The bankruptcy of the Penn Central Transportation Co. on June 21, 1970 came as a surprise to much of the public, including many Penn Central shareholders. Only 21⁄2 years earlier the company had been formed by the merger of the Pennsylvania and the New York Central railroads to fanfares of optimism. The merged road was going to be more efficient and was going to produce sizable earnings. In addition, diversification into real estate development and other areas was seen as the beginning of a profitable conglomerate growth. These heady prospects sent the stock price soaring from approximately 20 in the early 1960's, when the merger was first announced, to 84 in the summer of 1968, 6 months after merger. The day after the filing for reorganization the stock sold for 6%1⁄2. The loss to shareholders, bondholders, and other investors from the collapse of Penn Central is measured in billions of dollars. Many of these investors were older people who had invested in Penn Central because of its apparent solidity and its long record of dividend payments. The Commission's investigation was conducted to determine whether the events surrounding the collapse of this major corporate enterprise were associated with violations of the Federal securities laws.

SCOPE OF INVESTIGATION

The staff undertook a thorough and extensive investigation of Penn Central, comprehending all aspects which seemed relevant to its collapse. This report is a distillation of that investigation, concentrating on certain areas which the staff determined were most critical from the viewpoint of the Commission's responsibilities.

The inquiry focused primarily on the events occurring between the merger on February 1, 1968 and the bankruptcy. However, in some instances, where the staff believed it was necessary for a full understanding of the facts, premerger conditions were also examined.

The report is arranged in four major parts. Part I involves the company's possible failure to disclose adverse information to the investing public. Within this area, the staff examined the operational and financial condition of the company and compared this with the representations made by management. The staff also inquired into many of the accounting practices of Penn Central to determine whether they provided adequate and accurate disclosure. Examination was made of the affairs of Great Southwest Corp., to determine whether adequate disclosure was made of the affairs of this important subsidiary. The role of the directors in overseeing the conduct of management and in insuring adequate disclosure was examined. The second major area of investigation, Part II of the report, relates to possible trading on nonpublic information by individuals and institutions. Part III describes the role of Penn Central's commercial paper dealer and a commercial paper rating service. The final area, Part IV, involves an examination of a private investment club in which several

Penn Central financial officers were members and which raised issues of possible misuse of position by these officers.

Nearly 200 witnesses were called to testify and approximately 25,000 pages of testimony were taken. Among the witnesses were most of the major officers and directors of the corporation during the relevant period. Voluminous documents were examined either on site or by requesting that they be submitted to the Commission's offices. Every officer or director who to the staff's knowledge had any significant trading was subpenaed and statements obtained through affidavits or in the form of testimony. In connection with the trading inquiry the roles of approximately 150 institutions were examined through document submission or testimony. As a result of this analysis, those treated individually in this report were selected for special study.

ORGANIZATION OF PENN CENTRAL

Because the Penn Central organization went through several changes and contained numerous subsidiaries, a brief note on the organization and the names used in this report may be helpful. When the New York Central and the Pennsylvania railroads merged on February 1, 1968 the resulting company was called the Pennsylvania-New York Central Transportation Co. The name was then changed to the Penn Central Co. On October 1, 1969 the name was changed to the Penn Central Transportation Co. upon the formation of a parent holding company which took the Penn Central Company name. For convenience, the name Penn Central is often used in this report to refer to the Penn Central complex generally. When reference is made specifically to the entity containing the railroad in a context which might be confusing, the name Transportation Co. is used. When reference is made specifically to the holding company in a context where the reference might be unclear, the entity will be described as the holding company. The Transportation Co. owned 100 percent of the common stock of Pennsylvania Co., an investment company, which is often referred to in this report as Pennco.

RAILROAD DIFFICULTIES: MERGER AND OPERATIONS PROBLEMS (I-A)

Penn Central, despite attempts to convince the public to the contrary, was predominantly a railroad company and its future was tied inexorably to these activities. Thus, before assessing the information being disseminated to the public, it is essential to understand what was occurring in the operations area in general and more particularly the circumstances surrounding the merger itself.

The merger of the Pennsylvania and the New York Central railroads had been born out of the weakness of the two constituent parts. Despite such an inauspicious beginning, however, and the obvious dangers involved in such a situation, little thought appears to have been given to the basic feasibility. In the premerger period management had conducted a study which purported to show sizable savings through the elimination of duplicate facilities and in other areas. The study, however, bore little relation to the consequences of merger of the two roads. The merger involved more than was revealed in the study; it involved complicated and costly rebuilding of two roads into one. The resulting burden on the merged railroad would be twofold: (1) ample funds would be needed for capital expenditures; and (2) operational problems could be expected. This presented, in reality, a bleak picture because the roads had no cash for the expenditures and no planning or ready skills commensurate with the operations problems. Planning staffs were formed and consultants were hired but to little avail. There was no adequate supervision or decisionmaking in the planning process. Some departments, such as the accounting department, never even got to the meaningful planning stage. In the crucial area of operations, a detailed plan was prepared but was then abandoned just before the merger. Little or no training of employees whose jobs would be affected was conducted.

In the postmerger period, as attempts were made to combine the operations of the two roads, severe service problems materialized and the losses on railroad operations increased at an astounding rate. Management blamed the postmerger difficulties on elements beyond their control including unions, the ICC, Government in general, the necessity of continuing unprofitable passenger operations, high interest rates, inflation and the recession. Without denying that these matters had an adverse impact on Penn Central, as they had on other companies and other railroads, they do not explain the postmerger plunge. It appears that the collapse was a result of entering a complex and costly merger without adequate planning and adequate financial and management resources. Conflicts among senior management officials further complicated the problem.