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PREVENTION OF FRAUD IN PROMOTION OR SALE OF

SECURITIES

TUESDAY, JANUARY 20, 1931

UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON THE

DISTRICT OF COLUMBIA,

Washington, D.C. The subcommittee met, pursuant to call, at 10 o'clock a. m., in the committee room, Capitol, Senator John J. Blaine, chairman, presiding.

Present: Senators Blaine (chairman), and Kean.

Present also: Oscar H. Brinkman, special counsel for the committee.

Senator BLAINE. The committee will come to order. Mr. Brinkman desires to make a statement, preliminary to the hearing.

STATEMENT OF OSCAR H. BRINKMAN, SPECIAL COUNSEL FOR THE

COMMITTEE

Mr. BRINKMAN. At the last meeting of the subcommittee the representative of the Investment Bankers Association of America, and the representative of the local bankers urged the reporting of the Capper bill (S. 1332) rather than the Blaine bill (S. 3191) and stated in effect that the Blaine bill would unduly handicap the legitimate investment bankers, whose securities do not need supervision before they are issued. The experience of the last few years in Washington and throughout the country has demonstrated that hundreds of bond and stock issues have been put on the market by socalled reputable investment firms that have proved disastrous to the investors.

There have been hundreds of defaults on issues put out by the so-called reputable investment firms, and here in Washington we have had examples of that by the dozen.

In examining the situation for the subcommittee I found many local issues put out by men who would have had no difficulty in securing licenses under the bill S. 1332. They were men who stood high socially and in the business world, and who could have secured a license for the issuance of securities and sale of securities without any difficulty at all. Nevertheless, the issues that they did make were issues that never would have been sanctioned under the Blaine bill.

In casting about for illustrations, I decided it would be the best to center attention on two or three issues rather than to attempt to cover all issues of a character that would not have been permitted under the Blaine bill. For instance, some of the banks here have organized subsidiary or affiliated companies that have sold stock to customers of the banks, the subsidiary companies being engaged in the discounting of real-estate mortgage notes. The experience of several of these companies has been such that the stockholders are not able to sell their stock, and the companies are being dissolved and wound up; and yet the stock of those companies could have been sold if the Capper bill had been enacted.

The sponsors of the companies were the bankers, themselves, here in Washington.

However, I have not gone into detail on those cases, or other local companies that were sponsored by Government officials and men high in public life, who would have had no difficulty in securing permits for the sale of securities under the bill S. 1332.

They could have issued their stocks and the investors would have been defrauded or would have suffered great loss without any interference by the law under the bill S. 1332. As a matter of fact, under that bill there is no limitation that is not possible now under the present law. The district attorney at the present time has practically the same powers of investigation and prosecution that he would have under the bill, S. 1332. He can issue subpænas for books and records, call people before the grand jury and examine into any scheme that appears fraudulent. The Čapper bill would give him no additional authority of any great value, except the power to secure injunctions.

Senator BLAINE. The district attorney now has the power to bring criminal prosecution in cases of fraud ?

Mr. BRINKMAN. Yes. He has the full power to stop any fraud now by starting prosecutions.

Senator BLAINE. And the only substantial additional power would be the use of the injunctive process in the Capper bill?

Mr. BRINKMAN. That is correct, so that it is necessary, after examining the local situation, and the situation generally, to have some sort of law that provides for at least a preliminary scanning of securities before they are put on the market. To show the necessity of that I secured some figures from the Wall Street Journal. This was more than a year ago; the issue of December 7, 1929. It showed that during the year 1928, which was a good business year, industrial bonds—not stocks, but industrial bonds—in the amount of $164,000,000 went to default, and in the following year, 1929, the defaults on industrial bonds were $123,000,000. In 1929 there were nearly a half billion dollars of industrial bonds in default. The exact figures were $158,524,245. Bonds, of course, are supposed to be the safest class of securities, and in this same issue is a long list of the bonds that defaulted, many of them put out by reputable or supposedly reputable investment firms of the highest standing. Prob. ably the majority of these defaults are on real-estate mortgage bonds and hotel company bonds. For instance, there are defaults on 54 hotels and apartment houses.

Senator Kex. That is nothing to what it is going to be this year.

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Mr. BRINKMAN. Probably not, Senator. Those were in what might be called good years. The point is that many of these bonds should never have been issued, and probably would not have been issued if there were proper supervision before the securities were put on the market.

Senator KEAN. Of course, as to the hotel bonds, the savings banks and great insurance companies will not buy them. It does not make any difference what they are, from their past experience with hotel bonds it has been such a big risk that the big companies will not buy them.

Mr. BRINKMAN. Nevertheles, these bonds are permitted to be sold here.

Senator Kean. Have they all gone to default here?

Mr. BRINKMAN. Some of them are headed that way, Senator, here in town.

To get down to two issues that demonstrate the need for supervision, we find the issue of the bonds of the Mayflower Hotel; and that might as well be taken up first, because it demonstrates the need for the law.

Senator BLAINE. I would like to take up first the assessment of several properties in the city, and then follow that with each specific case after the investment is put in.

Mr. BRINKMAN. You want to call the assessor?
Senator BLAINE. Yes; I would like to.

STATEMENT OF WILLIAM P. RICHARDS, ASSESSOR FOR THE

DISTRICT OF COLUMBIA

Senator BLAINE. Mr. Richards, you are the assessor for the District of Columbia ?

Mr. RICHARDS. I am.

Senator BLAINE. We need not administer the oath, because you have already subscribed to an oath, so we will just go ahead. The first property I would like to have you tell us about is the Mayflower Hotel and addition, the assessment made in 1928. That consists of square 162, lot 88? Mr. RICHARDS. Lot 88 and lot 91. Senator KEAN. Mr. Chairman, may I ask two or three questions? Senator BLAINE. Yes. Senator KEAN. You are the assessor of the District ? Mr. RICHARDS. Yes, sir.

Senator BLAINE. You are the sworn assessor and you have taken your oath that your valuations are the true valuations of property in the District ?

Mr. RICHARDS. As near as I am able to make them; full market value as near as I am able to arrive at them.

Senator BLAINE. And you assess on the full valuations according to your best judgment ?

Mr. Richards. According to my best judgment, we are somewhere between 90 and 100 per cent. In some cases sales have been above our valuations and in other cases below.

I have here some sales comparisons, which I will put in later, on that I would like to offer in substantiation of what we are trying

to do.

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Senator BLAINE. We will take the assessments of lots 88 and 91. I think you can give those separately, can you not?

Mr. RICHARDS. Yes. The number of square feet in lot 88 is 59,329, at $20 per foot, or, land, $1,186,580; improvements, $3,250,000, or a total of $4,436,580. Lot 91, 5,277 feet, at $20 or $105,540 for the land; $190,000 for improvements, or a total of $295,540; and for the two the total is $4,732,120.

Senator BLAINE. And the tangible property assessment, based on the sworn return of the owner?

Mr. Richards. On the sworn return, $500,000, making the total of the real estate and the tangible property $5,232,120.

Senator BLAINE. What year was that for?

Mr. RICHARDS. Beginning July 1, 1929, the assessment made in 1928, for the fiscal year 1930.

Senator BLAINE. Now, we will turn to the Wardman Park Hotel, lots 25 and 824, annex, and we will ask you to give the same items as you did before.

Mr. RICHARDS, I have for lot 25 in square 2132, 583,173 square feet, at $1.25, or land, $728,966; improvements, $2,853,600, or a total of $3,582,566; the annex, 117,994 square feet, at a rate of $1.65, or land, $194,690; improvements, $1,000,000, or a total of $1,194,690; the total of the two, $4,777,256, or very close to $5,000,000.

Mr. BRINKHAM. I suggest that we can put this statement in the record, and thus expedite the hearing.

Senator BLAINE. Yes; certainly.

Mr. RICHARDS. I will just read the titles of those that are on here and then hand it over for the reporter.

Senator BLAINE. All right.

Mr. RICHARDS. I have the Carlton Hotel, the Boulevard Apartments, the Cathedral Mansions, the Chastleton Hotel, Connecticut Avenue and Davenport, the Highlands, the Stonleigh Courts, 2700 Connecticut Avenue, and the Department of Justice Building.

(The statement referred to is as follows:) Assessment of full value (100 per cent) Wardman real-estate properties as of

September 15, 1928
(As of July 1, 1929, fiscal year 1930. Assessment made in 1928)

Property

Square

feet

Rate, square

foot

Land

Improve-
ments

Assessor

Ford, Bacon, Davis

Wardman Park Hotel, etc.: 1

Square 2132, lot 25
Square 2132, lot 824 (annex).

583, 173
117, 994

$1. 25 $728, 966 $2, 853, 600 $3, 582, 566 $6, 415, 555
1. 65

194, 690 1,000,000 1, 194, 690 2, 153, 687 923, 656 3,853, 600 4,777, 256

8, 569. 242

19, 628

22.00

431, 816

1, 425, 000

1, 856, 816

3, 488, 414

Carlton Hotel:

Square 199, lot 58..
Boulevard Apartments:

Square 84, lot 804..
Square 84, lot 806..

5,984
29, 978

2. 75
2. 20

16, 456
65, 952

1,000,000

1, 082, 408

1,771, 972

82, 408

1,000,000

1,082, 408

1, 771, 972

1 Including- Apartment hotel.

Theater
Swimming pool.
Brick shop.
Brick garage
Gas station..

$2,650,000

78,000 7,000

1, 100 115,000

2,500

2,853, 600

Assessment of full value (100 per cent) Wardman real-estate properties as of

September 15, 1928Continued

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Senator BLAINE. The total assessment of all of the property on your sheet, beginning with the Wardman Park Hotel, I notice is $17,145,525; is that right?

Mr. RICHARDS. Yes, sir. That is next to the last column. The last column, by Ford, Bacon & Davis, we had nothing to do with.

Senator BLAINE. You do not know where those figures came from? Mr. RICHARDS. No, sir.

Senator BlainE. Now, Mr. Richards, you wanted to make some statement regarding your assessment methods. Let me say, first, that we will offer in evidence these two statements, one relating to the Mayflower Hotel and additions, and the one relating to the Wardman Park Hotel and the Department of Justice Building, all inclusive, about which Mr. Richards has testified.

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