would merely inform the customers as to what paper was available, and the customer would decide which paper it wished to purchase.

Goldman, Sachs also maintained that in the company, which was the country's fourth largest corporation, there were always sufficient assets which could be liquidated should the need arise, which provided sufficient protection for commercial paper holders.

Goldman, Sachs did take certain steps to disseminate information to customers and at least on two occasions did call in the company's top management for an explanation of what was happening. In addition, customers, if they so desired, could have obtained some information on the company since as a publicly held corporation it was required to make public its financial condition.

III-B. ROLE OF NATIONAL CREDIT OFFICE IN RATING THE COMMERCIAL PAPER OF PENN CENTRAL

The concealment of Penn Central's condition was aided by Goldman, Sachs as described in the preceding section. Another entity, the National Credit Office (NCO), also contributed to the misleading of investors. This section is concerned with the activities of NCO prior to June 21, 1970, the date of bankruptcy, with respect to the commercial paper issued by the Transportation Co. and sold by Goldman, Sachs.

National Credit Office is a wholly owned subsidiary of Dun & Bradstreet, Inc. (D. & B.) which until on or about August 23, 1971, functioned as a rating agency for commercial paper. On August 23, 1971, the commercial paper rating service of NCO was transferred to Moody's Investors Services, Inc., another wholly owned subsidiary of D. & B. which is a registered investment adviser.

NCO had been rating commercial paper since 1920 and prior to 1970 it was essentially the only national commercial paper rating service. NCO was never registered with the Commission as an investment adviser.

As a standard method of operation, NCO would enter into a subscription agreement with the prospective issuer of commercial paper wherein the issuer would agree to pay an annual fee to NCO for appraising commercial peper and pursuant to which NCO agreed to evaluate and assign one of the following classifications to subscriber's (i.e., the issuer's) commercial paper:

Prime. Companies with a net worth or capital funds (net worth plus long-term subordinated loans) in excess of $50 million, which also meet NCO requirements and credit judgment in all other respects.

In the cases of "captive" finance companies, net worth or capital funds in excess of $15 million are required in addition to meeting NCO requirements and credit judgment in all other respects.

Desirable.-Companies with net worth or capital funds (net worth plus longterm subordinated loans) of $25 million to $50 million, which also meet NCO requirements and credit judgment in all other respects.

Satisfactory.-Companies with net worth or capital funds (net worth plus longterm subordinated loans) ranging from approximately $10 million to $25 million, which also meet NCO requirements and credit judgment in all other respects. Fair.-Companies which do not meet a sufficient number of NCO's requirements for the three preceding classifications.

No Rating. Companies which do not meet any NCO requirements for inclusion in the commercial paper market.

Additionally, the issuer agreed to "furnish promptly to NCO pertinent financial reports and other data normally provided line banks, in order that NCO may accurately appraise the commercial paper."

From the foregoing it would appear that NCO's function was to rate the desirability of specific commercial paper. It would also seem apparent that as Mr. Eugene Schenk, the president of NCO, has stated:

NCO is the agency on which virtually all prospective buyers rely for ratings in the commercial paper field. Through the years our authoritative appraisals have been of material assistance in making a market for these short-term notes.

The commercial paper market which NCO had been engaged in as the sole national rating agency had experienced phenomenal growth in the late 1960's, primarily due to the severely tight money markets of that period and the relative ease and privacy of raising short-term debt afforded by this market. As the market grew rapidly, NCO's rating responsibilities grew concomitantly as the following data illustrates: NCO rated the following number of issuers in the respective categories at the indicated date.

Thus in a period of 27 months the number of commercial paper issuers rated by NCO had increased by 388 or 271 percent. Further, by June 1, 1970, this number had increased to 647 issuers.

Included in this group of 615 issuers were Penn Central, King Resources Co. and Four Seasons Nursing Centers of America, Inc. all of which received a "prime" or highest possible rating.1

The relationship between NCO and the Transportation Co. which began in July 1968 was the customary one, described previously, between an issuer of commercial paper and NCO. After the execution of the subscription agreement and presumably after a customary review by NCO, the Transportation Co. was assigned a "prime" rating. This rating was listed by NCO and disseminated to all subscribers to its rating service.

Additionally, certain subscribers could at their election receive special service from NCO which consisted of a more extensive analysis of the issuer. In the case of Penn Central this would consist of excerpts from the latest annual report and interim financial data, if any, published by the issuer. The only other information contained in this report to subscribers not also contained in the annual report or interim financial statements were the rating classification by NCO, the identity of the dealer handling the paper and condensed information regarding the bank lines of credit available to the issuer, names of the lead banks, and amount of available credit, if any, from such banks.

All of the foregoing information plus, in the case of Goldman, Sachs, more detailed and current financial data was also customarily available to the dealer in the paper who also provided similar information to its customers.

Furthermore, the data contained in these NCO releases, except for the specific items heretofore mentioned, does not differ in any ma

1 It is interesting to note that not only was NCO's estimation of the quality of the notes issued by King Resources and Four Seasons deficient, but also that certain of such notes of both entities had a stated maturity of more than 270 days which would not qualify same for the statutory definition of commercial paper and exemption from registration.

terial way from that which Penn Central itself publicly disclosed either in annual or quarterly reports or in press releases which it issued. Moreover, none of these releases contains information as of a date prior to such public release by Penn Central. In fact, most of the data contained in the NCO releases is a mere reprint of Penn Central press releases or excerpts from annual reports.

Preliminary to a specific examination of NCO activities in rating the Transportation Co.'s commercial paper it is necessary to examine the standard or customary operating procedures at NCO during this period.

On September 15, 1969, Rudolph G. Merker was assigned as vice president in charge of NCO's commercial paper rating service. Prior to the assignment of Merker, responsibility for operation of this department had been assigned to Allen Rogers (now deceased.) However, Rogers had only been physically present in NCO's office twice since January 1965, preferring, apparently because of illness, to do his work from his home. The other analysts employed by NCO were located in the Manhattan office and the number of these individuals varied from three to four during this period.

Merker had previously been employed by D & B as manager of the retail and wholesale division of NCO, which apparently is part of the traditional D & B retail credit reporting system. Merker had been employed by NCO for 42 years, primarily in the retail credit reporting area. Merker has no college education and is not a chartered financial analyst. Prior to becoming head of the commercial paper division of NCO, Merker had very limited experience in the commercial paper rating area.

Merker stated that he was to assume Rogers' supervisory responsibilities, but that he did not know why he in particular was selected for this position. The following colloquy is illustrative of the conditions prevalent at NCO during this period:

Question. When you assumed your responsibilities, were you instructed or informed as to what these responsibilities would be specifically, and if so, by whom were you informed?

Answer. No; it was not spelled out.

Question. How were you aware of what your responsibilities and duties would be? Answer. Well, it was just that being a department head, I knew what the responsibilities of a department head had been at NCO.

Question. At the time you assumed your responsibilities, did you have any conversation or meeting with Mr. Rogers to explain what he expected of you and what you expected of him?

Answer. No; not along these lines; no.

Question. How was it determined what responsibilities you would have and Mr. Rogers would have after you assumed your new position?

Answer. Well, he was a consultant and he was guiding me in my new position as director of commercial paper.

Question. At the time you assumed your responsibilities, were there any written policies or operations manual for the different responsibilities in NCO?

Answer. No; nothing in writing.

Question. How did you become familiar with your duties and the manner of discharging them?

Answer. Just by working with them.

Question. With whom?

Answer. With the problems and the reports and inquiries, and the workload of the day; and guiding and calling Allen Rogers and having his long years of knowledge in the department.

It would seem apparent from the foregoing that NCO's commercial paper department was relatively disorganized and of scant importance

in the D. & B. corporate complex as the person selected to manage same is a veteran functionary of limited skills and experience in this area and as he received no training or ongoing guidance in the performance of these duties.

In any event, Merker was responsible for the daily activities of the commercial paper division subject to the overall supervision of Eugene Schenk, president of NCO. Merker described the daily activities of his department as essentially consisting of supervising the activities of a limited number of analysts-three or four during the period from September 1969 to June 1970 who reviewed files, interviewed prospective issuers and responded to inquiries from subscribers to NCO's rating services.

Merker indicated that the analysts in rating the commercial paper would consider the issuer's annual reports and general operating statements to determine the issuer's liquidity. The analyst would individually review the issuer and assign a rating. However, the same analyst would not necessarily continue to be responsible for the rating of a particular issuer or a specific group of issuers. Thus, this responsibility would be rotated among the various analysts depending upon their availability and workloads. Prior to March 1970 there was no individual responsibility, for as Merker states:

*** we didn't have this individual control. It was a case of taking the reports and writing them as they became due to be written but no accounts were assigned to any specific analyst.

It should be noted that the system of rotating responsibility for assigning and/or reviewing the rating of issuers necessarily resulted in varying degrees of familiarity and expertise about such issuers by the NCO analysts.

In the ordinary course of rating commercial paper the issuer would enter into a subscription agreement whereby the issuer would agree to provide NCO with information which would differ in no material way from that information provided by the issuer to its line banks. This information would normally consist of the company's annual fiscal report, quarterly reports, profit-and-loss statements and press releases. It was normal procedure for NCO to agree with the issuer that a specified officer of the company would provide the aforementioned information to NCO and be available to answer inquiries from NCO. Normally, NCO, after having had an opportunity to review the aforementioned material might have occasion to personally contact the financial officers of the issuer for purposes of clarification.

However, it should be noted that NCO would not ordinarily consider whether or not the issuer had conformed to any or all applicable regulatory requirements prior to the issuance of the paper. The reason for this was that NCO was concerned primarily, if not exclusively, with the financial condition of the prospective issuer rather than the regulatory environment in which it might operate.

Moreover, the information that NCO would normally obtain in order to issue or continue a rating would not differ in content, detail or timeliness from that which was publicly available except as Merker stated:

*** bank information, the individual bank lines from an individual bank for that particular issuing company, the amount outstanding in bank lines, amount owing, and the high and low in bank borrowings for a period of time, either three months or it could be 6 months.