(4) He knew of instances where stolen securities were placed in insurance companies' portfolios, both in the United States and abroad. According to Wuensche, the same people involved in stolen securities are also involved in the counterfeiting and development of fraudulent and/or otherwise worthless securities. He estimated them to number about 500 persons, usually doing business with one another. When their associates are included, the total is about 1,500 individuals. He told the Subcommittee that he believes that the major portion of the business in this field has been controlled since the early 1960's by persons connected with organized crime, or associates of such persons. That was when Carmine Lombardozzi was known as "the King of Wall Street." Initially, Lombardozzi had young brokerage clerks who were either trapped because of indebtedness, gambling, etc., or for fear of their lives if an order came to steal a particular stock. Later, however, Wuensche was convinced that organized crime elements put their own people into the financial institutions with instructions to carry out vast quantities of certificates at certain times. In that regard, I asked Wuensche whether a really effective clearing house operation in this country, with computerized security procedures, would "dry up" the market for stolen securities. Wuensche replied: "Well, sir, that would still boil down to the simple fact that if you have a banker, a lawyer, an accountant who has a connection and who wants to make an easy buck, you can still put the security to bed." (P. 862, Hearings.) Wuensche emphasized the role of the "friendly banker." He said that such a person, even though he was frequently setting a price on his own "services," was an absolute necessity to the confidence man. He said that he did not mean to imply that the 14,200 commercial banks in this country all had bank officers engaged in such schemes. However, he estimated that he had personally used some 25 "friendly bankers," spread throughout the country, in his business. Wuensche also felt that there are some mob-connected banks, owned indirectly by members of organized crime with the top officers serving as figureheads. The witness supplied the Subcommittee with accounts of a number of transactions relating to stolen or counterfeit securities in this country in which he was either personally involved or had knowledge of the details. These are very similar to those explained by Vincent Teresa. Wuensche operated in somewhat different geographical areas than Teresa did, however. He was active in New Jersey, Pennsylvania, Florida, Illinois, and California. Wuensche also described a number of operations in foreign countries in which he participated. He said that during the period from 1958 to 1963, he disposed of some stolen securities through a man named Allen Eli Wright from Pascagoula, Mississippi, with whom Wuensche had done business in Texas earlier. In one instance, he and Wright were involved in a transaction involving $1 million worth of Canadian bearer bonds which were a part of a bigger theft from a Canadian bank. The bonds were delivered to Wuensche in New York by Chester Gray, with whom Wuensche had done business before. Through a Canadian named Harry Banks, Wuensche was able to obtain loans from various banks in Canada, using the securities as collateral. He also recalled placing some stolen securities in a bank in the Bahamas, although he did not recall the specific circumstances. He said that in 1962 and 1963 he made a number of trips to Europe to place stolen securities in banks, particularly in Switzerland. On one trip in 1962, he went with Frankie "The Bear" Basto by way of Canada with approximately $71⁄2 million in stolen securities which had been delivered to Wuensche by Frank Sacco of West Chester County, New York. They went to Amsterdam and through a contact named Aronson, they were put in touch with a Zurich bank official named Dr. Schaeffer. Schaeffer accepted the securities as collateral for loans which were paid to them in West German marks. These were later changed to Canadian dollars and on their return to Canada, they purchased American securities which were later sold for U.S. dollars in this country. In 1963, Wuensche delivered $1 million of stolen "Banks for the Cooperative" bonds in $5,000 denominations to a man named Bauer in Zurich. Bauer had them placed in a Zurich bank as collateral for a loan. Again, the money was converted from West German marks into U.S. dollars by the same process of going through Canada. Again in 1963, accompanied by Jon Boran of Philadelphia, Wuensche contacted another man in Zurich named Schacht, who was known to Wuensche as an international banker. They delivered $4.1 million worth of U.S. Treasury notes to Schacht, all in bearer form, which Wuensche thought had been stolen from the Marine Midland Bank of New York. These securities had been delivered to Wuensche by Frank Sacco. Wuensche had paid Sacco about 20 percent of their face value, or $800,000. He and Boran received a total of $3 million in West German marks. Wuensche estimated that he made about $80,000 on the deal. Wuensche told the Subcommittee that he had also been involved in various schemes involving the transfer of stolen securities to different sources in Europe, and the later transfer of them to certain persons in foreign governments who, in turn, redeemed them for cash in the United States. For instance, in 1967-1968, Wuensche, Aronson, Boran, and Louis Mayo, Jr., put together a package of $52 million of stolen U.S. Treasury notes. It was arranged to have them delivered to persons unknown to Wuensche in the Sheikdom of Kuwait. Wuensche later learned that these securities somehow found their way back to this country where they were redeemed by the U.S. Treasury from the Government of Kuwait. I asked Wuensche why all of these trips abroad were being made, and, because of them, whether the mob operated on a worldwide basis. Wuensche replied: "In my opinion, they do. It is easier to place at least it was up until the last couple of years-it was easier to place stolen securities outside the country into trust accounts, banks, overseas funds, mutual funds, and other diversified entities for the simple reason that these people would have a strange way of operating. "If the security that you brought them was not on what is known as 'a hot sheet,' then they would take it as quick as look at you, make a deal with you, pay you, and send you on your way. (Note: He continued by saying that if the security was on the 'hot sheet,' they would ask you to come back later, an Interpol agent would be there, and they would take you away!) "It boils down to one thing: In this country today it has gotten since the early 1960's where you can't hardly use a street name certificate anywhere because the broker wants to know who you got it from, how you got it, where you got it." (P. 861, Hearings.) Additionally, Wuensche said if there were more audits in this country they might more quickly pick up the fact that securities are missing. At another point in his testimony, Wuensche stated that he believed the principal means of disposing of stolen securities at present is by marketing them abroad. He thought that most of the securities went to Switzerland, the Bahamas, and "other small islands" with small banks that can put the securities into trust accounts and then issue letters of credit against those trust accounts. It is my understanding that foreign banks and financial institutions, particularly in Europe, prefer to have the stock certificates before them-as compared with a computer number or an IBM card-when they carry out a business transaction. In these circumstances, it should be considered that the immobilization, and eventual elimination, of the stock certificate might very well serve to put an end to such international frauds but, on the other hand, we must consider the countless number of legitimate transactions that occur daily, both within European countries, and between banks in this country and in Europe. I am reminded of the testimony of John M. Meyer, Jr., retired chairman of the Morgan Guaranty Trust, who was serving as the chairman of the Banking and Securities Industry Committee (BASIC) at the time of his appearance before you on October 1, 1971. Mr. Meyer said: "Of course, a large part of the securities business and the custody business-I am now speaking as someone who used to be a bank officer, if I can change my hat for a minute-a large part of the business of New York banks as custodian of securities comes from those who are not citizens of the United States, foreign banks, foreign insurance companies, who hold dollar securities and they choose to keep them in custody in the States so that if they wish to sell, they can make delivery promptly." (p. 187, Hearings.) The securities market is international. What would become of the European tradition if we here in the United States decided to immobilize or eliminate the stock certificate? This is something that should be seriously considered. MICHAEL RAYMOND The third "confidence man" to appear before the Subcommittee was Michael Raymond. I had heard Raymond testify in executive session and was impressed with his knowledge of the securities industry. I felt that Raymond was one of the most valuable and potentially helpful witnesses the Subcommittee had ever had before it. Mr. Raymond, testifying under the pseudonym of "George White" on July 21, 1971, did not fault my belief in his capabilities. After his discharge from the Army in 1952, Raymond answered a New York ad for a mutual funds salesman. He worked at this and in selling over-the-counter securities for about two years, when in 1954 he formed his own brokerage firm and proceeded to make $125,000 the first year, and approximately $225,000 in the following year. However, he ran afoul of the law on four different occasions. He served 27 months at the federal penitentiary in Lewisburg, Pa., in the mid-1950's and it was there that he became well acquainted with Pete LaPlaca, a leader of organized crime in New Jersey. During his last imprisonment in 1970, Raymond decided to cooperate with law enforcement officials. Although Raymond told the Subcommittee of his personal involvement in various schemes and swindles, at times it seemed as though he was conducting a seminar when he appeared before us. First, he explained how he developed a technique of using "payment guarantee bonds." These were notes or certificates of deposits drawn by unknown corporations on banks, but which were guaranteed by domestic casualty insurance companies with known credit ratings. Stolen or worthless securities were used as underlying collateral for the paymelt of the bonds. The bonds proved to be very marketable pieces of commercial paper. Some of the worthless stocks that Raymond used included the following: "Seaboard Airlines Railroad" while the actual name of the existing company was "Seaboard Airlines Railways, Inc." "Chicago, Rock Island Railway" stock was easily confused, even by bankers, with the existing company's name of “Chicago, Rock Island and Pacific Railroad Co., Inc." Raymond also entered into a number of schemes to hypothecate stolen or worthless securities. At times he made a fortune; at other times he did not do well at all. One of his more interesting experiences pertained to an arrangement entered into with a man named Benton whereby Raymond raised approximately $1 million for a Swiss-owned bank, "Banco Suisso Panamanio," and in return he generated from the bank about $500,000 as a line of credit for his own company, again using payment guarantee bonds. He learned about the opportunity from Emil "Tommy the Twitch" Tucker, a person Raymond described as "well connected in organized crime." The bank was looking for funds for the New York market. Raymond made a deal whereby the bank would lend him 50 percent of all the funds he raised for them. Raymond would give them a note, which would be secured by an absolute payment guarantee bond of an insurance company. Raymond put together an additional $200,000 worth of counterfeit Charles Pfizer and Co. securities for further collateral for his payment guarantee bonds. The securities were printed in the Bronx by a mob-controlled printing company and delivered to Raymond by Raymond Coppola, nephew of the late "Trigger Mike" Coppola, once a lieutenant in the Vito Genovese family. Raymond said, if he had been able to continue, he could have raised unlimited sums of money for extended period of time. However, the scheme failed in October of 1964 when the first of the series of notes issued by Raymond's corporation came due. Raymond had forwarded the funds to cover his notes to Benton in Florida and Benton was to pay them. Raymond described the transaction as follows: "Once again I ran afoul of the limited mentality of the confidence man and the organized crime element, all of whom seem to find the payment of money in pursuit of more money an unnecessary illogical action. Sam didn't pay the notes, even though it was evidence that prompt repayment would have doubled the loans to us which already had been made.... However, Sam couldn't bring himself to make the payment, the note was defaulted, and the balloon burst." (Pp. 697-98, Hearings.) Of the many millions that Raymond "turned over" in his stolen securities operations for the better part of a six-year period (1964-1970), he estimated that he kept approximately $1 million and that he had nothing to show for it at the time of his testimony. He said he had personally seen or known of perhaps $100 million of stolen securities that had been hypothecated. He also knew that much of the volume had not been reported because banks and other financial institutions did not like to publicize their losses. He also felt that there is a large volume of such stolen securities still in financial institutions which are not even known to be stolen. Raymond said that during his 20 years in dealing with the financial community, it became clear to him that there had been a substantial infiltration by many persons directly or indirectly connected with organized crime. I asked Raymond what there was about the securities business that caused it to lend itself so well to theft, fraud and mob tactics. Raymond told me that to the thief, securities were just pieces of paper. To a printer, counterfeit securities were just wallpaper. However, the catalyst is organized crime, which puts everything together. The criminal knows the securities thieves, and he has the contacts to dispose of the loot for profit. Terror tactics are used when needed but there is little or no capital investment for the underworld. Raymond also shared my view that organized crime cannot operate without the complicity of persons and institutions which seem "aboveboard" and honest. In that regard, Raymond, as did Wuensche, spoke of the “friendly banker." He supplied the staff with approximately 50 bank names and said that he had done business with perhaps five of them. He spoke also of the substantial infiltration of organized crime into the banking, brokerage and insurance businesses, and said that this is often not known to the officials of the business because of the insulation of the criminal elements. However, he said that there usually comes a time when such an institution, run normally on the highest standards, will be utilized specifically for the benefit of those involved in criminal activities. When asked how some of these practices could be eliminated, Raymond said that he noticed that banks in general-through ignorance, neglect or complicity— tend to engage in loose practices and procedures. He named two: (1) In processing loans, unless a client is well known to a bank, the bank should check with the transfer agent to see if there are any "stops" on the securities being offered for collateral. This is often not done. (2) When loans are made, and stocks offered as collateral are not in the customer's name, any banker should automatically check them because of the hypothecation agreements. Again, this is overlooked frequently. Raymond said that it is also very important to tighten general security procedures and to have continuous audit practices, which are closely supervised and controlled. Speaking of the immobilization or elimination of the stock certificate, Raymond said that he believed the formation of the Central Certificate Service (CCS) by the New York Stock Exchange was "a step in the right direction." He thought that, as a result, physical security would be bolstered by cutting down on the movement of stock certificates. On the other hand, he had heard that through "an inside job," $2.5-$3 million of securities had been stolen from the CCS within 30 days before his Subcommittee appearance. Raymond said that the improvement of security is essentially "a people problem." The Central Certificate Service or any computerized system for bookkeeping entries and transfers is not the complete answer. Raymond mentioned that when a sophisticated electronic surveillance system was being installed in one of the financial institutions in New York, the installer asked either Raymond or one of his close associates if they wanted to steal any stock at that time! Finally, on the elimination of the stock certificate, Raymond told the Subcommittee: "(If you didn't have any stock certificates) It doesn't make any difference. You have to issue some receipt of some kind. What difference does it make what the receipt is? That theory I have heard advanced before but I don't think it has any foundation at all. So long as the receipt is a negotiable instrument, it is academic as to what form it is in. "Why pick on the certificate is what I am saying. The certificate didn't do anything. If it is a negotiable instrument, you can discount it." (P. 742, Hearings.) Raymond has cooperated extensively with law enforcement officials in various levels of government since testifying before the Subcommittee. I have taken considerable time to tell you about the activities of the common thieves and confidence men. We all must realize that there are forces-sophisticated forces-at work that will be scheming and conniving to beat any new legislative proposals you develop, even before the ink used to sign the bills has dried. Our Subcommittee also called a number of prominent officials in Government and in the securities industry to discuss this problem. They included the following individuals, in the order of their appearance: John N. Mitchell, Attorney General of the United States Murray J. Gross, Asst. District Attorney to Frank Hogan, New York County, William J. Cotter, Chief Postal Inspector, U.S. Postal Service Eugene T. Rossides, Asst. Secretary of the Treasury for Enforcement and Operations John Carlock, Fiscal Asst. Secretary of the Treasury William J. Casey, Chairman, Securities and Exchange Commission Robert W. Haack, President, New York Stock Exchange Frank G. Zarb, former Executive Vice President of CBWL-Hayden Stone, Inc., first Chairman of the Joint Bank-Securities Industry Committee on Securities Protection, and Mahlon M. Frankhouser, former Vice President of the New York Stock Exchange, presently a Vice President with CBWL-Hayden Stone, Inc., and present Chairman of the abovementioned Joint Committee James Condon, Vice President of Continental Insurance, New York, New York John F. Beardsley, Vice President of Hartford Fire Insurance Company, Hartford, Connecticut John J. Rohlf, Executive Vice President and head of the Operations Division, Morgan Guaranty Company of New York Richard A. Debs, Vice President of the Federal Reserve Bank of New York Donald Regan, Chairman of the Board, Merrill Lynch, Pierce, Fenner and Smith W. Henry duPont, President and Chairman of the Board, Sci-Tek, Inc. The testimony of these witnesses, coupled with that of the previous group who had been granted immunity to testify, made it manifestly clear that one of the newest and most lucrative illegal activities of organized crime in this country and abroad has been the trafficking of stolen, counterfeit and otherwise worthless securities. This activity grew at an alarming rate from the mid-1960's, particularly in 1967 and thereafter. As Attorney General Mitchell told the Subcommittee about members of organized crime: "(they) became interested in securities when they acquired sufficient knowledge in busines affairs to comprehend the ripe opportunities, the low risks, and the high reward in marketing stolen securities." As witnesses from the law enforcement sector pointed out, members of organized crime and those closely associated with them were fences and became experts in converting securities into cash or utilizing them by placing them in banks as collateral for loans, placing them in insurance companies' portfolios, or shipping them abroad for similar purposes. We were convinced that the wave of securities thefts must have been a contributing factor to the critical situation in the financial community for 19671970. An unprecedented amount of business in the stock exchanges, the necessary addition of several thousands of untrained personnel, the old-fashioned practices of brokerage houses in the handling of securities, all combined to produce what has been called "the paper crunch." This combination opened the door for the thieves to walk in. These factors, and the concomitant failure to keep adequate records, resulted in the demise or merger of several brokerage firms. Mr. Haack indicated the number has exceeded 100 within the past two or three years. He said that the New York Stock Exchange has paid out roughly $100 million in indemnity agreements in this area. There were significant losses of Treasury notes in the same period. Morgan Guaranty had $13.2 million in Treasury securities-bearer instruments-taken in October 1969, and the National Crime Information Center reported that there |