INTERSTATE LAND SALES FULL DISCLOSURE ACT OF 1967 WEDNESDAY, MARCH 1, 1967 U.S. SENATE, COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met at 10:05 a.m., in room 5302, New Senate Office Building, Senator Harrison A. Williams, Jr. (chairman of the subcommittee), presiding. Present: Senators Williams, Spong, Bennett, Hickenlooper, and Brooke. Senator WILLIAMS. We will now reconvene and begin our second day of hearings on the interstate land sales bill, with the statement of Mr. Nathaniel E. Kossack, First Assistant, Criminal Division, Department of Justice. Mr. KOSSACK. Senator. Senator WILLIAMS. Welcome before the subcommittee, Mr. Kossack. May we have your statement? Mr. KOSSACK. Yes, sir. STATEMENT OF NATHANIEL E. KOSSACK, FIRST ASSISTANT, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE; ACCOMPANIED BY HERBERT EDELHERTZ, CHIEF, FRAUD SECTION Mr. KOSSACK. May I introduce my associate, Mr. Edelhertz, who is Chief of the Fraud Section of the Criminal Division of the Department of Justice. I have a statement. Mr. Chairman, members of the subcommittee, it is a pleasure to appear before the Subcommittee on Securities to express the views of the Department of Justice on S. 275, a bill to provide full and fair disclosure of the nature of interests in real estate subdivisions sold through the mails and instruments of transportation or communication in interstate commerce, and to prevent frauds in the sale thereof, and for other purposes. Last year I appeared before this committee to report that the Department could not recommend enactment of a similar bill, S. 2672. Although the Department had long been vitally concerned with every aspect of fraud in the promotion of land, we suggested at that time that the mail fraud statute-18 U.S.C. 1341-provided effective criminal sanctions against fraud in the interstate sale of land. I did, however, state that if the hearings before this committee demonstrated to Congress the need for disclosure legislation, the Department would defer to that conclusion. In fact, the Department has also reached the conclusion that such disclosure as would be required under S. 275 is desirable on the basis of the massive volume of material developed by this subcommittee during its hearings on S. 2672 last year. We therefore recommend enactment of legislation embodying the philosophy and chief substantive features of S. 275. We consider it most important, however, that Federal legislation regulating interstate public offerings of undeveloped land be carefully limited to avoid imposing unnecessary burdens upon the legitimate developer. Therefore, we believe that the exemptions described in section 3 of S. 275 represent a major improvement over counterpart provisions in the original version of S. 2672. In this connection, I would like to take this opportunity to correct the record of last year's hearings on S. 2672, insofar as it is there indicated-p. 243-that the Department reported on the amended version of S. 2672, dated June 9, 1966, reprinted in appendix 1. The amended bill, which incorporated significant revisions of the original bill and which is substantially identical with S. 275, was apparently not submitted to our Department for comments. Thus our report on S. 2672, although dated June 27, 1966, after the amended bill had been printed, actually referred to the original bill and not the amended version. In addition to the major improvements provided by the exemptions in S. 275, we believe a further exemption is necessary. It is our understanding that the proposed legislation is not intended to govern real estate transactions between professionals. For that reason, the Department recommends the addition of a specific exemptions for "transactions incident to the assembly or financing of a subdivision or the organization of a development and which do not involve the sale or lease of any interest in any individual lot or parcel in such subdivision." This exemption will sharpen the bill's proper focus on frauds against the public at large. The Criminal Division anticipates no difficulty in enforcing the penal provisions of S. 275. Mr. Chairman, I appreciate having had the opportunity of appearing before the subcommittee and reading this statement. Senator WILLIAMS. We appreciate your return visit. I am not too sure I understand the suggestion made at the end of your statement. Mr. KOSSACK. Well, sir, let me put it in a different way. We don't really suggest that this is the only language that you need to adopt. What we wanted to emphasize was that every means of foreclosing the proscription of the bill against transactions between professionals be taken; that we consider that the real import of the bill, the real good to come of such a bill is the protection of the public, the buving public, as opposed to Mr. Real Estate Man dealing with Mr. Real Estate Man. This will relieve some burdens on the assembling of subdivisions. Senator WILLIAMS. Would the language which you suggest have that effect? Mr. KOSSACK. We believe so, but we are not married to it. We suggest merely the philosophy, the approach, the aim. Senator WILLIAMS. Well, I can accept your philosophy or principle or approach as you accept our principle, philosophy, and approach in S. 275. We are grateful for your support. Senator Bennett? Senator BENNETT. Do you not think there should also be an exemption for the situation in which the single owner of a tract of land sells it to a subdivider, who then may sell it to the public, but the original owner who sells the whole tract to the subdivider should not be subject to the provisions of this, because in effect that is not a public offering, either? Mr. KOSSACK. Yes. As a matter of fact, I understood that that was part of the bill already, in the sense that section 9-is it? Let me get to the bill, sir. Yes, I agree with you, but I thought that the words "the sale or lease of real estate not pursuant to a common promotional plan" would cover that, but I agree with you. Senator BENNETT. I think that it falls within the spirit, or that kind of a transaction falls outside of the spirit of this particular bill. Mr. KOSSACK. Yes, sir. Senator BENNETT. This morning you obtained a copy of my bill, S. 911, which will be before another committee for consideration. Have you had any time at all to consider the alternative approach of S. 911? Mr. KOSSACK. Senator, I received your bill this morning, and that is the time I had to consider that approach. Senator BENNETT. Just for the record, may I express the hope that you will consider the provisions of this alternative approach and be prepared to comment on it at a later time. Mr. KOSSACK. You may be assured, sir, that I will give it serious consideration. Senator WILLIAMS. Let us pause a moment. As I understand Senator Bennett's bill, it would create a Federal offense if a subdivider sold land in contravention of a State law; is that it? Senator BENNETT. If he sold land across State lines in contravention of the law of the State in which the prospective buyer resides. Senator WILLIAMS. Where the land is located? Or where the land is sold? Mr. KOSSACK. Not in contravention of the law of the situs State, just the investor State? Senator WILLIAMS. Yes, the purchaser's State. Mr. KOSSACK. The State which has no control over the real estate. Senator BENNETT. That is right. Mr. KOSSACK. Do you want me to say something about it? Senator BENNETT. No, sir; unless you have an immediate reaction. I think you probably will want to study the implications. Mr. KOSSACK. I only have one reaction that may be of interest to you, sir, based on our experience. While we do have one or two Federal laws one comes to mind, 1952, of title 18, which adopts the State criminal law as a basis for prosecutions. It is a quite simple State law, for example committing bribery, which is almost uniform from State to State. We have a great deal of difficulty being experts in two fields, not that we are experts in any one field, sir, but we de 75-315.067- -11. vote a great deal of attention to being experts in the Federal criminal law, and we don't have the time or the manpower, I would say, to be expert in 50 State laws. They are usually different, you know. The philosophy and attitude of the State of Utah naturally is quite different than the philosophy and the attitude of the State of Massachusetts. It would express itself in a different criminal law. Senator BENNETT. Well, take a look at this and let us have a more careful consideration. Mr. KOSSACK. All right. Senator WILLIAMS. Well, I wonder if we could have an understanding that after your studying S. 911 we could have a statement on it, and we will keep the hearing record open, until March 31. Mr. KOSSACK. Oh, of course, we can, sir. Senator WILLIAMS. While the primary jurisdiction over S. 911, is for the Judiciary Committee, we have an interest in it. Senator BENNETT. That is right. Senator WILLIAMS. I think it would be artistic to have a statement in our hearing record, now that we have discussed this bill. Senator BENNETT. It is just the accident of the way the bills have to be written that sends them to separate committees. They attempt to attack the same problem. Mr. KOSSACK. As I understand, Senator Bennett and Mr. Chairman, you would like us, the Department, to make a comment to this committee in connection with this bill. Senator WILLIAMS. Yes. Senator BENNETT. That is right. Senator BENNETT. Even though you may not get an official request from the Judiciary Committee for some time. Mr. KOSSACK. I quite understand. You are directing our attention to a statement on this bill for the purposes of the record in this committee in this hearing? Senator BENNETT. Yes. Senator WILLIAMS. It would be very useful. This bill may be considered by the subcommittee, the full committee, and then the Senate. (See p. 219). Senator BENNETT. Thank you. Mr. KOSSACK. Yes, sir. Senator WILLIAMS. Senator Hickenlooper? Senator HICKENLOOPER. Just a second, Mr. Chairman. With respect to the question which Senator Bennett raised just a moment ago about an owner who sells a large parcel of land which will later be subdivided, the possibility of that transaction being exempt, I call your attention to paragraph (1) of section 3 (a) of this bill, and I wonder if that should not be clarified a little bit. Mr. KOSSACK. I beg your pardon, sir? Senator HICKENLOOPER. I call your attention to section (1) of section (a). Senator WILLIAMS. On page 4 of the bill. Senator HICKENLOOPER. On page 4 of the bill it says, "the sale or lease of real estate not pursuant to a common promotional plan to offer or sell 25 or more parcels of subdivided land." It is entirely conceivable that a person who sold a large parcel of land, even though he divested himself completely of it, to somebody that was going to subdivide it could be considered to be engaged in a common purpose under certain circumstances. Mr. KOSSACK. Provided, of course, his land is subdivided. As I understand it, if I own a large Senator HICKENLOOPER. Assuming it is going to be subdivided. Mr. KOSSACK. No, sir-if I own a tract of land consisting of 10 acres completely unsubdivided and I sell to you. Senator HICKENLOOPER. But with full knowledge that I am going to subdivide it. That may be a little farfetched, I do not know, but that is to say that it would either come under this exemption or would not be exempt. But if the sale of a single unit, large parcel of land, which is later subdivided, if that is to be exempt, that original sale, I just raise the question should not this (1) be clarified a little bit? Mr. KOSSACK. It may very well, sir. I read (1) as excepting that kind of a sale, but then I must tell you, Senator, that I am a criminal lawyer, and this is an area that I am volunteering on, and this is not my area of expertise. However, I offer my opinion. Senator HICKENLOOPER. There are criminal penalties here, are there not? Mr. KOSSACK. The criminal penalties would be for false statements in connection with the registration, and the nature of the false statements would be administratively determined beforehand. For example, in the Securities Act, we don't pretend to be experts in the law on the sale of securities. When the SEC refers a matter to us it says that a certain registration statement is false "in that:" They provide us with the "in that." Senator HICKENLOOPER. This is just an item in that bill. We can look at it a little later. I do not think it is of very great moment at this time. Mr. KOSSACK. I appreciate that. Senator HICKENLOOPER. I do not think I have any other questions. Senator BENNETT. I would just like to pursue this one more step, because I raised it. I can see a situation in which a man in Utah, owning a hundred acres of land in California, is persuaded to sell that for the purpose of subdivision, and he knows it is going to be subdivided, and I do not think he should be subject to the penalties of this act and the act of the subdivider over which he has no particular control. So I think maybe we need a clarifying amendment which will make it perfectly clear. Senator WILLIAMS. Maybe we need clarification, but the way you describe your hypothetical-it would be a one-undivided-lot transaction which is not covered by this bill. Senator HICKENLOOPER. I only raise the question to submit that it very well could be. Senator WILLIAMS. I do not see how. Senator HICKENLOOPER. Because it is in pursuance, or could be interpreted as being in pursuance of the eventual subdivision of this land, that unit sale. Senator WILLIAMS. It would be on the second go-round-the purchaser from the original owner. |