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There are no known copyright restrictions in the United States on the use of the text. http://www.archive.org/details/cu31924030188555 SSsifLlxiON OF THE STOCK EXCHANGE HEARINGS BEFORE THE COMMIHEE ON BANKING AND CURRENCY UNITED STATES SENATE SIXTY-THIRD CONGRESS - SECOND SESSION ,7 ON S. 3895 A BILL TO PREVENT THE USE OF THE MAILS AND OF THE TELEGRAPH AND TELEPHONE IN FURTHERANCE OP FRAUDULENT AND HARMFUL TRANSACTIONS ON STOCK EXCHANGES Printed for the Committee on Ba^king;3,n(l Currency WASHINGrTON GOVERNMENT PRINTING OEMOE 1914 REGULATION OF THE STOCK EXCHANGE HEARINGS BEFORE THE COMMITTEE ON BANKING AND CURRENCY UNITED STATES SENATE SIXTY-THIRD CONGRESS SECOND SESSION ON S. 3895 ,tr - A BILL TO PREVENT THE USE OP THE MAILS AND OF THE TELEGRAPH AND TELEPHONE IN FURTHERANCE OF FRAUDULENT AND HARMFUL TRANSACTIONS ON STOCK EXCHANGES Printed for the Committee on Banking and Currency WASHINGTON OOVEENMBNT PRINTING OFPIOE 1914 ^.11X3^4 COMMITTEE ON BANKING AND CURRENCY. United States Senate. ROBERT L. OWEN, Oklahoma, Chairman. GILBERT M. HITCHCOCK, Nebraska. KNUTE NELSON, Minnesota. JAMES A. REED, Missouri. - JOSEPH L. BEISTOW, Kansas. ATLEE POMERENE, 01iio.\ COE I. CRAWFORD, South Dakota. JOHN F. SHAFROTH, Colorado. GEORGE P. McLEAN, Connecticut. HENRY F. HOLLIS, New Hampshire. JOHN W. WEEKS, Massachusetts. BLAIR LEE, Maryland. James W. Bellek, Clerk, rectUlation of the stock exchange. WEDNESDAY, FEBRUABY 4, 19X4. CojIMITTEE ON BaXKING AND CUEEENCY, United States Senate, Washington, D. G. Pursuant to notice the committee met at 10.30 o'clock a. m. Present: Senators Owen (chairman), Hitchcock, Lee, Pomerene, Shafroth, Nelson, Bristow, McLean, and Weeks. The Chaieman. Gentlemen, this meeting was called to hear an argument upon Senate bill 3895, a bill — To prevent tlie use of tlie mails and of the telegraph and the telephone in furtherance of fraudulent and harmful transactions on stock exchanges. I understand that representatives of the New York Stock Ex- change — President Mabon, Mr. Pomroy, Mr. Van Antwerp, Mr. Milburn, the counsel for that organization, and others — are here, and if the committee please we will give them an opportunity to be heard on this bill at this time. Senator Weeks, Mr. Chairman, it seems to me that those who are advocating this legislation, if there are any present, who desire it considered and adopted, should give the committee tlieir reasons for ■so doing, and then the members of the stock exchanges of New York and other cities should have an opportunity to answer the arguments which they may advance, in the regular course of procedure. It does not seem to me at this time that those representing the New York Stock Exchange should be called upon until arguments and evidence in favor of this legislation have been presented to this committee. The Chairjian. I was assuming that the members of the com- mittee were familiar with the Pujo report, the recommendations made in that report, and the evidence which was taken by that com- mittee, and that the representatives of the stock exchange were like- wise familiar with those matters. Senator Weeks. That is true. The members of the committee are familiar with the report, and, of course, the members of the stock exchange are familiar with it; but there is a great deal in that re- port that is subject to controversy. Some of the evidence, I think, is easily controverted. Many of the conclusions are questioned. If it is desired now to take up the Pujo report and give the representa- tives of the stock exchanges a chance to reply to conclusions that were reached in that report, or evidence that was presented at that time, I see no objection to doing that. 3 4 _ REGULATION OF THE STOCK EXCHANGE. The Chairmax. They had a \'ery full hearing before those con- clusions were reached, and that evidence is now before this com niittee in three volumes. , , Senator AYeeks. I understand. I am perfectly familiar witn not only the evidence but the report, and in my judgment not only was much of the evidence erroneous to some degree, but much ot tne report based on that testimony would be changed if additional evi- dence were submitted to the committee. I suggest that the propo- nents of this legislation, present their case, or if it is desirable, to take up the Pujo report, that the representatives of the stock ex- changes ha\e an opportunity to submit such supplemental evidence as they may have on that report before taking up a bill which is based on it. ■ j j a Senator Hitchcock. Mr. Chairman, before that matter is decidea, I would like to learn how our committee gets its jurisdiction of this bill. . . , . ^ The Chairman. It gets its jurisdiction by order ot the Senate. January 12, 1914. . Senator Hitchcock. That was a pro forma matter, inasmuch as the chairman of the committee who introduced the bill requested that it go to this committee. I must confess I have not read the bill, but as I glance through it I can see nothing with reference to either banking or currency. It relates to either interstate commerce or post offices, and the administration of the post offices. The Chairman. The effect upon the banking of the country has been very great. Senator Shafroth. This matter is one that would have to be pre- sented to the Senate for determining a motion to refer it to another committee. Until it is moved and discussed in the Senate, of course the reference should stand and would stand. The Chairman. The Senate referred it to this committee. Senator Nelson. But, Mr. Chairman, there is one thing I would like to suggest, leaving the suggestions of the Senator from Nebraska for the moment. I would like to have an explanation as to the scop© and purposes of this bill. Senator Shafroth. Let us read the bill right now. Senator Nelson. I would like to have those who are at the back of this bill, who believe in it, explain the scope and purpose of it, so we may get a full understanding of it. The Chairman. The scope and purposes are declared right in the title of the bill : To prevent the use of the mails and of the telegraph and telephone iu further- mice of fraudulent and harmful transactions on stock exchanges. Senator Nelson. But if you go on and read, you will see it is not limited to that. The Chairman. The Pujo report, of course, dealt with the concen- tration and control of credits in the United States, and the control of credits in the United States, which has operated to control the great industries and incidentally to control the operation of the great banks and trust companies of the United States, has a very direct important relation to the banking of the country. Senator Nelson. Mr. Untermyer is here, and I suppose he is familiar with the bill and could explain it to us, and how it will ('perate. REGULATION OF THE STOCK EXCHANGE. 5 The Chairman. The committee will be pleased to hear from Mr. Untermyer first, and have him briefly explain this bill. Senator Nelson. It seems to me that is the best plan. Senator Hitchcock. I would like to have the bill read first. The Chairman. Senator Shafroth, would you be good enough to read the bill ? (Senator Shafroth read aloud the bill under discussion.) The Chairman. Mr. Untermyer, will you explain briefly what has been done, and the purposes of this bill ? STATEMENT OF SAMUEL TINTERMYEE, OF NEW YORK CITY. Mr. Untermyer. I shall be glad to do so, Mr. Chairman and gen- tlemen, although I assumed that those who were opposed to the bill would state the reasons for their opposition, in view of the fact that this is substantially the same bill that has been recommended by the subcommittee of the Committee on Banking and Currency of the House at the last day of the last session. I would like to say, before answering the chairman's suggestion as to the statement made by Senator Weeks, that I imagine he must have been misinformed with respect to the proceedings of the Pujo committee. Perhaps he may have gotten his false information through the press reports of the transactions of the Pujo committee. There was never a more elab- orate press organization gotten up in the history of the country than that which was centered upon that inquiry. Everything done by that committee was misrepresented, everybody connected witli the committee was bitterly assailed, and it has taken some time for the true facts connected with that investigation to be appreciated by the public generally. To illustrate, if I may just for a moment by way of preliminary statement : The feeling was so bitter, engendered by those who were affected by the investigation, that it went to the extent of assaults upon the floor of the House upon those who were connected with the investigation, and inspired newspaper editorials with no foundation in fact were put in the Congressional Record affecting them. Among other things, statements were made by Members of Congress on the floor to the effect that the investigation had cost $250,000. It cost something less than $60,000. The statement was made also that as counsel for the committee! had been paid the extravagant sum of $16,000 for my services to the committee, which had extended almost continuously over a period of eight months, when in point of fact I had spent about $23,000 of my own money in connection with tliat investigation. Senator Hitchcock. In what way? Mr. Untermyer. I spent about $16,000 in distributing or having distributed 155,000 copies of the report of the committee, when it be- came impossible to secure a resolution from the House of Representa- tives for distribution of a sufficient number of copies of that report, in order to inform the public. I spent large sums of money in expert accountants' fees, in preparing statements, and in other ways, for which I did not feel disposed to put in vouchers. Senator Nelson. Did you receive no pay from the committee ? Mr. Untermyer. We received $15,000 from the committee. Senator Nelson. Whom do you mean by " we " ? b EEGULATION OF THE STOCK EXCHANGE. Mr. Unteemyee. I, on behalf of my firm, received $15,000 for eight months' services to the committee, and I personally spent about $23,000. It is unnecessary for me to state that part of that $15,000 I personally received ; but I do state that I personally spent $23,000. I am only instancing that for the purpose of showing the extent to which the activities of those connected with the investigation were misrepresented. Senator Nelson. Do I understand you received $15,000 for your services and then $23,000 for expenses? Mr. Unteemyee. No, sir ; I spent $23,000 of my own money, which I did not get back. Senator Nelson. Oh, I see. Mr. Unteemyee. And which I did not and do not care to get back. I was glad to be able to perform this important public service, but protest Under further misrepresentation of the facts and of my motives. It is time the facts Avere known. Senator Hitchcock. This $23,000 was for distribution of the Pujo report i Mr. Unteemyee. Yes, sir. Senator Hitchcock. Did not the House provide for the publication of the report '{ Mr. UNTEEiiYEE. The House provided by one resolution for the printing of 5,000 copies, and by another resolution for the printing of 10,000 more copies ; but I understand there are applications for thou- sands of copies from all parts of the country, applications on file here, with which there has been no means of complying, and that the copies could not be obtained. I had distributed these 155,000 copies, which I had printed privately at my own expense ; but, notwithstand- ing that further distribution, the demand was so great from all parts of the country that I am told there are on file here with the Com- mittee on Banking and Currency requests from every section of the country for further copies of the report and that the supply has been exhausted. The report is out of print and has been for many months. Senator Hitchcock. Was there no effort made in the House to have it reprinted ? Mr. Unteemyee. I do not know. I think there was an eft'ort made, but nothing came of it. I think an effort was made in the Senate also. I think the Senate did put through one resolution for printing 5,000 or 10,000 copies, but the demands were so great they were almost immediately exhausted by the applications on file. Mr. Chairman, I think Senator Weeks has reflected upon the sense of fairness of the Pujo committee. I am sure he did not intend to do so, but I think his remarks may be construed to reflect upon the fair- ness with which that investigation was conducted. I do not think it is necessary or becoming or appropriate in me to stand here to defend the action of a constituted committee of the House of Representa- tives as to its fairness in conducting an investigation. I do not believe this committee is going to assume that the committee of the House was unfair in its action. Senator Nelson. ^Ir. Untermyer, will you pardon me? I do not want to embarrass you, but we are all very busy. ^ I have not the time to read through all of that Pujo committee report now. I would be very glad if you would go on and briefly state to the counnittee the eviis of the stock exchange. REGULATION OF THE STOCK EXCHANGE. 7 _ Mr. Unteemyee. I will in a moment, Senator Nelson. I would like to complete this statement I am about making. So far from there being anything unfair or one-sided about th& investigation, with a few exceptions, the witnesses who were called in connection with the stock exchange part of the investigation, which was only one of many branches of the inquiry — there are 27 distinct recommendations, of which this is only one — were members or officials of the exchange. The exchange was invited to name: those of its officers and members whom it believed best able to en- lighten the committee, and the witnesses whom they nominated wer& called by the committee and fully examined. There was no attempt to discredit the operations of the exchange from out of the mouths of soreheads, muckrakers, or enemies. Whatever evidence there i& here before the committee is mainly evidence that came from out the mouths of the officials of the exchange and evidence that is furnished mainly by statistics and documents. No question that it was sought to put by any member or by counsel for the exchange to a witness on the stand remained unput. Every question which anybody con- nected with the exchange wanted to put to a witness was put... Counsel for the exchange Mr. MiLBUEN (interposing). We were not allowed to put any questions. Mr. Unteemtek. The questions were put through counsel for the committee. It would have been a most unseemly performance to have allowed every one of the one hundred or more witnesses to have sepa- rate counsel and to have had an examination of each witness on the part of separate counsel. The investigation would have been end- less. Our time was very limited. As it was, the inquiry was unfin- ished when the session closed. The report was hurriedly prepared and put in on the last day of the term of Congress. No such pro- cedure as it is now suggested should have been followed has ever been known, so far as I ever heard, in any congressional inquiry, and na such procedure would have been within the range of possibilities. Counsel and the witnesses were invited to put, through the counsel for the committee, any questions they wanted put ; not only that, but they were invited to read over their testimony and make any corrections and to add anything they chose by way of explanation ; and, availing themselves of that permission, the principal witnesses did that. One of them, Mr. Sturgis, came in the following morning and read a statement descanting in glowing terms upon the virtues of the stock exchange, which you will find in the record. Every witness had the fullest opportunity of explanation or of having put any questions that were sought to be asked. Counsel for the exchange was also afforded the opportunity of submitting to the committee a brief covering every question that was discussed before the committee.. Availing himself of that privilege, he furnished the committee a printed brief covering these questions, that brief comprising 61 or 6^ printed pages. I resent the suggestion that there_ was anything unfair or partisan about the conduct of that investigation. There was never an investi- gation conducted in which the lines of legal evidence were so rigidly adhered to as in that inquiry ; and, gentlemen of the committee, you will find, if you will look over that record, that there is nowhere any- 8 REGULATION OP THE STOCK EXCHANGE. thing in the way of hearsay evidence; that none of the precedents of loose testimony, involving people upon secondary evidence, were permitted in the inquiry. You will find a record there which, so far as concerns its adherence to legal lines, will stand muster in a court of law upon review by an appellate court, and that is saying a great deal, I think, for a congressional inquiry. It marks a new departure in proceedings of this character. But for the fact that the chairman of that committee is no longer in Congress, and that the presentation of this bill or the championing of this bill may be fairly regarded as within the legitimate scope of counsel who conducted the inquiry and was paid therefor, I should not be here to defend and champion the bill. I am here because I believe it is a part of the duty that was within the range of that com- mittee, and I feel that, so far as concerns any and all of the recom- mendations of that committee, I ought, in justice to the retainer that I received, to continue the work until it is completed especially in view of the fact that you have a very voluminous record here of three or four volumes of testimony, a report covering hundreds of pages, and very complicated statistics, with which it would be difficult for any member of the committee within a reasonable time to familiarize himself. It seems to have been assumed by those who are opposed to this bill — and it is a very powerful factor that is so opposed, including not only the stock exchange, but all its financial ramifications — that this proposed legislation comes here as an original question without authority or support. I think there is sufficient authority for a bill of this kind when it comes recommended not only by the unanimous Democratic membership of that committee, but by the support and approval of three of the four Republican members. Before going into detail on the question I would like to call your attention brie% to these quotations from the report, the first being from the majority report. Senator Pomeeene. From what report are you about to read ? Mr. Untermter. From page 115 of the report of the Pujo com- mittee : The general public, wMcb has grown to look upon the exchange with distrust t)ecause of the practices that have been permitted, will be given new confidence in it when it is under legal supervision. Notwithstanding these facts, it contends that it should be permitted to con- tinue its voluntary organization with the privileges and freedom of action of a private club and should not be made subject to legislative or judicial control •or supervision, and that it is not amenable to Federal regulation in its use of the mails and of the telegraph and telephone in interstate commerce and in the •dealings of its members with foreign countries. To this contention your committee is unable to agree. It is incongruous that such an Institution wielding such power and equipped to perform such useful and important functions in our economic system should be uncontrolled by law On the other hand, your committee believes that incoi-poration and regulation would banish from the exchange transactions which now disgrace it bringins in their place a greater volume of business of an investment and 'otherwise legitimate character, and marking the dawn of a new era of prosperitv for its members and of usefulness to the public. From page 116 of the same report I read as follows: In other words, the facilities of the New York Stock Exchange are employed largely for transactions producing moral and economic waste and corruption- and it is fair to assume that in lesser and varying degree this is true or may BlfiCiUl^AXION OF THE STOCK EXCHANGE. 9 come to be true of othef institutions throus^liout tlie country siniilai-ly (irL'anized and conducted. Your committee believes, therefore, that Congress has power unconditionally to prohibit the malls, the interstate telegraph and telephone, the national banks, and all other Instrumentalities under its control from being used in executing, negotiating, promoting, increasing, or otherwise aiding transactions on such stock exchanges. In that connection I want to say that you will find in this report, from pages 119 to 127, an argument on the question of the constitu- tionality of this law, reciting and reviewing all the authorities on this Subject. Senator Pomekbne. Let nie understand you. You say " the con- stitutionality of this bill." Do you mean the bill pending before the committee here now ? Mr. Unteemybe. Yes. Senator Pomeeene. Was a similar bill being considered by this Pujo committee in its report at the time it was prepared? Mr. Unteemyer. Certainly : yes. The attack upon its constitu- tionality was made by counsel for the exchange in a printed brief which he submitted to the committee. Senator Weeks. The bill was presented with the report ? Mr. Unteemyer. Yes; the bill Was presented with the report. There were two bills presented with the report — one covering stock exchanges and the other covering many of the other recommendations of the committee. There were some that the committee had not the time to embody in, the bills, such as those affecting interlocking direc- torates, voting trusts, fiscal agents, and the supervision of bond and stock issues of railroad corporations. Senator McLean. Are you the author of the bill ? Mr. Unteemyer. In conjunction with the committee, I prepared the bill. The bill in its present form is not the bill as I originally pre- pared and submitted it to the committee. We spent some days on it, and the committee made a great manj' changes in the bill as origi- nally presented. The same is true of the other bill. There were two bills subjoined to the report, and both of them, as a result of days of discussion, in which the minority as well as the majority participated, were very materially changed. Many of those suggestions of the minority members were adopted by the majority. Senator McLean. The framework, as I understand, is yours, and you were acting as counsel for the committee ? Mr. Unteemyer. The original framework of both bills was mine, as counsel for the committee. It is only fair to say that in many respects the bills are hardly recognizable in their present form as compared with the initial work of counsel for the committee. Three out of the four minority members of the committee stated in their report as follows : Many abuses are disclosed by the evidence produced before the committee, a number of which are well known to the public and recognized by everybody at all familiar with the business conditions in this country. Abuses on the stock exchange, of quite long standing, were disclosed before the committee, as were also abuses existing in clearing-house associations, especially in New York City. Evils existing in both stock exchanges and clearing-house associations could be corrected ty the exchanges and associations themselves, if they were so m- cHned They having failed and neglected to remedy the abuses existing m their conduct and operation, in our opinion, it is the duty of each State m which these exchanges and associations are located to compel their incorporation and 10 EEGULATION OF THE STOCK EXCHANGE. to regulate their management by approiiriate legislntion. Should the exchanges and the associations, as well as the various States, neglect this plain and im- perative duty, then we believe that it is the duty of Congress to exercise any jurisdiction or power conferred upon the Federal Government by the Constitu- tion to pass such restrictive and regulative legislation as may be necessary. This duty arises from the fact that these evils are not such as affect only the local communities in which they exist, but their results are as broad as the business interests of the country, and affect in their most intimate and im- portant business relations all the people thereof. There were 2-i other recommendations in the report, but so far as concerns the regulation of the stock exchanges, with the exception of one of the four minority members of the committee, there was a unanimity of opinion upon that subject. Having regard to that fact, I can not see that the suggestion of Senator Weeks, in respect to the fairness of that investigation, ought to be regarded as an open subject for discussion here. Senator Weeks. If you have finished that point, I would like to interject a conunent here. Mr. Untermyer. Yes. Senator Weeks. Mr. Chairman, I had no intention of charging Mr. Untermyer with unfairness in connection with this investigation. I think he used the same degree of fairness which attorneys usually do when interrogating witnesses. But I referred to the Pujo in- vestigation as extraordinary in that it was dissimilar in some re- spects from any investigation that has even been conducted in Con- gress. Xever before, I believe, nor since nor under any other condi- tion has a committee turned over to an attorney its sole powers in interrogating witnesses. In this investigation, if I am correctly in- formed — and I think I am — ^not only did Mr. Untermyer insist, in his arrangement with the committee, that he should ask all questions, but if a member of the committtee wished to ask a question it had to be submitted to Mr. Untermyer and he determined whether the ques- tion should be asked or not. My reason for making that statement is based on information ob- tained from members of that committee, and so far as I recall no question asked by a member of that committee appears in the record of the evidence. Mr. Untermyer. You are wrong. _ Senator Weeks. I may be Avrong in a degree, but I am practically right. Mr. Untermyer. You are Avrong in principle, fundamentally wrong from beginning to end, and very much misinformed on every arrangement or understanding connected with the committee. I think Senator Weeks is confusing what he has read in the inspired press. He must be, because I am satisfied that no member of the committee ever told Senator Weeks that there was any understanding or arrangement of any kind with counsel for that committee with respect to the putting of questions. Senator Weeks. Mr. Untermyer. did members of that committee put questions? Mr. Untermyer. Yes. Senator Weeks. Do they appear in the record of the evidence? Mr. Untermy'er. Yes ; quite a number of them. Senator WpKS. Will you take the trouble to look over the evi- dence and point them out? REGULATION OF THE STOCK EXCHANGE. 11 Mr. Untbrmy:ee. It is a long hearing to loolc through, but if yon will look at the testimony of the physicians who testified concerning Mr. Rockefeller's illness, you will find the chairman put most of the questions to some of those physicians. It was understood, and it was the suggestion of the committee in the interest of the orderly course of procedure, that as the committee felt this was a complex and technical and highly specialized subject, which necessitated in their opinion the employment of counsel, the inquiry could best be con- ducted through counsel, as is done in our State in all important in- vestigations. Senator Weeks. Just permit me to ask a question right there. Is it any more complex than the consideration of the banking and currency question? Mr. Unteesiyee. Yes; because the consideration of the banking and currency question did not, in so far as I have been able to learn, involve the drawing out of improper and illicit practices on the part of a great body which is an integral part of the national and inter- national financial system. Senator Weeks. What would you have thought of this committee if it had abrogated its right to interrogate witnesses in connection with the banking and currency investigation ? Mr. Unteemyer. I should have thought that no committee should abrogate its rights and no committee, so far as I ever knew, has done so. Mr. McMorran has made a statement which is not concurred in by any other member of the committee. Will you read it? Senator Weeks. I will read what Mr. McMorran stated. Mr. Untermyee. That is what I refer to. Senator Weeks. It is one of the things— but other members of the committee have told me the same things. Mr. Unteemyee. Of course. Senator Weeks, nothing is further from my desire than to raise any personal issue with any member of this committee. But I do not think you will find any member of the committee who Avill make that statement, because there was no under- standing except that it was decided by the committee that it would be better that the questions put to the witnesses should be put through one person ; and the members of that committee, when they had ques tions to put, would write them and hand them to counsel who hap- pened to be examining, and he would put the questions. Those ques- tions were constantly being put to witnesses. Then counsel would consult with members of the committee before a witness was dis- charged, and the various members would suggest lines of questioning which counsel would pursue. But what has that to do with this ? , ■ • . u Senator Hitchcock. Mr. Chairman, it seems to me this is rather out of order. Mr. Unteemyee. I think so. The Chairman. It is out of order ; yes. -r i • , -x • Mr Unteemyee. I think so, too, Mr. Chairman ; but I think it is only iust to the Pujo committee, which has gone out of existence. Senator Hitchcock. We will endeavor to do justice to that com- "^ Se^nator Pomeeene. Senator Weeks was about to read something, Mr. Chairman. I suggest we let him read it. ■ The Chairman. Yes. 12 EEGULAKON OF THE STOCK EXCHANGE. Senator Weeks. I differ with the members of the committee in that respect. I do not think this is out of order in any respect. Here is a bill that is based on a certain investigation. I have not said nor do I say now that the investigation was un- fair; but I do state that it was an extraordinary investigation, and that the evidence was obtained by unusual methods when compared with the methods obtaining in congressional investigations generally. My information is obtained from members of the committee. I do not recall what member of the committee has talked with me about it, but several members of the committee have discussed the matter with me. I have here Mr. McMorran's statement, which I was about to read at Mr. Untermyer's suggestion. Mr. McMorran says : I also recognize tliat the metliod of the Investigation has been of an imsual character, entirely different from anything that I ever witnessed during my experience in Congress. Mr. McMorran was a Member of Congress for 12 or 14 years. I refer to the agreement under which no member of the committee has been permitted to interrogate witnesses upon subjects material to the Investigation. Mr. Untermyer. Mr. McMorran is alone in that statement. All the Democratic members have made their report and the Repub- lican members have made their report, and he is mistaken. None of his colleagues supports him. Senator Shaeroth. What is there wrong about it if the members of the committee agreed to that course of conduct? Is it not ex- peditious to do that? Mr. UnteRmyer. I think the time will come before long when we will never conduct an investigation on a specialized subject in any other way. We have had our experience in our States. The insur- ance investigation, which Mr. Justice Hughes conducted, was con- ducted along those lines, as have been all the great inquiries. Senator Weeks. But that was not an investigation by a legis- lative committee. Mr. Untermyer. Oh, yes ; it was an investigation by a legislative committee. Senator Weeks. It was an investigation by a commission. Mr. Untermyer. I beg Senator Weeks's pardon ; it was an investi- gation by the Assembly of the State of New York. Senator Hitchcock. I again raise my point of order, Mr. Chair- man, more insistently. We are here to pursue a course of investiga- tion on a pending bill, and it seems to me absolutely our of order for us to go into either a criticism or a defense of a House committee. The. Chairman. I think the Senator is right about that. Senator Hitchcock. I do not want to spend my time here in such a way. The Chairman. The witness will confine himself to the bill. Mr. Untermyer. I am not here as a witness ; I am here at the re- quest of the chairman to make such argument and to give such in- formation as I can with respect to this bill and to present such con- siderations as occur to me. I do not know what it is that you want by way of preliminary statement. I had assumed we were going to hear from the other side by way of opposition to the bill. Senator Pomeeene. Permit me to suggest that Senator Nelson asked a moment ago that you detail the evils of the stock exchange REGULATION OF THE STOCK EXCHANGE. 13 Senator Nelson. Yes ; those evils that require a remedy. Senator Pomeeene. That is a matter that would interest us very mBeh. Mr. Untermyeh. They are set out at great length in this report of the Pujo committee. The Chaikman. But Senator Nelson wants an abstract of it, and I think it will be helpful to the committee if you will abstract what those evils are and the means by which to remedy them. Mr. Untekmyer. In order to point them out with any degree of intelligence, I think I ought to state briefly what is the constitution of the New York Stock Exchange and how it is organized. (See Exhibit A, Appendix.) The Chairman. He will be glad to hear that. Mr. Untermter. It is a voluntary association. It is incorporated under no statute. It has a limitation of membership of 1,100 mem- bers. That limitation has not been increased since 1879. It is nominally a meeting place for the members where they deal with one another m the securities that are listed and quoted upon that ex- change. In effect, it is an integral and inseparable part of the national financial system, as important as any part of the whole system, as important as the banks themselves. Senator Hitchcock. Is it an organization differing in any im- portant particular from the bourse of Paris? Mr. Untermyer. Yes; I contend it is. We have had no end of discussion about that. We say the bourse is under Government con- trol. So, too, is the bourse in Germany, in Berlin. Senator Hitchcock. Take the bourse of Paris and explain how it is under the French governmental control? Mr. Untermyer. I understand the minister of finance is the con- trolling power in the organization of the bourse — I mean in its, af- fairs, and dealings. I am not very familiar with the bourse in Ger- many or in France. Senator Hitchcock. Could you file with the committee some state- ment showing how those are organized? Mr. Untermyer. Yes; I will do so. I will file such a statement. The corporate laws, the method of listing securities, the protection thrown around the investor in their distribution and sale, are so dif- ferent in those countries, where they have a unified system, where each State has not its own law bidding in laxity of administration against all others, that there is no analogy to be drawn between them at all. Senator Hitchcock. Are they voluntary? Mr. Untermyer. I believe in a sense they are voluntary. Senator Hitchcock. Not incorporated? Mr. Untermyer. I do not think they are incorporated. Senator Hitchcock. Memberships are bought and sold the same as in New York ? Mr. Untermyer. I do not so understand ; not in the same way. I do not understand the system is the same. I understand it is an entirely different system. For instance, in Germany and France there are only a limited number of securities that are listed upon these exchanges, and they have to go through a crucial test. The com- mon stock of a corporation in Germany is not listed until after it has gone through all sorts of tests. 14 REGULATION OF THE STOCK EXCHANGE. But the foreign system, the continental system, is one with which I am not very familiar. I will get the data, however. I have written for it, but there has not been time to get it. I wrote for it after I heard this hearing was to be held, and hoped to be able to submit the accurate information to the -committee at this time. I do not want to be understood as attempting to set forth with any degree of correctness the constitution of those various foreign exchanges; but I do know from my experience abroad and my knowledge- of the way in which they list securities and the laws that protect the security holders that there can be no analogy between our stock-exchange method of listing securities that are put out under our loose corporate laws of the various States and the listing of securities on those exchanges that are put out under the most rigid legal regulation. • Senator Hitchcock. You say the London Stock Exchange is regu- lated by act of Parliament ? Mr. Unteemyek. I think not ; I think it is not. Senator Hitchcock. It is a law unto itself ? Mr. Unteemybe. Not entirely. Senator Hitchcock. What would regulate it ? Mr. Untermyee. In the first place the companies acts have a great bearing on the question. Senator Hitchcock. Is it incorporated 1 Mr. UsTTEEMYEE. No ; the exchange is not incorporated. Senator Hitchcock. How could the companies acts regulate it ? Mr. Unteemyee. The securities are issued under the companies acts, which enforces the most complete disclosure and publicity. The London Exchange has practically nothing to do with the degree of publicity that is to attend the issuance of securities. The companies acts require that a prospectus shall be filed; that there shall be a disclosure of all intermediate profits. Then these prospectuses are issued. The offer of securities goes directly 'to the public ; and the public, having a law protecting them and on which they caii rely, sub- scribe largely upon direct solicitation by advertisement. Our system is entirely different. Our system is about this: A corporation, we will say, wants money in order to start in business. It can not issue a prospectus to the public and call for subscriptions. Of course it can, but the prospectus, when issued, is not sufficiently protected, and the public can not safely buy securities upon the faith of such a prospectus. Senator Hitchcock. Then your position is that if we regulate all incorporated companies the stock-exchange evils would not exist ? Mr. Uxteb^iyer. I think they would still exist, but not in the same measure as they do exist. I want to show you how our stOck- exchange methods operate with respect to newly organized corpora- tions or the new securities of an old corporation in our country and how different it is from the system provided in England. If the securities of a new corporation are issued, with us they can only be, if it is a large concern, advantageously issued through a banking house. Those securities are not known to the public. There may be a perfunctory advertisement of securities, but that is not the way they are put out. The banking house gets that security under- written by its clients, and those underwriters agree that if the bank- ing house can not market those securities, the underwriters will take BEGULATION OF THE STOCK EXCHANGE. 15 those that are not marketed. Whereupon the banking house pro- ceeds to endeavor to market the securitj^ We will say they are stocks of a corporation. They have them listed on the stock exchange. Then they proceed to create an appearance of activity in those se- curities, which is often a fictitious activity. They are marketing them for the underwriters. The evidence shows here that when a new security has been put upon the market, the banking house having charge of the distribution, of that security Avill hire a brokerage house, and that brokerage house Senator Nelson (interposing). What are the rules of the stock exchange as to limiting the security? Mr. TJni'ermyer. That is a long story. We will go into that in a moment. Senator Nelson. I want to hear that. Mr. Untermyee. That brokerage house will, not infrequently, give out orders from day to day. They will give to 5 or 10 brokers orders to buy at a price, and to 5 or 10 other brokers orders to sell at a price. Senator Shafroth. That is done by the bank ? Mr. Unteemyer. By the banking house. Senator Shaeeoth. And the person who underwrites is a broker? Mr. Untermyee. No ; the person who underwrites is the person who gets a commission. He may be a broker, he may be a banker, or he may be an investor. If the banking house can not dispose of these securities, he will take all the banking house does dispose of, and for that he gets a commission. He does not want the securities, as a rule. He wants the commission. So the banking house proceeds on behalf of its underwriters to market these securities. It sometimes markets them by legitimately selling them among its clients and sometimes by creating a fictitious appearance of activity in those securities on the exchange and deal- ing them out to the public. Senator Weeks. Whenever the stock exchange lists securities, does not. the company file with the stock exchange a list of the stock- holders ? Mr. Untermyee. I do not think they file a list of stockholders. My recollection is that they do not file a complete list of stockholders, though I am not sure as to that, nor is that material. Senator Weeks. Do you recall any cases where the stock exchange has listed the securities of a new company before those securities have been to a considerable degree distributed? Mr. Unteemyee. There has to be a certain amount of distribution of those securities. But those securities are frequently distributed to members of the syndicate, and then the syndicate, as you know. Senator Weeks, at times agrees to hold those securities, not putting them on the market. The members of the syndicate, as well as the syndicate managers, dispose of them through the stock exchajige for members of that syndicate. Is not that right ? Senator Weeks. Your suggestion of something that I am supposed to know may be true and may not be true. Mr. Unteemyee. In your experience as a banker, you know how things are operated. , -r , n x i Senator Weeks. I know very much about it, and I shall take occa- sion later to state what I know. But there are all kinds of ways of floating the securities of a company, and it seems to me what you 16 REGULATION OF THE STOCK EXCHANGE. are driving at now is to compel the stock exchange to do what the companies acts of England and other countries do. It would not be a very simple matter for us to say what securities shall be floated under a national law. Most of these companies are not incorporated under a national law ; they are incorporated under State laws. Mr. Untekmyer. That is just the point I am trying to develop. _ Senator Weeks. I will allow you to proced without interruption. Mr. Untermyer. I am trying to develop the point that by reason of the fact that we have no national corporation law and no adequate protection to investors, as they have in England under the com- panies acts, therefore our stock exchange is made to perform entirely different functions in the marketing of new securities from those which it would be required to perform if we had a uniform corpora- tion law. Senator Weeks. That is to say, it is made to perform different func- tions so far as the listing of securities is concerlied. Mr. Untermyer. And the marketing; that the distribution of securities, instead of being made as in England partly through pub- lication with the protection of the law, is made very largely here through a series of manipulated transactions. Practically the only way in which it has been made in many cases is through a manipula- tion of the market. Senator Weeks. Do you not know that is an exceptional case rather than the general character of the methods followed? Mr. Untermyer. On the contrary, Mr. Chairman, I differ there with Senator Weeks, and I do so with great hesitation, because I know Senator Weeks's great familiarity with the subject. But I differ radically with Senator Weeks. I say that is not exceptional. That is the way in which the great issues of securities have been largely marketed, and that is the only effective way in which they have been distributed within a reasonable time. Unless you can attract public attention to a security of that kind through manipulated transactions, creating a false appearance of activity in the security, it takes a long time to distribute the securities. Senator Weeks. If you are right about that, Mr. Untermyer. I am incorrectly informed. I do not know of my personal knowledge about it, I do not know whether you know of your personal knowl- edge; but before you leave the stand, if you are a witness Mr. Untermyer (interrupting). 1 am not a witness. Senator Weeks (continuing). I shall take occasion to ask you some direct questions along that line and point out some instances. Mr. Untermyer. I shall not answer them if it involves disclosing niy professional relations with people. I am not going to make use of my professional relations with anybody for the purpose of enlight- ening this or any other committee. But I should be very much sur- prised if Senator Weeks shall name any issue that has been put upon the Boston Stock Exchange which has not first been underwritten and then put upon the exchange. I will take his statement as to how that issue has been distributed among the public from the Boston Stock Exchange, whether it has not been distributed by the syndicate managers through buying and selling orders and creating that ap- pearance of activity and getting the stock up to a certain figure and having it distributed there. EEGULATION OF THE STOCK EXCHANGE. 17 The Chaikman. I understand that is practically a false activity and not real sales ? Mr. Unteemyee. They are real sales, in a sense ; yes. The record of the investigation contains many such transactions. It is not neces- sary for Senator Weeks and myself to get into any controversy about it. I am perfectly willing that we shall rely upon the record, not upon the words out of the mouths of witnesses, but upon the documents submitted. Here is an instance in the record, a fair sample of the character of transaction. It was conducted by three pf the leading banking houses in New York— Solomon & Co., Hallgarten & Co., and Lew- isohn Bros. You will admit they are large banking houses ? Senator Weeks. I will admit they are large banking houses. Mr. Unteemyee. And very reputable banking houses. They con- sider themseh-es reputable, and they are generally regarded as re- putable ; but these practices that have been regarded as reputable are nothing more than a mock auction. The Chaieman. Gentlemen, it is now 5 minutes of 12. (After informal discussion.) We will take a recess until half past 1 this afternoon. (Thereupon, at 12 o'clock noon, the committee took a recess until 1.30 o'clock p. m,) after recess. The committee met, pursuant to the taking of recess, at 1.30 o'clock p. m. The Chairman. You may proceed with your statement, Mr. Untermyer. STATEMENT OF SAMUEL UNTERMYER— Continued. Mr. Unteemyee. Mr. Chairman and Senators, by way of illus- trating the extent of the abuse and the persistent unwillingness of .the stock-exchange authorities to interfere with the vicious practices that are perpetrated, there was an operation that was actually being conducted in the manipulation of a newly listed securitj' day by day on an enormous scale by prominent members with two leading bank- ing houses as allies and associates whilst the Pujo inquiry was in progress. I present it only as an illustration of methods that are pursued with the apparent sanction of the exchange. The details of this particular transaction, which is typical of the method of " making a market " in the securities of a new company, are summarized at pages 50-52 of the report. That was the case of the California Petroleum Co., and this is what the report says of it, and every statement in the report of any conse- quence refers to the page of the testimony in support of tliat state- ment. The facts are gathered not only from the testimony of the people who were concerned in the transaction, but from the docu- ments that were submitted. I may say here, by way of parenthesis, that I do not recall now in the Pujo report many cases in which a statement is made of any sort that is not supported by the testi- mony of the people who were concerned in the transaction; and I 30578—14 2 I;8 EEGULATIOS" OF THE STOCK EXCJIAKGE. want to repeat, in that connection, that the testimony was taken from the mouths of the members themselves, or the people who were eoncerneld in the transactions, and not gathered from inimical sources. Senator Weeks. What are you about to read from now ? Mr. Untermtee. From the report of the Pujo committee, pages 50 to 52 of the report : A typical instance of manipulation for the purpose of stimulating specula- tion in a new security is tlie operation in the stock of the Californln Petroleum Co. begun in October last whilst this investigation was in progress and the subject of manipulation of securities on the stock exchange was under active discussion. This company was organized in September, 1912, with an authorized capital ©f $32,500,000—117,500,000 preferred and $15,000,000 common — of which $11,997,024 preferred and $13,513,081 common was given in payment for the stocks of two California oil-producing companies. Senator Hitchcock. That is, they paid $8,000,000? Mr. Unteemyee. $8,215,000 for $17,500,000 of stock, 10 millions of the preferred and 7 million-odd of the common (reading) : William Salomon & Co., bankers of New York, and associates, namely: Hall- garten & Co. and Lewisohu F.r(]S.. of Xt'w York, and a fourth not named, for $8,215,662 in cash, purchased from Die \endors $10,000,000 of the preferred and $7,572,845 of the common stock of the California Petroleum Co., which the latter had accepted in payment for thf stock of the twn producing companies, William Salomon & Co., Hallgarten & Co., and Lewisohn Bros., each taking 29i per cent. Thereupon the bankers, as we shall hereafter call them, formed a syndicate in New York to underwrite $5,000,000 of the preferred and $2,500,000 of the common stock at the price of $5,000,000 and sold to a London syndicate the same amount at the same price, leaving the bankers at this point with a profit of $1,784,338 in cash and •f2 .j72,S4.j in common stock, which latter they sold at 40 and 45. The bankers also joined the New York syndicate, in which nltogether there were 104 members, including — (a) Three corporations afhliated with national banks — two of them in New York, one of which had a participation of $500,000 and the other $50,000, and one outside with a participation of $50,000 ; (6) One trust company in New York with a participation of $.50,000; and (c) Twenty-four officers of banks, among them officers of four national banks in New York, two in Chicago, and one in Detroit, whose aggregate participa- tions were $535,000; the largest single participation, $50,000. going to an officer of a Wall Street bank which lends on stock-exchange collateral. The stock was all sold at an advance of nearly $500,000, above the price at which it was underwritten on the day it was delivered to the biuilvers, October % 1912. Senator Hitchcock. What stock was sold? Mr. IJnteemtee. Part of this syndicate stock. Senator Shafeoth. This 5 millions? Mr. Untermyee. Five millions preferred, with 2| millions com- mon. Senator Hitchcock. That was all sold ? Mr. Unteemyee. All sold on the day on which it was delivered to the original banking houses, and before any appreciable number of members of the syndicate had accepted an offer of participation ; in fact, before these bank officers and others became in any way bound to take any participation tlie stock was all sold for them." Senator Hitchcock. Sold on the stock exchange ? Mr. Untermyee. No; it was sold to a syndicate, which in turn marketed it on the stock exchange. Senator Hitchcock. They had the benefit of the sale? EEGULATION OF THE STOCK EXCHANGE. 19 Mr. Untermyer. Yes. The second syndicate had (reading): Thus nearly all the underwriters, iucludlug the bank officers, got their profits without having made any commitment; and none of them put up any money or had to take any stock. (Henry, 1277, 1278.) Senator Hitchcock. Who lost by that? Mr. Untermyer. The public, I think, as I shall show you in a moment. The public lost by this transaction, by the method in which the stock was marketed for a large amount, and afterwards, when the activity ceased, when this artificial activitj' ceased, the stock dropped. [Eeading :] Mr. Henry, of Saloipon & Co., who was chilled as a witness In regard to this transaction, having refused to divulge the names of the national-bank officers who received participations in this syndicate, his contumacy was certified to the House and from there to the United States attorney for the District of Columbia for prosecution under sections 102, 103, and 104 of the Revised Statutes. Your committee is of opinion that the Information sought from Mr. Henry is germane to the question. Whether national-bank officers are being influenced by any form of reward to lend the money of their banks on nevply listed and unseasoned stocks? It was impossible for the committee, without knowing the identity of the banks and officers, to determine whether these participations to officers were given for the purpose of inducing the banks they served to accept these new securities as collateral for loans or whether they were so accepted. At that point you will have to understand that you can not make an active market, a speculative market, in stocks on the stock ex- change unless the speculators, the people who buy those stocks, can borrow on them. If you have a great national bank, or a series of banks, that are ready to lend 80 or 90 per cent, or whatever it may be, upon that stock, it is very easy to speculate in it ; and when a security is new and unknown, it is quite an important thing' to have the good will of leading bank officers, and to have banks that will take that sort of new security, otherwise unknown, as collateral on loans. Senator Hitchcock. I do not quite understand the facts. If you Avill permit me to ask a question or two Mr. Untermyer. Yes. Senator Hitchcock. This oil concern had a total capital, of pre- ferred and common, of 32 millions? Mr. Untermitir. 32 millions. Senator Hitchcock. About 7 millions of preferred and common were allotted to these participating bankers, and the stock was sold to somebody before the bankers had accepted the allotment? Mr. Untermyer. No. In acquiring these different properties from the original owners this corporation was formed with 32 millions of capital, or thereabouts, of which most was issued to the vendors of the properties in payment of their participations. The vendors,, be- fore taldng this stock, wanted to see that they did not get all stock but got some money. So the bankers who undertook this financial transaction said: We will get 10 millions of money for you ; we will get 5 millions in New York and, If you please, we will get 5 millions in London — I think the same amount in Ix)ndon — and we will get 5 millions of dollars on 5 millions of the preferred and 2i millions of the common. That is, we- will form a syndicate of men in the street and other, people, who will agree to take 5 millions of the preferred stock and 2^ millions of the common stock for fp.5,000.000. 20 . EEGTJLATION OF THE STOCK EXCHANGE. Senator Nelson. I understood, Mr. Untermyer. that 7 millions or so was paid out of that stock in the first instance for two properties they acquired. Mr. Untermyer. Xo. Senator Xelson. I got that impression. . Senator Shafroth. They paid $10,000,000 of preferred and about $7,000,000 of common, did they not ? Mr. Untermyer. Xo; they paid for all the properties sll,997,000 of preferred and $13,000,000 of common. Senator XEL.sr)x. There is where the stock went in the first instance. Mr. Untermyer. That is the way it was first issued, lawfvdly issued, in payment for properties. The vendors said : We have these properties, and we will turn ttieui into tliis banking liouse — the banking house organized a company, with a $32,000,000 author- ized capital, of which they issued 24 millions, 11 preferred. Senator Nelson. So that left these owners of this property the owners of that stock? Mr. Untermyer. It left them the owners of that stock. But they did not want the stock: they wanted money, or some part of it in money, and they wanted a stock that had a market and that could be marketed. So as a part of the transaction the bankers said to the vendors : Kow. we are going to make a market for tliis stock, and we are going to make two syndicates — I tliink the one in London was the same as the one in Xew Xork — and the New York syndicate is going to be made up to acquire 5 millions of preferred and 24 millions of common for $5,000,000. Senator Hitchcock. Where does that come from — out of the Treas- ury? ^h: Untermyer. No; from the vendors. That is part of this stock. They said : We are going to have that underwritten, and we are going to make a market tor it. Now, then, let us see how they make a market. Senator Nelson. You mean the vendees of the btock? ^Ir. Untermyer. No; the vendors. Senator Hitchcock. The vendors of the property. ^Ir. Untermyer. Whether this money went into working capital or whether all of it went back to the vendors for part of that stock is something that I do not think appears by the record. But that is not material to the point we have here. The point we have here is that the way the bankers who undertake to form this company and to make a market for this stock go about maldng the market is to interest banks and bank officers in this underwriting. This under- writing is based on the idea that the people who underwrite are going- to get rid of that stock and get their profits. They do not want the stock ; they want the profits. Senator Nelson. Did this all occur before it was listed on the stock exchange? Mr. Untermyer. They could not get the profits until it was listed This story is not very long, and I am going to read the rest of it (reading) : It was impossible for the committee, without knowing the identity of the banks and officers, to determine whether these participations to officers were flEGULATIOX OF THE STOCK EXCHANGE. 21 given for the purpose of inducing the banlis they served to accept these new securities as collaternl for loans or whether tliey were so accepted. The stocli of the California Petroleum Co. was listed on the New York Stock Exchange on October 5, after the portion underwritten liy the syndicate and the separate holdings of the bankers had all been sold. There was a subsyndicate formed to take this off of the hands of the syndicate, and that subsyndicate put the stock on the exchange. Senator Hitcik'Ock. Up to that time the stock had been a private sale? Mr. UxTEEJiYKit. It had not been publicly sold. It had been sold to a subsyndicate. As soon as these banks and bankers and banking houses underwrote this syndicate the stock was turned over to a sub- syndicate. Senator Hitchcock. Was not that a sale ? Senator Nelson. And the subsyndicate had it listed? Mr. UxTEEMYER. The subsyndicate got it listed. The banks and bankers got their profit before they had committed themselves even to underwrite the stock. It turned out to be simply a gift to them, merely to enlist their interest in the security and to make it market- able by having a place where it could be pledged as collateral for a loan. Senator AVeeks. How much did they make? Mr. UxTEEMTER. Who? Senator Weeks. These bankers you are speaking of? Mr. Untermyee. $535,000. Oh, what they made on it? Senator Weeks. Yes. Mr. Untermyer. The stock was all sold at an advance of nearly $500,000. They made a little over $500,000. Senator Weeks. I mean the officers of the national banks who may have been induced to loan on the stock on account of having had an interest in the syndicate. Mr. IIntermyer. We tried to get Mr. Henry to tell us who the officers Avere. He said he would not do it. Senator Weeks. Without any regard to who they were, how much did they make? Mr. UxTEEJii'EE. TAventy-four officers of banks, among them offi- cers of four national banks in New York, two in Chicago, and one in Detroit, with an aggregate participation of $535,000; the largest single participation, $50,000. The stock was sold at an advance of nearly $500,000. Senator Weeks. The total stock? Mr. Unterjiy-er. No. That is their participation, as I under- stand. Senator Weeks. I want that clear. Mr. UxTERMYEE. I clo uot think the exact amount they made ap- pears. Senator Weeks. Did they underwrite $500,000 ? Mr. Unteesiyee. They underwrote $535,000. Senator Weeks. And it was sold at what price above the under- writing price ? Mr. Unteemyee. The original syndicate got the $5,000,000, with $2,500,000 bonus. The stock was sold by them Senator Weeks. What I am trying to get at is how much money the officers of the national banks or State banks made out of their underwriting ? 22 EEGULATION OF THE STOCK EXCHANGE. Mr. UxTERMTER. I think 30U can figure that out; it was sold at 90 and 40. Here it is. [Eeading :] Which latter common stock sold at 40 and 45. You can figure that. Senator Weeks. How many shares did they underwrite? Mt. Untehmyee. They underwrote $535,000 worth of stock. Senator Weeks. Par value? Mr. UNTEE3ITEE. I think it was 90 for the preferred and 40 to 45 for the common. Senator Weeks. Wlaat price was it sold at ? Mr. Unteemyee. This is what it was sold at. They sold it at 40 and 45. They sold the conunon at 40 and 45. They got the com- mon for nothing. They got 50 per cent of the common with their preferred for nothing and the common they sold to the subsyndicate at 40 and 45. Senator Weeks. Can you tell hoAv much money the officers of the banks made? Mr. Unteemtee. Yes ; you can figure that out. I will be glad to figure it out for you. Senator Hitchcock. I have not a clear idea what these bank officers actually underwrote. I understood you to say, in the first place, that they took $5,000,000 of the preferred stock and got a bonus of $2,500,000 of the common stock. Mr. ' UxTEEMTEE. They did not get all that. Of that $5,000,000 underwriting they got $535,000, and that $535,000 entitled them, I think it was 90, to about $600,000 preferred stock and $300,000 of common stock, for $535,000 in round figures. That $300,000 of com- mon stock they turned over immediately to the subsyndicate at $40 and $45 a share. That cost them nothing; that was a bonus on the prefered stock; and they cleaned out before they became committed to take it. They had not put up a cent. They never put up a cent at any time, and they did not even become committed to take it. They turned it over to Lewisohn Bros., this same banking-house syndi- cate — subsyndicate — at $40 and $45 a share. Forty dollars a share on $300,000 would be $120,000. Senator Hitchcock. I wish it could be stated plainly. Mr. Unteemyee. You can not state a complicated transaction any less complicated than it is. Senator Hitchcock. The company is organized and takes this $17,000,000 of stock? Mr. Unteemyee. Yes. Senator Hitchcock. And the syndicate proposes to sell about $10,000,000 of the stock for them? Mr. Unteemyee. Yes; with $5,000,000 of common bonus. Senator Hitchcock. With $5,000,000 of common? :Mr. Unteemyee. Bonus. They divided that into two syndicates. Senator Hitchcock. That is to be sold by the syndicate, as you call it, to bankers — to Solomon & Co. ? Mr. Unteemyee. Solomon and Lewisohn and others. Senator Hitchcock. They proceeded to sell it by inducing a syndi- cate of bankers to underwrite it? Mr. Unteemyee. Yes; bankers and others. REGULATION OF THE STOCK EXCHANGE. 23 Senator Nelson. I understood that part of it was sold in Europet Mr. Untermyer. Y6s ; half of it. Senator Hitchcock. What does that underwriting consist of? Mr. Untermyer. It consists of an obligation on the part of the underwriter to the etfect that if that stock is not sold he will take it. For instance, if I go into that^ Senator Hitchcock. I understand it fully. Then the man who receives the stock and becomes an underwriter must meet his obliga- tion? Mr. Untermyer. He signs an agreement. Senator Hitchcock. I understood you to say that the stock was turned over to him, and the profit was earned on it before he had given the obligation? Mr. Untermyer. It never was turned over to him. The stock was never turned over to him ; but as a matter of fact, before he even said he would take it, before he committed liimself to it, it had been trans- ferred Senator Hitchcock. Hoav can you refer to him as an underwriter, then, if he did not give any obligation and performed no service ? Mr. Untermyer. Because they sent a notice to him and said, " You have been allotted $100,000 in this syndicate." They sent him such a letter, and before he answered that letter they disposed of it, and he had made his profit and he had not even committed himself. Senator Hitchcock. The bankers, then, disposed of $10,000,000? Mr. Untermyer. Five millions in this country. Senator I-Iitchcock. Salomon & Co. disposed in some way of $5,000,000 of stock in this country? Mr. Untermyer. Yes. Senator Hitchcock. And then they allotted a part of the profit in that transaction to these favored bankers, who were to use their influence in loaning money on the stock? ]Mr. Untermyer. Yes ; presumably. "We have no evidence of that, except from the fact that those bankers did become participants in the syndicate, did not commit themselves, and did get their profits. Senator Hitchcock. I want to know who bought that stock? Mr. Untermyer. Another syndicate was formed. Senator Hitchcock. Up to this time the New York Stock Ex- change has not appeared at all ? Mr. Untermyer. Not up to that point. Senator Hitchcock. How did they induce that subsyndicate ta buy that stock at a profit ? Mr. UN'raRMYER. This is what was done : The bankers having made that first syndicate, turned it over to another syndicate, of which they had the management. That other syndicate got outside under- writers to take that stock on the idea that they would make a market for that on the stock exchange and get rid of that stock for them. Senator Hitchcock. This subsyndicate, then, takes this stock and pays a higher price for it, and gives those on the inside a profit ? Mr. Untermyer. Yes. Senator Hitchcock. How is the subsyndicate going to unload? jNIr. Untermyer. I am going to show you. Senator Weeks. Who formed the subsyndicate? Mr. Untermyer. The subsyndicate was composed of perhaps 10® members. Senator Weeks, Who were they ? 24 EEGXJLATION OF THE STOCK EXCHAISTGE. Mr. Unterjiyee. They did not disclose. But we know how these syndicates are made up. They are made up of customers of these people, outsiders, a variety of people. Senator Weeks. You do not know, in this case, any of the members of that subsyndicate? Mr. IJnteejiyee. We know that some of these same banking houses went into the subsyndicate, to some extent. But ^ve were not able to ascertain the membership of that syndicate. It is not important for the purpose -ne hare in mind here. We are trying to illustrate, and the committee was trying to give you a typical transaction of making a market for a new'security, how it is done. This is nothing^ex- ceptional. Senator Hitchcock. Up to this time we have the stock in the hands of a subsyndicate of outsiders, and I want to see how you are going to give them a profit. Mr. Untee:myer. I am going to show you [reading] : The stock of the California Petroleum Co. was listed on the Xew York Stocli Exchange on October 5 — Mind you. the company was formed in September, 1912. The un- derwriting agreement of the original syndicate was the 2d of October, and on the 5th of October this stock was listed on the stock exchange [reading] — after the portion underwritten by the syndicate and the separate holdings of the bankers had all been sold. Thereafter an operation in the stock was conducted (principally in the com- mon) on the New Tork Stock Exchange by I^ewisohn Bros., for the joint account of the bankers, for the purpose, as described, of "making a market." Senator Hitchcock. Whom did Lewisohn & Bros, represent ? Mr. Unterjiter. They were the original bankers. Senator Hitchcock. And they were buying this back from the sub- syndicate ? Mr. Untermyee. He took all over in bulk. Senator Hitchcock. I mean his associates on the stock exchange? Mr. Unteemyer. Xo. He and his associate bankers made this original syndicate first. Senator Hitchcock. I know that. Mr. ITNTER3IYER. And then they took it over in bulk into the second syndicate, allowing the first syndicate a profit. Then they imme- diately listed it on the stock exchange. Then this is what happens to it. They proceeded to dispose of this block of stock bv making a market [reading] : Under the general direction of Salomon & Co., Lewisohn Bros, would put in separate orders to different brokers on the morning of every day to sell on a scale up and to buy on a scale down, so adjusted that at the end of the day they would have bought and sold, so far as market conditions permitted, sub- stantially the same number of shares. There is in the record a table showing the purchases and soles of Lewisohn Bros, and the prices day by day from October 5, when the stock was listed, through the end of that month, from which it appears that during that period of about 21 business days 163,000 shares were purchased and 172.900 sold by Lewisohn Bros, for account of themselves and associates. There were only sixty-odd thousand listed [reading] : Under the influence of this operation, the price of the common stock starting at about 62i quickly rose to 72; it had fallen to 50 by December. Mr. Henry of Salomon & Co., stated that he supposed the public bought largely on the rise" REGULATION OF THE STOCK EXCHANGE. 25 The total purchases and sales on tlae exchange diii-iug these -1 days were 362,270 shares, which was equal to over three and one times the total outstand- ing common stoclv. It may be remarked in passing that this stock, which .was thus manipulated to $72 per share and distributed to the public, has since sold as low as $10. and is now selling at $28. The report singled out that and other transactions from the num- ber of transactions just for the purpose of iUustr.iting how a new security is put upon the market or an ohl security manipulated under the present methods of the exchange. Senator Weeks. Do you know whether the exchange did anything about this ? Mr. Ukteeimyee. It did nothing about it. We asked them why they did not. Senator Weeks. Was it ever brought to the attention of the exchange ? Mr. Unteejiyee. It could not help being brought to the attention of the exchange. The vast number of sales in that short time would itself bring it to the attention of the exchange. Here is a company called the California Petroleum Co.. a new name, a new property ; nobody knew anything about it. It bobs up on the exchange, newly organized, newly put together, on the .5th of October, and in 21 days the capital is sold I forgot how many times over. Senator Weeks. The common stock ? Mr. Unteemyer. I think that is the common stock ; over three and a half times the total outstanding capital of the company is sold. And how is it sold? By Lewisohn Bros, every morning giving five different brokers orders on, a scale down to buy and five other brokers at the same time on the scale up to sell, and these brokers meet one another and they buy and sell and make the stock appear active. That is the way in which the transaction is conducted. It does not appear that the brokers who buy know that the selling orders are in at all. Senator Nelson. What about this company that was organized and issued this stock? Did they carry on any business aside from this paper business? Mr. Unteemyee. Oh, yes ; they are legitimate oil-producing prop- erties. Senator McLean. Does the preferred pay dividends? Mr. Unteemyee. I do not know. I think the preferred has paid a dividend. I think the preferred pays dividends, if I am not mis- taken. I am talking about the methods of rigging the stock and manipulating it, and mailing it appear active on the market. I am not discussing the merits of that company. I am not sajdng that that company was a swindle, because I do not believe it was. The Chairman. You are explaining how they were selling stock at $72 which afterwards sold at $16 ? Mr. Unteejiyee. Some day it may be worth $72, for aught we know. Senator Nelson. Here was the point: Was the stock exchange guilty of any wrong in listing that stock at any time ? Mr. Unteeimyee. No; they were not guilty of any wrong in listing that stocic at any time. What they were guilty of a wrong in was 26 EEGULATION OF THE STOCK EXCHANGE. that they must have known from the nature of that transaction, fr?^ the tremendous activity of that new security, from the way in which the market was going, they must have known, any man who under- stood anything about stock-exchange operations could have seen, that that was a manipulated market. It was known all over the street. If we had gotten the names of the underwriters, undoubtedly it could have been proved that a good many stock-exchange houses be- sides these three banking houses were in the operation. These bank- ing houses were themselves in the operation. They had members on the stock exchange, and they are among the best-known reputable banking houses in New York, and there was nothing extraordinary about this transaction at all, except the fact of its daring, in that it was being perpetrated right under the nose of the committee whilst they were conducting their investigation. Senator Hitchcock. Then the subsyndicate you spoke of got out of the stock about $60 or $70 which had come into their hands at $45 or $50? Mr. UxTEEJiiEE. What they got out of it, of course, we do not know. Presumably they got a profit out of it. But whether they got a profit or whether they sustaineda loss does not seem to nie very material for the purpose of illustration as to the method in which the public is drawn into the purchase of securities on the basis of values of the quotations that go through the mails all over the land and in Europe. The Cha:r:man. I understand from this illustration you give that this false pretense of buying and selling induces innocent outsiders to purchase the stock at a very high price beyond its real market value ? Mr. UxTEEMYEE. It leads the public to believe the stock is active and much desired, and there is apparently so much being bought and sold of the stock that it keeps going up, and the people go in, and they go on a false appearance of activity. The point about it is that until you. regulate the stock exchange so that the mails and the tele- graph and the telephone throughout this country are not going to be used for the purpose of facilitating that class of transaction for the purpose of drawing in the public all over the country you will get no cessation of that sort of business. Senator 3IcLeax. Are not the rules of the stock exchange very strict against that sort of thing now ? ]\Ir. UxTEEMYEE. They have inaugurated rules in the last few months ; but I claim that they do not cover these transactions and are not enforced and can not be without public regulation. Senator McLean. To meet just this contingency? Mr. UxTERMYEE. I do not think they are to meet just that contin- gency. But whether they are or not does not affect the question in mind. I do not believe it would be considered an answer to the laws against rebating nor to the control of the Interstate Conmierce Com- mission over the books of railroads so as to discover rebating to say that the presidents of the railroads had gotten together in an asso- ciation and made laws to prevent rebating. I do not think that Con- gress should leave it to the brokers to say whether their associates are manipulating stocks. Senator ^McLean. _:My question is this: Under the rules as they exist to-day could this thing happen? KKliUJLATION OF THE STOCK EXCHANGE. 27 Mr. Uatekmyee. I think it could, and I am going to read you £^ the testimony of a former president of the exchange and one of the governors, in which they defend these transactions ; in which they do not see any wrong in them. Senator Weeks. Let me ask you Mr. Untermteh. I can not make any headway with this thing, gentlemen. Senatnr Weeks. Is there any evidence that any national bank or trust company loaned any money on the common stock of the Cali- fornia Petroleum Co.? Mr. Unteemyer. Yes; I think there is. My recollection is that these stocks were good as collateral in the banks. Senator Weeks. Would it not be a pretty unusual thing for a bank to loan money on the common stock of an oil company which had only been listed a month or two months ? Mr. Untermyee. No; I think not. Senator Weeks, and I think that that is the rule rather than the exception; I mean where a stock is listed and where it is active. They would rather have a loan on an active stock that they felt could be disposed of readily than they would a loan on an inactive stock. This stock was so active that there were over 300*000 shares dealt in in 21 days. Senator Weeks. That would be true if it were a Avell-established industry with a well-established reputation for stability in the market. But would it be true of an oil stock listed within 30 or 60 days, and the common stock of an oil company ? Mr. Unteemyer. I am sure you know that 362,000 shares of a new oil company's stock could not be traded in in 21 days unless that stock was good as collateral in the banks. You could not speculate in it to that extent except on the theory that it was good collateral. Senator Weeks. I do not know that: and I want to know if you have any evidence that any bank in New York loaned any money on that stock. Mr. Untermyer. I have not read all this testimony for some time, but my present recollection is that there was evidence of that kind. In fact, I am quite sure of it. Senator I-Iitohcock. Would it not also be possible that the activity in the common stock, the raising of its price, was for the purpose of bolstering up the preferred stock? Mr. Untermyer. Certainly. They were both dealt in. I have not taken up with you here the statistics of the preferred, but the record shows the transactions in both stocks. Senator Hitchcock. It would help the preferred stock a great deal to have the common pushed up. Senator Weeks. Let me ask you this. Is there any other case like this in the record? Mr. Unteemyee. I think there are a great many that are worse. Senator Weeks. Do you know of any particular case? Mr. Unteemyee. Yes; I know a great many of them. It is the custom on the exchange. Senator Weeks. Senator Weeks. I rather doubt that. Mr. Unteemyee. I am sure you know more about those things than I do. -^ , -, , j_ ■. Senator Weeks. That is the reason I rather doubt it. Mr. Unteemyee. You may be a little out of touch with it just now. Senator Weeks. I am. 28 REGULATION OF THE STOCK EXCHANGE. Mr. Unteemyer. But I Avould be very much surprised if you aid not know a great deal about it. Senator Weeks. Let me tell you this Mr. Unteemyee. Let me show you Senator Weeks. Wait while I ask you a question. I am doing the talking now. Will you tell the committee whether you know any other cases where stocks liave been manipulated on the New York Stock Exchange similar to the one which you have instanced; that is, the California Petroleum Co.? Mr. Unteemyide. I am going to do it now, if you aviU ]ust let me go at it; but it is rather foreign, to some extent, to the discussion here. I have gone into this instance simply because of the fact that it took place at this particular time while the Pujo inquiry was under way. It was nothing unusual. Senator Weeks. No ; but you say it is the usual thing. Mr. Unterjiy-ee. Yes ; I say it is a very general thing. It is the way of introducing these securities. Senator Weeks. That is what I want. Senator Shafeoth. I move you, Mr. Chairman, that persons who address the committee may be permitted to proceed without questions until they close and then be subject to such examination as Senators may wish to make. We are not making any headway, it seems to me. Mr. Unteemyee. No ; none at all. Senator Weeks. We went through all that before, Mr. Chairman. The Chairman. We have aimed to do that and members have been asked to refrain from cross-questioning until the witness gets through his main statement. But that must be left to the members of the committee. Mr. Unteemy'ee. Here is the quotation from the testimony of Mr. Frank P. Sturgis, who was a former president of the exchange, and whom you, Senator Weeks, know very well, of Strong, Sturgis & Co., for many years a governor of the exchange and one of the most reputable, well-known men in New York (reading) : Mr. Untermyee. Very well: tliat is nn answer. How do you justify as legiti- mate the triinsaction of a pool or syndicate in giving out, buying, and selling orders to brokers for tbe purpose of lifting the price of tlie stock or of depress- ing it? Jlr. Sturgis. Tbose are tbe acts of individuals. I can not be responsible for wbnt thousands of people throughout this country do. Mr. Untermyes. Do you seek to justify it? Jlr. Sturgis. It depends entirely upon circumstances. I ha-^-e already said that under certain conditions oi'ders given out, commissions paid, no collusion whatsoever, the broker who buys not having the slightest idea where the order comes from that the broker executes to sell — I say it is not an illegitimate transaction. * * . V t „ Mr. Untermyer. * * * will you be i;ood enough to answer that question? Is not the operation at times resorted to to depress prices and at other times to lift prices? Mr. Sturgis. Yes; I can consistently answer that. * H: .!t * * :[. ,^ Mr. ITntermyer. You approve of those transactions, do you? ilr. Sturgis. I approve of transactons that pay their proper commissions and are properly transacted You are asking me a moral question and I am answering you a stock exchange question. Jlr. Unterjiyer. What is the difCereuce? EEGULATION OF THE STOCK EXCHANGE. 29 Mr. Stubgis. They are very different things. Jlr. Untermyeb. I thought so. There is no relation between a moral ques- tion, then, and a stock exchange question? Jlr. Stubgis. Sometimes. Another witness who was called, not a stock exchange broker, Mr. Morse, being asked who was the middleman, testified as follows: He is the gentleman who manipulates the stock, giving the buying and sell- ing orders. (Morse, rec, 710.) If he merely wishes to make a stociv appear active he gives buj-ing and sell- ing orders in about equal volumes : if he wishes to put up the price he gives an excess of buying orders; if he wishes to depress he gives an excess of selling oiders. Senator Nelson. That is Mr. Sturgis's testimony? Mr. Unterjiyer. No. That is not Mr. Sturgis's. That is the testimony of a man who is not a broker, but who was an expert called in connection with one of the failures on the stock exchange as the lesnlt of one of these manipulations. It was the case of the Hocking Valley, in 1909, a pool engineered by Mr. Keene, in which there were 9 or 10 stock-exchange firms, and that transaction consisted of run- ning U23 the stock to $92 a shaie, Mr. Keene being the manager for this syndicate, including these 9 or 10 stoclc-exchange houses. He ran up the stock to $92 a share, and unloaded great quantities of the stock. It went up like a rocket and came down like a stick to $2 a share, and (hen disappeared from the lists (reading) : Jlr. TiNTEKWYEK. Wc are speaking of transactions that are made by members of your exchange in the way of short selling. Would not their books show whether or not they were selling short? Mr. Sttjegis. If the broker is operating for his own account; yes. Jlr. Untebmyer. And you say from a quarter to a half of the transactions on the exchange are for the broker's own account? Jlr. Stubgis. We agreed upou a third, I thinlt. Senator Nelson. "What is that? Mr. Untermyer. That a third of all the transactions on the stock exchange are for the account of the brokers themselves, and not for the customers; in other words, presumably nothing but pure specu- lation. In connection with the collapse of the Hocking Valley, as I said, there were 9 or 10 stock-exchange brokerage houses. Two of them failed as the result of the pool, and those two that failed were ex- pelled, but nothing was done with the seven or eight stock-exchange houses that did not fail. I asked Mr. Sturgis about that (reading) : .Mr. LfNTERMYER. I should like to know why you should expel two members of .1 pool nut of seven stock-exchange firms for doing the same thing that the (/ther five did, simply because those two happened to fail at it. Jlr. Sturgis. Because they went away beyond their means. * * * * , * ^ s^ Jlr. Untermyeb. Do you mean to say that the things these seven firms did were not punishable under the constitution? Mr. Stubgis. No ; they were not punishable. Jlr. Untermyeb. Do you not think they ought to be? Jlr. Sturgis. We have not thought so heretofore. Jlr. Untermyer. Do you not think so? Jlr. Sturgis. I do not thinly so; no. 30 EEGULATION OF THE STOCK EXCHANGE. Then this extraordinaiy colloquj' occurred on the subject of short selling : Mr. Untekmyek. Cei'tainly. Wliat is the iiurpose of short selling-' Mr. Sturgis. Generally sjieaking, to make a profit. Mr. Untekmyek. To make a profit by what process? Mr. Stubgis. By repurchasiug the short sale at a declining price. Mr. Untermyer. That Is, by selling a security that you have not got and gambling on the proposition that you can get it cheaper and deliver the thing that is sold? Is not that it? . Mr. Sturgis. That is the usual process— selling when you think the price is too high and repurchasing when you think it has reached the proper l^vel. Mr. Untebmyer. But is it, or not, the process of selling a thing you have not got Mr. Sturgis. It is. Mr. Untermyer. And is it, or not, with the idea that it will go lower, or can be depressed lower, and bought cheaper and delivered? Mr. Sturgis. Truly. Mr. Untermyer. Do I understand that you regard that as legitimate and defensible? Jlr. Sturgis. Do you wish my personal expression of opinion? Mr. Untermyer. Yes. Mr. Stubgis. I think it depends entirely upon circumstances. Mr. Untebmyer. Under what circumstances would you regard that sort of short selling as legitimate and proper Mr. Sturgis. I would regard it so if there was a panic raging over the country and it was desirable to protect interests which could not be sold. I think It would be a perfectly legitimate thing to do. Mr. Untebmyee. Let us see about that. If there was a panic raging over the country and a man sold stocks short, would not that simply add to the panic? Mr. Sturgis. It might. Self-preserartion is the first law of nature. * * :) ^ * * * Mr. Untermyer. But. as I understand it, if there Is a panic raging over the country, do you think it is defensible for a man to depress stocks by selling stocks he has not got, with the idea of adding to the panic? Mr. Sturgis. Mr. Untermyer, if a person has property which is absolutely un- salable and he can, so to speak, protect his position by selling something for which there is a broad market Mn Untermyi:r. That he has not got? Mr. Sturgis (continuing). I do not consider it wrong. Mr. Untermyer. Mr. Sturgis, let us just analyze that, because I do not think I understand you. Ton do not want to be misunderstood, do you? ^Ir. Stubgis. It is not my wish. Mr. Untermyer. And I do not want you to be misunderstood. Do you mean to say that if there is a panic raging it is a defensible thing for a man, under any circumstances, to sell stock that he has not got, with the idea of getting it back cheaper? Mr. Sturgis. I do not think it is indefensible. I certainly think it is de- fensible. Mr. Unteemy-er. For what purposes does he do that except to try to make money? Mr. Sturgis. To try to save his credit, perhaps. Mr. Untermyer. How does he save his credit in a panic by selling stocks that he has not got, with the idea of adding to the panic and getting them cheaper? Mr. Sturgis. Because if he can make a profit on that sale it may repair the losses that he has made on stocks he can not sell. Mr. Untermyer. I see. You know that that would simply accentuate the fierceness of the panic, do you not? Mr. Sturgis. It could not be otherwise. Mr. Untermyer. Certainly. And his only purpose in doing a thing of that kind In time of panic would be to make money, would it not? Mr. Sturgis. To protect himself. Mr. Untermy'eb. It would be to make money, would it not? Mr. Sturgis. Yes ; and that would protect him. Mr. Untebmyer. Of course it always protects a man to make money, no matter how he makes It, does it not ? jKJSUUi.AiiuJN OF THE STOCK EXCHANGE. 31 Mr. Sturgis. Yes, sir. Mr. Untermybr. Aud that, you think, is justifiable? Mr. Stukgis. I thinlc under those circumstances it is. Mr. Untebmyer. You do not want to malte any further explanation of that proposition, do you? Mr. Sturgis. I do not. Mr. Unteemyer. Is it any more justiiiable for a man to sell short in a jianic than in a normal marlcet? Mr. Stubgis. It depends very much upon his financial necessities. Mr. XJntermyeb. Do you regard it as justifiable in a normal market for a man to sell a thing he has not got, with the idea of depressing prices in order to buy in the stock at a lower level ? Mr. Stubois. I think it is a question between a man and his own conscience. Mr. Untermyer. Mr. Untermyes. I am asking for your judgment. You have been many years In the exchange, and .^•ou are a careful observer, and I would like to know your Judgment. Mr. Sturgis. I think a great many people deprecate it. Others approve it. Mr. Untermybr. Do you approve of it? Mr. Sturgis. You fsk me personally? Mr. Untermyer. Yes. Mr. Sturgis. I never sold a share of stock short in my life. Mr. Untebmyer. Then you do not approve of it, do you'.' Mr. Sturgis. 1 just happen not to have done it. My private business, if you please, I beg you to omit. Mr. Untermyer. I have not asked you your private business. Mr. Sturgis. Y'es ; you asked me what I did myself. Mr. Untebmyer. I did not ask you that, sir. I asked you what you thought about it. >!. It * * * =. * Mr. Untermyer. Do you approve of short selling in others? Mr. Sturgis. Under what conditions? Mr. Untermy'ee. Under any conditions. Mr. Sturgis. Yes ; under some conditions. Mr. Untebmyer. Do you approve of short selliug in a normal market? Mr. Sturgis. I will answer that question by sayiiig it is a moral question with the individual himself. It is not up to me to express my opinion upon it. Mr. Untermyer. Do you personally approve of short selling in a normal ma rket ? Mr. Sturgis. Not I, personally ; no. Mr. Untermyer. You do not. And is it or not the fact that the bulk of the short selling is done in a normal market? Mr. Sturgis. I should say no ; more often on an excited market. Mr. Untermyer. It is done every day, is it not? Mr. STUiuiis. Oh. .yes ; to some extent. Mr. Untermybr. And it is done in large volume, is it not? Mr. Sturgis. .-\t times. Mr. Untermyer. The stock exchange does not discourage it. does it? Mr. Sturgis. The stock exchange does not enter into it at all. Mr. Untermyer. The stock exchange does not discourage short selling, does it? Mr. Sturgis. The stock exchange takes no position in the matter at all. Mr. Untermyer. Has the stock exchange any rule or regulation against short selling? Mr, Sturgis. None. Jtr. Untermyer. AVliy is it not just as simple a matter for them to have a regulation against short selling as to have a regulation against a broker splitting his commissions? Mr. Stubgis. There is no regulation against short selling; that is all I can say to you about it. This same gentleman said that the most heinous offense that could be committed on the stock exchange is the splitting of a commission, and the record of punishments shows that that is the most hemous offense. Senator Nelson. In what way? 32 REGULATION OF THE STOCK EXCHANGE. 3Ir. I'ntekmtee. If he allows his customer part of his commission. The uniform rate of commission is 12-^- cents a share. Senator Hitchcock. "Would he be a " scab " ? Mr. UxTERMXEE. He is no longer •' scabbing " because he is ex- pelled and put on the outside. Senator Hitchcock. He breaks the union rule? Mr. UxTERMYEE. He is put out. He is expelled ; he loses his right to do business and to a livelihood. The records of the exchange that have been put in evidence show the discipline that has been in- flicted upon members, and that whilst brokers who split commis- sions or who hired high-salaried clerks to aid them in getting busi- ness and were held thus to have tried to evade the commission rule are suspended for long terms, 3 or 4 or 5 years; a broker who was convicted of obvious fraud was suspended for 30 or 60 days. Sixty days. I think, was the term. Senator Hitchcock. It shows that the stock exchange people are members of a union in some form? ]Mr. U>"TERJiYEE. Yes. I do not see any objection to a uniform rate of commission. I think it is a wise thing, and I do not think the commission is too high. Senator Hitchcock. You do not believe in the outsiders having any commission? Mr. Untermyee. I believe that the uniform commission that they charge is reasonable, and I do not see any objection to it. I do not believe they ought to be allowed to cut commissions indiscriminately, because it would lower the responsibility of members, and the least responsible members would get the business ; nor do I see any reason why, under incorporation, the stock exchange should not be per- mitted to keep its present limitation of membership, which is limited to 1,100, or why the value of its seats should be impaired. I think these are wise regulations for the purpose of preserving the in- tegrity of the institution, that are calculated to be of the greatest possible aid to our financial system if it is properly regulated and restricted in its operation and is not made the medium of improper transactions. Senator Nelson. I do not want to take you off your line of argu- ment, btit I would like to know this : Are there any instances where the stock exchange has been guilty of listing improper securities that they ought not to have listed? >Ir. Unteejiyee. I think the stock exchange is now quite careful in its listing of securities. The rules have become more rigid year by year until the disclosure that is required of the companies that want to list there is getting on toward a reasonable basis. -There are ^till many things they ought to do and should be required to do, as this bill requires them to do, before they list a security. For in- '-tance. there should be required from companies that 'list a new security a statement of what the intermediate profits and commis- sions of promotion are, so that the public may know what the vendor got out of that transaction, what the bankers' commissions were and what the intermediaries got out of it. There should be a rule that would require, before a security was listed, a copy of the list of profits that the officers of the corporation made out of their own corporation ; that should be disclosed, of course. There are a num- REGULATION OF THE STOCK EXCHANGE. 33 ber of regulations that have not yet been put into effect by the stock exchange that are required by this bill, with the view of properly protecting the public in each respect in which they are not pro- tected, but it is only fair to repeat, as I have often said, that the stock exchange since this Pujo investigation began has made many substantial reforms. The fundamental thing, the thing that re- quires incorporation and regulation of the stock exchange, has not been corrected and can not be corrected without regulation. It is the power to examine the books of members so as to discover manipu- lation and other dishonest practices. Senator McLean. Do you laiow whether any considerable portion of this California petroleum stock was sold to the public by means of these wash sales? Mr. Untermybr. You would not properly call them " wash " sales. It is manipulation. There is a difference between a matched order and a wash sale and a manipulated sale. Of course you can not sell these thousands of shares of stock a day without the public getting in. The best proof that the public has got in is shown by the fact that there were 360,000 shares sold in the 21 days, and that the syndi- cate managers who held all the stock and dealt it out only bought and sold 163,000 shares ; so there must have been 200,000 shares of stock that went some where else. In these transactions the men who underwrites does not get the stock. All that stock is held by the syndicate managers. Senator Weeks. I think you are in error in your figures, Mr. Untermyer. Mr. Untermter. In what way? Senator Weeks. The total transactions were about 163,000 pur- chased and 173,000 sold through the or'ders which you instance. That would indicate there are 10,000 shares more sold than were bought. In other words, the public may have bought 10,000 shares. Mr. Untermter. Oh, no ; that figuring is not right ; let us get that right. The Chairman. Page 6, paragraph 1, is where the figures are mentioned. Mr. Untermter. The syndicate managers bought 160,000 and sold 172,000, or sold 163,000 and bought 172,000. Senator Weeks. They bought the lesser amount? Mr. Untermter. They bought 162,000 and sold 172,000. But there were dealt in 362,270 shares in that time, so there were 200,000 shares with which the syndicate managers did not deal directly but that trickled out to the public in some way. Senator Weeks. You are sure the total sales mean bought and sold? Mr. Untermter. They always do, you know. The day's record on the stock exchange of the number of shares only refers to one side of the transaction. It does not refer to both sides; is not that right? Senator Weeks. That is right. The Chairman. They are identical? Mr. Untermter. They neveT double them up. They do not add the purchases and sales together. They only take one side of the account. 30578—14 3 34 EBGULATION OF THE STOCK EXCHANGE. I want to give you an idea of how these manipulated transactions have taken place in 13 different securities that were selected at ran- dom by the committee and were supported by the facts and figures, the purchases and sales day by day, and the range of prices. There are 13 different companies so selected. They are again merely typical of the methods of dealing in the active stocks. Senator "Weeks. "What years were these ? Mr. "Untermttjr. All the way from 1905 or 1906 to the date of the hearing, year by year and month by month. All the purchases and sales are shown on these charts which I will hand to the various members of the committee. Senator Weeks. It covers the whole time? Mr. Unteemyee. Yes ; it covers the whole period. You will notice two sets of blank lines on these charts. Senator Nelson. Have you one showing the Northern Pacific or the Great Northern? Mr. "LTnteemxee. They are not speculative. They are legitimate dealings and run on a legitimate basis. Senator Nelson. I think I recall one instance in Northern Pacific which seemed to be somewhat speculative? Mr. Unitermyee. That was when two giants were trying to get hold of it. That was not speculative. That was business. You will notice on the outside margin of these charts which I have handed to you the price of the stock. The next column shows the shares sold or transferred. Then the stocks dealt in are shown. Down at the bottom you will notice the years. The blank lines at the bottom and the prices of the stock are shown by those lines at different times. That lower line shows the stocks that were sold for investment; that is, those were stocks that were transferred on the books of the company, the number of shares sold and transferred. The other blank line running up into the millions of shares in some cases shows the stocks that were sold and not transferred. Senator Weeks. Do you think that that transfer of stock means necessarily that it is purchased for investment ? Mr. IJnteemyer. No ; on the contrary. I think we have been very generous to the stock exchange in these lists for this reason : Stocks that are sold upon speculation and go from the hands of one broker to another, where they are dividend-paying stocks, are usually trans- ferred on the books into the name of the purchasing brokers, but if you consider them all as investment stocks Senator Weeks (interposing). On the other hand, do you not think there are many stocks purchased for investment and not trans- ferred ? Mr. "Unteemyee. Not dividend-paying stocks — not as compared with those that are speculated in though transferred from the name of the selling broker to the buying broker ? Do you think they are anything as compared with the stocks that are passed from broker to broker on a speculative account and that are transferred by the broker ? Senator Weeks. It depends upon the security. Mr. Unteemyee. Do you not think that that is a very fair wav to get at it? Senator Weeks. It is not conclusive. REGULATION OF THE STOCK EXCHANGE. 3,6 Mr. Uktermyer. How can you make it conclusive? Senator Weeks. I do not think you can. Mr. Untermyek. Do you not think we have given the stock ex- change the benefit of every doubt when we include every stock that is transferred, even from one broker to another, as an investment stock and put that in the investment column ? Senator Weeks. No ; I do not think that is entirely true. Mr. Untermyee. I do not know of anybody who can get it more accurately. Senator Weeks. I do not think anybody could get it accurately. That is what I want to bring out. Mr. Untermyer. Referring again to these charts, the red lines show the range of prices. Senator Hitchcock. There are two red lines. What is the differ- ence? The Chairman. Those indicate the high and the low prices ? Mr. Untermyer. Yes; for the same period. You will notice also that the volume of the dealings is the greatest in nearly all these cases when the stocks are highest. With the exception of a few cases, where there was a tremendous bear market in the stock, that will be found to be the case, and then only the volume of dealings was greater when the stocks were less. Senator Bristow. It is a great game? Mr. Untermyer. It is a game that ought to be stopped, regulated, or minimized in some way or other. Senator Nelson. You do not seem to get to the root of the matter. I think the root of the matter is lifting a lot of these stocks. Mr. Untermyer. I do not think that is so. Senator Nelson. We will take a railroad that is worth $10,000,000. It is a property that is worth that for its physical property alone. $10,000,000 of bonds have been issued. Those bonds represent the actual value of the whole plant. The company has issued, in addi- tion to that, $20,000,000 of preferred stock, and $20,000,000 of com- mon stock, representing pure water. Why should that stock be listed on the stock exchange ? Mr. Untermyer. That would be a pretty drastic proposition, and I hope we are not going so far as that. I, for one, am not prepared to urge such a drastic program as that, because you never would have had a railroad built if that had been the program. It would not allow anything for the good will of any project, and good will is quite an essential element of value, as much so as physical assests, and frequently more essential. The Chairman. Would not the suggestion of Senator Nelson come up for public discussion if this plan shall be adopted of giving pub- licity to the facts ? Mr. Untermyer. When you have publicity, when you have regu- lation, when there is some power to look into the question of whether sales are real of whether they are fictitious, whether the public is being fleeced by the rigging of the market, perhaps it will be tinie enough to take up the other question. That is a pretty big proposi- tion, Senator Nelson. All that this bill asks by way of protection for the public is, first, a complete disclosure of the facts so that every- one may know what he is buying, and, second, that there shall be no sham or deception in the public dealings. 36 ' EEGTJLATION OF THE STOCK EXCHANGE. Senator Nelson. I want to tell you how you people treat us down in New York, and you are not reaching that difficulty. A firm or company in my State wants to develop a water power. They want to issue bonds and sell them, say, $1,000,000 worth, enough to start the proposition. They go down to New York to one of your great bankers Mr. Unteemyee. One of Mr. Milburn's bankers. Senator Nelson. They say : We want to borrow $1,000,000 and give you a mortgage on tbls plant. They show the property is good and amply worth all they claim, but the banker says : My dear fellow, you are not wise. You ought to Issue $2,000,000 in preferred stock and $2,000,000 In common stock. If you will give me lialf of that stock, half of the common and half of the preferred, I will see that your bonds are sold. That is the way they work us down there. Mr. Unteemyee. I think that is the way the countryman appears in New York on the scene usually to the banker. He generally comes along with his stock to give as a bonus. This bill goes this far in the direction you suggest; it requires the completest publicity in these affairs before a stock can be listed. It requires that its tangible as- sets should be stated, its good will stated, the profits to the bankers and promoters stated; so if I buy stock, at least I am not fooled as to what is water and what is not. To-day I have no way of finding out what is or what is not water. Senator Nelson. What good does it do me if go down the street and my pocket is picked to have the newspapers the next morning publish the fact? Mr. Unteemyee. You can find out before you go there what you are buying. They should be regulated, and if they make disclosures such as this bill requires, you have gone some distance toward curing the evil. Senator Weeks. If these progressive States of the West had passed laws as sound as the State of Massachusetts, for instance, they would require that stock should be sold under the direction of their railroad commissioners or public-service commissions. Mr. Unteemyee. Yes; that is right. Senator Weeks. And sold at tlieir value? Mr. Unteemyee. That is the reason you Massachusetts people or- gamze your companies somewhere else— not your public-utilities com- pany, but your others. Senator Weeks. Not the public utilities in any case ? Mr. Unteemyee. But you can do that as to 'some of your other companies. Senator Weeks. I was talking about the public-utilities laws. Mr. Unteemyee. Your public-utilities laws are admirable They are a model for Congress or any State in the Union. But that i^ the reason Massachusetts is losing such a large revenue from incor- porations other than public-service corporations that are compelled by law to organize there. I could name to you, and you could name to me, practically most of the large industries that are located in Massachusetts, but are organized in New Jersey or some other wild- cat State. REGULATION OF THE STOCK EXCHANGE. 37 Senator Weeks. You mean they are owned in Massachusetts and not located there? Mr. Unteemyee. They are located there; I happen to know that. Senator Weeks. I only know of one mill located in Massachusetts that is organized under the laws of any other State. Mr. Unteemyee. I know of more. Senator Weeks. You have the advantage of me. Mr. Unteemyee. They have to do it. They can not raise their capital there. Senator Weeks. They have been able to raise capital for practi- cally all the industries in the State. Mr. Unteemyee. At any rate, we are getting off the subject. These maps or charts may be summarized m this way: That over a series of years some of those corporations have had their shares sold, though not wholly for investment, to the extent of 8 per cent for in- vestment and 92 per cent for speculation, and others have had a larger amount of investment, some of them going to 20 or 25 per cent of investment and 80 or 75 per cent of speculation. Senator Weeks. Assuming that that statement is correct. You do not mean to imply that the speculative transactions are in the nature of matched orders, or any considerable part of them, do you ? Mr. Unteemyee. A part of them ; yes. Senator Weeks. What part of them? Mr. Unteemyee. A considerable part of them, I imagine. There is no way of determining. There are no statistics, but you know, for instance, that when the Amalgamated Copper Co. sells its capital one and one-half times over in one day, that is manipulation. Is not that true ? Senator Weeks. It looks like manipulation. Mr. Unteemyee. It looks like it ; yes. When the Rock Island has millions of shares handled in the dealings, and we find 13 times its capital sold in one year, that looks like some manipulation, does it not? Senator Weeks. It may have been. Mr. Unteemyee. We do not know, because we did not see every lorder executed ; but we have a pretty good assurance that it was done. Senator Weeks. The largest percentage of those are speculative sales ? Mr. Unteemyee. There is a considerable proportion of them specu- lative sales ; yes. Senator Weeks. Without any reference to matched orders or manipulation of the kind which you have been describing. Mr. Unteemyee. There is no doubt of the fact that the room traders and others speculate without any incentive in the way of manipulation. A good deal of that is done. The harmful part of it to the public is not so much the speculation, because I do not see how you are going to stop speculation, and I do not see why you should try to do so entirely if you could. There is much speculation that is not harmful, but most of it is pure gambling and harmful. Senator Hitchcock. Would you stop speculation ? Mr. Unteemyee. I would not. No, sir ; not entirely. I think it is a wholesome thing, provided it is genuine, honest speculation, kept within bounds as this bill proposes. 38 EEGTJLATION OF THE STOCK EXCHANGE. Senator Nelson. I am afraid you have become infected by the Wall Street spirit. Mr. UnteejMtee. You are the first man I ever heard say that. Your certification may go a great -svay with me in New York, Sena- tor Nelson. At the same time, I think, I know something about the operations, and I do not see how you are going to stop speculation. I do not know that it would be entirely wise to do it. Everybody in business speculates to some extent. The man who sells goods specu- lates on the raw material. Senator Hitchcock. These transactions of which you are com- plaining are purely speculative? Mr. Unteejitee. No; I am complaining of the manipulation. The Chaieman. Fraudulent speculation? Mr. Unteemtee. Yes. When the public is involved in that sort of speculation Senator Weeks. You do not mean fraudulent transactions? Mr. Unteemtee. I consider them fraudulent. Senator Weeks. Let us get at that word, because that is a pretty strong word. Taking the case which you have instanced of Solomon & Co. and Hallgarten & Co. Mr. Unteemtee. That is not an aggravated case at all. Senator Weeks. Those orders were actually given to brokers, who executed the orders according to your own statement and who did not know there were other orders given on the other side? Mr. Unteemtee. Yes; but they knew and you know and I know that you can not have a large activity in a stock without the brokers on the exchange knowing whether that is for the purpose of creating a market or not. The Chaieman. The brokers up there are very unsuspecting. Mr. Unteemtee. Yes; they all come from the farm at some time or other, but they are just like any other men in business, no better and no worse ; and the general standard of integrity of the member- ship of the New York Stock Exchange is very high. Senator Weeks. As a matter of fact, in all these transactions the stocks were actually delivered, were they not? Mr. Unteemtee. No; they were not. That is another difficulty. Senator Weeks. If it were not for the clearing house, they would be. Mr. Unteemtee. The stock-exchange clearing house aids manipu- lation. It makes manipulation possible. Manipulation would be very difficult if you did not have a stock-exchange clearino- house. If you had a clearing house, where the members were required, as they should be, to clear stocks like the clearing-house association is re- quired to clear checks, by having all the stocks brought in there, you could not have such a condition of unchecked manipulation and short selling as exists to-day. Senator Weeks. It has the effect of any other clearing house ? Senator Hitchcock. I got the impression at first that you wanted to put a stop to all speculative or gambling transactions, to all trans- actions except the actual buying and selling of stock. Mr. Unteemtee. Speculation is the buying and selling of stocks. For instance, a man buys stock to-day and puts up 20 per cent of it.' No one can tell whether he buys it to "sell it or to keep it. If he buys REGULATION OF THE STOCK EXCHANGE. 39 it just for a rise he is a speculator; if he sells short, he is a specula- tor. This bill certainly does seek to restrict speculation to some extent, I think to a limited extent. It does not allow stock-exchange houses to lend stocks to people who have sold short. In other words, if a man sells 100 shares of stock short he has to deliver them. The rule now permits, and the customer permits him to go to another 'broker, who is carrying them for you and for me, and get those stocks and borrow them from that broker, and make his delivery; that is what facilitates short selling. This bill seeks to prevent the lending of stocks for that purpose. Senator Weeks. The law would prevent a broker loaning his stocks, as a matter of fact? Mr. Unteemyeb. No : this bill prevents him lending the customer's stock and not his own. Senator Weeks. But his customer's stocks are his until they are paid for? Mr. Unteemyek. That is not the law with us. Senator Weeks. It is the law in Massachusetts. Mr. Unteemyer. He has a lien on those stocks. Senator Weeks. The Supreme Court of Massachusetts has passed on that question. Mr. Unteemyee. I do not understand any court has laid down any such proposition. I should not dispute with you if you were a lawyer. You being a business man I take issue with you and I will under- take to say that no court has ever held that the pledges of a stock- exchange certificate, or any other kind of a certificate, is the owner of it. He is the lender and that is all.- Senator Weeks. You look up the decision of the Supreme Court of Massachusetts and the law of England and then come and apologize. Mr. Unteemyer. No; on the contrary, I would not ask you to apologize to me, because you are not supposed to know the law. Senator Weeks. Having been in business, I am supposed to keep within the limitations of the law. Mr. Unteemyee. Then, you always go and consult a lawyer as diligently as you can, if you are wise. Senator Nelson. With all due respect, it seems to me your plan is just scotching the snake. It is not killing it. Mr. Untermy'eb. I have been told it was too drastic. Everybody connected Avith the stock exchange and the newspapers is denounc- ing it as too drastic. Senator Nelson. You do not reach the real difficulty. The real root of the trouble is the listing of worthless stocks on the stock exchange. That gives them credit among the public when you list them on the stock exchange. Every time they list a stock there that is watered and does not represent actual value they are impos- ing on the public by saying that "We regard this stock as worthy to be listed on the exchange." Mr. Unteemy'ee. I imagine you will reach that by your trade com- mission and Interstate Commerce Commission control of securities. Senator Nelson. I hope we will reach it somewhere. 40 EEGULATIOlir OF THE STOCK EXCHANGE. Mr. Untermyee. I do not think you can reach that through the stock exchange entirely. This bill does not seek to bring about the millennium. It seeks simply to be an advanced step in the journey toward honest conduct in the stock-exchange business. I want to say this, if I may be pardoned for digressing a moment : There is an opposition to this sort of legislation — a natural opposi- tion on the part of the press. I am going to ask you gentlemen to ignore and set aside that attitude of the press, especially the metro- politan press. I think it ought to be understood what motives may be behind or back of that opposition. The press has always been very jealous of any extension of the f)ost-ofiice privileges or the use of the post office for even the most egitimate purposes. Fearing that it may at some time reach the point at which libelous matter will not be permitted to go in the mails, or if it does that somebody may be held accountable for it by some sort of legislation on the part of Congress, they assume this attitude of opposition. Whatever may be the purpose that opposi- tion has been very much accentuated since the decision a few months ago by the Supreme Court of the United States in the case of the Lewis Publishing Co. against Morgan, in which you will remember Congress, by a rider on an appropriation bill for the Post Office De- partment, said something to the effect that no newspapers should be accepted as second-class matter, which means they should not be accepted at all, because that is the only way they could send that newspaper matter through the mails, unless certain conditions are complied with. One thing is that they must state their circulation; another is that they must not send advertisements under the guise of news matter without labeling the matter as an advertisement ; and there are a number of other conditions. Senator_ Nelson. They must state who are the owners and what their holdings are ? Mr. Unteemter. Yes. Senator Nelson. While you are on that press matter, let me call your attention to another matter. Do they allow newspaper re- porters on the stock exchange Mr. Unteemyer. No ; I think not. I do not think any but mem- bers are allowed on the floor of the exchange. Senator Nelson. I mean in the building. Can newspaper re- porters be there in the gallery and know about the sales ? Mr. Unteemyer. I imagine they can be in the visitors' gallery. I do not know as to that. Senator Nelson. They could be there and make a note of the sales and other transactions? Mr. Unteemyer. It would not be possible. Senator Hitchcock. If there is any excitement, they describe it. Mr. Unteemyer. They describe a general excitement, but they could not know the sales. Senator Nelson. Suppose the newspapers, through their own ac- count, through their own reporters and not through any instru- mentality or employee of the stock exchange, printed the stock transactions every day ? Mr. Untermyee. That is a physical impossibility. Senator Nelson. But suppose they did it, how could you exclude those newspapers from the mails ? BEGULATION OF THE STOCK EXCHASTGE. 41 Mr. Untjebmyer. I am coming to that in a moment. That is a physical impossibility. You will see that when you understand how the quotations are gathered and how they are distributed. I was about to say that since this decision in the Lewis case the fear and hostility of the press to any kind of legislation, however legitimate, looking to the freeing of the, mails from fraudulent mat- ter and to their use for their legitimate functions in keeping fraudu- lent matter out of the mails, has become very much more intense, so that while many of them doubtless would like to see the stock ex- change regulated, they would not like to see it regulated in the only way in which it can be regulated — that is one ground of objection that is undoubtedly made. Senator Hitchcock. Of course, as a newspaper man, I will have to stop you right there. I do not think there is any sentiment at all among the newspapers in the country against the proposed stopping of fraudulent matter being circulated through the mails. There is a very strong prejudice in the legitimate newspaper world against vesting any man, whether he is the Postmaster General or anybody else, with the power to censor the matter which newspapers publish. Mr. Unteemyee. This does not attempt to censor the matter at all. This bill does not allow him to open a letter or newspaper unless it is addressed to himself. I am coming to that in a moment. Senator Hitchcock. But it does allow him in section 1, where it says:. Unless such exchtinge has been incorporated under the laws of the State or Territory in which its business is conducted, or unless the charter and by-laws of such an exchange or the law under which it is organized shall contain regu- lations and prohibitions satisfactory to the Postmaster General. In other words, the Postmaster General has got to be satisfied that those things are right; that is, it leaves it purely discretionary with him ; and if he is not satisfied the paper can not even publish the news from this exchange. Mr. Untee^iyee. Let us see what he has to be satisfied about. Somebody has to be satisfied. You have to regulate in some way. Senator Hitchcock. No one wants to establish a censorship such as they have in Russia. We do not want such a censorship in the United States, and the newspapers want to protect the public from it. They are not going to vest in any individual the power of admission or refusal of admission to the public mails. Mr. Unteejiyer. But they do now. The Postmaster General can issue a fraud order where he believes that any security is being dealt with or any matter is being sent through the mails that has a ten- dency to deceive the public, and the Supreme Court has affirmed that principle in a number of cases that are rather border-line cases. He can prosecute criminally for sending misleading and fraudulent rep- resentations through the mails, and he can stop anything going through the mails that has the semblance or color of fraud. Senator Weeks. He has all the legitimate power he should have, and the newspapers do not object to that; but they do not want the Postmaster General intrusted with the power to say what news the papers shall publish. Freedom of the press is absolutely fundamental in this country, and it is not only the newspapers but it is public senti- ment that will not permit any one man to" have that power. 42 EEGULATION OF THE STOCK EXCHANGE. Mr. Untermyer. Senator Hitchcock, there is nothing in this bill that can be regarded, hj any stretch of construction, as either a cen- sorship of the press or as abridging the freedom of the press; I would be the last man in the world to have anything to do with any such legislation. Let us see what the purpose of this bill is and what it does. It is the only possible way, as the Supreme Court said in the Lewis case, of preventing fraudulent matter from going through the mail. Let us see what this bill does. The stock exchange is an integral and important part of the great financial system of this country, as great as any other part of the system — more so, as I have said, than the banks. The quotations of the New York Stock Exchange are taken by banks all over this country as a basis for loans on securities. Courts of justice in every section of the country figure their damages on the quotations of the New York Stock Exchange. Those quota- tions constitute evidence of value. The Comptroller of the Currency, in fixing the value of the assets of a bank, fixes that value on the stock-exchange quotations. Superintendents of banks, taxing offi- cials in taxing a man's capital, in attempting to settle an estate, take the stock-exchange quotations. In fixing an inheritance tax the stock-exchange quotations of securities are taken. This is not a thing that affects New York alone. This is an institution which is just as foreign to New York, almost, as if it were in Kamchatka. It is a .country- wide institution, impressing its influence upon nearly all the daily transactions of the country. What more important, what more imperative, than the dissemination through the mails of that sort of information should be protected, so that it can not create fictitious values, so that it shall represent the meeting of the minds of the buyer and the seller. How are you going to do it? What is the most legitimate method? What Is the title of this bill, to begin with, and does it go one iota beyond the title? The title of the bill is— To prevent the use of the mails and of the telegraph and the telephone in furtherance of fraudulent and harmful transactions on stock exchanges. It has been said. Why does not the State of New York take care of it? Why does it not insist on incorporating and regulating the ex- change? You can not have one rule by which the quotations of the New York Exchange go through the mails and another for the Boston quotations or the Chicago Stock Exchange quotations. You must have some uniform restriction under Avhich these quotations are permitted the use of the mails. Senator Nelson. Pardon me, Mr. Untermyer — excuse me for ask- ing you questions, for I am asking to clear up this matter in my own mind— assume you have these restrictions about publication. What tribunal or board is to determine the character of these sales ? Where is that tribunal that determines whether or not these sales that you call fraudulent are fraudulent? Who is to determine that question? Here are, say, 1,000 sales or 100,000 sales of shares of stock in a day. Mr. Untermyer. I will tell you that. Senator Nelson. Senator Nelson. Who is to determine that question? Mr. Untermyer. This bill first defines manipulation, and defines fraudulent transactions of different kinds. To define them and say they are crimes means nothing. That does not enforce their detec- REGULATION OF THE STOCK EXCHANGE. 43" tion. "i ou can not find out when a transaction is manipulated unless you can get at the books of the brokers. When you incorporate the stock exchange and provide that manipulated transactions and fraudulent transactions shall not go through the mails, that is per- fectly legitimate. Senator Nelson. But here Mr. Unteemyer (interrupting). I am coming to your question,. Senator Nelson. The next question is to find some machinery for discovering that.. Senator Nelson. That is the point. Mr. Unteemyer. Because we merely say they are fraudulent means nothing. The stock exchange itself has the right to call on every broker, to get his books and look them over. They can tell whether a transaction is manipulated. They do not want the public au- thorities to have that knotvledge or means of securing it. They do not want to give the same facilities to those who are intrusted with the mails as they themselves have. All this bill seeks to do is to require them to incorporate so that the Postmaster General can go in there and find out whether a transaction is fraudulent; and if he can do that, we will have no more fraudulent transactions.. It is because he can not get at those books, because nobody can do that except the members themselves of the board of governors of the stock exchange; it is because of that inability to get the evi- dence that you can not stop these transactions. This bill asks for nothing more or less in that direction than the right, on the part of a responsible officer of the Government, to go to those who are carrying on these transactions, promoting these frauds to deceive the country, and ascertain whether or not they are fraudulent — to get the evidence which is not otherwise obtainable, and without which no law can be made effective. Senator Nelson. Take the example you gave of what you call wash sales. We will say Senator Weeks is a broker, and he buys, and I am another broker, and I sell, and you are the stock ex- change. We are independent of each other; I know nothing about his deal and he knows nothing about mine. Now, do you, as the stock exchange, determine that his buying and my selling are wash sales ? Mr. Unteemyer. They have no trouble in determining it. The governors can determine it whenever they please. For instance, if you are buying and selling Senator Nelson (interposing). But I am buying, and Senator Weeks is selling. Mr. Untermyee. If you are buy\ng and he is selling, then that is not a wash sale. Senator Nelson. But suppose some third gentleman has the stock. Mr. Unteemyeb. A wash sale is when you are buying and selling, both. Senator Nelson. The same man ? Mr. Unteemyer. Yes. Senator Nelson. The same broker ? Mr. Untermyee. No ; through the same authority. Senator Nelson. Senator Weeks is one broker and I am another broker. How do you, as a stock exchange, determine that our deals are fraudulent? 44 EEGULATION OF THE STOCK EXCHANGE. The Chairman. In all likelihood he would be on the outside sell- ing through you buying through Senator Weeks; in other words, he would use you two gentlemen as agents to make one transaction. Senator Nelson. Would not you have to call me up and say, " Mr. Nelson, for whom are you selling? " Would not you have to call up Senator Weeks and ask, "For whom are you buying? " Other- wise, how could you determine? Mr. Untermtee. Manipulated transactions are different. For in- stance, let us take the California Petroleum Co. again. Lewisohn Bros, is a stock-exchange house. Its books would show that it was buying and selling and giving orders every morning on both sides of that market, and at the end of 21 days that it had bought or sold practically nothing. That could never have been discovered except under the compulsion of a subpoena in that particular inquiry. We had no trouble. We would have no trouble and you would have no trouble in uncovering manipulated transactions if we could get access to the books on both sides of the dealings. Senator Nelson. Did not they have these transactions operated through brokers ? Mr. Untermtee. Certainly they did; but they are brokers, too, and their books show they gave buying and selling orders and that they bought and sold every day. So if you get at their books you you would be able to ascertain those facts. Suppose, now, a man outside who was not a broker, gave you buying orders, Senator Nelson, and gave Senator Weeks selling orders, and you would both appear on his books. You would appear on his on his books as a seller and Senator Weeks as a buyer. When the proper authority, the stock-exchange governors, looked at those two sets of orders, both the buying and selling orders — and they exchange stocks by the minute or by the hour — it would not take them long to find out whether you knew you were washing that stock. Those are bookkeping propositions. We can not go into the question of how you are going to do it when you get the power. The fact remains that the exchange itself has the power, through its board of governors, to do it, and that it does find out manipulation whenever it chooses to do so. Is it right that it should be left to them to determine? Is it right that the processes of investigation should be lodged exclusively in the men who are themselves concerned? The Chairman. It leaves the protection of the public in private hands that may profit by it. Mr. Untermter. Not only that, but the record shows that the bulk of business done on the exchange is done by them. Senator Shaeroth. The Post Office Department have machinery by which they detect frauds, and issue fraud orders against the use of the mails, Mr. Untebmyer. All the time. This is more legitimate and more strictly within the letter and spirit of the post office power than many of the powers now exercised daily, because there can be no question about the fact that this is not a subterfuge to regulate the exchange, but simply an attempt to protect the mails and instrumen- talities of interstate commerce against fraudulent deception of the public. If they may throw out of the mails a prospectus because EEGULATION OF THE STOCK EXCHANGE. 45 they learn that there is a representation in it that is not true, why hesitate to authorize the department to ascertain whether the mails are being used to perpetrate far more serious and far-reaching frauds? The Supreme Court has held the power is absolute; they have gone further than anybody who has regard to the liberty of the press would care to go. The power asked by this bill does not com- pare with that now being exercised. Senator Shafkoth. On the theory that the United States has the right to control the privilege of using the mails ? Mr. Untermyeb. Yes. I was not subscribing to that proposition without limitation, but that is the law. If I were asked what the law should be, I should say that the courts have gone very far, but here you have no border-line case. You have no encroachment, no threatened encroachment at all. You have what? The Postmaster General can not stop these false and manipulated quotations from going through the mail until he has found and established a case of manipulation. Then his remedies are very much circumscribed. He has power under other laws with respect to fraud orders, with re- spect to circulars and prospectuses, that go through the mails to summarily stop their circulation. There is no attempt to give him any such authority here. Senator Shafeoth. They always make citations to appear and show cause why they should not be excluded from the mails. Mr. UNTEHaiYEE. They do; but when they decide the Supreme Court has said there is no review. The court may think that the prospectus is genuine and that it is not intended to deceive, but they will not review it. They say the Government has the power to de- termine what shall go through the mails and that it has supreme con- trol. The States surrendered, under the post-roads clause of the Constitution, all powers to the General Government, and the Gen- eral Government has autocratic power in that respect. This bill does not contend for any such autocratic power. I do not think the power should be extended. I think it has gone to the limit. In the Lewis case it has gone about as far as it is possible to go; but under this bill we are not seeking to exercise all the power that is now possessed by the Government. This bill expressly provides that the Postmaster General can not open a letter or newspaper unless it is addressed to himself. There is an express prohibition m the bill against it. , . . , p xi, • Nothing could be more moderate, and it is the purpose ot the in- corporation of the exchange to get it in a position in which it would be subject to legitimate regulation. -, j.. -, Senator Weeks. That incorporation has to be done under the laws of some State, does it not? ■- i, n u Mr. Unitdemxee. Not necessarily, but the bill provides it shall be incorporated under State law. . Senator Weeks. Suppose the State refuses to incorporate? Mr Untermyee. You have no right to assume that. We have a general incorporation law in our State for the incorporation ot the ^^Senator Weeks. Did not the State of New York refuse to incor- porate the stock exchange? r^, , -, , 1^ !.„„„ Mr Unteemyer. On the contrary. The stock exchange could have incorporated under the general law of New York. I am glad you 46 REGULATION OF THE STOCK EXCHANGE. called up that question. The State of New York did not refuse to incorporate. An incorporation bill was devised and proposed, and I went up there and fought it. It was nothing but a blind. The stock exchange fought it and we all fought it. I opposed it on the ground that it provided that the books of the stock exchange should be subject to supervision. The stock exchange having said it kept no books, it was rather a useless formality to give the right to look at the books of the exchange. It was the books of the brokers that we wanted the right to inspect on the part of a public authority. New York State passed a series of laws last year, following the Pujo investigation, and as a result of it they passed a number of other laws, and I have tliem here. They are too innocuous and inoffensive and too limited to reach the core of this thing. I infer they were intended to be ineilective. They passed a law against manipulation that does not describe manipulation at all. It describes merely fictitious sales, and you can manipulate all you please and still not evade that law. Senator Weeks. Do you mean the New York Stock Exchange could be incorporated under the general incorporation laws of the State of New York? Mr. Unteemyee. Certainly. Senator Weeks. As they are now? Mr. Unteemyee. The Consolidated, I think, is incorporated — the rival exchange. Is it not, Mr. Milburn ? Mr. JNIiLBUEN. No; I understand not. It is not. Mr. Unteemtee. Mr. Pomroy, you know? Mr. PoMEOY. No ; it is not incorporated. Mr. Untermyer. The produce exchange is, and there are a number of exchanges that are incorporated. That sort of incorporation un- der that general law would not get us much further. There is another aspect of this thing Senator Weeks (interposing). Let me ask you this question in connection with incorporation : Would you go so far as to let the brokers incorporate? Mr. Unteemyee. Certainly. As long as these regulations are in the bill, it does not make any difference who incorporates. Senator Weeks. Would it not lessen the responsibility of the brokers ? Mr. Untee^myee. No. Every broker would still be responsible. I would go much further. I would save in the act of incorporation the provisions now existing for limitation of membership. I would not save the one thing that the stock exchange wants to save, and that is its present discipline over members. As at present constituted, under the decisions, its right over members is supreme. There has been no relief granted against its decisions in respect to the expulsion or suspension of a member. I do not think its record in the past, as shown by this testimony, entitles it to continue to discipline its mem- bers without the right of review, as the disciplining of a member means that if a member is convicted of having split his commission or done something of that kind he is expelled, and he loses every- thing he has in the world, his reputation, his property, and every- thing. Senator Nelsox. Does he forfeit the value of his seat? KauujLATION OF THE STOCK EXCHANGE. 47 Mr. Unteemyeb. No; the value of his seat is retained for fhe benefit of himself or creditors. I do not think he loses that. Senator Weeks. But he loses his right to do business on the stock exchange. Mr. Untekjlyee. And he loses his life's work and his customers' business, his customers, his reputation, and perhaps everything he has in the world. That is not subject to any sort of review, and I think it ought to be subject to review. Senator Weeks. Has it ever been abused, do you think? Mr. Ui^TERMyEE. I think it has been grossly abused. When I say that, I do not mean to say that men have been expelled without reason, but I think they have been expelled for comparatively trivial offenses, or they have escaped any sort of discipline for the gravest and grossest offenses. Senator Hitchco(;k. The public has not much interest in that. They go into the game knowing what they are likely to encounter. Mr. Unteemyer. The people who are members of that exchange have some rights. Senator Hitchcock. They need not go in there if they do not want to. Mr. Unteemyer. It is not a subject that interests one very much from the public point of view, so far as I can see. It is not one of those things on which anybody interested in this bill would insist very strenuously. If the lawmakers think it is an unjust condition, they would remedy it. Senator Weeks. Do you think supervision over the members of the exchange by the governors of the exchange is better than it was five years ago? Mr. Unteemyer. Yes; I think it is constantly imjDroving. Senator Weeks. Do you think it is pretty thorough under present conditions ? Mr. Untermyer. No ; I think it permits the very class of transac- tions that the public is interested in seeing stopped; and the fact that it may be better now than it was — assuming that it is — is no reason why the Government should leave wide open the use of its mails for the perpetration of a class of illegitimate transactions upon the whole country such as have been disclosed by this record. If you will read this record, you will be astounded at the situation and at the level of the morale on certain subjects on the exchange. The level of membership is very high when it comes to meeting their obligations. They keep them with scrupulous care, and they are made in the hurry of a vast business, without the scratch of a pen, but they are kept. The peculiar feature is that while they are kept, if a stock-exchange broker fails and his seat is worth $40,000 or $100,000, the members have a preferred claim to the full amount of that value before any victimized customer can get a cent. That seems to me a little inconsistent with their standards. They have that advantage or preference over the other creditors, which is not a just thing and which ought not to be permitted. But I do not consider that is a matter for Federal regulation. We have not sought to touch it. There are a dozen abuses disclosed by the report which the bill has not sought to reach, because they have no legiti- mate relation to the use of the mails. Internal management of the 48 BEGULATION OF THE STOCK EXCHANGE. stock exchange is not a matter of interest to us at all just now. It may become important when the terms of the State charter come to be fixed. Senator Hitchcock. Is Congress not interested in protecting the public from losses by gambling operations \ Mr. Unteemtee. Yes. Senator Hitchcock. Suppose John Smith begins to gamble on the Xew York Stock Exchange and loses $5,000. Senator Shaproth. The Supreme Court decided that in the Lou- isiana Lottery Case. Senator Hitchcock. Have we any interest in that matter? Mr. Untehmtee. TATien it is done through the instrumentalities of the mail, yes. Senator BEitchcock. Then we should stop speculation altogether? Mr. UiJTEEJiTEE. The purpose of this bill is not to prevent people from being deceived by gambling, but to prevent the honest in- vestor, who buys securities, from being deceived in his purchase as to its price, or as to its value as regulated by its apparent price, be- cause it may be a manipulated price. Senator Hitchcock. Most of these looses are not from the invest- ment, but from speculation. Mr. UxTEKMTEE. Xo : I think the public losses are investment losses. Senator Hitchcock. Take the oil stock: I doubt whether there are many investors out in my State who bought any oil stock. Mr. UxTERMTEE. I would not be surprised if many had in your neighboring States, but my guess is as good as yours and your guess is as good as mine. Wlien the public does come in, and the small public comes in when this fevered excitement goes on, then we have the question up as to protesting against the mails being used to de- ceive them. This bill does not attempt to stop gambling. It is the use of the mails and the use of these manipulated quotations to attract investment through the country to which we object and which we want to stop. For instance, I happen to have $1,000 and I live in Omaha and I am told by my broker, who is told by his broker in Xew York, "Here is an active stock; buy it." I may buy it outright. I do not gamble at all in that stock. I may buy it. because some man who is supposed to know tells me it is a good pur- chase. But I am allowed to do it and my broker is allowed to do it and urged to do it by his broker in Xew York, and in that way we get into the game of manipulation without knowing it. I do not think the people who lose by these transactions are largely gamblers. Senator Hitchcock. My knowledge is that the western men who go to Xew York and dabble in stock or who spend there do not do so for investment, because we have plenty of good investments out West that pay 10 per cent ; but they do it for speculation, and S9 out of everj- $10 are lost by an attempt to speculate in the Xew York game. Mr. IjNTERMrEE. AVhy has the Government gone actively into the business of stopping all these circulars that are intended to deceive the people in the matter of the purchase of stocks ; How do you reconcile the lottery case and that line of cases with your present KEGULATION OF TPIE STOCK EXCHANGE. 49 suggestion? AVhat reason can be assigned for stopping all other forms of fraud through the mails and leaving this unchecked? Senator Hitchcock. I think where the agents of the Post Office Department find the mails are being used under seal to promote a confidence game or a direct fraud, of course it should be stopped. Mr. Untermyer. Yes. sir ; of course. Senator Hitchcock. But when it comes to saying the newspapers shall not carry stock ciuotations of the stock market in New York as news unless the Postmaster General approves the method of that stock market, you are interfering with the liberty of the press, and you are providing darkness instead of light. Mr. Untermyer. The Postmaster General is considered good enotigh to decide in the most arbitrary way whether certain things shall go in the mails at all. Yet you now suggest that as to this class of frauds he shall not even have the right to inquire, but must permit the mails to be used unchecked for any form of deception stockbrokers may see fit to perpetrate through the use of the mails. Senator Hitchcock. He has powers, and 'very just powers. I be- lieve in restricting the mails and in preventing frauds, but I do not believe in making the Postmaster General into a censor of the press. Mr. Untermyi:e. There is no censorship of the press here at all. The press has nothing to do with it. This censorship is imposed upon the operation of the exchanges that want the use of the mails. It does not touch the press. All it says is that newspapers shall not carry the quotations of any public exchange or public market unless that exchange has conformed to certain regulations. Senator Hitchcock. Can I not permit my New York correspond- ent to send me news with reference to the quotations of the Reading stock in New York on a certain day unless the Postmaster General thinks that particular stock market could come under the Sunday- school class ? You are touching the liberty of the press, and touch- ing something that you can not touch, and public opinion of the United States will not tolerate it. Your purpose is all right, but you must choose another method. Mr. Untermyer. You can not get another method. You are up against the proposition of whether you are going to allow these great instrumentalities of our financial system to regulate themselves and be above and beyond the law, or whether you are going to have somit way of seeing that they are properly regulated. It does not coma anywhere near touching the freedom of the press. It does not in- volve a single principle that is involved in the freedom of the press. The newspapers can carry every security of any incorporated ex- change. Senator Hitchcock. No ; not under this laAV ; not until it has the full approval of the Postmaster General. Mr. Untermyer. But an incorporated exchange, incorporated un- der a charter and by-laws that are approved by the Postmaster Gen- eral, would be all right. Senator Hitchcock. It is not sufficient that a great State incor- porates the exchange. These transactions all have to be satisfactory and the Postmaster General must approve them? Mr. Unter3iyer. I beg your pardon, Senator Hitchcock; I 5~ not think that is a fair statement. 30578—14 i 50 EEGULATION OF THE STOCK EXCHANGE. Senator Hitchcock. Read what is stated on the second page. Mr. Unteejiyer (reading) : Unless tlie chiiiter nud by-laws of such exchange or the law uurter which it is organized shall contain regulations and prohibitions satsfactory to the Postmaster General safeguarding the transactions of such exchange, the char- acter of the securities dealt in thereon, the genuineness of the quotations thereof, and all information concerning such transactions that is to be carried through the mails and by telegraph and telephone line beyond the limits of the State of the organization of said exchange, etc. Those transactions that must be carried through the mails niust comply with this lays- in certain particulars. "\^''hat are the particu- lars — the specified particulars? They, and they only, are within the jurisdiction of the Government and such features of the charter and by-laws as are especially scheduled here. What are they? The fact requires that the corporations must make a statement — that is, that they shall be honest companies, whose affairs may be known ; second, that such company shall disclose, in the case of a new company, what the promoters got out of it; third, that those corporations that are listed there should be required to file statements once a year; next, that manipulation of securities shall be prevented in a certain way. That is all there is to it. They may have any other charter powers or by-laws or do anything else that their law permits them to have. All the Postmaster General can intrude upon is that one specific point, to see that their use of the mails is not fraudulent in certain limited and prescribed details. What has that to do with the freedom of the press? If a public market that does not establish these prohibitions against frauds wants its securities to go through the mails, the newspapers can not take them and distribute them, but that does not interfere with the freedom of the press. You might as well say it was an interference to exclude a newspaper containing a fraudulent advertisement. It would, of course, be ex- cluded. Senator Hitchcock. It is not a question whether the Xew York Stock Exchange wants its quotations to go through the mails. It does not send them i Mr. Untermyer. Yes: it does. Senator Hitchcock. No; the newspapers send and get them. Mr. Unter^iyee. You are wrong, and I will show you that you are wrong. The Xew York Stock Exchange holds all' the stock of the New York Quotation Co., which operates tickers south of Chambers Street. It collects all the quotations of the exchange. It has a contract with the Western Union Telegraph Co., through a subsidiary, the Golden Stock Quotation Co., all the stock of which is owned by the Western Union Telegraph Co. It has a contract with that company, terminable on one day's notice wherebv the Western Union pays them $100,000 a year for the exclusive right to take these quotations off the exchange and distribute them but not south of Chambers Street, because that is where it has its own territory. The stock exchange owns the stock of the ticker companv that has tickers in the offices of the members south of Chambers Street, and those quotations are supplied by that companv All other quotations are supplied to the Western Union throuoh one of its companies, and the stock exchange gets $100,000 a year for that right. KEGULATIOX OF THE STOCK EXCHANGE. 51 Those quotations are collected by the employees of the stock ex- change, on the floor of the exchange. Nobody else is permitted to collect them; nobody can go on the floor. They are furnished to the Senator Nelson (interposing). To the Associated Press? Mr. Uni-ermyer. No. They are furnished through the Western Union. They come through the Western Union to the Associated Press. They are not furnished by the stock exchange direct. Senator Nelson. Does the telegraph company charge the Asso- ciated Press? Mr. Untermyer. Presumably, yes. At any rate between the stock exchange and the Western Union, the stock exchange controls the way in which those quotations may be sold and circulated. It con- trols also the way in which the people get them below Chambers Street. At every stage at which these quotations go out to the world, they go out under the absolute control of the stock exchange, which collects and distributes them, presumably vouches for their accuracy. Senator Hitchcock. That does not answer my question. "When they are once sold, they are public property and every one of the thousands of newspapers in the United States is able to get at them ? Mr. Untermyer. Through whom? Senator Hitchcock. They are published. Mr. Untermyer. After they are published, yes. Senator Hitchcock. They are given to the public, just as the notes of the stenographers of the Senate are given to the public; and what you have described is simply the regular method for giving them out. Instead of having the thousands of newspapers get them, they are issued in a certain way, and maybe a charge is made that covers the cost of the transaction, whether it is $1,000,000 or more. When the transaction is once concluded, it is news that every paper in the United States is entitled to. Mr. Untermyer. We do not object to that, but the plan here is Senator Hitchcock (interposing). What I am getting at is this: It is not the New York Stock Exchange which sends out these quota- tions through the country. Mr. Untermyer. Yes ; it is. Senator Hitchcock. These newspapers all pay for having it trans- ported through the Associated Press. Mr. Untermyer. It is the New York Stock Exchange that sells them for distribution through the country, and through that dis- tribution it gets its business. Its brokers have their branches and private wires to almost all the large cities of the United States, and the orders come to them from brokers all over the United States, based upon those quotations. Senator Hitchcock. I am not talking a.bout orders that come from quotations immediately. I am saying that every morning the daily papers are publishing quotations on the New York exchange, and" the Chicago and Boston and other papers are having to have that news transported to them, but it is not the New York Stock Exchange that pays to have it sent out. The papers are paying either the Associated Press, the United Press, or Hearst's service or their own special correspondents to have them sent out to them. The 52 EEGULATION OF THE STOCK EXCHANGE, papers of the United States will not permit any Postmaster General ' to say how much of that news shall come to them, any more than they will permit him to say what international news shall come to them, or any other news. Mr. Unteemyek. The papers of the United States are not con- cerned in it at all, except in this respect: If this bill passes. Con- gress will have enacted that unless certain regulations are made, safeguarding the honesty of quotations on which the whole country can safely rely, they can not be carried out through the mails; and that does not affect the freedom of the press. It does not come within 1,000 miles of affecting the freedom of the press. If you can not regulate them, then throw open the doors and let the mails be used for defrauding everybody in the Country. Senator Shafeoth. Is it any more an interference with the free- dom of the press than this lottery advertisement that is published, which the department says shall not be published by any newspaper? Mr. Unteemyee. It shall not go through the mails. They might call that interfering with the freedom of the press. Here all they have to do is to conform to reasonable regulations, that you must be satisfied will safeguard against fraud and nothing else, and when you get to that point you should not go any further. Senator Weeks. Let me ask you this question, Mr. Untermyer: Suppose the New York Stock Exchange were incorporated under the laws of the State of New York and some portion of its trans- actions indicated that orders of the character about which we have been talking were given to brokers and executed on the exchange. How is the Postmaster General going to proceed as a legal propo- sition to get at that? How long will it take to determine whether some broker is doing an illegitimate business. What is going to stop that stockbroker continuing to do it until it has gone through all the courses of the courts ? Mr. Unteemyee. You have told the people what is a criminal offense and you have the right as Postmaster General to come in and get the evidence, just as the Interstate Commerce Commission does in rebating cases. How many rebate cases could have been discovered if the Interstate Commerce Commission had not the right to go into the books of the railroad companies and find out the facts ? Could you ever have stopped rebating? You could no more have stopped rebating without that privilege than you could stop manipulation without this privilege. Senator Weeks. I am not making an argument on the advisa- bility of it. I am simply asking how long it will take to get at your dishonest broker and get him convicted, he going on with his business all the time until that operation is completed ? Mr. Unteejmyee. My answer is that if there is an official authority to go in and examine the books and find the facts it will make it a very rare occurrence. No broker will take the risk. That law will almost execute itself. I do not believe there will be any occasion, except in rare instances, for any action on the part of the Govern- ment. That is a pretty good reason for having this sort of regula- tive law. It is not fair to the members of the exchange that the governors of this incorporated company shall be the judges of when their own members do this or that or the other. It does not stand the test of arguirent for a moment. REGULATION OF THE STOCK EXCHANGE. 53 Senator Weeks. Do you think it would be a good reason for in- corporating a labor union or a farmers' institute or the Knights of Columbus or some other secret organization, we will say, as for incorporating the stock exchange? Mr. Untermyee. If I could go and buy their securities on the statements that they put out and on public dealings and on the faith of their quotations, it might be, but there is no analogy between the cases. What we want to prevent here is the. false appearance of value as represented and reflected by these quotations being acted upon throughout the countrj' by banks and trustees and courts of justice and public authorities. Senator Weeks. Nearly all these stocks which you have instanced are not investment stocks. They are speculative stocks. Mr. Untebmyek. They are investment stocks, nearly all of them paying dividends. Senator Nelson. How much of a dividend has the Erie been hav- ing since Jay Gould got through with it ? Mr. Untermyee. Some of the stocks are paying dividends, but not all. Senator Nelson. The public have not had any dividends since. Mr. Unteemyee. Let us see. We have 13 cases that are presented here in the record before the Pujo committee. The Reading is one. This is an analysis of those charts. Senator Weeks. The Reading has been in years past a highly speculative stock. It is getting on a sounder basis. Mr. Untermyee. The question is whether it is a dividend stock. Senator Weeks. How long has it been paying dividends? Mr. Untermyee. I do not know, but some years. Senator Weeks. I think you will find that most of the time dur- ing which you make these comparisons it was not paying dividends. Mr. Unteemyee. Oh, yes ; I think it was. Of the Reading stock, the entire stock listed and subject to sale was sold 20 times over in one year at two different times, and from that up to 43 times over in a single year. In a single month of that period it was sold 6 times over, and in only two months of the entire period was it sold less than once over in a single month. Although it is a dividend-paying stock, the number of shares transferred on the company's books aver- aged for the period 8.6 per cent of the shares sold. Senator Weeks. I think you will find that it Was not a dividend- paying stock in the early days. Mr. Untermyer. It was not in the early days, but has been for some years. In United States Steel, since January 1, 1906, the entire common stock issue has been sold 5 times over each year on the average, while the number of shares transferred on the company's books has aver- aged 25 per cent of the number sold. In the same period the entire common stock issue of the Amalga- mated Copper Co. has been sold 8 times over each year on the aver- age, while the number of shares transferred has averaged about 20 per' cent of the number sold. . ^u tt ■ r. ■« t? -i The entire listed common stock issue of the Union Tacihc Rail- road has been sold 11^ times over each year. These are all dividend- paying stocks so far. 54 KEGTJLATION OF THE STOCK EXCHANGE. Senator "Weeks. You do not think the Union Pacific stock has ever been manipulated, as we have discussed, do you ? Mr. Unteemyer. Yes; I do. Since you ask my opinion, I think the bulk of Mr. Harriman's fortune came from that sort of manipula- tion, but I know nothing about it except from hearsay. Senator Hitchcock. How has it been in recent years? Mr. Untermyee. Very largely that way at times, I imagine. Senator Hitchcock. Manipulated? Mr. Untermyer. We did not go into the books of this company, and I do not want to make what would look to be like an assertion, but it would seem to me that way. Senator Weeks. Is it not true that stock is dealt in by people who want to speculate in it, and who buy it because they think it is going up? It is a standard stock in many Avays and for that purpose. Mr. Unteemyer. Very largely, at times. Senator Weeks. Is there any evidence that there have been substan- tial matched orders in Union Pacific stock in recent years ? Mr. Unteemyer. We could not get evidence on that, except what these lists show, and I think the lists show when a stock of that vast number of shares of capital has been sold 11^ times over in a year it is not all speculative investment. Senator Nelson. We farmers have that in the West with respect to our wheat crop. They sell our wheat crops many times over, a great many times more than we produce, in the course of a year. The same is true of our corn crop and so, I believe, of the cotton crop of the South. Mr. Untermyer. It is sold in New York, largely, and Chicago? Senator Nelson. Yes. Mr. Untermyer. It is sold by speculators? Senator Nelson. Yes; and sold in Duluth and Minneapolis. Mr. Untermyer. And sold short to cover? Senator Nelson. I presume so. Mr. Untermyer. That is not different from stock gambling, is it, even though it takes place in your section of the country? Senator Nelson. And yet some years ago an effort was made to stop speculation in wheat, and finally it dawned upon our farmers that that would be depriving them of one of their markets. If you stop all speculation in wheat, there would be nobody to buy but the millers, and they preferred to have the millers and the stockbroker for customers. Mr. UNTEEMYER. This bill does not seek to stop speculation in stocks. It seeks to stop dishonest speculation. Senator McLean. Eeferring again to the California Petroleum Co., if what you say about it is true, does not this combination come pretty near being a violation of the Sherman Act? Mr. Untermyer. Why? Senator McLean. A combination in restraint of trade? Mr. Untermyer. In what particular ? Senator McLean. They are buying and selling something, are they not? Mr. Untermyer. No; they are producing oil. Senator ]McLean. Are they not trying to set the price on all the property ? REGULATIOX OF THE STOCK EXCHANGE. 55 Mr. I NTEEMYER. Xo ; I should not think it came anywhere near a violation of the antitrust law. I do not think it encroaches upon that territory at all. Senator McLean. Do you not think if we should have a commis- sion appointed as an arm of the Department of Justice, it would be better as an agency to trust with a matter of this kind than one per- son, like the Attorney General ; and do you not think the Sherman Act could be easily amended to cover it ? Mr. Unteemyer. I do not think the Sherman Act would have any reference to this company. All this property is located in California ; it is conducted presumably as a legitimate business there, meaning the producing of oil and selling it there in that country. Senator McLean. Stock of a railroad company might be manipu- lated in this way. Mr. Unteemyer. No trade commission could reach this subject at all. This is a stock exchange problem. The oil company has noth- ing to do with it. Senator McLean. But the owners, for the time being, are creating a fictitious price for the property. Mr. Unteemyer. No; the owners are not having anything to do with it. Many of these transactions are conducted entirely inde- pendent of the owners. Senator McLean. The thought just came to me. I do not know whether you have given that any consideration or not. Mr. Unteemyer. I do not think it would touch the subject at all. Next is the American Canning Co., and next is the Eock Island. Senator Weeks. Are you talking about common or preferred stocks of these companies? Mr. Unteemyee. The common stocks. The Eock Island is not a dividend payer, nor is the American Canning Co. There is in the record rt transaction with reference to the Eock Island that is a little exceptional and shows how many ways there are of conducting im- proper transactions on the stock exchange. A prominent operator in New York one morning gave 10 brokers each orders to buy 2,000 shares of Eock Island without price limit. Of course, he knew when he gave those orders they would all rush in to buy and would bid against one another. The result was that the stock Avent up, I think, about 40 points or more in a few hours. It went down in the same time to below Avhere it started, and in the meantime, of course, the excitement and period of activity would naturally bring in lots of other buyers. Senator N"elson. That stock at that time was of no intrinsic value, was it, as compared with the property of the company ? Mr. Unteemyer. I do not know. I assume not. Some people think it is of not much value now. Senator Nelson. That brings me back to the question of listing such securities on the stock exchange; that is, giving them a certifi- cate of character that they would not otherwise have. Mr. Unteemyer. It has not been regarded as a certificate of char- acter to find a stock listed on the stock exchange. It ought to be. That brings me to another subject. Senator Weeks. What was the result of the investigation that took place with reference to that transaction? 56 KEGVLATIOISr OP THE STOCK EXCHANGE. Mr. Untermyek. You mean by the stock exchange ? Senator Weeks. Yes. Mr. UNTEE^rYEE. They suspended for 60 days the naan who gave I'lios^ oro-Grs Senator Nelson. I would like to see some legislation to prevent them from listing on the stock exchange any stock that is of no in- trinsic value. Mr. Untermyee. This bill, it seems to me, goes about as far as we can go at the first step in that direction. Let us see what it does. It requires that before a stock is listed, certain requirements have to be complied with, which are very comprehensive ; and. all of that is a safeguard for these quotations against fraud. Senator Weeks. What would you say to having a commissioner of corporations pass on these things, instead of the stock exchange ? That is, to pass on the character of the organization and other matters that might properly come before him ? Mr. Unteemyee. It seems to me that would simply deprive the stock exchange of all power over its business, and it is not desirable to do that. They are experts in that business, and I do not think they should be deprived of all discretion. Senator Nelson. I call your attention, Mr. Untermyer, to page 6, paragraph 1, of the bill. That does not seem to rpach the matter at all. Mr. Untermy'ee. That is not all. Just look at pages 2 and 3 that require — That before the securities of any corporation shall be listed, quoted, or dealt in upon any such exchange, tliere shall be filed with the secretary of the exchange a statement formally approved by resolution of the board of di- rectors of such corporation and verified by the oath of an officer thereof, before a person authorized to administer oaths at the place where the same is taken, setting forth separately and in detail, first, the nature, amount, and value of the tangible and other property, assets, and effects of such corporations, its actual and contingent liabilities and obligations, the volume of its business and net earnings year by year for at least three years next preceding the filing of such statement or for such lesser time as the corporation shall have been engaged in business ; and a like statement with respect to every subsidiary or controlled corporation in which it is Interested ; and Second, a copy of every contract and agreement in writing, and a full state- ment and description of the terms of every contract, agreement, or understand- ing in parol connected with or affecting the authorizing, issue, sale, or dispo- sition of the securities, admitted or sought to be admitted to the official list of said exchange and quoted and dealt in thereon, etc. Senator Nelsox. But that does not go at all to the intrinsic value of the stock ? Mr. Untermyer. It enables everybody to see what it is. This requires that it be there, open to inspection. I do not see how you can go any further unless you want to paralyze the industries of the whole country. Senator Nelson. You ought to require them to publish any list of stocks Mr. Unteemyee (interrupting). That puts everybody on guard. The public can not be said then not to know what they are buying. They have the chance to buy the things they know about, and not a pig in a poke. It seems to me that is the extent to which the pub- lic should be guarded. In the next place, it should be guarded that it does not pay a price for that security based on rigging of REGULATION OF THE STOCK EXCHAXGE. 57 the stock market, but pays a price based on actual transactions on the fixed value of the stock. Senator Nelson. Unless the stock exchange publishes these facts and makes them public, so that everybody may know the true con- dition, what good does it do the purchaser of' that stock to simply Icnow the bald fact that this list is there? Mr. Untermyee. Every purchaser has the right to get a copy of these statements. _ Senator NELS0^^ Why should it not be given to the public, pub- lished to the public? Mr. Untermyer. How could you do that? You would have to have a volume of a thousand pages a day. Senator Nelson. Have it published every time they list a stock. Senator Hitchcock. Let the Postmaster' General run a newspaper, put him in business and let him run all the papers. Mr. Untermyee. That would be a good thing for the papers. You ought not to object to that. Senator Hitchcock. It is a fact, is it not. that each State has . jurisdiction complete over each stock exchange? New York has absolute authority over the regulation of her stock exchanges, if she chooses to exercise it? Mr. Untermyee. She can not regulate the conditions under which these matters could go into the mails. Senator Hitchcock. But she can regulate transactions of the stock exchange to prevent fraud ? Mr. Untermyer. Yes. Senator Hitchcock. Massachusetts can do the same for Boston ? Mr. Untermyer. Yes. Senator Hitchcock. And Illinois can do the same for Chicago? Mr. Untermyer. Yes. Senator Hitchcock. The real fact is you are trying to take away from the State and bring under the jurisdiction of the United States all these stock exchanges, under these regulations, and you are trying to compel us to use the unnatural medium of the mails to do it. That is the only way you can get jurisdiction? Mr. Untermyer. I differ from you radical^. In the first place, the only thing we are trying to reach here is the condition on which the mails may be used for the quotations of the stock exchange. There are other regulations, innumerable regulations, that the State will take care of itself, and this bill provides it shall be incorporated under a State law; and if you want to protect the mails, then we have to safeguard the mails against the carrying of fraudulent mat- ter. All other provisions of the charter they can have to suit them- selves. If you did not have Federal regulation, what would be the situation? New York State would have, perhaps, a law for incor- poration; Illinois might have none. Should the Illinois exchange send its quotations through the mails on conditions different from those prescribed for the New York Stock Exchange? Should we have a different set of conditions for every State of the Union on which the mails can be used by different exchanges? Is it not essen- tial and is it not imperative that there shall be a uniform regulation ? Senator Hitchcock. Congress has no jurisdiction over the stock exchange, you will admit? 58 KEGITLATION OF THE STOCK EXCHANGE. ^Ir. Unterjiyee. Certainly not unless they may be said to be en- gaged in interstate business. Senator Hitchcock. You are only able to get it by the use of the mails ? Mr. Unteemyer. ^ye are not seeking by this bill to get it. Whether Congress can get control through the commerce clause is another cjuestion. Senator Hitchcock. By regulation of the use of the mails? Mr. Unteemtee. We are not seeking to do it. Congi'ess has no jurisdiction over the lotteries, either; but no State can maintain a lottery if it pleases. Senator Hitchcock. There is no question about that. Mr. Untermy-ee. The State of Nebraska may say there shall not be any stock exchange at all in that State, and so can the State of New York; but when it comes to the use of the mails you have to have a uniform rule for everybody. There are plenty of cases in the books where the courts have sustained the use of the mails by indi- rection for some other purpose. But this is not one of those cases. Senator Hitchcock. Has any State established a law for regula- tion of a stock exchange so as to prevent the frauds that you com- plain of? Mr. UNTEEM-iTiE. Xo ; not to my knowledge. Senator Hitchcock. How do you explain that? Mr. Unteemyer. New York State, following this investigation, passed these laws which I have mentioned and which I will read to you, to show you how ineffective and how impossible, to my mind, they are. (See Exhibit B, Appendix.) Senator Weeks. When were they passed? ]\Ir. U^TERjiYER. In 1913, after this investigation. Senator Weeks. That was the reform legislation?. Mr. IJntermyer. The Sulzer legislation; yes. They did not pass the incorporation bill, and, as I said, we opposed it because it was such a transparent blind and such a humbug. They passed a bill purporting to prevent manipulation, but it does not touch manipu- lation ; it only deals with matched orders and fictitious sales. Senator Weeks. You are a citizen of New York. Have you made any effort to induce the Legislature of New York to pass this leg- islation ? Mr. U>;TER:M'iT;R. Certainly; we have been doing nothing but agi- tating this. Senator Weeks. And you can not get them to do it ? Mr. T'xTERjrYEE. We can not get them to do it. Senator Weeks. Why ? Did they refuse to do it ? Mr. U>«teemyee. I have my own idea of why they do not do it. 1 have my own opinion Avhy they want to regulate the small bankers and not re.oidate the large ones. Senator Wr.roKS. I am asking your opinion. Mr. I'>"rEET,iYER. I have my opinion, but I would rather not ex- press it. Here is another point of view on this matter, and it is quite as im- portant as ones we have been discussing. The stock exchange can be made the greatest agency in this country for investment purposes by a very rigid, legitimate exercise of this power that inheres in Congress through the use of the mails. I'^nless we misapprehend our financial KEGULATION OF THE STOCK EXCHANGE. 59 s.ystem and the way in Avhicli it is grounded, you can. do more to de- centralize the control of money through the agency of a legitimate exercise of this power than you can in any other one way. In our country the system of distributing securities among the pub- lic is different from the system of other countries. It is different because we have no adequate corporate laws that protect the public, so that it feels it can safely deal directly with a coi-poration in the purchase of securities that are offered under a prospectus. Senator Weeks. You are excluding Massachusetts from that gen- eral assertion? Mr. U^'TERMYEE. Not until I have read the laws more carefully would I care to commit myself on that. Senator Nelson. You are right about that. The root of this diffi- culty lies in our incorporation laws, allowing people to issue a limit- less amount of stock, with no intrinsic value. Mr. Unitshmyee. We must be practical, however. We must not try to reach the millennium by one step. We must go gradually. That is what I have been seeking — to go gradually, but to get there. In England they have the companies acts, and the companies acts protect the security holder. The securities there are distributed largely through public issue by a prospectus, which has to be filed at Somerset House; it has to be accompanied by all the contracts con- nected with the transaction. It has to disclose what the vendor gets and what the intermediary gets. It has to give all the details con- cerning that enterprise. Thereupon that prospectus is published in the newspapers, and the public of Englancl have become accustomed, by reason of the protection of their law, to rely upon these itdver- tisements. Senator Nelson. And yet they have been awfully fleeced there at times ? Mr. Unteejiyer. They are fleeced when they buy gambling securi- ties If they want to buy such securities, they get the thing they buy, but they know what they are buying. The English public responds to these published advertisements. The securities are generally un- derwritten by a banking house when it is a large transaction, but the corporation is not dependent upon the banker to the extent that it is in this country, because our system is different. When a new company is about to be launched here the banker does it on an entirely different basis. The investor has not the protection of the law, such as they have over there. The prospectus is not surrounded by the same safeguards, so the banker here gets his underwriters among his friends, and instead of offering these securities broadcast to the pub- lic, instead of the public being accustomed to buying them on the faith of the prospectus, the banker proceeds to make a market for these securities, largely through the stock exchange in many cases. Senator Weeks. I think that is the most careless statement you have made during your whole discussion. Mr. Unteemyee. What is that ? Senator Weeks. That that is the way the public buy _ securities, and the way securities of corporations are marketed in this country. Mr. Unteemyee. Let us see whether that criticism is justified. I say it is not and that my statement is absolutely accurate. I said that the securities are marketed largely through the stock exchange. They 60 REGULATION OF THE STOCK EXCHANGE. are marketed to underwriters. In the first place, the banker gets the securities underwritten, and when he can not sell them, either by private solicitation or on the stock exchange, the underwriter has to take, after a limited time, what is not sold. But there are certain banking houses that have a large clientele, like Lee Higginson, of Boston, and a few houses of the same kind in New York, who have a large private clientele, and they go around and try to sell the securi- ties, but usually on the quotations or the representation that the stock will be listed. Senator Weeks. What happens when they make a mistake ? Mr. Uiv'TEEMYEE. When they make a mistake their prestige is hurt, just as the prestige of a banking house in England is hurt when they offer them to the public. SenatorWEEKS. That inclines them to use the greatest care, does it not? Mr. Unteemyer. The large and more reputable houses do use the greatest care. That is not the point at all. I am talking about the difference between the two methods of marketing securities. The banker is held accountable in this country mainly because he has to market his securities among his particular clientele, whilst in England the securities are marketed to the general public. Whilst the banker is held accountable, the banker holds himself acountable for the conduct of the corporation, and so he watches its operations. Senator Weeks. That is, in the United States ? Mr. Unteemyer. Yes. He watches it, and he is a factor, a gov- erning factor in it; and that is the way in which our corporations naturally come under the control of a few great banking hous^, because the banker has to assume the responsibuity for that propetty, because he does sell its stock among his own clientele and because he has to watch it for the reason that he is held accountable. That is one of the ways in which there has been brought about a vast and dangerous concentration of control in the hands of a few great bank- ing houses of these vast enterprises, and the impetus of some has brought others, until you can count on the fingers of j^our hands the men who control the destinies of many of these great corporations. It is most unfortunate. Much of it could be corrected in the future through the instrumentality of the stock exchange. It is as a' con- structive agency that the problem mainly interests me. Senator Nelson. Let me ask a question right there. These under- writing syndicates, who take these bonds or securities in the first place from the promoters, dispose of them in what manner to the public ? Do they do it privately or through the stock exchange ? Mr. Unteemy'ee. Through their own customers, largely ; frequently through the exchange or by reason of the market that they promise to create to enable their customers to unload. Senator Nelson. Customers that come through the stock exchange? Mr. Unteemyee. When the security is listed, its listing helps to sell it. Senator Weeks. That is the point to which I have been trying to call your attention — that the banker, as a matter of fact, sells these securities to his customers, and sooner or later they are listed on the stock exchange ; but, it is not a precedent to his selling to his customer that these securities are listed on the stock exchange, usually. KJiUUl^ATlOJS OF THE STOCK EXCHANGE. 61 ^Ir. UNTEE.^iyEE. Usually it is that they are to be listed. Senator "Weeks. It comes afterwards? Mr. Unteemybe. Usually it does, Senator Weeks. Senator Weeks. I think, if you would make some comparison, you would find, generally speaking, these securities are distributed and then are listed. Mr. Unteemyee. I think you will find the contrary frequently the case, Senator Weeks. Senator Weeks. You have given the committee the impression that the stock exchange is used to distribute these securities? Mr. Unteemyee. Very largely. Senator Weeks. For manipulating purposes ? Mr. Untbemyee. I say the stock exchange is largely used for the - purposes of distributing, and that this is the only way in which they get an appearance of activity and in which they are able to dis- tribute largely. I say, at the same time, that where the stocks are distributed to underwriters, the latter sometimes themselves sell ; but you know the common method is to have the syndicate managers hold the securities and sell those securities for the account of the underwriters. That is the more frequent plan. In other words, the banking house issues a lot of bonds, and they have underwriters who agree they will take those bonds unless the banking house can sell them. Then the banking house holds those bonds for the under- writers in that syndicate, and it undertakes to market them for the syndicate, does it not ? Senator Weeks. Yes. Mr. Unteemyee. We will take Lee Higginson, for example, who have large facilities for marketing bonds. New York bankers will interest them to help market the bonds. Senator Weeks. Yes. Mr. Unteemyee. But they are all held together for account of the syndicate until the syndicate expires or they choose to dissolve it, and then, if they have not sold all the bonds, the underwriters take what is left. Meantime those securities are listed. Senator Weeks. Sometimes they are. Mr. Ukteemyee. And they are, sold. Senator Weeks. But the listing is not a method through which they are sold ? Mr. Unteemyee. Yes ; sometimes not so much with bonds, but more generally with stocks. Senator Weeks. They are sold to customers of the bankers who are in the syndicate. Mr. Unteemyee. They are sold in both ways. What happens Avhen these bonds are listed is that the syndicate manager who under- takes to market the issue of new securities wants the whole market to himself, so as to create a satisfactory public price. He wants the selling of all those securities, and so the underwriters agree not to sell. The bonds are listed on the stock exchange and the syndicate manager sells them for the account of all the members of the syndi- cate. In the case of bonds, they are largely sold privately, but the manager makes a pric« on the market, buying and selling these se- curities in that market and giving an appearance of activity to the market and getting as much profit as possible out of it, so as to make 62 REGULATION" OP THE STOCK EXCHANGE. a good distribution to the syndicate. The amount of bonds thus sold is, however, negligible. It is with the stock we have to deal mainly. Senator Weeks. Do j'ou really think that is the way investment securities are handled ? ^ Mr. Unteemxee. It depends whether they are stocks or bonds. Senator Weeks. Either one ? Mr. Unteemter. I think that is the way in which stocks are fre- quently sold. I think that is the way in which l^onds are sometimes, but rarely, sold. I do not think ; I know it. Senator Nelson. Does not somebody have to make application to the stock exchange for the listing of securities before they are listed ? That is to say, the stock exchange does not do it of its own motion? Mr. Unteemyee. The corporation does that. Senator Nelson. It is done through the corporation ? Mr. Unteemyee. Yes. When it sells an issue of bonds it genei- ally agrees that it will make application to list. Senator Hitchcock. What showing does the corporation make when it makes that application ? Mr. Unteemter. It makes quite a substantial showing nowadays. The stock exchange has been constantly improving and adding to its requirements of facts for the purpose of listing, until now they get everything except what they ought to get, and that is the real water in the transaction and profits of the bankers and intermediaries and a few other things that, to my mind, are much more essential than all the things they get. Senator Nelson. Does the corporation, as a rule, make this appli- cation for listing before or after it transfers the bonds to the under- writers ? Mr. Unteemyee. They do not transfer them to the underwriters. The underwriters agree to take them if they are not sold, as I have explained. Senator Nelson. After the agreement with the underwriters? Mr. Unteemyee. It is after the agreement with the underwriters, but frequently before the syndicate is dissolved. When they have enough on the market to induce the. stock exchange to allow them to be listed — because the stock exchange will not allow them to be listed until Senator Weeks (interposing) . It has always been the purpose of the stock exchange to prevent improper securities or wildcat securi- ties from being listed. Mr. Unteemyee. I do not know what you mean by '" always." Senator Weeks. I will say during the past 25 years. Mr. Unteemyee. I think that is rather a broad statement. Senator Nelson. There are some stocks that never ought to be on the list. Mr. Unteemyee. Of course, you might call a great many stocks, which they have listed, " wildcat," in the sense that they never did and probably never will pay any dividends. For instance when the Eock Island holding company was formed, those securities were listed. Do you think anybody believed they would every Dav a dividend? j f j KJiUULATIOJSr OF THE STOCK EXCHANGE. 63 Senator Weeks. Every time any transaction takes place like the Hocking transaction, or the Rock Island, or the other one which you have mentioned, that injures the stock exchange, does it not? Mr. Untermyer. Yes; very much. Senator Weeks. It injured the prestige of the stock exchange? Mr. Untermyer. Perhaps that is true. Senator Weeks. Therefore it is the purpose of the managers of the stock exchange to prevent such things occurring. Do you not think that is true? Mr. Untermyer. I A-\ant to answer that in this way : I do not want to appear to be reflecting upon the management of the stock ex- change. I am here on an economic proposition which is broader than good or bad management, which depends for its success upon the proper and just protection of the public. Whether one adminis- tration is better than another does not make much difference to my mind, because I do not know when it will be bad again, and that is another reason for having a good law. You ought to have a law to govern this matter. Senator Weeks. I think myself the management has been very bad at times in the past, but I think, like most other things in the world, it has been getting better and better and better. Mr. Untermyer. Under the spur of this agitation? Senator Weeks. And long before that, too. Mr. Untermyer. This agitation which is so distasteful to the members, and which they regard as so inimical to them, and which they resent so deeply that they have been doing much better. When the spur is removed, the question is whether or not there should be some law to protect the public, whether they are to be entirely above the law. When Senator Nelson asked me this question, I was about to say why I thought the stock exchange could be made better. Our friends tell us that it is not the business of the stock exchange. I say it is the business of the stock exchange, because it is so integral and essen- tial a part of the financial system of our country. That is where it ought to be worked out. Senator Nelson. I hope you are right about it. Mr. Untermyer. If the stock exchange is incorporated and is sub- ject to the projjer regulation and control, its listing of securities will be a hallmark. It will be a certificate of genuineness and sub- stantial value that will be a guide to the public. It can, through its listing powers now, for instance, at present pass on the form of every mortgage and every bond that is listed. It is very strict in its regulations. There are requirements concerning the way in which the coupons are made payable and the provisions that shall be con- tained in the mortgage protecting the bondholder, all very whole- some and very important regulations. It can be so conducted, under incorporation and regulation as to require, for instance, the pro- tection of American stockholders, a variety of other requirements that are not now insisted upon. One of the abuses that this bill seeks to correct is this: The bill provides that when a stock has once been listed it shall not be re- moved from the list without notice to the stockholders of the cor- poration. That is made necessary by reason of this situation : When a stock is listed, that gives it a value, gives it a fixed price in the 64 REGULATION OF THE STOCK EXCHANGE. markets of the country. It is good as collateral, and when it is not listed it is not good as collateral. It has happened in the past that the stock exchange has been used and can again be used as a medium for great oppression upon minority stockholders. This report in- stances two or three cases of that kind, and I will just briefly call your attention to one of them. The Southern Railway was one of those named in this report. In 1897 the Southern Railway was re- organized by J. P. Morgan & Co. as banliers. Part of the plan of reorganization , required that the stockholders of the reorganized company should give Morgan, Baker & Lanier as trustees a voting trust, that the stockholders should resign their rights to vote or any control over the company, should hand it over to these gentlemen for five years, and those gentlemen should issue voting-trust certifi- cates instead of stock. They took the stock and took the voting power, and they listed the certificates on the stock exchange. The voting-trust certificates were listed, which carried no voting powers. At the end of five years, Morgan & Co. wanted an indefinite voting power, and this is what happened : They got a great many of those old certificates in for exchange for the new ones. They tried to get them all in, and after trying for six months, there were 183,000 shares of stock that would not come in, who did not want to sur- render their voting power indefinite^; and by the way, they still control that property through that voting trust, and it is nearly 17 years old. These 183,000 shares wanted to get back their stock and their votes; they wanted the thing ended. What happened? Morgan & Co. had the stock exchange list the new voting-trust cer- tificates for the extended indefinite term and the old stock certificates taken off the list. The result was that a man holding the old cer- tificates woke up to find that he had a security that was no longer good as collateral, which was no longer listed. Senator Nelson. They were frozen out ? Mr. Untermyer. He had to go and give them the indefinite power, or had to take his certificates and get his stock, and his stock was not listed. Neither the stock nor the old certificates were listed ; only the new voting-trust certificates. Senator Nelson. That illustrates the enormous power this listing power really is. Mr. Untermter. That is what I say. It ought to be under regula- tion. This bill provides that before a stock can be taken from the list in that way some notice shall be given, because that is a fraud on every holder. Another instance— a still more aggravated case — and it is only typical Senator Weeks (interposing). What do you mean by " typical "? Mr. Untermyer. Typical of the abuse of the listing power. Senator Weeks. Do you mean to say there is a general abuse of the listing power ? Mr. Untermyer. I mean to say there has been considerable abuse of the listing power. There is no general abuse of the listing power. On the contrary, the listing power on the whole is wisely exercised There are occasional abuses when great interests bring their power to bear on the stock exchange. Those great interests are large dealers in securities, and these gentlemen are in business in order to deal with them. BEGXJLATION OF THE STOCK EXCHANGE. 65 Senator Nelson. What is this other case ? Mr. Untermyee. This case is that of the American Tobacco Co, I can say, gentlemen, that without the use of the listing privilege on the stock exchange it would have been difficult to have formed a great many of these big combinations in the form of holding com- panies. The American Tobacco Co. was in this situation: It had stock that was earning very largely, I think, 20 or 30 per cent or more, but was only paying 8 per cent. Its stock was selling at about 200. The Continental Tobacco Co. had stock selling around par and earn- ing a great deal more than the dividends. Messrs. Kyan, Duke, and their associates, who controlled the American Tobacco Co., apparently made up their minds that they would like to get the equity from these stockholders without paying for it. Senator Nel80n. Of their own company ? Mr. Unteemyer. They would like to get it for themselves, and this is what they did: They formed a company called the Consoli- dated Tobacco Co., with an authorized capital of $30,000,000, 25 per cent paid in, which was $7,500,000 paid in. Then they said to the stockholders of the American Tobacco Co., " We will give you a bond of this Consolidated Tobacco Co., secured by your own stock, a i per cent bond at $200," because it was paying 8 per cent and earn- ing much more. They gathered in a large amount of the stock. They paid in that $7,500,000, which gave them the equity in the companies, and they paid out this $7,500,000 to themselves, 1 believe, in one year, and never paid the other three-quarters, because it was never necessary to do it. In effect, they never really paid a cent for those equities. What happened was that some of the American Tobacco stockholders did not want to make this exchange, and there were 11,000 or 12,000 shares of that stock, a very small fraction, that had not been gotten in, but still it amounted to $2,000,000 or $3,000,- 000. They did not want to come in. Thereupon the stock exchange struck their stocks from the list. If their stocks were up as collateral, they could no longer borrow on them, and if they wanted to sell they had to go to the majority holders, and would have difficulty in selling. There was no other market left. That is an abuse of the privilege. This is the argument by which they defended their action Senator Hitchcock (interposing). These people were still receiv- ing dividends on it? Mr. Unteemyer. Certainly; but they could not borrow on their stock. The banks would not lend, and they were no longer listed. Senator Weeks. Is that absolutely true? Mr. Untermyer. No; that is largely true; that an unlisted stock has not the same borrowing capacity as a listed stock. Senator Weeks. Not quite the same, but if it is a di-vidend-paying stock you can borrow on it. Mr. Untermyee. No; on a nonlisted stock you can not borrow readily, as a rule. Senator Hitchcock. Suppose I own an unlisted stock paying 15 per cent, could not I borrow anything in New York ? Mr. Unteemyer. I think you would have more trouble than if it were paying 6 per cent and listed. 30578—14 5 66 REGULATION Of THE STOCK EXCHANGE. Here is the defense they make of that transaction : They say that Tvhen there is only a small amount of ^rtock out it is likelj' to lead to a corner in that stock. The people get to dealing in it, and they can not make delivery. Senator Hitchcock. That i^ the reason for taking it out of the Est? Mr. Untermyee. Yes. In other words, because a man sells short a stock that he had not got and can not get the investor who bought that stock when it was listed, who had a right to assume it would continue to be listed, has to lo.-e his market for his stock. That does not seem right. Senator Weeks. Did the stock go down in this case ? Mr. Untermyer. I do not know, really. I think a good many of those who held on probablj' got $40(3 or $500 in the end. Senator Weeks. Did it not, a?^ a matter of fact, go up two or three times over? Mr. Untermyer. What it did was this: After the company was consolidated it started showing its real earnings and showing them so large that there were some people who could afford to hold to that stock and who could freeze on to that stock and keep it — that they did hold on to their stock imtil the insiders had to have it in connec- tion with another deal. When they came to make another consolida- tion in tobacco they had to have those stocks. They did not pay what they were worth, because they were worth $1,000 a share. Senator Weeks. Is it not true that the tobacco stockholders who came in received $2 for $1 in the 4 per cent bonds ? Mr. Untermyer. Yes. Senator Weeks. Is it not true that the stock of the Americai Tobacco Co. later on went to SOOO a share '. Mr. Untermyer. I think that is another tobacco company. Senator Weeks. Is it ? Mr. Untermyer. Yes ; it was. There have been a good many reor- ganizations. Senator Weeks. It was the same crowd ? Mr. Untermy-er. It is true, because I happen to know that those nf the stockholders who were rich enough to put the stocks away and tell these fellows they would nut allow them to take them and held on to them long enough to get paid some fair share of what their stocks were worth. But what about the man who had his stock in the bank at that time, the bank~ 'TEEMYEE. No, sir; they were trying to make it apjDear iictive, to get the people to buy stock at a fictitious price, and to put up the price by their own transactions in the stock that it would not have made on its merits. Senator Nelson. Is it not a fact that many stocks are listed on the exchange that are really not as valuable as many of the curb stocks ? Mr. UxTEEMYEE. I think there are, Senator Nelson, but this law would also require the curb to do the same thing as the stock exchange is required to do. Senator Nelson. Take the Wisconsin Central, for instance? Mr. Unteejitee. It would not allow any public market unless it complied with the law. Senator Nelson. Take the Wisconsin Central, for instance? Mr. Unteejitee. You can not give a man an insurance policy on every stock he buys. Senator Nelson. It seems to me, though possibly I am doing you an injustice, as though this bill of youre tends a great deal toward protecting one of your brokers or one of your New York speculators against the other fellow ? ' Mr. Unteemyee. How do you figure that out? Senator Nelson. As they say in our country, it is to protect one crow from digging the eyes out of another crow. Mr. ITnterjiyee. I do not think you will find any trace of anything of that kind in the bill. The bill does not seek to do at one time everything that eventually may be done; in other words, it does not seek to absolutely control the listing of stocks except to require full disclosure. It does not seek to exclude from listing an inflated se- curity. It does undertake to tell the public where the inflation is and what it is. But what it primarily undertakes to do — and this is the main purpose of the bill — is to say that transactions in those securities shall be honest and not juggled, so that people who lend on them all through the country and people who buy and sell them are not deceived. That is all it undertakes to do. Senator Nelson. But do you not see what a great deception they can practice ? A man who holds stock and wants to sell it says : This stock of the Wisconsin Central or the Great Western or any other Steele is listed on the New York Stock li^;.cu '.iiiie. That gives it a certificate of character. Mv. Unteemyee. But not of value. The only certificate that it gives it is that its character has been honestly disclosed, whatever it is. It does not give it a certificate of value at all. AVhat I want to avoid by this bill is giving a fictitious, misleading certificate of value. You would object to a bill, would you, Senator Nelson, that was doing a gi-eat deal of good because it did not do all the good that is possible to be done? Senator Nelson. But you do not get at the root of the evil? Mr. Unteemyeh. Oh, I think we do. The root of the evil is the misrepresenting of the value of the securities. Senator Nelson. The initial evil is giving such worthless paper stock, or inflated stock, a standing on the stock exchange. If it were not for the stock exchange it would be simply curb stock, and it would have to take its chances on the rest of the scrub stocks ? KJiUULAllON OF THE STOCK EXCHANGE. 69 Mr. UisTEKMYER. There are plenty that do take their chances among the scrub stocks, and I do not think you could carry out such a comprehensive and drastic scheme as you suggest at this time. I am trying to urge you to do what is practicable to be done. Senator Nelsoi<. I have listened to Senator Hitchcock's questions, and it seems to me the most drastic thing is prohibiting the news- papers having the facilities of the mail if they publish those stock quotations. Mr. Untermyek. xVll the bill says is that unless the exchange com- plies with the regulations to safeguard these quotations against fraud the mails shall not be used to further those frauds. Senator Hitchcock. I want to make a suggestion. Out in the country where Senator Nelson lives and where I live, and where some other members of this committee live, a very small percentage of the people buy or sell stocks. Most of the stock buying and selling is done right in New York. Mr. Unteemyee. I do not think so, Senator Hitchcock. Senator Hitchcock. There is a larger amount in New York than in any other one spot. It is in New York where the railroads are on, the telegraph and telephone lines, and all the other important in- dustrials are largely owned. Mr. Unteemyee. I do not think you will find that is correct. Senator Hitchcock. Your New York newspapers could continue to publish these stock quotations without let or hindrance in their city editions. All you would reach by this strict act would be the western newspapers giving what is going on in New York. You do not attempt in your limit to stop the gambling and speculation, and you do not prevent the people of New York or Boston or Chicago, who are really the large bulk of the speculators, from doing it. Senator Shafeoth. The New York papers would have to go through the mails? Senator Hitchcock. No; very frequently they publish city edi- tions. Mr. Unteemyee. The New York stock markets and values are sup- ported by the country and not by New York. The New York brokers get their orders from all over the world. The orders that come to them are from all parts of the world. Senator Hitchcock. I do not doubt they get some outside orders, but -it would simply leave the thing wide open for the people in New York or the people of any great center to go on buying and selling without let or hindrance. ' You might apply some of the limits to the people in New York when they wanted to carry on their transactions ? Mr. Unteejiyee. Is that a practical idea, Senator? Senator Hitchcock. No ; and I do not think yours is, either. You have attempted bv a strained operation to bring yourself within the jurisdiction of Congress through the post office, instead of making your efforts with the NeAv York Legislature and the jNIassachusetts Legislature and the Illinois Legislature ; if there is any virtue in your contention, the people of those States can regulate it. Mr. Unteemyee. In that statement you have not answered the sug- gestion I made to vou: Are you going to have different conditions under which different exchanges in different States can use the mails? Senator Hitchcock. You can depend, if you make an appeal to 70 REGULATION OP THE STOCK EXCHANGE. the people of New York in their legislature, if there is any A'irtue in your claim, to recognize it. You can depend on them to regulate it. Mr. Untermtee. They can not regulate it. You say this is a strained construction. I take issue with you on that proposition. I say nothing has ever been found relating to the Post Office Depart- ment that is less strained or more germane and legitimate, that is more imperative as the duty of the Post Office Department, than it is to prevent the circulation of manipulated stock quotations. If they are not to do it, there is no way to do it. As the Supreme Court of the United States said in this Lewis case, these wholesome regulations against certain frauds through the mails are the only way of pre- venting them. Senator Hitchcock. So it is. The stock exchange has nothing to do with that. Any irresponsible individual can set up an office in an office building and start sending out fraudulent circulars, and there is no way of reaching him except by preventing him using the mails. Mr. Untermyer. But any broker can conduct a mock auction to fix fictitious value and prices, and send them through the mails, on which you and I and others buy and sell. Senator Hitchcock. You come here admitting that the New York Legislature has full jurisdiction over the New York Stock Exchange? Mr. Untermyer. No ; I do not admit it has any jurisdiction over the main business of the stock exchange. Senator Hitchcock. It is purely a domestic affair and can abso- lutely be regulated by the New York Legislature, as it can regulate anything else in the State of New York. Mr. U^cTERMYER. It is no more a domestic affair than if it were lo- cated in your city of Omaha. Senator Hitchcock. It would be domestic to Nebraska. Mr. Untermyer. You know if it were located in Omaha and did business all through the country, it could do it as well from Omaha as from New York. The fact that it is located in New York has no relation to the bulk or body of its transactions at all. It has no local relations. It is an important part of the country's financial system. Senator Hitchcock. Do you not think it is straining the' thing a little to Eussianize the United States and say the papers shall be sub- ject to the censorship of the Postmaster General ? Mr. Untermyer. You have said that two or three times, but I do not see where it comes in. " Russianize " is a very bad word. Senator Hitchc:o(!k. That is M'hat they do in Russia. They have a law there that says to the papers, " You shall not publish this or that," through a certain authority. Mr. Unterjiyee. All this bill says is that fraudulent quotations shall not be carried through the mails. Senator Hitchcock. No; it says quotations shall not be carried through the mails from any stock exchange, even when it is incor- porated by a State, unless it meets the approval of the Postmaster General. Mr. Untermyer. I beg your pardon. Senator Hitchcock. Let me read the language to you. Mr. Untermyer. We have just been reading it: Senator Hitchcock. Let us read it again. KEGULATION OF THE STOCK EXCHANGE. 71 ]Mr. U>^TFj{MYEE. I will read it. It provides that unless it is safe- guarded in certain particulars against fraud Senator Hitchcock. Xo; it is not that. Mr. Untermyee. Yes; it is. Senator Hitchcock. Here it is: Unless the charter and by-laws of such exchange or the law under which it is organized shall contain regulations and prohibitions satisfactory to the Postmaster General. Mr. Uni-ermyee. Upon ^Yhat subject? Senator Hitchcock (reading) : Safeguarding the transactions of such exchange. In other words, the Postmaster General is to be the supreme censor. Mr. Untermyer. No; you are wrong. Senator Hitchcock. If it does not pass muster with him it is to be excluded from the mails, and there is no appeal. Mr. UNiTaRMYEE. You are mistaken. It is only in certain pre- scribed respects that it must be satisfactory, and those respects con- cern the mails. Senator Hitchcock. I realize that reads : Prohibitions satisfactory to the Postmaster General, safeguarding the trans- actions of such exchange. Mr. Unteemyee. To safeguard the transactions of such exchange in certain specified 23aTticulars. Senator Hitchcock. He is to be the only judge. Mr. Unteemyee. Only on the question of fraudulent transactions that go through the mail. Senator Hitchcock. The Postmaster General is to be the only judge? Mr. Unteemyee. That is the law to-day. Senator Hitchcock. No ; I do not think it is. Senator Shafeoth. It is in the matter of issuing fraud orders. Mr. Unteemyee. Yes; it is in the matter of fraud orders. Senator Hitchcock. The Constitution absolutely guarantees the freedom of the press. Mr. Unteemyee. If a fraud order is issued against the corpora- tion, a newspaper can not carry a circular of that corporation through the mails. Senator Hitchcock. The newspapers are not excluded from the mails now without a reason. There is a very just law about that. Mr. Unteemyee. Senator Hitchcock, that last law the Supreme Court passed upon is on debatable ground. It is (.n border-line ground. Senator Hitchcock. It is pretty satisfactory to the newspapers. ilr. Unteemyee. It was not satisfactory to them until the Supreme Court said it. Senator Hitchcock. A few of the paiaers objected to disclosing to the public who their owners were and what their circulations were; but the great mass of papers were perfectly content to submit to that regulation. That was an act of Congress. That did not leave it to the discretion of the Postmaster General. Mr. Unteemyee. So is this an act of Congress. Senator Hitcpicock. But it proposes to put a large discretionary power in the Postmaster General? b 72 EEGULATION OF THE STOCK EXCHANGE. Mr. Untermyeb. Nothing like there is there to-day_. What has the circulation of a newspaper got to do with the question, anyway ? Senator Hitchcock. Congress has tried to say that a newspaper shall not go through the mails unless it publishes its circulation, but that is an entirely different thing from being a newspaper shall not go through the mails unless it has enough circulation. Mr. Unteemyee. That is a very different proposition. A question of constitutionality was presented, and it has been very fully argued in the brief. AH of the authorities on the subject have been presented, and the argument against the constitutionality was presented to the committee of the House. I want to put in the record Mr. Milbum's brief that was presented to the Pujo committee before it made its report, and in which he very ably and in his usual in- genious way, in his very ingenious way, argues all the questions that are presented by this bill. Mr. MiLBUEN. This bill was not heard of or even thought of then. Mr. Unteemyee. Every question that is presented by this bill was presented by this brief which you filed, if I am not mistaken. At any rate, that presented certain considerations which I would like the committee to have, to show what subjects were .under the considera- tion of that committee. The Chaieman. Without objection, the brief of Mr. Milburn will be incorporated in the record. (See Exhibit C, Appendix.) Senator Siiafrotk. You have no objection to that, Mr. Milburn? Mr. MiLBTmN. Oh, no ; I was going to ask that it be incorporated. Mr. Unteemyee. So far as I understand the main argument that was presented, that has heretofore been loresented against the incor- poration and regulation of the stock exchange, is that it would take away the control of the stock exchange from its own members. On that subject the report of the Pujo committee shows how that power of discipline has heretofore been exercised. I do not regard it as at all essential to this bill whether that control is or is not taken away. It does not appear to bear very largely upon the fundamental ques- tion here. That fundamental question is whether or not the mails should be permitted wrongly to be used for the transactions such as have been disclosed by the evidence here; whether there should not be some power lodged somewhere that will control the use of the mails for quotations that are not subject to any sort of regulation anywhere except by the stock exchange itself. As the situation stands now, the tickers that disclose these transac- tions record, without fear or favor and without earmarks, every transaction, whether it be true or whether it be false, whether it be fictitious or whether it be real. The question has been asked. Why should you incorporate and reg- ulate a stock exchange ? I have frequently asked the question, Why should you not regulate it? Why should you regulate any great public utility ? Why should not I be able to run a life insurance com- pany if I want to. and if the people want to insure with me? Why should I have to incorporate? Yet I can not run a life insurance company in any State, so far as I know, without incorporating. Why should I not be able to run a bank, and why should casualty com- panies and all classes of industries requir^ed to be regulated. I could not run a casualty company in any State that I know of without REGULATION OF THE STOCK EXCHANGE. (3 incorporating. Why should all classes of people who are engaged in different businesses be subject to corporate regulation — auctioneers, pawnbrokers, hotels, employment agencies, boarding houses, plumb- ers, pharmacists, warehouses, etc. ? Senator Hitchcock. Do you favor the regulation of all these people through the mails ? Mr. Untermter. No. Senator Hitchcock. Why not regulate them through the mails and take jurisdiction over all the States? Mr. Untermter. Because they have no concern with the public outside of their States. They are all local dealers in their own States, doing business in their own States. Senator Hitchcock. Some of them are doing an interstate busi- ness. Mr. Untermyee. All of them are engaged in local business. I am sure, Senator Hitchcock, you would not compare a great agency like a stock exchange, which is a national thing and which furnishes the machinery on which all the great public transactions in stocks and securities of the country are based, with these different private busi- nesses. All I was seeking to say is that these people are licensed Senator Hitchcock (interposing). By the States. Mr. Untermter. Yes; because they do a State business. They do not use the mails for that purpose. Here is an institution that de- pends for its existence and for its transactions on the mails. Senator Hitchcock. Everybody uses the mails. You can not find any class of people that are not using the mails. Why not regulate everybody through the mails? Mr. Untermter. Do you think I ought to answer that ? Senator Hitchcock. I seems to me it is merely a matter of degree. Mr. Untermter. I do not think so at all. When you are dealing with a public exchange, that has its ramifications into every corner of the earth, and when the courts and trustees and banks all over the world and the taxing officials look upon that as a basis of value and take it as a basis of value, and it is accepted in the courts as a basis of value, it is a very different transaction from somebody's private tnisiri6ss. Senator Hitchcock. Why not regulate the banks through the mails and have jurisdiction over all the State banks? Mr. Unter^iter. What have a bank's transactionf to do with the credit in other countries ? Senator Hitchcock. Buying and selling and exchanging is going right on between State banks. Mr. Untermter. But they do not fix values; a bank can not fix the value. A stock-exchange quotation which you see out in Omaha does fix a value. You are the- president of a bank there, for instance, and a man comes in to borrow money from you, and you will lend him on that quotation. t , •, ,, j, ^u The Chairman. I think we are being diverted really from the purpose of your argument. . , . .• i Mr Untermter. If you do not recognize this as a national agency and its transactions as of a national consequence, you will not deal with it • but if you do recognize it as perhaps the most important of our national financial system, and on which is based the larger part of the operations of the country, then you do want to regulate it. 74 REGULATION OF THE STOCK EXCHANGE. In 1906, Justice Hughes, then Gov. Hughes, was asked, and the legislature Avas asked, to make an investigation of the stock exchange. There was no legislative investigation of the stock exchange ordered, but the governor voluntarily appointed a commission, not under legis- lative authority. He appointed a very eminent commission to inves- tigate the stock exchange. They had no power to subpoena witnesses and they had no appropriation, but they went on and framed a list of questions for the stock exchange to answer. We brought this out in evidence in the Pujo investigation. The stock-exchange governors got together with these questions before them and considered them for a few weeks, and, with the aid of counsel, they prepared answers which were submitted to this commission. Upon those answers that commission made a report. There was no question of testimony; there was nothing except to rely upon what the stock exchange had given them and upon such investigation as thej^ were able extra- judicially to make. That was in 1906. And I want to read what was said then. There were soine views that were expressed then which I am sure they would not express to-day, because that wa? five years ago, and we have moved along since then. There is one quotation I want to read from their report made at that time. They were not in favor of incorporation then. They said the stock ex- change had better try to reform its own abuses, and if they did not do so, then they would take hold of it. We say the exchange has not corrected these abuses. In the most essential feature they have not done so, but they had views with respect to short selling and things of that kind that perhaps would not be repeated if they were making their report to-day. This is what they said then : It i« unquestionable that only a small jiart of tlie transactions upon the exchange is of an investment character. A substantial jiart may be character- ized as virtually gambling. The rules of all exchanges forbid gambling ■ * but they make so easy a technical delixery of the property contracted for that the practical effect of such speculation, in point of form legitimate, is not greatly different from that of gambling. Oontraets to buy may be privately ol3:set by contracts to sell. The offsetting may be done in a systematic way, by clearing houses or by "ring settlements." Where deliveries are actually made, property may be temporarily borrowed for the purpose. In these ways speculation whicb has none of the legal traits of legitimate dealing may go on almost as freely ns mere wagering and may have most of the pecuniary and immoral effects of gambling on a large scale. A real distinction exists betwen speculation which is carried on by persons of means and experience and ba.seil on an intelligent forecast and that which is carried on by persons without these qiialiflcntions. The former is closely connected with regular business. While iicjt unaccompanied by waste and loss, this speculation accomplishes an amount of good which offsets much of its cost. The latter does but a small amount of good and an almost incalculable amount of evil. In its nature it is in the same class with gambling upon the race track or at the roulette table, but is practiced on a vastly larger scale. Its ramifications extend to all parts of the co\intry. It involves the practical certainty of loss to those who engage in it. A continuous stream of wealth taken from the actual ca)iital of innumerable persons of relatively small means, swells the income of brokers and operators dependent on this class of busi- ness; and in so far as it is consumed, like most incomes, it represents a waste of capital. The total amount of this waste is rudely indicated by the obvious cost of the vast mechanism of brokerage and by manipulators' gains, of both of which it is a lar.iie constituent element. But for a continnous influx of new customers, replacing those whose losses force them out of the " Street " this costly mechanism of speculation could not be maintained on anything like its present scale. EEGULATION OF THE STOCK EXCHANGE. 75 ."-I'lialor Hitchcock. You do not propose really to do away with that speculation? Mr. UisTEKMYER. AVe propose to minimize it vei y much by this bill in a number of different ways. In the first place, as I have said, we propose lo make it unlawful for a broker to lend his customer's stock m order to fill short sales, which is the purpose for which it is Lised, and without which most short selling could not be conducted. In the next place, we propose to make it unlawful for a broker to rehypothecate the securities of a customer for more than the customer owes him, even with the consent of the customer. It appears in evi- dence here that Mr. Sturgis admits that fully one-third of all deal- ings on the exchange are transactions by the brokers for their own account. If I have stock in a broker's hands on which I have paid 50 per cent, he is allowed to pledge that for all he can get on it— 80 or 90 per cent ; and the experience has been that in every failure on the stock exchange the customer has lost his security ; that is, it has been pledged for more than it is worth, and the customer has to redeem it, if it can be redeemed, or lose it, and the victimized customer inust lose all his money, while the broker gets 100 cents on the dollar, if the seat is worth it. Senator Hitchcocjk. The customer you speak of is only a gambler? Mr. Untermyer. No ; not necessarily. Senator Hitchcock. Speculating through a broker? Mr. Unitermyee. No. A man may buy a security just as he buys a piece of real estate and pay half of the price on it and intend to pay the other off gradually and take it up. Senator Hitchcock. Do not your statistics there show that in three-fourths of the cases he is a mere gambler? Mr. Unttsrmybr. My statistics show the vast bulk of these matters are gambling, but if the broker is i^revented from rehypothecating his securities for more than his customer owes him, he can not do business on the customer's capital. Our State in 1913 passed the law against rehypothecation, but it allows it with the consent of the customer. What we AN'ant to pre- vent is the broker from using his customer's securities, except for what the customer owes him, and not for one dollar in excess of that. That will minimize speculation, as the law provides against lending. Senator Nelson. What about short sales? Why not include them ? Mr. Untermyer. We would very much minimize short sales in that way. Senator Nelson. Why should not that be stopped? Mr. Untermyer. If the broker is prohibited from lending stocks which he holds for his customer, to fill a short sale, that will verj^ much minimize short sales. Another way of reaching short sales would be through the clearing house of the stock exchange. To this I have referred earlier in the day. As it stands now, if a broker buys 1,000 shares and sells 900 shares of stock during the day, he has only to account for 100 shares in the clearing house. I Avould re- quire that the clearing house should get ei^ery certificate, and it should make a clearing. The brokers should not be iDcrmitted to set- tle on the balance. That would to some extent curtail short selling. Of course, there are differences of opinion as to the wisdom or un- wisdom of short selling. It is said in defense of it that it supports 76 REGULATION OF THE STOCK EXCHANGE. a weak market and that it prevents a runaway market. There is a good deal to be said on that side of the question. This Avould cer- tainly keep it within limits. Senator McLean. Does your bill require 20 per cent margin in all cases ? Mr. Unteemxer. Yes. Senator Shafeoth. What is the amount required now ? Mr. Unteemyee. I believe that some of the best houses do re- quire 20 per cent, and I think others require 10 per cent, but some brokers probably have customers whom they consider perfectly good and may not require any. I do not Imow. How is that, Mr. Mil- burn? Mr. MiLBUEN. I think it is one of the instances in which adults are allowed to deal with each other. Mr. Unteemyee. That would apply to the roulette table. The law does recognize that there is some restraint at times over adults. That is hardly a proposition that would apply to all things. Per- haps you do not think there ought to be any laws against larceny or other improper practices either, because adults ought to be able to overpower them. Senator. Shafeoth. We can not class them in that light. Mr. Unteemyee. I do not intend to class them in that light, but when the suggestion is made that there shall be no restraint over illegitimate transactions or gambling transactions, on the theory that adults shall be allowed without limitation to deal with one an- other,'! do not think that is quite an answer. (Thereupon, at 5.30 o'clock p. m., the committee adjourned until to-morrow, Thursday, February 5, 1914, at 10.30 o'clock a. m.) THURSDAY, FEBRUARY 5, 1&14. Committee on Banking and Cueeenoy, United States Senate, Washington, D. G. Pursuant to the adjournment of yesterday the committee met at 10.30 o'clock a. m. Present: Senators Owen (chairman), Hitchcock, Pomerene, Nel- son, McLean, and Weeks. STATEMENT OF SAMUEL ITNTERMYER— Continued. The Chaiemax. Mr. Untermyer, you may continue your statement. Mr. Unteemyee. Mr. Chairman, the press reports' of yesterday's hearing convey the impression that my statement of the money ex- pended by me. in connection Avith the Pujo inquiries, was voluntary and gratuitous, which, you know, is not correct. The fact is that it was brought out in answer to Senator Weeks's implied criticism of the manner of the Pujo inquiry, which he afterwards graciously withdrew. My explanation was made only to illustrate the mislead- ing character of the inspired attacks upon the work of that com- mittee, one of which was to make it appear that counsel had received BEGULATION OF THE STOCK EXCHANGE. 77 a large sum of money, when in point of fact, he was considerably out of pocket, aside from the time devoted to the work. Senator Weeks. Do you mean inspired attacks relating to the amount of money expended? Mr. Untermyee. No; that was only one of many features of the attack. Senator Weeks. That is the particular one to which you are now referring ? , Mr. Unteemyer. Yes; another of the many of those inspired at- tacks was to the effect that Mr. Morgan, who went abroad after the inquiry and who unfortunately died in Egypt months later, had practically been killed by reason of the fact that he had voluntarily testified before the committee. Another, if you will remember, was that the committee was trying to kill Mr. William Rockefeller be- cause they dared to make the effort to examine him and did not suc- ceed in examining him, and his critical illness, you may remember, mysteriously disappeared with the expiration of the life of the com- mittee. These are only a few of the many attacks to which I refer. Senator Weeks. I suppose that is a fact, is it? I did not know that it was. Mr. Unteemyer. What is a fact? Senator Weeks. That Mr. Rockefeller's illness was what you term "feigned"? Mr. Unteemyer. No; I did not then think it was feigned, and I do not think so now. I think Mr. Rockefeller was a very ill man, and that is the reason I refused to examine him. But the spasm, which he is said to have suffered when we sought to examine him, was a newspaper spasm at the time of the attempted hearing. He was a sick man, but he was not so critically ill as it was supposed he was, which I am very glad to learn. Senator Weeks. I was led to the conclusion that you thought his illness was largely feigned, by your saying that it mysteriously dis- appeared as soon as the life of the Pujo committee expired. Mr. Unteemyer. What I mean is the supposed critical illness which led to our abandoning the effort to investigate and examine him. I am more than j)leased to have had the opportunity to perform that public service in conducting the investigation, and feel fully repaid by the results which are rapidly bearing fruit, both in legisla- tion and in voluntary reforms in the financial world. The voting trusts in the two Morgan institutions in New York, that have alone $400,000,000 of resources, have been dissolved and disbanded as a direct result of the exposure of their existence. Some reforms have been effected in the clearing-house association and the stock exchange, and other abuses exposed have been remedied by legislation, such as the attempted boycott of the New York Stock Exchange against the Consolidated Stock Exchange. Senator Weeks. Of what did that consist? ]Mr. Untermyee. The breaking up of the interlocking directorate system has begun, and I am hopeful that legislation will do the rest. Senator Weeks. What was covered by the boycott to which you refer? To what did it extend? Mr. Unteemyer. No member of the New York Stock Exchange was allowed to telephone or send a letter to a member of the Consoli- dated Stock Exchange, under penalty of discipline. No member of 78 KEGULATION OF THE STOCK EXCHA^STGE. the New York Stock Exchange was allowed to sell any securities for a member of the Consolidated Exchange that were not quoted on the Consolidated but were quoted on the New York Stock Exchange. If a member of the Consolidated Exchange owned 10 bonds that were listed on the New York Exchange, it was a violation of the regula- tions for the stock-exchange members to handle those bonds or deal with them in any way. That has been corrected by legislation in New York State in 1913. The committee reported that that was not a subject with which Congress ought to deal ; that it had no reference to the mails. Senator AVeeks. "What committee? Mr. Untermyee. The Pujo committee. There were a number of those abuses as to which the Pujo committee reported they were not the subject of Federal regulation, and this was one of them. Senator Hitchcock. "V\T^iy could not we provide in this bill that the mails should not be open to any member of a stock exchange that boycotted another one? Mr. Unter31yer. Because I think that would be regulating the ex- change hy indirection, and the purpose of this bill is to avoid any action of that kind. Senator Hitchcock. I thought this bill was to regulate it by indi- rection ? Mr. UxTERMYER. No ; I say not. The only purpose of this bill is' to regulate the use of the mails, the character of quotations that shall be taken through the mails. It does not undertake to regulate any of the internal affairs of the exchange and carefully avoids that. I would like you to be good enough to note on the cover of the copies of the Pujr) committee furnished to you the following references to the pages that deal with the stock exchange : Pages 33 to 52, 114 to 120. and 162 to 163. You will have to read only those pages on this subject. The balance of the report deals with other topics, such as interlocking directorates, holding companies, voting clubs, and the various other forms of control that go to make up tne concentration of the control of credits, with which the report is primarily concerned, and of which the New York Stock Exchange is only an incident. The maps at the end, which cost thousands of dollars and months of time, are all intended to show the extent of the interlocking direc- torates. There are 27 separate recommendations of legislation, of which this as to stock exchanges is 1 only. I need hardly say to you that I have no possible interest or concern in this legislation beyond that of representing the views of the com- mittee that devoted months of time and study to the work and pre- pared and recommended a bill in which I heartily concur. It has not been a pleasant task for me, living in the very heart of this com- munity, whose business these gentlemen claim will be ruined by the enactment of this bill, but I have regarded it as a plain duty. Senator Weeks. Does anybody claim that the business of the ex- change will be ruined by the enactment of this bill? Mr. UxTERjiYER. I hare heard some of these gentlemen make that claim. Senator Weeks. Where? Mr. TT>;teemter. Frequently. Senator Weeks. Where? Mr. Unterjiter. Everywhere. I think thev will tell vou so. EEGULATION OF THE STOCK EXCHANGE. 79 Seiiatdi- Weeks. In public? Mr. UNiF.RjiYEii. I think thej' will tell vou so. I do not think there is any question about it. I differ radically from these gentle- men as to the effect of this bill. I believe that under incorporation and regiilation, with illegitimate transactions banished from the ex- change, its power and usefulness will be greatly enhanced ; that with the confidence of the public in its dealings restored, the new legiti- mate business that Avill come to it will vastly more than offset the' loss of that which has, in my judgment, done much to discredit it in the past. It may be and is doubtless true that the details of this bill can be improved by discussion and suggestion, but I do not believe the purpose can be accomplished by any other means. I am not con- cerned with mere matters of detail, but am respectfully insistent upon the fundamental principles that a way shall be found to protect the courts, the banks, the investors, and the public authorities of tlie country, as well as the general public, against the use of the mails to distribute fraudulent or manipulated quotations. To say that such legislation has the slightest concern with the press or its freedom is to entirely misapprehend, to my mind, the scope and ])urposes of this bill. I realize what it means to raise that cry, however baseless, against any legislation. Under cover of it the most iniquitous abuses will be allowed to go uncorrected. I realize that, however unpopular may be a stock exchange in the public mind, the press can succeed in making it and its methods an angel of light and virtue in the de- fense of anything that looks like an encroachment upon the pre- rogatives of the press. Senator Hitchcock. Is not the opposite true? The press has been the first to denounce the iniquities of the stock exchange and the abuses of the stock exchange, and the press, as a whole, would like to see the stock-exchange abuses eradicated. Is not that true — but that they want them eradicated in a proper way? Mr. I'ktermyee. I am rather referring to that part of the press that comes under my observation in New York, the metropolitan press. Senator Hitchcock. Is it not true that even in the New York papers they denounce wash sales and matched dealings, and denounce frauds openly? Mr. Untekmyeb. No ; I do net think it is fair to say that, except as to one or two of the papers. I do not think it is fair to say that as to the bulk of them. I discussed that quite fully in the prepared argument which I have submitted to the committee. Senator Hitchcock. I think I am rather familiar with the New York papers, and it seems to me they are quite outspoken. Mr. Uktermyer. I think not, Senator Hitchcock. Of course, I do not relish the idea of antagonizing the press, but I am going to trv to do what I believe to be niy duty in this business. The fact that this measure can be thus mistakenly made unpopular renders it all the more important that some one shall assume the duty of presenting its merits, even at the risk of incurring the displeasure of the governing body of the land, the press. The danger is not of ("ongress Eussianizing the press so much as the press Eussianizing Congress and the people. It would be difficult to say which would so EEGULATION OF THE STOCK EXCHANGE. be the greater misfortune. The first never has been, and I think never will be true, but there are times when thinking men feel that the latter is well-nigh upon our necks. The same cry was raised against the lottery law by the press of Louisiana. The power given to the Postmaster General under this bill is not a circumstance compared with that which he is exercising every day in the issue of fraud orders and in the exclusion of what he happens to regard as obscene pictures from the mail. It does not compare with the power over the newspapers that was recently un- siiccessfully challenged in the interests of the American Newspaper Publishers' Association in the Lewis case in the Supreme Coutt. It does not at any point touch or even in the remotest degree relate to rhe principle of the freedom of the press which we shall treasure more and more, as time goes on, as the very bulwark of a liberty- loving people. The objection rests upon a strained and, I think, far- fetched construction and grave misapprehension of the scope of this bill. Surely it will not be seriously contended, upon reflection, that a regulation against the use of the mails and telegraph for the dis- semination of false values, fixed as the result of manipulation, can by any stretch of construction be contorted into an assault upon the liberty of the press. This claim renders it all the more essential that you be not misled by first impressions, but that you give to it the careful study that the importance of the subject deserves. That is all I have to say, gentlemen. Senator Weeks. Mr. Untermyer, you referred to the connection between the stock exchange and the Consolidated Exchange. I would like to develop that a little, because ilr. Unteejiter. Senator Weeks, it is very fully developed in this record and in the report. It is all gone into, and I do not feel that it has any relation to the inquiry here. It could not, by any stretch of construction be claimed that any legislation here should reach it, and it has been reached by a bill passed at the last session of the legislature. I shall be glad to answer any question that you may have to ask. Senator Pomeeene. You refer to the New York Legislature ? Mr. Unteemyer. Yes. It is a matter of the internal affairs of a corporation. It does not concern the use of the mails for quotations. ^nator Weeks. The suggestion which you make would create some prejudice, I think, in the minds of those who read it, about the rela- tions betAveen the two exchanges. Do you know the reason why the regulations were adopted, to which you have referred, prohibiting an exchange of business? Mr. TTxTEEMYER. Only as testified to by the officers of the exchange at the mquiry. They put it on the ground that it was a rival ex- change. Senator Weeks. Was that the only ground ? Mr. Untermvee. Yes. Senator Weeks. Do you not think there was another reason? , Mr. Unteejiyee. I do not. Senator Weeks. You think it was simply an attempt to destroy the llll^ ness of a rival exchange? Mr. Untebmter. I think it was. Senator Weeks. And no other reason ? KEGULATIOlSr OF THE STOCK EXCHANGE. 81 Mr. Untermyer. I think so, and I think the testimony there of the gentlemen concerned bears me out. Senator Weeks. That is your honent conviction as to that differ- ence? Mr. UNraRJirER. That is my belief; yes. Of course, it was a smaller and less powerful institution and dealt with smaller people. I do not think its dealings were any more irregular than those of the big exchange except that there was a claim in earlier years that some of the members were bucketing orders and there were a good many bucket-shop people among the membership. Senator Weeks. There is a vast difference between trying to destroy the business of a rival, small or otherwise, and trying to regu- late the business of your own voluntary members and the method of doing their business. Mr. Untermyer. Will you allow me to call your attention on that subject to page 37, of the report of the Pujo committee, where you will find this statement : There is also in New York a much smaller marl^et for securities known as the Consolidated Stock Exchange, which is incorporated, and a market called the " curb " for securities not listed on the New York Stock Exchange. The last named wages bitter warfare against the Consolidated for no other apparent reason than that the latter is a competitor.- Senator Weeks. Whose' statement is that ? Mr. IJntermyer. This is the statement of the committee with refer- ence to the testimony of the officers of the exchange and of one or two other witnesses who were called and whose testimony was not dis- puted. Senator Weeks. Did you write that report, Mr. Untermyer? Mr. Untermyer. I drafted the report originally. Senator Weeks. Did not you write this part of it ? Mr. Uni'ermyer. This report. Senator Weeks, is signed by the members of this committee. Senator Weeks. Oh, I know that. Mr. Untermyer. You are a Senator of the United States. Do you sign anything you do not believe in ? Senator Weeks. I sometimes vote for things I am doubtful about. Mr. Untermyer. You ought not to do so. Senator Weeks. Because the proposition contains larger matters which are of sufficient importance to overcome my doubt. Mr. Untermyer. There is a long minority report of three E«- publican members, there is another minority report of one Repub- lican member, showing that everybody gave the most careful atten- tion to this report, and the three minority members coincide with the majority with respect to the stock exchange part of the report. Senator Weeks. I do not wish in any way to discredit the report signed by the members of another legislative bodj^, but you know, Mr. Untermyer, there is an enormous amount of business here, and men have not the time ordinarily to give attention to all details, even de- tails connected with the matters with which they are intimately asso- ciated. Mr. Untermyer. That does not apply to this report, because this report was drafted and brought here to Washington. Then we had meetings of .the committee, at which that draft was revised. Then 30578—14 6 82 REGULATION OF THE STOCK EXCHANGE. we put it in galley proof. We had a number of galley proofs. We spent a great deal of time, and night after night, around the table with the members of the committee, changing, correcting, and revis- ing this report. Each one took a copy of the draft and came in with suggestions, and never, in my judgment, in the history of legislative proceedings was a report more carefully prepared and gone over. A great many suggestions that were contained in the original draft were eliminated in the report. Others were changed. It is perfectly evident that you, in common with a great many other people, have been misinformed and misled about the action of this committee. There were very able men on that committee, and they gave to that the same study which you gentlemen gave to the currency question, except that they had about eight months in which to do it, and they were present at the hearings and asked a great many questions through counsel, arid were familiar with everything that went on. Senator Weeks. I want to make the suggestion that I do not think I have been misinformed, and I know the members of the committee, or many of the members, and I have high regard for them; but I know the way business is done in legislative matters, and that all the members of a committee do not give the detailed attention to reports and other matters, which they sometimes sign, which would warrant one in saying they were in accord with everything they had signed or everything they voted for. I never have voted for a bill, since I have been in Congress, of which I fully approved — not one. Mr. Unteemyek. Of course, that need not be so with respect to a report of this kind, because every man can file his own views. In connection with this report, the minority and the majority sat together in all the conferences. Mr. Hayes, one of the minority members, will tell you that many of the things in this report are the result of his suggestion. He is in the House now, from California. Other Republican members will tell you that there are things in this report which are the result of their suggestions, and changes were made at their suggestion. Up to almost the last moment it was sup- posed this report was going to be signed by all 11 members of that committee, but within a day or two before its signing the Republican members conferred among themselves, and they split on the question, three of them making one report and one of them making another report ; so this is perhaps an exceptional situation with respect to this report. Referring again to the New York Stock Exchange, the Pujo Com- mittee went on to say : The last named (tlie New York Stock Excliauge) wages bitter warfare against the Consolidated for no other apparent reason than that the latter is a competitor. It has adopted and rigidly enforces a rule prohibiting any busi- ness transactions between its members and members of the Consolidated, and any communication by telegraph, telephone, messenger, or otherwise, directly or indirectly, between the places of business of its members and the places of business of members of the Consolidated. Following the adoption of this rule members of the Consolidated Exchange having accounts with the New York Exchange were required to close them out. That is the testimony of a number of men who were required to close out their accounts. A member violating the rule is punished by suspensiou, usually for one year, during which time neither he nor his partners, if any, can execute orders on the exchange nor employ other members to do so and divide the cnmniissions. REGULATION OF THE STOCK EXCHANGE. 83 That is the testimony of Mr. Ely and Mr. Mabon. So far-reaching is this prohibition that a member of the Consolidated Ex- •change owning securities listed only on the New York Stock Exchange could not sell them there, and therefore would be without a market, except by private sale. That is the testimony of the secretary of the New York Exchange, and again of the president of the exchange. The president of the New York Stock Exchange admitted that the purpose of the rule is to drive the Consolidated out of business. Here is his testimony at page 387 of the record : Mr. Un'J'ermyek. Do you not regard that as a most oppressive and unjust rule? Mr. Mabon. I do not. Mr. Untekmyer. How do you justify it? You are the president of the stock exchange. We would like to know how you justify it. Mr. Mabon. I justify it by the fact that the Consolidated Exchange is an organization that is a rival organization of our own, and this is a business that we have and is a business that we should be able to keep. I do not see any reason why we should not strengthen our institution as much as we can. Mr. Untermyeb. But do you not keep all that business when your own listed stocks are sold on your own exchange through your own brokers? Mr. Mabon. What business? Mr. tiNTEEMYEE. The business to which you refer. It does not take any busi- ness away from you, does it, for a member of the Consolidated Exchange to sell through your exchange stocks that are not listed on his exchange, but it gives you business, does it not? Mr. Mabon. Yes. Mr. Untermyee. And your refusal to take it really takes away business, does It not? Mr. Mabon. Yes. Mr. Untermyee. But you are willing to take away business, you are willing to drive away business, are you not, in order to prevent a man who is a member of another exchange from doing any business at all, and to drive him out of business? Mr. Mabon. Yes. The committee then says : The committee can find no justification for the methods adopted by the New York Stock Exchange to exterminate its weaker rival. Members of the New York Stock Exchange may engage in transactions on the " curb " so long as no issue of securities dealt in on the former is allowed to be dealt in on the latter. When an issue theretofore dealt in on the " curb " is listed on the New York Stock Exchange, trading therein on the former must cease, or reprisals from the latter may be expected. That is the testimony of Mr. Mabon, at pages 460-462 of the record. Mr. Mabon was the president of the New Yorlc Exchange. Some of the more important mining shares have recently been so transferred from the one market to the other. The " curb " lives by the mere sufEerance of the exchange, and only so long as it meekly permits to be taken from it such business as the exchange concludes to take unto itself. This is, I say again, quite beside the question. I had not intended to refer to it. I did not in my discussion yesterday refer to it be- cause I felt it had nothing to do with the scope of this matter. I have now done so in answer to your questions. Senator "Weeks. Senator Pomerexe. Mr. Chairman, it seems from the little colloquy between the Senator and Mr. Untermyer that it is contended by Mr. Untermyer that the apparent reason which inspired the fight of the New York Stock Exchange against the Consolidated Stock Exchange was to destroy it as a competitor. It is indicated that there were some other reasons for this fight. I would be interested at this point in knowino- what those reasons were, if there were other reasons. 84 EEGULATION OP THE STOCK EXCHANGE. Mr. Untermyer. Senator Pomerene, these gentlemen were upon the witness stand and they developed no other reasons. "V\Tiat I said in answer to Senator Weeks was what I understood to be the talk of the street, and I suppose it has come to you in that way. too, Senator Weeks? Senator Weeks. It did not come to me in that way at all, Mr. Untermyer. I want to say, for the benefit of Senator Pomerene, that the reason that I raised this question is the apparent tendency of that report, which may have been justified by the testimony — I am not quite sure whether it was or not — to develop a prejudice in the minds of people against the New York Stock Exchange on account of having attempted, by coercive methods, to destroy a rival in busi- ness, and that it was for that reason, and for that reason alone, that this action was taken. What I want to say is that, in my judgment, the president of tlie stock exchange, in that testimony which Mr. Untermyer has quoted, did not go fully and completely into the question. I do not know whether he had opportunity to do so or not. Mr. Untermyer. Yes, he had every opportunity. Senator Weeks. He may have had every opportunity, but there were other reasons, and I think probably several reasons which might be developed why this interchange of business was sought. It did promote manipulation and illegitimate and improjjer manipu- lation, but that could be easily enough developed through witnesses, if the witnesses were here; and it was for that reason, in my judg- ment, and that was the primary reason for the rules which were adopted by the New York Stock Exchange. Mr. Untermyer. I do not think there is any justification in the record for saying there was any reason other than that of destroying the competition of the Consolidated Exchange. Senator Weeks. I do not think there is any reason, so far as you have read it. Mr. Untermyer. If you had been on that committee, you would not have made any other findings. Senator Weeks. But I would have asked some questions. Mr. Untermyer. You would have asked no questions that were not asked, in my judgment. Furthermore, I asked him what were the reasons. Just see how unfair your attitude may be. Senator Weeks. Not " is," but " may be " ? Mr. Untermyer. " Is "' in that respect. I do not think " is delib- erately," but " is somewhat partisan." My claim is that my point of view is entirely unpartisan. See what the questions were that were asked the president of the stock exchange. The Chairman. That is President Mabon? Mr. Untermyer. Yes. Senator Weeks. I do not want to leave in the record, even for a minute, the suggestion that my position is partisan. I try to be a dealer in facts, and all I want is facts in this case. Ir. Untermyer. Have not you ignored them? Senator Weeks. I do not think so. Mr. Untermyer. I read you this question : Q. How do you justify if.' Xou are the president of the stock exchange We would like to know how you justify it ? REGULATION OF THE STOCK EXCHANGE. 85 Could a question be broader than that? Senator Weeks. I said I thought, based on the testimony which you read Mr. Unteemyee. But " How do you justify it? " I asked the man and he says : 1 justify it by the fact that the Consolidated Exchange is an organization that Is a rival organization of our own, and this is a business that we have and is a business that we should be able to keep. I do not see any reson why we should not strengthen our institution as much as we can. Then I go on to sift that reason, and it is not a reason at all, be- cause they have driven business away instead of getting it. Each of these witnesses had the right to make any explanation he saw fit. They would have been permitted to come in the next morning and read statements if they wanted to do so. I want to disabuse your mind of the idea that there was anything in that investigation that was not very broadly fair and impartial. Do not you think you are wrong about that ? Did not these men have the fullest opportunity for explanation ? Senator Weeks. If I had been there and a member of that com- mittee, I should have insisted on asking questions, and I should have asked some questions which would have led the president of the stock exchange to make additional and qualifying statements as to what he had said there — and they exist, too. Mr. Unteemyee. But, Senator Weeks, those gentlemen were not New York bankers or Boston bankers or brokers, and those men on the committee did not know local conditions there as you would. They are not familiar with them, and therefore if you were on all the committees of the House and Senate, with your accumulated experience in banking, I have no doubt a great many investigations would be conducted on different lines. Senator Weeks. I simply used myself in an impersonal sense. Every member of this committee would have done it. Mr. Unteemyee. When you ask a man, "How do you justify a thing," it opens the door for him to say everything he chooses, and if he answers fully you would not have asked anything else on that subject. Senator Weeks. I am bound to say I think the president of the stock exchange did not answer that question completely, and he had no opportunity to do it. Mr. Unteemyee. How do you know? Perhaps he did. I think he will answer it the same way again if you will ask him. I do not think he will say there was any other reason. Senator Weeks. I am going to ask somebody, out of curiosity, be- fore this hearing is completed. Mr. Unteemyee. I have concluded what I have to say, Mr. Chair- man. I do not want any misunderstanding on one point, however. We do not claim that the controversy between the exchanges is a matter with which this body has any concern, or that it is the basis of any legislation, and the report so states. The Chaieman. That is obviously not within the scope of this Senator Weeks. There is a vast amount of prejudice in the public mind against stock exchanges, some if it may be justified and has 86 REGULATION OP THE STOCK EXCHANGE. been in the past and quite likely may be to-day. Any attempt to bhow the New York Stock Exchange is destroying a rival by im- proper methods increases the justification for that prejudice, and I was trying to bring out and am going to continue to do it, until I have satisfied myself through you or through others, that there were other reasons, than improper reasons, for the action taken by the New York Stock Exchange. Mr. Untekmyee. I think, Senator Weeks, they took the position which many people in business take, and which has been quite a prevalent idea, that competition is war and that when two exchanges^ like two businesses, are competing with one another, they have a right to fight. That was the attitude they took, and it is not an un- usual attitude. We brought before the committee a number of witnesses who had made efforts to sell their securities that were not listed on the con- solidated through the New York Stock Exchange. We showed in- stances in which brokers, who sold securities for years for consoli- dated members — very responsible men — were notified by the stock exchange that they must drop that man's account and must not deal with him and must not sell his securities. He had never speculated, but had been a man of high responsibility. Senator Nelson. Mr. Chairman, had we not better go on with the hearings ? The Chairman. I think so. Senator Hitchcock. That evil has been cured since by legislation in New York State, has it not? Mr. Untekmtee. Yes. Senator Weeks. I want to ask Mr. Untermyer one more question, Mr. Chairman. Mr. Untermyer, you spoke of fundamental reasons for this legis- lation. In just a sentence, what do you think are the absolute essentials? What do you think are the absolute essentials which we should incorporate in a bill to carry out what you think is necessary to prevent abuses in the New York Stock Exchange ? Mr. Untermyer. Simply. such regulations as will make it possible for some authority to see to it that the quotations of the securities on the exchange that go through the mails are genuine quotations of genuine transactions, and not manipulated transactions. That is all, and that is the scope of this bill. Everything in it is adapted to that end. In my judgment, that can only be done if the power resides somewhere to do what the governors of the exchange can now do, if necessary— to go into the books and find out whether the quotations have been manipulated ; I mean the books of the members. If they can not do that, there is no more hope of finding it out than there would be of finding the rebates in the railroads without access to their books. I want to say that I believe nothing will so rehabilitate the ex- change, nothing will give so much confidence in it, nothing will add so much to its power, as some such legislation. Senator Weeks. Do you think, if there were no manipulated quo- tations on the exchange, that in other respects the business of the exchange, as now conducted, would be satisfactory? Mr. Untermyer. With certain changes. Do you want me to name those? EEGULATION OF THE STOCK EXCHANGE. 87 Senator Weeks. Yes. Mr. Ukteemyer. Shall I summarize them? Senator Weeks. Yes. Mr. Unteemtee. One change is in the listing department. As the bill sets forth, I think the public should know, through the informa- tion gi^ven to the listing department, what the stoclfs represent, whether they are wind, water, or assets. Second, I think they should know what the promoters have re- ceived out of the transaction, and W|hat the properties really were sold for and what the intermediate commissions and charges of the banks were. etc. I think there should be lists of the shareholders available, and a few other minor things; that is, in the listing. The third condition I would make Ivould be one that would mini- mize short selling and make it less irresponsible; not entirely do away with it, but to very much minimize it. I discussed that yes- terday. The brokers should not be permitted to lend the stocks of their customers, even with the customer's consent. That is in the interest of minimizing gambling transactions. You know — I am sure you know — that if I have an account with a broker, and I own 100 shares with him, on which I owe money, he charges me interest on my loan right along. He also lends that stock to fill short sales and get paid for it when he lends it, and gets the money; so he draws interest on that money and he keeps on charging me interest on my account. That is a very prevalent practice. He does not stop charg- ing me interest on my account because he has been paid for that stock by the broker to whom he loans it. He keeps right on charging it to me. You loiow of such practices, do you not? Senator Weeks. Absolutely. Mr. Unteemyee. It is not right? Senator Weeks. You mean to continue the practice of selling short or loaning stock? Mr. Unteemyee. No; the practice of the broker lending his cus- tomer's stock and getting paid for it, and still charging his customer interest on the money should be stopped. Senator Weeks. As I told you yesterday, under the laws of Massa- chusetts, the stock is not his customer's as long as the customer owes any money on it. It is the broker's. Mr. Unteemyee. It does not make any difference. Senator Weeks. The transaction about which you are talking is between the customer and the broker, and it is all right for the cus- tomer to pay interest on the money that he owes. Mr. Unteemyee. He can not owe the money and the broker still own the stock, can he? If the Massachusetts rule is right, then he does not owe the money ? Senator Weeks. Yes ; he does. Mr. IXntermtee. Who owns the stock? Senator Weeks. The broker owns the stock until it is paid for in full. Mr. Unteemyee. The broker has both the stock and the money? Senator Weeks. He has ; he furnishes you the money. Mr. Unteemyee. He charges his customer interest on that loan, does he not? Senator Weeks. He charges his customer on the amount of money which the customer owes on that particular stock? 88 REGULATION OF THE STOCK EXCHANGE. Mr. Untbemyer. He charges interest on that loan and he holds the stock as collateral to that loan. You say he has the legal title, but that is immaterial. He holds the stock. Is it right he should go on charging the customer interest on that loan when he has loaned that stock out to another broker, who has been paid for it ? Senator Weeks. You will get me in the position of a witness and you will be occupying your usual position unless we adopt a different course. Mr. Unteemyee. I am perfectly willing. Senator Nelson. What is the sense in listing a stock like this: Eock Island, 11, 9|, 10, 7 shares ; Eock Island, preferred, 16, 14f , 15f ; Great Western, common, 14, 13 ? What is the use of listing that kind of stock on the stock exchange to gull people with ? I am sorry you have not anything to say on that question. Mr. Untermyee. I have a great deal to say on it. Senator Nelson. It would take a long time to say it. Senator Nelson. A stock exchange that will list pure water and give it a market — give it a credit on the exchange — ought to be reached in some way. The Chairman. If it gets sufficient newspaper publicity it may find a market among the innocent of Minnesota. Senator Nelson. Yes ; they might capture them. Mr. Unteemyee. May I suggest you ask some gentleman from the stock exchange that question? Senator Nelson. I am sorry you do not go for the real root of this matter. Mr. Untermyee. I do go for the root, but this is where I have en- deavored to draw the line : I am trying to reach one thing at a time. I do not think we can do everything at once. That stock that is quoted at 11 may have been worth 100 some day; I do not know what it was worth when it was listed. In the next place, the stock-exchange governors can not fix the value. You know a great many railroads have been built in this country, of which the stock was ;worth very little at the beginning, and the people could not have gotten the money to build them if that stock could not have been sold and dis- tributed? Senator Nelson. Given away, you mean? Mr. Unteemyer. Even given away. The country would be 50 years behind where it is to-day if it were not possible to take a security and market it for what it is Avorth. My contention is that as long as the people know the facts and are given all the facts, so they can find out what a thing is worth, it is for them to determine. What I am trying to reach now is to get a disclosure of the facts and to prevent fraudulent quotations from going through the mails. Senator Nelson. Your argument is like that of the old-time pirate we used to have, who said he helped to promote commerce and ship- ping. Mr. Untermyee. I think you will find that neither Mr. Hill nor any of the great railroad builders of this country coidd have built their roads without help from the bankers. Senator Nelson. Mr. Hill built his road, not on wind and on con- sequences. He built it on money. Mr. Unteemyer. He had to give away his stock with his bonds when he started, like everybody else; and he had to do the same thing they all have to do. EEGULAilON OF THE STOCK EXCHANGE. 89 Senator Nelson. He built the transcontinental line with his own money ; without any money, subsidy, or land grant, and the only one, too, of its kind, that we have in the country. Mr. Unteemyee. But he had to do it through the bankers, and he had to- pay them for it, and his stocks were not always worth $100. Suppose you take a, new enterprise that is starting : A man is start- ing in business, and his securities are not well known. They have to take their chances on the market. Senator Nelson. You have become demoralized from your en- vironment up there, as well as the rest of them. Mr. Unteemyee. You are mistaken. I am trying to show both sides of it. You are so far away you only see one side. Senator Shafboth. Is it your contention that, according to this bill, the publicity that will be given such stocks as the Rock Island, and the Great Western, would have a tendency to wipe them off the slate from quotations ? Mr. Unteemyee. Yes; if speculation in stocks continues, and as long as it continues the speculator likes a low-priced security. It takes little money and little margin, and you will always have specu- lation in those low-priced securities that have not paid, and prob- ably never will pay, a dividend. Senator Shafeotii. You think the publicity of the status of those companies would prevent people from buying, and therefore there would be no market in the stock exchange for them? Mr. Unteemyee. No ; I do not think it would prevent them from buying, but I think it would enable them to know what they are buy- ing; and when they buy, it would enable them to pay honest prices for them, and not the price at which somebody is holding them up by manipulation. Senator Nelson. I find that 200 shares of Wabash were sold at 3 cents yesterday. [Laughter.] Senator Weeks. Have you finished the summary which you were discussing, when we were interrupted? Mr. Unteemyee. I had not finished it; no. There are other fea- tures that lead in the same direction. For instance, I referred yester- day to the stock exchange clearing house and to the fact that by re- quiring that the certificates should all be brought there and ex- changed you would to some extent reduce gambling transactions. Senator Weeks. Do you think the stock exchange clearing house is an evil ? Mr. Unteemyee. No; I think it is a very necessary benefit to the exchange, but I think it could be very much more of a benefit if they did not simply settle balances, but did as they do in the New York Clearing House Association with checks, if they handed around the certificates. If a man bought 9,000 shares and sold 8,000 shares, if he had to bring in the 8,000 shares that he sold and get back the 9,000 shares that he bought Senator Weeks (interposing). Of what benefit would a cleanng house be if he did that ? Mr. Unteemyee. Because they would make the exchanges there as it is done in clearing houses, instead of his having to go to 50 brokers with whom he dealt. He would go there and deposit his securities as they do in the clearing-house association with the checks. 90 REGULATION OF THE STOCK EXCHANGE. Senator Weeks. Do you not know that is all that is done in the clearing house to settle the balance with a check ? Mr. Untermtee. On the contrary, I know that in the New York Clearing House Association each bank brings in all its checks. Senator Weeks. They go into th« clearing house ? Mr. Unteemyer. Each bank comes in with all its checks. Senator Weeks. The transaction really means the paying of a bal- ance with a check ? Mr. Unteemyee. In the end, yes; but if you should apply that principle to the stock exchange clearing-house association, you would minimize those speculative transactions to some extent, if it is deemed wise to do so. That is a question of economics as to which there is plenty to be said on both sides. Senator Weeks. Is there any other fundamental ? Mr. Unteemyee. I do not recall any other, except the question of striking securities from the list, to which I very fully referred yes- terday. The Chaieman. If there are no further questions, we will hear from Mr. Mabon, of the New York Stock Exchange, or his repre- sentative. Mr. Mabon. Thank you very much, Mr. Chairman, for the oppor- tunity of being heard here. Mr. Van Antwerp will speak for the stock exchange. He is a member of the stock exchange. (Mr. Untermyer, in closing, submitted the following written argu- ment which he had expected to make before the committee, but was unable to do so because of the many interruptions to which he was subjected. Although much of this argument is contained in Mr. Untermyer's verbal statement, at his request and by direction of the chairman it is made a part of the record:) Mr. Chairman and gentlemen of the committee, unless I wholly misappre- hend the operations of our financial system the regulation by law of the stock exchange Is an indispensable condition precedent to the destruction of the con- trol of great financial credits by a few men or to any effective corporate reform In this country. It is through the illegitiniiite use of the facilities of this, the world's greatest security market, that the vast predatory fortunes have been filched from the public. The relation and importance of the exchange to cor- porate independence of banking domination are little understood. We shall accomplish nothing substantial toward reaching tln' coveted goal for which we are striving until this factor in appreciated. This discussion has thus far proceeded on the nssumptifin on the part of the exchange that there are no official data to guide us and that the field of irre- sponsible assertion is wide open. Permit me to suggest at the outset that the opponents of this legislation seem to have lost sight of the fact that this bill was favorably reported by a committee of the House of Representatives of the Sixty-second Congress by the unanimous action of the seven Democratic mem- bers of that committee, based upon a voluminous record of sworn testimony supported by documents and statistics. I quote from thejr report on this subject as follows : [Page 11.5.] " The general public, which has grown to look upon the exchange with distrust because of the practices that have been permitted, will be given new confidence In it when It is under legal supervision. " Notwithstanding these facts, it contends that it should be permitted to con- tinue its voluntary organization with the privileges and freedom of action of a private club and should not be made sub,1ect to legislative or judicial control or supervision, and that it is not amenable to Federal regulation in its use of the mails and of the telegraph and telephone in interstate commerce and in the dealings of its members with foreign countries, xir.vjUJ^AJ.iuJN Ui- THE STOCK EXCHANGE. 91 "To this contention your committee is unable to agree. It is incongruous that such an Institution wielding such power and equipped to perform such useful and important functions in our economic system should be uncontrolled by law. " On the other hand, your committee believes that incorporation and regula- tion would banish from the exchange transactions which now disgrace it, bring ing in their place a greater volume of business of an investment and otherwise legitimate character, and marking the dawn of a new era of prosperity for its members and of usefulness to the public." [Page 116.] " In other words, the facilities of the New York Stock Exchange are em- ployed largely for transactions producing moral and economic waste and cor- ruption ; and it is fair to assume that in lesser and varying degree this is true or may come to be true of other institutions throughout the country similarly organized and conducted. " Your committee believes, therefore, that Congress has power unconditionally to prohibit the mails, the interstate telegraph and telephone, the national banks, and all other instrumentalities under its control, from being used In executing, negotiating, promoting, increasing, or otherwise aiding transactions on such stock exchanges." It seems also to have been overlooked that three of the four Kepublican members of that committee joined in the recommendation of the majority on this subject in their minority report. I quote from the minority report as follows : " Many abuses are disclosed by the evidence produced before the committee, a number of which are well known to the public and recognized by everybody at all familiar with the business conditions in this country. Abuses on the stock exchange, of quite long standing, were disclosed before the committee, as were also abuses existing in clearing-house associations, especially in New York City. " Evils existing in both stock exchanges and clearing-house associations could be corrected by the exchanges and associations themselves, if they were so Inclined. They having failed and neglected to remedy the abuses existing in their conduct and operation in our opinion, it is the duty of each State in which these exchanges or associations are located to compel their incorporation and to regulate their management by appropriate legislation. Should the exchanges and the associations, as well as the various States, neglect this plain and im- perative duty, then we believe that it is the duty of Congress to exercise any jurisdiction or power conferred upon the Federal Government by the Constitu- tion to pass such restrictive and regulative IcgislaLIon a? may be necessary. This duty arises from the fact that these evils are not such as ai¥ect only the. local communities in which they exist, but their results are as broad as the busi- ness interests of the country, and affect in their most intimate and important business relations all the people thereof. " While agreeing substantially with the majority upon many of the abuses to be corrected in the financial system, the stock exchanges and thy clearing-house associations, the undersigned have doubts as to the wisdom of some of the reme- dies proposed by the majority to correct these abuses." (The last clause refers to other subjects discussed in the report — not to stock exchanges.) ^, . ^ i, ^ „ • ,.■ .- The opponents of the bill also ignore the circumstance that the mvestigation disclosed and the committee found the existence of an incredibly deplorable state of affairs which demands prompt and drastic correction for the public protection and which can be corrected' in no way other than that proposed by The' following language of Chief Justice White in Lewis Publishing Co. v. Morgan decided by the Supreme Court in June, 1913, in which the right of Con- gress was sustained to exclude from the second-class privileges of the mail newspapers that did not make certain disclosure, is peculiarly applicable here : " Under that six- word grant of power (referring to the post-roads clause of the Constitution) the great postal system of this country has been built up, involving * * ■* the suppression of lotteries and a most efficient sup- ■pression of fraudulent and criminal schemes impossible to be reached m any otliGr Wtiy " It was impossible in the yery nature of things for the committee to go further in the taking of testimony within the limited time at its disposal than 92 REGULATION OF THE STOCK EXCHANGE. to present selected instances by way of illustration of the character of the wrongs and abuses that were being perpetrated upon the community, but the disclosures made were such as to shock and amaze the country and to demand redress. So blindly reckless was the action of the exchange members that the com- mittee was able to establish, by way of illustrating the extent of the abuse and the persistent unwillingness of the exchange authorities to interfere with these vicious practices, an operation that was actually being conducted in the manipulation of a newly listed security day by day on an enormous scale by prominent members, with two leading banking houses as allies and associates, whilst the inquiry was in progress. The details of this particular transaction, which is typical of the method of " making a market " in the securities of a new company, are summarized at pages 50-52 of the report, in the following language : " The California Petroleum Go. flotation. — A typical instance of manipulation for the purjKise of stimulating speculation in a new security is the operation in the stock of the California Petroleum Co., begun in October last, whilst this in- vestigation was in progress and the sub.iect of manipulation of securities on the stock exchange was under active discussion. " This company was organized in September, 1912, with nn authorized capital of $32,500,000— $17,500,000 preferred and $15,000,000 common— of which $11,- 997,024 preferred and fl.3,513,081 common was given in payment for tlie stocks of two California oil-producing companies. (Henry, R., 1251-1253.) Simulta- neously, and as part of the plan, William Salomon & Co., bankers, of New York, and associates, namely, Hallgarten & Co. and Lewisohn Bros., of New York, and a fourth, not named, for $8,215,662 in cash, purchased from the vendors $10,000,000 of the preferred and $7,572,845 of the common stock of the California Petroleum Co., which the latter had accepted in payment for the stock of the two producing companies, William Salomon & Co., Hallgarten & Co., and Lewisohn Bros, each taking 294 per cent and the unnamed associate 12i per cent. (Henry, R,, 1253, 1255, 1270; Exs.. 149-153: R.. 1261-1266.) " Thereupon the bankers, as we shall hereafter call them, formed a syndicate in New York to underwrite $5,000,000 of the preferred and $2,500,000 of the common stock at the price of $5,000,000, and sold to a London syndicate the same amount at the same price, leaving the bankers at this point with a profit of .$1,784,338 in cash and $2,572,845 in common stock, which latter they sold at 40 and 45. (Henry. R., 3271, 1285.) " The bankers also joined the New York syndicate, in which altogether there were 104 members, including (a) three corporations affiliated with national banks — two of them in New York, one of which had a participation of $500,000 and the other $50,000, and one outside with a participation of $50,000; (6) one trust company in New York, with a participation of $50,000: and (c) 24 offi- cers of banks, among them officers of four national banks in New York, two in Chicago, and one in Detroit, whose aggregate participations were .?535.000. the largest single participation— $50,000— going to an officer of a Wall Street bank which lends on stock-exchange collateral. (Henry, R.. 1271-1275.) " The stock was all sold at an advance of nearly $500.0(X) above the jn-ice at which it was underwritten on the day it was deli\ered to the bankers — October 2, 1912 — and before any appreciable number of the syndicate had accepted the offers of participation. Thus, nearly all the undei-writers, including the bank officers, got their profits without having made any commitment, and none of them put up any money or had to take any stock. (Henry, R., 1277, 1278.) " Mr. Henry, of Salomon & Co., who was called as a witness in regard to this transaction, having refused to divulge the names of the national-bank officers who received participations in this syndicate, his contumacy was certified to the House, and from there to the United States attorney for the District of Columbia for prosecution under sections 102, 103, and 104 of the Revised Stat- utes. Your committee is of opinion that the information sought from Mr. Henry is germane to the question — whether national-bank officers are being influenced by any form of reward to lend the money of their banks on newly- listed and unseasoned stocks. It was impossible for the committee, without knowing the identity of the banks and officers, to determine whether these participations to officers were given for the purpose of inducing the banks they served to accept these new securities as collateral for loans or whether they were so accepted. " The stock of the California Petroleum Co. was listed on the New York Stock Exchange on October 5, after the portion underwritten by the syndicate and the separate holdings of the bankers had all been sold. (Henry, R., 1281 ) REGULATION OF THE STOCK EXCHANGE. 93 "Thereafter an oiieratiou in the stock was conducted (principally in the common) on the New York Stock Exchange by Lewisohn Br(js. for the joint account of the bankers, for the purpose, as described, of ' making a market.' (Henry, R., 1282, 1283.) Under the general direction of Salomon & Co., Lewisohn Bros, would put in separate orders to different brokers on the morn- ing of every day to sell on a scale up and to buy on a scale down, so adjusted that at the end of the day they would have bought and sold, so far as market conditions permitted, substantially the same number of shares. (Henry, R., 1282, 1284.) There is in the record a table showing the purchase and sales by Lewisohn Bros, and the prices day by day from October 5, when the stock was listed, through the end of that month, from which it appears that during that period of about 21 business days 163,000 shares were purchased and 172,900 sold by Lewisohn Bros, for account of themselves and associates. Ex. 134i, R., 1186.) " Under the influence of this o])eration the price of the common stock, start- ing at about 62i, quickly rose to 72 ; it had fallen to 50 by December. ( Henry, R., 1285-1286.) Mr. Henry, of Salomon & Co., stated that he supposed the public bought largely on the rise. (R., 1286.) " The total purchases and sales on the exchange during these 21 days were 362,270 shares, which was equal to over three and one-half times the total outstanding common stock." It may be remarked in passing that this stock, which was thus manipu- lated to $72 per share and distributed to the public, has since sold as low as $16 and is now selling at $28. The only comment that would appear necessary in answer to the claim of the exchange that the disciplining of its members should be left exclusively in its hands without interference or review by the courts or by Government officials is to refer to the fact that neither in this nor in the many other instances of manipulation uncovered by the committee was there any effort made to punish the offenders, except where the operation resulted in in- solvency. The transactions were, on the contrary defended and sought to be justified. Yet they amount in effect to a mock auction with the public as the victims and are vastly more dangerous and far-reaching because conducted under the cloak of respectability of an honorable calling. The following from the testimony of Mr. Frank K. Sturgis, a then governor and former president of the exchange, is illuminating on this point: " Q. Very well ; that is an answer. How do you justify as legitimate the transactions of a pool or syndicate in giving out buying and selling orders to brokers for the purpose of lifting the price of the stock or of depressing it? — A. Those are the acts of individuals. I can not be responsible for what thousands of people throughout this country do. . " Q. Do you seek to justify it? — A. It depends entirely upon circumstances. I have already said that under certain conditions — orders given out, commis- sions paid, no collusion whatsoever — the broker who buys, not having the slightest idea where the order comes from, that the broker executes to sell — I say it is not an illegitimate transaction. ******* " Q. * * * Will you be good enough to answer that question? Is not the operation, at times, resorted to to depress prices and at other times to lift prices? — A. Yes; I can consistently answer that. ******* " Q. Y'ou approve of those transactions, do you? — ^A. I approve of transac- tions that pay their proper commissions and are properly transacted. Yon are asking nie a moral question, and I am answering you a stock-exchange question. " Q. vrhnt is the difference?— A. They are very different things. " Q. I thought so. There is no relation between a moral question, then, and a stock-exchange question?— A. Sometimes." Another witness (Mr. Morse at p. 719) described the mechanism of manipula- tion as practiced on the exchange as follows: " He is the gentleman who manipulates the stock, giving the buying and selling orders. (Morse, R., 710.) " If he merely wishes to make a stock appear active, he gives buying and selling orders in about equal volume ; if he wishes to put up the price, he gives an excess of buying orders: if he wishes to depress, he gives an t-xcess of sellhig orders. (Morse, R., 710, 711.)" 94 BEGULATIOK' OF THE STOCK EXCHANGE. There is not time to rehearse here the inaumerable ways in which the ma- chinery of the exchange is shown by the testimony to have been used with impunity over a long series of years and up to the conclusion of the inquiry for the practice of fraud and deception upon the public. The cases of the Columbus & Hocking coal and Iron pool, Rocls Island & California Petroleum Co., described at pages 47 and 50 of the report, are illus- trations of one phase of the evil to which I refer. Suffice it to say that there is overwhelming evidence to support the findings of the committee. The testimony comes, not from hearsay nor from muck- rakers or enemies, but out of the mouths and records of the members them- selves. The exchange was represented by eminent counsel, as astute and resourceful as any in the land, who submitted a lengthy printed argument dealing with every phase of the law and facts, the witnesses who testified to its general methods and practices were selected by the exchange at the invitation of the committee and they were afforded the most ample opportunity for •explaining and supi)lementlng their testimony. There Is no basis for the Impression that the exchange, through its press bureau, has industriously sought to create, in order to excuse the deplorable showing it made, that there was anything unfair or onesided about the manner of conducting the inquiry. Every witness whom It asked to have examined was called, it was invited to submit whatever questions it desired to have asked, and all such questions were put, and every witness was given the oppor- tunity to exalnine' and correct his testimony, and to make such additions, ex- planations, and statements as he chose at the conclusion of his evidence. Avail- ing himself of that permission, Mr. Sturgis delivered a carefully prepared address, which will be found at the end of his testimony. I do not deem it necessary or appropriate to enter upon a defence of the fairness of an inquiry by a committee of the House of Representatives against such Irresponsible and unfounded attacks. The record and the unanimity of the conclusions reached regardless of partisan lines speak for themselves. In the face of the record accompanying the report of the Pujo committee, it is worse than idle to assert that the exchange will ever be able to bring about its own reformation. The unanswerable figures presented by the diagrams at pages 1120-1178 -of the report demonstrate that no such result will ever be achieved. Nothing short of legal regulation and restraint will ever be effective. A few further quotations from the testimony of Mr. Sturgis will give a fair iden of the prospect for reform from that direction : " Q. We are speaking of transactions that are made by members of your -exchange in the way of short selling. Would not their books show whether or not they were selling short? — ^A. If the broker is operating for his own account; yes. " Q. And you say from a quarter to a half of the transactions on the ex- change are for the broker's own account?— A. We agreed upon a third, I -think." One of the most notorious and' disastrous instances of manipulation in the recent history of the exchange was that of the Hocking pool in 1009, of which •the late James R. Keene was manager, the operation.s of which will be found described on pMges 47-49 of the report. Ten stock exchange firms participated in it. The stock, which was earning only one-half of 1 per cent, was forced up from $24 to $92.50 per share. The entire iiumber of shares listed was 69,304. In a single month (March), when the pool operations began, 14,8,400 shares were traded in. Upon the termination of the pool the stock declined to $2 per share und then disappeared. More remarkable even than the neglect of the authorities of the exchange to stop this, operation when they knew it was going on was the theory on which , they infilcted punishment after the pool collapsed. Of the 10 firms'engaged in the pool, only the three that failed were punished. They were expelled from the exchange. The others were neither expelled nor suspended, but merely '• censured." Thus the punishment was inflicted not for the character of the ■ oprations, since all were equally culpable in that regard, but for becoming insolvent in consequence of dealing beyond one's means. This was admitted by Mr. Sturgis (R., 846) : " Q. I shoiiUl like to know why you should expel two members of a pool out of seven stock exchange firms for doing the same thing that the other five did simply because those two happened to fail at it? — A. Because they went away ' beyond their means." BEGULATION OF THE STOCK EXCHANGE. 95 Mr. Sturgis further stated tli.it the members of this pool who did not fall were not punishable under the constitution of the exchange for the character of operations in which they engaged, and that he did not think they ought to be. (Sturgis, R., 846, 847) : " Q. Do you mean to say that the things these seven firms did were not pun- ishable under the constitution?— A. No; they were not punishable. " Q. Do you not think they ought to be? — A. We have not thought so here- tofore. " Q. Do you not think so?— A. I do not think so; no." The following extract from Mr. Sturgis's testimony fairly represents the stock exchange view of .short selling and the arguments that are advanced to support It (Sturgis. R.. 830, 831, 832, 833) : " Q. Certainly. What is the purpose of short selling? — A. Generally speaking, to make a profit. " Q. To make a profit by what process? — A. By repurchasing the short sale at a declining price. " Q. That is, by selling a security that you have not got and gambling on the proposition that you c;in set it cheaper and deliver the thing that is sold? Is not that It? — A. That is the usual process — selling when you think the price is too high and repurchasinfc when you think It has reached the proper level. " Q. But is it, or not, the process of selling a thing you have not got?— A. It is. " Q. And is it. or not, with the idea that it will go lower, or can be depressed lower, and bought cheaper and delivered? — A. Truly. " Q. Do I understand that you regard that as legitimate and defensible?— A. Do you wish my personal expression of opinion? " Q. Yes. — A. I think it depeuds entirely upon circumstances. " Q. Under what circumstances would you regard that sort of short selling as legitimate and proper? — A. I would regard it so if there was a panic raging over the country and it was desirable to protect interests which could not bn sold. I think it would be a perfectly legitimate thing to do. " Q. Let us see about th.nt. If there was .i panic raging over the country and a man sold stocks short, would not that simply add to the panic? — A. It might. Self-preservation is the first law of nature. * * * <>;;:,* " Q. But, as I understand it, if there is a panic raging over the country, you think it is defensible tor a man to depress stocl^is by selling, stocks he has not got, with the Idea of adding to the panic? — A. Mr. Untermyer, if a person has property which is absolutely unsalable and he can. so to speak, protect his posi- tion by selling something for which there is a broad market " Q. That he has not got? — A. (continuing). I do not consider It wrong. " Q. Mr. Sturgis, let us .iust analyze that, because I do not think I under- stand you. You do not want to be misunderstood, do you? — A It is not my wish. " Q. And I do not want you to be misunderstood. Do you mean to say that if there is a panic raging it Is a defensible thing for a man, under any circum- stances, to sell stock that he has not got, with the idea of getting it bfick cheaper? — A. I do think it Is defensible. I certainly think it is defensible. " Q. For what purposes does he do that except to try to make money? — A. To try to save his credit, perhaps. " Q. How does he save his credit in a panic by selling stocks that he has not got, with the idea of adding to the panic and getting them cheaper? — A. Be- cause if he can make a profit on that sale It may repair the losses that he has made on stocks he can not sell. " Q. I see. You know that that would simply accentuate the fierceness of the panic, do you not? — A. It could not be otherwise. " Q. Certainly. And his only purpose in doing a thing of that kind in time of panic would be to make money, would it not? — A. To protect himself. " Q. It would be to make money, would it not? — A. Yes; and that would pro- tect him. " Q. Of course, it always protects a man to make money, no matter how he makes It, does it not? — ^A. Yes, sir. " Q. And that, you think, is justifiable?— A. I think under those circum- stances it is. " Q. You do not want to make any further explanation of that proposition, do you? — A. I do not. 96 REGULATION OF THE STOCK EXCHANGE. " Q. Is it any more justifiable for a man to sell short in a panic than in a normal market? — A. It depends very much upon his financial necessities. •' Q. Do you regard it as justifiable in a normal market for a man to sell a thing he has not got, with the idea of depressing prices in order to buy in the stock at a lower level? — A. I think it is a question between a man and his own conscience. " Q. I am asking for your judgment. You have been many years in the ex- change, and you are a earefi'l observer, tmd I would like to know your judg- ment. — A. I think a great niai)y people deprecate it. Otliers jipprove it. " Q. Do you approve of it?— .\. You ask me personally? " Q. Yes" — A. I nevei- sold a share of stock short in my life. "Q. Then you do not approve of it, do you?— ,\. I just happen not to have done it. My private business, if j'ou please, I beg you to omit. " Q. I have not asked you your private business. — A. Yes; you asked me what I did myself. " Q. I did not ask you that, sir; I asked you what j^ou thought about it. ******* "Q. Do you approve of short selling in others? — A. Under what conditions? " Q. Under any conditions. — A. Yes: under some conditions. "' Q. Do you approve of short selling in a normal market? — A. I will answer that question by saying it is a moral question with the individual himself. It is not up to me to express my opinion upon it. " Q. Do you personally approve of short selling in a normal market? — ^A. Not I, personally ; no. " Q. You do not. And is it or not the fact that the bulk of the short selling is done in a normal market?— A. I should say no; more often on an excited market. "Q. It is done every day, i.« it not? — A. Oh, yes; to some extent. " Q. And it is done in large volume, is it not. — A. At times. " Q. The stock exchange does not discou.rage it, does it? — A. The stock ex- change does not enter into it at all. " Q. The stock exchange does not discourage short selling, does it? — ^A. The stock exchange takes no position in the matter at all. " Q. Has the stock exchange any rule or regulation against short selling? — A. None. " Q. Why is it not Just as simple a matter for them to have a regulation against short selling as to have a regulation against a broker splitting his com- missions? — A. There is no regulation against short selling; that is all I can say to you about it." The demand of these gentlemen that they be further intrusted with the task of self-reformation, which would involve the sacrifice by them of the bulk of their business, is an unreasonable and unthinkable proposition. If these acts are to be hereafter prohibited as unlawful, the suggestion that the machinery for uncovering the offense and the punishment therefor be left exclusively in their hands to deal out justice to one another is certainly both naive and unique, to say the least. Not more so, however, than the further argument of the exchange that it is now mending its ways and that there should therefore be no means provided by the law for discovering and punishing future offenses. Truly a most remarkable process of reasoning ! If a member divides any part of his commissions with his customer or with anyone through whom he secures business, eximlsiou and ruin are the im- mediate results. " Splitting commissions is the most heinous oflfense a member can commit," says Mr. Sturgis, far more heinous than "wash sales" or fraud. One would imagine that these gentlemen would have sufficient sense of humor to pause in their expressions of righteous denunciation of those who have dared suggest that they have not quite demonstrated the justice of their demand that they be permitted to continue in the conduct of their business free from the lega"l regulation and restraints that pertain to other occupations affecting the public. The extreme gravity and importance to the public of the situation we are here discussing are little understood outside the very restricted circle that has to do with large corporate business. Even to the latter the mechanism of the stock exchange and the way in which prices are made are largely a closed book. It is technical and complicated in the extreme, which accounts for the endless opportunities for misrepresenting the issues and misleading the public. I claim that incorporation and rigid regulation of the exchange have become essential to the ptiblic protection; that they will vastly add (o the value and KEGULATION OF...THE SlOCK EXCHANGE. 97 Stability of meritorious securities aud to the usefulness of the exchange as a legitimate ami necessary part of our financial system and that they are the only means of preventing fraud and deception in the quotation, purchase, and sale of securities on public exchanges. I claim further that there can be no effective regulation vrithout incorporation, nor without the accompanying all-important power to inspect the books of members of the exchange in so far as concerns the transactions on the exchange. In making this claim it is not necessary to impugn the good faith and honest purposes of the general body of membership of the exchange. Nor am I unmindful of the earnest efforts that the exchange has recently been making to correct existing defects in its management in certain directions nor the inherent difficulty in bringing about reforms, but the chief abuses remain, and so it will continue until the law renders them impossible. My contention is that without the aid of incorporation the exchange will be unable to put an end to Illegitimate practices and that the best element in Its membership, whose business does not depend upon these practices, should wel- come the proposed legislation instead of short-slghtedly arraying itself with the other element against public sentiment and opposing every measure that is intended to restore and maintain public confidence, on the mistaken theory that the exchange must be permitted to continue to be a law unto itself. A comprehensive understanding of the complex machinery by which prices are controlled is necessary to form a judgment on the question. This knowledge is of far greater importance to the masses and in more ways than is generally appreciated. Those who have never bought or sold or owned a bond or share of stock, and never will, are as deeply concerned in the rigid regulation of this vast instrumentality of finance as are those who deal in the securities that are listed on the exchange. Their interest will be found not only in the close rela- tion between fictitious values of securities and the prices of the commodities of the companies represented by these securities, but in many public aspects of the subject connected with its qaotations of securities. But for the incentives and opportunities offered by the stock exchange, most of the great trusts would have been impossible. Inflation of prices of com- modities means dividends, thus increasing security prices; the control of the market for a given product, with the accompanying power to levy tribute on the public, is capitalized at all that the traffic will bear, and the securities representing no actual property and nothing but this artificial control find a ready market on that basis. In order to support the fictitious values thus created, that control must at all hazards be maintained. The merits of the controversy over this question of whether the stock ex- change should be required to incorporate and be subject to regulation have, with few exceptions, been unrecognizable from the newspaper reports. The exchange maintains a publicity department disguised under the euphoni- ous title of the " library committee." The latest accomplishment of this bureau is only a few days old, when there was distributed from Washington and pub- lished all over the country a canard to the effect that the President had ex- pressed his disapproval of the bill now under discussion. So persistent and circumstantial was the rumor that an explicit denial from the White House was considered advisable to prevent the discrediting of the legislation. Such methods are most unfortunate, for they are bound to react against the exchange and thus obscure the merits of the controversy, which the champions of this measure are anxious to have impartially and impersonally discussed. In many cases the facts and arguments in favor of regulation have been willfully distorted and suppressed by financial writers in the employ of inspired press bureaus. In other cases the result has been due in part to the fragmentary way in which technical and complicated questions are dealt with by our overworked press. The result is, however, chiefly attributable to the fact that, under our recent practice of press agents and press bureaus, repre- senting powerful special interests, only one side of the controversy gets before the people. They accordingly form their judgments upon premises that are often grossly misleading and sometimes designedly false. It is in the nature of things impossible for the most enterprising and beet- equipped newspaper to maintain a staff or to find the time in the hurry with which news must be supplied, that will assure thoroughness and accuracy on the endle«s topics that go to make up the day's news or, except in cases of importance to give the subjects the study necessary for intelligent editorial comment. It is this situation rather than any deliberate design on the part of 30578—14 7 98 EEGULATIOW OF THE STOCK EXCHANGE. the newspapers that has created this new occupation of the press agent with all its perilous possibilities. Day by day we lean more heavily on the newspapers for our lijformation of the affairs of Government, institutions, and individuals. Even those of .us who are fairly familiar with the defects and abuses of the existing methods of reporting and distributing news allow ourseUes to be unduly influenced by what we read, forgetful of the personal friendships, hostilities, mlstalies, and other Influences that at times inspire or influence these publications. On the whole, however, the policy of the paper, the clientele on which it depends, and the desire to furnish the most attractive news service are the chief factors. The great corporations and other special interests with their endless ramifica- tions have been alert to seize upon this situation. Able men, experienced in the newspaper business and with wide acquaintanceships in that field, are tempted into the service of these private interests by the brilliant opportunities which they alone are able to offer. Most of the important corporations and many of our great capitalists are now thus equipped for their so-called publicity carti- paigns. The employee through whom the advertising patronage is distributed, and who in that way comes into intimate relations with the newspapers not infrequently also acts as press agent. High officials in the service of the Nation, State, and city find it to their interest nowadays to attract to their service men with these facilities for securing access to the columns of our great newspapers. In that way there has been built up in the last few years a new industry that is exerting an important and not always a wholesome influence on public opinion. These men are expert in preparing material in the form in which it is most attractive for publication. They have access to the columns of the papers. They understand the demand. They save the papers the expense of gathering and preparing the facts that concern the questions of the day with which the special interests are concerned. This sort of material is naturally acceptable in the most impartial quarters. Yet the stories are at times so cleverly or par- tisanly constructed that they tell half-truths or less and may be more mislead- ing than clumsy falsehoods. It is important to the people that these public questions in which the special interests are concerned should be impartially presented. But the people have no press agents. There is no one to collate and present the public view of the facts in its most attractive form or press it for consideration unless the news- papers do this worii on their own account, which they frequently do when time permits or interest is sufficiently aroused to justify the expense. But this la not true of the bulk of the news of the day and especially not of financial news. The public has no financial advertising or other patronage to offer and no means of securing the respectful attention of those in authority or of correcting honest misapprehension and there is no one charged with that duty. If you will looli at the advertising pages of some of our great metropolitan papers that have been persistent in their opposition to stock-exchange regulation you will see what I mean by saying that stock-exchange houses are substantial and steady patrons. I suppose It is natural that the press, like other business associates, should to some extent unconsciously absorb and share the views of their business as- sociates, for I am satisfied that these papers are acting in good faith in the expression of their views, and freely concede that the form and manner of reg- ulation are debatable questions. They are dealing with a te;Unical subject that is little understood, and in the nature of things they have heard only one side of the case, and that side presented by experts or by men of influence on ' whose judgment they dely. Their financial writers are so iieriueated with the atmosphere in which they live that they share and reflect the views of those among whom they move and are virtually part of the system. Have they ever warned against or exposed any great financial operation of th' ])owerf ul interests until after it has collapsed? The public is just now witnessing with amaze- ment the spectacle of the silence of our metropolitan press, with a few hon- orable exceptions, over the exposures of mismanagement and ruin of a great railroad system, that is one of the financial scandals of the age. It is impos- sible to measure the injury that has been thus inflicted upon our credit in the financial markets of the world where oUr securities were eagerly sought. Are the judgments of those who control our organs of public opinion overawed by these powerful men in the world of high finance, whose slightest doings they EEGULATION OF THE STOCK EXCHANGE. 99 Chronicle from day to day? Maybe. But, tiaijpily, the people no longer share that obsession. No great legislative reform that threatens to interfere with important special interests has been attempted of late years that has not been met by the bugaboo that it was unconstitutional, no matter how insincere and untenable may be the claim. The controversy over this bill Is no exception to that rule. The committee that reported the bill the day of the expiration of the last Congress has anticipated this objection in an extended argument supported by the au- thorities that will be found on pages 119-128 of the report, and which it Is not necessary to repeat here. If Congress has not the power to adopt such means as it may deem adequate and as are germane to the purpose, to protect the public against being swindled through the distribution broadcast over the country of false, fictitious, and misleading quotations of securities by means of the mails, telegraph, and telephone, the post-roads clause of the Constitution, which is supposed to embody the broadest grant of power anywhere to be found in that great docu- ment. Is indeed meaningless. The exercise of this power invuhes no extension of the authority that Congress is now constantly exercising under well-settled principles in protecting investors. Since the preparation of the legal argument embodied in the Pujo report the Supreme Court again expressed itself on this question in no uncertain terms in the case of Lewis Pub. Co. v. Morgan (229 XJ. S., 288), above referred to. The distinguished counsel for the exchange professes to find consolation in the concluding paragraph of the opinion of the Chief Justice, which reads as fol- lows: " Finally, because there has developed no necessity of passing on the question, we do not wish even by the remotest implication to be regarded as assenting to the broad contentions concerning the existence of arbitrary power through the classification of the mails, or by way of condition embodied in the proposi- tion of the Government which we have previously stated." To anyone who has read the revolutionary contentions advanced in the brief of the then Attorney General there will be cold comfort in this statement. He contended for the most sweeping and unrestricted power of Congress over the mails, and for the exclusion of anything it saw fit, without rhyme or reason. What connection there is between the use of the mails and the public state- ment by a newspaper of its circulation, it is difficult to comprehend. Yet the court held that the power of Congress o\-er the mails was so all embracing that those who did not conform to the requirements might be excluded, without thereby Infringing upon the constitutional liberty of the press. Here it is not necessary to plead for any such broad extension of the prin- ciple as is announced in that case. Nor is any question of the liberty of the press involved here. It is the plain right and duty of the Government to exhaust every reasonable precaution to prevent the use of the mails to defraud the public. It is actively exercising that privilege and punishing its violation every day. What could be more plainly and legitimately within the lines of that power and duty than to prohibit the records of transactions of public ex- changes purporting to fix prices on the faith of which the public buys and sells from being carried through the mails unless they are subject to inspection so that the Government may at all times be able to Satisfy itself that they are genuine and that they are not being made the instrument of fraud? There are none of the elements of a close or " border-line " case of constitutionality here. It is as plain as a pikestaff. .^ j, . Taking up now the question of the wisdom and necessity of mcorporatmg the stock exchange I think you will find that no legitimate reason has yet been advanced against incorporation and that regulation is impossible without it. The only debatable propositions, to my mind, are (1) whether there can be effective regulation by Congress without requiring Incorporation, and (2) whether if incorporation Is necessary it should be directly under Federal law or whether the Congress should enforce State supervision by prohibiting the use of the mails telegraph, and telephone in interstate communication to stock exchanges that are not incorporated under the laws of the States in which they are located with State supervision and witb such other safeguards as Congress may prescribe To permit them to longer remain unregulated and uncontrolled is quite outside the realm of reasonable discussion In answer to the question. Why should the stock exchange be incorporated? We might with far greater justice ask. Why should It not? It is to-day the most iwwerful and far-reacjiing of all the instrumentalities of national and 100 BBGTJLATION OF THE STOCK EXCHANGE. international finance. Its records, whether genuine or fictitious, honest or jug- gled, are the guides by which transactions are conducted and values fixed by millions of people here and abroad. Its vast and delicate machinery, with its endless opportunities for the perpetration of fraud and pillage (unfortunately too often accomplished in the past) should not be in the uncontrolled, unregu- lated, and irresponsible power of any body of men, however unselfish and altruistic may be their aims. Without yielding here to the temptation to rehearse the history of the past 15 years of the exchange as the instrumentality by which billions of dollars have been filched from the public through the absence of control over Its operations, it is sufficient to remind you at this point that the plea for in- corporation and regulation does not necessarily involve any reflection upon the exchange or its membership. Why should any public utility or instrumentality be subjected to control? Why should banks, trust companies, life and fire insurance companies, casualty, accident, burglary, insurance, and other industries that might equally well be conducted by individuals be required to be incorporated? Why should not you or I have the right to insure lives or property if we are considered suffi- ciently responsible and otherwise acceptable by those who are concerned? There was a time when this was permitted. It is no reflection upon your honesty, or mine, that these things are no longer tolerated in any civilized country. Why should auctioneers who buy and sell any kind of personal property, except securities, require licenses and have their books of account and all their transactions subject to public inspection, whilst the brokers who deal in securities are free from such inspection? Is not such a broker an auctioneer in the largest and broadest sense? How does a manipulated stock transaction difCer from any other kind of mock auction? It is the worst form of mock auction, because you can not even see the goods you are buying. You Imagine that you are purchasing in an open competition in which true values are fixed when, in fact, the cards have been stacked against you. Why are the books of employment agencies, hotels, boarding houses, etc., now required by law to be subject to public inspection? Why are barbers, plumbers, pharmacists, liquor dealers, warehousemen, steamship ticket agents, public accountants, and innumerable other occupations required to be licensed and regulated? I mean no disrespect to the calling of the stockbroker and suggest no com- parison except in the principle involved in asking why the pawnbrokers should be open to the inspection of the public authorities if, as is now claimed, there is no power to compel the transactions of brokers on an open board to be sub- jected to examination by State or Federal authority? There is no argument in support of the constitutional power in the one case that does not apply to the other. They are all conducting legitimate business, but the right to regulate them Uke that of dozens of other industries that might be named is recognized. Their occupations may be more humble than that of the stockbroker in the sense that the transactions may not be of such magnitude, but they are quite as legitimate. The reasons in favor of regulation and control of the exchange are vastly more weighty than those appertaining to any of the occupations mentioned. The exchange is in no sense a private or local enterprise. It is grossly inaccu- rate and misleading to say, as has been argued by the defenders of its present irresponsible form of association, that it is not engaged in business and that Its only function is to provide a meeting place where its members may deal with one another under prescribed rules. The exchange is engaged in business and of a highly important and distinctly national character. It owns the entire stock of the New York Quotation Co., which for a specified rental supplies members' offices south of Chambers Street, New York City, with a ticker service that registers, impartialy and without earmarks, every genuine and fictitious transaction that takes place on the floor of the exchange. For $100,000 a year, under contract terminable upon one day's notice, it sells these quotations to a subsidiary of the Western Union, the Gold and Stock Telegraph Co., which also maintains a like ticker service. The latter, however, can supply the quotations to such persons only as the exchange approves, and under no circumstances to members' offices south of Chambers Street, or to any competing exchange in New York City. The quota- tions are gathered upon the floor of the exchange by Its employees and trans- EEGULATION OF THE STOCK EXCHANGE. 101 mitted by its own operators to the officers of the New York Quotation Co., and the Gold and Stock Co., and thence distributed throughout the United States, but the exchange retains the right to determine absolutely who shall and who shall not receive these quotations. There is no other method by which quota- tions of transactions on the exchange are obtainable. It is the market place of the entire country and of foreign countries for securities, and the only public market in the United States where money is loaned and borrowed. The business transacted by its members has no relation to State lines. It comes to them from almost every corner of the civilized world. It is not only Nation wide, but internationl in scope. Its members maintain private wires to all the principal cities of the United States, and the transactions conducted on this open board are for the account of customers from all parts of the country and from foreign countries. Its hall mark as to the genuineness of a certificate of interest in a corpo- ration passes current everywhere and It is rightly super^ is4^d with jealous care and at considerable expense to the corporations concerned. It undertakes to prescribe the form iind conditions of every corporate security in which it authorizes deiliugs and its cietermin.-ition is final through its control over the listing of such securities. It reserves the right to exact the minutest details of the business and affairs of the issuing corporation, to impose its will in the matter of the procedure by which such corporation shall declare and pay interest and dividends and in the matter of the transfer agent and registrar and as regards endless other details ; all this very properly on the ground that it is performing a public function national in its scope. It jealously controls the reports of every ti'ansnction on its floor, issues and distributes the records of every purchase and sale, or offer of purchase and sale, which it thereby impliedly represents as an honest and genuine transac- tion. Courts of justice, trus.tees, financial institutions, tax ofHcials, State super- intendents of banks, trust companies, and life insurance companies, and other corporations that are subject to supervision in the se\'eral States throughout the country, and the Comptroller of the Currency in fixing the value of securities of national banks, and the public the world over, act on this information. It exacts compensation for the service of listing securities, sells the quotations to interstate and international telegraph companies for large sums of money, and scatters them broadcast through the newspapers, over the telephone and telegraph, but always under its control. In the face of this array of undisputed facts this stupendously powerful national and international agency of finance contends that it would not be a reasonable or legitimate exercise of the power of Congress to jorevent the use of the mails, telephone, and telegraph in interstate business as a means of perpetrating frauds upon the public. Congress not only has the unquestioned power — it has become an imperative duty. It is a necessity of modern finance from which there is no escape. It is far more important thiui the power now exercised by the Post Office Department over letters and prospectuses that are circulated through the mails, under which there h.ove of recent years been so many wholesome convictions for fraudulent use of the snails. Regulation through incorporation is not only needed as a preventive of fraud — it will accomplish still greater results as m constructive measure. Great and much-needed reforms in the organization and methods of our corporations may be legitimately worked out through the power wielded by the stock exchange over the listing of securities. Much of the confusion and many of the defects in corporate regulation due to the diversity of State laws and to the bidding of the States against one another in laxity of administration in order to attract corporations within their borders may be corrected and uni- i'orniity of methods introduced through the listing department of the exchange. Thus complete publicity as to all the affairs of a corporation may be uni- formly enforced. It may and should require as a condition of listing a security that all the intermediate profits and commissions of bankers, brokers, and mid- dlemen shall be fully disclosed, thus throwing about the investor the protec- tion afiCorded by the " companies act" of Great Britain and of other civilized countries. Every new security should be required to lie publicly issued and offered to the public through the publication of a prospectus so as to eliminate the secret profits of the middleman as far as possible. It is the only way to create confidence in and to popularize investments in corporate securities. Detailed annual statements should be exacted from all corporations whose securities are listed, disclosing all iinyments made or profits or emoluments 102 REGULATION OP THE STOCK EXCHANGE. received, directly or indirectly, hy officers, directors, bankers, and brokers from the corporation, so that every security holder may know whether and to what extent his company is being exploited. The scandalous practices of officers and directors in speculating upon inside and advance information on the action of their corporations may be curtailed, if not stopped, by requiring that the officers shall make full disclosure of all their transactions in bu.ving and selling securities of their companies. The act incorporating the exchange should provide that all statements required to be made by corporations shall he under oath and that false swearing shall con- stitute per.iury. At present they are extra-judicial. In short, the opportunities of the exchange as an agency of corporate reform are almost endless, provided its own practices can be reformed so .ns to entitle it to exercise these broad powers. Instead of the investment business of the country abandoning the exchange, as is now and has been to some extent the case for some time past, it will become necessary to the reputation and sala- bility of a security that it should be listed. by renson of the protection thereby afforded the investor. The general public, which has grown to look upon the exchange with distrust because of the practices that have been tolerated in the past, will be given new confidence in it when it is under legal sujjervision. The principal ob.iection urged by the exchange against incorporation is that it will interfere with its power of discipline over its members and thus lower the standard that has been reached and that can only be maintained by an unquestioned and spmmary final authority. In that connection it may be said that the discipline maintained by it under freedom from governmental super- vision has not been of such character as to constitute a valid reason against such supervision. An examination of the record of punishments inflicted fur- nishes the most conclusive argument in favor of the wisdom and necessity of judicial review. The offense most severely punished is the splitting of com- missions or any infraction of the uniform commiesion rule. Fraudulent and fictitious transactions by which the public has been grossly swindled on an enormous scale and which have brought the exchange into world-wide disrepute have heretofore been treated as mere venal offenses beside the crime of allow- ing a customer part of the commission. The latter crime was, as above stated, characterized under oath by an old and influential governor and former presi- dent of the e.vchange as " the most heinous crime a member could commit." Notwithstanding these peculiar views of the duty of the exchange to the public, it urges the importance of its unrestricted control ovei- the discipline of its members as the sole reason why it should not be forced to incoi-porate I regard it as an added reason in favor of incorporation. I do not perceive why such results as have been suggested by the exchange should follow from giving to an accused member whose reputation and entire business career and means of livelihood depend on the action of his comembers and competitors the ordinary measure of justice of a right to review by au impartial authority. There is no danger that the courts will deal less severely or less effectually than has the exchange with the frauds practiced upon the public which it is the purpose of incorporation and regulation to prevent and punish. That would be difficult. Nor are they likely to regard manipulation with any less disfavor than the spokesmen of the exchange, who have steadily insisted on attempting to defend and justify such practices by arguments that are surprising for their speciousness and lack of understanding of the public aspects of the business of the exchange. It is next suggested that if there is to be incorporation it should be under State and not national authority, and yet when the former is attempted it is opposed with equal bitterness. Apart from the fact that efforts at State legis- lation have proven a farce, as will be hereafter seen, there can be no efficient relief from that direction. It would he manifestly unjust' to have one set of conditions on which the New York Stock Exchange could use the" mails and another or none for the Boston, Chicago, Denver, or San Francisco Exchange Uniformity of regulation is essential: Boston and Chicago should no more than New York be permitted to prey upon the country because their respective States do not see fit to restrict them. The three fundamental reasons, in addition to a number of subsidiary ones for requiring the incorporation of the stock exchange mav be summarized as follows : . - - . . 1. To prevent detect, and punish the practice of frauds upon the public through manipulation, matched orders, wash sales, and like fictitious trnns- EEGXJLATION- OF THE STOCK EXCHANGE. 103 actions, by meuns of which apparent values are created for securities in the world's marliets. This can only be accomjilished through incorporation and the accompanying delegation to public authority of the right to examine the books of members, through which alone these transactions are discoverable. The argument that has been urged against tfye constitutionality of such a provision is not worthy of serious consideration. The State and" the Nation have each, separately and independently, the unquestioned right to safeguard the public against imposition on a subject that so nearly affects the interests of all its citizens. Neither is bound to permit an institution so preeminently public in its character and so vitally affecting the financial interests of the entire country and of other countries to remain uncontrolled. Such regulation Involves no attempt to Interfere with the individual in buying and selling securities except in a public market. Its purpose is to secure fair dealing in such a market. No one need become a member of such a corporation; but if, as a condition of membership, the law requires that his books shall be subject to inspection, none of his constitutional rights are violated nor is it an inter- ference with such rights to prohibit the individuals engaged in that calling from combining for the creation and operation of such a public market except through incorporation and under such regulations as the State or Nation may prescribe. At the 1913 session of the Legislature of the State of New York, following the disclosures of the congressional inquiry, a number of bills were passed that were supposed to be intended to meet some, but by no means all, of the existing evils. The stock exchange points to these bills as demonstrating that incorporation is not now necessary in order to regulate the exchange. I consider none of them as of any value. None of them meets or even attempts to deal with the worst evils under the present system. None of them offers or is able to offer the opportunities for enlarging the power and useful- ness of the exchange as a constructive force to secure corporate reforms. A bill to require incorporation was defeated, as it deserved to be. I opposed it as a mere " blind," as are those that were passed. The most important, and in fact the only relatively important bill passed is that which purports to prevent manipulation, but it does no such thing. The bill reads as follows: " Manipulation of securities. — Any person who inflates, depresses, or causes fluctuations in, or attempts to inflate, depress, or cause fluctuations in, or com- bines or conspires with any other person or persons to inflate, depress, or cause fluctuations in the market prices of the stocks, bonds, or other evidences of debt of a corporation, company, or association, or of an issue or any part of an issue of the stock, bonds, or evidences of debt of a corporation, company, or associa- tion, by means of pretended purchases and sales thereof, or by any other ficti- tious transactions or devices, for or on account of such person or of any other person, or for or on account of the persons so combining or conspiring, whereby, either in whole or in part, a simvltaneoiis change of ownership of nr interest in such stocks, bonds, or evidences of debt, or of such issue or part of an issue thereof, is not effected, is guilty of a felony, punishable by a fine of not more than $5,000 or by imprisonment for not more than two years, or by both. "A pretended purchase or sale of any such stocks, bonds, or other evidences of debt where'by, in whole or in part, no simultnneous change of oirnership or in- terest therein is effected, shall be prima facie evidence of the violation of this section by the person or persons taking part in the transaction of such pretended purchase or sale." (The italics are ours.) ,.,.,. The fact is that the manipulation of securities is not accomplished to any appreciable extent by fictitious transactions and that as now practiced upon the exchange it does result in a change of ownership, so th'it the most widespread forms of manipulation practiced on the exchange are not reached by this bill. When a banker or a broker wants to create a fictitious appearance of activity in a given securitv for the purpose of stimulating dealings in it or to advance or depress the market price, he no longer does it through matched orders or washed sales He gives at the same time a number of different brokers orders dav by day— and sometimes hour by hour— to sell the security on a scale either up or down, dependent on whether he wants to advance or de- nress the price- and he gives at the same time and as part of the same opera- Won another set of brokers orders to sell on a scale. These brokers are not 104 REGULATION OF THE STOCK EXCHANGE. supposed to know — and often do not know — of the counter orders that have been given. The effect of these transactions is, however, to create a nominal change of ownership acconipanjnng every transaction, and yet at the end of the day the operator has probably neither bought nor sold the stock on gen- eral balance although the records and quotations of the transactions a,s pub- lished and scattered throughout the country will show great apparent activity and heavy dealings and rising or falling prices, when there have been in fact no dealings other than those of this operator on both sides of the market, except the purchases and sales of such victims and the gambling transactions of such "room traders" as have been attracted to the stock by this false ap- pearance of activity. No law will reach these transactions unless the exchange is subjected to legislative control through incorporation, with the right to some public author- ity to examine the books of its members. The mere existence of such power will in and of itself be a powerful deterrent. In view of the concession that one-third of all the transactions are those of the members themselves for their own account and of the statistics showing that upward of 80 per cent are purely speculative, there would appear to be urgent need of every determent that can be lawfully applied. As illustrating the insincerity of the proposed bill requiring Incorporation, to which I have referred as having been defeated in he last New York Legis- lature, the bill empowered the superintendent of banks to examine the books of the exchange, but not the books of its members. As the exchange claims that it conducts no business and keeps no books, that was rather an empty formality. What is needed is the power to examine the books of the members. Without that power no law against manipulation is of the slightest avail. The governors of the stock exchange now have that power and occasionally exercise it summarily. Are public officials less entitled to be trusted? Few would dare to take the risk of conviction. The law against railroad rebates would be a dead letter unless tbe commission had power to examine the books of the railroad companies. The same is true as to the members of the ex- change to discover manipulation. Nothing short of that will ever do so. As matters now stand there is not the slightest peril in such transactions. Strange to say, many of the most prominent members defend manipulation for the pur- pose of creating a false appearance of activity as entirely proper. The com- mission appointed by Gov. Hughes confirmed and apiiroved that astonishing point of view. But that was in 1909 and was the judgment of a body that had no offlciiil authority to investigate or to subpoena witnesses or administer oaths and no appropriation. It was not a legislative inquiry. The mode of pro- cedure adopted by that voluntary commission was inquired into by the Pu.io committee (Ely. R., .319-.322; Mahon, R., 363-365; Sturgis, R., 789-792, 82.T ; Keppler, R.; 853-854). The commission prepared lists of questions that were considered for weeks by the governors of the exchange who in secret session, with their counsel, formulatfd the replies. And that was in 1909. Nothing could better illustrate the rapid advance in financial morals in thef^e few yeai-s. No such point of view as that expressed by the distinguished commission would be tolerated to-day. And yet under all these disadvantages, having in effect heard only the care- fully prepared arguments of the exchange, the commission had this to say of the plea of the exchange (upon which, by the way, it continues to insist) in favor of speculation and nuinipulation : "It is unquestionable that only a small part of the transactions upon the exchange is of an investment character; a substantial part may be characterized as virtually gambling. " The rules of all the exchanges forbid gambling * * * but they make so easy a technical delivery of the property contracted for that the practical effect of such speculation, in point of form legitimate, is not greatly different from that of gambling. Contracts to buy may be privately offset by contracts to sell. The offsetting may be done in ii systematic way, by clearing houses, or by ' ring .settlements.' Where deliveries are actually made property may be temporarily borrowed for the iiurpose. In these ways, speculation which has the legal traits of legitimate dealing may go on almost as freely as mere wager- ing, and may have most of tlie pecuniary and immoral effects of gambling on a large scale. "A real distinction exists between speculation which is carried on by persons of means and experience and based on an intelligent forecast, and tliat which is carried on by persons without these qualifications. The former is closely REGULATION OF THE STOCK EXCHANGE. 105 connected with regular business. While not unaccompanied by waste and loss, this speculation accomplishes an amount of good which offsets much of its cost. The latter does but a small amount of good and an almost incalculable amount of evil. In its nature it Is in the same class with gambling upon the race track or at the roulette table, but is practiced on a vastly larger scale. Its ramifica- tions extend to all parts of the country. It involves a practical certainty of loss to those who engage in it. A continuous stream of wealth, taken from the actual capital of innumerable persons of relatively small means, swells the income of brokers and operators dependent on this class of business; and in so far as it is consumed, like most income, it represents a waste of capital. The total amount of this waste is rudely indicated by the obvious cost of the vast mechanism of brokerage and by manipulators' gains, of both of which it is a large constituent element. But for a continuous influx of new customers, replacing those whose losses force them out of the 'street,' this costly mechanism of speculation could not be maintained on anything like its present scale." Another of the many abuses exposed by the inquiry of the Pujo committee, which the exchange claims has been corrected by the New York State legisla- tion of 1913 is that of the hypothecation by brokers of the securities belonging to their customers for loans to the brokers in excess of the amount owing by the customer to the broker. As the result of this practice, whenever the broker became insolvent the customer lost his stock through its sale by the creditor of the broker. The customer might owe 50 per cent of the value and the broker may have borrowed 80 or 90 per cent of such value. The law of 1913 pretends to, but does not correct this flagrantly dishonest practice which the exchange permitted to go unchecked all these years until thus exposed. In other States where there has been no attempt at legiflation following these exposures the stock exchanges continue to tolerate this form of fraud without even the modification that has been introduced in the New York Exchange. The New York broker now goes through the formality of requiring from his customer a consent to the use of his (the customer's) securities for an amount greater than is owing the broker by the customer. This has little less justifica- tion than the other. Why should the broker be permitted to exact the right to do business on the capital of his customers? Is it any wonder that one-third of all the transactions on the exchange are for the broker's own account? One of the most effective means of checking the worst form of speculation is to pro- hibit this practice. Still another remedy will be to require every purchase and sale to be delivered or " cleared " through the stock exchange clearing house, as checks are now cleared in the various clearing house associations instead of permitting a mere delivery of balances as is now the rule in the stock exchange clearing house. Still another remedy will be to require that at the time of pur- chase the broker be paid 20 per cent of the then purchase price. It would not be necessary to keep good any such margin. Its requirement at the beginning would be a wholesome deterrent against the worst form of gambling by those who can least afCord it and who are always the surest victims. Still another rule of the exchange quite as reprehensible as any that were exposed and quite as repugnant to the sense of justice is that which assures to all the members of the exchange a preference against the estate of a bankrupt member for all debts owing such member to the full extent of the value of the membership seat over the claims of the victimized customers of such bankrupt. It often happens in such cases that the " seat," which is worth from $40,000 to $100,000, dependent on the activity of speculation, is the only valuable asset of the banljrupt. Every dollar of that money Is applied toward paying the cred- itor members in full to the exclusion of the outside creditors. If the broker has rehypothecated your securities for twice what you owe him and they have been swept away you get nothing except your share of what is left after the members of the exchange have been fully paid. Such an intolerable condition would not be pei-mitted to survive incorporation and regulation. This rule is defended as essential to the present system, under which the meniibers accept one anothers' obligations for large sums: The defense appears to me most inadequate. What becomes of the much-prized code and standards of honor, of which the members are so proud, if it must be fortified by a prefer- ence over other creditors? There is a fine spirit among the members in that respect that is unique and that makes it possible for them to conduct large transactions in the heat of excitement by mere word of mouth with amazing smoothness and freedom from repudiation or controversy, and which should render this injustice to their customers unnecessary. It should be made Impossible. 106 BEGULATION OF THE STOCK EXCHANGE. The suggestion that the discipline of members for manipulation be left_ in the hands of the stock exchange governors, without the right of judicial review if seriously advanced, demonstrates that these gentlemen give the public very little credit for a sense of humor. It is like relegating to the Association of Railway Presidents the punishment of one another for granting rebates. Or to an association of the presidents of the trusts the power to determine violations of the antitrust law and to inflict punishment. In what other department of the administration of justice is the punishment of crimes left with the col- leagues of those who are charged with the commission of such crimes? Tet it is now seriously proposed that whilst the evidences of these crimes shall be available to the governors of the exchange (as it now is under its rules), so that they may inflict punishment, such evidence shall not be made available to the public authoriies. Could the law against r.-iilroad rebates ever have been enforced but for the power of the Interstate Commerce Commission to examine the books of the railway companies and thereby discover the violations? How could the manipu- lation of a given stock be discovered except by comparing the accounts of the manipulating brokers? I have yet to hear of any plausible argument against according this neces- sary power to discover illegitimate practices on the exchange through access to the books of the members. It can be accomplished by (1) denying the use of the mails to the quotations of the transactions of public exchanges that are not incorporated, and (2) requiring that the books of all members of such exchanges be subject to inspection. 2. The second important result to be gained by incorporation will be to secure complete publicity of the proflts of bankers, brokers, and intermediaries in the flotation of companies and the exposure of all the salaries, commissions, and other proflts of officers und directors, through the control of the department of the exchange for the listing of securities, and to prevent securities that have once been listed from being stricken from the list without notice and the right of review. ^ Listing on the New York Stock Exchange gives to a security a public market and a deflnite current value, rendering it salable and available as collateral. Securities are not generally available as collateral for stock-exchange loans unless they are listed. The constitution of the New York Stock Exchange provides that the com- mittee on stock list " shall have power to direct that any such securities or temporary receipts be taken from the list and further dealings therein pro- hibited " ; and that the governing committee " may suspend dealings in the securities of any corporation previously admitted to quotation upon the ex- change, or it may summarily remove any securities from the list." A regulation dated March 27, 1895, further provides that " whenever it shall appear to the committee on stock list that the outstanding amount of any security upon the stock exchange has become so reduced as to make inadvisable further dealings therein upon the exchange, the said committee may direct that such security shall be taken from the list and further dealings therein prohibited." Acting under this authority, the governing committee and the committee on stock list have frequently removed securities from the list. Stocks have been so removed on the ground of an insufficient amount outstanding, simply because a large proportion of the issue has been absorbing by some other corporation. Taking a security from the list is a serious injury to the holders by depriving them in large part of a market and making borrowing upon such security diflS- cult, if not impossible. Obviously, therefore, the effect of prohibiting further dealings in the stock of a corporation when the great bulk of it has been acquired by one person, group, or corporation is, whether Intentionally or not, to coerce small stock- holders into selling out to the majority holders. It destroys their market. Striking illui^l-ralioiis of the operation of this regulation are not lacking. Thus, on the reorganization of the Southern Railway Co. by J. P. Morgan & Co. a majority of its stock was plar^ed in a voting trust, which deprived the stockholders of all reiiresentation and voting powers, and vested the absolute control of the rompany in the trustees— J. P. Morgan, George P. Baker, and Charles Lanier — who. upon the transfer of the stock into their names, issued the usual trust certificates, which were listed and traded in on the exchange Instead of the stock certificate. When this voting trust expired in September, 3902, the trustees, through J. P. Morgan & Co., requested certificate holders tQ KBGULATION OF THE STOCK EXCHANGE. 107 extend the trust. Kew trust certificates were issued to tliose assenting to the extension and these were listed on the exchange. In March, 1903, the old trust cei-tiheates were removed from the list, although thhere were at that time which was six months after .Messrs. Mor-an had requested the extension of the voting trust, certificates representing 183,938 shares whose holders were ap- parently unwilling to further resign their voting powers. The result was that those not assenting to the extension of the trust, and hence not taking new trust certificates, found themselves with a security jiot Used on the exchange, and therefore without a ready market and not available as collateral The listing of the extended certificates and the removal from the list of the old ones, whether so intended or not, operated as a means of coercing the holders or these lSi!,9ci8 shares into exchanging their old certificates In order to get a listed security which could be sold or made available for borrowing purposes. It IS now 19 years since that voting trust was created, and it has not yet been dissolved. j »^ = Again, in the development of the Tobacco Trust, those who were in control of the management organized a new company known as the Consolidated lobacco Co., to the stock of which they a'one were permitted to subscribe They paid in 2.5 per cent of the $30,000,000 capital (which thcv shortly thereafter repaid themselves in the form of a dividend), and thereupon offered the 4 per cent bonds of the new Consolidated Co. at par in exchange for the shares of the old American Tobacco Co. and the Continental Tobacco Co. at 200 and par, respectively. The bonds had no security behind them other than the stock that was being received In exchange and the subscriptions to the stock of the Consolidated Co. The exchange of securities having proceeded until the Con- solidated Co. had acquired all but 11,357 shares of the common stock of the old American Tobacco Co., application was made in the interest of the Con- solidated Co. to remove the tobacco stock from the list and to list in its place the new convertible bonds of the Consolidated Co. The request was granted without notice to the holders of the outstanding 11,357 shares of the Tobacco Cu. It is admitted by the governors of the exchange that the effect of this action might be to further the schemes of the promoters of this enterprise to take from the stockholders their equity and transfer that equity into the pockets of the promoters. When that stock was stricken from the' list it ceased to be readily available as collateral, as it had lost its market quotation. Its best market thereafter was manifestly among the insiders, who understood its in- trinsic value. The holders of this stock, as did the holders of Southern Railway securities and of a number of others that ha-i e been stricken from the list, presumably made their purchases while the securities were listed. They did nothing to forfeit their right to have them remain on the list and therel)y keep the market they had when they acquired their holdings. Yet, without reison or notice, the holders find themselves confronted with the alternative of selling at a price fixed by the purchaser or having their market destroyed. The rule authorizing the removal of a stock from the list is defended on the ground that where all but a small proportion of an issue is held in a single con- trol it is easier to manipulate the price of it and create a corner in it. This contention, when analyzsd, amounts to the assertion that an investor who bought his stock, relying upon its being a listed security, must be penalized in order to protect a speculator who may sell stock that he does not own and is unable to buy It to make deliverj'. Xo one who owns what he is selling is in danger of a " corner." Through the incorporation of the stock exchange there is offered to the country an opportunity to secure uniformity of corporate regulation that is possible through no other agency. The exchange should be made the most powerful weapon for enforced publicity of corporate afCairs, and its business should be augmented many times over. whilEt at the same time it would be performing the highest order of public service. The fact that this incongruous form of irresponsible government of the great- est of our national agencies of finance has been tolerated all these years fur- nishes no reason why it should longer continue. It demonstrates the dangerous power that the financial interests have wielded over governmental agencies. I do not mean by this that the stock exchange has knowingly exercised a corrupt influence. I mean only that we have not yet begun to understand the potency for evil of this unrestrained power, and have, therefore, been content to be le