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Mr. COHEN. Thank you, Mr. Chairman.

Senator WILLIAMS. We didn't know you would be here on this subject when you took office, but we have a record that suggests that you, your Commission, and its whole organization is eminently qualified to fill this big vacuum.

I mentioned before you came in the problem of the undisclosed sale through interstate commerce of land goes back even in my memory to the twenties when Florida tidal areas were sold.

I remember a next door neighbor-I will never forget it. When he found out that what he bought was under water, it was suggested then that something was lacking in terms of how people should be protected against the real hucksters. And, as Senator Mondale so eloquently expressed it, what we are trying to do here should be not only accepted but it should be welcomed. It should be applauded and fought for by reputable people who are selling land. And I hope they will agree, just as the Securities folks did.

I haven't read the record for a long time, but along about February of 1933, I will bet the Securities industry moaned and groaned about the 1933 act.

Now, they are happy, indeed, with your Commission.

Mr. Cohen. This is my understanding of it. And maybe I should quit now when I am ahead of the game.

Mr. Chairman and members of the committee, I am Manuel F. Cohen, Chairman of the Securities and Exchange Commission. I have been asked to testify on S. 2672.

I have with me Mr. Philip A. Loomis, Jr., our General Counsel, and Mr. Irving Pollack, who is Director of our Division of Trading and Markets and who, for many years, has been in charge of enforcement activities in the Commission.

I should also say that I regret that I was a little late this morning and didn't have the benefit of the entire statement made by Senator Mondale, but I heard enough for me to feel that I am again in the position of following a very good act.

I hope that you will bear that in mind and forgive me.

Senator WILLIAMS. I followed George Jessel, one time and I will tell you the story. It didn't work very well.

Mr. COHEN. Š. 2672 is entitled “The Interstate Land Sales Full Disclosure Act," and, if I may interrupt at this point, I have two documents, Mr. Chairman; one, a fairly brief statement, and another document entitled “Explanation of Basic Provisions of the Interstate Land Sales Full Disclosure Act." I can read both, or I can read my statement, submit the explanation and refer to certain portions of it briefly, and make myself available for questions. I will do this in any way

that suits your convenience. Senator WILLIAMS. If you have the time, if you could read your full statement, we would appreciate it.

Mr. COHEN. All right.

As I was saying, S. 2672 is entitled “The Interstate Land Sales Full Disclosure Act," and was developed in response to information obtained in hearings before the Senate Subcommittee on Frauds and Misrepresentations Affecting the Elderly and the Senate Special Committee on Aging. These hearings developed evidence of certain fraudulent promotions by land developers involving installment sales by mail order of subdivided lots.

As we see it, there are three principal questions to which we assume you would wish us to address ourselves.

First, is there need for further Federal legislation regulating the interstate sale of subdivision lots?

Second, if there is a need for legislation in this area, in our view will this bil] adequately meet this need?

Third, if the bill is enacted, should it be administered by the Securities and Exchange Commission, or by a new agency, or by some other existing agency of the Federal Government?

With respect to the first point, the need for legislation, we have no firsthand information on which to base a truly informed judgment. The sale of land is normally beyond the jurisdiction of the Commission, except in somewhat unusual cases where interests in land are sold in such a way as to raise a question whether an investment contract (and, therefore, a security) is involved under the doctrine of Securities and Exchange Commission v. W. J. Howey Company (328 U.S. 293), which the Supreme Court decided in 1946. In that case, small parcels of land located in a large orange grove were sold in conjunction with contracts for the common management of these properties by the promoters. The profits from the groves were to be divided in proportion to the acreage held by each investor. This "package” was held to involve the offering of a security. Consequently, the extent and nature of such abuses as may exist in this area normally would not come to our attention.

I should add, however, that we have had some additional experience in real estate matters, as they arise from so-called real estate investment trusts and corporations, and other companies of that character. Those companies normally engaged in the purchase, management, and trading of improved real estate, although, on occasion, they also engage in the purchase and sale of unimproved realty.

We are aware, of course, that the record developed before the Senate Special Committee on Aging in 1964 presented substantial evidence of interstate sales of subdivision lots, which were either fraudulent or, at least, were accomplished by most inadequate disclosure. The report of the subcommittee before which hearings were held concluded that Federal legislation was necessary. We are aware that there have been a number of prosecutions under the Mail Fraud Act and that various of the States have taken action. Whether these actions have had the effect of dampening these promotions and whether adequate measures have been taken to prevent the recurrence of these abuses, is a matter with respect to which we of the Commission have no firsthand information. Accordingly, although at your request we participated in drafting certain portions of the bill, we have not gathered significant additional evidence upon which to express an informed view as to the current need for this legislation.

However, if I may interpolate at this point, we do have information that certain persons, who had been very actively engaged in boiler-

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room operations in the sale of securities as a result of which we put them out of business, immediately moved to Miami and started boilerroom operations in unimproved real estate.

Senator WILLIAMS. Well, they all didn't go to Miami. Some stayed up North. We have an individual—I won't mention his name, because we might hear from him later—who lost his opportunity to be a dealer or salesman in securities, in equity securities, and he moved into this area. He didn't go to Miami. He bought some swampland south of Lake Okeechobee and is selling it off. He proved that he had lost his right to deal in your area, and then he moved into this area.

Mr. COHEN. I didn't mean to limit these cases to people who moved to Miami. Miami happens to be attractive to some of these people. They are, as you suggest, in other areas of the country.

When securities were not selling as readily as they have been, beginning around 1959 and 1960, some of these people were engaged in selling home improvements. When that petered out, they became securities salesmen. When that petered out, they became land salesmen. When we get after them on this activity, they will sell something else.

This is a roving profession, if you will.

Now, my remarks about our lack of substantial information should not be understood as detracting from the very impressive record made by the subcommittee, and I understand that other witnesses have appeared and will appear before this subcommittee to present further evidence as to this issue.

There is one point which should perhaps be made, in view of the resemblance between this bill and the Securities Act of 1933, and the fact that there is some similarity in the problems to be dealt with. The justification for the Securities Act of 1933 extended considerably beyond the mere protection of individual investors who bought particular securities which were being offered. The distribution of new issues of securities is an essential part of the financing of American industry and abuses in this area, with their impact on investor confidence, have major significance in the functioning of the whole national economy. This may not be true of the interstate sale of subdivision lots. I hasten to add, however, that, of course, this fact is not essential to Federal interest in or concern for the protection of the public in interstate land sales.

Senator MONDALE. At that point, Mr. Chairman, I think you have just testified that, on occasion, real estate operators, who have attempted to promote that land through securities, have come up against the existing regulatory rules of the Exchange Commission. And once the Commission has exerted its jurisdiction, dropped the sale of securities and shifted to the sale of land itself

Mr. COHEN. I didn't mean to suggest that, Senator Mondale, although I think I spoke to both the points involved in that question.

The first point I wanted to make was that real estate operations, apart from the typical real estate corporation or company, have come to our attention in a form which has suggested itself as being a security, and this was tested out in the Supreme Court. There are at least two leading cases on the general proposition in the Supreme Court and many other cases in lower courts.

In those situations, the question was whether or not the particular instruments, arrangements, investments, securities, however you de


nominate them, were subject to registration with this Commission, and the courts agreed with the Commission that they were. That was the issue in those cases.

The other point I wanted to make related to people who had been engaged in selling what is clearly an equity, a security, but in an improper manner, by tactics ordinarily referred to as boiler room tactics, that is, by long-distance telephoning, misleading statements, the omission of necessary information, and the compelling of people to make investment decisions in a hurry, without adequate information.

What I said was that as to a number of those who had been put out of business as a salesmen or as broker-dealers, it had come to our attention that some of these people had turned to the sale of interests in land, using similar tactics.

Senator MONDALE. We have a classic example, a promotion known as “Golden Palm Acres," and, according to an article appearing in the Miami Herald, May 1, 1966 (text on p. 332), the president of Golden Palm Acres, in his operation, ran into trouble with the SEC and his license was revoked on January 7, 1966, for alleged violations of antifraud provisions of the sale of common stock.

The SEC found that Pelnick had used high-pressure selling tactics and placed unsophisticated investors in the position in which they were induced to make hasty investments. He went from that situation, in which he had run afoul of your regulations, the regulations of the Commission, and moved into the sale of outrageously valueless property.

Now, doesn't this show a parity or similarity of problem between that within the present jurisdiction of your Commission

Mr. COHEN. Indeed it does, and this is exactly what I had in mind when I made the remark earlier.

Now, if I may move on to the second point: assuming that there is a need for such legislation, the legislation of the kind now being considered by this subcommittee, the second question is whether this particular bill will adequately meet that need. In our judgment it will. It basically follows the pattern of the Securities Act of 1933, which is generally recognized to have dealt successfully with the problem at which it was aimed. We believe that the same technique could successfully be used in the regulation of the interstate sale of subdivision lots. Supervised and mandatory disclosure, together with provisions designed to prevent and punish fraud, should adequately meet the problem of deceptive or fraudulent tactics and inadequate disclosures uncovered by the Senate Subcommittee on Frauds and Misrepresentation Affecting the Elderly. I should note here that although we assisted in drafting the amended bill, it does not in all its aspects follow the securities acts administered by the Commission and reflects certain judgments in which we had no part. I am not being critical of those judgments, I merely state this fact for the record. In our analysis of the bill which I shall submit for the record, we make certain suggestions for further amendment and, if this subcomimttee wishes, we may make others as the hearings continue.

Perhaps I might refer at this particular moment, so that it is close to what I have just said in the record, my statement beginning at page 9

Senator MONDALE. Of the explanation ?



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Mr. COHEN. Of the explanation, that is right. On that page, and on pages 10 and 11, we make a number of suggestions for change. One of the suggestions that appears on the bottom of page 10 would specifically require that there be a listing of the names and addresses of all persons who would serve as agents in the documents filed with the Commission. We thought that infornation was essential.

In the draft which our people assisted in presenting to the subcommittee staff, I think we contemplated that agents and developers would be registered with the Commission. A determination was made not to follow that course, and it is for that reason that we believe that this amendment is essential.

Senator MONDALE. In other words, this proposed measure does not involve jurisdiction of licensing by the Commission of the real estate agents selling land? Mr. COHEN. That is right.

Senator MONDALE. But you think, at the very minimum, the Commission should be provided with names of agents selling, and addresses, so you might review their background?

Mr. COHEN. That is right, and, particularly, in the light of certain other provisions of the bill, which exclude certain persons from acting as agents. In order to test that, in any effective way, there should be an obligation to list the names of all persons who may act as agents.

We have developed a great deal of information about a great many people, and there are other agencies of the Government which have information, which would be helpful in carrying out the purposes, as we understand it, of this particular legislation.

Senator MONDALE. Suppose this were included in the measure and, as a result of being supplied with the names and addresses of agents, you investigated that person and found that he had a record of unscrupulous business practices, what could the Commission do, at that point?

Mr. COHEN. Well, under the bill, as now before this committee, if all we found was evidence of unscrupulous activities, I am not sure there is much we could do, except to require disclosure of certain of these activities, so that the person who is being asked to acquire an interest in land, would be aware of the type of person with whom he is dealing.

But section No. 12 of the statute, at page 23 of the amended bill, makes it unlawful for any person to act as a developer or agent, who, within 10 years, has been convicted of a felony or misdemeanor, or is subject to other disabilities, as spelled out. And that is another reason why the listing is essential.

Now, I think the bill, as drawn, would probably vest the Commission with sufficient authority to develop that information. But we thought that, because of the importance of this item, it would be helpful, just as a matter of clarification, that this be specifically included in the bill.

Senator MONDALE. I think that point is very well taken.

Mr. COHEN. There is one other point that I do want to mention, and I will come back to some of the other proposed amendments later. I want to mention, at this point, another decision made by the persons who drafted this legislation to exempt from every provision of the bill

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