tional grounds, a statement from Prof. Noel T. Dowling, who is a professor of law at Columbia University. I would like to have his statement in the record in the open hearings.

(Statement of Noel T. Dowling, professor of law at Columbia University, entitled "Memorandum Concerning the Power of Congress, Under the Commerce Clause, to Regulate Securities Exchanges", will be found printed in full at the end of today's transcript of hearing.)

Mr. PECORA. I have just received a communication from Mr. John Dickinson, Assistant Secretary of Commerce, which I think might as well go into the executive-hearing record. The letter is accompanied by a statement of the amendments which he suggested might be made when he appeared before this committee last week. He was then requested, if you will recall, to reduce his proposed amendments to written form. There has just been handed me that list of amendments.

The CHAIRMAN. I have the original of that.

Mr. PECORA. I did not know you had that, Mr. Chairman.

Senator WAGNER. Judge Healy, I did not have the advantage of listening to your entire testimony. Did you touch the question of margins at all today?

Mr. HEALY. No, sir.

Senator WAGNER. Have you any views about that subject?

Mr. HEALY. No, sir; I had no hand in the writing of the bill and do not feel competent to talk about that subject.

Senator WAGNER. I wanted to get the benefit of your opinion if you had one on the subject.

Mr. HEALY. I have just one opinion, which is of a very general nature, and that is that it is in the public interest to control speculation through the control of credit in connection with margins. Further than that I would not care to go.

Senator WAGNER. What prompted my question was that in a talk with Governor Black the other day he suggested as part of the control that instead of having restrictions or limitations in the act itself, the Federal Reserve Board ought to have the authority from time to time to fix the margin limitation. I wondered whether you had any views about that.

Mr. HEALY. It occurs to me that it would not be wise to leave it entirely to the Federal Reserve Board if you do something of that sort. It seems to me that if the Federal Trade Commission is going to administer the act it ought to have some official part in any activity relating to marginal requirements. I do not mean the sole authority, by any means, but some part.

Senator WAGNER. None of your activities go into the area of control of credit?

Mr. HEALY. No, sir.

Senator WAGNER. Would not that be a new field for you?

Mr. HEALY. Yes, sir; but of course work in connection with securities on the stock exchange is something of a new field.

The CHAIRMAN. The law might fix a minimum and draw a line of its own and then leave the Federal Reserve Board to fix a margin within that zone.

Senator WAGNER. I have no very definite views about it myself, but I thought I would like to get Judge Healy's opinion.

(Informal discussion occurred which the reporter was directed not to record; after which the following proceedings took place :)

Mr. PECORA. Judge Healy, will you be good enough to turn to page 33 of the bill, H.R. 8720, at the top of the page, item no. 10, requiring the filing of balance sheets for preceding years certified by public accountants, and so forth?

Mr. HEALY. Yes, sir.

Mr. PECORA. It has been suggested, and I think it was Mr. Dickinson's suggestion, that after the words "balance sheets for " there should be inserted the words "not to exceed the three preceding years." That is, to have balance sheets filed for the preceding 3 years. And a similar amendment to item 11, profit and loss statements for a period not to exceed 3 preceding years. Do you think such an amendment would be a good one?

Mr. HEALY. It would not occur to me that that was an unreasonable suggestion. However, it ought to be left perfectly clear, if such an amendment is made, that nevertheless the commission or the corporation reporting must disclose the content of its fixed capital account and its surplus account, various reserve accounts, investment accounts, and so on, if necessary, in order that their content may be known. Sometimes it is necessary, in order to get that information, to go back more than 3 years.

With that much of a reservation I should think that the suggestion was rather a wise one.

Also, I would suggest that the commission should be left with authority to require balance sheets for other years without certifi cate, if it wants to. I do not think anybody wants a certified public accountant to go back and examine all the balance sheets that have been put out for years.

The CHAIRMAN. We are very much obliged to you, Judge Healy The committee will now take a recess until 10 o'clock tomorrow morning.

(Whereupon, at 1:25 p.m., a recess was taken until tomorrow Tuesday, Apr. 3, 1934, at 10 a.m.)

For release Tuesday, April 25, 1933, after the full report of which this is on the summary, has been introduced in the official record, Federal Trade Com mission, Washington. (This copy will not be made available until the ful report containing the summary has been introduced in the record.)

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

The Cities Service Securities Co. is a securities marketing and tradin agency set up in 1927 by Henry L. Doherty & Company and is wholly owne by Cities Service Company.

The report of which the following is a summary, sets out briefly in Chapte I the organization and purpose of Cities Service Securities Co. and the manne of its functioning. In thirteen sections of Chapters II and III are presente the activities in thirteen typical securities marketing campaigns based on th functions and purposes set out in Chapter I.

The summary is as follows:

SUMMARY OF REPORT ON CITIES SERVICE SECURITIES COMPANY

Henry L. Doherty & Company, managers of Cities Service Company, 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 Company. 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.

Incorporation, Capitalization and Control.-Cities Service Securities Company is a wholly owned subsidiary of Cities Service Company. Its organization on March 17, 1927, and its incorporation in Delaware on April 9th 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 Company and its subsidiaries. The performance of that function had been carried on with the assistance of funds advanced by Cities Service Company; and Henry L. Doherty & Co. reimbursed that company for the advances by transferring to it the Securities Company's capital stock at a valuation of $20,000,000 and by causing the Securities Company to assume an open account indebtedness to Cities Service Company of $21,721,175.42.

Main Function.-The Securities Company'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 Company 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 Company 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 Company 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 Company usually does not itself market any considerable portion of an original issue of bonds or stocks of Cities Service Company 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 Company 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 Company'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 viewpoint 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 attraetive 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 Security Company's burden.

Method of Performing Main Function.-The method by which the Securities Company 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:

(1) They provide the ready resale market for those investors in the securities in question who had occasion to dispose of those investments.

(2) They tend to prevent the market price from sagging under the influence of the addition to the supply, because this added demand by the Securities Company competes with the public demand as expressed in purchases on the Curb Exchange and appears or is augmented in volume just before and during the period in which a new block of original issue is being offered to the investing public. This supplement to such public demand may even cause the market quotations for the security in question to advance.

(3) They induce investment confidence in the security in question and also speculative cupidity. The latter is stimulated especially when the Securities Company's activities result in successive advances in the market price, which advances offer the speculator the prospect of reaping a profit by purchasing the security and reselling it later at a higher price,

Basis of Market Purchases and Sources of Funds.-These "market purchases " tend rapidly to deplete the Securities Company's cash funds; and it could not long continue to make them if it did not have means of replenishing its funds. They are provided or replenished, and the Securities Company obtains a basis on which to determine the volume of its market purchases, by the following means. In addition to their sales offices in New York City, Henry L. Doherty & Co. had, in May, 1929, district offices in 25 cities of the United States; and 802 securities salesmen reporting to these offices operated not only in those cities and adjacent communities but in 28 others also. Those salesmen were continuously active in obtaining from their acquaintances and other sources the names of likely individual and institutional prospects, and in following up such leads, soliciting and obtaining orders for the securities. Telegraphic reports followed by daily transmission of copies of the sales confirmations kept the New York office continuously informed as to the details and volume of orders so obtained. The volume of sales orders so obtained and of sales effected "over the counter" constituted a basis of the volume of "market purchases" made by the Securities Company over the counter" and on the organized exchange: and the down payments of cash by the customers and the later collections of cash from them constituted an important source from which were replenished the cash funds that were depleted through the aforesaid market purchases.

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To some extent these sales orders and funds were supplemented for this purpose by orders and funds obtained from or through investment retailers who participated in special offerings and even in syndicate distributing groups.

Thus the Securities Company, through Henry L. Doherty & Co. as agent, functioned, to the extent of its market purchases, very much like a broker who received from customers orders to purchase certain designated securities in specified quantities and then purchased on the exchange or over the counter the securities with which to fill the orders. However, it differed from an ordinary broker in the following respects:

(1) The customer investor did not give an order to purchase the securities for him, but he contracted to purchase them from Henry L. Doherty & Co.; (2) The securities salesmen of Henry L. Doherty & Co. took the initiative in soliciting the orders rather than waiting for orders to come;

(3) Neither the Securities Company nor Henry L. Doherty & Co. is a member of the exchange, but the purchases on the exchange were executed through broker members;

(4) The purchases of securities with which to fill the customers' orders did not necessarily have to be made immediately after receipt of the orders, because of the fact that a large portion of the orders was made on account or on 10-months installments, thereby affording the Doherty Management leeway as to the time at which to provide the securities. According to the company's representatives, the shares sold on the installment plan during the period under review averaged something less than 15% of the Securities Company's total sales of this stock. The securities so sold were not deliverable until paid for in full; and, according to the terms of the installment contract used in 1929, those sold on such contracts were not deliverable until the expiration of the contract period even though the customer completed his payments before that expiration. Also securities needed for delivery to customers, particularly Cities Service Company common stock, could be and were provided temporarily by borrowing them from large holders. This made it possible to build up sales balances to cover which securities of new original issue were disposed of to the lenders or to the ultimate investors. The last step accomplished the ultimate purpose of the whole process-the acquisition of new capital.

Secondary Function.―The Securities Company is also a convenient instrument through which gradually to buy in those securities that are to be retired, or that are to be tendered to sinking fund trustees, or that are to be taken out of the market temporarily, or that are to be modified.

For example, Public Service Company of Colorado, an indirect subsidiary of Cities Service Company, found it advantageous to issue 6% rather than 7% preferred stock, and later to issue 5% rather than 6% preferred stock. Up to January 29, 1931, the Securities Company and Henry L. Doherty & Co., who functioned before the Securities Company was formed, purchased $3,939,215.12 par value of the 7% preferred stock at a cost of $4,287,062.17, exchanged $895,000 par value of it for $966,800 par value of the 6% preferred at an annual dividend saving of $4,634, exchanged $300,000 par value for $375,000 par value of the 5% preferred at an annual dividend saving of $2,250, and sold $2,690,000 par value of it to Cities Service Company. Also after the marketing of 5% preferred stock was commenced, the Securities Company gathered in 6% preferred stock, and, on August 2, 1929, sold $535,700 par value of it to Cities Service Power and Light Company at cost, $547,500.94. The Securities Company also marketed $4.112,700 par value of the 6% preferred stock for $4,046,921, and, during the process, spent $991,348.34 making market purchases to the extent of $977,000 par value.

Again in March, 1927, Cities Service Company sold $15,000,000 face amount of 5% debentures maturing in 1966 to A. B. Leach & Co.; and the Securities Company participated in the distribution as a member of the distributing group. The issuing company had outstanding at the time 6% debentures maturing in the same year; and the Securities Company purchased these in considerable quantities in the market. It continued these purchases up to the end of 1928, both in the market and from European bankers, while two other debenture issues bearing 5% interest were being marketed. More than $17,000,000 face amount of these were sold to Cities Service Company.

Examples of buying in securities and modifying them previous to resale are the following. On November 1, 1928, when the market price of Cities Service Company common stock was about $70 per share, that company sold to Harris, Forbes & Co. and Halsey, Stuart & Co., who marketed them through a distributing group of retailers, $30,000,000 face amount of 5% debentures matur