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The assets of open-end companies rose to $600,000,000 in this period. Senator, you were not here when Judge Healy made this statementand that is one of the things that in my opinion makes it essential that this legislation be passed that at the very time we were conducting this investigation some of the most outrageous abuses and wrongs were being perpetrated. I thought every day, "Thank God, I am through with hearings," and then I would get a telephone call. Somebody was looting another investment trust by some other method, and we had to start all over again.

The fact is that one of the most outrageous things, and you will hear all about it tomorrow, took place in the latter part of 1937. Here I was in the midst of writing my report. Through some fortuitous circumstance we got the information about this looting and I had to undertake an investigation of the whole Continental Securities case, where they cleaned out the First Income Trading Corporation out in Detroit, Mich. They cleaned out the Continental Securities Co. Then they got into the Bonding Share Co., the Reynolds Investing Co., the Burco Trading Corporation, and the Insuranshares of Delaware Corporation.

Senator TOWNSEND. Do you not think, if that happened in 1937, Congress was entitled to a report earlier than this on that matter?

Mr. SCHENKER. Maybe I am to blame a little for that. I have listened to statisticians a little too much, and if you ever had anything to do with a statistician you will know the meticulous care with which they want to prepare the information. The fact of the matter is that we have a thousand pages of statistics, and Prof. E. B. Wilson, of Harvard University, said that it is one of the most thorough jobs he has ever seen.

The fact is that we made progress reports to the Congress as we went along and we started sending out our reports on June 10, 1938. That is in addition to the summary reports that were sent up.

Then, Senator, no one is more mindful than I am of the technical aspects of this business. I just did not want to go haywire and I just wanted to make sure, as did the Commission, that we understood every aspect of this business, that we understood every aspect of every subdivision of this business. We wanted to do a most competent, objective job, and I think the consensus of opinion, even among the industry, is that we did that. We may have taken a little longer than we should have.

Senator TAFT. How big a force has been used on the work?

Mr. SCHENKER. We started, of course, in the first instance, with a staff of about 45, which included people who had to go out in the field. Now, you take one of the biggest system investment companies, the Founders companies, to which $500,000,000 of the people's money was contributed by 1929 and in which the stockholders lost $376,000,000. There was nobody there to help us make a study of these companies. They literally did this, Senator

Senator TAFT. I am not criticizing you. I was just trying to find out how many worked on it.

Senator WAGNER. You started to say "They literally did this." You did not finish.

Mr. SCHENKER. They took two roomfuls of books and dropped them. in Bill Spratt's lap.

In direct answer to that question, my guess is we had 45 to 55 people in the first instance. As we completed the field investigation we kept letting the men go and depleting our staff.

Senator ToWNSEND. You can furnish for the committee the number of people and the cost?

Mr. SCHENKER. Yes, sir.

Senator TAFT. Will you do that?

Mr. SCHENKER. Yes, sir. In that connection, if I may make this observation, I think you have got to study that figure with two or three things in mind. May I take a second on that.

Senator TOWNSEND. Yes. I was only trying to find out for the information of the committee.

Mr. SCHENKER. It was during the course of our investigation that the use of Bahamas Corporation for avoidance of income tax was uncovered. In the second place, because of our investigation, in my opinion—and I was never more serious-we have saved the investor many millions. Let me give you an example. You asked me why I did not get it finished before, and maybe this will explain it to you.

Our jurisdiction in connection with investment trusts was limited to the investigation and making reports to Congress. In the early part of 1938, after the Continental Securities clean-out, a person who controls an investment trust came to me and said, "I am going to sell control of this investment trust to Mr. So-and-so."

You would think, when he said, "I am going to sell control of this investment trust to Mr. So-and-so," that he owned that investment trust. What he had was some of this tricky management stock, which had been issued in the first instance to the management. The fact of the matter is his stock had absolutely no asset value and all of the assets really belonged to the senior security holders. Yet he was going to sell the trust.

I said, "To whom are you going to sell the trust?"

He said, "Mr. So-and-so.

I said, "What are you getting for your stock?"

He said, "Well, we are going to get $2,000,000," which was a $2,000,000 premium on the stock, Senator, because my recollection is that the total assets would have to come back approximately $2,200,000-before his stock was worth nothing, you see.

I said, "How is he going to pay you for that stock?" I said, "Anybody who will pay you a million dollars or two million dollars for stock that is under water 50 dollars a share must have some fancy ideas. The only way he could get his money back is either to put his hand on the cash register and take the money or he has some crackpot theories that he can run the trust in such a manner as to get his money back."

He said, "He is going to buy the control block of stock. Simultaneously I am going to turn over the board of directors to him. He then expects to liquidate the blue-chip portfolio, pay me for the control block; then in order to reimburse the investment trust he is going to"

Senator TAFT (interposing). Is it fair to ask who the party was? Mr. SCHENKER. Yes, it is fair. The prospective purchaser of the trust was an individual by the name of McDermott, and I do not

hesitate to mention his name at the present time because he is under indictment.

I said to him, "You just saw what happened in the Continental case. This is the same razzle-dazzle they are trying to work.

He said, "I have my control stock and any safeguard you suggest I will interpose."

I said, "Why don't you tell your stockholders that they are going to sell the blue chips to somebody and are going to substitute real estate mortgages? Why don't you wait until the annual meeting, so they know what is going on and they can protect themselves?"

Evidently he shied clear of the transaction. What happened? If you read the newspaper, Mr. McDermott is the one who a couple of months ago bought control of an investment company with assets of approximately $100,000, started the printing press rolling, and then printed bonds and real estate mortgages. Those were the bonds and mortgages he sold to that investment trust.

I will give you other illustrations. We will bring letters where the people said they were going to commit similar acts. It is my opinion that had not the study fortuitously been proceeding as it was, you would have had many more clean-outs.

Senator TOWNSEND. What happened to the first transaction?
Mr. SCHENKER. They didn't go through with it.

Senator WAGNER (chairman of the subcommittee). Do you care to present anything else now?

Mr. SCHENKER. No, sir. If you care to take another witness, in order to give the committee some background on this subject we may have one of the members of the staff tell the story of what happened to the biggest investment trust that existed in this country. It will give you some idea

Mr. HEALY. Perhaps you would rather hear that tomorrow morning?

Senator WAGNER. Perhaps we can do that tomorrow morning. I understood Mr. Cook will be here.

Mr. SCHENKER. He is the trustee for the Continental Securities. Co. He is going to tell you about the Continental case.

Senator WAGNER. That is the case to which you referred a moment ago?

Mr. SCHENKER. Yes.

Senator WAGNER. How large a sum did that involve?

Mr. SCHENKER. Continental Securities, about $5,000,000.

Senator WAGNER. Very well, then. The committee will recess until tomorrow morning at 10:30.

(Thereupon at 12:10 p. m. an adjournment was taken until tomorrow, April 3, 1940, at 10:30 a. m.)

INVESTMENT TRUSTS AND INVESTMENT COMPANIES

WEDNESDAY, APRIL 3, 1940

UNITED STATES SENATE,

SUBCOMMITTEE ON SECURITIES AND EXCHANGE

OF THE BANKING AND CURRENCY COMMITTEE,
Washington, D. C.

The subcommittee met, pursuant to adjournment on yesterday, at 10:30 a. m., in room 301, Senate Office Building, Senator Robert F. Wagner presiding.

Present: Senators Wagner (chairman of the subcommittee), Glass, Maloney, Hughes, Herring, Miller, Downey, and Frazier.

Senator WAGNER. The subcommittee will come to order. Mr. Alfred A. Cook, will you take the third chair on this left side of the table over here?

Mr. Cook. Certainly, Mr. Chairman.

Senator WAGNER. I think I have the right to say that Mr. Cook is one of our distinguished citizens and one of our outstanding lawyers in New York. He is counsel to the trustee for the Continental Securities Co., and has been invited here by the subcommittee because of his experience with that company. I am sure he can enlighten us.

STATEMENT OF ALFRED A. COOK, TRUSTEE FOR THE CONTINENTAL SECURITIES CORPORATION, NEW YORK CITY

Senator WAGNER (chairman of the subcommittee). Mr. Cook, you have had an opportunity to read the bill, S. 3580, now before this subcommittee, I take it?

Mr. Cooк. A part of it carefully and a part of it hastily. I gave my particular thought and attention to those phases of the bill which, as I saw it, would prevent such happenings as those that characterized I the existence of the Continental Securities Corporation in its last phases.

Senator WAGNER. Perhaps we had better permit you to proceed with your statement to the subcommittee. We are very anxious to have it. Mr. Cook. May I say this: I can appreciate that with the exception of the members of the bar on your committee, lawyers generally like to talk, and if in my exposition I am too lengthy and express views that you or your associates do not want, merely correct me.

Senator WAGNER. I do not think that will be necessary.

Mr. Cook. In March of 1938 Judge Patterson of the Federal Court, Southern District of New York, appointed Mr. Arthur A. Ballantine temporary trustee of the Continental Securities Corporation-application for its adjudication in a bankruptcy proceeding being before Judge Patterson.

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