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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 fest, 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, Congress

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.)

TO AMEND THE SECURITIES ACT OF 1933

THURSDAY, JUNE 10, 1937

HOUSE OF REPRESENTATIVES,
COMMITTEE ON INTERSTATE AND FOREIGN COMMERCE,

Washington, D. C. The committee met at 10 o'clock a. m., Hon. Clarence F. Lea (chairman) presiding.

The CHAIRMAN. The committee will please come to order.
Mr. Jackson, you may proceed in your own way.

STATEMENT OF PERCIVAL E. JACKSON, NEW YORK CITY Mr. JACKSON. Mr. Chairman and Gentlemen:

My name is Percival E. Jackson. I am a practicing lawyer in New York, and make my office at 68 William Street. I have practiced law there for 25 years with the exception of the period of the war. Generally I have specialized in corporate reorganization work in the courts, particularly in the Federal courts.

Almost invariably I have represented the smaller creditor, or the smaller investor; not so much as a matter of choice, but it has been my lot to represent the smaller investor.

I have been acting as counsel for a committee of the United States Senate, which was charged with the duty of investigating receiverships in Federal courts. In that connection I have made a study, which was the subject of a report to the Senate, and which became a public document, by virtue of a resolution of the Senate last year. That study involved particularly a study of the receiverships in equity proceedings in the Federal courts; bankruptcy; the general history of insolvency legislation, and in particular the experience of the courts in connection with reorganizations under the present section 77 (b) of the Bankruptcy Act.

I have personally represented clients, investors and, as I say, almost invariably, small investors, in probably 15 of the larger proceedings that we have had in the eastern courts, particularly about New York. They have been the cases, for instance, of the Paramount-Publix Corporation; Pressed Steel Car Corporation; the Prudence Co., and various companies associated with the Prudence Co.; Warner-Quinlan Co., and so forth. That is my private practice.

In connection with the study that I made for the Senate committee, I sent forms of inquiry to the reorganization lawyers in New York and to the corporate depositories, and particularly to committee men, and I collated the information from those replies. So that I am more or less factually versed in the general situation.

The CHAIRMAN. Nr. Jackson, will you give the identifying number of that document to which you have referred?

Mr. JACKSON. Yes, sir.
The CHAIRMAN. You might put it in the record.

Mr. JACKSON. The report that I referred to is Document 268 of the Seventy-fourth Congress, second session; and the resolution of the Senate was Senate Resolution 308, adopted on calendar day June 5, 1936.

The CHAIRMAN. I had in mind just to put the identification in the record and not the document itself.

Mr. JACKSON. That is just what I did; I put in the identification of the document.

Mr. MAPES. Will you state who were the members of the committee?

Mr. JACKSON. Senator McAdoo was chairman; Senator McCarran, Senator Van Nuys, Senator Austin, and Senator White. The last two Senators were from Vermont and from Maine. Senator Van Nuys is from Indiana, Senator McAdoo from California, and Senator McCarran I think is from Nevada.

I think I have formed a fairly accurate concept of the present situation in reorganizations generally, if I am not egotistical when I say so.

It seems to me that the present situation very concretely put is this: There has been a struggle between the courts and private reorganizers for control of reorganizations in the past. That is nothing new and nothing novel under our form of government. Private interests have invariably competed for the control of branches of government. The legislature vested control of reorganization in the courts and private interests have been trying to get control of reorganizations away from the courts, because reorganizations have proved to be a most profitable line of business, in the security business.

The history of insolvencies in this country-and it is illustrated very well by the railroad reorganizations—is that when private parties put stocks out, they put water in the stocks, or they put too much stock out, for the purpose of making a private profit. While everything is all right, those enterprises are taken care of. There is enough profit available to take care of the investor. But then when a period of depression comes, there is not enough profit to take care of the investor and they invariably default on their bonds. That happens periodically.

In the case of the railroads it happened in 1875 and then at 10-year intervals, in 1885 and in 1895. Then it skipped over to 1915 and apparently in this century it runs in 20-year cycles, coming in 1935 after 1915. We have 30 or 40 railroads lying on their backs awaiting reorganization.

That is invariable. Of course, every time there is a period of depression decent people properly claim that they are affected by the depression. But the fact remains that the backbone of our insolvencies is the fact that when times are good and profits are inflated, we build up a capital structure on the basis of prospective earnings; we figure the earnings on the basis of good times, and then when bad times come, those capital structures cannot support the load.

Now, as I visualize the commercial era in this country, for the latter part of the 19th century, we had the gigantic enterprises that were formed out of our natural resources and out of which men made money for themselves and for the public generally.

In this 20th century, with those enterprises established, we got a new crop of titans and they were financial giants. They took the

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