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TO AMEND THE SECURITIES ACT OF 1933
THURSDAY, JUNE 10, 1937
HOUSE OF REPRESENTATIVES,
Washington, D. C. The committee met at 10 o'clock a. m., Hon. Clarence F. Lea (chairman) presiding.
The CHAIRMAN. The committee will please come to order.
STATEMENT OF PERCIVAL E. JACKSON, NEW YORK CITY Mr. JACKSON. Mr. Chairman and Gentlemen:
My name is Percival E. Jackson. I am a practicing lawyer in New York, and make my office at 68 William Street. I have practiced law there for 25 years with the exception of the period of the war. Generally I have specialized in corporate reorganization work in the courts, particularly in the Federal courts.
Almost invariably I have represented the smaller creditor, or the smaller investor; not so much as a matter of choice, but it has been my lot to represent the smaller investor.
I have been acting as counsel for a committee of the United States Senate, which was charged with the duty of investigating receiverships in Federal courts. In that connection I have made a study, which was the subject of a report to the Senate, and which became a public document, by virtue of a resolution of the Senate last year. That study involved particularly a study of the receiverships in equity proceedings in the Federal courts; bankruptcy; the general history of insolvency legislation, and in particular the experience of the courts in connection with reorganizations under the present section 77 (b) of the Bankruptcy Act.
I have personally represented clients, investors and, as I say, almost invariably, small investors, in probably 15 of the larger proceedings that we have had in the eastern courts, particularly about New York. They have been the cases, for instance, of the Paramount Publix Corporation; Pressed Steel Car Corporation; the Prudence Co., and various companies associated with the Prudence Co.; Warner-Quinlan Co., and so forth. That is my private practice.
In connection with the study that I made for the Senate committee, I sent forms of inquiry to the reorganization lawyers in New York and to the corporate depositories, and particularly to committee men, and I collated the information from those replies. So that I am more or less factually versed in the general situation.
The CHAIRMAN. Mr. Jackson, will you give the identifying number of that document to which you have referred?
Mr. JACKSON. Yes, sir.
Mr. JACKSON. The report that I referred to is Document 268 of the Seventy-fourth Congress, second session, and the resolution of the Senate was Senate Resolution 308, adopted on calendar day June 5, 1936.
The CHAIRMAN. I had in mind just to put the identification in the record and not the document itself.
Mr. JACKSON. That is just what I did; I put in the identification of the document.
Mr. MAPES. Will you state who were the members of the committee?
Mr. JACKSON. Senator McAdoo was chairman; Senator McCarran, Senator Van Nuys, Senator Austin, and Senator White. The last two Senators were from Vermont and from Maine. Senator Van Nuys is from Indiana, Senator McAdoo from California, and Senator McCarran I think is from Nevada.
I think I have formed a fairly accurate concept of the present situation in reorganizations generally, if I am not egotistical when I say so.
It seems to me that the present situation very concretely put is this: There has been a struggle between the courts and private reorganizers for control of reorganizations in the past. That is nothing new and nothing novel under our form of government. Private interests have invariably competed for the control of branches of government. The legislature vested control of reorganization in the courts and private interests have been trying to get control of reorganizations away from the courts, because reorganizations have proved to be a most profitable line of business, in the security business.
The history of insolvencies in this country-and it is illustrated very well by the railroad reorganizations—is that when private parties put stocks out, they put water in the stocks, or they put too much stock out, for the purpose of making a private profit. While everything is all right, those enterprises are taken care of. There is enough profit available to take care of the investor. But then when a period of depression comes, there is not enough profit to take care of the investor and they invariably default on their bonds. That happens periodically.
In the case of the railroads it happened in 1875 and then at 10-year intervals, in 1885 and in 1895. Then it skipped over to 1915 and apparently in this century it runs in 20-year cycles, coming in 1935 after 1915. We have 30 or 40 railroads lying on their backs awaiting reorganization.
That is invariable. Of course, every time there is a period of depression decent people properly claim that they are affected by the depression. But the fact remains that the backbone of our insolvencies is the fact that when times are good and profits are inflated, we build up a capital structure on the basis of prospective earnings; we figure the earnings on the basis of good times, and then when bad times come, those capital structures cannot support the load.
Now, as I visualize the commercial era in this country, for the latter part of the 19th century, we had the gigantic enterprises that were formed out of our natural resources and out of which men made money for themselves and for the public generally.
In this 20th century, with those enterprises established, we got a new crop of titans and they were financial giants. They took the
old enterprises and made paper empires out of them. They found that there were huge profits in capitalizing these empires that the giants of the past had built. Then they found that when those empires collapsed, there was money to be made in reorganization.
So that, as they struggled in the first place for the control of the enterprises, so that they could issue and sell the stock, they struggled for the control of those reorganizations in the courts.
Now, gentlemen, I am not talking mere theory. Let me illustrate that for just a moment. I know that this committee has heard the underlying situation of these abuses, so that while I am primed for bear on that, I put all of that back into my bag, because yesterday I sat here and heard one of your members tell Mr. Lowenthal that they were full up on that. I was glad I happened to be here but was not able to go on yesterday, because I readjusted my presentation more nearly to suit what I thought were your wants.
But let me give you an example of the profits in reorganizations. It will be very brief.
I represented bondholders in the matter of the Pressed Steel Car Corporation that was reorganized in the Western District of Pennsyl
The reorganization was finished only this year. During the whole depression, the Pressed Steel Car Co. was a carbuilding concern. There was no business, of course, from the railroads. So we sat there with that insolvency. I say “we”—the creditors and their representatives. Then along came Kuhn, Loeb & Co. and said, "Here is the General American Transportation Co. They are prepared to underwrite your needs. What do you need?” “We need one and three quarter million dollars.” And they saidand I have the plan here; I went back to the files, so that I would not quote it inaccurately—they said "We will buy 350,000 shares of your preferred stock at $5 a share. That will give you the one and three-quarter million dollars that you need." And they specified the terms of that stock. They took that stock and they paid for it 1% million dollars. They got, as compensation for doing that, 30,000 shares of common stock. And they got the stock at $5. I think it was delivered late last year.
I bought a New York Times this morning to see what that stock was quoted at. The stock had reached a high-it is presently quoted at 21—it reached a high of 31, and its lowest price was 20.
Mr. EICHER. And they bought it for $5?
Mr. JACKSON. They bought it for $5. They got 350,000 shares. And they got 30,000 shares of common stock for doing that.
Now, we people who represented the bondholders, when we woke up, we succeeded in compelling them to give some of it up to us, but they would not give it to us at $5. They gave us the option to buy it at $7.50 to $10, which netted them an immediate profit.
Mr. MAPES. Which stock are you talking about now, the preferred or common?
Mr. Jackson. The preferred stock. The common stock, I do not know what that is worth.
Mr. MAPES. The common stock was given to them?
Mr. Jackson. The 30,000 shares of common was just given to them for subscribing for the preferred at $5. And immediately the stock was listed at $20. It went in at $20 and sold at $20 immediately. The right to subscribe for it was worth money even at $7.50 or $10.
Kuhn, Loeb & Co. acted as reorganization managers without compensation, except as they participated in the purchase of that stock. The plan says so. They looked to their purchase; they expected the purchase would be profitable. We did not know how profitable. But there was made in that reorganization, as I have figured it, not less than $4,625,000, and at 31, the top price, quoted in the market, it was 7% million dollars; or as much as one Congressman can get out of his salary in a thousand congressional years.
That was just one reorganization.
Mr. JACKSON. Yes. It was in the matter of the Pressed Steel Car Co. The underwriters were the General American Transportation Co. and Kuhn, Loeb were the reorganizers.
I am frank to say that 6 months ago, with all of the study that I have made, I had no idea that the profits of reorganization were anything like this. I did succeed in getting some of these rights to subscribe for the bondholders. But I had no idea that we were talking about 7% million dollars. That had to come from somewhere.
Now, that is the profit in reorganization. I am not criticizing the court in that case, because if I criticized the court I must criticize myself. All I can say about the court is that he probably was not any smarter than I was. He did not realize the gigantic potential profits in that issue of stock. It looked most innocent in the plan. They were doing us a favor. They were giving us a million and three quarters dollars.
But that is a prize well worth struggling for.
Mr. MAPES. Suppose this bill had been the law at the time of which you speak, at the time of this reorganization; and suppose that you had been the representative of the Securities and Exchange Commission and intervened in court in behalf of the stockholders. Do you think you would have approved this reorganization, just as you did in your private capacity as a lawyer?
Mr. JACKSON. No; for two reasons
Mr. Mapes. What different judgment would you have formed as a representative of the Commission than you formed as an individual interested in the matter?
Mr. Jackson. I would not have approved, for two reasons. One, because in that case I approved the plan of reorganization because I represented a bondholders' committee and I made them give us 100 cents on the dollar. That ended my interest in the situation. I was representing a purely partisan interest. My job was to see that my bondholders were paid
Mr. Mapes. What percentage of the security-holders did you represent?
Mr. JACKSON. Oh, I think we represented four or five hundred thousand dollars worth of bonds.
Mr. MAPES. Out of a total of how much?
Mr. JACKSON. Oh, yes; all the bondholders got 100 percent. We saw to it that they got 100 cents on the dollar.
The second reason is this: The Lea bill would have prevented this situation, one, because the Securities and Exchange Commission know more about this sort of thing than I do, or any of us do. They have experts. They are qualified. They could evaluate this thing. They would know what Kuhn, Loeb & Co. were getting. They would know that this meant a potential profit for their underwriters of 772 million dollars. And if any evidence of that sort had been presented to the court, the court would have disapproved the plan.
But it simply is the fact that the court did not have the machinery, the court did not have the knowledge, and we were not smart enough, that enabled the underwriters to walk way with 7% million dollars.
Mr. MAPES. Of course, the Commission would be represented by human beings; and they would not be smart enough to foresee what condition would be in the future.
Mr. Jackson. That may be so, except that they have a staff of accountants and auditors and engineers.
I go down there representing two or three hundred thousand dollars worth of bondholders. I go down there on my wits. I do not have accountants and auditors and engineers. I have to walk into the courtroom and get my information for the first time and think on my feet. I have to do the best I can under the circumstances. And when I get 100 percent for a partisan body that I represent, I am through. But if I am representing the Securities and Exchange Commission and I want to know where that money is coming from, and I find it is coming from stockholders, I am as interested as though it is coming from the bondholders.
But there is not any doubt, Congressman--and I do not think I am partisan when I say so—that if the Lea bill were the law when the Pressed Steel Car reorganization went through, the General American Transportation Co., and Kuhn, Loeb & Co., and their associates would not have made between five and seven and a half million dollars within 6 months of that deal.
Mr. MARTIN. Was that reorganization in court?
Mr. JACKSON. Because the court has not the means of obtaining the knowledge that is necessary. With all due respect I would say that if you were sitting on that bench, and I went before you and we were both trying our darndest to see that there was a fair reorganization, we would not have known that there was that much money in this proposition.
If I gave you the plan of reorganization and I have it hereand you read it, you would have no idea that there was that much money to be made out of that reorganization, the way this is worded. It is beautiful. They have the right to subscribe to 350,000 shares, but they are not obligated to take them. The minute you read that you say, "Well, this is no bonanza." But they were taking them, and they were glad to take them. And this is the reason why. I had to pick up the New York Times to find out why.
But I am frank to confess—and I am fairly egotistical—I could not read that out of this plan. This did not look like 7% million dollars worth of reorganizing profit to me in these 14 or 15 short pages.