signed by Curtis L. Ivey and L. C. Huck, payable to Coordinated Interiors, and another check dated June 22, 1963, on the Putnam account at Connecticut National Bank, signed by Curtis L. Ivey and L. C. Huck, again payable to Coordinated Interiors.

Senator HARRIS. Without objection, those two checks will be received into evidence together and marked as exhibit No. 19.

(Documents referred to marked "Exhibit No. 19" for reference and may be found in the files of the subcommittee.)

Senator HARRIS. In the process of your investigation, Mr. Walsh, of Putnam Investors, Inc., and the individuals who organized the company, did you learn how the capital for the formation of the company was obtained?

Mr. WALSH. Yes, sir; I did.

Senator HARRIS. Now, did you prepare in graphic form the information for presentation here?

Mr. WALSH. Yes, sir; I have.

Senator HARRIS. Will you describe this chart which you have presented? What does it purport to show?

Mr. WALSH. This is a chart which was prepared under my direction, and we have entitled it "Putnam Bootstrap Financing."

I might say that we define "bootstrap financing" as an operation where the private capital for an SBIC consists entirely of borrowed money where the people put in no unencumbered financing of their

own.

Senator HARRIS. This chart is true and correct?

Mr. WALSH. Yes, sir.

Senator HARRIS. And prepared under your direction and control? Mr. WALSH. Yes, sir.

Senator HARRIS. Very well. The chart will be admitted into evidence as Exhibit 20.

(Document referred to marked "Exhibit No. 20" for reference and will be found in the appendix on p. 286.)

Senator HARRIS. You may proceed with your testimony concerning where this money came from, referring to the chart as necessary. Mr. WALSH. Our investigation showed that the initial capital which was invested in Putnam Investors was $150,900. The sources of these funds were personal loans by Messrs. Finneran, Huck & Ivey, at the Connecticut National Bank, and the City Trust Co. of Bridgeport, Conn.

The personal loan of Finneran, Huck & Ivey at the Connecticut National Bank gave proceeds of $72,600. It was a $75,000 face amount, and 1-year term, and the proceeds were $72,000.

The loan at the City Trust Co. was $79,000 and the proceeds were $78.300.

This money was the source of the capital with which the operators of Putnam Investors began the business.

Mr. ADLERMAN. Mr. Walsh, in examining the loans that had been made from both the Connecticut National Bank and the City Trust Co. of Bridgeport, Conn., did you find that some of these loans were locked in and could not be used, that there were letters of exchange between the borrowers and the bank which said that these deposits had to be kept in the bank?

67-788-66- -9

Mr. WALSH. Yes, sir. We found a letter from Mr. Huck to the City Trust Co. dated August 28, 1961, in which he agreed for Putnam Investors that a minimum balance of $75,000 will be maintained in the City Trust Co. for the duration of this loan.

Senator MCCLELLAN. Do I understand by that that although they borrowed $79,000, $75,000 had to remain on deposit at all times? Mr. WALSH. Yes, sir. May I read the exact words from the letter? They are:

We agree that until the loan is paid, we will maintain a minimum balance of $75,000 and that the City Trust Co. will become a principal depository of the corporation.

Senator MCCLELLAN. So they really got a net of $3,300 for operating purposes, in connection with their company.

Mr. WALSH. Sir, they didn't even get that. They had to maintain a $75,000 balance, and they only had a $72,000 deposit in their account. Senator MCCLELLAN. I was looking at the other one here. That is $78,300.

Mr. ADLERMAN. Will you explain that?

Mr. WALSH. There was a subsequent letter dated November 14, 1961, again signed by Mr. Huck, and I will read a sentence. This was in connection with a renewal loan:

We agree to maintain an account of at least $80,000 during the term of this note.

This letter was in reply to a letter from the City Trust Co. in which the City Trust Co. asked: "Will you kindly send the letter stating that $80,000 will remain on deposit in Putnam Investors, Inc., account for the duration of the loan?"

Senator MCCLELLAN. This actually is tantamount, then, to the Federal Government making all of the investment for the operation of the company; whereas, the other was, in effect, a sham as to assets that were actually available to the company.

Mr. WALSH. Yes, sir.

Mr. ADLERMAN. This is on one of the two bank accounts. The other bank accounts did not have that restriction on them?

Senator MCCLELLAN. I am talking about this, this particular bank. None of the money that was borrowed from it, that was represented as capital on the basis of which to induce the Government to make an investment-none of it was actually available for the operation of the company.

Mr. WALSH. That is right.

Senator MCCLELLAN. So it was a sham and a pretext and, in effect, a fraud upon the Government.

Mr. WALSH. Yes, sir.

Senator MCCLELLAN. To represent to the Small Business Administration that they had this much in assets available.

Mr. WALSH. Yes, sir.

Senator MCCLELLAN. For the operation of the company. Actually, it was not available, and it was only a paper asset, because it did not show the corresponding liability that they had to keep this $75,000 in the bank.

Mr. WALSH. That is right. For the record, the documentation on this is SP-15.

Senator HARRIS. Let these documents which have been testified to concerning these loans be marked exhibit 21A through 21F. Without objection, they will be admitted into evidence.

(Documents referred to marked "Exhibits Nos. 21A through 21F” for reference and will be found in the Appendix on pp. 286-289.)

Senator HARRIS. I want to call your attention to this City Trust Co. letter, among these exhibits, dated September 12, 1961, Mr. Walsh. I wonder if you would just read the body of that letter? First state to whom it was addressed.

Mr. WALSH. This is a letter dated September 12, 1961, addressed to the Small Business Investment Corp., Washington, D.C.

Gentlemen: This is to certify that Putnam Investors, Inc., a Connecticut corporation, having its principal place of business in Westport, Connecticut, has on deposit with us as of this date $78,330.69. These funds have been on deposit since August 30th of this year.

Senator HARRIS. It is signed by whom?

Mr. WALSH. By H. Raymond Sturdevant, assistant treasurer.

Senator HARRIS. Was this among the documents that these men furnished to SBA in order to receive the charter for Putnam Investors, Inc.?

Mr. WALSH. Yes, sir; it was.

Senator HARRIS. Actually, that did not state the true situation as of that time, did it, since those funds were restricted and could not be available freely as capital to the company?

Mr. WALSH. Yes, sir.

Senator HARRIS. Very well.

Mr. WALSH. To continue, in the third column there are two notations there concerning the Government capital. The Government supplied $300,000 on two dates, October 19, 1961, and March 12, 1962.

Now, this was the maximum amount that the SBIC could obtain based upon a private capital of $150,000, which for the record they indicated they had as of that time.

Senator HARRIS. For the first transaction there, these men, Finneran, Huck, and Ivey, with borrowed capital of $150,900, only had been able to secure Government capital of $300,000 in two transactions under the two sections of the program.

Mr. WALSH. Yes, sir.

Senator MCCLELLAN. They did not have available to them at the time that they made those representations and secured this $300,000 from the Government $150,000 in assets available for their operation of the company as they represented.

Mr. WALSH. No, sir.

Senator MCCLELLAN. They only had about $75,000; is that right? Mr. WALSH. That is right.

Senator MCCLELLAN. Instead of $150,000.

Mr. WALSH. That is right.

Senator HARRIS. In the next item, did they secure or represent to SBA that they had secured additional capital for the company at a later time?

Mr. WALSH. Yes. In July of 1962, in an exhibit which we have already put in the record, SBA was advised that an additional capital of over $100,000 had been invested by the operators of this company.

Our investigation showed that this actually came from two sources. The first was another personal loan of the three-Messrs. Finneran, Huck, and Ivey-from the County National Bank of Mineola, N.Y. That was a $100,000 loan, and the proceeds, $92,000, was made available to Putnam Investors.

Senator HARRIS. Was there any restriction on that deposit?

Mr. WALSH. None that we know of.

Senator HARRIS. Now, the exhibit you have referred to, for the notification of SBA, is in the exhibit 21 series that we have already admitted.

What does it consist of? Is it a letter to SBA?

Mr. WALSH. It was an amendment to the charter application which showed that an additional capital injection, I believe they call it, had been made of $100,000.

Senator HARRIS. Where did the additional funds you show on the chart, exhibit 20, come from then?

Mr. WALSH. The $92,000 came from the county bank. We made an examination of Putnam's bank accounts to determine where the additional money came from, and our investigation showed that the additional $8,000 actually came from Putnam's own money; that is, the $92,000 came from the County National Bank, a personal loan at the County National Bank of Mineola, N.Y.

Senator HARRIS. Then the $8,120 was money derived from Putnam's own funds?

Mr. WALSH. Yes, sir; that is correct.

Senator HARRIS. And you will testify later, I presume, as to other diversions, including that one?

Mr. WALSH. Yes, we can testify to that right now.

Senator HARRIS. All right.

Mr. WALSH. Part of this $8,000 came from three checks of Putnam Investors of $2,300 each. These were payable to Amy T. Finneran, to Louis C. Huck, and Curtis Ivey. This gave a total of $6,900, and we traced these funds through several bank accounts.

Five thousand dollars of this money was redeposited to the Putnam Investors bank account. We traced another $3,500 which came from the proceeds of a loan that was made by Putnam Investors in October of 1961 to a company named BAMG Corp.

Senator HARRIS. To summarize your chart then, exhibit 20, the Putnam Investors, Inc., the people who received that, put up $251,020, in response to which Government capital was injected into the company in the amount of $400,000 under the small business investment program, but none of the capital furnished by the investors in the company was their own capital but all was borrowed and some of it was restricted in that it could not be withdrawn from the bank and some of it came from the company's own funds.

Mr. WALSH. That is correct.

Senator HARRIS. Very well. That brought a total capital, then, of $651,020 as shown by your chart, exhibit 20.

Mr. WALSH. That is right.

I might say, Senator, with this additional capital investment of $100,000 the operators of Putnam then applied for and were granted an additional $100,000 of Government money, as shown in column 3 under date of September 11, 1962.

Senator HARRIS. That is in response to that last transaction, and the addition of capital.

Mr. WALSH. Yes, sir.

Mr. ADLERMAN. Mr. Walsh, in questioning Mr. Finneran, Mr. Huck, and Mr. Ivey, did you ask them to explain where they got that $8,120 and what was their explanation?

Mr. WALSH. In an interview that we had with Mr. Ivey, we were advised that these funds represented salary which they were paying to themselves as officers and directors of Putnam Investors, and that it was their intention to reinvest this money in Putnam.

Mr. ADLERMAN. Now, at that time, did they claim that they received salaries from the company; that this money was partly salary? Mr. WALSH. You mean did they claim to whom?

Mr. ADLERMAN. To us.

Mr. WALSH. Yes, they did.

Mr. ADLERMAN. And at that time, had they made representations to the SBA that they would not draw salaries? In order to draw salaries did they need permission from the SBA?

Mr. WALSH. Our investigation showed that they had indicated they would serve without compensation.

Mr. ADLERMAN. At this point I would like to introduce SP-17, which is a part of the method of operation. I will read it: "Proposed director and principal stockholder will also serve initially without compensation." This was true of the other officers of the corporation. Each of them stated that he would serve without compensation.

Senator HARRIS. This document, Mr. Walsh, SP-17, is the basis for your statement that the officers of Putnam had indicated that no salaries were to be paid to them?

Mr. WALSH. Yes, sir.

Senator HARRIS. That will be admitted as exhibit 22.

(Document referred to marked "Exhibit No. 22" for reference and may be found in the files of the subcommittee.)

Senator HARRIS. I would like to go back now. The amendment to which you testified, dated July of 1962, advising SBA of additional capital of $100,120, is SP-18, which has already been introduced as exhibit 16.

The documents and instruments which substantiate your tracing of the funds from which that money was secured will be admitted into evidence and marked as "Exhibits 23A through 23G."

(Documents referred to marked "Exhibits Nos. 23A through 23G" for reference and may be found in the files of the subcommittee.)

Mr. ADLERMAN. Mr. Chairman, I would also like to bring another matter to your attention. They are too voluminous to put in the record, but these are the original documents from the SBA, which state that in 1961 there were somewhat similar statements made in the plan of operation by Amy Finneran, Louis Huck, and by Curtis Ivey, that they had no employment contract and none was contemplated or believed to be necessary during the year's operation.

(At this point Senator Javits entered the hearing room.) Senator HARRIS. Do you have the original?

Mr. WALSH. Yes.