Senator KEAN. At all events, they have it?

Mr. HEALY. They have got it, but can they keep it?

The second item, however, in this group that I have been dealing with is $3,490,000, which is simply a transfer of earnings on the books of the subsidiary company from surplus account to stated value of nonpar stock and has never been paid over.

Senator KEAN. They are not entitled to that.

Mr. HEALY. The next item is a very interesting one. I wonder if they are entitled to this one: This is $1,978,513.12, which is Federal income taxes received from subsidiaries in excess of current deduction for Federal income taxes. Let me explain what that

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Senator KEAN. I do not think they are entitled to that.

Mr. HEALY. The practice in the Associated Gas & Electric Co. system, as in several others, is for each company to accrue and set up on its books the Federal income taxes which it would have to pay if it made a return as an individual company and did not figure in a consolidated return. The holding company for that group makes a computation of what it would have to pay on a consolidated basis if it made one return for itself and all of its subsidiaries. Thereupon the Associated Gas & Electric Co. takes on to its books what the subholding company accrues for taxes. But the Associated Gas & Electric Co. does not pay it to the United States Government. It gets out a consolidated return, and the amount that they pay being less than the amount that is in effect paid over to them by the subsidiaries, they pocket the difference. As a matter of fact, there have been several years in which this kind of income was taken up by Associated Gas & Electric Co. when they did not pay any Federal income taxes. Mr. Nodder has eliminated $1,978,000 of that kind of income.

The CHAIRMAN. Has that been brought to the attention of the Treasury?

Mr. HEALY. Yes, sir. A man named Davison from the Treasury Department has worked for many weeks in that connection. This is not the only company that does that. There are quite a few of these companies that make a profit out of their consolidated return by assessing each company what it would pay if it made an individual return, and then keeping out what it saves by making a consolidated return. There is an item of $1,900,000 shown right here [indicating].

The next adjustment of corporate surplus was $958,000. I will not stop to give the detail about that, because by comparison the amount is small and the hour is getting late.

Also, Mr. Nodder removed $15,520,000 from capital surplus to write off from the capital surplus account certain items, in view of the fact that the principal items therein consisted of write-ups of security investments.

That picture, I submit, as of December 31, 1929, can be contrasted with this one which appears in the published annual report of the Associated Gas & Electric Co. for 1929, and it seems to me it goes a long way toward proving the point that I hoped to prove when I came up here, and that is that by the provisions of sections 11 and 12 you should give the Commission power enough to learn the content of

these statements. Give it authority to get the information so that it can analyze balance sheets and income statements.

It is suggested that I ought to state that some of the appraisals reflected in the books of Associated Gas & Electric Co. have not been approved by State commissions. Many of the appraisals upon which many millions of dollars of write-ups have been recorded on the books of operating subsidiaries of the Associated Gas & Electric Co. have been made by a man named Cheney in New York; and the controlling influences in Associated Gas & Electric Co., as I think all of you know, are Mr. Hopson and Mr. Mange.

I had one of Mr. Hopson's associates on the stand the other day, a young man named Stix, and I inquired of him as to the relations between Mr. Hopson and Mr. Cheney because I wanted to know whether Mr. Cheney's appraisals were independent, and what his connections were with the system, because, as stated, there had been many million dollars of write-ups put on the Associated's books to reflect the appraisals made by Mr. Cheney. Mr. Stix said-I did not ask him this, because I do not ask witnesses for hearsay testimony, but Mr. Stix said-and he is very close to Mr. Hopson—that it was common gossip in the Hopson office that Mr. Cheney divided with Mr. Hopson one half of all the profits that Cheney made from the operation of his engineering department. We hope that before many days have passed we will be able to develop with some particularity just what the relations between Hopson and Cheney are. Senator WAGNER. Is the appraisal for the State?

Mr. HEALY. No, sir; for the company. He is represented as an independent appraiser.

Senator WAGNER. It is supposed to be a detached appraisal?
Mr. HEALY. Yes, sir.

Mr. PECORA. Did you not find two companies were in existence, the stock of which is held solely by Hopson and his associate Mange? Mr. HEALY. Yes.

Mr. PECORA. And those two companies purport to render management and financial service and advisory service of some kind to the subsidiaries of the Associated Gas & Electric Co. for which they receive fees that guarantee a million or more dollars a year, which go simply to those two men?

Mr. HEALY. No, sir; my memory is not quite that way. The principa! management companies in the Associated group are subsidiary to Associated Gas & Electric Co., so that their earnings ordinarily will go up to the Associated Gas & Electric Co. However, H. C. Hop on & Co., and a corporation owned by him and his sisters which has succeeded the old H. C. Hopson Co. partnership, does render financial service and income-tax-return service for which they get pay. They also render service in connection with the issuance of various securities; and it is my impression that those services have been rendered at a profit to Mr. Hopson and his corporation. But let me say this, that in the report of Associated Gas & Electric Securities Co., Inc., which we put into the record just about 2 weeks ago, we do show dealings between corporations owned wholly by either Mr. Hopson or Mr. Hopson and Mr. Mange together, where the dealings were to the profit and advantage of the corporations wholly owned by them and where the profits that they made entailed

some expense or loss to the companies that were subsidiaries to Associated Gas & Electric Co. I recall one such corporation that made profits through dealings with the Securities Co., and this was the Associated Securities Corporation, which is owned through a series of trusts or holding companies by Hopson and Mange. There is full detail on that in our record, giving the amounts to a penny.

I would like also to say-and this is pertinent in view of Mr. Pecora's question put to me regarding the insertion of a clause relating to accounts kept according to State requirements-that as you know, the Associated Gas & Electric Co. is not subject to the State public service commission and their accounting methods are not prescribed by State authority.

Senator KEAN. If that were put in there, it would not affect your authority to go into it, would it?

Mr. HEALY. No, sir; it would not, as the State law now stands. Senator WAGNER. What do you mean by saying that they are not subject to the State Public Service Commission?

Mr. HEALY. That the company itself is a holding company and is not subject to the State Public Service Commission of New York. Mr. PECORA. Judge Healy, the contention has been advanced here by opponents of the bill that the provisions of section 12 vesting the Federal Trade Commission with authority to require certain corporation reports and prescribe the form of them, and so forth, would virtually give the Federal Trade Commission absolute domination and control of the business of these corporations. Do you see anything in the provisions of section 12 or anywhere else in this bill that would so operate?

Mr. HEALY. I do not. The Commission is not seeking any such authority. The Commission, if I may speak for it—I have no authority to speak for it, but I am sure the Commission feels that you should have such provisions in the bill as to make the bill effective. Senator KEAN. Îf you have authority to remove the officers at will, do you not absolutely control the company?

Mr. HEALY. In the first place, the bill does not purport to give the Commission authority to remove the officers of corporations. Senator KEAN. It does as to the stock exchange.

Mr. HEALY. It gives authority as to the officers of the stock exchange, but only in the event that they violate the law.

Mr. PECORA. Where they fail in the duties imposed upon them by the bill. The objection advanced to this bill, among other things, was that section 12 clothes the Federal Trade Commission with a power equivalent to control and domination of the affairs of corporations, merely because that section gives the Federal Trade Commission the right to prescribe the form of reports which such corporations are required to make.

Mr. HEALY. In section 18, subdivision 3, there is a provision that after notice and opportunity for hearing the Commission may suspend or may expel any member or officer who violates the law or the rules and regulations thereunder.

Senator KEAN. You might make very unreasonable rules. Supposeyou omitted the words "rules and regulations." Would you con

sent to that?

Mr. HEALY. I should think if the Commission made unreasonable rules and regulations, the courts would set them aside.

Senator KEAN. Probably they would, but in the meantime you have cut off the other fellow's head.

Mr. HEALY. I think we could not cut of his head under an invalid regulation; and certainly rules and regulations cannot be made in excess of the power bestowed by the act.

Senator KEAN. Yes; but suppose you omitted the words "rules and regulations"? If they violated a law as passed by Congress, which they will all know about, that is one thing; but if you make new rules and regulations every day, that is different.

Mr. HEALY. Very different; and I do not think that they could be penalized for violating a rule or regulation that they did not know about. I should think the Commission would be wise enough to make its rules and regulations take effect at such a time that everybody on the exchange would know about them.

Senator KEAN. Yes; but the trouble is that you make these regulations that you think are wise, and perhaps the Commission might not always be so wise.

Mr. HEALY. That is the chance we take with the administration of any law, either in the courts or elsewhere. However, I should hope that the Commission would take counsel of those members of the New York Stock Exchange and other exchanges in whom it has confidence, to see that the rules and regulations are fair and reasonable. I do not mind saying at all that I have had correspondence with a man named Hoxsey, who is on their listing committee, and the trend of his views as shown in the subject of his correspondence with me was very pleasing to me.

Mr. PECORA. That is the Mr. Hoxsey who is executive assistant to the stock-list committee?

Mr. HEALY. Yes, sir.

But to answer the Senator's question, I do not think that the provision by which men may be suspended or expelled if they violate the rules ought to be taken out. I think if rules are promulgated inside the authority of the act, those who violate them should suffer some penalty. We cannot get effective regulation without it.

Senator KEAN. Yes; but that is a very drastic penalty, because it gives you exactly the same authority as if that were put into the bill, does it not?"

Mr. HEALY. No, sir; not precisely. So far as rules and regulations are concerned that are reasonable and that are authorized by the act, you are correct, in my opinion, and only to that extent.

Mr. PECORA. The court has injunctive power to restrain the enforcement of a rule that is unreasonable or invalid?

Mr. HEALY. Yes, sir.

Mr. PECORA. After all, is this power any greater, if indeed as great as that invested in the governing authority of the stock exchange over its own members for violation of its own rules?

Mr. HEALY. I should judge not, from what I have heard, although I have very little first-hand knowledge.

Senator KEAN. That is a self-governing body. The members of the exchange vote for those people to govern them, and they have their consent. They have given them that power. We take it without consulting them. We put this bracelet around their necks.

Mr. PECORA. It is not a bracelet. It is just simply giving a desirable disciplinary power over those who are subject to its rules and regulations and who are guilty of an infraction.

Senator WAGNER. When I was a judge on the bench I issued a temporary injunction to restrain the stock exchange, until the matter could be heard by the court, from expelling a member who had, they claimed, violated their rules by some wash-selling operation, and when the matter came before the court eventually I was compelled by the evidence to sustain the stock exchange. The man was expelled, but he had his day in court absolutely.

Mr. PECORA. He will have it here.

Senator WAGNER. That is what I say.

Mr. PECORA. It provides for notice and opportunity for hearing. The CHAIRMAN. I was just going to ask the committee to allow your testimony to be incorporated in the hearings. This is a very important statement, and I think it should go into the hearings.

Mr. HEALY. If that is done, may I have an opportunity to revise it? The CHAIRMAN. Yes.

Mr. HEALY. Because, speaking here under tension, it is sometimes difficult to make oneself clear.

The CHAIRMAN. Without objection, it will be inserted in the hearings.

Senator KEAN. The other day Mr. Pecora produced a statement which he wanted to substitute for one made by Mr. Redmond. Mr. PECORA. Relating to section 10?

Senator KEAN. Yes. I suppose it was in the record.

Mr. PECORA. So did I.

Senator KEAN. And so did he.

The CHAIRMAN. That may be inserted in the hearings also; and we will insert your statement in the record of the hearings so it will be printed.

Mr. HEALY. I think that is a matter that is up to the committee entirely. I would be glad to have it appear, however, that I came here at the committee's request.

The CHAIRMAN. You will be given an opportunity to revise the proof.

(The statement of Mr. Redmond, referred to, was handed to Senator Kean to be returned by him to the clerk of the committee for insertion in the record.

The CHAIRMAN. I wanted to ask you one more question. Please turn your attention to page 52, section 25. As the bill now reads [reading]:

Any person who willfully violates any provision of this act or any rule or regulation made thereunder, or any undertaking filed thereunder, or any person who willfully and knowingly makes, or any person, including a director, officer, accountant, or other expert thereof who willfully and knowingly is responsible for any statement in any application, report

And so forth.

What I have in mind is that expression, "Who willfully and knowingly is responsible for any statement." It seems to me that that is rather ambiguous and indefinite. Can we not explain that in some way? Can we not make that clearer? You, as a lawyer, would know how difficult it is going to be to show that someone is responsible for a thing, and whether that definition is sufficiently clear.

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