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which conceivably might share or bear that burden, relieving the investor of that loss in whole or in part. One group is made up of the men who have had

Mr. WITHROW. I am sorry to interrupt, but I would appreciate if you would state, for my benefit, your name and whom you represent, as I came in after you had started.

Mr. LOWENTHAL. My name is Max Lowenthal. I am now counsel to the subcommittee of the Interstate Commerce Committee conducting the railroad investigation.

Mr. Mapes. Do you live here in the District?

Mr. LOWENTHAL. I am resident in New York City. I might add that I have had occasion to deal with matters such as are involved in this bill in jurisdictions other than that of New York and have, in the course of a number of years study of this particular field, studied proceedings in various parts of the United States.

Mr. MAPES. Are you in general practice in New York?

Mr. LOWENTHAL. I am not now in general practice and have not been for some time; except insofar as acting for a Senate committee may be deemed to be practice.

I was saying that the ordinary investor in securities of a company which has gone into receivership or bankruptcy has two main needs. One need is for the recovery by the estate of every dollar which the estate is entitled to recover from anybody for anything previously done to the company on which a cause of action can properly be based.

Now, there are in general two groups from whom an estate can make recovery, which recovery will indirectly but substantially benefit the ordinary investor. One group is made up of the people who have been in control or management of the company which got into receivership; and the other group are the bankers who floated the securities and may have dealt, in other respects, with the company which has now gone into receivership.

In referring to that type of recovery for an estate, I do not mean to suggest that because recovery can be had, the bankers or the management must, in consequence, be regarded as men who have proceeded unethically. I am dealing with the cold question of dollars and cents for the ordinary investor.

If there are facts on which a cause of action can be based so that the estate may have the benefit of it, investors can recover large sums of money that ought to be paid. It has been done in too few cases of large receiverships or large bankruptcies.

There are now pending in the Federal courts and in the State courts a number of suits by trustees in bankruptcy of large railroads for the recovery of many millions of dollars from directors or bankers.

Similar suits have been instituted in norailroad cases and in cases of industrial corporations which have gone into receivership.

That is a branch of activity in connection with receiverships and reorganizations on which a great deal can be done to help the ordinary investor salvage a loss which was not of his making.

The second job which the ordinary investor needs is the job of reorganization in his interest. That involves a number of major and difficult questions. I will be through with this phase of my remarks in a moment. I just want to indicate what the fundamental need of the investor is here and how this bill will help him to have it met.

In reorganizations, one of the most important considerations is that of control of the reorganized company; management of the reorganized company. If you go to New Îork and meet with a group that is discussing reorganization of a large company, you will find that one of the first questions that any banker interested in the situation or any large creditor interested in the situation will ask, is this: “Who is going to control the reorganized company? Who is going to manage it?"

If they are interested in those questions, those questions are obviously of great importance to the ordinary investor.

Another type of problem in connection with reorganization is that of the division of the reorganization securities. Reorganization involves a shuffling of securities, and a redistribution of the cards. Now, sometimes in that reshuffling, the dealer deals from the bottom of the deck. One of the important jobs in reorganization is to make sure that the cards are dealt from on top and to have them properly and fairly shuffled before the deal begins.

There are other major questions involved in reorganizations. In both classes of jobs to which I have referred, the work involved is of a very difficult and very complex nature. The ordinary court machinery is not adequate for the administration of that type of work. Sometimes the digging into the past history of a corporation with a view to recovering money for the estate and with a view to ascertaining what kind of management and control the involvent company hadbecause that has a bearing on whether the men who controlled it in the past shall be permitted to control after reorganization-sometimes a job of that kind can take many months and even some years. It takes very skilled and very experienced men.

And so it is in studying the problems in connection with reorganization. For dealing with those problems, the investor needs the services of a permanent, trained and experienced staff. No court has a staff of that kind.

Now, to be sure, when a court appoints a trustee, the trustee should provide such a staff. I regret to say that in a great many cases the trustees have not risen high enough in the discharge of that duty. And I regret to say also that even when you have a trustee or a trustee's counsel who wants to do a thorough job, interests which seek to serve themselves against the security holders will sit in at the conferences with the trustee and trustee's counsel and endeavor to persuade the trustee or trustee's counsel in a way that may not in fact be for the benefit of the security holder. And it is of great assistance to the trustee or trustee's counsel, in such a situation, to have present the representative of an independent committee or of a Government administrative commission like for example, the S. E. C., who would urge the sound course of action and would offset the urging that is being made by the other side.

Now, it may seem to you that a high-class trustee ought to be able himself to withstand the wrong kind of urging, but when you sit in a room with the representatives of several committees, and they put up a plausible although specious argument for not taking the course of action that should be taken, and they say, "There is nobody here urging that you do what you, Mr. Trustee, want to do; all the interests in this room are urging you to do the contrary”, it puts the trustee


on the spot. It would be a great help to him to have some administrative agency of the Government there which could take the other side, when the other side ought to be taken.

I know some judges, some fine judges, who are wholly impatient with the performance of the type of duty imposed upon them in the administration of insolvent estates. And that impatience makes for their not doing the job that ought to be done.

It must be borne in mind that the adminstration of insolvent estates and the handling of large corporate bankruptcies and receiverships involves a function that would differ from the ordinary function of a judge. He ordinarily acts as an umpire between litigants, a small number of litigants, who come before him, who bring him the facts on which he is to make his decision, and present him with the legal considerations which each side claims should be regarded in making a decision.

That is far different from the job of getting out on your own initiative, through yourself and your agents and digging up the concealed facts; going out into the highways and byways, for the purpose of getting the facts and yourself evolving the considerations which should be given weight for the protection of the security holders.

Now, most of the real parties in interest in large receiverships and bankruptcies never get to the courtroom where their interests are being determined.

Mr. BULWINKLE. Mr. Lowenthal, you said you had to go pretty soon and I would suggest that you get down to the bill before you leave.

Mr. LOWENTHAL. I am dealing with this bill, you see; I am dealing with the provisions of sections 12 to 14, which give

Mr. BULWINKLE. The point is that yesterday we had the general discussion of the bill, the necessity for the bill, covering 2 hours.. I would like to get down to the particular provisions of the bill in which you have an interest.

Mr. LOWENTHAL. Well, sections 12 to 14, in brief, provide that the Securities and Exchange Commission

Mr. ELLENBOGEN. Mr. Chairman, I think the explanation that Mr. Lowenthal is making is very interesting

Mr. BULWINKLE. It is. I have no question about it. Mr. ELLENBOGEN. How much longer had you intended to go on with your general statement?

Mr. LOWENTHAL. I hoped to conclude within about 5 minutes.

Mr. BULWINKLE. The point is that Mr. Lowenthal expressed, before the hearing started, his desire to leave within 30 minutes, because he had to go over to the Senate.

Mr. MAPES. Did you have something to do with the drafting of this bill?

Mr. LOWENTHAL. I did not, except perhaps in the very remote respect that when the S. E. C. was getting some men to help them in their protective committee study, one of their representatives came to me to ask for suggestions of persons whom it might be well for them to employ in conducting their investigation.

Mr. MAPES. Speaking individually, I join with Major Bulwinkle in the suggestion that you tell us what this bill does. We know something about the problems. We would like to know how this bill meets it.

Mr. LOWENTHAL. I am addressing myself particularly to sections 12 to 14 of the bill.

Mr. COLE. In one of your previous comments you referred to some of the evils of railroad reorganization in pending suits.


Mr. COLE. My understanding is that this bill does not include such railroad reorganization.

Mr. LOWENTHAL. That is correct. But I think you will find the problems in the administration of receiverships and bankruptcies of railroads and of industrial and public-utility companies and holding companies are in general of the same nature.

Mr. Cole. This bill has nothing to do with railroad reorganizations; is that a correct statement?

Mr. LOWENTHAL. That is my understanding.

Mr. COLE. All of that is left to the language in the present Bankruptcy Act?

Mr. LOWENTHAL. That is my understanding.

Mr. ELLENBOGEN. Do you think this bill should include the railroads?

Mr. LOWENTHAL. I understand that will be taken up as a separate matter in due time and I think it might be well to go ahead on that basis.

Sections 12 to 14 empower the Securities and Exchange Commission to inquire into and report on the pertinent facts and considerations which should be held in mind in dealing with the administration of the receivership and bankruptcy of large insolvent corporations and with their reorganization, and in connection with the readjustment of companies which are being readjusted out of court.

I could talk for a half hour about that and say the same sentence in many different ways, but I think that says what the bill provides in Sections 12 and 14.

Mr. Mapes. Mr. Chairman, may I interrupt to ask a question there? Do those sections give the Commission any affirmative power or any absolute power except to make investigations and reports?

Mr. LOWENTHAL. They do not give the power to say that we veto this plan as unfair, we disapprove it, it is void, it is out, it is dead. The Commission is not given that power under this bill.

Mr. Mapes. All that the Commission can do is to investigate and make known to the parties in interest and to the court what are the facts, and then let them do what they think ought to be done with that information before them?

Mr. LOWENTHAL. That is my understanding of the bill. I should add that there is another valuable provision in the bill which authorizes the Commission to intervene in the proceedings, which I think is a necessary supplemental provision, because

Mr. MAPES. Even though the Commission has no power to make orders?

Mr. LOWENTHAL. That is my understanding of the bill.

Mr. MAPES. It seems to me in one provision of the bill the Commission has the absolute authority to fix fees; is that correct?

Mr. LOWENTHAL. I could not substantiate that view, Mr. Mapes. It may be the case, but I think it is not.

Mr. KENNEY. Is not that the case only when the question of fees is submitted to the Commission and, as arbitrator, it is given the power to fix fees?

Mr. LOWENTHAL. There is a provision giving the Commission power to act as an arbiter between a committee and the security holders who have deposited with it, in cases where a committee requests the Commission to do so.

Mr. MAPES. That may be right.

Mr. LOWENTHAL. In that sense it may be that the Commission has that power. That arbiter provision is section 14 (b), on page 46 of this bill.

Mr. MAPES. But for the most part this bill only gives the Commission power to require a disclosure of the facts; and also power in certain cases to make investigations and reports of the facts. That is what the bill does for the most part, is it not?

Mr. LOWENTHAL. Yes, I think that is so. But, of course—I do not think you were here when I began my statement; I indicated at the outset

Mr. MAPES. I was here.

Mr. LOWENTHAL. That I was limiting my remarks to the second of the two divisions of this bill which was discussed in two divisions here yesterday. I am not, except perhaps for a moment, going to discuss the question of the committees. I am discussing the power given to the Securities and Exchange Commission by this bill, in the way in which you have described it.

Mr. MAPES. I have heard all of your statement.

Mr. COLE. Carrying Mr. Mapes' inquiry a little further, you leave the impression that in a proceeding in court, where the Securities Exchange Commission intervenes, the Commission acts in an advisory capacity solely. In reading the language in this bill it seems to me that if the Commission, being permitted to intervene under Section 14, becomes a party in a private litigation, that if they are not satisfied with the decision of the court, they can appeal the case.

Mr. LOWENTHAL. I think the Commission could do that.

Mr. COLE. It would be a party to such an extent that they could carry the litigation on to the higher court.

Mr. LOWENTHAL. Yes. But as I understand it as any party to such litigation simply has the power to make argument before the judge and produce testimony and would not have the power to overrule the judge. But they could appeal from his decision.

Mr. COLE. That is correct, but that is going a little farther than being advisory to the court, such as a master in chancery, and supplying help to the judge in these very technical matters. In other words, it goes beyond that and involves appeals. Even though the original litigants in the case might be satified, the Government agency could compel them to go to the cost of an appeal, and an appeal beyond that until it reached the highest court. That is the purpose of this, is it not?

Mr. LOWENTHAL. I am very glad that that point was made, because it seems to me worth commenting on. It seems to me to be the minimum requirement in a bill of this kind, for this reason. Let us suppose that there is a large corporation that has 30,000 security holders—29,950 of them will never get into the courtroom and will not know very much about what is going on. They are really the

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