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Appreciation (write-ups) developed by Federal Trade Commission in its inquiry

under Senate Resolution 83, 70th Congress, 1st session-Continued Oklahoma Gas & Electric Co. (pt. 36) (Byllesby group)--- $3, 263, 560. 16 Nebraska Power Company-Excess of write-ups on operat

ing-company books over write-ups on holding-company books (pt. 41)

2, 521, 063. 35 Pacific Power & Light Co. (pt. 35)

5, 679, 427. 66 Northwestern Electric Co. (pt. 35).

5, 000, 000. 00 Idaho Power & Light Co. (pt. 35)

9, 692, 314. 99 Tide Water Power Co. (pt. 44) (Insull group)

2,714, 967. 75 Carolina Power & Light Co. (vol. 26, p. 90) (Electric Bond & Share group)

22, 414, 833. 79 United Public Service Co. (Thompson Ross & Co.)-

6, 818, 940. 16 Northern States Power Co. (pt. 43, pp. 210, 214, and 249) -. 8, 082, 104. 00 Central Illinois Public Service Co. (pt. 44, exhibits 16 and 17).

5, 721, 247. 00 National Light Heat & Power Co (pt. 44)

1, 841, 550. 68 National Electric Power Co. (pt. 40, p. 368)

3, 487, 442. 61 Profits on sales to affiliated companics (pt. 40, p. 369) -- 4, 214, 285, 36 Utah Power & Light Co. (pt. 45)

34, 320, 046. 00 Metropolitan Edison Co. (pt. 50, exhibit 5260)

25, 890, 525. 26 Central Public Service Corporation (pt. 52, exhibit 5322,

p. 303): Central Gas & Electric Co...

$2,000, 092. 17 Federated Utilities, Inc.,

1, 759, 394. 36 Central Public Utility Corporation.. 3, 822, 102. 94 Southern Cities Public Service Co.--- 3, 312, 511. 98

10, 894, 101. 45 Columbia Gas & Electric Co. (exhibit 5193, p. 41, pt. 47).

420, 687. 50 Ohio Fuel Corporation (exhibit 5193, p. 61, pt. 47) ----- 8, 238, 400.00 Ohio Fuel Corporation subsidiaries (exhibit 5193, p. 265, pt. 47)--

2, 374, 407. 86 Columbia Corporation (exhibit 5201, p. 96, pt. 47).

354, 500.00

366, 521. 60 The Manufacturers Light & Heat Co. (exhibit 5215, p. 41, pt. 47)------

2 10, 899, 734. 11 The Manufacturers Light & Heat Co. (exhibit 5215, p. 126, pt. 47).

2, 619, 930. 40 United Fuel Gas Co. (exhibit 5236, p. 26, pt. 49)

39, 751, 228. 66

9, 264, 350, 46 Huntington Gas Co. (exhibit 5238, p. 29, pt. 49).

2, 257, 629. 21 New England Gas & Electric Association (exhibit 5218, p. 25, pt. 48).

122, 135. 64 New England Gas & Electric Association (exhibit 5218, p. 28, pt. 48)

9, 476, 149. 66 Worcester Gas Light Co. (exhibit 5218, p. 79, pt. 48).

5, 831, 833. 30 Cambridge Gas Light Co. (exhibit 5218, p. 122, pt. 48) - 10, 394, 824. 11 Cambridge Electric Light Co. (exhibit 5218, p. 159, pt. 48)

4, 344, 822. 37 Cape & Vineyard Electric Co. (exhibit 5218, p. 190, pt. 48)

473, 975. 96 New Hampshire Gas & Electric Co. (exhibit 5218, p. 298, pt. 48)

957, 753. 63 Derry Electric Co. (exhibit 5218, p. 372, pt. 48).

139, 987, 36 Pennsylvania Electric Co. (exhibit 5231, p. 97, pt. 48) - 17, 284, 353, 53 Niagara, Lockport & Ontario Power Co. (exhibit 5348, p. 70–Intangible Fixed Capital)--

2, 444, 154. 24 Adirondack Power & Light Corporation (exhibit 5412, p. 81c-Revaluation of Intangible Fixed Capital).

8, 692, 835. 65 Cohoes Power & Light Corporation (exhibit 5415, p. 12) 2, 531, 037. 67 Municipal Gas Co. of City of Albany (exhibit 5414, p. 18).

235, 926. 20

Total.

1, 159, 914, 276. 74 Utilities Power & Light Corporation (exhibit 5346-A, p.281)..

4, 902, 291. 62 ? Excess of book value over par value of stocks of subsidiary companies whose properties were taken over.

Mr. MARLAND. May I interrupt you?
Mr. HEALY. Yes.

Mr. MARLAND. Would it not be advisable to have all of these statements require them to show what part of the surplus was earned?

Mr. HEALY. Yes, sir.
Mr. MARLAND. And what was written up by appreciation?

Mr. Healy. I think it would be extremely valuable and quite necessary, and it is exactly the thing the Commission should be allowed to do.

Let me show you the balance sheet of the Columbia Gas & Electric Corporation, consolidated balance sheet of that corporation, and its surplus.

That shows a figure for assets of $609,000,000, and when you get over to the surplus account, you do not find the surplus divided. You just find surplus $44,000,000.

Now, that surplus has write-ups in it.
Some of them give them the high-sounding name of appreciations.

That surplus is in part a reflection of those write-ups in the fixed capital account.

Let us look at the property account, asset side: $609,000,000. According to the best figure that we can make, $84,000,000 of that is write-up, but the consolidated balance sheet does not disclose it. Nor does it disclose the content or make-up of that surplus account.

And—these certified public accountants--they certify to these balance sheets, that

Mr. MARLAND. As to that, would it be wise that they be required to show in the capital account, so much cost?

Mr. HEALY. Yes, sir.
Mr. MARLAND. So much appreciation?

Mr. HEALY. Yes, sir; I believe it would. And I think that it is very remarkable that in the case of two or three large companies that have been studied by the Commission the management cannot tell, and the books of the corporations do not show, actual original cost of the properties.

Now, I am not, as I have said, an expert accountant-but I have always supposed that the purpose of bookkeeping and accounting was to make a historical record of events; that if a corporation took in so much money, it made a record of it and if it paid out so much money, it made a record of that, and when you get corporate accounting to a point where you cannot tell the original cost of property, I think things have come to a bad pass.

As to the corporation I referred to with the $63,000,000 write-up, I find, on looking at my memorandum, the write-up was really $66,000,000. It was the Appalachian Electric Power Co.

In the case of the Minnesota Power & Light Co., the property with a ledger value of $17,000,000 were entered on the books of a new company controlled by the same management at $38,000,000, a write-up of $21,000,000, or 126 percent. Another write-up was made on that, which brought the total write-up to more than $27,000,000.

The Minnesota Power & Light Co. had certain lands and water rights that had not been developed, which were held for future development. They were not earning the company a penny. In fact, the company had the burden of carrying them, and they put a valuation on that property, and they proceeded to compute interest on it. They

added the interest to their fixed capital and land account, and showed this interest in an income statement; not only showed it on their books, but they included it in a statement they made to a trustee under a bond indenture, relating to the right to take down additional bonds against that income.

The Florida Power & Light Co.: Certain companies were consolidated to form that company. The constituent companies carried their property on their books at $26,000,000. The went on the books of the Florida company at $58,000,000, a write-up of $30,000000, or 103 percent increase.

This Central Public Service Corporation that I have spoken of before, which was adjudicated a bankrupt on the 8th of March 1933, during the time that that stock was being supported on the market hy manipulation and the price made on the market and while they were selling the stocks throughout the country, there was a deficit in the earned surplus of the company; but they had a capital surplus and paid in surplus; paid in surplus being established out of the money that the investors paid into the corporation; but it was all reported to the public in one lump sum. And I have many instances of these write-ups. Take the case of the Arkansas Natural Gas Corporation. A write-up was recorded of over $5,600,000. Take the case of the Associated Gas & Electric Co. In their published balance sheet you will find surplus reported in one item. You will find no explanation of the fixed capital, but our records at the Commission indicate that there are write-ups of a very large sum in the figures at which their properties are recorded.

Now, I have brought with me a mimeographed summary of the reports presented by our examiners on the Cities Service Securities Co. and the Associated Gas & Electric Securities Co. which I would like to leave with the committee.

Let me give you another illustration of a surplus account, and how part of it was created. The Associated Gas & Electric Co. was a New York corporation. It was selling class A stock. Under its charter, and under the New York laws, if it sold a share of class A stock to you or me at $50 a share, it was required to set up that $50 in the capital stock account.

This is what they did. They created a subsidiary corporation, which they fully owned, 100 percent, Associated Gas & Electric Securities Co. They issued the class A stock to the securities company at $35 a share. The securities company sold it to the public at prices above that; sometimes $50 and sometimes $60 a share. When they sold at $50 a share, the securities company recorded a profit of $15 a share, and carried that to a surplus account from which they subsequently paid a dividend of some $20,000.000. That went to another associated company, which in turn paid it over to the Associate Gas & Electric Co., which carried it into its capital surplus account, so that by that device they made a disposition of the actual consideration received for those shares that would not have been possible had they not used that subsidiary corporation.

The reason I speak of this in this connection is that, if that company, whose stock is traded in on the various curb exchanges, were to file a statement here of its surplus, or file a statement with the Commission itself of its surplus, in the same form that it is published to the public, the Commission nor the investors--neither the Com

mission nor the investors, would know that $21,000,000 of that surplus account was created out of money paid in for stock subscriptions. Of course, there is much more to the story than that, because on the book of the securities company, profits of that character were made in other ways. If you exchanged certain securities that you had with the Associated Gas & Electric Co., and they gave you back class A stock in that exchange, the class A stock was put out, according to their books, at a figure which showed a profit above the $35 a share.

My point is, from all of this, that if the Commission is to give any protection to the public, and if this bill is to operate effectively, then the Commission ought to have the authority that is given it by section 12. (b) of this act, and if you say to the Commission that it may require reports from these companies, and then if you say that the Commission cannot get this detail as to the accounts, then your requirement for reports is a futile thing and will afford no protection to the public. (For release Tuesday, April 25, 1933, after the full report of which this is only the summary, has been introduced in the official record, Federal Trade Commission, Washington. This copy will not be made available until the full report containing the summary has been introduced in the record]

The following summary of the report of the Federal Trade Commission examiner, was placed in the record in the commission's investigation of power and gas utilities, Tuesday morning, April 25. The examiner, Dr. Thos. W. Mitchell, testified regarding this report which is based on his examination of the books and accounts of Cities Service Securities Co., of the Doherty group of utilities.

The Cities Service Securities Co., is a securities marketing and trading agency set up in 1927 by Henry L. Doherty & Co., and is wholly owned by Cities Service Co.

The report of which the following is a summary, sets out briefly in chapter I the organization and purpose of Cities Service Securities Co., and the manner of its functioning. In 13 sections of chapters II and III are presented the activities in 13 typical securities marketing campaigns based on the functions and purposes set out in chapter I.

The summary is as follows:

SUMMARY OF REPORT ON CITIES SERVICE SECURITIES CO.

Henry L. Doherty & Co., managers of Cities Service Co., furnished by application of the proceeds of sales during 1927 and 1928 and up to the stock market crash in 1929, the great bulk of that demand for that latter company's common stock that was expressed in purchases on the New York Curb Exchange. That stock was purchased continuously in large volume over the counter and on the New York Curb Exchange. They were enabled to do this by applying to these "market purchases” a large proportion of the funds and orders that were obtained through cash, short-time, and installment sales to investors in every nook and corner of the United States. The purchases and sales were made for account of Cities Service Securities Co. The purpose claimed for these market purchases by the company was that of facilitating the sale of new blocks of original issue of the stock by providing for the investors an active resale market in which they could readily dispose of their holdings if occasion required. However, the volume in which these market purchases were made was not merely sufficient to support and steady the market price but was such that the market price rose to a great height, from which it crashed in October 1929.

This organization's market activities constitute an outstanding example of what is believed to be a general practice in modern finance and stock-market control. The practice has far-reaching effects upon the welfare, not only of the investing and speculating public, but of the entire general public. It may conceivably be carried on only in such volume as to support and steady market prices; or, as in 1927, 1928, and 1929, it may be carried on in such volume as to induce a continuous rise in the prices of stocks generally, and as to induce a general orgy of speculation in which stock prices go to absurd heights, from which they must inevitably crash to the great injury not only of the speculators but of the entire Nation. 45381-34

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Incorporation, capitalization, and control.-Cities Service Securities Co. is a wholly owned subsidiary of Cities Service Co. Its organization on March 17, 1927, and its incorporation in Delaware on April 9 following, were caused by Henry L. Doherty & Co., who transferred to the new company in exchange for its capital stock' ($15,000,000 par value supported by net assets valued at $20,000,000), the assets, liabilities, and current situation that pertained to a certain function that previously had been performed by Henry L. Doherty & Co. as fiscal agent for Cities Service Co. and its subsidiaries. The performance of that function had been carried on with the assistance of funds advanced by Cities Service Co.; and Henry L. Doherty & Co. reimburesd that company for the advances by transferring to it the Securities Co.'s capital stock at a valuation of $20,000,000 and by causing the Securities Co. to assume an open account indebted. ness to Cities Service Co. of $21,721,175.42.

Main function.—The Securities Co.'s main function, which is the certain function referred to and which is performed for it by the staff of Henry L. Doherty & Co. (for the Securities Co. has no paid organization of its own), is that of obtaining or facilitating the raising of additional capital funds, and it has been variously described as follows:

To facilitate the marketing of securities of Cities Service Co. and its subsidiaries;

To supervise the market, or (in connection with syndicate operations) the sole handling of the market for such securities;

To provide a ready resale market in which owners of securities of Cities Service Co. and its subsidiaries can readily dispose of their holdings at retail when they desire to do so.

This function is most actively performed during those periods in which new original issues of the securities in question are being marketed by banking syndicates and distributing groups or in which preparation is being made for the issuance of such new blocks. The Securities Co. usually does not itself market any considerable portion of an original issue of bonds or stocks of Cities Service Co. or of its subsidiaries, although it has occasionally taken an additional original issue for the purpose of covering a technically “short” position that it has created in the course of its activities in “supervising the market.”. When the Securities Co. does participate in the marketing of a block of original issue of securities, it usually obtains its portion of the issue; not from the issuing company, but from the managers of the syndicate that has undertaken the marketing of the block.

In connection with the marketing of such blocks of original issue, the Securities Co.'s function may be described as that of making the security in question attractive to the public. A natural effect of adding to the supply of a given security is to depress its market price; it is important from the view point of the results to the issuing company that this price-depressing tendency be counteracted and, if possible, even be converted into a price-advancing tendency. One condition in conjunction with others, that makes a security attractive to the investing public is an active organized market in which the investor can readily dispose of his investment if he has occasion to do so. It is therefore important from the viewpoint of results to the issuing company that such an active market be created and sustained for some time prior to and during the period in which the new block of original issue is being marketed. In addition to the investment demand, a speculative demand for a given security may be stimulated by a persistently rising price of the security in question, the motive of the speculator being to obtain a profit in the purchase and resale of the security. Such speculative purchases may be made outright; but they can be made in greater volume on margins. Such a speculative demand is likely to be stimulated if the sustained volume of purchases on the organized exchange is of sufficient magnitude to cause a fairly rapid and continuous rise in the market quotations. However, purchases by speculators result later in speculators' sales, which add to the Securities Co.'s burden.

Method of performing main function.The method by which the Securities Co. performs this function is as follows:

Having regard, of course, to the volume of sales to investors effected by the selling organization, it purchases the security day by day in considerable volume on the organized exchange. These purchases are made through brokers. They are made in such volume as to constitute a large supplement to the public investment and speculative demand for the security as expressed in purchases on the curb exchange. It also purchases the security "over the counter", which has the effect of keeping such quantities out of the supply offered on the organized exchange. All of those purchases have the following effects:

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