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the law to suit itself. You really haven't any prohibition at all. The difficulty with a statute built around such language is that a prosecutor can prove violation.

Mr. HUDDLESTON. It is essential in nearly every criminal prosecution to prove intent to commit the crime.

Mr. CORCORAN. Not necessarily. You could make it so.
Mr. HUDDLESTON. I say, that is a most common provision.
Mr. CORCORAN. It is common.

Mr. HUDDLESTON. In nearly all criminal prosecutions proof of intent to commit the crime is required.

Mr. CORCORAN. That is undoubtedly true.

Mr. HUDDLESTON. It is true that guilt is presumed in some cases, but it is generally the other way. You are required to show that there is an intent. Even in murder, or the most serious criminal cases that is so.

Mr. CORCORAN. Yes, sir; but it usually is confined, in modern law, to the very serious crimes. You have a great, great, great many statutes under which a defendant can be held without proving intent, for minor offenses. If you look in section 24, on page 43, the general penalty clause, you will notice there a provision which reads:

Any person who wilfully violates any provision of this act or any rule or regulation made thereunder.

Mr. HUDDLESTON. “Willfully" does not necessarily mean "knowingly," or with intent to deceive; or intentionally, or deliberately, or with the intent to do the act. Here is an act which may be good or bad, according to the intent, and yet we make it a crime unless the accused is able to acquit himself. We cast upon him the burden of showing that he is not a criminal, instead of leaving the burden where it has always been, on the prosecution to show that he is a criminal.

Mr. Corcoran. In connection with this paragraph (5), you have two sanctions. There is first of all a criminal penalty. There is secondly a civil liability and for the purpose of the civil liability the paragraph is not worth a hoot if a plaintiff should have to prove that the defendant intentionally deceived him. It is the same situation you had to meet under the Securities Act.

Mr. HUDDLESTON. We are dealing with a criminal statute.

Mr. CORCORAN. Well, with respect to the criminal statutes, over on page 43, in section 24, there is a provision to the effect that the statute must be willfully violated.

Mr. HUDDLESTON. You do not think that that means knowingly, do you?

Mr. CORCORAN. Willfully.
Mr. HUDDLESTON. Yes,
Mr. CORCORAN. I should certainly think so, sir.
Mr. HUDDLESTON. Well, I am glad to have your point of view.
Mr. CORCORAN. I may be wrong.

Mr. HUDDLESTON. Willfully is more applicable to a civil liability than to a criminal liability. I submit that“willfully” does not necessarily mean "knowingly.

Mr. CORCORAN. Possibly, sir; the act needs redrafting on that point.
May I go on?
The ChairMAN. Go ahead.
Mr. Corcoran. Paragraph (7).

Mr. PETTENGILL. You have not talked about (6) yet.

Mr. CORCORAN. No; I have not. That relates to advertising of pools. The payment of money to circulate a rumor that there is a pool operating, which raises or lowers the price of the stock.

Paragraph (7) Mr. Mapes. Where you pay for the publicity agent? Mr. CORCORAN. Yes, sir. Mr. PETTENGILL. Newspaper reports. Mr. CORCORAN. Yes, sir. Mr. PETTENGILL. Paragraph (7). Mr. CORCORAN. Paragraph (7) relates to pegging, fixing, or stabilizing prices, without prior reporting to the Commission. That catches "good” pools as well as "bad" pools. Most people think that such a large proportion of pools are bad that trying to decide which are kittens and which cats is not worth while—that it is better to say that all are suspect, but leave it to the Commission to permit operators if they can make out a good particular case, to make prearrangement with the Commission for pegging or fixing or stabilizing prices of securities.

Paragraph (8) relates to the cornering of the floating supply of a stock.

Paragraph (9) relates to transactions in options, and the particular kinds of options that are called puts, calls or straddles.

A put is a right to sell stock to another at a given price within a given time. A call is a right to buy from another at a given price within a given time. A straddle is a right either to buy or sell, wholly at the same price, within a given time.

It is on the basis of an option that a pool usually operates.
Mr. MERRITT. Why do you think that pools are so dangerous?

Mr. Corcoran. Because they acquire practically no investment in the stock—and are always used as a basis of pool operations in the stock.

What benefit they may offer is quite outweighed by the difficulties they cause. Every pool operation is based on options.

Subsection (b) which begins on page 18, imposes a civil liability on any person violating any of the preceding sections to a person who buys or sells securities because of the operations forbidden and loses.

Subsection (b) relates to the person who bought the stock because of any of these operations.

Subsection (c) relates to the person who sold stock because of them, subsection (d) gives the right of contribution to a defendant who is liable, civilly, under any of the sections.

Mr. Mapes. The question occurs to me. Reading this paragraph (b), why give a person the right to recover more than he is injured?

Mr. ČORCORAN. Because you can never prove, sir, a positive relationship between the day a purchaser might have bought or sold and the manipulative operation intended to induce him to buy or sell or not to buy or sell. So the bill straddles the problem by giving the person injured the advantage of the best price within 90 days,

Mr. Mapes. It seems to me in that paragraph you are giving the critics of this legislation an opportunity to make some criticism which will appeal to the people.

Mr. CORCORAN. Of course, the damages will be confined to the trend within 90 days, the period during which most pools will operate. Mr. MAPES. Take the alcohol stocks. That was within a 90-day period.

Mr. CORCORAN. You would not mind soaking them in the alcohol matter, would you?

Mr. KENNEY. Do you mean that literally? Mr. CORCORAN. No, sir. Mr. MAPES. Without any reference to the soaking feature of it, why should a man get more than he has been injured?

Mr. CORCORAN. At some point during the operation of a pool, or during the dissemination of false information, the purchaser who buys goes into the market. You know at what time he bought the stock and what he paid for it. You do not know on what date or at what price he might have bought the stock except for the dissemination of the information or the operation of the pool. There is no way of fixing that other date or price. The bill therefore just gives the purchaser the most advantageous price for him over a period of 90 days.

Mr. MAPES. Suppose he buys the stock at 100, senses that something is wrong and sells at 90, and it goes down to 40. Why give him the opportunity of recovering all of that difference, when he has not suffered that loss?

Mr. CORCORAN. There are two cases to distinguish. One case is where a purchaser actually sells and we know what his loss is. The other case if where he hangs on. In that case you never know his actual loss. There should be a distinction of that kind made.

Mr. Mapes. I can see where he hangs on that there might be justification for it, but of he sells out and he has not actually suffered, that is a different situation.

Mr. CORCORAN. I think you are quite right.

Mr. Mapes. I do not see why he should be allowed to recover so much more damages than he had suffered.

Mr. CORCORAN. Paragraph (e) fixes a limitation for suits of 2 years after the discovery of the violation.

Section 9, page 20: That forbids short-selling and stop-loss orders except in accordance with such regulations as may be prescribed by the Commission. Subsection (c) says, “Thou shalt not devise any other cunning devices."

This section 9 relates to matters which a great many people think ought to be absolutely forbidden. You heard a witness here say the other day that short selling should be legislated out of existence. The theory of this bill is that no one yet knows enough about short selling to know whether it should be legislated out of existence, or whether it might not be handled as a possibly useful tool of the market under regulations devised by the Commission.

The same thing is true about the stop-loss orders. Of course subsection (c) is a catch-all clause to prevent manipulative devices I do not think there is any objection to that kind of a clause. The Commission should have the authority to deal with new manipulative devices.

Now, section 10 raises a problem on which there will be a great deal of discussion, that is the segregation of the functions of the broker, the specialist, the dealer, and the underwriter.

There are many houses--in New York, and throughout the country that combine three or four functions. They float an issue as an underwriter or act as members of underwriting syndicates. As such they have a real interest in the market for particular securities and so that they will have a reputation to induce investors to buy other issues when floated by him.

Those same underwriting houses, as merchants, buy and sell stocks from and to the public for their own account for a merchandizing profit whenever they can get an opportunity. And those same houses act in a third capacity as brokers executing orders for a commission.

There are certainly difficulties about having those first two functions combined with that of a broker. It is very hard for a man to sit on 3 sides of the fence at the same time, or even on 2 sides of the fence, particularly when as a matter of practice your broker acts not only as an agent who executes your own orders, but also as your investment lawyer to give you advice as to what securities to buy and sell.

Look at the alcohol situation again. There a stock-exchange house that was a participant in the pool thus acting as a dealer for its own account was sending out every day in “flashes” to its brokerage customers tips to buy the stock. The house was therefore acting in two capacities and it is awfully hard to serve your own interest and serve your customer's interest at the same time.

Now, the difficulty is that there is no underwriting at the present time, has not been for a long time and may not be for a long time to come, simply because the public will not buy.

Many underwriting houses without underwriting business are holding their staffs together by a “back log” of commissions from a sideline of brokerage business. As the Dickinson report said, in the abstract there is no question at all but that the functions of broker and dealer should be divorced but you have the immediate problem of what you are going to do if you break up the present organization of the brokerage underwriting and dealer business, at a time when of the two branches of the business, one is uneconomic, and the branch earning brokerage commissions is carrying the whole pay roll of both branches.

There is one other kind of mechanician of the stock exchange in whom you are particularly interested. That is the floor trader who buys a seat, goes on the floor and there trades in and out for his own account.

Now, all member brokers on the stock-exchange floor are to some extent floor traders for their own account as well as brokers for the public; but there are a certain number of members-I understand from estimates I have heard about 100 out of thirteen hundred and some members listed—who are just trading on their own account.

You put an order through a broker. It gets on the floor, is executed and reported over the ticker. You put in that order on the basis of what you or your broker's office saw coming out over the ticker, which showed the last transaction. But the floor trader buys a seat on the exchange, sees transactions before they get to the ticker, and in his trading has a 6-minute jump on you by being on the floor.

Mr. MAPES. He is called a dealer?
Mr. CORCORAN. He is a floor trader.
Mr. MAPES. What is the difference between him and a dealer?

Mr. CORCORAN. He is on the exchange floor. A dealer is usually off the floor. He is a special kind of dealer, who actually stands on the stock-exchange floor and trades at the post

Mr. MAPES. He is a dealer but is not on the floor?

Mr. CORCORAN. The term "dealer" is broad enough to include this special kind of a dealer who trades on the floor, and other dealers, who deal off the floor.

Mr. MAPES. The dealer includes him.
Mr. CORCORAN. The term "dealer" includes the floor trader.

Mr. MERRITT. The floor trader acts only for himself, or buys and sells for others?

Mr. CORCORAN. Sometimes. He is a fully accredited member of the exchange and he can if he wants to, buy and sell for others as a broker. I saw some figures the other day, estimates, which came from Mr. John Flynn, who is working with the Fletcher investigating committee, to the effect that last year, I do not know how accurate they are, I am simply reporting something that was told to methat last year the floor traders affected about half of the transactions on the floor of the stock exchange.

The justification for throwing them off the floor is that there is no reason why any trading for himself should have a jump on the rest of the buying public by being on the floor and knowing what is going on whereas the rest of the public has to buy strictly from the ticker outside.

The argument that is put up for them is that because they are in and out, in and out, in and out, on the floor, and can keep up with the fluctuations the difference between sales funds to be the quarter of a point, or three eighths of a point, or whatever other minimum spread the floor transfer can operate on. The answer to that argument is that while the floor trader may keep the market within narrow limits from sale to sale, he certainly does not keep the market narrow over the day, because that would require him to take a risk in the market which he simply will not do. His profits depend upon his running along and playing with the trends and not getting caught taking positions.

This bill simply says that no member of the exchange and nobody else doing a brokerage business through a member of the exchange can be anything but a broker. It goes the whole way in segregating brokers from dealers. The Twentieth Century Report went the whole way too.

The CHAIRMAN. We will go on again tomorrow at 10 o'clock.

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