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results in injury to a third or fourth hand should nevertheless be responsible to the person suffering the loss.

Senator GORE. With this situation the question which arises in my mind is: Would there be any machinery put in motion at all? Or would it come to a standstill, if you placed such risk and responsibility upon directors? Wouldn't they simply strike and refuse to operate?

Mr. HOLTZOFF. Well, if they struck and refused to operate they could not borrow any money from the public, could not sell any securities to the public. And maybe it might be a good thing for a good many members of the public.

Senator GORE. If that is your distinction I think you are probably going along the right line. But it seems to me this would paralyze business entirely. I think, maybe, that is your scheme.

Mr. HOLTZOFF. I think, Senator Gore, after all this would not paralyze business. It would mean, probably that a man who sits on 50 or 100 boards of directors would resign from a good many of them, and would confine his directorships to a few corporations, and that then he would really direct. And that is the English. system. In England a director directs.

Senator GORE. But this goes a good deal further than the English system in the matter of fixing responsibility upon directors, does it not?

Mr. HOLTZOFF. Yes, it does, so far as personal liability is concerned.

Senator GORE. As to your remark just now about taking the teeth out of the bill: My point is that I do not want so many teeth in it; that it will frighten everybody out of business. I think we ought to proceed on the theory that most people are honest.

Mr. HOLTZOFF. Oh, yes.

Senator GORE. And that a minority of the people are dishonest, and that we ought to fashion our legislation in that way, to deal with the dishonest minority and so as not to frighten the honest along with the dishonest, or punish the honest as well as the dishonest in the case of an innocent mistake. I fear if that is going to be your theory it will stop business.

Mr. HOLTZOFF. Well, this bill is not merely aimed at dishonesty, but also at negligence and carelessness, because many losses to investors are not due to dishonesty of directors but are due to negligence on the part of directors in allowing the use of their names in circulating securities, without knowing in detail what is back of those securities. Of course, I need not recall to your mind the well-known practice of many corporations of getting high-class names on boards of directors, to use as selling points in distributing securities. And then oftentimes they have signed the prospectus without knowing what it contains.

Senator COUZENS. I think you hit the nail on the head right there, and that that is more often true than dishonesty on their part. I know that there are men sitting on boards of directors of banks and other corporations who never attend meetings, and their names are used, and they permit their names to be used in fact, for publicity purposes. That sort of thing is reprehensible, and there should be some way of reaching them.

Senator GORE. Yes, that is the basis of a lot of our trouble in the past. I think you put your finger on the point when you say you will

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get at the facts back of this business. Now, I would certainly go as far as you do to furnish people with the facts, and to punish everybody who commits a fraud in the furnishing of facts.

Senator COUZENS. And right there is an element which is rather difficult. Take a big motor car company that wants to reorganize. They have to rely upon some firm of public accountants, Price, Waterhouse & Co., Ernst & Ernst, or some like company, to make an examination and report. Obviously, no officer of the corporation could personally certify as to the accuracy of their figures.

Mr. HOLTZOFF. No officer of a corporation could certify to the accuracy of every single dollar or cent; no. But I had the thought that every officer of a corporation should have sufficient familiarity with its affairs to know pretty much as to whether there are any gross errors in the statement. Take, for instance, a bank officer. He has to file a statement with the Comptroller of the Currency, and that statement has to be signed by a certain number of the directors. I think they are liable for false statements, that they are liable under the Banking Act. I am not sure as to that, but am under the impression that they cannot excuse themselves from liability under the National Banking Act by saying that their accountant checked the figures, prepared them, and that they assumed the accountant's work was correct.

Senator COUZENS. But this is a very practical proposition that presents itself. Suppose you have a directors' examination of a bank and there are five directors on the examining committee. We will say that they go in to count all the currency, check all the assets, check all the loans. Obviously, each one of the five cannot do all the work separately. So one of the directors takes, perhaps, the work of counting the currency, and another director examines the papers, and another director checks the assets, and another director checks the securities back of loans. Then they make a composite statement, which they all sign, each trusting the other to have done his share of the work accurately. That is a practical proposition, which everybody does. If it should thereafter appear that one among the five directors made an inaccurate check or count or inaccurate report of his work, could you logically penalize the other four?

Mr. HOLTZOFF. Well, Senator Couzens, those five directors composing the examining committee, as you suggest, are putting out a statement which contains certain representations to the public, and they intend to have the public rely upon that statement. Now, having the public to rely upon their statements, why shouldn't they be held liable in the case of a person who, having relied upon them, loses money?

Senator COUZENS. Then upon your theory all confidence and all reliance upon each other is to be withdrawn. You bring it down to the point where it is wholly impracticable and unsound.

Mr. HOLTZOFF. I suppose under the set of circumstances you suggest the other four directors might have the right of contribution as against the act of the faithless director in case they should be compelled to make good to any outside investor.

Senator GORE. It has worked well with reference to banks, hasn't it?

Mr. HOLTZOFF. I think so. Certainly we have not seen any bank directors resigning their directorships because they were afraid of liability under the National Bank Act.

Let us

Senator COUZENS. Perhaps not, but they do have to trust somebody. It is quite obvious that they could not do it all in the case of each individual person.

A director of a bank cannot verify each and every item in the bank. That would be wholly impossible. And it is rather foolish to advocate that he shall be made morally responsible for the failure of one of his colleagues on the board.

Mr. HOLTZOFF. Yes; but isn't this the point after all? The point is that the law, nevertheless, holds a signing director of a bank responsible for every statement contained in a report to the Comptroller of the Currency.

Senator COUZENS. Well, I might suggest that you could not get a conviction in court under such circumstances as I have described.

Mr. HOLTZOFF. Perhaps not.

Senator COUZENS. Then what is the use of setting up a system under which you could not expect to get a conviction?

Mr. HOLTZOFF. It is not a question of criminal liability. Criminal liability is based only on knowingly making a false statement. But civil liability exists even in the case of an innocent mistake. assume that an innocent mistake is made and an investor loses money because of it. Now, who should suffer? The man who loses the money or the man who puts the mistake in circulation knowing that other people will rely upon that mistaken statement?

Senator COUZENS. Well, of course, you have to reach the conclusion in advance that that mistake was responsible for the loss. That is a question of proof, and is a fact which you may not be able to demonstrate.

Mr. HOLTZOFF. Mr. Thompson calls my attention to section 17 of the bill as to criminal responsibility. Criminal responsibility is limited to a director or officer who knowingly participates. But as to civil liability it seems to me that we go back to the old principle of law that where 1 of 2 innocent persons must suffer, the person who innocently, but because of the state of facts that brought about the suffering, did the act, he should bear the liability rather than the innocent victim.

Senator GORE. I think there is one point you ought to consider in this connection, and that is: Whether or not we really need a market where people can transact their business, and if so, whether it is wise to make your regulations so stringent that you may force those people to buy tax-exempt securities and let the market go hang.

Senator COUZENS. I think that is a rather fallacious argument, because only a limited number of tax-exempt securities can be purchased.

Senator GORE. That may be true in a way, and yet there are $35,000,000,000 of them.

Senator ČOUZENS. And they have already been taken up.
Senator GORE. Yes, but that is a quite considerable amount.

Mr. HOLTZOFF. After all, suppose we have a partnership composed of 4 or 5 persons, and 1 member of the firm is faithless and there is a default, the other 4 members, no matter how innocent and ignorant of their partner's wrongdoing, are liable for his default. In other words, there are a number of instances in our law where a person is under heavy financial responsibility for the misdeeds or neglects of somebody else.

In that connection I might say: We may come to the point where we will have smaller boards of directors, and where we will have directors who really direct and keep in touch with the affairs of their company And I think if we do come to that state of affairs, which is the state of affairs prevailing in England, it will be a very desirable one.

Senator COUZENS. I think you are entirely right in that respect, but I think you will have to put some limitation upon the responsibility of an innocent director.

Senator ADAMS. In that connection would it be feasible at all to permit an alternative to directors, that if they do not want to sign a report or statement of their company, if they furnish the report of certified public accountants, accountants of responsibility, that that might be permitted in their stead? That is, if they furnish to the public a statement which is certified by responsible public accountants, might that be suggested as a remedy here?

Mr. HOLTZOFF. The only difficulty about that would be that you would not have anybody who would be financially responsible for a misstatement.

Senator Adams. But you would make that obvious on the face of your filing, wouldn't you? That is, what you are after here is the truth of the situation.

Mr. HOLTZOFF. Yes. But we want a guaranteed statement of facts.

Mr. THOMPSON. As to truthfulness.

Mr. HOLTZOFF. And unless you have some guaranty of those statements you will necessarily have careless statements filed.

Senator ADAMS. That is probably true. I am not making a suggestion, but an inquiry as to whether or not in the place of a statement by a director which he must guarantee, of taking the responsibility off the director to this extent—and I do not personally pretend to know whether that would work out or not—but, let us say, there is this statement appended: I furnish with this statement a report of responsible certified public accountants, who have made the examination, and you may take that for whatever you think it is worth.

Mr. HOLTZOFF. Well, we want to do away with prospectuses where we have seen the statement in small type at the bottom: Sources of information are not guaranteed but are believed to be reliable.

Mr. THOMPSON. You have that situation right now in the case of many prospectuses.

Senator Adams. I do not see what that has to do with this inquiry.

Mr. HOLTZOFF. It has this to do with it: Today if a director or an investment house is sued for issuing a false prospectus, they will take refuge behind the statement that they obtained the information from a public accountant, is that it?

Senator ADAMS. No. I am inquiring whether or not the actual accountant's statement might be attached to statements that are to be filed with the Federal Trade Commission, responsible certified public accountants. In many instances I would much rather have a statement of certified public accountants, such as Ernst & Ernst, or Price, Waterhouse & Co., or somebody else of like kind, than to have the statement of some director who knew nothing about it and who merely walked up and said: Where do I sign?

a manner.

Mr. HOLTZOFF. Well, I think it would weaken the effect of this bill if you were to allow a director to excuse himself from liability in such

Senator COUZENS. Would it be practicable to have the Federal Trade Commission to pass upon the reliability of the certified public accountant who made the statement?

Mr. HOLTZOFF. Well, I don't know

Senator CouZENS (interposing). What I mean is, you have to be practical about this thing. No one director can answer for the figures and details of a corporation. He has to place some confidence and some reliance in somebody.

Senator GORE. In England they have certified public accountants, do they not?

Senator COUZENS (continuing). And I take it a director, in many cases, could not go along and do business without doing that.

Mr. HOLTZOFF. Of course, in England the provision as to accountants is somewhat different. They have chartered accountants, who are authorized by the Government and who are really independent auditors. We have no such system here.

Senator COUZENS. That is what I am suggesting, that we do that very thing so as to make it a practical proposition. Let the Federal Trade Commission, if they want to, pick the certified public accountants, at the expense of the person registering:

Mr. THOMPSON. We would have to amend our laws in that case, because under the British law an accountant is a chartered accountant and is criminally liable for any false statement made in his report.

Senator COUZENS. That ought to be the case here.

Mr. Thompson. In addition to that, he is liable for a grossly negligent statement.

Senator ADAMs. He should be.
Senator COUZENS. Yes.
Senator GORE. You would be reaching the source in that case.

Mr. HOLTZOFF. But I do not believe you could permit, as Senator Adams suggests, dependence upon the statement of the auditor and thus relieve yourself of liability, if you want to make the responsibility of directors worth anything.

Senator COUZENS. You would make him or his organization responsible for any dishonesty or error. Mr. Thompson knows just as well as I know that it is wholly impracticable to make each director of a corporation individually responsible for any errors that might occur in a statement that was published. It just cannot be done from a practical standpoint. For instance, if Mr. Thompson were on the board of directors of the United States Steel Corporation, or of General Motors, or any other of these large corporations, he certainly could not verify every figure which was in their annual statement or prospectus.

Mr. HOLTZOFF. Well, where would we place responsibility? Suppose you had purchased $100,000 worth of stock, and the man from whom you had purchased was so busy he could not attend to his duty, or there was too much minutæ in the corporation, so that he could not follow it, and he made a mistake. Would you want to pay for his mistake, and he in no sense be responsible?

Senator COUZENS. It is not a question here of whether the director has the time to ascertain the minute details. It is a question of im

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