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The CHAIRMAN. Very well. Mr. Friedman is passing through and would like about 10 minutes.

STATEMENT OF HERBERT J. FRIEDMAN, ATTORNEY AT LAW, CHICAGO, ILL.

The CHAIRMAN. State your name, address, and occupation, please, Mr. Friedman. Mr. Friedman. Mr. Chairman and members of the committee, my name is Herbert J. Friedman; place of residence, Chicago, Ill., and I am an attorney at law. I do not represent anybody in this connection whatsoever, and I am here merely at the suggestion of Senator Bulkley, with whom I was discussing certain phases of this bill a few minutes ago. It was Senator Bulkley's suggestion that I should state them to the committee. I told the Senator that in my judgment the bill, the contents of which I approve of cordially, §d be clarified and possibly strengthened in some respects. I cannot see, from a study of the bill, or a cursory examination of it rather, that there are any provisions in the bill relating to what may happen in connection with the reorganization of a property in the event it goes into a default or a receivership, and everybody knows that, no matter how careful bills of this character may be drawn, some issues and some companies are bound to fail in the future. In the last few years we have seen the evils cast upon security holders in connection with the costs of reorganization and often the inability of certain classes of security holders to really get a voice in the matter of reorganization. The recent amendment to the bankruptcy act passed in the last days of the last session of Congress has given to the Interstate Commerce Commission a wide discretion and authority in passing upon some of these matters that I am now suggesting should be continued in this bill, and it should be conferred upon the Federal Trade Commission. The amended bankruptcy act provides for the Interstate Commerce Commission to have a right and voice to say whether a plan of reorganization is fair to all the classes of security holders, and I believe, while legislation of this character is now being passed and subject to scrutiny relating to securities other than those relating to Hood. Congress should now protect the security holders in some such similar way by giving the Federal Trade Commission a similar right and authority to pass upon the fairness of a plan of reorganization. I further feel that it would be wise if the Federal Trade Commission would have the right and authority to pass upon the reasonableness of fees that may be charged. In the city of Chicago we see a situation now where a tremendous number of real-estate properties have been drawn into receivership where the value of the bonds have now sunk to 8 or 9 or 10 percent of their par value, where the depositaries have been trying to exact in many instances, merely for the right of depositing the bond with them, a cost or a premium or a charge of the par value of the bond of 2 percent. Senator ADAMs. May I interrupt—I was going to ask Mr. Butler

a question, since he was one of the draftsmen of the bill. Am I correct

that railroads are not included in the bill as we have drawn it?

Mr. BUTLER. No; they are still under the jurisdiction of the Interstate Commerce Commission, and may I suggest at this point that no attempt in drafting this bill was made to amend corporate law. The only aim of this bill was to control the sale of securities. Mr. FRIEDMAN. In the same way very often depositors have no voice and cannot get any voice in the right of reorganization, and any time any independent group attempts to get a voice in the right of reorganization they are blocked by the house of issue. That is to say, the house of issue has within its means all the avenues of contact as to the security holders. They can place them and they know who they are. You probably saw evidence of this most recently in the most acute case of Kreuger & Toll. Lee, Higginson had issued the securities, and they would not allow anybody else to see the list of security holders. There are times when the independent security holders should have that right of finding out where his common fellow in the class of holders of that security may be, so he may get in contact with him; and if he has a plan that differs from that of the house of issue he should have a right of presenting it by communicating with the security holders. Now, I felt that could be reached by giving the Federal Trade Commission the right to say when any independent group of security holders could go to the house of issue and say, you must turn over to this independent group the list of security holders, their names and addresses. I believe that would give to the security holder, in the event of reorganization, a protection that he needs today, and that is sadly lacking. Senator ADAMS. May I ask, are you reasonably clear that that would be within the power of Congress to do? Mr. FRIEDMAN. I was listening to the statement of Mr. Butler yesterday, and he stated that without doubt the right to use the mails would make the provision of this act legal, and I have no doubt whatsoever Senator ADAMS (interposing). I was thinking of your suggestions in reference to a regulation of the security house in the matter of reorganization and disclosing its security holders, and so forth. Mr. FRIEDMAN. Yes, Senator; it is my belief that if the right to use the mail were withdrawn, unless the house of issue did that, it would be compelled to do it. It could not possible proceed with its plans, unless it made a request for the use of the mails, and I think that the Federal Trade Commission should have the right to examine this list. I am not saying it should be an indiscriminate right. I believe an application should be made to the Federal Trade Commission and the Federal Trade Commission should have the power and authority and discretion to say whether a man should have a right to examine the list of security holders. Senator BULKLEY. Is it your idea that the list should be deposited in the first instance with the Federal Trade Commission? Mr. FRIEDMAN. Well, I had not thought of that, but the bill might even provide for that. - The CHAIRMAN. Might they not be used by speculators for improper purposes? Mr. FRIEDMAN. I think there would be dangers if it were an indiscriminate right, Senator, and so I am merely suggesting that the right to examine that list should rest in the authority of the Federal Trade Commission, and that application should be made to the Federal Trade Commission whether persons should have the privilege of examining that list. Now then, the other and last thing that I wanted to add is that the Federal Trade Commission should in like manner have the right and authority to pass upon the reasonableness of the compensation of the members of the depositary committees, the depositaries, and the attorneys, of whom I happen to be one. We know that in a great many instances some of these services are negligible. In a great many instances the members of the depositary committee do nothing except at the dictation of a banker as to a plan or scheme, and sign their name to it and bring it in and then charge very large compensation or get substantial compensation for services of a minor character, and I believe a full statement should be made. I might add one more thing: I feel that at the time of reorganization when an advertisement is made and any statement goes out as to the depositary committee a full statement should also be made as to the interest of each of the members of that committee, what his holdings may be in the company that he is interested in reorganizing. Very often names are put down, certified by a banker, who has no interest whatsoever. They are really strangers and brought in by way of good will or to do a man a good favor, and he goes down and participates in the reorganization of the company in which he has no real or substantial interest. I think if a man is going to deposit his securities with any group he ought to know not merely the name of the man but what interest he has in the property. That completes what I had in mind, I had not any idea of making any statement here, but Senator Bulkley suggested that I should come in and present those thoughts. The CHAIRMAN. I am glad that you were able to make your statement. Does any member of the committee wish to ask Mr. Friedman any questions? If not, you will be excused. Mr. FRIEDMAN. Thank you very much. The CHAIRMAN. Gentlemen of the committee, on yesterday I requested Mr. Penn Harvey, a former director in the investment house of Harris Forbes & Co., and later a vice president of Chase Harris Forbes Cos. of New York, to outline for the information of the committee the mechanics of the origination and distribution of investment securities. I thought the committee might be interested in having such information. Mr. Harvey, will you come forward to the committee table and give your full name, business, and address, and inform the members of the committee with respect to that particular subject.

STATEMENT OF PENN HARVEY, OF THE CHASE HARRIS FORBES COS., NEW YORK CITY

Mr. HARVEY. Mr. Chairman, I am recovering from a broken leg. Might I be seated?

The CHAIRMAN. Certainly.

Mr. HARVEY. Might I also inquire how much time will elapse before you ordinarily adjourn?

The CHAIRMAN. As soon as we can, perhaps within half an hour. Will that be enough? Mr. HARVEY. Yes sir. The CHAIRMAN. You may proceed with your statement, after giving the information I have requested, in order that the members of the committee may know who you are. Mr. HARVEY. My name is Penn Harvey. Practically all of my business career has been in the investment banking business. First with the house of Harris, Forbes & Co., in which I became a director, and which according to our terminology was a partnership. That business, as the most of you gentlemen know, was absorbed by the Chase Securities Corporation, and out of that came the house of Chase Harris Forbes Cos., and I became a vice president of the new corporation. The CHAIRMAN. What business are they engaged in? Mr. HARVEY. Investment banking. My home address is MontClair, N.J. My business address is 60 Cedar Street, New York City, at least for the time being. Senator KEAN. That is where you used to be? Mr. HARVEY. Well, I made that statement because, as you may know, we are about to divorce the affiliate, so I do not know where the orphans of the storm may land. Shall I now proceed, Mr. Chairman? The CHAIRMAN. Yes; in your own way. Senator CostIGAN. Let me ask you: What is the cause of the divorce to which you have referred? Mr. HARVEY. Well, Mr. Aldrich, the president of the Chase National Bank of New York City, has announced that he is going to separate the security affiliate from the bank. And they are now taking steps to do so. Senator CosTIGAN. So the reference was not personal? Mr. HARVEY. Oh, no. Senator KEAN. If you want it, I will put in Mr. Aldrich's circular in that regard. Mr. HARVEY. I prefer that you use your own judgment about that. Senator KEAN. Do you want it in? Mr. HARVEY. No; but just as you like. The CHAIRMAN. I think we might hear from Mr. Harvey first. Senator KEAN. All right. Mr. HARVEY. In the first place, I should like to make it clear that I am not appearing before your committee in any capacity except that of personal interest in the subject, and that I represent nobody but myself. I happened to drop in here on yesterday, because, quite naturally, I am most vitally interested in all this sort of thing, and wanted to hear the proceedings; and having been originally from Florida, I knew Senator Fletcher, and he requested me to talk to you. I had no intention in the world of doing such a thing until your chairman suggested it on yesterday. Now, Senator Fletcher has asked me to outline the mechanics of investment banking. In the brief space of time that I have I can only touch upon the high spots. I know, from what I heard here this morning, that Senator Kean is particularly familiar with such operations and I could probably get a good deal of information from him, and perhaps I should do so rather than to try to tell him what he already knows. But I do not know how familiar all the members of the committee are with the mechanics of investment banking. Senator ADAMs. The most of us have been victims, I take it. Mr. HARVEY. Well, I hope you would not call that the mechanics of investment banking. Senator ADAMs. No; perhaps not. The CHAIRMAN. You may go ahead with your statement, Mr. Harvey. Mr. HARVEY. The investment banking business is divided into two major functions: (1) The function of originating securities; and (2) the function of distributing securities. Now, I should like to discuss, briefly, this general subject under those two heads, trying to tell you in my own way as a practical man in this business, and I have been in it for the past 17 years, just how those functions are discharged by an investment banking house. At the beginning we have the originating function. The originating investment house, investment banker, makes a full investigation of the project which desires to do some financing. That investigation at first is carried on, generally speaking, by some of the technical experts of the buying department of the given house. That is to say, their engineers, if it happens to be an electric power company, or a gas company, or a railroad company, the engineering expert along that particular line, who is a part of the organization, makes the first investigation. Perhaps their own lawyers would go into certain phases of it. Then we must have our own accountants, accountants in our own organization, look at it. ' And if we are not satisfied with that situation, and with the bookkeeping records of the corporation attempting to do the financing, we would employ independent audit experts, or certified public accountants, to make an independent audit for us. Now, all of this, and in more detail than I have the time to give it to you, represent the preliminary steps. The CHAIRMAN. And all of it is at the expense of the investment banking house, I take it? Mr. HARVEY. Yes, sir. Now, if such investigations indicate that it is an attractive proposition, that the securities proposed to be issued are interesting and attractive; and then if the issue is larger than the originating house wants to commit itself for a loan, it will ask some of its competitors to join with it in that particular piece of business. In so doing it would make available to its partners those that it calls into the particular deal, such information as it has secured in its original investigations; and, perhaps, furnish them what we call an advance proof of the circular. And it may be that 4 or 5, or 6 or 10 such houses would be invited to consider the particular piece of * and take an interest as partners along with the originating OuSe. Now, let us assume that it is an attractive piece of business, and that all of the houses invited want to go into it. When you have gotten that far you have reached the point of the signing of a contract for the securities with the issuer, for the outright purchase of those securities. That is what we call making the commitment, making the actual contract of purchase to take up the securities and pay for them. In other words, as Senator Kean mentioned a little earlier this morning, at that point you begin to assume liability for the issue.

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