In regard to the Bath Industries matter, on May 20, 1970, the United States Court of Appeals for the Seventh Circuit affirmed the decision of the District Court for the Eastern District of Wisconsin, which had granted a preliminary injunction based on a probable violation of section 13 (d) of the Securities Exchange Act of 1934, to preserve the status quo pending a trial on the merits.

Several stockholders of Bath, including a foreign investment company and a foreign bank, were found to have agreed to act together, acquiring additional shares and pooling their votes for the purpose of electing a new chief executive officer.

The District Court held that they constituted a group, and that it had failed to make the required filing with the Commission within the prescribed time.

We will be happy to supply for the record a copy of the appellate decision if you desire it.

On February 18, 1969, Resorts International, Inc., mailed proxy soliciting material to its shareholders requesting authorization for the issuance of an additional 20 million shares of the company's class A common stock, and the confirmation and approval of two agreements to purchase large blocks of Pan American World Airways, Inc., common stock from Gulf and Western Industries, Inc., and the Chase Manhattan Bank.

The commission conducted an investigation into the circumstances surrounding this agreement to purchase a large block of stock of Pan American. While we were thwarted in our inquiry with respect to determining the full extent of the ownership of Resorts by foreign entities, we did develop information to indicate that the company had engaged in certain violative conduct.

As a result, on March 31, 1969, the Commission filed a complaint against Resorts, alleging violation of certain proxy rules in the aforementioned solicitation. Resorts, without admitting the allegations, entered into a consent judgment to this complaint which, in effect, stipulated that it would not vote proxies previously received and would include all pertinent and required information in all future proxy materials to be distributed.

Resorts also agreed to resolicit proxies from its stockholders for approval of the purchase of one-half of the amount of Pan American stock originally contemplated and reaffirmed its intention not to seek control of Pan American or engage in a proxy contest or tender for additional shares.

On April 14, 1969, stockholders of Resorts approved this new agreement to purchase 1,200,000 shares of Pan American.

Cases such as the foregoing are not at all unusual, and they suggest that hundreds of millions of dollars are being furnished annually by foreign sources to assist in endeavors to gain control of American companies. In some cases there may be no disclosure that a takeover attempt is being made, because the parties fail to make the requisite filings with the Commission, undoubtedly hoping that secrecy afforded through use of foreign channels will serve as a cover for their activities.

In other cases, disclosure of the existence of foreign financing is made, but the disclosure may not reveal the actual parties behind the financing. Unless there is such disclosure, it is difficult and sometimes

impossible to discover whether the foreign moneylenders are acting for themselves or on behalf of undisclosed interests.

Particularly if they are in a position to assume control of a company upon the default of their loan to the takeover group, it is important that we be able to determine whether all material facts about. the group and its intentions for the company have been disclosed at the time of the tender offer.

Two other areas where our efforts are hindered by foreign secrecy laws, are market manipulation and the apparent abuse of inside information. We have a difficult enough time with our limited resources in maintaining surveillance over the securities markets to detect possible illicit activities when only domestic participants are involved.

There are several thousand stocks listed on the stock exchanges, and several thousands more traded in the over-the-counter market. In any given year, there may be manipulative activities in a considerable number of these stocks. We try to get an explanation of significant price movements or unusual volume in dozens of stocks each week, and we concentrate on the more suspicious cases for further investigation.

I might add that the computer which the Commission installed a couple of years ago has been most helpful in this area. There are some 15,000 issues of over-the-counter stocks in the computer. The computer is set with tolerances in various ways as to increases and decreases in price quotations, as to concentration of dealers, and certain other factors. When the computer run is made, there will be perhaps 200 or 300 of the 15,000 stocks that are kicked out of the computer became they exceed the tolerances previously set.

Our staff then immediately attempts to determine whether or not there is an easy explanation for whatever occurred, and if there is not, we immediately contact the issuer, the broker-dealer, customers, and anyone else who has been involved, to try to find out just what has happened. We, of course, would not be able to do that with human beings. Computers are an essential part of the operation.

Too often, however, we are finding that the trail has a dead end in a foreign financial institution.

Senator PROXMIRE. May I interrupt to say that is a very interesting analysis of what the computer can do for you. If the computer indicates serious irregularities and throws the stock out, as you say, wouldn't you run into a dead end if you found that the ownership by a secret party was concealed by a Swiss bank, for example?

Mr. BUDGE. We can and we do.

Senator PROXMIRE. That is one of the reasons why legislation of this kind would be useful?

Mr. BUDGE. It is.

It is only with great difficulty that we can pierce the veil of secrecy to uncover the identity of the persons engaged in manipulative activity or trading on the basis of inside information.

We are concerned not only with the use of foreign intermediaries by a few individuals to obtain unlawful profits, we are even more concerned with the possible harmful effects which may be generally felt in the securities markets if we are unable to maintain adequate and effective surveillance because of the use of foreign intermediaries. Almost every day our market surveillance staff discovers instances where foreign purchases or sales have taken place under circumstances

which raise questions whether their impact on our securities markets was the result of proper or improper activities.

Even in the investment company area, we have come across situations where foreign depositories have been used to the disadvantage of public investors.

În one case, large deposits were made with certain foreign banks by a company which was subsequently determined to be an investment company. These deposits were further obscured by the subsequent use of these moneys by one of the banks for loans to other foreign intermediaries whom we believed were affiliated with principals of the investment company.

Some of the money so deposited was ultimately returned to the corporation, apparently in large part as a result of prompt Commission action. However, it appears extremely doubtful that the balance of the money will ever be recovered. The balance was transported to a foreign country by personal courier, ostensibly for deposit in a branch of a certain bank.

The bank records, however, failed to disclose that the money was ever, in fact, deposited. It is interesting to note in this connection that we learned, as a result of the subsequent bankruptcy of the parent bank, that the money apparently never made its way to the branch and that the parent bank and its branch frequently employed fictitious accounts for the purpose of establishing the existence of deposits when in fact none existed. To this date, the ultimate destination of the balance remains a question.

Senator PROXMIRE. Could you tell us the name of the bank in this case?

Mr. BUDGE. It is the Germann Bank.

We would next like to make a few remarks about the avoidance of the Federal Reserve Board's rules for the regulation of purchases of securities on credit, through the use of foreign financings.

As we mentioned a few minutes ago, the recent contest for control of MGM illustrates how large sums are being obtained abroad for the purchase of American securities on terms which are not permitted by the margin rules. In the MGM case, we understand, American lenders would have required over three times the collateral that the foreign banks did. The problem as we see it is twofold.

First, it may be contended that, under the existing margin rules, as interpreted by the Federal court in the MGM litigation, foreign lenders can make loans to Americans for the purchase of securities in American markets on any terms they care to.

Obviously, to the extent that the margin rules attempt to prevent unwise market credit extension and "pyramiding," the extension of credit by foreign lenders without regard to the margin restrictions defeats these objectives.

Second, we have the problem of policing the margin rules as to the activity of domestic lenders, who may disguise their participation in transactions with American companies by placing them through foreign intermediaries. We found that some foreign entities, in certain instances, opened and maintained special omnibus accounts with American brokerage firms for American customers, who used them to evade the clearly applicable margin rules.

We suggested that such accounts be restricted to American firms, and last year the Federal Reserve Board limited the availability of

such accounts, which should stem this type of illegal activity. However, the evasion of the margin rules through other types of transactions is still possible unless we have the means necessary to get behind the facade provided by foreign intermediaries.

Because obtaining information on securities transactions coming through foreign entities has been so very important to us in carrying out the responsibilities that the Congress has placed on us under the Federal securities laws, this Commission has been in the forefront of those attempting to obtain all relevant information concerning foreign entities involved in any of our cases.

While we have had some success in obtaining information in certain cases, as indicated above, by and large we have been thwarted more often than not. The problem is that we have been unable to obtain the information we need on any regular basis. In a few cases, foreign authorities have been able to be helpful to some extent, but in most cases where information has been obtained it has only been made available after a considerable lapse of time.

Measures applicable to American citizens and residents, and, in certain instances, persons doing business in America, which help us obtain more information concerning these kinds of transactions, together with treaties or international agreements which would secure the cooperation of foreign governments in our investigatory efforts, are most desirable.

We appreciate that some foreign institutions may oppose any actions which would make it more difficult for them to wrap the cloak of secrecy about questionable financial dealings. However, we believe that responsible foreign financial agencies and investors should support such actions because it is in their best interest to preserve the fairness and honesty of America's securities markets.

We know from experience that it is the confidence in the integrity of our markets, as much as it is the strength of our economy, that has been responsible for the extensive foreign trading and investment in the stocks and bonds of American companies.

We welcome any reasonable measures which will be of assistance to us in dealing with the problems described above and thus be of help to us in continuing to protect the investing public by enforcing full disclosure in connection with public offerings of securities, as well as detecting and preventing evasion of the antimanipulative, antifraud, and other applicable regulatory provisions designed for public investor protection.

To the extent that the provisions of S. 3678 will discourage Americans from making use of foreign banks and financial institutions for unlawful purposes, or enable Americans who may do so to be more readily identified, it should be of assistance to agencies such as the Commission in carrying out their enforcement and regulatory duties. At the same time, as I have said, we are desirous of encouraging legitimate foreign investment in our securities markets; it is only the illicit practices that we wish to inhibit and eliminate.

We wish to thank you very much for the opportunity to appear here today, and if you have any questions concerning this matter, we will endeavor to answer them now to the best of our ability, or undertake to provide you with the answers at a later date.

Senator PROXMIRE. Chairman Budge, I think this is a useful statement, and I am delighted you have put this in the proper perspective.

Both in the beginning and in the end you talked about welcoming foreign investment, which all of us do. We would be in even worse shape on our balance of payments if we didn't do that, and this is a constructive action on the part of the foreigners who want to invest in our country.

In your statement, you say:

Cases such as the foregoing are not at all unusual, and they suggest that hundreds of millions of dollars are being furnished annually by foreign sources to assist in endeavors to gain control of American companies.

In the first place, these may not be foreign sources in the sense they may be foreign persons. These could be American citizens, they could be criminal elements in America who are taking over companies by using the concealment of foreign bank accounts that is one possibility. Another, as I understand it, is it may be people which you indicate very well in your statement who are violating the antitrust laws.

You gave a very good case where we had one instance where a company was prohibited from a takeover because of a violation of the antitrust laws, and then it proceeded to use the foreign source, which could very well have been the same people involved.

Mr. BUDGE. That is correct.

Senator PROXMIRE. Do you know whether or not there has been any interest on the part of those responsible for enforcing our security laws, not the securities laws which you enforce but our military security laws? It would seem to me that a foreign country that wanted to get defense information that was classified and that would be very valuable to them, instead of the usual cloak and dagger stuff, could buy a position on the board of a big defense contractor through using its secret account and conceivably get information in this way. I just don't see any reason why that wouldn't be a manner of achieving this smoothly and probably rather economically.

Mr. BUDGE. I would certainly think it is a very definite possibility, Senator.

Senator PROXMIRE. And securing a substantial dividend perhaps in the process.

Your statement does concern me to this extent. It is an informative statement, but it seems to me it is somewhat inconclusive. Are you for the legislation, S. 3678, or are you against it?

Mr. BUDGE. We are for the legislation, Mr. Chairman, insofar as it would assist us in performing our law-enforcement functions. There are some areas where we would of necessity have to defer to the Congress and to other branches of the Government in weighing the benefits to enforcement against the burdens imposed.

Senator PROXMIRE. You think it would strengthen your ability to enforce the securities laws?

Mr. BUDGE. Yes, sir.

Senator PROXMIRE. Your only hesitation is that you can't endorse every last part of it because you feel part of it is beyond your responsibility?

Mr. BUDGE. Well, as the chairman indicated, if the legislation went so far as to inhibit foreigners from purchasing securities in this country, we would feel that should be weighed by the Congress and the other agencies of the Government in determining whether or not the legislation should be enacted.