Mr. SANDOWSKI. This report just about summarizes the work of your committee? Mr. SABATH. No; I am working on the last report which will be ready in a few weeks, which will be perhaps a thousand pages. Thank you very much, and I regret that I have detained you as long as I have. The CHAIRMAN. Thank you. Mr. SABATH. In accordance with leave granted me, I hereby include the following data and documents in order to more clearly give an analysis of my various pending bills having a similarity to H. R. 6968 (Lea bill): JANUARY 29, 1935.-Committed to the Committee of the Whole House on the state of the Union and ordered to be printed Mr. SABATH, from the Select Committee to Investigate Real Estate Bondholders' Reorganizations, submitted the following PRELIMINARY REPORT [Pursuant to H. Res. 412] Your committee was authorized to investigate the activities and practices of real-estate reorganizations, bondholders' protective committees, or similar or other groups, trustees, receivers, or other persons, and to report to the Congress the results of this study, together with recommendations for necessary legislation, all as more fully set forth in House Resolutions 412 of the Seventy-third Congress and 39 of the Seventy-fourth Congress. The foregoing resolutions creating and extending the life of this committee were prompted largely by the many thousands of complaining letters from holders of defaulted real-estate bonds, and by a petition bearing some 500,000 signatures. Disclosures indicate fraud and dishonesty, together with apparent evasion of income taxes, to an extent that will doubtless warrant the scrutiny of the Department of Justice and the Department of Internal Revenue. The contents of this report are supported by the sworn testimony of witnesses and by the examination of records by accountants of your committee. 20,000,000 CITIZENS AFFECTED Of approximately $10,000,000,000 real-estate bonds outstanding, it is estimated upward of $8,000,000,000 are in default, directly affecting some 4,000,000 and indirectly upward of 20,000,000 of our citizens. These are the thrifty, hard-working citizens of the Nation, and not the Wall Street speculating class. Many had placed their life savings in these real-estate securities so that, in the evening of life, they might live pridefully independent of gratuities-only to be destitute today. Many thousands of letters state the writers are on public relief, notwithstanding the fact they have anywhere from a few hundred to several thousands of dollars invested in these defaulted real-estate bonds, from which they have not been able to receive any income but from which the bondholders' protective committees and their associates have been drawing excessive fees and/or expenses. The following excerpts from a few of the many thousands of letters received by this select committee give evidence of this statement: My wife and I are 69 years of age and on emergency relief. I stated in my application for relief that I possessed $1,500 in defaulted gold bonds. They told me I must dispose of that $1,500 for $150 and gave me the name of a brokerage house which would buy them for 10 cents on the dollar; and unless the bonds were disposed of as they suggested, I would be taken off the relief roll. I hope the Government will do something to bring these bondholders' committees to time. I am 80 years old with no work-and now, no income. Words fail to express the confidence and hope of many millions of investors in real-estate bonds for the efforts of your committee. I have scrimped and saved for my old age but now am cleaned out. I hope the Government helps the poor bondholders as it has banks, farmers, home owners, and others. I have wondered why the Government has apparently given no attention to bondholders who have invested their whole life savings. I note in the press that the Government is at last going to investigate the worst thieving in American history. Is there any hope that at last the Government is going to help protect what is left? I pray to God they will. It is very wise and necessary for the Government to regulate these real estate reorganizations. Our present administration is to be congratulated on making this searching inquiry. Through self-denial we saved our earnings and invested in mortgage bonds for our declining years-but look at us now. Surely our Government will not permit this to continue. I am proud your committee was authorized by the House to make this investigation and am hopeful your findings will be of help to the public. There seems to be no justice from the courts, the bondholders' committees, or trustees. These bondholders are usually poor, hard-working people who have saved a few dollars, only to have it legally stolen from them. I have received $67.50 for my $1,000 bond. Congress should so something and here's hoping that something will be a good investigation. I am now past 90 years of age and my earning power is gone, and I expected this investment would take care of ma and me when we were old, but it is now swept away. Some branch of the Federal Government should direct the reorganization of these properties all over the country. The foregoing are only a few of the expressions received, all of which are of the same plaintive appeal. Letters such as these have been received from nearly every congressional district in the Nation. The following pages briefly portray the activities of this committee and its findings thus far, disclosing such instances as: In New York City a bondholders' original protective committee pledged $52,000,000 of bonds deposited with it by the owners for a loan of $446,000, proceeds of which were used to defray the fees and ex penses of the bondholders' committee, its predecessors, counsel, and their associates, and of which amount $430.000 still remains unpaid by this committee. In Detroit a bondholders' protective committee pledged $15,000,000 of bonds likewise deposited by the owners for a loan of $135,000, proceeds of which were used for purposes similar to those enumerated in the foregoing paragraph. In New York City a bondholders' protective committee or similar group usurped unbelievable powers in the extraordinary provisions of their deposit agreement and actually acquired $10,000 par amount of bonds for $75.61 which ranked on a parity with the bonds for which the investors paid the full face value. In Detroit the use of the words "United States of America", with a similarity of engraving to that used by the Treasury Department, appeared prominently in many places on bond certificates and conveyed the impression they were obligations of the United States Government. In Philadelphia, upon the termination of a bondholders' protective committee's activities, the investors who deposited their bonds received a certificate of cremation evidencing the fact their bonds had been legally destroyed. The nondepositing bondholders received 6 cents on the dollar. Indications of equity owners conspiring with others, purposely creating a default so that such bonds could be purchased at a few cents on the dollar, and a reorganization effected most advantageously for some of the owners, but disastrous to the innocent investor. Certain bondholders' committees, through their brokers and others, conspire to trade out innocent holders of defaulted real-estate bonds at a few cents on the dollar for worthless oil stock, cemetery lots, and the like. Bondholders' lists were bartered and traded in by insiders including banks, trustees, and receivers, who alone were in the advantageous position of possessing these lists, but these lists were not available to the individual bondholder. Such interests appear to control bondholders' committees, and evidence of the consummation of such deals through the use of "dummies" is available. Creation of bondholders' committees by small groups of attorneys and bankers who apparently control this racket, but who themselves seldom, if ever, own any bonds and therefore had none of their own money invested. Bondholders' committees usually function through management corporations, advisory committees, and voting trusts, in order to control indefinitely the property and its income, all of which permits of the ultimate acquisition of title to the property by the committee or its nominees. They determine the amount of insurance, and through which brokers and from which insurance companies, policies are to be written. They determine the rent schedules; control all expenditures; decide what disposition is to be made of any surplus income over operating expenses; retain counsel for any legal work which might be required, such as proceedings to reduce assessed valuation; fix fees of such counsel, to be paid out of the income of the property; determine what amount is to be bid at a foreclosure sale under a plan of reorganization. This last factor is of controlling importance to those bondholders who do not join in a plan of reorganization. Such dissenting bondholders receive merely their proportionate share of the amount bid at the foreclosure sale. The amount so bid is very low in order to induce deposit of bonds under the plan of reorganization. Otherwise, the amount which would be paid to dissenters might be sufficiently large to induce bondholders to prefer to take the cash, rather than the new securities under the plan. In this determination, the committee's decision is usually dominant. Competitive bidding is virtually nonexistent, in view of the fact that an outside bidder must put up cash to cover his bid, while committees are in a position to use deposited bonds for the proportionate amount applicable to such bonds. Fees and expenses are chargeable against the deposited bonds and/or the income of the property or corporation for services in the various capacities above enumerated. Such fees and expenses are usually enormous. In one instance, fees totaling $725,000 were claimed, but the publicity accompanying this select committee's investigation of this particular situation resulted in nearly a 70-percent reduction of such fees by the court. Members of many so-called "bondholders' committees" and/or their counsel, bankers and associates, act as committee, receiver, depositary, trustee, and in numerous conflicting capacities on the same properties, evidencing a definite conflict of interest for the bondholders, and creating a definite possibility for collusion and conspiracy. In Chicago absolute disregard of the rights of bondholders in many instances are of such flagrant and multiple nature as to merit special emphasis in the subsequent pages of this report. It is noteworthy that the accountants of your select committee have uncovered what may prove to be of considerable interest to the Internal Revenue Department. In one instance the sum of $81,000 had been secured as a refund by one of these committees under what appears to be misrepresentation of facts. The attention of the Internal Revenue Department was directed to this situation, and the institution of proceedings by the office of the Attorney General to recover this sum has resulted. It has been impossible, thus far, for the select committee to carefully study the subject of violations or evasions of income taxes. Facts already disclosed appear to warrant a careful analysis to determine whether, in any cases, the Federal income-tax laws have been evaded. What may be described as "chain committees" have blossomed forth in different sections of the country. These committees control from a few individual properties or bond issues, up to as many as 400, aggregating in par amount of defaulted bonds from a few million to upwards of $200,000,000. While the executive operations of these "chain committees" are centered mainly in a very few of our largest cities, it is noteworthy that the properties over which they and their associates exercise control or administration is Nation-wide, similar to the ownership of the bonds, and therefore should receive proper consideration of the Federal Government. In the analysis of the extent of the territorial operations of only two of the Chicago "chain committees", it is disclosed that they are |