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Mr. KEYSER. We have set forth in this report as succinctly as we could our individual views with regard both to the question of the necessity of legislation here and the character of legislation that to us seems preferable.

Senator Kean. Did you say who you were?
Mr. KEYSER. My name is Paul V. Keyser.
Senator KEAX. Whom do you represent?

Mr. KEYSER. I am here in a dual capacity. In one capacity I am chairman of the local committee.

Senator KEAN. What local committee?
Mr. KEYSER. The committee of representatives of local associations.
Senator KEAN. What local associations?

Mr. KEYSER. You will find them listed there on the first page of the report, Senator; and, in the second capacity, I am also counsel for the Investment Bankers' Association of America, and I am interested in both ways, both as a local citizen and also as counsel for the American Bankers' Investment Association.

The substance of our report covers only a few pages and I think, if the chairman of the committee will give me his permission, I can say what I have to say most shortly by simply reading that report.

Senator BLAINE. We can read that ourselves. I do not like to take the time of the committee reading extracts from reports unless it has to do with some particular point that is being made.

Mr. KEYSER. Well, I am very glad to pursue any course you prefer.

Senator BLAINE. I don't mean to be arbitrary. "I say the committee can read that. There is no necessity of having it twice.

Mr. KEYSER. On the question of the need for legislation, our committee recommends that Congress pass a law to regulate the sale of securities in the District of Columbia. At the present time we have no such statute here. The mere enforcement of criminal statutes does not seem to be adequate to safely control the fraudulent promoter. Prevention is important. Our opinion is that legislation is necessary.

We have no specific instance to cite you, but we do make this general observation, that by far the great majority of security transactions in the District of Columbia are honest and honorable transactions. Instances in which fraud and improper practices occur are comparatively few, and when such instances arise they exaggerate in the public mind the extent of the evil. We think it is quite undesirable that an exaggerated view of the evil should obtain, and therefore we offer that comment.

Senator BLAINE. What is that exaggerated view!

Mr. KEYSER. The instances in which fraud occur, of course, are magnified in the public mind.

Senator BLAINE. Well, are they? What do you mean? Let us have that magnified picture.

Mr. KEYSER. Take a specific instance of a fraudulent transaction.

Senator BLAINE. Well, let us take this Smith case. Do you think that is an exaggeration ?

Mr. KEYSER. I know very little about the Smith case, and I do not care to discuss it, but it is an instance in which parties have been tried and convicted in the local courts.

Senator BLAINE. That is a very outstanding case. The F. H. Smith Co. issued something like $50,000,000 in bonds. Do you mean to say that is not of any great consequence ?

Mr. KEYSER. I mean to say this, that if you take all of the security transactions that occur in the District of Columbia

Senator BLAINE. No, no. Answer my question on the Smith Co. I am a realist. I like to get down to a specific case or cases.

Mr. KEYSER, I do likewise.

Senator BLAINE. This general talk is of very little value. That is largely opinions.

Mr. KEYSER. May I ask the chairman this question-
Senator BLAINE. Let us take a specific case. Take the F. H. Smith

. . Co., which issued $50,000,000, and practically that whole $50,000,000 has been lost to the investors. Do you regard that as unimportant?

. Mr. KEYSER. In the first place, I wish to challenge the statement of the chairman that the $50,000,000 of bonds is lost.

Senator BLAINE. Well, I did not say all lost.

Mr. KEYSER. I know nothing about the Smith promotion, except what I have read in the public press, but the bonds sold' by the Smith Co., while they may have been sold on an inflated appraisal, do not represent a total loss.

Senator BLAINE. Oh, no.

Mr. KEYSER. And I have yet to hear any person make such a sweeping and general statement.

Senator BLAINE. I did not say they meant a total loss, but there was a loss on all of the $50,000,000 that was issued by the F. H. Smith Co. Will you challenge that?

Mr. KEYSER. Mr. Chairman, I will also challenge that statement.

Senator BLAINE. All right; state in what respects there was no loss on the bonds.

Mr. KEYSER. My general information is that in certain instances the bonds are amply secured.

Senator BLAINE. Specify in what instance.

Mr. KEYSER. I told you in the beginning I am not here to discuss the Smith Co. episode.

Senator BLAINE. I am trying to qualify you as a witness. You say you challenge that statement. Now you say you do not know of any instance where they will not pay out.

Mr. KEYSER. Mr. Addison of my committee reminds me that the Smith Co, sold the bonds secured on the Investment Building here in Washington, at Fifteenth and K Streets, and the general local belief is that those bonds are fully secured.

Senator BLAINE. Is not that case in the hands of a receiver at the present time?

Mr. ADDISON. Senator, I simply wish to state

Senator BLAINE. Let us have the facts on that, now. That is in the hands of a receiver ?

Mr. Addison. The Investment Building is not involved as one of the principal first issues since this new crowd got into the Smith Co. coffers.

Senator BLAINE, Just wait a minute; there have been several mortgages on this building!

Mr. ADDISON. Oh, yes.
Senator BLAINE. And several foreclosures of those mortgages?

Mr. Addison. I do not question that, but not under the F. A. Smith Co. bonds.

Senator BLAINE. Let us not be too technical. There have been foreclosures. There have been foreclosures of the first mortgage

Mr. ADDISON. Not on the Investment Building, sir.
Senator BLAINE. What foreclosures? Second mortgages?
Mr. Addison. Second and third.
Senator BLAINE. Did they pay out in full?
Mr. Addison. Not a cent, and they were not worth it.
Senator BLAINE. Well.
Mr. ADDISON. That is what I am trying to call to your attention.

Senator BLAINE. Maybe they were not actually issued by the F. H. Smith Co.

Mr. ADDISON. I hold no brief for them, and I can condemn them even more than

you can. Senator BLAINE. I am not condemning them. I am simply stating the fact that in the Smith Co. transaction I doubt if there was a single project in which there has not been a heavy loss. That is what we are getting at.

Mr. ADDISON. That is why I rise to interrupt the speaker. I am here also in the capacity of representative of the Better Business Bureau. We want legislation here to correct conditions that arose when the Smith Co. attempted to put a refunding mortgage on their own building on Fifteenth Street. There is no legislation that we could invoke to get anyone to act. We could not get anyone to act unless we got people to put themselves on record as to what the land and building was worth. There was no fraud until there ws some specific statute under which an investigating committee would handle it. At the time that was issued I defy any public utility commission under your bill to be in a position to say whether it was then fraud. Unfortunately, after the bonds were sold values changed and the damage was done. Had there been this Capper bill in effect at the time the Smith Co. offered their refunding bonds we of the Better Business Bureu would have had some medium through which we could have acted. There would have been no possibility, in my opinion, of the securities of the Smith Co. being refused by reason of their past record under the Blaine bill.

Senator Glass. Under what law was the Smith Co. prosecuted and convicted ?

Mr. ADDISON. Under a charge of conspiracy in this particular indictment. They were out, according to the conviction, to deprive the stockholders of their money by fraud by Pitts taking the money out of the company.

I do not believe either law could be in a position to say, “You can not issue a real-estate security," or anything else, “because in the opinion of this commission it is not worth it." Whether a parcel of ground is worth $50 a foot or $100 a foot is a matter of opinion. If we are going to have to go to the Public Utilities Commission to have them say what a piece of ground is worth before we can go ahead, we are going to throttle honest business.

I did want to get that Smith Co. information concretely before you, because I do not believe there are any of this committee but are in theory in agreement with your opinion of the way they got money from the public.

Senator BLAINE. You suggested something that is very interesting. You understand that I have no concern about the authorship of any



bill at all. This bill designated as the Blaine bill was not my bill at all. It is the uniform bill recommended by the American Bar Association. I simply had Mr. Brinkman take it up and write in specific things to fit into the District organization, leaving the whole substantive part of the American Bar Association bill as they had drafted it. So that I am not the author of it.

Mr. Addison. The American Bar Association was not preparing it for the District.

Senator BLAINE. I am not ashamed of it, but I am simply stating that fact so there will be confusion about this. You said, under the Capper bill in this Smith instance, it could have been prevented. I am anxious to inquire by what method.

Mr. Addison. By this method. In 1923 they put out an issuance, the prospectus of which said the value was $1,135,000. They put a $635,000 mortgage on it, and three years later they put out a refunding circular, putting a value of $1,850,000 on it—the figures may not be exact—and when the Better Business Bureau sought some way by which we could prevent their sale of these securities we found we could not. We were not a party to it. We simply were giving information to anyone who asked us. If we could have taken those two prospectuses within three years down before the district attorney, with his inquisitorial powers, he could have called witnesses, put them under oath, and made them state what, in their opinion, values were, and he could have convinced himself so clearly that it was not anything in the world but an imposition on the buyers of these securities.

Under the Blaine bill it would have done this, as I view it

Senator BLAINE. Let us get this straight. Under the Capper bill, after the securities had been issued

Mr. Addison. Not so, though.

Senator BLAINE. Wait a minute. After the securities had been issued, and after advertisements had been made setting forth exorbitant and excessive and fictitious values, then under the Capper bill you could go to the district attorney here and present this to him. If he were convinced that a fraud was going to be committed, then he could bring an action in the court to restrain the commission of that fraud ?

Mr. Addison. There is one step ahead of that.
Senator BLAINE. Let us have the other step.

Mr. Addison. The step ahead of that is this: Before anyone can be a salesman or a broker he first must get the permission of the authorities of the District of Columbia to be a licensed dealer. I mean they would have had to post bond which, because of their size, would have been nominal, but nevertheless a penalty. Third, because of the compactness of the District, and knowing that the means of advertisement in the District is only four or five newspapers and that every competitor and that the Better Business Bureau would be watching them at all times for fraudulent statements, would, in my humble opinion. have operated to have prevented this. They would have subjected themselves to revocation of license; they would have subjected themselves to an injunction.

Senator Blaine. They went even further than that. They went so far that now they are committed to jail.

Mr. ADDISON. Out of the District. I will say that 99 out of 100 sa les in the District are done in good faith. Your bill requires that a commission pass on every one of the 100 sales, without any possibility of having the ability to pass on the hundred.

Senator BLAINE. Not on the sales.
Mr. ADDISON. Unless they are in bulk.
Senator BLAINE. They pass on the value of the property.
Mr. ADDISON. I mean before they can offer for sale.

Senator BLAINE. And if it is found that the security proposed to be issued has back of it a sufficient amount of property to justify permission to sell, then the commission gives a certificate.

Mr. ADDISON. That is true, except that in your bill before any certificate can be sold it must be appraised and passed upon by a commission not, in your opinion, competent to do that.

Senator BLAINE. The issue must be passed upon, not the sale.
Mr. ADDISON. Oh, yes; the issue before sale.
Senator BLAINE. Yes.

Mr. ADDISON, Now, to pass upon issues, 99 of which will be passed, cumbers them up; whereas in the other cases 95 of those cases need have had no attention whatever by any commission to investigate, because they are meritorious and should go through. But those 95 are held up for the other 5.

Now, in a compact city like this it is our opinion, and this committee is representative of every organization that was interested here, and there must have been 20 or 25, including every kind of an organization, including also the citizens' organizations which delegated these seven men and women to study the problem, and if there ever was a bill studied, in my opinion, to give you the benefit of the opinion of a cross section of this city, it has been these bills

Senator BLAINE. Your proposal, in brief, is to enforce the law by injunction after the act has been perpetrated ?


Mr. Addison. Mr. Keyser can give you the facts in that better than I can.

Senator BLAINE. I am just trying to analyze that.

Mr. Addison. I just wanted to interrupt Mr. Keyser for the Smith end of it.

Mr. KEYSER. I would call the attention of the chairman and the attention of the members of the committee to the fact that the items mentioned by the chairman of the committee are not at all the more important features of the bill recommended by our local committee. In our judgment, the important feature of the bill we are recommending to your consideration is the feature that requires that all dealers and all salesmen shall be registered and bonded before they shall be allowed to engage in business.

Senator BLAINE. How much bond?

Mr. KEYSER. The bond is $10,000, given by a surety company of a net worth of $1,000,000.

Senator BLAINE. Of course, that would be perfectly useless on an issue of $1,000,000 or even $100,000.

Mr. KEYSER. The question about the bond is not indemnity; it is a question of a test of character.


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