stock traded on the exchange, indeed exceeded the totals in 9 out of the 18 months. Thereafter the proportion of the securities company's market purchases to the total trading on the exchange was less than 100 percent and, with exceptions, grew progressively less-not, however, through diminished volume of the market purchases (which increased, instead) but through a greater increase in the volume of purchases on the curb exchange by the investing and speculating public. It is probable that the spectacle of the continuous and rapid rise in the market quotations for this stock attracted speculators who purchased in larger and larger volumes, doubtless on margins to a large extent, for the purpose of reaping large profits in the resale.

On December 17, 1928, Cities Service Co. announced to its common stockholders another offer of common stock for pro-rata subscription at $65 per share to the extent of 10 percent of their record holdings on January 8, 1929. The securities company undertook supervision of the market for the rights and for the stock during this operation. It formed another Put Syndicate and paid it a fee for the privilege of putting to it not to exceed 200,000 "market shares" at $75 per share or cost, whichever should be the less. In order to provide channels through which to dispose of any shares that should not be taken by the stockholders, it joined with Pearsons-Taft Co. in the formation of another syndicate distribution group, which was to obtain orders at retail for 300,000 shares at the current closing curb price plus % point. In its market "supervising" activities the securities company purchased in the market at a cost of nearly $2,489,000, rights to subscribe for 110,8800 shares. Also, during December 1928 and January 1929, it spent over $56,900,000 in market purchases of approximately 649,087 shares. Its sales during the same 2 months amounted to 890,068 shares with contractual proceeds of $75,079,805.64. The closing Curb quotations rose from $73 on December 1, 1928 to $891⁄2 by January 10, 1929, and to $91 by February 1. The number of shares offered to and subscribed by the stockholders was 522,8422.

Although, including the securities company's subscriptions, the pro-rata subscription offer to the stockholders was a complete success, extensive sales had been effected by the syndicate distributing group and by Henry L. Doherty & Co.'s organization. These sales were sufficient not only to cover the securities company's market purchases but to leave a margin to which could be applied more shares. With market quotations approaching and attaining $120 per share, the Doherty management continued the marketing campaign; also Mr. Doherty decided to sell 200,000 shares of his personal holdings. Steps were also taken whereby he reinvested $1,000,000 in Cities Service Co.'s newly created noncumulative stock in such manner as to increase his voting power from 144,813 votes or 6.19 percent of the total voting power to 1,104,813 votes or 33.11 percent of the total. The company's representatives averred that there was no connection between these two transactions. With such high prices for a 20-dollar par stock, steps were also taken to change the common stock to the non-par variety and split it 4 shares for 1, which became effective on May 2, 1929. A new selling campaign was launched in April 1929 and was carried on through a dealers' special offering and through the Doherty organization until the end of September. While the market quotations held at about $120 per share from about March 19 to the date of the split-up, their upward movement resumed after the split-up and continued to a maximum of $68% for the new non-par stock (equivalent to $272.50 per share of the 20-dollar par stock) which was attained on October 15, 1929.

In this connection the company's representatives urged that the advance in market price of this stock during 1927 and the greater part of 1928 lagged noticeably behind the upward trend of the general market for stocks. They also point out that on December 4, 1928, one of the Cities Service Co. subsidiaries brought in the discovery well in the now famous Oklahoma City oil pool; and they claim that this discovery attracted public interest and focused attention of investors and speculators upon Cities Service common stock, that this interest was stimulated as other wells in this pool came in later; and they point out that it was during this period from November 1928 to October 1929-particularly from July to October 1929-that the market price of Cities Service common stock had its spectacular rise. They point out that during this period the management was engaged in raising a large amount of new capital with which to develop its holdings in this oil field. However, that may be, it is a fact that during the 11 months and 6 days from October 31, 1928, to October 5, 1929, during which large additional amounts of new capital were sought, the management spent nearly $389,250,000 in the purchase of the equivalent of nearly 12,072,000 non-par shares

of Cities Service Co. common stock over the counter and on the curb exchange, with which to fill sales orders from customers.

The extent to which the securities company's market activities influenced and contributed to that spectacular elevation of the market quotation for Cities Service Co. common stock and to the general market condition that was attained by the beginning of October 1929, and that culminated in the stock-market crash of that month, may be judged from the following summary of significant facts. The records of Cities Service Co. show that, from November 1, 1928, to October 5, 1929, that company issued, exclusive of stock dividends, new original issues of common stock to the extent equivalent to 5,763,850 shares of the present non-par variety, for proceeds amounting to $86,789,125. During identically the same period, the Doherty management, as agent for the securities company, spent $389,248,248.77 in the purchase, mostly on the curb exchange, of the equivalent of 12,071,692.812 non-par shares of Cities Service Co. common stock. Of course, all of the shares so purchased and several millions more were resold over the counter by Henry L. Doherty & Co.'s stock salesmen and through other channels. During that period the market quotations for the stock rose from the equivalent of about $17.69 to $61.75 per share. The contribution of those market activities to that price elevation may be inferred from the fact that those purchases amounted to 73.5 percent of the entire reported demand on the Curb Exchange. Any percentages are subject to qualification because not all transactions on the Curb Exchange may have been reporting-in fact, particularly in the early years (1927 and 1928) numerous discrepancies occurred between quantities reported by different agencies.

Prior to September 30, 1928, the securities company's market purchases of Cities Service Co. common stock frequently exceeded the total number traded on the Curb Exchange. The last statement in the preceding paragraph shows the proportion from November 1, 1928, to October 5, 1929, at 73.5 percent. The proportion from October 1, 1928, to October 5, 1929, was about 74.4 percent. Even this is a very large proportion, and indicates that the public market demand of investors and speculators for this stock was a very small proportion of the total market demand expressed on the Curb Exchange. It also indicates, however, that the general public had been attracted to this stock. Probably these purchases by the general public consisted in large part of margin purchases by speculators for the purpose of reaping large profits on the resale at still higher prices.

In September 1929 the Doherty management planned another 10 percent prorata subscription offer to Cities Service Co. common-stock holders of record November 7, 1929. In order to provide an alternative channel in case the stock-holders did not respond fully, another syndicate distributing group was arranged, and marketing commenced on October 1. The securities company undertook supervision of the market.

The market condition was exceedingly precarious, however. Doubtless stimulated by the sustained upward trends of market prices of stocks which in turn were doubtless stimulated by the large and sustained volumes of market purchases by "sponsors" such as Cities Service Securities Co., there was a very large volume of margin holdings of stocks-10 to 12 billions of dollars-as was evidenced by brokers' loans which stood on Octobr 3, 1929, at the stupendous total of $8,549,383,979 and which had increased during the preceding 4 months to the extent of nearly $1,868,000,000. Call loan rates were high. The prices of many stocks were so high that the income accruing to them represented yields of 2 percent or less on those prices, a fact that would naturally precipitate investment selling. Speculators would have to sell in order to realize their paper profits in cash. These facts invited short selling raids by "bear" cliques in the hope of producing sufficient drops in market quotations to precipitate a large amount of forced selling by the margin speculators, which would enable the "bear" operators to cover their short sales at a profit. Once such forced selling was commenced there was not necessarily any stopping point until the last speculator was squeezed out.

During the first half of October 1929 the securities company spent vast sumsof money in withstanding the selling pressure on Cities Service Co. common stock; and it was so successful that the market quotations actually advanced from a closing $60% on September 30 to a high of $68% on October 15. However, on Monday, October 21, in a panic that was precipitated on the preceding Saturday, 936,500 shares of Cities Service Co. common stock, were hurled onto the market. The securities company, in an endeavor to allay the panic, spent more than $48,886,000 in the purchase of 784,644 of those shares. It was only partially

successful, however, the price having broken from $66% to $59%. This price break was followed by even heavier selling pressure-1,151,900 shares on October 24, 976,700 shares on October 28, and 1,105,900 shares on October 29. During the whole course of the stock-market crash in the latter half of October 1929 the securities company spent more than $138,000,000 in the purchase of 2,372,101 shares of Cities Service Co. common stock; but, as these amounted only to about two fifths of the total quantity of that stock thrown onto the market, they were not sufficient to uphold the market price, which broke to a low of $20 on October 29. During October the securities company sold, exclusive of the shares taken by warrant-exercising debenture holders, 3,401,462 shares, the contractual proceeds of which, after certain adjustments, amounted to $180,314,663.10 as against purchases during October of 3,080,392 shares at a cost of $181,825,808.

The rapid changes in market quotations during this period resulted in numerous price adjustments to the customers for Cities Service Co. common stock. By the end of the year these amounted to $10,605,811.52 on sales effected through the syndicate and to $2,168,658.55 on sales effected by Henry L. Doherty & Co.'s organization.

As a result of the relatively low market quotations prevailing for Cities Service Co. common stock after the stock-market crash of October 1929, the pro-rata subscription offer to the stockholders was abandoned and modifications were made in the syndicate distribution group agreement. A new special offering to dealers was announced in February 1930. During 1930 the sales of this stock through all channels amounted to 7,382,696.16 shares, with a gross invoice value of $210,441,088.86. The company made market purchases aggregating 7,337,156% shares at a cost of $218,803,730.37. There was a period of upward trend in the market price of the stock-from a low of $25 on December 20, 1929, to $41% on May 1, 1930. But during this period, the securities company's market purchases exceeded its total sales through all distribution channels. A market decline set in in May 1930 during which the sales exceeded 1,000,000 shares and exceeded the market purchases by nearly 279,000 shares; and a fluctuating decline continued throughout the remainder of that year, the market price at the very end being $14% per share.

On January 17, 1930, Cities Service Co. provided the securities company with 600,000 common shares with which to make deliveries to customers. Although the market price at the time was about $28 per share, the gross proceeds available from accumulated sales averaged only $15.91 per share to be provided; and the price to the securities company for these shares was $12.50, which left the latter a margin of about $3.41 per share with which to cover commissions and expenses. As of December 31, 1930, Cities Service Co. provided the securities company with another 633,879,206 shares at $10 per share. This price left the securities company with a margin of about 53.82 cents per share with which to cover commissions and expenses.

The securities company's accounts represented that company as selling to the holders of Cities Service Co. debentures the common shares that were issued to them when they exercised the warrant options carried by their debentures, and as obtaining the requisite shares from the issuing company at prices from $5.50 to $7 per nonpar share less than the prices paid by the debenture holders. As the securities company had no function to perform in the issuance of these shares, this resulted in counting for it a gross profit of $18.429,723.23 for which it did not render service. However, this made no difference in the ultimate proceeds to Cities Service Co. because the securities company's net deficits from these operations were charged back to it.

As of December 31, 1929, the securities company wrote down the book cost of its "Trading purchases" of Cities Service Co. common stock, $21,121,097.98. This was not an inventory adjustment, as the company had no unsold shares, its aggregate sales up to that time having exceeded its aggregate purchases by 1,946,941 shares. Such bookkeeping enabled the securities company a year later to count on certain classes of sales of this stock a gross profit of $99,642.39 instead of an actual gross loss of $21,021,455.29. Profits and losses made by trading in securities are not, however, taken into earnings but are treated as more or less capital proceeds from the securities of new original issue, which treatment is represented on the company's books by carrying them, not to surplus, but to an account called "Reserve for cost of distribution."

After counting profits and losses on December 31, 1930, the securities company emerged with a deficit in its "Reserve for cost of distribution" of $1,956,775.71. This was charged back to Cities Service Co., as also was $12,518,998.55 of uncollectible balances of breached partial payment contracts.

[For release afer the full report of which this is only the summary, has been introduced in the cffiical record which will probably be Tuesday, March 20, 1934. Federal Trade Commission, Washington. Investigation of power and gas utilities under Senate resolution]

SUMMARY OF EXAMINER'S REPORT ON ASSOCIATED Gas and ElecTRIC SECURITIES CO., INC.

This report covers the activities of the principal securities company of the Associated System from its incorporation, April 18, 1925, to December 31, 1929, for the most part. However, certain aspects of the securities situation respecting the Associated Gas and Electric System are discussed as of later dates.

This report was required for two general reasons: First, to show the activities of this Securities Co. and certain other securities companies in the Associated Gas and Electric System; and their functions and relations to the Associated Gas & Electric Co.; second, to complete the record of security issues and reacquisitions by Associated Gas & Electric Co. as set forth in the report of this examiner on Associated Gas & Electric Co.,' due to the fact that many of the security transactions recorded on the books of the latter company were open account entries between Associated Gas & Electric Co. and the securities company. During the examination of Associated Gas & Electric Co., the examiner was denied access to the records of the securities company, which was the only source of information with respect to such transactions. Therefore, in chapter II of this report there are set forth detailed explanations of the original issues, reacquisitions and other dealings in eight issues of stocks, debentures, etc., of Associated Gas & Electric Co. of varying types, as being representative of the numerous issues.

This report is in three chapters, the first dealing with its organization and functions. The second covers the issuance and reacquisition of certain selected typical securities of Associated Gas & Electric Co. and the third chapter deals with the results, as shown in surplus accounts, including under such title the "Reserve for premiums, discounts, etc." account.

The securities company was organized in 1925 and at first its activities were somewhat limited. It was about this time, too, that Associated Gas & Electric Co. really began to put out securities in volume. Prior to that year, Associated Gas & Electric Co. handled its own security transactions, such as they were, its own forces carrying on customer-ownership campaigns and its officials dealing with bankers or dealers in the issuance of major financing through the latter channels. With the organization of the securities company, this condition gradually changed and the securities company took over more and more of the dealings in securities for the Associated Gas & Electric System. Even so, it should be borne in mind that the securities company has always been nothing more than a department of Associated Gas & Electric Co. In many cases, its officers, directors, and employees occupied similar positions with other companies of the Associated System. Although a separate entity, the securities company has been nothing more than an agent of Associated Gas & Electric Co.

In this report the securities company has been treated as a separate entity. Its functions, in effect those of a securities department, have been the following: (a) To act as agent of Associated Gas & Electric Co. in the sale of certain securities of Associated Gas & Electric Co. and other Associated Gas & Electric System companies through Nation-wide campaigns and otherwise.

(b) To handle numerous exchange offers made by the Associated Gas & Electric System to underlying company security holders, including the payment of commissions to dealers for their participation in the exchanges.

(c) To handle the various conversions of Associated Gas & Electric Co. securities into class A and common stock of the latter and other Associated Gas & Electric System securities.

(d) To conduct customer-ownership campaigns.

(e) To act as agent of Associated Gas & Electric Co. in the payment of dividends on Associated Gas & Electric Co. class A, class B, and preferred stocks, in class A stock.

Certain special functions have also been noted:

(A) It has underwritten at least two security issues of subholding companies of the Associated Gas & Electric System and performed numerous other duties pertaining to system securities.

(B) The securities company has purchased on the open market over 3 millions of shares of class A stock of Associated Gas & Electric Co. in what has been in large part an effort to support and maintain the market in that stock. Similarly, the 1 Federal Trade Commission, utility corporations, pt. 45, S. Doc. 92, 70th Cong, 1st Sess. (exhibit 5157).

securities company has bought and sold thousands of shares of preferred and common stocks of Associated Gas & Electric Co. and numerous other underlying companies in open-market transactions.

The securities company has actively engaged in promoting wide distribution of class A stock of Associated Gas & Electric Co. and to that end has participated in an extensive campaign to place this stock in the hands of permanent investors. To this end it has acquired large quantities of stock on the open market for redistribution through a group consisting of several hundred dealers throughout the United States.

In the original disposition of the securities of Associated Gas & Electric Co. there has been no fixed procedure. In certain cases Associated Gas & Electric Co. sold entire issues to bankers or syndicates and in other cases the securities company disposed of the entire issue. Among the principal securities of Associated Gas & Electric Co disposed of almost exclusively by the securities company were the following:

Class A Stock.

Convertible 41⁄2 gold debentures, due 1948.

Gold debenture bonds, consolidated refunding 5-percent series, due 1968. 51⁄2 percent convertible investment certificates.

$8 interest-bearing allotment certificates.

In the sales of Associated Gas & Electric Co. securities, the securities company adopted several methods. Large amounts of securities have been sold in Nationwide campaigns by direct offers to its security holders, through the issuance of rights or privileges to buy at less than the market. Large amounts have been sold to and bought from affiliated and related companies. Sales have also been made to or through nonaffiliated dealers throughout the United States and in foreign countries and stated commissions have been paid these dealers for subscriptions received through them. Sales have also been made through customerownership campaigns in which the company's own salesmen and employees have been active, the latter being paid stated commissions. The company had none of its own dealer offices except those located in New York and at the headquarters of the various operating companies and these can hardly be strictly termed dealer offices. At these offices, salesmen were at hand to take subscriptions for the particular security being sold, and to assist security holders in connection with exchanges, conversions, etc. Such offices did not, however, function as dealer offices in the sense that both buying and selling took place therein. The action was one way; sales only were made. No attempt was made to create a trading mart at which security holders could dispose of their securities. Holders could turn in their securities, under stated conditions, as consideration for subscriptions to other associated system securities, but they were seldom able to sell them back to the company.

The financing methods, and the types of securities issued by Associated Gas & Electric Co., have been among most complicated. The numerous conversion features of the securities and the thousands of exchange offers made by Associated Gas & Electric Co., the securities company, and other system companies, to the holders of Associated Gas & Electric Co. and underlying company securities have made a vast amount of detail work for the securities company. In this respect "securities company" is used in a collective sense in that there were a number of securities companies within the system, most of which, except the one which is the subject of this report, and its partial successor, the Associated Corporation, were more or less bookkeeping units in order formally to comply with various State laws. Some brief outline of these related functions are in order at this point. Until December 31, 1929, the entire sales of securities, the effectuation of exchanges and conversions, payment of dividends in stock, customer ownership activities, etc., were carried on throughout the system with brokers and with the public, in the name of Associated Gas & Electric Securities Co., Inc., the subject of this report. After December 31, 1929, these functions were split up and Associated Gas & Electric Securities Co., Inc., the subject of this report, became s dealer company, distributing securities of Associated System, carrying on customer ownership campaigns, etc., in all States of the Union excepting New York, Pennsylvania and the New England States. In the last-named States, companies organized respectively in New York, Pennsylvania, and Massachusetts carried on the distribution of associated system securities, customer ownership campaigns, etc., within those States.

The consummation of exchanges and conversions, the payment of dividends in stock, etc., formerly carried on by Associated Gas & Electric Securities Co., Inc., the subject of this report, were, after December 31, 1929, carried on by The Asso