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Ripley, William Z., Main Street and Wall Street, The Modern Corporation and

Private Property, Our Corporate Revolution and Its Perils. New York

Times, July 24, 1932. Sackett, Hon. F. M., Exploitations of Finance Which Call for New Line of

Legislative Defense, Trust Companies, November 1929. Sherrod, J., Scapegoats. South Dakota Laws, 1915, chapter 275. Statistical Abstract, 1931, page 295. Statutes 19 and 20, George V, chapter 23. Stoddard, William L., Financial Racketeering, page 199. Thompson, Hon. Huston, Federal Trade Commissioner, American Bar Associa

tion Journal, 9 : 57, March 1923. Uniform Sale of Securities Act, National Conference of Commissioners on

Uniform State Laws.
Wharton on Criminal Law and Procedure, ninth edition, section 31.
World's Work, March 1919.

ACTS AND HEARINGS

on

H.R. 188 (Taylor bill). Hearings before the Committee the Judiciary,

Sixty-sixth Congress, first session. H.R. 2789. Regulation of Stock Ownership in Railroads. page XLIX, testimony

of Interstate Commerce Commissioner Jos. Eastman. H.R. 7215 (67th Cong., 1st sess.; Denison bill). Hearings before Committee on

Interstate Commerce. Paul_V. Keyser, attorney for Investment Bankers Association; Hon. Clarence F. Lea of California; Letters from security com

missioners of 38 States reprinted in hearings. H.R. 8932 (Sabath bill). H.R. 9065 (Bowman bill; 72a Cong., 1st sess.; S. Rept. 412). Hearings before

Committee on the District of Columbia on the Prevention of Fraud in the

Sale of Securities in the District of Columbia. H.R. 9447. H.R. 12898 (La Guardia bills). H.R. 12603 (Volstead bill; 66th Cong., 2d sess.). Hearings pursuant to S.Res. 19,

Seventy-second Congress, first session. (Foreign bonds.) H.Res. 57, H.Res. 59, H.R. 348, H.R. 4604, H.R. 4639, H.R. 4642, H.R. 11509,

H.R. 11510. Bills relating to short selling of securities and commodities and bucket-shop transactions introduced during the first session of the Seventysecond Congress.

FOREIGN LOANS

Walter H. C. Laves, National and International Control of Foreign Investments,

American Political Science Review, August, 1931. George W. Edwards, Government Control of Foreign Investments, American

Economic Review, December 1928. H. Feis, Europe, the World's Banker, 1870–1914. J. Viner, International Finance and Balance of Power Diplomacy, Southwestern

Political and Social Science Quarterly (IX-1); Political Aspects of International

Finance, Journal of Business, I, 141. B. Williams, Capital Embargoes, Political Science Quarterly, June 1928. Walter H. Č. Laves, German Government Influence on Foreign Investments. L. H. Jenks, Migration of British Capital to 1875. E. M. Borchard, Diplomatic Protection of Citizens Abroad. C. K. Hobson, Export of Capital. H. Lowenfeld, All About Investments. Arthur N. Young, Department of State and Foreign Loans, New York Times,

August 27, 1924. John Foster Dulles, Our Foreign Loan Policy, Foreign Affairs, October 1926,

page 34.

TABLE OF CASES

Alabama and New Orleans Transport Co. v. Doyle, 210 Fed. 173.
Alpha Portland Cement Co. v. Commonwealth, 268 U.S. 203.
American Steel & Wire Co. v. Speed, 192 U.S. 500.
Binderup v. Pathe Exchange, 263 U.S. 291.
Blue Sky cases-Hall v. Geiger-Jones, Caldwell v. Sioux Falls Stock Yards Co.,

Merrick v. Halsey, 242 U.S. 539–568.
Book Co. v. Pigg, 217 U.S. 91; 30 Sup.Ct. 481; 54 L.Ed. 578; 27 L.R.A. 493; 18

Ann. Cas. 1105.

Bowditch v. New England Mutual Insurance Co., 141 Mass. 292.
Bracey v. Darst, 218 Fed. 282.
Brennan v. Titusville, 153 U.S. 289.
Broom case-Rearick v. Penn., 203 U.S. 507.
Brown v. Maryland, 12 Wheat. 419; 6 L.Ed. 678.
Browning v. Waycross, 233 U.S. 16.
Caldwell v. Sioux Falls Stock Yards Co., 242 U.S. 559.
Cashin v. Pliter, 168 Mich. 386.
Chy Lung v. Freeman, 92 U.S. 275; 23 L.Ed. 550.
Clark Distilling Co. v. Western Maryland Railroad, 242 U.S. 311.
Coffey v. United States, 116 U.S. 436.
Compton Co., Wm. R. v. Allen, 216 Fed. 537.
Crenshaw v. Arkansas, 227 U.S. 150.
Dickerson v. Northern Trust Co., 176 U.S. 181.
Duke v. Olson, 240 Ill. App. 198.
Edward v. Ioor, 205 Mich. 617.
Ex parte Hoffstot, 180 Fed. 240; affirmed 218 U.S. 665.
Ex parte C. H. Taylor, 66 South, 292.
Gibbons v. Ogden, 9 Wheat. 1; 6 L.Ed. 23.
Grain case Shafer v. Farmer's Grain Co., 268 U.S. 189.
Hall v. Geiger-Jones, 242 U.S. 539; 230 Fed. 233.
Hanover National Bank v. Moyses, 186 U.S. 181.
Hosiery case-Real Silk Mills v. Portland, 268 U.S. 325.
Hyatt v. People, 188 U.S. 691; affirming 172 N.Y. 176.
Ice case-Knickerbocker Ice Co. v. Stewart, 253 U.S. 149.
Insurance casePaul v. Virginia, 8 Wall. 168 (decided in 1868).
In re Rahrer, 140 U.S. 545.
In re Suchow's Estate (Wis.) 212 N.W. 280.
Jones v. Leonard, 50 Iowa, 106.
Knickerbocker Ice Co. v. Stewart, 253 U.S. 149.
Lemke v. Farmer's Grain Co., 258 U.S. 50.
Lightning Rod case- --Browning v. Waycross, 233 U.S. 16.
Lottery cases--188 U.S. 321; 23 Sup.Ct., 321;

47 L.Ed. 492. Mail Order Cases-Ex parte Hoffstot, 180 Fed. 240; affirmed 218 U.S. 665;

Hyatt v. People, 188 U.S. 691; 172 N.Y. 176.
Merrick v. Halsey & Co., 242 U.S. 568.
Original Package Case_In re Rahrer, 140 U.S. 545.
Pandolfo v. U.Š., 286 U.S. 8.
Paul v. Virginia, 8 Wall., 168 (decided in 1868).
Public Utilities Commission of Rhode Island v. Attleboro Steam & Electric Co.,

273 U.S. 83.
Railroad Co. v. Husen, 95 U.S. 465; 24 L. Ed. 527.
Real Silk Mills v. Portland, 268 U.S. 325.
Rearick v. Penn, 203 U.S. 507.
Robbins v. Shelby Taxing District, 120 U.S. 489.
Savings Bank of San Diego v. Burns, 104 Cal. 473.
Shafer v. Farmer's Grain Co., 268 U.S. 189.
Stafford v. Wallace, 258 U.S. 495.
Stock Quotations case Western Union Tel. Co. v. Foster, 247 U.S. 105.
Stone v. United States, 167 U.S. 178.
Telegraph cases:

Telegraph Co. v. Pendleton, 122 U.S. 347; 7 Sup. Ct. 1126; 30 L. Ed. 1187.
Telegraph Co. v. Telegraph Co., 92 U.S. 1'; 96 U.S. 1; 24 L' Ed. 708.

Telegraph Co. v. Texas, 105 U.S. 460. Textbook case-Book Co. v. Pigg, 217 U.S. 91; 30 Sup. Ct. 481; 54 L. Ed. 678;

27 L.R.A. 493; 18 Ann. Cas. 1105.
United States v. Donaldson-Shultz Co., 148 Fed. 581.
Weeks v. United States, 245 U.S. 618.
West v. Kansas Co., 221 U.S. 229; 31 Sup. Ct. 564; 55 L. Ed. 716; 35 L.R.A. (N.

S.) 1193.
Western Union Telegraph Co. v. Foster, 247 U.S. 105.
White, Potter & Page Mfg. Co. v. Pettes Importing Co., 30 Fed. 864.
Wilkes v. Dinsman, 7 How. 89.
Wire Co. case -American Steel & Wire Co. v. Speed, 192 U.S. 500.
Woodruff v. Parkham, 8 Wall. 123.
Youngstown Sheet & Tube v. Bethlehem Steel Co.

1

INTRODUCTION

The American people have enjoyed a degree of well-being and comfort unknown in history before; their material advantages and wealth have steadily increased throughout the history of the country. The per capita wealth of the average American increased from $514 in 1860, at the beginning of the Civil War, to $2,918 in 1922, four years after the end of the World War, while the best available estimate indicates an annual income of $3,000 for every family in the United States. Both the income and wealth of the American people have been reduced since October 1929, when the decline in the price of stocks brought forcibly to the attention of a wide public the reaction in business and industry which added the United States to that large group of countries in the throes of an economic depression even though the economic advantage of the American people continues unchallenged.

Since the Biblical days of Job times of depression have been considered especially appropriate for reflection and readjustment. If the present depths of misery and economic losses are to be counterbalanced by improvements, epoch-making developments may well be expected. The people generally, both in the United States and throughout the world, have suffered through no fault of their own. They had no part in bringing about the depression which is usually ascribed primarily to the World War. Their only mistake might be said to be a too literal adoption of the principle of free spending and investing.

The wide distribution of wealth in the United States has resulted in a large number of investors among the people. The days of restricted ownership of stock are gone forever, many corporations counting their stockholders in the hundreds of thousands and bankers and promoters offering their securities to the general public. There are more than 800,000 individual owners of stocks of the 160 class I railroads of the United States.

In the 13 years from 1919 to 1931, $50,000,000,000 o worth of new stocks and bonds were issued in the United States, of which nearly twenty billions were stocks. Unfortunately, a considerable portion of this $50,000,000,000 was invested in securities of little intrinsic value and in some cases of no value whatever.

Since the World War, partly as a result of the wide distribution of bonds among people who had never owned securities before, the number of questionable stock and bond issues has increased markedly.6 In a report made to Congress under date of December 2, 1918, the Capital Issues Committee of the Federal Government stated:

At no time has the obligation been so definitely placed upon the Government to protect its public from financial exploitations by reckless or unscrupulous promoters. The field has been greatly enlarged by the wide distribution of Liberty bonds, and the purveyor of stocks and bonds is no longer put to the necessity of seeking out a select list of prospective purchasers with money to invest. He now has the entire American public, and the transaction becomes one of persuasion to trade a Government bond bearing a low rate of interest for stocks or bonds baited with promise of high rate of return and prospect of sudden riches."

Because of the wide extent of the operations of swindlers who were urging the holders of Liberty bonds to exchange them for worthless securities, President Wilson recommended in his message to Congress on August 8, 1919, the passage of a Federal Securities Act which had been proposed by the Capital Issues Committee:

“May I not add that there is a bill now pending before Congress which, if passed, would do much to stop speculation and to prevent the fraudulent methods of promotion by which our people are annually fleeced of many millions of hardearned money.

1 E. Dana Durand, Introduction of American Industry and Commerce. 2 Statistical Abstract, 1931, p. 295. • Edwin F. Gay, The Great Depression, Foreign Affairs, July 1932. * American Telephone & Telegraph Co. stock is owned by 665,000 individuals; General Motors Corporation stock by 263,528; United States Steel stock by 187,409. According to the New York Times of July 7, 1932, “In the first official classification which it has made of its common-stock holders, the United States Steel Corporation showed, in a statement issued yesterday, that 80,309 of its 187,409 holders of common stock own less than 10 shares each. - Regulation of Stock Ownership in Railroads, U.S.H.R. 2789, p. XLIX.

The United States Legion of Capitalists, by Joseph S. McCoy. American Bankers Journal, February 1927, pp. 559-560, 626-628.

The Diffusion of Stock Ownership in the United States, Gardiner C. Means, Quarterly Journal of Economics, August 1930, pp. 561-600.

Commercial and Financial Chronicle, Monthly Statements.
6 Capital Issues Committee Report to Congress Dec. 2, 1918, Public Document No. 1485.

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*

*

The author of a recent book entitled “Financial Racketeering”? writes as follows:

A 5-foot bookshelf could without great labor be filled with scandalous volumes if some bold writer should essay to docket and report the cases of all the financial swindles which occurred in the United States in, for example, the last 5 calendar years.”

In a statement before the Committee on the Judiciary of the United States House of Representatives, recommending the passage of a Federal blue sky law of which he was the author, Congressman E. T. Taylor, of Colorado, said: 8

“During the war and ever since, there has been a deluge of mushroom, getrich-quick corporations organized all over the country for the purpose principally of selling stock. Nearly every State has produced some of them. I learned that something like $500,000,000 of the wildest kind of speculation stock was being flooded over the country every year, and a very large part of it utterly worthless. From every State I think, except California, when these commissions (blue sky) expressed an opinion they urged the passage of a Federal law, and stated the reasons why the State laws were insufficient.

The report of the United States Senate Committee on the District of Columbia on the Prevention of Fraud in Promotion or Sale of Securities in the District of Columbia, contained the following statement: 9

“The subcommittee developed the fact that within the past 6 or 7 years there have been issued in or sold from the District a great quantity of these securities, largely consisting of mortgage bonds or notes, in an amount approximating $100,000,000—a very considerable portion of which are of highly dubious value, and in some cases utterly worthless.

“Many of these securities have been distributed to women as safe investments for insurance and savings funds, and to a large class of people who have no detailed knowledge of investment principles.

“The subcommittee discovered in such sales gross misrepresentation of values and concealment of essential facts, as to value amounting to fraud, criminal in character.

“In many instances, investors were induced to exchange hard-earned sayings of a lifetime for ‘securities' which were not worth the paper on which they were engraved or printed.”

In discussing a blue sky law for the District of Columbia, Congressman Daniel A. Reed, of New York, made the following statement in the House of Representatives: 10

A group of financial bandits, actuated by selfish motives and with no regard for the welfare of the Nation have driven the public into a frenzy of fear and despair for no other purpose than to profit by it. Recent disclosures in financial circles have shaken public confidence to its very foundations. The financial pirates, who have fleeced the public out of billions of dollars, now hope to obscure their iniquities by directing public attention elsewhere."

Estimates of the amount of questionable securities sold to the American public each year vary considerably because of the difficulty of collecting accurate statistics. It is evident, however, that a considerable percentage of new capital issues are fraudulent.

The entrance of the general public, untrained in business principles and perplexed by the magnitude of modern business organizations, into the investment field has brought about some complications of a major character. “Public policy demands that the savings of the poor be secure, because in hard times these savings are the first line of defense against destitution, doles, communist propaganda and many other painful and dangerous effects.” 11

The doctrine of caveat emptor (let the buyer beware) of the old common law is not applicable to modern conditions. 12 Both the Federal and State Governments protect the public from the unscrupulous by regulating the sale of many articles. As indicated by the common law, from time immemorial, persons with funds to invest were considered capable of determining the soundness of business ventures but recent developments in the field of business have been so rapid and so gigantic that even persons trained in one field are incapable of determining values in a related business. Even trained accountants are unable to determine, without detailed investigation, the intrinsic value of securities of corporations whose property and activities extend into many States and foreign countries. Numerous court decisions have emphasized the need for clear, simple financial statements which may be understood by the layman.13 Banks and bond houses offering securities to the public have felt the need of protecting themselves against loss by including in their advertisements of securities that, while they believe the statements of the issuing company to be correct, they do not guarantee their accuracy.14

7 William L. Stoddard, p. 199. | Hearing before the Committee on the Judiciary, U.S. House of Representatives, 66th Cong., 1st sess., on H.R. 188, p. 7. • S.Rept. 412. 10 Congressional Record, May 23, 1932, p. 11262. 11 The Irrepressible Conflict, p. 28, David C. Coyle. 12 London Fiancial News, May 18, 1932, The Law and Folding Companies.

Nearly all of the States of the Union have passed laws regulating the sale of securities. 15 These laws have resulted in the suppression of many fraudulent securities and have saved the public untold sums of money.

There are many differences in the laws, however, and until some general Federal law is enacted unscrupulous persons may continue their dishonest practices in one State or another.16

The rapid growth of investment trusts, industrial holding companies, and similar financial supercorporations has accentuated the need for some Federal legislation of a general character which, while in no way interfering, with sound honest financing of business enterprises, will protect the investing public.17 Although such protection will require legislation somewhat divergent from laws now on the statute books there is ample precedence for such a measure 18

The enactment of the Sherman Act to prevent agreements in restraint of trade by gigantic corporations, the various transportation acts to hold in check the railroad systems of the country and secure equality of benefits to all users, the regulation of banks and savings institutions by such measures as the McFadden Act limiting branches to the municipal homes of parent corporations, the regulation of public utilities, all have had to be added to the law to meet changing conditions.19 According to two recent writers,20 the translation of perhaps two thirds of the industrial wealth of the country from individual ownership to ownership by the large, publicly financed corporations vitally changes the lives of property owners, the lives of workers, and the methods of property tenure.

LEGAL ASPECTS OF BLUE SKY LAWS

Early abuses of corporate privileges.—The abuse of the privileges and immunities created by incorporation, in using them to mulct an uninformed public through the sale of shares in enterprises of little or no value, is by no means of recent origin though the methods employed have undergone considerable change and the magnitude of the operations has increased many times. As early as 1720 the prospectus of the South Sea boom in England advertised a company organized ‘for carrying on an undertaking of great advantage but nobody to know what it is”.21 More than 200 years later, supposedly sophisticated Americans are wasting billions of dollars in the purchase of shares in enterprises with no more information concerning the important facts than those earlier British “investors” had concerning the South Sea project.

13 I am further of opinion that directors, shareholders, and incidentally, courts, should have a clear, explicit presentation of the accounting facts relating to a corporation in form and language, which in accord. ance with common sense, will enable the ordinary reader without hiring a technical interpreter, to determine the actual state of the company's business, prospects, and value."--Common Pleas Judge David G. Jenkins, Youngstown, Ohio; Youngstown Sheet & Tube Co, v. Bethlehem Steel Co. National Petroleum News, Jan. 7, 1931. 14 Senator Hiram Johnson, Congressional Record, Mar. 15, 1932.

18 Manual of Securities Laws and Service, Leonard L. Cowan. Uniform Sales of Securities Act drafted by National Conference on State Laws. See prefatory note, p. 3. Blue Sky Laws, Reed and Washburn.

*16 Congressman E. T. Taylor, of Colorado: Hearings before the Committee on the Judiciary on HR, 188, proposed Federal blue sky law, p. 7.

11 The investment trust and those kindred financial organizations usually grouped under that headholding and finance and security companies of all sorts—are reaching out in all directions for the posession of industrial and financial securities and they will, unless checked, take American industry out of the hands of its industrial leaders and put it into the hands of promotors.-- John T. Flynn, Investment Trusts Gone Wrong, p. 11. Regulation of Stock Ownership in Railroads, H.Rept. 2789, p. 10, testimony of Interstate Commerce Commissioner Joseph B. Eastman.

18 Felix Frankfurter, The Public and its Government, pp. 49-51.

19 F. M. Sackett, Senator from Kentucky, Exploitations of Finance Which Call for New Line of Legis. lative Defense, Trust Companies, November 1929.

20 Berle and Means, The Modern Corporation and Private Property.

21 Finlason's Report of the Case of Twycross v. Grant, published in London during 1877, contains the following interesting comments: “When, half a century ago, the principle of association was largely applied to commercial enterprises, it became, as all good things are liable to be, grossly and lamentably abused, and the first fault was excess.

'However absurd', observes the historian, 'many of these schemes were, the shares of some

enormous premiums, especially in foreign mines,' • People had so much money they did not know what to do with it and so fell an easy prey to artful schemes.'

It seems incredible, but such was the fatuity of a reformed Parliament in dealing with such subjects, the Joint Stock Companies Act positively allowed a company to be formed, registered, and incorporated by the mere subscription of seven persons for a single share each”. Blue Sky Laws. R. R. Reed, p. 1.

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