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Mr. PECORA. And that despite the fact that its president, upon receipt of your suggestion, pointed out the bad practice involved in declaring a dividend at a rate exceeding its earnings?

Mr. LORD. I would not call it bad practice if they had a substantial undivided profit account.

Mr. PECORA. This took place in June 1930?
Mr. LORD. Yes, sir.

Mr. PECORA. The general business conditions were not good at that time, were they?

Mr. Lord. They were better, as I recall it. We had quite a bulge in June 1930.

Mr. PECORA. Did they seem to be better in view of the fact that Mr. Stalker called your attention to a falling off in earnings?

Mr. Lord. I cannot answer your question, Mr. Pecora. I assume that the directors, if they had not thought it was proper to declare a dividend, would not have declared it.

Mr. PECORA. Do you think that the directors were influenced in their judgment by the suggestion that you made to them?

Mr. LORD. No, I do not-not those directors.

Mr. Pecora. Did you suggest to the directors or to Mr. Stalker that, despite the fact that the

earnings were not at a rate which would justify the declaration of a dividend at the rate that you suggested, they should make that good out of undivided profits or surplus?

Mr. LORD. I do not recall, sir.
Mr. PECORA. But in any event, that is what they did ?
Mr. LORD. Accepting your statement; yes.

Mr. PECORA. And that despite the fact that coupled with a falling off in earnings the bank had not set up any reserves against losses or depreciation of securities value?

Mr. Lord. Might I make this comment! As I recall it, the Guardian Trust Co. and the Union Trust Co. were consolidated in the spring of 1930. I may be incorrect about that. It is quite likely that the board of directors figured sufficient earnings and savings in expenses to justify that dividend-savings through the consolidation of those two institutions.

Mr. PECORA. Didn't you notice in this memorandum addressed to you by Mr. Stalker that he said

Were our earnings sufficient to justify dividends at the annual rate of 20 percent, we would not raise the question of the loss in income from the bond department.

Mr. LORD. May I hear your question again?

Mr. Pecora. Did you notice that statement of Mr. Stalker and give it any thought!

Mr. Lord. I assume I did, sir.

Mr. PECORA. Was the thought that you gave it of a character which led to the conclusion that you should insist upon the observance of the suggestion that you made about the dividend rate that should be declared ?

Mr. Lord. I do not recall whether my suggestion was made direct to the board of directors or whether Mr. Stalker discussed the matter with his own board of directors and they took that action, or not. That was—what? Nearly 4 years ago?

Mr. PECORA. Three and a half years ago.

Mr. Lord. I can only answer on this assumption, that the facts were laid before that board of directors and their conclusions were that if they did declare the dividend it was a proper declaration.

Mr. PECORA. Mr. Stalker in his memorandum to you also said: However, as you are aware, a dividend of this amount has not been earned.

You were aware of that fact, were you not—that the dividend rate had not been earned ?

Mr. Lord. I was told that.

Mr. PECORA. Did you, in the face of that, continue to advance the suggestion that the dividend rate be declared according to your idea of it?

Mr. LORD. Mr. Pecora, I do not recall whether there was any further suggestion after the original letter to which Mr. Stalker replied. Have you any further letter from me on the subject !

Mr. PECORA. Have you no further recollection of the matter?
Mr. LORD. I have not, sir.

Mr. PECORA. Let me call your attention to this further statement in Mr. Stalker's memorandum to you:

I presume a dividend of this amount (namely, 5 percent quarterly or 20 percent annually) is necessary to the fulfillment of your plan.

What was that plan?

Mr. LORD. I do not know what he was talking about, except the budget, to carry the Group companies' dividend and whatever ex. penses they had.

Mr. PECORA. Well, conceivably was the plan referred to by Mr. Stalker in his memorandum to you one whereby the Group's board of directors had to determine upon the amount of dividend that the Group would pay to its stockholders, and in order to enable the Group to pay that amount of dividend it called upon the unit banks to make certain dividend declarations to meet the requirements of the Group dividend?

Mr. Lord. Mr. Pecora, I know of no cases where the group determined in advance what the dividends should be, except for a few days, based on the report of the directors.

Mr. PECORA. Perhaps repeating the following sentence from your letter of June 4, 1930, to Mr. Stalker would serve to refresh your recollection on this subject; so I will read it to you:

DEAR MR, STALKER: To provide for the dividend requirements of the Guardian Detroit l'nion Group, Inc., on the basis of an annual disbursement of $3.20 per share, a dividend should be declared at the June meeting of your board of directors. I would suggest, therefore, that it would be in order for your board to declare a quarterly dividend equal to 20 percent annually.

Mr. LORD. For that quarter. Mr. PECORA. I beg your pardon? Mr. LORD. At the rate for that quarter. Mr. PECORA. Yes. I am reading your letter now. Mr. LORD. For that particular quarter. Mr. PECORA. You state specifically here that to provide for the dividend requirements of the Guardian Detroit Union Group, Inc., you suggest to Mr. Stalker's board that they declare a quarterly dividend at the rate of 20 percent per annum.

Mr. LORD. That is correct.

Mr. PECORA. Does not that indicate, Mr. Lord, that the dividend policy of the Group was such that, first, the Group determined what dividend it wanted to pay or deemed it advisable to pay to its own stockholders, and then passed the word along by way of suggestion, if

you please, to the boards of directors and executive officers of the unit banks to have them declare appropriate dividends to enable the Group to pay its dividend to its stockholders?

Mr. LORD. Mr. Pecora, it was not possible for the Group to determine what it wanted to pay in the way of dividends without having more or less accurate estimates and figures as to the earnings of the units. As I recall it, the dividend that was declared in April of 1930 was an 80-cent dividend.

Mr. PECORA. That is, a quarterly dividend ?
Mr. LORD. At the rate of $3.20 per annum.
Mr. PECORA. That was on shares having a par value of how much?
Mr. LORD. On shares having a par value of $20.

Mr. PECORA. Which was an annual dividend rate of how much on the par value?

Mr. Lord. Sixteen percent, in round figures. It was a normal and natural thing that any board of directors or any management would want to continue dividends at the rate started. But certainly

Mr. PECORA. Would it want to do that regardless of earnings?
Mr. LORD. It would not.

Mr. PECORA. I did not mean to interrupt you. You said, “ But certainly

Mr. LORD. No; it would not, regardless of earnings. It would not want to do it regardless of earnings. That would not be sound.

Mr. PECORA. But is not that exactly what was done in this instance, in the making of this suggestion of yours originally made under date of June 4, 1930, to the president of the Union Guardian Trust Co.?

Mr. LORD. There was no reason why that board of directors should accept that suggestion.

Mr. PECORA. What was the reason for your renewing the suggestion after Mr. Stalker informed you, or reminded you, rather, of what apparently you already knew, namely, that the bank had not earned a dividend at the quarterly rate of 20 percent?

Mr. LORD. Did I renew the suggestion, or was the matter discussed with the board and they approved it? I do not know, Mr. Pecora. I do not recall. I am asking that as a question.

Mr. PECORA. Well, on that perhaps your recollection will be refreshed by what I now show you, and that is what purports to be a photostatic reproduction of a memorandum addressed to you by Mr. Stalker under date of June 26, 1930. Will you look at it and tell us if you recognize that as a true and correct copy of such a memorandum received by you from Mr. Stalker?

Mr. Lord. I do not quite get the connection with this other side.

Mr. PECORA. Do you recognize that as being a true and correct copy of a memorandum that you received ! ?

Mr. Lord. I presume it is. It is addressed to me.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. It may be received.

(Photostatic copy of memorandum addressed to Mr. Lord by Mr. Stalker under date of June 26, 1930, was received in evidence, marked " Committee Exhibit No. 8, December 19, 1933.")

Mr. PECORA. The memorandum received in evidence as Committee's Exhibit No. 8 of this date reads as follows: It is on the letterhead of the Guardian Detroit Union Group, Inc., Intra-Group memorandum to Mr. Robert O. Lord from Mr. John N. Stalker, dated June 26, 1930 [reading] :



Date: June 26, 1930.
To: Mr. Robert O. Lord.
From: Mr. John N. Stalker.

MY DEAR BOB: I commented in a recent letter on the matter of the dividends which should be paid by the Union Guardian Trust Company the latter half of this year. The loss of our Bond Department affects our earnings very seriously. For the five years from 1925 to 1929 inclusive, the net earnings of that department after the payment of expenses average a trifle over $296,000.00 a year. If we had those earnings today, I believe we could pay a 20 percent dividend or $1,000,000.00 a year. We do not in any way question the transfer of the Bond Department to the Guardian Detroit Company. This seems to us logical and proper. The effect on our earning capacity, however, cannot be ignored.

As against $500,000.00 in dividends which we are paying the first six months of this year, our earnings will probably not run over $425,000.00 and this without setting up any reserves at all. Our policy in the past has always been to set up liberal reserves, although we were fortunate enough to need them only to a very limited extent. At the present time we feel that reserves are rather urgently required, and find ourselves unable to provide them.

Mr. Blair and I are of the opinion that for the last half of this year, dividends aggregating $400,000.00 or at the annual rate of 16 percent is the maximum that this company should undertake to pay. This would make 18 percent for the year. As our accruals for the next dividend period should commence the first of next month, we would be glad to get your opinion and advice on this subject.

JOHN N. STALKER. Now, from this letter it would appear, would it not, that the bank, Mr. Stalker's bank, that is, the Union Guardian Trust Company, had adopted your suggestion embodied in your letter of June 4, 1930, that they declare a quarterly dividend at the annual rate of 20 percent?

Mr. LORD. I do not recall what the directors did declare. I would say that

Mr. PECORA. Does not Mr. Stalker in this memorandum to you specifically say that the dividend they had declared for the first half of the year, which included the quarter that you wrote to him about under date of June 4, amounted to $500,000, which was at the rate of 20 percent per annum?

Mr. LORD. Yes.

Mr. PECORA. Does it seem to you, Mr. Lord, that when Mr. Stalker in his letter to you of June 5, 1930, pointed out in response to your suggestion that the quarterly dividend be at the 5 percent rate or 20 percent per annum, that they were not earning that much and that no reserves had been set up, that nevertheless he recommended your suggestion to his board of directors because it was your suggestion?

Mr. LORD. I would not think so.
Mr. PECORA. And not his judgment?

Mr. LORD. I would not think so; no. It was apparently the judg. ment of the board that the dividend should be declared; and the basis on which Mr. Stalker recommended it to the board I do not know. I suppose that whatever he recommended was sincere.

Mr. PECORA. If it was the judgment of the board or Mr. Stalker's judgment that it should be recommended to the board, what do

you suppose he meant when he wrote to you on June 5, 1930, pointing out that you were suggesting a dividend rate in excess of earnings and that the company had set up no reserve against loss? What did you think he was writing that letter to you for-in order to express his hearty approval of your suggestion?

Mr. LORD. No; I presume not. Mr. PECORA. What did you suppose he wrote it to you for, then, Mr. Lord ?

Mr. Lord. To give me his own personal reaction to that suggestion.

Mr. Pecora. But was there not at least a mild suggestion from him that you ought to revise your suggestion to his board?

Mr. Lord. I do not know that there was.
Mr. PECORA. You did not so construe it, anyway?

Mr. Lord. No. I construed that the board would make up their own mind about the declaration of the dividend.

Mr. PECORA. You had already made up your mind and passed it on to the board ?

Mr. LORD. As a suggestion, purely.

Mr. PECORA. Which was followed, though, despite the circumstances, the unwisdom pointed out by Mr. Stalker in his reply to your letter.

Is not that so? Mr. LORD. Apparently.

Mr. PECORA. As a matter of fact, Mr. Lord, was it not the invariable custom and policy of the Group at about the time that the Group was making or had made its dividend declarations to its own stockholders to send communications generally similar in form to this one of June 4, 1930, which you sent to Mr. Stalker, to the executive heads or officers of all of the unit banks?

Mr. LORD. You stated in the first, about the time the Group had declared its dividend to its stockholders? No; I do not think so, Mr. Pecora. I think that a few weeks before the dividend date had arrived a suggestion was sent to the unit banks as to the amount which we would like to have them put before their boards for their consideration.

Senator COUZENS. What is the deposit liability of the Union Guardian Trust Co, at this time?

Mr. Lord. At present?
Senator COUZENS. Yes.
Mr. Lord. I cannot answer that, Senator. I am sorry.
The CHAIRMAN. Is there any stockholders' liability?
Mr. LORD. Five million dollars of stock.
The CHAIRMAN. Yes; but what does the law require?
Mr. Lord. The State law?
Mr. Lord. The same as the national law-double liability.

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