Mr. Healy. No, sir. The New Hampshire commission was taken into the Federal district court by the Associated interests when it undertook to learn what the books of certain Associated companies showed as to companies operating in New Hampshire, and the State commission was defeated.

The CHAIRMAN. This way of passing the earnings of affiliated companies or operating companies, for instance, on to parent companies and holding companies deprives the stockholders of the affiliated companies of the benefit of those earnings, does it not?

Mr. Healy. No, sir. It results in the parent company taking into its earnings account and its surplus account earnings of subsidiaries which it does not receive, which does not mean that those earnings are diverted to interests outside of the system; it does not mean that they are embezzled or wasted. The difficulty is that the parent company takes into its earnings account and into its surplus account earnings which it may never receive.

The CHAIRMAN. The stockholders of the affiliated company did not actually lose that money?

Senator KEAN. Oh no.

Mr. HEALY. The earnings of the subsidiary company will appear in the surplus account of the subsidiary. They also appear in the surplus account of the parent company.

Mr. PECORA. It is all a piece of bookkeeping legerdemain.

Mr. HEALY, I have here the balance sheet of the Associated for December 31, 1929, and on the assets side, page 26, we read: “Plant, property, franchises, and cost of acquiring capital, $634,000,000.”

The operating subsidiaries of the company, of course, have fixed capital. The Associated Gas & Electric Co. itself has very little fixed capital, such as buildings and power plants. It is more or less of a holding company. If you were to go to the books of all of the subsidiary companies of the Associated Gas & Electric Co. whose fixed capital is supposed to be reported in its balance sheet—that is, the consolidated balance sheet-you would find that the fixed capital, according to Mr. Nodder, our witness at the Commission who examined the books, appears on the books of those subsidiaries at about $402,000,000.

Mr. PECORA. As against six-hundred-odd millions ?

Mr. HEALY. As against six-hundred-odd millions, as shown by the consolidated balance sheet.

Now, the question is, What does the difference represent? Here is a little memorandum that Mr. Nodder gave me in this connection, which I will read [reading]:

The significant thing about this entire balance sheet is the fact that there has been counted in fixed capital an amount of around $200,000,000, representing excess cost to Associated Gas & Electric Co. of investments in subsidiaries over and above the par or stated value of the investments in those companies, as recorded by the books of the subsidiary companies, as well as an item of Cost of Acquiring Capital exceeding $18,000,000. In other words, what appears to the reader on the printed balance sheet as fixed capital, which he naturally presumes to be of the value fixed by the balance sheet, includes a highly intangible amount in excess of $200,000,000.

Senator KEAN. In other words, if they bought an electric company at $150,000,000 and the value of that company, according to its books, and so forth, was $100,000,000, they put it in at $150,000,000 ?

Mr. HEALY. It is very nearly that. If they paid $150,000,000 for a company whose fixed capital was stated as $100,000,000, when they reported fixed capital in the consolidated balance sheet it went in at $150,000,000.

Senator KEAN. Of course the earnings of the company may have warranted that price.

Mr. HEALY. They may have. I am not here to criticize the price that the Associated Gas & Electric Co. paid for its properties.

Senator KEAN. I say, it may have.

Mr. HEALY. I think that during the years 1927, 1928, and 1929 these holding companies paid some absurd prices for properties which they bought.

Senator KEAN. There is no doubt about that.

Mr. HEALY. But the point is that the balance-sheet statement does not disclose the facts that I have mentioned; and when you turn to the other side of the balance sheet you will find surplus reported in this fashion [reading]:

Class A (5,817,371 shares), Class B (500,000 shares), Common stock (1,703,538 shares)—Capital and surplus $261,266,024.80.

In other words, the capital, except the preferred stock, and the surplus are all thrown in together in one item. There is nothing that discloses the difference between earned surplus, capital surplus, or paid-in surplus, or surplus created through write-ups, or surplus created through the type of dividends that I tried to describe a few moments ago that arose through the Securities Co. taking Associated Gas & Electric stock at arbitrary values and then selling them out at higher values.

Just a few more words, and I will finish.

Senator Kean. I would like to call attention to the fact that you are quoting statements and statistics of 1929.

Mr. HEALY. Yes, sir.

Senator KEAN. That was many years ago. Are we supposed to assume that if you get this authority, the best you can do is to furnish us with statements 7 years old?

Mr. HEALY. No, sir. I picked this statement for several reasons. I have got printed balance sheets for the Associated for every year since 1929. I took this one first because I happened to have it handy. I have only used it to illustrate or to try to prove the necessity of disclosing the content of these fixed capital and surplus accounts. My argument is that the Commission should have authority to get the facts that underlie figures like these.

A second reason for taking this statement was that in our utilities investigation we cut off investigation of this company as of the end of 1929, and I wanted to use this statement because Mr. Nodder, who made the study of the Associated Gas & Electric Co., had given me a breakdown of the information as to how these particular figures were made up. If the committee wishes information as to the Associated Gas & Electric Co. as of a later date, we have the annual reports and can give you some information about it.

Senator WAGNER. Is there not some very recent information ? Mr. HEALY. Yes, sir.

Senator Kean. If this bill provided—and it does not so providethat you should have authority to pass on the accountants and

or 8

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engineers where an outside report is made, it seems to me that you should have authority to say that these accountants are satisfactory to us or that they are not satisfactory, or that the engineers are satisfactory to us or they are not satisfactory.

Mr. Healy. I hope the day will come, Senator, when we will have in this country chartered accountants who will be licensed by the Government and who will be punishable for false statements, and who will make their reports to stockholders and not to directors.

Senator KEAN. At the present time, under this bill, if you had that authority you could license accountants and you could license engineers; but under these circumstances you are not going to be able possibly to do this work. To make a general report on all the corporations of the United States is just foolishness.

Mr. HEALY. Of course, under the terms of the bill accountants incur a civil liability if they are not accurate within certain limits.

Senator KEAN. I know that. But what I thought was that you ought to have authority in this bill to license accountants and engineers. What do you think of that? I have just put it to the witness, Mr. Chairman, as to whether the Commission ought to have authority to license accountants and engineers.

Mr. HEALY. My first reply was—some of the committee were busy with something else—that I would be very pleased, as far as I am concerned, if the day would come when public accountants would be licensed and would have to report to stockholders instead of to directors and would have a dignified position of responsibility under Federal laws. Whether or not public sentiment and the sentiment of Congress is at the point where they are willing that engineers and accountants should be licensed by the Federal Trade Commission I do not know. I have some doubt about it.

The CHAIRMAN. We have enough to deal with now without going into outside questions. The complaint about this bill is that it goes too far.

Senator KEAN. Yes; it does in some respects; I agree to that. I am opposed to the bill in some respects, but I am in favor of having accountants that are responsible and engineers that are responsible. For instance, if I make an issue of securities I hire the highest class and the best people that I can get, and I do not restrain them in any way. They are to make a report of the situation. I take their report and publish it, and I am bound more or less by that report. I issue securities by it, and I pick the very best I can get. If they make mistakes, I suffer.

The CHAIRMAN. Would it be any better if they were licensed ? Licensed men make mistakes.

Mr. PECORA. It would not add to their knowledge or efficiency. The fact that a lawyer has a certificate of admission to the bar does not improve his knowledge of the law.

Mr. HEALY. I should like to interject an observation, if the committee will permit, which is not particularly apropos of anything, that eventually the solution for many of these problems is going to come from a compulsory incorporating or licensing of all corporations engaged in interstate commerce.

The CHAIRMAN. You mean, to give them Federal charters?

Mr. HEALY. Yes, sir; either Federal charters or Federal licenses. There is hardly a State in the United States today that will permit a foreign corporation incorporated under other laws to come in and do business in that State without complying with the State requirements. But Congress permits anybody or anything or any kind of à corporation to engage

in interstate commerce almost without let or hindrance. There is considerable support in rather conservative quarters for this view. Mr. Whitney has favored it, and Attorney General Wickersham favored it and President Taft favored it, and there are in existence bills that were drawn that represented the views of some of those gentlemen.

A second thought that I wish to express, which is a little out of line, is that many of the present difficulties will never be met until there is created an authority which has the right to decide at what figures properties shall go on to the books of corporations. Watered stock and inflation of all kinds depend, according to my observation, upon the figures that corporations are allowed to put on their books, particularly in recording assets. Some day, in my opinion, there will have to be some supervision of that sort of thing in the case of all corporations who are selling their securities to the public, just as in certain States today there is that kind of supervision over publicservice operating companies.

I have just one other small matter that I will refer to in connection with the Associated Gas & Electric Co. and then will conclude, unless you have some further questions to put to me.

Mr. Nodder, our accountant and examiner, made up a revised balance sheet of the Associated Gas & Electric Co. as of December 31, 1929, and then he undertook to eliminate from it all matters of write ups, nonreceived income, and certain received income which, in his view, the Associated Gas & Electric Co. was not entitled to receive. As a result of his revision making these eliminations the corporate surplus which was stated at $1,886,000 shows a deficit of $24,056,000. The capital-surplus account which, according to the statement that he made up based on the books of the company, stood at $11,167,000, after his revision had but $4,395,000 left in it. The stated value of common stock which, according to the books of the company and Mr. Nodder's interpretation of them, stood at $21,685,000, after his revision stood at $2,025,000.

The net result of all of his revisions was to reduce the total of assets by $50,387,000 out of a total of $641,000,000. The company contests his revision.

A few brief words as to some of the reasons that actuated him in making these adjustments and eliminations. First, he eliminated about $8,900,000 to eliminate the cost of acquiring capital account; the principal items comprising the same consisting of capital and surplus created for several classes of stocks; and that was done in the way that I have attempted to describe, in the first instance, earlier in my testimony.

Senator KEAN. What did he do with the $15?

Mr. HEALY. That is left in capital and surplus. You mean, if I understand you, the difference between $35 and $50 ?

Senator KEAN. Yes.

Mr. HEALY. Yes; he did not eliminate that, as I interpret his statement. He eliminated $17,800,000 from corporate surplus to eliminate from corporate surplus amounts received as dividends from subsidiary companies and other sources. He eliminates by this process certain dividends that they received but which, when he had traced them back through several layers of corporations, were originally paid, not out of earnings, but out of write-ups.

He next eliminates from corporate surplus a total of $7,110,000; $1,640,000 of this was compensation for management and construction services in return for which, according to Mr. Nodder, the Associated Gas & Electric Co. never rendered any management or construction service.

He next eliminates $3,400,000 and something over for current net earnings of subsidiaries transferred to the stated value of nonpar capital stock and never actually distributed

Senator KEAN. Excuse me. Go back one item. The company received that money, did it not?

Mr. HEALY. Which money?
Senator KEAN. Money for managing.
Mr. HEALY. Yes, sir.
Senator KEAN. Then they have got the money?

Mr. HEALY. Yes, sir. The basis of Mr. Nodder's elimination of that item was that they were not entitled to receive it, that they rendered no construction or management service.

Senator KEAN. Yes; but they got the money?
Mr. HEALY. They did.
Senator KEAN. Therefore it is part of their assets.
Mr. HEALY. That is true, in that respect. That is agreed to.

Senator KEAN. It is not a fair statement, so far as that goes, because they have got the money:

Mr. HEALY. I think it is a fair statement, because I said at the outset when I began to talk about it that he eliminated, among other items, items that they actually received but which, in his view, they were not entitled to receive.

The CHAIRMAN. In other words, did they have to return it to somebody else?

Senator KEAN. No. I do not think there is any chance of their returning it.

The CHAIRMAN. If they have something that they have no right to, why not return it?

Senator KEAN. The witness says that they did not have any right to it, that they did not render proper service for it; but they have the money in their account, and the only one that could sue them would be one of the subsidiaries that they own.

Mr. HEALY. One of the State commissions having supervision over the subsidiaries that paid this management fee may take a hand in it. It is not absolutely certain that none of this money will-

Mr. PECORA. Rates are fixed on the basis of such expenditures?

Mr. HEALY. Yes, sir; because such expenditures are charged against income before the return permitted by law is computed.

Senator KEAN. But if they had this money and they earned it and they charged this in

Nr. HEALY. They had it, but they did not earn it.

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