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sales, the margin provisions, violating 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 successful 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 anti-fraud provisions of the Federal securities laws.

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% of a corporation's stock by a person or group, and with regard to the making of a tender offer for more than 10% 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. Incidentally, of the three most recent tender offer filings made with us involving foreign financing, two of the companies making the offers are also foreign.

The MGM case illustrates the use of foreign financing in a take-over attempt. When the financing arranged in this country was blocked by a Federal court on anti-trust 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% of the loan was pledged ; in contrast, the margin rules require the pledge of stock with a value of 500% 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.

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 M & M, undisclosed interests may acquire the control stock, which was put up as collateral.

A similar situation exists with regard to the take-over 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.

In regard to the Bath Industries matter, on May 20, 190, the United States Court of Appeals for the 7th 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 20,000,000 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 perinent and required information in all future proxy materials to be distributed.

Resorts also agreed to re-solicit 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 take-over 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 take-over 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 difficult enough time with our limted resources in maintaining surveillance over the securities markets to detect possible illicit activities when only domestc participants are involved. There are several thousand stocks listed on the stock exchanges, and 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. Too often, however, we are finding that the trail has a dead end in a foreign financial institution. 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 of 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. In 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.

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 two fold.

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 maintanied 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 availablity 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 instituions 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 America 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 anti-manipulative, anti-fraud 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. The committee will stand in recess until 10:30 tomorrow morning and reconvene to hear Mr. Rossides of the Treasury Department and other witnesses on these bills.

(Whereupon, at 12:00 p.m., the hearing was adjourned, to reconvene Tuesday, June 9, 1970, at 10:30 a.m.)

(Testimony of the Securities and Exchange Commission before the House Banking and Currency Committee referred to earlier on p. 75 follows:)

FEBRUARY 16, 1970.


To: Wright Patman, Chairman.
Subject: Investors Overseas Services (IOS) and its use of secret foreign fi-

nancial facilities. Transmitted herewith is a report on IOS, including (1) its background, (2) its sources of revenue, (3) SEC-IOS litigation, and (4) its investment in companies in the United States.

The total net assets of the mutual funds managed by IOS were $1.8 billion at August 31, 1969, of which approximately $1.2 billion or about two-thirds were invested in equity securities of United States corporations. The consolidated net income of IOS has increased from about $1.7 million in 1964 to about $14.7 million in 1968.

Each IOS-managed mutual fund is subject to applicable governmental regulation in the country of its organization. The funds are apparently purposely organized in countries with a minimum of regulations. This is particularly true as regards tax regulations, and IOS and its subsidiaries have paid taxes at very low rates (almost no taxes are paid in the United States despite equity investments in this country in excess of $1 billion).

It is the conclusion of the committee staff that the bank secrecy laws of the countries in which IOS operates enable investors in the U.S. securities market to conceal their identity and the purpose of their investments. This in turn makes possible (1) the purchase of stock without meeting the margin limitation on credit promulgated for this purpose by the Federal Reserve, (2) the funneling of funds from illegal enterprises into legal businesses, (3) "insider” trading by those with privileged information, to the possible detriment of other stockholders, (4) possible weaknesses in security when companies controlled by unknown individuals have defense contracts, and (5) evasion of income taxes.


Investors Overseas Services (IOS) was the forerunner of a growing number of off'shore mutual funds which, theoretically, sell their shares to non-Americans, using most of the proceeds to invest in American securities and real estate.

One reason for the tremendous growth of these funds is attributed partially to the fact that most of them operate from countries having corporate and bank secrecy laws. Thus, investors seeking to remain anonymous for any number of reasons, either proper or improper, can do so. Another reason is the Foreign Investors Tax Act enacted by Congress in 1966. This act, in effect, said that if a corporation's sole activity in the United States was the buying and selling of securities, it was not considered doing business in the U.S. and therefore, not subject to U.S. income tax laws. The total amount invested in the American market by these funds is now estimated to be several billion dollars.

IOS is by far the largest of these funds. It was founded as a mutual fund sales business in Paris in 1956 by Bernard Cornfeld. Incorporated as a Panamanian corporation in 1960, it was expanded to include mutual fund management and a vast complex of other financial activities. The Panar nian corporation was reconstituted as a Canadian corporation during the week commencing June 20, 1969, without change in management. The company's principal executive (offices are in Geneva, Switzerland, and the registered office is in Montreal, Canada. In addition, the company maintains more than 200 regional sales, administrative, and information offices throughout the world, including Australia, Austria, Bahamas, Canada, England, France, Germany, Hong Kong, Italy, Lebanon, Luxemburg, Malta, Netherlands, Netherland Antilles, Panama, Spain, and Switzerland. IOS divested itself of its United States companies rather than provide full listing of investors, together with their detailed accounts requested by the Securities and Exchange Commission. The litigation leading to the divestitute of these U.S. companies and the revealing agreement are discussed later in the report and in the testimony to be given by the Securities and Exchange Commission before the Committee.


The company has grown into an international sales and financial service organization principally engaged in the sale and management of mutual funds and complementary financial activities, including: (a) investment and commercial banking, providing financial services, among others, in connection with the purchase and carrying of mutual fund shares; (b) sales and management of real estate investments and properties; and (c) life insurance, equity related policies and mutual fund program completion insurance. A diagram showing IOS and its principal subsidiaries appears in Appendix I. Consolidated net income has increased from $1,683,000 in 1964 to a reported $14,369,000 in 1968.

In terms of its sales volume, the company presently is the largest distributor of mutual funds and related equity investment products in the world, and, in terms of assets under management, the largest manager of mutual funds outside the United States. Total net assets of the mutual funds managed by the company increased from $119,668,000 at December 31, 1964, to $1,821,754,000 at August 31, 1969. As of June 30, 1969, the company reported that about two-thirds of the investments in securities held by company-managed mutual funds were invested in equity securities of United States corporations and approximately one-third was invested outside the United States. As of September 25, 1969, the company owned four percent or more of the securities of some 50 American companies. The company is represented on the board of directors of several of these companies because of the large ownership of equity securities and on others in accordance with loan agreements that were the result of large short and long-term loans.

The company's sales force numbers in excess of 13,000. In addition, the company employs more than 3,000 executive and administrative personnel to support the sales force and to service its more than 750,000 fund, bank, and insurance accounts. These accounts are from investors from more than 100 different countries.

The company exercises central direction of its sales force from its executive offices in Geneva and maintains departments in Geneva and also in FerneyVoltaire, France, covering the various fields of operation. A multi-lingual staff of correspondents is maintained to respond to inquiries from clients and others in ten languages. A translation department insures distribution of most company publications and sales material in at least five languages—English, French, German, Italian and Spanish.

The financial data on IOS and its mutual fund management, banking and other financial activity, real estate, and insurance operations in subsequent sections of this report were obtained principally from IOS Prospectus dated September 24, 1969, because the secrecy under which IOS is operated precludes obtaining information from more objective sources. This prospectus was for the sale of IOS, Ltd., stock outside the United States, hence, it did not come under the review of the Securities and Exchange Commission. Capitalization

The capitalization of IOS and its subsidiaries as of June 30, 1969, as adjusted to give effect to a recapitalization in September 1969, was as follows:

June 30, 1969 as adjusted

Minority interests in:

Consolidated subsidiaries.-
Unconsolidated subsidiaries.

$772, 000 2, 206, 000


2,978, 000 Shareholders' equity :

Preferred shares, $0.25 par value (75,000,000 shares authorized

(1); 43,303,368 shares issued and outstanding at June 30,

10, 826, 000 Common shares, $0.25 par value (150,000,000 shares authorized

(2); 5,392,000 shares issued and outstanding at June 30,
1969, as adjusted to give effect to the recapitalization; and
10,992,000 shares issued and outstanding).

1, 348, 000 Consideration received in excess of par value--

8, 951, 000 Amounts due on subscriptions for 2,641,776 preferred shares-- (4,794, 000) Retained earnings

43, 560, 000 Cost of preferred shares held by an affiliated company--- (1, 035,000)

Total shareholders' equity

58, 850, 000

Total capitalization--

61, 834, 000

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