the amount set forth in that memorandum, which should be used for that purpose. The reason for the statement "before the next call" was probably in order that this would be done so that no statement would be made public indicating-I believe that was $600,000? Mr. PECORA. $600,000.

Mr. VERHELLE. Indicating $600,000 more of undivided profits than there would be there should the reserve account be bolstered up to that extent.

Mr. PECORA. What was considered to be the desirability of bolstering up the reserve account before the issuance of the next statement in response to the comptroller's call for a report of condition?

Mr. VERHELLE. The principal reason would be so as to not reflect an erroneous impression that the bank had made a certain amount of money. I do not recall exactly the particular circumstances regarding that, that is, as to what their figures were, and what had been_contributed to the reserve account up to that particular time, but I presume that the amount contributed to that account had not been sufficient, in my opinion, at that time to properly take care of the reserve account.

Mr. PECORA. Do you know whether the transfer that you recommended in this memorandum was made?

Mr. VERHELLE. I have been trying to recall it, and I do not recall, sir, whether it was or not.

Mr. PECORA. Was this recommendation part of a desire to "window dress" the condition of the bank?

Mr. VERHELLE. It was just the opposite, sir.

Mr. PECORA. So that certain conditions would be shown in the call statement?

Mr. VERHELLE. The effect of that would be the very opposite.

Mr. PECORA. Why was it desired to be done before the next call? Mr. VERHELLE. Because at that time the statement would be published indicating undivided profits $600,000 more than actually would be there if that transfer were made.

Mr. PECORA. Did you want to reduce the item of undivided profits by $600,000?

Mr. VERHELLE. I doubt very much whether that would have reduced it from the previous call. I presume that the earnings during that period were probably considerably in excess of that amount, and I doubt seriously whether that would have affected the undivided profits as compared with the previous call.

Mr. PECORA. One of the other documents produced by you last week and marked for identification as " Committee's Exhibit No. 29. of January 25, 1934 ", consists of a copy of a memorandum addressed by you to Mr. Mills under date of May 27, 1932. I now show you that exhibit, marked for identification. Will you look at it and tell me if you recognize it to be a true and correct copy of the memorandum submitted by you to Mr. Mills on or about the date which it bears?

Mr. VERHELLE (after examining paper). Yes, sir; I do.

Mr. PECORA. I offer it in evidence.

The CHAIRMAN. Let it be admitted.

(Memorandum May 27, 1932, Verhelle to Mills, heretofore marked "Committee's Exhibit No. 29 for Identification, January 25, 1934",

was received in evidence, marked "Committee Exhibit No. 97, January 30, 1934 ", and the same was subsequently read into the record by Mr. Pecora.)

Mr. PECORA. The memorandum received in evidence as Committee's Exhibit No. 97 of this date contains, among other things, the following statement [reading]:

In line with this same subject, and while you are considering organization, I want to take the opportunity to suggest to you the substance of recommendations that have been made to the senior executive loaning officers of the bank from time to time during the past 2 years.

The best evidence to the fact that our present system is wrong lies in the terrific losses which we have incurred in the past and are still suffering from day to day.

What did you have in mind, or to what, specifically, did you refer by that language?

Mr. VERHELLE. I believe I referred to the. organization of the loaning groups, together with their relationship to the credit department.

Mr. PECORA. What were the terrific losses referred to?

Mr. VERHELLE. I would say that they are the items that the examiners placed in the loss columns at the times of their examinations. Mr. PECORA. That refers specifically to the operations or the activities of some of the senior officers. Can you designate the officers that you had in mind?

Mr. VERHELLE. Well, sir, it hardly refers to the operations of the senior executive officers. It refers to the operations of the loaning groups, and their relationship with the credit department, and the organization of the loaning groups themselves.

Mr. PECORA. Can you not designate the officers by name?

Mr. VERHELLE. There were probably thirty to fifty loaning officers in that bank, sir. This referred to the organization of them, as between themselves and the credit department.

Mr. PECORA. When you referred to the relations of these officers, what did you mean?

Mr. VERHELLE. I meant their particular physical and other interdepartmental set-ups, through which they would receive the greatest benefits from the sources at their disposal, which were used for the investigation of names and the development of credits.

Mr. PECORA. In this same memorandum you say as follows, or you make the following recommendation [reading]:

All matters pertaining directly and indirectly to one name should be handled by one officer, irrespective of the division of the alphabet in which the name may fall, and the customer's choice should determine the officer. Incidentally, the amount of paper dependent upon endorsement for its value is completely out of line with other banking institutions.

Tell us more in detail what you found to be the facts that evoked this recommendation from you.

Mr. VERHELLE. The set-up had been made requiring the customers to go to certain officers in connection with their loans. These officers depended entirely upon the first letter of the last name of the customer. My thought in the matter was that this meant that a new officer had to become thoroughly acquainted again with the financial condition of the borrower, and that the arrangements that had been negotiated as between borrower and the bank would again have to be

reinstated, and for a multitude of other minor reasons. My thought was that it was a better plan to have the customer go to the particular officer who was familiar with his financial situation; and, furthermore, that all of his transactions-that is, all of his loans should be handled through that one officer or loaning group, so that that loaning group would be familiar with all the transactions involving that particular customer.

Mr. PECORA. What were the facts you found which called forth particularly the comment [reading]:

Incidentally, the amount of paper depending upon endorsement for its value is completely out of line with other banking institutions?

Mr. VERHELLE. I do not recall what the percentages were, but I do know that at time the amount of such paper considerably exceeded the normal amount of that type of paper carried by a bank.

Mr. PECORA. Do you recall whose endorsements were in question? Mr. VERHELLE. No; that is just a particular type of paper, sir. That is paper depending upon the endorsements of others than the maker.

Mr. PECORA. Did any of those notes include those endorsed by officers of the bank?

Mr. VERHELLE. Such as there were, I believe I outlined, or they were outlined in various reports submitted, I am sure, by the personnal department, and so forth; but that would be an infinitesimal amount, and had nothing to do with that particular comment.

Mr. PECORA. You found, in making the examinations which were covered in your confidential memorandum to Mr. Mills, which is in evidence, that there were officers of the bank who apparently had received the benefit of discounts of paper signed by persons other than themselves, did you not?

Mr. VERHELLE. To the extent that it was indicated in that confidential report at that time.

Mr. PECORA. Did you make mention of those instances, and of all those instances, in the confidential report to Mr. Mills?

Mr. VERHELLE. All those that I had verified and knew to be a fact, I stated in there. That is, I went absolutely according to the records of the bank, and outlined all the transactions which might be subject to criticism.

Mr. PECORA. Among those transactions which you so characterized and called attention to in your confidential memorandum were transactions in which officers who received the benefits of those discounts, did not have their names appear whatsoever on the discounted paper. Do you recall such instances?

Mr. VERHELLE. I wonder if I may have that question once again? (The reporter read the pending question.)

Mr. VERHELLE. I do not right now, sir.

Mr. PECORA. Now, I show you another one of the documents produced by you last week, which was marked "Committee's Exhibit No. 61 ", for identification on January 25 last. Will you look at it and tell me if you recognize it to be a true and correct copy of a memorandum submitted by you to the operating committee on June 1, 1932? Mr. VERHELLE (after examining paper). I do, sir.

Mr. PECORA. I offer it in evidence.

The CHAIRMAN. Let it be admitted.

(Memorandum June 1, 1932, Verhelle to operating committee, heretofore marked for identification " Committee's Exhibit 61 ", Jan. 25, 1934, was received in evidence, marked "Committee's Exhibit No. 98", Jan. 30, 1934, and the same was subsequently read into the record by Mr. Pecora.)

Mr. PECORA. The memorandum has been marked in evidence as "Committee's Exhibit No. 98" of this date, and contains the following statement, Mr. Verhelle [reading]:

Due to the dangers originating with our employees' loans, it is recommended that we determine the total liability of all officers and employees and that no officer or employee of any of the units, whose total unsecured liabilities exceed three times his or her annual salary, be permitted to handle cash or securities. If the officer or employee is past 55 years of age this limit should be placed at unsecured liabilities of twice the annual salary.

What were the circumstances that called forth this recommendation?

Mr. VERHELLE. I do not specifically recall, sir. I think the circumstances are possibly outlined in the operating committee minutes of that particular day.

Mr. PECORA. What were the dangers to which you referred in this memorandum?

Mr. VERHELLE. Predicated on the same theory as the present rules and regulations recently covered by the Banking Act of 1933 are predicated upon.

The CHAIRMAN. Had many loans been made to employees?

Mr. VERHELLE. No new loans were made to employees at that time, sir.

The CHAIRMAN. I did not get you.

Mr. VERHELLE. No new loans were made to employees at that time, sir.

Mr. PECORA. No new loans?

Mr. VERHELLE. Not to my knowledge.

Mr. PECORA. The chairman did not ask you that.

Mr. VERHELLE. I beg your pardon.

The CHAIRMAN. I asked you if loans had been made to employees? Mr. VERHELLE. Yes, sir.

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

(Whereupon, at 1 p.m., Tuesday, Jan. 30, 1934, a recess was taken until 2 p.m. of the same day.)

AFTERNOON SESSION

Upon the expiration of the noon recess the committee reconvened at 2 o'clock p.m.

The CHAIRMAN. The committee will come to order, please.

Mr. PECORA. Mr. Chairman, may I state for the purpose of the record that communication has been received from Dr. C. R. Davis, of Detroit, Mich., in which in substance he states that, owing to the physical condition of Mr. Donald N. Sweeny, the attendance of Mr. Sweeny before this committee in response to a subpena which has been served upon him would subject Mr. Sweeny to possible serious consequences to his health. He indicates further that Mr. Sweeny is willing to give such testimony as may be desired of him at his bedside in his home.

TESTIMONY OF JOSEPH F. VERHELLE Resumed

Mr. PECORA. Mr. Verhelle, among the other memoranda which you produced last week is this one marked "Committee's Exhibit No. 17 for identification as of January 25, 1934 ", which purports to be a copy of a memorandum submitted by you to Mr. Wilson W. Mills. chairman of the board, First Wayne National Bank, dated May 5. · 1932. Will you look at the document in question and tell me if it is a true and correct copy of the memorandum submitted by you to Mr. Mills on or about that date?

Mr. VERHELLE. It is.

Mr. PECORA. I offer it in evidence.

The CHAIRMAN. Let it be admitted.

(Memorandum from Joseph F. Verhelle to Wilson W. Mills, dated May 5, 1932, previously marked for identification, upon being admitted in evidence, was designated "Committee Exhibit No. 99, Jan. 30, 1934", and appears in full at the end of today's record.)

Mr. PECORA. Among the rules that you recommended in this memorandum be adopted by the bank is the following, designated as "Item No. 12":

That a report be submitted to the loan groups by the operating end of the loan department-that is, the discount cage-which report will go to all of the loaning officers and which will cover all loans. The loaning officers should not have access to the liability ledgers nor to the notes, and all loans should be reviewed by the entire group. This procedure involves considerable explanation, all of which has been covered in memorandums previously submitted and which we will be glad to review with you at your pleasure.

What reason did you have, or what reasons did you have, for advancing this particular recommendation?

Mr. VERHELLE. A note to a bank is about as important to it as its cash. The liability record itself retains practically the same position. It was always very difficult to keep the liability records in balance and to keep the notes properly balanced up. It was with that in mind, together with the fact that it was better practice to definitely place the responsibility for the notes in the hands of some specific individual or limited number of individuals, that that recommendation was made.

Mr. PECORA. Why did you consider it undesirable that the loaning officers should not have access to the liability ledgers?

Mr. VERHELLE. There are quite a number of reasons for that, and it is general practice to keep the liability ledgers and the notes directly under the control of others than those handling the notes. It serves many purposes, the principal and outstanding one being that the discount teller will normally see to it that the new note taken either as a renewal or a part renewal will have and contain all of the endorsements that the original note contained; that the same individuals will definitely be liable there for on the renewed note as they were on the old note. I think that is about the total. Mr. PECORA. Now, Mr. Verhelle, why did you recommend in this memorandum that the loaning officers should not have access to the notes?

Mr. VERHELLE. My explanation on the endorsements pertained to the notes. The liability ledger is merely a ledger sheet containing the debits and credits, the amount, that is, the payments and the