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The Bankers' Association only asks that some law go through, but one which will not hamper, if we can possibly avoid it, the sale of legitimate securities, that any commission would pass; and we then definitely say that we do not believe that the Utilities Commission could possibly be an effective means of passing on security sales.

The CHAIRMAN. Next Tuesday morning, beginning at 10 o'clock, the committee will take evidence with respect to some specific cases that have relation to the question of securities; so the committee will stand adjourned until 10 o'clock next Tuesday morning.

(Whereupon the subcommittee adjourned to meet on Tuesday, January 20, 1931, at 10 o'clock a. m.)

PREVENTION OF FRAUD IN PROMOTION OR SALE OF

SECURITIES

TUESDAY, JANUARY 20, 1931

UNITED STATES SENATE,

SUBCOMMITTEE OF THE COMMITTEE ON THE

DISTRICT OF COLUMBIA,
Washington, D. C.

The subcommittee met, pursuant to call, at 10 o'clock a. m., in the committee room, Capitol, Senator John J. Blaine, chairman, presiding.

Present: Senators Blaine (chairman), and Kean.

Present also: Oscar H. Brinkman, special counsel for the committee.

Senator BLAINE. The committee will come to order. Mr. Brinkman desires to make a statement, preliminary to the hearing.

STATEMENT OF OSCAR H. BRINKMAN, SPECIAL COUNSEL FOR THE COMMITTEE

Mr. BRINKMAN. At the last meeting of the subcommittee the representative of the Investment Bankers Association of America, and the representative of the local bankers urged the reporting of the Capper bill (S. 1332) rather than the Blaine bill (S. 3491) and stated in effect that the Blaine bill would unduly handicap the legitimate investment bankers, whose securities do not need supervision before they are issued. The experience of the last few years in Washington and throughout the country has demonstrated that hundreds of bond and stock issues have been put on the market by socalled reputable investment firms that have proved disastrous to the investors.

There have been hundreds of defaults on issues put out by the so-called reputable investment firms, and here in Washington we have had examples of that by the dozen.

In examining the situation for the subcommittee I found many local issues put out by men who would have had no difficulty in securing licenses under the bill S. 1332. They were men who stood high socially and in the business world, and who could have secured a license for the issuance of securities and sale of securities without any difficulty at all. Nevertheless, the issues that they did make were issues that never would have been sanctioned under the Blaine bill.

In casting about for illustrations, I decided it would be the best to center attention on two or three issues rather than to attempt to

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cover all issues of a character that would not have been permitted under the Blaine bill. For instance, some of the banks here have organized subsidiary or affiliated companies that have sold stock to customers of the banks, the subsidiary companies being engaged in the discounting of real-estate mortgage notes. The experience of several of these companies has been such that the stockholders are not able to sell their stock, and the companies are being dissolved and wound up; and yet the stock of those companies could have been sold if the Capper bill had been enacted.

The sponsors of the companies were the bankers, themselves, here in Washington.

However, I have not gone into detail on those cases, or other local companies that were sponsored by Government officials and men high in public life, who would have had no difficulty in securing permits for the sale of securities under the bill S. 1332. They could have issued their stocks and the investors would have been defrauded or would have suffered great loss without any interference by the law under the bill S. 1332. As a matter of fact, under that bill there is no limitation that is not possible now under the present law. The district attorney at the present time has practically the same powers of investigation and prosecution that he would have under the bill, S. 1332. He can issue subpoenas for books and records, call people before the grand jury and examine into any scheme that appears fraudulent. The Capper bill would give him no additional authority of any great value, except the power to secure injunctions.

Senator BLAINE. The district attorney now has the power to bring criminal prosecution in cases of fraud?

Mr. BRINKMAN. Yes. He has the full power to stop any fraud now by starting prosecutions.

Senator BLAINE. And the only substantial additional power would be the use of the injunctive process in the Capper bill?

Mr. BRINKMAN. That is correct, so that it is necessary, after examining the local situation, and the situation generally, to have some sort of law that provides for at least a preliminary scanning of securities before they are put on the market. To show the necessity of that I secured some figures from the Wall Street Journal. This was more than a year ago; the issue of December 7, 1929. It showed that during the year 1928, which was a good business year, industrial bonds-not stocks, but industrial bonds-in the amount of $164,000,000 went to default, and in the following year, 1929, the defaults on industrial bonds were $123,000,000. In 1929 there were nearly a half billion dollars of industrial bonds in default. The exact figures were $458,524,245. Bonds, of course, are supposed to be the safest class of securities, and in this same issue is a long list of the bonds that defaulted, many of them put out by reputable or supposedly reputable investment firms of the highest standing. Probably the majority of these defaults are on real-estate mortgage bonds and hotel company bonds. For instance, there are defaults on 54 hotels and apartment houses.

Senator KEAN. That is nothing to what it is going to be this year.

Mr. BRINKMAN. Probably not, Senator. Those were in what might be called good years. The point is that many of these bonds should never have been issued, and probably would not have been issued if there were proper supervision before the securities were put on the market.

Senator KEAN. Of course, as to the hotel bonds, the savings banks and great insurance companies will not buy them. It does not make any difference what they are, from their past experience with hotel bonds it has been such a big risk that the big companies will not buy them.

Mr. BRINKMAN. Nevertheles, these bonds are permitted to be sold here.

Senator KEAN. Have they all gone to default here?

Mr. BRINKMAN. Some of them are headed that way, Senator, here in town.

To get down to two issues that demonstrate the need for supervision, we find the issue of the bonds of the Mayflower Hotel; and that might as well be taken up first, because it demonstrates the need for the law.

Senator BLAINE. I would like to take up first the assessment of several properties in the city, and then follow that with each specific case after the investment is put in.

Mr. BRINKMAN. You want to call the assessor?
Senator BLAINE. Yes; I would like to.

STATEMENT OF WILLIAM P. RICHARDS, ASSESSOR FOR THE DISTRICT OF COLUMBIA

Senator BLAINE. Mr. Richards, you are the assessor for the District of Columbia?

Mr. RICHARDS. I am.

Senator BLAINE. We need not administer the oath, because you have already subscribed to an oath, so we will just go ahead. The first property I would like to have you tell us about is the Mayflower Hotel and addition, the assessment made in 1928. That consists of square 162, lot 88?

Mr. RICHARDS. Lot 88 and lot 91.

Senator KEAN. Mr. Chairman, may I ask two or three questions? Senator BLAINE. Yes.

Senator KEAN. You are the assessor of the District?

Mr. RICHARDS. Yes, sir.

Senator BLAINE. You are the sworn assessor and you have taken your oath that your valuations are the true valuations of property in the District?

Mr. RICHARDS. As near as I am able to make them; full market value as near as I am able to arrive at them.

Senator BLAINE. And you assess on the full valuations according to your best judgment?

Mr. RICHARDS. According to my best judgment, we are somewhere between 90 and 100 per cent. In some cases sales have been above our valuations and in other cases below.

I have here some sales comparisons, which I will put in later, on that I would like to offer in substantiation of what we are trying to do.

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