ence to the name of the registered owner, Depository Trust accepts deposits of securities listed on the Exchange or the American Stock Exchange or traded over-the-counter from its members (which include brokerage firms, other clearing corporations, banks and other institutional holders of securities) which, when credited to a member's account, may then be transferred or pledged pursuant to the foregoing provisions within the Depository Trust system by the member to other members by computerized book-entry without movement of the certificates representing such securities, which remain in the custody of Depository Trust or its custodian banks. Cede & Co. and the Central Certificate Service division of Stock Clearing (the predecessor to Depository Trust) were created by Stock Clearing, a wholly-owned subsidiary of the Exchange, in response to a felt need to reduce the enormous paperwork burden upon the securities industry created by the necessity of delivering paper stock certificates and bonds and putting them through a transfer agent each time a transaction is effected. All members' securities (not just airline issues) which are deposited with Depository Trust are immediately registered in the name of Cede & Co., a New York partnership comprised of employees of Depository Trust, which is Depository Trust's nominee. Deposited securities are registered in the name of a nominee, as permitted by UCC § 8-320(1)(b), because it is far simpler to effect a transfer of securities registered in the name of a partnership nominee than in the name of a corporation. NO CONTROL OVER BENEFICIAL OWNERS Neither Depository Trust nor Cede & Co. is the beneficial owner of, or has any knowledge of the identity of the beneficial owners of, securities so deposited. Depository Trust and Cede & Co. have knowledge only of the identity of the Depository Trust members who make such deposits, who may or may not be the beneficial owners of the securities. The deposit with Depository Trust and registration in Cede & Co.'s name for the purpose of utilizing the Depository Trust book-entry transfer and pledge system obviously effect no change in beneficial ownership. Prior to deposit by the member and registration in the name of Cede & Co., the securities so deposited may have been registered in the name of the member (in "street name"), or in the name of the member's customer or its nominee; in addition, they may have been beneficially owned by the member or the member's customer or held by the member or the member's customer in a fiduciary capacity, such as trustee, on behalf of third parties. Complainant has erroneously and irresponsibly alleged that "Cede & Co. . . . appears to be an instrument created by certain major stockholders of the airlines respondents for the purposes of concealing the identity of such stockholders." Other interested and not uncritical parties have seen no mystery surrounding the creation, purpose and identity of Cede & Co., Depository Trust and its predecessors. As stated by the Senate Subcommittee on Securities: In 1968 the New York Stock Exchange activated its Central Certificate Service ("CCS") as a division of Stock Clearing Corporation. CCS acts as a depository for the stock certificates of participating broker-dealers in much the same way as similar depositories have operated since Additional information relating to Cede & Co. is available from Depository Trust, any one of the hundreds of brokers and other entities which are Depository Trust members, in documents such as the Securities Industry Study cited above, in public records maintained at the Securities and Exchange Commission, the New York County Clerk's office and at the New York State Tax Commission, and in various publications describing CCS, the predecessor of Depository Trust (e.g., New York Times, June 4, 1967, at Fl, col. 1; American Banker, February 25, 1969, at 1, col. 1; New York Times, February 25, 1969, at 53, col. 1). Obviously, neither Cede & Co., its creator nor its users is clandestine in nature or purpose. Information about Cede & Co. and its function is readily available and Complainant apparently failed to make even a minimal inquiry as to the identity or function or Cede & Co. CEDE & Co.'s PROXY VOTING PROCEDURE Cede & Co., as record holder of securities of New York iss uers, is entitled to vote such securities (New York Business Corporation Law §612). A similar rule applies with respect to securities of Delaware issuers (General Corporation Law of the State of Delaware §219(c)) and, we assume, with respect to securities of issuers of most, if not all, other states (e.g., California Corporations Code corporation may look for the exercise of voting power, §§ 2215, 2218). But the question concerning to whom a which is, of course, a matter of each state's corporation laws, is quite different from the question of control under Section 408 of the Federal Aviation Act, which is, of course, a matter of federal law. Cede & Co. never votes securities of which it is the record holder except on the instructions of the Depository Trust member (received by Cede & Co. through Depository Trust) to whose account such securities are credited. It is the consistent practice of Cede & Co. (via Depository members as to the voting of securities credited to the Trust) to solicit instructions from Depository Trust Depository Trust account of such members and to vote such securities only as and to the extent that instructions are received. If the member in turn holds such securities for the account of its customer(s), the member has responsibilities, at least under some circumstances, imposed upon it under the Securities Exchange Act of 1934 (see Walsh and Levine v. Peoria and Eastern Railway Company, 222 F. Supp. 516 (S.D.N. Y. 1963)) and under the rules of the various exchanges of which it nay be a member (see, e.g., Exchange Rules 450 et seq.) to solicit instructions fron such beneficial owner before voting such securities. Beyond voting the securities as directed, Cede & Co. has no control over the action taken by the member and has no knowledge whether the instructions it receives are those of the member itself or instructions given the member by a third party beneficial owner. Cede & Co. is specifically forbidden by the provisions of the partnership agreement among the partners of Cede & Co. to vote such securities without instructions. Section 4 of the partnership agreement provides in relevant part: The business of the Partnership shall be, and is hereby limited to, serving as a nominee partnership of DTC [Depository Trust], and such other entity or entities as DTC shall hereafter approve for all purposes of the system for the central handling of securities maintained by DTC or such other entity or entities as DTC shall hereafter approve, and, in this connection, holding in the Partnership name stocks, bonds and other securities of whatsoever kind, and property for the account and subject to the instructions of DTC and/or such other entity or entities as DTC shall hereafter approve, and otherwise acting with respect to such securities and any rights, benefits or privileges relating thereto, in accordance with, and only in accordance with, instructions of DTC and/or such other entity or entities as DTC shall hereafter approve. The Partnership shall not... vote. In addition, § 7 of the partnership agreement provides that [n]either the Partnership nor any member thereof shall have or claim any beneficial interest whatsoever in any stocks. or other securities. at any time held by the Partnership or registered in its name All right, title, equity, interest, lien, claim and demand whatsoever in and to any stocks. . . or other securities. . at any time held. by the Partnership. are hereby irrevocably waived and disclaimed. Finally, § 3 of the partnership agreement provides that [t]he purpose of the Partnership is to enter into and form a contract with DTC and such other entity or entities as DTC shall hereafter approve upon such terms and conditions as may be expressed therein for the conduct of the business hereinafter mentioned. The agreement between Depository Trust and Cede & Co. entered into pursuant to § 3 of the partnership agreement is substantially identical to the partnership agreement itself and contains the same restrictions, quoted above, upon Cede & Co.'s voting of securities. Moreover, Depository Trust itself exercises no more discretion with respect to the voting of securities held in Cede & Co.'s name than does Cede & Co. itself. Depository Trust instructs Cede & Co. to vote the securities registered in Cede & Co.'s name only to the extent that and as Depository Trust is instructed by the members who have such securities credited to their account with Depository Trust. At no time does Depository Trust direct Cede & Co. to vote such securities without such instructions. In the event that no such instructions are received such securities are not voted by Cede & Co. THE PRESUMPTION OF SECTION 408 (F) Turning now to the point raised in the second paragraph of your letter, we would like first to observe that the statement that "[u]nder Section 408(f) of the Federal Aviation Act of 1958. . ., any person that holds 10 percent or more of the voting stock of an air carrier shall be presumed to be in control of such air carrier . . ." is not an accurate paraphrase of the provision, and it is the same incorrect interpretation of Section 408(f) which appears to be the ground for Complainant's mistaken reliance on the presumption. The presumption provided for in Section 408 (f) is applicable only to beneficial owners and has no application to holders of record title. The purpose of the reference to record holders is to measure the amount of stock which must be owned by the beneficial owner, regardless of whether he is the holder, for the presumption to apply. (Letter from SEC Chairman Budge to Senator Magnuson, 115 Cong. Rec. 18243, 18244 (1969).) Section 408(f) of the Act provides: (f) For the purposes of this section, any person owning beneficially 10 per centum or more or the voting securities or capital, as the case may be, of an air carrier shall be presumed to be in control of such air carrier unless the Board finds otherwise. As used herein, beneficial ownership of 10 percentum of the voting securities of a carrier means ownership of such amount of its outstanding voting securities as entitles the holder thereof to cast 10 per centum of the aggregate votes which the holders of all the outstanding voting securities of such carrier are entitled to cast. In addition to defining, in terms of voting power, the stock ownership necessary for the application of the presumption, Section 408 (f) anticipates the possibility that the beneficial owner and the record holder may be different persons, as is obviously the case with respect to Cede & Co. For example, Cede & Co. might (even though it is never the beneficial owner) be entitled as record holder of voting securities of a given air carrier to cast 10 percent or more of the aggregate votes which the holders of all the outstanding voting securities of such air carrier are entitled to cast; if 10 percent of such voting securities are benefically owned by one person the presumption is applicable, but it is applicable to such person and not to Cede & Co. Application of the presumption to Cede & Co. would not only render the prohibition of Section 408 (a) applicable to Cede & Co. when it in fact has no control over or interest in controlling the management of any air carrier; it would also defeat the purpose of Section 408(a) with respect to those beneficial owners of stock who, by instructing Cede & Co. how to vote their shares, may in fact exercise actual control over an air carrier. One effect of Section 408(f), in making the distinction between beneficial ownership on the one hand and holder entitled to vote on the other, is to assure that a beneficial owner of 10 percent or more of an air carrier's voting securities cannot evade the intent of the Act by the simple expedient of registering such securities in a name other than his own. With respect to the third paragraph of your letter, it is correct that McClain v. Lanova Corp., 39 A. 2d 209 (Del.Ch. 1944) holds that mere record ownership of voting stock entitles the holder to vote such stock even absent the directions of the beneficial owner. The McClain case, however, has no bearing upon the meaning of control for purposes of Section 408 (f) of the Act; it was not concerned with the concept of control, but merely with the narrow question of entitlement to vote stock or to execute proxies with respect thereto. The person who is so entitled may or may not, depending upon the facts and as is recognized in Section 408 (f), be the same person who has control. CONTROL UNDER SECTION 408 2 When applied to Cede & Co., the principles set forth in the decisions of the Civil Aeronautics Board ("the Board") which are cited in the last paragraph of your letter compel the conclusion that Cede & Co. does not control any air carrier within the meaning of the Act. In each of these cases the Board considered the question whether there had been an unlawful acquisition (or retention, in the Eastern case) of control within the meaning of the Act. In each case, the Board based its decision upon a careful, detailed consideration of the facts surrounding the relationship between the alleged controlling party and the carrier it allegedly controlled. The applicable standard is clearly stated in the Boston and Maine case: The decisions of the courts support the view that Each case was decided on the basis of that practical standard of control in fact. The Eastern case is particularly significant, not only by virtue of the careful factual analysis given the question of control but also because it specifically recognizes the distinction for the purpose of determining control, between the record holder of stock and the person who actually 2 Boston and Maine and Maine Central Railroads, Control-Northeast Airlines, Inc., 4 CAB 379 (August 23, 1943); National-CaribbeanAtlantic Control Case, 6 CAB 671 (March 1, 1946); Eastern-Colonial Control Case, 20 CAB 629 (April 29, 1955); Railway Express Agency, Inc. et al. Order No. E-26199 (December 29, 1967). determines how stock shall be voted. See 20 CAB at 640 & n.8. By the same token, Cede & Co., being only the bare record holder and being forbidden by its agreements and long standing operating policies and procedures from voting securities of which it is record holder, can by no stretch of the imagination be deemed to have control of any issuer of such securities regardless of the extent of its record holdings. The description which we have already provided of the structure and business of Depository Trust and Cede & Co. makes it perfectly clear that there is no basis for a finding of control by Cede & Co. of any air carrier within the meaning of Section 408, both because the Section 408(f) presumption is inapplicable and because there is no basis whatever for a finding that there exists "as a matter of fact a power to dominate or the actual domination" by Cede & Co. of any air carrier. In addition, there exists with respect to Depository Trust and Cede & Co. none of the business relationships, understandings or agreements which existed in the cases cited which would provide a basis for a determination of control on grounds other than ownership of voting stock. VOTING WITHOUT DIRECTION ILLUSORY The theoretical possibility that Cede & Co. might vote securities of which it is record holder without direction from a Depository Trust member is illusory. For Cede & Co. so to act would be a complete breach of the agreements under which it operates. It would also be a complete breach of Depository Trust's and Cede & Co.'s consistent and long standing practice and understanding with Depository Trust members, a factual consideration which is just as compelling a reason for a determination that no control exists as were the business relationships and understandings which existed in the Railway Express case compelling reasons for a determination that there and Cede & Co. would result in a complete lack of faith in control did exist. Any such action by Depository Trust Depository Trust and Cede & Co. on the part of Depository Trust members and would, of course, place such members in a completely untenable position with respect to those of their customers for whom they hold securities in Depository Trust and upon whose direction Cede & Co. is required to vote such securities. Depository Trust members would in such event probably have no alternative but to withdraw such securities from Depository Trust so that they could fulfill their own responsibilities and they might even feel compelled to terminate their Depository Trust membership-consequences completely at odds with Depository Trust's own business interests and purposes, which are to provide a stock depository and central system for the handling of securities. BACK-OFFICE PROBLEMS Moreover, the consequences which would follow from a grant of relief of the sort sought by Complainant would constitute a serious setback to the securities industry's efforts to resolve its back-office problems. The urgency of resolving the problems involved in the clearance and settlement of securities transactions, and the significance of Depository Trust and its predecessors in this area, were recognized by the SEC in its Study of Unsafe and Unsound Practices of Brokers and Dealers. (Report and Recommen dations of the Securities and Exchange Commission, H.R. Doc. No. 92-231, 92nd Cong., 1st Sess. (1971) ("the Study").) The Study states that: . . . the Commission envisions the necessity 1. Regulation of the process of effecting secu- There is no area of the securities business See also, Statement of the Securities and Exchange Commission on the Future Structure of the Securities Markets at 16 (February 2, 1972). Yet, if it were determined that the Section 408(f) presumption was applicable, all stocks of air carriers held by Cede & Co., to the extent that such holdings equaled or exceeded 10 percent of an air carrier's total voting stock, would have to be removed from the Depository Trust system. Transactions in such shares could no longer be effected by the expeditious book-entry process provided by Depository Trust but would instead be relegated to the fomer inefficient and cumbersome procedure whereby stock certificates are shuttled back and forth between parties to a transaction and through the transfer agent. All of this would result without in any way changing the beneficial ownership of the stock of the air carrier, without in any way effecting the realities of "control", which would still reside in the person for whose benefit the stock is voted, while working a substantial disruption of Depository Trust in its efforts to upgrade the efficiency of the securities transfer process. Very truly yours, WILLIAM E. JACKSON. Chase did not have power to vote all shares held in the name of its nominee, Kane & Co. However, as trustee for various personal and pension trusts or as agent for various customers, Chase was authorized by the trust instruments or investment management agreements to vote the stock held for the account of the trust or customer. In some such cases Chase, as trustee or agent, had sole voting discretion and in other cases voting discretion was shared with one or more co-trustees or the customer. In cases where voting discretion was shared with a co-trustee or customer, Chase executed the proxy and forwarded it to the co-trustee or customer, who could approve or change Chase's vote and then return the proxy to the corporation. PROXY EXECUTED IN BLANK In cases where Chase had no voting discretion, Chase executed the proxy in blank and forwarded it to the party authorized to vote the shares. Chase did not and could not vote such shares "by default" since the proxy was not returned to the corporation by Chase but by the party with power to vote the shares. 2. We enclose copies of various types of "normal financial covenants" excerpted from several representative loan agreements with air carriers.' The exact terms of financial covenants depend upon the particular circumstances and are subject to some extent to negotiation between borrower and lender. The degree to which restrictions are imposed will vary according to, among other things, the credit standing of the borrower. 3. Transactions in which Chase, as of June 5, 1972, held title or other interest in Leased Aircraft "as agent for itself and others" or "for its own account", are as follows: 1 Retained in CAB files. 29-553 O-74-23 CIA AND SUYDAM & CO. [From the Washington Star-News, Aug. 13, 1973] CIA and the Southern Airline SALE HEARING RAISES SPY QUESTIONS (By Stephen M. Aug, Star-News Staff Writer) Southern Air Transport is an airline with the authority to operate a charter business nearly anywhere in the world. Stanley G. Williams is the president of Southern, and he would like very much to buy the line from its present owners. All in all a simple enough matter, complicated only by one thing: Southern has, for about 13 years, apparently been owned-secretly and perhaps illegally-by the Central Intelligence Agency. It is a set of circumstances that has led to one of the most bizarre airline acquisition cases ever to come before the Civil Aeronautics Board. With the hearings ended, CAB Administrative Law Judge Milton Shapiro has begun writing his report on the case. Lawyers representing Williams have tried to keep all mention of the CIA out of the case. They have been successful in convincing Shapiro to hold nearly the entire hearing on the matter in secretwith those taking part being required to take an oath that they wouldn't disclose what transpired. They have even been able to keep out of the public record parts of some complaints made by rival charter airlines who fear that Williams is getting a windfall by being allowed to purchase from a government agency privately without public bidding an airline with valuable CAB operating authority. CAB records show that Southern Air Transport was incorporated in Florida in 1947. The firm holds authority to transport inclusive charter tours within this country and between the United States and American Samoa, Guam, the Johnston Islands, the Marshall Islands, Okinawa, Wake and points in Australia, Indonesia and Asia, as well as to Caribbean Islands including Haiti and the Dominican Republic. It also has world wide authority under Defense Department contracts, and holds authority to transport cargo to Central and South America. (Southern Air Transport is not related to Southern Airways, a domestic scheduled airline that serves the southern United States.) Williams joined Southern in its operations department in 1949 and, according to his biographical statement, worked his way up to president. He is also listed as a one-third owner, along with Percival F. Brundage and Perkins McGuire. Brundage was director of the Bureau of the Budget during the Eisenhower administration and McGuire was a deputy assistant secretary of defense and later an assistant secretary for international security affairs during the same periods. Last March, Williams asked the CAB for authority to acquire all of the stock in Southern for about $5.1 million. Within a few days several supplemental airlines that compete with Southern decided to intervene in the matter. They include Overseas National Airways, Trans International Airlines, World Airways and Saturn Airways. The case was turned over to Shapiro for hearings. Almost from the start, Southern officials balked at providing any information about the company or its ownership other than that which they had volunteered in the first place. In early June, virtually on the eve of the hearings, ONA, Trans International and World asked for a postponement. The material that Southern had provided, they said, raised serious questions as to what kind of business Southern was engaged in. Then there was something called Actus Technology, a corporation which appears to have served no other purpose than as a conduit for funding Southern. Actus subleases some space at Miami International Airport to Southern, which has a base there. Williams, McGuire and Brundage are the officers, stockholders and directors of Actus as well as of Southern. Federal law requires CAB approval before the same individuals may be associated with an airline and an aeronautics firm. No such approval was sought or received here. CAB documents indicate that Actus' main role was lending money to Southern-more than $11.6 million since 1969. Actus received money from Air Americanearly $9.4 million between 1960 and 1973. During the same period, Southern itself borrowed nearly $7.4 million from Air America. And Air America's parent, the Pacific Corp., guaranteed $6.6 million of loans from Manufacturers Hanover Trust Co. to Southern. The District of Columbia telephone directory lists Air America, the Pacific Corp., Civil Air Transport is the |