Mr. THOMPSON. In this country.

Mr. CHAPMAN. Yes.

Mr. THOMPSON. We could stop them.

Considerable comment was made by Mr. Breed upon the British Companies' Act. It is true that we have fashioned the publication feature of this bill, and filing of documents after the British bill. We believe that the British law goes in the right direction and the same direction as the Belgian, the German, and the French laws, but we are not here to say that the British law is perfect. The British have been amending and reamending their law, right along. Their bill has been amended, as I said, with an attempt to set up a tighter and tighter law, so that they could protect the public. In answer to Mr. Breed's statement with respect to their loosening up the act, let me refer to the report of the Committee on Finance and Industry of 1931. This report was presented to Parliament, by command of His Majesty, June 1931. I will read from page 168. This is the opinion of the committee.

It would in our opinion be an important reform that relations between finance and industry should be so developed that issuing institutions of first-class strength and repute should vouch to the investor more normally and more fully for the intrinsic soundness of the issues made and that the joint stock bank should not give the appearance of sponsoring issues so long as in fact their real responsibility is limited to receiving subscriptions.

Now, if I were called upon to criticize the British act, I would say that it is lacking in the very great essential which we have got in this bill, namely, the right of revocation. The British act calls for publicity, and carries many penalties, but those penalties only apply after the trouble has occurred.

We are, as I say, trying to present here a prophylactic bill, a preventive bill, a bill which will reach out and meet the situation before the public has been mulcted out of its money. We believe that with the Commission keeping its hand on the shoulder of the issuer, now, and even 10 years from now, that we are going to have a bill which will have teeth in it, and which will function in such a way that issuers will carry this attitude in their minds-we will prevent damage to the purchasers.

Mr. MERRITT. Mr. Thompson, do you think that you could do that without doing more harm, in the long run, than you would do good?

Mr. THOMPSON. I would answer by repeating, not verbatim, but in substance, what the representative of Kuhn, Loeb & Co. said here the other day. He believed this is an excellent bill and that the time is right for such a bill and that the exposé of the facts of an issue and the supervision of the Commission was a very good thing. Mr. MERRITT. As a matter of fact, are there not questionable securities sold in England too?

Mr. THOMPSON. I did not hear you.

Mr. MERRITT. Are there not questionable stocks sold in England, too?

Mr. THOMPSON. They have had the trouble in England; yes. They have lost millions on securities over there, but nothing like the amount that we have lost over here. Of course, we do things in extremes, much more than the British do. That may account for it.

Mr. MERRITT. When you speak about the importance of revocation, is there not this to be said, insofar as revocation is concerned?

Will it not result in harm to the innocent holders? How can they possibly liquidate under this bill the holdings which they have got an equitable interest in, which they have obtained equitably and honestly, and which have some value? Why should we say to them that they cannot sell at all?

Mr. THOMPSON. Well, they could sell. It is a matter of issue

Mr. MERRITT. They could not under this bill, because they could not legally try to find a man who would buy.

Mr. THOMPSON. I think that this bill is going to be prophylactic in this sense, that you are going to have a situation where men are going to know what kind of securities they are putting out.

Mr. MERRITT. You know how well the prophylactic act worked in the case of the eighteenth amendment. In other words, I think that you cannot legislate a whole nation into honesty and wisdom.

Mr. THOMPSON. I do not think that we are trying to legislate a nation at all into honesty. We are simply saying that you can go ahead and do business; but if you do business, you have to comply with these provisions. We are not saying here that you cannot drink, as we said under the Prohibition Act, you could not have liquor. We are going to say, "Go ahead and trade, but, if you do, you have got to do it in a certain way." I would say that that is the distinction. Now, let me refer again to the Kylsant case. The British Companies Act did not cover the Kylsant case. They had to go back to 1860, to get a fraud act to get jurisdiction of his lordship, and, after the damage was done by Lord Kylsant.

We have an act here which will cover an issue in addition to the fraud act. We are setting up new stakes. We have got a new condition which the old common law did not reach in time. We are charting a new field.

But, with the Kylsant case, when they found that they did not have sufficient under that act to meet the case, they went back and prose-cuted under the old fraud act. They presented a case where Lord Kylsant told the truth, so far as the old common law was concerned, but he did not tell the whole truth.

Yesterday, Mr. Breed undertook to analyze the President's message. He said that this question of revocation was not, specifically, referred to by the President. Therefore he drew the inference that the President had no intention of having revocation in this bill. That is what I got from his statement.

Well, if you will analyze the message, you will find that the bill does not attempt to set out procedure, that the bill attempts to set out policy.

The message goes to the extent of policy. It does not attempt to set up procedure. If it did the message would have been very much longer.

But, yesterday, in order that I might be absolutely certain on this matter, that the President had no intention of not supporting the idea of revocation, I went to the White House. I am authorized to say that "the President is in favor of the idea of revocation as expressed in section 6, page 12, House bill no. 4314; that he did not attempt to, or intend his message to Congress to cover any more than the general statement regarding the bill."

Now, for some of the questions that have been asked, I think that it has suggested itself to the minds of some of you gentlemen, that perhaps this bill is a little too far reaching.

Let me read to you, from the case of Sears, Roebuck & Co. v. The Federal Trade Commission. I am reading from the book in which the case is found, Statutes and Decisions Pertaining to the Federal Trade Commission, 1914-1929, from pages 40 and 41 of that volume.

First let me say that this case arose in the Commission when I was there and had to do with unfair advertising of sugar and a number of other articles, by Sears, Roebuck & Co. The Commission's jurisdiction reached out and took hold of that situation.

Now, when the Commission began to function, the advertising had been going on for approximately 2 years. It had begun to get in its damaging effect upon those who were in competition with Sears, Roebuck & Co., and, of course, they came to the Commission and complained.

Now, I am going to read, just very briefly, from that decision, in order to show you how far the courts have gone already in this matter of control of business.

Mr. MERRITT. What court?

Mr. THOMPSON. This is the Circuit Court of Appeals, Seventh Circuit.

I am reading from page 39:

It was also proper to note that petitioner was contending (and still contends) that the act is void for indefiniteness, that the act is unconstitutional, and that the act, even if valid, under any proper construction has not ben infringed by petitioner's practices. In Goshen Mfg. Co. v. Myers Mfg. Co. (242 U.S. 202, 37 Sup. Ct. 105, 61 L.Ed. 248), which was a suit for infringement of a patient, the defendant company averred and introduced evidence to prove that 6 months before the bill was filed and with notice to complainant it had sold its factory, wound up its business, and had no intention of resuming. But throughout the intervening period and also in the answer to the bill the defendant company was attacking the validity of the patent and the right of the complainant to compel desistance. This conduct was held to be such a continuing menace as to justify the maintenance of the bill. So here, no assurance is in sight that petitioner, if it could shake respondent's hand from its shoulder

That is, the Federal Trade Commission, which has reached out and taken jurisdiction

would not conitnue its former course.

Then, at the bottom of page 40:

On the face of this statute the legislative intent is apparent. The Commissioners are not required to aver and prove that any competitor hsa been damaged or that any purchaser has been deceived. The Commissioners, representing the Government as parens patriae, are to exercise their common sense, as informed by their knowledge of the general idea of unfair trade at common law, and stop all those trade practices that have a capacity or a tendency to injure competitors directly or through deception of purchasers, quite irrespective of whether the specific practices in question have yet been denounced in common-law cases.

Let us take the case of sound securities that come in competition with the unfair or unsound one so that a competitive condition is

But the restraining order of the Commissioners is merely provisional. The trader is entitled to his day in court, and there the same principles and tests that have been applied under the common law or under statutes of the kinds hereinbefore recited are expected by Congress to control.

Then, very briefly, on page 41:

But such a construction of section 5, according to petitioner's urge, brings about an unconstitutional delegation of legislative and judicial power to the

Commission. Grants of similar authority to administrative officers and bodies have not been found repugnant to the Constitution.

The Commission under its present jurisdiction has the jurisdiction already over unfair methods of competition, and can hold that jurisdiction indefinitely over a recalcitrant. Mr. Breed said, "Why, this might continue for 10 years." Why shouldn't it continue for 10 years?

Mr. Breed painted a picture here where he said that the time would come when directors would be sitting around the table, and, first, the president would arise and say, "Well, under this act I do not dare sign this document." He said that one by one the other directors would arise and leave the room and say that they would not sign, and then they would call in dummy directors to sign.

Mr. LEA. Mr. Thompson, do you understand the statute of limitations would apply to a fraud action authorized by this legislation? Mr. THOMPSON. In answer, Mr. Lea, I would say that I presume it would. I do not believe, of course, the statute would be set in motion until the fraud was discovered. That is the rule always, however, with regard to fraud.

Mr. LEA. There is nothing in this bill, as I read it, that refers to the time of the revelation of fraud. I think that the general practice in fraud is that the suit must be brought within a reasonable time after its discovery of fraud.

Mr. THOMPSON. Yes.

Mr. LEA. Now, it occurred to me under this bill that it is possible that a purchaser, after having knowledge of fraud, if the stock market was all right, could fail to proceed, or take no action, but if the stock market should subsequently turn unfavorable, then this bill might give him the opportunity to prosecute for fraud or the recovery of the purchase price.

Mr. THOMPSON. Yes.

Mr. LEA. And it looks like something ought to be put into this bill to cover those situations.

Mr. THOMPSON. In other words, you think that he might sleep on his rights, or bide his time?

Mr. LEA. It would be his duty to proceed promptly after information of fraud in any event.

Mr. THOMPSON. Of course, the burden would be, I presume the burden would fall upon him to show that he had not been guilty of laches under the statute of frauds.

Mr. LEA. Well, I was in doubt about what his rights would be under this bill.

Mr. THOMPSON. Yes.

Mr. LEA. But it seems to me there should be a statute of limitations of fraud covering the time when the statute would begin to run. Mr. THOMPSON. Yes.

Mr. LEA. And in any case he should be required to proceed promptly on revelation of fraud.

Mr. THOMPSON. I think that that is a good suggestion. I think that we can put that in the bill, all right.

Now, I do not see the director as Mr. Breed does. I see boards of directors becoming very much smaller. I do not think that we will have boards of directors of 100 members, or 80 members, hereafter, under this bill. They will have 10 or 12, and they will know what they are doing.

The CHAIRMAN. And the individuals will not be on so many boards.

Mr. THOMPSON. They will not be on so many boards.

Again, I would be surprised if you could find any man so dumb in the face of this law, who would become a dummy director, with the penalties of this act staring him in the face.

Mr. Breed suggests that you will have to depend upon accountants. He refers to the accounting section in the British act; but the British accountant is in a totally different situation from the accountant in America. He not only belongs to an organization, but he is a chartered accountant, and responsible to the Government. He is responsible for fraud. He is responsible for gross carelessness. He is responsible in many ways, so that the accountant is just as anxious to have the truth known as the director would be to have the truth known and that is the reason why the British act deals with him as it does. Mr. PARKER. Mr. Thompson.

The CHAIRMAN. Mr. Parker.

Mr. PARKER. On this direct liability clause:

Suppose, for instance, that you had here a situation where you were in the oil business; you had a big oil lease, and you had employed the very best geologists that you could find, and you wanted to register your stock, and your geologists should show that there was oil. Mr. THOMPSON. That there was oil?

Mr. PARKER. That there was oil, and you wanted to state that fact, and then you should drill and find no oil. Would you be held liable?

Mr. THOMPSON. No; not necessarily. Let me answer that in this

way

The CHAIRMAN. In the first place, Mr. Thompson, coming from an oil company, I want to say that no geologist can say that you can go down 3,000 feet in the ground and find an oil pool. They do not claim to be able to do that.

Mr. THOMPSON. As coming from a mining State, let me give you this illustration:

Now, when you go out to prospect for a mine, you may find traces of ore, that will lead you to what is known as the vein, or lode, as we call it out there. I would advertise under this act, that I had gotten traces, or stringers that might lead to a vein. I would describe the security that I was about to sell, in that way. I would not say that we had the mother lode, or vein, which would indicate that you have got the real vein.

Men are going to become careful in their descriptions, under this bill.

Mr. KENNEY. Mr. Thompson, suppose that the geologist made a misstatement. Still this would make you guarantee it, would it not? Mr. THOMPSON. Yes; and he would have to look out for his geologist.

Mr. KENNEY. Even though it were an honest mistake on the part of the geologist?

Mr. THOMPSON. If it were an honest mistake, he would not be held criminally, but civilly. My experience with most of the geologists, that they will not go to the point. They are cautions of every statement that they make, so much so that if you depend upon their reports you will not have much trouble.

Mr. HUDDLESTON. Mr. Thompson, may I ask a question?