From what I have been able to read, the estimates and extrapolations which lead to the $50 billion figure sweep up every security which may have been reported missing at any time and for any reason. The strong inference is that these securities, whatever their total value, are hanging over society and will, at any moment, be converted into cash by criminals. This just is not the case.

First, many securities reported missing are not in the hands of criminals. They are temporarily misplaced, accidentally lost or even destroyed.

Second, of those that are stolen, many are recovered without loss to anyone. For some reason, the recoveries are not subtracted from the thefts and the public is left with grossly exaggerated figures and a misconception as to the magnitude of the problem.

Frankly, I don't see the relevance of an estimate which admittedly includes misplaced and lost securities, in addition to stolen securities, where the problem which this subcommittee is addressing, in the words of its chairman, is stolen securities. I also believe that references to such an inflated figure, which may well be taken out of context, can actually serve to encourage the criminal element to focus on the financial community.

Having said that, let me hasten to add that I do consider securities thefts a serious matter. I think it is important, however, to place it in an appropriate context.

As to whether the situation is getting better or worse, our own experience, happily, shows that the situation has improved significantly because in the last 3 years we have suffered no losses from theft.

Second, while another New York City bank recently had a large securities theft, I understand that it has suffered no loss to this day. Third, while securities thefts from brokers, banks, and the U.S. mails were widely reported in the press prior to your hearings in 1971, such reports have become a rarity.

Fourth, I know that substantial efforts have been made by the financial community generally to perfect their procedures.

Turning to the proposed mandatory central validation system, I would like first to correct a major inaccuracy that appeared in an article on the front page of The Wall Street Journal on April 17 of this year, an inaccuracy which I hope is not reflected in your own thinking. The first sentence of that article states:

Nearly three years ago, Wall Street assured Congress it had an important new weapon to fight an alarming rise in securities stolen from banks and brokers.

The weapon to which the article made reference is a central validation system.

If the validation system in question contemplates mandatory checking as to all incoming securities, I know that the major banks gave no such assurance to Congress.

As you may have read in my written statement furnished to you yesterday, I see very real problems in any system that has such a requirement. In addition, in his 1971 testimony before this sub

committee the then-president of the New York Stock Exchange's stock clearing corporation stated:

You will throw Wall Street into chaos if we do that. In our depository alone, Senator, we receive some 20,000 deposits of securities every day which represents close to 100,000 individual certificates. It will take quite a computer operation to check 100,000 certificates just from that one source.

Moreover, Mr. Haack of the New York Stock Exchange and the brokerage firm representatives who testified in 1971 recommended mandatory reporting of suspected stolen or lost securities and not mandatory checking as to all securities.

Let me emphasize that we have no objection to the concept of reporting known or suspected securities thefts. In fact, we have recommended that this be made mandatory. Nor do we have any objection to inquiring with regard to the status of securities when we have some reason to be suspicious.

There are data banks in existence right now which perform those functions, namely, the Federal Reserve banks, the transfer agents, and the National Crime Information Center which the FBI operates. We believe these data banks are operating effectively and should not be displaced, duplicated or otherwise disturbed. In fact, it is one of our recommendations that the NCIC be made more accessible to the financial community generally.

Let me now quickly identify the problems we visualize when we consider a massive system to which all securities reported missing for any reason must be reported and with which all securities received in routine day-to-day transactions must be checked.

As to reporting, it seems incredible to me that anyone would suggest that millions of stop transfer requests, the bulk of which have nothing to do with thefts, should be entered in such a system. Receiving, maintaining and releasing such stops would be terribly costly and what purpose would it serve. The transfer agents must maintain such records anyway and they are routinely called when securities appear to be stolen or lost. It would be a case of sheer, useless duplication.

As to mandatory checking, such a requirement could, in my opinion, be totally disruptive. Thousands of transactions involving hundreds of thousands of certificates take place every day, many certificates changing hands several times.

Bear in mind that our Custody Department alone receives some 10,000 certificates each day. Mr. Chairman, if every certificate had to be "validated" each time it changed hands, a day's work would not get done.

As I understand the proposed system, it would in fact create massive delays in transactions. This runs counter to a major effort of the securities industry over recent years to reduce the time period for settling transactions and effecting transfers.

The SEC itself has been involved in this effort. Such a system would create the very kind of back office problems which the industry, the SEC and other congressional committees have been working so hard to overcome.

It could result in the very sort of operating disruptions which in the past have provided fertile ground for criminal activity.

To sum up, we do not need still another reporting system, particularly one that would create very real problems.

Thank you very much.

Mr. FELDMAN. Mr. Klemme, your entire prepared statement will be placed in the record.

Mr. KLEMME. Thank you very much.

[The statement referred to follows:]

PREPARED STATEMENT BY CARL W. KLEMME, EXECUTIVE VICE PRESIDENT, MORGAN GUARANTY TRUST CO. OF NEW YORK

I am Carl W. Klemme, an Executive Vice President of Morgan Guaranty Trust Company of New York and head of its Operations Division. It is the Operations Division which is responsible for the handling of securities in the bank. I am pleased to accept the Chairman's invitation to provide this statement and to appear before the Subcommittee.

The invitation requested certain specific information with respect to the theft of securities from this bank during the past three years, details concerning the operation of the bank's Stock Transfer Department, recommendations we might have regarding the theft and conversion of securities and comments on recommendations made in previous testimony. I am glad to do this and to provide any other relevant information that might be requested by the Subcommittee or its staff.

Response to request for information

An attempt should be made at the outset to define the scope of the problem of security thefts, which is undoubtedly why the June 13 letter from Senator Jackson requested details with respect to any thefts from the bank during the last three years. From our bank's point of view the problem has diminished significantly since the testimony in 1971. In saying this I do not deny that the problem does exist, and since it exists it should be addressed squarely and not swept under any rug.

Morgan Guaranty has had two cases of securities thefts between January 1, 1971 and the present. Both occurred in the Stock Transfer Department, which has the responsibility for transferring registered bonds as well as common and preferred stocks.

This Department serves as transfer agent for some 750 issues of stock and maintains the shareholder records for about 475 of those issues. The Department also is agent for over 2,000 different issues of bonds and keeps the bondholder records for approximately 1,850 of them. Last year, which was certainly not an active year in the securities markets, the Department issued over 8,500,000 stock certificates and over 600,000 bond certificates. On a daily average basis, this comes to over 30,000 stock certificates and nearly 2,500 bond certificates. (Issuance averaged nearly 40,000 per day in the first three months of 1974.) The Department last year also made nearly 10,000,000 postings to shareholder and bondholder records and issued over 11,000,000 dividend checks.

I cite these statistics so that you and your staff will be better able to place in context not only these two thefts but also the other information about Stock Transfer which appears later in this statement.

The first case of theft involved various registered certificates totaling •$1,000,000 face value of General Motors Acceptance Corporation debentures. These were delivered to us for transfer on November 16, 1972. At the time we discovered that they were missing from their designated location, we were advised by the FBI that it had knowledge that one of these certificates was in the possession of an outside person. The missing securities were promptly identified, the loss reported throughout the industry, and an investigation begun by the New York City Police Department. On December 4, 1972 two of our employees and one other person were arrested. All three were subsequently convicted. One was sentenced to a one-year prison term and the other two were placed on probation. The securities involved were recovered, $100,000 by the FBI in New York and $900,000 by the Department of Justice Strike Force in Philadelphia.

The second case of theft involved 80 certificates of $25,000 each of Columbia Gas System bonds, a total face value of $2,000,000. On March 30, 1973 we were advised by the City Police Department that it had information that at some future time a number of bonds would be stolen from us. Specific surveillance procedures were instituted by the Police and by our security force. The bonds described were taken from the bank on May 31, 1973 and one employee and one other person were arrested on June 1, 1973. Both were convicted and sentencing is scheduled for June 28, 1974.

In both cases the work of the law enforcement agencies has been exemplary. If we have any quarrel with the administration of justice it would be over the lightness of the sentences imposed in the first case, as well as in other cases reported in the press.

You requested information about the placement of stops against transfers. Stops are requested because someone believes a certificate may be missing. The shareholder may have misplaced it in his home, may simply have forgotten that he has put it in his safe deposit box, or may fear that it has gone into his waste basket. Also, it is not unusual for the executor or administrator of the estate of a decedent to find ample evidence of dividends being received but not be able to find the underlying certificates because the decedent left no indication as to their location. Finally, certificates are lost in the mails, as will be seen below.

We estimate that we have approximately 190,000 stops in the files of our Stock Transfer Department. These date as far back as 1870. Of this total about 115,000 are on issues for which we are record-keeping agent and 75,000 are on issues for which we are a co-transfer agent and for which someone else maintains the shareholder records. It has not been possible, in the very short period of time available since receipt of your letter, to determine either the number of shares or the market value represented by these stops.

However, for the period from January 1, 1971 through May 31, 1974 we have been placing stops at a rate slightly in excess of 1,000 per month. (These do not include stops placed because of various types of restrictions which limit transferability, such as unregistered shares, option shares subject to holding periods, etc.) These stops represent some 67,000,000 shares having a value of some $890,000,000. Of the stops placed, we estimate that 85% have been placed at the request of individuals.

Besides issuing over 8,500,000 certificates last year, the Department received for cancellation over 11,000,000 certificates. These 11,000,000 certificates were checked against the file of 190,000 stops. Only 697 matched and were not transferred. We have no knowledge that any of these 697 were stolen.

Stops placed by us at the request of the shareholder are also reported by us to co-transfer agents if we are the principal agent and to the principal agent if we are a co-transfer agent. Similarly, many stops placed by us are placed at the request of other principal or co-transfer agents. We also report all stops to the registrars and receive stop notices from transfer agents for issues for which we are the registrar. There is no other reporting of stops by us.

It should be understood that the placing and honoring of stops is an integral part of the transfer business. It is the agent's responsibility to assure that he does not improperly transfer a security and he takes the risk or loss if he does so. Furthermore, most but not all requests for stops include, or lead to, a request for the issuance of replacement certificates. Issuing replacements can only be done by a transfer agent, after the receipt of proper documents, of course. The agent's role is well-defined and well-understood.

As a result, transfer agents do receive inquiries regarding the status of particular certificates, i.e., whether there are stops against them and whether they are outstanding on the records. Transfer agents have a duty to respond to such inquiries quickly, and we believe they are doing so. Supplemental information

We know from experience that securities are "missing", or are thought to be missing at a given point in time, for reasons other than theft. We believe the data on stops provided above support this view, but would like to provide additional information with the hope that it will help in the understanding of this subject.

During the three years from January 1, 1971 through December 31, 1973 we lost on our premises 61 items of various types, consisting of one or more stock or bond certificates, notes certificates of deposit or coupons. In every case but one we either received payment, received replacements or issued replacements. The one exception was a single coupon and that was the only loss sustained by us or anyone else with respect to these missing items.

Another area of some concern is that of lost mail shipments. We, like other institutions, send vast numbers of securities through the mails, both first class insured and registered. During 1973 we made nearly 750,000 separate shipments of securities and coupons by first class mail. Addressees reported that they failed to receive 531 of these, valued just under $1,500,000. During the same year we made about 150,000 separate shipments by registered mail, having a value of nearly $6.7 billion. Of these, only one item worth $1 million failed to reach its desination, and it consisted of matured bonds being sent to the agent for collection of the proceeds.

But, again for the purpose of putting these missing item cases in perspective, these statistics cover a Transfer Department which cancels and issues 75,000 certificates a day; a Custody Department which processes 4,000 transactions each day involving many times that number of certificates; a Vault which is responsible for tens of billions of dollars of securities; a Collection Department which collects on an average day 4,500 items consisting of stocks, bonds and coupons: and a Corporate Trust Department and a Loan Department which are also actively involved with the handling of securities.

A few words about counterfeiting are appropriate at this point. In our role as indenture trustee for over 700 corporate issues we do, on occasion, come across counterfeit bonds. However, the number of such instances has been small and, when they do occur, we immediately notify the law enforcement agencies. We have no record of having suffered any kind of a loss as trustee, nor have we any record of ever holding counterfeit securities as collateral for a loan.

So much for Morgan Guaranty's experience with stolen, lost or otherwise unaccounted for securities. Should you wish additional information of any kind I will of course do my utmost to provide it.

Response to request for comments

I would now like to address the broader issues with which this Committee has been concerned since at least the summer of 1971. It has been established through your own investigations and previous testimony that stolen securities can be converted or used in extremely clever schemes to the profit of the unscrupulous and to the loss of the unwary, although the magnitude of such occurrences is subject to debate.

The root cause of this, it seems to me, lies in the nature of human beings. The greedy will go to unimaginable lengths "to make a quick buck". The unsuspecting will be victimized.

There will continue to be thefts of securities, although every reasonable effort should certainly be made to prevent them. We must have systems and controls that work effectively, first to prevent thefts, and second to reveal them as promptly as possible. We must also have well-staffed, determined law enforcement agencies to find the criminals and bring them to justice, armed with adequate powers to do so. However, even with all the expertise that together we can bring to bear on the problem, we will, unfortunately, remain vulnerable, particularly to the dishonest employee. He is our greatest threat. I also believe that there are times when externally imposed conditions make it easier for criminals to succeed in their crimes. Such certainly was the case several years ago when all segments of the securities industry found it impossible to keep up with the unprecedented volumes of activity. In a desperate effort to do so, the industry acquired hundreds of poorly screened and untrained personnel, made errors, failed to see the inadequacies of controls, took short cuts, and allowed records to lose their integrity. Still the work piled up. It should be no surprise that securities were lost and stolen. Conditions were ripe for the easily-tempted as well as for the hardened criminal.

The memory of those days remains vivid, as it should, but it sometimes overshadows, without justification, the changes that have occurred. Lessened activity in the securities markets, while causing substantial disruptions, has