Mr. PECORA. But the terms of purchase were not indicated.

Mr. STONE. If they bought direct from the First Detroit Co., they would be.

Mr. PECORA. Do you know of such cases?

Mr. STONE. Not personally. I did not have anything to do with them.

Senator ADAMS. For my own information, do I understand that the Trust Co., which became the trustee, was practically buying from itself, for the use of this trust, securities, and making a profit out of the transaction?

Mr. PECORA. It goes even beyond that. The Trust Co. was a unit of the Detroit Bankers Co., and it purchased mortgage-bond certificates from one of the investment affiliates of the same company, the Detroit Bankers Co., at a price which yielded a profit to the investment affiliate, and then sold those to the trust estates at a still higher price.

Senator ADAMs. Was the trust estate charged a commission or an expense charge in handling the money?

Mr. PECORA. Yes. That is true, is it not, Mr. Stone?

Mr. STONE. Yes.

Mr. PECORA. The Trust Co. collected its usual fees and commissions, those fixed by the statute, in addition to the profit it made through the mark-up of prices.

Mr. STONE. I repeat again, in those cases where they had permission to do so by the terms of the trust investment; not in other cases. Mr. PECORA. Yes; I say in those cases, in addition to making the profit that it realized from the sale of its own securities to the trust estates, it also collected the fees and commissions that it was authorized by law to receive as trustee, did it not?

Mr. STONE. I think where there was an investment fee provided in the instrument itself there was no profit taken. Where there was not an investment fee there was a profit taken only in cases where the instrument expressly provided for it.

Mr. PECORA. And in those cases, where an investment fee was provided for, did the Trust Co. also charge a fee or commission for the handling of the investment funds in addition to the investment fee?

Mr. STONE. I think not.

Mr. PECORA. Are you sure of that, Mr. Stone?

Mr. STONE. No; I am not sure. I was not the officer who administered that, so I am speaking not from very definite memory about it.

Mr. PECORA. Mr. Stone, is there any officer or former officer of the Detroit Trust Co. now available who had a longer experience and affiliation with the Trust Co. than you have had?

Mr. STONE. No; not in all capacities. That is true.

Senator COUZENS. You know, Mr. Stone, that in addition to the profit on these transactions which Mr. Pecora has been talking about, you made a collection charge even though you waived an investment charge?

Mr. STONE. Oh, yes; that is for services as trustee.

Mr. PECORA. That is what I am getting at.

Mr. STONE. Yes.

Senator COUZENS. That is what Senator Adams was driving at. Senator ADAMS. In addition to that, Senator Couzens, the question in my mind was not only as to the propriety, but to the legality of a purchase by a trustee for a trust from itself, regardless of the price at which it is purchased.

Senator COUZENS. I think that memorandum gave that authority. The CHAIRMAN. It depends on the trust agreement.

Senator ADAMS. I will go further than that and question the right of the trustee to make contracts with the cestui que trust which enabled it to have the opportunity to take advantage of it.

Mr. PECORA. I know of no other cases, Senator, where an agent or trustee would be permitted to keep a profit which it made under similar circumstances.

The CHAIRMAN. Did the Trust Co. also have the right, after acquiring certain securities for a trust estate, to change that investment at its will, and sell those securities for the trust estate, and buy other securities for the trust estate?

Mr. STONE. Oh, yes; in the performance of its regular duties as

a trustee.

The CHAIRMAN. They could do that at will, without consulting the cestui que trust?

Mr. STONE. Some trust instruments provide for approval by cestui que trusts. Some do not. Some are minors who have not judgment and discretion enough. In some there are no provisions at all giving anybody, where it is a cestui que trust or co-trustee, powers of that kind, and in those cases the Trust Co. had to exercise it alone. Where the instrument provided for consultation and getting the approval of the cestui que trust or co-trustees, they got it. Then there were frequent accounts, quarterly, semiannually, and annually, two copies of which were sent to the cestui que trust, showing all the facts, and filed in court, in the case of court trusts, so that they were all fully informed.

Mr. PECORA. Mr. Thomas, I want to show you a statement signed by Felix M. Farrell, under date of January 9, 1934. Will you look at it and tell me if you recognize the signature to be that of Mr. Farrell?

Mr. THOMAS (after examining paper). I think that is Mr. Farrell's signature, although I have only seen it on one or two occasions. I am not familiar with the exhibit at all. I do not believe I have ever seen it.

Mr. PECORA. I offer it in evidence.
The CHAIRMAN. Let it be admitted.

(Statement January 9, 1934, signed Felix M. Farrell, was received in evidence, marked "Committee Exhibit 102, January 30, 1934 and the same will be found at the conclusion of today's proceedings.) Mr. PECORA. Mr. Stone, do you know a gentleman employed as an auditor by the Detroit Trust Co., by the name of Van Every? Mr. STONE. Yes.

Mr. PECORA. I show you this document, which bears the signature reading "F. C. Van Every ", as nearly as I can make it out. Will you look at it and tell me if you recognize it to be the signature and handwriting of Mr. Van Every?

Mr. STONE. (after examining paper). Yes, I think it is.

Mr. PECORA. I offer that in evidence.

The CHAIRMAN. Let it be admitted.

(Document signed F. C. Van Every, Jan. 9, 1934, was received in evidence, marked "Committee Exhibit No. 103, January 30, 1934," and will be found at the conclusion of today's proceedings.)

Mr. PECORA. The first one of these two exhibits, marked "Committee's Exhibit No. 102", bears the signature of Mr. Felix M. Farrell under the following statement (reading):

I hereby verify the above unit costs and other relative figures are as per the records of the First Detroit Co.

It is dated January 9, 1934. It shows, among other things, that there were acquired by the Detroit Trust Co.-the transaction being indicated by invoice no. 7460-$100,000 face value of mortgage bonds, gold notes, referred to as Rex Clark collateral gold notes; that the unit cost of those notes to the First Detroit Co. was 95; that the unit cost thereof to the Detroit Trust Co. was 9912. According to the other exhibit marked "Committee's Exhibit 103 in evidence $96,000 of that issue of gold notes were sold by the Detroit Trust Co. to trust clients at 100. That would show a spread of five points in those gold notes between the cost to the First Detroit Co. and the cost to trust clients of the Detroit Trust Co.

It also appears, according to exhibit 103, that the remaining $4,000 of those Rex Clark collateral gold notes were sold to a trust client of the Detroit Trust Co. at 9912.

From exhibit 102 it appears that $50,000 face value of M. J. Gallagher gold notes were acquired by the First Detroit Co. at a cost of 974, and were sold to the Detroit Trust Co., owned by the same holding company as the First Detroit Co., at 99, and sold to trust clients by the Trust Co., $31,000 worth at 100 and $19,000 worth

at 99.

The CHAIRMAN. Do you know whether the trust clients lost anything by that operation or not?

Mr. STONE. Are you referring to this?

The CHAIRMAN. Yes.

Mr. STONE. That is quite a question, Senator. I am afraid I would have to have it written out and study it and refer to the record, and make an investigation.

Senator ADAMS. Mr. Stone, in these sales from the Trust Co. to its trust clients, who represented the clients?

Mr. STONE. In the case of court trusts?

Senator ADAMS. No. I mean where you were the trustee?
Mr. STONE. Oh, yes.

Senator ADAMS. Who represented the seller of the securities?
Mr. STONE. The Trust Co. itself.

Senator ADAMS. So the Trust Co. was the buyer and the seller. Mr. STONE. Are you referring to those cases of purchase through the First Detroit Co.?

Senator ADAMS. No; I am referring just to the cases where the Trust Co. itself sold its own securities to trusts for which it was the trustee.

Mr. STONE. Yes.

Senator ADAMS. I understood from you that in those sales the Trust Co. represented the trust as the vendee, and represented itself

as the vendor. In which capacity did it decide what was a reasonable spread?

Mr. STONE. Well, there was no spread. You are talking now about purchases direct from the Trust Co.

Senator ADAMS. In which capacity did it decide that it was a proper sale or a proper purchase?

Mr. STONE. In the case of what might be termed cost trusts, where there was no provision such as you read there, prevailing market price provision, the securities were sold to the trusts at cost, and the Trust Co.

Senator ADAMS. But the Trust Co, decided

Mr. STONE. Yes.

Senator ADAMS. The Trust Co. decided, representing the trust, that it was a good purchase from itself. In other words, this Trust Co. was on both sides of the transaction.

Mr. STONE. That is true. That was a practice that began with the organization of the company, and when any of the securities defaulted they were taken off the hands of the Trust Co. That practice continued for 30 years, up to the time of the beginning of the depression, so that it could be said there were no losses to the trusts. Senator ADAMS. Burglary goes back further than that, but it has not become legitimate yet. It seems to me it is not only illegal, but a vicious practice.

Mr. STONE. You refer, I suppose, to the common-law rule with respect to an individual dealing with himself as trustee.

Senator ADAMS. Yes; not only the common-law rule but the matter of ordinary ethics, that no man can deal fairly and represent both sides of a transaction.

Mr. PECORA. And make a profit therefrom.

Senator ADAMS. Or even without that because, Mr. Pecora, he was selling his own stuff. Necessarily there was an interest, more or less, in keeping or disposing of it, forgetting the profit.

Mr. PECORA. But I would suggest that in those instances where a profit was realized, it is even more reprehensible.

Senator ADAMS. It might be even worse where there was a loss. Mr. STONE. Might there not be a difference, Senator, with the advent of trust companies?

Senator ADAMs. I do not think morality has changed any with the advent of trust companies.

Mr. STONE. I do not refer to that element-where the purchases were made for the trusts at cost.

Senator ADAMS. From whom? From themselves?

Mr. STONE. No; from the mortgagor, or some broker, or railroad. Senator ADAMS. That is entirely different.

Mr. STONE. That is what I mean. That was our practice. We were conducting a bond department, and we were buying for company investment. At the same time we bought for our trusts, and we were able to buy at wholesale prices. The trust would get the benefit of that, and we would put these securities in the trust, having bought them for them. At one period of our career we earmarked them for trust investment.

Senator ADAMS. That would be perfectly proper; but after they had become the property of the Trust Co., the question I raise is the

right to then dispose of them to your trusts. It seems to me it is just as feasible to speak of a man being his own son. They are two conflicting relationships which cannot be merged.

Mr. STONE. I agree with you as to that; but these purchases were made, and while they may have been carried temporarily with the title in the Trust Co., they were bought in blocks and in volume, so that the trust funds could be promptly invested, and it was done without profit to the Trust Co. Unfortunately our attorney missed his train today. He would probably be able to give a better interpretation of that than I can.

Mr. PECORA. Who can, Mr. Stone?

Mr. STONE. Mr. Long, our attorney.

Mr. PECORA. Did he have anything to do with these transactions? Mr. STONE. Oh, no; but I am discussing with the Senator the validity or the propriety of purchasing in blocks by the Trust Co., and placing them there, shortly thereafter, in the trust, having bought them for that purpose. That was our practice.

Mr. PECORA. It was also your practice to purchase such securities in large quantities from as investment unit or affiliate of the Detroit Bankers Co., of which the Detroit Trust Co. was also a unit, was it not?

Mr. STONE. Yes.

Mr. PECORA. Those transactions were at a profit to the investment unit, were they not?

Mr. STONE. They were at a profit to the investment unit, yes; in some cases, but not at a profit to the Trust Co.

Mr. PECORA. Those transactions can be discussed by you as a trust officer of 37 or more years' experience without regard to the question of naked legality, can they not?

Mr. STONE. Yes, sir; certainly.

Mr. PECORA. After all, they rest in good conscience rather than upon statutory declarations, do they not?

Mr. STONE. That is correct.

Mr. PECORA. Can you harmonize these transactions with the sentiments to which you gave expression in your address before the trust division of the American Bankers Association in February 1932, which I have read into the record this afternoon?

Mr. STONE. I see no inconsistency, where the Trust Co. itself made no profit.

Mr. PECORA. But the Trust Co. itself, in many of these instances, did make a specific profit, did it not?

Mr. STONE. Only where the instrument permitted it.

Mr. PECORA. Do you think that that was in harmony with the principles you laid down in your address before the American Bankers Association 2 years ago!

Mr. STONE. Yes; I do.

Mr. PECORA. You do?

Mr. STONE. Yes, sir. I do not see any inconsistency.

Mr. PECORA. Do you think that is a fulfillment of the duties of a trustee, evidenced by a realization, to use your own language from that address, of the sacred character of the trust reposed in it?

Mr. STONE. Yes; I do not see where it is reprehensible, where the Trust Co. made no profit out of it.