letter of April 24, 1963 (copy attached) in this regard, you will note that it does not quote from item No. 4 but merely sets forth what it regarded as the implication of that item. As we explained in numbered paragraph 3 above, our real differences are not alleged misquotations, but differing interpretations of article XV and other provisions of the settlement agreement. 6. The Board is in complete disagreement with your statement in the fourth paragraph on page 4 of your letter that it has not thus far fulfilled its obligations under the settlement agreement. The Board states without equivocation that it has fulfilled and will continue to fulfill each and every obligation which it assumed under the settlement agreement. With respect to the dissolution of Long Beach, it intends to continue to cooperate with the Long Beach management to accomplish this end in accordance with the terms of the settlement agreement and in a manner consonant with its statutory and regulatory responsibilities. In this connection, we take the opportunity to point out that the settlement agreement is not a one-way street. Long Beach also has obligations under the agreement. We have twice advised you in writing as to respects in which Long Beach was not fulfilling its obligations. See our letter of January 30, 1963 (copy attached) which was based on the advice given by George E. Monk, Esq., of Messrs. Hogan and Hartson in his letter of January 24, 1963, to the Board (copy attached), and Mr. Monk's letter of April 15, 1963, to the Board (copy attached), a copy of which was given to you on April 19, 1963, when you met in Washington with staff members. As you know, Mr. Monk is the independent and outside counsel who drafted the settlement agreement and is fully cognizant with all its terms and provisions. For your further information, Mr. Monk is now reviewing the events of the April 27, 1963, Long Beach members' meeting to advise the Board whether such events were in accord with article XV of the settlement agreement. 7. With respect to the free-rider problems discussed in your letter, we can only refer you to our previous discussions and our previous letters on this subject. The Board's grave concern about this matter was also expressed at the recent congressional hearing, described in item 4 above, in response to questions raised by several members of the subcommittee. With respect to pre-April 2, 1962, free-riders, the Board made it perfectly clear to you in its letter of April 24, 1963, that it was willing to treat all free-riders alike, whether their investments were made prior to or on and after April 2, 1962. 8. Despite the contentions advanced on pages 4 and 5 of your letter, the Board does not believe that the elimination of free-riders from participating in the Long Beach reserves and undivided profits under its proposed plan for dissolution by way of merger with Equitable is violative of the legal rights of such free-riders. The Board's legal authority in this regard stems from section 5(d) (2) of the Home Owners' Loan Act of 1933, as amended (12 U.S.C. 1464 (d) (2)) which, in pertinent part, grants the Board "power to make rules and regulations for the reorganization, merger, and liquidation of Federal associations." Pursuant thereto, the Board promulgated regulations for the voluntary dissolution of Federal associations which regulations are embodied in 12 CFR 546.4. It was under the foregoing statutory and regulatory authority that the Long Beach management proposed to dissolve Long Beach by way of merger with Equitable. And, as you know, section 546.4 of the Rules and Regulations for the Federal Savings and Loan System, cited above, requires, among other things, Board approval before the plan can be effectuated. The regulation, in pertinent part, reads, "If it appears to the Board that dissolution is advisable and that the plan of dissolution submitted is in the interest of all concerned, the Board will approve the plan; if the plan submitted appears to be inadvisable, the Board will either make recommendations to the association concerning the plan or disapprove it." Thus, under the statute and the regulations, the Board has an affirmative responsibility to see to it that any plan of dissolution is advisable and in the interest of all concerned. Management's policies in permitting the influx of large accounts into Long Beach upon the return of the association on April 2, 1962, in the then existing circumstances constituted an unfair dilution of the interests of Long Beach shareholders in the reserves and undivided profits of the association. It is the unfair dilution of the interests of such shareholders resulting from management's failure to observe its fiduciary obligations which has caused the Board so much concern, a concern which has been expressed to you repeatedly and which has taken up so much of our time in efforts to achieve a mutually satisfactory solution of the problem thus result 20-602-63- 4 ing. In connection with the Board's responsibilities in this area and the rights of free-rider to participate in the distribution of Long Beach's net worth, we refer you to that part of the opinion, dated December 21, 1961, of Judge Wasserman in the Matter of the Dissolution of Cleveland Savings Society (Court of Common Pleas, County of Cuyahoga, State of Ohio, Case No. 719,002), from which I quoted during my testimony before the above-described congressional subcommittee. 9. You imply that had Long Beach not accepted the free-rider money Long Beach's goodwill value would not have been more than the $3 million assigned thereto, as evidenced by the Standard Research consultants' report. You know, of course, that Standard Research, in appraising the value of Long Beach for the purpose of merger with Equitable, took into account the fact that some $10 million-$11 million of accounts would be withdrawn from Long Beach when the merger was consummated. We understand you provided that information to Standard Research and we regard that as an implicit admission that at least $10 million-$11 million of Long Beach accounts were investments made by free-riders. These investments were not considered by Standard Research in making its appraisal. 10. The fact that the Long Beach shareholders may have voted at their April 27 meeting to permit all account holders to participate in the distribution is no answer to the free-rider problem. Even if the facts and all alternatives for dissolution of Long Beach were objectively presented, the Board has responsibilities and duties in this area, as outlined above, which transcend merely one assocition. To sanction unfair dilution in this case would set a precedent which could plague the Board in the future. This it cannot and will not do. 11. You persist in saying that the Board is only interested in eliminating accounts of $100,000 and over from participating in the distribution. As the Board advised you in its letter of April 24 (copy attached), the $100,000 figure was used only for the purpose of arriving at a mutually agreeable compromise which I thought we had reached at our July 27 meeting. And as you also well know, the compromise envisaged the elimination of all pledged accounts to the extent of the pledges, regardless of amount, as well as certain classes of socalled insiders. Such a compromise would have eliminated the most flagrant instances of free-riders. You chose not to implement the compromise. That being the case, as you were advised, the Board's concern with the free-rider problem is not limited to accounts of $100,000 and over. 12. Notwithstanding the request in our letter of April 24, 1963, that you present evidence of any improper activities on the part of the Board's staff, you persist in your implication by posing a question that the Board's staff has misrepresented the situation to the Board. The Board regards this as a very serious charge and again urges you to present substantiating evidence before you make any further charges along these lines. 13. The last three paragraphs of your letter can be interpreted as a threat to and an attempt to intimidate the Board. We hope this was not your intention. The Board and its staff are all mindful of their responsibilties under the statutes and regulations which they are administering. In assuming their respective offices they each solemnly undertook to discharge their responsibilities in accordance with their oaths of office. This they intend to continue to do and by doing so no serious consequences can possibly ensue. 14. This Board has no personal knowledge as to the actions taken by other Board chairmen as described in the next to the last paragraph of your letter. For myself, I can say that the past Board chairmen whom I personally know have never given me reason to believe that they were other than men of character, integrity, and honesty. Inferences to the contrary may possibly be drawn from your statement. I would hope that upon further reflection you might wish to reconsider that statement. The Board is still hopeful that the problems which are still unresolved in connection with the dissolution of Long Beach can be amicably disposed of. We look forward to continuing to cooperate with you so that Long Beach can be dissolved in the shortest possible time without doing violence to our statutory and regulatory responsibilities. Congressman Multer received a copy of your letter of May 6, addressed to me, before I received it. At the hearing on May 7, Congressman Multer referred to the letter and, when I told him that I had not yet received it, he asked that we furnish him with a copy of our reply or give him any comments we cared to make with respect to it. Accordingly, we are sending him a copy of this letter. Sincerely, JOSEPH P. MCMURRAY, Chairman. Mr. T. A. GREGORY, President, Long Beach Federal Savings & Loan Association, OCTOBER 15, 1962. DEAR MR. GREGORY: The Board is glad to hear that you are making a successful recovery from your recent operation. Members of the staff of the Insurance Corporation, who met with you about 10 days ago, reported to me that you are looking very well despite your ordeal. I and my Board associates sincerely hope that you will be soon restored to the boundless energy which has always characterized your activities. Your letter of October 8, 1962, requesting an additional extension of time under article XV of the settlement agreement of February 14, 1962, as amended, "to permit the proper preparation of proxy statements and other documents to be used in connection with the proposed merger" with Equitable Savings & Loan Association caused us to reexamine your earlier letter of September 13, 1962. In the latter letter you had requested a 90-day extension of the period set forth in article XV for the calling of a special meeting of Long Beach shareholders. That request was granted in part by extending such period for 30 days. We note from your September 13 letter that the requested extension of time did not relate to a shareholders' meeting to be called to vote on the specific plan of dissolution set forth in article XV of the settlement agreement, a plan already approved by the Board. Rather it related to an entirely different plan of dissolution, one by way of merger with Equitable Savings & Loan Association, Long Beach, Calif., and not yet approved by the Board. As the Board previously advised you by letter of June 7, 1962, it does not regard article XV as applicable to your proposed plan of dissolution by way of merger with Equitable and therefore, while no harm was done, it was not necessary to extend the time period in article XV to enable you to proceed further with your new plan of dissolution. In short, there are now no time limitations as to the calling of a shareholders' meeting to vote on a dissolution plan by way of merger. Such a time will doubtless be fixed when an appropriate plan of dissolution by way of merger is approved by the Board. In these circumstances, therefore, we see no reason why any further extension of time under article XV is necessary. In the event, however, you have not abandoned the plan of dissolution specifically set forth in article XV and you wish an extension of time so that such plan may perhaps be submitted for shareholder approval, the Board, for reasons which will appear below, has serious misgivings as to whether the request should be granted. So that the Board's position may be viewed in proper perspective, I am taking the liberty of setting forth the pertinent background facts. Negotiations looking toward a settlement of all controversies between the Board and the Insurance Corporation, on the one hand, and Long Beach Federal Savings & Loan Association, on the other, commenced, I am told, approximately 10 months before I assumed office. They came to a successful conclusion about 9 months after I became Chairman of the Board, when on February 14, 1962, the settlement agreement was executed. The negotiations, as you know, involved many difficult and complex problems which had to be resolved against a background of almost ceaseless controversies and litigation lasting over a 16year period. Nevertheless, because each of us was determined to bring the controversies to an end, a settlement was reached. I am sure you will agree that during my stewardship the record conclusively demonstrates that the Board and its negotiators cooperated earnestly and in good faith in the effectuation of the settlement. While many illustrations of such cooperation could be given, I shall, so as not to lengthen this long letter more than necessary, limit myself to remind you of my own personal participation in the negotiations between the Board and the Department of Justice as to the desirability of the settlement, an effort which proved successful. My action in this regard was motivated by my belief that a settlement was in the public interest. In the same spirit of cooperation, the settlement agreement was consummated on April 2, 1962, when Long Beach was returned to its private management under your leadership. The escrow established under the settlement agreement was closed in 46 days despite the initial forecast of the escrow agent that it would take many more days than 60 as provided for in the agreement. It was closed in that recordbreaking time because all who participated in the undertaking, and in particular you and your staff and the Board (including the Insurance Corporation) and its staff, wanted to get the job done. at the time of the closing of the settlement escrow shall survive such closing and shall continue in effect despite any investigation with reference thereto at any time made by or on behalf of any party." [Emphasis added.] The Bank Board agreed to article XV authorizing the transfer of certain Long Beach assets and liabilities to Equitable as therein provided and also to article XVII, "to implement this agreement *** to aid in carrying out the purposes and intent hereof." Article XV and article XVII were not fully performed on closing the settlement escrow but pursuant to article XVI-"continue in effect ***." The Bank Board joined in the representations to the U.S. court and the State court that the settlement agreement was effective, and accepted, among other things, the benefits of the court approval for dismissal of the shareholders' and association's damage claims against the Bank Board, et al., based on such representations. The Bank Board has not thus far fulfilled its agreement filed with the court as a basis of the dismissal of damage action against the Board, et al., even though the association has respectfully requested the Bank Board to fulfill its obligations under the settlement agreement. In the last paragraph of your page 2, you refer to a group of "free-rider" shareholders of our association. After receipt of your letters and before convening of our shareholders' special meeting, the attorney for the Long Beach Federal Shareholders Committee asked you to define "free rider." You have not done so. I do not know of any shareholder in Long Beach Federal who has opened an account on or after April 2, 1962, that can justly be called such a name. It is my belief that every such shareholder, be he friendly or unfriendly, is a shareholder at a cost to himself, with a bona fide investment, with a contractual right to participate in the association and a constitutional guarantee against the abridgement of his contract and a constitutional guarantee of equal protection under the law. You have been furnished, at your request, many weeks ago, with a comprehensive law brief from our association setting out the legal rights of our shareholders, yet you continue to insist upon Long Beach management violating the association's charter, breaching its contractual agreement with the shareholders, and violating the legal requirement of the U.S. Constitution. The attorney for the shareholders' committee asked for citations of your claimed authority to make such forfeitures. You have given none. The congressional committee's report of July 2, 1960, recommended, among other things, the following: "In effecting the return of Long Beach Federal to its former management, the Board should utilize the financial and credit resources of the Federal Savings and Loan Insurance Corporation and the Federal Home Loan Bank of San Francisco to enable the association to repair the damage done by the seizure and to regain its previous business position." The Federal Savings and Loan Insurance Corporation and the Federal Home Loan Bank of San Francisco were not required to use their credit resources; i.e., to make any loans, to aid the association in regaining its previous business position. The influx of money into Long Beach Federal from private investors upon restoration on April 2, 1962, resulted in a substantial rehabilitation of the association and changed the goodwill value of the association from nothing under Board operation to in excess of $3 million under the association's founding management, as appraised by the Standard Research Consultants in their report. You call the rehabilitation of the association an unfair dilution of the interest of Long Beach shareholders but you overlook the more than $3 million benefits to the association and its shareholders. Further, the shareholders at their special meeting unanimously voted against forfeiting one group of shareholders' assets in favor of another group of shareholders. The shareholders unanimously voted at their special meeting to abide by the law and by their mutual agreement among themselves to make an equal and equitable distribution based upon their respective investments. Our shareholders own such surplus and have voted how to distribute such among themselves. You requested that accounts of $100,000 or more opened on or after April 2, 1962, withdraw their accounts without participation. Our subsequent investigation disclosed that such a request, except on strictly a voluntary basis, is a violation of the Constitution, law, and Bank Board regulations as has been pointed out to you. In fairness to all, we believe that all are entitled to equal protection under the laws and charter of the association. Commencing in the last paragraph of page 2 of your letter, you state the "Board, without the presentation to it of any substantiating facts, was disturbed by the implication in your letter of April 20, 1963, that its staff has engaged in improper activities during the past year and has withheld information from the Board, apparently for the purpose of preventing the implementation of the plan of dissolution of Long Beach under article XV or the plan of dissolution of Long Beach by way of merger with Equitable." I did not state in my letter that your staff was withholding information from the Board. I did point out your previously inconsistent position and asked the following question: "Could it be the advice you must be relying on for this inconsistency is related to the fact that one of your SRIC's became a business associate of a group of savings and loan operators who shortly thereafter became substantial savings account holders in our association while the successor SRIC was yet in possession?" The question asked is based upon a factual condition, which by the very nature of the facts, justify the question asked. I believe the matter deserves the serious consideration of the Board. Apart from our previous correspondence, I believe the Board should consider very carefully the history of prior Board Chairmen and sometimes its members. Since 1946 only one Chairman of the Bank Board has survived the tenures of such office without serious embarrassment. Mr. Walter McAllister, the only such Chairman not seriously embarrassed, adopted a policy of requiring his staff members to take responsibility for the statements in the letters prepared by them for his transmittal. We observed that Mr. McAllister refused to take responsibility for the inaccuracies of the Bank Board's legal and supervisorial staff after his first few months' experience. Other Bank Board Chairmen have taken written responsibility for statements not personally known by them to be true and in due course have found themselves committed to an unsound and sometimes illegal position which has ultimately resulted in disaster for the people who invest in savings associations. Your quality of desiring to believe in and rely upon your legal and supervisorial staff would be admirable were it justified and if it did not lead to disastrous results as it has for three out of four of your predecessors. Very truly yours, T. A. GREGORY, President. FEDERAL HOME LOAN BANK BOARD, Mr. THOMAS A. GREGORY, President, Long Beach Federal Savings & Loan Association, DEAR MR. GREGORY: Your letter of May 6, 1963, has raised many matters which require a response by the Board. 1. In the fourth paragraph of your letter you refer to our conference in the latter part of July 1962, in Congressman Celler's office in only one respect. You state that I then requested an opportunity to consider the proxy statement before it was mailed. To keep the record straight, the quesion of the consideration of the proxy statement arose in the context of our discussions about the "free-rider" problem resulting from the influx of large accounts into the association on and after April 2, 1962. We have written you about this problem before, and for the purpose of refreshing your recollection, I am attaching a copy of my letter to you of October 15, 1962, which sets forth the background of the problem and the Board's concern about it, not only in connection with the merger plan of dissolution of Long Beach, but with the article XV plan of liquidation. I thought we had reached substantial agreement at the meeting in Congressman Celler's office as to how the "free-rider" problem was to be handled and at that time, rather than simply requesting an opportunity to consider to proxy statement, I offered to send staff members to California to work with you on the changes to be made in the proxy statement to carry out our understandings. 2. You also refer in the fourth paragraph of your letter to the Board's "belated extension of the time limit for Long Beach Federal to act under article XV ***" which extension was, according to your letter, granted at the request |