This contract must be presented to the cashier of the firm it is endorsed by before the expiration of the exact time limit. It will not be accepted after it has expired and cannot be exercised by telephone.

NEW YORK

193__

For value received, the bearer may deliver me on 1 day's notice except last day, when notice is not required shares of the..

stock of the

($.

----), any time in

at

days from date.

dollars per share

All dividends for which transfer books close during said time go with the stock.
Expires
193...
M.

Delivery on C.H. sheet of N.Y.S.E. or next day according to S.E. usage.
Guaranteed by a New York Stock Exchange firm.

APPENDIX No. 2

COURT DECISIONS

The attitude of the courts toward put and call transactions is shown in the following court decisions:

In Biglow v. Benedict (70 N.Y. 202), the defendant, in consideration of a payment of $250, agreed to receive from the plaintiff at any time within 6 months a certain quantity of gold coin at a specified price. The defendant refused to carry out the contract and set up the claim that the transaction was a gamble. The court held that the contract was legal in spite of the element of hazard involved. It was pointed out that the same element of chance occurred in every optional contract when one of the parties binds himself to sell or receive property at a future time at the election of the other. The court said:

"Mercantile contracts of this character are not infrequent and they are consistent with the bona fide intention on the part of both parties to perform them. The vendor of goods may expect to purchase or acquire them in time for a future delivery, and while wishing to make a market for them is unwilling to enter into an absolute obligation to deliver, and therefore bargains for an option, which, while it relieves him from liability and assured him of a sale in case he is able to deliver, and the purchaser may in the same way guard himself against loss beyond the consideration paid for the option in case of his inability to take the goods. There is no inherent vice in such a contract."

Story v. Solomon (71 N.Y. 420), involved the question of a double option where the seller agreed either to receive or deliver 100 shares of Western Union stock within a certain time at a certain price. The court said:

We

"There is always an element of speculation and uncertainty as to that, and yet it had never been supposed that there is any betting by such contracts. Here the option to buy or sell was put in the same contract. On the face of the contract the plaintiff provided for the contingency that on that day he might desire to purchase the stock, or he might desire to sell it, and in either case there would have to be a delivery of the stock or payment of damages in lieu thereof. should not infer an illegal intent unless obliged to. Such a transaction, unless intended as a mere cover for a bet or wager on the future price of the stock, is legitimate and condemned by no statute; and that it was so intended was not proved. If it had been shown that neither party intended to deliver or accept the shares, but merely to pay differences according to the rise or fall of the market, the contract would have been illegal."

In Irwin v. Willear (110 U.S. 499), the question arose as to whether a contract covering grain futures was a gambling contract. The defendant contended that he never intended to take delivery. The court said:

"It makes no difference that a bet or wager is made to assume the form of a contract. Gambling is none the less such because it is carried on in the form or guise of legitimate trade. It might therefore be the case that a series of transactions such as that described in the present record might present a succession of contracts perfectly valid in form, but which on the face of the whole taken together and in connection with all the attending circumstances, might disclose indubitable evidence that they were mere wagers.'

It was held, however, that it was not sufficient to show that one party intended that delivery should not be made. "The proof must go further and show that this understanding was mutual-that both parties so understood the transaction." To the same effect:

Hentz v. Miner (58 Hun. 428); Zeller v. Leiter (189 N.Y. 361); Springs v. James (137 App. Div. 110, affd. 202 N.Y. 603); Cohen v. Rothschild (188 App. Div. 408).

In Lewis v. Wilson (50 Hun. 166), the plaintiff sought to enjoin his suspension by the Consolidated Exchange where a claim was made that he failed to perform an agreement to accept stock under a put contract. The defendant claimed the contract was illegal. The court said:

* * * to render agreements of this description illegal and void, it must appear affirmatively that they were entered into as gaming contracts and not as real transactions for the purchase and sale of property * * * Embrey v. Jemison (131 U.S. 236); Watson v. Blossom (2 Ñ.Y.S. 551); West v. Wright (86 Hun. 436).

STATEMENT OF JOHN M. HANCOCK, MEMBER OF LEHMAN BROTHERS, NEW YORK, N.Y.

The CHAIRMAN. Mr. Hancock, we will hear you.

Will you please state your full name and your connection, Mr. Hancock?

Mr. HANCOCK. John M. Hancock. I am a member of the banking firm of Lehman Brothers.

Our main activity is as an underwriter and dealer in securities. In addition we are members of practically all the securities and commodity exchanges in the country. We are owners of securities, naturally. We are dealers in securities. We do not have floor members on any of the exchanges except the New York Cotton Exchange. We deal through floor members.

Now, my principal purpose in coming here is not in any sense to oppose the purposes you are aiming at in this legislation. I am prepared to go a long ways beyond where you have gone in pointing out things that ought to be done by law, soon, with regard to the problem in this situation.

There is a lot more ground that you could cover than you have touched, so far as I know, at least. I cannot speak for what you know, but so far as I know, from what you have talked about, there is a lot more ground you can cover. You are facing, I believe, a Federal incorporation act, before you get through. There is a lot that should be done along that line that I think could well be done now, rather than later.

I am afraid your feeling today is to limit your work to the scope of this bill, and I think you will be making a serious mistake if you do. Now, my particular work in my firm is in relation to 17 corporations, on whose boards of directors I serve. This gives me probably more the industrial than the banking point of view. I have very little to do with the stock exchange part of our business. I am bound to see it, of course. While I am in close contact with it, I cannot qualify at all as an expert with regard to the detailed problems of the exchange and operation of an exchange, or control of an exchange and for that reason I want to confine myself today to the particular features of the bill that relate to my own firm, though I believe they have a wider application as well.

The first part that strikes me is the provision regarding penalties. Now, bear in mind I want you to legislate against every vice that you can find that you have uncovered so far or that you can find― and I want too to make it specific that certain things are wrong.

We are glad to help if we can in any way in the definitions. You have no doubt made them broad and complete, but unless you make

them accurate, covering only the vices that invade the trading in securities and not touching the good, you cannot have the stringent character of penalties that you have in this bill.

Let me just give an illustration. You provide that if I do a vicious act, I am liable for the loss a man may suffer from the market, regardless of whether the loss flows from my action. It might well happen that I might cause a damage of a dollar to a man, by intention, or by lack of intention, but under the terms of this law, I am penalized $50 or some other very large amount not related to my act.

It seems to me it ought to be perfectly easy, given time, to work out clear definitions of the things that are wrong and then prescribe adequate penalties for those things that are wrong.

I am not opposed to the provisions of this law in relation to willful doing of wrong. I do not care what those penalties are. They do not concern me one particle. They do not concern the men I work with. The men I work with do not do that kind of thing; but I am concerned about the character of civil damages for acts not willful. Let me take a practical illustration of the character or thing that comes to me every day. On this matter of penalties again, two men come to me, one with a preconceived idea that he wants to buy a stock and the other man with a preconceived idea that he wants to sell. They may both hear every word I have said. They may put their own interpretations upon it and they may both leave me and do as they wish.

Now, I have no means of knowing that those men are going to buy or sell; but I believe under the terms of this act, I am liable to both of them for the transactions that happen afterward, entirely without any intention on my part or without any possibility of profit on my part anywhere in the transaction. I am held to be liable to those two men, and in certain characters of acts, I am held to be liable to everybody in the market, not the two men to whom I talk, but to everybody else as well as those two.

I am told that, quite unofficially, of course, not from any member of the committee, the penalty provisions may be modified. I do not want to labor the point. I know you are busy and you have heard a lot of this material before, in all probability. I have written out views which I have, and have them in type. This will be available to you, if you want them, but I urge very strongly that you look into the matter of the penalties, because I think they are beyond what any man is going to say is fair.

Mr. PETTENGILL. You think that the penalties should be compensatory and not punitive?

Mr. HANCOCK. Yes, sir. I think that they can be made so, and they should be made so. No man I know wants to avoid responsibility for the things flowing from this own acts. He wants not to be held accountable for things outside of his control, or anybody's control.

I believe that the discussion that has taken place so far may result in a change in the margin requirements, and the general character of loan provisions.

I believe that you have been told by men whom you respect, that the terms of the present bill will provide a drastic deflationary effect on banks, investors, and consequently on industry. I believe this bill-I mean the bill in its present form-will do away with most of

the responsible machinery whereby essential long-term private capital may flow into industry, leaving the burden of providing such capital chiefly on the Federal Government.

I believe the character of the penalties will tend to deprive investors of responsible sources of financial information and advice, and that it will, through excessive penalties, tend to drive conscientious management out of industry.

Now, those of us who have the problem of watching the operations of industry, and I have 17 large national corporations that come under my eyes all of the time-recognize the problem of trying to get good management. We do have the best we can get as we go along every day, but we do believe if you are going to hamstring the honest management by the character of penalties imposed on every move, every word said, that you are going to make it far more difficult to get the kind of management that is required.

Now, my further interest in this question revolves around the provisions covering segregation, section 10.

I think this has been covered with you very fully. I want to stress just two points. You know the situation about the small dealers over the country, I am sure.

You are going to force, by this bill as I see it, two things: You are going to force business into the hands of the very strong rich houses who may survive, or into the hands of irresponsible houses.

The middle class of houses, the middle-sized houses like ourselves, cannot survive.

Now, we are special pleaders. We admit it. We have been in business, however, 85 years. There is some vitality, there is some life in an institution that has that long a record lying behind it, and that has been building up over the years. That is a good while. And, it has been getting the respect of its customers over that time. The concern has not gone down over the years. It has gone up.

What are we aiming at in this bill, in these sections or provisions? We are aiming at two problems. One is ethical and one is financial. Now, we know perfectly well that the financial problem has arisen from the failures of houses of issue who took securities of brokerage customers and pledged them to carry their own slow-moving securities. There is nothing essentially different between that and embezzlement. Mr. PETTENGILL. Except that the customers in a lot of fine print have given the broker the right to do that; is that not right?

Mr. HANCOCK. Yes, sir; I would not say that they have given them that right; they never gave them the right to do what they did do.

Mr. PETTENGILL. It would be embezzlement, except for that, except that the customer has perhaps given his consent.

Mr. HANCOCK. Well, I am not a lawyer. I cannot answer.

Mr. PETTENGILL. Not knowing what he was doing.

Mr. HANCOCK. I am not a lawyer. I do not know what the exact situation is, but there was a conversion, beyond any doubt there, and it was not the customers' intent to permit that, regradless of what the law may say, or what the technical usages may be.

Mr. PETTENGILL. I agree with you absolutely on that.

Mr. HANCOCK. I do not see why you cannot effect every possible purpose by a separation of the capital employed in the brokerage business. Now, obviously, if my firm has no margin customers-and

it has none that question cannot arise. If we have no margin custotomers, the question cannot arise at all. If, however, we did have customers' securities under margin accounts, then why should there not be merely a segregation of capital and a prohibition against loans from the brokerage part to the banking part of the business. Why is that not going to be effective, with all of the penalties that you want to put upon evasion. That is the first question, a financial question, principally.

The ethical question involves two problems, I think; The feeling that we, as a house of issue, may advise brokerage customers to buy our slow moving securities, and the feeling that we may have them on the shelf and may advise customers to buy the securities we own, whether slow moving or otherwise.

Now I am sure you realize, if we sell to any customer who puts a brokerage order through us, we must tell him now that we are selling to him. Now, if you want to go beyond that, why not make a provision by law that we shall put on our confirmation slip to the customer that we have an interest in the security. If we have an interest of any character, I do not see any reason why we should not tell any brokerage customer doing business with us that we have an interest. Now, when you come to define "interest", you have a difficult problem, I will tell you, frankly, because interest shades off into all sorts of degrees. You may have this character of an interest where the firm itself may have been a house of issue; where it may own securities today, where a partner may own securities in his own name; where his wife may own securities; or his children, or his favorite charity, and so on. It reaches out to several degrees beyond this.

Now, there is no way of telling what is going to motivate one man as against another; but if you cover major degrees of interest and require us, if we execute an order for a customer, to let him know what our position is; then if we do not give him the right information, he should have a right to proceed against us. If we do, I think that he is entitled to the protection of knowing our position.

I do not see any reason why a man should not be free to do business with me if he knows I own a security, if he knows the facts about it. If he does business with me, I have all the more obligation to tell him what the facts are, and what my interests are, what my attitude is.

That is the reason I believe men come to us in our business, because they believe in us. I do not mean we do not make mistakes. Of course we make mistakes. But there is a lot of factors, a lot of matters, in connection with dealing with securities that are not going to be covered by this bill, or any bill that anybody can design. They are things that cannot be touched.

We are not particularly affected in my firm, with respect to the segregation of capital and the provisions and arrangements for a separation of capital, since we have no margin accounts. We do not think there is any need in our case to do anything about that, because we do not do a margin business in securities; but I think you will have an adequate provision if you separate the capital and then on top of that require revelation of the interest and define "interest" as broadly as you want to. We do not care how far you go in defining it. We do not have anything to hide. We do not see any reason why anything should be hidden. We think the customers are entitled to that kind of protection.