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 suggest to you the reason why you recommended this rule?

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.

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

action.

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.

Mr. VERHELLE. If I did, it would be mentioned in that report, sir. Mr. PECORA. It is mentioned in the report; that is, the system under which it was possible to do it is mentioned.

Mr. VERHELLE. The specific transaction would have been mentioned in that report.

Senator COUZENS. Well, Mr. Verhelle, I may be dumb, but I haven't got the system yet in my mind under which this could have been operated. I wish you would explain it. You say, "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." How would that system have been operated? You said it was a possibility, but you did not say how it could be

worked.

Mr. VERHELLE. I did not want to make a record of the 246 ways in which to defraud a bank.

Senator COUZENS. Isn't this one specific way that a bank could be defrauded?

Mr. VERHELLE, I do not believe that I had that particular way in mind at that time, because the one big question for consideration was the recovery department, which in itself would have eliminated in itself, without any further check, all possibility of such an item as we are discussing here now.

Senator COUZENS. I am still undetermined how a system like that could be worked, and I think it is of importance to this committee to know how a system could be worked.

Mr. VERHELLE. Well, I will explain one way in which this thing could be worked and which was definitely under consideration and which was being worked upon with a view to holding it in tow.

One is, assuming that a note was in the bank, and assume further that the examiners came in and reviewed the notes with the officer who is handling them. If that officer were to indicate to the examiner that the note is worthless and the examiner therefore set it up in his loss column, it was quite possible to have that note charged off due to the fact that it was a loss item, and unless it were followed up there would be no way of determining as to the type of a loan it was.

Senator COUZENS. Well, assuming that the examiner had set the note up as a loss, could it have been charged off without action of the board of directors?

Mr. VERHELLE. Yes; but the basis upon which the examiner charged it off would be recognized.

Senator COUZENS. What examiner are you talking about now?
Mr. VERHELLE. By the national banking department, for instance.
Senator COUZENS. Yes; but he does not charge off any losses!
Mr. VERHELLE. No, sir; but he sets them up in the loss column.
Senator COUZENS. Not on your books; only in his report?
Mr. VERHELLE. In his report; yes, sir.

Senator COUZENS. But I am trying to find out how this loan could be set up on the books of the bank without the action of the board. Mr. VERHELLE. It could not, without the action of the board.

Mr. PECORA. And so, as a matter of fact, then, an officer could not borrow or loan to himself or anyone else and discharge his liability

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without the matter coming to the attention of those concerned, could he?

Mr. VERHELLE. The number of notes that are charged off is so large that no board of directors could possibly expect to review each item and know definitely the particular financial position of the individual. He might have completely disappeared.

Senator COUZENS. Who might have disappeared?

Mr. VERHELLE. The borrower. There would be nothing further they could do about it. There would be no way by which they could check up to determine whether or not this individual can be located or can be reached.

Senator COUZENS. You mean the officer might have entirely disappeared?

Mr. VERHELLE. No; I mean the man on the note.

Senator COUZENS. Well, you said the officer could borrow or loan to himself. So that you must mean that the officer could have entirely disappeared, if it happened to have been an officer's note. Couldn't that have happened, according to your statement?

Mr. VERHELLE. Well, hardly. That is a peculiar construction to place on it.

Senator COUZENS. That is not my construction. I am using your English, if I understand it correctly. I assume that when the board of directors vote to charge off these loans or loss items they would have them submitted to them for that action, would they not? Mr. VERHELLE. Yes, sir.

Senator COUZENS. Would that be one of the officers who would be concerned, as referred to in your memorandum here?

Mr. VERHELLE. Well, that would be upon the recommendation of a group of officers.

Senator COUZENS. That the loan be charged off?

Mr. VERHELLE. Those officers who review the report to the examiners, for instance, would generally be the ones to make the recommendation.

Senator COUZENS. The officers in making the recommendation to the board of directors to charge off an officer's loan might do that without anyone knowing about it except the board of directors, whom you say were unable to pass upon all these numerous items?

Mr. VERHELLE. I think that-I would like to read that paragraph there, because I cannot quite follow your interpretation.

Senator COUZENS. It is peculiarly phrased to me, and I do not understand it. I have been in a bank a long time, and I do not understand how that could be worked.

Mr. VERHELLE. This would be by means of an accommodation loan.

Senator COUZENS. To whom? To anyone, to an officer, or what? Mr. VERHELLE. To anyone. That officer's name certainly would not appear on the note, because, quite naturally, the name would be recognized.

Senator CouZENS. So that would be a case of someone else other than an officer, but you also include an officer's loan in that memorandum.

Mr. VERHELLE. Well, presume that Jones

Senator COUZENS (interposing). Who is Jones now? Is he an officer, for example?

Mr. VERHELLE. We will say that he is.
Senator COUZENS. All right; go ahead.

Mr. VERHELLE. Who has the right to make loans, who has the authority to make loans.

Senator CoUZENS. Yes.

Mr. VERHELLE. Makes out the note, signs it with the name of Smith.

Senator COUZENS. Oh, then he forges it in the first instance then, because he does not sign his own name; is that true?

Mr. VERHELLE. I don't know whether that would be forgery or

not.

Senator COUZENS. Well, it would be obtaining money under false pretenses, would it not?

Mr. VERHELLE. Oh, yes; it would be the wrong thing, beyond a doubt.

Senator COUZENS. All right. Follow on after Jones got the money by signing someone else's name to the note. Follow that through and see how it works.

Mr. VERHELLE. Well, Smith has disappeared by the time this note falls due. The examiner comes in and determines that due to the bank's inability to locate Smith, therefore this note is a loss.

Senator COUZENS. In spite of the fact that Jones got the money?
Mr. VERHELLE. Yes.

Senator COUZENS. I think I understand it now.

Mr. VERHELLE. There are a number of ways and methods. Senator COUZENS. That is one way that occurs to you, is it? Mr. VERHELLE. That is one way that occurs to me, yes. And numerous other ways; and certain recommendations were made whereby practically every conceivable method that could be used would be definitely eliminated.

Mr. PECORA. Now, Mr. Verhelle, how could the hypothetical case that you have just discussed with Senator Couzens be precluded by the adoption of a rule which prohibited access to loaning officers to the notes and liability ledgers in the bank?

Mr. VERHELLE. That is exactly what I suggested, Mr. Pecora, that that rule does not preclude the possibility of that particular act. Mr. PECORA. Then there must have been something else that you learned in connection with the loaning activities of the loaning officers of the bank that prompted you to make this recommendation.

Mr. VERHELLE. Well, it is of vital importance to keep the records in balance and to facilitate the balancing of the records, and my recollection is that that was by far the principal reason for that. particular recommendation right there.

Mr. PECORA. What were the other things that it was possible in: your opinion, under the system that you found to exist in the bank at the time you made the examination, that led to this confidential memorandum, which you say made it "entirely possible for a loaning officer to borrow or loan himself or anyone else and discharge his liability without the matter coming to the attention of those concerned others in the bank?