Now, what were the facts and circumstances that you had ascertained the existence of which prompted you to make that recommendation in this memorandum?

Mr. VERHELLE. I would say, principally, the amount of unlisted collateral securing loans.

Mr. PECORA. You found that kind of collateral in considerable volume in the various unit banks of the Detroit Bankers Co., did you?

Mr. VERHELLE. I would say so.

Mr. PECORA. And what were the few very heavy concentrations of collateral that you referred to in this paragraph of your memorandum, and as to which you recommended they should be under constant surveillance by the investment committee, and upon which arbitrary values should be set?

Mr. VERHELLE. Well, I would consider large concentration, any stock of which a large portion of that outstanding is held as collateral for a loan. Irrespective of the actual amount involved in dollars, any one of those would be a large concentration.

Mr. PECORA. You say there were a few very heavy concentrations of such collateral. What were those classes of collateral? Or, rather, what kind of stock or security made up those few very heavy concentrations?

Mr. VERHELLE (after a pause as if in deep thought). I do not know that I could answer that question.

Mr. PECORA. Well, did you find, for instance, heavy concentrations of collateral consisting of capital stock of the Detroit Bankers Co. in the various unit banks of the company?

Mr. VERHELLE. Of course, that would not be involved in that recommendation.

Mr. PECORA. Well, I am asking if you found such heavy concentrations, I mean of that kind of stock.

Mr. VERHELLE. Well, there was a large amount of stock of the Detroit Bankers Co.

Mr. PECORA. About how much was the volume of that stock held as collateral against loans in the various unit banks?

Mr. VERHELLE. I have been trying to recall that figure, but I just can't answer you.

Mr. PECORA. Just make a little effort to give us even an approximation of it, will you?

Mr. VERHELLE (again lapsing into deep thought).

Mr. PECORA. Possibly in order to help you along I will say, my recollection of the evidence here is that there was something like one-million-seven-hundred-thousand-odd shares of that stock outstanding. Is that right?

Mr. VERHELLE. Yes, sir; that is correct.

Mr. PECORA. Now, how many hundreds of thousands of those shares did you find were pledged as collateral to secure loans in the various unit banks?

Mr. VERHELLE. I just could not give you an approximate idea of that. The figures are hazy in my mind, and I could not approximate it.

Mr. PECORA. You could not even approximate it?

Mr. VERHELLE. It is covered in the reports, I think.

Mr. PECORA. In whose reports?

Mr. VERHELLE. I think in the bank examiner's reports.

Mr. PECORA. Of course it is, but I just want to see how much of it you can tell this committee about in that respect.

Mr. VERHELLE (as if lapsing into deep thought again).

Mr. PECORA. Let me ask you specifically: Do you know of any other collateral that was held as security for loans in any larger amounts than in the case of the stock of the Detroit Bankers Co.?

Mr. VERHELLE (again lapsing into deep thought).

Senator COUZENS. He seems to want to think it over a good deal. Mr. PECORA. Can't you tell us?

Mr. VERHELLE. I cannot say; but that answer would not mean that there was not.

Mr. PECORA. That there was not what?

Mr. VERHELLE. Any other stock that was carried in larger amounts. Mr. PECORA. You cannot think of any other stock that was more heavily concentrated as collateral for loans than that of the Detroit Bankers Co., can you?

Mr. VERHELLE. I cannot think of any. There might be some, but I just can't think of any.

Mr. PECORA. Now, Mr. Verhelle, in this memorandum marked "Committee Exhibit No. 100" in evidence you say as follows, under the caption of "Detroit Company":

This company acts as nominee for any of the units. It will take a considerable length of time to place stock in the names of others, under control. Stock has been transferred in the names of employees and their families in a most negligent manner. In certain cases bank stocks or stocks that have

been charged off, have been carried in this manner, and it will take a considerable length of time before we can know that we are receiving all the income to which we are entitled, and that we are not subject to the liability that normally accompanies the holding of bank stock. The use of this company as a nominee has resulted in the stoppage of a very substantial leak.

Now, Mr. Verhelle, do you recall the circumstances and facts that prompted you to call Mr. Ballantyne's attention to that particular matter?

Mr. VERHELLE. Well, I think that was more or less a review of all the various major items, and I think I wanted it understood that it would take some time to get that particular phase of it organized to a point where the entire matter was left under the control which it was intended to be produced through the use of that company.

Mr. PECORA. Had it been the practice or the custom of the Detroit Bankers Co. to transfer to nominees, banks stocks that it held in order to enable the company, and I mean the Detroit Bankers Co., to avoid the liability that normally accompanies the holding of bank stock?

Mr. VERHELLE. Well, the particular type of item that would go into the Detroit Co. was collateral resulting from a loan that wasMr. PECORA (interposing). I am not asking about collateral. Mr. VERHELLE. Well, that was the use of the Detroit Co. Mr. PECORA. What was the use of the Detroit Co. ?

Mr. VERHELLE. It acted as nominee for the collateral in the way of stocks securing, or the securities rather, securing loans. That was the principal function.

Senator COUZENS. In other words, before you made a loan secured by stock of the Detroit Bankers Co., for instance, you changed it over to the Detroit Co. as nominee. Is that what you mean?

Mr. VERHELLE. Not before the making of a loan, but after the loan was made, and if there was any difficulty indicated in the matter of collection of that loan, in order to assure ourselves of the collection of all dividends, why, the procedure-that is, the Detroit Co. was named as nominee-so that dividends would be forwarded direct to the bank, and so that the bank would definitely receive the benefit of them. And, on top of that, there was one other use for it, and that was in connection with collateral that appeared to be worthless, and which might some day possibly again have some value. The records of that company were set up so as to effect control over that type of collateral. The securities did not appear on the books anywhere, because they had no specific value, and when the occasion arose and they would obtain some value, if ever, why, then they would be definitely recorded on some specific set of books. Mr. PECORA. What kind of stocks did you just refer to-bank stocks?

Mr. VERHELLE. Any stocks.

Mr. PECORA. Well, now, in view of the fact that in this memorandum you specifically called attention to the liability that normally accompanies the holding of bank stock, isn't it apparent that what you were referring to were bank stocks?

Mr. VERHELLE. Well, that particular phase of it refers to numerous bank stocks which had accumulated, that is, that particular phrase in that paragraph, where it refers to double liability, to numerous bank stocks, where the stocks were of little or no value, practically of no value I think in some cases, or where the bank was paying a dividend and where in order to obtain that dividend, a nominee was set up with a view to eliminating that particular liabilty.

Mr. PECORA. In other words, this Detroit Bankers Co., or its unit banks, would acquire title to bank stocks, and in order to assure itself of the collection of dividends that might be declared on those bank stocks, you suggested that steps be taken to improve the system then in vogue, and at the same time preserve in that system a feature that would not subject the company to the usual statutory liability accompanying the holding of bank stocks.

Mr. VERHELLE. Well, the error in your question is that the bank would not acquire title to those bank stocks. No, they would not acquire title to them. In fact, there was a very intricate document, which was drawn up and which was recorded with the transfer agent, that the bank acted only as nominee, and I have forgotten the details of it, but the attorneys are thoroughly familiar with it, and drew it up; to indicate definitely on the records of the bank in question that the only purpose in our having this stock transferred to this nominee, was to obtain the dividends resulting from the stock itself.

Mr. PECORA. And at the same time not subject the Detroit Bankers Co. to the statutory liability accompanying the ownership of bank stock?

Mr. VERHELLE. Well, quite naturally, that was a part of it.

Mr. PECORA. And that was an important part of it, wasn't it?
Mr. VERHELLE. I would say so.

Mr. PECORA. And the Detroit Co. was organized essentially to provide that kind of medium, to enable the Detroit Bankers Co. to accomplish those two objects.

Mr. VERHELLE. No, sir.

Mr. PECORA. Well, what other functions did the Detroit Co. exercise?

Mr. VERHELLE. The Detroit Co. was organized as a security company. Then they liquidated and its corporate form was continued, and it was used for that purpose.

Mr. PECORA. Yes; after its liquidation its organization was preserved so that it might function for those two purposes.

Mr. VERHELLE. That is, for the purpose of

Mr. PECORA (interposing). For the purpose of insuring the collection of dividends on bank stocks, and at the same time putting the ownership of those bank stocks in a company that could not respond

Mr. VERHELLE (interposing). No.

Mr. PECORA (continuing). To statutory liability because of its financial irresponsibility.

Mr. VERHELLE. No, sir. It was leaving the ownership with the borrower definitely. The ownership of all the stocks and against which the Detroit Co. acted as nominee, was to the best of my knowledge very definitely left with the borrower, and the only purpose, or the purpose served by this particular method of procedure, was to definitely have the dividends resulting from that stock sent to the institution handling the loan.

Senator COUZENS. Well, I do not understand how, if the stock remained in the name of the borrower, the bank paid the dividend to the Detroit Co.

Mr. VERHELLE. Well, that is something I can hardly give complete information on, because, while I did discuss it at great length and all that, I am sure you would get a much clearer information from the attorneys. But my definite understanding is that the ownership of the stock was left, and that the books of record with the transfer agent, the registrar, indicated the old owner to be the remaining owner after the transaction, but that the bank acted purely as a dividend-collecting agency. Documents were so set up, it seems to me, as to accomplish that particular end.

Mr. PECORA. Now, had you any discussions with Mr. Ballantyne prior to the writing by you of this memorandum of March 28, 1932, with respect to the subjects or items reviewed in this memorandum?

Mr. VERHELLE. I do not know. I may have. I would like to look over all of them. I can tell, probably, by doing that.

Mr. PECORA. All right [handing the paper to the witness]. Mr. VERHELLE (after looking over the papers). I think I did, sir, on numerous occasions [handing the papers back to Mr. Pecora].

Mr. PECORA. I notice in the annual report to the stockholders of the Detroit Bankers Co. for the year 1931, and with respect to which you gave considerable testimony last week, the statement is made therein regarding the book value of the stock on December 31, 1931. You said that the book value was in excess of $40 a share, didn't you?

Mr. VERHELLE. That is right; yes, sir.

Mr. PECORA. In looking over the annual reports of the company to its stockholders for other years I do not find any mention of book value of the stock. Why was mention of it made in this 1931 report? Mr. VERHELLE (after looking over his copies of annual reports). I thought it had been mentioned before, but

Mr. PECORA (interposing). No.

Mr. VERHELLE (continuing). Apparently it had not.

Mr. PECORA. No.

Mr. VERHELLE. I know there were a great many inquiries along that line, and I don't recall just now why.

Mr. PECORA. Well, was it because the market value of the stock at that time was around $30 a share that it was stated in the annual report that the book value was upwards of $40 a share?

Mr. VERHELLE. My off-hand information would be that it was because of the number of inquiries we were receiving, that it seemed as though it was an important point to some people to know the book value of the stock.

Mr. PECORA. You do recall, don't you, that the market value of the stock on December 31, 1931, was less than what is stated to be its book value in this report?

Mr. VERHELLE. I would say so off-hand. I don't recall the market value at that time, but I would say so.

Mr. PECORA. At the end of the year 1930 do you recall that the market value of the stock was considerably in excess of its then book value?

Mr. VERHELLE. I cannot. I do not recall the market value.

Mr. PECORA. The market value on December 31, 1930, was around $80 a share, as I understand it, whereas the book value was around $50 a share.

Mr. VERHELLE. I wouldn't be sure of that, but will take your word for it.

Mr. PECORA. Wasn't it the purpose in setting forth the book value of the stock in the 1931 report, to bolster up the confidence of stockholders in the stock, because its then market value was $30 a share or thereabouts?

Mr. VERHELLE (looking through his copies of annual reports). I do not recall the specific reason for that, I mean for that figure being included in there. I think the statement is the reverse; that is, that it might be it was so as not to destroy confidence.

Mr. PECORA. Now, Mr. Verhelle, is there anything you want to say to this committee in regard to any matters pertaining to the Detroit Bankers Co., or any of its unit banks, that you have not been asked about; or even if you wish to make any statement with regard to the matters that you have been asked about, you may do it now if you wish.

Mr. VERHELLE. Well, one of the statements I should like to make is in connection with that confidential report and, again, I wish just simply to repeat what I have probably needlessly spoken of before, and that is that any judgment should be reserved in connection with any of the individuals mentioned therein; and most particularly, with regard to the business organizations and the customers named. The purpose of the report was entirely different from that for which it has been used here, of course.