Mr. MAPES. Do you think that this legislation will have a tendency to restrict that? Mr. CORCORAN. Yes, because it cuts down, sir, the volume of credit available for flotations. Mr. MAPES. Let me ask this, a little aside from that: Do many people who make permanent investments in stocks take advantage of brokers' loans or marginal accounts? Or are brokers' loans confined largely to those who are in the market for speculative purposes? Mr. CORCORAN. Well, sir, offhand, in 1928 and 1929 the temper of the public was such that it was hard to tell whether a purchaser was in the market for permanent investment or not. You saw a stock going up. You said to yourself, if you wanted to justify yourself as an investor rather than a speculator: "I am going to make a permanent investment, but I am going to buy on margin now while this stock is low and I will pay in installments as the stock goes up. I will use a margin transaction as a means of financing an installment purchase at this low level." Mr. MAPES. It occurs to me the average person who wants to make a permanent investment in any security goes to his local bank and negotiates a loan, if he does not have enough cash himself, and handles it that way rather than through a broker's loan, and I should like to have your opinion as to that. Mr. CORCORAN. It is true. At the present time of about $5,000,000,000 outstanding securities loans in this country some $4,400,000,000 are held by banks rather than through brokers' loans. Another thing that you get with volume in the market is manipulation. The manipulative practices you hear so much about become much easier when a terrific volume of margin money can be brought in and, of course, the temptation to engage in manipulative practices becomes stronger the bigger the profit to be made out of it. Many a man would not think of running a shady pool for $10,000 profit, but he will if $100,000 is in it or $1,000,000. Mr. MAPES. This 30-day provision applies to speculative purchases? Mr. CORCORAN. Yes. Mr. MAPES. There is no limitation at all so far as permanent investors are concerned? Mr. CORCORAN. The 30-day provision, as I told you, sir, was utilized as a rule of thumb to determine that a loan being made on the collateral of securities was being made not for the purchase and carrying of the securities, but in connection with a loan for inventory, or some other purpose unconnected with securities. It is a crude rule of thumb, the best that could be devised at the time. If there is a better way of doing that particular job, I'm for it. Mr. MAPES. The average man has got to have something to start on if he desires to make an investment, and if he goes to the bank to make a permanent investment with his securities, he is apt in most cases to ask for a longer period than 30 days. Mr. CORCORAN. That is true. Shall I go on? The CHAIRMAN. Proceed. Mr. BULWINKLE. I want to ask you a question; just a minute. The CHAIRMAN. Mr. Bulwinkle. Mr. BULWINKLE. You are an official of this Government? Mr. BULWINKLE. In the Reconstruction Finance Corporation? Mr. CORCORAN. Yes. Mr. BULWINKLE. You made a statement just now that the N.R.A. is having considerable trouble with small businesses, or corporations, and about their being fearful of monopoly, about there being fear of monopoly, and a lot of small companies being put out of business. Where did you get that information? Mr. CORCORAN. Well, sir, that is current knowledge. I am talking about an apprehension. You feel it in the air everywhere. A small industries' committee has already been formed. Mr. BULWINKLE. I know, but you made the statement. Mr. CORCORAN. I said that there was a certain fear of it going around. I did state that. That is true. There has been a small industries' committee formed. Mr. BULWINKLE. You first stated that they were having trouble. Mr. CORCORAN. Well, that is true. Mr. BULWINKLE. Do you know that of your own knowledge? Mr. CORCORAN. Well, I do not know what you mean by knowledge, sir. Mr. BULWINKLE. Or, are you just making the statement from information? Mr. CORCORAN. All you ever have from which to learn things is information. I only know that everyone I talk with is very much concerned with the problem and that Congress at the present time, you remember, is considering it. Mr. BULWINKLE. I cannot agree with that, because I have talked with many small business men myself, and they do not have that fear. The CHAIRMAN. Is not this true, Mr. Corcoran, that that talk got so persistent and the small business men were so much alarmed about that that they appealed to the President and he asked that a separate committee be set up, and some of these matters have been referred to the Federal Trade Commission? Mr. CORCORAN. Yes, sir. The CHAIRMAN. It has gone that far. Mr. CORCORAN. Yes, sir. Mr. BULWINKLE. I know, but he made the statement that they were having trouble this year. The CHAIRMAN. We are on this bill now. And, the point is, you are referring to the discussions of Senator Borah and Senator Nye. Mr. CORCORAN. Of Senator Nye, and the setting up of the small industries' committee in the N.R.A. and attempts being made by Congress at the present time to provide some way of providing working capital loans to small industries to tide them over. I am not stating anything as a fact. These are all matters of opinion. If I have overstated anything, as a fact, that was not my intention. Mr. BULWINKLE. That is what I thought. Mr. CORCORAN. But, the feeling is in the air. You feel it everywhere. The CHAIRMAN. All right, proceed. Mr. CORCORAN. May we go on, Mr. Chairman? The CHAIRMAN. Yes; proceed. Mr. KENNEY. Before you do, Mr. Chairman 45381-34- -8 The CHAIRMAN. Mr. Kenney. Mr. KENNEY. There is such a thing as a stop-loss order, of course. Mr. CORCORAN. Yes, sir. Mr. KENNEY. What part does that play in the manipulations and the limiting of losses of the little fellow in the market? Mr. CORCORAN. Theoretically, the stop-loss order is a way in which the little fellow, who does not know where the stock may drop, takes care of himself. It happens also to be used in another way. When a market is going down, and it gets a stop-loss order, that order says sell at 35, or at the market if you can not get 35, and in a tremendously falling market it may have a very unfortunate effect of touching off other stop-loss orders until you get an indefinite number of stop-loss orders in the market and there is nothing to stop the stock from going through air pockets to the very bottom. You notice this bill does not prevent stop-loss orders. It simply says that the Commission shall be given power to prescribe rules and regulations under which stop-loss orders can be exercised. When a specialist's books are open to his short-selling friends, if they see a big bunch of stop-loss orders of big traders at a certain figure, and can force the market down to the stop-loss orders, they can touch off a huge block of sales which will run the stock away down. Mr. KENNEY. Do you hold, or do you think, that is a protection to the little fellow or not? Mr. CORCORAN. I just do not know, sir. It is one of these matters where there are arguments on both sides and for that reason the bill takes no position on it. It includes no certainty of prohibition against the stop-loss order. There is simply a provision leaving it to the Commission to investigate the subject, and if they see something that should be done as to stop-loss orders, do it. Now, if we may go on to section 8 of this bill. Section 8 embodies a proposal with which very few people disagree. This section makes unlawful washed sales, matched orders. Subsection (1) under section 8 refers to washed sales, where you simply buy and sell to yourself to create an appearance of activity in the market. A great deal of the attraction of a particular security depends on the activity in the stock. If you read the stock-market reports in the morning you will notice over on the side a record of the number of shares traded. One sure method of pulling traders into a pool is to show a rising market on heavy volume. Manipulators give the appearance of volume by buying and selling through different brokers, giving an impression of activity in the stock, whereas actually very few bona fide outsiders are buying, only those inside the pool. Subsection (2) relates to matched orders. Mr. KENNEY. In that connection, a great many of the large corporations deal in their own stocks, do they not, on the exchange? Mr. CORCORAN. Yes. Mr. KENNEY. And is that taken care of in this bill, buying and selling for the purpose of stabilizing the market? Mr. CORCORAN. Subsection 1 relates to fictitious trading; subsection 2 to matched order transactions. If a corporation is really trying to stabilize its stock on the market, is buying from and selling to bona fide outsiders; I mean, taking stock as it comes on the market from outsiders, to keep the market orderly, subsections 1 and 2 would not stop that bona fide buying and selling. But if you are just washing stock to keep up an appearance of activity, or matching orders with somebody else under a prearranged agreement, subsections. 1 and 2 will block you. Mr. PETTENGILL. What is the particular distinction between washed and matched sales? Mr. CORCORAN. In a washed sale you technically buy from and sell to yourself; in a matched order transaction you technically make an arrangement with somebody else to buy from and sell to him. Mr. CHAPMAN. That is usually effected by collusion between two brokers? Mr. CORCORAN. Yes. Mr. PETTENGILL. Have a wash-out arrangement? Mr. CORCORAN. Yes. You simply buy through one broker and sell through another. Mr. PETTENGILL. The same individual will trade with two brokers? Mr. CORCORAN. Yes. Mr. KENNEY. What is to prevent a subsidiary corporation from buying stock and selling it back? Mr. CORCORAN. You mean as a washed-sale arrangement? Mr. KENNEY. No, on a bona fide sale. They could sell stock; a subsidiary could, through the stock exchange and the subsidiary could hold it and unload it the next day back again. Mr. CORCORAN. Well, if it is for the purposes stated in subsection 3 here, if it is for the purpose of making an artificial market in the security to give an appearance of activity, it is forbidden. Mr. KENNEY. Well, it they want to stabilize their stock and keep it at a price below which they do not want it to go, would you call that a fictitious sale? Mr. CORCORAN. I do not know. When you are dealing with your subsidiary Mr. KENNEY. So far as this bill is concerned. Mr. CORCORAN. I should think it would be. Mr. KENNEY. You would probably be confronted with the same practice under this bill. Mr. CORCORAN. I think that when a corporation deals with its own subsidiary, the situation is the same as if it were dealing with itself. I am not going to give a snap judgment on that right now, because there are a lot of factors that might enter into the picture, but I should certainly think so. Mr. KENNEY. It is certainly a separate entity. Mr. CORCORAN. Yes, it is a separate entity. But in our corporate law we are now getting beyond the point where we are fooled very much by theoretically separate entities. There is a very carefully drawn provision in this bill which will catch those who control others liable under the bill. Subsection 3 relates to jiggling the market for the purpose of creating or with the expectation that there will be created a false or misleading appearance of active trading in such securities. The CHAIRMAN. That is paragraph (3)? Mr. CORCORAN. Yes, sir; that is paragraph (3). Mr. CORCORAN. Tipping pools, as for instance, a broker tipping that there is or may be a pool operating. It is one of the factors in the success of pools. As a matter of fact, in this alcohol pool of 1933, one of the most disturbing incidents of it is that one of the best houses on the New York Stock Exchange was not only participating in the pool but the market "flashes" of that house every day during the operation of that pool kept recommending to its customers, to buy the stock. They did not exactly say that there was a pool in the market and therefore they might not have been within the terms of this paragraph. But, during the boom times, there was a great deal of tipping by brokers-that there was a pool operating in connection. with a particular stock that the customer had better get in. Mr. MAPES. Let me ask this question: Of course if this bill is passed and the law is effective there would not be any pools, would there? Mr. CORCORAN. Well, there ought not to be any pools. Mr. MAPES. This particular paragraph then would be more or less of a dead letter? Mr. CORCORAN. Oh, sir, only there is more perfect compliance with this law than we have known before. Mr. MAPES. I do not mean by that, that I think that this paragraph is unnecessary. Mr. CORCORAN. We should hope, sir, that it would be. But that would be our hope. Section 5, paragraph (5). This relates to the circulation or dissemination of information which in the light of circumstances under which it was made, was false or misleading. There has been some worry about that provision, statistical services and investment counsel are afraid that they may be held for passing out what proves to be false and misleading information. But you will notice a very carefully considered provision at the end of that paragraph, to the effect that one who passes out the information, granting that it is false or misleading, is not held for a violation of the law if he can prove that he acted in good faith and in the exercise of reasonable care-that is, if he were not negligent in passing out information that actually turned out to be false and misleading. Paragraph (6)– Mr. HUDDLESTON. Before leaving that paragraph, what would you say to a provision which required that this misinformation have been passed out "knowingly" or "with intent to deceive?" Mr. CORCORAN. The difficulty with such language, sir, is simply this it is almost impossible to prove the state of a man's mind in a law court and when you are trying to prove that somebody did something intentionally, you have too tough a job. Mr. HUDDLESTON. It is a quite common provision of criminal law, that the accused must "knowingly" perform the act. Mr. CORCORAN. And you very seldom get men under criminal statutes for that very reason. One of the difficulties with the New York Stock Exchange is new regulations, on pools, is just that. The stock exchange released that regulation the other day. It forbids members intentionally participating in a pool, that will unfairly affect the price of securities. An administrative body handling a rule, or a statute, including words like "knowingly", "intentionally", or "unfairly", can make |