The fraud law of New York was originally enacted in 1921. I think I may safely say that since 1921 there have been more fraudulent securities sold in the State of New York than at any time in history, and more fraudulent securities sold in the State of New York than anywhere else in the country. In all fairness, of course, I must say that was to be expected. New York being the financial center would naturally sell more securities than any of the other States, and conditions generally the last few years have brought about the fact that more securities have been sold everywhere in the United States than at any other time in history. I mention the point in passing merely as an indication that the fraud law of New York is not necessarily a model and that such incidents as we have all read about recently, such as the Kreuger & Toll fiasco, the Straus Co.'s activities, and many others that could be mentioned, indicate that the fraud law is not particularly effective and, as has often been said, is the type of law that "locks the door after the horse is stolen." This law is an attempt, at least, to prevent the sale of worthless securities, rather than to punish someone after they have sold worthless securities. We also have in example in the fraud provision of the postal laws. In nearly all prosecutions brought under the fraud clause of the postal laws the damage has been done before any action was taken. Delaware had no securities law at all until 1931. In 1931 Delaware passed a single paragraph fraud law giving chancery authority to issue an injunction against the sale of securities. No penal provisions are inclued in that act. The State of Maryland has now a commission appointed for the purpose of reforming their securities law. I have not read the findings of that commission. It is to report during 1933. But it is evident that the law of Maryland has not been satisfactory and that they are contemplating a change. All of the other States, with the exception of Nevada, have laws of the regulatory type, which endeavor either to license the person selling the securities, that is, the dealer, or the security itself. Senator KEAN. In regard to New York, is it not true-you say that there has been more fraud committed there-but is it not also true that there have been more convictions for fraud during the last 5 years than any other time in its history? Mr. BUTLER. That is doubtless true. I do not know the statistics. It is doubtless true. Of course, there is much more activity in the State of New York, naturally, in securities than there would be in any other States, and I am mentioning the New York fraud law merely because it has been suggested by the opponents of this bill as the model for Federal legislation to take. Senator KEAN. Of course, you take the cases you have mentioned, the case of Kreuger & Toll, the Match King; why, that was certified accountants' work. All the certificates were vertified by certified accountants, for the whole issue. So that you would have issued under this bill a certificate to the house issuing those securities. Mr. BUTLER. This law does not contemplate the issuance of any certificates. Senator KEAN. I mean to say they would have filed one; under this law they would have complied with all of the requirements of this law, the issuing house. Mr. BUTLER. Yes, sir. Senator KEAN. And they would have sold the securities, just the same way that they did. Mr. BUTLER. If it had come to the attention of the Commission, through complaints or otherwise, that the securities were unsound, they would have had the power to revoke immediately. Senator KEAN. Yes; yes, but there was not any such complaint. The securities were certified by some of the best certified accountants in the business and the United States. Mr. BUTLER. In that event the information, either true or inaccurate, would at least have been available to the public. Senator KEAN. Then that has been made public all the time. Senator KEAN. Oh, yes. It was sold on those statements. It was sold on the accountant's certificate. Mr. BUTLER. Well, of course Senator KEAN. Now then, in regard to the Straus Co., why, of course, the Straus Co. only sold their own certificates, and they boasted that they had been in business for 40 years or 50 years or 60 years or whatever it was, and that they had a record that no bond that they had ever sold had defaulted. That was their advertisement. Mr. BUTLER. My associate, Mr. Miller, tells me that he understands that the Kreuger and Toll people became very independent when these statements were asked for, said that they were so important they did not need to make such statements, and refused to give them to the bankers. Senator KEAN. Price-Waterhouse certified to their statements. Mr. MILLER. Yes, sir; I understand they did, to certain general statements, but when the bankers asked for these detailed statements Kreuger and Toll refused to give them. Senator CoSTIGAN. Do you understand that was his invariable practice or that that happened at the end of his life? Senator KEAN. I think that was after the securities had already been sold. Mr. MILLER. And for a short time before I mean just before that. Senator KEAN. Yes; and that was after the securities had been sold. Mr. MILLER. But I believe at the time they were considering selling more in the United States. Senator KEAN. Yes; but that was after the original sale and after the distribution of the securities. The point is that in the original issue certified by Price-Waterhouse-I think I am correct, am I not? Was it not Price-Waterhouse? I think I am correct. At all events, some certified accountants certified to this issue and certified to the statements and certified to the whole thing, which would be in compliance with this law and the English law too. Mr. BUTLER. If the directors had signed that statement they would have been responsible under the responsibility clause. Senator KEAN. That is all right one of them committed suicide and the other has gone to jail now. The CHAIRMAN. I understand Kreuger and Toll got over a million dollars from New York bankers without any security at all. Mr. BUTLER. Of course, Senator Kean, after many centuries of endeavor the legislatures and the courts have been unable to stop unlawful acts positively except by physical restraint, and the best that we can do in an attempt to draw a law of this character is to make is as severe as possible for violators. Senator KEAN. And I am in favor of making it very strong, but I am not in favor of injuring innocent holders. You get all companies, yes; for fraud, yes. Mr. BUTLER. Would you be in favor of preventing suffering to innocent holders to the extent that they would be allowed to pass on worthless securities to the unsuspecting? Senator KEAN. No, but who is going to determine? It is very hard to determine what securities are worthless very often. Mr. BUTLER. Yes, sir, but Senator KEAN (interposing). For instance, I will tell you a case. In 1872 when J. Cook & Co. tried to build the Northern Pacific Road they failed and went all to pieces. They left with Mr. Cook what they thought were worthless securities, and on those worthless securities he became a millionaire. I am just citing that. Mr. BUTLER. The act, of course, makes no attempt to prohibit the sale of speculative securities. Senator KEAN. No, no. But I am talking about what Mr. BUTLER (interposing). It merely attempts to give the public knowledge of what the speculation is. Senator KEAN. I think it is quite right. I am for that. I am for a severe act to put every safeguard you can possibly put around the issuing of securities; but once in the hands of the innocent public I do not think we ought to stop the sale of them. The CHAIRMAN. All right; proceed, Mr. Butler. Mr. BUTLER. I believe there is very little more I have to say at this time. The hour is getting late, but I have been requested to submit to the committee certain amendments. But before going further, I wish to say in connection with the opposition to this bill, that I yesterday discovered in the mails a circular bearing no heading to indicate who issued it and no signature, in other words, an anonymous circular, which is apparently being addressed to investors. I know this one was addressed to an investor, and no doubt others have been sent to banks and brokers. It is a circular opposing the bill and pointing out certain objections. The CHAIRMAN. Do you wish to have that inserted in the record? Mr. BUTLER. What do you think about it? Should it be? The CHAIRMAN. I suppose it may be. It may be relevant. (The circular presented by Mr. Butler is inserted at the end of his remarks.) Mr. BUTLER. The only other suggestion I have relates first to the Senator CoSTIGAN (interposing). Is that circular expressing opposition to the bill? Mr. BUTLER. Yes, sir. Senator CoSTIGAN. Have you replied to the various criticisms contained in it? Mr. BUTLER. There has been reply made. I have not replied to all of them, but reply has been made. The Bar Association of the District of Columbia has also requested that an amendment be inserted which provides that the company shall designate in writing an agent in the city of Washington on whom process may be served. I submit that to the committee for consideration. The CHAIRMAN. Do you recommend it? Mr. BUTLER. I submit it without comment, for the record. (The proposed amendment is as follows:) H.R. 4314, TO BE INSERTED AS SUBSECTION (E) OF SECTION 5, ON PAGE 12 AFTER LINE 18 (e) At the time of filing such statement the applicant shall designate in writing an agent in the city of Washington, District of Columbia, upon whom service of all notices, orders, and processes may be made for and on behalf of such applicant in any proceeding before the Federal Trade Commission, which designation may from time to time be changed by notice in writing filed with the Federal Trade Commission; and thereupon service of all said notices, orders, and processes may be made upon such applicant by leaving a copy thereof with such designated agent at the address given in such designation, with like effect as if made personally upon such applicant, and in default of such designation of such agent, service of any notice, order, or other process in any proceeding before said Federal Trade Commission may be made by posting such notice, order, or process in the office of the secretary of the Federal Trade Commission. Amendment of the Bar Association of the District of Columbia. Mr. BUTLER. The next recommendation that I wish to submit is one relative to the appropriation. Section 18 is the appropriation clause in this bill and merely reads: That the necessary appropriations for the purpose of carrying out the provisions of this act are hereby authorized. The amendment provides that All moneys derived from the fees imposed by the provisions of this act shall be paid into the Treasury to the credit of the Commission and shall be available until expended: Provided, That the amounts so collected shall be used by the Commission for authorized expenditures in carrying out the provisions of this act. Senator ADAMS. That would take out the vague and unlimited appropriation clause then? Mr. BUTLER. Yes, sir. The CHAIRMAN. You think that should go in the bill? Mr. BUTLER. Yes, sir; I think it should. We are all aware that Congress hesitates to enact such a provision as that. The CHAIRMAN. It is not in your reprint. Mr. BUTLER. It is not; no, sir. It was not suggested in time. We all realize that Congress hesitates to enact such a provision, in other words, to appropriate the fees of a unit to the administration expenses of that unit, but it is impossible to anticipate at this time how much work will be involved, and this will enable the Appropriations Committee to make an appropriation which would be of great benefit to the Commission in the administration of this law.. I believe, gentlemen, that is all we have to say, and I thank you for your attention. The CHAIRMAN. We are very much obliged, Mr. Butler. Senator CoSTIGAN. Mr. Butler, before you retire-you will pardon me, Mr. Chairman-may I ask whether you have commented on these sections 6, 7, 8, 9, 11, 12, and 14 so far as you care to do so? Mr. BUTLER. I think I have, sir. Section 6, as I remember, refers to revocation, does it not? Senator CoSTIGAN. Yes; that is right. Mr. BUTLER. Section 7 to judicial review. Section 8 refers to publicity and advertising. There has been very little question on that point. Section 9 refers to a provision that it shall be unlawful to Senator COSTIGAN. Responsibility of directors. Mr. BUTLER. Oh, responsibility of directors. I have discussed. that; yes, sir. Senator CoSTIGAN. Or the persons signing statements. Mr. BUTLER. Yes, sir. Section 10 refers to Senator CoSTIGAN (interposing). Section 11 was the next one. Mr. BUTLER. Section 11 relates to the question of exempt securities. That has been discussed at some length and some amendments made. Section 12 refers to certain exempt transactions. I believe that is all. Senator CoSTIGAN. And 14. Mr. BUTLER. And 14. It is now 10 minutes to 12. I have made no comments on section 14, because I felt that I had taken too much time, but I am greatly interested in it. That is the section that makes it unlawful to transport in interstate commerce any security the issuers of which have not complied with the laws of the State in which it is to be sold. Senator ADAMS. Or to which it is to be taken. Not alone where it is to be sold. Mr. BUTLER. Into which it is to be transported. Yes. That is correct. Of course, that is taking a rather extreme view of it, and I do not imagine the Commission or anyone would prosecute a man who takes securities from New York over to San Francisco when he is simply moving his residence or anything like that. It was to cover the people who were, of course, engaged in the business, and perhaps it might cover your objection, to add in a clause that it would apply only to those engaged in the business of buying and selling securities. Senator KEAN. Well, if he goes over to New York to sell securities, is he not engaged in the business of buying and selling securities? Mr. BUTLER. I do not believe, Senator, that the courts would say that if I took my personal securities up to New York and sold them that I was engaged in the business of selling securities. A regular business might be added there. Senator KEAN. Yes, regular. Mr. BUTLER. Or as a regular practice. Senator KEAN. Now one thing about this clause I would like to call to your attention is that you, as I read it, in it prevent their communicating in regard to an issue of securities before it is registered. Mr. BUTLER. That has been amended, sir. Senator KEAN. What? Mr. BUTLER. Oh, no; I thought you were speaking about section 14 Senator KEAN. Before it is registered. That is, if a railroad company or any other company wishes to sell me securities they cannot |