Answer. The Interstate Commerce Commission has some authority under section 1 (18) of the Act to control diversion of any carrier property used for transportation purposes, inasmuch as the carrier must seek authority from the Commission prior to abandoning any lines or property so used. However, the Commission under existing law has no authority over the sale or conveyance of non-transportation assets of a carrier otherwise subject to its jurisdiction. Question 3. What procedures do you follow and what reports do you require to keep yourself informed about carrier assets so that you can determine whether or not diversion is occurring? If you do not keep yourself so informed at present, what plans do you have to keep yourself informed in the future? Answer. Our field program provides for an examination of all large railroads and motor carriers on an annual basis. These examinations include a detailed review of all material transactions between the carriers and their affiliated companies. Prior to 1969 all carriers were required to submit certain data with respect to payments for services, and in 1969, the motor carrier annual reports were revised to provide for detail reporting of payments and receipts recorded from transactions with affiliated companies. Similar reporting requirements are currently under consideration for rail carriers. Question 4. At page 8 and 9 of the Bureau of Accounts Special Review of Railroad Conglomerates, March 11, 1969, is a list of questionable practices which I think are so important that I would like to take a moment and read them into the Records IV. Summary of Questionable Practices The review of railroad holding companies disclosed a number of questionable practices including: 1. Intercompany dividends detrimental to financial welfare of railroad. a. Railroad required to pay dividend of common stock of its subsidiary consisting primarily of real estate and marketable securities which had a book cost of $20 million and an appraisal value of $45 million. b. Holding company liquidated loans to the extent of about $900,000 by requiring railroad to declare special dividends. c. Holding company lent cash to railroad to pay dividends to holding company. d. Holding company exercises control over railroad dividends to maintain its (holding company) dividend policy. 2. Sales of carrier real estate ($65 million in past nine years) for the purpose of generating cash and profits necessary to establish a holding company and maintenance of the holding company's dividend policy. 3. Intercompany sales and transfers of railroad assets without adequate compensation to railroad, such as sales of air rights, sales and transfers of real estate and transfers of marketable securities at less their appraised or market value. 4. No reimbursements by the holding company or affiliates in consolidated tax returns for use of carrier tax benefits resulting from accelerated depreciation methods, investment tax credits and net operating losses. However, one carrier has been required to pay holding company about $1.4 million for holding company loss contributions on a consolidated tax return, including a year in which no tax was actually paid. 5. Intercompany leasing arrangements whereby carrier is required to f nance the property to be leased, pay rental charges in excess of authorized depreciation plus a profit and rental charges in advance. This results in a carrier paying considerably more than if the property were owned and yet the carrier enjoys none of the benefits available in a normal lease arrangement such as conservation of capital. 6. Advances were made by railroad to holding companies and affiliates at no interest cost or at rates below market. 7. Use of railroad's credit by holding company without adequate compensation. 8. Officers and administrative salaries and expenses applicable to the holding company have been included as a cost of railroad operations. Arbitrary management services have been billed by a holding company to its railroad subsidiary. 9. Insufficient details in carrier records to support intercompany transactions, such as leasing, management services and transfers of assets. 10. Access to records was limited-staff was unable to review noncarrier records. 11. Diversion of carrier resources without just compensation has an adverse impact on minority stockholders. To what extent have the above practices occurred in the Penn Central? Who pays the salaries of the Chairman of the Board of the holding company? The railroad? Is there any allocation between the corporations? How about administrative costs of the holding company? Answer. The questionable practices disclosed in the Bureau of Accounts Special Review of Railroad Conglomerates, dated March 11, 1969, are included in our audit program for Penn Central. The investigation is currently in progress and we will advise of our findings when it is completed, with a preliminary report due, as you were informed at the hearings, in about 90 days. The officers and administrative salaries and expenses of Penn Central Company are paid by the transportation subsidiary, Penn Central Transportation Company. Direct expenses applicable to the holding company are subsequently rebilled to the holding company in total. Seventy-five percent of the salaries and administrative expenses of the following former officers were subsequently billed to the holding company: Chairman of the Board (S. Saunders) Chairman of the Finance Committee (D. Bevan) Vice President, Public Relations and Advertising (W. Lashley) Question 5. At page 34 of the Bureau of Accounts report is a list of potential questionable practices at page 36 you describe "Distortion of carrier income"-do you have an example-has the Penn Central engaged in this practice? Answer. This item is also currently under investigation by our audit staff as explained in answer to the preceding question. Question 6. Sec. 10 of the Clayton Act prohibits a carrier from dealing with another company having a common director, president, manager or selling or purchasing agent except by competitive bidding. Sec. 10 requires reports to be filed with the ICC of any such transactions and provides fines and jail sentences for violation. It would seem that the Penn Central must have a considerable number of dealings between companies with common directors. Do you investigate to satisfy yourself that Sec. 10 has been complied with? Are reports filed? Has the Penn Central filed reports? How do you enforce Sec. 10? How many cases have you certified to the Attorney General for prosecution? Answer. Our audit procedures include a general review of carrier compliance with provisions of the Clayton Antitrust Act. Carriers purchasing material or services amounting to more than $50,000 per year from companies having a common director, president, manager, or selling or purchasing agent are required to file reports detailing the transactions and bids requested in connection therewith. Penn Central Transportation Company files reports required by this Section. It filed 11 reports in 1968, 11 in 1969, and 9 to date in 1970. The Commission is looking into the possibility of violations of this Section by Penn Central in its dealings with banks. Violations of this Section are normally discovered under the audit procedures, and are submitted to the Commission's Bureau of Enforcement. If additional information should be necessary, as is often the case, the Bureau conducts a field investigation to obtain the complete facts and evidence available. When this is concluded, the file is referred to the Department of Justice, Antitrust Division, for prosecution. Since January 1, 1967, seven cases have been referred to the Department. Question 7. Sec. 1(8) of the ICC act prohibits transportation of certain articles mined, produced, manufactured or owned by the carrier. Do you know of any violations of this clause? Because of all of its diverse companies and businsses, a company like the Penn Central would have a difficult time not violating this section-wouldn't it? Answer. We have been able to find only three proceedings during the period November 3, 1958, to July 31, 1970, in which the question of the commodities clause was raised as an issue. These cases are: 1. Florida East Coast Ry. Company Reorganization, decided November 3, 1958, 307 I.C.C. 5, 18. 2. St. Mary's R. Co., Construction, decided August 4, 1960, 312 I.C.C. 178, 179. 3. Texas & Pacific Ry. Co.-Control-Kansas, Oklahoma & Gulf Ry. Co., et al. decided June 22, 1964, 324 I.C.C. 309, 323, 324. In all three cases, the Commission found that no violation of the commodities clause was involved. However, the commodities clause has been emasculated by the decisions of the Supreme Court in United States v. Elgin, J.&E. Ry. 298. U.S. 492 (1936) and United States v. South Buffalo R. Co., 333 U.S. 771 (1948). Question 8. The Bureau of Economics Report on Project No. 46, March 1969, at page 5, states that parent company should be required to submit lists of its directors, officers, and directors and officers of all affiliates—why is this recommendation important? Answer. At the present time relatively few of the parent holding companies are subject to the reporting requirements of the Commission. Thus, the Commission, from its own records, has little or no information about these nonreporting parent companies and their respective non-reporting subsidiaries and affiliates. The Bureau believes the Commission should know the identity of the officers and directors of these non-reporting companies as well as what interlocks might exist with other companies. While the Bureau recognizes that a control or community of interest situation is not necessarily indicated when two or more companies have common directors, the situation is one which must be considered, in their opinion, in order to determine its effect upon the regulated carrier. Question 9. Sec. 20a (12) makes it unlawful for a person to be an officer or director without an order of the Commission showing that neither the public nor private interest would be adversely affected thereby. What criteria do you use in approving directors and officers! How do you determine whether the private or public interest is adversely affected? Do you approve all officers and directors that are proposed? Answer. Actually, section 20a (12) makes it unlawful for an individual to be an officer or director in more than one carrier without Commission authority. An individual may therefore become an officer or director of a carrier or of a carrier and one or more noncarriers without violating the provisions of section 20a (12). In an application under section 20a (12), the applicant has the burden of proof on the following criteria:" (1) Neither public nor private interests will suffer through the interlocking directorate; (2) the absence of competition between the carriers involved; (3) even in the absence of direct competition of parallel tracks, if either carrier has an election as between the other carrier and another road or roads as to routing of traffic at interchange points, public and private interests will be assumed to be adversely affected by an interlocking directorate: (4) no existing or prospective conflicts between the interests of the respective carriers. For example, if there are prospective negotiations between the carriers in question for consolidation of their properties, no person, regardless of his high character, should "be asked or permitted to sit on both sides of the table"; (5) the interlocking position "will not tend to accomplish or effectuate the control or management in a common interest of the carriers" and "will not tend to interfere with the independence of those carriers;" and (6) no person should be permitted to serve as officer or director of more than one such railroad or system, except in special circumstances, because of the importance of maintaining complete independence and impartiality 1 The term carrier is defined under Section (1) (3) (a) of Part 1 of the Interstate Commerce Act, generally embrasing pipe-line companies, express car companies, sleeping car companies, and railroads. 2 The criteria are set out and discussed in detail in Chesapeake & O. Ry. Co. Purchase, 271 I.C.C. 5, 17. between major railroad companies or systems and the possibility of competition and conflict of interest between such railroads or systems. In light of these criteria, if an individual is already an officer or director of a railroad, his application for authority to hold a similar position with another railroad or railroad system will be usually summarily denied. However, there have been some exceptions made. For example, where the two unrelated railroads involved are small carriers located in widely separated sections of the country, such as Texas and Maine, and there is no connection between the two and no possibility of their competing for traffic, an individual with some special skill will be approved by the Commission to hold a position of officer or director of both railroads. There have also been a few instances where an unprofitable branch line has been abandoned by a railroad and then acquired by a group of local shippers or a municipality and operated as an independent railroad. In such cases, the Commission has approved the holding by an officer of the abandoning railroad of an office in the new railroad in order to aid the new owners in establishing their carrier operation. The president of the former New York Central was also permitted to serve as director of the Reading after New York Central's interest in the latter was sold to Baltimore & Ohio. This permission was granted in order that New York Central's interest in maintaining an important route into New York City from the South would not be adversely affected by the sale. Furthermore, an application would usually be approved if the carriers involved are all members of the same system and operated under common control. Under such circumstances, it is to the economic advantage of a railroad system to permit its officers and directors to serve in several capacities rather than requiring each separate position to be filled by a different person. Indeed, such construction of the statute has been codified in the Commission's regulations-See question 13. Numerous applications filed under section 20a (12) have been denied by the Commission since this section was enacted in 1920, but the total would be difficult to ascertain since our finance dockets are not segregated as to the type of action involved. However, we have been able to establish the most recent denials between the period October, 1968, and the date of this letter, and attached for your information are the orders in these five proceedings. We hope this information will be sufficient for your purposes. Question 10. Do you think the interlocking directorates of the Penn Central and a large number of banks are in the public interest? Answer. Presumably banks require representation upon a railroad's board as a condition to granting a loan in order to safeguard their investments. If a bank is unable to have representation upon a board it possibly could become reluctant to advance the funds a carrier requires for equipment and other capital expenditures. If this were the case, the public could suffer because the carrier's ability to furnish needed transportation would be placed in jeopardy, and that clearly would not be in the public interest. Therefore, such interlocking directorates as in the case of Penn Central may well have been in the public interest by providing funds not otherwise available. However, the Commission is looking into the possibility of violations of Section 10 of the Clayton Act by Penn Central in its dealing with banks. As we pointed out in answer to a previous question, an individual may be an officer or director of a carrier and one or more noncarriers, such as banks, without violating the Interstate Commerce Act, because Section 20a (12) does not apply in such circumstances. A problem arises, in our opinion, when such individual, who is director of a carrier, is an officer of a bank or a partner in a law firm, for example, and at the same time another officer or partner of the same organization is a director of another railroad. In this manner, the prohibition of section 20a (12) is circumvented, and the spirit of the law, if not the letter, is violated. This is a matter on which the Commission has previously expressed concern to the Congress and recommended legislation to correct it in the following manner: That section 20a (12) be amended so as "(b) to make it clear that the prohibition against the holding 'by any person' of the position of officer or director of more than one carrier applies to the holding of such positions by different members, officers, employees, or directors of the same firm, co-partnership, corporation, associa tion, or joint stock association, or to the representation of a person on the board of directors of more than one carrier through an agent or nominee." This recommendation was presented initially to the 87th Congress, and S. 2558 was introduced to reflect it, but no other action was taken. Thereupon, the recommendation was renewed before the 89th Congress, and S. 1150 and H.R. 5241 were introduced in response to it. Hearings were held before Subcommittees of both the House and Senate Commerce Committees, and on May 27, 1965, H.R. 5241 passed the House. However, no further action was taken by the Senate Subcommittee on Surface Transportation. List of persons' applications denied since October, 1968 requesting authority under section 20a (12) of the act to hold positions with more than 1 carrier subject to Part I of the act: James Boyd, Finance Docket No. 25093 Howard A. Newman, Finance Docket No. 26180 Reason for denial: That it had not been shown that neither the public nor private interests would be adversely affected by authorizing the interlocking directorate. On reconsideration, order of the Commission, Commissioner Tuggle, dated July 18, 1968, affirmed, and application of James Boyd for authority under section 20a (12) of the Interstate Commerce Act to hold the position of director with the Soo Line Railroad Company in addition to the position of president of the Copper Range Company, a noncarrier which controls the Copper Range Railroad Company, a carrier subject to part I of the act, denied. W. H. Parsons for applicant. BY DIVISION 3: REPORT OF THE COMMISSION ON RECONSIDERATION DIVISION 3, ACTING AS AN APPELLATE DIVISION, By order dated July 18, 1968, in this proceeding the application of James Boyd for authority under section 20a (12) of the act to hold the position of director with the Soo Line Railroad Company (Soo Line), while holding the position of president of the Copper Range Company (Copper Range), a noncarrier which controls the Copper Range Railroad Company (CRRC), a carrier subject to part I of the act, was denied. By order of division 3 dated September 17, 1968, a petition for leave to intervene filed by the Soo Line was granted and the proceeding was reopened for reconsideration. |