I had the privilege of being asked whether that firm and I would act as counsel for the temporary trustee, and I accepted. We went into the affairs of the Continental Securities Corporation I think with very great care, went through its affairs in all its aspects. (Chart submitted by Mr. Cook is as follows:)

Mr. Cook. I think as a matter of fairness I ought to state that we were very much helped in our inquiry by what I regard as the very efficient and vigorous examination undertaken in New York by Mr. Schenker in behalf of the Securities and Exchange Commission.

The temporary trustee and his counsel had a job to do because in October of 1937, just 5 months prior to the appointment of Mr. Ballantine as trustee, we found that the portfolio of the Continental Securities Corporation was worth, at an estimated market value of the securities in the portfolio, $3,300,000. That is it approximately,

although I might be a few thousands of dollars out of the way, but nothing material.

At the time of the appointment of Mr. Ballantine as trustee there was in the portfolio about-well, at the outside, $50,000. If I may be pardoned for using a colloquial expression, Mother Hubbard's cupboard was quite bare.

The problem presenting itself to the trustee and to the firm and myself was this: How was it that in the short space of time of five months $3,300,000 of worthwhile securities were gone, except to the extent of about $50,000.

We tried to find out. That was our duty. And if I may be forgiven for going over the course of our inquiry in my own way, always subject to correction by the Chair, we found out the following: In October of 1937, at a time when the portfolio was, as I have stated $3.300,000, the banking firm that had been the managers of the Continental Securities Corporation, an investment trust which was organized in 1924, and one of the first of the investment trusts that I recall organized in this country; they approached the managers of the trust and offered them, for the majority of the shares of the Continental Securities Corporation, $20 a share.

The corporation at that time had outstanding approximately $2,800,000 of debentures, approximately $1,400,000 of cumulative preferred stock, with dividend accumulations unpaid of $33 a share; and 50,000-odd shares of common stock.

The common stock alone had the vote. The value of the common stock at that time, in October, after you allow for the debentures, the payment of the par of the preferred stock and its accumulated dividends, which was of course prior to the common stock-the common stock from the viewpoint of representation and assets was not only worthless as we saw it but was sunk to the extent of something like $22 a share. In other words, there was a minus of $22 a share for the common stock.

The offer was made of $20 a share for the stock of the kind and description of which I have spoken. Those that made the offer insisted, and it is so set forth in the agreement for the sale of the majority of the shares of the Continental Securities Corporationand the number of shares that were to be sold was 29,000 which represented more than 50 percent of the 57,000 shares outstanding. Senator HUGHES. Do I understand that this offer was for the common stock?

Mr. Cook. Yes, sir.

Senator HUGHES. Which common stock had the voting power in the corporation?

Mr. Cook. Yes, sir. In other words there were about 57,000 shares of common stock, and the offer was for 29,000 shares of that common stock, at $20 a share, aggregating $580,000. I emphasize the figure of $580,000 because it will be of some importance as I go along.

The agreement provided that the managers contemporaneously with the payment to be made by the purchasers, through the management as a condition precedent to the payment, would see to it that the then directors of Continental Securities Corporation would tender their resignations; and, following the method adopted from time to time of rotation in office, they were to see to it, before the payment was made, that those persons selected by the purchasers

to sit as directors in their place and stead, would be put into office. Therefore there was the position for an entirely new-I was going to say deal but I will say new deck of cards, concerning which those that had been in the picture before, would be out. That transaction was carried through. The $580,000 was paid. The management contract ended at that very meeting, when the payment was made, and there were gradually elected to office, upon resignation one by one of the then directors, the nominees of the purchasers.

Now, we gave some thought to the question as to who were the nominees. We felt impressed with the idea that an investment trust, appealing to the public or investors, by reason of the confidence one might have in the management-and I do want to stop to say that the management of the Continental Securities Corporation up to that time was represented by houses of standing and houses that were held in high regard, and in my opinion, if I may be forgiven for going that far, deservedly so.

We found out that the nominees suggested by the purchasers were out of employment, either customers' men in brokerage houses, or clerks. I think one of them is now the manager of well, I suppose he has to make a living, but of a saloon at night.

I might say that a great deal of this was also covered by Mr. Schenker in his examination, and is in the records of the S. E. C. I take it, and may be now with this subcommittee. But if I may be forgiven for expressing my own opinion, and I do not think anybody will question it, those selected were entirely unfit to occupy the positions they occupied. They were entirely irresponsible, and as I see it entirely at the beck and call of the purchasers, and whom before the court in New York and in our pleadings in the case that was brought, were referred to as "looters."

Now, it was interesting to determine how the $580,000 was paid, and where it was obtained. A check for $580,000 was given to a lawyer and I am sorry, Mr. Chairman, to feel that a member of the legal profession was not what he should be--who represented to the banking house in Boston that as against the $580,000 there would be deposited with them ample collateral. In fact they were advised that the collateral to be deposited would have a market value of something like two and a half million dollars.

Senator WAGNER. I did not get that quite clear. Did you say "a check for $580,000"?

Mr. Cook. Yes, a check for $580,000.

Senator WAGNER. Why did that need collateral, if the check was good?

Mr. Cook. The $580,000 check was given by a banking house to the lawyer, and in those days, and I suppose in these, when one advances $580,000 one wants collateral.

Senator WAGNER. I thought it was against the deposit.

Mr. Cook. Oh, no. This transaction was closed on the 25th of October, and this banking house as I understand it and think the record will show, learned of this for the first time 2 or 3 days before the 25th of October.

If I may be personal for a minute, Senator Glass, whom I have the great privilege of knowing, just sits there and looks at me. Well, Senator Glass, I do not blame you. And, Mr. Chairman, we found out in this matter that truth can be stranger than fiction, and what I am stating is the truth of this transaction strange as it may seem.

That $580,000 was taken by the lawyer to Jersey City, where this transaction was closed. Upon payment over of the $580,000, as mentioned before, there was a new board of directors. The old board retired. The 29,000 shares of common stock were paid for, and the destiny of the Continental Securities Corporation therefore was in the hands of the purchasers, whom I have referred to as "looters," and I stand by that statement.

What happened? The entire portfolio was in their hands now. So they sent to the banking house that loaned the $580,000, ostensibly against collateral; they sent the two and a half million dollars of collateral to the banking house, with instructions to sell securities up to $700,000. That was done. In fact, eight-hundred-and-some-oddthousand dollars of securities were sold. The $800,000 of securities segregated from the two and one-half million dollars, were put into an account in the name of the lawyer or his associate. The difference between the two and one-half million dollars and the $800,000, was kept in a separate account, known as Continental Securities #75.

We are interested in the account with the lawyer. The banking house sold about $800,000 of those securities. It paid itself back, and properly, for the $580,000 loaned, and the usual brokerage commisAnd then, pursuant to resolutions and directions from the new contingent, paid over to the lawyer, gave him various checks, in the aggregate amount of $106,000, which $106,000 was divided by the lawyer with various others of his associates; and we find that the 29,000 shares of common stock, for $580,000, were purchased, not with outside money, but with the securities of the Continental Securities Corporation.

Senator WAGNER. In other words, they were taken right out of its portfolio?

Mr. Cook. Perhaps I have felt this situation too strongly, Mr. Chairman, but stolen. There is no question about that. So that at that time, if nothing else had happened, the portfolio had been depleted to the extent of $700,000, with nothing to show for it.

Now, of course something had to be done so far as the books of the Continental Securities Corporation were concerned, to show that this $700,000 was not stolen; that there should be some asset of some kind as against it.

Well, that was not found very difficult because those whom I have referred to as the "looters" and in our complaint filed with the Federal court were referred to as "conspirators", had organized in Canada a company known as the Fiscal Management Co., Ltd. It had really no assets. The new board of directors, however, agreed that they would buy $700,000 of the preferred stock of the Fiscal Management Co., Ltd., and then, for the 29,000 shares of common stock, paid for out of the portfolio of Continental Securities Corporation, there comes into Continental Securities Corporation $700,000 of shares of Fiscal Management Co. preferred stock, which was worthless; and the Fiscal Management Co. gets these 29,000 shares of Continental Securities. Corporation, which as I have said before were likewise worthless. The books of Continental Securities Corporation show that the stealing of this, what I have referred to as collateral, in part of the portfolio, is offset by this bookkeeping figure of $700,000 of preferred stock of Fiscal Management Co., Ltd.

221147-40-pt. 1

Now, Senator Glass, you look at me askance. I can understand why you are looking at me in amazement, but it happened. Please remember also that in connection with the $700,000 I referred to, the "conspirators" or "looters" divided amongst themselves $116,000 for commissions and what not. I suppose as I saw it, and I hope not unfairly, it was a reward for theft. I cannot figure it out in any other way.

Well, now, the Continental Securities Corporation, in the hands of the people that got it, had more things to do, because they not only depleted the portfolio to the extent of $700,000 but did other things. So someone among them conceived the idea, in their quest for the acquisition of investment trusts, that there was another corporation, known as Administered Fund, 2d, which had a portfolio of about $4,000,000. The securities were deposited with a trust company in Jersey City, I think the Commercial Trust Co. but I am trying not to mention names as I do not think there is anything to be gained by that in this inquiry, unless you direct me to do so, and I hope you will not, and of course the Commercial Trust Co. did its duty-but a lawyer and a member of the stock exchange had organized Administered Fund, 2d, and contemporaneous with its organization had also organized a company known as Capital Administration-no, I mean Corporate Administration. That is a correction, and I hope it will be the only correction. Well, Corporate Administration agreed, being the same people, for 6 percent of the value of the portfolio to pay all expenses involved in the sale of Administered Fund, 2d shares, and that they would also provide investment counsel. I think they put some money into Corporate Administration, but the venture was not a success. Corporate Administration was losing money, was worthless from my viewpoint, and I think from anybody else's.

But in the portfolio of Administered Fund, 2d, there were $4,000,000 of securities, held by 330,000 investors who invested, naturally, in small amounts.

At a time when the ownership of Corporate Administration was entirely at a loss, and at a time when all the securities were with the trust company, the representatives of those whom I referred to as "looters" or "conspirators"-and one may take one's choice as to namewent to the lawyer and a member of the exchange, and offered them $250,000 for the ownership of Corporate Administration, which from the viewpoint of dollars and cents was losing money. They must have that at that time if they are to have control of Corporate Administration, and having the management of the affairs of Administered Fund, 2d, they could then freely play with the portfolio, as they had played with the portfolio of Continental Securities Corporation up to the extent as I have stated.

Well, they obtained ownership of the shares. An agreement was drafted whereby the directors of Administered Fund, 2d, should get out and they should come in. But someone was wise enough probably to speak out, that sale of control is one thing and sale of directorships another. At any rate, when the $250,000 was paid over, the majority of the directors of Administered Fund, 2d, resigned and new men went in. A week or two later the lawyer also resigned, and now you find the "looters" and "conspirators" in control of Administered Fund, 2d.

Evidently they were impressed with the idea, for some reason or other, that this being an open-end trust, and the securities being with