Page images



June 29, 1966.
Chairman, Seourities and Exchange Commission,
Washington, D.C.

DEAR MR. CHAIRMAN : Your testimony on S. 2672 before the Securities Subcommittee of the Senate Banking and Currency Committee was very informative and helpful to us in our consideration of interstate land sales.

Because of your experience, we feel that you may be able to answer some questions that arose from the hearing. We hope that your response might assist in efforts to arrive at an equitable solution to the problem which exists without penalizing those who are not part of the problem.

1. What would you estimate to be the cost of registration under the proposal now under consideration by the Committee? If it would vary, as is likely, please give us an estimated range. Could it be as much as $500 a lot for a small operation ?

2. Is it the best judgment of the Commission that this proposal represents a better avenue toward the solution of the problem than improvement in Post Office Department or Federal Trade Commission ability to act against it?

3. Several times in the hearing, a possibility of legislation applying only to "sight unseen" or "site unseen” sales was favorably discussed. We would like a response from the Commission regarding the Commission's view of such a proposal and the possibility of its drafting?

4. It appears that the bill as presently drafted would apply to relatively small operations in which land in Washington suburbs of Virginia and Maryland is advertised in Washington newspapers. The same would hold true of land near any large city near the border of an adjoining state. Could the purposes of the bill be retained while exempting such sales?

5. In your testimony, you mentioned the possibility of setting up an organization with subsidiaries, each having 24 lots, to avoid being subject to the proposed legislation. In what way could this “loophole" be closed without being impossibly burdensome on very small operators ?

6. You suggested in your testimony that although the Commission assisted in the drafting process of the amended bill, it reflects certain judgments in which you had no part. You also proposed certain amendments and added that there would be others if the Subcommittee wished. Since we were not consulted during the drafting and have not had the benefit of the Commission's thinking, we would appreciate receiving the suggestions referred to. Sincerely,



Washington, D.C., July 25, 1966. Hon. STROM THURMOND, Hon. WALLACE F. BENNETT, Hon. BOURKE B. HICKEN LOOPER, Committee on Banking and Currency, U.S. Senate, Washington, D.C.

DEAR SENATOR THURMOND, SENATOR BENNETT and SENATOR HICKEN LOOPER: 1. Turning to your questions in order, at the outset it should be borne in mind that there is a tendency to attribute expenses to the registration process which

are not really expenses of registration. Even if registration were not required, presumably a responsible, honest developer would resolve uncertainties concerning the title to a particular property, the existence of easements, assessments, liens, and other encumbrances and the availability of municipal or utility services, before offering lots to the public. The resolution of such questions might entail the payment of substantial legal and engineering fees, but these fees would have to be paid in any event. Such costs are not fairly attributable to the registration process and should not be designated as part of the cost of registration.

It is almost impossible without some experience to estimate the costs which would be fairly attributable to the registration of subdivisions. My best guess is that such costs for an entire offering and covering an entire subdivision would range from a few hundred dollars to several thousand, depending upon the complexity of the situation. Costs would include legal, accounting, engineering, printing and filing fees. Presumably these costs would be substantially less than those required for registration of corporate securities because the process of description should be much simpler. The legal work would also be much simpler, particularly if title insurance had been obtained. Further, registration statements for interests in subdivisions would probably not be printed on the high quality paper and in the expensive fashion used in the literature employed to sell lots, and printing expenses could thus be kept to a minimum. In those instances in which as authorized by the bill, we would be in a position simply to accept a descriptive filing already made with state authorities the additional cost of registration would, of course, be minimal.

2. As I indicated in my prepared statement, it is the judgment of the Commission that if Congress determines that federal legislation or regulation is necessary at all in this area. S. 2672 would deal with the problem effectively. The Senate Subcommittee on Frauds and Misrepresentations Affecting the Elderly concluded that action by the Post Office Department or the Federal Trade Commission was not an adequate solution. We have no basis to question that conclusion. I believe our experience with securities regulation has demonstrated that a mere prohibition against fraud without other controls is not completely effective both because of the difficulty in proving fraud and the fact that there may be many situations involving inadequate disclosure which fall short of fraud. As to the Federal Trade Commission, it is difficult for me to express a judgment as to what that Commission might be able to do, but the Senate Subcommittee felt that they had not been in a position to meet the problem in the past. It is, of course, true that in addition to its perhaps primary concern with antitrust problems, the FTC must deal with a multiplicity of unfair practices affecting consumers and others, and it may well be that the FTC would not be in a position to concentrate a great deal of effort in the area of land sales without further legislative support.

3. You inquire as to the desirability and practicability of applying the legislation only to "sight unseen" or "site unseen" sales. It is the Commission's view such a limitation would be neither desirable nor practicable for two reasons. First, many of the material facts which would be disclosed to a prospective purchaser cannot be ascertained from a mere inspection of the property. These material facts include such elements as the condition of the title, the existence of encumbrances, the price paid by the seller, the improvements to be installed by the developer and his schedule for completion, and the financial condition of the developer. Second, the providing of such an exemption would tend to put a premium on guile and delude purchasers into thinking that they were protected when they were not. It is common knowledge that certain developers have taken advantage of investors by flying them over the general area of the property which they intend to sell them or by taking them by selected properties on a sightseeing bus with the deliberate purpose of avoiding obligations of full disclosure. Such an exemption is in the opinion of the Commission so vulnerable to this type of abuse that it could effectively defeat the purpose of the statute.

4. You suggest that perhaps the statute could be amended to exempt sales in metropolitan areas, for example, the relatively small operations in which land in Washington suburbs of Virginia and Maryland is advertised in Washington newspapers. Our impression is that many such metropolitan offerings are by builders who undertake to construct a dwelling for the purchaser and that accordingly such offerings would be otherwise exempt under Section 3(a) (2) of the bill. However, we recognize that there are offerings of unimproved lots which fall into the category you suggest. Many of these latter offerings would be exempt under the intrastate exemption in Section 3(a) (8) of the bill. We would generally be opposed to a metropolitan offering exemption on the ground that tho protections afforded by disclosure are just as necessary there as in other interstate offerings. If there were to be an exemption for such offerings it would be preferable to grant the agency administering the Act discretionary authority to create the exemption by rule. It would be difficult to draft a satisfactory statutory exemptive provision whereas such an exemption could be developed by rule on the basis of continuing experience with the Act and could be modified from time to time as the desirability and appropriate scope of such an exemptive rule were demonstrated by specific cases.

5. While in my testimony I mentioned the possibility of someone seeking to avoid compliance by subdividing his organization, I believe that Section 2(3) of the bill, which defines a subdivision as including 25 or more lots offered “as part of a common promotional plan", would be interpreted as including offerings by related organizations in appropriate cases, particularly if the point were clearly made in Committee Reports with respect to the legislation. The suggestion in the explanation of the bill, which was included in my testimony, that the definition of developer be expanded to include all persons in a control relationship with the developers as defined would facilitate closing the “loophole” which you mention.

6. The reference in my prepared statement to the fact that the bill reflects certain judgments in which we had no part refers to various changes made in preparing the Committee Print of June 9, 1966, which differed to some degree from the bill as introduced. For example, a provision to require registration of agents was deleted, certain additional exemptions were added and provision was made for increased deference on the part of the Commission to state regulation. My mention of these and other changes was in no way intended to be critical of them and all may well be necessary or appropriate. I merely wished to clarify the record of the Commission's participation in drafting the bill.

In our explanation of the bill, a copy of which I attach, we made certain suggestions for amendments commencing at page 9 of that statement. Further, in my testimony at pages 169–170, in pointing out that certain decisions were made by the persons who drafted the legislation which depart from the scheme of the Securities Act of 1933, I noted that the exemptive provisions in the bill exempt their subjects from all provisions of the Act including fraud provisions, rather than merely from the registration and disclosure provisions as in the 1933 Act. I suggested that the Committee should consider whether it desired to follow this path as against the pattern established in the 1933 Act. In this regard, it would seem to me that certain of the exemptions, such as the intrastate exemption and the Regulation A type exemption contained in Section 3(b) of the bill, should apply only to the registration provisions. While we have not as yet developed any additional suggestions of this nature, it does occur to me that perhaps the administering agency should be empowered, as is the case in the Securities Act, to authorize by rules and regulations the omission of certain of the information and documents specified in Section 6 in respect to particular types and classes of subdivisions if it finds that such information or documents are inapplicable to such class or that fully adequate disclosure is otherwise being provided.

It might also become advisable to make more precise provision than is now contained in Section 7(c) of the bill for keeping the information in a registration statement of prospectus current as circumstances change. I hope that the foregoing will be of some assistance. Sincerely,

MANUEL F. COHEN, Chairman,

JUNE 24, 1966. Hon. LAWRENCE F. O'BRIEN, Postmaster General, Washington, D.C.

DEAR MR. POSTMASTER GENERAL: During the June 22, 1966, testimony of Chairman Manuel F. Cohen, of the Securities and Exchange Commission, on S. 2672 before the Senate Banking and Currency Subcommittee on Securities, it was noted by Mr. Cohen that several agencies or departments of the Federal Government might have far more experience in the matter of preventing fraudulent interstate land sales, a practice which is attacked by the bill.

Included in Mr. Cohen's suggested enforcement authorities was the Post Office Department. He mentioned the Post Office Department's experience with false advertising and consumer frauds.

We would appreciate at your earliest convenience comment on Mr. Cohen's suggestion and also an explanation of what changes would be necessary in the existing Post Office Department statutes to effectively control the fraudulent sale of land through interstate operations. Sincerely yours,



Washington, D.C., July 11, 1966. Hon. BOURKE B. HICKENLOOPER, U.S. Senate, Washington, D.C.

DEAR SENATOR: Reference is made to the joint correspondence, dated June 24, 1966, addressed to me by yourself, Senator Thurmond, and Senator Bennett, which called attention to that portion of the testimony of the Chairman of the Securities and Exchange Commission on S. 2672 which indicated that this agency had accumulated experience on the problems which S. 2672 was designed to meet. Suggested changes in postal statutes to help meet these problems were also requested.

The Chief Postal Inspector has testified on these problems before the Senate Committee on Frauds and Misrepresentations Affecting the Elderly. A copy of his testimony is enclosed.

As a result of these hearings, S. 1364 and H.R. 6102 were introduced, which would amend 39 U.S. Code 4005 in such a way as to permit the curtailment of such fraudulent land schemes in a shorter period of time than is presently possible.

I do believe, however, that the primary solution to these problems can be provided by adequate state legislation. Our records disclose that land frauds occur infrequently in states which have adequate statutory controls which are actively enforced. Sincerely yours,




The opportunity to again report to this committee concerning the status of our investigations of alleged fraud in mail order land sales is appreciated. These investigations are made by us under authority of 18 USC 1341 and 39 USC 4005, which impose a duty of the Postmaster General to prevent the use of the postal establishment in the perpetration of schemes to defraud the public.

There are many facets to these land fraud schemes. In most cases, the promoters launch a lavish advertising campaign in media throughout the nation in which extravagant claims are made depicting nearly worthless land as suitable for homesites or retirement or investment purposes. The principal inducement to buy is usually a seemingly low price. Buyers are seldom near enough to the property to personally inspect it without spending more for transportation than the price of the land warrants. This coupled with the appeal to the "bargain instinct" present in most people is an integral part of the scheme.

A variation of this theme is practiced by some promoters who peddle worthless land at fairs, flower shows, and other similar public events at which the land is disposed of by a so-called “free drawing" in which practically everyone who registers is a "winner.” Such "winners” are then separately notified that each has won a valuable lot which may be obtained simply by paying so-called nominal "closing costs" which actually represent far more than the land is worth. Based on the great number of victims these "closing costs" provide a vast profit for the promoters.

Another gimmick frequently used in a promotion is the promise of improvements in the form of club houses, recreational facilities, roads, sewers, and utilities which are never furnished. Many instances have been found where promoters have skipped without fulfilling such commitments after disposing of the land. In other cases unscrupulous promoters have advertised and accepted payments from victims for land to which they could not convey a clear title.

The following statistics dating from July 1, 1962, are indicative of the scope of the land investigative program being conducted by the Postal Inspection Service : Land fraud investigations authorized.

358 Cases closed.---

165 Cases currently under investigation.

193 Cases presented to U.S. attorneys.

35 Cases in which indictments returned.

22 Number of defendants indicted.

60 Cases in which convictions obtained..

7 Number of defendants convicted..

13 Cases wherein indictments are outstanding---

15 Prosecutive action in these cases is closely coordinated with the Criminal Division, Department of Justice, and United States Attorneys throughout the nation.

In view of this committee's concern with frauds in general, many of which particularly affect the elderly, we should bring to attention that in the first ten months of this fiscal year, through April 1964, postal inspectors made 548 arrests for mail fraud violations of all types. This was an increase of 7.2% over the same period last year. Also, while it is not within our jurisdiction to cause adjustments to be made, a total of $5,224,340 was restored to victims as a result of mail fraud investigations.

JUNE 24, 1966. Hon. STEWART L. UDALL, Secretary of the Interior, Washington, D.C.

DEAR MR. SECRETARY: During the June 22, 1966, testimony of Chairman Manuel F. Cohen, of the Securities and Exchange Commission, on S. 2672 before the Senate Banking and Currency Subcommittee on Securities, it was noted by Mr. Cohen that several agencies or departments of the Federal Government might have far more experience in the matter of preventing fraudulent interstate land sales, a practice which is attacked by the bill.

Included in Mr. Cohen's suggested enforcement authorities was the Bureau of Land Management in the Department of the Interior. He mentioned the Bureau's experience with real estate problems.

We would appreciate at your earliest convenience comment on Mr. Cohen's suggestion and also an explanation of what changes would be necessary in the existing Interior Department statutes to effectively control the fraudulent sale of land through interstate operations. Sincerely yours,




Washington, D.C., September 21, 1966. Hon. STROM THURMOND, U.S. Senate, Washington, D.C.

DEAR SENATOR THURMOND: Your letter of June 24, 1966, asked for our comments on testimony given by Mr. Manuel F. Cohen on S. 2672.

We have reviewed the testimony of Mr. Cohen before your Committee on June 22, 1966. The reference to the Bureau of Land Management appears on page 170 of the transcript. Mr. Cohen said that:

"However, in considering whether the Commission should administer the bill, if it is enacted, we are at something of a disadvantage. There are a number of other agencies, such as the Bureau of Land Management to the Department of the Interior, or the Housing and Home Finance Agency in the Department of Housing and Urban Development, which have far more experience than we with the real estate problems and evaluation of lands and subdivisions, particularly unimproved lands.” Mr. Cohen went on to say that "Other agencies, such as the Post Office Department and the Federal Trade Commission, have

« PreviousContinue »