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So you see, Mr. Chairman, I have done a great deal of work on, and given a great deal of study to, this proposed legislation. I believe that my bill H. R. 6963, as reported by the Judiciary Committee the first time, would have eliminated most of the existent abuses in our courts and would have restricted these self-appointed and self-anointed protective committees; it would have protected the security holders, the bondholders, and even equity owners; it would have eliminated many of the abuses that have crept in under provisions of section 77 (b); it would have eliminated fraudulent and collusive sales and leases of properties, running into millions of dollars, on the part of these committees and receivers, and those behind the scenes—the combinations that control many of these committees, receivers, and trustees.

The CHAIRMAN. Mr. Sabath, you spoke of eliminating fees. In what way did you provide for compensation for the work done by these committees?

Mr. SABATH. In my bill I restrict the fees, giving the Conservator right and power to pass upon fairness of fees. Not only that, in my bill I have tried to eliminate fees by providing that deputy conservators could be appointed trustees in these matters; and that compensation of other trustees and receivers would be limited to an annual payment not to exceed $10,000; and that only a reasonable fee would be charged against the reorganization of a property by the Conservator for his services so as to make his Department selfsustaining. I felt that in that way these excessive fees to lawyers, to trustees, to receivers, to masters and special masters, and committees would be restricted to such an extent that in the future there would not be such an incentive to these selfish men-hungry for great gain—to force themselves on courts for appointments as receivers, trustees, masters; and that it would not be so lucrative to some of the law firms who endeavor to control that class of law business.

You may have read in the newspapers that in one of these cases that we investigated—I think it was the Paramount case in New York—the fees requested, in that case alone, were over four million dollars. In another case, the Gerard Trust case, the assets were something like six million dollars, and the fees, charges, and costs were over four million dollars. We have had hundreds of cases where almost the entire total of assets was absorbed by fees, charges, more charges and more fees; and the poor bondholder never got a penny for 6 or 7 years although the properties earned tremendous sums of money; not even taxes were paid. The money was all absorbed by fees.

The CHAIRMAN. Those excessive fees were approved by somebody, were they not? Mr. SABATH. Oh, by the courts; yes.

But in some instances some of these matters did not find their way into the courts. tective committees so arranged matters that they controlled the business without the courts. I will try to bring that out to you and try to make it as clear as possible. And while you have asked that question, let me deviate for a moment from what I wanted to say, because this is not a prepared statement; I just wanted to give you some facts as I went along.

Originally, when these defaults started, and even before defaults in many instances, these people anticipated defaults and the houses of issue started out by devising schemes whereby they would get

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control of the properties, get control of revenues from properties, get possession and control of their management. Then they started to appoint protective committees. Were they to protect the bondholders? No. The membership of these committees was composed of representatives of the houses of issue, the bankers, the investment bankers, and law firms. They were their agents and representatives. In that way they absolutely controlled these properties, and the assets and income of these properties. In some instances there were committees which had over 400 valuable pieces of property under their control, and the bond issues on them would total millions of dollars.

There was the Roosevelt committee in New York, the Pound committee, the S. W. Straus committee, the American Bond & Mortgage committee; and other committees in New York, Detroit, Milwaukee, Philadelphia, in your own State, Mr. Chairman, and so on. They had a double purpose in putting in their own people on protective committees whom they could control. In the first place they would have control of the foreclosures and the management of the property. And, by the way, they have had control of the property and will continue to have for the next 10 or 15 years in most reorganized cases, because even under section 77 (b) when they go into court, the very courts that appointed the receivers and aided these crooked committees, where these men are appointed as voting trustees for the next 10 or 15 years, and when their term expires there probably will be nothing left for the security holders.

Do you know how many security holders there are in real estate alone? Originally there were over 5 million. And there are over 10 million when you take into consideration security holders of various industrial issues.

This racket is so far reaching, Mr. Chairman and gentlemen, that you have no conception how much fraud has been perpetrated upon the American people. And we should wonder how it is possible that we permit these things to go on. But they are going on. They have been going on for 7 long years.

I am proud to say that our little committee tried to put—and in many instances succeeded—the fear of God in some of these people, and that it stopped some of these abuses in the matter of fees, collusive leases and sales. I am proud of the help we gave security holders, and of the fact we have been able to stop some of these avaricious men who represent investment banking interests. There was one other reason why they were anxious to get their own men on these committees. We had in this country a great many guarantee companies, mortgage guarantee companies. They were, perhaps guarantors on two billion dollars' worth of securities. They defaulted; the companies were liable. In many instances there were individuals of standing who also guaranteed some issues. To get away from their liability under their guarantees, they would put in on these protective committees people who would do them no harm, who would forget about the guarantee. Well, we did from time to time remind them of these guarantees outstanding against themselves and in many instances we succeeded, due to the investigations that we made, in having adjustments brought about.

You see, it helped them to sell these bonds whenever there was a guarantee behind an issue. It helped the high-powered salesman to unload them. And the result was that millions and millions of dollars of bonds were unloaded upon unsuspecting people who thought they had reason to believe that their investment was secure and good. Such investors looked only to real estate to something tangible. They were people who did not want to gamble in stocks. They wanted to put their money where it would be safe. They bought real-estate bonds, guaranteed, and they felt assured that they would receive their interest and have their principle safeguarded.

Do you know that there were nearly four hundred thousand men and women who invested from $3,000 up to $140,000 in these bonds, who found themselves, in 1933 and 1934, on the relief rolls? When they invested their savings they thought they had every reason to believe they were protected, and that their future was safeguarded because they had taken advice of these bankers and investment houses who arranged their investments by putting their life's savings into these bonds.

But there was a reason why these committees were appointed, and the way they were appointed. The moment they were appointed, do you know what they did? They started to send out communications to these bondholders. And mind you, no one else but the houses of issue had the lists of these bondholders. And they gave the names of these bondholders to their agents. But the individual bondholders themselves could not communicate with each other nor get together, because they did not know each other's name or address. But the houses of issue had these lists, and the protective committees used them to send out letters to bondholders, something like this:

MY DEAR MRS. SO AND So: In your interest and for your protection, this splendid committee has been appointed to safeguard your investment. You are advised to send your bonds in here and we will look after them and after your interests. If you do not do so you may lose almost all.

Many times fancy names appeared on the membership of these committees. Many men who permitted their names to be used were honest. That is the worst part of it. They were misled. Most of these committees were controlled by houses of issue, or by law firms representing houses of issue.

After they sent out this letter bonds started coming in, bonds which were paid for at hundred cents on the dollar-$1,000, $2,000, $5,000, $10,000, $25,000, were deposited. Some people had as many as thirty different issues hoping by diversification to safeguard their investment; that is, if one issue went bad perhaps the rest would remain good. People sent their bonds to these committees under provisions of vicious deposit agreements. I wish you gentlemen would have time to read some of them. They are a most complete power of attorney usurped from those who paid par for these bonds and who sent them in to these committees.

They clothe committees with full and complete powers to do with other people's securities as they wish.

These committees, in many instances, took the bonds-your bonds, and your bonds, and your bonds—and pledged them with banks, here and there, so that they would get enough cash to pay their committee expenses and to pay themselves.

Deposit agreements provide for a service charge of 5 percent of face value of bonds, in most instances. In others there may be a limitation, “No more than 5 percent"; and in a few instances the charge is only 4 percent of the face value of bonds. Yet those very bonds may be selling for only 5, 6, or 7; very few at prices higher than that. Deposit agreements provide fees to committees; they provided fees to

Unfortunately, my first bill provided that the President have the power to appoint a conservator, whether it would be the Securities and Exchange Commission or the Comptroller of the Currency, or any other. I did not wish to create a new bureau. And mind you, it would not have cost the Government a dollar, because every dollar of expense would have been repaid. The fees would have been small, would have been reasonable, but sufficient to take care of the expense. I have no feeling in that matter. Certain Senate provisions were eliminated from the securities and exchange bill, that I had helped with certain Senators, to put into the securities bill. But they were eliminated and in conference; a provision was agreed to that there should be an investigation of these conditions on the part of the Securities and Exchange Commission. That was about the same time our Select Committee was created. Of course, I understand and I understood then—why those certain Senate provisions were eliminated and why the latter was put in.

Well, I see that the Securities and Exchange Commission has made a thorough investigation; but I am not going to say that it has made as thorough an investigation, or a better investigation, than was made by that small committee of ours. We held hearings in 12 different cities. We examined under oath hundreds of witnesses. I have been accused of being harsh; of course, I am given to talking a little loud at times, but that is merely to give expression to my feelings and sentiments. So if I do talk a little loud, Mr. Chairman, I hope you will bear with me.

Now, the Commission made its first report, I think, about 3 or 4 months ago. I had this matter up with the President. I had a conference with others, upon the advice of the President. But somehow or other, the Securities and Exchange Commission has not cooperated with the select committee as I thought it should. Perhaps they thought that they had more experienced men, and men better able to make this investigation than we had. Nevertheless, I am glad to see that their report substantiates our report in every particular. They find the same conditions that our committee has reported.

Our select committee made its first report on its work in 1935, January 29. Then we filed a supplementary report in 1936. But even before that we had prepared and drafted the bills to eliminate these abuses.

The Securities and Exchange Commission filed their report. I admit preparation of reports requires a great deal of time. We were obliged to work day and night, and had I not received some assistance from one or two of the departments, our committee never would have been able to do as much work as it did nor get our report in as early as it did.

A supplementary report was filed by our committee in June 1936, containing about 120 pages. I wish you gentlemen would read it. Not that I am proud of its verbiage, but for the facts that it contains. I know that you would not hesitate at all to report legislation that would cure these damnable abuses that exist.

The bill that I introduced in behalf of the committee, contained provisions to restrict and control the activities of these protective committees, and also to limit the abuses in the courts.

I have pending before you H. R. 6978. That was introduced the same day as your bill, Mr. Chairman. I will explain why. This bill (H. R. 6978) is part of my bill (H. R. 9), which I introduced on January 5 and which had been reported in the Seventy-fifth Congress. shows, nearly 8,000,000 people who own these bonds on properties that have not as yet gone through the wringer. Most of these properties still are in court. Many still are in control of these committees. And unless something is done, within another year or two, most of them also will be gone.

I will say this, that as to most of the properties reorganized by committees and their lawyers, bondholders have only a slim chance of ever receiving much out of them. Some leases and some sales are so arranged that some of the bondholders may receive something after 35 years or 45 years—after taxes have been paid and costs have been paid and if leases will not be reduced again. And mind you, these committees, in many instances, have reduced leases by 75 percent on some hotels, theaters, and properties, with the knowledge of judges, to people who were dishonest, who were racketeers, who obtained possession at their own price notwithstanding offers before the court twice as high from respectable people. Decent offers could not get a hearing, because the two sides in the case controlled by the protective committee said, "We have investigated and we think this lower offer is the best and we recommend it”; and the courts had no power to do otherwise but consent. Courts have not the help needed to investigate whether reports made by receivers or trustees or committees are accurate or whether they are false. We must give courts such help.

I have been speaking of real-estate securities. We have, all in all, in the United States, gentlemen, even today, close to 20 billion dollars of defaulted bonds and securities of all classes. Perhaps that has been reduced some because a few are not in default any more having been returned to bondholders in small envelopes as ashes. They were destroyed; they had become worthless; the bonds had been burned and bondholders got certificates of cremation.

But there still are billions of dollars worth of these securities being foreclosed or in reorganization. There are millions of people who can be safeguarded if legislation is enacted without delay.

I assure you, Mr. Chairman and gentlemen, that I have left nothing undone to try to secure action. I neglected nearly all of my duties on the floor of the House. Partly, of course, due to my illness I was obliged to let up. But I have given the best that there was in me, as have the other members of the select committee. There was never question as to how this should be handled. Every member of our committee, with the exception perhaps of one member, worked in harmony; Democrats and Republicans alike. There was no politics in this

We feel, speaking now not only for myself as the chairman of this committee but for the members of the committee, that legislation is needed. My bills were reported after tremendous effort on my part and they embody nearly all provisions that are in the bill that is before you now. My bill, H. R. 6963, and my first bill, H. R. 9, embodied not only the provisions that are in this bill, but other provisions that would have restricted the courts; or would have given courts certain assistance at the same time restricting them whereby they could not ignore evidence of fraud. We gave the conservator the right to investigate and report to the court. We provided in our bill that the conservator should investigate and find out whether there is justification for certain action, whether conditions warrant certain action, and so forth. And there is also a provision as to the restriction of fees.

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