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Senator COUZENS. Perhaps not, but they do have to trust somebody. It is quite obvious that they could not do it all in the case of each individual person. A director of a bank cannot verify each and every item in the bank. That would be wholly impossible. And it is rather foolish to advocate that he shall be made morally responsible for the failure of one of his colleagues on the board.

Mr. HOLTZOFF. Yes; but isn't this the point after all? The point is that the law, nevertheless, holds a signing director of a bank responsible for every statement contained in a report to the Comptroller of the Currency.

Senator COUZENS. Well, I might suggest that you could not get a conviction in court under such circumstances as I have described.

Mr. HOLTZOFF. Perhaps not.

Senator COUZENS. Then what is the use of setting up a system under which you could not expect to get a conviction?

Mr. HOLTZOFF. It is not a question of criminal liability. Criminal liability is based only on knowingly making a false statement. But civil liability exists even in the case of an innocent mistake. Let us assume that an innocent mistake is made and an investor loses money because of it. Now, who should suffer? The man who loses the money or the man who puts the mistake in circulation knowing that other people will rely upon that mistaken statement?

Senator COUZENS. Well, of course, you have to reach the conclusion in advance that that mistake was responsible for the loss. That is a question of proof, and is a fact which you may not be able to demonstrate.

Mr. HOLTZOFF. Mr. Thompson calls my attention to section 17 of the bill as to criminal responsibility. Criminal responsibility is limited to a director or officer who knowingly participates. But as to civil liability it seems to me that we go back to the old principle of law that where 1 of 2 innocent persons must suffer, the person who innocently, but because of the state of facts that brought about the suffering, did the act, he should bear the liability rather than the innocent victim.

Senator GORE. I think there is one point you ought to consider in this connection, and that is: Whether or not we really need a market where people can transact their business, and if so, whether it is wise to make your regulations so stringent that you may force those people to buy tax-exempt securities and let the market go hang.

Senator COUZENS. I think that is a rather fallacious argument, because only a limited number of tax-exempt securities can be purchased

Senator GORE. That may be true in a way, and yet there are $35,000,000,000 of them.

Senator COUZENS. And they have already been taken up.
Senator GORE. Yes, but that is a quite considerable amount.

Mr. HOLTZOFF. After all, suppose we have a partnership composed of 4 or 5 persons, and 1 member of the firm is faithless and there is a default, the other 4 members, no matter how innocent and ignorant of their partner's wrongdoing, are liable for his default. In other words, there are a number of instances in our law where a person is under heavy financial responsibility for the misdeeds or neglects of somebody else.

In that connection I might say: We may come to the point where we will have smaller boards of directors, and where we will have directors who really direct and keep in touch with the affairs of their company. And I think if we do come to that state of affairs, which is the state of affairs prevailing in England, it will be a very desirable

one.

Senator COUZENS. I think you are entirely right in that respect, but I think you will have to put some limitation upon the responsibility of an innocent director.

Senator ADAMS. In that connection would it be feasible at all to permit an alternative to directors, that if they do not want to sign a report or statement of their company, if they furnish the report of certified public accountants, accountants of responsibility, that that might be permitted in their stead? That is, if they furnish to the public a statement which is certified by responsible public accountants, might that be suggested as a remedy here?

Mr. HOLTZOFF. The only difficulty about that would be that you would not have anybody who would be financially responsible for a misstatement.

Senator Adams. But you would make that obvious on the face of your filing, wouldn't you? That is, what you are after here is the truth of the situation.

Mr. HOLTZOFF. Yes. But we want a guaranteed statement of facts.

Mr. THOMPSON. As to truthfulness.

Mr. HOLTZOFF. And unless you have some guaranty of those statements you will necessarily have careless statements filed.

Senator Adams. That is probably true. I am not making a suggestion, but an inquiry as to whether or not in the place of a statement by a director which he must guarantee, of taking the responsibility off the director to this extent-and I do not personally pretend to know whether that would work out or not—but, let us say, there is this statement appended: I furnish with this statement a report of responsible certified public accountants, who have made the examination, and you may take that for whatever you think it is worth.

Mr. HOLTZOFF. Well, we want to do away with prospectuses where we have seen the statement in small type at the bottom: Sources of information are not guaranteed but are believed to be reliable.

Mr. THOMPSON. You have that situation right now in the case of many prospectuses.

Senator Adams. I do not see what that has to do with this inquiry.

Mr. HOLTZOFF. It has this to do with it: Today if a director or an investment house is sued for issuing a false prospectus, they will take refuge behind the statement that they obtained the information from a public accountant, is that it?

Senator Adams. No. Í am inquiring whether or not the actual accountant's statement might be attached to statements that are to be filed with the Federal Trade Commission, responsible certified public accountants. In many instances I would much rather have a statement of certified public accountants, such as Ernst & Ernst, or Price, Waterhouse & Co., or somebody else of like kind, than to have the statement of some director who knew nothing about it and who merely walked up and said: Where do I sign?

Mr. HOLTZOFF. Well, I think it would weaken the effect of this bill if you were to allow a director to excuse himself from liability in such

a manner.

Senator Couzens. Would it be practicable to have the Federal Trade Commission to pass upon the reliability of the certified public accountant who made the statement?

Mr. HOLTZOFF. Well, I don't know

Senator COUZENS (interposing). What I mean is, you have to be practical about this thing. No one director can answer for the figures and details of a corporation. He has to place some confidence and some reliance in somebody.

Senator GORE. In England they have certified public accountants, do they not?

Senator COUZENS (continuing). And I take it a director, in many cases, could not go along and do business without doing that.

Mr. HOLTZOFF. Of course, in England the provision as to accountants is somewhat different. They have chartered accountants, who are authorized by the Government and who are really independent auditors. We have no such system here.

Senator COUZENS. That is what I am suggesting, that we do that very thing so as to make it a practical proposition. Let the Federal Trade Commission, if they want to, pick the certified public accountants, at the expense of the person registering.

Mr. THOMPSON. We would have to amend our laws in that case, because under the British law an accountant is a chartered accountant and is criminally liable for any false statement made in his report.

Senator COUZENS. That ought to be the case here.

Mr. THOMPSON. In addition to that, he is liable for a grossly negligent statement.

Senator Adams. He should be.
Senator COUZENS. Yes.
Senator GORE. You would be reaching the source in that case.

Mr. HOLTZOFF. But I do not believe you could permit, as Senator Adams suggests, dependence upon the statement of the auditor and thus relieve yourself of liability, if you want to make the responsibility of directors worth anything.

Senator COUZENS. You would make him or his organization responsible for any dishonesty or error. Mr. Thompson knows just as well as I know that it is wholly impracticable to make each director of a corporation individually responsible for any errors that might occur in a statement that was published. It just cannot be done from a practical standpoint. For instance, if Mr. Thompson were on the board of directors of the United States Steel Corporation, or of General Motors, or any other of these large corporations, he certainly could not verify every figure which was in their annual statement or prospectus.

Mr. HOLTZOFF. Well, where would we place responsibility ? Suppose you had purchased $100,000 worth of stock, and the man from whom you had purchased was so busy he could not attend to his duty, or there was too much minutæ in the corporation, so that he could not follow it, and he made a mistake. Would you want to pay for his mistake, and he in no sense be responsible?

Senator COUZENS. It is not a question here of whether the director has the time to ascertain the minute details. It is a question of impossibility. You as a director of General Motors could not investigate all of their plants throughout the United States, you could not count all automobiles, you could not value all their buildings and property, you could not check all their accounts receivable, and certify to the fact that they are correct. Why be impracticable about it? That is a thing that just cannot humanly be done. I am just as anxious as Mr. Thompson or anybody else to protect the public.

In fact, no one is more anxious than I am in that regard, but we must be practical. If you want to place responsibility for any

mistakes, errors, or omissions, let us place it on the man who makes the record. It is obviously a fact that no individual director can make such a record. It has got to be made by somebody else, because an individual director cannot make up such a record. He has not the competency to do all the work, in the first place, nor has he the time. Certainly Mr. Thompson would not suggest that if there are 10 directors on the General Motors' board he would have each one of those 10 directors separately go around and value all of their property, count their automobiles, and take a complete inventory.

Mr. THOMPSON. No. But, Senator Couzens, I think if I were in that position I would see to it that I got the very best accountants possible, persons I could depend on.

Senator COUZENS. That is true.
Mr. THOMPSON. Ernst & Ernst, or somebody like them.

Senator COUZENS. But why not let the Federal Trade Commission certify to the character and reliability of the accountants?

Mr. THOMPSON. If you can have some system whereby the Federal Trade Commission can be responsible for the selection of accountants, you will provide a lot of business for the Federal Trade Commission; and then those accountants would have to be put under criminal penalty for false statements. If you are going to make those requirements perhaps you can protect the situation, but it will become somewhat involved.

The CHAIRMAN. I do not understand that a director would be liable in a civil suit for any and every little item in the whole statement that might be erroneous.

Mr. THOMPSON. Oh, no.

The CHAIRMAN. They are only liable when, taking the whole statement together, they have misrepresented very material facts, either through omission or misstatement.

Mr. THOMPSON. That is correct. That is an excellent statement of it.

The CHAIRMAN. That being true I do not see why the company should not be responsible, because the people it employs to check up inventories, and all that sort of thing, they must know about, and they must not be misleading so as to cause loss. That is the main question, and they ought to be responsible for the fact that they are not to misrepresent a material issue.

Mr. THOMPSON. That is the way we feel about it.

Mr. HOLTZOFF. There are also remedial provisions in the bill, but they have been discussed already. So I do not think I should take any of your time discussing them.

The CHAIRMAN. All right.
(Thereupon Mr. Holtzoff left the committee table.)

The CHAIRMAN. Who will you have next, Judge Thompson?

Mr. THOMPSON. We will call Judge Healy, chief counsel of the Federal Trade Commission, and one who has had to do with an investigation of the power companies, has been connected with all of the power investigations. He will give you a number of illustrations and point a moral.

The CHAIRMAN. Very well. Judge Healy, come up to the committee table, and give your name, address and, position.

STATEMENT OF HON. ROBERT E. HEALY, CHIEF COUNSEL,

FEDERAL TRADE COMMISSION, WASHINGTON, D.C.

Mr. HEALY. Mr. Chairman and Senators, I appreciate the opportunity to appear and testify in support of this bill. I am a little embarrassed by the kind things that Mr. Thompson has said about me, but the subject is one that is very close to my heart on account of the work we have been doing.

The gentlemen who drew this bill were kind enough to invite me to sit in conference with them a few days ago. I made a few suggestions, and some of them have been adopted, but I am not sure how many I have prepared a typewritten memorandum of suggestions for amendments to the bill, which I ask leave to file with the committee after I have checked it over with Mr. Thompson.

The CHAIRMAN. And that is to go in the record?
Mr. HEALY. I will offer it, Mr. Chairman.
The CHAIRMAN. All right.

Mr. HEALY. On the 10th of September 1932 in a statement published in the magazine Liberty, Franklin D. Roosevelt, now President, made this statement:

Instance after instance of pillage, deceit of the public, and even of the prostitution of public agencies and officals—for which these same managers have often been responsible-may be found in the files of the Federal Trade Commission investigation of public utilities. The record is convincing. It is so voluminous that anyone may pick out examples to convince himself. But if you are willing to believe me that this is so, I will add that nothing more atrocious in the way of thievery inside the law has ever been successfully attempted against the American public.

Before I get through I should like to call attention to a few examples of bad accounting and of irregularities in practice, which I think have worked out to the disadvantage of the public although I do not mean that all of them come within the severe language used by the President in the article referred to. I merely refer to certain of them that come to my mind without a search of the record. For example, on the 21st of June, 1928, there was a short advertisement published in the New York Times, which I will read:

First mortgage bond yielding 672 percent with valuable stock-purchase privilege. Property value at least 150 percent of total issue. Interest charges earned more than three times. Sinking fund to retire all bonds by maturity. Managed by an engineering company of high repute. In heart of dense shale gas area and indus-trial markets. Life of reserves and sales contracts at least 15 years.

And then there was added:
Information upon request.
Senator COUZENS. Who is it signed by?

Mr. HEALY. I cannot answer the question offhand, but I will before I get through.

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