1758 STOCK EXCHANGE PEACTICES
The Chairman. The committee will therefore adjourn and will
convene here oa Tuesday, February 21, 1933, at 10 o'clock a. m.
Mr. Pecora. All the witnessess who have been subpoenaed to
appear before the committee this week are now excused from further
attendance before this committee, with the exception of Mr. George
W. Davidson.
(Whereupon, at 5 o'clock p. m. on Friday, February 17, 1933, the
committee adjourned to meet on Tuesday, February 21, 1933, at
10 o'clock a, m.)
STOCK EXCHANGE PRACTICES
HEARINGS
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVENTY-SECOND CONGEESS
SECOND SESSION -
ON
S. Res. 84 and S. Res. 239
RESOLUTIONS TO THOROUGHLY INVESTIGATE PRACTICES
OF STOCK EXCHANGES WITH RESPECT TO THE
BUYING AND SELLING AND THE BORROWING
AND LENDING OF LISTED SECURITIES
THE VALUES OF SUCH SECURITIES
AND THE EFFECTS OF SUCH
PRACTICES
PART 6
(NATIONAL CITY; CONTINUATION OF
RICHARD WHITNEY TESTIMONY)
FEBRUARY 21, 22, 23, 24, 27, 28, AND MARCH 1 AND 2, 1933
Printed for the use of the Committee on Banking and Currency
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1933
STOCK EXCHANGE PRACTICES
HEARINGS
BEFORE A
SUBCOMMITTEE OF THE
COMMITTEE ON BANKING AND CURRENCY
UNITED STATES SENATE
SEVENTY-SECOND CONGRESS
SECOND SESSION
ON
S. Res. 84 and S. Res. 239
RESOLUTIONS TO THOROUGHLY INVESTIGATE PRACTICES
OF STOCK EXCHANGES WITH RESPECT TO THE
BUYING AND SELLING AND THE BORROWING
AND LENDING OF LISTED SECURITIES
THE VALUES OF SUCH SECURITIES
AND THE EFFECTS OF SUCH
PRACTICES
PART 6
(NATIONAL CITY; CONTINUATION OF
RICHARD WHITNEY TESTIMONY)
FEBRUARY 21, 22, 23, 24, 27, 28, AND MARCH 1 AND 2, 1933
Printed for the use of the Committee on Banliing and Currency
UNITED STATES
GOVERNMENT PRINTING OFFICE
WASHINGTON : 1933
3 p^-
IX f^ .^-^-y^J^^ii.
COMMITTEE ,0N BANKING AND CURRENCY
PETER Sfbi.BECK, South iakota, Chairman
SMITH W. BROOKHART, Iowa. DUNCAN U. FLETCHER, Florida.
PHILLIPS LEE GOLDSBOROUOH, Maryland. CARTER GLASS, Virginia.
JOHN Q. TOWNSEND, Jr., Delaware. ROBERT F. WAONER, New York.
FREDERIC C. WALCOTT, Connecticut. ALBEN W. BARKLEY, Kentucky.
JOHN J. BLAINE, Wisconsin. ROBERT J. BULKLEY, Ohio.
ROBERT D. CAREY, Wyoming. THOMAS P. GORE, Oklahoma.
JAMES E. WATSON, Indiana. EDWARD P. COSTIGAN, Colorado.
JAMES COUZENS, Michigan. CORDELL HULL, Tennessee.
FREDERICK STEIWER, Oregon. ROBERT R. REYNOLDS, North Carolina.
JuUAN W. Blount, Clerk
Subcommittee on Senate Resolutions 84 and 239
PETER NORBECK, South Dakota, Chairman
JOHN O. TOWNSEND, JE., Delaware. DUNCAN U. FLETCHER, Florida.
JOHN J. BLAINE, Wisconsin. CARTER GLASS, Virginia.
JAMES COUZENS, Michigan. EDWARD P. COSTIGAN, Colorado.
II
CONTENTS
Page
Testimony of—
Baker, Hugh B., president National City Co., New York City 1889
Biilier, Hugli B., president National City Co., New York City (re-
sumed) 1911, 1926, 1965, 2006, 2047, 2060, 2080
Baldwin, Samuel W., treasurer National City Co 2141
Barrett, Edward F., a vice president, National City Co 2196
Brown, Edgar D., Pottsville, Pa 2170
Byrnes, Ronald M., late a vice president of National City Co 2119
Byrnes, Ronald M., late a vice president of National City Co. (re-
sumed) 2298
Calvin. C. W., memorandum on the financing of the Peruvian Gov-
ernment 2103
Covington, J. H., Wasliington, D.C., counsel for National City Bank,
statement of 2043
Davison. George W., Greenwich, Conn., officer of Central Honover
Bank & Trust Co., New York 1759
Law, Harry S.. secretary, National City Co 1900
Law, Harry S., secretary, National City Co. (resumed) 2147
Lehmann, Frederick W., Solicitor General of the United States,
opinion of 2030
Meehan, M. J., stock broker. New York City 2343
Mitchell, Charles E.. chairman of the board. National City Bank of
New York and National City Co 1762
Mitchell, Charles E., chairman of the board, National City Bank of
New York and National City Co. (resumed) 1780,
1827, 1887, 1982, 2026, 2014, 2265
Mitchell, William D., Attorney General of the United States, letter of- 2044
Rentschler, Gordon S., president National City Bank. New York Clty_ 1867
Ripley, Joseph P., a vice president of the National City Co 2324
Roberts, Grace Van B., Highland, Ulster Countv, N. Y., additional
statement of 1821
Robinson, Edwin S., Brooklyn, N.Y., formerly an employee of J. R.
Schmeltzer & Co., brokers 1998
Russell, Stanley A., a vice president of the National City Co 2269
Schoepperle, Victor, vice president. National City Co 2059
Schoepperle, Victor, vice president, National City Co. (resumed) 2088
Sylvester, Horace C, a vice president of the National City Co 2183
Train, George F., foreign department, National City Co 2139
Train, George F., foreign department, National City Co. (resumed). 2151
Whitney, Richard, president New York Stock Exchange 2202
Whitney, Richard, president New York Stock Exchange (resumed) 2227
STOCK EXCHANGE PEACTICE8
TUESDAY, FEBBUABY 21, 1933
United States Senate,
Subcommittee of Committee on Banking and Currency,
Washington, D. C
The subcommittee met, pursuant to adjournment on Friday, Febru-
ary 17, 1933, at 10 a. m., in room 301, Senate Office Building, Senator
Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Couzens, Townsend, Glass,
and Costigan.
Present also : Senators Brookhart, Goldsborough, Walcott, Watson,
Barkley, Bulkley, and Reynolds.
Further present: Ferdinand Pecora, special counsel to the com-
mittee; Julius Silver and David Saperstein, associate counsel to the
committee.
The Chairman. The subcommittee will come to order. Mr. Pecora,
call your first witness.
Mr. Pecora. We will ask Mr. George W. Davison to come forward.
Mr. Chairman, he is called as a witness in connection with the Insull
matter and is anxious to get away.
The Chairman. Please stand, hold up your right hand, and be
sworn : You solemnly swear that you will tell the truth, the whole
truth, and nothing but the truth regarding the matter now under
investigation by this committee, so help you God.
Mr. Davison. I do.
TESTIMONY OF GEORGE W. DAVISON, GREENWICH, CONN., AN
OFFICER OF THE CENTRAL HANOVER BANK & TRUST CO., OF
NEW YORK CITY
Mr. Pecora. Mr. Davison, will you kindly give your full name, ad-
dress, and business?
Mr. Davison. My name is George W. Davison. My residence is
Greenwich, Conn. I am interested in banking and am an officer of
the Central Hanover Bank & Trust Co.
Senator Couzens. How long have you been in the banking
business!
Mr. Davison. Not quite 21 years. It will be 21 years in April.
Senator Couzens. Are you also a lawyer as well as a banker?
Mr. Davison. Yes, I was.
Senator Couzens. You were?
Mr. Davison. I am.
Mr. Pecora. What office do you hold in the Central Hanover Bank
& Trust Co.?
1759
1760 STOCK EXCHANGE PRACTICES
Mr. Davison. Chairman of the board.
Mr. Pecoka. How long have you been identified with that bank in
an official capacity?
Mr. Davison. Twenty-one years on April 2.
Mr. Pecora. Did your bank have a number of loans outstanding
in favor of Insull Utility Investments, Inc., Corporation Securities
Co. of Chicago, and other companies identified with the so-called
Insull group of public-utility companies?
Mr. Davison. We had a loan to Insull Utilities and a loan to
Corporation Securities Co., and one to National Public Service.
Mr. Pecora. What was the aggregate amount of those loans in
December 1931?
Mr. Davison. They were $12,500,000.
Mr. Pecora. Were any of those loans reduced in that month?
Mr. DA\^soN. They were.
Mr. Pecora. By what amount or amounts, and when?
Mr. Da\7son. The Insull Utilities loan was reduced $500,000, I
think on the 24th of December, and the Corporation Securities loan
was reduced $1,000,000, I think, on the 28th of December.
Mr. Pecora. What was the aggregate amount of those loans?
Mr. Davison. Each was for $5,000,000.
Mr. Pecora. And at times subsequent to the making of the loans
did your bank call upon the borrowers for additional collateral to
secure the loans?
Mr. Davison. We did.
Mr. Pecora. And received such collateral?
Mr. Davison. They did.
Mr. Pecora. And the collateral consisted for the most part of
securities issued by one or more of the Insull Cos. ?
Mr. Davison. The collateral were securities of operating com-
panies, Commonwealth Edison, People's Gas, Public Service of
Northern Illinois, and some Mid-West utilities.
Mr. Pecora. You know, do you not, that all those companies are
in the so-called Insull group?
Mr. Da\ison. Yes.
Mr. Pecora. Between June and December of 1931 were you famil-
iar with certain debenture obligations which were then outstanding
against Insull Utility Investments, Inc., and Corporation Securi-
ties Co. of Chicago?
Mr. Davison. I was not.
Mr. Pecora. At no time during that period were you familiar
with those debenture obligations?
Mr. Daaison. At no time during that time.
Mr. Pecoka. Did you have any conversations with Mr. Owen D.
Young with regard to those loans at any time prior to the 1st of
January 1932?
Mr. Davison. No.
Mr. Pecora. Did you have any communication with him on the
subject?
Mr. Davison. No.
Mr. Pecora. Do you know whether any other officer of your bank
had such conversation or communication?
Mr. Davison. I am rather certain not, but am not positive.
STOCK EXCHANGK PRACTICES 1761
Mr. Pecora. Did you have any such conversation or communica-
tion between the 1st of January and the 16th of April, 1932?
Mr. Davison. Yes.
Mr. Pecoea. With whom?
Mr. Davison. Mr. Young.
Mr. Pecora. Wliat was the general substance of the conversations ?
Mr. DA^^soN. Some time in February Mr. Young came in and
talked about the InsuU situation, and I think he asked our coopera-
tion. An agreement had been made in December about not calling
for additional collateral, but it had not been signed, I think, by
anybody.
Mr. Pecora. That is the so-called " standstill agreement " ?
Mr. Davison. It has been referred to in that way. We were
claiming that we had the right to go ahead, and I think that was
the sub]ect of Mr. Young's conversation, that we should not do it,
and that the Insull situation probably was not hopeless.
Mr. Pecora. Well, as a result of that conversation did your bank
standstill?
Mr. Davison. We did.
Mr. Pecora. And when did you first learn of those debenture
obligations that I have referred to ?
Ml-. Davison. I think it was the end of February, 1932.
Mr. Pecora. But that was not your first knowledge of these loans
which your bank had made?
Mr. Davison. Oh, no.
Mr. Peoora. Did you consult the files of your bank with regard
to those loans at any time prior to February, 1932?
Mr. Davison. I did not ; no.
Mr. Pecora. Did you at any time consult the files of your bank
with regard to those loans ?
Mr. Davison. No.
Mr. Pecora. Do you know now that among the files of your bank
with regard to the loans there was a memorandum relating to those
debenture obligations?
Mr, Davison. I do not.
Mr. Pecora. Did you, at the outset, take any part in the confer-
ences that led to the making of the loans to those Insull companies
originallj' ?
Mr. Davison. Yes.
Mr. Pecora. Did you take part in any subsequent conferences
which led to the making of payments on account of those loans?
Mr. Davison. Yes.
Mr. Pecora. And which also led to the making of demand for
additional collateral to secure the loans ?
Mr. Davison. No ; I did not have anything to do with that.
Mr. Pecora. And at no time prior to February, 1932, did you learn
of these debenture obligations?
Mr. Davison. That is correct.
Mr. Pecora. That is all.
The Chairman. Mr. Davison, you will be excused.
Mr. Davison. Thank you.
(Thereupon the witness was excused.)
1762 STOCK EXCHANGE PRACTICES
Mr. Pecora. Mr. Chairman, I now ask that Mr. Charles E.
Mitchell be called.
The Chairman. You will stand, hold up your right hand and be
sworn, Mr. Mitchell.
Mr. Pecora. Mr. Chairman, Mr. Mitchell is simply recalled for
further examination. He has already been sworn in these hearings.
The Chairman. Very well.
TESTIMONY RESUMED OF CHARLES E. MITCHELL, CHAIRMAN OF
THE BOARD, NATIONAL CITY BANK OF NEW YORK AND
NATIONAL CITY CO.
(The witness was sworn on his prior appearance before the
committee.)
Mr. Pecora. Mr. Mitchell, I believe you have heretofore been
sworn as a witness before this committee.
Mr. Mitchell. I have.
Mr. Pecora. And you are now being recalled for further exam-
ination.
Mr. Mitchell. All right.
Mr. Pecora. In your prior testimony you gave some testimony
with respect to the organization of the National City Co. I believe
you said it was organized in 1911.
Mr. Mitchell. I think that is correct.
Mr. Pecora. Under the laws of which State was it incorporated?
Mr. Mitchell. Of New York State.
Mr. Pecora. When did you first become connected with the
National City Co.?
Mr. Mitchell. In 1916.
Mr. Pecora. Wlien did you first become connected with the
National City Bank?
Mr. Mitchell. In 1921.
Mr. Pecora. That bank was organized in the year 1812, was it
not*
Mr. Mitchell. It was.
Mr. Pecora. And the National City Co. is regarded as the invest-
ment affiliate of the National City Bank of New York ?
Mr. Mitchell. It is.
Senator Couzens. In fact, the National City Bank owns all of the
stock of the National City Co., or their stockholders do; isn't that
true?
Mr. Mitchell. I think I explained that in my previous testimony,
Senator Couzens.
Senator Couzens. I think you did.
Mr. Mitchell. The stock of the National City Co. is trusteed with
three trustees for the benefit of the shareholders of the National City
Bank ; and a record of that beneficial interest, through the trustees,
appears on the reverse side of the stock certificates of the National
Citv Bank.
S^enator Couzens. That was my understanding.
Mr. Pecora. Wlien was that trust agreement prepared and when
did it become eflfective ?
STOCK EXCHANGE PRACTICES 1763
Mr. Mitchell. I assume that it did at the time of the organization.
Mr. Pecora. I can not conceive it as being otherwise, but I would
have to look it up.
Mr. Pecora. You mean at the time of the organization of the
National City Co. in 1911?
Mr. Mitchell. Quite so.
Mr. Pecora. Who were the original trustees under that trust agree-
ment for the benefit of the shareholders of the National City Bank?
Mr. Mitchell. I have not refreshed my memory on that, and I
would rather leave it to the record.
Mr. Pecora. How many trustees are there under this agreement ?
Mr. Mitchell. Three, I think.
Mr. Pecora. Do you know who the three trustees are today ?
Mr. Mitchell. I think the trustees today are Mr. Beekman Win-
throp, Mr. Percy A. Kockefeller, and Mr. James A. Stillman. That
is my recollection. That, again, I would prefer to leave to the record.
Mr. Pecora. How were those trustees designated or chosen ?
Mr. Mitchell. That I cannot say. I have not refreshed my mem-
ory on that particular phase of the situation, Mr. Pecora.
Mr. Pecora. By the exercise of whose power are they subject to
removal ?
Mr. Mitchell. Again I should have to give the same answer there.
It is a matter of record, and if I were to be asked to state from
memory I should say the board of directors of the National City
Bank. But of that I am not wholly certain.
Mr. Pecora. May I suggest, Mr. Mitchell, that a memorandum be
made of these various matters with respect to which you want to
inform yourself from the records?
Mr. Mitchell. Certainly.
Mr. Pecora. So that you may have an opportunity later of in-
forming the committee of those items.
Mr. Mitchell. Certainly. I will give you a memorandum for the
use of the committee with resjDect to them.
Mr. Pecora. All right. Now, Mr. Mitchell, do you know whether
the trustees at any time since their designation in 1911 have held any
stated meetings?
Mr. Mitchell. They have met from time to time, but what their
procedure has been I do not know.
Mr. Pecora. Do they have stated meetings or do they meet on rare
occasions and in an informal fashion ?
Mr. Mitchell. I do not know how informal their meetings are,
but they meet on occasion.
Mr. Pecora. Do you know whether minutes or other records of
the business transacted by them at their meetings are kept ?
Mr. Mitchell. I do not know.
Mr. Pecora. Will you find out by reference to the records of the
bank?
Mr. Mitchell. I will.
Mr. Pecora. Do you know what powers are exercised by those
trustees for the shareholders of the bank?
Mr. Mitchell. They have all the powers incident to shareholder
ownership.
1764 STOCK EXCHANGE PRACTICES
Mr. Pecora. Do you mean that they vote the stock for the share-
holders at all meetings of the banks' shareholders?
Mr. Mitchell. They vote as trustees all the National City Co.
stock.
Mr. Pecora. Well, they represent all shareholders of the bank,
don't they?
Mr. Mitchell. They are acting as trustees of this stock for the
benefit of the shareholders of the bank.
Mr. Pecora. Well, do they vote the stock either of the bank or of
the National City Co. at meetings of the shareholders of those
organizations ?
Mr. Mitchell. They vote all the stock of the National City Co.
Mr. Pecora. Now, sometime subsequent to 1911 did the National
City Bank enter into an arrangement or agreement with the bank-
ing institution known as the Farmers Loan & Trust Co.?
Mr. Mitchell. Might I have a repetition of your question?
Mr. Pecora. I will ask the committee reporter to read it to you
[which was done].
Mr. Michell. It entered into an agreement for the merging of
the interests of those institutions, and the Farmers Loan & Trust
Co. was merged with the National City Bank.
Mr. Pecora. When did that happen, Mr. Mitchell ?
Mr. Mitchell. It happened in the spring of 1929.
Mr. Pecora. At that time was the capital stock of the National
City Bank increased in order to effect that mei'ger?
Mr. Mitchell. It was.
Mr. Pecora. By what amount?
Mr. Mitchell. Of course, that is a matter of record, Mr. Pecora.
I would have to again refresh my memory. I will give you a state-
ment of that if that is all right.
Mr. Pecora. All right. Now, Mr. Mitchell, can you give the com-
mittee, in a general way, the terms upon which that merger was ef-
fected in 1929 ?
Mr. Mitchell. I cannot recall the exact ratio, but it was on a
basis of so many shares of National City Bank stock for so many
shares of Farmers Loan & Trust Co. stock.
Mr. Pecora. Will you jDrocure the details of that for subsequent
testimony ?
Mr. Mitchell. I will give you that later.
Mr. Pecora. The Farmers Loan & Trust Co. was a banking cor-
poration at that time, existing under the laws of the State of New
York?
Mr. Mitchell. That is so.
Mr. Pecora. And it had a large trust business ?
Mr. Mitchell. That is so.
Mr. Pecora. Its trust business was one of the attractive features
of that institution which induced your bank to effect this merger?
Mr. Mitchell. The particular advantage, over and above the vol-
ume of trust business which they had, which was large, was the fact
that it was the oldest trust organization in the State of New York,
and the men connected with it had had unusual and long experience
in trust work.
STOCK EXCHANGE PRACTICES 1765
Mr. Pecora. As a result of that merger the National City Banl?
took over all the commercial banking business of the Farmers Loan
& Trust Co., did it not?
Mr. Mitchell. It did.
Mr. Pecora. And the Trust Co. took over all the trust business
of the National City Bank?
Mr. Mitchell. It was unable to take it over in total, en bloc, but
it supervised all the trust business.
Mr. Pecora. In substance it took over all the trust business, but
the title in some cases had to remain in the National City Bank of
New York because of legal questions ?
Mr. Mitchell. Quite so.
Mr. Pecora. The purpose of the incorporation of the National
City Co. was to give the National City Bank an investment affiliate
in connection with its business, was it not?
Mr. Mitchell. I assume so. It ultimately developed so, at any
rate.
Mr. Pecora. Do you know that there is a provision in the charter
of the National City Co. specifically providing, in substance, that
transactions in which the National City Co. engages, even with
officers of the company, are not to be invalidated for that reason?
You are familiar with such a provision, aren't you, Mr. Mitchell?
Mr. Mitchell. In the charter?
Mr. Pecora. In the charter or in the by-laws of the National City
Co.
Mr. Mitchell. Well, I should have to refresh my mind on that.
Frankly, I do not recall the particular provision.
Mr. Pecora. Since 1911, the National City Co. has entered into
business transactions to which some of its officers were parties in
their individual capacities, has it not?
Mr. Mitchell. Well, do you mean that it has sold securities and
bought securities from officers? Yes.
Mr. Pecora. And it has done that rather frequently since 1911,
hasn't it ? That is, these incidents have not been rare occurrences.
Mr. Mitchell. I assume not.
Mr. Pecora. Now, the National City Co. was organized, among
other things, to conduct the business of buying and selling securities
to the general public, was it not?
Mr. Mitchell. Well, that has been a large part of its business.
Mr. Pecora. That has been by far the greatest part of its busi-
ness, hasn't it?
Mr. Mitchell. Yes.
Mr. Pecora. What is the governing board of the National City
Co. — its board of directors?
Mr. Mitchell. Its board of directors.
Mr. Pecora. How frequently does that board meet?
Mr. Mitchell. Once each week.
Mr. Pecora. Is there any subdivision of the board of directors,
such as an executive committee, or a finance conunittee, or an invest-
ment committee, which functions between meetings of the board of
directors?
Mr. Mitchell. Up to 4 or 5 years ago, or perhaps 3 or 4 years
ago, we had an executive committee, who met each week prior to the
1766 STOCK EXCHANGE PRACTICES
board meeting. Latterly, and I should say for 2 or 3 years, the
entire affairs of the company have been considered by the board
itself acting as a whole, and I do not recall the functioning of the
executive committee during this latter period.
Mr. Pecora. Well, when did this executive committee cease to
function; in what year?
Mr. Mitchell. As I say, I should say 3 or 4 years ago.
Mr. Pecora. Wasn't it prior to 1927?
Mr. Mitchell. I would not think so.
Mr. Pecora. You can verify the fact, can't you ?
Mr. Mitchell. I can. And I am advised here that it was prior to
1927.
Mr. Pecora. How long prior to 1927?
Mr. Mitchell. That I cannot give you. I will look that up for
the record, if you choose.
Mr. Pecora. Now, since the beginning of the year 1925 the Na-
tional City Co.'s transactions in the buying and selling of securities
to the public increased tremendously in volume year by year, did
they not? That is, up to the year 1931.
Mr. Mitchell. Well, they were more or less stable for several
years.
Mr. Pecora. Then they took a spurt in 1925.
Mr. Mitchell. I think that was the large year.
Mr. Pecora. And another spurt in 1926.
Mr. Mitchell. I should say, roughly, Mr. Pecora, from pure recol-
lection, that the sales of securities by the National City Co. had aver-
aged over a 10-year period a billion and a half dollars a year, and I
think the high was about $2,000,000,000, and the low was just under
a billion dollars.
Mr. Pecora. Wlien was the high reached — what year?
Mr. Mitchell. I should say from memory that it was 1927 or 1928,
but I should want to check it. It is a matter of record.
Mr. Pecora. Wlien was the low of that 10-year period ?
Mr. Mitchell. This past year, I think.
Mr. Pecora. Can you find out now from any of your associates
sitting with you, Mr. Mitchell, in what year the executive committee
of the board of directors of the National City Co. ceased to function?
Mr. Mitchell. I asked for that.
Mr. Pecora. Is any one of the gentlemen back of you able to tell
you ?
Mr. Mitchell. In 1926, I am told.
Mr. Pecora. Now, Mr. Mitchell, since 1926
Senator Couzens (interposing). Before you go into that, may I
ask why thej ceased to function?
Mr. Mitchell. They ceased to function. Senator Couzens, because
the executive committee constituted a large portion of the board, any-
way, and it seemed best, instead of having two meetings, to bring all
matters that were brought to the executive committee to tlie attention
of the board as a whole. I think it meant the introduction of a com-
paratively small number of additional men, and it seemed best to
hold one meeting instead of two.
Senator Couzens (continuing). Had anything gone wrong to
cause you to decide to dispense with executive committee meetings?
STOCK EXCHANGE PRACTICES 1767
Mr. Mitchell. Nothing.
Senator Couzens. Who is the executive officer of the National City
Co. now?
Mr. Mitchell. We are made up, Senator Couzens, by my being
chairman, which is the chief executive office.
Senator Couzens. Yes. But you do not operate in the National
City Co.'s office all day, do you?
Mr. Mitchell. Oh, no.
Senator Couzens. Who is the executive officer who runs that office?
Mr. Mitchell. The president of the National City Co. is H. B.
Baker.
Senator Couzens. How long has ho been that ?
Mr. Mitchell. He was made president early in 1929.
Senator Couzens. What was has occupation prior to that time?
Mr. Mitchell. He was a vice president of the National City Co.
Senator Codzens. Who was the chief executive officer before Mr.
Baker was made president of the National City Co. ?
Mr. Mitchell. I was.
Senator Couzens. And you went from there to the National City
Bank?
]\Ir. Mitchell. Yes. But I still held the presidency of the Na-
tional City Co. for a considerable period after I had been made
president of the National City Bank.
Senator Couzens. Sometimes it is only theoretically that the pres-
ident is the chief executive officer. I mean, who managed the busi-
ness? I mean the everyday business without calling in the presi-
ilent or the chairman of the board.
Mr. Mitchell. I attempted to attend the officers' meetings every
iay. The officers, the vice presidents, constituted the operating man-
xgement of the company.
Senator Couzens. Yes. But there was some one of them who was
superior to the rest, was there not?
Mr. Mitchell. I was the superior officer, Senator Couzens.
Senator Couzens. In other words, all of the vice presidents wor*^
an the same basis. One had no more authority than another, do
pou mean?
Mr. Mitchell. One had no more authority than another, although
2ach had his particular part of the business to handle, and all ques-
:ions of policy, for instance, the taking on of any new issue, was con-
sidered in detail by the officers' council, and you might say we main-
tained a practice similar to that of a general partnership — that no
issue was taken on except by the unanimous approval of all the
Dfficers.
Senator Couzens. Who decided the spread as between the price
you paid and the price at which you sold a security?
Mr. Mitchell. The necessities of a situation, of course, were con-
stantly under discussion in each particular issue. The officer in
charge of the negotiations v^as the man who ultimately negotiated
the spread.
Senator Couzens. And, then, I suppose you had different acqui-
sitions of securities, where the spread was small in one case, and
larger in another case, and intermediate in another case.
Mr. Mitchell. Oh, quite so.
1768 STOCK EXCHANGE PRACTICES
Senator Couzens. Depending upon the gullibility of the public,
or the ease with which the sale of the securities might be made, or
the soundness of the securities, I suppose?
Mr. Mitchell. I would not grant your expression, gullibility of
the public.
Senator Couzens. Well.
Mr. Mitchell. I think you will grant very readily, Senator
Couzens, that there is a great deal of difference between selling, for
instance, a bond of the State of New York and selling a bond of the
primest of our railroads. Sales requirements, methods of distribu-
tion, are very different, and different in their cost, and that is all
represented in the spread.
Senator Couzens. In other words, you would get a bigger spread
on an Insull security than you would on a jDrime railroad security.
Mr. Mitchell. Well, I recall in the so-called " Insull securities "
that bonds of the Commonwealth Edison Co. were regarded over a
long i^eriod of years as among the primest of all public utility or
corporate bonds in the United States, and their spread was very,
verj' small.
Senator Couzens. I was not siieaking of those underlying organi-
zations, operating organizations, so much as I was those that had
the name Insull attached to them.
Mr. Mitchell. Well, I have very little knowledge of that, because
we were not active in that business, Senator Couzens.
Senator Couzens. That is all, Mr. Peeora. I did not want to
interrupt your line of examination.
Mr. Pecoka. That is all right. Now, Mr. Mitchell, was there any
particular reason for dispensing with the services of the executive
committee of the board of directors of the National City Co. in 1926?
Mr. Mitchell. I thought I had answered that.
Senator Couzens. Yes; he answered that to me.
Mr. Pecora. There was no other reason than that embodied in your
answer to Senator Couzens' question?
Mr. Mitchell. None, so far as I know.
Mr. Pecoea. Did this board of executive officers of the company
keep a record of its activities and proceedings?
Mr. Mitchell. No.
Mr. Pecora. Had the executive committee during its existence
kept such a record?
Mr. Mitchell. Tlie executive committee meetings of the National
City Co. were quite informal. Occasionally you would find a formal
action taken by the executive committee, and that would be recorded.
But their meetings were largely informal meetings that were held at
luncheon as a matter of fact to save the time of everybody, and the
discussion was general and informal.
Mr. Pecora. Since 1926, decisions with respect to the nature and
kind of securities that the company would buy for resale to the pub-
lic were made in this informal fashion by the executive officers of
the company?
Mr. Mitchell. That is quite true.
Mr. Pecora. And the officers would meet daily, usually at luncheon,
for that purjiose?
STOCK EXCHANGE PRACTICES 1769
Mr. Mitchell. No. The officers met daily in the board room of
the National City Co., but their findings on various issues were re-
ported informally again to the executive committee when they met,
so that the executive committee were quite familiar with the opera-
tions of the executive group, and with the new issues that were
coming out or that were in contemplation from time to time.
Mr. Pecora. But since 1926 there has been no executive committee?
Mr. Mitchell. Well, business has been considered by the board as
a whole.
Mr. Pecora. Which officers composed the group that since 1926 has
acted in the place of the executive committee ; I mean which officers
of the company?
Mr. Mitchell. None have acted in place of the executive
committee.
Mr. Pecora. Well, they functioned in the fashion that you have
described. Who were they?
Mr. Mitchell. All the vice presidents
Mr. Pecora (interposing). How many were there, or are there?
Mr. Mitchell. Oh, I should say seven or eight. It is a matter of
record that I should be glad to produce.
Mr. Pecora. What other officers besides the vice presidents took
part in those conferences that made those decisions?
Mr. Mitchell. The president and myself.
Mr. Pecora. And the president at the present time is Mr. Baker.
Mr. Mitchell. Yes.
Mr. Pecora. When did he become president?
Mr. Mitchell. In the early part of 1929.
Mr. Pecora. Who preceded him in that office ?
Mr. Mitchell. I did.
Mr. Pecora. You became president in what year?
Mr. Mitchell. 1916, 1 should say ; it might have been 1917.
Mr. Pecora. And coincidentally you became president of the Na-
tional City Bank?
Mr. Mitchell. No. I became president of the National City Bank
in May of 1921.
Mr. Pecora. Well, then, in 1929 you were made chairman both of
the bank and the company?
Mr. Mitchell. Chairman of the company, chairman of the bank,
and chairman of the trust company.
Mr. Pecora. The trust company to which you refer is now known
as the City Bank Farmers Trust Co., isn't it?
Mr. Mitchell. Yes, it is.
Mr. Pecora. Now, in the year 1927 was a management fund cre-
ated by action of the board of directors of the National City Co.?
Mr. Mitchell. It was created many years before that.
Mr. Pecora. But in 1927 was there any modification made in the
management fund plan?
Mr. Mitchell. None that I can recall.
Mr. Pecora. What was tliat management fund plan designed for?
Mr. Mitchell. You see. the National City Co. was an investment
corporation, and it selected as its executives men who would normally
be of the type to hold partnerships in private banking and invest-
ment companies. It was necessary to meet the competition of pri-
1770 STOCK EXCHANGE PRACTICES
vate partnershij^s, which partnerships were often extremely hicrative,
by giving to the officers, who were the equivalent of partners in a
private banking or investment firm, some share in the profits that
they shoulil make.
Mr. Pecora. Was that share beyond and in addition to their
salaries?
Mr. Mitchell. Yes. Their salaries in the case of the National
Cit}' Co. were held at what was regarded as a low figure, and all
vice presidents and the president received the same base salary.
Mr. Pecora. What was that in 1925 ?
Mr. Mitchell. It was $25,000 each.
Mr. Pecora. How about the chairman?
Mr. Mitchell. I was president at that time.
Mr. Pecora. Well, when you became chairman in 1929.
Mr. Mitchell. Well, my recollection is that that was not changed,
that all the so-called " executive officers " carried the same salary of
$25,000. Then the plan of the management fund was this: The
officers, looking at it as a group, and I think I can explain this so
it will be understandable, and, say, this is the theory of it: They
paid 8 per cent on the tools to start with, the tools being the capital
and suiplus and undivided profits as furnished by the shareholders.
Those we can consider as the tools with which the officers were fur-
nished to operate. In setting up the management fund there was,
first, allowed 8 per cent per annum on the tools —
Senator Brookhart (interposing). On what stock was that, the
National City Co. ?
Mr. Mitchell. This is not stock. It is represented by the stock
of the National City Co., yes; and what the officers had to deal with,
the tools that they had
Senator Brookhart (intei"posing). The stockholders of the Na-
tional City Co. were the same as of the National City Bank, and
they were only to get 8 per cent out of it.
Mr. Mitchell. I shall have to go on, Senator Brookhart. to really
make this picture clear, and if I might just explain this briefly, and
then if it is not clear I will go back to it.
Senator Brookhart. All right. I will get it.
Mr. Mitchell. This group first paid 8 per cent for the tools.
Then they received, as a group, in the management fund 20 per cent
of the profits of the year, current operating profits, after this deduc-
tion of 8 per cent on the capital, surplus, and undivided profits.
Now, that fund was made up and divided among the officers, as
follows: The officers were periodically asked to express themselves
by vote to the executive committee as to what portion of that fund
should go to the president, myself, and subsequently to the chairman.
Having determined that, they were requested — well, I am getting
too far
Mr. Pecora (interposing). Pardon me, Mr. Mitchell, but who de-
termined the apportionment of the management fund as between
you, the president, and subsequently the chairman, and the others
when that fund was created?
Mr. Mitchell. Let me just go back one moment, because I have
neglected a rather vital point as to how this fund was distributed.
The fund was theoretically divided into two parts, and at the outset
STOCK EXCHANGE PRACTICES 1771
of the year the executive committee determined what portion each
and every officer should have of one half of the fund that might
accumulate during that year. That was what we called the forward
look, because, of course, hardly any two men can be judged to be
worth exactly the same amount, and they were all getting the same
salary, and this differentiation in the value to the company of these
various men was represented in the percentage of this first half of
the management fund of which I speak.
Senator Beookhakt. Then they were to get all as among its
officers ?
Mr. Mitchell. They were to get one half of the management fund
to be created during the coming year on the basis of fixed percent-
ages, of which they were advised. And the differentiation of those
percentages represented what would ordinarily be considered a dif-
ferentiation in their salaries. You understand that they start from
an even salary basis, and then these differentiations were put in as
to the first half of the fund. That was what we considered the
forward look
Senator Beookhart (interposing). And this fund was made up of
the earnings over and above that 8 per cent?
Mr. Mitchell. Twenty per cent of the earnings after 8 per cent
had been deducted.
Senator Couzens. "VVliat did you do with the other half of the
fund?
Mr. Mitchell. The other half was determined usually twice a
year, in July and in January. The officers who participated in this
fund were generally asked at that time to submit a vote, which was
not a signed vote and was not submitted to me but to some repre-
sentative of the executive committee, as to what
Senator Couzens (interposing). Was it a secret vote?
Mr. Mitchell. It was a secret vote as to what portion should
be mine. And then they were asked, having made that vote, for a
signed vote as to what proportion each officer should get as to the
balance, leaving themselves out of consideration.
Those figures were presented to the executive committee, compiled
for them by someone whom they might designate, and they deter-
mined then just what that distribution should be.
Mr. Pecoka. But since 1926 there has been no executive committee.
Mr. Mitchell. Then it was referred to the board. The board
acted instead of the executive committee.
Mr. Pecoka. In what year was the largest amount realized for
that management fund of the National City Co.?
Mr. Mitchell. I should say, without having figures for reference,
that it occurred in 1928, Mr. Pecora.
Mr. Pecora. What was the amount of the management fund that
year ?
Mr. Mitchell. I should have to check again on that.
Mr. Pecora. Can you check it now, while we are on the subject?
Senator Couzens. Is that practice being continued, Mr. Mitchell?
Mr. Mitchell. No. There was a provision. Senator Couzens,
through all these management funds that they should apply only as
the regular and customary dividend was maintained, and when,
in 1929, we ran into losses all management funds were suspended.
119852— 33— PT 6 2
1772 STOCK EXCHANGE PRACTICES
Senator Couzens. Are they still suspended?
Mr. Mitchell. They are still suspended.
Senator Couzens. And, as you look at it in retrospect, do you
think that was a good system to set up for a financial institution ?
Mr. Mitchell. Yes; I think so, and 1 would really feel quite
strongly about that. I have seen it apply in the bank where it was
established after I became president of the bank, and it establishes
an esprit de corps and an interest in one officer in another officer's
work that is to me most noticeable.
Senator Couzens. Does it not also inspire a lack of care in the
handling and sale of securities to the public, because each individual
officer has a split?
Mr. Mitchell. I can readily see, from your point of view, that
that would seem so, and I must grant that it must have some
influence. Senator Couzens. At the same time, I do not recall seeing
it operate in that way.
Senator Couzens. You would not see it. Only the customers
would see it after they had gotten the securities. May I ask you at
that point — if you have not the figures convenient, you may furnish
them, perhaps, later — how many securities that you have sold are
now in default?
Mr. Mitchell. That is a rather difficult figure. I carry in my
mind these general figures, Senator Couzens. During a 10-year
period, our total sales, which included Governments and States
and Canadians and other things that perhaps are not in those first
figures I gave you, were about $20,000,000,000, and I think that there
has been difficulty of one sort and another — a good deal of it, of
course, developing during this latter period of depression — with
something under $1,000,000,000.
Senator Couzens. Did that include all your South Americans,
and all?
Mr. Mitchell. Oh, yes.
Senator Couzens. And so, after counting in all of your sound
State, municipal, and Government bonds, which aggregated $20,-
000,000,000, you say less than $1,000,000,000 are in default or
trouble ?
Mr. Mitchell. That is my recollection. If I am wrong in regard
to that, I would like to have the opportunity of correcting it.
Senator Brookhaet. Did you sell these securities through the
stock exchange?
Mr. Mitchell. No, Senator Brookhart. Of course, the National
City Co. has maintained offices throughout the United States, and
in many foreign countries.
Senator Brookhart. You sell them direct, then?
Mr. Mitchell. We sell a great many securities direct. We also
act as wholesalers, selling to dealers everywhere, who, in turn, are
selling to their customers.
Senator Brookhart. You conduct no direct operations on the stock
exchange?
Mr. Mitchell. No; none whatsoever.
Senator Brookhart. Let me ask you a question or two about these
salaries, before we leave that. What did these individual salaries
amount to, after these commissions were added to tlie $25,000?
STOCK EXCHANGE PRACTICES 1773
Mr. Mitchell. I beg your pardon?
Senator Bkookhart. Read the question.
(The reporter read the question.)
Mr. Mitchell. There have just been handed to me the figures on
the management fund for the year 1927-28. The management fund
for 1927 was $1,567,500. The management fund for 1928 was
$2,240,938.98.
iSenator Bkookhart. What is the portion of that that you got?
Mr. Mitchell. That, again, I should have to check. In 1927 my
portion of the management fund was $527,000.
Mr. Pecora. That is in addition to your salary?
Mr. Mitchell. Of $25,000 ; yes, sir. In 1928 my proportion of the
management fund was $750,515.53.
Mr. Pecora. Also in addition to your salary?
Mr. Mitchell. Yes.
Senator Brookhart. That indicates a big increase in the sale of
these inflated securities, does it not?
Mr. Mitchell. It indicates a larger jjrofit in a legitimate business.
Senator Brookhart. Compared to present price levels, practically
all the securities you sold in 1928 were inflated, were they not?
Mr. Mitchell. A great many of those securities have since been
paid in one way or another. Of course there is scarcely a security, as
you know, outside of possibly United States Government bonds and
one or two of the primest States and municipals in the United
States, which is worth in the market what it was selling for in the
years 1928 and 1929.
Senator Brookhart. Does not that big commission encourage the
officers of a company like this to put off those securities on the
public, regardless of their real soundness?
Mr. Mitchell. I think not, Senator Brookhart.
Mr. Pecora. Mr. Mitchell, I observe from the figures you have
given concerning your participation in the management fund for the
years 1927 and 1928 that your participation amounted to about one-
third of the management funds for those respective years. Was
that the ratio that was followed in determining the amount of your
participation in the management funds?
Mr. Mitchell. I think it was changed almost every year, one
way or the other.
Mr. Pecora. Generally it was about one-third?
Mr. Mitchell. I should say it was about a third.
Mr. Pecora. Did not the National City Bank during these same
years also have a management fund for the benefit of its senior
executives ?
Mr. Mitchell. It did.
Mr. Pecora. Can you tell the committee Ijow much you received,
as either president or chairman of the National City Bank, from
the bank's management fund for the year 1927 ?
Mr. Mitchell. May I, Mr. Pecora, just show the difference as to
how that fund was set up?
Mr. Pecora. If you will answer this question now, it will be more
orderly for you to give us the information you want to give us later.
Senator Couzens. Is Mr. Winston your attorney ?
1774 STOCK EXCHANGE PRACTICES
Mr. Mitchell. He is one of my counsel; yes.
Senator Couzens. Is he attorney for the bank or just for j'ou
personally ?
Mr. Mitchell. No. He is counsel for the institution. He is of
the firm of Shearman & Sterling.
Senator Couzens. He is not attorney for the National City Bank
or the National City Co.?
Mr. Mitchell. He is counsel for the National City Bank, the Na-
tional City Co., and general counsel for the trust company.
Senator Couzens. Is he on a salary roll, per diem, or fee basis?
Mr. Mitchell. The firm of Shearman & Sterling?
Senator Couzens. Mr. Winston.
Mr. Mitchell. Mr. Winston is not employed by us directly.
Senator Couzens. You say he is not?
Mr. Mitchell. No, sir.
Senator Couzens. I thought if he was, he might take the witness
stand himself, but as long as he is not we will not ask him to.
Mr. Pecora. Can you answer my question, Mr. Mitchell, as to the
amount you received from the management fund of the National
City Bank for the year 1927 ?
Mr. Mitchell. I can not, offhand, but I will be glad to produce
that.
Mr. Pecora. Was it as great as the amount you got from the
National City Co. that year — that is, from its management fund ?
Mr. Mitchell. I can not answer that, quite frankly, Mr. Pecora.
Mr. Pecora. How long would it take you to get the data to answer
the question?
Mr. Mitchell. I presume that we can get it in some of our papers.
We have a volume of papers down here, and if it is not here I can
get it certainly from New York quite jjromptly for you.
Mr. Pecora. Mr. Mitchell, have you produced here, in response to
the subpoena served upon you, the minute books of the board of direc-
tors of the National City Co. for the years 1927 to 1932, inclusive?
Mr. Mitchell. We have produced the minute books as called for
by the subpoena.
Mr. Pecora. The minute books called for by the subpoena included
the minute books of the National City Co. for those years. Are those
minute books here, do you know — the minute books of the National
City Co.?
Mr. Guy Cart. The minute books we thought were here this morn-
ing. They have been sent for. They will be here this afternoon.
The minute books of the bank covered by the subpoena are here. The
oversight on the others was due to the fact that they understood you
wantecl certain statements from them, and not the books, so I have
sent for the books and they will be here in a short time.
Senator Couzens. Mr. Mitchell, I understand you have quite a
national reputation as a salesman and as a financier, both?
Mr. Mitchell. I can not tell you what my popular reputation is,
Senator.
Senator Couzens. We usually know, do we not?
Mr. Mitchell. I do not know whetHer we do, or not.
Senator Couzens. Which are you, a better salesman or a better
financier ?
STOCK EXCHANGE PRACTICES 1775
Mr. Mitchell. Is that a fair question ?
Senator Couzens. Yes. I would be able to answer that question if
somebody asked me.
Mr. Mitchell. I will say this, Senator Couzens : I have rarely seen
an executive who had to do with the public and the management of a
great corporation who was not inherently, by personality or other-
wise, in the class that might be called a good salesman.
Senator Couzens. That is what I understand ; and from my obser-
vations of you here, and on numerous occasions, I should judge you to
be a better salesman than a financier — and that is no disparagement
on your financial ability at all.
Mr. Mitchell. I thank you for the compliment.
Mr. Pecoea. Measured by the amount of compensation you re-
ceived, both by way of salary and by way of participation in the
management funds of the Na'tional City Co. and the National City
Bank for the years 1927 and 1928, would you say that your services
as a salesman reaped a greater return for you than your services as a
financier?
Mr. Mitchell. My services as rendered are not those of a sales-
man, Mr. Pecora.
Mr. Pecora. The business of the National City Co. is that of sell-
ing securities to the public, is it not?
Mr. Mitchell. That is only one phase of it.
Mr. Pecora. That is the most important phase of it, is it not?
Mr. Mitchell. I should certainly say not.
Mr. Pecora. Is not the greater part of its earnings derived from
its sale of securities to the general public ?
Mr. Mitchell. That is where they show themselves, but where
they are created is in the production end prior to the time that they
ever go into the sales end. An analogy is the manufacturing con-
cern. We have a certain portion of our organization — and it amounts
to a large force — devoting itself to the manufacture of long-term
credits suitable for public distribution, and for the analysis of the
production of other manufacturers, if I may continue to use the
analogy
Senator Couzens. I think the word is unfortunate — manufactur-
ing securities.
Mr. Mitchell. It may be in your mind. Senator Couzens. At the
same time that has an analogy that I do not consider amiss. A large
part of the business of the National City Co., and a large part of the
executive brains, is devoted to the development of long-term credits
suitable for public investment, and the organization in number would
have a preponderance along the sales line, but the gray matter of the
organization is certainly devoted in no small measure — and I should
say in preponderance — to the production of long-term credits.
Senator Brookhart. Does not that come up this way? Do not
various enteriDrises apply to you for this credit, submit their propo-
sition, and you just check them?
Mr. Mitchell. They come up in various ways, Senator Brook-
hart. Of course, they come often by applications from corporations
or States or municipalities and others who have need of long-term
financing.
1776 STOCK EXCHANGE PRACTICES
Senator Brookhart. They are the ones that oi-iginate the produc-
tion proposition, then?
Mr. Mitchell. They are the ones who show the opportunity for it,
but the study of it, the ways of developing to a suitable issue to give
to the public, are a matter that takes considerable experience and a
great deal of understanding.
Mr. Pecora. Various propositions are presented to the National
City Co.'s executives from time to time for the purpose of having
your company consider the financing of those propositions ?
Mr. Mitchell. Quite so.
Mr. Pecora. Is that what you mean by the production end of the
work, done by the National City Co. executives?
Mr. Mitchell. No. It is not merely the primary consideration
of that which comes in, because I think I scarcely need say that far
more propositions are turned down than are accepted. Yet they all
have to be studied. Then as we determine that something is accept-
able, or indications are that it may be acceptable, we have a great
deal of work to do — engineers studying properties, accountants work-
ing over the figures, men versed in the make-up of these issues,
finding that which would be safe and proper to issue under the cir-
cumstances ; how the issues should be set up ; and ultimately, coming
to the point where the price range and the spreads, and so forth, that
3'ou were interested in. Senator Couzens, are considered. That is the
last thing that is considered in the production side of our business.
Mr. Pecora. But the earnings of the company are all reflected, or
substantially reflected, from that end of its business which refers to
the sale of securities to the public ?
Mr. Mitchell. That is where you find it, just as you find, in a
mercantile or manufacturing concern, that the sale of the product is
the last thing that occurs, and the profit for the business shows itself
there.
Mr. Pecora. In the sale of those securities, or products, as you
choose to call them, to the public, you do not mean to imply, do
you, that the National City Co. creates that product, or makes that
product, consisting of those securities ?
Mr. Mitchell. The product which it makes is the form of the
issue. Of course, the obligor is always some debtor extraneous to
the National City Co.
Mr. Pecora. Exactly. The National City Co. is the vehicle by
which the i^roduct is sometimes set up, and the vehicle by which it is
sold to the public.
Mr. Mitchell. That is true ; yes.
Mr. Pecora. And, according to the earnings it derives from those
sales, the contributions or conmiissions or bonuses paid to its execu-
tive officers through the operation of the management fund are
determined.
Mr. Mitchell. That is so.
Senator Couzens. May I ask him to elaborate on the statement he
made a while ago? I understood you to say that the sale of these
securities, or the production of them, was extraneous to the National
City Co. Did you say that?
STOCK EXCHANGE PRACTICES 1777
Mr. Mitchell. No. I said that the obligation of these securities,
the promise to pay — in other words, the debtor — is apart from the
National City Co. itself.
Senator Couzens. But they may be a part of it through director-
ship or otherwise, may they not ?
Mr. Mitchell. No; I do not recall any case that I think would
come under your category.
Senator Couzens. You do not know of any director of the National
City Bank or the National City Co. interested in selling any securi-
ties that were sold to your company ?
Mr. Mitchell. Oh, I would not say that. There have been cases
where the National City Co. has bought issues and distributed issues,
where the obligor company on that issue had a director of our bank
or our company on their board.
Senator Couzens. That is what I meant. Then, it is not quite cor-
rect to say that the obligor has no relation with the National City
Co.?
Mr. Mitchell. From that angle, I think you are correct. Senator
Couzens.
Senator Couzens. And, so, as a matter of fact, the director, or the
connection between the obligor on the security, and the National City
Co., might be quite close, as a matter of fact?
Mr. Mitchell. Yes; but the direct obligation was what I was
referring to. Senator Couzens.
Senator Couzens. I understood, of course, that there was no obli-
gation of the National City Co., because if there had been, undoubt-
edly you would not have taken some of the chances that were taken,
is that true ?
Mr. Mitchell. I do not think we would ever have started business.
Senator Couzens. In other words, you sold securities that you pos-
sibly would not want yourself, or would not want retained in the
portfolio of the National City Co. ?
Mr. Mitchell. That does not seem to me quite fair.
Senator Couzens. I do not want to be unfair.
Mr. Mitchell. I realize that.
Senator Couzens. I am trying to determine the difference between
an investment
Mr. Mitchell. We sell a large amount of United States Govern-
ment bonds, for instance. It is not that we are selling those bonds to
the public because we do not think they are fit for our own portfolio.
We are selling those Government bonds because a public is seeking to
buy Government bonds.
Senator Couzens. Is that quite fair? Is it not a fact that in the
negotiations that take place between the officers and directors of the
trust company or a bank or an investment house, that dii'ectors some-
times say, " Well, I don't like it very much. I would not want any
of that in my portfolio, but I am willing to O.K. it for sale "?
Mr. Mitchell. I can conceive of that occurring very readily, be-
cause you might be sitting on such a board, and your judgment would
be very good, but you might say, " For my own box, I want only a
certain class of securities. I realize that there are plenty of people
who want a different class of security for their box, but I personally
1778 STOCK EXCHANGE PRACTICES
do not want it, but, realizing tlie demand that there is for that class
of security, I Certainly would approve this. It is not a security for
my own box, but I realize that there is a public demand for it."
Senator Cotjzens. That is what I am trying to get at. You being
a supersalesman, of course, can sell that to your directors. You can
sell them the idea. You do not always have to sell a security. Some-
times you can sell an idea.
Mr. Mitchell. I think you compliment me unduly, Senator.
Senator Couzens. I do not think so. I have observed you very
closely since you have been here.
Mr. Mitchell. I presume I have some influence, but I certainly
think that with certain of the hard heads that I attempt to gather
around me, they are not overinfluenced by what you call nw sales-
manship.
Senator Beookhaet. They give you a good deal bigger proportion
of this fund than the others, do they not?
Mr. Mitchell. They do, sir.
Mr. Pecoea. Mr. Mitchell
Senator Brookhart. Wait just a minute. I want to get some idea
what your compensation was in the National City Bank.
Mr. Pecoea. We are getting that information.
Mr. Mitchell, is it not a fact that for the year 1928, the total com-
pensation you received, from both the National City Bank and the
National City Co., by way of salarv and participations in the man-
agement fund, was $1,238*324.42?
Mr. Mitchell. If you have the record there, Mr. Pecora, it is
doubtless taken from certain records that prove that your figure is
accurate.
Mr. Pecora. Will you jot that figure down, and afterwards see if
you can confirm it?
Mr. Mitchell. What is the figure?
Mr. Pecora. For the year 1928, $1,238,324.42.
Mr. Mitchell. I will check it and confirm it.
Senator Couzens. Did not that amount make you envious of Mr.
Grace, of the Bethlehem Steel Co., and Mr. Hill, of the Tobacco
Co-
Senator Brookhart. In view of that compensation, Congress is
making a big noise about reducing the salaries of these $l,600-a-year
Government employees. Would not it be a good idea for them to
consider regulating the salaries of these national-bank presidents,
first?
Mr. Mitchell. That is something you will have to answer your-
self.
Mr. Pecoea. Mr. Mitchell, is it not also the fact that for the year
1929 you received, by way of both salary and commissions, or par-
ticipations in the management fund of the National City Co. and the
National City Bank, a sum aggregating $1,206,195.02?
Mr. Mitchell. May I have that figure again, because I have to
check it up ?
Mr. Pecora. $1,206,195.02.
Mr. Mitchell. I will be glad to check that figure, and confirm it,
or question it.
STOCK EXCHANGE PRACTICES 1779
Senator Couzens. For the matter of the record, I want to say that
this testimony is being elicited, not with the idea of going into the
personal affairs of Mr. Mitchell, or the National City Co., but for the
purpose of demonstrating publicly, if possible, that these unreason-
able salaries and these bonuses lead to unsound banking and unsound
sales of securities. I, as temporary chairman, want to make it plain
that this committee is going into that for that very purpose, and not
for the purpose of headlines or for the purpose of delving into indi-
vidual people's personal affairs. I personally dislike this sort of
thing, but I think that the public should know what inspires some
of these sales, and some of these securities being foisted on the public.
When I say that, it does not mean any reflection on the National
City Co. particularly, but it is quite general, that where there are
excessive profits and bonuses to employees and officials, it has been
verj' detrimental to the public interest. I thought I ought to say
that, because I disapprove of some of the questions that have been
asked of Mr. Mitchell, but I see no other way of getting at it.
Mr. Pecora. I may say, Mr. Chairman, that one purpose I had in
going into these items of evidence, was simply to establish what you
have just given expression to, namely, that this sort of an arrange-
ment constitutes, either consciously or unconsciously, an incentive to
perhaps unwise security selling methods, and unwise and unsound
banking methods.
Senator Cotjzens. That is exactly what I said. I want to say
that I would not have permitted some of these questions to be asked,
if it had not been that they relate to the public interest.
Mr. Pecora. Mr. Mitchell, was there an increase made in the cap-
ital stock of the National City Bank in the year 1927 ?
Mr. Mitchell. There was.
Mr. Pecora. And what was the amount of increase ?
Mr. Mitchell. Let me see if I have that here. I can not recall the
exact amount, that is my difficulty. (After examining papers.) I
think I can give it to you here, through the annual report. 1 thought
1 might have it here, but I am just 1 year back.
Senator Couzens. What was the question?
Mr. Pecora. About the increase of the capital stock of the bank in
1927.
Mr. Mitchell. Is the amount essential? I can jot it down and
bring that in here.
Senator Couzens. Mr. Mitchell has a number of questions to
answer, and if the committee is in agreement, we will adjourn until
2 o'clock.
(Whereupon, at 12 o'clock noon, a recess was taken until 2
o'clock p. m.)
after recess
The subcommittee resumed at 2 o'clock p. m., on the expiration of
the recess.
The Chairman. I will ask Senator Fletcher to take the chair, and
I will return in a few minutes.
Senator Fletcher (presiding). You may proceed, Mr. Pecora.
1780 STOCK EXCHANGE PRACTICES
TESTIMONY RESUMED OF CHARLES E. MITCHELI, PRESIDENT OF
THE NATIONAL CITY BANK, NATIONAL CITY CO., AND CITY
BANK FARMERS TRUST CO., NEW YORK CITY
Mr. Pecora. Mr. Mitchell, you made notations during your ex-
amination this forenoon of certain items with respect to which you
wanted to obtain information or confirmation from the records of
the bank and the company. Have you done so during the recess?
Mr. Mitchell. I have, I think, covered the questions you asked,
Mr. Pecora.
Mr. Pecora. All right. You may proceed to answer them.
Mr. Mitchell. Your first question had to do with the trustees
under the National City Co. trusteeship. The first trustees were
James Stillman, F. A. Vanderlip, and S. S. Palmer.
Mr. Pecora. All right.
Mr. Mitchell. Then you asked how these trustees are appointed.
Under the agreement they are appointed by the members of the
board, not by the board as a board, but by the members of the board
delegated as individuals to sit for the election.
Mr. Pecora. When you say " by the board " do you mean the
board of the National City Bank ?
Mr. Mitchell. Yes, sir; members of the board.
Mr. Pecora. In other words, members of the board of directors of
the National City Bank, select the three trustees, who act as trustees
for the shareholders of the bank in connection with their ownership
of the stock of the National City Co.
Mr. Mitchell. They act as trustees of the shareholders of the
bank.
Mr. Pecora. And as vacancies occur among these trustees for the
shareholders, how are those vacancies filled.
Mr. Mitchell. They are filled by an appointment that is made
by the individuals sitting as a group, not as a board.
Mr. Pecora. What individuals do you mean ?
Mr. Mitchell. The individuals who constitute the board of direc-
tors of the National City Bank.
Mr. Pecora. And are any of those trustees removable by anyone
other than the board of directors of the bank?
Mr. Mitchell. I think under the trustee agreement there is a dif-
ferentiation between the board of directors and those who are desig-
nated and delegated to the power of trustee reappointment and re-
moval. A majority of those individuals signing a paper may remove
any trustee and may reijlace any trustee.
Mr. Pecora. Now, let me see, Mr. Mitchell, about this : How many
constitute the full membership of the board of directors of the bank,
how many individuals?
Mr. Mitchell. I think we have authority for 27 at the moment.
Mr. Pecora. How many of that board compose the group that you
sjDeak of as having the power to designate the trustees?
Mr. Mitchell. Twenty-seven individual men.
Mr. Pecora. Twenty-seven individual men.
Mr. Mitchell. Yes.
Mr. Pecora. Do you mean to say that when they act in any man-
ner involving the designation of a trustee, they disassociate them-
selves from their relationship to the bank as its directors?
STOCK EXCHANGE PRACTICES 1781
Mr. Mitchell. Yes, sir.
Mr. Pecoka. Is that in pursuance of any provision of the original
trust agreement that was made back in 1911 when the National City
Co. was organized?
Mr. Mitchell. I so understand it.
Mr. Pecora. Have you a copy of that trust agreement ?
Mr. Mitchell. I haven't it here, and the information I have got-
ten has been received by telephone from New York.
Mr. Pecoea. Has any one of your associates or the other officers
of the bank wlio are present a copy of that trust agreement, do you
know ?
Mr. Mitchell. I tried to get it, and we had to get this informa-
tion by telephone, so I think I can answer your question " no." But
I will inquire. [After making inquiry of some of his associates.] I
will say " no."
Mr. Pecoba. How is it possible for those 27 individuals who com-
pose the board of directors of the bank, to function not as directors
but as individuals when they designate trustees for the shareholders
of the bank to represent them as shareholders of the stock of the Na-
tional City Co. ?
Mr. Mitchell. I can only draw the assumption that when that
agi-eement was drawn, the stockholders appointed a group of men to
act for them, and they as individuals should be the individuals who
constitute a board of directors of the National City Bank.
Mr. Pecoka. Was the identity of the members of that group coin-
cident with the identity of the members of the board of directors of
the bank at that time ?
Mr. Mitchell. I cannot really give you anything more than I
have ah'eady given you. That comes from reading over the tele-
phone what that provision is.
Mr. Pecora. Well, then, that leaves tlie situation in this fashion,
does it not, namely, the persons who own all the capital stock of the
National City Co. are the shareholders of the National City Bank?
In substance is that correct ?
Mr. Mitchell. It seems to me you are asking something that
might have a legal angle to it that I would not understand. I can
state it very definitely : That these three trustees are the shareholders
of all the stock of the National City Co., and under the agreement
they hold that stock for the benefit of the shareholders of the Na-
tional City Bank.
Mr. Pecora. Yes; but those three trustees are in no way chosen
today by the shareholders themselves, are they ?
Mr. Mitchell. No. This goes back to the original provision,
and
Mr. Pecoea (interposing). And that provision was inserted in the
trust agreement at the very outset of the existence of the National
City Co.
Mr. Mitchell. I think that is true.
Mr. Pecora. So that at no time since the National City Co. was
organized have any of the shareholders had any voice in the designa-
tion of the trustees who hold their stock for them, is that correct?
Mr. Mitchell. I should say that is correct, except as they have the
right to appoint the individuals as members of the board of di-
1782 STOCK EXCHANGE PRACTICES
rectors, and do so appoint them, and those individuals, year by year,
whoever they may be, are the designating body of the trustees.
Mr. Pecora. Well, as a matter of fact, has there been at any time
since you became the president of the National City Bank any action
at the annual meetings of the shareholders which was attended in
person by more than a few actual shareholders of the bank?
Mr. Mitchell. You are speaking of shareholders now of the
bank ?
Mr. Pecora. Yes, sir.
Mr. Mitchell. Oh well, we have a room two-thirds the size of this,
which is crowded at every annual meeting.
Mr. Pecora. And you have how many shareholders of record?
Mr. Mitchell. Something over 85,000.
Mr. Pecora. So that if they were to crowd that room, two thirds
the size of this, to its utmost capacity, you wouldn't have more
than a very small fraction of 1 per cent of the shareholders actually
attending meetings at which this group is chosen.
Mr. Mitchell. Yes; as to the number of shareholders. But we
have a very large percentage, of course, of the capital stock repre-
sented by shareholders who are present.
Mr. Pecora. To whom are the directors of the National City Co.
accountable or responsible for their acts and for their administration
of the company ?
Mr. Mitchell. Accountable to the trustees, who are the share-
holders.
Mr. Pecora. They are accountable to these three men who are
chosen by a gi'oup of the directors of the bank, aren't they, in fact?
Mr. Mitchell. They are selected by a group of men who con-
stitute as individuals the board of the National City Bank.
Mr. Pecora. Whenever in pursuance of the laws of the State of
New York, under which the National City Co. was organized, it is
necessai-y to have a stockholders' meeting of that company, the meet-
ing is confined to these three trustees?
Mr. Mitchell. That is so.
Mr. Pecora. Do these three trustees ever make a report at a stock-
holders' meeting, to the shareholders themselves?
Mr. Mitchell. No.
Mr. Pecora. Have you ever known them to do it?
Mr. Mitchell. No.
Mr. Pecora. Have you ever known those trustees to keep any
minutes or record of any proceedings that they have had as such
trustees for the stockholders of the National City Co.?
Mr. Mitchell. You asked me this morning if the trustees had
meetings and if they kept minutes. I read from a memorandum
of the cashier of our bank answering that question [reading] :
Referring to your inquiry regarding minutes of proceedings of the trustees
who hold tlie stoelj of the National City Co. I wish to adxise that I am the
custodian of the records of tlie trustees, which consists of the trust agreement,
documents relating to the appointment of present and former trustees, dividend
orders executed by the trustees, powers of attorney given by them to agents
to indorse stock certificates, and incidental papers. There is no minute hook or
minutes of proceedings of the trustees in my possession. Action taken by the
trustees has been recorded so far as my knowledge extends, which goes back
a good many years, in the documents and standing orders and appointments
above referred to.
STOCK EXCHANGE PRACTICES 1783
Mr. Pecoea. That means that they have never kept any minutes
of any proceedings of theirs, doesn't it?
Mr. Mitchell. I should think that that means that.
Mr. Pecora. And to your knowledge have those trustees ever
made any report to the stockholders of the company for whom they
act as trustees ?
Mr. Mitchell. I think I answered " no " to that.
Mr. Pecora. They have not.
Mr. Mitchell. No.
Mr. Pecora. Has the National City Co. made any public report to
the holders of its stock, of its corporate proceedings?
Mr. Mitchell. I do not understand just what you mean as to its
corporate proceedings.
Mr. Pecora. Let me put it this way : Does the National City Co.
make any annual report of its business operations?
Mr- Mitchell. As chairman of the three institutions, we make a
report to the shareholders at their annual meeting, and I report at
that time on the ojjerations of the National City Co. for the past
year.
Mr. Pecora. So that the report which you as the chairman of the
three institutions make every year is an oral report, is it not?
Mr. Mitchell. It is printed and sent to every shareholder.
Mr. Pecora. Insofar as that annual report alludes to the business
of the National City Co., it is very general and sketchy, isn't it?
Mr. Mitchell. Well, I do not consider that it is more general and
sketchy than with respect to the bank. It used to be that way; no
report of earnings or the lialance sheet of the National City Co. was
furnished to our shareholders.
Mr. Pecora. When for the first time did the National City Co.
furnish that information to its shareholders?
Mr. Mitchell. I think two years ago.
Mr. Pecora. Prior to that it never gave any such information even
to its shareholders ?
Mr. Mitchell. It did not. Now, may I continue with the ques-
tions you asked this morning ?
Mr. Pecora. If you will.
Mr. Mitchell. You asked me if I knew whether there was provi-
sion, either in the original charter or the by-laws, providing that no
contract should be invalidated by the participation therein by a
director. I find that that is a provision in the original charter of
the company, in 1911. Now, do you care to have me answer the
further questions you asked?
Mr. Pecora. Yes, sir; whatever they are. I have not a note of
them.
Mr. Mitchell. You asked me regarding the management funds
and my participation therein. You asked me particularly my par-
ticipation therein and gave me certain figures for 1928 and 1929 to
corroborate.
Mr. Pecora. Yes.
Mr. Mitchell. I judge that the figures you gave were the amounts
that I received in 1928 and 1929. Now, t call attention to the fact
that the management fund of a given year is distributed in part in
the middle of the 3'ear and in part in the following year. So that
1784 STOCK EXCHANGE PRACTICES
the amounts that you have that I received do not indicate the
amounts that were subject to distribution for that particular year.
In other words, my return would be different than the actual man-
agement fund and my participation therein. But I am now prepared
to give you, if you desire, the amount of the management fund
accrued during those years, and what proportion thereof I received.
Mr. Pecora. Well, were the figures which I embodied in my ques-
tions this forenoon correct for the 12-month period on each occasion?
Mr. Mitchell. Well, I assume that tlie figures you used were the
figures shown that I received as a result of the management fund
during those periods.
Mr. Pecora. And your salary ?
Mr. Mitchell. And ray salary. Now, I have not been able to
check these. But I have the management funds for the two years
and what part of the management funds I did receive, whicli I
assume is what you were getting to, from the bank and the company
during those years in question.
Mr. Pecora. Well, give us your figures then. Take first the vear
1928.
Mr. Mitchell. Well, now, you see the figures for 1928 cover in
large part the figures of the management fund for 1927, because the
accumulations of 1927 were distributed in smaller part in July of
1927. The balance would have been distributed in 1928. But the
fund would have been closed in 1927. So that what I received from
the accumulation of the management fund of 1927 would have been
received in part in 1927 and in part in 1928.
Mr. Pecoka. Can't you make a computation or calculation which
will give us the amount you received by way of salary and partici-
pation in the management funds of the National City Co. and the
National City Bank for the year 1928?
Mr. Mitchell. Well, perhaps these figures which I have obtained
from New York by telephone, will give you the figures you want.
Mr. Pecora. All right. Go ahead.
Mr. Mitchell. The accumulations of the management fund of the
bank in the year 1927 were $1,356,999.53, of which I received $529,-
230, a part of it of course in 1927 and a part in 1928. But that was
the proportion that I received of the 1927 management fund accum-
ulations of the bank for that year.
The National City Co. accumulated in the 1927 management fund
the sum of $1,988,000, of which my proportion was $527,000. There-
fore the total amount which I received from the management funds
from the accumulations of that year was $1,056,230.
In the year 1928 the accumulation in the management fund of the
bank was $1,401,585.47, from which mj' proportion amounted to
$566,634.19.
Mr. Pecora. About one-third.
Senator Brookhart. Oh, no. More than that.
Mr. Mitchell. Over one-third.
Mr. Pecora. Well. Go ahead.
Mr. Mitchell. The company accumulation in 1928 was $2,739,-
438.98, and the amount apportioned to me was $750,000.
Mr. Pecora. How about 1929?
STOCK EXCHANGE PRACTICES 1785
Mr. Mitchell. In 1929 the acciinuilatioii in the management fund
of the bank was $1,725,177.90, of which the amount apportioned
to me was $G08,bGy. The accuniuhition in the management fund
of the National City Co. was niL
Mr. Pecoka. Tliat is, for the 3'ear 1929 {
Mr. Mitchell. Yes; and the amount given to me was nil. As
to the Trust Co.
Mr. Pecora (interposing). For the entire year there were no
accumulations in the management fund of the National City Co.?
Mr. Mitchell. There was an accumulation in the first part of
that year, but it was wiped out by losses in the latter parl^ of the
year, so that the management fund at the end of the year had
nothing in it.
Mr. Pecoea. But wasn't there a distribution made at some time
during the year of that portion of the management fund which had
been accumulated up to that time ?
Mr. Mitchell. A portion of the amount accumulated was dis-
tributed in July.
Mr. Pecoka. In July of 1929 ?
Mr. Mitchell. Yes. But when we came to the end of the year
we found the management fund as a whole was in the minus, and
therefore provision was made that the amount should stand as
advances to the officers, payable out of future accumulations in
the management fund.
Mr. Pecora. In other words, the officers did not refund at the end
of the year that portion of the management fund which had accu-
mulated up to July of 1929 and had been distributed?
Mr. Mitchell. There was a portion only of that distributed at
that time.
Mr. Pecora. But that portion which was distributed in July of
1929 was not refunded by the officers to whom it had been distributed,
at the end of the year, was it ?
Mr. Mitchell. No.
Mr. Pecoka. They were permitted to keep it as an advance against
future accumulations in the management fund in subsequent years.
Mr. Mitchell. That is quite true. Then there was
Mr. Pecora (interposing). And how much of that participation
did you get for the first 6 months of 1929, of the National City Co.'s
management fund, do you know?
Mr. Mitchell. I do not recall the exact figure.
Mr. Pecoka. Can you tell us approximately?
Mr. Mitchell. I carry in my mind the figure of — well, now, let me
see.
Mr. Pecoka. Was it a figure around $500,000?
Mr. Mitchell. I should think so. It is a matter of record, but
I can not recall definitely. Quite frankly, I always felt that the
officei-s could claim that as a final payment, because the original
provision regarding the management fund was that the directors
could distribute at any time during the year such proportion of the
management fund then accumulated as seemed to them wise, and
that was a payment of that character. But when the year ended
there being nothing in that management fund it seemed wise to me
and I recommended to the directors at the time, that the officers
1786 STOCK EXCHANGE PRACTICES
should be willing to consider that purely as an advance upon future
accumulations of the management fund, and it was so arranged.
Mr. Pecora. Might it not have been more in the interest of the
company if it had been then decided that the officers should refund,
at the end of the year, the distributions that had been made to them
out of the first half year's accumulations in the management fund?
Mr. Mitchell. I think it would be fairer from the officers' stand-
point if they had, on their side, been insistent that it was an actual
payment to them.
Mr. Pecora. But I asked you if it would not have been fairer to
the company for them to have made a refund.
Mr. Mitchell. I do not think so. Under the original provisions
for distribution of the management fund I would not say so.
Senator Fletcher. And were there future accumulations?
Mr. Mitchell. You see, from that time on the earnings have been
comparatively small and the management fund has not been opera-
tive since that time.
Mr. Pecor^v. Now, as I have jotted down the figures you have just
given, your total participation in the distribution of the manage-
ment fund of both the bank and the company, for the years that
you have covered, namely, 1927, 1928, and 1929, are $3,481,732. That
is, estimating an approximate figure of $500,000 as your share of
the management fund of the National City Co. for the first six
months of 1929. Is there anything wrong with that calculation?
Mr. Mitchell. Except that I think the estimation is wrong, if
that $.500,000 which I am to return out of some future earnings, is
included.
Mr. Pecora. Well, you have not been called upon to return it.
You actually have received it and still retain it.
Mr. Mitchell. But on any reestablishment of the management
fund there would be accruals from which that would have to be paid.
In other words, that has to be paid out of future accruals in the
management fund.
Senator Brookhart. That cannot happen in the depression, can it?
]\Ir. Mitchell. It certainly cannot, I am sorry to say.
Senator Brookhart. And the depression will not get over as long
as the farmers cannot buy anything.
Mr. Pecora. These compensations paid to you only have reference
to compensations you have received by way of participation in the
management funds of the bank and of the National City Co. for the
period of time indicated. Tliere has to be added to those figures
whatever you received by way of salary, has there not?
Mr. Mitchell. Yes.
Mr. Pecora. And there also has to be added whatever you received
by way of salary and participation in the management fund of the
City :6ank Farmers Trust Co. ?
Mr. Mitchell. Yes, sir.
Mr. Pecora. Which City Bank Farmers Trust Co. of course did
not come into existence as a trust affiliate of the bank until 1929.
Mr. Mitchell. No. I started to give you the management fund
figures of the City Bank Farmers Trust Co. for the year 1929.
Mr. Pecora. Well, you can give us the precise figures on that.
STOCK EXCHAN-QE PRACTICES 1787
Mr. Mitchell. There was accumulated in that half year, from
July to December 31, 1929, $283,497.38, in which I participated to
the amount of $15,997.38.
Mr. Pecoea. That is outside of the matter of salary.
Mr. Mitchell. Yes.
Mr. Pecoea. You are also chairman of the board of the City Bank
Farmers Trust Co., are you not?
Mr. Mitchell. I am chairman of the board of that company, the
same position I occupy in the others.
Mr. Pecoea. And receive a salary for your services as chairman
of the board of that institution?
Mr. Mitchell. No. I receive no salary there.
Senator Fletchee. How was this management fund created?
Mr. Pecoea. He discussed that this morning.
Senator Fletchee. Well, all right. Was it created out of profits?
Mr. Pecoea. Out of earnings.
Mr. Mitchell. I was interrupted this morning I think in showing
the difference in the method of distribution of management fimds in
the bank as against the company. I did not want to leave the impres-
sion that the same method of distribution obtains in the bank that
obtains as in the company. In the bank twice a year, so long as the
management fund prevailed under the old resolution, a vote is taken
of all the officers, three ballots being cast: The first ballot is an
unsigned ballot lodged in a ballot box with the cashier of the bank,
as to what portion of the management fund accumulated I personally
should receive.
The second is a signed ballot as to how much of the management
fund after the proportion which I receive is deducted, should be dis-
tributed to each other eligible officer, each man voting eliminating
himself. The third ballot is a signed ballot indicating what men
other than the eligible officers should be considered in the distribu-
tion of the fund, what men have contributed most effectively during
the period under review to the advancement of the interests of the
institution.
Those ballots are presented by the cashier, after he has made a
computation of their showing, to the executive committee, who, with
myself absent, determine what proportion I shall receive. My only
insistence to the executive committee of the bank has been that I
shall never receive in excess of the proportion voted me by the
officers. The other percentages are computed and tabulated by the
cashier, and against those percentages amounts are set.
Those are given to me by the executive committee to iron out what
I consider unfairnesses that might have crept in. Then, with my
recommendations, they determine how that portion of the fund shall
be given.
As far as employees who are not regularly eligible for the fund,
we took those who received the highest recommendations, the greatest
number of votes from the official staff, and those were reconsidered
by the officers, and we selected from six to a dozen such men for
special consideration in the management fund. That is done twice
a year. And it is under that kind of provision, where, as you will
see, I do the rather bold thing of placing myself on a pedestal where
the officers can throw all the stones that they will at me without my
119852— 33— PT 6 3
1788 STOCK EXCHANGE PRACTICES
knowing from whom the stone comes, and I take their final net as
the maximum which I will receive.
Mr. Pecora. And those officials who can throw those stones at you
are all subordinate officers, aren't they, subordinate to you?
Mr. Mitchell. They are, but their ballots are unsigned.
Mr. Pecora. And you, in turn, have a voice in fixing the appor-
tionments to be given to them out of this management fund ?
Mr. Mitchell. I do, but I do not know what their votes have
been as to me.
Senator Fletcher. What portion of the earnings goes into this
management fund?
Mr. Mltchell. Twenty per cent of the net earnings after 8 per cent
of capital, surplus, and undivided profits have been deducted from
the net operating earnings of the year.
Mr. Pecora. Now, may I ask you, Mr. Mitchell, if the minute books
of the board of directors of the National City Co. have arrived here?
Mr. Mitchell. I do not know.
Mr. Pecora. Are they in New York, Mr. Carey ?
Mr. Carey. They are on the way now.
Mr. Pecora. When do you expect them, later on this afternoon ?
Mr. Caret. Yes.
Mr. Pecora. In the absence of the minute books I will have to
rely somewhat u2)on your recollection. Do you recall now that there
was an increase of the capital stock both of the National City Co.
and of the National City Bank in February of 1927 ?
Mr. Mitchell. Yes, sir.
Mr. Pecora. How much increase in the capital stock of the bank
was effected at that time?
Mr. Mitchell. There was an increase in the capital of the bank
from $50,000,000 to $75,000,000.
Mr. Pecora. How was that apportioned as between capital and
surplus, if there was any such apportionment made ?
Mr. Mitchell. There were issued to shareholders 250,000 shares of
additional stock at $200 per share. The avails of that ran to an
aggregate of $50,000,000, which was divided, $25,000,000 to the bank's
capital, $12,500,000 to the company's capital, and $12,500,000 to the
company's surplus.
Mr. Pecora. That is, the $50,000,000 raised through the issuance
and sale of those 250,000 shares of stock of the bank, at $200 a share,
were divided equally between the bank and the company?
Mr. Mitchell. That is true.
Mr. Pecora. But the allotment of $25,000,000 that went to the
company was divided equally between its capital and its surplus
account.
Mr. Mitchell. That is true.
Mr. Pecora. Now, coincidentally with that increase in the capital
and surplus of $25,000,000 in the National City Co., did the National
City Co. have any business transactions with a corporation called the
General Sugar Corporation?
Mr. Mitchell. In connection with this increase.
Mr. PEaiRA. No; coincidentally with it. That is, at about the same
time as this increase of $25,000,000, which was made to the capital
and surplus account of the National Citj' Co. ?
STOCK EXCHANGE PRACTICES 1789
Mr. Mitchell. I can not lemember the dates. I will get it.
I After consulting with an associate.] The National City Co. pur-
cliased on February 16. ]927. 1.500.U00 shares of the General Sngar
Co. for $25,000,000.
Mr. Pecoka. And the increase of capital and surplus of the Na-
tional City Co. was effected the day before that transaction, was
it not ?
Mr. Mitchell. Yes, sir.
Mr. Pecorv. In other words, on February 15, 1927.
Mr. Mitchell. Yes, sir.
Mr. Pecora. Now, was there any relationship, other than that of
time, between those two transactions?
Mr. Mitchell. Well, I should think probably, yes. I do not
recall the situation directly, but I think one would have to realize
what the stock of the General Sugar Co. was to see the relationship
there.
Mr. Pecora. But was there a relationship, other than that of time,
between those two transactions, namely, between the issuance of the
.stock and
Mr. Mitchell (interposing). I should think probably, yes.
Mr. Pecora. Isn't it fair to say that the primary reason for this
increase in the capital and surjjlus of the National City Co. of
$25,000,000 was to enable the National City Co. to take over with
that specific siun $25,000,000 of the capital stock of a corporation
called the General Sugar Corporation?
Mr. Mitchell. Yes; I should think so. I think that is a fair
assumption.
Mr. Pecora. Now, this $25,000,000 that went into the capital and
surplus account of the National City Co. on February 15, 1927, came
from the shareholders of the bank and the company who purchased
those 250,000 shares at $200 a share?
Mr. Mitchell. That is right.
Mr. Pecora. When was the General Sugar Corporation organized ?
Mr. Mitchell. I think it was organized right then. I will have
to inquire.
Mr. Pecora. That is, at the same time.
Mr. Mitchell. Yes ; the General Sugar Co. must have been formed
just about that time.
i\Ir. Pecora. Well, the General Sugar Co. is a different corporation
from the General Sugar Corporation, isn't it?
Mr. Mitchell. No.
Mr. Pecora. Wasn't there a General Sugar Co. formed prior to
1927?
Mr. Mitchell. Let me inquire. [After consulting an associate.]
There was a General Sugar Co. formed, as a management company,
for the management of sugar properties in which the bank was
interested.
Mr. Pecora. That was formed in 1921 or 1922, wasn't it?
Mr. Mitchell. It was not in 1921. I should say it must have been
formed in late 1922 or early 1923.
Mr. Pecora. Yes. Now, then, when you speak of the General
Sugar Co. I want you to please bear in mind that that is the name
ot this corporation that was formed in 1922 or 1923.
1790 STOCK EXCHANGE PRACTICES
Mr. Mitchell. That is right.
Mr. Pecora. And when you speak of the General Sugar Corpora-
tion will you please bear in mind that that is the name of the com-
pany which was formed in February of 1927 ?
Mr. Mitchell. Yes.
Mr. Pecoka. Now, have you in mind, within your own recollection,
Mr. Mitchell the outstanding facts with regard to the formation of
the General Sugar Corporation in 1927?
Mr. Mitchell. Yes.
Mr. Pecora. So that you think you will be able to answer my ques-
tions concerning that company and its operations without seeking
assistance from anyone else?
Mr. Mitchell. I would not say so entirely. My associate, Mr.
Rentschler, the president of the bank, is far better qualified to answer
those <iuestions directly than I woulct be. but I will be glad to do my
best for you.
Mr. Pecora. All right, sir.
Senator Fletcher. What proportion of the total shares of the
General Sugar Corporation did your company take over?
Mr. Mitchell. All of them.
Senator Fletcher. One and one half million shares?
Mr. Mitchell. Yes, sir.
Mr. Pecora. In other words, the $25,000,000 that the National
City Co. obtained in February of 1927 through the sale of 250,-
000 additional shares of the capital stock of both the bank and the
company was immediately turned over to the General Sugar Cor-
poration in return for all of its capital stock?
Mr. Mitchell. Yes, sir.
Mr. Pecora. Now, the General Sugar Corporation had, just prior
to that transaction, acquired all the capital stock of the General
Sugar Co., which was organized in either 1922 or 1923?
Mr. Mitchell. That is right.
Mr. Pecora. Now, then, when this General Sugar Co. was organ-
ized in 1922 or 1923, wasn't it organized for the purpose of taking
over the equities of four or five sugar-producing companies in Cuba?
Mr. Mitchell. I think that that was a management company.
Mr. Pecora. It was a management company?
Mr. Mitchell. Yes.
Mr. Pecora. And as a management company didn't it ac(]uire the
equities of the producing companies, which were some 4 or 5 in
number, 1 of them being the Camaguey Sugar Co., and then 2 or 3
other companies generally referred to as the Oriente sugar group —
do you recall those names?
Mr. Mitchell. Oh, yes.
Mr. Pecora. Now, this management company, called the " General
Sugar Co.'" was organized in 1922 or 1923 after you as the president
of the National City Bank and as the president of the National City
Co. had made a survey of the sugar industry down in Cuba, was
it not?
Mr. Mitchell. Yes.
Mr. Pecora. And you were accompanied to Cuba on that occasion
by Mr. Rentschler, whose name you just mentioned a few moments
ago?
STOCK EXCHANGE PRACTICES 1791
Ml-. Mitchell. Yes, sir.
Mr. Pecora. And this Mr. Rentsi'hler is now the president of the
National City Bank, is he not?
Mr. Mitchell. He is.
Mr. Pecora. Was lie an officer of the National Citj- Bank when he
accompanied von to Cuba in 1922 to survey the sugar industry
there?
Mr. Mitchell. He was not.
Mr. Pecora. Was he connected with the sugar industrv in Cuba
at that time, in 1922 ?
INIr. Mitchell. He had been a manufacturer, who, incidentally,
produced a large quantity of sugar machinery, and his company had
sold that sugar machinery over the island of Cuba for a long series
of years, and he had been there and was acquainted very thoroughly
with the sugar properties of the island, and the leading personali-
ties in the sugar business in Cuba.
Mr. Pecora. He was acquainted with the sugar industry as a man-
ufacturer of machinery used in sugar production?
Mr. Mitchell. Yes. i
Mr. Pecora. He was not a banker at that time?
Mr. Mitchell. No.
Mr. Pecora. When did he first become affiliated in any official
capacity with the National City Bank?
Mr. Mitchell. He became a director. I should not want to com-
mit myself as to what year, but I should say he became a director
about the year 1924 or 1925. It is a matter of record.
Mr. Pecora. Now, were you also accompanied on that trip to
Culia by a Colonel Deeds?
Mr. Mitchell. Yes.
Mr. Pecora. Was Colonel Deeds at that time connected with either
the National City Bank or the National City Co. ?
Mr. Mitchell. No, sir.
Mr. Pecora. You regarded him also as well posted on the sugar
industiy in Cuba at that time, did j'ou?
Mr. Mitchell. Yes, sir.
Mr. Pecor.\. What was his relationship at that time to the sugar
industry in Cuba, if you can tell us ?
Mr. Mitchell. Colonel Deeds had been general manager of the
National Cash Register Co. at one time. He had been a leading
manufacturer of automotive apparatus, and a large owner in a prom-
inent company in that field which company he finally sold to the
General IMotors Co., and became a retired man. But Colonel Deeds
is of that type that can never retire, he will die with his boots on.
Mr. Pecora. And he still has his boots on, I assume?
Mr. Mitchell. Yes; he still has his boots on. He went to Cuba
first I think, thinking it would be a good place for pastime or a
holiday. And he immediately became interested in the sugar situa-
tion there. He is a business man of very substantial acumen, and
has been a friend of our institution for many years, and finding him
there with that time on his hands and with the business background
that he had, we asked him if he would not look into our situation
down there. And he did so, at an expenditure of a very large amount
of time, and he spent that time most intelligently.
1792 STOCK EXCHANGE PHACTICES
Mr. Pecora. Now, Colonel Deeds at that time was in no way con-
nected with the National City Bank or the National City Co., was he ?
Mr. Mitchell. No. sir.
Mr. Pecora. Did he thereafter become connected with either or
both of those companies?
Mr. Mitchell. He became a director of the National City Bank.
Again reaching for a date out of mv memorj^, I should say about
1928.
Mr. Pecora. And he still is a director of that bank?
Mr. Mitchell. And still is a director.
Mr. Pecora. Now, you said a few minutes ago that you asked
Colonel Deeds to accompany you to help look over your situation.
That may not be the exact terminologj^ you used, but it is the sub-
stance. What was that situation ? Was it one in which the National
City Bank had some loans outstanding amounting to millions of
dollars which you had previously made to these sugar-producing
companies whose management was taken over in 1922 or 1923 by
the General Sugar Co.?
Mr. Mitchell. The National City Bank made some very large
loans on the sugar business in Cuba.
Mr. Pecora. Prior to 1922 ?
Mr. Mitchell. Prior to 1922. This was in 1918, I think. It was
before I was connected with the bank, Mr. Pecora. And as 3^ou will
perhaps
Mr. Pecora (interposing). Before you were connected with the
bank?
Mr. Mitchell. Before I was connected with the bank ; these loans.
Mr. Pecora. But it was while you were connected with the Na-
tional City Co.?
Mr. Mitchell. While I was connected with the National City Co.,
but I knew nothing of these ojDerations. If j'ou will recall, sugar
reached the price, I think, of about 28 cents a pound in Cuba in 1919
or 1920, and it had a collapse that was very sudden, dropping about
90 percent of that
Senator Brookhart (interposing). Who was behind that manipu-
lation? I remember carloads of sugar coming on the track in the
city of my State, and it sold five times right there on the track and
a higher price every time, to keep up with the New York manipula-
tion.
Mr. Mitchell. I do not know of New York manipulation. I can
give you my impression of what happened, Senator Brookhart. As
you know, during the war many of the European countries who
had been large beet-sugar producers on their own account lost their
beet fields in the war, and with men going away the beet factories
were shut down and sugar became extremelj^ valuable. At that time
the facilities for producing sugar in Cuba were materially increased.
Senator Brookhart. That offset this European trouble, didn't it?
Mr. Mitchell. No; it did not offset it. The loss of production
in Europe was very substantial, and following the war it took some
time for these European fields and factories to get back into pro-
duction. In the meantime the high price had stimulated production
all over the world. The Philippines, Puerto Eico, places that could
not begin to approach Cuba's cost of production, began to set up
STOCK EXCHANGE PRACTICES 1793
their facilities for production very, very rapidly, and suddenly this
production that had been started after the people began to recover
themselves from the effects of the war came into the market and the
Cuban sugar prices dropped precipitously. Of course, I imagine
there must have been a great deal of speculation in it. It is a situa-
tion, as I say, that my associate, Mr. Rentschler, can talk on very
much more intelligently than I. Mine is a recollection of it.
But to get back to your question, Mr. Pecora : During the period
of 1917 and 1918 and 1919, 1920 probably, the early part of it, our
bank had been lending to sugar producers in Cuba. They were
building new properties, and there was a good deal of activity there,
and we had branches at that time in Habana and in all of the prin-
cipal cities.
Senator Beookhart. Do you still have those interests in Cuba ?
Mr. Mitchell. Yes. We haven't as many branches as we had. but
we have a large branch in Habana and we have branches through the
principal cities.
Senator Brookhaet. It is charged that the National City Bank is
sustaining the Machado government.
Mr. Mitchell. That is absolutely false, because the National City
Bank, neither in Cuba, nor the United States, nor in any other part
of the world, has anything to do with politics or the promotion of
any regime or the maintenance of any regime in office ; and I say
that positively and am glad to have the opportunity to do it, because
it is a thing that is often charged up against us and with absolute
untruth.
Mr. Pecora. Now. Mr. Mitchell, what was tlie total amount of
loans which the National City Bank had made to the sugar-producing
companies prior to 1922 whose managament was shortly taken over
by the General Sugar Co.?
Mr. INIiTCHELL. I don't think I can give you that exact amount.
When I first started to look into the situation in Cuba I found that
they had made many loans to individuals and to corporations and to
propei'ties, which, with the collapse that had taken place, were truly
valueless, and those we did not attempt to do anything with except
to start to write them off our books. There were certain properties
that our examination showed as having a promise in one way or
another.
Mr. Pecora. What was the total amount of the loans that had been
made and which were outstanding in 1922 to these sugar companies
by the National City Bank? That was the question.
Mr. Mitchell. Well, I can not answer that without reference.
Mr. Pecora. Was it around $30,000,000?
Mr. Mitchell. I should think it was at least that.
Mr. Pecora. And did the bank continue to hold those loans up to
1927, when the General Sugar Corporation was organized?
Mr. Mitchell. Many of them.
Mr. Pecora. Did the bank transfer or assign those loans to anyone
in 1927 after the incorporation of the General Sugar Corporation
and the purchase of its stock for $25,000,000 cash bv the National
City Co.?
Mr. Mitchell. Not as far as I know. When the General Sugar
Corporation became holden of this money that had been put in by
1794 STOCK EXCHANGE TRACTICES
the National City Co. they paid off a substantial amount of obliga-
tions of those various companies to the National City Bank.
Mr. Pecora. In other words, with the moneys realized from the
sale of this additional capital stock in February, 1927, amounting to
$25,000,000, the National City Co. paid off over $20,000,000 of those
loans to the bank ?
Mr. Mitchell. I can not tell you just how much they paid off, but
they paid off a substantial amount. You see
Mr. Pecora. Is there any one of your associates who can give us
those figures? I am sorry you haven't the minute books here, Mr.
Mitchell, because I could get those figures, or you could get them,
directly out of the minute book.
Mr. Mitchell. I am prompted to this effect : That at that time the
General Sugar Corporation took over from the bank approximately
$25,000,000.
Mr. Pecora. Didn't it take over from the bank approximately
$31,000,000 in loans?
Mr. Mitchell. No ; not at that time. I think at that time it took
over about $25,000,000, and it, furthermore
Mr. Pecora (interposing). Mr. Carey, have you got the minute
book of the board of the bank?
Mr. Caret. Yes.
Mr. Pecora. Of 1927?
(A minute book was produced.)
Mr. Mitchell. I was just going to say in the meantime, Mr.
Pecora
Mr. Pecora. Let me finish this question, will you, please?
Mr. Mitchell. Why, certainly.
Mr. Pecora. Now, let me read to you, Mr. Mitchell, from the
minute book of the board of directors of the National City Bank the
following entry from its proceedings held on Februan' 15. 1927,
found at page 238 of the minute book:
Tlie president asks the particular attention of the bo.irtl to the action taken
by the executive committee to-day mth reference to the investment by the
National City Co. of the sum of $25,000,000 in the stock of General Sugar
Corporation and sale by this bank to said General Sugar Corporation for
approximately $20,893,198 in cash and $11,000,000 of 5-yfar 6 per cent secured
notes, of all this bank's interest in and loans fo Cia. Azucarera Vertientes,
Ci.i. Azucarera de Caniaguey, and Cia. Azucarera San Cristobal, and the com-
panies grouped under the control of the Santa Clara Sugar Co., with the
exception of bonds held for investment and of current loans to said group of
companies on pignorated sugars and of such portion of current iinsecnred loans
of ])roducing comijanies as this bank is satisfied to retain.
Does that entry refresh your recollection as to whether or not
on February 15, 1927. that being the date when the National City
Co. obtained $25,000,000 through the increase of capital stock of
the company and the bank, that being the date on which the General
Sugar Co. was organized, and that being the date referred to in the
minute entry which I have just read to you?
Mr. Mitchell (interposing). Yes; it does.
Mr. Pecora. Df)es that refresh your recollection as to the fact that
on that date loans of the National City Bank which it had made
in previous years to these various sugar-producing companies in
Cuba, aggregating over $31,000,000, were taken over by the General
STOCK EXCHANGE PRACTICES 1795
Sugar Corporation in return for nearly $21,000,000 in cash and
$11,000,000 of 5-year notes?
Mr. Mitchell. That is right.
Mr. Pecor^v. And the General Sugar Corporation raised that
twenty-odd million dollars in cash that same dav by receiving
$25,000,000 in cash from the National City Co. in "return for the
entire outstanding capital stock of the General Sugar Corporation?
Mr. Mitchell. That is correct.
Mr. Pecora. How many of those 5-year 6 per cent secured notes
for an aggregate of $11,000,000 haA'e since been paid by the General
Sugar Corporation to the National City Bank?
Mr. Mitchell. Apparently 2,000,000 of them were retired, and
there has since been written off of the books of the National City
Bank a value so that they stand on the books of the National City
Bank at a present value of $2,000,000.
Mr. Pecora. So that by this process the National City Bank was
enabled to obtain something like $23,000,000 in cash for these loans?
Mr. Mitchell. Yes.
Mr. Pecora. And those loans at this time, in February. 1927, were
in default, were they not, to the bank?
Mr. Mitchell. They were short-term obligations.
Mr. Pecora. As originally created. They were created away back
prior to 1922 ?
Mr. Mitchell. Yes.
Mr. Pecora. And were being carried as bad loans by the bank in
February, 1927, were they not?
Mr. Mitchell. I think not all of them were rreated prior to that
time, but they were the residue of loans created prior to that time,
plus some additions in the way of losses that had crept in during the
subsequent years.
Mr. Pecora. They were regarded as bad loans by the bank in
the years between 1922 and 1927, were they not?
Mr. Mitchell. Well, they were regarded as certainly slow and
doubtful, so long as the sugar industry remained in its existent
state, and this was a process by which they were transferred from
the bank, which we desire to keep as liquid as we possibly can, and
were turned over to the National City Co. as a long-term invest-
ment. And now, as a matter of fact, the investment has depreciated
by virtue of the tariff laws very largely, that we have not only in
this country but elsewhere, which result in the production of un-
economic cost sugar, the sugar business in Cuba, as well as all Cuba
economy, as everybody knows, has been very, very discouraging.
So much so that the National City Co., with respect to that stock
of the General Sugar Corporation which it accepted at that time, has
wiped out through write-offs every dollar of it.
Mr. Pecora. In other words, the National City Co. has written
down to $1 this $25,000,000 investment that it made in 1927 in the
stock of these sugar companies ?
Mr. Mitchell. Yes, sir.
Mr. Pecora. But the bank's loans were paid through the process
of raising $25,000,000 for the National City Co. by the issuance of
250,000 additional shares of the capital stock of the bank in
February 1927?
1796 STOCK EXCHANGE PRACTICES
Mr. Mitchell. That is one way to put it ; yes.
Mr. Pecoka. Is that what is known in the vernacular as a " bailing
out " of the bank of a bad loan ?
Mr. Mitchell. I don't think you would call it that. It was a
transfer at the time of a short-term questionable investment that the
bank had, putting it into a long-term investment in the City Co.,
which, under any return of the sugar industry to normal would have
been an excellent investment, because these properties that are owned
by the General Sugar are the lowest-cost producers, or among the
lowest-cost producers, on the entire island of Cuba, and Cuba in itself
is the lowest-cost producer in the world.
Mr. Pecoea. Without going into all the details that you have given
us of the sugar industry, I am confining myself to these loans. The
bank succeeded in having the greater part of these $31,000,000 worth
of slow and doubtful loans, as you call them, taken over by the
National City Co., and the monej', amounting to some $23,000,000,
which the bank has received for those loans to the present time,
was raised by this process of issuing 250,000 additional shares of
capital stock of the bank and the company in 1927 and selling them
to the shareholders for $50,000,000?
Mr. Mitchell. If I may put it in my own way, Mr. Pecora
Mr. Pecoea. Is that an unfair way of putting it, Mr. Mitchell \
Mr. Mitchell. Yes; without just one additional word, I am in-
clined to think it is, Mr. Pecora.
Mr. Pecora. Will you add the additional word ?
Mr. Mitchell. Yes; I will add the additional word if I may.
This may be regarded as a contribution hj shareholders in the light
of the write-offs that have been taken since that date, a contribution
by shareholders in cash to make up for losses which would other-
wise have affected the capital and surplus and undivided profits,
the capital structure of the bank. It may be regarded in the light
of the subsequent write-offs as a repairment of the condition of the
institution.
Mr. Pecoea. With that additional word to the facts assumed in
my question, have we a complete i^icture of the disposition made of
these loans by the bank to the company ?
Mr. Mitchell. I should say so ; yes.
Mr. Pecora. Now, when the stockholders or shareholders of the
bank in 1927 were asked to subscribe to these 250,000 shares of addi-
tional capital stock at $200, and when they did so by paying this
$50,000,000 for that additional stock, were they told that they were
going to make this sort of a reparation that you have just re-
ferred to ?
Mr. Mitchell. I called your attention to the fact that it was the
transfer of a questionable short-term investment that the bank had
into what we hoped was a good long-term investment, which we
intended to permanently keep in the City Co.
Mr. Pecora. But when the shareholders were asked to subscribe
for those 250,000 additional shares, for $50,000,000, were they told
that $25,000,000 of that money, of $23,000,000 of that sum, were
going to be used to enable the National City Co. to take over these
slow and doubtful loans of the bank?
STOCK EXCHANGE PRACTICES 1797
Mr. Mitchell. I don't think so, but the record would show it.
Mr. Pecora. You have no recollection of any such thing being told
the shareholders?
Mr. Mitchell. No ; I have not, Mr. Pecora.
The Chairman. In other words, the bank had what had become
a bad loan ? The bank relieved itself by various processes, but the
result of it was in the end that the public held long-time securities
for it without having knowledge why these issues were made, but
which afterwards turned out not to be so very good; is that it?
Mr. Mitchell. This was not an issue that went to the public, Sen-
ator Norbeck. These transfers that have been discussed here were
transfers that were made possible through the issuance of stock of
the National City Bank.
The Chairman. Yes; but somebody bought them without having
information as to the loss that was being taken up by them?
Mr. Mitchell. The loss did not exist at that time, Senator Nor-
beck. These were transferred as a long-term investment for the
National City Co.
The Chairman. But the National City Co. had relieved the bank
of this slow and doubtful paper?
Mr. Mitchell. Short-term loan.
The Chairman. Yes.
Mr. Mitchell. The process was taking it out of short term and
putting it into long term, and the stockholders when they got
through it had exactly what they had before.
Senator Fletcher. These 250,000 shares of the National City Bank
were not offered to the public?
Mr. Mitchell. By law any increase in capital stock has to be
offered to the shareholders pro rata to their existent holdings.
Senator Fletcher. And that is the way they were disposed of ?
Mr. Mitchell. Yes, sir.
Senator Fletcher. Not to the public generally ?
Mr. Mitchell. They were offered to our shareholders.
Senator Brookhart. Listed on the stock exchange?
Mr. Mitchell. No. Let's see — well, that occurred in 1927. I
think our stock was listed on the stock exchange then, but there were
no dealings in it.
Mr. Pecora. Now, Mr. Mitchell, as a matter of fact, in February
1927, when these transactions took place between the bank, the com-
pany, and the General Sugar Corporation, didn't you and the other
directors of the bank know that these loans which the bank then
held, which it had made to these sugar companies, were bad loans
and were not good investments, even as long-term investments?
Mr. Mitchell. They were bad short-term loans, Mr. Pecora, and
nothing but a turn in the tide would make them suitable for short-
term classification.
Mr. Pecora. As a matter of fact, don't you recall that at the meet-
ing of the board of directors of the National City Co. on January 25,
1927. when action was taken with respect to the set-up of the man-
ageinent fund for that j^ear, a resolution of the board with respect to
the management fund, after reciting the manner in which that man-
1798 STOCK EXCHANGE PRACTICES
agement fund was to be derived out of current earnings, contained
this language:
Except that for the purpose of computation —
meaning the computation of the management fund from earnings —
the stock of the General Sugar Corporation whicli it is intended to introduce
Into the balance sheet on or about February 15, 1927, in the amount of $25,000.-
000, shall not be considered as a part of capital surplus and undivided profits.
and any dividends or returns thereon shall not be considered as a part of
current earninvis.
Don't you recall that resolution?
Mr. Mitchell. I recall it perfectly well, and I will tell you why it
was put in.
Mr. Pecoea. Wasn't it put in because the board at that time re-
garded these loans as bad loans?
Mr. Mitchell. No, sir.
Mr. Pecoea. Not merely slow or doubtful loans, but bad loans ^
Mr. Mitchell. No, sir; it was not, and I have just suggested you
let me tell you why it was put in.
Any profit that might come from that investment, any loss that
might come from that investment, would be a profit or a loss for
which no officer of the National City Co. who might participate in
that management fund was in any way responsible. This was a
transfer of assets for the convenience of the institution. The debt
had been created by a long prior management in the bank. The
introduction of that as an investment in the City Co. was not any-
thing that the management at that time had to do with, and if there
was a profit or if there was a loss that group of men who were par-
ticipating in that management fund had nothing to do with it. and
so it was eliminated from the computation of the management fund.
And that was the sole reason for it to be handled in that way.
Mr. Pecoea. But if they had known that was going to be a loss
to the company, that would be just the kind of action they would
take in order to be fair to the company in the process of comi:)uting
the management fund, would it not?
Mr. Mitchell. I think very likely, but that is an assumption. I
have given you the truth.
Mr. Pecoea. But it is not an unsound assumption or a violent one,
is it?
Mr. Mitchell. No; I think it is quite a reasonable assumption,
but it does not happen to be the proper one.
Mr. Pecoea. Now, the sugar industrj" in Cuba collapsed after the
war period, didn't it?
Mr. Mitchell. Yes.
Mr. Pecofa. That is about in 1921 or 1922?
Mr. Mitchell. 1920.
Mr. Pecoilv. And it has been in a state of collapse practically ever
since, hasn't it?
Mr. Mitchell. That is true.
Mr. Pecoea. And continuously since 1920 up to virtually the pres-
ent time?
Mr. Mitchell. I think in 1923 or 1924, or 1925, there was a slight
breath of hope that came into the situation for a brief period, but
by and large your statement is deplorably correct.
STOCK EXCHANGE PRACTICES 1799
Mr. Pecofa. You mean unfortunately correct?
Mr. Mitchell. Both.
Mr. Pecora. Well, now, Mr. Mitchell, isn't it a fact that in this
period between 1920 and the present time the National City Co. sold
to the public bonds of the Cuban Dominican Sugar Co.?
Mr. Mitchell. Yes.
Mr. Pecora. At a price very nearly par?
Mr. Mitchell. Yes. I don't recall when that issue was, but that
is a fact.
Mr. Pecora. It was about in 1928, wasn't it, that some of those
bonds were sold to the im'esting public by the National City Co.,
1927 or 1928?
Mr. Mitchell. No; 1926, I should say.
Mr.. Pecora. And how large an issue did the National City Co. then
put out of these sugar bonds?
Mr. Mitchell. Again, on these specific questions, I really would
appreciate it if you would ask one of my associates, Mr. Ripley, who
is here and who knows the Cuban Dominican Sugar situation and
the issuance of those securities from A to Izzard. I have not at-
tempted to refresh my mind on it, and I think really that you would
be losing time with me, though I should be glad, Mr. Pecora, to
give you anything that rests in my memory about it.
Mr. Pecora. I will exhaust your memory, and then if that does not
prove adequate to the presentation of the facts, why, I will call on
Mr. Ripley. When these Cuban Dominican Sugar bonds were offered
to the investing public by the National City Co. did you pass upon
the wisdom of that offering?
Mr. Mitchell. Yes.
Mr. Pecora. As the chief executive officer of the company?
Mr. Mitchell. I passed on it with my associates; yes, sir.
Mr. Pecora. You said this morning that these offerings had to meet
the approval unanimously of all the officers of the company, who
exercised their judgment about them before thej' were taken over by
the National City Co. ?
Mr. Mitchell. Yes, sir.
Mr. Pecora. So that that means that wlien these Cuban Dominican
Sugar bonds were offered to the public in 1926 or 1927 by the Na-
tional City Co. the offering was made after you as one of the offi-
cers had approved of it?
Mr. Mitchell. Yes : and I thought it was such a good investment
that I went away behind the bonds myself and bought stock in the
open market and put it away in my box, and it is tliere today.
Mr. Pecora. And you gave that approval of this offering to the
investing public here, despite the knowledge you then possessed of the
collapse of the sugar industry, which you say took place in 1920 and
has continued almost continuously from that year until the present
time?
Mr. Mitchell. That is so. And bear in mind that Cuban Domini-
can has a portion of its assets only in Cuba, where these difficulties
were occurring, and the properties that they had there were among
the best, and the bonded debt, as I recall it. was exceedingly small.
There had been wiped out in that organization of Cuban Dominican
at tliat time very large values that had gone into those properties.
1800 STOCK EXCHANGE PRACTICES
Senator Fletcher. What was the bonded debt, do you re-
member ?
Mr. Mitchell. I can not recall that, Senator Fletcher. That is
why I asked that Mr. Ripley be called. He has those figures all
at his tongue's end.
Mr. Pecora. The offering price to the public of those bonds was
$97.50, was it not, for each hundred dollar par value ?
Mr. Mitchp:ll. I can not remember that, but I should think it
likely.
Mr. Pecora. Let me refer you, Mr. Mitchell, for the purpose of
possibly refreshing your recollection, to this table [handing docu-
ment to Mr. Mitchell]. See the notation I have made?
Mr. Mitchell. Yes.
Mr. Pecora. Does that refresh your recollection concerning the
issue of Cuban Dominican Sugar bonds'
Mr. Mitchell. Yes.
Mr. Pecora. That we are speaking about?
Mr. Mitchell. It does, as to the amount offered, the date, and
so forth.
Mr. Pecora. What was the amount of the issue, total amount?
Mr. Mitchell. $15,000,000.
Ml'. Pecora. And when was it made?
Mr. Mitchell. October 23, 1924.
Mr. Pecora. That was during this period in which the sugar
industry was in a state of collapse?
Mr. Mitchell. It was in a period wliere the sugar industry was
being reorganized under what was then considered to be a more
normal period into which we were reaching.
Mr. Pecora. A few minutes ago you referred to that period as
being a slight flurry which was only a hope. Was it sufficient of a
hope in 1924 to justify your company, in j'our opinion, in offering
those bonds to the public at two and a half points below par?
Mr. Mitchell. Distinctly so; yes.
Senator Brookhart. How did you offer those, on the stock ex-
change ?
Mr. Mitchell. Xo; they were offered in the usual way, through
dealers and through our own organization in one way and another.
Senator Brookhart. You did not sell them for any less?
Mr. Mitchell. No. They were sold in the same way. I can not
tell you exactly how the marketin<x was done.
Senator Brookhart. What are they worth now ?
Mr. Mitchell. The company has gone through another reorgani-
zation verv lately.
Senator Brookhart. What did these bonds realize?
Mr. Mitchell. I can not tell you that. If vou will only get Mr.
Ripley here on the stand he will give you anything you want on
this, but I personally can give it only from memory.
Senator Fletcher. You sold the whole $15,000,000 to the public?
Mr. Mitchell. Well, apparently we had a participation. We must
have had some partners in this deal. I don't remember who they
were, Senator Fletcher. We had a participation ourselves of a little
over $11,000,000 in it. and we actually sold five million five of those
bonds.
STOCK EXCHANGE PRACTICES 1801
Mr. Pecoea. Who sold the others? Were there any participants
with the National City Co. in .the offering?
Mr. MiTCHELi/. Yes; I assume so. There must have been. And
then, of course, we sold through dealers over the country and others.
Our own sales are stated in mis memorandum that you laid before
me, which is a memorandum that I submitted before the Senate
Finance Committee investigation at one time.
Senator Fletcher. Did you sell any stock in tliat company?
Mr. Mitchell. No.
Senator Brookiiart. Eleven million dollars of this were your own
bonds you were selling?
Mr. Mitchell. We participated in the purchase of those bonds
apparently.
Senator Brookhart. Who else participated with you?
Mr. Mitchell. Well, I cannot tell you without a further record.
Senator Bkookhart. Perhaps some other New York banks?
Mr. Mitchell. I cannot tell you who participated in that.
Mr. Pecora. What was the spread to the National City Co. on this
offering ?
Mr. Mitchell. I can only tell you by looking at this memoran-
dum. There was a gross spread in that business of 71/2 points.
Mr. Pecoea. That means the company got them at 90 and offered
them at 971/2 ?
Mr. Mitchell. You mean the company sold them at 90. The
Cuban Dominican Sugar Co. sold them
Mr. Pecora. I mean the National City Co. got them at 90 and sold
them at 971/2.
Mr. ]Mitchei.l. That is correct.
Mr. Pecoea. Now, in any of its sales literature or circulars relat-
ing to this offering did the National City Co. indicate to the invest-
ing public the fact that these bonds had been taken over by the
National City Co. at 90?
Mr. Mitchell. No. And that, of course, is a practice that has
never been followed in America in any issue that I can recall. It is
an English practice, but it is not an American practice at all.
Mr. Pecoea. Well, the practice is made by the investment houses
themselves, isn't it?
Mr. Mitchell. Yes ; and the investment houses themselves, for all
the years that I have known anything about the investment business,
have never stated the spreads.
Mr. Pecora. They made their own custom in that respect?
Mr. Mitchell. Yes. It is a custom that has grown up over the
decades.
Mr. Pecora. There never has been any law which prevented these
companies from indicating to the investing public the prices at which
they had acquired the issues that they were offering to the public?
Mr. Mitchell. No ; nor any law tliat called upon them to do so.
Mr. Pecoea. And because of that custom of withholding that in-
formation from the investing public, the public has never been able
to learn and has no means of ascertaining at the time it is asked to
subscribe to an offering ju.st what the financial interest is of the com-
panj' or concern making the offer?
Mr. Mitchell. Well, of course, Mr. Pecora, you are getting down
to a fundamental of the business, and I myself am somewhat per-
1802 STOCK EXCHANGE PRACTICES
plexed about it. If I go in and buy a pound of coffee there is no in-
dication as to what the grocer paid for it and what profit he got for
it. It is not the custom that I know anywhere in America, whatever
is sold, to show what it cost when it was sold to tlie consumer.
Mr. Pecora. But when a person goes to a store to buy a pound of
coffee he knows the merchandise that he is buying, doesn't he?
Mr. Mitchell. Well, from some of the coffee that I have drunk I
wouldn't think he did.
Mr. Pecora. And that usuall}' is the fact with regard to the aver-
age investor, isn't it; he doesn't know the offers except as to such
information as is vouchsafed to him by the offering house?
Mr. Mitchell. That is correct. I do not know just exactly how
pertinent the cost of that issue to the investment banking house is to
the buyer. If it is a desirable thing, then it is something that I feel
very stronglj' should be regulated into our system.
Mr. Pecora. Do you think it is a desirable thing?
Mr. Mitchell. I have been unable myself to really see the desir-
ability of it. I do think, Mr. Pecora, that in all of our American
investment banking practice we ought to work toward giving addi-
tional information to the public. But whether that information
is pertinent, whether it is something that would really aid a buyer
to determine the true intrinsic merit of that which he buys, I must
say I am very much in doubt. I think we ought to give them a lot
more of infonnation, but as to tliat particular information I do
not know.
Mr. Pecora. Would it not be an aid to the investor in determining
the real value of a security which he is asked to buy if he knew
how much of the price that he was paying for it was actually going
to be turned into the treasury of the company issuing the security?
Mr. Mitchell. Well now, let's see whether it would or not. I
think we can conceive cases where it would not. Supposing a com-
pany is being formed and you as an investment banker interested in
its formation say, " I will take a million dollars of bonds of your
company when it is formed and I will pay you 85 for them." The
company goes on with its organization. It gets set up. This fa-
vorable thing or that favorable thing may hapjjen, and by the time
you get ready to issue that bond — j'ou may have bought it with the
idea that you could put it out at, saj', 89 as a proper price to
the public — at the time you get ready to offer it. that bond has
assumed a very much better position, to the point where it has a
worth of at least 95.
Xow, supiDOsing you went to the public and said. " Now, here is
a bond. You can all recognize it to be a fine bond. And we offer
it at 95. We paid 85 for it.'' The public immediately stops, looks,
and listens and says, '" This bond must be no good, because there is
a 10-point spread in this bond.'"
Mr. Pecora. And frequently that would be a very fair conclusion,
would it not?
Mr. Mitchell. Yes. sir; but in this particular case that I have
mentioned it certainly would not.
Mr. Pecora. Are you giving us tlie exceptional case, Mr. Mitchell,
conjuring up an exceptional case?
STOCK EXCHANGE TRACTICES 1803
Mr. Mitchell. I am giving you an exceptional case, yes ; because
the exception in this particiilai- phase of the investment banking
business seems to me to be worth while to bring up.
Senator Brookhakt. It would not hurt the j)ublic any if they did
buy it at a lower price, would it?
Mr. Mitchell. No. We are talking here about a bond that might
have a 10-point spread in it, when as a matter of fact the normal
spread would be really, say, 2 points.
Senator Brookhart. If the public had this information it might
only have a 5-point spread : it would be 5 points better for the public
if they knew about that, wouldn't it?
Mr. Mitchell. Senator Brookhart. my ordy point is that the
spread does not always indicate the merit classification of the bond.
Mr. Pecoka. It is a factor that always should be considered, isn't
it ? Doesn't it enter into the real value of the bond ?
Mr. Mitchell. Not into the real value of the bond. There are
certain bonds that can be put out to the public with ease because
the public may know all about the company. There may be millions
and millions of bonds outstanding of that company, and they may
have a very good position and the spread may be justified of 2i/^
points. You can find an equally meritorious bond, and with per-
haps as good or better background. But the public does not know
about the debtor, and the difficulty of introducing this credit obli-
gation to the public and educating them regarding this bond may
be far greater than in the first instance, and you may have to
have it
Mr. Pecora. You do not mean to imply by that that it is better
to keep the public in ignorance of that element of value?
Mr. Mitchell. I do not think that the public is in a position to
judge it, Mr. Pecora.
Mr. Pecora. It has never had a chance to judge of that fact, has
it. because of the custom you referred to before ?
Mr. Mitchell. I come back to what I said. I don't see the advan-
tage, but if it will do any good, then let us regulate so that the
investment companies will have to show the spreads.
Senator Brookhart. Let me ask a question on that: I got the
Federal Reserve Board to make me some charts of English stocks
in comparison with American stocks. Of course, as you say, the
information is given to the public much moi'e fully there than ours
is, and this up and down of stock speculation in the United States is
eight or ten times more than it is in Great Britain.
Mr. Mitchell. Yes; it is
Senator Brookhart. Doesn't that information, then, help the jDub-
lic somewhat to stabilize these prices and i^revent these sfDeculative
profits which are really criminal?
Mr. Mitchell. I do not think that this particular information
does. If it would stabilize the industry, if it would really be hon-
estly indicative to the investing public and to the buyer, I should be
heartily in favor of it. Personally, I do not care whether it is done
or not. I would be perfectly willing to put the cost price on all of
our circulars if it would accomjilish any good.
119852— 33— PT 6 4
1804 STOCK EXCHANGE PIL\CTICES
Mr. Pecoea. Mr. Mitchell, as you sit there now, are you attempt-
ing to justify the custom of the past which has hidden that knowl-
edge of the spread from the American investor ?
Mr Mitchell. Well, I didn't say
Mr. Pecoea. Or are you merely calling attention to the fact that
that has been the custom without attemj^ting to justify it ?
Mr. Mitchell. I am taking the latter course, Mr. Pecora.
Mr. Pecora. You are not attempting to justify it, then?
Mr. Mitchell. I am questioning. I am giving you the reasons
that are in my mind to question it.
Mr. Pecora. You have not given us any definite conclusion one
way or the other that you may have reached, then, have you?
Mr. Mitchell. I told 3'ou at the outset that here was a question
that I was pondering
Mr. Pecoea. You are still in doubt about what conclusion should
be drawn from it ?
Mr. INIiTCHELL. I can not yet convince myself that the American
practice has been wrong.
Senator P'letcher. Let me ask you this : Isn't there another side
to that question? Suppose in the case of the Dominican Sugar Co.
you stated that you paid 00 for these bonds; wouldn't that persuade
the public, wouldn't that be more likely to cause them to buy in that
case ? Say, the National City pay 96 or 95 or 92, or say they buy at
90, and suppose I had bought a thousand dollar bond — you would not
pay any attention to it unless it is a million, but a thousand is quite
enough for me — suppose I had bought a tliousand dollar bond at
90, the same as you paid for it, and I was induced to do that because
you had paid 90. What would be my situation with regard to that
bond now?
Mr. INIiTCHELL. You would be just in the position that anybody
else that bought it at 90 would be.
Senator Fletcher. I am trying to find out what would be my posi-
tion now.
Mr. Mitchell. You see. Senator, that this company has gone
through a reorganization, and the fellow that held that bond is hold-
ing something else in place of it. And as I said before, Mr. Ripley
can tell you just what chance that fellow has had from the time he
bought his bond and the chance he has got now, and his chance for
the future, and I would not pretend to give the answer on that. I
only say this, that this company has been through a reorganization,
which was examined by the court all the way through, and when the
court finished up the}' complimented the reorganization committee as
having had a very fair reorganization plan, and he approved it
heartily.
Now. just exactly what each one of these bondholders got in the
reorganization is a matter that Mr. Ripley can tell' you about, and
doubtless you will call him.
Mr. Pecora. Now, Mr. Mitchell, the obligation of the company
that issues the bond is to pay that bond at maturity, isn't it?
Mr. Mitchell. Yes, sir.
Mr. Pecora. Pay it in full ?
Mr. Mitchell. Yes. sir.
Mr. Pecora. At par?
STOCK EXCHANGE PR.\CTICES 1805
Mr. Mitchell. Yes, sir.
Mr. Pecora. If a company putting out those obligations in the
form of bonds actually receives for them 10 points under par, or,
in other words, only 90 per cent of the par value, because it has made
a deal of that kind with an underwriting syndicate or an underwriter
of any kind, the company's financial position to redeem that bond
would not be nearly so good as if it had received par; isn't that right?
Mr. Mitchell. No; that is not particularly a fair
Mr. Pecoba. It would have that much less money in its treasury,
wouldn't it?
Mr. Mitchell. Now let us take a case again and see if it is right.
Supposing a company has got a confirmed credit, an established
credit in the market, for its long-term securities on a 5 per cent basis.
It could put out then, tomorrow, blank dollars of additional bonds,
5 per cent bonds, at par.
Now. let us assume that that company says, "We don't want 5 per
cent coupons on our bonds over a period of years. Therefore, we
want to issue blank dollars of new bonds, but we want to put them
out as 3 per cent bonds on a 5 per cent basis to the public.
You can see if you put out a 20-year 3 per cent bond on a 5 per cent
basis to the public you must sell your bonds at a very large discount.
T do not know just what that would figure, but I should think it
would figure about — let's see; two points for 20 years would be 40,
wouldn't it? That bond would be selling, I should say, at 78. Per-
haps some of my expert assistants could figure that.
The Chairman. It would depend entirely on how long it had to
run?
Mr. Mitchell. Yes; it would depend entirely on how long it had
to run. Senator. That is right.
The Chairman. Does that case illustrate your situation ?
Mr. Mitchell. It illustrates this : If that company came out with
a bond at 78, let us say, would you forthwith question its standing or
the worth of that bond? That same company could have put out a
bond that same day, a 5 per cent bond, at 100.
The Chairman. Is that a parallel case with the one that you are
being questioned about?
Mr. Mitchell. I think it is pertinent to Mr. Pecora's question.
Mr. Pecora. Look; see if this also is not pertinent: Let's see
whether this is not an analogy reduced to its simplest terms : If I
were to borrow a thousand dollars from you and you were to give me
$900 in return for my obligation or note or bond to pay you a thou-
sand dollars, I would be thereby impaired to the extent of that $100
that I do not get from you in my ability to pay back that $1,000 when
the note falls due, wouldn't I?
Mr. Mitchell. No.
Mr. Pecora. I have suffered an impairment to that extent,
haven't I(
Mr. Mitchell. No. If it was payable to-morrow and you bor-
rowed that money from me, you would have me arrested overnight,
so that you would not have to pay me, because it would be usury.
But let us assume that it is a long-term obligation. What is the dif-
ference as to whether you amortize, let us say, over a 20-year period
1806 STOCK EXCHANGE PKACTICES
a discount of 22 points or whether you pay yearly a higher interest
rate, the difference between 3 and 5 per cent, on your obligation?
That is the point I make.
The Chaikman. It all makes a difference who gets the money,
whether the company or the broker gets the money or the bank gets
the money.
Mr. Mitchell. Well. I frankly do not see the purpose of your
question.
The Chairman. If they only get 90 per cent, doesn't it make a
difference to them whether they get 90 per cent or 100 per cent of an
issue ?
Mr. Mitchell. You mean an issuing debtor ?
The Chairman. A company borrowing; whatever the commis.sioii
is. they are minus that ; if it is 10 per cent, they are that much short.
Mr. Mitchell. I judge for the moment that we are not discussing
the discount or commission. We are now discussing the price at
which a bond is sold.
Mr. Pecora. I am discussing in connection with that the matter
of withholding information from the investing public to whom the
bonds are ultimately sold concerning the spread which the offering
house has in the issuing. That is what I am discussing.
Mr. Mitchell. Mr. Pecora, on that frankly I say that if I could
be convinced, as you evidently are, that that is in the interest of
the investor, nothing would stop me in forcing through our organiza-
tion a practice which would be contrary. 100 per cent contrary, to
the usual practice of investment banking to publish the cost price of
every issue. I frankly do not see that it is in the interest of the
public that that should be. and I wish
Mr. Pecora. Is it harmful to the public to have that information?
Mr. Mitchell. No ; but it would not be harmful or beneficial as to
whether the circular was printed on red paper or gray paper or
yellow paper.
Mr. Pecora. I am not discussing the best color. The color of the
paper gives no information, does it, of the security to the public?
Mr. Mitchell. And I do not consider that spread is pertinent in-
formation. Maybe it is.
Mr. Pecora. Can you conceive of any harm that the giving of that
information would do to the investing public?
Mr. Mitchell. I can not see, in the first case, in the illustration
that I gave you, where it would be misleading.
Mr. Pecora. Do you know of any instance where the giving of that
information has proved misleading or detrimental to the British in-
vesting public, to whom that information is given because of the
British practice?
Mr. Mitchell. I am not familiar enough to know wliether there
are cases or not, Mr. Pecora.
Mr. Pecora. You are familiar with the investment market all over
the world, aren't you?
Mr. Mitchell. Yes. But to point out any particular case out of
the hundreds and hundreds of British issues that are made, one
would have to be in daily contact with that market and remember
over a long i)eriod of years. I do not.
STOCK EXCHANGE PRACTICES 1807
Mr. Pecora. You have not heard the British investing public com-
plaining of this information that the law requires investment houses
to give them, have you ?
Mr. Mitchell. No; but I know of
Mr. Pecora. And you have heard
Senator Brookhart (interposing). Let me ask a question.
The Chahsman. Wait till the counsel completes his question.
Senator Brookhart. It is right on that point that I want to ask
this question : He said he had not heard the British public complain-
ing about it. As this committee adjourned at 12 o'clock to-day I was
surrounded by a dozen people in this room who said they had lost
all their life's savings by buying securities in the National City Co.
or the National City Bank, and they are complaining about this situ-
ation. There they are right here in this room.
Mr. Mitchell. Yes. You see, the securities, whether issued by the
National City Co. or other investment bankers, have gone down and
caused enormous losses. Even last year, you know the United States
issued 3 per cent bonds, and we bankers lost millions and millions
and millions of dollars because of the price at which those bonds
were offered.
The Chairman. They will still be paid with interest?
Mr. Mitchell. They certainly will ; and there are a lot of bonds
that the National City Co. has issued that are down to-day that will
be paid with interest.
The Chairman. Well, of course, it depends on what is back of
them. The United States Government is back of United States Gov-
ernment bonds, of course. But speaking of losses, you mean simply
market losses, don't you ?
Mr. Mitchell. Market losses. That is what exists to-day.
The Chairman. In other words, if the Government issues a good
deal, the market is liable to sag because there are not buyers for
them?
Mr. MitchelIv. Certainly.
The Chairman. But it has not changed the security at all, has it?
Mr. Mitchell. No; and it has not with a lot of the other issues;
but. Senator Norbeck, just as long as men arc human and judgment
has the element of error in it, just so long there will be mistakes
made by the National City Co. or any investment banking house
that puts out securities.
The Chairman. No member of this committee will dispute that,
but that does not go to the question of whether the public should have
fuller information than they are getting.
Mr. Mitchell. T think they should. Senator Norbeck, and I would
be
The Chairman. Aren't other countries doing that? You have
twice referred to the fact that in England full information is
required.
Mr. Mitchell. Yes.
The Chairman. Simply telling half the truth does not go. AH
of the truth has got to be told. Isn't that true of other European
countries ?
Mr. Mitchell. Not to the extent—
1808 STOCK EXCHANGE PEAbTICES
The Chairman. They do not go quite so far, but most of them go
farther than we do, do they not ?
Mr. Mitchell. I would not say that most did. The English law
is very complete as to the first issuance of securities.
The Chairman. You remember the lord that was sent to prison
Mr. Pecora. Lord Klysant.
The Chairman. For a year, because he had failed to tell it all.
The statement jjut out was truthful.
Mr. Mitchell. Yes. He had eliminated a very vital fact.
The Chairman. Or he said it was to pay 6 per cent dividend. He
failed to say in which way it was earned.
Mr. Mitchell. But I am heartily in favor of fuller information.
I wish we could regulate it all through the investment banking
business.
Mr. Pecora. The National City Co. is the biggest investment house
in the country isn't it ? Do you know of any bigger ?
Mr. Mitchell. Well, I think that it has a very large producing
organization ; that is. as an issuing house its own originations are
large. I do not think they are as large perhaps in dollars as some
others.
The Chairman. He has previously testified to this committee that
his bank is the largest bank in the world.
Mr. Pecora. Yes: but isn't the National City Co. the largest
investment company selling securities to the public?
Mr. Mitchell. I should think probably ; but I would not want to
make any boast about that, Mr. Pecora.
Mr. Pecora. It would not have been unbecoming for the National
City Co. to have taken the lead in bringing about a change in custom
with regard to putting out fuller information to the public?
Mr. Mitchell. We are doing it every day. We are issuing to the
public to-day more complete information regarding the condition of
the companies that we finance than we ever have in our history, and
we are trying to go a very long way. We are trying to blaze a trail
with respect to that.
Mr. Pecora. "V^Hien did you commence to blaze that trial?
Mr. Mitchell. I should say a year and a half ago. We have
learned much. We have all made mistakes, and a man that can not
profit by it certainlj' is not very worthy. We are trying to blaze
the way for investment finance into a higher ground than it has
been.
Mr. Pecora. But you have not yet blazed the trail to the point
where j'ou are giving the investing public information concerning
the price at which the company acquires these securities that it
offers to the public ?
Mr. Mitchell. And I have told you why.
Mr. Pecora. I mean you have not yet reached that stage in the
blazing of the trail ?
Mr. Mitchell. No.
Mr. Pecoka. All right. Now, as originallj' organized and op-
erated for many years following its incorporation in 1911, what
kind of securities did the National City Co. confine itself to?
Mr. Mitchell. Fixed maturity securities.
Mr. Pecora. You mean by that, bonds?
STOCK EXCHANGE PRACTICES 1809
Mr. Mitchell. Bonds and notes.
Mr. Pecora. Bonds and notes, debentures?
Mr. Mitchell. Bonds, notes, debentures, acceptances.
Mr. Pecoka. Not stocks?
Mr. Mitchell. No, sir.
Mr. Pecora. When for the first time did the National City Co.
depart from that policy and include stock securities in its offerings
to the public?
Mr. Mitchell. I think it was in 1927 or 1928—1927, I guess-
might have been 1926, when we first offered Southern Eailway and
Baltimore & Ohio stock.
Mr. Pecora. That was 1927, wasn't it?
Mr. Mitchell. Well, you probably have checked the offering.
My recollection would have been 1926 or 1927, probably 1927. You
are probably right.
Mr. Pecora. But its operations along that line in 1927 consisted
of an offei'ing of common shares, shares of the common stock of the
Southern Railway?
Mr. Mitchell. Yes.
Mr. Pecora. To the public ?
Mr. Mitchell. Yes.
Mr. Pecora. Then in 1928 it enlarged upon that scheme, did it
not, and offered to the public coimnon stocks of several other corpo-
rations ?
Mr. Mitchell. I doubt if it was several. I am trying to think.
I should tliink not over a half a dozen, but if you have the record
and have checked it you know.
Mr. Pecora. Well, sav a half dozen different issues of common
stock?
Mr. Mitchell. Yes.
Mr. Pecora. Were acquired or accumulated by the National City
Co. in 1928 for sale to the public?
Mr. Mitchell. Yes. I would not think there were that many.
Mr. Pecora. In 1929, up to October, 1929, the National City Co.
accumulated common stock of still more corporations and sold them
to the public ?
Mr. ]\Iitchell. We did not sell through our organization. We
accumulated quite a portfolio of common stocks, but very few,
I would not say in more than two or three cases, were a part of those
sold or offered to the public.
Mr. Pecora. Wliat were those that were offered to the public in
1928 and 1929, if you remember ?
Mr. Mitchell. We offered Baltimore & Ohio, Anaconda Copper.
Mr. Pecora. Penn Road?
Mr. Mitchell. No.
Mr. Pecora. Oliver Farm Equipment Co.?
Mr. Mitchell. Preferred, I think.
Mr. PEC0Ri\. Not the common ?
Mr. Mitchell. A very small amount.
Mr. Pecora. Any other companies that you can think of whose
common stock or preferred stock vou offered to the public in 1928
and 1929?
1810 STOCK EXCHANGE PRACTICES
Mr. Mitchell. If you come to prefer reds, I think there were sev-
eral. There was Cannon Mills.
Mr. Pecora. United Aircraft?
Mr. Mitchell. We ottered a unit of preferred stock and some
common with it.
Mr. Pecora. Of what corporation?
Mr. Mitchell. Of the United Aircraft. Grasselli Chemical Co.
and Hershey Chocolate Co.
Mr. Pecora. How about Wesson Oil and Snowdrift?
Mr. Mitchell. Preferred stock.
Mr. Pecora. Have the minutes arrived yet, Mr. Cary?
(There was no audible response.)
Mr. Pecora. Now, to go back for a moment to the $15,000,000
bond issue of tlie Cuban-Dominican Sugar Co. which the National
City Co. offered to the public at 971/0 in 1924, do you recall whether
the National City had any representation on the board of the
Cuban-Dominican Co. at that time?
Mr. Mitchell. Mr. Ripley, our vice president, who is with the
City Co., was a member of the board. Oh, Mr. Russell — excuse me —
Mr. Stanley Russell.
Mr. Pecora. Mr. Stanley A. Russell ?
Mr. Mitchell. Yes; vice president.
Mr. Pecora. And how about Mr. Gordon S. Rentschler, the present
president of the National City Bank?
Mr. Mitchell. I should have to refresh my recollection, but I
think very likely he was, because he was regarded as one who knew
more about our sugar interests than anybody else.
Mr. Pecora. How about Mr. Guy Cary?
Mr. Mitchell. He did not represent us in any way. I think Mr.
Guy Cary was counsel for the Cuban-Dominican Sugar.
Mr. Pecora. He or his firm is counsel for the National City Co.?
Mr. Mitchell. That is correct.
Mr. Pecora. And also counsel for the National City Bank?
Mr. Mitchell. That is so.
Mr. Pecora. And he is on the board of directors of the bank?
Mr. Mitchell. I am reminded that Mr. Cary or his firm were
not counsel for the Cuban-Dominican. He went on that board rep-
resenting certain private interests, for which he was counsel, and
those interests were not related to the National City Co. or bank.
Mr. Pecora. By the way, in 1928 when you received those sums
that you have testified to out of the management funds of the Na-
tional City Bank and the National City Co., how many other com-
panies were you an officer or director in?
Mr. Mitchell. It is hard for me to remember dates or any par-
ticular year. I sliould say that — the list is a matter of record in the
directory of directors, but I would assume in answer to your question
that I was a director of perhaj^s 10 or a dozen companies.
Mr. Pecora. Not any more than that?
Mr. Mitchell. I would not say so. If we had a directory of direc-
tors it would give that clearly.
Mr. Pecora. Do you know just the number of different corpora-
tions of wliich you were an officer or director at any one time?
STOCK EXCHANGE PBACTICES 1811
Mr. Mitchell. No; I do not. But I think that would cover it
quite completely, outside of the National City Bank, the National
City Co., the City Bank Farmers Trust Co., aiid perhaps some com-
panies that were our own companies for one purpose or another.
Senator Brookhart. How much stock did you own in the bank?
Mr. Mitchell. At what time or what year ?
Senator Brookhart. Say in 1927.
Mr. Mitchell. Oh, I should think, and I have not the exact figure
on that date and it is difficult to say, but in the neighborhood of
30,000 or 35,000 shares of stock.
Senator Brookhart. Did you sell any of that stock?
Mr. Mitchell. I bought, sir.
Senator Brookh.-^rt. In what years did you buy ?
Mr. Mitchell. I bought the largest amount of stock in 1929.
Senator Brookhart. Before or after the collapse?
Mr. Mitchell. In the midst of the panic.
Senator Brookhart. Trying to sustain the value of the stock ?
Mr. Mitchell. Yes, sir; trying to protect our shareholders.
Senator Brookhart. Do you remember what price you paid?
Mr. Mitchell. I can not tell you exactly, but in the neighborhood
of $375 a share I should think. '
Senator Brookhart. And it has been as high as $600 or $700 a
share.
Mr. Mitchell. No. I think its high was somewhere around $570
a share or something like that.
Senator Brookhart. $576 a share?
Mr. Mitchell. Something of that sort.
Senator Brookhart. All right.
Mr. Pecora. Well, Mr. Mitchell, did you also sell during the year
1929 any substantial portion of your holdings of National City Bank
stock ?
Mr. Mitchell. I held in the midst of the panic all the stock I
had owned for a long, long time, and in order to keep the market
from collapsing where it would be destructive to the interests of our
shareholders I permitted the National City Co. to put into an ac-
count which I established for them of my own, stock which they
might purchase from our shareholders to the tune of $12,000,000. In
other words, I put all that I had back into this institution, and for
its stability. Some of that stock was subsequently sold. There were
personal transfers through the years. To-day I hold the largest
amount of stock of the National City Bank that I have ever held.
Mr. Pecora. No ; I asked you this : You stated in answer to Sen-
ator Brookhart's question that you bought the bank's stock very ex-
tensively in 1929, and that a portion of that was embraced within
the period of the stock-market collapse. Now, my question was:
Have you also sold very extensively of your holdings in that period
or before the end of that year?
Mr. Mitchell. Well, I bought 28,300 shares, which I had hoped to
hold only temporarily. It was done in order to help the situation.
Mr. Pecora. To sustain the market?
Mr. Mitchell. Yes. Of that, 10,000 shares were sold, leaving me
at that time the holder of 53,300 shares of stock. There were some
personal transactions of a part of that holding in the latter part of
1812 STOCK EXCHANGE PRACTICES
1929, and since that time I have bought that stock back, so that to-
day I am the holder of that and a little more.
Senator Brookhart. A little more than 53,000 shares?
Mr. Mitchell. Yes, sir.
Senator Brookhart. At what price did you buy those back I
Mr. Mitchell. I paid for those 18,300 shares — I can not tell you
offhand just what it would be, but I can give you an approximate
figure. Let me see, at $375 or $380 a sliare
Senator Brookhart (interposing). That was during the panic?
Mr. Mitchell. Yes, sir.
Senator Brookhart. Then you sold 10,000 shares?
Mr. Mitchell. I am giving you the net of that 18,000 shares. I
am counting that as this exti'a stock that I bought at that time, Sen-
ator Brookhart.
Senator Brookhart. All right.
Mr. Mitchell. I should say roughly, and I do not recall exactly,
but that the net jjrice of the 18,300 shares of stock was about $375
to $380 a share, as a guess.
Senator Brookhart. If I understood your statement, then, after-
wards you sold a part of that stock.
Mr. Mitchell. I did.
Senator Brookhart. And then still later bought it in, recently.
Mr. Mitchell. I, frankly
Senator Brookhart (interposing). How much did you buy in
recently ?
Mr. Mitchell. I bought in all that I sold, and I bought a few
shares more in the meantime.
Senator Brookhart. What price did j'ou pay for those last pur-
chases ?
Mr. Mitchell. I sold this stock, frankly, for tax purposes.
Senator Brookhart. That was to avoid income tax?
Mr. Mitchell. Throwing my fortune into the breach as I did for
the benefit of this in.stitution. Senator Brookhart, in 1929, I had a
definite loss in that stock which I was forced to take.
Senator Brookhart. In other words, by making a sale of it that
showed a loss in your income.
Mr. Mitchell. That certainly did.
Senator Brookhart. And then you bought it back afterwards?
Mr. Mitchell. Yes, sir.
Senator Brookhart. And, now, those are the prices I want to get,
what 3'ou sold at and what you bought it back at.
Mr. Mitchell. The prices are a matter of record, but the one to
whom I sold this stock, a person of some means, had no ability to
take the loss that existed in that stock and at the end of last year I
bought the stock back at what had been paid for it.
Senator Brookhart. At the same price?
Mr. Mitchell. Yes, sir.
Senator Brookhart. That sale was just really a sale of con-
venience, to reduce your income tax ?
Mr. Mitchell. You can call it that if you will.
Senator Brookhart. Well, is that right?
Mr. Mitchell. Yes ; it was a sale, frankly, for that purpose, where
you hoped the buyer would be able to make a profit. And it was
STOCK EXCHANGE PRACTICES 1813
bought with the idea of niakino; a profit. But the accumulated loss
was so great that I offered, and did buy. the stock back this year at
what had been paid for it.
Senator Brookhart. This buyer was a friend of yours, of course.
He had favored you and you wanted to favor him.
Mr. Mitchell. It was not that kind of negotiation. But I simply
could not see that buyer take that loss. And I hold today that stock.
Senator Brookhart. You did not have a similar sympathy for
all these buyers here in the room and buy that stock back, did you?
Mr. Mitchell. If anybody here in the room, or anybody that
you know, has suffered a loss in gross that I have in City Bank
stock, then you know somebody that I do not. I, individually have
suffered a gi-eater loss from the market failure in National City
Bank stock than any other individual in the United States.
Senator Brookhart. Well, the real fact is, then, that neither
yourself nor any of the big financial crowd realized that this thing
was inflated beyond all reason in 1929 ?
Mr. Mitchell. I did not realize this, and I was looking over
today
Senator Brookhart (interposing). The fact is that the public
cannot rely on the judgment of the big financial crowd in these
financial matters at all.
Mr. Mitchell. With respect to the future and on market prices
and on the economics of the situation, there are so many factors
over which the men in finance have no control and really have com-
paratively little knowledge, that it is just as impossible for them
to predict a definite future as it is for anybody else.
Senator Brookhart. Then, shouldn't they state that fact in every
prospectus that they put out to the people ? Shouldn't they state :
We do not know and nobody can tell what will happen, and it is
impossible to tell.
Mr. Mitchell. Well, I ^vill tell you for all of them, myself
included, tliat we are human, we are filled with error, and it does
not matter how good our intention may be we are going to make
mistakes at times. I only hope that we can learn something from
all this and be able to reach that period when we can put into
constructive effort the lessons that we have learned during this
period.
The Chairman. The committee will now
Senator Fletcher (interposing). Mr. Mitchell, what were your
holdings in the National City Co. at this time?
Mr. Mitchell. You see, the stock of the National City Co., the
investment affiliate, is not a stock that is owned by the public at all,
Senator Fletcher.
Senator Fletcher. Yes.
Mr. Mitchell. That is owned by these three trustees for the
benefit of the shareholders of the National City Bank. So that
every shareholder of the National City Bank has an interest ratably
to his holdings as to the total of the assets and earnings of the
National City Co. And that beneficial interest is evidenced by a
stamp on the back of the shares of the National City Bank, so that
the beneficial interest in the company goes along with the bank
shares.
1814 STOCK EXCHANGE PRACTICES
Senator Fletcher. And if there is a loss in the company that is
reflected.
Mr. Mitchell. It is reflected in the bank shares.
Mr. Pecoka. Mr. Mitchell, you spoke of a sale of thousands of
shares of your bank stock in 1929 for tax purposes. How much
loss did that sale enable you to show?
Mr. Mitchell. My recollection is $1,600,000 or $1,800,000.
Mr. Pecora. It was nearly $3,000,000, wasn't it?
Mr. Mitchell. No: I think not. It must have been about the
diiference between — let me see, I will take $370 and $381) a share — •
well, I should say, about $150 a share on 18,000 shares. That
would be somewhere near it.
Mr. Pecora. Wasn't the amount nearer $2,800,000 as the loss
that you were able to show for your tax purposes by that
transaction ?
Mr. Mitchell. No; it could not have been. I should have said
$150 a share on 18,000 shares.
Senator Brookhart. Doesn't that run pretty close to the figure
Mr. Pecora mentioned?
Mr. MrrcHELL. That was a figure of about $2,700,000 ?
Mr. Pecora. That figure was about $2,800,000?
Mr. Mitchell. Yes; I think so. It would be a matter of record,
but probably that.
Mr. Pecora. And that enabled you to avoid an income tax pay-
ment for the 3'ear 1929?
Mr. Mitchell. Yes. My losses had been such that I did not have
to pay it.
Mr. Pecora. Now, Mr. INIitchell. while we are discussing the stock
panic of 1929, do you recall whether any action was taken by the
directors of the National City Bank, early in November of 1929,
whereby a fund of $2,000,000 was set aside by the bank to be used
for the making of loans without interest or securitj- to certain
officers of the bank? Do you recall that action?
Mr. Mitchell. I think it was not onlj' to the officers, but to
officers and employees of the bank. Yes; if you will amend your
question to that extent.
Mr. Pecora. By the way, that sale of this bank stock that you
referred to in the latter part of 1929 was made to a member of your
family, wasn't it?
Mr. Mitchell. It was; yes, sir.
Senator Fletcher. Did you do anything to check this wild specu-
lation up to October of 1929 that occurred on the stock exchange?
Mr. Mitchell. Did I do anythink to check it ?
Senator Fletcher. Yes.
Mr. Mitchell. Yes.
Senator Fletcher. You did that?
Mr. Mitchell. Oh, yes. Senator Fletcher. And if the committee
would like to give me the opportunity I should be glad to go into
a long discussion of that, but it is a subject by itself.
Senator Fletcher. Well, as I understand about that time brokers'
loans mounted to something like six to eight billion dollars, and
call loans were paying somewhere near 20 per cent at the peak.
STOCK EXCHANGE PRACTICES 1815
Mr. Mitchell. Yes.
Senator Fletcher. You recognized tliat as an unhealthy situation,
didn't you?
Mr. Mitchell. Most decidedly.
Senator Fletcher. Could you briefly state what you did to stop it?
Mr. Mitchell. One of tlic greatest difficulties was, of course,
loans for account of others, which very materially swelled the credit
structure, and that was the very source from which came those
large brokers' loans. Bankers, in other words, did not have control
of the money situation. It was in the control of the so-called
" others ". And we did everything in our power to find a correction
of that fundamental fault. Furthermore, I alwaj^s myself felt that
this tax on capital gains and lo.sses was creating, in a period' of
inflation, a demand for securities which could only be corrected by
a change in the law. I largely wrote a bulletin wlvich oiur bank
published in April of 1929. pointing that particular fact out, and
pointing out what I believed to be true, that the situation could
not be corrected by ordinary methods, that we needed to loosen up
the stocks and make more stocks available, and then your prices
would not have risen as they did. I think the prices of stocks rose
largely as a result of what I regard as a defect in the law.
Senator Brookhart. How much brokers' loans did your bank
make?
Mr. Mitchell. We always carried a certain amount of brokers'
loans, but we did not lean on the Federal Reserve Bank.
Senator Brookhart. Didn't you increase your brokers' loans dur-
ing this very speculative period?
Mr. Mitchell. No, sir. Our brokers' loans were increased only
as the demand of industry and commerce subsided. And, of course,
after the break, and then all those people who had been lending
on call for their own account and not through the banks rushed
and took their money out ; then every bank in New York was obliged
to make up that deficiency and was forced to go to the Federal
reserve bank for borrowings. So that following the period of the
collapse the record will show that all New York banks leaned
heavily on the Federal reserve credit, and that was the only thing
that saved the situation at that time. But prior to that time and
while this speculation was going on we did not lean on the Federal
reserve bank credits at all. or for only a day or two here and there,
to even our position up.
Mr. Pecora. Mr. Mitchell, don't you recall that it was in March
•of 1929 the Federal Reserve Board sounded a public warning with
regard to this tremendous inflation of the credit structure?
Mr. Mitchell. Yes, sir.
Mr. Pecoea. As represented by brokers' loans and loans for
•others ?
Mr. Mitchell. Yes, sir.
Mr. Pecora. Loans that had up to that time reached an unprece-
dented amount?
Mr. Mitchell. Yes, sir.
Mr. Pecora. And, in order to apply a corrective to that inflation
of prices, the Federal Reserve Board raised the rediscovmt rate in
March of 1929, didn't it?
1816 STOCK EXCHANGE PRACTICES
Mr. Mitchell. Yes; but they were very slow in being permitted
to do it. I can not tell you offhand just whether that occurred at
that particular date or not.
Mr. Pecoka. Well, subject to confirmation of tlie date, do you
recall the episode?
Mr. Mitchell. The episode you refer to ?
Mr. Pecoka. Yes.
Mr. Mitchell. I think I understand it.
Mr. Pecoea. Do you recall that at the same time the National
City Bank threw $25,000,000 into the call-loan money market at
rates of 16 per cent and more ?
Mr. Mitchell. Yes, sir.
Mr. Pecora. And that that was regarded as a flaunt on the warn-
ing sounded by the Federal Reserve Board ?
Mr. Mitchell. It was regarded as that in certain quarters: yes.
Mr. Pecora. In certain responsible quarters?
Mr. Mitchell. Yes, sir.
Mr. Pecora. In other words, at the time when the Federal Re-
serve Board was seeking to apjjly the brakes to this inflationary
process the National City Bank w-as nullifying that to the extent
that it threw this $25,000,000 into the call-loan money market.
Mr. Mitchell. That I deny, Mr. Pecora.
Mr. Pecora. Well, didn't it have the opposite effect from that
which was intended by the Federal Reserve Board in raising its
rediscount rate at that time ?
Mr. Mitchell. I think not.
Mr. Pecora. Didn't it contribute to the opposite effect?
Mr. Mitchell. I think not. Wliat happened — and since the ques-
tion has been brought up I think I should be permitted to reply to
it — was this: We had not been borrowing from the Federal re-
serve bank at all. The Federal Reserve Board's warning was a
warning against banks leaning on Federal reserve credit to support
speculation. We were not leaning upon Federal reserve credit to
support speculation. There developed in New York, at a time when
we were not borrowing a penny from the Federal re.serve bank, and
not rediscounting. when we had plenty of Government bonds and
eligible loans for discount at the Federal reserve bank — as I say, there
developed one day at the money post on the exchange a period when
there w-as no money to lend.
The rate has gone up, I think, to 15 or 16 per cent. We stepped
in there to allay what wa.^ becoming a money panic, an inability of
the legitimate borrower to borrow for his day contracts the money
that was essential if they should be maintained.
Senator Brookhart. Do you consider 16 per cent a legitimate
charge for money borrowed?
Mr. Mitchell. No. And of course that was not a renewal rate.
But Avhat we did at that time was to say : We are not prepared to
support this situation by lending money at any rate that is posted,
but if there are legitimate borrowers who have an honest need for
this money overnight, we are prepared to lend $5,000,000, and I
STOCK EXCHANGE PEACTICES 1817
think we offered to lend $5,000,000 at every few points of interest
up. We did not want to lend it.
Mr. Pecora. It was an increase of 1 point for every $5,000,000 of
those $25,000,000, wasn't it?
Mr. Mitchell. No; my recollection is it was more than 1 point
in interest. But perhaps you are right.
Senator Brookhaet. Who were those honest borrowers? Weren't
they speculators?
Mr. Mitchell. No. Those were brokers who had to make good
the contract that day, for overnight. We went in and loaned
Senator Brookhart (interposing). That was a speculative contract.
It was one of those gambling deals, wasn't it ?
Mr. Mitchell. This was not in support of the speculative market.
This was to prevent a money panic, which was sudden, and developed
overnight, and we went to tiie Federal reserve bank for two clays
only. I take the opi^ortunity of asking if you will just let me read
a paragraph from our bulletin? This pertains to what occurred in
March of 1929. It won't take but a moment. And four days
later
Mr. Pecora (interposing). Four days after what date?
Mr. Mitchell. After the date when we made these loans, which
I think were about March 26 or 27, 1929. On the 1st day of April
our monthly bulletin was issued, and I caused this paragi-aph to be
put in :
During the last week of March these large credit demands, including shifting
of balances in connection with income-tax payments and in preparation of
quarterly disbursements of dividends and interest, combined with the substan-
tial withdrawal of funds from the New York call-loan market, resulted in a
scarcity of call money that sent the rates up to 20 per cent and caused a sharp
reaction in stock prices. Prompt action by New York City banks, however, in
offering to provide funds to take care of the market's requirements, served to
avert any fears of a money panic.
The National City Bank fully recognizes the dangers of overspeculation and
endorses the desire of the Federal reserve authorities to restrain excessive
credit expansion for this purpose. At the same time, the bank, business gener-
ally, and it may be assumed the Federal reserve banks, whose policies over the
past year have beeu marked by moderation, wish to avoid a general collapse of
the securities markets such as would have a disastrous effect on business.
It is evident from the way money has acted here in the past few days that
the crisis has passed and the incident is a closed book. At the same time it
would be unfortunate that any action taken by this bank during the emergency
should have created the thought that our views, again and again expressed, as
to undue expansion of the credit structure have changed.
That there has been a most unusual expansion in credit is a fact that is
generally admitted and that the largest element in that expansion is so-called
speculative loans must also be, and is, recognized.
With this crisis passed, the people of the country would be generally weU
advised to bear in mind the condition of the credit structure and voluntarily
see to it that in their loan accounts they maintain wider margins and lean less
heavily on borrowed money.
Mr. Pecora. Now, this expansion of the credit structure that is
referred to in that bulletin, Mr. Mitchell, was due primarily, wasn't
it, to the unprecedented amount of speculation in the stock market
over a period of two or three years prior to March of 1929?
Mr. Mitchell. It was the development of excessive speculation.
1818 STOCK EXCHANGE PRACTICES
Senator Brookhart. If you had let it collapse in Maicli that would
have saved hundreds of thousands of dollars to people who invested
later on, prevented them from buying, and the collapse would not
have suffered such purchases to mean a loss; is not that a fact?
Mr. Mitchell. I do not believe that any man who has it within
his power to stop a money panic is going to take the responsibility
of seeing the money panic develop.
Senator Brookhart. That is what is wrong with our financial
system ; nobody is going to stop this speculation.
Mr. Mitchell. I may be an inferior banker, but so long as I am
in the banking business and can find a way to stop a money or a
credit panic every bit of the weight I can put into the situation is
going to be put in.
Senator Brookhart. You helped to inflate matters later and on
up to the 25th of October, and you could not stop it then.
Mr. Mitchell. No ; I beg pardon. Senator Brookhart. We stepped
in in a critical moment, and we stopped the development of a panic
at a critical moment. The warning of tlie Federal reserve bank
was against the fostering of a speculative market by lending upon
Federal reserve credit.
Senator Brookhart. You did not take that as a general warning
against speculation, then ?
Mr. Mitchell. It was the same kind of warning that we gave in
what I just read you, that we gave through 1929 and prior thereto,
again and again.
Senator Brookhart. I do not think that any bank lias any business
at any time in working up an unnatural boom in stock prices or farm
values whether in a critical moment or any other kind of moment.
Senator Fi-etcher. The depreciation in securities that resulted in
October in a drop of some $25,000,000,000, as I recall, would not have
been as great
Senator Brookhart (interposing). Would not have been at all,
would it ?
Senator Fletcher. Would not have been as great if this collapse
had occurred in March, would it? If that collapse had occurred in
March 1929, what would have been the situation?
Mr. Mitchell. The banker could not see a panic occurring because
of a money squeeze that was minor in its character. Security prices
were high, speculators and investors everywhere were borrowing
more money than they should; that was a fact that we all appre-
ciated and that we were trying to preach against and educate the
public in regard to.
Senator Brookhart. And the way you did it was to lend them
more money. That is what it means.
Mr. Mitchell. Well, of course, you are viewing it through differ-
ent eyes than I would view it. I would view it purely as a monetary
money squeeze, one that any banker who has a responsibility to a
public, if it is within his power, should avert.
Senator Brookhar'I'. You admit that the big financial minds did
not foresee this October panii'. But it was along about that time
that I wrote an article in Plain Talk predicting that we were
STOCK EXCHANGE PRACTICES 1819
headed into the greatest panic in the history of the world. And I
did not see very far into it, either. Now, don't you think the finan-
cial crowd had better begin to look at this thing from the standpoint
of facts rather than from the standpoint of profit making?
Mr. MrrcHELL. I certainly think we have been looking at it from
the standpoint of the facts.
The Chairman. May I ask a couple of questions now?
Mr. Mitchell. Certainly.
The Chairman. Mr. Mitchell, you have stated that you averted
a shortage of money, and that as a result business went right on on
the exchange. You have stated also that at that particular time
you thought stocks were high. If I may ask, how much higher did
"they go before they broke off — by three or four times, some of them,
didn't they?
Mr. Mitchell. Oh, I think not.
The Chairman. Didn't the big loss to the public take place be-
tween the period when you and the Federal Reserve Board disagreed
on policy and the time when the breakdown came?
Mr. Mitchell. We did not disagree on the policy. Senator Nor-
beck, fundamentally. I think there was a misunderstanding due to
a quotation that had been put in a New York paper by a newspaper
reporter who talked with me that evening, and it was regarded as a
statement that I had given out. He had gone out and tried to re-
member what I had said as to our reasons for stepping in, and that
was referred to as defiance of the Federal Reserve Board. I never
issued any statement.
The Chairjman. It has been repeatedly interpreted by Senator
Glass as your saying to the Federal Reserve Board to go to hell.
Isn't that so?
Mr. Mitchell. Senator Glass took that attitude at the time, and
it was an exaggerated statement made as the result, not of any
statement made by me, but as the result of the newspaper article.
I was not
The Chairman (interposing). Well, wasn't the point that they
were trying to get over, that of retrenchment, and you took the
opposite view?
Mr. Mitchell. No, sir.
The Chairman. You say you found a shortage of money in the
market. Didn't the Federal Reserve Board take the view that there
should be a restriction of credit?
Mr. Mitchell. All banks were lending; not only banks but indi-
viduals were lending in the call market constantly. As a matter
of fact, call loans were the most liquid of all the assets that we
had. Now, we had an expansion in deposits and industry owing
to the fact that industry had paid oft large quantities of its debts
through its ability to issue shares in the place of debts. That was
not borrowing. So that there was a large amount of money resting
in the banks, a large amount of credit that could be used only ini
the call market. We are always operating in competition with the
fellow who was lending his own money. And yet we were not lean-
ing on the Federal reserve bank at all. Of course, we had a cer-
119852—33— PT 6 5
1820 STOCK EXCHANGE PEACTICES
tain proportion of our assets in call loans, but we were maintaining;
an even position.
We did not lend on call because we wanted to expand call loans
but because they were the onl3r available asset for us. This hap-
pened to be the situation when, with our position even, not leaning
in any way on the Federal reserve bank, when this money squeeze
developed and we stepped in. We were in the Federal reserve two
days as a result.
I will say that I submitted a chart of the rates and borrowings
on the call market, in the New York market, and our own borrow-
ings from the Federal reserve bank, at my hearing before the Glass
committee. And if you would like it in support of my statement
in regard to this I should like very much indeed to introduce it and
have it accompany this testimonj^, because it shows very clearly that
the National City Bank was not throughout this period in any way
leaning on Federal reserve credit for the support of the market
during the so-called speculative era.
The (-HAIRMAN. I do not think it has been claimed that you did.
But the Federal Keserve Board had sounded a warning, and you
have said already that you found them short of money up there
and you put more money in the market, and of course the boom
went on. I do not think there is any disagreement about the facts.
Mr. Pecora. It is simply one of motive.
The Chairmax. Well, I do not attempt to interpret motives.
Mr. Mitchell. It is one of method. I do not think anybody would
say that an undesirable trend should be stopped by bringing about
a collapse that would be the collapse not only of speculation but of
industry too, which that would have meant.
The Chairman. I am not trying to interpret that. We are trying
to get at the facts as to conditions at that time, and they seem to be
agreed upon here. You were a Class A director of the Federal
reserve bank over there at the time, were you not ?
Mr. Mitchell. Yes, sir.
The Chairman. And as soon as the squeeze came they appealed
to you for help and say you took the opposite course, and you deny
that.
Mr. Mitchell. I doubt if the Federal Reserve Bank of New York
would support that view at all, that what was done by our bank at
the time was in violation of the spirit of what thej' were attempting,
I mean attempting to get member banks to do in the conduct of their
affairs.
The Chairman. I see that you have carefully selected your words.
You do not sa}' Federal Reserve Board but Federal Reserve Bank of
New York.
Mr. Mitchell. I cannot speak for the Federal Reserve Board.
The Chairman. But the Federal Reserve Board is the only one
whose action is referred to. No one has referred to the action of
the Federal Reserve Bank of New York except you, and you say
you doubt very much if they had that view. I say the Federal Re-
serve Board had a certain view.
Mr. Mitchell. Yes, but they were bound to express their view
through the Federal reserve bank controlling our district. We are
STOCK EXCHANGE PRACTICES 1821
not in direct touch with the Federal Reserve Board, j'ou will bear
ill mind.
The Chaiuman. I know that the impression has fn^own that the
Federal Reserve Board has been entirely subordinated to New York
influences. I know that that influence has developed.
Senator Couzen.s. Is there anybody with the Federal Reserve Bank
of NeM- York whom this committee could call to substantiate your
viewpoint 1
Mr. IVIiTCHELL. Governor Harrison is the governor of that bank.
Senator Couzen.s. Was he active at the time this incident occurred
of which Senator Glass complained?
Mr. Mitchell. Yes, sir; he was the governor of the bank at that
time.
Mr. Pecoua. Do you recall at that time saying this, either in words
or substance, which was published in one of the papers:
This question of stock prices is inextricably bound up witli that expansion of
credit, and this is one point that tlie Federal Reserve authorities apparently
did not dare discuss.
Mr. Mitchell. No ; I do not remember that.
Mr. Pecora. Do you recall that you were quoted to that effect in
the New York Times of March 30,' 1929?
Mr. Mitchell. No; I do not. I might have been quoted that
way. but I do not remember the interview of which you speak, or
the article.
The Chairman. Well, the committee will adjourn at this time until
10 o'clock tomorrow morning.
Senator Costigan. Mr. Chairman, it is my understanding that Miss
Grace van Braam Roberts, of Ulster County, New York, who has
heretofore testified before this committee, has a brief supplemental
statement which she desires to make. She has a written statement
which she is willing to read, or if the committee prefers, she will
submit it for the record.
Senator Couzens. I suggest that the statement be printed in the
record at the request of the witness.
The Chairman. Without objection that will be done.
Additional Statement by Miss Grace van B. Roberts, Ul.sterdorp
Farms, Highland, Ulster County, New York
In order to clarify some points in a case which has already been considered
by this committee, and which offers an interesting field for further investiga-
tion, I wish to place in the records of the.se hearings two documents, which are
here attached. The first is a transcript of part of Mr. Richard Hoyt's testimony
for the defense in Miss Grace van Braam Roberts's suit acainst Hayden, Stone
& Co. This transcript includes Mr. and Jlrs. Hoyt's joint account in Atlantic,
Gulf, and West Indies stock, his personal account for some of his dealings
in the same stock, and the pool account. This pool, as was proved in court,
was admitted by Mr. Hoyt, an oflicer of Hayden, Stone & Co., to have been
formed to support Atlantic, Gulf, and West Indies stock. It operated during
the six weeks from November 17 through December 31, 1920, while, as was
afterwards disclosed, members of the firm of Hayden, Stone & Co. were secretly
unloading their stock under cover of an active campaign by their customers'
men directed by Jlr. Richard Hoyt, urging the stock as a splendid investment.
The second document is a transcript of figures from the New York Times for
part of the period covered by the suit, showing selling prices and amounts sold
1822
STOCK EXCHANGE PRACTICES
daily of Atlantic, Gulf, and West Indies stock from October 1 through December
31, 1920.
Excerpts from the testimony filed with the court (pp. 55, 63-65) :
New York, May 28, 1925.
Memorandum of transactimts in common stock of Atlantic, Gulf d West Indies
Steamship Lines t>y Richard F. Eoyt from January 1, 1920, to December St,
1921
[S298 account in which Mr. Hoyt had one-half interest and Mrs. Hoyt one-half interest]
1920
Purchases
Amount
1920
Sales
Amount
Jan. 1
1,000 balance, $148.90
200.
$148,895.00
32, 440. 00
87, 920. 00
14, 970. 00
17. 245. 00
13,970.00
Mar. 5
Mar. -9
Mar. 10
Mar. 16
Mar. 17
Apr. 7
June 1
Dec. 21
Dec. 23
Do-..-
Dc...
Dec. 24
Do..-.
Do-.-
Do....
Do....
Dec. 29
200
$30, 002. 00
23
100-..
15,476.00
Mar. 6
600
100—
15, 926. 00
8
100
300 -.
46, 728. 00
Apr. 1
100
100
16, 476. 00
100
17, 226. 00
2,100 --
100 -
16.376.00
100
10,381.00
100
10,281.00
100
10, 218. 60
100
10,231.00
100 ---
10, 681. 00
100
10, 481. 00
100
10, 381. 00
100
10, 281. 00
100
10,181.00
200
19,212.00
(1) -
46,001.50.
2, 100-
315,440.00
315, 440. 00
204 from joint account
Margin from joint account...
204 balance, $104.83 . .
1921
Jan. 12
Jan. 13
Do....
Jan. 31
100,$72?4
Dec. 31
1921
Jan. 1
14, 885. 28
6,600.00
21, 386. 28
21, 336. 28
7, 266. 00
204
4,$74H
296. 84
100,$76
7, 481. 00
(')- . -
6, 352. 44
204
Total
21, 385. 28
Nov. 4
Nov. 17
1921
Dec. 31
1922
Mar. 31
100,$29H -
4.00
12, 469. 07
2, 931. 00
ON RICHARD F. HOYT ACCOnNT
300, $41.09
100,$32^
3,231.00
1922
Mar. 15
300, $26.81 -
8, 043. 00
300..
(1)
4, 416. 07
300 . .. -
Total
12, 459. 07
12, 459. 07
' Trading operation, losses.
In account loith Sayden, Stone & Co., New York, record of pool operations
[.\ccount No. 418]
Date,
1920
Boucht or
received
.Sold or de-
livered
Description
Price
Debit
Credit bal-
ance
Nov. 17
100
100
100
100
200
100
100
100
100
100
100
100
100
100
100
114
116
lUH
llOM
109
109
111
1104
112
113
m>4
112H
108H
108
107
$11,415.60
11,515.00
11,440.00
11,065.00
21, 830. 00
10,915.00
11,11.5.00
11, 165. 00
11,215.00
11,316.00
11,306.00
11,26.5.00
10, 866. 00
10,816.00
10,715.00
- - do
do
18
- do
do
do
.--- do
do
- - do
do
do
do ---.
19
do
do
do —
STOCK EXCHANGE PEACTICES 1823
In account with Hayden, Stone d Co., Neio York, record of pool operations — Con.
Date,
1920
Bought or
received
Sold or de-
livered
Description
Price
Debit
Credit bal-
ance
Nov. 10
100
100
100
100
100
100
100
100
100
lOO
100
100
.'Atlantic Gulf
106M
1071.^
104
lOSJi
m'A
106
105Ji
104K
105
103?^
105V^
mvi
no
llOJi
iiiH
111
lovA
103
105!^
1011-2
lOl'i
102
102M
mn
104K
104
103M
103S4
lo&'A
106'i
107
107K
108
104K
106
104M
106
102H
102 J.4
102
WH
99H
103
1008^
lOOH
100
101 Ji
101
vnii
lOlH
100
102S4
102
108
111
UVA
112M
112
114
1I4H
113H
113
108
108H
109.U
109
110
107} •,
108
107
lOejs
105
105>i
106
110
106
104,1.:
103 !'4
103
$10, 665. 00
10, 76,'i. 00
10,415.00
10, 540. 00
10, 640. 00
10,615.00
10, 640. 00
10, 440. 00
10, 515. 00
10,390.00
10, 566. 00
10, 466. 00
do
22
do
do
dn
< do
1 do
! . do
___ do
do
do
do -
23
100
100
100
100
do
$10,981.00
.... do
do
11,131.00
do
11,081.00
100
100
100
100
100
100
200
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
lOO
200
100
100
1,000
100
100
do
10, 165. 00
10,315.00
10, 565. 00
10, 166. 00
10, 190. 00
10, 215. 00
20, 480. 00
10,340.00
10, 440. 00
10,415.00
10, 365. 00
10, 390.00
10,690.00
10, 640. 00
10,665.00
10,715.00
10,765.00
10, 816. 00
10,465.00
10, 616. 00
10,490 00
10,615.00
10, 265. 00
10, 240. 00
10, 215. 00
9,977.50
9,965.00
10,315.00
10,090 00
10. 065. 00
10,015 00
10,190.00
20, 230. 00
10, 040. OO
10,165.00
100, 150. 00
10, 290. 00
10, 215. 00
.. . do
do
do
___ dn
do
do
J . do
do
do
do - .
do
do
1 . do
do
L do . - .
do
. , 1 do
do
29
do
.. do
do.
.. do
do
do
do
do
do
do
. do
do.
do
do
do
100
100
100
100
100
100
100
100
100
do
3
- do
11,081 00
do
do
do
6
do.
do
11,431.00
do
. do
i6,"8i5.'66'
10, 865. 00
10, 965. 00
10, 91,6. 00
11.016.00
10, 766. 00
10, 816. 00
10,716.00
10, 666. 00
10. 616 00
10, 606. 00
10.616.00
11,281 00
7
100
100
100
100
100
100
100
100
100
100
100
100
do
. do
do
do
do.
10
do
do. ..
13
do
do
14
do
do
do
15
100
do
20
100
100
200
100
do
10.616.00
10,46.6.00
20, 680. 00
10, 315. 00
do
do.-
do
1824 STOCK EXCHANGE PRACTICES
In account with Hayden, Stone & Co., New York, record of pool operations — Con.
Date,
1920
Bought or
received
Sold or de-
livered
Description
Price
Debit
Credit bal-
ance
Dec. 22
10(1
100
100
100
100
100
100
100
100
100
100
100
100
iOO'A
lOlH
100?i
102
102M
mi
99
98
971^
98}.
mi
101
100V<
100
10414
1051-2
102'.;
$10,015.00
10. 065. 00
10,165.00
10, 090. 00
10,216.00
10, 206. 00
9,940.00
9,915.00
9,81.5.00
9.765.00
9.865.00
9,940.00
do
do
do
do
do .-
23
do._.
do...
do
- do
do
do
100
100
100
100
100
100
100
100
100
do
$10,OSl.0O
do
10, 031. 00
do
9.9S1.00
do
10.431.00
24
do
do
do
do
10,231.00
1031;
10,331.00
1061 0
10.631.00
do
lOl'j'
97
10, 1.56.00
28
100
.. do
9. 71.5. 00
(Signed) R. F. Hoyt.
Account long 8,000 shares, delivered proportionately to partici-
pants against payment for same on December 31, 1920.
Closing prices and amount
of d'lilii sales of Atlantic. Gulf rf Tl'esf Indies
stock, 1920
[Taken from the New York Times]
Date
Closing
price
.\mount
sold
Date
Closing
price
Amount
sold
143
1501.2
148
145
142
i4i;2
146
144
146
14414
1431.2
146
147l.i
145
144M
145J^
1451.2
1444
142H
142
142
142
I43I2
139M
139H
132M
niH
124Ji
123H
123
118)i
113
1141.^
1131^
114
700
1,000
Nov. 17
110 '' 7,200
mH\ 7.000
105W 12- 700
Oct. 5
2,000
Nov. 20
107
lllJi
110
102K
1021^
104
105
106?4
109H
2,600
6,600
600
700
1,200
700
400
100
700
200
300
600
2,600
BOO
2,200
2,300
2,800
800
1,100
5,700
1,100
300
100
1,100
2,200
9,500
4,600
10,200
7,100
8,300
21,000
19,600
4,700
7,900
5,500
Nov. 23
3,300
9,600
17,800
Oct. 11
Nov. 27
3,100
6,000
Nov. 30
5,300
.5.900
Dec 2
lUKI 16,000
111 6.400
114h
no
112H
iiOH
l08!-i
1094
1065^
1055^
no
1074
108
107K
10312
103=4
lom
100=4
105.1 i
102
97;i
93K
89K
75H
75H
7.000
Oct. 20
8,500
8,600
Oct. 22
Dec. 8 .-
6, lUO
7,200
7,200
Oct. 26
Dec. 11
3,300
7,000
7,700
4,800
2,400
1,700
6.700
4.100
Dec. 21
8.200
Nov. 6
Dee. 22
14,700
Nov 8
Dec. 23
8,200
Nov. 9
Dec. 24
3,700
Dec. 27..
10,800
Dec. 28
19,600
Dec. 29
16,800
Nov. 13
Dec. 30
23,300
29,800
Bid 1451.5, asked 147.
> Bid 148. asked 150.
STOCK EXCHANGE PRACTICES 1825
In eonnectiou with these records and with the testimony already given by me
before this committee the following questions rise :
(1) To what extent were members of Hayden, Stone & Co. and their families
selling stock under their own names or through dummies while they were urg-
ing tlieir customers to buy?
(2) When tlie members of the firm contributed to the pool 171^ per cent of its
stock, did they buy this stock in the open market, or did they merely transfer
some of their personal holdings?
(3) When the pool relinquished considerably over 17 J/^ per cent of its stock
during its lifetime, did this percentage include the stock belonging to Mr.
Hayden and Mr. Stone, and did they then sell it before the expiration of the
pool?
(4) Did members of the firm or their families, while selling stock in their
possession to customers whom they could persuade to hold that stock, at the
same time sell short before the expiration of the pool and also from time to time
in 1921, wliile they were still advising me to hold my stock?
(5) While officers of the stock exchange, the most powerful institution in the
world, have declared themselves unable to answer the foregoing questions, can
investigators working under the direction of the Committee on Banking and
Currency learn the answers?
I wish to call attention, also, to the following paradoxical situation. The
Supreme Court of New York .iudged Hayden, Stone & Co. guilty of fraud.
Mr. Whitney has repeatedly asserted that he sees nothing worthy of censure in
the firm's conduct. Yet on October 28, 1930, Mr. Whitney said before an .audi-
ence consisting of the junior league and their friends, " We endeavor to have
righteous men as our members and to have their conduct of business done in a
straightforward way." Tlie difference between the standards of the court and
those of the stock exchange invites further investigation.
Some light is thrown upon the attitude of bankers toward stock-exchange
practices in letters from several of the most influential New York banks, of
which the following letter from Mr. J. P. Morgan's office is typical :
NOVBMBEE 16, 1932.
J. P. Morgan, Esq.,
New York City.
My Dear Sir: I am venturing to send you under separate cover a copy of
part 3 of the hearings before the Senate Banking and Currency Committee
investigating stock-exchange practices, and to request that you read pages 1127
through 1144. including tlie correspondence between Senator Burton K. Wheeler
and Mr. Richard Whitney, president of the New York Stock Exchange.
I testified at that hearing with the under.standing that the committee would
take action if abuses were found. Senator Norbeck planned to have Mr.
Whitney down to .inswer my charges and to have me return in surrebuttal.
Just recently I have heard from another Senator that a group of bankers,
headed by the chairman of one of the large city banks, is endeavoring to have
the proceedings quashed on the plea that they are delaying business recovery.
Mr. AVhitney and an influential brokerage house are under fire.
After you have read the above-mentioned evidence I hope that you will write
me how you feel about allowing these dishonest groups to conspire to rob the
public, the most contemptible and cruel form of robbery possible. Also, do you
believe that recovery can be built on a rotten foundation?
Sincerely yours,
G. VAN B. ROBEBTS.
December 12, 1932.
J. P. Morgan, Esq.,
New York City.
My Deiab Sib: I have received no acknowledgment of my letter to you of
November 16, and feel that I must write again in order to make your attitude
on the issue of stock-exchange connivance with fraud clear beyond question.
Your great house cannot be afraid of Mr. Richard Whitney or of Mr. Charles
Hayden ; and if you refrain from censure of their acts, you will be understood
to approve them. Hayden was adjudged a cheat, and did not appeal. Whitney
is his defender, and says that the Supreme Court was wrong. I have sent you
the evidence as printed by the Senate Banking and Currency Committee.
1826 STOCK EXCHANGE PRACTICES
This is no trivial matter. I cannot allow this thieving to be covered up.
Hayilen, Stone & Co. not only has a large amount of my money but also is still
cheating trusting clients. For the financial district to defend these cheats is
to invite sweeping condemnation. If the members of thi.s firm had cheated
at cards or in a yacht race, they would have been exijelled from their clubs.
Why is stealing money from trusting customers more respectable? Will Mr.
Whitney's false statements tend to establish public confidence at a time when
the stock exchange needs confidence?
The law in England is very much more severe against one who recommends
securities that he knows are unsound than it is here. The need for reform
here is evident.
I hope that you will write me that your house disapproves of the conduct
of Mr. Whitney.
Yours very truly,
G. VAN B. Roberts.
New York. January 27, 19S3.
Miss Gbaoe van B. Robekts,
Highland, Ulster County, Neu' York.
Dear Madam : Mr. Morgan directs me to acknowledge receipt of your letters
of November 16 and December 12 and to say that he has the highest regard
for both gentlemen you mention, and feels sure that you are misinformed.
Yours very truly,
V. AxTEN, Secretary.
Januaey 29, 1933.
Mr. J. P. Morgan, Esq.,
New York City.
My DsiiB Sir: The most fitting comment on the letter that you requested
Mr. Axten to write for you is, " Whom the gods would destroy they first make
mad."
When you hold in your hand a Supreme Court decision against them, can you
deceive yourself into believing that adjudged cheats or tricksters — nay more,
criminals, if I had handed the decision to the district attorney — can by the
mere declaration of your faith in them be rehabilitated? We shall not get the
country back on an even keel by any .such unsound policy. We need sobriety,
common sense, and honesty. Can you believe that your statement of Janu-
ary 27 will do more than serve public notice where you stand, to your own
undoing? The letter of January 27 is in reply to my letters of November 16
and December 12, and hence seems not to have been written in haste.
This matter is very important. I urge you, if possible, to correct the unfor-
tunate impression made by your message. If, however, the letter really conveys
the matured answer upon which you have determined in the months since my
letters reached you, then, unless I hear from you to the contrary, I shall con-
sider that I have your permission to make that answer public.
Very truly yours,
G. VAN B. ROBESITB.
The Chaikman. The subcommittee will now stand adjourned until
to-morrow morning at 10 o'clock.
(Thereupon, at 4.40 o'clock p. m., Tuesday, February 21, 1933, the
committee adjourned to meet at 10 o'clock on the following morning.)
STOCK EXCHANGE PRACTICES
WEDNESDAY, FEBRUARY 22, 1933
United States Senate,
Subcommittee of Committee on Banking and Currency,
Washington, D. C.
The subcommittee met, pursuant to adjournment on yesterday, at
10 o'clock a. m., in room 301 Senate Office Building, Senator Peter
Norbeck presiding.
Present: Senators Norbeck (chairman), Townsend, Costigan, and
Fletcher.
Present also: Ferdinand Pecora, special counsel to the committee;
Julius Silver and David Saperstein, associate counsel to the com-
mittee.
The Chairman. The subcommittee will come to order. Mr. Pe-
cora, you may resume with Mr. Mitchell.
TESTIMONY RESUMED OF CHARLES E. MITCHELL, CHAIRMAN
NATIONAL CITY BANK OF NEW YORK, NATIONAL CITY CO., AND
CITY BANK FARMERS TRUST CO.
Mr. Pecora. Mr. Mitchell, are you an officer of the General Sugar
Corporation ?
Mr. Mitchell. I am a director of the General Sugar Corpora-
tion. I do not think that I am an officer — let me ask an associate — •
yes; I am a director.
Mr. Pecora. Have you been an officer of it, other than a director?
Mr. Mitchell. I think not.
Mr. Pecora. Poor's Manual of Directors lists you as chairman of
that corporation. Do you know about that?
Mr. Mitchell. I may have been chairman of the board of di-
rectors but never an executive officer.
Mr. Pecora. Who is the executive head of that corporation?
Mr. Mitchell. I think Col. E. A. Deeds is the president of it.
Mr. Pecora. He is a director of the National City Bank?
Mr. Mitchell. He is, at the present time.
Mr. Pecora. There was some testimony given yesterday by you
concerning loans that the National City Bank had made over a
period of j'ears and which aggregated upwards of $30,000,000. Do
you recall that testimony?
Mr. Mitchell. I recall that the question was raised ; yes.
Mr. Pecora. Now, were any other loans made to the sugar com-
panies that were taken over by the General Sugar Corporation,
1827
1828 STOCK EXCHANGE PRACTICES
either since the transaction of February 15, 1927, that was referred
to in your testimony of yesterday or before that date ?
Mr. Mitchell. Oh, yes. There were loans made to the integral
companies, whose stock was held by General Sugar.
Mr. Pecora. And those loans were made since February of 1927?
Mr. Mitchell. Yes, sir.
Mr. Pecora. Are you familiar with those loans?
Mr. Mitchell. Not in detail ; no, sir.
Mr. Pecora. What is the aggregate amount of the loans that have
been made since February of 1927?
Mr. Mitchell. I can not give you that without refreshment.
Mr. Pecora. How many such loans have been made?
Mr. Mitchell. They have been made during the grinding season,
large loans made constantly' on pignorated sugar, and there have
been some dead-season loans, if you understand those terms.
Mr. Pecora. I do not.
Mr. Mitchell. Well, pignoration loans are loans that are made
against sugar in warehouse, with the sugar securing the loan.
Dead-season loans are loans that are made for preparing the crop
in advance of the harvest ; and under the Cuban laws they are well
protected by a lien on the crop to be taken off.
Mr. Pecora. And those loans have been made since and during
this iDcriod of collapse in the sugar industry in Cuba ?
]\Ir. Mitchell. With respect to the collapse of the sugar industry
in Cuba, you questioned me yesterday when my mind had not been
refreshed with regard to prices of sugar and tlie movements over a
period of years. I wish j'ou would give me an opportunity to correct
some impressions that prevailed at that time, because overnight I
have studied the situation and can now give you a very much
clearer picture, and one that is very much fairer to this presentation.
The Chairman. Well, Mr. Mitchell, if it is brief there could be no
objection to it. But we do not want to get into a long statement or
sjaeech here this morning.
Mr. Mitchell. I can understand that. Senator Norbeck.
The Chairman. If it is too long we can have some of it printed in
the record. We would like to accommodate you, however, to clear
up any wrong impression that might have been developed yesterday.
Mr. Mitchell. Quite so; and that is what I am asking now,
Senator Norbeck.
Mr. Pecora. First, Mr. Mitchell, will you answer the question I
put to you, and then you may make a statement if you desire to
make it.
Mr. Mitchell. I am not prepared to admit, and this presentation
will indicate it, that the collapse of the sugar industry was a con-
tinuing thing from 1920 and 1921 through this period. I mentioned
yesterday in my testimony that the market had improved at various
times.
Mr. Pecora. You mentioned it as of one period, and you placed it
at about 1926.
Mr. Mitchell. Well, I was wrong about that.
Mr. Pecora. When you stated there was only a slight flurry
upward.
Mr. Mitchell. Well, I was wrong about that, and that is what I
desire now to correct.
STOCK EXCHANGE PRACTICES 1829
Mr. PzcoRA. AVell, the chairman lias indicated you may state it
briefly.
Senator Fletcher. I think he has a right to correct it.
Mr. Pecoka. Is it merely a correction that you wish to make of
your testimony on yesterday?
Mr. Mitchell. I wish to correct an impression that I gave on
yesterday as to the conditions of the sugar industry over a period of
years, my mind not then being fresh on the subject. It is vital to
this question that you are asking.
Mr. Pecora. Well, if the statement will be a brief one the com-
mittee will hear it.
Mr. Mitchell. I have before me official statistical charts of sugar
prices from 1920 to the close of 1932.
The high price of sugar in 1922 was 22yo cents. It dropped to a
low of approximately 31/2 cents per pound during that year.
The following year, in 1921, Cuban sugar reached a high of 514
cents, and a low of approximately 2.41 cents.
In 1922 sugar opened the year at a low of about 1.81 cents. It im-
proved throughout that year, and it was assumed that sugar was
coming back into a position of stability. In the closing months of
that year sugar reached 4 cents a pound, and closed the year at 3.71
cents a pound. It was during the last quarter of that year that the
financing of the Vertientes and Camaguey companies, which you
mentioned on yesterday, was done.
Senator Fletcher. Are those New York jirices of sugar?
Mr. Mitchell. Those are f.o.b. Cuba.
Mr. Pecora. What you have just referred to as financing was in
reality refinancing, wasn't it ?
Mr. Mitchell. No, sir. That was financing incident to the com-
pletion and rebuilding of those properties, which
Mr. Pecora (interposing). The properties were in operation and
had been producing, ancPhad been given certain loans by the National
City Bank, and in 1922 the General Sugar Co. was organized to take
over the management of those underlying producing companies, and
it was the General Sugar Co. that was financed in 1922, is that
correct ?
Mr. Mitchell. The General Sugar Co. was formed in 1922. and
money was furnished through them for the development of the
Vertientes and Camaguey companies, and the National City Co.
made bond issues to which I referred on yesterday, at that time for
the Vertientes company and for the Camaguey company. And I
have before me the circulars that were issued Avith regard to those
companies incident to the bond issues. The estimates, incidentally,
showed that with sugar at 4 cents per pound, which it reached,
where it was on November 25, 1922, that property would earn $4,-
130,000. And I have the range at lower prices. The year, as I say,
closed at 3% cents. At 3i/) cents it was estimated the earnings
would be $3,420,000 per annum.
Mr. Pecora. Those are all estimated earnings, on which that cir-
cular was based, are they not?
Mr. Mitchell. They are estimated earnings, and the balance sheet
was given. This company had been in operation, and had been a
profitable company.
1830 STOCK EXCHANGE PRACTICES
Mr. Pecora. Were those earnings realized as a matter of fact?
Mr. Mitchell. The cost per pound of sugar produced at the Ver-
tientes mill was less than was estimated, less than any estimate that
was made.
Mr. Pecora. But the question I asked is : Were those estimated
earnings actually realized that year?
Mr. Mitchell. They were realized on the basis of the price Oi.
sugar prevailing during that year and the following years.
Mr. Pecora. But the question I asked you was : Did the company
actually get those earnings? Did they realize those estimated
earnings ?
Mr. Mitchell. You see, this plant was in process of building.
Mr. Pecora. My question, Mr. Mitchell, was : Were the estimated
earnings referred to in that circular actually realized in that year by
the company?
Mr. Mitchell. They were not estimated for that year, Mr. Pecora.
They were estimated for the years 1923, 1924, and 192.5 in the cir-
cular, during which time the property was being completed.
Mr. Pecora. Do you mean that in 1922, when that circular offer-
ing the bond issues of those sugar companies was put out, the value
of the bonds was based upon estimated earnings for the next three
years ?
Mr. Mitchell. It was in part on estimated earnings. But
Mr. Pecora (interposing). For three years ahead?
Mr. Mitchell. For three years ahead ; yes, sir. But^
Mr. Pecora (interposing). On a crop like sugar?
Mr. Mitchell. Yes, sir.
Mr. Pecora. Were those estimated earnings for those three years
actually realized?
Mr. Mitchell. The estimates, as I recall them, were all under
as to the production of the mill, the cost of sugar, and were in
accordance with various prices at which the earnings were estimated.
This was not a new property.
Mr. Pecora. The question is : Were the estimated earnings for
those three years actually realized by the company ?
Mr. Mitchell. This estimate was made on the basis of certain
production. I can not tell you, without further reference, exactly
what the production was in those years.
Mr. Pecora. Well, if you are going to give us a complete explana-
tion of these things, wouldn't it be better to first fortify yourself as
to the facts of actual earnings instead of taking merely estimated
earnings ?
Mr. Mitchell. Mr. Pecora, I think you are very unfair to me.
I stated to you yesterday in connection with this sugar matter,
and in connection with certain other matters that you brought up,
that there were associates of mine who were thoroughly familiar with
every detail of these companies, and you have summoned them to
appear here, and they are here.
Mr. Pecora. Who were those associates?
Mr. Mitchell. The associates of mine that have to do or know
about this far more in detail than I do, are Mr. Rentschler, who is
now president of the National City Bank, and Mr. Russell and Mr.
Ripley, both vice presidents of the National City Co.
STOCK EXCHANGE PEACTICES 1831
Mr. Pecora. Were Mr. Russell and ]\Ir. Ripley with you and Mr.
Rentschler when you made this trip to Cuba in 11)22 to survey the
sugar industry there?
Mr. Mitchell. Mr. Rentschler was.
Mr. Pecora. I asked you if Mr. Russell and Mr. Ripley were. I
know tiiat Mr. Rentschler was, because that was brought out yes-
terday.
Mr. Mitchell. I think neither of them was. But they have been;
and they are a part of our organization who have kept in daily
touch with this sugar industry.
Mr. Pecora. And you think it is unfair for me to ask you about
this sugar situation rather than Mr. Ripley and Mr. Russell, who
did not go down to Cuba in 1922 to make the survey that j-ou made ?
Mr. Mitchell. Mr. Rentschler has been very closely identified
with our interests in sugar from the time that I came into the Na-
tional City Bank and started to make the study incident to the
heavy loans which then existed. He made that study in detail, and
he lived witli it for several months. He is familiar, I think, with
every step that has been taken in that matter, and, personally, I
haA'e relied very largely on him and the men he has gathered about
him in connection with this phase of our work.
Mr. Pecora. Is Mr. Ripley an officer or director of the National
City Bank?
Mr. Mitchell. No, sir.
Mr. Pecora. You went down to Cuba not only as an officer of the
bank but as an officer of the National City Co., both of which or-
ganizations were interested in those sugar loans; isn't that so?
Mr. Mitchell. The National City Co. at that time, I think, was
not interested in it in any waJ^
Mr. Pecora. It became vitally interested in it in 1927, didn't it?
Mr. Mitchell. It did.
Mr. Pecora. When it took those loans over from the bank.
Mr. Mitchell. It did. And I wish to correct your statement, or
make a clear statement of what occurred on yesterday.
Mr. Pecora. By whom was the statement made of which you
complain, you or me ?
Mr. Mitchell. I wish to clear up the statement that was made
by 3'ou, whicli in the passage of testimony was slipped over and
which left an incorrect impression.
Mr. Pecora. What was slipped over on yesterday?
Mr. Mitchell. The impression was slipped over to this effect:
You spoke of these loans being " unloaded " by the National City
Co.. and you indicated that they were no good as of the time they
were turned over, and that we were misleading our shareholders with
regard to that particular increase in stock which gave the National
City Co. $25,000,000, to take these over.
Mr. Pecora. Did I slip that over, or did you make answers to my
questions which created that imiDression?
Mr. Mitchell. I remember distinctly your words " unloading of
these " and the intimation of your questions was distinctly that this
was the equivalent of something that was misleading and a fraud
upon the stockholders, which it was not.
1832 STOCK EXCHANGE PRACTICES
Mr. Pecora. Didn't I ask you whether the turn that these trans-
actions took in 1927 was an unloading?
Mr. Mitchell. You used the words
Mr. Pecora (interposing). I used the words "bailing out"?
Mr. Mitchell. Yes.
Mr. Pecora. Wasn't it you that made the answers to the questions
that I put to you, that created whatever impression is in your mind
concerning them ?
Mr. Mitchell. I hardly think so. and I should like the oppor-
tunity to make clear the situation, as 1 have requested here, and if you
would let me go on with this, then you could come back to your
questioning. This would, it seems to me, clarify the situation.
Mr. Pecor.\. Was there any limitation placed upon your answer-
ing the questions that you answered yesterday?
Mr. IVIiTCHELL. No. But there was only this impression : I was
asked at that time about these matters, and I stated there were
men who were more familiar than I, and who were in this room, and
I asked that they be permitted to testify on this. But j-ou asked
me to testify from memory, and I did the best I could, scratching
my memory for things that happened years and j'ears ago upon
which I had not refreshed myself. Since that time and overnight I
hare refreshed myself, and I am prepared to give the general situa-
tion in a very brief picture and that is what I have asked the chair-
man of this committee the privilege of doing.
Mr. Pecora. I think, Mr. Chairman, it ought to be done, but not
at this time. I do not think the examination of this witness should
be interrupted by a statement which is going to concern other things
besides the General Sugar Corporation, or that mj- examination
should be diverted to allow the witness to make explanations wliich
he had every chance to make in answer to the questions put to him
by me yesterday and which he then answered.
Mr. Mitchell. I call your attention to the fact that you forced
me to answer from what I said at the time was a vague memory.
The Chairman. Mr. Mitchell, you may proceed to make your
explanations, with the understanding that they will be brief and you
will keep to the point. If there were mistakes made yesterday,
correct those few mistakes, if you will, and then let counsel for the
committee go on with his examination.
Mr. Mitchell. I presume, Senator Norbeck, your committee is
after the facts, and not after the creation of a wrong impression in
regard to these matters.
Mr. Pecora. Whatever Mrong impression was created j^esterday
was created by your testimony, because you were the only witness
who testified yesterday, isn't that a fact?
Mr. Mitchell. I think it was created by the questions and not
permitting me
Mr. Pecoka (interposing). By the answers you made to m}' ques-
tions. I was not testifying. I was asking you questions, and cer-
tainly if anything that I assumed in my questions was incorrect
you had every opportunity' in answering those questions to point that
out. Now, you want to point it out, after 24 hours.
The Chairman. Mr. Mitchell, you maj- proceed.
STOCK EXCHANGE PRACTICES 1833
Mr. Pecora. I resent the witness' statement that the wrong impres-
sion was created b}' my questions rather than by his answers.
The Chairman-. You may proceed, Mr. Mitchell.
Mr. MiTCHKLL. Tlie point I desired to make clear was that there
had been a very definite improvement in the sugar market. The
market in 1922 advanced from 1.81 cents per pound to 4 cents per
pound, and it was in the latter part of that year that the financing
was done for the Vertientes and Camaguey companies. The first
financing for Sugar Estates and (^rientes was done at that time, and
the General Sugar Co. came into being.
Xow in 192.3, after some drop in the market, there was an advance
in Cuban sugars to a high of 6.62.5 cents per pound, with a drop
later in the year to 4 cents per pound, and the j-ear closed, after
going to 6 cents a pound, at .5.62.5 cents per pound. You will see
that the industry had begun to stabilize itself markedly.
The Chairman. That was in what year?
Mr. Mitchell. It was in 1923. The following year the high was
5.625 cents per pound. In the middle of that year there was a drop
in price to 3.2 cents, but in the latter part of that year sugar again
stabilized itself around 4^4 cents, in January being as high as 4.375
cents. And at that time the Cuban-Dominican bonds spoken of j-es-
terday were put out and a small additional issue of Orientes bonds.
In the following year — 192.5 — the price of sugar varied from 3.03
cents per pound to a low of 1.94 cents, but closed the year at 214
cents.
In 1926 the j'ear was bad at the start, the price of sugar running
down to 2.19 cents per pound, and closed the year at 3.375 cents per
pound.
In 1927 sugar opened the year at 314 cents per pound, stabilized
itself during the months of January and February at about 3.10 cents
to 3.15 cents, and closed the year, never going below 2.69 cents per
pound.
It was in 1927, in the early months, January and February, when
sugar was around a low of 3.06 cents per pound, and with a high
Soint during January and February of 3iy4 cents, that the General
ugar Corporation was formed, and these accounts which were in
the bank and which I referred to on yesterday as slow and doubtful
as current accounts, were taken from the bank and placed in the
National City Co.. where they could be held as a more permanent
investment through the holding of the conunon .stock of the Gen-
eral Sugar Co., and at that time the $25,000,000 was furnished by
the shareholders which was used to purcha.se the common stock of
the General Sugar Corporation. And it was estimated
Mr. Pecora (interjjosing). One moment right there. You say the
$25,000,000 was furnished b}' the shareholders. You do not mean
by that that when the shareholders put up that $25,000,000 they
knew it was going to be used to finance this sugar transaction, do
you?
Mr. Mitchell. They knew it was going to go into the Xational
City Co.
Mr. Pecviira. But they did not know what the Xational City Co.
did with that $25,000,000 the very day it was received, did they?
Mr. iliTCHELL. I hardly think there was any necessity for it.
1834 STOCK EXCHANGE PRACTICES
Mr. Pecora. Just answer my question : Did they or did they not
know what was going to be done with it ?
Mr. Mitchell. As far as I know, they did not.
Mr. Pecora. All right.
Mr. Mitchell. But at the time that went in, that investment was
considered by the officers and directors a sound investment for the
National City Co. And it was estimated that on the average of
prices for sugar over a long period of years the General Sugar Co.
would earn, as I recall, approximately $6,000,000 a year applicable
to that $25,000,000 of stock which the National City Co. took over.
Mr. Pecora. Now, if the officers and directors of the National City
Co. considered it was going to be such a tine transaction for the
company, whj' didn't they tell the stockholders who put up that
money to purchase additional stock of the bank and the company,
what was going to be done with $25,000,000 of that $50,000,000?
Mr. Mitchell. I have not been able to go over our records to see
whether or not anj' indication was given to the shareholders at that
time, but from time to time the shareholders, at their annual meet-
ings, have been advised of this investment, and it has been common
knowledge that the National City Co. has had this investment in
General Sugar.
Mr. Pecora. And by the use of the term " from time to time " you
mean after the investment was made ?
Mr. Mitchell. I assume so ; yes.
Mr. Pecora. And not before?
]\Ir. Mitchell. I can not answer on that.
Mr. Pecora. Can't j'ou answer whether or not the shareholders
were notified that $25,000,000 of their money was going to be put
into this sugar transaction ? Do you mean to say you can not answer
that?
Mr. Mitchell. I can not; no.
Mr. Pecora. Who prepared the circular announcing the addition
to the capital stock effected in 1927 that was sent out to the share-
holders ?
Mr. Mitchell. If you ask who signed it, I think I did.
Mr. Pecora. Was there anything said in that circular to the effect
that $25,000,000 of the $50,000,000 was to go into the possession of
the General Sugar Corporation?
Mr. Mitchell. I would not have considered it necessary. That
was not an investment of the shareholders of the bank that they
did not already have. They had it in the form of obligations that
were in the bank in one way and another, and it seemed advisable
to the directors that that be taken out and put in the form of a more
permanent investment, because it was not sufficiently liquid as a
current account to be held in a commercial bank.
Mr. Pecora. It was not sufficiently liquid because of the disturbed
condition of the sugar industry all through those years?
Mr. Mitchell. Because the sugar industry was not earning enough
to pay off the current loans that then existed.
Mr. Pecora. And because the sugar industry was in a state of
collapse.
Mr. Mitchell. Oh, I hardly think you can say that, and
especially
STOCK EXCHANGE PRACTICES 1835
Mr. Pecora (inteqjosing) . Let me read your own language out
of your minute book right on that. I am reading from page 283
of the minute book of the executive conmiittee of the National City
Bank:
The collapse of the raw-sugar industry in Cuba, which occurred during the
year 1921, and the banking crisis in the island which followed the coUap.se,
left the National City Bank of New York with very large sums tied up in loans
and credits to companies and individuals engaged in constructing and operating
sugar estates.
Do you recall that language of yours ?
Mr. Mitchell. I think I do.
Mr. Pecora. All right. Go ahead.
Mr. Mitchell. That refers to the state of collajDse resulting from
1920 and 1921 price drop.
Mr. Pecora. But j'ou were making this statement on February 8,
1927, with the advantage of all that had happened since 1921.
Mr. Mitchell. What was that resolution in connection with?
Mr. Pecora. In connection with this sugar transaction, in con-
nection with this $25,000,000 bailing out.
Mr. Mitchell. This was a transfer. You speak of it as a " bailing
out " and I am afraid again that that creates in the public mind
an incorrect impression. That was the passage from the part of the
institution where it is vital that liquidity prevail, of certain loans
that were bound to be slow under the condition of the industry, and
in the stockholders' interest it seemed far better to carry those
in the form of a permanent stock investment in the National City
Co. And at that time it was estimated that under normal conditions
in the sugar industry that company would earn, as I say, about
$6,000,000 a year applicable to that stock.
Mr. Pecora. Now, Mr. Mitchell, were not the loans of those sugar
companies with the bank the subject of frequent criticism by na-
tional bank examiners, to your personal knowledge?
Mr. Mitchell. Yes. sir.
Mr. Pecora. And that criticism was made year after year,
wasn't it?
Mr. Mitchell. Yes, sir: and we granted, and I granted to you on
yesterday, that they were not sufficiently quick in their possible
liquidation for us to hold them there.
Mr. Pecora. And so, in response to those criticisms and because of
other considerations, in 1927 the bank was relieved of those loans to
an amount agregating upwards of $30,000,000 through the process of
the issuance of additional .stock of the bank and of the National
City Co., and the turning over of $25,000,000 of the moneys raised
through the sale of that additional stock to the National City Bank,
which thus received paj'ment of those loans almost in full. Isn't
that a correct statement of what took place?
Mr. Mitchell. I cannot sui^j^ort from my knowledge your exact
figui-es.
Mr. Pecora. Well, let us assume the figures are not quite exact, is
that substantially the process followed in 1927 with regard to those
loans?
Mr. Mitchell. The process was to finance the National City Co.
so that without a further leaning on their funds, in the matter of
119852— 33— PT 6 6
1836 STOCK EXCHANGE PRACTICES
this particular investment, and we regarded it as an investment, that
it would be worked out over the years and could be carried as a
separate entity.
Mr. Pecora. And do you still say that that process was not a
bailing of the bank out of those loans ?
Mr. Mitchell. Your words " bailing out "
Mr. Pecora. That is rather a harsh term, perhaps, but it is a
term used on the street with reference to a situation such as this was.
Mr. Mitchell. I think it is used too often in connection with
other situations not to create a wrong impression when used in con-
nection with this.
Now, in 1929 the market varied from 2 cents to 2^/^ cents per
pound for sugar. In 1930 it stood at a little over 2 cents per poimd.
At that time in my remarks to the shareholders, copies of which
were mailed to each and every shareholder, I made this statement,
and it is a brief statement :
Occasional uninformed comment regaiding our interest in Cuban sugar prox)-
erties prompts a word witli respect tliereto. Since tlie post-war collapse of
the sugar industry in 1921, which caused wide distress in Cuba aud forced
banking creditors to take over actual properties for the protection of their
accounts, we have had proprietary interests in certain proiierties, \\hich have
been assembled in the General Sugar Corporation, the stock of which is owned
by the National City Co. While these properties are among the best in the
island, with thoroughly modern mills and production costs well below the
average, their aggregate output is only a small factor in tlie industry, con-
trary to what has sometimes been supposed, being only about 6 per cent of the
output of the island as a whole. The post-war condition of world-wide over-
production has resulted in a period of abnormally low prices, from which pro-
ducers in all countries have suffered. The properties, inventories, and accounts
in the balance sheet of the corporation reflect values based on a sugar price
equal to 60 per cent of the average sugar prices ruling over a period of 30
years. The investment of the National City Co. is carried at about three-
fourths of the book value thus shown. Under these circumstances, we are
prepared to support this investment until, with the inevitable turn of the
agricultural cycle, a normal degree of prosperity asserts itself, and it can be
disposed of to advantage.
The 30-year average price for sugar was 3.39 cents per pound.
The 20-year average was just under 4 cents per pound. We spoke
here of the 30-year average and as if these properties were appraised
on that basis. Sugar properties have to be appraised on three items:
Their potential production, cost of operation, and selling price; and
selling price of course reflects volume demand for sugar as well. But
I call attention to the fact that on the basis of a 30-3Tear average price
and these other factors these properties were at that time appraised
on the books of the National City Co. at 60 per cent of the value, and
were then carried at $25,000,000, and we advised the shareholders that
we were prejjared to support the investment of $25,000,000 on that
ba.sis.
Mr. Pecora. Mr. Mitchell, does that complete your explanation
in order to clarify whatever confusion arose from the testimony of
yesterday ?
Mr. Mitchell. I think so.
Mr. Pecora. Concerning the American Sugar Corporation?
Mr. Mitchell. I think so. Mr. Pecora.
Mr. Pecora. Now, that explanation does not
STOCK EXCHANGE PRACTICES 1837
Mr. Mitchell (interposing). Except if I might be permitted to
show what has happened since then. In 1930, before the year was
done, sugar had gone to about 1.04 cents per pound. In 1931 it
went to 1.09 cents per pound. In 1932, last year, it dropped at one
time to about fifty-seven one hundredths of 1 cent per pound.
Mr. Pecora. That is quite a toboggan slide.
Mr. Mitchell. That is a toboggan slide; yes; but a thing over
which no man has control, so far as I know, and it represents what
has happened in agricultural prices generally.
Mr. Pecoea. And knowing that that is what generally happens
in agricultural j^rices, you continued to put out bond issues based
on future estimated earnings of these perilous undertakings.
Mr. Mitchell. Excuse me, but the average price over a period of
30 years, as I have shown by the figures, was well over 'dy^ cents
per pound. And I think a 30-j'ear average was a fair basis to take.
Taking a SO-j^ear average would certainly be considered fair, it seems
to me, and that average was just under 4 cents per pound.
Mr. Pecoea. And this entire $25,000,000 investment at the end of
the period covered by this exjDlanation of yours simmered down to $1
of value, didn't it?
Mr. Mitchell. It did, because we have attempted to make it the
practice in our institution to keep our values in accordance with the
condition of the times, regardless of what they are, and when we saw
the price of sugar drop to approximately half a cent a pound it was
perfectly obvious that, at that moment, that investment had no value.
And it was written down accordingly on our books.
Senator Fletcher. What is the price to-day?
Mr. Mitchell. The price of sugar?
Senator Fletcher. Yes.
Mr. Mitchell. About eight-tenths of a cent a pound. It has im-
proved somewhat. Senator Fletcher.
Mr. Pecoea. Now •
Mr. Mitchell (interposing). The point I want to stress to the
subcommittee is, and it is a point which I very .strongly feel should
be made clear, that it is unfair to look upon this as something that
has been foisted on an unsuspecing public or that there is anything
criticizable in this. I contend an examination of this entire matter
from the time that we had that first collapse, where those loans were
made on actual sugar, and those credits got into trouble, and we had
to step into the situation, down to date, there is nothing which from
the standpoint of the banker, in that which he has done, that is
criticizable. If there is, I can not find it.
Mr. Pecora. The national-bank examiners found it criticizable
every year since 1922, didn't they?
Mr. Mitchell. Mr. Pecora— —
Mr. Pecora (interposing). Won't you please answer the question?
Mr. Mitchell. I will not answer it by a yes or no. It is unfair.
Mr. Pecoea. Isn't it susceptible of a yes-or-no answer?
Mr. Mitchell. It is not ; no, sir.
Mr. PecoeA. Did not the national-bank examiners at your bank
criticize all these sugar loans year after year since 1922?
1838 STOCK EXCHANGE PR.4.CTICES
Mr. Mitchell. I refuse to answer that with a yes or no, but I will
answer it this way : They criticized those loans as not being quickly
liquidatable, and as a current asset for the bank they were subject to
criticism.
Mr. Pecora. Are you sure that is all they said about ^ [There was
a pause.] Are you sure that was all they said about it, Mr. Mitchell?
Mr. Mitchell. Well, Mr. Pecora, with the hundreds of thousands
of questions and problems and papers that have passed over my desk
in 10 years, I think that I could not be expected to say that I am sure
of an answer that I might give to your question. That is distinctly
my impression.
Mr. Pecoea. Do you recall a criticism along these lines :
It is questionable whether or not the management is according stockholders
and depositors the proper protection iu continuing to operate these properties —
meaning the sugar properties — ■
at a loss of several millions each year.
Mr. Mitchell. I recall that we had various discussions. You will
bear in mind that operating those properties during a low and unfa-
vorable market meant that as we had to make advances for dead
season — that is, while the crop was being prepared — we were making
loans that might by chance at the time the crop came in be impossible
of liquidation, and those loans were very large. We were operating
those properties through the General Sugar Co. and in the interest
of the bank and in the interest of the shareholders. But what a bank
examiner could know about the detail of operation of these great
properties in Cuba was always a question in our mind.
Mr. Pecoea. AVell, let us assume bank examiners do not know any-
thing.
Mr. Mitchell. That is not true.
Mr. Pecoea. Do you recall, Mr. Mitchell, that particular criticism
having been made within very recent years of these sugar loans?
Mr. Mitchell. I don't remember that particular criticism; no,
Mr. Pecora.
Mr. Pecoea. That is an answer to my question.
Mr. Mitchell. I am ready to take your word for it.
Mr. Pecoea. All right; that is an answer to my question.
Now, Mr. Mitchell, I believe toward the end of your testimony of
yesterday afternoon's session — I haven't a transcript of the minutes
before me — you reached the point where you stated that it was in
1927 that the National City Co. departed from the policy it had
theretofore followed of not accumulating and selling common stocks
to the public. Do you recall that?
Mr. Mitchell. Yes, sir; not ,'^elling common stocks to the public.
Mr. Pecoea. Did you take part in any discussion between the
officers and directors of the National City Co. at which it was deter-
mined to depart from that policy?
Mr. Mitchell. I remember that we discussed very broadly, and
I should say both in the officers' meetings and in the meetings of the
executive committee, or directors, the question as to whether the con-
ditions in Southern Railway stock were such that we could properly
make an offering of that stock to the public. That was the first offer-
ing that was made.
STOCK EXCHANGE PRACTICES 1839
Mr. Pecora. That was the time when your policy theretofore ob-
served was first departed from ?
Mr. Mitchell. Yes. It was not departed from as a general rule.
It was departed from in a particular case, consideration to which was
specifically given.
Mr. Pecora. After that original departure in that particular case
which involved the common stock of the Southern Railway, were
there many departures in many other particular cases ?
Mr. Mitchell. Yes. We offered stock during 1928 and 1929 ;. not
many issues, but some.
Mr. Pecora. Do you know how many common-stock issues were
offered to the public?
Mr. Mitchell. You did ask me that, Mr. Pecora, but overnight I
have not — I have been looking up other things, and that particular
thing escaped my mind. I told you yesterday, I think.
Mr. Pecora. Have you any way of ascertaining by conference with
any of your associates in tlie company who are in the room now how
many issues of common stock the company sold to the public in 1928
and 1929?
Mr. Mitchell. I will be glad to confer. [After a pause.] That
will be produced, Mr. Pecora.
Ml". Pecora. All right, sir. Was that policy the result of a confer-
ence and deliberation on the part of officers and directors of the
National City Co.?
Mr. Mitchell. You mean at the time of the Southern Railway-
Mr. Pecora. Or subsequently, when it became more of a custom.
Mr. Mitchell. Oh, yes ; it was always discussed.
Mr. Pecora. Did you advocate the policy of the National City Co.
engaging in the selling of common stock issues to the public, or did
you oppose it?
Mr. Mitchell. No; I think I went along with the views of my
associates.
Mr. Pecora. Who originated those views, you or some of your
associates ?
Mr. Mitchell. I cannot say. It seems to me immaterial ; that we
are talking about this, I assume this study is being made not as a
personal matter but as a company matter. I am prepared to say for
the company that my associates considered anything could not have
been done if I had opposed it ; it could not have been done if anybody
else opposed it. Therefore, it was the unanimous view of our group
that we should proceed.
Mr. Pecora. Do you recall about when that decision was made ?
Mr. Mitchell. In connection with Southern Railway ?
Mr. Pecora. No; in connection with the general policy which was
thereafter adopted or followed of selling common stocks to the
public.
Mr. Mitchell. I think I have made it clear in my testimony that
it was not taken up as a general policy ; it was taken up as a specific
question in connection with the Southern Railway. It was taken up
as a specific question in regard to each and every other issue that was
made.
Mr. Pecora. One of the issues that was most exclusively dealt in
by the National City Co. during the year 1929 was the common stock
of the Anaconda Copper Mining Co., was it not?
1840 STOCK EXCHANGE PRACTICES
Mr. Mitchell. Yes.
Mr. Pecoka. Were you a member of the board of directors at that
time of the Anaconda Copper Mining Co. ?
Mr. Mitchell. No, sir; I was not.
Mr. Pecora. Were you ever a director of the Anaconda Copper
Mining Co. ?
Mr. Mitchell. I became a director in May, 1929.
Mr. Pecoka. And how long did you continue serving as a director
of that companj' thereafter?
Mr. Mitchell. I am still a director.
Mr. Pecora. When did the National City Co. commence the accu-
mulation and sale of common stock of Anaconda Copper?
Mr. Mitchell. I have some Anaconda papers here. I may be able
to answer. I think, Mr. Pecora, I ought to say with respect to
Anaconda Copper Mining Co. I have been before this conmiittee for
an extensive investigation, drawn here in connection with Mr. Ryan,
who died last week, and that investigation was so exhaustive I can
not conceive of the committee having further interest in it.
Mr. Pecoka. Have j'ou any further interest in it?
Mr. Mitchell. In pursuing the Anaconda investigation here?
Mr. Pecoka. Yes.
Mr. Mitchell. Most decidedly no.
Mr. Pecoka. No. Well, I have just a little additional interest in
following up certain lines that apparently were not pursued when
you were before the committee last year.
Now, let me ask you this : Did you ever, either individually or in
behalf of the National City Co., take part in any pools or sjaidicate
accounts in the common stock of Anaconda Copper Mining Co. or
any of its subsidiary companies ?
Mr. Mitchell. No, sir.
Mr. Pecoka. Did the National City Co. evei- participate in any
syndicate accounts trading in the common stock of any of the sub-
sidiaries of Anaconda Copper?
Mr. Mitchell. Of course, I just don't quite — you mean a joint
syndicate or a pool? If I remember correctlj', my testimony
Mr. Pecora (interposing). In my last question I referred to syndi-
cate accounts.
Mr. Mitchell. If you are referring to what we generally know as
pool accounts, and what the public understands as pool accounts, my
answer is distinctly no. I think there were times when, as recorded
in the previous testimony probably — and I state this from recollec-
tion— where there was some accumulation for one purpose or another
in connection with some entity of Anaconda Copper Co. directly.
But as far as pool operations, no. And it was assumed that there
were several pools in the street, in none of which did we ever par-
i^Jcij^ate in any way, shape, or manner, and none of our men, to 1113'
knowledge, except, as it appeared in the last investigation, there
was one of our vice presidents who. much to my surprise at that
time, and I didn't know it, had a small interest in what was called
a pool operation. I didn't know it until it was produced before me
on this stand.
Mr. Pecoe.\. I again ask you if the National City Co. ever par-
ticipated in any syndicate account which traded in the common stock
of any Anaconda Copper Co. subsidiary?
STOCK EXCHANGE PRACTICES 1841
Mr. JIiTCHELL. Well, as I urulerstand what _you mean by a sj-ndi-
cate account, I should say no.
Mr. Pecora. I simplj' used the term "syndicate account," Mr.
Mitchell, in my question without any definition of it. I have simply
used tlie phrase "syndicate account," haven't I?
Mr. Mitchell. Yes.
Mr. Pechra. Now, will you please answer the question as to
whether or not the National City t"o. at any time participated in
any syndicate account which traded in the common stock of any
Anaconda Copper Co. subsidiary?
Mr. Mitchell. If it did, my previous testimony will make it per-
fectlj' clear.
Mr. Pecoea. Have you any present recollection of the .subject?
Mr. Mitchell. Not in what I would conceive to be a syndicate
account, I should say no. Mr. Pecora.
Mr. Pecora. Let me refer to it then as a joint account.
Mr. Mitchell. I think that there was a joint account which was
discussed here at the last meeting when I appeared before tliis com-
mittee with respect to Anaconda Copper Co. ; I think that there were
perhajis two or three joint accounts.
The Chairmax. Perhaps, Mr. Mitchell, you may recall that the
first time you were before this committee it was in connection with
the banking bill, and while Anaconda Copper was mentioned, there
was no mention as to trading in Anaconda Copper by j'our bank or
your company or as to any syndicate or pool in which you might
have been. The onlj' thing which appears in that record is the fact
that you did recommend it at a certain high figure.
ISIr. Mitchell. That was before the banking
The CiiAiRMAX (interposing). That was the first time. Then
there came a second hearing last summer.
Mr. Mitchell. Yes.
The Chairman. But let us get down to the fact that there was only
one hearing that this committee ■
Mp. Mitchell (interposing). Oh, yes, sir; the first hearing was
before the Committee on Banking and Currency.
The Chairman. But it was before another subcommittee than this
one.
Mr. Mitchell. The Glass committee.
The Chairman. And these matters were not gone into except very
incidentally at that time.
Mr. Mitchell. That is correct.
The Chairman. You were not sent for to testify in that matter.
Mr. Mitchell. No, sir.
The Chairman. So that any reference to having been here twice
is misleading. You have only been here once, at which time Mr.
Gray, who was counsel for the committee, went into the Anaconda
matter to some extent.
Mr. Mitchell. If I said twice I was wrong about that. The only
time that I was referring to. Senator Norbeck, was when I appeared
here to discuss nothing but Anaconda, if I recall correctly. That
was at least the only subject that was imder discussion at the time.
Mr. Pecora. Do 3'ou recall a joint account that was participated
in by the National City Co. in the common stock of the Andes Cop-
per Mining Co. ?
1842 STOCK EXCHANGE PRACTICES
Mr. Mitchell. There was some account — may I refer to the testi-
mony before this same investigating committee ?
Mr. Pecora. Mr. Mitchell, can't you refer to your own recollection
of the facts? If you have no recollection of the facts, and will indi-
cate that, I would then suggest that you refresh your recollection by
anything that would serve to do it.
Mr. Mitchell. I think I really will have to do tliat, because that
subject I had assumed to have been exhausted before; I remember
that there was a joint account built up at the time of the conversion
of Andes into Anaconda, and I should have to i-efresh my mind.
My mind is not sufficiently refreshed at the moment to answer, Mr.
Pecora, in regard to that in detail. I had assumed that that sub-
ject was exhausted.
Mr. Pecora. Perhaps I can refresh it a little, Mr. Mitchell. Let
me ask : Do you recall that on or about December 12, 1928, you in
behalf of the National City Co. entered into an agreement with the
Anaconda Copper IMining Co. to accumulate for joint account up to
200,000 shares of the common stock of Andes Copper Mining Co. on
a 50-50 basis?
Mr. Mitchell (after referring to paper). Yes; my mind is re-
freshed in connection with this now. There was an arrangement
made on December 13, 1928, between the Anaconda Copper Co. and
the National City Co. for 200,000 shares of the common stock of the
Andes copper, and under that agreement 151,045 shares were accu-
mulated on our books, of which 127,945 shares were oifered to the
public and 23,100 shares were sold through brokers. The account
was closed on January 18, 1929. That was the sale of Andes Copper
stock. In July, 1929, an offer was made to exchange that stock for
Anaconda stock.
Mr. Pecora. Mr. Mitchell, are you now reading your answer from
a statement prepared by you?
Mr. Mitchell. I am not.
Mr. Pecora. "Wlio prepared the statement from which j-ou are
reading your answer?
Mr. Mitchell. This was a memorandum that has been handed
to me that happened to be in my files at the time that I appeared
before this committee before and is not a statement at all. I am
making it a running story from notes before me.
Mr. Pecora. "Wlio prepared the memorandum to which you are
referring as you make your answere?
Mr. Mitchell. I should have to find out the handwriting of this.
This was just in my files.
Mr. Pecora. Who handed it to you ?
Mr. Mitchell. It was handed to me by one of my counsel.
Mr. Pecora. Now, the trading in this joint account continued for
about five weeks, didn't it?
Mr. Mitchell. I haven't the information. The account was made
on December 13 and closed on January 18.
Mr. Pecora. That is about five weeks?
Mr. Mitchell. About five weeks; yes.
Mr. Pecora. Who conducted the trading for this joint account or
under whose direction was the trading conducted ?
STOCK EXCHANGE PRACTICES 1843
Mr. Mitchell. It was conducted in the trading department of the
National City Co. It was doubtless prompted by my own examina-
tion of it and the examination of Mr. Baker from day to day.
Whether any of the other officers had to do with the accumulation
I can not say, but it is more than likely that it was under the dom-
inance of Mr. Baker and myself.
Mr. Pecora. The Mr. Baker you refer to is the gentleman who
was then and is now the president of the National City Co. ?
Mr. Mitchell. Yes.
Mr. Pecora. Do J'ou recall the joint-account agreement that you
entered into on behalf of the National City Co. at that time with
Mr. John D. Eyan as chairman of the board of the Anaconda
Mining Co.?
Mr. Mitchell. No ; I do not.
Mr. Pecora. Let me show you this paper, which purports to be a
copy of a letter sent by you under date of December 12, 1928, to Mr.
John D. Ryan, and also this pajjer which purports to be a copy of a
letter addressed to you by Mr. John D. Ryan under date of De-
cember 13, 1928. Will you look at those papers and tell us if they
are true copies of the correspondence that constituted the agreement
with respect to this joint-account trading operation?
Mr. Mitchell. Yes; I should be willing to accept your statement
that these were copies.
Mr. Pecora. I may say that those were given to me by the attor-
ney for the late John D. Ryan within the last two or three weeks.
Mr. Mitchell. I should be willing to accept them as valid.
Mr. Pecoka. I ask that they be spread on the record.
The Chairmak. Without objection, that will be done.
(The two documents are as follows:)
The National City Co.,
National City Bank Building,
Heio York, December 12, 192S.
Mr. John D. Ryak,
Cl\ulrma/n Anaconda Copper Mining Co.,
25 Brouciicay, Neio York.
Deak Mr. Kyan : This is to confirm that j'ou, acting for the Anaconda Copper
Mining Co., and I, for the National City Co., have agreed to accumulate up to
200,000 shares of the common stock of Andes Copper Mining Co. for joint
account on a 50-50 basis.
The National City Co. will run this account as you and I personall.y, from
time to time, may deem wise. As stock is accumulated the National City Co.
may deliver your share at the approximate cost basis and upon final liquidation,
accounting will take into consideration cost-plus carrying charges and the two
companies will share equally any profit or loss on the transaction.
An acknowledgement will be appreciated.
Sincerely yours, C. E. Mitchell.
December 13, 1928.
Mr. C. E. Mitchell.
Presidetit the National City Co.,
55 WaJl Street. New York.
Dear BIr. MiTCHEaLL: I beg to acknowledge receipt of yours of December 12
confirming our understanding that you. for the National City Co., and I, for the
Anaconda Copper Mining CVi., have agreed to accoumulate up to 200,000 shares
of the common stock of Andes Copper Mining Co. for a joint account on a
50-50 basis, the account to be run by the National City Co. as stated.
Very truly yours,
John D. Ryan.
1844 STOCK EXCHANGE PRACTICES
Mr. Pecora. You will observe that under the agreement evidenced
by these two letters that have just gone into the record you were
to run this account.
Mr. Mitchell. Yes.
Mr. Pecora. Do you recall how you ran it ?
Mr. Mitchell. Not specifically. I recall in general the account,
that I would be in touch with Mr. Ryan more or less constantly,
and I would instruct our trading department the limitation of their
buying for accumulation.
Mr. Pecora. The Andes Copper Mining Co. referred to in that
joint account corresi^ondence is a subsidiary of the Anaconda Copper
Mining Co. ?
Mr. Mitchell. It is.
Mr. Pecora. And it was back in 1928, also, was it not ?
Mr. Mitchell. Yes.
Mr. Pecora. What broker or brokers were employed in the opera-
tion or trading in this joint account ?
Mr. Mitchell. I could not answer that.
Mr. Pecora. To what extent were purchases and sales in the com-
mon stock of Anaconda Copper jSIining Co. made for the purposes
of this joint account by the trading department of the National
City Co. ?
Mr. Mitchell. May I have that question ?
Mr. Randolph (shorthand reporter). To what extent were pur-
chases and sales in the common stock of Anaconda Copper Mining
Co. made for the ijurjioses of this joint account by the trading
department of the National City Co.?
Mr. Mitchell. I should say that they were made to the extent
that resulted in this accumulation, Mr. Pecora, but I haven't the
detail of that before me.
Mr. Pecora. Do you know the profit that accrued from this joint
account ?
Mr. Mitchell. The memorandum before me indicates that tliere
was a total profit in the account of $33.5,000.
Mr. Pecora. Was there any profit also not included in that sum
which was represented by stock on hand at the time the account was
closed ?
Mr. Mitchell. I see no indication of it whatsoever. The memo-
randum that I have here, which I will stand by as being authentic,
is that there was a total profit in the account of $335,043.42, of which
$167,521.22 was paid to the Anaconda Copper Co. and we retained
an equal amount. In other words, the jDrofit to the National City Co.
was $167,000 plus.
Mr. Pecora. The Andes Copper Mining Co.'s common stock at
that time was listed on the New York Stock Exchange, wasn't it?
Mr. Mitchell. It was.
Mr. Pecora. Were the tradings that were had for the purposes of
this account made on the market ?
Mr. Mitchell. Undoubtedly, completely.
Mr. Pecora. On the exchange ?
Mr. Mitchell. Completely, I should say.
Mr. Pecora. And the effect of these trades in part at least, was to
maintain ceitain market prices for the stock?
STOCK EXCHANGE PR.A.CTICES 1845
Mr. Mitchell. Oh, I think not.
Mr. Pbcora. Wasn't that effect produced in any way, shape, or
form ?
Mr. Mitchell. It might have been produced in some shape or
form, but that was not the purpose of the account.
Mr. Pecora. I did not ask you if that was the purpose; I asked
jou if that was one of the effects.
JNIr. Mitchell. I can not say. I haven't got the market range
before me to indicate what the effect might have been.
Mr. Pecoua. "Who financed the transactions in this joint account?
Mr. Mitchell. The letters that have passed and made a part of
this record indicate that the National City Co. was to have the right,
as it purchased stock, to deliver to the Anaconda Copper Mining Co.
its jjortion of the stock. Am I not correct in that ? The letter says :
As stock is accumulated the National City Co. may deliver your share at the
approximate cost basis, and upon final liquidation accounting will take into
consideration cost plus carrying charges, and the two companies will share
equally any profit or loss on the transaction.
Therefore, whether the City Co. carried the full burden and asked
the Anaconda Copper Co. to pay its interest in accordance with this
agreement, or whether it turned over its one-half approximately of
the stock as accumulated to the Anaconda Co^^per Co., I can not say
without further reference to records.
INIr. Pecora. Well, under that provision that you have just
read
Mr. Mitchell (interposing). It might.
Mr. Pec( RA. Who was called upon to finance it?
Mr. Mitchell. The initial purchase the National City Co. ob-
viously, if they were to accumulate the amount, but they had the
privilege as the stock was accumulated to deliver the share of the
Anaconda Copper Co.'s proportion to it.
Senator Fletcher. The letter says your company was to " run the
account ", whatever that means.
Mr. Mitchell. Yes; that means it was to accumulate the stock,
but it goes on to say that as it is accumulated one-half of the amount
accumulated may be turned over to the Anaconda Copper Co.
Mr. Pecora. Does not that phraseology, that your " Company will
run this account,"' mean something more than the fact that your
company was to accumulate the stock? Doesn't it mean that the
tradings in the account were to be under the dii'ection of the National
City Co.?
Mr. Mitchell. It says :
The National City Co. will run this account as you and I personally from
time to time may deem wise.
That is Mr. Ryan and myself, I acting for the National City Co.
and he acting for the Anaconda Copper Co.
Mr. Pecora. Do you recall how this account was run ?
Mr. Mitchell. No; I do not.
Mr. Pecora. And what course the trading took under it ?
Mr. Mitchell. No ; I do not, Mr. Pecora.
Mr. Pecora. Do you know anyone that could tell us ?
1846 STOCK EXCHANGE PRACTICES
Mr. Mitchell,. Not without reference to papers and to markets
during that period. I think it would be surprising if we had any-
thing liere that would indicate that.
Mr. Pecora. The National City Co.'s capital and surplus were
derived from the sale of stock of the National City Bank in the first
instance, isn't that correct?
Mr. Mitchell. Yes.
Mr. Pecora. So the National City Co.
Mr. Mitchell (interposing). And as to surplus from its earnings
as well.
]Mr. Pecora. Yes. So the National City Bank indirectly and
through the use of its funds procured in the manner indicated
through the sale of stock in the National City Co. was financing this
joint account?
Mr. Mitchell. The money came from the shareholders of the
National City Bank, but you bear in mind that in one of our share
increases there was set up, and announced to the shareholders there
would be set up, and the stock was in part issued, in order that there
might be set up a fund which could be used for the purchase and
sale and holding of securities, shares, and so forth, on a term basis,
the holding of which would inure to the benefit of the company and
the bank.
Mr. Pecoka. Do you think, Mr. Mitchell, that it is a proper or a
sound banking function for a national bank, either directly or indi-
rectly, to participate in joint stock-market accounts?
Mr. Mitchell. If you ask me on the back-look I think this kind
of an account that was set up by the shareholders' monej' and with
their full knowledge and consent, and through which particular
accounts were operated, finding ourselves often in what would be
termed stock-market operations, is unfortunate, and I would not do
it again. As a matter of fact, I would rather look to the time when
we would be completely out of that sort of thing. I do not believe
that it is a thing that we should be doing, Mr. Pecora.
Mr. Pecora. When did you fii-st reach that conclusion ?
Mr. Mitchell. Oh, at the same time that many of us began to feel
the headache from that which had gone before.
Mr. Pecora. Well, the headaches of some people have been so ex-
tensive they have forgotten when they commenced.
Mr. Mitchell. That is right.
Mr. Pecora. What was the date when you reached the conclusion?
Mr. Mitchell. Oh, I should say in recent months, Mr. Pecora.
I would not be carried off my feet by any immediate movement of a
market.
The Chairman. What was the date on which it advanced those
25 million that you testified to yesterday? I have forgotten.
Mr. Pecora. That was in February, 1927 — February 15, 1927.
That is correct ?
Mr. Mitchell. Yes, but that is not the kind of account that I am
referring to now and that we are discussing.
The Chairman. No ; but that was at the time the Federal Reserve
Board was trying to slow down the boom.
Mr. Pecora. No ; that was 1929, Senator, March, 1929.
STOCK EXCHANGE PRACTICES 1847
The Chairman. I know the banking committee here reported fa-
vorably on the resolution in the spring of 1928, forecasting a break-
down, and there were very few bankers on this committee, very few
of them who had any expert knowledge. It came a year and a half
later.
Mr. Pecora. The $25,000,000 you referred to, Senator, was that
the $25,000,000 thrown into the call loan money market?
The Chairman. Yes.
Mr. Pecora. That was in March, 1929.
The Chairman. That is what I thought. The boom was about to
break and he testified yesterday that he found the market short of
money.
Mr. Pecora. That was March, 1929.
The Chairman. And advanced them 25 million. And the boom
went on. The break came in the fall of 1929.
Mr. Pecora. Yes, sir. I thought, Mr. Chairman, you were re-
ferring to the $25,000,000 that went into General Sugar Corporation.
Now, was there aiw other joint account in the common stock of
the Anaconda Copper Mining Co. or any of its subsidiaries to which
the National City Co. became a party in 1928 or 1929?
Mr. Mitchell. I find before me a memorandum similarly pre-
pared when I was before this committee before.
Mr. Pecora. And likewise a memorandum not prepared by you ?
Mr. Mitchell. No. It is some facts that were developed from the
books.
Mr. Pecora. But it is not a memorandum prepared by you?
Mr. Mitchell. No, sir.
Mr. Pecora. That is all I asked.
Mr. Mitchell. There was an agreement dated January 14, 1929,
between Mr. John D. Ryan on the one part, Mr. Daniel and Harry
Guggenheim, second, and the National City Co. third, for an account
of 100,000 shares of common stock of Chile Copper Co., the account
to be handled by Mr. John D. Ryan personally. That account was
extended, and under the agreement 140,500 shares were purchased
and 29,400 were sold.
Mr. Pecora. 140,000 purchased and 29,000 sold ?
Mr. Mitchell. 29,400, leaving 111,100 shares long, which were
exchanged for 81,103 shares of Anaconda stock, of which 51,103
shares were sold, leaving on February 14, 1929, a long position of
30,000 shares. This is all in the testimony given before this particu-
lar subcommittee before.
As a part of that operation we carried 78,840 shares, of which
68,840 shares were delivered on instruction of Mr. Ryan, leaving
10,000 in our investment account which we held. The stock of the
Guggenheims was sold and a check given to them for that. The
stock of Mr. Ryan's, I recall he testified, went into his hands and
continued in his personal account.
Mr. Pecora. What were the total profits that flowed from that
joint accoimt?
Mv. Mitchell. As I told j'ou, there were 30,000 shares when they
got through, and Mr. Ryan took his 10,000 shares and put them
away in his box, and the National City Co. put 10,000 in its invest-
ment account, which it continued to hold and did still hold, I think.
1848 STOCK EXCHANGE PEACTICES
at the time that I last testified here, and the only stock that was sold
and showed a profit was the stock that was the Guggenheims' share,
and Mr. Daniel Guggenheim, now dead, and Harry Guggenheim,
were the ones interested in that. From this I would judge that was
$400,000, as the check that went to the Guggenheims was in that
amount.
Mr. Pecoka. They had a one-third interest in the jjrofits of this
account ?
Mr. Mitchell. They did.
]\Ir. Pecora. That would indicate total profits of about $1,200,000?
Mr. Mitchell. It would if it had been sold, but as a matter of
fact, it was taken by us for accumulation and went down, and to-day
of course there would be a loss on it.
Mr. Pecora. But if that stock had been liquidated, if the stock that
remained over as a profit from this account had been liquidated, by
the National City Co., as the Guggenheims liquidated their portion
of the stock, the company also would have reaped a profit of about
$400,000?
Mr. Mitchell. That would seem to be a fair conclusion from this
statement. My testimony again I say was offered before this com-
mittee before.
Mr. Pecora. Now, that joint account dealt in the common stock
of the Chile Copper Co. ?
Mr. Mitchell. Yes, sir.
Mr. Pecora. Wliich was then and still is a subsidiary of the Ana-
conda Copper Mining Co.?
Mr. Mitchell. Yes. That was at the time, if I recall it, where a
conversion was offered. I do not think that prior to that the Chile
Copper Co. was a subsidiary of Anaconda. I think that was the
time at which the control was exchanged for Anaconda stock.
Mr. Pecora. Mr. Mitchell, was one of the effects of the operation
of this joint account a maintenance or a support or an increase in the
market value of that common stock during the period covered by the
joint account?
Mr. Mitchell. My recollection, Mr. Pecora, is that it was an ac-
count established not in any sense to increase the price but to stabilize
the price as between the Chile Copper stock and Anaconda stock
during the period of offer of conversion. That is my recollection.
Mr. Pecora. Then one of the purposes was to produce a certain
effect on the market quotations of the stock during the period of the
operations in the joint account?
Mr. Mitchell. The account was formed in order to facilitate the
conversion. Now, what the effect was on the market I simply can
not tell you. It may be in previous testimony there.
Mr. Pecora. Was it not to facilitate conversion at a certain ratio
of exchange?
Mr. Mitchell. Yes, sir.
Mr. Pecora. And in order to facilitate that conversion was it not
necessary to stabilize the market quotations?
Mr. Mitchell. It was necessary, as I would recall it, to maintain
that ratio of exchange that was offered.
Mr. Pecora. So it is a fair inference or a fair assumption that one
of the purposes of this joint account was to produce an effect on
the market quoUitions of the stock traded in?
STOCK EXCHANGE PBACTICES 1849
Mr. Mitchell. Well, I can not answer that. It was to facilitate
the exchange, and that is the best I can sny.
Mr. Pecora. And one of the ways of facilitixting the exchange was
to maintain certain market jDrices for the stock during the period of
the exchange?
Mr. Mitchell. To maintain an equality on the basis of the ratio
established as between the two stocks, 1 think would be a better
expression of it.
Mr. Pecora. That produced a certain effect on the market quota-
tions, did it not, and it was designed to produce such an effect, was
it not?
Mr. Mitchell. No; it was not designed to produce — it was de-
signed to facilitate the conversions.
Mr. Pecora. In order to facilitate the conversions, certain market
values for the stock had to be maintained?
Mr. Mitchell. That is right.
Mr. Pecora. And one of tlie purposes of this joint account was to
help maintain those mai-ket values?
Mr. Mitchell. Correct, Mr. Pecora.
Mr. Pecora. And that manifests itself in the effect on market
values during the jseriod of operations, doesn't it?
Mr. Mitchell. During the period of the conversions ; yes, sir.
Mr. Pecora. What is the difference between a joint account and
syndicate account?
" Mr. Mitchell. A syndicate account is scarcely a recognized term
unless it is qualified. It may be a selling syndicate account or it may
be a syndicate buying account or a syndicate holding account. But
a sj'nclicate to my mind at least carries with it a very large group of
people wlio are entering into an agreement one with the other for
a specific purpose. I do not think you can just say " syndicate ac-
count " and have it mean anything to the average man. It means
nothing to me.
Mr. Pecora. Do you mean that a syndicate account is the same as
a joint account except that there are more participants than is
usually found in what is called a joint account?
Mr. Mitchell. I think so.
Mr. Pecora. That just about represents the difference in prin-
ciple '.
Mr. Mitchell. I should say so ; yes.
Mr. Pecora. So there is really no difference in principle; it is
simply in the number of participants?
Mr. Mitchell. I think when two parties or three parties enter
into an agreement for their joint venture that that is different —
you call that the joint account. I just can not conceive in my own
mind calling that a syndicate account.
Mr. Pecora. What "is the difference between a joint account and
a pool to trade in stocks— that is, as you understand the term
"pool"? , ^ , ^
Mr. Mitchell. It is very difficult for me to make a broad defi-
nition that I could be certain would stand without finding a loop-
hole in it. A pool indicates to me a bfind operation entered into
by a group with some one manager whom the group itself does not
perhaps know of in a business way or have any contact with but is
1850 STOCK EXCHANGE PRACTICES
the operator of the pool. It is a condition that has to do with stocks
particularly and operations in stocks, and I am not familiar with
these pools, because we have not been members of pools of this sort.
Mr. Pecora. Well, don't j'ou know the difference between a joint
account and a pool other than the one you have stated?
Mr. Mitchell. No ; I do not.
Mr. Pecora. Then, there is no difference with the exception of
the difference that you have just called attention to?
Mr. Mitchell. I should want to sit down and work a couple of
hours if I were to try to make a clean-cut definition and differentia-
tion between these terms in giving you again my impression of the
differences, Mr. Pecora.
Mr. Pecora. The principal impression I got of the difference,
Mr. Mitchell — and if I got the wrong impression I wish you would
clear it up — is that in a pool most of the members have nothing
to do or say about the operation of it, and in the joint account all
of the members know in advance the pur]50ses and the operation.
Does that summarize it ?
Mv. Mitchell. I think that under actual operation of business
that that would be considered a fair differentiation; yes, Mr. Pecora.
To make complete the record since you asked me a question, I
will have to state one other account.
Mr. Pecora. I was just coming to it — the one in Greene Cananea?
Mr. Mitchell. Yes.
Mr. Pecora. In the early part of 1929 was there any other joint
account trading in the common stock of the Anaconda Copper Co.
or any of its subsidiaries to which the National City Co. was a
party ?
Mr. Mitchell. This seems to say 1928, Mr. Pecora; December 13,
1928. Does that check with your records ?
Mr. Pecora. Yes, sir; December. How long did the o])eration in
that pool — I beg A'our pardon^ — in that joint account continue?
Mr. Mitchell. "It was cleared in March, 1929; March 21, 1929.
Mr. Pecora. Commenced in December l, 1928?
Mr. Mitchell. The agreement apparently, from the notes that
I have here, is one that was made in December 13, 1928, between
John D. Ryan et al. and the National City Bank.
Mr. Pecora. The respective shares of the participants in that joint
account were as follows, were they not: The National City Co., one-
half; John D. Ryan, one-sixth; C. F. Kelley, one-sixth; W. D. Thorn-
ton, one-sixth? Is that correct?
Mr. Mitchell. I do not know that I personally knew of who Mr.
Ryan had in his account and the amounts. I am sure that he did not
tell me. I presume that that again was offered in the previous testi-
mony when the Anaconda accounts were under consideration by this
committee. But so far as my information is concerned, it runs com-
pletely to John D. Ryan et al., and I presume that " et al." means
some of his friends. I should have to see the agreement.
Mr. Pecora. How many shares were involved in that joint
account?
Mr. Mitchell. This shows that the account was for 100,000 shares.
The account was to be run by Mr. J. D. Ryan. Under the agree-
ment there were 226,000 purchased and 151,100 sold, lea\'ing 7.5,000
STOCK EXCHANGE PRACTICES ]851
shares long in the account. Of that amount v/e took that half which
we converted into Anaconda Copper Co. stock on the basis of one
and a half shares of Anaconda for each share of Greene-Cananea.
Mr. Pecora. Who financed that joint account?
Mr. Mitchell. Perhaps you have the agreement before you, Mr.
Pecora. If you have, I would be glad to accept it as authentic. I
haven't a copy of the agreement here.
Mr. Pecora (handing paper to Mr. Mitchell). Let the record
show I handed the witness a paper.
Mr. Mitchell. The agreement provided that Mr. Ryan should run
the account as lie and I personally from time to time might deem
wise; that as the stock was accumulated he might deliver our share
at the approximate cost basis, and upon final liquidation, accounting
would take into consideration cost plus carrying charges, and our
two interests were to share equally in any profit or loss on the trans-
action.
Mr. Pecora. Do you recall who actually financed that joint
account ?
Mr. Mitchell. No; I do not, Mr. Pecora.
Mr. Pecora. Does the paper which I handed you a few moments
ago embody the terms of this joint account?
Mr. Mitchell. This paper that I have in my hand, you mean?
Mr. Pecora. Yes.
Mr. Mitchell. Yes.
Mr. Pecora. I ask that it be spread in full on the record.
The Chairman. If there is no objection, it will be so ordered.
(The document is as follows :)
The Nationai, City Bank,
New York, January 14, 1929.
Mr. John D. Ryan, Neio York.
Dear Me. Byan : This is to confirm that (1) you, acting for yourself and
associates, and (2) Mr. Harry F. Guggenheim, and (3) I, acting for the
National City Co., have agreed to accumulate up to 100,000 shares of the
common stock of Chile Copper Co. for joint risk and profit, each of the afore-
said parties having a one-third interest in the account.
You will be responsible for all purchases, sales, and accumulations of the
account and for all accountini; witli rplation tliereto. As stock is accumulated
jou may deliver in blocks at an approximate cost basis to the National City
Co., which in turn upon one day advance notice shall be privileged to deliver
for carrying purposes approximately one third of any stock accumulated to
each of the other parties to this joint account, but all such stock shall be at
your call as manager.
Any member of the account carrying stock shall be entitled to receive inter-
est at the rate of 6 per cent per annum.
Upon final liquidation or dissolution of the account, your accounting will
take into consideration cost plus carrying charges and the three parties to the
account shall share equally any resulting profit or loss.
This letter is sent to you in duplicate in order that you may lodge one copy
with Mr. Guggenheim. An acknovs'ledgment and an acceptance of the terms
from yourself and from Mi-. Guggenheim will l)e appreciated.
Tours very rrul.\',
C. E. Mitchell.
Mr. Pecora. I show you with respect to the joint account in Chile
Copper Co. what purport to be copies of three letters signed respec-
tively by yourself. John D. Ryan, and Daniel Guggenheim. Are
those the letters which embody "the terms of the joint-account trans-
actions with respect to which you have testified ?
119852— 33— PT 6 7
1852 STOCK EXCHANGE PRACTICES
Ml'. Mitchell. They seem to be, and on your statement that you
have taken these copies from our files I should say
Mr. Pecoka (interposing). No; I got those copies from an attorney
for the late John D. Ryan * * *
Mr. Mitchell. I am -willing to accept them.
Mr. Pecora. * * * with Mr. Ryan's knowledge and consent.
Mr. Mitchell. I am ready to accept them.
Mr. Pecoka. I ask that those three letters be spread in full in the
record.
The Chairman. AVithout objection, it will be so ordered.
(The three documents are as follows:)
The National City Co.,
Mr. John D. Ryan, New York, December 12, 1928.
Neio York.
Dear Mr. Ryan: Tbis is to confirm that you, acting for yourself and asso-
ciates, and I, for the National City Co., have agreed to accumulate up to 100,000
shares of the common stock of Greene Cananea Copper Co. for joint account
on a 50-50 basis.
You will run this account as you and I personally from time to time may
deem wise. As stock is accumulated you mas' deliver our share at the approxi-
mate cost basis and upon final liquidation, accounting will take into considera-
tion cost plus carrying charges and our two interests will share equally any
profit or loss on the transaction.
An acknowledgment will be appreciated.
Sincerely yours, C. E. Mitchell.
Janttaby 14, 1929.
Mr. C. E. Mitchell,
President National City Co., New York.
Db-^r Mr. Mitoheill : I am in receipt of your letter of January 14 confirming
our verbal understanding covering the joint account in Chile Copper Co. stock,
and I accept for myself and associates the terms as stated.
Very truly yours, John D. Ryan.
January 15, 1929.
Mr. John D. Ryan, New York City.
Dear Mr. Ryan : This will acknowledge receipt of a copy of Mr. Charles E.
Mitchell's letter to you of January 14, and is an acceptance of its terms. In
his letter he refers to (2) Mr. Harry P. Guggenheim. This should be for the
joint account of Harry F. Guggenheim and myself.
Yours faithfully, Daniel Guggenheim.
Mr. Pecora. Now referring to this joint account in Greene
Cananea common stock
The Chairman. That was a coj^per company also, was it not?
Mr. Pecora. Yes. Was that companj' a subsidiary of Anaconda
Copper ?
Mr. Mitchell. No.
Mr. Pecora. It is now, is it not ?
Mr. Mitchell. Yes. The Anaconda Copper Co. had a substantial
interest, but it was the resulting conversion of Greene Cananea for
Anaconda stock on the basis of one and a half shares of Anaconda
for each share of Gi'eene that resulted in Anaconda Co. getting its
controlling position in Greene, which incidentally is the lowest cost
producer at the moment, I think, that exists in the world.
The Chairman. Located where?
Mr. Mitchell. It is located in Mexico.
Mr. Pecora. One of the purposes, if not the main purpose, of this
joint account with the Greene Cananea stock was to maintain a
market in that stock?
STOCK EXCHANGE PRACTICES 1853
Mr. Mitchell. No; not at all.
Mr. Pecora. Was it to facilitate the exchange of Greene Cananea
stock for Anaconda Copper Mining Co. stock?
Mr. Mitchell. Yes.
Mr. Pecora. And in order to facilitate that exchange the market
had to be maintained, did it not?
Mr. Mitchell. No ; I think that did not occur during that time,
Mr. Pecora. This Greene Cananea stock was acquired between
December 13, 1928, and March 21, 1929. In July of 1929 a conver-
sion was worked out. This was very definitely an account to acquire
stock which would give the base for a conversion in due course and
permit the Anaconda Copper Co. to obtain control of this very
valuable property, a property which even under the existing copper
prices is profitable.
Mr. Pecora. At the time the joint account in Greene Cananea was
closed in what form were the profits distributed, in the form of
cash or in the form of stock?
Mr. Mitchell. Well, from our standpoint we took our share of
the stock and we held it in our box and we ultimately converted
it into Anaconda stock. I see a memorandum here that there was
delivered to Mr. Kelley 12,500 shares for a cash payment. I do not
know whether that had anything to do with this account, however.
Mr. Pecora. I think you will find it did, because Mr. Kelley had
one-sixth interest, taken out of Mr. Ryan's one-half interest in this
joint account. By the way, who is the Mr. Kelley to whom you have
just referred?
Mr. Mitchell. Coi'nelius F. Kelley, the President of the Anaconda
Copper Co.
Mr. Pecora. And Mr. Ryan was chairman of the board of the
Anaconda Co.?
Mr. Mitchell. He was chairman of the board of the Anaconda
Copper Co.
Mr. Pecora. And you were a member of the board ?
Mr. Mitchell. Not at that time; not until May of the following
year.
Mr. Pecora. Now, do you find by your memorandum that Mr.
W. D. Thornton had some of the profits of this joint account at the
closing of it?
Mr. Mitchell. No; I do not find that here. I am sure that
Greene-Cananea was covered in the previous hearings here, and an
examination of the testimony will develop any facts that you desire
in connection with it ; but l' have not that information.
Mr. Pecora. Well, what profit accrued in the operation of this
joint account to the participants in it?
Mr. Mitchell. Well, we got some stock.
Mr. Pecora. How much stock?
Mr. Mitchell. We got— you see, there were left 75,000 shares of
stock.
Mr. Pecora. Now, those 75,000 shares were 75,000 shares of Greene-
Cananea ; is that right ?
Mr. Mitchell. Yes: that was Greene-Cananea stock.
1854 STOCK EXCHANGE PRACTICES
Mr. Pecora. And that Greene-Cananea, some 3 or 4 months after
the closing of this account, was changed for a larger number of
shares of Anaconda Copper?
Mr. Mitchell. Xo; less, I think. There was IV2 shares of Ana-
conda given for each share of Greene-Cananea.
Mr. Pecora. That is a larger number? '
Mr. Mitchell. No.
Mr. Pecora. If 11/2 shares
Mr. Mitchell (interposing). Yes; a larger number of shares.
Mr. Pecora. That is what I asked you.
Mr. Mitchell. Yes, sir. That 75,000 shares, we took half of that
and put it in our box. I see some shares were delivered to Mr.
Kelley. I could not tell you from my papers here
Mr. Pecora (interposing). At the market price for Anaconda
Copper at the time you received this profit in the form of shares,
■what would have been the profit in dollars and cents from this joint
account ?
Mr. Mitchell. I do not see an indication here of that figure in
my memorandum. I can saj^ that that must have been in the
previous testimony before this committee.
Mr. Pecora. Now, the common stock of the Anaconda Copper
Mining Co. was accumulated and sold to the investing public by the
selling organization of the National City Co. during the year 1929
in very large amounts, was it not?
Mr. Mitchell. It was; j'es, sir.
Mr. Pecora. Do you recall the total number of shares of Anaconda
Copper common stock which the National City Co. sold through its
selling agencies throughout the country in 1929?
Mr. Mitchell. I am referring to the testimony before this com-
mittee, because I know the questions were exactly along the same line,
and I think that we can
The Chairmax (interposing). I want to say, Mr. Mitchell, if you
had time to read that testimony, you would not be referring to it so
many times, because there is not so much in that testimony.
ISIr. Mitchell. The testimony was very complete.
The Chairman. Maybe on one or two things. On some things.
The old testimony is not an alibi.
Mr. Mitchell. No; I am not attempting to establish an alibi; but
I think every question that is asked me here was asked either of
myself or Mr. Rvan in the previous appearance before this committee.
Mr. Pecora. Well, do you remember that the total number of
shares of Anaconda Copper common stock accumulated by the Na-
tional City Co. in 1929 and sold to the public was upward of 1.300,000
shares?
Mr. Mitchell. Yes ; here I see the counsel said before :
Do you know whether ,vou sold, out of that lot 1,315,830 shares?
Senator Brookiiart. Did you sell it?
Mr. Pecora. The Senator is asking whether that was sold.
Mr. ]\Iitchell. That stock was sold very largely through our sales
organization and through dealers in the country.
Senator Brookiiart. This 37,500 shares was your profit ?
Mr. Mitchell. No
Senator Brookhart (interposing). That is what it is.
STOCK EXCHANGE TliACTICES 1855
Mr. Mitchell. Oh, j'es.
Mr. Pecora. I am talking iiom- about the general operations in
Anaconda Copper stock.
Senator Brookhart. Yes.
Mr. Pecora. Now, I believe you testified last year before this com-
mittee that most of those shares were accumulated at prices at par
around $100, and sold at prices around $130. Does that accord with
your recollection? I did not want to go into that.
Mr. Mitchell. I think at the first we did accumulate stock, and
bought it in block for our permanent account. I remember the first
block was 50,000 purchased as a block, and then we accumulated,
through the market, and built up an inventory there, and I should
say our cost on that inventory was something around $100 a share.
Mr. Pecora. And the sales to the public were made at prices rang-
ing about $130 a share ?
Mr. Mitchell. Well, we bought stock from time to time, and I
think that when we made our initial offering to the public it was
made around $120, and it followed the market up and down as we
had stock to offer through our organization.
Mr. Pecora. Now, you, as an officer of the National City Co., ap-
proved of your company selling this Anaconda stock to the public?
Mr. Mitchell. Yes. sir.
INIr. Pecora. You considered it a good investment stock
Mr. Mitchell (interposing). I did.
INIr. Pecora (continuing). I believe, at the time.
Mr. Mitchell. Yes, sir.
Mr. Pecora. And your company was so advising prospective buy-
ers of it?
Mr. Mitchell. Undoubtedly.
Mr. Pecora. You considered the copper industry in a very stable
condition that justified the view that the common stock was a good
investment?
Mr. Mitchell. Yes, sir.
Mr. Pecora. Had you studied the copper industrv at that time,
Mr. Mitchell?
Mr. Mitchell. Oh, yes.
Mr. Pecora. Thoroughly?
Mr. Mitchell. Perhaps" not as thoroughly as someone else might
have studied it. but we made it a subject of intensive study.
Mr. Pecora. Mr. John D. Kyan. who was then chairman of the
board of Anaconda Copper, was also a member of the board of the
National City Co. ?
Mr. Mitchell. Yes, sir.
Mr. Pecora. And he had made a study of it?
]\Ir. Mitchell. Yes, sir.
Mr. Pecora. And ai^proved it ?
Mr. Mitchell. Most decidedly.
Mr. Pecora. Do you know an organization called Copper Ex-
porters, Inc. ?
Mr. Mitchell. Yes, sir.
Mr. Pecora. Were you connected with that ?
Mr. Mitchell. No, sir. • i • »
Mr. Pecora. Was the Anaconda Copper Co. connected with it (
Mr. Mitchell. Yes, sir.
1856 STOCK EXCHANGE PBACTICES
Mr. Pecora. And these subsidiaries were connected with it, nearly
all
jNIr. Mitchell (interjDosing). Several of the large subsidiaries.
Several were not included.
Mr. Pecora. I think the Greene-Cananea was not included.
Mr. Mitchell. I just cannot tell you, but I think there were 1 or 2
that were not.
Mr. Pecora. Now, this Copper Exporters, Inc., was sort of a price-
fixing organization, was it not, for the copper metal ?
Mr. Mitchell. No, sir.
Mr. Pecora. Was it not ?
Mr. Mitchell. No, sir.
Mr. Pecora. Was it not a price-fixing organization for the export
trade?
Mr. Mitchell. Under the — what is the name of that law ?
Mr. Pecora. The Webb-Pomerene law?
Mr. Mitchell. Yes. This is what is known as a Webb corporation.
Mr. Pecora. Yes.
Mr. Mitchell. Formed with the full knowledge and consent of
the Government and the operations were constantly a matter of
open knowledge to the authorities, to the Washington authorities.
It was an agency formed in order that these American copper ex-
porters could unite with respect to the foreign market
Mr. Pecor.\ (interposing). That is just what I said.
Mr. Mitchell (continuing). And not compete with one another,
but as a unit group face the foreign market, which is just what the
Webb-Pomerene law had in contemplation.
Mr. Pecora. In other words, this organization called Copper Ex-
porters (Inc.) was avowedly designed to enable the domestic copper
producing companies that were represented in the organization to
avoid competition with one another in the export trade of the copper
metal.
Mr. Mitchell. Yes, sir.
Senator Brookhart. Were all the copper companies in that ?
Mr. Mitchell. Practically all the American companies were in it.
Senator Brookhart. And by being combined in that way it gave
you more power to ask and secure a price on the foreign market?
Mr. Mitchell. Yes ; it made the foreign market a place where we
could market in an orderly way.
Senator Brookhart. Do you not think that sort of an organization
would improve farm prices?
Mr. Mitchell. I think we ought to have a lot more of them, Sen-
ator Brookhart.
Senator Fletcher. It enabled the corporation to be exempt from
antitrust laws?
Mr. Mitchell. I beg your pardon ?
Senator Fletcher. It enabled the corporation to be exempt from
antitrust laws?
Mr. Mitchell. That is what the Webb-Pomerene bill did.
Mr. Pecora. To that extent this organization called Copper Ex-
porters (Inc.), had a very definite control over the price of copper
for the export trade?
Mr. Mitchell. Quite so.
STOCK EXCHANGE PRACTICES 1857
Mr. Pecora. And do you think that that power which it had was
reflected in the ability to peg the price for the copper metal even
for domestic use or domestic sales?
Mr. MiTciTELi,. No, sir.
Mr. Pecora. The office of Copper Exporters (Inc.) was in the same
building as the Anaconda Copper Co. offices'^
Mr. Mitchell. I do not know.
Mr. Pecora. Twenty-tive Broadway?
Mr. Mitchell. Twenty-five Broadway is the building where Ana-
conda offices are located. I was never in the offices of Copper Ex-
porters (Inc.).
Mr. Pecora. Do you know of the action taken by Copper Ex-
porters (Inc.), in the latter part of the year 1928 with respect to the
making of a world-wide announcement concerning the condition of
the copper industry at that time ?
Mr. Mitchell. No.
Mr. Pecora. That never came to your knowledge or notice?
Mr. Mitchell. No ; not that I recall.
Mr. Pecora. You made a study of the copper industry for the pur-
pose of enabling you to determine whether or not the common stock
of the Anaconda Copper Co., was a good investment security for
your company to sell to the public ?
Mr. Mitchell. The study was made in the office; yes.
IMr. Pecora. Now, when you say it was made in the office, do you
mean that some one other than yourself made it?
Mr. Mitchell. Oh, yes; I mean that we had the benefit of the
judgment of the grouiD.
Mr. Pecora. Did any member of your group call to your attention
at the time the officers of the National City Co. were discussing the
advisability of offering Anaconda Copper common stock to the jiub-
lic, or ever say anything about this pronouncement of October 29,
1928, of the Copper Exporters (Inc.) ?
Mr. Mitchell. Not that I recall, Mr. Pecora.
Mr. Pecora. Let me read to you a document that I have, and that
is over the signature of Mr. K. K. Eckert, manager of Copper Ex-
porters (Inc.), and addressed to Chadbourne, Stanchfield & Levy,
25 Broadway, New York City [reading] :
Gentlemen : The following Is a true and accurate copy of the minutes of the
meeting of the board of directors of Copper Exporters (Inc.) of October
29, 1928:
" In view of the continued exceptional demand for copper, the great volume
of sales of Copper Exporters (Inc.) during the current and past month, and
the belief that buyers are contracting in excess of tlieir requirements, thereby
creating a condition that might lead to an unstable and artificial situation in
the industry, the following statement was authorized:
" Directors of Copper Exporters ( Inc. ) authorized the following statements :
"The urgent demand for copper has forced the Copper Exporters (Inc.)
to raise the price of copper for export to IGV-t cents c. i. f. European ports. In
the opinion of the producers and refiners forming the membership of Copper
Exporters (Inc.) consumers are buying in excess of actual requirements,
thereby creating the danger of a runaway market; they believe that the in-
creased mine production (September 7,000 tons over August and 20,000 tons over
January) will be sufficient to satisfy any reasonable demand.
" Unfilled orders on the books of producers and refiners, as shown by avail-
able statistics, were 353,000 tons at the end of September as compared witn
257,000 at the end of August and have undoubtedly been further increased
•during this month.
1858 STOCK EXCHANGE PRACTICES
" It is believed that if buyers would confine their purchases to actual i fquire-
ments, the situation should be relieved by increased mine production coming
upon the market.
" The secretary was directed to cable this statement to Brussels with
the request that they issue it to the press."
Yoli never heard of that before?
Mr. Mitchell. No; this is the first time I ever heard that letter,
or saw it.
Mr. Pecora. I ask that this be marked, Mr. Chairman. It has al-
ready been s^jread on the record by my reading it.
(The letter, on the letterhead of Copper Exporters (Inc.), 25
Broadway, New York, dated Februarj' 6, 1933, addressed to Chad-
bourne, Stanchfield & Levy, 25 Broadway, New York City, signed
by R. E. Eckert, manager, was marked " Mitchell Exhibit 10," and
is in the files of the committee.)
Senator Townsend. Did Copper Exporters (Inc.) get any profit
by buying up the coi^per, or by payment of the companies that were
a part of the organization?
Mr. Mitchell. Senator Townsend, I do not personally know. I
never had anything to do with it. It was a joint venture of all of
those companies, and this company, itself, never made any money
except for the benefit of its own shareholders and those interested,
who were the copi^er companies.
Senator Townsend. Well, it was a joint venture for some specific
purpose, of course.
Mr. Mitchell. It was a joint venture in order to join the Ameri-
can producers as they faced the export market, so as to avoid a
competition as between American consumers with the foreign
market.
Mr. Pecora. As I understand it. Senator, it was simply an organi-
zation, around the council table of which sat the representatives of
the big copper producing companies here, and through the medium
of which they reached understandings in regard to the prices at
which they would sell copper to the export trade. In other words,
a pi'ice-fixing organization with the permission of the Webb-Pom-
erene Act to enable them to eliminate competition and control prices
of copper for the exjiort trade. That is correct, is it not, Mr.
Mitchell?
Mr. Mitchell. I think that is a fair statement.
Senator Brookhart. What effect did that have on the domestic
prices ?
Mr. Mitchell. I do not think it had any effect at all on the do-
mestic prices. Senator.
The Chairman. What effect did it have on the foreign prices?
Mr. Mitchell. It stabilized the i^rices.
The Chairman. Those people joining controlled the foreign
market ?
Mr. Mitchell. They met alwaj's the competition of the foreign
producers wherever they were. It unified the American producers.
Mr. Pecora. It eliminated competition ?
Mr. Mitchell. It unified the producers.
Mr. Pecora. It unified them bj^ eliminating competition ?
Mr. Mitchell. Yes, sir.
Senator Bkookhaet. How many producers were selling abroad
before this organization was formed ?
STOCK EXCHANGE PRACTICES 1859
Mr. Mitchell. I could not tell you exactly, but my recollection
is there were possibly 35.
Senator Brookhart. About as many as there are cotton exporters
and competing with each other?
Mr. Mitchell. Yes, sir.
The Chairman. Mr. ISIitchell, it had the effect of raising and get-
ting a better price for the foreign metal, did it not ?
Mr. Mitchell. Well, it had the effect of eliminating what might
have been a destructive competition among American interests if
they went into the export trade, Senator.
The Chairman. And that thing which you call elimination of
destructive competition raised the price?
Mr. Mitchell. Yes : I think so.
The Chairman. In other words, it raised the price in foreign
lands ? It must have, if it had the effect that you said it did.
Mr. Mitchell. These latter evidences are the reverse of this, it
seems to me. In other words, if these consumers had been allowed
to go on and take copper far in excess of their requirements and
there had not been a set price put on it by this combination the
American price might have advanced rather than gone down.
The Chairman. We are going afield now.
Mr. Mitchell. Yes.
The Chairman. The purpose was to eliminate destructive
competition ?
Mr. Mitchell. Yes, sir.
The Chairman. Which would have brought it to a lower price ?
Mr. Mitchell. Yes; probably would.
The Chairman. Therefore, it was for the purpose of getting a
higher price, which you admit they got.
Mr. Mitchell. Yes, sir.
The Chairman. Now did it not also have the effect of giving a
somewhat higher level in the United States, as well as outside?
Mr. Mitchell. I expect if you had a level on the market you
would get a steady and better condition for the amount left for dis-
tribution and consumiDtion here.
The Chairman. What one would call a better condition, and an-
other man might call worse?
Mr. Mitchell. Yes, sir.
The Chairman. Is that not correct?
Mr. Mitchell. Yes, sir.
The Chairman. The buyer might not call it a good condition, and
the seller might think it was a good condition?
Mr. Mitchell. Yes, sir.
The Chairman. The buyer in this case was the American public.
Mr. Mitchell. The great advantage of this sort of thing is that
you bring competitors to where they are forced to know one another,
at least as they sit around the table. They would not have any
commune regarding the domestic situation at all. But here is a
point where they did reach
The Chairman (interposing). I think I understand that fully.
You have answered it well. In other words, I think we get your
idea of it.
Now can you describe what this word "Anaconda " means today ?
What does it include; what properties?
1860 STOCK EXCHANGE PRACTICES
Mr. Mitchell. It includes the Anaconda properties in Montana,
especially at Butte.
The Chaikmen. Yes.
Mr. Mitchell. It includes, I think, a principal ownership— not
complete — of Inspiration Copper.
The Chairman. Wliere is that located?
Mr. Pecoka. The Senator wants to know where the mines are
located which are owned by the Anaconda Mining Co. Is that it?
The Chairman. Yes ; where is that located i
Senator Fletcher. The Greene-Cananea is in Mexico.
Mr. Mitchell. Well, the principal properties of tlie Anaconda are
the group in Butte; the Inspiration Co., which is in Arizona; the
Greene-Cananea Co., which is in Mexico, and the Chile and Andes
Cos., which are in Chile.
The Chairman. Have you property in Canada and Alaska, too?
Mr. Mitchell. No; neither one.
The Chairman. Now what percentage of the production was this
when these were taken over, which are the big ones?
Mr. Mitchell. I thought your question had to do with where they
produced copper.
The Chahuhan. Yes.
Mr. Mitchell. Of course, they have a very large fabricating com-
pany
The Chairman (interposing). No; you understood my question.
Mr. Mitchell. I thought I did.
The Chairman. At the time they were taken over, what was the
production, say, at those mines, in j^ercentage, or any other way?
Mr. Mitchell. I would have to scratch my memory. I would be
glad to get those figures up for you and give them to you.
The Chairman. Could you confer with your associates who are
sitting here ? I want to get at the percentage that was produced by
those companies here or abroad.
Mr. Pecora. I might say. Senator, that the late John D. Ryan
told me, just a week or two before his recent death, that the Ana-
conda Copper Mining companies controlled or produced about 55
percent of the copper of this country and about 22 percent of the
copper of the world.
The Chairman. Well, with that statement, I am willing to pass
it over, Mr. Mitchell.
Mr. Mitchell. Yes ; it is a very large production. I am sure that
I covered that in mj' previous testimony.
The Chairman. The witness has repeatedly stated that copper
produced in Mexico is jiroduced so much cheaper than by any of the
other companies; for instance, the Mexican comiDany, the Greene-
Cananea Co., has the lowest production cost. What is the principal
reason for that ? There may be more than one.
Mr. Mitchell. Principally, at the moment, because they are work-
ing on high-grade ores. That is a pocket property. The Anaconda,
you know, is a deep-vein property. This is a different kind of
property.
The Chairman. What is the difference in wages at the Anaconda
(Mont.) property and the Anaconda property, the Greene-Cananea
projjerty in Mexico?
STOCK EXCHANGE PRACTICES 1861
Mr. Mitchell. I can not give you those figures.
The Chairman. AVho is there in your group that knows that?
Mr. Mitchell. I do not know anyone in my group knows it in
detail.
Senator Fletcher. Generallj', the labor cost in Mexico is lower?
Mr. Mitchell. Oh, generallj^, the labor cost in Mexico is lower.
In Chile the labor cost is very much cheaper ; very much, indeed.
Mr. Pecora. May I ask the name of the gentleman who just gave,
you some information?
Mr. Mitchell. Judge Covington.
Mr. Pecora. Is he connected with any of the copper companies,
the Anaconda?
Judge Covington. I happen to know considerable about copjjer.
Mr. Pecora. Are j'ou connected with the Anaconda?
Judge Covington. No; not in the slightest degree.
Senator Fletcher. Are any of these mines closed down ?
Mr. Mitchell. They are not closed down, but ought to be. Senator.
In other words, copper at this moment is selling very low. It is
lower than it has been in the history of the decades, and these mines
are constantly producing. They are kept open simply to give labor
a chance to work. They are being operated at a loss day by day,
and the copiDer industry would be very much better, and the com-
panies themselves would be very much better off if the mines could
be definitely closed for a period.
The Chairman. "What percentage of the men have been laid off at
the Anaconda?
Mr. Mitchell. I could not give it to you on a percentage basis;
but a good many men have been laid off, and they are dividing the
work. Senator ; they are giving part time to a great many men.
The Chairman. Well, is your pay roll one-fifth of what it was
when you were running full blast?
Mr. Mitchell. No; I would not say so.
The Chairman. One tenth?
Mr. Mitchell. Well, you are getting down to a figure that one
of the management would have to give.
The Chairman. That is all right. In the Greene-Cananea Co.,
what percentage of the men have you laid off thei'e \
Mr. Mitchell. I think there— the operation is not as great as
it was. I cannot give you the figures.
The Chairman. That is running iDretty nearlv full blast, is it
not?
Mr. Mitchell. Oh. no: it is not running full blast.
The Chairman. How about the Inspiration?
Mr. Mitchell. That is in the same category as Butte.
Senator Brookhart. Now the principal reasons the demand for
copper has fallen off is that there are about 35.000.000 people on
the farms that cannot buy anything at present prices; is that true*
Mr. Mitchell. Well, they are not only on the farms. I am sorry
to sa3^
Senator Brookhart. But if the farmers could buy they would
put these people to work, would they not, not only in copper, but
many other things ?
Mr. Mitchell. Yes, sir.
1862 STOCK EXCHANGE PRACTICES
Senator Brookhart. These 12,000,000 people who are out of jobs
cannot buy anything either, and that is what is deepening the de-
pression all around the ring.
Mr. Mitchell. That is quite true.
Senator Fletcher. The Anaconda stock is now about $7 a share ?
Mr. Mitchell. I do not know what it is.
Mr. Pecora. About seven.
Mr. Mitchell. It has been running between 7 and 10, something
of that sort.
Senator Fletcher. At the peak it was 170 ?
Mr. Mitchell. Not far from that, according to my recollection.
Very high.
Mr. Pecora. Now when this study was made of the copper in-
dustry by officers of the National City Co. which led to their decision
to accumulate large blocks of Anaconda Copper common stock and
sell it to the American investing public, was it learned that in March
of 1929 the price of copper, the metal, was 24 cents a pound, and that
within a month thereafter it dropped to 18 cents a pound?
Mr. Mitchell. Of course, the facts were known to us.
Mr. Pecora. Do you recall that particular fact?
Mr. MrrcHELL. AVell, I know that there was a big rise and subse-
quent dip there. But we never work on the top bulge price of that
sort. We would work on a basis of long-term average.
Mr. Pecora. No; but I mean, was it known to you
Mr. Mitchell (interposing). Oh, yes; of course it was known.
Mr. Pecora. In other words, the fact that the price of copper, the
metal, slumped Z^Vs percent in the world markets within a period of
one month during the spring of 1929 was known to the officers of
your company when they decided, in the early spring of 1929, to sell
Anaconda Copper common stock to the public as an investment
stock?
Mr. Mitchell. If you tell me that you have looked up those rec-
ords of the prices of copper, and that that was the price, I will
accept that. When you say those were the jirices of copper, and
did our people know, of course we knew. But, I repeat, that we were
not recommending Anaconda Copper Co. shares on the basis of
26 cents or an 18-cent price.
Mr. Pecora. You were talking about the profits that would be
earned by Anaconda Copper on the basis of those prices, were
you not?
Mr. Mitchell. We may have been. I do not know what they
were talking about, but from my standpoint I was working on the
basis of long-term averages of the price of copper, to determine the
intrinsic value of those properties.
Mr. Pecora. So the common stock of a company dealing in a
commodity the price of which could slump in the world's market
by one third within a month's period was the kind of stock that
your company, through its officers, marketed as a good sound invest-
ment security?
Mr. Mitchell. Oh, I do not think that had anything to do with
it, Mr. Pecora. If one is working on the basis of a long-term
average, why should one be concerned with violent fluctuations
that are away above the base?
STOCK EXCHANGE PRACTICES 1863
Mr. Pecora. Because it would tend to indicate a tendency to
instability in commodity prices, would it not?
Mr. JMiTCiiELL. Instability at the moment, certainly.
Mr. Pecoea. Well, your decision to sell Anaconda counnon stock
to the public was made very shortly after the fluctuations, and the
price of cojjper had fallen from 24 cents a pound to 18 cents a
pound within a month; is that not so?
Mr. Mitchell. I will take your word for that. It did not influ-
ence my judgment, I can assure j'ou of that.
Senator Brookhart. Were you selling your own stock then?
Mr. Mitchell. Yes, sir.
Senator Brookhart. Had you reached the conclusion that it was
about time to get rid of it; is that the idea?
Mr. Mitchell. That is not the way
Senator Brookhart. That is the way you did it ?
Ivlr. Mitchell. That is not the fair way to do it.
Senator Brookhart. I admit it is not.
Mr. Pecora. Do you know that the copper producing companies
that were centered in Anaconda copper, when the slump of the
price in the metal came, in March and April, 1929, pegged the price
at 18 cents a pound in order to pi'event its slipping further?
Mr. Mitchell. Well, I do not know anything about pegging the
price. I know that the copper companies are free agents within
themselves. The bankers do not control that, and do not control the
price of copper.
Mr. Pecora. No; but the National City Co. made a decision,
based upon a judgment that the common stock of a company dealing
in a commodity which was subject in price to such violent fluctua-
tion, was a good investment stock.
Mr. Mitchell. I think I have answered that.
Mr. Pecora. Yes. Now this stock was sold through the medium
of salesmen?
Mr. Mitchell. Yes, sir.
Mr. Pecora. Making almost house-to-house canvasses for cus-
tomers ?
Mr. Mitchell. Well, we had salesmen located all over this coun-
try and Europe. Large quantities were sold here and in Europe,
and large quantities sold through other investment dealers who
were interested.
Mr. Pecora. But the National City Co. itself had on its pay roll
probably 1,500, or more, salesmen who were confining their selling
activities to this country, did it not?
Mr. Mitchell. Three hundred and fifty salesmen.
Mr. Pecora. Three hundred and fifty salesmen?
Mr. Mitchell. Yes, sir.
Mr. Pecora. In this country?
Mr. Mitchell. Yes, sir.
Mr. Pecora. Is that all it had?
Mr. Mitchell. Yes, sir.
Mr. Pecora. What was its total personnel?
Mr. Mitchell. Total personnel of 1.900.
Mr. Pecora. And of that 1,900, only 300 were salesmen?
Mr. Mitchell. That is correct.
The Chairman. Three hundred and fifty.
1864 STOCK EXCHANGE PKACTICES
Mr. Mitchell. Three hundred and fift}'.
Mr. Pecora. Three hundred and fifty?
Mr. Mitchell. Yes, sir.
Mr. Pecora. What were the others?
Mr. Mitchell. Well, I tried to explain to you yesterday that, just
as in a manufacturing concern, the sales department is just the tail
end of the funnel ; that is where the goods finally leave your plant.
Mr. Pecora. Well, the others were not turning out securities which
were sold by the sales force, were they ?
Mr. Mitchell. Mr. Pecora, a business like the National City Co.
is an institution within itself with buyers, with engineers, with ac-
countants, with a large bookkeeping and clerical force, telephone
operators, telegraph operators, office boys, policemen. You run the
number of your personnel up very rapidly when you
Senator Brookhart (interjDosing). Let me ask you a question
there : How long were you engaged in this operation of selling this
stock ?
Mr. Mitchell. I can not tell you, without referring
Mr. Pecora (interposing). Let me see if I can refresh your recol-
lection.
Mr. Mitchell. Yes, sir.
Mr. Pecora. Was it not from August 6, 1929, to October 1, 1929 ?
Mr. Mitchell. Well, if you have looked it up I will take your
word for it, Mr. Pecora. I could not tell.
Mr. Pecora. Is there any one of your associates that can confirm
that? They seem to nod their heads in approval.
Mr. Mitchell. That is about it.
Mr. Pecora. It was two months?
Mr. Mitchell. Yes, sir.
Senator Brookhart. What did the stock market do during that
operation of selling?
Mr. Mitchell. Wliat were the dates?
Mr. Pecora. August 6, 1929, to October 1, 1929.
Senator Brookhart. Did it go up, or down ?
Mr. Mitchell. Has anybody got a record on it here? I have not.
The Chairman. It was a rising market, was it not?
Mr. Mitchell. I just do not remember.
Mr. Pecora. It reached a high of 178% some time in September,
did it not?
Mr. Mitchell. No; on October 1 — I have got those quotations
in this previous testimony. Those same questions have come up
before.
Mr. Pecora. Not all of them, Mr. Mitchell.
Mr. Mitchell. Let me repeat this (reading) :
The high during the first week in August was 122ii- The high in the second
■week was 123%. The high in the third week was 122%. The high during the
next week was 129. The high during the next week was 133. The high dur-
ing the next week was 133%. The high during the next week was 126%.
And then the question :
And on October 1, when you quit, it was back to 114 again?
That is a question by counsel, and I answered :
One hundred and fourteen low, 117 high.
Mr. Pecora. Yes, sir.
STOCK EXCHANGE PRACTICES 1865
Mr. Mitchell. In other words, during that operation of selling
the price had a comparatively small range and at the close of our
selling was approximately back to where it was when we started.
Mr. Pecora. Mr. Mitchell, in how many different cities did the
National City Co. at that time, that is, in the late summer and early
fall of 1929, maintain branch or district offices?
Mr. Mitchell. Fifty-eight cities.
Mr. Pecora. Were they connected with the head office in New
York by any private wire service?
Mr. Mitchell. Not all of them. Some of them were.
Mr. Pecora. How many private wire services did the National
City Co. maintain at that time between its head offices and its branch
or district offices throughout the country ?
Mr. Mitchell. I think we had a wire up and down the coast,
and a wire across the continent, with loops to Minneapolis and St.
Paul, and so forth. The principal cities of the country were cov-
ered by our offices, and the principal cities were comiected by wire.
Mr. Pecora. A private wire system?
Mr. Mitchell. A private wire system.
Mr. Pecora. What was the extent of it?
Mr. Mitchell. Well, I thought that I had just given that.
Mr. Pecora. I mean, in mileage.
Mr. Mitchell. I think it was 11,000 miles.
Mr. Pecora. Was it 11,300 miles?
Mr. Mitchell. Well, I do not know. The figure given me was
11,000 miles.
Mr. Pecora. Well, the figures I gave you in my questions are
taken from the figures you gave at one of the annual meetings.
Mr. Mitchell. Yes ; anything I said at those meetings I stand by.
Mr. Pecora. Eleven thousand three hundred miles ?
Mr. Mitchell. Yes, sir.
Senator Brookhart. Now that market was booming up about all
the time you were selling that stock, and at the time you got
through it was down again. How do you account for that?
Mr. Mitchell. If you will go back to those very hectic days,
that was a comparatively mild fluctuation that occurred there.
Senator.
Senator Brookhart. Well, did you have any operations on the
stock exchange yourself?
Mr. Mitchell. No; I think not, other than buying stock, which
we were constantly doing. We found the investment demand for
that stock very much greater than we had anticipated when we
started selling.
Senator Brookhart. So you were buying stock on the exchange
at the same time your agencies were selling it?
Mr. Mitchell. That is correct, sir. You see •
Senator Brookhart (interposing). You paid those higher prices
to get that stock you bought ?
Mr. Mitchell. Yes; undoubtedly.
Senator Brookhart. And how much did you buy in that way?
Mr. Mitchell. I cannot say. That has all been in the previous
record of this committee. I could best refer you, if you would take
time. Senator, to read it. I am sorry that you were not present
1866 STOCK EXCHANGE PRACTICES
when J appeared before this committee discussing this Anaconda
situation before the committee.
Senator Brookhart. If you do not remember I will look in the
record.
Mr. Mitchell. Yes, sir.
Senator Brookhart. You did not buy nearly as much as you sold ?
Mr. Mitchell. Oh, yes; we had to. Do you think we sold it
short?
Senator Brookhart. Well, you had the stock of your own to sell
through your agencies, as I understand it.
Mr. Mitchell. "VVe had stock, but that was quickly distributed.
Senator Brookhart. This was a sort of a syndicate operation
then?
Mr. Mitchell. Oh, no, no, no. This was an operation of the
National City Co.
Senator Brookhart. All by yourselves?
Mr. Mitchell. Yes, sir.
Senator Brookhart. A syndicate all by yourselves.
Mr. Mitchell. I refer to that testimony, Senator, and I will just
read these two or three sentences (reading) :
But being bankers for tlie company, even though we promptly sold that
300,000 shares which we owned and had under option, it became our duty, or
so we conceived it, so long as our customers viewed that stock as an invest-
ment stock, to buy in the market and to sell additional shares to them. Which
we did. And thus it came about that we bouglit this very large amount of
stock during August and September and distributed it through our organization.
Senator Walcott. In addition to the 300.000?
Mr. MiTCHEXL. In addition to the 300,000 shares. And we closed the account
early in October.
Senator Brookhart. That does not say how much.
Mr. Mitchell. I think we can probably pick that out.
Senator Fletcher. Mr. Mitchell, yesterday morning I had two
committee engagements and I could not hear your testimony. I
do not want to go over in detail this set-up that you had, but it is
not quite clear in my mind about how the National City Co. was
constituted. As I understand the shares in the National City Co.
were held by three trustees ; they controlled these shares, voted them,
and so forth.
Mr. Mitchell. That is right.
Senator FiiEtcher. They did not have to do actively with the
operation of the company — the trustees?
Mr. Mitchell. No, sir.
Senator Fletcher. Did they elect the officers of the company?
Mr. Mitchell. They elected the directors, and the directors elected
the officers.
Senator Fletcher. I see. And that is the set-up that carries on
the operations of the company, independent of the trustees?
Mr. Mitchell. That is quite correct.
Senator Fletcher. How many directors do you have?
Mr. Mitchell. I think in the company we have nine directors.
Senator Fletcher. And who is the ])resident of that com]5any ?
Mr. Mitchell. Mr. H. B. Baker is the president of the National
City Co.
STOCK EXCHANGE PRACTICES 1867
The Chairman. The committee will recess until 2.30 o'clock this
afternoon. Those under subpcena will be here at that time.
(Whereupon, at 12.50 oVlock p. m., a recess was taken until 2.30
o'clock p. m. of the same clay.)
AFTER RECESS
The subcommittee resumed at 2.30 p. m., on the expiration of the
recess.
The Chairman. The subcommittee will come to order. Who will
you have, Mr. Pecora ?
Mr. Pecoea. Mr. Rentschler. In calling this gentleman now, Mr.
Chairman, it is understood that the examination of Mr. Mitchell
is simply being suspended for the time being. I am calling Mr.
Rentschler out of turn in order to enable him to return to New York,
where he feels he ought to be to-morrow for the purposes of his
bank. Is that correct?
Mr. Rentschler. That is quite correct.
The Chairman. You will stand, hold up your right hand, and be
sworn : You solemnly swear that you will tell the truth, the whole
truth, and nothing but the truth regarding the matter now under
examination bj' this subcommittee, so help you God.
Mr. Rentschler. I do.
The Chairman. You maj' proceed, Mr. Pecora.
TESTIMONY OF GORDON S. RENTSCHLER, PRESIDENT OF THE
NATIONAL CITY BANK, NEW YORK CITY
Mr. Pecora. Mr. Rentschler, will you give your full name, address,
and business or occupation, jDlease?
Mr. Rentschler. Gordon S. Rentschler, New York City
Mr. Pecora (interposing). What is the address?
Mr. Rentschler. 933 Fifth Avenue, New York City. I am presi-
dent of the National City Bank of New York.
Mr. Pecora. How long liave vou been president of the National
City Bank?
Mr. Rentschler. Since April of 1929.
Mr. Pecora. When did you first become connected in any official
capacity with that bank?
Mr. Rentschler. In October of 1923.
Mr. Pecora. In what capacity did you become affiliated with that
bank then ?
Mr. Rentschler. As director.
Mr. Pecora. And did you hold any office in the bank other than
that of director? In other words, did you hold any office in the
bank before you became its president in April of 1929 ?
Mr. Rentschler. Yes, sir; I was a vice president of the bank be-
ginning in January of 1925.
Mr. Pecora. As vice president of the bank at that time were you
also assistant to the president?
Mr. Rentschler. Yes.
Mr. Pecora. And you held the office of vice president and assistant
to the president until you were made president in April of 1929?
119852— 33— PT 6 8
1868 STOCK EXCHAXGE PRACTICES
Mr. Eentschler. Yes, sir.
Mr. Pecoea. Prior to your becoming a vice president and assistant
to the president of the bank in 1925 had you been an officer of any
other bank?
Mr. Rentschler. I had not been.
Mr. Pecoea. What was your business or occupation before you
became a vice president of the National City Bank?
Mr. Rentschlee. I was engaged in manufacturing.
Mr. Pecora. What line?
Mr. Rentschlee. Heavy machinei-y, at Hamilton, Ohio, with the
Hooven, Owens, Rentschler Co., of Hamilton, Ohio.
Mr. Pecora. You are also a director of the bank, of course?
Mr. Rentschler. Yes, sir; I have been a director since 1923.
Mr. Pecora. Do you recall a meeting of the board of directors of
the bank held on or about November 13, 1929, at which certain ac-
tion was taken with respect to setting aside a fund of $2,000,000
or more for the purpose of making loans to the officers of the bank?
Mr. Rentschler. Yes, sir; I recall that meeting.
Mr. Pecora. You were present and took part in the discussion?
Mr. Rentschler. I am quite sure I did.
Mr. Pecora. And the date was November 13, 1929 ?
Mr. Rentschler. I would have to check that before I would be
sure of it.
Mr. Pecoea. At any rate, it was within about a fortnight after
the first big break in the stock market at the end of October?
Mr. Rentschler. Yes, sir.
Mr. Pecoea. Who brought up that matter for discussion or con-
sideration ?
Mr. Rentschlee. I do not recall just what individual brought it
up. It was a matter that liad been discussed by a great many of
the directors informally prior to that meeting. So I would not re-
call exactly as to who brought it up. It might well have been Mr.
Mitchell or myself who initiated the discussion.
Mr. Pecoea. Is it your best recollection that it was either you or
Mr. Mitchell?
Mr. Rentschler. It would be very likely that one or the other of
us would bring it up in the way that we did our business. That
would probably come through the executive committee first, and
then to the board. Yes; I find that it was November 13, 1929, when
this matter came up in the executive committee.
Mr. Pecora. Have you before you now a copy of the resolution
which was adopted by the board at that meeting with respect to this
$2,000,000 fund?
Mr. Rent.schlee. Yes, sir; or rather I have a resolution adojated
by the executive committee, and I think it is probably identical with
the one that was later voted by the board.
Mr. Pecoea. I have before me the minute book of the board meet-
ing of that date. If you will read the resolution you liave I will hold
mine and compare it with yours.
Mr. Rentschlee. It reads:
Resolved, That the proper oflBcers are hereby authorized to advance to Eric
P. Swenson and James H. Perkins, as trustees and not individually, upon
their un.secured note or collateral loan agreement, signed by them as such
trustees without personal responsibility, such sum or sums as such trustees
STOCK EXCHANGE PRACTICES 1869
may call for, not exceeding a total of $2,000,000, and without interest, in order
to enable such trustees to malce loans or advances, either with or without
security as in their complete discretion they may deem proper, to such officers
of the banlv and its affiliate corporations as they may deem proper, for ttie
purpose of making loans to such officers in the present emergency, and thereby
sustaining the morale of the organization.
Mr. Pecora. "Well, that reading corresponds to the resolution em-
bodied in the minute book of the board of directors.
Mr. Rentschler. All right.
Mr. Pecora. Now, as a matter of fact, was not more than
$2,000,000 made available to Mr. Swenson and Mr. Perkins as trus-
tees, for the purpose set forth in the resolution?
Mr. Rentschler. Yes, sir. There were subsequent resolutions that
permitted a total sum of something like $2,366,000 to be so loaned.
Mr. Pecora. As a matter of fact, wasn't it $2,400,000?
Mr. Rentschler. I am trying to find the other resolution. It
might have been. Xo; I do not have that here. If you have that
figure, all right.
Mr. Pecora. Now, the two men named as trustees in this resolu-
tion, Mr. Swenson and Mr. Perkins, were both directors of the
National City Bank, were they not?
Mr. Rentschler. Yes, sir.
Mr. Pecora. Mr. Perkins at the time was also president of the
City Bank Farmers Trust Co.?
Mr. Rentschler. Yes, sir.
Mr. Pecora. Which is the trust affiliate of the National City Bank?
Mr. Rentschler. Yes, sir.
Mr. Pecora. What officers of the National City Bank and of its
affiliates j^articipated in the loans that were made from this fund?
Mr. Rentschler. There were probably 100 different men, men of
various ranks in the organization.
Mr. Pecora. What was the largest amount loaned to any one officer
out of this fund?
Mr. Rentschler. I am sorry, but I have not got that information
here.
Mr. Pecora. Have any of your associates possession of it?
Mr. Rentschler. You, Mr. Pecora, may have it.
Mr. Pecora. I have the working sheets of our accountants. I will
have it looked up. But in the meantime let me ask you: Those loans
were all made without interest, weren't they?
Mr. Rentschler. Yes, sir.
Mr. Pecora. And they were made to those various officers without
security ?
Mr. Rentschler. Some of them with and some without security.
Mr. Pecora. Did any of the officers of the bank who participated
in the distribution of the management funds also participate in the
loans that were made out of this fund?
Mr. Rentschler. I would have to determine that by looking at the
list. But I think there were some. There must have been some.
Mr. Pecora. Have those loans been repaid to the bank?
Mr. Rentschler. Some have and some have not.
Mr. Pecora. What proportion of them have been paid and what
proportion have not been paid?
1870 STOCK EXCHANGE PRACTICES
Mr. Rentschlee. Again, I would have to consult the record.
Mr. Pecora. Will you please do so?
Mr. Rentsciiler. I should say not over 10 per cent, or perhaps not
over 5 per cent has been repaid.
Mr. Pecora. Not over 5 per cent of them have been repaid ?
Mr. Rentsciiler. Yes; I think that is right. Of course, those
loans were closed out as of December 15, 1930.
Mr. Pecora. By that do you mean they were written off and
charged up against undivided profits?
Mr. Rentschler. Some were, and the balance were taken over on
new loans made by the National City Co.
Mr. Pecora. Those were then transferred to the National City Co. ?
Mr. Rentsciiler. That is right.
Mr. Pecora. Is that what you would call a bailing-out process of
the bank as regards the respective loans referred to?
Mr. Rentschler. No. But those loans that were at that time
definitely determined not to be current, or not obligations which
could be paid back within six months or a year, and therefore not
a proper bank asset, were turned over to the National City Co. where
thev could be on a long-time basis.
Mr. Pecora. Well, would you say that the bank was bailed out of
those loans under that process?
Mr. Rentschler. Whatever word you wish to use. The bank was
relieved of those loans ; yes, sir.
Mr. Pecora. You have heard that term used before, " bailed out,"
haven't you?
Mr. Rentschler. Yes, sir.
Mr. Pecora. Haven't you heard that term used ?
Mr. Rentschler. Oh, yes.
Mr. Pecora. It is used in the common parlance of Wall Street,
isn't it?
Mr. Rentschler. Well, I suppose so. But I do not use it.
Mr. Pecora. You think it has a harsh sound to the ear, is that it?
(Witness does not respond but simply smiles.)
Mr. Pecora. Well, do j^ou know any politer term for it?
Mr. Rentschler. Well, those loans were taken over by the
National City Co., is the answer to j'our question.
Mr. Pecora. Were any loans out of this fund which were made
to those officers who had participated in the management fund dis-
tribution, repaid out of any interest of those officers in the manage-
ment fund?
Mr. Rentschler. Well, there has been practically no management
fund since 1929. There was quite a small management fund, if I
recall it correctly, and there I would have to get the exact figures,
in the bank at the end of 1929, but there has been practically
nothing since then.
Mr. Pecora. In the resolution which sets forth the purpose for
which this fund of $2,000,000 was set aside, it is stated that this
was clone —
for the purpose of protecting such officers In the present emergency, and
thereby sustaining the morale of the organization.
Just what did you mean by that?
STOCK EXCHANGE PR.\CTICES 1871
Mr. Rentschler. That was the crash of the market of 1929, and
the i-esultant confusion that came from it, which at that time was
looked upon as a crisis and an emergency.
Mr. Pecoea. That is, a personal emergency to those officers?
Mr. Rentschler. Yes, sir.
Mr. Pecora. Who benefited by borrowings from this fund because
of their own commitments in the stock market; is that right?
Mr. Rentschler. Well, they may have been bank loans or otlier
market commitments, or personal obligations, which when incurred
were incurred on the basis of a very reasonable margin, and on the
basis where they could be looked upon as very safe borrowings.
Mr. Pecora. Now, at the time when the National City Bank set
aside this fund of $2,400,000 to relieve those officers in their emer-
gency, was the bank selling out other customers, not officers of the
bank, who had loans at the bank secured by collateral ?
Mr. Rentschler. That may well be, because it is the absolute rule
of the bank to preserve its assets that are secured in any manner.
Mr. Pecora. Did you consider that the bank was taking a step to
preserve $2,400,000 of its assets when it made that sum available
to officers who have not yet repaid 5 percent of it to the bank?
Mr. Rentschler. Yes. At the time when this loan was made it
was made to men who had up to that time earning power and who
had assets in one form or another, that made it look like their obli-
gations were good obligations to take. But now taking a hind look
at it, it is a different picture.
Mr. Pecora. In the three years or more which have elapsed since
that time the responsibility of those men to the bank has not proven
as good as you thought it would in November of 1929?
Mr. Rentschler. As a financial responsibility it has not proven
so good, because their things have shrunk like everybody else's.
Mr. Pecora. Most of these officers are still officers of the bank i
Mr. Rentschler. A great anany of them are.
Mr. Pecora. And of the affiliated companies ?
Mr. Rentschler. Yes, sir.
Mr. Pecora. Did the bank have any legal opinion from anybody
concerning the validity of those loans?
Mr. Rentschler. Yes. This was done under the guidance of the
bank's counsel.
Mr. Pecora. Who?
Mr. Rentschler. Shearman and St-erling.
Mr. Pecora. Did they submit a written opinion as to its legality
to the bank's officers, supj^orting this action ?
Mr. Rentschler. I do not think so. It is not a regular custom
usually for us to receive written opinions from them. But they were
closely in touch with this situation.
Mr. PECORiV. As the president of the National City Bank are you
familiar with the essential provisions of the national banking act?
Mr. Rentschler. I think so.
Mr. Pecora. Well, you are not guessing now, are you? Do you
feel that you are familiar with the main features of the national
banking act?
Mr. Rentschler. Yes, sir.
1872 STOCK EXCHANGE PRACTICES
Mr. Pecora. Do you know of anj' pi'ovision of the national banking
act which justifies loans that ai'e unsecured to officers?
Mr. Rextschler. Well, these loans were made to the trustees.
That was the way this matter was arranged, and we think it is en-
tirely within the provisions of the national banking act.
Mr. Pecoka. Do you think the adoption of the trustee form of
these loans took it out of the operation of the provisions of the
national banking act?
Mr. Rentschler. No. It could be considered a straight loan
and then be a proper loan.
Mr. Pecora. And which was a loan to its officei's.
Mr. Rentschler. Quite so.
Mr. Pecora. We might say that two of the officers were designated
as trustees for the other officers who were to benefit by those loans ?
Mr. Rentschler. Quite right.
Mr. Pecora. When were those loans taken out of the National
City Bank and transferred to the National City Co. ?
Mr. Rentschler. In December of 1930.
Mr. Pecora. Some time in 1927 a stock-purchase plan under which
officers and employees of the National City Bank were permitted
to subscribe for shares of the capital stock of the bank was put into
effect, wasn't it?
Mr. Rentschler. A stock-i3urchase plan in 1927?
Mr. Pecora. Yes.
Mr. Rentschler. Yes; February 15, 1927.
Mr. Pecora. And a modification of that plan was put into effect
in December of 1929, wasn't it?
]Mr. Rentschler. Yes, sir. And I think I have a memorandum
I could refresh my memory from and give you what you want.
Mr. Pecora. Do you need that memorandum in order to refresh
your recollection ?
Mr. Rentschler. Yes.
Mr. Pecora. If you do I will say there is no objection, but I want
the record to show it if you do.
Mr. Rentschler. Yes, sir ; I should like to use it.
Mr. Pecora. Did you prepare that niemorandum ?
Mr. Rentschler. No. It was prepared by one of my associates.
Mr. Pecora. Which one?
Mr. Rentschler. Mr. Lancaster.
Mr. Pecora. And he is the cashier of the bank?
Mr. Rentschi-er. This is a memorandum by Mr. Lancaster, one
of our attorneys.
Mr. Pecora. Is he an officer of the bank?
Mr. Rentschler. No, sir. He is an attorney associated with
Shearman & Sterling.
l^f. Pecora. Now, under the modification of the stock-purchase
that pT'^^*^^^ ^^^® P"^ "^^*^ effect in December of 1929, the scope of
pjgygggan or the benefits of it were enlarged so as to permit em-
to clerl- °^ ^^^^ bank and of its affiliates, in the lower grades, down
j^j. is, to participate?
j^Ij,' Rentschler. Quite so.
1929 -^Pecora. The general feature of the plan was, as modified in
^"^ " To enable those employees of the bank and of its affiliates to
STOCK EXCHANGE PRACTICES 1873
subscribe for and purcliase shares of the capital stock of the bank
and to pay for them over a 4-year period in instaUments?
Mr. Kentsciiler. Yes, sir.
Mr. Pecora. With interest charged against tliem on the unpaid
balances?
Mr. Rentschler. Yes, sir.
Mr. Pecora. Through the 4-year period?
Mr. Eentschler. "Yes, sir.
Mr. Pecora. How many shares of the bank's stock were disposed
of under this stock purchase arrangement on the instaUment jjlan?
Mr. Rentschler. Something between 40,000 and 50,000 shares. I
think I can get it exactly for you.
Mr. Pecora. Wasn't it more than 100,000 shares?
Mr. Rentschler. No. Well, there were more than 100,000 shares
apiilied for but not allotted.
Mr. Pecora. Were not more than 100,000 shares subscribed for?
Mr. Rentschler. They were subscribed for but not allotted. I do
not remember now the total of the subscriptions, but I can get it
for you.
Mr. Pecora. Weren't they all allotted but many of the allotments
thereafter canceled ?
Mr. Rentschler. No, sir.
Mr. Pecora. Are you sure of that?
Mr. Rentschler. I am very sui-e of it, because those subscrip-
tions were all cut down on the basis of what we thought at that
time would be a very prudent size subscription for these various
employees to carry.
Mr. Pecora. Let us see about that. Don't you recall that some
time after December of 1929, at a meeting of the board of directors
of the bank, the chairman, Mr. Mitchell, made a statement to the
eifect that the shares had been oversubscribed — that more than
100.000 shares had been subscribed for?
Mr. Rentschler. Yes; but
Mr. Pecora (interposing). Pardon me until I conclude my ques-
tion.
Mr. Rentschler. Pardon me.
Mr. Pecora. And that it was necessary to allot another 10,000
shares under the plan in order to take care of all the subscriptions?
Do you recall that?
Mr. Rentschler. Yes; that is quite true, that there were 10,000
extra shares provided, but the whole 100,000 shares were not al-
lotted.
Mr. Pecora. If the 100,000 shares were not allotted, why was it
necessai\y to allot another 10,000 shares to take care of subscriptions?
Mr. Rentschler. Because we had only provided in the first place
a smaller number of shares, either 40.000 or 50,000 shares. But if
you will give me an opportunity to go over this memorandum for a
minute I think I can give that information to you absolutely exactly.
Mr. Pecora. All right.
Mr. Rentschler. There was a total number of shares acquired by
the stock-purchase plan of 50,000 which were offered to the employees
for subscription. But there were subscriptions from the employees
of 100,000 shares. And I do not see here just what that final allot-
1874 STOCK EXCHANGE PRACTICES
merit was, but I know it was not in excess of 50,000 shares, and
possibly an additional 10,000 shares.
Mr. Pecora. Do you think if you conferred with some of your
associates here you miejlit get more specific information on that?
Mr. Kentschler. Yes. Here it is. There were total allotments
of 60,000 shares.
Mr. Pecora. "^Vliat were the total subscriptions?
Mr. Kentschler. Over 100,000 shares. But we provided 50,000
shares before subscriptions were offered, and then it was necessary
to provide 10,000 additional shares to take care of the 60,000 shares.
Mr. Pecora. At what price was the capital stock of the National
City Bank made available to its employees under this installment
purchase plan?
Mr. Rentschler. At $200 a share, and $220 a share.
Mr. Pecora. And that was after the crash in October and Novem-
ber of 1929?
Mr. Rentschler. That is right. This was in December of 1929.
Mr. Pecora. And the installment payments required to be made
by the employees under this stock purchase plan were deducted from
their monthly salary checks?
Mr. Rentschler. Quite right.
Mr. Pecora. Are employees still being held to the purchase price
for their stock?
Mr. Rentschler. Yes, sir ; they are still paying on these amounts.
Mr. PecorjV. What is the market for National Citv Bank stock
now
Mr. Rentschler. About $40 a share.
Mr. Pecora. It has been below $100 a share for the greater part
of the time since this stock purchase plan was effected in December
of 1929, hasn't it?
Mr. Rentschler. No. During 1930 it stood above $100 a share,
and since then I think it has been below $100 a share the most of the
time.
Mr. Pecora. It has gone down to as low as $25 a share, hasn't it?
Mr. Rentschler. I think so.
Mr. Pecora. And the National City Bank has not done anything
to sustain the morale of its employees with regard to those stock
commitments of theirs under this plan, has it?
Mr. Rentschler. I think the employees are, far and wide, entirely
well satisfied with the fact of their part in this plan. I think from
the standpoint of the morale, Mr. Pecora. well, I doubt very much
if there is an organization in this country where the morale has kept
as strong and fine as in this institution.
Mr. Pecora. As a matter of fact, after paying their installments
as they have fallen due since December of 19*29 to date, most of the
employees who subscribed for stock under this installment plan still
owe more than the stock is worth in the market ; isn't that so ?
Mr. Rentschler. Yes, sir; more than the market value of the
stock to-day.
Mr. Pecora. And they are still content to pay it?
Mr. Rentschler. Right.
Mr. Pecora. And the only way they could be relieved of payments
is b}'^ resigning their positions; isn't that so?
STOCK EXCHANGE PR.\CTICES 1875
Mr. Rentschler. Yes.
Mr. Pecoka. Now, as a matter of fact the morale of the officers
in the emergency that confronted them in November of 1929 because
of the stock market crash was due in large part to their own commit-
ments for shares of stock of the bank; isn't that so?
Mr. IIextschlek. Quite right — oh, I beg pardon. I answered that
question too quickly. It is due to their commitments for various
things. It may have been bank stock or for their houses or for
something else.
Mr. Pecora. Don't you know it was principally commitments in
the stock of the bank?
Mr. Rentschler. I think that was the principal item, perhaps;
yes, sir.
Mr. Pecora. You Ivuow that to be a fact, don't you I
Mr. Rentschler. I liave not been over all these loans enough
to say.
Mr. Pecora. Isn't that a fact which has been called to your atten-
tion as the president of the bank, through the examinations of the
bank?
Mr. Rentschler. Yes. I think you are probabW correct, that a
majoritj' of it represents stock ; yes.
Mr. Pecora. Now, let us get back to the identity of the officers who
received the largest loans
Mr. Rentschler (interposing). In passing, I should like, if I may,
to add to the statement about the stock-purchase plan and the reason
I think the employees are so well satisfied with what happened, that
this whole idea came from a committee of 13, which is a committee
annually elected by the various departments of the bank and which
represents the employees of the bank in dealing with the officers.
This was their plan and suggestion. They pressed it very definitely
as an opportunity, as they saw it. to get a bigger part in the bank.
And at that time they stood ready to be committed to twice the
amount that they are actually committed to at the present time.
Mr. Pecora. "Wliich officer of the bank received the largest indi-
vidual loan?
Mr. Rentschler. You have the record there, haven't you?
Mr. Pecora. Is there a man in your organization named Barrett,
a vice president?
Mr. Rentschler. Yes. sir.
Mr. Pecora. Do you Icnow that he received a loan originally of
$260,000 out of this fund, and thereafter two additional loans for
$10,000 and $26,000. respectively ?
Mr. Rentschler. Yes. sir: if you have that record there. I will
sav it is correct.
Mr. Pecora. That would make a total of $296,000?
Mr. Rentschler. Correct.
Mr. Pecora. Do you know how much of that loan he has paid back?
Mr. Rentschler. No ; I do not.
Mr. Pecora. Wasn't it $11,000?
Mr. Rentschler. I haven't it here in my records. If you have it
there, all right.
Mr. Pecora. Consult your own records.
Mr. Rentschler. I have not a record of that.
1876 STOCK EXCHANGE PRACTICES
Mr. Pecora. Somebody in your group must have a record of that.
Mr. Rentschler. My associate says he gave these records to Mr.
Pecora and we Jiave none here.
Mr. Pecora. We did not take your records. We made notations
from your records.
Mr. Rentschler. Yes, sir ; but you have a copy.
Mr. Pecora. Now, do you recall what was done with the remaining
$285,000 of the loan made to Mr. Barrett out of this fund ?
Mr. Rentschler. No; unless that was taken over by the National
City Co. in December of 1930. If you have the record and if I may
use that I will be glad to testify from it.
Mr. Pecora. According to the records made by our accountants
from your records.
Mr. Rentschler. All right.
Mr. Pecor.^. The unpaid balance of $285,000 was written down to
$65,000 by the National City Co.
Mr. Rentschler. Yes; and is an obligation, of course, still re-
tained.
Mr. Pecora. What was that?
Mr. Rentschler. Is an obligation, of course, still retained.
Mr. Pecora. He has not been required to make any payments on
account out of his salary as an officer, has he ?
Mr. Rentschler. That, again, I cannot answer.
Mr. Pecora. Do you think that to have done so might have im-
paired his morale?
Mr. Rentschler. [Witness smiles without replying.]
Mr. Pecora. I am asking that question seriously, Mr. Rentschler.
Mr. Rentschler. No. I do not know what other obligations he
might be paying on. That would have to depend entirely on the
conditions in order to give you a frank and complete answer as to
his individual situation, of which I am not entirely familiar.
Mr. Pecora. Who is the officer who received the next largest loan?
Mr. Rent.schler. I will be glad if you will tell me.
Mr. Pecora. Was it Mr. Lee Olwell ?
Mr. Rentschij:r. If j^our records show it.
Mr. Pecora. That is what our record shows. That is, our nota-
tions from your records.
Mr. Rentschler. All right.
Mr. Pecora. They show that he received $175,000 originally and
then an additional amount of $170,272, making a total of $345,272,
and that he has paid nothing back on account. Does that accord
with your recollection?
Mr. Rentschler. Yes.
Mr. Pecora. And that loan account of $345,000 was written off to
$200,000 by the National City Co. after the transference of the loan
to that company ?
Mr. Rentschler. Yes; that is in accord with my recollection.
Mr. Pecora. He is no longer an officer of the bank ?
Mr. Rentschler. No ; he is no longer an officer of the bank.
Mr. Pecora. Have any proceedings been taken to enforce that
obligation.
Mr. Rentschler. No, sir.
Mr. Pecora. Do you think it was necessary to sustain the morale
of the officers of vour organization in this fashion, in view of the
STOCK EXCHANGE PRACTICES 1877
fact that many of those officers had been permitted to participate in
handsome bonuses out of the management fund ?
Mr. Rentschxer. Well, I can answer that by saying that at the
time we were dealing with this situation, in October of 1929, it was
absolutely essential for the good of the bank and for the good of the
enormous number of contacts that we had that every officer and
every employee of that organization should be functioning at his
very best, entirely leaving aside any of his personal interests. And
I think the answer as to whether or not it was wise to do it is defi-
nitely shown in the way that those men, officers, and on down to the
most casual employees, paid, day in and day out, did their job. And
from that standpoint I will therefore answer your question yes.
Mr. Pecora. The morale of the employees has been sustained with-
out relieving them of the burden of paying several times more than
the market price of the stock even to-day.
Mr. Rentschuer. The officers are a part of this plan just as much
as the employees; I mean the officers just as much in proportion. A
great many of the officers are in the stock-purchase plan and have
had large amounts of the .stock, and have exactly the same relative
position to deal with as the employees.
Mr. Pecora. But the employee was not given the benefit of un-
secured loans, borrowed with no interest, to tide him over the emer-
gency, in order to sustain his morale, was he?
Mr. Rentschler. Well, I think the answer there is that the morale
of our employees has been sustained, and we have been very careful
to see that it is done.
Mr. Pecora. Not by relieving them of the burden of these sub-
scriptions or commitments, however.
Mr. Rentschler. No.
Mr. Pecora. And you admit it was necessary to do that in order
to sustain the morale of the officers.
Mr. Rentschler. We did not relieve the officers of any of their
stock purchase plan commitments. They were all treated exactly
alike.
Mr. Pecora. But the officers were relieved of their commitments,
outside of the stock purchase plan, to the extent of $2,4:00,000, which
the bank is still out.
Mr. Rentschler. That is right.
Mr. Pecora. Now, as of February of this year do you know how
much is due from employees under this installment stock purchase
plan?
Mr. Rentschler. Let me see if I have it here. No ; I haven't got
that figure. If your accountants have it I will be glad to testify
from their transcript.
Mr. Pecora. I understand the amount due from employees as of
Februarj^ 18, 1933, according to an examination of your records by
our accountants, is $5,303,276.96.
Mr. Rentschler. All right.
Mr. Pecora. What was the total amount represented by the sub-
scriptions of employees under this stock purchase plan as modified
in December of 1929 ?
Mr. Rentschler. Originally about $12,000,000.
Mr. Pecora. So the employees have paid subscriptions down to
date without having had any of their subscriptions marked off?
1878 STOCK EXCHANGE PRACTICES
Mr. Rentschler. Mr. Pecora, let me correct you there : The stock
purchase plan is composed of officers and employees, of which about
20,000 shares have been subscribed for by employees without officer
title, and the other is subscribed for by officers with title, and that
burden is carred in that fashion.
Mr. Pecora. By employees and officers alike?
]\Ir. Rentschler. Yes ; both alike.
Senator Fletcher. How many shares altogether?
Mr. Rentschler. Sixty thousand shares altogether.
Senator Fletcher. And the employees had 20,000 shares ?
Mr. Rentschler. Yes ; about 20,000 shares.
Mr. Pecora. Now, Mr. Rentschler, did you as a vice president of
the National City Bank participate in the distribution of this man-
agement fund in the year 1927?
Mr. Rentschler. Yes; I did.
Mr. Pecora. To what extent?
Mr. Rentschler. I think I have a memorandum here, which I
got over the telephone this morning, so I am not at all sure it is
accurate. Will you check me with your memorandum?
Mr. Pecora. My record shows $154,760.53.
Mr. Rentschler. Yes.
Mr. Pecora. To \vhat extent did you participate in the manage-
ment fund of the bank for the following year?
Mr. Rentschler. $125,000.
Mr. Pecora. This was all in addition to your salary ?
Mr. Rentschler. Yes.
Mr. Pecora. And what were your salaries for those 2 years?
]Mr. Rentschler. $50,000 each year.
Mr. Pecora. By the way, Mr. Rentschler, are the moneys accru-
ing to this management fund kept on deposit in the National City
Bank?
Mr. Rentschler. They are not separated frona any other fund
until the actual payment to the officers. It is just an accrual, in
the bank month by month, and is finally determined at the end of
6 months, and then at the end of the next 6 months.
Mr. Pecora. Where are the funds deposited during their accrual?
Mr. Rentschler. Just with the funds in the bank.
Mr. Pecora. Are you sure of that?
Mr. Rentschler. Yes.
Mr. Pecora. They are carried there up to the day of payment?
Mr. Rentschler. Yes, sir.
Mr. Pecora. Are they paid out of the funds of the bank as repre-
sented by checks drawn against the bank?
Mr. RENTSCin.ER. No. They are paid by checks drawn on other
banks to which the funds have been transferred from the bank
itself to the other bank.
Mr. Pecora. What was the reason for that?
Mr. Rentschler. All of our salary checks go through other banks
rather than through our own employees, where the
Mr. Pecora (interposing). "What is the reason for it?
Mr. Rentschler. Well, the same reason that any other pay roll
or any other salary roll is kept in a confidential relationship in the
oi-ganization. It has not been a custom of ours or of any other
STOCK EXCHANGE PR.\CTICES 1879
business organization I know of, to discuss with each other in the
oro-anization or outside the amount of our compensation.
Sir. 1'ecora. To boil it down to a sentence : Is the reason for it to
avoid disclosure
Mr. Eentsciiler. Quite so.
Mr. Pecora. To employees and other officers ot the bank, of the
identity of the officers participating in the management fund and
the extent of their respective participations?
Mr. Eentschler. That is the quite definite reason ; yes, sir.
Mr. Pecora. That is the reason ?
Mr. Rentschi.er. Quite definitely so.
Mr. Pecora. Mr. Rentschler, to what extent, generally speaking,
has the bank financed the securities business of the National City
•Co.? ^ . ,
Mr. Rentschler. Financed the securities business of the National
City Co.?
Mr. Pecoea. Yes.
Mr. Rentschler. Not at all. The National City Co. has always
stood absolutely on its own feet.
Mr. Pecora. Does not the National City Co. at times borrow
money from the National City Bank?
Mr". Rext.*chler. Well, the National City Co. has had the bank's
limit in unsecured loans, and has also had loans in addition to its
limit secured by United States Government bonds.
ilr. Pecora. What is the limit of unsecured loans available to
the National City Co. ?
Mr. Rentschler. It would be 10 per cent of our capital and surplus
at what they are from time to time.
Mr. Pecora. In other words, they have a borrowing capacity or
•credit up to the legal limit ?
Mr. Rentschler. That is right.
Mr. Pecora. Hom' much is that in dollars and cents?
Mr. Rentschler. About $20,000,000, and I think I have the exact
figure.
Mr. P?;coi!A. Well, that will do.
Mr. Rentschler. If they borrow more than that, they borrow
against United States Government bonds issued up to 1917, and
they get 15 per cent more. But tliat has not happened.
Mr. Pecora. Has the National City Co. availed itself of this loan
•credit ?
Mr. Rentschler. Not often.
Mr. Pecora. How frequently?
ilr. Rentschler. At the present time they owe nothing. At other
times they will be using their entire amount for, say, a week or a
month, depending upon what their needs may be.
Mr. Pecora. You know that in the year 1928 and in the year 1929
and in the year 1930. or in portions of those years, the National City
Co. engaged in an intensive campaign for the sale of the capital stock
of the bank to the public, don't you ?
Mr. Rentschler. Yes; they were selling stock right along.
Mr. Pecora. Do you know how many shares of the bank's stock
were distributed to the public through the National City Co.?
Mr. Rentschler. No; I do not.
1880 STOCK EXCHANGE PRACTICES
Mr. Pecora. Have you any idea of the amount ?
Mr. Rentschlek. I have not seen those figures.
Mr. Pecora. It is a very large amount, isn't it?
Mr. Rentschler. I should think it would be a very large amount.
Mr. Pecora. What would strike you as a very large amount?
INIr. Rentschler. We may have those figures available and can
get them rather than to be guessing. Maybe you have them.
Mr. Pecora. I want to see how much you know about it.
Mr. Rentschler. I do not know, in the buying and selling, what
it would run into.
Mr. Pecora. Several hundred thousand shares?
Mr. Rentschler. At least that.
Mr. Pecora. It would run into seven figures, as a matter of fact?
Mr. Rentschler. I should think so in taking all those years, with
sales in and out as folks do in regard to bank shares, as well as other
shares. During that period we went up from 10,000 or 15,000 stock-
holders to where we have now 86,000 stockholders. So it must have
been quite a large figure.
Mr. Pecora. For the 31/4 year period ending December 31, 1930,
our accountants report as a result of an examination of the records
of the National City Co. approximately 1,950,000 shares of the bank's
stock, at an approximate cost of $650,000,000, were sold to the public.
Would that be in accord with your general knowledge ?
Mr. Rentschler. Yes. If you have the figures I should say that
is right, and I will testify to it.
Senator Brookhart. What was the total number of shares of the
bank ?
Mr. Rentschlek. 5,500,000 shares.
Senator Brookhart. And those shares were owned by the banlc
itself?
Mr. Rentschler. Not at all. The National City Bank has never
owned a share of its own stock so far as I know.
Senator Brookhart. Well, how did you happen to be selling
them?
Mr. Rentschler. They were shares, so far as the National City
Co. was concerned, that were bought from one person and sold to
another.
. Senator Brookhart. It was not the bank making the sales?
Mr. Rentschler. No, sir. It was where the National City Co.
sold to one stockholder, or rather sold for one stockholder who
wanted to sell, to somebody else who wanted to become a stock-
holder, and the City Co. was the trading post past which those
trades were made.
Mr. Pecora. Don't you know that the National City Co. always
had a very extensive position during those three and a half years
in the stock of the bank?
]\Ir. Rentschler. I don't know what you would call extensive. I
think some figures were furnished to you showing exactly what the
net amount of stock was at the end of each month or at the end of
each week.
Mr. Pecora. Don't vou know that the companv had a long position
at the end of 1930 of 99.227 shares of the capital stock of the bank?
Mr. Rentschler. Yes; that was one — well, I think that was the
longest position we had probably had.
STOCK EXCHANGE PRACTICES 1881
Mr. Pecora. That is a pretty extensive position, isn't it?
Mr. Kentschlek. That is a big position ; yes, sir.
Mr. Pecora. And that was at the end of the three and a half year
selling campaign in which very nearly 2,000,000 shares were dis-
posed of.
Mr. Rentschler. Yes, sir; and in which we had a most unsettled
world-wide market situation such as we had ever had to deal with.
Mr. Pecora. Do you know that in 1929 alone the National City
Co. acquired and disposed of approximately 1,355,000 shares of the
bank's stock?
Mr. Rentschler. If that is the figure that your accountants have
taken from our records, all right.
Mr. Pecora. Well, that knowledge does not surprise you, does it ?
Mr. Rentschler. No.
Mr. Pecora. And it accords with your general knowledge ?
Mr. Rentschler. Yes ; I knew it was a very large amount, liecause
that was a period when there was a tremendous demand for bank
stocks and a great deal was changing hands.
Mr. Pecora. Do you know of any single person or group that has
traded in the bank's stock to any greater extent than the National
City Co. during this period ?
Mr. Rentschler. Of my own knowledge I do not.
Mr. Pecora. You know that a national bank may not buy or sell
its own shares.
Mr. Rentschler. Yes, sir ; I do.
Mr. Pecora. Do you consider that those provisions of the national
banking act were violated in spirit if not in letter through this
medium of its investment affiliate, called the National City Co.,
engaging in those transactions?
Sir. Rentschler. I do not think so, either in spirit or in letter.
But I think from the experience of that period we determined sorne
time last year not to have a long position or a short position in
National City Bank stock so far as the National City Co. was con-
cerned, and to do nothing more with it than to simply fill orders
as they come in, passing one customer's order over to somebody else
to execute it.
Mr. Pecora. Don't you know that the National City Co. during
this period of time was going out in the byways and highways so-
liciting customers for the stock of the bank?
Mr. Rentschler. That may quite well be, because it seemed, look-
ing back, that it was a very desirable thing for us to broaden our
contacts, that is, for the banking institution to broaden its contacts
to make it possible for more people to become stockholders in our
bank. There were a great many collateral conditions flowing to
the bank because of it, and it was prompted to let those shares be
sold, and for a long while they proved to be one of the best invest-
ments that folks had. And I do not question at all that there was
very broad selling of National City Bank shares.
Mr. Pecora. By the National C'ity Co. ?
Mr. Rentschler. By the National City Co.; yes, sir.
Mr. Pecora. You do not regard that as in effect the selling or buj'-
ing of bank shares by the bank itself?
Mr. Rentschler. No, sir.
1882 STOCK EXCHANGE PRACTICES
Mr. Pecora. Because in form at least it was done l)v the National
City Co.
Mr. Kentschler. Right. But in the light of experience I am
perfectly willing to say to you I prefer that the National City Co.
not sell shares.
Senator Brookhart. Why did you do that if it was all right?
Mr. Rentschler. I do not think any of us had foresight to see
the great catastrophe that was coming aci'oss the world in this last
two or three years, Senator Brookhart. I know 1 didn't have.
Senator Brookhart. In a speech back in 1925 Senator Shipstead
reasoned it out quite clearly, even then.
Mr. Rentschxer. Well, more power to him.
Senator Brookhart. There was not apparently any power, because
the financial crowd paid no attention to his good sense.
Senator Fletcher. What was the peak of the National Citj' Bank
stock ?
Mr. Rentsghler. How high did it go ?
Senator Fletcher. Yes.
Mr. Rentschler. Sometime in September or October there were
relatively few shares sold at somewhere around 575 to 580.
Senator Fletcher. 1929?
Mr. Rentschler. 1929. There were the peak months where the
stock went up. I think it was around $400 a share somewhere in
early August. All of these things the peak was in August or Sep-
tember or early October, where we had this very violent run up, and
then came down, and in the beginning of November again it was
selling down around two hundred and some odd dollars a share, $200
or $220 a share.
Mr. Pecora. Mr. Rentschler, what was the par value of the stock
when it was selling at its peak of 578 or 579 ?
Mr. Rentschler. $20 par.
Senator Brookhart. $20; and it was selling for 500
Mr. Rentschler. $585 ; yes, sir.
Senator Brookhart. It never could earn a return on that kind of
price, could it ?
Mr. Rentschler. No; looking back at it now, it could not have.
Senator Brookhart. Then why didn't you advise the poor people
that were buying it of that fact? Why didn't you stop the sale of it
at such exorbitant price as that?
Mr. Rentschler. It was not our stock they were buying, Senator
Brookhart. They were buying stock from each other. They wei-e
making their own market.
Mr. Pecora. When you say it was not your stock they were buying,
what do you mean, Mr. Rentschler ?
Mr. Rentschler. If you have the figures there of what the Na-
tional City Co. had net long at the end of each day or the end of
each week during those months under discussion, why, that would
show what proportion of the stock actually was owned by the Na-
tional City Co, The balance of it, Mr. Pecora, would be the stock
that was bought and sold during the day of the trading when one
customer came to buy and the other customer came to sell.
Mr. Pecora. Don't you know something about the long or short
position of the National City Co. in the stock of the bank, inasmuch
as von yourself are jiresident of the bank?
STOCK EXCHANGE PRACTICES 188d
Mr. Rentschlek. I don't know it exactly, and I would have to re-
fresh ni}- mind.
Mr. Pecora. AVell, don't j^ou know approximately?
Mr. Eentschleb. Yes. The general policy was to keep within
5.000 shares one way or the other, but there were times when it went
above that. I would not know without consulting the records again
just how much it did go above that.
Mr. Pecora. For instance, it does not surprise you to learn, does it,
that at the end of 1930 the City Co. had a position of nearly a hun-
dred thousand shares of the stock ?
Mr. Rentschlek. Yes. As I explained to you, that was a very
unusual situation that came as a result of the 1930 situation.
Mr. Pecora. Do you know what its position is to-day in the stock?
Mr. Rentschlek. City Co. ?
Mr. Pecora. Yes, sir.
Mr. Rentschlek. Why, they do not have a share left at the end
of each month. City Co. has no City Bank stock and has not had
any City Bank stock since about January 1, 1932. From that day
on the City Bank has been out of business of carrying any City
Bank stock for its own account.
Mr. Pecora. Why was it necessary for the National City Co. under
an}' circumstances to be long of the stock if it was merely acting as a
broker ?
Mr. Rentschlek. They were long with what in comparison was
a small amount. They really, as a matter of fact, should have had
very little stock. It was the general policy for years to keep very
little.
Mr. Pecoka. Do you mean to say that a long position on a hun-
dreed thousand shares was
Mr. Rentschlek. Now, Mr. Pecora, the hundred thousand shares
that you keep mentioning, sir, is the result of 1930, and if you will
be good enough to take the figures that you have I will be glad
to give that to you if I can.
Mr. Pecora. Well, for instance, jjrior to the break in the market
in October, 1929, according to the examination by our accountants,
the long position of the company in the stock of the bank on the
1st of February, 1929, reached as high as 77,000 shares.
Mr. Rentschler. Yes. Well, now, that
Mr. Pecora (interposing). That was months before this abnormal
condition which was precipitated in October.
Mr. Rentschlek. Yes. I will be glad to explain that to you, sir.
That was at a time when a new issue of .stock of the City Bank
came out, in February, I think, of 1929. It was authorized at the
stockholders' meeting of Januai-y, 1929, and at that time, as at each
other time when there was an increase in the shares of the bank,
rights are traded in, and this represented the accumulation of rights
during that period, and tliis stock again was disposed of as ijromptly
as possible, and you will find here, if you consult these other figures —
take, for instance, here when you come back to July of 1929, July
tlie 5th, you get 9,500 shares, you go back to a comparative day in
June, June 7, and there were 8.170 shares; for May 3, 7,811 shares; on
April 25, 24,679 shares; on March 1, there were" 23,607. That was
the beginning of the run-off of the new rights.
119852—33— PT 6 9
1884 STOCK EXCHANGE PRACTICES
Senator Brookhart. Let me ask you there : Did this National City
Co. buy stock of the bank at the same time it was selling these stocks ?
Mr. Rentschler. They were selling shares that had come by
reason of rights. Yes; they would be buying and selling both, be-
cause they would be doing one thing for one customer and the other
for the other customer.
Senator Brookhakt. As long as they had shares and tried to
favor the customer, they did not need to buy any to supply the
demand, did they ?
Mr. Rentschler. In the normal trading. Senator Brookhart, they
would be doing something else.
Senator Brookhart. That is, this trading to make a market or
affect the price?
Mr. Rentschler. No, no. A man running a grain elevator. Sena-
tor Brookhart, will buy corn and bring it in and sell it, and someone
else will buy it.
Senator Brookhart. We haven't any schemes like that in the corn
business, among the farmers ; I know that.
Mr. Rentschler. The same process goes on, because corn comes
into one side and goes out the other — you are buying and selling
all the time, and that is exactly what takes place in every commodity.
Senator Brookhart. Our corn does not get juggled until it gets
in to the board of trade.
Mr. Pecora. Mr. Rentschler, in this large volume of trade in the
bank's stock in which the City Co. was engaged, do you know
whether it assumed the relationship of a broker or a principal to
those trades?
Mr. Rentschler. Oh, it was a principal in those trades, Mr.
Pecora.
Mr. Pecoka. Did not charge brokerage?
Mr. Rentschler. Now I don't think so.
Mr. Pecora. You don't think so?
Mr. Rentschler. No; I don't think so. Somebody here can tell
me. Just a block or so.
Senator Fletcher. It was testified this morning that the National
City Co. had some 350 branches of separate agents throughout the
country.
Mr. Pecora. No; salesmen.
Mr. Rentschler. No; 56 branches. Senator Fletcher, and there
are 350 salesmen who work from those branches.
Senator Fletcher. Did they all work on commission?
Mr. Rentschler. No ; they worked on salary and commission both.
Mr. Pecora. For a while during this 3i/^-year period that I have
already mentioned, you know, don't you, that the salesmen of the
National City Co. were given an additional premium upon any sales
of the bank's stock which they made?
Mr. Rentschler. I knew there were premiums for certain periods.
I don't know whether that was a general rule or not, Mr. Pecora.
Mr. Pecora. At certain times
Mr. Rentschler. That may be well so.
Mr. Pecora. They were given a premium for effecting sales of
the bank's stock?
Mr. Rentschler. Part of their compensation was in premiums
they received in the selling of all kinds of securities, and it may well
STOCK EXCHANGE PRACTICES 1885
be that they might have received premiums on the City Bank's
stock, although as to that I have no immediate or personal recol-
lection.
Mr. Pecora. You are not an officer of the National City Co., are
you?
Mr. Rentschler. No; I am not.
Mr. Pecora. As president of the bank did you give any instruc-
tions or directions to the employees of the bank in any of its branches
to sell stock of the bank for the account of the National City Co.?
Mr. Rentschler. Branch of the bank managere? No.
Mr. Pecora. Are you quite sure of that, Mr. Rentschler ?
Mr. Rentschler. The managers or the bank officers themselves
directly are not selling stock of any kind. It may be that there may
be instances where a branch officer might find a customer who wanted
to buy this or that and he would turn him over to a City Co. man
to effect the sale.
Mr. Pecora. Did he get a commission on those sales?
Mr. Rentschler. No, sir.
Mr. Pecora. Are you sure of that?
Mr. Rentschler. Absolutely. No bank officer would have any
right so far as I know to get it.
Senator Fletcher. Has the National City Bank branches through-
out the country?
Mr. Rentschler. No ; the National City Bank has branches in the
city of New York, as permitted under the national banking act.
We have 75 branches in Greater New York now. In addition to
that we have branches scattered around the world in various coun-
tries, as permitted under the Federal reserve act of 1913.
Mr. Pecora. At annual meetings of the shareholders of the bank
has it been the custom in recent years to submit to them a report of
the operations of the National City Co., its investment affiliate?
Mr. Rentschler. Yes. Mr. Mitchell, the chairman, at each annual
meeting for a number of years has given the shareholders the essen-
tial story of the operation of the City Co., and that has been incor-
porated and printed in the annual reports. To that extent the report
has been made to them.
Mr. Pecora. I have before me what is described as the annual
report of the National City Co. and its subsidiary corporations for
the year ended December 31, 1929, summarizing the operating results
and various activities of the year, and on the last page thereof
appears this statement:
With the closing of our Jacksonville (Fla.) ofBce 69 district and representative
offices were in operation at the year end, all served either directly or indirectly
by our private-wire system of 11,386 miles. Sales facilities are also available
at 26 of the bank's Greater New York City branches, each connected with our
home office by private line, telephone, or teletype service.
Mr. Rentschler. That was the end of 1929.
Mr. Pecora. This is the report for the year 1929.
Mr. Rentschler. That has all been done away with.
Mr. Pecora. I have not asked you about that.
Mr. Rentschler. Oh, I beg your pardon.
Mr. Pecora. Let me read further.
Mr. Rentschler. I am sorry.
1886 STOCK EXCHANGE PEACTIOES
Mr. Pecoea. Reading wheie you interrupted me :
This makes a total of 95 points offering National City Co. facilities to in-
vestors through its own staff, proof of the excellent service rendered for our
account by bank employees at offices where City Co. men are not yet located.
Did you hear that report made?
Mr. Kentschler. Yes; I am familiar with that.
Mr. Pecora. Did that bring home to you knowledge for the first
time that the emploj-ees of the bank were supplementing the selling
efforts of the sales force of the company in the sale of securities in
which the company was engaged?
Mr. Rentschler. Yes; they would take orders for them, unques-
tionably.
Mr. Pecora. I did not ask you if they would take orders ; I asked
you if you learned for the first time that that was being done.
Mr. Rentschler. No.
Mr. Pecora. Well, you knew of it currently, didn't you?
Mr. Rentschler. Certainly.
Mr. Pecora. Was that done with your consent and knowledge and
approval as president of the bank?
Mr. Rentschler. Yes. I knew that was the practice.
Mr. Pecora. You approved of it?
Mr. Rentschler. Surelj'.
Mr. Pecora. And you knew that the National City Co. was paying
commissions and bonuses and premiums to the employees of the
bank
Mr. Rentschler. No.
Mr. Pecora. In so far as they rendered service for the City Co.
in selling its securities to the public?
Mr. Rentschler. No. If there was any compensation given for
that it was given to the credit of the bank and not to the credit of
any individual. That is the reason I said that no officer of the bank
was receiving compensation because of his sales of securities.
Mr. Pecora. That is, the branch of the bank got the benefit of
those commissions ?
Mr. Rentschler. Of those commissions.
Mr. Pecor^v. If any were jjaid?
Mr. Rentschler. If any were paid.
Mr. Pecora. And the branch accounted to the bank for them, is
that it?
Mr. Rentschler. Exactly. There would be nothing to the indi-
vidual.
Mr. Pecora. So that the bank profited through commissions on
those sales?
Mr. Rentschler. If there was any profit awarded to anybody it
would be to the bank, but I don't know, I would have to look that
up to see exactly how that was handled.
Mr. Pecora. I think you were asked before by Senator Brook-
hart what was the capital of the National City Bank in 1929.
Mr. Rentschler. I answered that- — 5,500,000 shares.
Mr. Pecora. With a par value of $110,000,000 ?
Mr. Rentschler. That is right, $110,000,000.
Mr. Pecora. Do you know wliat the market value of those shares
was in September, 1929?
Mr. Rentschler. It was a lot more than that. In September?
STOCK EXCHANGE PRACTICES 1887
Mr. Pecora. Yes. sir.
Mr. Rentschler. Roughly, $500 a share.
Mr. Pecora. Yes, sir. That made a market value of around two
and three-fourth billion?
Mr. Rentschler. Yes, sir.
Mr. Pecora. Wliat was the book value at that time? Can you tell
us?
Mr. Rentschler. Let me see — I would only have to guess at that.
Mr. Pecora. Your best guess is what?
Mr. Rentschler. Not over $70 a share, $60 to $70 a share.
Mr. Pecora. 60 or 70 — around $70 a share?
Mr. Rentschler. Around $70 a share. So that the- market was
seven times book value if you want to jDut it that way.
Senator Brookhart. Do you think it is right for the Government
of the United States to charter a bank or permit a market that will
kite its stock up to levels like that?
Mr. Rentschler. Well, Senator Brookhart, it all depends on
whether you say we jDermitted the market to go up. I can not answer
that question.
Senator Brookhart. You were, through your affiliates, part of the
great oi-ganizations that were boosting all these prices of all these
securities ?
Mr. Rentschler. Senator Brookhart, these prices of securities and
of values all over the world wei'e being boosted by the competition
of men to get these things that somebody else had. It was away
beyond the ability of anybodj' connected with the National City
Bank. As a matter of fact, it was away beyond the ability of any-
body connected with the banking sj'stem of this country. We had no
control over that.
Senator Brookhart. Do you think it is right for the charter banks
to assist in that kind of a performance? (No response.)
Senator Fletcher. What dividends did the bank pay?
Mr. Rentschler. $4 a share.
Mr. Pecora. Mr. Rentschler, $70 a share, the highest figure you
mentioned as the book value of the capital stock of the bank in
September, 1929, would give us $385,000,000, and the market value
then was upwards of $3,200,000,000?
Mr. Rentschler. Right.
Mr. Pecora. I have no further questions to ask him, Mr. Chairman.
The Chairman. You may be excused from further attendance.
Mr. Rentschler. Thank you verj' much.
Mr. Pecora. Mr. Chairman, Senator Brookhart has asked that
Mr. Mitchell resume the stand, as he wants to ask him two or three
questions.
The Chairman. Very well; Mr. Mitchell. After which we will
probably recess till to-morrow.
FURTHER TESTIMONY OF CHARLES E. MITCHELL, CHAIRMAN THE
NATIONAL CO., THE NATIONAL CITY BANK OF NEW YORK, CITY
BANK FARMERS TRUST CO., AND INTERNATIONAL BANKING
CORPORATION, NEW YORK CITY
Senator Brookhart. You stated, Mr, Mitchell, as I recollect, that
the National City Co. handled some twenty billions of securities and
1888 STOCK EXCHANGE PRACTICES
that only about 1,000,000,000 were in default or that you had trouble
with or something of that kind?
Mr. Mitchell. Yes. I have not attempted to get a clean check-
ing on that. In fact, I do not think we can do it until we get back,
but in general
Senator Brookhaet. You can not tell exactly.
Mr. Mitchell. No. That figure of $20,000,000,000 is apparently
the figure of the originations and the participations by ourselves in
these securities issued by others.
Senator Brookhaet. One billion of that, you say, has turned out
bad?
Mr. Mitchell. It is something less than that.
Senator Brookhart. How about the other nineteen billions?
Haven't they depreciated a third or half or more?
Mr. Mitchell. Oh, no. A great deal of that has already been
paid off. It is matured and paid.
Senator Brookhart. AVell, how about the stocks?
Mr. Mitchell. Well, of course, the stocks
Senator Brookhart. They are included in that, aren't they?
Mr. Mitchell. They would be included in the total ; yes.
Senator Brookhart. And they have all depreciated enormously?
Mr. Mitchell. Oh, yes.
Senator Brookhart. So that that 1,000,000,000 you mentioned
would only be a little fraction of what the public has lost by dealing
in these twenty billions?
Mr. Mitchell. A great deal of it, of course, that the public i^aid
less for than the par value. It has been paid off at par value. A
great deal of it has been called at premiums.
Senator Brookhart. That would be bonds?
Mr. Mitchell. Yes; that is bonds; and it applies to some extent
to stocks, to preferred stocks, Senator Brookhart, that have been
retired. I think of one case offliand where a stock I think was put
out at 45 and several millions of it retired later at 55.
Senator Brookhart. All of that portion that you have handled
since 1929, that has been a loss to the people that purchased it?
Mr. Mitchell. I do not think that we have generally offered com-
mon stocks since 1929.
Senator Brookhart. I believe that is all.
Mr. Pecora. Will the Chairman direct the witnesses still under
subpoena to attend to-morrow morning?
The Chairman. Mr. Mitchell, you are excused until to-morrow
morning at 10 o'clock. All who are under subpoena will remain here
until they are excused and will return here at 10 o'clock to-morrow
morning. The committee will now adjourn until to-morrow morn-
ing at 10 o'clock.
(Accordingh\ at 3.57 o'clock p. m., the committee adjourned, to
meet again at 10 o'clock a. m. of the next dav, Thursdav, Febru-
ary 23, 1933.)
STOCK EXCHANGE PRACTICES
THURSDAY, rEBRUARY 23, 1933
United States Senate,
Subcommittee of Committee on Banking and Currency,
Washington,, D. C .
The subcommittee met, pursuant to adjournment on yesterday, at
10 o'clock a. m., in room 301 Senate Office Building, Senator Peter
Norbeck presiding.
Present: Senators Norbeck (chairman), Townsend, Fletcher, and
Costigan.
Present also : Senator Brookhart.
Further present : Ferdinand Pecora, special counsel to the com-
mittee: Julius Silver and David Saperstein, associate counsel to the
committee.
The Chairman. The subcommittee will come to order. Mr.
Pecora, who will you have first this morning?
Mr. Pecora. Call Mr. Baker.
The Chairman. Mr. Baker, please stand, hold up your right hand
and be sworn. You solemnly swear that you will tell the truth, the
whole truth, and nothing but the truth regarding the matters under
investigation by this subcommittee, so help you God.
Mr. Baker. I do.
TESTIMONY OF HUGH B. BAKEE, NEW YOEK CITY, PRESIDENT
NATIONAL CITY CO.
Mr. Pecora. Mr. Baker, will you kindly give your full name,
residence, and business or occupation ?
Mr. Baker. Hugh B. Baker, 834 Fifth Avenue, New York City;
president National City Co.
Mr. Pecora. How long have you been president of the National
City Co.?
Mr. Baker. Since April of 1929.
Mr. Pecora. Before that were you connected with the National
City Co. in any other capacity?
Mr. Baker. Well, I was vice president.
Mr. Pecora. How long had you been vice president?
Mr. Baker. Well, for several years. I am not exactly sure of
the year, but probably 1917 or 1918.
Mr. Pecora. "When you became a vice president of the National
City Co., did you also become a member of its board of directoi-s?
Mr. Baker. No, sir.
Mr. Pecora. When did you first become a member of its board
of directors?
Mr. Baker. In 1929.
1889
1890 STOCK EXCHANGE PRACTICES
Mr. Pecora. What is the business generally of the National City
Co.?
Mr. Baker. Dealing in investment securities.
Mr. Pecora. You have heard the preceding witnesses testify this
week?
Mr. Baker. Yes, sir.
Mr. Pecora. I ask you that in order to save time. The other
witnesses whom you have heard testify have been questioned with
regard to the business of the National City Co. and its affiliation
with the National City Bank. Is there anything that you want to
add to what those witnesses testified to on that subject? ,
Mr. Baker. I think not, Mr. Pecora.
Mr. Pecora. Now, among the securities sold by the National City
Co. was there included the capital stock of the National City Bank ?
Mr. Baker. Yes, sir.
Mr. Pecor.\. Did you hear the testimony of Mr. Gordon S. Rent-
schler, president of the National City Bank, yesterday afternoon?
Mr. Baker. Yes, sir.
Mr. Pecora. Did you hear him testify, either in words or in sub-
stance, to the effect that the National City Co. in selling the capital
shares of the National City Bank to the public, sold as principal
instead of as broker?
Mr. Baker. Well, I do not remember the exact statement he made,
but I think in substance that is it.
Mr. Pecor.v. In substance he testified that in connection with
the selling of that stock the National City Co. went into the market
and bought the stock which it had sold, or which it needed to fill the
buying orders it had received from the public.
Mr. Baker. That is right.
Mr. Pecora. Was that testimony substantially correct?
Mr. Baker. I think so.
Mr. Pecora. In other words, whatever shares the National City
Co. bought were bought for the purpose of meeting orders which it
had received from customers for the stock.
Mr. Baker. Well, do you mean received prior to the time it was
bought ?
Mr. Pecora. Yes.
Mr. Baker. No; that is not quite it.
Mr. Pecora. That is what I understood Mr. Rentschler's testimony
to mean. Do you ascribe a different meaning to that testimony of
Mr. Rentschler's?
Mr. Baker. Well, I did not understand it that way, Mr. Pecora.
That would mean that we had orders definitely in hand for any
amount of stock that we might have purchased.
Mr. Pecora. What do you understand was the fact in that respect?
Mr. Baker. Well, I did not quite get the question, Mr. Pecora, as
it relates to the former question.
Mr. Pecora. Let me ask it in this way : How many shares, all told,
of National City Bank stock were sold to the investing public by
your company in the year 1929?
Mr. Baker. Of the total number of shares sold I can not differ-
entiate as between the investment public and dealers. I do not know
how those individual amounts might be, but the total amount sold
to dealers, investors, and everybody, was 1,359,000 shares.
OXU^^IV EjA^^ja^
Mr. Pecoea. Xow, at the time when your company made the sales
which aggregated that total, did it have the stock on hand or did it
go out into the market in turn and buy the stock with which to ful-
fill those sales?
Mr. Baker. We bought the stock.
Senator Brookhaet. Before or after the sales?
Mr. Baker. "Well, Senator, in some cases it might have been
before — yes ; always before, I should say. The exact balance of the
buying orders may not have coincided exactly with the transaction.
Senator Brookhaet. You bought the stock and then went out
to sell it, is that it?
Mr. Bakee. Well, the buying and selling was going on concur-
rently.
Mr. Pecoea. From the large volume of sales in that stock made
by your company in 1929 I fancy that the sales it was making evei'y
business day during that year were quite large, is that correct?
Mr. Baker. Well, I do not know about every business day, and
of course I have not those sales by days.
Senator Fletcher. Did you buy and sell on the stock exchange?
Mr. Bakee. No, sir. Those shares were not listed on the stock
exchange.
Mr. Pecoea. They had been listed prior to 1929? That is to
say. until January of 1928, hadn't they s
Mr. Baker. Yes, sir.
Mr. Pecoea. They had been listed for many years prior to Janu-
ary of 1928 on the New York Stock Exchange, hadn't they?
Mr. Bakee. Well, I do not know for how many years, but I
assume that is correct.
Mr. Pecoea. And they were taken from the listing on the exchange
in January of 1928 after the National City Bank had requested
that. to be done. Do you know that to be a fact?
Mr. Bakee. Yes; that is approximately correct.
Mr. Pecoea. Do you know that the request of the National City
Bank to remove its shares from the trading list of the New York
Stock Exchange was made back in July of 1928 originally, and that
the exchange authorities refused to accede to the request at first?
Do you recall that, Mr. Baker?
Mr. Bakee. Well, I do not recall that date exactly, Mr. Pecora.
I do not think that was the date, as a matter of fact.
Mr. Pecoea. It was several months prior to January of 1928 that
the bank requested the exchange to strike its shares from the
trading list.
Mr. Baker. Yes; but I understood you to say in July of 1928.
Of course I don't remember that date.
Mr. Pecora. If the date was not in July it was several months
prior to January of 1928?
Mr. Bakee. Well, if so, I do not know about that.
Mr. Pecoea. Well, I will get the specific dates.
Mr. Bakee. All right.
Mr. Pecoea. Senator Fletcher asked you if your company bought
through the exchange the shares of bank stock which it sold to the
public in 1929, and your answer was that it was then not listed.
Mr. Baker. That is right.
1892 STOCK EXCHANGE PR.4.CTICES
Mr. Pecora. Will you state how the National City Co. acquired
the 1,359,000 shares of that stock which it sold in 1929?
Mr. Baker. Well, I can only approximate it because I haven't
any records to show how much stock we may have purchased directly
from holders of stock, because we were maintaining bid and asked
prices on the stock regularly, and whether the stock was offered to
us for sale by dealers or whether it was offered by private individuals
did not make any difference to us.
Mr. Pecora. AA'eli, what was the fact in relation to that^ From
whom did you buy it principally?
Mr. Baker. From individuals and dealers.
Mr. Pecora. Did the company ever have or maintain a long posi-
tion in this stock during the year 1929 ?
Mr. Baker. Yes.
Mr. Pecora. Did it always maintain a long position in the stock
during that year?
Mr. Baker. Yes, sir.
Mr. Pecora. Are you sure of that?
Mr. Baker. Well, according to my records here I think that
is right.
Mr. Pecora. According to your records, what was the long posi-
tion of the company in the shares of the National City Bank at the
end of January of 1929 ?
Mr. Baker. Well, according to my figures that would be — I am
not sure whether these figures are at the end of the month or at
the first of the month, the figures that I have, but on February 1
they would show 21,500 shares.
Mr. Pecora. That you were long of?
Mr. Baker. Yes.
Mr. Pecora. What was its long position on the 1st of March?
Mr. Baker. 18,932 shares.
Mr. Pecora. And the 1st of April.
Mr. Baker. 7,704 shares.
Mr. Pecora. The 1st of May?
Mr. Baker. 8,692 shares.
Mr. Pecora. Now, did the company ever go short of the stock
at any time after the 1st of April, 1929 ?
Mr. Baker. I think not, sir.
Mr. Pecora. Will you see if you can make certain of that?
Mr. Baker. Well, in my records by the month we did not.
Mr. Pecora. Did the company borrow any National City Bank
stock in the month of April 1929, in order to cover a short posi-
tion in the stock?
Mr. Baker. I have not any record here to show that. I don't
know.
Mr. Pecora. Apart from having any record, have you any recol-
lection on that?
Mr. Baker. No; I have not any recollection on that at all, Mr.
Pecora. There were times during, perhaps that year, and I am not
sure whether it was that year or not, where there were rights for
the stock and where we may not have actually had the definite
certificates of stock, but we had the right which when converted
would produce the definite certificates of stock. And in the mean-
STOCK EXCHANGE PRACTICES 1893
time to facilitate deliveries of that stock we would borrow some
stock.
Mr. Pecoea. Do you recall whether the National City Co. bor-
rowed any shares of National City Bank stock during the month
of April, 1929, from anybody?
Mr. Baker. No — Well, now, yes ; I have a record here now which
shows
Mr. Pecoka (interposing). Are you now answering on the basis
of some paper that has been handed to you?
Mr. Baker. Yes, sir.
Mr. Pecora. Since j'ou started to answer my question in the neg-
ative ?
Mr. Baker. That is right.
Mr. Pecora. And the handing of that paper to you has served
to refresh your recollection so that instead of maMng a negative
answer to the question you are now about to make an affirmative
answer, is that right?
Mr. Baker. Well, in the first place, I answered you from my rec-
ollection. I did not know the answer to the question. According to
this memorandum I am now trying to answer that question.
IVIr. Pecora. And your answer will be as your recollection has been
refreshed by that memorandum?
Mr. Baker. Well, from this memorandum, and I am not depending
upon my recollection now for this, you will understand.
Mr. Pecora. Mr. Baker, is your recollection generally good or
bad?
Mr. Baker. Well, I would not boast about it.
Mr. Pecora. Do you think your recollection generally is bad?
Mr. Baker. Probably about the average.
Mr. Pecora. I do not know what the average is.
Mr. Baker. Neither do I.
Mr. Pecora. I merely want to know the state of your recollection.
Is it generally good or is it generally bad?
Mr. Baker. I do not know how to answer that question, Mr.
Pecora.
Mr. Pecora. You can not tell us whether you think you have a poor
memory or a good one, is that it?
Mr. Baker. No ; I can not answer that question.
Mr. Pecora. What is the answer to the question as to whether
or not the National City Co. borrowed any National City Bank
stock in the month of April, 1929 ?
Mr. Baker. According to this memorandum, on April 23 we bor-
rowed 15,000 shares of National City Bank stock.
Mr. Pecora. Borrowed from whom?
Mr. Baker. From Mr. Mitchell.
Mr. Pecora. Was it Mr. Mitchell who refreshed your recollection
a moment or two ago by handing j'ou that written memorandum?
Mr. Baker. No. One of my associates hei'e, who was behind me,
and I do not know just who handed it to me.
Mr. Pecora. Had you completely forgotten about that transaction
when I asked you about it?
Mr. Baker. Well, as to the records on any particular date, Mr.
Pecora, yes. I did not know what the date was at all.
1894 STOCK EXCHANGE PRACTICES
Mr. Pecora. Had you completely forgotten that the National City
Co. had borrowed any bank stock in 1929 regardless of the period
of the year, when I asked you about borrowing stock?
Mr. Baker. Oh, I think I answered that question that we had.
Mr. Pecora. Now, with your memory refreshed by the memo-
randum handed to you, are you ready to give this committee the de-
tails of the transaction and the circumstances under which the Na-
tional City Co. borrowed 15,000 shares of National City Bank stock
from ]SIr. Mitchell in April, 1929?
Mr. Baker. I wanted to see about those rights. Are they in here?
[Apparently addressing the question to some associate.] Well, I
do not find "here the exact position of rights at that particular time.
But there were rights which we had accumulated covering our sales
entirely ; and that is the time that we borrowed this stock from Mr.
Mitchell.
Senator Brookhart. What is the difference between that situation
and what you would call a straight short sale ?
Mr. Baker. Well, that we had purchased those rights which
called for stock.
Senator Brookhart. At the same time ?
Mr. Baker. At some specific date.
Senator Brookhart. But here now I mean : At the particular time
when you needed this stock for delivery ?
Mr. Baker. That is right.
Senator Brookhart. So you borrowed, and in fact at that partic-
ular moment you were short?
Mr. Baker. I shouldn't say so, because otherwise if we had
bought in the open market the actual stock, and at the same time
bought these rights, which is the equivalent of a certain number of
shares of stock, we would have doubled up our investment.
Senator Brookhart. But those rights could not be executed at
once, so you borrowed this stock; otherwise you would not have
borrowed this stock.
Mr. Bakfj?. No ; l)ut there was a specific date, within a compara-
tively short time.
Senator Brookhart. In the future, so that at that particular time
you were short, regardless of those rights?
Mr. Baker. It does not seem that way to me.
Mr. Pecora. When were the rights issued to which you haye just
referred ?
Mr. Baker. I cannot find that date.
Mr. Pecora. They were issued January 12, 1929, weren't they?
Mr. Baker. Well, I just haven't got that figure right here.
Mr. Pecora. In other words, some three months or more before
those 15,000 shares were borrowed.
Mr. Baker. That may be entirely correct, Mr. Pecora. but I
haven't got the date of those rights.
Mr. Pecora. And you say tliat the company had not obtained the
stock in the exercise of those rights by April of 1929?
Mr. Baker. Well, I am not trying to tie those dates together, be-
cause I do not recall the date when the rights were exercisable.
Mr. Pecora. Can you refresh your recollection on that, Mr. Baker,
by any records or data you might have here ?
STOCK EXCHANGE PEACTICES 1895
Mr. Bakek. I thought there were some papers here on that, but
I do not seem able to find them.
Senator Fletcher. When were those 15,000 shares returned that
you borrowed?
Mr. Bakei!. They were returned July 10.
Senator Fletcher. July 10, 1929?
Mr. Baker. Yes, sir.
Mr. Pecora. Have you now consulted any data ?
Mr. Baker. Yes; but I have not got the date of that here, I am
sorry to say. I can probably have it for you during the day.
Mr. Pecora. Mr. Law, the secretary of the company, is here in
attendance, isn't he?
Mr. Baker. Yes, sir.
Mr. Pecora. Can't you ascertain from him the date when the
rights were issued? Isn't some officer of the company here who
knows about that?
Mr. Baker. Well, I don't know. I just asked him and he did not
give me the date.
Mr. Pecora. Supjaose you ask him now or ask some of those men
who are right back of you.
Mr. Baker. Well, as I understand that, the rights expired on
February 15, but
Mr. Pecora (interposing). Well, now, when wei'e the rights
issued ?
Mr. Baker. In January.
Mr. Pecora. Let us get it in chronological order.
Mr. Baker. January 15.
Mr. Pecora. January 15, 1929 ?
Mr. Baker. I think I am right about that.
Mr. Pecora. When did the right to exercise those rights expire ?
Mr. Baker. February 15, but
Mr. Pecora (interposing). February 15, 1929?
Mr. Baker. Yes.
Mr. Pecora. Did the National City Co. have any rights issued on
January 15 which it had failed to exercise by February 15?
Mr. Baker. Oh, yes ; I think so.
Mr. Pecora. How many shares were affected by failui-e to exercise
those rights?
Mr. Baker. I am sorry to detain you in this way, but
Mr. Pecora (interposing). I did not hear that.
Mr. Baker. I say I am sorry to delay you in this way, but as I
understand that transaction we did exercise the rights, but we held
the stock.
Mr. Pecora. How is that?
Mr. Baker. But we held a certain amount of stock on account of
delays from all over the world of people who had the right to exer-
cise or participate in those rights, we held it open for perhaps a
couple of months or more.
Mr. Pecora. When you say " we held it open " whom do you mean
by "we?"
Mr. Baker. The National City Co. held this stock.
Mr. Pecora. The National City Co. had the right to acquire cer-
tain shares of National City Bank stock under the rights that it
owned, on January 15, 1929, didii't it?
1896 STOCK EXCHANGE PRACTICES
Mr. Bakek. That is right.
Mr. Pecora. How many shares did it have the right to acquire in
the exercise of those warrants?
Mr. Bakek. Well, I haven't that figure, but I am assuming it cov-
ered this amount of stock which we bought.
Mr. Pecora. We do not want any assumptions on that. I do not
know why you can not give us exact figures. Your records would
show the exact situation, wouldn't they?
Mr. Baker. Certainly.
Mr. Pecora. And the records are here, aren't they?
Mr. Baker. Well, I do not think they are on that particular point.
The Chairman. If the records are not here, we will send for them.
Mr. Baker. I will be glad to do that.
The Chairman. We must first know whether they are here or not.
And we have got to progress better with this examination than we
are now doing. With all of you here, it would not seem to be a fact
that nobody knows anything about it. And the records are here,
and you say you can not find it from the records. If there is any-
thing missing, let us send for it. What is missing?
Mr. Baker. Well, evidently the figures showing the exact amount
of those rights that we had are missing.
Mr. Pecora. Mr. Baker, will you say now that prior to April,
1929, the National City Co. had permitted any of its warrants or
rights to lapse?
Mr. Baker. No; I think not.
Mr. Pecora. You stated before that the reason for borrowing
those 15,000 shares from Mr. Mitchell in April, 1929, was in order
to have that stock to take the place of stock which had not yet been
issued to you in the exercise of your rights. Now, do you say that
is not so?
Mr. Baker. Well, I was incorrect in my date on that.
Mr. Pecora. All right. Then what was the real purpose for which
the National City Co. boi-rowed 15,000 shares of the National City
Bank stock from Mr. Mitchell in April of 1929 ?
Mr. Baker. Well, that is the same as I said, in order to facilitate
deliveries.
Mr. Pecora. To facilitate the delivery of what? Of shares the
company had already sold?
Mr. Baker. That is right, that were in the course of being sold
day by day.
Mr. Pecora. In other words, the company had sold shares of bank
stock which it had not owned or did not own and did not have on
hand to deliver. Is that right ?
Mr. Baker. I do not think that is correct.
Mr. Pecora. Will you tell me what is correct?
Mr. Baker. I have already said that we owned those rights cover-
ing a sufficient amount of stock to make those deliveries.
Mr. Pecora. You said that the rights had all been exercised prior
to February, 1929.
Mr. Baker. No, February 15.
Mr. Pecora. Yes, February 15, 1929. And the stock you borrowed
from Mr. Mitchell was borrowed on April 25, 1929, wasn't it?
Mr. Baker. Yes, sir.
STOCK EXCHANGE PEACTICES 1897
Mr. Pecoka. Nearly two and a half months after your company
had exercised its rights, is that correct ?
Mr. Baker. Well, that would seem to be correct.
Mr. Pecoba. So that if those 15,000 shares which were borrowed
near the end of April, 1929, were needed, as you say, to facilitate
the making of deliveries by the National City Co. to customers to
whom it had sold National City Bank stock, wouldn't it be a fact
that in making those sales the National City Co. had sold bank
shares which it did not own and which it needed for delivery?
Mr. Baker. No ; I do not think so.
Mr. Pecora. Then, why was the stock of Mr. Mitchell borrowed
for the purpose of facilitating delivery?
Mr. Baker. Because the stock that we acquired through the exer-
cise of rights were held for a substantial period in order to take care
of stockholders' rights from various parts of the world that were
delayed in reaching New York.
Mr. Pecora. Will you kindly produce a single record or book of
your company which shows the amount of shares held in reserve for
this purijose, for customers all over the world? See if you can do it.
Mr. Baker. Well, I am sure I haven't those records here, but I can
produce those records certainly.
Mr. Pecora. Where are they, in New York?
Mr. Baker. Yes, sir.
Mr. Law. No. I have them here.
Mr. Pecora. Well, then, why didn't you show those records to the
committee's accountants?
Mr. Baker. Well, I can not answer that. As I understand it,
they had access to all these books. But I can not answer that.
Mr. Pecora. They had access merely to whatever books they called
for.
Mr. Law. Would I be permitted to answer that question?
Mr. Pecora. I do not know why the president of the National City
Co. can not answer it.
Mr. Baker. Here seems to be a record of that. There were un-
subscribed shares at the close of that period, which was February
15, 1929, of 51,590 shares, which were delivered to the National City
Co. against j^ayment.
Mr. Pecora. When?
Mr. Baker. I presume at that particular time.
Mr. Pecora. At what particular time?
Mr. Bakek. February 15.
Mr. Pecora. February 15, 1929?
Mr. Baker. Yes, sir. That was the date we made payment.
Those were held pending delayed subscriptions on the part of stock-
holders. And the last one of those subscriptions was received May
3, 1929.
Mr. Pecora. Do you mean received by the company or by the
bank ?
Mr. Baker. Well, the company undertook in the interest of the
stockholder who for one reason or another was delayed, or hap-
pened to be away, or did not get his rights in at just the proper
time, to protect over a period of a reasonable time, two or three
months.
1898 STOCK EXCHANGE PRACTICES
Mr. Pecora. And that was done voluntarily by the company?
Mr. Baker. That is right.
Mr. Pecora. And did it protect all stockholders in that way?
Mr. Baker. I think any stockholder who was delayed.
Mr. Pecora. With respect to those stockholders who, for any reason
whatsoever, failed to exercise their rights — what happened? Did
the National City Co. exercise the rights for them and get the stock?
Mr. Baker. That is right.
Mr. Pecora. And how many shares did the National City Co. get
for itself in that fashion, Mr. Baker?
Mr. Baker. Well, at that time as I say there were delivered to us
51,590 shares.
Mr. Pecora. Now, let me see — those rights expired on February
15, 1929?
Mr. Baker. That is right.
Mr. Pecora. Those rights attached to all the outstanding shares
of the capital stock of the National City Bank at that time ; is that
right?
Mr. Baker. That is right.
Mr. Pecora. And the holders of those shares wei'e scattered all
over the world ; is that right ?
Mr. Baker. That is right.
Mr. Pecora. And the National City Co. gratuitously undertook
to protect those shareholders in remote parts of the world for a
certain period of time, without any request from those shareholders
to do that for them; is that it?
Mr. Baker. That is right.
Mr. Pecora. And in doing that the National City Co. was enabled
to acquire thousands of shares under those rights belonging to other
shareholders who had permitted them to lapse; is that right?
Mr. Baker. That is not quite correct.
Mr. Pecora. Well, in what way is it not quite correct? Give us
a correct statement about that.
Mr. Baker. The correct statement is, that at the expiration, at
that time
Mr. Pecora (interposing). Wliat time are you referring to?
Mr. Baker. The last subscription was received May 3, 1929, and
the balance left unsubscriljed was 437 shares.
Mr. Pecora. Wliat happened then?
Ml'. Baker. They were j^urchased at the price.
Mr. Pecora. And you purchased only 437 shares under the pref-
erential rights?
Mr. Baker. That was the net result of it.
Mr. Pecora. And the other shares which you acquired were ac-
quired for the benefit and account of those shareholders all over
the world?
Mr. Baker. That is right.
Mr. Pecora. How many shares were so acquired and held?
Mr. Baker. Well, it seems to me that gets back to the figure I
gave you before.
Mrl Pecora. And what figure is that?
Mr. Baker. 51,590 shares.
STOCK EXCHANGE PRACTICES 1899
Mr. Pecoka. Are you now testifying that that is the number of
shares your company acquired and hekl in trust for those sharehold-
ers all over the world?
]Mr. Baker. I do not quite understand j'our term, " held in trust."
We had the stock ; yes.
Mr. Pecoea. Weil, what were you holding them for? Did you
hold them for the account of your company?
Mr. Baker. We bought the stock and we held it to take care, as
I say, of delayed subscriptions from stockholders.
Senator Brookhart. Let me ask this question right there : Was the
price of this stock greater or less at this period than those share-
holdei's had agreed to pay for them?
]\Ir. Baker. The stock had advanced in price.
Senator Brookhart. Above the agreement of the stockholder?
Mr. Baker. That is right.
Mr. Pecora. When did your company receive those 51,590 shares?
Mr. Baker. Well, we paid for them on February 15, 1929.
Mr. Pecora. When did the company receive them ?
Mr. Baker. I suppose on the same day.
]Mr. Pecora. How long did the company hold those shares?
Mr. Baker. Of course, they were not held as a whole until any
specific date, because, as those rights came in, we were assigned that
stock.
Mr. Pecora. Wasn't the company also using that stock for the
purpose of filling orders which its salesmen had received for the
purchase of National City Bank stock?
Mr. Baker. Well, I do not know that the particular block of
stock was segregated from any other stock.
]\Ir. Pecora. What was the long jiosition of the company in the
stock of the bank on February 28, 1929 ?
Mr. Baker. Well, I can not give it to you on that date.
Mr. Pecora. Well, give it to me on the 1st of March.
Mv. Baker. On the 1st of March it was 26,781 shares, I think.
Senator Townsend. Then you had sold a part of those 51,590
shares in that interim ?
Mr. Baker. You see, these people had sent their rights in and
we were delivering stock against those delayed rights. It was merely
an accommodation to them, to protect them from losing their
privilege.
Senator Townsend. Were they given stock at the same price at
which the rights were subscribed for?
!Mr. Baker. Yes.
Mr. Pecora. Did the company keep a special account or record at
that time of the shares it had acquired for the account of those
shai"eholders all over the world who had failed to exercise their
rights ?
Mr. Baker. I do not know how we accounted for them on our
books, whether it was kept in a special account or not, but we were
prepared to deliver the stock.
Mr. Pecora. Well, now, you just consulted Mr. Law, the secretary
of the company.
Mr. Baker. And he tells me it was held in a separate subscription
account.
119852— 33— PT 6 10
1900 STOCK EXCHANGE PRACTICES
Mr. Pecora. Will you ask Mr. Law to give you a transci-ipt of
that subscription account so that you can testify with respect to it?
Will you do that, Mr. Law ?
Mr. Law. I haven't that with me, but will be glad to get it by
telephone.
Mr. Pecora. Have you any recollection of the account, Mr. Law?
Mr. Law. I know the account was opened and held open until the
subscriptions were filled, some time in May, May 3.
Mr. Pecora. Mr. Chairman, may I suspend the examination of
Mr. Baker for the moment and put Mr. Law on the stand, to see
what evidence he can give us ?
The Chairman. Yes.
Mr. Pecora. Just change seats, Mr. Law.
Senator Fletcher. Mr. Law, please stand, hold up your right
hand and be sworn : You solemnly swear that you will tell the truth,
the whole truth, and nothing but the truth, regarding the matters
now under investigation by this subcommittee, so help you God.
Mr. Law. I do.
TESTIMONY OF HAKRY S. LAW, SECRETARY NATIONAL CITY CO.,
NEW YORK CITY
Mr. Pecora. Mr. Law, please give your full name, address, and
business or occupation.
Mr. Law. Harry S. Law, secretary, The National City Co., 55 Wall
Street, New York City ; residence. No. 28 Outlook Place, Glen Ridge,
Mr. Pecora. What is your business?
Mr. Law. Secretary o.f the National City Co.
Mr. Pecora. How long have you been its secretary ?
Mr. Law. Since March, 1931.
Mr. Pecora. Were you connected with the company prior to
March, 1931?
Mr. Law. I have been with the organization for 14 years.
Mr. Pecora. What was your position in the organization immedi-
ately prior to March, 1931?
Mr. Law. Comptroller.
Mr. Pecora. As its comptroller did you have charge of its records
and books of accounts?
Mr. Law. I did.
Mr. Pecora. You heard the testimony of Mr. Baker, the witness
who preceded you?
Mr. Law. Yes, sir.
Mr. Pecora. He referred in his testimony to certain subscription
rights which the National City Co. exercised between January 15
and February 15, 1929, in connection with the capital stock of the
National City Bank.
Mr. Law. Yes, sir.
Mr. Pecora. Did you hear his testimony?
Mr. Law. Yes, sir.
Mr. Pecora. Are you familiar with that subject?
Mr. Law. Yes, sir.
Mr. Pecora. Can you testify from your recollection concerning
ihe extent to which the National City Co. exercised those rights, the
STOCK EXCHANGE PRACTICES 1901
-extent to -which it acquired stock by the exercise of those rights, and
what it did with the stock so acquired ?
Mr. Law. In connection with each capital increase of National
City Bank, the National City Co. underwrites the unsubscribed
shares, which are held subject to subscriptions.
Mr. Pecoea. Talk a little louder.
Mr. Law. In connection with each capital increase of the National
City Bank, the National City Co. underwrites the unsubscribed
shares and holds them subject to future subscriptions or delayed
•subscriptions of people who are abroad or ill or for some otlier
reason have failed to exercise on the expiration date.
Mr. Pecora. That is done by the company gratuitously ?
Mr. Law. Yes, sir.
Mr. Pecora. That is not done at the request of those shareholders
who might be ill or in remote parts of the world, is it'^
Mr. Law. Indirectly; yes.
Mr. Pecora. All right, go ahead and tell us about this subscription
.account.
Mr. Law. In addition to the shares taken over under that agree-
ment we are entitled to the rights on our own position in this stock
.at the time the rights are issued.
Mr. Pecora. Yes; go ahead.
Mr. Law. So that the stock we received on the date of issue is a
combinntion of the unsubscribed shares on the part of shareholders,
and our own amount as represented by the stock in our inventory.
We acquired in connection with the unsubscribed shares, 51,590
•shares.
Mr. Pecora. How many?
Mr. Law. 51,590 shares.
Mr. Pecora. When did the National City Co. get those shares?
Mr. Law. February 15, 1929.
Mr. Pecora. Yes. And how many of those shares did it get under
its subscription for its own account? That is, upon shares of stock
^that the National City Co. itself held ?
Mr. Law. Whatever we received, Mr. Pecora, would be in addition
to the 51,590 shares. Those are shares not subscribed by stockhold-
•ers other than the National City Co. in its capacity of dealer. I
.mean by that that we were entitled to rights on the shares which we
held in our own portfolio momentarily at the effective date.
Mr. Pecora. How many shares was the National City Co. entitled
'to subscribe for, and how many shares did it subscribe for under the
warrants or rights attaching to its own shares of capital stock of the
J^ational City Bank in January of 1929?
Mr. Law. I have not before me the number of rights issued, but
we did have a balance on January — well, the nearest date is Janu-
ary 11, and I suppose our next day's balance was not materially
•changed — we did have 10,579 shares on which we would be entitled
to rights to subscribe for the new stock.
Mr. Pecora. Well, to subscribe for how many shares of new stock ?
Mr. Law. As I say, I have not the ratio of exchange before me.
Senator Townsend. You do not remember the number of rights
given to each share?
1902 STOCK EXCHANGE PRACTICES
Mr. Law. No, sir; I do not. I am sorrj-, but I will be glad to
get that.
Mr. Pecora. The ratio was 5 shares of the new stock, having a
vahie of $20, for every 9 shares of the old stock having a par value
of $100, was it not?
Mv. Law. I think that is correct, Mr. Pecora, as I recall it.
Mr. Pecora. So that if the company had 10.579 shares of the old
stock on hand on January 15, how many shares of the new stock
was it entitled to subscribe for under these riglits?
Mr. Law. Five ninths.
Mr. Pecora. Which at that rate would be five-ninths of 10.57&
shares
Mr. Law. That is approximately it.
Mr. Pecora. Something around 6,000 shares?
Mr. Law. Yes.
Mr. Pecora. How many subscriptions did the National City Co.
make and exercise on the rights attached to shares of stock held
by others, sick or remote from the city of New York?
Mr. Law. Out of the 51,590 shares received for that particular
purpo.se all but 437 shares were subscribed.
Mr. Pecora. "When were those shares received under those sub-
scriptions by your company?
Mr. Law. You refer to the 51,590 shares ?
Mr. Pecora. Yes.
Mr. Law. They were received on February 15, 1929.
Mr. Pecoha. And what did the company do with those shares?
Mr. Law. The}' set up a special account entitled " Subscription
account," which was held open until the last subscription was ac-
cepted in May 1929.
Senator Fletcher. Was the company dealing in the stock all
this while outside of this fund?
Mr. Law. Yes, sir.
Senator Fletcher. Buying and selling ?
Mr. Law. We filled orders as they came to us. Senator Fletcher;
yes.
Senator Townsend. During this iDeriod you borrowed this 15,000
shares from Mr. IMitchell?
Mr. Law. Yes, sir.
Senator Townsend. If you had 51,000 shares delivered to j'ou
what was the necessity for borrowing 15,000?
Mr. Law. Senator, we know that there are always people who
delay their subscriptions, and it would not be fair to them, if they are
ill or abroad and not able to exercise their rights
Senator Townsend. Could you not have just as well delivered a
portion of these shai-es?
Mr. Law. Then we would have been unable to fill the subscriptions
from the people who were legitimately entitled to these particular
shares.
Senator Brookhart. Did you get those shares at a less price than
they paid for them ?
Mr. Law. No, sir; we took them at the subscription price.
Senator Brookhart. They took them at the subscription price?
Mr. Law. They pass hands both ways, from the bank to us and
from the National City Co. to the subscriber.
STOCK EXCHANGE PRACTICES 1903
Senator Brookhart. Then you got them on the 15th of February,
the 51.000, and they advanced after that, and you got that profit
then?
Mr. Law. No, Senator. They were delivered to the subscribers
at the original subscription price. The National City Co. made no
profit whatever from those unsubscribed shares.
Senator Brookhart. Then that would be the market price on the
15th of February?
Mr. Law. No, sir ; tliat would be the subscription price.
Mr. Pecora. The subscription price was less than the market price,
wasn't it?
Mr. Law. It was $100 a share, as I recall it, Mr. Pecora.
Mr. Pecora. And the market price was how much for the new
shares at that time?
Mr. Law. On February 15 the market was 319 to 348.
Senator Brookhart. And you let them have it at 100?
Mr. Law. They were subscribers, Senator, which was necessary
under the original contract.
Senator Brookhart. Did your company pay the price 300 and
over on them?
Mr. Law. No, sir. We paid the original subscription price to the
bank.
Senator Brookhart. I do not understand how you got that stock
from the holders of it then when it was worth three times that much
and more.
Mr. Law. We got it directly from the bank. Senator, for the sub-
scription price, and merely held it
Senator Brookhart. Oli, you got it from the National City Bank
itself?
Mr. Law. At the subscription price and as a service to the
Senator Brookhart (interposing). Kegardless of the market
price
Mr. Law. Yes, sir; under the orginal agreement. It was a serv-
ice to holders who had not been able to subscribe for their shares
due to illness or absence from the country or for some other cause.
Mr. Pecora. Now, Mr. Law, to make this thing clear : The holders
■of the $100 par value stock had the right on January 15, 1929, to
sub.scribe for new stock which was to be issued on a $20 par value
basis in this proportion: they had the right to subscribe for five
shares of the new stock for every nine shares of the old stock they
owned. Is that correct?
Mr. Law. I think that is substantially correct, Mr. Pecora.
Mr. Pecora. Yes. That did not mean that there was to be an ex-
change of the old shares for the new, but merely tliat by virtue of
their ownership of the old shares they had the right to subscribe at
$100 each for five shares of the new stock for every nine shares of the
old stock which they owned on the date when subscriptions closed,
which was January 16; is that correct?
Mr. Law. I think that is substantially correct, as I recall it. That
was brought out, par $20.
Mr. Pecora. At what price were they entitled to subscribe for the
new shares if they elected to exercise their rights ?
Mr. Law.
1904 STOCK EXCHANGE PRACTICES
Mr. Pecora. At $100?
Mr. Law. Yes, sir.
Mr. Pecora. At that time what was the market value of the new
shares for which the old shareholders were entitled to subscribe at
$100 a share?
Mr. Law. The quotation I have here for February 15, which is
taken from the New York Times, is 319 bid and 348 asked.
Mr. Pecora. So that one in a position to exercise those rights
could acquire for $100 a share, stock which had a market value of
upwards of $300 a share. Is that correct ?
Mr. Law. Substantially.
Mr. Pecora. Now you say the National City Co. subscribed on be-
half of such shareholders as were ill, or as might be in remote places
of the world, for these new shares at $100 apiece ?
Mr. Law. No, Mr. Pecora. I said that tlie National City Co. had
taken these up under an underwriting agreement and held them sub-
ject to subscription. We had no right to subscribe for holders whO'
had failed to exercise their own rights.
Mr. Pecora. With whom was that underwriting agreement made?'
Mr. Law. With the National City Bank.
Mr. Pecora. How was the National City Co. to learn what share-
holders had failed to exercise their right to acquire this new stock at
$100 a share which then had a market value of more than $300 a
share ?
Mr. Law. Through subscriptions which came in.
Mr. Pecora. Came in to whom ?
Mr. Law. The National City Bank.
Mr. Pecora. To the bank. And the bank gave the benefit of that
information to the National City Co.; is that correct?
Mr. Law. I believe the reason for that, Mr. Pecora
Mr. Pecora (interposing). No. Is that correct? Is that what was-
done?
Mr. Law. I think it should be qualified.
Mr. Pecora. Well, tell us what the fact is.
Mr. Law. The National City Bank has no right to hold its own
stock after the subscription date, as I understand it.
Mr. Pecora. Yes.
Mr. Law. Therefore, it is necessary to have the stock transferred.
Mr. Pecora. Yes.
Mr. Law. To some other medium.
Mr. Pecora. Yes.
Mr. Law. At the time of the payment, the payment dated Feb-
ruary 15.
Mr. Pecora. And the medium chosen was its affiliate, the Na-
tional City Co., is that right?
Mr. Law. Absolutely.
Mr. Pecora. The deliveries of stock to subscribers closed on Feb-
ruary 15, 1929. is that correct?
Mr. Law. To those who exercised their rights.
Mr. Pecor.\. To those who exercised their rights, deliveries of the-
new stock were made at $100 a share, when it was worth more than'
$300 a share.
Mr. Law. Which is in accordance with the usual practice.
STOCK EXCHANGE PRACTICES 1905
Mr. Pecora. Yes, I Imow that is the practice ; but those deliveries
were made by the bank on February 15 '(
Mr. Law. Correct.
Mr. Pecora. On that date how many shares of the new stock sub-
scribed for at $100 a share were delivered by the bank to the Na-
tional City Co. on those rights which had not been exercised by
the record holders of the old stock ?
Mr. Law. I think I answered the question before that the unsub-
scribed shares were 51,590 delivered to us against payment on Feb-
ruary 15, 1929.
Mr. Pecora. And did the company make payment for those 51,000
shares on February 15?
Mr. Law. It did.
Mr. Pecora. Then what did the company do with those 51,000 and
odd shares ?
Mr. Law. It segregated the shares in a subscription account, as I
have previously testified, and held them until the last subscription
came in.
Mr. Pecora. And when did the last subscription come in?
Mr. Law. During May, 1929.
Mr. Pecora. What date in May?
Mr. Law. The subscription was actually received on May 3. It
always takes a few days to transfer the stock. I have not the
exact date, but it was probably between the 3d and the 10th.
Mr. Pecora. Was a separate record kept of these 51,000 and odd
shares for this subscription account ?
Mr. Law. The special subscription account was on the ledgers
whi(5h your men examined.
Mr. Pecora. And you haven't this special subscription account
with you, have you ?
Mr. Law. I am sorry, Mr. Pecora, but I was not asked to bring
the books.
Mr. Pecora. How many shares of that subscription stock, so-
called, did the National City Co. have long on February 28, 1929,
if you can tell us.
Mr. Law. I am sorry; witliout the books I haven't that, but I
will be glad to get it if you wish, by telephone.
Senator Fletcher. Did not the company charge these subscrib-
ers— say the person who put in his subscription in May — did not
your company charge him interest from February to May and take
service charges also?
Mr. Law. No, Senator; these went directly to the subscribers at
$100 a share. There was no profit or interest charge or carrrying^
charge of any kind to the National City Co., as far as I know. I
would prefer to refresh my memory, but that is my recollection.
Senator Fletcher. You were doing all this for the benefit of the
shareholders. It would have been fair, would it not, to charge them
interest for carrying them and service charges ?
Mr. Law. I am reminded that tliere may have been an interest
charge. I would have to check. But we do perform a great many
services without charge in our institution, which is usual in institu-
tions such as ours and any commercial bank.
1906 STOCK EXCHANGE PRACTICES
Mr. Pecora. Mr. Law, were these 51,590 shares acquired for this
subscription account held intact by the company from February 15
until some time in May, 1929 ?
Mr. Law. The physical shares, Mr. Pecora, may have been
merged with the regular shares of the organization.
Mr. PECoiLi. Ancl sold to the public?
Mr. Law. Undoubtedly used to fill orders, because simultaneously
we had purchases coming from all over the world which would be
used to replace these shares.
Mr. PecoRiV. Then the company used shares which it had acquired
under these subscription rights for persons other than itself in order
to make deliveries of capital stock of the bank which it had sold to
the general public; is that correct?
Mr. Law. We were not under any contract rights to deliver this to
anyone at the time it was taken over.
Mr. Pecora. Will you please answer that question, Mr. Law ?
Mr. Law. It must be qualified, Mr. Pecora.
Mr. Pecora. Wliat must be qualified, the cjuestion, or your answer?
Mr. Law. My answer.
Mr. Pecora. Well, answer the question without qualification first,
and then qualify it if you want to.
Mr. Law. Will you please repeat the question?
Mr. Randolph (shorthand reporter). "Then the company used
shares which it had acquired under these subscription rights for per-
sons other than itself in order to make deliveries of capital stock of
the bank which it had sold to the general public; is that correct? "
Mr. Law. That can not be answered yes or no.
Mr. Pecora. Why can't that be answered yes or no? It either did
or did not do that.
Mr. Law. This was not acquired under subscription rights. It
was acquired under an agreement to take the unsubscribed stock
over.
Mr. Pecora. I thought you said it was acquired on account of un-
subscribed rights.
Mr. Law. That is correct.
Mr. Pecora. Held by stockholders who might be ill or in remote
places of the world?
Mr. Law. That is correct.
Mr. Pecora. And whose rights the National City Co. wanted to
protect ?
Mr. Law. That is right.
Mr. Pecora. Is that correct?
Mr. Law. But
Mr. Pecora (interposing). But after the City Co. acquired 51,000-
odd shares of stock in that manner, for the protection of those share-
holders as you say, did the National City Co. use any of that stock
to make deliveries to those customers to whom it had sold National
City Bank stock in the meantime?
Mr. Law. It may have done so, but there was •
Mr. Pecora (interposing). Did it or did it not?
Mr. Law. I haven't the slightest recollection without referring to
the inventory of stock in our boxes.
Mr. Pecora. Can't you answer that question yes or no after con-
sulting whatever records you have before you ?
STOCK EXCHANGE PUACTICES 1907
^Ir. Law. The answer is j'es, with the qualification that we had
the right to use those shares because the subscribers had not exer-
cised their rights at the time, and we were able to secure other
shares to meet their rights as they came in.
Mr. Pecora. The shareholders for whose benefit the company ex-
ercised these subscription rights meanwhile were kept in ignorance
of this gratuitous protection that the company was giving them,
weren't they?
Mr. Law. I would not say that, Mr. Pecora. They have done the
same thing in ev^ery issue
Mr. Pecora (interposing). Whether they did it before or since,
the question is, were they kept in ignorance of this gratuitous pro-
tection that 3'our comiiany was giving them ?
Mr. Law (after apparently conferring with associates). My asso-
ciates inform me that correspondence was carried on with these
various stockholders who had not subscribed their rights in an en-
deavor to get them to subscribe during this period.
Mr. Pecora. And you had to be told that by your associates be-
fore you learned it?
Mr. Law. These subscriptions, as you understand, were not
Mr. Pecora (interposing). Mr. Law, won't you please answer the
question put to you? Were you in ignorance of that up to the
moment your associates gave you the information ?
Mr. Law. Not in complete ignorance, but I wanted confirmation
of the thought that I had. The subscriptions came into the bank,
which is what I started to tell you, but you just didn't wait.
Mr. Pecora. The subscriptions came into the bank?
Mr. Law. Absolutely.
Mr. Pecora. The subscriptions on the rights which had already
been exercised b}^ the National City Co. came into the bank?
Mr. Law. For the stock taken over by the National City Co. The
rights had not been exercised because they were still held by the
stockholders.
^Ir. Pecora. The subscriptions which came into the bank after
February 15, 1929, were the delayed subscriptions from these share-
holders of record?
Mr. Law. That is true.
Mr. Pecora. Other than the company ?
Mr. Law. That is true.
Mr. Pecora. Meanwhile the bank on February 15, 1929, had issued
to the company these 51,000-odd shares under the subscription which
the City Co. had made for those shareholders in default of the
exercise of their rights; is that right?
Mr. Law. Not for the subscription, Mr. Pecora, but under the
agreement we took the shares and were prepared to let them exercise
their subscriptions.
Mr. Pecora. When did the Gty Co. pay for those 51,000-odd
shares?
Mr. Law. On February 15, 1929.
Mr. Pecora. And it paid how much then ?
Mr. Law. $5,159,000.
Mr. Pecora. And what did it do with the 51,000 shares after that
date ?
1908 STOCK EXCHANGE PRACTICES
Mr. Law. Held them subject to subscriptions, which subscriptions
were received and filled, leaving a residue of 437 shares in the hands
of the National City Co. representing unsubscribed shares.
Mr. Pecora. When was that residue left there?
Mr. Law. As of May 3.
Mr. Pecoka. Now, how many of those shares did it have as of
April 15?
Mr. Law. I haven't that exact date before me, Mr. Pecora.
Mr. Pecora. About?
Mr. Law. The nearest date that I have was April 12, then it had
eighteen or twenty thousand shares, I should say, somewhere between
eighteen and twenty thousand. Your men may have the exact
figures.
Mr. Pecora. Is it the subscription account that j'ou are talking
about now?
Mr. Law. No ; I am talking about the balance, the total amount of
shares held by the company at that particular time.
Mr. Pecora. The total amount of shares held by the company as
of what date?
Mr. Law. The nearest date that I have is April 12.
Mr. Pecora. What was that total amount on April 12?
Mr. Law. That was 18,000 in the box.
Mr. Pecora. Did that include shares which the company had re-
ceived from the bank on February 15 in exercise of those subscrip-
tion rights as to which the other shareholders had defaulted?
Mr. Law. It included those particular shares, but it did not in-
clude shares contracted for all over the world and which had not
yet arrived in our box.
Mr. Pecora. Then on April 12 the company had 18,OOO-0dd shares
all told of National City Bank stock?
Mr. Law. In its box.
Mr. Pecora. In its box ?
Mr. Law. In its box in New York, without regard to what it
owned and was coming into New York from various parts of the
world.
Mr. Pecora. How many shares did it have in its subscription
account, if any, at that time?
Mr. Law. I haven't that record with me, Mr. Pecora. As I say,
the books were not requested and I haven't them with me.
Mr. Pecora. Wasn't it about 492 shares?
Mr. Law. I would prefer not to say. If your men have checked
that I will be glad to take their word for it.
Mr. Pecora. Will you look at these work sheets taken from your
records and see if they are correct?
Mr. Law. I presume this is an exact ledger transcript?
Mr. Pecora. Yes, sir.
Mr. Law. That appears to be right.
Mr. Pecora. It appears to be right. So that on April 12 the total
long position of the National City Co. in stock of the National City
Bank was only 492 shares? That is, on account of the subscription
rights? Is that correct?
Mr. Law. Assuming that your men have copied the record cor-
rectly ; yes, sir.
STOCK EXCHANGE PRACTICES 1909
Mr. Pecora. I am assured that that is what they have done, and
you can send for your own records to check up.
Now, have you the records of your own company showing its long
iposition in its own holdings of the National City Bank stock on
April 12, 1929?
Mr. Law. That figure is 492?
Mr. Pecora. That other figure is 492.
Mr. Law. Exclusive of stock contracted for, which had not arrived
in New Yoi-k, we had in our box 17,818 shares.
Mr. Pecora. Making a total of 18,310 shares with the 492 that
were held in its subscription account?
Mr. Law. That is correct, exclusive of contracts again.
Mr. Pecora. Now just forget for a moment those contracts and
let us confine ourselves to the shares actually in its possession. All
the shares actually in its possession, both for its own account and
for this subscription account, were 18,398 shares on April 12, 1929?
Mr. Law. It is impossible to segregate the two factors.
Mr. Pecora. I want to know the number of shares it actually had
in its possession on April 12, 1929. Was it or was it not 18,398?
Mr. Law. In its possession, but not subject to its control; that is
•correct.
Mr. Pecora. But it had actually received into its possession .51,590
■shares on February 15, 1929, by the exercise of these subscription
rights for other shareholders, had it not?
Mr. Law. That is correct.
Mr. Pecora. What had become of the difference between this
18,000 figure and the 51,000 figure? What had become of the shares
represented by that difference?
Mr. Law. Your transcript of the subscription account will show
that those shares were used largely for the filling of subscribed
rights between February 15 and the date to which you refer.
Senator Brookhart. Just a minute. I don't quite understand
that. Had you used up all of this 51,000 except the 492 on the 12th
■of April?
Mr. Law. Apparently, Senator; yes.
Senator Brookhart. That had all been gone and this extra 17,000
'were other shares that you had acquired from other sources?
Mr. Law. Yes, sir ; that is correct, Senator.
Senator Brookhart. This 492 was the same number you had on
May 3 when that transaction was closed, was it not?
Mr. Law. The shares left on May 3 were about 437; that was
just slightly under the 492.
Senator Brookhart. Then on May 3 the 437 were turned back
to the National City Bank?
Mr. Law. No, Senator; they cannot hold their own stock.
Senator Brookhart. Where was it?
Mr. Law. We had to retain those.
Senator Brookhart. You retained those at the $100 price your-
self?
Mr. Law. At the $100 price is correct.
Mr. Pecora. Do you know on what date the company borrowed
15,000 shares of the stock of the bank from Mr. Mitchell?
Senator Fletcher. April 29, he said.
Mr. Law. April 23, 15,000 shares.
1910 STOCK EXCHANGE PRACTICES
Mr. Pecoka. AVliy did it borrow those shares?
(There was a pause.)
Mr. Pecora. Why is it taking you such a long tune to answer the
question, Mr. Law ^ , ., ^ ^, ,
Jlr. Law. I am not familiar with the details of the borrowing,
except from a mechanical standpoint.
Mr. Pecoua. Do vou know anyone who is familiar with the de-
tails of this transaction? Mr. i3aker did not seem to know, and
he is the president. You are the secretary. Can you refer us to
any other otlicer who knows more about it?
"(There was another pause.)
]Mr. Pecora. Well, do j'ou know anything about this transaction,
Mr. Law?
INIr. Law. From the mechanical standpoint only.
Mr. Pecoka. Do you know anything about it otherwise ?
Mr. Law. Not a great deal.
Mr. Pecoka. Do' you know anything about it other than the
fact tliat the stock was borrowed ?
(There was a pause.)
Mr. Pecoka. What is the answer, Mr. Law ?
Mr. Law. That is just what I am trying to get. Mr. Pecora.
Mr. Peci>ka. I think the record should shcTw the lapse of time
that this witness allows to ensue in answering the question.
Who do you think knows about it. Mr. Law?
Mr. Law. Why. I should say that Mr. Mitchell having loaned
the stock probably should be able to.
Mr. Pecoka. Would not anyone in the coni]>any know something-
about the transaction? The company, you know, was the other
party to this transaction.
Mr. Law. That is the idea.
Senator Brookhart. Let me ask a question or two there :
Now, Mr. Baker testified, I believe, that this 15.000 loan was
on account of the 51.000 obligations to these stockholders, those
rights that had been acquired. There was only between 492 and 437
out on the '20th of April at the tune this last loan was made,
was there not?
Mr. Law. That I believe is correct. Senator.
Senator Brookhart. Then it could not be on account of that
obligation that this second 15.000 loan of shares was made by Mr.
jNIitchell to your company?
Mr. Law. I was not a party to the contract, Senator Brookhart.
I was in charge of the records and recorded what came to me. I
thought ]>robably a brief study of this would give some indication.
I am sorry that it does not.
Mr. Pei'oka. Does your brief study of the records before you give
any indication of tlie purpose for which these 15,000 shares were
borrowed on April •2?> from Mr. Mitchell.
Mr. Baker. Mr. Pecora. I think iirohably
Mr. Pecora. What is the answer?
Mr. Law. It was to fill deliveries : there is no doubt in the world.
Mr. Pecora. It has taken us a half hour to find that out.
Mr. Law. That is not an unusual street practice.
^rr. Pecoka. Whether it is usual or unusual, we want to find out
what the fact is.
STOCK EXCHANGE PKAOTIOES 1911
Mr. Law. Well, naturally it was to fill deliveries.
Mr. Pecuka. It has taken us a half hour to ascertain that it was
to fill deliveries of the stock which the company had already sold
to other customers, has it not?
Mr. Law. That is the purpose of the purchase or obtaining of any
stock ; yes, sir.
Mr. Pecoka. So that when it made those sales it was selling stock
it did not have for delivery, is that right?
Mr. Law. That it did not momentarily have for delivery, yes.
Again _you get into the question of the contracts outstanding which
had not been delivered.
Senator Brookhart. Mr. Chairman, I want to make one correc-
tion with reference to my question. I asked about this 15,000 loan
of stock as the second loan. It was the first loan, I am informed,
Mr. Mitchell made to the company. However, there was a second
one, I am informed, of the same amount later.
Mr. Law. 15,000 shares later ; yes, sir.
Mr. Pecoka. I was going to ask Mr. Baker about that, yes. Now
we will suspend with you, Mr. Law, and let Mr. Baker resume.
TESTIMONY OF HUGH B. BAKER, PRESIDENT NATIONAL CITY CO.,
NEW YORK CITY— Resumed
Mr. Pecora. Now, Mr. Baker.
Mr. Bakek. Yes, sir.
Mr. Pecora. Will you produce the letter which you wrote to Mr.
Mitchell under date of April 23, 1!)29, relating to the borrowing of
15,000 shares of capital stock of the bank by your company from
him ?
Mr. BAitEE. Yes, sir ; I have that.
Mr. Pecora, Let me have it.
(A document was handed to Mr. Pecora.)
Mr. Pecora. Who signed this letter in behalf of the company'^
Mr. Bakes. I think I probably did. (After examining docu-
ment.) Yes, sir.
Mr. Pecoka. Have j'ou the original letter?
Mr. Baker. No ; I haven't that. That is a copy of it.
Mr. Pecora. Have you any reply to that letter which the company
received from Mr. Mitchell?
Mr. Bakek. No ; I haven't that.
Mr. Pecora. What other letters have you in connection with this
transaction? How about those letters Mr. Law just gave you?
Mr. Bakek. This is a later transaction, another letter.
Mr. Pec(1ra. Is that the transaction of IMay ?
Mr. Baker. Yes.
Mr. Pecora. May I see those letters?
(Mr. Baker handed a document to Mr. Pecora.)
Mr. Pecora. Let me see them all, if you will.
(Additional documents were handed to Mr. Pecora.)
Mr. Pecora. Now, let me have the first letter, the one of April 23.
(Mr. Baker handed a document to Mr. Pecora.)
Mr! Pecora. I ask that this letter, dated April 23, 1929, addressed
to Mr. C. E. Mitchell, from the National City Co., by the witness
as president, be spread upon the record.
1912 STOCK EXCHANGE PRACTICES
The Chairman. Without objection, it is so ordered'..
Mr. Pecoba. Shall I read the letter, Mr. Chairman?
The Chairman. Yes.
Mr. Pecora (reading) :
April 23, 1929:
Mr. O. E. MiTCHEXL,
55 Wall Street, New York.
Dear Mb. Mitchell: We desire to borrow from you 15,000 shares of the-
National City Bauk of New York stock from date hereof to July 10, 1929^
against which we will advance to you forthwith the sum of $380 per share-
as security for the return of the stock, stock in like number of shares to
be returned by us to you on July 10, 1929, against reimbursement to us in,
the amount now advanced. We will hand you on July 10, 1929, our check for
any cash dividend declarations on such stock in the interim.
Pursuant to verbal agreement, in lieu of delivery of check to you in accord-
ance vrith the above, we will credit your account on our books with the sum.
of $5,700,000, which will be considered as a loan by you to us and upon such
loan account we will pay you interest at the rate of 6 per cent per annum, you
to be free, however, to withdraw any portion of this loan on demand, the-
understanding being, however, that such portion as is withdrawn will be repaid
to us on July 10, 1929.
Tour acceptance of the foregoing proposal by initialing the carbon copy
hereof and delivery of the said 15,000 shares of stock to us will complete-
the arrangement.
Yours very truly.
The National City Co.,
By Hugh B. Baker, President.
In the month of May, 1929, Mr. Baker, did your company borrow
any additional shares of the National City Bank from Mr. Mitchell*
Mr. Baker. Yes, sir.
Mr. Pecora. On what date and in what number ?
Mr. Baker. May 13 we borrowed 15,000 shares.
Mr. Pecoha. That is in addition to the 15,000 shares borrowed on
April 23?
Mr. Baker. That is right.
Mr. Pecora. And you have produced here what purports to be
a true copy of the letter addressed by you on behalf of the National
City Co. to Mr. Mitchell with respect to this borrowing of 15,000-
shares on May 13, 1929?
Mr. Baker. Yes, sir.
Mr. Pecora. I ask that this be spread on the record.
The Chairman. If there is no objection, it will be spread on the
record.
Senator Fletcher. Was this an individual transaction with Mr.
Mitchell or Mr. Mitchell for the National City Bank?
Mr. Baker. For Mr. Mitchell individually.
Mr. Pecora. The letter is dated May 13", 1929, and is as follows-
(reading) :
ilAT 13, 1929.
Mr. O. E. Mitchell,
55 Wall Street, Neic York.
Dear JIr. JIitchell: We desire to borrow from you 15,000 shares the
National City Bank of New York stock from date hereof to July 10, 1929,
against which we will advance to you forthwith the sum of $400 per share
as security for the return of the stock, stock in like number of shares to be
returned by us to you on July 10, 1929. against reimbursement to us in the
amount now advanced. We will hand you on July 10, 1929, our check for any
cash dividend declarations on such stock in the interim.
Pursuant to verbal agreement, in lieu of delivery of cheek to vou in accord^
ance with the above, we will credit your account on our books "with the sum.
STOCK EXCHANGE PRACTICES 1913
Of $6,000,000, which will be considered as a loan by you to us and upon such
loan account we will pay you interest at the rate of 6 per cent per annum,
you to be free, however, to withdraw any portion of this loan on demand, the
understanding being, however, that such portion as is withdrawn will be
repaid to us on July 10, 1929.
Your acceptance of the foregoing proposal by initialing the carbon copy
hereof and delivery of the said 15,000 shares of stock will completel the
ngreement.
Xours very truly,
The National City Co.,
By Hugh B. Baker, President.
Now, when July 10, 1929, came around the National City Co.
returned on account of these borrowings 30,000 shares of the capital
stock of the bank to Mr. Mitchell, did it not?
Mr. Baker. That is right, July 10.
Mr. Pecora. And accompanying the 30,000 shares of stock so
returned did your company cause this letter to be sent to Mr. Mitchell
[handing document to Mr. Baker] ?
Mr. Baker. That is right.
Mr. Pecora. I ask that that be spread on the record.
The Chairman. There being no objection, it is so ordered.
Mr. Pecora. The letter is as follows (reading) :
The National City Co.,
Jitiy 10, 1929.
Mr. C. E. Mitchell,
55 Wall Street, New York, N. T.
Dear Mr. Mitchell: With reference to our letters to you of April 23 and
May 13 of this year, borrowing from you the aggregate of 30,000 shares of the
capital stocl£ of the National City Bank of New York, we take pleasure in
handing you herewith, against receipt, 30,000 shares of this stock, registered
in your name, represented by certificates No. E838 to No. E843, inclusive, iu
denominations of 5,000 shares each.
We also enclose our check to your order for $128,850 as the interest due you,
in addition to our check for $30,000, representing the July 1 dividend on this
stock.
Yours very truly,
F. J. Maquire,
Assistant Treasurer.
Is it or is it not the fact, Mr. Baker, that these 30,000 shares of
the stock of the bank were borrowed by your company from Mr.
Mitchell in order to enable it to make deliveries of that stock to
customers to whom it had sold the bank stock, when as a matter of
fact the City Co. did not have the stock for such delivery in its own
account ?
Mr. Baker. That is true to the extent that we did not have the
stock in New York.
Mr. Pecora. Did you have it anywhere else?
Mr. Baker. I cannot answer.
Mr. Pecora. You cannot answer?
Mr. Baker. Whether we had the stock en route to New York or
not, in what amount. I am sorry I cannot give the exact answer to
that. It is probable — possible that we did. We were buying Farm-
ers Loan and Trust stock at that time, which was converted into
City Bank stock later.
Mr. Pecora. Would you say that these shares of the stock of the
bank sold by the company at this time, to deliver which it was nec-
cessary for the bank to borrow 30,000 shares of that stock from Mr.
1914 STOCK EXCHANGE PRACTICES
Mitchell, were short sales by the company of the bank stock at
that time?
Mr. Bakzk. "Well, the answer would be " no " if we take into con-
sideration that we were accumulating Farmers Loan & Trust stock
to be exchanged into City Bank stock, or that we had stock coming
in on delivery of purchases that we had made throughout the United
States. If figured directly against our immediate holding at that
moment, the answer would be " yes."
Mr. PzcoKA. The answer would be " yes " under those circum-
stances i
ilr. Bakee. Yes.
]Mr. Pecora. Xow, as a matter of fact, wasn't the company selling
thousands of shares of the City Bank stock in excess of the number
of those shares which it was buying ?
Mr. Bakee. TTell. as to some specific time I would have to answer.
Mr. Pecoea. About the time these 30,000 shares were borrowed
from Mr. Mitchell?
Mr. Bakee. Xot when you take into consideration the purchase of
Parmers Loan & Trust stock, Mr. Pecora.
Mr. Pecora. ^as the company selling thousands of shares of the
bank stock to the public, between April 1-2 and May 13. 1929. in excess
of the number of shares it was buying ?
Mr. Baker. Between April — weU, that is best answered by our
inventory figures.
ilr. PtcoEA. I don't care how it is answered. But what is the
answer?
Mr. Bakee. The answer is, in April that our balance of stock on
hand was 7.701 shares.
Mr. Pecoea. That is including the 1-5,000 shares borrowed from
2klr. ^Mitchell, isn't it ?
Mr. Baker. That is including that, and this is giving consideration
to the stock that we actually had in Xew York : and in May it was
8.692 shares.
Mr. Pecoea. And that includes the 30,000 which had been borrowed
from INIr. Mitchell by that time ?
ilr. Baker. It probably does. That is May 13, that stock came in,
and in June at the end of that
Mr. Pecoea (interposing). Xow never mind June. I want to get
down to this period covered by these borrowings.
Senator Brookhaet. Let us have June there. You still had the
30.000 during June up to about the 10th of Jime ?
Mr. Baker. June shows a balance on hand of 17^91.
Senator Fletcher. How much Farmers Loan & Trust Co. stock
did you buy?
Mr. Bakee. I AviU get that by telephone. .Senator.
Senator Beookhabt. The fact is, Mr. Baker, you filled every order
for this stock that came to you at a satisfactory price, whether you
had the stock on hand or not ?
ilr. Baker. Wliether we had it ready for delivery, probably, yes.
.Senator Brookhart. And then you borrowed this of Mr. Mitchell
to cover that sort of transaction ?
Mr. Baker. To be able. yes. to make those deliveries.
Senator Towxsexd. Mr. Baker, would the 30.000 shares you bor-
rowed show on this side of the ledger as purchase stock ?
STOCK EXCHANGE PRACTICES 191o
;Mr. Bakze. I think so.
Mr. PzcoEA. !Mr. Baker, tou are familiar with the relationship
that existed at all times between that company and the National Citr
Bank since the National City Company was organized in 1911, aren't
you?
Mr. Baxze. "Well. I was not. of course, with the company in 1911.
]Mr. PzcoRA. I know that. Tou are familiar with the relationship
between the two institutions in so far as that relationship is indicated
by the fact that all the shares of the National City Co.'s capital stock
are owned by three trustees who represent all the shareholders of the
National City Bank?
Mr. Baker. That is right.
}*Ir. Pecora. And that the bank and the company had various
executive officers in common?
!Mr. Baker. Yes.
Senator Brookhart. On that, so far as any beneficial interest was
concerned in the buying and selling of this National City Bank stock
by the National City Co.. it all went to the stockholders of the
National City Bank ?
ilr. Bakxr. IVell. let me see if I get that just exactly, Senator
Brookliart. May I have that repeated again?
Senator Brookhart. So far as any beneficial interest arising now,
coming out of the profits of dealing in this National City Bank
stock
Mr. Baker. Yes.
Senator Brookhart. It idtimately all goes back to the stock-
holders of the National City Bank ?
Mr. Baker. That is right.
The Chatr^iax. Then the bank was in effect selling its own stock
short while the public was buying it?
Mr. Baker. I dont think that.
The Chahlmax. If vou sell what vou haven't got, isn't that selling
it short ? * "
Mr. Baker. But we had it coming in from various parts of the
world.
The CHAHQiAjf. You had the money with which to get it ?
Mr. Baker. And it was en route for delivery.
The Chaiemax. It was in existence somewhere?
^Mr. Baker. On the way to us.
^Ir. Pecora. You did not know what was on the way to you. did
you ?
Mr. Baker. Well, our figures show where we stood at the end of
that period.
Mr. Pecora. And your figures, as testified to by Mr. Law. show
that on April 1-2. before the first borrowing of 15,000 shares from
Mr. ^Mitchell, the company had received all but 492 shares on ac-
count of these subscriptions from all over the world ?
Mr. Baker. I heard that : yes.
Mr. Pecora. So that when this stock was borrowed there were
only 492 shares of the new stock which might be comins eventuallv
to the National City Co. from all over the world ?
Mr. Baker. Of that particular block of stock.
Mr. Pecora. Of that particular lot: yes. So these 30.000 shares
were all used, were they not, to enable your company to deliver to
llf>S52— 33— PT 6 11
1916 STOCK EXCHANGE PRACTICES
the persons to whom it had previously sold National City Bank
stock, the stock which it had sold ?
Mr. Baker. I assume it is; yes, of course.
Mr. Pecora. Do you know", Mr. Baker, the peak of the short
position of the National City Co. in the National City Bank's stock?
Mr. Baker. No ; I do not think there was any short position, Mr.
Pecora.
Mr. Pecora. You do not think there was a short position because
the Company had borrowed 30,000 shares of the stock from Mr.
Mitchell; isn't that correct?
Mr. Baker. And as I have said, because stock was en route to us.
Mr. Pecora. But you had received all but 492 shares of that
stock, had you not ?
Mr. Baker. We are talking about
Mr. Pecora. Prior to April 12, 1929.
Mr. Baker. We are talking about two different things. On that
particular subscription stock that is correct.
Mr. Pecora. Well, now, what else are you bringing into the pic-
ture? What other stock?
Mr. Bakeb. Only the stock that we had purchased in various places
of the United States that had not as yet been delivered.
Mr. Pecora. You were selling more than you were buying at that
time anyway, wern't you ?
Mr. Baker. In the month of April
Mr. Pecora. In the month of April and in the month of May?
Mr. Baker. We did.
Mr. Pecora. Yes. So that what you were selling even currently
at that time was more than what you were buying from people all
over the United States, wasn't it ?
Mr. Baker. In that particular month our purchases were 92,000
and our sales 103,000.
Mr. Pecora. So there was a short position there of 11,000 shares?
Mr. Baker. But, of course, we had
Mr. Pecora (interposing). Taking into account all this stock
which you had purchased all over the United States and which you
say was on its way into your box, you still were 11,000 short, were
you not?
Mr. Baker. Of course, these are ledger figures that we are using.
Mr. Pecora. Of course they are ledger figures we are using. But
you would not have any other figures; you won't tell that from
memory.
Mr. Baker. Oh, yes ; but it would not show stock that is en route
to us. These are shares that are in the box.
Mr. Pecora. Don't they show the number of shares you had pur-
chased even for future delivery?
Mr. Baker. Not on a specific date. That simply shows the stock
that is delivered to us.
Mr. Pecora. Doesn't that show the stock jjurchased even against
future delivery?
Mr. Baker. No.
Mr. Pecora. Are you sure of that ?
Mr. Baker. I am quite sure of that. (After a pause.) This shows
the stock actually delivered to us and paid for. Yes, that is right.
STOCK EXCHANGE PRACTICES 1917
Mr. Pecoea. What is right?
Mr. Baker. It does not show contracts on stocks that we have
contracted to buy and have out that is en route to us.
Mr. Pecora. Does it also show sales which you have made and
against which you have not yet made deliveries f
Mr. Baker. It shows deliveries.
Mr. Pecora. What?
Mr. Baker. That shows stock delivered out.
Mr. Pecora. Have you a separate record of those purchases? Ask
Mr. Law if he has.
Mr. Baker. This is our ledger acoimt.
Mr. Pecora. That includes purchases which had been contracted
for, does it not ?
Mr. Baker. No, sir.
Mr. Pecora. Doesn't it, Mr. Law?
Mr. Law. No, Mr. Pecora.
Mr. Pecora. Have you any record of those transactions ?
Mr. Law. We have not, sir. That did not enter into the picture
at the time we were asked to bring records.
Mr. Pecora. Where did you get the 30,000 shares of stock which
were returned to Mr. Mitchell on July 10, 1929 ?
(Mr. Baker conferred with Mr. Law.)
Mr. Pecora. Well, who is answering now, Mr. Baker or Mr. Law ?
Mr. Law. I am, sir.
Mr. Pecora. Mr. Baker, do you consider yourself qualified, as the
president of the company, to answer these questions, or do you think
that some one else can answer them more accurately?
Mr. Baker. Well, probably there are others who can answer better,
but
Mr. Pecora (interposing) . Is there anyone who knows more about
the company's transactions than you?
Mr. Baker. I don't think so.
Mr. Pecora. Then suppose you answer these questions and not
have Mr. Law whisper the answer in your ear. Will you ?
Mr. Baker. Yes; I will try to.
Mr. Pecora. If you need Mr. Law's help, say so on the record so
the record will show that you need it.
Mr. Baker. Very well.
Mr. Pecora. Now go ahead.
Mr. Baker. Well now, what is the question ?
Mr. Pecora. The question is. Where did the company get the 30,000
shares of bank stock which it returned to Mr. Mitchell on July 10,
1929.
Mr. Baker. From purchases in the market and from exchange of
Farmers Loan & Trust stock into City Bank stock.
Mr. Pecora. And does not that still prove that the company took
a short position in the stock of the bank in April and May and June?
Mr. Baker. If you are unwilling to include in that that we had
this other stock coming to us.
Mr. Pecora. You mean that it was coming to you ?
Mr. Baker. Yes.
Mr. Pecora. Not that you had it in possession ?
Mr. Baker. That is probably riglit.
1918 STOCK EXCHANGE PRACTICES
Senator Fletcher. Mr. Baker, may I ask what was the profit or
loss to the National City Co. on these operations ?
Mr. Baker. As pertains to what, this particular operation with
Mr. Mitchell?
Senator Fletcher. Yes ; with the bank stock.
Mr. Baker. Over the whole period of time ?
Senator Fletcher. Well, take up to July.
Mr. Baker. I have got that for the whole year here, Senator.
Senator Fletcher. State it then for the whole year.
INIr. Baker. There was a loss for 1929 of $10,393,000.
Senator Brookhart. That included the panic?
Mr. Baker. Yes.
Mr. Pecora. That is when the loss accrued, subsequent to October?
Mr. Baker. That is right. There was a profit up to the middle
of the year.
Senator Fletcher. Of how much? Can you give that?
Mr. Baker. I will get that for you.
Senator Brookhart. Did you have a profit on this handling of
this 30,000 shares of Mr. Mitchell ?
Mr. Baker. I assume so, Senator. Of course, that depends upon
the general movement up and down in the market price of the stock.
Senator Brookhart. Did you have to pay him anj' interest?
Mr. Baker. Yes; 6 per cent.
Senator Brookhart. And had a profit over and above that that
the market ran up to the 10th of Juh'?
Mr. Baker. Yes. That would depend upon the general market
movement.
Senator Brookhart. That means, then, that you were using Mr.
Mitchell's stock just as a matter of stock transactions as if it were
your own, does it not?
Mr. Baker. Yes; just the same as a loan to us.
Mr. Pecora. In other words, you were using it to cover a short
position ?
Mr. Baker. Well
Mr. Pecora. That is what actually was done, wasn't it?
Mr. Baker. A short position as far as actual stock in the box to
deliver; yes.
Mr. Pecora. Yes; the actual, physical operation consisted of the
borrowing and the use of that stock to cover a short position, did
it not?
Mr. Baker. Well, as I have just said.
Senator Fletcher. That borrowing is usuallj' done for this pur-
pose on the exchange, isn't it?
Mr. Baker. Yes. But as I tried to explain, Senator, if we had
no other stock coming in to offset that, I would readily admit that
it would be a short sale.
Senator Brookh^vrt. You mean you had contracts at some time
in the future that would bring in other stock?
Mr. Baker. Yes.
Senator Brookhart. But j'ou did not pay any attention to those
to see whether they amounted to the full amount of your sales or
not, as long as you "had this 30,000 share loan to cover sales, did you?
Mr. Baker. I think we probably knew exactly at that time.
STOCK EXCHANGE PRACTICES 1919
Mr. Pecora. Why, as a matter of fact, you could not have known
at that time, could you?
Mr. Baker. Could not have — I don't quite get the question.
Ml". Pecora. You undertook to pay Mr. Mitchell 6 per cent in-
terest, which amounted to $128,000, for these borrowings of 30,000
shares, didn't you ?
Mr. Baker. Yes.
Mr. Pecora. And you did that without knowing whether or not
yoii would need that stock with which to make deliveries of the
stock you had sold?
Mr. Baker. I say we did need it to make delivery.
Mr. Pecora. Of course you did.
Now, Mr. Baker, was it the policy of the National City Co. to seek
to exercise any control of the market in the shares of the bank?
Mr. Baker. We tried to keep the price of our bank stock, the City
Co. did, in general line with other bank stock, the general market
conditions.
Mr. Pecora. Did you seek to control the market for that purpose?
Mr. Baker. Oh, no, I should not say so.
Mr. Pecora. Wasn't it the
Mr. Baker (interposing). We were prepared to make a bid for
the stock as well as make an offering for the stock, at any time.
Senator Brookhart. Was that advertised to the public ^
Mr. Baker. No, sir.
Senator Brookhart. Did you make it in the stock exchange?
Mr. Baker. No, sir.
Mr. Pecora. Wasn't it the studied purpose and policy of the com-
pany to try to control the market on City Bank stock?
Mr. Baker. I don't think so; no. We could not possibly. There
were many, many dealers in bank stocks in New York. I don't know
how many thousand shares of bank stocks they wei-e dealing in, but
certainly we were only a very small part of the market.
Mr. Pecora. Are you familiar with the circumstances under which
the bank applied to the New York Stock Exchange in the fall of
1928 to take its stock from the trading list of the exchange?
Mr. Bakek. Yes; somewhat.
Mr. Pecora. What were those circumstances?
Mr. Baker. Mr. Mitchell was in Europe in the latter part of 1927,
and there had been very little trading on the stock exchange in
City Bank stock or any other bank stock until late in the fall of
1927 there were some arrangements made whereby the trading in
bank stocks was begun, and we noticed these transactions, in fact
I saw on one particular day sales in National City Bank stock rang-
ing five points difference between one transaction of 10 shares each.
Mr. Pecora. Wliat was the market quotation for the stock on the
exchange at those times when you saw those 5-point differences ?
Mr. Bakee. 1927?
Mr. Pecora. Yes ; the fall of 1927.
Mr. Baker. In the fall of 1927 the price of City Bank stock
ranged from 668 in October to 747 in December.
Senator Brookhart. That is for $20 par share?
1920 STOCK EXCHANGE PRACTICES
Mr. Baker. No, that was the $100 par share. When I saw this
activity in bank stocks I wired Mr. Mitchell. This is after discuss-
ing with others. And I said to him :
City Bank stock and stocks of other large banks of New York, although
listed on the New York Stock Exchange for many years, have infrequently,
if at all been traded in. Last week they were transferred to one trading jwst
in order to facilitate active trading. Ti-ading principally our stock active,
and Chase also traded in and quite active, with wide fluctuations, our stock
indicating manipulation. Mr. Garver requests that we advise you that he
regards this as distinctly disadvantageous, and probably at times might even
be dangerous, and with your approval lie proposes to discuss with the execu-
tive committee of the bank next Tuesday recommending to board to have
steps taken to withdraw from listing if possible.
Mr. Pecora. When was that communication sent by you to Mr.
Mitchell?
Mr. Bakek. September 23, 1927.
Mr. Pecoea. Was Mr. Mitchell then out of the city or the country?
Mr. Baker. He was in Paris.
Mr. Pecora. The fluctuations that you had observed were 5-point
fluctuations in small lots?
Mr. Baker. Yes. There were sales, I think five sales, one right
after another.
Mr. Pecora. And what was the aggregate of those five sales?
Mr. Baker. Fifty shares.
Mr. Pecora. Fifty shares?
Mr. Baker. Yes; 10 shares each.
Mr. Pecora. And you thought that indicated manipulation of the
stock on the floor of the exchange?
Mr. Baker. It seemed to offer those possibilities, with a spread of
five points in between each transaction on a small lot of 10 shares.
Mr. Pecora. And what were the number of shares the bank had
outstanding at that time? That is in September, 1927?
Mr. Baker. I think that is 750,000 shares, Mr. Pecora.
Mr. Law. 750,000.
Mr. Pecora. And from a total volume of sales aggregating 50
shares on that date you thought there was a manipulation in the
stock of the bank?
Mr. Baker. Thought it was possible that there was.
Mr. Pecora. Thought it was possible?
Mr. Baker. Yes.
Mr. Pecora. Did you complain to the exchange authorities about
that manipulation ?
Mr. Baker. No; I did not. I had nothing more to do with that
transaction other than to notify Mr. Mitchell.
Mr. Pecora. After you made that suggestion and sent those ad-
vices to Mr. Mitchell, what followed?
Mr. Baker. He replied, saying:
I have been nnich disturbed regarding recent speculative movement of Na-
tional City Bank stock and believe activities on New York Stock Exchange
only intensify speculative interest which can not be of any possible advantage
to us. I therefore concur fully in Mr. Garver's suggestion.
Mr. Pecora. And that was what? To apply to the New York
Stock Exchange
Mr. Baker. Yes.
Mr. Pecora. To strike the stock from its trading list?
Mr. Baker. That is right.
STOCK EXCHANGE PRACTICES 1921
Mr. Pecora. And the Mr. Garver whom you have mentioned is an
attorney at the head of the law firm of Shearman & Sterling?
Mr. Baker. Yes.
Mr. Pecora. The attorneys for the bank and also the National
City Co.?
Mr. Baker. That is right ; yes.
Mr. Pecora. Now, thereafter was formal application made by the
bank to the exchange to strike its stock from the list?
Mr. Baker. Yes, sir.
Mr. Pecora. When?
Mr. Baker. Let me see if I can find a copy of the actual letter here.
[After a pause.] I find a letter under date of January 11 from
Sir. Simmons — copy of letter — who was then president of the stock
exchange.
Senator Fletcher. 1928?
Mr. Baker. Yes; January 11, 1928, stating:
At a meeting of the governing committee of tlie New York Stock Exchange
held to-day your letter of January 11, 1928, was presented, and after discussion
the governing committee voted to remove from the list of securities dealt In
on the exchange the stock of the National City Bank.
Senator Brookhart. What date was that?
Mr. Baker. That was January 11, 1928. Then there are various
minutes here showing the action of the bank prior to that.
Senator Brookhart. What was the price quotation of the stock at
that time?
Mr. Baker. January?
Senator Brookhart. Yes.
Mr. Baker. $780 a share on January 7.
Senator Brookhart. That is sufficient for my purpose. That is
on par at $100?
Mr. Baker. $100; yes, sir.
Senator Brookhart. When was it changed to $20?
Mr. Pecora. February, 1929.
Mr. Baker. That was in 1929.
Senator Brookhart. 1929?
Mr. Baker. Yes.
Senator Brookhart. After this 1928 transaction you took charge
of the dealing of the National City Bank's stocks in the National
City Co. itself?
Mr. Baker. Yes, sir; and the National City Bank
Senator Brookhart (interposing). And the exchange sold, no
more; they were not listed over there at all?
Mr. Baker. Yes. It was not traded in.
Senator Brookhart. Then after you took charge in the National
City Co. and after this change to $20 par, what did the stock go to ?
Mr. Baker. Well, that price varied. In 1928 the price on January
7 was 780.
Senator Brookhart. That would be 7.8 to 1 ; that is, 780 per cent
of the par?
Mr. Pecora. No; the par was $20.
Mr. Baker. At this time the par in 1928 was $100 a share.
Senator Brookhart. So it was 780 per cent at that time. Now, I
want to get the percentage it went to after you took charge of it
yourself in the National City Co.
1922 STOCK EXCHANGE PRACTICES
Mr. Baker. Shall I run down a few of these here ?
Senator Brookhart. Yes ; run down to when
Mr. Baker (interposing). January 14, 762; January 21, 760
Senator Brookhart (interposing). I don't care about the date
along there. I want to know later.
Mr. Pecora. The general rise.
Senator Brookhart. The general rise in 1929.
Mr. Baker. After the par value was reduced to $20, is that right,
Senator ?
Senator Brookhart. Yes.
The CHAHtMAN. Do you want it immediately after it was reduced?
Senator Brookhart. No ; it is all right immediately, but I wanted
to find out which was the more efficient booming of this stock, the
stock exchange or the National City Co. That is what I want to
know.
Mr. Baker. Well, let's see — that exchange of old shares took place
January 15, I think it was, 1929.
The Chairman. And you have given the market on that then.
Mr. Baker. That is right.
Senator Brookhart. What did it go to during the months before
the panic?
Mr. Baker. It went as high as $580 a share.
Senator Brookhart. On a $20 par?
Mr. Baker. That is right.
Senator Brookhart. That would be 2,500 per cent of the
Mr. Baker (interjDosing). Yes; about that.
Senator Brookhart. So your company was about five times as
efficient as the exchange was in booming this stock?
Mr. Baker. That with all other — with the whole general trend of
the market. It moved right with it.
Senator Brookhart. There were a lot of other companies organ-
ized doing something like that to assist the exchange along in this
inflation period, weren't there?
Mr. Baker. Well, I don't know about that.
The Chairman. Then may I ask you : Prior to dividing the stock
into five points what dividends had the company been paying?
Mr. Baker. It has paid — the last year?
The Chairman. Yes; the year before that. If you don't know,
give us the average.
Mr. Baker. The dividend on the old stock was $20 per share.
The dividend on the new stock was
The Chairman (interposing). On that $100 investment, was that
earning $20 each year? Or don't I understand you?
Mr. Baker. No ; that was the dividend paid out of earnings.
The Chairman. Twenty per cent?
Mr. Baker. Yes ; $20 per share.
The Chairman. That is the common stock?
Mr. Baker. That is the National City Bank stock.
The Chairman. Then after it had been split into five parts what
was the dividend after that ?
Mr. Baker. $4 a share.
Mr. Pecora. It was the same rate?
Mr. Baker. Twenty per cent.
STOCK EXCHANGE PRACTICES 1923
Mr. Pecora. On the new par value?
Mr. Baker. That is right.
Mr. Pecora. And that went to 500 and what, did you say?
Mr. BAitER. 580.
Mr. Pecora. And went down to what ?
Mr. Baker. 23.
Mr. Pecora. And is what price now ?
Mr. Baker. I think about 40.
Mr. Pecora. And paying
Mr. Baker. $2.
Mr. Pecora. And paying $2 a share ?
Mr. Baker. A share, yes.
Senator Brookiiart. A little correction : I mentioned your effi-
ciency as five times as great, but that was a lightening calculation,
and I, on figuring it again, see it was only a little over three times as
great. So I don't want to advertise you too strongly.
Mr. Baker. All right. Thank you.
Mr. Pecora. The application to strike the stock from the list of
the New York Stock Exchange was made by the bank on September
30, 1929, wasn't it?
Mr. Baker. I thought it was a little later than that.
Mr. Pecora. Look at a letter signed by Mr. Swenson, chairman
of the board of the National City Bank of New York
Mr. Baker. I haven't tliat letter.
Mr. Pecora. Addressed to the president of the New York Stock
Exchange, dated September 30, 1927. Have you that letter?
Mr. Baker. No, I don't think I have. Just a moment.
Mr. Pecora. There is a photostatic copy of it [handing document
to Mr. Baker].
Mr. Baker. Yes. I haven't that letter. That is September 30.
Mr. Pecora. And what reply did the exchange make to that appli-
cation ?
Mr. Baker. I haven't a copy of the reply that they made to Mr.
Swenson's letter, but there were some comiDlications about it ; that is,
difficulties about it as to the method, and so forth, to have it removed.
Mr. Pecora. Haven't you the reply signed by Mr. Simmons, presi-
dent of the New York Stock Exchange, dated October 13, 1927?
Isn't that among your files there?
Mr. Baker. I don't think I have that. No ; I haven't that. This
shows the discussion and the notice to the shareholders, and so forth.
Mr. Pecora. See if that is not a photostatic copy of the stock ex-
change reply to the bank [handing document to Mr. Baker].
Mr. Baker. Of course, I never saw this reply, so I would not
know whether it is or not.
Mr. Pecora. Can you get from any of your associates the files of
the correspondence between the bank and the New York Stock Ex-
change on this subject of striking the bank stock from the list?
Mr. Baker. I don't know whether we have such file here. [After
conferring with associates.] I don't know where these letters were.
I am willing to accept this, Mr. Pecora. I haven't a copy of it
myself.
Mr. Pecora. I ask there be spread upon the record letter dated
SeiDtember 30, 1927, addressed to Mr. E. H. H. Simmons, president
of the New York Stock Exchange, by Mr. E. P. — is that Swenson?
1924 STOCK EXCHANGE PEACTICES
Mr. Bakek. That is right.
Mr. Pecora. Swenson, chairman of the board of the National City
Bank of New York, reading as follows [reading] :
The National City Bank of New Tokk,
New York, September 30, 1927.
Mr. E. H. H. Simmons,
President New York Stock Exchange, New York.
Dear Mr. Simmons: The directors of the National City Bauk of New York
have had under consideration the question of requesting the stock exchange to
remove the stock of the bank from the exchanse list.
The subject came up again at the meeting of our board held Tuesday, Sep-
tember 27, and It was tlie sense of the board that such a request should be
made.
Will you be so good as to advise me what steps, if any, other than this
request, the bank should take to bring the matter formally to your attention?
With assurances of our highest esteem.
Very sincerely yours,
E. P. Swenson,
Chairman of the Board.
I also ask that there be spread upon the record the reply to this
letter received from the stock exchange by the National City Bank,
the letter reading as follows [reading] :
OCTOBEB 13, 1927.
Mr. E. P. Swenson,
Chairman Board of Directors, The National Citij Bank of New York,
Neio York City.
Dear Mr. Swenson : I beg to acknowledge receipt of your letter of September
30 requesting on behalf of the board of directors of the National City Bank,
that the stock of the bank be removed from the list of the New York Stock
Exchange, and asking me to advise you what steps, if any, other than such
request, the bank should take to bring the matter formally to the attention of
the exchange.
While the stock exchange is most desirous of complying with the wishes of
your board, it feels that it would not be justified In removing the stock of the
National City Bank from its list upon the request of the board of directors
alone, and without the sanction and approval of the stockholders of the bank.
It appears that the stock of the National City Bank has been listed in the
stock exchange for many years, and that, since the original listing of the
stock, the bank has made applications from time to time for the listing of
additional amounts of stock when the capital of the bauk has been increased.
Under these circumstances, the removing of the stock of the National City
Bank from the list of the stock exchange would effect the rights of the stock-
holders of the bank, in that it would deprive them of a market for their stock
which has existed for many years. The stock exchange, therefore, can not
consider and act upon any request or application to remove the stock of the
National City Bauk from the list, unless .such request or application be author-
ized by the stocldioklers of the bank at a special meeting at which no sub-
stantial number of the stockholders vote against the proposed action.
Regretting very much that the stock exchange can not see its way clear to
comply with the request contained in your letter, I am
Very truly yours,
, President.
The stock was eventually stricken from the list by the exchange
some time in January, 1928 ?
Mr. Baker. That is right.
Mr. Pecora. And thereafter it was traded in in so-called over-the-
counter transactions?
Mr. Baker. That is right.
Mr. Pecora. Mr. Baker, can you tell us the largest niuiiber of
shares of bank stock which was sold by the National City Co. on any
one day subsequent to Januarj-, 1928, or that date in January when
it was stricken from the list of the exchange?
STOCK EXCHANGE PRACTICES 1925
Mr. Bakek. Of course, there began to be — there was great in-
creased activity in all trading of all character as time went on there
during 1928 and 1929, in the whole markets, bonds and stocks.
Mr. Pecoea. Yes; but what was the largest number of shares of
the stock of the National City Bank sold by the National City Co.
on any one day subsequent to January, 1928, when it was stricken
from the exchange list?
Mr. Baker. The highest number that I see — I have this only here
by the week. I haven't this by the day.
Mr. Pecora. Can jj'ou tell us, Mr. Law ?
Mr. Law. I can not. I did not have that.
Mr. Baker. I haven't it by the day.
Mr. Pecora. Were there days when the company sold tens of thou-
sands of shares of the bank stock in one day?
Mr. Baker. I suppose there have been days where there was as
much as perhaps thirty or forty thousand shai-es sold.
Mr. Pecora. On single days?
Mr. Baker. In one day.
Senator Townsend. You have it by the week there?
Mr. Baker. I have it by the week; yes.
Senator Townsend. That might give us what we are trying to get.
Mr. Pecora. For instance, take the week commencing February
21, 1929, or the week ending February 21, 1929.
Mr. Baker. All right.
Mr. Pecora. The National City Co. alone sold 92,709 shares of the
bank stock, didn't it, according to your records?
Mr. Baker. According to my records.
Mr. Pecora. In September, 1927, on September 23, 1927, to be ex-
act, you saw five sales of 10 shares each recorded on the Stock Ex-
change ticker, and you thought that indicated a manipulation of the
stock, didn't you?
Mr. Baker. I thought it merely showed that manijiulation of the
stock would be very easy.
Mr. Pecora. Yes. And did you think that sales amounting to tens
of thousands of shares a day miglat also be sales that would indicate
manipulation of the price of tlie stock in over-the-counter trans-
actions ?
Mr. Baker. I don't think you can draw that conclusion necessarily,
because the activitj' of markets generally had so tremendously in-
creased that it was difficult to find a basis of comparison.
Senator Brookhakt. Wasn't that general activity due to manipu-
lation, to general manipulation of everything?
Mr. Baker. Well, I don't think so. I think the public was insist-
ing on buying things.
Senator Brookhart. And they had been worked up to that state
of mind by the manipulation in selling things ? Is that correct ?
(There was no response.)
The Chairman. How much money did you spend encouraging
them ? How much did you spend monthly or by the year encourag-
ing them in that idea that it was a good time to buy ?
Mr. Baker. Well, of course, we were dealing in investment securi-
ties. Senator, and we tried to
The Chairman. In other words, you helped it along?
Mr. Baker. I didn't — I certainly was not trying to stop business.
1926 STOCK EXCHANGE PRACTICES
Senator Beookhart. You were interested in selling and not in pro-
tecting the public?
Mr. Baker. I was interested in both.
Senator Brookhakt. What did you do to protect the public ^ I
have not seen anything yet that was done to stop all this vast loss
they have sustained as a result of all these transactions.
Mr. Baker. Well, I haven't any answer to that. There was not
anything we could do that we did not do, as far as I know, to protect
the public as regards its investments.
Senator Brookhart. Were you going to excuse Mr. Baker, Mr.
Chairman ?
The Chairman. We were about to recess.
Senator Brookhart. I wanted to ask a few questions on an en-
tirely different line.
The Chairman. The committee will recess until 2.30. Those un-
der subpoena will appear here at that time. The witness will
continue.
(Accordingly, at 12.43 o'clock p. m., a recess was taken until 2.30
o'clock p. m., of the same day.)
AFTER RECESS
The subcommittee resumed at 2.30 o'clock, on the expiration of
the recess.
The Chairman. The subcommittee will resume. Senator Brook-
hart desires to ask a few questions of Mr. Baker before counsel to
the committee resumes his questions.
TESTIMONY OF HUGH B. BAKER, PRESIDENT THE NATIONAL CITY
CO., NEW YORK CITY— Resumed
Senator Brookhart. Mr. Baker, Mr. Mitchell testified that your
company handled some $20,000,000,000 of securities altogether since
its organization. That is about right, is it ?
Mr. Baker. For the last 10 years.
Senator Brookhart. And he said there was only about $1,000,000,-
000 of that that you had trouble with. Now, the things you handled
were stocks and bonds both, were they not?
Mr. Baker. Yes, sir.
Senator Brookhart. Take those stocks that j'ou handled: How
does their value to-day compare with what you sold them at?
Mr. Baker. Oh, as "to that
Senator Brookhart (interposing). Just in a genera] way. I am
not asking you to come down to any particular figures. I want to
get a general view of the economic situation of the country.
Mr. Baker. Well, I think they are in line with the general decline
in the market as a whole.
Senator Brookhart. But very much lower than the selling prices ?
Mr. Baker. Yes ; they are lower.
Senator Brookhakt. And yet I have a chart prepared by the Fed-
eral Reserve Board that shows they are still, I mean at the present
time, on an average, higher than the level of 1914.
Mr. Baker. That may be correct, but I do not know.
STOCK EXCHANGE PRACTICES 1927
Senator Brookhaet. Now, bonds have deijreciated considerably,
too, haven't they?
Mr. Baker. Some of them. Of course, a great many of those
bonds, of that $20,000,000
Senator Brookhart (interposing). He said $20,000,000,000.
Mr. Baker. Yes; of the $20,000,000,000, have been paid.
Senator Brookhart. I understand that, but in the prices they
now represent, those that are outstanding, they are depreciated. In
other words, all values are down now.
Mr. Baker. Well, that is true in the case of certain bonds. That
would not be true as to anywhere near the total, because in that
total are a great many municipal and State bonds.
Senator Brookhart. They have held up better in value?
Mr. Baker. Yes; they are better.
Senator Brookhart. United States Government, State, and mu-
nicipal bonds have held up better ?
Mr. Baker. Yes; and public-utility bonds.
Senator Brookhart. But private business bonds are all depre-
ciated, or nearly all of them, to-day?
Mr. Baker. Yes ; they have declined, the most of them.
Senator Brookhart. Now, what rate of interest do those bonds
generally carry?
Mr. Baker. Well, that varies, of course, considerably. Utility
bonds would perhaps carry a 5 per cent coupon, and municipal bonds
probably would carry 4 per cent coupons, or thereabout, and so on
through the list.
Senator Brookhart. Do they vary in that way?
Mr. Baker. Yes, sir.
Senator Brookhart. Take the stocks that you advertised and
sold, what kind of return did your prospectuses indicate for those
as a general thing?
Mr. Baker. Well, of course that was in accord with the general
dividend that was being paid on those stocks.
Senator Brookhart. They all expected 6 or 7 or 8 or 9 per cent
dividends, did they not ?
Mr. Baker. Well, it varies, of course. I just can't recall any
average.
Senator Brookhart. What would be the low level of dividends
that they would carry? That is, as to the prospectus and the idea
you put out to the public to whom you sold them ?
Mr. Baker. As to the prospective dividends in the future, do you
mean?
Senator Brookhart. Yes.
Mr. Baker. Well, of course we were quite in line with the earn-
ings and the earning prospects, and it looked to us as if the earnings
were safe on the existing basis at the time. We felt that those
dividends were justified and felt at the time that they would con-
tinue to be paid.
Senator Brookhart. Well, I wasn't interested in that proposition,
but was interested in what those dividend levels might be. You did
not advertise anything as low as 4 per cent, did you ?
Mr. Baker. Well, I am not sure just what the various dividends
on the various issues might have been.
1928 STOCK EXCHANGE PRACTICES
Senator Brookhart. The most of those stock issues were trying to
get 5 per cent at least, or as much as 10 per cent and some of them
even more, were they not?
Mr. Baker. Well, not 10 per cent, but 5 per cent, or something
like that.
Senator Brookhart. I want to ask you whether you know what
the general and capital earnings in the United States are, taking
them over a period of years, and that covers prosperity as well as
depression, cutting out the present worst of all depressions.
Mr. Baker. All right.
Senator Brookhart. Do you know what the average capital earn-
ing has been in the United States during its history ?
Mr. Baker. No; I do not.
Senator Brookhart. You have never made any study of that basic
proposition 'i
Mr. Baker. I haven't that.
Senator Brookhart. Well, suppose I said to you that the census
estimates, together with a scientific study made by Senator Howell,
of Nebraska, show that throughout the entire history of the country
the possibility of production has been less than 4 per cent a year,
and then I ask you if that continues possible, but, of course, since
1929 it has not been that, has it?
Mr. Baker. No.
Senator Brookhart. It has gone the other way?
Mr. Baker. Yes.
Senator Brookhart. And would now be way below 4 per cent if
we used these times as a level to go by. But to use a prosperity as
well as a depression period, the American people have the ability
to produce, say, 4 per cent, and that includes all value of new terri-
tory we acquired, all increases in values, and everything else, it has
been less than 4 per cent a year, has it not?
Mr. Baker. Perhaps so.
Senator Brookhart. If that be true, isn't it going to unsettle
business in this country always if institutions like yours are out
selling stocks and bonds at a price higher than the ability of the
American jDeoijle to i:>roduce?
Mr. Baker. Well, I should assume that it is because of that aver-
age rate of 4 per cent that you mention — I mean that is the result
of some companies having a much higher rate than others, and per-
haps some having no dividend rate at all, or no earnings.
Senator Brookhart. Your theory is that they should have a higher
dividend rate if the risk is greater.
Mr. Baker. No ; I think the dividend rate should be in line gener-
ally with the earnings of the company.
Senator Brookhart. Well, the earnings of the company should be
greater when it has a greater risk to carry ; is that it ?
Mr. Baker. Not always, because into that enters the question of
efficiency of management.
Senator Brookhart. Well, assuming that the management of all
is good, and all the same, then as to an enterprise where there is a
bigger risk or a bigger element of uncertainty, you would expect
ultimately a bigger dividend, wouldn't you ?
STOCK EXCHANGE PRACTICES 1929
Mr. Baker. Well, yes; if you assume that all management is
equally able, and the profit possibilities in industry are equal, then
I should say yes to that.
Senator Bkookhart. On that basis, then, agriculture would be
entitled to the biggest dividend of anybody, wouldn't it?
Mr. Baker. Well, I would certainly like to see it get it.
Senator Brookhart. But it never has yet that you know of,
has it ?
Mr. Baker. Not that I know of.
Senator Brookhart. Well, now, the thing I am getting at is this :
We have investigated the stock exchanges, the New York Stock
Exchange, and its operations of all sorts to boom stocks and bonds
to extortionate levels. Then we get into your company, and you
beat the stock exchange three or four times over in percentage.
How can we ever have stable prosperitj^ in this country as long as
we permit that kind of business to go on in the big wholesale way
you people conduct it ?
Mr. Baker. Well, that is a big question. [Laughter in the room.]
I am afraid it is too big for me to try to answer without any
preparation.
Senator Brookhart. Well, you are one of the big men in this game.
Mr. Baker. I am not so sure of that.
Senator Brookhart. In 1921 you people, through Mr. Mellon
and his associates, got practically control of this Government, in
the executive and legislative branches, and even the judicial branch,
for you have had two-thirds at least of the Supreme Court all the
time. The management of politics has been through the influence
of those sources. And then the big economic affairs of the country
have been managed by you people, and this is what you brought
us to.
Mr. Baker. Well, of course, I did not realize that that was the
situation.
Senator Brookhart. You did not?
Mr. Baker. No.
Senator Brookhart. You have been friendly with Mr. Mellon
and his financial ideas all through those times, haven't you?
Mr. Baker. Well, I have known Mr. Mellon, but not at all
intimately.
Senator Brookhart. Well, of course, we have known that his in-
fluence has been paramount in every branch of the Government here
since Harding became President.
Mr. Bakek. Well, I certainly had no influence with Mr. Mellon
at all one way or other.
Senator Brookhart. Well, you were friendly to his policies and
his way of managing things, weren't you?
Mr. Baker. Well, I could not say j^es to that without saying that
in so far as I regarded him as a conservative and a gentleman with
ability ; yes.
Senator Brookhart. And you belong to the conservative class
yourself.
Mr. Baker. I want to be conservative ; yes, sir.
Senator Brookhart. Well, now, supposing that when this new
administration comes in the Congress would enact a farm bill that
1930 STOCK EXCHANGE PRACTICES
would reestablish farm prices — and you are aware of the fact that
at the present time farm prices are fixed by the sale of the surplus
in the free trade markets of the world. You are aware of that
proposition, are you not?
Mr. Baker. Yes, sir.
Senator Bkookhart. Suppose we were to enact a bill that would
remove that surplus from having an influence on agricultural prod-
ucts in this country, and were to raise the price level up, as President
Wilson did during and after the WorFd War, to a cost-of-production
level to farmers, which would restore their buying power, and that
is a third or more of the buying power of the whole country, isn't it?
Mr. Baker. Yes.
Senator Brookhart. And were to send that buying power into
the channels of business. And then supposing the incoming admin-
istration would also jDut on public works to employ about one-third
of the unemployed labor of this country — and I think agi-icultural
prosperity would put a third of them to work ; then with two-thirds
going to work would put the other one-third to work. Now, sup-
posing some such arrangement were done by the new administra-
tion, wouldn't that start immediately a gigantic stock boom again in
New York?
Mr. Baker. Well, I would doubt that. If the unemployment sit-
uation of the country were reduced through the methods you sug-
gest, and business were improved, there is no doubt but that that
would be reflected in an improvement of prices for securities. But
as to that producing a boom beyond reasonable prices for existing
securities, I do not know, and I doubt that very much.
Senator Brookhart. With all your propaganda and selling ma-
chinery down there in New York, and in the stock exchange itself,
wouldn't you be able again to kite values up far above the earning
capacity of the coimtry, above this 4 per cent I am talking about?
Mr. Baker. Well, I do not like to be put in the class of having
kited those things up. I am not just exactly sure that I know what
that means.
Senator Brookhart. Well, when you increased your own stock
2,500 per cent beyond its fair value, that was a pretty high kite
itself, wasn't it?
Mr. Baker. Of course, Senator Brookhart, after all it is the con-
sumption of the stock, the buying of a stock or issue of bonds, which
controls the price. And in om- particular case that you mentioned,
we felt very strongly that the more stockholders that we had in the
bank, the more contacts we would have and the better our business
possibilities for the bank would be.
Senator Brookhart. But you knew all the time that the bank
could not earn on a 2,500 per cent increase of its par capital.
Mr. Baker. Well, of course, with the general growth of the coun-
try, of business and industry generally, banking facilities must keep
up with it; and the value of bank stocks, of this kind of bank, is
determined not only fi'om the current dividend earning, but from
the increase in its capital requirements, which aflFect favorably the
holder of stock.
Senator Brookhart. Then the speculative fever and manipulation
sent it very much higher still.
STOCK EXCHANGE PRACTICES 1931
Mr. Baker. Well, I should hate to think that is the controlling
factor in it.
Senator Brookhart. Now, if you would look at the history of the
country, and study what the earning level had been through its
prosperous periods, and if you had known that they were less than
4 per cent, then you would have known tiiat there was no such
increase possible as 2,500 per cent for conservative banks, or for a
bank like your bank, isn't that so?
Mr. Baker. Well, I don't quite see how you can measure the value
of any jjarticular industry, whether it is farming or banking or
manufacturing, by an average.
Senator Brookhart. Let us concede that you would not abso-
lutely follow the average. Yet when we charter corporations, when
the law charters corporations to combine their capital and go out
and earn against individuals, and when the Congress permits them
to come into interstate commerce and into the mails and into the
telegraphs and telephones and all those things, shouldn't the Con-
gress have something to say, and shouldn't the law have something
to say about the profits they would chai'ge people, when they have
these great special privileges that the law gives them ?
Mr. Baker. Well, I certainly believe in proj^er regulation, if that
is what you mean.
Senator Brookhart. Well, is it proper regulation when the Con-
gress sits by arid lets your stocks go up to 2,500 per cent of their par
value ?
Ml Baker. Well, I think the public buying will control that of
itself.
Senator Brookhart. Now, there is this final question : Supposing
when we start this prosperity in agriculture and of labor again,
when we have them reemployed, and when that starts general pros-
perity, if all your affiliates, and all stock exchanges get busy again
and put on another gigantic boom, and then when that bubble
bursts, won't we come back again into depression just as we did this
time?
Mr. Baker. Well, I hope not.
Senator Brookhart. You hope not, but that will be the fact if
you go in the same way again, and if we leave j^ou unrestrained to
do things on the stock exchanges, and in the affiliates, won't that
have to be the result?
Mr. Baker. Of course, I can not speak for the stock exchange at
all because we are not members of the stock exchange, and have
nothing whatever to do with its control or operation.
Senator Brookhart. Yes; I see that you pulled out, but you
thought they were not going fast enough to suit you then, didn't
you ?
Mr. Baker. I am sorry if you think that.
Senator Brookhart. I believe that is all I have to ask.
Mr. Baker. Mr. Pecora, before you resume, let me say: I tried
to draw on my memory this morning in order to answer one of your
questions, and I fear I did not do it very well. During the luncheon
recess I telephoned to get the real situation that existed on our books
as regards that period of time when we borrowed that stock from
Mr. Mitchell. I did say to you that the Farmers Loan & Trust Co.
1198.52— 33— PT 6 12
1932 STOCK EXCHANGE PRACTICES
was entering into that, but I did not have those dates before nie. I
now have the position that we had in tlie Farmers Loan & Trust
Co. stock, which a few weeks later was to be converted into National
City Bank stock. And if you would like for me, or will perimt
me to do it, I should like to give you those figures at this time.
Mr. Pecoea. \^^len was that conversion to take place?
Mr. Baker. The formal announcement to shareholders was made
on April 1. , , • ^
Mr. Pecoba. "Wlien was the exchange of stock or the conversion to
Mr. Baker. The actual exchange of stock took place on July 8.
Mr. Pecora. On July 8 ?
Mr. Baker. Yes.
Mr. Pecora. Well, that was fully two and a half months after
the first borrowing of 1.5,000 shares of stock from Mr. Mitchell,
wasn't it?
Mr. Baker. Yes ; but we had that stock at that time.
Mr. Pecora. You had what stock?
Mr. Baker. We had the Farmers Loan & Trust Co. stock, which
would be definitely exchanged for National City Bank stock.
Mr. Pecora. The National City Co. had a number of shares of
the old Farmers Loan & Trust Co. stock in April?
Mr. Baker. Yes ; on April 22 we had 3,569 shares.
Mr. Pecora. Under the ratio of exchange that had been agreed
upon, into how many shares of National City Bank stock woxild
they be convertible?
Mr. Baker. Seventeen thousand five hundred and odd shares.
Mr. Pecora. Now, as a matter of fact, how could you tell in April,
1929, that this merger of the Farmers Loan & Trust Co. with the
National City Bank would receive the approval of the stockholders
of both banks ?
Mr. Baker. We could not, except that the principal stockholders
had informally agreed to it. It had been approved by the boards
of directors and the announcement was made.
Mr. Pecora. And the stockholders of both institutions — that is,
of the Farmers Loan & Trust Co. and of the National City Bank —
were not called upon to approve or disapprove the merger until
June 28, 1929; isn't that correct?
Mr. Baker. The formal announcement went to the shareholders
on Ajiril 1.
Mr. Pecora. Not the announcement. You mean the proposal,
dont' you?
Mr. Baker. And then the ratification by the stockholders was
on June 28.
Mr. Pecora. Was to be on June 28 ?
Mr. Baker. That is right.
Mr. Pecora. When was the proposed agreement of merger be-
tween the National City Bank and the Farmers Loan & Trust Co.
actually made?
Mr. Baker. Well, the discussion of the thing was prior to that
by a good many weeks.
Mr. Pecora. And this was a discussion that was participated in
by a handful of persons, wasn't it, and not by this large army of
STOCK EXCHANGE PRACTICES 1933
thousands of shareholders in all parts of the world to whom you
referred this morning?
Mr. Bakee. Well, of course, the boards of directors of both insti-
tutions had approved it.
Mr. Pecora. The directors of both institutions proposed to present
a plan to the stockholders of both institutions some time in April,
is that correct?
Mr. Baker. Well, they approved it before that, because on April 1
the formal announcement went out to stockholders.
Mr. Pecoka. All right. The actual agreement, or the proposed
agreement calling for the merger of the two institutions, was not
entered into until late in May of 1929, was it, or, to be specific,
on May 28, 1929?
Mr. Baker. You mean the actual formal approval by the stock-
holders ?
Mr. Pecora. The actual merger, the proposed merger, the agree-
ment upon which the merger was to be effected.
Mr. Baker. Yes.
Mr. Pecora. Was not entered into until May 28, 1929, was it?
Mr. Baker. To be approved by the stockholders?
Mr. Pecora. No ; not by the stockholders.
Mr. Baker. I am sorry, but I do not quite understand you.
Mr. Pecora. The approval by the stockholders was not until
June 28, 1929, was it?
Mr. Baker. June 28 ; yes.
Mr. Pecora. Now, about a month before that the terms of the
proposed merger between the two banks were reduced to writing
and signed by the officers of the two banks, isn't that correct?
Mr. Baker. Well, I do not believe so, because on April 1 formal
announcement of this proposal went to the stockholders.
Mr. Pecora. When was the actual agreement signed?
Mr. Baker. Well, May 3 then, as I understand it now, was the
formal announcement.
Mr. Pecora. May 3 and not in April?
Mr. Baker. Just let me check on that.
Mr. Pecora. I thought you had checked on that during the recess.
Mr. Baker. I thought I had this correct. Let me ask Mr. Law —
well, the information I have on this is that April 1 the form&I
announcement to shareholders was made.
Mr. Pecora. What was the nature of that announcement ? Let us
go one step at a time now.'
Mr. Baker. Of course, I telephoned to New York for this, and
this was in the evening papers I think in New York on that day.
Mr. Pecora. What was the nature of the announcement that was
made on April 1?
Mr. Baker. Outlining the exchange proposal and terms of it.
Mr. Pecora. And then what was the next step ?
Mr. Baker. Well, of course, then on June 28 was the actual vote
by the stockliolders.
Mr. Pecora. Wasn't there any step in the interim ?
Mr. Baker. I do not know what papers might have gone out in
between April 1 and June 28. I haven't those here.
1934 STOCK EXCHANGE PRACTICES
Mr. Pecora. Now, the situation was that the directors of the two
institutions had had some sort of informal negotiations with each
other.
Mr. Baker. Yes ; that had been taken.
Mr. Pecora. Wait a minute. Sometime in the spring of 1929, is
that right?
Mr. Baker. That is right.
Mr. Pecora. As a result of those informal conferences and nego-
tiations between the officers and directors of those two banks, an
announcement was caused to be made by advertisement in the news-
papers to the shareholders of both institutions concerning the pro-
posal for a merger of the two banks.
Mr. Baker. That is right.
Mr. Pecora. Did any of the directors or officers of the National
City Co. participate in those preliminai-y conferences and negotia-
tions with the officers and directors of the Farmers Loan & Trust
Co.?
Mr. Baker. Well, the directors of the National City Bank were,
of course
Mr. Pecora (interposing). I have asked about the National City
Co. Just answer that question.
Mr. Baker. The directors of the National City Co., who at that
time were directors of the National City Bank, would naturally
participate.
Mr. Pecora. Were you one of those directors of the bank ?
Mr. Baker. I was elected a director of the bank during the month
of April, but whether this was while that — no. that was April 1, I
find. No; I don't know.
Mr. Pecora. You would answer in the affirmative the question as
to whether any officers or directors of the National City Co.
participated in those preliminary conferences and negotiations look-
ing to the merger of the two banks.
Mr. Baker. Well, as officers or directors of the National City Co.
as such, no. But those same individuals might have been directors
in the National City Bank.
Mr. Pecora. And there were some such individuals who were
officers or directors of both the bank and the City Co. at the one
time?
Mr. Baker. That is right.
Mr. Pecora. And they took part in those preliminary negotiations
and conferences, did they?
Mr. Baker. That is right.
Mr. Pecora. Now, as a result of those conferences did those offi-
cers and directors assume that the stockholders of both institu-
tions— that is, the Farmers Loan & Trust Co. and the National City
Bank — would ratify a proposal to merge the two institutions?
Mr. Baker. Yes.
Mr. Pecora. They felt quite certain that that would follow, did
they?
Mr. Baker. Yes. Both boards of directors had approved it.
Mr. Pecora. And you Imow that to be the fact, do you?
Mr. Baker. Yes. I just wanted to give you those facts.
STOCK EXCHANGE PRACTICES 1935
Mr. Pecora. Did the National City Co. take a position in the
market with regard to the stock of the National City Bank because
of that advance knowledge which they had?
Mr. Baker. Well, we bought Farmers Loan & Trust Co. stock.
Mr. Pecora. Because of that knowledge?
Mr. Baker. We knew that that was to take place.
Mr. Pecora. And you figured that if that merger took place it
would — ■ — ■
Mr. Baker (interposing). Well, we
Mr. Pecora (interposing). Wait a minute until I finish.
Mr. Baker. I beg pardon.
Mr. Pecora. You figured that if that merger took place it would
redound to the benefit — Mr. Law, let me ask this question of Mr.
Baker, and don't interrupt him.
Mr. Law. I beg pardon.
Mr. Pecora. lou figured that if this merger took place it would
redound to the benefit of the shareholders of both institutions, and
for that reason the National Gty Co. started to acquire the stock
of the Farmers Loan & Trust Co. in order to be able to take advan-
tage of the proiDOsed merger through exchange of stock?
Mr. Baker. Not that at all. This announcement was on April 1,
and our accumulation of stock there was April 22.
Mr. Pecora. And that was before any agreement was actually
arrived at for the merger, wasn't it?
Mr. Baker. Well, the stockholders had not formally approved,
but the directors had, and we assumed that the stockholders would,
which they did.
Mr. Pecora. When was this matter of the proposed merger first
discussed at any meeting of the board of directors of the bank, if
you can tell me ?
Mr. Baker. I cannot tell you. I was not on the board of direc-
tors at that time.
Mr. Pecora. Now, the Farmers Loan & Trust Co. was a State
bank, wasn't it?
Mr. Baker. Yes, sir.
Mr. Pecora. It was not a national bank?
Mr. Baker. That is right.
Mr Pecora. And the National City Bank was a national bank >.
Mr. Baker. That is right.
Mr. Pecora. And the Farmers Loan & Trust Co., being a State
bank, could only merge with another banking institution with the
approval of the State superintendent of banks in New York; isn't
that so?
Mr. Baker. Well, I assume that is true, that it would be through
the regular procedure there, whatever it was.
Mr. Pecora. Don't j'ou know that is a requirement of the law ?
Mr. Baker. I think that is right.
Mr. Pecora. You are not guessing at it, are you? You are a di-
rector of the bank, aren't you, Mr. Baker ?
Mr. Baker. Yes ; I am entirely in accord with that, of course.
Mr. Pecora. Did the directors and officers of the National City
Co., before they started to accumulate the shares of the Farmers
1936 STOCK EXCHANGE PRACTICES
Loan & Trust Co., in anticipation of this merger, know that the
State superintendent of banks of New YorTi would give his ap-
proval?
Mr. Baker. No ; I do not know the answer to that.
Mr. Pecora. You did not feel that they were taking any risks, did
you, in accumulating the stock of the Farmers Loan & Trust Co.
in anticipation of the merger and the benefits that would thereby
be acquired by your company as a stockholder ?
Mr. Baker. No; I did not think there was any risk. My only
reason for getting this information was merely that I wanted to
clear up the point, which I could not give you the figures on this
morning, because I was certain we were not short of National City
Bank stock, and yet I had to have these figures.
Mr. Pecora. Well, as a matter of fact, doesn't that still leave you
short of National City Bank stock in April and May, when you
borrowed 30,000 shares from Mr. Mitchell to cover that position?
Mr. Baker. On that technicality, yes.
Mr. Pecora. Isn't it something more substantial than a mere tech-
nicality?
Mr. Baker. It does not seem so to me.
Mr. Pecora. As a matter of fact, you did not know and could not
know until June 28, when the stockholders of the two banks acted
upon the proposal to merge, that such a merger would in fact be
effected, did you?
Mr. Baker. No ; we could not be absolutely certain.
Mr. Pecora. So that
Mr. Baker (continuing). But we were morally certain that that
would be effected.
Mr. PECORri. You still say that your company's selling of the capi-
tal stock of the National City Bank in April and May and June of
1929 was not of a character that required and compelled you to
borrow 30,000 shares in order to protect a short position?
Mr. Baker. Oh, yes, because this stock we held of the Farmers
Loan & Trust Co. was not converted into National City Bank stock
until July 8.
Mr. Pecora. You could not know and did not Imow at any time
prior to June 28 whether it would be effected by a merger or not?
Mr. Baker. I say, I could not tell, but it seemed practically certain
it would be ratified by the stockholders.
Mr. Pecora. The number of shares your company could have
obtained from that merger at the most was about 17,000 shares.
Mr. Baker. At the date of April 22 that is what it would have
been. On the date of the conversion, which was July 8, we had
5,446 shares.
Mr. Pecora. When was the first public announcement made of
the proposal to merge the two banks s
Mr. Baker. April 1, I think.
Mr. Pecora. Are you sure of that?
Mr. Baker. I am sure if this information given me from New
York is correct and I think it is.
Mr. Pecora. Isn't it a fact that it was on April 1, 1929, that the
subject was first discussed or proposed at a meeting of the direc-
tors
Mr. Baker. No, sir
STOCK EXCHANGE PRACTICES 1937
Mr. Pecoea (interposing). Let me finish. At a meeting of the
directors of the National City Bank?
Mr. Baker. No, sir. I am quite sure it was prior to that.
Mr. Pecora. Will you look at the minutes of a special meeting of
the board of directors — well, while I am having some records exam-
ined let me ask j^ou this question: Your statement was that as a
result of the certainty, or moral certainty, on the part of the officers
and directors of the National City Co. in April, 1929, that a merger
of the National City Bank with the Farmers Loan & Trust Co. would
be ratified and become effective on June 28, 1929, your company
accumulated several thousand shares of the stock of the Farmers
Loan & Trust Co. ?
Mr. Baker. That is right.
Mr. Pecoea. And that as a result of this accumulation, and through
the ownership of this stock, your company would be enabled to
acquire on some ratio of exchange about 17,000 shares of National
City Bank stock when that merger became effective, is that right?
Mr. Baker. That is right, on the basis of our purchases.
Mr. Pecora. Wlien did you buy those three or four thousand
shares of Farmers Loan & Trust Co. stock?
Mr. Baker. April 22.
Mr. Pecora. Isn't it a fact that on that date, April 22, the National
City Co. was short over 25,000 shares of stock of the National City
Bank which it had previously sold to customers throughout the
country ?
Mr. Baker. No ; I am quite sure not.
Mr. Pecora. Will you look at your records in verification of those
figures ?
Mr. Baker. I have not the records by days, Mr. Pecora.
Mr. Pecora. Will you see if it was not short 25,181 shares at one
time within that period?
Mr. Baker. No. My figures do not show a shortage at all at
any time.
Mr. Pecoea. Your figures do not show a shortage because of the
borrowing of those 30,000 shares from Mr. Mitchell ?
Mr. Baker. Yes; but borrowing those and applying this conver-
sion of this stock into National City Bank stock eliminates any
possibility of a short position.
Mr. Pecora. Then you felt sure you could sell short 17,000 shares
because you could cover by the merger of the two banks in the latter
part of June ; is that right ?
Mr. Baker. In other words, by converting that into National City
Bank stock we were not short.
Mr. Pecora. And if the stockholders of either of the banks on
June 28, 1929, had kicked those plans for a merger into the waste-
basket, your company would have been short 17,000 shares.
Mr. Baker. We would have been short on that date in that event ;
yes.
Mr. Pecoea. And yet in April and in June you went ahead, as-
suming that the merger would take place on June 28, and sold
shares of National City Bank stock which the City Co. did not have.
Mr. Baker. That is right.
Mr. Pecoea. Does that complete your explanation?
1938 STOCK EXCHANGE PRACTICES
Mr. Barer. That is all I wanted to saj-. I just wanted to get
those figures to you.
Mr. Pecoka. Now, Mr. Baker, in answer to one of Senator Brook-
hart's questions in tlie last few minutes you stated, either in words
or in substance, as follows : We, meaning the National City Co., felt
very strongly that the more stockholders the bank had the more
contacts we would have; do you recall that?
Mr. Baker. Yes.
Mr. Pecora. "Wliat did you mean by that ?
Mr. Baker. I meant the more business possibilities, the more
people would be interested in our institution.
Mr. Pecora. That is to say, you would have a larger army of
prospective customers for the securities Avhich the National City Co.
was selling to the public ; is that right ?
Mr. Baicer. That, plus whatever facilities the bank had that
could be used.
Mr. Pecora. In other words, it would also enlarge the facilities
which the National City Bank could place at the disposal of the
National City Co. in the sale of the latter company's securities to
the public ?
Mr. Baker. Oh, no ; I didn't have that in mind.
Mr. Pecora. What did you have in mind by the addenda that
you made?
Mr. Baker. It seemed to me that the more stockholders that the
National City Bank had in the United States the more business op-
portunities there would be opened to the bank and the more people
there would be interested in the business of the bank.
Mr. Pecora. Well, why was that the concern of the National City
Co. as the securities selling organization.
Mr. Baker. Because those same people with whom we were doing
business throughout the United States, and others, and we were con-
stantly increasing our business range, thej^ would be prospective cus-
tomers of the bank and of the companj' and of any other facility
we had in banking.
Mr. Pecora. In other words, the stockholder of the bank would
become a potential customer of the National City Co. for its securi-
ties.
Mr. Baker. If he were an investor; yes.
Mr. Pecora. And that was the special desire of the National City
Co. in enlarging the number of shareholders of the National City
Bank, wasn't it?
Mr. Baker. Oh, no; not particularly.
Mr. Pecora. It was one of them, wasn't it?
Mr. Baker. It was one, certainly.
Mr. Pecora. And it was not an insignificant feature of its desire
in that respect, was it?
Mr. Baker. Not at all.
Mr. Pecora. Was it in order to serve that purpose or to further
that purpose in some fashion, that the National City Co., from the
time when the National City Bank was taken off the trading list of
the New York Stock Exchange, in January of 1928, embarked upon
an intensive campaign to sell the stock of the National City Bank
throughout the country?
Mr. Baker. Will you let me have that question repeated ?
STOCK EXCHANGE PRACTICES 1939
Mr. Pecora. The committee reporter will please repeat it. [Which
was done.]
Mr. Baker. Well, there are a good many diflferent points in that
question, I think.
Mr. Pecoea. Was that one of the purposes that actuated or
prompted your company to sell the stock of the bank throughout
the country?
Mr. Bakek. One of the purposes, of course, was to increase the
business in the National Citj^
Mr. Pecora (interposing). For whom?
Ml". Baker. For the bank and the company.
Mr. Pecora. Was the company engaged in increasing the business
of the bank?
Mr. Baker. No ; but we were interested in promoting the interests
of the bank in any way we could, of course.
Mr. Pecora. Because you were an integral part of the bank,
weren't you, in substance if not in form?
Mr. Baker. Because we were all stockholders, and we were all in-
terested in the general progress of the institution.
Mr. Pecora. Well, the National City Bank was a national banking
institution under its charter, and the National City Co. was an invest-
ment company under the charter given to it by the State of New
York. They were two separate legal entities, but in truth and in fact
they were inseparably interwoven with each other, weren't they?
Mr. Baker. Well, we certainly were a part of the same institution.
Mr. Pecora. They were so inseparably interwoven with each other
that it was not possible for anyone not a stockholder of the bank to
have any interest in the stock of the company.
Mr. Baker. That is correct.
Mr. Pecora. And the bank was helping the company, and the
company was helping the bank, all along the line, isn't that the
conclusion ?
Mr. Baker. Actually helpful all the time.
Mr. Pecora. For that reason, among other reasons, your company
was desirous of enlarging the number of stockholders of the bank?
Mr. Baker. That is right.
Mr. Pecora. You know that a bank under the law can not trade in
its own stock, don't you ?
Mr. Baker. Yes ; that is right.
Senator Brookhart. Where did you get this stock to enlarge the
number of stockholders?
Mr. Baker. Of course, there is a general market prevailing on the
stock in New York, quotations all the time, people wanting to sell
and people wanting to buy.
Senator Brookhart. You got it from other stockholders and
thereby reduced the number, as you bought it, didn't you ?
Mr. Baker. But where some estate, for instance, had to be settled
and out of that estate came, perhaps, a block of a few thousand
shares of stock, that stock would be purchased and we would sell it.
Senator Brookhart. How much did you increase the number of
stockholders of the bank ?
Mr. Baker. From 15,000 to 84,0000 or 85,000.
Senator Brookhart. In how long a period of time ?
Mr. Baker. In three and a half years or four years.
1940 STOCK EXCHANGE PRACTICES
Senator Brookhaet. And that increase all occurred before the
stock broke down in price, didn't it?
Mr. Baker. No. The number of stockholders in 1927 was 15,854.
In 1928 the number of stockholders was 18,402. The number of
stockholders in 1929 was 62,868. The number of stockholders in
1930 was 68,491. The number of stockholders in 1931 was 79,260,
and the number of stockholders in 1932 was 84,892.
Senator Brookhart. But the price increased more rapidly, or I
mean the number of stockholders increased more rapidly since the
stock declined.
Mr. Baker. Well, of course the largest increase was from the 1928
figures to the 1929 figures, and on account of the fact that the stock
was split at that time.
Mr. Pecora. Mr. Baker, in order to enable the company more
easily to find new stockholders for the bank, wasn't the par value
of the stock of the bank reduced from $100 to $20 in February of
1929?
Mr. Baker. It seemed to us that the price of the old stock was
getting to such a high figure that the average investor could not
afford to buy it.
Mr. Pecora. Well, the stock was placed, wasn't it?
Mr. Baker. Yes; but
Mr. Pecora (interposing). The bank did not own any of it and
could not own any of it ; isn't that a fact ?
Mr. Baker. That is true.
Mr. Pecora. The public had the stock when it was $100 in par
value ?
Mr. Baker. But the bank was growing and more stock was being
issued from time to time.
Mr. Pecora. And in order to increase the number of shareholders
the stock of the bank was reduced in par value from $100 to $20 in
February of 1929, wasn't it?
Mr. Baker. Yes, that is right.
Mr. Pecora. All right. Now, Mr. Baker, are you reading some-
thing that helps you to answer any of my questions?
Mr. Baker. I was just reading this paper to get the date and the
announcement we made at the time the stock was split from $100
par value to $20 par value. If I may read to you what the board said
about that matter.
Mr. Pecora. I luiow what the board said. I simply want the fact
to appear in the record that there was a change in par value from
$100 to $20 effective in February of 1929, and that one of the
immediate effects of that change was to facilitate enlarging the
number of shareholdere of the bank.
Mr. Baker. That is right, that it was then within the reach of
the smaller investor.
Mr. Pecora. And the larger the number of shareholders the greater
the number of prospective customers the National City Co. had for
its securities.
Mr. Baker. Tliat is right.
Mr. Pecora. All right. Now I want to ask vou : Did the National
City Co. in the selling campaign which it instituted in the shares
of the bank's stock, after those shares were taken from the trading
STOCK EXCHANGE PRACTICES 1941
list of the New York Stock Exchange, ever seek to control the
market ?
Mr. Baker. No, except that there were times when the market
would seem to be moving too fast one way or the other due to some
extraordinary situation of the moment, and there we would under-
take to do it.
Mr. Pecora. Let me ask you a few questions about the selling
facilities and organization of the National City Co. : How many
departments did it have to handle its securities, and by what names
were they designated or known?
Mr. Baker. You are not referring to the sales organization par-
ticularly, but to the entire organization?
Mr. Pecora. To the general setup and operation of the company
in its business of bujdng and selling securities.
Mr. Baker. Well, our bujang work is in the hands and is the
responsibility of vice presidents. For instance, there is a vice presi-
dent in charge of industrial work, and a vice president in charge
of municipal work, and a vice president in charge of railroad work,
and a vice president in charge of foreign work, and a vice president
in charge of the selling organization.
Mr. Pecora. And you had a vice president in charge of securities
issued by industrial corporations?
Mr. Baker. Yes.
Mr. Pecora. And you had a vice president in charge of securities
issued by railroad corporations?
Mr. Baker. That is right.
Mr. Pecora. And you had a vice president in charge of securities
issued by foreign governments and by foreign corporations?
Mr. Baker. That is right.
Mr. Pecora. And you had a vice president in charge of municipal
issues ?
Mr. Baker. That is right.
Mr. Pecora. And also of State and Federal Government issues ?
Mr. Baker. Well, that came under the same vice president.
Mr. Pecora. That would come under municipal issues generally I
Mr. Baker. That is right.
Mr. Pecora. And you had a vice president in charge of securities
issued by utility companies, didn't you? Wasn't that another sub-
division in charge of a vice president?
Mr. Baker. That is right, but that particular vice president was
also in the industrial end as well.
Mr. Pecora. That is, utility securities came under the supervision
of the vice president who had the industrial issues also in charge ?
Mr. Baker. That is right. And I did not mention a vice presi-
dent in charge of accounting and treasury work.
Mr. Pecora. How many branch offices or district offices did the
National City Co. have at the end of 1927?
Mr. Baker. We had fifty-some odd.
Mr. Pecora. Can you get that information?
Mr. Baker. Yes. I find it is 67.
Mr. Pecora. You had 67 district and representative offices, is that
right?
Mr. Baker. That is risht.
1942 STOCK EXCHANGE PRACTICES
Mr. Pecoea. And they were linked up by 11,100 miles of private
wire services, weren't they?
Mr. Baker. That is correct.
Mr. Pecoea. That is exclusive, isn't it, of service and sales facili-
ties which the company had at 10 of the metropolitan branches of
the bank in the city of New York ?
Mr. Baker. Yes, sir. I don't remember exactly what the dates
were when we had the representatives in those branch offices of the
bank. We established in those offices — or the fact is that when the
offices were determined upon for the bank we generally had facili-
ties, there, either a room of our own or a desk, and so forth, for the
National City Co.
Mr. Pecoea. Mr. Baker, have you before you a copy of the annual
report of the operations of the National City Co. and its subsidiary
corporations for the fiscal year ending December 31, 1927, which
was made by Mr. Mitchell as the then president of the company
to its board of directors?
Mr. Baker. Yes, sir.
Mr. Pecoea. Turn to the last page of it, please.
Mr. Bakee. The chart page?
Mr. Pecoea. No, just ahead of the charts. Do you follow this
statement concluding the textual portion of the report :
Sales and service facilities have recently been established at 10 banks, metro-
politan branches, but as tliese are not yet ready as additional offices, the year
closed with a total of 67 district and representative offices supplemented by
11,100 miles of private wire seiTice.
Mr. Bakes. That is correct.
Mr. Pecoea. Now, Mr. Baker, do you know that frequently de-
positors of a bank seek the advice of officers of their bank with
respect to making investments?
Mr. Baker. Yes, sir.
Mr. Pecoea. And in order for a bank to give that kind of advice
disinterestedly it should not be interested in pushing any particular
security, should it?
Mr. Baker. Well, I think it is distinctly to the advantage of a
bank if it has the benefit of the study of securities which our or-
ganization, we thought, was able to give.
Mr. Pecora. Isn't every well-organized and fimctioning bank pos-
sessed of certain facilities for informing its clients of security issues
generally ; I mean the soundness of security issues generally ?
Mr. Baker. It is, but of course that is in the matter of degree.
There is a tremendous amount of study and research work required
in the development of issues of securities and then in following
their progress afterwards.
Mr. PECORiV. Mr. Baker, you would not hesitate to say, would you,
that the advice which a bank gives to a depositor, in response to
the depositor's request for such advice concerning investments, should
be wholly unselfish and disinterested on the part of the bank and
should be designed to serve the depositor's interests?
Mr. Baker. It should certainly serve the depositor's interests all
the time.
Mr. Pecora. And do you think that a bank which has an affilia-
tion with an investment company, sponsoring its own issues or the
STOCK EXCHANGE PRACTICES 1943
issues of others, is in a position to give that kind of unselfish and
disinterested advice to a depositor seeking such advice?
Mr. Baker. I think so.
Mr. Pecora. Do you recognize that to sucli a bank and its officers
and employees there is the temptation of favoring the securities in
which its affiliate is interested ?
Mr. Baker. That may be true, but the
Mr. Pecora (interposing). Well, it is true, isn't it?
Mr. Baker. But the point is, as I see it, that where the investment
house has the facilities to determine the value of securities, that is a
distinct advantage to have.
Mr. Pecora. But the investment house has not given the same
consideration to all securities offered to the ])ublic as it has to those
in which it is particularly interested, has it ?
Mr. Baker. That is right.
Mr. Pecora. So that a bank with that kind of investment affiliate,
functioning even through the bank's own branches, is in the position
of having the affiliate particularly interested in certain issues of
which it has made a si^ecial study and of having the temptation
always present to advise a depositor seeking its advice for investment
purposes to invest in the securities which its investment affiliate is
sponsoring.
Mr. Baker. There is no doubt about that, and yet
Mr. Pecora (interposing). And to that extent isn't there always
lurking the danger that the depositor seeking disinterested advice
won't get it?
Mr. Baker. That depends upon the ability of the investment
banking house in its research work, and in its investment in securi-
ties it recommends, to try to keep on hand a diversified list that will
fit all classes of investors.
Mr. Pecora. Mr. Baker, do you still think it is good banking
practice for a bank to have itself so interwoven with an investment
affiliate, as the National City Bank is with the National City Co.?
Mr. Baker. Yes, sir.
Mr. Pecora. You do?
Mr. Baker. Yes, sir.
Mr. Pecora. Do you think it is good banking practice for a bank
to have on its board interlocking directors?
Mr. Baker. I do not see any objection to that.
Mr. Pecora. All right. I simply wanted to get your views about
it. Now let me take up
Senator Brookhart (interposing). Mr. Baker, have you seen
Senator Norris's spiderweb of Wall Street interlocking directorates
down here?
Mr. Baker. No.
Senator Brookhart. I think you better go down and study that.
Mr. Baker. All right.
Mr. Pecora. I will come back to the National City Bank stock
matter later, but I want to take up something else for the moment :
Mr. Baker, around the beginning of December, 1931, at which time
you were a director of the National City Bank, and also president
of the National City Co., did you jDurchase 1,500 shares of the stock
of the bank?
1944 STOCK EXCHANGE PRACTICES
Mr. Baker. In 1931?
Mr. Pecora. Yes.
Mr. Baker. You are referring, I assume, there to
Mr. Pecora (interposing). I am referring to a transaction, or I
am asking you about any transaction you might have had, involving
the purchase by you of 1,500 shares of National City Bank stock.
Mr. Baker. Yes.
Mr. Pecora. Now, have you in mind the transaction to which I
have directed j'our attention?
Mr. Baker. Yes.
Mr. Pecora. How much did you pay for that stock ?
Mr. Baker. I paid $50 a share, and
Mr. Pecora (interposing). That means $75,000 for the 1,500-share
block?
Mr. Baker. That is right, and
Mr. Pecora (interposing). In order to enable you to make that
purchase did you borrow the total purchase price, $75,000?
Mr. Baker. Yes, that is correct.
Mr. Pecora. From whom?
Mr. Baker. From the Stock Purchase Corporation of our insti-
tution.
Mr. Pecora. From whom?
Mr. Baker. From the Stock Purchase Corporation.
Mr. Pecora. Well, now, just what is that Stock Purchase Cor-
poration which you refer to?
Mr. Baker. Well, that is a corporation that was discussed here
on yesterday, I think.
Mr. Pecor,\. That was the corporation which was set up to enable
the officers and employees of the bank and its affiliates
Mr. Baker (interposing). Yes.
Mr. Pecora (continuing). To buy the capital shares of the bank
on the installment plan ?
Mr. Baker. Yes.
Mr. Pecora. At what price was the stock made available to the
officers and employees under that plan ?
Mr. Baker. Well, that was in 1329, when the stock was selling at
about $200 a share. And, later on, there were additional offerings
I think, in there, at $80 a share. But if you will permit me to
tell you what this transaction was that I had ?
Mr. Pecora. I am going to permit you to tell us all about it. I
will ask you a number of questions, and I want to bring out all the
facts connected with it.
Mr. Baker. All right.
Mr. Pecora. Now, when this stock plan was set up, to enable the
officers and employees of the bank and its affiliates to purchase
shares of the bank on the installment plan, those shares were to be
purchased generally at the market, weren't they ?
Mr. Baker. Yes; about the market or a little below the market.
Mr. Pecora. That plan was set up originally some time in 1927,
wasn't it ?
Mr. Baker. Well, there was a plan in 1927. I am not particularly
familiar with that. The first time that I knew about it. particularly,
was the 1929 plan.
STOCK EXCHANGE PRACTICES 1945
Mr. Pecoea. The plan as originally set up in 1927 was not designed
to include in its participation the lower-grade employees of the
bank and its affiliates, was it?
Mr. Baker. I am not sure about that.
Mr. Pecora. Well, the modification made in 1929 was intended to
bring in the lower-grade employees, wasn't it?
Mr. Baker. Yes; anybody in the organization.
Mr. Pecora. Then the inference is that prior to that time it was
not possible, under this stock purchase plan, to admit to its benefits
and participation the lower-grade employees.
Mr. Baker. Well, that may be perfectly correct.
Mr. Pecora. Now, when it was modified in that way in 1929, the
purpose was to enable officers and employees in the lower grades, get-
ting a salary of $1,600 a year or more, to participate in this plan
and to purchase shares of the National City Bank stock on the in-
stallment plan over a i^eriod of four years ; is that right ?
Mr. Baker. That is right.
Mr. Pecora. And it was also intended under that modification to
enable them to get that stock at about the general market price,
which in December of 1929 was around $200 to $220 a share ?
Mr. Baker. That is right.
Mr. Pecora. And all employees who subscribed to the purchase
of stock under that modified plan had the stock allocated to them
at prices of $200 to $220 a share ; is that correct ?
Mr. Baker. Yes.
Mr. Pecora. Now, in December of 1931 did something hapjaen
which enabled you to acquire 1,500 shares under this plan at $50 a
share ?
Mr. Baker. Well, now, that is what I want to answer.
Mr. Pecora. First answer the question yes or no. Did something
happen which had that effect?
Mr. Baker. It had that effect.
Mr. Pecora. Well, now, what happened ?
Mr. Baker. What happened was this: I had loaned 1,500 shares
of my stock
Mr. Pecoka (interposing). To whom?
Mr. Baker. To my brother, and he used it to support a position
as a partner in a stock exchange house. In the crash of 1929 he
suffered serious losses, and this stock of mine of course was there
supporting his
Mr. Pecora (interposing). Supporting his margin account.
Mr. Baker. Supporting his position as a partner in this firm.
And I did not want to lose that stock. So that in reality I bought
my own stock back again. And I could take my stock out only by
putting in the amount of cash represented by the market value of
the stock as of that day.
Mr. Pecora. Was that the complete explanation of it ?
Mr. Baker. Yes, sir.
Mr. Pecora. Now, let us make sure that we understand you. At
the time of the market crash in October, 1929. a brother of yours
had a partnership interest in a stock brokerage house ?
Mr. Baker. That is right.
1946 STOCK EXCHANGE PRACTICES
Mr. Pecora. And in order to enable him to come through the
emergency of that crash you loaned him 1,500 shares of capital stock
in the National City Bank which you then had ?
Mr. Baker. No. I had loaned him 1,500 shares which represented
his capital in that firm.
Mr. Pecora. Did you have any beneficial interest in your brother's
interest in that firm ?
Mr. Baker. Not at that time.
Mr. Pecora. So you did that simply as an accommodation for
your brother?
Mr. Baker. That is right.
Mr. Pecoka. After the stock-market crash did you lose your 1,500
shares which you had loaned to your brother to support his position
in his firm?
Mr. Baker. No ; but I would have lost it except that I took it up,
as I said.
Mr. Pecora. You took it up?
Mr. Baker. I let the stock stay there, of course.
Mr. Pecora. Yes?
Mr. Baker. And as his own personal affairs were in the red, were
at a loss, with losses on account of the capital account, my stock
therefore was tied up in this situation, and I wanted to get the stock
out, and the only way I could get it out was to put cash in in its place.
Mr. Pecora. When did you get those 1,500 shares out of your
l)rother's firm?
Mr. Baker. That was some time in 1931. I don't remember the
exact month.
Mr. Pecora. And how did you get them out?
Mr. Baker. I arranged with the stock-purchase plan of our organ-
ization to take the stock up for me.
Mr. Pecora. At $50 a share?
Mr. Baker. That was the market at that time.
Mr. Pecora. That was the market at that time?
Mr. Baker. That is right.
Mr. Pecora. None of the other officers or employees who had sub-
scribed for stock at $200 or $220 a share were ever permitted to
replace that stock by stock which they could buy at $50 a share,
were they?
Mr. Baker. No; but neither was I replacing the stock. I had
paid for this stock once, you see. It was my own stock, which I
had loaned.
Mr. Pecora. But you had loaned it to your brother to support
his position in his brokerage firm?
Mr. Baker. Yes; that is right.
Mr. Pecora. And it was in danger there, wasn't it?
Mr. Baked. Well, I don't know exactly that it was in danger,
but I wanted to get the stock back, and the market price at that time
was $50 a share, and I could get it back by putting up that additional
amount. So, in effect, the $50 a share which I paid to get it back
was $50 in addition to what I had originally paid for the stock
years ago.
Mr. Pecora. I still don't understand it, Mr. Baker, and I do
want to.
STOCK EXCHANGE PRACTICES 1947
Mr. Baker. I am sorry. I did not make that very clear.
Mr. Pecora. Let me see.
Mr. Baker. I owned the stock, to begin with. I bought it some
years ago. I loaned the stock to my brother.
Mr. Pecora. Prior to the crash in 1929 ?
Mr. Baker. Oh, yes. And when the crash came along and he ran
into serious losses his account was in the red, in the vernacular, and
there was no way, of course, that he could release my stock back to
me. So that the holders of the stock at that time were willing to
take the market value of the stock in cash instead of holding the
stock, and I wanted the stock back in my possession, and therefore I
wanted to take the stock up, which I did.
Mr. Pecora. So you borrowed $7.3,000 from this stock-purchase
plan in order to enable you to do that, didn't you?
Mr. Baker. That is right.
Mr. Pecora. So it was not a purchase of stock under the install-
ment plan, as that plan was originally proposed and conducted?
Mr. Baker. No. That is right.
Mr. Pecora. Has that loan been repaid ?
Mr. Baker. It is being paid monthly.
Mr. Pecora. Is it secured, or otherwise ?
Mr. Baker. Just with the stock itself.
Mr. Pecora. It is not secured with stock that is now worth less
than $50 a share, is it ?
Mr. Baker. Of course, there have been payments every month
since it was put in there, which have reduced the amount of it sub-
stantially.
Senator Brookhart. You mean the bank accepts its own stock as
security ?
Mr. Baker. No. This is a separate corporation. Senator.
Senator Brookhart. The stock is the bank stock, isn't it ?
Mr. Baker. Yes; that is right.
Senator Brookhart. Is that what you put up for the security for
this loan?
Mr. Baker. Yes ; but the loan
Senator Brookhart (interposing). To the corporation ?
Mr. Baker. To the corporation.
Senator Brookhart. And not to tlie bank?
Mr. Baker. That is ri^ht.
Senator Brookhart. Of course, the bank furnished the money to
the corporation?
Mr. Baker. No. That loan supplying that money is made outside ;
the stock purchase corporation.
Senator Brookhart. I thought the bank set that corporation up.
Mr. Bakxr. No. The City Co. advanced a certain amount of
money, but the principal part of that loan is outside.
Mr. Pecora. Mr. Baker, this merger of the bank with the Farmers
Loan & Trust Co. that we discussed earlier this afternoon was pro-
posed in the spring of 1929 and became effective on June 28, 1929,
didn't it ; that is, on that date it was ratified by the stockholders of
both banks?
Mr. Baker. Yes; that is right, June 28.
119852— 33— PT 6 13
1948 STOCK EXCHANGE PRACTICES
Mr. Pecora. And from the comroencement of the negotiation you
felt sure that that merger would receive the approval of the stock-
holders ?
Mr. Baker. Yes, sir.
Mr. Pecora. Later that year were similar negotiations undertaken
by the bank with the officers and directors of another bank in New
York for a merger?
Mr. Baker. That is right.
Mr. Pecora. That was with the Corn Exchange Bank, wasn't
it?
Mr. Baker. Tliat is right; yes, sir.
Mr. Pecora. And when was that first jiroposed?
Mr. Baker. I do not know just when the discussion first began
on that, but it must have been some time in the early part or tihe
middle of 1929.
Mr. Pecora. And were you just as sure at the outset of those nego-
tiations that that merger would be ratified?
Mr. Baker. Felt reasonably certain it would.
Mr. Pecora. Yes; just as reasonably certain as you felt that the
earlier one with the Farmers Loan & Trust Co. would be ratified;
is that right?
Mr. Baker. Yes.
Mr. Pecora. As a matter of fact
(Mr. Law handed Mr. Baker a document.)
Mr. Pecora. Did you ask Mr. Law while I was asking you a
question to hand you any papers?
Mr. Baker. Just now?
Mr. Pecora. Yes.
Mr. Baker. No, sir.
Mr. Pecora. He did, didn't he?
Mr. Baker. Yes, sir. He handed me this paper. It is the history
of the Corn Exchange deal.
Mr. Pecora. Was that proposed merger with the Corn Exchange
Bank ratified by the stockholders of any other bank?
Mr. Baker. No; it was not.
Mr. Pecora. So that in that instance your moral certainty was
proved utterly unfounded by the action of the stockholders?
Mr. Baker. That is right.
Mr. Pecora. And you had no more reason to believe that that
proijosal to merge those two banks would be disapproved by the
stockholders than you had to believe that the earlier proposal to
merge with the Farmers Loan & Trust Co. would not be ratified, had
you?
Mr. Baker. Not at that time ; no, sir.
Mr. Pecora. Mr. Baker, did the National City Co. ever grant any-
one any option on a large block of National City Bank stock?
Mr. Baker. Yes, sir.
Mr. Pecora. On how many occasions did it do that?
Mr. Baker. Well, once that I recall definitely. I don't think of
any other.
Mr. Pecora. And to whoni did it gi-ant the option on the one
occasion that you recall definitely?
Mr. Baker. Dominick & Dominick.
STOCK EXCHANGE PRACTICES 1949
Mr. Pecor.'\. What is the business of Dominick & Dominick?
Mr. Baker. They are members of the stock exchange and invest-
nent bankers.
Mr. Pecoka. Was a Mr. Dominick who is a member of tliat firm
ilso a director of the bank or of the National City Co. ?
Mr. Bakek. He is now a director of the bank. He was not at that
:ime.
Mr. Pecoka. Was he a director of the company ?
Mr. Baker. No, sir.
Mr. Pecora. At am' time?
Mr. Bakek. Not at any time, nor is he now.
Mr. Pecoka. When did he become a director of the bank?
Mr. Baker. Some time in 1932.
Mr. Pecoka. When did you grant his firm the option?
Mr. Bakek. Well, let's see what that date was. (Mr. Law handed
iocument to Mr. Baker.) January 27, 1930.
Mr. Pecoka. Have you the record, or rather the original cor-
respondence between your company and Dominick & Dominick?
Mr. Baker. Yes, sir.
Mr. Pecoka. With respect to that option ?
Mr. Baker. Yes, sir.
Mr. Pecoka. Will you produce it, please?
(Mr. Baker handed document to Mr. Pecora.)
Mr. Pecoka. Now, the option which your company granted to-
Dominick & Dominick on January 27, 1930, extended to 30,000
iliares of the stock of the bank, didn't it?
Mr. Baker. That is right.
Mr. Pecoka. At prices which changed with each — well, I will say
it the following prices : 5,000 shares at $212i/^ a share ; 5,000 shares
it $215 a share: 5,000 shares at $2171/^ per share; 5,000 shares at
^220 per share; 3,000 shares at $225 a share; 3,000 shares at $230
1 share; 3,000 at $235 a share; and 3,000 at $240 a share.
This option has no time limit ?
Mr. Baker. Not at all; subject to cancellation.
Mr. Pecora. Except that your company reserves the right to cancel.
)ii five days' notice at any time ?
Mr. Baker. At once, I think it is.
Mr. Pecora. No.
Mr. Baker. Isn't it?
Mr. Pecoka. Upon five days' written notice, isn't it?
Mr. Baker. OTi, yes. I am sorry.
Senator Brookhart. What is the date of that?
Mr. Pecora. January 27, 1930.
Mr. Baker. Yes; that is right.
Mr. Pecora. Do you know what the market value of the stock was
)n January 27, 1930?
Mr. Baker. It was about $212 a share, I think, or $210.
Mr. Pecora. Wasn't it from 2231/2 to 2251/2 on that date?
Mr. Baker. No, not at the time that — no, I am quite sure not.
Mr. Pecora. Have you the quotations for January 27, 1930, before
^ou?
Mr. Baker. No ; I have not.
1950 STOCK EXCHANGE PRACTICES
Mr. Pecora. Will you please get them and then see if my figures
are correct ?
Mr. Baker. I don't know that I have them exact. Their idea of
this placement, you see
Mr. Pecora (interposing). First I want to settle this one item
and then we will get the idea.
Mr. Baker. All right. The date of that is the 27th.
Mr. Pecora. January 27, 1930.
Mr. Baker. I have got on the 24th
Mr. Pecora (interposing). No, the 27th.
Mr. Baker. Yes ; but I haven't quite got that.
Mr. Pecora. What is the date that you have nearest to the 27th?
Mr. Baker. The 24th.
Mr. Pecora. And what were the quotations on that day ?
Mr. Baker. 213.
Mr. Pecora. And what is the next date of which you have the
quotations ?
Mr. Baker. January 31, and it is 223.
Mr. Pecora. I see. Now, you would not be surprised to know
that the actual quotation on January 27, the day this option was
granted, was 2231/2 bid, 2251/^ asked, would you?
Mr. Baker. Well, I would be a little ; but it might readily be.
Mr. Pecora. It was 223 on the 30th ?
Mr. Baio:r. Yes ; that might very readily be.
Mr. Pecora. Now, you started to tell us something about an idea,
Wliat was it? "
Mr. Baker. The idea only connected with that was that they re-
garded the stock at that time — there was a group of houses connected
with that, I think five. Dominick was acting for 3 or 4 or 5 houses.
Mr. Pecora. You mean stock brokerage houses?
Mr. Baker. Yes; investment houses.
Mr. Pecora. Yes.
Mr. Baker. And they wanted to offer the stock to their own cus-
tomers, and they had no stock, and they made this arrangement with
me.
Senator Brookhart. They never exercised that option ?
Mr. Baker. Yes.
Mr. Pecora. Yes, they did.
Senator Brookhart. All of it?
Mr. Baker. Yes; they exercised the full option.
Mr. Pecora. Now, do you know when Dominick & Dominick first
drew upon the City Co. for stock under this option ?
Mr. Baker. January 29; we delivered 15,100 shares to them.
Mr. Pecora. 15,100 shares?
Mr. Baker. That is right.
Mr. Pecora. At what prices ?
Mr. Baker. I would have to refer to that. I haven't figures to
show that.
Mr. Pecora. Wasn't it 5,000 shares at 2121/., s^oOO shares at 215,
5,000 at 2171/2, and 100 at 220?
Mr. Baker. Yes. That is in the confirmation. That is right.
Mr. Pecora. And do you Imow what the market value of those
shares was on January 29, 1930 ?
STOCK EXCHANGE PRACTICES 1951
Mr. Baker. Well, let's see if I have that. (After referring to
paper.) January, 1930 — January 31 shows, as I said a while ago,
223 on
Mr. Pecora (interposing). 223; is that the bid or the asked price?
Mr. Bakeb. Yes, that was the bid, 223.
Mr. pECdRA. What is the asked price? The asked price is usually
higher than the bid i
Mr. Baker. Yes.
Mr. Pecora. Give us the range bid and asked and not just the
lowest.
Mr. Baker. 223 bid, 227 asked.
Mr. Pecora. And that was January
Mr. Baker. That is for that week.
Mr. Pecora. For that week?
Mr. Baker. Yes.
Mr. Pecora. And it was when the range of prices in the market
for the stock was 223 bid and 227 asked that under this option 5,000
shares were delivered at 2121/2^ 5,000 shares at 215, 5,000 shares at
2171/2, and 100 shares at 220?
Mr. Baker. That is right.
Mr. Pecora. The company was giving Dominick & Dominick
quite a bargain then, wasn't it?
Mr. Baker. Yes, it was a bargain, of course, and a deal that I
made, and I went through with it. The market moved up.
Mr. Pecora. The market was considerably up beyond these prices
of 2121/^ and 215 when you made the deal, wasn't it?
Mr. Baker. Just slightly above.
Mr. Pecora. Do you call a 10-point spread an insignificant spread ?
Mr. Baker. No. I haven't that. My figure does not show that
was a 10-point spread.
Mr. Pecora. My figures show that the bid was 223i/^ and the asked
price 2251/2 on January 27, 1930. You would not dispute those
figures would you ?
Mr. Baker. No. No, I don't care to dispute those figures.
(Mr. Baker conferred with Mr. Law.)
Mr. Pecora. Does Mr. Law know more about this transaction
than you do, Mr. Baker?
Mr. Baker. No.
Mr. Pecora. Have you asked him to give you any assistance to
answer this question?
Mr. Baker. No; but I would like to have him where I could get
these papers from time to time, if you don't object.
Mr. Pecora. I have no objection. Will the papers that he turned
over to you help some ?
Mr. Baker. Not in this market price, because I haven't that.
Mr. Pecora. How much was lost to the National City Co. by giv-
ing this option at these prices to Dominick & Dominick, as com-
pared with the market prices ?
Mr. Baker. I could not answer that, except as I had the exact
price or figures each day and compared with the deliveries to them.
Mr. Pecora. The amount was rather considerable, wasn't it?
Mr. Baker. I don't think so, but I can not answer that.
Mr. Pecora. Perhaps your idea of a considerable amount and
mine would differ.
1952 STOCK EXCHANGE PRACTICES
Mr. Baker. I don't know.
Mr. Pecora. What do you think was the loss ?
Mr. Baker. I just don't know.
Mr. Pecoka. Perhaps Mr. Law can help you.
Mr. Baker. No; he does not know.
Mr. Pecora. He does not know either?
Mr. Baker. No.
Mr. Pecora. Did you know when you gave this option that you
were doing it upon terms that would represent a loss to the National
City Co. as compared with the market i^rices?
ilir. Baker. I thought the prices — of course, I am drawing on my
memory again — I thought tlie prices were approximately the market
prices.
Mr. Pecora. Well, now, when you agreed on January 27, 1930
Mr. Baker. Yes.
Mr. Pecora. To give Dominick & Dominick an option on .5,000
•shares, the first 5,000 shares
Mr. Baker. Yes.
Mr. Peccira. At 2121/0 j'ou could have found out the market price
Tvithin 10 minutes, cou]dn't you?
Mr. Baker. Yes. I knew it then, of course.
Mr. Pecora. Wliat was it then?
Mr. Baker. I say I knew it then. I don't remember what it was
on that day.
Mr. Pecora. Do you now recall that 2121/0 was around 10 points
!below the market on that daj'?
Mr. Baker. I don't know that.
Mr. Pecora. Did you ascertain what the market price was at the
time you agreed to this option?
Mr. Baker. Oh, yes. Certainly I knew.
Mr. Pecora. So that if the market was 10 points or more above
this price in the option, you gave the option knowing that fact, did
jou?
Mr. Baker. If it were; yes.
Mr. Pecora. Was it your purpose to give them an option at that
much below the market? Did you do that advisedly, intentionally?
Mr. Baker. I don't recall, as I say, that there was that difference
between the market and the option.
Mr. Pecora. Well, assuming that there was that difference, you
gave the optit)n with knowledge of the difference, didn't you?
Mr. Baker. With a knowledge of the difference, certainly.
Mr. Pecora. Did you know Christmas time had passed by a month
when this option was given.
Mr. Baker. Yes.
Mr. Pecora. Did you intend to favor Dominick & Dominick to
that extent?
Mr. Baker. Why, no; of course not. They were interested in of-
fering this stock to their customers.
Mr. Pecora. You know that Dominick & Dominick
Mr. Baker (interposing). I was delighted for them to do it. They
■were good customers.
Mr. Pecora. Good customers to whom, to Dominick & Dominick
or the National City Co.?
Mr. Baker. Dominick & Dominick and Brown Bros. & Co.
STOCK EXCHANGE PRACTICES ■ 1953
Mr. Pecora. Was the National City Co. looking out for the cus-
tomers of another investment dealer^
Mr. Baker. No; but thej' would become stockholders of the Na-
tional City Bank.
Mr. Pecoea. If they did not become stockholders some one else
would, wouldn't they?
Mr. Baker. Probably.
Mr. Pecora. Did you know who the customers of Dominick &
Dominick were?
Mr. Baker. No.
Mr. Pecora. Why did you think they would be good customers
for your company?
Mr. Baker. Because they are good houses.
Mr. Pecora. Are you sure you did not know who were going to
participate in the account which was maintained by Dominick &
Dominick under this option?
Mr. Baker. You mean their customers?
Mr. Pecora. Yes.
Mr. Baker. Absolutely positive.
Mr. Pecora. You notice that in Dominick & Dominick's letters
to you with regard to this account, this option rather, they write
as follows:
We liave formed an aceouut, of which we are the managers, with full
discretionary powers as such, including the right to terminate the account
at any time, and in which account we will participate for the purpose of
dealing in the capital stock of the National City Bank of New York.
You noticed that language in their letter at the time, didn't you?
Mr. Baker. Yes, certainly.
Mr. Pecora. Didn't that language strike you as being a reference
to a trading account and not an investment account ?
Mr. Baker. Not at all. Because we discussed that very point,
Mr. Pecora, in this thing.
Mr. Pecora. Who discussed it?
Mr. Baker. I discussed it with some of the partners of Dominick.
Mr. Pecora. After you received this letter?
Mr. Baker. No, no, no, no, no.
Mr. Pecora. Before?
Mr. Baker. Prior to that.
Mr. Pecora. And in that discussion did you learn that these shares
upon which you were giving an option to Dominick & Dominick at
prices below the market were not going to be used in a trading
account ?
Mr. Baker. That is right.
Mr. Pecora. When you got the letter did not the letter contain
sufficient information to indicate to you that they were to be used
in a trading account and not in an investment account?
Mr. Baker. No; because
Mr. Pecora (interposing). Now look at the caption of the letter
itself and read what it says.
Mr. Baker. That is what the caption is, but I discussed
Mr. Pecora. Read it. What is it?
Mr. Baker. I had discussed this
Mr. Pecora (interposing). Read the caption out loud so the
record will show it.
1954 STOCK EXCHANGE PRACTICES
Mr. Baker. " National City Bank of New York Capital Stock
Trading Account." [Laughter.]
Mr. Pecora. All right.
Mr. Baker. That is because they have an investment department
that is distributing securities, not through the stock exchange, but
as permanent investors.
Mr. Pecora. Now they say : " We are the managers of the account."
Mr. Baker. That is right.
Mr. Pecora. They are not managing an investment account, are
they?
Mr. Baker. They have a group in this account of five houses, all
with investment-distributing departments.
Mr. Pecora. Despite the fact that their letter to you with respect
to this option and confirming the option is headed " National City
Bank Trading Account "
Mr. Baker. Yes.
Mr. Pecora. You still say that when you received that letter you
believed that these shares u)3on which you gave them an option were
intended for investment purpose distribution?
Mr. Baker. Yes, because I had that positive verbal understanding
with Mr. Bellamy.
Mr. Pecora. Well, that verbal understanding was shattered by
that letter, wasn't it?
Mr. Baker. Not when their word is perfectly good.
Mr. Pecora. The letter to the company conforms with the word,
doesn't it?
Mr. Baker. That is the title that they put on there, but that did
not mean more than that
Mr. Pecora (interposing). They were not putting that title on
there to deceive you, were they?
Mr. Baker. No ; I don't think so.
Mr. Pecora. They put that title on there in order to tell j^ou in
so many words that they were operating a trading account in this
stock, didn't they ?
Mr. Baker. I don't think so.
Mr. Pecora. That was what they said in the letter, didn't they,
in substance?
Mr. Baker. That is the heading they put on it ?
Mr. Pecora. Yes. Now, about Dqminick & Dominick drawing
down stock from your company on this option; didn't they always
draw the stock down at the prices fixed by the option quotations,
but on days when the market for the shares was way above the
option prices?
Mr. Baker. I don't know that. «
Mr. Pecora. It would not surprise j^ou to know that that was the
fact, would it?
Mr. Baker. No.
Mr. Pecora. May I have the letter?
(Mr. Baker handed a document to Mr. Pecora.)
Mr. Pecora. When was the last stock delivered to Dominick &
Dominick under this option agreement?
Mr. Baker. The actual delivery seems to be March 24, where the
stock was actually delivered.
STOCK EXCHANGE PRACTICES 1955
Mr. Pecora. Yes; and how many shares were delivered then?
Mr. Baker. Seven thousand shares.
Mr. Pecora. What was the market for the shares on March 24,
1930?
Mr. Baker. March 21 I have ; 236 was bid and the high asked that
day was 252.
Mr. Pecora. 236 bid ; 252 asked ?
Mr. Baker. That is right.
Mr. Pecora. And on that day
Mr. Baker. That is for the week.
Mr. Pecora. That is for the week ?
Mr. Baker. Yes.
Mr. Pecora. That is of March 21 ?
Mr. Baker. Yes ; March 21.
Mr. Pecora. And you know that the prices rose from day to day
thereafter for a period of at least several days?
Mr. Baker. Well, the following week the market was 240, with a
high of 248, 247, 245, and 242. Now the market was dropping there
a little. The market declined there the few weeks following.
Mr. Pecora. Don't you know that on March 24, 1930, the closing
bid and asked prices for City Bank stock were 246 and 248, respec-
tively ?
Mr. Baker. I do not, but that is probably correct.
Mr. Pecora. And that was the day on which you delivered under
this option 1,335 shares at 230, 5,000 shares at 235, and 500 shares at
240; is that right?
Mr. Baker. That is probably right. I haven't the exact figures
here. I have the deliveries, but I haven't the prices. You have
them there.
Mr. Pecora. Yes. Was anything paid by Dominick & Dominick
to the City Co. for this option ?
Mr. Baker. No ; I think not.
Mr. Pecora. Do you know what profit Dominick & Dominick made
as managei's of this trading account?
Mr. Baker. No.
Mr. Pecora. Under this option?
Mr. Baker. No ; I do not know.
Mr. Pecora. Would it surprise you to know that it was $354,088.10?
Mr. Baker. No; but I haven't any idea. I didn't know a thing
about that.
Mr. Pecora. And you do not know the participants in that trading
account, do you?
Mr. Baker. I know two of them, and I am not sure about the
other two, but I am quite sure that one was Brown Bros., and another
was Cassatt & Co., but I don't know — recall who the others were.
Mr. Pecora. Do you know of any other option that your company
ever gave to anyone else under generally similar circumstances?
Mr. Baker. No; I do not.
Mr. Pecora. I want to ask that the correspondence relating to this
option between the National City Co. and Dominick & Dominick be
spread on the record, sir. I have photostatic copies so that we will
not have to have your
1956 STOCK EXCHANGE PRACTICES
Mr. Baker (interposing). That is my original. If you do not
need that I would like to have it.
Mr. Pecoea. Certainly.
The Chairman. Without objection, it is so ordered.
(The correspondence is as follows:)
DOMINICK & DOMINICK,
New York, January 27, 1930.
The National City Bank of New York, Capital Stock
trading account
The National City Co.,
New York City.
(Attention of H. B. Baker, Esq.)
Dear Sirs : We have formed an account of which we are the managers
with full discretionary powers as such, including the right to terminate the
account at any time, and in which account we sliall participate, for the pur-
pose of dealing in the capital stock of the National City Bank of New York.
We beg to confirm that you have extended to us, for and on behalf of the
account, the right to purchase from you, in wliole or in part, capital stock of
the National City Bank of New York as follows :
Pel' sLare
5,000 shares at $212.50
5,000 shares at 215.00
5,000 shares at 217. 50
5,000 shares at 220. 00
3,000 shares at 225.00
3,000 shares at 230. 00
3,000 shares at 2.35.00
3,000 shares at 240. 00
said options to be exercisable by us at any time and from time to time and
to continue in full force and effect for the life of the account, subject, however,
to the right on your part to cancel these options in whole or in part upon five
days' written notice to us.
Please confirm that the above is in accordance ^vith your understanding
and is the agreement between us by signing and returning to us the inclosed
duplicate of this letter.
Very truly yours,
Confirmed and agreed to:
The National City Co.,
H. B. Bakesi, PreHAent.
January 28, 1930.
the national city' bank of new york, capital stock
The National City Co.,
Neio York City.
(Attention of Mr. H. B. Baker.)
Dear Sirs : Confirming our telephone conversation of today, we have called
from you, for delivery tomorrow, January 29, the following:
Per share
5,000 shares at $212.50
5,000 shares at 215.00
5,000 shares at 217.50
100 shares at 220. 00
representing a portion of the above stock wliich we have under option from
you, as outlined in the agreement between us dated January 27, 1930.
After exercising the above options there still remain under option to us a
balance of 16,900 shares, at the following prices:
STOCK EXCHANGE PRACTICES 1957
Per share
4,900 sUares at .^220.00
3,000 shares at _ .>,g qq
3,000 shares at _ " " "~ oqn no
3,000 shares at ""r-I"III. ril"!' ^35 OO
8,000 shares ,"it "~_~ ~ "_" 940 oOi
as specified in the above-mentioned agreement.
Very truly yours,
_ February 10, 1930.
The National City Co.,
New York City.
(Attentiim of H. B. Baker, Esq., President.)
Dear Sirs : Referring to the agreement dated January 27, 1930. between us,
under the terms of which you ceded us as managers of an account, option to
purchase from you all or any part of 32,000 shares of capital stock of the
National City Bank of Xpw York, at prices ranging from $212.50 to $240 a
share, we now confirm the understanding between us, that our option to
purchase 3,000 shares at .«;240 a share has been reduced to 500 shares at that
price and the difference canceled.
In all other respects the terms of the above contained agreement of
January 27 continues in full force and effect.
Very truly yours.
The National City Bank,
New York, February 11. 1930.
DOIIINICK & DOMINICK,
N&iv York, N. Y.
(Attention of Mr. Beach.)
Gentlemen : Agreeable to your request over the telephone today relative t»
our delivery of 2,000 shares of National City bank stock, I wish to state that
this stock was delivered at the following prices :
Per .share
200 shares at .$251%
100 shares at 2521^
50 shares at 252%
100 shares at 252%
500 shares at 252%
200 shares at 2.52%
400 shares at 253%
25 shares at 2.53%
400 shares at 253%
25 shares at 253%
In connection with this delivery, we have charged you transfer tax of $25.64,
Very truly yours,
R. O. Baldwin. Treasnrer.
Fitbruary 11. 1930.
The National City Bank of New York, Capital Stock
ACCOUNT
TiTK National City Co..
Nar York City.
(Attention of Mr. Meyer.)
Dear Sirs: The iiarticipants in the above account, including ourselves, have
to-day taken down a total of 7.565 shares of the above stock at $249 a share, for
regular delivery.
We have received your letter of this date confirming that yon sold in the
market yesterday, 2,000 additional shares at prices ranging from .$251.75 to
1958 STOCK EXCHANGE PEACTICES
$253.75 a share. As you have informed us that you were unable to cover any
of this stock to-day at or below the mutually agreed upon price of $250 a
share, we will therefore call 2,000 shares under our options in addition to the
7,565 shares above mentioned, as follows :
Per share
4,900 shares at $220
5,000 shares at 225
1,665 shares at 230
If agreeable to you, we will accept delivery of 7,565 shares on Thursday
against payment of the amount due and will exchange checks with respect to
the 2,000 .shares.
Very truly yours,
, Managers.
March 21, 1930.
The National City Co.,
Nexo York City.
Dear Sirs : Referring to the agreement of January 27, 1930, between us, we
confirm having called from you all of the unexercised options to purcliase
capital stock of the National City Bank of New York, as follows :
Per share
1,335 shares at $230
3,000 shares at 235
500 shares at 240
for delivery to us on Monday, March 24, against payment of the amount due.
We also confirm the understanding between Mr. H. B. Baker and Mr. Bellamy
of our firm, that you' have sold us for delivery on the same date. 2,165 shares
of capital stock of the National City Bank of New Tork at ■15249 a share, in
order to complete delivery of stock against withdrawals of participants in the
account.
Very truly yours.
Mr. Pecoea. And I also want to include in that request, Mr.
Chairman, the copy of the statement of the account of Dominick &
Dominick with respect to its trades under this option.
Senator Townsend. Does that give the participants in the pool?
Mr. Pecora. Yes, sir.
Senator Brookhart. Who are the participants?
Mr. Pecora. The participants according to their statement of the
account are Hornblower & Weeks, Abbott, Hoppin & Co., Dominick
& Dominick, C. D. Barney & Co., Cassatt & Co., Brown Bros. & Co.
Senator Brookhart. Is that all ?
Mr. Pecora. Yes, sir. That is in the major trading account.
The Chairman. Without objection, it is so ordered.
(The accounts are as follows:)
STOCK EXCHANGE PRACTICES
1959
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STOCK EXCHANGE PRACTICES
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O O O O O O O
STOCK EXCHANGE PRACTICES 1961
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555
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=88888888888
§8sa8sssssgss?saaassss5
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5S8SSS
1962
STOCK EXCHANGE PRACTICES
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EMPMgrtKK
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STOCK EXCHANGE PRACTICES
1963
9
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195.00
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119852— 33— PT 6 14
1964 STOCK EXCHANGE PRACTICES
Mr. Pecora. Now, those firms that I have just mentioned you
know to be brokers — brokerage firms ?
Mr. Baker. Yes ; I know most of them.
Mr. Pecora. And tliey all had close business affiliations and deal-
ings with your company, did they not?
Mr. Baker. Well, some of them.
Mr. Pecora. Throughout the years that it has been in business ?
Mr. Baker. That is right.
Senator Townssend. Was this stock you gave purchased from time
to time?
Mr. Baker. Yes ; that is right, sir.
The Chaikman. The committee will recess until 10 o'clock in the
morning. All witnesses under subpoena will repoi't here at that time.
(Accordingly, at 4.17 o'clock p. m., the subcommittee adjourned
until 10 o'clock a. m. of the next day, Friday, February 24, 1933.)
STOCK EXCHANGE PRACTICE
FKIDAY, FEBBXTABY 24, 1933
United States Senate,
subcommitee of committee on banking and currency,
Washington, D. G.
The subcommittee met, pursuant to adjournment on yesterday, at
10 o'clock a.m.. in room 301 Senate Office Building, Senator Peter
Norbeck presiding.
Present: Senators Norbeck (chairman), Couzens, Townsend,
Fletcher, and Costigan.
Present also : Senators Brookhart and Reynolds.
Further present: Ferdinand Pecora, special counsel to the com-
mittee ; Julius Silver and David Saperstein, associate counsel to the
committee.
The Chairman. The subcommittee will come to order. Mr. Pecora,
who will you have this morning?
Mr. Pecora. Mr. Baker will please resume his testimony.
TESTIMONY OF HUGH B. BAKER, PRESIDENT NATIONAL CITY
CO., NEW YORK CITY— Resumed
Mr. Pecora. Mr. Baker, did you participate in the management
fund distribution for the year 1929 of the National City Co.?
Mr. Baker. Yes, sir.
Mr. Pecora. To what extent?
Mr. Baker. Well, of course as to the year 1929 there really wasn't
a fund, you might say.
Mr. Pecora. I did not hear you.
Mr. Baker. I say. in 1929 the fund entirely disappeared before
the end of the year. I don't remember what the amount was.
Mr. Pecora. Wasn't there a distribution for the first six months
of that year ?
Mr. Baker. Yes, sir.
Mr. Pecora. And wasn't the distribution a very substantial
amount ?
Mr. Baker. Yes.
Mr. Pecora. What was your participation in that fund?
Mr. Baker. From memory, and I haven't that figure before me,
I think it was $225,000 or thereabouts.
Mr. Pecora. For the first six months?
Mr. Baker. Yes.
Mr. Pecora. What was the extent of your participation in the
management fund of the National City Co. for the year 1928?
Mr. Baker. It was $266,670.41.
1966 STOCK EXCHANGE PRACTICES
Mr. Pecora. And that was exclusive of your salary?
Mr. Baker. Yes, sir.
Mr. Pecora. Wliat was the extent of your participation in the
management fund for the year 1927 of the National City Co.?
Mr. Baker. It was $185,250.
Senator Fletcher. And what has been your salary ?
Mr. Baker. Twentj'-five.
Mr. Pecora. What was that?
Mr. Baker. Twenty-five.
Mr. Pecora. For the year?
Mr. Baker. Yes, sir.
Senator Costigan. AAHien vou said " 25 ". did you mean that vour
salary was $25,000? . "
Mr. Baker. Yes, sir.
Mr. Pecora. Did you say it was about $250,000 for the first 6
months ?
Mr. Baker. I was guessing at the figure. I am not sure about it.
Mr. Pecora. But was the figure that you guessed at $250,000?
Mr. Baker. I guessed it was $225,000.
Senator Townsend. Mr. Baker, you maj' have covered this here-
tofore, but how were the profits made that were included in this
particular division ?
Mr. Baker. In this management fund?
Senator Townsend. Yes.
Mr. Baker. The earnings of the company first had deducted from
them 8 per cent of the capital surplus and undivided profits, that
was first deducted, and then of the balance the deductions were 80
per cent and 20 per cent, 20 per cent going into the management fund
to be allotted to various executives.
Senator Townsend. You mean that a management fund was set
up out of capital ?
Mr. Baker. No; it depends upon the current earnings of the
company.
Senator Townsend. And you say 8 per cent was what?
Mr. Baker. Before any management fund is figured at all there
is allotted out of current earnings, capital, surplus and undivided
profits, 8 per cent, and then of the balance 20 per cent goes into the
management fund.
Senator Townsend. Of the surplus of the National City Co. ?
Mr. Baker. Yes, sir.
Senator Townsend. All right.
Mr. Pecora. Mr. Baker, it has already been testified, either by
you or one of the preceding witnesses, that during the year 1929 your
company sold to the public upwards of 1,300,000 shares of the capi-
tal stock of the National City Bank. Do you recall that testimony?
Mr. Baker. Yes, sir.
Mr. Pecora. It is correct, is it?
- Mr. Baker. Yes.
Mr. Pecora. Mr. Baker, in eflFecting those sales, and in making
purchases of stock that your company found it necessary to buy in
order to make deliveries for those sales, did the National City Co.
employ stock brokerage houses to accumulate stock for it ?
Mr. Baker. No; I should not say that. But we bought stock
from brokers.
STOCK EXCHANGE PRACTICES 1967
Mr. Pecora. To what extent, in percentage ?
Mr. Baker. Well, that would only be an estimate, Mr. Pecora.
I should estimate that to be, perhaps — oh, I should think 75 per cent.
Mr. Pecora. How many brokerage firms did you have transac-
tions of that kind with ?
Mr. Baiver. That would be quite a large number.
Mr. Pecora. About how many, whether large or small?
Mr. Baker. I should think 15 or 20, and probably 20.
Mr. Pecora. With which firm, according to your best recollection
now, did you have the largest number of such transactions in that
year?
Mr. Baker. Well, sir, I do not know that I can answer that. I
have never studied the division of where those orders went, and
through what brokers they were placed, to try to get that in my
mind. It made no difference to me to what brokers they went.
Mr. Pecora. Do you recall a brokerage firm known as J. R.
Schmeltzer & Co. ?
Mr. Baker. Yes; I know that name, but I do not know the indi-
vidual members of the firm.
Mr. Pecora. Were they specialists in your bank stock?
Mr. Baker. I think they were specialists in bank stocks gener-
ally but not in any one particular bank.
Mr. Pecora. Do you recall that you had a large volume of trans-
actions with that brokerage firm in the stock of the National City
Bank during the year 1929 particularly?
Mr. Baker. Well, I do not know how large the volume amounted
to. There were transactions with that firm and I think in sub-
stantial amount.
Mr. Pecora. Now, Mr. Baker, was there any security of any kind
whatsoever in which the National City Co. traded in the year 1929
to a greater volume than National City Bank stock — any other single
security I mean ?
Mr. Baker. Well, I can only answer that after referring to our
records. Mr. Pecora, and seeing just the amounts of the different
issues, because during the year 1929 our total volume of business in
all our different offerings ran into a very substantial volume.
Mr. Pecora. It ran into a volume of over $2,000,000,000, didn't it?
Mr. Baker. Yes.
Mr. Pecora. Now, of that volume did you deal in any single issue
or security to a greater extent than you dealt in the capital stock of
the National City Bank ?
Mr. Baker. Well, I do not know. I would have to refer to our
complete records on that to answer the question.
Mr. Pecora. As you sit there now, can you recall any other issue
in which your dealings were greater than in the bank stock for that
year ?
Mr. Baker. I do not recall any.
Mr. Pecora. Did you have anything to do with the trading in
National City Bank stock on behalf of your company in that year?
Mr. Baker. Do you mean in the placing of orders ?
Mr. Pecora. Did you have anything whatsoever to do with it?
Mr. Baker. Oh, yes; certainly.
Mr. Pecora. What did you have to do with it?
1968 STOCK EXCHANGE PRACTICES
Mr. Baker. Well, I was the president of the company, and I was
interested in all of our purchases and in all of our sales.
Mr. Pecora. And gave directions for the making of purchases
and sales?
Mr. Baker. Yes; but not always in detail. In a general way I
gave the directions controlling that.
Mr. Pecora. Was the execution of your instructions or directions
entrusted to the supervision of any particular individual?
Mr. Baker. Yes, sir.
Mr. Pecora. To whom?
Mr. Baker. Mr. Morrison.
Mr. Pecora. And Mr. Morrison was the head of your trading
department ?
Mr. Baker. Yes ; and a vice president of the company.
Mr. Pecora. And he is here under subpoena ?
Mr. Baker. Yes, sir.
Mr. Pecora. Did the National City Co. make the market for that
stock ?
Mr. Baker. No; I would not say that at all. We were prepared
to make quotations, either to buy or sell, at any time in exact line
with the prevailing general market.
Mr. Pecora. Do you know of any other trader or dealer in securi-
ties who had anything like the volume of trading in National City
Bank stock in the year 1929 that the National City Co. had?
Mr. Baker. Well, I could not give you that, because I do not
know the records of other houses. I do know that there were per-
haps 60 or more houses advertising in the newspapers as bank-stock
specialists or dealers in bank stocks, and as to what the volume of
their business may have been I have no way of knowing. But my
estimate would be that our volume as it related to the entire volume
of trading, would not exceed somewhere around perhaps 10 or 15
per cent.
Mr. Pecora. No, my question was: Do you know of any other
dealer or trader who dealt in the stock of the National City Bank
to as great an extent as the National City Co. ? Have you knowledge
of any such ?
Mr. Baker. No, I do not know that, because I do not know what
the trading of any particular firm was.
Mr. Pecora. Weren't you in constant touch with the over-the
counter market in the bank's stock?
Mr. Baker. Yes, sir.
Mr. Pecora. Wouldn't that enable you to learn whether there was
any other single dealer or trader whose business compared with that
of the National City Co. in that stock ?
Mr. Baker. No ; I could not possibly know that.
Mr. Pecora. You say you could not possibly know that?
Mr. Baker. No.
Mr. Pecora. You have no idea or information on that subject
to-day ?
Mr. Baker. I, of course, loiew that there were a great many people
trading in bank stocks, our and other bank stocks, but as to the
amount of their volume, I do not know that.
STOCK EXCHANGE PRACTICES 1969'
Mr. Pecora. Now, one day in September of 1927 you noticed that
five sales of 10 shares each of the National City Bank stock were
made on the New York Stock Exchange ?
Mr. Baker. Yes, sir.
Mr. Pecoha. And the spread between the bid and asking prices
was 6 points, as I recall your testimony.
Mr. Baker. That was between sales?
Mr. Pecora. Yes, between sales.
Mr. Baker. Yes, sir.
Mr. Pecora. And you thought that indicated a manipulation of
the stock on the floor of the exchange, didn't you ?
Mr. Baker. No. I thought
Mr. Pecora (interposing). Isn't that what you testified to
yesterday ?
Mr. Baker. Well, I don't remember my exact words, but
Mr. Pecura (interposing). Well, I do remember j^our exact words,
and I think I have quoted them textually.
Mr. Baker. Well, if you will permit me to explain my thought
on that, it is this : That it showed to me that a sudden order came
on to the stock market without anj' particular stock there for sale
at that same time, and that it would be a very easy thing if anyone
wanted to do it to manipulate the stock.
Mr. Pecora. You said yesterday that those five sales of 10 shares,
each made on the Stock Exchange one day in September of 1927,
so impressed you with the thought that they were the result or gave
evidence of manipulation, that you sent a cable to Mr. Mitchell who
was then in Paris.
Mr. Baker. That is right.
Mr. Pecora. And called his attention to the startling manipulation
evidenced by five sales grossing 50 shares.
Mr. Baker. The possibility of it.
Mr. Pecora. The possibility of it?
Mr. Baker. Yes, sir.
Mr. Pecora. How many wires did you have in the trading depart-
ment of your company?
Mr. Baker. Telephones connecting with brokers, do you mean ?
Mr. Pecora. Yes.
Mr. Baker. Well, I don't know, probably 20 or 30.
Mr. Pecora. And how many men did you have in the trading
department?
Mr. Baker. I should think about that same number, 15 to 20.
Mr. Pecora. Wouldn't that indicate that the National City Co.
in those days was engaged in a volume of trading in the bank's stock
far, far exceeding what alarmed you in September of 1927 when 50
shares gross were traded in on the Stock Exchange in 5 transactions ?
Mr. Baker. Mr. Pecora, I misunderstood your question just prior
to this. I thought you meant how many telephone connections or
wires theie were with brokers generally for the conduct of our
general business, our entii'e business. My reply was with that
thought in mind. I do not think there was over one — well, I don't
know that there was any particular wire strictly confined to trading
in National City Bank stock. I think that was just over any of our
wires, of which we had perhaps 15 or 20.
1970 STOCK EXCHANGE PRACTICES
Mr. Pecora. In other words, you made trades over your 20 wires
connecting with different brokerage houses?
Mr. Baker. Over any wire, with any broker.
Mr. Pecora. Didn't that indicate a volume and kind of trading
that far exceeded the trading amounting to 50 shares in 1 day which
alarmed you in September of 1927 when those 50 shares were dealt
in on the New York Stock Exchange in 5 transactions of 10 shares
each?
Mr. Baker. Well, except of course, I repeat, that those wires were
being used for the conduct of our general business.
Mr. Pecora. They were being used extensively too for your trades
in National City Bank stock?
Mr. Baker. Any time we had trades to make they were made over
the telephone.
Mr. Pecora. And you sold as many as 90,000 shares in a single
week, didn't you, in 1929 ?
Mr. Baker. No, sir — yes, that is right, for the week of February
21. But that — let me see — but that was after the old stock had been
exchanged on a 5-to-l basis.
Mr. Pecora. Of course, that volume of trading did not indicate
any manipulation of the market, did it?
Mr. Baker. Not necessarily.
Mr. Pecora. \Vlien does a volume of trading indicate manipula-
tion, and when doesn't it?
Mr. Baker. That is — I can not answer that, because I think each
case there has to be studied in itself. There might be a great many
buying orders received on any particular security, and selling orders
on the same day, and that might not have any feature of manipula-
tion in it, but would simply be the execution of buying and selling
orders.
Mr. Pecora. Isn't it easier to control the over-the-counter market
for a security than the Stock Exchange market ?
Mr. Baker. That again depends upon its activity and how many
buyers and sellers there may be.
Mr. Pecora. Well, generally speaking isn't it easier to control the
over-the-counter market for a security than the Stock Exchange
market?
Mr. Baker. Well, there may be cases where that is true ; yes.
Mr. Pecora. Isn't that true with bank sliares particularly?
Mr. Baker. I do not know why it should be.
Mr. Pecora. Well, is it true ?
Mr. Baker. With outside dealers trading over the counter, traders
in any volume at all, with anybody who is interested to buy and sell,
there is a free and open market on it.
Mr. Pecora. I am not inquiring into the why of it but whether
or not it is a fact.
Mr. Baker. It may be, but I don't know.
Mr. Pecora. You are market wise, aren't you?
Mr. Baker. I don't know that I am.
Mr. Pboora. Do you think you would be the president of the
National City Co. if you were not a keen student and observer of the
markets for securities, all markets?
STOCK EXCHANGE PRACTICES 1971
Mr. Baker. Well, I certainly don't know the answer to that ques-
tion. That is somebody else's decision to make.
Mr. Pecoka. It is not an unfair assumption that you were chosen
for the chief executive position of this great investment company
because you were market wise, is it?
Mr. Baker. Well, I doubt if that was the consideration of it. I
don't think that was 'the idea, as to whether I was market wise or
not.
Senator Brookhart. That was one of the things, wasn't it?
Mr. Baker. I do not knpw. Senator. I was not there when the
matter was being discussed.
Mr. Pecora. Now, Mr. Baker, in the month of October, 1929, do
you know the volume of transactions in National City Bank stock
that your company had with J. R. Schmeltzer & Co. ?
Mr. Baker. No.
Mr. Pecora. Have you any figures in mind that would indicate
to you what they were?
Mr. Baker. No; I have not.
Mr. Pecora. None at all?
Mr. Baker. No, sir.
Mr. Pecora. You have no personal recollection of it?
Mr. Baker. No ; I have not at all, I am sorry to say.
Mr. Pecora. Is your mind a blank on that point as you sit there
now?
Mr. Baker. Yes, sir.
Mr. Pecora. An utter blank?
Mr. Baker. So far as the amount of the transactions we had with
Schmeltzer is concerned.
Mr. Pecora. What was the general course of the transactions
you had with J. R. Schmeltzer & Co. in the stock of the bank?
Mr. Baker. Well, we gave them — we would buy stock or sell
stock from them the same as we would any other dealer in bank
stocks. As to whether or not the volume ran greater with any par-
ticular house than some other house I assume would depend entirely
upon the character of service and so forth rendered by that house
in that particular issue.
Mr. Pecora. Would you give them orders to accumulate shares
of National City Bank stock for you and have those paid for by the
National City Bank?
Mr. Baker. No, sir.
Mr. Pecora. Did you do anything in the course of your transac-
tions in National City Bank stock with J. R. Schmeltzer & Co. that
included the National City Bank in the process ?
Mr. Baker. Not to my knowledge.
Mr. Pecora. Have you with you here the correspondence passing
between J. R. Schmeltzer & Co." and the National City Bank?
Mr. Baker. No.
Mr. Pecora. Will you ascertain whether any of your associates
has it?
Mr. Law. Your Mr. Saperstein has that, Mr. Pecora.
Mr. Pecora. Let me read, for instance, what purports to be a
copy of a letter addressed to the National City Bank by J. R.
Schmeltzer & Co. under date of October 11, 1929 :
1972 STOCK EXCHANGE PRACTICES
National City Bank.
(Attention of Mr. We.st.)
Dear Sib: We having to deliver to the National City Co. 2,100 shares of
National City Bank .stock, hereby ask you for an additional overcertification
of $1,000,000.
Thanking you for your courtesy, we are.
Very truly yours,
What does that letter indicate ?
Mr. Baker. Of course. I know nothing about that. It is the first
time I have heard it. It is directly a bank matter in which I had
no voice or knowledge.
Mr. Pecora. You know nothing about it ?
Mr. Baker. No.
Mr. Pecoka. Well, here J. R. Schmeltzer & Co. say that they have
to deliver to your company 2,100 shares of National City Bank
stock. Now. that stock had to be paid for by 3'our company?
Mr. Baker. And would be as soon as delivered.
Mr. Pecora. How would your company pay for it?
Mr. Baker. We would pay with check.
Mr. Pecora. With funds obtained from whom?
Mr. Baker. Ourselves.
Mr. Pecora. 'Wliat would be the occasion for a letter of the kind
I have just read to you. then ?
Mr. Baker. That would be a matter. Mr. Pecora. which was
strictly a banking matter between the firm you mention and the
National City Bank, in which the National City Co. would have
nothing whatsoever to do.
Mr. Pecora. What would be the occasion for a letter of this kind
written by J. R. Schmeltzer & Co. to the bank in connection with
a transaction in which they were to deliver shares of stock to your
company?
Mr. Baker. I have not the slightest idea. That is strictly a
bank matter.
Mr. Pecora. And you do not know the purpose of it?
Mr. Baker. Of which I knew absolutely nothing.
Mr. Pecora. And you do not know the purpose of it?
Mr. Baker. Of that letter to the National City Bank?
Mr. Pecora. Yes. sir: of the transaction indicated by this letter.
Mr. Baker. Not the slightest.
Mr. Pecora. This letter is utterly meaningless to you?
Mr. Baker. It is absolutely a bank routine matter of which I know
nothing.
Mr. Pecora. And is utterly meaningless to you?
Mr. Baker. Yes, sir ; so far as any relation between J. R. Schmelt-
zer & Co. and the bank are concerned, I know absolutely nothing.
Mr. Pecora. And the letter is utterly meaningless to you? That
is, you do not know what it means.
Mr. Baker. They are evidently applying for a loan, if that is what
you mean.
Mr. Pecora. I want to know what it means to you. Wliat does it
mean to you?
Mr. Baker. Mr. Pecora, I am not in the bank. I am not in the
Commercial Bank, and do not have anything to do with loans that
STOCK EXCHANGE PRACTICES 1973
are made between brokers and the National City Bank. I would not
know anything about it.
Mr. Pecora. What does this particular letter I have read mean to
you?
Mr. Baker. May I read it, please?
Mr. Pecora. Yes: here it is.
Mr. Baker. It would seem to me that they are applying for ac-
commodation for the day.
Mr. Pecora. To enable them to do what?
Mr. Baker. To enable them to conduct their regular business.
Mr. Pecora. To enable them to take up the 2,100 shares they were
delivering or were going to deliver to your company; is that it?
^Ir. Baker. That would seem to be included in it.
Mr. Pecora. That is the most important part of the idea, isn't it;
not merely an incidental part?
Mr. Baker. Tliat would seem to by included in it, but I don't
know what it was.
Mr. Pecora. Despite the fact that your company is wound up in
the transaction to which that letter refers, you don't know anything
more about it than you are telling us now; is that what you mean
to say?
Mr. Baker. Not the slightest. May I say this : As far as our rela-
tions with dealers with whom we deal in buying and selling securi-
ties, that does not have any connection at all with the method that
they may use in facilitating deliveries to and from their offices in any
particular day. We would not know anything about it.
Mr. Pecora. You don't think this letter indicates that the bank
was extending accommodation to the brokerage house which was
picking up shares of stock on behalf of the National City C ., do
you?
Mr. Baker. It would seem so, yes; but I do not know anything
about it.
Mr. Pecora. Is this the first time you have heard of this kind
of dealing between J. R. Schmeltzer & Co. and the National City
Bank whei'e the brokers take up stock of the bank for the National
City Co.?
Mr. Baker. Yes; and it is perfectly natural it should be, because
I haven't any contact or knowledge of the loan arrangements made
between brokers and the National City Bank.
Mr. Pecora. Now, under date of October 15, 1929, J. R. Schmeltzer
& Co. wrote to the National City Bank, attention of Mr. West, as
follows :
Dear Sir: We having to deliver to the National City Co. 1,600 shares of
National City Bank stock, hereby ask you for an additional overeertitication
of $800,000.
Thanking you for your courtesy, we are.
Very truly yours,
That indicates also that on that date, October 15, 1929, the writers
of this letter had picked up 1,600 shares of the bank's stock for
delivery to your company, and needed an accommodation or loan
from tiie bank in the amount of $800,000 to enable them to pick up
the stock and deliver it to your company, doesn't it?
1974 STOCK EXCHANGE PKACTICES
Mr. Baker. That would seem to be similar to the other trans-
action.
Mr. Pecora. Now, I have here another letter, written October 16,
1929, by the same firm of brokers to the National City Bank, atten-
tion of "Mr. West:
Dbab Sir : We having to deliver to you the National City Co. 1,547 shares cf
National City Bank stock, hereby ask you for an additional overcertification
of $800,000.
Thanking you for your courte.sy, we are.
Very truly yours.
That is evidence of a similar transaction in which those brokers
had picked up 1,547 shares of the bank's stock for delivery to your
company and needed an accommodation or loan in the sum of
$800,000 from the bank to enable them to do so, is that right?
Mr. Baker. Well, from some bank.
ISIr. Pecora. And this indicates that the National City Bank was
the bank that was asked to extend the accommodation, which
apparently it did.
Mr. Baker. Evidentlj'. And that is all I know about it.
Mr. Pecora. You are learning about this for the first time, aren't
you ?
Mr. Bakee. Yes. I have no contact with those deliveries at all.
I do not know anything about it. We buy and when delivery is
made to us we pay for it.
Mr. Pecora. I thought you said you would give directions to the
head of your particular department regarding these transactions.
Mr. Bakek. That is true, but that has nothing to do with that
matter.
Mr. Pecora. With the bank's financing these transactions?
Mr Baker. No.
Mr. Pecora. Financing brokers that were picking up stock for
your company?
Mr. Baker. Not at all.
Mr. Pecora. It is all news to you?
Mr. Baker. Yes, sir.
Mr. Pecora. That is being imparted to you for the first time in
this fashion?
Mr. Baker. Yes ; we have nothing to do with that.
Mr. Pecora. You have nothing to do with the bank either, have
you?
Mr. Baker. No, sir.
Mr. Pecora. The only thing you have to do with the bank is that
all your stockholders own the stock of the bank?
Mr. Baker. Yes, sir.
Mr. Pecora. Through three trustees.
Mr. Baker. And that is
Mr. Pecora (interposing). And the fact that you do business
under the same roof.
Mr. Baker. Well, just one minute there: It is just the reverse of
that to which you referred. The stockholders of the bank, through
three trustees, own our stock.
Mr. Pecora. That is what I meant to say.
STOCK EXCHANGE PRACTICES 1975
Mr. Baker. Yes.
Mr. Pecora. And that you do business under the same roof as
the National City Bank.
Mr. Baker. That is right.
Mr. Pecora. And that you have among your officers and directors
persons who hold executive offices and places on the board of direc-
tors of the bank?
Mr. Baker. That is right.
Mr. Pecora. Is that right, now?
Mr. Baker. Yes, sir; that is right.
Mr. Pboora. And a report is made to the bank every year, or
every 6 months, of the operations of your company?
Mr. Baker. Yes.
Mr. Pecora. Outside of that you have nothing to do with the
bank ?
Mr. Baker. I have nothing to do with the current daily business
operations of the bank.
Mr. Pecora. Now, I have here another letter addressed by J. R.
Schmeltzer & Co. to the bank, attention of Mr. Rave, under date
of October 23, 1929, readings as follows :
Dear Sir : We having to deliver to the National City Co. 900 shares of
National City Bank stock, we hereby ask you for au additional overcertiflcation
of $500,000.
Thanking you for your courtesy, we are,
Very truly yours,
That is another one of these transactions, is it?
Mr. Baker. Evidently; yes, sir.
Mr. Pecora. And here is another letter, dated the same day, Oc-
tober 23. 1929, addressed to the National City Bank, attention of
Mr. Rave, readings as follows:
Dear Sir : We having to deliver to the National City Co. 1,750 shares of
National City Bank stock, we hereby ask you for an additional overcertiflcation
of $900,000.
Thanking you for your courtesy, we are,
Very truly yours,
That letter indicates a similar transaction, doesn't it?
Mr. Baker. Yes, sir.
Mr. Pecora. Here is one dated the following day, October 24, 1929,
addressed to the National City Bank, and reading as follows :
Dear Sir: We having to deliver to the National City Co. 1,650 shares of
National City Bank stock, hereby ask you for an additional overcertiflcation of
$800,000.
Thanking you for your courtesy, we are.
Very truly yours,
J. R. SCHMEXTZER & CO.
That would indicate a similar transaction, wouldn't it?
Mr. Baker. Yes, sir.
Mr. Pecora. Here is one dated October 25, 1929, addressed to the
National City Bank, attention of Mr. Rave, reading as follows :
Deiar Sir: We having to deliver to the National City Co. 8,100 shares of
National City Bank stock, hereby ask you for an overcertiflcation of $3,500,000
additional. We believe, however, that it will not be necessary for us to ask
for all the above overcertiflcation as in all probability all of this stock will
1976 STOCK EXCHANGE PRACTICES
not be delivered to us, but we are asking at tlie moment for $1,000,000
additional.
Tlianliing you for your courtesy, we are,
Very truly yours,
J. R. SCHMELTZE2! & CO.
Now, you probably notice that the phraseology of this letter is
somewhat different from those which preceded it. What does this
letter indicate to you?
Mr. Baker. Well, I do not know what it is. It does not mean
a thing to me. As I said before, if we contracted to buy the stock
and it is delivered we would pay for it. That is the only interest
I woidd have in it.
Mr. Pecora. What does this letter, which you say you are now
learning about for the first time, mean to you I
Mr. Baker. Just the same as the others prior to that.
Mr. Pecora. Oh, no. Doesn't it depart from the others in a
slight way, for instance
Mr. Baker (interposing). The only departure I can see in it,
from your reading of it, would be that they probably did not expect
all that stock in hand to deliver that particular day. That would
be all I would understand about it.
Mr. Pecora. But that they had picked up 8,100 shares for which
they had committed themselves. In other words, you had asked
these brokers for your company to pick up 8.100 shares of National
City Bank stock. ' They had picked them up, but were only going
to deliver
Mr. Baker (interposing). They had sold to us, and in the delayed
purchases
Mr. Pecora (interposing). They say, "We believe, however, that
it will not be necessary for us to ask for all the above overcertifica-
tion '\ which was for 31/2 million dollars, " as in all probability all
this stock will not be delivered to us." What did they mean^
Mr. Baker. I haven't any idea.
Mr. Pecora. Is this meaningless to you ?
Mr. Baker. Yes ; it is. If they had sold to us 8.100 shares of stock,
or whatever the amount was that you mentioned, we would cer-
tainly expect delivery of the stock, and as delivered we would pay
for it.
Mr. Pecora. It says, " will not be delivered to us " — or, to get
back, " as in all probability all this stock will not be delivered to
us." Why should these brokers ask the bank for an overcertifica-
tion or loan to cover Sy^ million dollars for stock which they had
picked up for the account of your company but which was not
going to be delivered to them?
Mr. Baker. I would not know what the}' meant by that, unless
they meant tiiat the stock might not be delivererl that particular
day. That would be the only explanation I could see to that.
Mr. Pecora. Is there any possibility that the other stock was to
be delivered to the bank directly?
Mr. Baker. Oh, absolutely not.
Mr. Pecora. Or to the City Co., directly, by the brokers?
Mr. Baker. I do not think so. But that is the first time I have
ever heard of that and T don't know. I can't imagine that that would
be the case.
STOCK EXCHANGE PRACTICES 1977
Mr. Pecoka. You are hearing of other things about your company
for the first time, aren't you ?
Mr. Baker. These are all new to me.
Mr. Pecora. Here is another letter, dated October 28, 1929, from
J. R. Schmeltzer & Co. to the National City Bank, attention of
Mr. Rave, reading as follows:
Dear Sir : Referring to our letter of October 25 —
And that is the one I have just read.
we are asking for an additional overcertification of $1,000,000. Thanking you
for your courtesy, we are, very truly yours.
Now, that would indicate that they had to make deliveries to you
which they had not expected to make the day before, or rather
on October 25, wouldn't it?
Mr. Baker. Might I ask you the date of the first letter?
Mr. Pecora. October 25, and the one I have just read is October 28.
Mr. Baker. Well, I would not, or I could not understand what
that meant there, only as I said a few moments ago, it was because
the stock which they had purchased had been delayed in being
delivered to them. Otherwise I can not see any reason for that.
Mr. Pecora. Here is another letter, Mr. Baker. And I wish you
would follow me while I read it. It is addressed by J. R. Schmeltzer
& Co. to the National City Bank, attention of Mr. Rave, and is dated
October 29, 1929, and reads as follows :
Deak Sir: We having to deliver t<i National City Co., 20,000 shares of Natinual
City Bank stock, hereby ask you for an overcertification of $9,000,000 addi-
tional. We believe, however, that it will not be necessary for us to ask for
all the above overcertification, as in all probability all of this stock will not
be delivered to us, but we are asking at the moment for $2,000,000 additional.
Thanking you for your coui-tesy, we are,
Very tnily yours,
J. R. SCHMEI-TZER & Co.
What does that indicate to you ?
Mr. Baker. I think the same as the former letter.
Mr. Pecora. 'Wliat?
Mr. Baker. That all the stock they had sold to us would not be
delivered to them on one particular day; in the course of a few
days, possibly.
Mr. Pecora. And that they needed $9,000,000 to finance those de-
liveries, that is, all deliveries, but in view of the fact that the deliver-
ies were not to be made all at one time, they only sought accommoda-
tion, called overcertification, to the extent of $2,000,000.
Mr. Baker. Well, that would seem to be the explanation of it.
Mr. Pecora. Now, I have another letter here addressed by J. R.
Schmeltzer & Co. to The National City Bank, attention of Mr. Rave,
dated October 30, 1929, and reading as follows :
Dear Sir: We having to deliver to the National City Co., 4,100 shares of
National City Bank stock, hereby ask you for an overcertification of $1,500,000
additional.
Referring to our letter of October 29, we will also ask you for an additional
overcerHfication of $2,000,000.
Thanking you for your courtesy, we are.
Very truly yours.
What does that mean to you?
1978 STOCK EXCHANGE PRACTICES
Mr. Baker. I should think just as I have stated to you formerly.
Mr. Pecora. And what is that?
Mr. Baker. I want to make it clear that I am not an officer of the
bank nor an employee of the bank. I haven't anything to do with
their loans or loan arrangements with brokers. I do not know any-
thing about that.
Senator Beookhart. Were those stocks delivered to you as these
letters indicate?
Mr. Baker. Well, as they would deliver them to us we would pay
for them. I just have not, of course, the records here of the amounts
of the delivery to us each day. But as they made deliveries we would
pay for them.
Mr. Pecora. Well
Senator Brookhart (continuing). It is quite plain from this that
the bank is financing directly the sale of its own stock, is it not?
Mr. Baker. Well, that is a bank matter having to do with loans,
and I do not know anything about that.
Senator Brookhart. For purchases and sales.
Mr. Baker. I say, that is a purely bank matter with which I have
no contact at all.
Mr. Pecora. Mr Baker, have you ever had any banking affilia-
tion? I mean, have you ever been an officer or director of any
bank?
Mr. Baker. Yes ; I am a director of the National City Bank.
Mr. Pecora. You are a director of the National City Bank?
Mr. Baker. Yes, sir.
Mr. Pecora. How long have you been such director?
Mr. Baker. Since 1929.
Mr. Pecora. Since you became president of the National City Co. ?
Mr. Baker. Yes, sir.
Mr. Pecora. Is that the extent of any banking experience you
have had?
Mr. Baker. That is right.
Senator Brookhart. Were j'ou a director at the time of these
sales?
Mr. Baker. Yes.
Mr. Pecora. You were a director when these letters were written,
in October of 1929, by J. R. Schmeltzer & Co. ?
Mr. Baker. That is correct.
Mr. Pecora. And you were also the president of the National City
Co. during this entire period?
Mr. Baker. Yes, sir.
Mr. Pecora. Here is another letter I want to read, under date
of
Senator Couzens (interposing). Prior to that let me ask: Mr.
Baker, from your banking experience do you justify these prac-
tices?
Mr. Baker. Well, Senator Couzens, I have just stated, before you
came in and since, that as far as the general practice between brokers
and their banks as to the accommodations which they have from
day to day, it is something with which I have no contact at all,
and know absolutely nothing about. I am not familiar with the
practice on these things, and I do not know.
STOCK EXCHANGE PRACTICES 1979
Senator Couzens. I did not ask you that question. I asked you
if in view of these developments, if you would indorse this prac-
tice?
Mr. Baker. Well, I assume it is perfectly in accord with banking
practice, and if so I would indorse it.
Senator Cotjzens. You are too evasive. Perhaps I may have to
ask you more pertinent questions as we do not seem to be able to get
direct answers from you. I asked you whether you indorsed this
practice or not. And I now ask you whether, regardless of banking
practice or not, you indorse this practice?
Mr. Baker. Yes, I think I would.
Senator Coitzens. That is all right, now. That answers my
question.
Mr. PEcoRiV. In other words, Mr. Baker, you think it is sound
banking practice?
Mr. Baker. So far as I know, yes, I think so.
Mr. Pecora. You do not claim to be ignorant of sound banking
practices, do you ?
Mr. Baker. Well, perhaps not. I think that is all right.
Mr. Pecora. All right. Now, here is another letter, dated October
31, 1929, written by J. R. Schmeltzer & Co. to the National City Bank,
attention of Mr. Rave, reading as follows:
Dewb Sie : We having to deliver to the National City Co. 5,000 shares of
National City Bank stock, hereby ask you for an additional overcertiflcation of
$2,000,000.
Thanking you for your courtesy, we are.
Very truly yours.
That letter indicates the same sort of situation as the letters pre-
ceding it, doesn't it?
Mr. Baker. Yes.
Senator Couzens. Mr. Baker, have you any information as to how
many accounts you had on the books of the National City Bank?
Mr. Baker. No, sir.
Mr. Pecora. Senator Couzens, he said in the earlier part of this
examination that he thought his company had as many as 15 or 20
brokerage houses trading in National City Bank stock at that time,
and this is only one of them.
Senator Couzens. Mr. Baker, may we assume that this practice
was continued with all these brokerage firms?
Mr. Baker. I would assume so, if they had banking relations with
the bank.
Senator Brookhart. Other accounts than with these deals for
purchases and sales of National City Bank stock; other accounts than
these deals were permitted and financed almost altogether by the
National City Bank itself ?
Mr. Baker. Well, I do not know what proportion of that business
that you have just read there is to the total business done.
Senator Brookhart. Well, if all brokerage houses proceeded in the
same way, then the answer to my question would be yes.
Mr. Baker. It would be facilitating the delivery of securities.
Mr. Pecora. It was more than the facilitating of the delivery of
securities. It was facilitating the purchase of them in the first
instance for the account of the company, wasn't it ?
1198.52— 33— PT 6 15
1980 STOCK EXCHANGE PRACTICES
Mr. Baker. No, sir; because our purchases were direct purchases
and sales to us.
Mr. Pecora. That is, you mean from the broker to you?
Mr. Baker. That is right.
Mr. Pecora. And the broker in picking up the stock to deliver to
your company in fulfillment of the company's orders, was borrowing
money from the National City Bank through the medium of this
so-called overcertification ?
Mr. Baker. According to those letters it would seem so, to some
extent.
Mr. Pecora. Isn't that a species of transaction in which the bank is
virtually trading in its own stock?
Mr. Baker. Well, it does not seem so to me.
Mr. Pecora. And you say that in the light of the languagte of
these letters, all of which indicates that the broker has to deliver
shares of the capital stock of the bank to your company and is call-
ing ujDon the bank for a loan to enable the broker to pick up the
shares to deliver to your comj^any?
Mr. Baker. It seems to me that is just the same transaction that
any broker would have with his bank on the delivery of any securi-
ties that he might have sold.
Mr. Pecora. But here the bank is put on notice by the broker,
through the medium of these letters, that the transaction is one
which he has with the National City Co. and involves the capital
stock of the National City Bank; isn't that a fact?
Mr. Baker. That would seem to be the case.
Senator Couzens. Mr. Baker, do you know if this was the general
practice in New York banks during the time you were doing it ?
Mr. Baker. I do not. And again I apologize for, as you say,
being evasive, but it is because I am not in contact with the banking
end of it at all.
Senator Coitzens. You were a director?
Mr. Baker. Yes, sir; but, of course, this is routine or daily busi-
ness of the bank.
Senator Brookhart. Did it ever come to the attention of the
directors ?
Mr. Baker. Not specific transactions : no, sir.
Senator Cotjzens. Did you ever have any banking experience be-
fore you went on the National City Bank board?
Mr. Baker. No, sir.
Senator Cotjzens. After you went on the National City Bank
board did you ever come in contact with or associate with other
bankers in New York- other big bankers?
Mr. Baker. Yes ; with quite a few.
Senator Couzens. And did you discuss at that time the general
practices of banks in those matters?
Mr. Baker. Not at all as regards matters of this kind, loans, and
so forth, from brokers by the banks, or I mean by banks to brokers,
and the way they conduct their daily business. I know notliing
about that.
Senator Couzens. Did you hear or read any of Mr. Aldrich's
statement before the Finance Committee with relation to the bank-
ing situation, made a few days ago ?
Mr. Baker. I have not yet ; no, sir.
STOCK EXCHANGE PRACTICES 1981
Senator Couzens. In the light of what we can now see back be-
hind us, do you approve of continuing those practices?
Mr. Baker. Such as has been read here, do you mean ?
Senator Couzens. Yes.
Mr. Baker. AVell, I have not sufficient Ivnowledge of commercial
banking transactions to really have any very definite opinion on
that. So long as it is the general banking practice in New York,
or any other place, and in accordance with banking laws; yes, it is,
I would say, but I don't know.
Senator Coitzens. Let us forget about that technical answer, and
ask the question from a moral and ethical standpoint: Do you be-
lieve commercial banldng should be continued in the future as it
has been in the past, according to the testimony we have developed
here ?
Mr. Baker. I do not see that the bank has taken the slightest risk.
The sale has been made and upon delivery will be paid for.
Senator Couzens. In other words, as long as the bank does not
take any risk you justify any conduct on its part, do you?
Mr. Baker. Oh, no.
Senator Couzens. You substantially stated that.
Mr. Baker. Oh, no. We are talking about daily transactions be-
tween its customers and itself.
Mr. Pecora. Mr. Baker, have you any reason to believe that the
transactions evidenced by these letters were anything other than
routine transactions, and that similar transactions were not had be-
tween the bank and other brokers whom your company was using
to accumulate shares of the bank's stock for you ?
Mr. Baker. Well, Mr. Pecora, I absolutely have no knowledge of
that at all. I do not know what the relations between brokers and
the bank were.
Mr. Pecora. Didn't the bank, or anyone in the bank, ever call you
up to find out whether it was proper to extend this credit to J. R.
Schmeltzer & Co., amounting to millions of dollars in the course of
a few days' time?
Mr. Baker. No one called me. But I would not be surprised if
they may have called to find out if we had made those purchases.
Mr. Pecora. Who would be called for that purpose, do you think?
Mr. Baker. Well, I think that would be perhaps the treasurer of
our company or the vice president in charge of its finances.
Senator Couzens. In one of the letters, dated October 11, 1929,
addressed to the National City Bank, attention of Mr. West — who
is Mr. West?
Mr. Baker. He is one of the officers in the bank.
Senator Couzens. Is he still employed?
Mr. Baker. Yes.
Senator Couzens. And in view of the fact that this letter is ad-
dressed to his attention, I assume he had complete authority to do
what was requested in the letter.
Mr. Baker. I assume so. with his other associates in that par-
ticular department.
Senator Couzens. In the other letters I see here they are addressed
to the attention of Mr. Rave. What is his position ?
Mr. Bakfk. He is an officer.
1982 STOCK EXCHANGE PKACTICES
Senator Couzens. Is he still with the company?
Mr. Baker. Do you mean with the bank?
Senator Couzens. Yes.
Mr. Baker. I think so.
Senator Couzens. And he would have authority by himself ap-
l^arently to extend the accommodations requested in the letters?
Mr. Baker. Well, I assume he has that authority. It has to come
from the president of the bank to him.
Senator Couzens. Is there any evidence on the minutes of the
board of directors giving him authority for this practice ?
Mr. Baker. I do not know that, Senator Couzens.
Mr. PecoriV. Mr. Baker, an overcertification by a bank is really
an authorized overdraft, is it not?
Mr. Baker. I must repeat to you that I do not know about those
phases of banking operation. It is not my function. I have not
had anything to do with it. I know nothing about it.
Mr. Pecora. In order to save time, will you ask one of your
associates from the bank who knows about it to give you the infor-
mation ?
Mr. Baker. I do not know that there is anj'one here that would
know that.
Mr. Pecora. Mr. Mitchell is here. Mr. Law is here.
Senator Brookhart. Just for the record, let me state that I have
totaled those shares handled in this wav from October 10 to October
30, 1929, and they are 46,749, $21,800,000.
Mr. Pecora. May I just ask Mr. Mitchell a question? Have him
recalled and susjiend the examination of Mr. Baker. Stay right
where you are, Mr. Baker. It will only be a question or two.
TESTIMONY OF CHARLES E. MITCHELL, NEW YORK CITY, CHAIR-
MAN THE NATIONAL CITY BANK OF NEW YORK, CITY BANK
FARMERS' TRUST CO., INTERNATIONAL BANKING CORPORA-
TION, THE NATIONAL CITY CO., AND THE NATIONAL CITY CO.
(LTD.), OF CANADA— Resumed
Mr. Pecora. Mr. Mitchell, have you heard me read in the course
of my examination of Mr. Baker, certain letters written in the
month of October, 1929, by J. R. Schmeltzer «& Co. to the National
City Bank?
Mr. Mitchell. I have.
Mr. Pecora. Are you familiar with the transactions referred to
in these letters?
Mr. Mitchell. Not the specific transactions, but I would be glad
to exjDlain.
Mr. Pecora. Are you familiar with the nature of these transac-
tions ?
Mr. Mitchell. Oh, yes, indeed.
Mr. Pecora. Will you kindly tell the committee the nature of
the transactions evidenced by these letters?
Mr. Mitchell. Since the national bank act was adopted immedi-
ately following the Civil War there has been a practice among all
banks of giving what we call day loans. They are clearance loans.
Wlien any dealer in securities or broker has securities to deliver to
STOCK EXCHANGE PKACTICES 1983
some other he has to have temporary accommodation to make that
deliver J^ All banks give lines to brokers for such accommodations.
The lines are usually established — I know they are in our bank — for
day loan accommodation, clearance day loans.
Senator CotizENS. Do you have any securities for those?
Mr. Mitchell. None. No security but a day-loan contract that
has become a set form, Senator Couzens, is in use, and the day loans
given by banks, the day loan accommodations, are very large. They
have to be.
Senator Couzens. But in effect they are continuous, are they
not ?
Mr. Mitchell. No.
Senator Couzens. I mean if they go from one day on to the next
day and the next day, they amount in substance to a continuous
loan almost?
Mr. Mitchell. Oh, no, they are paid off each day. They are paid
oif during the day.
Senator Couzens. Yes; but they are renewed the next day so
that in effect it is the same as a continuous loan?
Mr. Mitchell. They may, and they may not be, Senator Couzens.
Senator Couzens. I notice in one of the reports I have here made
by one of our examiners, and as I understand it this is substantially
correct :
Accordingly it appears that the aforesaid brokers hiid a credit of $500,000
for day-loan purposes with the National City Bank.
Mr. Mitchell. That is right. We give in our banks to recognized
dealers, and especially stock exchange members, a day-loan line.
In our bank we figure that line usually on the basis of the cash po-
sition of the brokerage firm shown in his return to the stock ex-
change. That we require, in order to know the credit upon which
we are extending that day line. Then if, as and when that broker
has extraordinary calls upon him by virtue of the volume of securi-
ties under delivery, he advises us that he for that day will have to
have or would like to have additional accommodations. It becomes
a loan that is again good on the basis of the contract.
Under such circumstances the bankers' question is. Does the person
to whom he is to deliver this security, another broker or investment
house, recognize his contract to receive those securities, and if he
does, those larger lines are often extended for the day. The loan
is wiped out during the day. The New York Clearing House As-
sociation has a regular charge established at. I think, 1 per cent for
those loans during the day.
Now the loans are very large. We do in our bank a smaller
amount of that business than a number of the other New York banks,
but I ])resume that at times the clearance loans or day loans in New
York banks, when markets are active, would run to three, four or
five hundred million dollars perhaps. They are all wiped out during
the day.
Senator Couzens. When you said 1 per cent, what do you mean by
1 per cent?
Mr. Mitchell. We charge 1 per cent for the accommodations.
Senator Brookhart. One per cent a year ?
Mr. Mitchell. At the rate of 1 per cent per annum.
1984 STOCK EXCHANGE PRACTlCBb
Senator Brookhart. That is the way I understood it.
Mr. Mitchell. It is a pure accommodation based upon contracts.
Senator Couzens. Does this line that you speak about, a line of
daily credit, have to be passed upon by your directors or any execu-
tive committee?
Mr. Mitchell. The lines are all approved. Senator Couzens.
Senator Couzens. And these officers to whom these letters are
addressed do not have authority to exceed the lines approved by
the board?
Mr. Mitchell. They do not have authority. The lines are set
up, for instance, by a group of senior officers. Those are junior
officers and operating officers to whom those letters have been ad-
dressed. We have one vice jDresident in the bank who is responsi-
ble for what we call street loans of any kind, and this junior to
whom these letters are addressed is an operating officer reporting to
him.
Senator Couzens. In other words, this practice grew to great size
during the boom, did it not?
Mr. Mitchell. It has always been of substantial size, but of
course as markets become more active and there are more securities
to be delivered and to be received by the Street, the necessity for
increase in day loans becomes obvious.
Senator Couzens. But you never have any actual possession of the
securities that are being transferred?
Mr. Mitchell. No, sir. The loan is based entirely upon the
contracts.
Senator Couzens. In other words, it is this practice, as I under-
stand it, that Senator Glass has particularly objected to ?
Mr. Mitchell. I have not known of Senator Glass objecting to
this particular practice. He may have, Senator Couzens, but I don't
recall it.
Senator Couzens. What was the basis of his controversy with you,
then, on that practice of lending money on these day loans?
Mr. Mitchell. No. That had nothing to do with day loans. That
controversy had to do with lending money to the loaning post on
the New York Stock Exchange. That was for the carriage of secu-
rities over night, or for a day or two.
Senator Couzens. There is not much difference between these and
those, is there?
Mr. Mitchell. Oh, yes. This is a pure operating problem. The
other is a loan-carrying problem. This has nothing to do with that,
Senator.
Senator Couzens. No; but I mean they are in the same category,
because they have to do with stock-market activities. You may
classify them as different.
Mr. Mitchell. Oh, if you put it in that class, yes; but I am quite
certain that Senator Glass has never raised any question in regard
to this class of loans. In fact, I never have heard a question on this
class of loan raised in any investigating committee.
Senator Couzens. But it all contributes, however, to the diversion
of capital from industry and commerce to stock-market transac-
tions, whether it be through this scheme or whether it be through
the scheme which you stated Senator Glass specifically complained
about.
STOCK EXCHANGE PRACTICES 1985
Mr. Mitchell. Well, I would hardly say so. This class of loan
is made on the basis of a contract between 2 people on the Street,
1 to receive and 1 to deliver. The risk is really a matter of a
few moments, in the process of which the bank, lending itself to
the facilitation of that operation, takes a risk that is, in part, meas-
ured by the capital strength of the broker, and, secondly, the strength
of the contracts between the one to deliver and the one to receive.
Senator Couzens. So when these requests were made for over-
drafts of $2,000,000 you examined the purchaser to see if he was
able to make good upon the purchase from the broker; is that not
true?
Mr. Mitchell. That is what is ordinarily done. I can not tell you
specifically in this ease. I think it very likely that when that man
received that letter he would call up the treasui'er of the City Co.
and say: "Are you prepared to receive so many shares of stock
to-day from this particular firm and pay for it as it is delivered?"
He said "Yes."
All right, there is a good contract between two houses on the
Street, and he makes that arrangement for a day loan and credits
the amount requested to the broker, so that when he presents his
checks for delivery of the stock to him for redelivery they can be
certified against that amount so established.
Senator Couzens. Do you do that with every other broker the
same way?
Mr. Mitchell. Every broker.
Senator Couzens. Every one- — —
Mr. Mitchell (interposing). Everyone that we have on our list.
As I say, we do not have as much of this class of business as a gi-eat
many banks. Some banks have made a great play at this. It is
the safest kind of banking operation, as a matter of fact.
Senator Couzens. Is it what you would construe real banking
business to facilitate the interchange of commerce and industry?
Mr. Mitchell. Oh, yes, sir; I should say so, distinctly. It is
facilitating exchanges on perfectly good contracts during a single
day.
Senator Brookhaet. Speculative contracts the same as any other?
Mr. Mitchell. It may be; we have this same arrangement be-
tween bond houses. The largest we have are in connection with
dealers in United States Government bonds. You can realize that
the transactions there are very, very heavy, and those dealers demand
usually very heavy day loans.
Senator Couzens. What do you think, Mr. Mitchell, is the extent
to which the Federal Government can go in selling their bonds or
securities? You are the leading banker of New York, and you are
not only that but a good salesman. We may have to have you to
sell our Government securities before we get through.
Mr. Mitchell. Senator Couzens, it all depends upon the credit
of the United States Government, and if the United States Govern-
ment does that which everybody else is trying to do at the moment,
balance its Budget, it can sell all of the bonds that it can possibly
need for its requirements.
Senator Couzens. So you have not fixed in your mind just what
specifically we have got to do to issue a number of bonds without
limit almost ? I said that badly. In other words, you think that
1986 STOCK EXCHANGE PRACTICES
if we did certain things here in Congress we could sell up to thirty-
five or forty billions of Government securities?
Mr. Mitchell. "Well, that is a pretty big order.
Senator Couzens. Well, I presume so. I am trying to get at it.
I put it up big so as to get your sane judgment on it.
Mr. Mitchell. It can sell as many bonds as are required to meet
what the investing public regard as sound and not as affecting the
credit. What they are interested in is the strength of the credit.
No concern can go on, whether it is a Government or a business,
and continue to issue more evidences of debt, except as their basic
principles are sound, and one of those princiiiles, of course, must
be the balancing of their day-to-day budget. These bonds cannot
be issued, for instance, to pay for deficits. There we run immedi-
ately into a limitation. Senator Couzens.
Senator Couzens. I hope the committee will excuse me for asking
extraneous questions. When you speak of balancing the budget and
making up of deficits through the issuance of securities what do you
include as budgetary items?
Mr. MitchelIj. Well, of course —
Senator Couzens (interposing). Would you include your sugar
loss and all of those things in one year's budget and expect it to be
paid out by earnings, so that you balance your budget.
Mr. Mitchell. No, but I think if that went on — let me put it
another way : If we are an operating concern and our yearly income
and outgo shows in red, then our credit position is weak. If we
have got some losses — you speak of sugar losses, writeoff — if we
have got writeoffs and we indefinitely continue those writeoffs, every
writeoff we make is harmful, not only to the shareholders, but to our
strength. There has got to be a limitation to that sort of thing.
Senator Couzens. Do the banks ever defer writeoffs or divide
them up over the years?
Mr. Mitchell. Yes; but not
Senator Couzens (interposing). Don't put any "but", but do
they?
Mr. Mitchell. Oh, yes. Yes, indeed.
Senator Couzens. So you would not say now that the banks of
the country had written off all they ought to have written off,
would you, or that was possible to write off?
Mr. Mitchell. No.
Senator Couzens. When we come to balancing the Federal Budget,
do you assume that all of the bond buj^ers, all of the note buyers,
of Government securities, differentiate between the $2,000,000,000
that we have borrowed practically for the K. F. C— $125,000,000 for
the Federal land banks, $125,000,000 for the home-loan banks —
those are all outgoes ?
Mr. Mitchell. Yes.
Senator Couzens. But they are not current outgoes, are they ?
Mr. Mitchell. No, sir.
Senator Couzens. And do you assume that when a buyer of these
bonds analyzes the Government's accounts to know whether this ex-
cess of outgo over income is made up of items to which I have just
referred, or whether they are made-up items of actual operating
expenses of the Government ?
STOCK EXCHANGE PRACTICES 1987
Mr. Mitchell. I think they differentiate.
Senator Couzens. You do?
Mr. Mitchell. Yes; I do.
Senator Couzens. All right; now we will take the figures of
today. How many bonds that are in the market today that were
issued for those items to which I have just referred and how many
_^bonds are in the market for carrying operating expenses ?
Mr. Mitchell. I would have to refresh my memory on that, Sen-
ator Couzens.
Senator Couzens. I do not imagine there is anybody in the room
can answer that question. If there is anybody in the room, I would
ask the chairman to invite them to stand up and tell us.
I only mention that because of the absurd discussion all the time
about balancing the Budget when I venture to say there is not one
man in a million knows what it means. Certainly they do not con-
template that you are going to take out of taxes in one year the
$2,000,000,000 advanced by the E. F. C. ?
Mr. Mitchell. No, no.
Senator Couzens. Or the $500,000,000 handed to the Farm Loan
Board ?
Mr. Mitchell. Certainly not.
Senator Couzens. Then what are you talking about when you are
talking about balancing the Budget, and who knows what you mean
by it when you are talking about balancing the Budget?
Mr. Mitchell. Well, we know what are received from taxes, and
we know what the revenues of the Government are.
Senator Couzens. Certainly. So do we all.
Mr. Mitchell. And we know what the current operating expenses
are.
Senator Couzens. What are the current operating expenses of the
Government for 1932?
Mr. Mitchell. You mean what are they in character?
Senator Couzens. No ; what are they in amount ?
Mr. Mitchell. I would have to refresh my memory on that.
Senator Couzens. So when the Treasury issues statements under
its perfectly absurd bookkeeping system that they expended a billion
dollars more than they received, that does not mean anything,
does it ?
Mr. Mitchell. They paid out a billion dollars more than they
received, you mean?
Senator Couzens. Yes.
Mr. Mitchell. It does not, unless they say what it is for.
Senator Couzens. They do not say what it is for.
Mr. Mitchell. Yes.
Senator Couzens. They show in their reports as published in the
press from day to day that the Government paid out a billion dollars
more than it took in, and immediately you great bankers and indus-
trialists and captains of industry assail the Government for spend-
ing so much more than they receive, and yet no consideration is given
to the fact that billions are spent out for emergency purposes, which
obviously cannot be balanced in a year.
Mr. Mitchell. That is certainly true.
Senator Couzens. Well, why doesn't somebody explain that to
the public? When you great bankers, like Mr. Aldrich and all of
1988 STOCK EXCHANGE PRACTICES
this group, appear before the Finance Committee and tell us poor
dubs what we ought to do, they just nonchalantly say, "Balance
the budget." I would like to know what in hell it means. They
don't tell us. [Laughter.]
Now we have one of the gi-eatest, I understand, and best bankers
and salesmen in New York, and I would like to get the benefit of his
advice.
Mr. Mitchell. I think, Senator, that expenditures, that is, any
outgo of the Treasury Department, has very definitely got to be
analyzed before one can reach a conclusion as to whether it con-
tinues to be a sound one or not.
Senator Cotjzens. You have got one of your advisors here, one of
the greatest Under Secretaries of the Treasury since Alexander Ham-
ilton had one. I think he ought to be able to tell you what we ought
to do so that you in turn could tell us. [Laughter.]
Mr. Mitchell. I will ask him and see if he might give you the
benefit of his advice. Senator Couzens.
Senator Brookhart. Now I want to ask a question or two about
that. You say, let us assume that running expenses are greater
than the revenxies, without reference to these other items. How
would you balance the Budget then? What kind of taxes would
you levy to balance it?
Mr. Mitchell. Tliat is not a question it seems to me to be an-
swered definitely off hand.
Senator Brookhart. That is what I supposed he would say. The
sales tax is what you are for, is it not?
Mr. Mitchell. I am for whatever is necessary to get the revenue
that is required, Senator.
Senator Brookhart. Is that not the thing you think is necessary,
the sales tax?
Mr. Mitchell. I am inclined to think that before we get through
we may have to come to some sales tax.
Senator Brookhart. Well, now; then I propose that we levy the
first sales tax on the sales of stocks and bonds. What do you say
to that.
Mr. Mitchell. I think that you have a sales tax there now. There
is a tax.
Senator Brookhart. Yes; but it is not enough to get a revenue.
It is just nominal. You would not be in favor of that, would
you?
Mr. Mitchell. Well I think we have a tax there now. You may
consider that you want to increase it, but I am sure that j^ou would
not be in favor of increasing it to a point where j'ou would interi'upt
the proper financing of commerce and industry.
Senator Brookhart. I would not want to interrupt the proper
financing, but I would want to interrupt all this speculation. I
would like to interrupt and stop all that.
Mr. Mitchell. I would not mind if you could find the way to do
it, but as long as humans are humans, I do not think that can be
stopped.
Senator Brookhart. What do you say to this proposition : Sen-
ator Glass offered an amendment to the tax bill which levied a tax
of 5 per cent on all sales on the stock exchange where the}' were
STOCK EXCHANGE PRACTICES 1989
resold in 60 clays. What -would you say the effect of that would
be on the speculation ?
Mr. Mitchell. I think it would materially dampen it.
Senator Brookhart. So do I.
Mr. Mitchell. Is that all, Mr. Pecora.
Mr. Pecora. No. Mr. Mitchell, let us get back to these Schmeltzer
& Co. day-by-day loans and overcertifications as reflected in these
letters that have been read in evidence tliis morning.
Mr. Mitchell. Yes.
Mr. Pecora. The overcertifications referred to in these letters are
extensions of credit in excess of the day-by-day credit that J. R.
Schmeltzer & Co. had been accorded by your bank, are they not?
Mr. Mitchell. Apparently.
Mr. Pecora. Do you know what the day-by-day credit of J. R.
Schmeltzer & Co. at your bank was in October, 1929?
Mr. Mitchell. I have been told that our day loan accomodation
to them was $500,000.
Mr. Pecora. That accords with my information.
Mr. Mitchell. Yes.
Mr. Pecora. These overcertifications are in effect a species of
authorized overdrafts, are they not?
Mr. Mitchell. No; they are not overdrafts, and an overcertifica-
tion is not the proper word for that.
Mr. Pecora. That is the word which has been used in the cor-
respondence passing between the bank and the broker.
Mr. Mitchell. It has, and it is quite a general term on the Street,
overcertification. As a matter of fact, the machinery is that a defi-
nite credit for that day is placed against the account of the one
to whom the day loan is made and is
Senator Brookhart (interposing). Do you get any note or any
evidence of that debt?
Mr. Mitchell. We have what we call a day-loan contract which
covers the amount of the application, Senator Brookhart.
Senator Brookhart. Is there a contract signed for every day, or
is that a general contract?
Mr. Mitchell. That is a general day-loan contract, and where
these special amounts, added amounts, are put onto the day loan,
my recollection is that they are signed up for that additional
amount. It is an arrangement by which that amount of money is
placed to the credit of that concern against the checks which come
in, and that those checks may be certified, but they are certified, as
you will see, over and above the amount which the concern would
ordinarily have in the bank, and therefore you get this over-
certification.
Senator Brookhart. This contract begins then by your making
a contract with the broker that you will extend to him in day loans
a limit of so much or for a period of time ?
Mr. Mitchell. Each day a limit.
Senator Brookhart. Each day a limit?
Mr. Mitchell. That is right.
Senator Brookhart. And you have no note, no security, and no
evidence of that except this contract?
1990 STOCK EXCHANGE PRACTICES
Mr. MiTOHELX,. That is very true. It is a clearance loan. It is a
loan made to facilitate clearances between the one who delivers it
and the one who receives.
Senator Brookhart. What is the basis for extending credit to
these brokers ? What is the basis of your contract ?
Mr. Mitchell. The basis with us in establishing a day-loan limit,
as I have told you, is a study of their own balance sheet. Now we
have a rule
Senator Brookhart (interposing). You mean of the amount of
daily business that they transact?
Mr. Mitchell. No, sir. The amount of their quick assets really.
We take — and I don't know the practice of other banks ; I can only
give you the practice of our bank — we take their return to the New
York Stock Exchange of their position, which is submitted to us,
and the rule in our bank is that the day loan line shall not exceed
the cash and securities ready for delivery and government bonds
that are in the balance sheet of that house. In other words, we do
not give any credit for the value of their Stock Exchange member-
.ship or real estate or furniture and fixtures, or anytliing else. We
establish that day loan line on the basis of their quick assets.
Senator Brookhart. It would not be possible for a farmer to
get a loan on those terms at your bank then, would it ?
Mr. Mitchell. I am afraid not. The farmer's loans ordinarily
go beyond the day.
Senator Brookhart. Yes, but for 50 years the farmer was the
best security our banks had, and then we got you fellows and your
siieculation and your gambling and breaking up of all prices and of
everything, and now a farmer can not get a loan anywhere.
Mr. Mitchell. Yes ; but I call your attention, in all fairness. Sena-
tor Brookhart, to the record of these day loans. Since I have had
any connection with the National City Bank we have never lost a
penny in all of our day loan accommodations.
Mr. Pecora. Did you lo.se any during the stock market crash in
1929?
Mr. Mitchell. Not a penny.
Senator Brookhart. There are some fellows I have heard running
poker games that could tell you the same thing as that. The fact
that you succeed in a gambling operation does not make it any more
desirable than if you failed.
Mr. Mitchell. I would not consider the day-loan operation, and
I don't think under any stretch of imagination you cauld call the
day-loan system a form of speculation or gambling. It, of course,
has inherent in it that which every transaction has that is made by
a bank, which is a continuing risk of some sort or another. But I
mentioned that record on day loans to indicate that perhaps there
is no business done in Wall Street where the risk as far as the banker
is concerned is as light as it is in day loans.
Senator Brookhart. But conceding that it is still supporting and
promoting a speculation in these stocks, and in this case in your
own stock?
Mr. Mitchell. It does not seem to me that it is supporting it any
more than is our very presence there as a credit institution. We are
there. We facilitate the malcing of deposits and the passage of
checks. We facilitate the speculative markets, if you say so, by our
STOCK EXCHANGE PRACTICES 1991
presence there, and usual regular operation, but we do not facilitate
it to any substantially greater degree by this kind of an operation,
which, as I say, has been the standard form of operation since the
National Bank Act came into being in, if I recall right, 1865.
Senator Brookhart. It seems to me it is a mighty convenient way
of getting easy money.
Senator Reynolds. Mr. Chairman, I would like to ask Mr. Mitchell
a question.
The Chairman. Senator Reynolds.
Senator Reynolds. Mr. Mitchell, speaking of these loans that are
under discussion here, I understand that it has been brought out here
in the testimony before this committee by Mr. Pecora that the vice
presidents of your institution borrowed some $2,000,000 from the
bank. Is that right ?
Mr. MiTCHEiL. Not entirely. I think perhaps the impression was
given by Mr. Rentschler's testimony to that effect. The resolution
of the board of directors out of which came those particular loans
provided that the board authorized a loan initially of $2,000,000 tc
members of that board acting as trustees. The provision was that
there shoxdd be no interest charged against the trustees. Those
trustees were authorized to make loans, not only to officers but to
officers and employees, and the number of employees I think far
exceeds the number of officers to whom those loans were made. Now
they did make those loans to officers. The officers paid interest.
Senator Reynolds. What interest did they pay ?
Mr. Mitchell. I think 5 per cent.
Senator Reynolds. Five per cent?
Mr. Mitchell. Yes.
Senator Reynolds. Have those loans been repaid ?
Mr. Mitchell. No. They have not been repaid. I think some
portion of them have been repaid. The far greater portion has not
been repaid.
Mr. Pecora. About 5 per cent has been repaid, according to Mr.
Rentschler.
Senator Reynolds. Five per cent of the $2,000,000?
Mr. Pecora. $2,400,000.
Senator Reynolds. Now, do you owe the bank anything?
Mr. Mitchell. No, sir.
Senator Reynolds. You do not owe the bank anything?
Mr. Mitchell. No. sir.
Senator Reynolds. I wanted to pursue that inquiry directed by
Senator Couzens a moment ago, with your kind permission, gentle-
men.
Speaking of balancing the Budget, suppose we do not balance it
for the next two or three years. How many millions of dollars of
bonds under the present conditions could we market with the Ameri-
can public?
Mr. Mitchell. Senator Reynolds. I am distinctly under the im-
pression that unless there is an honest attempt to balance the Budget
by income or vice versa ; that is, by cutting expenditures in the course
of time- — it may be six months and it may be five years ; I can not be
wise enough to state — but if this balancing process does not establish
itself within a reasonable time, the public will lose confidence in the
credit of the Government to a point where the amount of securities
1992 STOCK EXCHANGE PKACTiCES
that can be floated on a creditable basis to the Government will be
restricted.
Senator Eetnolds. Then you haven't any definite idea as to the
exact amount or the approximate amount that we might be able to
market ?
Mr. Mitchell. No. The more we market from month to month
the nearer we come to the end of the road.
Senator KETisroLDS. I see. That is all, Mr. Chairman.
Senator Brookhaet. On that proposition, if we would go directly
to the i^eople, as we did in financing the war and the campaigns, and
cut out the investment companies and the stock exchange for the sale
of bonds, there is not much limit to the amount of bonds the people
would buy direct, is there ?
Mr. Mitchell. That is what we are doing now in connection with
Government bonds. The banker and the investment banker does not
buy Government securities from the Government at one penny less
than anybody else has the opportunity to do.
Senator Brookhart. The amount of credit the Government could
carry is limited by its taxing power only, isn't it?
Mr. Mitchell. Its taxing power and the exercise thereof.
Senator Brookhaet. Yes. And if it wanted to float more bonds,
and pay more interest, why it could levy higher taxes on the big
upper brackets and get the money to pay that interest, could it not?
Air. Mitchell. You will bear in mind that the minute you pay
higher interest you def)reciate the value in the market of the securi-
ties that are already existing, and continually feeding a higher
interest rate will be a red flag to
Senator Brookhaet (interposing). I did not mean a higher inter-
est rate; I meant a greater amount of bonds. It may be a lower
interest rate.
Mr. Mitchell. The more bonds that you put out, whether the
effect is momentarj^ or not, sooner or later they will be reflected in
the interest yield on the outstanding bonds, and the rate that must
be paid by the Government on any new issues that it puts out.
Senator Brookhaet. Now, as these new issues and this increase
of indebtedness has come about through depreciation, the interest
rate over in the Treasury has gone down all the time.
Mr. Mitchell. Yes ; it has gone down, but you will bear in mind
that for a long period now the Government has done its financing on
the basis of short term. The short-term issues have, of course, been
taken up by the banks of the country very largely because they did
not find a demand from a good borrower in commerce and trade and
agriculture, and banks have used their money to hold Government
bonds.
Senator Beookhart. Is not the specific reason why they have taken
these Government loans coming from the fact that they had beep
loaded up on advice of the big banks, with private bonds, and the
bank examiners, and all advised, that this list of bonds were good,
and they have depreciated so much that nearly all the banks of the
country are in trouble and they are buying the Government bonds
to be safe?
Mr. Mitchell. Well, it is not altogether right to say that it is
entirely bonds. Bonds have affected the situation adversely. There
STOCK EXCHANGE PRACTICES 1993
is no question about that. But you bear in mind that we have had
a great deal of trouble throughout the country with mortgages. We
have had a slowing up in the power of debtors to pay their current
obligations at banks. We have had as a result of this dspression a
tightening process all along the line.
Senator Brookhakt. It was preceded by a swelling process where
all these things were inflated enormously above any just level, every-
thing, land, and so forth, and the bubble burst and now we are getting
the reaction that follows, due to the bad management of you people
that are running the finances and Government of the United States.
Mr. Mitchell. I do not think that we acting in finance had any-
thing to do with the high price of agricultural commodities at a cer-
tain time, and the introduction of tariif barriers and the develop-
ment of uneconomic production of agricultural products in various
parts of the world that affected agricultural price.
Senator Brookhart. You are quite awai-e on that, are you not,
that agricultural prices have not been high since 1920 and that they
did not boom up with the boom of your stocks and bonds?
Mr. Mitchell. I realize that they
Senator Brookhart (interposing). They stayed low all the way
through. You reached a point where you thought you could be
prosperous without the buying power of a prosperous agriculture.
Mr. Mitchell. You recall, Senator Brookhart, that we had quite
a drop in wheat, if I recall, along in 1930, that was very disastrous
to the farmers of the West.
Senator Brookhart. That was after the panic. It not only hit
other business but it hit agriculture another jolt, and sent it still
lower, until now we are on the lowest price level that ever I can
remember.
Mr. Mitchell. Or I can remember either.
Senator Brookhart. Or you either. Now then, these agricul-
tural prices were held down in part by the raise of railroad rates of
60 per cent on agricultural products and railroad securities were
sold on the value of seven or eight billion dollars higher than the
market value at the time the valuation was fixed by the law. That in-
flated the railroad stuff. Then InsuU came in and inflated his stuff
two or three billion dollars, Morgan did, and then you got your
bank stock up to, I said, 2,500 per cent, but it is over 2,800 per cent
nearly 2,900 per cent, above its par, and everything was inflated
in this country, in a country that in good times produces only about
4 per cent a year on an average, and that, of course, produced a result
that when that burst, why, there was a general calamity in the whole
country, and you are not offering us any way to get out of it. That
is the worst part. You got us in, but how about getting us out?
Mr. Mitchell. Well, I think it is something that is going to take
the cooperation of everybody in the system.
Senator Brookhart. The fact is there is nobody with an organiza-
tion strong enough to do it but the Government of the United
States itself, and it has got to do that by taking charge of this agri-
cultural surplus and employing these unemployed men instead of
loans we have been talking about to do it.
The Chairman. Senator Brookhart, I agree with you in so much
of what you say, but I think I shall have to raise a point of order.
1994 STOCK EXCHANGE PRACTICES
Tlxis is not the matter under investigation, and we will have to limit
our time more closely to the matter that we are here for. So give us
a chance part of the time anyway.
Senator Brookhart. Very well; I am through.
Mr. Pecoi:a. Mr. Mitchell, just before you leave the stand, to get
back to the Schmeltzer & Co. overcertifications of October, 1929, were
you aware that those overcertifications were being granted to
Schmeltzer & Co. at that time?
Mr. Mitchell. I did not Icnow anything about these particular
transactions. They would not naturally come to my attention. They
would not get beyond the attention of the vice president in charge
of the street loan, Mr. Pecora.
Mr. Pecora. Who was that vice president in October, 1929?
Mr. Mitchell. This would be a matter that would be attended to
by either Mr. Brady or Mr. W. A. Simonson.
Mr. Pecora. As you heard these letters read, you caught the im-
plication of them, didn't you?
Mr. Mitchell. Oh, yes.
Mr. Pecora. And they indicated, did they not, that these brokers
were buying large blocks of capital stock of the National City Bank
for the account of the National City Co. ?
Mr. Mitchell. They had sold to the National City Co. I do not
believe that any of those brokers were commissioned to buy for the
account.
Mr. Pecora. Where the brokers were asking the bank for exten-
sions of their day-by-day line of credit, as these brokers were through
these requests for overcertification, did not that fact indicate that
they were acquiring these shares of stock for delivery to the National
City Co.?
Mr. Mitchell. I presume that there were many, many days pos-
sibly through that very period where the National City Co. was
delivering stock to Schmeltzer. Schmeltzer is a broker. He would
be buying and selling during the day, and they may have bought
from the National City Co. so that the National City Co. had large
deliveries to make to them.
Mr. Pecora. All these letters refer to deliveries which the brokers
were to make to the National City Co.?
Mr. Mitchell. Yes.
Mr. Pecora. Let us confine ourselves to the subject matter of these
letters and the transactions indicated by these letters.
Mr. Mitchell. They indicate that on the transactions of the day
before this broker, Schmeltzer & Co., had sold to the National City
Co. blank shares of stock which required a substantial amount of
money, and their day loan would have to be increased that day in
order to enable them to clear that transaction.
Mr. Pecora. They would have to get money to clear the transac-
tion when they had the stock?
Mr. Mitchell. They had to pick up the stock.
Mr. Pecora. Exactly. These brokers had to pick up the stock
for delivery to the National City Co.?
Mr. Mitchell. Absolutely.
Mr. Pecora. And the value of the stock which thej' had to pick
up for delivery to the National City Co. was such that they required
these loans in excess of their $500,000 daily credit?
STOCK EXCHANGE PRACTICES 1995
Mr. Mitchell. Their clearance was increased tliat day, so that
had to be covered as an excess.
Mr. Pecoka. Does not that indicate, Mr. Mitchell, that where the
bank granted those overcertifications to the broker, the bank was,
loaning money to enable that broker to acquire stock of the bank for
delivery to the National City Co. ?
Mr. Mitchell. Yes ; but they did it on the basis of the contract
of the National City Co. to receive.
Mr. Pecora. In other words, the bank gave these overcertifications
to the broker because it knew the responsibility of the customer of
the broker to whom the broker was to deliver the stock, the customer
in these instances being the National City Co. ?
Mr. Mitchell. They knew that there was a contract there that
would be fulfilled.
Mr. Pecoka. Yes; exactly. Wasn't that a species of trading by the
bank in its own stock ?
Mr. Mitchell. I do not think you could conceive it to be that
at all, Mr. Pecora.
Mr. Pecora. Well, I realize that the delivery of the stock was to
be made not to the bank, of course, but to the National City Co.
Mr. Mitchell. Yes.
Mr. Pecora. But the company is inseparably interwoven with the
bank, is it not?
Mr. MiTCHEL_. Yes, it is; but it would not — —
Mr. Pecora (interposing). It is like one body with two heads, isn't
it ? It has the same body ; it has the same blood, meaning the capital
derived from the sale of the capital stock of the bank to the bank's
shareholders. But instead of having one head it has two heads, and
the two heads seem to be the one head in your personality. You were
the chairman of both institutions. But in form it had two heads,
didn't it?
Mr. Mitchell. Yes.
Mr. Pecoka. Inseparably interwoven with the bank, virtually as
one entity?
Mr. Mitchell. One entity, institutional entity, yes. But, Mr.
Pecora, I do not want to prolong this, but ordinarily a broker apply-
ing for a day loan would not state what this was for, and it was not
at all necessary for him to state it there.
Mr. Pecora. They did state it here?
Mr. Mitchell. They did state it here, but what I am getting at
is that the National City Bank when they received that letter un-
doubtedly paid no attention to the name of the security that was
involved. They were interested only in one thing. Here was a
delivery to be made to the National City Co. of something against
which
Mr. Pecora. It was not of something; it was of a specific thing
set forth in the letters, was it not ?
Mr. Mitchell. Yes; but these excess day loans are built up on the
basis of the contract and not on the security. The banker that
handled that paid no attention whatsoever to the security involved.
He paid attention to the question, Is the contract good between his
entity as a deliverer and this entity as a receiver ?
119852— 33— PT 6 16
1996 STOCK EXCHANGE PRACTICES
Mr. Pecora. I know that to a certain extent this transaction did
not depart from the routine of many other similar transactions.
Mr. Mitchell. Yes.
Mr. Pecoka. But the transactions reflected by these letters are of
particular interest now because the broker, either fortunately or
unfortunately, specified the particular security, namely, the stock of
the National City Bank, wliich he was delivering to the National
City Co., and it is that feature which interests me.
Mr. Mitchell. Yes.
Mr. Pecora. AVhen the bank got these letters the bank was in-
formed specifically that Schmeltzer & Co. were picking up stock of
the National City Bank for delivery to the National City Co. to an
amount that required an extension of credit in excess of the $500,000
daily line which the bank had accorded these brokers 'i
Mr. Mitchell. That is correctly stated.
Mr. Pecora. That is correct, is it not?
Mr. Mitchell. That is correctly stated.
Mr. Pecora. Now, in view of the knowledge which the bank there-
by acquired of the specific character of these transactions through
many of these letters, did not the bank have notice that it was loan-
ing moneys or extending credits to the brokers to enable them to
finance transactions for the benefit of themselves and the National
City Co. in connection with the capital stock of the bank?
Mr. Mitchell. Well, there is no prohibition that I know in bank-
ing against lending to a broker or anybody else without collateral.
Mr. Pecora. May a bank loan on its own stock as collateral 'i
Mr. Mitchell. A bank may not loan on its own stock at all; no.
Mr. Pecora. And in these transactions wasn't that virtually what
the bank was doing?
Mr. Mitchell. I would not say so. I do not agree with you on
that. I am sorry. I wish I could, Mr. Pecora. [Laughter.] But
I just can not.
Mr. Pecora. Well, the bank was put on notice by these letters that
the overcertification or extension of credit was required by the brok-
ers from the bank in order that the brokers might be enabled to make
delivery to the National City Co. of large blocks of the capital stock
of the bank?
Mr. Mitchell. That I have granted. That is clear from the
Mr. Pecora (interposing). And those overcertifications or exten-
sions of credit were granted, were they not?
Mr. Mitchell. The day loan was increased by that amount.
Mr. Pecora. And you still say that this was not an extension of
credit or a loan made upon the bank's own stock ?
Mr. Mitchell. I do.
Mr. Pecora. You would not have granted, or the bank would not
have granted, an overextension or an overcertification to the amount
of $9,000,000 to J. R. Schmeltzer & Co. without knowing something
definite about the transaction, in view of the fact that the amount
is so far in excess of its daily line of $500,000?
Mr. Mitchell. If J. R. Schmeltzer or any other sound broker that
happens to be on our credit books would come and say, " I have
contracts for delivery of securities to-day to J. P. Morgan or the Na-
tional City Co., or any other house of sound credit and reputation
STOCK EXCHANGE PRACTICES 1997
on the Street," and we got word from the one that was to receive
the securities that he was under agreement to receive them and would
make payment upon receipt, we would have granted that just as
readily as though it was on National City Bank stock.
Mr. Pecora. But in these cases you knew, through the medium of
letters, that the loans to the brokers were required to enable the
brokers to finance their transactions with the National City Co. in
the stock of the bank?
Mr. Mitchell. Yes. The broker mentioned this specific security
in this case. I tell you it is not customary and that fact would be
passed over immediately by an operating officer.
Mr. Pecora. It was passed over by your bank's operating officer
in that case, was it not?
Mr. Mitchell. Yes ; it was.
Mr. Pecora. What is the difference in principle, Mr. Mitchell,
between the granting of this certification to Schmeltzer & Co. and
permitting Schmeltzer & Co. to draw overdrafts against their credit
or against their account with the bank? Is there any difference in
principle?
Mr. Mitchell. Oh, yes.
Mr. Pecora. What is the difference?
Mr. Mitchell. In this particular case there is not an overdraft.
The operation of the day loan is that when acceded to and it is known
that it is to be used there is set up on the books of the bank a credit
against which the checks are certified. It is not an overdraft; it is
a form of loan.
Senator Brookhart. Why isn't that an overdraft until the other
party pays for it or until it is paid back?
Mr. Mitchell. Well, because in the meantime it is a loan to this
concern.
Senator Brookhart. The only thing I can see that protects it
from being an overdraft is that contract you have there.
Mr. Mitchell. That is right.
Senator Brookhart. Supposing they did not pay it after you
gave them that credit? Then what would you do? You would
have to go back and sue on your original contract ?
Mr. Mitchell. If there was fraud and the amount was not forth-
coming and they went over at the end of the day with a part of that
day loan unpaid, it would be a very unusual case, and the only way
it could be covered then would be by that concern making a regular
loan on its credit, either secured or unsecured, in some place or
another. Of course, they could not borrow from us over
Senator Brookhart (interposing). Then the whole loan is in that
same condition until it is paid after it goes on your books?
Mr. Mitchell. Paid during the same day.
Senator Brookhart. So far as the looKs of the books are con-
cerned it is a straight overdraft then ?
Mr. Mitchell. Well, we don't
Senator Brookhart (interposing). You do not call it that, but
it would look just like an overdraft that you had allowed, would
it not?
Mr. Mitchell. It might. It might look that way to you, but
that is not the operation.
1998 STOCK EXCHANGE PRACTICES
Mr. Pecora. I do not contend that it is an overdraft in form, but
in principle or effect it is similar to an authorized overdraft, is it
not?
Mr. Mitchell. It has much the same effect, Mr. Pecora, certainly.
Mr. Pecora. Yes. Well, that is what I mean to indicate.
The Chairman. The committee will recess until 2 o'clock. All
witnesses will be here again at 2 o'clock.
(Whereupon, at 12.10 o'clock p. m., the subcommittee recessed until
2 o'clock p. m. of the same day.)
after recess
The subcommittee resumed at 2 o'clock p. m. on the expiration of
the recess.
The Chairman. The subcommittee will come to order. Whom
will you have, Mr. Pecora?
Mr. Pecora. Mr. Robinson.
The Chairman. Please stand, hold up your right hand, and be
sworn. You solemnly swear that you will tell the truth, the whole
truth, and nothing but the truth regarding the matters now under
investigation by this subcommittee, so help you God.
Mr. Robinson. I do.
TESTIMONY OF EDWIN S. ROBINSON, BROOKLYN, N. Y.
Mr. Pecor-^. Mr. Robinson, will you give your full name, address,
and business or occupation to the reporter?
Mr. Robinson. Edwin S. Robinson, 9229 Shore Road, Brooklyn,
N. Y.
Mr. Pecora. And your occupation or business.
Mr. Robinson. Stockbroker.
Mr. Pecora. How long have you been connected with the stock
brokerage business?
Mr. Robinson. Oh, about 12 years.
Mr. Pecora. With what office or firm in that business are you
now connected?
Mr. Robinson. With Hardy & Co.
Mr. Pecora. How long have you been connected with that firm?
Mr. Robinson. Two years.
Mr. Pecora. Innnediately prior to that with what firm were you
connected ?
Mr. Robinson. J. R. Schmeltzer & Co.
Mr. Pecora. With J. R. Schmeltzer & Co.
Mr. Robinson. Yes, sir.
Mr. Pecora. Were you associated with the brokerage firm of J. R.
Schmeltzer & Co. in the j^ears 1928, 1929, and until about September
of 1930?
Mr. Robinson. Yes, sir.
Mr. Pecora. In what capacity?
Mr. Robinson. Manager of the bank stock department.
Mr. Pecora. Did you say manager of the bank stock department?
Mr. Robinson. Yes.
STOCK EXCHANGE PRACTICES 1999
Mr. Pecora. Bank stocks are usually dealt in on the over-the-
counter markets, aren't they, as distinguished from the exchange
markets ?
Mr. Robinson. They are.
Mr. Pecora. In January of 1928 the capital stock of The National
City Bank was taken from the stock exchange trading list, as you
know.
Mr. Robinson. Yes, sir.
Mr. Pecora. From that time until September of 1930 did you as
a member of J. R. Schmeltzer & Co. handle any transactions in the
capital stock of the National City Bank for and on behalf of the
National City Co.?
Mr. Robinson. I would have to correct you there. I was not a
member of the firm but a salaried employee.
Mr. Pecora. Witli that correction to my question, will you now
make answer?
Mr. Robinson. Well, that is, that I traded with the National
City Co.
Mr. Pecora. Yes.
Mr. Robinson. I either sold stock to them or bought stock from
them.
Mr. Pecora. You had transactions with them?
Mr. Robinson. Yes, sir.
Mr. Pecora. In the stock of the National City Bank?
Mr. Robinson. That is correct.
Mr. Pecora. You were known as the specialist in the over-the-
counter market in the stock of the National City Bank during those
times, weren't you?
Mr. Robinson. Commonly but not officially known.
Mr. Pecora. I know. There is no such official designation.
Mr. R0BIN.S0N. That is what I am trying to bring out.
Mr. Pecora. But that was the common report about you.
Mr. Robinson. Yes.
Mr. Pecora. That you were the specialist in that stock; is that
right?
Mr. Robinson. That is correct.
Mr. Pecora. Now, during the time I have mentioned did you have
daily transactions in the stock of the National City Bank with the
National City Co.?
Mr. Robinson. I 23resume I did.
Mr. Pecora. Were they of an extensive character, would you say?
Mr. Robinson. Well, no; I do not think so. They varied from
time to time, with one day more with the National City Co. and
another day more with somebody else. There was no steady volume
so far as I could say.
Mr. Pecora. But the total volume of those transactions in that
period of time greatly exceeded the total volume of the transactions
you had in any other bank stock, didn't it?
Mr. Robinson. Well, I was only specializing in National City
Bank stock.
Mr. Pecora. You only had trades in that stock?
Mr. Robinson. Oh, occasionally we did get orders in other stocks,
but the most of it was done in National City Bank stock.
2000 STOCK EXCHANGE PRACTICES
Mr. Pecora. Who was the gentleman in the National City Co.
with whom you came most frequently in contact in connection with
those transactions?
Mr. Robinson. That would be the manager of their bank stock
department or trading department.
Mr. Pecoea. And who was he?
Mr. Robinson. A man named Mr. Pritchard.
Mr. Pecora. Mr. Pritchard?
Mr. Robinson. Yes, sir.
Mr. Pecoka. Do you know who Mr. Pritchard's superior was ?
Mr. Robinson. I do not really know. I could imagine ; but I don't
know.
Mr. Pecora. Don't you know it was Mr. Morrison?
Mr. Robinson. I believe it was Mr. Morrison.
Mr. Pecora. Do you know where Mr. Pritchard is now?
Mr. Robinson. I do not.
Mr. Pecora. When did you last have any contact with Mr.
Pritchard ?
Mr. Robinson. Business or personal?
Mr. Pecora. Of any kind.
Mr. Robinson. I had personal contact with him the day after you
served the subpcena on me.
Mr. Pecora. That is, to come to this hearing?
Mr. Robinson. Yes, sir.
Mr. Pecora. Was Mr. Pritchard then connected with the National
City Co.?
Mr. Robinson. No, sir.
Mr. Pecora. Did you know that he had severed his connection
with the National City Co. several months ago?
Mr. Robinson. Yes, sir.
Mr. Pecora. Did Mr. Pritchard then indicate to you that he was
going to leave New York City for any extended stay?
Mr. Robinson. He told me that he planned to leave, a month or
so ago.
Mr. Pecora. And do you know whether he left?
Mr. Robinson. I imagine he did. I have not talked to him since
that day.
Mr. Pecora. You have not seen nor heard from him since, have
you ?
Mr. Robinson. No, sir.
Mr. Pecora. Will you describe generally but briefly for the com-
mittee the procedure that was followed in the transactions you had
with the National City Co. in connection with stock of the National
City Bank?
Mr. Robinson. Well, there would be various ways. One way
would be that I either had some stock for sale for the firm's account
or one of their various customers, and I would offer that stock to the
National City Co. at a set price and they would buy it. If they did
not buy it I would attempt to sell it elsewhere, or vice versa.
Mr. Pecora. Would you go to the trading department of the
National City Co. to find out the market they were making for the
stock?
Mr. Robinson. I would call them and attempt to find out if they
were maintaining or quoting a market.
STOCK EXCHANGE PEACTIOES 2001
Mr. Pecoea. You would go or call on the telephone to find out if
they were maintaining or quoting a market; is that right?
Mr. Robinson. Correct.
Mr. Pecora. What do you mean by maintaining a market?
Mr. Robinson. Well, maintaining and quoting are two different
waj's. You maintain a market by
Mr. Pecora (interposing). I am asking you now to talk about
both ways. But first, about the meaning of the term " maintaining
a market."
Mr. Robinson. To maintain a market is to establish a bid and an
offering price on stock. That would obligate you to trade with any-
one who called you. If I make a price on a stock, at such and such
a price you obligate me to trade. If you quote a market you are not
obligated to trade. I could quote you a price right now, but I am
not obligated to trade with you.
Mr. Pecora. You found it of exceeding value to you as a special-
ist in the stock of the National City Bank to know what market the
National City Co. was maintaining or quoting, as the case may be?
Mr. Robinson. Yes, sir; at times I did.
Mr. Pecora. And their action in maintaining or quoting the mar-
ket had something to do with the daily quotations, didn't it?
Mr. Robinson. Through the day?
Mr. Pecora. Yes.
Mr. Robinson. Well, they would change. The market they were
making would not necessarily mean that it was maintained during
that day. There might be other houses making prices, and if they
were
Mr. Pecora (interposing). How many times a day would you
call upon the National City Co. to tell you what market it was
maintaining, or what prices it was quoting, on the stock of the
bank?
Mr. Robinson. You are going back now three and one half years
ago. This is from memory. There wasn't a record kept of every
conversation.
Mr. Pecoea. I understand that; but all I expect of you is your
general recollection of the matter.
Mr. Robinson. Well, I would call very frequently, maybe every
three or four minutes.
Mr. Pecoea. And you found it advisable to keep in touch with
them to that extent during your day's transactions, regarding the
market they were maintaining or quoting for the stock of the
National City Bank, did you ?
Mr. Robinson. Yes, sir.
Mr. Pecora. How would you communicate with them — ^through
a direct wire that was available to your office and to the National
City Co.'s office?
Mr. Robinson. Through a direct wire.
Mr. Pecora. Now, do you recall particularly the transactions you
had with the National City Co. in the stock of the National City
Bank during the month of October, 1929?
Mr. Robinson. I believe I do.
Mr. Pecora. Were your transactions with the National City Co.
in that month much greater in volume than they were for other
months during the period from January, 1928, to September, 1930?
2002 STOCK EXCHANGE PRACTICES
Mr. Robinson. I believe in accordance with general business con-
ditions they were.
Mr. Pecora. Were you in this hearing room this forenoon while
letters written to the National City Bank in the month of October,
1929, by J. R. Schmeltzer & Co. were spread upon the record and
were read aloud?
Mr. EoBiNSON. Yes, sir.
Mr. Pecora. Are you familiar with the transactions referred to
in those letters ?
Mr. Robinson. Not in the least.
Mr. Pecora. Not in the least?
Mr. Robinson. No, sir.
Mr. Pecora. Do you know who in the organization of J. R.
Schmeltzer & Co. was familiar with those letters?
Mr. Robinson. I do not; but I imagine it would be under the
partnership or one of the partners.
Mr. Pecora. Mr. Robinson, did you know at any time that the
National City Co. gave options for tens of thousands of shares at
a substantial number of points below the market to others?
Mr. Robinson. Not until yesterday.
Mr. Pecora. And the first time you learned of it was through
the medium of testimony adduced at the hearing before this com-
mittee yesterday?
Mr. Robinson. That is correct.
Mr. Pecora. If you had known of those option prices at the time
when an option was given and when the option was exercised by
Dominick & Dominick, would it have made any difference in the
open market on the question of the value, or the market value or
quotations, for the National City Bank stock?
Mr. Robinson. That is a hard question, Mr. Pecora. It all de-
pends upon the market conditions at the time. For me to answer
now would be guesswork.
Mr. Pecora. Well, it would affect market values generally if it
were known, wouldn't it?
Mr. Robinson. It should.
Mr. Pecora. With options covering 32,000 shares of stock given
by the company to others at prices well below the market?
Mr. Robinson. Well, I have known of them to affect market prices
on other options, but I have not known of the National City Bank.
But it is not the rule.
Mr. Pecora. But if knowledge of these options and the prices at
which they were given, had become public property it would have
affected prices, wouldn't it?
Mr. Robinson. I believe it would.
Mr. Pecora. So. in order not to affect prices by the gi'anting of
these options below the market, the options are secretly given, isn't
that right?
Mr. Robinson. I believe that is correct.
Mr. Pecora. What was the daily line of credit awarded J. R.
Schmeltzer & Co. by the National City Bank in October of 1929?
1929?
Mr. Robinson. It is impossible for me to answer that. As a sal-
aried employee I would not know.
STOCK EXCHANGE PRACTICES 2003
Mr. Pecora. You do not know?
Mr. EoBiNSON. No, sir.
Mr. Pecora. Was any other person connected with J. R. Schmelt-
zer & Co. in the month of October 1929 engaged in those transac-
tions in the bank's stock with the National City Co. ?
Mr. Robinson. No.
Mr. Pecora. Did you handle all those transactions in the market?
Mr. Robinson. Well, that is hard to answer, too. There were two
private wire sj^stems, and occasionally someone might be on a part
of some trade. But on the whole I would say that I handled all
the trades. We have an assistant who does the details of the work.
In the course of the business, for a part of the day, it might be
handled by someone else.
Mr. Pecora. Weren't you to a considerable extent guided in your
quotations for the stock by the advices you would receive every 3
or 4 minutes throui;hout the day from the National City Co. concern-
ing their prices for the stock ?
Mr. Robinson. Not as to the whole of the day. I might be mo-
mentarily for that, but not for the length of the day.
Mr. Pecora. But your inquiries would generally be made through-
out the day, wouldn't they?
Mr. Robinson. That is correct.
Mr. Pecora. And the information you received from them was
of very considerable guidance to you in your market operations in
the stock?
Mr. Robinson. I would say to that, Mr. Pecora, no.
Mr. Pecora. They were of some guidance to you ?
Mr. Robinson. They were of some guidance to me.
Mr. Pecora. Do you know of any other dealer in that stock whose
advices on that matter would have been of greater guidance to you?
Mr. Robinson. Not greater in the long run but greater at that
one moment. Tliere were 30 or 40 other large exchange houses
maintaining markets.
Mr. Pecora. But in the long run the advices you received con-
cerning the position of the National City Co. were of more guidance
to you than advices you received from any other dealer in that
stock, weren't they ?
Mr. Robinson. The position in the stock of the National City
Bank by the National City Co. was never revealed to me.
Mr. Pecora. I am not asking about the position of the National
City Co. but its market quotations for the stock.
Mr. Robinson. Well, there were no advices received. I can not
answer that, because no one gave me any advice.
Mr. Pecora. I said " advices." I did not mean advice in the
sense that some one was counseling you, but advices. The word
" advices " was used by me as synonymous with information. Now,
so understanding my question, will you answer it?
Mr. Robinson. Advices, as you put it, did help me in trading at
times.
Mr. Pecora. Didn't it always help you?
Mr. Robinson. No, sir.
Mr. Pecora. Did you ever ignore it?
Mr. Robinson. Yes, sir.
2004 STOCK EXCHANGE PRACTICES
Mr. Pecora. Completely?
Mr. KoBiNsoN. Well, it is a case of either ignoring it or not ignor-
ing it.
Mr. Pecora. When you ignoi'ed it, do you mean that you ignored
it completely ?
Mr. Robinson. At that moment ; yes, sir.
Mr. Pecora. In the long run were the advices so given of greater
guidance to you than information received from any other dealer?
Mr. Robinson. I would say their information or advices were of
more help than others.
Mr. Pecora. Yes. In order to be specific, Mr. Robinson, if you
were bidding 250, we will say, at a given time for the stock of the
National City Bank and you received advices or information that
the National City Co. was bidding 240 for the stock, you wouldn't
continue to bid 250, would you?
Mr. Robinson. Not unless any other house or our connections were
bidding 260.
Mr. Pecora. Do you remember having an interview with me in
my office in New York, or in the office of this committee in New
York, about three weeks ago?
Mr. UoBiNSON. I do.
Mr. Pecora. Do you recall telling me there, in words or substance,
that as the specialist in the over-the-counter market in National City
Bank stock you considered that you handled about 70 per cent of the
volume of trades in that stock?
Mr. Robinson. I remember that.
Mr. Pecora. That was true, wasn't it?
Mr. Robinson. It was true in the handling of 70 per cent, I think,
of the stock over a length of 2 years, but not daily.
Mr. Pecora. I mean over the period of time we are now dis-
cussing.
Mr. Robinson. Wliich is mere guesswork.
Mr. Pecora. That is your best estimate?
Mr. Robinson. It is guesswork.
Mr. Pecora. You say it is guesswork?
Mr. Robinson. Surely.
Mr. Pecora. It is your best estimate, whether you call it guess-
worlc or not, isn't it?
Mr. Robinson. Right.
Mr. Pecora. Since you first told me that you have not had any
reason to revise that guess, have you ?
Mr. Robinson. No, sir.
Mr. Pecora. And you do not want to revise it now, do you?
Mr. Robinson. No. But I don't want to be guessing now.
Mr. Pecora. If you were asked to give us your best guess now, you
would give that guess, wouldn't you?
Mr. Robinson. Certainly.
Mr. Pecora. As the specialist who handled about 70 per cent of
the over-the-counter trades in that stock, you found it necessary or
advisable to keep in constant touch throughout the day with the
National City Co. for the purpose of learning what they were doing
to maintain the market or " prices "; isn't that right?
Mr. Robinson. That is richt.
STOCK EXCHANGE PRACTICES 2005
Mr. Pecora. Who handled the financial end of those trades on
behalf of your firm in October of 1929 ?
Mr. Robinson. The financial end of it would be handled by any
one of the partners.
Mr. Pecoka. Who is A. B.? What person in the office had a name
the initials of which were A. B.?
Mr. E.OBINSON. I believe, although I may be wrong on this, but I
believe he was one of the clerks in the cage.
Mr. Pecora. Was there any advice or instruction or direction
given to you by anybody in the firm during that month concerning
the extent to which you could commit the firm in transactions in
National City bank stock with the National City Co.?
Mr. Robinson. Only regarding their own position, that is, the
position they wanted to be in over the night, was all.
Mr. Pecora. Who gave you your directions or instructions in that
respect ?
Mr. Robinson. Mr. Clifford.
Senator Fletcher (presiding). Did Mr. Pritchard tell you why
he was going away?
Mr. Robinson. No, sir.
Mr. Pecora. In the over-the-counter market isn't it true that the
largest buyer and seller has a greater influence, or exercises a greater
influence, on market quotations than anyone else?
Mr. Robinson. That would be natural in any market.
Mr. Pecora. Yes.
Mr. Robinson. Yes, sir.
Mr. Pecora. And in connection with the market for National City
Bank stock wasn't the National City Co., by and large, through that
period of time the largest buyer and the largest seller so far as you
know?
Mr. Robinson. So far as I know they were.
Mr. Pecora. By what percentage did the volume of their trans-
actions exceed the next largest buyer and seller of that stock in that
period of time?
Mr. Robinson. I can not answer that without the record and I
haven't the record.
Mr. Pecora. Give us the best answer you can make. We under-
stand that it is not to be accepted as mathematically correct, but I
want the best approximation you can give us from memory.
Mr. Robinson. I should say they bought from me about 30 to 40
per cent more.
Mr. Pecora. Than any other individual buyer or seller, is that
right?
Mr. Robinson. Yes, sir.
Mr. Pecora. The National City Co. was your biggest customer for
National City Bank stock?
Mr. Robinson. That question was just answered.
Mr. Pecora. No further questions, Mr. Chairman.
Senator Fletcher (presiding). You may be excused. Is he to be
excused entirely, Mr. Pecora?
Mr. Pecora. Yes, sir. We are through with him.
Senator Fletcher (presiding). You need not return.
(Thereupon the witness was excused from further attendance.)
Mr. Pecora. Mr. Baker will resume the stand, please.
2006 STOCK EXCHANGE PRACTICES
TESTDIONY OF HUGH B. BAKER, PRESIDENT NATIONAL CITY CO.,
NEW YORK CITY— Resumed
Mr. Pecora. Mr. Baker, there was some reference in the testimony
yesterday about the selling organization of the National City Co.,
and some witness testified that the number of salesmen directly
employed by the National City Co. throughout the country in the
sale of its securities to the public was about 350. Do you recall that ?
Mr. Baker. Yes, sir.
Mr. Pecora. Now, in addition to selling securities to the public
through the instrumentalities of those 350 salesmen, I mean em-
ployed salesmen, the company used other agencies or facilities for
selling and distributing its securities to the public, didn't it?
Mr. Bakee. Well, other dealers.
Mr. Pecora. It referred to them as other instrumentalities or
agencies. Did it or not?
Mr. Baker. Yes. We did business with hundreds and hundreds
of dealers.
Mr. Pecora. Now, those hundreds and hundreds of dealers were
scattered throughout the country, weren't they?
Mr. Baker. That is right.
Mr. Pecora. And the radius of their respective operations was
rather large?
Mr. Baker. Oh, yes.
Mr. Pecora. So that in addition to your own selling force of 350
salesmen, your company utilized the selling facilities of hundreds and
hundreds of dealers throughout the country.
Mr. Baker. Well, of course we had no control over them.
Mr. Pecora. Didn't it
Mr. Baker (continuing). Well, if I may explain that in this way:
We had business relations with dealere all over the United States,
perhaps not frequently, but when we had some new deal or some
new issue we were then offering, we would then be in contact with
dealers throughout the whole of the United States. So that when
I say we did business with dealers throughout the country I mean
it in that way.
Mr. Pecora. That is to say, you proceeded to market your secur-
ities to the investing public not only through your own 350 salesmen,
but also through the selling facilities of hundreds of dealers scat-
tered throughout the country.
Mr. Baker. They were invited to participate in our deals.
Mr. Pecora. And they did participate in them, hundreds of them.
Mr. Baker. Many of them did; yes, sir.
Mr. Pecora. Now, throughout the years 1928 and 1929 your com-
pany maintained marked activity in the sale of the bank's stock,
didn't it?
Mr. Baker. Yes, sir.
Mr. Pecora. Not only through its own 350 salesmen but also
through dealers and houses throughout the country.
Mr. Baker. Weil, of course in only those cases with dealers where
they had actual orders for the stock. There was no commission of
any kind that would justify any effort on their part. If they had
orders for the stock they might place the orders through us or some-
body else.
STOCK EXCHANGE PRACTICES 2007
Mr. Pecoea. The National City Bank had correspondents or cor-
respondent banks in the interior of the country, didn't it?
Mr. Baker. Yes, .=ir.
Mr. Pecora. What was the number of those correspondent banks
in the interior?
Mr. Baker. I can not answer that. I do not know.
Mr. Pecora. Many?
Mr. Baker. Yes, many.
Mr. Pecora. But the National City Co. also utilized the facilities
of those correspondent banks and distributed its securities through-
out the coimtry?
Mr. Baker. Well, some of those banks had bond departments, in-
vestment departments, and in those cases, many of them were in-
vited, but it did not necessarily correspond with the fact that they
were correspondent banks. If we regarded them as investment
dealers probably they would be invited, the same as any other
dealer.
Mr. Pecora. What I want to get at are the facts as distinguished
from probabilities. What are the facts in that respect?
Mr. Baker. Those are the facts.
Mr. Pecora. To put it simply : Your company in distributing
securities to the investing public not only utilized the services of its
350 salesmen and hundreds of dealers throughout the country, but
also the facilities of those correspondent banks throughout the
country ?
Mr. Baker. Only where they had bond departments or investment
departments, and other banks. It did not make any difference to
us whether they were correspondents of the National City Bank or
any other bank, if they had investment departments.
Mr. Pecora. And you found that most of those banks had invest-
ment departments, didn't you?
Mr. Baker. I doubt if the most of them had, but quite a number.
Mr. Pecora. A substantial number had?
Mr. Baker. Yes.
Mr. Pecora. Now, at various times during those two years, in
selling the stock of the bank throiigh its various agencies and selling
facilities, the National City Co. offered a premium to selling agents,
did it not, on whatever sales they made of the stock of the bank?
Mr. Baker. That was to our salesmen. And the same thing is
true in all securities which were on our list, as a part of their com-
pensation.
Mr. Pecora. Do you mean to say that you offered premiums on
all sales they made?
Mr. Baker. Not necessarily all. There might be so-called buying
orders for some security which we did not have and which was
executed merely as a service execution.
Senator Fletcher. Did you allot stock to your correspondents
and signify to them that you desired they take that stock?
Mr. Baker. No, sir.
Mr. Pecora. Did you give special discounts to the banks, the cor-
respondent banks or banks in the interior, which sold the stock of
your bank?
Mr. Baker. Not at all. Never.
2008 STOCK EXCHANGE PRACTICES
Mr. Pecoea. Never?
Mr. Baker. Not to my knowledge.
Mr. Pecora. Well, did you get the same prices from them, or quote
the same prices to them that you did to the general public?
Mr. Baker. Yes.
Mr. Pecora. Well, now, let us understand : How wei'e your sales-
men compensated for their work?
Mr. Baker. By salarj^ and premiums; in other words, commissions.
Mr. Pecora. Did every salesman get both a salary and a com-
mission ?
Mr. Baker. Yes.
Mr. Pecora. On the sales made by him for the company?
Mr. Baker. Yes.
Mr. Pecora. Now, in addition to the salary and commission there
were occasions when they also got premiums, didn't they?
Mr. Baker. No. That word " premium " I am using with the
same meaning as commission. Salary and premium, we call it.
Mr. Pecora. What was the commission they got?
Mr. Baker. It varied with different issues. Usually on bonds the
premium would be anywhere from $1 to $2 or $3.
Mr. Pecora. For how many shares ?
Mr. Baker. I said bonds.
Mr. Pecora. Of what units?
Mr. Baker. $1,000.
Mr. Pecora. How about stocks?
Mr. Baker. As to stocks, that varied also. It might be anywhere
from 10 cents a share to 50 cents a share.
Mr. Pecora. Who fixed the amounts of those premiums or com-
missions ?
Mr. Baker. Well, that was generally fixed by Mr. Beebe in our
office.
Mr. Pecora. What position did he have?
Mr. Baker. Assistant vice president.
Mr. Pecora. And do you know what elements were considered by
him in fixing the premiums within the range mentioned by you?
Mr. Baker. Well, of course, there were at times new issues, not so
well known, credits, in which the demand was not so great, and it
required expense of ojjeration, and so forth.
Mr. Pecora. The premiums were higher where the security was
considered more difficult to sell, is that it ?
Mr. Baker. At times ; yes, sir.
Mr. Pecora. At times ?
Mr. Baker. Yes, sir.
Mr. Pecora. And the premiums were also higher when the com-
pany desired to accelerate sales of any particular issue, weren't they?
Mr. Baker. There were times when that was true ; yes, sir.
Mr. Pecora. Now. were any of those times reached during the
years 1928 and 1929 with respect to the stock of the National Citv
Bank?
Mr. Baker. Well. I don't know what the premium dates were on
those. I haven't it.
Mr. Pecora. Can not you answer my question?
Mr. Baker. No. sir.
STOCK EXCHANGE PEACTICES 2009
Mr. Pecora. Can't you answer the question now, as to whether
or not durino- 1928 and 1929 there were occasions when your com-
pany offered a higher premium or commission to its salesmen for
selling the stock of the bank ?
Mr. Baker. Here is a paper which is now handed me which gives
the premium lists of National City Bank stock from 1927, and it
shows on the old stock 50 cents a share, and then when it was changed
to the new stock, 20 cents a share. And then from April 2, 1929,
until January 7, 1930, it was 50 cents a share.
Mr. Fecora. Did you have to get that information from Mr. Law
before you were able to answer my question ?
Mr. Baker. Yes. I did not have it with me.
Mr. Pecora. In other words, until Mr. Law gave you some written
memorandum which you consulted in making your reply, you were
not able to answer the question as to whether or not during 1928
and 1929 there were occasions when your company' raised the pre-
mium or commission which it gave to its salesmen for making sales
of bank stock?
Mr. Baker. I could not have answered it, because with our num-
bers of transactions, Mr. Pecora, through the National City Co.
in the course of a year's time, will run 600,000 or 700,000. I cannot
remember exactly what pi'emiums were given on this, that, or the
other issue without refen-ing to the records.
Mr. Pecora. Did Mr. Beebe consult you on the matter of fixing
the premiums for salesmen?
Mr. Baker. Not always, but occasionally.
Mr. Pecora. Did he have the right to exercise his own independent
judgment on that?
Mr. Baker. Yes, sir.
Mr. Pecora. Did you give him that right ?
Mr. Baker. Yes, sir.
Mr. Pecora. And he is an assistant vice president?
Mr. Baker. That is right.
Mr. Pecora. In selling your securities to the public through deal-
ers, were the dealers given instructions by your company to maintain
offering prices except for special discoimts to banks and other
dealers?
Mr. Baker. Are you speaking now of general securities?
Mr. Pecora. Yes.
Mr. Baicer. Yes, sir; that is correct, where it was a syndicate or
a new deal.
Mr. Pecora. So that they got those securities at prices lower than
the prices at which they were offered to the general public?
Mr. Baker. They were participating in the distribution of the
issues, and were paid thereby.
Mr. Pecora. Can not you answer a, simple question like that with
a yes or a no ?
Mr. Baker. I am trying to explain
Mr. Pecora (interposing). They either were permitted to get
those securities at prices less than the general public paid, or they
were not. Now, were they? Answer yes or no.
Mr. Baker. The reason I can not answer that yes or no, is because
it does not apply the same to all issues of securities.
2010 STOCK EXCHANGE PRACTICES
Mr. Pecora. Whether it applies the same to all issues of securities
or not in those instances where dealers were given these discounts,
can't you tell us whether or not they were permitted to get those
securities at prices lower than the general public?
Mr. Baker. Yes. In those cases; yes.
Mr. Pecora. All right. Do you know what I mean by the term
" flashes " as applied to the business of the National City Co. in
selling its securities to the public?
Mr. Baker. Yes, sir.
Mr. Pecora. What are they?
Mr. Baker. They are messages that we send to our organization,
trying to keep them acquainted with information that we have at
the head office, and to keep in touch with them regularly.
Mr. Pecora. And who composes those flashes?
Mr. Baker. Various people in our organization. They were
directly under my supervision at that time.
Mr. Pecora. You are willing to assume the responsibility for
those flashes, are you ?
Mr. Baker. Yes, sir.
Mr. Pecora. Did you compose any of them yourself?
Mr. Baker. Some of them I did.
Mr. Pecora. And did you generally supervise the flashes that were
sent out to the sales force of the company ?
Mr. Baker. Yes, sir. I should say yes to that, with this addition :
That I did not see all of them, but, whether I saw them or not, the
men who wrote them were men with whom I placed that responsi-
bility.
Mr. Pecora. Now, in order to keep the salesmen up on their toes,
sales contests were arranged by the company at times, isn't that so?
Mr. Baker. Yes, sir.
Mr. Pecora. Whose idea was that?
Mr. Baker. Mine.
Mr. Pecora. Describe those sales contests which were your idea,
will you?
Mr. Baker. I suppose our sales organization is like all other sales
organizations. There are times when they seem to slow down and
are tired. In order to inject new life into the organization we would
develop what we called sales contests, to add some competition.
Mr. Pecora. Have you produced flashes which emanated from
the main office of your company to its sales force generally through-
out the country ?
Mr. Baker. Yes. But you asked for specific ones.
Mr. Pecora. Have you the flash sent out under date of Septem-
ber 27, 1929?
Mr. Baker. On what subject?
Mr. Pecora. On the Intercontrol Contest.
Mr. Baker. I haven't that right here before me, but it is here
I know.
Mr. Pecora. Perhaps Mr. Law can help you get it. And while
Mr. Law is looking for that flash let me ask you this : Isn't it a fact
that many of these flashes were sent out to the general sales organi-
zation ?
Mr. Baker. Yes, sir.
Mr. Pecora. Who prepared the flashes so sent out?
STOCK EXCHANGE PRACTICES 2011
Mr. Baker. They may have been prepared by any officer of the
general sales organization.
Mr. Pecora. And submitted to you for approval before being
dispatched ?
Mr. Baker. Not necessarily submitted to me. But, as I said be-
fore, I assumed that responsibility anyway.
Mr. Pecora. Now, Mr. Law, have you the September 27, 1929,
flash, no. 5033 ?
Mr. Law. Here it is.
Mr. Pecora. Now have you got it, Mr. Baker?
Mr. Baker. Yes, sir.
Mr. Pecoka. Well, please read the first paragraph there.
Mr. Baker. It says :
We are pleased to announce this morning the beginning of one of the greatest
sales contests ever held by the National City Co.
And there seems to have been written in here with pencil, and
there is something scratched out, but the something written in is :
We are pleased to announce this morning the beginning of one of the greatest
sales contests ever held by the National City Co.
Mr. Pecora. Is that the complete paragraph?
Mr. Baker. Oh, I misunderstood you. I thought you said the first
sentence.
Mr. Pecora. No.
Mr. Baker. It goes on to say :
There will be liberal cash prizes for a large number of men in every part of
the organization, and higher premium schedules. Contest will be organized and
operated between control organizations and six contesting units, being terri-
tories controlled from San Francisco, Chicago, Philadelphia, Boston, New York
metropolitan, and New York control offices outside New York City. Security
issues with premium schedule and point ratings for prizes are as follows.
Mr. Pecora. What were the security issues?
Mr. Baker. They were Beaux-Arts units; Cannon Mills, conunon;
General Mills, common; Kendall Co., participating preferred;
M. K. T., 7 per cent preferred ; Oliver, prior preferred ; Oliver, con-
vertible participating; Wesson, convertible preferred; Pirelli, com-
mon; Lautaro, 6's; Minas Geraes, B^^'s; Finland Reserve Mortgage
Bank, 6's.
Mr. Pecora. Now, the premiums oflfered on the list, as to the last
three securities were at the rate of $4 per thousand, weren't they,
and not $3?
Mr. Baker. That is right.
Mr. Pecora. And the issues to which these higher premiums re-
lated were all foreign issues, weren't they?
Mr. Baker. That is right.
Mr. Pecora. And the Lautaro 6's are Chilean nitrate bonds, aren't
they ?
Mr. Baker. Yes, sir.
Mr. Pecora. And the Minas Geraes Gi/o's are bonds issued by the
State of Minas Geraes of the Republic of Brazil ?
Mr. Baker. That is right.
Mr. Pecora. And the Finland bonds were, as the name indicates,
Finnish securities?
Mr. Baker. That is right.
119852— 33— PT G 17
2012
STOCK EXCHANGE PRACTICES
Mr. Pecora. The other issues were all either common or preferred
stocks, weren't they?
Mr. Baker. Yes, sir.
Mr. Pecora. Now, the securities specified in that flash are all se-
curities that were then owned by the National City Co., weren't they?
Mr. Baker. Yes, sir.
Mr. Pecora. And tlie premiums on the common and preferred
stocks referred to in this flash, range from 30 cents to 40 cents per
share ?
Mr. Baker. That is right.
Mr. Pecora. Mr. Chairman, I ask that there be spread in full on
the record the entire flash testified to by the witness, which is dated
September 27, 1929, and known as " Flash 5033 ", signed " General
Sales."
Senator Fletcher (presiding) . Without objection, it is so ordered.
Flashes on the I.ntercontrol Contest
FLASH 5033
September 27, 1929.
We are pleased to announce this morning the beginning of one of tiie greatest
sales contests ever held by the National City Co. There will be liberal cash
prizes for a large number of men in every part of the organization and higher
premium schedules. Contest will be organized and operated between control
organizations and six contesting units, being territories controlled from San
Francisco, Chicago, Philadelphia, Boston, New York metropolitan, and New
York control offices outside New York City. Security issue with premium
schedule and point ratings for prizes are as follows :
Security
Premi-
Points
Secm-ity
Premi-
ums
Points
Per share
$0.40
.30
.30
.40
.40
.40
.30
.30
Per share
6
1
1
2
4
2
1
2
Per share
$0.30
Per thovr
sand
$4.00
4.00
4.00
Per share
Cannon Mills, common
General Mills, common
Kendal] Co., part, preferred...
M. K. T., 7 per cent, preferred.
Per thou-
sand
26
Oliver convertible, part
Finland, Reserve Mortgage
This premium schedule will bold straight through entire contest. Total
prize money for entire organization will be $25,000 divided among various
controls in proportion to the work done and to be subsequently divided among
the highest ranking men in the various controls according to rules set forth
below. At the end of the contest each control organization will receive a
percentage of the total prize fund calculated ratio between tile total number
of contest points reported by that control and total contest points for whole
organization. In any particular control organization there will be first prizes
of equal amount for the number of men representing one tenth of all the
salesmen in the control. These first prize men will divide equally 60 per cent
of the controls prize money. Second prizes in equal amounts will go to the
next highest ranking men representing one fifth of all the salesmen in the
control organization who will divide equally the remaining 40 per cent of the
controls prize fund. While this sounds quite complicated we believe it will
work out simply in practice. For example, let us assume that our San Fran-
cisco control organization having 36 salesmen sells all of the issues in amounts
as we will allot them the total for that control would be 37,245 points as com-
pared with total points for the whole organization of 347,500 points. Out of
the $25,000 prize fund this would give San Francisco $2,690. One tenth of
the 36 men to the nearest whole number would be 4 men who would divide
STOCK EXCHANGE PRACTICES 2013
60 per cent of the $2,090 givinf.' each of the first prize men !i;403.5t>. Thou Uie
next highest 7 luen representing one fifth of the total 30 would cliviile the
remaining amount giving each of them a prize of $154. If, however, San
Francisco should nmke more than 37.245 points, the prize fund for thut control
would lie increased proportionately and the first and second prizes would be
increased in corresponding amounts. In wires to follow we will advise each
control of their proportionate share of the various issues included in the
contract.
General Sales.
Mr. Pecora. Mr. B.iker, I think I asked you yesterday if your
company ever sought by its operations in the stock of the bank to
control the market for those shai'es.
Mr. Baker. Yes, you did.
Mr. Pecora. And your answer was that it did not.
Mr. Baker. That is right. But I qualified the answer, as 1
remember, by saying that it depends on whether— or it depends on
the way that word is used. If we had the stock we would try to
prevent any wide move either way.
Mr. Pecora. Now, Mr. Baker, can you produce flash No. 3765,
dated February 1, 1929, entitled " Strictly confidential to all man-
agers? ■'
Mr. Baker. I think so.
Mr. Law. Is it on National City Bank stock, Mr. Pecora?
Mr. Pecora. Yes.
Senator Fletcher. While you ai-e finding that let me ask : This
flash No. 50313 does not state the amounts of these securities. Sup-
pose you had these numerous agents over the country and they sold
your holdings, there is nothing here to indicate how many shares
you have.
Mr. Baker. No; and we would stop that immediately. We would
take that one out.
Senator Fletcher. How often did you get reports i
Mr. Baker. Oh, right along during the day.
Senator Fletcher. Regularly?
Mr. Baker. Yes, sir; regularly.
Mr. Pecora. Now have you flash No. 3765 ?
Mr. Baker. Yes, sir.
Mr. Pecora. Will you read that flash ?
Mr. Baker. It is as follows :
FLASH NO. STfi.'i
February 1, 1929.
(Strirtly ciinfidential to all managers)
In the course of the last lew weeks through the purchase of rights and
Otherwise we have aciiuired a small block of tlie new shares of National City
Bank. Market lias been one nf increasing strength, and in order to keep it
orderly we have been forced to lose some of our long position over the counter
in the open market. This is defeating a plan which we had in mind of creating
new stockholders who will be beneficial to the institution, as there is no doubt
in our minds that perhaps a considerable part of the buying at present is
speculative. We did not want to see the stock run up in price and then make a
distribution through our organization to new customers. We therefore have
decided very suddenly today that rather than lose any more of our stoek in the
open market we will ask your cooperation in the distribution of what we have
left in small amounts and to holders who will be of definite value in the
2014 STOCK EXCHANGE PRACTICES
future to this institution and only to those who intend to hold the stock.
The amount which we can give any one office will he very limited, and we
will expect you to see to it that this stock is placed in accordance with the
above program. As a stockholder yourself you will readily see why we are
stressing this distribution to new holders. The direct and indirect results of
such placement will add materially to the business of this institution. We
have decided to make a very special price to such new holders of 5 points
under the market. This is a very delicate distribution to handle, and we will
require your utmost finesse to get the kind of placement we want without
offending some of your present customers. A premium will be allowed, of
course, as usual, and if .vou will give us your complete cooperation in this
matter it will result in the addition of a substantial number of new business
prosi)ects for all of us.
H. B. Bakeb.
Mr. Pecora. And that is signed by you.
Mr. Baker. Yes, sir.
Mr. Pecora. Wlien you said at the very end of this flash of Feb-
ruary 1. 1929, " if you will give us your complete cooperation in this
matter it will resvtlt in the addition of a substantial number of new
business prospects for all of us," you meant to convey to your sales-
men that additional holders of the stock of the bank would be
regarded as new prospects of 3^our company to whom other securities
sponsored by your company could be more readily sold; is that
correct ?
Mr. Baker. Absolutely.
Mr. Pecora. And in order to create these new prospects for the
other securities that your company was selling to the public you
were, in this flash, instructing your sales department and its men in
the field to sell the stock of the bank at 5 points under the market?
Mr. Baker. That is right.
Mr. Pecora. Wliat did you mean when you said in this flash,
" This is a very delicate distribution to handle, and we will require
your utmost finesse to get the kind of placement we want witnout
offending some of your present customers " ?
Mr. Baker. I meant that the price being under the market — that
is, under the quoted market — it would be difficult in that placement
to avoid selling to people who would immediately sell it back into the
market, and that was not what we were after.
Mr. Pecora. In other words, you wanted this stock of the bank
sold to persons who would keep it as a long-term investment?
Mr. Baker. That is right.
Mr. Pecora. You did not want that stock coming back into the
market, did you ?
Mr. Baker. That is right.
Mr. Pecora. And you wanted the salesmen to be especially careful
about offending old customers in offering the stock of the bank to
new customers at 5 points under the market ?
Mr. Baker. That is right.
Mr. Pecora. Your company at all times had access to the complete
list of the stockholders of the bank, did it not ?
Mr. Baker. If we did I do not think it was ever used. I do not
recall that we ever
Mr. Pecora (interposing). Can't j'ou answer that question yes
or no?
Mr. Baker. As I just said, I doubt if that was ever looked at by
anybody in our organization.
STOCK EXCHANGE PRACTICES 2015
Mr. Pecora. I did not ask you whether it was ever looked at; I
asked you whether you had access to it.
Mr. Baker. I don't remember the definite instructions as regards
that, nor the restrictions, but I do know that the access to the stock-
holders books of the National City Bank is not open to the organiza-
tion of the National City Co.
Mr. Pecora. Of course, I did not mean to suggest that it was open
to everybody in the organization, but it was available to any of the
executive officers, was it not?
Mr. Baker. I probably could have looked at it.
Mr. Pecora. And other persons holding executive positions could
probably have looked at it too, without any hindrance, could they
not?
Mr. Baker. Senior executives probably could have.
Mr. Pecora. In connection with the marketing of its securities to
the public, your company made it a business, did it not, to contin-
ually feed the names of prospective new customers to your selling
force in the field ?
Mr. Baker. Yes. sir.
Mr. Pecora. As a rule, how many new names a year were sent
out to the selling force by the main office of the company?
Mr. Baker. I haven't the slightest idea.
Mr. Pecora. You haven't the slightest idea ?
Mr. Baker. Not in my mind ; no, sir.
Mr. Pecora. Are you familiar with the annual reports of your
company.
Mr. Baker. Yes, sir.
Mr. Pecora. Do not those annual reports contain references to the
number of new names sent out ?
Mr. Baker. I think they probably do at times, but I don't remem-
ber exactly whether that is in the annual report or not. If it is there,
why, that is the figure.
Mr. Pecora. And imtil I suggested that it might be in those an-
nual reports you had absolutely no idea of the number of those cus-
tomers ?
Mr. Baker. No.
Mr. Pecora. Of prospective customers whose names were sent out
into the field?
Mr. Baker. No. No ; I would have to refer to that or some other
file to know that.
Mr. Pecora. Let us take the annual report for the year ending
December 31, 1927. I see the following statement :
A summary of the department's past year activities —
the department referred to being called the New Business Depart
ment.
Mr. Baker. Yes.
Mr. Pecora. " Comprise the preparation and issuance of " — then
" names distributed to district offices 47,447."
Is that the number that would indicate
Mr. Baker (interposing). Yes; that is all right.
Mr. Pecora. The number of names of prospective customers sent
out by the head office to its agents in the field ?
Mr. Baker. Yes : that is correct.
2016 STOCK EXCHANGE PRACTICES
Mr. Pecoka. Do you know how many or approxinaately how many
new names were sent out by the new business department to its
men in the field for the j'ear 1928? Look at page 19 of the annual
report for 1928.
Mr. Baker (referring to document). 1928, one hundred twenty-
two thousand, three hundred and thirty-two.
Mr. Pecoka. That compares with 47,-147 sent out during the pre-
ceding year i
Mr. Baker. That is right.
I\Ir. Pecora. Now, during the year 1928 the company was ex-
tensively engaged in selling the stock of the bank, was it not?
Mr. Baker. Yes. We sold quite a substantial amount.
ilr. Pecora. And do you ascribe this very large increase of new
names over the number sent out to your field agents for the year
1927 as in any way due to the increased number of holders of the
bank stock which had developed during the year 1928?
Mr. Baker. I doubt that very much, because the
Mr. Pecora (interposing). Do you only doubt it?
Mr. Baker. Well, I don't understand.
Mr. Pecora. Don't you know one way or the other? Was any
part of this increase due to the increase in the number of stockholders
of the bank's shares?
;Mr. Baker. I am trying to explain that, Mr. Pecora, if you will
permit me to do it. The reason I said I doubted it is because the
particular offices where new stockholders of the City Bank were
developed would not need to have names sent to them, because they
already have them.
Mr. Pecora. Where did they get this large number of additional
prospects over the year 1927?
Mr. Baker. I can not explain just where those lists are gathered
together from, but wherever we can get lists that seem to be investors
we put those through a department who study those and finally
sort them out and send them out, tax lists, automobile owners, and
all that sort of thing.
Mr. Pecora. It seems from the annual reports of your company
for the years 1927 and 1928, respectively, that in 1927 forty-seven
thousand new names were sent out to your field agents, and in 1928
approximately 75,000 more.
Mr. Baker. Yes, sir ; that is right.
Mr. Pecora. 75,000 more than in 1927 were sent out.
Mr. Baker. That is right.
Mr. Pecora. That is a total of 122,000 new names?
Mr. Baker. That is right.
Mr. Pecora. Now don't you know where those names came from?
Mr. Baker. A good many of them come from automobile registra-
tions, tax lists, and so forth.
Mr. Pecora. Who compiled these lists of new names for the com-
pany?
Mr. Baker. We have a department- — did have at that time — whose
business was solely to develop names for the use of these offices.
Mr. Pecora. That was the so-called "new business department"?
Mr. Baker. Yes; certainly.
Mr. Pecora. How many new names were sent out to your field
forces during the year 1929 by the new business department?
STOCK EXCHANGE PRACTICES 2017
Mr. Baker. Fifty-four thousand one hundred and seventeen.
Mr. Pecora. Those names were culled from similar sources?
Mr. Baker. Yes.
Mr. Pecora. When Mr. Rentschler was on the stand the day before
yesterday he gave some testimony, which you doubtless heard, to the
effect that in some of the bank's metropolitan branches, where the
National City Co. had no salesmen or representatives clirectly em-
ployed, the branch bank's employees sold securities to the investing
public on behalf of your company. Do you recall that testimony ?
Mr. Baicer. Yes. I do not remember the exact words in it, but I
remember the sense of the. statement.
Mr. Pecora. Yes. And did those bank employees receive pre-
miums or commissions for those sales ?
Mr. Baker. No, sir.
Mr. Pecora. Who did?
Mr. Baker. That was a result of — that only lasted a very short
time — I think 3 or 4 or 5 months.
Mr. Pecora. In what year ?
Mr. Baker. 1931. AVhen we were beginning to retract our opera-
tions somewhat, and where we had no representatives left in an
office, customers who would come in to inquire about securities would
be directed to some particular window or somebody that would talk
with them intelligently, and if they wanted to buy a security of any
kind that was transmitted to the head office and handled from there.
Eventually the bond would be sent back to that particular branch,
where they made deliveries to the customer who came in and in-
quired.
Mr. Pecora. My question was not how these bank employees func-
tioned, but m}' question related to the payment of commissions on
those sales. Were any commissions or premiums paid on those sales ?
Mr. Baker. No, no. There was a service allowance that we made
at the branch to compensate them for the time and effort spent.
Mr. Pecora. Who got that allowance? To whom was it distrib-
uted?
Mr. Baker. The branch itself.
Mr. Pecora. Well now, the branch itself is a part of the institu-
tion?
Mr. Baker. That is right.
Mr. Pecora. The branch did not take the money and stow it away
somewhere ?
Mr. Baker. That is right.
Mr. Pecora. It was given to employees, wasn't it?
Mr. Baker. No, no, no, no. It was a part of the profit of that
branch.
Mr. Pecora. In other words, the bank then got those commissions?
Mr. Baker. It was a service charge paid by us for a service ren-
dered by that branch.
Mr. Pecora. And you say that only happened for a period of about
four or five months in 1921 ?
Mr. Baker. Yes. I will give you the exact time. Six months.
Mr. Pecora. Will you look at the annual report of the National
City Co. for the year 1928 ?
Mr. Baker. What page ?
2018 STOCK EXCHANGE PKACTICES
Mr. Pecoka. Page 20. Do you find there at the very end of the
report the following statement :
Sales facilities are now established in 20 of the bank's branches in New
York City, aucl this service will be further expanded during 1929.
Mr. Baker. That is right.
Mr. Pecora. Does that relate to promotion of sales by the bank's
employees ?
Mr. Baker. Not at all.
Mr. Pecora. Just to the salesmen of your company stationed in the
bank's branches?
Mr. Baker. That is right.
Mr. Pecora. Now, will you look at the report of your company
for the year 1929 ?
Mr. Baker. What page, please?
Mr. Pecora. The last page, page 18. Do you find the following
statement therein, referring to the sales facilities of the company
during that year :
This makes a total of 95 points offering National City Co. facilities to in-
vestors through its own staff, exclusive of tlie excellent service rendered for
our account by bank employees at offices where City Co. men are not yet
located.
Mr. Baker. Yes, sir.
Mr. Pecora. That relates to the year 1929, not 1931, does it?
Mr. Baker. That is right; yes.
Mr. Pecora. So that as far back as 1929 employees of the bank in
various of its metropolitan branches were promoting the sale of
securities by the company?
Mr. Baker. No; I do not so interpret that at all. What that
means is that where there were opportunities for National City Co.
business coming to the attention of the employees in the bank branch
they would report that immediately to the nearest branch where
there was direct City Co. representation.
Mr. Pecora. And that does not relate to actual promotion of sales
by the bank employees ?
Mr. Baker. No; not at all. Now. there may have been orders
from time to time that were transmitted that way, but there were
no premiums, and it did not amount to anything. That refers really
to leads sent to the other branches.
Mr. Pecora. Were the lists of depositors of the bank and its vari-
ous branches used as a source from which your company gathered
names of new prospects ?
Mr. Baker. No, sir.
Mr. Pecora. How do you know that?
Mr. Baker. I know it because we would never have access to the
names of depositors in the National City Bank. It is entirely pos-
sible that in some of the smaller branches there might be some dis-
cussion of that kind, in which the name might be given, but as far
as a general policy of taking the names of the depositors of the
National City Bank, so far as I can recall, that has never been done.
Mr. Pecora. You said yesterday you thought your memory was
rather poor. Is it possible you have forgotten anything about that?
Mr. Baker. It might be, but I don't think so.
STOCK EXCHAN-GE PRACTICES 2019
Mr. PrxoRA. Do you know that many depositors of the bank who
had never been customers of the company or buyers of its securities
were approached directly by representatives of tlie company and
their business solicited for the company?
Mr. Baker. That might possibly be, but the way the name might
have come to the attention of the salesmen does not necessarily follow
that it comes merely because he is a depositor of the bank, Mr. Pecora,
He has business interests, and it is the business of every new business
department to find out who the people are in the community who are
investors, and so forth.
Mr. Pecora. Would it surprise you to know that many of the
bank's depositors who never before had had any business with the
company were appi'oached directly by salesmen or representatives of
the company and greeted with the remark that the salesman knew
that they were depositors of the bank?
Mr. Baker. Well, that could still be possible. I do not dispute
that at all. But it was not from any general list of the depositors of
the bank.
Mr. Pecora. If that could be possible, can you suggest any way
by which the salesmen of your company were able to learn that these
prospects upon whom they called were depositors of the bank
Mr. Baker (interposing). Oh, yes.
Mr. Pecora. Excei:)t from the bank itself?
Mr. Baker. Oh, yes ; that could easily be, because
Mr. Pecora (interposing). Do you think it is easy to find out in
which bank one deposits?
Mr. Baker. A customer of the bank, let us say, in talking to some
officer in the bank indicates that he is interested in making some in-
vestments. That would be transmitted to the National City Co.,
and that name would be called upon immediatel}'.
Mr. Pecora. So that when a depositor of the bank went to the
bank seeking advice on matters of investments the name of that cus-
tomer or depositor would be transmitted by the bank's representative
to the company ?
Mr. Baker. The probabilities are that it would; yes, sir.
Mr. Pecora. And that is the way the bank would advise such an
inquirer on matters of investments?
Mr. Baker. It all depends on the nature of the inquirer.
Mr. Pecora. If it was an inquiry for the making of investments
that was the way he would be advised frequently ?
Mr. Baker. I think he would say that " the investment part of
this organization is the National City Co. and I would be glad to
refer 3'ou to them," some pai-ticular name.
Mr. Pecora. And if that depositor or customer then followed up
that suggestion by calling upon the National City Co. for advice as to
his investments, it was not an unusual thing for the National City
Co. to suggest investment in securities that the company was sponsor-
ing, was it ?
Mr. Baker. That is right.
Mr. Pecora. In fact, it was the usual thing, wasn't it?
Mr. Baker. That is right. But he did not recommend — —
Mr. Pecora (interposing). And do you consider, as a director of
the bank, that that was a disinterested and unselfish way for the
2020 STOCK EXCHANGE PRACTICES
bank to advise a depositor concerning the making of investments
generally ?
Mr. Baker. Well, as I told yovi yesterday, Mr. Pecora, the reason
I say I do feel that is the proper way to do is because of the facilities
which we had in the National City Co. for a study of investments,
and based upon that we made our recommendations.
Mr. Pecora. Do you still think that is good banking practice?
Mr. Baker. Yes ; I think that is good banking practice.
Mr. Pecora. And you would approve of its continuation, would
you?
Mr. Baker. Yes, sir.
Mr. Pecora. By the way, have you a sales letter dated Febniary
6, 1929, entitled "Loaves from Crumbs "?
Mr. Baker. Yes.
Mr. Pecora. Who prepared that?
Mr. Baker. I can not tell the specific author of it, but it was
undoubtedly prepared in the general sales department.
Mr. Pecora. Was it read over by you before it was sent out?
Mr. Baker. I assume that it was, but whether it was or not, I
take responsibility for it.
Mr. Pecora. That letter reads as follows :
February 6, 1929.
LO.WES FROM CRUMBS
It is the usual expeiience, when trading out one block of securities for
another, to find that tlie client has a cash difference in his favor. More often
than not these differences are too small to permit an immediate and satisfactory
investment. As a consequence the cash balance goes into the customer's bank
account to be lost sight of or spent.
The 5-to-l split-up of National City Bank stock provides an excellent way
to take immediate care of these cash differences.
Assuming that the client's circumstances are such that he can afford a
current rate of income as low as that on National City Bank stock (and very
few can not, the small amount of cash considered), you should make it a point
to see that the crumbs resulting from an exchaniie of securities go at once
into one or more .shares of the stock. If the amount is insufficient to buy one
share you can have the customer put up the remaining cash. If you will
continue this practice it will not be long l)efore each client and ,vou will
be agreeably surprised by the shares of National City Bank stock that he will
have accumulated.
These shares of National City Bank stock should not only prove a very
satisfactory investment over a period of time, but, as you know from experience,
their ownership ties the customer in closer than ever. By following the prac-
tice suggested you will be able to work in odd shares of City Bank stock in a
great many jilaces where it has never been before as well as increase the
holdings of some of your present owners.
Experience is admitted to be a trustworthy guide and your own experience
indicates that National City Bank stock should be as desirable a medium as
one can find for the investment of odd amounts.
By using the crumbs of cash resulting from exchanges to buy the new stock
of the National City Bank and continuing that practice as opportunity arises
you will work these crumbs into a loaf of substantial size with consequent
advantages to the client, the National City Co.. and yourself.
You assume responsibility for this letter?
Mr. Baker. Yes, sir.
Mr. Pecora. The date of it is February 6, 1929. I offer it in
evidence. It has already been spread upon the record by my reading
of it.
When your salesmen were attempting to sell securities sponsored
by your company, were they advising prospects to sell out securities
STOCK EXCHANGE PKACTICES 2021
which they then owned and use the proceeds of the sale to buy
securities sponsored by the company?
Mr. Baker. That might be, dei^ending upon the securities held
by the customer.
Mr. Pecora. That was the common practice, was it not?
Mr. Baker. Not necessarily a common practice; no, not at all, but
it did occur frequently.
Mr. Pecora. It occurred very frequently, did it not?
Mr. B.^KER. I don't know about " very . but frequently.
Mr. Pecora. Do you know how frequently?
Mr. Baker. No, sir.
Mr. Pecora. The practice was not discouraged, was it, by you?
Mr. Baker. Not where the exchange, in the judgment of our ex-
perts, was a desirable exchange to make.
Mr. Pecora. Who were the experts who exercised that judgment
and gave the advice to the prospect — the field salesmen?
Mr. Baker. We tried to maintain in New York control of that
so that the judgment as to whether a security was desirable for a
customer to hold as against some other security would be jjassed upon
by some department in New York Cit}' in charge of that study,
but it is true that exchanges were made from time to time. Whether
on the recommendation of the salesman or whether at the suggestion
of the holder of the security himself, I do not know.
Mr. Pecora. Well, don't you know that in many, many cases these
exchanges were made on the advice and recommendation of your
salesmen? Don't you personally know that, Mr. Baker?
Mr. Baker. I say that I know where exchanges of such character
have been made, yes.
Mr. Pecora. And don't you have that knowledge because of the
avalanche of letters that have come to you and to j^our company
from customers all over the country who told you of that practice?
Mr. Baker. I have had some letters of that kind sent directly to
me, yes.
Mr. Pecora. How many letters of that kind were sent directly
to you and how many were sent to the company which were not
addressed to you individually?
Mr. Baker. I don't know.
Mr. Pecor.\. Well, a large number, were there not?
Mr. Baker. I don't think a particularly large number, no.
Mr. PeCora. What would strike you as a number of such letters
large enough to make you characterize them as large in number?
Mr. Baker. I don't want to guess on that.
Mr. Pecora. I am not asking for a guess; I am asking you for
some estimate.
Mr. Baker. Well. I don't know.
Mr. Pecora. What number would strike you as being a large
number of such letters ?
Mr. Baker. I don't know.
Mr. Pecora. So that when I say there was a large number why
did you say " not a large number ", if you don't know what a large
number would mean?
Mr. Baker. I will withdraw that statement, then.
Mr. Pecora. What statement are you withdrawing?
2022 STOCK EXCHANGE PRACTICES
Mr. Baker. I am saying that what you mean by a large number
I may not mean the same. I don't know how many letters are re-
ceived of that kind.
Mr. Pecora. Have you any reason to believe that the volume of
those letters was kept from you by any of the employees of the
companj' ?
Mr. Baker. Why, no; of course not.
Mr. Pecora. Well, how many were addressed to you personally?
Mr. Baker. You are asking me to tell you how many letters I
received 'i I can not answer that.
Mr. Pecora. I am asking you for general information, Mr. Baker.
I don't expect you to give me a mathematically correct answer to
a question like that.
Mr. Baker. Why should you want me to guess at the number of
letters I have received over the last year?
Mr. Pecora. Because you can guess better than anyone else as
to the number of letters you received, and if I am going to find out
from any one I can find out best from you. can I not?
Mr. Baker. Yes. And the only way I can answer the question
is to have my files gone over and determine the number and tell
Mr. Pecora. You could not give us an approximate idea without
doing that?
Mr. Baker. No; I would rather not.
Mr. Pecora. Did those letters run into the thousands?
Mr. Baker. No; not at all.
Mr. Pecora. Into the hundreds? I mean those addressed to you
personally ?
Mr. Baker. Well, of course, that is a guess again. I don't like
to do it.
Mr. Pecora. Now will you produce Flash No. 3873. dated February
27, 1929, relating to sales of the bank stock? Let me read that to
3'ou first, Mr. Baker:
flash no. 3s73
February 27, 1929.
Ill the past few days the market on City Bank ^:toc•k has been very
erratic. It has been some time since we have had a position in the stock
which would give us any working control of this market, and we have there-
fore been obliged to place on the street the orders which have been sent in to
us through our organization. This has served to accentuate the wide fluctua-
tions. Under these conditions you must realize there is little, if any, profit
on these transactions, and we are therefore discontinuing premiums immediately.
General Sales.
Were you familiar with this flash when it was sent out ?
Mr. Baker. Yes; I must have been.
Mr. Pecora. In the face of the statement in this flash to the effect
that " It has been some time since we have had a position in the
stock which would give us any working control of this market " do
3'ou still say that the company never sought to control the market
in the stock of the bank?
Mr. Baker. The way that word is used there in that flash is meant
that the orders that we had had for stock were of such a substantial
amount that we were unable to continue to fill those orders. If we
had a jiroposition that we were willing to sell to the point where
STOCK EXCHANGE PRACTICES 2023
we would fill those orders rather than go into the market witli the
orders, it would prevent, of course, a move-up of the stock. And
what was meant undoubtedly is the fact that we were not in a
position at that time to avoid going into the market for the stock.
We did not want to lose the position we had, and that shows, of
course, that was the reason, becau.se of the discontinuance of that
premium.
Mr. Pecora. But the flash alludes specifically to the policy of
your company in seeking to maintain or have a "working control of
the market, does it not?
Mr. BAKf:R. Only to prevent these wide swings, as I said.
Mr. Pecora. Well, the flash does not say tliat that was the pur-
pose, does it ?
Mr. Baker. I think it very clearly says that we are not in a posi-
tion to supply stock and thus we can not control the movement
of the stock up and down.
Mr. Pecora. Don't you actually say that in order to enable you
to keep a working control of the market you do not want to throw
your own stock into the market for the purpose of filling the selling
orders, which your salesmen were getting all over the country?
Mr. Baker. That is all right : yes. That is all right.
Mr. Pecora. And the reason you did not want to jiart with any
of j'our stock for that purpose was because to do so would have
deprived the company of a working control of the market? Isn't
that the fair meaning of that?
Mr. Baker. No; I don't think it is. We just did not want to
reduce our position at that time any lower than it was, and since
we did not, with large orders coming into the market, there was no
way — nothing we could do with them except to put them right into
the marlvet to buy the stock.
Mr. Pecora. That is what vou had in mind when this flash was
sent?
Mr. Baker. Yes.
Mr. Pecora. And the language used by you in conveying that im-
pression was this language in the flash?
Mr. Baker. That is right. I did not write it very well.
Mr. Pecora. Now. vou notice the date of this flash, don't vou,
February 27. 1920 ?
Mr. Baker. Yes, sir.
Mr. Pecora. That is just about two months before the time when
your company found iit necessai'y to borrow 15.000 shares of the
bank's stock from Mr. Mitchell, isn't it?
Mr. Baker. That was.
Mr. Pecora. April the 23d?
Mr. Baker. Yes: that is right.
Mr. Pecora. Do you remember sending out a sales letter to your
salesmen over your own name which ended with this expression :
'' Enough said. We will let vour imagination do the rest." Do vou
recall that?
Mr. Baker. ^Yh2it is the number of that, please?
Mr. Pecora. No: before you go to your file, do you recall that?
Mr. Baker. I just don't recall it. buit I certainly will if it is here.
What is the number of it?
2024 STOCK EXCHANGE PRACTICES
Mr. Pecora. The date of it is May 3, 1928. No, it is the letter
of March 23, 1928; just after you sent flash No. 1912, March 23,
1928.
Mr. Baker. I have it; yes.
Mr. Pecoka. Let me read it to you :
FLASH NO. 1912
March 23, 1928.
For your informatiou we quote from letter which will go out to shareholders
of National City Bank of New York to-night :
" You will find inclosed a formal notice of a special meeting of the stock"
holders to be held on April 24, 1928, for the purpose of acting upon the recom-
mendation of your board of directors that the capital stock at the bank " — —
That should be " of the bank," shouldn't it?
Mr. Baker. Yes.
Mr. Pecora (reading) :
■■ Be increased from $70,000,000 to $90,000,000, the surplus remaining at
$50,000,000, and that the eapital stock of the National City Co. be increased
fi-om $25,000,000 to $45,000,000 and its surplus from $25,000,000 to $50,000,000.
" It is proposed that each shareholder in the bank be given the right to sub-
scribe for one additional share of stock of the bank for every five shares
registered in his name on the books of the bank at the close of business on
April 28, 1928, upon the payment of $400 in respect of each share subscribed,
of which $100 shall be applied to increasing the capital stock of the bank
and $300 shall be applied to increasing the capital stock and surplus of the
National City Co. in the amounts mentioned.
"As regards the bank this increase of capital is in line with our traditional
policy referred to on the occasion of the last previous increase of maintaining
a larger ratio of capital and sui-plus to deposits than is dictated by general
banking practice. As regards the National City Co. the board is of the
belief that these additional capital resources should be provided to permit
the company to acquire from time to time for sliort or long investment ac-
count bonds, stocks, or other equity interests, the holding of which will facili-
tate the development of its regular business or generally inure to the benefit
of the bank and the company, and that such resources can be thus profitably
employed."
Enough said. We will let your imagination do the rest.
H. B. Bakee.
Do you recall that flash?
Mr. Baker. Yes, sir.
Mr. Pecora. Now tell us what you meant by the expression after
the quotes : " Enough said. We will let your imagination do the
rest."
Mr. Baker. It was my opinion, with that move that was being
made there, that it was adding gi-eat value to the stock of the Na-
tional City Bank.
Mr. Pecora. Was that in preparation for a selling campaign to be
made by the company in the shares of the bank?
Mr. Baker. No; no particular selling campaign. Simply I felt
that that should be called to the attention of every stockholder and
pointed out to him.
Mr. Pecora. Why were you calling upon the salesmen to let their
imagination do the rest? What conclusion did you expect their
imaginations to reach from the information conveyed to them in
this flash?
Mr. Baker. I expected the conclusions to be very constructive on
that, and that should be featured with every .shareholder in their
territory as distinctly desirable.
STOCK EXCHANGE PRACTICES 2025
Mr. Pecora. Do you think the constructive conclusions would be
reached by a lively working of the imagination?
Mr. Baker. Yes, sir; that was all right.
Mr. Pecora. The day following that flash there was another flash
sent out over your signature numbered 1915. Have you that flash
before you?
Mr. Baker. Yes; I have.
Mr. Pecora. Please follow me while I read it:
flash no. 1915
March 24, 1928.
The program for City Bank Cit.v Co. as told you yesterday is featured on
front pages of New York morning papers and is causing tremendous excite-
ment. We are flooded witli orders, some to sell but mostly to buy, and are
unable as yet to determine which of these buy orders are speculative. We
necessarily will deal recklessly in executing orders — ■ — •
Mr. Baker. " Ruthlessly," 1 said.
Mr. Pecora. "In executing orders."
Mr. Baker. I did not say " recklessly."
Mr. Pecora. What did you say?
Mr. Baker. "Ruthlessly."
Mr. Pecora. "Ruthlessly"?
Mr. Baker. Yes.
Mr. Pecora. We have it " recklessly," but we will adopt your term
"ruthless."
Mr. Baker. Yes. [Laughter.]
Mr. Pecora. Thanks for the correction.
Mr. Baker. I like that much better.
Mr. Pecora. So do I.
We necessarily will deal ruthlessly in executing orders. You realize, of
course, that we have none to sell and all orders will be executed in the street.
It would be extremely unfair to our customers to throw all our buying orders
into the street at one time, and we will therefore use our own judgment.
We request you to assist us as far as possible by using the utmost care in
the character of orders accepted. This market must be handled in as orderly a
way as possible, and we do not want to permit prices to run above reasonable
figures, resulting, therefore, in sudden drops or wild fluctuations. We ask your
utmost cooperation.
H. B. Bakee.
I have correctly read it?
Mr. Baker. Yes, sir.
Mr. Pecora. With the correction you made?
Mr. Baker. That is right.
Mr. Pecora. Now, the news referred to in this flash as having been
featured on the front pages of New York morning papers and
causing tremendous excitement was the news about the proposed
increase of the capital stock both of the bank and your company?
Mr. Baker. Yes.
Mr. Pecora. Which the last flash alluded to, the one prior to this?
Mr. Baker. Yes.
Mr. Pecora. The one on March the 23d?
Mr. Baker. Yes.
Mr. Pecora. In the light of the .statement you made in this flash
of March 24, 1928, do you still say that your sole purpose in com-
2026 STOCK EXCHAJifGE PEACTICES
municating the information embodied in the flash of March 23,
1928, to your salesmen was simply to inform them of the proposed
increase, or would you rather say that the purpose of the flash of
March 23 was to indicate to them the commencement of a selling
campaign for the stock of the bank?
Mr. Baker. Oh, no. I did not have that in mind. What I said
before on that subject was that I thought it was distinctly desirable
to call to the attention of our customers and stockliolders that it
would be of great added value to the National City Bank and the
National City Co.
Senator Fletcher. Was this proposal on March 23, 1928, actually
accomplished and carried out?
Mr. Baker. Yes, sir.
Senator Fletcher. About the increase of capital?
Mr. Baker. Yes, sir.
Mr. Pecora. May I, Iklr. Chairman, suspend with the witness at
this point and ask that Mr. Mitchell be recalled ?
The Chairman. It is so ordered.
TESTIMONY OF CHAELES E. MITCHELL, NEW YORK CITY, CHAIR-
MAN THE NATIONAL CITY BANK OF NEW YORK, CITY BANK-
FARMERS' TRUST CO., INTERNATIONAL BANKING CORPORATION,
THE NATIONAL CITY CO., AND THE NATIONAL CITY CO., (LTD.),
OF CANADA— Resumed
Senator Fletcher. Mr. Mitchell, while they are conferring about
another matter I want to ask you, based on your experience and
from your knowledge of the public and of conditions, could you
offer any suggestion respecting legislation by Congress that might
tend to i^rotect and safeguard the interests of the public, either as
to banks, investment companies, or stock-exchange operations?
Mr. Mitchell. I think there should very definitely be legislation
enacted: yes, sir.
Senator Fletcher. Of what character? Now can you give us an
idea about what should be done?
Mr. Mitchell. Well, take for instance, this matter of investment
affiliates of banks: I have a feeling that the whole system should
be revamped, that there should be in an institution some portion
of it dealing with the long-term credit market. I subscribe to that.
I think there must be that.
But it is this contact with the public that disturbs me, cioming
as it does through the investment affiliate, and I think we have got
to find some different means of distribution.
Furthermore, I think there should be added controls with respect
to the character of securities handled. The investment affiliate
is an established thing. It is handling apparently something over
50 per cent of the total volume of the long-term credit business. I
do not think that you can eliminate it, certainly carelessly, without
very definitely retarding any period of recovery, because there is a
great deal of financing to be done and the machinery is there.
I think the investment affiliate should be put under regulation and
control, because that after all is the one place where the Government
STOCK EXCHANGE PRACTICES 2027
has got a chance to regulate and control. If you take the invest-
ment affiliate and throw it out completely and say, " Let all of this
business develop through private agencies," you have taken the
long-term credit machinery awaj' from the place where j'ou can
control it and put it in a place where you can not control it.
Therefore, I think we ought to look for legislation and control
of the long-term credit market, which is handled so largely by the
investment affiliate, \inder .stronger regulation.
Senator Fletcher. Do you tliink the investment affiliate should
be separated from a commercial bank?
Mr. Mitchell. No; I think that its methods of doing business
should be regidated and controlled.
Senator Fletcher. As distinguished from the bank itself?
Mr. Mitchell. The control and regulation should be separate
from the control and regulation of the bank itself, because they con-
stitute two different problems. But there is a va.st amount of financ-
ing that must be done over such a period as we have been through.
You take, for instance, the Insull properties that have been a matter
for your study here. Those properties come into a period like this,
where they have got to be financed on new lines. The thanks who
handle short credits for them and who have handled them in quan-
tity are going to get rid of those credits by putting them into per-
fectly sound long-term securities. Those banks really are the ones
to do that. It means, perhaps, as it did in that case, actually carry-
ing a considerable quantity of new perfectly sound securities for
some time awaiting a market, and it was largely the affiliates of banks
who found the long-term market for those securities.
We are trying in our company to-da}^, Senator, as a result of all
these things that we have learned to be along the path of error, to
find regulation for ourself, and I think we will find it little by lit-
tle, and as a matter of fact, I think we have got to go a long way
further than we have.
Answering your question directly, I do not believe in the elimina-
tion of the investment affiliate, but I do believe in legislation by
Congress to put such companies under very definite regulation and
control, which would be exactly the kind of regulation and control
that we are trying to build up for ourselves at the present moment.
Mr. Pecora. Mr. Mitchell. I have come right to a subject col-
lateral to that. Are you familiar with the opinion that was ren-
dered to the Attorney General of the United States in November,
1911, bv Frederick W. Lehmann, at that time Solicitor General of
the United States?
Mr. Mitchell. I am not ; no, sir.
Mr. Pecora. Did you ever hear of that?
Mr. Mitchell. I have heard of that, and at one time I read it,
but I don't recall it now. It has been many, many years since I
saw it.
Mr. Pecora. Well, I happen to have a copy of it before me.
Mr. Mitchell. Yes.
Mr. Pecora. Let us see how far we can recall it. It is dated No-
vember 6, 1911, addressed to the Attorney General, and I will just
read a few excerpts from it, Mr. Mitchell, and then, Mr. Chairman,
119852— 33— PT 6 18
2028 STOCK EXCHANGE PRACTICES
I propose to have the entire opinion spread in full on the record
here [reading] :
NOVEMBEK 6, 1911.
The Attorneiy Genesijvl.
Sib: You advise nie that the Presideut desires that there shall be submitted
to him upon his return to Washington a fuller discussion of the question of
the legality of the agreements and arrangements existing between the National
City Bank of New York and the National City Co., a corporation of the State
of New York.
On August 1, 1911, I submitted to you an opinion, in which you concurred,
that the agreements and arrangements in question were means of enabling the
bank to carry on business and exercise powers prohibited to it by the national
banking act.
I have reconsidered the question with the care demanded by its importance,
and have reached the conclusion that both the bank and the company, whether
considered as affiliated or as unrelated, are in violation of the law.
Now, there follows considerable matter after that which I have
not the time to read but which relates to certain provisions of the
national banking act and the United States Statutes. We come to
this statement [reading] :
In Logan County National Bank v. Townsend (139 U. S. 67, 1. c. 73), the
court, speaking through Mr. Justice Harlan, said :
" It is undoubtedly true, as contended by the defendant, that the national
banking act is an enabling act for all associations organized under it, and
that a national bank can not rightfully exercise any powers except those ex-
pressly granted by that act, or such incidental powers as are necessary to carry
on the business of banking for which it was established.''
Then follows other matter. Then I want to read this excerpt
[reading] :
It follows that while a bank may take the stocks of another corporation as
collateral to a loan, or take them in payment of a debt previously incurred,
it can not deal in stocks. The limit of its powers in this respect is stated by
Chief Justice Walte in First National Bank v. National Exchange Bank (92
U. S. 122, 128).
Then follows other matter, and I come to this excerpt [reading] :
The investment by national banks of their surplus funds in other national
banks, situated, perhaps, in distant States, as in the present case, is plainly
against the meaning and policy of the statutes from which they derive their
powers, and evil consequences would be certain to ensue if .such a course of
conduct were countenanced as lawful.
Then follows other matter and I now come to this excerpt
[reading] :
Another evil that might result, if large and wealthy banks were permitted
to buy and hold the capital stock of other banks, would be that, in that way,
the banking capital of a community might be concentrated in one concern,
and business men be deprived of the advantages that attend competition
between banks. Such accumulation of capital would be in disregard of the
policy of the national banking law, as seen in its numerous provisions regulating
the amount of the capital stock and the methods to be pursued in increasing
or reducing it. The smaller banks, in such a case, would be in fact, though
not in form, branches of the larger one.
Then there is other matter and I come to this excerpt [reading] :
Section 5201 may also be referred to as indicating the policy of this legis-
lation. This provision, forbidding a national hank to own and hold shares of
its own capital stock, would, in effect, be defeated if one national bank were
permitted to own and hold a controlling interest in the capital stock of
another.
STOCK EXCHANGE PRACTICES 2029
Then comes imicli other matter, and I reach tliis excerpt [reading] :
From the history of the national banking act. from its terms and pro-
visions, and from the decisions of the Supreme Court construing it, these
propositions are derived :
I. The banks are local institutions and independent of each other, none the
less that they are creatures of Federal power and subject to Federal super-
vision and control.
II. A bank may in its by-laws regulate the manner in which its shares may
be transferred, but it can not impair or limit the right of transfer.
III. As to business operations, the bank has such powers as are expressly
granted by the act and such as are properly incidental to those expressly
granted, and none other, and so can engage only in the business of banking as
that business is defined by the act.
IV. It is neither banking nor an incident of banking to invest the funds of
the bank in another business, in any manner or to any extent : and the bank
has therefore no right to invest its funds in the stocks of another corporation,
and especially not in the stocks of another national bank.
V. The powers of a national banking association are and can be granted only
by the United States, and as no grant of such powers is made by the act to
any State corporation, they may not be exercised by such a corporation.
These propositions relate to matters of substance, and so may be no more
evaded than violated. Indirection, if it accomplishes the same purpose, stands
upon the same footing with direction.
Then I come, after much other matter that follows, to this
excerpt [reading] :
This, then, is the situation : The company was not independently organized,
but was ox'ganized by the bank, its oflScers and shareholders acting as such.
This, of course, refers to the National City Co.
Only shareholders of the bank were permitted an interest in the company
and these only in the proportion of their holdings in the bank. This consti-
tution of the interests of the compan.v must continue to end, for no one can
ever come into the company without coming into the bank, and no one can ever
go out of the company without going out of the bank. The bank, by declaration
of a dividend, furnished the entire capital of the comjjany. No person can be
an officer or director of the company unless he is an officer or director of the
bank.
This is not all. The company has no independence of action. It has no con-
trol or authority over its own affairs. It is to be remembered that all its
stock is to be held by the trustees, and of course is to be voted by them.
Plenary power over the company is therefore held by these trustees. Now,
these trustees were not elected by the incorporators of the company, nor by its
stockholders. They were nominated by the agreement between the bank, its
officers and shareholders, made before the company was in existence. They
can not be removed, nor can their successors be elected or determined by any
power or interest of the company. The trustees, nominated by the agreement,
perpetuate themselves. They appoint their own successors. The only power
outside them.selves which can make a change in their membership is the
shareholding body of the bank. The .shareholders by not continuuig a trustee
iis an officer or director of the bank eliminate him as a trustee. The official
organization of the company and the vesting of its powers are determined and
can be determined only by the corporate action of tlie bank.
Then follows, after much other matter, the following excerpt
[reading] :
And the National City Co., considered by itself and apart from its relations
to the National City Bank, is also in violation of law. Its charter from the
State of New York expressly prohibits it from the business of banking. And
that charter could not confer the power to engage in the business of national
banking. Such power cotuld be conferred only by the laws of the United
States.
2030 STOCK EXCHANGE PRACTICES
Then follows much other matter, and I come to this concluding
paragraph [reading] :
Here the National City Co. is not simply to control banks, but it may en-
gage in any business whatever, even that forbidden by its charter, if, despite
its charter prohibition as to certain liinds of business, it may invest in the
stoclvs of companies conducting such business. The other enterprise in which
the company is engaged may stand in need of credit and of funds, and it is
too much to expect that the company's banlis will deal simply as banks,
equitably and impartially as between its own subsidiaries, and pei-sons and
corporations with whom it is not affiliated. The temptation to the specula-
tive use of the funds of the banks at opportune times will prove to be irre-
sistible. Examples are recent and significant of the peril to a bank, incident
to the dual and diver.se interests of its officers and directors. If many enter-
prises and many banks are brouglit and bound together in the nexus of a
great holding corporation, the failure of one may involve all in a common
disaster. And if the plan shoiuld prosper, it would mean a union of power
in the same hands over industry, commerce, and finance, with a resulting
power over public affairs, which was the gravamen of objection to the United
States Bank.
I conclude the National City Co. in its holding of national-bank stocks is
in usurpation of Federal authority and in violation of Federal law.
Respectfully submitted.
Frederick VC. Lehmann, Solicitor General.
Now, I may say, Mr. Chairman, that the Attorney General of the
United States at the time when the Solicitor General rendered this
opinion was the Hon. Charles W. Wickersham, and upon communi-
cation with his office, which communication I had for the purpose of
requesting him or subpoenaing him to appear before this committee,
I learned that he is now in Europe.
I ask that this opinion be spread in full upon the record.
The Chairman. There being no objection, it is so ordered.
Mr. Pecora. Wliat I am submitting is a carbon copy produced
from the files of the Department of Justice.
(The opinion is as follows:)
Department op Justice.
yovember 6, 1911.
The .Vttorxby Gene3!AL.
Sir: You advise me tlmt the President desires that there shall be submitted
to him upon his return to Washington a fuller discussion of the question of
the legality of the agreements and arrangements existing between the National
City Bank of New York and the National City Co., a corporation of the State
of New York.
On August 1, lOll, I submitted to you an opinion, in which you concurred,
that the agreements and arrangements in question were means of enabling the
bank to carry on business and exercise powers proliibited to it by the national
banking act.
I have reconsidered the question with the care demanded by its importance,
and have reached the conclusion tliat both the bank and the company, \^liether
considered as affiliated or as unrelated, are in violation of the law.
At the outset it is well to consider the purposes which the framers of the
national banking act had in view. The first, the paramount purpose was to
secure a uniform national system of currency, and to do tliis without the
creation of a great central institution like the old United States Bank.
The opposition to such an institution was deep seated and widespread, and
the sponsors of the various plans which took final shape in the national bank-
ing act were careful to point out that the objections to the United States Dank
had l3een duly considered and had been avoided liy them.
In August 1861 O. B. Potter of New York submitted to the Secretary of
the Treasury a scheme to pemiit State banks and bankers to issue notes
secured by United States bonds, saying. "None of the objections justly urged
against a United States bank lie against this plan. It gives to the Govern-
ment no power to bestow favors and does not place a dollar in its hands to
STOCK EXCHANGE PRACTICES 2031
lend. * * * It is impossible to see how such a sysitein can be made use
of for )Militi(al ends." (The origin of the national banlcing system, S. Uoc.
No. 582. pp. 4(>-18, 01st Cong., 2d sess.)
Samuel Hooper, a member of the House from Massachusetts, was an active
agent in the attainment of the end sought. In support of one of the early
measures proposed, which, while it did not become a law, was a step in that
direction, he said :
" Thus are secured all the benefits of the old United States Bank without
many of those objectionable features which aroused opposition. It was affirmed
that, by its favors, the Government enabled that bank to monopolize the busi-
ness of the country. Here no sucli system of favoritism exists. » * * it
was affirmed that freijuently great inconvenience and sometimes terrible disaster
resulted to the trade and commerce of different localities by the mother bank
of the United States arbitrarily interfering with the nianajrement of the
branches by reducing suddenly their loans and sometimes withdrawing large
amounts of their specie, for political effect. Here each bank transacts its
own business upon its own capital, and is subject to no demands except those
of its own customers and its own business. It will be as if the Bank of the
United States had been divided into many parts, and each part endowed with
the life, motion, and similitude of the whole, revolving in its own orbit, man-
aged by its own board of directors, attending to the business interests of its
own locality and yet to the bills of each will be given as wide a circulation
and as fixed a value as were given to those of the Bank of the United States
in its palmiest days." (Cong. Globe, 37th Cong., 2d sess., part 1, p. 616.)
In the naliiin.-il bunking act as passed in 1863 it was believed that the
desired result had been obtained.
Mr. Hugh McCuUoch, president of a leading bank at Indiamipolis. and dis-
tinguished as a financier, was induced, at great sacrifice to himself, to accept
the office of Comptroller of the Currency and inaugurate the new system. In a
letter to a friend published in the Banker's Magazine, Vol. XVIII, pages 8 and
9, he said :
" The national system of banking has been devised with a wisdom that re-
flects the highest credit upon its author, to furnish to the people of the United
States a national-))auk-note circulation without the agency of a national bank.
It is not to 1)6 a mammoth corporation, witli power to increase and diminish
its discounts and circulation, at the will of its managers, thus enabling a
board of directors to control the business and politics of the country. It can
have no concentrated political piiwer. Nm' do I see how it can be diverted
from its proper and legitimate objects for partisan purposes. It will concentrate
in the hands of no privileged persons a monopoly of banking. It simply author-
izes, under suitable and necessary restrictions, any number of persons, not less
than five in number, in any of the States or Territories of the Union, to engage
in the business of banking, while it prevents them from issuing a single dollar
to circulate as money which is not secured by the stocks and resources of the
Government. It is. therefore, in my judgment (as far as calculation is re-
garded ) , not only a perfectly safe system of banking, but it is one that is emi-
nently adapted to the nature of our political institutions."
In his first report as Comptroller of the Currenc.v, made November 28. 1863,
he S'lys :
"By the national currency act the principle is for the first time recognized
and established, that the redemption of bank notes should be guaranteed by the
Government authorizing their isrue. The national currency will be as solvent
as the Nation of which it represents the unity. The country has at last secured
to it a permanent paper circulating medium of a uniform value, without the
aid of a national bank. This national system confers no monopoly of banking,
but opens its advantages equally to all. It interferes with no State rights.
It meets both the necessities of the Government and the wants of the iieojile.
It needs modifications and may require others than those whicii are suggested
in this report : but it is right in principle, and of its success there can. I think.
be no reasonable doubt."
And again in his second report, made November 25, 1864 :
" Thi.s examination of the act, and the observation of the manner in which it
Is being administered, have resulted in the entering up of a popular judgment in
favor of the national banking system ; n judgment, not that the system is a
perfect one. nor free from danger of abuse, but that it is a safer system, better
adapted to the nature of our political institutions and to our commercial
necessities, giving more strength to the Government, with less risk of its being
2032 STOCK EXCHANGE PRACTICES
used by tlie Government against the just rights of the States or the rights of
the people tliaii any system which lias yet been devised, and that by such
amendments of the act as experience may show to be needful, it may be made
!is little objectionable, and as beneficial to the Government and the iieople, as
any papi'r money banking system that wisdom and experience are likely to
invent. It promises to give to the people that long-existing " desidiTatum,"'
a national currency without a national bank, a bank-note circulation of uniform
value without the creation of a moneyed ix)wer in a few hands over tlie poli-
tics and business of the country."
When in his letter and reports Mr. McCulloch speaks of " a national bank
note circulation without the agency of a national bank," etc., he manifestly
has reference to an institution national in the sense of being a central institu-
tion like the old Uinted States Bank, operating throughout the country by
means of branches.
The banks created by the national banking act were, and were designed to
be, local institutions and independent of each other, but under national control
and supervision. Nationalization without centralization was the keynote of
the law. This is demonstrated by the structure of the banks provided for.
Reference will be made to tlie national banking act as contained in the
United States Compiled Statutes, 1901. It is title 62, and consists of four
chapters. The first chapter deals with " organization and powers," the second
with "obtaining and issuing circulating notes," the third with "regulation of
the banking business," and the fourth with " dissolution and receivership."
The entire act is too long for reproduction here, but pertinent sections will be
set out in full, or in their substance.
Section 5133 — " formation of national banking associations " — provides :
"Associations for carrying on the business of banking under this title may
be formed by any number of natural persons, not less in any case than five.
They shall enter into articles of association, which shall sfiecify in general
terms the object for which the association is formed, and may contain any
other provisions, not inconsistent with law, which the association may see fit
to adopt for the regulation of its business and the conduct of its affairs. These
articles shall be signed by the persons xiniting to form the association, and a
copy of them shall be forwarded to the Comptroller of the Currency, to be filed
and preserved in his office."
It should be noted in passing that only " natural persons " may engage in
the formation of a bank.
Section 5134 — "requisites of organization certificate" — provides:
" The persons uniting to form such an association shall, under tlieir hands,
make an organization certificate, which shall specifically state:
" First. The name assumed by such association ; which name shall be subject
to the approval of the Comptroller of the Currency.
" Second. The place where its operations of discount and deposit are to be
carried on, designating the State, Territory, or District, and the particular
county and city, town, or village.
" Third. The amount of capital stock and the number of shares into which
the same is to be divided.
" Fourth. The names and ]ilaces of residence of the shareholders and the
number of shares held by each of them.
" Fifth. The fact that the certificate is made to enable such persons to avail
themselves of the advantages of this title."
By this .section the bank is distinctly localized, tor it requires that "the
place where its operations of discount and deposit are to be carried on " shall
be designated as to State, county, and city, town, or village ; and it allows but
one place.
This is repeated in section 5190 — " place of business "• — which provides :
" The usual business of each national banking association shall be trans-
acted at an office or banking house located in the place specified in its organi-
zation certificate."
By an act of May 1, 1SS6 (ch. 73. 24 Stat. IS), a bank was authorized to
change its location, but not to a place more than 30 miles distant, and the
new location must be within the same State. No provision has ev^r been made
for increasing the number of cities, towns, or villages in which a bank may do
business.
Section 5138 — "requisite amount of capital" — provides:
" No association shall be organized with a less capital than $100,000, except
that banks with a capital of not less than $50,000 may, with the approval of the
STOCK EXCHANGE PRACTICES 2033
Secretary of the Tronsury, he organized in any place the population of which
does not exceed 6,000 inhabitants, and except that banks with a capital of not
less than $25,000 may, with the sanction of the Secretary of the Treasury, be
organized in any place the population of which does not exceed 8,000 inhabi-
tants. No association shall be organized in a city the population of which
exceetls 50,000 persons with a capital of less than $200,000."
This, because of the small amount of capital required in such case, extends
the facilities of national banking to the smallest communities.
Section 5146 — "requisite qualifications of directors" — provides:
'• Every director must, during his whole term of service, be a citizen of the
United States, and at least three-fourths of the directors must have resided
in the State, Territory, or District in which the association is located, for at
least one year immediately preceding their election, and must be residents
therein during their continuance in office. Every director must own, in his
own right, at least 10 shares of the capital stock of the association of which
he Is a director. Any director who ceases to be the owner of 10 shares of the
stock, or who becomes in any other manner disqualified, shall thereby vacate
his place."
Here the lotal character of the bank is secured. The directors must all be
shareholders, they must all be citizens of the United States, and three-fourths
of them must be residents of the State.
The powers of the bank are conferred in general terms by section 5136, and
they are : to have a seal, and perpetual succession, to make contract.?, sue and
bo sued, elect oflicors and define their duties, and further
" Sixth. To prescribe, by Its board of director.s-, by-laws not inconsistent
with law, regulating the manner in whicli its stock shall be transferred, its
diret'tors elected or appointed, its officers appointed, its property transferred,
its general business conducted, and the privileges granted to it by law exercised
and enjo.ved.
" Seventh. To exercise by its board of directors, or duly authorized officers
or agents, subject to law, all such incidental powers as shall be necessary to
carry on the business of banking ; by discounting and negotiating promissory
uotes, drafts, bills of exchange, and other evidences of debt ; by receiving de-
posits ; by buying and selling exchange, coin, and bullion ; by loaning money
on personal security ; and by obtaining, issuing, and circulating notes according
to the provisions of this title.
" But no association shall transact any business except such as is incidental
and necessarily preliminary to its organization, until it has been authorized by
the Comptroller of the Currency to commence the business of banking."
Section 5137 confei-s power to hold real property and limits it to such as may
be necessary for " its immediate accommodation in the transaction of its busi-
ness ". and such as it may acquire in the vs'ay of securing payment of debts
previously contracted, but real estate so acquu'ed can not be held for a longer
period than five years.
Section 5197 limits the rate of interest which may be taken to that " allowed
by the laws of the State, Territory, or District where the bank is located."
This again emphasizes the local character of the institution.
Section 5201 prohibits a bank from loaning upon or purchasing its own shares.
It has been repeatedly held that the powers of a national bank are limited
to those expressly granted by the act and such as are properly incidental to
those granted.
In Logan County National Bank v. Townsend (139 U. S. 67, 1. c. 73), the court,
speaking through Mr. Justice Harlan, said :
" It is undoubtedly true, as contended by the defendant, that the national
banking act is an enabling act for all associations organized under it, and that
a national bank can not rightfully exercise any powers except those expressly
granted by that act, or such incidental powers as are necessary to carry on
the business of banking for which it was established. The statute declares
that a national banking institution shall have power to 'exercise, by its board
of directors, or duly authorized officers or agents, subject to law, all such
Incidental powers as shall be necessary to carry on the business of banking;
by discounting and negotiating promissory notes, drafts, bills of exchange, and
other evidences of debt ; by receiving deposits ; by buying and selling exchange,
coin and bullion ; by loaning money on personal security ; and by obtaining,
issuing, and circulating notes according to the provisions' of title 62 of the
Revised Statutes."
And in California Bank v. Kennedy (167 U. S. 362, 1. c. 366), the court,
through Mr. Justice White, said:
2034 STOCK EXCHANGE PRACTICES
" It is settled that the United States statutes relative to national banks
constitute the measure of the authority of such corporations, and that they
can not rightfully exercise any powers except those expressly granted, or which
are incidental to carrying on the business for which they are established.
Logan County Bank i\ Townsend (139 U. S. 67, 73). No express power to
acquire the stock of another corporation is conferred upon a national bank,
but it has been held that, as incidental to the power to loan money on personal
security, a bank may in the usual course of doing such business accept stock
of another coriioration as collateral, and by the enforcement of its rights as
pledges it may become the owner of the collateral and be subject to liability
as other stockholders. (National Bank v. Case, 99 U. S. 628). So, also, a
national bank may be conceded to possess the incidental power to accept in
good faith stock of another corporation as security for a previous indebted-
ness. It is clear, however, that a national bank dues not possess the power to
deal in stocks. The prohibition is implied from the failure to grant the
power." (First National Bank v. National Exchange Bank, 92 U. S. 122, 128.)
The proposition is an elementary one in corporation law and needs no
elaboration.
It follows that while a bank may take the stocks of another corporation
as collateral to a loan, or take them in payment of a debt previously incurred,
it can not deal in stocks. The limit of its power in this resipect is stated by
Chief Justice Waite in First National Bank v. National Exchange Bank (92
U. S. 122, 128) :
<i« * * In the honest exercise of the power to compromise a doubtful
debt owing to a bank, it can hardly be doubted that stcxks may be accepted
in payment and satisfaction, with a view to their subsequent sale or conver-
sion into money so as to make good or reduce au anticipated loss. Such a
transaction would not amount to a dealing in stocks."
In First National Bank v. Converse (200 U. S. 425), a manufacturing com-
pany had failed, and the creditors, among whom was the bank, organized a
new corporation to purchase the stocks, evidences of debt, and assets of the
old, and to continue in the manufacture of the same articles that had been
manufactured by the old company. This tran.saction was held to be without
the powers of the bank. The court, p. 439, said :
..* * * To concede that a uiitional bank has ordinarily the right to
take stock in another corporation as collateral for a present loan or as
security for a preexisting debt does not imply that because a national bank
has lent money to a corporation it may become an organizer and take stock
in a new and speculative venture: in other words, do the very thing which
the previous decisions of this court have held can not be done."
As to acquiring the stocks of other national banks, the ruling of the court
is very explicit.
In Concord First National Bank r. Hawkins (174 U. S. 3(>4), the Bank of
Concord, N. H., had bought and held as an investment 100 shares of the stock
of the Indianapolis National Bank. The last-named bank failed and Hawkins
as receiver sued the Concord bank to recover the assessment which had been
made upon the stock of the Indianapolis bank. The Concord bank denied
liability upon the ground that it had no right to hold the stock. Tlie court
refused so much as to apply the doctrine of estoppel in favor of creditors.
Referring to previous decisions of the court and to the distinc-tion made by
the Circuit Court between the acquisition of stocks in national banks and of
stocks in other corporations, the court, p. 368, said :
" No reason is given by the learned judge in support of the solidity of such
a distinction, and none occurs to us. Indeed, we think that the reasons which
disqualify a national bank fi-oni investing its money in the stock of another
corporation are quite as obvious when that other corporation is a national
bank as in the case of other corporations. The investment by national banks
of their surplus funds in other national banks, situated, perhaps, in distant
States, as in the present case, is plainly against the meaning and policy of
the statutes from which they derive their powers, and evil con.sequences would
be certain to ensue if such a course of conduct were countenanced as lawful.
Thus, it is enacted, in section 5146. that ' every director must, during his
whole term of service, be a citizen of the United States, and at least three-
fourths of the directors must have resided in the State, Territory, or district
in which the association is located for at least one year immediately preceding
their election, and nuist be residents therein during their continuance in office'."
STOCK EXCHANGE PKACTICES 2035
One of the evident purposes of this enactment is to confine tlie management
ul' each bank to persons who live in the neighborhood, and who may, for that
reason, be supposed to know the trustworthiness of those who are to be
appointed officers of the bank, and the character and financial ability of
those who may seek to borrow its money. But if the funds of a bank in New
Hampshire, instead of being retained in the custody and management of Its
directors ai-e invested in tlie stock of a bank in Indiana, the policy of this
wholesome provision of the statute would be frustrated. The property of the
local stockholders, so far as thus invested, would not be managed by directors
of their own selection, but by distant and unknown persons. Another evil that
might result, if large and wealthy banks were permitted to buy and hold
tlie capital stock of other banks, would be that, in that way, the banking
capital of a community might be concentrated in one concern, and business
men be deprived of the advantages that attend competition between banks.
Such accumulation of capital would be in disregard of the policy of the national
banking law, as seen in its numerous provisions regulating the amount of the
capital stock and the methods to be pursued in increasing or reducing it. The
smaller banks, in such a case, would be in fact, though not in form, branches
of the larger one.
Section 5201 may also be referred to as indicating the policy of this legisla-
tion. It is in the following term.s:
" No association shall make any loan or discount on the security of the
shares of its owai capital stock, nor be the purchaser or holder of any sucli
shares, unless such security or purchase shall be necessary to prevent loss uix)n
a debt previously contracted in good faith ; and stock so purchased or acquired
shall, within six months from the time of its purchase, be sold or disposed of at
public or private sale ; or, in default thereof, a receiver may be appointed to
close up the business of tlie association."
This provision, forbidding a national bank to own and hold shares of its
own capital stock, would, in effect, be defeated if one national bank were
permitted to own and hold a controlling interest in the capital stock of another.
Here is an express recognition and assertion of the local and independent
character of our national banks and the denial of any power which would
tend to create what is in effect a central bank with branches.
As to the transfer of its shares, a national bank has power only " to pre-
scribe, by its board of directors, by-laws not inconsistent with law, regulating
the manner in which its stock shall be transferred." Manner relates to method
or form and not to substance. So the by-laws may require a formal indorse-
ment of the outstanding certificates, the issuance of a new one, and a register
of the transfer upon the books of the bank. But no condition can be imposed
which limits or impairs the right of transfer.
The national banking act as originally passed in 1863, by section 36, denied
to the stockholder " power to sell or transfer any share held in his own right
so long as he shall be liable, either as principal debtor, surety, or otherwise,
to the association for any debt which shall have become due and remains
unpaid," etc. ; but this provision was repealed by tlie act of 186-1. which, with
amendments, is the act now upon the books. The purpose of the repeal was
to make the shares more readily transferable. Banks thereafter, however,
attempted to enforce the restrictions of the original act by means of by-laws,
but these have been held always to be invalid. Speaking to this subject
in Bank v. Lanier (11 Wall. 369, 1, c. 377-378), the court said:
" The power to transfer their stock is one of the most valuable franchises
conferred by Congress on banking as.sociations. Without this power it can
readily be seen the value of the stock would be greatly lessened, and, obvi-
ously, whatever contributes to make the shares of the stock a safe mode
of investment, and easily convertible, tends to enhance their value. It is
no less the interest of the shareholder, than the public, that the certificate
representing his stock should be in a form to secure public confidence, for
without this he could not negotiate it to any advantage.
" It is in obedience to this requirement, that stock certificates of all kinds
have been constructed in a way to invite the confidence of business men, so
that they have become the basis of commercial transactions in all the large
cities of the country, and are sold in open market the same as otlier securities.
Although neither in form or character negotiable paper, they approximate to
it as nearly as practicable. If we assume that the certificates in question are
not different from those in general use by corporations, and the assumption
is a safe one, it is easy to see why investments of this character are sought
2036 STOCK EXCHANGE PEACTICES
after and relied upon. No better form could be adopted to assure tlie pur-
chaser that he can buy with safety. He is told, under the seal of the corpo-
ration, that the shareholder is entitled to so much stock, which can be trans-
ferred on the books of the corporation, iu person or by attorney, when the
certificates are surrendered, but not otherwise. This is a notification to all
persons interested to know, that whoever in good faith buys the stock, and
produces to the corporation tlie certificates, regularly assigned, with power
to transfer, is entitled to have the stock transferred to him. And the notifica-
tion goes further, for it assures the holder that the corporation will not
transfer the stock to any one not iu possession of the certificates."
This ruling holding the restrictive by-law to be invalid was repeated in
Bullard v. National Eagle Bank (IS Wall. 594), Third National Bank v. Buffalo
Gorman Ins. Co. (193 U.S. 581) ; and in many cases on the circuit and in the
State courts.
If the law was changed to permit a transfer, when to deny it was in the
immediate interest of the bank, it surely never was the purpose to authorize
a restriction upon transfer in behalf of any interest foreign to the bank, and
witli which it is forbidden that the bank as a bank may be identified.
From the history of the national banking act, from its terms and provisions,
and from the decisions of the Supreme Court construing it, these propositions
are derived :
I. The banks are local institutions and independent of each other, none the
less that they are creatures of Federal power and subject to Federal super-
vision and control.
II. A bank may in its by laws regulate the manner in which its shares may
be transferred, but it cannot impair or limit the right of transfer.
III. As to tiusiness operations, the bank has such powers as are expressly
granted by the act, and such as are properly incidental to those expressly
granted, and none other, and so can engage only iu the business of banking
as that business is defined by the act.
IV. It is neither banking nor an incident of banking to invest the funds
of the bank in another business, in any manner or to any extent ; aud the bank
has therefore no right to invest its funds in the stocks of another corporation,
aud especially not in the stocks of another national bank.
V. The powers of a national banking association are and can be granted
only by the United States, and as no grant of such powers is made by the act
to any State corporation, they may not be exercised by such a corporation.
These propositions relate to matters of substances, and so may be no more
evaded than violated. Indirection, if it accomplishes the same purpose, stands
upon the same footing with direction.
Coming now to the case in hand, we have to consider what is the practical
effect of the creation of the National City Co. and its affiliation with the
National City Bank of New York.
So far as concerns matters of form, it may be conceded that the National
City Co. was incorporated as an independent institution. Still, its certificate
of incorporation while not compelling dependence upon or interrelation with
any other Institution, does provide for it. Its business powers and capacities
are very extensive. They authorize the acquisition of any kind of property
and the conduct of any kind of business, and the doing of whatever may be
incident thereto. (See article second of the certificate of association.) The
only limitation upon its business activities is to be found in paragraph VIII
of article II, and this is :
" * * * but nothing herein contained shall be construed as authorizing the
business of banking nor as including the Imsiness purpose or purposes of a
money corporation or a corporation provided for by the banking, insurance,
railroad, and the transportation corporations laws, or an educational institution
or corporation which may be incorporated as provided in tlie education law,
nor as authorizing or intending to authorize tlie performance at any time of
any act or acts then unlawful."
As the business of banking, which must be taken to include the business of
banking under the national banking law.s, is expressly prohibited, the powers
of the company as granted by its charter do not offend the Federal laws.
The tenth article provides in Its first paragraph that " the directors of the
company need not be stockholders ", and in the second paragraph that —
" No transaction entered into by the company shall be affected by the fact
that the directors of the company were personally interested in it, and every
director of the company is hereby relieved from any disability that might
STOCK EXCHANGE PRACTICES 2037
otUeiwise prevent his contracting witli the company for the benefit of himself
<ir any firm, association, or corporation in which he may be in anywise
interested."
These provisions in and of tliemselves violate no Federal statutes, but they
give a facility for serving two masters, which is, to say the least, un'usual;
and they do permit the use of the company as a mere instrumentality or
convenience of some other institution.
The capital .stock of tlie company is by the third article fixed at $10,000,000,
but it is provided by paragraph .5 of article 10 that —
■' The board of directors shall have absolute discretion in the declaration
of dividends out of the surplus profits of the company, and they may accumu-
late such profits to such extent as they may deem advisable instead of dis-
tributing them among the stockholders, and may invest and reinvest the same
in such manner as in their absolute discretion they may deem advisable."
Thus, wliile there is a limit placed upon the capital stock of the company,
there is none upon the actual capital it may accumulate, and so none upon its
possible financial power.
These various provisions of the certificate of incorporation are important
to be coiisiderefl in view of the use which has been made of the company.
The certificate is dated July 5. 1911, but prior to that <late, on June 1, 1911,
an agreement was entered into between the National City Bank of New York
as the first party, James Stillman, Frank A. Vanderlip, and Stephen S. Palmer,
trustees, as the second party, and Henry A. C. Taylor, Cleveland H. Dodge,
William Rockefeller, Moses Taylor Pyne, J. Pierpont Morgan, and other sub-
scribers. " who are shareholders of the said bank ", as parties of the third
part. In the agreement these parties ai'e designated, respectively, as " the
bank ". " tlie trustees ", and " the subscribers."
The trustees are all of them officers of the bank. Mr. Stillman is the chair-
man of the board of directors, Mr. Vanderlip is its president, and Mr. Palmer
is a director.
The agreement, then, is one between the bank, its officers, and its share-
holders, and. as will be seen, the officers and shareholders are dealt with not
as individuals, but as officers and shareholders.
The ]ireanil)le recites that —
" Opportunities and facilities for making desirable investments, other than
those which are possible in the ordinary course of the banking business, are,
from time to time, presented to tlie officers of the bank, which they desire to
make available to the shareholders of the bank."
Here is the declared purpose to do something, make investments, not within
the scope of the bank's powers. That the officers and shareholders of the
bank as individuals may m.ike such investments is conceded, but that the
bank, or its officers or shareholders, as officers and shareholders, may do so,
in other words, that the powers and facilities granted by the national banking
act may he used for purposes outside the ordinary course of banking business,
is denied.
The first article of the agreement provides for the organization of an invest-
ing company. It is here called the United States Investing Co. It is, however,
the National City Co. under a provisional name.
It is not within the scope of the bank's powers to have part or lot in such
an agreement, for the simple reason that the formation of an investing com-
pany under State corporation laws is not tlie conduct of banking under na-
tional laws. And what is true of the bank is true of its officers and sharehold-
ers acting as such.
The second article accords to each shareholder of the bank, as a right,
a beneficial interest, through the trustees, in the capital stock of the investing
company, to the extent of two-fifths of the par value of his capital stock
in the bank, provideil he exercises his right by executing the agreement or
by having his bank stock stamped as thereafter provided in the agreement.
If the shareholder does not exercise his right in time, the trustees may deter-
mine the conditions upon which he may do so thereafter.
The par value of the capital stock of the bank is $25,000,000. and two-fifths
of this is ten millions, which is the par value of the stock of the investment
company. Every shareholder of the bank exercising his right, the stock of the
company is fully provided for.
It is contended that the shareholder of the bank is not required to take
his allotted beneficial interest in the company, but manifestly he is under
strong compulsion. The bank and the company, as will be seen from later
2038 STOCK EXCHANGE PRACTICES
provisions of the agreement, are so closely bound together that the welfare
of the company will always be the serious concern of the bank. For better
or for worse the bank and the company are united. The shareholder, if he
is not in the arrangement, must none the less hazard the worse and get none
of the better, and so, inasmuch as against his will he is in for the worse, he
will in self-protection go in further and entitle himself to the better.
The third article provides that in order to facilitate participation by the
shareholders of the bank in the beneficial interests in the company, the trustees
will recommend to tlie directors of the bank the declaration of a special
dividend of 40 per cent on the capital stock of the bank, which will amount
to $10,000,000, or the exact amount of the capital stock of the company. The
subscriliers, shareholders of the bank, agree to apply the dividend to the pay-
ment of the stock of the company.
The recommendation of the trustees, officers of the bank, assent to by the
bank and by two-thirds of its shareholders, are sure to be adopted, but not
even as against a dissenting or nonassenting minorit.v, no matter how small
that minority might be, was there a right to declare a dividend except as
such declaration was made in the interest of the biuik and its shareholders as
such. And there Is a larger interest, that of depositors and of the National
Government, which requires that the bank shall be conducted as a bank pure
and simple and not as a promoting agency of speculative investment companies.
The fourth article requires that the subscribers at once assign the special
dividend to the trustees in order to enable the trustees to organize the
investing company.
This only emphasizes the fact that the resources and facilities of the bank
were utilized to create the investing company.
The fifth article provides (1 that the stock of tlie investing company shall
be issued to the trustees and shall be held by them and their successors in
trust, and (2) that the beneficial interest (,f the subscribers in this stock " Shall
not be transferable separately, but only by the transfer of the shares of stock
of the bank held by them respectively ; and every sale or transfer of stock of the
bank by a subscriber or his successor shall inilude the beneficial interest of such
subscriber or his successor in the capital stuck of the investing company attach-
ing to the shares of the bank so sold or transferred."
The first clause of this article limits the number of stockholders in the com-
pany to three, the three being the trustees and their successors in trust.
Article 9 of the agreement provides :
"The number of trustees hereunder shall not be less than three. Any trustee
may, at an.v time, resign. In ca.se of any vacancy in the number of trustees,
it shall be filled by the remaining trastees by the selection of someone who is an
officer or a director of the l)ank : and any trustee who shall cease to be an
ofiicer or a director of the bank shall thereupon also cease to be a trustee here-
under ; it being intended that only oflicers or directors of the bank shall act
as trustees.
" No trustee shall be liable for the acts of any other trustee, but shall be
liable only for his own willful misconduct.
" The trustees may act by a majcrit.v. either at a meiting or by writing
with or without a meeting ; and they may vote iTi person or by proxy."
Thus only officers or directors of the bank can ever be stockholders in the
company, for the trustees held the stock and only officers and directors of the
bank can be trustees. And the trustees are a self-perjpetuating body. Any
vacancy is to lie filled by the remaining trustees.
By article 8 it is provided that the trustees and such other persons as they
may designate, who shall be officers or directors of the bank, shall constitute
the first board of directors of the company, and that no one shall ever be a
director of the company whc is not also an officer cir director of the bank.
The certificate of incorporation of the company provides for five directors,
but it has only three stockholders: therefore, it was provided in the certificate
that directors need not be stockholders.
The second clause of article 5 prohibits transfer of beneficial interests in the
company without a transfer of the corresponding shares of the bank, and,
conversely, prohibits transfer of shares in the bank without a transfer of the
corresponding beneficial interest in the company.
Article 6 provides for certain indorsements upon the certificate of bank
shares and upon the certifit-ates of beneficial interest in the company. These
indorsements are in aid of the plan and purpose of the agreement.
STOCK EXCHANGE PRACTICES 2039
Article 7 requires paymeut of company divUleiuls to be made to shareholders
of the bank, whose certificates of bank shares are stamped or indorsed as pro-
vided in article 5. Payments of these dividends may be made by the trustees
to the bank, and such paymeut will relieve the trustees from further liability
on their account.
Article 10 provides for the amendment, modification, or termination of the
agreement. Any of these can be accomplished only " with the written consent
of the trustws and of two-thirds in interest of those for whom the capital stock
of the investing company is then held by the trustees."
This, then is the situation. The company was not independently organized,
but was organized by the bank, its officers and shareholders acting as such.
Only shareholders of the bank w'ere per'mitted an interest in the coniiwny
and these only in the proiwrtion of their holdings in the bank. This consti-
tution of the interests of the company must continue to the end, for no one
can ever come into the company without coming into the bank, and no one
can ever go out of the company without going out of the bank. The bank, by
declaration of a dividend, furnished the entire capital of the company. No
person can be an officer or director of the company unless he is an officerl or
director of the bank.
This is not all. The company has no independence of action. It has no
control or authority over its own affairs.l It is to be remembered that all its
stock is to be held by the trustees and, of course, is to be voted by them.
Plenary power over the comjiany is therefore held by these trustees. Now,
these trustees were not elected by the incorporators of the company nor by its
stockholders. They were nominated by the agreement between the bank, its
officers, and shareholders, made before the company was in existence. They
can not be removed, nor can their successors be elected or determined by any
power or interest of the company. The trustees, nominated by the agreement,
perpetuate themselves. They appoint their own successors. The only power
outside themselves which can make a change in their membership is the share-
holding body of the bank. The shareholders by not continuing a trustee as an
officer or director of the bank eliminate him as a trustee. The official organi-
zation of the company and the vesting of its powers are determined and can
be determined only by the corporate action of the bank.
And the agreement which accomplishes all these things is beyond the scope
of the legitimate action of the bank to change or terminate. Two-thirds of the
shareholders of the bank and the trustees must agree before there can be a
change in it or an end of it. In this matter, so material to the welfare of the
bank, the shareholders and the directors have abdicated their powers and duties
and abandoned them to a minority of their number and the three trustees.
To facilitate the conduct of the business of the company by the officers of
the bank, article 10 of the certificate of incorporation of the company pro-
vides that no transaction entered into by the company shall be affected by the
fact that its officers or directors are contracting for their own benefit, or for
the benefit of any firm, association, or corporation in which they may be inter-
ested in any wise.
This arrangement between the bank and the company virtually consolidates
them, unifies their every interest, and requires that all the powers and capac-
ities of both shall always be exerted in unison — or it does not.
If we have tw^o institutions, and not one. chartered as each one of them is
by public authority, and b.v different sovereignties, then each has its own
peculiar mission and its own distinctive rights and duties, powers, and obliga-
tions. The bank is not concerned with the company, except as it might be with
any other possible borrower of its funds, and the company is not concerned with
the bank except as it might be with any other institution whose funds it might
wi.sli to borrow. The bank will not be influenced tn lend money in aid of any
enterprise in which the company may be engaged, because of that fact, and
the company will not. because of its relations with the bank, look to it the
more readily for financial support. The business of each will be conducted with
regard to its own distinctive advantage.
If these institutions are twain in the substantial sense indicated, then the
arrangement which places the control of the company so absolutely and irre-
vocably under trustees appointed by the bank, and subject to change only by
the corporate action of the bank, offends the fundamental law that "no servant
can serve two masters; for either he will hate the one and love the other or
else he will hold to the one and despise the other." This law is impliefl in
every line of the charter of the hank, and the attempt to repeal it in the tenth
article of incorporation of the company is vain and nugatory.
2040
STOCK EXCHANGE PRACTICES
If. however, the mission of the bank and the mission of the company are
alilie and linked always in interest and welfare, if the rights and duties of the
two are necessarily harmonious and reciprocal, if the bank at all times must
cooperate with the company and the company with the bank, if tlie officers and
directors of the bank \\ho are also the officers and directors of the coiupan.v can
not come into the predicament of divided allegiance, and, indeed, are in the
service of but onc^ master, then the bank is involved, engaged, particip-.iting in.
and conducting the business of the company, business beyond its chartered
powers, bu.siness that is not national banking."
Only the absolute unity and identity of interest between the two institutions
would afford moral excuse for the fusion of their powers under one control, but
that excuse can not justify transgression of the positive mandate of the national
banking act, which, from considerations of public interest, has determined that
national banking shall be a business apart to be conducted )iy inslitutions
organized for that purpose and for no other.
I am constrained to conclude that as to the bank the agreement violates the
law, in its details, because it impairs and limits the right of transfer of shares,
and because it assumes to bind the tank beyond the possibility of release by
the majority action of its sharehoblers and directors, and in its general plan
and scope, because it embarks the bank in business and ventures beyond its
corporate powers.
The operations under this agreement are proper to be considered, and what
is said in this connection is based uiion a letter of date July 26, 1911. from
President Vanderlip to United States Attorney Wise.
At that date $9,679,000 of the capital stock of the company had been paid
up, showing that more than 96 per cent of the shareholders of the bank had
come into the arrangement.
The company had made investments in the shares of 16 different banks and
trust companies, the aggregate number of shares being 29.178. The market
value of these was not shown. In addition, approximately $3,200,000 had been
invested in other companies of different character.
Of the banks, nine were national banks. The number of shares- held by the
company and the total number of shares of the capital stock of the banks is
as follows :
Total num-
ber of
Comrany's
shares of
holdings
capital
stock of
bank
10
10,000
167
20,000
260
500
30,000
1.000
35,000
2,240
10,000
3,000
3,000
4,324
10.000
9,800
250.000
Second National Bank of New York
Fletcher American National Bank of Indianapolis.
American National Bank of Indianapolis ^
Fourth Street National Bank of Philadelphia
National Shawmut Bank of Boston
Riggs National Bank of Washington
National Butchers & Drovers Bank of New York.
Lincoln National Bank of New York ._
National Bank of Commerce of New York.
I No such bank shown in the American Bank Reporter.
Thus tlie company holds the entire capital st<ick of the National Butchers
& Drovers Bank, not even deducting the shares, 10 each, which its 9 directors
are by the law required to hold in their own right. Tliis bank surely is not
independent of the National City Bank in view of the relations of each to the
company.
The company wants but 677 shares to hold a majority of the capital stock
of the Lincoln National Bank, and practically it may be said that when 4,324
out of 10,000 shares are held in one ownership the control of the corporation
has been secured.
If the National City Bank may extend its powers to the control of two
other national banks, there is no limit to vv'hat it may do in that way. If the
power exists, there is no restraint upon its exercise. By different methods and
under i ther forms the National City Bank is doing, and in larger measure,
what the Supreme Court in Concord National Bank v. Hawkins, supra, declared
to be in contravention of the national banking act.
STOCK EXCHANGE PRACTICES 2041
And the National City Co., considered by itself and apart from its relations
to tlie National City Bank, is also in violation of law. Its charter from the
State of New York exijressly prohibits it from the bu.siness of banking. And
that charter could not confer the power to engage in the business of national
banking. Such power could be conferred only by the laws of the United States.
Section 5133, quoted above, confers the power to form a national banking
association only upon " natural per.sons." Other sections of the law restrict
the place of operations of the association to a single city, town, or village
and require that the directors shall be natural persons, all of whom have a
substantial interest in the bank and three-fourths of whom must be citizens
and residents of tlie State in winch tlie association operates. Then, too, as we
have seen, the bank may not as an investment acquire the shares of anotlier
bank, or, indeed, of any other corporation. The purpose and the result are
that each national bank must be a local, independent, institution, managed bv
natural persons, and not linked by proprietary interest with any other business
than that of national banking.
It is not necessary to consider whether the national banking act absolutely
prohibits the holding of shares in a national bank by a State corporation to
any extent or for any purpose, and it may be conceded that a State corporation
may acquire such sliares as an incident to securing payment of a debt and
hold them to a convenient time for sale, or that an institution like a trust
company may hold them in a fiduciary capacity, but certainly there can be no
liolding of such sliares by any corporation when tlie result is to defeat the policy
of the national banking act ; that is, to destroy the local character of the bank,
break down its independence, vest its control in another corporation, and link
it in substantial proprietary interest with some other business thau national
banking.
The National City Co. may embark in almost any business whatever, and in
fact has made large investments in other enterprises than banking. It has
acquired ownership of all the stock of the National Butchers & Drovers Bank,
a virtually controlling interest in the Lincoln National Bank, and interests of
magnitude in other national banks.
The ownership of property implies duties as well as rights. As the company
owns all the shares of the Butchers & Drovers Bank, it has a duty with
respect to them. It must vote them at shoreholders' meetings, it must elect
the directors of the bank, and decide important questions of policy. If this is
not conducting the business of a national bank how shall it be characterized?
In Anglo-Americ-an Land Co. v. LomWrd (132 Fed. Rep. 721, 1. c. 736), the
Court of Appeals for the Eighth Circuit, in an opinion by Judge Van Devanter,
now a justice of the Supreme Court, held that the acquisition by a Missouri
company of the stock and control of a Kansas company was illegal. He said :
" * * * Where it is not otherwise provided, the implication in a grant
of corporate power and life is that the corporation shall exercise its powers
and carry on its business through its own officers and employees, and not
indirectly, through another corporation operated under its control, and that it
shall maintain an independent corporate existence, and not surrender the con-
trol of its affairs or the exercise of its powers in another corporation. Con-
ceding that a corporation of a private character, not charged with any public
duties, may, in pursuance of appropriate action on the part of its stockholders,
sell all of its property, wind up its affairs, and jiermanentl.v retire from busi-
ness, still, in the absence of express authorization, neither the corporation nor
its stockholders can, incidental to the sale of its property or otherwise, clothe
another corporation with the right to maintain the corporate life or exercise
the corporate powers. These views are sustained, and the reasons therefor
are fully set forth in De La Vergne Co. v. Ornnan Savings Institution (175
U^ S. 40. 54, 20 Sup. Ct. 20, 44 L. Ed. 66), Bueheiie MarhJe & Freestone Co. v.
Earveii (Term.) (20 S. W. 427, 18 L. R. A. 252, 36 Am. St. Rep. 71), Easum v.
Buckeye Brewing Co. (C. C. 51 Fed. 156), and in the cases there cited.
We are dealing with corporations of a public character, with national banks,
which have public duties to perform, and of these it is a peculiar obligation
" to maintain independent corporate existence and not surrender control of
their affairs or the exercise of their powers to another corporation."
No authority is given by the Federal statutes to the national banking asso-
ciations for assigning their powers and delegating their duties to a corporation
created by a State, and which, under its charter from the State, may engage
in a business and exercise powers denied to the banking association by the law
of its creation.
2042 STOCK EXCHANGE PRACTICES
Here iigain it is to be observed that if the power in question exists, it exists
without limit. The company may extend its power to the full control of all
the banks into which it has made entrance. Nor need it stop with these. As
it grows by what it feeds upon it may expand into a great central bank, with
branches in every section of the country. It is, in incipient stage, a holding
company of banks, with added power to hold whatever el.se it may find to be
to its advantage.
Where public law and public policy are involved, forms and fictions are dis-
regarded and the facts are dealt with as facts. In the Northern Securities
Case (193 U. S. 197), the Securities Co. had acquired the majority of the
shares of two great competing railway companies, and this was dealt with in
effect as a consolidation of the railway companies. Judge Harlin, aflirming
the decree of the circuit court, said (p. 326) :
The stockholders of these two comi^eting companies disappeared, as such,
for the moment, but immediately reappeared as stix'kholders for the holding
company which was thereafter to guard the interests of both sets of stock-
holders as a unit, and to manage, or cause to be managed, both lines of railroad
as if held in one ownership. Necessarily by tins combination or arrangement
the holding company in the fullest sense dominates the situation in the interest
of those who were stockholders of the constituent companies ; as much so, for
every practical pui'pose, as if it had been Itself a railroad corporation which
had built, owned, and operated both lines for the exclusive benefit of its stock-
holders. Necessarily, also, the constituent companies ceased, under such a
combination, to be in active competition for trade and commerce along their
respective lines, and have become, practically, one powerful con.solidated
corporation, by the name of a liolding corporation the principal, if not the
sole, object for the formation of which was to carry out the purpose of the
original combination under which competition between the constitutent com-
panies would cease.
So in the Standard Oil case (221 U. S. 1), and in the Tobacco case (221 U. S.
106), the holding of stocks by the principal companies in the various subsidiaiT
companies was recognized and dealt with as engaging in, directing and control-
ling tie business of the subsidiary companies.
Here the National City Co. is not simply to control banks, but it may engage
in any business whatever, even that forbidden by its charter, if, despite its
charter prohibition as to certain kinds of business, it may invest in the stocks
of companies conducting such business. The other enterprises in which the
company is engaged may stand in need of credit and of funds, and it is too
much to expect that the company's banks will deal simply as banks, equitably
and impartially as between its own subsidiaries, and iiersons and corporations
with whom it is not affiliated. The temptation to the .speculative use of the
funds of the banks at opportune times will prove to be irresistible. Examples
are recent and significant of the peril to a bank, incident to the dual and
diverse interests of its ofiicers and directors. If many enterprises and many
banks are brought and bound together in the nexus of a great holding corpora-
tion, the failure of one may involve all in a common disaster. And if the plan
should prosper it would mean a imion of power in the same hands over
industry, commerce, and finance, with a resulting power over public affairs,
which was the gravamen of objection to the United States Bank.
I conclude the National City Co. in its holding of national bank stocks is
in usurpation of Federal authority and in violation of Federal law.
Respectfully submitted.
Solicitor General.
Mr. Covington. Before you finish, Mr. Chairman, may I make a
statement? I think I have a right so to do.
Mr. Pecora. Do you have a right so to do?
Mr. Covington. I think that I have, Mr. Pecora. I am quite ad-
vised of the rights of an investigating committee.
Mr. Pecora. I will ask the chairman to determine whether or not
he has any right to make a statement.
Mr. Covington. I want to call attention to a pertinent fact in
connection with that opinion, and I submit to the committee whether
or not it should be permitted.
STOCK EXCHANGE PRACTICES 2043
The Chaikman. How long a statement?
Mr. Covington. One minute.
Mr. Pecora. All right; let us hear him.
STATEMENT OF J. H. COVINGTON, WASHINGTON, D. C, COUNSEL
FOR THE NATIONAL CITY BANK
The Chairman. Will you give your name on the record, Judge?
Mr. Covington. J. H. Covington, counsel for the National City
Bank.
The Chairman. Where is your office, Judge Covington?
Mr. Co\iNGTON. The Union Trust Building in Washington.
The Attorney General of the United States is charged with the
responsibility of enforcing the law. This opinion was directed to
him. This was simply the opinion of the Solictor General. The
Attorney General qute obviously, in so high-minded a man as Mr.
Wickersham, must have differed with it, for there has been no pro-
ceeding thereafter to undertake to charge the National City Bank
with a violation of the law in conspiracy with the voting trustees
and officers of the National City Co.
Mr. Pecora. I submit that is a gratuitous assumption of the
learned gentleman who made it.
Mr. Covington. Not so much a gratuitous assumption as some
that 3'ou have made from time to time.
The Chairman. We want no more of that.
Mr. Covington. But I want to call attention to the fact that if I
heard it right Mr. Lehmann said that to the Attorney General,
who was then Mr. Wickersham, and it was his opinion.
Mr. Pecor.\. He said that he agreed with him, in an earlier
opinion referred to in this opinion, dated August 1, 1911, and for
the benefit of the learned gentleman who has just placed his observa-
tion on the record, Mr. Chairman, I will repeat
Mr. Covington (interposing). I heard that, Mr. Pecora.
Mr. Pecora. This language from the opinion now spread on the
record. [Reading.]
On August 1, 1911, I submitted to you an opinion in which you concurred
that tlie agreements and arrangements in question were made to enable the
bank to carry on business and exercise powers prohibited to it by the
national banking act.
Did you hear that. Judge Covington?
Mr. Covington. I heard that, Mr. Pecora.
Mr. Pecora. And you still say that the Attorney General did not
concur, do you?
Mr. Covington. I did not say that he did not concur.
Mr. Pecora. Then I misunderstood you. Excuse me.
Mr. Covington. I said the Attorney General was charged with
the responsibility of enforcing the law and obviously came to that
ultimate conclusion, because he did not undertake to proceed against
the National Citv Bank in creating the organization with the Na-
tional City Co., and the fair presumption is that Mr. Wickersham
always obeved the law.
Mr. Pecora. I merely want to say, Mr. Chairman, that the only
purpose I had in seeking to invite General Wickersham to a hearing
before this committee was to have him state, not through an as-
11!»,S52— :r.— FT G 19
2044 STOCK EXCHANGE PEACTICES
sumption by somebody else, but directly and upon his own respon-
sibility whether or not he concurred in the opinion of the Solicitor
General of the Department of Justice who served under his admin-
istration of that department, and what proceedings, if any, were
ever instituted or contemplated to be instituted based upon that
opinion.
The Chairman. The interesting thing to me is the observation
made as to what would be the effect of it if it were done. He seems
to have been a prophet.
Mr. Pecora. You mean Solicitor General Lehmann?
The Chairman. Yes.
TESTIMONY OF CHAELES E. MITCHELL, NEW YORK CITY, CHAIR-
MAN THE NATIONAL CITY BANK OF NEW YORK, CITY BANK
FARMERS' TRUST CO., INTERNATIONAL BANKING CORPORA-
TION, THE NATIONAL CITY CO., AND THE NATIONAL CITY CO.
(LTD.), OF CANADAr-Resumed
Mr. Pecora. Now. Mr. Mitchell, you said that you at one time
had this opinion of the Solicitor General called to your attention.
Did you give it any careful consideration?
Mr. Mitchell. It was so many years ago, Mr. Pecora, that I just
carry in mind that there was an opinion rendered.
Mr. Pecora. Well, have you any recollection of your having given
that opinion serious consideration?
Mr. Mitchell. I understood, as Judge Covington has truly stated,
that the opinion was not acted upon by the Attorney General.
Mr. Pecora. For that reason did you give it no serious consider-
ation ?
Mr. MiTCHEix. That opinion has not had serious consideration by
me. At that time the subsequent line of development of the Na-
tional City Co. was not contemplated. AVhat was contemplated, I
think — of course, this was long before I ever came to the City Co.
or had anj'thing to do with it — was the acciunulation of stocks of
other banks, making the National City Co. somewhat like the present
group banking companj' which is operating extensively in this
country.
Mr. Pecora. Mr. Chairman, according to a letter addressed to
the chairman of this committee by the present Attorney General
of the United States, bearing date of February 20, 1933, only a
carbon copy of the opinion of the Solicitor General of November,
1911, is submitted to tliis committee. Apparently the original is
not to be found among the files of the Department of Justice. I
will put in evidence tlie letter addressed to _you by the Attorney Gen-
eral of the United States, dated Fcbruarj' 20, 1933, on this subject,
and ask that it be spread on the records.
The Chairman. If there is no objection, it will be so ordered.
(The letter is as follows:)
< )KFICE OF THE ATTORNEY GeNEIUL,
Wushinffton, D. C, Fehruary 20. 1933.
Hon. Petek Norbeck,
Chairman Comtmitec on Bankiny and Currenoy,
United States Senate.
My Dear Senator Norbeck: I have your letter of Februar.v 18 asking me
for records of this department relating to the origin of the afBliate svstem in
STOCK EXCHANGE PRACTICES 2045
couiiection with the affairs of the National City Bank of New York for the
use of the subconimittee of the Senate Committee on Banking ami Currency.
I liave caused a search to be made of the files of this department to ascertain
wliether there is anything in them of the kind you desorilie.
There is in tlie files a carbon copy of a memorandum prepared liy Solicitor
General Lehmann, addressed to the Attorney General ( Wickershani ) , dated
November G. 1911. which deals with the legal question involved. I am inclos-
ing this document for tlie use of tlie committee. We liave not had time to copy
it, and I will ask you to please preserve it for return to our files. It relates
to the situation of the National City Bank of New York.
In May, 1932, a copy of this memorandum was handed to Senator Glass,
and I believe it was published in the Congressional Record with the deletion
of the name of the bank mentioned. It appears also from our files that under
date of September 19, 1913, Attorney General McReynolds wrote the Hon.
William G. McAdoo, Secretary of the Treasury, sending him a copy of Solicitor
General Lebnianii"s memorandum, saying :
" In comiiliance with your request I am sending you herewith a photographic
copy of what seems to be a carbon copy of a memorandum prepared by the
Solicitor General on tbi.'< subject. A careful search of the files here fails to
disclose any opinion by the Attorney General in this matter."
It is apparent from Solicitor General Lehmann's memorandum that he had
before him some information as to the situation of the National City Bank
and National City Co., but there is nothing in the files of tlie department,
that we have been able to find, showing how Mr. Lebmann obtained the infor-
mation referred to in his memorandum, and there are no documents in the
file containing any statement of the facts or any information respecting the
situation of the National City Bank and affiliated companies.
The file opens with a letter from Solicitor General Lehmann to the Hon.
Henry A. Wise, then the United States attorney for the southern district
of New York, dated July 7, 1911, referring to an account appearing in the
New York papers respecting the formation of corporations to hold shares of
national banks, and requesting the United States nttoniey to ascertain the
facts, and under date of July 10, 1911, a letter from the United States attor-
ney stating that he would have the matter thoroughly investigated and would
report as .soon as possible, but no such report is contained in the files, although
it may be inferred that tlie facts set forth in Solicitor Lehmann's memorandum
may have been obtained from the United States attorney.
In short, the only document or record in the department that throws any
light whatever on the situation of the National City Bank and its affiliated
companies is the memorandum of Solicitor General Lehmann which is in-
closed. I may add that there appears in the file a letter dated January 19,
1921, from the Comptroller of the Currency to Attorney General A. Mitchell
Palmer requesting that the Comptroller of the Currency be furnished with a
copy of the memorandum of November 6, 1911, prepared by Mr. Lehmann.
and there is a notation on this letter as follows : " Request granted, F. K. N."
The initials are apparently those of former Assistant Attorney General
Nebeker.
In that connection there appears in the files a copy of a letter dated Jan-
uary 26, 1921. to the Hon. John Skelton Williams, Comptroller of the Cnr-
renc.v, which reads as follows:
" I have examined the files relating to the so-called opinion of Solicitor
General Lelimann. dated November 6, 1911. The paper you handed me is
unsigned. It purports to be a photographic copy of a letter addressed to the
Attorney General and intended for the signature of the Solicitor General. The
original is not in the files. The copy bears an unsigned indorsement, dated
April 24, 1913. to the effect that it is understood that Attorney General Wick-
ersham prepared a letter summarizing the attached opinion of the Solicitor
General but to whom this letter is addressed does not appear, and no record
of such a letter is found in the flies. The only thing of interest I find in the
files is a letter of Attorney General McReynolds, dated September 19, 1913,
addressed to Secretary McAdoo, in which it is stated:
■• 111 compliance with your request, I am sending you herewith a photo-
graphic copv of what seems to be a carbon copy of a memorandum prepared
bv tlie Solicitor General on this subject. A careful search of the files here
fails to disclose any opinion by the Attorney General in this matter."
2046 STOCK EXCHANGE PRACTICES
Apparently what was sent to Secretary McAdoo at that time was a duplicate
of the photographic copy which you have.
The only thing in our files is what purports to be a photographic copy of
an unsigned letter to the Attorney General, apparently intended for the sig-
nature of the Solicitor General ; I find no record of what action was taken
by the Attorney General or of any subsequent action except the sending of a
copy to Secretary McAdoo and, for this reason, I do not feel justified in
authorizing the publication of the memorandum.
Respectfully yours,
WiLUAM D. Mitchell,
Attorney General.
The Chaikman. The committee will recess until 10 o'clock Mondaj'
morning, and those under subpoena will appear at that time.
(Accordingly, at 4.15 o'clock p. m., the subcommittee adjourned
until 10 o'clock a. m. Monday, February 27, 1933.)
STOCK EXCHANGE PRACTICES
MONDAY, FEBBUARY 27, 1933
United States Senate,
Subcommittee of the Committee on
Banking and Currency,
Was/imgfon, D. C.
The subcommittee met, pursuant to adjournment on Friday, Feb-
ruary 24, 1933, at 10 o'clock a. in., in room 301 Senate Office Building,
Senator Peter Norbeck presiding.
Present: Senators Norbeck (chairman), Couzens, Townsend,
Fletcher, and Costigan.
Present also : Senators Brookhart, Barkley, Gore, and Reynolds.
Further present: Ferdinand Pecora, special counsel to the com-
mittee: Julius Silver and David Saperstein, associate counsel to the
committee.
The Chairman. The subcommittee will come to order. Mr.
Pecora. whom will we have this morning?
Mr. Pecora. Mr. Baker will please resume the stand.
The Chairman. Mr. Baker will come around to the committee
table. He has already been sworn.
TESTIMONY OF HUGH B. BAKER, PRESIDENT THE NATIONAL
CITY CO., NEW YORK CITY— Resumed
Senator Gore. Mr. Chairman, I want to go over to the Senate, and
I should like permission to ask a question or two here, if I may.
Senator Couzens (presiding). Certainly.
Senator Gore. I do not want it to break in on questions propounded
by counsel to the committee, who is developing his subject in a
general way. If these questions have already been answered by
Mr. Mitchell I do not want them answered now, because I do not
want to tread the same path again. But I was not here at the time
the inquiry was being made as to the National City Co. carrying on
the campaign to sell the stock of the bank in this country.
Senator Couzens (presiding). Go right along. Senator Gore.
Senator Gore. Was it also carrying on a campaign to sell its stock
in foreign countries?
Mr. Baker. There were offerings abroad. Senator Gore; yes.
Senator Gore. How many offices or branches have you abroad?
Mr. Baker. We have an office in London, and — do you mean the
National City Co., Senator Gore?
Senator Gore. Yes. .sir; or the bank, whichever it is, or both.
Mr. Baker. Well, the National City Co. has an office in London,
and in Amsterdam, and in Geneva, and in Berlin.
2047
2048 STOCK EXCHANGE PRACTICES
Senator Gore. And then you liave correspondents, I suppose, in
other countries?
Mr. Bakek. Oh. yes.
Senator Gore. How many?
Mr. Baker. Well, I don't know how many correspondents, but a
large number, of cour.se.
Senator Gore. And in South America as well as Europe?
Mr. Baker. Yes.
Senator Gore. Well, now, at that time did you cable your repre-
sentatives or offices in foreign countries to make offerings of your
stock, of the National City Bank, I mean ?
Mr. Baker. We quoted the markets to them frequently, and gave
our impressions of general conditions as they existed.
Senator Gore. In a selling campaign of the stock, so to speak?
Mr. Baker. Well, I would hardly call it a campaign, but they were
offerings.
Senator Gore. Yes. Can you insert into the record of your testi-
mony some of those communications to your foreign correspondents?
Mr. Baker. I have no doubt I can, but I would have to get those
from the files in New York, Senator Gore.
Senator Gore. Yes ; that is what I mean, about contemporaneously
with the activity in this country to sell the stock of the bank.
Mr. Baker. Yes. I can get that.
Senator Gore. Typical communications to European countries and
to South American countries, for instance.
Mr. Baker. Yes ; I will be glad to do that.
Senator Gore. I have been informed that that is the case, and I
wanted to get that information in the record.
Mr. Baker. All right. A matter of two or three days would not
make any difference on that, would it ?
Senator Gore. No.
(The communications to cori-espondents in foreign countries re-
quested in foreign countries requested by Senator Gore will, when
furnished by Mr. Baker, be inserted at this point in the original
transcript for use of the Government Printing Office in printing the
record. See page 2050.)
Senator Gore. An amendment was included in the Glass bill, that
recently passed the Senate but has not yet passed the House, making
it unlawful for the officers of a bank to borrow from the bank of
which they are officers, and unlawful for a bank to loan to its officers.
Now, what is your judgment in regard to that?
Mr. Baker. Senator Gore, I have to admit that I am not an expert
on those things. My function is the investment banking end of the
work.
Senator Gore. Well, I would not want you to answer if you do not
feel qualified to do so.
Mr. Baker. All right.
Senator Gore. That is all, Mr. Chairman. And I thank you for
this opportunity.
Senator Couzens (presiding). That is certainly all right. Senator
Gore.
Senator Reynolds. Mr. Chairman, I should like to ask one ques-
tion along that line, if I may-
STOCK EXCHANGE PRACTICES 2049
Senator Couzens (presiding). The Senator from North Carolina
is reco<rnized.
Senator Ketnolds. Mr. Baker, what connection did Mr. Charles
E. Mitchell have with the National City Co. ?
Mr. Baker. In these issues we were talking about in 1923?
Senator Keynolds. Yes.
Mr. Baker. I am not sure just what time — yes, he was the presi-
dent of the National City Co at that time.
Senator Reynolds. When did Mr. Mitchell resign?
Mr. Baker. Well, he became chairman in 1929.
Senator Reynolds. He became cliairman of the board of directors,
do you mean?
Mr. Baker. No. It is the office of chairman of the National City
Co. That means the chief executive officer of the company.
Senator Reynolds. Does Mr. Mitchell owe the National City Co.
any money?
Mr. Baker. Not a cent, so far as I know. No ; not a cent.
Senator Reynolds. All right. That is all, Mr. Chairman.
Senator Couzens (presiding). You may proceed, Mr. Pecora.
Mr. Pecora. Mr. Baker, in the course of the testimony which you
gave last week before this subcommittee you stated, among other
things, tliat the National City Co., before sponsoring any security
issues for sale to the public, held a conference of its executive officers,
informal in character, at which the proposed issues were discussed.
Do you recall that testimony ?
Mr. Baker. Yes. I am not sure that I recall those words, but that
was the substance of it.
Mr. Pecora. That was the substance of it?
Mr. Baker. Yes, sir.
Mr. Pecora. Did that procedure also apply to issues of foreign
bonds ?
Mr. Baker. Yes, sir.
Mr. Pecora. Will you please tell the subcommittee, generally but
concisely and comprehensively, just what steps were taken by the
executive officers of the company before they reached any judgment
or conclusion with respect to the wisdom or advisability of oifering
a foreign issue to the investment public in this company?
Mr. Baker. Well, of course the general subject would be presented
by the vice president in charge of that particular field. And he
had made his studies, either through representatives of ours having
been in that particular field, or through other contacts that we may
have had there, so that he could present the important facts as re-
gards the credit situation in that country, its general economic con-
dition, history, and so forth ; and of coui-se that, following liis state-
ment, would be discussed, questions would be asked of various other
executives, in which we tried to determine every important factor
connected with that proposed loan.
Mr. Pecora. In other words, it was sought to make an intensive
study of economic and political conditions, that is, political in so far
as tliey might involve the stability of the Government, is that right?
Mr. Bakek. Yes, sir ; that is right.
Mr. Pecora. For that purpose your company had representatives
in various foreign countries.
Mr. Bakek. That is right.
2050 STOCK EXCHANGE PRACTICES
Mr. Pecora. And that applied, of course, to South American re-
publics ?
Mr. Baker. Yes, sir.
Mr. Pecora. Who was the
Senator Couzens (interposing). Let me ask a question at that
point: Do you have any information as to how many South Amer-
ican bonds you sold during the years 1927, 1928, and 1929?
Mr. Baker. I have not in my mind. I would have to refer to
my records on that and compile them. I can easily do it for you,
however.
Senator Couzens. Do you know the approximate amount, can you
give us an approximate estimate?
Mr. Baker. I should not like to guess at that. But I will supply
you with that information this afternoon.
Senator Couzens. Thank you. What South American bonds are
in default?
Mr. Baker. That are now in default?
Senator Couzens. Yes.
Mr. Baker. Peru, Chile, State of Minas Geraes in Brazil, and — I
think those are the principal ones.
Senator Couzens. Those are the only governmental agencies that
you recall that are in default?
Mr. Baker. Yes; they are all that I now recall. And I think that
is right.
Senator Couzens. Are there any private or utility securities in
default?
Mr. Baker. The Lautaro Nitrate Co., which is an industrial
corporation.
Senator Couzens. How soon could you get your information from
your records as to the governmental agencies that are in default, and
also the private or utility or industrial bonds that are in default?
Mr. Baker. Do you mean in their entirety, or the ones we have
been interested in?
Senator Couzens. The ones you are interested in.
Mr. Baker. I can give you that by early afternoon.
Senator Couzens. If you please.
Mr. Baker. I think I can.
(Thereafter the following letter was presented for the record :)
The National City Co.,
New York, March 9, 19S3.
Hon. Peteb Noebeck,
ChainiKni Subcommittee, Banking and Currency Committee,
Sena I c Office Building, Washington, D. C.
Deab Senator Noebeck : In the examination of Mr. Baker at the hearing
Monday, February 27, 1933, before your committee. Senator Gore asked for
insertions in tlie testimony of typical commun'cations from Mr. Baker to
European countries and to South American countries in connection with the
sale of National City Bank stock. The only general communications with
reference to National City Bank stock were those delivered to counsel for the
committee and from which he introduced in evidence certain communications.
These communications were sent by telegi'aph or mail to local oflBces of the
National Cit.v Co. in the United States but copies of them went by mail to
European offices of the National City Co. and therefore represent the communi-
cations iu which Senator Gore may have been interested. As tlie testimony
discloses, such offices were in Europe and not in South America.
At the same day's hearing Senator Couzens inquired as to the South American
bonds sold by the National City Co. which are in default. On the same page
STOCK EXCHANGE PRACTICES 2051
Mr. Baker mentioned the Republic of Peru. Republic of Chile, State of Minas
Geraes in Brazil and the Lautaro Nitrate Co. issues. I find that there should
be added to that list certain issues of the United States of Brazil the Mortgage
Bank of Chile, and the State of Rio Grande do Sul, in which we were interested
as participants.
Very truly yours,
H. S. Law, Secretary.
Senator Couzens (presiding). You may proceed, Mr. Pecora.
Mr. Pecora. Who was the vice president of your company in
charge particularly of South American loans during the years 1927
to 1930, inclusive.
Mr. Baker. Well, there were two, Mr. Pecora; Mr. Byrnes was a
vice president of the company a part of that time and he gave atten-
tion to those things. And he has since retired from our organiza-
tion, but Mr. Schoepperle was also associated with him and carried
on afterwards alone.
Mr. Pecora. Mr. Byrnes severed his connection with your com-
pany about two years ago, didn't he?
Mr. Baker. Yes, sir ; about that time.
Mr. Pecora. He has retired from business so far as you know,
has he?
Mr. Baker. Yes, sir.
Mr. Pecora. Do you know where he is now?
Mr. Baker. Well", he is in this room.
Mr. Pecora. He is in this room now?
Mr. Baker. Yes, sir.
Mr. Pecora. That is Mr. Ronald Byrnes, isn't it?
Mr. Baker. Yes, sir.
Mr. Pecora. Now, it required a unanimous (^pinion on the part
of those executives of the company before an issue was sponsored,
didn't it?
Mr. Baker. Yes; that is correct. It does not mean that we neces-
sarily took a vote on it, but if there were any objections to it we
would not proceed.
Mr. Pecora. Do. you recall an issue of
Senator Gore (interposing). That means that the issues that you
did offer were agreed upon unanimously by those various executives?
Mr. Baker. Yes, sir.
Senator Gore. All right.
Mr. Pecora. Mr. Baker, do you recall an issue of $15,000,000 of
7 per cent sinking fimd gold bonds, issued on March 1, 1927, by the
Republic of Peru?
Mr. Baker. Yes, sir.
Mr. Pecoka. Commonly referred to as the Tobacco Loan?
Mr. Baker. Yes, sir; I remember it. Of course, I know of the
loan generally.
Mr. Pecora. The National City Co. participated in the flotation
of those bonds in this country, didn't itf
Mr. Bakek. Yes, sir.
Mr. Pecora. And, of course, it did so after the question of par-
ticipation in the flotation of that issue had been discussed by the
executive officers and unanimously approved by them?
Mr. Baker. I am quite sure that is correct. Of course, that is
sometime ago, and I was not the president of the National City
Co. at that time.
2052 STOCK EXCHANGE PRACTICES
Senator Couzens (presiding). What was your participation?
Mr. Baker. That is March 16, 1927, did you say, Mr. Pecora?
Mr. Pecora. There were issued on March 1, 1927, 7 per cent bonds
due in 1959.
Mr. Baker. Yes. There were $15,000,000 of those bonds.
Mr. Pecora. Yes.
Mr. Baker. Yes, sir. And I beg pardon. Senator Couzens ; what
was j^our question to me ?
Senator Couzens (presiding). Did you handle the whole of the
issue ?
Mr. Baker. No. We were not handling the entire issue.
Senator Couzens. Who originated them?
Mr. Baker. J. & W. Seligman & Co.
Senator Couzens. Who were your associates in the distribution
of those bonds?
Mr. Baker. Well, of course they handled the syndication of it in
their office. We had nothing to do with the development of tihat
issue. The participants in the syndicate were J. & W. Seligman
& Co. as managers ; National City Co. ; E. H. Rallins & Sons ;
Graham, Parsons & Co.; F. J. Lisman & Co., and Ames Emerich
&Co.
Mr. Pecora. What was your portion of the syndicate ?
Mr. Baker. We had an original position of $S,000,000.
Mr. Pecora. And did you increase it or reduce it?
Mr. Baker. We increased it.
Mr. Pecora. To what extent?
Mr. Baker. In the distributing group we had a position of
$5,000,000.
Mr. Pecora. And is that to be added to your original $3,000,000,
or was that the aggregate amount?
Mr. Baker. No ; that was the total.
Mr. Pecora. Those bonds were offered to the public at 96^?
Mr. Baker. That is right.
Mr. Pecora. What was the spread on that issue to the members
of the syndicate ?
Mr. Baker. Approximately 5 points, or I think it was 5.53,
according to my figiires — no, I mean 5.03 points.
Mr. Pecora. Practically the entire issue was disposed of, wasn't it ?
Mr. Baker. Yes, sir.
Mr. Pecora. Do you know the present market quotation on those
bonds ?
Mr. Baker. I do not, but I think it is about 10, or thereabouts.
Mr. Pecora. It is between 7 and 8, isn't it?
Mr. Baker. That may be.
Mr. Pecora. Now. did your company
Senator Barklet (interposing). Is anybody buying them now?
Mr. Baker. Well, I don't know. There is a transaction occa-
sionally.
Senator Barklet. You are not buying them, are you?
Mr. Baker. No, sir.
Mr. Pecora. Mr. Baker, your company generally had a repre-
sentative in Peru, who was referred to as an expert on South Ameri-
can issues and credits as far back as 1921, did it not?
STOCK EXCHANGE PRACTICES 2053
Mr. Baker. I do not think we had anybody stationed there, Mr.
Pecora. We had representatives from time to time who visited
South America.
Mr. Pecora. Well, do you recall a representative of your company
by the name of Claude W. Calvin?
Mr. Baker. I remember his name. I do not know him.
Mr. Pecora. Have you produced here from the files of your com-
pany a letter from C. W. Calvin to J. T. Cosby, a vice president of
the National City Bank, dated December 9, "li>21. on the subject
of a Peruvian loan ?
Mr. Baker. Was that suppoenaed here?
Mr. Pecora. Yes, sir.
Mr. Baker. I do not know, but I suppose it is here, then.
Mr. Pecora. Have you the letter in question now placed before
you?
Mr. Baker.. Yes, sir; dated December 9.
Mr. Pecora. December 9, 1921.
Mr. Baker. Yes, sir.
Mr. Pecora. J. T. Cosby at that time was a vice president of the
National City Bank, wasn't he?
Mr. Baker. That is right.
Mr. Pecora. I will read the letter into the record :
Copy of letter from C. W. Calvin to J. T. Cosby, vice president, National
City Bank of Xew York, X. Y.
Lima, Peru. December 9, 1921.
Deak Mr. Cosby :
Proposed Peruvian loan by Guaranty Trust Co.
You will doubtless be interested to liave a word from us in regard to the
doings of the committee sent to Peru by the Guaranty Trust Co. to make a
report upon tlie proposed loan to the Peruvian Government. The committee
lias now been here al)Out three weeks, and I understand have made a pre-
liminary report upon the matter, but they are continuing their investigation
and have made no announcement of any sort.
I have talked with tlie members of the commission and they speak in a very
sophisticated manner with reference to conditions here, and appear to be
very well informed. Their somewhat cynical comments in regard to the Gov-
ernment would ordinarily inspire doubt as to the seriousness of their inten-
tion, but this may be a cloak. No information is forthcoming as to when an
announcement in regard to the proposed loan will be made, but I understand
that the committee intends to make several trips into the interior of Peru.
In the meantime the conditions of Government finances is positively dis-
tressing. Treasury obligations are almost impossible to collect. Government
officials and employees are months in arrears in their salaries, and, as one
business man expressed it, the government treasury is " flat on its back and
gasping fur iavath." Witli the export trade continuing small, customs revenues
are not of a large amount, and, unle.ss some sort of loan is fortlicoming in
the near future, I do not see how the government can continue functioning
on the basis of its present income.
Very truly yours,
C. W. Calvin.
Now, that letter has been in the files of the National City Co.
since it was received in December of 1921, has it not?
Mr. Baker. Yes, sir.
Mr. Pecora. Do you recall whether or not the information em-
bodied in this letter concerning the financial and trade conditions
in Peru, was discussed and considered by the executives of the com-
pany when they decided to participate in the flotation of this loan
in 1927?
2054 STOCK EXCHANGE PRACTICES
Mr. Baker. Well, I do not reinemher specifically that this letter
was read or discussed, but of course that was several years later,
and there were as full discussions as we could have on the situation.
Mr. Schoepperle and Mr. Byrnes, of course, would be thoroughly
familiar with the answer to your question.
Mr. Pecora. Yes. But you were one of the executives in 1927
that approved the flotation of this issue, were j^ou not?
Mr. Baker. Yes, sir.
Mr. Pecora. Do you recall whether the committee, or rather the
executive officers in their informal discussions and considerations
had before them the contents of the files of the company on Peruvian
credits ?
Mr. Baker. Well, I do not recall that we had. But I think we
must have undoubtedly had that.
Mr. Pecora. Have you produced here in response to the subpoena
served upon you on behalf of this committee, a memorandum dated
April 2, 1923, written by this Mr. Schoepperle whose name you
mentioned a few minutes ago, and captioned " Memorandum re
Peruvian Govermnent Financing"?
Mr. Baker. Yes; I have that.
Mr. Pecora. Now, will you follow me while I read the following
extract from that memorandum
Senator Gore (interposing). What is the date of that memo-
randum ?
Mr. Pecora. April 2. 1923.
Senator Gore. All right. Excuse me.
Mr. Pecora. Oh, that is all right, Senator Gore. Now I read as
follows :
EXTRACT FROM MEMORANDUM DATED APRIL 2, 1023, FROM VICTOR SCHOEPPERLE EN-
TITLED "memorandum be PERUVIAN GOVERNMENT FINANCING"
As reasons for our decliniug the business, we cited the history of Peruvian
credit, the political situation in Peru, and our feeling that the moral risk was
not satisfactoi-y. Mr. Eakins asked whether there was any prejudice toward
A. B. Leach & Co. in reaching our conclusion, and I assured him that this was
not the case, and that we had considered the matter purely as a proposition
between the Peruvian Government and the National City Co. for purposes of
reaching the conclusion which we had announced to him.
Do you find that extract in the memorandum that you have before
you?
Mr. Baker. Yes, sir.
Mr. Pecora. On the whole Mr. Schoepperle's report as embodied
in this memorandum was against financing any Peruvian credits,
wasn't it?
Mr. Baker. Yes, at that time.
Mr. Pecora. Because it was considered a bad risk; isn't that so?
Mr. Baker. I assume that must have been his reason there.
Mr. Pecora. Do you know whether that memorandum was con-
sidered by the executive officers of your company when in the early
part of 1927 the company gave its consent to the flotation of this
$15,000,000 issue ?
Mr. Baker. I am quite sure that that was discussed, although, as
I saj^, the specific memorandum I do not recall. But certainly we
went back into all those matters.
STOCK EXCHANGE PRACTICES 2055
Mr. Pecora. Well, now, if this memorandum was discussed there
was nothing in it, was there, that encouraged the officers in floating
this loan ?
Mr. Baker. Certainly not at that particular time.
Mr. Pecora. Who is the Mr. Eakins whose name is mentioned in
this memorandum ?
Mr. Baker. He evidently was at that time representing the firm of
A. B. Leach & Co.
Mr. Pecora. And theA' are an investment banking house, aren't
they?
Mr. Baker. Yes, sir.
Mr. Pecora. It is the practice among investment bankers and deal-
ers to exchange information from time to time with regard to these
foreign credits particularly ; isn't that so ?
Mr. Baker. Yes, sir ; that is so.
Mr. Pecora. Now. have you produced here from your files with
regard to these Peruvian loans, a memorandum addressed to Mr.
Cosby, a vice pretiident of your company, from E. A. K., and E. A.
K. is Mr. Eakins, isn't it?
Mv. Baker. I am not sure about that.
Mr. Pecora. Well, anyway, it is signed by E. A. K.
Mr. Baker. Yes, sir.
Mr. Pecora. Have you that memorandum now before you?
Mr. Baker. Yes. sir: I have it.
Mr. Pecora. Do you find the following extract, and will j'ou follow
me while I read it :
EXTRACT FROM MEMORANDUM FOR MR. COSBY FROJI E. A. K., MAT S, 1923, DUXSMUIB
RAILWAY CONCESSION IN PERU
As far as the attitude of the City Co. is concerne<l in connection with this
financing, it may be mentioned that the history of Peruvian credit, the political
situation in Peru, and the company's feeling regarding the moral risk have
hitherto caused them to avoid Peruvian financing. Moreover, while the to-
bacco monopoly may he profitable, it appears very doubtful whether the rail-
ways will be profitable for a long time to come, and the Government appears
to "be determined to use all the tobacco monopoly's profits for railroad con-
struction.
Do you find that ?
Mr. Baker. Yes. sir.
Mr. Pecora. What is the date of this memorandum ?
Mr. Baker. 1923. Mav 8.
Mr. Pecora. It is dated May 8. 1923 ?
Mr. Baker. Yes.
Mr. Pecora. Do you recall whether this memorandum was con-
sidered by the executive officers of the company when they decided
to participate in this issue?
Mr. Baker. Why. I answer that as I did the other, that I do not
recall the specific inemorandum, but I again say I have no doubt it
was discussed.
Mr. Pecora. Can you tell the subcommittee wlto the E. A. K. re-
ferred to is?
Mr. Baker. No. I am sorry I cannot answer that, unless I con-
fer here.
2056 STOCK EXCHANGE PRACTICES
Mr. Pecora. Well, you may confer if that will enable you to
answer.
Mr. Baker. It is Mr. Kircher.
Mr. Pecora. "VVliat was his relationship to the National City Co. *
Mr. Baker. He was with Mr. Schoepperle, in his department.
Mr. Pecora. That is, in the South American department?
Mr. Baker. Yes.
Mr. Pecora. And this memorandum came from Mr. Kircher, in
Peru at the time?
Mr. Baker. I do not know whether he was in Peru at the time or
not. I can not tell from my memorandum that I have here. Ap-
parently this was made in the office in New York.
Mr. Pecora. Now, who is Mr. Dunham 'I
Mr. Baker. He is not with us, but he was with us also as somewhat
of a student of conditions in various parts of the world.
Mr. Pecora. Particularly in South America ?
Mr. Baker. Yes. I think his duties included South America
among others.
Mr. Pecora. Have you produced here from your files a memo-
randum signed by Mr. Dunham, addressed to Mr. Byrnes, whom
you have referred to as a vice president of the company at that
time, with resiJect to Peruvian credits, dated July 11, 1923?
Mr. Baker. Yes.
Mr. Pecora. Have you the original of that memorandum before
you?
Mr. Baker. Yes, sir ; I have it.
Mr. Pecora. Now, let me read it for the purpose of the record :
memorandum foe mb. byenes
July 11, 1923.
Mr. Eakins, of A. B. Leach & Co., has approached us again with a repre-
sentative of the Foundation Co. in regard to a $6,000,000 Peruvian loan. Mr.
Eakins says he had this biLSiness up with Mr. Schoepperle last April but on
account of the little time available before a decision had to be made, we
turned it down. In a memoradum dated April 2, in our flies, Mr. Schoepperle
says : * * * on Thursday, March 29, we advised Messrs. Eakins and
Swetsch that we did not care to enter into negotiations for this business. A3
reasons for our declining this tmsiness we cited the history of the Peruvian
credit, the political situation in Peru, and our feeling that the moral risk was
not satisfactoi-y.
I do not see any reason now to change our attitude. It is my feeling that.
if we ever do go into Peruvian business, we ought to go in in a big way and
not in these piecemeal propositions. We can not go in in .i big way without
making a real investigation, perhaiis somewhat along the lines that the Guar-
anty made, with the idea of having foreign control of the customs and certjiin
internal revenues.
I understand that most of the recommendations which the Guaranty made
have not yet been put into force, except the establishment of a new bank of
issue.
Our information shows that conditions in Peru are improving ; the political
situation is better but is largely dependent upon the continuance of the present
administration in power, and a good deal of opposition is met in Congi'ess when
reforms are proposed by the President.
I have in mind to tell Mr. Eakins that we are not disposed to go into this
business.
Dunham.
(Note in ink at bottom of memorandum:)
I notified Mr. Eakins that we would not be interested in this $6,000,000 prop-
osition— that our ideas have not changed.
Dunham.
STOCK EXCHANGE PRACTICES 2057
Now there is nothing in that nie)noran(him which would give en-
couragement to the financing of Peruvian credits in this country,
is there?
Mr. Bakek. No, sir; not as to that.
Mr. Pecora. Is Mr. Dunham still employed by the National City
Co.?
Mr. Baker. No, sir.
Mr. Pecora. How long ago was his connection with the comjjany
severed ?
Mr. Baker. I should think probably 3 years ago, or, say, 2 or 3
years ago.
Senator Couzens (presiding). Your turnover seems to have been
quite large.
Mr. Baker. We had quite a large organization, and it is very
much reduced on account of economy.
Mr. Pecora. Now, Mr. Baker, have you produced from your files
a letter addressed to Mr. T. A. Eakins, care of Messrs. A. B. Leach
& Co., New York City, dated July 12, 1923, and signed by the man-
ager of your foreign department?
Mr. Baker. Yes ; I have that.
Mr. Pecora. Have you got it before you now?
Mr. Baker. You said July 12?
Mr. Pecora. July 12, 1923.
Mr. Baker. That is right.
Mr. Pecora. I will read the text of the letter :
LETTER TO MR. T. A. EAKINS. CARE OF MESSRS. A. B. LEACH & CO., NEW YORK CITY, N. Y.
JUI,Y 12, 1923.
Dear Mr. Eakins : Confirming our telephone conversation of this afternoon
with your office, we have received tlie following cable from Mr. Schoepperle in
London :
" Convey following message collect to A. B. Leach & Co. in answer to their
direct cable. July coupons Peru 5 per cent loan 1920 now in default. Various
coupons have been in arrears recent years. Peru has defaulted on earlier
loans according Corporation Foreign Bondholders. Peruvian corporations
contract situation confused. No indications Peruvian loans under discussion
London, England. Would not consider new loan good \rtthout specific ade-
quate pledge. Continuance of Cumberland in ofl3ce subject entirely to wishes
of Government, therefore much depends upon political situation even if ade-
quate pledges available; 5 per cent 1920 loan quoted London, England, 45,
50; 51/2 per cent loan 1909 quoted 94, 96. Recent 7% per cent guano loan 98
par."
Very truly yours,
A. W. Dunham,
Manager, Foreign Department.
By whom is that letter signed ?
Mr. Baker. The initials are those of A. W. Dunham.
Mr. Pecora. Now, in determining whether or not the foreign
credits should be sponsored by your company to the investing public
here, was the past record of the prospective debtor nation taken
into account?
Mr. Baker. Yes, sir.
Mr. Pecoka. The information embodied in this letter, which quotes
a cable sent from London by the National City Co.'s representative,
Mr. Schoepperle, called attention, did it not, to the fact that the
2058 STOCK EXCHANGE PEACTICES
Peruvian Government in 1923 was in default on several of its prior
issues ?
Mr. Baker. That is right.
Mr. Pecora. There was nothing in that situation which coniniended
a Peruvian line of credit or a Peruvian loan, was there ?
Mr. Baker. Not at that time ; no, sir.
Mr. Pecora. Now, to get back to this Peruvian tobacco loan of
March 1927: Have you produced here, Mr. Baker, the original
memorandum to Mr. Dunham of your company, signed by C. M.
Bishop, under date of July 12, 1923 ?
Mr. Baker. Yes, I have that here.
Mr. Pecora. I want to read the following extract from that memo-
randum :
Peru has been careless in tlie fulfillment of contractual obligations. City of
Lima 5 per cent loan coupons, clue January 1, 1922, were not paid until the
following May, 1922. The Peruvian 5 i)er cent gold bonds of 1920, due in
January, 1922, were paid in September, 1922. and those due in July, 1922, were
paid in October of 1922. The Loudon Times, in its issue of Marc-li 30, 1922,
alluded to Peru's " frequent unobservance of her undertakings to the Peruvian
Corporation, her broken pledges over the Chimbote concession, and her flagrant
disregard of guarantees given to the North Western Railway of Peru."
C. M. Bishop.
Now, who is Mr. Bishop?
Mr. Baker. I Just don't know that.
Mr. Pecora. He was connected with the foreign department of
the National City Co. in July, 1923, wasn't he?
Mr. Baker. May I ask Mr. Schoepperle who he was?
Mr. Pecora. Surely.
Mr. Schoepperle. He was an employee.
Mr. Baker. He was; yes sir.
Mr. Pecoka. Emploved in the foreign department of the National
City Co. in July, 1923"'?
Mr. Bakeb. That is right.
Mr. Pecora. There is nothing in that memorandum which would
give encouragement to the flotation of Peruvian bonds?
Mr. Baker. No, sir.
Mr. Pecora. Have you produced here in response to subpoena from
the files of your company a paper marked " Peruvian Study. A
table of the revenues and expenditures of Peru for the years between
1915 and 1924"?
Mr. Baker. I suppose that is in this file. I think if you have no
objection Mr. Schoepperle can produce that for us.
Mr. Pecora. All right. Mr. Schoepi>erle can help you locate
that ?
Mr. Baker. Mr. Schoepperle, can you help me locate that?
Mr. Schoepperle. Yes (handing documents to Mr. Baker).
Mr. Baker. Is this it?
Mr. Schoepperle. Yes. We have a table here. I do not have the
date. There is no date on it.
Mr. Pecora. I suggest that Mr. Schoepperle be sworn, Mr. Chair-
man, so that I may question him about this.
STOCK EXCHANGE PRACTICES 2059
TESTIMONY OF VICTOR SCHOEPPERLE, SHORT HILLS, MELBURN
TOWNSHIP, ESSEX COUNTY, N. J., VICE PRESIDENT NATIONAL
CITY CO.
Senator Couzens (presiding). Mr. Schoepperle, do you swear to
tell the truth, the whole truth, and nothing else but the truth in this
investigation, so help you God?
Mr. Schoepperle. I do.
Mr. Pecora. Mr. Schoepperle. will you kindly give your full name,
address, and business or occupation to the reporter ?
Mr. Schoepperle. Victor Schoepperle : occupation, vice president
of the National City Co. ; address. Short Hills, Melburn Township,
Essex County, N. J.
Mr. Pecora. How long have yon been vice president of the Na-
tional City Co.?
Mr. Schoepperle. Since about May, 1927, April or May.
Mr. Pecora. Prior to that time were you connected in any other
capacity with the company?
Mr. Schoepperle. Prior to that time I was an assistant vice presi-
dent of the National City Co.
Mr. Pecora. For what period of time?
Mr. Schoepperle. I think three or four years prior to 1927.
Mr. Pecora. Did j'ou have any connection with the company prior
to that period?
Mr. Schoepperle. Prior to that period, j'es; I had been connected
with the company as an officer in a minor capacity from 1916 on.
Mr. Pecora. Were you connected with any particular department
of that company ?
Mr. Schoepperle. I was connected with the foreign department
of the National City Co. from about 1919 on.
Mr. Pecora. To the present time?
Mr. Schoepperle. To the present time ; yes, sir.
Mr. Pecora. So that since 1919 practically all your sei'vices have
been in connection with foreign loans and credits participated in by
the National City Co. ?
Mr. Schoepperle. Practically speaking; yes.
Mr. Pecora. For a period of time were you in charge of Soutli
American credits for the company?
Mr. Schoepperle. In a general sense; yes.
Mr. Pecora. You have been ]n-esent at this hearing this morning
since the examination of Mr. Baker was resumed, haven't you?
Mr. Schoepperle. I have.
Mr. Pecora. And liave you heard the testimony he has given this
morning ?
Mr. Schoepperle. Yes; I have.
Mr. Pecora. You are the Mr. Schoep]3erle referred to in some of
the communications that have been read either in whole or in part
into the recf)rd this morning, are you not?
Mr. Schoepperle. I am; yes.
Mr. Pecora. Now, I will ask you, because of your greater familiar-
ity with the files of your company with respect to Peruvian loans
whether there has been produced here a table showing the revenues
and expenditures of the Government of Peru for the vears between
191.5 and 1924.
11(IS.52— .33— PT 6 20
2060 STOCK EXCHANGE PRACTICES
Mr. ScHOEPPERi/E. There has been, sir.
Mr. Pecoka. Will you look at that table and tell us if it is not
the fact tliat during that period the Government of Peru had suc-
ceeded in balancing its budget only for 3 years ; that is, on only three
occasions during that 10-year period?
Mr. ScHOEPPERLE. Yes ; that appears on the table of expenditures
which goes with this file, table on revenues.
Mr. Pecora. Yes ; and that table shows that as a general rule the
expenditures year by year exceeded the revenues by substantial
amounts, does it not ?
Mr. ScHOEPPERLE. Well, would you mind if I were a little more
specific ?
Mr. Pecora. Yes.
Mr. ScHOEPPERLE. lu 1915 there appears according to these tables
to be a deficit of 157,000 Peruvian pounds.
Mr. Pecora. A Peruvian pound is equivalent to what in American
dollars?
Mr. ScHOEPPERLE. At that time it was equivalent to the pound
sterling, $4,867.
Mr. Pecora. Go ahead.
Mr. ScHOEPPERLE. Now, to coutinuc
Mr. Pecora (interposing). What is the proportion of excess of
the expenditures over the revenues for that year? I mean, give it
to us approximately.
Mr. ScHOEPPERLE. Yes. I do not want to delay your proceedings
at all, but I want to be fairly accurate; 2,829,000 divided into 157,000
[calculating] — for that year, 1915, under discussion, about 7 per cent.
Mr. Pecora. "Wliat other detailed answer do you want to make to
the general question whether the expenditures did not exceed the
revenues almo.st every year during that lO-year-period?
Mr. ScHOEPPERLE. I think I would prefer to accept the statement
that you made in the first instance, that during three of those years
there appears to have been, according to these tables, a surplus of
revenues over the expenditures, and for the balance of the period
under discussion there appears to have been a deficit.
Mr. Pecora. Yes. Now, I will resume the examination of Mr.
Baker.
TESTIMONY OF HUGH B. BAKER, PRESIDENT THE NATIONAL CITY
CO., NEW YORK CITY— Resumed
Mr. Pecora. Mr. Baker, have you produced from the files of your
company with respect to the Peruvian loan a report dated December
16, 1925, signed by E. A. K. ?
Mr. Baker. Is it signed by E. A. K. ?
Mr. Pecora. E. A. K., monographed by E. A. K.
Mr. Baker. Well, I am very soi'ry; I do not find that report.
I will be very glad to take any transcript you may have of it.
Mr. Pecora (handing document to Mr. Baker). Perhaps this will
help you locate it.
(Mr. Baker and Mr. Schoepiierle perused documents.)
Mr. ScHOEPPERLE. Mr. Pecora, for the purpose of the record and
not to delay the ]n-oceedings, I think Mr. Baker would accept this
as a transcript from that i-cport. We will find it.
STOCK EXCHANGE PRACTICES 2061
Mr. Pecora. I understand that a representative of the committee
made that directly from your files.
Mr. ScHOEPPERLE. Yes. We will find that in due course.
Mr. Pecora. I want to read into the record from this memoran-
dum or report the following extracts :
Apparently the iuternal debt of Peru ha.s not yet been placed on a satisfac-
tory footing. The internal debt of 1918, wliicb bears 7 per cent interest, bad
its 1922 and 1923 amortizations in arrears early in 1925, and apparently there
are also some arrears in interest, causing this issue to sell around 54 to 56
per cent in Lima, which is almost as low as the amortizable debt of 1898, which
bears no interest and sells around 50. The default in the 7 per cent issue of
1918 apparently is responsible for the failure of the holders of the vales de
consoladacion issued in 1889 and bearing 1 per cent interest to convert the same
into internal 7's of 1918 at 1-4 per cent of their nominal value, which would
secure approximately the same rate of return.
And also the following extract :
1925 setbacks : The presidential speech made only slight reference to the
flood damages which caused heavy losses to railway property and agricultural
products, which are bound to have a reflex action upon the pre.sent year's
position. This year the government will have to tind a considerable sum for
repairs to railways, roads, and compensation to agricultural interests. Repair's
to the Peruvian Corporations' railway lines alone have entailed an outlay of
about 220,000 Peruvian pounds, apart from the loss of receipts during the
interruption of traffic. In February and March the decrease in gross receipts
was about 100,000 Peruvian pounds, while normal traffic was not restored until
June. Over 35,000 tons of guauo along the shore were dissolved, involving a
75 per cent decrease in the total guano collection anticipated. This loss has
been increased by a decrease in the nitrate content in the remaining dejjosits.
This is particularly disappointing, since the state relies upon the profits of the
guano industry to exceed the high mark set last year, when 280,584 Peruvian
pounds were received.
The improvement in the petroleum output, however, will help to counter-
balance this. The sugar industry has suffered from the decrease in prices,
while exportable supply has been considerably reduced. Cotton also has
suffered, and those engaged in sugar and cotton raLsing have sustained con-
siderable hardships. Unfavorable agricultural conditions here mentioned have
resulted in several commercial failures, while bankers have curtailed credits
to local retailers.
The State has been more punctual in payments of liabilities and pensions,
while stricter economies have been introduced in the various ministries. It is
calculated, that the new import tax will more than correspond to the calcula-
tions upon which it was based, and that customs receipts will continue to show
a healthy advance.
Now, Mr. Baker, you do not consider there was anything in that
report which was favorable to the flotation of Peruvian loans in this
country, do you ?
Mr. Baker. It was not particularly enthusiastic, certainly.
Mr. Pecora. No. And do yon know whether this report was dis-
cussed and considered by the executive officers of the company when
they decided to participate in this Peruvian loan ?
Mr. Baker. I assume it was. I have no doubt but that it was.
Mr. Pecora. Have you produced from among your files a report
addressed bv Mr. Calvin to Mr. Byrnes, of your company, under
date of November 3, 1925 ?
Mr. Baker. November, you say ?
Mr. Pecora. November 3, 1925, Ke Peruvian Government Financ-
ing. That is the title of it.
Mr. Baker. My date is December the 3. Are you sure that is
riffht?
2062 STOCK EXCHANGE PRACTICES
Mr. Pecora. Does that start with a statement : " The general sit-
uation " ?
Mr. Baker. Yes.
Mr. Pecora. That is the one I mean, then.
Mr. Baker. Yes.
Mr. Pecora. You say that is dated December?
Mr. Baker. Yes, December 3.
Mr. Pecora. That is about one and a quarter years prior to the
flotation of this tobacco loan in March, 1927, is it not?
Mr. Baker. Yes.
Mr. Pecora. Do you find the following statements embodied in
that memorandum :
The jrcuoral situatinn of llie Peruvian Government lias improved during the
past two years to tlie extent that I feel renewed consideration should be given
to the advisability of the National City organization Interesting itself in
Peruvian financing.
The poor (■r( dit standing of the Pei'uvlan Government lias been due, in my
opinion, in a oonsiderable measure to causes which to many are not fully
understood.
Mr. Baker. Just a minute, Mr. Pecora.
Mr. Pecora. These are just extracts.
Mr. Baker. Oh, I see. Because you left out what they say there
about the budget balance.
Mr. Pecora. Yes. There follows a historical resume of Spanish
colonies in South America and tlie increase in the tendencies toward
stabilization, does there not ^
Mr. Baker. Yes: and he speaks about the stabilization.
Mr. Pecora. Yes. I am just quoting extracts. Then to re.-ume :
The principal reason for Peru's delay in showing a like improvement was
the war with Chile in 1879 to 1883, which left the country prostrated, with
currency depreciated to nothing, many of its wealthy families ruined, and the
treasury empty, and made it impossible for the country to attend to tlie service
of its foreign indebtedness contracted prior thereto, largely for public im-
provements. Under such conditions a turbulent political ctmdition logically
continued until the election of President Legula in 1919.
Then follows other matter I will not read into the record. Then
I want to read this excer))t :
Despite ti.e unsatisfactory condition of this country's tiuanccs aud the con-
tinued hostility of most of the old aristocracy of the country, which has not
been interested in building up and educating the lower classes, Leguia has
made such progress that I feel the whole Peruvian situation merits renewed
consideration by our institution.
Then follows a discussion of natural resources, and now I will read
this extract :
In conclusion, attention is invited to the fact that the recent loan handled
liy White, Weld & Co. was put out at 7% percent, as against the previous rate
of 8 percent, which is a straw indicating the trend of affairs. I do not and
would not su,i;i;(st the consideration at this time of making loans to Peru upon
the unsecured obligation of the Government, but with designated revenues
specifically set aside to guarantee the service of loans affected and provisions
whereby such revenues would be paid direct to the Lima branch of our institu-
tion by the collecting agencies, I feel that a Pei-uvian Government bond would
offer no greater, if as much, risk as that involved in other issues which have
been fioated by the National City Co. I also feel that, when possible, within
the limits of safe and conservative financing and without affecting unsound
loans, efforts should be made to cooperate as much as possible in furthering
the progress of the branches established abroad by the bank.
Do vou find those extracts correct?
STOCK EXCHANGE PRACTICES 2063
Mr. Baker. Yes, sir.
Mr. Pecora. Now, this Mr. Calvin, who sent that memorandum
to Mr. Byrnes of your company in December 1925 was the gentle-
man who executed the Peruvian national loan agreement as attor-
ney in fact of your company, wasn't he?
Mr. Baker. Mr. Schoepperle will have to answer that question,
having negotiated that.
Mr. Schoepperle. Yes.
Mr. Pecora. Was there anything in that memorandum which en-
couraged the flotation of this tobacco loan in the early part of 1927?
Mr. Baker. The memorandum as a whole seems to show that
jjrogress was being made in the general situation in Peru.
Mv. Pecora. It also showed a picture of general conditions still
somewhat unsettled and disturbed ?
Mr. Baker. Yes.
Mr. Pecora. Both economically and politically?
Mr. Baker. But with a favorable trend.
Mr. Pecora. With a favorable trend?
Mr. Baker. Yes. In the early part there he speaks about the
balancing of budget or nearly so.
Mr. Pecora. What did you understand by this expression embodied
in Mr. Calvin's memorandum of December 3, 1925:
I tlo not and would not suggest the consideration at this time of making
loans to Peru uix)n the unsecured obligatiou of the Government, but with
designated revenues .specifically set aside to guarantee the service of loans
affected and provisions whereby such revenues would be paid direct to the
Lima branch of our institution by the collecting agencies, I feel that a
Peruvian Government bond would offer no greater, if as much, risk as that
involved in other issues which have been floated by the National City Co.
Mr. Baker. Well, that would seem to indicate that he felt that this
credit was sound and if we protected the payment through some
delivery through our branch, collection through the branch of our
institution, so that there would be no possibility of the moneys being
diverted into other channels than for the service of this loan, he
felt that it would be a safe risk.
Mr. Pecora. Did he feel it would be a safe risk, or did he feel
that it would involve no greater risk than those assumed ordinarily
in other loans floated by your company?
Mr. Baker. I think his expression is a very general one, and cer-
tainly there is no possible way of covering our entire issues with one
general expression, because there are so many different types. Muni-
cii^al bonds of one State as compared with the municipal bonds of
another cannot even be entirel}'
Mr. Pecora. You have observed that in the communications I have
read into the record from your files on the Peruvian loan studies,
hazards were pointed out and perils were referred to, making a
Peruvian loan a risky and hazardous thing? You have recognized
that, have you not?
Mr. Baker. Yes ; extending back there to the early days.
Mr. Pecora. Also as late as 1925 ?
Mr. Baker. Yes. There were some reports.
Mr. Pecora. Less than two years before this tobacco loan was
floated ?
2064 STOCK EXCHANGE PRACTICES
Mr. Bakeb. Yes, that is right; but in this 1925 report here —
isn't that 1925? Yes; that was 1925, where he was indicating
progress, and with proper direct support of that loan, specific rev-
enues pledged for it, he regarded it as a proper risk.
Mr. Pecora. In putting out a foreign loan you said before that
the executives considered the credit history?
Mr. Baker. That is right.
Mr. Pecora. Of the foreign government?
Mr. Baker. That is correct.
Mr. Pecoka. As an important element to be considered?
Mr. Baker. That is correct; yes.
Mr. Pecora. And you have noticed that your files refei-ring to the
credit history of Peru show a pretty bad history ?
Mr. Baker. That was a bad history, but, of course, we would
take into consideration improvements that are being made during
that period and approaching that period of this loan of 1927, which
was two years later than this, that if the economic situation and the
political situation and so forth in Peru had sufficiently improved,
our opinion as to what we would regard a good credit in 1927 might
have been an entirely different thing in 1923 or 1924 or 1925.
Mr. Pecora. Do you think that a short period of three or four
years is adequate upon which to revise a determination as to the risk
and peril in a foreign loan
Mr. Baker. Well, I think that that is
Mr. Pecora. When you consider the life of nations, do you think
that an improvement that only manifests itself over a period of
three or four years is sufficient to counterbalance a bad credit record
for many years?
Mr. Baiver. I think that would require a very complete study of
what those improvements are and how they have been developed.
Mr. Pecora. Was that very complete study gi^■en to the question
of this Peruvian loan in 1927 by the executives of your company?
Mr. Baker. I think so.
Mr. Pecora. "Wliat do you recall was ascertained about those im-
provements before you gave approval to it?
Mr. Baker. Well, of course, I can not recall all of the detailed dis-
cussions that took place in those meetings at that particular time.
But as they were discussed and presented to us by Mr. Schoepperle
or Mr. Byrnes there was nothing in the conclusion with which I
disagreed.
Mr. Pecora. Do you recall the testimony of Mr. Mitchell here last
week, that among the factors which influenced the company in ac-
cumulating and selling to the public shares of the comimon stock of
the Anaconda Copper Co., a 30 or 35 j^ear period of earnings, and so
forth, was taken into consideration?
Mr. Baker. Yes; that is right.
Mr. Pecora. Before the decision was arrived at?
Mr. Bakek. That is right. Yes; I remember that.
Mr. Pecora. And that with res^Dect to the putting out of sugar is-
sues in 1923, 1924, and 1925, the Cuban-Dominican sugar bonds that
were the subject of inquiry last week here
Mr. Baker. Yes, sir.
Mr. Pecora. Before the decision was arrived at?
Mr. Baker. Yes.
STOCK EXCHANGE PRACTICES 2066
Mr. Pecora. That a history of some 30 years of the sugar industry
was taken into account?
Mr. Baker. Yes, sir.
Mr. Pecora. In connection with this Peruvian loan your judg-
ment in indorsing this loan seems to have been based on a resume
of three or four years of great imiDrovement as against many years
of bad credit record; is that right?
Mr. Baker. Well, that is not entirely correct, because those studies
even back in the troublesome days of Peru would have to be gone
into in a most careful and thorough way to see the causes of each
one and the general trend of the economic situation in Peru.
Mr. Pecora. Is there anything in your records— it seems there is
nothing within your recollection at the moment — which will indi-
cate what these improvements were that you witnessed in the two
years preceding this March 1927 loan that caused you to arrive at a
judgment not warranted by the prior long bad-credit record of Peru?
Mr. Baker. I think if you would permit those engaged in that
study and negotiation to answer that question we could give you the
details of that.
Mr. Pecora. Who are those persons ?
Mr. Baker. Mr. Schoepperle.
Mr. Pecora. You have no recollection about those improvements,
the nature of them, et cetera, have you ?
Mr. Baker. I have no recollection of the detailed discussion of
that.
Mr. Pecora. Now, do you find among your files on the Peruvian
loan study an unsigned memorandum containing the following
notes :
Peru bad-debt record adverse moral and political risk. Bad internal-debt
situation. Budgetary and trade position about as satisfactory as Chile in
past three years. Natural resources more varied. On economy showing Peru
should go ahead rapidly in next 10 years.
Do you find that among your files ?
Mr. Baker. Yes, sir.
Mr. Pecora. In whose handwriting is that memorandum, if you
know?
Mr. Baker. I think that is Mr. Schoepperle's handwriting.
Mr. Pecora. Will Mr. Schoepperle, please look at it and tell us.
Mr. Schoepperle. Yes ; that is my memorandum.
Mr. Pecora. That is your memorandum. Mr. Baker, do you know
when that memorandum was made by Mr. Schoepperle?
Mr. Baker. No ; I do not.
Mr. Pecora. Mr. Schoepperle. can you answer that question?
Mr. Schoepperle. No; I cannot. There is no date on it and I
haven't much idea.
Mr. Pecora. Perhaps its place of insertion in the file would have a
tendency to fix the date. Will you please look at it for that purpose ?
Mr. Schoepperle. It stands in the file between December 3, 1925,
and July 27, 1927.
Mr. Pecora. Would that indicate to you that the memorandum
was written by you somewhere between those two dates?
Mr. Schoepperle. Oh, certainly. I think it must have been.
Mr. Pecora. That is between December, 1925, and March, 1927?
Mr. Schoepperle. I think so.
2066 STOCK EXCHANGE PRACTICES
Mr. Pecora. And in March. 1927. this loan was floated, this
$15,000,000 tobacco loan?
Mr. ScHOEPPERLE. Tobacco loan; yes.
Mr. Pecora. Now, Mr. Baker, do you know whether that memo-
randum of Mr. Schoepperle was discussed by the executive officers
when they agreed to float this loan or to participate in it?
Mr. Baker. I do not, because I never have seen it before.
Mr. Pecora. Do you recall ever having had any discussion with
your expert, Mr. Schoepperle, prior to giving your sanction to the
flotation of these bonds in March, 1927?
Mr. Baker. As I said, Mr. Pecora, in those meetings there were
discussions that would last for days and hours at a time, in those
days and. of course. I remember there were such discussions, but
the specific points brought up in each one I can not remember.
Mr. Pecora. Do you recall discussions by the executives with Mr.
Schoepperle or in which Mr. Schoepperle's advices and opinions
were sought and obtained by the executives of the company?
Mr. Baker. Oh, yes. Yes; certainly.
Mr. Pecora. Do you recall that Mr. Schoepperle had stated in
substance that his opinion about a Peruvian loan was that it was a
bad — " Peru had a bad debt record " : that " it was an adverse moral
and political risk"; that "it had a bad internal debt situation",
et cetera?
Mr. Baker. Of course, those are headings for some memorandum
that he evidently had prepared, or studies that he had made, in
which he was getting the answer to some of those particular things
himself, and one tiling that I do know is that in these discussions
every point that we could criticize during those discussions was
brought up, and the man in charge of the study and the negotiation
was relied upon to give us the answer to those questions.
]Mr. Pecora. \^^lo was the man in charge of these negotiations
whose judgment and advices you relied upon ?
Mr. Baker. That would be Mr. Schoepperle, and at that time Mr.
Byrnes; Mr. Schoepperle and Mr. Byrnes.
Mr. Pecora. Do you recall that Mr. Schoepperle approved the
making of this loan ?
Mr. Baker. I do not recall a specific vote by Mr. Schoepperle, but
I can assume with positive assurance in my own mind that he did
approve it or we would not have gone ahead with it.
Mr. Pecora. Are you sure of that ?
Mr. Baker. I would be sure of that ; yes, sir.
Mr. Pecora. Well, are you merely assuming that that was the
case, or have you a present recollection that it happened?
Mr. Baker. No; I can not recall definitely that Mr. Schoepperle
was at a specific meeting and said, " Yes, I approve,'' but I am sure
that except as he did approve we would not have proceeded.
Mr. Pecora. Are you sure, too, that before 3-ou reached your judg-
ment to approve this loan you had before you all the written data
and memoranda that I have read into the record and that those vari-
ous reports and data were discussed ?
Mr. Baker. No; I can not say for sure that they were, but I am
positive that the vice presidents in charge of those negotiations and
studies called them to our attention.
STOCK EXCHANGE PRACTICES 2067
Mr. Pecora. Now, have you produced from your files with regard
to this Peruvian loan study a letter dated March 10, 1926, addressed
by Mr. R. M. Bishop, vice president, to Mr. Calvin, manager of
the National City Bank of New York, in Lima, Peru?
Mr. Baker. Yes, sir.
Mr. Pecora. I will read that letter into the record. The letter
is written from Lima, Peru, is it not, or rather a letter addressed to
Mr. Calvin in Lima, Peru?
Mr. Baker. Yes.
Mr. Pecora (reading) :
M.\E0H, 10, 1926.
Mr. M. C. D. Calvin,
TJie National City Bank of Ncic York,
Lima, Peru.
Deak Mr. Calvin : I suknowledge receipt of your letter of February 23
Inclosing copy of a letter of the same date to Mr. Cosby. I regi-et to say there
has been no substantial moditication in the attitude of the National City Co.
toward South American credits since you left here in December. However, I
hope this will not deter you from sending us from time to time such authentic
information as you may have that wouhl throw a proper liglit on the present
and prospective economic, financial, and political situation in Peru.
Very truly yours,
R. M. Btbnes, Vice President.
You will notice from that letter, Mr. Baker, that up to March 10,
1926, which was just about one year before this loan was floated, the
National City Co. had not modified its attitude, which was unfav-
orable toward a Peruvian loan.
Mr. Baker. That is right.
Mr. Pecora. Now, do you find anything at all in your files with
regard to these Peruvian loan studies subsequent to this letter of
Mr. Byrnes's that has just been read into the record dated March 10,
1926, and up to March, 1927, when this tobacco loan was approved
and floated, that gives you more information concerning the sound-
ness of the proposed loan.
Mr. Baker. I do not have it in this file, but again, as I say, that
would be distinctly in the minds of the men who were making those
studies week by week and month by month and keeping in constant
touch with those situations.
Mr. Pecora. "^^Iien the National City Co. in March, 1927, par-
ticipated in the flotation of this $1."'),000,000 Peruvian loan it issued
a circular or prospectus concerning the loan, did it not ?
Mr. Baker. Yes, sir.
Mr. Pecora. Have you a copy of the circular or prospectus before
you ?
Mr. Bakek. Yes ; I have it.
Mr. Pecora. Do you find any mention in it whatsoever of the
bad credit record of Peru which is embodied in the information I
have read into the record from your files?
Mr. Baker. I should have to read this over, Mr. Pecora. [After
perusing document.] No; I do not see anything. It is a secured
loan. I do not see any statements in there.
Mr. Pecora. No statement or information was given to the Ameri-
can investing public in your circular corresponding to the informa-
tion that your company possessed in writing among its files concern-
ing the bad debt record of Peru and its being a bad moral and polit-
ical risk?
2068 STOCK EXCHANGE PRACTICES
Mr. Baker. No, sir.
Mr. Pecora. Who prepared that eircuhir?
Mr. Baker. I don't know who prepared it in our shop. Seligman
evidently jDrepared the circular. They managed the offerings. It
was under their leadership.
Mr. Pecora. But the National City Co. also approved the circular
before it permitted its name to go on it with that of J. & W. Selig-
man & Co., did it not?
Mr. Baker. Yes; that is correct.
Mr. Pecora. Do you recall what officer of the National City Co.
approved that circular ?
Mr. Baker. That would either have been Mr. Byrnes or Mr.
Schoepperle.
Mr. Pecora. Do you know any reason why no information was
conveyed to the investing public on that circular
Mr. Baker. Not at all.
Mr. Pecora. Concerning the bad debt record of Peru
Mr. Baker. No ; I do not.
Mr. Pecora. And its being a bad moral and political risk?
Mr. Bakek. I do not.
Mr. Pecora. And the unsatisfactory internal condition of the
country ?
Mr. Baker. No, sir.
Mr. Pecora. Do you think it was fair to the investing public, to
withhold from it knowledge which the participating bankers had
of this issue when they offered it to the public ?
Mr. Baker. If the conclusions were that that was a thing of the
past and the conditions were proper sui^porting this loan, which
they evidently were in our minds, or we would not have participated
in the loan.
Mr. Pecora. You thinlc it was fair to the public to withhold the
information which you had or your company had, do you, merely
because somebody in your company reached the conclusion that the
loan would be a sound loan?
Mr. Baker. I think it was fair to pi-esent the facts as they existed.
Mr. Pecora. The facts as they existed included this bad-debt
record, did they not?
Mr. Baker. I am speaking about the facts that were then currently
existing.
Mr. Pecora. You mean joii think it was fair to present a con-
clusion based upon facts which could not have been more than a year
old as against a bad-debt record for many, many years prior thereto?
Mr. Baker. I think it would have been better if the whole story
perhaps were included, a description of it, and it is quite possible
that there was some supplemental publication which went into the
history of it. I do not know.
Mr. Pecora. Can you produce any such supplemental publication
that gave the whole history?
Mr. Baker. I can see if it is in the files.
Mr. Pecora. Do you think if the circular that accompanies this
offering in March, 1927, to the investing public had given this bad-
debt record of Peru which is embodied in the various memoranda
read into the record from your files, that the American investing
public would have subscribed at 961/2 to those bonds?
STOCK EXCHANGE PRACTICES 2069
Mr. Bakee. If he saw sufficient income from this tobacco monopoly
to support the loan, I think, yes ; he would have taken the issue.
Mr. Pecora. Despite the fact that much of that information
showed the unsatisfactory agricultural condition, not only of tobacco
but of cotton and sugar in Peru ?
Mr. Bakee. Well, of course, I can not answer what the public's
opinion might have been. I do not know.
Mr. Pecoea. Under all the circumstances was not this a very
highly speculative and risky loan to make? Tell us frankly, Mr.
Baker.
Mr. Baker. Well, I can not answer that question, because, as I
say, we have to get into the question of the support of this loan
through this tobacco monopoly and just what those revenues were
and what we expected them to be. There are so many elements that
enter into that I can not answer that question in
Mr. Pecora. Who was responsible for this printed inscription at
the bottom of the first page of the printed circular which accom-
panied this offering:
The above statements are based on information received partly by cable from
official and other sources. While not guaranteed, we believe them to be
reliable, but they are in no event to be construed as representations by us.
Mr. Baker. What was your question, please?
Mr. Pecora. Who was responsible for the inclusion of that state-
ment in the circular?
Mr. Baker. That is a statement that I think, through general
practice over a long period of years, as far as I know, is on all cir-
culars.
Mr. Pecora. In other words, the National City Co. in putting
out this circular was absolutely unwilling to hold itself responsible
for the information embodied in it, and yet upon that information
it was asking the public to subscribe for the bonds at 96^^ ; is that
right ?
Mr. Baker. That statement that appears on this circulars is merely
stating a fact that we have to the best of our judgment and ability
det€rmined these to be the facts.
Mr. Pecora. And yet you serve notice on the public that you are
not responsible for the statements?
Mr. Baker. That is right. That is what it does.
Mr. Pecora. And you ask the public to be guided by these state-
ments, for which you disavow responsibility, in buying the bonds?
Mr. Baker. But which we do say to the best of our ability and
judgment are correct.
Mr. Pecora. Well, now, it did not take very long to sell the bonds
of this $15,000,000 tobacco loan, did it?
Mr. Bakee. I do not think so. I think it was a very quick issue.
Mr. Pecora. Quick issue. Quickly subscribed for?
Mr. Baker. Quickly sold.
Mr. Pecora. Was there a second Peruvian loan?
Mr. Baker. Yes, sir.
Mr. Pecora. That was floated by the National City Co. in partici-
pation with others in December, 1927?
Mr. Baker. There was a — yes; there was another issue December
21, 1927, again under the leadership of J. & W. Seligman & Co.
2070 STOCK EXCHANGE PRACTICES
Mr. Pecora. When you say " under the leadership of J. & W.
Seligman & Co ", you do not mean to imply that the National City
Co. participated in this issue merely because J. & W. Seligman
took the leadership in it, do you?
Mr. Baker. No. No; because of our own study, of course.
Mr. Pecoea. In other words, the participation of the National
City Co. in this loan flotation was the result of its own independent
judgment?
Mr. Baker. That is right.
Mr. Pecora. What was the amount of that issue in December,
1927?
Mr. Baker. $.50,000,000.
Mr. Pecora. $50,000,000. And at what price were those bonds
offered to the public?
Mr. Baker. Ninety-one and one-half.
Mr. Pecora. What was the spread to the National City Co. in
that underwriting?
Mr. Baker. The total spread in the issue you are speaking of?
Mr. Pecora. Yes; gross spread.
Mr. Baker. Five points.
Mr. Pecora. The issue of March 1927, nine months earlier, was
made at 96%, wasn't it?
Mr. Baker. Yes.
Mr. Pecora. And this one of December, 1927. was made at 911/2?
Mr. Baker. Yes.
Mr. Pecora. A difference of 5 points?
Mr. Baker. The issue of March 16, 1927, was a 7 per cent coupon,
and this one is a 6.
Mr. Pecora. Now, do you recall the discussion among the officers,
the executive officers, of the National City Co., in the course of which
they reached the jvidgment that this $50,000,000 Peruvian loan was
a sound issue to offer to the investing public here ?
Mr. Baker. I recall that we discussed it; yes, sir.
Mr. Pecora. Do you recall the general nature of the discussion
and what facts were presented in that discussion?
Mr. Baker. Not particularly.
Mr. Pecora. Which persuaded the judgment of the executives
that this was a sound loan?
Mr. Baker. Not particularly. I would have to go back through
the files altogether and study that, which I have not. That again
was under the negotiation of Mr. Schoepperle.
Mr. Pecora. Have you produced from your files a letter dated
July 27, 1927, addressed to Mr. Charles E. Mitchell by J. H. Durrell,
vice president and overseas manager of the National City Bank,
formerly in charge of South America ?
Mr. Baker. Yes; I have that.
Mr. Pecora. Now, let me read that letter into the record and you
follow me from the original. That is, I will read the following
extracts from it:
As I see it, tliere are two factors that will long retard the economic impor-
tance of Peru.
Mr. Baker. Just a minute. I have got to find that. Oh, yes;
all right.
STOCK EXCHANGE PRACTICES 2071
Mr. Pecora. The letter is dated July 27, 1927, is it not?
Mr. Baker. Yes.
Mr. Pecora. I will repeat :
As I see it, there are two faetor.s that will long retard the economic impor-
tance of Peru. First, its poinilation of 5,500,000 is largely Indian, two-thirds
of whom reside east of the Andes, and a majorit.v consume almost no manu-
factured products. Second, its principal sources of wealth, the mines and oil
wells, are nearly all foreign-owned, and excepting for wages and taxes, no
part of the value of their production remains in the country. Added to this,
the sugar plantations are in the hands of a few families, a majority of whom
reside and invest their protits abroad. Also, for political reasons, the present
Government has deported some 400 prominent wealthy conservative families,
but allows them to continue to receive and to make use of abroad the income
from their Peruvian properties. As a whole, I liave no great faith in any
material betterment of Peru's economic condition in the near future.
The country's political situation is equally uncertain. President Leguia.
while not having the absolute power possessed by General Gomez in Venezuela,
is the last word in all things political, and usually the first word as well. He
is a forceful character, reputed to be absolutely honest, though surrounded
by a group of rascals, and is highly intelligent and well educated. He has the
army and police well in hand, and it would probably be witliin his power to
continue himself in oflfice when his present term expires in 1929. Unfortu-
nately, his health is bad, and it is reported that he must undergo a serious
operation soon.
I discussed political possibilities in the event of his death or retirement with
many business and professional men during my stay in Lima. While some,
including the United States ambassador, were optimistic, the majority, even
the Presidents political opponents and ill-wishers, believe a revolution or worse
would result. Added to this uncertainty, the Tacna-Arica squabble is giving
most of the business men no little concern, though they believe at last analysis
the United States will refuse to permit open hostilities to break between Peru
and Chile. Incidentally, there is a pronounced pro-American feeling in Pei-u,
and officers of the American Navy are engaged in training that of Peru.
Our business is a peanut proposition. While profits have steadily increased
each year since the branch was established, the volume of its business is not
much greater to-day than it was five years ago, and deposits at June 30 of
this year were actually less than those of the corresponding date in 1922.
Now, President Leguia's administration did terminate a few years
ago, didn't it?
Mr. Baker. Yes. I don't know the exact date.
Mr. Pecora. Do you recall the political conditions that followed?
Mr. Bakek. They were considerably disturbed, yes.
Mr. Pecora. Just as Mr. Durrell in July, 1927, reported that they
probably would be?
Mr. Baker. Yes.
Mr. Pecora. Now, these advices contained in this letter from Mr.
Durrell, dated July 27, 1927, came some foiu- months after the March,
1927, loan was floated, did they not?
Mr. Bakek. Yes.
Mr. Pecora. Were they not out of harmony with any advices you
say had been received for the year prior to March, 1927, and which
you sav probably actuated the judgment of the company in putting
out the March, 1927, loan?
Mr. Baker. There were certainly questions raised there on the
question of exactly what procedure was followed by Mr. Schoep-
perle in charge of these studies in analyzing those questions and
getting the answers to them. Of course, I can not answer that, and
Mr. Schoepperle is here, who handled all those negotiations and all
that study, and he can answer that.
2072 STOCK EXCHANGE PRACTICES
Mr. Pecoea. Mr. Schoepperle was not one of the executives of the
company in March, 1927, was he^
Mr. Bakek. Oh, yes ; he was. He and Mr. Byrnes. You were vice
president [addressing Mr. Schoepperle] 'i
Mr. Schoepperle. I became a vice president in April or Ma}', 1927,
according to my recollection.
Mr. Baker. And Mr. Byrnes.
Mr. Pecora. But you are putting emphasis on Mr. Schoepperle.
Was Mr. Schoepperle a vice president at the time your company
approved this loan in March, 1927?
Mr. Bakek. I do not know whether he was or not, or an assistant
vice president, but Mr. Byrnes was there in charge of that negotia-
tion and those studies, and he is prepared to discuss these things.
Mr. PECOR.V. But these advices embodied in this letter of July 27,
1927, from Mr. Durrell to Mr. Mitchell would be seriously at variance
with any rej^orts that your company might have had between March,
1926, and March, 1927, which prompted you to float this loan?
Mr. Bakek. And they would raise a very big question in our minds,
I have no doubt, on those questions, and they would be gone into
immediatel}' by those men in that department.
Mr. Pecora. Do j'ou i-ecall that they were gone into and discussed
with you as one of the executives at that time ?
Mr. Bakek. I do not recall this specific letter.
Mr. Pecora. Do you recall the advices contained in that letter?
Mr. Baker. Well, Mr. Pecora, what I recall are general discussions
of Peru led by the officers in charge of those studies.
Mr. Pecora. Do you recall the information embodied in Mr. Dur-
rell's letter being discussed at any time during the year 1927?
Mr. Baker. Personally I do not remember the exact particular let-
ter shown to me.
Mr. Pecora. Well, now, some five months after that letter was sent
by Mr. Durrell, the vice president and overseas manager of the
National City Bank at that time, your company participated in the
flotation of the $50,000,000 Peruvian loan, did it not?
Mr. Baker. Yes, sir.
Mr. Pecora. Do you recall upon what information or advices it
concluded that the $50,000,000 loan in December, 1927. was a good
risk to offer to the American investing public ?
Mr. Baker. No, I do not; but our officers in charge of that can
answer that question.
Mr. Pecora You can not answer it?
Mr. Baker. No; I can not.
Mr. Pecora. Do you recall any advices at variance with what Mr.
Durrell wrote in July, 1927. which prompted the company to get
behind a $50,000,000 loan in December, 1927 ?
Mr. Baker. I do not recall the specific discussions on those, Mr.
Pecora; no.
Mr. Pecora. Now, that December loan of $50,000,000 was the loan
with respect to which it was testified that a bribe of four hundred-
odd thousand dollars was paid to the son of President Leguia ? Do
you recall that. Mr. Baker?
Mr. Baker. I do not recall any such word as that used in con-
nection with it.
STOCK EXCHANGE PRACTICES 2073
Mr. Pecoka. Well, what word do von recall was used in connection
with it? Gift, gratuity?
Mr. Baker. Again that is a question that I knew absolutely noth-
ing about at the time. I was not the president oi the company, and
it is a question with which Mr. Schoepperle is familiar and has testi-
fied before a committee here in Washington on.
Mr. Pecorj^. Testified about a year ago?
Mr. Baker. And I think he can answer.
Mr. Pecora. That it was a bribe, didn't he?
Mr. Baker. I do not think he said that, but I am not sure what he
said, but he can answer that question, because he knows about it. I
do not.
Mr. Pecora. Mr. Schoepperle testified that at the time of the pay-
ment of that sum of money, whether it was a bribe, a gift, a gratuity,
whatever it was, he did not know of it?
Mr. Baker. I think that is correct; yes.
Mr. Pecora. But he also testified that he found out about it about
10 days before this $50,000,000 loan was floated ?
Mr. Baker. Yes.
Mr. Pecora. Do you recall his reporting to the executives of your
company about the payment of that sum of money to the son of the
then President of Peru?
Mr. Baker. I do not recall just when he mentioned it in an
officers' meeting; no. I do not remember the date that he men-
tioned it. I do remember there was a discussion about it led by
Mr. Schoepperle.
Mr. Pecora. If any such sum of money was paid to that particular
individual for no apparent reason, that would not be a circumstance
which would make the loan sound, would it? It would not con-
tribute to the soundness of the loan or the risk, would it?
Mr. Baker. Why, no ; of course not.
Mr. Schoepperle. May I make an observation on that point?
Mr. Pecora. I am going to put you on the stand later and you can
testif_y about that.
The testimony that Mr. Schoepperle gave, Mr. Baker, was not
given before this committee, you know that, don't you?
Mr. Baker. Yes.
Mr. Pecora. It was given before a subcommittee of the Senate
Finance Committee?
Mr. Baker. Yes; I know that. That is all right.
Mr. Pecora. That held its hearings under Senator Hiram John-
son's resolution authorizing the committee to make certain investi-
gation ?
Mr. Baker. Yes; all right.
Mr. Pecora. Upon the sale of foreign bonds and securities.
In the course of your discussions with the other executive officers
of the National City Co. concerning these Peruvian loans in 1927,
did you have any conversation with a Mr. Dennis, connected with
J. &"W. Seligman &Co.?
Mr. Baker. I did not.
Mr. Pecora. Do you recall liaving seen any correspondence or
written communications of any kind with Mr. Dennis on the sub-
ject of these Peruvian loans?
Mr. Baker. I do not.
2074 STOCK EXCHANGE PRACTICES
Mr. Pecora. Haven't j'ou in your file a letter dated May 27, 1927,
written from the Peru branch of J. & W. Seligman to Earl Bailie
and J. & W. Seliginan & Co.?
Mr. Baker. Yes ; here it is.
Mr. Pecoea. Discussing conditions in Peru?
Mr. Baker. May 27, 1927; yes, sir.
Mr. Pecoea. Do you find anything in that report or letter which
indicates a Peruvian loan at that time to have been a sound invest-
ment ?
Mr. Baker. I have not studied this. I would like to read this
over completely. [Examining document.] I would have to study
that completely, except
Mr. Pecoea. Well, it is not so very long. Suppose you look at it
Mr. Baker. All right.
Mr. Pecoea. Let me first ask you : Is tiiis the first time that letter
has been brought to your attention ?
Mr. Bakee. It is the first time that I recall it. It undoubtedly
was
Mr. Pecoea (interposing). You found it bound up in the files of
your company relating to its study of the Peruvian loans, did you
not?
Mr. Bakee. Yes.
Mr. Pecoea. Go ahead and read it.
Mr. Bakee (perusing documents). That seems to be a general
study of the situation, Mr. Pecora, in which he is expressing his
views. He raises various questions, and then he speaks about the
currency system, which seems to be sound, he says.
Mr. Pecoea. He does not express any optimistic or enthusiastic
views about Peruvian finances, does he ?
Mr. Bakee. Not particularly, no.
Mr. Pecoea. Now, I believe you said that this $50,000,000 loan
was floated in December 1927 at 9iyo ?
Mr. Bakee. Qli/g.
Mr. Pecoea. What was the market value? What is the market
value of those bonds at the present time, do you know ?
Mr. Baivee. Five or six, I suppose — seven. Very low, almost noth-
ing.
Mr. Pecoea. Do you know that they were quoted last week — that
is, on February 18, at 5% ?
Mr. Bakee. I assume so.
Mr. Pecoea. And that the low for this year was 11/2 •
(There was no resjjonse.)
Mr. Pecoea. Now, have you before you a cop}^ of the circular or
jirospectus that was put out by your company and the other par-
ticipants or underwriters in this loan in offering these $.50,000,000
worth of bonds to the American investing public?
Mr. Bakee. Yes, sir.
Mr. Pecora. Is there a statement anywhere in that circular con-
cerning the bad-debt record of Peru for years past?
Mr. Baker. I have not read this. I would liave to read it entirely
to answer that. But I do not know that there is anything.
Mr. Peci ra. Just look at it so that the record will have your
answer based upon an ac'.iiid examination of the circuhii' which is
STOCK EXCHANGE PRACTICES 2075
before j'ou. See if j-ou find any such reference to the Peru debt
record.
Mr. Baker (perusing documents). "Well, there is a complete story
of the total amount of debts and all that, if you want to
Mr. Pecoea. The total amount of debts without any statement
that Peru was ever in default
Mr. Baker (interposing). No.
Mr. Pecoea. "Was not informing the public of the bad-debt record
of Peru, was it?
Mr. Bakee. No ; it is not.
Mr. Pecora. As a matter of fact, it might mislead the public into
believing that it had always met its obligations in the past, might
it not ?
Mr. Baker. I don't think so.
Mr. Pecoea. What was the purpose of mentioning its outstand-
ing indebtedness without also mentioning its debt record?
Mr. Baker. I can not answer that.
Mr. Pecoea. Do you know anybody that can ?
Mr. Bakee. I think my associate who did this negotiating and this
study can answer it, as I said awhile ago.
Mr. Pecoea. "Well, now, none of your associates could have gone
into this thing without unanimous approval of all the executives,
including yourself, could they?
Mr. Baker. Of course, his studies were made in his department,
as I said this morning, at ^-eat length, and spending a great deal
of time in detailed studj^ ot which a syno^jsis was given to all of us
and discussed fully in our meetings.
Mr. Pecoea. In the circular that accompanied the offering of the
$50,000,000 bond issue of December, 1927, there is the following
statement, is there not, under the caption " General " :
The Republic of Peru is the third largest country In South America, with
an area of approximately 550,000 square miles
Mr. Baker. Just a minute.
Mr. Pecoea. " It has a population estimated at 6,000,000."
Mr. Bakee. Just a minute, Mr. Pecora. I have a different cir-
cular there Oh, here is a paragraph on that. All right.
Mr. Pecora. Do you see it?
Mr. Baker. Yes.
Mr. Pecora. " It has a population estimated at 6,000,000."
Now, as a matter of fact, when that circular was put out your
company had in its files the letter dated July 27, 1927, from Mr.
Durrell, its vice president and overseas manager, to Mr. Mitchell,
in which, discussing the population of Peru, he said:
As I see it, there are two factors that will long retard the economic impor-
tance of Peru: First, its population of 5,500,000 is largely Indian, two-thirds
of whom reside east of the Andes, and a majority consume almost no manu-
factured products.
"Wliy wasn't that detailed information given in this circular along
with the statement that the population of Peru was 6,000,000?
Mr. Baker. I can not answer that.
Mr. Pecora. Did you think it would have had a bad effect on the
flotation of these bonds if the advices contained in Mr. Durrell's
119852— 33— PT 6 21
2076 STOCK EXCHANGE PRACTICES
letter of July 27, 1927, had been given to the investing public
through the medium of a circular?
Mr. Baker. It might have; yes.
Mr. Pecora. You feel pretty sure it would have, don't you?
Mr. Baker. Depending ujjon the character of the remainder of
that population.
Mr. Pecora. Yes. Do you think that the public here would have
subscribed at 91^3 foi" these bonds if they had been given the in-
formation that was given to your company by its overseas manager
and vice president, that " there are two factors that will long retard
the economic importance of Peru " ?
Mr. Baker. You say. Would the public have subscribed with that
statement?
Mr. Pecora. Yes.
Mr. Baker. I doubt if they would.
Mr. Pecora. And do you think that the public would have sub-
scribed to these bonds at 911/4 if they had been told in the circular
that Mr. Durrel in July, 1927, advised the company that '' Peru's
political situation is equally uncertain. I have no great faith in any
material betterment of Peru's economic condition in the near
future?"
Mr. Baker. I doubt if they would.
Mr. Pecora. Do you know vfhj that information was not embodied
in this circular?
Mr. Baker. I do not. We did not write the circular, but evi-
dently we did not altogether agree with some of the things.
Mr. Pecora. You say you did not write the circular — but your
name appears on it.
Mr. Baker. Yes; it was approved by us.
Mr. Pecora. And it was approved by your company ?
Mr. Baker. That is right.
Mr. Pecora. Which makes your company just as responsible as
though it had itself prepared the text of that circular?
Mr. Baker. We were responsible for those statements, subject
to those conditions ; yes. We believed them to be correct.
Mr. Pecora. Do you know why this information was not given
to the investing public in the circular '*
Mr. Baker. No, sir.
Mr. Pecora. Do you know upon whose judgment it was withheld
from the investing public?
Mr. Baker. No, sir.
Mr. Pecora. Do you think that it was fair to the investing public
to withhold this information that your company had about Peru?
Mr. Baker. Well, I think it is fair to present the facts in refer-
ence to Peru, as we tried to do. I do not see any occasion to go into —
going over all of these long studies that have been made in which
the people were not altogether in accord, and in which generally
there were changes taking place, and. as some of them said, the
economic trend was improving and all that. You could write, of
course, a whole book on the subject, giving various people's opinions,
but when we arrive at a conclusion it seems to me that a statement
of the important facts connected with it is what is necessary and
proper.
STOCK EXCHANGE PRACTICES 2077
Mr. PEfORA. And that statement of important facts should have
included the statement of your vice president and overseas mana-
'^er in July, 1027, to the effect that " there are two factors that will
long retard the economic importance of Peru. As a whole, I have
no great faith in any material hetterment in Peru's economic condi-
tion in the near future," and " the country's political situation is
equally uncertain? '" That would have been fair, would it not, to
include that information?
Mr. Baker. If further study of that convinced those in the de-
partment that that was correct.
Mr. Pecora. Have you any evidence before you that convinced you
or any other official of your company at that time that Mr. Durrell's
information was not correct?
Mr. Baker. I haven't it, but as I say — said before — those in charge
of this negotiation can probably answer that question.
Mr. Pecora. Were you exercising your judgment when you gave
j^our approval to this issue, or were j'ou just simply signing on the
dotted line pursuant to somebody else's judgment — some subor-
dinate ?
Mr. Baker. As I undertsood the facts given us bj' those in charge
of those negotiations, I favored it.
Mr. Pecora. You do not recall what the facts were that prompted
you to favor it, do you?
Mr. Baker. No.
Mr. Pecora. You do not recall any facts tliat overthrow all the
presumptions and implications of the written information and ad-
vices that you had in your files ?
Mr. Baker. No.
Mr. Pecora. As you sit there noM', can you recall specifically why
you approved this bond issue?
Mr. Baker. Why, no, Mr. Pecora. These were discussions had
over days and days. I don't remember the specific things that led
up to that.
Mr. ScHOEFrERLE. If you will permit me, I think I could answer
that question in a general way.
Mr. Pecora. Ytiu will be put on the stand, Mr. Schoepperle, I will
examine you about this. [Laughter.]
Now, there was a third Peruvian loan floated by your company
in October, 1928, was there not ?
Mr. Baker. Yes, sir.
Mr. Pecora. And what was the amount of that ?
Mr. Baker. $25,000,000.
Mr. Pecora. $25,000,000. Do you recall the fact.s and circum-
stances that persuaded you to apijrove the offering of those bonds to
the American investing public?
Mr. Baker. Same general discussion as we had on the others.
Mr. Pecora. You do not recall what they were ?
Mr. Baker. Not specifically.
Mr. Pecora. You do not recall now the specific information?
Mr. Baker. No.
Mr. Pecora. Given to you that prompted you to
Mr. Baker. No.
Mr. Pecora. Approve the offering of those $25,000,000
2078 STOCK EXCHANGE PRACTICES
Mr. Baker. I do not.
Mr. Pecoea. Worth of bonds ?
Mr. Baker. No ; I do not.
Mr. Pecora. In October, 1928 ?
Mr. Baker. No.
Mr. Pecora. What were those bonds offered at?
Mr. Baker. Ninety-one.
Mr. Pecora. And what was the gross spread to your company
under the underwriting agreement ?
Mr. Baker. Five points. That is the total, gross.
Mr. Pecora. Have you produced from the files of your company
copy of a report forwarded under date of January 12, 1928, by Kalph
Dalton, vice president of the Foundation Co., to Victor Schoepperle,
vice president of the National City Co? [After a pause.] Have
you got that ?
Mr. Baker. Yes ; I have it.
Mr. Pecora. Tliat is a photostatic copy of a report entitled " Penny
Eeport of 1926." is it not?
Mr. Baker. Yes ; that is right.
Mr. Pecora. Does that report contain the following statement?
The present low value of Peruvian money is due primarily to the fact that
the balance of international payments is unfavorable to Peru, although the
commercial scales show a favorable balance, and this is apparent at a glance
when one considers that metals and minerals, oils, bring into the country only
a part of the real value as shown by the customhouse statistics, for the reason
that the production of these articles is largely in the hands of foreign com-
panies which sell exchange only sufficient to cover their operating costs, and
many other articles leave a part of their value abroad.
Mr. Baker. Yes, sir.
Mr. Pecora. That statement found its way into the possession and
information of the National City Co. on January 12, 1928, did it not?
Mr. Baker. Yes, sir; evidently.
Mr. Pecora. 'Wlio is Ralph Dalton, the vice president of the
Foundation Co.?
Mr. Baker. That is all I know about him.
Mr. Pecora. Did you ever hear of him before ?
Mr. Baker. I don't know him.
Mr. Pecora. There is nothing in that statement which makes Pe-
ruvian loans a good investment, is there?
Mr. Baker. There is nothing in that statement that is particularty
damaging either way or that is favorable. It is a general discussion
of the situation as he sees it.
Mr. Pecora. Don't you think that a statement that — assuming the
statement to be based upon facts — the " present low value of Peru-
vian money is due primarily to the fact that the balance of interna-
tional payments is unfavorable to Peru," and that " metals and
minerals, oils, bring into the country only a part of the real value
as shown by the customhouse statistics, for the reason that the pro-
duction of these articles is largely in the hands of foreign companies
which sell exchange only sufficient to cover their operation costs,
and many other articles leave a part of their value abroad " — don't
you think that is an unfavorable comment on the soundness of a
Peruvian loan?
STOCK EXCHANGE PRACTICES 2079
Mr. Bakek. That would require a study of the whole situation
that produces those conditions, which of course was done, and as to
the details of that particular discussion I do not recall.
Mr. Pecora. Was a circular put out by your company and other
underwriters of this loan, to the American investing public in con-
nection with their offering of these bonds ?
Mr. Baker. Yes.
Mr. Pecora. Does the circular contain this unfavorable comment
by Mr. Ralph Dalton?
Mr. Baker. I don't know.
Mr. Pecora. Well, look at it, will you? You have a copy of it
before you, haven't you?
Mr. Baker (after examining document). I do not see anything
here that relates to it particularly.
Mr. Pecora. Do you see any references in that circular to the
previous bad debt record of Peru ?
Mr. Baker. No.
Mr. Pecora. Do you see anything in that circular, any references
to the factors that were mentioned by Mr. Dalton in his letter to
your company of July 27, 1927?
Mr. Baker. No; I do not.
Mr. Pecora. Wliich caused him to feel and to say that " There
are two factors that will long retard the economic importance of
Peru," and " I have no great faith in any material betterment of
Peru's economic condition in the near future," and that " the coun-
try's political situation is equally uncertain "? Do you?
Mr. Baker. No.
Mr. Pecora. Do you know why those things were left out?
Mr. Baicer. No, sir.
Mr. Pecora. You would not say that the omission of these state-
ments or that information from the circular was purely accidental,
would you ?
Mr. Baker. I don't know why they were not in.
Mr. Pecora. Now, you say these bonds were sold at 91 ?
Mr. Baker. Yes, sir.
Mr. Pecora. And a half — no ; 91, I think.
Mr. Baker. 91.
Mr. Pecora. Do you know what their market value is today?
Mr. Baker. Seven or eight, I think.
Mr. Pecora. Don't you know that on February 18 of this year they
were quoted at 5i/o, or rather at 51/4, and that the year's low has been
4%?
Mr. Baker. That is no doubt correct if you have those figures.
Mr. Pecora. Is there any explanation you care to make other than
you have already made, Mr. Baker, concerning the offering of these
bonds to the American investing public in 1927 and 1928 ?
Mr. Baker. Not if I understand you are going to ask Mr. Schoep-
perle about the technicalities and details of this.
Mr. Pecora. No ; I am asking you now.
Mr. Baker. No.
Mr. Pecora. If there is any explanation you would like to make.
Mr. Baker. No. sir.
2080 STOCK EXCHAlfGE PRACTICES
Mr. PrxoRA. Other than you have already made in your testimony
here this morning.
Mr. Baker. No. sir.
Mr. Pecora. Is there any other information that you can give us
concerning the making of these loans to the Peruvian Government
and the selling of its bonds to the American public ?
Mr. Baker. No, sir.
Mr. Pecora. I suggest we take a recess until 2.30.
The Chairman. The committee will take a recess until 2.30, when
we will again meet in this room. AVitnesses will appear at that
time.
(Accordingly, at 12.45 o'clock p. m., a recess was taken until 2.30
o'clock p. m. of the same day.)
AFTER RECESS
The subcommittee resumed at 2 o'clock p. m. on the e.xpiration of
the recess.
The Chairman. The subcommittee will coaie to ortler. Who will
you have first, Mr. Pecora?
Mr. Pecora. Mr. Baker will take the stand again, please.
The Chairman. He has already been sworn.
TESTIMONY OF HUGH B. BAKER, PRESIDENT THE NATIONAL CITY
CO., NEW YORK CITY— Resumed
Mr. Pecora. Mr. Baker, do you know an organization called the
Investment Bankers" Association of America?
Mr. Baker. Yes, sir.
Mr. Pecora. Is the National City Co. a member of that
organization?
Mr. Baker. Yes, sir.
Mr. Pecora. Of whom does that organization consist, generally
speaking?
Mr. Baker. Of investment banks and dealers of the United States.
Mr. Pecora. How long has the National City Co. been a member
of it?
Mr. Baker. We were members a good many years ago for a con-
siderable time, and then withdrew, and became members again about
a year ago, perhaps, or a year and a half ago.
Mr. Pecora. When did the National City Co. withdraw?
Mr. Baker. Three or four years previous to that.
Mr. Pecora. Do you recall the circumstances of the withdrawal?
Mr. Baker. Yes.
Mr. Pecora. What were they?
Mr. Baker. Principally these : Our objection was based upon the
fact that the Investment Bankers' Association of America as a
national association divided itself up into so-called groups. In other
words, there would be a branch located in various cities of the United
States, and those groups had authority to determine certain plans
and programs of operation, and for us to have a representative
member of that group meant that we had to give him authority to
vote on the question of policy of the company as a whole, which we
were unwilling to do.
STOCK EXCHANGE PRACTICES 2081
Mr. Pecora. Wasn't some question or issue raised at that time
with regard to the unwillingness of the National City Co. to sub-
scribe to certain obligations that the association sought to insist upon
from its members ?
Mr. Bakek. I think not.
Mr. Pecoka. Are you sure of that?
Mr. Baker. There were occasionally disputes, not only with us
but with other members of the association, as to questions of plan
of procedure, and so forth, in the offering of securities. But that
was not the determining factor.
Mr. Pecora. Was any issue involving a question of ethics raised
at that time which had to do with the withdrawal of the National
City Co. from the association?
Mr. Baker. I do not recall that that was the case.
Mr. Pecoka. Would you say you are sure that that was not the
case?
Mr. Baker. Well, I would say I am sure that that was not the
case, except that there were, as I said, discussions in reference to
matters of plan of procedure at various times, not only with us
but with others of the association.
Mr. Pecora. What do you understand by the expression " beating
the gun " as applied to investment bankers' transactions ?
Mr. Baker. That, as I understand it, is an ex^Dression used to
mean that offerings would be made prior to some stipulated time set
for the offering.
Mr. Pecora. Was the ethical question of indulging in the practice
known as '' beating the gun " raised at the time of the withdrawal
of the National City Co. from this association?
Mr. Baker. I do not think so. I am not positive on that.
Mr. Pecora. You are not positive about it?
Mr. Baker. No.
Mr. Pecora. Do you know who would be positive about it?
Mr. Baker. No ; I do not. I would have to check that up.
Mr. Pecora. Do you recall whether or not the National City Co.
was formally accused at that time of having been guilty of this
practice colloquially called "beating the gun"?
Mr. Baker. I do not know that there was any formal accusation.
I think it is fairly general among distributing houses to question
the time of offering by the other.
Mr. Pecora. Do you mean by that answer that the practice of
" beating the gun " was one that was generally indulged in?
Mr. Baker. No; I do not think so.
Mr. Pecora. How was that?
Mr. Baker. No; I do not think so. But I think where one house
failed to get an order because some other house had offered it prior,
would lead to the statement sometimes, frequently, that the other
house had offered the issue prior to the regular time for offering.
Mr. Pecora. Was the withdrawal of your company from member-
ship in that association 3 or 4 years ago, brought about after a con-
ference and discussion of the matter on the part of the executive
officers of the company?
Mr. Baker. I think it was discussed. I don't remember that there
was any particularly formal discussion.
Mr. Pecora. Did you take part in the discussion?
2082 STOCK EXCHANGE PRACTICES
Mr. Baker. Yes.
Mr. Pecora. Whether formal or informal?
Mr. Baker. Yes; I took part. In fact, I think I recommended
that we withdraw.
Mr. Pecora. Due to the fact that you now believe you recom-
mended the withdrawal, can you tell us whether or not the issue of
" beating the gun " was raised against your company by other mem-
bers of the association?
Mr. Baker. I think not in any specific way that I recall.
Mr. Pecoka. Well, was it done in any general way?
Mr. Baker. I have just said, Mr. Pecora, that general statements
of that kind were made from time to time. But I do not know that
there was any specific case brought out or mentioned.
Mr. Pecora. Do you know an organization calling itself the Insti-
tute of International Finance ?
Mr. Baker. I just know that there is such an organization, yes.
Mr. Pecora. What kind of organization is that?
Mr. Baker. I think it is an organization principally for the study
of securities generally.
Mr. Pecora. Of foreign issues?
Mr. Baker. Foreign issues, I think, specifically.
Mr. Pecora. Principally that?
Mr. Baker. Yes.
Mr. Pecora. When was that so-called Institute of International
Finance organized?
Mr. Baker. I don't know.
Mr. Pecora. How long has it been in existence ?
Mr. Baker. I don't know.
Mr. Pecora. Is the National City Co. a member of it or a con-
tributor to it?
Mr. Baker. May I ask Mr. Schoepperle? I think we are, but he
is more familiar with that than I am.
Mr. Pecora. All right.
Mr. Schoepperle. As members of the I. B. A., out of whose budget
there is appropriated a sum of money which supports the institute,
which is supposed to be a joint organization, under the auspices of
New York University and the I. B. A.
Mr. Baker. In that way we contribute to the institute, through
an appropriation made by the Investment Bankers Association of
America.
Mr. Pecora. What are the methods by which the Institute of
International Finance functions?
Mr. Baker. I would have to refer that to Mr. Schoepperle.
Mr. Pecora. Don't you know ?
Mr. Baker. He is in direct touch with it all the time.
Mr. Pecora. Who is the director of that institute?
Mr. Baker. Dean Madden, Mr. Schoepperle tells me.
Mr. Pecora. He is the dean of what institution of learning?
Mr. Baker. Of New York University.
Mr. Pecora. How is that institute supported — by the Investment
Bankers' Association of America?
Mr. Baker. Well, there is a contribution made to its support by
the Investment Bankers' Association of America. There may be
other sources of income that I am not familiar with.
STOCK EXCHANGE PRACTICES 2083
Mr. Pecora. Are you individually a member of the executive com-
mittee of the Investment Banlvers' Association of America*
Mr. Baker. No, sir ; I am not.
Mr. Pecora. Are you familiar with the operations of the Institute
of International Finance at all?
Mr. Baker. Not at all, really.
Mr. Pecora. Do you know of any instances where persons con-
nected with the institute have passed judgments or expressed opin-
ions on foreign issues?
Mr. Baker. Well, I am not sufficiently familiar with that, Mr.
Pecora, to answer. I think Mr. Schoepperle, who is in direct con-
tact with it, knows about that.
Mr. Pecora. Are you a member of the executive committee or
foreign securities committee of the Investment Bankers' Association
of America?
Mr. Baker. Yes ; I am a member of that committee.
Mr. Pecora. "Were you a member of that committee during the
year 1932?
Mr. Bakee. Yes ; I think so. I am not sure whether I was during
the entii-e year or npt, but certainly for a portion of that year.
Mr. Pecora. Does the National City Co. subscribe to their service?
Mr. Baker. I think so, yes.
Mr. Pecora. To what extent ?
Mr. Baker. I don't know.
Mr. Pecora. Do you know of instances where opinions that have
been prepared after examination and survey of the facts by members
of the Institute of International Finance, have been given to the
Investment Bankers' Association of America, or to any of its mem-
bers, and have thereafter been revised by banking houses or invest-
ment bankers who are members of the association ?
Mr. Baker. No ; I don't know.
Mr. Pecora. By the way, Mr. Baker, have you here the so-called
prospectus file of your company with regard to Peruvian loans?
Perhaps Mr. Schoepperle can help you answer that.
Mr. Schoepperle. I do not think we have anything called a pros-
pectus file, although we may. Are you referring to a file of our
prospectuses on Peru?
Mr. Pecora. Yes, exactly.
Mr. Schoepperle. Well, I can readily make one up for you.
Mr. Pecora. Have you a file that contains them?
Mr. Schoepperle. I think I have the whole business here. I have
not a file that contains them, or I do not believe so.
Mr. Baker. Is this what you want, Mr. Pecora?
Mr. Schoepperle. If you' have such a file, Mr. Pecora, I will be
glad to identify it for the purposes of the inquiry.
Mr. Pecora. "You have a file, as I understand, containing all pros-
pectuses in connection with Peruvian loans, and in that file are con-
tained letters submitting the prospectuses for the consideration of
the company.
Mr. Schoepperle. If you will permit me I will be very glad to
have my assistant go back and look in the case of files and see if he
can find anything which corresponds to that description.
Mr. Pecora. Ask him to look for a letter from some member of
the Institute of International Finance with respect to one of three
2084 STOCK EXCHANGE PRACTICES
Peruvian loans that were the subject of testimony at this morning's
hearing, and a reply or replies to that letter from officers of your
company.
Mr. ScHOEPPERLE. All right.
Mr. Pecgra. Now, Mr. Baker, among other purposes of the Insti-
tute of International Finance, do you recall that there was included
the work of preparing articles to be published in magazines and
other periodicals?
Mr. Baker. I have understood so, but I am not familiar with any
of the details of it.
Mr. Pecora. And also the preparation of speeches to be broadcast
over the radio?
Mr. Baker. I have heard that mentioned, but I do not know the
fact.
Mr. Pecora. Did you ever see the report made to the members of
the executive committee — the annual report of the director of the
Institute of International Finance — in which, among other things, he
stated as follows :
It is obvious tliat the director aud the assistant director, under the customs
of academic freedom, can express themselves more completel.v as individuals
than they may in their oflBcial capacities as representatives of the institute.
Mr. Baker. No ; I don't remember having seen that. If I had seen
it I would have sent it directly to the department in charge.
Mr. Pegora. What would that language convey to you concerning
the freedom of action of the director and the assistant director of the
Institute of International Finance?
Mr. Baker. May I read it again ?
Mr. Pecora. Yes; the portion I have underlined.
Mr. Baker. Well, I hardly know, Mr. Pecora, what he has in mind
in that statement, unless they were stating that they could do so in
expressing their own views aside from the institute, without consult-
ing statistics, and so forth, that might be in the Institute.
The Chairman. Speak a little louder, please.
Mr. Baker. I beg pardon, Mr. Chairman. I have not seen that
statement before, Mr. Pecora, and I do not know just what they
meant by that.
Mr. Pecora. Well, I understand this is taken from their annual
report to the executive committee for the past year.
Mr. Baker. Yes.
Mr. Pecora. Wasn't that ever brought to your notice or attention ?
Mr. Baker. It may have been given to me, and if so I would
have immediately passed it over, as I say, to the department in our
organization in direct charge, or directly interested in tliat matter.
Mr. Pecora. Does it indicate to you that the director and the as-
sistant director of this institute felt that their freedom to express
their opinions publicly in their capacities as director and assistant
director, respectively, of this institute, was more or less trammeled?
Mr. Baker. I do not think so. I can not imagine so, because, cer-
tainly, they would not have retained those positions if they felt that
they could not express their conclusions as they arrived at them.
Mr. Pecora. Well, what other meaning could possibly be attached
to those words ?
Mr. Baker. I do not know.
STOCK EXCHANGE PRACTICES 2085
Mr. Pecora. They say here:
It is obvious tliat the director and the assistant director, under the customs of
academic freedom, can express themselves more comiJletely ;is individuals than
they may in their olticial capacities as representatives of the institute.
Do you mean that they were free to express their opinions without
reserve in academic cloisters, while they were not as the official
representatives of the institute?
Mr. Baker. I am sure that I don't know what they had in mind
in making that statement. I have not the slightest idea, and have
never seen the statement before, that I can recall.
Mr. Pecora. Were not the pronouncements of this institute of
interest to you as head of the National City Co., which was one of
the members of tiie Investment Bankers' Association of America,
which in turn helped to support this institute?
Mr. Baker. They were : but, as I say, if they came to me directly
they would go to the department having that in charge for analysis.
Mr. Pecora. That is. without any perusal of their reports by you ?
Mr. Baker. Very likely; yes.
Mr. Pecora. Well, in that way, how did you think you could
exercise a well-informed judgment on matters of policy for your
company in the putting out of foreign issues?
Mr. Baker. If that message, or any other statement which they
made, contained any information that should be called to my atten-
tion it would have been done by the department that studied it.
Mr. Pecora. Then, it was left to the judgment of the subordinate
officers of the company to call these things to your attention, al-
thotigh in the first instance the communication was presented to you.
Mr. Baker. It would have been left to the vice president in charge
of that department.
Mr. Pecora. And this particular portion of the report was never
called to your attention so far as you can recall ?
Mr. Baker. Not that I recall. I have never seen it, so far as I
can recall.
Mr. Pecora. Would you approve of the imj^lications of this
statement ?
Mr. Baker. Well, that depends upon what they are.
Mr. Pecora. Is there any doubt in your mind as to what they are?
INIr. Baker. I say again, I haven't any idea what the professor
had in mind, and I should think the only way I could determine
that would be to ask him. I don't know- what it was.
Mr. Pecora. He has already expressed himself in the words I have
called to your attention. Suppose you read them again and see
what meaning you attach to them.
Mr. Baker, t read it, and I told you I don't know what he meant.
Mr. Pecora. You don't know what that language means?
Mr. Baker. I don't know what he meant.
Mr. Pecora. Is there any word in that extract the meaning of
which you do not understand ?
Mr. Baker. I think not.
Mr. Pecora. The words are all simple enough ?
Mr. Baker. Yes.
Mr. Pecora. The meaning is obvious, isn't it ?
Mr. Baker. Yes; I suppose so.
2086 STOCK EXCHANGE PRACTICES
Mr. Pecora. Why are you unable to understand what is meant
by that phraseology then?
Mr. Baker. Well, I don't know what the gentleman had in mind
when he wrote that particular statement.
Mr. Pecora. Well, he had in mind exactly what he has publicly
charged in tliat statement, hadn't he?
Mr. Baker. I assume he had.
Mr. Pecora. And those words are meaningless to you ?
Mr. Baker. Well, they are meaningless if you ask me to interpret
what was in his mind when he wrote it. I can not do that.
Mr. Pecora. Do you think the English used there is so involved
that the author did not make himself clear?
Mr. Baker. Well, I don't understand just what you are trying to
get me to answer.
Mr. Pecora. I am trying to find out if you attach any meaning
at all to that sentence, or if those words are merely a meaningless
jumble to you.
Mr. Baker. Well, they do not seem to particularly convey any-
thing to me. I don't know what they meant.
Mr. Pecora. Didn't this statement mean specifically that the di-
rector and the assistant director of the institute felt that they had
less freedom to express themselves in their official capacities as
representatives of the institute, than they had as professors in their
institution of learning?
Mr. Baker. That might be implied, but I can not imagine those
gentlemen retaining those positions if they felt they were not free
to express their views.
Mr. Pecora. Now, the institute is supposed to function as an in-
dependent fact-finding body, with respect to foreign issues, is it
not?
Mr. Baker. I think so ; yes, sir.
Mr. Pecora. And yet wasn't it the custom of the director or the
assistant director of the institute to send in advance of publica-
tion a draft of its views to the banking houses interested in the
particular issue in order that they might express their views about
it?
Mr. Baker. I am not sure about that. But I think that is prob-
ably correct. If it is cori'ect our vice president in cliarge of foreign
issues would know about that and can answer that question. Per-
sonally, I have never seen a suggested article that is to appear prior
to its appearance.
Mr. Pecora. You would not say, though, that the practice alluded
to in my former question was not the practice?
Mr. Baker. Not at all. It probably is.
Mr. Pecora. Did the Investment Bankers' Association of America
by that process seek to trammel and fetter or qualify the otherwise
independent judgment of the members of the institute ?
Mr. Baker. That is not my understanding of it at all. I think
it was merely to assist in the presentation of the facts, that if there
were additional facts, information, or figures, to supply them. That
is my idea. I think that is what it was.
Mr. Pecora. Now, from the file that I called for a few minutes
ago and which has just been turned over to me by Mr. Schoepperle
of 3'our company, I find the following letter on the letterhead of the
STOCK EXCHANGE PRACTICES 2087
Institute of International Finance, conducted by the Investment
Bankers' Association of America in cooperation with New York
University, dated August 11, 1928, reading as follows:
Mr. Victor ScHOEPPEKLa
Xcw York City.
Dbab Me. Schoetpekle: We are inclosing a preliminary draft of the pro-
posed bulletin on tlie credit position of I'eru. We sliall greatly appreciate it
if you will be good enough to review this draft and return it at your conven-
ience. As soon as we receive the draft with your suggestions the bulletin will
be sent to press.
Sincerely yours,
John T. Madden, Director.
Does that letter indicate that the director was following the prac-
tice I alluded to a moment ago, and that it was the general practice ?
Mr. Baker. Of conferring with houses generally interested in those
issues ?
Mr. Pecoba. Of submitting their independent views before publi-
cation to the investment banking house interested in the issue.
Mr. Baker. Yes ; I think that would.
Mr. Pecora. And of not presenting them to the public until after
they had been revised by the house of issue or the offering house.
Mr. Baker. Well, I do not know that it means at all that it has
been revised. It has been looked over I suppose to see if there are
any errors or suggestions that could be made. I do not know that
it necessarily means that it has been revised.
Mr. Pecora. Well, for instance, the concluding paragraph says:
"As soon as we receive the draft with your suggestions the bulle-
tin will be sent to the press."
Mr. Baker. Yes; that is all right.
Mr. Pecora. In this same file appears a copy of the following let-
ter, which apparently is a reply to Dean Madden's letter of August
11, 1928, that I have just read. I will read this letter into the
record :
August 15, 192S.
Dra-n John T. Madden,
New York.
Delab Doctor Madden : We have read over with great interest the prelimi-
nary draft of the proposed bulletin on the credit position of Peru which you
sent us with your letter of August 11. We are returning this draft, together
witli memorandum whicli we trust may be of some help to you.
Very truly yours,
Victor ScHOEPPEaiLE, Vice President.
Does that letter also indicate that that was the practice?
Mr. Baker. That we made suggestions?
Mr. Pecora. Yes.
Mr. Baker. Yes.
Mr. Pecora. And that no bulletins were issued by the institute
to the public until after they had been submitted for approval and
suggestions or revision to the issuing liouse or the offering house.
Mr. Baker. Well, I cannot assume that. I do not know. As far
as I know it may be the universal practice that it is submitted to the
house interested, but I do not know about that.
Mr. Pecora. That is all for this witness, Mr. Chairman. Mr.
Baker, you will remain subject to further call.
The Chairman. All right, Mr. Baker.
Mr. Pecora. Mr. Schoepperle, will you resume the stand, please?
2088 STOCK EXCHANGE PRACTICES
TESTEVrONY OF VICTOR SCHOEPPERLE, SHORT HILLS, MELBURN
TOWNSHIP, ESSEX COUNTY, N. J., VICE PRESIDENT NATIONAL
CITY CO. — ^Resumed
Mr. Pecora. Mr. Schoepperle, have you before you copies of the
prospectus of the National City Co. and other underwriters offering
the $15,000,000 bond issue of the Republic of Peru in March, 1927,
that was referred to in the examination of Mr. Baker today?
Mr. Schoepperle. I have.
Mr. Pecora. Have you also the prospectus issued by your com-
pany and the other underwriters offering to the public in December,
1927, the $50,000,000 bond issue of the Republic of Peru ?
Mr. Schoepperle. I have.
Mr. Pecora. And also the circular relating to the issue in October
1928 of the $25,000,000 bond issue of the Republic of Peru ?
Mr. Schoepperle. I have.
Mr. Pecora. Now, take those three prospectuses in their chrono-
logical order : The first prospectus purports to set forth the revenues
of the Government of Peru for the year 1924, does it not?
Mr. Schoepperle. 1924 to 192G inclusive; yes, sir.
Mr. Pecora. I am confining myself first to the year 1924.
Mr. Schoepperle. All right.
Mr. Pecora. What is the statement in that first prospectus as to
what the revenues were in the year 1924 of the Government of Peru ?
Mr. Schoepperle. This statement in this prospectus, signed by
the Minister of Finance of the Republic of Peru, reads as follows:
The revenue of the
Mr. Pecora (interposing). Just give the figure for the revenue in
the year 1924.
Mr. Schoepperle. It is $3,931,594.
Mr. Pecora. $3,000,000, did you say?
Mr. Schoepperle. It is $3,931,594."
Mr. Pecora. No. You are reading the revenues from the pledged
securities only, aren't you?
Mr. Schoepperle. That is right.
Mr. Pecora. Under the caption " Currency and Finances " what
were the revenues set forth in that prospectus, as the entire revenues
of the Government of Peru for the year 1924 ?
Mr. Schoepperle. For 1924 — let me see
Mr. Pecora. It is right there.
Mr. Schoepperle. The thing is put in doubled, 1924 and 1925
together.
Mr. Pecora. Give us first the year 1924.
Mr. Schoepperle. It is $33,905,805.
Mr. Pecora. Now. will you take up the second prospectus, the
one relating to the $50,000,000 loan. Have you that?
Mr. Schoepperle. Yes.
Mr. Pecora. Now, under the caption " Revenues and Expendi-
tures "' what statement is contained there as to the total revenues
of the Government of Peru for the year 1924?
Mr. Schoepperle. The .statement "here is $38,655,800.
Mr. Pecora. That is a difference of over $5,000,000, isn't it?
Mr. Schoepperle. That is true.
STOCK EXCHANGE PRACTICES 2089
Mr. Pecora. Now, will you look at the third prospectus, the one
relating to the $25,000,000 bond issue, of October, 1928. Have you
that there ?
Mr. ScHOEPPERLE. Ycs, sir ; here it is.
Mr. Pecora. What is stated there to be the total revenues of the
Government of Peru for the year 1924?
Mr. ScHOEPPEELE. It is $37,691,325.
Mr. Pecora. Now, you have three different amounts, haven't you?
Mr. Schoepperle. That is right.
Mr. Pecora. Was that noticed by anybody in the foreign depart-
ment of the National City Co. ?
Mr. Schoepperle. It did not need to be noticed. There was a
perfectly clear explanation in the face of the prospectus, in rela-
tion to tliose discrepancies.
Mr. Pecora. Isn't it a fact that in each of those three prospectuses
a different sum is stated as the total revenues of the Government of
Peru for the year 1924 ?
Mr. Schoepperle. It is a fact, but you must remember that the
revenues of the Government of Peru are received by the Government
in Peruvian pounds, and the Peruvian pound has a fluctuating value
when transferred into dollars, which depends upon the value of the
currency at the time the calculation is made.
Mr. Pecora. Is that explanation included in any one or all of the
prospectuses ?
Mr. Schoepperle. Yes, sir ; in all three of these prospectuses.
Mr. Pecora. Wliere?
Mr. Schoepperle. In the first prospectus, last paragraph, it says
"All conversions herein are made at $3.68 to the Peruvian pound."
In the second prospectus it says ''AH conversions are made at the
rate of $3.94 per Peruvian pound." And the last prospectus says
"All conversions are made at the rate of $3.83 per Peruvian pound."
And it points out that the present value of the Peruvian pound is
$4. I think, Mr. Pecora, if you will sharpen up a pencil we can
determine that that is about the explanation.
Mr. Pecora. That is about the explanation ?
Mr. Schoepperle. Yes, sir.
Mr. Pecora. Now, Mr. Schoepperle, you were present this morn-
ing at the examination of Mr. Baker with respect to those three
loans, weren't you ?
Mr. Schoepperle. That is true.
Mr. Pecora. And you heard all his testimony?
Mr. Schoepperle. Yes, sir.
Mr. Pecora. You were for a number of years the so-called South
American expert of the National City Co., weren't you?
Mr. Schoepperle. I never qualified myself as an expert, although
possibly some people may have considered me an expert.
Mr. Pecora. Now, Mr. Schoepperle, before I come to that I am
going back to those three diffei'ent figures set forth in those three
prospectuses. Don't those fluctuations in the value of the Peruvian
pound indicate the instability of their currency ?
Mr. Schoepperle. They do. They represent instability in the
Peruvian currency, and I should like to point out, in connection with
those Peruvian negotiations and the work which we did as one of
2090 STOCK EXCHANGE PRACTICES
the bankers in connection with the Peruvian loans, that one of the
chief points for correction in the program for the reconstitution of
Peruvian finance, was to get the Peruvian pound stabilized so that
it would not be fluctuating from month to month and from year to
year.
Mr. Pecora. So that one of the chief points that actuated the Na-
tional City Co. in putting out these three loans aggregating $90,-
000.000 was just that, was it?
Mr. ScHOEPPEKLE. It was not the chief point.
Mr. Pecora. I mean in the years 1927 and 1928?
Mr. ScHOEPPERLE. It was not the chief point.
Mr. Pecora. Well, was it one of them ?
Mr. ScHOEPPERLE. It was a collateral point, and a point of very,
very great importance.
Mr. Pecora. Was that one of the important collateral points at
least, to stabilize the currency of Peru?
Mr. ScHOEPPERLE. In our efforts to get Peru straightened out. that
certainly was one of the collateral objectives.
Mr. Pecora. And in your efforts to get Peru straightened out you
sold $90,000,000 of Peruvian bonds to the American public?
Mr. ScHOEPPERLE. I sliould like, if you will permit me
Mr. Pecora (interposing). Is that right? You can answer that
yes or no.
Mr. ScHOEPPERLE. I would say in the process of getting the Pe-
ruvian financial situation straightened out we sold those bonds; yes.
Mr. Pecora. Now, let us go to the first loan, of $15,000,000, in
March of 1927.
Mr. ScHOEPPERLE. All right.
Mr. Pecora. Was not a portion of the proceeds of that loan de-
voted to the retirement of existing indebtedness?
Mr. ScHOEPPERLE. I believe it was; yes, sir. That was one of
them.
Mr. Pecora. Who held that indebtedness?
Mr. ScHOEPPERLE. Well, you understand, Mr. Pecora, that there
were five issues of Peruvian bonds outstanding in the American
market, which had been sold in the market during the period 1921
to 1923 by investment houses other than ourselves.
Mr. Pecora. Did the National City Co. have anything to do with
those five issues between 1921 and 1923 ?
Mr. ScHOEPPERLE. No, sir.
Mr. Pecora. You know from the records and files of your com-
pany with regard to the Peruvian studies made during those years,
or the greater part of those specific years, that the advices given to
the company by its agents and officers, including yourself, were
unfavorable to Peruvian loans, do you not?
Mr. ScHOEPPERLE. I most decidedly do.
Mr. Pecora. And then in 1927, knowing that one of the objects
of the $15,000,000 flotation was to retire some indebtedness that had
been put out during those years, did you sanction this loan or issue
of $15,000,000 of bonds to the American public ?
Mr. ScHOEPPERLE. We joined the firm of J. & W. Seligman &
Co., who had arranged the negotiations for this loan, knowing what
the proceedings were; yes, sir.
STOCK EXCHANGE PRACTICES 2091
Mr. Pecora. Did you advise your company to participate in tliat
offering ?
Mr. ScHOEPPERLE. I personally?
Mr. Pecora. Yes.
Mr. Schoepperle. You can see from
Mr. Pecora (interposing). No. Did you? Answer yes or no.
Mr. Schoepperle. I want to put in the record
Mr. Pecora (interposing). Well, first, put in your answer to that
question.
Mr. Schoepperle. Yes, sir; I did.
Mr. Pecor^v. All right.
Mr. Schoepperle. I should like in that connection to make a
collateral statement.
Mr. Pecora. Do you want to explain why you did it?
Mr. Schoepperle. I cei'tainly do. I think we all want to know
how that happened.
Mr. Pecora. But first, you specifically advised the company to
do it?
Mr. Schoepperle. I most certainly did.
Mr. Pecora. In what form were your advices to the company
submitted, in writing or orally?
Mr. Schoepperle. Orally.
Mr. Pecora. To whom?
Mr. Schoepperle. I just mentioned the fact that there is a memo-
randum in the files, which is the only thing I can find that in any
way indicates the position I took at that time. And I have asked,
or suggested, that I might refer to that memorandum, and one para-
graph thereof.
Mr. Pecora. To whom did you make your suggestions or recom-
mendations, was my question.
Mr. Schoepperle. I concurred in the action that was being taken
at the time when the subject was under discussion between Mr.
Byi-nes and the firm J. and W. Seligman & Co. I will take the
responsibility for having reported my views to the executives, al-
though I do not remember the occasion on which I may have made
such a report.
Mr. Pecora. Do you recall when j'ou made that oral report about
the issue?
Mr. Schoepperle. I should say that was about February 11, 1927,
or a little before that.
Mr. Pecora. That was about a month or so before the actual
offering to the public of those $15,000,000 of bonds, wasn't it?
Mr. Schoepperle. Yes.
Mr. Pecora. And you were the author of the memorandum sjaread
upon the record from the files of your company this morning, reading
as follows:
Peru : Bad debt record, adverse moral and political risk, bad internal debt
situation, trade situation about as satisfactory as that of Chile in the past
three years. Natural resources more varied. On economic showing Peru should
go ahead I'apidly within the next 10 years.
Mr. Schoepperle. That is perfectly true.
Mr. Pecora. What information did you have subsequent to the
filing by you of that memorandum regarding Peru as having a bad
] 19852— 33— PT 6 22
2092 STOCK EXCHANGE PRACTICES
debt record and as being an adverse moral and political risk, with
a bad internal debt situation, which caused you in February of 1927
or thereabouts to recommend to your company participation in this
$15,000,000 loan?
Mr. ScHOEPPERLE. A great many things had happened in the mean-
time.
Mr. Pecora. When did they begin to happen ?
Mr. ScHOEPPERLE. They began to hapjaen in February, 1925, which
is the date of a memorandum from which you quoted in part this
morning, signed by Mr. E. A. Kercher.
Mr. Pecora. Yes. What happened then and thereafter?
Mr. ScHOEPPERLE. I am merely pointing out that in that memo-
randum there were — I would like to quote that if you are inter-
ested— some aspects of the Peruvian situation which were in some
measure favorable to the progress that was being made by the
Republic of Peru at that time.
Mr. Pecora. AVhat are they?
Mr. ScHOEPPERLE. I wiU have to read them.
Mr. Pecora. Go ahead.
Mr. ScHOEPPERLE. This is from the same memorandum quoted
this morning, February 16, 1925, E. A. Kercher. It states, in part :
Under the coin]ietent leadership of President Leguia the Republic has made
remarkable progress and appears to have entered upon an era of unusual and
permanent prosperity.
Mr. Pecora. "Unusual and jjermanent prosperity," did you say?
Mr. ScHOEPPERLE. That is what it says.
Mr. Pecora. All right.
Mr. ScHOEPPERLE (reading) :
The more important aebievenients of the Leguia administration during the
last five years include —
1. Establishment of a central reserve bank.
2. Revision and improvement of the budget system.
3. Reorganization of customs department with American assistance.
4. Reorganization of educational system.
5. Placing experts from foreign nations in charge of several administrative
departments.
6. Placing sanitation services under direction of American experts.
7. Contracting with American firms for construction of extensive sanitary
works, modern roads, etc.
8. Marked progress in solving vital problems of irrigation, colonization, rail-
road construction, road building, and the development of water power, agri-
culture, and the mining and cattle industries.
Under President Leguia progress has been made in settling disputes with
neighboring States. A treaty has been signed with Ecuador, while the Tacna-
Ariea dispute is now being arbitrated under American supervision. The
trouble with Colombia is also well along toward an amicable solution.
FOREIGN CAPITAL INVE.STMENTS
Because of its vast natural wealth, developed and undeveloped, the improve-
ment in its national finances and the present policy of developing natural
resources with the aid of foreign capital, Peru is rapidly assuming increasing
Interest in the eyes of American investors. For generations the country has
been a favorite field for the investment of European capital.
And so on, and so forth.
Mr. Pecora. So on and so forth. Did that overcome the implica-
tion of this statement in the report
Mr. ScHOEPPERLE (interposing). You notice there
STOCK EXCHANGE PRACTICES 2093
Mr. Pecoea. Wait a minute. How did you know what statement
I was going to read?
Mr. SciiOErPERLE. Excuse me.
Mr. Pecora. You were ready to say it overcame any implication,
weren't you?
Mr. Schoepperle. I was ready to say tliat that liad not influenced
my previous judgment on the Peruvian situation.
Mr. Pecora. What was your previous judgment on the Peruvian
situation ?
Mr. Schoepperle. It is in the record.
Mr. Pecora. What was it? Tell us now.
Mr. Schoepperle. My previous judgment on the Peru situation
was that Peru was an unsatisfactory political and moral risk, with
a liad debt record, as you have ali'ead quoted from my statement.
Mr. Pecora. And what caused you to revise your opinion to that
effect and to recommend in Febrnary. 1927, to your company its
participation in this $1.5,000,000 loan ?"
Mr. Schoepperle. I have stated that a number of things did hap-
pen in that period, and I have only been able to cite one thus far.
Mr. Pecora. Is that the one you have cited, the one you have just
read from?
Mr. Schoepperle. That I just cited I said did not influence my
judgment particularly.
Mr. Pecora. Well, then, give us something that did influence your
judgment.
Mr. Schoepperle. Here is something that I believe must have
influenced my judgment: This morning I think you read from a
letter dated December 3, 1925, from the manager of the
Mr. Pecora (interposing). From Mr. Calvin to Mr. Byrnes; yes.
Wliat was it in that letter or memorandum of Mr. Calvin to Mr.
Byrnes that influenced your prior judgment, that Peru was a bad
moral and political risk?
Mr. Schoepperle. You put that letter in the record this morning,
and without going back to it I simply refer to it to say that the gen-
eral terms of that letter were not altogether adverse to Peruvian
credit. Nevertheless, I do not think it— —
Mr. Pecora (interposing). Was it favorable to Peruvian credit
altogether ?
Mr. Schoepperle. Not altogether. Only in part.
Mr. Pecora. Now, tell us what caused you to revise the judgment
that you had had about Peru being a bad moral and political risk.
Mr. Schoepperle. I just want to state that I do not think even
that had any material influence on my judgment.
Mr. Pecora. Then why did you mention it?
Mr. Schoepperle. Because I think nevertheless it is a fact that
should lie taken into account, that in these excerpts that were put
into the record this morning we ought to have perhaps the full record
rather than that part of it that you had.
Mr. Pecora. I am trying to get now from you the things
Mr. Schoepperle. All right.
Mr. Pecora. That influenced your judgment, and so far you have
given us the things that did not influence your prior judgment that
Peru was a bad moral and political risk.
2094 STOCK EXCHANGE PRACTICES
Mr. ScHOEPPERLE. All right. Now, I come to the things that did
influence my judgment, and I remember very distinctly that on July
13, 1927, Mr. Calvin wrote a letter to Mr. E. M. Byrnes in which he
says that " the tobacco loans under way " — that " the Rothschild peo-
ple in London are after this tobacco loan "
Mr. Pecora. Now, just a moment. You expressed your recom-
mendation in favor of the March 1927 loan. You certainly could
not have based any recommendation in favor of that loan upon some-
thing that developed in July 1927, could you 'i
IMr. ScHOEPPERLE. Quitc right.
Mr. Pecora. Well, now, please answer the question with respect
to the things that caused you, prior to March 1927, to recommend
to your company participation in that $15,000,000 loan, in view of
your prior opinion that Peru was a bad moral and political risk.
Mr. ScHOEPPERLE. We have already referred to a memorandum
written and signed by me as assistant vice president, dated February
14, 1927. That memorandum details arrangements which were
made in conversations with J. and W. Seligman & Co. between
officers of the City Co. and members of that firm concerning this
tobacco loan. I remember distinctly that I came back from Europe
on or about February 11, 1927. This is the first time my name
appears in the files of the City Co. for that year.
Evidently I sat in a discussion of this whole question, those being
present being Mr. Byrnes and Messrs. Strauss, senior partner of
J. and W. Seligman & Co., Mr. White, and Mr. Breck. The last
paragraph of that memorandum :
Lastly, it is understood that tlie fnndamental consideration underlying our
decision to appear in this business is the expectation that we eventually .shall
take an active interest in Peruvian financing on a major scale, anticipating,
as we do, some large-scale operations which will be necessary for refunding
as well as otlier government purposes.
Mr. Pecora. Please do not put that away. I want to see the
entire memorandum.
Mr. ScHOEPPERLE. Yes, sir; with pleasure [handing document to
Mr. Pecora]. Xow, let me tell you what happened at that time .
(There was a pause.)
Mr. Pecora. Is the concluding paragraph of this memorandum
signed by you under date of February 11, 1927, the most important
consideration that was pointed out by you in this memorandum?
Mr. ScHOEPPERLE. By no means.
Mr. Pecora. The reason I asked that is because it is the only
portion of the memorandum which you quoted in full.
Mr. ScHOEPPERLE. That is right.
_ Mr. Pecora. And I thought you quoted from it because you con-
sidered it the most important element.
Mr. ScHOEPPERLE. By no means. But it is important for the pur-
poses of this discussion, very important for the purposes of this dis-
cussion, because it refreshes my memory on the situation that existed
at that time.
Mr. Pecora. Yes. Now go ahead.
Mr. ScHOEPPERLE. I knew and my associates knew that Peru had
an unsatisfactory debt record. We felt that Peru was not a good
moral risk. There was evidence, however, that under the adminis-
tration of President Leguia from 1918 or 1919 to 1927 there had
STOCK EXCHANGE PRACTICES 2095
been great progress made in the constructive development of the
Republic, its economics, its financial arrangements, and we had the
information from Mr. Calvin that he thought that the position
warranted our serious consideration of this business.
Now, we never would have considered that business for one minute
except as we were promised and assured that the President in his
wish to complete his financial and economic reconstruction of the
country, which hatl been in process for a period of 10 years, wished
to cooperate with some major banking interests with a" view to con-
solidation of his entire external debt, which had been, as said this
morning, issued piecemeal; wished to effect a stabilization of his
currency, which he felt sure he could do, because the Reserve Bank
of Peru had a gold reserve then of about 88 per cent as against its
outstanding currency; wished to effect the stabilization of the
Budget ; wished to embark ujjon a public woi'ks program which had
been in process for a period of four or five years, and which had
been financed by these various five issues of bonds which had pre-
viously, during 1921 to 1927, been floated in the New York market.
The President was pointing out to the bankers that in his desire
to complete this financial program it would be necessary to work
in very close cooperation with the banking group and that with their
assistance he was prepared to complete the work that he had been
engaged in for the past 10 years. He felt that a constructive ])iece
of work could be done. He was willing to leave this piecemeal
financing that he had formerly been in. He wanted to effect the
consolidation. And it was only, as we thought, that we could em-
bark on a program that would clear the financial position in Peru,
stabilize the currency, establish a balanced condition in his budget,
help him carry out the public works program already under way,
which was showing increased taxing power and increased public
revenues — it was only in that way that we were willing to embark
upon the financing of Peru, and it was on the President's assurance
that we be given such an opportuinty that we went into that business.
Mr. Pecora. So that your judgment, reached in February, 1927,
or thereabouts, that Peru, theretofore regarded by you as a bad risk,
was a good one, was more or less dependent upon the continuance
in office of President Leguia, wasnt' it?
!Mr. ScHOEPPEELE. No, I don't think so, Mr. Pecora. I think that
consideration was very important, that Leguia, the strong man of
Peru — and by the way, he was constitutionally elected and was hold-
ing his office upon a constitutional basis — the continuance of Leguia
and his program — and he assured us when the question came up
about his — the question of his continuance in office, that there were
other constructive elements in that community that could be de-
pended on to carry out a constructive program ; that it did not hinge
entirely on his existence. But it did have an important bearing, of
course, on our hope for getting, with the cooperation of the Presi-
dent of the Republic, a proper program that would put Peru's
financing on a sound basis.
Mr. Pecora. And it was largely on the basis of those considera-
tions that you recommended offering to the public this loan of
$15,000,000?
Mr. ScHOEPPERij;. The loan of $15,000,000 was a secured loan,
secured on the tobacco monopoly of Peru.
2096 STOCK EXCHANGE PEACTICES
Mr. Pecoea. It is a loan that has not been paid.
Mr. ScHOEPPEELE. That is perfectly true.
Mr. Pecora. That shows how well it was secured, does it not?
Mr. Schoepperle. The loan went into default subsequently.
Mr. Pecora. I believe you said this morning it was some time be-
tween December 5, 1925, and March, 1927, that you wrote that
memorandum ?
Mr. Schoepperle. That is right.
Mr. Pecora. It refers to Peru as having a bad debt record and as
being an adverse moral and political risk and as having a bad
internal debt situation?
Mr. Schoepperle. Yes, sir. That was sometime between 1925 and
1927.
Mr. Pecora. Did this hope and expectation, based more or less on
the continuation of President Leguia's health, life, and government,
remove the bad-debt record which Peru had?
Mr. Schoepperle. It certainly did not.
Mr. Pecora. Did it remove the adverse moral and political risk
that Peru had been, between December, 1925, and February, 1927?
Mr. Schoepperle. I don't think so.
Mr. Pecora. Did it make the bad internal debt situation any
better?
Mr. Schoepperle. Well, this program that we embarked on made
the bad internal debt situation very much better ; yes, sir.
Mr. Pecora. But as it turned out, it has made it much worse, has
it not?
Mr. Schoepperle. I beg your pardon?
Mr. Pecora. As it turned out, it is much worse than it was even
then, is it not?
Mr. Schoepperle. I can not go along with you on that.
Mr. Pecora. Do j'ou think it was better then than it is now, or do
you think it was worse then than it is now ? Which is it ?
Mr. Schoepperle. I am simply saying this, that what was done in
Peru improved the situation for the Peruvian Government very
considerably. And the position in Peru now is bad and worse than
it was when Leguia was president, because the present government
is a revolutionary government.
Mr. Pecora. Give us some definite data or official records or
figures, will you, Mr. Schoepperle, which show the extent of im-
provement that you sav took j^lace? That is, between December,
1925, and February, 1927?
Mr. Schoepperle. I have already testified the basis on which I
joined in the undertaking to do the tobacco loan under the leadership
of Seligman.
Mr. Pecora. Why do you continue to say " under the leadership
of Seligman"? Were you following in their wake or wei'e you
parallel with them?
Mr. Schoepperle. Well, unfortunately, in the case of the tobacco
loan we were following in their wake ; yes, sir.
Mr. Pecora. Do you mean that j'ou adopted their judgment in-
stead of your own independent judgment in participating the loan?
Mr. Schoepperle. No; I don't mean that. I am referring to a
technical term that is used in Wall Street when we speak of the
STOCK EXCHANGE PRACTICES 2097
" leadership of a house " in a given piece of business. We mean by
that that they carry the negotiations.
Mr. Pecora. But your company made itself fully cognizant of all
the internal conditions in Peru before it participated, did it not?
Mr. ScHOEPPERLE. That is true. You can see from our files that
we have a great deal of information.
Mr. Pecora. You had a great deal of adverse information, didn't
you?
Mr. ScHOEPPERLE. That is true.
Mr. Pecora. Mr. Schoepperle, did you recommend to your com-
pany its participation in the flotation of the $50,000,000 loan in
December, 1927?
Mr. Schoepperle. I was in accord with the judgment of the in-
stitution on that point.
Mr. Pecora. Wliat institution do you mean now?
Mr. Schoepperle. The judgment of the officers of the National
City Co. on that point. And their reasons
Mr. Pecora (interposing). Mr. Baker this morning apparently
had no judgment. He said he followed yours. Now whicli is it?
Mr. Schoepperle. Well, I say this, that Mr. Baker had judgment
all right, Mr. Baker
Mr. Pecora (interposing). He has apparently forgotten about
it, Mr. Schoepperle, and he referred to your judgment as having
influenced his.
Mr. Schoepperle. I regi'et to say that, while his memory may have
failed him on this point, he did, as well as the other officers of the
company, sit in or at the officers' meetings where this matter was dis-
cussed.
Mr. Pecora. He said that much, but he also said that he was
guided by the judgment of the experts, and he mentioned you as one
of them. You recall his testimony this forenoon to that effect, do
you not?
Mr. Schoepperle. Yes; I recall it perfectly.
Mr. Pecora. Do you think he was mistaken when he said that?
Mr. Schoepperle. No ; I don't tliink he was.
Mr. Pecora. Then he was guided by your judgment, was he not?
Mr. Schoepperle. If you will permit, I have a little difficulty
in my mind and I will tell you what it is. You have the record there
showing that in April or May of this year I went down to Chile.
Mr. Pecora. In April or May of 1927?
Mr. Schoepperle. That is right.
Mr. Pecora. Yes.
Mr. Schoepperle. In April or May of 1927.
Mr. Pecora. Yes. Were you back in December?
Mr. Schoepperle. Yes, I was.
Mr. Pecora. Then was your judgment consulted by the officers of
your company with respect to your company's participation in the
$50,000,000 loan that month ?
Mr. Schoepperle. Yes, it was consulted.
Mr. Pecora. And did you recommend participation in that loan?
Mr. Schoepperle. Yes, I definitely went along in the decision to
participate in that loan.
Mr. Pecora. You say you " definitely went along." Did you def-
initely recommend it and was it your recommendation that was
2098 STOCK EXCHANGE PRACTICES
adopted and caused the officers of your company to participate in
this loan?
Mr. ScHOEPPEELE. I 'wiU answer that by saying that I recom-
mended that we go into that business ; yes, sir.
Mr. Pecora. When you made that recommendation, did you feel
that 3'ou had fuUy acquainted j'ourself with the situation in Peru
up to date?
Mr. ScHOEPPERLE. I had visited Lima, the capital of Peru, on my
way down to Chile.
Mr. Pecora. Is that the answer to the question? My question
was, whether you felt that you had fully informed yourself con-
cerning conditions in Peru up to that time. Your answer was that
you had gone to Lima, Peru, in May or June of 1927.
Mr. ScHOEPPERLE. Ycs. I stopped in Lima, Peru. I had a talk
with the President. I went over with him the project which he had
in his mind, which has been previously related in my testimony.
He informed me of his desire to effect a relationship with bankers
that could carry out a constructive program for the reconstruction
of Peru's finances and her economic situation. He related to me the
experience that he had had in the investment of the proceeds of
these five loans to which I have previously referred in various public
works; the fact that the taxing revenues of Peru had been greatly
increased, the taxing resources of Peru had been increased : that
public works were a profitable investment from his point of view.
He cited the progress they had made up to that time. He cited me
the figures. I can not remember them exactly, but they were im-
pressive, as to what revenues had been expended upon the public
works enterprises that had been up to that time completed.
Mr. Pecora. Did you bring back those figures with you?
Mr. ScHOEPPERLE. No.
Mr. Pecora. You say they were very impressive?
Mr. ScHOEPPERLE. I did not bring back any figures. But I was
there with him and talked the situation over, and was very defi-
nitely convinced that we were embarked on a program, on a con-
structive program for Peru, which would, and did, consolidate the
Peruvian national debt and reduced the total amount of interest
charges which the Peruvian Government was then paying on these
five issues of bonds which were redeemed out of the proceeds of these
issues which we made. Sixty-eight per cent of the proceeds of the
loans which we made went to refund other outstanding external loans
of Peru.
Mr. Pecora. Who held those loans?
Mr. ScHOEPPERLE. PubUc held the loans.
Mr. Pecora. What public?
Mr. ScHOEPPERLE. The investing public.
Mr. Pecora. The American public?
Mr. ScHOEPPERLE. In the United States •
Mr. Pecor^v (interposing). The American public?
Mr. ScHOEPPERLE. Yes ; for the most part.
Mr. Pecora. Or foreign investors?
Mr. ScHOEPPERLE. Well, both.
Mr. Pecor.\. How much of them were held abroad?
Mr. ScHOEPPERLE. Well, now. I am sorry to say that is for me a
difficult question. There were certain investments abroad
STOCK EXCHANGE PRACTICES 2099
Mr. Pecora. What were you doing, then — asking the American
public to subsci'ibe to a large bond issue, among other reasons, in
order that bondholders of prior issues might be jsaid?
Mr. SCHOEPPERLE. No.
Mr. Pecora. That is what you are mentioning, are you not, as a
circumstance ?
Mr. ScHOEPPERLE. No ; that was not the objective in itself, that we
were making a loan so that bondholders of prior issues should be
paid. The objective in this program was to reconstruct the finances
of Peru and to consolidate its external debt, which is exactly what
we are going to do here in the United States some day with a fund-
ing operation.
Mr. Pecora. Let us confine ourselves to what was done in Peru
and not what is going to be done here in the future. We do not
know that.
Mr. Schoepperle. The consideration was to put the finances of
Peru into some kind of order and to get rid of these piecemeal
transactions that characterized the Peruvian financial eifort from
1921 to 1927.
Mr. Pecora. Put them in some kind of order so that prior bond-
holders could be paid?
Ml-. Schoepperle. That was the effect; that was not the motivating
reason.
Mr. Pecora. That was not a negligible effect, was it?
Mr. Schoepperle. Not at all.
Mr. Pecora. You do not know how many of those prior bonds
were held abroad, do you?
Mr. Schoepperle. Outside of the United States?
Mr. Pecora. Yes.
Mr. Schoepperle. Well, I have not very much idea as to how
much of those external debts of Peru were foreign debts. I know
that there were three of tliem, and I know that part of these Peruvian
loans which we issued were sold as sterling bonds in the London
market. So that I should say that about squared itself off in any
case.
Mr. Pecora. You say you went to Chile in May, 1927?
Mr. Schoepperle. That is true ; yes, sir.
Mr. Pecora. How much time did you spend in Peru on that trip?
Mr. Schoepperle. Well, I only stopped over there two or three
days. I had a talk with the president.
Mr. Pecora. While you were there those two or three days did you
have any conversation with Mr. Durrell, the vice president of the
Lima, Peru, branch of the National City Bank?
Mr. Schoepperle. He was not there at that time.
Mr. Pecora. Then you did not see him, did you?
Mr. Schoepperle. No, sir.
Mr. Pecora. Did you discuss business conditions with whoever
was in charge of the hank at that time ?
Mr. Schoepperle. I did.
Mr. Pecora. Did he tell you that the deposits in the bank at that
time were less than they were on the corresponding date five years
previous ?
Mr. Schoepperle. If he did, I would not remember it. I don't
think it concerned me any.
2100 STOCK EXCHANGE PRACTICES
Mr. Pecora. Would that not have been some indication of the
jjrosperity of the countr}'?
Mr. ScHOEPPERLE. No ; I should say not.
Mr. Pecora. Oh, bank depo.sits do not reflect such a thing?
Mr. Schoepperle. That is all very true as a general statement, Mr.
Pecora; but the que.stion is. Does the fact that over a period of years
the City Bank had in its branch fewer deposits than it had five years
previous by any means reflect a reduction in general economic activity
of Peru? By no means.
Mr. Pecora. It certainly would not imply a radical improvement
in those things, would it?
Mr. Schoepperle. It would not indicate anything one way or the
other.
Mr. Pecora. Did you discuss the internal situation economicallv
and politically in Peru with whoever was in charge of the branch
of your bank at that time?
Mr. Schoepperle. Yes.
Mr. Pecora. With whom?
Mr. Schoepperle. Mr. Calvin.
Mr. Pecora. When did you return to the head office in New York
from that trip?
Mr. Schoepperle. I think it was August or September, 1927.
Mr. Pecora. Meanwhile did you know that under date of July 27,
1927, Mr. Durrell, the vice president in charge of the Lima, Peru,
branch, had written the communication that was read into the record
this morning?
Mr. Schoepperle. I did not ; no, sir.
Mr. Pecora. When you recommended participation to your com-
pany in this $50,000,000 loan in December, 1927, did you not have
any knowledge of this letter which Mr. Durrell had written to your
company on July 27?
Mr. Schoepperle. I did not. I first saw that letter this morning
when you produced it.
Mr. Pecora. It was produced from among the files of your com-
pany, was it not?
Mr. Schoepperle. That is true; yes, sir.
Mr. Pecora. It has been in the possession of the company ever
since its receipt, has it not?
Mr. Schoepperle. It was ; yes, sir.
Mr. Pecora. Did you not make a study of whatever matter was in
the files of your company before you recommended participation in
the $50,000,000 loan?
Mr. Schoepperle. I knew what was in there, but I never saw that
letter.
Mr. Pecora. The letter must have been there, must it not?
Mr. Schoepperle. I suppose it was.
Mr. Pecora. Why did you say you knew what was in there if you
did not know of this letter and did not hear about it until this morn-
ing when I put it in evidence out of your own files ?
Mr. Schoepperle. I mean by that statement in a general way I
knew what was in our files.
Mr. Pecora. But you did not know about this letter until this
morning, did you?
STOCK EXCHANGE PRACTICES 2101
Mr. ScHOEPPERLE. I did not know about that letter until this
morning.
Mr. Pecora. You consider Mr. Durreil, who is resident manager
of the branch of the bank in Lima, Peru, exceptionally qualified to
express an opinion and a judgment about the hazards of a Peruvian
loan, do you not?
Mr. ScHOEPPERLE. I Considered the resident manager in Peru very
well qualified to express an opinion about the hazards of a Peruvian
loan, and he had expressed those opinions by mail and orally to us.
Mr. Pecora. Favorably?
Mr. ScHOEPPERLE. Favorably.
Mr. Pecora. Do you consider that this was a favorable expression
of opinion when he said on Jul}^ 27, 1927, "As I see it "
Mr. ScHOEPPERLE (interposing). Mr. Pecora
Mr. Pecora (reading) :
there are two factors that will loug retard the econoinic importance of Peru :
First, its population of five and a half million is largely Indians, two-thirds
of whom reside east of the Andes, and a majority consume almost no manu-
factured products. Secondly, its principal sources of wealth, the mines and
oil wells, are nearly all foreign owned, and excepting for wages and taxes, no
part of the value of their production remains in the country. Added to this,
the sugar plantations are in the hands of a few families, a majority of whom
reside and invest their profits abroad. Also, for political reasons the present
Government has deported some 400 prominent wealthy conservative families,
but allows them to continue to receive and to make us of abroad the income
from their Peruvian properties. As a whole, I have no great faith in any
material bettenaient of Peru's economic c(mditiou in the near future. The
country's political situation is equally uncertain.
From that statement of Mr. Durreil, made under date of July 27,
1927, do you find any recommendation for participation in a $50,-
000,000 Peruvian loan ?
Mr. ScHOEPPERLE. I do not.
Mr. Pecora. Five months later?
Mr. ScHOEPPERLE. I do not. Let me point out that the resident
manager to whom you referred and to whom I referred was Mr.
Calvin, who had been resident there for 11 j'ears, and who had ex-
pressed in 1926 and 1927 favorable opinions. He had been there
11 years. Mr. Durreil, who wrote that letter, jsrobably had not been
there 11 days. He was traveling about from one branch to another
inspecting branch banks. Whatever gossip he happened to pick up
that he thought was interesting he sent along to Mr. Mitchell for
what it was worth, but that does not profess to be a seriously con-
sidered report on the Peruvian situation. The seriously considered
report is the report of Mr. Calvin, who was there for 11 years. He
was there for 11 days.
Mr. Pecora. Bring out what Mr. Calvin wrote at about that time
which pre.sented a different picture.
Mr. ScHOEPPERLE. July ]3, 1926, see if you can find something on
that (addressing Mr. Accola). I will give you a letter dated July
13. 1926, which shows that Calvin, after'lO or" 11 years on the ground
9 or 10 years, I don't remember exactly how many, expressed a favor-
able opinion, after having held quite a pessimistic attitude for a
number of years.
Mr. Pecora. Is Mr. Calvin's opinion in 1926 at variance with Mr.
Durrell's in Julv 1927?
2102 STOCK EXCHANGE PKACTICES
Mr. ScHOEPPERLE. I think this letter of July 13, 1926, is at variance
with Mr. Durrell's letter.
Mr. Pecora. And Mr. Calvin's advices of July 1926 were likewise
at variance with all the information and advices which you previ-
ously had had since 1921, were they not?
Mr. ScHOEPPERLE. It was at variance with my earlier opinion on
the whole subject, certainly was.
Mr Pecora. Now, let us see the things that Mr. Calvin said that
caused you to reverse your opinion and to ignore Mr. Durrell's
statement and advices of July, 1927.
Mr. ScHOEPPERLE. Well, I beg your pardon. But, of course, I
have said that the major consideration in my mind, and especially
after talking with President Leguia, was that we were embarking
on a program, a constructive and comprehensive program, to re-
organize the debt, to stabilize the currency, to put the government's
finances on equilibrium, and generally to reconstruct that country
on a clean basis.
Mr. Pecoha. That was all based on this confidence in President
Leguia's retaining office, was it not?
Mr. ScHOEPPEELE. I Certainly can not admit that there was any-
thing said in confidence about his retaining office, certainly not.
Mr. Pecora. I did not say anything said in confidence. It was
all based upon your
Mr. ScHOEPPERLE (interposing). Oh. I beg your pardon.
Mr. Pecora. Upon your confidence, or Mr. Calvin's confidence,
whosesoever confidence it was, in the wisdom of President Leguia?
Mr ScHOEPPERLE. Leguia's remaining in office was a very impor-
tant consideration to tlie carrj-ing out of this program on which we
were embarked, but we vei-y definiteW had the impression that there
were enough other constructive elements in Peru to warrant our be-
lief that the program could be carried out.
_ Mr. Pecora. By the way, do you notice that in this communica-
tion from Mr. Durrell in July, 1927, referring to President Leguia,
he saj's :
Unfortunately, his health is bad, and it is reported that he must undergo a
serious operation soon.
Did you notice that in Mr. Durrell's communication ?
Mr. ScHOEPPERLE. I See it now, but, as I ha^'e stated, I do not for
one minute admit that the question of whether Leguia stayed alive
was the governing consideration or the mam consideration in our
believing that a constructive program cotikl be carried out in Peru.
There were other intelligent and able people in the country who were
in sympathy with Leguia's program.
Mr. Pecora. These bonds were long-term bonds, were they not?
Mr. ScHOEPPERLE. That is true.
Mr. Pecora. They were floated in 1927 and 28 ?
]Mr. ScHOEPPERLE. That is true.
Mr. Pecora. They were 40 and 50 year issues, were they not?
Mr. ScHOEPPERLE. That is true.
Mr. Pecora. You did not expect Leguia's influence to continue
that length of time, did you ?
Mr. ScHOEPPERLE. I Certainly did not expect President Leguia to
live all that time; no, sir. We had that fact very much in mind.
STOCK EXCHANGE PRACTICES 2103
that before these bonds matured we would have to depend on other
constructive and inteUigent and able statesmen in Peru to carry out
the program that was designed to set that country on its financial
feet.
Mr. Pecoka. You were taking a chance to that extent, were you
not?
Mr. ScHOEPrEHLE. No matter what investment you buy you are
taking some kind of a risk. No debt record is perfect. No govern-
ment debt record is perfect.
Mr. Pecora. Do you know any which was as bad as Peru's and
whose securities your company helped to sell to the public here ?
Mr. SciiOEPPERLE. No; I do not.
Mr. Pecora. Now let us go back to Mr. Calvin's views: You find
among your files a communication or report or memorandum or
letter dated December 3, 1925, do you not?
Mr. ScHOEPPERLE. December 23, 1925 [examining documents].
Mr. Pecora. While you are looking for that let me ask this
Mr. ScHOEPPERLE (interposing). Yes; I would like to see that
memorandum go into the record.
Mr. Pecora. I have put into the record portions of it.
Mr. Schoepperle. I would like to see the whole thing go into the
record.
Mr. Pecora. Put it all into the record.
Mr. Schoepperle. Thank you.
Senator Townsend (presiding). Unless there is objection, let it
go into the record.
Mr. Pecora. Just mark the place there so that the reporter can
copy it.
(The memorandum is as follows:)
Memorandum fob Ronald M. B-njNES. Vice President, National Citt Co., Ke:
Peruvian Govebnmejnt Financing
December 3. 1025.
The general situation of the Peruvian Government has Improved during the
past two years to the extent that I feel renewed consideration should he given
to the advisability of the National City organization interesting itself in
Peruvian financing. The budget of the Peruvian Government for the year 1923
was practically balanced except for a nominal deficit of Lp. 10,000, and the
budget report for the calendar year 1924 showed a surplus from ordinary rev
enues and expenditures of over Lp. 600,000, equivalent to about $2,ri00.000
United States currency, aside from the foreign-loan operations effected for
specific purposes mostly connected with public improvements. The country
has enjoyed five years of stable government under President Leguia. and the
public improvement program now being carried out by the Foundation Co. of
New York is beginning to change and modernize the whole aspect of things.
The poor credit standing of the Peruvian Government has been due, in my
opinion, in a considerable measure to causes which by many are not fully
understood. Speaking generally, practically all of the Spanish colonies in South
America, on achieving their independence from Spain, for the first 50 or 60
years of tlieir independent life passed through a period of political and eco-
nomic unsettlement. During the past 30 or 40 years there has been an Increas-
ing tendency toward stabilization in both respects. The principal reason for
Peru's delay in showing a like improvement was the war with Chile in 1879-
1883, which left the country prostrate, with currency depreciated to nothing,
many of its wealthy families ruined and the treasury empty, and made it impos-
sible for tlie country to attend to the service of its foreign indebtedness con-
tracte<I prior thereto largely for public improvements. Under such conditions a
turbulent political condition logically continued until the election of President
Leguia in 1919.
2104 STOCK EXCHANGE PBACTICES
Leguia had served a previous term ending in 1909, and after completing
bis term had been forced to go to England, where he had resided for a number
of years. Upon his election in 1919 be announced his tirm intention to rehabili-
tate his country, establish a stable government, educate the lower classes, en-
courage the entrance of foreign capital and immigration, and generally bring
about the development, which had been so long deferred, of the country's
great natural resources.
On his way to Peru from England, Leguia stopped in New York in the spring
of 1919 and called on President Vauderlip, of our institution. He stated that
he desired to consolidate the various government agencies and monopolies oper-
ating in Peru, eliminate all unnecessary overhead and put the entire govern-
ment machine upon an economic and etficient basis. To do this would require
the refunding of various loans secured by such monopolies. Mr. Vauderlip
indicated some interest in the matter and promised to send a man to Peru
to investigate after Jlr. I^eguia hud been inducted into office.
When I arrived in Lima in October, 1919, to install the branch of the
National City Bank, President Leguia thought I was the man sent by our
institution pursuant to his conversation w'ith ilr. Vauderlip, and was much
disappointed to learn that my visit had no such significance. He repeated his
program to me, stating that he desired to tie up the Peruvian Government with
one of what he regarded the then three leading financial institutions in Nevs"
York — the National City Bank, J. P. Morgan & Co.. and the Guaranty Trust
Co. — remarking that he would prefer our institution, particularly in view of its
decision to establish a branch in his country. It was his idea to make us the
approved bankers of his government, which would take care of all of his
financing and advise and assist him in his program of improving and building
up the country, which advice and assistance would be at all times most
welcome.
Upon learning that our institution was not disposed to enter into the matter,
he sent his minister of finance, Mr. Fernando C. Fuchs, to New York to en-
deavor to arrange the matter elsewhere. Mr. Fuchs is a very affable and pleas-
ant gentleman, who is a good friend of mine, but he is a mining engineer
and not a financier in any sense of the word, and his presentation of the ease
in New York was such as to injure rather than help President Leguia's plan.
Nothing was accomplished, and the Peruvian Government has gotten along since
as best it could by " hand to mouth " financing through smaller financial
institutions, with the exception of a loan of .$2,.500,000 arranged three years
ago with the Guaranty Trust Co., which was the cause of a quarrel between
that institution and President Leguia.
I enileavoicd to get the exact cause of this at the time from my friend. Dr.
W. W. Cumberland, then manager of the Peruvian Reserve Bank, but Doctor
Cumberland did not feel that he could give me a full explanation without
violating confidences imposed In him. He did remark, however, that there
was considerable " horse play " on both sides, which he gave me to under-
stand had been started by the Guaranty Trust Co. in taking advantage of
certain clau.ses in the loan contract to effect commissions never di.scussed
or agreed upon. This aroused President Leguia's anger and in reprisal he
failed to carry out certain other clauses of the contract, in taking which action
he was, of course, at fault. He made a vow that he would never again do
business with the Guaranty Trust Co. The differences were finally patched
up, but the President insisted that subsequent operations should not be handled
in the name of the Guaranty Trust Co. Firms allied therewith have, there-
fore, handled the business.
Despite the unsatisfactory situation of his country's finances and the con-
tinued hostility of most of the old aristocracy of the country which has not
been interested in building up and educating the lower classes, Leguia has
made such progress that I feel the whole Peruvian situation merits renewed
consideration by our institution. The country's natural resources are un-
questioned and are more diversified in character than any other South American
country. The petroleum production along the Northern Litoral is steadily
increasing and is now between 8,000,000 and 10,000,0<X) barrels per annum.
Peruvian cotton is of a high grade and commands a price 50 per cent higher
than American cotton. Her sugar production amounts to about 400,000 tons
per annum. She is a considerable exporter of sheep and llama wool from
the Arequipa region, and is the world's only source of supply of alpaca. Her
mining wealth has been long famous, and development is steadily increasing.
She has an extensive and very fertile area of cultivable land east of the Andes
STOCK EXCHANGE PRACTICES 2105
which is now almost wholly undevelopetl and uninhabited. Last but not least,
the high prices obtained by Peru for her export products during the World
War greatly increased the country's general wealth with the result that the
losses suffered during the war with Chile have now been probably more
than recouped.
The Cerro de Pasco Corporation's investment of about $50,000,000 and that
of the Vanadium Co. of America is now being substantially augmented by
development work of the American Smelting & Refining Co. and other interests.
Peru's mineral wealth consists of gold, silver, copper, vanadium, lead, zinc,
marble, and others. A distinctive characteristic is the guano industry, although
this product is now used almost exclusively by the local agricultural interests.
What the country does lack is an enterprising, energetic population to develop
these resources. The Peruvian, as a rule, is not possessed of much initiative
or business ability. He is not, in general, a success as an executive in admin-
istering an enterprise of magnitude with the single exception of agriculture,
in which line the Peruvian planter usually seems to produce better re.sults than
the foreigner.
President Leguia appreciates the defects of his people and hopes to improve
the situation by encouraging immigration, particularly the northern Italians
and Spanish, wliich he feels will assimilate better than any other races. He is
keeidy desirous of constructing a railroad into the large fertile area of eastern
Peru in the upper Amazon basin \Ahich is capal>le of supporting several million
people and is now practically uninhaliited. Leguia has his defects, but the
manner in which he has surmounted difficulties and steadfastly adhered to
his program has aroused no little admiration for him. He has ruled with
a firm hand, but the progress achieved during the past five years has been
greater than that attained during the preceding 30 or 40 years.
At this writing the Peruvian Government is in the midst of the attempt to
settle its long-standing Tacna-Ariea controversy with Chile. Pi'esident Cool-
idge'.s decision that a plebiscite .should be held to determine the sovereignt.v of
these two provinces was at first received with considerable hostility in Peru
on account of the feeling that a fair vote would be impossible with Chile in
charge of the territory. However, the American head of the Plebiscitary Com-
mission. General Pershing, has made rulings calculated to protect the Peruvians
and insure a fair vote so that at the present it is Chile that is up in arms
while Peru is now exceedingly coi-dial and friendly. If the thing comes to
a vote, I believe Peru will win it by a substantial margin.
If Chile withdraws and refuses to proceed, the feeling toward American
interests in Peru will nevertheless continue cordial. At the same time I would
be inclined to wait the outcome of this affair before definitely deciding to go
into the Peruvian business. This decision should be forthcoming, however,
within the next few months. If the Tacna-Arioa territory is assigned to Peru
as a result of Leguia's diplomacy and management, his hold on the Peruvian
public will, in my opinion, be so firmly entrenched that he will serve out his
present term of office less hampered than in the past and will he able to shape
matters up so as to bring al)out a continuance of his policies. In other words,
the winning of these two provinces, in themselves unimportant economically,
will mean increased political and economic stability in Peru. Leguia was
reelected last year for another term of five years, of which there are nearly
four years yet to run.
In the meantime, in view of the improved situation as above outlined, in-
creasing Interest is being shown in Peru from several sources. Messrs. E. H.
Rollins & Sons have indicated their desire to consider a Peruvian Government
loan upon a properly guaranteed basis. They had one of their best represen-
tatives visit Peru two years ago, and although nothing was done then, they
have been keeping in touch with the situation. In the absence of interest by
the National City Co.. the Lima branch offered to render them banking services
for any operation which they might effect there. I had lunch several days
ago with Mr. Green, of the Rollins firm, who appeared somewhat chagrinned
that the recent $7,500,000 Peruvian loan handled by White. Weld & Co.. Blyth.
Winter & Co., and others got away from them. He remarked that if they had
had a good man down there he was satisfied they could have gotten the oper-
ation. He asked me to see him again before I sail, and I am inclined to believe
he has in mind asking if we will put them in touch with any future Inisiness
offered. I would, therefore, be glad to receive an indication of what attitude
I should adopt in connection with such an Inquiry if made of him.
2106 STOCK EXCHANGE PRACTICES
In conclusion, attention is invited to the fact that the recent loan handled by
White, Weld & Co. was put out at 71/0 per cent as against the previous rate
of 8 per cent, which is a straw indicating the trend of affairs. I do not and
would not suggest the consideration at this time of making loans to Peru
upon the unsecured obligation of the Government, but with designated revenues
specifically set aside to guarantee the service of loans effected and provisions
whereby such revenues would be paid direct to the Lima branch of our
Institution by the collecting agencies. I feel that a Peruvian Government
bond would offer no greater, if as much, risk as that involved in other issues
which have been floated by the National City Co. I also feel that when pos-
sible within the limits of safe and conservative financing and without efCecting
unsound loans, effort should be made to cooperate as much as possible in
furthering the progress of the branches established abroad by the bank.
C. W. Cai.v[n.
Mr. Pecora. The number of Indians who constituted two-thirds
of the popuLation of Peru, according to Mr. Durrell in July, 1927,
had not changed between July and December, 1927, liad they ?
Mr. ScHOEPPERLE. I imagine it had increased. [Laughter.]
Mr. Pecora. I hope no personal consideration enters into that.
Mr. Schoepperle. No, I hope you'll admit I had nothing to do
with that.
Mr. Pecor.\. Now, Mr. Schoepperle, their habits of consumption
[Laughter]
Senator Townseiv'd (presiding). Let us have quiet.
Mr. Pecora. I say their habits of consumption had not improved
any, had they, so far as you know ?
Mr. Schoepperle. That all depended on their state of prosperity,
Mr. Pecora.
Mr. Pecora. According to Mr. Durrell their state of prosperity
was rather low at that time ?
Mr. Schoepperle. Yes. The state of prosperity of any Indian
population is always rather low, because, as you know, they do not
hang onto anything very long.
Ml". Pecora. AVliy do you say I know? I am not an Indian.
[Laughter.]
Mr. Schoepperle. But whatever prosperity there was they would
participate in it, and it would be over that very day, of course.
Their habits of consumption are notorious.
Mr. Pecora. And do you think that is the kind of population
which could sustain a $90,000,000 loan made over a period of a year
and three quarters?
Mr. Schoepperle. Well now, of course, you will remember that
they did not get $90,000,000 over a j'ear and three quarters clean.
About 68 per cent of it went into the refunding of their previously
outstanding debts. The balance of it went into public-works pro-
gram. So that the population did not actually consume this sum
of money.
Mr. Pecora. Did it give greater security for tlie repayment of
the $90,000,000, that $68,000,000 of that loan went to pay an existing
and prior indebtedness?
Mr. Schoepperle. No; but a very large part of it went to build
this great irrigation works which was being constructed by Ameri-
can engineers. I regret to say they have never been completed.
Mr. Pecora. I was just going to ask you about that.
Mr. Schoepperle. Also to proceed with the completion of the
Callao docks, which, as you know, are the greatest public
STOCK EXCHANGE PRACTICES 2107
Mr. Pecora (interposing). I don't know anything about it, Mr.
Schoepperle. I have never been down there.
Mr. Schoepperle. That is the great piece of work that Leguia did.
It is called to Leguia Tunnel. You know, on the Pacific the vessels
can not come in; they have to stay outside, and Leguia built these
magnificent Callao docks, and an American contractor built it out
of the proceeds of these loans, and there you have the harbor of
Callao docks, the finest harbor on the western coast of South Amer-
ica, the harbor of Callao, Peru. So that the Indians did not exactly
consume it.
Now, to answer your question — and I fear that I have not an-
swered exactly as you put it — it was because of this Indian popula-
tion that I had always felt that Peru was not particularly a good
moral risk. There were some very fine elements, and ai'e to-day, in
Peruvian population, but, taken as a whole, I concede to your point
that a population of that sort is not an especially good moral risk,
looking at it from a broad point of view.
Senator Townsend. Did you stress your view to your company
along that line?
Mr. Schoepperle. I had in previous years expressed my views, as
shown by the records, very definitely.
Mr. Pecora. But your views in previous years were contrary to
the views that you say led to the recommendation ?
Mr. Schoepperle. That is so.
Mr. Pecora. And the adoption of such a recommendation for
participation in these loans?
Mr. Schoepperle. That is so.
Mr. Pecora. Between December, 1927, and October, 1928, there
was a further loan of $25,000,000 to the Peruvian Government, par-
ticipated in by your company ?
Mr. Schoepperle. That is true.
Mr. Pecora. Did j^ou recommend to your company participation
in that loan ?
Mr. Schoepperle. Yes; because once embarked on our program,
it was our bxisiness to try to go through it, and we had, owing to the
bondholders, the engagement undertaken in the representations made
in the first project that we were embarked on such a constructive
program.
Mr. Pecora. In other words, your recommendation was based
principally upon the fact that in December, 1927, the company had
participated in the $50,000,000 loan?
Mr. Schoepperle. No, no.
Mr. Pecora. That is what you just said in substance, isn't it?
Mr. Schoepperle. I am very glad you called my attention to the
fact that I may have given such an impression. Because in the
meantime some very fine independent investigations had been made
by Frederick K. Kent, a director of the Bankers Trust Co. of New
York, and an acknowledged expert on currency stabilization and on
finance, and he had made very exhaustive inquiries, investigations,
and reports, not only to the bankers but also to President Leguia.
So that, during that period between these two loans, a great many
things were accomplished, including the stabilization of the Peruvian
currency.
119852— 33— PT 6 23
21Uo STOCK EXCHANGE PRACTICES
Mr. Pecora. Now, let us see about the recommendations or report
of Mr. Kent.
Mr. SchoepperIjE. Yes.
Mr. Pecoka. Look in your files, will you please, and see if you
do not find there, under date of March 4, 1928, a communication
from Mr. Kent to Albert Strauss of the Guaranty Co. — no; he
was with J. & "VV. Seligman Co.
Mr. ScHOEPPEBLE. Yes ; he was senior partner in J. & W. Selig-
man & Co.
Mr. Pecoka. Have you his communication before you?
Mr. ScHOEPPERLE. That is what date, Mr. Pecora ?
Mr. Pecora. March 4, 1928. That is the report you have just
characterized as a fine summary by an expert, is it not ?
Mr. ScHOEPPERLE (examining document). That is a report, I
should judge, of about 50 or 60 pages. Wouldn't you ?
Mr. Pecora. Well, you have it, haven't you?
Mr. ScHOEPPERLE. Yes.
Mr. Pecora. Do you find that he says — look at page 3 — among
other things, " Export surpluses are far in excess of the true balance
of payments " ?
Mr. ScHOEPPERLE. Yes, of course.
Mr. Pecoka. " Export surpluses during the last few years have
been turned into imiDort surpluses by invisible items, which, of
course, include foreign interest and activities, such as production of
copper, petroleum, sugar, et cetera."
Mr. ScHOEPPERLE. I do uot find it, but I am glad to have you read
it to me.
Mr. Pecora. Will you look at it. No. 2 on page 3 ?
Mr. ScHOEPPERLE (examining document). I am sorry. Yes; I
will accept it, of course.
Mr. Pecora. See if you don't find it there.
Mr. Schoepperle. Oh, yes; I see it. That is on page 13. Let us
see; where are we now?
Mr. Pecora. In the hearing.
Mr. Schoepperle. It is, of course, true that there are invisible
transactions the other way, representing new foreign money coming
into the country.
Mr. Pecora. Do you find under item 9 this statement by Mr. Kent?
(There was a pause.)
Mr. Schoepperle (after examining files). I do not like to waste
your time. I wish you would read it, because I am sure it is here.
Mr. Pecora. I will read it :
That the taxable income of the Peruvian iieople, lucludiug foreign organiza-
tions, is not sufficient to warrant an increase in piiblic works, of sanitation,
irrigation, highwa.v building, nor railroad building, except in those cases where
an immediate return will arise from an increased income and where foreigm
loans are used for the purpose of foreign exchange in sufficient sums to meet
the debt charge.
Mr. Schoepperle. Yes. I do not have it here, but I will accept
that.
Mr. Pecora. Do you find also on page 7 of his report that he says
as follows:
As I had the feeling tliat the whole taxation system is a hodgepodge, I asked
Mr. Larranaga of the Caja whether he could have prepared for me in the
StOCK EXCHANGE PRACTICES 2109
Cuja, statements showing wliat furui of taxes wore too costly to collect to make
them worth while, which were merely hit-or-miss forms of taxation, and what
recommendations would seem to be advisable based on the actual experience of
collection. He told me that it was impossible to answer such a question and
that he could not do it and that no one in the government could do it and
that possibly at the end of two years, if an expert were brought down from
the States who could go over the books of the Caja in connection with its
collections, that they might get the answer.
Do you find that statement there ?
Mr. ScHOEPPERLE. I clo not find it there, but I will accept that.
Mr. Pecora. Let us make sure that it is there.
Mr. Schoepperle. What page do you figure that on, Mr. Pecora?
Mr. Pecora. Page 7.
Mr. ScnoEPPEKLE. Well, I am very sorry; I do not find it.
Mr. Pecora (addressing Mr. Accola). Help him find it, will you?
Mr. Schoepperle. I would like, in order to assist the inquiry, to
read the conclusions of the report, which I think might interest the
Senators.
Mr. Pecora. First let us find that. Then you can read them.
Mr. Schoepperle. Let me make sure that is in there. I am sure
it is. But I think the conclusions of the report would be interesting
to the Senators.
And I might say, if you are interested in connection with this Caja
that is referred to here
Mr. Pecora (interposing). Some government agency, is it not,
down there?
Mr. Schoepperle. Yes. And there was in 1915 approximately I
think, established a government agency called the Caja de Depositos
y Consignaciones, which means a bureau for the receipt and deposit
of revenues, government revenues. This Caja had been in existence
since 1915 and had collected certain revenues of the Republic year
by year. Wlien we went into this Peru business we suggested, and
the President adopted the suggestion, that the activities and the scope
of the Caja's activities be expanded so that the Caja should receive
all the governmental revenues other than the customs, which of
course no sovereign power is willing to pledge in any case, and other
than those revenues which were given as liens for these four or five
bond issues that I have referred to on several occasions.
This Caja was to receive and did receive under an irrevocable
agreement between the fiscal agents, that is to say, the banks that
acted as fiscal agents, the Seligman people and the National City
Bank, did receive all these reventies except those which I have re-
ferred to, and by an irrevocable arrangement paid first in order out
of the receipts that were collected by that Caja, paid them to the
fiscal agents each month for the service of these Peruvian loans,
these national loans which I have referred to, not the tobacco loan.
That was secured by a separate set of revenues on which the bonds
had a specific lien. But month by month the first money that came
into this Caja was turned over to the banks, the fiscal agents for the
service of these loans, until that monthly installment of one-twelfth
had been completed.
So that it just occurs to me to make that explanation, since you
have referred to this Caja, and I might say that the Caja was not a
government agency; it is owned by the banks in Peru. So that wc
2110 STOCK EXCHANGE PRACTICES
felt that we had adequately secured this loan by every possible and
reasonable device ; that we thought we had the loan thoroughly well
protected before we issued it.
Mr. Pecora. Now, do you find in your files a communication under
date of August 25, 1928, from the Lima, Peru, branch of the bank?
Mr. ScHOEPPERts. While I am looking that up you promised to let
me read the conclusion of Kent's report.
Mr. Pecora. We will let you read it. We are looking for extracts
from it.
Mr. ScHOEPPERLE. Let us get that straight, please.
Mr. Pecora. August 25.
Mr. Schoepperle. August 25 what year ?
Mr. Pecora. I have it here 1928.
Mr. Schoepperle. I am afraid it may be that you have the file
that contains that.
Mr. Pecora. Look at your own file. Who wrote that letter to your
compan}' ?
Mr. Schoepperle (referring to file). Extract of letter from Lima,
Peru, branch dated August 25, presumably 1928.
Mr. Pecora. Who wrote it?
Mr. Schoepperle. I take it that it was written either by Mr. Calvin
or by his assistant, Mr. Dewey.
Mr. Pecora. Were they connected with the National City Bank or
company down in Lima, Peru, at that time?
Mr. Scoepperle. Mr. Calvin is in the room. He says that he was
not. I take it that must have been Mr. Dewey.
Mr. Pecora. Was he connected with the company?
Mr. Schoepperle. He was the manager of the National City Bank,
I believe, the branch in Lima.
Mr. Pecora. Among the extracts from that letter do you find the
following statement :
Economic conditions: Business continues to be extremely dull. Although
there has been more activity in the cotton market during the past month, im-
portant growers estimate that the crop will be 2.5 per cent below normal and
probably a bit more. Our collection department report that collections are be-
coming increasingly difficult. At every luind one hears complaints regarding
slow sales and scarcity of money. Prices of securities and real estate are at
extremely low levels, and new building operations have naturally been curtailed
considerably.
Mr. ScpiOEPPERLE. Yes.
Mr. Pecora. You had better keep it before you. Do you find also
this statement in that letter :
Government conditions : Financial condition of Government. Continues very
tight. We understand that practically all of the Government dependencies are
in arrears as regards salaries paid to employees. One of the members of the
American Naval Mission Informs us that for tlie first time in years they have
been unable to secure their daily allowance of some Lp 4/500. from the Treas-
ury. Although the Treasury has called upon a number of the banks to effect
the discount of some of its paper, we have received no such requests of late.
Do you find those extracts there ?
Mr. Schoepperle. Yes, sir. This is a monthly letter from the
manager of the branch, which from month to month reports the
immediate position, but very often those positions, of course, are
transitory.
STOCK EXCHANGE PRACTICES 2111
Mr. Pecoea. Was there anything in those advices, dated August
25, 1928, that made this Peruvian loan which was put out in October,
1928, in the sum of $25,000,000, an attractive one?
Mr. ScHOEPPEKLE. That report indicates to me that at that time,
as my notes indicate, the bankers were making every endeavor to get
the Government to contract as far as possible its expenditures, and
naturally there was a squeeze on in the local money market, because
the negotiations between the bankers and Presidunt Leguiii at that
time were dealing with these questions of stabilization, the clearing
up of the floating debt, getting the budget in to balance, and the
bankers took this position that the local floating debt, the payment
of Peruvian pounds to the people in government in Lima, should
be financed locally by the local banks.
Mr. Pecoka. Does it not also indicate what economic conditions
at that time were in Peru and indicate them to be extremely dull?
Mr. ScHOEPPEELE. Indicates them to be dull ; yes, sir.
Mr. Pecora. " Securities and real estate are at extremely low
levels."
Mr. ScHOEPPEELE. It indicates that the business position was dull,
just as it says, and that the whole position was
Mr. Pecoea (interposing). And this economic condition is re-
ported to your companj', to have prevailed in August, 1928, and that
was months after the flotation of $65,000,000 worth of loans for
Peru?
Mr. SchoeppekLiE. Yes. Most of which were used for the pur-
poses of refunding external debts.
Mr. Pecoea. Which did not help the internal condition of Peru
any, did it, nor give greater security to the holders of those bonds
that were issued to retire an existing indebtedness ?
Mr. ScHOEPPEELE. Well, I beg your pardon; that was part of the
proceeds of the amount j'ou mentioned should be — well, we will
say $65,000,00 — you are quite right. Part of those proceeds were
used to clear up some of the internal floating debt.
Mr. Pecoea. A good part of them?
Mr. ScHOEPPEELE. No ; no ; not
Mr. Pecoea (interposing). You said 68,000,000.
Mr. ScHOEPPERLE. Well, I say
Mr. Pecoea (interposing). We will use that figure for that pur-
pose— or 68 per cent rather.
Mr. ScHOEPPEELE. Yes.
Mr. Pecora. Sixty-eight per cent.
Mr. ScHOEPPEELE. I am saying 68 per cent of the total issues of
$85,000,000 of the national loan were used to redeem previously out-
standing external debt.
Mr. Pecoea. Did you recommend your company's participation
in October, 1928, in the $25,000,000 loan?
Mr. ScHOEPPEELE. YcS.
Mr. Pecoea. "\\1ien you recommended it did you have any knowl-
edge of this letter from the Lima (Peru) branch of your com-
pany, dated August 25, 1928 ?
Mr. ScHOEPPEELE. I did. I had knowledge of all the monthly
letters that were being sent up by the Lima branch, and I knew the
position, and I knew that at that time assurances had been given
2112 STOCK EXCHANGE PRACTICES
by the President of Peru to the bankers that he would clean up
this internal floating debt jMsition, and the bankers were taking the
position that the local banks and the local market ought to clean up
the local floating debt. And again I ask that
Mr. Pecoka (interposing). And in the hope that they would clean
up the local situation these bonds were offered to the public upon
the recommendation of your company?
Mr. SciiOEi'PEKLE. No, no ; that was not the sole consideration, but
the basic consideration.
Mr. Pecora. That is what you are mentioning.
Mr. ScHOEPPERLE. I am referring to it because you asked me about
the particular point.
Mr. Pecora. No; I asked you if that helped to influence your judg-
ment in recommending the participation by your company in the
flotation of the $25,000,000 loan in October, 1928.
Mr. ScHOEPPERLE. The fact that the local banks would clean UD
the local situation?
Mr. Pecora. Yes.
Mr. ScHOEPPERLE. It was subsequently and finally cleaned up
Mr. Pecora. And the loan is in default ?
Mr. ScHOEPPERLE (interposing). With an internal loan.
Mr. Pecora. The loan is in default ?
Mr. ScHOEPPERLE. I do not think so.
Mr. Pecora. The price is around $5 ?
Mr. ScHOEPPERLE. I am talking about the internal loan.
Mr. PEct>RA. I am talking about the loan that your company sold
the bonds for.
Mr. ScHOEPPERLE. That loan is in default, not the internal one.
Mr. Pecora. Did you have before you when you recommended to
your company its participation, in October, 1928, in the $25,000,000
loan, the cablegram that was received by your company at its New
York office from its branch in Lima, Peru, under date of September
14, 1928?
Mr. ScHOEPPERLE. Will you kindly tell me what that was '(
Mr. Pecora. Haven't you got it in your files there ?
Mr. ScHOEPPERLE. Yes ; that is a cablegram concerning this in-
ternal floating debt position that we have just been discussing. That
refers to the internal position of the floating debt of the government.
That was cleaned up in 1929 by the flotation of an internal loan by
the local banks ; and that is all it refers to.
Mr. Pecora. Do you find in your files a letter dated October 8,
1928, passing between Mr. H. E. Henneman, assistant vice president,
and Mr. Durrell of the Lima branch?
Mr. ScHOEPPERLE. Yes. I know that is here. That deals with the
same internal floating debt.
Mr. Pecora. Let us go back to this cablegram of September 14,
1928. That states, among other things, as follows (does it not) —
We have assumed (a) no further national loan can be safely issued and (6)
integrity Republic's finances threatened until floating debt problem solved.
Stop.
Mr. ScHOEPPERLE. Until it is solved; yes.
Mr. Pecora. Was it solved between September 14, 1928, and Oc-
tober, 1928, when the $25,000,000 issue was put out?
STOCK EXCHANGE PRACTICES 2113
Mr. ScHOEPPERLE. No ; but one of the partners had an interview
with Leguia and had very definite assurances that steps would be
taken to solve the problem, and they were, and the problem was
solved.
Mr. Pecora. So that when the $25,000,000 loan was put out, the
only thing that justified it were those assurances by President Leguia
that the local banlring situation would be cleared up ; is that right ?
Mr. ScHOEPPERLE. Yes, sir; those assurances were perfectly good.
May I put into the record
Mr. Pecora. Just a moment; I will give you a chance to put in
everything that Mr. Kent said in that regard, if you want to put
it in.
On October 8, 1928, there was a communication that passed be-
tween Mr. Henneman and Mr. Durrell, both connected with the
bank? ^
Mr. ScHOEPPERLE. I have it before me.
Mr. Pecora. What is the date of it?
Mr. ScHOEPPERLE. October 8, 1928.
Mr. Pecora. To whom was the memorandum addressed?
Mr. ScHOEPPERLE. It is addressed to Mr. Durrell concerning the
Lima branch of the bank.
Mr. Pecora. By whom?
Mr. ScHOEPPERLE. By Mr. H. E. Henneman, assistant vice
president.
Mr. Pecora. Ajnong other things that memorandum states as
follows :
Economic conditions in the country leave considerable to be desired. The
last cotton crop was a short one on account of lack of water for proper
irrigation ■
Mr. ScHOEPPERLE. And some crops were good — excuse me.
Mr. -Pecora. I will repeat:
The last cotton crop was a short one on account of lack of water for proi>er
irrigation, and recently the fall in prices has discouraged picking and marketing
to such an extent that a very considerable part of the crop is still in the fields
in the southern valleys, especially in the lea district. The important hacienda
" Hoja Redonda " owned by the Ooloma interests has well over 50 per cent of
its cotton still in the fields unpicked. The financing of cotton growers is some-
thing which we must approach with the greatest precaution. At the present
time a large percentage of the estates are mortgaged to the limit, and the
hazards of financing the crops of these estates are, generally speaking, too
great to be justified. Some of the British financing concerns, such as Graham
Bowe and Duncan Fox, are into these estates up to their necks and are using
all their diplomacy to get some of the banks to bail them out.
*******
A very large volume of new construction work is still being carried on both
by the Government and by private capital, and although the representative of
J. and W. Seligman & Co. is endeavoring in a diplomatic manner to induce the
president to cut down very materially his public-works program, there is as
yet no evidence to show that such step has been or will be taken. A number
of prominent Peruvians with whom I talked seemed to be of the opinion that
the President does not dare to reduce his public-works expenditures for fear
of the effect upon his political fortunes and throwing any large number of men
out of work. My own impression, however, is that he is doing very little
worrying about the political effect of such a move. Having a well paid and
loyal army behind him, it is difficult to see what he has to fear. It seems
clear, however, that only the most drastic necessity will induce him to reduce
materially his expenditures for public work purposes.
It is apparent that the local banks are still badly over extended, this referring
particularly to the Peru y Londres and the Banco Italiano.
2114 STOCK EXCHANGE PRACTICES
TTnder the caption of " Government Finance " in this letter or
memorandum, it states as follows:
The budget is not balanced and in fact the floating debt is larger than ever.
Just recently the figures were compiled as of June 30, 1928, showing a floating
debt of more than 3,000,000 Peruvian pounds or more than double what it was
at the beginning of 1927. It seems a fair guess that it is now very close to
4,000,000 Peruvian pounds. When aslied about the matter, the President
stated as his opinion that the floating debt was not over 2,000,000 Peruvian
pounds, and appeared disinclined to examine the details when the compiled
figures were shown to him.
Mr. ScHOEPrEKLE. That was a report made by a supervising of-
ficer of the branches who visited Peru for the purpose of ascertain-
ing what the position of the commercial outstandings were and what
the risks of commercial business were at that time. I will admit
that it is a picture of the general situation, but I do not say that
there are not some extenuating statistics that can be cited to show
that he was rather unduly pessimistic at that time.
Mr. Pecora. Who was?
Mr. ScHOEPPEELE. This man, Henneman.
Mr. Pecora. He was connected with your company, was he not?
Mr. ScHOEPPERLE. Yes ; he was connected with the bank.
Mr. Pecora. In the light of subsequent events Mr. Henneman's
judgment appeared to be pretty sound, did it not?
Mr. ScHOEPPERLE. Ycs ; but in 1928 the foreign trade exports in
terms of thousands of dollars were higher than they had been at
anj' time since 1924. I do not have a record farther back — and
higher again in 1929.
Mr. Pecora. But those exports were owned principally by persons
living abroad and the profits were invested abroad, were they not,
and not in Peru?
Mr. ScHOEPPERLE. That was one of the difficulties which Kent's
report cited, as you have pointed out, and we felt that by the restora-
tion of confidence and the establishment of a balanced position in
Peru that that state of circumstances which you have referred to
would come into a position where the continued seeping of capital
out of Peru would cease. If the jarogram of stabilization and the
whole plan of reorganization of finances had been carried out, it is
a fair assumption that capital would have stayed in Peru rather than
having taken flight out of Peru.
Mr. Pecora. And that all means, does it not, that there were
flotations of these loans in 1927 and 1928 and the investing public
in America was asked something like $90,000,000 for those bonds
in order to restore some sort of order out of the economic and
political chaos that, to your knowledge, had existed in Peru for
many years prior to 1927? Does it not simmer down to that, Mr.
Schoepperle? Is not that a true statement?
Mr. ScHOEPPERLE. I feel that that conclusion is impressed with
an interpretation which at the time and under the then existing
circumstances I would not have accepted. Under the conditions
which exist to-day I feel bound to accept it.
Mr. Pecora. The conditions which exist to-day bear out the opin-
ion that you had expressed for years prior to 1927
Mr. Schoepperi.e. I regret to say
Mr. Pecora. Wait a moment — that Peru was a bad moral,
economic, and political risk?
STOCK EXCHANGE PRACTICES 2115
Mr. ScHOEPPEELE. I regret to say that in the light of subsequent
developments after 1927 and 1928, the opinion that I had previously
expressed earlier, in 1921, 1922, and 1925, was borne out. I thought,
like a great many others, that I was in a new era, and I made an
honest mistake of judgment; and I think that the most that can
be said and the only construction that can be put upon the state
of facts that has been under review here to-day is that the City Co.
made an honest mistake in connection with Peruvian finances.
Mr. Pecora. And it made that mistake in the face of advice from
Mr. Durrell, Mr. Henneman, and other experts, including yourself,
who were studying the situation and had reported their conclusions;
is that right?
Mr. ScHOEPFERLE. I havc pointed out that Mr. Durrell and Mr.
Henneman were commercial banking men who were interested in
making observations in Peru for the purpose of determining the
position of their commercial loans and commercial branch banking
operations.
Mr. Pecora. The observations they made were not mistaken or
false observations, were they?
Mr. Schoepperle. I do not think they were mistaken or false
observations. At the same time, I submit that they were not con-
sidered opinions based on a long and continuing study of the
Peruvian situation. Those were letters which those managers write
occasionallj' when they happen to be inspecting any branch. A
branch manager writes you one letter a month telling what condi-
tions are there. Mr. Durrell would visit branches ail around the
world, as I remember it, stay a few days, and write an opinion to
Mr. Mitchell, including a good bit of the gossip of the town, which
was purely of an ephemeral nature.
Mr. Pecora. Was he sent around the world to pick up opinions
of an ephemeral nature for your guidance ?
Mr. Schoepperle. Certainly not. His opinions of an ephemeral
character were gratituous. He was sent around the world for the
purpose of looking after the operating arrangements of the bank,
and not for expressing any opinions on the financing that was
being done by the National City Co.
Mr. Pecora. Was it for that reason that his statements with regard
to the economic and political situation in Peru appear to have been
ignored ?
Mr. Schoepperle. It was not for that reason that they were
ignored. You will find from an examination of our files that we
received great masses of information on every conceivable point.
We examined a great number of details with the most meticulous
care. We found pros and cons on every one of those questions,
and at various times we made a mistake in the appraisal of the facts
presented, and we made errors in judgment, just as everybody made
errors of judgments in 1927 and 1928.
Mr. Pecora. But in this case you had just as many cons as you
had pros, did you not?
Mr. Schoepperle. Yes; I would say we did, Mr. Pecora. That
was an optimistic era in which optimistic interpretations were put
on any situation where the pros were about equal to the cons.
Mr. Pecora. And most of the cons came from you ?
Mr. Schoepperle. From me personally?
2116 STOCK EXCHANGE PEACTICES
Mr. Pecora. As a result of years of study ?
Mr. ScHOEPPERLE. They came from me in the early period, most
certainly.
Mr. Pecora. And none of the pros came from you in writing, did
they?
Mr. Schoepperle. No, sir ; there were no pros that came from me
as far as I can judge. But my intellectual judgment was convinced
in this project that we embarked on
Mr. Pecora. Convinced in favor of embarking on it?
Mr. Schoepperle. That was an honest judgment. I thought we
were going to accomplish for Peru something that was very badly
needed in that country, and I felt that we could accomplish it. I was
honestly convinced on the point.
Mr. Pecora. Was it in the same way that the National City Bank
was advised to undertake other South American bond flotations?
Mr. Schoepperle. I would say not.
Mr. Pecora. You think the others were based upon a sounder
judgment ?
Mr. Schoeppert^e. I think they were.
Mr. Pecora. We will go into some of them to-morrow.
Senator Fletcher. Do you still hold that an investment company
is justified in extending ci'edit on a basis that would be unsound as
to commercial banks ?
Mr. Schoepperle. No ; I do not hold that. I would not say that
I have held that; but 1 was offering some explanations in exten-
uation of the ephemeral reports and judgments that came from men
who were not studying this whole problem from a long point of
view.
The learned counsel offered me the opportunity of putting into
this record the following paragraphs of Mr. Kent's report^
Mr. Pecora. Yes; go ahead.
Mr. Schoepperle. Let me read you two of them. One of the last
paragraphs says :
Based upon the actual experience of many other countries with whose
developments since the war I have been closel.v familiar and whose itroblems
have been somewhat similar in character I am positively convinced that the
recommendations herein contained are carried out in their entirety, that
barring unseen disaster that might come from abnormal developments, the
Peruvian pound can be stabilized and maintained at $4 American money " —
And it was stabilized; it was not maintained there.
and that the progress of Peru can continue in growing proportion as the
years go on.
Further, if the program recommended is carried out there is no reason why
the Government and the business interests of the country cooperating together
can not so strengthen the economic position of Peru that it will be able to
meet successfully all of the emergencies which naturally arise now and again
from years of crop failures or overproduction or from reduced foreign markets
due to degrees of world prosperity.
It is almost prophetic, is it not?
Mr. Pecora. So were the Durrell advices almost prophetic, were
they not?
Mr. Schoepperle. Yes.
Mr. Pecora. Now, Mr. Schoepperle, according to present figures,
who turned out to be the false prophet as between the two — Mr.
Kent or Mr. Durrell ?
i
STOCK EXCHANGE PRACTICES 2117
Mr. ScHOEPPERLE. Well, you have heard the concliuliiig paragraphs
of Mr. Kents' report.
Mr. Pecora. Just answer. Was it ^Ir. Kent or Mr. Durrell?
Mr. ScHOEPPERLE. I sav Mr. Durrell was nearer right. Kent, of
course, hedged his concluding recommendations with a great many
conditions.
Mr. Pecoka. The National City Co.'s profits from its participa-
tion in these three Peruvian loans were what?
Mr. ScHOEPPERLE. I think Mr. Baker has testified to that; I can
not tell you. They were large.
Mr. Pecora. They were large?
Mr. Sciioepperle. That is my recollection of Mr. Baker's figures.
Mr. Pecora. I understand that from its participation in the first
loan of $15,000,000, made in March, 1927, its gross profit was $252,000,
in round numbers, and its net profit, $211,000, and that from its
participation in the $50,000,000 loan of December. 1927, its gross
profit was $382,000 and its net profit, $318,000, and from its par-
ticipation in the $25,000,000 loan of October, 1928, its gross profit
was $221,000 and its net profit, $152,000. Does that accord with
your recollection?
Mr. ScHOEPPERLE. Well, you must understand that in my capacity
of an officer in charge of the foreign buying department I would
not have any direct recollection or knowledge of those profits. If I
wanted to know them I would be able to ascertain them; if I heard
them I would forget them. But I take it that that is absolutely
right, of course.
Mr. Pecora. Did you participate in the distribution of the man-
agement fund of the National City Co. for the years 1927, 1928,
and 1929?
Mr. ScHOEPPERLE. I did.
Mr. Pecora. To what extent, in those three years ?
Mr. ScHOEPPERLE. Wait a minute. You said three vears, did you
not?
Mr. Pecora. 1927, 1928, and 1929.
]\Ir. ScHOEPPERLE. In 1927 I was an assistant vice president, as
far as the management fund was concerned, and I participated as a
junior officer.
Mr. Pecora. To what extent were you a participant?
Mr. ScHOEPPERLE. I Can not tell you, because I do not just remem-
ber. If you have a record there I will accept it, I think.
Mr. Pecora. Do you recall the extent of your participation in
the management fund in 1928?
Mr. ScHOEPPERLE. I do.
Mr. Pecora. You were then a vice president?
Mr. ScHOEPPERLE. I was then a vice president and participated
in the management fund as a senior officer; and my recollection is
that I must have received about $15,000 along toward the 1st of
June or July, and I received about $55,000 in December or January.
Mr. Pecora. A total of about $70,000 for that year ?
Mr. ScHOEPPERLE. I think so.
Mr. Pecora. That was in addition to your salary, of course?
Mr. ScHOEPPERLE. That was in addition to my salary, which prob-
ably was about $20,000 a year then.
2118 STOCK EXCHANGE PRACTICES
Mr. Pecora. For the year 1929 to what extent, if any, did you
participate in the distribution of the management fund?
Mr. ScHOEPPEELE. I was off on a sabbatical year in 1929 and I
did not participate in any of the 1929 management fund.
Mr. Pecora. Did you participate in any management fund dis-
tribution for the first six months of 1930?
Mr. ScHOEPPERLE. The first six months of 1930, I think I partici-
pated to the extent of about $4,000 in some management fund.
Mr. Pecora. Prior to 1927 you had no participation in the man-
agement fund, did you ?
Mr. ScHOEPPERLE. Yes, I did.
Mr. Pecora. Did you as a junior officer?
Mr. ScHOEPPERLE. I had some participation in management funds
prior to 1927. I can not remember what. I should say that when
I was a junior officer my participation was relatively smaller than
the participation I received as a senior officer.
Mr. Pecora. Did you have anything to do with the preparation
of tlae three prospectuses issued in connection with those three loans
or bond issues ?
Mr. ScHOEPPERLE. Those prospectuses were prepared in the office
of J. & W. Seligman & Co. who were leaders in the business and who
were managing it. I do not recall that we had anything to do with
the preparation of the prospectus, but I think it is a perfectly fair
assumption that it was referred to us and shown us for our approval
befoi-e our name was put on it.
Mr. Pecora. So it must have been approved by your company
before you permitted the company's name to go on it?
Mr. ScHOEPPERLE. I should say that it had been.
Mr. Pecora. Were the prospectuses submitted to you individually?
Mr. ScHOEPPERLE. I liave no recollection of it.
Mr. Pecora. Do you know to whom they were submitted?
Mr. ScHOEPPERLE. I should think they would have been submitted
to me, but I do not recall that they were.
Senator Fletcher. The committee will take a recess until tomor-
row morning at 10 o'clock.
(\Aniereupon, at 5 o'clock p. m., a recess was taken until tomorrow,
Tuesday, February 28, 1933, at 10 o'clock a. m.)
STOCK EXCHANGE PRACTICES
TUESDAY, FEBRUARY 28, 1933
United States Senate,
Subcommittee of Committee on Banking and Currency,
Washington, D.C
The subcommittee met, pursuant to adjournment on yesterday,
at 10 o'clock a.m. in room 301, Senate Office Building, Senator Peter
Norbeck presiding.
Present: Senators Norbeck (chairman), Couzens, Townsend,
Fletcher, and Costigan.
Present also : Senator Brookhart.
Further present: Ferdinand Pecora, special counsel to the com-
mittee; Julius Silver and David Saperstein, associate counsel to the
committee.
The Chairman. The committee will be in order.
Mr. Pecora. Is Mr. Ronald Byrnes here?
TESTIMONY OF RONALD M. BYRNES, WATCH HILL, R.I.
The Chairman. Do you solemnlj'^ swear the testimony you are
about to give is the truth, the whole truth, and nothing but the truth,
so help you God?
Mr. Byrnes. I do.
Mr. Pecora. Mr. Byrnes, will you give the reporter your full name,
address, and business or occupation?
Mr. Byrnes. Ronald M. Byrnes; no business; unemployed.
Mr. Pecora. Are you retired from business?
Mr. Byrnes. You may call it that. I am not in business now.
Mr. Pecora. What was yom- last business or occupation?
Mr. By'rnes. Vice president of the National City Co.
Mr. Pecora. For what period of time were you connected with that
company as vice president?
Mr. Byrnes. I was elected as vice president of the National City
Co., I think, in the summer of 1917.
Mr. Pecora. And continued to hold that office until when?
Mr. Byrnes. Until June, 1931.
Mr. Pecora. Were you assigned to any particular branch or de-
partment of that company's business as a vice president?
Mr. Byrnes. Shall I explain or just answer these specific questions?
Mr. Pecora. Yes.
Mr. Byrnes. I had been previously employed with the bond de-
partment of the National City Bank before 1917. The bond depart-
ment of the bank became a part of the National City Co. in the
summer, I think, of 1916.
2120 STOCK EXCHANGE PRACTICES
Shortly after that, however, I was detached from active service in
the institution to go to England in connection with a group of the
important houses in the street in connection %vith allied financing.
I returned from Europe I think in the spring of 1917, May or June,
and thereafter became identified first with Mr. Vanderlip in setting
up the war savings certificate scheme and then in the scheme that
was worked out by me for the Liberty Loan allotments. So that
during that period I was sort of not appointed or apphed to any
particular department.
^^^len I was elected vice president of the National City Co. the
field that was allotted to me was the development of the analytical
and buying organization of the National City Co., which as you
realize from the testimony, is not a banker; it is a merchant, and its
business naturally divides into the two aspects of selling and buying,
or bujang and selling. My job was to develop the analytical and
buying organization of the City Co., which, as has been explained to
you, was departmentized at that time, and subsequently the men in
charge of those departments were one by one I think made vice
presidents.
Is that sufficient?
Mr. Pecora. Yes. Was there a department connected with the
company that confined its buying and selling or analyses to foreign
issues?
Mr. Byrnes. Yes.
Mr. Pecor-'V. Were you at any time connected with that depart-
ment, Mr. Byrnes?
Mr. Byrnes. That was the last department that I kept under my
direct personal supervision.
Mr. Pecoe.i. And m what years did you have supervision of that
department particularly?
Mr. Byrnes. All years from 1917 to the date of my resignation.
Mr. Pecora. You heard the testimony that was given here yester-
day by Mr. Baker and Mr. Schoepperle of the company with respect
to the issuance and flotation of the Peruvian bonds?
Mr. Byrnes. I did, mostly. I would not guarantee that I heard
every word of it.
Mr. Pecora. In the course of that testimony reference was made
to President Leguia. * * *
Mr. Byrnes. Yes.
Mr. Pecora. As being the head of the Peruvian Government at
the time of the issuance of those bonds. Do you recall that?
Mr. Byrnes. Yes.
Mr. Pecora. And some testimony was given to the effect that
among the circumstances which induced the National City Co. to
lend itself to the flotation of those bonds were the plan of President
Leguia for internal improvement of that country. Do you recall
that testunony?
Mr. Byrnes. Yes.
Mr. Pecora. As a matter of fact, was not Leguia president of
Peru from 1919 on until about 1931?
Mr. Byrnes. I would not trust my memory on dates. He had
been President of Peru in either a constitutional or perhaps extra
constitutional capacity. He had been head of Peru for quite some
STOCK EXCHANGE PRACTICES 2121
period, and it was under his leadership that Peru showed such extra-
ordinary progress in its economic and financial affairs.
Mr. Pecoea. He was at the head of the Government between 1921
and 1926, that is, during the period of time in which unfavorable
reports were made to the National City Co. by its representatives
and South American experts, was he not?
Mr. Byrnes. Your question implies a characterization of various
men as experts that perhaps we would not entirely agree on as being
experts, Air. Pecora.
Air. Pecora. Well, they have been alluded to here as experts, and
I am perfectly willing to acknowledge their e.xpertness.
Mr. Byrnes. If I take your definition of their expertness, I am
quite willing to admit that apparently the record shows here that
various of them at various times expressed an unfavorable point of
view as to one phase or another of Peruvian credit.
I will add that during that same period, and in fact even earlier,
I myself had refused to consider Peru as having yet reached a point
of development that warranted the National City Co., with the
standards of conservatism that I had insisted upon, as being a fit
subject for National City Co. distribution.
But during that period, even granting the unfavorable opinions, I
will add my own opinion that very substantial progress was being
made in the economic condition of the country tliroughout the period
of Leguia's regime.
Mr. Pecor.^. Was that progress reflected in the report or advices
contained in the letter which Mr. Durrell sent to the National City
Co. from Lima, Peru, under date of July 27, 1927?
Mr. Byrnes. I heard that letter yesterday for the first time.
Mr. Pecora. You mean to say that you learned of the existence
of that letter for the first time when it was read in evidence at the
hearing here yesterday?
Mr. Byrnes. Yes. And at the time I wondered whether I had
seen the letter and had completely forgotten it, and I was going to
ask, if I was asked about the letter, whether my initials appear upon
it. Do you know?
Mr. Pecora. The original letter is undoubtedly still in the files
of the company, which are now before Mr. Train. Perhaps he will
show you.
Mr. Byrnes. Is it of any interest that I should check this, whether
my recollection is at fault?
Mr. Pecora. While we are on the subject I think it might be
worth while, Mr. Byrnes. July 27, 1927, a letter of Mr. Dirrrell
addressed to Mr. Charles E. Mitchell.
(Mr Byrnes conferred with Mr. Train.)
Mr. Byrnes. No. The reason I asked is that it is a practice of
mine generally to initial any letter or docimient that I saw, and my
initials are not on that, and I had not seen it before.
Mr. Pecora. That is a clear indication, because of your practice
and custom of initiahng letters and documents submitted to you,
that that letter was never submitted to you, is it?
Mr. Byrnes. It is evidence, but not proof.
Mr. Pecora. Do you know of any reason why the information
contained in that letter should have been withheld from you in 1927?
2122 STOCK EXCHANGE PRACTICES
Mr. Byrnes. I haven't the sUghtest idea. I was in this country
during the summer of 1927, but I may not have been at the office.
I may have been away on vacation when that letter arrived. That
is the only explanation I can think of.
Mr. Pecora. Now, in December of 1927 you will probably recall
that the National City Co. participated in the underwriting of
$50,000,000 Peruvian loans for which the bonds were issued that
month. Was your judgment consulted with respect to the National
City Co. taking a participation in that issue?
Mr. Byrnes. That was December, 1927?
Mr. Pecora. Yes, sir.
Mr. Byrnes. You understand that I came down here, of course,
without any information as to what I was to be questioned on, and
I have not checked, but I think it is a reasonable assumption that I
was present when that loan was up for consideration. Mr. Schoep-
perle was in active charge of it, but I tliink that I was fully au courant
at that time.
Mr. Pecora. Do you recall whether or not you recommended par-
ticipation in that loan to your company?
Mr. Byrnes. I think the general question of the policy of the
National City Co. in regard to Peru had been more or less settled and
recommended by myself earlier, and that the $50,000,000 loan that
you now mention was a subsequent operation that was in accord
with the policy that I had been in entire agreement with.
Mr. Pecora. Apparently that policy had been adopted some time
prior to March, 1927, in view of the fact that in that month the
National City Co. participated in the offering of a $15,000,000 bond
issue, being the so-called tobacco loan to Peru?
Mr. Byrnes. That is my recollection, because the policy was first
established and then the individual operations followed that. I
have a clearer recollection of my shift in viewpoint in regard to Peru
which preceded our active participation in the tobacco loan, than I
have in any details of the subsequent operations.
Mr. Pecora. If your judgment was specifically consulted with
respect to participation in the $50,000,000 issue of December 1927,
it is clear to you now that that letter of Mr. Durrell dated July 27,
1927, had never been called to your attention?
Mr. Byrnes. I never saw it.
Mr. Pecora. Do you loiow whether its contents were made a
subject of discussion between July and December?
Mr. Byrnes. With me?
Mr. Pecora. Yes, su-.
Mr. Byrnes. Not with me.
Mr. Pecora. Between July and December 1927.
Mr. Byrnes. Not with me. That does not preclude it may have
been considered by those who may have seen the letter.
Mr. Pecora. But as to any such discussion you know nothing,
because you did not participate in it?
Mr. Byrnes. I can not recall anything on that letter.
Mr. Pecora. Mr. Byrnes, do you recall an issue of $8,500,000
6K per cent bonds due 1958 issued by the State of Minas Geraes?
Mr. Byrnes. Yes; in general.
Mr. Pecora. What do you recall about that issue in general?
STOCK EXCHANGE PRACTICES 2123
Mr. Byrnes. That the National City Co. handled it; that we intro-
duced that credit in this market ; that we had perviously over a period
of years considered the various South American credits; had more or
less ranked them as to those that we were willing to immediately
handle; and set aside others that we would reconsider, and that we
would keep an eye on, and see how the countries progressed, and
specifically in regard to Brazil tliat we had studied the taxation system
of the country and had decided that certain States were at least
equally good credits with the National Government, and had con-
sidered which of those States were most likely then or later to measure
up to our rcquhements, and in that ranldng Minas had been ranked
as the tMi'd State. My recollection is the State of Sao Paulo was
ranked first, Rio Grande do Sul second, Minas Geraes third.
Mr. Pecora. Was that the first time the National City Co. had
participated in any financing operations for the State of Minas
Geraes?
Mr. Byrnes. It was the first time that the State of Minas had come
to this market, to the American market.
Mr. Pecora. Just to digress for the moment, Mr. Byrnes, and
going back to the fh-st Peruvian loan of $15,000,000 in March, 1927,
which was referred to yesterday, as I now recall it, part of the pro-
ceeds of that loan was used to pay off an existing funded indebtedness.
Do you recall that circumstance?
Mr. Byrnes. I woidd have to refresh my recollection on that.
May I explain why? I do not want to clami a miraculous memory,
but I have rather a good one. The determination of the shift in
policy which decided us to go into Peru, I think I was responsible for
in the end of 1926 or the beginning of 1927. At the beginning of
1927, I think in February, I left New York and went to Japan on
rather a leisurely trip, so that I did not get out there for some time.
It just happens, I tliink at that time, Mr. Schoepperle, as he ex-
plained yesterday, was abroad, and between the time he arrived in
New York and I left New York there was a very brief interval, and
I think I communicated to him orally my views, and the principles
established, and those were subsequently enacted. I tliink that may
have been his embarrassment yesterday at one point where you were
asking liim whether he had decided or whether he had recommended.
At that time he was assistant vice president directly under me, and
I take responsibility primarily for the change in the point of view,
which was a change in my point of view, which was reflected in the
change of the point of view of the National City Co.
Mr. Pecora. Now let us go back to the circumstances that part
of the proceeds of that first loan was used to pay off an existing
indebtedness.
Mr. Byrnes. Yes.
Mr. Pecora. Who held the bonds representing that existing
indebtedness which was paid off by part of the proceeds of that
$15,000,000 loan?
Mr. Byrnes. May I appeal to the gentlemen who have the files?
Mr. Pecora. Surely. You may utihze any records available.
Mr. Byrnes (addressing Mr. Train). Do you have the information
on that?
Mr. Train. I did not hear the question.
119852— Sa—PT 6 24
2124 STOCK EXCHANGE PRACTICES
Mr. Byrnes. The question is, Who held — may the reporter read
the question?
The Shorthand Reporter. "Who held the bonds that repre-
sented that existing indebtedness which was paid off by part of the
proceeds of that $15,000,000 loan?"
Mr. Train. Discussing Peru?
Mr. Byrnes. Peru, the tobacco loan, as it was called, the
$15,000,000 loan; apparently in the circular somewhere information
is given that part of the proceeds were used to pay off existing indebt-
edness. The question is. What is the character of that indebtedness
and by whom was it held?
Mr. Train. My recollection is that it was indebtedness held inter-
nally in Peru.
Mr. Pecora. Mr. Train has not been sworn.
Mr. Byrnes. Shall he tell me and shall I tell you?
Mr. Pecora. He can refresh your recollection and you may
testify
Mr. Byrnes. It will be his information and not mine.
Mr. Pecora. We had better not get into that, then. We are going
to swear Mr Train subsequently, anyway
Now, you say it was shortly prior to March, 1928, that the Brazilian
State of Minas Geraes first came into the American market for credits
or loans?
Mr. Byrnes. That is my recollection.
Mr. Pecora. And prior to that where had its financing been done?
Mr. Byrnes. At home in Brazil and abroad in the Paris market,
and I am not sure but there was some in the London market.
Mr. Pecora. Was not most of it in the Paris market?
Mr. Byrnes. I think the principal State loan floated abroad was
in the Paris market.
Mr. Pecora. Do you recall the amount of the outstanding loans
wliich the State of Minas Geraes had floated principally in the Paris
market prior to March 1, 1928?
Mr. Byrnes. No. I could not give that without going to the
records.
Mr. Pecora. Perhaps the gentlemen from the National City Co.
have those records here. Have you those records here, Mr. Train?
Mr. Train. Yes, sir.
Mr. Pecora. The two Minas Geraes loans.
Mr. Train. In Paris?
Mr. Pecora. No, the two Minas Geraes loans here.
Mr. Train. Yes.
Mr. Pecora. And your file on the subject of those loans?
Mr. Train. We have a number of files.
Mr. Pecora. Do they also show the prior loans that were handled
in Paris?
Mr. Train. Yes, they do.
Mr. Pecora. Will you make those records available to Mr. Byrnes,
please?
(Mr. Train handed documents to Mr. Byrnes.)
Senator Couzens. Wliile that is being looked up I would like to
ask if you have received any complaints with respect to the Chase
Bank and Chase Securities Co.
Mr. Pecora. Yes, sir.
STOCK EXCHANGE PRACTICES 2125
Senator Couzens. Have you started any inquiry along those
lines?
Mr. Pecora. Not in any intensive way, because time has not been
available for that purpose.
Senator Couzens. I will submit some information that came to
me for you to look into.
Mr. Pecora. Very well, sir.
Mr. Byrnes. This appears to be a photostatic resume of the details
of direct issues as of December 31, 1925, of the State of Minas Geraes,
Brazil. At that time there had been issued direct State loans, four
different ones. The currency in which they had been issued was
francs. Wliether they were Belgian, Swiss, of French francs is not
specified. I assume French francs. There was the 5 per cent loan
of 1927 of 25,000,000 francs with a final maturity at 1948.
Mr. Pecora. Is that 1927?
Mr. Byrnes. 1907.
Mr. Pecora. I thought you said 1927.
Mr. Byrnes. If it was, it was a slip of the tongue. Nineteeen
hundred and seven.
Senator Brookhart. How many dollars would that be?
Mr. Byrnes. Possibly $5,000,000, at that time. With the depre-
ciation of the franc and restabilized value, it is only a million dollars.
Senator Couzens. Are they in default?
Mr. Byrnes. I would have to look up the records. Senator Couzens.
Senator Couzens. Do you know whether all the Peruvian securi-
ties are in default?
Mr. Byrnes. Tliis is Minas.
Mr. Pecora. This is Minas, a Brazilian State.
Senator Couzens. Are any of those in default anywhere?
Mr. Pecora. Yes, that was testified to yesterday; they are all in
default.
Senator Couzens. I mean this loan that you are speaking about
now, are they in default, any of them?
Mr. Byrnes. I have been out of active business for two years.
Mr. Pecora. These other loans?
Senator Couzens. Any of the loans that you are now discussing,
are any of those in default?
Mr. Pecora. Yes, sir.
Mr. Byrnes. All of these four loans apparently were issued by a
French banking firm, so I think that confirms to the fact, Mr. Chair-
man, that they were issued in French francs, and that we divide
roughly any of these figures by 5 and we have the dollar equivalent.
Then there was a 4}^ per cent loan of 1910 for 120,000,000 francs.
There was the so-called 4}2 per cent municipal loan of 1911. That was
a direct State loan. I suppose the title "municipal loan" indicates
that it was reloaned by the State to its municipalities, because on
account of the bad division of taxing power in Brazil the State
credits are good and the municipal credits are bad, relatively.
That is rather typical of the taxing situation now in most any
Latin country; the States are apt to have the taxing powers and the
municipalities not, rather different from our system in this country.
Then there is a 5% per cent funded loan of 1916 for 16,000,000, and
there was one of 4H in 1911 of 50,000,000, which I skipped.
2126 STOCK EXCHAXGE PRACTICES
Mr. Pecora. 50,000,000 francs?
Mr. Byrnes. 50,000,000 francs. These are all stated in francs.
A total of the four loans roughly 210,000,000 francs, or $42,000,000.
Mr. Pecora. When the State of Minas Geraes came into the
American market for a loan in the latter part of 1927 or the early-
part of 1928 the National City Co. became interested in the project,
did it not?
Mr. Byrnes. It did.
Mr. Pecora. Who conducted the negotiations on behalf of the
National City Co. that led to that company underwriting the issue of
$8,500,000 on March 1, 1928?
Mr. Byrnes. My recollection is not clear, Mr. Pecora, on that.
I think the files would show very clearly what was done.
Mr. Pecora. Mr. Train, I think, will make the files available to
you.
Mr. Byrnes. My recollection is that I sent Mr. Train to Brazil
and that the negotiations on the ground were in the first instance
initiated by Mr. Train, assisted, I tliink, by one of the staft' of the
City Bank down there, who of com'se had command of the Portuguese
language. Mr. Train speaks Spanish, but Portuguese is not quite
the same. So I think that those two gentlemen initiated the dis-
cussions, but if my recollection is correct, they did not eventuate in
actual business then, and Mr. Train actually left Brazil before the
business came up again and it was pursued to a conclusion.
May I ask if that is correct?
Mr. Train. Yes, Mr. Byrnes.
Mr. Pecora. Who is Mr. D. C. Baldwin?
Mr. Byrnes. Mr. Baldwin was one of the research and analytical
men in the foreign department.
Mr. Pecora. Of the National City Co.?
Mr. Byrnes. Of the National City Co.
Mr. Pecora. Under you?
Mr. Byrnes. Under me. Directly under Mr. Schoepperle, but
indirectly under me.
Mr. Pecora. Have you before you the files of the National City
Co. with respect to this loan of $8,500,000 which was floated by the
National City Co. for the State of Minas Geraes?
Mr. Byrnes. The answer to the question is no, but I suppose they
may be gotten.
Mr. Pecora. I understand the file is right before you, is it not?
Mr. Byrnes. Is it? All I have is this [exhibiting photostat].
Mr. Pecora. I think that boimd set of papers probably constitutes
the file.
Mr. Train. No; that is a Peruvian study, Mr. Pecora.
Mr. Pecora. Wliere is the Minas Geraes file?
Mr. Train. Here they are, Mr. Pecora.
Mr. Pecora. The Minas Geraes finances file?
Mr. Train. I have been having difiiculty in locating the various
memoranda and letters asked for by your assistants. I am having
considerable difficulty in finding them, I may say, because we have a
number of files here and they do not follow in order in any way. We
have identified and found a number of the things asked for.
Mr. Pecora. Can you locate the letter, or a copy of the letter,
dated June 11, 1927, addressed to Mr. Hynson
Mr. Byrnes. Yes, sir.
STOCK EXCHAXGE PEACTICES 2127
Mr. Pecora. By D. C. Baldwin, of the foreign department of the
National City Co. to Mr. Hynson, manager of the Washino-ton office
of the National City Co.?
Mr. Byrnes. I will answer just as fast as I can. You understand
ray difficulties?
Mr. Pecora. Yes; I know that.
Mr. Byrnes. I think I have the letter. Letter of June II, 1927,
addressed to Mr. Hynson.
Mr. Pecora. And signed by Air. D. C. Baldwin.
Mr. Byrnes. There is no signature on it, but the initials are
D. C. B., which I assume is Mr. Baldwin.
Mr. Pecora. ^Vllich indicated Mr. Baldwin?
Mr. Byrnes. I should say so.
Mr. Pecora. I ask that that letter be read into the record. I
shall read from my copy:
State of Finances, Foreign Department,
Minas Geraes, June 11, 1927.
To R. W. Hynson, Manager Washington OfBce.
Dear Mr. Hynson: We are interested in possible financing for the State of
Minas Geraes, Brazil. In thi,s connection ■^\-e wisli to investigate further certain
outstanding foreign loans of the State which were issued in Paris, and Mr. Byrnes
is very anxious if possible to obtain copies of the loan contracts.
Tlie first three loans, with the respective dates of issuance, are as follows:
State of Minas Geraes
Mr. By'enes. That is apparently excerpts. It is not the entire
letter.
(Mr. Byrnes handed document to Mr. Pecora.)
Mr. Pecora. Oh, yes. Well, that is immaterial matter.
Mr. By'rnes. I do not know, but you were asking for the letter.
Mr. Pecora. I will just read the portions of the letter that I think
pertain to the e.xamination, and then if you want to refer to any
other portions of the letter, Mr. Byrnes, in answer to any questions,
you are at liberty to do so.
The first thiee loans, with the respective dates of issuance, are as follows:
6 per cent loan of 1907 issued in Paris in October, 1907, by J. Loste & Cie.
4Ji per cent loan in 1910, i.ssued in Paris June 15, 1910, by Perier & Co.
4H per cent loan of 1911, issued in Paris April 11, 1911, by Perier & Co.
There is also outstanding a fourth external loan known as the 5% per cent
funding loan of 1916.
Owing to financial difficulties which the State experienced during the first years
of the World War, the State was unable to maintain the service on the three
loans mentioned above, and this funding loan was used for the purpose of funding
the matured and unpaid coupons of the three preceding loans.
We are unal:)le to ascertain the date of issuance of this loan, and probably,
owing to its nature as a funding loan, it was never offered publicly. The various
reference books state that the plan in regard to this loan was published in October,
1916, and that the plan was not actually put into execution until June, 1920. So
that the location of this contract would probably require going through several
years of the files. We do not wish you to take any undue trouble in this con-
nection, but would like to have you make an attempt and report to us.
Very truly yours,
Now, as a res ult of the inquiries made by the National City Co.
and the information it received, the National City Co. finally agreed,
to float this loan of $8,500,000 in March, 1928, for the State of Minas
Geraes did it not?
Mr. Byrnes. Yes, after very considerable consideration and study.
Mr. Pecora. In connection with that study and consideration did
you learn that there had been any default within a few years prior to
2128 STOCK EXCHANGE PRACTICES
1928 on the part of the State of Minas Geraes in meeting its outstand-
ing obligations on loans which had been floated abroad?
Mr. Byrnes. I do not know as I can accept the word "default"
without definition, Mr. Pecora. There are all shades of failiu-e to
meet a given obligation. My recollection in the case of Minas
Geraes is that they had some agreement, they had an agreement with
a French banking house, to wliich they had supphed funds for a more
or less specified purpose. This is rather delicate, but my recollection
and impression is that, due more or less to the failure of that French
banking house, which was located in Paris but was in some way
involved I tliink also in Russia, the funds provided by the State
were not available, and that because of that failure of the banking
house to keep its commitment the State either refused or was unable
to keep its part.
Now that is a general recollection wliich can undoubted^ be more
accurately stated from the files.
Mr. Pecora. Was the banldng house that j-ou have referred to the
fiscal agent in Paris of the State of Minas Geraes at that time?
Mr. Byrnes. I flunk so.
Mr. Pecora. These prior existing loans which had been floated in
Paris by the State of Minas Geraes were paj'able in gold francs, were
they not?
Mr. Byrnes. I think that that is doubtful. There was some
clause in the contract that had to be adjudicated, and I am not
familiar as to how it was finally adjudicated.
Mr. Pecora. An adjudication of that question had been made
prior to March, 1928, had it not?
Mr. Byrnes. I would have to testify
Mr. Pecora. Well, won't you kindly refresh your recollection by
whatever records have been produced here?
Mr. Byrnes. They have not been produced to me, Mr. Pecora.
Mr. Pecora. They are all here, Mr. Byrnes. They are right here
on the table before you. You might look at them. They are here
for all purposes.
Mr. Byrnes. Yes, but they are not available to me. I must ask
them each time.
Mr. Pecora. Mr. Train, would you be good enough to make those
records of your company available to Mr. Byrnes?
Mr. Train. Of course, Mr. Pecora.
Mr. Pecora. You have to refresh your recollection, do you not,
in order to answer these questions?
Mr. Byrnes. Why, certainly. Of course I do.
Mr. Pecora. And do you feel that the records and the files of the
National City Co. with respect to these loans would serve to refresh
your recollection?
Mr. Byrnes. I should certainly say so.
Mr. Pecora. Now will you kindly consult those records to refresh
your recollection?
Mr. Train. What was the question?
Mr. Randolph (the shorthand reporter). "An adjudication of that
question had been made prior to March 1928, had it not?"
Mr. Train. Yes.
(Mr. Byrnes conferred with Mr. Train off the record.)
STOCK EXCHANGE PRACTICES 2129
Mr. Byrnes. I am informed that the settlement was by agree-
ment between the State, and I assume the French — was it a bond-
holders' committee?
Mr. Train. Association.
Mr. Byrnes. Association, the French official association, a French
oflficial association, Associacion Nationale Porteurs des Frangais de
Valeurs Mobiliers who apparently represents the French bondholders
in the settlement. I have here a statement apparently of that
association in regard to these loans, in French.
Mr. Pecora. Mr. Byrnes, did you have personal knowledge of
these elements back in March, 1928, when you were still a vice
president
Mr. Byrnes. Oh, why, certainly.
Mr. Pecora. Connected wdth the National City Co.?
Mr. Byrnes. Certainly.
Mr. Pecora. You gave your time, study, and consideration to the
question of the advisability of the National City Co. underwriting
this $8,500,000 loan in March, 1928, did you not?
Mr. Byrnes. Oh, j'es.
Mr. Pecora. Have you now no recollection of the cu'cumstances
surrounding the flotation of this loan oy the National City Co.?
Mr. Byrnes. I have a general recollection, but your questions are
specific, and I can not answer those questions except by refreshing my
recollection.
Mr. Pecora. Well now, won't you please
Mr. Byrnes (interposing). And I have no right to ask for those
records except as you request these gentlemen to assist me.
Mr. Pecora. Well, let us settle that now. Mr. Train, is there
any objection to Mr. Byrnes' having those records on the Minas
Geraes loan placed before him so that he may readily consult them
from time to time to refresh his recollection?
Mr. Train. I know of no objection, Mr. Pecora.
Mr. Pecora. Then will somebody be good enough to put the file
before Mr. Byrnes, so that it will be readily available to him?
(Mr. Train complied with request of Mr. Pecora.)
Mr. Byrnes. Well now, in this case, answering your question,
there was an agreement between the State and tliis official association
of French bondholders.
Mr. Pecora. Before that agreement there was Utigation, was
there not?
(Mr. Byrnes conferred with M. Train.)
Mt. Train. Mr. Pecora, I am worldng under considerable handi-
cap, since I have been handed a 3-page memorandum asldng for
various papers to be located in various files, and I am trjdng to do
that simultaneously with Mr. Byrnes' testimony, which makes it
extremely difficult for me to paj- attention. If somebody could be
allowed to come to the table and locate this material while I sit here
and listen to your questions and Mr. Byrnes' answers, it would help
me considerably.
Mr. Pecora. I suppose in the long run we would be saving time if
we did that. I am sorry that it is necessary.
Mr. Byrnes. I am sorry too, but I am just not able to answer
these questions.
2130 STOCK EXCHANGE PRACTICES
Mr. Pecora. You feel unable, Mr. Byrnes, to answer these
questions upon yoxir mere recollection?
Mr. Byrnes. I think it would be a mistake to attempt to answer
such questions when the facts are undoubtedly available in the
City Co.'s files.
Mr. Pecora. I want the fullest possible answers, and I know
those are what you want to make.
Mr. Byrnes. I certainly will be glad to answer anytliing exactly
and accurately that I Icaow.
Mr. Train. I might explain parenthetically that there is some
diflBculty here because some of the material listed in this memorandum
is contained in files which your associate, Mr. Saperstein, did not
specifically ask be brought to Washington. It created a little con-
fusion here.
Mr. Pecora. Have you the files here?
Mr. Train. We have a number of the files, such files as Mr. Saper-
stein asked for.
Mr. Byrnes. You see, the very volume of the files and considera-
tion it was given makes it a little difficult to recall the things in detail.
It was pretty complicated.
Mr. Pecora. Do you recall whether or not a dispute had arisen
between the French holders of the bonds of the State of Minas Geraes
prior to March, 1928, in which the issue was whether or not the State
should pay those bondholders in gold or in paper.
Mr. Byrnes. My recollection is that there was a dispute between
the State and the bondholders in regard to a currency clause in either
the bonds or the loan contracts.
Mr. Pecora. That dispute was taken into the French courts by
the bondholders, for determination was it not?
Mr. Byrnes. My recollection is yes.
Mr. Pecora. And the French court handed down a decree in favor
of the contention of the bondholders substantially to the effect that
the bonds were payable in French gold francs. Do you recall that?
Mr. Byrnes. I do not, no. It may be so. At that time there were
a great many of these cases before the French courts on currency
clauses, and naturally the French courts in every case where they
could would hold in favor of their own citizens.
Mr. Pecora. You do not mean to say that naturally the French
courts woidd ignore the specific terms and provisions of the indenture
agreements
Mr. Byrnes. No, but natm-ally
Mr. Pecora (interposing). And make decisions in favor of bond-
holders merely because they were French, do you?
Mr. Byrnes. No, no. A decision, I suppose, in any court of any
country would have to be justified by the evidence, but if there were
any possibihty of the weight of evidence perhaps just teetering one
way or the other, naturally it would be resolved in favor of their own
citizens.
Mr. Pecora. Don't you know that the State of Minas Geraes did
not even raise a defense to the contention of the French bondholders
that the bonds were payable in gold francs?
Mr. Byrnes. Yes, but you know that the question of the bond-
holders against a sovereign State and the right to sue, a decision of a
French com't is not necessarily binding upon the United States
Government or upon the Government of the State of Minas?
STOCK EXCHANGE PRACTICES 2131
Mr. Pecora. But the State of Minas Geraes accepted the decision
of the French courts in that respect, did it not?
Mr. Byrnes. I would hke to be as positive as I feel, but my recol-
lection is that the State of Minas did not accept the decision of the
French court.
Mr. Pecora. Did not the State of Minas Geraes
Mr. Byrnes (interposing). May I check it, Mr. Pecora, with Mr.
Train?
Mr. Pecora. Let me see if I can refresh your recollection by my
question: Did not the State of Minas Geraes take an appeal to a
higher judicial tribunal, which appeal was based solely on the ground
that the original court or tribunal had no jurisdiction? Do you recall
that?
Mr. Byrnes. I do not. I am sorry, but I do not. If that is so,
it has slipped my memory.
Mr. ScHOEPPERLE. Do you mind if I hand Mr. Byrnes a memoran-
dum covering that point?
Mr. Pecora. Hand Mr. Byrnes anything from your records which
will enable him to refresh his recollection. We want these questions
answered.
(Mr. Schoepperle handed Mr. Byrnes the documents.)
Mr. Pecora. Have you completely forgotten all these details,
Mr. Byrnes?
Mr. Byrnes. Completely? I would not say that; no.
Mr. Pecora. Or to the extent that
Mr. Brynes (interposing). I have forgotten them to the extent
that I am telling you. May I read from this?
Mr. Pecora. What are you reading from?
Mr. Brynes. This is a memorandum or extract from a letter
from Mr. Train to myself dated June 12, 1927. (Addressing Mr.
Train:) I assume that this letter was written after you had studied
the situation either in New York and Minas
Mr. Train. And Bello Horizonte.
Mr. Brynes. And the State's capital.
Mr. Pecora. What is the date of that memorandum?
Mr. Byrnes. June 12. It is an extract from a letter of that date,
June 12, 1927. It is not very long.
Mr. Pecora. All right; go ahead.
Mr. Byrnes (reads) :
The State authorities contend that they received no complaints regarding the
payment of the service of the three loans of 1910, 1911, and 1916 in paper francs
up to 1924. Apparently this refers to the action taken by the bondholders com-
mittee through diplomatic channels. The State contends that it furnished expla-
nation of its position in this respect, and that the coupons of that year and of 1925
were paid without protest from the bondholders.
Late in 1925 it was informed by Bauer, Marchal & Co. that a suit was pending
in the French courts, and shortly thereafter judgment had been rendered against
the State by default.
Parenthetically may I assume that that means that the State did
not appear?
Mr. Pecora. The State did not put in a defense?
Mr. Byrnes. Yes. [Continues reading:]
The State authorities received no formal summons to appear to defend the
suit or any official notification thereof. In accordance with French law, the
summons was served on the proctor of the French Republic. The State contends
2132 STOCK EXCHANGE PRACTICES
that immediately it was placed in cognizance of the facts, it engaged French
counsel, and caused an appeal to be filed. The grounds for the appeal were
chosen with a view to any subsequent action the State might have against Bauer,
Marchal & Co.
Mr. Pecora. What was the outcome of that appeal taken by the
State?
Mr. BYRNEa (addressing Mr. Train). Is the decision of the court
here in the files?
Mr. Train. I do not know.
Mr. Pecora. Well, let us see if you recall that during the pendency
of the appeal the State of Miaas Geraes made a settlement with the
French bondholders and paid them in gold. Do you recall that?
Mr. Byrnes. I am reminded that a settlement was entered into
between the State and the bondholders or their representatives. The
exact terms of that settlement are not clear in my mind.
Mr. Pecora. Eventually the National City Co., with your con-
currence and approval or recommendation, decided to float this
$8,500,000 issue of bonds for the State of Minas Geraes, did it not?
Mr. Byrnes. Yes.
Mr. Pecora. Do you recall at what price those bonds were offered
to the public?
Mr. Byrnes. No; I do not.
Mr. Pecora. Can you refresh your recollection on that point by
the records?
Mr. Byrnes. I have before me an advertisement apparently
appearing in the papers of Monday March 19, 1928, showing an
offering of the $8,500,000 State of Minas 6K per cent bonds, in 1928,
at the price of 97K and interest, made by the National City Co.,
Kissel, Kinnicutt & Co., and the J. Henry Schroeder Banking Corpo-
ration.
Mr. Pecora. What was the spread to the National City Co. on
this flotation?
Mr. Byrnes (after conferring with others). Apparently the net
cost was 93.167 percent, a spread of somewhat over 4 points.
Mr. Train. 4.333.
Mr. Pecora. What do you mean when you say the "net cost"?
At what price were these bonds underwritten?
Mr. Byrnes. You see, we bought the bonds on a flat basis.
Mr. Pecora. What was that flat basis?
Mr. Byrnes. We bought the bonds at 95 flat, and deducting from
that price the accrued interest to date made the price.
Mr. Pecora. 93.167?
Mr. Byrnes. Yes. We deal in this market, in the American
market, generally on an "and interest" basis. Most foreign markets
deal in bonds flat, and I assume this arrangement was probably due
to the fact that the State officials were accustomed to thinking in
terms of flat prices, and at the same time the London banking house,
you see, J. Henry Schroeder & Co., were with us, and I think their
practice a little bit dictated.
Mr. Pecora. Subsequent to that was another bond issue floated
by the National City Co. on behalf of the State of Minas Geraes, in
the sum of $8,000,000?
Mr. Byrnes. Yes. In the file before me I see an advertisement
over the same names of 8,000,000.
STOCK EXCHANGE PRACTICES 2133
Mr. Pecora. They were also 6H-percent bonds?
Mr. Byrnes. Thev were 6H-percent bonds. The series of 1929
series A of 1929.
Mr. Pecora. When were they issued in 1929? Was it about
September 1?
Mr. Byrnes. The date of this advertisement is Septonihor 16.
That woidd more or less fix the date of pubHc ofrerinji,
Mr. Pecora. Yes. The National City Co. toolc part in that
ofi'ering, did it not?
Mr. Byrnes. Yes.
Mr. Pecora. At what price were they offered to the public?
Mr. Byrnes. 87 and interest.
Mr. Pecora. 87 and interest?
Mr. Byrnes. Yes.
Mr. Pecora. A year and a half before the $8,500,000 issue bearing
the same rate of interest was oft'ered at 97^. How do you account
for a depreciation of 10 points in the similar issue offered a year and
a half later?
Mr. Byrnes. By the general conditions of the market. A year
and a half lapse of time there, you see, from
Mr. Pecora (interposing). From March 1928 to September 1929.
Mr. By'rnes. There was a substantial change in the market of
practically all bonds of tliis type in the interim.
Mr. Pecora. What was the spread to the National City Co. on
that issue of September 1929?
Mr. Byrnes. Again the bonds were bought at a flat price of 84%
and with the allowance for the interest deduction, the net price to
The National City Co. appears to have been 82.33, a spread of 4.67
points.
Mr. Pecora. Have you before you a copy of the circular or pros-
spectus that accompanied this offering in September 1929?
Mr. Byrnes. Yes.
Mr. Pecora. Will you produce it, please?
(Mr. Byrnes handed Mr. Pecora documents.)
Mr. Pecora. Do you find in this cu'cular the following statement
with regard to the use to be made of the proceeds of this loan, "The
proceeds of this loan will be utUized for purposes designed to increase
the economic productivity of the State"?
Mr. Byrnes. That statement is contained in the simimary on the
outside page of the cu'cular. In the letter which constitutes the actual
body of the prospectus from the President of the State, that purpose
was stated a little bit more fully.
Mr. Pecora. How was it stated in that portion of the circular to
which you have just referred? Will you just read it into the record?
Mr. Byrnes. It says:
The proceeds of the loan will be utilized as provided in law No. 1061 of August
16, 1929, for all or some of the following mentioned purposes: Purchase of addi-
tional equipment for the South Minas Railway and the Paracatu Railway, the
further development of the Electric Light & Power system of Bello Horizonte,
the State capital, advances to the Banco do Credito Real of Minas Geraes — ■
the land credit bank —
for the purpose of increasing its facilities for making agricultural and mortgage
loans, for loans to the municipality of the capital, and to other municipal cor-
2134 STOCK EXCHANGE PRACTICES
porations of the State, and for an}' other productive undertakings duly authorized
by law.
Mr. Pecora. As a matter of fact, do you know whether or not the
proceeds of this second loan of $8,000,000 were used for those pur-
poses entirely?
Mr. Byrnes. Of my own knowledge?
Mr. Pecora. Your own knowledge.
Mr. Byrnes. No.
Mr. Pecora. Do you recall that, as a matter of fact, around
$4,000,000 of the proceeds of this second loan of $8,000,000 were
used to pay ofl" e.xisting short-term obUgations held bv the National
City Co.?
Mr. Byrnes. I have no such recollection.
Mr. Pecora. And by Schroeder?
Mr. Byrnes. I have no such recollection, no. It may be so. I do
not recall it. I would rely upon the fiscal officers of the State of
Minas to apply the funds in accordance with their statement of the
purposes.
Mr. Pecora. Will you see if you have among the files of the National
City Co. before you, a copy of the contract?
Mr. Byrnes (after examining documents). Mr. Pecora, may I
speak to you off the record?
Mr. Pecora. Yes.
(Discussion off the record.)
Mr. Byrnes. Well, Mr. Pecora, that was four years ago, nnd I
certainly was not being paid, nor anybody else, either undistributed
profits or otherwise, for handling any of the legal details, and this
appears to have been a cpiestion of legal details, ^ind in the end they
were interested in seeing that the issue was legally made, and we got
from our cotmsel in New York, supported by high legal opinion in
Brazil, an absolute opinion as to the legality of the issue.
Mr. Pecora. Now, Mr. Byrnes, what I want to find out essentially
is this: Is it not a fact that when the National City Co. put out this
circular offering the second loan of $8,000,000 to the American
investing public, wliich circular contained the statement that the pro-
ceeds of the loan were to be utilized for purposes designed to increase
the economic productivity of the State of Minas Geraes, the National
City Co. knew that appro.ximately half of this loan was to be used to
pay off short-term obligations which it held. That is what I want
to loaow.
Mr. Byrnes. That very law, Mr. Pecora, under which the authority
was granted contains a paragraph to this effect :
The Government is also authorized to make, within the country or abroad, in
national or other coin short-term loans or other credit operations within the limits
above mentioned — -
And referring to the present authorization —
For all and any of the purposes declared in letters a, b, e, d, and e of this law,
and such loans and transactions for short terms shall be paid and redeemed with
the proceeds of the credit operations authorized by this law.
Mr. Pecoka. Exactly. And you find that among the records of
the National City Co., don't you?
Mr. Byrnes. Yes. And that is apparently a transaction within
the law.
STOCK EXCHANGE PRACTICES 2135
Mr. Pecora. When did the National City Co. receive the infor-
mation embotried in the records from which you have just read?
Mr. Byrnes. This is a photostatic copy of the translation. And
I am informed here that our counsel wrote the law, so to speak, so
that I am assuming that would give me greater confidence that it
was legally issued.
Mr. Pecora. You mean that Shearman and Sterling wrote the
law for the State of Minas Geraes?
Mr. Byrnes. No; I would hardly say that. I think rather that
Momsen and Torres, who were our counsel down there, that they
drafted the law, which would be a better way of putting it, than that
they wrote the law.
Mr. Pecora. And you might be right in both instances.
Mr. Byrnes. Well, that would be rather extraordinary to say the
least.
Mr. Pecora. All right. But, Mr. Byrnes, does it now appear to
you that between the flotation of the first loan of $8,500,000, in
March of 1928, and the flotation of this second loan of $8,000,000 in
September of 1929, some short term loans or advances had been made
to the State of Minas Geraes? Does that appear to you to be a fact
now?
Mr. Byrnes. I assume that would be the fact.
Mr. Pecora. What was the amount of these short term loans or
advances?
Mr. Byrnes. Well, now, let me see
Mr. Pecora (interposing). Just approximately will do.
Mr. Train. In what period, Mr. Pecora?
Mr. Pecora. Those that were paid out of this $8,000,000 loan.
Mr. Train. Well, there were £650,000 and, let me see, $800,000.
Mr. Byrnes. Apparently the loan was split between
Mr. Pecora (interposing). Give us the aggregate amount in terms
of dollars.
Mr. Byrnes. Well, I would say $750,000, and the equivalent of
£650,000, which at that time would have been, roughly — well, let me
see
Mr. Pecora (interposing). So that between $3,000,000 and $4,000,-
000 of the proceeds of this $8,000,000 loan, instead of having been
used for the purposes designed, to increase the economic productivity
of the State of Minas Geraes, were actually used to pay back those
who had made short-term loans or advances to the State.
Mr. Byrnes. No, I think the language here is correct. It says
the proceeds will be utilized, or if you will change that, were utilized
as provided in law No. 1061.
Mr. Pecora. Now, the statement on the face of the prospectus is
specifically as follows, isn't it:
The proceeds of this loan will be utilized for purposes designed to increase the
■economic productivity of the State.
Mr. Byrnes. Yes, but that is preceded by a statement that the
following summary is based upon the accompanying letter signed by
His Excellency Antonio Carlos Ribeiro de Andrada, President of the
State of Minas Geraes.
Mr. Pecora. And in the summary of the letter placed in this
prospectus that statement is made concerning the utilization to be
made of the proceeds of this loan, is it not?
2136 STOCK EXCHANGE PKACTICES
Mr. Byrnes. Yes.
Mr. Pecora. That statement is couched in the words I have just
read.
Mr. Byrnes. Yes.
Mr. Pecora. That the proceeds of this loan will be utiUzed for
purposes designed to increase the economic productivity of the State,
is that correct?
Mr. Byrnes. Yes; and I think it is quite correct.
Mr. Pecora. When, as a matter of fact
Mr. Byrnes (interposing). Have you that
Mr. Pecora (continuing). One minute. When as a matter of
fact between $3,000,000 and $4,000,000 of the proceeds of this $8,000-
000 loan, were actually used to pay back to the lenders between
$3,000,000 and $4,000,000 of short term advances or loans, is that
right?
Mr. Byrnes. Yes; but those advances had been made for those
purposes, you must remember.
Mr. Pecora. Those advances had been made for those purposes,
but why was the public told that the proceeds of this particular loan
represented by this bond issue were going to be utihzed, not to pay
back those existing short-term obHgations but directly for purposes
designed to increase the economic productivity of the State?
Mr. Byrnes. Because the buyer of a bond is interested in the
essential facts rather than the maclunery.
Mr. Pecora. The essential fact in this case was that those short-
term loans were to be paid back out of the proceeds of tliis loan,
isn't that so?
Mr. Byrnes. Yes; but
Mr. Pecora (interposing). And the public was not told that fact
ia this circular, was it?
Mr. Byrnes. Yes.
Mr. Pecora. Where?
Mr. Byrnes. Right in the back, under law no. 1061.
Mr. Pecora. Read it.
Mr. Byrnes. It says:
The proceeds of this loan
Mr. Pecora (interposing). Read the information that you say is
contained in that circular, which informs the public that a substantial
part of the proceeds of that loan was to be used to pay back those
short-term advances.
Mr. Byrnes. That is inherent in the first phrase, that the proceeds
of the loan will be utihzed as provided in law 1061.
Mr. Pecora. Is that the information given to the public to inform
it that the proceeds, or a substantial part of the proceeds, were to be
used to pay back those short-term advances?
Mr. Byrnes. Yes, sir.
Mr. Pecora. Is that what you claim served notice on the pubUc
that nearly half of the proceeds of this loan was to be used to pay
back those short-term loans?
Mr. Byrnes. Mr. Pecora
Mr. Pecora (interposing). Won't you answer that question?
Mr. Byrnes. Well, excuse me. Of course, I will answer your
question, but
Mr. Pecora (interposing). Please do so then.
STOCK EXCHANGE PRACTICES 2137
Mr. Byrnes. But you want my opinion. If you ask me: Does
this paragraph contain the direct statement that certain sliort-term
advances incurred for these purposes were to be refunded by this
loan, I must answer no, it does not state in here that short-term
advances incurred for those purposes are going to be paid back.
But that machinery was provided in the law.
Mr. Pecora. Well, Mr. Byrnes, why was not the simple statement
embodied in this circular issued to the American investing pubhc
that between $3,000,000 and $4,000,000 of the proceeds of this loan
were to be applied to the payment of the short term loans? \Vhy.
was not that simple statement put in the circular?
Mr. Byrnes. Because it was more important to state the real
purposes for which the borrowing was made, rather than the ma-
chinery thi-ough which it was to be applied.
Mr. Pecora. It was the purpose of the circular to give the investing
public here, who were asked to buy those $8,000,000 worth of bonds,
a full and complete picture of the purposes behind this loan, wasn't it?
Mr. Byrnes. Yes.
Mr. Pecora. And if it was understood and known to the National
City Co. at the time of tliis flotation that between $3,000,000 and
$4,000,000 of the proceeds of this loan were to be used to pay back
short term loans or advances, then held either wholly or in part by
the National City Co., why was not that simple statement made in
this circular instead of the statement reading as follows :
The proceeds of this loan will be utilized for purposes designed to increase the
economic productivity of the State.
Mr. Byrnes. Do you wish me to answer by giving my opinion?
Mr. Pecora. I have asked the question and am now awaiting
your answer.
Mr. Byrnes. In my opinion there is no investor that I know of
who would have had the slightest interest, or whose judgment would
have been in the least affected, by the fact that the moneys from this
loan were to be used to pay advances which were made for these
purposes. But such investor is interested in the real expenditures of
the State, and for what purpose the State is really borrowing. And
that is the essential information which is given. Now, to have quoted
the law in full, to have embodied in the prospectus the full legal opinion
of our Brazilian counsel and our New York counsel on this thing,
would have made such prospectus so inordinately long that there
would have been no chance that the investor would have read it, in
my opinion.
Mr. Pecora. Is that your statement now?
Mr. Byrnes. Yes.
Senator Brookhart. That proposition would not have taken much
space, just to set out the interest of the National City Co. and say
that the company itself was going to have in this money, would it?
Mr. Byrnes. It is assumed in aU financial practice in every market
I know that the fiscal agents and bankers for the Government carry
it with short-term advances, just as the Federal Reserve bank carries
the United States Government pending the funding operation.
Mr. Pecora. Why do you say it is assumed by everybody? What
do you know as to what is in the minds of the general mass of the
investing public when they receive chculars offering bonds for their
subsciiption?
2138 STOCK EXCHANGE PRACTICES
Mr. Byrnes. Well, I do not know much that is in the mind of the
investing public, perhaps, but I have had a certain amount of contact
with that public over a period of a good many years.
Mr. Pecora. The elements which you refer to may be known to
the trained and sophisticated bond buyer, but you certainly do not
mean to tell this committee, do you, Mr. Byrnes, that the mass of
the investiEg public here in America know the elements to which
you have just referred?.
Mr. Byrnes. Naturally, they depend upon the bankers to see that
the issue is properly made, and the bankers in turn must depend on
counsel to see that the necessary legal formalities are set up.
Mr. Pecora. The average investor, the average bond buyer, does
not look into those tilings, does he?
Mr. Byrnes. He depends, first, upon the banker, and they in
turn must depend upon their counsel as to the matter of legality.
Mr. Pecora. And the bond buyer relies considerably upon the
prestige of the offering and distributing house, doesn't he?
Mr. Byrnes. Why, certainly he does, not only here but anywhere
else that I know of.
Mr. Pecora. Exactly, anywhere.
Mr. Byrnes. Yes, sir.
Mr. Pecora. The National City Co. considered that it not only had
the prestige which it had developed since its incorporation inlOll, but
that it also had the prestige represented in the name of the National
City Bank, didn't it?
Mr. Byrnes. I do not think the prestige of the National City
Bank had anytliing to do with the prestige achieved by the National
City Co. in the course of a careful and conservative development of
its business over the years.
Mr. Pecora. Don't you know that the National City Co. put out
literature for general distribution among the investment public
connecting it specifically with the National City Bank, calling atten-
tion to the history of the National City Bank, and referring to the
bank as having been chartered way back in the early days of the
Republic and as having had as its first president a member of the
cabinet of George Washington? Don't you loiow that?
Mr. Byrnes. Do you mean that the National City Co. put out
such hterature?
Mr. Pecora. Yes. Don't you know that such literature was put
out either by the National City Co. or the National City Bank?
Mr. Byrnes. I do not know. You asked me about the National
City Co., and I do not know that any such literature was put out by
the City Co.
Mr. Pecora. If you will come here this afternoon, Mr. Byrnes, I
will show you some of it.
Mr. Byrnes. That is all right. I am perfectly wilhng to be shown
if you can do so. But you asked me the question about the National
City Co., and I do not know any such tiling.
Mr. Pecora. Mr. Byrnes, you did not have charge of putting out
literature on behalf of the National City Co., did you?
Mr. Byrnes. I did not.
Mr. Pecora. Do you know who did have charge of that?
Mr. Byrnes. No; I do not.
Mr. Pecora. It had a publicity department, didn't it?
STOCK EXCHANGE PRACTICES 2139
Mr. Byrnes. Yes, and a different man at different times.
Mr. Pecora. Who was at the head of it in 1927, 1928, and 1929?
Mr. Byrnes. I think Mr. McNaraee.
Mr. Pecora. Is he still connected with the company, do you
know?
Mr. Byrnes. I do not know. I do not think he is though.
Mr. Train. That is, at any rate he headed a department, and
over him was someone else.
Mr. Pecora. Is Mr. Baker in the room?
Mr. Train. I believe not.
Mr. Byrnes. I had nothing to do with that, Mr. Pecora.
Mr. Pecora. You never saw such literature as I have referred to?
Mrl Byrnes. No; I did not. That is, I do not recall it.
Mr. Pecora. Mr. Byrnes, are both of these bond issues of the
State of Minas Geraes which we have been referring to in the course
of your examination, now in default?
Mr. Byrnes. I overheard your statement that they were, made by
you to Senator Brookhart, otherwise I would not attempt to state.
Mr. Pecora. Can you confirm that?
Mr. Byrnes. I have talked with Mr. Train, and he confirms that
the last two coupons have not been paid.
Mr. Pecora. Well, the default was made in September of 1931,
wasn't it?
Mr. Byrnes. No; in 1932, I am informed. The March, 1932,
coupons were not paid, I believe.
Mr. Pecora. Wasn't that in September of 1931?
Mr. Train. The September, 1931, coupons were paid out of the
service reserve fund impounded with the bank.
Mr. Pecora. What is the first issue of those bonds quoted at now?
Mr. Byrnes. Around 21 or 22, Mr. Train tells me.
Mr. Pecora. Wliat is the second issue quoted at?
Mr. Byrnes. I assume at about the same price but I don't laiow.
Mr. Pecora. Now, Mr. Chairman, that concludes the questioning
of this witness. But I do want to examine Mr. Train on the subject
of these two foreign issues.
The Chairman. Mr. Train, please stand, liold 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 tliis committee, so help you God?
Mr. Train. I do.
TESTIMONY OF GEORGE F. TRAIN, SCARSDALE, N. Y.
Mr. Pecora. Mr. Train, give your full name, address, and occupa-
tion, please, to the committee reporter.
Mr. Train. My name is George F. Train, 12 Colvin Koad, Scars-
dale, N. Y., a member of the foreign buying department. National
City Co.
Mr. Pecora. \Miat is your business or occupation?
Mr. Train. I am a member of the foreign department. National
City Co.
Mr. Pecora. Wiat position do you hold there?
Mr. Train. I have no ofRcial position.
119852— 33— PT 6 25
2140 STOCK EXCHANGE PRACTICES
Mr. Pecora. How long have you been connected with the foreign
department of the National City Co. in any capacity?
Mr. Train. Since February of 1926.
Mr. Pecora. Do you recall the negotiations, facts and circum-
stances of the underwriting and offering of the $8,500,000 of Minas
Geraes bonds by the National City Co. in March of 1928?
Mr. Train. I recall particularly the negotiations and investiga-
tions which I made in Brazil in the year 1927. However, at the
time of the 1928 loan, when it was finally issued in March of that
year, and for several months prior thereto, I was again in South
America. I was not in New York.
Mr. Pecora. Did you express any judgment, opinion, or recom-
mendation to the executive officers of the National City Co. with
respect to the underwriting of this loan of March, 1928?
Mr. Train. I did.
Mr. Pecora. Were any of your expressions submitted in writing?
Mr. Train. They were.
Mr. Pecora. Have you copies of them here, or the originals, if
possible?
Mr. Train. Mr. Pecora, the State of Minas Geraes No. 1 file,
the negotiation file, which contains practically all of my letters
Mr. Pecora (interposing). I do not hear you. Please speak up
louder.
Mr. Train. The No. 1 State of Minas Geraes fUe, which contains
the most of my letters, does not appear to be here. I am told that
one of your associates subpoenaed the specific files that he wanted
brought to Washington, and apparently that was not one of them.
That file is in New York and can be produced later if desired. We
can have it here by to-morrow morning the fu'st thing.
Mr. Pecora. Were not all the files referring to the Minas Geraes
loans asked for by subpoena?
Mr. Train. I do not know, Mr. Pecora. Mr. Law handled that.
Mr. Pecora. Senator, if you wiU take a recess at this time, we will
go over the files and find out what the situation is.
Mr. Train. Mr. Pecora, if you have extracts from those files, I
am prepared to accept any tiling that you have.
Mr. Pecora. I am suggesting to the chairman of the committee
that a recess be taken now, instead of within half an hour, to enable
us to do that very thing, and we will probably save time in the long
run, by that process, Mr. Chairman.
The Chairman. The subcommittee will stand in recess until 2
o'clock p. m.
(Thereupon, at 11.45 a. m. the committee recessed until 2 o'clock
p. m. the same day.)
AFTER RECESS
The subcommittee resumed at 2 o'clock p. m. on the expiration of
the recess.
The Chairman. The subcommittee will resume. Who will you
have fu-st, Mr. Pecora?
Mr. Pecora. Mr. Chairman, there is some evidence I want to
present about a matter wholly unrelated to tlie Minas Geraes bond
issues, which are the subject of inquiry in connection with the exam-
ination of Mr. Train who is now on the stand. So, with your per-
STOCK EXCHANGE PRACTICES 2141
mission, I should like to suspend my examination of Mr. Train at
this point, but having him remain in the room, and ask that Mr.
Baldwin be called to the stand.
The Chairman. It is so ordered. Please stand, hold up your right
hand, and be sworn. You solemnly swear that you will teirtho truth,
the whole truth, and nothing but the truth regarding the matters now
under investigation by this subcommittee, so help you God?
Mr. Baldwin. I do.
TESTIMONY OF SAMUEL W. BALDWIN, MAPLEWOOD, N. J.
TREASURER NATIONAL CITY CO.
Mr. Pecora. Mr. Baldwin, will you give your full name to the
committee reporter?
Mr. Baldwin. Samuel W. Baldwin.
Mr. Pecora. And your residence.
Mr. Baldwin. Maplewood, N. J.
Mr. Pecora. And your business or occupation.
Mr. Baldwin. National City Co.
Mr. Pecora. What position do you hold with the National City Co.?
Mr. Baldwin. Treasurer.
Mr. Pecora. How long have you been its treasurer?
Mr. Baldwin. Since June 1, 1929.
Mr. Pecora. Prior to that time were you connected in any other
capacity with that company?
Mr. Baldwin. Yes.
Mr. Pecora. Will you give briefly a history of your connection
with that company, when it commenced, the various positions you
may have held up to the time when you became treasurer in 1929?
Mr. Baldwin. Well, I came to the National City Co. from N. W.
Halsey & Co. in August of 1916. At first I was a clerk, and I was
later made chief clerk, and later assistant treasurer. I can not give
you the dates as I do not remember them.
Mr. Pecora. All right.
Mr. Baldwin. And then I remained assistant treasurer until I was
made treasurer of the company.
Mr. Pecora. Do you recall a transaction m which the National
City Co. in 1931 underwrote an issue of 4:% per cent serial bonds issued
by the Port of New York Authority, and having various maturities?
Mr. Baldwin. I do.
Mr. Pecora. Can you tell the committee the general purpose of the
loan represented by those bonds?
Mr. Baldwin. I have nothing to do with that and I would not
know.
Mr. Pecora. Was the entire issue underwritten by the National
City Co., or did it do so in combination with others?
Mr. Baldwin. With others.
Mr. Pecora. In combination with others?
Mr. Baldwin. Yes, sir. It was a joint account.
Mr. Pecora. You say it was a joint account?
Mr. Baldwin. Yes, sir.
Mr. Pecora. Wlio were the other participants in the joint account?
Mr. Baldwin. Well, that is a matter^ of record in the municipal
department. I do not keep that data.
2142 STOCK EXCHANGE PRACTICES
Mr. Pecora. Do you happen to recall?
Mr. Baldwin. No, sir.
Mr. Pecora. As treasurer of the National City Co. have you
general supervision over its financial accounts?
Mr. Baldwin. No.
Mr. Pecora. Well, what generally are your duties as treasiu-er?
Mr. Baldwin. Well, just to pay in and pay out, the custody of
securities or cash belonging to the company or to customers who may
leave them there for safe-keeping, service, and so forth.
Mr. Pecora. You have supervision of its finances and securities?
Mr. Baldwin. Yes, sir.
Mr. Pecora. WTiat was the total amount of this Port of New York
Authority bond issue in 1931?
Mr. Baldwin. It was $66,000,000.
Mr. Pecora. Did you say $66,000,000?
Mr. Baldwin. Yes.
Mr. Pecora. Do you recall the transaction in connection with the
handling of that bond issue wliich was had on or about the 2d day of
June 1931, in connection with which a cash ticket for $10,020 was
made out and the cash given to you?
Mr. Baldwin. I do.
Mr. Pecora. Have you the book of record, the book of account
containing the record of that withdrawal of cash?
Mr. Baldwin. Well, it is here. That is, the ledger record is here.
Mr. Pecora. Have you with you the syndicate expense book in
connection with that issue?
Mr. Baldwin. Yes.
Mr. Pecora. Will you produce it, please?
Mr. Baldwin. Yes, sir. Here it is.
Mr. Pecora. May I look at that book, please?
Mr. Baldwin. Yes, sir.
Mr. Pecora. This is the ledger account of the syndicate expenses
in connection with this bond issue, that you have just handed to me,
is it not?
Mr. Baldwin. It is; yes, sir.
Mr. Pecora. Now, I call your attention to the entry on sheet 2
of this ledger account, reading as follows:
1931, June 2, Ticket No. 642546, check to S. W. Baldwin, treasurer, $10,020.
Do you know what that transaction refers to?
Mr. Baldwin. I do.
Mr. Pecora. Will you please state it to the subcommittee?
Mr. Baldwin. Wliy, I received a telephone call from the vice
president telling me he needed $10,020 in cash.
Mr. Pecora. Wlio was the vice president from whom you received
that telephone call?
Mr. Baldwin. Mr. Sylvester.
Mr. Pecora. And was he the senior vice president of the company,
or did he hold any other title?
Mr. Baldwin. Well, he is vice president in charge of municipal
financing.
Mr. Pecora. And tliis issue I have referred to was an issue of that
kind, was it?
Mr. Baldwin. Yes, a municipal issue.
STOCK EXCHANGE PRACTICES 2143
Mr. Pecora. And in response to that telephone call did you cause
that cash ticket to be drawn to your order as treasurer?
Mr. Baldwin. I did.
Mr. Pecora. And the cash procured thereon?
Mr. Baldwin. I did.
Mr. Pecora. Wiat did you do with that cash?
Mr. Baldwin. I gave it to Mr. Sylvester.
Mr. Pecora. Did Mr. Sylvester say anything to you either at that
time, I mean at the time of that telephone call, or at the time when
you gave him the cash, as to the purpose of drawing that cash and
giving it to him?
Mr. Baldwin. He did not. He simply signed the receipt.
Mr. Pecora. Were you told to have tliis cash ticket drawn to your
order as treasurer?
Mr. Baldwin. I do not know that I was actually told that, but
that was the natural way to do it.
Mr. Pecora. Has any statement or explanation ever been made
to you in any way, shape, or form by anybody in the company con-
cerning the purpose of drawing out that cash?
Mr. Baldwin. There has not.
Mr. Pecora. Is there anything in the books of account of the com-
pany anywhere that would serve to show the purposes for which that
cash was drawn out and turned over by you to Mr. Sylvester?
Mr. Baldwin. Well, not that I know of. The books are not under
my supervision, but I do not know of anything.
Mr. Pecora. Is it usual to pay expenses of any kindincurred by
the company in connection with its business operations, in cash?
Mr. Baldwin. No; I should not say that it was.
Mr. Pecora. Do you know of any other instance of a similar
character where a sum of money amounting to several thousand
dollars or more was drawn out in cash and charged to expenses?
Mr. Baldwin. Not during my term as treasurer.
Mr. Pecora. Did you ever have any conversation with Mr.
Sylvester at any time in connection with this particular withdrawal
of $10,020 that served to enhghten you as to the purpose for which
that cash was drawn out or to which it was devoted?
Mr. Baldwin. No; I did not.
Mr. Pecora. Mr. Sylvester is not present here in the room at this
time, is he?
Mr. Baldwin. I do not think so.
Mr. Pecora. I understand, Mr. Chairman, that Mr. Sylvester has
been subpoenaed and will probably be in attendance before the
committee to-morrow morning.
The Chairman. All right.
Mr. Pecora. Mr. Baldwin, is there anything that .you can tell us
about this cash transaction other than what you have already told us?
Mr. Baldwin. Absolutely nothing.
Mr. Pecora. You have exhausted your entire and complete knowl-
edge of his transaction in the testimony that you have given here this
afternoon about it?
Mr. Baldwin. When I handed over the cash to Mr. Sylvester and
took his receipt I forgot all about it, and never gave it another thought
until just to-day.
Mr. Pecora. How was it charged on the books of the company.'
2144 STOCK EXCHANGE PRACTICES
Mr. Baldwin. Charged to syndicate expense.
Mr. Pecoea. Charged to syndicate expense?
Mr. Baldwin. Yes, sir; as shown right there.
Mr. Pecora. Have you any idea as to the nature of the syndicate
e.xpense wliich was paid by that cash?
Mr. Baldwin. None whatever.
Mr. Pecora. As a rule what was the nature of the expenses that
attended a syndicate account of this character?
Mr. Baldwin. Well, various needs, advertising, and sometimes —
well, I don't know that that would apply to municipal bonds, but
sometimes the preparation of temporary bonds, that is charged into
the syndicate expense, the use of a signatm-e company for signing the
bonds.
Mr. Pecora. Those expenses are paid by check, aren't they?
Mr. Baldwin. Mostly, yes.
Mr. Pecora. Specifically drawn to the person who receives the
money?
Mr. Baldwin. Usually.
Mr. Pecora. That was not done in the present case, that, is, with
regard to the item of $10,020?
Mr. Baldwin. It was not.
Mr. Pecora. Now, will you look at that ledger account before
you and tell us if it is not a fact that there is a specific item amounting
to $12,478 charged to advertising in connection with this syndicate
account?
Mr. Baldwin. Well, there may be $12,478 made up of various
items. I see one item of $11,918, which I happen to know is an ad-
vertising concern, and another one for $560.
Mr. Pecora. And that makes up the $12,478, doesn't it?
Mr. Baldwin. Yes, that is right.
Mr. Pecora. There is an item in that expense account of $15,000,
is there not?
Mr. Baldwin. I do not see any, no.
Mr. Pecora. Now, when were those bonds acquired by the Na-
tional City Co.?
Mr. Baldwin. Well, do you mean the date that we made payment
for them?
Mr. Pecora. Yes.
Mr. Baldwin. I think it was some time in March, but I can not
give you the exact date.
Mr. Pecora. As a rule when are the expenses accrued? When do
the expenses accrue in the maintenance of a syndicate account of that
character?
Mr. Baldwin. Well, do you mean when they are settled or paid?
Mr. Pecora. Yes.
Mr. Baldwin. Well, it varies probably with the issue, after the
issue has been received and deliveries to purchasers made.
Mr. Pecora. When in the present instance had those expenses
fully accrued?
I*- Mr. Baldwin. Well, I do not understand what you mean by
"accrued."
Mr. Pecora. When had they accrued and been paid?
Mr. Baldwin. Well, they were paid on these respective dates that
appear here.
STOCK EXCHANGE PRACTICES 2145
Mr. Pecora. What is the range of time covered by those dates?
Mr. Baldwin. From March 13 to June 30.
Mr. Pecora. Of what year, 1931?
Mr. Baldwin. Yes; 1931.
Mr. Pecora. All in the year 1931?
Mr. Baldwin. Yes.
Mr. Pecora. May I look at that ledger?
Mr. Baldwin. Certainly.
Mr. Pecora. The last entry appearing on this ledger record of this
syndicate account, is dated June 30, 1931, and is represented by
Ticket No. 43781, and is described as "Keserve for general investi-
gations," and the amount thereof is $4,980. Do you laiow the nature
of that item?
Mr. Baldwin. I beUeve that means — —
Mr. Pecora (interposing). Or, what are the supporting data for
that item?
Mr. Baldwin. Well, I believe it means that it was reserved for
any unforeseen expenses during the life of the expense account.
Mr. Pecora. Do you recall that a reserve of $15,000 for some
purpose or other was set up in connection with this syndicate account?
Mr. Baldwin. I do not.
Mr. Pecora. Did you receive instructions of any land that you
now recall about the writing off of $10,020 from the reserve of $15,000,
which would leave a balance of $4,980?
Mr. Baldwin. I never received any such instructions.
Mr. Pecora. Do you know of any written memorandum of any
kind in existence containing instructions to write down that reserve
from $15,000 to $4,980?
Mr. Baldwin. I do not.
Mr. Pecora. Didn't you present or produce a written memorandum
this morning to one of the associate counsel for the committee, or
exhibit it to him?
Mr. Baldwin. There was a memorandum in the municipal files,
yes.
Mr. Pecora. Have you that with you?
Mr. Baldwin. I think so.
Mr. Pecora. Will you produce it now?
Mr. Baldwin. There is a memorandum addressed by the municipal
department to the accountant.
Mr. Pecora. How does it read?
Mr. Baldwin. It reads:
We attach hereto a statement of joinl-account expenses in connection with the
issue of $66,000,000 of Port of New Yorlc Authority 4^ per cent bonds, dated
March 15, 1931. Kindly set up as a reserve for sundries, $15,000.
Mr. Pecora. Was that reserve set up in pursuance of the instruc-
tions embodied in this memorandum?
Mr. Baldwin. Well, I presume it was, but of course that did not
pass through me. ■ i i j
Mr. Pecora. Well, does that reserve appear anywhere in the ledger
record of that syndicate account?
Mr. Baldwin. I see no entry of $15,000 in this account.
Mr. Pecora. Attached to the memorandum that you have lust
produced, which is dated April 21, 1931, is a printed sheet entitled:
Expenses syndicate joint account,
2146 STOCK EXCHANGE PRACTICES
And so forth,
Issue of $66,000,000 Port of New York Authority 4% per cent bonds, dated
March 1, 1931.
Do you notice an entry on that sheet entitled "Reserve for sun-
dries, $15,000?"
Mr. Baldwin. I do.
Mr. Pecora. Does that memorandum which you have read relate
to that item?
Mr. Baldwin. I can not answer that, because that does not pass
through me.
Mr. Pecora. Whom did that pass through?
Mr. Baldwin. I assume it is the municipal department.
Mr. Pecora. Who is in charge of that department?
Mr. Baldwin. Mr. Sylvester.
Mr. Pecora. Did you say Mr. Sylvester?
Mr. Baldwin. Well, he is the vice president in charge.
Mr. Pecora. Do you now say that you have exhausted all the
knowledge you have concerning this transaction?
Mr. Baldwin. Yes. But I should like to point out that the
treasury department, in oiu- organization, maintains no record. I
mean the books of records are not imder the supervision of the treas-
urer.
Mr. Pecora. Do you recall when you gave that $10,020 in cash
to Mr. Sylvester, asking him how it was to be entered or to what it
was to be charged?
Mr. Baldwin. I will answer that in this way if I may: When
I received the telephone request I dictated a memorandum to myself,
a combination memorandum and acting as a receipt and instructions
to charge it to this account, which I presented with the currency to
be signed.
Mr. Pecora. And was it signed?
Mr. Baldwin. Yes, sir.
Mr. Pecora. Where is it?
Mr. Baldwin. In New York.
Mr. Pecora. It is now in New York?
Mr. Baldwin. Yes, in the files.
Mr. Pecora. Well, in addition to doing that did you ask Mr.
Sylvester how that specific sum should be treated and entered on the
books and to what it should be charged?
Mr. Baldwin. It said so on the memorandum, to be charged to
syndicate expense. That was written right into the memorandum.
Mr. Pecora. Have you any idea whatsoever of the nature of the
expense charged to the syndicate account in the transaction which
that $10,020 represents?
Mr. Baldwin. None whatever.
Mr. Pecora. May I ask, Mr. Chairman, whether there is any
gentleman connected with the National City Co. now in the room,
who can enlighten the committee with regard to this item? [After
a pause.] If there is I should hke to have liim indicate that and take
the stand. [After a pause.] Do you know about that, Mr. Law?
Mr. Law. I can explain the mechanical entries. But I do not
know anything more about it.
Mr. Pecora. I think we may now excuse Mr. Baldwin. Will you
leave those records here, please?
STOCK EXCHANGE PRACTICES 2147
Mr. Baldwin. All right.
(Thereupon Mr. Baldwin left the stand.)
The Chairman. Mr. Law, will you resume the stand?
TESTIMONY RESUMED OF HARRY S. lAW, SECRETARY THE
NATIONAL CITY CO., NEW YORK CITY
Mr. Pecora. Mr. Law, you have heretofore been sworn, I believe?
Mr. Law. Yes, sir.
Mr. Pecora. IVIr. Law, have you heard completely the testimony
given by the last witness, Mr. Samuel W. Baldwin?
Mr. Law. I have.
Mr. Pecora. Do you loiow of your own personal Icnowledge any-
thing with respect to the matters that he was interrogated about?
Mr. Law. No; except the explanation of their method of setting
up the expense, and probably the clearance of what a reserve means.
Mr. Pecora. You say "probably." Do you know definitely as
applied to the specific transaction now under consideration?
Mr. Law. As to the entries, yes; they were under my direction.
Mr. Pecora. Did you make any of the entries concerning this
particular transaction?
Mr. Law. No, sir. I never have made any entries.
Mr. Pecora. What expenses are included in a syndicate account
of the nature referred to in Mr. Baldwin's testimony with respect to
the expenses or reserve for expenses?
Mr. Law. Any expense necessary to investigate and negotiate a
deal. And by "any" is meant what may be necessary for legal fees,
printing, postage, insurance, traveling expense, and other things of
that kind which are necessary in the preparation and issuance of a
security of any kind. They vary according to the deal, of course.
Mr. Pecora. Yes. Now, will you look at the ledger account
produced here by Mr. Baldwin, with respect to which he was ex-
amined. Look at the entire account, and see whether you can tell
this committee from any entries you find, anything about the cash
ticket for $10,020 that appears there under date of June 2, 1931.
Mr. Law. It indicates that a payment was made in the form of
cash by Mr. Baldwin as treasurer of the company and charged to
this account on June 2, 1931.
Mr. Pecora. Is it customary or usual to make payment of expenses
in large sums by cash?
Mr. Law. I can not tell you how large other cash transactions have
been. There are always some cash transactions in connection with
practically every deal. It depends entirely upon the nature of the
transaction.
Mr. Pecora. Do you know of any other cash payments of that
amount, $10,020?
Mr. Law. I can not recall any right now; no.
Mr. Pecora. Have you any explanation to offer, either on the
basis of your personal Icnowledge or an assumption on your part,
with respect to this cash item?
Mr. Law. Not that particular item; no.
Mr. Pecora. You set up and supervised the system of accounting
that is kept by the National City Co., did you not?
Mr. Law. Yes, sir.
2148 STOCK EXCHANGE PRACTICES
Mr. Pecora. And this is the only transaction you know of, in-
volving a cash item of that amount or anything like that amount?
Mr. Law. Without reference to the books, I should say yes. But
there have been thousands of transactions that have passed over our
ledgers since I have been the comptroller of the company, and with-
out referring to the books I would not care to make a definite answer.
Mr. Pecora. Within your recollection, as long as you have been
the secretary of the company, have there been any other instances
where a sum of money anything as large as $10,000 has been drawn
out of the company's fund and paid out to some one in cash?
Mr. Law. I have not the slightest idea, Mr. Pecora.
Mr. Pecora. That is not in accordance with any system of ac-
countancy or bookkeeping which you have set up, is it?
Mr. Law. The system of accountancy and bookkeeping that I have
set up is to record the position of the company, its progress and its
status at a given moment. This is strictly
Mr. Pecora (interposing). That would include payments on be-
half of the company
Mr. Law. Yes.
Mr. Pecora. Of its obligations or indebtedness?
Mr. Law. Exactly. As I have testified, there are thousands of
syndicate and joint account transactions that have gone over our
ledgers during the period of my authority over the accounting de-
partment, as a part of the daily routine, and it would be a physical
impossibility for one man to watch all the entries that pass over the
National City Co.'s books.
Mr. Pecora. We do not expect you to be able to do that, of course.
But would a cash transaction involving a sum Hke $10,020 be an
imusual thing for your company so far as you know, as its secretary?
Mr. Law. It might be unusual, but not over the period of time I
have mentioned.
Mr. Pecora. You said a few moments ago that you did not know
of any other cash transaction.
Mr. Law. I say I have no recollection of such.
Mr. Pecora. You have no recollection of any?
Mr. Law. No.
Mr. Pecora. That means that you have no knowledge, doesn't
it? No knowledge which you could give expression to at tliis time?
Mr. Law. Recollection and knowledge are two entirely different
words.
Mr. Pecora. I will put it in this way: Have you now any knowl-
edge of any other cash transaction where payment was made in cash
and not by check or other written voucher, of any item nearly as
great as $10,000?
Mr. Law. I can not recall it.
Mr. Pecora. When you say you can not recall it, do you mean that
at this moment you have no knowledge of any other such transaction?
Mr. Law. That means that without an analysis of the records I
would not care to commit myself.
Mr. Pecora. You woidd not care to commit yourself?
Mr. Law. No, sir.
Mr. Pecora. Have you ever given instructions to any of the book-
keepers or accountants, or other employees of the company coming
directly under your supervision, to record cash transactions of any
STOCK EXCHANGE PRACTICES 2149
amount nearly as great as $10,000 in the way that this item has been
recorded?
Mr. Law. Specific instructions for recording any articidar transac-
tion are not given. The system is so set up that it records auto-
matically all the items that are passed by the treasurer or by the
accounting department according to a particular ticket.
Mr. Pecora. Well, the system that you set up for this accountancy
woidd not include the malang of a payment of as much as $10,000
by cash would it?
Mr. Law. That, Mr. Pecora, would be purely up to the vice
president in charge of the department negotiating the loan. His
instructions would be obeyed by the treasurer of the company, and
the transaction from that pomt on would be purely mechanical from
the standpoint of recording the payment made and entering it in
the proper account.
Mr. Pecora. Do you think it is good business practice to do that?
Mr. Law. I shoidd say yes.
Mr. Pecora. Do you think it is good business practice to make
payments of as much cash as $10,000 to an officer of the company?
Mr. Law. It would depend upon the officer and Ms authority.
This particular man had the authority to receive that cash.
Mr. Pecora. Do you think it is good bookkeeping practice?
Mr. Law. Good bookkeeping practice, yes; because bookkeeping
is merely a recording of items in a particular form for future reference.
Mr. Pecora. Do you know of any reason why a cash payment of
as much as $10,000 should be set up on the books of the company or
entered on the books of the company in a manner which would not
indicate the ultimate receiver of that cash and the purposes for which
it was paid?
Mr. Law. There is no reason why it should not be, I suppose.
Mr. Pecora. In this particular instance does the entry which
appears in the ledger account relative to that item, give you any
information such as I have suggested?
Mr. Law. Not at all.
Mr. Pecora. As that entry appears does it convey to you any
information or intimation as to the purpose for which that sum of
money was drawn and disbursed?
Mr. Law. Merely an expense in connection with the negotiation
or handling of the Port of New York Authority account.
Mr. Pecora. Well, other expenses are itemized and designated and
identified in the books, are they not?
Mr. Law. No. You have referred to the matter of general investi-
gations $4,980, which is not itemized.
Mr. Pecora. Do you know what the supporting data for that
item might be?
Mr. Law. At the time each deal is handled an estimate is made of
the expense necessary to handle it. All the expenses that are con-
nected with the negotiation and the handling of a loan are buried in
the general expenses of the National City Co.
Mr. Pecora. Buried there, what do you mean?
Mr. Law. Naturally, because those " negotiations are conducted
over a period of time. We haven't any idea when we start them
whether they will be successful or unsuccessful. Therefore they are
left in our expense account until the loan is signed or we think it is
2150 STOCK EXCHANGE PRACTICES
going to be signed, and then we estimate the expense necessary, or
that has been incurred in connection with it, phis what we think may
be incurred in the company until the deal is completed.
Mr. Pecora. This deal was completed entirely by June 30, 1931,
wasn't it? That is the date of the last entry appearing on that
ledger account.
Mr. Law. So the records show; yes. But often expenses are or
may have been incurred long prior to that.
Mr. Pecora. Is there anything on the printed sheet which Mr.
Baldwin presented here, and I refer particularly to the sheet entitled
"Expense of Syndicate Joint Account and so forth, reserve for sun-
dries $15,000", which would enlighten you in any way as to the
purposes for which the sum of $10,020 was used?
Mr. Law. I can explain the $15,000 very clearly. The expenses
which are itemized in the two columns, aside from this $15,000, are
definite expenses that were known at the date tliis sheet was set up,
April 21, 1931. And we knew that there were other expenses that
had to be incurred, or that would likely be incurred, in connection
with the negotiation and handling of tliis syndicate, that had to be
included with them, and this $15,000 reserve is to take care of the
additional expense. That is done in every syndicate and joint
account handled in connection with any issue.
Mr. Pecora. Does the data before you indicate that the reserve
of $15,000 for expenses for sundries was fully disbursed?
Mr. Law. It indicates that $10,020 was drawn by Mr. Baldwin in
the form of cash, and that $4,980 was used as a general investigation
item, which represents an expenditure of the National City Co.
because of expenses previously incurred in connection with this syn-
dicate. In other words, it was returned to the e.xpense account of
the National City Co. as a reduction to offset the previous expense.
Mr. Pecora. This $4,980 was not used.
Mr. Law. That was not used.
Mr. Pecora. But the $10,020 was used.
Mr. Law. Yes; that is correct.
Mr. Pecora. Now, look over the detailed and itemized expenses
that appear in the ledger account in regard to tliis syndicate account
and see if they cover all the conceivable expenses incurred in an enter-
prise of that character.
Mr. Law. Without knowing the nature of the expense of $10,020
I could not say. That might have been an expense incurred by some-
one outside for our account which Mr. Sylvester settled personally.
I have not the slightest idea.
Mr. Pecora. It might be some expense incurred outside for your
account?
Mr. Law. Yes, sir. I have not the slightest idea because I did not
handle the deal.
Mr. Pecora. You are familiar with the general nature and kind of
expenses incurred in these operations by the company, aren't .you?
Mr. Law. To some extent, yes; but each deal differs. In other
words, the expense in connection with a large deal of tliis kind, which
takes a long period to handle and negotiate, is not at all comparable
with a foreign deal or even with a small municipal deal.
Mr. Pecora. This was not a foreign deal.
STOCK EXCHANGE PRACTICES 2151
Mr. Law. I say, they are not comparable. I am trying to bring
out the comparison. It is not comparable with a small municipal
deal, which is bought and sold in one day.
Mr. Pecora. Can you think of any expense which this sum of
$10,020 might have been devoted to other than the items of expense
enumerated in that ledger account?
Mr. Law. No, sir. I am sorry to say I can not.
Mr. Pecora. How often are the accounts audited?
Mr. Law. The accounts are under a continual audit. The
National City Co. maintains its own auditing department, and the
accounts are audited in sections each day, so that once a month prac-
tically all accounts have been audited.
Mr. Pecora. They are not audited by any independent accountants?
Mr. Law. No, sir.
Mr. Pecora. And never have been?
Mr. Law. Never have been.
Mr. Pecora. That is all with this witness on this subject.
Mr. Law. Do you want to keep those records that you have in
your hand?
Mr. Pecora. If you please.
Mr. Baldwin. Mr. Chairman, am I to keep those records?
Mr. Pecora. Until Mr. Sylvester gets here tomorrow.
Mr. Law. I will guarantee to have them produced tomorrow.
Mr. Pecora. I should like to have our accountants look at them.
Mr. Law. And if they will return them to me I will keep them for
production tomorrow.
Mr. Pecora. All right.
Senator Fletcher (presiding). The witness is excused for the
present.
Mr. Pecora. Mr. Train will please resume the stand.
TESTIMONY RESUMED OF GEORGE F. TRAIN, SCARSDAIE, N. Y.
Mr. Pecora. Now, Mr. Train, referring to the second loan of
$8,000,000 for the State of Minas Geraes, which was underwritten in
part by the National City Co. in September of 1929 : Are you familiar
with the short-term notes or advances, or loans, which had been made
prior to that time by the National City Co. and other creditors of the
State of Minas Geraes?
Mr. Train. In 1929, Mr. Pecora, I was in Buenos Aires from the
beginning of the year until December of that year. I am only famil-
iar in a general way with the details of those transactions by reason
of familiarity with the files of the National City Co. concerning
Minas Geraes.
Mr. Pecora. Have you in the files a letter dated April 27, 1928,
written by you to Mr. M. E. Squires, acting manager of The National
City Bank of New York at Rio de Janeiro?
Mr. Train. Apparently that file is one wliich was not produced
here tlu-ough a misunderstanding, but if you have a copy I am pre-
pared to accept your extracting on that subject, and think I can
identify it.
Mr. Pecora. Have you prior to this time seen what purport to be
copies or extracts from yonr files concerning those Minas Geraes
loans?
2152 STOCK EXCHANGE PRACTICES
Mr. Train. I have not.
Mr. Pecora. I show you tliis paper, and I ask you to look it over,
please, and then tell us if you are prepared to say that in so far as it
contains an extract or extracts from your letter of April 27, 1928, it
correctly quotes those extracts.
Mr. Train. I would accept it as having been written by me; yes,
Mr. Pecora. I do not want to delay you by taking the time to read
it tkrough.
Mr. Pecora. Let me call your attention to the following extract
therefrom :
I regret to say that the reaction here in regard to how the State has handled
the details of this transaction is generally unfavorable, and there is a considerable
degree of uneasiness on the part of all concerned over the question of the State's
willingness to meet its obligations.
Do you find that there?
Mr. Train. I do.
Mr. Pecora. You were writing this letter from Rio de Janeiro,
in the Republic of Brazil, weren't you?
Mr. Train. No. This letter is addressed from me in New York
to Mr. M. E. Squires, acting manager of the National City Bank of
New York at Rio de Janeiro.
Mr. Pecora. You were referring to the reaction in the offices of
the company in New York City?
Mr. Train. Exactly.
Mr. Pecora. To the matter of whether the State of Minas Geraes
had handled certain of its financial transactions satisfactorily, is
that it?
Mr. Train. I recall perfectly well that at that time I was in New
York, and I should like to observe that as a result of several months
in Brazil I had become convinced that Minas Geraes was the best
State credit in Brazil. While I was there many proposals, many
propositions for external financing by Brazilian States, were brought
to me, and, considered in the light of statistical factors that one takes
into consideration, I rejected them all with the exception of Minas
Geraes. And — —
Mr. Pecora (interposing). Now — —
Mr. Train (continuing). I am trj-mg to explain the point I wish
to make, Mr. Pecora, if you will permit me.
Mr. Pecora. Well, no, you are trying to explain something that
I have not asked you about.
Mr. Train. That is quite true, but ■
Mr. Pecora (interposing). I am asldng you about the reaction
referred to in your letter of April 27, 1928, in which you say:
I regret to say that the reaction here in regard to how the State has handled
the details of this transaction is generally unfavorable, and there is a consider-
able degree of uneasiness on the part of aU concerned over the question of the
State's willingness to meet its obligations,
That is what I am questioning you about.
Mr. Train. I think, Mr. Pecora, if you wUl permit me, it is quite
pertinent to my reply in order to explain the background in my
mind with respect to the soundness of the Minas Geraes credit.
Mr. Pecora. No. First tell us why you wrote on April 27, 1928,
from the main office in New York to the manager in Rio de Janeiro
that there was uneasiness in the New York office about the willingness
STOCK EXCHANGE PRACTICES 2153
of the State of Minas Geraes to meet its obligations. Why did you
say that?
Mr. Train. Because certain of my superiors in the New York
office did not fully concur in my feeling that in any event the State
of Minas Geraes was good for its obligations. There is reference in
this letter, and I should hke with your permission, Senator, to note
for the record that immediately following the extract which Mr.
Pecora read, comes this statement:
It is freely stated here in New York that had it not been for the insistence of
Schroeder, the loan contract would never have met with our approval, without the
concession of the escrow clause, and certainly subsequent events would seem to
justify our contention in this respect. I am naturally reassuring our executives
here as to the good faith of the State officials in meeting their obligations, but
it would have left a much better taste in everybody's mouths had the matter
gone through in the usual orderly manner, to say nothing of the saving of cable
and other e.xpenses.
Mr. Pecora. Who were the higher officials of the company that had
expressed to you their uneasiness over the wilhngness of the Minas
Geraes State to meet its obligations?
Mr. Train. You will appreciate, Mr. Pecora, that in these matters
at times a somewhat narrow and legalistic interpretation is taken.
My recollection is that the officials in New York felt it would have
been safer for the bondholders to have escrowed the proceeds of this
loan for the specific purpose of redeeming the franc bonds. But I
felt from my experience in Brazil that the State was perfectly able to
redeem them and would do so, and it has since so proved to be the case.
Mr. Pecora. The question was: Who were the higher officials in
yoiu- company who had expressed to you their uneasiness over the
wilhngness of the State of Minas Geraes to meet its obUgations.
Please answer that question.
Mr. Train. I wiU be very glad to do so.
Mr. Pecora. All right. Please do so.
Mr. Train. As I recaU it, it was Mr. Schoepperle.
Mr. Pecora. Anyone else?
Mr. Train. I do not recaU. I might add that I have had a friendly
difference of opinion with Mr. Schoepperle from time to time with
respect to this State's credit in Brazil. I had spent considerable time
in Brazil, and was thoroughly convinced in my own mind that the
credit was perfectly sound, and that there was no necessity for these
technicahties. Mr. Schoepperle felt, from his longer experience and
no doubt better experience in this business that it would have been
better to have escrowed these funds for the specific purpose of redeem-
ing those franc bonds.
Mr. Pecora. Do you know that it has been testified here by the
executive officers of your company that before the company under-
took to sponsor any issue of domestic or foreign bonds there had to be
a unanimity of opinion on their part?
Mr. Train. I think I heard it so testified; yes.
Mr. Pecora. Was there any unanimity of opinion with respect to
the wisdom of offering these Iviinas Geraes loans?
Mr. Train. Of that I have no knowledge since I did not attend
any of the executive meetings of the National City Co.
Mr. Pecora. But you detected an uneasiness in April of 1928 on
the part of the liigher officials in the company here in New York,
2154 STOCK EXCHANGE PRACTICES
concerning the willingness of the issuing State to meet its obligations,
didn't you?
Mr. Train. Since you have pursued this Hue of questioning I now
recall that subsequent to the issuance of the bonds there were various
mechanical details in connection with the listing of the bonds, issuance
of definitive bonds, and tilings of that nature
Mr. Pecora (interposing). Oh, now, my question concerned any
uneasiness with regard to the willingness of the issuing State to meet
its obligations. That has notliing to do with the mechanical details,
has it?
Mr. Train. If you will permit me to proceed I will
Mr. Pecora (interposing). Please answer the question and do not
talk about collateral matters that are really not responsive to the
question.
Mr. Train. I am endeavoring to respond to the question, but
Mr. Pecora (interposing). Please answer the question.
Mr. Train. You asked me to explain, and I am trying
Mr. Pecora (interposing). No; I have not asked you to explain.
You are wanting to explain.
Mr. Train. Well, can't I
Mr. Pecora (interposing). Did you say that you detected in April
of 1928 a state of uneasiness on the part of the higher officials of your
company here in New York with regard to the willingness of the State
of Minas Geraes to meet its obhgations, or did you not?
Mr. Train. I am endeavoring to give you an explanation of
why— — -
Mr. Pecora (interposing). Can't you first answer the question
either yes or no, either affirmatively or negatively. Did you or did
you not detect a state of uneasiness here in New York.
Mr. Train. I would say that Mr. Schoepperle was not fully satis-
fied that the State of Minas Geraes would live up to its obligations to
redeem the franc bonds, if the redemption of the bonds were left
wholly to its disposal.
Mr. Pecora. And you communicated that to the manager of the
company down in the capital of the Kepublic of Brazil, didn't you?
Mr. 'Train. To the manager or acting manager of the National
City Bank in Rio de Janeiro. The National City Co. has no branch
in Brazil.
Mr. Pecora. So in view of the absence of a branch of the companj^
in Brazil, the branch of the bank acted for the company, didn't it?
Mr. Train. The manager of the branch of the bank did so, yes,
which would be a perfectly natural thing to do.
Mr. Pecora. Now, in September of 1929 this second $8,000,000
loan was floated by the National City Co. and others, for the State
of Minas Geraes.
Mr. Train. That is correct.
Mr. Pecora. Have you before you the correspondence that passed
between the various persons connected with the National City Co.
in connection mth that floatation?
Mr. Train. I believe they have been produced here under sub-
poena.
Mr. Pecora. Now, let me show you a copy of the prospectus that
accompanied the ofl'erjng of the $8,000,000 issue in September, 1929,
to the investment public, or have you a copy before you?
STOCK EXCHANGE PRACTICES 2155
Mr. Train. Of the 8% million dollar loan?
Mr. Pecora. No; the second one, of $8,000,000 in Septend)er of
Mr. Train. All right. I have that one now.
Mr. Pecora. Do you notice on the front page the following state-
ment, along about the middle of the page:
Prudent and careful management of the State's finances has been characteristic
of successive administrations in Minas Geraes.
Mr. Train. I do.
Mr. Pecora. Do you know who drew up this circular or pros-
pectus?
Mr. Train. I do not.
Mr. Pecora. Does that statement conform with what was your
own knowledge of the management of the finances of the State of
Minas Geraes up to that time?
Mr. Train. May I have that question repeated? (Which was done
by the committee I'eporter.) It does.
Mr. Pecora. I think you said before that in the month of June,
1927, you were in Rio de Janeiro, is that right?
Mr. Train. Yes; as nearly as I can now recall. I was in Brazil at
any rate.
Mr. Pecora. Were you then the manager of the National City
Bank branch in that State?
Mr. Train. I was not.
Mr. Pecora. You made that branch of the bank in that State your
headquarters while there, didn't you?
Mr. Train. The manager of the branch gave me office room in the
building which they owned.
Mr. Pecora. Do you recall a letter written by you from Rio de
Janeiro, under date of June 12, 1927, to Mr. R. M. Byrnes, in New
York City, then a vice president of the National City Co., in which,
regarding the financial management of the State of Minas Geraes,
among other things you said :
The 1911 contract was concluded in Brazil, and apparently the same thing
happened. I am unable to confirm this as I have as yet no photostats of the
bonds, but the lasness of the State authorities borders on the fantastic. The
1916 bonds were admittedly signed by the then Secretary of Finance in Paris, who
carelessly overlooked the wording not being in accordance with the contract.
It would be hard to find anywhere a sadder confession of inefficiency and inepti-
tude than that displayed by the various State officials on the several occasions.
And also the following in that letter, among other things :
The foregoing recital serves to show the complete ignorance, carelessness and
negligence of the former State officials in respect to external long-term borrowing.
It is hard to beheve that there was not some collusion between the officials and
Perier & Co., but whether that was the case or not, the latter seem to me to have
given sufficient evidence of their bad faith.
Mr. Train. Now that you read me the extracts from that letter,
I recall it, yes; Mr. Pecora. And I should hke to observe that I
particularly referred to the laxity and carelessness of the officials
with respect to the details concerning the external loans contracted
in 1907 and 1911.
Mr. Pecora. And subsequent dates, 1916.
Mr. Train. And 1916, yes.
119852— 33— PT 6 26
2156 STOCK EXCHANGE PRACTICES
Mr. Pecoea. Now, the statement in the'circular or prospectus to
which I call your attention, is as follows :
Prudent and careful management of the State's finances has been characteristic
of successive administrations in Minas Geraes.
Keep that in mind when you answer.
Mr. Train. I will be very glad to do it. I recall this particular
sentence, because it has been taken from the first circular written
with respect to Minas Geraes, a part of which I prepared in Brazil in
1927 as a result of my careful investigations there, and I referred in
that sentence, although
Mr. Pecora (interposing). You said taken from the first circular,
is that right?
Mr. Train. I think so.
Mr. Pecora. Aren't you mistaken about that?
Mr. Train. I think it will be found in the first circular. May
I quote?
Mr. Pecora. Yes. Under revenues and expenditures.
Mr. Train. It says:
Prudent and careful management of the State's finances has been characteristic
of successive administrations in Minas Geraes.
That is quoted from the first circular. Wliat I meant by that, and
I think it is fully borne out by the fact, is that it refers only to the
management of the State's budget; that they had shown an extremely
careful and prudent administration, especially in comparison with the
policies followed by other Brazilian States. I might add that the
inhabitants of the State of Minas Geraes are generally known in
Brazil as the Scotsmen of Brazil. They have given an exhibition of
that by a succession of budget surpluses, with one or two minor excep-
tions, wliich practically continued from 1916 to 1929. And — well, I
have nothing to add to that.
Mr. Pecora. Do you mean to say then that that statement referred
only to the management and administration of the State's internal
finances?
Mr. Train. On wliich the security for the loan rested; yes.
Mr. Pecora. And was not intended to relate to its external
finances; is that right?
Mr. Train. To the handling of its external financing in previous
periods.
Mr. Pecora. In previous periods?
Mr. Train. Yes.
Mr. Pecora. "What were the successive administrations referred to
in this circular?
Mr. Train. Well, the administration of the State, as I recall it,
changes every four years. The president is elected, and other officials
are elected. So that there would have been in a period of 14 years —
let me be accurate and say from 1916 to 1928 there would have been
12 years or three administrations.
Senator Fletcher (presiding). Has that Idnd of administration
continued up to date?
Mr. Train. In the State of Minas Geraes?
Senator Fletcher. Yes.
Mr. Train. Yes.
STOCK EXCHANGE PRACTICES 2157
Senator Fletcher. Do you think that is the character of adminis-
■tration that they have now?
Mr. Train. The character of adininistration they have now.
They have a very excellent internal administration and management
of their finances.
Mr. Pecora. Mr. Train, did you prepare that first prospectus?
Mr. Train. In part.
Mr. Pecora. Are you responsible for that particular language
I have quoted from it?
Mr. Train. As to prudence and careful administration?
Mr. Pecora. Yes.
Mr. Train. I accept responsibility for that. Yes, sir; I recall that
I wrote that.
Mr. Pecora. Do you recall having received any criticism of that
portion of yom- prospectus from a Mr. Baldwin connected with the
-company here in New York?
Mr. Train. I have had many discussions with Mr. Baldwin, who
was in New York during this period, respecting Minas Geraes finances.
Mr. Pecora. Let me see if you recall receiving a letter from Mr.
Baldwin of the foreign department of the National City Co. here in
JSTew York, dated September 14, 1927, addressed to you down in
Rio de Janeiro, contaiaing the following statement, among other
things, and this refers to the draft of tliis prospectus that had been
submitted to Mr. Baldwin for liis suggestions.
Mr. Train. Not by me.
Mr. Pecora. I am quoting now from Mr. Baldwin's letter to you,
of September 14, 1927, under the heading of "Revenues and expen-
ditures":
Prudent and careful administration of the State's finances has been axiomatic
with successive administrations in Minas Geraes. I am not trying to criticise,
And no doubt I am too mucli saturated with material dealing with the French
issues of the State, but in view of the extremely loose way in which the external
debt of the State was managed, do you think the statement quoted above would
be subjected to criticism?
Now, do you recall that?
Mr. Train. You have recaUed that to my memory. I would not
recall that specific letter, but I would say it represented a difference
of opinion, a difl'erence of interpretation between Mr. Baldwin and
myself. I was in Brazil and perhaps became, as one often does in
that country, a little overenthusiastic with respect to the merits of
the particular credit I was investigating.
Mr. Pecora. Do you recall that criticism of that portion of the
prospectus made by Mr. Baldwin in this letter to you of September
14, 1927?
Mr. Train. Not specifically, except as you read it to me I recall
that there was some difference of opinion.
Mr. Pecora. Do you want the help of Mr. Schoepperle in making
your answer?
Mr. Train. I do not think I need any help.
Mr. Pecora. Well, please tell that to Mr. Schoepperle, who seems
io think you do.
Mr. Train. Well, perhaps he does.
2158 STOCK EXCHANGE PRACTICES.
Mr. Pecora. You notice in this letter of Mr. Baldwin's to you
that he apparently was famihar with what he terms the extremely
loose way in which the external debt of the .State was managed.
Mr. Train. I have already explained I think clearly for the record
that there was a difference of opinion between myself, who had been
in Brazil and was thoroughly acquainted with and familiar with the
Minas Geraes situation, and those who sat up in New York at a
distance of several thousand miles and looked at it through long-
distance spectacles.
Mr. Pecora. Didn't Mr. Baldwin in New York have access to the
files of the company which contained this letter of yours of April,
1928?
Mr. Train. I would assume so.
Mr. Pecora. Wherein you referred to the inefficient and inept
manner in which prior administrations had handled certain loans?
Mr. Train. 1 would point out that I was referring to the handling
of the external debt of the State.
Mr. Pecora. And apparently that is what Mr. Baldwin pointed
out, because in his letter of September 14, 1927, he says expressly,
"In view of the extremely loose way in which the external debt of
the State was managed," do you think the statement quoted above
would be subjected to criticism? You want to tell us now, do you,
that when you incorporated in the prospectus of not only the first
issue in March, 1928, but of the second one in September, 1929, the-
statement that "Prudent and careful management of the State's
finances has been characteristic of successive administrations in
Minas Geraes," you simply had in mind what you conceived to be
the efficient manner in which the Government had conducted its
internal finances; is that right?
Mr. Train. I would like to make a small correction to that state-
ment. I believe you stated that I had this statement incorporated
in the second prospectus.
Mr. Pecora. You said a few minutes ago that you assumed the
responsibility for it, did you not?
Mr. Train. I said that I had put it in the first prospectus, but I
was not there at the time the second prospectus was issued.
Mr. Pecora. Do you repudiate it as it appears in the second
prospectus?
Mr. Train. I most certainly do not.
Mr. Pecora. Then why make the point about it?
Mr. Train. Well, because I thought it was a slight inaccuracy on
your part. [Laughter.] Will you repeat the question? I lost the
trend of it. I am sorry.
Mr. Pecora. When 1 asked you that question which led you to
believe there was a slight inaccuracy I was not referring to any par-
ticular prospectus.
Mr. Train. May I have that question read?
Mr. Randolph (shorthand reporter). "You want to tell us now,
do you, that when you incorporated in the prospectus of not only
the first issue in March, 1928, but of the second one in September,
1929, the statement"^
Mr. Train. That is sufficient. I see you referred to the pro-
spectuses.
Mr. Pecora. I referred to both of them.
STOCK EXCHANGE PRACTICES 2159
Mr. Train. You did, Mr. Pecora.
Mr. Pecora. And you are not disavowing responsibliity for the
statement in the second prospectus, are you?
Mr. Train. Most certainly not.
Mr. Pecora. All right now; do you want to tell this committee
that the statement "prudent and careful management of the State's
finances has been characteristic of successive administrations in
Minas Geraes", which appears in both the first and the second
prospectuses of these two loans, that you merely had in mind the
State's internal finances?
Mr. Train. Mr. Pecora, I am here under oath, and I am here to
state that is exactly what I meant.
Mr. Pecora. But you knew at the time you made that statement
for its inclusion in either the first or the second prospectus that the
State's management of its external finances had been "extremely
loose, inefficient, and inept and careless"?
Mr. Train. I did.
Mr. Pecora. Don't you consider that when you speak of the
management of a State's finances you speak of its finances generally
and as including both internal and external finances?
Mr. Train. I think it is a question as to where you want to put
the emphasis. I was a banker, and I was putting emphasis on what
I regarded as a fundamental security for the Minas bonds, which was
the question of their internal revenues and then- budgetary surpluses.
Mr. Pecora. That may have been where you were putting empha-
sis in your mind, but as you placed the emphasis on paper you simply
made reference to the management of the State's finances without
drawing any distinction between internal and external finances; isn't
that right?
Mr. Train. Well, you have quoted from a single letter. If my
letters were all taken together I do not think that they would sustain
that thesis.
Mr. Pecora. Was it your intention merely to refer to the manage-
ment of the internal finances when you had this statement incorpo-
rated in the prospectus?
Mr. Train. That was my intention.
Mr. Pecora. Why didn't you say so in the prospectus then?
Mr. Train. Well, of course, it would rest on an interpretation of
the word "finances." It would have been more accurate had I
said the "State's budget" or "budgetary position."
Mr. Pecora. But if you wanted to make a favorable comment on
the administration of the internal finances of the State, woidd it not
have been extremely simple to have inserted the word "internal"
before the word "finances"?
Mr. Train. I think it would have been more accurate.
Mr. Pecora. And if you wanted to convey to the investing public
through the medium of this prospectus what you had learned con-
cerning the "careless, inefficient, and inept and loose way of the
State's management of its external finances," you would have said so
too, would you not, in the prospectus?
Mr. Train. Let me have that again?
Mr. Randolph (shorthand reporter). And if you wanted to convey
to the investing public through tue medium of this prospectus what
you had learned concerning the "careless, inefficient, and inept and
2160 STOCK EXCHANGE PRACTICES
loose way of the State's management of its external finances," you
Movdd have said so too, would you not, in the prospectus?
Mr. Train. These people in Minas were back-country people, and
they had shown, as I stated in my letter, ineptitude in handling
Mr. Pecora (interposing). Will you answer my question now?
Mr. Train (continuing). In the handling of their external finances..
Mr. Pecora. Are you answering my question now?
Mr. Train. I am endeavoring to.
Mr. Pecora. Let me put it again to you in another way: Let us^
assume that in the prospectus you wanted to give the American
investing public your observations or your knowledge concerning the
inept, careless, and inefficient way in which the Government of the
State of Minas Geraes had administered its external finances, you
could very easily have done it by including a sentence conveying that
knowledge in the prospectus, could you not?
Mr. Train. That was a question of past administrations, and I
was very favorably impressed with the officials of the State whom I
met in Bello Horizonte. I felt that that was an incident of the past.
Mr. Pecora. You were referring to successive administrations in
this prospectus, were your not, and that means the past?
Mr. Train. That means the past in a veiy general sense. Perhaps
I did not go back far enough.
Mr. Pecora. You did not go back to the point where the adminis-
tration was loose and inefficient in its handling of its external finances,,
did you?
Mr. Train. I think my phraseology in that respect might be modi-
fied by other statements which are made concerning the French
bankers with whom the State of Minas Geraes had contracted for
the franc bonds. The French bankers in that case were banking
firms which I subsequently found, upon investigation, to have been
somewhat sharp in their deaUngs, and it was my feehng that the
State officials of that day, while admittedly careless and lax and
lacking in knowledge of the technical details of external financing,
had nevertheless been misled in many respects by the French banking
houses with whom they had done business.
Mr. Pecora. Have you completed yoiu' answer?
Mr. Train. I have.
Mr. Pecora. I am going to ask the reporter to read the question
to which you made that answer, and see if j'ou have ansv/ered the-
question. Will you be good enough to read the question, Mr.
Reporter?
Mr. Randolph (shorthand reporter). "You did not go back to
the point where the administration was loose and inefficient in its
handling of its external finances, did you?"
Mr. Pecora. Now, Mr. Schoepperle, he said he did not need your
help.
That is the question. Now, what is the answer to that question?"
Mr. Train. In this prospectus?
Mr. Pecora. Of course, in the prospectus.
Mr. Train. No; we did not go back to that point. I did not go
back to that point.
Mr. Pecora. All right. Mr. Train — when you are through quarrel-
ing with Mr. Schoepperle, I will ask you a question — Mr. Train,
do you know anything about the short-term loans or advances which.
STOCK EXCHANGE PRACTICES 2161
were made by the National City Co. and Schroeder to the State of
Minas Geraes between the floatins; of the first loan in March 1928
and the second loan in March, 1929? ' '
Mr. Train. 1 think my testimony will show that I said that I was
m Buenos Aires during that period and that my only knowledge of
those transactions is by reason of familiarity with the files in reference
thereto.
Mr. Pecora. On the basis of the famiharity which you have
thereby acquired with the subject, you know, do you not, that those
short-term loans or advances were made within that period of time?
Mr. Train. I do.
Mr. Pecora. To the State of Minas?
Mr. Train. I do. Quite true.
Mr. Pecora. Do jou know the circumstances which induced the
making of those short-term advances or loans, either from your own
personal knowledge or from your familiarity with the files?
Mr. Train. Are you referring to all of them or part of them?
Because the question must be answered in part.
Mr. Pecora. To all of them, aU the short-term advances made in
the period between these two long-term loans.
Mr. Train. My answer to that question, based on my recollection
of the files, would be that with respect to £500,000 advanced by the
three leading London banking houses, Baring, Schroeder and Roths-
childs, I would have no knowledge concerning the considerations
that governed or lead up to that advance. With respect — I will
continue if you care to have this.
Mr. Pecora. Yes; go ahead.
Mr. Train. With respect to an advance of $750,000 by the National
City Bank of New York and mth respect to an additional advance of
£150,000 by the same London banking houses that I referred to,
I would say that the files would show that the consideration for those
advances, or in connection with which those advances were made,
was an agreement between the President of the State and the bankers
whereby certain arrangements were made for long-term financing.
The president of the state, I might observe, was requiring, as I
recall it, at that time some funds to meet maturities for public works
expenditures, and there was a question as to the existing legal author-
ity for the issuance of long-term bonds. Counsel for the National
City Co. apparently were not satisfied with the existing legal authori-
zation, although Brazilian counsel expressed themselves as being
perfectly satisfied. Therefore, to bridge over the gap until the long-
term bond issue could be duly authorized and issued, this advance
of $750,000 and £150,000 was made.
Senator Fletcher. How were those advances secured?
Mr. Train. Those advances were not secured. Senator Fletcher.
Mr. Pecora. I was going to ask you- — those short-term advances
were all unsecured, were they not?
Mr. Train. So far as I know.
Mr. Pecora. And they were all paid out of the proceeds of the
second loan of $8,000,000 which was floated in September, 1929,.
were they not?
Mr. Train. Yes ; I beheve that is right.
2162 STOCK EXCHANGE PRACTICES
Mr. Pecora. And one of the purposes of that second loan was to
enable the State of Minas Geraes to pay those short-term unsecured
loans, was it not?
Mr. Train. I would say that it was to refund the advances made
in anticipation of those loans.
Mr. Pecora. That is your way of putting it, but does it not mean
the same thing as that which I said in my question?
Mr. Train. I do not think quite the same.
Mr. Pecora. Does it mean generally the same thing? You see,
I do not speak the banker's language. You will pardon me, Mr.
Train?
Mr. Train. No ; I know you do not. I do not speak your language
either, the legal language.
But in response to a question from you, with the courtesy of the
chairman, I should like to reply to it in my own language.
Mr. Pecora. Certainly. Is it or is it not the fact that one of the
purposes of the second loan was to enable the State of Minas Geraes
to repay those short-term unsecured loans which had been made to
it between the fu-st and second issues?
Mr. Train. I should like to let my previous answer stand.
Mr. Pecora. Will you answer that question?
Mr. Train. I think my previous answer answers it.
Mr. Pecora. Answer it again. I have forgotten the answer.
Mr. Train. One of the purposes of the loan was to refund the
short-term advances that had been made in anticipation of long-
term financing.
Mr. Pecora. My question was as to whether one of the purposes
was to enable the State to repay, and you say that one of the purposes
was to refund. That is the difference between your language and
mine, is it?
Mr. Train. The advances were made in anticipation of the financ-
ing. I think you left that out.
Mr. Pecora. Yes; all right. As a matter of fact, in whatever
language you choose to put it
Mr. Train. I am perfectly walling to agree with whatever
Mr. Pecora. A substantial part of the proceeds of the second loan
"went to repay or refund those short-term unsecured advances or
loans?
Mr. Train. We can meet on that, of course.
Mr. Pecora. All right. And is it not the fact that there were no
other funds available with which to repay those unsecured short-
term loans?
Mr. Train. The State of Minas for a number of years had been
borrowing at short term from London banking houses, and also from
the National City Bank of New York, unsecured. They were
advances either in anticipation of revenues or for extraordinary
pubhc works expenditures. The credit of the State was so considered
&t that time both in New York and in London that no specific security
was asked.
Mr. Pecora. Who is Mr. H. R. Jolles?
Mr. Train. At the present time Mr. Jolles is vice president of the
National City Co. in the foreign department.
Mr. Pecora. And Mr. Squires was connected with the National
City Bank at Rio de Janeiro in 1929, was he not?
STOCK EXCHANGE PRACTICES 2163
Air. Train. Mr. Squires, I believe, in 1929 was the manager of the
National City Bank there.
Mr. Pecoea. In .your familiarity with the files and records of the
National City Co. with respect to these loans did you come across a
cablegram from Mr. Jolles to Squires dated July 5," 1929, in which he
says among other things the following:
In view of State's urgent need for credit, we are inclined to question their
ability to meet sliort-term ad\-ances at maturity if issuance first tranche should
for any unforeseen reason be delayed?
Mr. Train. That is an expression of opinion from Mr. Jolles, is it
not?
Mr. Pecora. I am simply asldng you, did you become familiar
with that cablegram and that portion of it?
Mr. Train. I recall it now that you read it to me.
Mr. Pecora. The J. Henry Schroeder Banking Corporation was one
of the underwriters with the National City Co. of both these Minas
Geraes loans, was it not?
Mr. Train. That is correct.
Mr. Pecora. And where was its office?
Mr. Train. In New York City. I don't recall the address.
Mr. Pecora. Who was Andrade?
Mr. Train. Doctor Monteiro de Andrade was the president of the
Banco do Credito Real of the State of Minas Geraes. It might
briefly be referred to as the State credit bank.
Mr. Pecora. Did you become familiar with a cablegram sent by
Schroeder under date of April 12, 1929, to Andrade down in Rio de
Janeiro in which he said as follows:
At a group meeting consisting of representatives Baring, Rothschild, National
City Bank, and ourselves, held here this morning, your cable re new Government
loan to take place of Credito Real was fully discussed. We are all of the opinion
that the present moment is most unfavorable for any bond issues in London or
New York. The monetary outlook is so obscure that the public are most
unwilling to invest in bonds of any kind, and we fear that a new loan would not
prove a success, even if issued below the price which you and we have had in
mind. The present price of the last loan representa a loss to the subscribers,
and we think it essential in the interests of Minas that the next loan should prove
quickly profitable. We shall be happy to prepare contracts and all details for a
new Government loan in .sterling and/or dollars, amount equivalent to £2,000,000
to be issued. When we are able advise that the outlook is favoiable, and we
shall he greatly obliged if you will send us particulars of the taxes which are to be
hypothecated to the new loan. On receipt we will mail new draft contracts.
Mr. Train. What was the question?
Mr. Pecora. The date of this cablegram is April 12, 1929. Are
you familiar with that cable?
Mr. Train. I have listened very attentively and recall it in general
as you read it to me.
Mr. Pecora. Now, is it not a fact that between March 1928, and
September, 1929, the banldng firm of Kuhn, Loeb & Co. were seeking
an opportunity from the State of Minas Geraes to do its future external
financing?
Mr. Train. My recollection of the files would lead me to believe
that Kuhn, Loeb & Co. were interested in doing a loan for the State
of Minas Geraes, a long-term loan.
Mr. Pecora. Well, that is in the nature of external financing,
is it not? You see, I am trying now to use the banker's language.
2164 STOCK EXCHANGE PRACTICES
Mr. Train. Yes; Mr. Pecora, but I- understood you to say all
future financing, or something like that.
Mr. Pecora. External financing for the future.
Mr. Train. I think it was with respect to a specific loan.
Mr. Pecora. Oh. And that came to the notice of the National City
Co., did it not?
Mr. Train. I would assume so.
Mr. Pecora. And the National City Co. as a consequence was
naturally desirous of shutting out Kuhn, Loeb & Co. as a competitor
for this financing, was it not?
Mr. Train. The National City Co. felt that it had established,
together with the London house of J. Henry Sckroeder & Co., with
whom it was in joint account for Minas business, a continuing rela-
tionship, a satisfactory and continuing banldng relationship with this
State.
Mr. Pecora. The knowledge that Kuhn, Loeb & Co. and Lee,
Higginson & Co. were endeavoring in May or April, 1929, to negotiate
arrangements to float a long-term loan for the State of Minas Geraes
caused a good deal of correspondence to pass between New York,
London, and Brazil in which the National City Co. was interested,
did it not?
Mr. Train. I would say that it caused a good deal of correspond-
ence to pass; yes, and a good deal of surprise.
Mr. Pecora. Surprise — that is, perturbation?
Mr. Train. Perturbation would be a
Mr. Pecora (interposing). After the prospective entry of Kuhn,
Loeb & Co. and Lee Higginson into that particular field of financing —
is that right?
Mr. Train. Well, as I have stated, the City Co. and J. Henry
Schroeder Co. hoped to establish the general relationship, and it was
naturally, I would characterize it, as rather disconcerting to find that,
after having sponsored a loan for the State in the New York market
in 1928, that someone else whould come in and have some of the future
financing.
Mr. Pecora. Come in and do the future financing?
Mr. Train. Should come in and endeavor to "chisel in."
Mr. Pecora. "Chisel in" — that is not a banker's term, is it?
Mr. Train. That is just an expression. [Laughter.]
Mr. Pecora. Naturally the National City Co. and its co-under-
writers in that first loan were unwilhng to have these other banking
houses "chisel in", were they not?
Mr. Train. I would say that they did not like the idea.
Mr. Pecora. Was it not in order to retain the good will and the
favor of the authorities of the State of Minas Geraes that these short-
term unsecured advances were made?
Mr. Train. I think my testimony has already explained these
short-term advances to the best of my abihty.
Mr. Pecora. Your testimony did not explain that possible feature
of them, did it?
Mr. Train. I have no present recollection of that consideration of
which you speak having entered in.
Mr. Pecora. It is not a violent assumption, is it, that that entered
into the consideration of the National City Co. in making these
unsecured shortterm advances?
STOCK EXCHANGE PRACTICES 2165
Mr. Train. May I have that question again?
(The shorthand reporter read Mr. Pecora's question as above
recorded.)
Mr. Train. My recollection of the files is that those advances were
made some time after negotiations with Kuhn, Loeb and the Lee
Higginson had been broken off. So that in that case you see
Mr. Pecora. Were those negotiations broken off because the
State authorities down in Brazil had been given to understand that
through the National City Co. and its associates these short-term
loans could be made?
Mr. Train. My recollection is that the negotiations between the
State and Kuhn, Loeb & Co. and Lee, Higginson & Co. were broken
off by reason of representations made to the State Government by a
representative of the J. Henry Schroeder Banking Corporation who
happened to arrive in Brazil and discovered that this negotiation
was proceeding.
Senator Fletcher. How were they broken off?
Mr. Train. How were they broken off?
Senator Fletcher. Yes.
Mr. Train. Why, my recollection is that they were broken oft" by,
let us say, a cable addressed to these other two banldng houses stat-
ing that the President of the State had no desire to continue further
to negotiate with those particular houses. They would be put on
notice that their intervention was not wanted.
Mr. Pecora. From the files of the company have you become
familiar with a cablegram dated June 22, 1929, which was sent by
Squires, the National City Bank's branch manager in Rio de Janeiro,
to Mr. JoUes, the vice president here in New York, in which, among
other things. Squires said as follows:
As regards authority for redemption of short-term advances out of proceeds,
Government assures us that sucJi advances served purposes covered by said
"two laws, and counsel therefore holds that you can obtain necessary protection
by including in purpose clause statement such as "part of proceeds will be
applied to reimburse Government for expenditures already made in connection
■with works covered by said laws."?
Mr. Train. I have listened attentively to what you have read,
Mr. Pecora, and I have no doubt that that is in the files.
Mr. Pecora. The reference to the purpose clause which is made in
that part of this cablegram is in the prospectus that was to be issued
in connection with the flotation of the second or subsequent loan out
of which these short-term advances were to be paid, is it not?
Mr. Train. Yes.
Mr. Pecora. Now, instead of any such statement being included
in the prospectus issued in connection with that second loan, as was
specifically suggested by Squires in this cablegram, the statement in
the prospectus was to the eft'ect that the proceeds of this loan will be
utilized for purposes designed to increase the economic productivity
of the State, was it not?
Mr. Train. Will you repeat that question?
(The shorthand reporter read the last question of Mr. Pecora as
above recorded.)
Mr. Pecora. Do you know why that suggestion of Mr. Squires was
■disregarded in the preparation of the prospectus accompanying the
second issue?
2166 STOCK EXCHANGE PKACTICES
Mr. Train. I assume because the prospectus clearly stated the
purposes as provided by law no. 1061 for which the loan was issued,
and the borrowings had been made in anticipation.
Mr. Pecora. How would a recipient of that prospectus know what
those laws alluded to?
Mr. Train. I do not think I understand your question. How-
would a recipient
Mr. Pecora. How would a person receiving that prospectus and
reading it acquire any knowledge from the prospectus itself as to the
provisions of the laws referred to there.
Mr. Train. They are very generally summarized here under the
purposes of the loan.
Mr. Pecora. Ai-e they summarized in a fashion which would be
certain to convey to the average reader of the circular or prospectus-
the information or knowledge that a substantial part of the proceeds
of this second loan was to be used to pay these short-term unsecured
advances?
Mr. Train. No.
Mr. Pecora. Now, did you also, for the purpose of familiarizing
yourself with the records of the company in connection with these two
loans, read a letter from D. C. Baldwin to Mr. Squires dated July 12,
1929, on the subject of the prospectus to be issued in connection with,
the second loan of September, 1929?
Mr. Train. If you will read me that letter, no doubt I -will recall it.
Mr. Pecora. Let me read tliis portion of it to you:
We would like to have favorable information from any angle of the State's
activities, even in addition to the specific requests that we have made, for use in
a prospectus letter, for, while the amount of material that we can use in a pro-
spectus is limited on account of space, there is no limit to the material that we
can use in our daily sales letter, and as far as our own organization is concerned,
this can be put to just as effective use as the contents of the prospectus letter.
We realize that these bonds will be hard to sell, especially in this market, and we-
are willing to make every effort to put on an "educational campaign" among our
sales force if the State authorities will cooperate in trying to give us as much
material as possible.
Mr. Train. I have listened attentively to what you have read.
Mr. Pecora. And let me read another extract of the letter:
Such a statement constitutes the best kind of selling argument, and as j'ou are
no doubt well aware, we need some selling arguments for the new loan, as the
credit of Minas is not properly apprecitaed in this market.
Do you recall that?
Mr." Train. I do.
Mr. Pecora. Do you know whether those selling arguments were
furnished by anybody?
Mr. Train. I do not; no, sir.
Mr. Pecora. Do you know when the State of Minas Geraes de-
faulted on the first issue, the one of $8,500,000 of March, 1928?
Mr. Train. March 1, 1932.
Mr. Pecora. Was there a provision in the contract between the
National City Co. and other underwriters of that loan and the State
of Minas Geraes relating to the setting up of a reserve to be deposited
with the National City Bank for the payment of interest on these
bonds?
Mr. Train. There was set up in connection with each of the two
Minas Geraes loans, 1928 and 1929, a serwe reserve fimd.
STOCK EXCHANGE PRACTICES 2167
Mr. Pecora. Yes.
Mr. Teain. The presence of that service reserve fund may, I
think, be explained by the fact that in the first loan we were in asso-
ciation with J. Henry Schroeder & Co., London, who offered a similar
amoimt of bonds in London simultaneously with our offering in New
York. The contract of the first loan, I think the files would disclose,
was mainly drafted and signed in London, and many London prac-
tices crept into the contract wdth respect to the issuance of bonds.
In the London market it is very common in the case of these South
American issues for a service reserve fund to be set up.
Mr. Pecora. When the September, 1931, interest was paid on
these bonds was it paid out of funds, apart from this reserve which
were required under the contract, to be sent to the National City
JBank as the agent?
Mr. Train. It was not.
Mr. Pecora. It was paid out of the reserve, was it not?
Mr. Train. It was.
Mr. Pecora. Did not that indicate financial instability on the
part of the State of Minas?
Mr. Train. At that time, it would indicate an inability of the
State to transfer funds from Brazil. It was a fact that at that time
the foreign exchange question in Brazil became a very difficult one,
and the State informed us that it had repeatedly endeavored to
secure the necessary foreign exchange to remit to New York, but was
unable to do so. My recollection is that it thereupon requested the
fiscal agent for the loan, the National City Bank of New York, to
use the service reserve fund that it was holding for just such purposes,
•of a transitory nature.
Mr. Pecora. That did not prove to be of a transitory nature, did
it?
Mr. Train. It did not, because
Mr. Pecora (interposing). It proved to be of a permanent nature?
Mr. Train. The situation grew successively worse until in October
1931 the Federal Government of Brazil imposed a very severe
exchange restriction, a restriction on exchange by wliich the Bank of
Brazil, the Government bank, was given the control of all foreign
exchange transactions in Brazil, substantially along the lines these
exchange controls have grown up in many countries and exist at this
time.
Mr. Pecora. In addition to this reserve fund, the agreement be-
tween the underwriters and the State of Minas Geraes with regard
to both these loans contained a provision under wliich the State of
Minas Geraes was to send monthly to the National City Bank as the
paying agent in New York the sums necessary to meet the next
interest payment, did it not?
Mr. Train. Monthly?
Mr. Pecora. Monthly.
Mr. Train. No, sir. Semiannually.
Mr. Pecora. Semiannually. Was not such an agreement made
after the reserve fund was utihzed in September 1931 to meet the
interest falling due then?
Mr. Train. In connection with the use by the National City Bank
of the reserve fund the State of Minas Geraes agreed to make a deposit
2168 STOCK EXCHANGE PKACTICES
in Brazil in the local currency of an amount roughly corresponding to-
the amount of dollars needed and to reconstruct or replace this-
reserve fund in six equal monthly installments.
Mr. Pecora. That is what I am referring to.
Mr. Train. Yes.
Mr. Pecora. Did the State of Minas Geraes do that after the-
reserve fund was used to pay the interest coupons that fell due lq
September, 1931?
Mr. Train. The Statfe made one monthly payment.
Mr. Pecora. Only one?
Mr. Train. One monthly payment.
Mr. Pecora. And that served notice on the National City Co. of
serious financial difficulties in the State of Minas Geraes that would
probably render it unable to pay the next interest charge, did it not?"
Mr. Train. I would say rather that it indicated serious exchange
difficulties in Brazil. Brazil money was payable
Mr. Pecora (interposing). Was any such information given to the-
bondholders here in this country by the National City Co.?
Mr. Train. By the National City Co.?
Mr. Pecora. Yes.
Mr. Train. I do not recall.
Mr. Pecora. The company kept that information to itself, didi
it not?
Mr. Train. What information?
Mr. Pecora. That the State of Minas Geraes had failed to make
more than one monthly installment payment on account of the
interest that would be due and payable in March, 1932, after the
reserve fund was drawn upon in September, 1931, to meet the interest
payment which then fell due?
Mr. Train. That would be quite true, except that there was an
amount in Brazil in local cui'rency quite sufficient to purchase the
necessary exchange to pay the March 1 coupon, and the exchange
restrictions to which I have referred imposed by the Bank of Brazil
in October, 1931, might at any time have been removed prior to March
1, 1932.
Mr. Pecora. The restriction might have continued untU long after
March, 1932, might it not?
Mr. Train. Aiid has so contiuued.
Mr. Pecora. And has actually so continued?
Mr. Train. Granted.
Mr. Pecora. But did the National City Co. inform any of the
holders of these Minas Geraes bonds that that condition had arisen?
Mr. Train. I would like to answer that question by saying that
it is always a very difficult thing to decide whether or not to do it.
Mr. Pecora. Well, did it? Did it do so?
Mr. Train. I am under the impression that it did not.
Mr. Pecora. Did not?
Mr. Train. But I would like to observe that had the City Co. so
informed holders of Minas Geraes bonds, undoubtedly the bonds
would thereupon have declined in price, thereby causing losses to
existing holders, and if subsequently the bonds had recovered in
price many of the innocent holders of those bonds would have sold
them out.
STOCK EXCHANGE PKACTICES 2169
Mr. Pecora. But the public who had already purchased those
bonds from the National City Co. were, by the silence of the National
City Co., deprived of the opportunity to get rid of their bonds, were
they not?
Mr. Train. May I be permitted to correct my previous testimony?
I recall that, I think, some time prior to September 1, 1931, the
National City Co. notified its organization that the September 1,
1932, coupon was being paid out of the service reserve funds. That
is my recollection, and it is subject to verification. It may be in-
correct, but that is my distinct recollection.
Mr. Pecora. Has any bondholder's protective committee been
organized with regard to these bonds?
Mr. Train. Not that I know of.
Senator Fletcher. How many of those bonds of the $8,500,000,
first issue, and $8,000,000, second issue, were sold to the public in
the United States?
Mr. Train. I am very glad that you asked me that question,
Senator, because I would like to point out that out of the proceeds
of the second series bonds, with which there were some short-term
credits in Europe repaid, something like $3,000,000 principal amount
of those bonds were oft'ered and sold in Europe.
I would say generally, if I might be permitted, that with respect
to all our foreign issues, anywhere from 10 to 35 per cent of the original
bonds issued were originally sold in Europe at the time the offering
was made, thereby, if I may draw an assumption, confirming to some
extent the opinion of experienced European bankers and investors,
because these bonds were sold through European bankers, as to the
merit of the particular security oft'ered. Had they not thought that
the security or the bond offered was a reasonable investment, pre-
sumably they would not have subscribed.
Senator Fletcher. Out of the two issues how much was disposed
of in the United States?
Mr. Train. In the United States? Well, I would fear that it would
be a guess, but I would say that of the sixteen million five approxi-
mately 12,000,000 were sold in the United States. That is just a
guess. Perhaps 4,000,000 were sold in Europe.
Senator Fletcher. At what price?
Mr. Train. To the American investor?
Senator Fletcher. Yes.
Mr. Train. The first issue 97K, &% per cent bonds at 97^; and the
second issue 6)2 per cent bonds at 87.
Senator Fletcher. When did the default occur on the second
issue?
Mr. Train. On both issues the default occurred at the same time
and for the same reason, on March 1, 1932. May I observe
Senator Fletcher. That default has continued up to date?
Mr. Train. That default has contuaued to date, although at the
present time, if you are interested in this general question, the Federal
Government of BrazU is considering arrangements whereby the
coupons on these bonds may be optionally collected in internal cur-
rency in Brazil. In other words, the holders of these bonds could
optionally take Brazilian milreis, since the exchange situation is such
that it appears to be impossible to transfer the amounts into dollars.
You will appreciate that the foreign trade of Brazil, just as the foreign
2170 STOCK EXCHANGE PRACTICES
trade of every country, has shrunk tremendously, and the balance
of exports has not been sufficient to provide exchange.
Senator Fletcher. About what price to-day are those bonds?
Mr. Train. Senator, they are selling, my latest recollection of that,
though I have not checked'in the last few days, was around 21 or 22.
Mr. Pecora. I think that is all of tliis witness. Now Mr. Chair-
man, there is a gentleman here whom I have invited, and, whose
testimony I would hke to have presented at tliis time as a matter of
convenience to him, since he has been in attendance here for two days
and can not afford to spare the time. The gentleman is Mr. Edgar
Brown. Will you take the stand, Mr. Brown?
TESTIMONY OF EDGAR D. BROWN, POTTSVILIE, PA.
The Chairman. Do you solemnly swear the testimony you are
about to give is the truth, the whole truth, and nothing but the truth,
so help you God?
Mr. Brown. I do.
Mr. Pecora. Your full name, Mr. Brown?
Mr. Brown. Edgar D. Brown.
Mr. Pecora. And where do you live?
Mr. Brown. In Pottsville, Pa.
Mr. Pecora. What is your business or occupation?
Mr. Brown. I have none. Oh, yes; I am clerking for the poor
board.
Mr. Pecora. What was your business or occupation?
Mr. Brown. I was a theatrical manager, owner, and producer.
Mr. Pecora. In the early part of the year 1928 were you a resident
of Pottsville, Pa.?
Mr. Brown. Yes, sir.
Mr. Pecora. And at that time were you contemplating making
a trip for your health to the State of California?
Mr. Brown. I was.
Mr. Pecora. About the time that you had arranged to leave your
home for CaUfornia did 3^ou have any business transactions with the
National City Co.?
Mr. Brown. Yes, sir.
Mr. Pecora. How did the transactions originate?
Mr. Brown. I saw an ad in a national magazine that fitted my
particular dilemma.
Mr. Pecora. What was the substance of tliis ad, as you recall it?
Mr. Brown. It said^ — I can not quote verbatim.
Mr. Pecora. No ; the substance of it.
Mr. Brown (reading) :
Are you thinking of a lengthy trip? If you are, it will pay you to get in touch
with our institution, because you will be leaving the advice of your local banker
and we will be able to keep you closely guided as regards your investments.
Mr. Pecora. Whose name was signed to that advertisement?
Was it the National City Bank or the^National City Co.?
Mr. Brown. National City Bank.
Mr. Pecora. What did you do, if anything, when you read that
advertisement?
Mr. Brown. Why, it struck mc, Mr. Pecora, as suiting my needs,
and I answered the advertisement.
STOCK EXCHANGE PRACTICES 2171
Mr. Pecora. Did you receive a reply?
Mr. Brown. A man called that I had never seen before.
Mr. Pecora. Do you know his name?
Mr Brown. Yes.
Mr. Pecora. Wliat was his name?
Mr. Brown. Fred Rummel.
Mr. Pecora. Did he tell you whom he represented?
Mr. Brown. He told me he represented the National City Co. and
that they had received a letter from me.
Mr. Pecora. Your letter was addressed to the National City
Bank?
Mr. Brown. I think so.
Mr. Pecora. And a Mr. Rummel of the National City Co. called
to see you in response to your letter?
Mr. Brown. Yes, sir.
Mr. Pecora. Now tell the committee briefly the substance of the
conversation you had at that time with Mr. Rummel.
Mr. Brown. I told Mr. Rummel that I had just sold my chain of
theaters to different individuals and that the proceeds were becoming
due and that I would need to invest them and that I was contemplat-
ing leaving for the West Coast and that I was glad he had called in
response to my letter. I wanted liis guidance in investing those funds.
Mr. Pecora. Did you tell him how much money you had avail-
able for investment at that time?
Mr. Brown. Yes, sir.
Mr. Pecora. What did you say to him about that?
Mr. Brown. I told him that I would have approximately $100,000
to invest.
Mr. Pecora. What did Mr. Rummel say to you about that?
Mr. Brown. He told me that he would make — I had some bonds
as well as some cash. The cash was becoming due, Mr. Pecora.
Mr. Pecora. That is, the cash from the proceeds of the sale of
your theaters?
Mr. Brown. Yes, sir.
Mr. Pecora. It was about to be paid by the purchasers?
Mr. Brown. Yes, sir.
Mr. Pecora. And jou told that to Mr. Rummel?
Mr. Brown. Yes, sir.
Mr. Pecora. You said that cash would amount to about $100,000?
Mr. Brown. Together with bonds that I had at the time.
Mr. Pecora. What kind of bonds had you at the time?
Mr. Brown. I had Government bonds.
Mr. Pecora. United States Government bonds?
Mr. Brown. Yes, sir; and some Italian Government bonds.
About $25,000 all told.
Mr. Pecora. Yes. Now, did Mr. Rummel give you any advice
concerning the investment you should make with yoxu- resoirrces?
Mr. Brown. He said that he would take that up with his company
and would advise me.
Mr. Pecora. What happened thereafter?
Mr. Brown. He came back with certain recommendations for the
sale of all of the securities I had.
Mr. Pecora. That included the United States Government bonds?
Mr. Brown. Yes, sir.
119852— 33— PT 6 27
2172 STOCK EXCHANGE PRACTICES
Mr. Pecora. Yes. Go ahead.
Mr. Brown. And the purchase of other bonds through his company.
Mr. Pecora. Were there any specific issues that he recommended
you to buy with the proceeds of the sale of the Government bonds?
Mr. Brown. I don't remember.
Mr. Pecora. Tell the committee from that point on in your own
way
Mr. Brown (interposing). Oh, I can remember some, Mr. Pecora.
One was that issue of Peru that we spoke about.
Mr. Pecora. You mean the Peruvian bonds that were the subject
of testimony here yesterday?
Mr. Brown. Yes, sir.
Mr. Pecora. Tell the committee in your own way, Mr. Brown, if
you will, just what transactions and negotiations led to the making of
investments by you with representatives of the National City Co.
from that point on. Just tell the committee in your own narrative.
Mr. Brown. My attention was called to the fact that all the
secirrities wliich I then held were all wrong, and certain recommenda-
tions were made for the purpose of replacing those securities, and
loans were made at banks wliich I had never been in. The first loan
was made at the National City Bank of New York of $75,000.
Mr. Pecora. Who arranged that loan?
Mr. Brown. Mr. Rummel.
Mr. Pecora. Had you ever before had any dealings or transactions
with the National City Bank or the National City Co.?
Mr. Brown. I had never been in them; no, sir.
Mr. Pecora. Give the committee, please, the general circumstances
surrounding the making of the loan, what induced it, what the purpose
was, and what you did with the proceeds of the loan.
Mr. Brown. My attention was called bj" Mr. Rummel that if I
could buy bonds below par that were paying 7'^, netting 7}i per cent,
and borrow the money at 5 or 5% per cent, that I could make the
difference on the borrowed money and pay off' those loans when the
bonds came back, as he expected they would go to par.
Mr. Pecora. Did you also invest at that time upon his recom-
mendation any part of the $100,000 approximately, which you had
in cash or obtained as a result of the sale of your Government bonds?
Did you make any investments through Mr. Rummel of that money?
Mr. Brown. Yes, sir.
Mr. Pecora. Tell the committee about those investments.
Mr. Brown. They are substantially the same, Mr. Pecora, as the
loan at the National City Bank.
Mr. Pecora. Tell us about that.
Mr. Brown. We would buy Greek Government 6's and have them
sent to a bank in Reading that I had never been in, the Northeastern
Trust Co., and a loan approximately 2 or 3 times that amount,
the amount of the value of the bonds, would be placed and other
bonds equal to that sum would be purchased.
Mr. Pecora. Upon whose judgment were the investments made?
Mr. Brown. I am presuming upon that of the National City
Bank and National City Co. because he was their representative.
Mr. Pecora. You mean Mr. Rummel?
Mr. Brown. Yes, sir.
STOCK EXCHANGE PRACTICES 2173
Mr. Pecora. Had you made any suggestions to liim concerning
the specific securities that you wanted to invest your moneys in
Mr. Brown (interposing). Only that I did not want stock.
Mr. Pecora. or did you leave that entirely to his judgment?
Mr. Brown. I left it entirely to his judgment, except that I
specified I did not want stocks.
Mr. Pecora. You wanted fixed interest security?
Mr. Brown. Yes, sir.
Mr. Pecora. Fixed income security?
Mr. Brown. Yes, sir.
Mr. Pecora. Such as bonds?
Mr. Brown. Yes, sir.
Mr. Pecora. What investments were made for you by Mr.
Rummel?
Mr. Brown. I would have to consult my records.
Mr. Pecora. Please do that, will you, if you have your records
with you?
(The witness left the witness chair for a few moments and returned
with documents.)
Mr. Brown (handing document to Mr. Pecora). That will give
you an idea, Mr. Pecora. It is entirely too lengthy to read. They
were bought and sold and traded in to such an extent that I could
not follow it.
Mr. Pecora. What was the aggregate amount of investments in
dollars and cents that you made under Mr. Rummel's advice and
guidance?
Mr. Brown. I should say $200,000 to $250,000.
Mr. Pecora. You had approximately $100,000 of capital to start
with in the early part of 1928 when you first met Mr. Rummel?
Mr. Brown. Yes, sir. I want to correct that. That is December
or November, 1927, instead of the early part of 1928.
Mr. Pecora. All right. Where did you get the funds above that
amount — —
Mr. Brown (interposing). They were borrowed.
Mr. Pecora. that you invested to the aggregate to $200,000
to $250,000?
Mr. Brown. They were borrowed at various banks.
Mr. Pecora. Through whose instrumentality were those loans
eftected?
Mr. Brown. Only through Mr. Rummel's.
Mr. Pecora. And at what banks were those loans placed?
Mr. Brown. The Northeastern Trust Co. of Reading, Pa.
Mr. Pecora. Had you ever had any business transactions with
that bank before?
Mr. Brown. No, sir.
Mr. Pecora. Go ahead.
(There was a pause.)
Mr. Pecora. May I read into the record the list produced by the
witness as being a list of the securities in wliich investments were
made for him in the manner that he has indicated?
Mr. Brown (handing other documents to Mr. Pecora). That is
the bank in Pliiladelphia, sir.
2174
STOCK EXCHANGE PRACTICES
Mr. Pecora. Beginning with 14th of December, 1927, $2,000 of
Vienna 6 per cent bonds, due 1952; 30th of December, 1927, $15,000
of the same issue of Vienna bonds; 30th of December, 1927, $15,000
German Central Bank 6's due in 1960; December 30, 1927, $15,000
of Saxon Pubhc Works 6 per cent bonds, due 1951; December 30,
1927, $15,000 Remington Rand SK's, due 1947.
Well, the list is so lengthy I will ask that it be spread on the record,
Mr. Chairman.
The Chairman. If there is no objection, it is so ordered.
(The list is as follows :)
Edgar Brown, Pottsville, Pa.
Dec. 14,1927
Dec. 30,1927
Do
Do
Sold to
do
do
do -
Do
do
Do
do
Do
do
Mar. 20, 1928
July 24,1928
July 31,1928
Aug. 3, 1928
Aug. 7, 1928
Aug. 17, 1928
Do-
Aug. 18,1928
Oct. 2, 1928
Mar. 20, 1928
Mar. 22, 1928
Mar. 23, 1928
Apr. 3, 1928
Apr. 11, 1928
Apr. 18,1928
Do-
Apr. 25,1928
May 2, 1928
do
$2,000
15,000
15.000
15,000
15,000
15,000
160 shares.
$16,000
10,000
100 shares.
150 shares.
$15,000
15,000
16,000
160 shares.
$13,000
15.000
16,000
100 shares.
160 shares.
$10,000
....do
Sold to
Bought of..
Sold to
....do
Bought of- -
Sold to
do
.do..
do
$2,000
2,000
4,000
2,000
4,000
4,000
100 shares.
16,000
10,000
6,000
16, 000
10, 000
100 shares.
16,000
150 shares.
16,000
....do
Bought of...
Sold to
Bought of...
....do -
Sold to
....do
do
100 shares.
10,000
16,000
16,000
10,000
10,000
10,000
10,000
' These are being held by the National
Vienna, Austria, 6's, due November, 1952
do -
German Central Bank 6's, Oct. 15, 1960
Saxon Public Works, H's, May, 1951
Remington Rand 5H's, May, 1947
Kingdom of Italy 7's, December, 1951
Willys-Overland 7 per cent preferred stock
Rhine Westphalia 6's, May, 1962
Chicago, Milwaukee, & St. Paul & Pacific
R. R. 6's, January, 2000.
IBelgian National Railways, par. preferred stock
Geo. A. Fuller Co. pr. preferred stock
Rhine Westphalia Electric 6's, May, 1952
Greek Government 6's, February, 1968
Missoiu-i Pacific Ry. 4'3, March, 1975..
Belgian National Ry., par. preferred stock
Republic of Peru 6's, December, 1960
Erie R. R. 5's, May, 1967
Irish Free State 5's, November, 1960
IVIohawk Carpet Mills common stock..
Postal Telgraph & Cable 7 per cent preferred
stock.
Northern Ohio Power & Light 6}i's, January,
1941.
Saxon State Mortgage 6's, September 1947
Erie R. R. 6's, May 1, 1967
Missouri, Kansas & Texas 7 per cent preferred.
Mortgage Bank of Chile 6M's, 1967
Republic of Chile 6's, April, 1960
Republic of Chile 6's, February, 1961
Vienna, Austria 6's, November, 1952
Italian Credit Consort 7's, 1947
Antioquia Col. 7's, 1945.
Rhine Westphalia Electric common stock
Erie R.R. 5's, May, 1967
Budapest, Hungary 6's, June, 1962...
...-do -
Missouri Pacific Ry. 4's, March, 1976..
Fiat S. F. 7's, July, 1946
U. S. Realty «fe Improvement common stock..
Erie R. R. 5's, May, 1967
Missouri, Kansas & Texas 7 per cent preferred..
German Central Bank for Agriculture 6's, Apr.
16, 1938.
Geo. A. Fuller Co. prior preferred stock _
German Central Bank for Agriculture 6's, Apr.
16, 1938.
American Power & Light 5 per cent preferred...
Erie Railroad 6's, May 1, 1957
Greek Government 6's, February, 1968
Kingdom of Italy 7's, December, 1961
Fiat S. F. 7's, July, 1946
Norwegian Hydro bH's, due November, 1967...
Remington Rand 6M's, May, 1947
German General Electrlc6's, April, 1948
City Bank against your loans.
STOCK EXCHANGE PBACTICES
Edgar Brown, Pottsville, Pa. — Continued
2175
June 13,1928
July 10,1928
July 11,1928
July 12,1928
Oct. 16,1928
Do
Oct. 2, 1928
Oct. 24,1928
Oct. 25,1928
Nov. 20, 1928
Nov. 27, 1928
Sold to
Bought of..
Sold to
do.-
Bought of..-
Sold to.-
Bought of...
do..
-...do..
.do.
150 shares.
$10, 000
10,000
100 shares.
275 shares.
12 shares.
50 shares.
100 shares.
.$14,000
$1,000
425 shares.
60 shares.
$10,000
100 shares,
100 shares.
100 shares.
60 shares.
Security
Willys Overland 7 per cent preferred
German General Electric 6's, April, 1948.
State of Eio Grande do Sul, June, 1968...
Cannon Mills common stock..
Andes Copper Mining common stock
.do.
Postel Tel. & Cable 7 percent preferred stookJ!
.do.
Andes Copper Mining common stock
Northern Ohio Power & Light 6H's, Jan. 1941 .. .
Pennsylvania Dixie Cement 7 percent preferred
stock.
Remington Band 5H's, May 1947
.do.
Andes Copper Mining common stock
Cannon Mills Co. common stock
Norwegian Hydro 6H's November 1957
Cannon Mills common stoclc
Mohawk Carpet Mills common stock
Baltimore & OhioR. R. common stock
Cannon MUls Co. common stock
94K.
48.
37J^.
37H.'
103K— 25
cents.
102K— 25
cents.
37.1
941/^20 cents.
93J^— 20cents.
47M— 15cents.
47J|— IScents.
47k— IScents.
56— 17}^.
' These are being held by the National City Bank against your loans.
Mr. Pecora. The last transaction shown on this Ust is dated
December 5, 1928, a transaction in the shares of the common stock
of Cannon Mills Co. What other bank loans were arranged to enable
you to make these investments?
Mr. Brown. North American Trust Co., of Philadelphia.
Mr. Pecora. How much of a loan did you get there?
Mr. Brown. I do not remember definitely.
Mr. Pecora. What other bank loans were negotiated for your
accommodation by Mr. Rummel?
Mr. Brown. The Peimsylvania National Bank in Pottsville.
Mr. Pecora. Had you ever done business with that bank?
Mr. Brown. Yes, sir; I had.
Mr. Pecora. How much of a loan did you get there?
Mr. Brown. I think it was $5,000.
Mr. Pecora. What other bank loans?
Mr. Brown. The Safe Deposit Bank, possibly. I think that loan
was $20,000.
Mr. Pecora. Go ahead.
Mr. Brown. And the National City Bank in New York City.
Mr. Pecora. How much of a loan did you get there?
Mr. Brown. $75,000.
Mr. Pecora. Anywhere else; any other bank loans?
Mr. Brown. Yes, sir. One at the Northeastern Trust Co., of
Reading, for about $80,000. I think with my original collateral that
would about make it.
Mr. Pecora. In the investments that were made by you, that
were made for you — Oh, do you recall a loan that was obtained for
you from a bank in Los Angeles by Mr. Pummel?
Mr. Brown. Oh, yes.
Mr. Pecora. What was the name of that bank?
Mr. Brown. That was not obtained by Mr. Runimel. That was
obtained by a Mr. Anderson of the Los Angeles branch bank?
Mr. Pecora. Of what Los Angeles branch bank?
2176 STOCK EXCHANGE PRACTICES
Mr. Brown. Of the Los Angeles branch of the National City Bank.
Mr. Pecora. I see. Now what collateral was that loan secured by?
Mr. Brown. Oh, I think an important thing has been missed which
will have to be brought out.
Mr. Pecora. Go ahead and tell us about it.
Mr. Brown. These bonds which I bought instead of accruing in
value declined steadily in value, and I complained.
Mr. Pecora. You complained to whom?
Mr. Brown. Mr. Riunmel.
Mr. Pecora. Yes?
Mr. Brown. And he said, "Well, that is your fault for insisting
upon bonds. Why don't you let me sell you some stock?
Well, the stock market had been continually moving up. So then
I took hook, line and sinker and said "Very well. Buy stock."
Mr. Pecora. Did you tell him what stocks to buy?
Mr. Brown. Never.
Mr. Pecora. Did he buy stocks then for your account?
Mr. Brown. Might I answer that facetiously — Did he buy stocks?
(Great and prolonged laughter.)
Mr. Pecora. The \vitness produces a large batch of confirmations
of purchases of various stocks. They are so numerous, Mr. Chair-
man, that I do not think it necessary to spread them all on the record.
Now, go ahead and tell the committee of the investments that were
made for your account, if not benefit.
Mr. Brown. In early 1929 I went to New York City, without
telling anyone connected with the National City Co. that I was going
there, on an irregularity in the purchase of Andes Copper Stock and
also to complain to the officers of that company that I feared that I
was being a shorn lamb, and I went and asked to see one of the officials
of the company. I was introduced to a Mr. H. W. Beebe. I laid
my complaint before him that my original sum of money, notwith-
standing a rising market and the violence with which I had been
traded in, was, so near as I could determine, less in value — I say so
near as I could determine, Mr. Pecora, because I could not tell where
I stood.
I present telegrams to show that I tried to get my accounts balanced
at these various banks that I was being traded in, in order to balance
my books, to find out where I was.
And Mr. Beebe said that he would make some recommendations to
a Mr. "the manager of our Philadelphia office." I went away
feeling that that would be done. I told him that I disliked the violent
trading, and he said a recommendation would be made. I told him
that I was fearful that a reaction in the market might wipe me out,
and that I had no income and he said that he would confer with the
manager of the Philadelphia office
Following that I was called upon by their agent.
Mr. Pecora. Can you give his name? Can you give the agent's
name?
Mr. Brown. The same man, Mr. Rummel.
Mr. Pecora. Go ahead.
Mr. Brown. With the reconvmendation that we trade the remain-
ing securities that we had for 200 shares of National City Bank, the
1,000 shares of Andes, which became 450 Anaconda, 250 shares of
STOCK EXCHANGE PRACTICES 2177
Oliver Farm, and 100 shares of Cannon Mills stock, and sit still on
that and see what would happen. [Laughter.]
About that time I went to Los Angeles. When I got there
Mr. Pecora (interposing). What time was this that you are speak-
ing of?
Mr. Brown. In August of 1929.
Mr. Pecora. Go ahead.
Mr. Brown. The eastern banks wanted my loans moved, because
I was moving out of the territory and out of touch with them and a
Mr. Anderson of the Los Angeles office arranged with a bank I had
never been in, the Farmers & Merchants Bank, to loan me on those
securities which I have just read into the record, $105,000, $95,000 of
which was used to reduce the $100,000 they had borrowed for me in
the East, and $10,000 to be kept on hand in the bank, a banking
custom I have since learned. That was in August.
In September, from data that I have made, I noticed that the
prices of those stocks were declining, and I concluded that at the
first opportunity I would clean out the whole business.
And about October the 4th I went into the National City Bank and
asked them to sell out everything.
Mr. Pecora. That is the branch in Los Angeles you are speaking of?
Mr. Brown. Yes, sir.
Mr. Pecora. Go ahead.
Mr. Brown. I was placed in the category of the man who seeks to
put his own mother out of his house. I was surrounded at once by
aU of the salesmen in the place, and made to know that that was a
very, very foolish thing to do.
Mr. Pecora. That is, to sell your stocks?
Mr. Brown. Especially to sell the National City Bank stocks.
Mr. Pecora. What was the quotation at that time for the National
City Bank stock, if you recall?
_ Mr. Brown. About $490— $500. $500. I then received an unso-
licited wire from their agent in the East, who did not know where I
was from any knowledge that I had given him, a telegram.
Mr. Pecora. Have you got it with you?
Mr. Brown. A short one. I have got it.
Mr. Pecora. Read the telegram into the record, will you?
Mr. Brown (reading) :
October 8.
Edgar Brown,
Beverly Hills, California —
Tills was the day following my conference in the Los Angeles bank.
It reads:
National City Bank now 525. Sit tight.
I had had no connection with Mr. Rummel for 4 months. I did
not see how he knew where I was.
Mr. Pecora. Is that Mr. Rummel's name signed to that telegram?
F. C. Rummel?
Mr. Brown. Yes.
Mr. Pecora. Proceed.
Mr. Brown. I still continued my endeavors to get that stock.
I realize that this testimony sounds rather foolish, to think that a man
can not go in and say, "Sell that stock" and walk out. But it was
not as easy as it sounds, because each time I woidd go to sell it they
2178 STOCK EXCHANGE PRACTICES
would call my attention to the fact that it had gone up a couple of
points.
But on October the 29th they sold the 200 shares of National City
Bank stock and the 450 shares of Anaconda, and so on — they sold
that without my specific command, stating that the Farmers Bank was
calling my loan at that time, which I afterward found out was not
the case.
Now in connection with that let me say that that was a Tuesday.
The price of that stock when it closed on Monday was $460 a share.
And at 7 o'clock on Tuesday morning, which was the equivalent of
10 in New York, 1 was told that the stock was crashing, and I either
had to get out or be sold out by the bank. I was helpless. They
got $320 for it. But instead of selling it they bought it themselves
for $320.
Mr. Pecora. The witness produces a confirmation.
Mr. Brown. In the Wall Street Journal the stock was quoted at
$360.
Mr. Pecora. The witness produced a confirmation from the Na-
tional City Co. of California, Los Angeles, dated October 29, 1929,
reading as follows:
Dear Sir: In accordance with instructions we are pleased to confirm purchase
from you of 200 shares National City Bank of New York stock at $320 fiat, and
We have sold for your account 400 shares Anaconda Copper Mining Co. com-
mon stock at 79 ^i flat less 20 cents a share commission of our broker.
Fifty shares of Anaconda Copper Mining Co. common stock at 79^ flat.
100 shares Eastman Kodak stock at 170 flat, less 25 cents a share commission
to our broker.
Settlement and disposition will be made in accordance with your instructions.
Very truly yours,
The National City Co. of California,
(Signed) R. R. Hodge, District Sales Manager.
What did you say was the quotation for the National City Bank stock
on October 29, 1929?
Mr. Brown. $450.
Mr. Pecora. What was the quotation on Tuesday, October 30?
Mr. Brown. $360. That is when I gave the order.
Mr. Pecora. And they confirmed a purchase from you at $320?
Mr. Brown. Yes, sir. This AviU prove that I knew no tiling about
the letters. The second paragraph.
Mr. Pecora. We will come back to this later on. Just finish youi
narrative of your transactions with the National City Co.
Mr. Brown. I felt that I had been very badly used, and protested.
Mr. Pecora. Well, in what way did you protest?
Mr. Brown. Personally, to the New York office. I wrote to Mr.
Beebe. I believe you have a copy of that letter there. I have got
it. Do you want me to read it?
Mr. Pecora. Yes.
Mr. Brown (reading):
Beverly Hills, Calif.,
October SI, 19S9
Mr. W. W. Beebe,
Assistant Vice President, National City Co., New York City.
Mt Dear Mr. Beebe —
Shall I omit any personal parts of the letter?
Mr. Pecora. Yes. Just read the portion relating to the stock
transaction.
STOCK EXCHANGE PRACTICES 2179
Mr. Brown (reading) :
I am the chap from Pottsville, Pa. * * * who with my wife called on
you some months ago concerning an irregularity in the purchase of Andes copper
through your Fred Rummel in Pottsville, and complained about being sold too
much stock and traded in too rapidly * * * this I relate only to identify
myself.
I told you, if you will recall, that I would Hke you to take my funds in to the
New York bank and trade in them there where you personally could watch them,
but this you said you were unable to do, but appreciated this show of faith on
my part in the National City Co., and added that I was perfectly safe in follow-
ing the advice of the company right where I lived.
Almost immediately after I left you I developed tuberculosis and was advised
to come out here for my health.
As soon as I arrived I went to your offices * * * and met Mr. Arthur
Anderson, and told him that I would like to have my banking facilities moved
out here; that I naturally wanted the National City Co. to look after my financial
affairs.
He arranged to have my stock moved to the Los Angeles Farmers & Mer-
chants Bank, and after it was out here recommended one or two minor changes
which, as always, I compHed with.
My collateral list at that time amounted to $170,000 face value, comprised of
National City stock, Anaconda Copper, Cannon Mills, and Oliver Farm. The
loan was for $105,000 — the loan actually really was only $95,000, but they
loaned me $105,000 and asked me to let $10,000 lie in the bank and use the
remaining $95,000 to lift the draft * * *.
All was well. My collateral grew until it was approximately worth its orig-
inal $200,000. * * * At this point I begged Anderson to sanction my
selling, but he insisted that City Bank would go to $750 at the very least.
Now I have made it a rule since the day I first came with the National City
with the proceeds of my first theater sale for them to invest — that I would
never buy or sell anything without their sanction and would always act upon
any suggestions which they might make, and to this day I have never once
departed from that rule. * * *
I bought thousands of shares of stock on their suggestion which I did
not know whether the companies they represented made cake, candy,
or automobiles. I just stuck to that rule feeling that it was the only
safe thing to do, but it was really the only way in which I could be
safe. But, alas, I am apparently wrong in placing my faith so.
If you can find a single transaction in the thousands of shares I have bought
and sold through your company where I have made any personal suggestion or
acted on my own initiative without some one in the National City Co. saying,
yes, that is the proper thing to do, or if you can find a single suggestion, just
one, concerning a transaction, which I have made up until this time regarding
the sale of your stock I will be pleased to withdraw that plea for help which I
am about to make.
On Monday night of this week Anderson called me on the phone and said,
"Brown, things are looking terrible."
At that time the stock was 450 (continuing reading) :
"I think the market might bust wide open tomorrow morning and let you out.
You'd better come down and watch it. If they move off you get out from
under." I had really never been in a board room. This morning I got up at
6 o'clock and was in the board room ne.xt to the National City Bank before the
exchange opened, which it did at 7. Anaconda closed, so Anderson said, at 96
the night before and the first opening was for 45,000 shares at 80. Anderson
said to myself and to Mrs. Brown, "Now, if this thing strengthens up the first
hour everything will be all right, but if it does not, look out." He watched the
proceedings, moving nervously about for approximately an hour, and I said,
"What do you think about it?" Anaconda was above its opening all this
while. He replied, "I don't know. The ticker is late out here and I can't
tell. I'll walk over to our office and see what news is coming in direct."
Marie and I — my wife — remained until after another hour had passed. I was
about as blue as a poker chip. Everybody was groaning and my godding until I
said, "Come on, let's go out into the air. This stuff will be all right. These
2180 STOCK EXCHANGE PRACTICES
folks are just getting panicky." We began to think of places where we might go
to scrape a little cash together to buy some more Anaconda and make our lot an
even 500. As I went in the door of your offices here I noticed that they were
deserted save Mr. Anderson. I saidj "Wait a minute, I'll see if he has any
news." Just as I got to him he hung up the telephone as I reached his desk, and
he said, " My God, Brown, City Bank is crashing. The banks are in on this thing
and the market is actually way under what it is quoted out here."
Which was not true.
"My advice to you is to get out. Bank stock is well down under 350."
Well, now, I ask you in all earnestness, having taken the National City Co.'s
advice, which you can readily prove, in every other case, what was I to do in
this instance? Where was I to turn? Who did I know? I said, "Let's ask
Kane."
Mr. Kane was the Los Angeles manager.
He said, "He is in Frisco." I said, "Well, where is Judge Ryan?"
He was the head of the Los Angeles Branch Bank.
He said, "Oh. I would not be surprised if he has gone out and cut his throat."
I said, "Well, Andy, this thing is serious — now, I don't have to sell, but if you
think it is the right thing to do I suppose I'll have to ride along — I presume that
even somewhat below the prices quoted on the board I'll have at least $25,000
left."
I walked to the door where my wife was waiting and told her what I had done,
and she was furious. She being an even-tempered soul felt that I had made a
mistake — and, brother, I had. She said, "You go back in there and tell him
not to sell that stock. We were just talking about other people getting panicky;
now why get hysterical?' '
So back in I went. Anderson stood his ground. He said, "The only thing to
do is to get out." Besides, he said, "The order has gone in and I can not stop
it." (I have a witness for this.)
"Anyway," he said, "the way they are busting this thing open you'll be able
to buy back all the Anaconda you want at 65, and anyhow, the bank is calling
your loan."
So I went over to the Farmers & Merchants Bank to report not only what I
had done * * * and they just gave me hell. They said they were not even
thinking of calling me. That my cash account and my stock value even at the
last low was such that they were not even putting out letters or phone calls for me.
Well, I was nearly crazy. Naturally they could not loan me any more money.
since my security was all sold, so
I hurried to Anderson and I asked him to try to get me some from City Bank
and to buy a thousand Anaconda, using my cash in my account. Whether he
actuall}' wired or not I don't know, but he called a little while later and he said,
"They won't loan you a cent on a thousand Anaconda."
The next morning when I woke up I discovered that instead of 350 for my
City Bank I got 320 and so on down the line, so that my calculated $25,000 was
in reality $6,000 * * *.
Now for my request.
Three years ago I came with your company iwith the profit on some real estate
sales amounting to approximately $100,000. I'll pay you anything I now own
if in these three years you can find a single instance where I did not first call up
your office before making a sale or a purchase or complying with any suggestions y ou
ever made. This statement is totally and wholly true. In all that time I never
bought a single share of stock through any person or company except your
companj .
Now get tnis picture.
I am now 40 years of age — tubercular — almost totally deaf — my wife and family
are depending on me solely and alone and because of my abiding faith in the
advice of your company I am to-day a pauper.
I am absolutely certain that if your man Anderson had sought the advice of
any of his superiors, or any of them had been within consulting distance they
would have stopped nim from innocently, but none the less thoroughly, ruining
me by his rattleheadedness. And I am equally certain that if before you ask
STOCK EXCHANGE PRACTICES 2181
him whether or not this is true, you assure him that he will not lose his job iffhe
confesses the truth, he will admit every word as I have written it I beheve
however, tnat he would rightly fear that he would be fired and will therefore
change the coloring of it. But if you ask him to answer yes or no whether he
advised me to get out while I still had something and assure him that no matter
how he answers he will still be working for you — he'll say, "yes," I told him to get
out.
Everybody out here says * * * that I am only wasting stampsjby
writing to you, but I can not help feel that your character — something in vour
eye as we saw you makes us feel that you'll do more than say, "That's too bad."
Now what I ask him to do is to loan me enough money to buy a
thousand shares of Anaconda stock by my putting up $25,000 in
cash, and their bank loaning me the balance.
I sent him a subsequent telegram following that letter, along the
same line, and in reply to that he says this :
While we believe Anaconda is an attractive security for long-term investment
we do not feel it advisable to make security purchases with borrowed funds except
in cases where the purchaser has an earning power which will enable him within a
reasonable time to pay off his loan and lock his securities in a safe-deposit box.
And this point I want to make clear to the examiner is that my
status at that time was exactly the same as when I went in originally.
I had no earning power and he knew it.
I wired again the second time, and again I got a second telegram
in reply. My wire to him is as follows:
Mr. W. W. Beebe,
Vice president, National City Co.,
No. 55 Wall Street, New York City:
Why do you object to my borrowing funds with which to purchase securities
now when conditions concerning my income were no different when Rumniel was
doing that very thing much against my wishes and concerning which I complained
to you personally? The only way in which I can possibly recover anj' appreciable
portion of the fortune I lost through following implicitly the advice of the repre-
sentatives of your company is to adopt the same purchasing methods they used
and then sell out at a point where they formerly induced me to stay in. For
example, I have ample witness that I wanted to seU City Bank stock after it
crossed five hundred but was urged not to do so by Anderson here saying that it
would sell over fifteen hundred before it would drop below five hundred and
simultaneously I received this telegram from Rummel in Pennsylvania whose
opinion I had not even asked and with whom I had not communicated for
months. "City Bank stock now crossing five hundred twenty-five. Sit tight."
Why was this permitted when Rummel knew all about my income or lack of it
but borrowed in order to sell me three times as much stock as I should have
been sold and in the face of this induced me to stay in against my wish and
now you refuse to help me in buying some of these same securities under con-
ditions exactly the same as when it was sold me in tlie first place, or perhaps I
am misinterpreting your telegram and you are not refusing to get the loan for
me but are merely advising me against doing it. Will you please wire again.
Edgar D. Brown.
In reply to that I got another telegram from Mr. Beebe, a very
brief one, as follows:
Re your wire the thirteenth. At the time you first brought to my attention the
condition of your account you will recall I asked the manager of your Philadelphia
oflSce to review that account and from time to time make recommendations.
No use reading this all.
Unless the borrower has assured earning power and could pay off the loan within
six montlis without resorting to the sale of the collateral we would not make a
collateral loan.
Mr. Pecora. But they did make the collateral loan to you back
in 1928?
2182 STOCK EXCHANGE PRACTICES
Mr. Brown. Yes. The conditions, Mr. Pecora, were identical.
There wasn't anything different about them.
Senator Fletcher. But if you had bought Anaconda stock at the
price then you would have lost just as much, would you not?
Mr. Brown. Would you mind repeating liis question?
Mr. Pecora. The Senator asked you if you had bought Anaconda
then, that is at the time you sent that letter to Mr. Beebe, you would
have lost just as much anyway?
Mr. Brown. That is true. Undeniably. That is true. I would
have.
Mr. Pecora. So that about covers your narrative?
Mr. Brown. Yes.
Mr. Pecora. About your transactions with the National City Co.?
Is that right?
Mr. Brown. That is correct.
Mr. Pecora. Did you get anything back out of your investments?
Mr. Brown. Not a cent.
Mr. Pecora. I think that is all to-day, Mr. Chairman.
The Chairman. The committee will adjourn untU 10 o'clock to-
morrow morning, and the witnesses under subpoena will be present at
that time.
(Thereupon, at 4.55 p. m. Tuesday, February 28, 1933, an adjourn-
ment was taken until 10 o'clock a. m. the next day, Wednesday,
March 1, 1933.)
STOCK EXCHANGE PRACTICES
WEDNESDAY, MARCH 1, 1933
United States Senate,
Subcommittee of Committee on Banking and Currency,
Washington, D. C.
The subcommittee met, pursuant to adjournment on yesterday, at
10 a. m. in room 301 Senate Office Building, Senator Peter Norbeck
presiding.
Present: Senators Norbeck (chairman), Townsend, Fletcher, and
Costigan.
Present also : Senator Brookhart.
Further present: Ferdinand Pecora, special counsel to the com-
mittee; Julius Silver and David Saperstein, associate counsel to the
committee.
The Chairman. The subcommittee will come to order. Mr. Hor-
ace Sylvester will come forward if he is in the room.
Mr. Sylvester. All right.
The Chairman. You will come forward to the committee table
and after being sworn take a seat in front of the committee reporter.
Now, please stand, hold up your right hand, and be sworn: You
solemly swear that you will tell the truth, the whole truth, and noth-
ing but the truth regarding the matters under investigation by this
subcommittee, so help you God?
Mr. Sylvester. I do, sir.
TESTIMONY OF HORACE C. SYLVESTER, JR., CALDWELL, N. J.,
VICE PRESIDENT OF THE NATIONAL CITY CO., NEW YORK
CITY
Mr. Pecora. Mr. Sylvester, will you give your fuU name to the
committee reporter, your residence, and your business or occupation?
Mr. Sylvester. Horace C. Sylvester, jr. My residence is Cald-
well, N. J. I am a vice president of the National City Co., with
offices at 55 Wall Street, New York City.
Mr. Pecora. How long have you been connected with the National
City Co. as a vice president?
Mr. Sylvester. I think, Mr. Pecora, although I am not exactly
sure of the date, but I beheve it is around 1910.
Mr. Pecora. Prior to that time were you connected with that
company in anj' other capacity?
Mr. Sylvester. I came with the company in its early formation,
in charge of the municipal bond department of the company.
Mr. Pecora. As a vice president since 1910 have you been in
charge of the municipal bond department of that company?
2183
2184 STOCK EXCHANGE PRACTICES
Mr. Sylvester. Yes, sir.
Mr. Pecora. And are to-day?
Mr. Sylvester. Yes, sir.
Mr. Pecora. Mr. Sylvester, I want to call your attention to an
issue of municipal bonds, specifically those issued by the Port of
New York Authority in 1931. Do you know the issue I refer to?
Mr. Sylvester. An issue of $66,000,000?
Mr. Pecora. Yes.
Mr. Sylvester. Yes, sir; of 4K per cent bonds.
Mr. Pecora. That issue was underwritten by the National City
Co., was it not?
Mr. Sylvester. The National City Co. and associates; yes, sir.
Mr. Pecora. Did you have charge of the negotiations on behalf of
the National City Co. which led to that Company's acquiring the
issue?
Mr. Sylvester. Yes, sir.
Mr. Pecora. Ai'e you familiar with the expenses incuri'ed by the
company in connection with those negotiations?
Mr. Sylvester. In a general sort of way; yes, sir.
Mr. Pecora. There appeared in the ledger account of the syndi-
cate handling that issue, produced here by your company, an entry
under date of June 2, 1931, regarding the withdrawal by means of a
cash ticket to the order of S. W. Baldwin, treasurer of the National
City Co., of the sum of $10,020. Are you familiar with that trans-
action?
Mr. Sylvester. Yes, sir.
Mr. Pecora. Mr. Baldwdn testified, in substance, that he drew
that cash under your dii'ection or instructions and turned the cash
over to you, and that he Icnows nothing more than that concerning
the uses or purposes to which that money was put. Can you tell us
about it?
Mr. Sylvester. Yes; Mr. Pecora.
Mr. Pecora. I wish you would.
Mr. Sylvester. The bonds were bought on March 9. The syndi-
cate was wound up and the checks for the profits sent to the syndi-
cate managers on April 22.
Senator Fletcher. Of what year?
Mr. Sylvester. 1931.
Mr. Pecora. Go ahead with your answer.
Mr. Sylvester. We have always set up a reserve for contingent
expenses, which was held over for misceDaneous bills that come in;
and after that has been held over, that is the National City Co.'s, not
the syndicate's profit, because the checks had already gone out on
that, and that goes into the company's income. From that amount
of money I gave Mr. Baldwin an order to send me $10,020 in cash,
which cash I gave to Mr. Edward F. Barrett, on the imderstanding
that he was going to make a loan to Mr. John Ramsey, general
manager of the Port of New York Authority.
Mr. Pecora. Did you say to Mr. John Ramsey?
Mr. Sylvester. Yes, sir. And that was on June 2, two months
after the syndicate was closed.
Mr. Pecora. Do you know who Mr. John Ramsey is?
Mr. Sylvester. Yes, sir.
Mr. Pecora. Who is he?
STOCK EXCHANGE PRACTICES 2185
Mr. Sylvester. Mr John Ramsey is the general manager of the
Port of New i ork Authority.
. Mr. Pecora. Do you know anything besides that about him I
mean about his identity? '
Mr. Sylvester. Well, I have known Mr. Ramsey in a business
way since 1926.
Mr. Pecora. Wlio is Mr. Edward F. Barrett?
Mr. Sylvester. He is an officer of the City Bank.
Mr. Pecora. Of the National City Bank? '
Mr. Sylvester. Yes, sir.
Mr. Pecora. What office?
Mr. Sylvester. A vice president.
Mr. Pecora. Do you Imow why that particular sum of money was
taken out of the expense account set aside as a reserve, for this
particular bond issue that was made by the Port of New York
Authority?
Mr. Sylvester. Mr. Barrett came to me and said that Mr. Ramsey
was in need of money and that he would like very much to make
him a loan.
Mr. Pecora. Did he make him the loan, do you Imow?
Mr. Sylvester. The bank could not make him a loan, and Mr.
Barrett asked me if there was a way to make him a loan in the National
City Co. After thinldng the matter over I decided that Mr. John
Ramsey being a good moral risk it would be perfectly proper to make
him a loan of $10,020, and I advanced that sum of money to Mr.
Barrett, and I understand that Mr. Barrett made that loan. I had
no negotiations with the loan matter at all.
Mr. Pecora. Was the loan made to Mr. Ramsey on behalf of the
National City Co.?
Mr. Sylvester. I presume it was, Mr. Pecora; yes. I let Mr.
Barrett attend to the details of the loan. I had no negotiations in
connection with the loan. I had no conversation with Mr. Ramsey.
I knew nothing whatsoever about that side of the picture.
Mr. Pecora. What written evidence of indebtedness does the
National City Co. hold or has it ever held with respect to this loan?
Mr. Sylvester. Mr. Pecora, you will have to get that information
from Mr. Barrett, because I had no more connection with the loan
after I passed the money on to Mr. Edward Barrett.
Mr. Pecora. Mr. Barrett is not an officer of the National City Co.,
is he?
Mr. Sylvester. No; he is not an officer of the National City Co.,
but he is a vice president of the bank.
Mr. Pecora. Well, you regard the two as separate institutions with
regard to tliis loan, do you not?
Mr. Sylvester. Absolutely. And I understand that he has a
note; that there was a note given for it.
Mr. Pecora. When did you understand that? When did you first
understand that, Mr. Sylvester?
Mr. Sylvester. Mr. Pecora, it is pretty hard for me to pin down
to the day, but I always looked on tliis thing as in the nature of a
loan to be repaid, and that a note would be given for it.
Mr. Pecora. If it was a loan made by the National City Co., to
Mr. Ramsey because he was considered by you to be a good moral
risk, will you please tell this committee why that loan was not set up
2186 STOCK EXCHANGE PRACTICES
on the books of the company, and why, instead of being set up as a
loan it is charged to expenses in connection with this bond issue of
the Port of New York Authority?
Mr. Sylvester. Mr. Pecora, the only way I could answer that
question is to tell you that I looked on this as an accommodation
to Mr. John Eamsey for a short period of time, and that the loan
would be repaid, and we carried it in the reserve fund pending that
repayment.
Mr. Pecora. Is it customary to carry loans in the reserve fund set
up for expenses?
Mr. Sylvester. No, sir; it is not.
Mr. Pecora. Do you know of any other instance where that was
done by your company?
Mr. Sylvester. Mr. Pecora, I have handled $4,500,000,000
worth of mimicipal, Government, and State bonds in 10 years, and I
know of no other instance of this character on the books of the
National City Co.
Mr. Pecora. Have you ever seen any note given by Mr. Ramsey
for this so-caUed loan?
Mr. Sylvester. No, sir.
Mr. Pecora. Do you distinctly recall Mr. Barrett actually teUing
you that he had a note as evidence of the loan?
Mr. Sylvester. No; I do not.
Mr. Pecora. Do you recall anybody ever telling you that?
Mr. Sylvester. No. It was just an understanding that I had,
that there was a note given.
Mr. Pecora. Do you mean it is an assumption on your part.
Mr. Sylvester. It is an assumption on my part.
Mr. Pecora. It is not an understanding that you had with any-
one else, is it?
Mr. Sylvester. I presumed, Mr. Pecora, when Mr. Barrett
made the loan that he took the proper evidence of that loan, because
I expected, and I fully expect, Mr. Ramsey to repay the loan.
Mr. Pecora. Has any interest been paid on account of this loan,
do you know?
Mr. Sylvester. That I can not tell you, Mr. Pecora.
Mr. Pecora. Who would know about that?
Mr. Sylvester. Mr. Barrett.
Mr. Pecora. Well, Mr. Barrett seems to be an officer of the bank
and not of the company, and this, you say, was a loan made by the
company.
Mr. Sylvester. He handled this loan matter, Mr. Pecora, and I
had nothing whatsoever to do with the loan. Mr. Ramsey and I
have never discussed the loan.
Mr. Pecora. Did you have any contact with Mr. Ramsey in con-
nection with the negotiations that led to the National City Co.'s
acquiring $66,000,000 issue of Port of New York Authority bonds?
Mr. Sylvester. The Port of New York Authority bonds, Mr.
Pecora, were sold by the finance committee of the Port of New York
Authority, and confirmed by the board, and my negotiations on this
$66,000,000 issue were in open meeting before the whole board. Mr.
Ramsey sits in that meeting, but he has no voice and no vote.
Mr. Pecora. Did you have any contact of any kind with him in
connection with the negotiations on the loan?
STOCK EXCHANGE PRACTICES 2187
Mr. Sylvestee. My negotiations on this loan, Mr. Pecora, were
had with Mr. Ferguson, the chairman of the finance committee.
Mr. Pecora. And that means that you had no contact of any kind
with Mr. Ramsey in connection with those negotiations?
Mr. Sylvester. A contact possibly as far as information is con-
cerned, and terms, and things of that kind. But as far as negotia-
tions in connection with price and the award of the bonds, no, because
Mr. Ramsey has no power along that Une.
Mr. Pecora. Was there any competitive bidding for this bond
issue?
Mr. Sylvester. I understand there was.
Mr. Pecora. I don't siippose the advance information that you
got from Mr. Ramsey had anything to do with guiding your company
in submitting its bid?
Mr. Sylvester. None whatsoever. Oh, none whatsoever.
Mr. Pecora. What kind of advance mformation did you get from
him?
Mr. Sylvester. The only information that I got that there was
competitive bidding was from Mr. Ferguson, that another group was
going to bid on the issue of bonds.
Mr. Pecora. Who was the other group that bid on the issue?
Mr. Sylvester. That I can not tell you, because those details
have never been made public.
Mr. Pecora. Was there more than one other group that submitted
a bid for those bonds?
Mr. Sylvester. I can not tell you. I do not know. We make
our bids and sometimes there is competition and at other times there
is not. May I
Mr. Pecora (interposing). Were not the bids open, and
Mr. Sylvester (continuing). May I go into that?
Mr. Pecora. Yes.
Mr. Sylvester. We bought from the Port Authority over a period
$130,000,000 worth of bonds. On the first sale there was an invita-
tion sent out to bid, and we were the only bidder and we bought the
bonds.
Senator Townsend. At what price?
Mr. Sylvester. That was back in 1926, and the bonds were iji's
at the price of 97 K- The second sale we bought the bonds, $20,000,000
4's at the price of 95.63. And I understand there were invitations
sent out, but due to conditions at that time there were no other bids.
The third block of bonds, in 1928, were bought by the Guaranty
group, $12,000,000, 4's. The fourth issue of bonds, $30,000,000
4M's .
Senator Townsend (interposing). At what price were those bonds
sold?
Mr. Sylvester. The 4's were sold at 99.73. Those bonds enjoyed
a certain special tax exehiption in New York State that made them a
little more valuable than the others.
Senator Townsend. All right, go ahead.
Mr. Sylvester. The fourth issue was $30,000,000 4K's, Hudson
River Bridge bonds, that we bought at 92.85. And this fifth and
last issue was the $66,000,000 of 4M's that we bought.
Senator Townsend. At what price?
Mr. Sylvester. We paid the price of 98.75 for the bonds.
119852— 33— PT 6 ^28
2188 STOCK EXCHANGE PRACTICES
Senator Townsend. That was the last lot, sold in 1931.
Mr. Sylvester. Yes; in 1931, and they were the 4}i's.
Mr. Pecora. Did Mr. Barrett, as a vice president of the National
City Bank, have any authority over the disposition of the funds of
the National City Co. for loaning purposes?
Mr- Sylvester. Not except as I gave it to him. I took the full
authority for it.
Mr. Pecora. When this $10,020 was given to you by the treasurer
of your company, Mr. Baldwin, you knew that you were going to
turn it over to Mr. Barrett to be given to Mr. Eamsey as a personal
loan, did you not?
Mr. Sylvester. Yes, sir; that was the understanding.
Mr. Pecora. Then why didn't you have it set up on the books of
the company in that way, Mr. Sylvester?
Mr. Sylvester. Mr. Pecora, as I told you before, the only reason
it was not set up on the books in that way was due to the fact that
we expected to have the loan repaid, and we had this $15,000 reserve
belonging to the National City Co., and we charged it against that.
Mr. Pecora. You expected the entire loan to be repaid, didn't you?
Mr. Sylvester. Yes.
Mr. Pecora. Has any part of it been repaid?
Mr. Sylvester. I don't know. I haven't had any negotiations
or connection with the loan at all with Mr. Ramsey, and I can not
tell you those details.
Mr. Pecora. Do we understand that this transaction which you
have described as a loan coidd not have been made possible without
your approval or direction?
Mr. Sylvester. I took the responsibihty, Mr. Pecora, and made it
myself as vice president in charge of the municipal department of
the National City Co.
Mr. Pecora. And without that approval on your part this loan
could not have been made?
Mr. Sylvester. I do not think it could have been made; no, sir.
I do not see how it could have been made.
Mr. Pecora. And you say this is the only transaction of the sort
of which you have any recollection or knowledge since you have been
a vice president of the National City Co.?
Mr. Sylvester. That is the only one I have any knowledge of in
the Government, State, and municipal business over which I have
control. We have never made
Mr. Pecora (interposing). In view of the fact that you approved
the making of the loan by your company to Mr. Ramsey, did you
make it your business to see that the loan was properly set up and
that it was repaid?
Mr. Sylvester. I saw that it was charged to this reserve fund,
and I stopped there, Mr. Pecora.
Mr. Pecora. Then was it because of your instructions or direc-
tions that this loan was charged against the reserve fund for expenses
in connection with that bond issue?
Mr. Sylvester. Well, now, whether I actually directed that it
should be charged against it or not I can not tell you.
Mr. Pecora. Yesterday Mr. Baldwin testified, in substance, that
he drew the cash ticket for this sum of money to his own order as
treasurer, turned the cash over to you, and that it was set up as it
STOCK EXCHANGE PRACTICES 2189
now appears on the books — as an item against cash for expenses in
connection with that loan because of directions given to him to that
effect.
Mr. Sylvester. By whom?
Mr. Pecora. He stated you were the only person he spolvc to in
connection with it.
Mr. Sylvester. Well, if Mr. Baldwin testified that those are the
facts perhaps they are the facts.
Mr. Pecora. Are they facts within your personal recollection now?
Mr. Sylvester. If Mr. Baldwin says so; yes.
Mr. Pecora. Are those the facts within your own recollection
irrespective of what Mr. Baldwin or anybody else may sav about
them?
Mr. Sylvester. I will have to look into the transaction and see.
I do not remember making any memorandum that they should be
specifically charged to that account, and I don't remember giving
any directions that they should be specifically charged to that
account. But if Mr. Baldwin says I did, why, he is the treasurer of
the company, and I will say yes to his testimony to that effect.
Mr. Pecora. Do you remember giving any directions of that
kind in regard to the manner in which that sum of money should
be set up on the books of the company?
Mr. Sylvester. Not directly; no.
Mr. Pecora. Did you do so indirectly?
Mr. Sylvester. My recollection is hazy on it. I do not want
to evade your question, but I don't loiow whether I did or not, or
whether it just came in the routine matters of the treasury depart-
ment and they set it up. As a rule I do not tell them how to set up
items, over in the treasury department.
Mr. Pecora. For how long a period of time was this loan to be
jnade?
Mr. Sylvester. It was a demand loan as I understood it.
Mr. Pecora. Is that anything more than your imagination or
understanding?
Mr. Sylvester. No
Mr. Pecora. Didn't you give any directions concerning that
rather important detail?
Mr. Sylvester. I authorized Barrett to go ahead and lend John
Ramsey the money, on the understanding that it would be repaid to
us, and he attended to the details. Now, as to the details of it I can
not tell you, because I had nothing whatsoever to do with them.
Whether he made it as a demand loan or as a 90-day loan or a 6-month
loan, or what, I don't know.
Senator Brookhart. Was this Mr. Ramsey a member of the New
York City government?
Mr. Sylvester. The Port of New York Authority is an authority
of two States, New York and New Jersey. It is composed of 12
commissioners, 6 appointed by the Governor of the State of New
York, and 6 appointed by the Governor of the State of New Jersey.
And those commissioners appoint a general manager.
Senator Brookhart. And this was Mr. Ramsey?
Mr. Sylvester. And Mr. Ramsey is that general manager.
2190 STOCK EXCHANGE PRACTICES
Mr.'PECORA. Mr. Sylvester, do you know of any other loans made
to any other persons connected with the Port of New York Authority
either at about that time or at any other time?
Mr. Sylvester. Mr. Pecora, as I have said, I know of no other loan
of any sort that has ever been made by the National City Co. Cer-
tainly none has been made under my supervision or guidance.
Mr. Pecora. Was this loan made on your initiative or on the ini-
tiative of Mr. Barrett?
Mr. Sylvester. Of Mr. Barrett. He came to me and said that
Mr. Ramsey was in dire need of money, and could we find a way to
help him out.
Mr. Pecora. And the way was found by the method you have
testified to?
Mr. Sylvester. Yes, sir.
Mr. Pecora. You do not know whether any part of that loan has
been repaid?
Mr. Sylvester. I do not.
Mr. Pecora. Do you know whether any interest has been paid
on account of it?
Mr. Sylvester. No; I can not answer that.
Mr. Pecora. Well, now, is Mr. Bridges in the room? [A pause,
without response.] You know Mr. Bridges, don't you, Mr. Sylvester?
Mr. Sylvester. Very well.
Mr. Pecora. He is an accountant for the National City Co., the
chief accountant, isn't he?
Mr. Sylvester. Yes.
Mr. Pecora. Did you give him any instructions or directions with
respect to the setting up of this loan on the books of the company?
Mr. Sylvester. Mr. Pecora, my mind is hazy on the matter of
giving any instructions on the setup of this loan. But my mind is
not hazy on making the request for the money.
Mr. Pecora. WTiich officer or employee of the company would
be in the best position to inform this committee whether or not any
part of this loan has been repaid, or whether or not any interest on
account of this loan has been paid, to the National City Co. by Mr.
Ramsey?
Mr. Sylvester. I do not believe there is any officer of the company
who could give that information. I believe you would have to get
that information from Mr. Barrett or from the bank.
Mr. Pecora. You mean that there is nothing of record in the books
of the company which made this loan that would disclose any such
information?
Mr. Sylvester. I thinlc Mr. Bridges will have to answer that
question.
Mr. Pecora. Will you consult with Mr. Bridges and then give us
the answer to the question?
Mr. Sylvester (after talking to a man who came to the table).
There is only one charge, Mr. Bridges advises me, and that is against
the reserve account.
Mr. Pecora. I now ask for the production of the ledger account of
this transaction. It was here yesterday.
Mr. Sylvester. Might I consult with Mr. Baldwin on the details
that will clear up this thing?
STOCK EXCHANGE PRACTICES 2191
Mr. Pecora. All right. [Mr. Sylvester talked with Mr. Baldwin.]
Now, Mr. Sylvester, wiU you be good enough to look at the ledger
account that Mr. Bridges has just placed before you, and show this
committee, please, any entry which indicates or says that this item
of $10,020 was charged against the reserve fund?
Mr. Sylvester. I see "Port of New York Authority "—and what
is this [addressing Mr. Bridges]?
Mr. Bridges. It is the syndicate account.
Mr. Sylvester. I see "Check, S. W. Baldwin, $10,020, June 2."
Mr. Pecora. "Wliat is the entry immediately following the entry
which you have read?
Mr. Sylvester. "Reserve for general investigations."
Mr. Pecora. What is the amount?
Mr. Sylvester. It is $4,980.
Mr. Pecora. Now, the amount of $4,980 plus $10,020 gives us
the total of $15,000, does it not?
Mr. Sylvester. Yes, sir.
Mr. Pecora. And does that represent the $15,000 reserve fund to
which you alluded in the early part of your testimony this morning?
Mr. Sylvester. Yes, Mr. Pecora.
Mr. Pecora. Well, now, does that item of $4,980 also represent,
perchance, any loans made to some one in distress?
Mr. Sylvester. No, sir.
Mr. Pecora. That is a charge specifically for general investigations?
Mr. Sylvester. Yes, sir.
Mr. Pecora. To whom was that paid?
Mr. Sylvester. That is National City Co. income. The general
procedure in municipal syndicates in Wall Street is to set up a general
reserve to take care of any expenses that may come in after the
closing of the syndicate. And as this expense or these expenses come
in they are charged to that account. What is left over goes into the
company's income. It is held in the reserve fund for the time being.
Mr. Pecora. Senator Brookhart has indicated to me he would like
to know who composed the syndicate that handled this $66,000,000
issue.
Mr. Sylvester. The names of the syndicate?
Senator Brookhart. Yes. And how they operate. What is the
purpose of the syndicate?
Mr. Pecora. Mr. Bridges, will you be good enough to let me have
that ledger?
Mr. Bridges. Certainly.
Mr. Pecora. Now, Mr. Sylvester, will you answer Senator Brook-
hart's question?
Mr. Sylvester. The National City Co. was the manager of the
syndicate, with a participation of $12,625,000, and we made sales of
$14,472,000 of bonds.
Chase Securities Corporation had the same interest, and had sales
of/$ 10,035,000 of bonds.
Kissel, Kinnicut & Co. had an interest of 7K million dollars.
Brown Bros., Harriman & Co. had an interest of $5,000,000.
Harris Forbes & Co. had an interest of $5,000,000.
Chemical Securities Corporation had an interest of 2^ milUon
dollars.
Chatham Phenix Corporation had an interest of 2K million dollars.
2192 STOCK EXCHANGE PRACTICES
Eldredge & Co. had an interest of 2% million dollars.
Koimtze Bros, had an interest of $2,000,000.
Ban- Bros. & Co. had an interest of $2,000,000.
L. F. Rothschild & Co. had an interest of $1,000,000.
Stone & Webster and Blodget had an interest of $1,000,000.
George B. Gibbons & Co. had an interest of $1,000,000.
First Detroit Co., Inc. had an interest of $1,000,000.
International Manhattan Co. had an interest of $1,000,000.
Do you want the rest of them? There are quite a few small ones
here, and I will give them if you wish them.
Senator Brookhart. Yes. We might as well have all of them.
Mr. Sylvester. Kean, Taylor & Co. had an interest of $500,000.
Senator Brookhart. That sounds pretty big to a farmer.
Mr. Sylvester. Phelps, Fenn & Co. had an interest of $500,000.
R. H. Moulton & Co. had an interest of $500,000.
Darby & Co. had an interest of $500,000.
Guardian Detroit Co. had an interest of $500,000.
Ames, Emerich & Co. had an interest of $500,000.
H. L. Allen & Co. had an interest of $500,000.
Hannahs, Balhn & Lee had an interest of $500,000.
Wallace, Sanderson & Co. had an interest of $500,000.
Mercantile Commerce Co. of St. Louis had an interest of $500,000.
Schaumburg, Rebhann & Osborne had an interest of $250,000.
First National Co. of St. Louis had an interest of $250,000.
Batchelder & Co. had an interest of $250,000.
County Trust Co. had an interest of $250,000.
WiDiam R. Compton & Co. had an interest of $250,000.
Stern Bros., Kansas City, Mo., had an interest of $250,000.
Dean Witter & Co., San Francisco, had an interest of $250,000.
That makes a total syndicate participation of $66,000,000.
Senator Brookhart. Who was the manager of this syndicate?
Mr. Sylvester. The National City Co.
Senator Brookhart. Do you know whether any of these other
companies made any loans to Mr. Ramsey?
Mr. Sy'lvester. No.
Senator Brookhart. You don't know whether they did or not?
Mr. Sylvester. Oh, no.
Senator Brookhart. Now, did you operate on the stock exchange?
Mr. Sylvester. Oh, no. You buy these bonds from the port
authority commissioners in open meeting, and they sell the bonds to
you.
Senator Brookhart. Did you sell them on the stock exchange,
any of them?
Mr. Sylvester. No. We bought them at a price of 96.675, and
then we resold them. They are serial bonds with various maturities,
at an average price of par and one-half, with a total profit of around
one and three quarters points. And then we go out and sell the bonds
through our various sales organizations.
Senator Brookhart. You all offered them at the same price?
Mr. Sy'Lvester. We all offered them at the same price, and with
the same concessions, and released them at the same hour.
Senator Brookhart. And that was understood and agreed to in
the beginning?
Mr. Sylvester. Oh, absolutely.
STOCK EXCHANGE PRACTICES 2193
Senator Brookhart. And is so in all these things?
Mr. Sylvester. That is the usual form, Senator.
Senator Brookhart. Eegardless of whether it might be in restraint
of trade or not.
Mr. Sylvester. Well, I cannot answer that. But there are plenty
of other groups around here that could sit in and give you competition
on a block of that sort, other dealers. And we had competition from
other dealers, the Guaranty Co., the Bankers Trust, and plenty of
other dealers in the street.
Senator Fletcher. Did you have to buy all of the bonds, the
$66,000,000?
Mr. Sylvester. Yes, sir.
Senator Fletcher. You could not buy a few? For instance, you
could not bid for a few million dollars here and a few million dollars
there?
Mr. Sylvester. They asked for bids on the $66,000,000 of bonds,
they asked us to make a bid and we made it on the $66,000,000 of
bonds.
Senator Fletcher. And it is the same way with other bidders, I
suppose?
Mr. Sylvester. That is the usual procedure in municipal bond
sales.
Senator Fletcher. They do not offer them in broken lots at all?
Mr. Sylvester. Oh, yes. When we offer them you can buy 1
bond or 2 bonds or 10 bonds as you may desire.
Senator Fletcher. You did that, but the Port of New York
Authority did not do that?
Mr. Sylvester. Oh, no, sir.
Mr. Pecora. Now, Mr. Sylvester, I notice in looking over this
ledger account of syndicate expenses that this sum of $10,020 was set
up as a part of the expense of this syndicate account ; is that correct?
Mr. Sylvester. That is what I said.
Mr. Pecora. And it continues to so appear?
Mr. Sylvester. Yes, sii-.
Mr. Pecora. From the very inception it was treated
Mr. Sylvester (interposing). Mr. Pecora, not the syndicate
accoimt, but
Mr. Pecora (interposing). Well, what account?
Mr. Sylvester. We bought the bonds in March, on the 9th, and
we sold them. We sent out profit checks on April 22, and here is
the fund left over, the general reserve fund, to take up general inci-
dental expenses, and on June 3 this check was drawn, and what is
left over in that account belongs to the National City Co. And
that is the usual procedure in the Street. It is not a syndicate
account, and it is not charged to the syndicate account.
Mr. Pecora. When the distribution of profits was made to the
members of the syndicate who participated in this syndicate account,
was this sum of $10,020 deducted first from those profits before the
distribution?
Mr. Sylvester. No, sir.
Mr. Pecora. What is that?
Mr. Sylvester. $15,000 was deducted before they were sent out,
because that is a reserve that we set up.
Mr. Pecora. Then the sum of $15,000 was deducted?
2194 STOCK EXCHANGE PRACTICES
Mr. Sylvester. Yes.
Mr. Pecora. As a part of the expenses of that syndicate?
Mr. Sylvester. Yes; that is the usual procedure.
Mr. Pecora. And the National City Co. was the manager of this
syndicate?
Mr. Sylvester. Yes, sir.
Mr. Pecora. In making the distribution of profits to the other
members of the syndicate, before those profits were estimated and
distributed, the snra of $15,000 was deducted from the profits?
Mr. Sylvester. It was.
Mr. Pecora. And the checks given to the members participating
in the syndicate for their respective shares of the profits were drawn
in amounts which took into accoimt this $15,000 reserve as a part of
the expense?
Mr. Sylvester. That is the usual practice in Wall Street.
Mr. Pecora. Whether it is the usual practice or not, was it a fact
in this particular instance that the other syndicate members have
suffered a pro rata reduction of a portion of that amount and failed
to receive this $10,020, which was not actually a syndicate expense?
Mr. Sylvester. I would not say that, Mr. Pecora, because in the
general set-up of all municipal syndicates you set up a reserve fund.
You send out your checks for your profit and that reserve fund is
held for a period of 30, 60, or 90 days to take care of incidental bills
that come in.
Senator Brookhart. What is done with it then?
Mr. Sylvester. And then the syndicate manager takes that
money for his own account. It is part of the compensation that goes
for the work that you do in the managing of the account.
Senator Townsend. Do you have in mind what those incidental
bills would be, Mr. Sylvester?
Mr. Sylvester. Oh, that might be printing bills, circulars. You
take this account here: $66,000,000 with a $15,000,000 reserve — a
job of that character is a very small reserve.
Senator Townsend. You mean $15,000?
Mr. Sylvester. $15,000 — is a very small reserve. You might
have gotten out yoiu- first circulars, your first advertising. Bonds
go slow. It might be necessary to get out a booklet, get out some
more information, and that is held there for that purpose, paying the
expenses.
Senator Brookhart. When do you determine the amount of this
reserve?
Mr. Sylvester. Generally when we set up a syndicate, when we
buy a block of bonds, we set up so much for advertising, so much for
legal expenses, and so much for general reserve.
Senator Brookhart. Did you fix this before you knew about this
loan?
Mr. Sylvester. Oh, absolutely. Absolutely. Your loan is not
until June the 2d. Your checks for yom- profit went out on April the
22d, and these bonds were bought on May the 9th.
Mr. Pecora. If this loan is ever repaid to the National City Co.,
assuming that it has not yet been repaid, imder your explanation this
repayment would belong entirely to the National City Co., would it
not?
STOCK EXCHANGE PEACTICES 2195
Mr. Sylvester. Yes, sir; that would be National City Co. income.
Mr. Pecora. Although, as a matter of fact, it was deducted as
part of the expense and no such expense was actually incurred by the
syndicate, was it?
Mr. Sylvester. Mr. Pecora, I do not agree Avith you. It was not
deducted from any part of the syndicate expense.
Mr. Pecora. It formed part of the syndicate expense and was de-
ducted from the profits?
Mr. Sylvester. $15,000 formed a part of the reserve.
Mr. Pecora. Yes.
Mr. Sylvester. And this was taken out ■
Mr. Pecora (interposing). Of that $15,000?
_Mr. Sylvester. Of that $15,000. But the syndicate participants
did not suffer in any way on any loan that we made on this account.
Mr. Pecora. If tliis reserve had not been set up and charged to
syndicate expenses, the profits would have been increased by that
amount, wouJd they not?
Mr. Sylvester. The reserve is a usual item, Mr. Pecora.
Mr. Pecora. All right, but if it had not been set up the profits
would have been increased by the amount of this reserve, would they
not?
Mr. Sylvester. If there were no expenses.
Mr. Pecora. And the only expenses were $4,980 out of that
$15,000 reserve, were they not?
Mr. Sylvester. And the balance is City Co. income.
Mr. Pecora. Then the balance is City Co. "gravy," is it not?
Mr. Sylvester. Yes, City Co. income.
Mr. Pecora. At the expense of the other participants in the
syndicate?
Mr. Sylvester. I do not agree with you, Mr. Pecora. We set
up a $15,000 reserve when we set the account up.
Mr. Pecora. Yes.
Mr. Sylvester. For expenses that may come in.
Mr. Pecora. Yes. Do you mean to say
Mr. Sylvester (interposing). And we set up so much for adver-
tising and we set up so much for legal opinions, and the bonds are
sold.
Mr. Pecora. Yes.
Mr. Sylvester. And it is the pohcy of WaU Street to hold over
the general reserve fund, and if there is anything left over it goes to
the syndicate managers for the efforts that they have had in managing
the syndicate.
Mr. Pecora. Is there not a fee or commission paid to the syndi-
cate manager for those efforts?
Mr. Sylvester. No, sir. Not on municipal bonds. You buy
municipal bonds at 98; you sell them at par less a quarter, and you
get your profit according to your syndicate interest.
Senator Fletcher. So if the National City Co. had this $15,000
reserve up they could spend it as they saw fit?
Mr. Sylvester. Absolutely. Supposing it was necessary to print
a booklet or do something of that sort, and we had some additional
advertising expenses and so forth. It would come out of that.
Senator Brookhart. Supposing it was not necessary to do any-
thing? Wall Street would still get the reserve, would it not?
2196 STOCK EXCHANGE PRACTICES
Mr. Sylvester. National City Co. would get the reserve, $15,000.
If the expenses were over the $15,000, why, that would have to come
out of our pocket. Supposing the expenses were $25,000, we would
still set up a reserve for $15,000. The $10,000 would come out of
the National City Co.'s pocket.
Mr. Pecora. In any municipal issue which the National City Co.
imderwrote, do you recall any instance where the National City Co.
was tripped up that way by not setting up enough of a reserve for
contingent expenses?
Mr. Sylvester. Mr. Pecora, I would have to go over the records
to tell you.
Mr. Pecora. There is no such case within your recollection, is
there?
Mr. Sylvester. No. Over a 20-year period I could not say there
was any — but I probably could find some if I dug into them.
Mr. Pecora. Yes, very likely. Mr. Sylvester, who fixed the
amount of this reserve in this particular syndicate at $15,000?
Mr. Sylvester. The municipal department, and I approved it.
Mr. Pecora. You mean the National City Co.?
Mr. Sylvester. Yes, sir; the municipal department of the Na-
tional City Co., and I approved it.
Mr. Pecora. Wliat guided you in fixing it at $15,000, can you
tell us?
Mr. Sylvester. Yes, sir. $66,000,000 worth of port of authority
4K per cent bonds bought in March, 1931, looked like a tremendous
job.
Mr. Pecora. You had other items that were allowed?
Mr. Sylvaster. No, sir.
Mr. Pecora. For instance, a $45,000 item for legal fees, as part of
the expense, didn't you?
Mr. Sylvester. Yes. True.
Mr. Pecora. \^Tiat was the total expense of this syndicate?
Mr. Sylvester. My recollection is that is around 60, isn't it?
You have the record there.
Mr. Pecora. Here is an entry which shows $66,925.47.
Mr. Sylvester. Well, you have the record. I will stand on the
record.
Mr. Pecora. Well, that is the record.
Mr. Sylvester. $66,000.
Mr. Pecora. Mr. Chairman, I ask that a subpoena be issued for
Mr. Edward F. Barrett, returnable to-morrow.
Mr. Sylvester. Mr. Pecora, Mr. Barrett is in the room if you
would like to see him.
Mr. Pecora. Oh, is he?
Mr. Sylvester. Yes, sir.
Mr. Pecora. I ask that he take the stand then. Mr. Barrett.
TESTIMONY OF EDWARD F. BARRETT, OF NEW YORK CITY, VICE
PRESIDENT, NATIONAL CITY BANK
The Chairman. You do solemnly swear the evidence you are about
to give is the truth, the whole truth, and nothing but the truth, so
help you God?
Mr. Barrett. I do.
STOCK EXCHANGE PRACTICES 2197
Mr. Pecora. Will you please give your full name, address, and busi-
ness or occupation to the reporter?
Mr. Barrett. Edward F. Barrett, 55 Wall Street; vice president
of the National City Bank.
Mr. Pecora. How long have you been a vice president of the
National City Bank?
Mr. Barrett. Since 1926.
Mr. Pecora. Prior to that time did you have any other connection
with the bank?
Mr. Barrett. Beg your pardon?
Mr. Pecora. Prior to that time did you have any other connection
or any employment with this bank?
Mr. Barrett. Yes, sir. I was with the National City Bank in
various capacities since 1921, and prior to that time I was president
of the National City Realty Co., and prior to that I was assistant
secretary of the National City Co.
Mr. Pecora. You heard the testimony given this morning by Mr.
Horace Sylvester, a vice president of the National City Co.?
Mr. Barrett. Yes, sir.
Mr. Pecora. Did you hear all of his testimony?
Mr. Barrett. Yes, sir.
Mr. Pecora. How long have you loiown John Ramsey, the gen-
eral manager of the Port of New York Authority?
Mr. Barrett. I would say about 10 years.
Mr. Pecora. Do you know him socially?
Mr. Barrett. Yes, sir.
Mr. Pecora. Do you recall the transaction on or about June
2, 1931, wliich was alluded to by Mr. Sylvester in his testimony?
Mr. Barrett. Yes, sir.
Mr. Pecora. Tell the committee what your knowledge is with
respect to that transaction.
Mr. Barrett. Mr. Ramsey came to me as one of liis old friends and
told me that he was being sadly pressed, or hardly pressed, for money.
He wanted to know if there was any way in wliich I knew where he
could get a loan. I told him it was not a bank loan; we could not
make it in the National City Bank, because we did not make loans
of that kind. He said he did not expect the National City Bank
to make liim a loan on accoimt of liis association with the port author-
ity. I said, "The only other place I can possibly tliink would be from
some private source or some other way of doing it." I could not
tell him right then and there. But I said, "If you let me have this
for a day or two and let me tliink it over I may be able to help you
out."
Mr. Pecora. How long before June 2, 1931, did you have that
conversation with him?
Mr. Barrett. I would say two or three days.
Mr. Pecora. At that time did you know that the National City
Co. participating with others in a syndicate, had, in March 1931,
underwritten an issue of $66,000,000 of bonds issued by the Port of
New York Authority?
Mr. Barrett. Yes, sir.
2198 STOCK EXCHANGE PBACTICES
Mr. Pecoka. Wlaat conversation did you have with Mr. Sylvester
following the one you had with Mr. Eamsey to which you have
just testified?
Mr. Barrett. I went upstairs and I told Mr. Sylvester of Mr.
Eamsey's plight, and I said to Mr. Sylvester, "If there is any possible
way that you could think of that we could help him out I would like
to do it, because I have always found John Ramsey to be a very fine,
upstanding, square fellow, and he is in this jam, and if I can help him,
I want to do it."
Mr. Pecora. Had Ramsey told you the jam he was in?
Mr. Barrett. He told me, yes; he was in a financial jam and he
had to have approximately $10,000 — eight or ten thousand dollars,
I forget what it was.
Mr. Pecora. Did he tell you the reason for the jam?
Mr. Barrett. No, sir.
Mr. Pecora. Is that all he said about it, in substance?
Mr. Barrett. Well, he told me that he needed, figured, I think,
that he needed $10,020 to cover the necessary calls on him for pay-
ments.
Mr. Pecora. Payments of what kind, did he say?
Mr. Barrett. I think loans. He did not go into detail, in definite
detail, with me. He told me that he needed this money badly, and
I knew the way that he talked that he did need it badly.
Mr. Pecora. What was the reason that the National City Bank
could not, in the regular routine of banking business, have made this
loan to him?
Mr. Barrett. Because we do not make loans there on an unsecured
basis.
Mr. Pecora. You know that that is not so, don't you, Mr. Barrett?
Mr. Barrett. Well, I don't know- — I mean it is not the kind of a
loan that we would make there without any collateral. We have
made loans in some of our departments where there is no security on
the small loans, but even those loans are secured by endorsements.
Mr. Pecora. Was this loan to Ramsey to be an unsecured loan?
Mr. Barrett. Well, as far as he was concerned it was to be an
unsecured loan, yes; because he did not have any security to put up.
Senator Fletcher. Couldn't he furnish endorsements?
Mr. Barrett. I did not ask him for that, sir.
Mr. Pecora. At whose suggestion was this loan made to him in
cash?
Mr. Barrett. I do not think at anybody's suggestion.
Mr. Pecora. Why was it made to him in cash?
Mr. Barrett. As I understood it, he needed the money that day.
Mr. Pecora. Don't you think a check of the National City Co.
for the amount of $10,020 would be honored by anybody at that
time?
Mr. Barrett. It possibly would.
Mr. Pecora. There is not any doubt about that in yom* mind?
Mr. Barrett. No, sir.
Mr. Pecora. You do not mean "It possibly M'ould"; you knew it
would?
Mr. Barrett. Yes, sir.
Mr. Pecora. Don't you know that the money would have been
available to him if it had been paid in the form of a check of the
National City Co.?
STOCK EXCHANGE PRACTICES 2199
Mr. Barrett. It would.
Mr. Pecora. Do you know any reason why it was not given to
him by check?
Mr. Barrett. None except that he wanted the money that day,
because that was the day that he had to make the payments, and to
facihtate that, why, I asked Mr. Sylvester if he could get the money
and he said he could.
Mr. Pecora. You said at the outset of your testimony that Ramsey
asked you for this accommodation something like two or three days
before June the 2d.
Mr. Barrett. Yes, that is exactly right; but he needed it on this
day.
Mr. Pecora. When did you speak to Mr. Sylvester about it? On
the day that Ramsey spoke to you or on June the 2d?
Mr. Barrett. I think it was over a weekend, Mr. Pecora, when
Ramsey first spoke to me about it, and I think the next time I talked
to him was the day before he needed the money.
Mr. Pecora. Did you get any written evidence from Mr. Ramsey
of the loan having been made to hhn?
Mr. Barrett. Yes, sir.
Mr. Pecora. Where is it?
Mr. Barrett. He gave me a note.
Mr. Pecora. Where is it?
Mr. Barrett. I have it in New York.
Mr. Pecora. Where in New York?
Mr. Barrett. In my belongings.
Mr. Pecora. To whose order is the note made?
Mr. Barrett. I recall the note — I have not looked at it in a long
while — I recall the note was made to my order.
Mr. Pecora. In your individual capacity?
Mr. Barrett. Yes, sir.
Mr. Pecora. Any endorsements on it?
Mr. Barrett. No, sir.
Mr. Pecora. When did he give you that note?
Mr. Barrett. Either the day he got the loan or the day after.
Mr. Pecora. Why didn't he give it to you at the time he got the
loan?
Mr. Barrett. He probably did. I am not so sure about that.
Mr. Pecora. Did you ask for the note?
Mr. Barrett. No, sir; he gave it to me himself.
Mr. Pecora. Did you ever tell anybody connected with the Na-
tional City Co. that you had received this note as evidence of the
loan which that company had made to Ramsey?
Mr. Barrett. No, sir.
Mr. Pecora. Was there any reason for not telUng the officers of
the National City Co. anything about that?
Mr. Barrett. No, sir.
Mr. Pecora. It is not good banking practice or good business
custom, is it, to do it that way?
Mr. Barrett. Nobody asked me about it, and I didn't say any-
thing to anybody about it.
Mr. Pecora. Didn't you consider that this loan was a loan made
by the National City Co. to Ramsey?
Mr. Barrett. Ye^, sir.
2200 STOCK EXCHANGE PRACTICES
Mr. Pecora. Didn't you think it was the business of the National
City Co. to have the written evidence of the indebtedness rather than
you?
Mr. Barrett. Mr. Pecora, when that loan was made it was made
on a temporary basis.
Mr. Pecora. How temporary?
Mr. Barrett. Well, he gave me to understand that he needed this
money for a short while until he coiild get hmiself straightened out.
Mr. Pecora. Well, how temporary? How long a period is that
"short while"?
Mr. Barrett. Maybe two or three weeks or a month.
Mr. Pecora. Has it been paid?
Mr. Barrett. No, sir.
Mr. Pecora. Any part of it?
Mr. Barrett. No, sir.
Mr. Pecora. Have you pressed him for payment?
Mr. Barrett. No, su-.
Senator Fletcher. What is the due date on the note?
Mr. Barrett. It is a demand note, Senator.
Mr. Pecora. Does it bear interest?
Mr. Barrett. Yes, sir.
Mr. Pecora. Has any interest been paid on account of it?
Mr. Barrett. No, sir.
Mr. Pecora. Have you ever demanded any payment either of
principal or interest or any part thereof?
Mr. Barrett. No, sir; I have not.
Mr. Pecora. Have you learned whether Mr. Ramsey's condition
was such that he might have met the demand for payment of part or
all of it?
Mr. Barrett. Yes, sir; I did. That is the very reason that I did
not press him, because I realized Mr. Ramsey's position was going
from bad to worse ; that the Port Authority had instituted a program
of strict retrenchment up there; that his salary had been cut two or
three times, and I knew that he could not make any payment, and
I did not want to embarrass John Ramsey.
Mr. Pecora. Now, Mr. Barrett, this John Ramsey received this
loan because he was a friend of yours of some 10 years' standing, is
that right?
Mr. Barrett. Precisely. The one reason that I went to help him
was because he was a friend of mine, and a very good friend of mine for
10 years standing, and I have always found him a very high-standing
fellow, and I wanted to help him if I possibly could.
Mr. Pecora. So you helped him with the funds of the National
City Co. with which you were not connected, didn't you?
Mr. Barrett. I went to Mr. Sylvester and I asked him if there
was any way in which we could help him.
Mr. Pecoka. Did you go to Sylvester because he was in charge of
the numicipal bond department of the National City Co.?
Mr. Barrett. Well, Mr. S^dvester is a man that I am very closely
associated with in business up there, and I probably know him better
than any other man in the place, and I could talk to. him.
Mr. Pecora. Well, now, let's see: Mr. Sylvester, since 1920, has
been vice president of the National City Co. in charge of its municipal
bond department?
STOCK EXCHANGE PBACTICES 2201
Mr. Barrett. Yes, sir.
Mr. Pecora. And you, since 1925 or 1926, have been vice president
of the National City Bank?
Mr. Barrett. Yes, sir.
Mr. Pecora. Your duties as a vice president of the bank in no way
effect Mr. Sylvester's duties as vice president of the company in
charge of municipal bonds, do they?
Mr. Barrett. None whatever, except that we work very close on
all financial matters relating to New York City, New York State, Port
Authority, and other municipal authorities in the city of New York.
Mr. Pecoka. Do you ever work with Mr. Sylvester with regard to
other municipal issues in a fashion similar to the way you worked mth
him for the purpose of relieving Mr. Ramsey's distress?
Mr. Barrett. Just reframe that again.
Mr. Pecora. I won't reframe it, but I will ask the same question
again. Will j^ou read it to him, Mr. Reporter?
(The shorthand reporter read the question of Mr. Pecora as above
recorded.)
Mr. Barrett. No, sir.
Senator Fletcher. Is Ramsey still general manager of the Port
Authority?
Mr. Barrett. Yes, sir.
Mr. Pecora. Did you have any reason for not teUing Mr. Sylvester
that you had a note from Ramsey made to your individual order?
Mr. Barrett. No, sir.
Mr. Pecora. How soon can you produce that note?
Mr. Barrett. I looked for it yesterday afternoon. Mr. Pecora.
Mr. Pecora. Did you find it?
Mr. Barrett. No, sir; I could not find it.
Mr. Pecora. Where did you look for it?
Mr. Barrett. I looked through my own desk where I left it.
Mr. Pecora. Have you kept it in your desk since June, 1931?
Mr. Barrett. Yes, sir.
Mr. Pecora. And could not find it?
Mr. Barrett. That is the last place I remember having it.
Mr. Pecora. Can you think of any other place where you might
have put that note?
Mr. Barrett. No, sir.
Mr. Pecora. You think, then, a further search would be fruitless?
Mr. Barrett. I am not so sure.
Mr. Pecora. Where else do you think you might have placed it?
Mr. Barrett. I haven't any — no place that I can think of.
Mr. Pecora. You did make a thorough search of your desk yester-
day for this note?
Mr. Barrett. I did; yes, sir. I may have filed it m some place or
other that I cannot recall.
Mr. Pecora. What prompted you to make this search for the note
in your desk yesterday?
Mr. Barrett. Because I knew I was coming down here.
Mr. Pecora. What did you know you were commg down here
about? , . „ , -J
Mr. Barrett. Well, I knew that Mr. Sylvester was commg down
here, and I knew that the story would come right here, that you would
2202 STOCK EXCHANGE PRACTICES
naturally want me to follow him on this stand, and I wanted to be
prepared.
Mr. Pecora. Did Mr. Sylvester tell you that he had been sub-
poenaed to appear before this committee for to-day?
Mr. Barrett. I don't think he did, but I know it.
Mr. Pecora. When did you learn that Mr. Sylvester had been
subpoenaed to come here today?
Mr. Barrett. I think yesterday some time.
Mr. Pecora. Who told you?
Mr. Barrett. I could not tell you definitely. It was all around
the shop.
Mr. Pecora. By "shop" do you mean the bank?
Mr. Barrett. Yes, sir; the institution.
Mr. Pecora. Wliat led you to conclude from that information that
Mr. Sylvester was going to be questioned in any way with regard to
this sum of $10,020?
Mr. Barrett. Except that I saw in the newspapers last night this
statement that Mr. Baldwin had testified that the money was given
to Mr. Sylvester and that Mr. Sylvester was to come down here, and
I thought that the thing to do was to come right down with him and
tell the whole story to the committee.
Mr. Pecora. When did you learn that last night?
Mr. Barrett. I saw it in the Sun, I think.
Mr. Pecora. What time?
Mr. Barrett. On my way home.
Mr. Pecora. Then what did you do, go back to your bank and
look in your desk for the note?
Mr. Barrett. Well, I tliink I heard it before I left the office.
Mr. Pecora. Why didn't you say that?
Mr. Barrett. Because I saw it definitely ia the Sun. I think I
heard that Mr. Sylvester was subpoenaed here quite a while before I
left the office.
Mr. Pecora. You proceed on the principle that if you see it in the
Sun it is so?
Mr. Barrett. Yes, sir.
Mr. Pecora. I do not think there are any more questions to ask
Mr. Barrett about this.
The Chairman. All right; you are excused.
Mr. Barrett. Mr. Ramsey is here in Washington if you want him.
Mr. Pecora. Mr. Richard Wliitney.
TESTIMONY OF RICHARD WHITNEY (RESUMED), PRESIDENT
NEW YORK STOCK EXCHANGE, NEW YORK CITY
Mr. Pecora. He has been sworn before this committee on a prior
occasion.
The Chairman. He does not have to be sworn again.
Mr. Pecora. Mr. Whitney, you have heretofore been sworn and
have testified before this committee, I understand?
Mr. Whttney. Yes, sir.
Mr. Pecora. That was some months ago when I was in no way
connected with the committee?
Mr. Whitney. Yes, sir.
STOCK EXCHANGE PRACTICES 2203
Mr. Pecora. Are you still the president of the New York Stock
Exchange?
Mr. Whitney. Yes, sir.
Mr. Pecora. How long have you been a member of the New York
Stock Exchange?
Mr. Whitney. Since Januaiy 18, 1912.
Mr. Pecora. Do you actively conduct the business of a stock-
broker?
Mr. Whitney. More particularly, sir, that of a bond broker.
Mr. Pecora. Mr. Wliitney, will you tell us generally the form of
organization of the New York Stock Exchange?
Mr. Whitney. That is a large order, Mr. Pecora. I -will try to
if you want me to. I think there is in the record here the constitution
of the New York Stock Exchange, which specifically and exactly
shows the organization in great detail.
Mr. Pecora. Perhaps you could give us the more salient features
of it, without the necessity of our reading that constitution in its
entirety. Tell us the general form of the organization.
Mr. Whitney. As I go along will you advise me as to what you
wish me to be specific about?
Mr. Pecora. Very well.
Mr. Whitney. I do not know what you want.
Senator Fletcher. It is not a corporation, as I understand it?
Mr. Whitney. No, Senator Fletcher, it is not a corporation. It
is an unincorporated body consisting at the present time of 1,375
members, barring those that may be deceased, but there are 1,375
memberships.
The control of the exchange rests with the board of governors, 40
in number, and the treasurer and president ex officio.
There are various standing committees. The more prominent of
these is the committee on business conduct, committee on stock list,
•committee on admissions, committee of arrangements.
There are also various special committees appointed from time to
time to undertake certain particular studies that come before the
attention of the governing committee.
There are then officers of the exchange who conduct the routine
affairs of the exchange under, however, the supervision and control
of the president or the chairman of the various committees.
That, simply, Mr. Pecora, is the organization of the Exchange. I
will be delighted to amplify if you tell me what you have in mind.
Senator Brookhart. Wliat connection or association do you have
with the Better Business Bureau?
Mr. Whitney. What associaion, sir? We ask information of the
Better Business Bureau, of any of the Better Business Bureaus,
■continuously as to matters that come under their jurisdiction and in
which they can help us gather information.
Senator Brookhart. You yourself are a director and on the
advisory council of the Investors Section?
Mr. Whitney. I believe so.
Senator Brookhart. And the Better Business Bureau is a sort of a
•censor of business all over the country, is it not?
Mr. Whitney. I do not understand that it is a censor, Senator
Erookhart. I understand that it investigates business practices.
119852— 33— PT 6 29
2204 STOCK EXCHANGE PEACTICES
Senator Beookhart. And then it publishes reports against dis-
honest or fraudident practices?
Mr. Whitney. I beheve so.
Senator Brookhart. And tries to stop them?
Mr. Whitney. I beheve so.
Senator Brookhart. But it never has pubhshed any report against
the New York Stock Exchange, has it?
Mr. Whitney. Not that I know of.
Senator Brookhart. And has never pubhshed a report against
any syndicate or any pool or any group operating in the New York
Stock Exchange?
Mr. Whitney. That I do not know.
Senator Brookhart. If those fraudulent pools are organized to
make a market and manipulate the price of issues to put them off on
the people, they never tell the people about that, do they?
Mr. Whitney. If there were fraudulent pools and they chose to
make statements about them, it would be entuely within theu' prov-
ince, I presume.
Senator Brookhart. But they never do it?
Mr. Whitney. I don't know whether they have discovered fraudu-
lent pools. If I remember rightly, there were some statements by the
Better Business Bureau of New York with regard to the Manhattan
Electric Supply Co. operations, which we found to be unethical. It
was referred to the Attorney General in the fust instance, and in the
second instance of a second pool in that stock we suspended a member
who merely had his office used through carelessness on his part for
certain operations.
Senator Brookhart. But the Better Business Bureau had nothing
to do with that; you were doing that yourselves?
Mr. Whitney. I believe, as I stated, the Better Business Bureau
made certain statemeiats with regard to those practices.
Senator Brookhart. Well now, in yoiu- testimony before you
testified to a transaction, I think, of a $98,000,000 issue of bonds
that were sold on the exchange by Morgan & Co.
Mr. Whitney. I beg j^our pardon, Senator Brookhart. I never
said they were sold on the Exchange by Morgan & Co. They were
not sold on the exchange.
Senator Brookhart. How were they sold?
Mr. Whitney. They were distributed through various syndicate
participants and through them by their associates in their organiza-
tions throughout the country.
Senator Brookhart. During that distribution you testified that
your company was employed to purchase those bonds for Morgan &
Co. at the same time they were selling them?
Mr. Whitney. I stated that I had orders to buy those bonds at
certain prices for the syndicate; yes, sir.
Senator Brookhart. And the price, as I recollect it, was 90?
Mr. Whitney. A large part of the time 90. At other times lower
prices.
Senator Brookhart. And did you maintain that price dining all
the time that those bonds were being distributed?
Mr. Whitney. I had bids for a considerable length of time; yes, sir.
Senator Brookhart. And bought in some $10,000,000 of those
bonds during that distribution?
STOCK EXCHANGE PRACTICES 2205
Mr. Whitney. Approximately; yes.
Senator Brookhart. And then you maintained the price for 18
days after the bonds were all sold?
Mr. Whitney. If I remember rightly, the bonds during that time
sold at higher prices, Senator Brookhart, than our bid or the price
at which we bought them.
Senator Brookhart. Yes; but you testified that you maintained
the price for 18 days.
Mr. Whitney, t think that I had bids on the bonds for 18 days
thereafter, if that is the fact, and bought bonds at varying prices;
yes, sir. I had orders.
Senator Brookhart. To maintain that price for IS days?
Mr. Whitney. To buy bonds. Sometimes my orders were very
limited in volimie.
Senator Brookhart. Then the next day after the 18 was out, why,
they dropped from 90 to 86?
Mr. Whitney. I can not vouch for that without referring to my
testimony.
Senator Brookhart. And were 32 at the time you were testifying?
Mr. Whitney. And have sold up to 60-odd since that time.
Senator Brookhart. And the Better Business Bureau never reports
any of the practices of that kind of the stock exchange to people of
the country, does it?
Mr. Whitney. I do not claim that that is an unethical practice,
Senator Brookhart, as I stated.
Senator Brookhart. Well, I do. I do. I think that is just about
as unethical as you can figure it out.
Mr. Pecora. Mr. Whitney, are any stock brokerage firms holding
more than one membership in the exchange?
Mr. Whitney. Are there?
Mr. Pecora. Yes.
Mr. Whitney. Yes, sir.
Mr. Pecora. That is a rather frequent occurrence, is it not?
Mr. Whitney. Yes, Mr. Pecora.
Mr. Pecora. Of the 1,375 members who now constitute the mem-
bership of the exchange, how many offices, stock brokerage offices, or
firms or companies, do they actually represent?
Mr. Whitney. This is largely a guess. I could find it out of
course exactly for you. I haven't got it in my mind. But about
613, I think. That may be a little high, but I think about that.
Mr. Pecora. How many different issues are listed and traded in on
the exchange to-day?
Mr. Whitney. I think approximately 1,547 bond issues, and some-
where in the neighborhood of 1,228 stock issues. That does not mean,
sir, of different companies, but issues.
Mr. Pecora. Different issues of securities?
Mr. Whitney. There may be four or five issues of the same com-
pany.
Mr. Pecora. Will you let me have those figures again, please?
Mr. Whitney. Again approximately, please, sir?
Mr. Pecora. Yes.
Mr. Whitney. About 1,547 of bonds and about 1,228 of stocks.
2206 STOCK EXCHANGE PRACTICES
Mr. Pecora. Of course, the stock issues include both preferred
and common stock?
Mr. Whitney. Yes, sir.
Senator Brookhart. One other ciuestion: The stock exchange or
members of it put up $100,000 in the beginning to organize this
Better Business Bureau, did they not?
Mr. Whitney. They put up $100,000 to help organize a Better
Business Bureau. "V^liether it was the national or the — yes, sir, the
Better Business Bureau of New York.
Senator Brookhart. And out of that came the National Better
Business Bureau?
Mr. Whitney. No, sir. The national was the organization of all
the Better Business Bureaus in all the cities.
Senator Brookhart. The New York Better Business Bureau is a
part of it?
Mr. Whitney'. It was a part. I think it has divorced itself.
Senator Brookhart. It is yet? Wlien did it get the divorce?
Mr. Whitney. I think it got the divorce together with all the other
members about a year or two ago. I tliink almost all of the Better
Business Bureaus broke away for some reason from the National
some time ago.
Senator Brookhart. But the New York Better Business Bureau
continues its relations with the stock exchange?
Mr. Whitney. In so far as I say that we ask them for information
frequently; yes, sir. And they ask us for information.
Senator Brookhart. But never report against you? They have
never made a report
Mr. Whitney (interposing). I have not actually gone through their
files. I do not know if they have.
Senator Brookhart. You would hear of it if they did?
Mr. Whitney'. I hear a great many things about the exchange;
yes, sir.
Senator Brookhart. But you have never heard of a complaint
against the stock exchange by the Better BusinesB Bureau?
Mr. Whitney. No, sir.
Mr. Pecora. When was the exchange organized, Mr. Whitney?
Mr. Whitney. I think in 1791, and counsel tells me in organized
written form in 1819.
Mr. Pecora. And when was its membersliip increased to 1,100?
Mr. Whitney. You are asking questions I can not — may I ask
counsel? I do not know, sir.
Mr. Pecora. Many years ago, wasn't it?
Mr. Whitney. Many years ago, yes.
Mr. Pecora. About 40 or 45 years ago?
Mr. Roland L. Redmond. About 70.
Mr. Whitney. 70 years ago.
Mr. Pecora. When was that membership increased to its present
number of 1,.375 members?
Mr. Whitney. In 1929, February, 1929, February 7, 1929. You
are now getting down to my period of life, sir.
Mr. Pecora. And my own.
Mr. Whitney. Thank you.
Mr. Pecora. Wliat kind of auditing has been made by the exchange
of issues, or corporations making issues, which have been listed on the
exchange?
STOCK EXCHANGE PEACTICES 2207
Mr. Whitney. There is in the record, which I presented diirino-
some of my previous appearances, a memorandum showing that in
detail, Mr. Pecora, and examples of various Usting apphcations made
by various companies applymg for listing. We make no audit of the
company ourselves. We do not pretend to pass upon values of shaj-es
that seek listmg. We do, however, seek to find out that they have
actual plant and earning capacity or both, and when they present
their a,pplications for listing they are accompanied by accountants'
or auditors' statements from the company itself. Those are reviewed
for the facts to be found out, as stated in this memorandum which is
in the record.
Mr. Pecora. Then, accompanying the application for listing of a
stock there must be a financial statement?
Mr. Whitney. Yes, sir.
Mr. Pecora. Made by the corporation seeking to have its securities
listed?
Mr. Whitney. Yes, sir.
Mr. Pecora. That financial statement is analyzed by the members
of yoiu- stock list committee?
Mr. Whitney. By the employees of the stock hst committee;
yes, SU-.
Mr. Pecora. But no independent audit is made by the stock
exchange itself?
Mr. Whitney. Of the company itself?
Mr. Pecora. Yes.
Mr. Whitney. No, sir. We are demanding now
Mr. Pecora (interposing). That never has been a requirement of
the exchange, has it?
Mr. Whitney. Yes, sir.
Mr. Pecora. What, to make an independent audit?
Mr. Whitney. A requirement of the exchange that an independent
audit be made and submitted to us. That has been in force •
Mr. Pecora (interposing). I say it never has been a requirement
or rule of the exchange for it to make an independent audit or cause
one to be made in its behalf. Is that correct?
Mr. Whitney. May I answer?
Mr. Pecora. Yes, sir.
Mr. Whitney. It is not a requirement of the exchange that the
exchange itself will make an independent audit. It is a requirement
of the exchange on all applications for Ustings from April 1, 1932, that
they have to be accompanied by independent audits.
Air. Pecora. But the independent audits are not made at the
instance of or by or for the exchange?
Mr. Whitney. Not made by the exchange.
Mr. Pecora. And the auditor making one is the auditor of the
corporation which is making the listing application?
Mr. Whitney. Except in so far as we demand independent
audits; yes, sir.
Mr. Pecora. But the auditors who make a so-called independent
audit are chosen or selected by the corporation making the listing
application; is that correct?
Mr. Whitney. That is correct. If I may add, I think the stand-
ing of the auditors or accountants who made such an independent
audit would naturally be taken into account in the investigation and
review of the application by the exchange.
2208 STOCK EXCHANGE PRACTICES
Mr. Pecora. Does the stock exchange prescribe as an essential to
the Hsting of securities that any particidar form of accounting or
auditing be made and submitted by the corporation making the
hsting apphcation?
Mr. Whitney. Yes, sir; in certain instances.
Mr. Pecora. In what instances?
Mr. Whitney. You are getting rather above my head there, Mr.
Pecora, in the details. I can only refer you again to the memorandum
that is here in this record.
Mr. Pecora. How long have you been the president of the ex-
change, Mr. Whitney?
Mr. Whitney. Since May, 1930.
Mr. Pecora. That is for nearly three years?
Mr. Whitney. Yes, sir.
Mr. Pecora. And these questions are over your head?
Mr. Whitney. Yes, sir. I must grant it, because they are very
detailed in their ramifications, and although in general I am acquainted
with the subject,! can not tell you the actual forms of accounting that
are set forth except in certain specific cases that have come to my
attention.
Mr. Pecora. Well, tell us of those specific cases, or give us an
illustration of the nature of them.
Mr. Whitney. With regard to the management investment trusts.
There we have demanded the following specifically; if I may quote
from the memorandum I have here:
"The very rigid requirements adopted in regard to the listing of management
type investment trusts, created the public demand for full publicity in regard to
not only the earnings but also the investments held by organizations of this
character."
Mr. Pecora. Is that statement one that was prepared by you?
Mr. Whitney. Yes, sir. I never prepare any statements or
speeches of any kind without consultation. It was prepared in con-
sultation with my associates.
Senator Fletcher. Do you require, Mr. Whitney, any investiga-
tion to satisfy you regarding the integrity of the people who are
making application for listing their stocks?
Mr. Whitney. Yes, sir.
Senator Fletcher. As to their standing, their honesty, their good
faith?
Mr. Whitney. Absolutely, Senator Fletcher.
Mr. Pecora. Does the exchange continue that sort of inquuy with
respect to the integrity of men constituting the officers in control or
in management of a corporation whose security is listed, after the
listing has been effected?
Mr. Whitney. I am not quite sure, Mr. Pecora, that that is done.
It may be done incidentally. We do, however, demand that, when
application is made, in the future the statements made by that cor-
poi'ation shall be along the same lines — and that is a contract with
that company — as were the statements made by the company when
applying for listing.
Mr. Pecora. What is the purpose of the exchange in making the
kind of inquiry which Senator Fletcher has alluded to?
Mr. Whitney. To see that the background of the company making
application for listing is proper in as many waj^s as we can cover.
STOCK EXCHANGE PRACTICES 2209
Mr. Pecora. And don't you think it would be just as advisable to
exercise that same kind of supervision by inquiry even after a cor-
poration has succeeded in having its securities listed?
Mr. Whitney. I think it would be advisable, and I do not say it
is not done, Mr. Pecora, but please bear this in mind, that afte'r a
company is listed on the exchange, or even before it was listed on the
exchange, the shares of that company are available for purchase to
anybody in this wide world, and so the officers or the directors or
whoever they might be, are entirely beyond our control thereafter.
Mr. Pecora. If it is considered of importance to the public for
the exchange to make some inquiry so that it may satisfy itself of
the integrity of the persons in control of the corporation at the time
the corporation makes its listing application, is it not just as impor-
tant to continue after the listing has been effected?
Mr. Whitney. I think it is important.
Mr. Pecora. That same sort of inquiry and supervision?
Mr. Whitney. I think it is important, sir, yes. But I am tiying
to answer you by calling to your attention that there is nothing that
we can do about it after the company is once listed, unless such
transgressions with regard to conduct or ^witli regard to their agree-
ment with the exchange take place as to force us to take penalizing
action.
Mr. Pecora. What circumstance or condition renders the stock
exchange impotent to continue that sort of inquiry?
Mr. Whitney. I liave not granted, sir, or meant to infer that
anything, any condition — I do not say that we do not follow up
who are the officers. Of course, that is presented to us.
Mr. Pecora. You said j^ou can do nothing abuut it. What were
you referring to then?
Mr. Whitney. We cannot remove those officers.
Mr. Pecora. I know you cannot remove the officers, but can't
you exercise your influence in the proper conduct and administration
of a corporation whose securities are traded in through the facilities
offered by the exchange?
Mr. Whitney. I did not understand that you had signified that
improper conduct had taken place, and I did try to point out that
if there was improper conduct in the administration of that corpora-
tion or in any relevant affairs of that corporation, then the exchange
could try to take certain action to rectify the situation.
Mr. Pecora. Along what lines could it take such kind of action?
Mr. Whitney. Our final power, sir, is to strike from the list.
Mr. Pecora. Has that power ever been exercised by the exchange,
to your knowledge, because the exchange officials had reached a
conclusion that those in control of a corporation listed on the exchange
did not possess that degree of business integrity which would protect
the public?
Mr. Whitney. To all intents and purposes, yes. In the case of the
second manipulation of Manhattan Electrical Supply Co.'s stock.
They were in a position to desire additional listing of stock. We
refused to list — I think it would have jeopardized the company in its
corporate existence — we refused to list unless the officers of that
company, the prior company, be removed and a new name given to
the new company and new officers put in.
Mr. Pecora. That is, you refused to list additional issues?
2210 STOCK EXCHANGE PBACTICES
Mr. Whitney. Yes, sir.
Mr. Pecora. Put out by that company?
Mr. Whitney. Which would ■
Mr. Pecora (interposing). But the original listing continued in
effect?
Mr. Whitney. I think the company would have broken up and
gone to pieces.
Mr. Pecora. I say that original hsting under those circumstances
would continue in effect, would it not?
Mr. Whitney. It would have, but not in tliis particular instance,
sir.
Mr. Pecora. In this particular instance it worked out the other
way?
Mr. Whitney. It worked the way that we wanted it to work; yes,
Mr. Pecora. The exchange had no control over that; it just devel-
oped that way, didn't it?
Mr. Whitney. It did develop that way, giving us a control.
Senator Brookhakt. Mr. Whitney, I do not believe I quite under-
stood this German bond deal, so I want to refer back to your testi-
mony.
Mr. Whitney. What page, please, Senator Brookhart?
Senator Brookhart. I am going to start quoting to you on page
245. I will start down near the bottom of the page. I think from
there on it contains all the ideas I want to bring out (reading) :
Mr. Gray. You mean that all had been disposed of that the syndicate desired'
to dispose of; is that the answer?
Mr. Whitney. All so far as I know had been disposed of by the syndicate.
Mr. Gray. Yes.
Mr. Whitney. And during that time purchases were made at the sj'ndicate
price until the price restriction was taken off, so that for a period of 18 to 20 days
all those who had purchased those bonds could have sold them at the purchase
price or for more. And during that time we purchased for the account of the
syndicate approximately $9,200,000, slightly in excess of $9,200,000 bonds.
Mr. Gray. When was that that the syndicate put that out, last year you mean?'
Mr. Whitney. No, sir.
Mr. Gray. I do not know the year.
Mr. Whitney. June 12, 1930. I beg your pardon.
Mr. Gray. Not blaming it on you, of course, but what are those bonds selling
for now?
Mr. Whitney. They are selling for around 35}^. They have sold at 23 in-
spite of the fact that they and the 7 per cent German bonds have at all times paid
interest, the latter having paid on April 1.5 last; and I have every reason to believe-
that the SJ'^'s will pay interest on June 1. That is the fluctuation in the world
situation.
Mr. Gray. Your firm, now, acting for Morgan & Co., and if I am wrong about
this, correct me; I so understood your statement the other day — acted for this^
syndicate in maintaining that price during the time that the syndicate's opera-
tions were in effect; is that correct?
Mr. Whitney. Yes, sir; under order.
Mr. Gray. Under order, of course.
Mr. Whitney. Yes.
Mr. Gray. That means that your brokerage house executed such orders as
were given to you by the syndicate; that is correct, is it not?
Mr. Whitney. Through J. P. Morgan & Co.
Mr. Gray. And the purpose of the execution of those orders was to maintain —
and I was going to use the word "artificial", but I know you would not agree
with me — to maintain a fixed valuation for those bonds; that is correct, is it not?
Mr. Whitney. To maintain a price, sir. So that at any time, as I have stated,
during some 18 or 20 days any purchasers who did not want to hold the lionds that
they had bought could have sold them at the selling price or higher. That is an
absolutely usual and customar\' method of merchandising and distributing
securities.
STOCK EXCHANGE PKACTICES 2211
That last statement is the one I particularly want to call your
attention to. [Continuing reading:]
Senator Brookhart. In that connection did j-ou tell them that you were only
going to maintain that price for 18 or 20 days?"
Mr. Whitney. Tell whom?
Senator Brookhart. These purchasers?
Mr. Whitney. Tell the purchasers — I did not have anything to do with the
purchasers, if you mean the jiersons to whom the bonds were sold.
Senator Brookhart. You maintained the price 18 or 20 days, so that they
could sell and get their money back?
Mr Whitney. No; I said if they wanted to sell.
Senator Brookhart. If they wanted to sell.
Mr. Gray. I think Mr. Whitney will admit that no such information was con-
veyed to those who actually conducted the deals with the purchasers.
Mr. Whitney. As to how long the bid would be named?
Mr. Gray. Yes.
Mr. Whitney. No, sir.
Mr. Gray. He will admit that.
Senator Fletcher. Were those bonds sold to the public generally?
Mr. Whitney. That is to be presumed, Senator Fletcher, inasmuch as there
were 1,011 participants in that syndicate.
Senator Fletcher. How much was the total?
Mr. Whitney. A little in excess of 98,000,000.
And then I skip down to the bottom of the page. [Continuing
reading :]
Mr. Gray. The point I want to develop, Mr. Whitney, is this: During that
period of time your firm, acting under orders from this syndicate or from J. P.
Morgan & Co. in connection with those bonds, were maintaining a price on the
market. That is correct, is it not?
Mr. Whitney. We were bidding a price at which anybody could sell bonds;
yes, sir.
Mr. Gray. Yes. In other words, what you were doing was executing buying
and selling orders for the purpose of maintaining that price?
Mr. Whitney. Not selling orders; no, sir.
Mr. Gray. Only buying orders. In other words, what you had was what in
effect you may call either a syndicate and pool, a syndicate for the issuance of
the bonds, the underwriting of them, possibly, but a pool for the purpose of
maintaining that price at a certain level. Isn't that true, for a certain period of
time?
Mr. Whitney. Yes, Mr. Gray. The syndicate at all times were selling the
bonds.
And then down at the bottom of page 248. [Continuing reading:]
Senator Brookhart. As I understand this, your firm was selhng bonds?
Mr. Whitney. No, sir; we were not. We were buying bonds.
Senator Brookhart. Who were selling them for the syndicate?
Mr. Whitney. The syndicate participants, consisting of 1,011 dealers and
individuals throughout this country.
Senator Brookhart. They were selling these German bonds?
Mr. Whitney. I presume so.
Senator Brookhart. And while they were selhng they had you employed to
maintain the price?
Mr. Whitney. My firm had the orders, had some orders, these orders.
Senator Brookhart. You were buying them for this same syndicate that
was selling them to the public?
Mr. Whitney. That is right.
And the remark I made was that that was double-crossing the
public.
Now Mr. Whitney, you say in there that it is a general practice
of the stock exchange when these syndicates are formed to float these
securities to maintain the price for them during the period when they
are being sold?
2212 STOCK EXCHANGE PRACTICES
Mr. Whitmey. Senator Brookhart, I do not wish to quibble, but I
never said it was a practice of the stock exchange. I said that it
was the usual practice of syndicates merchandising securities to
maintain a price during the life of the syndicate, and many times
long after the life of the syndicate. And that occurs not only on the
stock exchange but off the stock exchange where merchandising of
securities is talcing place.
Senator Brookhart. We have had some very pointed evidence
off the stock exchange, and I want to get it now on the stock exchange.
Mr. Whitmey. I grant that it is done by orders placed on the
stock exchange. I do not grant that the stock exchange does it.
Senator Brookhart. Well, you knew, for instance, when Morgan
& Co. gave you this order to bid at this price of 90 or thereabouts —
you knew that was being done for the purpose of keeping the price
up to that level while the syndicate was disposing of the bonds?
Mr. Whitney. Yes, sir; and I was advising personally the sale
of bonds at higher prices because I felt they were worth it.
Senator Brookhart. And you also knew that as soon as the bonds
were disposed of that those orders would be withdrawn?
Mr. Whitney. I did not.
Senator Brookhart. Well, you knew it was just during the period
of disposal that
Mr. Whitney (interposing). I did not.
Senator Brookhart. How long was the order given in this partic-
ular case?
Mr. Whitney. Daily.
Senator Brookhart. Just daily?
Mr. Whitney. Day orders.
Senator Brookhart. Well, you know the syndicate's practice
that they will give you these orders daily until they have disposed of
theii' issue.
Mr. Whitney. And very often, Senator, they will continue orders
in such securities for a period after the syndicate's life.
Senator Brookhart. And that is for coverup purposes, to make
the public think they have been fair with them?
Mr. Whitney. No, su-. Because they think the securities are
worth buying at that price. Remember, we are speaking of German
Government bonds in 1930, and shortly after that period, if you
remember, there were very serious happenings on the continent,
and for that reason, and that reason alone, as I tried to describe
when I was last here, there was a depreciation in the price of those
bonds and all other foreign government issues — I mean central-con-
tinent government issues. Those bonds went down, as I said
Senator Brookhart. We have had a lot of testimony about that.
We are quite familiar with it. But the thing I want to bring out is
that it is a practice of the stock exchange members with the Icnowl-
egde, of course, of the stock exchange management, that brokerage
firms will go in during the period of disposal of securities to the
public, to the people at large, and they will take orders from the
same syndicate that is selling those bonds and maintain the price so
they will seU them at this fixed price by the syndicate?
Mr. Whitney. They wiU take such orders. If I am correct in
my memory it is an agreement, a public agreement of all the par-
ticipants in the syndicate that such will be done.
STOCK EXCHANGE PRACTICES 2213
Senator Bkookhart. And you think that is not a violation of the
antitrust laws in restraint of trade?
Mr. Whitney. Senator, I am no lawyer.
Senator Brookhart. Well, I think it is, myself.
Senator Fletcher. Was that interest paid in June wliich you
predicted would be paid?
Mr. Whitney. Oh, yes, sir; and since. The interest has been
maintained steadily on those two issues, and the 5K's that we are
referring to have sold up recently to around 65. There has also
been, I tliink, a large sinking fund operating on the part of the
German Government and purchasing those bonds, which they were
under contract to do.
Senator Fletcher. What were they sold for here?
Mr. Whitney. Ninety. They have recently, in the last few days,
dropped down again, due to certain conditions" abroad.
Senator Brookhart. Has there been any pool or syndicate oper-
ating in them since they were down to 23?
Mr. Whitney. That I can not tell you, Senator.
Senator Brookhart. You do not know whether there is any pool
boosting them up again or not?
Mr. Whitney. I do not.
Senator Brookhart. And if there had been and they had asked
your firm to buy them at a stated price you would have bought them,
of course?
Mr. Whitney. Yes, sir.
Mr. Pecora. Shall I proceed. Senator?
Senator Brookhart. Yes; go ahead.
Mr. Pecora. Mr. Whitney, what is the disciplinary power which
the exchange authorities exercise over the members?
Mr. Whitney. The governing committee has the power to dis-
cipline either by suspension or expulsion, depending upon the mis-
conduct.
Mr. Pecora. Under the agreement between the members and the
exchange is a decision of the board of governors or other disciplinary
board of the exchange, effecting the expulsion or suspension of a
member, reviewable by the courts?
Mr. Whitney. With apologies to you as a lawyer, because I do
not pretend to be a lawyer, and I may be wrong in what I am going
to say from a legal point of view — they have been re^•iewed by the
courts at various times, and notably, as I referred when I was last
here, the last re^-iew by the courts came before Senator Wagner, who
handed down a very wonderful decision in its legal elements and
otherwise, upholding the absolute power of the governing committee
to take such action "as it had taken under its constitution, toward the
member.
Mr. Pecora. Oh, I know that there have been cases in which
members who have been dealt with by the power of discipline of the
exchange authorities have sought redress in the courts.
Mr. Whitney. Yes, sir.
Mr. Pecora. But do you know of any court decision or review that
reversed the decision of the board?
Mr. Whitney. No; I do not.
Mr. Pecora. On the ground of lack of merit?
Mr. Whitney. I do not know of any; no.
2214 STOCK EXCHANGE PRACTICES
Mr. Pecora. Has it not always been the contention of the exchange
in such actions that its decisions are not reviewable by the courts?
Mr. Whitney. I do not tliink so. I do not know any rule of the
exchange preventing a member who has been suspended or expelled
to seek an injunction, or whatever it might be, from a court.
Mr. Pecora. I have not asked about that. I have asked whether
it has not been consistently the contention of the exchange, whenever
any member who has been disciplined has sought to review its decision
in the courts, that the courts were without power to make such review?
Mr. Whitney. Mr. Pecora, I cannot answer that. I would be glad
to refer to our counsel, Mr. Redmond, who is right here. He can
answer.
Mr. Pecora. That, it strikes me, Mr. Whitney, would be a matter
of general policy of the exchange with which you might be familiar
not only because you have been president since 1930, but also because
you have been a member since 1912, something like 21 years ago.
Mr. Whitney. I am not personally acquainted with the argimient
of counsel when the case that I referred to was brought before
Senator Wagner when he was then a judge.
Mr. Pecora. Well, it is the endeavor of counsel for the exchange to
seek in all instances to carry out the policies of the exchange?
Mr. Whitney. And to uphold the constitution.
Mr. Pecora. Just as an attorney for a private client seeks to carry
out the policy of his client, is that not true?
Mr. Whitney. If I msiy say, I think to uphold the constitution of
the exchange.
Mr. Pecora. For what infractions or conduct, for instance, may
the governing authorities of the exchange discipline a member by
expulsion?
Mr. Whitney. May I read from the constitution?
Mr. Pecora. Will you tell us in your own language without
referring to the formal phraseology of the constitution?
Mr. Whitney. Expelled, you said?
Mr. Pecora. Yes.
Mr. Whitney. Found guilty of fraud. Making fictitious transac-
tions. Purchasing or selling securities where there is no change of
ownership. Misstatements to any committee of the exchange.
Senator Brookhart. Now on that one about where there is no
change of OAvnership. Where a syndicate is selling bonds and then
the brokerage firm is buying them back for the same syndicate, in
effect there is no change of ownership in that deal?
Mr. Whitney. No, sir; there is a real change of ownership. The
bonds are sold by the participants in the syndicate to an individual.
Let us say to Mr. Pecora. Mr. Pecora decides that he does not want
those bonds, and he sells them tlii'ough liis broker on the New York
Stock Exchange to me, who am buying for the syndicate. There is a
change of ownership just as exact as I can imagine. Mr. Pecora paid
his money and then changed his mind and sells them and he is paid
money for his sale.
Senator Brookhart. Yes, you sell them to Mr. Pecora, or the syn-
dicate does, but he wants to get rid of them right away, and you turn
around and buy them back from him for the same syndicate that sold
them to hull and before night they are in the same hands that they
STOCK EXCHANGE PRACTICES 2215
were before. Now there is no substantial change of ownership there?
Mr. Whitney. I am sorry, Senator Brookhart, I can not agree.
Mr. Pecora. May the record have it clearly shown that all these
are suppositious transactions with me.
Senator Brookhart. I will agree with that, Mr. Pecora.
Mr. Pecora. What section were you reading from when you were
answering my last question, Mr. Whitney?
Mr. Whitney. Article 17 of the constitution. And I was trying
in my own language, as you requested — — ■
Mr. Pecora. Yes.
Mr. Whitney (continuing). To state. The fraud is in section 2;
fictitious transactions is in section 3 ; misstatement to a committee,
section 5; and section 4 is any act intended to demoralize the market.
And 7, the violation of just and equitable principles of trade or pro-
ceeding inconsistent with just and equitable principles of trade, which
is left to the discretion of the governing committee.
Mr. Pecora. Let us assume a transaction where a syndicate has
been formed to trade in a security hsted on the exchange, and the
syndicate, we will say, consists of 10 members. It is conceivable,
is it not, that a sale might be made by the manager of the syndicate
through the speciahst to an individual member of the syndicate, and
that individual member of the syndicate in turn, might sell back to
the syndicate or to some other individual member of the syndicate?
Such a thing is easily possible, is it not?
Mr. Whitney. It could be possible.
Mr. Pecora. And if all that were done in pursuance of an agree-
ment or understanding on the part of the several members of the
syndicate to make those trades for the purposes of the syndicate, do
you consider that an actual change or transfer of ownership of the
securities so traded in would be effected?
Mr. Whitney. No, sir. If I understand you right, no, sir.
Mr. Pecora. That would be a violation of the rules of the exchange?
Mr. Whitney. Absolutely.
Mr. Pecora. And would subject any member guilty of that viola-
tion to the penalty of explusion?
Mr. Whitney. Yes, sir.
Mr. Pecora. Now what steps, if any, do you know of that have
been taken by the governing authorities of the exchange to detect
such collusions?
Mr. Whitney. The business conduct committee at all times where
it believes there is a pool in operation is in touch with the specialist
and requests of the specialist any information that may seem to
denote improper transactions. I have every reason to believe that
frequently the business conduct committee when such knowledge
comes to them will go to the office of the manager of the syndicate
and go through the transactions there.
Mr. Pecora. Through what means or channels would the govern-
ing authorities of the exchange acquire such knowledge?
Mr. Whitney. Through the accountants of the exchange acting,
as I have described, for the business conduct committee.
Mr. Pecora. Well, what I mean to inquire about is this: The
accountants of the exchange would not function in such a situation
unless they were first requested to do so by the governing authorities?
Mr. Whitney. Yes, sir.
2216 STOCK EXCHANGE PRACTICES
Mr. Pecora. And before the governing authorities would request
their accountants to function in that fashion they would first have to
have some knowledge or belief that a pool was being operated, would
they not?
Mr. Whitney. They would have, presumably, to have knowledge
that transactions in a stock were such as to cause or render it neces-
sary to investigate.
Mr. Pecora. That is to say they would have to have loiowledge
or information of the transactions which would suggest that a pool
was in operation? Is that what you mean, Mr. Whitney?
Mr. Whitney. Yes; the Business Conduct Committee investigates
complaints or other matters that indicate there have been irregu-
larities in the conduct of the members.
Mr. Pecora. Would the governing committee act only after it had
received specific complaints?
Mr. Whitney. Largely, Mr. Pecora. The governing committee,
you understand I am talking about the business conduct committee.
That is the committee that does it.
Mr. Pecora. Well, I am talldng about the governing authorities
generally who exercise any powers with regard to disciplining members
for infractions of the kind which you have alluded to.
Mr. Whitney. Yes, sir.
Mr. Pecora. Wliether it be the board of governors or the business
conduct committee or any other agency of the exchange?
Mr. Whitney. It just so happens that the business conduct com-
mittee is the only committee to which is delegated the power to go
into offices other than the governing committee itself.
Senator Brookhart. Mr. Pecora, may I interrupt?
Mr. Pecora. Yes, Senator.
Senator Brookhart. Let me ask you about another transaction or
two. Supposing a brokerage firm is selling securities for anybody, are
they permitted to buy them for the same party at the same time they
are selling, the same day?
Mr. Whitney. Do you mean if I sell securities to one individual
for the account of a firm, may I buy securities for that same firm from
another individual?
Senator Brookhart. Yes; we will take that first.
Mr. Whitney'. The answer is yes.
Senator Brookart. They are permitted to take orders buying and
selling for the same firm on the same days at the same time?
Mr. Whitney. Certainly. So can I buy hogs the same day for
the same individual and sell for liim. Absolutely, yes.
Senator Brookhart. Yes ; but we do not do the hog business that
way until it gets in the produce exchange. Then we have a simpler
transaction. Now what is a wash sale? Let us get an exact definition
of that.
Mr. Whitney. Where there is no change of ownership. Members
being parties to a wash sale would transgress the constitution, which
is very specific on that point, and be subject to expulsion.
Senator Brookhart. Suppose that three people would make an
arrangement: Morgan & Co. would make an arrangement to sell to
Mr. Pecora, and he would sell it to me, and then I would sell it back
to Morgan. Would that be a wash sale?
STOCK EXCHANGE PRACTICES 2217
Mr. Whitney. If you made an arrangement, you say, on the New
York Stock E.xchange?
Senator Brookhart. Yes.
Mr. Whitney. I tliink it would be, without question.
Senator Brookhart. Well, notwithstanding the fact that it was a
different party sold it back from the one that bought it?
Mr. Whitney. Just such transactions took place, Senator Brook-
hart, in the Manhattan Electrical Supply Co.'s stock to which I
referred. Various officers of the corporation were selling it around
the rosy, and we found it out.
Senator Brookhart. When Morgan & Co. are selling German
bonds and they do not want to buy bonds, but they do buy them for
the purpose of maintaining the market, they are conducting just as
unethical a proposition as the one I described?
Mr. Whitney. No, sir.
Senator Brookhart. You can not see that at all?
Mr. Whitney. No, sir.
Mr. Pecora. You used an expression in answer to one of the
Senator's questions just now; as I heard it it was "round the rosy".
Is that a colloquialism of the exchange?
Mr. Whitney. No, sir. I was referring to a certain game, Mr.
Pecora, that I think they used to play once, holding hands and dancing
round the rosy.
Mr. Pecora. Are there any transactions on the exchange which
suggest that kind of a game to you?
Mr. Whitney. Yes, the holding of hands or the agreement by
yourself and J. P. Morgan & Co. and Senator Brookhart.
Mr. Pecora. I wish you would leave me out of this, please.
Mr. Whitney. But Senator Brookhart said that. The Senator
put you in. I did not, Mr. Pecora.
Senator Brookhart. But so far as Morgan & Co. are concerned, if
they are buying back bonds when they do not want them, but for the
purpose of maintaining the market, they are defrauding the public
then as to the market trend, are they not?
Mr. Whitney. I can not agree with you, and I do not know that
there has been any evidence presented anywhere that they did not
want the bonds. Thev did want them.
Senator Brookhart. Well, take these $9,200,000 that you bought
back for them, or your firm, they were all resold again right away;
they cleared their books of them?
Mr. Whitney. That I can not tell you.
Senator Brookhart. And their theory is to stay liquid and not
hold those bonds, pass them on to the public as quick as they can, is
it not?
Mr. Whitney. I do not know that for a fact at all.
Senator Brookhart. We will have to have Mr. Morgan down here,
I guess, and find out about that.
Mr. Pecora. Did I understand you to say a few minutes ago that
disciplinary power is exercised by the exchange tlirough its business
conduct committee?
Mr. Whitney. The investigation of offices through the business
conduct committee, yes.
Mr. Pecora. Wefi, is not the power of discipline actually exercised
and imposed upon its members by the governing committee?
2218 STOCK EXCHANGE PRACTICES
Mr. Whitney. Yes.
Mr. Pecora. The governing committee acts upon evidence pre-
sented to it by the business conduct committee, is that it?
Mr. Whitney. Or any other committee of the exchange.
Mr. Pecora. Are there any agencies of the exchange or its govern-
ing authorities wliich, upon their own initiative, seek to ascertain
evidence of violations of these trading rules to which you have
referred, without waiting specifically for a complaint to be made?
Mr. Whitney. If they have knowledge of what they beUeve is
wrongdoing, yes.
Mr. Pecora. It would be possible, would it not, for the governing
authorities of the exchange to acquire knowledge, through observa-
tion of transactions on the part of its members, which woidd suggest
to those authorities a violation of the rules as, for instance, by the
operation of a pool?
Mr. Whitney. That might be so. But j^ou have used the word
"power", and the power of the governing committee, as delegated
to the business conduct committee, is supreme, true. But it is
essential that the use of that power shall be based upon a right to go
into the personal affairs of a member of the exchange.
Mr. Pecora. I do not think you have answered the question, Mr.
Whitney.
Mr. Whitney. I am sorry.
Mr. Pecora. Perhaps I have not made it clear to you. Do the
governing authorities of the exchange, before they set their disci-
plinary machinery in motion, wait for the receipt of a complaint?
Mr. Whitney. In some instances, and in others where the business
conduct committee by its observation or another committee by its
observation feels that there has been something going on that is suffi-
cient for investigation. In other words, our committees or the em-
ployees of our committees who are sent on such investigations do not
go into offices unless they are told to do so for a specffic reason.
Mr. Pecora. And who has the power to tell them to do so?
Mr. Whitney. The various committees.
Mr. Pecora. Do those committees ever act without first receiving
a complaint or do they always wait for a complaint?
Mr. Whitney. I have tried to answer that, Mr. Pecora. I said '
upon complaint, or when it has come to their knowledge in some way
or another, or by their observation or otherwise that there has been
improper conduct on the part of members in one way or another.
Mr. Pecora. Now, the operation or existence of a pool trading in
a certain security might suggest itself through violent fluctuations in
prices, might it not?
Mr. Whitney. Yes, sir.
Mr. Pecora. Were there many occasions during the year 1929,
prior to October 29, when issues fluctuated violently in price in the
course of a single day's or fraction of a day's trading?
Mr. Whitney. Yes. I suppose there were, although if I remember,
those days the market as a whole was going in the same general direc-
tion at all times, and sometimes violently as a whole.
Mr. Pecora. There were many occasions, were there not, in those
days in 1929, when securities jumped as much as 50 points in the
course of a single hour's trading?
STOCK EXCHANGE PRACTICES 2219
Mr. Whitney. If you will tell me specifically I can answer that. I
can not of my own personal information, Mr. Pecora.
Mr. Pecora. How violent do you think a fluctuation should be in
order to excite a suspicion in the minds of the governing authorities
of the Exchange that a pool is operating?
Mr. Whitney. Well, that would entirely depend upon the par-
ticular security, the price at which it was selling, and so forth. If it
was selling in the high hundreds that security might fluctuate very
much more than if it were selling in the price range of 50 or there-
abouts.
Senator Brookhart. Are pools against the rules of the exchange?
Mr. Whitney. No, sir.
Mr. Pecora. You say pools are not against the rules of the ex-
change?
Mr. Whitney. They are not, Mr. Pecora.
Mr. Pecora. What did you understand by the term "pool" when
you answered that question?
Mr. Whitney. A group of individuals, or whoever they might be,
feel that a stock or a security is selling at a price that is out of line,
and they will go and buy that stock or that security up to a price
where they think it is in line. And then
Mr. Pecora. In line with what?
Mr. Whitney. With their judgment as to what it should sell at.
And then
Mr. Pecora. That is, in line with then- judgment of its intrinsic
value?
Mr. Whitney. We had a discussion here last spring about intrinsic
value, and I am very scared of the word, because I cannot explain it.
Mr. Pecora. Well, it is a very definite term, is it not, Mr. Wnitney?
Does it not convey a very definite meaning to you?
Mr. Whitney. Not after what Senator Bulkley said last year; no.
Senator Brookhart. Not in stocks and bonds.
Mr. Pecora. Does not the term "intrinsic value" convey a very
definite meaning to you whether applied to stocks or merchandise?
Mr. Whitney. Not very; no. Because it all depends on what you
believe makes up intrinsic value.
Mr. Pecora. Well, I would not know what makes up intrinsic
value if I did not Imow the meaning of the term "intrinsic value",
would I? Would you?
Mr. Whitney. Well, the term is broad, Mr. Pecora.
Mr. Pecora. What?
Mr. Whitney. The term is broad.
Mr. Pecora. What do you understand by the term "intrinsic
value?"
Mr. Whitney. I used to think that it meant the worth of the fLx-
tures, the plant of a corporation — that they all had a certain intrinsic
value. But in these days you do not know whether anything is worth
anything that might wipe out what was very important in constituting
intrinsic value of a corporation and, therefore, its securities.
Senator Brookhart. Do you think that values of 1929 on the stock
exchange were supported by any substantial intrinsic value?
Mr. Whitney. They were supported. Senator Brookhart, in many,
many instances, I believe at that time, by tremendous earning capacity.
119852— 33— PT 6 30
2220 STOCK EXCHANGE PRACTICES
Senator Brookhart. But the prices went up above even the
tremendous earning value?
Mr. Whitney. In some instances; yes. The pendulum always
swings too far.
Senator Brookhart. And that is the purpose of the stock exchange,
to help it swing?
Mr. Whitney. No, sir. The purpose of the stock exchange is to
allow the ready action of the law of supply and demand. Purchasers
and sellers.
Senator Brookhart. Well, in order to follow the law of supply
and demand you pay a good deal of attention to tliis intrinsic value?
Mr. Whitney. The purchasers and sellers. Not the New York
Stock Exchange; sir. They do nothing in the evolution of securities.
Senator Brookhart. Nothing whatever?
Mr. Whitney. No, sir. The New York Stock Exchange does not.
Senator Brookhart. It leaves that to the dear pubhc to find out
altogether for itself?
Mr. Whitney'. Yes, sii\ We are a market place.
Senator Brookhart. And you have no responsibility for the
quality of the stuff you market?
Mr. Whitney. We have a responsibility, a very real one, as to
the secm-ities that we list upon the New York Stock Exchange.
I have said that today. And we are trying to progress. We do not
say that our rules are perfect by any manner of means.
Senator Brookhart. And under yom- rules every security 3^ou had
listed went too high in 1929, did it not?
Mr. Whitney. I do not know. Senator Brooldiart.
Senator Brookhart. And they are all down now, are they not?
Mr. Whitney. Regrettably. And so is everytliing else.
Senator Brookhart. And they are still high, are they not? The
chart I had when you were here before showed them still too high.
Have they depreciated considerably since that?
Mr. Whitney. I could not say. I presume they have. Cer-
tainly some of them.
Senator Brookhart. I will have to get my chart. ^
Mr. Whitney'. We have a chart down to date in that connection
if you would like to see it.
Senator Brookhart. Yes. Who made it?
Mr. Whitney. Our accountant. Our economist, I should say.
Mr. Pecora. Mr. Wliitney, when you testified before this com-
mittee last year
Mr. Whitney. May I have the page please, Mr. Pecora?
Mr. Pecora. Page 2.54. In April of last year
Mr. Whitney'. Yes, su-.
Mr. Pecora. You were asked the following questions to which you
made the following answers, which I will read.
Mr. Whitney. Yes, sir.
Mr. Pecora. Most, if not all the questions having then been asked
you by Senator Brookhart. [Reading:]
Senator Brookhart. What are the purposes of pools generally?
Mr. Whitney. To distribute that stock or bonds.
Senator Brookhart. That kind of a pool wants to dispose of them at the
highest possible price, does it not?
Mr. Whitney. Not necessarily. At a price.
Senator Brookhart. And at a profit?
Mr. Whitney. Not nef-ossjirilv.
STOCK EXCHANGE PRACTICES 2221
That is not the whole of that answer, but it is the portion I want
to question you about. Did you ever know of a pool that was formed
to distribute stocks and bonds definitely at a loss?
Mr. Whitney. Yes, sir. If you will read on it will be explained
there. At great losses.
Mr. Pecora. You know of pools formed specifically for the purpose
of trading in stocks in order to incur a loss?
Mr. Whitney. May I ask you to have read the question before
this last one?
Mr. Pecora. Yes.
(Thereupon the question was read by the reporter, as above
recorded, as follows: Mr. Pecora. * * * j)i(j yQ^^ gygp know of a
pool that was formed to distribute stocks and bonds definitely at a
loss?)
Mr. Whitney. Yes, sir.
Mr. Pecora. That is, the pool was formed for the purpose of mak-
ing the distribution at a loss?
Mr. Whitney. Which would incur a loss to the pool managers or
the syndicate participants; yes.
Mr. Pecora. What would be the purpose of pool managers or par-
ticipants in organizing and conducting a pool specifically to incur a
loss?
Mr. Whitney. In order to sell securities, sir, at a price at which
they could be sold that had cost them higher prices. That has been
a very customary act in recent years.
Senator Brookhart. These securities have depreciated in the
meantime, have they not, since they got them?
Mr. Whitney. Considerably.
Senator Brookhart. It is like the bonds they put oft" on the banks
all over the country; they have depreciated so much that they closed
several thousand banks. And, of course, the bank or the receiver
is forced to sell those at a loss.
Mr. Whitney. I do not think the cause of the failure of those
banks can be entirely attributed to their security holdings.
Mr. Pecora. Can you tell me of an instance within your knowl-
edge where a pool was formed for the specific purpose of taking a
loss?
Mr. Whitney. No; not here, Mr. Pecora. But I can inquire of
our committee on secondary distribution and point out a great many
of them.
Mr. Pecora. You have none now that you can give us from your
recollection?
Mr. Whitney. No. I am not on that committee, and I would
hate to say from memory. But I can get you that information
readily.
Mr. Pecora. How were the interests of the members of such a
pool advanced by the operation, Mr. Whitney?
Mr. Whitney. By seUing securities they had on their shelves at
prices at which they could be sold properly.
Mr. Pecora. Well, give me an instance of that, or give me an
illustration of how it is done, so that we will understand the applica-
tion of it.
2222 STOCK EXCHANGE PRACTICES
Mr. Whitney. Well, a group — a syndicate may have purchased,
let us say, 25,000 shares of stock tliinking that stock at the time of
purchase was cheap, that they could sell it at lugher prices. I
grant — and if that was what you had in mind — that naturally when
people go into business they do it for the purpose of making money,
and that is the intent naturally. But these specific instances, to
go back: they were wrong in their judgment, as so many of us
have been in these last few years, as to security values or any other
values. And there came a time — there might have been a steadying
in the stock market or in the security market and they felt that at a
recession of price those securities could be merchandised to whomever
wished to buy them, and they then in these particular instances,
where they happened to be listed securities, came to our committee
on secondary distribution and asked permission to do so, wliich
was granted, and in many, many cases at a considerable loss to
those original participants.
Mr. Pecora. In such a case the pool was not originally formed to
trade in the stock or security at a loss, was it?
Mr. Whitney. Probably not. It might not have been, sir, a
pool in the original situation. It may have been one firm or one
individual that bought those securities.
Mr. Pecora. That kind of pool then is undertaken, among other
things, for the purpose of bailing out those holders?
Mr. Whitney. Possibly; yes.
Mr. Pecora. And by that process the loss wliich other\vise would
accrue to those security holders is minimized: is that not true?
Mr. Whitney. Not necessarih^; no. The price at which they sold
those securities in the last instance might be the low price at which
those securities sold.
Mr. Pecora. Those are the exceptional circumstances when a
pool is organized and operated for the specific purpose of incurring a
loss?
Mr. Whitney. I think that is one of them; yes, sir.
Mr. Pecora. They are rather exceptional, are they not? ,
Mr. Whitney. Yes. Not in recent years. But I have granted
that I tliink a pool or a syndicate is formed for the purpose of making
a profit.
Mr. Pecora. In 1929, prior to the market crash in the latter part
of October, do you know of any pool which was organized and
operated to take a loss in the fashion you have described?
Mr. Whitney. No, sir. But I believe if you wish I can recount
to you pools that were operated in that time or approximately that
time that did take a loss.
Mr. Pecora. Well, we know that there were pools which did take
a loss, but the object of these pools when organized and when their
operations commenced was not to incur a loss?
Mr. Whitney. No, sir. No one goes into a business deal to lose
money intentionally.
Mr. Pecora. That is the point I am trying to make.
Mr. Whitney. Except in these connections that we referred to.
Mr. Pecora. That is the point I am trying to make. The general
purpose of pools is to distribute securities at a profit to the members ;
is that not so?
Mr. Whitney. Yes, sir.
STOCK EXCHANGE PEACTICES 2223
Mr. Pecora. And in order to distribute at a profit they have to sell
at a higher price than that at which they purchased?
Mr. Whitney. Yes, sir.
Mr. Pecora. Pool operations then are often maintained in a
fashion calculated to bring higher prices for the stock accumulated?
Is that correct?
Mr. Whitney. May that be repeated?
(Mr. Pecora's last question was thereupon read as above recorded.)
Mr. Whitney. I do not understand, Mr. Pecora, what you have
in mind by the use of the word "maintamed."
Mr. Pecora. Would you be good enough to read that question to
the witness?
(The question by Mr. Pecora was again read by the shorthand
reporter, as above recorded.)
Mr. Pecora. Well, "maintained" there is used as a verb synony-
mous, we will say, with "conducted."
Mr. Whitney. I think that is a fair statement; yes.
Mr. Pecora. And it then becomes the definite object and purpose
of the members of the pool to conduct such market operations in the
stock as will enable them to dispose of it at a profit? Does it not?
Mr. Whitney. If it can be disposed of at a profit.
Mr. Pecora. If it can be disposed of. And it is natural to assume,
is it not, that the pool members will do whatever is calculated to
bring such a result about?
Mr. Whitney'. If in connection with members of the New York
Stock Exchange so that they do not transgress our rules.
Mr. Pecora. The pool could operate through the medium of
fictitious transactions — that is, fictitious beneath the surface — for
the purpose of effectuating the result I have referred to?
Mr. Whitney. I suppose there is no agency in the world that can
prevent crookedness.
Mr. Pecora. Do you mean that in many, many respects the
governing authorities of the stock exchange are powerless to detect
that kind of crookedness?
Mr. Whitney. I do not say in many, many respects. I — —
Mr. Pecora. Or in many respects?
Mr. Whitney. It is possible that people without our control may
effect transactions on the New York Stock Exchange that are
fictitious or wrong or improper.
Mr. Pecora. Wliat kind of manifestations would there have to be
of the existence of a pool in order to give the exchange authorities
knowledge or belief that a pool is operating?
Mr. Whitney'. As I tried to explain to you, the business conduct
committee is in close touch mth what goes on in the various stocks
through the specialists in those stocks, and if there are any unusual
transactions — I do not mean to infer by that improper transactions — •
but if there are transactions that would denote the operation of a pool
that particular stock would be closely scrutinized thereafter.
Mr. Pecora. Were you ever a member of the business conduct
committee of the exchange?
Mr. Whitney. For many years.
Mr. Pecora. Well, what kind of transactions would strike you as
being of such an unusual character as to excite your suspicion of the
existence of a pool?
2224 STOCK EXCHANGE PRACTICES
Mr. Whitney. If the orders to buy in that pool all seemed to come
from the same source, the same members of the exchange, and vice
versa, or if the orders to both buy and sell seemed to come from the
same sources, that would create interest at least.
Mr. Pecora. It is the desire of the authorities of the exchange to
maintain a free and open market?
Mr. Whitney. Yes, sir.
Mr. Pecora. Thi-ough the medium of the exchange for the pur-
chase and sale of secmities?
Mr. Whitney'. Yes, sir.
Mr. Pecora. And by a free and open market you do not mean a
controlled market, do you?
Mr. Whitney. What is a controlled market?
Mr. Pecora. Well, Mr. Wliitney, I am trying to use words that are
simple in their meanmg, but if I am using words that you do not
imderstand I will try to change them.
Mr. Whitney. I understand the word "controlled" completely,
Mr. Pecora. But the mere fact that a pool may buy large quantities
of a stock, if they do not buy them from themselves there is no
nefarious transaction, and that, as I see it, is not controlled.
Mr. Pecora. You know what is meant by a controlled market, do
you not?
Mr. Whitney'. I do — what you mean I think I know, but I do not
know specifically of controlled markets. If you will give me an
example of what you have in mind I will try to answer it.
Mr. Pecora. Well, where the bids and offerings virtually come
from the same party or group or groups.
Mr. Whitney. But there is nothing to prevent other persons
interested in that stock from selling large quantities of that stock or
from buying it.
Mr. Pecora. But it is possible under the operation of the exchange
for a group so to operate in the market as to more or less control
prices for the time being?
Mr. Whitney. If their stock and if their money holds out, yes.
Mr. Pecora. And it is that sort of thing wliich the exchange does
not like to have done, is it not?
Mr. Whitney. If there are no improper transaction connected
with such an operation my answer is that the exchange does not
object. The exchange has no objection to a man or a pool bidding 40
for 5,000 shares and offering 5,000 shares at 40 K- None whatsoever.
Mr. Pecora. Is it easily possible for a group operating through the
medium of a pool to exercise temporarily, at least, or for the purposes
of the operation, a control of the market price?
Mr. Whitney'. I will answer yes, sir; on the conditions
Mr. Pecora. The market price of a given security?
Mr. Whitney'. As long as the stock and their money hold out, yes.
Mr. Pecora. Yes. And to that extent those persons are enabled
to exercise a control, are they not?
Mr. Whitney. By bidding and ofi'ering; yes.
Mr. Pecora. By bidding and offering. Now, what steps, if any,
does the exchange take to prevent that land of control?
Mr. Whitney. I do not know of any, Mr. Pecora.
Mr. Pecora. When such a pool is operating and effecting such a
control it is restricting a free and open market where honest values
can be obtained, is it not?
STOCK EXCHANGE PRACTICES 2225
Mr. AVhitney. No, sir.
Mr. Pecora. Is it not?
Mr. Whitney. No, sir. And there are hundreds of individuals
that can do the same thing. A man may bid 40 for 5,000 shares and
oflFer 5,000 shares at 40 ^i I can do it. Any member of the exchange.
I do not call that a restricting of a free and open market. The world
can take that stock from me or sell that stock to me.
Mr. Pecora. When I said "restricting" I meant restriction to the
extent that such an operation would bring about an artificial stimula-
tion of prices.
Mr. Whitney. Mr. Pecora, I am afraid I can not agree with what
you have in mind, if I understand j^ou correctly. If you will give me
a specific instance of where you believe the operation of a pool has
been improper I will gladly give you my opinion.
Mr. Pecora. Well, take, for instance, the many pools that by
common report were operating on the stock exchange in various
securities such as Anaconda Copper and Radio in 1929. You heard
those common rumors or reports, did you not, Mr. Whitney, at the
time?
Mr. Whitney'. Yes, sir; and I have investigated them.
Mr. Pecora. What investigation was made?
Mr. Whitney. WeU, it is quite long. If you care to I would like
to put it in the record. I have got it here. I have got the account-
ants' reports with regard to it.
Mr. Pecora. How many pools did you find had operated in 1929
in the exchange?
Mr. Whitney. That I can not tell you. That would be a matter
that only the business conduct committee could give you. With
relation to the Anaconda pool — the two Anaconda pools, and the radio
pool, I went into that at some length and have the facts before me.
Mr. Pecora. Did you find that pools had been operated in those
stocks in 1929?
Mr. Whitney. We did.
Mr. Pecoka. And did you find that as a result of those pool opera-
tions artificial prices were for the time being established?
Mr. Whitney. We did not, except in one instance.
Mr. Pecora. In which instance?
Mr. Whitney-. Where there was an incorrect sale or an improper
sale by accident purely, made in 35,000 shares of Greene Cananea
stock.
Mr. Pecora. An accidental sale, you say?
Mr. Whitney. Yes, sir; improper execution of the order given to
the broker. The broker made an error.
Mr. Pecora. How long after the making of the error was its com-
. mission first noticed in that particular case, Mr. Whitney?
Mr. Whitney. That I can not tell you.
Mr. Pecora. Was it not something like a month?
Mr. Whitney. I do not truly know. Again I would have to refer
to the records of the business conduct committee.
Mr. Pecora. Did you cause that transaction to be fully explored?
Mr. Whitney. Did I? Yes; last spring, or last summer.
Mr. Pecoka. Is it not a fact that the authorities did not learn of
that until something like two or tliree years after the commission of
the operation?
2226 STOCK EXCHANGE PRACTICES
Mr. Whitney. I just said I can not tell you that without referring
to the records of the business conduct committee, sir.
Mr. Pecora. Wliy was the investigation wliich you caused to be
made delayed until the summer of 1932?
Mr. Whitney. Because there were references made to these
various pools, sir, in the investigation last spring, and I wished to
acquaint myself with the facts and to present them to the members
of the New York Stock Exchange.
Mr. Pecoea. Did you personally make the investigation?
Mr. Whitney. No, sir; the accountants of the exchange did,
though.
Mr. Pecora. But they reported then- conclusions to you?
Mr. Whitney. Yes, sir.
Mr. Pecora. And their conclusions were that in that particular
instance there was a mistake? Is that right?
Mr. Whitney. An absolute mistake, an accident, yes.
Mr. Pecora. Did they report how long a period of time elapsed
before the mistake or accident was discovered by anybody?
Mr. Whitney. It was discovered almost momentarily. And if I
remember, Mr. Pecora — this is gathering a little momentum in my
brain, because if I remember rightly I was chairman of the business
conduct committee at that time — ^I may have been; I am not quite
sure — —
Mr. Pecora. Ai-e you through?
Mr. Whitney. No.
Mr. Pecora. Go ahead.
Mr. Whitney. That that transaction was reported, the accident
of it, to the business conduct committee within 10 or 15 minutes after
it occurred, or shortly thereafter.
Mr. Pecora. Whom did you find to be responsible for that accident
or mistake?
Mr. Whitney. A broker on the exchange. A misunderstanding of
an order given. The order was for immediate execution, and he
considered it a day order in error.
Mr. Pecora. Now, if that broker, as you say, discovered the mis-
take within 15 minutes after he had made it, do you laiow whether
any announcement was made of the commission of that mistake in a
transaction involving 35,000 shares?
Mr. Whitney. I do not think there was any announcement because
no harm had been done in so far as our investigation shows.
Mr. Pecora. Did not the price of that stock go up as the result of
that mistake?
Mr. Whitney. Not that I know of.
Mr. Pecora. Have you any data which indicates whether it did
or not?
Mr. Whitney. Just one minute, please [looking over some papers].
My answer to that, Mr. Pecora, is that the stock — I don't loiow that
the stock went up on future days, on subsequent days, but I do know
that the pool that was operating in that stock never sold any stock
on balance on future days, and were always buyers on balance, and
finally distributed their entire holdings in the stock to the partici-
pants of the pool. They distributed no stock thereafter on balance.
Mr. Pecora. Did you learn what effect that mistake had on the
quotations for that stock at the time of the commission of the mis-
take?
STOCK EXCHANGE PBACTICES 2227
Mr. Whitney. Now, I have got to go back to the records of the
business conduct committee, wliich I have not in mind, unless we
have them here. Let me see
Senator Townsend. It is now 10 minutes of 1. It has been sug-
gested that the committee take a recess until 2.30 o'clock this after-
noon.
Mr. Pecora. Mr. Whitney, suppose you look at that during the
recess and see if you can answer the question.
Mr. Whitney. All right. I do not have the records here.
Mr. Pecora. The testimony of the broker who claimed to have
made the mistake was that the stock jumped four points as a result
of that 35,000-share transaction.
Mr. Redmond. And it immediately went back, didn't it? I think
it was sometliing that went up and down for a minute.
Mr. Pecora. The stock jumped from 192 to 196, he says.
Mr. Whitney. What page is that on?
Mr. Pecora. It is on page 810, and Mr. Fayne testified to that
effect.
Mr. Whitney. It might have been so, but we could not have done
anytliing about it after that.
Senator Townsend. The committee is now in recess until 2.30
o'clock this afternoon.
(Whereupon, at 12.50 p. m. the subcommittee recessed until 2.30
o'clock p. m. the same day.)
after recess
The subcommittee resumed at 2.30 o'clock p. m. on the expiration
of the recess.
The Chairman. The subcommittee wiU come to order. You may
proceed, Mr. Pecora.
TESTIMONY OF RICHARD WHITNEY, PRESIDENT, NEW YORK
STOCK EXCHANGE, NEW YORK CITY— Resumed
Mr. Pecora. You recognize, don't you, Mr. Whitney, that the
New York Stock Exchange through its facilities for trading in securi-
ties probably constitutes the greatest market for securities in this
country, if not in the world?
Mr. Whitney. Yes, sir.
Mr. Pecora. And that its daily quotations of the trades executed
on its floor are accepted as substantial evidence of the value of the
securities to which they relate?
Mr. Whitney. Yes, sir; at that time.
Mr. Pecora. Yes; at that time.
Mr. Whitney. Yes, sir.
Mr. Pecora. And that the securities listed on the exchange which
are the subject of its transactions are freely accepted as collateral by
banks to support loans?
Mr. Whitney. Yes, sir.
Mr. Pecora. And that they are much more readily accepted as
collateral because they are listed on your exchange than they would
be if they were not so listed, isn't that so?
Mr. Whitney. I believe that is true.
2228 STOCK EXCHANGE PRACTICES
Mr. Pecora. So that the operations, the trades, which take place
daily on the stock exchange are of interest to the entire country
because of the relationship wliich those trades bear to the value of
securities traded in?
Mr. Whitney. Yes, sir.
Mr. Pecora. The stock exchange, as now constituted, is subject to
no official regulatory power, is it?
Mr. Whitney. Well, it is not an incorporated company if that is
what you mean?
Mr. Pecora. No. You know of no public agency that exercises
any regulatory power over it, do you?
Mr. Whitney. I know of none that has been exercised, yes.
Mr. Pecora. You know of none that has the power of exercising
regulation over its affairs, do you?
Mr. Whitney. I will grant that there is none, Mr. Pecora. From
a legal point of view I perhaps do not follow you, but I will grant it.
Mr. Pecora. The stock exchange has consistently resisted all
efforts to subject it to official regulation of some kind or other, has it
not?
Mr. Whitney. No, sir. They have resisted efforts toward its
incorporation, believing that if it were incorporated it would take
away the most salutary and most important powers that it now has in
controlling the conduct of its members.
Mr. Pecora. Do you tliink that that power could not be just as
well exercised under State or Federal supervision of some kind?
Mr. Whitney. By incorporation?
Mr. Pecora. Yes.
Mr. Whitney. I do not.
Mr. Pecora. As it now stands the stock exchange has absolutely
autocratic power over the discipline of its members.
Mr. Whitney. Yes, sir.
Mr. Pecora. And over the conduct of members on its floor?
Mr. Whitney. By its members; yes, sir.
Mr. Pecora. By its members I mean.
Mr. Whitney. Yes, sir.
Mr. Pecora. Now, the course of market values evidenced by
trade on the stock exchange has an effect on bank loans, for instance,
that are secured by so-called stock exchange collateral, has it not?
Mr. Whitney. The prices at which shares sell, certainly, yes, as
they fluctuate.
Mr. Pecora. As prices move up or down notice is taken of the
movement of prices by banks that have made loans secured by stock
exchange collateral.
Mr. Whitney. Correct, the same as the movements of shares up
and down off the exchange are taken cognizance of.
Mr. Pecora. But most of the securities which are the subject of
daily trades are listed on the exchange, aren't they? You would not,
for instance, compare the volume of over-the-counter trades with the
volume of stock exchange trades, would you?
Mr. Whitney. No, perhaps not; and yet I would not know.
There is a large volume of trading on the New York Curb Exchange,
and there is a large volume of trading at times over-the-counter in
securities.
Mr. Pecora. But their volume does not compare with the volume
of transactions on the New York Stock Exchange, do they?
STOCK EXCHANGE PRACTICES 2229
Mr. Whitney. I do not believe that the volume of transactions
in bonds, and even in listed bonds is otherwise than greater over-
the-counter than on the floor of the e.xchange.
Mr. Pecora. Is that true with respect to stocks, common and
preferred?
Mr. Whitney. Not with regard to those that are listed, no, sir.
Mr. Pecora. If prices of listed stocks move downward as a result
of manipulation by members of the Stock Exchange, or by customers
dealing through members of the Stock Exchange, such a thing would
have its echoes in the offices of banks holding collateral for loans, and
would frequently constitute a reason for the calling of additional
margin from the borrowers. That is true, isn't it?
Mr. Whitney'. Yes, sir; if such manipulation takes place.
Mr. Pecora. Have you ever heard of any such manipulations tak-
ing place?
Mr. Whitney. For the downswing?
Mr. Pecora. Either for the downswing or for the upswing.
Mr. Whitney. I have loiown operations to take place, as you
referred to this morning, pool operations for the upswing. I do not
know of manipulations by groups or syndicates or pools for a down-
swing. There has been a great deal of rumor to that effect but I
do not know of it.
Mr. Pecora. Well, then, let us confine ourselves for the time
being to manipulations for the upswing: Those manipulations may
be of a character to excite activity on the part of the pubhc, and
attract it to those stocks that are subject to that kind of manipu-
lation.
Mr. Whitney. Yes, sir.
Mr. Pecora. And to that extent the investing public might be
tempted to buy securities at prices which have been made as a result
of such manipulation, isn't that so?
Mr. Whitney. Possibly, more particularly perhaps the speculating
public.
Mr. Pecora. Do you know what proportion of the trades which
are made on the floor of the New York Stock Exchange represent
speculative buying and what proportion represent investment buying?
Mr. Whitney. No, sir. But I would say that in 1927, 1928, 1929,
and 1930 the proportion was far greater as to speculative buying as
against what has happened since that day, where the ratio has turned
very much I believe to investment buying.
Mr. Pecora. How is speculative bujnng, as it is indulged in through
the medium of the stock exchange, to be distinguished from invest-
ment buying? Wh&t are the earmarks of it?
Mr. Whitney. Do you mean between specidation and investment?
Mr. Pecora. Yes, sir.
Mr. Whitney. I have always felt that that depended upon the
intent of the individual.
Mr. Pecora. But what are the outward and visible evidences, as
they would appear to you
Mr. Whitney. When the purchases are made
Mr. Pecora (continuing). Evidences of whether buying is for spec-
ulative account or for investment account?
Mr. Whitney. From watching trades on the floor?
2230 STOCK EXCHANGE PRACTICES
Mr. Pecora. Well, I am asking how you would determine what
land of buying is speculative buying and what kind is investment
buying. That leaves you free to describe them.
Mr. Whitney. One could not determine without knowing what the
buying was.
Mr. Pecora. Where the stock of a particular corporation is made
the subject of an unusual amount of trading on one day or on a
series of days, woiddn't that unusual amount of trading have a strong
tendency to indicate that most of it was for speculative account?
Mr. Whitney. It is very possible.
Mr. Pecora. You know of many instances where the number of
shares of a certain stock dealt in during the course of a fewda5='s,
would exceed the total number of shares of capital stock that that
corporation had do you not?
Mr. Whitney. Yes, sir.
Mr. Pecora. Surely a case of that sort woidd indicate that most
of the buying was for specidative purposes, woiddn't it?
Mr. Whitney. In the particular cases that I do know of the buying
and selling were both for speculative purposes.
Mr. Pecora. Yes. Woidd it be fair to say that investment buying
woidd be evidenced by the actual registration of certificates on the
books of the issuing company or with its registrar?
Mr. Whitney'. Not necessarily, unless it was a dividend-paying
stock. Then eventually investment buying would be registered on
the books.
Mr. Pecora. Do you laiow or have you any means of knowuig
what proportion of the transactions on the floor of the stock exchange
result in a change of ownership on the books of the issuing corporation?
Mr. Whitney. No, sir; I do not know.
Mr. Pecora. If you were to venture an opinion on that you would
say it is a very small percentage, wouldn't you?
Mr. Whitney. It would depend very greatly in the particular period
you referred to. As I have said to-day, and for the last few years,
the ratio or proportion would be far greater than woidd have been
true in 1929, 1928, and 1927. That is my judgment. The invest-
ment buying to-day is very tremendous, as shown by the terrific in-
crease in the number of stockholders in our corporations.
Mr. Pecora. The volume of buying and selling to-day is much less
than it was in 1928 and 1929.
Mr. Whitney. Yes, sir.
Mr. Pecora. What proportion of the transactions to-day — and I
am speaking merely of the present period rather than of this calendar
day — are transactions in which the change of ownership of the securi-
ties dealt in is evidenced by registration or transfer on the books of
the company?
Mr. Whitney. I have no idea, sir. But to-day, with the few stocks
paying dividends, or we will say the many stocks that are not dividend
payers, there is not the necessity for such transfer that there was when
they were dividend payers.
Mr. Pecora. Do you think that speculative buying and selling are
evidenced more in nondividend-paying securities than in dividend-
paying securities?
Mr. Whitney. No; not necessarily. What I meant to say was, as
to finding out the actual facts regarding the question that you pre-
viously asked, I do not know how that fact could be determined.
STOCK EXCHANGE PRACTICES 2231
Mr. Pecora. Would you say that, by and large, the greater per-
centage of the transactions on the floor of the stock exchange are
speculative transactions as distinguished from investment trans-
actions?
Mr. Whitney. As compared with the case in recent months, and
recent years, no. But in 1929, 1928 and 1927, perhaps, yes.
Mr. Pecora. Do you say "perhaps, yes"?
Mr. Whitney. Yes.
Mr. Pecora. Aren't you willing to give an unqualified opinion to
that effect?
Mr. Whitney. Yes; I wUl give that opinion. I do not know, but I
think so. I do not think it is so now.
Mr. Pecora. Speculative transactions as a rule are margin trans-
actions, aren't they?
Mr. Whitney. They may very well be.
Mr. Pecora. Aren't they as a rule, to your loiowledge?
Mr. Whitney. Well, they may be. It depends on how far you
wish to extend your understanding of "margin." It may be a specu-
lative transaction and not on margin, but by a collateral loan not made
through a brokerage house. The situation to-day is that in the bro-
kerage houses their loans have been steadily coming down and have
been fairly dormant at a fairly low level.
Mr. Pecora. The reverse of that situation was true in 1928 and
1929, wasn't it?
Mr. Whitney. Yes, sir.
Mr. Pecora. What, if anything, did the authorities of the stock
exchange do in those years toward exercising vigilant supervision
over or scrutiny of speculative buying?
Mr. Whitney. Supervision by the business conduct committee
over the financial conditions of theii' houses, and with respect to
margins a demand for a far greater margin on the part of our houses.
Mr. Pecora. How were those demands for far greater margin
evidenced?
Mr. Whitney. By the frequent, continual contact of the business
conduct committee and its representatives and the accountants of the
exchange with our houses.
Mr. Pecora. To what extent were the margin demands increased?
Mr. Whitney. The margin demands by the business conduct
cortmiittee?
Mr. Pecora. Yes.
Mr. Whitney. The actual margin considered necessary was 25
per cent or more, together with the fact — and all this I have said in
the past — together with the fact that the rule was that any accoimt
must carry itself. And during that period certain stocks selhng at
high prices were not accepted as collateral at anywhere near the
prevaihng market price.
Mr. Pecora. That was due, wasn't it, to a recognition by lending
institutions that market prices were way out of line with intnnsic
values?
Mr. Whitney. That I do not know, Mr. Pecora. It might have
been a recognition on their part that the fluctuations in those high-
priced stocks were very great, as they were.
Mr. Pecora. I believe you dehvered an address yesterday before
the Cleveland Chamber of Commerce, did you not?
2232 STOCK EXCHANGE PRACTICES
Mr. Whitney. I did.
Mr. Pecora. I have not had access to your entire address, but I
read some paragraphs from it in one of the newspapers last evening.
Mr. Whitney. Here it is.
Mr. Pecora. What I read indicated that, among other subjects,
you discussed inflation of prices of securities.
Mr. Whitney. Yes, sir; I did.
Mr. Pecora. You were referring to inflation of security vahies in
1927, 1928 and 1929, weren't you?
Mr. Whitney. Particularly to 1929 in what I said, or to 1928 and
1929.
Mr. Pecora. Those two years particularly witnessed a very strong,
so-called bull market, did they not?
Mr. Whitney. Yes, sir.
Mr. Pecora. In the course of the making of that bull market did
you detect an unusual inflation of security values?
Mr. Whitney'. Did I detect it?
Mr. Pecora. Yes, sir.
Mr. Whitney. At that time?
Mr. Pecora. At that time; yes.
Mr. Whitney. No, sir.
Mr. Pecora. Well, from the perspective of time since 1929 do you
now recognize that an unusual inflation of values was brought about
during that bull market?
Mr. Whitney. Yes; that has been true, I think.
Senator Brookhart. Just a minute, on that proposition: Mr.
Whitney, neither j'ou nor any other of the financial leaders detected
that great inflation at the time, did you?
Mr. Whitney. I thank you for the compliment. Senator Brook-
hart, but I had many times felt that the market was running away
with itself, as did many others, and that we were going to pay for it
very seriously. But because the market continued to go up I think
we were all fooled.
Senator Brookhart. You made an official report to tliis committee
on that proposition, didn't you, in which you said that neither the
financial leaders nor the political leaders detected the inflation of
values in the market at that time.
Mr. Whitney. I do not think that my statement was quite as
comprehensive as that.
Mr. Pecora. Isn't that what you said in substance just a moment
ago in answer to a question of mine?
Mr. Whitney. In substance; yes, sir.
Senator Brookhart. Have you a copy of your report as President
of the New York Stock Exchange with you?
Mr. Whitney. The annual report?
Senator Brookhart. Yes, the annual report, and, I think, the last
one.
Mr. Whitney. No, sir; we have not. But we can easily get it for
you.
Senator Brookhart. Well, I have it in my office, but did not bring
it with me. I should have brought it along. In that you have stated
that political leaders, the last three Presidents and the big financial
leaders, none of them saw the great inflation that had taken place
until after the collapse.
STOCK EXCHANGE PBACTICES 2233
Mr. Whitney. I grant it, Senator Brooldiart. I do not think the
majority of the people did see it or it would not have gone as far as
it did. I tliink there were various warnings by economists and others,
but the surge upward continued, and the 'country, perhaps some
leaders, but individuals and everybody, were fooled terribly.
Senator Beookhart. I know that Senator Shipstead made a speech
discussing this question in 1925, in which he analyzed its course quite
fully, even that far back, and there were several of us that commented
on it in Congress. I know that I wrote an article myself 5 months
before the crash in wliich I said we were headed into the greatest panic
in the history of the world. And that is the way it came out, isn't it?
Mr. Whitney. I think it was.
Mr. Pecora. Mr. Whitney, can you account either for the failure
or the inability of stock-exchange authorities to recognize that
inflation wliile it was in the making during the bull market of 1928
and 1929?
Mr. Whitney. The exchange authorities, Mr. Pecora, do not
pretend as such to evaluate securities or prices. But I do not doubt
that there were various partners in stock exchange firms and members
of stock exchange firms who were members of the exchange, who felt
that the inflation was getting out of hand. I know of some. But
their views were not heard by the pubUc or by the majority of the
people throughout the countiy. The stock exchange does not
evaluate prices.
Mr. Pecora. Is there any reason why the stock-exchange author-
ities should hold themselves detached from that duty or respon-
sibility?
Mr. Whitney. I cannot see that it is a duty or a responsibility.
We do not control prices. The stock exchange neither buys nor
sells any securities.
Mr. Pecora. But the operations of the members of the exchange
have the effect of maintaining prices or of establishing prices, do
they not?
Mr. Whitney. Absolutely; yes.
Mr. Pecora. And those operations have their repercussions
throughout the country, have they not?
Mr. Whitney. In their buying and selling of shares on the ex-
change upon order, yes, sir; or if they do it for their own account.
Mr. Pecora. Prices of commodities are often aft'ected by quotations
on securities, are they not?
Mr. Whitney. It is supposed to be so, and vice versa.
Mr. Pecora. 'V^^iat is your personal opinion on that?
Mr. Whitney. I do not believe that it has a tremendous influence
one way or the other. I think the trends up or down are apt to be
together, but we have seen, in 1929 and 1928, where commodity
prices were not going up but were coming down, and yet security prices
were going up. So I think there is no real proof of it.
Mr. Pecora. As you look back upon the bull market of 1928 and
1929 you have no difficulty now in realizing and understanding that
that market was accompanied by a very considerable inflation of
securities values.
Mr. Whitney. That has been the result; yes.
Mr. Pecora. You mean that you now can readily see that that
was what happened in 1928 and 1929?
2234 STOCK EXCHA>«-GE PRACTICES
Mr. Whitxet. That is what happened. There is no question
about it.
Mr. Pecora. Why wasn't it possible to perceive at that time
that it was happening?
^[^. Whitney. Mr. Pecora, you are talking about judgment of
hindsight. We did not have it" then, nor did but very few, if any,
have it then.
Mr. Pecora. Didn't prices of certain securities that had never
paid a dividend go up into the hundreds of dollars a share during that
bull market?
Mr. Whitxet. I beheve so. But the New York Stock Exchange
did not put them there.
Mr. Pecora. The Xew York Stock Exchange gave its facilities to
operations that resulted in putting those prices there, did it not?
Mr. Whitxet. The New York^tock Exchange as a market place
did. That is, it offered a market place for the exercise of supply and
demand.
Mr. Pecora. Mr. Whitney, don't you think that becaue the ZSew
York Stock Exchange, through its market place which is open to the
pubUc, offers that opportunity, it owes some measure of responsibility
to the public to watch those prices and when they get out of line to
sound some kind of pubUc warning?
Mr. Whitxet. If you will teUme, Mr. Pecora, how I, as president
of the New York Stock Exchange, might do that I will be glad to
have you do so, and will endeavor to acl accordingly. But I will say
that if the president of the New York Stock Exchange at that time
had issued such warnings, in the first place he vvould have been
attempting to evaluate securities, and in such effort he would have
been speaking as an individual, and I think he would have been
laughed at.
Mr. Pecora. Does the New York Stock Exchange particularly
avoid any effort to evaluate securities?
Mr. Whitxet. We do not think it is our duty in any way to do so.
Mr. Pecora. And you sedulously avoid doing so, don't you?
Mr. Whitxet. It being not our duty; yes.
Mr. Pecora. Since you consider it is not your duty, you avoid
doing it?
Mr. Whitxet. Because neither our duty nor within our province;
yes, sir.
Mr. Pecora. In view of the fact that through the maintenance
of those faculties afforded by the New York Stock Exchange it is
the most important market place for trading in securities, and in
view of the fact that the quotations of security prices on the New
York Stock Exchange have a nation-wide effect, don't you think
that the stock exchange could very well conclude that it might be
its duty, or that it owes some measure of responsibUity to the pubUe,
to protect it from a feverish or artificially stimulated" activity?
Mr. Whitxet. No, sir. I do not see how it could do it, Mr.
Pecora. I do not think that the New York Stock Exchange has
either the facihty or the abUity to be the oracle as to howprices
should fluctuate, or to set forth whether a price is too high or too low.
If I might illustrate: I have frequently during the last few months
averred that the people of this coimtry were trying to sell the United
STOCK EXCHANGE PRACTICES 2235
States short. I think security prices are far too low. But it has
not done any good.
Senator Brookhart. Well, you are always on that side of the
market on the stock exchange, aren't you?
Mr. Whitney. Do you mean that I am?
Senator Brookhart. Yes.
Mr. Whitney. No, sir.
Senator Brookhart. You are always wanting to draw the public
in and to have them buy more. That is the general position of the
New York Stock Exchange and of its members, isn't it?
Mr. Whitney. Well, I do not know, Senator Brookhart, whether
we try to draw the public ia to buy more or to sell more. But at the
same tune the action of the pubhc through stock exchange members
has been predominantly on the other side in the last two or three
years.
Senator Brookhart. They have been on the buying side of the
market, haven't they?
Mr. Whitney. They have sold more than they have bought.
Senator Brookhart. That is, the professionals?
Mr. Whitney. No ; I am talking about the real buyers.
Senator Brookhart. Well, they are the fellows who had to sell
because of economic conditions generally?
Mr. Whitney. Not necessarily. Again I think many have sold
merely because they felt it was best to sell.
Senator Brookhart. Well, now, if telling them to buy and that
this stuff is too low, does not take us out of the depression what do
you think will take us out?
Mr. Whitney. Restoration of confidence in this couatry.
Senator Brookhart. Well, what do you do particularly to restore
confidence? Apparently they have not got confidence back in the
New York Stock Exchange.
Mr. Whitney. Well, that is a very large economic question,
Senator Brookhart.
Senator Brookhart. But you are representing a very large trading
institution, the largest the world has ever known, and you ought to
be able to answer some pretty large questions.
Mr. Whitney. Well, do you wish to have my personal opinion?
If so, I will be very glad to give it.
Senator Brookhart. Well, that is what I want.
Mr. Whitney. Well, I think the Government Budget must be
balanced. That is No. 1. And next
Senator Brookhart (interposing). How would you balance the
Budget?
Mr. Whitney. By decreasing expenditures throughout the country.
Senator Brookhart. You would cut out, for instance, the soldiers'
compensation in the way of nonservice-connected disabilities, would
you?
Mr. Whitney. I would.
Senator Brookhart. You are a member of the National Economy
League, are you?
Mr. Whitney. I am.
Senator Brookhart. And you would change, then, the whole 150
years of American history on that proposition, would you?
119852— 33— PT 6 31
2236 STOCK EXCHANGE PRACTICES
Mr. Whitney. I would give to veterans who had been injured or
affected by the war every care in the world, and to their dependents.
Senator Brookhart. But if they had suffered injuries since the
war you would tell them to go to the poorhouse, would you?
Mr. Whitney. If their injuries were in no way attributable to the
war I wouldn't think the Government is called upon to help them.
Senator Brookhart. Then you think that George Washington,
when he recommended land grants to soldiers of the Revolution
regardless of disability, was wrong?
Mr. Whitney. I think that was for the purpose of colonization.
Senator Brookhart. Well, we had land in those days, and now
we have profits, or at any rate when speculation is going on. And
you would think what they did after the War of 1812 was wrong in the
way of giving pensions to nonservice-connected disabilities.
Mr. Whitney. I do not know the details of that matter. _
Senator Brookhart. And you think the Government did wrong
after the Mexican War. There are still some Mexican War pen-
sioners, and evidently they did not get their disability in the war.
Mr. Whitney. As to that I do not know.
Senator Brookhart. And as to the Ci\'il War, that was all wrong,
was it?
Mr. Whitney. I did not say it was all wrong. I am only express-
ing myself as to
Senator Brookhart (interposing). But it is wrong for Spanish-
American veterans and World War veterans, you say that?
Mr. Whitney. No; I do not say, because I can not compare one
with the other for the reason that I do not know. But I do think
that any man who fought in the war, and any dependents of such
men as fought in the war and were injured or killed, should have
proper care from our Government. On the other hand, that able-
bodied men should be given money for having fought in the war, I
can not see that in these days of this Government's situation.
Senator Brookhart. And your theory is that they came out of
the war in as good physical condition as when they went in, and
therefore they are not entitled to any consideration from the Gov-
ernment?
Mr. Whitney. If they did not come out of the war in that con-
dition they should be taken care of. On the other hand, if they did
come out of the war in good shape, in as good shape as when they
entered, they should not be taken care of by the Government.
Senator Brookhart. You know that the most of them were
drafted into the war at a dollar a day, don't you?
Mr. Whitney. Yes, sir; and a great many others were drafted
during the war for nothing a day.
Senator Brookhart. Those dollar-a-year men who made a million
or two dollars on the side in the way of profit; do you mean those?
Mr. Whitney. I do not know anything about a million dollars on
the side in profits.
Senator Brookhart. Those men that were drafted and paid a
dollar a day, suffered economic damage at the hands of the Govern-
ment, didn't they?
Mr. Whitney. That I do not know. Senator Brookhart.
Senator Brookhart. You know that the most of them did. You
know that that was not adequate pay for the most of those men,
don't you?
STOCK EXCHANGE PRACTICES 2237
Mr. Whitney. Well, I think they had a dut}' toward their coun-
try. Some one had to fight.
Senator Brookhakt. Yes; some one had to fight in order to main-
tain the New York Stock E.xchange, for instance.
Mr. Whitney. No, sir. The New York Stock E.xchange was
closed during a part of the Great War.
Senator Brookhart. And I am sorry it has not stayed closed ever
since. [Laughter.] Now then, you would balance the Budget and
you would cut ofif $300,000,000 of expense by means of that item
that you mentioned. And I know what it is, because I have been
through it recently. But that would not balance the Budget.
Mr. Whitney. It would not seem so; no.
Senator Brookhart. What else would you do in order to balance
the Budget?
Mr. Whitney. I was trying to tell you. Curtailment of Federal,
State, county, municipal expenditures throughout the country.
Senator Brookhart. Well, in the matter of State governments I
can not go into that, but what would you take out there?
Mr. Whitney. I am not a lawmaker, sir. But I am sure that
expenditures could be curtailed by a great deal.
Senator Brookhart. Well, what items do you think of that could
be curtailed?
Mr. Whitney. I must answer there that I am not a lawmaker, sir.
Senator Brookhart. But you are a financier and you ought to
know something about these matters of finance. If you are going to
balance the Budget by reducing expenditures you ought to have
some bill of particulars to present. It ought not to be all a matter
of glittering generalities. I want to know what else you would do
besides cutting off the soldiers' compensation.
Mr. Whitney'. I think that salaries might be reduced. [Laughter
in the room.]
Senator Brookhart. I will agree with you on that. Here was
Mr. Mitchell who came before this subcommittee and showed that
he had a salary and compensation of $1,200,000 a year. That ought
to be reduced in some way.
Mr. Whitney. I never knew that Mr. Mitchell was working for the
Government.
Senator Brookhart. Well, he was working for a corporation that
the Government chartered. You knew that, didn't you?
Mr. Whitney. Yes, sir; but
Senator Brookhart (interposing). And you knew that the Govern-
ment could regulate those salaries, too. By the way, how much
salary do you get?
Mr. Whitney. As what?
Senator Brookhart. As president of the New York Stock
Exchange?
Mr. Whitney. Nothing.
Senator Brookhart. How much salary do vou get with Whitney
&Co.?
Mr. Whitney. Very httle in the last few years.
Senator Brookhart. Well, how much is that? I want to find out
what very little is in your opinion.
Mr. Whitney. Do you mean in 1932?
2238 STOCK EXCHANGE PRACTICES
Senator Brookhart. Yes.
Mr. Whitney. I think I received approximately $60,000.
Senator Brookhart. Well, that would be as much as the salary
received by six United States Senators. I think you ought to be
reduced. [Laughter in the room.]
Mr. Whitney. That is a return on efforts and business and capital
and one thing and another, Senator Brookhart. I am not paid as
president of the New York Stock Exchange, although I have given
practically my entire time to that work for three years.
Senator Brookhart. Then that is just a labor of love altogether,
is it? [Laughter in the room.]
Mr. Whitney. I am interested in the institution; yes, sir.
Senator Brookhart. Well, I know some railroad presidents
that draw $125,000 a year.
Mr. Whitney. I draw no salary from my firm, if you please.
Senator Brookhart. In fact, I know of a long string of salaries
that I think ought to be reduced that are collected out of the people,
out of soldiers and farmers and different people by way of economic
taxation if not by governmental taxation, and the most of those are
subject to regulation in interstate commerce. So I agree with you
that there are a lot of salaries in tliis country that ought to be reduced.
But the $1,600 Government employee I do not think is getting any
too much. What do you think about that?
Mr. Whitney. If all expenditures of the Government have got to
be reduced it seems to me everybody must take his share in it. And
I rather think the railroad presidents you refer to are themselves taking
reductions in their salaries, and they are also paying very large
income taxes.
Senator Brookhart. But after they reduce them they have left
seven or eight times as much as a United States Senator receives.
Mr. Whitney. I have known United States Senators to take
positions that also had large remuneration.
Senator Brookhart. Well, they might get to be attorney for the
New York Stock Exchange or sometliing of that kind and get big
pay. [Laughter in the room.]
Mr. Whitney. That is quite an idea.
Senator Brookhart. Now, let us see: I want to know a little more
about balancing the Budget because we have not got very far along
that line yet. How much would you cut out of salaries?
Mr. Whitney. Senator Brookhart, I am not competent to speak
of those detailed affairs with regard to governmental expenditures.
Senator Brookhart. You do know that when they get down to it
they figure $200,000,000 or about that as all they can reduce in the
way of Government expenditures. Then the Economy League, of
which you are such a prominent member, wanted to reduce the soldiers
about tlvree hundred or four hundred million dollars more. Those
two items would not balance the Budget, would they?
Mr. Whitney. Not from what I hear.
Senator Brookhart. Where will we get the money needed to
balance it, then?
Mr. Whitney. I do not know where you can get the money to
balance the Budget.
Senator Brookhart. Are you for a sales tax?
STOCK EXCHANGE PRACTICES 2239
Mr. Whitney. Yes, sir. I do not see where the additional revenue
needed can be got in order to bahmce the expenditures of the Govern-
ment, and therefore Government expenditures must be reduced.
Senator Brookhart. But you thinlv after they are reduced as far
as we can, we will still have to have a sales tax in" order to balance the
Budget, do you?
Mr. Whitney. That or some other tax that would bring in revenue,
yes.
Senator Brookhart. Well, a sales tax is the one you advocate
first, is it?
Mr. Whitney. I have, and
Senator Brookhart (interposing). All right. Now let us put that
on sales on the stock exchange. What do you say to that?
Mr. Whitney. It has been put on.
Senator Brookhart. What is it now? Wliat is the rate?
Mr. Whitney. Now it is 5 cents as a Government tax, and 4 cents
to New York State. It is a sales tax.
Senator Brookhart. Four and five cents on what?
Mr. Whitney. Per share.
Senator Brookhart. On the $100?
Mr. Whitney. On $100 par, but they may sell very much below
and do.
Senator Brookhart. Supposing we put the same rate of sales tax
on stocks, on speculative sales and all, that you want put on com-
modities in general, what do you say to that?
Mr. Whitney. It is very much higlier than any suggested general
sales tax that I know of, that is generally suggested by anj^body. It
is already a sales tax.
Senator Brookhart. I understand that it is a sales tax, but the
rate on it that you have mentioned is only a fraction of what is pro-
posed to be put on commodities.
Mr. Whitney. I don't think you will find that it works out that
way with present prices of securities.
Senator Brookhart. Well, then, you would favor putting a sales
tax on every speculative sale just the same as on sales of various com-
modities, five per cent or something like that?
Mr. Whitney. We were talking about a general sales tax. There
is already a sales tax on stock transactions.
Senator Brookhart. But it is so light. It is not anything like
5 per cent of those sales.
Mr. Whitney. I have never heard it suggested to put a 5 per cent
sales tax on.
Senator Brookhart. Yes, Senator Glass offered a bill to levy 5 per
cent sales tax on all resales that are made witliin 60 days, and I am
suggesting now that we extend that to all sales so that the stock
exchange \vill get under tliis sales tax just the same as other folks.
Mr. Whitney. As I understand, taxation is sought in order to
collect revenue, and you will not collect revenue by any such tax.
Senator Brookhart. Wliy wouldn't we?
Mr. Whitney. Because the volume would be stifled and smothered
by a prohibitive tax to that extent.
Senator Brookhart. In other words, it would stop the stock
gambling down there and speculation?
2240 STOCK EXCHANGE PRACTICES
"Mr. Whitney. I think there is extremely Httle stock speculation
at jthe present time.
Senator Brookhart. You are not in favor of stopping that
speculation?
Mr. Whitney. I am not, or any speculation in tliis country.
Senator Brookhart. I am. That is where we differ on that
proposition.
Now, let us see: Balancing the budget you think would bring back
prosperity?
Mr. Whitney. Yes, sir; it would be a contributing cause. Yes.
Senator Brookhart. Is there anything else necessary to do?
Mr. Whitney. Yes. I think there are a great many things to do
to bring back confidence.
Senator Brookhart. Do you think we can have prosperity as long
as agricultural products are down on the present level?
Mr. Whitney. I think that is one of the things that need to be
rectified, sir, and I think it is by a resumption of international trade,
and probably only by a resumption of international trade, that you
will get an increase in agricultural prices.
Senator Brookhart. Of course, you know the industrial prices are
protected by special laws of the country, and agriculture is entitled
to the same kind of a consideration, is it not?
Mr. Whitney. I understand it is protected by certain laws.
Senator Brookhart. Do you understand that tariff rates protect
agriculture now?
Mr. Whitney. I believe there is quite a high tariff on wheat, is
there not?
Senator Brookhart. Yes, and wheat is selling for less than the
tariff. So it does not protect.
Mr. Whitney. There is an oversupply.
Senator Brookhart. It was a citizen of your own city, your own
State, Alexander Hamilton, that said we would have to protect agri-
culture with bounty ; said that when he presented the first tariff" bill
to the first Congress of the United States. Would you be in favor of
doing that?
Mr. Whitney. No, sir. I think there are better ways of doing it.
Senator Brookhart. What is the way?
Mr. Whitney. Resuming international trade.
Senator Brookhart. That can not be done without the other
fellow in the other country agrees to it, can it?
Mr. Whitney. That is true, I presume.
Senator Brookhart. And at present they are all putting up
barriers against it. Unless we can get new treaties that will not
get anywhere, will it?
Mr. Whitney. Unless we can get new treaties.
Senator Brookhart. Yes. Well now, what are you going to do
with these 12,000,000 laborers that are unemployed? Can we have
prosperity as long as 12,000,000 men are out of jobs and the president
of the stock exchange drawing a $60,000 a year salary?
Mr. Whitney. I do not draw a salary, sir. I am sorry.
Senator Brookhart. Not as president of the exchange, but you
draw it in the other business.
Mr. Whitney. Not as a salary at all. At the risk of the business.
Senator Brookhart. Did it in speculation, is that the way?
STOCK EXCHANGE PRACTICES 2241
Mr. Whitney. No, sir.
Senator Brookhart. But what about these 12,000,000 unem-
ployed? What are you going to do with those?
Mr. Whitney. I think the 12,000,000 unemployed are going to be
taken care of if prosperity returns, and if you get "a basis for a return
of prosperity
Senator Brookhart (interposing). How are you going to get a
return of prosperity? That is what I am trying to find out.
Mr. Whitney. I have been trying to explain what my small ideas
are in that regard, Senator. One must leave those matters to the
lawmakers of the country.
Senator Brookhart. I may be pretty dumb, but I have not found
out yet how you are either going to balance the Budget or bring back
the prosperity.
That is ali; Mr. Pecora.
Mr. Pecora. Now, Mr. Wliitney.
Mr. Whitney. Yes, sir.
Mr. Pecora. You said in answer to the last question I put to you
that the exchange has pronounced its views publicly with regard to
selling America short.
Mr. Whitney. I said that I had stated that.
Mr. Pecora. That is, you have stated it in your individual
capacity
Mr. Whitney. Entirely.
Mr. Pecora. Or as a representative of the exchange?
Mr. Whitney. I have stated it here, and I was here in an official
capacity, I presume.
Mr. Pecora. Do the amount of brokers' loans that are carried give
any indication of the amount of speculative transactions on the
exchange?
Mr. Whitney. I think they do; yes.
Mr. Pecora. And you noticed that in 1928 and 1929 broker's loans
reached a maximum that was absolutely unprecedented?
Mr. Whitney. It was, the largest that it had ever been.
Mr. Pecora. Did the exchange authorities take action of any
kind at that time for the purpose of placing some restraint or limi-
tation .upon that undue amount of speculative activity in the market?
Mr. Whitney. No. I have stated that before, Mr. Pecora. The
business conduct committee had constant supervision over our mem-
bers and what they were doing. But I did not feel, and I do not
feel, that the exchange can dictate as to whether individuals shall
buy or sell shares. The individual brokers and members of the
exchange may suggest, but they can hardly dictate.
Mr. Pecora. I am going to ask again the substance of a question
or series of questions that I put to you before recess to-day. Were
there not many rumors and reports abroad in 1928 and 1929 about
the existence of pool operations on the exchange during those years?
Mr. Whitney. I think there was considerable rumor, about that
and other things.
Mr. Pecora. Did the exchange officials do anything specifically to
ascertain how much basis of fact there might have been with regard
to those rumors at that time?
Mr. Whitney. I tried to explain to you before the recess about
the business conduct committee of the exchange. Its duty is to see
2242 STOCK EXCHANGE PRACTICES
that the conduct of its members is not improper and that there were,
whenever occasion arose, investigations made to see if any trans-
actions were improper, and constantly were being made, to see
wliether transactions were improper or proper.
Mr. Pecora. Did they report any conchisions at that time as a
result of their investigations?
Mr. Whitney. Not that I remember. I am not quite sure when
the Manhattan Electrical Supply Co. occurred. That was in 1927
and 1930. They did in those cases.
Mr. Pecora. Are those the only cases in which they reported
definite conclusions that pools had been in operation?
Mr. Whitney. Again this is a matter that could be definitely stated
by reference to the business conduct committee's files. I personally
remember they reported with regard to a pool in Devoe & Reynolds
stock.
Mr. Pecora. Did they examine into the existence of any pool in
radio stock in those years?
Mr. Whitney. I believe they did.
Mr. Pecora. What conclusions did they report?
Mr. Whitney. They did not find anything that was improper in
those transactions.
Mr. Pecora. Did they definitely make such a report?
Mr. Whitney. The governing committee? No, sir.
Mr. Pecora. Did they make any report to the governing com-
mittee?
Mr. Whitney. In the case of the Manhattan Electrical Supply Co.
only.
Mr. Pecora. No; I mean in the case of radio.
Mr. Whitney. I beg your pardon. I did not understand you.
No ; not that I know of.
Mr. Pecora. Did they make any investigation that you know of?
Mr. Whitney. That I cannot tell you definitely. I have made an
investigation since, or had an investigation made.
Mr. Pecora. Do you think it so easy to make an investigation
some three years after the alleged event?
Mr. Whitney. Yes, sir.
Mr. Pecora. Just as easy?
Mr. Whitney. I think so.
Mr. Pecora. Is it not a fact that brokers do not maintain records
of their transactions after a certain period of time?
Mr. Whitney. Complete records were maintained by the brokers.
Mr. Pecora. Haven't you informed this committee in the past that
investigations made by committees of the exchange — I withdraw that.
Testimony has been given before this committee in the past by mem-
bers of the exchange, if my recollection is correct, Mr. Whitney, to
the efl'ect that they had destroyed their records of transactions in
certain stocks with respect to which pools had been reported. Did
you find this condition to be so?
Mr. Whitney. No, sir; not in the Radio pool. I have stated, in a
public document that I sent to the members of the exchange, with
regard to certain items of transactions but the fundamentals we got.
Mr. Pecora. I have before me, Mr. Whitney, what purports to be
a printed pamphlet entitled "Statement by Richard Whitney,
STOCK EXCHANGE PRACTICES 2243
president of the New York Stock Exchange, Made to the Governing
Committee and to the Membership."
Mr. Whitney. Yes, sir.
Mr. Pecora (reading):
With regard to the investigation of Stock Exchange practices by the Banking
and Currency Committee of the United States Senate.
This pamplilet bears date August 24, 1932.
Mr. Whitney. Yes, sir.
Mr. Pecora. The committee referred to in the title page is this
committee, is it not?
Mr. Whitney. Yes, sir.
Mr. Pecora. Let me call your attention to the statement con-
tained on page 18 of that pamphlet, as follows:
1 regret that it is impossible to analyze every transaction which took place in
the radio pool accounts. To do so would require the examination of the orders
sent through to the floor of the exchange, and the reports sent back when the
orders were executed. It is now more than three years since these transactions
took place, and many of the orders and reports have been destroyed, as it is not
customary for members of the exchange to keep records of this kind for any
extended period.
Mr. Whitney. Yes, sir.
Mr. Pecora. In view of the statement which you made to the
governing committee and the members of your exchange through
the medium of this printed pamphlet, do you now say that in the
examination which you caused to be made, with respect to whether
or not a pool in Radio was operated in the exchange in 1928 and 1929,
all the facts were fidlj'^ investigated?
Mr. Whitney. I do think that all the material facts with regard to
the operations of that pool are in existence and were determined in
our investigations. Orders on the floor and reports from the floor
are taken off onto the ledgers if transacted, and those ledgers existed.
Mr. Pecora. Wliat did you mean when you said:
It is now more than three years since these transactions took place, and many
of the orders and reports have been destroyed, as it is not customary for members
of the exchange to keep records of this kind for any extended period.
Mr. Whitney. I mean exactly this, Mr. Pecora: An order goes from
the telephone of a member on the floor of the exchange to a broker
to be executed, and the report comes from that member on the floor
after executing the order to that phone, and is reported to the oflSce,
and if there is an execution so reported, that is put on sheets com-
monly called purchase and sales sheets, and then are entered into
permanent ledger records. Those records existed, and all transac-
tions that took place in that Radio pool, it is my belief, we have
found on ledger records, and the report of the investigation was made
thereon.
Mr. Pecora. Then what did you mean by this portion of j^our
statement :
I regret that it is impossible to analyze every transaction which took place in
the radio pool accounts.
Mr. Whitney. From the point of view of what I went on to say
there as to reports and orders.
Mr. Pecora. Do you feel that you were hampered in any way in
making that analysis by the fact that the records referred to by you
in this pamphlet were unavailable?
2244 STOCK EXCHANGE PRACTICES
Mr. Whitney. No, sir; not in the material points.
Mr. Pecora. Or do you now say that the absence of those records
in no way hampered or impeded you in making a complete analysis
of the transactions?
Mr. Whitney. I think the analysis has been complete ,sir, in the
material points that we wished to find out and could find out.
Mr. Pecora. Why was it necessary, then, to report that it was
impossible to analyze every transaction which took place in the Radio
pool accounts and to express your regret at that circumstance?
Mr. Whitney. So that no false statement could be made.
Mr. Pecora. The Radio stock in that year was not a dividend-
paying stock, was it?
Mv. Whitney. I don't think so, no.
Mr. Pecora. It never had been up to that time, had it?
Mr. Whitney. I don't think so.
Mr. Pecora. What was the highest price reached on the exchange
for that stock prior to October, 1929?
Mr. Whitney. During that year 114%.
Mr. Pecora. 114?^.
Mr. Whitney. Yes, sir.
Mr. Pecora. What was the highest during the preceding year?
Mr. Whitney. I do not think I have any record of that. Some-
where near $.500 a share, and was split, if I remember, 5 to 1.
Mr. Pecora. So that this high of 114 that you have referred to
was after the stock had been split 5 for 1?
Mr. Whitney. Yes, sir. If I am correct in the amount. I think
it was 5 for 1.
Mr. Pecora. And when that stock reached a value of about 500 in
1928 did the exchange make any inquiry for the purpose of ascertain-
ing whether or not that valuation was completely out of line with
intrinsic value?
Mr. Whitney. We did not, sir.
Mr. Pecora. It has since been ascertained that it was very largely
out of line with intrinsic value, has it not?
Mr. Whitney. Well, I think, Mr. Pecora, there were a good many
other considerations that went into the fact of that stock selling
where it did. It was supposed to have a great many elements of
business that it was developing. The general radio field, I do not
think at that time, had been tremendously entered into by a tremen-
dous amount of competitors, and probably you are quite correct as to
intrinsic value. But how one is going to determine what is intrinsic
value I do not quite know.
Mr. Pecora. For what purpose does the stock exchange require an
applicant for listing of its stock to iile a financial statement?
Mr. Whitney. To show whether it is solvent.
Mr. Pecora. Solvent. It also gives some information as to value,
does it not?
Mr. Whitney. That is determined by the company itself. Or
rather that can be determined by a deduction of debts and the
division of the shares outstanding into what is set down as its assets.
Mr. Pecora. Do you mean to say, Mr. Whitney, that the exchange
does not seek to ascertain anything about the intrinsic or other value
of a security when application is made for the listing of that security?
Mr. Whitney. An audit, as I said, is presented by the applying
company.
STOCK EXCHANGE PRACTICES 2245
Air. Pecoea. And that is the only guidance the exchange has on
the c[uestion of the vahie of a security?
Mr. Whitney. We are not looking for the value of the security.
Mr. Pecora. Then why do you require that financial report or
audit, Mr. Whitney?
Mr. Whitney. To see that the company is a solvent company;
that it has assets.
Mr. Pecora. That it has assets?
Mr. Whitney. Yes, sir.
Mr. Pecora. Of a definite value?
Mr. Whitney'. Of a definite fact.
Mr. Pecora. You mean merely assets as assets, irrespective of the
amount of value represented by those assets? Is that what you mean?
Mr. Whitney. Yes, sir.
Mr. Pecora. Wlien a new issue is listed how is the market made
for it on the exchange?
Mr. Whitney'. If a new issue is listed the committee on arrange-
ments places that stock at a particular post on the floor of the exchange.
Some broker presumably makes a book in that stock; in other words,
becomes a specialist, and receives orders to buy and sell shares in
that stock. That is all the exchange does toward facilitating a
market.
Mr. Pecora. But the stock that is traded in as a nde is owned
onlj^ by those interested in the promotion of that stock at the outset,
is it not?
Mr. Whitney. No, sir. The exchange demands a material dis-
tribution of that stock before it may be listed.
Mr. Pecora. And the distribution or the terms of distribution are
made known to the exchange in connection with the listing application?
Mr. Whitney". The terms of distribution?
Mr. Pecora. Yes. Are they or are they not?
Mr. Whitney. I believe the number of shareholders are made
known to the exchange, and the fact that they are bona fide share-
holders, in other words, not holding the stock in one interest, although
in difl'erent names.
Mr. Pecora. Is an inquiry or investigation made by the exchange
through its hsting committee or any other agency in order to verify
or confirm the statements set forth "in the listing application?
Mr. Whitney. I do not think so; sir. I think they are certified by
the company to be true by an official of the company.
Mr. Pecora. It is easily possible
Senator Brookhart (interposing). Mr. Pecora, I have to go. I
wanted to ask him about one other thing.
In the Kreuger & Toll listing, that had no value at any time, had it?
Mr. Whitney. Well, I do not think I am competent to answer
that question. Senator Brookhart. It was thought to have con-
siderable value.
Mr. Pecora. It was thought to have, but in fact it did not have?
Mr. Whitney. That I do not know, at one time.
Senator Brookhart. These oaths you mentioned were fraudulent,
were they not?
Mr. Whitney. I beg your pardon?
Senator Brookhart. These oaths that you mentioned about the
value were fraudulent, not true?
'2246 STOCK EXCHANGE PRACTICES
Mr. Whitney. That may have been true in that situation.
Senator Brookhart. Now, what I wanted to ask you about
particularly: You do not think the stock exchange caused the infla-
tion in 1928 and 1929?
Mr. Whitney. No, sir.
Senator Brookhart. Supposing the stock exchange had stayed
closed when it was closed during the war and had not been opened at
all. Could that inflation have occurred?
Mr. Whitney. Yes, sir.
Senator Brookhart. Would it, anything like it did?
Mr. Whitney. I can only answer that in years prior to 1928
and 1929 there was greater inflation in agricultural products, farm
value, and real estate and in many other things not listed on the
New York Stock Exchange at least comparable in their inflation,
with any shares of stock listed on the New York Stock Exchange.
Senator Brookhart. The greatest inflation of land perhaps
occurred in my own State, and values never more than doubled in all
that time at the liighest peak.
The Chairman. I think the census gives it 102 percent.
Senator Brookhart. Sometliing like that. And your values
increased several hundred percent?
Mr. Whitney. Yes, sir; some of them did.
Senator Brookhart. W^ell, on an average they did. So that the
agricultural inflation is not comparable after all to the stock exchange.
Mr. Whitney. I do not think I can agree with you, Senator,
because, if I remember rightly, wheat sold at what price? You
know better than 1, the top.
Senator Brookhart. We fixed the price of wheat at $2.26 a
bushel.
Mr. Whitney. Yes, sif. Now it is selling in the 40's.
The Chairman. When comparative conditions meant that it
would have gone considerably above $2 the Government pulled it
down and fixed it there.
Mr. Whitney. And now it is selling in the 40-cent area, I believe.
Senator Brookhart. Yes; sometliing like that. And it costs
about a dollar and a quarter to produce it.
Mr. Whitney. Yes, sir; and it costs a good deal to produce the
plants of the companies listed on the exchange.
Senator Brookhart. Is it not plain to you or to anybody that if
this speculative institution had been suppressed that great inflation
of 1929 and the bursting of that bubble could not have happened?
Mr. Whitney. No, sir; it is not plain to me.
Senator Brookhart. You do not see that at all?
Mr. Whitney. No, sir.
Senator Brookhart. I believe you are the only fellow in the room
that cannot.
Mr. Whitney. I am in the vast minority.
Senator Brookhart. That is all.
Mr. Pecora. The exchange in acting upon a listing application
requires that a substantial proportion — and by that I do not neces-
sarily mean a majority of the authorized capital stock — shall have
actually been issued, does it not?
Mr. Whitney. I do not think I understand your question qidte.
The stock of a company where application is made to list must, if
outstanding, be distributed.
STOCK EXCHANGE PRACTICES 2247
Mr. Pecora. Yes; there must be a substantial portion actually
distributed?
Mr. Whitney. Yes, sir.
Mr. Pecora. The persons to whom that stock has been issued are
required to be set forth in the listing application?
Mr. Whitney. Their number, yes.
Mr. Pecora. Their number, and also the amount of shares allo-
cated or issued to them?
Mr. Whitney. In some cases, yes; where we specifically wish to
find out. I do not think that is the universal rule, that each share-
holder has to have his name against it.
Mr. Pecora. What is the purpose of that rule?
Mr. Whitney. That there shall be proper distribution of that
stock so that no action tending toward a corner could be possible.
In other words, that a free market will e.xist in the stock when listed.
Mr. Pecora. And a free market would not exist if the names shown
in the application for listing were unknown to the exchange — were
names of mere dummy holders; isn't that so?
Mr. Whitney. A free market might not exist, but on the other
hand, the company certifies that the distribution is bona fide.
Mr. Pecora. Does the exchange accept without any attempt to
confirm or check up the certification of the corporation's officers?
Mr. Whitney. That is my understanding; yes.
Mr. Pecora. Now, there was evidence presented before this com-
mittee two weeks ago, Mr. Whitney, to the eft'ect that upon the
incorporation of one of the so-called Insull companies in the State
of Illinois several hundred thousand shares of the common stock had
been issued to certain persons whose names were set forth in the
fisting application.
Mr. Whitney. To whom?
Mr. Pecora. The exchange in that case was the Cliicago Stock
Exchange.
Mr. Whitney. Yes, sir.
Mr. Pecora. An employee of Halsey Stuart & Co. was named in
that application as the person to whom 999,996 shares of common
stock in the corporation had been issued, and it developed that he
was merely a diunmy for Halsey Stuart & Co., who, as investment
bankers and dealers, thereafter sold to the public senior securities
issued by that company consisting of debentures. Could such a
thing be possible on the New York Stock Exchange?
Mr. Whitney. Mr. Pecora, naturally, if people wish to be crooked
and to make false statements, they may get away with it with any
agency or institution.
Mr! Pecora. But does the New York Stock Exchange take any
steps to confirm the statements made by the officers of a corporation
seeking to list its securities on your exchange?
Mr. Whitney. I would like to refer to the memorandum of the
committee on stock lists.
Mr. Pecora. No. Can't you tell me that from j^our own knowl-
edge, Mr. Whitney?
Mr. Whitney. 1 haven't got that of my own laiowledge. I do not
serve on the committee on stock list. That is what committees are
for. To attend to certain matters.
2248 STOCK EXCHANGE PRACTICES
Mr. Pecora. My dear sir, you have been a member of the exchange
for 21 years. You have been its president for nearly three years.
Mr. Whitney. Yes, sir.
Mr. Pecora. Can't you tell me, from the wealth of knowledge and
experience that must have come to you during those years •
Mr. Whitney (interposing). I have told you
Mr. Pecora. Whether or not the exchange affirmatively takes any
action seeking to check up or to confirm the statements made to it by
corporation officers seeking to have their securities listed?
Mr. Whitney. I do not think, unless a check is made through the
transfer agent, that any other check is made except the certified
attestation of an official of the company that the facts given are cor-
rect. Now, I believe that is all the United States Governinent asks
from any individual in reporting to them or is common in any court
of law in a legal paper.
Air. Pecora. In other words, the exchange proceeds upon the
assumption that nobody lies to it, does it?
Mr. Whitney. The exchange, I think of necessit}^, has got to take
people at their face value and that they are honest until they are
proved otherwise.
Mr. Pecora. The presumption is all in favor of the person who
makes applications as to honesty and integrity? Is that what you
mean?
Mr. Whitney. Yes; if you wish it that way.
Mr. Pecora. In the case that I spoke of — and it was elicited from
the testimony of the man who was the head of Halsey Stuart & Co.
Mr. Whitney (interposing). That was not made, Mr. Pecora,
to the New York Stock Exchange.
Mr. Pecora. Well, it was made to the Chicago Stock Exchange
and I learned that their rules and procedure are similar to yours.
Is that so or is it not?
Mr. Whitney. No, sir; not that I laiow of.
Mr. Pecora. They did not make any investigation. They took
the statements in the listing application at full face value, and that is
exactly what your exchange does.
Mr. Whitney. May I call to your attention, sir, that we have not
listed any of the Insull securities.
Mr. Pecora. I know, but the procedure of the Chicago Stock
Exchange, in the cases that I have cited, was identical with the
procedure followed by your exchange, was it not, sir?
Mr. Whitney. I do not grant that at all.
Mr. Pecora. Haven't you testified here within the last few minutes
that the exchange authorities ■
Mr. Whitney (interposing). You are talking about people
Mr. Pecora. Wait a minute — ^the exchange accepts at full face
value the sworn statements embodied in the applications for listing?
Mr. Whitney. Yes, sir; unless they are checked with the transfer
agents. Yes; I said that. No question about it. But our stock-list
committee is not the stock-list committee of the Chicago Stock Ex-
change and the executive staff of the committee of stock list of the
New York Stock Exchange is not the same as that of the Chicago
Stock Exchange; and also, sir, we will list certain securities, or we
will not list certain securities that perhaps may be listed elsewhere.
Mr. Pecora. The purpose of the exchange in requhing a distribu-
tion before listing of the outstanding stock of the corporation making
STOCK EXCHANGE PRACTICES 2249
application for listing, is to insure, so far as possible, that there will
be a free and open market for that stock when trading m it is opened
after listing, is it not?
Mr. Whitney. That is correct.
Mr. Pecora. Now, in order to assure itself of that, would it not be
necessary for the exchange to make certain that the information con-
tamed in the listmg application is honest Information?
Mr. Whitney. Mr. Pecora, that is but one of the many require-
ments
Mr. Pecora (interposing). I will come to the others.
Mr. Whitney (continuing). Demanded by the stock-list committee.
Mr. Pecora. I will come to that. For the time being let us con-
fine ourselves to that one. With regard to that one requirement,
your exchange accepts without question the information contained
in the listing application, does it not?
Mr. Whitney. From persons that we believe to tell the truth, yes.
Mr. Pecora. Have you ever Icnown of an instance where any
effort was made to check up on that particular land of information
embodied in a listing application?
Mr. Whitney. Not to my knowledge, but I do not say it has not
been done. I know that at various times we have recpiested the
same advice from companies over their attestation, the attestation of
some official of the company.
Mr. Pecora. In order to insure that the opening trades in the
security after listing will be in a free and open market, does it not
now seem necessary to you for the exchange to verify the statements
concerning the distribution of the outstanding stock which are em-
bodied in the listing applications made to it?
Mr. Whitney. No, sir; because that means the presumption of
dishonesty rather than honesty.
Mr. Pecora. In other words, you would rather discover the
dishonesty after it has come to light or after its evil efi'ects have been
manifested, than prevent the dishonesty beforehand?
Mr. Whitney. But that has not happened, Mr. Pecora.
Mr. Pecora. How do you know it has not happened?
Mr. Whitney. We have not found reason to believe that there was
not a free and open market in the shares of stock that we have listed,
or else if we have found it we have taken action upon it.
Mr. Pecora. The stock could be described in a listing appHcation
as being distributed, we will say, to A, B, C, D, and E, and it would
be conceivable or possible under the stock exchange procedure for B,
C, D, and E to be dummies of A, would it not?
Mr. Whitney". Yes, sir.
Mr. Pecora. Inasmuch as the exchange takes no precautions to
ascertain the owner?
Mr. Whitney. Yes, sir.
Mr. Pecora. In such an event A would be in a position to dominate
the opening of the market, would he not, without the stock exchange
knowing any thing about it?
Mr. Whitney. Yes, sir.
Mr. Pecora. And vou still think that the stock exchange should
do nothing affirmatively to prevent that sort of thing but should wait
until it happens and then punish those who have been responsible
for it?
2250 STOCK EXCHANGE PEACTICES
Mr. Whitney. It does not happen, Mr. Pecora, that I know of.
Mr. Pecora. Isn't that an assumption on your part?
Mr. Whitney. Assumption
Mr. Pecora (interposing). That it has not happened?
Mr. Whitney. You are asking me of my knowledge regarding
affairs to do with the New York Stock Exchange, and frankly, sir, I
do not know of any misinformation ever having been given in this
particular regard.
Mr. Pecora. Has any inquiry been made to ascertain whether or
not the information supplied to the exchange was honest information
or misinformation?
Mr. Whitney. Our basis is for a free and open market.
Mr. Pecora. That does not answer my question, Mr. Wliitney.
Will you please read the question, Mr. Reporter?
The Shorthand Reporter. Has any inquiry been made to ascertain whether
or not the information supphed to the exchange was honest information or
misinformation?
Mr. Whitney. In what way do you mean "Inquiry?"
Mr. Pecora. In any way, Mr. Wliitney, under which the stock
exchange could inquire.
Mr. Whitney. No, sir; not that I know of. I would not say that
it has not been done. I do not know of it. I do not know that there
has been occasion to make any such inquiry or that any events
occurred subsequent to its being listed, the stock being listed, which
warranted such action on our part.
Mr. Pecora. Does the listing application also inform the exchange,
Mr. Whitney, of the prices at which the stock shown to have been
issued was issued?
Mr. Whitney. That I do not know.
Mr. Pecora. Haven't you ever seen a listing application?
Mr. Whitney. Yes, sir; but I have not studied it. If I may state
what counsel tells me, in some cases they do and in some cases they
do not.
Mr. Pecora. There is no requirement of the exchange as to
whether that should or should not be set forth?
Mr. Whitney. Not that I know of, sir.
Mr. Pecora. Mr. Whitney, do you have to depend upon the
information given to you by counsel who is sitting alongside of you
in order to answer questions concerning the rules and customs of the
stock exchange?
Mr. Whitney. With regard to the details of what goes on in certain
committees, yes; or to members of that committee.
Mr. Pecora. How long does a man have to be a member of the
stock exchange or its president before he can hope to inform himself
as to such fundamental things as the information entered in the
listing application?
Mr. Whitney. I do not know that any man, president of the stock
exchange, unless he has been a member of the stock list committee,
could ever know. Counsel knows because he has gone over from a
legal point of view countless listing applications. I, Mr. Pecora,
have not gone over any listing applications. I have never served on
that committee. I meet with them on a policy occasionally, but I
I have never studied them. Those applications are studied by the
STOCK EXCHANGE PRACTICES 2251
executives, the employed executives of tliat committee in certain
cases, and then a report is given on the facts as found.
Mr. Pecora. As president since May, 1930, can you tell us now
what the requu-ements of the exchange are with respect to the kind
of information that must be given in a listing apphcation?
Mr. Whitney. I have it here and it is in the record, sir.
Mr. Pecora. No; can you give it to me from your own knowledge?
Mr. Whitney. In all the details; no, sir, certainly not. I ques-
tion whether anyone except Mr. Hoxsey, who is the "executive secre-
tary of the committee on stock lists, could do it.
Mr. Pecora. Ai'e the rules and requirements so compUcated in that
respect, Mr. Whitney
Mr. Whitney (interposing). They are voluminous.
Mr. Pecora. That the president, who has served nearly three years,
can not acquire within that time the information which I have
asked for.
Mr. Whitney. I believe that the president, if he saw fit to memorize
these facts, could do so, Mr. Pecora. If you would look at tliis
requirement for hsting, which is a printed pamphlet, you would
notice it is some 11 pages long of close print, and the accompanying
papers that have to be filed, one of which is the matter that you
have been asking about regarding distribution.
Mr. Pecora. Suppose you look at it and see if you find any rule
in there which requires a corporation making application to the
exchange for the right to Ust its shares to state the price for which the
outstanding stock has been issued.
Mr. Whitney. That will take some time, Mr. Pecora. I have
no idea that that is a requirement. In that connection may I state
that in many, many instances securities are listed long after any sale
or attempted sale of those securities has taken place. In other
instances they are listed at approximately the time the sale is taking
place. But it is rare that we will list the securities of any company
where it is just going info organization, although we will list new
sscurities of companies that already have securities listed with us.
Mr. Pecora. I am talking about applications for original listings.
Mr. Whitney. With relation to the original hsting I find no
demand that the information suggested by you is asked for. WTien a
company wishes to make additional hstings of securities, of shares,
then we ask, among a great many other questions, the purpose of the
issue, the application of the proceeds, the amount, description and
disposition of the securities exchanged for new issues, and so forth.
I do not find that the price at which a stock is sold to the public or
offered for sale is demanded by us.
Mr. Pecora. I have not asked about that, Mr. Whitney; I have
asked whether or not there is any requirement or rule of the stock
exchange in connection with applications for original hstings that the
price paid for the shares already issued should be shown in the hsting
application.
Mr. Whitney. Are you not speaking about, when you say the
shares that are issued, "their being ofl'ered for sale? That is what I
have been gomg on, Mr. Pecora.
Mr. Pecora. Or being offered for sale. All right; have it that way.
Mr. Whitney. That is not asked. I stated that.
13 9852— 33— PT 6 32
2252 STOCK EXCHANGE PRACTICES
Mr. Pecora. In the case of the company of which I spoke a little
while ago, it developed also that nearly 2 million shares of the com-
mon stock of the company making the application for original listing
on the Chicago Stock Exchange had been issued to a few individuals
who caused the company to be incorporated, at a price of $7.54 a
share, and that two days after such issuance trading in the stock was
opened on the Chicago Stock Exchange at $30 a share, and on the
second day's trading the price had gone up to $40 a share. Would
such a thing be possible on the New York Stock Exchange under the
rules and requirements that it has for listing securities?
Mr. Whitney. All things are possible, Mr. Pecora.
Mr. Pecora. Would that be possible, just that?
Mr. Whitney. You are using a hypothetical question of an actual
company which was not making application to the New York Stock
Exchange.
Mr. Pecora. Would that operation have been possible under the
rules of the New York Stock Exchange, if that had been the arena of
action instead of the Chicago Stock Exchange?
Mr. Whitney. As a hypothetical question I presume it might have
been possible. I will not grant, however, that that security could have
been listed on the New York Stock Exchange, and I have tried to
point out to you that our investigation, our requirements, and the
fulfillment of those requirements, axe more stringent than any other
stock exchange in the world.
Mr. Pecora. And yet those requirements do not include an inquiry
in some concrete, definite, authenticated way into the real value or
intrinsic value, as you please, of its stock?
Mr. Whiteny. I do not see that that advice would change the
situation in the hypothetical case that you cited, Mr. Pecora.
Mr. Pecora. W'ell, would it not change the situation in this respect,
that if, from information of that sort given to the exchange in the
listing application, it learned, for instance, that the stock was valued
by its promoter at $10 a share and that on the opening trades it sold
at $40 or $50 a share, there would be evident inflation of value in the
public market right at the outset?
Mr. Whitney. Such a situation might exdst; yes.
Mr. Pecora. And could e.xist to-day so far as the exchange has
taken any precautions against it; could it not?
Mr. Whitney. I think that is true. May I point out to you that
there were frequently issues brought out in 1928 and 1929 where the
stock was offered at a price and entirely subscribed for, and the very
day that those particular securieties were made available for trad-
ing in the open market they sold at 10, 20, 30, and sometimes 50
points above the issued price, at which price they had all been sold.
I do not see where the exchange is going to have a control of what
the price of that stock is if the market is made free and open.
Mr. Pecora. It is quite apparent from your testimony to-day, that
the exchange assiduously avoids having such a control.
Mr. Whitney. We do not have such a control.
Mr. Pecora. And you avoid having such a control, do you not?
Mr. Whitney. Of evaluating securities?
Mr. Pecora. Yes.
Mr. Whitney. Of course
Mr. Pecora (interposing). In any way, shape, or form?
STOCK EXCHANGE PRACTICES 2253
Mr. Whitney. That is in so far as the appHcation for hsting is
concerned. If transactions on that stock thereafter are improper
and contrary to decent conduct and decent methods of doing business,
they are taken immediately into consideration and control is exercised.
Mr. Pecora. Now, you admitted in your speech at Cleveland yes-
terday, and you have indicated the same tiring in your testimony
to-day, that there was a great inflation of securities values in 1928 and
1929; is that correct?
Mr. Whitney. I stated that there was inflation.
Mr. Pecora. You admit that now in tliis year of 1933, don't you?
Mr. Whitney. And I have for a long time" past.
Mr. Pecora. For a long time — since 1929?
Mr. Whitney. Yes, sir.
Mr. Pecora. And yet you were not able to see the processes of
inflation while they were actually in operation in 192S and 1929;
isn't that so?
Mr. Whitney. It may be so. I do not think it is fair.
Mr. Pecora. Whether it is fair or not, is it so? If it is a fact it
is fair, isn't it?
Mr. Whitney. Did you?
Mr. Pecora. I am not a broker and I am not president of the
New York Stock Exchange and I have no duties to tlie public in that
regard, because I furnish no facilities for trading in securities to the
public. Now will you answer my question?
Mr. Whitney. I wish to Heaven that I had had that insight into
situations at that time, Mr. Pecora. I did not.
Mr. Pecora. Then the same tiling that happened in 1928 and 1929
conceivably could happen in 1936 and 1937?
Mr. Whitney. Conceivably.
Mr. Pecora. Yes.
Mr. Whitney. And we have made suggestions to prevent it in so
far as we see that possibility.
Mr. Pecora. Now tell us just what you have done to prevent that
situation from recurring.
Mr. Whitney. We have concretely endeavored and been endeav-
oring for years for more and more complete and more frequent infor-
mation to be given by corporations to shareholders and made avail-
able to them.
Mr. Pecora. Now let me ask you fu'st about that: You have not
reached the point of requiring defmite information of the price at
which the stock of a company seeldng to list its shares on your
exchange has been issued, have you?
Mr. Whitney. Mr. Pecora, if I understand you rightly
Mr. Pecora (interposing). Well, if you do not, please tell me.
Mr. Whitney. If I understand you rightly, that fact is public
knowledge in almost every case.
Mr. Pecora. What are the facilities — what are the media through
which it becomes public knowledge?
Mr. Whitney. The newspapers, the offerings of that stock by
bankers and dealers that are merchandising it. We do not take
securities on the New York Stock Exchange until they have been
distributed.
2254 STOCK EXCHANGE PRACTICES
Mr. Pecora. I know that, and the price at which they have been
distributed would be
Mr. Whitney (interposing). That is piibUc knowledge.
Mr. Pecora (continuing). Some indication to the e.xchange of their
vahie, would it not?
Mr. Whitney. I do not doubt that the executives of the stock list
committee have that information. What I am saying to you is that
we do not require it in the application.
Mr. Pecora. So that if they have that information they have it
by force of some fortuitous circumstance?
Mr. Whitney. Yes; and I do not see where that has a bearing
upon the application, sir.
Mr. Pecora. It has a bearing in so far as it tends to inform the
exchange of the value of the security so that if it was traded in after
listing at a price far beyond that figure the exchange officials would
thereby gain some knowledge or information that the opening
market was maintained as as result of manipulation.
Mr. Whitney. Sir, the committee on stock list has no control
whatever in that direction. They list a security. They are through
with it when they have presented it and recommended its listing to
the governing committee. The governing committee either ap-
proves or disapproves, and the next day that is put upon the stock
exchange. What the stock sells for after that time has no relation to
the committee on stock list whatsoever in general.
Mr. Pecora. Has it any relation to anybody in the stock exchange?
Mr. Whitney. Absolutely. That is what I was going to say. And
then it comes under the other committees in respect to their duties,
more particularly probably the business conduct committee.
Mr. Pecora. In 1928 or 1929 when, as you are now able to see,
there was inflation of securities values to an unprecendented extent,
the exchange officials were unable to see the processes by which that
inflation was eft'ected — is that a correct statement?
Mr. Whitney. I think it would be unfair for me to presume to
state what the opinions were of the officials of the exchange at that
time. I tried to give you my own, that I did not have the insight or
foresight to see what was going to happen in the calamitous way it
has happened.
Mr. Pecora. Do you know anybody in the stock exchange in 192S
and 1929 who perceived the processes of inflation then in operation
and made a public pronouncement about it?
Mr. Whitney. Not that I know of, public pronouncement; no, sir.
Mr. Pecora. Did they make private pronouncements about it?
Mr. Whitney. I believe there have been many men who believed
that the inflation had gone to ridiculous lengths; yes, sir.
Mr. Pecora. But the investing public was not given the benefit
of that knowledge or belief, was it, through any public pronouncements?
Mr. Whitney. Not so far as I know, public pronouncements, no.
Mr. Pecora. So that the investing public continued to rush into
the market and buy securities at inflated prices during those two years?
Mr. Whitney. As hindsight now shows it.
Mr. Pecora. So far as you can tell us, what has been done to
prevent a recurrence of that in the future by the exchange?
Mr. Whitney. I started to, Mr. Pecora, and you asked me another
cjuestion. And that is that we believe and have been working steadily
STOCK EXCHANGE PRACTICES 2255
toward the giving of complete, full and adequate information by
companies to their shareholders, or the public, I should say.
Mr. Pecora. What have you done along those lines?
Mr. Whitney. What have we done?
Mr. Pecora. Yes, sir.
Mr. Whitney. We have arrived a long ways toward getting that
information.
Mr. Pecora. Now you are stating a conclusion. What have you
done? Wliat are the acts which have been undertaken or performed
or committed by the exchange, supporting the conclusion you have
just expressed?
Mr. Whitney. I refer you to our listing requirements which are
far more full and complete. I refer you to our
Mr. Pecora (interposing). Can't you tell us without putting us to
the burden of reading a long and complicated document?
Mr. Whitney. I think I can tell you a great many of the points.
Mr. Pecora. Will you please do it?
Mr. Whitney. That is one. In seeking listing we are far more
demanding in tlie details of answers given us. We have since April
1932 demanded of all companies seeking listing or additional listing
independent audits. We have requested and have achieved the
publication of quarterly reports, or if not quarterly reports, semi-
annual reports, where possible. We have acliieved in that way the
greatest cooperation from our corporations. They have to move
slowly, because great wheels have to be changed in their progress,
but we have done, I believe, Mr. Pecora, as much as we can to date
to safeguard investors who are interested in securities listed on the
New York Stock Exchange.
Mr. Pecora. Along that line, what specifically has been done to
indicate to it anything of a tangible character which will enable it to
determine that market quotations might be greatly in excess of
actual values?
Mr. Whitney. Mr. Pecora, if proper information and frequent
information is given with relation to the activities of corporations no
one in the world can dictate to the individual as to whether or not he
will buy or sell those securities. If the information is put before them
it is their duty to choose and to study it.
Mr. Pecora. Wliat has been done by the exchange to enable it to
ascertain when a quotation might be far in excess of actual value?
Anvthing at aU? . .
Mr. Whitney. No, sir; because we do not evaluate securities.
We can not do that, sir.
Mr. Pecora. Why can you not do it?
Mr. Whitney. Because who can judge?
Mr. Pecora. Do you mean to say that it is impossible for anyone
to judge the real value of a security?
Mr. Whitney. You are talking about the market value?
Mr. Pecora. I am talking about both market and real values, am
I not?
Mr. Whitney. I think it is impossible.
Mr. Pecora. You think it is impossible for anyone to ascertain
the real value of a security?
Mr. Whitney. It depends on what you call real. You may be
able to get book worth as of today that may change tomorrow.
2256 STOCK EXCHANGE PEACTICES
Mr. Pecora. Well, what do you call real value?
Mr. Whitney. I do not know. The nearest
Mr. Pecora. Wliat do you call inflated value?
Mr. Whitney. ^Mien there seems to be no real eciuation between
the price and the earning power or what is said to be the asset value
of the corporation.
Mr. Pecora. Then does not earning power indicate to a certain
extent real value?
Mr. Whitney. I think it has a great deal to do with the proper
price at which a security should sell, and it is along that very line
that the exchange is seeking to get that information to those that are
interested so they can govern themselves accordingly.
Mr. Pecora. If you were contemplating the purchase of stock for
investment purposes you would find it possible, would you not, to
learn from something outside of mere market quotations what real
or asset value was?
Mr. Whitney. Yes, sir. And the only way I could do that is, just
as I have said, by studying the information given by that particular
corporation as to its financial structure.
Mr. Pecora. Does the exchange call for information of that sort
from time to time from the corporations whose securities are listed?
Mr. Whitney. Yes, sir.
Mr. Pecora. Does it make it a rule to call for those reports periodic-
ally or at regular intervals?
Mr. Whitney. Yes, sir.
Mr. Pecora. And what is done with those reports when they are
received by the exchange?
Mr. Whitney. Thej' are received by the committee on stock list
and, as I understand it, they are compared with the agreement by that
company in its application to make such and such reports along such
and such lines, to see that it follows that agreement.
Mr. Pecora. I am talking about the obtaining of those rejjorts
from a company whose stock is already listed.
Mr. Whitney. So am I, sir.
Mr. Pecora. All right. Now, as the result of the procurement of
these reports the exchange authorities are enabled to get some definite
information bearing upon the real value of the security, are they not?
Through the medium of these financial reports that you have referred
to?
Mr. Whitney. They can determine book worth; yes, I imagine so.
Mr. Pecora. All right. Now, thereafter if the quotations in the
stock are far in excess of the book value or asset value or any other
value, call it what you will, reflected by the financial statement given
to the exchange in response to its call, does the exchange do anything,
as a matter of course, or under any rule?
Mr. Whitney. About it?
Mr. Pecora. About it?
Mr. Whitney. No, sir.
Mr. Pecora. Do you not think the exchange might do something
with advantage to the investing public toward preventing the inflation
of a security to a price far beyond the values shown by the company's
own reports to the exchange?
Mr. Whitney. I would be delighted to be advised as to how the
exchange could do it, Mr. Pecora. Frankly realizing that between
STOCK EXCHANGE PRACTICES 2257
reports tremendous orders may be given to that company, as happened
during the war, and as happened during great times of prosperity in
1927, 1928, and 1929, I do not see how, as I said before, the exchange
can set itself up as an oracle and dictate that General Electric is
worth $15 a share, that United States Steel is worth $25. That might
change hour by hour.
Mr. Pecora. Let us take a supposititious case. Let us take the
case of a corporation listed on the exchange whose financial reports,
submitted periodically to the stock exchange, show an asset value
for its stock of $50 a share. Suppose the market quotation should go
up to $100 or $150 a share; would the exchange do nothing about it?
Mr. Whitney. It would not. Might I call to your attention
certain corporations that exist that have practically no asset value
whatsoever. They have a plant and they produce a product that is
world-wide and known throughout the world. Their asset value in
that instance has no relation to the price of that stock. That is
based, I would believe, entirely upon its earning capacity. And that
may vary with the days, with the weeks. Wlio is to set liimself up
as the dictator of what prices should be day by day is beyond me,
frankly. If you can suggest how we could help toward that end to
give information to that dictator who would make those pronounce-
ments we would be willing to help as much as we could. How the
New York Stock Exchange could do it is beyond my conception.
Mr. Pecora. Those prices way above asset values indicated by the
company's own financial reports are of no concern to the exchange
then, are they?
Mr. Whitney. From the point of view of being
Mr. Pecora. From any point of view?
Mr. Whitney. Of being
Mr. Pecora. From any point of view.
Mr. Whitney. Well, yes; from some points of view. Because if
there seems to be something going on at a price that together with
other facts seems totally out of line, I think the business-conduct com-
mittee without fail would look into it to see that there was a free and
open market.
Mr. Pecora. Did the business-conduct committee correct any
situation in 1928 and 1929 which contributed to the inflation of
security values?
Mr. Whitney. I think the business-conduct committee sent out
various questionnaires on particular stocks that seemed to be acting
in an untoward way.
Mr. Pecora. Did the business-conduct committee when it got the
answers to those questionnaires give the information to the investing
public?
Mr. Whitney. The residt of those questionnaires that I have any
knowledge of is that they almost invariably have corrected the wrong
condition of the market, the price, merely by the sending out of the
questionnaire.
Mr. Pecora. Well, they did not do it in 1928 and 1929, did they?
Mr. Whitney. I believe there were certain instances; yes, sir.
Mr. Pecora. In some instances?
Mr. Whitney. Yes.
Mr. Pecora. But in the main it did not have that eff"ect, did it?
2258 STOCK EXCHANGE PRACTICES
Mr. Whitney. It was only in those cases where there was some-
thing going on that should not be and over which we did not ha ,e
control.
Mr. Pecora. And you are unable to suggest after 20 years' experi-
ence as a member of the exchange and as its president for nearly
three years anything that the exchange might do to protect the
investing public against inflated values reflected by market cjuota-
tions?
Mr. Whitney. I did not say that, Mr. Pecora.
Mr. Pecora. Well, you asked
Mr. Whitney. I said that I did not know how the exchange or
anybody connected with the exchange could value prices. I tried
to say that the exchange was doing everything in its power, from the
point of view of information to the public, to any that are interested,
so that they would have at hand the facts frequently regarding their
corporations or what corporations they wanted to get the facts about.
I also advised yesterday that I believed and that we believe in some
kind of uniform corporate laws for incorporation of companies.
Mr. Pecora. But you do not believe in any incorporation law for
the New York Stock Exchange, do you?
Mr. Whitney. I do not. I have explained that before this com-
mittee before, and briefly to you this morning. It would take away
the power of the governing committee to act.
Mr. Pecora. And would lodge it somewhere else, would it not?
Mr. Whitney. There would be the recourse to court action, which
would totally prevent the exchange exercising its immediate control
of its members.
Mr. Pecora. And that is what the exchange does not want to
surrender or have abrogated, limited or qualified in any way?
Mr. Whitney. We do not wish that control because we feel the
entire essence of the conduct of the exchange would be done away
with.
Mr. Pecora. With all that power which the exchange is jealous of
and does not want to surrender in any respect to any public authority,
the exchange officials were unable to perceive in 1928 and 1929 that a
tremendous inflation of security values was going on?
Mr. Whitney. I did not say that, Mr. Pecora.
Mr. Pecora. Well, you said you could not see it at the time?
Mr. Whitney. I did. I said that I could not see it. But I did
not say
Mr. Pecora. You do not loiow any one else connected with the
exchange who made any public pronouncement of views that he had?
Mr. Whitney. Public pronouncement; no, because I do not think
it is a part, even if they had them, of exchange officials — and I
have tried consistently to say that this afternoon — to make pubhc
pronouncement as to what is the proper value of this share of stock or
that.
Mr. Pecora. Is it not a fact that pools operating in securities
very often operate under options given to them for large blocks of
stock in the security in which they desire to operate?
Mr. Whitney. That may be so.
Mr. Pecora. Is there any rule or requirement of the exchange
that the giving of such options should be reported to the exchange?
Mr. Whitney. No, sir.
STOCK EXCHANGE PRACTICES 2259
Mr. Pecora. Do you not think that information derived under
such a rule would put the exchanp;e authorities in a position where
they could more easily learn of the existence of a pool to artificially
affect market values?
Mr. Whitney. I do not think that it would give the exchange more
easily the information in that regard; no, sir.
Mr. Pecora. Those options are secret options, are they not?
Mr. Whitney. You mean in so far as the exchange is concerned
or the public is concerned?
Mr. Pecora. Yes.
Mr. Whitney. I presume so. Just as any contract between one
person and another is secret.
Mr. Pecora. And one of the reasons for their secrecy is to enable
the members of the pool or syndicate safely to conduct their operation,
is it not?
Mr. Whitney. I frankly have never looked upon it in that light.
Mr. Pecora. Suppose you ponder that for a moment.
Mr. Whitney. When one makes a contract, Mr. Pecora, you do not
make it public to the world.
Mr. Pecora. Are not contracts made public to the world?
Mr. Whitney. In some instances.
Mr. Pecora. Do you not know that there are many statutes
passed by the several States and by the Government that require
that publicity be given to important contracts of certain kinds?
Mr. Whitney. Very likely, if you say so. I did not know it. I
do not know what the certain kinds are that you refer to.
Mr. Pecora. Your exchange has very able counsel, Mr. Whitney,
and I have not any doubt they will inform you of many such instances
as I have referred to.
Mr. Whitney. I do not doubt it, Mr. Pecora. I am not in any
way attempting to take exception. But I do not see anything inher-
ently wrong in having a contract to purchase shares of securities
and not giving that to the public.
Mr. Pecora. Where those contracts, as you are pleased to caU
them, or options, as I \vill refer to them
Mr. Whitney. The same thing.
Mr. Pecora (continuing). Are given to members of a pool it is the
possession of such an option and the rights under it that enable the
pool to operate, is it not?
Mr. Whitney. That may be; yes.
Mr. Pecora. It gives the pool definite assurance that they can
call upon persons giving them the option for a specified number of
shares at a specified price, does it not?
Mr. Whitney. Yes; that is what options are.
Mr. Pecora. And within a certain specified period of time?
Mr. Whitney. Yes, sir.
Mr. Pecora. Have you ever worked under such an option?
Mr. Whitney. I do not know of any, Mr. Pecora.
Mr. Pecora. Some evidence was given here within the last few
days of the giving of an option to the firm of Dominick & Dominick.
for some 32,000 shares of the capital stock of the National City Bank,
which at the time was an unlisted security. The option was given at
prices ranging 10 points below the market. Have you heard of
2260 STOCK EXCHANGE PRACTICES
similar things being done with regard to securities listed on the
exchange?
Mr. Whitney. I haven't that in my knowledge in detail. Such
options I know are given; yes, sir.
Mr. Pecora. At prices below the market?
Mr. Whitney. I would believe that the more common way of
giving options is at prices below the market and ranging to prices
above the market. The average might be approximately what the
market was at that time.
Mr. Pecora. And do you see any objection to the giving of those
options secretly?
Mr. Whitney. I do not.
Mr. Pecora. Do you think that it is a practice that should not be
interfered with in any way?
Mr. Whitney. It is the merchandising practice, sir, for the dis-
tribution of stock or securities or whatever it may be.
Mr. Pecora. It is a practice often resorted to to enable persons
through pool operations to manipulate prices, is it not?
Mr. Whitney. You do not refer in this instance to Dominick &
Dominick?
Mr. Pecora. I am referring to an abstract case, Mr. Whitney.
Mr. Whitney. I will ask to have that question repeated.
(Thereupon the question was read, as above recorded, as follows:)
Mr. Pecora. It is a practice often resorted to to enable persons through pool
operations to manipulate prices, is it not?
Mr. Whitney. Yes; with the reserve with regard to the word
"manipulate."
Mr. Pecora. Is there anything about that word which is harsh or
displeasing?
Mr. Whitney. I think the word is usually used in the sense that
some wrongdoing entails to it.
Mr. Pecora. Have you not heard that pool operations are often
conducted for the purpose of pegging prices artificially so as to
enable pool members to sell to the investing public the shares which
they meanwhile have accumulated? In other words, by exciting or
stimidating the demand through their own buying and selling opera-
tions do they not often lead the public to pay higher prices in the
market than the security is actually worth?
Mr. Whitney. I have never luiown of a pool, Mr. Pecora, that
was successful in merchandising or selling its securities unless its
operation was in accordance with the trend of the market at that
time.
Mr. Pecora. Do you think that the operations of 1928 and 1929
were in accordance with a normal trend of the market? Or do you
think that they were in accordance with an artificial trend?
Mr. Whitney. I think the market did what it did in 1928 and
1929 largely on its own resources, without any operations as you
state. I would refer you to United States Steel. I would refer you
to General Electric. To New York Central. To General Motors.
To a hundred, two hundred, three hundred others, where I have never
heard, sir, that there was a pool in operation.
Mr. Pecora. In those instances, Mr. Wiitney, would you say
that the peak prices reached on the exchange for those securities,
were justified by the earnings' statements?
STOCK EXCHANGE PRACTICES 2261
Mr. Whitney. Just at that time, yes. I will not say all. Now,
let me
Mr. Pecora. No. Well, you will not say all?
Mr. Whitney. But in large measure the earnings of those corpora-
tions justified their prices at the time.
Mr. Pecora. Would you say that about Radio in 1928 and 1929?
Mr. Whitney. I tried to explain Radio was what is called a mystery
stock.
Mr. Pecora. Wliat characteristics must a stock have in order to
come watliin that classification of a mystery stock?
Mr. Whitney. I do not quite know, except that people believe or
say — there are rumors that the company has undeclared profits,
that is has undeclared inventions, patents, contracts, and those are
the very things, sir, that we are trying to have adjusted by more
complete, more detailed, and more frequent information regarding
those corporations that are listed.
Mr. Pecora. And when you get that information you say that
even if the quotations went far beyond the prices or values given by
those statements the exchange would do nothing about it?
Mr. W^hitney. I did not think that we had received any values.
We received the information upon which anybody interested in the
purchase or sale of those securities could base their opinion.
Mr. Pecora. Do you make that information available to the
public?
Mr. Whitney. Yes, sir.
Mr. Pecora. How?
Mr. Whitney. It is available to the public to anybody that wants
to apply at the exchange, and we also demand under certain condi-
tions that these reports to us wall be made public where there are
quarterly reports. It is only, as I understand, that we demand an
audited statement once a year, but we call for quarterly or semi-
annual reports which shall be published and made available also to
the shareholders.
Mr. Pecora. And anyone can go down to j-our exchange and have
ready access to those financial statements?
Mr. Whitney. Anybody in the world; yes, sir. We can not give
copies of those out indefinitely, because we have not got them, but
anj^body may come and look at our files at any time.
Mr. Pecora. Has any public pronouncement ever been made of
that by the exchange?
Mr. Whitney. I think I have said it myself; yes, sir, publicly.
Mr. Pecora. You have referred on various occasions during the
day to the Manhattan Electric Supply issue in wliich the exchange
took some action because it found that pools had operated in violation
of rules.
Mr. Whitney. Individuals, sir.
Mr. Pecora. That is individuals
Mr. Whitney. If my memory serves me.
Mr. Pecora (continuing). Who were members of the pool?
Mr. Whitney. If you wash it. I would not call it a pool.
Mr. Pecora. Upon whom was the disciplinary action of the ex-
change visited?
Mr. Whitney. In the first case we found no misconduct on the
part of our members. We found a misconduct on the part of in-
2262 STOCK EXCHANGE PRACTICES
dividiials connected with the company, and I beheve a firm that pre-
viously had been^ — or individual that previously had been connected
with our exchange. In that the information, or that the facts showed
that it was beyond our specific control we turned it all over, every-
thing, to the office of the attorney general of the State of New York.
That was in the first instance.
In the second instance I believe some of the same men were operat-
ing, washing stock, and because if greater care, greater scrutiny had
been used by one of our members who allowed the facilities of liis
office to be wrongfully used, perhaps these transactions could not
have taken place. Certainly not through him. And he was sus-
pended for five years.
Mr. Pecora. Does the exchange enforce a uniform system of ac-
counting upon the corporations whose securities are listed?
Mr. Whitney. No, sir. That would be impossible.
Mr. Pecora. Why?
Mr. Whitney. Well, I tliink that is self-evident. That a railroad,
an oil company, a manufacturing company, a motor company, can
not have the same form of accounting.
Mr. Pecora. Well, might it not devise separate forms of account-
ing for different classifications like industrial stocks in one class,
railroad stocks in another, and so forth?
Mr. Whitney. Possibly. Of course the Interstate Commerce
Commission dictates as to railroads. The New York Stock Exchange,
particularly through Air. Hoxsey has been in the closest touch with
the American Institute of Accountants for some years in this particu-
lar regard. And there was appointed by that institute a committee
which was entitled "The committee to cooperate with stock ex-
changes." That subject, if I may briefly add to what I have said,
Mr. Pecora, has been having the riiost extreme care and investiga-
tion and attention by that committee and our own representatives.
And we have adopted, or there has been adopted the Federal Reserve
Board's so-called minimum requirements for corporate accounting by
the exchange with relation to corporations that seek listing. That is
an evolutionary process.'
Mr. Pecora. You said this morning in answer to a question that
Senator Brookhart asked you that you do not favor limiting specula-
tion of any kind? Am I correct?
Mr. Whitney. I said I did not favor limiting speculation of any
kind with reference to his question as to speculation on the exchange,
and I had in mind also speculation in its true and proper sense.
Mr. Pecora. Wliat is the true and proper sense of speculation in
which you use that term?
Mr. Whitney. I think speculation, sir, has built this country.
Mr. Pecora. What is the improper sense in which that term
"speculation" is used?
Mr. Whitney. Wiere the word "speculation" is used when denot-
ing gambling.
Mr. Pecora. Would you say that speculative trading of that
character in issues listed on the stock exchange is indulged in?
Mr. Whitney. In the main, no. The line of distinction I grant
is delicate.
Mr. Pecora. Wliere do you draw it?
STOCK EXCHANGE PRACTICES 2263
Mr. Whitney. Personally I draw it: Wliere a man speculates he
buys something for a rise or with a possibility of loss that he can not
liimself at the time of purchase or sale determine. A gambler gambles
for a fixed sum and can not lose more.
Mr. Pecora. Do you not tliink that a very considerable amount
of trading of that kind is indulged in on the stock exchange?
Mr. Whitney. Not in a true sense, Mr. Pecora, no. If you will
specifically tell me what you have in your mind I will answer it the
best I can.
Mr. Pecora. What I have in my mind is the very kind of specu-
lation that you have defined as gambling.
Mr. Whitney. That can not be so in the main in stock exchange
transactions.
Mr. Pecora. Why can it not be so, Mr. Whitney?
Mr. Whitney. Because you buy a hundred shares of stock; you
never know what you are going to get out of it, at either up or down.
Mr. Pecora. Well, is that the element that takes it out of the
gambling classification of speculation?
Mr. Whitney. As I tried this morning to say, the dift'erence be-
tween speculation and investment lies in the intent. The investor
buys to hold thinking or expecting to have security in his capital and
because of the income therefrom. A specidator buys in order to have
an appreciation in the capital.
Mr. Pecora. And the gambler buys for what purposes?
Mr. Whitney. The gambler — well, I say there is a small distinc-
tion. I use the word in so far as the purchase or sale of securities, or
commodities, or real estate, or whatnot is concerned, that that is not
gambling. It is speculation.
Mr. Pecora. Well, what would constitute speculation of the kind
that you would classify as gambling?
Air. Whitney. I do not know what there is. That is what I have
said.
Mr. Pecora. You have said that there was a delicate line be-
tween
Mr. Whitney. There is a delicate line.
Mr. Pecora (continuing). Between the right kind of speculation
and the gambling kind of specidation, so that you must have some
idea of what constitutes the Idnd of speculation you characterize as
gambling in order to recognize that there is a delicate line dividing
the two classes?
Mr. Whitney. Yes, sir; I grant it. I suppose that an individual
who bought 100 shares of stock hoping that the market was going to
carry up and then immediately tried to sell it, that would hardly be
called a speculator in the true sense. Although without his will be
may be a speculator in the true sense. But Iris intent may be merely
to gamble. Just as a man may risk a dollar on the flip of a coin.
Mr. Pecora. So that it is all a nuxtter of intent wluch controls?
Mr. Whitney. It seems to me so, yes.
Mr. Pecora. How do you determine the intent of a traders in his
market operations?
Mr. ■\A hitney. How do I? I do not know what his intent is, sir.
Mr. Pecora. Then how are you able to recognize any line that
distinguishes an honest or proper kind of speculative trading from an
2264 STOCK EXCHANGE PRACTICES
improper land or gambling Idnd, if you have no way of ascertaining
the intent?
Mr. Whitney. I have not, Mr. Pecora, any more than I know
whether a man buys shares — officially I can not know when a man
buys shares of stock on the exchange whether lie is an investor or a
speculator.
Mr. Pecora. Then as far as you know to the contrary the majority
of the speculative buying might be of the gambling variety, might
it not?
Mr. Whitney. I do not think so, sir.
Mr. Pecora. What is your test for determining it? If you say
that intent is the test and you are unable to ascertain intent, how
could you say whether it is or not?
Mr. Whitney. I say I do not think so. I do not say that it is
not. I do not think so. The very fact that individuals, particularly
in the specidative era of 1926, 1927, 1928, and 1929, in there— with
brokers' loans denoting large margin accounts, or a large volume of
margin accounts, when they mounted so, that denotes to my mind,
and I think to any fair-minded person, a great wave of speculation
and not gambling.
Mr. Pecora. Mr. Chairman, I suggest that recess be now taken.
I do not want it understood that this concludes my examination of
Mr. \^^[^itney. But at some future time I shall resume this with the
permission of the committee.
The Chairman. The committee will adjourn until tomorrow at
10 o'clock. The witnesses will appear at that time. You are
excused for the time being. You need not be here, Mr. Whitney.
Mr. Whitney. Thank you. Senator.
(Thereupon, at 4.50 p. m., Wednesday, March 1, 1933, an ad-
journment was taken until 10 o'clock a. m. the next day, Thursday,
March 2, 1933.)
STOCK EXCHANGE PRACTICES
THURSDAY, MARCH 2, 1933.
United States Senate,
Subcommittee of Committee on
Banking and Currency,
Washington, D. C.
The subconiniittee met, pursuant to adjournment on yesterday,
at 10 o'clock a. m. in room 301, Senate Office Building, Senator Peter
Norbeck presiding.
Present: Senators Norbeck (chairman), Walcott and Carey.
Present also : Senator Brookhart.
Further present: Ferdinand Pecora, special counsel to the com-
mittee; Jidius Silver and David Saperstein, associate counsel to the
committee.
The Chairman. The subcommittee will come to order.
Mr. Pecoea. Mr. Mitchell.
FURTHER TESTIMONY OF CHARLES E. MITCHEII, NEW YORK
CITY
(The wdtness was sworn on his prior appearance before the com-
mittee.)
Senator Brookhart. Mr. Chairman, I would like to ask Mr.
Mitchell a few questions. I have to go in just a few minutes.
The Chairman. Very well. Proceed, Senator.
Senator Brookhart. Mr. Mitchell, Mr. George E. Roberts is a
vice president of the National City Bank, is he not?
Mr. Mitchell. That is true.
Senator Brookhart. Is he still vice president?
Mr. Mitchell. He is. He has a title of economic ad\asor in
addition to his ^^ce presidency.
Senator Brookhart. In addition to being vice president. "VS hat
is his salary?
Mr. Mitchell. I can not be certain from memory, but I should
say offhand that it was $25,000.
Senator Brookhart. Does he have any bonus then?
Mr. Mitchell. He has participated in the management fund;
ves, sir.
Senator Brookhart. Do you know what that amounts to?
Mr. Mitchell. No; I can not tell you, Senator.
Senator Brookhart. Can you give an approximate idea?
Mr. Mitchell. No; I reallv could not. . .
Senator Brookhart. Have 'you records here so you can put it in
the record later?
2265
2266 STOCK EXCHANGE PRACTICES
Mr. Mitchell. I can give it to you; yes, sir. I do not think that
we have anything here. I think I will have to introduce it later; I
will have to send it to you, Senator.
Senator Brookhart. Well, his participation would be a good deal
more than his salary, would it not?
Mr. Mitchell. 1 should judge not.
Senator Brookhart. It would up to 1929?
Mr. Mitchell. I should judge not. But it would be a matter of
record.
Senator Brookhart. I will have you put it in the record. Now he
controls a big newspaper out at Fort Dodge, Iowa; I believe his son
is in charge of it now, or in control of it. And that paper has very
strongly advocated the reduction of Government salaries, and I
wanted to know something about Ms own situation.
Mr. Mitchell. I did not know that he owned, controlled, or in any
way managed or had anytliing to do with a newspaper in Fort Dodge,
Iowa.
Senator Brookhart. I learned from a Fort Dodge man tliis morn-
ing that he still has charge of it tlirough his son. And he has had it,
I know, before that for a long time. And I wonder if you have
any other vice presidents controlling newspapers over the United
States.
Mr. Mitchell. No, sir. And I would doubt very much indeed
if tluit could be substantiated with respect to Mr. Roberts. I have
never heard of it. I never have heard of Mr. Roberts doing any writ-
ing or paying any attention whatsoever to any outside interest of
that character.
Senator Brookhart. I heard of it this morning from the most dis-
tinguished citizen of his town, so I think it is not a wild rumor. And
I have heard of it in former years myself.
Mr. Mitchell. All I can say is that I never have heard of it.
Senator Brookhart. Then if you will put those figures in the
record, why that is all I will ask at this time.
(Thereafter a letter, supplying certain information desired of the
witness, was received by the chairman, which is made a part of the
record, as follows:)
New York, March 4, 1933.
Senator Pbtek Norbeck,
Chairman Subcommittee, Senate Office Buildinq,
Washington, D. C.
My Dear Senator Norbeck: In compliance with the request that Senator
Broolihart made of Mr. Mitchell at the hearing yesterday in Washington, I
advise you that the salary of Mr. George E. Roberts as vice president of the
National City Bank in 1929 was $30,000 and his share of the management fund
for that year was $20,000. Mr. Rol)erts sold all interest that he had in a news-
paper in J^ort Dodge, Iowa, over 20 years ago. He now has no interest in any
newspaper in Fort Dodge, and no son of his is in charge of a newspaper in Fort
Dodge or controls a newspaper in Fort Dodge.
I am writing this letter because my father is out of town at present.
Very truly yours,
Geo. B. Roberts.
Mr. Pecora. Mr. Mitchell, when you were examined before this
committee last Friday, February the 24th, you were questioned among
other things on the subject of the opinion which was submitted by
Solicitor General Lehmann to the Attorney General of the United
J
STOCK EXCHANGE PRACTICES 2267
States under date of November 11,1911. Do you recall the testimony
in question?
Mr. Mitchell. I do.
Mr. Pecora. My recollection is that you then testified that you
had seen a copy of that opinion or memorandum several years ago.
Do you recall that?
Mr. Mitchell. Yes.
Mr. Pecora. Did you at that time have in your possession a copy
of that opinion or memorandum?
Mr. Mitchell. Mr. Pecora, my recollection is entirely vague about
it. I could not tell you when I saw it. It seemed to me that that
was something that Senator Glass had introduced into the record at
some time or another. I am uncertain. In general I have loiown
that there was such an opinion, and my recollection is that I had at
some time or another seen the opinion. To indicate that I had read
that opinion with care at any particular time I could not possibly
testify.
Mr. Pecora. Well, you said last Friday that you had seen a copy
of the opinion several years ago.
Mr. Mitchell. Yes.
Mr. Pecora. Where did you see it? In New York or Washington
or elsewhere?
Mr. Mitchell. No; it is something that I have seen somewhere at
some time, certainly not in Washington. I never connected Wash-
ington in any way with it.
Mr. Pecora. Can you tell the committee how many years ago it
was that you saw a copy of that opinion?
Mr. Mitchell. No, I can not. I would say that very likely I
never saw any part of that opinion until, according to my recollection,
it was introduced somewhere by Senator Glass at some time. Prior
thereto I had understood that when the National City Co. was
formed in 1911 there was an adverse opinion that had to do particu-
larly with the holding of bank stocks.
Mr. Pecora. National bank stock?
Mr. Mitchell. National bank stock. When the City Co. was
formed — I am giving this from impression because, of course, I had
no connection with it then.
Mr. Pecora. You had no connection with it then.
Mr. Mitchell. There was a portfolio of bank stocks introduced
into that company's assets at its very outset, and I had assumed that
the question that was up had to do very largely with the propriety of
their holding of such bank stocks. And that as an outcome of the
discussion as to the proprieties at that time it was determined that
the company should not find its future through a channel that looks
as though it might have been in part the raison d'etre of the organiza-
tion of the National City Co. It did dispose of that portfolio, and
at the time I came into the National City Co. it did not own bank
stocks. And has not since.
Mr. Pecora. Do you recall who it was that showed you the copy
of the opinion in question?
Mr. Mitchell. I do not, Mr. Pecora.
Mr. Pecora. Was it a typewritten copy or a printed copy?
Mr. Mitchell. I do not recall that. My recollection about it is
perfectly vague, Mr. Pecora. I have simply the knowledge that I
119852— 33— PT 6 83
2268 STOCK EXCHANGE PRACTICES
have spoken of here with perfect truth and frankness.
Mr. Pecora. Mr. Mitchell, have you any recollection of the iden-
tity of the person who showed it to you?
Mr. Mitchell. No; I have not.
Mr. Pecora. Was it as you now recall some one connected either
with the bank or the National City Co.?
Mr. Mitchell. That I do not recall. As I say, my impression is
that at some time or another some record of that opinion was intro-
duced by Senator Glass. Now beyond that I have no recollection
of it. Whether it was in a record or whether I may have asked some-
body about it and got a copy of that record I truthfully can not say.
Mr. Pecora. Nor do you recall who it was that had a copy of it
and showed it to you?
Mr. Mitchell. I do not.
Mr. Pecora. How long ago, would you say, you saw a copy of it?
Last Friday you stated that it was several years ago.
Mr. Mitchell. Yes; I stated
Mr. Pecora. I will read to you your testimony on that. The
question specifically was: "Did you ever hear of that?" Meaning^
the opinion. You answer was "I have heard of that, and at one time
I read it, but I do not recall it now. It has been many, many years
since I saw it."
Mr. Mitchell. Yes. That was an impression that was in my
mind at the time. The existence of that opinion or anything about
it had not entered into my mind for so long that it is simply a vague
recollection of having heard that there was such an opinion, and at
some time or another having seen parts of it, or it may be all of it.
I could not say. Whether it was 3 years or 5 years or 10 years aga
I simply could not answer, Mr. Pecora.
Mr. Pecora. The incident to which you have alluded this morning,
namely, that of Senator Glass having had that opinion incorporated
into a record, took place on May 10, 1932, when Senator Glass spread
that opinion on the Congressional Record in the course of proceedings
on the floor of the Senate. Now, the date of that occurrence is less
than a year ago. May 10, 1932. You feel quite certain, do you not,
that the copy which you saw was shown you years before May 10,
1932?
Mr. Mitchell. I would not say so. Now that you say this, I
think it very hkely it may have been even as late as that that I saw
this. I had heard that there was such an opinion many, many years
ago.
Mr. Pecora. Do you know whether the bank or the company ever
had a copy of the opinion in its files?
Mr. Mitchell. I can not answer that, Mr. Pecora. I should think
it was very doubtful. If in file at all I should think likely it would
be in the files of counsel.
Mr. Pecora. Is that Shearman & Sterling?
Mr. Mitchell. I am prompted by counsel to say that the secretary
of our company has looked in the files of the National City Co. for
evidence of that opinion and has been imable to locate it.
Mr. Pecora. Did you ever see a copy of the opinion of August 1,
1911, referred to in the opinion of SoHcitor General Lehmann, which
is dated November 6, 1911?
Mr. Mitchell. Is this the same opinion that you have been talking
about?
STOCK EXCHANGE PRACTICES 2269
Mr. Pecora. No; the opinion that we have been discussing Mr
Mitchell, is one dated November 6, 1911, submitted by Mr. Lehmanii
to the then Attorney General of the United States. And in that
opinion he refers to an opinion which he submitted to the Attorney
General on August 1, 1911.
Mr. Mitchell. If I ever have seen it I do not recall. If you would
ask me definitely to say yes or not I should say no.
Mr. Pecora. That is all with Mr. Mitchell, Senator.
The Chairman. You will be excused, then, from any further attend-
ance at this hearing.
Mr. Mitchell. Thank you.
Mr. Pecora. Mr. Kussell, please take the stand.
The Chairman. You do solemnly swear that the evidence you are
about to give is the truth, the whole truth, and nothing but the truth,
so help you God?
Mr. Russell. I do.
TESTIMONY OF STANLEY A. RUSSELI, VICE PRESIDENT OF THE
NATIONAL CITY CO., MONTCLAIE, N. J.
Mr. Pecora. What is your full name, please?
Mr. Russell. Stanley A. Russell.
Mr. Pecora. Your address?
Mr. Russell. Montclair, N. J.
Mr. Pecora. What is your business or occupation?
Mr. Russell. Vice president of the National City Co.
Mr. Pecora. How long have you been a vice president of the
National City Co.?
Mr. Russell. Since June, 1922.
Mr. Pecora. Prior to that time did you have any connection with
that company in any other oflBce or capacity?
Mr. Russell. Assistant vice president.
Mr. Pecora. When did you first become connected with the
National City Co.?
Mr. Russell. In August, 1918.
Mr. Pecora. Since becoming a vice president of that company
have you been assigned to any particular department or branch of the
company's business?
Mr. Russell. I have been responsible for a part of its industrial
financing and its public utility financing.
Mr. Pecora. Have you been in charge of that branch of its work?
Mr. Russell. I have shared the responsibility of the industrial
financing with another officer and have been responsible largely for
the public utility work.
Mr. Pecora. Tell us generally, will you, Mr. Russell, your duties
as a vice president in the fields that you have referred to?
Mr. Russell. How far do you want me to go, Mr. Pecora?
Mr. Pecora. Just far enough to give the committee a comprehen-
sive idea of your duties as a vice president in the industrial and
utilities division of the National City Co.'s work.
Mr. Russell. Internally the responsibility embraces the selection
and training of a staff of employees and junior officers to the end that
they become competent in the analysis of corporation balance sheets.
2270 STOCK EXCHANGE PRACTICES
income accounts, the judgment upon investment securities, the
direction of studies of various corporations by that stafl", the con-
tacting of officers of industrial and pubHc utility corporations with
whom we have financial relations and of those with whom we would
like to have financial relations. I think in general that is about the
picture.
Mr. Pecora. Wlien you say that part of your duties consists of
establishing contacts with the officers of industrial corporations with
whom you would like to have business relations, what do you mean?
Mr. Russell. Well, if our studies in the departments were to dis-
close a particular corporation which it appeared might require some
financing at some future time and the past performance of that cor-
poration was a creditable one we naturally would endeavor to become
acquainted with the management of that company.
Mr. Pecora. With a view
Mr. EussELL. With a view to doing the financing if, as, and when
it developed.
Mr. Pecora. Did you also make similar studies with. a view to
biinging about or effecting mergers or combinations
Mr. Russell. Oh, yes.
Mr. Pecora (continuing). Of industrial corporations?
Mr. Russell. Oh, yes.
Mr. Pecora. And that incidentally brought you the business of
financing such a merger?
Mr. Russell. That is right.
Mr. Pecora. That was rather a common practice of the National
City Co., was it not, Mr. Russell?
Mr. Russell. The development of a merger is not as common,
I should not say, as simply buying an issue of bonds and selling it.
It is a rather common occurrence; yes.
Mr. Pecora. Well, the National City Co. devoted itself with some
care and particularity to that kind of business, did it not?
Mr. Russell. Yes, sir.
Mr. Pecora. That is to say, it had departments and officers whose
business it was to survey a section of an industrial field, see what
companies were operating in it, and, where in the opinion of the com-
pany a merger could be effected with profit and advantage, efforts
were made to bring about such a merger or combination?
Mr. Russell. Those suggestions, Mr. Pecora, usually came to us
from the outside.
Mr. Pecora. Oh, you did not look the field over with a view of
ascertaining ■
Mr. Russell (interposing). Sometimes, sometimes. But generally
speakmg, the idea of a consohdation will arise from the outside.
Mr. Pecora. Did you at any time during the years 1928 and 1929
get information concerning the business of the manufacture of agri-
cultural machinery and unplements?
Mr. Russell. Yes, su-.
Mr. Pecora. Was that information brought to your notice by
anyone, or did you ascertain it for yourself?
Mr. Russell. That was brought to my notice.
Mr. Pecora. By whom?
Mr. Russell. Mr. Baker.
Mr. Pecora. Mr. Hugh B. Baker?
STOCK EXCHANGE PRACTICES 2271
Mr. Russell. Yes.
Mr. Pecora. He was then a vice president, was he not?
Mr. Russell. Yes.
Mr. Pecora. And subsequently he became president of the National
City Co.?
Mr. Russell. That is right.
Mr. Pecora. As a result of having had your attention drawn to
the business of manufacturing farm machinery and implements did
you endeavor to bring about a merger or combination of any com-
panies engaged in that business?
Mr. Russell. Well, I should like to answer that this way. The
suggestion to Mr. Baker was made to him by a personal friend, a
business friead, an individual who was then interested financially in
one of those companies. And his first suggestion to us was that we
interest ourselves in financing his particidar company.
Mr. Pecora. Which company was that?
Mr. Russell. Nichols & Shepard Co., Battle Creek, Mich. Do
you want me to go on with this?
Mr. Pecora. Yes, sir.
Mr. Russell. Tell it in my own way?
Mr. Pecora. Yes, sir.
Mr. Russell. We did look into the Nichols & Shepard Co., which
was then prospering very considerably. But owing to the rather
small size of that particidar company we did not feel that we wanted
to undertake its financing. \Vliereupon this gentleman made the
suggestion that possibly a consolidation of that company with some
others, which apparently had been discussed, could be developed.
I then said that we would be very much interested in looking at
that.
That is the preliminary history of it.
Mr. Pecora. Yes. Wliat was the name of the gentleman con-
nected with the Nichols & Shepard Co. who first discussed that
subject with Mr. Baker and then with you?
Mr. Russell. Mason B. Starring.
Mr. Pecora. When did Mr. Starring have a discussion of that
subject with you and Mr. Baker?
Mr. Russell. In August, 1928. I think it was August.
Mr. Pecora. Did he suggest the identity or names of the other
companies with which a merger might advantageously be affected?
Mr. Russell. He did later.
Mr. Pecora. What companies did he suggest?
Mr. Russell. The OUver Chilled Plow Works, of South Bend,
Ind., and the Hart-Parr Co., of Charles City, Iowa.
Mr. Pecora. Did you then get in touch with the officers of those
two corporations with a view to ascertaining whether or not they
would be favorably disposed toward such a merger?
Mr. Russell. Well, I first talked with Mr. Brown, the president
of Nichols & Shepard, and he in turn talked with the officials of the
OHver Co. and of the Hart-Parr Co. with whom he had previously
had some talks.
Mr. Pecora. The Nichols & Shepard Co. at that time was, you
say, in a prosperous, flourishing condition?
Mr. Russell. Very.
Mr. Pecora. How about the other two companies?
2272 STOCK EXCHANGE PRACTICES
Mr. Russell. The Hart-Parr Co. was likewise prosperous. The
Oliver Co. was not so prosperous. But it was in good shape.
Mr. Pecora. The Ohver Co. was the largest of the three, was it not
at that time?
Mr. Russell. Somewhat. Somewhat.
Mr. Pecora. Well, from that point on did you have a series of
conversations or conduct negotiations with the executive officers of
those three companies with a view to merging them into one company?
Mr. Russell. At various times; yes.
Mr. Pecora. Did you personally conduct those negotiations in
behalf of the National City Co.?
Mr. Russell. I did.
Mr. Pecora. The interest of the National City Co. in brmging about
such a merger was what?
Mr. Russell. The financing.
Mr. Pecora. Well, the three companies, you say, were in pretty
good financial condition?
Mr. Russell. Right.
Mr. Pecora. Was it necessary for them to have any financial sup-
port outside of their owti resources in order to bring about such a
combination or merger?
Mr. Russell. It was desirable.
Mr. Pecora. Desirable to whom?
Mr. Russell. To the new company.
Mr. Pecora. And to the National City Co.?
Mr. Russell. Obviously.
Mr. Pecora. Is that not what really animated the National City
Co. — a desire to make some money
Mr. Russell. Sure.
Mr. Pecora (continuing). Out of bringing about this merger
through the handling of it?
Mr. Russell. Certainly. That is what we are in business for. _
Mr. Pecora. Now such a merger was eventually effected, was it
not?
Mr. Russell. Yes, sir.
Mr. Pecora. When?
Mr. Russell. The final consummation of the merger took place I
tliink on April 2, 1929.
Mr. Pecora. April 2. What was the name of the new company?
Mr. Russell. The final name was the Oliver Farm Equipment Co.
Mr. Pecora. What was the name originally of the new company?
Mr. Russell. Oliver Agricultural Equipment Co.
Mr. Pecora. When was that incorporated?
Mr. Russell. I think it was along in February.
Mr. Pecora. Of 1929?
Mr. Russell. Yes, sir.
Mr. Pecora. Under the laws of the State of Delaware?
Mr. Russell. Yes, sir.
Mr. Pecora. And you say the name of that corporation was subse-
quently changed?
Mr. Russell. Yes, sir.
Mr. Pecora. To the Oliver Farm Equipment Co.?
Mr. Russell. Oliver Farm Equipment Co.
STOCK EXCHANGE PRACTICES 2273
Mr. Pecora. Oliver Farm. Now who were the officers of the
Oliver Farm Equipment Co. at the outset?
Mr. Russell. Do you mean before or after it acquired the prop-
erties of the predecessor companies?
Mr. Pecora. At the time of the incorporation and at the time it
acquired the properties of the constituent companies.
Mr. EussELL. Well, Mr. Pecora, it was incorporated a month and
a half before it acquired the actual properties.
Mr. Pecora. All right. Who were the officers at the time of
incorporation?
Mr. EussELL. I think Mr. Winston was president, and I was
secretary or vice president — I am not positive.
Mr. Pecora. The Mr. Wmston you refer to is Mr. Garrard A.
Winston, is it not?
Mr. EussELL. Mr. Garrard Winston; yes.
Mr. Pecora. Garrard B. Winston?
Mr. ExJssELL. Yes, sir.
Mr. Pecora. Was he connected with the National City Co. at
that time?
Mr. Russell. He was a director and counsel.
Mr. Pecora. Who were the officers of the Oliver Farm Equip-
ment Co. at the time that company acquired the three predecessor
companies?
Mr. Eussell. Mr. J. D. Oliver was chairman of the board. I
think Mr. John T. Nichols was vice chairman. Mr. M. W. Ellis was
president. Mr. Brown was executive vice president. Mr. W. A.
Weed was a vice president. And I think a Mr. Freeman was secre-
tary.
Mr. Pecora. At the time this merger was effected were any of the
predecessor companies indebted in any way to the National City
Co.?
Mr. Eussell. The Nichols & Shepard Co. during the progress of
the negotiations, as I recall it, was building an extension to its plant
and needed some funds. They also contemplated retiring an issue of
their notes which were convertible into stock. They wanted to get
them out of the way. They proposed to go ahead with an additional
offering of common stock to their stoclcholders to raise that money,
which they could have done. But in view of the pendency of the
negotiations for the consolidation we all thought it would be better
if they did not go ahead with the stock offering and that they make
a temporary loan to carry them through on the theory that that loan
would be paid off out of the proceeds of financing, or if the consohda-
tion did not go through they could then offer stock to their share
holders and raise the necessary money. As a consequence for those
purposes a temporary loan was made with the National City Bank, a
small part of it in the fall of 1928; the greater part of it, approxi-
mately $2,000,000, was made I think the latter part of January or
February. I am not svire which.
Mr. Pecora. January 31, 1929, was it not, that a loan of $1,939,-
144.71 was made by the National City Bank to the Nichols & Shepard
Co.?
Mr. Eussell. Yes. Prior to that particular circumstance the
National City Banlc had had no loans and I think no financial rela-
tions with any one of these three companies.
2274 STOCK EXCHANGE PRACTICES
Mr. Pecora. Now, what was the financial set-up of the merging
corporation, the OUver Farm Equipment Co.?
Mr. EussELL. Do you mean the corporate set-up?
Mr. Pecora. Yes. .
Mr. Russell. They had an authorized issue of pnor preferred
stock. I think it was 300,000 shares. They had had an authorized
issue of convertible participating stock. And an authorized issue of
common shares. c ■
Mr. Pecora. You said the authorized number of shares of prior
preferred stock was 300,000?
Mr. Russell. Yes, sir.
Mr. Pecora. Of any par value?
Mr. Russell. No par value. . . .
Mr. Pecora. And the authorized number of convertible partici-
pating stock was 750,000 shares?
Mr. Russell. I think so.
Mr. Pecora. The authorized number of common stock was
2,000,000?
Mr. Russell. I think so.
Mr. Pecora. Both without par value?
Mr. Russell. Yes, sir.
Mr. Pecora. Now did any of those issues carry any rights or
warrants?
Mr. Russell. Yes, sir.
Mr. Pecora. Which of them?
Mr. Russell. The prior preferred stock carried a purchase warrant
to buy common stock over a period of 10 years.
Mr. Pecora. At what price?
Mr. Russell. The first five years was a right to buy one and one
quarter shares of common stock at $80 a share, and the last five years
I think it was one share of common stock at $100 a share.
Mr. Pecora. Did the convertible participating stock have any
rights or warrants?
Mr. Russell. I think it had only the right to convert into the
common stock share for share.
Mr. Pecora. What stock possessed the voting rights?
Mr. Russell. As I recall, the convertible and the common stock
both had voting rights, and the prior preferred stock had the usual
voting rights of a preferred stock in the event of default. But not
otherwise. That is my recollection.
Mr. Pecora. Upon what terms was this merger effected? That is
to say, what was paid by the Oliver Farm Equipment Co. to the three
predecessor companies for their respective rights and properties?
Mr. Russell. The Oliver Farm Equipment Co. took over all the
assets and assumed the liabilities of the Nichols & Shepard Co., the
consideration therefor being the delivery by Oliver Farm Equipment
Co. of 126,000 shares of convertible participating stock and 126,000
shares of common stock. The Oliver Farm Equipment Co. took over
the assets and assumed the liabilities of the Hart-Parr Co., and the
consideration therefor was 267,972 shares of convertible participating
stock, and 133,986 shares of common stock. The Oliver Farm Equip-
ment Co. took over the assets and assumed the liabilities of the Oliver
Chilled Plow Works, the consideration being cash in the amount of
$9,325,652, and 75,000 shares each of the convertible and common
stock.
STOCK EXCHANGE PRACTICES 2275
Mr. Pecoea. Have you a copy of the contract entered into be-
tween the National City Co. and the OUver Agricultural Equipment
Co. with respect to this merger?
Mr. Russell. We have brought everything down you asked for.
I do not know whether you asked for that or not. Did you?
Mr. Pecora. Yes; we asked for that contract. If you have not
the original contract perhaps you have some data or record before
you which will enable you to give the committee the essential provi-
sions of that contract. Particularly with respect to the consideration
to be paid to the National City Co. for its services in financing this
combination or merger.
Mr. EussELL. Yes; I can give you that. There were a series of
contracts. The National City Co. had a contract with the Oliver
Farm Equipment Co. It may have been with the Oliver Agricultural
Equipment Co. at that time. I mean the new company. The new
company in turn had contracts with the three predecessor companies.
AH of these contracts were conditioned upon the fulfillment of each.
The National City Co. contract with the new company provided
that the City Co. would purchase from the new company 200,000
shares of prior preferred stock, 31,028 shares of convertible partici-
pating stock, 15,014 shares of common stock, and options to purchase
over a period of time 75,000 shares additional of common stock at
varying prices. And the National City Co. paid for that package
$20,625,652.
Mr. Pecora. That was paid in cash?
Mr. Russell. Yes, sir.
Mr. Pecora. On what date?
Mr. Russell. I believe April 2, 1929.
Mr. Pecora. Now in arriving at that total purchase price of
$20,625,652, was there any allocation of values given to the respective
classes of stock that you were contracting to purchase?
Mr. Russell. We did on our books.
Mr. Pecora. Well, did you in the negotiations, or was the alloca-
tion made after the purchase?
Mr. Russell. I think, Mr. Pecora, the allocation was made after
the purchase.
Mr. Pecora. But in the negotiations the National City Co. simply
undertook to purchase this package of securities issued by the new
company, for $20,625,652?
Mr. Russell. That is right.
Mr. Pecora. Without any allocation
Mr. Russell. That is right.
Mr. Pecora (continuing) . Or apportionment of value as among the
three different classes of stock?
Mr. Russell. That is right.
Mr. Pecora. Now when the allocation or apportionment of value
was made by the National City Co. on its books the figures appor-
tioned or allocated to the different classes of stock were arbitrary
figiu-es, were they not?
Mr. Russell. Well, they necessarily were arbitrary, but I should
express it this way, that we allocated a purchase price to the two
senior stocks, and the rest of the cost was applied against the common.
It so happened it worked out in pretty even figures.
Mr. Pecora. Who made that allocation or apportionment?
2276 STOCK EXCHANGE PRACTICES
Mr, EussELL. I think I did.
Mr. Pecora. And what were the figures you ascribed in that fashion
to the three classes of stock respectively?
Mr. Eussell. $94 a share on the prior preferred stock; $54 a
share on the convertible participating stock; and $10 a share on the
common stock.
Mr. Pecora. There is no doubt those were arbitrary figures, is
there?
Mr. Eussell. I do not quite imderstand what you mean —
arbitrary. Obviously the contract did not have them in it.
Mr. Pecora. The contract merely required the payment of a lump
sum?
Mr. Eussell. That is right.
Mr. Pecora. The sum of $20,000,000 plus?
Mr. Eussell. That is right.
Mr. Pecora. In return for these three classes of stock in the
amoimts that you have stated?
Mr. Eussell. That is right.
Mr. Pecora. The apportionment or allocation of value to these
three classes of stock was made by you in the exercise of an arbitrary
judgment, was it not?
Mr. Eussell. Not an allocation of value. An allocation of cost.
Mr. Pecora. Well, that was made in the exercise of an arbitrary
judgment, was it not.
Mr. Eussell. Yes.
Mr. Pecora. Now, you said that included in this purchase price of
$20,625,000 and odd was an option which gave to your company the
right to purchase 75,000 shares of the common stock at various prices.
What were those prices?
Mr. Eussell. One fifth, I think, at the end of 1 year, at $10 a
share ; one fifth at the end of 2 years, at $20 a share ; one fifth at the
end of 3 years, at $30 a share; one fifth at the end of 4 years, at $40
a share; one fifth at the end of 5 years, at $50 a share.
Mr. Pecora. This option resided solely in the judgment of the
National City Co. to exercise?
Mr. Eussell. That is right.
Mr. Pecora. Did the company exercise any of its rights under this
option to acquire the common stock at these prices?
Mr. Eussell. Well, in the first place, we had partners in the
business.
Mr. Pecora. Who were the partners you had?
Mr. Eussell. The National Eepubhc Co., of Chicago, and Mason
B. Starring, Jr., as an individual.
Mr. Pecora. Now, Mason B. Starring was an officer of the Nichols
& Shepard Co.?
Mr. Eussell. Oh, no.
Mr. Pecora. I understood you to say that he was.
Mr. Eussell. No; he was a member of the firm of Campbell,
Starring & Co., New York, and a director of the Nichols & Shepard
Co., and interested in it as a stockholder.
Mr. Pecora. Or a director?
Mr. Eussell. Yes.
Mr. Pecora. Not an officer?
Mr. Eussell. I think he was a director.
STOCK EXCHANGE PRACTICES 2277
Mr. Pecora. Yes. And that is the gentleman who first brought
this proposition to the notice of your company?
Mr. KussELL. Quite true.
Mr. JPecora. Was it because of that circumstance that he was
taken in as a partner?
Mr. Russell. That is right.
Mr. Pecora. Wliat partnership interest was accorded to him?
Mr. Russell. Seven and one-half per cent.
Mr. Pecora. That is a custom quite prevalent in this kind of
business, is it not?
Mr. Russell. Yes, sir.
Mr. Pecora. That is, a certain percentage of profits is paid to
the person who finds the business, so to speak?
Mr. Russell. I would not say a certain percentage of profits. I
would say that a fee, a payment, is made very frequently.
Mr. Pecora. And the payment is usually made on the basis of a
percentage of the profits?
Mr. Russell. I know of no common practice, Mr. Pecora.
Mr. Pecora. Well, was that done in the instance you are testifying
about?
Mr. Russell. We arrived at this figure. He wanted more, and
we traded it out to 7% per cent.
■ Mr. Pecora. Of what? The profit of the National City Co.?
Mr. Russell. Seven and one-half per cent interest in the original
terms accoimt.
Mr. Pecora. I see. And the National Republic Co., I think you
said?
Mr. Russell. Yes.
Mr. Pecora. What interest did it acquire as a participant in the
original terms account?
Mr. Russell. Fifteen per cent.
Mr. Pecora. Why was the National Republic Co. taken in as a
partner?
Mr. Russell. Because they had been the bankers for the Hart-
Parr Co.
Mr. Pecora. In other words, as the bankers for the Hart-Parr
Co., one of the constituent companies in this merger, they had
expected that would reap them certain profits if they continued as
bankers of the company?
Mr. Russell. Yes, sir.
Mr. Pecora. They lost that position because the National City
Co. stepped in and undertook upon effecting tliis merger to take care
of the finances of the Hart-Parr Co.? Is that right?
Mr. Russell. The president of the Hart-Parr Co. requested that
we take the National Republic Co. into the account. And under the
circumstances existing it is a common practice to do so.
Mr. Pecora. And the reason that the National RepubHc Co. was
taken in as a partner was to make up to it for whatever loss of pros-
pective profits would result from its being dislodged as the financier
of the Hart-Parr Co.?
Mr. Russell. It was a friendly recognition of their position.
Mr. Pecora. Well, their position was in substance that as finan-
ciers of the Hart-Parr Co. they expected to make certain profits
if permitted to continue in that position, but on account of this
2278 STOCK EXCHANGE PRACTICES
merger they would be dislodged from that position and those poten-
tial profits would not accrue to them?
Mr. Russell. That is possible.
Mr. Pecora. That was the basis or consideration for this 15-per-
cent interest, was it not?
Mr. Russell. Sure.
Mr. Pecora. Is that a common practice?
Mr. Russell. Sure. . ...
Mr. Pecora. Was there any banking house which occupied a sini-
ilar relationship to either of the other two predecessor companies in
this merger?
Mr. Russell. Yes, sir.
Mr. Pecora. Wlio?
Mr. Russell. Nichols & Shepard Co.
Mr. Pecora. Wlio were their bankei-s prior to the merger?
Mr. Russell. Eastman, Dillon & Co.
Mr. Pecora. Were they taken care of in the same general fashion
as the National Republic Co.?
Mr. Russell. They were not.
Mr. Pecora. Was there any reason for leaving them out of con-
sideration?
Mr. Russell. They were not left out of consideration.
Mr. Pecora. Well, I asked you if they were taken care of and you
said they were not.
Mr. Russell. I beg your pardon, you asked if they were taken
care of in the same fashion.
Mr. Pecora. They were taken care of for a similar reason?
Mr. Russell. In some fashion.
Mr. Pecora. In some fashion?
Mr. Russell. Yes.
Mr. Pecora. In what fashion?
Mr. Russell. They were given an interest — I have forgotten how
much — in the — I thirik, in the banking group.
Mr. Pecora. Amounting to what?
Mr. Russell. I can not recall that, Mr. Pecora.
Mr. Pecora. Have you your contracts to show?
Mr. Russell. I say they were given an interest in the banking
group — I think it was the banking group. They had no interest in
the original terms group. None of the parties signed these contracts
except the National City Co. so far as the bankers were concerned.
Now I have no information on what position Eastman, Dillon were
offered.
Mr. Pecora. What is the original terms group that you have
referred to so far? Explain why it was organized, who composed it,
and the interests conceded or accorded to the members of the original
terms group.
Mr. Russell. An original terms group in investment banking
practice is the first step above the purchase cost in most pieces of
finance. For instance any banldng house buys an issue of bonds at,
let us say, 95. They may form an original terms group with one
point in it.
Mr. Pecora. Do you mean one point profit?
Mr. Russell. Yes; gross spread. Then they may form a banking
group.
STOCK EXCHANGE PRACTICES 2279
Mr. Pecora. Yes, but what is the necessity for forming an original
terms group? You see we just want a little general education.
Mr. Russell. Primarily to carry the commitment.
Mr. Pecora. Was it necessary for the National City Co in ful-
filling its commitment of twenty million and odd dollars in this
merger to have the financial assistance of anyone?
Mr. Russell. Not necessary, no.
Mr. Pecora. Did it receive any financial assistance from anyone
else?
Mr. Russell. We had their commitment.
Mr. Pecora. When you say you had their commitment, what do
you mean?
Mr. Russell. They were conamitted to their pro rata portion of
the business — namely, 15 per cent and 7K percent.
Mr. Pecora. The National City Co. did not need any such com-
mitment from them, did it?
Mr. Russell. Did not need it, no.
Mr. Pecora. Who were the participants in the original terms
group? Name all of them.
Mr. Russell. The National City Co. 77^ per cent. National
Republic Co. 15 per cent. Mason B. Starring, jr. Iji per cent.
Mr. Pecora. Now outside of the National City Co. none of the
participants in this original terms group actually advanced any
moneys for the carr3dng out of this merger?
Mr. Russell. No. Until they paid for the securities which they
had sold, if they sold any.
Mr. Pecora. Was it necessary for the original terms group to sell?
Mr. Russell. Well, they naturally followed through into later
groups except Starring. He did not. His firm did.
Mr. Pecora. Did the other members of the original terms group
follow through?
Mr. Russell. The National Republic Co. did. We did.
Mr. Pecora. The members of the original terms group, by the way,
were all let in on the same terms as the National City Co.?
Mr. Russell. Oh, yes. That is what an original terms group is.
Mr. Pecora. They paid $94 a share for the prior preferred stock,
$54 a share for the convertible stock, and $10 a share for the common
shares, is that right?
Mr. Russell. Well, an account like that, Mr. Pecora, is not par-
celed out in that way.
Mr. Pecora. How was it parceled out in this case?
Mr. Russell. We handled a syndicate — we headed a syndicate
and managed it.
Mr. Pecora. And put up all the money?
Mr. Russell. Yes.
Mr. Pecora. What management fee did the agreement pro\ade
that the National City Co. was to receive?
Mr. Russell. Receive from whom?
Mr. Pecora. From whomever was to pay it. From the profits, in
other words?
Mr. Russell. There was no fee from the OHver Farm Equipment
Co. We bought something at a price. The bankers made the profit
above that price. It is common in syndicate agreements to have a
management fee of a certain per cent of the gross profit in the ac-
2280 STOCK EXCHANGE PRACTICES
count, which fee obviously comes out of the other members of the
syndicate for the effort of management. I do not recall whether in
this particular one we had such _a management fee. We may have.
It is generally common practice in the Street to do so.
Mr. Pecoea. Well now, after the formation of tliis original terms
group which included the National City Co., Mr. Starring and the
National Republic Co., was another group formed for the pm-pose of
floating the stock?
Mr. Russell. There was. I can not remember, Mr. Pecora,
whether it was a banking group or a distributing group or what it
was.
Mr. Pecoha. Perhaps your records will enhghten you.
Mr. Russell. Not here. I haven't them. We formed a distri-
buting group.
Mr. Pecora. How many persons or corporations composed the
distributing group.
Mr. Russell. Well, you mean dealers? Thirty-six.
Mr. Pecora. All dealers?
Mr. Russell. All except Starring.
Mr. Pecora. Was Starring also a member of the distributing group?
Mr. Russell. Yes.
Mr. Pecora. Mr. Starring you said was a director of the Nichols
& Shepard Co.?
Mr. Russell. I think so.
Mr. Pecora. Was the fact of his interest in the profits first of the
original terms group and secondly of the distributing group, made
known to the officers and stockholders of the Nichols & Shepard Co.,
Mr. Russell?
Mr. Russell. It was made known to the officers, yes.
Mr. Pecora. Not to the stockholders?
Mr. Russell. I do not know.
Mr. Pecora. Is that ethical?
Mr. Russell. Well, of course that is not our responsibility.
Mr. Pecora. Well, it was your responsibility to the extent that
you took liim in as a partner
Mr. Russell. Yes, sure.
Mr. Pecora (continuing). In the original terms group?
Mr. Russell. Sure.
Mr. Pecora. Do you think it ethical to do that without giving
information of that participating interest to the stockholders of the
company of which he was a director?
Mr. Russell. We had no responsibfiity to the stockholders of the
Nichols & Shepard Co.
Mr. Pecora. Well, do you think it was an ethical and sound
thing to do?
Mr. Russell. Well, I will answer you this way. I think if I had
been in Mr. Starring's place I would have disclosed that information.
And he may have done so. I do not know.
Mr. Pecora. You know that it is a sound and equitable principle
for an officer and dii-ector of a corporation not to make any secret
profit
Mr. Russell. Absolutely.
Mr. Pecora (continuing). Out of a transaction involving the cor-
poration?
STOCK EXCHANGE PRACTICES 2281
Mr. Russell. Absolutely.
Mr. Pecora. So far as you know the stockholders of the Nichols
& Shepard Co. never learned of the secret interest that Mr. Starrino-
had in the profits of the original terms group and the distributing
group? °
Mr. Russell. I do not Icnow.
Mr. Pecora. Was Mr. Starring's name ever made public in con-
nection with the flotation of the stock of the Oliver Farm Equipment
Co.?
Mr. Russell. I do not recall.
Mr. Pecora. I show you this circular and ask you if that is one of
the circulars or prospectuses put out by the Oliver Farm Equipment
Co. in floating these securities.
Mr. Russell. Yes, sir.
Mr. Pecora. Do you see Mr. Starring's name mentioned anywhere
as a participant in either the original terms group or the distributing
group?
Mr. Russell. No, sir; I know it is not there.
Mr. Pecora. You know it is not there?
Mr. Russell. It would not be there.
Mr. Pecora. Would it be in any other printed matter generally
circulated?
Mr. Russell. I do not know what commimications the officers or
directors of the Nichols & Shepard Co. may have made to their
shareholders.
Mr. Pecora. You know it was necessary for the shareholders of
the Nichols & Shepard Co. to agree to this merger?
Mr. Russell. Yes, sir.
Mr. Pecora. And they did agree to it?
Mr. Russell. Yes, sir.
Mr. Pecora. It was part of your business as manager of the nego-
tiations for the merger, in behalf of the National City Co., to see that
the merger was duly approved by the stockholders of the constituent
companies, was it not?
Mr. Russell. Yes.
Mr. Pecora. In that connection, did you see what notice was sent
out to the stockholders of the Nichols & Shepard Co. concerning this
proposed merger?
Mr. Russell. I saw one.
Mr. Pecora. Did it state or indicate that Mr. Starring, the director
of the company, had a secret interest in profits that would accrue to
the managers of the merger?
Mr. Russell. I do not recall.
Mr. Pecora. Do you know whether or not any person who was an
ofiicer or director of the National Repubhc Co. was an ofl[icer or
director of any of the three constituent companies in this merger?
Mr. Russell. I think Mr. Samuel White, who was an officer of the
National Repubhc Co., was also a director of the Hart-Parr Co.
Mr. Pecora. With respect to him, do you know whether or not the
stockholders of the Hart-Parr Co. were told that Mr. White would
participate as an officer of the National Repubhc Co. in a secret profit
from this underwriting?
Mr. Russell. He individually did not participate.
2282 STOCK EXCHANGE PRACTICES
Mr. Pecora. He did as a stockholder of the National Republic Co.,
did he not?
Mr. Russell. His firm did.
Mr. Pecora. His corporation did?
Mr. Russell. His corporation did.
Mr. Pecora. What officer was he in that company?
Mr. Russell. I think he was president; I am not sure. That was
an affiliate of the bank.
Mr. Pecora. Which bank?
Mr. Russell. The National Republic Bank— I have forgotten the
name of it.
Mr. Pecora. Was it an investment afiUiate?
Mr. Russell. Yes.
Mr. Pecora. Who was president of that bank?
Mr. Russell. I have forgotten.
Mr. Pecora. Is that the bank of which General Dawes was chair-
man?
Mr. Russell. No; not at that time.
Mr. Pecora. He was subsequently?
Mr. Russell. There was a merger.
Mr. Pecora. That is the bank?
Mr. Russell. That bank merged with General Dawes' bank;
but at that time it had no connection with it, as far as I know.
Mr. Pecora. The original terms group took over the prior pre-
ferred stock at $94 a share, did it not?
Mr. Russell. Yes.
Mr. Pecora. Two hundred thousand shares?
Mr. Russell. Riglit.
Mr. Pecora. And the original terms group also had 31,028 shares
of the convertible participating stock?
Mr. Russell. No. The convertible and common stock, I think,
went into what you would call a joint members' account.
Mr. Pecora. Did any of the members of the original terms group
have any interest in the 31,028 shares of convertible participating
stock?
Mr. Russell. Oh, yes.
Mr. Pecora. Or the 15,014 shares of the common stock which the
National City Co. acquired?
Mr. Russell. The same interest, I think.
Mr. Pecora. What do you mean by "the same interest"?
Mr. Russell. Seventy-seven and a half, 15 and 7}i.
Mr. Pecora. Who had that interest — the members of the original
terms group?
Mr. Russell. Yes.
Mr. Pecora. The National Republic Co. and Mr. Starring? i,
Mr. Russell. That is right; that is my recollection.
Mr. Pecora. When the distributing group, composed of 35 dealers
and Mr. Starring, was formed, upon what terms did they participate
in the distribution of this stock?
Mr. Russell. The distributing group dealt only with the prior
preferred stock.
Mr. Pecora. Only with the 200,000 shares of prior preferred stock?
Mr. Russell. Right.
STOCK EXCHANGE PRACTICES 2283
Mr. Pecora. The members of the distributing group had no inter-
est in either the convertible partici])ating stock or the common stock?
Mr. Russell. I am pretty sure that is right.
Mr. Pecora. On what terms were they permitted to participate in
the prior preferred stock?
Mr. Russell. Ninety-six.
Mr. Pecora. That is an advance of 2 points over the price at which
the original terms group took the stock?
Mr. Russell. That is right.
Mr. Pecora. What was the necessity for organizing this distribut-
ing group at an advance of $2 a share for the prior preferred stock?
Mr. Russell. I beg your pardon?
Mr. Pecora. What was the necessity for organizing this distribut-
ing group?
Mr. Russell. Mr. Pecora, we were merely following the usual
practice in the handling of an operation of this kind, which is to form
a distributing or banking group above the original terms group, and
to invite into that group a larger list of dealers, the more important
and larger dealers. That is done in every operation in Wall Street
in financing; and from there on you form a selling syndicate which
embraces a great many more dealers who do the distribution.
Mr. Pecora. Did not the National City Co. have its own selling
facilities?
Mr. Russell. Siu'e.
Mr. Pecora. For marketing these securities to the public?
Mr. Russell. Sure.
Mr. Pecora. Why was it necessary, then, to resort to this common
practice, as you say, of organizing a distributing group and giving it a
2-point profit?
Mr. Russell. Because we are not the only ones selling seciirities
in this country.
Mr. Pecora. You said that the National City Co. had its own
facilities for marketing its stock?
Mr. Russell. Right.
Mr. Pecora. Why did it not market the stock through its own
facilities?
Mr. Russell. We did.
Mr. Pecora. But you took in with you other dealers?
Mr. Russell. Sure.
Mr. Pecora. Did the National City Co. always do that?
Mr. Russell. We always do it; it is common practice.
Mr. Pecora. Was there any group after this distnbutmg group,
like a wholesale or selling group?
Mr. Russell. There was a selling group.
Mr. Pecora. Before that was there not a wholesale group, so
Mr.' Russell. According to my records, when you say "wholesale
group" you must refer to the distributing group.
Mr. Pecora. No. The original terms group took over the prior
preferred stock at $94 a share?
Mr. Russell. Right. „„„
Mr. Pecora. Then it was passed on to a distnbution group at !l>9br
Mr. Russell. Right.
119852— 33— PT 6 34
2284 STOCK EXCHANGE PRACTICES
Mr. Pecora. Was it not then passed on to a so-called wholesale
group at 97K a share?
Mr. Russell. My records do not show that, Mr. Pecora.
Mr. Pecora. If you will look among your records, 1 think you will
find that there was a wholesale group formed to take over these 200,000
shares of prior preferred stock at 97)2-
Mr. Russell. Well, that is what I have as a selHng group.
Mr. Pecora. Oh. You call it a seUiug group?
Mr. Russell. That is right.
Mr. Pecora. How many participants were in this seUing group?
Mr. Russell. A hundred and ninety-four.
Mr. Pecora. Did this group mclude persons who had been officers
or directors of the three predecessor companies?
Mr. Russell. I will have to look over the list, IS'Ir. Pecora. I have
a list here.
Mr. Pecora. First see whether Mr. Starring's name is on the selling
group list.
Mr. Russell. No.
Mr. Pecora. Do you recognize the names of any other persons who
were officers or directors of the predecessor companies?
Mr. Russell (after referring to memoranda). I do not find any,
Mr. Pecora.
Mr. Pecora. Now, this selling group was brought into the picture
to make the actual distribution to the investing public?
Mr. Russell. Right.
Mr. Pecora. And they took over the prior preferred stock at
97 K?
Mr. Russell. That is right.
Mr. Pecora. The convertible participating stock and the common
stock remained in the original terms group?
Mr. Russell. That is right.
Mr. Pecora. The National City Co., 77)2 per cent; the National
Republic Co., 15 per cent; and Mr. Starring 7^ per cent?
Mr. Russell. That is right.
Mr. Pecora. Did the selling group then offer that prior preferred
stock to the public?
Mr. Russell. Yes.
Mr. Pecora. Was it aU sold?
Mr. Russell. Yes.
Mr. Pecora. At what price?
Mr. Russell. $100 a share. That was the list price.
Mr. Pecora. How was it offered to the public — ^through what
media?
Mr. Russell. The usual method of a syndicate — advertising,
through its various dealers; the usual procedure.
Mr. Pecora. In ofl'ering it to the public was the pubhc told that
the original terms group had acquired the stock at 94, had passed it
on to the distributing group at 96, who, in turn, passed it on to the
selling group at 97}^?
Mr. Russell. No, sir.
Mr. Pecora. Wliat were the profits in cash that accrued to the
members of the original terms group from the marketing of the prior
preferred stock?
STOCK EXCHANGE PRACTICES 2285
Mr. Russell. I will have to do some figuring to get that for you,
Mr. Pecora.
Mr. Pecora. Have you not the figures before you?
Mr. Russell. I can give you the profits in the original terms
group, yes; but I assumed you wanted the profits — your question
indicates that you have asked for the total profits for the original
terms members in the whole operation of the prior preferred stock.
Mr. Pecora. No ; in the selling of the prior preferred stock.
Mr. Russell. Exactly. I will have to do some calculation to get
that.
Mr. Pecora. Mr. Russell, I am simply asking you now for the
profits of the original terms group.
Mr. Russell. Just the original terms group?
Mr. Pecora. Yes.
Mr. Russell. You said, members of the original terms group.
Mr. Pecora. I meant, of course, the original terms group; who took
the stock at 94 and passed it on to the distributing group at 96.
Mr. Russell. That is different. $400,000.
Mr. Pecora. That does not take into account, does it, whatever
value attached to the convertible stock and to the common stock?
Mr. Russell. Oh, no.
Mr. Pecora. Of that sum of $400,000 how much went to the
National City Co.?
Mr. Russell. Seventy-seven and a half per cent.
Mr. Pecora. That would be $310,000, would it not?
Mr. Russell. I have not figured it out.
Mr. Pecora. What profits accrued to the distributing group?
Mr. Russell. All members?
Mr. Pecora. Yes.
Mr. Russell. $300,000.
Mr. Pecora. Of which the National City Co. got how much?
Mr. Russell. You say, the distributing group?
Mr. Pecora. Yes, sir.
Mr. Russell. Approximately $129,000.
Mr. Pecora. What profits accrued to the selling group?
Mr. Russell. Appro.ximately $391,000.
Mr. Pecora. How much of that did the National City Co. get?
Mr. Russell. Approximately $249,000.
Mr. Pecora. That is still exclusive of the convertible stock and
the common stock which it received in the original transaction?
Mr. Russell. Right.
Mr. Pecora. That makes a total of about $688,000 which the
National City Co. got from these three groups?
Mr. Russell. Yes.
Mr. Pecora. Exclusive, again, of the convertible stock and the
common stock?
Mr. Russell. Yes; and exclusive, of course, of our own costs and
expenses which are not chargeable against the syndicate.
Mr. Pecora. Was any of this stock listed on any exchange at any
time?
Mr. Russell. Yes.
Mr. Pecora. Which?
2286 STOCK EXCHANGE PRACTICES
^ Mr. Russell. All three issues were on the New York Curb
Exchange, and later on the New York Stock Exchange.
Mr. Pecora. When did the first trading on any exchange take
place in any of these shares?
Mr. Russell. I think the first trading occurred on the New York
Curb Market on March 1, 1929, although I beUeve there had been
some over-counter trading before that.
Mr. Pecora. In what shares was the trading on March 1 — the
common?
Mr. Russell. I think it was in all three stocks. I am not positive,
but I think so, sir.
Mr. Pecora. At what prices was the common stock traded in on
that day?
Mr. Russell. I think it was a range of 42 to 48.
Mr. Pecora. $42 to $48 a share for the common?
Mr. Russell. Yes.
Mr. Pecora. That was stock to which you gave a value originally
of $10 a share?
Mr. Russell. The cost value; yes.
Mr. Pecora. In doing that you felt that was what it cost the
National City Co.?
Mr. Russell. Yes; what it cost; yes.
Mr. Pecora. On what date was the negotiation concluded with
respect to this merger?
Mr. Russell. I think the contract was signed on the 22d of
February.
Mr. Pecora. And on the 1st of March the common stock was
traded in on the public exchange at $42 to $48 a share?
Mr. Russell. Right.
Mr. Pecora. How many shares of common stock did the National
City Co. get from the Oliver Farm Equipment Co.?
Mr. Russell. Fifteen thousand and fourteen shares. That is, the
group as a whole got that.
Mr. Pecora. That is, the original terms group got it?
Mr. Russell. Yes.
Mr. Pecora. The National City Co. receiving 77K per cent of it?
Mr. Russell. It had 77 K per cent interest in it.
Mr. Pecora. On the basis of the quotations of common stock on
the first day's trading, what additional profit did the National City
Co. and its two participants in the original terms group get from
this common stock?
Mr. Russell. Which quotations shall I use?
Mr. Pecora. Take the average, the range between 42 and 48.
Let us take 45. That would be the average.
Mr. Russell. Well, there was a paper profit of approximately
$425,000.
Mr. Pecora. Is not that $525,000?
Mr. Russell. You are right — $525,000.
Mr. Pecora. At what price did the convertible participating
stock sell, on the exchange on March 1, 1929?
Mr. Russell. I think it was about 61 or 62. I think the range
was 61 to 62 that day.
Mr. Pecora. And the National City Co., with the other two
members of the original terms group, had 31,000 shares of that stock
given to it?
STOCK EXCHANGE PRACTICES 2287
Mr. Russell. Yes — not given to it.
Mr. Pecora. Well, I meant, allocated to it at $54 a share.
Mr. Russell. Right.
Mr. Pecora. What was the profit of the National City Co. and
the other two participants in the original terms group, based upon the
market value of the convertible participating stock on the opening
day's trading?
Mr. Russell. Approximately $248,000, paper profit.
Mr. Pecora. The National City Co. had 77 K per cent interest in
those two classes of paper profits, which made a total of $599,079,
approximately, as I have figured it out, Mr. Russell, that the National
City Co. made out of this deal, in addition to the cash profits in
connection with the distribution of the prior preferred stock Is
that right?
Mr. Russell. How much did you say?
Mr. Pecora. $599,079. That is about right, is it not?
Mr. Russell. That is about right.
Mr. Pecora. And that sum in addition to the cash profit of ap-
proximately $688,000 was the profit accruing in cash or on paper to
the National City Co. from its conceiving of this merger?
Mr. Russell. That is about right.
Mr. Pecora. That would make a total of $1,288,000; merely for
the idea of conceiving the merger?
Mr. Russell. No; I would not say that.
Mr. Pecora. It did not do very much beyond that, did it?
Mr. Russell. Oh, yes; it did.
Mr. Pecora. Outside of conceiving and financing it?
Mr. Russell. Oh, yes; it did.
Mr. Pecora. What else did it do?
Mr. Russell. It persuaded everybody to do it.
Mr. Pecora. The "everybody" were the three constituent com-
panies?
Mr. Russell. Right.
Mr. Pecora. You had the officers of the tliree companies assisting
you in persuading the stockholders to do it?
Mr. Russell. Far from assisting.
Mr. Pecora. Did not the officers of the three predecessor compa-
nies persuade their respective stockholders to agree to this merger?
Mr. Russell. They finally did; yes. That was a very difficult
negotiation, Mr. Pecora. It repeatedly broke down.
Mr. Pecora. Have you a letter addressed to your company by
Eastman, Dillon & Co. in connection with tliis merger?
Mr. Russell. There was such a letter.
Mr. Pecora. Will you produce it? It is a letter dated March 7,
1929, addressed specifically to you. Have you that letter?
Mr. Russell. My assistant is seeing to it now.
Mr. Pecora. Let me read from what purports to be a copy which
we got from the files or records of your company. [Reading.]
Re Oliver Farms Equipment Co.
March 7, 1929.
Mr. Stanley A. Russell,
The National City Co., New York City.
Dear Stanley: Last Friday while lunching with you I tried to leave with
you (as pleasantly as possible) "the idea that my partners and I feel very strongly
that up to date we have not been properly or fairly treated in this Oliver business,
2288 STOCK EXCHANGE PRACTICES
and that we were looking for you to give us some fair percentage of the origina-
tion profits in Hne with your personal promise to my partner, Bent, and Mr
Brown's personal promise to my partners. Bent and Buffington.
I had been hoping to hear from you favorably before now, but inasmuch as it
Is almost a week since I saw you, I naturally concluded that your present inten-
tion is not to do what we want in this matter.
After careful consideration of the points you made concerning your annoyance
at our delaying stepping aside from our contract with N. & S., it seems to me that
this is a niinor point in the whole matter. The big thing is that we did step
aside finally (because of your promise and Mr. Brown's promise to take us into
the deal with you on a fair basis) and, as a result of our stepping aside, you
stand to make a profit of between seven and eight million dollars on this deal,
providing your common stock options become as valuable as you told me you
felt pretty sure they would during the next two or three years.
You definitely stated to me last Friday that you would not have gone ahead
with the business under any conditions if we had not stepped aside-^I think this
was a wise decision on your part, because we were advised at the time that our
position was strong enough to probably prevent your going ahead with the
business if we had chosen to take that attitude, which we finally decided not to
take because of your promise to take us into the deal with you.'
It is quite clear from the above facts that our stepping aside from our contract
permitted you to make a profit which looks as if it might run into seven or eight
million dollars, and only by our stepping aside was that profit possible.
In thinking over the percentage of this profit which should come to us we have
no arbitrary or impossible ideas and we will try very hard to be reasonable, but
as matters now stand we are looking to you to carry out your agreement and Mr.
Brown's agreement. I hope that you will give the matter your immediate and
most serious consideration, because we feel very strongly about this and we
consider it a very serious thing for you to consider promptly and settle fairly in
line with your agreement.
Sincerely yours,
Herbert L. Dillon.
Had you, prior to March 7, 1929, which was the date of this letter,
told Mr. Dillon that you expected your company to make between
seven and eight mUlion dollars from this deal?
Mr. Russell. No, sir.
Mr. Pecora. What reply, if any, did you send Mr. DiUon?
Mr. Russell. I find a letter of March 9, 1929, addressed to Mr.
Herbert L. DUlon.
Mr. Pecora. Will you produce the letter, please?
(The witness handed a correspondence file to Mr. Pecoi'a.)
Mr. Pecora. Did you dictate the reply to Mr. DiUon's letter, a
copy of wliich you have just shown me?
Mr. Russell. I think I and counsel conferred on the reply.
Mr. Pecora. You and counsel?
Mr. Russell. I think so.
Mr. Pecora. What counsel?
Mr. Russell. Mr. Winston.
Mr. Pecora. You say you never told Mr. Dillon, prior to March
7, 1929, that you expected your company to make between seven
and eight million dollars in this merger?
Mr. Russell. I do not tliink I did. We may have discussed it as
a possibility, if the options tm'ned out well. Possibly we did. I do
not recall, Mr. Pecora.
Mr. Pecora. It seemed to you that if the company progressed as
you expected, after tliis merger was effected, your company could
make as much as seven or eight niiUion dollars on the deal, in view of
the options it had for 75,000 shares of the common stock?
Mr. Russell. I would have to figure it up. But we would make
a great deal of money, yes, if the options worked out. These 75,000
shares were not issued, of course; it was solely an option.
STOCK EXCHANGE PRACTICES 2289
Mr. Pecora. An option over a period of five years?
Mr. Russell. To buy for cash.
Mr. Pecora. May I read into the record the letter which the wit-
ness has produced as being his reply to Mr. DiUon's letter? (Reading:)
TIT TT T T^ Maiicii 9, 1929.
Mr. Herbert L. Dillon,
Messrs. Eastman, Dillon & Co., New York City.
Mt Dear Herbert: I have your letter of March 7 regarding the Oliver
financing.
I think possibly that our views diflfer because we are not entirely in accord
on the facts. Your firm were the bankers for the Nichols & Shci)ard Co. and
held a contract with that company giving you a preference on any future financ-
ing. When the National City Co. was studying a consolidation of farm-equip-
ment companies, Nichols & Shepard was one of the companies under consideration.
It was quite evident, however, that a single banking house must control the
negotiations in any large consohdation and we made it one of the prerequisites
to Nichols & Shei^ard participating in the consolidation that they secure a release
of any obhgation to outside bankers. If such a release could not have been
obtained, we would have dropped Nichols & Shepard Co. out of the plans and
considered some other company or companies. Your refusal to grant them a
release would not necessarily have prevented a farm-equipment consolidation
being put through by us, but it would have left Nichols & Shepard out of the
picture to the detriment of the stockholders of that company. The distinction
between the facts and the Impression conveyed in your letter is, as you see,
material.
I understand that Mr. Brown took up with your firm the question of release
and there was presented to us a release signed by your firm to the effect that you
released Nichols & Shepard Co. from its obligation to you upon condition that
your firm be accorded a reasonable participation in the financing incident to the
consolidation satisfactory to you. This condition was quite unacceptable to us
and I so advised Mr. Brown. Thereafter Mr. Brown advised me that he had a
release from your firm which eliminated this condition. Since the condition was
withdrawn, we had the right to and did assume the release was unconditional and
it was on this basis that we continued the negotiations.
Under these circumstances there exists no obligation on the National City Co.
to give you any participation in the financing incidental to the consolidation.
If Mr. Brown has made any promise to you such as you state, he has not
advised me. He has asked me, however, to give you reasonable consideration.
This request I believe I have met in giving you participation in the bankers' group
to the extent of 3^1,000,000, which you have accepted.
In your letter to me you say, "We were looking for you to give us some fair per-
centage of the origination profits in line with your personal promise to my partner,
Bent and Mr. Brown's personal promise to my partners. Bent and Buffington. " I
made no such promise and I have not been advised by Mr. Brown that he has
made any such promise. While I felt that the National City Co. was under no
formal obligation to j'ou to give you a participation of any kind in this financing,
I still felt that since yo\i had prior banking relations with the Nichols & Shepard
Co., it was fair you should participate to a certain extent in the offering, and we
have evidenced this feeling by granting you the participation mentioned above.
There are two other statements in your letter which I think should be men-
tioned. You say, "You definitely stated to me last Friday that you would not
have gone ahead with the business under any conditions if we had not stepped
aside. " As I have indicated above, what I did say was that we might not have
brought Nichols & Shepard into the consolidation if they could not have obtained
a release from their contract with you.
You also say, "You (the National City Co.) stand to make a profit of between
$7,000,000 and $8,000,000 on this deal." I gave you no specific figures. The
question of profits depends, of course, on the improvement the new cornpany
makes in earnings and the increase in the market value of its shares. A similar
profit is possible to anyone who would make a large enough investment in the
stock of the company.
Whhe I sincerely regret that you do not feel you have had reasonable treatment
from us in this business, I personally have endeavored to be entirely equitable in
the consideration accorded to your firm as well as to others. We have given you
the participation in the bankers' group contrary to the judgment of some of the
others interested in this business who have felt there was no reason for granting
2290 STOCK EXCHANGE PRACTICES
your firm any participation. I particularly regret the present misunderstanding
because of your expressed attitude on a previous piece of busmess with which 1
was not familiar. We can not, however, consider that there is either a legal or
moral agreement on our part which would entitle your firm to a participation in
the business on original terms.
Yours faithfully,
Vice President.
I presume it was signed by you as vice president?
Mr. Russell. Yes. . . . . ,
Mr. Pecora. Did Eastman, Dillon & Co. get a participation in the
bankers' group which netted them a profit of $1,000,000?
Mr. Russell. Oh, no. <■ , •
Mr. Pecora. That milhon dollars referred to the extent of their
participation in the so-caUed "bankers' group"?
Mr. Russell. Yes.
Mr. Pecora. It is referred to in this letter as a bankers' group.
You referred to it as a distributing group.
Mr. Russell. The terms are sometimes synonymous.
Mr. Pecora. But this alluded to the same group?
Mr. Russell. Yes. They had an interest of 10,000 shares in the
distributing group.
Mr. Pecora. When you apportioned the value of $10 a share to
the common stock which your company acquired from the Oliver
Farm Equipment Co. on or about February 22, 1929, you felt that
that was a fair and reasonable value for the common stock, did you
not?
Mr. Russell. No, sir.
Mr. Pecora. You thought it was unfair?
Mr. Russell. That was our cost.
Mr. Pecora. It was the cost to you?
Mr. Russell. Right.
Mr. Pecora. Would not the cost be an element to be considered in
determining the fair and reasonable value? Is not cost always an
element to be considered?
Mr. Russell. Not necessarily.
Mr. Pecora. Do you want to tell us that the consohdation sold
you its common stock at a price less than its value?
Mr. Russell. May I answer in my own way that question?
Mr. Pecora. You can only answer in your way.
Mr. Russell. Nobody in this negotiation had any idea what these
stocks would sell for when they opened up on the market; these junior
stocks. As a matter of fact, the officers, or some of the officers, of the
predecessor companies asked me for a guess as to what the common
stock would open up for, and I told them as a pure guess that I would
say maybe $20 a share. We had nothing to do with the opening of
the stock on the curb market, and I was as much amazed as anyone
else when the shares sold where they did.
Mr. Pecora. That is, from $42 to $48 a share?
Mr. Russell. Yes. That was a free market. We had nothing
to do with it. The pubhc did that.
Mr. Pecora. You said before that the apportionment of value
which was made among those three classes of stock that your company
took over for some $26,000,000 was an arbitrary one determined
by you?
STOCK EXCHANGE PRACTICES 2291
Mr. Russell. I think so, as I recall it.
Mr. Pecora. In making that apportionment of value did you not
attempt to express what your personal opmion was of the value of
these three classes of stock?
Mr. Russell. No, sir; except on the prior preferred.
Mr. Pecora. If the prior preferred was worth, in your judgment,
$94 a share, that would leave the convertible and the common stock
worth about the sums you fixed upon for them, would it not?
Mr. Russell. Those were our costs.
Mr. Pecora. When you let in the participants in the origmal terms
group, you let them in on the basis of $10 a share for the common
stock, did you not?
Mr. Russell. Yes.
Mr. Pecora. And on the basis of $54 a share for the convertible
participating preferred?
Mr. Russell. Yes, sir.
Mr. Pecora. You adopted those figures because they represented
your honest judgment of the value of those shares, did you not?
Mr. Russell. No, sir.
Mr. Pecora. Well, upon what basis did you reach those figures?
Mr. Russell. Out cost.
Mr. Pecora. The cost, Mr. RusseU, was not definitely based on any
specific valuation ascribed to any one of these three classes of stocks,
was it?
Mr. Russell. We made a trade.
Mr. Pecora. You made a trade whereby your company received a
certain number of shares of the prior preferred stock and a certain
number of shares of the convertible participating stock, and a certain
number of shares of the common stock for a total purchase price of
$20,625,652?
Mr. Russell. Right.
Mr. Pecora. And there was no apportionment of values ascribed
to any of those three classes of stock in agreeing upon that total
purchase price of $20,625,000, was there?
Mr. Russell. In the contract, you mean?
Mr. Pecora. In the contract or anywhere else, except in your
mind.
Mr. Russell. That is right.
Senator Walcott. Do you mean to say that you spent $20,000,000
of the National City Co.'s money for something that you gave no
thought to as to its value?
Mr. Russell. Not at all.
Senator Walcott. You just said that you paid no attention to
the value, that it was your guess. How did you estimate that it
was worth $10 a share if you did not know something about the
prospect, or at least estimated the prospects of the earnings of the
company?
Mr. Russell. We certainly did.
Senator Walcott. Why did you not bring that out, then, m answer
to Mr. Pecora's question?
Mr. Russell. I did not say we disregarded values.
Senator Walcott. You certainly implied it.
Mr. Russell. I said those figures were not the values; they are
cost figures.
2292 STOCK EXCHANGE PRACTICES
Mr. Pecora. Did you think you were getting this stock at less
than its real value?
Mr. Russell. What do you mean by "real value"?
Senator Walcott. What were the earnings apphcable to the stock
that was to be issued? You must have had the history of the
company.
Mr. Eussell. Surely. We had full audits; we had field investi-
gations of all three companies; we had audits by one of the very best
firms in America, and we had complete information of every kind
and character.
Senator Walcott. I assumed you did. That is why I feel that
you are trjing to dodge Mr. Pecora 's question.
Mr. Russell. I am not trying to dodge it at all, Senator.
Senator Walcott. Then why don't you help out and show how
you estimated the values, starting with yoiu" prior preferred, which,
let us say, had a fair market value of 94 ; you convertible, let us say,
with a fair market value of $54. Now, you have got a certain amount
of common stock to be issued at once for the formation of this new
company. What were the earnings or previous earnings 1 year or 2
or 3 or 4 or 5 years, that would be applicable to that common stock
per share?
Mr. Russell. The net income for the year ended December 31,
1928, of the consolidated companies as audited by Arthur Anderson
& Co. and adjusted to eliminate interest charges on outstanding
securities that were paid from the proceeds of the financing, and also
adjusted to the then existing Federal income tax basis of 12 per cent,
was $3,094,478. There were no bank loans or funded debt of any
kind of character; therefore, no interest. This sum was available
for dividends of $1,200,000 on the prior preferred stock, which leaves
$1,894,478. The convertible participating stock calls for a $3 divi-
dend, and there were 500,000 shares of it at $3, which is a million
and a half dollars.
Senator Walcott. That leaves you $394,000?
Mr. Russell. $394,478.
Senator Walcott. Applicable to how many shares?
Mr. Russell. 350,000 shares.
Mr. Pecora. Was it 350,000 or 375,000?
Mr. Russell. 350,000.
Senator Walcott. $1.20?
Mr. Russell. Yes, sir.
Senator Walcott. That is the answer. It seemed to be difficult
to get that out.
Mr. Russell. Senator, I felt that Mr. Pecora was trying to have
me say that that was the value of those stocks, in my opinion. It
was not. It was the cost.
Mr. Pecora. Then I ask you if you thought you got the stock at a
price lower than its real value.
Mr. Russell. What do you mean when you say "real value"?
Mr. Pecora. Apparently you recognize that there is a distinction
between real value and cost price, do you not?
Mr. Russell. Cost price is a definitely determinable thing.
Mr. Pecora. Cost price is an arbitrary thing, is it not?
Mr. Russell. Definitely determinable?
Mr. Pecora. Yes.
STOCK EXCHANGE PRACTICES 2293
Mr. Russell. Sure.
Mr. Pecora. The actual value is not quite so definitely determin-
able? Is that what you mean to say?
Mr. Russell. I do not know what you mean when you say "actual
value."
Senator Walcott. Let us get at it this way. You show an ap-
plicable earning there of $1.20 a share; and you know, of course, that
the old rule of thumb was ten times yoiu- net for the market value?
Mr. Russell. That is right.
Senator Walcott. And you got up in those boom days of 1929 to
anywhere from 15 up to 30 times net?
Mr. Russell. And more.
Senator Walcott. So that the old rule of thumb was 10, and you
have $12 a share?
Mr. Russell. Yes, sir.
Senator Walcott. Why not bring that into the testimony? I
presume it must have been going through yoiu- mind in figuring this
out.
Mr. Russell. Senator, I had no idea where these stocks might sell.
Senator Walcott. Of course not. Mr. Pecora is not trying to get
at what you thought they might sell at. It is what you determined
as an approximate value.
Mr. Russell. I was trying to make a good trade. That is what
I was trying to do.
Senator Walcott. Apparently you did make a good trade.
Mr. Russell. I think I did.
Senator Walcott. I think so too; but why take so much time in
developing your real point of view.
Mr. Russell. I do not mean to delay it. I am not trying to. But
I do not propose to have Mr. Pecora have me say that that is, in my
judgment, the value of those stocks.
' Mr. Pecora. If it is not the value of the stocks, just simply tell us
so, and then tell us what you really thought was the value.
Mr. Russell. We felt that the prior preferred stock, as a 6 per
cent preferred stock in this industry, could be sold at approximately
par, which it was sold at.
Mr. Pecora. That is, $100.
Mr. Russell. $100.
Mr. Pecora. They had no par value.
Mr. Russell. They had no par value. On the convertible par-
ticipating stock, it was difficult to determine approximately what that
might sefl at. As I recall it, at the time I think we had in mind gen-
erally around $60 a share as the probable sales value of that stock,
which, with a $3 dividend, would be about a 5 per cent basis. The
participating feature and the convertible feature in it added some
attractiveness. On the common stock, as I say, the best guess I
made, as a guess, was around $20 a share, as I told the gentleman,
in the negotiations when they asked me that question. But in those
days attempting to express an opinion as to what a new stock would
sell for on the stock exchange, resulting from a consolidation in the
prosperous condition of the farm-implement industry, was purely
a guess, and at the time your guess might have been just as good
as mine.
2294 STOCK EXCHANGE PEACTICES
Mr. Pecora. To summarize it, this common stock, which your
company got at a cost of $10 a share was sold exactly one week after
it concluded that negotiation, on the public exchanges for an average
price of four and a half times its cost price to you, and two and a
quarter times what you felt, under ordinary circumstances, it ought
to sell for or it might sell for on the exchange.
Mr. Russell. That is qiiite right.
Mr. Pecoba. Do you know who made the market for that common
stock?
Mr. Russell. I haven't any idea.
Mr. Pecora. Did the National City Co. have anything to do
with it?
Mr. Russell. I do not think we had a thing to do with it.
Mr. Pecora. Did the National City Co. hold on to its common
stock while the market was being made — that is, hold on to all of it?
Mr. Russell. No; we sold some.
Mr. Pecora. At the opening of the market?
Mr. Russell. I do not know whether we did or not. I can not
answer that.
Mr. Pecora. You do not know that?
Mr. Russell. We would have to get into the records.
Mr. Pecora. Who would have charge of that?
Mr. Russell. The records?
Mr. Pecora. No; of releasing your common stock at the opening
of the market.
Mr. Russell. I think Mr. Morrison, the head of the trading
department.
Mr. Pecora. Is Mr. Morrison stiU here?
Mr. Russell. No.
The Chairman. This is too important a point to pass over, I think.
If they are not willing to disclose it, we had better take the necessary
steps to get the information.
Mr. Pecora. It is important; yes, sir.
Mr. Russell. Of course, we will be glad to get you any information
you want on it.
Mr. Pecora. Would you have anything to do with making that
decision?
Mr. Russell. I might.
Mr. Pecora. What is your present best recollection as to whether
or not the National City Co. participated in any way in the making
of the market for that common stock?
Mr. Russell. I do not think we had the slightest thing to do with
it. As a matter of fact
Mr. Pecora. Then who made it — the members of the seUing
group?
Mr. Russell. No; I do not think so. I think some stock firm
probably did.
Mr. Pecora. What stock firm do you think probably did?
Mr. Russell. I haven't any idea. That is usually the way that
sort of tiling will arise.
Mr. Pecora. That is interesting
Mr. Russell. We had nothing to do with the making of that mar-
ket, I am positive.
STOCK EXCHANGE PRACTICES 2295
Mr. Pecora. How does a stock firm go about making the market for
a new issue?
Mr Russell I am not in the stock-exchange business, or so-called
stock farm. I really do not know, Mr. Pecora
Mr. Pecora. It seems to be an exceedingly difficult thing, Mr.
Chairman, to find out from any of these financiers how operations are
conducted on the market. Men who have been engaged in that
business for a score or more years seem to show an abysmal icrnor-
ance about the operations of their own Icind of business "
Mr. Russell Bear in mind, Mr. Pecora, that the great majority
of the convertible and common shares of this company were issued to
the shareholders of the predecessor companies. The stock of the
predecessor companies were outstanding, being traded in in the mar-
ket.
Mr. Pecora. Let me ask you
Mr. Russell. There was a direct comparison there.
Mr. Pecora. Let me ask you this, Mr. Russell. Who made the
hsting application to the stock exchange for the listing of these
securities?
Mr. Russell. Usually
Mr. Pecora. No; in this case who did it?
Mr. Russell. I can not recall definitely.
Mr. Pecora. Do you recall, Mr. Winston?
Mr. Winston. I do not know who signed it, but I appeared before
the committee on stock listing. This trading you are talking about
was not on the New York Stock E.xchange.
Mr. Pecora. It was on one of the exchanges.
Mr. Russell. The curb market.
Mr. Winston. There was a listing application made for that.
Mr. Russell. You do not have a listing application, I do not
think, on the curb market, in the same form as you do on the stock
exchange.
Mr. Winston. You do not have a listing application.
Mr. Pecora. Oh, yes. You have to make apphcation to the curb
exchange to list a security on its board.
Mr. Russell. But not like the New York Stock Exchange.
Mr. Pecora. The application might be in different form, but an
application must be made, and the application must be granted.
You know that, don't you, Mr. Russell?
Mr. Russell. Yes; but I think the brokers can do it. I am not
sure, but I think so.
Mr. Pecora. I am trying to find out who did do it.
Mr. Russell. I do not know.
Mr. Winston. I can find out for you, Mr. Pecora, whether the
National City Co. made any application to list it.
Mr. Pecora. Or any person connected with the National City Co.
Mr. Winston. Or any person connected with the National City Co.
Mr. Russell. Mr. Pecora, the common shares of the Nichols-
Shepafd Co. and the Hart-Parr Co. were being traded in on the
market at that very time.
Mr. Pecora. Mr. Russell, referring to the option which was given
at the outset by the Oliver Farm Equipment Co. to the National
City Co. for 75,000 shares of its common stock, how many shares
were drawn down under that option by the National City Co.?
2296 STOCK EXCHANGE PRACTICES
Mr. Russell. We split the option and gave the respective propor-
tions to the other members of the original terms group, and we
exercised our proportion of the first option, which was 11,625 shares.
Mr. Pecora. Eleven thousand six hundred and twenty-five shares.
Mr. Russell. Yes, sir.
Mr. Pecora. When did you exercise the option to that extent?
Mr. Russell. I think that was in AprU or May, 1930, a year later.
Mr. Pecora. My information is it was on April 24, 1930.
Mr. Russell. It may well be.
Mr. Pecora. You acquired those 11,625 shares at that time at $10
a share.
Mr. Russell. Right.
Mr. Pecora. What was the market for the stock at that time, do
you recall?
Mr. Russell. The market for the week ended April 26, 1930, was
a low of 31 and a high of 3d%, according to my records.
Mr. Pecora. Let us take an average of 32. That would be fair,
would it not?
Mr. Russell. Yes, sir.
Mr. Pecora. That was 22 points above the price at which the
National City Co. acquired those 11,625 shares. That would add a
paper profit of $255,750.
Mr. Russell. If we had sold it; and I think we still have some of it.
Mr. Pecora. All these profits were the result of the labors and serv-
ices— whether they were monumental in character or not — of the
National City Co. in bringing about this merger.
Mr. RissELL. And the risk of the commitment.
Mr. Pecora. You pretty well explored that risk before you
brought about the merger, did you not? You said that the three
companies were all in prosperous condition.
Mr. Russell. I am talking of the market risk.
Mr. Pecora. The market risk.
Mr. Russell. Of the banking commitment, which is inherent in
any financial operation of this character.
Mr. Pecora. The market risk was represented in part by the fact
that the cost of the common stock to your company was $10 a share
and the market opened at an average of $45 a week later.
Mr. Russell. There happened to be no risk. That does not
always happen.
Mr. Pecora. There happened to be no risk, and it also happened
that other bankers — Eastman, DUlon & Co. — had a controversy,
more or less friendly in character with you about your company mak-
ing a profit of between seven and eight million dollars out of this
operation.
Mr. Russell. Yes.
Mr. Pecora. In putting out the circular which the National City
Co. issued in connection with its sale of the 200,000 shares of prior
preferred stock, was anything said to the investing pubhc concerning
the entire interest which the National City Co. had in the stock of
the Oliver Farm Equipment Co.?
Mr. Russell. Concerning the entire interest?
STOCK EXCHANGE PKACTICES 2297
Mr. Pecora Concerning the interest which the National City Co
had been accorded by its contracts with the OUver Farm Equipment
Mr. Russell. No.
Mr. Pecora. You know that under the British Companies Act
that information would have to be given to the pubhc, do you not?
Mr. EussELL. I am not entirely famihar with British practice but
I imderstand that imder certain methods they do, and under other
methods they do not.
Mr. Pecora. That is, when they seek to comply with the letter
and the spirit of the law they do, and when they try to evade it thev
do not.
Mr. EussELL. No; that is not my understanding.
Mr. Pecora. Do you, as one who has had years of experience in
investment banking and in the accumulation and sale of securities to
the pubhc, favor a legal requirement of that kind, that is, one which
would require an offering house or a house of issue, to state to the
investiQg pubhc its complete interest?
Mr. EussELL. I would hke to think that subject over, Mr. Pecora.
I do not see any particular objection. I think a great deal more
importance is given to it than is warranted.
Mr. Pecora. You would not object to such a statute?
Mr. Russell. Off-hand I do not see any particular objection. I
would Uke to think it over more.
Mr. Pecora. What are these stocks selling for to-day, do you
know?
Mr. Russell. Yes. The prior preferred is seUing at dji. The
common and convertible have been reclassified into a new common
stock, which is selling at about 1}^ to IK.
Mr. Pecora. That is all for this witness.
Mr. Winston. Mr. Pecora, I can have a witness as to that prac-
tice of hsting if you want to examine him. He advises me that as
far as he can recall the National City Co. made no appUcation for
the hsting. It was done by some broker.
Mr. Pecora. I will take Mr. Winston's statement to that effect,
without caUing any witness.
Mr. Winston. Thank you.
The Chairman. The committee wiU adjourn until 2.30. Wit-
nesses under subpoena wiU appear at that time.
(Whereupon, at 12.45 o'clock p. m., the committee recessed, to
reconvene at 2.30 o'clock p. m.)
after recess
The committee reconvened at the expiration of the recess, at 2.30
o'clock p. m.
The Chairman. The committee wiU come to order.
Mr. Pecora. Mr. Chairman, the evidence in the matter of the
Lautaro Nitrate Corporation flotation of bonds by the National
City Co. will be presented by Mr. Juhus Silver, associate counsel to
the committee.
Mr. Silver. Mr. Bvrnes.
2298 STOCK EXCHANGE PRACTICES
FURTHER TESTIMONY OF RONAID M. BYRNES, WATCH HILI,
R.I.
(The witness, having been previously duly sworn, was examined
and testified further as follows:)
Mr. Silver. Mr. Byrnes, are you familiar with the details ot the
flotation of the $32,000,000 Lautaro Nitrate Co. (Ltd.), first mortgage
6 per cent convertible gold bond issue?
Mr. Byrnes. I was.
Mr. Silver. Was that issue floated under your supervision?
Mr. Byrnes. Yes.
Mr. Silver. You were a vice president of the National City Co.
at the time?
Mr. Byrnes. Yes.
Mr. Silver. Will you tell us what the relationship was between the
Lautaro Nitrate Corporation and the Lautaro Nitrate Co. (Ltd.)?
Mr. Byrnes. The Lautaro Nitrate Co. (Ltd.) was an English
company. It had been in e.xistence for a great niany years. My
recollection is that it was incorporated in England in, I think, 1889,
under the Enghsh Companies' Act, and at the time of this financing
and when the bond issue for the company was issued, it had been and
still was the largest producer of Chilean nitrate, sodium nitrate.
The Lautaro Nitrate Corporation was an American corporation
organized about that time, in the year 1929, I think under the laws
of the State of Delaware, and became the owner of all of the common
stock of the English company.
Mr. Silver. That Delaware corporation was, in effect, a holding
company, was it not?
Mr. Byrnes. Yes.
Mr. Silver. Is it not a fact, Mr. Byrnes, that the Lautaro Nitrate
Co. (Ltd.), was controlled by the Guggenheim interests?
Mr. Byrnes. The Lautaro Nitrate Co. (Ltd.), was not, had not
been prior to that time, and was not at this time, but as a result of the
arrangements made at that time, through control of the Delaware
corporation, it is my recollection that the Anglo-Chilean Consolidated
Nitrates Co., wiiich, in turn, was controlled by the Guggenheims, did
exercise subsequently control over the English company.
Mr. Silver. The Lautaro Nitrate Corporation, a Delaware com-
pany, was formed just prior to the flotation of the bond issue that I
have referred to, isn't that so?
Mr. Byrnes. I want to be legally accurate. I am not sure whether
it had actually been organized and incorporated at the time this
bond issue was offered to the public.
Mr. Silver. It was at or about the same time, was it not?
Mr. Byrnes. Before the bonds were deUvered, this company had
been organized and was in existence — the Delaware corporation.
Mr. Silver. It is a fact, is it not, that as a result of the organiza-
tion of this holding company, the Guggenheim interests were able to
procure control of the Lautaro Nitrate Corporation, and, through it,
of the Lautaro Nitrate Co. (Ltd.)?
Mr. Byrnes. That, I think, is a fair statement.
Mr. Silver. In any event, it represented, at the time of the flota-
tion of this bond issue, the outstanding and chief controlhng interest
of that Chilean company?
STOCK EXCHANGE PRACTICES 2299
Mr. Byrnes. It was an English company.
Mr. Silver. But, I mean, operating in Chile.
Mr. Byrnes. If we waive the matter of days or months in the
operation, eventually, as a result of the negotiation of which this was
a part, they acquired indirect control.
Mr. Silver. That issue was offered to the public at what price?
Mr. Byrnes. A price of 99 and interest.
Mr. Silver. Will you tell us how much was paid for this issue bv
the National City Co.?
Mr. Byrnes. I have before me the contract between the National
City Co. and the Lautaro Nitrate Co., and, under that, the National
City Co. did buy $32,000,000 of bonds, and paid for those bonds,
plus 600,000 shares of stock of the Lautaro Nitrate Corporation, the
sum of $30,000,000 plus interest accrued to date of delivery — date of
issue of interims, I should say.
Mr. Silver. Those bonds contained certain warrants, did they not?
Mr. Byrnes. Each $1,000 principal amount of bonds was accom-
panied by a warrant entithng the holder to receive, on January 1,
1930, without cost, 10 shares of the common stock of the Lautaro
Nitrate Corporation.
Mr. Silver. Of the 600,000 shares of common stock that you have
referred to as having been included in the purchase price of $30,000,-
000, 320,000 shares were reserved for these warrants, is that correct?
Mr. Byrnes. Yes; that would oe correct.
Mr. Silver. There were certain additional conversion privileges
attaching to the bonds?
Mr. Byrnes. Yes.
Mr. Silver. What were they?
Mr. Byrnes. There was a conversion privilege
Mr. Silver. With respect to the common stock, please.
Mr. Byrnes. Each $1,000 principal amount of the bonds was to
be convertible at the option of the holder at any time on or prior to
July 1, 1939, or, in the case of prior redemption, up to the date of
redemption, or six days before the date of redemption, into 10 shares
of cumulative preferred stock or shares of the Lautaro Nitrate Co.
(Ltd.), and 4 shares of common stock of the Lautaro Nitrate Corpor-
ation, of no par value, I beUeve.
Mr. Silver. Setting up the reserve of 320,000 shares of the common
stock for the warrants, and 128,000 shares of the common stock for
the conversion privilege to which you have just referred, that left
free to the National City Co. 152,000 shares of the common stock, is
that correct?
Mr. Byrnes. That is correct.
Mr. Silver. In other words, the National City Co. paid $30,000,000
and received in return $32,000,000 worth of these first mortgage 6 per
cent convertible gold bonds, and in addition, 152,000 shares of the
common stock?
Mr. Byrnes. That is a net statement. We received the
600,000
Mr. Silver. But it retained for its own purposes
Mr. Byrnes. The National City Co., out of that 600,000 attached
to the bonds the right of conversion plus — I do not like to use the
word— a bonus of stock. The warrant form was simply because the
119852— 33— PT 6 35
2300 STOCK EXCHANGE PRACTICES
Stock would not be deliverable until a later date on account of orga-
nization necessities. , , ti ^t. ^ t^
Mr. Silver. Is it your suggestion, then, Mr. Byrnes, that alter
providino- for the necessities of the contract contained in the bond,
that there was provision for 152,000 shares of common stock as a
bonus to the National City Co. in conjunction with this purchases of
the face amount of the bonds?
Mr Byrnes. After providing for the necessities ol the hnancing,
the National City Co. was left with 152,000 of those shares of stock,
in whicn, however, there was a minor interest that had been ceded,
so that its net, if vou want that exactly
Mr. Silver. We will get to that. What was the spread m connec-
tion with this bond issue?
Mr. Byrnes. Our cash cost was $30,000,000, which, apphed upon
the principal amount of $32,000,000, figures out 93^ per cent, ad-
justing the purchase price to the bond issue.
Mr. Silver. In other words, for purposes of computing the spread,
the 152,000 shares of common stock are not counted, and you get a
cost of 93% for the bonds?
Mr. Byrnes. Correct.
Mr. Silver. In the original terms group, there were certain other
interests in addition to the National City Co., were there not?
Mr. Byrnes. Yes; not parties to the contract, but an interest was
ceded by the National City Co.
Mr. Silver. Is it true that the National City Co. ceded an interest
of 10 per cent in the original terms group to the Guggenheim Bros.?
Mr. Byrnes. That is true.
Mr. Silver. Is it also true that an additional interest of 25 per
cent, less a management fee, was ceded to J. P. Morgan & Co.?
Mr. Byrnes. I believe that is also true; a one-quarter interest
after the deduction of the 10 per cent interest, was ceded to J. P.
Morgan & Co., subject to a management fee.
Mr. Silver. Will you be good enough to tell us what effort was
applied in the flotation of these bonds by Guggenheim Bros.?
Mr. By'rnes. Of course, the firm of Guggenheim Bros, had ap-
proached us in the first instance in trying to interest us in financing in
previous years — possible financing for their existing operations in the
Anglo-Chilean Nitrate. Subsequently, over a period of time, thej'
developed the idea of applying that process to the Lautaro operations,
and the Lautaro's assets, the deposits which they controlled. You
must bear in mind that there were very few deposits of nitrate in
Chile that could be made amenable to the Guggenheim process, because
it required a large ore reserve to incur the large capital expenditure
that was involved in the Guggenheim process. But just to make that
clear, Mr. Silver, and I think, perhaps, to save time, while this interest
was ceded to Guggenheim Bros., it was really destined for Lehman
Bros., a banldng firm, and not to Guggenheim Bros, in themselves.
Mr. Silver. Why was it not ceded directly to Lehman Bros.?
Mr. Byrnes. Simply because that interest really represented an
interest to Lehman Bros, that was involved in the fact that Lehman
Bros, had financed the previous operation of the Guggenheim
process, the Anglo-Cliilean Nitrate Consolidated Corporation, and
rather than myself being a party to that, or the National City
Co., it was merely a matter of form that it was ceded to Guggen-
STOCK EXCHANGE PEACTICES 2301
heim Bros.; to be dealt with in their discretion. It was destined
though, and it was revealed to me at the time, that the Guggenheim
Bros, wanted it, not for themselves, but for Lehman Bros.
Mr. Silver. Mr. Byrnes, there was no outstanding contract, was
there, between Lehman Bros, and the borrower?
Mr. Byrnes. Borrower?
Mr. Silver. There was no contract outstanding between Lehman
Bros., and the Lautaro Nitrate Co. (Ltd.), for its financing?
Mr. Byrnes. Oh, no.
Mr. Silver. Or for any exclusive right to its financing?
Mr. Byrnes. They had had nothing to do with the Lautaro.
They had had to do with Anglo-Cliilean.
Air. Silver. What was the reason for ceding this interest to
Guggenheim Bros., instead of directly to Lehman Bros.?
Mr. Byrnes. Mr. Silver, you can see, from a certain letter intro-
duced in evidence this morning, that bankers that at one time may
have had connection with an enterprise, may, at times, feel that they
have rights in a situation that perhaps would not be fully justified at
law, and I think Lehman Bros, felt that they had some rights, not,
perhaps, as against us, but perhaps as against, at least, the good will
of Guggenheim Bros.
Mr. Silver. Do you know whether Guggenheim Bros, permitted
Lehman Bros, to participate in any way in this 10 per cent interest?
Mr. Byrnes. Oh, yes. It is my understanding that they did.
Mr. Silver. Do you know to what extent?
Mr. Byrnes. Ten per cent. The whole 10 per cent went to
Lehman Bros.
Mr. Silver. Guggenheim Bros, represented the major stock interest
in this organization, did they not?
Mr. Byrnes. In the Anglo-Chilean, yes.
Mr. Silver. And they brought this issue to your attention?
Mr. Byrnes. Yes.
Mr. Silver. When they brought this matter to your attention
were they acting in behalf of the stockholders of the company, or
were they appearing personally?
Mr. Byrnes. When this business was first broached, it was, of
course, in a formative stage. The Guggenheims felt that it would be
a good idea to spread the application of their process to the extent they
could; that it would be a benefit to the industry, and also, of course,
a benefit to them, because, on account of the long time they had taken
to work the process up to a demonstrated commercial success, the
capital structure of Anglo-Chilean was such that there was not left
an earning power applied only to one plant and to one property, that
was adecjuate to the investment which they had made.
Mr. Silver. Mr. Byrnes, what part, in the flotation of this loan,
did J. P. Morgan & Co. play?
Mr. Byrnes. They took a commitment equal to their interest.
Mr. Silver. Their names do not appear on the prospectus.
Mr. Byrnes. Oh, no. That is quite customary, as between lead-
ing houses that have individual issues. They may spread tlieir
financial risk or commitment by taking other houses m on origmal
terms, who may or may not travel along into subsequent steps.
2302 STOCK EXCHAI^GE PRACTICES
Mr. Silver. Wliat do you mean by taking a commitment as applied
to this situation?
Mr. Byrnes. We took a commitment of $30,000,000. Because
of their 10 per cent interest on original terms, the firm of Lehman
Bros., through the Guggenheims, were committed for $3,000,000 on
that. The firm of J. P. Morgan & Co., through their 25 per cent
interest in what was left— that would be $27,000,000, one-quarter of
that would be, roughly, six and three-fourths million dollars, and
J. P. Morgan & Co. had that amount of commitment, so that the
National City Co. financial commitment of $30,000,000 had been
thereby reduced to approximately $20,000,000.
Mr. Silver. Is there any written memorandum or contract showing
that commitment of J. P. Morgan & Co.?
Mr. Byrnes. Yes. I think probably it is here. [After examining
papers.] I have before me a letter of June 19 from J. P. Morgan &
Co., addressed to the National City Co., saying:
We acknowledge receipt of your letter of June 18, offering us a one-quarter
interest in your 90 per cent share on original terms in the purchase of —
And so forth.
We are pleased to accept this offer, subject to the terms mentioned in your
letter, and thank you for including us in this business.
Mr. Silver. Did they have a full 25 per cent participation in the
original terms group, to the same extent and in the same manner that
the Guggenheim Bros, had a 10 per cent interest in that group?
Mr. Byrnes. I wiU have to find the letter of the 18th referred to,
to see what the terms were that were offered them. Suppose we look
through this file, to save time.
Mr. Silver. Guggenheim Bros, were not in a position, as stock-
holders and directors of this company, to take a commitment directly
of 10 per cent, or of any other amount, were they?
Mr. Byrnes. The firm of Guggenheim Bros, was not a direct stock-
holding interest in either the Lautaro Nitrate Co.
Mr. Silver. They were the controlling interest, in any event.
Mr. Byrnes. They were stocldiolders, as I understand it — I beUeve
I am correct — in the Anglo-Chilean Nitrate Co.
Mr. Silver. Which, in turn, owned 50 per cent of the stock of the
operating company, isn't that so?
Mr. Byrnes. No, that is not so. The English company was the
operating company, and we bought the bonds from the" English com-
pany. Its common stock was owned by the Lautaro Nitrate Corpo-
ration of Delaware, an American company, whose stock, in turn, was,
or a substantial portion of it — I think more than a majority — held by
the Anglo-Chilean Consolidated Nitrate Corporation, and Guggen-
heim Bros, interest was in the Anglo-Chilean, and had been right
along.
Mr. Silver. But, as a result of these various holding companies,
the effect was that Guggenheim Bros, were the controlling interest of
the main operating company, is not that so?
Mr. Byrnes. Through that step, yes, through those stages, but not
directly.
Mr. Silver. Guggenheim Bros., as such, were not in a position to,
nor did they accept any direct participation in the original terms
STOCK EXCHANGE PRACTICES 2303
group, from the standpoint of making a commitment as to the pur-
chase or distribution of any part of this flotation?
Mr. Byrnes. They accepted the 10 per cent interest, I believe.
Mr. Silver. And you say that they accepted this 10 per cent inter-
est in behalf of Lehman Bros.?
Mr. Byrnes. Yes. It was asked for and granted to them.
Mr. Silver. As a result of their participation, they received 10 per
cent of the profits, amounting to $32,000, and they received, in addi-
tion, 10 per cent of the common stock which we have referred to,
amounting to 15,280 shares; is that correct?
Mr. Byrnes. I believe so.
Mr. Silver. Do you know whether all, or any part of that amount
of cash and of stock, was delivered to Lehman Bros.?
Mr. Byrnes. Not of my own knowledge, but I would be willing to
give anything but the most solemn oath on it.
Mr. Silver. Is there any reason you Imow of for the omission of
the name of J. P. Morgan & Co. from the prospectus in connection
with the flotation of these bonds?
Mr. Byrnes. The signatures on the prospectus, as a matter of com-
mon practice, consist of the names of the principal houses who are in
the selling syndicate, rather than, necessarily, in any of the under-
lying groups. In other words, it is a selling presentation.
Mr. Silver. Did the addition of the name of J. P. Morgan & Co. to
any security of this type at that time have any value in promoting or
accelerating the sale of such a security?
Mr. Byrnes. You mean if it had been on the prospectus?
Mr. Silver. Yes.
Mr. Byrnes. It would certainly not have detracted from it.
Mr. Silver. Was the commitment made with J. P. Morgan & Co.
before the flotation was prepared for public consumption?
Mr. Byrnes. Oh, yes. The letter I have been looking for is sup-
posed to be dated June 18. It is referred to in Morgan's letter. We
are not able to find it.
Mr. Silver. Did you invite the participation of J. P. Morgan &
Co. in tliis issue or did they take the first step in that connection?
Mr. Byrnes. We invited them.
Mr. Silver. Did you at that time ask them for the right to use
their name on the prospectus?
Mr. Byrnes. I do not think so.
Mr. Silver. Did it occur to anybody in your organization that the
use of that name on the prospectus to be issued to the pubhc would
substantially enhance the salabilitv of the issue?
Mr. Byrnes. I do not see the bearing of the hypothetical ques-
tion. I do not recall that it was even discussed.
Mr. Silver. Now, in connection with the distribution of the profits
to the original terms s^roup, 25 per cent of the cash, amounting to
$53,100, was dehvered^to J. P. Morgan & Co., was it not? .
Mr. Byrnes. Yes; 553,100, in full and final settlement ot theu-
interest and account. , • i •
Mr. Silver. There was a letter written to them, in wliich it was
said that that sum was in full and final settlement of their participa-
tion in the original terms group?
Mr. Byrnes. Yes.
2304 STOCK EXCHANGE PRACTICES
Mr. Silver. Was any portion of the common stock delivered to
them? , ^ 1 .1 .
Mr. Byrnes. Now it has come back to me. I remember that, on
that phase of it, the fact that it was discussed with them as to whether,
under the circumstances— that may be too strong a word. I tliink it
was suggested that in view of the amount of work involved in the
thing, and in the presentation and the preparation of this deal, that
what we offered them was a one-quarter interest in the bonds less
the stock. In other words, they had an original terms position that
was not quite as original as either oiu-s or Lehman Bros.
Mr. Silver. Was any such reservation made, Mr. Byrnes, in the
letter in which they were invited to participate in this group?
Mr. Byrnes. That letter, I do not find here. I believe it must be
here. May I ask you, did you find it in the files?
Mr. Silver. No.
Mr. Pecora. We found no letter from them.
Mr. Byrnes. The letter from them is here, but our letter to them,
Mr. Pecora
Mr. Silver. We have not seen that letter.
Mr. Byrnes. We have not found it. I can not believe it is not
here, because they have referred to it. I do have a recollection that
the omission of stock from their interest was discussed orally, rather
than in the letter, and I think it was discussed subsequently.
Here is the letter to Morgan, of June 18th:
Referring to Mr. Baker's conversation with Mr. Anderson to-day relative to
our offering of $32,000,000 the Lautaro Nitrate Company Limited First Mortgage
convertible gold bonds due 1954 with some common stock bonus shares, these
bonds were bought by us, together with some stock of the Lautaro Nitrate Cor-
poration (an American company) .
In determining our cost price as applied to the bonds, we have concluded that
935^ per cent and interest is the originating base cost from which we start to
develop various selling steps.
Then we go on to tell them:
We are forming a bankers distributing group to take this over. We have a 90
per cent interest in this purchase, and we are pleased to offer you a one-quarter
interest in our share of the original terms profit, namely, 1 per cent, subject to
an origination and management fee of 5 per cent of the gross spread. Kindly
advise if you desire to accept.
Mr. Silver. In that letter
Mr. Byrnes. I am wrong. It was in the letter, and was not an
oral discussion. I thought it was.
Mr. Silver. Was there any reservation made in that letter with
respect to the common stock?
Mr. Byrnes. Oh, yes. It was discussed orally. This letter was
meant to cover an interest in the bonds without the stock. It was
not clear. There was subsequent oral discussion, which J. P. Morgan
& Co. accepted as constituting their understanding of our agreement.
Mr. Silver. In other words, there is no reference in this letter to
your participation in the common stock which you have referred to
as a bonus?
Mr. Byrnes. That is true.
Mr. Silver. And the price fixed, of 93%, is a price which does not
take into cognizance the value of that common stock.
Mr. Byrnes. As against J. P. Morgan & Co.
STOCK EXCHANGE PRACTICES 2305
Mr. Silver. Is there any letter, either written by J. P. Morgan &
Co., or by the National City Co., evidencing or confirming any con-
versation of the nature you have just referred to, in which thev
release any right or claim to participation in the common stock?
Mr. Byrnes. I have read the letter inclosing the check, I believe
is that in the record?
Mr. Silver. Just look at your letters, Mr. Byrnes, and tell us
whether there is any letter wliich makes written reference to that
release.
Mr. Byrnes. This is dated October 25. This is our letter addressed
to them:
Referring to our letter of June 18 wherein we ceded you a one-quarter interest
m our share, we are pleased to inclose our check to your order for $53 100 in
full and final settlement of your interest in this account. '
In other words, it was settled with them on the basis of the cash.
Mr. Silver. That letter, Mr. Byrnes, not only fails to make
reference to the common stock, but scrupulously refrains from making
any reference to the fact that that common stock was part of the
compensation or bonus, as you have put it, which accrued to the
National City Co. as a result of the flotation of tliis issue.
Mr. Byrnes. And their letter of October 26 acknowledges our
check, and they add:
Which we note is in full and final settlement of our one-quarter interest in
your share on original terms, in connection with the purchase and sale of
$32,000,000 Lautaro Nitrate Co. (Ltd.) first mortgage 6 per cent convertible
gold bonds due July 1, 1954.
Again, just for the bonds, you see.
Mr. Silver. Is there anything in any letter which you wrote to
J. P. Morgan & Co., or which they wrote to you, wnich shows that
they knew that part of the compensation you were receiving for the
flotation of this issue was a substantial amount of the common stock
of the borrowing company?
Mr. Byrnes. I was going to give you the letter to them, which
stated what we had bought. I can give you absolute assurance, Mr.
Silver, that J. P. Morgan & Co. were fully cognizant of the fact that
we bought bonds plus stock, and that their interest was in the bonds
at the price of 93%. There is no question about it.
Mr. Silver. Referring to the prospectus, Mr. Byrnes, will you teU
us whether any mention is made in the prospectus of the fact that the
banlang group was receiving a substantial amount of common stock
of the company?
Mr. Byrnes. In the prospectus, whether there is any statement
that the National City Co., or the original group, had received stock?
Mr. Silver. Yes.
Mr. Byrnes. I am prompted to tell you that there is nothing con-
tained to that eft'ect in the prospectus. I was looking through to see.
Senator Brookhart. There is nothing there about the price you
paid for the bonds, either, is there?
Mr. Byrnes. Oh, no.
Mr. Silver. Don't you think the public would have been inter-
ested in knowing that a substantial amount of the conimon stock of
the company had been delivered to the bankers as partial compensa-
tion for the flotation of this loan?
2306 STOCK EXCHANGE PKACTICES
Mr. Byrnes. I think the public might be interested. I do not
think that they are necessarily entitled to such information. _
Mr. Silver. Do you think it would have afifected the salability of
these bonds to have made that statement?
Mr. Byrnes. Not necessarily.
Mr. Silver. Would it have had any effect, in your opinion, upon
the value of the bonds in the eyes of prospective purchasers had
they been informed that the compensation paid to the bankers
included not only a spread of 5% pouits, but that, in addition, a sub-
stantial block of the common stock of the borrowing company had
been delivered to the bankers?
Mr. Byrnes. Not necessarily.
Mr. Silver. This spread of 5% pouits was distributed among how
many groups?
Mr. Byrnes. There was, first, the group we have aheady men-
tioned. Then there was a subsequent group.
Mr. Silver. Will you give us the price at wliich these bonds were
allocated to each group?
Mr. Byrnes. The original terms group was formed at 99%. The
next group was formed at 9i%. That was called a banking group.
Mr. Silver. In other words, there was a 1-point spread?
Mr. Byrnes. One point to the original terms group. The bank-
ers' group consisted of the Bankers Co. of New York; Brown
Bros. & Co. ; Continental Illinois Co. ; Lehman Bros. ; and the National
City Co.
The next group was called the distributing group, and was formed
at a price of 95%.
Mr. Silver. That is a rise of 1 point.
Mr. Byrnes. That is another point up. The distributing group, I
imagine, is rather a long list. Do you want the names?
Mr. Silver. No. Do not read the names. Just tell us at what
price they received these bonds.
Mr. Byrnes. They received the bonds at 95%.
Mr. Silver. That is another point, is it not?
Mr. Byrnes. Yes. Then there was a wholesale group, which was
given the privilege of taking bonds down. I guess that group was
formed at 96 K; two and one-half points off the issue price is the way
it is stated here. That would be 96/2, and the bonds were sold at 99,
so that there was two and one-half points to the last group, and one
point each to the first three groups.
Mr. Silver. Will you refer to the contents of a memorandum
dated November 13
Senator Brookhart. Just a minute. Were those facts stated in
the prospectus?
Mr. Byrnes. Oh, no. The spreads in the later groups were very
widely known. Senator, because there was a very large group of
dealers in it, and they, of course, had direct knowledge of the spread
they were receiving.
Senator Brookhart. What the public knew, then, was this last
figure you have given?
Mr. Byrnes. The public would only know that as, perhaps, it had
access to the information that some dealer might give to them.
Senator Brookhart. They did not know of these different spreads
or profits to all these insiders from the beginning?
STOCK EXCHANGE PEACTICES 2307
Mr. Byrnes. No; any more than I know the price the Atlantic &
Pacific has paid for the eggs I buy from them.
Senator Brookhart. I can tell you that is not much of a price.
I know about that.
Mr. Byrnes. They make some money, though.
Senator Brookhart. Of course they do, because they pay the
farmers hardly anything for the eggs.
Mr. Pecora. Might it be pertinent to observe here, Mr. Byrnes,
that when you buy eggs, you know you are buying eggs, and when
you buy bonds, you do not know whether you are buying gold and
water mixed.
Mr. Byrnes. It is a different kind of merchandise, I will admit,
and a form of merchandise with respect to which, as you have seen
from previous discussions here, it is very difficult to set up yard-
sticks of value agreeable to you and to others.
Mr. Pecora. You bankers are always fond of using the analogy
of merchandise, taking commodities like eggs and coffee, where there
is no water.
Mr. Byrnes. Even eggs have to be candled.
Mr. Pecora. But they do not pay for that.
Mr. Silver. Mr. Byrnes, will you be good enough to refer to the
memorandum dated November 13, 1929, addressed to Mr. J. E. Clark,
of the syndicate department, by W. R. Bridges, head accountant, and
tell me whether that statement indicates that the total gross profits
of the flotation of this issue amounted to
Mr. Byrnes. What date is that memorandum?
Mr. Silver. November 13— amounted to $1,766,138.28; and
whether the net profit to the National City Co. in cash amounted to
$998,089.19. (Subsequently computed at $995,275.)
Mr. Byrnes. It is not summarized in that form here. I will have
to do some figuring. You want the total profit for all groups?
Mr. Silver. Subject to confirmation, will you have somebody
make that computation for us?
Mr. Byrnes. I will accept it for the time being. We will con-
firm it.
Mr. Silver. Subject to confirmation. In addition to the amount
that I have just stated, the National City Co. received 136,800 shares
of the common stock of the Lautaro Corporation.
Mr. Byrnes. 136,800; correct.
Mr. Silver. That stock, at or about the time the bonds were being
floated, had a market value of $10 a share; is that correct?
Mr. Byrnes. No; it had no market.
Mr. Silver. Did it have a market value immediately after these
bonds were floated?
Mr. Byrnes. My recollection is not clear. I should say that there
was no market in that stock for some time after the flotation of the
bonds.
Mr. Silver. Were not those stocks traded in on the New York
Produce E.xchange?
Mr. Byrnes. I accept the information.
Mr. Silver. Were they not traded in on the New York Produce
Exchange at $10 per share?
2308 STOCK EXCHANGE PRACTICES
Mr. Byrnes. That would have to be checked, because I accept
the statement that they were. At what price, or when, I can not
answer, unless the information is available here.
Mr. Silver. What was the high reached on April 5, 1930?
Mr. Byrnes. Ten and one-fourth. That was nearly a year later.
Mr. Silver. Then, at the high figure of lOM, that would represent
a paper value of a sum in excess of $1,400,000, would it not, for the
common stock which was received as a bonus by the National City
Co.?
Mr. Byrnes. Accepting your premise, I would agree with your
conclusion, but in the first" place you could not have sold 136,000
shares on the New York Produce "Exchange in a year, I believe, so
that the idea that you could sell 136,000 shares at the top price
reached nine months later than the time at which we received the
shares, is no criterion at all of the value of the stock at the time we
received it.
Mr. Silver. Mr. Byrnes, you have heard of distributing opera-
tions, as a result of wliich substantial blocks of stock have been dis-
tributed and sold to the public at a time when the entire amount
could not have been sold on any one day on any one exchange.
Mr. Byrnes. Yes. But to value the stock which we became
entitled to in June, 1929, upon the basis of a peak quotation in
April, 1930, of probably only a few shares of stock dealt in on that
day, is absolutely an erroneous calculation of the value of the stock
that we received, at the time we received it.
Senator Brookhart. What did you do with the stock?
Mr. Byrnes. Held it.
Senator Brookhart. Have you got it yet?
Mr. By'rnes. Yes. It could never have been sold. Senator Brook-
hart, at any time — such a volume of stock. I am speaking from
only general acquaintance with dealings on the New York Produce
Exchange. I do not like to put it in the record, but it is not a big
market. Even on the London Exchange, which I believe also quoted
this stock in sterhng quotations, you could never sell any substantial
amount.
Senator Brookhart. Is it eligible for listing on the stock exchange?
Mr. Byrnes. No; under the requii-ements of the New York Stock
Exchange tliis stock could not have been listed on the New York
Stock Exchange, in my opinion.
Mr. Silver. Wliat was the low for that particular stock on the
produce exchange?
Mr. Byrnes. The low, in the first six months of 1930, was four
and one-eighth on June 25, but we have not yet found what was
the first date.
Mr. Silver. Then, on the basis of an estimate on the low for that
stock, the National City Co. would have had a paper profit in excess
of $600,000 for that bonus stock received in connection with the
same operation?
Mr. Byrnes. I would say that, valuing the holdings of the National
City Co. at any figure that you choose, the valuation on the basis
on which you choose to value it would be so much; but I would not
accept that as a correct method of valuation.
STOCK EXCHANGE PRACTICES 2309
Mr. Silver. Mr. Byrnes, you stated a moment ago that you felt
that this stock could not be listed on the New York Stock Exchange?
Mr. Byrnes. Because of the requirements of the e.xchange.
Mr. Silver. Were not the bonds in the same company? "
Mr. Byrnes. No.
Mr. Silver. The bonds were, of course, in the English company.
Mr. Byrnes. Yes.
Mr. Silver. Whereas the stocks were in the holding company,
which was a Delaware corporation?
Mr. Byrnes. Yes.
Mr. Silver. Was not the asset position of the holding corporation
based upon the earnings and profits of the operating company?
Mr. Byrnes. The holding company, of course, became entitled to
any earnings that were declared upon the stock of the operating
company.
Mr. Silver. In other words, they were both based upon the same
earnings base?
Mr. Byrnes. Yes. Now, of course, the New York Stock Exchange
would not list, I believe, the stock of any company of which the ma-
jority was owned by another company, as a general rule. That
would not satisfy, I tliiiik, their requirements on distribution. Sec-
ondly, the Delaware corporation was a new corporation wliicli in and
of itself did not have a previous record of successful operation.
Mr. Silver. What is the market value of these bonds in the present
market?
Mr. Byrnes. This morning I believe they are quoted at 2}i.
Yesterday's close was 2)2.
Mr. Silver. The bonds are in default?
Mr. Byrnes. Yes.
Mr. Silver. In other words, the present market value of the entire
issue is approximately less than one-half of the spread or the profit
received in cash by the bankers in the flotation of this issue?
Mr. Byrnes. The present quotation of the bonds is 2^-
Mr. Silver. In connection with this same issue do you recall a
provision in the contract which authorized the National City Co. to
make certain purchases of the bonds in the open market after the
date of the original flotation?
Mr. Byrnes. Is it the contract between the National City Co. and
the Lautaro Nitrate Co. (Ltd.)? Is that it?
Mr. Silver. Yes.
Mr. Byrnes. Section 10?
Mr. Silver. Yes.
Mr. Byrnes. Yes.
Mr. Silver. Will you tell us in your own words, and briefly, what
the substance of that provision is?
Mr. Byrnes. I do not beheve I can shorten this very much.
Suppose I read it. (Reading:)
Lautaro —
which means the Lautaro Nitrate Co. (Ltd.) —
autliorizes vou from time to time as you mav deem expedient in your discretion
to purchase, for its account prior to July 1, 1930, any of your interim certificates
and/or anv of the bonds, accompanied by original warrants entitling holders to
receive the stock, which you mav be able to purchase at prices not exceeding the
original issue price thereof and accrued interest. Lautaro agrees that upon
your request it will reimburse vou promptly for the purchase price plus accrued
2310 STOCK EXCHANGE PRACTICES
interest to date of such reimbursement of any and all interim certificates and/or
bonds with warrants so purchased together with the amount of any brokers
commission paid by vou in connection therewith provided that the total cash
disbursement of Lautaro under this agreement shall not at any one time exceed
$1,000,000. You are authorized to resell any interim certificates and/or bonds
and warrants so purchased by vou provided that the average sales price per
$1,000 principal amount equals or exceeds the average purchase price per $1,000
in each case exclusive of accrued interest and in each case of any such resale you
shall credit Lautaro with the net sales price realized by you upon such resale.
On or after July 1, 1930, any bonds with warrants then held by you for account
of Lautaro shall be delivered subject to its order.
Mr. Silver. Now, these bonds bore the date July 1, 1929, did they
not?
Mr. Byrnes. They bore the date of what?
Mr. Silver. Julyl, 1929?
Mr. Byrnes. They were to be dated as of July 1, 1929.
Mr. Silver. And they were issued and sold in one operation on
one day, on or about June 19, 1929?
Mr. Byrnes. I tliink that is correct.
Mr. Silver. So that under the terms of section 10 the City Co. was
authorized for a period of approximately one full year after the
flotation of this issue to purchase these bonds in the market at par
or less than par
Mr. Byrnes. No.
Mr. Silver. In accordance with the terms of this agreement?
Mr. Byrnes. At or below issue price. That would be 99 or less.
Mr. Silver. At or below 99?
Mr. Byrnes. Yes.
Mr. Silver. Provided that the total amount of the purchase of
these bonds at any one time shoidd not exceed $1,000,000?
Mr. Byrnes. Yes.
Mr. Silver. Should not exceed $1,000,000?
Mr. Byrnes. That the cash involved in such purchase should never
exceed $1,000,000.
Mr. Silver. What was the purpose of that provision, Mr. Byrnes?
Mr. Byrnes. To provide a purchasing power on behalf of the com-
pany in case the bonds should decline below the issue price. You
must remember that this was a bond for the construction of a new
plant. All of the cash proceeds of the bonds were impounded for the
construction of the plant, roughly. That is rather a technical — •
escrow provision. And at the time of the issue, or before the time of
the issue — at the time of the contract we thought it desirable, and the
company did too, that a purchasing power supplied by the company
should be available in the event that this new credit, which was not
an ordinary type to the American public — much better known in
England than in America — should decline below the issue price. The
company had substantial working capital and they agreed to such
purchasing power.
Mr. Silver. Now, Mr. Byrnes, what was the purpose of that
provision?
Mr. Byrnes. To have an interested purchasing power in the bonds
and to purchase at or below the issue price in the event we considered
the exercise of such purchasing power desirable, in the interest of the
bondholders, of course.
Mr. Silver. Was not this method or device employed for the pur-
pose of absorbing any slack in the bond market in this issue so as to
STOCK EXCHANGE PRACTICES 2311
maintain over that period of approximately one year a ])riee for the
bonds at or near the issue price?
Mr. Byrnes. The purchasing power could only be used in case the
bonds could be bought below the issue price, as 1 remember.
Mr. Silver. In other words, whenever the market sagged below
the ofl'ering price then this purchasing power which had been set up
was used for the purpose of bringing that price back up?
Mr. Byrnes. No; it could be used. Not would be used. It could
be used in our discretion.
Mr. Silver. In any event that was the purpose of the provision?
Mr. Byrnes. What was the purpose?
Mr. Silver. The purpose was to enable you, if in your discretion it
seemed necessary, to use that fund to bring the market value up to the
offering price?
Mr. Byrnes. I do not want to quibble, but I tliink the wording
here is exactly accurate, and if we deemed it desirable we could use
tliis purchasing power in our discretion providing we could use it
below the offering price.
Senator Brookhart. Whv did vou want a purchasing power hke
that? ■ '
Mr. Byrnes. There is always a possibility in a $32,000,000 issue,
and particularly in that type of credit, Senator Brookhart, that there
may be times when for one reason or other there may be the need of
some purchasing power. Very often we supply that ourselves.
Senator Brookhart. The thing that makes the need is the price
dropping down?
Mr. Byrnes. Yes. And if we can find interested
Senator Beookhart. You wanted that, then, for the purpose of
maintaining the price wliile you were disposing of those bonds?
Mr. Byrnes. No, no, no. Senator Brookhart, because those bonds
were all disposed of on or about this date, June 19. We could have
stepped out of the market and so could the Lautaro Nitrate Co.
(Ltd.), and never paid another bit of attention to it. But if so we
would not have been maintaining the reputation which we have
built up of paying attention to our secondary markets, and of really
achieving distribution.
Senator Brookhart. You wanted the public to believe, then, that
you were sustaining them and keeping them up?
Mr. Byrnes. As a matter of fact, no purchasing power was required
and none of it was exercised until after the crack in the stock market
in October, 1929. From June until October of that year this reserve
purchasing power did not need to be used — was not used.
Senator Brookhart. I understand. Was it used finally?
Mr. Byrnes. It was used in October, 1929.
Senator Brookhart. To what extent?
Mr. Byrnes. Let me go back. These bonds were immediately
disposed of. They went to a premium. They sold in August of
that year — I tliink I am correct; you correct me if I am wrong— as
high as 104. Maybe 105.
Senator Brookhart. That is in August of 1929?
Mr. Byrnes. August of 1929. And they maintained— they stayed
at or above their issue price until late in October, when all markets
were upset by the conditions that obtained at that time. And we
did use this purchasing power I think over a period — not to main-
2312 STOCK EXCHANGE PRACTICES
tain price; we did not peg price; we bought bonds on the decline, not
trying to— merely keeping it orderly, and I think that that purchasing
power was not exhausted until some time in December of 1929. A
few months later we were able to reverse the operation. A demand
sprang up for the bonds again, the market advanced, these bonds
were taken back from the company and distributed.
Mr. Silver. In connection with the flotation of any issue, Mr.
Byrnes, it is not only necessary to sell the issue but in order to mam-
tain the reputation of the issuing house it is also important that the
issue should stay sold, is that not so?
Mr. Byrnes. Higlily desu'able.
Mr. Silver. And iii that connection there is a practice which is
known as the creation of a secondary market in connection with the
flotation of any issue, is there not?
Mr. Byrnes. There are various phrases used. Primary distribu-
tion, secondary distribution; primary placement, secondary place-
ment. But the idea, of course, is to get bonds placed in a wide enough
market so that the amount that comes in from time to time is a reason-
able amount so that probably your purchasers and your sellers more
or less balance.
Mr. Silver. In other words, the important tiling is to keep out of
the market after the original distribution any speculative interests,
any floating bonds or any deluge of selling that would affect or depress
the market price; is that not so?
Mr. Byrnes. To absorb such selling if necessary.
Mr. Silver. And it is in order to absorb such selling and to keep
the market price orderly that a provision is made of the type referred
to in section 10 of this contract between the National City Co. and
Lautaro Nitrate Co.?
Mr. Byrnes. That is correct.
Senator Brookhart. Let me ask you a question about that. I do
not understand that. In absorbing selling you just buy back what
somebody else sells, do you not?
Mr. Byrnes. Yes; and replace it. Senator Brookhart.
Senator Brookhart. Do you have to have new stock or new
bonds?
Mr. Byrnes. There may be some man in Maine that wants to
for some reason sell and some man in California wants to buy.
Senator Brookhart. But you would not have to buy anytliing
from the nitrate company to absorb that?
Mr. Byrnes. We had bought these bonds for their account. This
market fund, or call it what you will here, tliis purchasing power put
in our hands by the company was exercised for their account. They
were the owner of these bonds we bought in the market.
Senator Brookhart. But I can not see what purpose you would
have in buying more from them unless it was to maintain the market
and keep the price up.
Mr. Byrnes. We did not buy any more from them.
Senator Brookhart. You did not buy them from them?
Mr. Byrnes. No, sir.
Senator Brookhart. Wliat you bought was in the market?
Mr. Byrnes. In the market; yes. Bonds that, as I said, had been
sold in June.
Senator Brookhart. And you did that, of course, to maintain the
old price at wliich you had sold them?
STOCK EXCHANGE PRACTICES 2313
Mr. Byrnes. Well, I think the history-if you wish the history of
the actual operations of that market fund it could be out in the
record. ^
Senator Brookhart. Well the purpose of it is what we are after
. / J^^ '^^ °r?.* ^^^* ^^^ ^°^^^ yourself as a further investment'
Mr. Byrnes. We buy bonds to sell, Senator Brookhart
Senior Brookhart. Yes; and then when you bought them the
second time, why, you bought them to maintain the market price'?
Mr. Byrnes. Not to maintain the market, necessarily. That may
he an effect of achieving an orderly market at any given moment yes
it might. It certainly would contribute to that. ' '
Senator Brookhart. Is that not what you do it for, then, to main-
tain that market value?
Mr. Byrnes. Well, that is perhaps an incidental effect. The pri-
mary thing is to have a purchasing power available in case one of
these bondholders wants to sell, and at the moment we have no other
purchasing power.
Senator Brookhart. It seems to me that the main purpose of a
deal like that is to maintain the market. I can not see that incidental
part of it.
Mr. Byrnes. I would say, sir, from the standpoint of the bond-
holders themselves and the company it is to maintain the credit
rating of the company in the market.
Senator Brookhart. Well, the credit rating is to make the public
believe that the stuff is really worth what you sold it at?
Mr. Byrnes. Yes, but there are always buyers and sellers. This
is a particular buyer, the company that is particularly interested in
maintaining an orderly market for its securities.
Senator Brookhart. I think that is all right. They want to
maintain the market.
Mr. Silver. In connection with this operation, Mr. Byrnes, did
the Lautaro Co. deposit with the National City Bank the sum of
$275,000 to be used in financing such purchases?
Mr. Byrnes. I will accept your statement to that effect if I may,
or we will check it and corroborate it. Do you want it technically
accurate? If so I must consult.
Mr. Silver. Yes. Please look at a memorandum from W. P.
Meyer of the trading department to S. W. Baldwin, treasurer, dated
October 31, 1929.
Now after this advance of $275,000 had been made by the Lautaro
Co. in connection with the financing of these purchases, is it not a
fact that additional funds of the National City Bank were made
available in connection with the same trransaction?
Mr. Byrnes. My recollection is that the Lautaro Nitrate Co. had
a line of credit or arranged a fine of credit with, naturally, the bank
that it had such a line with. And that the actual payment for bonds
in excess of that amount was made against that line of credit or
borrowed.
Mr. Silver. Will you refer to your records and tell us whether it
is not a fact that between November 11, 1929, and December 28,
1929, $1,000,000 were expended by the National City Co. in the
repurchasing of the Lautaro bonds and that a sum approximately 75
per cent of that amount was borrowed from the National City Bank
for this purpose?
2314 STOCK EXCHANGE PRACTICES
Mr. Byrnes. We will accept that. The gentleman here from the
National City Co. informs me that that is right. Mr. Schoepperle
informs me that. We have not seen the bank records on that, but
we believe it to be correct.
Mr. Silver. I show you a memorandum dated February 15, 1933,
signed by Mr. Baldwin, and let him check from this computation
while we go on with the questioning, and we will let the amount stand
subject to correction, if it should be requh-ed.
Now it is a fact, is it not, Mr. Byrnes, that in connection with this
operation the capital funds and assets of the Lautaro Co. were being
used for the purpose of maintaining a market in its own bonds, and
that that operation was being carried on with the knowledge and con-
sent of the National City Co.?
Mr. Byrnes. The National City Co. acting as the agent of the
Lautaro Nitrate Co. (Ltd.) did buy bonds of the company for account
of the company.
Mr. Silver." In other words, an operating company the purpose of
which was to manufactm-e and sell a nitrate product was permitting
a substantial portion of its assets to be used for the piu-pose of a
market operation in the support of its own bonds?
Mr. Byrnes. Yes, Mr. Silver. And in spite of the great praise
that we have had of the English Companies act, that company was
formed under the British Companies act.
Mr. Silver. But the disposition, sale, and the market were main-
tained in America.
Mr. By'rnes. It was the British company that was using its funds
and it was acting imder its corporate powers.
Mr. Silver. And the question is whether the market operation in
the use of funds of that character would have been authorized if
done in England.
Mr. Byrnes. A British company doing something in America
under its charter powers that it could not do in England? I do not
think so.
Mr. Silver. Is it not a fact, too, Mr. Byrnes, that the loan ad-
vanced by the National City Bank was advanced with specific
knowledge that that advance was to be used in connection with this
market operation for the maintenance of a market in the bonds?
Mr. Byrnes. I do not know that, but the mere fact that the
bonds were delivered into the bank and formed collateral for the
loan I should think woidd be some evidence that the loan was for
that purpose.
Mr. Silver. Well, is not this a sample operation, Mr. Byrnes:
The National City Co. would buy the bonds of the Lautaro Co.,
would deliver them to the bank, would receive payment, and leave
those bonds as collateral for the repayment of that indebtedness.
Is that not correct?
Mr. Byrnes. Yes. I beheve so.
Mr. Silver. The National City Bank advanced 100 per cent of
the purchase price of those bonds, is that not so?
Mr. Byrnes. I think there was a protective margin there of
$275,000 worth of the bonds, whatever it may be.
Mr. Silver. But after that $250,000 margin had been exhausted
by the actual purchase of bonds there were additional bonds to the
extent of $750,000 that were purchased at the then market and the
entire amount was advanced bv the National Citv Bank?
STOCK EXCHANGE PRACTICES 2315
Mr. Byrnes. And the entire amount of bonds, including- tlie
$275,000 worth, was pledged as collateral for the loan. "
Mr. Silver. In other words, the only security the National City
Bank had for that loan was the difference between the purchase price
or the then market value of the bonds and some other price that
they may have had at some prior time?
Mr. Byrnes. Plus the credit of the Lautaro Nitrate Co. (Ltd.).
Mr. Silver. But so far as the specific security was concerned here
this was virtually a loan ba.sed upon 100 per cent of the then value of
the security?
Mr. Byrnes. Oh, no. Oh, no. It was based upon that margin
of $275,000, and the borrowing of only $750,000; you had a margin
there of I should say at all times 25 per cent or more. Oh, more than
that — it is 33}3, or somewhere around there, margin.
Mr. Silver. Was not a substantial part of that $275,000 originally
desposited, subsequently returned to the company and prior "to the
completion of this market operation? [Pause] tVTiile that is being
checked, Mr. Byrnes; is it not a fact that the relationship between
the bank and the security company in this instance made it possible
for the bank to lend its resources to the National City Co. for the
purpose of maintaining a market operation in a security that had
been floated and sponsored by the National City Co.?
Mr. Byrnes. That was not the purpose at all. Naturally the
Lautaro Nitrate Co. borrowed from the bank mth which it had its
closest relations as a matter of comity and good relations. They
might just as well have borrowed the money from anybody else.
It was a perfectly good loan.
Mr. Silver. Well, whether that was the purpose or not, that
certainly was the efi'ect, was it not?
Mr. Byrnes. Yes; but you asked me the purpose, not the effect.
Mr. Silver. Well, was that the effect?
Mr. Byrnes. No; the effect was that the National City Bank
financed the Lautaro Nitrate Co. to buy its bonds. The National
City Co. merely acted as the agent of the Lautai'o Nitrate Co. to
effect the purchase of those bonds, and under dii'ections of the
Lautaro Nitrate Co. delivered those bonds to the banking institution
which the Lautaro Co. had selected.
Mr. Silver. But in financing that operation \vith the Lautaro Co.
the National City Bank had knowledge of the fact that the funds
advanced were being used by the Lautaro Co. in conjunction with
the National City Co. for the specific purpose of maintaining the
market in that bond issue?
Mr. Byrnes. I am not sure that they did. But it has no sig-
nificance to me if they did. It is a perfectly good banldng transaction.
They were probably very glad to have it.
Mr. Silver. Is there any question in your mind but that the
NationI City Bank had such knowledge, Mr. Byrnes?
Mr. Byrnes. I tliink they probably did. I mean the veiy form of
the transaction
Mr. Silver. Well, did they not really? Did they not without
doubt have knowledge of the purpose of this loan?
Mr. Byrnes. I did not arrange the fine of credit with the bank.
That was arranged by the Lautaro Nitrate Co. (Ltd.).
119852— 33— PT 6 36
2316 STOCK EXCHANGE PRACTICES
Mr. Silver. Do not your records show that the National City
Bank had knowledge of this transaction and the purpose of the loan?
Mr. Byrnes. I am not sure that they did.
Senator Brookhart. When was this done? What was the date
of it?
Mr. Byrnes. From the end of October, 1929, through December,
1929, and the loan was repaid — the bonds were resold in the first half
of 1930.
Senator Brookhart. And were they sold at a loss?
Mr. Byrnes. A loss to whom, Senator?
Senator Brookhart. Well, the Lautaro Co. bought them?
Mr. Byrnes. Yes; the Lautaro Nitrate Co. bought them.
Senator Brookhart. Now you had bought them before that under
your contract with the Lautaro Co.?
Mr. Byrnes. Yes.
Senator Brookhart. Now they bought them, and then did you sell
them altogether?
Mr. Byrnes. Well, I believe those figures are here. Senator. I
ofiFered to put them in the record some time back, and Mr. Silver said
we woidd come to that a little later.
Senator Brookhart. Yes; I understand. The point I want to
know is whether you sold them at a loss.
Mr. Byrnes, f would have to check to find out. And it would be a
question of loss to whom? No loss to us, and I think it was not any
loss, or certainly any substantial loss to the Lautaro Co. There was
no loss to Lautaro. There was no loss to us. In other words, we
did not buy them as was intimated before at a fixed price close to the
issue price. We bought them on a declining market, and subse-
quently the market went up again and the bonds were cleared out from
Lautaro without a loss to them.
Senator Brookhart. You bought them for yourselves and also for
the Lautaro Co. while the market was down?
Mr. Byrnes. We bought them for the Lautaro Co. as the market
was declining.
Senator Brookhart. Those that you bought under your contract
with them?
Mr. Byrnes. That is what I am talking about.
Senator Brookhart. Was that on a declining market?
Mr. Byrnes. That was on a declining market, after the crack in
the stock market in 1929.
Mr. Silver. In that connection may I read the memorandum sub-
mitted to counsel by Mr. H. S. Law, secretary, dated February 20,
1933, reading as follows:
Referring to the purchase fund on Lautaro Nitrate 6's of 1954:
The original purchase fund folder which you have reviewed, showed that the
total of 1,115 units were purchased for the Lautaro Nitrate Corporation for a
total principal of $974,108.25. During March and April, 1930, these were resold
for the account of the Lautaro Nitrate Corporation at prices ranging from .$875
to $932.90 per unit, producing a profit of $12,978.40 of which $1,516.75 was paid
to the Lautaro Nitrate Corporation and the balance retained by the National
City Co. for its services. The units consisted of one $1,000 bond and 10 shares
of common stock.
That refers, as I understand it, to this secondary market operation
that we have been discussing?
Mr. Byrnes. Yes, sir; I think so.
STOCK EXCHANGE PRACTICES 2317
Mr. Silver. Now, in connection, finally, with this deposit that you
have referred to of $275,000, may I call your attention, Mr. Byrnes
to a statement from the files of the National City Bank, including a
memorandum signed by T. A. Rave as assistant cashier, addressed
to — well, it is with respect to the Lautaro Nitrate Corporation,
general file, and it contains this excerpt:
The corporation —
Referring to Lautaro Nitrate Corporation —
Has made a cash deposit of $275,000 with the City Co. which was to be used
as margin, but as Mr. Edmunds desired to secure the return of part of this cash
deposit he felt that the purchase of the bonds could be handled to their better
advantage on a loan basis. We agreed to make loans as bonds were purchased
against our regular form of borrowing contract with a margin of 10 per cent.
Does that not indicate to you, Mr. Byrnes, that instead of maintain-
ing this margin of 27)2 per cent that you have referred to, shortly
after the inception of this margin plan, a new arrangement was
consummated under the terms of which this secondary market
operation was transacted on a 10 per cent margin basis?
Mr. Byrnes. It shows clearly that I had no knowledge of any
modification of the arrangement, and that it was made merely as a
banking arrangement between Lautaro and the bank.
Mr. Silver. You know it now?
Mr. Byrnes. I accept your statement; yes.
Mr. Silver. And you know now, do you not, that this operation
involving $1,000,000 was financed at least to the extent of 90 per cent
by the National City Bank with full knowledge of the fact that the
funds advanced for the account of Lautaro Nitrate Co. were being
used to maintain the market of tliis bond issue?
Mr. Byrnes. No, not to maintain the market. But to purchase
bonds in the market.
Mr. Pecora. Mr. Byrnes, at the time of the flotation of this
Lautaro Nitrate bond issue there were a number of European nations
engaged in the production of a synthetic nitrate, were there not?
Mr. Byrnes. You are getting onto a very technical subject, Mr.
Pecora. I will be very glad to explain if you wish to take the time.
The fertilizer material is not nitrate. It is nitrogen.
Mr. Pecora. Nitrogen. All right.
Mr. Byrnes. And nitrogen is fixed in various forms. It happens
to be fixed in this unusual deposit of caliche down in Chile in the
form of sodium nitrate, and that is the chemical form in which it is
contained. There is very little sodium nitrate produced by any
chemical process anywhere in the world.
Mr. Pecora. Now in connection with the National City Co.'s
negotiation to float this bond issue: A Mr. Sterling H. Bunnell, an
engineer in the employ bi the industrial department of the National
City Co. made a study and a survey of that industrial field, did he
not?
Mr. Byrnes. Although we had very great confidence in the acumen
and the ability of the Guggenheim organization, so-called, in the
engineers whom they had then attached to their organization, we did
take the final precaution of sending a man to Chile to study the in-
dustry on the ground, in order that we might have somebody in our
2318 STOCK EXCHANGE PRACTICES
organization that would understand something about the very tccli-
nical processes involved. . ^^
Mr. Pecora. And that answer is another way of saying les to
my question, is it not?
Mr. Byrnes. I think it is.
Mr. Pecora. All right. Now we would save time if you would just
confine yourself to simple answers. Mr. Bunnell made a written
report to the company under date of May 1, 1929, did he not?
Mr. Byrnes. I am informed that is correct.
Mr. Pecora. And in that report among other tilings did he not say
as follows :
Sodium nitrate was originally obtained almost exclusively from the caliche
rock deposits in Chile, but in recent years has also been produced synthetically.
During the great European war Germany and her allies, cut off from Chilean
supplies, developed methods for the atmospheric fixation of nitrogen. The bulk
of Chilean nitrate is used for fertilizer and for this purpose it acts in competition
with the various products of the nitrogen fixation plants and with by-product
such as ammonium sulphate produced from coke ovens. The result has been
price competition in which the Chilean product was handicapped by the high
Chilean export duty of * * * $12.32 per metric ton of 2,205 pounds. Thus
the tremendous dernand of the war years which after the recession of 1919 reached
a peak in 1920 was followed by minimum production in 1922. Since that time
the demand has fluctuated irregularly as prices were automatically maintained
by the Association of Chilean Nitrate Producers, backed by the Chilean Govern-
ment.
Do vou recall that report made by Mr. Bunnell less than two
months before the National City Co. floated this $32,000,000 bond
issue?
Mr. Byrnes. That was an ofiice study.
Mr. Pecora. Yes?
Mr. Byrnes. That report was not made after liis visit but before
he went to Chile.
Mr. Pecora. Well, he made that report under date of May 1,
1929, did he not?
Mr. Byrnes. Yes. That was an office study. That was not his
report from the field.
Mr. Pecora. Did you not learn from this report, if 3'ou did not
already know it, that the synthetic production of nitrate
Mr. Byrnes. Nitrogen.
Mr. Pecora. Nitrogen had assumed very formidable proportions
in various European nations?
Mr. Byrnes. Oh, j'^es.
Mr. Pecora. And those proportions grew to the point where in
competition with the Chilean natural product the Chilean product was
handicapped particularly because of a large export tax placed by
the Chilean Government on its product?
Mr. Byrnes. That was naturally an addition to their cost.
Mr. Pecora. Yes. Now in putting out a bond issue
Mr. Byrnes. Which had always existed, as you know.
Mr. Pecora. I know that. Now in putting out a bond issue to the
American investing public did the National City Co. always seek to
inform itself fully concerning the risks and hazards surrounding such
an issue?
Mr. Byrnes. We certainly tried to.
Mr. Pecora. Yes. And in the effort to acquaint itself with all
these elements in the nitrate industry in oi'der to reach a determina-
STOCK EXCHAKGE PRACTICES 2319
tion as to whether your company should have lent itself to the flota-
tion of these $32,000,000 worth of bonds your company learned of
the extent of the production of synthetic nitrate in Europe did it not'
Mr. Byrnes. We knew it. '
Senator Brookhart. It was also developed in the United States?
Mr. Byrnes. Not very much at that time, Senator.
Senator Brookhart. There was a plant at Syracuse, N. Y., and
there was one other plant in the West.
Mr. Byrnes. The production in this country of synthetic nitro-
genous fertilizer was relatively small at that time. Since that time
Senator Brookhart. But the process had already developed.
Mr. Byrnes. Oh, yes. There was a German process that was
seized.
Senator Brookhart. And then the same thing was considered in
the Muscle Shoals proposition?
Mr. Byrnes. But it had not been proven at that time. I do not
know that it is even proven to-day that the unit of nitrogen content
can be produced cheaper by the synthetic as against the natm-al.
Senator Brookhart. Well, you did not put this engineer's report
in your prospectus so as to let all people know what the real facts
were, did you?
Mr. Byrnes. Mr. Pecora has the study there.
Senator Brookhart. Here is the prospectus. I looked it over
hastily. I do not find anything like that.
Mr. Byrnes. The study is something over 70 pages long. The
report as finally made was eighty-odd pages long. And naturally it
was not contained in a prospectus of two pages.
Senator Brookhart. The short statement that Mr. Pecora read
here was not included?
Mr. Byrnes. I do not know whether that was produced or not.
Mr. Pecora. No. That was just an extract from the report which
I read. I know the report was a lengthy one. Now, after Mr. Bunnell
made that report, which you say was simply an office study and not
a report based upon field survey or operation, your company sent an
engineer to make a field study or survey, did it not?
Mr. Byrnes. Mr. Bunnell at the time he made the office study had
the advantage of the reports and the figures submitted to him by the
operating organization, the technical organization of Guggenheims.
He went to the field to check back those figures and see the method of
operation and satisfy himself.
Mr. Pecora. And when did he go to Cliile to make that check-up?
Was it before or after the flotation of these bonds by the National
City Co.?
Mr. Byrnes. Before.
Mr. Pecora. Before?
Mr. Byrnes. Before.
Mr. Pecora. When did he make his report based upon that field
survey?
Mr. Byrnes. His report based on the field study was made by
cable in the first instance, and subsequently confirmed in this written
report after he reached New York.
Mr. Pecora. What is the date of that written report?
Mr. Byrnes. Do you want the written report or the cabled report?
Mr. Pecora. The date of the written report.
2320 STOCK EXCHANGE PRACTICES
Mr. Byrnes. August 10.
Mr. Pecoba. August 10, 1929. Wlien were the bonds actually-
floated by the National City Co.?
Mr. Byrnes. June, 1929.
Mr. Pecora. So he made his written report some two months after
the actual flotation?
Mr. Byrnes. Yes; but made a very full report of conclusions by
cable before the bonds were issued.
Mr. Pecora. In his written report of August 10, 1929, did not Mr.
Bunnel among other things say as follows, referring to this proposition :
From the banking viewpoint, the proposition is speculative, but if there is
adequate value in Caliche land to secure the debentures the addition of a specu-
lative feature, together with the common stocic, should make the debentures
readily salable.
Do you find that he said that in his report?
Mr. Byrnes. No; that is in the study before he left New York.
Mr. Pecora. In the study before he left. Is that in the study
Mr. Byrnes. Of May.
Mr. Pecora. A part of which was made May 1, 1929?
Mr. Byrnes. Yes; page 71.
Mr. Pecora. So that the National City Co. actually had in its
files a month and a half before it floated these bonds an opinion from
its engineer in its industrial department that called attention to the
speculative character of tliis proposition, did it not?
Mr. Byrnes. It had that statement in his oflice study; yes.
Mr. Pecora. And with that statement in its files the company
nevertheless went ahead with the negotiations and put out the
bond issue?
Mr. Byrnes. Yes. But it had subsequent statements.
Mr. Pecora. Now, I am coming to the subsequent statements.
Did Mr. Bunnell go down to Chile before or after the bond issue was
floated by your company?
Mr. Byrnes. Before.
Mr. Pecora. How long before?
Mr. Byrnes. Mr. Bunnell arrived in Chile on May 17.
Mr. Pecora. And when did he send in liis cabled report?
Mr. Byrnes. They are in several cables here.
Mr. Pecora. How many of them, and give their respective dates,
wfll you? Well, if you can not find them and give me the dates
readily, let me ask you this question
Mr. Byrnes. There are qtiite a few. It is just a matter of locating
them in the files.
Mr. Pecora. Is it not a fact that when he submitted his final and
written report under date of August 10, 1929, Mr. Bunnell concluded
that written report with this statement? See if I read it correctly,,
the last paragraph. Have you got it?
Mr. Byrnes. Start it.
Mr. Pecora [Reading:]
The unknown factor is obsolescence. By the substantial reduction in the cost
of producing Chilean nitrate
Mr. Byrnes. "The unknown factor is obsolescence." That is one
sentence. Then start another sentence.
STOCK EXCHANGE PRACTICES 2321
Mr. Pecora (reading) :
By the substantial reduction in the cost of producing Chilean nitrate the
industry is placed in a competitive position niiraie tne
Mr. Byrnes. "Advantageous competitive position "
Mr. Pecora. "Advantageous." That is left out here. [Continuing
advantageous competitive position with synthetic and other production of
fertilizer chemicals. ^
Mr. Byrnes. "Fertilizing chemicals."
Mr. Pecora. "Fertilizing"?
Mr. Byrnes. Yes.
Mr. Pecora. All right. [Continuing reading:]
But with the current march of progress, it is impossible to prophesy the condi-
tions which may exist in the Chilean nitrate industry within the 25-year term of
new financing. There is, however, every possibihty that the Lautaro Anglo-
Chilean management will be able to maintain its lead in the Chilean industry and
to continue operation at a rate of earnings which will place the security of the
debenture beyond reasonable doubt.
Is that correct?
Mr. Byrnes. That is correct now.
Mr. Pecora. What study was made at the same time of the pro-
duction of synthetic nitrate abroad?
Mr. Byrnes. At the same time?
Mr. Pecora. At any time.
Mr. Byrnes. Every industrial company naturally guards its cost
figures. We endeavored — we had endeavored in a number of ways to
check the costs, the competitive costs of competitive nitrogenous
fertilizers. It was impossible for us to get the same kind of detailed
inside information on such things as it was to get on nitrate from the
Guggenheims. They were running a sodium nitrate undertaldng.
They were satisfied themselves that their competitive costs would be
at least as low as that of the synthetic competitors, and we could
obtain no informat on that proved them wrong.
Mr. Pecora. Now, Mr. Byrnes, is it not a fact that not long after
the flotation of these $32,000,000 worth of Lautaro Nitrate bonds the
National City Co. lent itself to the flotation of a bond issue put out by
a German company that was manufacturing synthetic nitrate?
Mr. Byrnes. I do not think so. Oh, You mean, the American
I. G.?
Mr. Pecora. Yes.
Mr. Byrnes. That was an American company.
Mr. Pecora. An American company, but operating under
Mr. Byrnes But not producing, itself, any nitrogenous fertilizers.
Mr. Pecora. Was it producing?
Mr. Byrnes. No. The I. G. Farbenindustrie is the largest pro-
ducer in Germany of nitrogenous fertilizers.
Mr. Pecora. What was the relationship between the American
I. G. Co. and that Germany company?
Mr. Byrnes. The American I. G. was an affiliated company
organized by a German company or one of its affiliated subsidiaries.
I think it actually may have been their Swiss subsidiary.
Mr. Pecora. Did the American I. G. Co. put out a bond issue?
Mr. Byrnes. Yes; but I think it was before the Lautaro.
2322 STOCK EXCHANGE PRACTICES
Mr. Pecora. Did the National City Co. have anytliing to do with
Mr. Byrnes. It certainly did. It issued bonds of the American
I. G. Chemical Co.
Mr. Pecora. To what amoimt?
Mr. Byrnes. $30,000,000.
Mr. Pecora. When did it do that?
Mr. B-rtiNES. I think it was May, 1929, but I do not thmk we have
any figures.
Mr. Pecora. Within a month or two of the time that was put out,
the National City Co. put out the $32,000,000 bond issue of the
Lautaro Nitrate Co.?
Mr. Byrnes. Quite right.
Mr. Pecora. So that within a space of, we will say, two months,
the National City Co. sponsored two bond issues, one for $30,000,000
and the other for $32,000,000; put out, respectively, by competing
companies, one a German company manufacturing a synthetic
product, and the other a Chilean company, that is, the operating
company, putting out a natural product?
Mr. Byrnes. That is not technically correct, and it is not actually
correct. We did not put out any bonds for a Germany company
producing nitrates.
Mr. Pecora. You put them out for the American I. G. Co.?
Mr. Byrnes. We did.
Mr. Pecora. And the securities underlying these bonds were the
earnings of the German company?
Mr. Byrnes. Only through the fact that the German company
guaranteed principal and interest; but the assets of the American
I. G. were not German assets.
Mr. Pecora. Was the American I. G. Co. a producing company?
Mr. Byrnes. It was a holding company.
Mr. Pecora. And dependent for its earnings upon the producing
company in Germany?
Mr. Byrnes. Oh, no; not at all.
Mr. Pecora. Where?
Mr. Byrnes. Here in this country.
Mr. Pecora. So that with that correction, the fact is that within
two months' time your company put out a bond issue of $30,000,000
representing obligations of interests engaged in the manufacture of
synthetic nitrates and a $32,000,000 issue representing the obliga-
tions of interests engaged in the natural production of nitrates; is
that right?
Mr. Byrnes. That is correct.
Mr. Pecora. And the two were competing one with the other,
were they not?
Mr. Byrnes. The bonds of the American I. G. Co.
Mr. Pecora. No; I mean the two industries were competing one
with the other. Were they or were they not?
Mr. Byrnes. The companies were not competing; no.
Mr. Pecora. The industries were competing industries, were thev
not?
Mr. Byrnes. But the bonds of the American I. G. were not bonds
supported purely or at all, really, directly by the nitrogenous fer-
tilizer industry of the German I. G.
STOCK EXCHANGE PRACTICES 2323
Mr. Pecora. The bonds put out by the American I. G. Co. were
bonds put out by corporate interests that were engaged in the pro-
duction of synthetic nitrate; is that correct, Mr. Byrnes?
Mr. Byrnes. The American I. G. does not produce any nitro-
genous fertihzer at all, that I know of — did not at the time and does
not to-day.
Mr. Pecora. You said the American I. G. Co. was a holding
company?
Mr. Byrnes. Yes.
Mr. Pecora. Well, what operating company supported it?
Mr. Byrnes. I have not the circular, but from my recollection the
American I. G. had, among other things, investments in companies
here producing pharmaceutics, dyes, photographic materials, and, I
think, an interest with the Standard Oil Co. in a subsidiaiy — or
that may have been represented by ownership of Standard Oil of
New Jersey stock. I am just trying to recall what that is.
Mr. Pecora. Did it also have an interest in any company pro-
ducing synthetic nitrate?
Mr. Byrnes. No.
Mr. Pecora. What was this German company you mentioned
before?
Mr. Byrnes. That is the I. G. Farbenindustrie, the biggest com-
pany in Germany, and I think, or the largest company in Europe;
the most important dye and chemical company, perhaps. Com-
parisons are odious.
Mr. Pecora. Was that company engaged in the manufacture and
production of synthetic nitrate?
Mr. Byrnes. It was, in Germany.
Mr. Pecora. Tell us again what the relationship was between the
German company and the American I. G. Co.
Mr. Byrnes. The German company owned these various interests
in enterprises in this country, some of them in partnership with
American enterprises, American companies. Those interests of the
German company were put into the American company in exchange,
directly or indirectly, for stock of the American company.
Mr. Pecora. Which company — the American I. G. Co.?
Mr. Byrnes. Yes.
Mr. Pecora. So there was that relationship between the American
I. G. Co. and this German company that was producing and manu-
facturing synthetic nitrate?
Mr. Byrnes. Yes; in Germany.
Mr. Pecora. Of course, in Germany; just as the Lautaro Nitrate
Co. was producing natural nitrate in Chile. And the National City
Co. sponsored the bond issue in the one instance of the American
I. G. Co., and within two months thereafter, this issue of $32,000,000
of the Lautaro Nitrate Co.
Mr. Byrnes. Yes.
Mr. Pecora. That is all I wanted to establish.
Mr. Chairman, associate counsel, Mr. David Saperstein, will
present evidence to the committee with respect to the operations by
the National City Co. in securities of the United Aircraft Co.
(Witness excused.)
Mr. Saperstein. Mr. Ripley.
2324 STOCK EXCHANGE PRACTICES
TESTIMONY OF JOSEPH P. RIPLEY, NEW YORK, N. Y.
The Chairman. Do you solemnly swear the testimony you are
about to give is the truth, the whole truth, and nothing but the
truth, so help you God?
Mr. KiPLEY. I do.
Mr. Saperstein. Will you be kind enough to state for the record
your full name, address, business, or occupation?
Mr. Ripley. Joseph P. Ripley; 55 Wall Street, New York City.
Residence, 120 Kensington Road, Garden City, Long Island, N. Y.
Occupation, vice president National City Co.
Mr. Saperstein. How long have you been connected with the
National City Co.?
Mr. Ripley. Since about April, 1925.
Mr. Saperstein. How long have you been a vice president of that
company?
Mr. Ripley. Since June 28, 1927.
Mr. Saperstein. You were a vice president of the National City
Co. at the time when a merger, involving three companies engaged in
the manufacture of airplanes or in the air-transport business, was
effected, resulting in the company known as the Boeing Airplane &
Transport Corporation, were you not?
Mr. Ripley. I was; but I must correct the way you put your ques-
tion, because I would not call it a merger operation.
Mr. Saperstein. You were a vice president of the National City
Co. at the time this operation took place, whatever you call it?
Mr. Ripley. Yes.
Mr. Saperstein. In connection with that business you went to
Seattle, Wash., did you not?
Mr. Ripley. I did.
Mr. Saperstein. And you arranged the details of this operation?
Mr. Ripley. I did.
Mr. Saperstein. On behalf of the National City Co.?
Mr. Ripley. I did.
Mr. Saperstein. Will you give us the names of the three companies
involved in this operation?
Mr. Ripley. Boeing Airplane Co., Boeing Air Transport (Inc.),
and Pacific Air Transport.
Mr. Saperstein. Prior to the time when you went to Seattle, did
the National City Co. or the National City Bank have any interest
in any of those companies?
Mr. Ripley. No.
Mr. Saperstein. Did the company or the bank have any stock
ownership in those companies?
Mr. Ripley. None whatever.
Mr. Saperstein. Did the National City Co. have loans outstanding
against any of them?
Mr. Ripley. Not a cent.
Mr. Saperstein. Those three companies were commonly owned
and controlled, were they not?
Mr. Ripley. That depends, sir, on how you use that expression
"commonly owned and controlled." If you will allow me to describe
the situation, I think it may suit your purpose.
Mr. Saperstein. Yes. Will you tell us where the control was?
STOCK EXCHANGE PRACTICES 2325
Mr. Ripley. I would say that a group of individuals identified with
these three companies and active in their management together con-
trolled all three of them through stock ownership— if tliat answers
your question.
Mr. Saperstein. Who was the head of that group?
Mr. Ripley. Mr. William E. Boeing.
Mr. Saperstein. You said a moment ago that you would not
describe this operation as a merger?
Mr. Ripley. That is right.
Mr. Saperstein. Will you tell us what you would describe this
operation to be, if it was not a merger?
Mr. Ripley. I regard a merger as an operation where two or more
corporations merge their affairs either into one of the then existing
corporations or into a new corporation owning and operating the prop-
erties of the companies that go into the merger. The formation of
Boeing Airplane & Transport Corporation I would speak of as the
formation of a holding company to acquire all or substantially all of
the stock of the three constituent companies.
Mr. Saperstein. The Boeing Airplane & Transport Corporation
was organized at or about the time when these negotiations were going
on, was it not?
Mr. Ripley. It was organized in the month of October, 1928,
which was the time that the negotiations were going on.
Mr. Saperstein. Did the Boeing Airplane & Transport Corpora-
tion succeed in procuring a controlling interest in the three companies
which you have named?
Mr. Ripley. It did, and it now owns 100 per cent of Boeing Air-
plane Co., 100 per cent of Boeing Air Transport (Inc.), and prac-
tically 100 per cent of Pacific Air Transport.
Mr. Saperstein. Did you make a thorough study of the condition
of each of those — I will call them constituent companies for the pur-
pose of convenience?
Mr. Ripley. To the best of my ability; yes.
Mr. Saperstein. Did you find those companies in a prosperous and
flourishing condition?
Mr. Ripley. It depends upon how you use the term "prosperous
and flourishing." I do not know how to answer that question.
They were all earning profits, if that answers the question.
Mr. Saperstein. What did you consider the prospects for earning
increased profits were?
Mr. RiPLEY. I thought they were favorable.
Mr. Saperstein. You recommended that the National City Co. go
into this financing because you thought the prospects were favorable,
did you not?
Mr. Ripley. I sent a telegram to head office in which I used the
e.xact expression, "I recommend and urge that you authorize me to
proceed with these negotiations."
Mr. Saperstein. What was the business of the Boeing Airplane
Co.?
Mr. Ripley. The manufacture of airplanes.
Mr. Saperstein. Have you any idea how many airplanes had been
manufactured by that company up to 1928? ^^ .
Mr. Ripley. No. Your question refers to "up to 1928;" and it
you will allow me to change it so as to read "up to the end of 1928,
the answer is about 1,060.
2326 STOCK EXCHANGE PRACTICES
Mr. Saperstein. What was the business of the Boeing Air Trans-
port (Inc.)?
Mr. Ripley. The Boeing Air Transport (Inc.) was engaged in the
carrying of United States air mail and passengers and small amounts
of express between Chicago and San Francisco.
Mr. Sapeestein. How many planes did it have in operation at
that time?
Mr. Ripley. At what time, sir?
Mr. Saperstein. At the time when negotiations for this financing
were going on.
Mr. Ripley. It had 26 in service and 10 under construction.
Mr. Saperstein. What was the business of the Pacific Air Trans-
port?
Mr. Ripley. The Pacific Air Transport flew the United States air
mail between Los Angeles and Seattle and also passengers and
moderate amounts of express.
Mr. Saperstein. Do you recall, Mr. Ripley, that there was con-
siderable discussion within your own organization as to whether this
issue of stock which the National City Co. was about to acquire
from the Boeing Airplane & Transport Corporation should be publicly
or privately offered for sale?
Mr. Ripley. I do; yes.
Mr. Saperstein. Do you recall what the decision was with regard
to that issue?
Mr. Ripley. The decision was to sell it by what was used as an
expressive term, "privately."
Mr. Saperstein. Did you recommend that the issue be disposed
of privately?
Mr. Ripley. No.
Mr. Saperstein. You were in favor of a public offering?
Mr. Ripley. I was. The files indicate that clearly. That was
what I had in mind when I went to Seattle.
Mr. Saperstein. How many shares of the stock of the Boeing
Airplane & Transport Corporation did the National City Co. acquire?
Mr. Ripley. The National City Co. purchased 90,000 shares of
preferred stock of $50 par value per share and 45,000 shares of com-
mon stock. Please note, however, that another investment firm had
an interest in that purchase. You have asked me how much the
National City Co. purchased.
Mr. Saperstein. You had a partner in the original terms group?
Mr. Ripley. We did.
Mr. Saperstein. 'Who was that?
Mr. Ripley. The Pacific National Co. of Seattle.
Mr. Saperstein. What was the extent of its interests?
Mr. Ripley. Ten per cent.
Mr. Saperstein. Are you aware of the factors which induced the
heads of your organization to arrive at the decision that the stock
would be offered not publicly put privately?
Mr. Ripley. My recollection is that I received a telegram from
head office advising me that the matter had been discussed, and my
recollection is that such telegram indicated that the head office
thought that such an offering was a little bit too speculative to be
spread around to the entire American pubhc.
STOCK EXCHANGE PRACTICES 2327
Mr. Saperstein. Was that telegram from Mr. Charles E. Mitchell?
ha^e^itt?orJyo''u^ ^^^^'"^^^^ ^^ *^^* '' '^^'■' '^' ' ^^*^- ^^^^ yt
Mr Saierstein I wiU read you what purports to be a copy of
the telegram to which you have just referred. It is dated October
'?'^''??,' ^T ,^^- ^^'■^f ^- ^'''^'^^' Nationat Sity Co. to you
at Seattle, Wash, [readmg] : j , j u.
Have had luncheon meeting to-day with Messrs. Swenson, Rockefeller, Ryan
Brady, Deeds, and Russell for purpose of discussing Boeing matter All heartilv
approve purchase, but urge that instead of a public offering and general distribu-
tion through sales organization the distribution be limited as far as possible to
our own officers key men, directors and special friends, the principal reasons
being that smaller group stockholders would enable us to more easilv handle
further desirable mergers and to some extent, at least, would take away the heavv
speculation that would accompany in general a public offering on our part At
the sarne time I would hope that the distribution could be sufficiently broad to
justify m due course a listing. Under these circumstances I see no need for hasty
distribution and believe we can await any early date that you will suggest We
strongly approve the suggestion that you should join the board of directors
We see no objection to a public announcement by Boeing along the line of your
suggestion. Russel! left this afternoon for Chicago, and Baker will not return
until to-morrow. Therefore, please address me on any vital questions.
Mr. Ripley, does Mr. Mitchell's statement that "a smaller group of
stockholders would enable us to more easily handle further desirable
mergers" accord with your own idea as to the reason for not ofiering
this issue publicly?
Mr. Ripley. You mean, the reason that moved the head office to
arrive at that conclusion?
Mr. Saperstein. Yes.
Mr. Ripley. No; I tliink the real reason was that the National City
Co. had not at that time come to the point where it felt justified in
sponsoring the aviation industiy to the investing pubUc of this country.
Mr. Saperstein. But it had come to the point where it felt that
it could safely and with profit ofi'er an aviation issue to its own
officers, duectors, and special friends; is not that a fact?
Mr. Ripley. I want to give you two answers. In the first place,
the motive, or the implied motive — impUed by you — that the main
purpose was put to through additional mergers or what not, does not
hold water, because the great bullv of the stock, the common stock —
and that was the voting stock^ — of Boeing Airplane & Transport Cor-
poration was owned by Mr. W. E. Boeing and his associates. In
other words, that group, quite regardless of any votes from this little
amount or relatively little amount of common stock we sold, could
have easily determined the course of action of Boeing Airplane &
Transport and coming into any further mergers, or what not.
Next, I want to point out that in your question to me you have left
out an important expression in Mr. Mitchell's telegram to me, namely,
the expression "key men " — meaning, I beUeve, key men in the Boeing
organization.
Mr. Saperstein. Mr. Ripley, I call your attention to the fact
that I was not quibbling about anything; I was asking you whether
your idea as to the reason that this issue was not publicly offered
accorded with the ideas expressed by Mr. Mitchell in this telegram.
Mr. Ripley. I feel quite certain that the reason for adopting the
so-called "private sale" method is outlined in this telegram, but it is
twofold and includes the element of the speculative nature of the
offering.
2328 STOCK EXCHANGE PRACTICES
Senator Brookhart. Also it includes the prospect of mergers, too,
does it not?
Mr. Ripley. Yes.
Mr. Sapbrstein. In addition to the 90,000 shares of 6 per cent
cumulative preferred stock, the National City Co. received 45,000
shares of the common stock of the Boeing Airplane & Transport
Corporation and rights to purchase an additional 45,000 shares at
$30 per share, is that right?
Mr. Ripley. Yes; I previously recited the 45,000 shares of common
stock which we purchased.
Mr. Saperstein. The total purchase price paid by the National
City Co. was how much?
Mr. Ripley. $5,013,500.
Mr. Saperstein. You said, as I understood you, that the National
City Co. did not want to put itself in the position of sponsoring air-
craft stock because it regarded that type of stock as still in the specula-
tive class. Don't you know, that on November 1, 1928, within a few
days after this telegram was sent, newspaper advertisements appeared
in several large cities in the United States announcing that the
National City Co. was sponsoring the issue of 90,000 shares of pre-
ferred stock and 27,000 shares of common stock of the Boeing Airplane
& Transport Corporation?
Mr. Ripley. I do.
Mr. Saperstein. Those advertisements also contained the state-
ment that none of those shares would be available to the general
public at that time because of the fact that they had been privately
subscribed for. Am I correct in that?
Mr. Ripley. I must look at the files. [After examining files.]
Will you read that cpiestion, Mr. Reporter?
(The pending question was read by the reporter as above recorded.)
Mr. Ripley. Not exactly. The advertisement reads as follows,
at the top: "These units have been sold privately", and so forth.
Mr. Saperstein. That is substantially what I said, is it not, Mr.
Ripley?
Mr. Ripley. Yes, substantially.
Mr. Saperstein. Each share of preferred stock had a warrant
entitling the holder to one half share of common stock at $30 a shai'e,
did it not?
Mr. Ripley. Entitling the holder thereof to purchase one half
share of common stock at $30 per share during a certain period of time.
Mr. Saperstein. In other words, for every 2 shares of preferred
stock he held, the holder was entitled to purchase 1 share of common
stock at $30 a share.
Mr. Ripley. During a certain period of time; yes.
Mr. Saperstein. The National City Co. allotted, out of the shares
of stock acquh-ed by it, only 90,000 shares of the preferred and 27,000
shares of the common stock, according to the circular which I have
before me.
Mr. Ripley. That is right.
Mr. Saperstein. Retaining in its possession some 18,000 shares of
the common stock which it had acquu-ed on the occasion of the
original purchase?
Mr. Ripley. Less the amount that it had to give to the Pacific
National Co., of Seattle.
STOCK EXCHANGE PRACTICES 2329
Mr. Saperstein. Less 10 per cent which the Pacific National Co.
was entitled to. Do you know at what price the stock was offered
to these private individuals — "officers, key men, directors, and special
friends"?
Mr. Ripley. Yes; it was offered in units of 10 shares of preferred
stock of $50 par value per share plus .3 shares of common stock at a
price of $590 flat per unit.
Mr. Saperstein. Do you loiow what the profit of the National City
Co. was in that transaction?
Mr. Ripley. In previous testimony before this committee, I be-
lieve there has been a differentiation drawn between the term "profit"
and the term "spread." As a matter of fact, in the investment bank-
ing business I know of no accounting system by which profit can be
ascertained in respect to any one transaction, because from any figures
that anj^ of us give you there is not deducted the expense of operating
the National City organization.
Mr. Saperstein. You mean the portion of the overhead of the
entire organization wliich is attributable to a particular issue?
Mr. Ripley. I know of no accounting system in this business that
splits up that expense as between the different transactions we handle.
Mr. Saperstein. Suppose you tell me the profit which the National
City Co. received, according to its syndicate records.
Mr. Ripley. $244,366.67 plus 16,200 shares of common stock plus
40,500 stock-purchase warrants.
Mr. Saperstein. That 40,500 figure you have given us, is after
deducting the share received by the Pacific National Co.?
Mr. Ripley. Quite so; as is the dollar spread as between the
dollars which I gave.
Mr. Saperstein. And the figures you have given represent the
net profit after deducting the expenses which are directly attribut ble
to the flotation of this issue?
Mr. Ripley. 1 would like to have that question read. I do not
wish to quibble, but I want to have it read.
(The pending question was read by the reporter as above recorded.)
Mr. Ripley. Yes; after deducting the charges made to the floating
of this issue.
Mr. Saperstein. What did your company do with the 16,200
shares which it had left after this entire issue of preferred stock was
disposed of?
Mr. Ripley. It kept them, so far as I know.
Mr. Saperstein. It traded in them, did it not?
Mr. Ripley. Not to my Imowledge. Let me make clear that I
have nothing to do with the trading department of the National City
Co.
Mr. Saperstein. Have you any records indicating whether or not
those 16,200 shares wliich you described a moment ago as part of the
profits on the transaction, were disposed of subsequently?
Mr. Ripley. I have before me a memorandum from the secretary
of the National City Co. indicating that the 16,200 shares of common
stock to wliich I have just referred were sold during the 5-nionth
period succeeding the offering in the latter part of October, 1928.
Mr. Saperstein. Does that memorandum show what the profit
was in connection with those 16,200 shares?
Mr. Ripley. The memorandum shows a profit of $1,414,884.50.
2330 STOCK EXCHANGE PRACTICES
Mr. Sapeestein. That sum must be added to the figure of $244,366
which you gave us before as the net profit in the syndicate account,
in order to determine what the entire profit of the company was; is
that right?
Mr. Ripley. Yes; again, with the use of the term "profit as 1 use
it.
Mr. Sapeestein. Subject only to the deduction which, at best,
would be only guesswork, of such portion of the overhead as may be
attributable to this particular issue?
ilr. Ripley. Quite so; guesswork in the same sense as it is im-
possible on a railroad to ascertain the cost of hauling this versus that,
versus that, and so on.
Mr. Sapeestein. In addition to the stock you have just related
as having been disposed of, the company exercised its option to acquire
additional shares of stock under the warrants to the extent of 28,000
shares, did it not?
Mr. Ripley. I have before me a memorandum sho\\ing that it did;
and I believe the memorandum. I can not answer from personal
knowledge.
Mr. Sapeestein. You believe 28,000 shares to be correct?
Mr. Ripley. Yes.
Mr. Sapeestein. Do you know the mininuiro price at which this
Boeing Airplane & Transport Corporation stock sold, during the first
few months of its existence?
Mr. Ripley. My distinct recollection is that I was in Seattle when
it first went on the New York curb market, and that the first transac-
tions were about 34, on the common stock.
Mr. Sapeestein. About 34. Are you sure of that, Mr. Ripley?
Mr. Ripley. I am not sure of it. It is my recollection; and in
order to be fair \vith you I hand you a chart prepared by my staff which
shows that it started higher, but my distinct recollection is that it
started at about 34.
Mr. Sapeestein. We have here the carb records, and perhaps in a
moment or two we will be able to tell you the opening prices for that
stock. Our records show that the stock opened at $60 per share.
Mr. Ripley. I have merely stated my recollection, and I may be
quite wrong.
Mr. Sapeestein. You acquired this additional stock in the exercise
of these warrants at $30 per share; is that correct?
Mr. Ripley. Yes.
Mr. Sapeestein. And if the opening were $60 per share — we will
assume that to be so, for the moment, until we check it — you would
have had an additional profit of $30 per share for each of those 28,000
shares?
Mr. Ripley. If they were all sold at that price.
Mr. Sapeestein. You would at least have had a paper profit of
$30 per share, would you not?
Mr. Ripley. Yes; quite so.
Mr. Sapeestein. And that would have aggregated an additional
$840,000 profit?
Mr. Ripley. Right.
Mr. Sapeestein. Now, that sum would have to be added to the
profits which we have heretofore aggregated at about $1,600,000.
Mr. Ripley. Yes.
STOCK EXCHANGE PRACTICES 2331
Mr. Saperstein. If we are to arrive at a figure indicating the total
profit made by the National Citj^ Co. in this one transaction?
Mr. Ripley. The profit made or to be made, depending on whether
the stock from the warrants was sold.
Mr. Saperstein. You know, of course, from Mr. Law's memo-
randum that the 16,200 shares were sold?
Mr. Ripley. Yes.
Mr. Saperstein. Mr. Ripley, I call your attention to the fact that
the report of sales on the New York curb market for Saturday,
November 3, 1928, which appears to be the opening day of trading'
indicates that the Boeing Airplane & Transport Corporation stock
opened at 57 and closed at 63.
Mr. RiPLEY'. May I see that sheet, please?
Mr. Saperstein. Yes [handing paper to the witness].
Senator Brookhart. Is that the date when the first of the stock
was sold?
Mr. Saperstein. Yes, su-.
Senator Brookhart. Did it go higher or lower than that?
Mr. Saperstein. It went much higher.
Mr. Ripley. May I hear your question again?
(The pending question was read by the reporter as above recorded.)
Mr. Ripley. That is not a question, is it?
Mr. Saperstein. Have you examined that report and ascertained
that statement to be correct?
Mr. Ripley. Yes. My memory certainly must be wrong.
Mr. Saperstein. Your recollection must be wrong in that con-
nection?
Mr. Ripley. It would certainly seem so. I accept that.
Mr. Saperstein. A hasty calculation of the profits that the
National City Co. made in connection with the Boeing Airplane &
Transport Co., indicated that the grand total is about $1,842,866,
subject, only to the deduction, which you have several times adverted
to, of the amount of overhead attributable to this one issue. Am I
correct?
Mr. Ripley. May I ask you to read off the component items? I
did not follow them.
Mr. Saperstein. $244,666, $1,414,884, and $840,000.
Mr. Ripley. Wliat is your total, sir?
Mr. Saperstein. My total is about $1,842,000.
Mr. Ripley. I accept it.
Mr. Saperstein. You accept it because the total is a httle bit more
than that, don't you?
Mr. Ripley. Yes.
Mr. Saperstein. It is over $2,400,000.
Mr. Ripley. But you must bear in mind that part of that is, as you
said, a paper profit.
Mr. Saperstein. If we leave out of consideration the warrants, we
still have a profit on the original transaction of over $1,600,000, do
we not?
Mr. Ripley. On the first two items I have mentioned, $1,659,000.
Mr. Saperstein. And that was the return of the National City
Co. on its original investment of $5,000,000?
Mr. Ripley. Of $5,013,500.
119852— 33— PT 6 37
2332 STOCK EXCHANGE PRACTICES
Mr. Saperstein. Do you know, Mr. Ripley, that your company
made an application to list this stock on the New York Curb Exchange
on or about October 31, 1928?
Mr. Ripley. I do not know of my company making an application.
My recollection is that Boeing Airplane & Transport made the
application; but I grant that the National City Co. cooperated in
the making of it.
Mr. Saperstein. I show you a letter dated October 31, 1928,
which purports to bear the signature of H. B. Baker, vice president of
the National City Co., to the committee on listing and securities.
New York curb market, and I ask you whether that letter does not
indicate that the National City Co. made application for listing the
stock on the New York curb market.
Mr. Ripley. No; it does not.
Mr. Saperstein. What does it indicate?
Mr. Ripley. It indicates that the National City Co. addressed
the coimnittee on listing and securities of the New York curb market
transmitting to it an application of Boeing Airplane & Transport
Corporation for a listing.
Mr. Saperstein. Do you know who prepared that application?
Mr. Ripley. I do not know, but I can make a good guess.
Mr. Saperstein. What is your guess?
Mr. Ripley. W. C. Cross, with the assistance of Messrs. Hilcken
and Renter.
Mr. Saperstein. Are they connected with the National City Co.?
Mr. Ripley. No. Messrs. Hilcken & Renter are a professional
firm in New York City specializing in the business of preparing listing
applications on the two mam stock exchanges.
Mr. Saperstein. Who is Mr. Cross?
Mr. Ripley. Mr. Cross was a member of the staff of the National
City Co. and is now a junior officer, and he was also a vice president
of Boeing Airplane & Transport Corporation.
Mr. Saperstein. If it was not the intention or desire of the
National City Co. to sponsor an aircraft stock because of the fact that
it was too speculative, why was an application made for fisting this
stock upon the New York Curb E.xchange?
Mr. Ripley. Because one of the conditions of my negotiations with
Mr. W. E. Boeing, starting in the early part of October, 1928, approxi-
mately a month before I received this telegram from Mr. Charles E.
Mitchell — one of the conditions of the said negotiations, was that the
stocks of the Boeing Airplane & Transport should be listed in New
York City on the New York Stock Exchange, if possible, and the
New York curb market, if not possible, on the big board, as we call it.
Mr. Saperstein. Does that answer the question, Mr. Ripley?
Mr. Ripley. I am not through.
Mr. Saperstein. I beg your pardon.
Mr. Ripley. In addition to that, the desirabihty of having a
quoted market on the stock was doubtless a consideration.
Mr. Saperstein. Why did you want a quoted market on the stock,
if you were confining its sale to the officers and the key men, and
those other persons who are mentioned in Mr. Mitchell's" telegram?
Mr. Ripley. Are you asldng why I wanted it?
Mr. Saperstein. Why did the National City Co. want it fisted?
STOCK EXCHANGE PRACTICES 2333
Mr. Ripley. I could not tell you what was in the minds of people
at head office. I was obligated to Mr. Boeing to get it listed.
Mr. Saperstein. Did you know that an application was actually
made for the listing of the stock?
Mr. Ripley. Yes, indeed.
Mr. Saperstein. You had arranged that?
Mr. Ripley. Certainly.
Mr. Saperstein. When you arranged it, you knew that the stock
was going to be offered in private only, and not to the public, did vou
not?
Mr. Ripley. My work in connection with making an application
to list started before receiving any telegram from Mr. Mitchell to the
effect that the offering was to be private.
Mr. Saperstein. When you received that telegram, you were
made cognizant of the fact that it was to be private, and yet you went
right ahead with your plans to have the stock Hsted, didn't you?
Mr. Ripley. Yes; having obhgated myself to Mr. Boeing to do so.
Mr. Saperstein. Mr. Ripley, are you familiar with a flash that
was sent out to the various dealers by Mr. Baker on November 1,
1928, flash No. 3225? Have you seen that?
Mr. Ripley. I have it.
Mr. Saperstein. I want to read that into the record. The
flash is as follows :
November 1, 1928. Advertisement on Boeing Airplane & Transport Corpora-
tion units of 6 per cent preferred with common stock is being published to-day
only in following cities: New York, Chicago, San Francisco, and Seattle, with the
statement that units have all l)een sold privately and the advertisement appears
as a matter of record only. The statement we are making to customers regarding
our inability to consider orders from them is substantially as foDows: We have
purchased an interest in this company, and on account of the fact this industry
is still somewhat unseasoned, even though we regard this particular company as
sound and having a very bright future, we were not quite ready to make a general
offering to our customers. It would have been next to impossible to avoid taking
orders from the type of investor who should not buy this stock. Therefore,
our own family and certain officers and employees of the Boeing Co. and affihations
have taken the entire issue.
Have you ever seen that flash before, Mr. Ripley?
Mr. Ripley. Yes, I have.
Mr. Saperstein. Wlien that flash was sent out, it certainly was
in the minds of the officers of the National City Co. that in the near
future the stock would be offered to the public, was it not?
Mr. Ripley. In the near future after the sending of this flash?
Mr. Saperstein. Yes.
Mr. Ripley. Certainly not that I know of, using the term "public"
as I take it you use it.
Mr. Saperstein. Does this not indicate an intention that very
shortly it would be ofl'ered to the members of the general pubhc,
when Mr. Baker says :
We have purchased an interest in this company, and, on account of the fact
this industry is still somewhat unseasoned, even though we regard this particular
company as" sound, and having a very bright future, we were not quite ready to
make a general offering to our customers.
What do you suppose that language means, if it does not indicate
that you were getting ready to make a general offering to your
customers?
2334 STOCK EXCHANGE PRACTICES
Mr. Ripley. I can not interpret Mr. Baker's use of words. He
might have had in mind the formation of a hirger company at a later
date. I do not know.
Mr. Saperstein. Have you before you tlie records mdicatmg at
what price and to whom these shares were offered or allotted?
Mr. Ripley. Yes.
Mr. Saperstein. At what price were they allotted?
Mr. Ripley. $590 fiat for each unit consisting of 10 shares of
$50 par value stock and 3 shares of common stock.
Mr. Saperstein. I \vill not ask you to read the entire list, but I
wdll ask you to state, for the purposes of the record, how many units
were allotted to the persons I am going to name. How many units
were allotted to Mr. Charles E. Mitchell?
Mr. Ripley. 200.
Mr. Saperstein. Are not those in alphabetical order, Mr. Ripley?
Mr. Ripley. Not entirely. May I show you? [Exhibiting paper
to Mr. Saperstein.]
Mr. Winston. If you will give the names, they can check them.
Mr. Ripley. It is not alphabetical.
Mr. Saperstein. I see by the hst which you have just handed to
me that Mr. E. P. Swenson was allotted 185 units. Who is Mr.
Swenson?
Mr. Ripley. Mr. Swenson was then chairman of the board of the
National City Bank, I believe.
Mr. Saperstein. The hst further shows that Col. Sosthenes Behn
received 100 units. Who is Colonel Behn?
Mr. Ripley'. I believe that he was chairman of the International
Telephone & Telegraph at that time.
Mr. Saperstein. Mr. Guy Cary received 150 units. Mr. Cary is
a member of the firm of Shearman & Sterhng, is he not?
Mr. Ripley. Yes.
Mr. Saperstein. Mr. John A. Garver received 100 units. He is
also a member of the firm of Shearman & Sterling?
Mr. RiPLEY". Yes.
Mr. Saperstein. And Shearman & Sterling are attorneys for the
National City Co., the National City Bank, and the City Farmers
Trust?
Mr. Ripley. Yes.
Mr. Saperstein. Mr. Gordon S. Rentschler received 100 units.
He is president of the National City Bank, is he not?
Mr. Ripley. He is now, but was not then.
Mr. Saperstein. Wliat was he then?
Mr. RiPLEY'. Assistant to the president.
Mr. Saperstein. Mr. Percy Rockefeller received 400 units. Did
he then have a connection with the National City Co. or bank?
Mr. Ripley. I believe he was a director of the bank at that time.
Mr. Saperstein. Col. R. W. Stewart received 100 units. Who is
he?
Mr. Ripley. I believe he was a director of the bank at that time.
Mr. Saperstein. Mr. James A. Stillman received 150 imits. Wliat
was his position?
Mr. RiPLEY'. A director of the National City Bank.
Mr. Saperstein. Mr. Garrard B. Winston received 100 units.
Mr. Winston is also a member of the firm of Shearman & Sterling?
STOCK EXCHANGE PRACTICES 2335
Mr. Ripley. Yes.
Mr. Saperstein. I note that the largest single allotment was made
to Francis Bartow, 645 units. Who was Mr. Bartow?
Mr. Ripley. Mr. Bartow is and was then a partner in the firm of
J. P. Morgan & Co., but I think it is no more than fair to point out
that I am quite certain that that was not all for him.
Mr. Saperstein. Do you mean that the allotment in his name was
for the various members of the firm of J. P. Morgan & Co.?
Mr. Ripley. I do not know for whom it was, but certainly for
somebody in addition to Mr. Bartow.
Mr. Saperstein. You have no basis for the statement you have
just made, have you, other than your guess that it was not all taken
by him?
Mr. Ripley. I have no exact facts, but I beUeve it.
Mr. Saperstein. I see also that Col. E. A. Deeds received 220
units. He is connected with the National City Co., is he not?
Mr. Ripley. No. Colonel Deeds is a director of the National
City Bank. I do not believe he is connected with the National
City Co.
Mr. Saperstein. According to the records which we have just
exhibited to you, Mr. Ripley, of the first day's trading on the New
York curb market, on November 2, 1928, the preferred opened at
$60 a share, and the common at $57 a share. The units, as you have
described them, were 10 shares of preferred, and 3 shares of common.
How much would that be for each unit?
Mr. Ripley. It would be $771 for each unit.
Mr. Saperstein. And the cost to each of these persons I have
mentioned, and to the others who appear on your list, was $590,
I think you said?
Mr. Ripley. Yes.
Mr. Saperstein. That would leave them a profit of how much on
each unit?
Mr. Ripley. A paper profit of $181 per unit.
Mr. Saperstein. And if you midtiply that profit by the number
of units outstanding in their hands, what total do you get?
Mr. Ripley. $1,629,000.
Mr. Saperstein. You refer to this as a paper profit.
Mr. Ripley. Yes.
Mr. Saperstein. I assume that you mean by that that some of
the participants may not have sold their shares at the opening price?
Mr. Ripley. Yes.
Mr. Saperstein. Don't you know, Mr. Ripley, that the price of
this stock went up, and continued to go up, until it sold for more
than $100 a share?
Mr. Ripley. I certainly do.
Mr. Saperstein. So that the figure I have just given you as^the
profit, the figure you have just designated as the "paper profit," is
the minimum profit which those persons would have made had they
cashed in on the first day of trading, is it not?
Mr. Ripley. I do not think so, because I do not beheve that all of
them could have cashed in on the first day of trading at those levels.
It is what I would call a thin market.
Mr. Saperstein. The level continued to rise from that point on
untU the stock was priced at over $100 a share?
2336 STOCK EXCHANGE PEACTICES
Mr. Ripley. Which surprised me more than anything in my life
yet.
Mr. Saperstein. Whether it surprised you or not, that increase in
price increased the amount of profit which was available to any mem-
ber of that comparatively small group at any time that he desired to
cash in on his investment, isn't that right?
Mr. Ripley. I will have to have that read. It is too long.
(The reporter read the pending question.)
Mr. Ripley. Up to a certain time, and within the limits of their
ability to sell it, yes.
Senator Brookhart. How long did the price rise?
Mr. Ripley. Senator Brookhart, the price rose until some time in
January, 1929. Then it dechned, not very much.
Senator Brookhart. When did this thing start, this first quotation?
Mr. Ripley. November 2, 1928.
Senator Brookhart. November; and the price continued to rise
until
Mr. Ripley. Some time in January, 1929.
Senator Brookhart. The purpose of these allotments was to
enable those persons to make a little easy money there while this
market was being boomed, was it not?
Mr. Ripley. I do not think so, Senator Brookhart. I have testified
that I was in Seattle conducting all the negotiations to purchase this
stock.
Senator Brookhart. But was not the intention all the time to
finally sell this whole thing to the public, and these allotments were
made so that these persons would have an advantage when it was
sold to the public?
Mr. Ripley. I do not think that was the intention. Senator Brook-
hart, there was grave doubt, at the time we bought these stocks from
the Boeing Airplane & Transport Corporation as to how the market
would receive them.
' Senator Brookhart. You thought you could sell them all right at
an advance. You did not have any doubt about that.
Mr. Ripley. I certainly thought that we could sell them at a
profit, but I never expected any rise in the market such as took place.
Senator Brookhart. Then what happened to them afterwards?
Mr. Ripley. After when. Senator Brookhart?
Senator Brookhart. After the stock was mostly all sold. This
was all sold within five months, according to that letter, as I recall
it — these allotments.
Mr. Ripley. These units were all sold in one operation.
Senator Brookhart. They were to these individuals, but the in-
dividuals sold them, did they not?
Mr. Ripley. I do not know.
Senator Brookhart. You don't know about that?
Mr. Ripley. These individuals involve a list of over 300 people,
and I have no knowledge
Senator Brookhart. But these people that got the allotments
were mostly connected with your company.
Mr. Ripley. Some of them were.
Senator Brookhart. And they were the ones that were wise about
the situation. They would sell while it was going up.
STOCK EXCHANGE PRACTICES 2337
Mr. Ripley. I do not know who is the wisest in regard to the market
movements of United Aircraft, as this has later become.
Mr. Saperstein. Mr. Ripley, you yourself received some share of
these allotments, did you not?
Mr. Ripley. Yes, indeed.
Mr. Saperstein. You got 175 units?
Mr. Ripley. I purchased 175 units for cash; yes.
Mr. Saperstein. Did you sell those out?
Mr. Ripley. I have sold them out at some time. I do not re-
member when.
Mr. Saperstein. How long after the trading began on the market
would you say you sold yours out?
Mr. Ripley. I will get you that information. [After examining
papers.] My records indicate December 7, 1928.
Mr. Saperstein. So that within five weeks from the time when
trading began on the curb market, you had sold out your allotment?
Mr. RipI;Ey. Yes.
Mr. Saperstein. Have you the record to show the prices at which
you sold out?
Mr. Ripley. The question can not be answered, because I trans-
ferred some of my preferred stock into common stock in the interim.
Mr. Saperstein. Haven't you a statement there indicating what
this stock cost you, and what you ultimately received for it?
Mr. Ripley. Yes. If you will tell me what you are driving at.
Mr. Saperstein. What was the amount of your profit in connec-
tion with these 175 units?
Mr. Ripley. $67,501.88.
Senator Brookhart. You were one of the wise ones, then, all right.
Mr. Ripley. I thought the price was too high, Senator Brookhart,
but if I had waited another several months, it would have been twice
as high.
Senator Brookhart. Did not all of these men that you have men-
tioned specially sell theirs out, too? They did not wait, either, did
they? They were like you, were they not?
Mr. Ripley. I do not know. I never asked a one of them.
Mr. Saperstein. Will you, by reference to this curb chart, Mr.
Ripley, state what the high was on this stock, and on what date that
high was achieved?
Mr. Ripley. The high was about 160, and achieved in May, 1929,
but please note that that was United Aircraft stock.
Mr. Saperstein. When did the Boeing Airplane & Transport Cor-
poration become the United Aircraft & Transport (Inc.)?
Mr. Ripley. Some time in the early part of February, 1929.
Mr. Saperstein. There were several other units included in that
company when it was organized, in addition to the Boeing units,
were there not?
Mr. Ripley. Please do not use the term "when it was organized."
The United Aircraft & Transport Corporation is the same corporate
entity that Boeing Airplanes & Transport was.
Mr. Saperstein. I see. The name was simply changed?
Mr. Ripley. Yes.
Mr. Saperstein. There were several additional units added to the
Boeing group at or about the time when the name was changed to
United Aircraft & Transport (Inc.)?
2338 STOCK EXCHANGE PRACTICES
Mr. Ripley. Yes.
Mr. Saperstein. Do you recall that in January, 1929, the National
City Co. entered into a contract with the Boeing Airplane & Trans-
port Corporation — I believe the name was changed a day or two after
that— to acquire 150,000 shares of the preferred stock of the company,
with warrants attached? Are you famihar with that transaction?
Mr. Ripley. Yes.
Mr. Saperstein. Do you know the price at wliich it acquired that
stock?
Mr. Ripley. The National City Co. bought from the Boeing xVir-
plane & Transport Corporation, 150,000 shares of $50 par preferred
stock, plus 100,000 stock purchase warrants, at an aggregate price of
about $8,800,000.
Mr. Saperstein. That purchase did not carry with it any common
stock, did it?
Mr. Ripley. No.
Mr. Saperstein. Are you aware of the fact that the company,
shortly before that date, had purchased from Mr. Frederick B.
Rentschler 65,000 shares of the common stock of the Boeing Airplane
& Transport Corporation?
Mr. Ripley. The National City Co. bought
Mr. Saperstein. Do you know at what price that common stock
was acquired?
Mr. Ripley. $70.
Mr. Saperstein. And the Pacific National Co. was granted 10
per cent in that purchase, was it not?
Mr. Ripley. Yes.
Mr. Saperstein. Wlien the name was changed to United Aircraft
& Transport Corporation, that stock was offered to the public, was
it not?
Mr. Ripley. Some of it.
Mr. Saperstein. How much of it was oflered to the public?
Mr. Ripley. Sixty thousand shares, I believe.
Mr. Saperstein. The 60,000 shares you refer to were the common
stock ofl'ering?
Mr. Ripley. Yes.
Mr. Saperstein. That stock was offered together with preferred
stock, was it not?
Mr. RiPLEY'. Yes.
Mr. Saperstein. What were the units, and what was the price of
each unit?
Mr. Ripley. The units consisted of 10 shares of preferred stock
and 4 shares of common stock, and the price was $1,000.
Senator Brookhart. That is what you paid for them?
Mr. Ripley. No. He asked me the offering price.
Senator Brookhart. At what price were they offered to the public?
Mr. Ripley. Do you want to know
Senator Brookhart. Yes. What did you pay for it? I was
talking to the chairman, and did not catch that connection.
Mr. Ripley. Senator Brookhart is asking what we paid for the
units. According to my rapid arithmetic, I figure it at about
$13,000,000.
Senator Brookhart. Not $1.3,000,000 per unit.
Mr. Ripley. No; for the total.
STOCK EXCHANGE PRACTICES 2339
Senator Brookhart. What would that be for each unit? I want
to get what you paid, and then what you offered them at.
Mr. Ripley. I am advised by Mr. Law that the cost was $867.50
per unit.
Senator Brookhart. Then you offered them to the public at a
thousand dollars?
Mr. Ripley. Yes.
Mr. Saperstein. Have you a copy of the prospectus for this
United Aircraft & Transport Corporation offer to the public?
Mr. Ripley. Yes.
Mr. Saperstein. You will note that the prospectus states that
there is being offered 150,000 shares of 6 per cent cumidative pre-
ferred stock, series A, and 60,000 shares of common stock. Do you
know, Mr. Ripley, that when that prospectus was issued, the National
City Co. had made a contract with William E. Boeing to sell him
20,000 shares out of this 150,000 preferred stock issue, for $58.75 per
share?
Mr. Ripley. I do not know that the National City Co. had so con-
tracted prior to the issuance of this prospectus.
Mr. Saperstein. Have you any records there that would indicate
when that contract was entered into?
Mr. Ripley. I have not, and I must add that I was in California
at the time of this offering.
Mr. Saperstein. Do you loiow the date when tliis prospectus was
issued?
Mr. Ripley. The president's letter is dated January 31, 1929.
Mr. Saperstein. Then it could not have been issued before that
date, could it?
Mr. Ripley. No.
Mr. Saperstein. I call your attention to a memorandum in your
syndicate files dated January 21, 1929, which is some 9 or 10 days
before the date of the prospectus, prepared by the manager of the
syndicate department, to Mr. Bradley, in which the following state-
ment appears:
We have purcha.sed from the United Aircraft & Transport Corporation 150,000
shares of its 6 per cent cumulative preferred stock, series A, with warrants at-
tached, to subscribe for 75,000 shares of common stock, and additional warrants
for 25,000 shares of common stock, the cost of which figures $55.75 per share of
preferred.
Mr. Ripley. $58.75.
Mr. Saperstein. Is it $58.75?
Mr. Ripley. You read it $55.75. Here it is [exhibiting paper to
Mr. Saperstein].
Mr. Saperstein. $58.75.
We have sold out of the original terms account 20,000 shares of preferred stock
with warrants attached to Mr. William E. Boeing at $58.75 per share.
That memorandum indicates that some time before the prospectus
was issued, your company had sold to Mr. Boeing 20,000 of these
preferred shares at the same price at wliich it had acquired them, does
it not?
Mr. Ripley. No; not the same price at which we acquired it, be-
cause you would have to make a deduction for the value of the 25,000
warrants.
Senator Brookhart. You had the warrants left?
2340 STOCK EXCHANGE PRACTICES
Mr. Ripley. Yes.
Mr. Saperstein. You had the warrants left.
Mr. EiPLEY. So, the true cost of that preferred stock is less than
$58.75.
Mr. Saperstein. Don't you think, Mr. Ripley, that the public was
entitled to know, when that prospectus was issued, that not 150,000
shares of preferred stock were being offered for public sale, but only
130,000 shares?
Mr. Ripley. I would rather have it do so.
Mr. Saperstein. You think that the prospectus should have said
130,000 shares?
Mr. Ripley. I would rather have it say so.
Mr. Saperstein. Do you know who prepared that prospectus?
Mr. Ripley. I do not. I repeat that I was in California, and add
that I left New York on January 4, 1929, and did not get back until
February 15, 1929.
Senator Brookhart. I am obliged to go, and I would like to ask a
question or two. With respect to these units we mentioned a while
ago, that you offered at $1,000 per unit, were they all sold at that
price to the public?
Mr. Ripley. Yes.
Senator Brookhart. What are they worth now?
Mr. Ripley. My arithmetic, and the last market quotations I
have seen bring it out to $598 per unit, which indicates distinctly less
decline than the general run of securities.
Senator Brookhart. Do you think that indicates less water in
this stock than in most of the stocks you sold, then?
Mr. Ripley. I do not know how you use the term "water,"
Senator Brookhart.
Senator Brookhart. Perhaps I ought not to use the term "water."
That is too thick. I expect I should have said "wind"
Mr. Saperstein. Your company offered to the public 60,000 shares
of common stock. It had previously acquired 65,000 shares of the
common stock from Mr. Frederick B. Rentschler, had it not?
Mr. Ripley. Correct.
Mr. Saperstein. That left you with 5,000 shares in your posses-
sion, besides which, when Mr. Boeing acquired his preferred stock,
he did not purchase any common stock, and that left you with an
additional 8,000 shares in your possession, making a total of 13,000
shares of common stock, which the National City Co. had left after
this pubhc offer was made. Am I correct in that?
Mr. Ripley. Yes.
Mr. Saperstein. Do you know what became of those 13,000
shares?
Mr. Ripley. They were sold, as I recall it, at a price of $80 a share.
Mr. Saperstein. Making a total of what?
Mr. Ripley. Do you mean the total realization from the sale of
the 13,000 shares?
Mr. Saperstein. Yes.
Mr. Ripley. $1,040,000.
Mr. Saperstein. To whom were those shares sold? Look at this
memorandum furnished to us by Mr. Henry S. Law, and tell me
whether this is a Ust of the persons to whom those shares were sold
[e.xhibiting paper to Mr. Ripley].
STOCK EXCHANGE PRACTICES 2341
Mr. Ripley. Yes; it is.
Mr. Saperstein. That list contains the names of all the principal
officers, or nearly all the principal officers of the National City Co.,
the National City Bank, and persons connected with the bank or the
company, in one way or another, is that right?
Mr. Ripley. No; because you have asked me whether it includes
all the principal officers, and I happen to have been omitted, and I
tliink I was one of the principal officers.
Mr. Saperstein. I modified that statement. I said nearly all
principal officers, Mr. Ripley. Mr. Charles Mitchell, for example,
was allotted 1,000 shares on that list, was he not?
Mr. Ripley. That is correct.
Mr. Saperstein. R. M. Byrnes was allotted a thousand shares,
was he not?
Mr. Ripley. That is correct.
Mr. Saperstein. Mr. Hugh Baker was allotted 500 shares?
Mr. Ripley. Yes; that is correct.
Mr. Saperstein. The other officers received graduated amounts,
apparently according to the importance of the individual, to his
respective institutions; is that correct?
Mr. Ripley. There are many officers of the bank and company
not on this list.
Mr. Saperstein. They did not all participate in this offering?
Mr. Ripley. No.
Mr. Saperstein. Nevertheless, the entire 13,000 shares were
allotted to the persons on that list?
Mr. Ripley. To the persons on that list; yes.
Mr. Saperstein. And that allotment was made at a price of $80
a share?
Mr. Ripley. At a price of $80 a share.
Mr. Saperstein. Do you know what the market price of the stock
was on the day when those allotments were made?
Mr. Ripley. I think about $88.
Mr. Saperstein. About how much?
Mr. Ripley. $88.
Mr. Saperstein. 'What record are you referring to, Mr. Ripley?
Mr. Ripley. A digest of my files.
Mr. Saperstein. Do you know the date when these allotments
were made, and these sales took place?
Mr. Ripley. I think January 31.
Mr. Law. January 29.
Mr. Ripley. Mr. Law says January 29. My records show it as
January 31.
Mr. Saperstein. Let me call your attention to a flash bearing No.
3752, from "General Sales" to your various dealers, dated January 31,
1929, which reads as follows:
For your information, United Aircraft & Transport Corporation preferred and
common being dealt in in over-the-counter market separately now quoted, com-
mon, 95 to 96; preferred, 77 to 78. We expect to have it listed on curb during
day. Therefore, your customers can now buy this stock through other channels,
but, as we would like to center this market in our own organization, wiU be glad
to have you place buying orders with us to be executed in the market.
That flash indicates that the price on January 31, 1929, on the
common was 95 to 96, does it not, Mr. Ripley?
2342 STOCK EXCHANGE PRACTICES
Mr. Law. What is the number of that?
Mr. Saperstein. Thirty-seven hundred and fifty-two.
Mr. Ripley. Yes; but I gave you a quotation of 88 on January
30, and tliis flash was dated January 31.
Mr. Saperstein. I thought you said your recollection was that
the sales were made on January 31.
J> Mr. Ripley. My recollection is that January 31 was the date of
the offering of the units.
Mr. Saperstein. That is what I am talking about, the date of
the offering of the units.
Mr. Ripley. Then, what is the question before me?
Mr. Saperstein. Read the question.
(The reporter read the pending question.)
Mr. Ripley. Yes; but I wish to point out that you have used the
expression "flash to dealers," whereas tliis flash is a flash only to
our branch offices.
Mr. Saperstein. I am not discussing that.
Mr. Ripley. No; but I wish to correct you.
Mr. Saperstein. One of the papers which appears among your
own records indicates that the price of this common stock on January
31, 1929, was 95 to 96. That was the same day or the day following
the day upon which these members of your organization received
their allotments of this common stock, at the price of $80 per share,
isn't that true?
Mr. Ripley. I am advised that that 13,000-share ofi'ering was on
the 29 th.
Mr. Saperstein. Then, it would be two days later that the price
was 95 to 96.
Mr. RiPLEY'. Yes.
Mr. Saperstein. Do you know what the price was on January 29?
Mr. Ripley. I am advised that there was no quotation, because it
opened on the 30th.
Mr. Saperstein. AU right. What was the price on the 30th?
Mr. Ripley. From 88 toSO^i, I am advised.
Mr. Saperstein. Then, on the 30th, the participants had 8 or 9
points profit on this allotment. On the 31st, they had 15 or 16 points
profit on each share allotted to them.
Mr. Ripley. Paper profits, yes.
Mr. Saperstein. Paper profits. Do you know what the gross
profit of the National City Co. was in this United Aii'craft offering?
Mr. Ripley. The original terms spread was $1,002,251, and the
selling profit, $442,482, and then a small additional profit of $2,338.
Mr. Saperstein. What is the total of those items?
Mr. Ripley. $1,558,430.
Mr. Saperstein. That figure you have just given us represents the
profit wliich the National City Co. made for itself after deducting
the amount wliich the Pacific National Co. made on this transaction,
is that right?
Mr. Ripley. My addition was wrong. The total is $1,447,820.
Mr. Saperstein. Does that figure represent the National City
Co.'s share after paying the 10 per cent to the Pacific National Co.?
Mr. Ripley. It does.
Mr. Saperstein. And the Pacific National Co. received an amount
approximately equivalent to 10 per cent of the amount which the
National City Co. received as its share of the profit?
STOCK EXCHANGE PRACTICES 2343
Mr. KiPLEY. Yes.
Mr. Saperstein. I think that is all, Mr. Chairman.
(Witness excused.)
Mr. Pecora. Call Mr. Meehan.
The Chairman. Please stand, hold up your right hand, and be
sworn: You solemnly swear that you will tell the truth, the whole
truth, and notliing but the truth regarding the matters now under
investigation by this subcommittee, so help you God?
Mr. Meehan. I do.
TESTIMONY OF MICHAEL JOSEPH MEEHAN, OF M. J. MEEHAN
& CO., STOCKBROKERS, NEW YORK CITY
Mr. Pecora. Mr. Meehan, please give your full name, address,
and business or occupation.
Mr. Meehan. Michael Joseph Meehan.
Mr. Pecora. And what is your address?
Mr. Meehan. 2 East Sixty -seventh Street.
Mr. Pecora. What is your business or occupation?
Mr. Meehan. Broker.
Mr. Pecora. Ai-e you a member of the New York Stock Exchange?
Mr. Meehan. Yes, sir.
Mr. Pecora. How long have you been a member of that exchange?
Mr. Meehan. Twelve years.
Mr. Pecora. Are you in the brokerage business by yourself or
are you a member of a firm?
Mr. Meehan. I am the senior partner of M. J. Meehan & Co.
Mr. Pecora. Where is the office of that firm?
Mr. Meehan. No. 30 Broad Street.
Mr. Pecora. Has it any branch offices?
Mr. Meehan. We did have a considerable number of branch
offices, but have not any more.
Mr. Pecora. Mr. Meehan, j^ou communicated to me that j^ou had
some statement you desired to make to the committee concerning
your unavailablity some time last year when it was sought to subpoena
you to appear before this committee.
Mr. Meehan. Well, Mr. Pecora, I was never subpoenaed. There
was a misunderstanding last year. Mr. Gray or Mr. Watson came
to my home when I was ill. And then I waited thi-ee weeks on them
and understood they had excused me. We had furnished all our
records, turned over all our books, and all the information that they
wanted, my partners did. And I understood that I had been excused;
that they were going to be able to use my partners. There seems to
have been some misunderstanding about the matter of my not being
permanently excused. And I have been waiting ever since to be
called.
Mr. Pecora. You were subpoenaed in the early part of this month
to attend before tliis committee on February 21, were you not?
Mr. Meehan. Yes, sir; and I have been here since that time.
Mr. Pecora. Have you been here in attendance on the com-
mittee since that time?
Mr. Meehan. Yes, sir.
Mr. Pecora. Now, Mr. Meehan, are you willing to make avail-
able to the committee or its present counsel whatever recor'^s, in-
2344 STOCK EXCHANGE PRACTICES
formation, or data may be in your possession and which may be
called for?
Mr. Meehan. Yes, sir.
Mr. Pecora. Concerning certain stock market operations?
Mr. Meehan. Yes, sir. And I think that the committee have all
of our records of any kind, of any size at all now. Mr. Watson and
his men were in our office for about three weeks.
Mr. Pecora. I will examine whatever records are in the files
Mr. Meehan (interposing). You may have anything we have.
Mr. Pecora (continuing). And I mean by that any records that
came from your office. And I may want you to supplement the
information contained in those records.
Mr. Meehan. All right.
Mr. Pecora. That you are willing to do at any time, are you?
Mr. Meehan. Yes, sir.
Mr. Pecora. Will you hold yourself subject to the call of this com-
mittee for attendance at any fiiture hearing?
Mr. Meehan. Yes, sir. And I have been very anxious to get down
and get that misunderstanding straightened out, because my partner
told me I was permanently excused. I might explain that I suffered
an automobile accident on March 24, which was very serious for one
of my partners and myself, and left me in very bad shape, and the
doctors insisted on my going away. When Mr. Gray told Mr. Mc-
Conchie that I had been excused I took it for granted I had been
permanently excused, because they knew I wanted to go abroad the
1st of May, and I waited until the 19th or 20th or somewhere along
in there before going.
Mr. Pecora. You do not now contemplate making any trip out
of the country, do you?
Mr. Meehan. No, sir.
Mr. Pecora. On event that you should decide to change your plans
you will notify me first, will you?
Mr. Meehan. Yes, sir.
Mr. Pecora. Mr. Chairman, in view of the lateness of the hour,
and the fact that I will require perhaps additional written data
from Mr. Meehan or his office in connection with various stock-
market transactions, with which I understand he or his firm were
connected, I will ask that the examination of Mr. Meehan at this
time be suspended, and that it be considered that he is still under
subpoena to attend before this committee upon call.
Mr. Meehan. That is agreeable to me.
The Chairman. All right. It is so ordered.
Mr. Pecora. Mr. Chairman, may I make a statement now, before
you recess?
The Chairman. Certainly.
Mr. Pecora. May I say, Mr. Chairman, that it was either Janu-
ary 24 or 25 that I was asked to serve as counsel to this committee
for the purpose of conducting the inquiry that had been in existence
since some time during the early part of last year. I accepted the
engagement with a high appreciation of the privilege and the honor,
which appreciation has been enhanced by the service that I have
been permitted to render. I want to say that I have received the
utmost cooperation from you, Mr. Chairman, and from all the mem-
STOCK EXCHANGE PRACTICES 2345
bers of your committee, in the work that I have been called upon to
do, and to say that that considerably eased my labors.
I think it also would be fair to say on the record and announce to
the public, because, after all, this is in the nature of the discharge of
a public service, that in the discharge of the duties of counsel to this
committee I have enjoyed their valued cooperation and assistance
in a professional way from Mr. Julius Silver of the New York Bar,
Mr. David Saperstein of the New Jersey Bar, and Mr. James B.
McDonough, jr., also of the New York Bar, who have acted as
associate counsel to this committee.
I have also enjoyed the cooperation of and have very highly valued
the assistance given by Mr. Frank J. Meehan as statistician, and also
Mr. Joseph F. O'Hanlen as accountant. These gentlemen have
served with me, and have spared no labor or exertion. We have sat
until late into the night practically ever since the date of our appoint-
ment, and I want to say for my associates that whatever results have
been attained represent in very large proportion the result of their
labors.
And I do not want to overlook the valuable assistance of Mr. John
A. Marrinan, and all that I have said in behalf of the other gentlemen
I want to say for him. He has been most untiring and devoted in
his zeal and industry, and his work has been of a character that has
made a very genuine contribution to our progress.
I want the record to show my personal appreciation and thanks for
their devotion, loyalty, industry and integrity, each and every one of
them, to the work in hand.
The Chairman. Spealcing for the committee, I wish to say that
we are well pleased with the progress you have made, Mr. Pecora,
in the remarkably short time that you have had a chance to work.
The Senate has ordered the committee to continue its work, and
there is no doubt in my mind that it will be vigorously prosecuted.
I shall not be chairman of the committee very long, but whoever
takes charge of the work will go ahead with it I feel certain.
Mr. Pecora. I thank you, Mr. Chairman.
Now do you wish to adjourn subject to the call of the Chair?
The Chairman. Yes; the committee will now stand adjourned
subject to the call of the Chair.
(Thereupon, at 5.50 p. m., Thursday, March 2, 1933, the com-
mittee was adjourned subject to the call of the Chair.)
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