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Mr. HALLECK. Yes.

Mr. CROSSER. Mr. Wolverton.

Mr. WOLVERTON. Mr. Lowenthal, I am sorry that I was a little late in getting to the committee meeting this morning, and I did not hear what connection you have with the Securities and Exchange Commission.

Mr. LowENTHAL. I am not connected with the Securities and Exchange Commission. I was accorded the honor at the start of being asked whether I would take on some work with them. I was able to do that.

Mr. WOLVERTON. In what capacity do you appear before this committee?

Mr. LOWENTHAL. I am at the present time counsel to the subcommittee of the Senate Interstate Commerce Committee investigating railroad financing, railroad reorganizations, and so on, and previous to that time I had for a number of years practiced at the bar in the field of activities covered by this bill and also studied and written articles on the subject for lay and legal periodicals.

Mr. WOLVERTON. Do you have any other governmental connection aside from that which you have stated?

Mr. LOWENTHAL. Not at the present time; none.

Mr. WOLVERTON. How long have you had that position?

Mr. LOWENTHAL. I was asked to go into that work in 1935 by the Senate Committee on Interstate Commerce.

Mr. WOLVERTON. Did you previously practice law?

Mr. LOWENTHAL. Yes.

Mr. WOLVERTON. For yourself or associated with some firm?

Mr. LOWENTHAL. Yes.

Mr. WOLVERTON. Which?

Mr. LOWENTHAL. Both.

Mr. WOLVERTON. With what firm were you identified?

Mr. LOWENTHAL. Well, I think that my firm was known as Lowenthal, Szold & Perkins.

Mr. WOLVERTON. Were you located in the city of New York?
Mr. LOWENTHAL. In New York.

Mr. WOLVERTON. I want to continue the line of questions that Mr. Boren was pursuing before he left.

I understood in answer to his questions you said you thought that the purpose of this bill was to enable an investor who was faced with losses, to communicate with the Commission and have its assistance and advice. Is that true?

Mr. LOWENTHAL. Well, I understand that the Commission could furnish from its public files information to investors, but that the bill provides for more than that.

Mr. WOLVERTON. Mr. Boren sought to get a typical situation before you by asking you to assume that he was an investor and felt that he had not sufficient knowledge upon which to act intelligently and that he would thereupon address a communication to the Commission stating the situation.

I understood your answer to be that as a result of such he would be advised by the Commission as to what steps he might take and in fact that the Commission itself might act in his behalf.

Was my understanding of that correct?

Mr. LOWENTHAL. Well, let me, if I may, answer that question in several sentences. Whether an investor writes to the Commission

or not, the Commission is likely to know that there is a proceeding pending in such and such a jurisdiction involving the reorganization of such and such a corporation. Whether the investor writes to the Commission or not, the Commission can intervene in that proceeding. And, I am referring to sections 12 to 14 of the bill.

Mr. WOLVERTON. Your answer indicates even a broader scope of activity for the Commission?

Mr. LowENTHAL. Yes.

Mr. WOLVERTON. Than his questions indicate.

Mr. LOWENTHAL. I think that is correct.

Mr. WOLVERTON. The underlying purpose is to protect the investor, is it not?

Mr. LOWENTHAL. So I understand.

Mr. WOLVERTON. In your opinion when should the Government properly start in its duty as you term it, to represent or to protect an investor? Should it start after he has lost the money, or should it start before the company has suspended and protect him from a management that is probably just as deceitful and dishonest then as it afterwards may be in reorganization proceedings, or, should it start when he makes his original investment?

Mr. LowENTHAL. Well, of course, your body and the Senate have already passed legislation indicating that to some extent you think the Government should afford protection at the very beginning.

Mr. WOLVERTON. The only protection that is now afforded at the very beginning is that provided by the Securities Act.

Mr. LOWENTHAL. That is in the field other than the railroad field. Mr. WOLVERTON. Yes. I am speaking now of the general invest

ments.

The only protection that is afforded is to make available to an investor the information that might be helpful to him in determining whether he should make the investment or not. It does not seek to advise him in advance as to whether he should make the investment. Mr. LowENTHAL. I think that is correct.

Mr. WOLVERTON. Is not that the scope of the Securities Act?
Mr. LOWENTHAL. I think that is correct.

Mr. WOLVERTON. Now, we go to the other extreme, where he has made his investment and has lost money, and is facing a situation of deciding what to do to properly protect himself. Why does that situation create an obligation on the part of the Government any more than in the first instance to properly advise him what investments to make?

Mr. LOWENTHAL. Well, I have sometimes wondered, Congressman what chance the ordinary investor has anyway.

Mr. WOLVERTON. I hope you see what I am endeavoring to get at. The theory of this bill is to lock the door after the horse has been stolen. The Government has assumed or acknowledged some responsibility in the first instance when it makes available the information which it considers important in determining whether it is wise or unwise to make the investment.

Now, it seems to me that if the theory which you have set forth to justify this remedial legislation should be carried to its logical conclusion, it would equally sustain a statute that would set up a governmental agency to protect the investor in the first instance as well as protect him in the last when he is facing a possible loss through reorganization of the company.

Mr. LOWENTHAL. I suppose, Congressman, that the same general comment could be made with respect to a good deal of the legislation on many subjects that goes through Congress, and perhaps you have to say to yourselves, well, the Government has not yet chosen; has not yet felt, that it will prevent this disease from attacking people; but it does feel that once the thing has gotten to such a stage, it will do what it can, or something, to prevent its spread.

Mr. WOLVERTON. We all agree with the old maxim that an ounce of prevention is worth a pound of cure, and as long as you have used the term "disease", and you are bringing into the subject a medical application, I think you will agree with me that medical science seeks to prevent disease, not only cure. They adopt means to prevent. Now, the loss that this individual has sustained is the result of bad judgment upon his part in making this particular investment.

Mr. LOWENTHAL. Not necessarily, Congressman, unless you say it is bad judgment to invest at all.

Some people might agree with that theory.

Mr. WOLVERTON. Both you and Mr. Douglas have emphasized the deceitfulness of those who frequently seek to control receivership proceedings and reorganization proceedings. I assume that that same individual is in the company to be organized in most instances from the very beginning and if the investor should be protected against such individuals in the final analysis why should he not be protected against them in the first instance when he is about to make his investment.

Mr. LOWENTHAL. Well, I would say, Congressman, that short of a guarantee by the Government against investment losses, that even if the Government participated in the very beginning in a man's investments, to a much greater degree than it does, you will find companies going on the rocks in the future, sometimes without the fault of any person and sometimes with the help of some persons, and that what is proposed in sections 12 to 14 of this bill would be desirable, would be needed, would be valuable, for the protection of investors even then. Mr. WOLVERTON. All right. Let us eliminate then from our discussion the question of advising him what investments to make and suppose we come down to the management of the company. The management of the company may be acting in a way to bring about a condition that will require a reorganization upon terms which they figure would be more helpful to themselves.

Now, if you protect the investor, after that has been done, in an effort to save what little he has left, why should not the Government intervene and protect these unfortunate investors before the company has gone upon the rocks?

Mr. LOWENTHAL. Of course, Congressman, your question deals with a much deeper and broader type of governmental activity than it is proposed in this bill.

I am not saying, Congressman, that what you suggest even if in the public interest would be an advisable burden for the Government to undertake. I am not saying that.

Mr. WOLVERTON. I am not suggesting it. I can very readily appreciate the difficulties that would be faced, but I do recognize that the Government has now entered into a field which it formerly did not occupy, by the passage of the Securities Act.

In other words, recognizing an obligation to a possible investor they have assumed an obligation to the extent of obtaining for him necessary and pertinent information. That was evidently as far as Congress or the administration preferred to go at that time; but now you are taking another step by this proposed legislation. As Mr. Douglas said yesterday, a step forward. You are now seeking to protect the investor that has lost, and I am asking whether as a practical matter it would not be less expensive to the Government and more advantageous to the investor if the Government intervened at some point before his loss has occurred, which would be either when he makes the investment, or before the company has gone on the rocks.

Mr. LOWENTHAL. I can make two comments on that, Congressman. In the first place I am not in a position to make an estimate as to which way you would, with the least cost to the Government and the most help to the investor, be able to proceed, but I would say -Mr. WOLVERTON. Pardon me for a minute. Let me get my viewpoint before you.

If the wisdom of this Commission is sufficient that they can differentiate between what is good and what is bad in a proposed reorganization and convince the investor accordingly, certainly it can be assumed that they have wisdom enough when an original issue of stock is made, to advise a possible investor whether it thinks that it is going to be good or whether it is going to be bad, and that would not take near the expense to the Government as it does afterwards to protect the investor when he is in danger of losing his money.

Mr. LOWENTHAL. Congressman, if they did the thing you are mentioning, you would still need governmental protection such as is proposed in sections 12 to 14 in this bill.

Mr. WOLVERTON. Well I can see more logic then for the Government to do it, because the Government having assumed the obligation in the first instance there might be a duty to follow through, but, in this case you stand blissfully by and you let the investor go into any kind of a wild-cat scheme he sees fit. You let that corporation conduct its business in the most unwise or uneconomical manner possible and you wait until the investor has been stripped of all that he had or with little remaining, and then you say, now, the Government is going to be the great paternal institution that idealists think it should be and it will step in now and it will seek to save you, when you have lost almost everything.

Mr. LOWENTHAL. I think, short of a guarantee by the Government, you will find that whatever the Government does, some companies will go over the dam into receivership or bankruptcy anyway, whether due to conditions or due to human beings and their activities, and that in such case it will be valuable to have the protection of sections 12 to 14.

Mr. WOLVERTON. That is true. I would not want you for a moment to think that I advocate that a paternalistic attitude of the Government should be extended to the point my questions might indicate; but I say that this bill is in effect seeking to lock the barn after the horse is stolen, and it seems more sensible to me to save the investor from a loss by wholesome advice and interest in his behalf before he invests than to step in and protect him after he is in difficulty and faces a loss.

Mr. CROSSER. We ought to adjourn, as the witness is anxious to get away.

Mr. MARTIN. I want to just ask one question, and that is this: Is it not a fact that bankruptcy, receiverships, and reorganizations have generally been more or less of a racket in which the investors are plucked by the protective committees and lawyers and so forth, often with the courts winking at what is going on, and that this act is at least some attempt to protect investors from that situation?

Mr. LOWENTHAL. I would say, Congressman, that even if what you said does not happen to be the case; even then this act would be of value, because you frequently have to protect investors against the inaction of those who should act and against the inefficiency of those who have power to act.

If I could, Mr. Chairman, just make one or two more remarks. I want to commend to your sympathetic attention the provisions on pages 37 to 39 of the bill with reference to deposit agreements.

Deposit agreements happen to be a subject as to which I have had some activity and of which I have written considerably.

The standard form of protective committee deposit agreement is for the protection not of the investor, but of the committee members against the investor.

The standard form of agreement gives the committee almost unlimited power over the securities deposited with the committee by the investors. Gives the committee very wide privileges, for the members to deal in their individual capacities, for their own pockets, with themselves as committee members, and gives the committee members very wide immunity from any real responsibility to the investors over whose securities the committee is exercising such great powers.

The ordinary type of deposit agreement is one of the great scandals in this field and the provisions on pages 37 to 39 at least make a provision at attacking that evil. Your committee may find some interest in remarks on the subject in an article I wrote for the Columbia Law Review, which I submit for your consideration.

Mr. CROSSER. Mr. Lowenthal, the committee appreciates your being here, in view of the fact that you had another engagement, and if there is no objection at this time the committee will stand adjourned until 10 o'clock tomorrow morning, when we will proceed with the same hearing.

(Thereupon, at 11:55 o'clock a.m., the committee adjourned as above indicated.)

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