INVESTIGATION INTO SMALL BUSINESS INVESTMENT COMPANIES WEDNESDAY, AUGUST 3, 1966 U.S. SENATE, PERMANENT SUBCOMMITTEE ON INVESTIGATIONS OF THE COMMITTEE ON GOVERNMENT OPERATIONS, Washington, D.C. The subcommittee met at 10:10 a.m., in room 3302, New Senate Office Building, pursuant to Senate Resolution 183, agreed to February 14, 1966, Senator Fred R. Harris (acting chairman of the subcommittee) presiding. Members of the subcommittee present: Senator Fred R. Harris, Democrat, Oklahoma; Senator John L. McClellan, Democrat, Arkansas; Senator Karl E. Mundt, Republican, South Dakota; Senator Jacob K. Javits, Republican, New York; also present Jerome S. Adlerman, general counsel; Philip W. Morgan, chief counsel to the minority; John J. Walsh, investigator; Ralph Dunavant, GAO staff; Ruth Y. Watt, chief clerk. Senator HARRIS. The subcommittee will be in order. (Members of the subcommittee present at time of convening: Senators Harris and McClellan.) Senator HARRIS. Let the record show that Senator McClellan is present this morning. He is in the anteroom at the moment, but we will proceed. We will first call Mr. John J. Walsh. TESTIMONY OF JOHN J. WALSH-Resumed Senator HARRIS. You are the same John J. Walsh that appeared yesterday before the subcommittee? Mr. WALSH. Yes, sir. Senator HARRIS. And you understand that you are still under oath in these proceedings? Mr. WALSH. Yes, sir. Senator HARRIS. Mr. Walsh, in the course of your investigation of small business investment companies for the subcommittee, did you investigate a company known as Putnam Investors? Mr. WALSH. Yes, sir; I did. Senator HARRIS. Will you proceed to tell the subcommittee what you found in regard to that company? Mr. WALSH. Our investigation was started based on information that we received in an investigation we conducted in Crown Savings 111 Bank, Newport News, Va., a bank which has failed and is now being liquidated by the Federal Deposit Insurance Corporation. Our investigation was started in August of 1965, and at that time Putnam Investors had pending a request for $100,000 additional Government money from the SBA and was also in the process of merging with another SBIC. Our initial inquiry showed indications of self-dealing existing in this company. We furnished this information to the Small Business Administration. The Small Business Administration denied the loan request and started a full investigation of its own. As a result of this action, the entire Government advance of $400,000 to Putnam Investors was ultimately repaid. Senator HARRIS. Is this the company that Mr. Boutin indicated yesterday had been required to make repayment, from after notice from the subcommittee staff? Mr. WALSH. Yes, sir; it is. Senator, I would like to introduce for the record at this time a copy of a letter dated February 16, 1966, from the Small Business Administration to the president of Putnam Investors, in which demand was made for the return of this money. Senator HARRIS. Where did you get this letter? Mr. WALSH. I received this letter from the Small Business Administration. Senator HARRIS. Very well. We will have them identify the letter later when they are testifying here, but for the time being, it will be admitted into the record and marked "Exhibit 13." (Document referred to marked "Exhibit No. 13" for reference and may be found in the files of the subcommittee.) Mr. WALSH. To go into more detail concerning the history of Putnam Investors, Senator, I would like to ask also that we do as we did yesterday: that I will testify as to the facts and then submit the information, the documentation in bulk, if that is satisfactory. Senator HARRIS. Very well. In order to save time that will be the procedure we will follow. Mr. WALSH. The proposal to operate as a small business investment company was received by the Small Business Administration January 27, 1961, from Putnam Investors, Inc. The owners, officers and directors shown on this proposal were Mrs. Amy T. Finneran, president and director, with a 331% percent interest. Our investigation showed that Mrs. Finneran was actually acting for her husband, Francis J. Finneran. Louis C. Huck, Jr., was listed as vice president, secretary, and director, with a one-third interest; and Curtis L. Ivey was listed as treasurer and director, with a third interest. Private capital to be contributed by the above was $150,900. Approval was granted by the Small Business Administration, and a license as an SBIC was issued September 26, 1961. Putnam Investors received Government funds on the following dates: On October 19, 1961, $150,000. On March 12, 1962, $150,000. Senator HARRIS. Now, this might be easier. You have a copy of the proposal to which you have just testified, received by SBA January 27, 1961? Mr. WALSH. Yes, sir. Senator HARRIS. Was this secured by you from SBA? Mr. WALSH. Yes, sir. Senator HARRIS. And it is a true copy of the original? Mr. WALSH. It is a copy of an excerpt. It is not the complete proposal, but a copy of an excerpt. Senator HARRIS. It is correct, is it? It is a true excerpting of the proposal? Mr. WALSH. Yes, sir. Senator HARRIS. Without objection, that will be admitted into evidence as exhibit 14. (Document referred to marked "Exhibit No. 14" for reference and may be found in the files of the subcommittee.) Senator HARRIS. You may proceed. Mr. WALSH. In July of 1962 the SBA was advised that the owners of Putnam contributed an additional $101,000 in private capital. Senator HARRIS. Was that in writing? Mr. WALSH. This is an amendment received July 17. This is listed as SP-18. Senator HARRIS. Without objection, that will be admitted as exhibits 15 A and B. (Documents referred to marked "Exhibits Nos. 15A and 15B" for reference and may be found in the files of the subcommittee.) Mr. WALSH. On April 3, 1963, SBA received an amendment which indicated that Amy T. Finneran now owned 94 percent of the Putnam stock, and that Huck and Ivey had transferred their shares to Amy Finneran, with the exception of 50 shares each which they held. Although this document indicated that the stock would not be used as collateral, our investigations showed that it had actually been pledged previously in February of 1963 by Francis J. Finneran for a personal loan of $150,000 which he obtained at the District of Columbia National Bank in Washington, D.C. Senator HARRIS. Amy T. Finneran was the wife of Francis J. Finneran? Mr. WALSH. Yes, sir; that is correct. Senator HARRIS. That April 3, 1963, amendment is in writing is it? Do you have it with you? Mr. WALSH. Yes, sir. I have a copy here listed as SP-4. Senator HARRIS. That will be admitted into evidence as exhibit 16. (Document referred to marked "Exhibit No. 16" for reference and may be found in the files of the subcommittee.) Mr. ADLERMAN. Is the language used as follows: It is not presently contemplated that any of the shares of the stock of the proposed operation will be made subject to any loan or pledge incident to the purchase thereof. Mr. WALSH. Yes, sir; that is correct. Mr. ADLERMAN. At that time was the stock pledged? Mr. WALSH. The stock was pledged in February of 1963 for the personal loan of Mr. Finneran at the District of Columbia National Bank. Mr. ADLERMAN. And at the time that this statement was made in their amendment, was it already pledged? Mr. WALSH. Yes, sir. I would like to offer also at this time a copy of a financial statement which Mr. Finneran submitted to the District of Columbia National Bank in connection with his application for credit at that institution. Senator HARRIS. Have you examined the original of that document at the bank yourself? Mr. WALSH. No, this was furnished to me by the bank. Senator HARRIS. That will be admitted into evidence as exhibit 17. (Document referred to marked "Exhibit No. 17" for reference and may be found in the files of the subcommittee.) Mr. WALSH. The exhibit consists of a statement of financial condition dated June 2, 1962, and also a statement of financial condition November 30, 1964. The net worth of Mr. Finneran as shown on the June financial statement is listed as $1,300,000. The net worth on the November 30, 1964, statement is $1,700,000. Senator HARRIS. That will be exhibit 17. Mr. WALSH. Our investigation showed that the records of Putnam Investors contained documents to the effect that the stock of Huck and Ivey, which was valued at over $83,000 each, for each one, was transferred to Finneran in February of 1963 in settlement of a loan of $10,000, which is considerably less than the amount of the actual value of the stock. It was $10,000 each. The documentation on this transaction is listed as SP-5. Senator HARRIS. What does it consist of? Mr. WALSH. The documentation consists of two letters signed by Mr. Huck and Mr. Ivey in which they acknowledge that they are transferring the stock at a substantial reduction of the original cost. Senator HARRIS. Without objection, that will be received in the record as exhibits 18 A, B, and C. (Documents referred to marked "Exhibits Nos. 18A, 18B, and 18C" for reference and may be found in the files of the subcommittee.) Senator HARRIS. In other words, Mr. Walsh, while they claimed this stock to be worth $83,333.33-that means the original cost of all shares for each man-the sale was actually in the amount of $10,000 to cancel a loan; is that correct? Mr. WALSH. Our investigation showed that no actual cash passed hands in connection with this. It was a cancellation transaction. Senator HARRIS. Did you find that Mr. Huck and Mr. Ivey had signed checks of the Putnam Co. ? Mr. WALSH. Yes. We found that even though this transaction indicates that Mr. Huck and Mr. Ivey were out of the management and operation of Putnam Investors, that they continued to sign checks as late as June of 1963, which was several months after this. Senator HARRIS. Do you have in your possession copies of any such checks? Mr. WALSH. Yes, sir. That is SP-6. Senator HARRIS. SP-6, then, is a copy of a check signed by whom? Mr. WALSH. It is a copy of two checks, one dated June 9, 1963, on the Putnam Investors' account at the Connecticut National Bank, |