Mr. PECORA. You think the Trust Co. should be permitted to act as trustee of an estate, and to purchase from itself, as a trust company, securities at a profit to the Trust Co.!

Mr. STONE. No; it did not do that.

Mr. PECORA. It is shown here from the last two exhibits in evidence that it did do that.

Mr. STONE. I do not know of those cases. I think really, when you get down to individual cases, Mr. Browning, our president, who was the executive officer, would be more familiar with the process through which those ran than I would.

Mr. PECORA. Who would? Mr. Browning?

Mr. STONE. Mr. Browning; yes. I am perfectly willing to testify on questions of principle, and I will try to figure out all those various changes in price there, and the various steps, if you wish me to. I do not wish to avoid any examination on the subject at all, but I think the committee will get a much clearer idea of how that operated, and what the effect of it was, through a man who had something to do with the administration of it.

Mr. PECORA. Do you know whether Mr. Browning subscribed to the sentiments that you enunciated in your speech of 2 years ago? Mr. STONE. No; I do not know.

Senator COUZENS. How long have you known Mr. Browning? Mr. STONE. Twenty-five or thirty years.

Senator COUZENS. Don't you know him well enough—

Mr. STONE. I should think he would.

Senator COUZENS. I thought he would, too, based upon my knowledge of him.

Mr. STONE. Yes.

Senator COUZENS. There is one thing that concerns me. In this so-called "prevailing market price clause " it is said [reading]:

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

And yet I observe, in the exhibit referred to by Mr. Pecora, that you sold a lot of $96,000 at 100 and $4,000 at 9912, so that the man who bought the $96,000 got stuck at 100 and the man who bought the $4,000 was sold at 992. How do you harmonize those prices with the clause referred to, in which it is said that they are to be sold at the prevailing market price?

Mr. STONE. I do not know what the reason might be, Senator. If you examined into the facts there might be some reason for it, but I do not know what it would be myself.

Senator ADAMS. You will notice the qualification on the market price the price at which they sell it to their customers. Senator COUZENS. That can be any old price.

Mr. PECORA. The price which the Trust Co. itself makes.

Senator COUZENS. Yes. I was hoping that the testimony would indicate that they were treating all their customers alike, and that the customer's price might be a fixed price, rather than a varying price as indicated in the exhibit.

Mr. STONE. One of them may be a cost trust, and the otherSenator COUZENS. If it was a cost trust, then you were certainly

defrauding the trust, because the cost to the unit, one of your affiliates, was 95, and you sold it at 992, although I suppose technically you could have said it cost you 992, because that was the price you paid your affiliate.

Mr. PECORA. When the Trust Co. bought securities of this kind which it afterward sold to itself as trustee for trust estates committed to it-securities from an investment affiliate owned by the Detroit Bankers Co.-it was virtually dealing with its own principal, was it not, in the sense that the Detroit Bankers Co. was also the owner of the Trust Co. as well as of the investment affiliate?

Mr. STONE. No; I think not. At least not in accordance with the opinion of our attorney, who said we were entitled to deal with it. Senator ADAMS. You had doubts about it, so that you ask your attorney.

Mr. STONE. Yes.

Mr. PECORA. Let us look at the substance rather than the form. The First Detroit Co. was an investment affiliate of the Detroit Bankers Co., was it not?

Mr. STONE. Yes.

Mr. PECORA. A wholly owned affiliate of that company?

Mr. STONE. Yes.

Mr. PECORA. And the Detroit Trust Co. was likewise a wholly owned affiliate of the Detroit Bankers Co.!

Mr. STONE. We had enough doubt about it-I don't think there is any question about that-so that we discontinued the practice later. Mr. PECORA. When was this practice discontinued?

Mr. STONE. By the First Detroit Co.?

Senator COUZENS. Or any affiliate?

Mr. STONE. I think January 29, 1931. In other words, the First Detroit Co. was organized March 12, 1930, and for 9 months we purchased from it, and then discontinued the practice in January

1931.

Senator COUZENS. Did you buy from any other affiliate after that? Mr. STONE. No.

Mr. PECORA. Will you look at Committee's Exhibits Nos. 102 and 103, respectively, both of which relate to the same kinds and classes and amount of securities, and tell us if you recognize any of the securities shown thereon to be securities that are now in default? Mr. STONE. I could not tell you that, Mr. Pecora. I kept no track of that personally.

Mr. PECORA. Perhaps Mr. Thomas, the erstwhile treasurer of the Trust Co., could tell us.

Mr. THOMAS. What was the question again?

Mr. PECORA. Are there any of the securities specified in those two exhibits that are now in default?

Mr. THOMAS. I do not know whether there are in that list or not. unless you consider those participation certificates in technical default. They are not paying all of their interest. They are paying partial payments on the interest.

Mr. PECORA. That is considered a default, is it not?

Mr. THOMAS. Well, partial default. I do not know whether any of these others are in default or not.

Mr. PECORA. Mr. Stone, was not the First Detroit Co. the securities affiliate originally of the Detroit Trust Co. itself?

Mr. STONE. It was formed by a combination of the bond business of the Detroit Trust Co. and the bond business of the First National Co. At the start the Detroit Trust Co. bond department owned 70 percent of the stock of the First Detroit Co., and the First National Co. owned 30 percent of the stock.

Mr. PECORA. But the First Detroit Co. was organized originally as an investment affiliate of the Detroit Trust Co., was it not?

Mr. STONE. Yes. It owned all the stock. It owned part of the stock, and then subsequently all the stock.

Mr. PECORA. Mr. Stone, I show you what purports to be a photostatic copy of a resolution adopted by the executive committee of the Detroit Trust Co. on January 2, 1931. Referred to therein is a resolution creating a trust for investment of trust funds. Will you look at this photostatic copy and tell me if you recognize it to be a true and correct copy of such resolution so adopted by the executive committee of the Trust Co. on the date mentioned?

Mr. STONE (after examining paper). Yes, sir; it is.
Mr. PECORA. I offer it in evidence.

The CHAIRMAN. Let it be admitted.

(Copy of resolution creating trust for investment of trust funds, adopted by executive committee, Detroit Trust Co., Jan. 29, 1931, was received in evidence, marked "Committee Exhibit No. 104, January 30, 1934", and the same was subsequently read into the record by Mr. Pecora.)

Mr. PECORA. Was this resolution adopted at about the time that, under the advice which you say the company received, it discontinued its former practice?

Mr. STONE. On the same day, I believe, at the same meeting. Mr. PECORA. And this was designed to take the place of that practice?

Mr. STONE. Yes.

Mr. PECORA. The resolution, which has been marked in evidence as "Committee's Exhibit 104", reads as follows [reading]:

Resolved, That in the judgment of this committee a distinct and substantial advantage will accrue to the numerous trusts being administered by this company from time to time by providing a means whereby the purchases of securities in the investment of the funds of such trusts may be consolidated and made at convenient and advantageous times in substantial blocks or amounts which may be carried in readiness to be turned over in smaller amounts or individual items to each respective trust as and when such trust may have funds howsoever small in amount for investment.

Resolved further, That to accomplish the purpose and result aforesaid there is hereby segregated and set aside, out of the funds of this company, the sum of $250,000, which, and the securities purchased therewith, shall be carried in a special account on the books and records of this company, which shall be designated "trust investment trust ", and shall be handled and administered in all respects and particulars as if an independent trust created by a third part for the objects and purposes and with the terms and conditions in these resolutions declared and established, which, in addition to the foregoing, include the following, namely:

(1) The said fund shall be invested and kept invested in securities which are proper for trust investments under the terms and provisions of the trusts at such time being administered by this company as trustee, and in the absence of any express terms and provisions then under the law applicable thereto, and in such proportions of different kinds or classes as the officers of this company administering said fund from time to time may determine. Purchases for investment of said fund shall not be made in smaller blocks or amounts than $10,000, unless an especially advantageous purchase of a smaller

amount happens to be possible at a particular time. The foregoing is subject to the exception that not exceeding 10 percent of the amount put into the trust created hereby out of the funds of this company may be invested and reinvested from time to time in securities of the nature aforesaid in small or odd amounts, so as to facilitate the investment of the funds of trusts entitled to the benefit hereof and having on occasion small or odd amounts to invest. All securities purchased with and for said fund shall at all times be clearly and explicitly identified as such.

(2) As often as any trust then being administered by this company shall have funds for investment securities of the kind and nature proper for the investment of the funds of the particular trust shall be transferred from the trust created hereby to such trust in the amount needed at the actual bare cost thereof to the trust created hereby or at the then current market price thereof whichever shall be the lower, subject however to the obligation of such transferee trust to account to the trust created hereby for the interest or income which accrued on the securities so transferred up to the time of such transfer of such securities as and when such transferee trust shall make collection thereof. Nothing herein contained shall however limit or restrict this company as trustee of said transferee trust in making its regular charge under and to such transferee trust for investing the funds thereof the same as if the original act of the purchase for the trust created hereby had been performed for such transferee trust directly and immediately.

(3) The interest and income accruing from time to time on the funds and securities of the trust created hereby after being collected and received shall be paid over from time to time to this company as beneficiary of income. Profits on the sale of any securities made pursuant to the provisions of paragraph no. (4) hereof shall not be income within the intent hereof.

(4) The turning over of securities to other trusts at cost or current market whichever may be lower may result from time to time in losses to the principal of the trust created hereby. To protect against substantial impairment of the funds of the trust created hereby the officers of this company administering the same may build up and maintain a reserve equivalent to 10 percent of the amount put into the trust created hereby out of the funds of this company. Such reserve may be so built up and maintained by the sale from time to time to third parties other than any trust then being administered by this company of securities in the trust created hereby as and when it may happen that the same can be sold at a net profit. But such power and authority to sell securities shall be strictly limited to sales to create or replenish said reserve or to minimize possible loss and except for such specific purpose no securities shall be sold or transferred other than as in paragraph no. (2).

(5) The trust created hereby shall become effective on the 31st day of January 1931. All trusts being administered by this company on said day and from time to time thereafter while the trust created hereby shall continue and all beneficiaries of each such trust shall have an interest and right hereunder to the execution and performance of the trust hereof for the benefit of said respective trusts so being administered from time to time. The trust created hereby may be terminated at any time by resolution of the executive committee or board of directors of this company approved in writing by at least one adult beneficiary not being a director, officer, employee, or stockholder of this company or any affiliated corporation, of each of at least six separate and independent trusts then being administered by this company or approved by any court of competent jurisdiction upon application by this company with said number of such beneficiaries before the court as representatives of all trusts being administered by this company and all beneficiaries thereof. On termination the funds and securities then held shall become the absolute property of this company. The amount of the trust fund may be increased from time to time by resolution of the executive committee or board of directors of this company and the transferring of funds so determined thereto, but no withdrawal from or decrease of the trust fund hereunder may be made except in manner and form as herein provided for a termination of the trust.

(6) If and as often as it shall appear to be to the greater furtherance of the intention and purposes of the trust created hereby to acquire a larger amount of securities than the funds available will pay for, the trust created hereby is empowered to borrow from this company, and this company is empowered to advance to this trust any sum deemed advisable so to be borrowed; such advances, however, shall be made for the purpose only of providing funds to the

trust created hereby for the acquisition of securities for the purposes contemplated by these resolutions, and the proceeds of such advances shall not be considered as an increase of the trust fund created hereby, and shall be on and subject to these conditions: Such advance shall be repaid only as and when from time to time the securities therewith shall be taken under and pursuant to paragraph two (2) hereof by trusts entitled to the benefit hereof, the amount to be repaid shall be only the amount realized by the trust created hereby on the transfer thereof on the basis specified in paragraph two (2) hereof, and the only interest or other charge for the use of the funds so advanced shall be the interest or income actually realized in cash by the trust created hereby from the securities acquired with the funds so advanced.

Trusts being administered by this company as used herein shall include estates and agencies as well as trusts proper. Trustee as used herein shall include executor, administrator, guardian, receiver, and agent as well as trustee proper. Likewise, any of the foregoing shall be entitled to the benefit hereof where this company is such fiduciary with one or more others as well as where sole fiduciary.

Resolved further, That the officers of this company are severally authorized and directed to execute and deliver all papers and documents and do all acts requisite or appropriate to the due and effective constituting of the trust hereby created or intended so to be and to the due and effective administering thereof, the respective officers having like power and authority in relation hereto which each has in relation to the business and affairs, including the administration of trusts, of this company generally and with like power of delegation from one officer to another.

Mr. PECORA. Under the plan set up by this resolution did the trust company make a charge called an investment fee, through the trust estate for the funds it invested in this trust investment trust?

Mr. STONE. It would in case trusts were bought at cost and the trust agreement provided for the investment fee.

Mr. PECORA. And it charged that investment fee in addition to the other fees and commissions that it was entitled by law or other agreement to receive?

Mr. STONE. No. If the fees are fixed by law they are fixed only by law, as I said a little while ago, in case of court trusts, so-called "probate trusts ", trustees under a will or an executor or an administrator.

Mr. PECORA. Where this 1-percent investment fee was charged to the trusts whose funds were invested in this trust investment trust created under this resolution, did the trust company acting as trustee make any charge for its service as such trustee additional to this 1-percent investment fee?

Mr. STONE. Only in case permitted by law or by the terms of the agreement.

Mr. PECORA. That is exactly what I am trying to get at.

Mr. STONE. Yes.

Mr. PECORA. That this 1-percent investment fee was in addition to those other fees and commissions.

Mr. STONE. No; it was provided in the agreement itself, and so far as the fees in the court were concerned, probate fees, the probate court permitted them, allowed them on accounting, where the trust company did the work of finding the investments, investigating them, and purchasing them. It was for that service that the investment fee was charged, and the securities were put in the trust at cost, so that it made just the one fee out of it.

Mr. PECORA. What kind of securities were put into this investment trust?

175541-34-PT 11-17