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There is no reason why absolute, detailed control of corporate management should be exercised through the control of the regulation of stock exchanges. The functions of stock exchanges are to promote reasonable, honest and fair open markets for the purchase and sale of securities and for the dissemination of such corporate information as is necessary for the public to have in order to pass sound judgment upon the securities of listers. Beyond that it is neither fair nor honest to endeavor to rigidly control corporations through the medium of a proposed stock exchange regulating bill.

The agency given such broad powers under these bills is the Federal Trade Commission. This Commission has never before operated in this field unless it may be said that they have gained certain knowledge of securities through the administration of the Securities Act. This, however, is hardly the type of experience that is necessary to formulate sound judgment on credit control, which rightfully falls in the experienced hands of the Federal Reserve Board with the supplementing assistance of exchanges themselves, who are equipped to supply much technical information regarding the loan values that should be placed upon securities.

There should be no setting up of a great bureaucracy in Washington to dictate every single detail of what a corporation may and may not do, or what sort of accounting system they may operate under, and all of the other multitudinous affairs it is proposed to bring under the wing of the Federal Trade Commission.

As I have previously pointed out, many executives have appeared before the committees and given their views, pointing out the far-reaching effect of what the proposed bill means to every banker, insurance company, corporation and individual who handle securities, who issue securities or who own securities.

It must be said, however, that industry generally is not alive, it would appear, to the dynamite contained in this proposed bill. If this legislation is passed as written, or even with some of the minor amendments that have been suggested by the drafters as a peace offering to those who have raised objections, it will mean that the country will at a future date realize that they not only have an onerous Securities Act to contend with but also a piece of legislation that goes far beyond anything heretofore conceived. The statutory powers set out in this bill in almost every section of the proposal provide the Federal Trade Commission, heretofore mainly identified with inquisitorial investigations, with the power to assume command over each and every corporation having securities jisted on even the smallest exchange, of not only information to be supplied in order to keep their securities listed, and it is impossible to use unlisted securities as collateral, but also to operate their business in such a way that it receives the approval of this Commission.

The bill also provides for the regulation of transactions in all securities other than those listed on an exchange which may become licensed, that is, where their sale may involve the use of the mails or any instrumentality of interstate commerce. One must draw upon his imagination or personal experience to visualize just what this means. Many of us have seen to what lengths a Bureau once established with powers to act may go in the direction of exercising those powers.

It will be seen, therefore, that the bill involves important considerations not only to the corporations whose stock or other securities may be listed on some exchange, but to the securities of all other corporations regardless of their soundness or character, and certainly every present security holder in the nation should be genuinely interested.

Objection is not directed to the provisions of this bill dealing with the stock market regulation except insofar as the provisions of the bill tend to put business or mercantile corporations in a straight jacket and vest in the Federal Trade Commission or other governmental agencies jurisdiction to dictate accounting methods and reports, the burdens of which may prove exceedingly Respectfully,

NATIONAL RETAIL DRY GOODS ASSOCIATION,
HAROLD R. YOUNG,

Washington Representative.

onerous.

STOCK-EXCHANGE PRACTICES

TUESDAY, APRIL 3, 1934

UNITED STATES SENATE,
SUBCOMMITTEE OF THE COMMITTEE ON,

BANKING AND CURRENCY,

Washington, D.C. The subcommittee met at 10 a.m., pursuant to call, in room 301 of the Senate Office Building, Senator Duncan U. Fletcher presiding.

Present: Senators Fletcher (chairman), Costigan, Adams, Goldsborough, Townsend, and Couzens.

Present also: Senators Wagner, Byrnes, McAdoo, Walcott, Kean, and Representative Francis Henry Shoemaker, of Minnesota.

Present also: Ferdinand Pecora, counsel to the committee; Julius Silver and David Saperstein, associate counsel to the committee, and Frank J. Meehan, chief statistician to the committee.

The CHAIRMAN. This hearing is being held before the subcommittee of our Committee on Banking and Currency under the resolutions S. Res. 84, 56, and 97. Senator Schall and others have requested the committee to hear Mr. Backus. He has some important matter in reference to practices of banks and corporations, as well as stock dealings, and so forth, to present to the subcommittee, and we will let him proceed in his own way.

Mr. Backus, if you will stand, hold up your right hand, and be

You solemnly swear that you will tell the truth, the whole truth, and nothing but the truth, regarding the matters now under investigation by the committee, so help you God.

Mr. BACKUS. I do.

sworn :

TESTIMONY OF EDWARD W. BACKUS, MINNEAPOLIS, MINN.

The CHAIRMAN. Mr. Backus, what is your name?
Mr. BACKUS. Edward W. Backus.
The CHAIRMAN. And your address?
Mr. Backus. Baker Building, Minneapolis, Minn.
The CHAIRMAN. What is your occupation, Mr. Backus?

Mr. Backus. Manufacturer of paper, lumber, and other forest products.

The CHAIRMAN. How long have you been engaged in that business?
Mr. BACKUS. A little over 50 years.
The CHAIRMAN. Now, you have, I believe, a prepared statement,
Mr. Backus?

Mr. BACKUS. Yes.
The CHAIRMAN. Do you want to submit that to the subcommittee?

66

Mr. BACKUS. I do.

The CHAIRMAN. You may proceed, then, with that, and we will ask you questions as we see fit.

Mr. BACKUS. I thank you.
The CHAIRMAN. You may just sit down at the table there.

Mr. BACKUs. I should first like to submit a signed copy of my letter addressed to you under date of March 17, 1934.

The CHAIRMAN. All right. The committee reporter will make it a part of our record.

BACKUS-BROOKS Co.,

MINNEAPOLIS, MINN., March 17, 1934. Senator DUNCAN U. FLETCHER, Chairman Senate Committee on Banking and Currency,

Senate Office Building, Washington, D.C. MY DEAR SENATOR FLETCHER : Your telegram of February 19 in which you requested me to appear before your committee on Friday, February 23, was duly received.

As it was impossible for me to respond immediately, I sent you the following telegram :

Telegram received. I am wiring Senator Schall to explain to you the necessity of asking for later date to appear before your committee and will appreciate your favorable consideration." My telegram to Senator Schall was as follows:

Senator Fletcher, chairman Senate Committee on Banking and Currency, has telegraphed me to appear before this committee next Friday the 23rd. This date is practically impossible owing to decision pending in Circuit Court of Appeals which may demand my immediate attendance in Federal court here on our receivership matters. Kindly see Senator Fletcher and arrange for my appearance before this committee 1 week or 10 days later and greatly oblige. Am wiring Senator Fletcher advising that you will see him and explain situation."

In reply, Senator Schall telephoned me that he had conferred with you and that I should report in Washington as promptly as possible and that your committee would hear me at its earliest convenience. I am now here subject to your call and will be pleased to appear before the Senate Committee on Banking and Currency to place in its records a statement of financial recketeering (as you call it in Liberty of March 17) which has attempted to destroy the property of thousands of bondholders in the Minnesota & Ontario Paper Co. and the Great Lakes Paper Co., Ltd. About 25,000 had invested in a great property built up in nearly 50 years of constructive business effort and with a full sense of the social responsibility which ought to underlie all business promotion and the use of natural resources. The livelihood of about 7,500 workers and 30,000 dependents is involved.

I therefore ask your committee and your counsel, Mr. Ferdinand Pecora, to consider the methods through which the receivership of the Minnesota & Ontario Paper Co., which was forced in 1931, principally by the officials of the Chase National Bank of New York and the First National Bank of Boston, though the Minnesota & Ontario Paper Co. was then solvent; the campaign of the so-called “ Bondholders Protective Committee” to depress the values of bonds to secure their sacrifice; the waste of capital and resources through the unwarranted mismanagement of receivers appointed through the insistence of the Officials of the Chase National Bank and the First National Bank of Boston; these receivers having no knowledge of the technical problems of paper, pulp, and forest products manufacturing; and the persistent injection of the International Paper & Power Co. in the conspiracy to destroy my life's work. The trail of evil doing runs chiefly through officials of the Chase National Bank, First National Bank of Boston, Halsey, Stuart & Co., and Bond & Goodwin, one of the close affiliates of the First National Bank of Boston, and the International Paper & Power Co.

It might be argued by the public, under ordinary circumstances, that your committee should not be expected to take up the troubles of any particular organization, to follow the trail of any wrong that has been done to it by bankers working in harmony with the rivals or competitors of such an organization, yet what the Minnesota & Ontario Paper Co. has suffered is a perfect

illustration of the greed, double crossing, and willful penetration and meddling of banks into all lines of manufacture, which your committee has under the cross-questioning of counsel and more particularly in recent months through Mr. Ferdinand Pecora, so fearlessly proved in the hearings from 1932 up to the present.

It will, therefore, give me pleasure to appear before your committee. I shall conie prepared with a formal statement, but I shall welcome cross-questioning, for I have nothing to conceal in over 50 years of participation in the development of the Northwest.

Through your various articles published in the press, an immense service has and can be done by showing how the bankers have exploited the public and how helpless the holders of securities have been.

Permit me in closing to quote from an issue of the New Republic (Jan. 3, 1934):

Reorganization of bankrupt or embarrassed corporations have been a scandal for many years. The practice has been almost uniform. As soon as a large corporation falls upon default, the bankers and insiders, who almost invariably have been responsible for the disaster, rush upon the prostrate carcass and assume possession of it. This they do, first, by getting their representatives named as receivers, and second, by organizing protective committees of stockholders and bondholders. These protective committees ostensibly keep an eye on the special interests of their respective groups of security holders. They exercise what in practice is more important, a controlling influence over the reorganization of the corporation. And as it is the reorganization of the corporation in which the promoters and bankers and insiders are chiefly interested, it is a matter of great importance to them to capture the control of these committees. Anyone who wants to know what grave abuses, what serious infractions of the simple law of trust, have been practiced by such committees has only to read Mr. Lowenthal's book."

I can substantiate every point as to the practices that would have destroyed us, except for your decision to hear us. Very respectfully your,

E. W. BACKUS, President. The CHAIRMAN. You may proceed, Mr. Backus. Mr. Backus. Supplementing my letter to your chairman, dated March 17, I ask that the following statement be made part of your records.

Pioneering Development of Northwest Resources: The Minnesota & Ontario Paper Co. represents, in a large measure, the consummation of a constructive and well-laid plan by Backus-Brooks Co. conceived over 25 years ago to coordinate its forest products and hydroelectric properties into one operating unit and under one management. These properties had been acquired and developed, wholly or in part, during the previous 25 years. To carry out this plan the Minnesota & Ontario Paper Co. was duly incorporated in 1908 as the operating organization which took over certain of these properties.

The plan also provided that from time to time additional forest products and hydroelectric properties of Backus-Brooks Co. would be taken over and coordinated with this organization, as and when developed by Backus-Brooks Co. Prior to the year 1931 this company had developed several of its latent properties which from time to time had been taken over by the Minnesota & Ontario Paper Co. However, at the time of the Minnesota & Ontario Paper Co.'s receivership on February 28, 1931, one of the largest properties, and the most recently developed by Backus-Brooks Co., namely, Great Lakes Paper Co., Ltd., was in the process of being coordinated with the Minnesota & Ontario Paper Co., but the receivership prevented its final, legal consummation.

175541-34-PT 16-16

At that time these properties had been developed, organized, and were in profitable operation. In the year 1930, during which period the business depression_was keenly manifest, the net earnings of Minnesota & Ontario Paper Co. (including Great Lakes Paper Co., Ltd., which for all practical purposes was then assumed by both companies to have been coordinated, after all charges, were substantially in excess of $1,000,000, in face of the fact that the combined operations were at less than 50 percent of capacity. In years of ordinary business conditions, when operating at capacity, minimum net profits after all charges should be $6,000,000 and in prosperous years $10,000,000 to $12,000,000.

Outstanding business structure: At that point the Minnesota & Ontario Paper Co. and subsidiaries (including Great Lakes Paper Co., Ltd.) had attained a poition as one of the largest organizations of its kind in the world. Thus from a very meager beginning these vast properties were acquired and had been developed through my initiative and efforts covering nearly half a century, during all of which time the active executive management was vested in me and represented my entire life's work. The locations of these operations are strategic from every essential standpoint; namely, natural resources, logical markets,

ample provisions for further expansion, and perpetual operation. My whole purpose and ambition was to create, operate, retain practically the entire earnings in the business, and build a sound, creditable, and permanent structure.

At the time of the receivership, namely, February 28, 1931, the amount of outstanding bonds were as follows: Minnesota & Ontario Paper Co., $24,400,000; Great Lakes Paper Co., Ltd., $10,000,000.

Several expert independent appraisers in 1930 valued these properties at a minimum of $100,000,000.

Approximately 95 percent of the combined common and preferred stock in these companies was owned directly and indirectly by me and

my close associates, our accumulated earnings having gone into these properties. The first-mortgage bonds of these companies then outstanding had been purchased by our fiscal agents when issued and were widely distributed to some 25,000 holders.

The financial crash came in 1929, and I advised with several of our company's commercial bankers early in 1930 respecting their views on future economic conditions. The concensus of their opinion was that the worst was over and that conditions would gradually improve; that any expansion of plants and properties that had been planned could be proceeded with in the regular course of business with entire confidence. On the strength of this encouragement our companies proceeded to carry out their plans previously made, and expended approximately $3,000,000 on same during the year 1930. Not the slightest thought was harbored respecting any possible default in outstanding obligations. Our companies enjoyed the highest credit standing, without the use of collateral, and our commitments had always been promptly met.

Mr. PECORA. Mr. Backus, might I interrupt you right there for a moment to ask a question?

Mr. BACKUS. Certainly.

Mr. PECORA. Who were the commercial bankers with whom you met and conferred as you say early in 1930?

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