those unit banks, discussed by the board of directors of the Detroit Bankers Co.?

Mr. STONE. I do not recall that they were, but that does not mean that they were not.

Mr. PECORA. From the fact that you do not recall that they were, and your statement that that does not necessarily mean that they were not, is it fair to infer that you were not a regular attendant at meetings of the board of directors of the Detroit Bankers Co.?

Mr. STONE. NO. I was quite a constant attendant, except when I went away on a vacation.

Mr. PECORA. The Detroit Bankers Co., as virtually the sole stockholder of these various banks, had a very legitimate and natural interest, in fact, an impelling interest, in keeping itself informed as to the condition of its various unit banks?

Mr. STONE. Yes.

Mr. PECORA. And for that reason I would assume that reports of examinations made by both the Federal and State banking authorities of the various unit banks would be brought to the notice of the board of directors of the Detroit Bankers Co., because of the legitimate interest they had in the condition of the unit banks. Is that a fair assumption?

Mr. STONE. I imagine they were not. I imagine they were submitted to the directors of the national bank in the group, but I doubt whether those reports were submitted to the directors of the Detroit Bankers Co. I think I would have remembered if it they had been.

Mr. PECORA. In view of the fact that there sat on the boards of directors of these various National and State banks that were units of the group, gentlemen who were also officers and directors of the group, would not the knowledge that those gentlemen acquired as directors of the unit banks be their knowledge as directors of the holding company?

Mr. STONE. Yes. You mean that whatever persons were directors of the First National Bank-let us take it after it was consolidatedand were also directors of the Detroit Bankers Co. would as directors of the Detroit Bankers Co. have knowledge of these examiners report?

Mr. PECORA. Exactly.

Mr. STONE. Certainly.

Mr. PECORA. And when they sat at board meetings of the Detroit Bankers Co. they did not leave their knowledge of the unit banks, acquired by them as directors of the unit banks, wholly outside the board room, did they?

Mr. STONE. Not at all.

Mr. PECORA. And it is fair to assume that that knowledge contributed to the action, or to the decisions which the board of directors of the Detroit Bankers Co. made from time to time on matters of company policy, is it not?

Mr. STONE. To the extent that the facts in the examiner's report would have reference or have a bearing, yes.

Mr. PECORA. Was there never any discussion at board meetings of the Detroit Bankers Co. that you now recall of matters connected with the operation and condition of the various unit banks

that had been the subject of criticism to those banks by the bank examiners, both State and Federal!

Mr. STONE. I do not recall anything specifically. I think they were handled within the meetings of the directors of the banks themselves.

Mr. PECORA. Now, with regard to the fourth paragraph of Mr. Carroll's letter to the Detroit Trust Co. marked in evidence as "Committee's Exhibit 109 ", under the caption of Reserves ", Mr. Carroll said, in part, as follows [reading]:

This Department frowns upon the plan of building up your reserves through a reciprocal deposit arrangement with other Detroit banks. We realize the present plan of setting up reserves was recently inaugurated. However, the plan of reciprocal deposits should be discontinued as fast as the necessary reserves are built up. Kindly advise the status of your reserves on date of reply.

What kind of reciprocal deposit arrangement was Mr. Carroll referring to there, Mr. Stone?

Mr. STONE. He was referring to deposits made by the First National Bank of Detroit, I think it was called then, and the Peoples Wayne County Bank, and the Detroit Savings Bank, upon certificates of deposit with us.

Mr. PECORA. Those are the deposits that are specifically mentioned in Committee's Exhibit No. 108, consisting of Mr. Van Every's report or statement, are they not?

Mr. STONE. Yes.

Mr. PECORA. And according to committee's exhibit 108, the aggregate amount of those deposits on August 8, 1931—or rather, that was the date when they were opened-was $6,700,000, distributed through those three banks, the Peoples Wayne County Bank, the First National Bank of Detroit, and the Detroit Savings Bank.

Mr. STONE. That is correct.

Mr. PECORA. Now, at the time of the making of these deposits by the Detroit Trust Co. in those three banks of trust funds aggregating $6,700,000, did those three banks, in turn, make reciprocal deposits corresponding to the respective deposits opened with them? Mr. STONE. They made deposits, but not reciprocal deposits. Mr. PECORA. What kind of deposits did they make?

Mr. STONE. May I see that memorandum, please?

Mr. PECORA. This one [indicating], or Mr. Carroll's letter?
Mr. STONE. Either one.

(Mr. Pecora handed a paper to the witness.)

Mr. STONE. They were not reciprocal, because these deposits in Exhibit No. 108, $6,700,000, were fiduciary accounts. The deposits which were made by the banks with us were on certificates of deposit, ordinary deposits. They were not reciprocal.

Mr. PECORA. What was the amount of those deposits made with the Detroit Trust Co. by those three banks at the time of the opening of these three deposit accounts with those three banks?

Mr. STONE. They were the same amounts.

Mr. PECORA. They corresponded exactly, did they not?
Mr. STONE. Yes.

Mr. PECORA. $6,700,000 in the aggregate?

Mr. STONE. That is correct.

Mr. PECORA. You say they were not reciprocal deposits?

Mr. STONE. No, sir.

Mr. PECORA. How do you account for the absolute correspondence in amount? That was not a mere coincidence, was it?

Mr. STONE. No; not at all. We found it advisable to segregate our trust balances; that is, to make deposits in other banks separately, as to fiduciary accounts.

Mr. PECORA. Yes.

Mr. STONE. We had not sufficient cash balances at the time to do that, so we solicited deposits from the First National Bank of Detroit, the Peoples Wayne County Bank, and the Detroit Savings Bank, those three banks mentioned there.

Mr. PECORA. And you got deposits in response to your solicitations from those three banks?

Mr. STONE. Yes.

Mr. PECORA. In amounts exactly corresponding to the amounts of deposits of fiduciary funds that the Detroit Trust Co. made in those three banks?

Mr. STONE. That is correct.

Mr. PECORA. And you got them at the same time that you made those deposits in those three banks of fiduciary funds, did you not? Mr. STONE. That is correct.

Mr. PECORA. You say those are not reciprocal deposits?

Mr. STONE. No, sir.

The CHAIRMAN. They are reciprocal in amount.

Mr. STONE. They are equal in amount and equal as to date. Senator COUZENS. What did you say to those banks when you asked them for a deposit?

Mr. STONE. I do not recall.

Senator COUZENS. Now, Mr. Stone, you know just as well what took place at those times as any person that was ever on this witness stand.

Mr. STONE. Yes.

Mr. PECORA. You know what was said to those banks when you solicited deposits. I would like to have the record show what you said to the banks.

Mr. STONE. I do not recall the exact conversation, but I presume we said to them that we needed these funds to segregate our trust balances.

Senator COUZENS. Then what did you do?

Mr. STONE. Then what?

Senator COUZENS. Then what did you promise to do? When you solicited these deposits, what did you promise the banks to do when you got the deposits?

Mr. STONE. We did not promise them anything that I know of, except to pay them as we were able to collect out of the assets of the company sufficient for that purpose, and that was done. Those certificates of deposit were reduced from tome to time as the company was in funds for that purpose.

Senator COUZENS. Now, look here. When you asked the Detroit Savings Bank, for example-I am just using that because that was not one of your subsidiaries or group units when you asked them for a deposit of half a million dollars, didn't you promise to put half a million dollars back as a trust fund?

Mr. STONE. Yes.

Senator COUZENS. That is what I am trying to get at.
Mr. STONE. Certainly.

Senator COUZENS. Is not that reciprocity?

Mr. STONE. It is not a reciprocal account. It is reciprocity.

Senator COUZENS. Certainly. What is the difference between a reciprocal account and reciprocity? You told the Detroit Savings Bank that if they would put in half a million dollars with you, under a certificate of deposit, you would, in turn, put half a million dollars back with them.

Mr. STONE. The difference is

Senator COUZENS. You do not deny that, do you?

Mr. STONE. No; that is all right. The difference is that the fiduciary account belonged to the trusts.

Senator COUZENS. We understand that. But you know that you did not have the money that you ought to have had for your fiduciary account. You had used it for other purposes and, therefore, did not have your fiduciary cash that was required by law, so you borrowed it, in effect, from these other units to make good your fiduciary account. You cannot deny that. That is a fact.

Mr. STONE. We did not borrow it.

Senator COUZENS. No; you got it as a deposit.
Mr. STONE. Yes.

Senator COUZENS. You can use all the technical language you like. It does not change the views of this committee.

Mr. STONE. A reciprocal account is where there is a mutual offset. There was none in this case. One deposit belonged to the trusts. The other belonged to the banks which made the deposits.

Mr. PECORA. Was not that mutual offset claimed by the savings bank in this particular instance?

Mr. STONE. Yes. It was also claimed at first by the national bank, and the receiver of the national bank, by instructions of the Comptroller, recognized that it was not reciprocal, that there was no offset, and paid the dividends upon the fiduciary accounts.

The CHAIRMAN. Was any interest paid by you on these deposits or by the banks?

Mr. STONE. Yes, sir.

The CHAIRMAN. The interest was the same each way?

Mr. STONE. I would not be able to testify as to that. The deposits received the current rate of interest paid by the bank, and the certificates of deposit bore some rate of interest. I do not recall what it was.

The CHAIRMAN. We will take a recess now until 2 o'clock.

(Whereupon, at 1 p.m., Wednesday, Jan. 31, 1934, a recess was taken until 2 p.m. of the same day.)

AFTER RECESS

The subcommittee resumed at 2 p.m., on the expiration of the

recess.

The CHAIRMAN. The subcommittee will resume. ahead, Mr. Pecora.

Mr. PECORA. Mr. Stone will resume the stand.

You may go

TESTIMONY OF RALPH STONE-Resumed

Senator COUZENS. Mr. Stone, while Mr. Pecora is looking up some data, let me ask you this question: When you decided to set up these fiduciary trust balances you did not have the money to do it with, as I understood you to testify this morning, did you?

Mr. STONE. Not sufficient money.

Senator COUZENS. What became of the money that was held in the fiduciary department so that you were unable to set up the necessary reserves?

Mr. STONE. It was represented in the company investments and company cash.

Senator COUZENS. What do you mean by " in the company cash "? Mr. STONE. Cash in banks to the credit of the Detroit Trust Co.in various banks.

Senator COUZENS. Couldn't you have withdrawn that money and put it into your fiduciary trust account?

Mr. STONE. Yes; if the amount was sufficient. But we had to keep balances for company use as well.

Senator COUZENS. So you conceived this method of getting deposits to enable you to cover the trust accounts?

Mr. STONE. Yes, sir; until company assets could be converted sufficient to cover it.

Senator COUZENS. I have been wondering how it was that company assets, the fiduciary trust account I mean, became involved in the investment business.

Mr. STONE. Well, they did not until as depreciation progressed it was difficult to make collections, and collections became slower. Prior to that time we generally, or almost always, had on hand an amount in excess of the trust balances. It was that which called our attention to the necessity of making the segregation actual.

Senator COUZENS. Well, at some time or other, then, you must have invested those fiduciary trust balances in company investments, otherwise you could not have used up the balances.

Mr. STONE. Naturally; yes.

Senator COUZENS. Well, do you think that was an ethical practice, to use fiduciary trust balances with which to make company investments?

Mr. STONE. Oh, yes. That was what was done with deposits generally. It is recognized in the Federal Reserve Act. That act provides that national banks with trust departments may deposit their trust balances in the banking department. They are required, by the act I mean, to set aside securities, consisting of United States bonds and other classes of bonds specified by the Federal Reserve Board, as proper for that segregation to secure it.

Senator COUZENS. But you had not followed that practice, otherwise they would have been available to make good your fiduciary balances.

Mr. STONE. We had not followed actual segregation, but we had the capital, surplus, and undivided profits as security. The same practice prevails in New York State.

Senator COUZENS. I do not understand how your capital could be considered an equivalent security, because it was not available when you wanted it to make good your trust balances.