THE WALL STREET JOURNAL, Monday, February 9, 1970

Swiss Credit Bank
is pleased to announce
its new location at
100 Wall Street.

耍

We look
forward to
serving our
customers
in our

spacious,

modern offices
and making

many new

friends in our

new home.

Visit us soon
and let us
welcome you

to our world
of banking.

25

Mr. BUDGE. Thus, the secrecy laws of a foreign country can be used by an American, who has never been to that country, to mask illegal activities taking place in the United States in the securities of American corporations.

Senator PROXMIRE. Could I interrupt to ask you if you could submit copies to the committee of the testimony so that we could have them for the record?

Mr. BUDGE. I shall be happy to do that.

(The testimony referred to appears on p. 91.)

Mr. BUDGE. Over the years, the veil of secrecy drawn over all types of transactions by these foreign banks and other similar entities has been a substantial impediment to the Commission and, we believe, other agencies of our government in carrying out the enforcement and regulatory duties for which they are responsible.

This has occurred in a number of important cases involving violations of the Federal securities laws. The main problems that we have with regard to foreign banks are, first, that being outside of the United States they are beyond the effective range of our subpenas and, in addition, they may also operate under laws providing broad secrecy over the affairs of their clients, regardless of who these clients are and where they reside or operate.

A growing number of stock market operators and others have now become sophisticated enough to take advantage of these foreign jurisdictions and secrecy laws in connection with their securities transactions and market operations in the United States by channeling their purchase and sale transactions through foreign intermediaries and by collecting proceeds from their unlawful activities in accounts at such

entities.

The basic method by which we traditionally prove securities law violations is by tracing the flow of stock from its original issuance through the promoters and out to the general public and then by tracing the proceeds from each sale back from the public to the promoters.

When either the distribution of the stock or the transmission of the proceeds are channeled through a foreign intermediary, it becomes very difficult, if not impossible, for us to acquire competent evidence establishing the identity of the persons who have beneficial interests in the stock sold and the proceeds received.

Foreign financial agencies may, of course, also be used to mask other activities that are violative of the Federal securities laws, such as violations of the margin provisons, volations of the restrictive provisions relating to short sales, and failure by corporate officials to report transactions in their company's stock.

Incidentally, a corporate official who is not filing with the Commission reports of transactions in his company's stock may also fail to report the profits resulting from such transactions for income tax purposes.

Foreign banks and other financial institutions have been used as intermediaries in an effort to prevent detection of or prosecution for, violations of a number of different provisions of the Federal securities laws. For example, in one of our succesful criminal prosecutions, American corporate officials, and others, used such foreign intermediaries to mask a massive distribution of worthless securities of an insolvent corporation to the American public at manipulated prices. This distribution, and the activities in support of it, were prosecuted under the registration and antifraud provisions of the Federal securities laws.

Senator PROXMIRE. Was this organized crime-this case you refer to here, sir?

Mr. BUDGE. Not to my knowledge, Mr. Chairman.

Senator PROXMIRE. There were businessmen who were apart from organized crime, as far as you know?

Mr. BUDGE. I believe that is correct.

Your letter of May 21, 1970, which requested our appearance here also stated that the subcommittee is interested in the role played by foreign financial institutions in recent corporate take-over attempts, including those involving Liquidonics, Resorts International, MGM, and Bath Industries.

As you know, under the Williams bill, the Commission was given authority to require disclosure of information with regard to the acquisition of over 10 percent of a corporation's stock by a person or group, and with regard to the making of a tender offer for more than 10 percent of a corporation's stock.

Since the Williams bill became effective in July 1968, there have been 104 cash tender offer filings and 16 of these have involved foreign financing.

Incidently, of the three most recent tender offer filings made with us involving foreign financing, two of the companies making the offers are also foreign based.

The MGM case illustrates the use of foreign financing in a takeover attempt. When the financing arranged in this country was blocked by a Federal court on antitrust grounds, foreign funds were immediately secured in the amount of $32 million. After the initial borrowing was exhausted, an additional $30 million was obtained.

These funds were not collateralized to the extent which is required by the margin rules. As security for the loan, stock with a value of 150 percent of the loan was pledged; in contrast, the margin rules require the pledge of stock with a value of 500 percent of the loan.

MGM filed suit seeking to enjoin this tender offer, contending that it violated the margin provisions under section 7 of the Securities Exchange Act of 1934 and the financing for the tender offer was therefore illegal.

The District Court for the Southern District of New York disagreed, holding that the margin provisions, as presently written, are not applicable to foreign lending institutions. Before appellate proceedings were completed, the matter was settled by the parties. The Commission did not participate in this case.

Senator PROXMIRE. That was a very significant finding, was it not? Mr. BUDGE. Yes, it was.

Senator PROXMIRE. I want to ask you questions about that a little later.

Mr. BUDGE. One of the problems that is presented by such activities is the possibility that control of some of our major corporations could shift to interests whose identity may more easily be masked by foreign secrecy laws. If there is a default on the $62 million in loans made to obtain control of MGM, undisclosed interests may acquire the control stock, which was put up as collateral.

A similar situation exists with regard to the takeover of UMC Industries by Liquidonics Industries. The controlling interest in UMC was purchased with a loan of $40 million from the Banque de Paris et des Pays-Bas (Suisse).

Liquidonics, which received only $36.9 million net proceeds from the loan, quickly went into arrears and was forced to sell out. The majority stock interest in UMC, a New York Stock Exchange listed company, is now owned by a Luxembourg banking subsidiary of the Swiss bank.

In regard to the Bath Industries matter, on May 20, 1970, the United States Court of Appeals for the Seventh Circuit affirmed the decision of the District Court for the Eastern District of Wisconsin, which had granted a preliminary injunction based on a probable violation of section 13 (d) of the Securities Exchange Act of 1934, to preserve the status quo pending a trial on the merits.

Several stockholders of Bath, including a foreign investment company and a foreign bank, were found to have agreed to act together, acquiring additional shares and pooling their votes for the purpose of electing a new chief executive officer.

The District Court held that they constituted a group, and that it had failed to make the required filing with the Commission within the prescribed time.

We will be happy to supply for the record a copy of the appellate decision if you desire it.

On February 18, 1969, Resorts International, Inc., mailed proxy soliciting material to its shareholders requesting authorization for the issuance of an additional 20 million shares of the company's class A common stock, and the confirmation and approval of two agreements to purchase large blocks of Pan American World Airways, Inc., common stock from Gulf and Western Industries, Inc., and the Chase Manhattan Bank.

The commission conducted an investigation into the circumstances surrounding this agreement to purchase a large block of stock of Pan American. While we were thwarted in our inquiry with respect to determining the full extent of the ownership of Resorts by foreign entities, we did develop information to indicate that the company had engaged in certain violative conduct.

As a result, on March 31, 1969, the Commission filed a complaint against Resorts, alleging violation of certain proxy rules in the aforementioned solicitation. Resorts, without admitting the allegations, entered into a consent judgment to this complaint which, in effect, stipulated that it would not vote proxies previously received and would include all pertinent and required information in all future proxy materials to be distributed.

Resorts also agreed to resolicit proxies from its stockholders for approval of the purchase of one-half of the amount of Pan American stock originally contemplated and reaffirmed its intention not to seek control of Pan American or engage in a proxy contest or tender for additional shares.

On April 14, 1969, stockholders of Resorts approved this new agreement to purchase 1,200,000 shares of Pan American.

Cases such as the foregoing are not at all unusual, and they suggest that hundreds of millions of dollars are being furnished annually by foreign sources to assist in endeavors to gain control of American companies. In some cases there may be no disclosure that a takeover attempt is being made, because the parties fail to make the requisite filings with the Commission, undoubtedly hoping that secrecy afforded through use of foreign channels will serve as a cover for their activities.

In other cases, disclosure of the existence of foreign financing is made, but the disclosure may not reveal the actual parties behind the financing. Unless there is such disclosure, it is difficult and sometimes

impossible to discover whether the foreign moneylenders are acting for themselves or on behalf of undisclosed interests.

Particularly if they are in a position to assume control of a company upon the default of their loan to the takeover group, it is important that we be able to determine whether all material facts about the group and its intentions for the company have been disclosed at the time of the tender offer.

Two other areas where our efforts are hindered by foreign secrecy laws, are market manipulation and the apparent abuse of inside information. We have a difficult enough time with our limited resources in maintaining surveillance over the securities markets to detect possible illicit activities when only domestic participants are involved.

There are several thousand stocks listed on the stock exchanges, and several thousands more traded in the over-the-counter market. In any given year, there may be manipulative activities in a considerable number of these stocks. We try to get an explanation of significant price movements or unusual volume in dozens of stocks each week, and we concentrate on the more suspicious cases for further investigation.

I might add that the computer which the Commission installed a couple of years ago has been most helpful in this area. There are some 15,000 issues of over-the-counter stocks in the computer. The computer is set with tolerances in various ways as to increases and decreases in price quotations, as to concentration of dealers, and certain other factors. When the computer run is made, there will be perhaps 200 or 300 of the 15,000 stocks that are kicked out of the computer because they exceed the tolerances previously set.

Our staff then immediately attempts to determine whether or not there is an easy explanation for whatever occurred, and if there is not, we immediately contact the issuer, the broker-dealer, customers, and anyone else who has been involved, to try to find out just what has happened. We, of course, would not be able to do that with human beings. Computers are an essential part of the operation.

Too often, however, we are finding that the trail has a dead end in a foreign financial institution.

Senator PROXMIRE. May I interrupt to say that is a very interesting analysis of what the computer can do for you. If the computer indicates serious irregularities and throws the stock out, as you say, wouldn't you run into a dead end if you found that the ownership by a secret party was concealed by a Swiss bank, for example?

Mr. BUDGE. We can and we do.

Senator PROXMIRE. That is one of the reasons why legislation of this kind would be useful?

Mr. BUDGE. It is.

It is only with great difficulty that we can pierce the veil of secrecy to uncover the identity of the persons engaged in manipulative activity or trading on the basis of inside information.

We are concerned not only with the use of foreign intermediaries by a few individuals to obtain unlawful profits, we are even more concerned with the possible harmful effects which may be generally felt in the securities markets if we are unable to maintain adequate and effective surveillance because of the use of foreign intermediaries.

Almost every day our market surveillance staff discovers instances where foreign purchases or sales have taken place under circumstances