hesitate to mention his name at the present time because he is under indictment.

I said to him, "You just saw what happened in the Continental case. This is the same razzle-dazzle they are trying to work.

He said, "I have my control stock and any safeguard you suggest I will interpose.'

I said, "Why don't you tell your stockholders that they are going to sell the blue chips to somebody and are going to substitute real estate mortgages? Why don't you wait until the annual meeting, so they know what is going on and they can protect themselves?"

Evidently he shied clear of the transaction. What happened? If you read the newspaper, Mr. McDermott is the one who a couple of months ago bought control of an investment company with assets of approximately $100,000, started the printing press rolling, and then printed bonds and real estate mortgages. Those were the bonds and mortgages he sold to that investment trust.

I will give you other illustrations. We will bring letters where the people said they were going to commit similar acts. It is my opinion that had not the study fortuitously been proceeding as it was, you would have had many more clean-outs.

Senator TOWNSEND. What happened to the first transaction?
Mr. SCHENKER. They didn't go through with it.

Senator WAGNER (chairman of the subcommittee). Do you care to present anything else now?

Mr. SCHENKER. No, sir. If you care to take another witness, in order to give the committee some background on this subject we may have one of the members of the staff tell the story of what happened to the biggest investment trust that existed in this country. It will give you some idea

Mr. HEALY. Perhaps you would rather hear that tomorrow morning?

Senator WAGNER. Perhaps we can do that tomorrow morning. I understood Mr. Cook will be here.

Mr. SCHENKER. He is the trustee for the Continental Securities. Co. He is going to tell you about the Continental case.

Senator WAGNER. That is the case to which you referred a moment ago?

Mr. SCHENKER. Yes.

Senator WAGNER. How large a sum did that involve?

Mr. SCHENKER. Continental Securities, about $5,000,000.

Senator WAGNER. Very well, then. The committee will recess until tomorrow morning at 10:30.

(Thereupon at 12:10 p. m. an adjournment was taken until tomorrow, April 3, 1940, at 10:30 a. m.)

INVESTMENT TRUSTS AND INVESTMENT COMPANIES

WEDNESDAY, APRIL 3, 1940

UNITED STATES SENATE,

SUBCOMMITTEE ON SECURITIES AND EXCHANGE

OF THE BANKING AND CURRENCY COMMITTEE,
Washington, D. C.

The subcommittee met, pursuant to adjournment on yesterday, at 10:30 a. m., in room 301, Senate Office Building, Senator Robert F. Wagner presiding.

Present: Senators Wagner (chairman of the subcommittee), Glass, Maloney, Hughes, Herring, Miller, Downey, and Frazier.

Senator WAGNER. The subcommittee will come to order. Mr. Alfred A. Cook, will you take the third chair on this left side of the table over here?

Mr. Cook. Certainly, Mr. Chairman.

Senator WAGNER. I think I have the right to say that Mr. Cook is one of our distinguished citizens and one of our outstanding lawyers in New York. He is counsel to the trustee for the Continental Securities Co., and has been invited here by the subcommittee because of his experience with that company. I am sure he can enlighten us.

STATEMENT OF ALFRED A. COOK, TRUSTEE FOR THE CONTINENTAL SECURITIES CORPORATION, NEW YORK CITY

Senator WAGNER (chairman of the subcommittee). Mr. Cook, you have had an opportunity to read the bill, S. 3580, now before this subcommittee, I take it?

Mr. Cook. A part of it carefully and a part of it hastily. I gave my particular thought and attention to those phases of the bill which, as I saw it, would prevent such happenings as those that characterized the existence of the Continental Securities Corporation in its last phases.

Senator WAGNER. Perhaps we had better permit you to proceed with your statement to the subcommittee. We are very anxious to have it. Mr. Cook. May I say this: I can appreciate that with the exception of the members of the bar on your committee, lawyers generally like to talk, and if in my exposition I am too lengthy and express views that you or your associates do not want, merely correct me.

Senator WAGNER. I do not think that will be necessary.

Mr. Cook. In March of 1938 Judge Patterson of the Federal Court, Southern District of New York, appointed Mr. Arthur A. Ballantine temporary trustee of the Continental Securities Corporation-application for its adjudication in a bankruptcy proceeding being before Judge Patterson.

I had the privilege of being asked whether that firm and I would act as counsel for the temporary trustee, and I accepted. We went into the affairs of the Continental Securities Corporation I think with very great care, went through its affairs in all its aspects.

(Chart submitted by Mr. Cook is as follows:)

Mr. Cook. I think as a matter of fairness I ought to state that we were very much helped in our inquiry by what I regard as the very efficient and vigorous examination undertaken in New York by Mr. Schenker in behalf of the Securities and Exchange Commission.

The temporary trustee and his counsel had a job to do because in October of 1937, just 5 months prior to the appointment of Mr. Ballantine as trustee, we found that the portfolio of the Continental Securities Corporation was worth, at an estimated market value of the securities in the portfolio, $3,300,000. That is it approximately,

although I might be a few thousands of dollars out of the way, but nothing material.

At the time of the appointment of Mr. Ballantine as trustee there was in the portfolio about-well, at the outside, $50,000. If I may be pardoned for using a colloquial expression, Mother Hubbard's cupboard was quite bare.

The problem presenting itself to the trustee and to the firm and myself was this: How was it that in the short space of time of five months $3,300,000 of worthwhile securities were gone, except to the extent of about $50,000.

We tried to find out. That was our duty. And if I may be forgiven for going over the course of our inquiry in my own way, always subject to correction by the Chair, we found out the following: In October of 1937, at a time when the portfolio was, as I have stated $3,300,000, the banking firm that had been the managers of the Continental Securities Corporation, an investment trust which was organized in 1924, and one of the first of the investment trusts that I recall organized in this country; they approached the managers of the trust and offered them, for the majority of the shares of the Continental Securities Corporation, $20 a share.

The corporation at that time had outstanding approximately $2,800,000 of debentures, approximately $1,400,000 of cumulative preferred stock, with dividend accumulations unpaid of $33 a share; and 50,000-odd shares of common stock.

The common stock alone had the vote. The value of the common stock at that time, in October, after you allow for the debentures, the payment of the par of the preferred stock and its accumulated dividends, which was of course prior to the common stock-the common stock from the viewpoint of representation and assets was not only worthless as we saw it but was sunk to the extent of something like $22 a share. In other words, there was a minus of $22 a share for the common stock.

The offer was made of $20 a share for the stock of the kind and description of which I have spoken. Those that made the offer insisted, and it is so set forth in the agreement for the sale of the majority of the shares of the Continental Securities Corporationand the number of shares that were to be sold was 29,000 which represented more than 50 percent of the 57,000 shares outstanding. Senator HUGHES. Do I understand that this offer was for the common stock?

Mr. Cook. Yes, sir.

Senator HUGHES. Which common stock had the voting power in the corporation?

Mr. Cook. Yes, sir. In other words there were about 57,000 shares of common stock, and the offer was for 29,000 shares of that common stock, at $20 a share, aggregating $580,000. I emphasize the figure of $580,000 because it will be of some importance as I go along.

The agreement provided that the managers contemporaneously with the payment to be made by the purchasers, through the management as a condition precedent to the payment, would see to it that the then directors of Continental Securities Corporation would tender their resignations; and, following the method adopted from time to time of rotation in office, they were to see to it, before the payment was made, that those persons selected by the purchasers