What did they have in 1932? $33,000,000, and in our opinion, Senator, a good part of that loss was of course attributable to the stock market decline, but another part of that loss was because they had such large funds to invest. What was the result? This was the result: This chart, which I would like to introduce in evidence Senator WAGNER (chairman of the subcommittee). That may be made a part of the record. (The chart entitled "The Goldman Sachs Trading Corporation" is made a part of the record.) Senator WAGNER (chairman of the subcommittee). You may proceed, Mr. Schenker. Mr. SCHENKER. This chart is the result. In their prospectus what do you think they said the nature of their business was going to be? To trade in securities. What did they wind up with? They wound up with a 32 percent interest in the Manufacturers Trust Co., upon which they lost in 1932 and 1933 $70,000,000. They wound up with a 49 percent interest in Frosted Foods, which cost them $13,000,000 and which they lost almost completely. They wound up with insurance companies and banks and promotional adventures. If you will take a look at this, and I consider this a matter of some importance, and Mr. Waddill Catchings who was in charge of that corporation denied this; but if you will look at this picture, what do you find? They had the investment trust buy institutions which were big purchasers of securities, banks, and insurance companies. Now, Goldman, Sachs & Co. had been bankers for a great many industrial companies, but they had never been bankers for any public utilities. Well, we find that suddenly they put up a large sum of money to build a Mississippi barge line. You also find that they accumulated, or had the investment company acquire, some of the largest distributing agencies for securities throughout this country, and one of the largest wire houses throughout this country. You will find that they took a half interest in the company which was going to build properties in New York. You may say that is fantastic, but you have a case where the Goldman Sachs Trading Corporation may have been using the funds of the public essentially to help Goldman Sachs & Co's. banking business. One of the investments they made, or that they had the trust make, was in the Greyhound Corporation, a bus company. In the files we find this letter, which they furnished to us. After the analyst describes the investment as a very speculative one, we find this paragraph: The connection with the company should prove valuable in other ways. In the first place if the industry develops as it gives promise of doing the contact should prove of material value to Goldman Sachs & Co. You do not see any statement to the effect that the contacts should be of value to the investment trust: With the expected stabilizing of the industry, the connection should give rise to financing opportunities. In the future the Motor Transit Corporation the original name of Greyhound Corporation] may be expected to require capital for additional expansion, the simplification of its present capital structure, and the possible acquisition of a larger interest in the two western holding companies. Now, that is all that section 11 of the bill says. Section 11 says that these are institutions in which the public puts their savings to receive diversification and expert management. That is the primary purpose; the distribution aspects should be secondary. The distribution aspect should not be the primary thing that motivates the formation of these companies. Now, we go on to section 12 Senator TAFT. I do not see what basis there is for saying that having organized one, he cannot organize another. I can see why we might prohibit an investment banker from having an interest in an investment trust; but after he once promotes it and is through with it, why should he not go on the next year and promote another one? What has Goldman-Sachs got to do with it? Mr. SCHENKER. That was just an illustration, Senator, of the rapidity with which these things were formed. I asked Mr. Sidney Weinberg, a partner of Goldman, Sachs & Co., "Why do you form them so rapidly?" He said, "Well, the people want them." You were probably not here, Senator, when I started the discussion in which I said that if we permit this constantly recurring promotion, the thing that might motivate constant promotion of these companies is not any inherent belief in the economic soundness of the set-up generally, but a desire to manufacture merchandise which may have sales appeal at the moment. Senator TAFT. That is the object of all promotion in this country. That is the way we got ahead by promotion. That statement assumes that promotion, in and of itself, is a bad thing. I do not see why, admitting that it is perfectly proper, possibly, to prohibit anybody from promoting a certain kind of investment company, after he promotes it and starts it on its way, I do not see why he could not start another one next year, if he is out of the first one. I do not see what that story has to do with this particular section which you are discussing. except to stir up prejudice. Mr. SCHENKER. Oh, well, Senator Taft, after all, Congress directed us to make a study Senator TAFT. No; I am objecting to your using this to support this section with which it has no relation. Mr. SCHENKER. The fact of the matter is, Senator, that it appears to me that it has relation, because here you have Goldman-Sachs & Co., bankers Senator TAFT. Your whole argument is directed to the one question of an investment company not having an interest in an investment trust, with which I wholly agree; but I do not see what it has to do with section 11 (a) which you are discussing. Mr. SCHENKER. Well, on section 11 (a), Senator, our study indicates that when an individual has a distributing organization with a tremendous overhead, the impulse may be to create these companies in rapid succession, not with any inherent belief in the economic soundness of the type of company he is creating, but because that particular institution has sales appeal. I illustrated that with an example where a person had one, and his salesmen told him they could sell the type Senator TAFT. That has nothing to do with section 11 (a). I want to know why, if a man has promoted an investment trust one year. he should not promote another one next year. Senator WAGNER. Are they dissociated? Senator WAGNER. That is what I want to find out from the instance given. Mr. SCHENKER. Section 11 (a) says (reading): It shall be unlawful for any promoter of a registered investment company organized on or after March 1, 1940, to serve or act as director, officer, manager, investment adviser, depositor, trustee, or principal underwriter of or for such company, if within 5 years such person, or any company of which such person was then an affiliated person, has been a promoter of another investment company. Senator TAFT. I say, he may have entirely dissociated himself and has no relation with it any longer, and for 5 years after that time be can not promote another one. Mr. SCHENKER. The bill does not say that. If you will take a look at paragraph (d), you will find that we make provision to permit other promotions if conditions warrant such promotions. But aside from the provision for exemption-you were not here, Senator, when I gave examples where there were six investment companies promoted in 1 year by one distributor, and in conjunction with that they switched them from one investment company into the other investment company. Senator TAFT. Those cases were cases in which they kept their hands on all of them. I can see the whole burden of that. But after be has entirely gotten out of one, why can be not start another one? Mr. SCHENKER. Is it your suggestion, if he is in the business of promoting investment trusts, distributing their securities, and then severing his connection with the investment trust, why should he not be able to promote another? Senator TAFT. Yes. Mr. SCHENKER. Would you have any difficulty, Senator, if he not only was promoting one trust and currently organizes another, and sells securities of the other, and then starts another and sells the securities of that other-would you have any difficulty with that situation? Senator TAFT. Well, if he has entirely dissociated himself, I do not see why he should not promote another one. We agree that there is some question about the whole matter of promotion. In Mr. SCHENKER. I am not unconscious, Senator, of the fact that this is a question that has two sides. We have discussed it at great length. The fact of the matter is that the situation which you describe never exists. I think I know of only one case where that was done. all these cases, Senator, he not only promotes it; he is not only the distributor, but he is the manager, and as soon as the security loses its "sex appeal," he starts organizing another one. Senator TAFT. Why not say "any company of which such person has been a promoter of another investment company of which he is a stockholder, director, officer, manager". Mr. SCHENKER (interrupting). Or distributor? Senator TAFT. Yes; then my objection would be removed. Mr. HEALY. May I have an opportunity to discuss that with my associates? Senator WAGNER. Yes. Senator MILLER. Would it be feasible to incorporate in subsection (d), page 28, terms or provisions which would determine or which should guide the Commission in answering a question propounded to it when a group or an individual came to it for a license to organize another investment company, or is the theory the same as that govern |