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responsibilities. Except I disagree with the statement I believe that the witness made that if the State fails to act, then the Federal Government should take the action.
I believe that was the essence of the statement, or do I stand corrected ?
Mr. KoSSACK. I think the statement attempts to make clear our view that the Federal Government and the State governments are both sovereign, responsible to the people. If one sovereign does not fulfill its responsibility to the people, the other sovereign has a responsibility to come into the field and do the job, if it has constitutional power.
Senator THURMOND. That is right. If it has constitutional power. Those are the key words and I am pleased the witness recognizes that.
Mr. KoSSACK. I don't think anybody has any question about the Congress' constitutional authority to enact this bill.
Senator THURMOND. Now I want to ask Mr. Kossack this question:
As I understand it, you feel that at present this bill is not necessary. I believe you sum
way: To sum it up, it is our position that existing statutory mechanisms are available to protect the Federal interest in prosecuting and preventing major land frauds. We believe that local enforcement efforts based on existing statutory schemes and where necessary the enactment of legislation utilizing State commissions and incorporating full disclosure provisions would be the appropriate remedy.
I believe that is the way you summed up your statement.
Mr. KOSSACK. I am here primarily as you know, Senator, to address myself to the subject of criminal prosecutions under this proposed statute. It is our belief, as I have said, that insofar as the prosecution of crimes is concerned, we think we have ample authority and means.
Senator THURMOND. In other words, you feel you have ample power now to prosecute
Mr. KOSSACK. Crimes.
Mr. Kossack. That is right. We ended our statement recognizing that we are getting into a field outside of the criminal area and said that if you feel that a disclosure, not talking in terms of criminal pros- : ecution, is necessary, then we would defer to your evaluation and finding of the necessity.
Senator THURMOND. If it should be determined that any Federal legislation is necessary, have you given any consideration as to what agency
of Government possibly should assume such responsibility? For instance, the Federal Trade Commission is interested in these matters.
Mr. KOSSACK. I do understand that the Securities and Exchange Commission has already indicated that it is willing to assume responsibility for handling the registration statements.
The only comment that the Department would make is that a registration statement, like any other submission to the Federal Government, should be a meaningful instrument, examined by people who have expertise and knowledge of what that document represents to disclose. And while we do not know right now what agency would have appraisers and real estate people capable of doing it, the SEC, I believe, has stated that they could staff people with this kind of expertise.
So the only position that the Department of Justice takes is this: That insofar as criminal prosecution involving the submission is concerned the disclosure must be material to somebody's decision, and if it is going to be a registration statement which is going to be put in the drawer, not paid attention to by anybody who had any expert knowledge, it is a meaningless instrument insofar as the Department of Justice proceeding in any prosecution is concerned. It has to be material to somebody's decision and, therefore, somebody who makes the decision has to be an expert in that field.
As I understand it, SEC has declared itself capable of coming forward and building up a staff to handle the task.
Our experience with SEC has been that when they undertake a job, they do a good job.
Senator THURMOND. But you are not making any suggestion as to what Government agency should do it.
Mr. KOSSACK. No, sir
Senator MONDALE. I have a listing of a host of land fraud prosecutions which have been brought, I think, under the Mail Fraud Statute (see p. 374). And it is my belief that these prosecutions that have been brought have done more to curb what was and growing and outrageous practice in this field than anything else and far more than the State measures that have been taken this far, as helpful as they are. But this raises the question of the adequacy of the Mail Fraud Statute insofar as it might be posed as a complete answer to those of us who favor this measure.
Do you have an estimate of the dollar volume which the public may have lost in the 23 mail fraud cases which your Department has brought?
Mr. KoSSACK. You would have to draw this out of the hat. But just as an example, in one situation alone there were $6 million which could realistically be called public loss, as opposed to total business.
Senator MONDALE. The Chief of the Mail Fraud Section of the Post Office Department has estimated that that amount is in excess of $50 million. Would you have any reason to disagree with that figure?
Mr. KoSSACK. No. As a matter of fact it might be conservative, because he is judging it based upon what his investigations revealed and his Mail Fraud investigations, as you know, don't reach every investor. If the Chief Inspector says $50 million
Senator MONDALE. So, as desirable as these indictments and convictions have been in terms of being instructive to those who resort, wish to resort to these practices, it is a fact that $50 million, more or less, was lost to the American public before these convictions were obtained. So in a sense they are after the fact.
Mr. KoSSACK. Unfortunately, Senator, almost anything you do in the way of enforcement, civil, administrative, or injunction, is after the fact.
Senator MONDALE. I think that is absolutely correct. That is one of the reasons many of us believe this type of legislation is needed, because we are not trying a criminal action here, strengthening the
criminal laws, we are trying to make available to the prospective purchasers the relevant and salient information that a wise purchaser must have so that that purchaser may protect himself against an unwise bargain.
Don't you believe that if we had had this Federal measure, say 15 years ago, that many of the lamentable losses that were disclosed which may reach $50 million in the cases that have been brought, would have been prevented ?
Mr. Kossack. We are conjecturing. Assuming, for example, that the disclosures were meaningful, were conveyed, and the public was aware of it, yes. And an aware public is a difficult public to delude and defraud. There is no question about that.
You know as well as I do that it is a difficult task. What we are saying is if you find this is the only way you can apprise the public, fine. But as a criminal measure, it means nothing to us at all.
Mr. Edelhertz reminds me of something which probably I shouldn't mention, but he says in colorful language, there has been some awful junk sold on the basis of registration statements, and there has been.
Senator MONDALE. I have no doubt about that.
Mr. KOSSACK. One thing, and this is not in derogation of the public, this is in derogation of communication: I was involved in a series of cases involving savings and loan associations. Right in the middle of one of the most spectacular trials, which the newspapers, radio and television were covering in minute detail, the deposits of that savings and loan association increased. The public was sending deposits into this savings and loan association which was on trial.
What I am saying is, that the mechanics of disclosing to the public, of reaching the millhand and the dockworker in New Jersey must involve more than just a piece of paper. I get in the mail every day a lot of brochures. I read some of them, some I don't read. The point is that communication to the public is a difficult matter. While as a criminal effort, we can't rely on this registration as being the deterrent. Anything that the committee can recommend to reach the public, to make the public aware, we endorse.
Senator WILLIAMS. Thank you very much.
Senator MONDALE. I wish to say, Mr. Chairman, that we have just heard from the man who has done
about this problem and I would like to express my personal gratitude for your vigilance in this matter.
Mr. KOSSACK. Thank you, sir.
Senator WILLIAMS. Again I reiterate, we have kept you here an hour, so you must have been helpful.
Mr. KOSSACK. I enjoyed it, sir.
STATEMENT BY NATHANIEL E. KOSSACK, FIRST ASSISTANT, CRIMINAL DIVISION
DEPARTMENT OF JUSTICE Mr. Chairman and Members of the Committee, I am pleased to be here today.
Fraudulent land sales have been and are 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 five 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, thirty-one mail fraud indictments, against eighty-two defendants, have been returned in seventeen 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 twenty-four cases which have gone to trial, and nine 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 five 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 take 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 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. It has been our view that the responsibility for preventing and punishing land frauds should be divided between the states and the Federal Government. Since real estate transactions have traditionally been regulated by the states in which the property is located we submit that a proper allocation of responsibility would leave to the states the responsibility for requiring full disclosure as outlined in the bill and prosecution in those cases in which the Federal Mail Fraud statute cannot be utilized. The Federal Government would use existing powers, as for example the Mail Fraud Statute and the Federal Trade Commission Act, to deal with false advertising and fraud on a Federal level.
To sum up it is our position that existing statutory mechanisms are available to protect the Federal interest in prosecuting and preventing major land frauds. We believe that local enforcement efforts based on existing statutory schemes and where necessary the enactment of legislation utilizing real estate commissions and incorporating full disclosure provisions would be the appropriate remedy.
The Department of Justice recognizes the importance of prompt and effective prosecution of those who perpetrate land frauds especially insofar as these frauds hurt those least able to protect themselves. It is our opinion that additional penal sanctions are unnecessary and that the state should assume the responsibility of making known to its citizenry the truth or lack of truth in the representations of land promoters and to continue to use the criminal sanctions available to them. We are not aware of a present need for disclosure through the Federal Government. However, if the information obtained by this Subcommittee makes it clear that a Federal disclosure statute is necessary, we would defer to your decision.
STATEMENT OF ROBERT P. McCULLOCH, JR., VICE PRESIDENT,
McCULLOCH PROPERTIES, INC., LOS ANGELES, CALIF. Senator WILLIAMS. Mr. McCulloch comes to us, as vice president of McCulloch Properties, Los Angeles, Calif. I thought Mr. McCulloch had been transferred to Arizona. Am I wrong in that?
Mr. McCULLOCH. No.
Senator WILLIAMS. I share your pleasure. We happened to visit Havasu on another mission, just as an afternoon of relaxation, and we talk about new cities, demonstration cities, that is a new city; isn't it?
Mr. McCULLOCH. Yes, sir.
Senator WILLIAMS. It is magnificant, it really is. Mr. McCulloch, are you the son of the creator of that project ?
Mr. McCULLOCH. Yes, sir.
Mr. McCULLOCH. Gentlemen, I am grateful for the opportunity and the privilege you offered me to express my views and the views of my associates, on the establishment of safeguards to protect the public interest against malpractice in the sale of land.
My name is Robert P. McCulloch, Jr. I am vice president of McCulloch Properties, Inc., headquartered in Los Angeles, Calif. McCulloch Properties, Inc., is a subsidiary company of McCulloch Oil Corp., a publicly owned corporation listed on the American Stock Exchange with 13,500 shareholders, and assets exceeding $40 million.
Today I speak for myself, for Robert P. McCulloch, Sr., president of McCulloch Oil Corp., and C. V. Wood, Jr., executive vice president of McCulloch Properties, Inc.
At the outset, let me say that we have previously commended this subcommittee, publicly and privately, for its conscientious and exhaustive work directed toward safeguarding the investing public in connection with the development and sale of real estate. It is a pleasure on this occasion to respectifully repeat that commendation.
McCulloch Properties, Inc., is the master planner and developer of Lake Havasu City, Ariz., on the eastern shoreline of the lower Colorado River. Lake Havasu City was founded 3 years ago on bare land. The long-range, 20-year objective established by Mr. McCulloch, Sr., who originally conceived the idea of Lake Havasu City, and Mr. Wood, the master planner, was to create a self-sustaining community of 60,000 resident population with a built-in economy based on light industry and commerce in an environment admirably suited for recreation, water sports, and tourism.
By almost very measurement, Lake Havasu City already is ahead of its master plan schedule. Nearly $30 million in capital investments have been put into the city not only by McCulloch corporate interests, but also by nearly 100 other small and large companies, creating a sound basis for a payroll and profit economy. The cur