from this point on, Goldman, Sachs was aware that the "prime" rating was based to a great extent on the fact that Goldman, Sachs was continuing to offer it. They also believed that the "prime" rating was based in part on Vogel's opinion that the company had sufficient properties and valuables which fact Goldman, Sachs had never investigated to liquidate if necessary. Furthermore, if they were looking to liquidation as a means of determining creditworthiness, the railroad clearly was no candidate for the "prime" rating.

Certainly investors involved in such short-term investments as commercial paper where liquidity is so vital would want to rely on liquidation of corporate assets as a means of payment. Also Rogers' apparent reliance on the simple statement of Vogel would indicate that NCO was not engaged in the kind of analysis required to make an independent determination to continue the prime rating. Nor had Goldman, Sachs done any kind of analysis which would substantiate these statements. In addition, Goldman, Sachs never disclosed to any customers any of these matters.

Goldman, Sachs reduces its inventory of Penn Central paper

Goldman, Sachs' analysis about the significance of the year-end results may be ascertained with greater reliability from the actions they took rather than from their statements. Thus, on the very same day they learned of the first quarter losses, they contacted the company and got a commitment from the company to buy back $10 million of its commercial paper from Goldman, Sachs' inventory. Furthermore, Goldman, Sachs insisted that from then on, the company's paper be sold under a tap issue arrangement whereby Goldman, Sachs would no longer buy any paper from the company, but would ask the company to issue certain paper only after it had found a customer for the paper, an arrangement involving no risk for Goldman, Sachs. At the time the company went into bankruptcy, Goldman, Sachs held none of the company's paper.

The coincidence of the timing of the reduction of inventory and the tap issue arrangement with the announcement of year-end results would appear to indicate that Goldman, Sachs' concern with the company made them more unwilling to risk their assets. In their testimony, Goldman, Sachs' people have admitted that one of the primary reasons for this action was the feeling that the yearend results would make the company's commercial paper much less marketable. Accordingly, they wanted to reduce their inventory. Most customers believed that Goldman, Sachs maintained an inventory in all commercial paper which they offered for sale. Many who purchased the company's paper after February 5, 1970, looked to the fact that Goldman, Sachs had an inventory of the company's paper as assurance that Goldman, Sachs felt the paper to be credit worthy. Goldman, Sachs never informed its customers of its decision to reduce and eventually eliminate its inventory.

Receipt of adverse information as to first quarter results

On March 23, 1970, in a conversation with Wilson, O'Herron stated the first quarter's figures would look terrible.

Goldman, Sachs made no further inquiry as to how adverse the first quarter results would be or how this would affect commercial paper holders. They did not seek to examine records of the company with regard to first quarter results. If they had done so, they would

have discovered that internal documents of the company indicated a loss of $60 million for the first quarter.

Goldman, Sachs continued to actively promote the sale of the company's commercial paper for the period of March 23 to April 14, when another discussion was held with the company's management concerning first quarter results. A total of $17.3 million in commercial paper was sold to 18 customers during this time. None of these customers were told about these expected terrible results for the first quarter.

On April 14, 1970, Goldman, Sachs learns that there will definitely be a loss for first quarter; public learns on April 22, 1970

On April 14, 1970, O'Herron told Wilson that the losses for the first quarter would be "lousy," and, in fact, "staggering." O'Herron added that he did not see the turnaround in the railroad yet, and that the cash position is in very serious shape.

Based on these comments Wilson recommended to Levy that they stop offering the company's paper until the current situation could be clarified. A meeting with Bevan and O'Herron was scheduled for later in the day for that purpose.

At that meeting O'Herron apologized to Wilson for the casual nature of his remarks made earlier in the day. Bevan indicated that he could not tell exactly what the first quarter losses would be, but they would be substantially in excess of the $12 to $13 million lost in the first quarter of 1969. The losses, he explained, had resulted from a $20 million reduction in anticipated revenues and larger expenses due to the most severe winter in the history of the railroad. Bevan stated that he did not anticipate that the losses for 1970 would be worse than those sustained in 1969. He further stated that the entire system had been put on a severe cost-cutting program by Gorman, the new president.

There was more discussion about what measures were being taken to improve conditions. Bevan stated that they expected to announce the final loss figure next Wednesday (April 22) and at the same time would file for the upcoming $100 million public debt offering. Bevan then outlined the ways in which he intended to meet the forthcoming cash needs of the company. He described specific steps that could be taken should it become necessary. Included in these was a plan to sell some of the real estate. Wilson asked whether these properties had several layers of mortgages and Bevan answered affirmatively. Bevan added that their cash position has been the subject of an intensive hearing in the past 30 days before the full ICC and Transportation Secretary Volpe. Bevan and O'Herron asked them to continue to offer the company's commercial paper until they effected their $100 million bond offering in early May.

Again based on a brief explanation by Bevan, Goldman, Sachs was assured that "there was no emergency at the Penn Central Transportation Co." At this meeting Bevan stated that the losses for all of 1970 would not be more than $56 million. Eight days later, the company announced that it lost $62.7 million in just the first quarter of 1970. Bevan outlined new contingency plans for liquidation of real estate, equipment, and securities. As in the past, few questions were asked (Wilson did ask if the real estate was encumbered and Bevan replied that it did have several layers of mortgages), and no steps were taken

to investigate Bevan's reassurances. The next day, Levy told O'Herron that Goldman, Sachs would continue to offer the company's paper. Bevan's statements at this meeting bore no resemblance to the reality of the situation. The situation was much worse at this time for in addition to the magnitude of the anticipated losses, O'Herron indicated that a substantial part ($51 million) of the income to be reported on a consolidated basis was to come from extraordinary and nonrecurring sources. The actual consolidated losses were, therefore, actually greater than was reported for the first quarter.

During the time between this meeting and the time that the first quarter losses were announed to the public, Goldman, Sachs made one sale of $300,000 of the company's commercial paper. This customer was told nothing of the first quarter results.

Sales of Penn Central Transportation Co.'s commercial paper after announcement of first quarter results

On April 22, 1970, the company announced the results of the first quarter. The parent, Penn Central Co., reported first-quarter consolidated losses of $17.2 million (compared with net income of $4.6 million for same period in previous year). The results included extraordinay income of $51 million. Penn Central Transportation Co. reported a loss of $62.7 million for the first quarter.

Goldman, Sachs continued to offer commercial paper to its customers and in the period April 22 to May 15 sold $5 million to one customer, the American Express Co., on May 1, 1970. Goldman, Sachs witnesses have testified that on April 30, their salesmen were required henceforth to read from press releases announcing first quarter results.

There is some dispute as to what American Express was told. The Goldman, Sachs salesmen stated that they were told about the first quarter results. American Express testified that this was not the case. It had been reluctant to purchase the company's paper, but Jack Vogel, head of the credit department, told it that there were adequate assets to back up commercial paper in order to persuade it to change its mind about buying the company's paper. The paper purchased by American Express resulted from a buy-back by Goldman, Sachs from Mobil Oil and then a resissue to American Express. American Express claims that at this time Goldman, Sachs told it that there was no reason to be concerned about the ability of the company to meet the maturity of the paper.

By mid-May it was clearly impossible to sell any more of the company's paper and all further effort was terminated by mutual agreement between Goldman, Sachs and the company. One of the reasons for the company's bankruptcy was its inability to roll over its commercial paper, for the amount of redemptions which could not be rolled over totaled $117 million for the first half of 1970.

OTHER FINANCIAL RELATIONSHIPS BETWEEN GOLDMAN, SACHS AND THE TRANSPORTATION CO.

In addition to the compensation received for the sale of commercial paper, there were many other areas of financial relationship with the company which were being developed around the time in question, which could have and did produce additional sources of revenue for Goldman, Sachs. On November 4, 1969, representatives of Goldman,

Sachs and the company met to discuss a $350 million pension fund and a high performance contingent compensation fund in which Goldman, Sachs was "hopeful that we will be able to make a contribution."

On November 17, 1969, Goldman, Sachs was invited to participate as a syndicate member in the underwriting of a $50 million Pennsylvania Co. debenture offering.

On December 9, 1969, in discussions with the company, Goldman, Sachs uncovered "some possible lease finance business."

On January 2, 1970, Canada Southern Railway Co., a subsidiary of the company, purchased commercial paper of another issuer from Goldman, Sachs ($1.5 million). Also Mahoning Coal Railroad Co., a company subsidiary, purchased commercial paper of another issuer from Goldman, Sachs ($1,300,000). On January 8, 1970, the Peoria and Eastern Railroad Co., a subsidiary of the company, purchased another issuer's commercial paper from Goldman, Sachs ($250,000). This was the first time these subsidiaries had ever purchased commercial paper.

By February 12, 1970, the company and its subsidiaries had purchased over $60 million of commercial paper from Goldman, Sachs in the last 7 weeks.13

On February 26, 1970, Robert Haslett of the company called Goldman, Sachs and stated that he would like Goldman, Sachs to start working with him on the company's thrift plan (they invest about $250,000 each month). George Ross of Goldman, Sachs stated that he had every reason to believe that they can do substantial securities business with the company and that Levy should mention Goldman, Sachs' investment management services to Bevan. Goldman, Sachs did eventually handle the thrift plan for the company.

Around this time Levy indicated to Wilson that he should get in contact with Bevan, who stated that the company may have a blanket mortgage from which Goldman, Sachs may benefit, and that this could amount to as much as a billion dollar underwriting.

METHODS EMPLOYED BY GOLDMAN, SACHS TO SELL THE COMPANY'S COMMERCIAL PAPER TO CUSTOMERS

GENERAL REPRESENTATIONS MADE ABOUT COMMERCIAL PAPER

Since Goldman, Sachs is the oldest and largest dealer in commercial paper, most customers believed that Goldman, Sachs would offer them only commercial paper which met their requirements and which Goldman, Sachs felt was credit-worthy. This impression was created in large part by oral representations made by Goldman, Sachs personnel and by written materials (pamphlets and brochures) distributed by them which extolled Goldman, Sachs as the "largest," and "most important," commercial paper dealer. Further enhancing this image were representations made by Goldman, Sachs that commercial paper is the equivalent of Government securities in terms of safety, that Goldman, Sachs only offered the paper of the top companies; that it maintained a credit department to review commercial paper issuers, that it offered investment advice to purchasers; that it purchased the paper of "outstanding" companies for resale to investors; that it would provide financial information on issuers whose paper

13 Most of these funds came from the proceeds of the $50 million Pennco debenture offering in December

it was offering for sale; and that it only offered paper rated "prime" by NCO, an independent credit rating service.

Most customers had sufficient contact with Goldman, Sachs for the latter to become familiar with the nature of the customers' businesses. Furthermore, this familiarity enabled Goldman, Sachs to learn that most customers contemplated that there would be a minimum risk involved as the funds were almost always earmarked for some purpose in the near future. In almost all cases Goldman would assure the customer, when asked, that the purchase was suitable for his situation. Initially Goldman, Sachs would often provide a customer with a book which contained the latest financial statements of the companies whose paper they offered for sale. After a customer had made a purchase, Goldman, Sachs would send a copy of the issuer's latest available financial figures which would update the information about the issuer which was contained in the book. The information Goldman, Sachs was sending customers about the company, even as late as the end of March of 1970, was the year-end financial statement for 1968.

Rarely would a customer investigate an issuer on its own. Most customers either just stated to Goldman, Sachs that they were relying on Goldman, Sachs to provide them with the "very best paper” or "NCO prime paper" or in a very few cases, gave Goldman, Sachs an "approved list."

Most customers would call Goldman, Sachs and ask what was available which would fit their maturity requirements, and the salesman would describe what was available. In a few cases a customer would ask questions about the financial or general condition of the issuer and would be given answers. The customer would then select a particular paper for purchase.

HOW THESE CUSTOMERS INVESTED IN THE COMPANY'S COMMERCIAL PAPER

In the sales of the Penn Central Transportation Co.'s commercial paper, most customers asked no questions and when some did, they were reassured that everything was fine. When questions were raised by customers concerning the company's increased losses, the salesmen usually replied that merger or other temporary problems were the cause, and with $6.5 billion in assets there was nothing to be worried about. Frequently, the salesmen, through the beginning of April 1970, would cite to customers the company's 1968 results in answer to these questions. Some customers who still resisted were persuaded only after arguments by salesmen that, additionally, the high rate of return (in 1970 the company was offering the highest commercial paper paper rates), and the fact that the company's paper could be tailored to their needs, made it the best for their purposes. Furthermore, most customers at the time of purchase did not have any current financial information about Penn Central Transportation Co., or any of the information described in sections above which was in the possession of Goldman, Sachs, and Goldman, Sachs did not offer any of it prior to the sales. If the customer indicated to the salesman that he had heard something adverse about the company, the salesman would often firmly reply that the company was still "NCO prime" and there was no risk at all involved.