We wish to point out that our problems with foreign financed takeovers stem from secrecy laws that make it more difficult to detect possible violations of disclosure requirements. For example, in April of this year, a group of dissident stockholders of Bath Industries determined to obtain additional shares and pool their votes for the purpose of electing a new chief executive officer. Members of the group included a foreign investment company and a foreign bank. A Federal district court held that the group's attempts to gain control without making a filing with the Commission violated section 13(d) of the Securities Exchange Act of 1934.

Another recent takeover case was the contest for control of Roosevelt Raceway, between Madison Square Garden and Gulf and Western Land Corp. Madison Square Garden entered into arrangements whereby certain institutions, some of which were foreign, were to purchase Roosevelt Raceway shares and hold them for a year, with a guarantee that they could then "put" the stock back to it at 120 percent of the purchase price. An action instituted by the Commission is presently pending in the courts in this matter.

Cases such as the foregoing are not at all atypical, 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. As I have mentioned, 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 real parties behind the loan. 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.

I should now like to turn to two other areas where we feel that our efforts are hindered by foreign secrecy laws: the areas of market manipulation and the abuse of inside information. We have a difficult enough time with our limited resources in maintaining surveillance to detect possible illicit activities in the stock market involving only domestic parties. 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 unexplained 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 uncover proof of manipulative activity.

We are concerned not merely with the use of foreign intermediaries by a few individuals to secure ill-gotten gains; we are primarily 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. One case this past summer typifies the reason for our concern. A listed stock rose more than 20 percent in 1 month, from $14 to $17%, on a volume of 102,300 shares. Almost 90 percent of these shares were bought for the accounts of a Swiss bank and an affiliated Luxembourg bank. We do not know whether the banks were acting as principals or as agents for undisclosed U.S. interests in making the purchases. We have not been able to find out even whether the transactions represented bona fide purchases.

At approximately the same time another listed stock rose from $29% to $35%. Of the 30,900 shares traded, 7,000 or 23 percent were purchased by a French bank. Again, we simply do not know the true circumstances of this transaction or the real parties in interest.

Such foreign activity occurs also in stocks traded in the over-thecounter market. During a recent 30-day period the bid price for one such stock ranged from $9% to $19%. At the same time we found 10,520 shares were sold, half of them at prices of $15 and above, for European accounts including Swiss and German banks and a Swiss investment company. We are endeavoring with great difficulty to determine the circumstances surrounding these events.

An equally interesting set of facts is presented by a small foreign company traded in our over-the-counter market. Major purchases and sales were made of its common stock this summer by foreign entities including offshore investment companies based in the Bahamas, and the stock has gyrated wildly, rising from $26 to $54 in 2 months and then sinking to $22. One offshore investment company purchased 30,000 shares during a 1-month period at prices ranging from $36.75 to $30; this company then sold 7,000 shares a month later at prices between $50.50 and $52.50. A Swiss bank purchased 4,000 shares at $27.25, and resold them a month later at prices from $27.50 to $42. Our investigation of this matter is continuing.

We are also investigating foreign activity in a recent offering made under regulation A, which is intended to exempt from full registration requirements offerings under $300,000. In this case, almost 50 percent of the offering was placed in the name of a single Swiss bank.

Another case of possible insider use of foreign conduits was the purchase of 250,000 shares of a major American company by two Swiss banks in 1967 at a time when the consolidation of that company with another major company was secretly under negotiation. These shares were apparently sold less than 2 weeks after their purchase, when the negotiations were terminated.

Virtually every day our market surveillance staff discovers similar instances where foreign purchases or sales have taken place under circumstances which raise questions whether their impact on our securities markets was the result of proper or improper activities.

Even in the investment company areas we have come across situations where foreign depositories have been used to the disadvantage of the public investors. In one case foreign deposits involving large amounts of money were made by the investment company with certain foreign banks. These deposits were further obscured by the

subsequent use of these moneys by one of the banks, that is, loans to other foreign intermediaries whom we believe were affiliated with principals of the investment company. While some of the money so deposited was ultimately returned to the corporation-we believe in large part as a result of a prompt Commission action-it appears extremely doubtful that the balance will ever be recovered. The balance was transported to one of these countries by personal courier, ostensibly for deposit in a foreign branch of that 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 establishing the existence of deposits when in fact none existed. To this date the ultimate destination of the balance remains a question.

I would next like to make a few remarks about the avoidance of the Federal Reserve Board's rules for the regulation of purchase of securities on credit, through the use of foreign financings. As I mentioned a few minutes ago, the recent contest for MGM illustrates how large sums are being obtained abroad for the purchase of American securities on terms which would not be permitted by the margin rules. In the MGM case, I understand, American lenders would have required over three times the collateral that the foreign banks did. The problem as we see it is twofold.

First, under the existing margin rules, as interpreted by the Federal court in the MGM litigation, foreign lenders can make loans to Americans for the purchase of securities in American markets on any terms they care to. Obviously, to the extent that the margin rules attempt to prevent unwise market credit extension and "pyramiding," the extension of credit by foreign lenders without regard to the margin restrictions defeats these objectives.

Second, we have the problem of policing the margin rules against the activity of domestic lenders, who disguise their participation in transactions by effecting them through foreign intermediaries. The committee will recall our previous testimony with regard to certain abuses by some foreign entities using "special omnibus accounts" maintained with American brokerage firms. We found that such accounts were in some instances recommended and maintained for Americans, through the use of a foreign intermediary, to evade the clearly applicable margin rules. Changes since made in the rules governing such accounts have helped to stem this illegal activity. However, the evasion of the margin rules through other types of transactions is still possible unless we have the means necessary to get behind the facade provided by foreign intermediaries.

Measures applicable to American citizens and residents and, in certain instances, persons doing business in America, which help us obtain more information concerning these kinds of transactions, together with treaties or international agreements which would secure the cooperation of foreign governments in our investigatory efforts, are most desirable.

We appreciate that some foreign institutions oppose any actions which would make it more difficult for them to wrap the cloak of secrecy about questionable financial dealings. However, we believe that responsible foreign lenders and investors should support such actions because it is in their best interest to preserve the fairness and honesty of America's securities markets.

As you know, during the past few years legitimate foreign investments have been welcomed and as a result have increased substantially. In 1968, foreign purchases of stock alone totaled $13 billion with a net investment of approximately $2.3 billion. In 1969, it is estimated that such stock purchases were $12.4 billion with a net stock investment of approximately $1.5 billion. In addition, our statistics reveal that over $2 billion worth of securities were issued in 1969 by subsidiaries of American corporations in Eurodollar financing. These securities were guaranteed by the American parent of the issuing company, and over $12 billion worth of such securities were issues convertible into stock of the American parent. While there has been a slight decline in the number and value of Eurodollar financings in 1969, the value of convertible issues alone will still be over a half billion dollars.

We know from experience that it is the confidence in the integrity of our markets, as much as it is in the strength of our economy, that has been responsible for this massive foreign investment in the stocks and bond of American companies. We welcome any reasonable measures which will enable us to continue to perform our tasks of enforcing full disclosure and detecting and preventing manipulative and fraudulent activities for the benefit of all investors. In this connection, as Mr. Rossides has pointed out this morning, a task force in the Treasury Department currently has under consideration a number of administrative and legislative proposals on this subject concerning which it will be reporting to your committee shortly. Any such proposals should perhaps be considered along with the draft bill to which this statement is directed.

Mr. Chairman, that concludes our general statement. We have prepared some short papers on the various situations which you specifically mentioned in your letter of November 7, 1969 to Chairman Budge. In these papers you will find as you requested, a discussion of the circumstances under which Investors Overseas Services removed itself from our jurisdiction, and of the activities of IOS in this country. You will also find factual discussions of various takeover attempts involving the use of foreign financing including Resorts InternationalPan Am, Madison Square Garden-Roosevelt Raceway, LiquidonicsUMC, Kerkorian-MGM and the acquisition of gambling operations by Parvin-Dohrmann. We would be pleased, Mr. Chairman, to submit those for the record if you so prefer.

Chairman PATMAN. Without objection, it is so ordered. Preceding these papers, however I would like to introduce into the record a study of the background of IOS that has been prepared by the committee staff.

(The information follows:)

February 16, 1970

STAFF MEMORANDUM

TO:

SUBJECT:

Wright Patman, Chairman

Investors Overseas Services (IOS) and its use of secret
foreign financial facilities

Transmitted herewith is a report on IOS, including (1) its background, (2) its sources of revenue, (3) SEC-IOS litigation, and (4) its investment in companies in the United States.

The total net assets of the mutual funds managed by IOS were $1.8 billion at August 31, 1969, of which approximately $1.2 billion or about two-thirds were invested in equity securities of United States corporations. The consolidated net income of IOS has increased from about $1.7 million in 1964 to about $14.7 million in 1968.

Each 105-managed mutual fund is subject to applicable governmental regulation in the country of its organization. The funds are apparently purposely organized in countries with a minimum of regulations. This is particularly true as regards tax regulations, and 105 and its subsidiaries have paid taxes at very low rates (almost no taxes are paid in the United States despite equity investments in this country in excess of $1 billion).

It is the conclusion of the committee staff that the bank secrecy laws of the countries in which 105 operates enables investors in the U.3. securities market to conceal their identity and the purpose of their investments. This in turn makes possible (1) the purchase of stock withour meeting the margin limitations on credit promulgated for this purpose by the Federal Reserve, (2) the funneling of funds from illegal enterprises into legal businesses, 3) insider" trading by those with privileged information, to the possible detriment of others tookkholders, (4) possible weaknesses in security when companies controlled by unknowm individuals have defense contracts, and (5) evasion of income taxes.