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Washington, D.C. The subcommittee met at 10:30 a.m., pursuant to adjournment on yesterday, in room no. 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding.

Present: Senators Fletcher (chairman) and Couzens.

Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee; and Frank J. Meehan, chief statistician to the committee.

The CHAIRMAN. The subcommittee will come to order. I wish a notation made on the record that in view of Dr. Davis' certificate, the subcommittee will excuse Mr. Sweeny.

Now, Mr. Pecora, you may proceed.
Mr. PECORA. Mr. 'Štone will resume the stand.



Mr. PECORA. Mr. Stone, are you familiar with the issuance and sale by the Detroit Trust Co. for a period commencing about in January of 1927 and up to and including April of 1931, of participation certificates representing an interest in pooled mortgages.

Mr. STONE. I have had very little to do with that. I sat in on officers' conferences with respect to them from time to time, but I am not very familiar with those. Mr. Browning, our president, had jurisdiction of that and looked after it personally.

Mr. PECORA. Well, are you familiar with the initiation of that practice?

Mr. STONE. Yes, sir.
Mr. PECORA. Will you tell us about that, then?
Mr. STONE. Your record says it started in January of 1927?
Mr. PECORA. About that time.

Mr. STONE. There was a large demand for mortgages for investment purposes, and likewise a large demand for the borrowing of money secured by mortgages, and we felt that we could meet that demand by taking blocks of mortgages and putting them into units, depositing them with the Detroit Trust Co. as depositary, and issuing certificates against them as such depositary of an undivided interest in those mortgages.

Mr. PECORA. In what denominations were those certificates issued! I mean the participation certificates.

Mr. STONE. I think they were $500 and $1,000. There may have been smaller denominations but I do not recall.

Mr. Pecora. There was no guaranty accompanying those participation certificates of the payment of principal or interest by the Detroit Trust Co., was there?

Mr. STONE. None. The circulars offering them for sale expressly stated that there was no personal obligation on the part of the Trust Co.

Mr. PECORA. Do you know the extent to which those participating certificates were issued ?

Mr. STONE. I believe up to 25 million dollars, and paid down I think to about 19 million dollars. That is my recollection but I am not positive.

Mr. PECORA. And how many of those certificates were purchased for the account of trust estates that the Detroit Trust Co. was administering?

Mr. STONE. I am afraid I cannot answer that.

Mr. PECORA. Did those participating certificates that were so issued and sold bear a flat rate of interest ?

Mr. STONE. Yes, I think so.
Mr. PECORA. What was it?
Mr. STONE. In some cases 6 percent and in others 512 percent.

Mr. PECORA. How did that rate of interest correspond to the interest charge as fixed in the mortgages that made up the pool with respect to which the participation certificates were sold !

Mr. STONE. I do not believe I know. I imagine they were, generally speaking, the same rate of interest as the mortgages in the obligations, or pools, as you call them. I am not sure about that. That would involve an examination of each of the mortgages niaking up each series.

Mr. Pecora. Do you know in how many series these certificates were issued ?

Mr. STONE. No; I could not testify to that.

Mr. PECORA. Our information is that there were 35 series. Does that accord with your recollection?

Mr. STONE. I imagine, around that figure.

Mr. PECORA. Which officer of the Trust Co. had special charge of the issuance of these participation certificates!

Mr. STONE. They were administered in the trust department, and I do not really know what particular trust officer handled it.

Mr. PECORA. You said at the outset, when I started to question you about the issuance and sale of these participation certificates, that you had very little to do with them, and you referred me to Mr. Browning

Mr. STONE. I say Mr. Browning, because he was the officer in charge of the administrative detail of the company.

Mr. PECORA. Mr. Thomas, are you more familiar with the details of these participation certificates than you believe Mr. Stone is?

Mr. THOMAS. I think perhaps I am; yes.
Mr. Pecora. I will examine you about them, then.



(The witness was duly sworn by the chairman on yesterday.)

Mr. PECORA. You have heard the examination of Mr. Stone up to the present moment at this hearing, have you not?

Mr. THOMAS. Yes.

Mr. PECORA, I am resuming your examination at the point where I just left off with Mr. Stone, and that is with respect to the flotation of these certificates of participation by the Detroit Trust Co., including trust accounts. Can you tell us what proportion of these certificates were sold by the Trust Co. to itself as trustee for trust accounts?

Mr. THOMAS. I cannot say accurately, but my recollection would be about 20 percent, or, roughly, $5,000,000.

Mr. PECORA. There have been supplied to us, Mr. Thomas, various statements which I will now show you and which are confirmed and verified and signed by Mr. Van Every, auditor of the Detroit Trust Co., under date of January 6, 1934. Those statements purport to show various facts with regard to the issuance of certificates of participation in these various series, 35 in number. Will you look at these statements, signed by Mr. Van Every, Mr. Thomas, and tell us if you can confirm their contents ?

Mr. THOMAS. Of course, I cannot certify as to the figures, but I assume, because Mr. Van Every has signed them, that they are correct.

Mr. Pecora. I offer them in evidence, without their being spread on the record.

The CHAIRMAN. They may be admitted.
Senator COUZENS. To be marked as one exhibit?
Mr. PECORA. Yes, sir.

(A number of statements, verified by Mr. Van Every, auditor of the Detroit Trust Co., under date of Jan. 6, 1934, relating to issuance of certificates of participation by the Detroit Trust Co., were received in evidence and collectively marked “Committee Exhibit No. 105, Jan. 31, 1934.")

Mr. PECORA. The mortgage loans represented by these participation certificates or which underlie the participation certificates were mortgage loans made in the first instance by the Detroit Trust Co., were they not?

Mr. THOMAS. That is right.

Mr. PECORA. And in the making of these mortgage loans I presume the Trust Co. made the usual charges for its services by way of appraisals, and so forth, for loaning money?

Mr. Thomas. Yes. They made a service fee or charge to the mortgagor when the mortgage was made.

Mr. PECORA. Was there any rate for such charges?
Mr. THOMAS. Any rate?
Mr. PECORA. Yes.
Mr. THOMAS. It was a fixed rate.
Mr. PECORA. What was it?

Mr. THOMAS. It varied from time to time, depending on the general rates charged by other institutions in the city, but I think you will find that the average rate is very close to 2 percent.

Mr. PECORA. What was the range of charge-between 2 and 3 percent?

Mr. THOMAS. I think that on some it was a little less than 2, but the average, I think you will find, is very close to 2 percent, possibly a little less.

Mr. PECORA. When the Trust Co. sold to itself as trustee of trust accounts any of these participating certificates, did the Trust Co. as trustee charge the trust estate with any investment fee, so called !

Mr. Thomas. It may have charged the 1 percent investment fee if the agreement permitted it.

Mr. PECORA. Can you not give us the facts definitely as to whether or not it did charge the trust estate 1 percent investment fee under such circumstances ?

Mr. Thomas. I imagine it did. If you have anything to refresh my recollection with any specific cases, of course, I could tell definitely

Mr. PECORA. Mr. Thomas, you as treasurer of the Trust Co. during that time ought to be able to tell us from memory if that was the policy of the Trust Co.

Mr. THOMAS. I think the policy was the same with respect to participation certificates as it was as to other types of bonds, except that the mortgages, of course, were made at par and put into the participation series at par and sold to the trusts at par; that is, the participations in those mortgages. On the trusts on which we were entitled to charge the 1-percent investment fee I naturally suppose it was charged; yes.

The CHAIRMAN. You got 2 percent from the mortgagor and a 1percent investment fee?

Mr. THOMAS. Two percent for making the mortgage.
The CHAIRMAN. That was paid by the mortgagor, was it not?
Mr. THOMAS. That is right.
The CHAIRMAN. And 1 percent for handling the trust!

Mr. Thomas. Yes, sir. That would just be on certain trusts, of course. In the court trusts there was no profit taken-no fee taken.

Mr. PECORA. In those cases where the Trust Co. as trustee purchased these participating certificates and charged, by virtue of the agreement that you have referred to, 1-percent investment fee to the cestui que trust, the Trust Co. as trustee also collected whatever other fees and commissions the statute entitled it to receive?

Mr. THOMAS. Yes, sir.

Mr. PECORA. According to the figures and statements represented on exhibit no. 105, offered in evidence this morning, the total amount of participating certificates purchased by the Detroit Trust Co. as trustee for trust accounts, from the Detroit Trust Co., was $5,589,500 face value, out of the total issue aggregating about $25,000,000. Does that conform to your recollection?

Mr. THOMAS. I would judge that is about right; yes. Mr. PECORA. Do you know what disposition the Trust Co. made of the other participating certificates in these 35 issues aggregating $25.000.000 ?

Mr. Thomas. They were sold to the general public.
Mr. PECORA. At par?

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