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Mr. PECORA. How is it that you know very little about it?
Mr. LORD. I think Mr. Bodman handled the legal end of it. They were very anxious to center in a single organization these assets so they could be properly serviced.
Senator COUZENS. Why could they not be serviced in the Group Co.?
Mr. LORD. Because we did not want to institute suits for collection of notes in the name of the Group Co. We thought it wiser to do it in the form of a separate corporation.
Mr. PECORA. Do you know how this Congress Corporation functioned in that respect?
Mr. LORD. I do not know what you mean by functioning.
Mr. PECORA. You told us what you understood the Congress Corporation was organized for.
Mr. LORD. It had a small group of men who spent all their time in trying to collect these lifted-out assets.
Mr. PECORA. Do you know when it was formed ?
Mr. LORD. I have not the date, no. My recollection is that it was formed some time in 1932.
Mr. PECORA. June 18, 1932. Is that right?
Mr. PECORA. Will you look at this document which I now show you and which purports to be a photostatic reproduction of an intragroup memorandum on the subject of the Congress Corporation, which came from Mr. R. C. Huelsman, of the group organization, under date of February 25, 1932? Please tell me
Please tell me if you recognize it to be a true and correct copy of a memorandum that passed from Mr. Huelsman to officers of the Group Co.?
Mr. LORD. I assume it is correct.
(Photostatic copy of intragroup memorandum dated Feb. 25, 1932, from R. C. Huelsman, on the subject of " Congress Corporation was received in evidence, marked “Committee Exhibit No. 113, Jan. 23, 1934.")
The document received in evidence as committee's exhibit 113 of this date reads as follows (reading]:
COMMITTEE EXHIBIT No. 113
GUARDIAN DETROIT UNION GROUP
Date 2-25-32. From: Mr. R. C. Huelsman
Group Company organization. Subject: Congress Corporation
In discussing with Mr. Patterson certain phases of our Group structure, particularly in connection with the liquidation of some of the companies and in connection with the purchase of assets from some of our banking units, the following plan has suggested itself to us.
In the process of liquidation of these companies and assets, we will probably encounter from time to time contingent liabilities and possibly lawsuits, some of which may involve considerable sums of money. If these companies are merged into the Group Company, or if the assets of such companies are transferred to the Group Company, there is some possibility that such liabilities may also fall to the Group Company. To avoid the possibility of the Group Com. pany becoming liable for any such contingencies as may arise, the idea developed that it would be better to form a new company with a nominal capital and have this company assume the assets and liabilities of any companies which we wish to liquidate. This company could also purchase assets from the banking units in the Group when necessary. In other words, all liquidation matters and special-loan matters would be handled by this company.
Funds required for the purchase of assets could be obtained by a loan from the Group Company. Salaries of officers and employees assigned to such liquidation and special loan department effort as well as other expenses in(urred by them should be paid by the new company. Such expenses should be set out of proceeds of collections received through liquidation of assets. In fact, from time to time there should be dividends available to the Group Company as the result of such liquidation. Such proceeds should of course first be applied against interest and principal indebtedness to the Group Company.
This plan will entirely segregate all of such activities and will avoid the possibility of liability on the part of the Group Company.
The Group Company then becomes purely a holding and group management company which will direct and coordinate the efforts of all the Group units. Eventually, the only items appearing in the Group Company's balance sheet will be its own capital stock and the capital stock of the units which it owns. The Group Company will receive dividends from the units and will pay dividends to the Group stockholder. From the spread between the amount of dividends received and the amounts of dividends paid, it should be enabled to pay its own operating expenses and establish any necessary reserves. Such reserves may be necessary to finance the new company which is to handle liquidating matters.
If this plan is adopted, the present loans which have been made by the Group Company could be continued. The Guardian Detroit ('ompany, Keane, Higbie & Company, Guardian Holding ('ompany, Grand Rapids National Company, Union ('ompany of Detroit and other companies which it is desired to liquidate could be merged into the new company. Possibly the present Guardian Holding Company could be used for this purpose.
As security for funds obtained by the new company from the Group Company, the new company would pledge all of the available assets, accounts receivable, etc. The Group Company in turn would pledge these assets or such of them as might seem necessary against loans which it has outstanding.
Does not this memorandum serve to define rather specifically the purposes for which this Congress Corporation was eventually organized ?
Mr. LORD. It certainly defines Mr. Huelsman's idea of it.
Mr. LORD. I should say to a great extent it was carried out, because I know that the Congress Corporation was servicing the liftedout assets.
Mr. PECORA. Then if, as you say, this memorandum defines Mr. Muelsman's idea with regard to what should be the purposes and the functions of what became eventually the Congress Corporation, and those ideas were adopted, this memorandum does set forth essentially the purposes for which the Congress Corporation was organized ?
Mr. LORD. I think it does, essentially.
Mr. PECORA. From the statements embodied in this memorandum of Mr. Huelsman's it would seem that one of the primary purposes for the creation of the Congress Corporation was to set up a company with only a nominal capital which would take over the task of liquidating whatever slow or undesirable assets might be in any of the unit banks of the Group Co., and, by so doing, keep the Group Co, safe from liability?
Mr. LORD. I do not know what liabilities or contingencies he was referring to, because I know no suits were brought in connection
with it. I assume that the principal function was just what I said in order to put in one basket and under one control the liquidation of the assets that had been lifted out of the unit banks; not while they were still in the unit banks, but after they had been lifted out.
Mr. PECORA. How were those assets lifted out of the unit banks prior to the incorporation of the Congress Corporation?
Mr. LORD. By the group paying cash for them at the figures at which they stood on the banks' books.
Mr. PECORA. And by so doing the Group Co. assumed certain contingent liabilities?
Mr. LORD. I do not know how you can assume a contingent liability by buying the note of some borrower or some bonds that are in default. "I do not know what contingent liabilities he has in mind.
Mr. PECORA. Mr. Huelsman specifically says that,
Meaning the Group Co.we will probably encounter from time to time contingent liabilities and possibly lawsuits, some of which may involve considerable sums of money.
Mr. Lord. I understand he said it, but I do not know what he was referring to.
Senator COUZENS. Were those assets taken out of your constituent banks at what they cost the constituent banks?
Mr. Lord. As they stood on the books, Senator. They might be written part way down by the time we bought them.
Mr. Pecora. And the funds that the Congress Corporation obtained in order to purchase those assets for the purpose of taking them out of the unit banks were received as loans from the Group Co.?
Mr. LORD. That is correct, sir. That is my understanding of it.
Mr. PECORA. And the Group Co. received as security for those loans these so-called “undesirable assets”?
Mr. LORD. Yes, sir.
Mr. PECORA. By the process of the Group Co. not taking over those undesirable assets directly from the banks, and by the process of the organization of this Congress Corporation to do that specific thing, the Group Co. placed itself in a position where it was free from incurring contingent liabilities referred to by Mr. Huelsman, did it not?
Mr. Lord. I should say that is a legal question. I would think it
Mr. PECORA. As a matter of fact, how much of a loss accrued to the Congress Corporation by taking these undesirable assets from the unit banks?
Mr. LORD. I cannot tell you. I have not the figures. They are still working on the liquidation.
Mr. PECORA. Have you no idea at all?
Mr. PECORA. Can you not give it to us more closely than several millions ?
Mr. LORD. I cannot. I know that $8,400,000 of assets were lifted out of the unit banks in a period of 2 or 3 years. How much they have gotten in the way of recoveries or how much there is that is recoverable I do not know.
Senator COUZENS. The group had to borrow the money, however, to lift out those assets?
Mr. LORD. It did. It borrowed the money to protect those banks.
Mr. PECORA. Did you notice this expression of Mr. Huelsman's in this memorandum reading as follows (reading]:
The Group Co. then becomes purely a holding or group management company which will direct and coordinate the efforts of all the group units?
Mr. LORD. I heard it.
Mr. PECORA. Apparently, Mr. Huelsman was of the opinion that the Group Co. was directing and coordinating the efforts of all of the units of the group?
Mr. LORD. He was correct as to coordinating, but not as to directing. What is the date of that, Mr. Pecora?
Mr. PECORA. It is dated February 25, 1932.
Mr. LORD. Well, that was very shortly after Mr. Huelsman came with the Group Co., and probably he wasn't acquainted with the policies of the company at that time.
Mr. PECORA. Well, apparently the fact that he had just come there and that he had become imbued with the idea that the Group Co. was directing the efforts of the various unit banks, was due to the fact that it was so readily apparent even to a casual observer, isn't that it?
Mr. LORD. I don't think so.
Senator COUZENS. Well, Mr. Lord, do you know the difference between coordinating and directing ?
Mr. LORD. We tried to confer with the banks and to help them, which I would call coordinating. But directing is what I would call running them.
Senator COUZENS. How can you coordinate if you cannot direct ?
Senator Couzens. You are really not capable of coordinating, if you do not direct, as I take it.
Mr. LORD. I think you can help them.
Mr. PECORA. Mr. Lord, I want to show you a typewritten report or statement entitled :
Assets Purchased from Units
Will you look at it and tell us if you can identify it as being a true and correct statement of the amount of assets purchased from the units by the Congress Corporation at various times?
Mr. LORD. Well, that is the approximate figure. I do not remember each one, whether it is correct, or not.
Mr. Pecora. Is that approximately correct, at least?
Mr. PECORA. Mr. Chairman, I offer it in evidence.
Senator COUZENS (presiding). Without objection it will be received and placed in the record.
(The statement entitled “ Congress Corporation; assets purchased from units ", was marked " Committee Exhibit No. 114, January 23, 1934 ", and will be found at the end of the day's proceedings.)
Mr. PECORA. This statement has been received as committee's exhibit no. 114, and shows that the total amounts paid in the purchase of assets from the different banking units was $8,414,501.28. Now, Mr. Lord, entirely apart from this statement, when you first appeared before the committee you gave some testimony relative to the approval that Mr. Bonthron, of Price, Waterhouse & Co. had expressed of the form of consolidated statements of conditions which the Guardian Detroit Union Group had issued at various times. Do you recall that?
Mr. LORD. I think the question was, including the consolidated earnings statement, as against the separate statement of the Group Corporation that we were discussing at that time.
Mr. PECORA. And you stated that the method adopted by the Group Co. had received the approval of Mr. Bonthron, and I then asked you to have Mr. Bonthron, or any other representative of Price, Waterhouse & Co. come before this committee to testify to that? Do you remember that request?
Mr. LORD. No. I think you said you might want him. You didn't ask me to get him.
Mr. PECORA. Oh, no. I made the suggestion to you to bring him. Mr. LORD. Well, I am sorry.
Mr. Pecora. Have you received, since you gave that testimony, a letter from Price, Waterhouse & Co., addressed to you, and dated January 8, 1934, and which letter I now show you?
Mr. LORD. I did. That letter was written to me at my suggestion. When I returned to Detroit after I had testified about that matter, I saw Mr. Bonthron, and he said that apparently there was some misunderstanding on the part of some of his partners as to just what advice they had given us. I then said to Mr. Bonthron: "Will you write me a letter and state exactly what you have done? Then I will be glad to put it before the committee.” And this is the letter he wrote. My discussion with Mr. Bonthron was exactly as stated in this letter, as to the propriety and correctness of making a consolidated statement of all the units of the group, including the Group Co. itself. That is the reason for this letter.
Mr. PECORA. In that letter Price, Waterhouse & Co. have expressed the wish that the statement be brought to the attention of his committee.
Mr. LORD. Yes, sir; and that is why I have brought the letter.
Mr. PECORA. In view of that situation, I think the letter should be offered in evidence, Mr. Chairman.
Senator COUZENS '(presiding). The letter will be received in evidence.
(A letter dated Jan. 8, 1934, written by Price, Waterhouse & Co., and addressed to Robert O. Lord, Detroit, Mich., was marked " Committee Exhibit No. 115, Jan. 23, 1934 ", and will be found immediately following where read by Mr. Pecora.)