reinstated, and for a multitude of other minor reasons. My thought was that it was a better plan to have the customer go to the particular officer who was familiar with his financial situation; and, furthermore, that all of his transactions that is, all of his loans should be handled through that one officer or loaning group, so that that loaning group would be familiar with all the transactions involving that particular customer.

Mr. PECORA. What were the facts you found which called forth particularly the comment [reading]:

Incidentally, the amount of paper depending upon endorsement for its value is completely out of line with other banking institutions?

but I do

Mr. VERHELLE. I do not recall what the percentages were, know that at time the amount of such paper considerably exceeded the normal amount of that type of paper carried by a bank.

sir.

Mr. PECORA. Do you recall whose endorsements were in question! Mr. VERHELLE. No; that is just a particular type of paper, That is paper depending upon the endorsements of others than the maker.

Mr. PECORA. Did any of those notes include those endorsed by officers of the bank?

Mr. VERHELLE. Such as there were, I believe I outlined, or they were outlined in various reports submitted, I am sure, by the personnal department, and so forth; but that would be an infinitesimal amount, and had nothing to do with that particular comment.

Mr. PECORA. You found, in making the examinations which were covered in your confidential memorandum to Mr. Mills, which is in evidence, that there were officers of the bank who apparently had received the benefit of discounts of paper signed by persons other than themselves, did you not?

Mr. VERHELLE. To the extent that it was indicated in that confidential report at that time.

Mr. PECORA. Did you make mention of those instances, and of all those instances, in the confidential report to Mr. Mills?

Mr. VERHELLE. All those that I had verified and knew to be a fact, I stated in there. That is, I went absolutely according to the records of the bank, and outlined all the transactions which might be subject to criticism.

Mr. PECORA. Among those transactions which you so characterized and called attention to in your confidential memorandum were transactions in which officers who received the benefits of those discounts. did not have their names appear whatsoever on the discounted paper. Do you recall such instances?

Mr. VERHELLE. I wonder if I may have that question once again! (The reporter read the pending question.)

Mr. VERHELLE. I do not right now, sir.

Mr. PECORA. Now, I show you another one of the documents produced by you last week, which was marked " Committee's Exhibit No. 61 ", for identification on January 25 last. Will you look at it and tell me if you recognize it to be a true and correct copy of a memorandum submitted by you to the operating committee on June 1, 1932! Mr. VERHELLE (after examining paper). I do, sir.

Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.

(Memorandum June 1, 1932, Verhelle to operating committee, heretofore marked for identification "Committee's Exhibit 61 ", Jan. 25, 1934, was received in evidence, marked "Committee's Exhibit No. 98", Jan. 30, 1934, and the same was subsequently read into the record by Mr. Pecora.)

Mr. PECORA. The memorandum has been marked in evidence as "Committee's Exhibit No. 98" of this date, and contains the following statement, Mr. Verhelle [reading]:

Due to the dangers originating with our employees' loans, it is recommended that we determine the total liability of all officers and employees and that no officer or employee of any of the units, whose total unsecured liabilities exceed three times his or her annual salary, be permitted to handle cash or securities. If the officer or employee is past 55 years of age this limit should be placed at unsecured liabilities of twice the annual salary.

What were the circumstances that called forth this recommendation?

Mr. VERHELLE. I do not specifically recall, sir. I think the circumstances are possibly outlined in the operating committee minutes of that particular day.

Mr. PECORA. What were the dangers to which you referred in this memorandum?

Mr. VERHELLE. Predicated on the same theory as the present rules and regulations recently covered by the Banking Act of 1933 are predicated upon.

The CHAIRMAN. Had many loans been made to employees?

Mr. VERHELLE. No new loans were made to employees at that time, sir.

The CHAIRMAN. I did not get you.

Mr. VERHELLE. No new loans were made to employees at that time, sir.

Mr. PECORA. No new loans?

Mr. VERHELLE. Not to my knowledge.

Mr. PECORA. The chairman did not ask you that.

Mr. VERHELLE. I beg your pardon.

The CHAIRMAN. I asked you if loans had been made to employees?
Mr. VERHELLE. Yes, sir.

The CHAIRMAN. We will take a recess now until 2 o'clock.

(Whereupon, at 1 p.m., Tuesday, Jan. 30, 1934, a recess was taken until 2 p.m. of the same day.)

AFTERNOON SESSION

Upon the expiration of the noon recess the committee reconvened at 2 o'clock p.m.

The CHAIRMAN. The committee will come to order, please.

Mr. PECORA. Mr. Chairman, may I state for the purpose of the record that communication has been received from Dr. C. R. Davis, of Detroit, Mich., in which in substance he states that, owing to the physical condition of Mr. Donald N. Sweeny, the attendance of Mr. Sweeny before this committee in response to a subpena which has been served upon him would subject Mr. Sweeny to possible serious consequences to his health. He indicates further that Mr. Sweeny is willing to give such testimony as may be desired of him at his bedside in his home.

TESTIMONY OF JOSEPH F. VERHELLE-Resumed

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Mr. PECORA. Mr. Verhelle, among the other memoranda which you produced last week is this one marked "Committee's Exhibit No. 17 for identification as of January 25, 1934 ", which purports to be copy of a memorandum submitted by you to Mr. Wilson W. Mills. chairman of the board, First Wayne National Bank, dated May 5, 1932. Will you look at the document in question and tell me if it is a true and correct copy of the memorandum submitted by you to Mr. Mills on or about that date?

Mr. VERHELLE. It is.

Mr. PECORA. I offer it in evidence.

The CHAIRMAN. Let it be admitted.

(Memorandum from Joseph F. Verhelle to Wilson W. Mills, dated May 5, 1932, previously marked for identification, upon being admitted in evidence, was designated "Committee Exhibit No. 99, Jan. 30, 1934 ", and appears in full at the end of today's record.)

Mr. PECORA. Among the rules that you recommended in this memorandum be adopted by the bank is the following, designated as "Item No. 12":

That a report be submitted to the loan groups by the operating end of the loan department-that is, the discount cage-which report will go to all of the loaning officers and which will cover all loans. The loaning officers should not have access to the liability ledgers nor to the notes, and all loans should be reviewed by the entire group. This procedure involves considerable explanation, all of which has been covered in memorandums previously submitted and which we will be glad to review with you at your pleasure.

What reason did you have, or what reasons did you have, for advancing this particular recommendation?

Mr. VERHELLE. A note to a bank is about as important to it as its cash. The liability record itself retains practically the same posi tion. It was always very difficult to keep the liability records in balance and to keep the notes properly balanced up. It was with that in mind, together with the fact that it was better practice to definitely place the responsibility for the notes in the hands of some specific individual or limited number of individuals, that that recommendation was made.

Mr. PECORA. Why did you consider it undesirable that the loaning officers should not have access to the liability ledgers?

Mr. VERHELLE. There are quite a number of reasons for that, and it is general practice to keep the liability ledgers and the notes directly under the control of others than those handling the notes. It serves many purposes, the principal and outstanding one being that the discount teller will normally see to it that the new note taken either as a renewal or a part renewal will have and contain all of the endorsements that the original note contained; that the same individuals will definitely be liable therefor on the renewed note as they were on the old note. I think that is about the total. Mr. PECORA. Now, Mr. Verhelle, why did you recommend in this memorandum that the loaning officers should not have access to the notes?

Mr. VERHELLE. My explanation on the endorsements pertained to the notes. The liability ledger is merely a ledger sheet containing the debits and credits, the amount, that is, the payments and the

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amounts loaned out in connection with that account, and acts more or less as a control on the notes themselves, so that you require two records in order to determine your loaning position. One is your liability record, which determines for you the amount of money you have loaned out and outstanding, and through those records you can determine the direct borrower normally, and the note itself indicates, generally speaking, two other facts not covered by the liability record, one of which is the collateral securing the note and/or the other is the record of the endorsers of the note.

Mr. PECORA. Well, now, Mr. Verhelle, hadn't you found something in your confidential investigation of the bank which prompted you to make the specific recommendation that loaning officers should not be permitted access either to the liability ledgers or to the notes themselves?

Mr. VERHELLE. I think that that entire memorandum is rendered practically simultaneously with or just prior to the rendering of this other report and that the two of them are definitely connected. Mr. PECORA. This memorandum is dated May 5, 1932. Your confidential report to Mr. Mills is dated May 18, 1932, or just about 2 weeks after this memorandum. What had you found in your investigation of this bank that prompted you specifically to recommend the adoption of a rule which would prohibit the loaning officers of the bank from having access either to the notes or to the liability ledgers?

Mr. VERHELLE. I would say that the first and outstanding point was the difficulty of balancing the notes and the liability ledgers themselves.

Mr. PECORA, How was that difficulty enhanced or created by the loaning officers having access to the records and papers of the bank? Mr. VERHELLE. Because quite frequently they would call for a record and fail to return it, and the result would be that it would be necessary to check out the term in which liability card is missing, and it is very definitely proper practice and common in the majority of institutions to restrict the use of the liability ledgers and the use of the notes to one or very few specific individuals. It must be borne in mind that there were a very large number of loaning officers here, and it might sometimes be difficult to determine just who had it, because one man might pass it on to another, and so forth.

Mr. PECORA. Is that the primary and principal reason why you recommended this rule?

Mr. VERHELLE. I would say that that was probably the outstanding consideration in the recommendation of that rule.

Mr. PECORA. Now you said that this memorandum of May 5, 1932, that contains this recommendation is to be read in connection with your confidential memorandum of May 18, 1932.

Mr. VERHELLE. Yes, sir.

Mr. PECORA. I find in your confidential memorandum of May 18, 1932, which is Exhibit No. 95 in evidence, the following statement that you incorporated in it:

Before entering into a discussion on the types of transactions involving the officers of the bank, it should be stated that under the systems in use it was entirely possible for a loaning officer to borrow or loan to himself or anyone else and discharge his liability without the matter coming to the attention of those concerned.

Does that item embodied in your confidential memorandum gest to you the reason why you recommended this rule?

sug.

Mr. VERHELLE. The carrying out of that particular rule would not have eliminated that possibility.

Mr. PECORA. It would have reduced it to a minimum perhaps? Mr. VERHELLE. It would have reduced it some, possibly, but it would not have eliminated it definitely.

your

Mr. PECORA. I do not know why you called attention in confidential memorandum to the possibility under the existing sys tem in the bank for loaning officers to make loans to themselves and discharge the obligation without anyone else learning of the transaction.

Mr. VERHELLE. Well, there is no reason why that particular rule that you have quoted there should of necessity stop that possibility. Mr. PECORA. Except that if your rule, the rule you recommend were adopted, such a loaning officer could not go to the bank's records and take out his note-isn't that so?

Mr. VERHELLE. No, sir; it is not.

Mr. PECORA. Why not?

Mr. VERHELLE. Well, just a simple removal of that note from that file would still have left a record behind it that would have indicated who was owing and how much. That is, there still would have been the liability card and there still would have been the journals of the department, through which it could be checked, and certainly the removal of the note would have left the department out of balance that night so that it would be necessary for the clerks to check out their work and determine just what note was missing. That rule would not have eliminated that possibility to which you refer.

Mr. PECORA. In your memorandum of May 18, 1932, immediately following the item that I have just read to you therefrom appears this: "It is understood that definite steps have been taken to place the liability ledgers under control and remove the original notes from the control of the loaning officers." I infer from that that the rule which you recommended in your report or memorandum of May 5, 1932 had been adopted?

Mr. VERHELLE. I have a notion that it was, sir.

Mr. PECORA. And the fact that you refer to the change in the system whereby liability ledgers were placed under control and the original notes removed from the control of the loaning officers, right after you call attention to the weakness of the system which made it possible for a loaning officer of the bank to borrow from the bank and discharge his liability without its coming to the knowledge of anybody else, suggests to me that you had found that that practice had been followed by loaning officers of the bank.

Mr. VERHELLE. Well, my recommendations were not necessarily based on things that had gone before but on the possibilities of the things that could be done as well, and therefore to check the system to determine the possibilities that lay in that system in order to tie up all of the methods and means whereby any practices that were not proper could be eliminated.

Mr. PECORA. Well, now, tell us frankly if you had found those practices to have been followed on the part of the loaning officers of the bank.