Senator O'MAHONEY. Was then and is now-the charter was issued by the State of Delaware. It provided for two classes of stock, one of which had all the voting power, and the other had no voting power. As it happened, there were 200,000 shares of stock without voting power, and 500 shares of stock with voting power. Both types of stock were placed upon the market at the same price, so that those who were associated with Mr. Sinclair in the organization of the Mammoth Oil Co. acquired control of the entire capital stock by the contribution of only a very small amount of capital. Is there anything in the Securities and Exchange Act, or any other provision of law of which you know, by which a practice of that kind could be prevented in interstate commerce?

Mr. O'BRIEN. Under the Securities Act the only requirement would be that they disclose that and make it quite apparent to those persons to whom the stock is offered for sale.

Senator O'MAHONEY. There is nothing in the securities and exchange law which empowers any Federal agency to prohibit the exercise of corporate power in an oppressive and fraudulent manner, provided the State law permits the use of that device?

Mr. O'BRIEN. No, they only require that an adequate disclosure of the material facts concerning that structure be made.

Senator O'MAHONEY. Have you any idea how many corporations there are, if any, in the United States which offer their securities to the public, but which are not upon any exchange, and which are not subject to the Securities and Exchange Commission, except insofar as the mail provision goes?

Mr. O'BRIEN. Perhaps Commissioner Frank can give you that information.

Mr. JEROME N. FRANK (member of Securities and Exchange Commission). We can supply you with the approximate figure.

Senator O'MAHONEY. We will be glad to have you do that.

Mr. O'BRIEN. I might say in reference to the Sinclair Oil Co. that we had a registration statement filed a short time ago which showed a capital structure of 100,000 shares of class A stock and 100,000 shares of class B stock. The 100,000 shares of class B possessed all the voting power. The A stock had no voting power. That was offered to the public at $2.50 a share, which would be a contribution of $250,000. The B stock was all purchased by the promoters at one cent per share. It was 10,000 shares instead of 100,000. They obtained complete control for $100, as compared with the contribution of $250,000 by the class A stockholders.

Senator NORRIS. What was to prohibit the public from buying the 1-cent stock?

Mr. O'BRIEN. Nothing, except the matter of personal judgment. Senator NORRIS. The promoters had to run the risk of being able to buy that stock themselves.

Mr. O'BRIEN. I do not quite understand that.

Senator O'MAHONEY. Senator Norris refers to the 1-cent stock. Mr. O'BRIEN. It was not offered to the pubic.

Senator NORRIS. I understood you to say it was offered.

Mr. O'BRIEN. No. That was offered only to the promoters. The board of directors who controlled the corporation offered it to them, and they purchased it for $100. The public had no opportunity to purchase it.

Senator O'MAHONEY. Under the laws of what State was that corporation chartered?

Mr. O'BRIEN. As I recall, that was Delaware, but I would like to reserve the right to make a correction in that if I am wrong.

Senator O'MAHONEY. Please check that. Have there been any other instances of such great disparity between the cost of the controlling stock to the promoters and the cost of the other stock to the public?

Mr. O'BRIEN. Yes. Those are quite common. For instance, in that case, as I recall it, the class A stock had a preference to dividends which amounted to about 6 percent. Thereafter the common stock participated equally with that senior stock in any earnings over the amount required to pay that preference. The percentage of return to the promoters in relation tot he capital contributed might run up as high as 3,000 or 4,000 precent, while the class A would return but 10 or 12 or 15 percent.

Senator O'MAHONEY. Do you recall where that corporation originated?

Mr. O'BRIEN. I think it was chartered in Delaware. I am quite sure it was.

Senator O'MAHONEY. Where was it selling its stock?

Mr. O'BRIEN. Generally, in interstate commerce.

Senator O'MAHONEY. It received its capital from people generally throughout the United States?

Mr. O'BRIEN. That is correct. The general public was being called upon to contribute to the enterprise.

Senator O'MAHONEY. I should like to have you prepare or have somebody prepare a list of corporations of that kind. If you are not at liberty to give the names, that will not be necessary, but give us some idea of the number of corporations which have registered with the Securities and Exchange Commission which disclose such a situation as you just now described.

Mr. O'BRIEN. I will be glad to do so.

Senator O'MAHONEY. Have you any power under the Securities and Exchange Act to control or regulate in any way the distribution of corporate funds, whether out of capital or out of earnings, by way of bonus to the members of the management on their own stock?

Mr. O'BRIEN. None whatsoever. All we can require is that whatever the compensation is or whatever the basis for its payment may be, that must all be adequately revealed, so that a person buying into the corporation would have notice of what was charged against it in the way of compensation for services.

Senator O'MAHONEY. What possibility is there for the public to learn the exact status of a corporation operating such as that? What opportunity is there for the public to learn those facts which you have disclosed?

Mr. O'BRIEN. The opportunity to learn the facts in connection. with the public distribution of stock which comes within our jurisdiction, I would say, in most cases, is very good, assuming a conscientious and truthful statement on the part of the management.

Senator KING. If they do not state the truth an offense is committed?

Mr. O'BRIEN. That is true.

Senator KING. A man runs the risk of going to the penitentiary if he makes a false statement of the set-up, does he not?

Mr. O'BRIEN. That is correct.

Senator NORRIS. I understand your principal work or objective is that there be a medium by which the public will know what the facts are.

Mr. O'BRIEN. That is correct.

Senator NORRIS. You cannot correct any errors? All you can do is require the facts to be stated and given to the public?

Mr. O'BRIEN. That is correct. We do not possess supervisory powers.

Senator O'MAHONEY. When corporations are registered, such as you have just described, in which the promoters secured absolute control by contributing $100 to capital and were selling 100,000 shares to the public, what opportunity is there for the public to protect itself, in spite of that publicity by the Securities and Exchange Commission, against the smooth-talking salesman who disposes of the stock?

Mr. O'BRIEN. Of course, that capital structure permits that. Assuming a conscientious management at one time, you do not know when it is going to change. In that situation the stockholder depends upon whatever conscience that management has.

Senator AUSTIN. The only way that can be overcome is by having a day-to-day supervision of the corporation by the Government, is it not?

Mr. O'BRIEN. Again, as I said before, that involves so much that I would not care to answer it offhand.

Senator O'MAHONEY. May I answer your question? I know you are anxious to have my view.

Senator AUSTIN. Always.

Senator O'MAHONEY. Of course, it does not involve a day-to-day supervision at all. If corporations are deprived of the power to issue stock in the manner described, it would not be necessary for anybody to interfere in the management.

Senator KING. Let me make this observation: A corporation is formed by individuals who purchase property. They sell the stock and tell the people: "You can buy this stock at a dollar a share. We have control of the company." If those who buy the stock know the facts, and know those men, if they succeed, are going to get a very large amount for the promotion of the company, they will not object to that. They are interested in getting a dividend. If they get that, they do not object to the other man making as much as he can.

Senator AUSTIN. I want to ask one further question: Suppose the promoters of a private corporation who intend to put their capital stock on the big exchange for sale fail to comply with what your Commission regards as suitable information to the public in their plan and in their prospectus, then what? What do you do about it? Mr. O'BRIEN. We have a choice of things to do. Assuming that there are material omissions or misrepresentations of the facts, we can issue a stop order on proper notice, with opportunity for the registrant to be heard. We can likewise seek an injunction enjoining a further distribution or sale of the stock.

Senator AUSTIN. Before those remedies are exercised do you not have another one? What is the first requisite to anyone who is promoting a corporation and wants to get it onto the exchange?

Mr. O'BRIEN. Of course, we have the procedure which involves the filing of certain data with us.

Senator AUSTIN. You can stop it in advance, can you not?
Mr. O'BRIEN. I do not quite understand you.

Senator AUSTIN. You can prevent its going onto the board at all, can you not?

Mr. O'BRIEN. Yes; but, of course, a corporation in that situation, even though its stock is not listed on an exchange, could offer stock for sale to the public.

Senator AUSTIN. The moment he uses an instrumentality of the Government, such as the post office, or the moment he undertakes to use a common carrier of any kind, he runs right into a criminal penalty for undertaking to distribute that stock without your authority, does he not?

Mr. O'BRIEN. He does not receive our approval. We examine registration statements in order to determine as far as we can whether they are intelligible, clean-cut, and on their face appear to tell the truth.

Senator AUSTIN. Does he not have to submit a plan or prospectus that is satisfactory to you?

Mr. O'BRIEN. The statute provides, the Securities Act, that a registration statement shall become effective 20 days after the date of filing, unless the Commission intervenes with some action. Our sitting still during that time does not prevent his obtaining an effective registration statement. Under the Exchange Act the registration statement becomes effective 30 days after certification by the exchange.

Senator AUSTIN. Then you have no power, if I correctly understood your answer, to prevent the carrying forward of a plan under a prospectus that you disapprove? Is that right?

Mr. O'BRIEN. The term "disapprove" is not quite apt in describing our authority under the statute. We may or may not be satisfied with a given plan of financing. In that sense we might disapprove it. But if all the facts concerning that plan are revealed and its bad elements shown, we have no basis upon which to take action. Unless we take affirmative action that statement will become effective within 20 days. We do have power, assuming misstatements or material omissions, either to prevent the registration statement from becoming effective or to take action to suspend its effectiveness when it has become effective.

Senator O'MAHONEY. What do you mean by saying you can prevent it from becoming effective?

Mr. O'BRIEN. Section 8 (b) of our statute provides that if a registration is incomplete or inaccurate on its face, we can by giving 10 days' notice and opportunity to be heard issue an order preventing the statement from becoming effective. Section 8 (d) of the statute provides that if we have reasonable grounds to believe the statement contains untrue or misleading statements we may give notice of a hearing to be held within 15 days of the date of the notice. The entire record of the hearing is passed upon by the Commission to determine whether grounds for issuing the order exist.

Senator O'MAHONEY. If there are no objections, the subcommittee will stand in recess until Thursday morning at 10:30, and we will be glad to hear Mr. Cunningham at that time.

(Whereupon, at 12 o'clock noon, a recess was taken until Thursday, March 3, 1938, at 10:30 a. m.)

FEDERAL LICENSING OF CORPORATIONS

THURSDAY, MARCH 3, 1938

UNITED STATES SENATE,

SUBCOMMITTEE OF THE COMMITTEE ON THE JUDICIARY,
Washington, D. C.

The subcommittee met, pursuant to recess, in room 212, Senate Office Building, at 10:30 a. m., Senator Joseph C. O'Mahoney presiding.

Present: Senators O'Mahoney (chairman), King, Logan, Borah, Norris, and Austin.

STATEMENT OF ELMER T. CUNNINGHAM, REPRESENTING THE
NATIONAL ASSOCIATION OF MANUFACTURERS

Senator O'MAHONEY. Mr. Cunningham, are you to proceed?
Mr. CUNNINGHAM. Yes, sir.

Senator O'MAHONEY. Please give your name.

Mr. CUNNINGHAM. Elmer T. Cunningham.

Senator O'MAHONEY. And your position?

Mr. CUNNINGHAM. I am temporarily resigned and inactive at the present time, so far as business activities are concerned.

Senator O'MAHONEY. In what capacity do you come here?

Mr. CUNNINGHAM. I am acting chariman of the committee of the National Association of Manufacturers on the Relation of Government to Industry. I am reporting their position on this proposed legislation.

Senator O'MAHONEY. You are not in the employ of the National Association of Manufacturers?

Mr. CUNNINGHAM. No, sir.

Senator O'MAHONEY. You were at one time associated with the Radio Corporation of America, were you not?

Mr. CUNNINGHAM. I was president of the R. C. A. Manufacturing Co. up to May of last year, at which time I resigned.

Senator O'MAHONEY. How long did you occupy that position? Mr. CUNNINGHAM. I occupied that position for 4 years. From April 1931 to April 1933 I was president of the R. C. A. Radiotron Co., Inc. On April 1933 I became president of the R. C. A. Victor Co., Inc. About a year later that was consolidated into the R. C. A. Manufacturing Co., Inc., and I became president of that consolidated company and continued in that capacity until the end of April 1937. During those 6 years I completely reorganized the electrical companies of R. C. A.

Senator O'MAHONEY. The R. C. A. Manufacturing Co. is a subsidiary of the Radio Corporation of America, is it not?

Mr. CUNNINGHAM. Yes.