Commissioner PURCELL. Well, I think it can be put this way, and I want to be perfectly fair, the offers for stipulation have been made by the Transamerica and Bank of America officials. The Commission has tried to work out stipulations with them. The stipulations have broken down, I think without exception, on the refusal of the Bank of America and the Transamerica officials to make an actual stipulation.

The stipulations have not been entered into, because they were not satisfactory to either side. Transamerica people did not like what we wanted to stipulate to; we did not like what they wanted to stipulate to. It has been just a continual course of attempting to agree and finally disagreeing and setting the matter down for hearing again. And every time we have tried to set the matter down for hearing again, it has had to be postponed because of motions to dismiss, new efforts by them at stipulation, and, as a last resort, efforts to get the courts to interfere.

Mr. WADSWORTH. May I ask, Mr. Purcell I appreciate perhaps you do not care to answer it, and if so I will not press it; but is the Commission still sticking to the statement contained in the original newspaper release?

Commissioner PURCELL. On that—and I am here subject to correction, Mr. Wadsworth, for failure to recollect properly-I do know that some of the items contained in the original order have been removed from the proceedings, inasmuch as Transamerica has filed an amendment to its registration statement which has corrected some of the matters relating to the financial statements of the Bank of America. As a result of this amendment, the Commission has eliminated several of the original items relating to the bank.

Mr. WADSWORTH. It is with a good deal of hesitancy that I would venture to criticize this proceeding. I note your statement just now to the effect that some amendments have been filed with the Commission by Transamerica which corrected certain items in the original registration statement to which the Commission pointed, and against which it complained in the release, so it occurs to me, Mr. Purcell, that those amendments might well have been achieved in the hearing held before the newspaper release was issued.

Commissioner PURCELL. Before our original order for hearing was issued, Transamerica knew exactly what our disagreements were with respect to their financial statements. There had been various proposals by Transamerica for registration with the Commission before that and our staff had given them repeatedly the reasons why their proposed registrations were deficient.

Mr. WADSWORTH. The trouble was in this case, or at least the trouble in part was that at the time you sent the letter of deficiency, you gave the whole thing to the press.

Commissioner PURCELL. Mr. Wadsworth, I think you don't understand what I meant. We didn't send any formal letter of deficiency; we didn't need to. They knew what we were talking about. When we issued our order for hearing, we were calling a hearing on matters which we had been discussing with them or nearly 2 years. Our order for hearing was not a press release; it was a formal order of the kind that every administrative agency must issue as the basis for any formal administrative proceeding. Is that clear?

Mr. MCGRANERY. Yes.

The CHAIRMAN. You may proceed, Mr. Twombly.

Mr. TWOMBLY. I think we have gone, Mr. Chairman, a little bit afield. The point that I am driving at here is not on the merits or demerits of this case, or what occurred during the course of the 3 years it has been under consideration. What I am driving at here is what the pretrial publicity or predecision publicity has done to the investors. I will put in the rest of this letter and letter No. 2. (The material referred to is as follows:)

As I don't believe that it is the function of Government to have a Commission act the way that one does, and the less one has to do with such a company the better one is off, as they have great power behind them, and, right or wrong, can harm a citizen.

Letter 2:

I notice your recent activities in connection with the development of a statistical background for proposed changes in the Securities and Exchange Commission legislation. Perhaps if you were to take a look at the Transamerica Corporation matter you will find some of the answers as to why there is unemployment, swollen bank deposits, lack of confidence in securities and other things.

Several years ago the public press was filled with stories to the effect that A. P. Giannini was being investigated by the Securities and Exchange Commission. In conjunction with this activity on the part of that body they made application to delist the stock from the stock exchange. The stock which is held by many thousands of holders at the time was selling close to 15, I believe, and immediately went down to 10, and subsequently, as a result of the continuation of the publicity and other moves by the Securities and Exchange Commission, dropped to its present price of about 42, and there has stayed despite the fact that it is paying 50 cents a share in dividends, and its earnings cover this dividend disbursement by an ample margin. As far as I can determine, the matter has been shelved, and after a rather hectic couple of weeks' investigation, both in Washington and San Francisco, everything has simmered down, although the application to delist was still pending a short time ago. I don't know how many millions were lost to Transamerica stockholders as result of these unproven charges and the tremendous publicity that was given to them.

Mr. TWOMBLY. It has been my observation that the orders calling such public hearings usually contain the broadest kind of detailed accusations which the S. E. C. investigator thinks may be sustained upon the hearing. In most instances a portion of these accusations is not sustained by the S. E. C. and a portion is sustained. Major accusations may have been disproved, but the accused is disciplined for less serious infraction. Is this the way justice should be done? Should a man be publicly accused before a hearing of housebreaking, burglary, atrocious assault, and thus condemned in the eyes of the world, even though later convicted of trespassing?

For example, I have taken from the records two outstanding examples, the initial releases concerning which were given wide publicity throughout the country. Let me state here I have not consulted either of the groups involved but have merely taken the public record. If a revival of the record causes any embarrassment to any, I want to apologize for having selected these particular cases which I think are typical and essential to prove my point to your committee.

On April 24, 1936, the full Commission released an order naming the 13 partners of White, Weld & Co. and 2 of the 13 individually and charging them, among other things, with violations of sections 9 (a) (1), 9 (a) (2) and 20 (b) of the Securities and Exchange Act by having entered "divers orders" for the purchase and sale of the common stock of A. O. Smith Corporation on the New York Curb

Exchange "for the purpose of creating a false and misleading appearance with respect to the market for said security" and of "creating actual and apparent active trading in said security and raising the price thereof for the purpose of inducing the purchase thereof by others." The order called for a hearing to determine whether the firm members should not be suspended or expelled from membership in the New York Stock Exchange, New York Curb Exchange, and Chicago Board of Trade. After protracted hearings, a decision was reached by the Commission June 21, 1938, over 2 years later, of which I will quote from the "Conclusions," S. E. C. Decisions and Reports, vol. 3, pages 513 and 514:

* *

Weighing the evidence with due regard to all that we have said of the difficulties inherent in that process, we have found that there was a violation of the statute. We are therefore required to make the further determination as to whether suspension or expulsion of those responsible for the violation from membership on national securities exchanges "* is necessary or appropriate for the protection of investors." We have given many hours of careful thought to this question. We have also considered the possible contention that in the absence of a deliberate intention to violate the law, there was no such culpable conduct on the part of the respondents as would require any action by the Commission other than the dismissal of the proceedings. But we have concluded that these factors are without controlling weight in this case, especially since the violation of section 9 (a) (2) and the consequent injury to investors does not hinge upon the existence of criminal intent or a "bad" purpose. Violation of the statute occurs whenever transactions are effected in a registered security for the purpose of inducing the purchase or sale of that security by others for the purpose of manipulating the market. And we have found that certain of the purchases effected by Russell for the account of White Weld were made by him for that purpose.

Here are the findings:

We have found that certain of the purchases effected by Russell for the account of White, Weld were made by him for that purpose.

However, we do recognize as a mitigating circumstance bearing upon the degree of his culpability that the manipulation, as a quantitative matter, was not of such an extent as to verge upon actual fraud. We also recognize that the respondent may not have been conscious that the purchase effected by him were unlawful since, when this series of transactions took place, the statute was new and sections 9 (a) (2) and 9 (a) (6) had not been the subject either of judicial or administrative construction. We therefore conclude that respondent Russell should not be expelled from membership upon national securities exchanges. However, we do consider it necessary and appropriate in order that the investing public be protected against repetition of these market practices, that he be suspended from membership upon all national security exchanges of which he is a member for a period of 90 days.

The other respondents have not been shown to have known of, or actively to have participated in, violation of the act. Therefore the proceedings will be dismissed as to them.

But, nevertheless, they all stood accused, Mr. Chairman, for a period of 24 months, roughly.

Twelve partners were exonerated; one was held a little bit guilty. Only the 13 partners can tell the damage done to them, their reputations, and their business during the intervening 2 years. Even though the 90-day suspension may have been in order, the damage flowing to the firm and its individual partners from premature public releases and public hearings clearly was not. If there had been no initial publicity of the broad, unfounded-save in a minor respectcharges, and if there had been private hearings, a gross injustice could have been avoided and still the same result could have been attained.

I would like to introduce at this time photostatic copy of the New York Times finance section containing the published material, dated April 26, 1936.

Mr. McGRANERY. Was this, so far as you know, discussed with the Commission itself?

Mr. TWOMBLY. I have not any idea.

(The article referred to is as follows:)

[From the New York Times, April 26, 1936]

SECURITIES AND EXCHANGE COMMISSION CHARGE CITES WHITE, WELD & Co.-FIRM, 11 PARTNERS, 2 FORMER MEMBERS CALLED FOR JUNE 1 TO FIGHT SUSPENSIONSPECIFIC DENIAL BY HOUSE-REBUTTAL SCOUTS ALLEGATIONS OF MANIPULATION OF STOCK OF A. O. SMITH CORPORATION

Representatives of the Securities and Exchange Commission at noon yesterday served on White, Weld & Co. an order to show cause why the firm, 11 partners and 2 former partners, should not be suspended or expelled from membership in the New York Stock Exchange, the New York Curb Exchange, and the Chicago Board of Trade for alleged manipulation of the common stock of the A. O. Smith Corporation on the Curb Exchange. A hearing on the charges was set for June 1 before Ernest Angell, administrator of the New York regional office of the Commission, at its headquarters in Washington.

The Commission set forth in its order that it had reason to believe that between January 1, 1935, and October 17, 1935, members of White, Weld & Co. had used the mails and facilities of the Curb Exchange to create a false and misleading appearance of activity in the A. O. Smith stock by "matching" buying and selling orders. Such operations are prohibited under section 9-A of the Securities Exchange Act of 1934.

The Commission's charges were denied immediately by White, Weld & Co., who, in a long statement explaining their transactions in the Smith stock, said that "any allegation or implication that we have engaged in any manipulative or rigging practices has no justification in fact."

The order was directed against Harold T. White, Francis M. Weld, Faris R. Russell, Harold Benjamin Clark, W. J. K. Vanston, William A. Barron, Jr., J. Preston Rice, Philip Gossler, Jr., Jean E. V. Cattier, Nathaniel S. Howe, Alexander M. White, Jr., Gilbert G. Browne, and Robert E. McConnell, as partners in White, Weld & Co., and against Messrs. Clark and Russell as individuals. Messrs. McConnell and Howe are no longer members of the firm, the latter now being a partner in Stanley, Janeway & Howe.

REPLY BY THE FIRM

Less than an hour after receiving the order, White, Weld & Co. issued the following statement:

"We have just received copies of an order of the Securities and Exchange Commission directing that a public hearing be held to inquire whether there has been a violation of the Securities Exchange Act by our firm in transactions in A. O. Smith Corporation stock. We assume that this public hearing will be a reopening of the investigation which was commenced by the Commission over 6 months ago.

"Early in October representatives of the Commission came into our office and informed us they wished to investigate our transactions in A. O. Smith stock. In all respects we cooperated with the Commission to the fullest extent. In addition to the Commission's examination of our books and records, partners of this firm appeared at formal hearings and testified at length before the head of the New York office of the Commission, who sat as examiner.

"It has now been 4 months since these hearings were concluded, and the apparent determination of the Commission to reopen the matter and to hold public hearings comes to us as a surprise.

TRANSACTIONS ARE OUTLINED

"We believe, and our counsel so advise, that the record and the testimony before the Commission's examiner conclusively showed that there had been no violation by our firm of any of the provisions of the Securities Exchange Act

relative to the manipulation or pegging of stocks, no matter how these newly enacted provisions may hereafter be interpreted or construed by the Commission—and with respect to which no regulations have been issued by the Securities and Exchange Commission for the guidance of the financial community. As to the general allegation in the Commission's order for the hearing to the effect that we entered orders to buy with the knowledge that similar orders to sell would be executed, it is obvious to us that this surprising contention arises from a complete misunderstanding of the facts.

"The facts as to our transactions in this stock are briefly these:

"In March of 1935 our firm received an option from certain large stockholders on 10,000 shares of stock at $55 per share under the direction to place this stock privately in the hands of a limited number of investment buyers, with the understanding that no part of the optioned stock should be acquired by the firm for its own account. In accordance with this arrangement we placed the entire amount of the optioned stock with some 10 interests, all of whom were of substantial means and were familiar with the history and prospects of the company. The average price at which we placed the optioned stock was about $60 per share.

"As a result of the favorable outlook and prospects for the company, the firm determined that the common stock was an advantageous purchase for the firm itself. As already stated, no part of the optioned stock was to be acquired by the firm for its own account and, accordingly, from time to time, the firm purchased shares on the New York Curb market and retained 3,600 shares for its own account, some of such purchases being prior to completing the exercise of the option and the remainder thereafter. The average cost to the firm for these 3,600 shares, which the firm still holds, was about $60 per share. Incidentally, the firm has had no transactions in this stock since September 1935. "In the hearings which have heretofore taken place there was no evidence of any nature whatsoever that we misled or deceived any of the 10 purchasers of the optioned stock or that at any time we misrepresented anything or that we entered orders to be matched against other orders.

"This firm did not in any sense engage in any public distribution of or selling campaign in this stock. In fact, far from endeavoring to distribute any of the already substantial holdings of the partners, the firm together with the partners and their families, added to their holdings a total of 6,400 shares, including the above-mentioned 3,600 shares, and this amount is today still held intact. "Finally, any allegation or implications that we have engaged in any manipulative or rigging practices has no justification in fact."

White, Weld & Co., who have had a membership in the Stock Exchange since 1910, are the third house holding membership there to be prosecuted by the Securities and Exchange Commission for alleged manipulation of securities on smaller markets. Last week the Commission completed hearings in the case of Michael J. Meehan, who was charged with manipulating common stock of the Bellanca Aircraft Corporation on the Curb Exchange.

On May 11 the Commission is scheduled to begin taking testimony in its case against Charles C. Wright, Jere A. Sexton, and George S. Simpson of the Stock Exchange firm of Wright & Sexton and others who are alleged to have manipulated stock of the Kinner Airplane & Motor Corporation on the Los Angeles Stock Exchange.

The market for common shares of the A. O. Smith Corporation was transferred from the Curb Exchange to the Stock Exchange on November 23, soon after the expiration of the period in which the Securities and Exchange Commission alleges that the stock was "rigged" by White, Weld & Co. Officials of neither exchange would comment yesterday upon the Commission's proceedings. The stock ranged in price during 1935 from a low of $29 a share on January 2 to a high of $72 on April 24 and closed on December 31 at $65. The net gain for the year was $35,125 on a turn-over of 53,500 shares.

Mr. TWOMBLY. On November 13, 1936, the full Commission released an order naming W. E. Hutton & Co., its 10 partners as partners, 3 of the partners individually and 1 other, and charging them with violations of section 9 (a) (1), (2), (3), and (4) of the Securities Exchange Act in connection with the stock of Atlas Tack Corporation in that they "for the purpose of creating a false and misleading appearance of active trading" in said stock and "for the purpose of creating a false and misleading appearance with respect to the market for such