shares for quotas under 7,000 shares, $40 per 100 shares for quotas of 7,000 to 14,999 shares, $45 per 100 shares for quotas of 15,000 shares or more. From those commissions the syndicate managers might deduct expenses not to exceed 21⁄2 cents per share. Certain adjustments of the commissions were also provided for on the basis of the size of order in which the distributing group members effected sales of the stock. For a sale to one purchaser of not more than 500 shares, an additional commission of $5 per 100 shares was to be made, provided that the member sold his entire quota to bona fide purchasers who retained the stock during a certain period, and, in any event, until the close of the operations of the syndicate. A deduction of $5 per 100 shares was to be made for sales to one purchaser exceeding 2,500 shares and no sale to one purchaser of 5,000 shares or more was to be made except by special permission of the syndicate managers. Out of these commissions the syndicate members were permitted to make concessions up to $10 per 100 shares to banks and financial institutions.

Question. Were there some conditions hedging about the payment of the described commissions?

Answer. Yes, sir. Those commissions were payable only on shares transferred by the distributing group member into the names of bona fide purchasers during the period in which the distributing group remained in force and provided that such shares should be held in the names of such purchasers during a minimum period of 60 days from the date of such transfer and in no event less than the period during which the distributing group remained in force.

Question. Was there a provision that the shares sold were not to be sold in exchange for either securities of Cities Service Co. or subsidiaries, either directly or indirectly?

Answer. Yes, sir. There was such a provision.

Question. At what price were the members of the distributing group authorized to sell stock?

Answer. They were authorized to sell stock on any given date at the closing prices for that stock on the New York Curb Exchange on the day preceding the sale.

Question. What provisions were made to apprise the members of the distributing group of these prices?

Answer. At the close of each day's operations the syndicate managers, which practically meant Henry L. Doherty & Co. as agent for the Securities Co., were to telegraph the closing prices of the stock to each member of the distributing group.

Question. By what time was the portion of the stock allotted to any distributing group members to be taken down?

Answer. That portion of the stock allotted to any distributing group member at the initial group prices was to be taken down not later than June 19, 1929. The remainder of the members' allotment and any additional stock confirmed during the life of the distributing group was to be taken down by the member not later than 10 days from the date of acceptance by the syndicate managers of orders for such stock.

Question. Was there a subcontract between the syndicate managers?

Answer. Yes, sir.

Question. What were the more important provisions of it?

Answer. In the division of territory, Pearsons-Taft Co. was to seek participants on the entire Pacific coast and as far east as and including the State of Utah. Elsewhere in the United States the syndicate managers were to mutually agree on the division of the investment retailers who were to be invited to participate.

Question. What commitments did Pearsons-Taft Co. undertake to obtain?

Answer. Not less than 300,000 shares of the stock on or before March 29, 1929.

Question. For what period was the distributing arrangement to continue?

Answer. The arrangement was to be extended 60 days after the expiration of the original 60 days unless terminated by mutual consent of the managers.

Question. Who was to have the sole handling of the market during the life of the syndicate?

Answer. Henry L. Doherty & Co.

Question. Was there some provision by which the syndicate participants might be relieved of their commitment on any unsold stocks? Answer. Yes, sir. They might be so relieved if the market price should reach a price, during the life of the syndicate, of more than 2 points above or more than 2 points below the market price prevailing upon the day upon which the initial public offering was made.

Question. Was Pearsons-Taft Co. to be allowed the regular dealers' commission on shares sold by that company?

Answer. Yes, sir.

Question. What additional commission was that company to receive?

Answer. It was to receive in addition a commission of $35 per 100 shares distributed either by that company or by syndicate participants obtained by that company. The extra commission was to be allowed only on shares sold and transferred to bona fide participants during the life of the syndicate.

Question. Was there a confidential agreement between the syndicate managers?

Answer. Yes, sir; an agreement that in addition to the commissions allowed the syndicate participants, as described previously, an extra commission of $5 per 100 shares was to be paid to syndicate participants who committed for 25,000 shares or more and actually sold their quotas to bona fide investors.

Question. Was there still another confidential understanding between the syndicate managers?

Answer. Yes, sir; an understanding with reference to commissions for stock that was sold out or that was retransferred by purchasers during the life of the syndicate. This understanding was to the effect that the commissions to Pearsons-Taft Co. and to the participants were to be paid in full, nevertheless, provided that the price in the sell-out or retransfer was more than $2 above or $2 below the price at which any of such shares was sold at retail by such participants to such purchaser. This understanding was to apply only to such portion of the 1,000,000 shares as the Pearsons-Taft group undertook responsibility for.

Question. What agreement was made as to the cost of advertising?

Answer. Pearsons-Taft Co. was to bear the cost of advertising on the Pacific coast and as far east as and including the State of Utah. The cost of advertising in the remainder of the United States was to be divided between the syndicate managers on a basis mutually agreed to.

Question. Have you summarized in this report the transactions of Cities Service Securities Co. in Arkansas Natural Gas Corporation common stock, class A?

Answer Yes, sir. That summary appears as table 4 on page 51 of the report.

Question. Does this report summarize the purchases and does it show the total purchases of Arkansas Natural Gas Corporation, class A, by the Securities Co.?

Answer. Yes, sir.

Question. For what period?

Answer. For the period from May 1929 to December 1930. Question. Does the table likewise classify the sales of this stock? Answer. Yes, sir.

Question. How were the purchases classified?

Answer. They are classified as purchases accounts, rights exercised, market purchases, purchases syndicate account, purchases from Arkansas Natural Gas Corporation, and other purchases trading

account.

Question. Did the Securities Co. trade in the rights that were offered to the common-stock holders to subscribe to the original 1,000,000 shares of class A common of the Arkansas Co.?

Answer. Yes, sir.

Question. After providing rights to cover its short position as of April 16, 1929, in voting common stock, did the Securities Co. have on hand the right to subscribe for class A common of the Arkansas Co.?

Answer. Yes, sir; the right to subscribe for 70,794 shares.
Question. Did it exercise those rights?

Answer. Yes, sir.

Question. What was the cost of the stock obtained in this manner? Answer. It was the cost of the rights, plus the amount of money paid to the issuing company. That is shown in text table 4 as about $355,240.

Question. I am looking at the table, Dr. Mitchell, which is text table 4 at page 50. I am going to ask you to help me learn from this table the total purchases by the Securities Co. of this common stock, class A, of the Arkansas Natural Gas Corporation.

First of all, what is the total number of shares which are shown as purchased by the Securities Co.?

Answer. The total number of shares purchased by the Securities Co. from all sources was 5,233,563 shares.

Question. What was the total cost of these purchases to the Securities Co.?

Answer. The total cost before making a certain $4,000,000 additional allowance to the Arkansas Natural Gas Corporation was $57,390,219.98. After making that allowance it was $61,390,219.98. Question. Over what period of time were these shares purchased and this cost of more than $61,000,000 incurred?

Answer. Over a period extending from May 1929, to December 31, 1930.

Question. Now, during the same period, what was the total number of shares of this class A common of the Arkansas Co. sold by the Securities Co.?

Answer. The total number sold, including redeliveries to syndicate and special offering participants, was 5,559,235 shares.

Question. These shares were sold for total proceeds of how much? Answer. $75,029,127.

Question. How did the total number of shares purchased compare with the total number of shares sold?

Answer. The total number of shares sold exceeded the total number of shares purchased by approximately 326,000 shares.

Question. How did the total cost of all purchases compare with the total proceeds from all sales?

Answer. The total cost of all purchases prior to the allowance of an additional $4,000,000 to the issuing company fell short of the contractual proceeds of all sales to the extent of about $17,639,000. The cost figure used there includes the amounts that were allowed to Arkansas Natural Gas Corporation at the time of receiving the shares from that company, and, therefore, includes the part of the proceeds to the Arkansas Natural Gas Corporation.

Question. What was the net result of the whole operation to the Arkansas Natural Gas Corporation?

Answer. The net result was proceeds of $21,448,373.69 for 2,500,000 shares issued.

Question. Which was at the rate of how much per share?

Answer. About $8.50 per share.

Examiner BENNETT. This proceeding will adjourn until 10 a.m. of next Tuesday at this place.

(Whereupon at 3 p.m. the further hearing of the above matter was continued until Tuesday, May 2, 1933, at 10 a.m.)

HEARING ROOM, FEDERAL TRADE COMMISSION,

Washington, D.C., Tuesday, May 2, 1933.

Met, pursuant to adjournment, at 10 a.m. Before John W. Bennett, examiner. Appearances: Hon. Robert E. Healy, chief counsel; Dr. Francis Walker, chief economist; Col. William T. Chantland, associate counsel; Col. William H. England, assistant chief economist; J. Butler Walsh, associate counsel; and C. F. Rhodes, associate counsel, on behalf of the Commission. Messrs. Bernard F. Weadock, Lewis J. Weadock, Robert Burns (67 Wall Street, New York), W. B. S. Winans (60 Wall Street, New York), and Earl G. Christian (60 Wall Street, New York), on behalf of Cities Service Corporation. Charles B. Moore (Taylor & Moore), 729 Fifteenth Street NW., Washington, D.C., appearing on behalf of certain New York stockholders of Cities Service Co.

Examiner BENNETT. You may proceed.

Mr. HEALY. Friday afternoon, when I was forced to ask for an adjournment, we were discussing the marketing of class A common stock of Arkansas Natural Gas Corporation, a direct subsidiary of the Cities Service Co. We were discussing the activities of the Cities Service Securities Co. in connection with that marketing process and

in buying and selling of that class A stock. It had also appeared that the Securities Co. traded in voting common stock of Arkansas Natural Gas Corporation which were in existence both before and after the class A common was created in April 1929.

It appears by the report and by what Dr. Mitchell has already said that a distribution group was formed to market shares of Arkansas Natural Gas Corporation, and before we get through it will appear that 2,500,000 shares of the class A common stock of the Arkansas Natural Gas Co. were marketed. It will also appear there were various operations on the market and elsewhere in connection with this stock and the common stock. It has also appeared that on April 16, 1929, the Cities Service Securities Co. was short of the old common stocktechnically short. That is, to April 16, 1929, it had sold 9,591.24 shares of the old common stock more than it had purchased. In connection with the marketing of the class A common stock to a syndicate distributing group Henry L. Doherty & Co., as agents for Cities Securities Co., was to handle the market for the class A stock. THOMAS W. MITCHELL resumed the stand as a witness and, having been previously sworn, was examined and testified further as follows:

Direct examination (continued) by Mr. HEALY:

Question. Did Henry L. Doherty, as agent for Cities Service Securities Co., do the bookkeeping that was necessary in connection with the management of the distributing group?

Answer. Yes, sir.

Question. As a result of that, what entries were made on the Securities Co.'s books?

Answer. All shares that were to be marketed through the distributing group were set up on the books of the Securities Co. is purchased for syndicate account, and as the syndicate participants effected sales from day to day and communicated the information to Henry L. Doherty & Co. and as Henry L. Doherty confirmed the sales to the syndicate participants, the sales so effected and confirmed were recorded on the books of the Securities Co. as syndicate sales.

Question. What original-issue shares of Arkansas Natural Gas Corporation were recorded on the books of the Securities Co. as having been marketed through these operations?

Answer. Two million five hundred thousand shares altogether. Question. Did the Securities Co. receive the first 1,000,000 shares provided for in the agreement between the syndicate managers until June 1929?

Answer. No, sir. It did not receive the first million shares until June 27, 1929.

Question. Prior to that had the Securities Co. made some purchases in the open market in this connection?

Answer. Yes, sir. It had made some open-market purchases and also some trading sales and sales through the syndicate participants. Question. When did those purchases and sales just referred to commence?

Answer. They commenced in May, more than a month before the million shares were received for the syndicate account.

Question. Prior to May 1929-that is, in April 1929-had the Securities Co. been trading in the old common shares of the Arkansas Natural Gas Co.?

Answer. Yes, sir.

102777-34-pt. 53-13