Lapas attēli

p. 86.)


EXCHANGE COMMISSION, ACCOMPANIED BY IRVING M. POLLACK, DIRECTOR, DIVISION OF TRADING AND MARKETS; STANLEY SPORKIN, ASSOCIATE DIRECTOR (ENFORCEMENT), DIVISION OF TRADING AND MARKETS; PHILIP A. LOOMIS, JR., GENERAL COUNSEL; IRA H. PEARCE, SPECIAL COUNSEL Mr. BUDGE. Thank you very much, Mr. Chairman. Mr. Chairman, Mr. Pollack is seated at my right, to his right is Mr. Sporkin, also of the Division of Trading and Markets, and to my left is Philip Loomis, Jr., who is General Counsel of the Commission, and to his left, Mr. Ira Pearce, who has had a special background with reference to this legislation in that he has not only worked in the Division of Trading and Markets, but he has served as the Commission representative on the treaty team which has been working with the Swiss.

Senator PROXMIRE. Any part of your statement that you omit in the course of presentation will be printed in full in the record. (See

Mr. BUDGE. We are pleased to have been invited to participate here today in the matter before this committee. We hope that our testimony will be of assistance to it in considering proposals to require that certain records be kept by banks, that certain transactions in U.S. currency be reported, that the margin provisions be broadened and that certain disclosure or certification be made as to transactions involving foreign financial agencies.

Since the bill concerning which we have been asked to testify, S. 3678, is quite similar to H.R. 15073, which was recently passed by the House of Representatives, our testimony before this committee will necessarily be quite similar to that which we have given previously before the House Committee on Banking and Currency.

Since this proposed legislation will impose certain reporting requirements on Americans engaging in foreign financial transactions, we wish to clearly emphasize at the outset, as we did before the House Committee on Banking and Currency, that the Commisison welcomes participation in the American economy by legitimate foreign investors. The Commission well realizes the benefits to the economy from the inflow of capital from abroad.

At the same time, we feel a responsibility to such foreign investors to enforce high standards of conduct in our securities markets so that they, as well as American investors, may invest their funds in an informed manner and with confidence in the integrity of our markets.

By way of background, we should first point out that many brokerage firms in the United States number among their clients foreign banks, as well as trusts and other financial agencies, formed in a number of the smaller countries in Western Europe and even closer to home, in the Caribbean area and elsewhere in North America.

These entities engage in transactions in the United States, on our exchanges and in the over-the-counter market, in securities of U.S. corporations through American broker-dealers registered as such with the Commission and, to a lesser extent, through American banks.

The volume of securities business done in this country by foreigners, including foreign banks and other financial agencies, is quite large.


In the calendar year 1969, on all markets in the United States, foreigners made total purchases of nearly $12.5 billion of common stock and total sales of just under $11 billion, with a total net investment of almost $1.5 billion.

Such purchases and sales were equivalent to almost 9 percent of comparable New York Stock Exchange volume for 1969. In the first quarter of 1970, there were total purchases of $2.4 billion and total sales of $2.5 billion with sales of common stocks by foreigners exceeding their pruchase by $98 million.

Unlike other customers of American brokerage firms or banks, however, it is usually not possible to find out the names and addresses of the persons for whose beneficial interests transactions have been effected by foreign banks and other financial institutions.

Nevertheless, on occasion, as the result of imaginative investigative work and fortuitous circumstances, we have been able to obtain sufficient evidence to establish the identity of such persons. Not surprisingly, in a number of these situations, the persons involved in the questionable activities have turned out to be Americans.

We understand that it is not even necessary for an American citizen to actually go to certain foreign countries to establish an account with a bank or other financial agency in those countries.

(Reprint of an advertisement from the Wall Street Journal follows:)

THE WALL STREET JOURNAL, Monday, February 9, 1970


Swiss Credit Bank
is pleased to announce
its new location at
100 Wall Street.


We look
forward to
serving our
in our
modern offices
and making
many new
friends in our
new home.
Visit us soon
and let us
welcome you
to our world

of banking.

Credit Suisse

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Mr. BUDGE. Thus, the secrecy laws of a foreign country can be used by an American, who has never been to that country, to mask illegal activities taking place in the United States in the securities of American corporations.

Senator PROXMIRE. Could I interrupt to ask you if you could submit copies to the committee of the testimony so that we could have them for the record ? Mr. BUDGE. I shall be happy to do that. (The testimony referred to appears on p. 91.)

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Mr. BUDGE. Over the years, the veil of secrecy drawn over all types of transactions by these foreign banks and other similar entities has been a substantial impediment to the Commission and, we believe, other agencies of our government in carrying out the enforcement and regulatory duties for which they are responsible.

This has occurred in a number of important cases involving violations of the Federal securities laws. The main problems that we have with regard to foreign banks are, first, that being outside of the United States they are beyond the effective range of our subpenas and, in addition, they may also operate under laws providing broad secrecy over the affairs of their clients, regardless of who these clients are and where they reside or operate.

A growing number of stock market operators and others have now become sophisticated enough to take advantage of these foreign jurisdictions and secrecy laws in connection with their securities transactions and market operations in the United States by channeling their purchase and sale transactions through foreign intermediaries and by collecting proceeds from their unlawful activities in accounts at such entities.

The basic method by which we traditionally prove securities law violations is by tracing the flow of stock from its original issuance through the promoters and out to the general public and then by tracing the proceeds from each sale back from the public to the promoters.

When either the distribution of the stock or the transmission of the proceeds are channeled through a foreign intermediary, it becomes very difficult, if not impossible, for us to acquire competent evidence establishing the identity of the persons who have beneficial interests in the stock sold and the proceeds received.

Foreign financial agencies may, of course, also be used to mask other activities that are violative of the Federal securities laws, such as violations of the margin provisons, volations of the restrictive provisions relating to short sales, and failure by corporate officials to report transactions in their company's stock.

Incidentally, a corporate official who is not filing with the Commission reports of transactions in his company's stock may also fail to report the profits resulting from such transactions for income tax purposes.

Foreign banks and other financial institutions have been used as intermediaries in an effort to prevent detection of or prosecution for, violations of a number of different provisions of the Federal securities laws. For example, in one of our succesful criminal prosecutions, American corporate officials, and others, used such foreign intermediaries to mask a massive distribution of worthless securities of an insolvent corporation to the American public at manipulated prices. This distribution, and the activities in support of it, were prosecuted under the registration and antifraud provisions of the Federal securities laws.

Senator PROXMIRE. Was this organized crime—this case you refer to here, sir?

Mr. BUDGE. Not to my knowledge, Mr. Chairman.

Senator PROXMIRE. There were businessmen who were apart from organized crime, as far as you know?

Mr. BUDGE. I believe that is correct.


Your letter of May 21, 1970, which requested our appearance here also stated that the subcommittee is interested in the role played by foreign financial institutions in recent corporate take-over attempts, including those involving Liquidonics, Resorts International, MGM, and Bath Industries.

As you know, under the Williams bill, the Commission was given authority to require disclosure of information with regard to the acquisition of over 10 percent of a corporation's stock by a person or group, and with regard to the making of a tender offer for more than 10 percent of a corporation's stock.

Since the Williams bill became effective in July 1968, there have been 104 cash tender offer filings and 16 of these have involved foreign financing

Incidently, of the three most recent tender offer filings made with us involving foreign financing, two of the companies making the offers are also foreign based.

The MGM case illustrates the use of foreign financing in a takeover attempt. When the financing arranged in this country was blocked by a Federal court on antitrust grounds, foreign funds were immediately secured in the amount of $32 million. After the initial borrowing was exhausted, an additional $30 million was obtained.

These funds were not collateralized to the extent which is required by the margin rules. As security for the loan, stock with a value of 150 percent of the loan was pledged; in contrast, the margin rules require the pledge of stock with a value of 500 percent of the loan.

MGM filed suit seeking to enjoin this tender offer, contending that it violated the margin provisions under section 7 of the Securities Exchange Act of 1934 and the financing for the tender offer was therefore illegal.

The District Court for the Southern District of New York disagreed, holding that the margin provisions, as presently written, are not applicable to foreign lending institutions. Before appellate proceedings were completed, the matter was settled by the parties. The Commission did not participate in this case.

Senator PROXMIRE. That was a very significant finding, was it not? Mr. BUDGE. Yes, it was.

Senator PROXMIRE. I want to ask you questions about that a little later.

Mr. BUDGE. One of the problems that is presented by such activities is the possibility that control of some of our major corporations could shift to interests whose identity may more easily be masked by foreign secrecy laws. If there is a default on the $62 million in loans made to obtain control of MGM, undisclosed interests may acquire the control stock, which was put up as collateral.

A similar situation exists with regard to the takeover of UMC Industries by Liquidonics Industries. The controlling interest in UMC was purchased with a loan of $40 million from the Banque de Paris et des Pays-Bas (Suisse).

Liquidonics, which received only $36.9 million net proceeds from the loan, quickly went into arrears and was forced to sell out. The majority stock interest in UMC, a New York Stock Exchange listed company, is now owned by a Luxembourg banking subsidiary of the Swiss bank.

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