This letter was dated March 12, 1970, a few days after the Cole and First National City Bank memoranda.

During the second quarter of 1970, American Contract finally wrote down its investment in EJA by $16.2 million because of impairment in value. This action was taken after the bankruptcy, when the public impact of such a writedown was minimal.

Conclusion. It is obvious that American Contract's investment in EJA was seriously impaired by the continued losses sustained since its formation. The inability of EJA to obtain financing from any independent source, the CAB's divestiture order, the withdrawal of the offer of U.S. Steel and Burlington to purchase Penn Central's interest, and the write-off by EJA of certain costs and equipment related to its anticipated operations as a supplemental air carrier made realization by Penn Central of its EJA investment extremely unlikely and reflected a permanent impairment in value. Based on all available evidence, it appears that the $16 million writedown recorded in mid1970 should have been recognized in 1968 and 1969.

EJA addendum: The $10 million Liechtenstein account

As part of our review of the Executive Jet Aviation matter, we also inquired into the transfer of $10 million by the Penn Central Transportation Co. to a Liechtenstein Account.

We encountered great difficulty in exploring the facts in this area. The key witness, Joseph Rosenbaum, a Washington attorney, declined to testify, asserting his rights under the fifth amendment. Other key witnesses are out of our jurisdiction and we were unable to question them or obtain records from them. Accordingly, the facts we have were obtained from the company's available documents and discussions with various persons who either have direct knowledge of the transactions or who have questioned others and have second-hand knowledge. The facts we have learned indicate the need for additional inquiry.

1. THE COMPANY'S USE OF EUROPEAN FUNDS FOR THE FINANCING OF THE REHABILITATION OF EQUIPMENT

In early 1969, the company found it almost impossible to find domestic sources of funds to be used for the rehabilitation of railroad equipment. Joseph Rosenbaum, a Washington attorney in practice with his brother, Francis Rosenbaum, had been involved in obtaining financing and possible acquisitions for the company since early 1968. The Rosenbaums had let it be known to the company's top management that they had foreign sources of available funds. One of these sources was Fidel Goetz, a German financier. A number of transactions resulted from this relationship.

The first effected by the Rosenbaums involved the obtaining of financing through a Rosenbaum family partnership, American Investors Co., for the purchase and lease of automobile racks used by the company in transporting automobiles. The second transaction involved a $12 million equipment-rehabilitation loan from the Berliner Bank, Berlin, Germany, in mid 1969. Thereafter in August of 1969, the Rosenbaums again through the Berliner Bank arranged for another equipment loan of some $10 million to be secured by a conditional sales

agreement between the company and American Contract Co., a wholly-owned subsidiary of the company. Funds were to be drawn down as "groups" of the equipment were completed and a schedule of equipment which had been rehabilitated was submitted to the lender.

2. THE CLOSING OF THE LOAN AGREEMENT AND THE DISBURSEMENT OF THE $10 MILLION PROCEEDS

(a) The closing

Prior to the completion of the transactions the parties met in Bevan's office in Philadelphia, Pa. on September 11, 1969. In attendance_were, among others, David Bevan, William Gerstnecker and Robert Loder from the company, Joseph Rosenbaum and his brother Francis Rosenbaum, and John Young of the New York law firm of Cravath, Swaine & Moore. It is not clear who the Rosenbaums represented in these discussions.

During the morning the various documents were reviewed by the parties, and corrections made. Right after lunch, there was a meeting of the officers of American Contract Co. ("ACC"), the company's subsidiary, at which time the contract and related documents were ratified. One of the Rosenbaums then took the documents to Germany for the approval and signatures of the appropriate officials of the Berliner Bank. Among these documents was a letter signed by the president of ACC addressed to an entity known as First Financial Trust ("FFT") a Liechtenstein trust. The letter advised FFT that it (ACC) had directed the Berliner Bank to transfer the $10 million proceeds of the loan to FFT's account. The letter instructed FFT to invest the funds for the benefit of Penn Central Transportation Co. and requested that the company be protected "insofar as possible against the possibility of revaluation of the Deutsche mark."

First Financial Trust prior to September 15, 1969, was a Goetz entity known as Finimobil Anstalt which had been a dormant "Liechtenstein trust." On September 15, 1969, its name was changed to First Financial Trust and Francis Rosenbaum and Joseph H. Rosenbaum were listed as the only individuals authorized to give instructions to the agents, Dr. Peter Marxer and Adulf Goop. The first act of First Financial Trust was to open a bank account with the “Bank in Liechtenstein."

(b) Transfer of the proceeds to the First Financial Trust account

Although the Berliner Bank was directed to transfer the $10 million to FFT's account with the bank in Liechtenstein, the Berliner Bank refused to do so because neither the company nor ACC had an account at the Bank in Liechtenstein.

This prompted the company to issue amended instructions providing for funds to be deposited with the Chemical Bank's correspondent bank in Germany, the Allgemeine Bankgeselleschaft. At the same time these instructions were given, the Chemical Bank's correspondent bank was directed to transfer the $10 million to FFT's account with the Bank in Liechtenstein.

(c) Transfer of $4 million of the loan proceeds to Fidel Goetz

In 1967, Fidel Goetz, a German financier, was introduced to the top management of the company by Charles Hodge of Glore Forgan, Wm. R. Štaats, Inc., who had also introduced Joseph Rosenbaum to the company. According to Bevan, when Goetz first met him,

Goetz expressed an interest in loaning money to American companies and investing funds in foreign airlines. Goetz was apparently aware of the company's interest in EJA, and of EJA's plan to acquire interests in foreign air carriers.

Goetz claims that during the latter part of 1967 and throughout 1968 he made various investments in foreign air carriers as a result of which he maintains he sustained losses of over $4 million. It is further claimed that the interests were acquired by Goetz to assist EJA in its foreign air carrier program, and that Bevan had promised that he would be held harmless from any loss sustained in connection with these transactions. Bevan denies that he had any such arrangement with Goetz. Goetz claims that the moneys were due him as a result of losses he sustained when the company was forced by the CAB to curtail and divest itself of its overseas foreign air carrier program of EJA.

David Bevan testified that the suggestion for transferring the proceeds of the loan to the Goetz entity, FFT, originated with Gerstnecker, his assistant. Gerstnecker testified that the suggestion came from Joseph Rosenbaum, and that he advised Bevan of that fact. Bevan imposed no objection to placing the funds with Goetz because, according to what Bevan told Gerstnecker, Goetz had attempted to raise financing for the company and had "been involved in EJA matters."

On the same day, September 22, 1969, that the $10 million proceeds were transferred from the company's account in the Chemical Bank to FFT's account in the bank in Liechtenstein, $4 million was withdrawn, at the direction of the Rosenbaums, and deposited in an account for Vileda Anstalt, a Goetz entity. Dr. Marxer, a Liechtenstein attorney, and his partner, Adulf Goop, who were agents for FFT had been directed to so transfer the funds by the Rosenbaums who had stated in writing to Dr. Marxer that Vileda Anstalt was owed these moneys by the company. Dr. Marxer did not question this statement as Francis Rosenbaum had been introduced by Goetz as an attorney representing Penn Central Transportation Co. (d) The drawdown of $6 million from FFT by the company

The conditional sale agreement signed on September 12, 1969, specified that the rehabilitated equipment was to be completed in two groups, the first group involving some $6 million and the second some $4 million.

When the first group was completed on October 21, 1969, the $6 million became available for use to the company's subsidiary, ACC. At or about that time Joseph Rosenbaum arranged to transfer that amount to the company's account at the Chemical Bank.

3. THE COMPANY'S DELAY IN DRAWING DOWN THE $4 MILLION ON DEPOSIT

WITH FIRST FINANCIAL TRUST

Some time in late 1969, the rehabilitation of the second group of equipment was completed, and the company would have been entitled to draw down the remaining $4 million at that time. When inquiry was made of Bevan by other company employees, Bevan stated that it was not the right time to draw down the funds. It was indicated that the funds were to remain in Europe so that Goetz could use them as a compensating balance. These funds have never been recovered by the company.

4. OTHER COMPANY FUNDS DIVERTED TO GOETZ BY THE ROSENBAUMS

This was not the first time that the Rosenbaums were instrumental in directing the company's funds to the use of Mr. Goetz. In May of 1968, the Rosenbaums received $1,125,000 from the company as a "security deposit" which was to be "front money" to enable the Rosenbaums to develop "fresh" sources from which the company could borrow funds. But, in fact, these funds were transferred to Goetz' account, Finance Aktiegesellchaft, in the bank in Liechtenstein. These funds were returned to the company on August 6, 1968. On August 28, 1968, the Rosenbaums were instrumental in transferring $675,000 to an account, Agencier Industrial Corp., in the bank in Liechtenstein. The funds were not returned to the company until July 21, 1969.

THE ROLE OF THE INDEPENDENT AUDITOR

The discussion of the accounting principles followed by Penn Central inevitably raises questions in regard to the role of Peat, Marwick, Mitchell & Co., the corporation's independent public accountants.

In the various individual accounting controversies discussed above, it appears that a variety of justifications were presented to the auditors supporting the accounting methods followed. The validity of a number of these justifications seems doubtful, and the depth of investigation by the auditors of company assertions was perhaps less than might have been expected under the circumstances.

The problem of distinguishing form from substance is a significant and difficult one, yet successful discrimination is essential if financial statements are to be meaningful to investors and creditors. A number of the specific problems above are of this nature. Independent auditors bear a heavy burden of public responsibility in reviewing transactions with such a distinction in mind. It is not clear that the auditors in this case gave sufficient consideration to the reality behind the various transactions.

In addition to the analysis of various individual transactions, the overall impression left by the financial statements is part of the responsibility of the public accountants. Statements cannot simply be the accumulation of data relating to individual transactions viewed in isolation. Questions can be raised as to whether a reasonable and dispassionate appraisal of the totality of Penn Central's operations could lead to the conclusion that the company was profitable in the year 1969. It is not apparent that such an appraisal of the total impression created was fully considered by the auditors.

EXHIBIT IB-1-DIARY OF DAVID C. BEVAN

For a variety of reasons, I have decided it is advisable to keep a diary regarding certain things.

1. About a month ago, at a Budget Meeting S. T. S. stated he thought we should deliberately underestimate our per diem charges until such time as we received a rate increase in order to help out in the income account. I ignored this statement and changed the subject to another area. After the meeting Tom Schaekel came up to me very much disturbed and shocked and asked me if S. T. S. meant this since I had specifically instructed him after we got out of some trouble when

the per diem was handled in the Operating Department that under no circumstances was there ever to be any juggling in this account. I told Schaekel to ignore the entire thing and proceed in accordance with instructions and accrue per diem as accurately as possible regardless of anyone and I would stand back of him.

2. The same afternoon S. T. S. advised me that he had a talk with Bill Johnson of the Illinois Central and they might be interested in purchasing our interest in the Willet Co. and he wanted to push this sale through to get profit involved before end of quarter, if humanly possible. He said if this did not work out could we arrange a wash sale to get the profit anyway. I told him this was not possible but I would do everything I could to work out a sale if the Illinois Central was interested-it developed they were not.

August 22, 1967

1. Coming back this morning on the plane from New York, S. T. S. was reviewing the very poor forecast of earnings for the third quarter. After covering various expense items that might be involved, he said that we had to find an additional $5 million of revenues. Although he did not come out and say so since I have nothing to do with revenue side of the picture, except from accounting, the implication was clear that he expected me to get this out of clearing account regardless, a matter in which he has expressed a great deal of interest.

2. I was informed by W. S. C. at home tonight that Basil Cole had been down to see him on instructions of S. T. S. to find out if there was any way we could avoid recording in the third-quarter accounting the loss on sale of Manor Building in Pittsburgh. W. S. C. replied in the negative.

Wednesday, August 23, 1967

Wednesday night, before dinner, at Seaview S. T. S. came up to me and said that he just wanted me to know that in his opinion the Financial Department was the best department in the Company and best managed and he greatly valued the warm friendship existing between us for many years.

Friday, August 25, 1967

Just before lunch today, Fred Sass said he had to see me immediately after lunch on an urgent matter. It develops that on Wednesday morning, before we left for Seaview, S. T. S. called him in and told him we had to find $5 million of additional revenues in the third quarter.

I asked Sass what that had to do with him since he has nothing to do with accounting but merely participates in forecasting. He said it was not clear to him. He did not have a chance to ask any questions as S. T. S. was talking at him but there seemed to be an implied suggestion that if revenues were not there we should mortgage our future and put $5 million in anyway.

I told Sass this was not very logical since he had nothing to do with accounting but he could review our present forecasts all he wanted to, but under no circumstances was he to come up with a revenue forecast on any other basis than the best combined judgment of the forecasting committee.

Wednesday, August 30, 1967

This morning at our Budget Meeting I advised S. T. S. that we had just received information with respect to taking inventory and there