whether the arrangements were negotiated on an arm's length basis and whether the IOS designees on Commonwealth's Board were negotiating for IOS and themselves as well as for Commonwealth. After these questions were raised, certain aspects of the arrangements were revised and the disclosures were modified. Among other things, under the arrangements as revised, the options and warrants to purchase Commonwealth shares to be received by IOS and its affiliated persons, were reduced from 1,450,000 to 300,000 shares. However, the revised plan still calls for IOS and its designees to receive substantial cash compensation. It should be pointed out that the Commission has had an interest in Commonwealth for some time. On October 2, 1969, with the consent of the company, Commonwealth was enjoined from further violations of the anti-fraud and proxy provisions of the Securities Exchange Act. In addition, trading in the company stock on both the American Stock Exchange and the over-the-counter market has been suspended since August 1, 1969. At this time, IOS is exercising control of Steel Crest Homes, Inc., a near bankrupt company, engaged in erecting low cost housing. Subsequent to the appointment of a receiver for the company under Chapter XI of the Bankruptcy Act, the Board of Directors of the company accepted an offer to turn over control to IOS in exchange for $650,000. This was accomplished by IOS Venture Fund, International, a Netherlands Antilles corporation, purchasing 650,000 shares at $1 each. By virtue of a reorganization, wherein the existing stockholders received one share of stock in place of each twenty shares they had previously owned, IOS wound up with 83 percent control of the company. We have been provided with a list of United States securities holdings of the various investment companies in the IOS complex as of September 25, 1969. The list will be made available to the Committee. It indicates that on that date, IOS and controlled investment companies had positions in approximately 520 different issues of securities. These securities included common stock, convertible preferred, debentures, warrants and notes. More than 10% of these 520 positions, some 63, are listed as constituting 4% or more of the outstanding securities of that issue. Nineteen of these 63 positions comprised 10% or more of the outstanding securities of that issue. Thus, it is quite clear that the holdings of this complex are extensive and constitute substantial positions in a number of issues. IOS recently made a public offering of approximately $50.000,000 of its shares outside the U.S. to other than U.S. Citizens-the stated purpose of which was to provide a market for IOS shares, apparently to allow the individuals in control of IOS an opportunity to sell part or even all of their interests to the foreign investing public. Also, it appears from their prospectus that they have 13,000 largely full-time salesmen and the turnover rate in their sales force is high. IOS still appears to be deriving very substantial benefits out of various arrangements it enjoys in connection with the operations of investment companies under its control, without need to provide to the investors in those companies the protection afforded investors in U.S. companies by the Investment Company Act which makes such types of transactions unlawful. One of these arrangements, according to the prospectus, involves the lending of FOF's own portfolio securities to broker-dealers to enable them to cover deliveries for customers who have sold securities but have not presented them for delivery by the settlement date and to lend securities to customers making short sales, Each loan is collateralized by a deposit of cash equal to the market value of the securities loaned at the time of the loan, adjusted from time to time to conform to market changes. From 1967 through December 31, 1968, it appears FOF earned gross income from this arrangement of $2,847,000 from which IOS was paid $645,000. The recent investment record of FOF shows that its net asset value of $24.13 on December 31, 1967 declined to $21.82 on June 30, 1969. According to the Wall Street Journal of December 23, 1969, however, by a rather unusual transaction involving the sale of Canadian Arctic oil and gas exploration permits, the reported net asset value of FOF jumped overnight from $20.57 on Christmas Eve to $23.29 the next day. This represented an increase in FOF's reported net assets of $70.8 million. We have twice requested that IOS supply us with the details of that transaction but to date we have received no information from them. Redemptions of FOF reportedly ran at the rate of approximately 40 per cent of the face amount of investment programs sold during 1967 and 1968. For the first six months of 1968, the redemption rate jumped to approximately 60 per cent. IOS has been excluded from operating in several countries and apparently still cannot sell securities in many other countries throughout the world. In this connection, the New York Times and the Wall Street Journal of January 12, 1970 reported that IOS has been accused of illegal fund sales by the government of Greece. IOS banking activities appear to be extensive. A controlled Swiss bank and a finance company together reported holding $40,000,000 of investor's loans collateralized by fund shares purchased under the IOS Investment Program. IOS also appears to be a significant factor in connection with the Eurodollar bond offerings of U.S. corporations with much of the IOS participation in such offerings taken down by the various non-American investment companies controlled by IOS. An example of this is the IOS participation in the Eurodollar offering of Commonwealth United Corp., which we have already discussed. IOS also has plans to expand into various non-securities activities. We understand, for example, that IOS has entered into joint venture arrangements for the exploration and development of natural resource ventures around the world. We believe, also, that FOF itself may be investing in works of art and already has substantial real-estate holdings in the United States. In another area, we have seen a news report that IOS or its affiliates may have engaged in gold bullion speculation. The IOS prospectus also indicates that IOS has a significant world-wide real-estate operation and that it has substantial plans to engage in the hotel business in various parts of the world. 1 On the assumption that the outstanding stocks as of the dates indicated in notes 2 to 8 below did not vary between such dates and June 30, 1966. All management company stock owned by FOF, with the exception of stock of Alleghany Corp., Insurance Securities, Inc., and the Dreyfus Corp., is nonvoting. 2 Alleghany Corp, is the controlling stockholder of Investors Diversified Services, Inc., investment adviser to and distributor of 4 registered mutual funds with combined assets in excess of $5,000,000,000, 2 face-amount certificate companies with combined assets in excess of $1,000,000,000 and a unit trust with about $5,700,000 in asset. As of Nov. 30, 1965. In addition there were 3,999,000 shares of class A voting shares and 537,500 shares of nonvoting class C outstanding. * As of Dec., 31, 1965. As of June 30, 1965. As of Dec. 31, 1965. In addition there were 32,514 shares of class B voting shares outstanding. 7 As of Dec. 31, 1965. In addition there were 33,000 shares of class B voting share outstanding. (Exhibit B) Administrative Proceeding File No. 3-497 UNITED STATES OF AMERICA Before the SECURITIES AND EXCHANGE COMMISSION February 3, 1966 IN THE MATTER OF I.O.S., LTD. (S.A.) D/B/A INVESTORS OVERSEAS SERVICES (8-8622); INVESTORS CONTINENTAL SERVICES, LTD. (8-6948); BERNARD CORNFELD, EDWARD M. COWETT, ALLEN R. CANTOR, W. THAD LOVETT, ROBERT NAGLER, HYMAN FELD (Securities Exchange Act of 1934) ORDER FOR PUBLIC PROCEEDINGS PURSUANT TO SECTIONS 15 (b) AND 15A OF THE SECURITIES EXCHANGE ACT OF 1934 I The Commission's public official files disclose and the Division of Trading and Markets alleges: A. I.O.S., Ltd (S.A.) d/b/a Investors Overseas Services (IOS), a Panama corporation, having its principal office at 119 rue de Lausanne, Geneva, Switzerland, became registered as a broker-dealer with the Commission pursuant to Section 15(b) of the Securities Exchange Act of 1934 (Exchange Act) on June 10, 1960. B. Investors Continental Services, Ltd. (ICS), having its principal office at 7 West 57th Street, New York, New York, became registered as a broker-dealer with the Commission pursuant to Section 15 (b) of the Exchange Act on November 18, 1958 and is a member of the National Association of Securities Dealers, Inc. C. IOS is the beneficial owner of more than 10% of the equity securities of ICS. D. Bernard Cornfeld (Cornfeld) is the president, a director and beneficial owner of more than 10% of the equity securities of IOS and a director and indirect beneficial owner of more than 10% of the equity securities of ICS. E. Edward M. Cowett (Cowett) is a vice-president and a director of IOS and secretary and a director of ICS. F. Allen R. Cantor (Cantor) is senior vice-president of IOS. G. W. Thad Lovett (Lovett) is executive vice-president of IOS. H. Robert Nagler (Nagler) is a director of IOS. I. Hyman Feld (Feld) is president and a director of ICS and an assistantsecretary of IOS. J. Pursuant to Rule 17a-7 of the Exchange Act IOS filed on May 27, 1960 an undertaking signed by Cowett to furnish at its own expense to the Securities and Exchange Commission, at its principal office in Washington, D.C., "true, correct, current and complete copies of any part of the books and records which the undersigned is required to make, keep current or preserve pursuant to any provision of any rule or regulation of the Securities and Exchange Commission under the Exchange Act." K. The Fund of Funds, Ltd., a non-resident Canadian corporation with its principal office at 119 rue de Lausanne, Geneva, Switzerland, is engaged in investing principally in shares of investment companies registered under the Investment Company Act of 1940 (Investment Company Act). L. The IOS Investment Program for the accumulation of interests in The Fund of Funds, Ltd. is a front-end load installment payment plan, or a fully paid plan, sponsored by IOS, by means of which interests in The Fund of Funds, Ltd. are offered for sale and sold. M. No registration statement has been filed or is in effect with the Commission under the Securities Act of 1933 (Securities Act) with respect to the securities comprising interests in The Fund of Funds, Ltd. or with respect to the participations in the IOS Investment Programs. N. Neither The Fund of Funds, Ltd. nor the IOS Investment Program relating thereto has filed an application pursuant to Section 7(d) of the Investment Company Act and neither has registered with the Commission pursuant to Section 8 of the Investment Company Act. O. On May 28, 1965 Value Line Special Situations Fund, Inc. (Value Line) filed a prospectus in connection with post-effective amendment No. 22 to its registration statement pursuant to Sections 7 and 10 of the Securities Act and Rule 424 (c) thereunder. P. On May 20, 1965 Convertible Securities and Growth Stock Fund, Inc. (Convertible) filed a prospectus in connection with post-effective amendment No. 26 to its registration statement pursuant to Sections 7 and 10 of the Securities Act and Rule 424 (c) thereunder. Q. On September 20, 1965 Research Investing Corporation (RIC) filed posteffective amendment No. 15 to its registration statement pursuant to Sections 7 and 10 of the Securities Act. R. On October 19, 1965 American Investors Fund, Inc. (American) filed a proxy statement pursuant to Section 14 of the Exchange Act. S. Value Line, Convertible, RIC and American are investment companies registered pursuant to the provisions of the Investment Company Act. II. The staff has obtained information which tends to show and the Division of Trading and Markets alleges: A. VIOLATIONS OF SECTION 5 OF THE SECURITIES ACT AND VIOLATIONS OF SECTION 7 OF THE INVESTMENT COMPANY ACT 1. IOS is the underwriter and exclusive distributor of the IOS Investment Program for the accumulation of interests in The Fund of Funds, Ltd. (FOF) which includes interests in numerous other securities in the portfolio of FOF. In the offer and sale of the IOS Investment Program, IOS has used the United States mails and means and instrumentalities of interstate commerce. 2. No registration statement pursuant to Section 7 of the Securities Act with respect to interests in FOF or participations in the IOS Investment Program has been filed with the Commission and none has been declared effective. Accordingly, during the period from approximately September 1, 1962 to the present time, IOS, Cornfeld, Cowett, Cantor, Lovett and Nagler, singly and in concert, willfully violated Sections 5 (a) and 5(c) of the Securities Act in that said persons, directly and indirectly, made use of the means and instruments of transportation and communication in interstate commerce and of the mails to offer to sell, sell and deliver after sale securities, namely the IOS Investment Program for the accumulation of interests in FOF, when no registration statement was in effect as to said securities under the Securities Act. 3. Neither FOF nor the IOS Investment Program relating thereto has filed an application pursuant to Section 7(d) of the Investment Company Act and neither has registered with the Commission pursuant to Section of the Investment Company Act. Accordingly, during the period from approximately September 1, 1962 to the present time, IOS, Cornfeld, Covett, Cantor, Lovett and Nagler, singly and in concert, wilfully violated and wilfully aided and abetted violations of Section 7(d) of the Investment Company Act in that said persons, directly and indirectly, made use of the means and instrumentalities of interstate commerce and of the mails to offer for sale, sell or deliver after sale in connection with a public offering of securities of investment companies (as defined in the Investment Company Act), namely FOF and the IOS Investment Program for the accumulation of interests in FOF, which companies are not and have not been organized or otherwise created under the laws of the United States or of a state. 4. Had such registration statements been filed and effective under the Securities Act and the Investment Company Act, full disclosure would have been required by the provisions of Sections 7 and 10 of the Securities Act and Sections 24 and 30 of the Investment Company Act, and the respective rules, regulations and forms thereunder, with respect to matters which have been inadequately and inaccurately disclosed as hereinafter stated; and such failure to register in that manner adversely affected the public interest and the interest of investors. a. Quarterly reports of FOF to investors, under the heading "Highlights," include a table which compares the net asset value per share performance of FOF over stated periods of time with the performance of the "Mutual Fund Industry average," "Standard & Poor's '500' Stock Index" and "Dow-Jones Industrial Stock Average." The table omits to disclose to investors that while the FOF net asset value per share reflects the reinvestment of all net dividend and interest income and realized capital gains, the Standard & Poor's "500" Stock Index and the Dow-Jones Industrial Stock Average do not include any element of reinvestment of income. The Mutual Fund Industry average, to which comparison is also made, is not identified and the FOF reports do not state whether or not this average reflects such reinvestment. Nor do the FOF reports disclose that registered investment companies, with rare exceptions, distribute such dividends, income and realized gains to their shareholders. Contrary to items (h) and (q) of the Commission's Statement of Policy (17 CFR 271.2621), the table (i) omits to disclose material differences between the subjects of the comparison and (ii) compares the performance of FOF with that of a Mutual Fund Industry average without disclosing whether the companies whose shares are held in the portfolio of FOF constitute a group of companies which generally approximates in composition and character the group of companies whose shares are included in the Mutual Fund Industry average to which comparison is made. b. The prospectus of FOF dated May 3, 1965, at page 5, the annual report of FOF to stockholders for the year ended December 31, 1964, at page 11, and the semi-annual report of FOF to stockholders for the six months ended June 30, 1965, at page 9, present charts which do not conform to item (j) of the Commission's Statement of Policy relating to the form and content of charts employed in the offer and sale of investment company securities. c. The prospectus of FOF dated May 3, 1965 contains a "Statement of Net Assets." Note 1 to the financial statements contained therein states that as of December 31, 1964 there were 7,841,688 Class A non-voting shares and 350 common shares of FOF outstanding. Said note and prospectus omit to disclose that all of said 350 shares (the only outstanding voting shares) are controlled by IOS. d. The prospectus of FOF dated April 1, 1964 and the prospectus of FOF dated May 3, 1965 each contain a section entitled "The Fund May Invest In" in which the various ways in which the assets of FOF may be invested are discussed. Neither prospectus discloses, however, that by reason of its control of all of the outstanding common (voting) stock of FOF, IOS may cause, and as set forth below has caused, the investment policy of FOF to be changed at will. (i) The prospectus of FOF dated April 1, 1964 states that the Fund may invest in |