Answer. Counting 24 working days per month, about $34,600,000. Question. All right. In that connection there I think it would be fair to comply with the request which the company representatives have just made to me, which is that you show how many shares of Cities Service common stock were sold by the Cities Service Securities Co. during the same period and what the avails thereof were to the Cities Service Co.? Examiner BENNETT: We will take a recess. (At this point a short recess was taken after which proceedings were resumed as follows:) Mr. HEALY. I will ask the reporter to read the question that I framed just before recess. (The last question as recorded was read by the reporter.) The WITNESS. I have not yet obtained the figures with which to given an accurate answer, so I will ask that that matter be deferred until after the luncheon recess. By Mr. HEALY: Question. All right. During this same period in which this sum you mentioned was spent in purchases on the curb exchange, or largely on the curb, what was the course of the market price of Cities Service common stock? Answer. The market price rose from an equivalent of $17.69 per no par share to $61.75 per no par share. Question. What was the ultimate purpose of the whole process? Answer. That of obtaining new funds for Cities Service Co. Question. Now, during this period from November 1, 1928, to October 5, 1929, during which this sum of more than $389,000,000 was spent in market purchases, what amount of new capital for Cities Service Co. was raised through the sales of this stock? Answer. $86,800,000 in round numbers. Question. During this same period was stock being sold on the installment plan? Answer. Yes, sir. Question. Was it being sold under contract pursuant to which, even though the stock were fully paid for, the stock could not be resold for a period of 10 months? Answer. Yes, sir. Question. And during the same period was stock being sold through dealers? Answer. Yes, sir. Question. Was there any arrangement or provision in the contract with the dealers on the subject of the resale of the stock? Answer. Yes, sir; a provision to this effect, that if any investor to whom a dealer sold stock transferred that stock out of his name within a certain specified period the dealer failed to earn his commission and was obligated to return the initial $1 of commission that was allowed him in the shipment price. Question. Do you recall what the period of time was to which you refer? Answer. During part of the time it was a period of 4 months. Question. What was the effect of these provisions in connection with installment sales and in connection with the payment of commissions to dealers? Answer. The effect in the case of the dealers was no doubt to cause the dealer to bring pressure to bear upon his customer to retain his shares for at least the specified time; therefore the effect through both arrangements tended to keep such shares out of the visible. market for a period of time. Question. During this period from November 1, 1928, to October 5, 1929, which we have been dealing with, was there some arrangement in effect between the Cities Service Securities Co. and any of these dealers or members of syndicates which fixed the price at which they should sell at the closing price on the New York Curb of the preceding day? Answer. Yes, sir. Arrangements usually provided that the price at which Henry L. Doherty & Co. or the syndicate managers would confirm stock to the purchasing dealer was at the closing price on the New York Curb Exchange the preceding day, plus one eighth of a point, less the first dollar of the dealer's commission. Question. Is it true, then, that the prices at which the sales of the common stock of Cities Service Co. were made throughout the country by these dealers and by these salesmen was based upon the closing price the preceding day on the New York Curb? Answer. Yes, sir. Question. Is it true at the same time shares of stock were being kept off the curb through the 10-month installment arrangement and the 4-month arrangement in connection with the dealer's commission to which you referred? Answer. Yes, sir. Question. Was it true during the same period Cities Service Securities Co. spent this $389,000,000 and something over in purchasing these common shares on the New York Curb? Answer. Spent that amount in purchases of the common stock over the counter and on the curb exchange and a large proportion of the purchases were on the curb exchange. Question. Did these purchases on the curb exchange by the Cities Service Securities Co. or for it help to make the curb prices? Answer. Undoubtedly. Question. What, in your opinion, was the effect of all of these elements to which I have made reference and concerning which you have testified on the curb price? Answer. It is my opinion that these factors operated or assisted in the matter of raising the price of Cities Service common stock from the price at the beginning of that period up to the much higher price that it attained at the end of the period. Question. As you have said, the price at which the stock was sold to various individuals throughout the country under these contracts. was based upon the closing prices of the preceding day on the New York Curb. Answer. Yes, sir. Question. Where, as I understand your testimony, Cities ServiceCo. was making extensive purchases? Answer. Yes, sir. Question. Now, in this connection, it seems fair to call attention to the explanation or the claim that the company's representatives urged in this connection. They have been stated to you, Dr. Mitchell, and you have seen fit to include them in your report, so I think it is proper for you to state them here. Answer. The company's representatives urged that the advance in market price of this stock during 1927 and the greater part of 1928 lagged noticeably behind the upward trend of the general market for stock. They also point out that on December 4, 1928, one of Cities Service Co's. subsidiaries brought in the discovery well in the now famous Oklahoma City oil pool and they claim that this discovery attracted public interest and focused attention of investors and speculators upon Cities Service Co. common stock; that this interest was increasingly stimulated as other wells in this pool came in later; and they point out that it was during this period from November. 1928 to October 1929-particularly from July to October 1929that the market price of Cities Service Co. common stock had its spectacular rise. They point out that during this period the management was engaged in raising a large amount of new capital with which to develop its holdings in this oil field. Question. In connection with this presentation of their claims, what comment do you make in your report? Answer. That it is a fact that during this period in which large additional amounts of new capital were sought and slightly less than $86,800,000 capital was raised through sales of this stock, the management spent nearly $389,250,000 in the purchase of the equivalent of nearly 12,072,000 nonpar shares of Cities Service Co. common stock over the counter and on the curb exchange. And I think it is pertinent to think about the probable effects of spending so large a sum in the purchase of this stock upon the couse of its market price, the rapidity with which that price rose, the extent to which speculative purchases of Cities Service Co. common stock were stimulated, the extent of the contribution of these expenditures for Cities Service common stock to the general speculative trend in stocks in the first three quarters of 1929 and to the condition that culminated in the stock markt crash in October 1929. Question. You have pointed out that the Securities Co. is wholly owned by the Cities Service Co.? Answer. Yes, sir. Question. Did these activities, therefore, of the Securities Co. in he stock of Cities Service Co. virtually amount to Cities Service Co. trading in its own stock? Answer. Yes, sir. Question. What is the attitude of the governing board of the New York Stock Exchange towards this practice? Answer. The attitude of the governing board of the New York Stock Exchange is unfavorable to that practice. Question. Is Cities common stock dealt in on the New York Stock Exchange? Answer. No, sir. It is dealt in on the New York Curb Exchange. Question. Is it listed on the curb? Answer. I believe not. Question. Can you tell me for how many years, approximately, it has been dealt in on the curb exchange? Answer. It has been dealt in on the curb exchange ever since the beginning of the period reviewed by this examination, which commenced on April 1, 1927. I do not know for how many years it was dealt in on the exchange before that. Information from the company's representatives, I believe, put the year 1916 as the year in which they commenced dealing on the curb. Question. May we understand that during this whole period this stock, which very evidently was so extensively dealt in on the curb, was not listed on the curb at all? Answer. You may so understand. Question. Now, we turn for a few minutes to a description of the working organization of the Cities Service Securities Co. I may say that before we get through we intend to describe these dealings on the curb exchange in more detail than has been given here. Dr. Mitchell has just pointed to one situation as sort of a sample or to illustrate the point he was trying to make. Has the Cities Service Securities Co. a working organization? Answer. No, sir. It has no paid staff working in its own name. Question. Has it a board of directors? Answer. Yes, sir. Question. Elected how? Answer. Elected by the proxy for the sole stockholder, the Cities Service Co. It has those officers that are required by law, who are elected by the board of directors. Question. Are these officers paid employees of the Cities Service Securities Co. or not? Answer. They are not. Question. Who are they? Answer. They are members of the staff of Henry L. Doherty & Co. Question. Selected by whom? Answer. Selected by the management of the Cities Service Co., which is Doherty management. Question. Who controls Henry L. Doherty & Co.? Answer. Henry L. Doherty is said to be the sole proprietor of Henry L. Doherty & Co. Question. Said by whom? Answer. Said to be by members of the staff of Henry L. Doherty & Co. Question. From whom do these employees and officers of Cities Service Securities Co. get their pay? Answer. From Henry L. Doherty & Co. Question. Who make all of the executive decisions? Answer. The officers and directors who are members of the staff of Henry L. Doherty & Co. Question. Are they employees of Henry L. Doherty & Co.? Answer. Yes, sir. Question. Who makes the sales of securities? Answer. Members of the staff of Henry L. Doherty & Co. Question. And the purchases of securities? Answer. Members of the staff of Henry L. Doherty & Co. Question. How is it as to collecting, clerical, and accounting functions? Answer. They are all performed by members of the staff of Henry L. Doherty & Co. Question. What reasonshave been assigned by representatives of the company for this arrangement? Answer. That from the viewpoint of selling securities in various parts of the country, it was convenient to have the salesmen be employees of an unincorporated firm so that it would not be necessary for the organization to qualify under the foreign corporation laws of the various States in which they operated. Question. Let us understand that. If these securities salesmen were employees of Henry L. Doherty it would not be necessary that Cities Service Securities Co. qualify under the foreign corporation laws of the States in which the securities salesmen were working; is that it? Answer. That is it. Question. Henry L. Doherty & Co., as you pointed out, is an unincorporated firm? Answer. Yes, sir. Question. What claim was made for this arrangement, so far as it related to the accounting and clerical forces? Answer. That it promoted economy, inasmuch as that although the staff was pretty well functionalized so that most of the force that worked on the business of Cities Service Securities Co. devotes all of its time to that work and most of those who were working on the work of the Cities Service Co. devoted all of their time to that, there were some who could not be kept fully busy upon the work of any one company and this arrangement gave a flexibility. Certain portions of the staff would be transferred from the work of one company to the work of another company, thereby keeping them busy. Question. Who transacts the business of Cities Service Co. and of its chief holding subsidiaries, the Cities Service Power & Light Co. and Empire Gas & Fuel Co? Answer. Henry L. Doherty Co., fiscal agent. Question. In places in this report you have used the expression "Doherty management." What is that intended to mean? Answer. It is used in the sense of management by Henry L. Doherty & Co. The purpose of its use, other than mere convenience is as a constant reminder that the management of the entire Cities Service group of companies is conducted by Henry L. Doherty Co., and to visualize this central executive staff, not controlled by Cities Service Co. or any of its subsidiaries, as the dominating influence in determining the policies, the decisions, the acts, and the procedures of the companies in this group, incidentally of the Securities Co. Question. When you say in this report that the Doherty management did a designated thing, what do you mean? Answer. It is to be understood that the Doherty management did it as manager of the Securities Co. Question. What is the main purpose of this report of yours, exhibit 5334? Answer. The main purpose of this report is to convey an adequate understanding and appreciation of what is meant by the main function of Cities Service Securities Co.; that is, an adequate understanding and appreciation of what is meant by the expression "facilitating the marketing of securities," "providing a ready resale market for securities", and "supervising the market.' 102777-34-pt. 53-3 |