
sell him the stock ?
Mr. WRIGHT. NO, sir.
The CHAIRMAN. That sort of
Mr. WRIGHT. It might have
Senator.
thing has been done, I believe.
been done, but I would not do it,
STOCK EXCHANGE PEACTICES
6127
The CHAIRMAN. When a corporation that has been offering its
stock for sale goes into the hands of the receiver, you take it off your
list, you would not sell that stock?
Mr. WRIGHT. NO clients to sell anything to.
Mr. PECORA. Did you have any participant in this option given
you by Bancamerica-Blair Corporation in the Superior Oil Co.
stock?
Mr. WRIGHT. Did I have a participation in it? Fifty per cent.
Mr. PECORA. Who was the other participant?
Mr. WRIGHT. Redmond & Co.
Mr. PECORA. That is this other stock exchange house?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Referring
to the option given to you for 25,000
shares of Granby Consolidated Mining Co. stock, did you have any
participation in that ?
Mr. WRIGHT. A very small one, sir.
Mr. PECORA. Who were your participants?
Mr. WRIGHT. Douglas, who was mentioned in that thing, whom
T never met.
Mr. PECORA. That is George Douglas of Abbott Hoppm & Co.?
Mr. WRIGHT. I don't remjember whether he is a member of the firm
or not. I doubt it.
Mr. PECORA. Abbott Hoppm & Co. is a stock-exchange firm, isn't
it?
Mr WRIGHT. Yes, sir. Twenty percent to Bradford Ellsworth.
Mr PECORA. I S he a broker or an operator ?
Mr. WRIGHT. I think he is very quiet, not doing much of either.
Mr. PECORA. Well, what was he then?
Mr. WRIGHT. An operator.
Mr. PECORA. Not a broker? Not a broker, Mr. Wright?
Mr. WRIGHT. NO ; he is not a broker at all A man by the name of
Missir.
Mr. PECORA. He is another operator?
Mr. WRIGHT. NO, sir; he is not an operator.
Mr. PECORA. IS he a broker?
Mr WRIGHT. NO, sir; he is an individual who lives m Paris,
France. And I believe myself 37% percent I believe the rates
were 17% percent to Douglas, 20 percent to Ellsworth, 25 to Missir,
and 87% to Wright & Sexton.
Mr. PECORA. NOW, I overlooked the option given to you, or rather
the option that you returned to us as one of the options that you had
during the year 1933, which was given by a man named H B. Dwyer
to a man named Mr. Oscar C. Seabass, dated May 24, 1933, which
has been marked in evidence as " exhibit no. 47." Do you recall that
option ?
Mr
WRIGHT. Yes,
sir.
Mr PECORA. That covers 7,000 shares of stock of the International
Salt Co.?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. At a price
of $26 per share for 2,000 shares, and $28
per share for the remaining 5,000 shares. Did you have any associates or participants with you in this option ?
6128
STOCK EXCHANGE PBACTICES
Mr. WRIGHT. I don't think I did have any on that particular option. As I remember, Mr. Pecora, I bought from Palmer & Co., a
defunct stock exchange firm, eight or nine thousand shares of International Salt two points above the market, which was amongst their
assets, I believe in consideration of buying this stock. These gentlemen who gave me this option I believe are the officers of the company,
and I don't believe any of the stock was ever exercised.
Mr. PECORA. This option is addressed to Mr. Oscar C. Seabass. Is
he a broker?
Mr. WRIGHT. He
was.
Mr. PECORA. And a member of the stock exchange ?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Was he a member of any stock exchange?
Mr. WRIGHT. NO, sir.
Mr. PECORA. HOW did he trade if he was not a broker?
Mr. WRIGHT. He is not a broker. He is associated with Mr.
George LeBlanc of a firm of chemists. He is not a broker, but was
formerly a member of a firm which went out of business, I believe
in 1929. He was one of the coreceivers I believe for the firm of
Palmer & Co., from which I purchased all of the International Salt
which was in their liquidation account.
Mr. PECORA. And you drew down 7,351 shares?
Mr. WRIGHT. From Palmer & Co. That was a contract of purchase and not an option,
Mr. PECORA. Purchased from the optionor or in the market?
Mr. WRIGHT. That was purchased from the receivers of Palmer
&Co.
Mr. PECORA. In the market operations that you conducted undei
this option it appears that you purchased 21,151 shares and sold an
equal amount, is that correct ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Did Seabass assign this option to you ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Was Seabass associated with you in this option ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. What participation did he have in it ?
Mr. WRIGHT. He got $4,300.
Mr. PECORA. TWO percent, wasn't it?
Mr. WRIGHT. Something like that.
Mr. PECORA. Did Brad Ellsworth have a participation with
you
in this account, too ?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. Equal to 25 percent thereof ?
Mr. WRIGHT. I think he had a little bit more than that, didn't he ?
Mr. PECORA Apparently not.
Mr. WRIGHT. I will tell you that story: These men owed me
money, and I gave them a participation in this account so that they
might pay me the money they owed me; I will say that to you very
frankly.
Mr. PECORA. In other words, you gave them the participation in
order to allow them to pay you what they owed you? You took
them into this pool account for that purpose?
STOCK EXCHANGE PBACTICES
6129
Mr. WRIGHT. Yes, sir. But I took a loss in that account myself,
personally.
Mr. PECORA. Have you any tabulation that would indicate the
total profits that you or your firm made from these 14 options and
from your trading in them during the year 1933 ?
Mr. WRIGHT. YOU have the records there yourself.
Mr. PECORA. Well, the records we have been furnished by your
office say that in connection with these 14 options and your trading
thereunder developed an aggregate loss of $45,853.19 as against
profits of $192,985.96, or a total profit of around $148,000.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. That is exclusive, of
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Well, on the subject
course, of commissions?
of commissions, you undertook
to have a calculation made from your records of the total amounts
your firm received from the trading or the orders you executed in
American Commercial Alcohol stock during the months of May,
June, and July 1933, and the amount given by you to me is $19,850.
Is that correct?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. YOU testified
this morning that your profits in the
trading that you did for your own account in American Commercial Alcohol stock during those 3 months of last year amounted to
approximately $138,000.
Mr WRIGHT. Yes, sir.
Mr. PECORA. And that
desipte the fact that you were murdered
when the stock broke.
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. And commissions were in addition to
Mr. WRIGHT. Yes, sir.
Mr. PECORA. NOW, the year 1932 apparently was not a
that.
good year
for options, not as good as the year 1933, was it?
Mr. WRIGHT. NO, sir.
Mr. PECORA. There seem
to have been only four options that your
firm had in listed securities that year.
Mr. WRIGHT. Except the subsequent ones that I handed to you a
couple of minutes ago and that I borrowed from the records of Eedmond & Co.
Mr. PECORA. In addition to the four options put in evidence this
morning, as committee exhibits 48, 49, 50, and 51, have you since
learned that you had two other written options ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Copies of which I now show you ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And are these two copies true and
correct copies of
the other options that you had during the year 1932 ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Mr. Chairman, I now wish to offer them in evidence.
The CHAIRMAN. Let them be admitted.
Mr. WRIGHT. Mr. Pecora, I will have to return those two copies
that I secured from Kedmond & Co, and which I took from the
records which are down here.
6130
STOCK EXCHANGE PRACTICES
Mr. PECORA. Very well. I can read them into the record.
Mr. WRIGHT. Redmond & Co. records are here and I can return
them tomorrow.
(The option dated Mar. 10, 1932, from Redmond & Co. to Messrs.
Wright & Sexton, was marked " Committee Exhibit No. 60, Feb. 20,
1934", and will be found immediately following:)
REDMOND &^ Co,
48 Wall Street, New York,
March 10, 1932
Messrs WRIGHT & SEXTON,
One Wall Street, New York Cvty
GENTLEMEN* Please be advised that in consideration of the National Distillers Products Corporation confirming sale to us as ot this date of two thousand (2,000) shares of the common stock of the Corporation at $22 00 per
share, we have cancelled the Call given under date of February 15, 1982, good
for thirty days, to purchase four thousand shares of the common stock at
various prices, and have received this two thousand shares into your # 3
Account at the above mentioned price
Please be further advised that we have obtained from the National Distillers
Products Corporation an option to purchase all or any part of twelve thousand
(12,000) shares of the common stock of the National Distillers Products Corporation, good for thirty days from this date, in the following amounts and
at the following prices:
1,000 shares @ 23
1,000-shares @ 24
1,000 shares @ 25
1,000 shares @ 26
1,000 shares @ 27
1,000 shares @ 28
1,000 shares @ 29
1,000 shares @ 30
1,000 shares @ 31
1,000 shares @ 32
1,000 shares @ 33
1,000 shares @ 34
We hereby assign this option to you to enable you to trade in the stock,
with the understanding that you will pay to us one-half of any profits which
you may realize through the purchase or sale of the stock during this period,
or through the exercising, in part or in whole, the option It is also undeistood that Redmond & Co will not be responsible for any loss which may occui
through such purchases or sales
It is further undeistood that you will give us notice from day to day of
your purchases and sales of this stock which we will clear foi your account
known on our books as Account #3-A and that you will at all times keep this
account adequately margined
Foi the completion of your records, we enclose herewith copy of the option
above referred to
We are sending this letter with an ongmal duplicate and for the completion
of our records, we lequest that you sign the duplicate and leturn it to us at
your convenience
Yours very truly,
Accepted
WEIGHT & SEXTON
(Signed)
(The option, dated May 6, 1932, from Redmond & Co. to Messrs,
Wright & Sexton, was marked "Committee Exhibit No. 61, Feb.
20,1934 ", and will be found immediately following:)
REDMOND & Co,
48 Wall Street, New Ywk, May 6, 1932
Messrs WEIGHT & SEXTON,
One Wall Street, New York, N Y
GENTLEMEN • Please be advised that we have obtained fioni the National Distillers Products Corporation a Call on twenty-five hundred (2,500) shares of
STOCK EXCHANGE PBACTICES
6131
the common stock of the National Distilleis Pioducts Corporation, good for
sixty (60) days from May 3, 1932, in the following amounts and at the following prices
500 shares @ 19
500 shares @ 19%
500 shares @ 20
500 shares @ 21
500 shares @ 22
We also confirm that we have obtained from the National Distillers Products
Corporation a Put to them for fifteen hundred (1,500) shaies of the common
stock in the above named company at $18 00 a share, good for sixty (60) days
from May 3, 1932
We hereby assign this Call and Put to you to enable you to trade in the stock,
with the understanding that you will pay to us one-half of any profits which you
may realize through the purchase or sale of the stock during this period, or
through the exercising, in part or in whole, the Call and Put It is also understood that Redmond & Co will not be responsible for any loss which may occur
through such purchases or sales.
It is further understood that you will give us notice from day to day of your
purchases and sales of this stock, which we will clear for your account known,
on our books as account no 3 and that you will at all times keep this account
adequately margined
For the completion of your records, we enclose herewith copy of the Call
and Put above referred to
We are sending this letter with an original duplicate and for the completion
of our records, we request that you sign the duplicate and leturn it to us
at your convenience
Yours very truly,
Comptroller
Mr. PECORA. Mr. Wright, exhibit no. 60, which has been received in evidence is an option addressed to Wright & Sexton from
Kedmond & Co., dated March 10, 1932, covering 12,000 shares of the
common stock of National Distillers Products Corporation, for 30
days from the date of the option, at prices ranging from $23 a
share for the first 1,000 shares, to $34 a share for the last 1,000
shares of the total of 12,000 shares.
Now, I notice that this option contains the following language:
We hereby assign this option to you to enable you to trade m the stock,
with the understanding that you will pay to us one half of any profits which
you may realize through the purchase or sale of the stock during this period,
or through the exercising, in part or m whole, the option It is also understood that Redmond & Co will not be responsible for any loss which may
occur through such purchases or sales
Will you tell the committee what the reason was for the inclusion
of that provision in this option agreement?
Mr. WRIGHT. Yes, sir. The option was obtained by Redmond &
Co. and turned over to me, for which they wanted 50 percent of the
profits.
Mr. PECORA. Why was it turned over to you? Weren't they in
equally as good a position as you were to trade in the stock under
the option ?
Mr. WRIGHT. Apparently not.
Mr. PECORA. DO you know of any reason why they wpre not?
Mr. WRIGHT. Well, I do not think they had the necessary broker
or brokers to handle the market as well in those market conditions
as I was myself.
Mr. PECORA. Well, you say that Redmond & Co. were then members of the New York Stock Exchange?
6132
STOCK EXCHANGE PEACTICES
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Were you
the specialist for National Distillers stock
in March of 1932?
Mr. WRIGHT. I was never a specialist in that stock.
Mr. PECORA. Who was the specialist in that stock at that time?
Mr. WRIGHT. B. C Brown
Mr. PECORA. What facilities did you have which were superior
as a specialist, if you had any such facilities for trading in this stock
under this option ?
Mr. WRIGHT. I am too modest to answer that question.
Mr. PECORA. Well, with due allowance for your modesty, we would
like to know.
Mr. WRIGHT. Well, Redmond & Co seemed to think I could handle
the market all right, so they turned it over to me.
Mr. PECORA, Well, now, they had some basis for that opinion,
didn't they?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. TO put it
briefly, they thought that you could trade
with greater intelligence ?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
with greater ease than anybody else on the floor
of the exchange ?
Mr. WRIGHT. Not greater than anybody else, but greater than
anybody they knew at that time.
Mr. PECORA. Well, better than anybody else they knew at that time.
Mr. WRIGHT Yes, sir.
Mr. PECORA. Would you
say that you had established a reputation
as a quick and intelligent trader, so that they were prompted by that
knowledge of your reputation to arrange to have you trade for them
under this option ?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. This option calls for prices beginning at $23 a share
for the first 1,000 shares, as I have already remarked, and stepping
up a dollar a share with each 1,000 shares of the 12,000-share lot.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And the option
was good for a period of 30 days from
its date, namely, from March 10,1932 ?
Mr. WRIGHT. Yes,
Mr. PECORA. Did
sir.
you succeed in so trading in the stock that the
stock was sold at a profit which meant prices above the prices mentioned during the period of the option ?
Mr. WRIGHT. I took down 2,000 shares, at a profit of $3,500.
Mr. PECORA. Only 2,000 shares did you deal in?
Mr. WRIGHT. That is all that I took down. We bought 3,500 shares
and we sold 3,500 shares.
Mr. PECORA. IS it common practice for one stock-exchange house to
give another stock-exchange house an option held by the first stockexchange house ?
Mr. WRIGHT. AS a general rule we like a stock-exchange name.
That is why one uses it, because a stock-exchange name is your guarantee. In that particular case Redmond & Co. were probably acting
for a client. Most people giving options like a stock-exchange
guarantee on them.
STOCK EXCHANGE PRACTICES
6133
The CHAIRMAN. A guarantee of what^
Mr. WRIGHT. Well$ a gurantee as between members of the stock
exchange that the trades will go through; that your particular
business, whatever it is, is guaranteed by a firm. That is, either
party in the stock exchange, in case anything goes wrong, can fyold
the other responsible. In the case of an outsider it might mean
a lawsuit. In the case of a stock-exchange firm it means that the
governors of the exchange would decide anything that might come
up.
Mr. PECORA. In other words, when you get an option from another
stock-exchange firm you have virtually a guarantee of performance
by the optioner of the terms and conditions of the option?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Namely, that
he will deliver to you the stock as you
call upon him for it under the option *
Mr. WRIGHT. That is it exactly.
Mr. PECORA. And at the prices fixed by the option.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Well, what
is it that makes that guarantee? Why do
you call that a guarantee?
Mr. WRIGHT. Because we have faith in one another.
Mr. PECORA. Well, does that mean that the stock exchange authorities will enforce such an agreement as between its members?
Mr. WRIGHT. Yes, sir. It is a contract between members.
Mr. PECORA. And hence will be rigidly enforced under all the
powers possessed by the governing authorities of the stock exchange?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Then does
the stock exchange take cognizance of such
contracts among stock-exchange houses, of one house giving another
house an option to trade under?
Mr. WRIGHT. Yes, sir
Mr. PECORA. NOW, the
second option produced by you this afternoon has been marked in evidence " Committee Exhibit No. 6 1 " ,
and was likewise given to your firm by Redmond & Co. under date
of May 6, 1932, and covers 2,500 shares of the common stock of
the National Distillers Products Corporation, the option period
being 60 days from May 3, 1932, and the option prices ranging
from $19 a share to $22 a share, in 500-share blocks.
Mr.
WRIGHT. Yes,
sir.
Mr. PECORA. Did you draw down all of the 2,500 shares covered
by this option?
Mr. WRIGHT. Yes; we did—no, it was 2,000 shares that we took
down.
Mr. PECORA. YOU took down 2,000 of the 2,500 shares optioned?
Mr. WRIGHT. We took down 2,000 shares and made a profit of
$11,000.
Mr. PECORA. NOW, Mr. Wright, this option agreement also contains
this clause:
We hereby assign this Call and Put to you to trade
understanding that you will pay to us one-half of any
realize through the purchase or sale of the stock during
the exercising, in part or in whole, the Call and Put.
that Redmond & Co. will not be responsible for any
through such purchases or sales
175541—-34—PT13
19
in the stock, with the
profits which you may
this period, or through
It is also understood
loss which may occur
6134
STOCK EXCHANGE PRACTICES
Did you seek this option, or was it offered to you ?
Mr. WRIGHT. It was offered to me by Redmond & Co
Mr. PECORA. Well, in view of that provision in this option agreement, which provision I have just read to you, it would seem that you
were taking all the chances of loss and that Redmond & Co. were
taking none.
Mr. WRIGHT. That is right.
Mr. PECORA. And it would also seem that Redmond & Co. were to
share equally with you in any profits arising from your trading
under this option.
Mr. WRIGHT. That is right.
Mr. PECORA. Then they got the better of the deal.
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
they sought to give you this option of their own
initiative.
Mr. WRIGHT. Mr. Day, of the firm of Redmond & Co., asked me if
I would be interested in it, and I told him I would.
Mr. PECORA. Were the trading operations under this option successful in that they resulted in a profit to the account ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. NOW, the other
options which you had during the year
1932, consisting of committee exhibits nos. 48, 49, 50, and 51, will now
be covered by me. The first one of these is committee exhibit no. 48,
dated August 12, 1932, addressed to your firm, and covers 9,000
shares of the capital stock of Affiliated Products, Inc., at $8.50 per
share, and the optioners are J. R. Williston & Co. Is that firm a
stock-exchange brokerage firm?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And they
are members of the New York Stock
Exchange ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And did you
take this option for the purpose of trading under it in the same manner as you have described heretofore?
Mr. WRIGHT. NO. I sold that stock to private individuals.
Mr. PECORA. YOU assigned your option rights, do you mean?
Mr. WRIGHT. NO. I sold the stock to private individuals.
Mr. PECORA. At what price?
Mr. WRIGHT. What was the date of that?
Mr. PECORA. It is dated August 12, 1932.
Mr. WRIGHT. We made about $3,700 on it.
Mr. PECORA. I mean at what price did you sell it, or did you sell
it m one block ?
Mr. WRIGHT. NO ; in two blocks.
Mr. PECORA. TO the same purchaser ?
Mr. WRIGHT. Yes, sir. We sold 4,000 shares at 9% and 3,500
shares at 9%.
Mr. PECORA. Did you have those purchases in view when you took
this option &
Mr WRIGHT. NO, sir. The stock was sold on August 24 and 27.
Mr. PECORA. Well, this option gave you the right to call upon the
optionor for the stock not later than 2:45 p.m., of August 24, 1932.
Mr. WRIGHT. That is the day we called it.
Mr. PECORA. And you did not contemplate trading in the market
under this option?
STOCK EXCHANGE PRACTICES
61S5
Mr. WRIGHT. Yes; I did. But it was not the kind of market that
was good for or that would take any trading.
Mr. PECORA. But you did not engage in any such trading operations cinder this option ?
Mr. WRIGHT. NO.
The CHAIRMAN. Mr.
Wright, you seem to have dealt entirely in
stocks. Didn't you handle bonds also?
Mr. WRIGHT. NO, sir.
Mr. PECORA. NOW, Mr.
Wright, the option put in evidence as exhibit no. 49 is addressed to you individually, and is given by F. Gerli
& Co., Inc., under date of September 1,1932, and covers 80,000 shares
of Beldmg Heminway Co. stock at prices ranging from 5 ^ to 9.
Do you recall that option ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Did you seek that option or was it offered
Mr. WRIGHT. I t was offered to me.
Mr. PECORA. By the optioner?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Did you take this option with a view to
to you ?
conducting
the kind of market operations you have already described under
the other options?
Mr. WRIGHT. Yes, sir.
Mr. PECORA* And did you
Mr. WRIGHT. Partially.
Mr. PECORA. HOW many
succeed in effecting such operations ?
shares did you draw down under this
option ?
Mr WRIGHT. Seventeen thousand shares.
Mr. PECORA. Did you say 17,000 shares?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. This option
agreement contains the following pro-
vision :
It is understood that you have the privilege ot borrowing up to five thousand
shares of the above stock, and that when you are short in position of the abovementioned five thousand shares, you are to take up from us the stock at option
price
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. What does that mean?
Mr. WRIGHT. That means that if I am short of the stock in market
operations I am privileged to borrow from them up to 5,000 shares,
and the minute that I get long 5,000 shares I have to call on them
for them.
Mr. PECORA. Does that mean that you are to start the operations
by selling short?
Mr. WRIGHT. Not selling short in the way of putting the market
down, but selling short in the interest of putting the market up.
Mr. PECORA. Well, Mr. Wright, I do not quite understand that.
Did you contemplate making short sales at the commencement of
your trading operations under this option?
Mr. WRIGHT. NO, sir.
Mr. PECORA. What was
the reason for the inclusion of that provision in the option?
Mr. WRIGHT. That is included in a great many options.
Mr. PECORA. But, I take it, there must be a reason for its inclusion,
and would like to know that reason.
6136
STOCK EXCHANGE PBACTICES
Mr. WRIGHT The reason is that if you get short of any stock that
is the basis of your operation, this provision comes in there. I t
meant short sales before the new rules went into effect. I t is
eliminated now.
Mr. PECORA. But going back to market conditions existing at the
time of this option, in September of 1932, you contemplated market
operations that would be commenced by short sales, isn't that right?
Mr. WRIGHT. NO, sir. I t is only technically right.
Mr. PECORA. Well, this option gave you the right to call upon the
optioner for the first block of 5,000 shares of those 80,000 shares at
$5.50. Now, what would be served by your selling short before yon
drew down any stock under this option?
Mr. WRIGHT. Because if you were short of the stock you would
be able to get the stock by applying for it, and thereby filling yonr
short position, and you could conduct sales on your short position.
Mr. PECORA. What is the advantage to the trader in doing that?
Mr. WRIGHT. He can always support this market.
Mr. PECORA. Then it is a part of the process as a rule whereby the
trader
Mr. WRIGHT (interposing). I t was a part of the process; yes.
Mr. PECORA (continuing). Or was a part of the process whereby
the market trader or operator, operating under the option, would
support his trading.
Mr. WRIGHT. H I S market in order to be successful would have to
be worked on a short position.
Mr. PECORA. It would have to be supported with a short position,
is that it?
Mr. WRIGHT. Yes, sir.
The CHAIRMAN. And I
understood you to say that that had been
done away with.
Mr. WRIGHT. Yes, Mr. Chairman. On account of the new rules
of the New York Stock Exchange they have prohibited the selling
of stock down short.
The CHAIRMAN. Why did they do that?
Mr. WRIGHT. TO prevent people selling stock short and ruining the
market, which was going on during the depression. It is not like
the ordinary short sale.
Mr. PECORA. In other words, it is not like bear raiding?
Mr. WRIGHT. NO, sir; it is just the opposite.
Mr. PECORA. It is to get the benefit of the technical market
position.
Mr. WRIGHT. Exactly.
Mr. PECORA. At the outset of a series of trading operations.
Mr. WRIGHT. Exactly.
Mr. PECORA. And it was the practice commonly indulged in under
such circumstances.
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
is to be distinguished from the kind of short
selling that has commonly been referred to as bear raiding; is that
right?
Mr. WRIGHT. That is right.
Mr. PECORA. NOW, the next operation under an option that you
had in the year 1932, appears to have been given to your firm by
STOCK EXCHANGE PBACTICES
6137
Kedmond & Co., under date of September 14,1932, and covers 15,000
shares of the common stock of the Warren Foundry & Pipe Corporation, at prices ranging from $13 per share to $18 per share,
the option being given up to the close of business October 5, 1932,
or, for a period of about 3 weeks. Did you solicit this option or
was it offered to you by Redmond & Co. ?
**
Mr. WRIGHT. It was offered to me by Eedmond & Co.
Mr. PECORA. NOW, I note that this option, which is marked " Committee Exhibit No. 50 ", contains the following provision:
We hereby assign this option to you to enable you to trade m the stock with
the understanding that you will pay to us 60 percent of any profits which you
may realize through the purchase or sale of the stock during this period or
through the exercising in part or whole of the option It is also understood
that Redmond & Co will not be responsible for any loss which may occur
through such purchases or sales
Now, what was the reason for the inclusion of that provision ii*i
this option agreement?
Mr. WRIGHT. The same as in the case of the others.
Mr. PECORA. That is, the same as other general similar provisions
to which I have called your attention?
Mr WRIGHT. Yes, sir.
Mr. PECORA Under this provision Redmond & Co. were to take no
stock loss at all, but were to share to the extent of 60 percent in the
profits, whereas you were to get only 40 percent and you took all the
risks ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. I notice the
risk was one that involved the putting
of the market up within a period of 3 weeks' time, that is, between
September 14, the date of the option, and October 5, the date of its
expiration; and that the price range was from $13 to $18 a share.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. HOW did you hope to accomplish that purpose?
Mr. WRIGHT. I don't know. I took that one with a prayer. And
it did not turn out very well
Mr. PECORA. And the prayer was answered or was not answered,
which ?
Mr. WRIGHT. It was not answered. I think I had to carry the
stock in, that I was long of, the stock to the following year. I believe at the present time the stock is selling at $15 or $20 higher than
that option.
Mr. PECORA. SO that the prayer has been answered this year ?
Mr. WRIGHT. NO ; I just got out even this year.
Mr*. PECORA NOW, the next option in the year 1932 is shown by
committee exhibit no. 51, and is dated September 21, 1932, given by
Bancamerica-Blair Corporation to George F. Breen, 20 Pine Street,
New York, N.Y., and covers 500,000 shares of the Curtiss-Wright
Corporation comman stock at $3 per share for the first 100,000 shares,
and $3.50 per share for the next 100,000 shares, and $4 per share
for the next 100,000 shares, and $4.50 per share for the next 100,000
shares, and $5 per share for the final 100,000 shares. Do you recall
that option?
Mr. WRIGHT. Yes,
Mr. PECORA. This
sir.
option, as you will notice, is addressed to Mr.
George F. Breen. Who is he?
6138
STOCK EXCHANGE PEACTICES
Mr. WRIGHT. He is a stock-market operator.
Mr. PECORA. He is not a broker?
Mr. WRIGHT. NO, sir.
Mr. PECORA. And did
he assign this option to you or to vour
firm?
Mr. WRIGHT. Yes,
Mr. PECORA. Did
sir.
Mr. WRIGHT. Yes,
sir.
you have any participants, or associates in the
market operations that you engaged in under this option?
Mr. WRIGHT. Yes. They were Breen, Bancamerica-Blair Corporation, and Wright & Sexton.
Mr. PECORA. What were their respective participations?
Mr. WRIGHT. I t was 25 percent, 25 percent, and 50 percent for
Wright & Sexton.
Mr. PECORA. DO you mean that Breen got 25 percent?
Mr. PECORA. Who was the other participant?
Mr. WRIGHT. Bancamerica-Blair Corporation, who got 25 percent.
And I believe the loss in it was $70,000.
Mr. PECORA. There was a loss in the operations that you conducted
under this option?
Mr. WRIGHT. Yes, of $70,000.
Mr. PECORA. HOW many shares were taken down under this option?
Mr. WRIGHT. 100,000 shares.
Mr. PECORA. Now, I notice that there is a provision here that
exempts Bancamerica-Blair Corporation from liability for any loss
in the trading under this option.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Who sustained the loss that you say ensued?
Mr. WRIGHT. I did.
Mr. PECORA. HOW about your coparticipant, George F. Breen ?
Mr. WRIGHT. I think his loss was 4,200 and some odd dollars,
which he paid me this last year. The balance of the loss was my.
own. He took his stock up out of the account, and I don't know what
he did.
The CHAIRMAN. What became of that corporation ?
Mr. WRIGHT. The Curtiss-Wright Corporation?
The CHAIRMAN. Yes.
Mr. WRIGHT. Well, it is still functioning very well. I t is the
largest manufacturer of airplanes in America.
The CHAIRMAN. What is the stock worth now ?
Mr. WRIGHT. It is worth $4 or $5 a share.
Mr. PECORA. The 500,000 shares referred to in this option appear
to have consisted of stock for which it was contemplated at the time
of the giving of this option an application would be made to list on
the New York Stock Exchange?
Mr
WRIGHT. Yes,
sir.
Mr. PECORA. Were those 500,000 shares eventually so listed?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. NOW, Mr.
Wright, one of the option agreements that
you handed to me this afternoon, or rather it is not an option agreement, but seems to be a copy of a letter addressed to your firm by
Redmond & Co. under date of June 20,1932,, and reads as follows:
STOCK EXCHANGE PBAOTIOES
6139
MESSKRS. WRIGHT & SEXTON,
One Wall Street, New York City.
• On April 30, 1932 the N A D Option Accounts #2 and # 3 were
closed, leaving in each a credit balance Checks to your order for your share
of these credit balances are enclosed herewith.
No acknowledgment, other than your endorsement on these checks, will be
necessary.
Yours very truly
GENTLEMEN
And I presume it was signed by Eedmond & Co., although this
copy bears no signature.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Does that
indicate that you had an interest or participation in two other options in stock known as " N.A.D.", which
I presume refers to National Distillers ?
Mr. WRIGHT. NO ; and I gave you those options.
Mr. PECORA. Oh, does this refer to the options of the dates March
10, 1932, and May 6, 1932, already received in evidence as committee exhibit^ 60 and 61 ?
Mr. WRIGHT. I believe so.
Mr. PECORA. HOW can that be in view of the fact that this letter
to you of June 20, 1932, states that the option accounts were closed
on April 30, 1932?
Mr. WRIGHT. I don't know.
Mr. PECORA. One of the two options you gave me is dated May 6,
1932, which is subsequent to the closing of the two option accounts
referred to in this letter I have just read into the record.
Mr. WRIGHT. I don't know. I borrowed that from their record^
this morning. Will you let me look at it?
Mr. PECORA. Certainly.
Mr. WRIGHT (evidently inquiring of someone representing Eedmond & Co.). The records in no. 3 account were kept in your office.
I do not have any accounts in regard to it at all. [The party addressed, sitting back in the audience, bowed his head.J Mr. Pecora,
it appears that that is one of the records kept in their office. We
will have to get it for you—the records.
Mr. PECORA. It would also appear from this letter dated June 20,
1932, that prior to April 30, 1932, there were two option accounts
conducted by Redmond & Co. m the stock of National Distillers.
Isn't that ,so?
Mr. WRIGHT. Yes. My assistant is going to try to explain that
if he can get the data.
Mr. PECORA. All right. Now, let us go to the year 1931 In answer to our questionnaire sent to your firm you furnished us with
photostatic copies of eight different options covering as many different accounts given to you or your firm during the year 1931, and
which have been marked as " Committee Exhibits Nos. 52, 53, 54,
55, 56, 57, 58, and 59." Now, I will take committee exhibit no. 52,
dated January 31, 1931, which is addressed to you individually, and
the optionor is A M. Andrews Investment Corporation, and covers
25,000 shares of the Budd Wheel Co. common stock, at prices ranging from $10 a share to $12 a share. Did you take this option with
a view to conducting market operations under it for the purpose of
distributing the stock at higher prices?
Mr. WRIGHT. Yes,
sir.
6140
STOCK EXCHANGE PBACTICES
Mr. PECORA. Were your trading operations successful in that
respect?
Mr. WRIGHT. I don't think so. I think we got about an even
break as I remember it. I think I distributed the stock, but made
no money.
Mr. PECORA. And in those trades you both bought and sold?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. DO you know
how many shares you drew down under
this option which covered 25,000 shares ?
Mr. WRIGHT. We drew down 25,000 shares,
Mr. PECORA. NOW, the second one of these options, which is committee exhibit no. 53, is addressed to you and is dated March 3,1931.
The optioner also is A. M. Andrews Investment Corporation, and
covers 10,000 shares at $10 per share of the stock of the Trans Lux
Daylight Picture Screen Corporation.
Mr. WRIGHT. That is a curb §tock.
Mr. PECORA. Did you take this option with a view to conducting
similar market or trading operations under it?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Both buying and Selling?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And how many shares did
you draw down under this
option?
Mr. WRIGHT. I don't think I drew down any. And I think I
traded in very little of it.
Mr. PECORA. I never heard of the A. M. Andrews Investment Corporation before. What kind of a corporation is that, Mr. Wright?
Mp. WRIGHT. That was the way Mr. Andrews put all of his investments.
Mr. PECORA. And who is Mr. Andrews ?
Mr. WRIGHT. A. M. Andrews is a man who was formerly the
largest stockholder of Hupmobile, Trans Lux, Budd Wheel, and
Budd Manufacturing Co.
Mr. PECORA. An individual operator, is he ?
Mr. WRIGHT. Well, he is not an operator, so far as I know. He
is a man who at various times in his life has sold many stocks. I do
not know what he does now.
Mr. PECORA. Your next operation in 1931 appears to have been an
option given to your firm by W. E. K. Taylor & Co. That is a stockbrokerage firm, too, isn't it?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
they are also members of the New York Stock
Exchange ?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
Mr. WRIGHT. Yes,
sir.
it is dated July 31, 1931, and covers participation of 1,500 shares in an account of 5,000 shares of the stock of LilyTulip Cup Corporation.
Mr. WRIGHT. That is a dead one.
Mr. PECORA. What was that?
Mr. WRIGHT. That was a dead one. We never did anything with
that.
Mr. PECORA. Well, you accepted this participation, didn't you?
STOCK EXCHANGE PRACTICES
6141
Mr. PECORA. Who conducted the account that was formed under it?
Mr. WRIGHT. W. K. K. Taylor!
Mr. PECORA. When you say " That is a dead one ", just exactly
what do you mean by it?
Mr. WRIGHT. I mean that the stock has no appeal. You could not
do anything with it.
Mr. PECORA. But an effort was made to move it in the market?
Mr. WRIGHT. I don't know what they did, to tell you the truth.
Mr. PECORA. Well, this account was formed for the purpose of
moving the stock in the market, wasn't it?
Mr. WRIGHT. Yes, sir. According to the records here they bought
about 3,000 shares and then stopped.
Mr. PECORA. Because they could not make any headway with it
in the market ?
Mr. WRIGHT. At that particular time, in 1931, you could not have
made any headway with anything.
Mr. PECORA. NOW, the next option in 1931 was given to your firm
by Redmond & Co., and is dated August 21, 1931, being marked
" Committee Exhibit No. 55 " in evidence, and covers 50,000 shares
of the Petroleum Corporation of America, at prices ranging from
$8.25 per share to $10.50, per share.
Mr. WRIGHT. I apparently drew down 19,000 shares of that Petroleum Corporation stock.
Mr. PECORA. Did you accept this option with a view to conducting
trading operations under it for the purpose of making a distribution of the stock covered by the option, at higher prices ?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. And to what extent did you succeed in those trading
operations ?
Mr. WRIGHT. TO the extent of 19,000 shares.
Mr. PECORA. And at a profit for the 19,000 shares ?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
under those trading operations you both bought
and sold?
Mr. WRIGHT. Yes,
Mr. PECORA. Did
sir.
you have any associates or participants m the
market operations conducted under this option?
Mr. WRIGHT. Redmond & Co. were in on it for—let me see.
Mr. PECORA. HOW about M. J. Meehan & Co. ?
Mr. WRIGHT. NO, sir Redmond was the only one in on it, for
40 percent.
Mr. PECORA. Well, now, let us see. Attached to this option agreement, committee exhibit no. 55, of August 21, 1931, is a letter of
the same date addiessed to Redmond & Co., reading as follows:
AUGUST 21,
1931
Messrs REDMOND & Co,
New York, N Y
On August 19, 1931, you gave us an order to sell 50,000 shares
of the capital stock of the Petroleum Corporation of America at certain prices,
which prices have been corrected by you under today's date. It is hereby
agreed between us that you may, with our consent, give an order to Messrs.
M J Meehan & Co. to sell all or any part of 15,000 shares of the above mentioned stock, in amounts and prices as follows: 2,500 shares at 9% ; 2,500 shares
at 9%; 2,500 shares at 9%; 5,000 shares at 10; 2,500 shares at 10%
GENTLEMEN .
6142
STOCK EXCHANGE PRACTICES
Messrs M. J Meehan & Co will agiee to pay you 40 percent of any profits
which they make in connection with these sales, if any, and will agree that
Redmond & Co. shall not be responsible for any loss which may loccur through
such sales.
It is understood that you will forward to us one half of any profits you may
receive from Messrs. M J Meehan & Co's sales
Yours very truly—
Now, no name is attached to this photostatic copy of the letter,
but I assume it was one forwarded to your firm by Redmond & Co.
Mr. WRIGHT. I do not think that anything happened on that. I
think the whole thing died at its inception so far as my memory is
concerned. But I would have to go through Redmond & Co.'s
records to find out if that is true. But I do not remember M. J,
Meehan & Co. ever being m with me on that.
Mr. PECORA. NOW, the next option in 1931 is dated August 25,1931,
and is granted to your firm by Redmond & Co., and it covers 200,000
shares of the capital stock of Transamerica Corporation at prices
ranging from $7 per share to $10 per share.
Do you recall that option ?
Mr. WRIGHT. Yes,
Mr. PECORA. Was
sir.
this option secured by you with the same purpose in mind of conducting market operations under it which would
enable you to distribute the stock at higher prices ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. HOW many
shares were drawn down by you under
this option?
Mr. WRIGHT. About 8,000 shares.
Mr. PECORA Did you say 8,000 shares ?
Mr. WRIGHT. Yes, sir. And then it stopped.
Mr. PECORA. Times were unpropitious then for this operation; is
that it?
Mr. WRIGHT. NO. I was taken sick and I had to stop.
Mr. PECORA. I notice this clause in this option:
It is further understood that upon the expiration of this order, as above
noted, you will forward to us 40 percent of any profits which you may realize
through the sale of these shares, and it is also understood that Redmond & Co
shall not be responsible for any loss which may occur through such sales
Now, the reason for the inclusion of that provision, I assume, is
similar to that heretofore given by you with regard to other similar
provisions in other options.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. NOW, Mr.
Wright, the next option in the year 1931
was given to you or to your firm by W. E K. Taylor & Co., of the
New York Stock Exchange, being marked " Committee Exhibit No.
57 ", and is dated October 21, 1931. I t covers 20,000 shares of the
stock of the American Machine & Foundry Co.
Mr. WRIGHT. IS that in 1931?
Mr. PECORA. That is dated October 21, 1931. This letter gives
your firm a 30-percent participation in the syndicate account that was
formed to trade under this option. Is that right?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Who managed that account?
Mr. WRIGHT. I did.
Mr. PECORA. HOW many shares were drawn
down, under it?
STOCK EXCHANGE PBACTICES
6143
Mr. WRIGHT- About 13,000 shares.
Mr. PECORA. Did the account close with a profit?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Was this
account also formed for the purpose of
conducting trades in the stock under the option in a manner calculated to distribute the stock at higher prices *
Mr. WRIGHT. Yes, sir. No, Mr. Pecora, I find that there was no
money made in that account.
Mr. PECORA. Was any money lost under it?
Mr. WRIGHT. Yes.
Mr. PECORA. HOW
Mr. WRIGHT. Our
much?
participation meant a loss of $7,600, on the
basis of a 20 percent participation.
Mr. PECORA. It was a 30 percent participation, unless you gave a
subparticipation to somebody else?
Mr. WRIGHT. I think Wright & Sexton had a participation of
20 percent.
Mr. PECORA. Well, the option agreement or letter received in evidence as committee exhibit no. 57 refers to the allotment to your
firm of a 30 percent participation in the option.
Mr WRIGHT. I think it was cut down by a subsequent letter to
20 percent.
Mr. PECORA. Well, now, let us see. Attached to this exhibit
Mr. WRIGHT (interposing). No; 30 percent is right.
Mr. PECORA. Attached to this exhibit are two other copies of
letters, dated, respectively, March 10,1931, and March 26, 1931, each
addressed to your firm by W. R. K. Taylor & Co., referring to
earlier joint accounts to trade in the stock of the American Machine
& Foundry Co. There were such earlier trading accounts, weren't
there?
Mr. WRIGHT. I have been trading in the stock for years.
Mr. PECORA. I mean that there were such earlier trading accounts
formed by W. R K. Taylor & Co. in that year.
Mr. WRIGHT. Yes, sir; in 1929,1930, and 1931 or thereabouts.
Mr. PECORA. NOW, committee exhibit no. 58 in evidence consists
of an option agreement, or an option granted to you or your firm
by Redmond & Co., under date of November 11,1931, and covers, or
rather relates to a joint account which is to trade in 51,500 shares
of the common stock of the Kaufman Department Stores, Inc., for
which options were given at prices ranging from $9.50 to $11 per
share?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And your
firm had a one third interest in that
account, did it not?
Mr. WRIGHT. Yes,
sir.
Mr. PECORA. Together with the firms of Redmond & Co. and Farnum, Winter & Co. ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Who conducted
the trading operations under that
option ?
Mr. WRIGHT. I do not remember, Mr. Pecora. I t was not me.
Mr. PECORA. Was it a man named Bergen?
6144
STOCK EXCHANGE PEACTICES
Mr. WRIGHT. Bergen, I believe, sold the stock through dealers. I
do not believe he conducted market operations. I do not think
there was much of a market operation in it. He tried to sell the
stock through dealers, and did not succeed?
Mr. PECORA. Who gave this option under this account in the first
instance * Were they officers of Kaufmann Department Stores, Inc.!
Mr. WRIGHT. I do not think so, as I remember it. I t was not
officers. It was a man who was one of the largest stockholders of
the company, and was formerly president of Stern Bros
Mr. PECORA. Was it Samuel Mundheim?
Mr. WRIGHT. That is it.
Mr. PECORA. And this joint account was formed for the same purpose as has heretofore been stated, namely, to conduct market operations with a view to disposing of the stock at a higher price.
Mr. WRIGHT. NO, sir.
Mr. PECORA. What was this account
Mr. WRIGHT. They were selling the
formed for ?
stock by means of dealer distribution and not by means of market operations.
Mr. PECORA There was no market operation conducted under this
option?
Mr. WRIGHT. NO, sir.
Mr. PECORA. NOW, the
last one for the year 1931 that you have
given to us is an option given to you under date of November 12,
1931, by W. H. Eshbaugh, and covers 10,000 shares of the common
stock of International Salt Co., at $32 per share, the option being
given for a period of 1 month. Did you take this option with a view
to conducting market operations under it so that you might distribute the stock at higher levels ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. NOW, Mr.
Wright, that covers all the options,copies
of which were reported by your firm in answer to the questionnaire
submitted to your firm m behalf of this committee last fall. But,
as I have remarked before, it covers options only for the calendar
years 1931, 1932, and 1933, although the questionnaire called for
options for the years 1929 and 1930 as well. You are going to have
further inquiry made m your office for records for those years,
are you?
Mr. WRIGHT. Yes; but I do not think that I had any. But I will
make as much inquiry as I possibly can.
Mr. PECORA. All right.
Mr. WRIGHT. NOW, Mr. Pecora, there are a couple of corrections
my assistant would like to make of statements that he tells me are
incorrect.
Mr. PECORA. What are they?
Mr. WRIGHT. AS to the American Machine & Foundry Co. the
share figures are not quite correct, although they are the approximate
amounts
Mr. PECORA. Well, they will be sufficient for our purposes.
Mr. WRIGHT. All right. Then we do not want to make any
changes.
Mr. PECORA. NOW, Mr. Wright, to your knowledge, is it common practice for members of the exchange to operate under option
agreements generally similar to those which you have produced and
which have been put in evidence here today?
STOCK EXCHANGE PRACTICES
6145
Mr. WRIGHT. I S it common practice?
Mr. PECORA. Yes.
Mr. WRIGHT. Well,
I wouldn't say it is common practice, but it is
done.
Mr. PECORA. I t is frequently done?
Mr. WRIGHT. Not frequently, but it is commonly done by a small
proportion of the members.
Mr. PECORA. By about what proportion of the members in your
opinion, and we understand that it is purely your opinion.
Mr. WRIGHT. In my opinion I wouldn't think that 1 man out of
every 100 who are members of the exchange, does it. I do not think
there are more than 15 men who specialize in that kind of work.
I was just trying to think, and I doubt if there are even 15 men.
Mr. PECORA. Those 15 members, taking that number by means
of purely an approximation, specialize in that kind of operation or
trading, do they?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
Mr. WRIGHT. Yes,
Mr. PECORA. I S it
sir.
do they get their options frequently from other
members of the stock exchange ?
Mr. WRIGHT. Yes, sir. And that is accounted for by the fact that
your options are granted by members of the exchange. That is why
members' names appear so frequently.
Mr. PECORA. DO you also know it to be the practice, perhaps not
common but more or less frequently, for members of the exchange
to operate under options given to them by corporations which issue
the stock in which the trading is done ?
Mr. WRIGHT. Well, as a general rule these options would not be
given by corporations to other than a stock-exchange firm, and in
turn the stock-exchange firm would give it to the individual operator. In other words, they very selfishly, quite naturally, want the
commissions themselves.
Mr. PECORA. That is, the stock-exchange firm that gets the option
from the corporation will turn it over to one of the other members
to trade in it?
also the practice or not infrequent for members
of the exchange to trade under options granted by officers or directory of corporations whose securities are listed on the exchange?
Mr. WRIGHT. Well, the American Commercial Alcohol Corporation did, and I presume there are others doing it.
Mr. PECORA. That is an instance of such a thing, isn't it?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Mr. Wright,
if you would care to tell this committee
your views on it, to what extent do you think that these trading
accounts that are formed for the purpose of enabling persons holding stock under option to distribute that stock at higher prices, are
justified when they are undertaken solely for that purpose.
Mr. WRIGHT. Might I have that question read to me?
Mr. PECORA. Yes. The committee reporter will read it to you.
(Which was done.)
Mr. WRIGHT. Just the same as it is possible to sell Campbell Soup
by advertising Campbell Soup. Just the same as frozen stocks
h h are held are of no benefit to anybody, and yet, if distributed
6146
£TOCK EXCHANGE PEAOTIOES
to the people, they are not so frozen. If you have them frozen and
not in the hands of the people, you have stagnation m the stock
market and in the banking business throughout the country.
Mr. PECORA. Those trading operations which are conducted for
that purpose are conducted for the selfish purpose of those conducting the operations to make profits at the expense of the investing
public, are they not ?
Mr. WRIGHT. NO ; that is not true, because those stocks sometimes
go up many, many points above the price at which they are sold.
Mr. PECORA. In other words, this movement that is started by
pools or syndicate accounts continue beyond the expectations, hopes,
or plans of the originators of the movement?
Mr. WRIGHT. In many cases they have.
Mr. PECORA. But where the trading accounts are initiated solely
for the purpose of enabling the persons who hold the stock under
option to sell that stock to the public at higher levels, don't you
think they are more or less unethical?
Mr. WRIGHT. NO, sir.
Mr. PECORA. Don't you
think they tend to excite the market in a
manner calculated to bring in the general public ?
Mr. WRIGHT. Yes,
Mr. PECORA. And
sir.
a part of the operations of such trading accounts
consist of buying and selling for the same accounts, in order to give
the market the appearance of activity so that the public may be
induced to come in; isn't that so?
Mr. WRIGHT. That is true.
Mr. PECORA. And you think that is sound and proper practice?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Despite the
fact that the general public which is
induced to come in has no way of knowing that that market activity
is simply fomented by a group for the selfish purpose of enabling
that group to dispose of its optioned stock at higher prices?
Mr. WRIGHT. That is true; but the part that you do not take into
consideration is that some men who indulge this practice should not
be allowed to do it, while other men who do it stand by their
markets.
Mr. PECORA. And how can you draw a line between those who
should not be allowed to do it and those who should?
Mr. WRIGHT. YOU could not draw a line, but, nevertheless, that is
the case.
Mr. PECORA. Well, now, you heard the testimony given before this
committee last week with regard to certain transactions in the stock
of American Commercial Alcohol Corporation ?
Mr. WRIGHT. Yes, sir.
Mr. PECORA. And you
yourself today said that the movement
which was started in that stock last May reached heights that were
absurd. Those were not your words, but I take it that is what you
meant to say.
Mr. WRIGHT. Yes, sir.
Mr. PECORA. Isn't that
an instance, Mr. Wright, of the evil of
starting a market in the manner that markets have been started, for
the purpose of enabling optionees to get rid of their stock at higher
levels ?
STOCK EXCHANGE PBACTICES
6147
Mr. WRIGHT. NO, sir; because the American Commercial Alcohol
appears to be an instance where the stock was carried up in sympathy
with the whisky stocks, where the craze became Nation-wide, and
there was no way that you could stop it. The American Commercial
Alcohol pool, from the testimony I listened to here, were out of
their stock around $30 a share, and yet that same stock sold at
89%.
Mr. PECORA. Well now, Mr. Wright, I think you are unfafriiliar
with the record brought out here before this committee when you
say that, and I again want to remind you of the evidence before this
committee produced last week from the records of W. E. Hutton &
Co. to the effect that the Bragg Syndicate operations commenced
on May 3, 1933, and continued until the end of July 1933; and yet
jrou persist in saying that the operations of that syndicate stopped
ong before July 1933.
lc Mr. WRIGHT. I would say that their trading in the stock, the little
I know about the testimony that I listened to, that they did practically no trading in the stock. You have the records there.
Mr. PECORA. We have the records and the records are here.
Mr. WRIGHT. That they did very little trading in June and July.
Mr. PECORA. Well, the records are just to the contrary, Mr. Wright.
Mr. WRIGHT. That I don't know anything about. I would say that
their trading in the stock on the option of 25,000 shares at 18, and
they made $210,000 profit and then continued to trade in that, I
would say it was awfully poor.
Mr. PECORA. That does not take into account whatever profits were
made individually by the participants m that syndicate not through
the operation of the syndicate, but taking advantage of market
conditions?
Mr. WRIGHT. Those things I don't know anything about.
T
Mr, PECORA. NO.
Mr. WRIGHT. But
I do think that most of the men in that syndicate
lost money in the end.
Mr. PECORA. What do you mean by saying they lost money in-the
-end?
Mr. WRIGHT. I think on balance they lost money over and above
the money they made on the options. I have heard some of the men
say that.
Mr. PECORA. That because of their individual trading in the
market?
Mr. WRIGHT. That is right.
Mr. PECORA. Bear in mind, Mr. Wright, that you yourself have
.admitted that as the specialist for this stock during this violent
movement of last year, to use your own expression, were " murdered "
when the break came, and yet for that 3-month period, for May,
June, and July 1933, you emerged from it with a profit of around
$138,000, despite the losses you took while you were being murdered?
Mr. WRIGHT. Yes, sir. I would like to also recall the fact that I
traded in 245,000 shares and sold 245,000 shares and made a profit
of $138,000 on that. That is a damned small margin of profit for
that amount of stock that I traded in.
Mr. PECORA. I am going to show you, Mr. Wright, the report made
to the committee on business conduct of the New York Stock Ex
6148
STOCK EXCHANGE PRACTICES
change under date of October 23, 1933, by the examiners or accountants of the New York Stock Exchange, and they show from transscripts of the accounts of W. E. Hutton & Co., account1 known as
" no. 296 ", which has been identified here as the Bragg Syndicate
account, tradings in that stock beginning with May 3,1933, and ending on July 31, 1933, and show orders executed by you for that
account as late as July 20. In fact there is one on July 24 executed
by you.
Mr. WRIGHT. Yes. I think, Mr. Pecora, you will find that the
Bragg Syndicate, so-called " Bragg Syndicate ", stopped playing the
market operations and started gambling, if you want to know.
Mr. PECORA. Well, that may be.
Mr. WRIGHT. And in the month of June I received from W. E.
Hutton & Co., $553 in commission; from Ben Smith, $107 commission; Durant, $17.50.
Mr. PECORA. Well, now, you look at this report of transactions
in American Commercial Alcohol for the account of B. E. Smith*
no. 296, account carried on the books of W. E. Hutton & Co., will
you, please, and see if that does not indicate that the operations in
that account were active all through May, June, and July 1933, and
that you executed some of the orders late in July 1933 for that
account?
Mr. WRIGHT. If I did, they were only a few thousand shares.
Mr. PECORA. Whatever they are, the account was only formed to
trade in 25,000 shares, wasn't it, or rather the option was to distribute 25,000 shares ?
Mr. WRIGHT. Yes, sir; they were just simply trading in the stock
like anybody else in July.
Mr. PECORA. There were trades, according to the returns made to
the New York Stock Exchange by W E. Hutton & Co., for the
account of that no. 296 account, which was identified here last week
as the account through which the Bragg Syndicate traded ?
Mr. WRIGHT. That is right. I would not know anything about
that, because Bragg was not here.
Mr. PECORA. They are the records of W. E. Hutton & Co., which
carried the account on its books.
Mr. WRIGHT. But I will say the same as I said before, Mr. Pecora,
that these men turned from running the market into gamblers. If
that was their business, to turn into gamblers, I had nothing to do
with it. That is what they did. You can see by their records.
They turned from market operators into just simply straight gambling in that particular stock.
Mr. PECORA. When did they stop being market operators and become gamblers in this trading?
Mr. WRIGHT. That is exactly what they did.
Mr. PECORA. When did they cease to be market operators and
become gamblers?
Mr. WRIGHT. The height of my business with them shows that I
did the height of my business for them in the month of May. There
are my slips [handing papers to Mr. Pecora], which will correspond
with yours. The month of May was the height of business I did.
In June it started to fall down; July practically nothing.
Mr. PECORA. NOW, let's see
STOCK EXCHANGE PRACTICES
6149
Mr. WRIGHT. There they are, right there. This represents the
amount [indicating on documents]. This lepresents the height of the
business that they gave me, which would be in May, the May commissions from W. E. Hutton. In June they started to drop down.
In July they got down to practically nothing.
Mr. PECORA. Look at the list of sales. According to W. E. Hutton & Co.'s records, you made—or the purchases and sales you made
for this 296 account in June, the latter part of June 1933——
Mr. WRIGHT. That is what I made for them, that amount of money.
Mr. PECORA. I don't care what the amount of money was. They
are the long list of transactions put through by you ?
Mr. WRIGHT. They do not prove to me any more than that thing
proves to me. That proves that in May they reached their height
of trading, and in June they started to drop down, and in July
practically nothing.
Mr. PECORA. DO you challenge these figures
Mr. WRIGHT (interposing). I don't challenge anything.
Mr. PECORA. Wait a minute—that the records of W. E Hutton
& Co. do show that, for instance, on June 26 that account, account
no. 296 on the books of W. E. Hutton & Co., bought through you
700 shares of American Commercial Alcohol and sold through you
1,500 shares?
Mr. WRIGHT. What is the date?
Mr. PECORA. June 26.
Mr. WRIGHT. The volume of June 26 was—to show how little their
trading meant—the volume or June 26 was 31,000 shares, and that is
probably 1,500 shares out of 31,000. That is very little trading.
Mr. PECORA. And that on June 27 that account bought through
you 3,100 shares?
Mr. WRIGHT. Well, to show you how little that meant, on that
self-same day there was 49,200 shares traded in on the floor of the
stock exchange, and this so-called " pool" did less than one tenth
of that amount of trading.
Mr. PECORA. Are you overlooking the fact that according to these
records of W. E Hutton & Co., orders for the account of no. 296,
which was this Bragg account, were also executed through other
brokers than yourself 9
Mr. WRIGHT. I would presume that they were executed through
other people outside of myself. That I know nothing about.
Mr. PECORA. All of which indicates that this account did not
cease operating m May or in June but continued right down to the
end of July?
Mr. WRIGHT. They probably did. I don't challenge that.
Mr. PECORA. NOW, as vou look at the transcript of the transactions
m the account of no. 296 on the books of W. E. Hutton & Co. in
American Commercial Alcohol last year, you say that it would
indicate that persons interested in that account stopped being market
operators and turned gamblers?
Mr. WRIGHT. That is what I would judge; jes^ sir.
Mr. PECORA. That includes this man Bragg, that you said was one
of the cleanest operators 9
Mr. WRIGHT. Yes; that includes him.
The CHAIRMAN. Smith?
175541—34—-PT 13
20
6150
STOCK EXCHANGE PBAOTICES
Mr. PECORA. And Smith too?
Mr. WRIGHT. Smith was not around, Mr. Pecora. He is never
around.
Mr. PECORA. I think that is all, Mr. Chairman, of Mr. Wright.
The CHAIRMAN. All right; you may be excused, Mr. Wright.
Mr. WRIGHT. Am I through, Mr. Pecora ?
Mr. PECORA. Yes.
Mr. WRIGHT. I want
to thank all of you gentlemen for your
courtesies.
Mr. PECORA. If you get any more options for 1929 send them to us.
Mr. WRIGHT. I will get you 1929 and 1930 if there were any, and
I will send you a copy. Am I excused for the balance of the
meeting?
Mr. PECORA. Yes.
Mr. WRIGHT. Thank you very much.
The CHAIRMAN. The committee will
Good night.
now take a recess until tomorrow morning at half past 10. I want the committee to meet
at 10 in order to have a little executive session. The regular session
will begin at half past 10 tomorrow, and the witnesses are excused
until half past 10.
.(Accordingly, at 4:40 p.m., the hearing was adjourned until
10:30 o'clock on the following morning.)
COMMITTEE EXHIBIT NO 34, FEBRUARY 20, 1934
HOBNBLOWER & WEEKS—BOSTON, NEW YORK, CHICAGO
42 BROADWAY, NEW YORK
Messrs. WRIGHT & SEXTON,
APRIL 25, 1933.
c/o Arthur Upper & Oo,
50 Broad Street, New York City.
DEAR SIRS : On behalf of a client, we herewith give you the right to call upon
us for delivery of twenty-five thousand (25,000) shares of Timken Detroit Axle
Common Stock at any time before 3.00 p.m., May 24, 1933, at the following
prices:
5000 shares, @ $250 per share.
5,000
" @ 3 00 "
5,000
" @ 3 50 "
5,000
" @ 4 00 "
5,000
" @ 4 50 "
The stock to be taken up in 100-share lots or any multiple thereof,
very truly yours.
(Signed)
HORNBLOWER & WEEKS.
HORNBLOWER & WEEKS—BOSTON, NEW YORK, CHICAGO
42 BROADWAY, NEW YORK,
Messrs. WRIGHT & SEXTON,
MAY 16, 1988
% Arthur Lipper & Co.,
50 Broad Street, New York, N.Y.
DEAR SIRS: This is to certify that on behalf of a client we have cancelled
your present Call on 25,000 shares of Timken Detroit Axle and have replaced
it by a new Call as follows:
10,000 shares at $4 00 per share.
10,000 "
" 4 50 "
" .
10,000 "
" 5 0 0 "
good until the close of business on Friday, June 23rd
Yours very truly,
(Signed)
HORNBLOWER & WEEKS.
STOCK EXCHANGE PEACTICES
6151
HORNBLOWER & WEEKS—BOSTON, NEW YORK, CHICAGO,
42 BROADWAY, NEW YORK,
June 2, 1988
Messrs. WRIGHT & SEXTON,
e/o Arthur Lipper & Co, 50 Broad Street, New York City.
DEAR SIRS On behalf of a client, we herewith give you the right to call upon
us for delivery of 30,000 shares of Timken Detroit Axle stock at any time
before 3 00 P M, June 23, 1933, at the following prices
7,500 shares, @ $5.50 per share
7,500
"
@ 6 00 "
7,500
"
@ 6 50 "
" .
7,500
"
@ 6 50 "
7,500
"
@ 7.00 "
" .
the stock to be taken up in 100-share lots or any multiple thereof
Very truly yours
(Signed)
HORNBLOWER & WEEKS.
HORNBLOWER & WEEKS—BOSTON, NEW YORK, CHICAGO,
42 BROADWAY, NEW YORK,
June 6th, 1988.
Messrs WRIGHT & SEXTON,
o/o Messrs. Arthur Lipper & Go, 50 Broad Street, New York, N Y
DEAR SIRS : On behalf of a cLent we herewith give you the right to call upon
us for delivery of 16,000 shares of Timken Detroit Axle stock at any time before
3 P M June 23rd, at the following prices—
4,000 shares at $5 50 per share.
4,000 shares at 6 CO per share
4,000 shares at 6 50 per share
4,000 shares at 7 00 per share
stock to be taken up in 100 share lots or any multiple thereof
This call on 16,000 shares is in addition to our previous Call given you under
date of June 2nd, 1933 on 30,000 shares of which you have already exercised
7,500 shaies at $550 per share
Yours very truly,
(Signed)
HORNBLOWER & WEEKS.
COMMITTEE EXHIBIT NO 35, FEBRUARY 20, 1934.
30 PINE STREET, NEW YORK,
May 16, 1983.
WRIGHT & SEXTON,
1 Wall Street, New York City.
Attention Charles Wright, Esq.
GENTLEMEN : This will confirm our understanding to the effect that you have
an option from Pacific Eastern Corporation and Blue Ridge Corporation to
purchase jointly from them 40,000 shares of the common stock of United Biscuit
Company of America for the account of a Selling Group, to be organized, at
prices as follows:
5,000 shares at 20.
5,000 shares at 21.
2,500 shares at 21%.
5,000 shares at 22.
2,500 shares at 22%.
5,000 shares at 23.
2,500 shares at 23%.
5,000 shares at 24.
2,500 shares at 24%.
5,000 shares at 25.
Any net profit realized by the Selling Group above the prices paid to these
Corporations, after payment of all commissions, etc., are to be divided equally—
one half to the firm of Wright & Sexton and one half jointly to the Pacific
Eastern Corporation and Blue Ridge Corporation. It is understood that the
6152
STOCK EXCHANGE PRACTICES
Selling Gioup will have a limited liability of not over 5,000 shares of stock a t
any one time
This option expires Thursday, June 15, 1983 at 3 p.m. It is our understanding that you will draw down stock for this account from day to day to correspond with your sales for the account of the Selling Group.
Yours very truly,
(Signed)
MELVIN E
COMMITTEE EXHIBIT NO 36, FEBRUARY 20,
SAWIN
1934
MAY 18, 1933.
Foi One Dollar ($1.00) and other valuable considerations, I hereby give
Wright & Sexton, 1 Wall Street, New York City, the option to purchase from
me the following number of shares of the common stock of the Gotham Silk
Hosiery Company, Inc, at the following prices, for a period of thirty (30)
days from date *—
10,000 shares common stock at $12 per share
10,000 shares common stock at $13 per share
10,000 shares common stock at $14 per share
All prices to be net
It is distinctly understood between us that I reserve the privilege-of cancelling this agreement on forty-eight (48) hours notice
(Signed)
H W BLTJMENTHAL
COMMITTEE EXHIBIT NO. 37, FEBRUARY 20,
1934.
SHUMAN & Co. MEMBERS NEW YORK STOCK EXCHANGE
25 BROAD STREET, NEW YORK
MAY
22, 1933
Mr. CHARLES C. WRIGHT,
Wright d Setvton, 1 Wall Street, New York 0%ty.
DEAR SIR* In consideration of One Dollar ($100), receipt of which is hereby
acknowledged, we grant to you an option on 25,000 shares of Granby Consolidated Mining, Smelting & Power Company, Ltd (a corporation of British
Columbia), under the following terms and conditions
(1) An option for 10 days on 2500 shares at 10%
(2) An option for 17 days on 2500 shares at 11
(3) An option for 24 days on 2500 shares at 11%
(4) An option for 31 days on 2500 shares at 12.
(5) An option for 38 days on 2500 shares at 12%
(6) An option for 45 days on 2500 shares at 13
(7) An option for 52 days on 2500 shares at 13%
(8) An option for 59 days on 2500 shares at 14
(9) An option for 66 days on 2500 shares at 14%
(10) An option for 73 days on 2500 shares at 15
If options No. 1, 2, 3, 4, 5, 6, 7, 8, 9, 10 are not exercised on the due date
withm the period of time mentioned as aforesaid, each and every succeeding
option shall become null and void and cease to exist
We shall agree to delivei the certificates in one hundred share lots
We understand that you may consider it necessary to purchase not over
4,000 shares of this stock in the open market before you exercise your first
option Should you find it necessary to do so it is our understanding that
you will agree to place said orders with us and we will agree to take for our
own account fifty per cent of any stock you may purchase, up to 4,000 shares,
covering this particular situation, for our own account and pay for same
It is to be further understood that George Douglass at Abbott Hoppm &
Co and associates, for their cooperation in furthering the distribution of this
STOCK EXCHANGE PRACTICES
6153
by creating the necessary purchasing power, are to receive from you
17 Vz per cent of the net profits, and that Shuman & Co. are in no way obligated
to Mr. Douglas.
We shall be glad to do everything possible to help you to be successful in
this undertaking.
We hand you this letter in duplicate, and if it meets with your approval, will
you kindly sign the copy where marked "Accepted " and return to us
Should any of the matunty dates of these options fall on a holiday or Sunday,
it is understood that the option may be exercised on the regular business day
following
Yours very truly,
(Signed)
COMMITTEE EXHIBIT NO 38, FEBRUARY 20,
W I SHUMAN
1934
REDMOND & Co, 48 WAIX STREFT, NEW YORK
1, 1933
Messrs WRIGHT & SEXTON,
One Wall Street, New York, N Y
We have purchased for ourselves and associates, including you,
«65,000 shares of common stock without par value of Libbey-0 wens-Ford Glass
Company, an Ohio corporation, at the price of $26 50 per share, and, in accordance with previous understanding, we confirm your interest in the above
purchase to the extent of 5,000 shares at said price We understand you
will leave this stock with us for sale proportionately with the balance of such
65,000 shares, you to accept the average of the net avails of such sales, as
determined by us in our absolute discretion, less brokerages taxes and other
expenses in connection theiewith
In connection with our purchase of said 65,000 shares of common stock, we
have obtained for ourselves and associates options to purchase additional
shares of such common stock as follows
Up to 20,000 shares on or before July 3, 1933, at $27 50 pei shaie,
Up to 20,000 shares on or before August 1, 1933, at $28 50 per share,
Up to 20,000 shares on or before September 1, 1933, at $29 50 per share,
Up to 20,000 shares on oi before October 2, 1933, at $30 50 per share,
•such options being respectively conditional on the full exercise by u« of the
preceding option within the period specified We confirm your mterebi m
the above options to the extent of 1,538 shares of such common stock out of each
of said blocks of 20,000 shares, and it is understood that, to the extent to
*which we, in our absolute discretion shall exercise such options, such purchases shall be proportionately for your account and that you will promptly
make payment on our call for the shares so purchased for you The stock
purchased under such options and remaining unsold shall not exceed 20,000
shares at any one time It is understood that any such additional stock purchased by you will likewise be left with us for sale proportionately with
the other stock purchased by us under such options, on the same terms provided above with reference to the original 65,000 shares
It is understood that we shall incur no liability for any action taken hereunder in good faith
If the foregoing is m accordance with your understanding, will you please
confirm your agreement therewith by signing and returning the enclosed
duplicate of this letter
Yours very truly,
GENTLEMEN
REDMOND & Co,
By A PERY OSBORN
6154
STOCK EXCHANGE PRACTICES
COMMITTEE EXHIBIT NO. 39, FEBRUARY 20, 1934
A. HECKSOHER, 52 VANDEEBILT AVENUE, NEW YORK,
W E I G H T & SBXTON,
JUNE 7, 1933
1 Wall Street, New York City.
GENTLEMEN • I hereby give you an option to purchase from me 28,824 shares
of common stock of the Consolidated Oigar Corporation at the following prices.
7,500 shares @ $16 per share
7,500 shares @ $17 per share
7,500 shares @ $18 per share
6,324 shares @ $19 per share
28,824
Stock to be taken up only in lots of not less than 7500 shares each, except
that the last lot shall be for the balance then remaining
This option shall expire August 5th, 1933, provided that of 20,000 shares
shall have been purchased and paid for by you on or before said date, your
option to purchase the remaining 8,824 shares shall be extended to and
including September 5th, 1933
The stock shall be delivered at my office, 52 Vanderbilt Avenue, New York
City, on not less than three days' notice against payment therefore in cash or
certified check
4500 shares of stock covered by the above options, are now held as collateral
for a bond issued by the National Surety Corporation and
the above option with
respect to said 4500 shares is subject to my obtaining1 consent of the Superintendent of Insurance of the State of New York to the withdrawal of the said
shares. I anticipate that I will be able to obtain such consent within the next
10 days or so.
Very truly yours,
A. HECKSHER
COMMITTEE EXHIBIT NO 40, FEBRUARY 30,
Mr. ARLINGTON W PORTER,
1934.
JUNE 21st,
1933
50 Pine Street, New York, N.Y.
DEAR SIR- In consideration of your purchasing fioni me, for immediate
delivery, 3,000 shares of no par value common stock of the American Seating
Company at $3 per share, I extend to you an option upon 17,000 shares of the
above mentioned stock on the following terms:
4,000 shares at 3
7,000 shares at 4
6,000 shares at 5
This option to extend for a period of sixty days from the date of this letter*
If this is in accordance with your understanding, will you kindly sign and
return the enclosed duplicate of this letter
Yours very truly,
(Signed) Louis H INGRAHAM
LOUIS H
INGRAHAM
72 Wall Street, New York, N Y
COMMITTEE EXHIBIT NO 41, FEBRUARY 20,
1934
THE SECOND NATIONAL BANK OF NEW HAVEN, NEW HA^EN, CONNECTICUT
Messrs. WRIGHT & SEXTON,
JUNE 19, 1933
% Enc and Dt overs, 115 Bioadway, New York, N.Y
GENTLEMEN : I hereby grant you an option on 40,000 shares PENNSYLVANIA
COAL AND COKE CORPORATION at $5 per share, net, good until ninety
days from date (September 18, 1933) for one of our clients.
It is understood and agreed that you or your nominee will take up for delivery not less than 5000 shares at $5 per share, net, every 30 days, otherwise
we are at liberty to cancel said option.
(Signed) E G ALLYN, President.
Yours very truly
STOCK EXCHANGE PEACTICES
COMMITTEE EXHIBIT NO. 42, FEBRUARY 20,
6155
1934
BANCAMERIOA-BLAIR CORPORATION, 44 WAUL STREET, NEW YORK
JUNE 20,
1933
Douglas Aircraft Company, Inc, Capital Stock.
Mr
SAM PASS,
% Messrs C E. WeUes & Co,
89 Broa&ivay, New York City.
DEAR SIR* The undersigned and associates hold an option to purchase from
Douglas Aircraft Co. Inc. certain shares of its no par value capital stock
We hereby confirm the sale to you today of 20,000 shares Douglas Aircraft
Co. Inc capital stock at $15 per share, subject, however, to our being able to
obtain delivery of said shares pursuant to the aforementioned option Delivery of and payment for said shares is to be made at the office of BancamericaBlair Corporation, 44 Wall Street, New York City, on Wednesday, June 31,
1933, subject to receipt of said shares from Douglas Aircraft Co Inc
After effecting delivery and receiving payment for the above 20,000 shares
at $15 per share, the unexercised balance of the aforementioned option will
be 47,969 shares, and we hereby confirm our understanding with you regarding
the same as follows:
We hereby give you an order to sell for account of ourselves and associates
all or any part of 24,000 shares of said stock at market prices, but in no event at
less than $16 per share net to us, and also give you an order to sell for account
of ourselves and associates all or any part of an additional 23,969 shares of
said stock at market prices, but in no event at less than $17 per share net to us.
The above orders are good for a period of 30 days from date hereof or until 3
p m Thursday, July 20, 1933.
It is understood that m the event that you have been successful in disposing
of the first block of 24,000 shares at $16 per share or better, we agree to extend
the order on 23,969 shares at $17 per share or better for an additional period of
30 days from July 20,1933
It is also understood that the shares covered by the above orders shall be
disposed of by you in the market and not en bloc
It is understood that during the life of this arrangement you are not to take
a long position in the above stock for this account, but you may repurchase
stock previously sold for the purpose of covering your short position which
short position shall not exceed at any one time 5.000 shares nor in any case more
than the unexecuted balance of the above orders In the event that your short
position exceeds 5,000 shares of stock, you are to take up from us and pay for
at clearance prices hereafter referred to the number of shares equal to your
short position in excess of 5,000 shares.
During the life of these orders you are not to trade in the capital stock of
Douglas Aircraft Co Inc except m the interest of the account as herein stated.
You agree to inform us daily upon our request as to your net position m
this stock, together with the average puce of said position
It is also agreed that your operations hereunder shall be conducted in accordance with the rules of the New York Stock Exchange and within the
State of New York
During the life of these oiders, certificates for these shares in good delivery
form as required by the rules of the New York Stock Exchange will be delivered to you or your nominee upon demand on us, giving us two days notice in
writing and upon payment at a clearance price to be agreed upon from time
to time, but such clearance price shall not be less than the minimum prices
specified on the above orders, namely, $16 and $17 per share at the office of
Bancamenca-Blair Corporation, 44 Wall Street, New York City
At the close of the account you agree to furnish us with a statement of your
account and to pay to us the difference between the clearance prices at which
shares are delivered to you and the net proceeds received therefrom less
expenses.
All your transactions hereunder or in any way connected with the sale by
you of the above shares are to be conducted in compliance with the Federal
Securities Act of 1933
It is understood that after deducting expenses any amount received in excess
of the puces herein stated from the sale of all or any part of the 67,969 shares
6156
STOCK EXCHANGE PBACTICES
covered by this transaction shall be divided 50% to you and 50% to us and our
associates We assume no obligation hereunder except to deliver stock to you
as provided herein and we shall not be liable for any loss arising out of this
transaction.
Kindly acknowledge and confirm that the foregoing is in accordance with
your understanding by signing and returning to Bancameriea-Blair Corporation the enclosed copy of this letter
Yours very truly,
E A PIERCE & Co
By E. A. PIERGE
BA.NCAMEBICA-BLAIR CORPORATION
By J. R MONTGOMERY, Vice President
COMMITTEE EXHIBIT NO 43, FEBRUARY 20,
1934
HAYDEN, STONE <L CO, 25 BROAD STREET, NEW YORK, N Y
JULY 11,
1933
MESSRS WRIGHT & SEXTON,
1 Wall Street, New York, N.Y.
We hereby give and grant to you the right and option to purchase 54,796 shares of the common stock of Youngstown Sheet & Tube Company (an Ohio corporation), in lots, at prices and expiring on or before the
close of business, on dates as follows, but all subject to the terms and conditions hereinafter stated, viz
DEAR SIRS:
Expiration date of options
Number Price per
of shares share
4,796
10,000
10,000
July 11,1933.
July 21, 1933.
July 26,1933.
33
Expiration date of options
July 31,1933—
August 7, 1933_
August 10,1933
Number Price per
of shares
share
10,000
10,000
10,000
33H
34
34H
If we or our client should be enjoined or restrained by any court or judge
from selling or disposing of said stock, and upon notice by us, either orally or
in writing, or by telephone or mail, to you at your ofl^e, 1 Wall Street, New
York City of such tact, we shall not be bound to Recognize arv calls by you
hereunder nor to make any delivery of stock, and all of our obligations hereunder, including the options herein granted, shall immediately cease and
determine
Title to said stock shall not pass until you pay for the same and the stock is
actually delivered to you
If you fail to take up and pay for any lot of stock withm the period of time
mentioned as aforesaid, all of your rights hereunder shall immediately cease
and determine
This option may not be assigned without our written consent
Very truly yours,
HAYDEN, STONE & Co
COMMITTEE EXHIBIT NO 44, FEBRUARY 20,
L
1934
F ROTHSCHILD & Co,
ONE TWENTY BROADWAY,
Messrs WRIGHT & SEXTON,
New York, July 17, 1933
1 Wall Street, New York City
GENTLEMEN Confiimmg oui telephone ccnveisation of this date, we agree
that tomorrow, July 18th, we will deliver to you calls on Ten Thousand
(10,000) shares of Robert Reis & Co. common stock at three dollars ($3) per
share, and six thousand five hundred (6,500) shares of Robert Reis & Co common stock at Four Dollars ($400) per share, good for thirty days, expiring
August 17, 1933
Very truly yours,
L. F . ROTHJSOHILD & CO.
STOCK EXCHANGE PEACTICES
6157
COMMITTEE EXHIBIT NO 45, FEBRUARY 20, 19B4
L F ROTHSCHILD & Co,
One Twenty Broadway, New York, August 26, 1938
Messrs. WRIGHT & SEXTON,
1 Wall Street, New York City
This is to confirm that the following privileges issued on July 18th
covering
8,000 shares Robert Reis common at 3
6,500 shares Robert Reis common at 4
and drawn by Mr. Harry Cowan, are to be extended to September 23, 1933,
and we hereby guarantee that such privileges will be endorsed to that effect
on Monday, August 28, 1933
Very truly yours,
BEAR SIRS :
L F ROTHSCHILD & Co
BANOAMEKEOA-BLAIR CORPORATION,
U Wall Street, New York, September 18, 1988
[Confidential]
SUPERIOR OIL CORPORATION CAPITAL STOCK
Mr CHARLES C. WRIGHT,
Messrs WRIGHT & SEXTON,
1 Wall Street, New York Ctty
We hereby give you an order to sell for our account, all or any
part of 135,000 shares of the no par value, capital stock of Superior Oil Corporation, in amounts and at prices as follows
10,000 shares at $2 75 per share net to us
25,000 shares at $3 00 per share net to us
25,000 shares at $3 50 per share net to us
25,000 shares at $4 00 per share net to us
50,000 shares at $4 50 per share net to us
The above order is good until the close of business at 12 noon Saturday,
October 14, 1933
It is understood that m the event you shall have been successful in disposing of a total of 60,000 shares of the above stock at the respective pi ices
listed above, we agree to extend the time for the execution of the balance of
the order for an additional period of sixty days from October 14, 1933
It is understood that the shares covered by the above orders shall be disposed of by you m the market and not en bloc
It is understood that during the life of this arrangement you are not to take
a long position in the above stock for this account, but you may repurchase
stock previously sold for the purpose of covering your short position, which
short position shall not exceed at any one time 20,000 shares of said stock.
In the event that your short position exceeds 20,000 shares of stock, you are
to take up from us and pay for, at clearance prices hereinafter referred to,
the number of shares equal to your short position in excess of 20,000 shares
During the life of these orders you are not to trade in the capital stock of
Superior Oil Corporation except in the interest of the account as herein stated.
You agree to inform us daily upon our request as to your net position in this
stock, together with the average price of said position
It is also agreed that your operations hereunder shall be conducted in accordance with the rules of the New York Stock Exchange and within the State
of New York
During the life of these orders, certificates for these shares in good delivery
form as required by the rules of the New York Stock Exchange will be delivered to you or your nominee upon demand on us, giving us two days' notice in
writing and upon payment at a clearance price to be agreed upon from time to
time, but such clearance price shall not be less than the minimum prices specified above, at our ofiice, 44 Wall Street, New York City
DEAR SIR:
1658
STOCK EXCHANGE PBACTICES
All your transactions hereunder or in any connected with the sale by you
of the above shares are to be conducted in compliance with the Federal Securities Act of 1933.
Kindly acknowledge and confirm that the foregoing is in accordance with
your understanding by signing and returning to us the enclosed copy of this
letter
Yours very truly,
BANOAMERICA-BLAIR CORPORATION,
By ROBERT C ADAMS, Vice President
COMMITTEE EXHIBIT NO 47, FEBRUARY 20, 1984
NEW YORK, NY., May 2k, 1988
Mr OSCAR C SEEBASS,
80 Broadway, New York City
In consideration of the sum of One ($100) Dollar and
other good and valuable considerations, I herewith grant you the option to
purchase International Salt Company stock as follows
Two Thousand (2,000) shares at the price of $26 per share, delivery of
which is to be taken on or before July 8, 1933; and
Five Thousand (5,000) shares at the price of $28 per share, delivery of which
is to be taken on or before July 8,1933.
In the event of the exercise of the option hereby granted, you are to give
me notice of your desire to exercise the same not later than 3 30 p m on the
day prior to the day fixed by you for delivery in such notice, and the place of
delivery shall be at my office, Room 2600, No 165 Broadway, New York City,
unless I shall designate a different place of delivery Payment of stock purchased pursuant to this option is to be made by cash, or by certified check
in New York funds The option hereby granted shall be available to you or
your assigns provided that notice of any assignment shall be given by you to
me and confirmed by your assignee, and only after receipt of such notice and
confirmation shall I be bound by any assignment
Very truly yours,
DEAR MR SEEBASS
H
B DWYER
COMMITTEE EXHIBIT NO 48, FEBRUARY 20, 1934
J R WILUSTON & Co,
11 WaHl Street, New York, August 12, 1932
Messrs WRIGHT & SEXTON,
1 Wall Street, New York City
For the consideration of your taking from us one thousand
(1,000) shares of the capital stock of the Affiliated Products, Inc for $8,500,
we will give you the right to call upon us for delivery until two-forty-five (2:45)
PM Wednesday, August 24th, 1932, of nine thousand (9,000) shares of the
capital stock of the Affiliated Products, Inc, at $8 50 per share
As Affiliated Products, Inc stock goes ex-dividend on August 18th, 1932, any
stock taken up from us prior to August 18 will carry the dividend, but any
stock taken up under this call after August 18th, will be ex-dividend
It is undeistood and agreed between us that, in the event of your not having
exercised your option with respect to any of said shares, we shall be under no
obligation to extend the option
Yours very truly
DEAR SIRS
J R WIIXISTON & Co.
6159
STOCK EXCHANGE PRACTICES
COMMITTEE} EXHIBIT1 NO. 49, FEBRUARY 20,
1034
E GERLI & Co, INO ,
49 East 84th Street, New Yo?k
Mr, CHARLES C* WRIGHT,
% Wright & Sewton,
1 Wall Street, New York, N Y
DEAR SIR: In consideration of the sum of One Dollar, we hereby grant you
the privilege to purchase fiom us any time within sixty (60) days from the
aftove date, the following.
5,000 Beldmg Hemmway Co, 5%
n
a 6
5,000
n
u 6y2
10,000
a
u 7
10,000
7%
15,000
8
15 000
15,000
8%
5,000
9
It is understood that you have the privilege of borrowing up to five thousand
shares of the above stock, and that when you are short in position of the above
mentioned five thousand shares, you are to take up from us the stock at option
price
Very truly yours,
it
it
it
ft
a
tt
E GERLI & Co, INC ,
JOSEPH GERLI, Tr
COMMITTEE EXHIBIT NO 50
FEBRUARY 20,
1934
REDMOND & Co,
48 Wall Street, New York, September 14, 1982.
WRIGHT & SEXTON,
1 Wall Street, New Yorh City.
• We hereby confirm grving you an option good until the close
of business October 5, 1932, on 15,000 shares of the Common Stock of the
Warren Foundry and Pipe Coiporation at the following prices
1,000 shares at $13 00 per share
2,500 "
" 14 00
" 15 00
2,500
"
" 16 00
3,000
"
3,000
"
" 17 00
3,000
"
" 18 00
We hereby assign this option to you to enable you to trade in the stock
the understanding that you will pay to us 60% of any profits which you
may realize through the purchase or sale of the stock dm ing this period or
through the exercising in part or whole of the option It is also understood
that Richmond & Co will not be responsible ±oi any loss which may occur
through such purchases or sales
Please confirm the above described option b3T signing and returning to us
the attached duplicate of this letter
Very truly yours,
DEAR SIRS
REDMOND & Co
COMMITTEE EXHIBIT NO. 51, FEBRUARY 20,
1934
BANOAMERIOA-BLAIR CORPORATION,
44 Wall Street, New York, September 21, 1982
Mr
GEORGE F. BREEN,
20 Pine Street, New York, N.Y.
I. In consideration of your using your best efforts to create a
market for and distribute shares of Curtiss-Wright Corporation Common Stock,
we hereby confirm the sale to you and your associates of 100,000 shares CurtissDEAR SIB:
6160
STOCK EXCHANGE PEACTICES
Wright Corporation Common Stock at $3.00 per share. We are to participate
to the extent of 25% in the purchase by you and your associates from us of
the above-mentioned 100,000 shares of stock at $3.00 per share.
II. In consideration of your purchasing the said 100,000 shares of Common
Stock of the Curtiss-Wright Corporation as above set lorth, we offer to sell
to you or your nominee or nominees, all or any part of an additional 400,000
shares of the Common Stock of said Corporation, at any time and from time
to time up to and including February 2, 1933, in the amounts and at prices as
follows:
(a) 100,000 shares at $3 50 per share
(&) 100,000 shares at $4 00 per share
(c) 100,000 shares at $4 50 per share
(d) 100,000 shares at $5.00 per share
provided, however, that this offer shall cease and terminate in respect to any
shares not taken up and paid for pursuant hereto, in the event you shall not
have purchased:
(a) 100,000 shaies at $3 50 per share on or pnor to the close of business
November 2, 1932
(fc) 100,000 shares at $400 per share on or prioi to the close of business
December 2, 1932
(c) 100,000 shares at $4 50 per share on or prior to the close of business
January 3, 1933
($) 100,000 shares at $500 per share on or prior to the close of business
February 2, 1933
III. The provisions of this letter are subject to our receiving the approval
of the Board of Directors of Curtiss-Wright Corporation, concerning the foregoing arrangements. A Special Meeting of said Board has been called for
this purpose, to be held on September 23, 1932
Our agreement with the Curtiss-Wright Corporation provides that upon
approval by its Board the said Corporation will apply forthwith to the New
York Stock Exchange for the listing of 500,000 shares of its Common Stock,
and upon the listing of said stock will deliver to the undei signed or its nominee
or nominees, 100,000 shares of said Common Stock Upon the delivery of ^aid
stock by the Corporation, the undersigned will immediately deliver the same
to you or to your nominee or nominees, upon payment to the undersigned of
the purchase price therefore at the office of the undersigned, No 44 Wall
Street, New York City
I i the event you subsequently purchase all or any part of the 400,000 shares
of the Common Stock of the Curtiss-Wright Corporation herein offered to
be sold to you or to your nominee or nominees, we agree that certificates
for the number of shaies so purchased will be delivered to you or your
nominee or nominees upon five days previous notice to the undersigned in
writing and upon payment to the undersigned, of the purchase price therefor.
Shares so delivered shall be in good delivery form as required by the rules
of the New York Stock Exchange
IV It is understood that in consideration of our accepting an interest of
25% in the purchase by you and your associates of the aforesaid 100,000
shares of stock at $3 00 per share, you agree that we are to receive 33%
per cent of any net profit realized by you and your associates through the
sale of any ot the shares covered by this agreement In no event shall we
be liable for any losses sustained by you or your associates our sole obligation hereunder being limited to the purchase of 25,000 shares at $3 00 per share.
V. It is understood that during the life of this agreement you are to give us
daily reports as to the number of shares sold by you, including prices of such
sales, and that all stock sold by you shall be disposed of in the market and
not en bloc
Kindly acknowledge and confirm that the foregoing is in accordance with your
understanding by signing and returning to us the enclosed copy of this letter.
Yours very tiuly,
BANCAMERICA-BLAHS CORPORATION,
By J. CHEHVER SANDIN, VP
STOCK EXCHANGE PRACTICES
6161
COMMITTEE EXHIBIT NO 52, FEBRUARY 20, 1934
ANDREWS, SEVENTEEN EAST FORTY-FIFTH STREET, NEW YORK, N Y
JANUARY 31, 1931
Mr. CHARLES WRIGHT,
SO Broad Street, New York City
DEAR MR WRIGHT* In consideration of One Dollar ($100) herewith paid us,
we give you herewith an option on twenty five thousand (25,000) shares of
Budd Wheel Co. Common stock, as follows.
5000 shares at $1000 per share, if taken up on or before February 9th, 1931
5,000 shares at $10 50 per share, if taken up on or before February 16th, 1931.
5,000 shares at $1100 per share, if taken up on or before February 24th, 1931.
5,000 shares at $1150 per share, if taken up on or before March 2nd, 1931.
5,000 shares at $12 00 per share, if taken up on or before March 9th, 1931.
All deliveries to be made in units of not less than 100 shares, will be made
by Central Hanover Bk & Tr. Co, 42nd Street Branch, against payment.
Failure to exercise any one of the options at the price and by the time stipulated cancels all succeeding option It is understood that the take-up of the
first 5,000 shares must be confirmed on or before Saturday, February 7th, 1931.
Yours very truly,
A M ANDREWS INVESTMENT CORP
A M. ANDREWS, Treasurer.
Accepted:
COMMITTEE EXHIBIT NO 53, FEBRUARY 20, 1934
MARCH 3,1931
For MB. CHARLES WRIGHT,
Central Hanover Bank & Trust Co.,
40 East 42nd St, New York City.
GENTLEMEN: From the stock which you are holding in safekeeping for our
account, please deliver to Mr. Charles Wright, Wright & Sexton, 30 Broad
Street, New York City, all or any part of ten thousand (10,000) shares of
Trans Lux Daylight Picture Screen Corpn. stock any time on or before March
30,1931, against payment at ten dollars ($10.00) per share.
Very truly yours,
A. M. ANDREWS INVESTMENT CORP.
A. M. ANDREWS, Treasurer.
COMMITTEE EXHIBIT NO. 54, FEBRUARY 20, 1934
W R K TAYLOR & COMPANY,
49 Wall Street, New York, July 81, 1931
WRIGHT & SEXTON,
1 Wall Street, New York City.
GENTLEMEN: Confirming our conversation with you, we have today opened
an account on our books designated as the Lily-Tulip Cup Corporation Trading
Group Account. The account is formed with a maximum liability of 5,000
shares, in which you have accepted a participation of 1500 shares, representing
50%. The account has nnrchased 1,000 shares at a cost ot $24,316 64.
A memorandum statement of all subsequent transactions will be mailed to
each participant every Monday giving a record of the transactions together
with the position of the account
Kindly signify your acceptance by signing and returning to us the enclosed
duplicate of this letter, retaining the original for your files
Very truly yours,
W. It. K. TAYLOR CO.
WJD: DEC
Aeepted:
6162
STOCK EXCHANGE PBACTICES
COMMITTEE EXHIBIT NO 55, FEBRUARY 20, 1934
REDMOND & Co,
J8 WM Street, New York, August 21, 1981.
Messrs WRIGHT & SEXTON,
30 Broad Street, New York, N Y
Attention: Charles C. Wnght, Esq.
GENTLEMEN: Keferring to our letter of August 19, 1931, in which we gave
you an order to sell for our account certain shaies of the Petroleum Corporation of America Capital Stock, we wish to correct the prices at which said
order ™as given, to be executed as follows:
5,000 shares at $8 25 per shaie
5,000 shares at $8 50 per share
5,000 shares at $8.75 per share
5,000 shares at $9.00 per share
5,000 shares at $925 per share
5,000 shares at $950 per share
5,000 shares at $9.75 per share
5,000 shares at 10.25 per share
10,000 shares at 10 50 per share.
All other terms and conditions as specihed in the above mentioned letter
are to remain the same as heretofore
Yours very truly,
REDMOND & Co
Accepted
Messrs REDMOND & Co,
AUGUST 21, 1931
48 Wall Street, New Yotk, N Y
GENTLEMEN On August 19, 1931, you gave us an order to sell fifty thousand
(50,000) shares of the Capital Stock ot the Petroleum Corporation of America
at certain prices, which prices iiave been conected by jou under today's date
It is hereby agreed between us that you may, with our consent, give an oider
to Messrs M J Meehan & Co. to sell all or any part of fifteen thousand
(15,000) shares of the above mentioned stock, in amounts and prices as
follows.
2,500 shares at 9%
2,500 shares at 9 ^
2,500 shares at 9%
5,000 shares at 10
2,500 shares at 10*4
Messers M J Meehan & Co will agree to pay you forty per cent (40%) of
any profits which they make in connection with these sales, if any, and will
agree that Redmond & Co shall not be responsible for any loss which may
occur through such sales.
It is understood that you will forward to us one-half of any profits you may
leceive from Messrs M J Meehan & Co.'s sales.
Yours very truly—
REDMOND & Co,
48 Wall Street, New York, Augtust 7, 1981
Messrs WEIGHT & SEXTON,
SO Broad Street, New Yoik, NY
Attention CHARLES C WRIGHT, ESQ
Dear Sirs* "We confirm our understanding that we have given you an
order (the execution of any part of which is optional with you) to sell for our
account all or any part of fifty thousand (50,000) shares of Petroleum Corporation of American Capital Stock in amounts and prices as follows
5,000 shares at $6 75 per share
5,000 shares at 7.00 per share
10,000 shares at 7.25 per share
10,000 shares at 7.50 per share
10,000 shares at 7 75 per share
10,000 shares at 8 00 per share
STOCK EXCHANGE PRACTICES
6163
" It is understood that the above prices are to be net to us and that this
order is to expire at 12 o'clock noon on Saturday, August 15, 1931 Certificates
for these shares will be delivered to you or your nominee upon one day's notice
and upon payment of the aforesaid prices therefor at our office at #48 Wall
Street, New York City.
" I t is further understood that upon the expiration of this order, as abo\e
noted, you will forward to us one half of any profits which you may realize
through the sale of these shares and it is also understood that Redmond & Co.
shall not be responsible for any loss which may occur through such sales
Yours very truly,
REDMOND & Co
AUGUST 18, 1981,
Messrs. WEIGHT & SEXTON,
30 Broad Street, New York, New York
Attention: Charles C. Wright, Esq.
DEAR SIKS . Referring to our letter of August 7th giving you an order to sell
for our account shares of Petroleum Corporation of America Capital Stock
at various prices, and to our verbal understanding extending the agreement on
terms of said letter to 12 00 o'clock noon, Eastern Daylight Saving Time,
August 22, 1931, we wish to confirm the fact that we have this day cancelled
the order m part as follows •
5,000 shares to be sold at $6 75 per share
5,000 "
" " " " 7 00 "
"
2,000 "
" " " " 7 25 "
"
Redmond & Co will make efforts to find purchasers for this stock and in
consideration of your accepting this cancellation Redmond & Co agrees to
account to you for one-half of such price or prices as may be received for this
stock in excess of the prices mentioned above.
It is further understood that you will not be responsible for any loss which
may occur through such sales by Redmond & Co.
All of the other terms as outlined in our letter of August 7th are to remain
in force until 12:00 noon, Eastern Daylight Saving Time, August 22, 1931.
Yours very truly,
ES:MA
Approved:
AUGUST 19, 1931
Messrs. WRIGHT & SEXTON,
30 Broad Street, New York, N Y.
Attention. Charles C Wright, Esq
DBAB SIBS • We confirm our understanding that we have given you an order
(the execution of any part of which is optional with you) to sell for our account all or any pait of fifty thousand (50,000) shares of Petroleum Corporation of American Capital Stock m amounts and prices as follows
5,000 shares at $8 75 per share
" 900 '
5,000 "
5,000 "
" 925 '
" 9 50 '
5,000 "
" 9 75 '
5,000 "
5,000 "
"10 00 '
" 1025 '
5,000 "
" 10 50 *
5,000 "
5,000 "
" 10 75 '
5,000 "
" 1100 '
It is understood that the above pi ices are to be net to us and that this order
is to expire at the close of business on Friday, August 28, 1931 Certificates
for these shares will be delivered to you or your nominee upon one day's notice
and upon payment of the aforesaid prices therefor at our office at #48 Wall
Street, New York City
It is further understood that upon the expiration of this order, as above
noted, you will forward to us one half of any profits which you may realize
6164
STOCK EXCHANGE PEACTICES
through the sale of these shares and it is also understood that Redmond & Co
shall not be responsible for any loss which may occur through such sales.
This order is m addition to the order given to you under date of August 7,
1931.
Yours very truly,
REDMOND & Co.
Accepted:
COMMISSION EXHIBIT NO. 56, FEBKTJABY 20, 1934
REDMOND & Co,
48 Wall St., New York, August 25, 1981.
Messrs. WEIGHT & SEXTON,
80 Broad Street, New York, N.Y.
Attention: Charles C Wright, Esq
GENTLEMEN: We are pleased to confirm sale to you of fifteen thousand
(15,000) shares of the Capitol Stock of the Transamenca Corporation to be
delivered by us to you on August 20, 1931, at $7 00 per share net to you.
We confirm our understanding that we have given you an order (the execution of any part of which is optional with you) to sell for our account all or
any part of one hundred and eighty-five thousand (185,000) shares of the
Capital Stock of the Transamenca Corporation in amounts and at prices as
follows:
15,000 shares at 7%
15,000
15,000
7%
15,000
8
15,000
8%
20,000
20,000
20,000
9
25,000
9}_
25,000
10 above prices are to be net to us and that this order
It is understood that the
is to expire at noon on September 5, 1931.
It is turther understood that in the event that you sell the first 30,000 shares,
as indicated above, before noon of September 5, 1931, the order for the balance
shall be extended to the close of business September 22, 1931; and it is
further understood that in the event that you sell the second 65,000 shares, as
indicated above, before the close of business September 22, 1981, the order for
the balance shall be extended to the close of business October 6, 1931.
It is understood that certificates will be delivered to you or your nominee
upon one day's notice and upon payment of the aforesaid prices therefor at our
office at #48 Wall Street, New York City.
It is further understood that upon the expiration of this order, as above
noted, you will forward to us forty-per cent (40%) of any profits which you
may realize through the sale of these shares and it is also understood that
Redmond & Co. shall not be responsible for any loss which may occur through
such sales.
Yours very truly,
REDMOND & Co
Accepted:
(Signed) WM. W. SEXTON.
COMMTTTEEJ EXHIBIT No. 57, FEBRUAEY 20, 1934
W. R. K. TAYLOB & Co ,
49 WiM Street, New York, October 21, 1981.
Messrs. WEIGHT & SEXTON,
1 Wall Street, New York City
GENTLEMEN: We have formed an account to purchase and sell the capital
stock of the American Machine & Foundry Company. The account will be
carried in our office under the name of American Machine & Foundry Syndicate
Account and is to run for a period of sixty days from date, expiring December
STOCK EXCHANGE PEACTICES
6165
20th, 1931 The total maximum liability of this account is 20,000 shaies The
account has purchased a total ot 3,700 shares for $82,64810, oi at an average
price of approximately $22 33
We are giving this account the following option
8,200 shares @ $23 per share, good for 30 days expiring at 3 00 pm.
November 20th, 1931
You have been allotted a 30% participation m this account and we are
making an initial call of $500 per share on your total commitment Your
participation amounts to 6,000 shares and, accordingly, we are charging your
account $30,000 to cover this initial call
Kindly signify youi acceptance by signing and returning to us the enclosed
duplicate of this lettei, retaining the original for your files
Youis very tiuly,
W R K TAYLOR & Co.
WJG DEC
Accepted
W R K TAYLOR & Co,
if9 Wall Street, New York, October 10, 1931
WEIGHT & SEXTON,
SO Bi oad Street, New Yorh City
We are forming an account to purchase and sell or otherwise
trade in common capital stock of the American Machine & Foundry Co, the
account to be carried in our office under the style and name ot "American
Machine & Foundry Co Trading Gioup Account" The account is to run for a
period ot sixty days fiom date, expiring May 10, 1931 The total maximum
liability of this account is 6,000 shares
The account was purchased 3,400 shares at $40 00 pei share
We are giving this account the following options
10,000shares @ 38%, expiring a t 3 00 pm April 12, 1931,
10,000 shares @ 40, expiring at 3 00 p m April 12, 1931,
10,000 shares @ 40, expiring at 3 00 pm April 9,1931, (the last named
option being given subject to our receipt through the mail tonight
of an option on a like number of shares)
7,000 shares @ 41, expiring at 3 00 p m. May 10, 1931,
1,000 shares @ 45, expiring at 3 00 p m. May 10, 1931
You have been allotted a 30% participation in this account Kindly signify
your acceptance by signing and returning to us the enclosed duplicate of this
letter, retaining the onginal for your files.
Very truly youis,
GENTLEMEN.
W
Accepted
R K TAYLOR CO
WJG DEC
enc
WRIGHT & SEXTON,
MARCH 26,
1931
80 Broad Street, New Y01 h Crty.
GENTLEMEN Referring to our letter to you under date of March 10th, 1931, m
reteience to the American Machine & Foundry Co. Trading Group Account,
which account became a joint account of Wright & Sexton and ourselves under
date of March 16th, 1931, by the withdrawal of Messrs Ladenburg, Thalmann &
Co., we confirm the sale to this account of 10,000 shares American Machine
& Foundry at $37 50 per share net.
We have also given this account an option to purchase from us 10,000 shares
American Machine & Foundry Co at $3900 per share, good for thnty days
from date, expnmg at 3 00 p m, April 25th, 1931.
In view of the above, we confirm that we have cancelled the following options
given to this account under date of March 10th, 1931:
10,000 shares at $38 50 expiring at 3.00 p.m. April 12th, 1931;
10,000 shares at $40.00, expiring at 3:00 p.m April 12th, 1931
Very truly yours,
WJG: DEC
W
Accepted:
175541—34, Pt 13
21
R K TAYLOR CO
6166
STOCK EXCHANGE PEACTICES
COMMITTEE EXHIBIT NO 58, FEBRUARY 20,
1934
REDMOND & Co.,
48 Wall Street, New York, November 11, 1931
Messrs. WRIGHT & SEXTON,
1 Wall Street, New York, N Y
GENTLEMEN : This letter will confirm the fact that we have this day formed
an undivided joint account between us to trade in and or distribute the capital
stock of the Kaufmann Department Stores, Inc, at such times, in such amounts
and at such pi ices as the managers may deem it advisable, except as otherwise
restricted in this letter.
The interest and liabilities in this account aie as follows.
Percent
Redmond & Co
38%
Wright & Sexton
33%
Farnum, Winter & Co
,
33%
Any net losses arising from the operation of this account will be shared by the
members in pioportion to their respective interests, and any net profit will be
distributed in like proportion with the exception that it is understood that in
the event the account shows a net profit, 20 percent thereof shall be paid first
to Mr John J. Beigen and 20 percent to Mr. Phillip King, but it is agreed
that Messrs. King and Bergen are not interested in any losses
Messrs. Wright & Sexton will trade in the account for the managers upon
the express understanding that the debit balance shall not at any time exceed
the market value of the long stock by more than six thousand dollars ($6,000)
and that the account shall at no time be long more than 2,500 shares.
This joint account will receive an option assigned to Redmond & Co for the
account of Redmond & Co, Wright & Sexton and Farnum, Winter & Co, in
equal third interests on 51,500 shares of the common stock of the Kaufmann
Department Stores, Inc, at the following prices:
1,500 shares @ 9%
42,500 shares @ 10
5,000 shares @ 10%
2,500 shares @ 11
good until the close of business December 8, 1931 This account will extend
until the close of business December 8, 1931, unless terminated earlier by the
managers
Redmond & Co shall be the managers of this account with full discretionary
power except as definitely restricted in this letter and without responsibility
except for lack of good faith. Nothing in this letter is to be construed to
mean that the managers of this account are partners with the participants or
that the participants are partners with each other.
Messrs. Farnum, Winter & Co agree to loan to Redmond & Co, as managers
of this account, 12,500 shares at $10 00 per share for the life of the account
The Managers of the account may permit Mr. John J. Bergen to take down
stock at the last tape sale on the New Yoik Stock Exchange, plus 12 k/2#
per share, representing the regular Stock Exchange commission, less an amount
sufficient to pay 60tf a share commission to dealers, 150 a share where necessary for wholesaling expenses, 12%£ a share representing Redmond & Co's
clearance charges, and 4tf a share representing State and Federal tax, or a
total of $9150 per hundred shares.
The Managers of the account may also permit Mr. Bergen to charge against
the account reasonable expenses including salaries, travelling expenses, postage, telephone, telegraph and printing, based upon a budget which will be
submitted to Redmond & Co, and approved by Redmond & Co. as managers
of the joint account Redmond & Co, as Managers of the three-way joint
account, will make these arrangements with Mr Bergen by letter and will
supply the other members of the account with copies of this letter together
with copies of the approved budget.
Kindly acknowledge acceptance of your interest in this trading account by
signing and returning to us the enclosed duplicate of this letter.
Yours very truly,
REDMOND & Co
STOCK EXCHANGE PKACTICES
6167
NOVEMBER 12,
1931
MB JOHN J. BEBGEN,
48 Wall Street, New York, N Y.
DEAR SIB: Messrs. Redmond & Co, Wright & Sexton and Farnum, Winter
& Co. have this day formed an undivided, joint account among themselves to
trade in and or distribute the capital stock of the Kaufman Department
Stores, Inc. Redmond & Co. will act as managers of the account The account will receive an option assigned to Redmond & Co., for the benefit of
the account on 51,500 shares ot the common stock of the Kaufman Department Stores, Inc, at the following prices:
1,500 shares @ 9%
42,500
"
@ 10
5,000
"
@ 10%
2,500
"
@ 11
good until the clo&e of business December 8, 1931.
In consideration of your aiding m the distribution of this stock, Redmond &
Co, as managers of the account agree that in the event the account shows a
net profit, 20% thereof shall be paid to you.
In order to enable you to make deliveries to dealers of the stock confirmed
out by you, Redmond & Co, as managers of the account, will permit you to
take down stock at the last tape sale on the New York Stock Exchange plus
12%0 a share representing usual Stock Exchange commission, less 60$ a
share to be paid to dealers, 150 a share to be paid for wholesaling where
necessary, 12%£ a share representing Redmond & Co.'s clearance charges and
%£ a share repiesenting State and Federal tax, totalling $88.00 per hundred
shares Redmond & Co as managers of the joint account will also permit
you, from time to time, to charge against the account your reasonable
expenses, including salaries, traveling expenses, postage, printing, telephone
and telegraph, based upon a budget to be submitted by you and approved by
Redmond & Co. as managers of the account. This budget is to be submitted
and approved before you incur any expense.
Upon the request of Redmond & Co, acting as managers of the account,
you will take down sufficient stock to even any short position At no time
shall you have a debit balance
This arrangement concerning wholesaling by you may be cancelled by Redmond & Co at any time by giving you written notice, but such cancellation in
no way effects your 20% interest in the profits of the account, if any.
The joint account formed between Messrs Redmond & Co, Wright & Sexton
and Farnum, Winter & Co in which you have the above described interest, expires at the close of business December 8, 1931, unless terminated at an earlier
date by the Managers. It is understood that any expenses incurred by you after
the termination of the account will not be recognized charges against this
account except in so far as these expenses are incurred by you in the winding
up and completion of business already done, such as making payments to
dealers such as would involve principally postage, telephone, telegraph, necessary travelling and clerical expense. It is understood, however, that such bills
for which you may have already committed yourself for printing and or stationary shall be a proper charge against the account It is also understood
that the portion of your budget which is represented by payroll expenses shall
continue for one week from either the date of the discontinuation of the wholebaling or the termination of the account.
Kindly sign the duplicate copy of this letter indicating your acceptance of
these arrangements
Yours very truly,
REDMOND & Co.,
48 WaU Street, New York, November 11,1931.
Messrs WEIGHT & SEXTON,
1 Wall Street, New York Qvty.
GENTLEMEN: In accordance with our understanding with you, we have committed the account to purchase Kaufmann Department Stores, Inc Common
Stock, as per letter enclosed herewith.
Very truly yours,
REDMOND & Co.
6168
STOCK EXCHANGE PRACTICES
NOVEMBER 18, 1931
SAMUEL MUNDHEIM, Esq
STERN BROTHERS,
West 42nd Sheet, New York Cvty
Re Kaufmann Department Stores Inc Common Stock
DEAR MR MUNDHEIM: Referring to your lettei of November 13th in which
you furnish Messrs. King and Posner with certain options in consideration
of their agreement to purchase 12,500 shares of the above stock, and with
reference to the letter dated November 18th in which Messrs Redmond & Co,
Farnum, Winter & Co, Wright & Sexton, Philip King and D R Posner agree
jointly and severally to purchase from you on or before December 8, 1931
these same 12,500 shares, it is our understanding that we, as Managers of
the Joint Account, who have so committed themselves in the letter of November 18th above referied to, shall have the right to put and deliver to you on
or befoie December 8, 1931 on one day's notice to you, but upon the last date
without notice, so much of the 12,500 shares as we may have purchased from
you on or befoie December 8, 1931 at the following prices:
1500 shaies at 9
11000 shares at 9%
Will you kindly acknowledge receipt of this lettei to us as Managers of the
Joint Account by " accepting " the enclosed duplicate ?
Very tiuly yours,
(Sgd)
Accepted
REDMOND & Co
SAMUEL MUNCHFIM
18, 1931
SAMUEL MUNCHEIM,
STERN BROTHERS
Esq,
West 42nd Street, New York City.
Re Kaufmann Depaitment Stores, Inc Common Stock
DEAR MR MUNOHEIM . Referring to lettei of Novembei 13th addressed to you
by Messrs Philkp King and D. R Posner and accepted by you, with respect
to your furnishing Messis King and Posner with options in accordance with
the terms of said letter and their agreement severally and jointly to purchase
12,500 shares of said stock, we confirm that we jointly and severally agree to
purchase said 12,400 shares from you on or betore December 8, 1931 in the
following amounts and at the following prices
1,500 shares at 9%
11,000 shares at 10
Veiy truly yours,
(Sgd)
Accepted
REDMOND & Co
FARNUM WINTER & Oo
WEIGHT & SEXTON
PHILIP M. KING
D R POSNER
SAMUEL MUNCHEIM
NOVEMBER 17,
1931
SAMUEL MUNCHEIN, Esq,
STERN BROTHERS,
West 42nd Street, New York Cvty
Re Kaufmann Department Stores, Inc Common Stock
DEAR MR MUNOHEIM : Referring to letter of November 13th addressed to you
by Messrs Philip King and D R Posner and accepted by you, with respect to
your furnishing Messrs. King and Posner with options in accord'ance with the
terms of said letter and their agreement severally and jointly to purchase 12,500
shares of said stock, we beg to advise you as follows •
On behalf of ourselves, Messrs Farnum, Winter & Co. and Messrs Wright &
Sexton, the commitment to purchase said 12,500 shares is shared by the three
mentioned houses equally, so that Messrs Redmond &1 Co, Messrs Farnum,
Winter & Co, Messrs Wright & Sexton, Mr Philip King and Mr D R Posner
are agreeing to purchase such stock from you on or before December 8, 1931
We will furnish you with a new agreement signed by all of these five parties,
evidencing such commitment
STOCK EXCHANGE PBACTICES
6169
It is our understanding we shall have the right to put and deliver to you on
one day's notice to you so much of the 12,500 shares as we may purchase ftom
you on or before December 8, 1931 at the following prices
1,500 shares at 9
11,000 shares at 9 ^
We will send you the letter evidencing these two matteis
Very truly yours,
Accepted •
COMMITTEE EXHIBIT NO 59, FEBRUARY 20,
1934
PALMER AND COMPANY,
NEW YORK CENTRAL BUILDING
Park Avenue and 46th Street, New York, November 12, 1981
Mr
CHARLES G WRIGHT,
Messrs. WRIGHT & SEXTON,
1 Wall 8t, New York (My
DEAR SIR* In consideration of One Dollar ($1.00) in hand, I hereby grant
you an option to purchase—
10,000 shares International Salt Co., Common Stock at Thirty-Two
Dollars ($32 00) per share.
This option will expire at the close of business on Saturday, December 12,
1931
Very truly yours,
W H ESHBAUGH
@FedFRASER