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Mr. VERHELLE. I did not quite get the first part of that. Mr. PECORA. What were the other things that you found were possible to do whereby a loaning officer could borrow or loan money to himself or to anyone else and discharge the liability without the matter coming to the attention of other officers?

Mr. VERHELLE. Well, at one stage of the game in any transaction, in order to discharge the loan without paying it, the loan must be charged off. That is one definite channel through which it must pass.

Mr. PECORA. But the charge-off, you say, cannot be made without the authorization of the board ?

Mr. VERHELLE. No; but the board would have no way of determining—no board would in any good-sized bank have any method whereby they could independently or individually determine the actual financial condition of all of the large number of charge-offs that take place. They would have to rely upon the officers themselves. A method was provided somewhere whereby all of the charged-off items would pass into an entirely new group of people who had not anything to do with the making of the loans, so as to prevent the possibility of such a thing happening.

Mr. PECORA. You were not making recommendations for the adoption of rules upon idle grounds, were you?

Mr. VERHELLE. No, sir.

Mr. PECORA. They were based upon what you had learned were practices?

Mr. VERHELLE. Yes, sir.

Mr. PECORA. And these rules were designed by you to prohibit or preclude those practices?

Mr. VERHELLE. Well, not only that, but also to facilitate the work as well.

Mr. PECORA. In your memorandum of May 18, 1932, you took occasion to refer to existing systems in use in the bank under which it was possible for a loaning officer to borrow or loan to himself or to anyone else and to discharge his liability without the matter coming to the attention of those concerned. And you also say in this memorandum:

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.

Those steps apparently consisted of the adoption of a rule that you recommended in your memorandum of May 5, 1932?

Mr. VERHELLE. Well, it would seem to me that the opening statement there saying that it is possible, and then following it up with the statement that steps have already been taken to accomplish this other, that I very definitely felt that this other-in fact, I know that I did-felt that this other rule was not going to obviate the possibility, not going to eliminate the possibility, covered by the first section of that paragraph.

Mr. PECORA. Well now, the possibilities enumerated or referred to by you in the memorandum of May 18 would not have been possibilities unless the loaning officer, through his access to the liability ledgers as well as to the notes, could have removed the notes and the liability ledgers or the entries thereon relating to any such loan? Mr. VERHELLE. It still would have been possible to do that very thing which I outlined in the beginning in the first section that you have read, even though the liability ledgers and the notes were under the control.

Mr. PECORA. If the liability ledgers and the notes were under the control of persons other than the loaning officers, would it still have been possible for the loaning officers under any of the systems you found in use in the bank to make loans to themselves or to their own nominees or designees and discharge the liability without others in the bank learning of the transaction?

Mr. VERHELLE. Yes, sir.
Mr. PECORA. What were those systems that permitted that?

Mr. VERHELLE. That theoretical transaction that we have just outlined is not in any way eliminated by the control of the note or the liability ledger.

Mr. Pecora. What other systems were there in vogue that enabled loaning officers to do those things?

Mr. VERHELLE. Of course, the control of the note did prevent one phase or one method.

Senator COUZENS. Yes; we understand that, but Mr. Pecora is asking some other method now.

Mr. PECORA. The reason I ask is because in your confidential memorandum you refer to “systems in use", not “a system "; but you mention the plural. So there must have been more than one system. You described one. What were the other systems?

Mr. VERHELLE. Well, there is a system in use in the discount department, a system in use in the special loan department or recovery department, as we have termed it here, and it is a combination of the two which I definitely felt if it were correct would permanently and very definitely eliminate the possibility of that type of transaction.

Mr. PECORA. Among the other documents that you produced last week and which were marked for identification is this one marked “ Committee's Exhibit No. 42 for Identification” on January 25 last, which consists of what purports to be a copy of a memorandum or letter addressed by you to Mr. John Ballantyne under date of March 28, 1932. Will you please look at it and tell me if you recognize it to be a true and correct copy of such a letter or memorandum that you addressed to Mr. Ballantyne at that time?

Mr. VERHELLE. I would say that this copy was corrected, sir, before it was sent out.

Mr. PECORA. Was what?
Mr. VERHELLE. Was corrected before it was sent out.
Mr. PECORA. In what respects?
Mr. VERHELLE. I notice pencil notations on here.

Mr. PECORA. Do the pencil notations indicate the corrections that were made in a final draft?

Mr. VERHELLE. Not necessarily all of them. They would definitely indicate to me that I corrected this, because I would not have sent the memorandum with the pencil notations on it.

Mr. PECORA. Would that copy with the lead-pencil corrections that appear upon the face thereof indicate the final form, giving effect


to the lead-pencil notations, of the memorandum when submitted to Mr. Ballantyne?

Mr. VERHELLE. Not necessarily, sir. It all depends upon whether I redictated this or whether I just returned it with the idea of making these particular changes. I am trying to recall that right

Mr. PECORA. The fact is that, among the papers you produced last week, that is the only draft of such a memorandum that was contained therein.

Mr. VERHELLE. Under the terms of the subpena I produced everything that I had along this line.

Mr. PECORA. I don't get you, Mr. Verhelle.

Mr. VERHELLE. I say under the terms specified in the subpena I produced this, and it would seem to me that I probably-in fact, I am almost certain that this was rewritten, and I don't know whether or not other changes were made and the pencil notations contained herein.

Mr. PECORA. How do you account for the fact that you have a copy of a tentative draft among your possessions and not a copy of the memorandum in its final form?

Mr. VERHELLE. Because I probably took this home to work on it, as I did with a lot of things.

Mr. PECORA. I observe that you gave generally similar testimony last week, when I asked you to identify what purported to be a copy of another memorandum addressed by you to Mr. Ballantyne. In referring to that memorandum last week you also said you were not sure whether or not that actual memorandum or any copy thereof had been delivered to Mr. Ballantyne. But I have observed here today that you have no hesitancy in identifying copies of memoranda that I have shown you addressed to Mr. Mills. I am wondering, Mr. Verhelle, if your memory is hazy about memorandums addressed to Mr. Ballantyne and clear about those addressed to Mr. Mills.

Mr. VERHELLE. No, sir; there would be nothing-
Mr. PECORA. How is that?
Mr. VERHELLE. No, sir; I don't believe that that has

Mr. Pecora. Well, you recall dictating that memorandum, a copy of which I have just shown you?

Mr. VERHELLE. I think I do.
Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.

(Memorandum dated May 28, 1932, from Joseph F. Verhelle to John Ballantyne, previously marked “Committee Exhibit No. 42 for Identification” on January 25, 1934, was thereupon, upon being received in evidence, designated “ Committee Exhibit No. 100, January 30, 1934 ", and appears in full at the end of today's record.)

Mr. VERHELLE. This particular one happens to be marked up. Senator COUZENS. Of course, you could have marked that up most

any time.

Mr. VERHELLE. But I did not.

Mr. PECORA. This memorandum or copy thereof has been received in evidence as Committee's Exhibit No. 100 of this date. Let me ask you if the lead-pencil notations or corrections that appear on the face thereof are in your handwriting?

Mr. VERHELLE. Yes, sir.

Mr. PECORA. I notice in this memorandum you say, among other things, as follows—first let me state that it is dated March 28, 1932, and is addressed specifically as follows:

Mr. John Ballantyne, president Detroit Bankers Co.-
And then it says:

The following is an unusually frank discussion of our organization. Please do not consider me presumptuous.

Later on you state as follows in this memorandum: The purpose of this memorandum, however, is to find a means whereby the officers may be informed of their responsibilities, this being considered necessary for the following reasons:

A considerable group of senior officers who handled a large variety of functions in their old institutions do not appear to have any specific duties or responsibilities. These men are of such senior rank from the standpoint of their titles that their activities either require almost constant meetings or else almost invariably result in embarrassment to the official staff as well as themselves.

What did you mean by that, Mr. Verhelle?

Mr. VERHELLE. Well, I would say that they either had to meet continuously to discuss things or else one would do something and another would not know about it and the result would be an embarrassing situation.

Mr. PECORA. Did you also mean to call attention to the fact that a large number of senior officers had no specific duties or responsibilities assigned to them and hence were in one another's way?

Mr. VERHELLE. Not necessarily, sir. Mr. PECORA. Well, does it mean that? Mr. VERHELLE. I would say, "No." Mr. PECORA. What did you mean then when you say that, A considerable group of senior officers who handled a large variety of functions in their old institutions do not appear to have any specific duties or responsibilities.

Mr. VERHELLE. Well, that they continued to handle the variety of subjects which they had handled prior to the consolidation.

Mr. PECORA. Oh, don't you say just the opposite to that? Don't you say that they handled-you say

A considerable group of senior officers who handled

Speaking of the past, a large variety of functions in their old institutions do not appear

Speaking of the present, to have any specific duties or responsibilities.

Mr. VERHELLE. No; I would have to read that memorandum a little more closely.

Mr. PECORA. Well, read that paragraph [handing document to Mr. Verhelle). I attach certain meaning and intendment to your language there, but if you understand anything other than what seems to me to be the plain meaning of the words you use I would like to know what else you understand.

Mr. VERHELLE. In order to explain this you have to have just a little bit of background in connection with this particular situation

at that particular time. This was after the consolidation of two institutions with their physical quarters continued in their old locations, and directly thereafter during the next few months steps were taken to consolidate the functions so that one function would be assigned to one certain officer and another function to another officer. As these became assigned in certain instances, quite naturally the duties were different from the others, and there was a switching of duties of these officers.

The result was that—and then I quote here:
A considerable group of senior officers handled large-

Mr. PECORA (interposing). “Who handled "_“in their respective institutions " you say. And that means you were referring to their activities prior to the consolidation, which is prior to December 31, 1931 ?

Mr. VERHELLE. No; not necessarily, because the duties were not immediately changed due to the fact that a group of figures were thrown together. The functions remained as they had been, but were being shifted as slowly as possible, with the result that we got here to the point of where, through this switching of functions and the centralization of certain specific functions into certain officers and the switching of officers themselves, for that matter, from one physical building to another, it resulted in a group of men having nothing but more or less general activities; that is, waiting on the public and handling whatever happened to come up, without any specific duty being assigned.

Mr. PECORA. You don't say that in that language, do you Mr. Verhelle?

Mr. VERHELLE. I don't say it in that language, but

Mr. PECORA. The language you use indicates, does it not, that at the time you wrote that memorandum in March 1932 those senior officers had no specific duties or responsibilities assigned to them? Isn't that what you would gather from it?

Mr. VERHELLE. Well, I would say so; yes.
The CHAIRMAN. Were they all drawing salaries?

Mr. VERHELLE. Well, that does not mean that they were not all working

Mr. PECORA. That is not the question. Were they all drawing salaries?

Mr. VERHELLE. Yes, sir.

Mr. PECORA. Now, Mr. Verhelle, in this memorandum of March 28, 1932, marked Committee Exhibit No. 100 in evidence, you also say this, referring to an investment committee which was headed by Mr. Mark A. Wilson as chairman:

To extend their activities to all assets, the value of which is predicated on securities other than real estate, will involve the appointment of a subcommittee. This is highly desirable for the following reasons :

1. There are numerous corporations whose stock is used as collateral, and so forth, in the various units, and to such an extent that if difficulties arose in connection with the company, the losses will be passed to us.

2. Numerous unlisted securities are used as collateral to loans, and no facilities are provided the loan officers from which they can determine the actual value of the securities in them unless those involve real estate.

3. There are a few very heavy concentrations of collateral that should be under constant surveillance by the investment committee, and upon which arbitrary values should be set.

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