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Senator GORE. And the classification under which the various State laws in that regard fall?

Mr. DEAN. The English Companies Act proceeds on the theory that before an original offering of securities can be made, and it only applies to an original offering and not to secondary distribution, a prospectus shall be filed setting forth rather complete information. There is no jurisdiction on the part of any public body to revoke that registration. There are penalties on those signing the prospectus for statements not made in good faith.

Senator Adams. Is there any official supervision of the statements filed?

Mr. DEẢn. Not apparently in the act itself. You file them with the Registrar under the English Companies Act.

Senator GORE. Well, some one went to the penitentiary a few years ago because of the filing of a false statement.

Mr. DEAN. That was an official of the White Star Line, because he got out a circular giving the average earnings over a period of years without showing that their current earnings were declining. He was charged with omitting pertinent information. He was neither indicted nor convicted under that act. He was convicted under an old fraud act.

Senator BARKLEY. And they paid dividends out of accumulated surplus and not out of current income?

Mr. DEAN. That is my understanding.
Senator BARKLEY. And he failed to state that.
Mr. DEAN. So I understand.
Senator BARKLEY. And they sent him to prison for a year.

Mr. DEAN. Yes. But that was under an old fraud act that had been on the statute books for a great many years.

The CHAIRMAN. And they were not very long in doing it, either. Mr. DEAN. No, sir.

The CHAIRMAN. Mr. Dean, you want to know what theory we are pursuing here. You heard Mr. Thompson's statement on yesterday about the origin of the bill and the foundations of the bill, I take it.

Mr. DEAN. Yes, sir.
The CHAIRMAN. And the theory upon which it was drafted.

Mr. DEAN. Yes. But, in my opinion, the bill does not proceed on . any of those theories.

The CHAIRMAN. Might I suggest, Mr. Dean, that what we want is not so much a criticism of the bill but constructive suggestions. If you have any amendments to offer, or if there is anything you care to suggest by way of improving the bill, that is what we want. We do not want to spend our time hearing criticism of the bill, with people picking it to pieces here and there and getting nowhere. That does not help us.

Senator GORE. I think it important, Mr. Chairman, if there is any theory running through the bill, or any contradictory theory, that he should state it. I should like for him to give us the benefit of his ideas about that.

The CHAIRMAN. One point is that of publicity. I have here a letter from a man who says:

Full publicity of new issues is important, but that is only a bare part of it. Publicity of all security transactions is the real thing needed.

That is his suggestion.

Mr. DEAN. My only idea in pointing out these detailed provisions is that this bill is going to affect not only the very small business institutions but the very large business institutions; and the raising of funds, the distribution of securities, is a very complicated and delicate business. If a corporation has a maturity-and if the bill is so confused that it can not file the information required—or if the Federal Trade Commission in addition is going to promulgate regulations giving it the right to call for information not called for by the act after the information required by the act has been filed, it may not be able to offer its securities in time to meet its maturities. In my opinion the bill in its present form would promote receiverships. I am therefore anxious that the bill should be clear and simple.

The CHAIRMAN. With regard to what?

Senator ADAMS. You say one difficulty is a lack of theory. I think, following what the chairman says, if you have a definite theory upon which you think the bill ought to be premised, I for one would like to know what theory you think ought to underly the bill.

Mr. DEAN. Senator Gore has asked me to state those theories.

Senator GORE. Yes. I would be glad if you would. Then we would have it in the record and we can make choice as between them.

Mr. DEAN. The English Companies Act proceeds on the theory of full disclosure, with no right of revocation.

Senator BARKLEY. That is one of the theories, full information with the right of revocation?

Mr. DEAN. Yes; and there is still another theory that I will point out later.

The Martin Act in New York requires that every person dealing in securities shall file a statement giving his history. Then, before he can sell any security, he must file the name of that security and a short description of it, at Albany. The act defines what amounts to engaging in fraudulent transactions, and gives the attorney general very broad powers to proceed by injunction against a person. The act provides that he may not only enjoin a person from selling those particular securities, but that he may obtain an injunction preventing that dealer from ever engaging in the securities business itself.

Senator GORE. And that has stood up, has it?

Mr. Dean. That has been a very effective provision. I can give you a concrete example of that. A year ago a man came into our office at 2 o'clock. He was retired, and he told me that he had met three men at a hotel and that he had turned over to them some thousands of dollars worth of securities in connection with the assignment of patent rights in a nonpuncturable tire. We called up the attorney general's office. We went up there. He described them. He went across the street to the rogues' gallery and identified the men, and at 7 o'clock they had them. He got his securities back, and the men were convicted. It is a very effective statute.

Senator GORE. And the highest courts have sustained the power to enjoin them from engaging in the sale of any other securities?

Senator BYRNES. Were they obtaining money under false pretenses, or trafficking in securities?

Mr. DEAN. Trafficking in securities without having registered, and obtaining money under false pretenses.

Senator BYRNES. I imagine the criminal code in New York covers the obtaining of money under false pretenses.

Senator GORE. Your highest courts have sustained the power to enjoin them from engaging in the sale of other securities?

Mr. DEAN. Yes.
Senator GORE. Suppose you put that citation in the record.

Mr. DEAN. I do not have it here. I will be glad to furnish it to you. The constitutionality of the act was sustained.

The other type of act provides for full disclosure to the various blue sky commissions, with no right to sell until the commissions have approved the issues. They have no right of revocation untless the approval was obtained by misstatements or fraud.

Senator CAREY. Does not that put the stamp of approval on those securities?

Mr. DEAN. Unfortunately, it does, no matter what you say in the law. Section 10: This law says that it shall be a penal offense for anyone to do that. Salesmen are going to show people in a circular that this further information is on file with the Federal Trade Commission and represent that the Government has approved these securities.

Senator CAREY. That would happen under any act.
Mr. DEAN. It would happen under practically any act; yes.

Those are substantially the three theories on which most of the acts are based.

Senator GORE. Those that provide for revocation are based on fraud in the inception of the transaction, are they not?

Mr. DEAN. I would not want to say positively that some of them do not give the right of revocation if they find out fraud afterwards. Some of them may contain that provision.

Senator GORE. How has that worked where they have revoked? That never happens, I suppose, in the sale of legitimate stock.

Mr. DEAN. It happens very rarely, Senator Gore; but one important thing is that you know before you can sell in those

States whether or not they are going to give their approval. I think that this bill in its present form would be completely unworkable, because no director or no responsible corporation would dare to authorize the issuance of securities if after 2 or 3 weeks or perhaps months the Federal Trade Commission should decide to revoke. This bill gives the Federal Trade Commission the right to revoke if any person engaged in connection with the underwriting of the securities has been or is engaged in a fraudulent transaction, regardless of whether it has anything to do with that particular issue.

Senator GORE. It would still relate to the particular issue?
Senator BYRNES. You mean, subdivision (b), line 9—
Has been or is engaged or is about to engage in fraudulent transactions?
Mr. DEAN. Section 6, on page 12, provides, line 22—

That the Commission may revoke the registration of any security by entering an order to that effect, if upon examination into the affairs of the issuer of such security, or in the case of securities issued by a foreign government or a political subdivision thereof, into the circumstances relating to the loan or the affairs of the person or persons negotiating or underwriting the issue in the United States, it shall appear that any such issuer or person:

(a) Has violated any of the provisions of this act, or any authorized order of the Commission of which such person or issuer has notice, but the burden of proof shall be on the person or persons asserting lack of notice; or

(b) Has been or is engaged or is about to engage in fraudulent transactions.

sible person.

Senator GORE. That authorizes them to investigate the affairs of the person engaged in selling these securities. The New York law, you say, requires the applicant to give an account of himself and his business. Is that to meet that situation so that they pass in advance on his qualifications?

Mr. DEAN. You have to give a record of your business connections and whether or not you have ever been convicted, and sufficient information so that they can find out whether or not you are a respon

Senator GORE. That takes the place, in practical effect, of the provision to investigate the affairs of the individual, which would take place at a subsequent date and might lead to revocation?

Mr. DEAN. Yes.

Senator BYRNES. What is the provision of the New York law along this line?

Mr. DEAN. You see, there is no registration of the security in the New York law, other than that you simply file what they call a further State notice that you plan to sell that particular security.

Senator BYRNES. Suppose the promoter or the issuer of a security is convicted of fraud in the issuance of a certain security; does the New York law have any prohibition against his further dealing in securities?

Mr. DEAN. Yes; you can get an injunction against that particular dealer selling that particular security preventing him from ever engaging in the securities business again.

Senator BYRNES. That would stop him from selling any?
Mr. Dean. It should stop him from selling any.

Senator BYRNES. This would provide for revocation where the issuer is guilty of fraudulent transactions or where it is shown that the affairs are in unsound condition or that they are insolvent.

Mr. DEAN. Let me give you a concrete example. Let us take Kreuger & Toll. Let us suppose that they had been registered, and then the Federal Trade Commission revokes. There are still some assets in Kreuger & Toll--not much, but some. We happen to represent one of the protective committees. The collapse in those securities was fully published, and the securities naturally went down on the stock exchange. Someone might have bought them at 1. But under this bill, regardless of the fact that everybody knew about it, you could not dispose of them at all. The act says that you can recover from any vendor knowing of such falsity, regardless of whether the purchaser knew it or not.

Senator BARKLEY. Of course the purchaser would be assumed not to know it; otherwise he would not have bought them.

Senator BYRNES. Do you suppose a man that knew that was so would have purchased them?

Mr. DEAN. There were people who bought at that particular price still feeling that they could get something at that particular price. But suppose your assets were worth 50 cents on the dollar; this would prohibit the poor investor who had bought them from selling to anybody that knew as much about it as he did, because the act says that you can recover from any vendor knowing of such falsity, and it makes no provision at all for the purchaser knowing of such falsity.

Senator BARKLEY. The act is not intended to protect people who buy stocks knowing that they are spurious or fraudulent. If he bought such, he would have to show he did not know.

Mr. DEAN. No; because the bill says in section Senator BYRNES (reading): That every person acquiring any securities specified in such statements and offered to the public shall be presumed to rely upon the representations set forth in the said statement.

Mr. DEAN. Yes; and (reading):

In case any such statement shall be false in any material respect, any persons acquiring any securities to which such statement relates, either from the original issuer or from any other person, shall have the right to rescind the transaction and to obtain the return, either at law or in equity, of any and all consideration given or paid for any such securities upon the surrender thereof, either from any vendor

Mark you, it does not say the vendor who sold to him, but it says:

Either from any vendor knowing of such falsity or from the persons signing such statement, jointly or severally.

Senator BYRNES. Your idea is that if the proof showed conclusively that the man sold them knowing of the fraudulent character or the falsity of the statements, we should seek to protect the man, throw protection around him, if the proof showed that the plaintiff in the suit was innocent or ignorant of any knowledge of it?

Mr. DEAN. I think this section, in its present form, would promote fraud.

Senator BYRNES. By punishing the man who engaged in it?

Mr. DEAN. Because I think that if a corporation files a statement down here and it later developed that there was an error in that statement, unscrupulous people will buy up those securities, and they will go out into the hinterland and sell those securities and say, “You can get a lot of money by buying these securities, because there are responsible men on this board of directors."

Senator GORE. It seems to me that one of the main objects ought to be to remove uncertainties instead of introducing greater uncertainties.

The CHAIRMAN. If they engaged in a fraud they ought to be sued.

Mr. DEAN. It may not be a fraud. Let us assume that you have got a copper mine in Alaska, and you are a director of the company and you pick out the very best firm of engineers that you can find to go up there and make a survey of those properties, and they come back and tell you that it is high-grade ore and that there are 10,000,000 tons of it. Let us assume that there is a geological fault so that there are not that many tons, and the rest of it is not as good a grade. Do you mean to say that you have got to study geology and go to Alaska before you can sign that statement as a director? I would not sit on a board of directors of any corporation, because I would not know when something like that might happen, regardless of my good faith, and I would not know when somebody might walk into my office and say, “Here, I bought these securities.

Buy them back."

Senator BYRNES. Suppose he undertook to show damage, what damage could he show?

Mr. DEAN. He does not have to show damage.

Senator BYRNES. The bill says he “shall have the right to rescind the transaction and to obtain the return, either at law or in equity, of any and all consideration given or paid for any such securities upon

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