June 1930.

July 1930

[99] A few words of explanation of the form of text table no. 10 are advisable. Each debenture 5 of 1963 carried a nondetachable option warrant that conferred upon the holder certain privileges of subscribing for Cities Service common stock at certain prices specified in the warrant. These privileges are outlined in detail later in that part of the discussion that deals with the effects of the warrant options as the market price of Cities Service common stock rose to such points as to make worth while the exercise of the options. Up until such time as the holder of a debenture exercised his option, the market price of his debenture contained whatever market price attached to the warrant privilege; the exercise of the option privilege that was carried by any debenture subtracted the value of the privilege from the previous value of the debenture. So that there came to be a considerable differential between the prices of these debentures with warrants attached and of these debentures ex-warrants. Inasmuch as the Securities Co. dealt both in debentures with warrants attached and debentures ex-warrants (even purchasing debentures with warrants attached and exercising the warrant privilege, thus converting them into the debenture ex-warrants) it was necessary to summarize separately its transactions in the debentures with warrants attached and its transactions in the debentures ex-warrants. This fact made necessary the presentation of the data on two sheets; and the examiner elected to devote one sheet exclusively to purchases and balances and the other sheet to sales and the profit or loss thereon. Sheet 1 is devoted to purchases, and it shows the purchases of debentures with warrants attached in the left half and the purchases of debentures ex-warrants in the right half.

[100] The purchases shown are classified with reference to source or purpose. The market purchases represent for the most part purchases on the organized exchange. A separate column shows certain purchases from syndicate managers. The syndicate purchases represent both the source and the purpose; that is, the $1,600,000 face amount of debentures shown in that column were purchased from a member of the syndicate and also were purchased to represent the Securities Co.'s participation as a member of the distributing group in the marketing of the debentures.

The sales, shown on sheet 2, are classified with reference either to the purpose of the sales or to the channel or channels through which the sales were effected. The syndicate sales represented, not sales through syndicate members, but sales by the Securities Co. as a syndicate participant. It is inferred that the channels through which the Securities Co. effected those sales were those that in other connections are classified as regular and trading. It will be observed that no sales were recorded under those two classifications until after the syndicate sales had been completed.

It was stated above that Cities Service Co. sold the entire block of these debentures to the syndicate at 92% and that the syndicate offered them to the investing public at 971⁄2. It will be observed that the $1,560,000 paid by the Securities Co. for the $1,600,000 face amount of these debentures purchased by it for syndicate account on November 1, 1928, represented a price of 97%; that is, the Securities Co. obtained these debentures from the syndicate managers at the public-offering price, which was 5 points above the price to the syndicate managers themselves. However, the company's representatives stated that the Securities Co. received $32,000 as its distributive share of the commissions payable to the syndicate [100a] distributive group; also that Henry L. Doherty & Co. participated for account of the Securities Co. in the banking and purchasing group and paid its share of the profits, $40,000, to the Securities Co. The latter's "Syndicate earnings and expenses" account records the $32,000, and records $16,000 and $24,000; it also shows a balance after deducting expenses, of $64,378.84, which was credited to profit and loss.

[101] It will also be observed that the Securities Co. sold $1,695,200 face amount of these debentures for $1,652,820 during October 1928, i.e., before the public offering date. In other words, the Securities Co. sold prior to the public offering date at 972, or cost, an amount of these debentures that was in excess of the amount that it took from the syndicate managers as a participant in the distributing group.

The syndicate was terminated as of the close of business on December 3, 1928. Up to that time, the Securities Co. had sold a total of $1,763,000 face amount of these debentures for $1,719,245, or at an average of 97.51815 percent of face. The Securities Co. naturally counted neither profit nor loss on the resale of the $1,600,000 face amount of debentures that it had obtained from the syndicate managers. On the remaining $163,000 of its sales, it counted a loss of $3,932.49. But see the second preceding paragraph.