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shares of common stock of the Spirits Corporation was not less than $465,000?

Mr. Brown. I had taken Mr. Phagan's note for $465,000.
Mr. PECORA. And that was its only asset?
Mr. Brown. Yes, sir.
Mr. PECORA. This promissory note of Mr. Phagan's?
Mr. BROWN. Yes, sir.

Mr. PECORA. And that was a note that he gave to the companythat is, to the Spirits Corporation in return for its 10,000 shares of common capital stock?

Mr. Brown. That is correct.
Mr. PECORA. Was that note secured?
Mr. BROWN. No, sir.

Mr. PECORA. Was it endorsed by any person of known financial responsibility!

Mr. BROWN. Not that I remember of; no, sir.

Mr. PECORA. Did you have any knowledge of Mr. Phagan's financial work other than that which you said last week you had?

Mr. BROWN. No, sir.

Mr. PECORA. And that was not a knowledge that indicated to you he was worth the amount of that note, namely, $465,000, was it?

Mr. Brown. I was confident he would pay the note.

Mr. PECORA. The question is not whether you were confident he would pay the note but did you have any knowledge of his financial responsibility that led you to believe he was worth $465,000 ?

Mr. BROWN. No, sir.

Mr. PECORA. Now, what investigation was made by the board of directors of your corporation—that is, the American Commercial Alcohol Corporation--so far as you know, that led that board to declare its judgment in this resolution I have read to you that the assets of the Spirits Corporation on August 8 last were worth not less than $465,000?

Mr. Brown. None other than what I indicated to them, I suppose.
Mr. PECORA. You say none other than what you indicated to them?
Mr. BROWN. Yes, sir.
Mr. PECORA. What had you indicated to them?

Mr. Brown. I indicated to them that I was confident the note would be paid.

Mr. PECORA. It was simply a belief on your part that Phagan's note would be paid ?

Mr. BROWN. That is correct.

Mr. PECORA. And that belief was not supported by any knowledge you had of Phagan's financial worth?

Mr. BROWN. No, sir.

Mr. PECORA. And was it upon that basis that the board of directors expressed its judgment that the assets of the Spirits Corporation were worth not less than $465,000 on August 8 last?

Mr. Brown. It was also based on the judgment that the Sid Klein Corporation, which the Spirits Corporation would acquire, would have very substantial earnings, and it is evidence by the fact that the earnings have been substantial.

Mr. PECORA. You said it was based further on the feeling that the assets which the Spirits Corporation were to acquire from the Sid Klein Corporation ?

Mr. Brown. Yes, sir; the acquisition of the Sid Klein Corporation, and its ownership by the Spirits Corporation, would prove a profitable venture.

Mr. PECORA. What assets did the Sid Klein Corporation have on August 8 last?

Mr. BROWN. Well, it had a contract, as I remember it, with Mr. Sid Klein, who was probably one of the most outstanding figures in the whisky business, and who

Mr. PECORA (interposing). A contract of what kind ?

Mr. Brown. A contract of employment by which all of his services were to be given to the Sid Klein Corporation, and he was also

Mr. PECORA (interposing). In other words, there was a person by the name of Sid Klein who caused the Sid Klein Corporation to be organized.

Mr. BROWN. That is correct.

Mr. PECORA. And that same Sid Klein was to devote all of his time and services to the Sid Klein Corporation?

Mr. BROWN. Yes, sir. Mr. PECORA. And you considered that that promise made by Sid Klein to the Sid Klein Corporation was an asset which, when acquired by the Spirits Corporation through its acquisition of the stock of the Sid Klein Corporation, would help to give a value of at least $465,000 to the assets of the Spirits Corporation?

Mr. Brown. Yes, sir. And I took the note. Mr. PECORA. What kind of services was this Sid Klein to render that made his services so extremely valuable ?

Mr. Brown. Well, because at that time it was apparent, or at least we felt that prohibition repeal would come along. Mr. Klein was probably one of the outstanding figures in the beverage liquor business. He had been in it all of his life, up to the time of the passage of the prohibition amendment. He was known from coast to coast.

Mr. PECORA. As being what?
Mr. Brown. As being a whisky merchant.
Mr. PECORA. As being a whisky merchant?
Mr. Brown. Yes, sir.

Mr. PECORA. Well, he may have been known from coast to coast, but frankly I never heard of him before.

Mr. Brown. Well, you were not in the whisky business. Mr. PECORA. Oh. He was only known to those in the whisky business, is that right? Mr. Brown. That is right. Mr. PECORA. Well, during prohibition days were there so many persons engaged in the whisky business in this country? Mr. BROWN. I don't know.

Mr. PECORA. That made Mr. Sid Klein's reputation an outstanding one!

Mr. Brown. Mr. Klein formerly was a whisky broker in Cincinnati, where his headquarters were located. He came East and was connected with the Kentucky Alcohol Corporation, and afterwards became an official of the United States Industrial Alcohol Corporation—and this was all during prohibition times, when he was in the industrial alcohol business. Then when he felt that prohibition re

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peal was going to be made effective he retired from the United States Industrial Alcohol Co., as I understand it, and decided to set himself up in the business of handling warehouse receipts, buying and selling whiskies and other beverage liquors for his own account, and also to act as an importer, all of which he is doing today under the name of the Sid Klein Corporation.

Mr. PECORA. Well, what proportion of this valuation of “ at least" $465,000 that you thought the assets of the Spirits Corporation were worth on August 8 last, represented the value you placed upon the contract for the exclusive services of Mr. Sid Klein?

Mr. Brown. Well, that I do not think was decided upon at the time. Everything taken together was assumed to be of that value.

Mr. PECORA. Well, the only tangible asset was this promissory note of Mr. Knox B. Phagan, wasn't it?

Mr. Brown. Yes, sir.

Mr. PECORA. Now, was there in existence on August 8 any contract between Mr. Sid Klein and the Spirits Corporation ?

Mr. Brown. As to that, I cannot tell you offhand. I do not believe so, no, sir; not anything reduced to writing. I think the negotiations, as I remember now, with Mr. Klein were started at Atlantic City by Mr. Publicker on the Fourth of July. I remember that it was on a holiday, and it was afterwards brought up.

Mr. PECORA. Now, what was to be the business of the Sid Klein Corporation ?

Mr. Brown. Dealing in whiskies, beverage liquors, importing alcoholic beverages, dealing in warehouse receipts, and so forth.

Mr. PECORA. In the main it was to engage in the business of selling alcohol and alcoholic products, is that it? Mr. Brown. No. Alcoholic beverages. Mr. PECORA. Alcoholic beverages, is that right? Mr. Brown. That is correct.

Mr. PECORA. What was to be the business, or what was the business of the Spirits Corporation?

Mr. Brown. At the time when it was organized it was believed that, perhaps, the Spirits Corporation might handle the beverage business of the American Commercial Alcohol Corporation.

Mr. PECORA. Do you mean act as a sort of selling agent?

Mr. Brown. No. To handle the whole beverage end of the business, in connection with the production, sale, and distribution of beverage liquors, it being considered quite inadvisable to put on a bottle of whisky which might be produced, the name of the American Commercial Alcohol Corporation. It was felt that an outside or a

. separate and distinct operation was needed to conduct the beverage business.

Mr. PECORA. Well, now, you recognize, don't you, Mr. Brown, that the steps taken in connection with the formation of the Sid Klein Corporation and of the Spirits Corporation, and the arrangements for the acquisition by the Spirits Corporattion of all the capital stock, or a major part of the capital stock, of the Sid Klein Corporatiton, and then in turn the acquisittion by the American Commercial Alcohol Corporation of the capital stock of the Spirits Corporation through an exchange of shares, paralleled very considerably what was done by the American Commercial Alcohol Corporation as testified to by you last week before this committee in connection with the formation of the Maister Laboratories, Inc., and Noxon, Inc.?

Mr. BROWN. That is correct. The reason that was handled in the way it was, was because of Mr. Klein's insistence that it be handled in that way; not direct acquisition by the American Commercial Alcohol Corporation, because he felt at the time it would be better if our interests and control of the situation was not disclosed generally, for the reason that he would do business with all the different whisky purchasers, buying and selling where he could make a profit.

Mr. PECORA. What position was Mr. Klein in to dictate to the American Commercial Alcohol Corporation how the latter corporation should conduct its business, and how it should issue its capital stock?

Mr. Brown. Well, I wouldn't say that he dictated to the American Commercial Alcohol Corporation. But I think we felt at the time it was quite correct, because of the feeling that it would be better for him to appear as an independent operator.

Mr. PECORA. Now, as a matter of fact, Mr. Brown, wasn't this plan which involved the creation of the Sid Klein Corporation and of the Spirits Corporation, and which involved further the acquisition and control of the Sid Klein Corporation by the Spirits Corporation, and the acquisition of the Spirits Corporation by the American Commercial Alcohol Corporation through an exchange of stock, conceived solely for the purpose of enabling the American Commercial Alcohol Corporation to make another issue of an additional block of its common stock without first offering that stock to its stockholders of record under their preemptive rights? Mr. Brown. I shouldn't say so.

The CHAIRMAN. What was the capital stock of the Sid Klein Corporation?

Mr. Brown. It had 5,000 shares of $100 par value noncumulative 7 percent nonvoting preferred stock, and 5,000 shares of $1 par value common stock. Of the preferred stock, 2,000 shares had been issued, and all of the common. And the earnings of that corporation for the last 2 months of the year, I think, were approximately $40,000, and the earnings for the month of January Mr. Klein advises me were approximately $20,000.

The CHAIRMAN. How much of that stock did the American Commercial Alcohol Corporation acquire?

Mr. Brown. We acquired all of the preferred stock, and 50 percent of the common stock.

Mr. PECORA. Now, Mr. Brown, in the application which was filed with the New York Stock Exchange on July 19, last, for the listing of these additional 25,000 shares of stock of your company, why wasn't there set forth in detail the assets which were to be purchased through the proposed issue of 25,000 additional shares?

Mr. Brown. As to that I don't know. I had nothing to do with the application.

Mr. Pecora. Who did have to do with the application?
Mr. BROWN. I assume it was prepared by Mr. Page.
Mr. PECORA. Did Mr. Page know more about the situation than

you did?

Mr. BROWN. No, sir.

Mr. PECORA. You said something before about the acquisition of a plant in Kentucky by the Spirits Corporation.

Mr. Brown. No; by the American Commercial Alcohol Corporation.

Mr. PECORA. Was it by the American Commercial Alcohol Corporation?

Mr. Brown. Yes, sir.

Mr. PECORA. Well, how did the acquisition of that plant figure in this transaction?

Mr. Brown. It did not figure in it at all.

Mr. PECORA. I mean with the Spirits Corporation and the Sid Klein Corporation.

Mr. Brown. Not at all.
Mr. PECORA. Why did you make reference to it, then?

Mr. BROWN. You asked me about the application for the issuance of 25,000 additional shares of stock.

Mr. PECORA. Was it contemplated then that among the assets to be acquired by the American Commercial Alcohol Corporation at the time it made this application to the New York Stock Exchange for this additional listing of 25,000 shares, was this Kentucky plant?

Mr. Brown. It was contemplated; yes, sir.

Mr. PECORA. Did that offer pass beyond the stage of contemplation, or that effort, I mean?

Mr. Brown. Oh, yes. There were considerable discussions, a complete inspection of the properties, and we were unable to arrive at a definite deal. We thought we had something that was possible, but finally they wanted too much money for the company.

Mr. PECORA. Well, nevertheless, at the time this application was filed with the New York Stock Exchange one of the purposes for which the additional listing of stock was sought was to enable your corporation to acquire this Kentucky plant?

Mr. BROWN, Yes, sir.

Mr. PECORA. Through the issuance of part or all of those additional 25,000 shares,

Mr. BROWN. Yes, sir.

Mr. PECORA. And that plan completely went by the board afterwards?

Mr. Brown. Yes, sir.
Mr. PECORA. When was it finally abandoned ?
Mr. Brown. Well, I cannot give you the date of that.
Mr. PECORA. Well, about when?
Mr. Brown. Well, it was some time after that application was
filed.

Mr. Pecora. This application was filed on July 19.
Mr. Brown. Correct.

Mr. Pecora. Was that plan completely abandoned within a month thereafter?

Mr. Brown. I should say so; yes, sir.

Mr. PECORA. Now, I show you what purports to be a final signed copy of supplemental data or statement filed by or on behalf of the American Commercial Alcohol Corporation, with the committee on stock list of the New York Stock Exchange, bearing date Novem

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