Further analysis discloses that in the entire group upon which reasonably accurate information was available that there were but 8 companies voluntarily liquidating which completed such liquidation without a loss to their stockholders. After eliminating these 8 companies from the total of 52, and also eliminating Insull Utility Investments, Inc., Corporation Securities Co. of Chicago, Swedish American Investment Co. and Bankus Corporation with its two absorbed companies, City Financial Corporation and Municipal Financial Corporation, which if included, would distort a representative picture because of their relative magnitude, it is found that 38 companies remain. To these 38 had been contributed an aggregate of $89,878,769 net capital. It is estimated that at their termination there remained a residual value of approximately $10,901,945.88, indicating a capital loss of $78,976,823.12, or 90 percent of the net contributed capital. It is believed that this 90 percent capital loss in 38 companies can be accepted as a very conservative indication of the loss sustained by the entire group of 148, and, that if more complete information was available with respect to the other 110 companies, an upward rather than a downward revision of this figure would result. HOW TERMINATED Every effort was made in preparing this chapter to determine how the 148 companies composing this group went out of existence. Obstacles already cited frustrated complete success in this direction, although again it is believed that a fairly elucidating cross-section picture has been produced. The cessation of the activities of 107 of the 148 companies may be summarized under the following general categories: TABLE 3.-Number of companies 24 19 47 4 7 1 1 4 107 41 148 With a few brief words of explanation, the foregoing facts speak eloquently for themselves without further comment. Because of a dearth of specific information, it was impossible to determine how many of the 47 companies listed merely as having been "dissolved" were dissolved voluntarily and how many involuntarily. It is quite possible that some of these actually belong under the heading of "receivership" or "bankruptcy," but because of a lack of precision in terminology used by financial manuals or individuals supplying information, the real facts have been obscured. Likewise, there is little doubt that while the term "dissolved" or "voluntarily dissolved" describes the demise of some companies with technical accuracy, they were in fact forced into liquidation, without resorting to formal court procedure, by reason of their precarious financial condition or helpless inability to continue operations with profit. Table 3 also shows that there were 41 companies out of the total of 148 regarding which no information at all could be found with respect to the manner in which they were terminated. In view of the circumstances under which the other 107 were liquidated, however, it is not unreasonable to assume that a substantial proportion of these companies met with similar fates. Therefore, it becomes apparent that, with the exception of the 8 companies which liquidated without capital losses, most of the entire 148 companies were forced to liquidate. Moreover, it is definitely known that those companies whose contributed capital comprises the great bulk of the $634,075,330.92 aggregate were placed in bankruptcy or receivership. SPONSORS The study conducted of the group disclosed that these companies were conceived and launched by a variety of inaividuals, firms, and institutions. Table 4, which immediately follows and is based upon information available, classifies these sponsors. TABLE 4.-Classification of sponsors Number of Percent of companies total 1. Companies known to have been sponsored by brokers, dealers, distributors, and/or investment bankers. 2. Companies the sponsors of which are not definitely known but which appear to have been sponsored by brokers, dealers, distributors, and/or investment bankers since their capital securities were distributed through one of these media 3. Companies sponsored by other investment companies or organizations functioning as managers or fiscal agents of investment trusts. 4. Companies sponsored by commercial banks. 15 5. Companies sponsored by investment counsellors. 253 10 2 802 6. Companies sponsored by organizations engaged in extraneous lines of busi ness. 2 1 Total. 7. Companies sponsored, or believed to have been sponsored, by private individuals or groups of private individuals. 8. Sponsorship not determined. Total 148 100 According to table 4, 85, or 58 percent numerically, of the total 148 companies were sponsored by firms engaged in one phase or another of the security business, commercial banks, or investment counsellors; the sponsorship of 24 companies was not determined; and, the remaining 39 companies, or 26 percent of the total, had for their sponsors private individuals or groups of individuals who are not specifically known to have been identified with nor to have represented interests falling within one of the other classifications. If more complete information were available with respect to the identity and business affiliations of all of these individuals it might be necessary to shift some of these 39 companies to other categories. However, the change would not be material. Further examination of table 4 reveals that 36, or 25 percent, of the 148 companies are known to have been sponsored by broker, security dealers and distributors, and investment bankers. Sponsors of one-third of these 36 companies are identified as having been members of the following stock exchanges: Still other sponsors were found to have been members of the Investment Bankers Association of America and the Security Dealers Association. Table 4 also shows that circumstances indicate that the sponsors of 17 more companies were firms operating as brokers, dealers, distributors, or investment bankers. Assuming these circumstances to be true indications of fact, the number of sponsors coming within this classification would then be 53, or 37 percent of the total. The foregoing table shows further that 12 of the 148 companies were sponsored by other investment trusts or firms functioning as managers or fiscal agents for investment trusts, and that 15, or 10 percent of the total had for their sponsors commercial banks. The experience of bank-sponsored or affiliated trusts included in this section of the Commission's report appears to have been almost uniformly disastrous. Of the nine regarding which sufficient information is available to permit tabulation, An outstanding extention is found in the ninth bankanna meita United State Trust Co., Newark. N. J., operated by L. F. Rittst :ச f the Park DETE Borated When the banks fallei, the double lat tr feature bank shares was too great a burden for the trust and bankruptcy resulted at least one other case it is defir tely known that the temptation to exchat Ze frozen anete of the bank for the Hould portfolie in the trist proved tou inesistible as expedient for the directors of tottering tanks. When these frzet assets falled to thaw over a period of time, the trist was left with no alternative brit rece verst..p. In a few instances, notably the Barkus Corporation 'affiliate of the Bank of United States, and the two companies it absorbed, Municipal Financial Corporstion and City Financial Corporation, the certificate of interest in the investment trust was attached to or stamped upon the stock certificate of the bank. Wile some of the bank-sponsored investment companies took the form of an investment trust (investing a wibstantial portion of its capital in a diversified list of securities the Bank's Corporation group appears to have been a combination holding company and underwriter. Its principal holding was stock of the Bank of United States. In some cases, the shares of the trust were offered publicly and in others admittedly sold to depositors of the sponsor bank. ORGANIZATION AND LOCATION OF PRINCIPAL OFFICES It was found that the corporate form of organization overwhelmingly predominated over any other in the choices of the organizers of these companies Information concerning form of organization is lacking in only 6 instances. Of the remaining 142 companies, 131 were incorporated. Ten of the other 11 were common law trusts organized in the following States: The eleventh company was created by a special act of the Legislature of the State of Connecticut and is difficult to classify. Table 6, designed to show the number of companies which were domiciled outside of the States in which they were organized, presents an interesting study. TABLE 6.-States in which organized and location of principal offices Of the total of 148 companies under consideration, the States of organization could not be determined in 14 instances. The remaining 132 companies were organized in 17 different States, and, while 66, or about half, were organized in the State of Delaware, not a single one operated in that State. The table also shows that while New York was the next popular State for organizing these companies, with 26 companies organized under its laws, 72 maintained their principal offices within its borders. Massachusetts ranked third in point of companies organized under its laws with 11 companies organized and about an equal number also maintaining their principal offices there. However, it is to be remembered that 6 of these 11 companies were Massachusetts common law trusts and were not created under the corporation laws. There were 6 companies organized in Maryland with none operating there and while only 3 companies were organized under the laws of the State of New Jersey, 13 maintained their principal offices in this State. In summary, the statistics concerning this group of companies merely serves to confirm what is known to be true with respect to the entire industry, that the corporation laws of the States of Delaware, New York, and Maryland are best adapted to the organization of investment trusts and companies: that New York and New Jersey, because of their proximity to the world's most important financial center, and, in the case of New Jersey, because of favorable tax laws as well, are the most popular seats of operation; and that Massachusetts leads in point of number of common law trusts. Table 7, which follows, presents a more specific tabulation of the locations of the principal offices of 126 of the 148 companies. This table examined in conjunction with table 6 discloses that of the 72 companies domiciled in New York State, 66 were located in New York City, that all of the 12 companies operating in Massachusetts were located in Boston, and that 11 of the 13 companies operating in New Jersey maintained their offices in Jersey City, a few minutes across the Hudson River from New York City. Likewise all 6 companies whose principal offices were in Illinois were located in Chicago. The offices of the remaining companies were scattered throughout 22 cities in nearly every section of the Nation. TABLE 7.-Cities in which principal offices were located New York, N. Y....... Boston, Mass. Jersey City, N. J. Chicago, Ill. Bridgeport, Conn. Des Moines, Iowa. Number of TABEE 7-Cities in which principal offices were located-Continued Senator WAGNER. I believe Senator Townsend has a question to ask you. Senator TOWNSEND. I have not a question particularly, but I would like to call attention to the fact that these companies did not last more than from 1 to 4 years. Mr. SMITH. Well, sir, I have a list of about 200 companies-and we were not going to put this list into your record unless you want itbut you will notice from this list of companies that were dissolved or liquidated, the great majority of them lasted only a few years, and primarily they were dissolved or liquidated in 1931, 1932, and 1933. Those are the common dates occurring through there, and those are the years of the depression. Senator WAGNER. You may proceed. Mr. SMITH. In addition there are about 200 companies which were merged, consolidated, or otherwise acquired by another company during the period 1927-35, mostly in the years 1930-32, which can be seen by our chapter IV. Many, if not most of these companies, can be presumed to have gone out of existence because of mismanagement based upon the known records and testimony as to a large number covered in chapter IV and the investors in these companies undoubtedly suffered large losses as a result of such mismanagement. For example, in the 20 companies (excluding Blue Ridge Corporation) acquired by the Atlas Corporation, there were large losses during the period before the Atlas Corporation acquired them which may be attributed in large measure to their mismanagement prior to being taken over by Atlas. Similarly, large losses occurred in the companies acquired by the Equity Corporation which companies were in the United Founders Corporation group, and others. Senator TOWNSEND. Might I make a comment there? Mr. SMITH. Yes, sir. Senator TOWNSEND. I have not been here very much due to the fact that I have been engaged on the work of other committees, but I presume you have put in the record a picture of how these companies contributed this capital, haven't you, or have you? Senator WAGNER. Oh, yes; that has been shown. |