Mr. HEALY. I can only interpret the philosophy of this bill as it appeals to me. The philosophy of this bill is that where the director has made a mistake, and the purchaser has not made any, except to buy the security, that the responsibility falls on the seller. Let the seller beware. The purchaser has not made any mistake, but the director has made one, no matter how honest a mistake it may be, but he has made a mistake, and it has resulted in somebody else's disadvantage.

Now, under the terms of this bill, the philosphy of this bill, if interpreted correctly, why should not the responsibility be upon the seller?

Let me ask you: Suppose you and I were in partnership, and I made a mistake, or I was guilty of fraud, within the scope of the partnership business, and you knew nothing whatever about it. I think there is no doubt but that you would be liable civilly.

Mr. PETTENGILL. I appreciate that.

Mr. BULWINKLE. You do not think, in your opinion

Mr. HEALY. I doubt if it will, but it will give the purchaser the right to rely on the statements, and he ought to have that right. And, if we enforce the law, it will be all well and good.

There is one further suggestion

Mr. PARKER. Mr. Chairman, I would like to know how a director in the Steel Corporation could possibly know, I do not care how diligent he may be, if he is to sign a statement based on the information of the best accountant that he could get; but with all of their multiplicity of plants, how could he know whether the statement was correct or not?

Mr. HEALY. I have conceded my statement, that is, in my illustration, that the director acts in good faith, but he does make a mistake.

Mr. PARKER. Yes; but if he has acted in more than good faith. He has taken all of the precautions he possibly can. It would be impossible for him, in the Steel Corporation or the General Electric Co., or any of those big corporations.

Mr. HEALY. In my illustrations, if a director or an accountant has acted in good faith, and has actually made a mistake, his corporation has gotten some money from the sale of those securities as a result of that mitake.

Mr. PARKER. But he has not.

Mr. HEALY. His corporation has.

Mr. PARKER. But he, personally, has not, any more than the other stockholders.

Mr. HEALY. It seems to me, Mr. Parker, just a choice as to which one of the views you are willing to take. If the director should only be responsible for negligence and bad faith, you are right. Upon the other hand, if the director should bear the consequences of the mistake that he makes rather than the purchaser, who could not be presumed to have made any mistake, then I am right.

Mr. PARKER. But let us take a case in which you are the director, and you have derived no personal benefit.

Mr. HEALY. Well, that brings us to an unfortunate condition, existing in some instances.

It is very interesting to one who goes through some of these corporations to note the relatively small amount of stock that some of these directors have in the corporations. Now, we went through

a very large corporation the other day that has a consolidated balance sheet of about $600,000,000, and out of 9 directors we found 1 who owned as much as one tenth of 1 percent of the outstanding stock.

The CHAIRMAN. We developed here in the holding company investigation, we found that a concern that owned 14 percent of the stock had absolute control of a railroad.

Mr. HEALY. In the Insull pyramid by purchasing, dividing, and subdividing, and splitting up the stock from each company as you go up the scale, you will find that a very small investment in the top holding company will control a large investment at the bottom, because it has been split and resplit, and divided and subdivided all the way up the pyramid.

I think that Mr. Huddleston asked one question, and here is a further answer to it. By multiplying the number of these companies going up the pyramid step by step, you reduce the investment that is needed to control the operating companies at the bottom.

Mr. PETTENGILL. The only reason that I have asked the question, is that I want to get this bill in a shape so that it will be just as favorable to the investor as possible.

Mr. PARKER. So do I.

Mr. PETTENGILL. But, is it possible that we can make the liability of a good, satisfactory, diligent director so dangerous that that class of men will not serve on a board of directors, and therefore the investing public will lose, as a result of a different kind of directors serving on corporate boards?

Mr. HEALY. I think, if a man acts as a director under this bill, of course, he will be very careful as to what he does. This bill will cause directors to act with a greater degree of care, with more care, than they have in the past.

Mr. PETTENGILL. I think that they should.

Mr. HEALY. It will not be a case of just attending a couple of meetings a year. They will know something about the business.

While I have contended for the views I have expressed, I have this in mind: This act says that if the statement is false, and is signed, the directors signing it shall be liable. The word "false" seems to have been given somewhat varying interpretations by the courts. I have just had a memorandum drawn up. It only came to me this morning. I am going to hand it to Mr. Thompson, because, from some of the cases, it appears that "false" may mean a misstatement knowingly made, or may mean a misstatement unintentionally made. The meaning of false ought to be cleared up in this statute. I am going to leave this little memorandum with the Clerk.

The CHAIRMAN. Mr. Lea wants to ask a question, a question or two, and then we will close.

Mr. HEALY. I have just one more thing that I would like to state, before I close.

I think that the act should require the interest of the directors in their corporations to be disclosed, because, if it is not good enough for them to put their money into, it is not good enough for the investor.

I would like to close with a quotation from Judge Brandeis' opinion in the Florida chain-store case, which goes a very long ways toward explaining the predicament in which we find ourselves, not only as to corporations, but as to our business affairs generally, and that is this,

and this refers to the laws of the States on the subject of corporations, as they have been written for the last 25 or 30 years:

The race was one not of diligence but of laxity.

That quotation is from Judge Brandeis' dissenting opinion, which pretty nearly describes what has happened in the field of corporation law, as showing how the States had competed for charter fees, just as some of them seem to be competing nowadays for divorce cases.

He said that the race was not one of diligence, but of laxity.

Mr. LEA. Judge, do you think that it is desirable for the Commission to be given authority to insist upon more details, more accurate registration statements, before those statements are permitted to be filed and given to the public?

Mr. HEALY. I think that would be a very excellent provision. I would say that it would.

Mr. LEA. This bill, as I understand, gives the Commission no authority to provide that the statements shall be more accurate before being filed.

Mr. HEALY. Of course, the Commission will make rules and regulations, and prescribe forms that will be used which will meet that situation to a certain extent, but to fully meet the situation such a provision as you describe, ought to be inserted in this bill, in my opinion.

Mr. LEA. Now, as I understand the act, any prospective buyer would have the right to write to the Commission and get certain information.

Mr. HEALY. Yes.

Mr. LEA. About offered securities.

Mr. HEALY. Yes, sir.

Mr. LEA. Will the Commission give those wanting facts, all of the facts, or will it simply transmit copies of the statements given by the issuers?

Mr. HEALY. Under my interpretation of this act, the Commission would not be at liberty to interpret the statements or give the inquirer any advice.

Mr. LEA. Do you think that it is desirable to limit the Commission's authority to any extent?

Mr. HEALY. I wish that there was some way that could be devised that would be safe for everybody, and permit the Commission a little leeway in that respect, but I do not know whether it could be written into the law or not, without raising the possibility of grave abuses.

The CHAIRMAN. That will conclude our hearings.

Mr. SADOWSKI. Would that come under an amendment to section 15 (a)?

Mr. LEA. I do not think that that is the section; but details might be given if there is any way in which we can reach them.

Judge, would you mind expressing an opinion as to section 14, which gives each State dominating control over interstate commerc within the State?

Mr. HEALY. I would be reluctant to answer that question, but, since you have put it to me, I must make an honest answer, and in making it, I regret to have to find myself somewhat in disagreement with the authors of the bill.

I think I cannot express my views without paraphrasing those you have already expressed. I think that this is, in a degree, a surrender of Congress's control over interstate commerce, and I think it would make the administration of the act a very difficult thing. I do not understand and I do not fully see how the Commission could become expert in the laws of all of the 48 States. They are not consistent, they conflict in many respects, and I am afraid, I am afraid of that provision. I am afraid of the workability of it.

Mr. LEA. That is all.

The CHAIRMAN. We are very much obliged to you, Judge, and to all of you gentlemen.

Mr. BREED. Yesterday, you asked me if I could furnish. you with copies of the Martin Fraud Act.

The CHAIRMAN. Yes.

Mr. BREED. And we have received them.

The CHAIRMAN. They have come?

Mr. BREED. They are here, and I will distribute them.

The CHAIRMAN. Tomorrow, at 10 o'clock, the committee will meet the drafting service, and at that time we will determine upon the policy of how far we will go, and how far we want to go; if we go as far as this bill goes, or some of the sections, and we want to determine those policies tomorrow, in connection with the drafting service, and then the drafting service can draw the bill.

I am having the amendments to the bill submitted by Mr. Thompson this morning copied, and they will be ready for every member of the committee, either late this afternoon or early in the morning.

Also, some other matters have come into my hands today that I think will be of benefit to us in consideraing the bill in executive session.

We will meet at 10 o'clock, tomorrow morning.

Mr. Thompson, we are very much obliged to you.

(Mr. Marland submitted the following telegram for the record:) OKLAHOMA CITY, OKLA., April 5, 1933.

don. E. W. MARLAND,

Member of Congress, House of Representatives.

Your consideration requested in re amending section 11 of Federal Securities Acts 875 to provide "any security issued by building and loan associations operating under laws and subject to examination, supervision, and control of any State." The building and loans of Oklahoma have 36,000 stockholders and investors residing outside of State; their total investments amount to $28,000,000. Such investments corresponds to that of deposits in savings bank. These out of State investors constantly receive literature, reports, and statements from State building and loans. Fifty percent of these out of State investors make monthly remittances. Believe expense and inconvenience to building and loans unnecessary and unwarranted and that type of stock or shares exceedingly different from those sought to be controlled. Regards,

JOHN B. DOOLIN,

Chairman Oklahoma State Building and Loan Board. JOHN F. MAHR, Executive Secretary Oklahoma Building and Loan League.

(Thereupon, at 1:20 p.m., the hearings on H.R. 4314 were con