STOCK EXCHANGE PRACTICES THURSDAY, JANUARY 25, 1934 UNITED STATES SENATE, SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY, Washington, D.C. The subcommittee met at 10 a.m., pursuant to adjournament on yesterday, in room no. 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding. Present: Senators Fletcher (chairman), Adams, Townsend, and Couzens. Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee; Thomas G. Long, attorney for witnesses summoned in connection with Detroit Bankers Co.; Clifford B. Longley, attorney for John Ballantyne. Senator COUZENS (presiding). I desire to make an announcement. Chairman Fletcher is in conference with the members of the House Banking and Currency Committee this morning and requested me to call the meeting to order and go on with the hearings until he can get here. The subcommittee will now come to order. Mr. Pecora, you may proceed. Mr. PECORA. Mr. Chairman, I will ask Mr. Verhelle to take the stand. But you may remain where you are, Mr. Ballantyne. Mr. BALLANTYNE. All right. TESTIMONY OF JOSEPH F. VERHELLE, GROSSE POINTE, MICH.— Resumed Mr. PECORA. Mr. Verhelle, at the conclusion of the hearing yesterday afternoon you and Mr. Ballantyne were being questioned with regard to the disposition that was made of the special cash dividend one one and one-half million dollars that was declared by the First National Bank in Detroit on December 23, 1931. Do you recall that, Mr. Verhelle? Mr. VERHELLE. Yes, sir. Mr. PECORA. You undertook, when left the stand yesterday afternoon, to acquaint yourself with the details of the disposition of that fund. Have you done so? Mr. VERHELLE. I tried as well as I could, by a long-distance call. And, incidentally, Mr. Pecora, I should like a little information as to who will cover the expense in regard to any action taken to secure data upon which to answer such questions. Mr. PECORA. Suppose you answer the question propounded to you, and we will take up later the other matter. That has nothing to do with this record. Mr. VERHELLE. Well, I was not able to obtain Senator COUZENS (interposing). I did not quite get that request made by the witness. Will you please repeat it? Mr. VERHELLE. I should like to know how far I can go in obtaining information of that kind, because it is quite difficult to get it, and there are, apparently, many factors involved, and in connection with this particular question I did not quite get the information. Mr. PECORA. Do I understand that it was necessary for you to telephone to Detroit, and what else? Mr. VERHELLE. It was necessary for me to do that; yes. Mr. PECORA. You may proceed with the information you have at hand, and we will decide the other matter later. Mr. VERHELLE. The only information I have at hand is that at one time, toward the latter part of December, there was specifically a total of 311⁄2 million dollars in the hands of the Detroit Bankers Co., either in the form of certificates of deposit, or certificates of deposit and other instruments, or other instruments; that those 31⁄2 million dollars consisted of a 12-million-dollar dividend declared by the First National Bank, a 2-million-dollar liquidating dividend declared by the First Detroit Co.; that the First National Bank dividend was paid prior to the payment of that First Detroit Co. dividend, and that at the very end of the year both had been paid. In other words, both were paid prior to January 1, 1932. Now, that is Mr. PECORA (interposing). Well, the special dividend of 11⁄2 million dollars was declared on December 22, 1931, and was paid the following day, December 23. And what you call the special liquidating dividend of $2,000,000 paid by the First Detroit Co., was paid on December 28, 1931. Incidentally, that special liquidating dividend was not a special liquidating dividend of $2,000,000, as you undoubtedly know, Mr. Verhelle. Mr. VERHELLE. No; I do not. Mr. PECORA. It was the proceeds from a special dividend of 30,000 shares of the capital stock of the First Detroit Co. Mr. VERHELLE. Well, that is what I meant. Mr. PECORA. And 20,000 of which shares were a few days thereafter surrendered for cancelation, and that was how the $2,000,000 was paid to the Detroit Bankers Co. You know that, don't you? Mr. VERHELLE. Yes; it reduced the invested capital from substantially $4,000,000 to $2,000,000. Mr. PECORA. Well, will you please refer to this matter on the basis of the facts and not as a special liquidating dividend of $2,000,000, which you know it was not. Mr. VERHELLE. Well, I am not quite certain what it was, then. Mr. PECORA. You were the comptroller of the Detroit Bankers Co.. weren't you? Mr. VERHELLE. Yes, sir. Mr. PECORA. And as such it was your business to keep track of these various things, wasn't it? Mr. VERHELLE. Yes, sir. Mr. PECORA. And you are not certain about that so-called "special dividend" declared by the Detroit Trust Co.? Mr. VERHELLE. The Detroit Trust Co. did not declare any dividend. Mr. VERHELLE. I am not certain of that. Mr. PECORA. What is there about it as to which you are uncertain? Mr. VERHELLE. The Detroit Trust Co. declared a $4,000,000 stock dividend. Mr. PECORA. And that dividend consisted of 30,000 shares of stock. Mr. VERHELLE. Yes, sir. Mr. PECORA. There was not a liquidating dividend of $2,000,000 declared in addition to that, was there? Mr. VERHELLE. The First Detroit Co. did declare such a dividend; yes, sir. Mr. PECORA. How and when? Mr. VERHELLE. I believe on December 28. I am using that date because it was within a few days of that. Mr. PECORA. Well, wasn't that on the occasion of the surrender of 20,000 shares of the capital stock of the First Detroit Co. by the Detroit Bankers Co.? Mr. VERHELLE. There were two transactions there, sir. The Detroit Trust Co. declared a dividend consisting of the capital stock of the First Detroit Co. Mr. PECORA. Yes. Mr. VERHELLE. That was no. 1. Thereupon the First Detroit Co. stock was set up on the books of the Detroit Bankers Co. and became their property through the declaration of this dividend. Mr. PECORA. It was set up on the books at what valuation? Mr. VERHELLE. I do not recall. I presume it was somewhere in the neighborhood of $4,000,000. Then this company was going to liquidate, and in order to proceed with that program they had to raise a certain amount of cash and liquidate some of their assets, and they turned over to the Detroit Bankers Co. the sum of $2,000,000, which resulted in a reduction of their invested capital again from, roughly speaking, $4,000,000 down to approximately half of that sum. Mr. PECORA. They turned over that $2,000,000 on the occasion of the surrender of 20,000 shares of the capital stock of the First Detroit Co. by the Detroit Bankers Co., didn't they? Mr. VERHELLE. I presume so; yes. Mr. PECORA. Now, it is that $2,000,000 that you have referred to as a special liquidating dividend? Mr. VERHELLE. Yes, sir. Mr. PECORA. That put the Detroit Bankers Co., in the month of December 1931, in possession of $3,500,000? Mr. VERHELLE. Yes, sir. Mr. PECORA. That it got in the form of these dividends we have discussed. Now, what did the Detroit Bankers Co. do after that? Mr. VERHELLE. They used $750,000 of that money in connection with the First National Bank of Pontiac. That left $2,750.000, which was used entirely in the liquidation of the indebtedness of the First National Co. Mr. PECORA. And the remaining $2,750,000 was used for what purpose by the Detroit Bankers Co.! Mr. VERHELLE. In the liquidation of this indebtedness that we discussed at great length here on yesterday. This $2,750,000 wasMr. PECORA (interposing). You referred to that as a liquidation of the indebtedness of the First National Co. Mr. VERHELLE. Yes, sir. Mr. PECORA. How did the Detroit Bankers Co. use it for that purpose? What did the Detroit Bankers Co. actually do with that $2,750,000? Mr. VERHELLE. Do you mean the actual procedure? Mr. PECORA. Yes. Mr. VERHELLE. They took $2,000,000 of this money, my recollec tion is, and applied it on a note at the Guaranty Trust Co., was it! Mr. PECORA. You mean the Chase National Bank, don't you? Mr. VERHELLE. I presume I do, then. Mr. PECORA. It took $2,000,000 of that $2,750,000 and turned it over to the Chase National Bank in reduction of a loan which the Chase National Bank had theretofore made, not to the First National Co.. but to the Detroit Bankers Co. Mr. VERHELLE. Who in turn had made a loan to the First National Co. Mr. PECORA. But that $2,000,000 was used to liquidate to that amount a loan which the Detroit Bankers Co. had obtained from the Chase National Bank, Mr. VERHELLE. That is correct. Mr. PECORA. All right. Now, what was done with the other $750,000? Mr. VERHELLE. Well, it was used in a similar way. But as to dates and amounts and the banks, I do not know as to which they were or what the dates were. But it was used in identically the same way as the $2,000,000. Mr. PECORA. That is, it was used to reduce an existing indebtedness of the Detroit Bankers Co., wasn't it? Mr. VERHELLE. Yes; and it was action taken to offset indebtedness created by the First National Co. Mr. PECORA. And that is what you mean by saying this money was used to liquidate the indebtedness of the First National Co.! Mr. VERHELLE. Yes, sir. Mr. PECORA. The fact is that it was used to reduce an indebtedness of the Detroit Bankers Co. directly, wasn't it? Mr. VERHELLE. And also to reduce an indebtedness of the First National Co. Mr. PECORA. You say it was used in that way. How was the indebtedness of the First National Co. reduced thereby? Mr. VERHELLE. Because the First National Co. had originally made this indebtedness. The Detroit Bankers Co. had assumed it in order to reduce the interest rate, and so forth, so that it was in reality the First National Co.'s debt that was originally involved. And the First National Co. still had indebtedness on its books, which, incidentally, was also reduced at the same time that this in debtedness was reduced. There was another resolution passed reducing the indebtedness of the First National Co. to the Detroit Bankers Co. at that time. Mr. PECORA. Mr. Verhelle, are you familiar with the substance of a resolution adopted by the board of directors of the Detroit Bankers Co. at a meeting of that board held on December 18, 1931, referring to the indebtedness of the Detroit Bankers Co. of $4,000,000 in favor of the Chase National Bank of New York? Mr. VERHELLE. No, sir. Mr. PECORA. Well, let me read it to you. Mr. VERHELLE. Well, I would then probably recall it. Mr. PECORA. Let me read the resolution as it appears from a photostatic copy which I have of the minutes of that meeting of the board of directors: Loan authorized: In order to supply funds for the purpose of liquidating an obligation of the company And that means the Detroit Bankers Co. in the amount of $4,000,000 maturing at the Chase National Bank of New York on December 29, 1931, the two following resolutions were presented and unanimously adopted: 1. Resolved, That the president and treasurer of this company be, and they are hereby, authorized to borrow in behalf of this company the sum of $2,000,000 from the Continental Illinois Bank & Trust Co., for such period and at such rate of interest and upon such terms and conditions as may be agreed upon between the said bank and the above-named officers of this company; and be it further Resolved, That said officers of this company be, and they are hereby, authorized and directed in order to evidence the amount of such loan, and the terms and conditions thereof, to make, execute, and deliver in behalf of this company and in its corporate name the promissory note or notes of this company; 2. Whereas this corporation is the owner of all the outstanding stock of the First Detroit Co., with the exception of certain shares issued to directors in order to qualify them, and it is considered advisable and for the best interests of this company that a partial liquidation of the affairs of the First Detroit Co. be accomplished. Now, therefore, it is resolved as follows: 1. That the board of directors of the First Detroit Co. be requested to declare and distribute a liquidating dividend to stockholders of the company in the amount of $2,000,000, either in cash or securities as may be found desirable at the time of declaration of such dividend; and 2. That the president of this corporation be and he is authorized and directed in behalf of the corporation to execute and deliver to the First Detroit Co. the formal consent of this company as a stockholder to the declaration and distribution of such dividend, in accordance with the provisions of section 23 of act 327 of the Public Acts of Michigan for 1931; and 3. That upon the payment of such liquidating dividend the capital stock of the First Detroit Co. now held by this company, of the value of $2,000,000, be delivered us for cancelation to the First Detroit Co., and the president of this corporation be and he is given full power and authority to make such delivery and to take any and all further proceedings in connection with the foregoing as may appear necessary or advisable to him. Now, does the reading of those two resolutions refresh your recollection concerning the process by which the Detroit Bankers Co. paid this indebtedness of $4,000,000 to the Chase National Bank? Mr. VERHELLE. Well, sir, that is absolutely the way I have indicated it, that is, that a $2,000,000 liquidating dividend was received from the First Detroit Co. as indicated in that resolution, and apparently was applied to the First National Bank; and additional borrowings of $2,000,000 were obtained from other institutions, and |