Interstate Land Before a Subcommittee of ..., 89-2 on S.2672, June 21, 22, August 18, 1966

Mr. KOSSACK. It could well be, yes, sir.

Talking about jurisdiction, I would like to make a comment about that.

Insofar as my specialty is concerned, which is the criminal law, we have ample jurisdiction under the mail fraud statute. We have wonderful coverage in aid to the States, any time they want us to come in or they have a basis for us to come in.

I appreciate the fact that jurisdiction may also be a term used in connection with injunctions by the States, or civil actions, or stop orders, and so forth. I do recognize, however, that the States cannot reach across their border, particularly in the case of the investor States.

The FTC Act does, of course, provide for nationwide coverage. But I am talking about a full coverage, short of a fraudulent statement, because, as I understand it, you are grappling with a problem which goes beyond that of fraudulent statements. It is the omission which is not fraudulent, but which is misleading by ommission or selective disclosure of information.

Senator WILLIAMS. And there is no authority in the present law to deal with that?

Mr. KOSSACK. Well, sir, criminally, yes. There is authority to deal with that.

Senator WILLIAMS. Suppose a seller says in his brochure that his property is near water. I go back to Barry Goldwater, who sat right here in 1963. We were talking about some land sales in Arizona, and the witness said that this property was described as near water. Barry Goldwater said, "Well, you know, that is a relative term, but I happen to know the closest water is 40 miles away." He said, "Let's do something about this."

Mr. KOSSACK. I remember that. I know the one he was talking about, too.

Senator WILLIAMS. I have forgotten the name of the development, but this is how long we have been in business. Senator Goldwater hasn't been around here for a few years.

Senator MONDALE. I think, Mr. Chairman, getting back to this point of the States' role, that one of the big problems in consumer protection is that which Mr. Kossack puts his finger on, and that is how do you encourage the States to do a better job than they have of asserting their own authority to protect their people?

We have grant-in-aid programs for all sorts of things where we want the States to step up their efforts, and I think it is true that, where the States become enthusiastically involved, there is an indispensible element of improved law enforcement that can't be duplicated or fully matched, solely at the Federal level.

Those of us who have worked at the State level want to see the States remain and grow as a vital part of our Federal system. But what do we do when they haven't fulfilled their responsibilities, when thousands of people are swindled because they haven't been told the whole truth, the bad as well as the good?

When we see that for years this public need has been evident, and yet most States have made such a modest beginning toward protecting their communities, I would like to see some serious consideration given

to a Federal program to help assist the States in taking a more vital role in protecting their own people. I don't know how this can be done, possibly by a grant-in-aid program or some other approach. But I think that is a long-term fundamental problem, for beyond the scope of this measure. But I think, in the meantime, the public has a right to be protected.

Mr. KOSSACK. As far as the Department of Justice is concerned, I repeat what I said before, that, if this committee sees a real need for full disclosure through the Federal Government and feels it can be accomplished through the bill of this type, our interest is only in asserting to you our confidence in our mail fraud statute, and giving to you our comments from our experience in criminal prosecutions. There are caveats, and I would like to throw them in. "My Department and members of your staff have, in the past, exchanged ideas as to possible solutions. I want to make a comparison between the type of disclosure which comes out of the Securities Law and this type of disclosure.

The caveat is not one which would be negating a bill of this type, but would emphasize the care that is necessary in its effective implementation. Stocks and securities are homogenous. One share of stock is like another share. So, when you have a full disclosure about X corporation and its common stock, it doesn't make any difference whether I purchase stock certificate No. 137592 or 137593.

But land, plot to plot, differs within a development. One of the schemes used, for example, in these sales of land frauds, as you well know, to have a development with one section in a beautiful location and four sections down under water. You can make a general statement concerning the land offered for sale and the man purchasing lots will be influenced by that portion of the brochure which talks of the beautiful rolling acres.

Unless the disclosure to Mr. Citizen is as to the individual plots of land, there is a real danger, because land is not a homogenous product. Every parcel of land may have to be described differently.

The second caveat I would offer, because of our experience in other fields, is that wherever the Federal Government comes forth with anything given to the public, in the way of a document and disclosure, there is an imprimatur. This may occur, whatever specific disclosure may be required in the prospectus itself.

The experience we had, for example, with the FHA documents is the public thinks the FHA approves the price and the construction of the house, whereas, the documents say they concern themselves only with the loans. Disclosure cannot go to the question of what is a fair price or this is a wonderful piece of land.

Yet, unless this disclaimer is well publicized, unless it is clearly put forth, the public will take this and say, "The Federal Government is watching out for me. There goes my $400. It is safe."

Senator THURMOND. Mr. Chairman, I believe the committee has the authority to meet only until 12 o'clock. The Defense appropriations bill is coming up at that time.

Senator WILLIAMS. What time does the Senate go in?

Senator THURMOND. The Senate is already in. It went in this morning at 10. And I believe, later this afternoon, the committee has a bill coming up, the demonstration cities bill.

I just wonder about the views of the chairman-I notice there are a number of witnesses here and I wouldn't want to inconvenience these witnesses, but I am just wondering what the chairman's views are in regard to desiring to go longer or not? That is very important legislation that is coming up on the floor. The Defense appropriation bill is most important.

Senator WILLIAMS. Unfortunately for the committee, Mr. Kossack has been a most interesting witness. We have witnesses, you know, who read the statement and that is it, and they go. But you have been so informative. We kept you on here for about-almost 45 minutes now, which presents a time problem.

How many witnesses that we have scheduled are here? Is Mr. McCulloch here? Yes?

Mr. KOSSACK. I would just like to conclude by saying, Mr. Chairman, that we are against sin. So, if this is sin, we are against it. Senator WILLIAMS. Then you're for the bill?

Mr. KOSSACK. For the bill, if it is against sin.

Senator WILLIAMS. All right. We will conclude with that.
Thank you very much.

Senator THURMOND. Mr. Chairman, excuse me, I haven't had the time to examine the witness.

Senator WILLIAMS. Don't use the word "examine"-communicate, discuss, negotiate.

Senator THURMOND. I believe it is customary to give the minority the right to ask questions; is it not?

Senator WILLIAMS. You used to be a majority, but you elected to go to the minority.

Senator THURMOND. Is it not customary? Mr. Chairman, I really don't have any questions to ask. I just wanted to commend Mr. Kossack upon recognizing the rights of the States because I think that is most important. And I think the point he has brought out, that if you don't get the backing of the people in the States, if they don't take an interest in matters, then you lose interest overall, so to speak.

I think it is most important that responsibility rest upon the States too and not have them feeling they can just shake the responsibility.

I want to say this, though, that I have never been one who said that if the State doesn't perform the responsibilities that some people think it should, that the Federal Government should go into the field, unless it has constitutional authority to do so.

Now in interstate commerce matters, we do have authority to go into those matters. But there has been a good deal said about if the States didn't act, the Federal Government ought to act. I wanted to make my position clear that in all matters that I don't think the Federal Government has a right to act simply because, or should act, simply because the States fail to act, unless it has a constitutional authority to enter that field of jurisdiction.

As the distinguished witness knows, the Federal Government was designed as a government of limited powers and those powers are listed in the Constitution and it has the right to go into those matters and no others. The Constitution can be amended to give it the right to go into other fields of jurisdiction. So I was pleased with the position that the witness took in recognizing the rights of the States and their

responsibilities. Except I disagree with the statement I believe that the witness made that if the State fails to act, then the Federal Government should take the action.

I believe that was the essence of the statement, or do I stand corrected?

Mr. KOSSACK. I think the statement attempts to make clear our view that the Federal Government and the State governments are both sovereign, responsible to the people. If one sovereign does not fulfill its responsibility to the people, the other sovereign has a responsibility to come into the field and do the job, if it has constitutional power.

Senator THURMOND. That is right. If it has constitutional power. Those are the key words and I am pleased the witness recognizes that. Mr. KOSSACK. I don't think anybody has any question about the Congress' constitutional authority to enact this bill.

Senator THURMOND. Now I want to ask Mr. Kossack this question: As I understand it, you feel that at present this bill is not necessary. I believe you sum it up this way:

To sum it up, it is our position that existing statutory mechanisms are available to protect the Federal interest in prosecuting and preventing major land frauds. We believe that local enforcement efforts based on existing statutory schemes and where necessary the enactment of legislation utilizing State commissions and incorporating full disclosure provisions would be the appropriate remedy.

I believe that is the way you summed up your statement.

Mr. KOSSACK. I am here primarily as you know, Senator, to address myself to the subject of criminal prosecutions under this proposed statute. It is our belief, as I have said, that insofar as the prosecution of crimes is concerned, we think we have ample authority and means. Senator THURMOND. In other words, you feel you have ample power now to prosecute

Mr. KOSSACK. Crimes.

Senator THURMOND. In matters of this kind?

Mr. KOSSACK. That is right. We ended our statement recognizing that we are getting into a field outside of the criminal area and said that if you feel that a disclosure, not talking in terms of criminal prosecution, is necessary, then we would defer to your evaluation and finding of the necessity.

Senator THURMOND. If it should be determined that any Federal legislation is necessary, have you given any consideration as to what agency of Government possibly should assume such responsibility? For instance, the Federal Trade Commission is interested in these

matters.

Mr. KOSSACK. I do understand that the Securities and Exchange Commission has already indicated that it is willing to assume responsibility for handling the registration statements.

The only comment that the Department would make is that a registration statement, like any other submission to the Federal Government, should be a meaningful instrument, examined by people who have expertise and knowledge of what that document represents to disclose. And while we do not know right now what agency would have appraisers and real estate people capable of doing it, the SEC, I believe, has stated that they could staff people with this kind of expertise.