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provision for review by the 77B court. An annual report and accounting must be rendered. Trading or otherwise profiting from the fiduciary relationship must be prohibited. Provision must be made for the termination of the authority conferred by the proxy or deposit under certain circumstances, including the suspension of the effectiveness of the declaration with regard thereto. Limitations are imposed upon the purposes for which deposits may be solicited. Further requirements are imposed by section 10 (b).

The provisions of section 6 (a) and section 7 (3) to 7 (6), inclusive, of the committee act are also more specific in their application. Section 6 (a) contains what is in effect a flat statutory disqualification of the issuer; of underwriters of any of its outstanding securities (not merely underwriters of the securities to be solicited); and of officials of the issuer or such underwriter. Section 7 (3) and 7 (4) are roughly comparable to subsection (h) (3) (B) of H. R. 6963.


In addition, H. R. 6963 contains certain provisions which have no analogue in the committee act.

Under subsection (i), the court may not, with certain exceptions, make any allowance or payment of compensation or reimbursement out of the estate unless the Commission has been allowed a reasonable time for investigation thereof, and the Commission is required to make a report thereon within such time. The committee act contains no such specific requirement, although the Commission may, of course, as intervener, express its views with regard to any proposed allow

LIMITATIONS ON TRUSTEES FEES By subsection (j) of H. R. 6963, the aggregate annual compensation of any one person for services as trustee, custodian, or receiver in all proceedings under section 74 or 77B in which he has been appointed as such is limited to $10,000. This restriction is outside the scope of the committee act.



Under subsection (k) of H. R. 6963 the Commission is entitled to costs, to be allowed out of the estate. The committee act contains no such express provision.

The CHAIRMAN. Mr. Sabath is with us, and we shall be glad to hear bim at this time.



Mr. SABATH. In connection with what you have just said, Mr. Chairman, I also have had prepared an analysis of my bill, the bill that is before you, and the other bills that are pending before the Judiciary Committee.

Let me state that I am heart and soul for the principle embodied in your bill, which also is expressed in my bill, H. R. 6978, now before your committee; and nothing I may say should be construed to mean that in any way I wish to delay consideration or favorable action on the bill, because I believe it is of utmost importance that early legislation be had.

If you will bear with me for a few minutes, I want to qualify as a witness; not as chairman of the select committee which has devoted 3 long years to investigation of this subject.

In 1929 I started my crusade against the stock exchange and its manipulations. Later I obtained a great deal of information about millions and billions of dollars worth of securities, real estate, and other, that were fast going into default. I urged immediate legislation, but unfortunately was not successful in obtaining a hearing until, I think, in 1932, before your own committee, Mr. Chairman.

The CHAIRMAN. Was it not 1933?

Mr. SABATH. You may be right, Mr. Chairman.
The CHAIRMAN. We can verify that and correct it in the record.

Mr. SABATH. When your committee was considering the Securities Act, that was in 1933. At that time, if you recollect, I pleaded we should embody in that act a provision which would apply to realestate securities; and that we should give the Securities Commission jurisdiction over defaulted real-estate securities.

But a few gentlemen, whom I did not know, but who claimed to represent the Real Estate Board of New York and other real-estate organizations, came here and convinced your committee, by their arguments, that that would be detrimental to real-estate securities and to real estate in general; and upon their plea my suggestions were not accepted.

Later on I obtained information that these very men represented the so-called protective committees which then were being created by many houses of issue-in 1929, 1930, and 1931-so as to give them complete control of all defaulting outstanding securities for the marketing of which they were responsible, and which they had unloaded upon the trusting public.

Had I then had that information I think I could have had convinced your committee that provisions suggested by me were absolutely necessary; that those who objected to them were not honest with your committee when they claimed them detrimental instead of beneficial if made applicable to real-estate securities.

There were then many other matters claiming my attention. Inasmuch as we passed the securities bill, I devoted no more time to my studies and efforts in that direction. However, I think in the latter part of 1933, a petition signed by 500,000 people of my cityall bondholders, some of our best citizens was presented to the President and leaders of the House pleading for investigation of the foreclosure and reorganization racket then in full operation by protective committees, law firms, trust companies, and others in that line of business.

In consequence, several resolutions were prepared; finally, on urgent request of Speaker Rainey, I introduced another which was passed, authorizing appointment of a select committee to investigate conditions relating to defaulted securities. It was the first time in 28 years of my service here that I accepted membership on a congressional investigating committee, because requested by Speaker Rainey.

I was made the chairman of that committee. Immediately we started penetration of the complaints and reported abuses. And ever since then I have devoted nearly all my time to that work and to putting an end to the deplorable conditions and practices surrounding defaulted investments prevalent throughout the United States.

In that connection we found a great many abuses in our courts-in bankruptcy proceedings and receiverships. I supported a resolution which finally was passed to investigate court conditions, and to some extent I have been helpful to the Judiciary Committee in bringing out evidence of these abuses in Chicago. They were shameful. Subsequently the subcommittee of the Judiciary Committee made a report criticising Chicago court practice. It then was believed generally that it would urge impeachment of one judge; but consideration of that proposal was postponed until the committee had time further to investigate and to obtain added evidence about two other judges in expectation of bringing impeachment proceedings against them all.

After investigation on the part of that committee, in 1934, I prepared a bill in hope of bringing about legislation that would eliminate those abuses. Tħat bill went before the Banking and Currency Committee; and although hearings were had on it, unfortunately it was not reported out. That committee was busy with other, and what they believed to be more important, matters.

In the following session I introduced bill H. R. 10634, which was referred to the Judiciary Committee. I desired it referred there in order to eliminate any question of jurisdiction. It was in the nature of an amendment to the Bankruptcy Act. Under the Bankruptcy Act we have broad-almost unlimited-powers to deal with matters relating to reorganization of defaulted securities and with inequitable activities of protective committees. I obtained a hearing on that bill; and finally in the last session of Congress, after many trials and tribulations, it was reported out by the Committee on the Judiciary, after I was requested to amend it in certain respects. As amended it was known as H. R. 12064. The Judiciary Committee's report was dated June 17, 1936, and I have here a copy of it.

H. R. 12064 was a broad bill, with adequate powers, creating a conservator and providing for assistance in bankruptcy matters to the courts; and it attempted to eliminate excessive fees, prevent fraudulent leases, rigged sales of properties, and other fraudulent practices.

Right here I wish to say that when attention was called to the existing abuses in bankruptcy proceedings, and as soon as courts indicated that some relief should be given, certain gentlemen prepared an amendment to the Bankruptcy Act which was passed as sections 74 and 77 (b). I, myself, had the utmost confidence that they would go far in curing the abuses so many were complaining of, in addition to giving relief to debtors and protection to security holders. Too late I learned, to my sorrow, that as the bill was drafted, passed by the House, and made into law-without the vast majority of Members knowing that was its main object-it was mainly to release restrictions on fees in bankruptcy proceedings. That was admitted by former Judge and Solicitor General Thacher on the stand at one of our public hearings in New York. Previously in bankruptcy proceedings there were limitations on fees; but under 77 (b) these restrictions were left open, and the sky became the limit.

I will come back to that, Mr. Chairman; I just want to make a record of these various bills introduced upon the findings and experience of our select committee.

After that bill, H. R. 12064, was reported there remained but 3 days before we adjourned the Seventy-fourth Congress, and there was no way for me to secure final action on it, or any chance of having it passed by the Senate.

Immediately on the first day of this session, I introduced-on January 5 of this year—my bill H. R. 9. Hearings were had on the bill. Finally, it was suggested that some changes should be made, and I agreed to them. The bill was reintroduced as H. R. 6963. After a great deal of effort on my part it was likewise reported out favorably; then it was withdrawn, more hearings held, and again it was re-reported; and now it finally finds itself on the Calendar of the House. The Judiciary Committee's report on it was filed June 17, 1937.

So you see, Mr. Chairman, I have done a great deal of work on, and given a great deal of study to, this proposed legislation. I believe that my bill H. R. 6963, as reported by the Judiciary Committee the first time, would have eliminated most of the existent abuses in our courts and would have restricted these self-appointed and self-anointed protective committees; it would have protected the security holders, the bondholders, and even equity owners; it would have eliminated many of the abuses that have crept in under provisions of section 77 (b); it would have eliminated fraudulent and collusive sales and leases of properties, running into millions of dollars, on the part of these committees and receivers, and those behind the scenes—the combinations that control many of these committees, receivers, and trustees.

The CHAIRMAN. Mr. Sabath, you spoke of eliminating fees. In what way did you provide for compensation for the work done by these committees?

Mr. Sabath. In my bill I restrict the fees, giving the Conservator right and power to pass upon fairness of fees. Not only that, in my bill I have tried to eliminate fees by providing that deputy conservators could be appointed trustees in these matters; and that compensation of other trustees and receivers would be limited to an annual payment not to exceed $10,000; and that only a reasonable fee would be charged against the reorganization of a property by the Conservator for his services so as to make his Department selfsustaining. I felt that in that way these excessive fees to lawyers, to trustees, to receivers, to masters and special masters, and committees would be restricted to such an extent that in the future there would not be such an incentive to these selfish men-hungry for great gain—to force themselves on courts for appointments as receivers, trustees, masters; and that it would not be so lucrative to some of the law firms who endeavor to control that class of law business.

You may have read in the newspapers that in one of these cases that we investigated-I think it was the Paramount case in New York--the fees requested, in that case alone, were over four million dollars. In another case, the Gerard Trust case, the assets were something like six million dollars, and the fees, charges, and costs were over four million dollars. We have had hundreds of cases where almost the entire total of assets was absorbed by fees, charges, more charges and more fees; and the poor bondholder never got a penny for 6 or 7 years although the properties earned tremendous sums of money; not even taxes were paid. The money was all absorbed by fees.

The CHAIRMAN. Those excessive fees were approved by somebody, were they not?

Mr. SABATH. Oh, by the courts; yes. But in some instances some of these matters did not find their way into the courts. tective committees so arranged matters that they controlled the business without the courts. I will try to bring that out to you and try to make it as clear as possible. And while you have asked that question, let me deviate for a moment from what I wanted to say, because this is not a prepared statement; I just wanted to give you some facts as I went along.

Originally, when these defaults started, and even before defaults in many instances, these people anticipated defaults and the houses of issue started out by devising schemes whereby they would get

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control of the properties, get control of revenues from properties, get possession and control of their management. Then they started to appoint protective committees. Were they to protect the bondholders? No. The membership of these committees was composed of representatives of the houses of issue, the bankers, the investment bankers, and law firms. They were their agents and representatives. In that way they absolutely controlled these properties, and the assets and income of these properties. In some instances there were committees which had over 400 valuable pieces of property under their control, and the bond issues on them would total millions of dollars.

There was the Roosevelt committee in New York, the Pound committee, the S. W. Straus committee, the American Bond & Mortgage committee; and other committees in New York, Detroit, Milwaukee, Philadelphia, in your own State, Mr. Chairman, and so on. They had a double purpose in putting in their own people on protective committees whom they could control. In the first place they would have control of the foreclosures and the management of the property. And, by the way, they have had control of the property and will continue to have for the next 10 or 15 years in most reorganized cases, because even under section 77 (b) when they go into court, the very courts that appointed the receivers and aided these crooked committees, where these men are appointed as voting trustees for the next 10 or 15 years, and when their term expires there probably will be nothing left for the security holders.

Do you know how many security holders there are in real estate alone? Originally there were over 5 million. And there are over 10 million when you take into consideration security holders of various industrial issues.

This racket is so far reaching, Mr. Chairman and gentlemen, that you have no conception how much fraud has been perpetrated upon the American people. And we should wonder how it is possible that we permit these things to go on. But they are going on. They have been going on for 7 long years.

I am proud to say that our little committee tried to put-and in many instances succeeded—the fear of God in some of these people, and that it stopped some of these abuses in the matter of fees, collusive leases and sales. I am proud of the help we gave security holders, and of the fact we have been able to stop some of these avaricious men who represent investment banking interests. There was one other reason why they were anxious to get their own men on these committees. We had in this country a great many guarantee companies, mortgage guarantee companies. They were, perhaps guarantors on two billion dollars' worth of securities. They defaulted; the companies were liable. In many instances there were individuals of standing who also guaranteed some issues. To get away from their liability under their guarantees, they would put in on these protective committees people who would do them no harm, who would forget about the guarantee. Well, we did from time to time remind them of these guarantees outstanding against themselves and in many instances we succeeded, due to the investigations that we made, in having adjustments brought about.

You see, it helped them to sell these bonds whenever there was a guarantee behind an issue. It helped the high-powered salesman to unload them. And the result was that millions and millions of dollars of bonds were unloaded upon unsuspecting people who thought they

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