Mr. LEISY. I think by that time we were aware of the subcommittee's interest in this company, but we were already, ourselves, seriously concerned about this company. We did not begin the investigation until March because we felt that the investigation staff which would have to do such an investigation should continue to work on completing other investigations that they had in process at that time.

The decision was made that we would not open the order of investigation until we were in a position, staffwise and workloadwise, to move quickly and effectively on it once it was opened.

Senator HARRIS. If you could suspend the license for failure to file a report on time, could you also have suspended the license for these violations your examination revealed in November?

Mr. CAMPBELL. Senator, it is my opinion we could have, if we had the evidence there to do it.

Senator HARRIS. Could you have moved on the basis of those violations to have revoked the license in November?

Mr. CAMPBELL. Possibly not to have revoked. Perhaps. But at least to have enjoined the company from further operation.

Senator HARRIS. Do you have any further questions, Senator Mundt, on this company?

Senator MUNDT. Yes.

In this report dated November 19, 1965, to Mr. James Thomas Phelan, Director, Office of Eastern Area, SBIC Operations, my copy is unsigned.

Can you tell me who wrote this report to Mr. Phelan? Was it Mr. J. Nichols and D. H. Birch, or not?

Mr. PHELAN. It was Mr. Birch who conducted the examination. His supervisor is Mr. Nichols. It goes through him to me, sir.

Senator MUNDT. I am curious about the action requested listed in paragraph 10 because you list there what looks to be a pretty thorough examination. You certainly come up with a great many discrepancies and violations, A, B, C, D, E, F, G, direct violations, and there are other criticisms.

I am curious about the nature of the action requested. I would like to find out whether this is standard operating procedure with your investigating forces when they find violations of this magnitude.

Action requested: In view of the failure of the licensee to operate within the act and regulations, it is recommended that a conference be held between the licensee and the Small Business Administration, and a full explanation of these matters be furnished to this office.

Is that as far as you go after all the laborious business of an examination, where you find all kinds of discrepancies that you say, "We think we ought to sit down and talk with them"?

Why didn't the examiner say, "I think there should be an investigation"? Why didn't he say, "I think some action should be taken"? Why did he simply brush it off by saying, "Let's get together, boys, and have a talk about it"?

Mr. LEISY. To my recollection, Senator, we did not have such a conference as was suggested in the report by the examiner.

Senator MUNDT. You did not have the conference?

Mr. LEISY. We did not have such a conference. That would indicate that we agreed with you that that was not the appropriate action to be taken, that the conference would not serve any useful purpose.

Mr. GREENBERG. I would like to violate a cardinal rule of mine, Senator, if I might.

Senator HARRIS. Mr. Greenberg.

Mr. GREENBERG. That concerns answering questions that have not been asked.

As you know, when Mr. Boutin came aboard, as of July 3, 1966– Senator HARRIS. Were you sworn in the other day?

Mr. GREENBERG. Yes, sir.

TESTIMONY OF HOWARD A. GREENBERG-Resumed

Mr. GREENBERG. As of July 3, 1966, the responsibility for all examinations and investigations which previously had been vested in the Deputy Administrator for Investments, as a result of action that Mr. Boutin had taken, was transferred to the Assistant Administrator for Administration, who reports directly to the Administrator, and all of the functions and personnel have been transferred, as well, to the Assistant Administrator for Administration.

As a result of that action these functions will be completely divorced from the operations of the Investment Division. It will give an independent review and reporting responsibility, and will give the Administrator an internal control check on the operations of the Investment Division.

I would like to state for the information of the committee, that the new procedures which are being developed by our Assistant Administrator for Administration and myself, will require reports to be submitted directly by him to the Administrator and to me for appropriate action, with a deadline date, a very tight deadline date, for action to be completed on the recommendations and for appropriate steps to be taken to clear up any matters in the reports.

Senator MUNDT. Will those new regulations include the suggestion of your Associate Counsel that you should be provided with legislative authority, if that is necessary, or an administrative regulation, which will permit you to act when you discover there is trouble afoot, instead of having to wait until 3 or 4 months elapse while you are conducting a thorough examination and investigation?

Mr. GREENBERG. Senator, I think the testimony of the Administrator indicated that he was exploring that at the present time and shortly would submit for appropriate action, recommendations concerning this particular matter. I am sure they will be forthcoming shortly.

Senator MUNDT. That is fine, because this is a most disillusioning instance. In the first place, no examination was held after the transfer of ownership from people who originally procured the Frontiers Capital Corp., no examination was held for a long period after the new and unknown owners had taken over.

In the second place, when an examination was held, all kinds of violations were found. In accordance with this exhibit, the only action that was requested was that you call the boys together and talk with them. Then a period of time, a substantial period of time, in my opinion, elapsed before the examination was held, and it wasn't until

our committee got into the business that you really went into an investigation which came up with substantive information upon which you could take legal action.

It seems to me that the whole process is just terribly conducive to corruption, and entirely ignores the public interest in handling the taxpayers' dollars. Certainly Congress never intended that an SBIC was to become some sort of a looter's paradise.

This was theoretically to help small business, and not for small businessmen to help themselves by this front in order to use Government money for their own purposes.

I just can't find any place along the line where in this particular case, the SBA-and I am certainly not talking about Mr. Boutin because he was not there, but whoever was there, whoever was working there seemed to do anything to protect the public interest.

This is a terribly serious case.

Senator HARRIS. We will stand in recess until 2:15, at which time we want to hear from you about the Putnam and Bloomington cases, following which we will hear very briefly from Mr. Walsh and then from Mr. Kelley. We would expect to get to Mr. Kelley by around 2:45, hopefully, or slightly before.

(Whereupon, at 1:15 p.m., the subcommittee recessed, to reconvene at 2:15 p.m. the same day.)

(Members present at time of recess: Senators Harris and Mundt.)

AFTERNOON SESSION

(The subcommittee reconvened at 2:15 p.m., Senator Fred R. Harris (acting chairman of the subcommittee) presiding.)

(Member present at the time of reconvening: Senator Harris.) Senator HARRIS. The subcommittee will come to order. I will place in the record at this point a statement signed by Senators McClellan and Mundt allowing the subcommittee to continue to meet, in accordance with the committee rules.

(The statement referred to follows:)

UNITED STATES SENATE

COMMITTEE ON GOVERNMENT OPERATIONS

SENATE PERMANENT SUBCOMMITTEE ON INVESTIGATIONS

Pursuant to rule 5 of the rules of procedure which was amended by the Committee on Government Operations for its Senate Permanent Subcommittee on Investigations on June 3, 1965, and reaffirmed on January 12, 1966, permission is hereby granted for the acting chairman (Senator Harris) to conduct hearings in open session without a quorum of two members for the purpose of taking testimony in the matter of small business investment companies on August 4, 1966, except for the testimony of Mr. Richard E. Kelley.

JOHN L. MCCLELLAN, Chairman.

KARL E. MUNDT, Ranking Minority Member. Senator HARRIS. Will those people from SBA who were previously at the witness table come forward, please?

Mr. GREENBERG. Are you going to discuss the Putnam case?
Senator HARRIS. Yes.

Mr. GREENBERG. If it meets with the Chairman's approval, I would like to have Mr. Friess accompany Mr. Leisy and Mr. Phelan at the table, sir.

Senator HARRIS. Thank you very much, Mr. Greenberg.

67-788-66- -16

TESTIMONY OF JAMES T. PHELAN, ROBERT B. LEISY, LAWRENCE FRIESS, AND HOWARD A. GREENBERG-Resumed

Senator HARRIS. Will you state your name?

Mr. FRIESS. Lawrence Friess.

Senator HARRIS. Have you previously been sworn?

Mr. FRIESS. Yes, sir.

Senator HARRIS. You understand that you are still under oath.
Mr. FRIESS. Yes, sir.

Senator HARRIS. Do you have a beginning statement you want to make about the Putnam Investors, Inc., case?

Mr. LEISY. I will be glad to, Mr. Chairman, run over some of the brief facts.

Senator HARRIS. If you would, I would appreciate it very much. Mr. LEISY. Putnam Investors, Inc., was licensed by SBA September 26, 1961. It had $250,020 in private capital. It was originally loaned over a period of time a total of $250,000 in section 302 funds by the agency and $150,000 in section 303 funds by the agency. The total of this $400,000 had subsequently all been repaid with the interest to the Small Business Administration.

Senator HARRIS. You know, everybody connected with that who testified, that is, Mr. Huck and Mr. Finneran, said they hadn't any personal contact with SBA. With whom in this company did SBA have contact? Do you have any idea?

Mr. LEISY. I believe our records will indicate that most of the agency's contact was with Mr. Stephen Tate, who I believe was the attorney or agent or correspondent for the company.

Senator HARRIS. Now your files reflect some CPA certificates, one dated August 3, 1964, and one dated August 13, 1965, concerning Putnam Investors. I will hand you, then, copies of those two certificates which are identified now as "SB11 A and B". I will ask you if you have had an opportunity or has someone with SBA had an opportunity in the past to examine these certificates?

Mr. LEISY. Yes, Mr. Chairman, this is a report received by the

agency.

Senator HARRIS. Received by the agency, both of them were? They show the true condition of Putnam Investors. Let me say first, those will be admitted into evidence as exhibits 46 A and B.

(Documents referred to marked "Exhibits Nos. 46A and 46B" for reference and may be found in the files of the subcommittee.)

Senator HARRIS. Did those certificates show the true condition of Putnam Investors as of their respective dates?

Mr. LEISY. They will show the condition of the company as reported to us by the company, and certified by their independent accountants. Senator HARRIS. It would show what? Excuse me.

Mr. LEISY. It would show the condition of the company as reported to us by the SBIC and as audited by their independent accountant. Senator HARRIS. Now this SBIC was chartered back in 1961. When was the first time it was examined or investigated?

Mr. LEISY. The first examination, Mr. Chairman, was October 16, 1964.

Senator HARRIS. I hand you what has been identified as SP 12, which purports to be an activity report concerning Putnam Investors made

by SBA people, and in your file, and state if that is a correct copy of the investigation order and report in your file.

Mr. PHELAN. Yes, Senator, the top page. The bottom page is a memorandum concerning Putnam.

Senator HARRIS. The top page is what?

Mr. PHELAN. This is the examination report to the company.
Senator HARRIS. Dated what, please?

Mr. PHELAN. Dated December 29, 1964.

Senator HARRIS. That is in your files?
Mr. PHELAN. Yes.

Senator HARRIS. Without objection, that will be admitted as exhibit 47A.

(Document referred to marked "Exhibit No. 47A" for reference and may be found in the files of the subcommittee.)

Senator HARRIS. What is the second page?

Mr. PHELAN. The second page, sir, is a memorandum dated September 23, 1964, from me as the Director of the then Office of Compliance, to Robert Downes, the examination chief, requesting that he examine the company.

Senator HARRIS. That will be admitted, then, as exhibit 47B, without objection.

(Document referred to marked "Exhibit No. 47B" for reference and may be found in the files of the subcommittee.)

Senator HARRIS. Why did you make that memorandum?

Mr. PHELAN. As I recall, Senator, our area coordinator, the man in the field in the area office, makes routine visits to licensees. He made such a visit to the licensee. He reported to the, I believe, then Deputy Administrator for Investment that there was nobody at the address of the licensee. This information came to me. I, in turn, wrote a memorandum which directed the examination chief, Mr. Downes, to schedule an examination as soon as possible.

Senator HARRIS. Did the examination, exhibit 47B to which you testified, disclose the true condition of Putnam Investors as of that time?

Mr. PHELAN. Not as subsequently revealed.

Senator HARRIS. Why didn't it?

Mr. PHELAN. The answer, sir, is that this was an examination by an examiner who does an examination in accordance with an examination guide that does not really dwell and go behind and investigate. He takes the books and records as he finds them, makes certain checks: checks the minute books, checks the disbursements, confirms with Small Business concerns, confirms bank accounts with banks, and writes an examination report. It is not an investigation.

Senator HARRIS. Would you draw for the subcommittee the distinction between an examination and an investigation?

Mr. PHELAN. An investigation really is a more thorough function, in that it goes behind what really appears on the books, what really appears in our records that have been supplied to us, the annual audit, the semiannual report. It traces the sources of funds. The purpose is to find out really if the money of the small business investment company has gotten to the small business concerns for the purposes of the act, sir. Under investigation, sir, we have broader powers in that