Senator GURNEY. A June 1974 newspaper article from Jacksonville, Fla., reporting the arrest of 11 businessmen who allegedly pledged counterfeit securities as collateral in 11 Florida banks. [The newspaper article referred to was marked "Exhibit No. 159" for reference and follows:]

EXHIBIT No. 159

U.S. CHARGES ELEVEN HERE WITH COUNTERFEIT OPERATION

Eleven business people, including a Jacksonville municipal bond specialist and the former vice president of a bank here, are charged with the operation of a counterfeiting ring involving fake securities and more than $2 million in bogus money.

Eight of those named in four federal indictments were arrested by the FBI and the U.S. Secret Service Monday. The other three are in custody on other charges.

Six of the 11 appeared Monday before U.S. Magistrate Joseph W. Hatchett and entered pleas of innocent.

Among them was bond specialist Joseph Hugh Scales, 38, of 704 Wendy Lane, who was jailed under $40,000 bond. Jailed under $20,000 bond was William Pannell Poarch, 32, owner of Poarch Printing Co., located at his residence, 1706 Forest Blvd.

Hatchett released the others who appeared Monday on $5,000 signature bonds. They included Herman Miller, 49, 8185 Trafalga Square, owner of Gateway-Orange State Uniform and Linen Rental Co.; Neal Gene Cury, 43, of 6034 Duke Road, real estate developer who formerly was in the waste control business; Dot Gaylor Burke, 44, of 5465 Community Circle, and her 20-year-old son, Julian Bliss Burke, co-owners of an art store, Environ Art, all of Jacksonville; Fred Steve Palilla, 42, in the dry cleaning business at Lake City, and James Patterson Hill Jr., 48, of 7053 Catalonia Ave., Coastal Printing Co. manager here.

Arraignment is scheduled today for Louie Arthur (Sonny) Best Jr., 32, of 1960 Holly Oak Ravine Drive, former vice president of the state Bank of Arlington; Robert John Wheeler, 32, former Jacksonville restaurant owner now living in Orlando; James Anthony Koblein, 32, and Charles Joseph (Chuck) Larson, both in Duval County jail on other charges; and Jerry Carson Friesland, 34, formerly of Jacksonville, now in jail on Tampa on charges in another case of possessing about $1 million in counterfeit money. An official of the Arlington bank said the bank was aware federal authorities were investigating matters involving Best. He added:

"THE BANK has completed an internal investigation and has reported the matter to the appropriate regulatory authorities. All indications are that the matter does not involve any bank funds or any loss to the bank or its depositors." A joint statement by Forres G. Guthrie and W. M. Alexander, special agents in charge of the Secret Service and the FBI here, respectively, said the latest charges involve the posting of false securities in obtaining loans from seven banks in Jacksonville, two Tallahassee banks and one each in Orlando, Fort Lauderdale and Miami and an attempt to get a loan from a Dallas, Tex., bank. The FBI said the usual stock used was that of Trans World Air Lines. It said a legitimate stock certificate would be copied and the copies taken to several banks who made loans and unknowingly accepted the counterfeit certificates as collateral.

Scales previously was under indictment on charges of using counterfeit Trans World Airlines stock as collateral for bank loans.

Both Miller and Cury have previous convictions on similar charges involving banks here and in Tallahassee. Miller received a split five-year prison sentence, which since has been terminated, and Cury drew three months prison time, which he has served.

Others previously indicted and named as unindicted co-conspirators in the current charges include Ann C. Westbrook, former women's fashions operator here, and Joseph Hahn, 36, who formerly operated amusements on Beach Boulevard.

Koblein is under a 10-year counterfeiting sentence and is under indictment with Larson on charges of perjury and obstruction of justice involving the alleged intimidation of a witness at Koblein's trial here earlier.

Current indictments also charge Koblein, Larson, Scales, Hill, the Burkes, Wheeler and Palilla with conspiring to forge and counterfeit securities to be used as collateral on bank loans. Scales, Miller and Cury also are charged with actually pledging such securities for bank loans in Jacksonville.

Another indictment charges Friesland, Poarch, Scales, Best, Koblein and Larson with conspiring to manufacture and distribute about $2 million in counterfeit money.

Best and Poarch are charged in a separate indictment with making, or causing their making, of false entries in the State Bank of Arlington's records and with concealing this from a federal grand jury.

Senator GURNEY. A letter from the comptroller's office for the State of New York, indicating that unclaimed dividend differences reached an all-time high for fiscal year 1974 of $11.3 million dollarstestimony to the "back office" crisis from 1967 to 1970.

[The letter referred to was marked "Exhibit No. 160" for reference and follows:]

EXHIBIT No. 160

DEPARTMENT OF AUDIT AND CONTROL,

Albany, N.Y., May 29, 1974.

Hon. EDWARD J. GURNEY,
U.S. Senate, The Capitol,
Washington, D.C.

DEAR SENATOR GURNEY: We are pleased to reply to your letter of May 15, 1974 in which you ask certain questions regarding the operation of the Abandoned Property Law of the State of New York. The nature of your questions indicates a primary concern with Article V-A of such Law, relating to stockbrokers and security dealers.

It would require an analysis of every affirmative report received from a broker or dealer to determine the exact amount received under each of the several categories of abandoned property as defined in said Article V-A. We can, however, approximate with some accuracy the amount of cash dividends received based upon the experience that 98.2 per centum of total cash received under such Article represents dividends. Application of this percentage against total cash received from brokers and dealers since 1969 reveals the following figures:

In addition to cash dividends, we receive unclaimed stock dividends from stockbrokers and security dealers. Our estimation of the cash value of such stock dividends is as follows:

As you will note, this data on stock dividends does not include the fiscal year 1973-74 since most of the sales of securities received in such fiscal year are effected in the fiscal year 1974-75.

The certificate numbers of the stock underlying cash dividends are to be reported by the broker or dealer whenever available on their records.

The Abandoned Property Law of the State of New York is a custodial statute and the State does not take title to either certificates or dividends but retains the same in a custodial capacity for the benefit of the person or persons entitled thereto. To dormacy period, however, after which certificates and dividends are to be reported and forwarded to the State Comptroller by a broker or dealer is five years, under most circumstances. While the State does not take title to cash dividends, it does have the use of such moneys; a statutorily mandated balance is maintained in the Abandoned Property Fund for the payment, without limitation in time, of any and all claims thereon for refund.

When the securities themselves, as distinguished from cash dividends, are received as abandoned property, the Law requires the sale of the same within fifteen months after delivery to the State Comptroller unless prior claim is made for their return. The securities are, therefore, evaluated on the basis of their market value at the time of such sale. They are not subject to any formula of evaluation prior to actual sale by our nominee.

Your use of the term "formula" indicates your interest in the amendment to Section 511 of the Abandoned Property Law effected by Chapter 617 of the Laws of 1973. This amendment, enacted at the request of the securities industry itself, is intended to enable those brokers and dealers which elect to use this formula to fulfill their obligations under the Abandoned Property Law despite the confusion in their records caused by the unanticipated volume of business in the years 1967 through 1970. The rationale for this amendment was stated by the Legislature: "It is hereby found and declared that very special and difficult problems came upon the securities industry during a prolonged period of unanticipated and extremely heavy volume of securities transactions as the result of which various basic records maintained by numerous securities brokers and dealers became inaccurate and unreliable, which condition in turn, caused industrywide record keeping problems." For your convenience, a copy of Subdivision 6 of Section 511 of the Abandoned Property Law, the statute under consideration, is enclosed herewith, together with the remaining sections of Article V-A.

Your final questions, relating to the percentage of certificates and dividend moneys remaining with the broker or dealer and to the capital ratio requirements of the broker or dealer cannot be answered by this office. Both relate to the internal financial management of the broker or dealer rather than to their obligations under the Abandoned Property Law and our records, therefore, would not reveal the information you seek.

We are pleased to have been of assistance to you in this matter and we trust that the above and the enclosed will help answer the questions raised in your letter.

Very truly yours,

ARTHUR LEVITT,
State Comptroller.

Senator PERCY. Mr. Chairman, I regret that I will have to leave for a very brief period. The confirmation hearing for Robert Ingersoll as Assistant Secretary of State is being heard in the Foreign Relations Committee. I will return as soon as possible.

Senator HUDDLESTON. Thank you. The distinguished chairman of the subcommittee and the ranking minority member have well stated the basis for this continuing investigation and hearing. One thing has been obvious since the beginning of this inquiry months ago. That is that the problem of stolen and fraudulent securities is considerably larger than anybody had reason to believe before this investigation got underway.

It is proper that we now inquire of those who have the responsibility of holding large amounts of securities, representing various citizens of this country, as to what extent they have been diligent, in what manner they have sought to protect the interests of their

customers.

I think it would also be interesting to know just what would happen if a bank in this country were to learn that a sizeable percentage of the collateral backing up loans that had been made were, in fact, fraudulent or stolen securities. And, of course, what happens to the individual when he learns that what he thought he had put away for his lifetime savings turned out to be fraudulent or stolen securities and perhaps worthless. This is a matter of great concern to the American people, one which it is proper that the Congress address itself to, in order that we may develop legislation that is fair, equitable, and effective in restraining this kind of activity and protecting the interests of the investors of this country.

We will proceed with our first witness this morning, Mr. W. Henry du Pont.

Would you raise your hand and be sworn?

Do you swear the evidence you are about to give is the truth, the whole truth and nothing but the truth?

Mr. DU PONT. I do.

TESTIMONY OF HENRY E. I. du PONT, CHAIRMAN OF THE BOARD, SECURITIES VALIDATION CORP.; WILLIAM H. RAPLEY, EXECUTIVE VICE PRESIDENT AND RONALD L. STERN, VICE PRESIDENT, TECHNICAL OPERATIONS

Senator HUDDLESTON. Are the gentlemen accompanying you also to testify?

Mr. DU PONT. Yes.

On my right is Mr. Ronald Stern, vice president of the Securities Validation Corp., and Mr. William Rapley, executive vice president. Senator HUDDLESTON. Would you gentlemen also be sworn?

Do you swear the evidence you are about to give is the truth, the whole truth, and nothing but the truth?

Mr. STERN. I do.

Mr. RAPLEY. I do.

Senator HUDDLESTON. Mr. du Pont, would you identify yourself for the record and identify the organization with which you are

associated?

Mr. DU PONT. My name is Henry E. I. du Pont.

[At this point Senator Percy withdrew from the hearing room.] [Letter of authority follows:]

U.S. SENATE,

COMMITTEE ON GOVERNMENT OPERATIONS,
SENATE PERMANENT SUBCOMMITTEE OF INVESTIGATIONS,

Washington, D.C.

Pursuant to Rule 5 of the Rules of Procedure of the Senate Permanent Subcommittee on Investigations of the Committee on Government Operations, permission is hereby granted for the Chairman, or any member of the Subcommittee as designated by the Chairman, to conduct hearings in open session without a quorum of two members for administration of oaths and taking of testimony in connection with stolen securities on June 25.

HENRY M. JACKSON,

Chairman.

CHARLES H. PERCY, Ranking Minority Member.

Mr. DU PONT. I am chairman of the board of Securities Validation Corp.

Mr. Chairman and distinguished members of the committee. I appreciate this opportunity to once again appear before you in your continuing efforts to probe organized and unorganized crime in the securities industry, relating to the increasing problem of theft, conversion, and fraudulent use of securities.

Approximately 1 year ago to the day, I appeared before this committee with statistical figures and projections based on data accumulated by the Securities Validation Corp. since 1971. On that day, I testified that we had a data base of 408,000 certificates, with an estimated value of $5.3 billion. Today, we have listed, in excess of 800,000 certificates, with an estimated value of more than $11 billion.

I will now provide a chart indicating our current position. This chart reflects the dramatic increase of the estimated dollar value of questionable securities as contributed by the various categories of subscribers and participants.

We feel that at this time, we now have approximately 15 to 20 percent of the reported outstanding lost, missing, and stolen securities' information in the industry. It is, therefore, still our considered judgment that the dollar value of lost, missing, and stolen government, State, municipal and corporate securities could be as high as $50 billion.

The chart shows the figures in 1973, the percentages and distributions and dollar volume.

The next is an update of the original to 1974.

Current figures indicate that the trust departments of United States' banks alone, report responsibility for some $400 worth of assets. Of this staggering amount, half of it is handled by 25 banking institutions. This figure does not include securities held in collateralized loan accounts. Since the 800,000 certificates currently on the SVC data base are considered to be valuable and negotiable documents, a portion of them are more than likely housed in the vaults of the above-mentioned financial institutions. These 800,000 certificates then, have been, are, and will continue to be used for seemingly legitimate and known illegitimate business purposes.

As the committee may recall, in June of 1973, $2.5 million worth of securities were reported as detected by subscribers of the Securities Validation System. These recoveries were based on 30 unique incidents. Today, 1 year later, the detection and recovery figure exceeds $12 million, based on 148 occurrences. I hereby wish to submit documentation of each of these occurrences to the committee and request they be included in the transcript of the hearings. Senator HUDDLESTON. Without objection, it is so ordered.

[The charts and documents referred to were marked "Exhibits Nos. 161 and 162" for reference and follow:]