Mr. THOMAS. Yes; he was an employee at that time of the First
Detroit Co. He was never an employee of the trust company.
Mr. PECORA. What is your name, sir?

Mr. THOMAS. W. J. Thomas.

Mr. PECORA. Mr. Thomas, the other day you asked me if you could be accorded the privilege of sitting with some of the gentlemen who might be called as witnesses here for the purpose of assisting them in the giving of their testimony. Do you recall that? Mr. THOMAS. Yes, sir.

Mr. PECORA. And I told you that if you so wished, the privilege would undoubtedly be accorded to you. Do you desire that privilege in connection with the examination of Mr. Stone?

Mr. THOMAS. Mr. Stone and Mr. Browning, if that is agreeable to the committee.

Mr. PECORA. In view of the fact that you may be called upon in the course of the examination of Mr. Stone and Mr. Browning to supply statements or evidence, I suggest that the chairman now administer the oath to Mr. Thomas as a witness.

The CHAIRMAN (addressing Mr. Thomas). You solemnly swear that the testimony that you will give in these hearings will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. THOMAS. I do.

The CHAIRMAN. Give your name and address and occupation, please.

Mr. THOMAS. William J. Thomas, 279 La Salle Place, Grosse Pointe, Mich.; occupation, treasurer of the Detroit Trust Co.

Mr. PECORA. Mr. Stone, do you know of any mortgage bonds issued by the Watson Realty Co. that in due course were acquired by the Detroit Trust Co. and thereafter sold to various trust estates which were being administered by or which had been committed to the care of the Detroit Trust Co.!

Mr. STONE. No; I would not be familiar with them.

Mr. PECORA. Do you recall any security of that kind?

Mr. STONE. No, sir.

Mr. PECORA. Do you, Mr. Thomas?

Mr. THOMAS. I recall the name of the issue; yes-Watson Realty Co.

Mr. PECORA. Mr. Thomas, will you describe briefly the nature of these mortgage bonds issued by the Watson Realty Co.!

Mr. THOMAS. I am afraid I cannot do that. I assume it is a first mortgage on real estate. I do not even know the type of property. Mr. PECORA. It was not a listed security, was it?

Mr. THOMAS. I doubt it. There were very few of the Detroit firstmortgage real estate bonds that were listed.

Mr. PECORA. I have a memorandum signed by Mr. Felix M. Farrell, who is known to you, indicating that on April 23, 1930, the First Detroit Co., which is one of the investment or security affiliates or units of the Detroit Bankers Co., acquired certain of these Watson Realty Co. mortgage bonds at 9312, transferred them to the Detroit Trust Co. on the same day at 95.759, and that the Detroit Trust Co. sold those mortgage bonds, some of them at par and some at 97, to various trusts committed to its care. Are you familiar with any of those facts?

Mr. THOMAS. Of course, I do not remember the details of those particular sales. I know that many sales were made of that nature. Mr. PECORA. About how many? Could you give the committee an idea, even approximately, of the amount of mortgage bonds that were acquired first by the First Detroit Co., transferred at an increased price to the Detroit Trust Co., and then sold by the Detroit Trust Co. at a further increase in price to trusts that it had charge of?

Mr. THOMAS. I would hate to hazard a guess on that. You mean. from the time the First Detroit Co. was organized up until the present time?

Mr. PECORA. Well, if you can give it to us for that period of time. Mr. THOMAS. I have no conception of the volume, really. Of course, I do know

Mr. PECORA. You were the treasurer of the Detroit Trust Co., you say?

Mr. THOMAS. Yes; but all those sales passed through what we call our trust investment department. I had very little jurisdiction over those sales. I can say this, that in cases of that kind, if the Detroit Trust Co. made a profit they were sold entirely to so-called prevailing market price trusts at the market at that time. Where would get your market price for mortgage bonds of that character it would be a price that the First Detroit Co., or whomever the broker might be, was selling them to outside customers.

you

Mr. PECORA. That would be a market price more or less controlled by the Detroit Co., would it not, under those circumstances! Mr. THOMAS. Not necessarily. The bonds may have been dealt in by various brokers in Detroit.

Mr. PECORA. Who fixed those prices, and what quotations were obtained?

Mr. THOMAS. I suppose, just brokers. I know of no other way. Mr. PECORA. Mr. Stone, let me ask you this. In view of the very splendid sentiments that you gave expression to in your address in February of 1932, can you reconcile transactions of the kind that I have just been discussing with Mr. Thomas with your sentiments that in serving and advising clients the trust officer is not influenced in the slightest by the compensation that his employer receives?

Mr. STONE. I do not see that it violates that, inasmuch as they were placed in the trusts by written agreement with the people who created the trusts, at prices to which they agreed; and where there are no such arrangements made with the creators of the trust, they were put in at cost without profit to the trust company.

Mr. PECORA. In those instances were not the securities sold by the trust company itself, the securities sold to those trusts? Mr. STONE. Yes.

Mr. PECORA. Did the trust company select securities in many instances consisting of mortgage bond certificates which it had acquired at a lower price from the First Detroit Co. which in turn had acquired them at a lower price than that at which it sold to the Detroit Trust Co.?

Mr. STONE. Yes; but I would have to repeat what I said before, that the price was agreed to by the makers of the trust, and if there was no such special arrangement in the trust, the price was cost to the trust company-the First Detroit Co., in some cases.

Mr. PECORA. Can you produce the text of any such agreement?
Mr. STONE. I think we have a copy of the clause.

Mr. PECORA. I would like to have it.

(Witness produces a paper which he hands to Mr. Pecora.) Mr. PECORA. The clause that you have produced here reads as follows [reading]:

In the investment and reinvestment of funds by the trustee thereunder said trustee is authorized to purchase investments from the Detroit Trust Co., owned by it, and at prevailing market prices. That is, prices for which such securities were sold to its customers.

That is the clause you referred to, Mr. Stone, is it?
Mr. STONE. Yes, sir.

Mr. PECORA. In the cases that have been alluded to here, involving the sale to trusts of mortgage bond certificates of the Watson Realty Co., there appears to have been a spread in those certificates of 931/2, which was the unit cost to the First Detroit Co., to par in some instances, which was the price at which they were sold to the trusts. Do you consider that a justifiable act on the part of a trust company that is administering estates and handling trust estates, with a realization of the sacred character of the trust imposed on them? Mr. STONE. You mean a spread of 932 to par?

Mr. PECORA. Yes.

Mr. STONE. Six and a half points. I think, in general, yes. I think it all depends upon the nature of the security, the amount of the work, the expense involved in making the investigation and making the appraisal, examining into the income, and the expense to which the trust company had been put in connection with it.

Mr. PECORA. You made those investigations and had those appraisals made with regard to mortgage bond certificates that the trust company acquired from the investment affiliate of the Detroit Bankers Co.?

Mr. STONE. I think not. I think the investment company would make that itself.

Mr. PECORA. And the Detroit Trust Co. was owned by the same interests that owned the investment unit; is not that so?

Mr. STONE. Yes-what is that question, please?

Mr. PECORA. The Trust Co. at that time was owned by the same company that owned the investment unit in question, the First Detroit Co.?

Mr. STONE. That is correct.

Mr. PECORA. In the case of trusts that were operating under an agreement containing the clause that has been read into the record here, were the persons interested in the trusts told of the price which the Detroit Trust Co. had paid for those mortgage-bond certificates?

Mr. STONE. I imagine not. I would not be sure of any specific case, but I think not.

Mr. PECORA. Would you say that in any case they were told of the fact that those securities had been in turn acquired by the Detroit Trust Co. from the investment affiliate of the Detroit Bankers Co.?

Mr. STONE. Oh, yes. I should think the vouchers would show a direct purchase from the First Detroit Co.

Mr. PECORA. But the terms of purchase were not indicated. Mr. STONE. If they bought direct from the First Detroit Co., they would be.

Mr. PECORA. Do you know of such cases?

Mr. STONE. Not personally. I did not have anything to do with them.

Senator ADAMs. For my own information, do I understand that the Trust Co., which became the trustee, was practically buying from itself, for the use of this trust, securities, and making a profit out of the transaction?

Mr. PECORA. It goes even beyond that. The Trust Co. was a unit of the Detroit Bankers Co., and it purchased mortgage-bond certifi cates from one of the investment affiliates of the same company, the Detroit Bankers Co., at a price which yielded a profit to the investment affiliate, and then sold those to the trust estates at a still higher price.

Senator ADAMS. Was the trust estate charged a commission or an expense charge in handling the money?

Mr. PECORA. Yes. That is true, is it not, Mr. Stone?

Mr. STONE. Yes.

Mr. PECORA. The Trust Co. collected its usual fees and commis. sions, those fixed by the statute, in addition to the profit it made through the mark-up of prices.

Mr. STONE. I repeat again, in those cases where they had permission to do so by the terms of the trust investment; not in other cases.

Mr. PECORA. Yes; I say in those cases, in addition to making profit that it realized from the sale of its own securities to the trust estates, it also collected the fees and commissions that it was authorized by law to receive as trustee, did it not?

Mr. STONE. I think where there was an investment fee provided in the instrument itself there was no profit taken. Where there was not an investment fee there was a profit taken only in cases where the instrument expressly provided for it.

Mr. PECORA. And in those cases, where an investment fee was provided for, did the Trust Co. also charge a fee or commission for the handling of the investment funds in addition to the investment fee?

Mr. STONE. I think not,

Mr. PECORA. Are you sure of that, Mr. Stone?

Mr. STONE. No; I am not sure. I was not the officer who administered that, so I am speaking not from very definite memory about it.

Mr. PECORA. Mr. Stone, is there any officer or former officer of the Detroit Trust Co. now available who had a longer experience and affiliation with the Trust Co. than you have had?

Mr. STONE. No; not in all capacities. That is true.

Senator COUZENS. You know, Mr. Stone, that in addition to the profit on these transactions which Mr. Pecora has been talking about, you made a collection charge even though you waived an investment charge?

Mr. STONE. Oh, yes; that is for services as trustee.
Mr. PECORA. That is what I am getting at.

Mr. STONE. Yes.

Senator COUZENS. That is what Senator Adams was driving at. Senator ADAMS. In addition to that, Senator Couzens, the question in my mind was not only as to the propriety, but to the legality of a purchase by a trustee for a trust from itself, regardless of the price at which it is purchased.

Senator COUZENS. I think that memorandum gave that authority.
The CHAIRMAN. It depends on the trust agreement.

Senator ADAMS. I will go further than that and question the right of the trustee to make contracts with the cestui que trust which enabled it to have the opportunity to take advantage of it.

Mr. PECORA. I know of no other cases, Senator, where an agent or trustee would be permitted to keep a profit which it made under similar circumstances.

The CHAIRMAN. Did the Trust Co. also have the right, after acquiring certain securities for a trust estate, to change that investment at its will, and sell those securities for the trust estate, and buy other securities for the trust estate?

Mr. STONE. Oh, yes; in the performance of its regular duties as a trustee.

The CHAIRMAN. They could do that at will, without consulting the cestui que trust?

Mr. STONE. Some trust instruments provide for approval by cestui que trusts. Some do not. Some are minors who have not judgment and discretion enough. In some there are no provisions at all giving anybody, where it is a cestui que trust or co-trustee, powers of that kind, and in those cases the Trust Co. had to exercise it alone. Where the instrument provided for consultation and getting the approval of the cestui que trust or co-trustees, they got it. Then there were frequent accounts, quarterly, semiannually, and annually, two copies of which were sent to the cestui que trust, showing all the facts, and filed in court, in the case of court trusts, so that they were all fully informed.

Mr. PECORA. Mr. Thomas, I want to show you a statement signed by Felix M. Farrell, under date of January 9, 1934. Will you look at it and tell me if you recognize the signature to be that of Mr. Farrell?

Mr. THOMAS (after examining paper). I think that is Mr. Farrell's signature, although I have only seen it on one or two occasions. I am not familiar with the exhibit at all. I do not believe I have ever seen it.

Mr. PECORA, I offer it in evidence.

The CHAIRMAN. Let it be admitted.

(Statement January 9, 1934, signed Felix M. Farrell, was received in evidence, marked" Committee Exhibit 102, January 30, 1934", and the same will be found at the conclusion of today's proceedings.) Mr. PECORA. Mr. Stone, do you know a gentleman employed as an auditor by the Detroit Trust Co., by the name of Van Every? Mr. STONE. Yes.

Mr. PECORA. I show you this document, which bears the signature reading "F. C. Van Every", as nearly as I can make it out. Will you look at it and tell me if you recognize it to be the signature and handwriting of Mr. Van Every?

Mr. STONE. (after examining paper). Yes, I think it is.