Mr. PECORA. Do you know of instances, Mr. Stone, where the Detroit Trust Co. sold to trust estates committed to its care securities which it, the trust company, had acquired at a lower price from the Detroit Bankers Co., or any of its securities units?

Mr. STONE. I do not understand. Did you say, at a low price? Mr. PECORA. That is, sold to trust estates securities which it, the trust company, had obtained at a lower price. That is, the trust company obtained securities at a price lower than that for which it sold those securities to various trust estates committed to its care. Mr. STONE. Only in those cases where the trust instrument provided for it.

Mr. PECORA. What do you mean by that, Mr. Stone?

Mr. STONE. I mean, there was a provision in many trust agreements, I think, in testamentary trusts, irrevocable trusts, and so on, which provided that investments owned by the company could be sold to that trust at the prevailing market price, the price at which the securities were sold by the company to, say, its bond customers. Mr. PECORA. What kind of securities which the Detroit Trust Co. had previously acquired from any of the security units or affiliates of the Detroit Bankers Co. did it usually sell to trust estates which it was administering?

Mr. STONE. I do not know that they acquired any. You mean, from the units that afterwards formed the Detroit Bankers Co.? Mr. PECORA. Yes.

Mr. STONE. I do not think it acquired any, unless through the First Detroit Co.

Mr. PECORA. That was one of the investment affiliates or security units of the Detroit Bankers Co., was it not?

Mr. STONE. Yes.

Mr. PECORA. What kind of securities were they?

Mr. STONE. That was after we had abandoned our trust department—I mean, our bond department. So they would be securities that were proper for investment of trust funds, Government bonds, municipal bonds, public utilities, railroads, mortgage bonds-anything that was regarded as a proper investment for trust funds.

Mr. PECORA. You mentioned mortgage bonds as one of the classes of securities which the trust company sold to its trust estates. Was there a public quotation on mortgage bonds?

Mr. STONE. I think not, as a rule.

Mr. PECORA. Do you know of many instances where mortgage bonds or mortgage certificates representing an interest in a mortgage instrument were sold by the Detroit Trust Co. to an estate committed to its care at prices higher than the price at which the trust company itself had acquired those mortgage certificates?

Mr. STONE. No; except those trusts that I have already described, where the trust instrument contained a provision permitting it to do so.

Mr. PECORA. As a rule, who drew up those instruments that contained those provisions?

Mr. STONE. I think they were drawn by our counsel—oh, you mean mortgage-participation certificates!

Mr. PECORA. No; the trust agreements or trust instruments that you have referred to, which you say permitted the trust company to

sell securities to trust estates at prices higher than those which the trust had paid for those securities.

Mr. STONE. I do not know that I have any personal knowledge of any specific case, but I assume they were drawn by counsel for the maker of the trust; possibly by officers of the trust company.

Mr. PECORA. In addition to whatever profit the trust company made through that step-up, so to speak, in the price paid for those securities and sold to a trust estate, the trust company also collected its fees and commissions authorized by the laws of the State of Michigan, did it not?

Mr. STONE. You are referring, now, to cases where the trust instrument provided for or permitted an investment at prevailing market prices or are you referring to cases where the securities were put in at cost?

Mr. PECORA. My last question did not have in mind any particular kind of trusts.

Mr. STONE. There was an investment fee

Mr. PECORA. My last question merely was addressed to the point of finding out from you if it was not a fact that the trust company in administering various trust estates that were committed to it, charged the fees and commissions which it was authorized to charge by the laws of the State of Michigan.

Mr. STONE. Oh, yes; certainly.

Mr. PECORA. And those fees and commissions are fixed by statute, are they not?

Mr. STONE. NO; not always. They are fixed by statute in the case of executor and administrator and trustee under a will, not as guardian or in the case of revocable and irrevocable trusts and agencies. Those are matters of private agreement.

Mr. PECORA. In those cases of private agreement what was the range of fees and commissions which the Trust Co. charged in such cases?

Mr. STONE. I do not believe I know what you mean.

Mr. PECORA. In those cases which you say were the result of agreement between the Trust Co. and those creating the trust?

Mr. STONE. Those charges varied according to the character of the property in the trusts. Some trusts will contain complicated property, with difficult propositions to handle, and the charges are commensurate with them.

Mr. PECORA. I want to show you, Mr. Stone, a memorandum or statement designed "Invoice No. 3045, Watson Realty Co., April 23, 1930 ", signed by a man named Felix M. Farrell. Do you recall him?

Mr. STONE. NO. I should explain that since I became chairman of the board I have had no administrative work to perform. I doubt whether I know the names of all of the 600 employees. My duties were in connection with the policies of the company, organization and operation and extension of business, and consulting in a advisory capacity. I do not think I would know about the details of those things.

Mr. PECORA. Will you inquire of the gentleman who is sitting next to you if he knows Felix M. Farrell?

Mr. THOMAS. Yes; he was an employee at that time of the First Detroit Co. He was never an employee of the trust company. Mr. PECORA. What is your name, sir?

Mr. THOMAS. W. J. Thomas.

Mr. PECORA. Mr. Thomas, the other day you asked me if you could be accorded the privilege of sitting with some of the gentlemen who might be called as witnesses here for the purpose of assisting them in the giving of their testimony. Do you recall that? Mr. THOMAS. Yes, sir.

Mr. PECORA. And I told you that if you so wished, the privilege would undoubtedly be accorded to you. Do you desire that privilege in connection with the examination of Mr. Stone?

Mr. THOMAS. Mr. Stone and Mr. Browning, if that is agreeable to the committee.

Mr. PECORA. In view of the fact that you may be called upon. in the course of the examination of Mr. Stone and Mr. Browning to supply statements or evidence, I suggest that the chairman now administer the oath to Mr. Thomas as a witness.

The CHAIRMAN (addressing Mr. Thomas). You solemnly swear that the testimony that you will give in these hearings will be the truth, the whole truth, and nothing but the truth, so help you God? Mr. THOMAS. I do.

The CHAIRMAN. Give your name and address and occupation, please.

Mr. THOMAS. William J. Thomas, 279 La Salle Place, Grosse Pointe, Mich.; occupation, treasurer of the Detroit Trust Co.

Mr. PECORA. Mr. Stone, do you know of any mortgage bonds issued by the Watson Realty Co. that in due course were acquired by the Detroit Trust Co. and thereafter sold to various trust estates which were being administered by or which had been committed to the care of the Detroit Trust Co.?

Mr. STONE. No; I would not be familiar with them.

Mr. PECORA. Do you recall any security of that kind?

Mr. STONE. No, sir.

Mr. PECORA. Do you, Mr. Thomas?

Mr. THOMAS. I recall the name of the issue; yes-Watson Realty Co.

Mr. PECORA. Mr. Thomas, will you describe briefly the nature of these mortgage bonds issued by the Watson Realty Co.?

Mr. THOMAS. I am afraid I cannot do that. I assume it is a first mortgage on real estate. I do not even know the type of property. Mr. PECORA. It was not a listed security, was it?

Mr. THOMAS. I doubt it. There were very few of the Detroit firstmortgage real estate bonds that were listed.

Mr. PECORA. I have a memorandum signed by Mr. Felix M. Farrell, who is known to you, indicating that on April 23, 1930, the First Detroit Co., which is one of the investment or security affiliates or units of the Detroit Bankers Co., acquired certain of these Watson Realty Co. mortgage bonds at 931/2, transferred them to the Detroit Trust Co. on the same day at 95.759, and that the Detroit Trust Co. sold those mortgage bonds, some of them at par and some at 97, to various trusts committed to its care. Are you familiar with any of those facts?

Mr. THOMAS. Of course, I do not remember the details of those particular sales. I know that many sales were made of that nature. Mr. PECORA. About how many? Could you give the committee an idea, even approximately, of the amount of mortgage bonds that were acquired first by the First Detroit Co., transferred at an increased price to the Detroit Trust Co., and then sold by the Detroit Trust Co. at a further increase in price to trusts that it had charge of?

Mr. THOMAS. I would hate to hazard a guess on that. You mean, from the time the First Detroit Co. was organized up until the present time?

Mr. PECORA. Well, if you can give it to us for that period of time. Mr. THOMAS. I have no conception of the volume, really. Of course, I do know

Mr. PECORA. You were the treasurer of the Detroit Trust Co., you say!

Mr. THOMAS. Yes; but all those sales passed through what we call our trust investment department. I had very little jurisdiction over those sales. I can say this, that in cases of that kind, if the Detroit Trust Co. made a profit they were sold entirely to so-called prevailing market price trusts at the market at that time. Where you would get your market price for mortgage bonds of that character it would be a price that the First Detroit Co., or whomever the broker might be, was selling them to outside customers.

Mr. PECORA. That would be a market price more or less controlled by the Detroit Co., would it not, under those circumstances?

Mr. THOMAS. Not necessarily. The bonds may have been dealt in by various brokers in Detroit.

Mr. PECORA. Who fixed those prices, and what quotations were obtained?

Mr. THOMAS. I suppose, just brokers. I know of no other way. Mr. PECORA. Mr. Stone, let me ask you this. In view of the very splendid sentiments that you gave expression to in your address in February of 1932, can you reconcile transactions of the kind that I have just been discussing with Mr. Thomas with your sentiments that in serving and advising clients the trust officer is not influenced in the slightest by the compensation that his employer receives?

Mr. STONE. I do not see that it violates that, inasmuch as they were placed in the trusts by written agreement with the people who created the trusts, at prices to which they agreed; and where there are no such arrangements made with the creators of the trust, they were put in at cost without profit to the trust company.

Mr. PECORA. In those instances were not the securities sold by the trust company itself, the securities sold to those trusts? Mr. STONE. Yes.

Mr. PECORA. Did the trust company select securities in many instances consisting of mortgage bond certificates which it had acquired at a lower price from the First Detroit Co. which in turn had acquired them at a lower price than that at which it sold to the Detroit Trust Co.?

Mr. STONE. Yes; but I would have to repeat what I said before, that the price was agreed to by the makers of the trust, and if there was no such special arrangement in the trust, the price was cost to the trust company-the First Detroit Co., in some cases.

Mr. PECORA. Can you produce the text of any such agreement? Mr. STONE. I think we have a copy of the clause.

Mr. PECORA. I would like to have it.

(Witness produces a paper which he hands to Mr. Pecora.)

Mr. PECORA. The clause that you have produced here reads as follows [reading]:

In the investment and reinvestment of funds by the trustee thereunder said trustee is authorized to purchase investments from the Detroit Trust Co., owned by it, and at prevailing market prices. That is, prices for which such securities were sold to its customers.

That is the clause you referred to, Mr. Stone, is it?

Mr. STONE. Yes, sir.

Mr. PECORA. In the cases that have been alluded to here, involving the sale to trusts of mortgage bond certificates of the Watson Realty Co., there appears to have been a spread in those certificates of 9312, which was the unit cost to the First Detroit Co., to par in some instances, which was the price at which they were sold to the trusts. Do you consider that a justifiable act on the part of a trust company that is administering estates and handling trust estates, with a realization of the sacred character of the trust imposed on them? Mr. STONE. You mean a spread of 9311⁄2 to par?

Mr. PECORA. Yes.

Mr. STONE. Six and a half points. I think, in general, yes. I think it all depends upon the nature of the security, the amount of the work, the expense involved in making the investigation and making the appraisal, examining into the income, and the expense to which the trust company had been put in connection with it.

Mr. PECORA. You made those investigations and had those appraisals made with regard to mortgage bond certificates that the trust company acquired from the investment affiliate of the Detroit Bankers Co.?

Mr. STONE. I think not. I think the investment company would make that itself.

Mr. PECORA. And the Detroit Trust Co. was owned by the same interests that owned the investment unit; is not that so?

Mr. STONE. Yes-what is that question, please?

Mr. PECORA. The Trust Co. at that time was owned by the same company that owned the investment unit in question, the First Detroit Co.?

Mr. STONE. That is correct.

Mr. PECORA. In the case of trusts that were operating under an agreement containing the clause that has been read into the record here, were the persons interested in the trusts told of the price which the Detroit Trust Co. had paid for those mortgage-bond certificates?

Mr. STONE. I imagine not. I would not be sure of any specific case, but I think not.

Mr. PECORA. Would you say that in any case they were told of the fact that those securities had been in turn acquired by the Detroit Trust Co. from the investment affiliate of the Detroit Bankers Co. ?

Mr. STONE. Oh, yes. I should think the vouchers would show a direct purchase from the First Detroit Co.