STOCK EXCHANGE PRACTICES

FRIDAY, JANUARY 5, 1934

UNITED STATES SENATE,

SUBCOMMITTEE OF THE COMMITTEE ON BANKING AND CURRENCY,

Washington, D.C.

The subcommittee met at 10 a.m., pursuant to adjournment on yesterday, in Room No. 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding.

Present: Senators Fletcher (chairman), Adams (proxy for Costigan), 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.

The CHAIRMAN. The subcommittee will come to order. You may proceed, Mr. Pecora.

Mr. PECORA. Mr. Kanzler, will you resume the stand, please? TESTIMONY OF ERNEST KANZLER, DETROIT, MICH.-Resumed

Mr. PECORA. Mr. Kanzler, referring again to the annual report, or the remarks, whatever you call them, that you made to the stockholders of the group at the last annual meeting of those stockholders, held on January 24 last, I want to call your attention to this statement, which I am reading from committee Exhibit No. 63, in evidence as of January 4, 1934:

During 1932, a difficult period for liquidation, securities carried on the books at $1,712,821 were sold with a resultant net loss of only $42,201, accomplishing this liquidation by the sale of the less desirable holdings and retaining only the highest grade securities.

On yesterday when you were on the stand I asked you if you knew to whom the securities referred to in this part of your report were sold, and you undertook to obtain the information so as to be in a position to give it to us today. Have you succeeded in doing so?

Mr. KANZLER I called Dr. Badger, from whom that language and those facts were obtained. He advised me that those securities were sold in the market, not to the units. He said that he could almost state as a fact that none of them had been sold to any of the units. Then he said that he did recall some discussion as to whether or not some amount might not be sold to 1 or 2 units, some securities that had been written down and a reserve set up the previous year against them, and that they might have disposed of those to 1 or 2 units. He said the amount involved might have been $10,000, but that, as his memory served him, it was not more than $10,000 that was involved, and that they were then transferred at the then market value.

Mr. PECORA. Your statement to the stockholders was to the effect that securities carried on the books of the securities affiliate of the group at $1,712,821 were sold with a resultant net loss of only $42,201 during the year 1932, which you recognized was a difficult period for the liquidation of securities.

Mr. KANZLER. Yes, sir.

Mr. PECORA. You now say that those securities were sold with a resultant net loss of only $42,201 in the open market during that difficult year of liquidation.

Mr. KANZLER. They had been written down to those levels so that they could be sold at that time.

Mr. PECORA. You mean that the figure of $1,712,821 represents the marked-down valuation?

Mr. KANZLER. Having written the cost down on the books, yes, sir.

Mr. PECORA. Well, that does not appear from the statement you made here, does it?

Mr. KANZLER. That is what I

Mr. PECORA (interposing). Do you think that is the meaning that could be placed upon the statement you made to the stockholders at the last annual meeting?

Mr. KANZLER. That is the meaning that I assumed Dr. Badger meant it to mean, and I think that would be the meaning I would take from reading that language.

Mr. PECORA. Now, when you told the stockholders that those securities had been liquidated at a resultant net loss of only $42,201, was it your intent to tell the stockholders that that was the entire net loss resulting to the securities affiliate from this purchase and sale of liquidation of those securities?

Mr. KANZLER. No, sir. That would be the loss for that year's operations. If there had been reserves in preceding years, and written down, then they would be on the books of the corporation at those figures. Having been sold during the year the loss from those figures was $42,201. That is what I assumed that statement to mean.

Senator COUZENS. Were they carried on the books of the corporation at the beginning of the year at the figures you have stated, or were they cut down during that current year?

Mr. KANZLER. I understand that to mean, Senator Couzens, that that was the figure to which they had been written down.

Mr. PECORA. How long before the liquidation had the mark-down been made?

Mr. KANZLER. I presume that that meant at the beginning of the year.

Mr. PECORA. Well, can't you tell us definitely?

Mr. KANZLER. No, sir; I don't know.

The CHAIRMAN. How much was the write-off?

Mr. KANZLER. Prior to that time?

The CHAIRMAN. Yes.

Mr. KANZLER. I have no idea.

Mr. PECORA. Do you think that telling the stockholders that over $1,700,000 worth of securities carried on the books of the securities affiliate at that figure had been liquidated or sold with a resultant net loss of only $42,201 gave the stockholders a true picture of what had actually happened in that respect?

Mr. KANZLER. I can say this, that the thing it means to me was what I think it would mean to any stockholder, and that is, that the securities had been written down to $1,712,000 and that those securities had been sold during the year.

Mr. PECORA. Was there anything in this statement to the stockholders indicating that the securities had been written down to this figure of $1,712,000?

Mr. KANZLER. Only that they were carried on the books at that figure.

Mr. PECORA. But they might have been carried on the books at the original purchase figure. There is nothing in your statement to the stockholders to inform them, or which would inform them, that that figure of $1,712,000 was a marked-down figure, is there?

Mr. KANZLER. Well, I think it is usual that from year to year securities are marked down to certain figures, and then when sold the loss that occurs during that particular year is the loss between the price at which they were sold and the figure at which they then stood on the books.

Mr. PECORA. Now, Mr. Kanzler, you were a director of the Guardian Detroit Union Group, Inc., from the inception of that corporation, weren't you?

Mr. KANZLER. Yes, sir.

Mr. PECORA. And vice president from its inception, or one of the vice presidents?

Mr. Kanzler. I do not recall what the officer structure was. There were a lot of inactive officers named when it was first formed. Mr. PECORA. Were you one of those inactive officers?

Mr. KANZLER. I was of the Guardian Detroit Group. I am not certain that I was of the Guardian Detroit Union Group.

Mr. PECORA. According to our examination of the corporate records you were a director and vice president, or one of the vice presidents, of the Guardian Detroit Union Group, Inc., from its inception, that is, during the year 1929, and you continued as such during the year 1930, and that in 1931 you became the chairman of the board. Mr. KANZLER. That was in 1932. I think.

Mr. PECORA. The annual report for the year 1931 of the group, that is, the report of the stockholders, carries your name as chairman of the board.

Mr. KANZLER. That report carried the officers-well, the report, you see, was issued in 1932, after the election, and that indicates the officers for the year 1932.

Mr. PECORA. Then you did not become chairman of the board until the annual election in January of 1932?

Mr. KANZLER. That is correct.

Mr. PECORA. As a member of the board of directors, from the inception, I assume you were familiar with the various policies of operation that were initiated from time to time by the group.

Mr. KANZLER. In the way that a director would; yes, sir.

Mr. PECORA. Well, directors are supposed to have a fairly complete knowledge of the corporation of which they are directors, aren't they?

Mr. KANZLER. Yes, sir.

Mr. PECORA. And did you feel that you had that knowledge of the group?

Mr. KANZLER. Well, I devoted time to it, and was informed as to the affairs of the corporation in the normal way.

Mr. PECORA. Now, when did the members of the board of the group, including yourself, first come face to face with a realization that they were fighting a war against the depression?

Mr. KANZLER. I do not know of any particular event at which that happened. I think that things just got progressively worse from year to year and from week to week.

Mr. PECORA. When did they first become conscious of the fact that the war was on?

Mr. KANZLER. I do not believe I can mention any specific date, and I do not believe I can answer for all the directors. I think we all got our ideas as time went on.

Mr. PECORA. Well, you got your ideas rather firmly fixed as to that early in 1930, didn't you?

Mr. KANZLER. Well, in 1930 things were certainly getting worse, there is no question about that.

Mr. PECORA. And with the exception of a few months in the early part of 1930, they became steadily worse, didn't they?

Mr. KANZLER. They progressed and progressed; yes, sir.

Mr. PECORA. And the banking situation, not only in Detroit and throughout the State of Michigan but throughout the country, suffered from those conditions rather acutely, didn't they?

Mr. KANZLER. Yes, sir; they were suffering. There were hopes of an upturn at times, and then they seemed to get worse.

Mr. PECORA. Now, did you as one of the directors of the group help to fix the dividend policy of the group?

Mr. KANZLER. Well, I was one of those who voted from time to time for a dividend. Sometimes I was not present and sometimes I was.

Mr. PECORA. You were cognizant currently of the dividend policy of the group, weren't you?

Mr. KANZLER. Yes, sir. Well, now, I don't know that it was a policy, except that each dividend which was declared was decided upon the facts and circumstances surrounding that dividend.

Mr. PECORA. Well, the dividends declared were generally, or the first dividend declared in 1930 was at a rate around 16 percent on the par value of the group stock, wasn't it?

Mr. KANZLER. Well, I think the invested capital was something like, or at least the book value was something like $60 or $65 a share at that time, and I think the original rate was $3.20.

Mr. PECORA. On a par value of the stock of $20 a share? Mr. KANZLER. Well, I think the par was $20 a share; yes, sir. Mr. PECORA. In order to enable the group to pay those dividends the group had to rely upon dividends it received from the various. units of the group, principally the banking units, didn't it?

Mr. KANZLER. Yes, sir.

Mr. PECORA. As a matter of fact the units other than banking units were we might say liabilities to the group, were they not? Mr. KANZLER. They became such with

Mr. PECORA (interposing). Almost from the start?

Mr. KANZLER. With the depression; yes, sir.

Mr. PECORA. Now, recognizing, as I understand you did early in 1930, that you were engaged in this war against the depression which