Mr. Cook. I am trying to explain the $3,300,000.

That brings you to $2,400,000 that is gone. Well, they were sort of interested in a sort of aircraft company, and $150,000 went into that. I think they succeeded in buying some second-hand airplanes, which I suppose was for an investment trust.

It all seems to me to be so weird that it is difficult to speak of. The house seemed to think that one of their clerks ought to be dignified by having a seat on the stock exchange, so they bought a seat on the stock exchange for this young man and also dipped into the Continental Securities, and paid $75,000 for the seat, and I think in order to put that transaction through the looters and those associated with them felt that a brokerage fee or a commission fee, or something or other--I do not know what to call it of $31,000 ought to be paid. Senator WAGNER. To be paid for what? For the purchase of this seat?

Mr. Cook. Yes.

Senator WAGNER. In addition to the money paid for it?
Mr. Cook. Yes.

Then there were losses in connection with commissions claimed by the banking house for trading, buying, and selling back and forth, and then also some of the moneys were utilized to take care of the First Income Trading Corporation. That amounts to some $250,000, so I think, Senator. if you feel that I have approached the $3,300,000 with reasonable accuracy, I can be relieved of that phase of the situation.

The Reynolds Investing Co. was forced into bankruptcy and Mr. Ballantine as trustee has engaged in litigation, and there is 1 suit, an omnibus suit, in equity in New York against 97 defendants and everybody who was interested in this situation either correctly or improperly, on the theory, Senator, that equity, when it has all the facts, can mold an appropriate decree, so that justice shall be done to all of the parties in court.

The Reynolds Investing Co. is a party in that suit and the Reynolds Investing Co. has brought a suit against the Reynolds directors for breach of their duties and their obligations. Those cases have not yet been disposed of.

Senator GLASS. Is that bank still a member of the stock exchange? Mr. Cook. No. The stock exchange house? They are off. They are a failure. The stock exchange took them over to see that none of the customers were hurt. That had been arranged. They are off the exchange.

I think, as far as this entire transaction is concerned, if I may be permitted to say it, we have received the fullest cooperation from the stock exchange, and I think the stock exchange has done everything that it possibly could do in the matter.

I think perhaps in fairness I should say this, because I referred to the suit that we have brought: between the house that provided the $580,000 and the house that sold it shares for the $580,000 we have, with the two, already made an adjustment, with the approval of the court, upon notice to everybody interested directly or indirectly, for $1,250,000, and of the $1,250,000 about $700,000 has already been paid and the balance is in course of collection, and we have some legal details to observe, and I think that will be paid during the course of the coming week.

Senator WAGNER. I would have said that what you have told us is incredible, that it just can't happen here.

Mr. Cook. Senator, I told you when we first took this up we were impressed with the thought that truth is stranger than fiction.

Senator WAGNER. Where did the original money that went into Continental Securities come from? Do you know whether it came from small investors?

Mr. Cook. I do not know. I should say large and small investors. I think it was organized in 1924. The company got quite a lot of money from the sale of debentures and their preferred stock. As far as I am able to determine, I do not know of anything in connection with the organization of Continental Securities in 1924 that was the subject of criticism.

Senator WAGNER. The whole transaction deals with other people's money. Where did that money originally come from? Mr. Cook. From the public.

Senator WAGNER. From the public?

Mr. Cook. Yes. If you have the small investor in mind, remember, I referred to the Administered Fund Second, where you have 330,000 investors.

Senator WAGNER. 330,000 of about $4,000,000?

Mr. Cook. Yes.

Senator WAGNER. That must represent small investors.

Mr. Cook. I brought that out to call attention to the fact that there were a lot of small investors.

I want you to know that as far as I am personally concerned the reason why the provisions of the bill which will prevent things happening such as have happened here have appealed to me is that the small investor is protected. Sometimes, I say, the large ones protect themselves; I do not know.

May I be forgiven for just saying one thing? It is not within my sphere; perhaps I ought not to say it. It is outside the provision of this bill that I have been speaking of, but I hope it will be weighed by the committee when it comes to it. I think some thought ought to be given to the fact, if Mr. Schenker will forgive me, as to whether, even under the mantle and protection of the S. E. C., investment trusts with only $100,000 should be permitted. That is in the bill. If I may speak as to that

Senator WAGNER. Certainly.

Mr. Cook. I am not against the small man or the man who tries gradually to develop and grow. He has got to be protected. We were all once, I think, small ourselves, but I do not see how it is possible, in connection with an investment trust, with a capitalization or assets of just $100,000 for it to have that degree of knowledge which, honestly meted out, is essential for the protection of investors, and I regard an investment trust as something which should be an investment, as it is in England.

I am fearful-I may be all wrong that with a company of just $100,000 appeals will be made by the salesmen, those who represent them, to the speculative desires (and I suppose we all have a little flare for that in some direction or other) of many who can ill afford to lose the small amounts that they put in, except on the best of security I am fearful of that.

Senator WAGNER. Of course, in these transactions you mentioned here the small investor not only had no say about it but he had no

knowledge of what was going on at all. He had no information of any kind

Mr. Cook. So far as what was done here, and that is the provision in the bill requiring information about changing your policy, changing your management, if you want to throw out some directors. I am entirely in accord with things concerning which the stockholders should be and must be consulted. One cannot overnight put somebody in charge of a portfolio which you have trusted, if you please, to the efforts of somebody else and not know the slightest thing about the person who disposes of the portfolio, and that is evidenced by what was done by the Continental Securities, where you have $3,300,000 of a perfectly good portfolio disposed of in 5 months so that you have $50,000 left.

I am obliged for your patience. I am sorry I did not speak a little louder.

Senator WAGNER. Are there any questions of Mr. Cook? Thank you very much, Mr. Cook. You have been very helpful.

Senator DowNEY. I wonder if I could intervene with a comment that is not concerned with Mr. Cook's statements at all?

Senator WAGNER. Yes.

Senator DOWNEY. Is there not a better arrangement or better table we could get for this hearing?

Senator WAGNER. The other day I pleaded with two members who are on the Committee on Rules. I have been after those two members about that. One of them was here a little while ago, Senator Miller, and the other is Senator Tobey. I realize that we need it very badly.

Senator DowNEY. Mr. Chairman, there are a hundred people here who are vitally interested in this and they cannot hear what is going on.

Senator WAGNER. I realize that.

Our next speaker is Mr. Hugh Fulton.

STATEMENT OF HUGH FULTON, ASSISTANT UNITED STATES ATTORNEY, SOUTHERN DISTRICT OF NEW YORK

Senator WAGNER. Mr. Fulton, you are the Assistant United States Attorney for the Southern District of New York, and you have had charge of some of the prosecutions and investigations? Mr. FULTON. I am the attorney who has brought the prosecution of those persons who were convicted in connection with the looting of investment trusts, some of which Mr. Cook has referred to and some of which he has not.

I might give something of my background. For 8 years I defended corporate litigation in the offices of Cravath, de Gersdoff, Swaine, and Wood, and after Mr. John F. Cahill was appointed district attorney he asked me to go to his office and prosecute certain of these complicated corporate cases.

Now, among those there came up the question of the looting of these investment trusts. In the first place, I think an investment trust is a very useful thing. A person who has a small income and small savings is particularly interested in it for the reason that it enables him in effect, you might say, to bet on the United States. He could not possibly afford to buy a share of stock of each of the numerous corporations that are dealt in on, say, the New York

Stock Exchange board, but if an investment trust were pooled with the savings of thousands of these small savers into a fund of some millions, it would be able to buy blocks, which would be substantial in size, of a great number of corporations, so that the small investor would be able in effect to take an interest in all of those corporations which he could get through no other means.

Now, the particular investment trusts that are involved in Mr. Cook's litigation, and in my trial in the southern district, in the first instance issued securities to the public on circulars which made representations as to an investment policy, but, of course, that is a mere statement of future expectancy, and as the years went by the investments of those companies were changed from time to time.

In all instances they were set up in such a way that a large part of the investment was made by persons who had nothing whatever to do with the management or control of the company. For example, in the Insuranshares Corporation of Delaware case fifteen millions of securities were sold to the public, but the control of the company was vested in stockholders who had contributed only $50,000.

That difference between management and ownership interest is quite important because of the temptation which it affords to any person who might be dishonest to sell the corporation something that is not worth what he sells it for or to buy from the corporation something that is more valuable than he paid. Worse still, they may make an exchange, and that, of course, makes it necessary for anybody in the position of Mr. Cook and myself to establish in any litigation that we may have that the exchange was not only a bad exchange but that it was an exchange that was intentionally bad, because a mere honest mistake is a defense. In cases such as the ones that we have had we really have situations where to some extent amateurs, without sufficient financial backing, were doing it in such a raw, crude way that it was apparent, or could be made apparent. After 6 weeks' trial the jury concluded that it was intentional and convicted them. Those convicted consisted of lawyers, some of whom Mr. Cook referred to, and two financial people, one of the financial persons being the individual who in the first instance loaned the money that was necessary to acquire the stock.

The whole thing might be said to stem back to a barroom meeting in the Hotel Book-Cadillac in Detroit. There is always the temptation on the part of a dishonest man to buy this stock which would control an investment trust. He does not care whether it has any value. He does not care what the price he pays for it might be, because he intends to foist all of it off on the corporation itself, but those who own the stock cannot, of course, sell it unless they get paid for it. They are unwilling themselves to participate in what you might term the looting of the trust, so they want to be paid-before they turn over the management-that is, before they cause their directors to resign and before they cause new directors to be elected who are nominees of the purchasers.

That means that anyone seeking to buy an investment trust would have to have cash, and in this Book-Cadillac Hotel one of the lawyers who had been convicted realized that another lawyer, who was a former associate of his, was an attorney of supposed reputable standing for one of the largest brokerage houses in the United States, and he conceived the idea that they in the first instance, through deceiving that firm, would get the firm to advance the hundreds of thousands

of dollars by a certified check temporarily, so that they could pay for the stock and get control, and in that first instance the First Income Trading Corporation-the old management-changed the board of directors and then in effect wrapped up all of the securities that were readily salable in the investment trust, took them downstairs in an elevator, and delivered them to the brokerage firm against the receipt of the check, which was then, of course, used by the sellers as the payment for their worthless stock.

That, of course, was a very easy transaction, and the conspirators went on to further fields.

Senator WAGNER. Using the same methods?

Mr. FULTON. Yes; they immediately contacted a second trust and in that case they found that the sellers would not cause the board of directors to resign until after the sellers were paid, so that there had to be what they termed an hiatus; in other words, the banking firm or brokerage firm had to loan its money without any security at all for the time being and then wait until the conspirators could get control and could loot the investment trust, by this method that Mr. Cook has described, and hand back to the brokerage firm the portfolio of the investment trust.

Now, that meant that as time went on and as transaction piled on transaction, the brokerage firm, I think-beyond a question of doubt through this one partner, at any rate, and the jury has so found by convicting him-knew that this method was being pursued.

Now, an investment trust, while it may have hundreds of thousands and even millions of dollars of assets, is little more than a safe deposit box. The securities, which, of course, represent millions, could be placed on several square feet of this table, and they are usually in the custody of a banking house.

In addition to that, the investment trust is nothing more than a set of books, ledgers, journals, and minute books, and letters back and forth to security holders.

There were one or two people who would determine what investments were to be purchased, and their whole offices in some instances were put in a space less than a third of the size of this room, and, of course, the securities are extremely liquid, and the very nature of an investment trust presupposes that there will be purchases and sales.

The only way you can approach one to see whether or not it is legal or illegal is by determining the motives which actuated the sale, and if you have got, in effect, to get into a man's mind and determine that he really knew that it was improper, it is a very difficult thing to do.

Now, Mr. Cook has described several of them and I will not describe those any further. I could not do as well as he did on those. To proceed to the next one after his, there was a corporation called Insuranshares Corporation, which was organized through the sale of $10,000,000 of securities to the public and ultimately of another $5,000,000, and, as I say, the management contributed $50,000 and it got in return the voting control which enabled them to change the board of directors and thereby to control the policies of the company.

The depression naturally resulted in losses, and at the end of about 1932 the portfolio had declined in value to about $4,000,000, making a realized and unrealized total loss of $11,000,000, if they sold out at that time. Control of that company was sold at that time for $2,000,000, and the stock had been reclassified, so that the $2,000,000