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I wonder if you have thought of the problem arising from the action of a corporation officer who buys or sells securities of his company and the risk of reporting such transactions? I wish I could feel, if I were just trying to be selfish now, I would like to feel that so-called inside information was of much value on the market. I do not doubt but that there have been cases where it has been of value, or where it has been abused, I cannot get around this point; I find myself in the position of director of several companies, with access to every fact that there is, but I still cannot tell what the market is going to do, and I do not know any one else who can either.

Mr. KENNEY. Mr. Chairman-
The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. Do you approve of the practice of corporations buying and selling their own stock on the exchange?

Mr. Hancock. Well, that is a tough one. You are referring, I suppose, primarily to common stock; you do not have in mind preferred stock, do you, that is to be retired shortly, or anything like that?

Mr. KENNEY. No; common stock. Some corporations buy and sell their own stock on the exchange and keep the stock at a price.

Mr. HANCOCK. One of the companies of whose board I am a member has bought its own stock in the market.

Mr. KENNEY. What?
Mr. HANCOCK. One of my companies does that. I do not favor it.

Mr. KENNEY. There is no rule now to prevent a corporation with a good supply of money, from running its stock up as much as 10 points?

Mr. HANCOCK. Except the fact that they fail when they try it. That is what deters them. They may do it in 1930.

Mr. KENNEY. In the case of our larger corporations, it might be an easy matter for them to run their stock up 10 points?

Mr. HANCOCK. Yes.

Mr. KENNEY. And, if they wanted to increase their earnings for any particular year, they could well resort to the stock market and do that, could they not?

Mr. HANCOCK. Well, it might be done but I doubt their accountants would regard it as profit.

Mr. KENNEY. And after a corporation got its stock up 10 points, it could begin to sell its stock and take a profit and then manipulate the stock back to the original price.

Mr. HANCOCK. Well, they would not have a profit, unless there was a real sale, they would not make a profit.

Mr. KENNEY. No.

Mr. HANCOCK. But, the difficulty is, as most men who have lived in this world long enough know, that that does not happen. The only thing that you do is this

Nr. KENNEY (interposing). Is it not a fact that a great many of the large corporations have a fund with brokers for the purpose of keeping their stock at a price on the market?

Mr. HANCOCK. Not that I know of, sir; not to my own personal knowledge.

Mr. KENNEY. You would not say that they do not?

Mr. HANCOCK. I do not know what may be happening; but I know of some 100 companies intimately that do not do it.

Mr. KENNEY. Would you call an operation like that a pool?
Mr. HANCOCK. No.
Mr. KENNEY. What would you call a pool?

Mr. HANCOCK. Well, you have me in a difficult spot with regard to definitions. A group of the buyers and sellers.

Mr. KENNEY. Well, if a corporation had $100,000,000, that would be considered a pretty good sized sum for pool?

Mr. HANCOCK. Yes.

Mr. KENNEY. And there are companies who could put up $100,000,000 for trading operations in case they wanted to?

Mr. Hancock. Well, you can count them on the fingers of one hand, can you not? I do not believe that those companies have done that.

Mr. KENNEY. Do you know whether they have or not?
Mr. HANCOCK. I do not know, sir.

Mr. COOPER. Mr. Hancock, would it entail a large cost to corporations if they had to send all of the information to the Federal Trade Commission which this bill requests to each stockholder they wanted voting proxies from? I would like to have you express yourself on that.

Mr. HANCOCK. I will cover it to the best of my ability. This provision about sending stockholders' lists to each stockholder I think was obviously a technical error and nobody means that.

Mr. COOPER. The cost would be tremendous to send a proxy list, when they send out for proxies, to send that out to 100,000 stockholders. They must send it to each stockholder, and send each stockholder a copy of the whole list.

Mr. HANCOCK. Yes. Well, of course, obviously somebody slipped somewhere.

Mr. COOPER. And, you have to send it to the commission.

Mr. HANCOCK. Well, it will be a good place for it to be filed. That will do no harm. If you require the corporation to keep it on file, and keep it accessible to the whole list of stockholders, you have served all purposes required.

There is nothing to be gained by filing a great stack of stuff down here in Washington, where no one will see it. You are not likely to have an archives building here for years. If you had it, it would take two men and a boy to find a stock list of most companies.

Now, about the other question—the matter of expense. If it were only a matter of expense to the corporation, it would be bad enough. The auditing expense is going to be very heavy: I suppose that you could say that it might treble the cost of auditing.

I do not believe that you want to have quarterly audited statements, because if you require that, you are going to be so long in getting them out that they will be only history, and they will furnish no guide as to current facts.

Now, if you change that provision and make it incumbent upon the corporation officers to furnish quarterly information unaudited, but to have an audited statement once a year, you will have something. If they give out in a statement, once a quarter, or more frequently as you may decide, all of the current information they have, without responsibility upon them except for willful acts, then you will get somewhere; but you will not get it by clamping down and requiring audited reports.

I think that the auditors will tell you that there are not enough men in America trained in accounting to do this kind of job. If you will ask the auditors, they will tell you frankly, I am sure.

Mr. WOLVERTON. Mr. Chairman-
The CHAIRMAN. Mr. Wolverton.

Mr. WOLVERTON. I understand you to say that you represented an underwriting house?

Mr. Hancock. Yes, sir; Lehman Brothers.

Mr. WOLVERTON. What justification is there in the practice to issue stock to a preferred list in order to make a price for it?

Mr. HANCOCK. I think that I ought to be excused from that question, sir. We do not do it.

Mr. WOLVERTON. Then, you do not do so because you do not believe it is justified?

Mr. HANCOCK. I do not know what the reason is why we do not do it. We did do it a good many years ago.

Mr. WOLVERTON. Have you been in the business of underwriting for a great many years?

Mr. HANCOCK. Yes, sir.

Mr. WOLVERTON. Your firm has been in business about 85 or 90 years, I believe?

Mr. HANCOCK. Eighty-five years.

Mr. WOLVERTON. I have been impressed by your frankness, and thought possibly you could give, from your experience, either the justification for the objections to this course, or

Mr. Hancock (interposing). Well, it could be done for good purposes, or it could be done for bad purposes. If the purposes are good, I cannot criticize it and I cannot tell what was in the mind of any man who did what you are speaking about.

Mr. WOLVERTON. You know that that is such a practice?
Mr. HANCOCK. I do not think that it is a general practice, sir.

Mr. WOLVERTON. Well, then, if it is an exception to the general practice, is it a proper practice to be pursued?

Mr. HANCOCK. I think it goes back to the intent, primarily. If it is done for the purpose of orderly distribution of securities, and for spreading of risk, it seems thoroughly sound, and not open to attack.

Mr. WOLVERTON. Then, it depends upon the good or bad intent of the individual house that adopts that means of establishing a price for a stock? If so, it would then seem to be a matter for regulation in order that there may be no possibility of such method being utilized by a house whose intent is not good.

Mr. HANCOCK. What form of regulation do you have in mind; a statute? I have no question about a statute; there would be no question about that, if you can find the wording that will cover the bad intent.

Mr. WOLVERTON. Is there anything in this bill, which in your judgment would affect the situation?

Mr. Hancock. Nothing that I have seen, sir.

Mr. WOLVERTON. And out of your experience, extending over a period of years, are you able to make a suggestion that would be helpful in precluding a practice that might otherwise be used with bad intent?

Mr. HANCOCK. I would be very glad to if I could. I cannot do it offhand. That is a question that is not in my own field. I have not

thought about it. I do not like to make a suggestion in a casual way. I will be very happy to sit down with anybody and express my idea and try to work out something, relating to this provision, or any other provision of the bill.

We would like to have you feel we are here to be helpful, if you want to use us.

Mr. KENNEY. Mr. Chairman-
The CHAIRMAN. Mr. Kenney.

Mr. KENNEY. You referred to bad practices which the committee had uncovered or found out. Do you know of any other bad practices?

Mr. HANCOCK. Yes, sir.
Mr. KENNEY. That have not been uncovered?
Mr. HANCOCK. Yes, sir.
Mr. KENNEY. Are you prepared to state what they are now?

Mr. HANCOCK. Well, I am not prepared to do it completely right now. I have and will be very glad to give you a memorandum about them. I have a memorandum but I do not have it here. I can tell you what they relate to and maybe that will cover your point.

I do not know how you happened to overlook the prohibition against bucket shops in the bill. Mr. MERRITT. Against what?

Mr. HANCOCK. Bucket shops, the most vicious thing that you could find.

Mr. KENNEY. Well, are they not taken care of by State legislation?
Mr. HANCOCK. Effectively?
Mr. KENNEY. They are taken care of by State legislation.
Mr. HANCOCK. I do not think that they are effectively.
Mr. HUDDLESTON. May I ask a question?

Mr. HANCOCK (continuing). May I answer that question, just 1 minute so I will not be diverted then.

Mr. HUDDLESTON. Yes.

Mr. HANCOCK. The problems relating to the manner of presenting the facts to stockholders in annual reports, and in earning statements, surplus accounts, statements of reserve, in that field particularly, there is a chance for a lot of very good work to be done. I do not want to see accounting practices poured into a mold, because they will not stay there; but there are certain things that are done, and are condoned that should not be done, and should not be condoned.

Now, it would be a matter, I am sure, of not less than an hour's discussion, if we went into these problems in detail. I have no desire to take up so much time. I could give you a memorandum of my whole views in the matter and they are all in a memorandum prepared some time ago.

Mr. KENNEY. Would you mention what occurs to you now, give us some idea of it and then afterward you may file your memorandum.

Mr. HANCOCK. Yes. I can return to the proposed provisions of the bill now.

We are talking about giving out information. Now, suppose that you have a provision requiring audits at the end of the year, requiring the corporations to give all of the facts. Now, at the end of the year, inventories are customarily priced on the basis of cost or market, whichever is lower, In the last year, with advancing commodity prices, every merchandising concern, certainly the well managed ones have a substantial gain in inventory. That is something that is not shown on the balance sheet. Now, under this law,

if the corporation officers give out a balance sheet that is conservative, although they are governed by the best standards today, they are giving out misleading information. I think that the stockholders ought to know what that so-called hidden profit in the inventory is at the end of the year.

The difficulty is that the average investor may assume that the profits for the coming year will be increased thereby—which is erroneous. Yet if he is not informed of the fact he will surely think he was misled.

I think that the accountants' statements ought to reflect the true normal earnings and not fortuitous events of one particular period; and if there is such an event, it ought to be spelled out.

Reserves should not be used to build up earnings, or to deflect them. Any transfers from reserves or to reserves ought to be spelled out in detail.

If you get me started, I will be talking for a week on that question.

Mr. KENNEY. Do I understand that there are other bad practices that ought not to exist?

Mr. HANCOCK. There are. There is no mystery about it. Anybody in my business or position can tell it. We fight with them all of the time, and we are making headway, So far as I know, these abuses do not exist generally; but I do not doubt that there are times when they exist.

Mr. HUDDLESTON. Mr. Hancock, you referred to the matter of bucket shops.

Mr. HANCOCK. Yes, sir.

Mr. HUDDLESTON. Subsection (1) of section 8, on page 15, provides that it shall be unlawful for any person, directly or indirectly, by the use of the mails or any means or instrumentality of interstate commerce, or of any facility of any national securities exchange

"(1) To effect any fictitious transaction in any security registered on a national securities exchange, or any transaction which purports to be a sale of any such security but involves no change in the beneficial ownership thereof;"

Which would seem, so far as these registered securities are concerned, to be a prohibition against bucket shops.

Mr. HANCOCK. A bucket shop takes the order. It does not do anything about it. A bucket shop merely takes the order and does not execute the order. Nothing is done about it.

Mr. HUDDLESTON. Yes.
Mr. HANCOCK. If the market goes down, the customer loses.
If the market goes up, the proprietor vanishes.

Mr. HUDDLESTON. Do they not take
Mr. HANCOCK (interposing). That is fictitious, I suppose.
Mr. HUDDLESTON. That is a fictitious transaction.

Mr. HANCOCK. That is not a transaction. There is no transaction at all.

Mr. HUDDLESTON. Any fictitious transaction is no transaction, of course. It does not have a reality.

Mr. HANCOCK. No.

Mr. HUDDLESTON. It occurred to me that that section would apply to them. I confess that I do not know just what a bucket shop is.

Mr. HANCOCK. You are lucky, sir.

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