STOCK-EXCHANGE PRACTICES

TUESDAY, APRIL 3, 1934

UNITED STATES SENATE,

SUBCOMMITTEE OF THE COMMITTEE ON,

BANKING AND CURRENCY, Washington, D.O. The subcommittee met at 10 a.m., pursuant to call, in room 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Costigan, Adams, Goldsborough, Townsend, and Couzens.

Present also: Senators Wagner, Byrnes, McAdoo, Walcott, Kean, and Representative Francis Henry Shoemaker, of Minnesota.

Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee, and Frank J. Meehan, chief statistician to the committee.

The CHAIRMAN. This hearing is being held before the subcommittee of our Committee on Banking and Currency under the resolutions S. Res. 84, 56, and 97. Senator Schall and others have requested the committee to hear Mr. Backus. He has some important matter in reference to practices of banks and corporations, as well as stock dealings, and so forth, to present to the subcommittee, and we will let him proceed in his own way.

Mr. Backus, if you will stand, hold up your right hand, and be

sworn:

You solemnly swear that you will tell the truth, the whole truth, and nothing but the truth, regarding the matters now under investigation by the committee, so help you God.

Mr. BACKUS. I do.

TESTIMONY OF EDWARD W. BACKUS, MINNEAPOLIS, MINN.

The CHAIRMAN. Mr. Backus, what is your name?

Mr. BACKUS. Edward W. Backus.

The CHAIRMAN. And your address?

Mr. BACKUS. Baker Building, Minneapolis, Minn.

The CHAIRMAN. What is your occupation, Mr. Backus?

Mr. BACKUS. Manufacturer of paper, lumber, and other forest products.

The CHAIRMAN. How long have you been engaged in that business? Mr. BACKUS. A little over 50 years.

The CHAIRMAN. Now, you have, I believe, a prepared statement, Mr. Backus?

Mr. BACKUS. Yes.

The CHAIRMAN. Do you want to submit that to the subcommittee?

Mr. BACKUs. I do.

The CHAIRMAN. You may proceed, then, with that, and we will ask you questions as we see fit.

Mr. BACKUS. I thank you.

The CHAIRMAN. You may just sit down at the table there.

Mr. BACKUS. I should first like to submit a signed copy of my letter addressed to you under date of March 17, 1934.

The CHAIRMAN. All right. The committee reporter will make it a part of our record.

Senator DUNCAN U. FLETCHER,

BACKUS-BROOKS CO.,

MINNEAPOLIS, MINN., March 17, 1934.

Chairman Senate Committee on Banking and Currency,

Senate Office Building, Washington, D.C.

MY DEAR SENATOR FLETCHER: Your telegram of February 19 in which you requested me to appear before your committee on Friday, February 23, was duly received.

As it was impossible for me to respond immediately, I sent you the following telegram:

"Telegram received. I am wiring Senator Schall to explain to you the necessity of asking for later date to appear before your committee and will appreciate your favorable consideration."

My telegram to Senator Schall was as follows:

"Senator Fletcher, chairman Senate Committee on Banking and Currency, has telegraphed me to appear before this committee next Friday the 23rd. This date is practically impossible owing to decision pending in Circuit Court of Appeals which may demand my immediate attendance in Federal court here on our receivership matters. Kindly see Senator Fletcher and arrange for my appearance before this committee 1 week or 10 days later and greatly oblige. Am wiring Senator Fletcher advising that you will see him and explain situation."

In reply, Senator Schall telephoned me that he had conferred with you and that I should report in Washington as promptly as possible and that your committee would hear me at its earliest convenience. I am now here subject to your call and will be pleased to appear before the Senate Committee on Banking and Currency to place in its records a statement of financial recketeering (as you call it in Liberty of March 17) which has attempted to destroy the property of thousands of bondholders in the Minnesota & Ontario Paper Co. and the Great Lakes Paper Co., Ltd. About 25,000 had invested in a great property built up in nearly 50 years of constructive business effort and with a full sense of the social responsibility which ought to underlie all business promotion and the use of natural resources. The livelihood of about 7,500 workers and 30,000 dependents is involved.

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I therefore ask your committee and your counsel, Mr. Ferdinand Pecora, to consider the methods through which the receivership of the Minnesota & Ontario Paper Co., which was forced in 1931, principally by the officials of the Chase National Bank of New York and the First National Bank of Boston, though the Minnesota & Ontario Paper Co. was then solvent; the campaign of the so-called 'Bondholders Protective Committee" to depress the values of bonds to secure their sacrifice; the waste of capital and resources through the unwarranted mismanagement of receivers appointed through the insistence of the Officials of the Chase National Bank and the First National Bank of Boston; these receivers having no knowledge of the technical problems of paper, pulp, and forest products manufacturing; and the persistent injection of the International Paper & Power Co. in the conspiracy to destroy my life's work. The trail of evil doing runs chiefly through officials of the Chase National Bank, First National Bank of Boston, Halsey, Stuart & Co., and Bond & Goodwin, one of the close affiliates of the First National Bank of Boston, and the International Paper & Power Co.

It might be argued by the public, under ordinary circumstances, that your committee should not be expected to take up the troubles of any particular organization, to follow the trail of any wrong that has been done to it by bankers working in harmony with the rivals or competitors of such an organization, yet what the Minnesota & Ontario Paper Co. has suffered is a perfect

illustration of the greed, double crossing, and willful penetration and meddling of banks into all lines of manufacture, which your committee has under the cross-questioning of counsel and more particularly in recent months through Mr. Ferdinand Pecora, so fearlessly proved in the hearings from 1932 up to the present.

It will, therefore, give me pleasure to appear before your committee. I shall come prepared with a formal statement, but I shall welcome cross-questioning, for I have nothing to conceal in over 50 years of participation in the development of the Northwest.

Through your various articles published in the press, an immense service has and can be done by showing how the bankers have exploited the public and how helpless the holders of securities have been.

Permit me in closing to quote from an issue of the New Republic (Jan. 3, 1934):

Reorganization of bankrupt or embarrassed corporations have been a scandal for many years. The practice has been almost uniform. As soon as a large corporation falls upon default, the bankers and insiders, who almost invariably have been responsible for the disaster, rush upon the prostrate carcass and assume possession of it. This they do, first, by getting their representatives named as receivers, and second, by organizing protective committees of stockholders and bondholders. These protective committees ostensibly keep an eye on the special interests of their respective groups of security holders. They exercise what in practice is more important, a controlling influence over the reorganization of the corporation. And as it is the reorganization of the corporation in which the promoters and bankers and insiders are chiefly interested, it is a matter of great importance to them to capture the control of these committees. Anyone who wants to know what grave abuses, what serious infractions of the simple law of trust, have been practiced by such committees has only to read Mr. Lowenthal's book."

I can substantiate every point as to the practices that would have destroyed us, except for your decision to hear us.

Very respectfully your,

E. W. BACKUS, President.

The CHAIRMAN. You may proceed, Mr. Backus.

Mr. BACKUS. Supplementing my letter to your chairman, dated March 17, I ask that the following statement be made part of your records.

Pioneering Development of Northwest Resources: The Minnesota & Ontario Paper Co. represents, in a large measure, the consummation of a constructive and well-laid plan by Backus-Brooks Co. conceived over 25 years ago to coordinate its forest products and hydroelectric properties into one operating unit and under one management. These properties had been acquired and developed, wholly or in part, during the previous 25 years. To carry out this plan the Minnesota & Ontario Paper Co. was duly incorporated in 1908 as the operating organization which took over certain of these properties.

The plan also provided that from time to time additional forest products and hydroelectric properties of Backus-Brooks Co. would be taken over and coordinated with this organization, as and when developed by Backus-Brooks Co. Prior to the year 1931 this company had developed several of its latent properties which from time to time had been taken over by the Minnesota & Ontario Paper Co. However, at the time of the Minnesota & Ontario Paper Co.'s receivership on February 28, 1931, one of the largest properties, and the most recently developed by Backus-Brooks Co., namely, Great Lakes Paper Co., Ltd., was in the process of being coordinated with the Minnesota & Ontario Paper Co., but the receivership prevented its final, legal consummation.

175541-34-PT 16-16

At that time these properties had been developed, organized, and were in profitable operation. In the year 1930, during which period the business depression was keenly manifest, the net earnings of Minnesota & Ontario Paper Co. (including Great Lakes Paper Co., Ltd., which for all practical purposes was then assumed by both companies to have been coordinated, after all charges, were substantially in excess of $1,000,000, in face of the fact that the combined operations were at less than 50 percent of capacity. In years of ordinary business conditions, when operating at capacity, minimum net profits after all charges should be $6,000,000 and in prosperous years $10,000,000 to $12,000,000.

Outstanding business structure: At that point the Minnesota & Ontario Paper Co. and subsidiaries (including Great Lakes Paper Co., Ltd.) had attained a poition as one of the largest organizations of its kind in the world. Thus from a very meager beginning these vast properties were acquired and had been developed through my initiative and efforts covering nearly half a century, during all of which time the active executive management was vested in me and represented my entire life's work. The locations of these operations are strategic from every essential standpoint; namely, natural resources, logical markets, ample provisions for further expansion, and perpetual operation. My whole purpose and ambition was to create, operate, retain practically the entire earnings in the business, and build a sound, creditable, and permanent structure.

At the time of the receivership, namely, February 28, 1931, the amount of outstanding bonds were as follows: Minnesota & Ontario Paper Co., $24,400,000; Great Lakes Paper Co., Ltd., $10,000,000. Several expert independent appraisers in 1930 valued these properties at a minimum of $100,000,000.

Approximately 95 percent of the combined common and preferred stock in these companies was owned directly and indirectly by me and my close associates, our accumulated earnings having gone into these properties. The first-mortgage bonds of these companies then outstanding had been purchased by our fiscal agents when issued and were widely distributed to some 25,000 holders.

The financial crash came in 1929, and I advised with several of our company's commercial bankers early in 1930 respecting their views on future economic conditions. The concensus of their opinion was that the worst was over and that conditions would gradually improve; that any expansion of plants and properties that had been planned could be proceeded with in the regular course of business with entire confidence. On the strength of this encouragement our companies proceeded to carry out their plans previously made, and expended approximately $3,000,000 on same during the year 1930. Not the slightest thought was harbored respecting any possible default in outstanding obligations. Our companies enjoyed the highest credit standing, without the use of collateral, and our commitments had always been promptly met.

Mr. PECORA. Mr. Backus, might I interrupt you right there for a moment to ask a question?

Mr. BACKUS. Certainly.

Mr. PECORA. Who were the commercial bankers with whom you met and conferred as you say early in 1930?

Mr. BACKUS. The Chase National Bank, the Northwestern National Bank of Minneapolis, the Continental National Bank of Chicago, and two or three of the others.

The CHAIRMAN. Who, connected with the Chase National Bank, did you confer with?

Mr. BACKUS. With Mr. A. H. Wiggin, chairman of the executive committee.

Mr. PECORA. Chairman of the governing board was his title, Mr. Backus.

Mr. BACKUS. Yes.

The CHAIRMAN. You may proceed, Mr. Backus.

Mr. BACKUS. Anticipating obligations: In the early summer of 1930 I began to anticipate making provisions for our funded obligations maturing in 1931. I took the matter up with our fiscal agents, Halsey, Stuart & Co., of Chicago, who then assured me that these obligations would be provided for at the proper time, but that it was then too early to give the matter consideration.

In the fall of 1930 several conferences were held with this fiscal agent in reference to meeting these maturities and alternate plans were discussed. However, they finally advised me that owing to the unsatisfactory bond market at that time, I should arrange with our company's commercial bankers to carry the additional $9,000,000 of first-mortgage bonds which we had agreed with them to issue, until they could be sold. I followed this suggestion, and as a result secured the pledges of our bankers and fiscal agents to do this. With this assurance I caused the Minnesota & Ontario Paper Co. to register its mortgage for $9,000,000, which was filed in February 1931, and to issue $9,000,000 of series D, first-mortgage bonds which were delivered to the trustee, namely, the Minnesota Loan and Trust Co., of Minneapolis, for certification as per agreement.

Bankers' pledges broken: Shortly before the middle of February 1931, I discussed these matters in detail with Mr. A. H. Wiggin of the Chase National Bank, and was definitely assured by him that the above plan would be carried through; and further, that if there should be any failure on the part of any of the several banks to keep their promises, the Chase National Bank would make good any such deficit by increasing its quota to insure that the plan would be consummated as agreed, and he firmly reiterated this assurance. By appointment I met our fiscal agents and our several commercial bankers in New York on February 26, 1931. At that meeting, in addition to our fiscal agents, there were present among the others, representatives of the Chase National Bank; the First National Bank of Boston, and the National Shawmut Bank of Boston. However, Mr. Wiggin was absent, having gone south on his vacation. This meeting was held at the offices of the Chase National Bank, in New York, where a formal agreement, covering the promises already made, was to be concluded, and the funds for liquidating the early funded maturities were to be credited to the company's account in the various banks involved. At this preliminary meeting these bankers promised to have an agreement prepared and in readiness the day following, which was to embody the promises and agreements previously made. When I arrived at the Chase Bank the