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Mr. ALTSCHUL. That is correct. On the other hand, the action of the committee was not limited in its formal action by those circumstances. The action of the committee was broader, and as I am trying to point out, the action of the committee was in accordance with the face of the document. In other words, if the application had read, if they had come to us and had actually made the statement to us that this was for the purchase of a distillery, and they had put that in as the purpose of the issue, and it had gone out to the public and the shareholders as the purpose of the issue, that would have been the action of the governing committee, and the purpose of the issue would have been that. This information was interesting information, but it did not determine the scope of the action of the committee. That is the point I am trying to make.

Mr. PECORA. Didn't you regard the information given to your committee by its own assistants as information which those assistants had obtained for the guidance of your committee?

Mr. AltschUL. Oh, yes; we regarded that as information that they had obtained and they had submitted to us, surely.

Mr. PECORA. For the purpose of guiding your committee in its action on the application?

Mr. ALTSCHUL. Surely; and if they had obtained any other different information and had stated that it was for the purpose of purchasing another property, the action conceivably would have been just the same. My point is that the breadth of the authorization went beyond Mr. Tirrell's memorandum and can only be considered, it seems to me, as being the authority and purpose of the issue which they stated in their official application, and which is what we approved.

Mr. PECORA. The breadth of the authorization embodied in the signed application which your committee approved there was to the effect that the company, the American Commercial Alcohol Corporation, was to issue the stock on account of the purchase of assets. That is all it said.

Mr. ALTSCHUL. That is right.
Mr. PECORA. That is the only description it gave of the assets.

Mr. AltschUL. That is right. And as I understand your question

Mr. PECORA (interposing). Now, your committee would not have acted merely on that general information would it?

Mr. Altschul. We would have authorized it on the understanding that we were going to get the information before it was actually placed on the list.

Mr. PECORA. Did you get that information?

Mr. Altschul. That information is covered by that document that I handed to you and the one you are speaking from, as the only information we had.

Mr. PECORA. The information as covered by which document?
Mr. ALTSCHUL. That one, the one you have in your hand.
Mr. PECORA. This?

Mr. ALTSCHUL. And then later amplified in the one that you showed me.

The CHAIRMAN. At this meeting at which Mr. Brown and his attorneys appeared before your committee, did they go into this question at all, about the assets?

Mr. ALTSCHUL. The meeting that we discussed a few minutes ago, Senator?

The CHAIRMAN. Yes. Mr. ALTSCHUL. No, sir. It had been represented to us that they wanted to get the authorization to issue the stock actually to be issued at the time of the disclosure, and that they did not want a record of what it was that they were going to acquire to be made public until they had completed their negotiations, and we accepted that explanation.

The CHAIRMAN. Do you know that they ever made a registration before the Federal Trade Commission!

Mr. ALTSCHUL. I am not except I heard something about it today which I did not understand very well—but I am not informed as to what steps they took in regard to registration. Mr. PECORA. The subsequent information that you got does

not refer in any way to the acquisition of any distillery property in Kentucky, does it!

Mr. ALTSCHUL. As I remember it, it does not. Mr. Pecora, your point apparently is that the subsequent information is inconsistent with Mr. Tirrell's comment. Mr. PECORA. Yes, sir. Mr. ALTSCHUL. No question about that. I agree. My point is

I that the subsequent information is not inconsistent with the authority and purpose of the issue which we actually acted on.

Mr. PECORA. But Mr. Tirrell's comment was with reference to the purpose of an issue set forth in the company's application to the stock exchange?

Mr. ALTSCHUL. That is quite right. Mr. PECORA. Had you any reason to doubt, from Mr. Tirrell's comment to your committee, that he was told by the officers and directors of the American Commercial Alcohol Corporation that the specific purpose of the issue was to enable that corporation to acquire a distillery property in Kentucky.

Mr. ALTSCHUL. No reason to doubt it at all, but we did not limit the authority of the listing to that specific purpose.

Mr. PECORA. All right; when you got the subsequent information in the month of December 1933, you yourself have noted that it was inconsistent with the information given to your committee by its examiner, Mr. Tirrell, and which in turn was based upon information he obtained from the corporation?

Mr. ALTSCHUL. That is correct.

Mr. PECORA. Did your committee, in view of that inconsistency, make any inquiry into the real purpose of the proposed issue?

Mr. ALTSCHUL. It did not. Îhe information was consistent, as We saw it, with the authority and purpose for issue as contained in the listing application, which I have tried to point out was the document which we considered governed it.

Mr. PECORA. And as I again want to remind you, according to your own testimony it was inconsistent

Mr. ALTSCHUL. No doubt about that.

Mr. PECORA (continuing). With the purpose stated to Mr. Tirrell, as an examiner of your committee, by the officers of the corporation and conveyed by him to your committee?

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Mr: ArtSCHUL. Correct.

Mr. PECORA. Wasn't that a circumstance that, frankly, should have put the committee on inquiry with regard to the real purpose of this issue?

Mr. ALTSCHUL. I am afraid that must be a matter of opinion. I would not think so, Mr. Pecora. We did not know precisely what this was being done for. We did not know—all we knew was definitely and precisely what the authority and the purpose of the issue was that we had authorized, as is outlined in very broad terms in the listing application.

Mr. PECORA. On December 7, 1933, there came before your committee this supplemental statement from the American Commercial Alcohol Corporation dated November 23, 1933, which merely states with regard to the specific purpose of the issue as follows:

Since the date of said application arrangements have been made for the issuance of 10,000 of said 25,000 additional shares to Mr. Knox B. Phagan in exchange for the entire capital stock, being 10,000 shares of common stock without par value, of the American Distilling Co., a Maryland corporation.

Did your committee ever make any inquiry into the American Distilling Co.?

Mr. ALTSCHUL. My recollection is that in one of these papers you will find a note of one of our staff asking for the balance sheet and the income account.

Mr. PECORA. All right now; you got that balance sheet embodied in the supplemental printed statement

Mr. ALTSCHUL. That is right.

Mr. PECORA (continuing). Also dated November 23, 1933, a copy of which has been received in evidence here as committee exhibit 63?

Mr. ALTSCHUL. That is quite right, sir.
Mr. PECORA. Which you have seen?
Mr. ALTSCHUL. Yes, sir.

Mr. PECORA. When you got that balance sheet and that supplemental statement was any inquiry made as to the assets of the American Distilling Co.?

Mr. ALTSCHUL. No, sir.
Mr. PECORA. None at all?
Mr. ALTSCHUL. No, sir.

Mr. PECORA. Despite the fact that among the assets was a note receivable amounting to $465,000; is that right?

Mr. ALTSCHUL. That is right. This, Mr. Pecora —
Mr. PECORA. Yes?

Mr. ALTSCHUL. This application was for listing of additional stock. I don't know whether you want me to go into that again in regard to our procedure, but in connection with the application for a listing of additional stock we first have before us the fact that the stock of the company has been listed in the first instance and at that time supposedly an investigation of it has been made. The shareholders in the company have by that time taken on the status of owners of shares listed on the exchange, and this materially affects their rights.

Now, then, a company comes along in that situation and applies for the authority to add additional stock to the list. The application is made pursuant to authority granted by the board of directors under powers that are given them apparently by the laws of the State in which they are incorporated. We get the opinion of responsible counsel, who are familiar with the whole question.

Mr. PECORA. But that opinion in this particular case said that the stock would be valid in the absence of fraud ?

Mr. ALTSCHUL. That is correct.
Mr. Pecora. In the application?

Mr. ALTSCHUL. I am just outlining the steps of our procedure for the moment.

We have a statement of the purposes of the issue, and we take at that time such steps as seem to be requisite to bring the financial statements of the applicant company itself, not necessarily the company that it is acquiring, but the applicant company itself, down to date, and also we take the steps that we can to bring the applicant company into accordance with any new agreements that the exchange may have drawn up since the time of an earlier application. And when we have done that we act on the application on the basis of that information.

The CHAIRMAN. Was there anything ever done under this application for 10,000 shares? Was anything ever done under that! Mr. ALTSCHUL. I beg your pardon, Senator? The CHAIRMAN. Was anything ever done to that application ? Mr. ALTSCHUL. To this application? The CHAIRMAN. Yes.

Mr. ALTSCHUL. This application went to the governing committee on December 19 for their information. Does that answer your question ?

The CHAIRMAN. Is that all?

Mr. ALTSCHUL. Yes, sir. You understand the shares under this have never been issued in this case.

Mr. PECORA. It is no fault of the stock exchange that the shares have never been issued. The stock exchange paved the way for its issuance, didn't it, by its action approving the listing!

Mr. ALTSCHUL. The stock exchange authorized the listing.

Mr. PECORA. You said last week in passing upon the pro forma balance sheet that was discussed in the course of your testimony in connection with the Noxon, Inc., that if your committee had had pro forma balance sheet before it, its attention would have been excited.

Mr. ALTSCHUL. That is correct.

Mr. PECORA. By an item of notes receivable, $270,000.
say the same thing with regard to this balance sheet?
Mr. ALTSCHUL. No, sir.
Mr. PECORA. What is the difference between them?

Mr. ALTSCHUL. I said before the committee last week, if I remember correctly, that the notes receivable, the large item for patents, promotion, and so forth, whatever it was, and the whole general aspect of the balance sheet, would have aroused our attention. I don't remember my exact words. Maybe you have them before you.

In this case there was a balance sheet presented which showed a 2 for 1 liquid position. It was supported by an income account that showed some earnings, and the whole thing could reasonably have made the impression of just a small independent company. It

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would not have excited my attention, at any events, to anything like the extent that the other one would.

Mr. PECORA. You gave full faith and credit to the balance sheet, didn't you?

Mr. ALTSCHUL. We did not go beyond it; no, sir.

Mr. PECORA. Did not go beyond it. You produced here committee exhibit no. 66, which is resolution adopted by the board of directors of the American Commercial_Alcohol Corporation on August 8, 1933, as certified to by Mr. Page, as secretary of that corporation, and that resolution sets forth, does it not, that the assets of the spirits corporation were worth not less than $465,000, which corresponds exactly with the item of notes receivable shown in the balance sheet of the supplemental statement submitted to your committee last December?

Mr. ALTSCHUL. That is correct.

Mr. PECORA. Wouldn't that have excited your suspicion that the situation was one that required further inquiry by your committee!

Mr. ALTSCHUL. It did not.

Mr. PECORA. Under similar circumstances do you think your committee would act in exactly the same way as it did on this application?

Mr. ALTSCHUL. Well, now, that is a hypothetical question that is very difficult for me to answer.

Mr. PECORA. You are the chairman of the stock list committee and supposedly more or less familiar with the policy of the committee in passing on these applications. If a similar situation were to present itself to your company is it fair to say that it would take the same action?

Mr. ALTSCHUL. If the committee had before it nothing that drew to its attention anything suggestive of bad faith or impropriety, I think they would take the same action.

Mr. PECORA. The committee then, without inquiring as to whether or not any bad faith was being exercised in connection with the making of an application, assumed and took it for granted that there was no bad faith and hence made no inquiry; isn't that so?

Mr. ALTSCHUL. To answer your question directly first; yes, sir. In the absence of bad faith, the committee would not go beyonddid not attempt to substitute its judgment for the judgment of boards of directors who have, after all, been elected by the stockholders to look after their interests. Íf a board of directors decides to acquire some properties, they come and submit to us the relevant information, and we try to have the informattion set forth on which the board of directors acted, which they give us, so that the stockholders and the public can see it. But we do not attempt to go behind the action of the board of directors in the absence of bad faith and substitute our judgment in a lot of business matters or the judgment of others that are supposed to exercise their judgment.

Mr. PECORA. How would you expect to see any evidence of bad faith in view of the fact that the committee makes no inquiry?

Mr. ALTSCHUL. Well, we examine the facts that are presented to us. We make no inquiry.

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