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Mr. POLLACK. We will find some foreign accounts in many of these cases. The problem is you don't know whether there is anything irregular because you don't have access to the evidence to determine that. But we do find, as the statement indicates, that in the surveillance operation we will run into foreign accounts in a number of instances.

Senator PROXMIRE. So, of the small fraction of cases which the computer would indicate merit further investigation, a significant number of them do involve foreign holdings?


Senator PROXMIRE. If the SEC suspects a stock is being manipulated and if on further investigation it learns that the orders are originating from a foreign bank in a country with strict bank secrecy laws, what can the SEC do?

Mr. POLLACK. Well, sometimes we are able through other channels to get some indication of the indicated ownership of the account, but more frequently we are unable to determine that, and so we are forestalled in completing the inquiry.

Senator PROXMIRE. Your statement mentions four recent corporate takeover attempts involving the use of foreign banks. In how many of these cases was IOS involved ?

Mr. BUDGE. It is my impression, Mr. Chairman, that IOS was involved in two of those attempts.

Senator PROXMIRE. How does a firm such as Liquidonics go about getting financing from a Swiss bank to take over UMC? Who arranges the loan?

Mr. BUDGE. Mr. Pollack was involved in that investigation. I would defer to him again, Mr. Chairman.

Mr. POLLACK. We, of course, don't know the exact banking procedures, but generally somebody connected with the borrower will go to Europe and arrange through contacts there for financing from European institutions.

Senator PROXMIRE. You say they go to Europe to arrange for financing through European institutions. In that case they don't have to use Swiss banks, it would be the European institutions providing the financing in the sense that the money comes from Europeans.

Mr. BUDGE. We assume it does. We don't know.

Senator PROXMIRE. It is a pretty safe assumption, it seems to me, it doesn't come from Switzerland. There is a little country with 2 or 3 million people, small incomes, and they buy billions and billions of dollars of securities in this country each year. Isn't it a pretty good assumption that much of this is coming from Americans who are investing in those Swiss banks?

Mr. POLLACK. We assume that some of it may well come from here. Of course, Switzerland has always been the international banking center of the European continent, and there is no question that the funds moving through the Swiss banking system do not come from that source alone. They don't have those resources. Whether the funds come from European sources or Asian sources or to the extent they come from the United States is something we do not know at this particular point.

Senator PROXMIRE. If they came from London or from Paris or from Italy or some other country, Germany, why wouldn't they use their own institutions, in which case there would be disclosure in those countries, would there not?

Mr. POLLACK. In some of these instances they might. Maybe because the way the group is put together, they will move it through Swiss banking channels for reasons of their own which we can only speculate upon.

Senator PROXMIRE. With respect to the Liquidonics takeover of UMC, who owns UMC now!

Mr. POLLACK. It is now owned by a Luxembourg subsidiary of a French bank, as I recall.

Senator PROXMIRE. Does this affiliate own the stock for itself or is it acting for another party?

Mr. POLLACK. As far as we know, we can only rely on what has been filed with us, it is purportedly owned by the Luxembourg subsidiary.

Senator PROXMIRE. There is no way you can check that out? Mr. POLLACK. Not at the present time. Senator PROXMIRE. You can't go any further? Mr. POLLACK. No, sir. We might be able from individuals involved if they are here, but we cannot go beyond the filing evidence that we have on record with us.

Senator PROXMIRE. Senator Bennett?
Senator BENNETT. Thank you, Mr. Chairman.

Mr. Chairman, I wonder if under the provisions of either of the two bills before us we might not be discriminating against American citizens in that we restrict their activities whereas there are no restrictions on the activities of foreign investors? Would you like to comment on that?

Mr. BUDGE. I think, Senator, there would be restrictions on certainly some of the classes of foreign investors. I don't know that we could ever remove this discrimination entirely. It exists in a lot of the areas of the securities laws today.

Certainly we would not want to permit foreigners to do things with relation to taking over corporations which we would not permit Americans to do. But I don't know that we can go as far with the foreign investor as we can with the American investor.

Senator BENNETT. What are the current restrictions on foreign investors in general?

Mr. BUDGE. I was speaking of the provisions of this bill which would place restrictions upon them. I have indicated at least one area where we think the disclosure of the foreign institution should be amplified.

Senator BENNETT. That is all I have, Mr. Chairman.

Senator PROXMIRE. Thank you, Chairman Budge very much for an excellent job and very responsive and helpful.

(The full statement of Chairman Budge follows:)



We are pleased to have been invited to participate here today in the matter before the Committee. We hope that our testimony will be of assistance to it in considering proposals to require that certain records be kept by banks, that certain transactions in United States currency be reported, that the margin provisions be broadened and that certain disclosure or certification be made as to transactions involving foreign financial agencies. Since the bill concerning which we have asked to testify, S. 3678, is quite similar to H. 15073, which was recently passed by the House of Representatives, our testimony before this Committee will necessarily be quite similar to that which we have given previously before the House Committee on Banking and Currency.

Since this proposed legislation will impose certain reporting requirements on Americans engaging in foreign financial transactions, we wish to clearly emphasize at the outset, as we did before the House Committee on Banking and Currency, that the Commission welcomes participation in the American economy by legitimate foreign investors. The Commission well realizes the benefits to the economy from the inflow of capital from abroad. At the same time we feel a responsibility to such foreign investors to enforce high standards of conduct in our securities markets so that they, as well as American investors, may invest their funds in an informed manner and with confidence in the integrity of our markets.

By way of background, we should first point out that many brokerage firms in the United States number among their clients foreign banks, as well as trusts and other financial agencies, formed in a number of the smaller countries in Western Europe and even closer to home, in the Caribbean area and elsewhere in North America. These entities engage in transactions in the United States, on our exchanges and in the over-the-counter market in securities of U.S. corporations through American broker-dealers registered as such with the Commission and, to a lesser extent, through American banks.

The volume of securities business done in this country by foreigners, including foreign banks and other financial agencies, is quite large. In the calendar year 1969, on all markets in the United States, foreigners made total purchasers of nearly 12.5 billion dollars of common stock and total sales of just under 11 billion dollars, with a total net investment of almost 1.5 billion dollars. Such purchases and sales were equivalent to almost 9% of comparable New York Stock Exchange volume for 1969. In the first quarter of 1970 there were total purchases of 2.4 billion dollars and total sales of 2.5 billion with sales of common stocks by foreigners exceeding their purchases by 98 million dollars.

Unlike other customers of American brokerage firms or banks, however, it is usually not possible to find out the names and addresses of the persons for whose beneficial interests transactions have been effected by foreign banks and other financial institutions. Nevertheless, on occasion, as the result of imaginative investigative work and fortuitous circumstances, we have been able to obtain sufficient evidence to establish the identity of such persons. Not surprisingly, in a number of these situations the persons involved in the questionable activities have turned out to be Americans. We understand that it is not even necessary for an American citizen to actually go to certain foreign countries to establish an account with a bank or other financial agency in those countries. 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.

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 subpoenas 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 provisions, violations of the restrictive provisions relating to short sales, the margin provisions, violating 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 successful 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 anti-fraud provisions of the Federal securities laws.

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% of a corporation's stock by a person or group, and with regard to the making of a tender offer for more than 10% 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. Incidentally, of the three most recent tender offer filings made with us involving foreign financing, two of the companies making the offers are also foreign.

The MGM case illustrates the use of foreign financing in a take-over attempt. When the financing arranged in this country was blocked by a Federal court on anti-trust 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% of the loan was pledged; in contrast, the margin rules require the pledge of stock with a value of 500% 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.

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 M & M, undisclosed interests may acquire the control stock, which was put up as collateral.

A similar situation exists with regard to the take-over 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, 190, the United States Court of Appeals for the 7th 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 20,000,000 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.

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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 perinent and required information in all future proxy materials to be distributed.

Resorts also agreed to re-solicit 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 take-over 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 take-over 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 difficult enough time with our limted resources in maintaining surveillance over the securities markets to detect possible illicit activities when only domestc participants are involved. There are several thousand stocks listed on the stock exchanges, and 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. Too often, however, we are finding that the trail has a dead end in a foreign financial institution. It is only with great difficulty that we can pierce the veil of secrecy to upcover 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 cir? cumstances which raise questions whether their impact on our securities markets was the result of proper or improper activities.

Even in the investment company area we have come across situations where foreign depositories have been used to the disadvantage of public investors. In one case, large deposits were made with certain foreign banks by a company which was subsequently determined to be an investment company. These deposits were further obscured by the subsequent use of these moneys by one of the banks for loans to other foreign intermediaries whom we believed were affiliated with principals of the investment company. Some of the money so deposited was ultimately returned to the corporation, apparently in large part as a result of prompt Commission action. However, it appears extremely doubtful that the balance of the money will ever be recovered. The balance was transported to a foreign country by personal courier, ostensibly for deposit in a branch of a certain bank. The bank records, however, failed to disclose that the money was ever, in fact, deposited. It is interesting to note in this connection that we learned, as a result of the subsequent bankruptcy of the parent bank, that the money apparently never made its way to the branch and that the parent bank and its branch frequently employed fictitious accounts for the purpose of estab

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