Question. On the other hand had purchases by the Securities Co. on the organized exchange been continued? Answer. Yes, sir; in volume many times that of the sales. Question. What was this period of small sales of the 6 percent preferred stock of sustained market purchases? Answer. It was a period during which the Doherty Management was marketing preferred stock of Public Service Co. of Colorado with a yet lower rate of dividend, namely, 5 percent preferred stock. Question. When did marketing in that stock commence? Answer. In September 1928. Question. Was it equal in all respects to the 6 percent preferred stock? Answer. In all respects except as to the dividend rate. Question. What was it necessary for the Doherty Management to do? Answer. It was practically necessary for the Doherty Management to support the market price of the 6 percent preferred stock in order to create and maintain public esteem for the 5 percent stock. Question. How was this done? Answer. This was done by making sustained purchases over the counter and on the curb exchange. Question. During a period when the public sales, as I understand you, were dwindling? Answer. Yes, sir. Question. Culminating in the sale of $535,700 par value of 6 percent preferred to an allied company, Cities Service Power & Light Co.? Answer. That is correct. Question. Was any profit or loss counted on the sales which the Securities Co. made to Cities Service Power & Light Co.? Answer. No, sir. Question. Was any profit counted on the sales made to the general public? Answer. Yes, sir; a profit of $297,359.95. Question. The text table shows at the end of June 1927 what you describe in your report as a negative balance of this 6 percent preferred stock to the extent of $598,100 par value. What is meant by this expression "negative balance"? Answer. The negative balance meant that the Securities Co.'s sales of this stock up to the end of June 1927 exceeded its purchases, inclusive of the stock taken over from Henry L. Doherty & Co. by that amount, $598,100 par value. Does it mean that the Securities Co. was technically short of Public Service Co. of Colorado 6 percent preferred stock to the extent indicated on June 30, 1927? Answer. It does. Question. When thereafter was the Securities Co. again short? Answer. It was short again at the end of August, at the end of October, and of November 1927 and at the end of January and February 1928. Question. What do you mean by the expression "technically short"? Answer. I mean the accumulated sales up to that date exceeded accumulated purchases from all sources up to that date, so that the company had an obligation to deliver shares that it had not yet provided for delivery. Question. Does it mean it had delivered more stock than it had obtained? Answer. Yes, sir. Question. Does it? Answer. Yes, sir. Question. Your report says that it does not mean that. Answer. No. It does not mean that it had delivered more stock than it had obtained. Question. It does mean, does it not, that it had contracted to deliver more stock than it had on hand? Answer. That is correct. Question. How was this position made possible? Answer. This was made possible because a large proportion of the sales contracts entered into were sales on time, 30-day accounts, or on the installment plan. Question. The 10-month partial payment plan? Answer. Yes, sir. Question. Was it necessary that the Securities Co. have in its possession ownership the shares of its stock that were sold on any particular date? Answer. No; it was not necessary. Answer. Because it was not obligated to make delivery until they had been paid for and to the extent that they were sold on time or on the installment plan they were not paid for at the time and therefore it did not need possession for the purpose of making delivery. Question. Did the short position of $598,100 par value of 6 percent preferred on June 30, 1927, antedate the receipt of $610,200 par value of the 6 percent preferred stock received in exchange for 7 percent stock? Answer. Yes, sir. Question. It antedated it by how much? Answer. By nearly 2 months. Question. Did this mean that in anticipation of the receipt of 6 percent stock in exchange for 7 percent stock the Securities Co. sold more 6 percent stock than it possessed and that it purchased in the market and went short to the extent of at least $598,000 par value? Answer. Yes, sir. Question. For what did it use the 6 percent stock obtained in exchange for the 7 percent stock? Answer. It used that 6 percent stock in order to cover that short position. Question. Similarly, in anticipation of what did the Securities Co. achieve a short position at the end of August? Answer. The Securities Co.'s short position to the extent of $221,300 par value of 6 percent preferred stock at the end of August 1927 was created in anticipation of the receipt of $500,000 par value of the 6 percent stock from Cities Service Power & Light Co., which took place on September 19. Question. Did these short positions in the 6 percent preferred stock in the Colorado Co. all exist in the period prior to April 1928? Answer. Yes, sir. Question. Was any 6 percent preferred stock_received from Cities Service Power & Light Co. or from the Colorado Co. subsequent to April 1928? Answer. No, sir. Question. From these facts, what do you conclude? Answer. I conclude that soon after the receipt of the last $108,000 par value of this 6 percent stock in exchange for 7 percent stock, the Doherty Management conceived the idea of creating a market for 5 percent preferred stock of Public Service Co. of Colorado instead of further marketing at that time of the 6 percent stock. Question. Had the market price of the 6 percent preferred been rising? Answer. Yes, sir. It passed par in February 1928. The average price at which this stock was purchased on the exchange and over the counter was 105.6 percent of par in April 1928, and 106 in May. Question. When were sales of the 5 percent preferred stock commenced? Answer. They commenced in September 1928 at 93 percent of par. Question. At that price what annual return did the dividend represent? Answer. It represented an annual return of 5.37 percent of the purchase price. Question. Whereas, at 106, the dividends on the 6 percent preferred stock represented what annual rate of dividend? Answer. An annual return of 5.660 percent of the purchase price. Question. From these facts what do you conclude it was advantageous for the Colorado Co. to do? Answer. It was more advantageous to sell 5 percent preferred stock at 93 or above than it was to sell 6 percent preferred stock at 106 or less. Question. Have you brought together in this report a summary of the transactions of the Cities Service Securities Co. in the 5 percent preferred stock of Public Service Co. of Colorado? Answer. Yes, sir. That appears in text table 3 on page 42 of the report. Question. On what date did sales of the 5 percent preferred stock of the Colorado Co. by the Securities Co. commence? Answer. Those sales commenced on September 14, 1928. Question. By October 11 what quantity had the Securities Co. sold? Answer. $117,200 par value. Question. At that time had the Securities Co. received any of that stock from the issuing company or from any other source? Answer. No, sir. Question. What does this illustrate? Answer. This illustrates the Securities Co.'s practice of effecting sales and creating a technically short position in anticipation of the issuance of the securities in whose marketing it is to participate or whose marketing it is to facilitate. Question. In this case the short position was created in anticipation of what? Answer. In anticipation of the receipt of $250,000 par value of the 5 percent preferred stock in exchange for 7 percent preferred stock. Question. How much of the 5 percent preferred did the Securities Co. receive in exchange for 7 percent preferred? Answer. It received $375,000 par value of the 5 percent preferred stock in exchange for $300,000 par value of the 7 percent stock. Question. When did the Securities Co. make its first purchases of the 5 percent preferred stock on the market? Answer. In December 1928. That is approximately 3 months after the Securities Co. began taking sales orders for stock. Question. Were many of these shares purchased in the market? Answer. The volume of market purchases was relatively small. Question. The sales of this stock having dropped to a low level, did the balance of stock on hand show a tendency to increase? Answer. Yes, sir; during the period in which the Securities Co. were making purchases in the market. Question. The balance on hand at the end of December 1928, was how much? Answer. $82,100 par value and that increased to as much as $223,100 par value at the end of January 1930. Question. What total profits or losses did the Securities Co. count on all of its purchases and dealings in the preferred stock of either of the three classes to which reference has been made? Answer. A profit of $315,388.75. Question. I understood you to say, Doctor, that the Securities Co. purchased some shares of the Colorado Co.'s 6 percent preferred from the Cities Service Power & Light Co.? Answer. Yes, sir. Question. I also understood you to say that the Securities Co. sold some of that same kind of stock to the Cities Service Power & Light Co.? Answer. Yes, sir. Question. What was the par value of the 6 percent preferred which the Securities Co. purchased from the Cities Service Power & Light Co.? Answer. $1,670,000 par value. Question. What was the total par value of the shares of 6 percent preferred which the Securities Co. sold to Cities Service Power & Light Co.? Answer. $535,700 par value. Question. In what month did the Securities Co. purchase this kind of preferred stock from the Cities Service Power & Light Co.? Answer. In September and November 1927, and December of that year. Question. When did the Cities Service Co. sell the 6 percent preferred to Cities Service Power & Light Co.? Answer. On August 2, 1929. Question. Do you know whether the Cities Service Power & Light Co. counted any profit on the shares of this 6 percent preferred which it sold to the Securities Co. in September, November, and December 1927? Answer. I do not know. Question. Did the Securities Co. count any profit on the shares of this 6 percent preferred which it sold to the Cities Service Power & Light in August 1929? Answer. It did not. The purchases were credited at sales value, 102.2029 percent of par. The average inventory value on August 2 was only 101.775 percent of par. Question. We turn now to the dealings of the Securities Co. in the stock of the Arkansas Natural Gas Corporation. This subject is discussed in section 2, chapter 2, page 44 of Dr. Mitchell's report, exhibit 5334. The Arkansas Natural Gas Corporation is a direct subsidiary of Cities Service Co. Prior to April 1929, did Arkansas Natural Gas Co. have outstanding more than one class of common stock? Answer. No, sir. It had outstanding only one class of common stock prior to that date. Question. Did this stock carry the voting rights in the corporation? Answer. It did. Question. Was a certain portion of it held by the general investing public and not in the hands of the Cities Service Co. or its subholding companies? Answer. Yes, sir; a certain portion of it was so held. Question. Was that portion a minority? Answer. Yes, sir. Question. In this connection, in the spring of 1929, what decision was made by the management? Answer. The management decided to create for Arkansas Natural Gas Corporation another class of common stock which should be in all respects equal to the common stock already issued, except that it should confer on its holders no voting power. Question. How was this new class of common stock to be known? Answer. It was designated as common stock, class A. Question. How much of this new stock was offered on April 16, 1929? Answer. One million shares was offered to the holders of the old common stock for pro rata subscription. Question. Did the Cities Service Securities Co. trade in both the old stock and in the rights? Answer. Yes, sir; it did. Question. Up to April 16, 1929, had it sold more shares of the old common stock than it had purchased? Answer. Yes, sir; 9,591 and a fraction more shares. Question. Thereupon, what disposition did the management make? Answer. The management decided to market another 100,000 shares of Arkansas Natural Gas Corporation, class A, common stock through a syndicate distributing group. Question. What was Henry L. Doherty & Co. to do? Answer. As agent for Cities Service Securities Co., Henry L. Doherty & Co. were to handle the market for the class A stock. Question. Did Doherty & Co., as such agent, enter into an agreement with certain persons? Answer. Yes, sir. It entered into an agreement with Pearsons-Taft Co. for the purpose of getting together a group of investment retailers who should undertake the responsibility for marketing quotas of the 1,000,000 shares and of managing the distributing group. Question. Did the syndicate managers make an offer to their respective clienteles of investment retailers? Answer. Yes, sir; under date of May 29, 1929. Question. What were the more important features of the offer? Answer. On commitment "taken down" and completed, the commissions offered to the distributing group members were $35 per 100 |