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I now show you what purports to be a photostatic reproduction of a letter purported to have been sent by Mr. Shorts as president of the Second National Bank & Trust Co. of Saginaw to Mr. S. Sloan Colt, president of the Bankers Trust Co., dated March 3, 1933, which, as you will recall, was after the banks were closed as a result of the decree of the Governor of Michigan last spring. Will you look at this photostatic copy of such letter and tell us if you recog. nize the signature thereon to be that of Mr. R. Perry Shorts? [After a pause.] I merely asked you to look at the signature, Mr. Lord, to see if you identify it.

Mr. LORD. Yes, I think it is the signature.
Mr. PECORA. I offer that in evidence.
The CHAIRMAN. Let it be admitted.

(Letter dated Mar. 3, 1933, from R. Perry Shorts to S. Sloan Colt, was thereupon designated " Committee Exhibit No. 111, Jan. 23. 1934 ", a portion of which appears in the record immediately following, where read by Mr. Pecora.)

Mr. PECORA. I do not think it is necessary to spread this document on the record, but I do want to read a certain portion therefrom, as follows. The letter is dated March 3, 1933, addressed to S. Sloan Colt, President, Bankers Trust Co., New York, N.Y. It contains the following provision, among others (reading]:

I have resisted every effort on the part of the present officers of the Group Co. to induce us to continue as a unit of the Group Holding Co. and thus rehabilitate the organization through increased efficiency, etc., in the hope of ultimately working out something for the group picture. We do not want any more Detroit efficiency or overhead organization loaded onto our institution. What we need right now is money and no theoretical ideas promulgated by men who are largely responsible for our present predicament. We want to row our own boat without any towline attached to Detroit, and we feel that in the present financial storm, with the big ship in Detroit rapidly sinking, it is up to them to cut the towline and let us paddle our own canoe. Furthermore, the organization of a new bank to take over our bank would be a disastrous and foolish procedure. We have a very large and profitable trust department in our bank and to transfer these court trusts from the old institution to the new would require court action, approval of beneficiaries affected, etc., and enough ordinary red tape to completely entangle anyone, and with little promise of success. What court would want to transfer a sacred trust held for the benefit of widows and children from one institution, which had gotten into financial difficulties, to another institution under the same management.

Now, the “big ship” at Detroit referred to in this letter in the following excerpt undoubtedly alluded to the Group Co., did it not? I will read the excerpt [reading]:

We want to row our own boat without any towline attached to Detroit, and we feel that in the present financial storm, with the big ship in Detroit rapidly sinking, it is up to them to cut the towline and let us paddle our own canoe.

Mr. LORD. I assume that is what he meant.
Senator COUZENS. Why was that addressed to Mr. Colt!
Mr. LORD. I haven't any idea. I never saw the letter.
Senator COUZENS. He had no interest in the group, did he?
Mr. LORD. Except his bank had loaned the group money.

Mr. PECORA. Oh, yes; the Bankers Trust Co. had made a loan of $7,000,000 to the Group Co., had it not?

Mr. LORD. That is correct.

Senator COUZENS. Yes; but I mean they had no control of the management, did they?

Mr. LORD. I might mention in that connection that Mr. Perry Shorts was chairman of the executive committee of the Group Co.

Senator COUZENS. How long had he been chairman? Mr. LORD. A year. Mr. PECORA. Was this the first time you learned of the opinion which Mr. Shorts expressed regarding the management of the group !

Mr. LORD. I think so.

Mr. PECORA. Whom do you suppose he referred to when he said in this letter, What we need right now is money and no theoretical ideas promulgated by men who are largely responsible for our pres. ent predicament”?

Mr. LORD. I have no idea, unless he is speaking of the whole board.
Mr. PECORA. Of the Group Co.!
Mr. LORD. Yes.

Mr. PECORA. I show you what purports to be an intragroup memorandum addressed by you, under date of December 22, 1930. Will you look at it and tell me if you recognize it as such an intragroup memoradum which you caused to be sent out to the directors of the group on the subject of confidential information for directors?

Mr. LORD. Yes, sir.

Mr. PECORA. I offer it in evidence, but it need not be spread in full on the record.

(Photostatic copy of intragroup memorandum dated Dec. 22, 1930, addressed by Mr. Lord to the directors of the group, was received in evidence, marked “ Committee's Exhibit No. 112, January 23, 1934.")

Mr. PECORA. In this intragroup memorandum addressed by you to the directors, marked in evidence as committee exhibit no. 112, appears the following statement referring to the Union Guardian Trust Co. [reading]:

In August the Trust Co. set up a special reserve of $100,000 to cover possible losses on other real estate." Up to date the sales of real estate acquired under foreclosure have resulted in a moderate profit, and this $100,000 special reserve on December 17 showed a balance of $109,600. Including this reserve, the Trust Co. has “hidden assets" and reserves which aggregate nearly $900,000.

What was this item of " hidden assets ” referred to?

Mr. Lord. I cannot tell you now, Mr. Pecora. That paragraph and the information contained in it came, as I recall it, from Mr. Stalker, of the Union Guardian Trust Co.; and in getting out the memorandum I tried to cover all the different phases of the situation. I cannot give you the details at the present time. I was never active in the Trust Co.

Mr. PECORA. But this memorandum is dated December 22, 1930, and at that time you were the executive head of the Group Co.

Mr. LORD. Yes; but I was never active as an officer in the Trust Co.; and the information and the figures had come to me from the units themselves.

Mr. PECORA. In view of the fact that special mention was made of these hidden assets in this memorandum that you prepared, can you not tell us what you know about those hidden assets?

Mr. LORD. I have no idea what they were. That information, as I

say, came from the Trust Co.

I am

Mr. PECORA. Why should the Trust Co. have had any hidden assets?

Mr. LORD. Reserves.
Mr. PECORA. Why should they be hidden?

Mr. LORD. Items carried at less than their real worth-I suppose that is the answer.

Mr. PECORA. Why should they be hidden?

Mr. LORD. Many banking institutions carry assets that are written down and are worth a great deal more, not on their books at that time, than market value.

Mr. PECORA. From whom were those assets and reserves of nearly $900,000 hidden?

Mr. Lord. They are part of the statement--in the statement; they are not hidden from anybody.

Mr. PECORA. Why do you refer to them as hidden assets? simply questioning you about language which you employed in your own memorandum to the directors.

Mr. LORD. That is a common term. For instance, many banks, where they write off losses and get recoveries, do not put the recoreries back on their books—simply carry them at a nominal figure, but keep those reserved to take care of any possible future losses. I assume that is what they were.

Mr. PECORA. Do you know of any reason why they should not be clearly set forth?

Mr. Lord. No particular reason except it was the conservative thing to do, to keep them.

Mr. PECORA. In this exhibit no. 112 appears also the following statement under the caption of “Earnings, confidential ” [reading]:

While it is the usual policy of banking institutions to make only annual reports to the stockholders, we are giving you, as a director, figures for 11 months with the understanding that they will, of course, be treated in confidence. The banks and trust companies alone for 11 months showed about $26,255,000 gross income and about $5,240,000 net operating profits prior to

Substantial reserves totaling more than $1,500,000 have been set up in the various banks during this period, leaving something over $3,700,000 after these reserves.

What was the occasion for giving to the directors at that time confidential information as to the earnings?

Mr. Lord. Don't you think as directors they are entitled to have it? I do.

Mr. PECORA. Why were they not given in connection with that confidential information the figures showing the condition of those units of the Group Co. which were not banking units or trust companies?

Mr. LORD. In connection with this report?
Mr. PECORA. Yes.

Mr. LORD. At meetings of the directors of the Group Co. there was a balance sheet and earning figures and statement of condition of every unit, a large book in which on the left hand side were the items that go to make up the balance sheet. There were 8 or 9 columns, and the figures of every banking unit were there. That book was at every directors' meeting and the figures were read off and discussed, and later they were put in separate books so that each clirector had a copy. But the book itself was always there at the lirectors' meetings.

reselves.

Mr. PECORA. You were in attendance before this committee last Friday, were you not, when Mr. Bodman was testifying ?

Mr. LORD. I was.

Mr. PECORA. Did you hear the testimony of Mr. Bodman in connection with which there was introduced in evidence here as an exhibit a letter which he addressed to you as president of the Group Co., in which he criticized the way that information was given to members of the executive committee of the board of directors of the Group Co. at their various meetings?

Mr. LORD. I heard it; yes, sir. I think it was a very constructive criticism, and after that we tried to follow his ideas.

Mr. PECORA. Were his ideas followed ?

Mr. LORD. Yes, sir; they were. Every member of the board and every member of the executive committee later had a book right in front of him with a statement of every single company. Instead of having Patterson stand up with the book with all these statements and read off the figures, which Mr. Bodman said in his memorandum were very difficult to keep in mind, we put before each member of the executive committee or the board a book which contained all of these things.

Mr. PECORA. As I recall that exhibit, which consisted of his letter to you containing the criticism, it was dated some time during the latter part of the year 1931.

Mr. Lori. I believe so; yes.

Mr. PECORA. I think it was in August 1931 from my recollection of the evidence now. Why were those meetings conducted in a fashion that evoked that kind of criticism?

Mr. LORD. I suppose, because the information was given verbally instead of having the information before a man so he could visualize it.

Mr. PECORA. The criticism extended to something more than that, did it not?

Mr. LORD. Well, I do not recall the particular point you have in mind.

Mr. PECORA. In this memorandum you sent to the directors, marked “Committee Exhibit 112", you say further as follows (reading):

Our Securities Companies, in keeping with other securities companies, will show on December 31, 1930, a substantial depreciation in the book cost of their inventory as against market values. Exclusive of this shrinkage, these companies will make an operating profit for the year.

The shrinkage, or the amount of the shrinkage, is nowhere referred to in this memorandum.

Mr. LORD. You could not tell what the figures were going to be at December 31.

Mr. PECORA. This memorandum was dated December 22, 1930, 9 days before the end of the year.

Mr. LORD. I know; but it is customary in the securities business to write your inventory down at stated periods, usually at the end of the year, and on December 22 there was no attempt or effort to write them down as of

Mr. PECORA. Did the shrinkage exceed the operating profits of the year?

Mr. LORD. I assume it did, very substantially.

Mr. Pecora. I note the following statement in this memorandum which is marked “ Committee Exhibit 112” (reading):

Through the transfer of the $5,000,000 capital stock of the New Union Building Company (which building is 93% rented), formerly owned by the Union Trust Company, to ownership by the Group Company, it is estimated that an ultimate saving of more than $150,000 per annum in taxes will be made. By this transaction the directly owned assets of the Group Company were increased by $5,000,000, while there was a corresponding decrease of this same amount in the capital structure of the Union Guardian Trust Company.

What does that relate to?

Mr. Lord. I testified as to that previously, Mr. Pecora, and stated I estimated the saving at $50,000. I had forgotten the figure; but that I suppose is more accurate because that was given by our tax man. It refers to the liquidating dividend by the Trust Co. to the Group Co. in the form of stock in the new Union Building Co. which was carried on the books at the Union Guardian Trust Co. at approximately $5,000,000, as I recall it.

Mr. PECORA. In other words, this refers to that process by which the Group Co. obtained the ownership or control of $5,000,000 of assets out of the capital structure of the Union Guardian Trust Co.?

Mr. LORD. That is correct.

Mr. PECORA. And to that extent, to the extent of the reduction of the capital assets of the Union Guardian Trust Co. by $5,000,000, that amount of security for depositors was taken out of the reach of the depositors of the Trust Co.?

Mr. LORD. If it had any value; yes, sir. It was an equity.

Mr. PECORA. It is spoken of here as something of value, because the building in question is referred to as being 93 percent rented.

Mr. LORD. That is correct.

Mr. PECORA. So by that process the assets of the Group Co. as a separate legal entity from the Union Guardian Trust Co. were increased by $5,000,000, and the assets of the Union Guardian Trust Co. were depleted by the same amount?

Mr. LORD. That is correct.

Mr. PECORA. All to the disadvantage of the stockholders of the Trust Co. and the other creditors?

Mr. LORD. I am not sure that it was any disadvantage.
Mr. PECORA. They would have that much less available to them.
Mr. LORD. The stockholders?
Mr. PECORA. No; the depositors.
Mr. LORD. Yes.
Mr. PECORA. That is no disadvantage?
Mr. LORD. The Trust Co. had sufficient capital left-
Mr. PECORA. I say, that is no disadvantage, in your opinion?
Mr. LORD. I assume it is a disadvantage to take anything out.

Mr. PECORA. Reference has been made in the testimony heretofore to a corporation called Congress Corporation. Will you tell us briefly what you know about the Congress Corporation ?

Mr. LORD. I know very little about it except that it was a corporation that they organized specifically to handle the lifted-out assets taken out of the various banks.

Mr. PECORA. It was organized at the instance of the Group Co., was it not?

Mr. LORD. It was.

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