the stockholders, to this case of the Byllesby Corporation of less than 1 percent, and in the case of Associated Gas & Electric Co. of less than 1 percent. The CHAIRMAN. You mean that 1 percent and less controls what? Commissioner SPLAWN. The entire system. That is, the investment in stocks at the top that gives the power of control as the result of this pyramiding. In the case of Standard 'Gas & Electric it enables $1 to control several thousand dollars in the system; a nominal investment of $23,000 at the top controls a billion-two-hundred-million-dollar concern. The same is true in the case of Associated Gas & Electric Co. There you have a pyramid headed by Associated Gas & Electric properties. Two certificates of beneficial interest control that concern. There are two officers of the company each of whom owns one of those certificates of beneficial interest, and the nominal investment that they have made to acquire those certificates of beneficial interest give them entire control of the Associated Gas & Electric system. Senator WAGNER. The system you are just describing has how many operating companies? Commissioner SPLAWN. Do you mean the Standard Gas & Electric Co. ? Senator WAGNER. Yes. Commissioner SPLAWN. The number of operating companies I do not remember at the moment, but it is set out in this report here. Their big operation is at Pittsburgh. Senator WAGNER. In number how do they compare with the holding companies? Commissioner SPLAWN. Do you mean with other holding companies? Senator WAGNER. With the holding companies in the system. Commissioner SPLAWN. The intermediaries are out of all proportion to the number of operations, not only in that system but in several others. Sentor WAGNER. But I wondered if you knew about the percentage of holding companies and operating companies in the one system. Commissioner SPLAWN. On page 822 you will find a list of these operating companies, and there are about 4 pages of them, in fine print. Of course, that gives all the little corporations, on those 4 pages there, including the little corporations that are held for franchise purposes in many instances. Senator WAGNER. All right. Commissioner SPLAWN. Now, in the case of the Associated Gas & Electric there is one instance you will find, in part 1, of pyramiding 10 corporations deep. The operating company has on top of it nine holding companies before you get up to this top control. Senator WAGNER. All feeding on the operating companies? Commissioner SPLAWN. Of course, when you get up above this one operating company these holding companies begin to spread out and feed on many other operations, and thereafter by the time you get to the apex it is feeding on all the operations. Senator WAGNER. All right. Commissioner SPLAWN. Now, let me explain to you what grows out of these intermediaries or subholding companies. These companies frequently are brought into existence in connection with the acquisition of operating companies. That is, just as out at Omaha a holding company acquired a property for about $5,800,000. That is, it carried it on its books at $5,800,000. They then organized a subholding company. They transferred the securities of this Omaha property to this subholding company in exchange for the subholding company's securities, one and a half million dollars of notes. $3,000,000 of preferred stock, $5,000,000 of common stock. They sold the notes and the preferred stock of this new subholding company to the public for about $5,000,000. That is, the subholding company, an intermediate company, was set up for the purpose of issuing its securities and selling the preferred stock and notes to the investing public in order to recover from the public enough money to pay for the purchase of this very attractive operating company in that city, leaving the $5,000,000 of common stock, with all the voting power and the control in the holding company which had put over this deal, and it created this subholding or intermediate company for the purpose I have mentioned. Now, when the Federal Trade Commission comes before you they will cite instance after instance of that practice, and they will point out to you that they have traced write-ups, just such as I have mentioned there, amounting to a billion and a half dollars, which they have labeled, which they have tied down. And they do not pretend that they have discovered them all, but they have traced down one and a half billion dollars of sheer write-ups. Now, the Federal Trade Commission's conclusion is that Senator MINTON (interposing). Are you referring to write-ups in relation to the corporate structures? Commissioner SPLAWN. Yes; and I will give you another illustration in order to make clear what I mean. Senator SHIPSTEAD. What State was that company operating in? Commissioner SPLAWN. In Nebraska. It was in Omaha, Nebr. Senator SHIPSTEAD. All right. Might I ask you another question right there? Commissioner SPLAWN. Yes; certainly. Senator SHIPSTEAD. I do not want to interfere with your presentation of the matter. Commissioner SPLAWN. Oh! Go right ahead. I am only here to try to help you. Senator SHIPSTEAD. To what extent have stocks and debentures and securities been sold against this write-up. I mean sold to the investing public? Commissioner SPLAWN. Might I give you an answer by way of illustration? Senator SHIPSTEAD. Yes; if you please. Commissioner SPLAWN. Take a situation in Florida: As I recall, a holding company went into Florida and acquired certain operating properties at, I think it was, $28,000,000 as they carried them on their books. They then organized a subsidiary holding company and transferred those properties to it and in exchange for its securities, to the amount of about $58,000,000, an increase of $30,000,000. Now, a part of that, the notes, preferred stock, and so forth, they sold to the investing public in order to recover as much as they could of the purchase price of those operating properties. The rest of it they held in their portfolio. And a majority of the voting stock, of course, they kept. The CHAIRMAN. So that I may understand it more clearly, let me ask you this question: Some holding company went into Florida and organized another holding company and they purchased operating companies for $28,000,000, do you say? Commissioner SPLAWN. Yes. The CHAIRMAN. They took them into the holding company, and then issued stocks to the extent of $50,000,000, was it? Commissioner SPLAWN. To the extent of $58,000,000, is my recol lection. The CHAIRMAN. And they unloaded on the investing public how much of that stock? Commissioner SPLAWN. Well, they sold to the public-I do not remember in that particular case, but in this Omaha case they sold to the public all the preferred stock and all the notes but kept the common stock. Senator SHIPSTEAD. Do you remember the amount sold to the public? Commissioner SPLAWN. Well, I remember the amount in another illustration, if I may give it to you. Senator SHIPSTEAD. All right. The CHAIRMAN. And these people who bought the stock, that got the stock which was unloaded on them, they are the ones that now these holding companies are appealing to to save them, aren't they? Commissioner SPLAWN. That is correct, Senator Wheeler. The public has been led to invest in the securities of these subholding companies and top holding companies that were stepped up away from the operations. The public often times think they are buying into a utility while these holding companies are not utilities. They are corporations controlling utilities. They say they own them but they own enough voting stock to give them working control in many instances, and sometimes they own 100 percent of an operating company, but they are far removed from the actual operations. At the same time the public often think they are getting close into something of value. The CHAIRMAN. How do operating companies get their money to pay dividends, if they pay any? Commissioner SPLAWN. Well, in the case of the operating companies The CHAIRMAN (interposing). Well, I meant to ask about holding companies. How do they get the money with which to pay dividends, if they pay any? Commissioner SPLAWN. Into a holding company, of course, there is the normal flow of cash through dividends on stock and interest. on bonds from the operating companies, right up through the pyramid. Senator MINTON. And that is from the rates charged to consumers? Commissioner SPLAWN. Yes. It all ultimately comes out of the consumer, every dime of it. There is nowhere else for it to come from, except what they get out of investors who are brought in on an unjustifiable promotion. The CHAIRMAN. Do you call them "investors "? Commissioner SPLAWN. Well, they are appealed to as investors.. They are offered these stocks and bonds. A preferred stock is a very attractive stock because it is supposed to stand ahead of something. Out there in this Omaha case it was in behind the notes. The notes and the preferred stock together represented practically the purchase price of the property and were absorbed by the public. People were really buying the last equity when they bought that preferred stock. The people who bought the notes were getting the preferred claim, ahead of the preferred stockholders, and they were getting notes of this holding company itself. And frequently these are debentures. mere Now, these investors are very much concerned about their bonds, especially bonds of these top holding companies. The CHAIRMAN. That is, a holding company issues a bond upon what? Is it upon common stock? Commissioner SPLAWN. It just issues a debenture very frequently, which is a promise to pay, but that comes ahead of the common and preferred. The CHAIRMAN. The holding company takes the operating company's common stock? Commissioner SPLAWN. Yes. The CHAIRMAN. And then the holding company issues bonds upon. that common stock; is that correct? Commissioner SPLAWN. Yes; or else puts out debentures, I O U's. Senator SHIPSTEAD. Are the debentures pretty big? Commissioner SPLAWN. Sometimes they are called "baby bonds ", selling for $10, and sometimes a thousand-dollar denomination. Senator SHIPSTEAD. I mean, the size of the paper. What is the value of the paper in itself? Is it worth 5 cents? Commissioner SPLAWN. It depends on the company, of course, Senator. Senator SHIPSTEAD. I am not asking about the value of the security but the intrinsic value of the paper. Commissioner SPLAWN. It is not worth much. The CHAIRMAN. It has a pretty gold seal on it. Commissioner SPLAWN. Yes; but after it is printed it is not worth anything as paper. It can never be used again. Senator MINTON. What the investing public really gets is not the security against the physical assets of the operating company but simply against the securities of the holding company? Commissioner SPLAWN. That is correct; that is, when they buy holding-company securities. The source of revenue, the flow of cash, is a most interesting thing to trace, how the cash flows from company to company, and the real sources of income. You have asked me what would be the sources of income of the top company. First, there is the flow of dividends from operating companies and interest on bonds of operating companies. Next, there is what the holding company may be able to get out of the operating company through service contracts and fees. for services. Senator MINTON. They really come first, do they not? Commissioner SPLAWN. That is the first charge on the operating company. The CHAIRMAN. What are those fees and charges for, generally? Commissioner SPLAWN. They are for operating the plant sometimes; for giving them accounting service; for giving them legal service. One of these service-holding companies collected for legal services from the operating companies $3,000,000 in a period of years and paid the lawyers $1,000,000 for their work. I do not know which is worse, to charge the operating company three times as much for the service as the lawyers were willing to perform the service for, or to give the lawyers who did the work only one-third of the amount that was collected from the operating companies to pay for the service. The CHAIRMAN. They charged $3,000,000, you say? Commissioner SPLAWN. Yes. The CHAIRMAN. And gave the lawyers who actually did the work $1,000,000? Commissioner SPLAWN. Yes. Senator WAGNER. Was it all under the head of legal services? Senator MOORE. The lawyers are as bad as the holding companies. Commissioner SPLAWN. They took cases for what they could get. The lawyers' services were perfectly legitimate. Then, with reference to income taxes, there is one company that collected from the operating companies over a period of years over $11,000,000 for income taxes, and during that time they paid to the Government a little over $2,000,000 and retained the rest of it or it was swallowed up in some of the intermediaries somewhere along the line. The Federal Government never got it. They figured what the operating companies as such owed as income taxes. Over a period of years they collected over $11,000,000, and the Government in the end got about one-fourth of that. Senator MINTON. How did they do that? Through consolidated returns? Commissioner SPLAWN. That is right. The CHAIRMAN. Is that still permitted to go on? Commissioner SPLAWN. I think you did something about that in the last Congress. Senator WAGNER. We did away with that last year. Commissioner SPLAWN. Those are mere bagatelles; these tax and lawyer fees are not the real source of income; those are just driblets compared with other larger takings. The real source, so far as service fees are concerned, is in the contracts they make for the management of the operation. The holding companies will tell you that they are the industry, while really they have, through these exchanges of securities, acquired control of the operating properties and set up service companies subsidiary to the holding company; and they have said to the experienced and expert operators and engineers and the people with the ability to really operate these properties, "If you want to continue to work you will have to come in and take a job with our service company." So they have these people under the control of a subsidiary service company, which is in the office of the top holding company, one of these great empires, charging operating-company fees to cover the service. |