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Those stock-option contracts matured June 1, 1932. That is to say, the officer in whose favor the contract was made had until June 1, 1932, to elect whether or not to purchase any pay for such stock.

In the plan and subscription agreement the bank directors were not only authorized to sell up to 5,000 shares of such increased bank stock but were given an irrevocable proxy by the subscriber to create such additional stock.

On April 10, 1929, a plan was sent out to the holders of unified shares setting forth the proposal to organize the Guardian Detroit Group and to exchange Group shares for unified shares. One purpose set forth in this proposal was that of increasing the capital of the Guardian Detroit Company by the sale of additional shares of the new Guardian Detroit Group without increasing the capital of either the bank or the trust company.

In this proposal of April 10, 1929, reference is made to the outstanding option contracts for the purchase of 3,000 Guardian units at $249 per share, the original issue price, which contracts would mature in 1932 and which would necessitate an increase of the capital stock, which might not then be needed or desirable.

The proposal of April 10, 1929, contemplated the issuance of Guardian Group stock for Guardian units on the basis of 2 shares of the new stock, of $50 par value, for 1 Guardian unit. In order to do away with those options and avoid the necessity of increasing the bank's stock, in order to fulfill those options, it was proposed to issue 6,000 shares of Guardian Group stock, of $50 par value, at $124.50 per share, being the equivalent of 3,000 Guardian units at $249 per unit. In other words, it was desired to get rid of those stock-option contracts and get the holders thereof to pay in 1929 the full amount of $749,000, which would be payable upon the exercise of their options in 1932 if they should then elect to exercise them.

The holders of those stock-option contracts were not required to exercise their options until June 1, 1932, and had they not relinquished, as they did do, in 1929, they would have saved themselves $749,000 plus any liability for assessments thereon.

Mr. PECORA. Why do you say that?
Mr. Lord. Because the stock is worth it today.
Mr. PECORA. All right. You may proceed.

Mr. LORD. There was, therefore, a valuable advantage to them in having the right to purchase, but not under any obligations to purchase,

Guardian units throughout the option period. The Guardian Group stock which was actually issued in exchange for the other shares, was given a $20 par value instead of a $50 par value as at first proposed; and instead of asking the option holders to subscribe for 6,000 shares of the Group at $124.60, they were asked to subscribe for 15,000 Group shares, of $20 par value, at $49.80 per share, the corresponding price.

As a part of the plan for issuing Group stock in exchange for the old Guardian units, there was offered to the stockholders of the Guardian Detroit Group additional shares equal to 10 percent of their holdings, after the exchange to be sold at $90 per share, of a par value of $20 each.

The holders of the stock option contracts were to have the same right, to subscribe at $90 per Group share, of $20 par value, for 10 percent of the Group shares, which they would subscribe and pay for in case they should be willing to surrender their option contracts and subscribe for Group stock at the original price of the Guardian units.

The essence of the transaction was that an officer held a valid contract granting him the option to purchase old Guardian units at $249 which during the period expiring June 1, 1932, was being asked to surrender that option and immediately subscribe for Guardian Group stock on the basis of the original unit price.

In order to assure the holders of those stock options of elimination of any possible income tax liability by surrendering their stock option shares before maturity and acquiring Group stock in place of the old units, advice was taken and the plan of organizing the R. 0. L. Co. was adopted.

Now, as regards the R. O. L. Co., which was organized under the laws of Michigan, having 6,000 no par shares, those shares were acquired by the holders of stock option contracts, and the company received therefore $750,000 in cash and the assignment of the stock option contracts by the officers respectively holding the same. The holders of those 6,000 shares of the R. O. L. Co. then exchanged their shares for 15,000 shares of Guardian Group stock.

After this had been accomplished the Group Co. owned all the stock of the R. O. L. Co. The stock option contracts were canceled, and $747.000 was paid to the Group Co. as liquidating the outstanding shares, equivalent to $249 a share.

Mr. PECORA. For the 3,000 original units?

Mr. LORD. Yes, sir. The original holders of the stock options received 15,000 shares of Group stock, at the corresponding price of $249 a share, at which the old Guardian units had been directed to be sold to them during the period ending June 1, 1932.

Now, is that clear to you, Mr. Pecora?

Mr. PECORA. Mr. Lord, I noticed as you made that answer that you read from a typewritten manuscript. Who prepared that manuscript?

Mr. LORD. It was prepared by Mr. Bodman and myself.
Mr. PECORA. And Mr. Bodman is your attorney?
Mr. LORD. He is attorney for the Group.

Mr. PECORA. Who were the officers to whom you have referred to whom those were granted ?

Mr. LORD. Do you want the amounts, too?
Mr. PECORA. Yes.

Mr. LORD. We will take it in the matter of the 15,000 shares rather than the 3,000, or in any way you may want it.

Mr. Pecora. Well, you may take it as of,
Mr. LORD (interposing). At the original option ?
Mr. PECORA. All right.

Mr. LORD. I received as part consideration for my coming to Detroit 1,000 of those options. Mr. Kanzler received 500, Dr. Fred T. Murphy received 500, John C. Grier, Jr., received 500, C. A. Shepherd received 300, and James L. Walsh received 200, making the total of 3,000.

175541-34-PT 9

Mr. Pecora. Now, you have stated in the course of your prepared statement, this morning, that from time to time the Guardian Detroit Union Group, Inc., acquired various local banks in and out of the city of Detroit, but all in the State of Michigan, on an exchange of stock basis?

Mr. LORD. Yes.

Mr. PECORA. Did all the existing stockholders of those various unit banks turn in their shares for Group shares upon those acquisitions?

Mr. LORD. So far as I know as regards the Guardian Detroit Group, Inc., not the other. I do not know the facts about that, of course.

Mr. PECORA. What was the general method of procedure by which those acquisitions were effected?

Mr. LORD. The Group appointed a committee of three-but perhaps I better start back of that: If a bank was considered as qualifying from the standpoint of their standing, reputation, and goodness, negotitions were usually carried on originally with the heads of those particular institutions, to see whether they would be interested in becoming a member of the Group. If they were interested, and the members of their boards were satisfied to have their institutions become members of the Group, those banks appointed, each a committee of three, and the Group Co. appointed a committee of three, and the Group Co.'s committee examined the assets of the particular institution that was under consideration. The committee of three representing that bank were given full access to any information they anted on the Group and on any of our institutions in the Group.

The basis of the exchange was not figured on the basis of the relative market value of the shares, but of the real worth of the shares based on the assets. Earning power was taken into consideration also in arriving at a basis that was mutually satisfactory,

The offer was made to the shareholders of the bank whose shares were sought to be acquired, and I believe in most cases that offer provided that it should become operative if and when 75 percent of the stockholders of that institution agreed to it. They were asked, if they agreed to it, to deposit their shares under a signed agreement. If the 75 percent was acquired the plan was declared operative.

That in brief was the way matters were handled.

Mr. PECORA. And as a banking unit was acquired in that fashion by the Group did the Group increase its capital stock in order to enable it to acquire such a new unit?

Mr. Lord. Mr. Pecora, I do not recall the exact increases, but my recollection is that the Group had authorized capital in excess at all times of their needs.

Mr. PECORA. Of the amount that it actually originally issued ?
Mr. LORD. Yes, sir. As I recall it, the authorized capital was

. 600,000 shares to start. I may be mistaken. And finally ended with two and a half million shares authorized. Each issue of stock that was issued in exchange for the shares of the acquired stock was approved by the Michigan Securities Commission.

Mr. PECORA. On page 6 of your prepared statement that you read into the record this morning, you said, among other things, as follows:


The Guardian Detroit Group, Inc., was incorporated in May 1929 under the provisions of the general corporation laws Act 84, Public Acts of 1921, as amendel, for the following purposes :

- To acquire, own, hold, dispose of, and deal in stocks, bonds, and other evidences of indebtedness and securities, including those issued by any corporation, domestic or foreign, and to possess and exercise in respect thereto all rights, powers, and privileges of individual owners thereof, including the right to rote the same and to execute proxies therefor."

Now, when was the amendment to that act of 1921 made you refer to here?

Mr. LORD. I don't know.

Mr. PECORA. Was it after the incorporation of Guardian Detroit Group, Inc.?

Mr. LORD. I cannot answer that. I don't know.

Mr. Pecora. Can you get the information from any of your associates to enable you to answer?

Mr. LORD. Could I supply it later? Mr. PECORA. I beg pardon? Mr. LORD. Could I try to supply it later for you? Mr. Pecora. All right. Now, reference was made in the course of your testimony this morning to a corporation known as Keane, Higbie & Co., of Detroit, Mich. What sort of a company was that?

Mr. LORD. It was what was termed “an investment banking house."

Jr. PECORA. An investment banking house?
Mr. LORD. Yes, sir.

Mr. PECORA. Was that the development or the outgrowth of a stock brokerage firm or house!

Mr. LORD. Ì think it was the outgrowth of a municipal bond house, Mr. Pecora.

Mr. PECORA. On page 11 of your prepared statement you read into the record this morning you said as follows:

Admittedly, the institutions in the Guardian Detroit Union Group made many mistakes, but to the best of my personal knowledge mistakes of judgment.

Will you enumerate the mistakes you referred to therein?

Mr. LORD. I am afraid no one could enumerate the mistakes that were made in 1929 up to that time. I spoke of the principal mistake in starting the Group at the peak of the Nation's prosperity.

Mr. PECORA. Well, was it actually started at the peak of prosperity?

Mr. LORD. The consolidation of the Union Commerce Corporation.
Mr. PECORA. That became effective in December 1929?
Mr. LORD. Yes, sir.

Mr. PECORA. Which was 2 months after the first big slump in the stock market that precipitated or marked the opening of what we called this depression?

Mr. Lord. That is true, but negotiations for the consolidation of those two groups were started in September prior to that.

Mr. Pecora. But they had not been consummated prior to December?

Mr. LORD. They had been announced in the newspapers, if I remember correctly.

Mr. PECORA. But not consummated?

Mr. LORD. I realize that.

Mr. PECORA. The consummation did not take place until December 16. 1929 ?

Mr. LORD. December 1929.
Mr. PECORA. And that was when the depression after this—

Mr. LORD (interposing). All right; perhaps it was a mistake that we did not call off the consolidations, but nobody at that time expected the depression to continue as it has or expected the severity of the depression as it proved.

Mr. PECORA. Now you have mentioned one outstanding mistake. What were some of the other of the “ many mistakes ” you referred to on page 11 of your statement ?

Mr. LORD. I would say, among other things, it was a mistake for those institutions to own a joint-stock land bank.

Mr. PECORA. To own what?

Mr. LORD. A joint-stock land bank. There was the Union Joint Stock and the Ohio-Pennsylvania Joint Stock. It was a different type of banking institution. We did, however, dispose of those at some later date.

The CHAIRMAN. How much stock did you take in those banks?
Mr. Lord. I can give you the number of shares, I think.
The CHAIRMAN. How much did it cost you?

Mr. LORD. I haven't the details on that, Senator. Those institutions were acquired by the Union Commerce Corporation.

The CHAIRMAN. What became of that stock?
Mr. LORD. That stock was traded back for Group shares.
The CHAIRMAN. Traded back to whom?
Mr. LORD. Mr. Blair and his associates.

Senator AdaMs. Mr. Lord, a mere matter of definition, but you spoke of the apparent mistake of incorporating the organization at what you call the “ peak of national prosperity.” Is "prosperity” quite the correct term for what was existing at that time I say it is purely a matter of definition.

Mr. LORD. I considered that there was prosperity up till the summer of 1929. Everybody thought they were rich. Maybe they were not.

Senator Adams. It was the “national delusion” perhaps, rather? Mr. LORD. I think you are right.

Mr. PECORA. What were others of these “many mistakes ” that you have allusion to in your prepared statement?

Mr. LORD. I did not detail them, Mr. Pecora.

Mr. PECORA. I know you did not detail them in your prepared statement. That is why I am asking you now to do so.

Mr. LORD. I did not in my own mind. I think it was a mistake for any banks, commercial banks, to take such a substantial amount of mortgages. Mortgages are perfectly safe investments, but not for an institution which has demand deposits. Mortgages should be carried by institutions in the nature of life insurance companies or mortgage banks which are distinctly mortgage banks, and not by commercial banks. Mr. PECORA. Why was such a policy adopted?

Mr. LORD. It was an inheritance of many years, and it was the practice in Detroit to loan on real estate, on homes, and it was our mistake, sir.

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