Senator HARRIS. Very well.

Mr. ADLERMAN. Did there seem to be a loss of morale in the investigative force?

Mr. WALSH. Yes, I believe that would be a fair statement.

Mr. ADLERMAN. What reason did they give for their poor morale! Mr. WALSH. I believe they felt that the investigations they made were not productive, that the Government money was not being returned, and that violators were not being prosecuted or being expelled.

Mr. ADLERMAN. Did they also feel that they were not getting proper attention from the SBA administration itself, that they were looked upon as stepchildren? Were they told: "Don't bother us with these troubles"?

Mr. WALSH. Yes, I believe that feeling did exist.

Senator HARRIS. That is an opinion, of course, but do you base it on some statement made to you by people there?

Mr. WALSH. It was not an official inquiry. It was information given to me in unofficial context.

Senator HARRIS. Very well. You may continue with your state

ment.

Mr. WALSH. We noted a void, which has already been commented on, in cases where an SBIC is in financial difficulty, where the management of an SBIC breaks down. Someone has to intervene and take over the active management of the company, conserve its assets and move toward either continuation on a reduced basis or liquidation. SBA apparently did not have the capability to step in and assume the active management of companies that were in severe difficulties. From the 43 files that we reviewed, we selected a number for further investigation. From these we developed three cases which we propose to use in these hearings in order to illustrate the problems that exist.

The first case that we propose to present is the case involving the Frontiers Capital Corp. of New York City and Rockville, Md. Senator MUNDT. Is that the same company?

Mr. WALSH. It is the same company. There was a change in ownership and it was moved from New York City to Rockville.

Briefly, this company was in existence since 1961. In 1964 the owners requested SBA for permission to reduce its size in order to achieve a more profitable operation. SBA denied the request to reduce the size and the owners then sold the company and within a few months most of the company's assets had disappeared. Senator MUNDT. What is the implication of that statement? Does that mean that the new owners had taken the assets?

Mr. WALSH. I think we will present the story as to what happened as we go along.

Mr. ADLERMAN. At this point I would like to call Mr. Hammer. Senator HARRIS. Mr. Milton Hammer. Come forward, please. Would you raise your right hand?

Do you swear the testimony you are about to give before this subcommittee will be the truth, the whole truth, and nothing but the truth, so help you God?

Mr. HAMMER. I do.

Senator HARRIS. First, without objection, we will place in the files of the subcommittee the report to the subcommittee by the Comptroller General. We will mark it as exhibit 1.

(Document referred to marked "Exhibit No. 1" for reference and may be found in the files of the subcommittee.)

TESTIMONY OF MILTON HAMMER

Senator HARRIS. Would you state your name and identify yourself for the record?

Mr. HAMMER. My name is Milton Hammer.

Senator HARRIS. I want to say it is the practice of this committee whenever we have witnesses who are not officials of the Government to be certain that they know their rights. As a matter of precaution, I would want to point out to you that you have a right to counsel, to an attorney, if you desire. If you do desire to have counsel, of course that is perfectly satisfactory. Do you have counsel?

Mr. HAMMER. No.

Senator HARRIS. Do you desire to have counsel before we proceed, Mr. Hammer?

Mr. HAMMER. No, I do not.

Senator HARRIS. It is also my duty to inform you that whatever you say here could possibly be held against you in some legal proceedings. You understand that?

Mr. HAMMER. Yes.

Senator HARRIS. Would you state for the record, Mr. Hammer, your address, please?

Mr. HAMMER. I live on Sterling Road, in Harrison, N.Y.

Senator HARRIS. Did you obtain a charter for the Frontiers Capital Corp. as a small business investment company?

Mr. HAMMER. Yes, I did. I think it was in April or May 1961.
Senator HARRIS. It might have been June 12, 1961?

Mr. HAMMER. Yes.

I just want to say to you and to the committee that I do not have any of the files of Frontier Corp., as you have learned.

Senator HARRIS. Because you divested yourself.

Mr. HAMMER. I don't have access to any of the detailed information. Senator HARRIS. What office did you hold with the company, Mr. Hammer?

Mr. HAMMER. I was the president.

Senator HARRIS. And you operated in that position until when? Mr. HAMMER. Until July 1964.

Senator HARRIS. During that period, the period during which you were president and a stockholder of the company, how much money was borrowed by the company from the Small Business Administration?

Mr. HAMMER. $350,000.

Senator HARRIS. How much private capital was invested in the company?

Mr. HAMMER. $353,500, I believe.

Senator HARRIS. Was the operation of the company successful? Mr. HAMMER. I don't know how to answer the question except to say that we were just about breaking even at the time it was sold."

Senator HARRIS. Let me ask it in perhaps a different way. There were other stockholders other than yourself?

Mr. HAMMER. Yes.

Senator HARRIS. During the period when you were the president, were they totally satisfied?

Mr. HAMMER. They were not satisfied because no progress had been made during the 3 years. There were rumblings about having invested money in this program, and no profit having been made in that period.

Senator HARRIS. Did some of the stockholders then want to get their money back?

Mr. HAMMER. Yes; the majority did.

Senator HARRIS. Did you take any action or attempt to take any action in response to that?

Mr. HAMMER. Yes. I thought that the best thing for me to do as an individual who wanted to stay in the program, and I had assurance from some of the others that they would go along, was that we ask the SBA for permission to reduce our capital so that those stockholders who did not want to stick it out could leave or we could have some pro rata distribution by reducing our capital so that we then could continue.

Senator HARRIS. I believe you then communicated with SBA?

Mr. HAMMER. Yes, sir. I wrote them a letter. I don't have the information as to the date.

Senator HARRIS. If I understand you correctly, you requested permission to reduce the capital of Frontier from $700,000 to $300,000 so that you could pay off these stockholders who wanted their money back and proportionately reduce the amount of money you owed the SBA?

Mr. HAMMER. I was prepared to send the SBA a check for the difference, because we had the money.

Senator HARRIS. In that letter that you wrote SBA did you offer to return $200,000 which had been borrowed from SBA?

Mr. HAMMER. Yes, sir.

Senator HARRIS. I will hand you what is marked "Exhibit 2," staff exhibit No. 2, and ask you if you can identify it and the letter attached to it?

(Document handed to witness.)

Senator HARRIS. Can you identify the first sheet of that identified as SF-1?

Mr. HAMMER. SF-1 represents a letter that I wrote to the SBA on January 9, 1964.

Senator HARRIS. Is that a correct copy of the letter you wrote?
Mr. HAMMER. It is.

Senator HARRIS. With a copy of your signature? You did sign that letter?

Mr. HAMMER. I did; yes.

Senator HARRIS. That will be admitted into evidence and marked as "Exhibit 2."

(Document referred to marked "Exhibit No. 2" for reference and will be found in the appendix on p. 283.)

Senator HARRIS. That was the offer you made to SBA to reduce the amount of money owed to them?

Mr. HAMMER. Yes, sir.

Senator HARRIS. Then are you able to identify the second sheet? If so, what is it?

Mr. HAMMER. The reply from SBA to my letter, to my knowledge, the one that I received, this is a copy of the one I received.

Senator HARRIS. This is a copy of the letter you received, dated January 31, 1964?

Mr. HAMMER. Yes, sir.

Senator HARRIS. That will be marked "Exhibit 3" and will be admitted into the record.

(Document referred to marked "Exhibit No. 3" for reference and will be found in the appendix on p. 283.)

Senator HARRIS. In summary, then, from the letter that you received from SBA, did they accept or reject your offer to reduce the amount owed?

Mr. HAMMER. The SBA rejected it on the basis that I requested it. I notice there is a reference to a regulation which says they would be willing to let us reduce it by 10 percent, which is what the regulations provided for at that time, which was of no relief to us, and so impractical, so small a reduction, that it didn't serve the purpose.

Senator HARRIS. What did you do, if anything, thereafter?

Mr. HAMMER. I called a meeting of the board of directors. I don't have the date because I don't have the minutes. I advised the board that SBA had declined our offer and the board of directors decided at that time that we ought to sell the company if we can, or take appropriate steps to get out of the business.

Senator HARRIS. Our records show that you sold the corporation on May 21, 1964. Would that date appear to be right in your memory? Mr. HAMMER. That date would not be the accurate date of the completed sale, but obviously you are referring to a date on which I signed a contract to sell the company. I believe the date of the completion of the sale was July 19, 1964.

Senator HARRIS. Do you have a copy of the sales agreement yourself?

Mr. HAMMER. No, I do not have one with me, but I provided the committee with it, I believe.

Senator HARRIS. The amount of the sale price was how much?

Mr. HAMMER. It was slightly less than the amount of money we had invested in the company. I don't recall the exact amount. I think it was $349,000. It was some odd amount that had been arrived at in negotiation.

Senator HARRIS. And the people to whom the sale was to be made, would you identify them? Who were the purchasers?

Mr. HAMMER. I met a gentleman who was identified to me as an attorney from Washington by the name of Milton Gordon. He had an assistant with him who was introduced to me as an associate of his but not a principal. His name was Donald Wasserman. Those are the only two people I ever met who developed into the successive.

company.

Mr. ADLERMAN. Mr. Hammer, at the time you entered into this agreement, did you enter into an escrow agreement where you put your stock up pending the payment or receipt of payment of the $349,965?

Mr. HAMMER. Yes, sir, I did.

Mr. ADLERMAN. And that was put up with a bank in Maryland? Mr. HAMMER. I believe it was the National Bank of Maryland. Mr. ADLERMAN. And did you become alarmed because you weren't getting paid? You insisted on the return of the escrow or getting payment?

Mr. HAMMER. Yes, I was alarmed.

Mr. ADLERMAN. Did you reach a stage where you set a deadline and they finally did pay you?

Mr. HAMMER. Yes, sir.

Mr. ADLERMAN. Did you subsequently learn that they had released the escrow without your consent from this bank and had used that stock to get money to pay you?

Mr. HAMMER. I learned it through hearsay, without any direct information.

Mr. ADLERMAN. But you had not given your release on the stock? You had not released the stock?

Mr. HAMMER. No, I had never released the stock.
Mr. ADLERMAN. And you were paid $349,000?

Mr. HAMMER. We were paid the contract price.

Mr. ADLERMAN. Subsequent to that, did you enter into an agreement with Mr. Gordon and Mr. Levenson, whereby you purchased practically all of the outstanding loans in Frontiers' portfolio for $155,000? Mr. HAMMER. Yes, sir. I don't know Mr. Levenson.

Mr. ADLERMAN. You don't know him, but did you enter into an agreement with him? Was he party to the agreement?

Mr. HAMMER. I don't recall his name being on the agreement.

Mr. ADLERMAN. Do you remember signing certain papers? Did you sign those papers in blank?

Mr. HAMMER. Which papers are you referring to?

Mr. ADLERMAN. You applied for transfer of the ownership of the company, the stock in the company. You asked the SBA for permission to do so. Did you sign a document which I showed you this morning, whereupon you told me that you received this document in blank?

Mr. HAMMER. The attorney who represented the application to the SBA for the purchaser asked me to sign the applications in blank. That is, in effect, the new owners state who their directors shall be. It is a rather odd procedure. The old president signs, but it is the new applicant who applies for approval, in effect, because this sale is made subject to approval of SBA.

Mr. ADLERMAN. I would like to offer this in evidence. This is the letter sent by Mr. Gordon to the Licensing Division of the Small Business Administration.

Senator HARRIS. You better have him identify them as we go along. What is the first one?

Mr. ADLERMAN. It is a letter from Gordon to the Small Business Administration.

Senator HARRIS. I hand you this letter, which is a copy of the letter which bore your signature.

(Document handed to witness.)

Mr. HAMMER. The top letter bears Milton Gordon's signature, and it refers-well, it is written to the Chief of the Licensing Division of SBA. Of course, I am not familiar with that letter.