Mr. SABATH. If I am not mistaken, there are around 5,000 cases pending under 77B in the various courts of the United States. But mind you, even under 77B, reorganization has taken place and these houses of issue and the trust companies and the banks are now in control and possession, because the courts have permitted these men to designate the so-called voting trustees, and under the reorganization they are given 10 to 15 years to control these properties. By that time I fear very little will be left to the real bondholders and owners of the properties.

Originally, as nearly as we could estimate, there were about $20,000,000,000 worth of these bonds outstanding. The bonds were held by close on to 5,000,000 of the best American citizens, people who did not wish to gamble with stocks, people who upon the advice of the probate judges and the bankers, and other advisers, invested in these securities in order that it would bring them a return and would be safe in their later years.

We have evidence showing that over 30,000 of these people who had had all the way from $500 to $125,000 invested in these bonds, who had put in their all, were on the relief rolls, having lost every dollar that they possessed.

I am not going to tell you of the thousands of widows and orphans whose money has been invested upon the advice and recommendation and approval of the probate courts and of trustees and guardians and administrators. And not only those, but benevolent organizations, charitable organizations, labor organizations, have invested their money in these securities, feeling that this was the safest way they could invest their money and protect themselves for the future.

There is a cry all over the United States for legislation to save at least those who have not yet been wiped out.

I admit that 25 percent of these people have already sold their bonds, most of them for 3, 4, and 5 cents, and some of them 7 and 10 cents on the dollar. Although we have not accomplished what we contemplated originally, I am pleased to inform you gentlemen that the mere investigation on the part of this committee has helped to increase the value of these bonds all the way from 50 to 1,200 percent.

We have called the attention of these committees to the fact that we will go as far as we can to bring prosecutions, criminals prosecutions, in every case where the evidence has disclosed that a wrong has been committed. And we have secured indictments and have sent many cases to the district attorneys' offices for prosecution.

That has had a wholesome effect upon many of these committees. But this committee cannot continue to operate and investigate and work much longer. We are exhausted. We have worked on this for nearly 2 years—many of us days and nights.

I ave been a member of the House for 30 years and have never accepted an appointment on any investigating committee. This was the first one. I want you to know, although I am familiar with the splendid work of many other committees, that I do not know of another committee that has worked as hard as this committee in trying to arrest, trying to stop these abuses and the frauds that have been perpetrated against nearly 5,000,000 of our best citizens.

This is the picture in brief that I want to leave with you.

Now I am going to inform you what this bill embodies and I feel, if there is any opposition to this bill, that it must be from these gentlemen whom it may affect. I want you to know that I, myself, am a lawyer. I was admitted to the bar 45 years ago, although I have not devoted a great deal of my time to the practice of law and I do not desire willfully or deliberately to say anything which is unfair or unjust to that profession. Nor do I desire to assail or attack our judiciary. We have some splendid judges on the bench, and we have found that many of them, in the last 9 months or so, started to cooperate with us and aided this committee splendidly. We called the attention of the judges to these abuses in the matter of the charges and fees that were demanded and allowed by some judges here and there. We called conferences of these judges in various parts of the country, and they started then to realize that they had been imposed upon by many of the largest law firms in the United States.

Now, these gentlemen may be here to oppose this bill because, under this bill, these unjustifiable fees and charges against these unfortunate stockholders and bondholders, who always hold the bag, as well as the creditors, will be eliminated at least to a great extent.

The thing that I feel will be opposed to a greater degree than any, thing else is the provision that we place the masters, the trustees, and the referees on salaries; and I also include the receivers. That eliminates these excessive charges that have been allowed to receivers, trustees, and masters, and all others in these proceedings, and places them all on a salary basis.

That was recommended by a special commission that was appointed in 1931 or 1932. I think Mr. Thatcher, of New York, was one of the members of a commission who made that recommendation, and who also recommended more or less the principle of this bill.

Every other State that has investigated these conditions has come to the conclusion that the principle upon which this bill has been drafted should be adopted.

Let I forget, the question will be raised that this is not for the Federal Government; that this is a thing for the respective States.

The State of Michigan—the gentleman is from Michigan, he knows—and New York and several other States, tried to cope with the situation, and found that it is impossible. We must have Federal legislation.

Congress, under the power given to it to legislate in the matter of bankruptcy, has the power to legislate in this matter.

There are a great many other provisions in this bill. There may be opposition to this bill perhaps on the part of some of the gentlemen connected with the R. F. C. because, in our bill, we provide that before any loan is approved or made for reorganization purposes, or to these guaranty or mortgage companies, the conservator should pass upon such loan and if, in his wisdom and after a thorough investigation, it would be in the interest of the bondholders as well as those who are applying for the loan, then such loan could be recommended.

We do not take away any right from the R. F. C. in this bill, but we do say that there should be a thorough investigation before any loan is made.


Mr. CHANDLER. What about the duplication of the work, Mr. Sabath?

Mr. SABATH. Some one must do it. They cannot make the loan without making an investigation. So it is only a question of which organization will be in a better position to make that investgaton.

Furthermore, the R. F. C. is not a permanent organization. We want a permanent organization that will cope with the situation in the future, not only to remedy the present evils but to preclude in the future the recurrence of such a crime as has been perpetrated against 5,000,000 people. And when I say 5,000,000 people, I am not reaching out and including the small banks of the United States. Many of them have been bankrupted and were obliged to close their doors due to this manipulation whereby they were obliged to hold these securities, these mortgages, that became really worthless upon the market.

The R. F. C., in good faith, has made loans to mortgage companies, to trust companies, to guaranty companies, and for reorganization purposes. But, unfortunately, most of that money that has been advanced, although it helped these mortgage companies and trust companies and guaranty companies—and we have no objection, because again the owners, the stockholders, and the policyholders of these corporations have been aided—but in very few instances have the bondholders received a single dollar.

We have evidence showing that loans of $5,000,000, $10,000,000, $15,000,000 have been made, and the money has been absorbed by these committees to pay their costs and bail out the banks, who always were in a position to get theirs first; and the bondholders would not get anything.

Mr. MICHENER. Does not the R. F. C. have some idea of what is going to become of money before they loan it?

Mr. SABATH. I will say this. I will give them credit for this, that they have tried. Of course, originally their aim was to save the institutions and the policyholders; and there are millions of them. That was uppermost in their minds. They had reason to believe that the bondholders would be aided and assisted. But unfortunately, in very few instances, was anything left for the bondholders. The loans were absorbed and used for the purpose of taking care of these institutions, and the bondholders still remain to hold the bag

Only one institution, came to our attention where, out of that money, 30 percent did go to the bondholders. That is still going

That is in the case of the Maryland Casualty Co.; also two others that combined, the United States F. & G. and one other.

I am pleased to say that we have helped to see to that, that the bondholders did get part of the money. The chances are it would have been done without this committee. I do not want any credit and this committee does not want any credit. All we are interested in is legislation that will put an end to this graft, to this thievery, to these manipulations by which, gentlemen, if no law is passed within a few years to prohibit it, the best buildings in the United States in your State and your State; in New York and Chicago and Detroit and Los Angeles, and everywhere else—will be in the hands


of a few who will acquire them for 5 and 10 cents on the dollar; buildings that never should have been foreclosed.

Surely, there are some buildings where loans were excessive. You and I and our committee cannot put the value into these bonds. But we can protect, what there is, and see that what belongs to the people goes to the people and not to the lawyers and these protective committees and depositaries and the banks who jump in with all kinds of claims before the poor bondholder ever has a chance to get in.

As it is now the bondholder has no standing in the courts. He has given his right to this protective committee, and that protective committee, in the majority of cases, does not protect him. They are there to get the properties for some of their designees or nominees, for some of their friends here and there who have organized real-estate corporations, or for some individuals who come in and buy up these interests; buy these properties when sales take place in court, and, as a rule, the sale is so low as to eliminate the nondepositing bondholders, and after taking care of the costs and the fees very little is left for the bondholders.

These are the abuses that exist, which, we believe, this bill will eliminate.

Mr. CHANDLER. Will you take the bill and, step by step, show us how it will do that?

Mr. MICHENER. May I ask a question! Who drafted this bill? This committee is always interested in knowing who has drafted the bill before the committee, because it makes a lot of difference whether someone familiar with this matter has drafted the bill or whether it is just the thought of someone not familiar with matters of this kind ?

Mr. SABATH. The entire committee had this matter up many times. I admit that I might have put in a little more time than the rest of the members of the committee. But, being a complicated matter, and wishing to eliminate any constitutional question that might be raised—and I know from past experience that it would be raised-we called in two gentlemen from the drafting bureau, Mr. Akerson and Mr. Morgan, who, in conjunction with Mr. Comer, who was loaned to us by the Securities Division, and Mr. Blaustein and Mr. Thomas, who worked on the original bill—the number was H. R. 9027—which was originally referred to the Banking and Currency Committee, but which we later on felt should be amended to eliminate any danger of contest as to its constitutionality.

We came to the conclusion that under the Bankruptcy Act this legislation can be enacted and will stand the test.

In addition to these four or five gentlemen, there are Mr. Powers and Mr. Tupy here, who worked with this committee in the city of Chicago. They had an advisory committee in Chicago of about 40 lawyers who worked with this committee, without any remunerarion, gentlemen; and what applies to Chicago applies to many other cities. We secured the cooperation in many cities of a large number of lawyers to aid the committee to make a thorough investigation.

One of these gentlemen is here and desires to be heard on this bill and give reasons for the passage of the bill. He is perhaps as well informed as anyone, because he redrafted lately some of the provisions of it.

In addition to that, we obtained information and advice from judges and lawyers in nearly every section of the United States, and we have embodied these in the bill in a manner that we hope will stand up and will accomplish what is intended.

Mr. CHANDLER. You have given us a rather vivid picture of the evil you are trying to cure, Mr. Sabath. Perhaps it would be advisable to have some member of your drafting committee, or someone whom you may select, to give us a brief analysis of the bill.

Mr. SABATH. Mr. Fuller would like to discuss the bill briefly for a few moments.

Mr. FULLER. I can present a brief analysis of it.

Mr. CHANDLER. Thank you, Mr. Sabath. We shall be very glad to hear you, Mr. Fuller.



Mr. FULLER. Gentlemen of the committee, I suspect that the bill we have before you now and of which we are asking your approval is the accumulation of at least a dozen bills that we have drawn and considered along this line. We do not claim that this bill is perfect. We come before this subcommittee of the Judiciary Committee, that is composed of lawyers of standing, men of experience, realizing that even though there are shortcomings in this bill, if it has real merit, if anyone will show us where the bill can be corrected, we are more than willing to hear them on those matters.

Of course, you are cognizant of the fact that section 77B, which we seek to amend, is a new provision. We passed that in 1934 as one of these emergency relief measures, to reach conditions that had been brought about by the greatest panic that we have seen in our generation.

It is natural that it would not be perfect. We hardly ever have any law of much consequence that we do not have to experiment with and amend more or less.

This law as it now stands is the vehicle for these profiteers and racketeers to get by with what they are doing. We are appearing here, not against big money, big institutions, and big bondholders, but we are appearing for the little fellow, and anything that is honest and fair for the little fellow ought to be honest and fair for the big one.

You cannot realize the scope of this matter unless you know more about the facts leading up to it. I am not going to take the time necessary to tell you all about it. But think of the $20,000,000,000 worth of these bonds that were in default, with over 5,000,000 people of the country owning them. Most of them were the unsuspecting people who would buy anything that looked yellow and was called à gold bond and was supposed to pay 6- or 7-percent interest.

The big banks, the big institutions of the country—they do not own any of them. They send them down to their smaller banks, and the smaller banks sell them to the suckers. They even bought sucker lists all over the United States. You can go into the smallest hamlet in this country and you will find the widow and the old, decrepit man, and the trust estate, where they had put their life's

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