Mr. MARTIN. It seems to me that if any Wall Street bank or investment concern was mixed up in it, the court should have taken judicial notice of the fact that it was a racket. [Laughter.] Mr. JACKSON. If you said that, Congressman, in court, as I have, they would think as little of you as they do of me. They would call you a striker. Mr. BULWINKLE. What was the total capital of the Pressed Steel Car Co.? Mr. JACKSON. I am depending on my memory. I think we had about 4%1⁄2 million dollars of bonds. We had 136,000 shares of preferred 42 stock and 411,000 shares of common stock. Mr. BULWINKLE. What did they pay for the preferred stock? Mr. BULWINKLE. I am talking about the reorganization plan. Mr. JACKSON. Under the plan of reorganization the new capitalization was 15-year 5-percent debentures authorized 41⁄2 million dollars. Those are exchanged bond for bond. We got new bonds and the bonds were sold for approximately 96 to 100. Five percent cumulative convertible first preferred stock with a $5 par value, 430,000 shares. Five percent convertible second preferred stock 81,000 shares. Mr. BULWINKLE. What was the total capital? I just want the figure for the record, because I would have to figure it out; what was the total capital at which they reorganized that corporation? Mr. JACKSON. Of course, it is quite impossible to figure it with a million shares of common with no par value. Mr. BULWINKLE. What did it sell for? Mr. JACKSON. The common has not been listed. Mr. BULWINKLE. What did they pay for it? Mr. JACKSON. They paid nothing for the common. They got that as a bonus. They paid $5 for the first preferred stock. The value of the first preferred stock on par would be about $20,000,000. Mr. BULWINKLE. The common stock carried a book value, did it not? Mr. JACKSON. Frankly, I cannot tell you what capital value they ascribe to it. That would be done after the plan of reorganization. The accountants would set that up, you see. I cannot tell you. I can tell you that the old concern carried a statement of assets of approximately $37,000,000. But that, of course, was carrying fixed assets at book value. Mr. MAPES. Mr. Jackson, you present this isolated case of the Pressed Steel Car Co. My superficial information is that you do not have to go to Wall Street, in the language of Mr. Martin, to find illustrations like that. Probably in every congressional district, many people with a few thousand dollars and from that up have taken advantage of reorganization set-ups in a similar fashion. And their investment now is worth many times what it was 2 or 3 years ago, is not that true? Mr. MARTIN. I would like to say to the gentleman from Michigan, that when I refer to Wall Street, I also take in Main Street, because every Main Street is a little Wall Street. Mr. JACKSON. There is not a bit of doubt, to answer your question, Congressman, that there has been an appreciation in security values. But nothing happened from the time of reorganization, between the date of reorganization and the listing of this stock on the exchange, to justify any jump in value from $5 to $20. The conclusion is inescapable; and that is why I selected this case. Mr. MAPES. What I mean is this. In many cases of business failures former managements have taken advantage of the situation, bought the business at a very low figure, compromised with the other stockholders and the creditors, and during the last 2 or 3 or 4 years, the investments which they made have multiplied in value many times in a great many instances, is not that true? Mr. JACKSON. There is not any doubt about it; and it is not confined, either, to large ones or small ones. Mr. MAPES. I would like to get your statement as to how this bill will remedy or affect that situation. Mr. JACKSON. In the first place, it will prevent anybody from underwriting, making any contract with the new concern, that is interested-well the statute reads being or becoming pecuniarily interested, directly or indirectly** *, in any contracts, arrangements, or undertaking with the issuer or with any successor company, or their respective nominees or agents, * * *. Under the Lea It would have prevented this type of agreement. bill, if it had been in effect, it would have resulted in a complete disclosure. It would have brought into the situation the Securities and Exchange Commission, with its knowledge and its ability and its personnel. Mr. MAPES. Would it have prevented it, if the Securities and Exchange Commission had given its approval to it? Mr. JACKSON. No. If the Securities and Exchange Commission is simply going out and acting like a rubber stamp, it will not prevent it. If the Securities and Exchange Commission is not going to make a thorough investigation and is misled itself, as the court is misled, it will not prevent it. But if the Securities and Exchange Commission does the kind of job that we may reasonably expect of them, it will prevent it. I am sure the Securities and Exchange Commission would have prevented it in this case, and I might say to you, too, as a matter of experience, that the judges in our district-and incidentally in the course of the study that I have made for my Senate committee, I have discussed these matters with the various judges in the districtwelcome the Securities and Exchange Commission, and they have voluntarily asked the Securities and Exchange Commission to come in in various of the complicated cases. Mr. MAPES. Do we not, in passing upon this bill, have to be very careful not to put the Commission in this position? Suppose, for example, the Commission had been, let us say, no wiser than you were, and this reorganization plan had gone through as it did. What would be the feeling of the investing public toward the Commission if the case developed subsequently, just as this case did? Mr. JACKSON. You are taking me outside of my expert field, but I would say that I would feel the Commission had fallen down on the job, and everybody else would feel the same way. But I do not see why they would, and I do not see how they would. I do say to you this Mr. MAPES. There is that danger, is there not? Mr. JACKSON. I suppose there is always that danger, that a legislative body will not function, or that an administrative body will not function. But I say to you, it is my firm belief that if the Securities and Exchange Commission had been in this picture, Kuhn, Loeb would not have made the profit that they did, and the General American Transportation Co. would not have made the profit that they did. Mr. MAPES. Of course, nobody can forecast accurately what the economic conditions will be in the future. Undoubtedly economic and business conditions have had something to do with the increased value of those securities? Mr. JACKSON. I am inclined to doubt it in this particular case, Congressman. That is why I selected this as an example. If we had passed from a depression year to one of prosperity immediately, that would have been another proposition. That is why I picked this case. Between the time of the reorganization and the listing of the stock on the exchange, the disparity in values makes it a perfect example of a case where the underwriters knew what the stock was worth and they were making a gigantic profit. The rest of us did not know. I am not saying this critically of them. I am giving you the facts. It was perfectly legitimate under the profit system, I suppose. You may be sure of one thing, Congressman. It is going to help the situation. It certainly cannot hurt it. It is bound to help it in some respects. Mr. HALLECK. Mr. Jackson, assuming the investors involved in one of these reorganizations or receiverships were able, either individually or collectively, to employ adequate representation of their interests, do you think there would be anything particularly to be gained by having the Securities and Exchange Commission also intervene? Mr. JACKSON. I am very anxious to answer that question. I think you asked the question of Mr. Lowenthal yesterday, a question somewhat along those lines, and I was not satisfied with his answer. It requires an explanation that I would like to give you. Do you mind, Congressman, if I go on with my argument for just a minute or two, and answer your question in that way? Mr. HALLECK. Not at all. I will withdraw it and wait. Mr. JACKSON. I am not trying to evade your question. But just let me lead up to it for a minute. The point that I was making was that reorganization profit is something that is desired; and the last 20 years has seen a struggle between private interests and the courts to control reorganizations. They did that in two ways. They did that by controlling the trustee, either getting the court to allow the debtor to remain in possession, or by subverting the independent representations of creditors, by_getting friendly committees. In that fashion they prevented investigation; first, investigation of past acts of mismanagement, and second, they prevented investigation of facts when a plan was presented, so you had to take what you could get. The result is that that is the vice, that is the the situation that you face today. The courts have lost control, and they have lost control partly through their own carelessness and their acquiescence in the trustee; and they have lost control because the creditors are not represented by persons of their own choosing, independent persons of their own choosing. I am answering your question. Now, at that juncture, when I found Mr. MAPES. May I interject this question at this time? Mr. MAPES. If you will allow me to interject this one question at this point, partly in defense of the court. The interested parties, in a great many cases at least, come in with an agreement all signed up, and it is more or less of a violent thing to interfere with what all of the interested parties have agreed to; is not that right? Mr. JACKSON. Congressman, you are merely anticipating my argument. I do not blame the courts. I say the judge cannot do a darned thing about it. He is surrounded. He is hedged in. He has no means of turning away. That is my point exactly. Mr. MAPES. He has not got the organization? Mr. JACKSON. Exactly, he has not got the organization. He has not the ability and he cannot trust the lawyers, including myself; for instance in this Pressed Steel Car case, when I got what I wanted for the interests that I represented, I quit. I did not go on fighting for anybody else. And if they were not represented, that was just too bad for them. We were purely partisan and selfish about it. At that juncture, when I reached that point in the investigation that I made last year, and when I was drafting this report, I said obviously the judges need help. They are not in a position to make the necessary investigation. They cannot protect themselves. How are they going to be helped? Obviously we must have some independent agency to do it. And I said this in writing a year ago. I am not just drawing on my imagination. The type of agency that we have is important. If we get an independent agency that is going off and do this job on their own, and is not going to coordinate or cooperate with the court, we are simply passing the judicial function to an administrative agency and I, for one, have got faith in the courts. We must get, I concluded, some type of agency that would swallow their pride and say, We are not independent of the courts; we will help the courts toward a common end. and with that in view, I talked to Commissioner Douglas and I said in this report in writing: What shall the agency be? Shall it be the S. E. C.? Shall it be the Federal district attorney? Shall it be an independent body, like the Federal Trade Commission? The S. E. C. was the desirable agency. They had the fact-finding ability. They had the staff. They had the personnel, because the very job that they do, to make sure that a man issues securities bonestly in the first place, is the very same job that you have to do in a judicial reorganization, because it is nothing more than a new issuance of new securities. And because it was issued under the aegis of the courts, Congress said when it passed the S. E. C. bill: We will give them an exemption. The courts are looking after this. The S. E. C. does not have to. But it was obvious that the courts were not looking after it, because they could not. And ultimately, as a result of those conferences, Commissioner Douglas and his associates were perfectly willing to go in and assist the courts. They went so far as to say: We are quite content to go in and render a report and the judge can take it or not, as he likes. If he leaves it, it is his fault. Mr. HALLECK. Mr. Chairman, I wonder if I may interject a question at this point. Mr. JACKSON. Now I come to the question. The point that I made with Commissioner Douglas, and the point that I make with you now is, and I struck the key a minute ago when I said that there must not be any administrative encroachment on the essential function of our courts, because when you put a judge on the bench there is something about the robe and the judicial oath that focuses public opinion on him and keeps him in better shape, by and large, through the years, than a man administering an administrative function. I have faith in the judges and I have ultimate faith in our lawyers. So I said, We must not do anything that will rob the courts; and we must not do anything that will rob private initiative. Because, after all, I was selfish in that respect. That is the way I have made my living. I certainly do not want to be any party to anything that would cut off the right of a private litigant and a private lawyer to walk into the courts. So I said, What we need is something to supplement private initiative. In the majority of small cases, however, we can get all we need, because in the small cases they are not so complicated You do not get these expert reorganizers. You do not get these marvelous draftsmen who can make black look like white. We ordinary lawyers are more capable of holding our own in those situations. We do not need the S. E. C. But in the large and complicated cases, where the prize is worth struggling for, and private reorganizers want to take that situation away from the courts, let us get some help. And I say to you, Mr. Congressman, that the purpose of this bill, if I understand it as a result of my conversations with Commissioner Douglas-and I wrote him a letter on that the other day and said that I hope the time will never come when by virtue of a statute or a rule or a regulation we are going to take away from the private investor or a group of private investors who are willing to go in and make their own fight in their own way, the right to do it; I hope that any measure such as this will simply supplement the efforts of the private investor, will give the judge the right to look to an administrative body, with a competent staff, for help. And Commissioner Douglas is here and can state his own view. But, as I understand, that is the purpose of this bill. Mr. Lowenthal voiced the thought yesterday when he said that he believed and I think the Commission believes that you can get far better results by allowing a fellow to represent his partisan interest. The profit-making instinct is the strongest in all of us. And when a man has got the money to save or to make, he will go in and fight hardest. Mr. HALLECK. That is about the only thing most of us will struggle for. |