possibility. You as a director of General Motors could not investigate all of their plants throughout the United States, you could not count all automobiles, you could not value all their buildings and property, you could not check all their accounts receivable, and certify to the fact that they are correct. Why be impracticable about it? That is a thing that just cannot humanly be done. I am just as anxious as Mr. Thompson or anybody else to protect the public.

In fact, no one is more anxious than I am in that regard, but we must be practical. If you want to place responsibility for any mistakes, errors, or omissions, let us place it on the man who makes the record. It is obviously a fact that no individual director can make such a record. It has got to be made by somebody else, because an individual director cannot make up such a record. He has not the competency to do all the work, in the first place, nor has he the time. Certainly Mr. Thompson would not suggest that if there are 10 directors on the General Motors' board he would have each one of those 10 directors separately go around and value all of their property, count their automobiles, and take a complete inventory.

Mr. THOMPSON. No. But, Senator Couzens, I think if I were in that position I would see to it that I got the very best accountants possible, persons I could depend on.

Senator CouZENS. That is true.

Mr. THOMPSON. Ernst & Ernst, or somebody like them.

Senator COUZENS. But why not let the Federal Trade Commission certify to the character and reliability of the accountants?

Mr. THOMPSON. If you can have some system whereby the Federal Trade Commission can be responsible for the selection of accountants, you will provide a lot of business for the Federal Trade Commission; and then those accountants would have to be put under criminal penalty for false statements. If you are going to make those requirements perhaps you can protect the situation, but it will become somewhat involved.

The CHAIRMAN. I do not understand that a director would be liable in a civil suit for any and every little item in the whole statement that might be erroneous.

Mr. THOMPSON. Oh, no.

The CHAIRMAN. They are only liable when, taking the whole statement together, they have misrepresented very material facts, either through omission or misstatement.

Mr. THOMPSON. That is correct. That is an excellent statement of it.

The CHAIRMAN. That being true I do not see why the company should not be responsible, because the people it employs to check up inventories, and all that sort of thing, they must know about, and they must not be misleading so as to cause loss. That is the main question, and they ought to be responsible for the fact that they are not to misrepresent a material issue.

Mr. THOMPSON. That is the way we feel about it.

Mr. HOLTZOFF. There are also remedial provisions in the bill, but they have been discussed already. So I do not think I should take any of your time discussing them.

The CHAIRMAN. All right.

(Thereupon Mr. Holtzoff left the committee table.)

The CHAIRMAN. Who will you have next, Judge Thompson? Mr. THOMPSON. We will call Judge Healy, chief counsel of the Federal Trade Commission, and one who has had to do with an investigation of the power companies, has been connected with all of the power investigations. He will give you a number of illustrations and point a moral.

The CHAIRMAN. Very well. Judge Healy, come up to the committee table, and give your name, address and, position.

STATEMENT OF HON. ROBERT E. HEALY, CHIEF COUNSEL,

FEDERAL TRADE COMMISSION, WASHINGTON, D.C.

Mr. HEALY. Mr. Chairman and Senators, I appreciate the opportunity to appear and testify in support of this bill. I am a little embarrassed by the kind things that Mr. Thompson has said about me, but the subject is one that is very close to my heart on account of the work we have been doing.

The gentlemen who drew this bill were kind enough to invite me to sit in conference with them a few days ago. I made a few suggestions, and some of them have been adopted, but I am not sure how many. I have prepared a typewritten memorandum of suggestions for amendments to the bill, which I ask leave to file with the committee after I have checked it over with Mr. Thompson.

The CHAIRMAN. And that is to go in the record?

Mr. HEALY. I will offer it, Mr. Čhairman.

The CHAIRMAN. All right.

Mr. HEALY. On the 10th of September 1932 in a statement published in the magazine Liberty, Franklin D. Roosevelt, now President, made this statement:

Instance after instance of pillage, deceit of the public, and even of the prostitution of public agencies and officals-for which these same managers have often been responsible-may be found in the files of the Federal Trade Commission investigation of public utilities. The record is convincing. It is so voluminous that anyone may pick out examples to convince himself. But if you are willing to believe me that this is so, I will add that nothing more atrocious in the way of thievery inside the law has ever been successfully attempted against the American public.

Before I get through I should like to call attention to a few examples of bad accounting and of irregularities in practice, which I think have worked out to the disadvantage of the public although I do not mean that all of them come within the severe language used by the President in the article referred to. I merely refer to certain of them that come to my mind without a search of the record. For example, on the 21st of June, 1928, there was a short advertisement published in the New York Times, which I will read:

First mortgage bond yielding 62 percent with valuable stock-purchase privilege. Property value at least 150 percent of total issue. Interest charges earned more than three times. Sinking fund to retire all bonds by maturity. Managed by an engineering company of high repute. In heart of dense shale gas area and industrial markets. Life of reserves and sales contracts at least 15 years.

And then there was added:

Information upon request.

Senator COUZENS. Who is it signed by?

Mr. HEALY. I cannot answer the question offhand, but I will before I get through.

Senator COUZENS. All right.

Mr. HEALY. In my opinion that advertisement referred to either the Inland Gas Corporation or the Kentucky Fuel Gas Corporation. The Inland Gas Corporation had been in existence but a short time when this advertisement was written, and it had been an operating deficit. So it had not made its operating expenses. Neither had it made its fixed charges.

The Kentucky Fuel Gas Corporation had never made its interest charges. About 1929 or such a matter the officers and attorneys of these two companies were apprehensive that receivership might follow, and they got up a plan to extend the natural gas pipe lines of the company into the city of Detroit. And they made application through the Northern Industrial Gas Co. to the city council, which was never acted upon.

In that connection they created a new corporation, known as the American Fuel & Power Co. That corporation issued several million dollars worth of debentures. Now, the only assets that the corporation had were the common stocks of the Inland Gas Corporation and the Kentucky Fuel Gas Corporation. And inasmuch as these two corporations had never earned their fixed charges the common stock was not worth very much.

A part of the interest payments that had been made by the subsidiary companies had been made from advances made by people interested.

In 1930 the Columbia Gas & Electric Corporation, which is commonly referred to as a part of the United or Morgan group, interested themselves in this situation. I will tell you about that in a minute. The great point is that in December of 1930 both the Inland Gas Corporation and the Kentucky Fuel Gas Corporation were placed in receivership.

The American Fuel & Power Co. was unable to meet its fixed charges and is in default under its indenture. The public has $9,000,000 of the bonds and debentures of these three corporations, and the chances of recovery are very slim.

There is another not quite pertinent point; but it is interesting, and I will refer to it briefly: The board of directors of Columbia Gas & Electric Corporation, on the day after the application by an affiliate of American Fuel & Power Co. was made to the city of Detroit for a franchise, authorized the construction of a pipe line from Toledo to Detroit. Soon thereafter Columbia acquired a majority of the shares of American Fuel & Power Co. and of Northern Industrial Gas Co., and the line was never built. The Columbia Gas & Electric Corporation, a Morgan subsidiary, blocked the entrance of that natural gas line into the city of Detroit, in several different ways.

Now, they say that that was not the purpose of it. They say the purpose of it was to get a larger supply of natural gas, as they were expanding their lines into the East. But by reason of owning a large percentage of the bonds of the Inland Gas Corporation and of the Kentucky Fuel Gas Corporation, they got a control of the supplying companies and by buying the stock of the American Fuel & Power Co. which controlled the two subsidiary companies they got stock control. Then they bought the stock of the Northern Industrial Gas Co., which was to go to Detroit. So it has blocked that matter

entirely. They put about $6,000,000 into these three corporations when it must have been perfectly apparent to them that they were not good for anything.

Senator COUZENS. You see what Kentucky did for Michigan, Senator Barkley?

Senator BARKLEY. Well, Michigan ought not to have stopped it. Senator GORE. When you say "they" you mean Columbia Gas & Electric Corporation?

Mr. HEALY. Yes. We have put into our record the circulars by which these various issues were put before the public, and they were sold in spite of blue sky laws.

I do not undertake to maintain that there are not good State blue sky laws, or that they are not well administreed. I do undertake to maintain that in spite of them the sale of worthless securities has gone on. And we have on file with the Federal Trade Commission some expressions from various State officials dealing with the administration of their blue sky laws.

Senator BARKLEY. I did not catch what you said about one of these companies being barred from Detroit. Was either one of them barred by the city of Detroit, from coming into that city, to sell gas in competition with someone already in there?

Mr. HEALY. Not so far as I know. As I have said, after the application was made to the Detroit City Council, Columbia Gas & Electric Corporation directed the building of a line from Toledo to Detroit and began the aggressive acquisition of the stock of the controlling parent company, and the line has never been built. As to the local situation, I know nothing about it, except that I do know this; that the representatives of the Northern Industrial Gas Corporation made quite a number of contingent contracts for supplying natural gas to industrial concerns in Detroit.

Senator GORE. And did you say that the Columbia Gas & Electric Corporation put about $6,000,000 into these three concerns? Mr. HEALY. Yes, sir.

Senator GORE. Did it take a loss on them?

Mr. HEALY. It is very plain that it will have to do so if it has not. I do not know whether they have written the loss off their books or

not.

Senator GORE. Do you think they contemplated them as investments, or were willing to prevent this concern from going into Detroit? Mr. HEALY. It seems to me there is only one sensible conclusion to be drawn from the record, and that is that they must have had information of the condition of the companies, or certainly of the American Fuel & Power Co., when they purchased. I can cite you two pieces of evidence which support that conclusion: First of all, at the time the contract for purchase by Columbia Gas & Electric Corporation was made there was attached to it a balance sheet of the companies. In the next place, there was attached to it a statement showing the advances which the affiliated interests had made, and that statement showed that some of the advances were for the purpose of meeting the fixed charges of the subsidiary companies.

Senator GORE. I was wondering why they would want both the producing companies and the holding concern. It seems to me if they got the holding company that was sufficient for their purposes.

Mr. HEALY. By getting hold of the holding company of course they got the stock ownership and thereby got stock control. Without that stock control they already had a substantial number of bonds of the two subsidiary companies.

Senator GORE. But not control?

Mr. HEALY. Not technical control. They were not satisfied to rely for control on the ownership of 30 to 40 percent of the bonds, although today they are in position to very largely influence the protective committee.

To resume the statement about what some State commissioners have said about blue sky laws: There is on file with the Federal Trade Commission a statement from a Rhode Island official, that in that State the only difficulty results from the selling in the State of unapproved securities through the medium of interstate agencies. We have similar statements from Pennsylvania, which say that at least 90 percent of blue sky securities sold there are sold through the mails. We have a similar statement from someone in California, and another one from an official in Montana.

Senator COUZENS. That also applies with respect to regulation of rates, doesn't it?

Mr. HEALY. Do you mean regulation of electric rates, gas, and so on?

Senator CoUZENS. Yes.

Mr. HEALY. I believe it does.

Senator COUZENS. I mean those agencies outside of the blue sky jurisdiction States, avoid it through holding companies and other

means.

Mr. HEALY. Yes, sir. I wisa I might have brought here with me, since you are interested in the interstate transmission of electricity, a chart we have of the American Gas & Electric Co., showing the socalled backbone line of the company, that runs through some 5 or 6 States, for hundreds of miles, as the pipe lines do. For example, through the Columbia Gas & Electric Corporation there is an actual connection all the way from the natural gas sections in the Texas Panhandle to New York, as well as to the District of Columbia. How much natural gas from Texas actually gets here is open to question, but the connection is there.

The development of the transportation of natural gas in interstate commerce has grown very rapidly, and very surprisingly I may say, within a comparatively short time. And there are many indications that the same interests who control the electrical industry of the United States are already in control, or on the way to the control, of the natural gas industry of this country, and will encounter no competition in their heating and lighting sales from that direction.

The CHAIRMAN. Do they get any of their money from the public? Mr. HEALY. Yes, sir. And I will now turn

Senator CoSTIGAN (interposing). By your reference to connection, do you mean that conduits are actually constructed?

Mr. HEALY. Yes, sir.

Senator CoSTIGAN. And rights of way secured?

Mr. HEALY. Pipe lines are actually built and in operation. And we hope to have the information to show to the Senate before very long. We did not ourselves realize until not so long ago just what this natural gas matter really meant, and we are getting up some maps