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usurp power from the courts because such reports would be advisory only. They would deal with the fairness and equity of the treatment accorded to various classes of security holders and claimants by the terms of the plan, and the adequacy of the steps taken to discover, disclose, and collect all assets of the corporation or of individual security holders. This would include all causes of action against officers and directors of the corporation and the underwriters of its securities. Such reports could treat also of the reasonableness and propriety of the fees and expenses of the reorganization; and would examine carefully into the provisions made in the plan for the management of the reorganized corporation in order to ascertain whether such provisions were in the interests of the security holders. It could examine into any other material and significant phases of the plan.

A similar provision is embodied in the Chandler bill, of which I made mention earlier. That provision, however, deals only with reorganizations under Section 77B of the bankruptcy act. A large area for such administrative assistance may remain in Federal equity receiverships, a field equally deserving of attention and in the past, equally susceptible, if not more so, to the abuses which I have already discussed. The two provisions need be carefully integrated, and in combination, should effectively cover all occasions on which there is resort to any Federal courts in the course of effecting a reorganization. In addition, should a State court, or agency, wish of its own initiative to call upon the Commission for its aid in the scrutiny and analysis of reorganization plans, provision should also be made empowering the Commission to render advisory reports when it is requested to do so by such State court or agency,

As a companion measure, the Commission should be given the power to intervene in reorganization proceedings, so that as a party in interest it could perform additional advisory functions in the court. There have been in the past necessitous cases where throughout the whole proceeding security holders have not had the benefit of able and disinterested advice and representation. That is to say in many proceedings there has not been an articulate, well-informed investor point of view. The Commission on intervention would not be representing any particular class of security holders. It would be present in the case in the public interest and in the interest of investors to see that unfairness or inequity was not done, that honesty in administration took place, and that reorganizers were not engaged in exploitation. The right of the Commission to intervene and to be heard on all phases of many of these cases would, in my judgment, supply a conditioning influence over the whole proceeding and supply the court with counsel and advice which in many cases have been sorely lacking.

In conclusion, the existence of widespread and persistent abuses in the reorganization field calls for vigorous and aggressive actionaction as constructive and as progressive as that which produced the Securities Act of 1933, the Securities Exchange Act of 1934, and the Public Utility Holding Company Act of 1935. There is such a national investor interest and stake in these reorganizations that mild or temporizing remedies will not suffice. The necessary reforms call for revisions in the present system along the evolutionary route made apparent by the experience of the last 4 years.

Mr. LEA. If there are any persons present who desire to appear as witnesses in this hearing, I would be glad if they will give their names and addresses to the clerk, and a statement of those whom they may represent, so that we can continue the hearings in an orderly way, as much as possible.

So we will adjourn to meet tomorrow morning at 10 o'clock. (Thereupon, at 11:55 a. m., the committee adjourned to meet the following morning, Wednesday, June 9, 1937, at 10 a. m.)

TO AMEND THE SECURITIES ACT OF 1933

WEDNESDAY, JUNE 9, 1937

HOUSE OF REPRESENTATIVES,
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D. C. The committee met at 10 a. m., Wednesday, June 9, 1937, Hon. Robert Crosser presiding.

Mr. CROSSER. The committee will please be in order. We will hear from Mr. Lowenthal.

STATEMENT OF MAX LOWENTHAL, COUNSEL TO SUBCOMMITTEE

OF INTERSTATE COMMERCE COMMITTEE OF THE UNITED STATES SENATE

Mr. LOWENTHAL. Mr. Chairman and gentlemen, my name is Max Lowenthal. I have had a number of years of practical experience at the bar in dealing with the general subject matter which the bill now before your committee seeks to legislate upon.

I have served in the capacity, from time to time, as counsel to committees, as counsel to receivers and trustees, and in other capacities in this general field.

At the present time I am counsel to the subcommittee of the Senate Interstate Commerce Committee conducting the railroad investigation.

I have for a number of years studied and written, both for legal and for lay periodicals, on the general subject matter here under discussion.

Yesterday, Commissioner Douglas of the Securities and Exchange Commission discussed this bill in two general divisions. One, relating to the subject of protective committees; and the second division, relating to the participation, to a limited extent, of the Securities and Exchange Commission in proceedings for the reorganization or readjustment of the capital structure of large corporations.

I should like to call your attention to the second division and in particular to sections 12 to 14 of the bill.

It may be helpful if I first discuss very briefly what it is that the ordinary investor needs, first, in connection with the reorganization of a corporation which has become insolvent.

The ordinary investor there needs two jobs. One is in the nature of a repair job and the other is in the nature of a reconstruction job. The repair job is with respect to the loss to which he has already been subjected, of which loss the receivership or bankruptcy of the company is simply a mark or indication.

Ordinarily the loss, when a company gets into receivership or bankruptcy, falls entirely on the investor. There are two other groups

which conceivably might share or bear that burden, relieving the investor of that loss in whole or in part. One group is made up of the men who have had

Mr. WITHROW. I am sorry to interrupt, but I would appreciate if you would state, for my benefit, your name and whom you represent, as I came in after you had started.

Mr. LOWENTHAL. My name is Max Lowenthal. I am now counsel to the subcommittee of the Interstate Commerce Committee conducting the railroad investigation.

Mr. Mapes. Do you live here in the District?

Mr. LOWENTHAL. I am resident in New York City. I might add that I have had occasion to deal with matters such as are involved in this bill in jurisdictions other than that of New York and have, in the course of a number of years study of this particular field, studied proceedings in various parts of the United States.

Mr. MAPES. Are you in general practice in New York?

Mr. LOWENTHAL. I am not now in general practice and have not been for some time; except insofar as acting for a Senate committee may be deemed to be practice.

I was saying that the ordinary investor in securities of a company which has gone into receivership or bankruptcy has two main needs. One need is for the recovery by the estate of every dollar which the estate is entitled to recover from anybody for anything previously done to the company on which a cause of action can properly be based.

Now, there are in general two groups from whom an estate can make recovery, which recovery will indirectly but substantially benefit the ordinary investor. One group is made up of the people who have been in control or management of the company which got into receivership; and the other group are the bankers who floated the securities and may have dealt, in other respects, with the company which has now gone into receivership.

In referring to that type of recovery for an estate, I do not mean to suggest that because recovery can be had, the bankers or the management must, in consequence, be regarded as men who have proceeded unethically. I am dealing with the cold question of dollars and cents for the ordinary investor.

If there are facts on which a cause of action can be based so that the estate may have the benefit of it, investors can recover large sums of money that ought to be paid. It has been done in too few cases of large receiverships or large bankruptcies.

There are now pending in the Federal courts and in the State courts a number of suits by trustees in bankruptcy of large railroads for the recovery of many millions of dollars from directors or bankers.

Similar suits have been instituted in norailroad cases and in cases of industrial corporations which have gone into receivership.

That is a branch of activity in connection with receiverships and reorganizations on which a great deal can be done to help the ordinary investor salvage a loss which was not of his making.

The second job which the ordinary investor needs is the job of reorganization in his interest. That involves a number of major and difficult questions. I will be through with this phase of my remarks in a moment. I just want to indicate what the fundamental need of the investor is here and how this bill will help him to have it met.

In reorganizations, one of the most important considerations is that of control of the reorganized company; management of the reorganized company. If you go to New York and meet with a group that is discussing reorganization of a large company, you will find that one of the first questions that any banker interested in the situation or any large creditor interested in the situation will ask, is this: “Who is going to control the reorganized company? Who is going to manage it?"

If they are interested in those questions, those questions are obviously of great importance to the ordinary investor.

Another type of problem in connection with reorganization is that of the division of the reorganization securities. Reorganization involves a shuffling of securities, and a redistribution of the cards. Now, sometimes in that reshuffling, the dealer deals from the bottom of the deck. One of the important jobs in reorganization is to make sure that the cards are dealt from on top and to have them properly and fairly shuffled before the deal begins.

There are other major questions involved in reorganizations. In both classes of jobs to which I have referred, the work involved is of a very difficult and very complex nature. The ordinary court machinery is not adequate for the administration of that type of work. Sometimes the digging into the past history of a corporation with a view to recovering money for the estate and with a view to ascertaining what kind of management and control the involvent company hadbecause that has a bearing on whether the men who controlled it in the past shall be permitted to control after reorganization-sometimes a job of that kind can take many months and even some years. It takes very skilled and very experienced men.

And so it is in studying the problems in connection with reorganization. For dealing with those problems, the investor needs the services of a permanent, trained and experienced staff. No court has a staff of that kind.

Now, to be sure, when a court appoints a trustee, the trustee should provide such a staff. I regret to say that in a great many cases the trustees have not risen high enough in the discharge of that duty. And I regret to say also that even when you have a trustee or a trustee's counsel who wants to do a thorough job, interests which seek to serve themselves against the security holders will sit in at the conferences with the trustee and trustee's counsel and endeavor to persuade the trustee or trustee's counsel in a way that may not in fact be for the benefit of the security holder. And it is of great assistance to the trustee or trustee's counsel, in such a situation, to have present the representative of an independent committee or of a Government administrative commission like for example, the S. E. C., who would urge the sound course of action and would offset the urging that is being made by the other side.

Now, it may seem to you that a high-class trustee ought to be able himself to withstand the wrong kind of urging, but when you sit in a room with the representatives of several committees, and they put up a plausible although specious argument for not taking the course of action that should be taken, and they say, "There is nobody here urging that you do what you, Mr. Trustee, want to do; all the interests in this room are urging you to do the contrary”, it puts the trustee

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