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Mr. MEHL. Yes.

Mr. HOPE. And, it was in pursuance of an investigation, of that kind, that you uncovered the facts which you are just giving the committee?

Mr. MEHL. Well, I would not want to suggest that it was an investigation at that time which was in pursuance of some suspected manipulation. We carry on a more or less systematic examination of the books and records of commission firms generally and we do not wait until we find reasons to suspect them. We just think it is a healthful thing—a helpful thing—to have our auditors make periodical examinations, not as fishing expeditions, but as a regular routine. Some helpful things have come out of those examinations.

Mr. HOPE. What is your authority under the present law to go into a firm's books and records? I mean, how much authority do you have to do that things?

Mr. MEHL. We have authority to examine the books and records pertaining to cash and futures transactions on contract markets. They are required, under the present Grain Futures Act, to keep records showing the details of all futures and cash transactions which are open to inspection of the Secretary of Agriculture. That is the general authority under which we proceed.

Mr. HOPE. You could, under the present legislation, go into the records and books of any firm which is a member of the board of trade on a contract market without having any particular purpose in view in doing so; is that right; or, without having any suspicion that something wrong might be going on?

Mr. MEHL. Yes.

Mr. HOPE. That is, without any limitations, you can make that examination and obtain that information. · Mr. MEHL. That is right. Mr. HOPE. That is all. The CHAIRMAN. Mr. Tobey, did you have a question ? Mr. TOBEY. No, Mr. Chairman. The CHAIRMAN. Mr. Kleberg. Mr KLEBERG. I would like to ask Mr. Mehl this question: Following up Mr. Hope's interrogation, if you find, upon investigation, information which leads you to believe that manipulation is going on, what are your powers thereon ?

Mr. MEHL. The next step is, if we are satisfied there is evidence of manipulation, is for the Secretary of Agriculture to file a formal complaint stating a place and time of hearing and requiring the party charged with manipulation to show cause why trading privileges on all contract markets should not be denied to him. Thereupon, the Secretary may himself sit at the hearing or he may designate a referee to take the evidence. The Government puts in its case, and after the respondent has put in his case, the record is submitted to the Commission consisting of the Secretary of Agriculture, the Secretary of Commerce, and the Attorney General. They rule on the facts and on that record determine whether or not an order should be issued denying contract market privileges.

Mr. KLEBERG. In other words, you have the power now under the existing law, through due process provided, to penalize anyone operating on the board, by going through the procedure you have just explained ?

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Mr. MEHL. Providing their acts, or the acts complained of, fall within the limited scope of the present Grain Futures Act.

The CHAIRMAN. Any further questions? Mr. BEAM. As a result of those investigations made from 1921 up to and including the present time, what action has been taken, if any, by this committee composed of the Attorney General, Secretary of Agriculture, and the Secretary of Commerce ?

Mr. MEHL. Well, I told you of that one case which was typical of the 24 cases, or 33 cases in all, including the Kansas City cases. I will be glad to read from the findings of the Commission in that case

Mr. BEAM. Just how many; that is all I am interested in; how many of all of these cases are you talking about?

Mr. MEHL. That was the only one of that type of case brought before the Commission.

Mr. BEAM. That is, in which the Commission has dealt with any disciplinary action.

Mr. MEHL. The Commission held that cross trading, taking orders into the broker's account, was not manipulation within the meaning of the Grain Futures Act, in that it did not affect the general level of the prices; it affected only the price in respect to those particular orders.

Mr. BEAM. All right. As I understand, not one case was disciplined by this court of inquiry.

Mr. MEHL. That is right.
Mr. Beam. In all of the investigations that you have made.
Mr. MEHL. That is right.
Mr. BEAM. And the purpose of this law is to correct that?

Mr. MEHL. Yes, the purpose of this bill. It is only fair, perhaps, to say that following the proceedings in that case, dockets 2 and 3, our auditors reported there was improvement; that there seemed to be much less cross trading and bucketing of orders by floor brokers while that case was pending before the Commission.

Now, what the situation has been since, the Commission in its opinion of November 9, 1933, decided that these practices were not violations of the Grain Futures Act, we do not know. Perhaps we have been negligent in not making investigations since that time to cover this particular field. But, in this connection, it should be remembered that for a number of years past there have been hopes of legislation which would enable us to deal more directly and effectively with practices of this kind and without which we can do nothing in our own right under the Grain Futures Act.

While the exchange representatives may now take the position that we have been negligent in not bringing cases of irregularity to their attention, I want to assure you that they have never in the past shown any disposition to want us to act as their policemen in the enforcement of their rules and regulations. That does not apply to the work that the grain futures administration and the boards of trade are now doing under the grain exchange code. Since the grain exchange code went into effect, we have had very happy and satisfactory relationships with the business conduct committees, and it is only fair to say that the code authority, within the limits of the code, is trying-sincerely trying—to do a good job. There

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is no quarrel between the grain futures administration and the code.
We think it has been a fine thing.
Mr. FLANNAGAN. Mr. Chairman, may I ask the witness a question?
The CHAIRMAN. Mr. Flannagan.

Mr. FLANNAGAN. As I understand the code does not cover the evil we are trying to correct in this bill; is that right?

Mr. MEHL. That is right. The code covers the field of minimum margin requirements, the placing of certain fixed limits within which the price may fluctuate from one day to the next, and establishes a business conduct committee, and requires the exchanges to appoint a supervisor to enforce the code requirements.

The CHAIRMAN. Mr. Kleberg. Mr. KLEBERG. The code, then, in other words, does not fill the requirements with reference to cross trading and bucketing?

Mr. MEHL. No; it does not deal with those matters at all.

Mr. KLEBERG. Í might ask this question, if the exchange would adopt just a definite set-up outlawing cross trading and bucketing, would that not solve the problem to a certain extent?

Mr. MEHL. I think the grain exchange representatives will tell you that the rules already prohibit those practices.

Mr. KLEBERG. One more question. There is a provision under the code whereby amendments to this code can be made, and then setting out the procedure to make such amendments.

If the trade would suggest on their own motion an amendment to the code covering these questions, would there then be any real necessity for the passage of this law?

Mr. MEHL. I think so.
Mr. KLEBERG. I am interested to find out why.

Mr. MEHL. Because I do not think it was ever intended that the grain exchange code should be a substitute for legislation. It is, I think, just what its name implies," a code of fair competition for the grain exchanges and members thereof." I call your attention to article 7—the first section in article 7—which is entitled “Uniform Trade Practices”, reading as follows:

SECTION 1. In addition to the matters covered by this code, the several exchanges have regulated and are expected to regulate the trade practices of such exchanges and of their respective members under rules and regulations which have been, are now, or shall hereafter be in effect.

The CHAIRMAN. Mr. Kleberg, are you through?
Mr. ANDRESEN. Mr. Chairman.

The CHAIRMAN. Mr. Andresen.
Mr. ANDRESEN. The cases you mentioned were back in 1929?
Mr. MEHL. Yes.
Mr. ANDRESEN. That is correct, is it not?
Mr. MEHL. I believe that some were in 1931.
Mr. ANDRESEN. 1931 ?
Mr. MEHL. It was while this case in dockets 2 and 3 was pending.
Mr. ANDRESEN. Have your auditors continued to examine the books
in the same manner as they did from 1929 to 1931 ?

Mr. MEHL. No. As I stated, since that decision was handed down in 1933 holding that we had no authority to deal with those practices, our auditors have not made any examinations on that point.

Now, it is possible that our accountants in Chicago could give us some further information, but I do not find anything in the files which shows any report of such violations since that time.

Mr. ANDRESEN. Have you had any complaints since 1931, and up to the present time, of these practices being engaged in?

Mr. MEHL. No; these cases of bucketing and cross trading rarely come to our attention as the result of complaints. This one case came up because the customer thought the execution was entirely outside of the range of recorded prices. That is why he complained. As long as the reported executions are kept within the range of recorded prices the customer has no means of knowing whether his orders are bucketed.

Mr. ANDRESEN. Then, you have only received one complaint since 1931 ? · Mr. MEHL. Involving that particular point; yes.

Mr. ANDRESEN. What was done in that particular case; was it referred to the business conduct committee?

Mr. MEHL. Yes. It was referred to the exchange officials.
Mr. ANDRESEN. And what was done?

Mr. MEHL. They first advised the customer that job-lot transactions were frequently executed at prices varying from the round-lot prices, which is the recorded price, and the customer then complained to the grain futures administration.

Our supervisor at Chicago had an accountant make an examination of the books of the clearing firm and of the brokers who handled that transaction and took it up with the exchange officials. Then they suspended this one broker who handled this particular order of the complaining customer. I do not know whether it was for 2 or 5 days. Then, later, when the grain futures administration decided to test the law to see whether or not we could deal with those practices under our present act, as a form of manipulation, the Chicago Board of Trade reopened the case and the man was suspended for 2 years.

Mr. ANDRESEN. Is that the case Dr. Duvel referred to here the other day?

Mr. MEHL. Oh, no; I do not think so. Mr. ANDRESEN. Well, what was that case ? Mr. Mehl. I do not know. He is to follow me on the stand. Mr. ANDRESEN. Well, he can give the information. Mr. COFFEE. Mr. Chairman. The CHAIRMAN. Mr. Coffee wanted to ask a question. Mr. COFFEE. I want to find out if there is any demand from the grain dealers out in the Western States for this class of legislation.

Mr. MEHL. I beg your pardon. Mr. COFFEE. Is there any demand among the grain dealers out in the Western States, who are particularly interested in a liquid market for this class of legislation ?

Mr. MEHL. From the grain dealers?
Mr. COFFEE. Yes.
Mr. MEHL. Well, if there is, I would not say that it is very vocal.

Mr. COFFEE. Well, are they not interested as anyone in having a liquid market and an unhampered market for hedging their operations?

Mr. MEHL. Oh, yes.

Mr. COFFEE. And they are particularly interested in anything that is of benefit to, outlet benefit, to the market for their particular purposes? Mr. MEHL. Yes.

Mr. COFFEE. And they are particularly interested in the grain producers ?

Mr. MEHL. Yes.

Mr. COFFE. Is there also a demand among the producers themselves for this legislation ?

Mr. MEHL. Yes; I think there is. Of course, the representatives of the farm organizations are more competent to speak on that question than we are. We have not made any attempt to canvass the producers. We have rather assumed that the leading farm organizations who support the bill are speaking for the producers on that question.

The CHAIRMAN, Mr. Gilchrist.

Mr. GILCHRIST. Is there anything in the code which limits the amount of either short or long holdings that any one operator or any one interest may hold at any particular day or time?

Mr. MEHL. No; but I will say this: The code recognizes the principle of limitation indirectly by fixing a 25-percent minimum margin requirement on speculative lines above 2,000,000 bushels.

Mr. GILCHRIST. As I recall, that was about the recommendation or authority of your administration a year ago, was to limit it to somewhat like 2,000,000 or 3,000,000 bushels, was it not?

Mr. MEHL. Yes; that figure has been suggested for wheat, I believe.

Mr. GILCHRIST. I think the figure given us then was 3,000,000 bushels at any one time, although they still left that amount open for future consideration of the Secretary. I think this bill does, too. Mr. MEHL. Yes.

Mr. GILCHRIST. He can limit it; the Secretary can limit it to such amount as he thinks proper?

Mr. MEHL. Yes.
Mr. GILCHRIST. Under this bill.

Mr. MEHL. I think the figure that Dr. Duvel has always mentioned as a suggested figure has been 2,000,000 bushels.

The CHAIRMAN. We desire to thank you, Mr. Mehl.
Mr. MEHL. Thank you.



Mr. Davis. May I answer that first statement, for just a moment?
Mr. Davis. Mr. Chairman and members of the committee-

The CHAIRMAN. We would like to have that statement made, and then we will try to finish the hearings.

Mr. Davis. Dr. Duvel's statement is the very best argument we could possibly have against the licensing features of this bill.

He refers to figures. Figures do not lie. But I just want to give the effect of those figures. In the first place, the December wheat

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