institutional holdings were sold over the next 2 years as the price of the stock continued to decline.

The examination focused on several institutions where the timing of the sales and the possible access to inside information raised questions. These institutions were Chase Manhattan Bank, Morgan Guaranty Trust Co., Continental Illinois Bank & Trust Co., Investors Mutual Fund, and Alleghany Corp.

As we conducted our inquiry in this area we were faced with difficulties of proof. Regardless of such difficulties, it is important to note that in the case of at least two of the banks it is clearly established that they had inside information at the bank at the time of the sales. The banks deny, however, that this information was known to those making the decision to sell. This points up the real possibility of conflicting responsibilities and the need for procedures to prevent misuses of information reposed with a bank in a commercial banking relationship.

Our inquiry also raised questions where Penn Central and banking institutions shared common directors. One such director indicated that at times in a meeting of a committee of the bank's board he was called upon to speak about Penn Central in the presence of members of the bank's trust department. Although in this case the director stated that he provided no inside information, banks should not place common directors in such a position where they might easily disclose inside information.

INSIDER TRADING BY OFFICERS AND DIRECTORS (II-B)

From its extensive review of the trading of officers and directors of Penn Central Co. which took place between the merger and the bankruptcy, the staff found that a number of high corporate officials had made sizable sales during this period.

A detailed review was made of the transactions of 15 officers whose trading was deemed to raise the most serious questions as to whether it had been based on material inside information. The 15 officers, who prior to bankruptcy had sold about 70 percent of the stock they owned at the time of the merger, included officials of the finance and operating departments. These officers had apparent access to information concerning the state of Penn Central's affairs which was reaching the public only with a serious amount of distortion. This section of the report summarizes the staff's investigation of the trading of these officers, examining the timing and extent of these sales, and the reasons given for them by the officers.

As in other major companies, Penn Central had an elaborate option system for its key employees. Many of these officers exercised their options through the use of large bank loans. As this study shows, the presence of such loans can clearly distort the purposes of the option system by encouraging officers to sell when the market in the company's stock declines, even though material undisclosed information may exist at the time.

COMMERCIAL PAPER SALES: GOLDMAN, SACHS AND NATIONAL CREDIT OFFICE (III A AND B)

As the company's financial condition deteriorated, management relied more heavily on the sale of commerical paper as a means of

financing the losses being incurred. The company was not using commercial paper for short-term borrowing which is the customary use of commercial paper. Instead, conditions developed in a way which required that the full amount of commercial paper be continually rolled over as if it were long-term financing.

Goldman, Sachs & Co. was the sole dealer in Penn Central's commercial paper and at its peak there was as much as $200 million of paper outstanding. While some of the buyers of this commercial paper were relatively sophisticated institutional investors, others were not. Only limited information was supplied to buyers of Penn Central paper. Even when Goldman, Sachs began receiving warnings of critical problems no additional information and no warnings were communicated to buyers. Goldman, Sachs maintains it was merely a dealer and not an underwriter and that it did not have duties of disclosure.

The sale of Penn Central's commercial paper was greatly facilitated by the receipt of a "prime" rating from the National Credit Office, the only national rating service of commercial paper. This rating was provided without adequate investigation of the company's financial condition. It is clear that NCO continued to provide the highest rating at a time when the facts did not support such a rating.

PENPHIL (IV)

Beginning in 1962, Bevan and Charles Hodge, an investment counselor to the Pennsylvania Railroad, formed a private investment club, Penphil Co. Its members included several other Penn Central financial department officers. The club made investments with funds borrowed from Chemical Bank. The bank made these funds available because Bevan was the chief financial officer of Penn Central and because the railroad had a substantial banking relationship with Chemical.

The investment club made investments in companies where the club had relationships which made inside information accessible to the club. From time to time, officers and directors of the companies in which investments were being made were invited to join the club.

1968

January 15: Supreme Court decision authorizing merger.

February 1: Merger of Pennsylvania and New York Central railroads.

March 30: Announcement of mailing of 1967 annual report to shareholders. Press release indicates merger proceeding smoother and more rapidly than anticipated. May 7: Annual shareholders meeting.

June 21: Final of a series of drawdowns in early 1968 against the revolving credit. This brings the total to $100 million.

July 3: Odell writes to Saunders expressing concern about Macco.

July: Butcher & Sherrerd releases report on Penn Central reducing 1968 earnings estimate. Because of firm's relationships to Penn Central, causes sharp decline in price of stock.

July 15: Press release announcing no adverse changes in the company's affairs to justify the recent market action.

July 17: Penn Central receives authority from ICC to sell commercial paper for the first time. Authorization for $100 million.

Summer: Service problems developing.

September 5: Saunders speech to New York Society of Security Analysts— critical response.

September 30: Washington Terminal Co. dividend-in-kind paid.

October 9: Bevan memo reviewing critical cash situation and calling for cutback in capital expenditures.

October 23: Third quarter earnings announcement. Consolidated earnings up. Company-only figures not given.

November: Penn Central draws down a $50 million Eurodollar loan.

December 11: ICC approval of $100 million revolving credit.

December 26: Year-end statement issued by Saunders.

December 31: Madison Square Garden transaction consummated.

December: Sale of Bryant Ranch by Macco.

December: Sale of Six Flags Over Georgia by Great Southwest.
December 31: Acquisition of the New Haven Railroad.

1969

January 7: Bevan seeks financial advice from former chairman of First Boston Corp. and from consultant who was president of International Bank for Reconstruction and Development.

January 23: Board approves plan to form holding company-announced to public. January: Penn Central claims this is peak for service problems.

January: EJA withdraws application to acquire Johnson Flying Service.

January: Penn Central discussions with Peat, Marwick and ICC relating to charging of mail handlers against the merger reserve.

January 30: Preliminary earnings for 1968 announced. Results show consolidated earnings of $90.3 million, up from 1967, and a parent company loss of $2.8 million, down from a profit of $11.5 million a year earlier.

February 13: Penn Central issues release on results of diversified subsidiaries. February: Meeting with officers of First National City Bank concerning increase in revolving credit.

February 20: Saunders' "turning the corner" claim set forth in release.
March 1: Smucker replaced by Flannery in charge of operations.

March 19: ICC authorizes increase in commercial paper from $100 million to $150 million.

April: Flannery objects to budget cutbacks. Cites danger of affecting service. April 23: Penn Central announces first quarter consolidated earnings of $4.6 million, down from $13.4 million a year earlier. Parent lost $12.8 million compared to a profit of $1.0 million in 1968.

May 12: ICC approves increase in revolving credit agreement from $100 million to $300 million, with $50 million reserved to refund commercial paper.

June 4: Settlement of employment contracts with Great Southwest officers. June: Sale of Six Flags Over Texas by Great Southwest.

June 13: Extraordinary joint finance executive committee meeting to discuss the situation.

June 25: Board discusses possibility of omitting dividend, but ultimately decides to declare dividend with special meeting on August 27, to review payment. July: $35 million private placement of Pennco debentures.

July 28: Second quarter earnings announced. Consolidated earnings at $21.9 million, down 7.5 percent. Railroad company lost $8.2 million versus year earlier profit of $2 million.

August 27: Kunkel suit discussed at meeting of Penn Central board. Investigation of EJA and Bevan approved. Bevan's subsequent threat of resignation causes cancellation of investigation.

September 18: Bevan diverts $10 million of equipment loans to Leichtenstein account of Goetz in connection with EJA and other matters.

September 8-12: Bevan and Saunders discuss bleak financial condition and call for cutbacks on capital expenditures.

September: Saunders orders halt of retirement of properties until accounting authority received, thereby avoiding writeoffs against ordinary income. September 23-24: Penn Central announces that Gorman named president, effective December 1. Saunders denies presidency offered to several others first. September 24: O'Herron reads to board Bevan's statement on Kunkel, EJA and Penphil.

September 25-26: Saunders testifies before congressional committee on passenger legislation.

October 1: Holding company becomes effective.

October 20: Penn Central reports consolidated third quarter loss with 9-month earnings down substantially. Railroad lost $19.2 million.

October 29: ICC approves increase in authorization to sell commercial paper from $150 million to $200 million.

October: Great Southwest offering called off because of disclosure problems. November: Service deterioration noted.

November 7: Attorney representing Penn Central tells ICC that since merger company has failed to regain its competitiveness and remains financially shaky. November 10: Odell invites all outside Penn Central directors to a dinner on November 25, to discuss financial and management problems.

November 12: Saunders testifies before congressional committee on passenger service losses in connection with pending legislation.

November 19: Saunders meets with Kirby in Alleghany offices re management problems.

November 26: Odell moves for dismissal of Bevan and Saunders.

November 29: Board of directors votes to omit fourth quarter dividend.

November-December: Commercial paper dealer evidences concern about financial condition of Penn Central.

December 1: Letter to shareholders concerning elimination of dividend.

December 1: Day's letter to Saunders suggesting better disclosure of railroad losses.

December 1: Saunders speech at staff luncheon concerning critical nature of service situation.

December 15: Saunders makes impossible demands for increased revenues and reduced expenses by yearend.

December 17: Pennco sells $50 million debenture offerings-proceeds passed up to Transportation Co.

December: Writeoff of long haul passenger facilities.

December: Discussions concerning sale of Great Southwest stock to Great Southwest officers.

December-January: Bad winter weather. Later blamed for poor earnings. December 31: Pennco accepts Great Southwest stock in exchange for previously created debt.

1970

January 22: Meeting on possible foreign financing leads later to Swiss franc loan. January 27: Bevan and O'Herron approach First National City Bank about "bridge" loan in contemplation of $100 million Pennco offering. First National City Bank asks for more security.

February: Discussions concerning $20 million Eurodollar offering through Penn Central International.

February 2: Initial contact with First Boston conerning Pennco $100 million debenture offering.

February 4: Penn Central announces 1969 earnings of $4.4 million versus $86.9 million a year earlier; railroad lost $56.3 million versus $5.1 million loss. February 5: Odell submits resignation letter to board.

February 6: Bevan et al., meet with Gustave Levy and others from Goldman, Sachs to review commercial paper situation.

February 12: Penn Central buys back $10 million in notes from Goldman, Sachs inventory.

February 13: ICC orders Alleghany to sell its Penn Central shares.

February: "Bridge" loan arranged with Chemical Bank.

March: Various evidences of concern with status of EJA.

March 12: "Comfort letter" from Bevan to Peat, Marwick re: (1) EJA; (2) Madison Square Garden; (3) Lehigh Valley.

March 12: Peat, Marwick signs opinion letter, qualified only for the failure by Penn Central to provide for deferred taxes.

March 20: Counsel for underwriters questions possible major writeoff. Bevan denies it, but appears evasive.

March 25: Pennco applies to ICC to sell $100 million debenture offering-announced in press release.

March: O'Herron tells commercial paper dealer first quarter losses will be "terrible."

March 28: Bevan seeks removal of "troublesome" attorney from underwriting. March 30: Penn Central files with ICC for discontinuance of 34 East-West longdistance passenger trains.

March 31: Meeting at Sullivan & Cromwell offices with senior officers of each of comanagers of $100 million offering. Possible bankruptcy of Penn Central discussed.

March 31: Wabash exchange transaction recorded.

April 6: Decision made to drop warrants from $100 million debenture offering. April 14: O'Herron tells commercial paper dealer that first quarter losses will be "staggering."

April 14: Fred Kirby resigns as Penn Central director.

April 22: Penn Central announces first quarter consolidated loss of $17.2 million and Transportation Co. loss of $62.7 million.

April 27: Pennco $100 million preliminary offering circular.

April 28: Pennco announces proposed offering of $100 million debenture. Proceeds will be passed up to the Transportation Co.

April 30: Penn Central representatives, led by Saunders, meet with Volpe of DOT. Discuss possible assistance on equipment financing and passenger losses. May 4: Due diligence meeting with underwriters-indications that initial interest in issue is poor.

May 8: O'Herron speaks with Volpe. Tells him situation more critical than revealed by management.

May 5: Gorman calls for special finance committee meeting. Objects to various reporting practices.

May 10: Saunders announces austerity program until Railpax program adopted. Capital spending cut.

May 12: Annual meeting.

May 13: Butcher & Sherrerd switches recommendation to "sell" after reviewing first quarter earnings.

May 15: Standard & Poor's reduces Pennco rating from BBB to BB.

May 15: Dun & Bradstreet (NCO) gives Penn Central's commercial paper a "Prime" rating.

May 16: Revised offering circular issued, including information on commercial paper runoff. Underwriters indicate issue is expected to carry interest rate of 10% percent.

May 19: Saunders discusses Government guaranteed loan with Kennedy of Treasury.

May 19: Penn Central spokesman announces he knows of no reason for the stock's decline.

May 21: Bevan meets with representatives of Chemical Bank, New York Trust and First National City Bank.

May 21: Penn Central notifies underwriters that it has decided not to go forward with the offering.

May 21: Chemical Bank and First National City Bank representatives meet with Bevan. Bevan tells them of decision to postpone debenture offering and seek Government loan.