was probably a fair enough price, but the persons who got in control of this company adopted this policy of paying for the control shares in installments and they sold to the investment trust such securities as were necessary to get the money to make the investment trust in effect finance its own purchases at its own expense, and in a year's time the securities of that investment trust had declined from $4,000,000 to about $300,000 in value.

Senator WAGNER. Where did that money go?

Mr. FULTON. The money went in this way: the securities of the investment trust were sold for securities which were not worth as much as the securities which were sold. Of that sum $2,000,000 went to pay for the investment trust

Senator WAGNER. Were there any personal profits made?
Mr. FULTON. To the stockholders?

Senator WAGNER. No.

Mr. FULTON. To the management?

Senator WAGNER. To the management, yes.

Mr. FULTON. After all, if they paid $2,000,000 for the management and then the investment trust paid that for them in effect by overpaying them in transactions in which they were interested, you could term if you wished to do so, the $2,000,000 as a profit to the manage

ment.

Now, had they been honest and kept the same securities in that portfolio, they would have gone, through the rise in the market that occurred in 1933, from $4,000,000 to about $7,000,000, so you see the result of that management was the depletion of assets by something over $6,000,000.

Senator FRAZIER. In these cases you mentioned did the original investors lose all the money they put in there?

Mr. FULTON. You can see that the people who had originally invested now had investments in a company that had only $300,000 of assets.

Senator WAGNER. Out of $15,000,000?

Mr. FULTON. Out of $15,000,000 originally. Of course, suits were instituted and they were waged over a period of years and they resulted in a net recovery in 1937 of about $300,000 after all expenses and all difficulties had been incurred.

Now, at that time that $300,000 was invested by Insuranshares in the stock of another investment trust, New England Fund, which is what we term an open-end trust. It is one of those trusts that values its securities periodically and will give any stockholder his proportionate share of his investment if he cares to turn in his securities.

In addition to that block of New England Fund, Insuranshares had about $200,000 of good, salable stock exchange securities, and in addition to that it had a third set of securities that you might term cats and dogs. They had value. Some of them had substantial value and some of them had practically no value and they were not readily salable.

The sum total of these assets by that time was, according to the management's own methods of computation, as set forth in their own contract of sale, about $815,000, and the book value, if you had liquidated the company as of that date and accepted the management's estimate of value for each share of stock, was about $2.80 to $2.90 a share.

The control of that company was held by a loosely affiliated group of individuals and bankers who held probably 30 percent of the stock, but 30 percent in many instances is working control, because proxies are sent out and not all stockholders come in, anyway.

They agreed to sell that 30 percent for a price of about from $3.60 to $3.70 a share, and in the contract by which they agreed to do that they specifically covenanted that the value of the securities would be around $2.80 a share, thereby recognizing a differential for the control value of almost a dollar a share.

Now, the company was in such shape that its investment adviser and counselor testified in the Federal Court that he had advised the directors that the only thing to do was to liquidate the company and to hand back to the stockholders whatever share of the assets were left for them. Instead of doing that, they sold this control and the provision in the contract was that they had to deliver the resignations of the directors, and they did just as Mr. Cook indicated before. The old directors, upon the payment of the purchase price for this control block of stock, and one by one as they resigned, elected the nominees of the purchasers.

Now, these purchasers were lawyers who had been convicted and are now serving time in the Lewisburg Penitentiary. They are lawyers who had no substantial assets, and their method of buying this control was this: They organized a Canadian company which they called Northern Fiscal Co., Ltd. They had previously participated for commissions in the looting of the other trusts, but this was a venture of their own, and they gave to that company some penny gold stock that they had paid about $1,800 for, but which, of course, amounted to many thousands of shares and looked well. They gave also a thousand dollars in cash for organization and legal fees in return for the entire common stock-that is, the entire stock which had the right to vote.

They thus had invested in that corporation less than $3,000, and what they did was to have that corporation sell to an agentI would term him a stooge of theirs-$500,000 of its preferred stock, and then he in turn entered into a contract with the new directors of the Insuranshares Co. to sell Insuranshares that $500,000 par value block of preferred stock for $500,000 in cash.

Now, that meant that Insuranshares had given up five-eighths of all of its assets, and substantially all of its readily salable assets, for preferred stock of a company which had total assets of only $3,000.

That could not be permitted, so in order to give the Northern Fiscal Co. the appearance of having assets, they had the Northern Fiscal Co. receive this common stock of Insuranshares-precisely the same type of thing that Mr. Cook has described-and then have it receive the sum of about $350,000 in cash. This meant that the net result of that transaction on that day was that Insuranshares had sustained an initial loss, any way you want to figure it, of at least $115,000, and had bought its control stock for the benefit of these lawyers when I say it had sustained a loss of $115,000, that is on the assumption that whatever assets were put in the Northern Fiscal were at least available to sustain some value for its preferred stock. But that is a pretty broad assumption, because the preferred stock had no voting power except in certain events which did not and were not expected to take place, and consequently all of the assets of Insuranshares were

in the hands of persons who had indicated their good faith by stealing $115,000 at the outset.

Now, the arrangement for that seems almost fantastic. This New England Fund stock held by Insuranshares was practically cash, but it had to be taken to Boston and delivered to the officers of the New England Fund before it could be cashed. The banking firm that was advancing $310,000 to these lawyers, who did not have more than a few thousands of dollars of their own, wanted to receive that $310,000, or most of it, back the very day that it advanced it. For that reason there was a special arrangement that one of the Boston lawyers should go to the Insuranshares office, start this transaction on its way, and then immediately take an airplane from Newark to Boston and carry with him this New England Fund stock, and in Boston arrangements were made that the New England depository would keep open a little later than usual so that this block of its securities could be cashed at once. The result was that on the very day of the conspiracy the persons who had advanced the money were in substance repaid, plus a commission for their actions, and the conspirators were in charge of the company.

Now, as to directors, it can be said that at least these new directors who came in were individuals, were men, who might at least have the semblance of honesty, but everyone knows that you can get a director who has no scruples of any kind. I might mention that the cost of the five directors was $100 apiece. They did it for that. I do not believe they knew what they were doing. Their occupations were such that you would not think they were financial men.

That left this group of conspirators in control of Insuranshares. They thought it would not look right for the balance sheet to show that it had a $500,000 investment in a newly organized Canadian company that no one had ever heard of. They thought it would look much better if they could show that they had control not only of Insuranshares, but that it had bought some other trust, so they entered into negotiations to buy another trust. They were not interested in the slightest whether the assets of that investment trust were worth the price that they would have to pay for its stock, because it was not their money that was going to the purchasers.

The second investment trust was Bond and Share Trading Corporation and they concluded that they would buy the control of that company for the sum of about $153,000, and they did not even want to go to the trouble of arranging to get a temporary loan from a bank that had money enough to pay $150,000, so they had what we term a razzle-dazzle check.

They had Northern Fiscal issue a check on its bank for $131,000. Of course, the check could not have been certified and, of course, it could not have been cashed. There was no such sum of money in the account. They had Northern Fiscal also deliver whatever cash it had, and it had about $20,000. This cash with the worthless check made a total of $153,000. Northern Fiscal loaned the cash and the check to Insuranshares and Insuranshares by contract agreed to buy the stock of Bond and Share, and what they did was to deliver to the sellers of the controlling stock the twenty-odd thousand_in cash and the $131,000 worthless check, which, of course, gave Insuranshares the controlling stock and control of the board of directors.

Now, the sellers were not interested in whether that check was worthless or not. They contend that they thought it was valuable, and we probably should give them the benefit of the doubt and assume that they thought it was valuable. But they had already made an arrangement that they would buy from Bond and Share Trading Corporation substantially the most valuable securities of the investment trust and would pay for them with that worthless check, and that was done.

That left Bond & Share with the worthless check, and that looked a little bit bad, so they had Bond & Share buy from Insuranshares $175,000 par value of this worthless preferred stock of Northern Fiscal which had been given to Insuranshares in place of and instead of its valuable assets.

Well, theoretically the $131,000 worthless check was too small, by some forty-odd-thousand dollars, to pay for that $175,000 block of Northern Fiscal stock, so Bond & Share not only gave Insuranshares the worthless check but it also gave Insuranshares the fortyodd-thousand dollars, which it obtained from selling such portion of its portfolio as was readily salable.

That left Insuranshares in possession of the worthless check, which it had borrowed from Northern Fiscal, and the $40,000. Insuranshares proceeded to pay Northern Fiscal the twenty-oddthousand dollars that it had borrowed and to give back to Northern Fiscal the worthless check that Northern Fiscal had delivered.

We thus find that the worthless check originated with Northern Fiscal, went all the way around the circle, and came back into Northern Fiscal and was canceled without ever having been presented to a bank at all.

Now, in that transaction we find that Insuranshares lost money, that Bond and Share lost money, and that Northern Fiscal lost money, and there is no reason whatever why the transaction should have taken place except that which was testified to in the Federal court. That was that these various people charged commissions for each and every step in this transaction, with the result that they were paying nothing and they were obtaining individual returns by reason of the thousands of dollars in commissions that were paid out to them. That being so, of course they looked around for other investment trusts, because it was a very lucrative thing that could not possibly fail in their estimation, and they came to the Burco Incorporated investment trust. That was a company on which stock had been sold to the public for around five millions of dollars. Through various means the value of those securities had declined to not more than a million and a half dollars. In fact, some people say not more than three-quarters of a million-But under no circumstances could you say that they were worth over a million and a half, and in the court trial there was substantially no dispute that the value could not exceed one million and a quarter.

There were preferred shares outstanding which were entitled, upon liquidation, to receive one million and a half dollars, and from that you can, of course, see that the common stock was under water. It was like the Continental stock. The assets of the investment trust would have has to increase substantially in value before the book value of the common stock was worth zero.

Under those circumstances the owners of the controlling block of that common stock entered into a contract to sell that controlling

block for $340,000, and that sale was consummated. Now, of course, that means just as it meant in every one of these other cases, that the investment trust itself would have to pay that outrageously high price, and they had a plan and method whereby just that occurred. There was a corporation which was organized to control petroleum concessions in Venezuela. They were concessions that probably had some value. What the value is would be hard to determine, because it would depend upon how much oil could be obtained, what the cost of drilling would be, what the cost of refining and shipping would be, and it would also depend on whether they could organize a selling organization that could go out and sell the products of that company in world markets in competition with existing situations.

It was one of those things where one would have honestly to say that if millions were spent and competent management was consulted the petroleum concessions might become very, very valuable.

On the other hand, their value had been determined to some extent by an American company, which had attempted to exploit it and had given up the venture as a bad risk.

The control of these concessions was an asset in the corporation, which had authority to issue hundreds of thousands of shares of stock. Three hundred seventy-five thousand shares of stock was issued for about 60 cents a share, although that was disguised by several different contracts. I am referring to the net actual cost. Senator WAGNER. Yes.

Mr. FULTON. And being purchased at 60 cents a share these shares of the oil company were sold at something over $2 a share to Burco, which, of course, gave the conspirators a sufficient sum of money not only to pay the $340,000 but to take for themselves over $100,000 in commissions, and it left Burco Incorporated with an asset which, so far as legal proceedings are concerned, the prosecution or the plaintiff would have to establish was not in fact worth what Burco paid for them.

In order to do that we had to obtain, and were fortunate enough to obtain, through the Department of Justice's long arm and large subpena power, the evidence in Canada and elsewhere as to that petroleum concession. The ordinary litigant might or might not have been able to obtain that. I doubt very much that they would have.

However, after obtaining that we had to convince the jury that there was no good faith in the transaction, that it was not just an honest mistake in judgment, and the jury did so conclude and those persons are now convicted.

Now, after all of these transactions had gone on there was beginning to be quite a bit of discussion of these particular trusts in the street and elsewhere, and the original conspirators became alarmed and they concluded that they would sell their interest in Northern Fiscal, which now controlled, directly or indirectly, through these associates and otherwise, Insuranshares and Bond and Share, and Burco, and they went to one of the conspirators, who in my opinion was the most brazen and who was still willing to carry on despite indications of trouble brewing, and said to him, "We will sell you our common stock in this Northern Fiscal Co. It has no asset value, but it has control value. It enables you to do what you will with these particular trusts." 221147-40-pt. 1-6