AFTER RECESS.

The committee reconvened, pursuant to the taking of the recess, at 2.30 o'clock p. m.

The CHAIRMAN. Mr. Thompson, you may proceed.

STATEMENT OF HON. HUSTON THOMPSON, COMMISSIONER, FEDERAL TRADE COMMISSION.

Mr. THOMPSON. Mr. Chairman, and gentlemen of the committee, I feel somewhat in the position of our trench rakers during the late war. You will recall that one line of troops would climb out of its trench, pass over to the enemys' first trench, and, if successful in taking it, would pass on to the next, and so on, being followed by a similar line of troops until there came along the trench rakers. They were the ones who were left to make the final clean-up.

Mr. STEELE. And you found a lot of poison gas?

Mr. THOMPSON. Yes, indeed. My associates have covered the subject under discussion very fully except in reference to several matters which they have left to me to discuss. I might say that I have been in the commission for about eight months. I came there after having been in the courts, particularly the Supreme Court, for a good many years-for six years trying the Government's cases. And so I came when the practice had, in a sense, crystallized. For a time I doubted whether we had the proper system of procedure. But after having gotten into the Federal Trade Commission act, and under it, so to speak, I became impressed with one thing in particular, and that is that we are especially (and putting the emphasis here) an administrative body and not a judicial body.

We are in a sense quasi legislative, in that Congress set forth a definition of unfair trade for us and within the boundaries of which we must stay. Congress in doing so performed a static act. We are the dynamic force behind the act. In other words, we put into action the order which Congress has set forth for us. In a sense we are quasi judicial-in form only. We do not enter a judgment; we have no powers of execution; we simply issue an order to cease and desist. The respondent after completing his case before us has not had his day in court. I am saying this all by way of preliminary to the presentation of the "blue-sky" question, and also by way of suggesting an addition to our act which will give us the right to enforce that act automatically upon the issuance of an order. When a case is presented to us, and the complaint is issued and the respondent answers, then we throw our cards on the table. This is a point that was not emphasized by the other two commissioners. In other words, we have to present our case first. We lay before the respondent all our evidence. He has full and ample time in which to reply. It is not necessary, therefore, that he should know who may have complained against him. Frequently the name is revealed to the respondent in the course of the hearing, after the complaint is submitted to him, as to who the complaining party is. Sometimes it is not. But we say that the knowledge of the individual complaining is a matter of indifference, because the respondent has the issue before him, to which he can reply, with nothing concealed whatsoever.

The CHAIRMAN. Have you any special power over "blue-sky" practices?

Mr. THOMPSON. Have we any?

The CHAIRMAN. Yes.

Mr. THOMPSON. Yes, sir; I think we have. That is a matter which we have considered, and, of course, the commission has functioned and set in motion its jurisdiction. I am coming to that in just a

moment.

The CHAIRMAN. There is a bill before this committee introduced by Mr. Taylor. Has your attention been called to that?

Mr. THOMPSON. Yes. I am going to refer to that bill in just a

moment.

I have here a classification of the practices involved in applications for complaint. If the committee cares to have it, we will let it go into the record. Advertising leads, false and misleading, with 366 cases. I might say, from my experience in legal practice and from being on this commission, and watching these cases as they come in, that I differ with my associate, Mr. Colver, when I say that 90 per cent of the cases that come before that commission are easily discernible. (The classification of practices involved in applications for complaint is as follows:)

Prevention of competitors obtaining machinery.

Prevention of competitors obtaining raw materials...

Prevention of competitors obtaining raw materials or machinery...

Price:

Pooling of...

Purchase of, to lessen competition or to create a monopoly.

Sale of, misrepresentations and concealment in (blue sky).

109

Suits, malicious and wrongful....

144

22

18

168,

Trade-marks, wrongful application for.

Transportation, control of...

2

NOTE. It should be borne in mind that one single application may involve a number of different practices. In these cases, a separate index card is put in for each alleged violation of law, and is so counted in the above list.

You wish me, however, to particularly address you on the "bluesky" subject. I have here the bill of Mr. Taylor, H. R. 188. That bill is a summation of the ideas of the capital issues committee, after a considerable experience in respect to the control of stock of a "wildcat" or doubtful type. I have gone over that bill several times, and I think, generally speaking, it is very well drawn. I do not know whether you have gone into the terms of the bill or not, but very briefly it is this, that the Secretary of the Treasury shall be the repository of a certain statement of facts which each corporation will have to file with the Secretary when it is to issue a security. The bill goes on in very great detail to state the necessary facts required to be lodged with the Secretary-the corporate officers, the place of business, the necessity of the issuance of the stock, the type of the stock (whether it is common or preferred, or bonds, or whatever it

may be), a full and complete statement of why the issue is being made and who shall partake of the commissions in the promotion of this stock, of the underwriting and the allocating of the same. Then there is tied to the bill a penalty, a criminal penalty, in which I believe the fine is $5,000, or one year imprisonment, for any one who has made a false statement knowingly with respect to the matters required by the Secretary of the Treasury to be filed.

The bill, I believe, is necessary to supplement the present jurisdiction of the Federal Trade Commission, and for this reason: During the war the Secretary of the Treasury, the chairman of the Federal Reserve Board, the capital issues committee, and a number of others, came before the Federal Trade Commission and asked for a hearing. They said the situation had gotten so bad in certain districts of this country, where at the present time there are many promotions going on, that something must be done to restrain "wild-cat" investing, if it was possible. We asked them to show us two things: First of all, was the sale of a bond, stock, or security, carried from one State to the other, interstate in its character. They presented a number of cases (and none of those cases having gone to the Supreme Court of the United States), several circuit court of appeals judges sitting in some of the cases, and most of the cases arising and stopping at the United States District Court doors, and all of those cases, declared that the action of transferring a stock from one State to the other gave it an interstate character; hence it was a transaction in interstate commerce.

The CHAIRMAN. That is, if it was sent from one State to the other in the course of dealing in that stock?

Mr. THOMPSON. Yes, sir.

Mr. STEELE. And did they distinguish that from insurance, which is not interstate commerce?

Mr. THOMPSON. They did distinguish it, in a case (I have forgotten the name of the case), in which Mr. Justice Day wrote the opinion, and which arose in Ohio.

Mr. STEELE. Will you place in the records the decisions you refer to?

Mr. THOMPSON. Yes; I will be glad to insert, with your permission, a "Brief on some points of law involved in blue-sky cases.'

The CHAIRMAN. You can insert it when you get the transcript to revise.

(The brief follows:)

BRIEF ON SOME POINTS OF LAW INVOLVED IN BLUE-SKY CASES.

This case presents several questions for consideration:

(1) Whether corporate stock may be the subject of commerce and therefore, if sold by mail, traveling salesmen or otherwise, by persons in one State to persons in other States, such sale constitutes interstate commerce.

(2) Whether the sale of stock by a corporation as a necessary incident of engaging in business under corporate forms, is commerce.

(3) Whether a general business of selling corporate stock of other concerns by persons or by corporations such as is engaged in by large brokerage houses or banking houses, may be interstate commerce.

(4) Whether a local agent to whom is assigned local territory in which to sell stock is in a different situation than if he were selling by mail or traveling from State to State.

(5) The extent of the remedy which may be given by order to cease and desist in this and similar cases. As a part of this question consideration should, perhaps, be

given (a) to the power of Congress to prohibit the sale of stock in interstate commerce, and (b) whether, if such power exist in Congress, it has conferred a similar power upon the commission.

(6) Whether there may be said to be competition in the sale of corporate stock, and if so, the limits of such competition.

1. The United States Supreme Court appears never to have directly passed upon the question whether stock, bonds, and other similar forms of securities are the subject of commerce when they are the subject of barter and sale between persons in different States. The lower Federal courts have frequently held, in passing upon the validity of the State blue-sky laws, that transactions in stocks and bonds between persons in different States constitute interstate commerce and have held the various State blue-sky laws invalid, as a direct burden upon such interstate commerce. The first of these cases appears to have been Alabama and New Orleans Transportation Co. v. Doyle (210 Fed., 173, 182), where the district court (Circuit Judge Denison and District Judges Sessions and Tuttle sitting) said in part as follows:

"It must be conceded that, if such burden is created, the act is, so far, void. We can not doubt that stocks and bonds are now the subject of interstate commerce, and that shipments and sales of them, between the States, are interstate commerce. We do not find that this has been expressly held in any authoritative decision, but, in the present development of commerce, it would be regarded as obvious, save for the argument based upon Nathan v. Louisiana (8 How., 73, 12 L. Ed., 992), involving foreign bills of exchange, and Paul v. Virginia (8 Wall.,168, 19 L. Ed., 357), involving insurance contracts. The former case really involved only the question whether a State tax or license fee could be imposed upon a citizen dealing in foreign bills of exchange. Such a tax, under the rules now familiar, and even if made an incident attendant on interstate commerce, would often be only an indirect burden upon such commerce, and so would be valid. The special insurance contract involved in the latter case is essentially different from stocks, bonds, and commercial paper. However, if either of these cases might otherwise be thought now controlling, we think the opinion in the Lottery cases (188 U. S., 321, 23 Sup. Ct. 321, 47 L. Ed., 492) requires the contrary result. As to stocks, some distinctions from lottery cases can be drawn, because the certificates, in part, represent rights of membership; but we can not appreciate the force of any considerations whereby it might follow that, although lottery tickets are the subject of interstate commerce, bonds and commercial paper are not. They pass freely from hand to hand, title to many of them passing by delivery; they are subject to State taxation; they are protected by State statutes against larceny; in an increasing volume from year to year, they have come to take a most important place in the business and commerce of the country. They satisfy, in every respect, the essentials of the definition in the Lottery cases; indeed, they satisfy the more limited definition contended for in the minority opinion in that case. A like decision was rendered in Compton v. Allen (210 Fed., 537, 546; Circuit Judge Smith and District Judges McPherson and Poleck, sitting). In that case the court said in part:

*

*

That the transportation of such articles of personal property from one State to another for the purpose of better, sale, and delivery constitutes not only commerce among the States of this country, but a very large and important element of such commerce in the magnitude of business transacted and the amounts of money involved, is self-evident."

These decisions were followed in Barcey v. Darst (218 Fed., 482, 495); Halsey v. Merrick (228 Fed., 805, 806); and Geiger-Jones v. Turner (230 Fed., 233, 242), but the opinions in these cases do not contain any particularly illuminating discussion of the subject. While they are the decisions of district courts, in each case three judges were sitting.

The Halsey and Geiger cases, supra, and the case of Caldwell v. Sioux Falls Co. went to the Supreme Court of the United States. The court reversed the lower courts in those cases and held the statutes valid, but did not directly pass upon the question of interstate commerce. The chief discussion by the Supreme Court of the question whether these statutes were a regulation of or burden upon interstate commerce, is found in the Geiger-Jones case, where the court pointed out that the terms of the statute applied only to the disposition of securities within the State," and that so construed, the statute did not impede the transportation of securities into the State. Assuming that corporate securities were proper subjects of interstate commerce, the court further held that the requirements of the statute constituted only an indirect burden upon such commerce such as a State could properly make in the exercise of its police power. The following is taken from the opinion of the court in the Geiger-Jones case. "The next contention of appellees is that the law under review is a burden on interstate commerce, and therefore contravenes the commerce clause of the Constitu