INTERSTATE LAND SALES FULL DISCLOSURE ACT

THURSDAY, AUGUST 18, 1966

U.S. SENATE,

COMMITTEE ON BANKING AND CURRENCY,

SUBCOMMITTEE ON SECURITIES,

Washington, D.C.

The subcommittee met at 10:10 a.m. in room 5302, New Senate Office Building, Senator Harrison A. Williams, Jr. (chairman of the subcommittee) presiding.

Present: Senators Harrison A. Williams, Jr., Walter F. Mondale, and Strom Thurmond.

Senator WILLIAMS. Our hearings on Senate bill 2672 conclude today with testimony from several witnesses who will, I am sure, add much of value to the impressive record taken on June 21 and 22. That record has, in my opinion, made a strong case for enactment of the interstate land sales full disclosure bill.

We have heard from experts who told us that even those States with effective land sales legislation are often frustrated. They can't hope to protect all buyers while other States have much weaker law or no law at all.

We have heard from on-the-spot observers who are convinced that shady promoters can deceive prospective buyers-not necessarily by violating fraud statutes, but by distorting or omitting facts essential for full understanding of the transaction and the land in question.

We have listened to several witnesses, and we will hear from one more today, who have firsthand knowledge of one promoter who apparently did not adequately inform buyers that land he sold could be inundated at any time because it is in a flood control district. And we have also entered into our record statements from land use planners and others who have grave reservations about some of the land sales schemes now in effect.

How, they wonder, can land increase in value-as promised-if ownership is scattered among thousands of owners in many States and nations and if there is no comprehensive plan for development? Some developers, of course, have already proven that entire communities can be built-and I think we have Mr. McCulloch here—but only when well planned and adequately financed.

Among the many letters that have arrived since our last hearingand I move now, without objection, to include these letters in the record (see p. 385)-are statements from at least four more State officials urging passage of S. 2672.

Senator WILLIAMS. We have also received much information on a national firm which sells vacation sites, usually near lakes, to persons who have been "selected" to receive them. Much of our information

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on this firm is critical of its methods, and so we asked its owner to be with us today to ask direct questions. He informs us that he is ill, but offers to answer our questions in writing. We will certainly put such questions to him (see p. 497).

We have many other questions as we close these hearings, but I believe that the fundamental issues are these:

Can we really be sure, when high pressure and morally deceptive sales techniques are used, that a long-distance buyer of mail, site unseen, actually understands the terms of purchase and the nature of the property he acquires?

If we believe that many pitfalls face such buyers, what can we do to give him access to full and fair information?

The bill before us, I believe, will help us find a positive answer to that last question. And now I look forward to hearing from our witnesses.

What we are doing here is trying to, in land investment, to provide the protections that are provided investors in securities; that is about what it amounts to.

Senator THURMOND. Mr. Chairman, I ask unanimous consent to put in the record letters I have written and replies from the following people: Manuel Cohen, of SEC; Paul Rand Dixon, of FTC; Robert Weaver, of HUD; Larry O'Brien, Postmaster General; and Stuart Udall, Secretary of the Interior. And also, there will be other letters. Senator WILLIAMS. You have become a spokesman for the administration?

Senator THURMOND. I would hardly say that.

In addition, we may have other letters and replies that the minority is interested in getting in the record. I ask unanimous consent that those be allowed to be placed in the record.

Senator WILLIAMS. Well, I certainly would not object to inclusion of those letters. I am just reserving the right to object. I want to ask a question of Senator Thurmond. Were these letters written to you, Senator?

Senator THURMOND. These are letters written in behalf of the minority members of the subcommittee, and the replies.

Senator WILLIAMS. And these are the replies in response to your letters?

Senator THURMOND. That is right.

Senator WILLIAMS. Certainly I have no objection.

And there will be some others on the part of the minority, too, similar letters.

These are letters in response to your inquiry?

Senator THURMOND. Yes, or the minority, other members.

Senator WILLIAMS. I see. I think they should be included. I don't think it will be unanimously agreed to. They will be without objection included in the record (see app. 3, p. 302).

Senator WILLIAMS. We will hear now from Mr. Nathaniel Kossack, Department of Justice, first assistant, Criminal Division.

I understand you have with you Mr. Edelhertz, Chief, Fraud Section, Criminal Division, Department of Justice.

We welcome your testimony, Mr. Kossack. I have been advised by very alert staff intelligence that you think our bill is unnecessary.

STATEMENT BY NATHANIEL E. KOSSACK, FIRST ASSISTANT, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE; ACCOMPANIED BY HERBERT EDELHERTZ, CHIEF, FRAUD SECTION, CRIMINAL DIVISION, DEPARTMENT OF JUSTICE

Mr. KOSSACK. Mr. Chairman, I think that is a rather oversimplification. I would rather go through the statement. Senator WILLIAMS. All right.

Mr. KOSSACK. Mr. Chairman, Senator Thurmond, members of the committee; I am pleased to be here today

Senator WILLIAMS. Have you been to Golden Palm Acres?

Mr. KOSSACK. No. I have been to a lot of other of these places, though. Mr. Chairman, I drove through some of these places from California, Nevada, Arizona, and so forth.

Senator WILLIAMS. Have you been to Lake Mead Ranches?

Mr. KOSSACK. Have I been to it?

Senator WILLIAMS. Yes.

Mr. KOSSACK. No, sir.

Senator WILLIAMS. You are talking from the ivory tower?

Mr. KOSSACK. Not at all, sir. I have been to Gamble Ranch in Nevada for example, which was the original one. I am not talking from an ivory tower at all.

Senator THURMOND. Speak a little louder, Mr. Kossack. I can't hear you.

Mr. KOSSACK. I said I am not speaking from an ivory tower at all. In order to give my credentials, sir, I was associated with the National Association of License Law Officials in their original venture to attack these land frauds some time before 1960. As a matter of fact, Colonel McClure, a very distinguished gentleman from California, who was originally one of the officers of the association, one of the most distinguished fighters for the cause, and I worked very closely together. The late Jerry McBride, who was president of the association from Nevada, and very many people from Arizona, including Senator Mondale and I were together in San Francisco on a panel involving this some years ago. So I don't think I would like to be described as operating from an ivory tower.

Senator WILLIAMS. All right. You qualify.

Mr. KOSSACK. Fraudulent land sales are and have been a source of deep concern to the Department of Justice. These swindles are major crimes which warrant the concentrated attention of all law enforcement officials, the courts, and the Congress.

I characterize them as "major crimes" because their impact can be far more tragic than common crimes such as assault or theft. A victim of an assault may recover, but each of these land fraud swindles leaves behind it a trail of broken and destroyed lives. This crime almost never victimizes a person who can afford the loss-and in most instances the swindled purchaser is not in a position to repair the damage done to his or her life. Either the victim is too old to start again to restore his losses, or he is on a low, fixed income, being a teacher, a civil servant, or a member of the Armed Forces. The net effect of the fraud can be to destroy the victim's hope of a carefully budgeted and decent retirement.

The Department of Justice has viewed its responsibility as going beyond prosecution of land fraud operators. It has, for the past 5 years, maintained active liaison with State governments, through their attorneys general and the National Association of License Law Officials, to encourage State action which would prevent these frauds. At the same time, with the cooperation of the Post Office Department--which merits high praise for its alert and zealous detection and investigation in this field-we have placed special emphasis on land fraud prosecutions. As a result, 31 mail fraud indictments, against 82 defendants, have been returned in 17 States since early 1963. Fifteen indictments were brought in 1963, 12 in 1964 and 4 in 1965. Forty-one defendants have been convicted to date in 24 cases which have gone to trial, and 9 of these defendants have been sentenced to serve prison terms. This ratio of prison terms is roughly comparable with sentencing in the area of other so-called "white-collar crimes."

The mail fraud statute provides for a maximum sentence of 5 years and a fine of $1,000 for each count of an indictment. The prison term is the same as that proposed in the legislation under consideration by this committee. Our experience would indicate that a mail fraud prosecution would be a more effective weapon against commercial frauds of this type, and, I might add, postal inspectors have demonstrated their competence to investigate these frauds. For these reasons we question the necessity of the proposed fraud provisions, although their enactment would not preclude prosecutions under the mail fraud statute.

The Department of Justice recognizes that it takes a long time to investigate and prosecute a mail fraud case. It is our experience that it takes a still longer time, in most instances, to investigate and prosecute a securities fraud case. Apart from the time problem, we feel that a mail fraud prosecution presents fewer technical problems and provides a better forum for a full exposure of fraudulent schemes. We therefore see little advantage to be gained from the proposed legislation insofar as the prosecution of fraud is concerned.

We do not minimize the benefit ensuing from a full disclosure of the public as is contained in the proposed legislation and we have in the past encouraged the States to enact such requirements.

Senator WILLIAMS. Would you restate that, please?

Mr. KOSSACK. Yes, sir. We do not minimize the benefit ensuing from a full disclosure of the public as is contained in the proposed legislation and we have in the past encouraged the States to enact such requirements.

Senator WILLIAMS. Well, now, there are only 11 or 12 States that do provide for disclosure.

Mr. KOSSACK. That is right, sir.

Senator WILLIAMS. As we provide in this bill for all of the States. Is this a statement then in support of the bill we are considering here, which is this is not a criminal statute, this is a disclosure statute that we are considering.

Can we stop here and just pause and say that you support the principle of disclosure as it appears in this bill before us?

Mr. KOSSACK. We support the principle of disclosure, meaningful disclosure, and understandable disclosure to the public.