SEP 7 19M 
 
 BRIEF AND REPLY BRIEF 
 
 SUBMITTED ON BEHALF OF THE 
 
 NEW YORK STOCK EXCHANGE 
 
 TO THE 
 
 ^xi Smiktng anb Olurrrttry 
 
 MARCH 5, 1914, AND MARCH 30. 1914, RESPECTIVELY 
 
 With the Compliments of the 
 


 r-^ 
 
 '^^^^^IfOBHii 
 
 OF THE UNITED STATES SENATE. 
 
 In the Matter 
 
 OF 
 
 Senate Bill 3895 entitled a bill " To 
 prevent the use of the mails and 
 of the telegraph and the telephone 
 in furtherance of fraudulent and 
 harmful transactions on stock ex- 
 changes." 
 
 BRIEF ON BEHALF OF THE NEW YORK 
 STOCK EXCHANGE. 
 
 Introduction. 
 
 We have discussed in a separate brief the constitutionality 
 of this bill. We propose to discuss the bill as a practical 
 measure in this brief, assuming for that purpose, but for that 
 purpose only, that Congress may, under its power to regulate 
 the mails and the interstate business of telegraph and tele- 
 phone companies, compel the Stock Exchange, within some 
 defined limits, to observe certain requirements as a condition 
 to the transmission of its quotations through the mails and 
 by telegraph or telephone. To justify such a bill it should 
 appear that there is a definite evil to cure, and that the S/) 
 bill is an appropriate and efficacious remedy. These are the 
 
 M19487 
 
2 
 
 concrete questions we propose to discuss ; and the task is one 
 that truth and justice require shall be executed in a spirit of 
 fairness and candor. That is the spirit in which we under- 
 take it. 
 
 What is the evil alleged as tlie reason for the bill ? In 
 the report of the Committee appointed pursuant to House 
 Resolutions 429 and 504 to investigate the concentration of 
 control of money and credit, dated February 28, 1913, (which 
 we shall hereafter take the liberty of calling, for brevity, the 
 Pujo Report) this is what is said on that subject (p. 116) : 
 
 " But whether stock exchanges in their wholly local 
 and internal relations may be regulated by Congress or 
 not where they lend their facilities for transactions 
 injurious to the public interests at large Congress may 
 prevent any instrumentality under its control from 
 being used to multiply and spread such transactions ; 
 and it is its .obvious duty to do so. It has appeared 
 
 '' [' tha^t; ^^l^sj of stocks on the New York Stock Exchange 
 average $r5;5Q0,000,000 annually ; that but a small part 
 
 I i.'c •',:ot". these', trans^ictions is of an investment character; 
 ' 'that Whifstano'ther part represents wholesome specula- 
 tion a far greater part represents speculation indis- 
 tinguishable in effect from wagering and more hurtful 
 than lotteries or gambling at the race track or the 
 roulette, table because practiced on a vastly wider scale 
 and withdrawing from productive industry vastly more 
 capital ; that as an adjunct of such speculation quota- 
 tions of securities are manipulated without regard to 
 real values, and false appearances of demand or supply 
 are created, and this not only without hindrance from, 
 but with the approval of, the authorities of the Ex- 
 change provided only the transactions are not purely 
 ^_. fictitious. In other words the facilities of the New 
 j/jj York Stock Exchange are employed largely for trans- 
 actions producing moral and economic waste and cor- 
 ruption ; and it is fair to assume that in lesser and 
 varying degree this is true or may come to be true of 
 other institutions throughout the country similarly or- 
 ganized and conducted." 
 
 m 
 
 This would be a grave indictment of a great institution, 
 whose membership is representative of the best citizenship 
 
of New York, if there was any foundation for it, which happily 
 there is not. 
 
 If this statement stood alone we would assume that the 
 bill was framed to correct the evil thus alleged to exist ; but 
 in another part of the report we find the following (pp. 114, 
 115): 
 
 " Great and much needed reforms in the organiza- 
 tion and methods of our corporations may be legiti- 
 mately worked out through the power wielded by the 
 Stock Exchange over the listing of securities. Much 
 of the confusion and many of the defects in corporate 
 regulation due to the diversity of State laws and to 
 the bidding of the States against one another in laxity 
 of administration in order to attract corporations 
 within their borders may be corrected and uniformity 
 of metliods introduced through the listing department 
 of the Exchange. Thus complete publicity as to all the 
 affairs of a corporation may be uniformly enforced. 
 The scandalous practices of officers and directors in 
 speculating upon inside and advance information as to 
 the action of their corporations may be curtailed if not 
 stopped. In short its opportunities as an agency of 
 corporate reform are almost endless provided its own 
 practices can be reformed so as to entitle it to exercise 
 these broad powers." 
 
 This is quite a different reason for the bill. The evil here 
 specified is the impotency of government under our political 
 system properly and adequately to regulate corporations ; and 
 the cure proposed is that the New York Stock Exchange shall 
 be constituted the effective agency of corporate regulation. 
 This means that the National Government may employ the 
 Exchange to correct the shortcomings of the State govern- 
 ments in the regulation of corporations and the reform of 
 corporate abuses ; but, it is added, that the Exchange itself 
 must be reformed that it may efficiently perform this function 
 of government. This proposition is as startling as it is novel. 
 It invests the Exchange with powers and functions that have 
 never been within its contemplation, and the assertion of 
 which would have subjected it to the accusation of an un- 
 
bridled arrogance. The question naturally arises, Low much 
 of the bill is based on the evils alleged to exist in the trans- 
 actions of the Exchange, and how much on this programme of 
 corporate regulation and reform. That line will have to be 
 drawn as we proceed. 
 
 The natural order of the topics to be discussed is, in the 
 first place, whether the alleged 'evils exist, and if so to what 
 extent ; and in the next place whether, and to what extent, 
 the bill is a practical remedy for any evils that may be found 
 to exist. The data to be examined in determining these ques- 
 tions are the statements that have been made and docu- 
 ments submitted at the hearings held by this Committee ; the 
 evidence taken by the House Committee that investigated the 
 so-called money trust, and the Pujo Report ; common knowl- 
 edge ; and the bill itself. It is to be borne in mind, so far 
 as the testimony taken by the House Committee is concerned, 
 that the Committee was represented by its own counsel ; that 
 it selected the witnesses it desired to hear, though in 
 some instances, so far as the Stock Exchange was con- 
 cerned, after a conference with its counsel ; that it selected the 
 topics respecting which it desired testimony ; that the ex- 
 amination of witnesses was conducted solely by its counsel 
 and was often in the nature of a cross-examination ; that 
 the sole right of counsel for a witness Avas to frame any ques- 
 tion he might desire to ask and submit it to the Committee 
 for approval so that it might be put by the counsel for the 
 Committee if approved ; and that many questions were asked 
 that could not be adequately or satisfactorily answered on the 
 spot without opportunity for previous preparation or reflection. 
 This is not said by way of criticism, but merely to call atten- 
 tion to the fact that the investigation was essentially ex-parte. 
 Moreover we feel bound to say that the officials of 
 the Exchange felt throughout that there was a deep 
 and controlling prejudice against it, reflected in 
 the tenor of the examination of many of the witnesses ; in the 
 
bringing in of topics calculated to create prejudice which were 
 not-germane to the inquiry, and which were afterwards discarded 
 in the conclusions of the report for that reason ; in the treat- 
 ment of such topics in the report though concededly not ger- 
 mane ; and in the bias of the report which ignores the case of 
 the Exchange on almost every point. Had the investigation 
 been broadened out to give the Exchange an opportunity to I 
 present its case in its own way, as it has presented it to this / 
 Committee, which would only have taken a few days, though 
 the report might not for reasons have been different, the 
 record would have been a more complete, reliable and useful 
 presentation of the facts. 
 
 The questions we propose to discuss are, (1) Is it true that, 
 while a small part of the transactions on the Exchange are of 
 an investment character, and another part represents whole- 
 some speculation, a far greater part represents speculation 
 indistinguishable in effects from the worst form of gambling ? 
 (2) Is it true that there is manipulation of securities on a 
 large scale without regard to real value ; and that this 
 manipulation proceeds not only without hindrance from the 
 authorities of the Exchange but with their approval, provided 
 only that the transactions are not fictitious ? (3) Is it true 
 that the facilities of the Exchange are largely employed for 
 transactions producing economic waste through withdrawals 
 or diversions of capital from productive industry and other 
 commercial purposes. 
 
 Having discussed these questions we shall then be in a 
 position to take up the remedies of the bill to determine to 
 what extent they are necessary, practical and germane. 
 
 
I. 
 
 The nature of tlie transactions on the Ex- 
 change. 
 
 (1) There are listed on the Exchange 665 issues of stock 
 with a par value of $13,385,447,500 and 1089 issues of bonds 
 with a par value of $12,589,577,100. They are issues made 
 in the main by railroad, industrial and mining cor- 
 porations; but there are some issues of municipal 
 bonds, domestic and foreign. The Exchange is the prin- 
 cipal market in this country for the purchase and sale 
 of these securities, and in the volume of its business 
 is second only to the London Exchange. It is also an inter- 
 national market of considerable magnitude. The transactions 
 originate in orders to buy or sell from all parts of the country 
 and from foreign countries. Ko one can say what proportion 
 of those transactions is of an investment nature, because no 
 clear line can be drawn between what is investment and what 
 is speculation. Many who buy for investment buy partly on 
 credit ; and purchase for investment may have in it a specu- 
 lative element determining the permanence of the investment. 
 It is a common experience to buy for investment and yet sell 
 on an unexpected rise in the market or when an expected 
 rise takes place. It is not a criterion of the investment or 
 speculative character of a transaction whether or not the 
 security is bought partly on credit any more than it is in the 
 case of purchases of real estate. Securities bought with a 
 speculative purpose may be retained as investments. Any state- 
 ment of the proportion of the transactions that are of an in- 
 vestment as distinguished from a speculative character is 
 merely a worthless guess. There have been numerous eflforts 
 in the past by foreign economists to establish that proportion 
 
on foreign exchanges, whicli has been discarded and the effort 
 abandoned as futile. 
 
 (2) There is a very large volume of speculative transactions 
 characterized in the Pujo reports as *' wholesome " speculation. 
 " Wholesome " speculation we take to be speculation by per- 
 sons who have the means or -credit to carry their transactions 
 through and who buy and sell intelligently in the expectation 
 of a rise in price in the one case or a fall in the other. This is 
 admitted on all sides to be perfectly legitimate, and it is just 
 as legitimate to sell in the expectation of a fall in price as to 
 buy in the expectation of a rise. No one can measure the 
 extent or proportion of the transactions on the Exchange of 
 this character; but they are unquestionably of great magni- 
 tude and a considerable proportion of the whole. What value 
 would be attached by any sensible man to any estimate of the 
 number of men of means and intelligence in this country who 
 speculate in securities to some extent or of the volume of 
 their transactions of that character ? 
 
 (3) Another large class of transactions on the Exchange 
 consists of the buying and selling of stocks by or for the 
 dealers in lots less than the Exchange's unit of one hundred 
 shares, or, as they are called, odd lots. We refer to the 
 statement of Mr. Noble on tl^is point, where it appears that he 
 is a dealer in odd lots ; that there are many houses engaged 
 in. the same kind of business; that this business in small lots 
 is about twenty per cent, of each day's business of the Ex- 
 change in normal times ; and that the bulk of it is investment 
 business (K., pp. 160-178). 
 
 (4) There is a considerable body of men on the Exchange 
 known as floor traders, who daily buy and sell large volumes 
 of active stocks in the expectation of a slight profit being 
 realized during the day. Another similar class, known as 
 arbitrageurs, is composed of brokers here and abroad who 
 buy and sell for a profit with reference to differences in 
 
8 
 
 prices on this and foreign exchanges. An arbitra- 
 geur buys or sells a security listed on both 
 the London and New York Stock Exchanges during the hours 
 that the London Exchange is open, and buys or sells it as the 
 case may be during the hours that the New York Stock Ex- 
 change is open on the same day. The business of the floor 
 trader is legitimate speculation, and is an important element 
 in providing a continuous market. The arbitrage business is 
 of considerable volume, and is not only legitimate, but has a 
 distinct value, recognized by economists, in assisting the 
 adjustment of international dealings. 
 
 Mr. Sturgis estimated that these dealings of floor traders 
 and arbitrageurs on their own account were one-third of the 
 total dealings on the Exchange (Pujo Test., p. 826). 
 
 (5) The only remaining element is speculation by those 
 who should not speculate because without either the means 
 or the intelligence to do so, properly called unwholesome 
 speculation. The volume of this sort of speculation on the 
 Exchange has been constantly diminishing. It is business 
 that the broker avoids because of the risks it involves in 
 rapid changes of price and the doubtful ability of his cus- 
 tomer to meet his obligations. The Exchange prevents it to 
 the utmost limit of its powers. What remains of it is 
 to some extent due to ignorance of the broker of the 
 real circumstances of his customer, either through misrepre- 
 sentation or neglect to make proper inquiries. There is no 
 doubt, however, that the volume of the transactions of that 
 character is enormously exaggerated not only in the popular 
 mind but by serious and thoughtful people. It is so easy for 
 a defaulter to attribute his fall to speculation that all such 
 cases, as well as the losses in bucket shops, and the losses 
 through all the swindling schemes in connection with mining 
 and other stocks, not listed or dealt in on the exchange, 
 with which the country is flooded, are widely attributed to 
 the exchanges. But the truth is that the volume of this un- 
 
wholesome speculation is, compared with the vast mass of 
 transactions that take place on the Exchange every day, 
 too inconsiderable to be classified as a feature of any 
 moment or influence on prices. 
 
 It is true that the Hughes Commission said in its report 
 that " it is unquestionable that only a small part of the trans- 
 actions upon the Exchange is of an investment character ; a 
 substantial part may be characterized as virtually gambling ". 
 But this statement is not a conclusion from any verifiable 
 data. Though it may voice a popular impression it is not in 
 accord with the judgment of the men intimately connected 
 with the aflfairs of the Exchange. Not only is the volume of 
 the investment business in their judgment much larger than is 
 indicated, but the term gambling is not appropriately applied 
 to any substantial body of transactions on the Exchange, 
 unless all speculation, whether in securities or commodities 
 or in any other department of human activity, is to be 
 regarded as gambling, which is not an accepted use of the 
 term either in the domain of law, business or economics. 
 Wagering or gambling in connection with transactions in 
 securities is well known to the law and has been defined 
 with precision ; and as so defined it does not include 
 what is known in business afifairs or economics as speculation. 
 Speculation is one thing and gambling another, and no useful 
 purpose is served by characterizing one as the other. When 
 important issues are under discussion affecting great and vital 
 interests language should be used with some degree of pre- 
 cision, and not figuratively. 
 
 (6) The foregoing is merely descriptive of the daily trans- 
 actions on the Exchange. It is what anyone would see if he 
 had eyes enough to perceive all the transaction that take 
 place on any day. He would see purchases for investment ; 
 he would see sales on behalf of persons wishing to convert 
 their securities for one purpose or another ; he would see pur- 
 chases and sales for the dealers in odd lots to meet the needs 
 
10 
 
 of the small investor ; he would see purchases and sales for 
 customers with a purely speculative purpose ; he would see 
 the floor trader bujing^aud selling for the profit of the hour ; 
 he would see the arbitrageur selling securities that he has 
 bought in London, or Paris, or Amsterdam, or Berlin, the same 
 day, or buying here the securities he has sold on a foreign 
 exchange the same day. Every transaction is recorded 
 and the quotations that go out are the result of all of these 
 manifold operations. They are the product of the judgments, 
 temperaments, hopes, fears and doubts of the vast multitude 
 that participate in them. It is a scene of competition ; the 
 conservatism of investment face to face with the enterprise of 
 speculation ; speculation in the expectation of a rise in prices 
 with speculation in the expectation of a fall ; optimism with 
 pessimism ; and the resultant of this play of forces is the 
 market price of the securities dealt in moment by moment, 
 hour by hour. The Exchange is the crucible in which all 
 these various elements are, as it were, chemically combined 
 and concentrated to produce what we call market values. All 
 these elements are indispensable as supplements and 
 correctives of each other. Eliminate speculation and 
 the conservatism of investment would arrest the 
 development of the country. Eliminate speculation in 
 the expectation of a fall in prices and the danger of inflation 
 of prices would be constant. Without the free interplay 
 of all these forces a market would not perform its function of 
 fixing values for the purposes of trade and commerce. To say 
 that the swift, ceaseless stream of transactions in such a market 
 as the Exchange is, or can be, polluted in its main body is to 
 our minds absurd. But the fundamental contention of the 
 Pujo Report is, that it is so polluted by what is called un- 
 wholesome speculation and manipulation ; hence this bill. 
 Whether there is any basis of fact for that contention we 
 now proceed to examine, because if there is not, that might 
 well be treated as the end of the matter without going 
 further. 
 
11 
 II. 
 
 . Un-wliolesoiue Speculation. 
 
 (1) An entire subdivision of the Pujo Report is devoted to 
 this subject (pp. 42-46). There is no attempt there to define 
 the characteristics of unwholesome speculation as contrasted 
 with any other kind of speculation. Attention is called to 
 certain tables and charts that had been prepared for the Com- 
 mittee, showing the dealings on the Exchange in the shares of 
 various corporations month by month since 1906, and day by 
 day during the most active months. The corporations selected 
 were the United States Steel Corporation, the Reading Com- 
 pany, the Erie Railroad Company, the Rock Island Com- 
 pany, the Consolidated Gas Company, the Union Pacific Rail- 
 road Company, the Columbia and Hocking Coal and Iron 
 Company, the American Can Company, the American 
 Smelting and Refining Company, the Amalgamated 
 Copper Company, the Colorado Fuel and Iron 
 Company, the Brooklyn Rapid Transit Company, 
 the California Petroleum Company and the Mexican Petro- 
 leum Company. This was certainly an artful selection for the 
 purpose. It was a grouping of the most speculative and active 
 stocks on the Exchange during the period covered by the 
 tables and charts, not to show normal or average conditions, 
 but for the dramatic efi'ect of a combination of extremes. Had 
 tables been prepared to show normal or average conditions it 
 would have appeared that the total of the dealings was just 
 about the amount of the total par value of the listed securities. 
 We are not criticising the propriety of the selection for the 
 purpose of showing extensive speculation in particular stocks ; 
 but merely guarding against the inference that it is a normal 
 condition with the numerous stocks actively dealt in on the 
 Exchange. If, instead of copper companies, petroleum compa- 
 nies and industrial companies there had been included in the 
 
12 
 
 list such companies as Chicago and Northwestern, the Chicago, 
 Milwaukee and St. Paul, the Pennsylvania, the New York 
 Central, the Northern Pacific, the Great Northern, the Louis- 
 ville and Nashville and the American Telephone and Telegraph 
 Company, the result would have been a more instructive pre- 
 sentation of actual conditions. 
 
 It is not necessary to state in detail what these tables and 
 charts show. It is enough to say in a general way that they 
 show dealings in the course of a month or a year in the stocks 
 of the companies selected of great magnitude, the total listed 
 stock of some of the companies having been sold many times 
 over in the course of a year, and sometimes more than once in 
 the course of a month. The tables are condensed on page 44 of 
 the Pujo Beport, to which we refer for the details. 
 
 (2) The important question is what conclusion is to be 
 drawn from these tables and charts. They show extensive 
 speculation concentrated in certain popular, active and 
 speculative stocks such as is taking place on every stock 
 exchange or bourse in the world. The speculator does not 
 select slow moving, inactive stocks in which the dealings 
 are mainly for investment. He picks the stocks that are con- 
 spicuous ; that are dealt in to such an extent as to have a con- 
 stant and wide market so that he can buy whenever he wants 
 to buy and sell whenever he wants to sell ; and which respond 
 quickly to all the varying conditions of business and affairs. 
 Such stocks are the natural centre of speculation. More- 
 over they are the stocks in which the floor trader 
 and the arbitrageur mainly deal, and the volume of 
 their dealings is always heavy in active times. Mr. Yan 
 Antwerp's statement covers this situation quite fully (R., 
 A pp. 130, 131). These are the facts that explain the great 
 volume of dealings shown by these tables and charts, and which 
 will occur just as long as there are markets and speculation. 
 What the tables and charts prove is speculation and nothing 
 
13 
 
 more. Thej do not establish that the speculation was " un- 
 wholesome ", whatever that may mean. There was no evidence 
 showing that it was speculation by unintelligent people of in- 
 adequate means and credit, or for an illegitimate or improper 
 purpose. As long as there is speculation it will occur, in its 
 most active and vigorous form, in connection with such stocks, 
 and therefore the tables and charts demonstrate no more than 
 that there is constant and active speculation in stocks of the 
 character selected involving a constant and rapid passing of 
 the same shares or certificates from one person to another. 
 The necessary consequence of speculation is that the same 
 shares or certificates pass rapidly from one ownership to an- 
 other in the constant buying and selling that goes on, and 
 without any transfer on the books of the company. Hence 
 the fact that the total dealings appear to be many times the 
 total of the capital stock of a company in a limited period of 
 time is the inevitable result of speculation in and of itself, and 
 no indication whatsoever of an unwholesome or illegitimate 
 form of speculation. 
 
 (3) Speculation is necessary, useful and legitimate. We 
 need not elaborate this proposition in view of the statements 
 made by Mr. Conant, Professor Emery, Mr. Page and Mr. 
 Van Antwerp. Their presentation of the matter was not 
 disputed by any one. It is scientifically treated in the 
 writings of economists everywhere, and its legitimacy 
 and vast usefulness demonstrated. John Stuart Mill in 
 his writings says that *' Speculators have a highly useful 
 office in the economy of society;" and Leroy — 
 Beaulieu, the great French economist, says that " the evils 
 which speculation prevents are much greater than those it 
 causes." That many engage in it who should not do so be- 
 cause of lack of means or intelligence is indisputable ; but 
 that does not affect the fact that it is a legitimate process. 
 As long as human nature remains as it is the unfit will en- 
 
14 
 
 gage in speculation to their detriment no matter what pre- 
 cautions are taken. As we have said in another place : 
 
 " The matter may be put in this way. The right to 
 buy and sell securities is just as much an inherent right 
 as the right to buy and sell any other commodity. This 
 right can be exercised unwisely and recklessly; but 
 there is no way of providing by law or rule that a right 
 may be exercised wisely but may not be exercised un- 
 wisely. The possession of the right carries with it the 
 possibility of its unwise exercise." 
 
 So far as the effect of illegitimate, as distinguished from 
 unwholesome, speculation upon prices is concerned, if they are 
 separable things, which there is nothing in the Pujo report to 
 indicate, the remark of President Hadley in his work on Econ- 
 omics that " the illegitimate speculations deal with the same 
 articles as the legitimate ones " has an important bearing, be- 
 cause it shows that whatever there may be in the way of ille- 
 gitimate speculation however defined with respect to a stock 
 or security or any other article is being corrected all the time 
 by the legitimate speculation in the same stock, security or 
 article. To conclude what we have to say on this sub- 
 ject we again insist that the tables and charts under discus- 
 sion simply show speculation, and contribute no evidence 
 whatsoever to support the assertion that it was unwholesome 
 or illegitimate speculation. 
 
 III. 
 
 Manipulation. 
 
 (1) The term manipulation is one of comparatively recent 
 origin. Like all such terms it is necessary to define it to 
 avoid confusion in its discussion. We get nowhere if it has 
 different meanings to different minds. It has been so much 
 
15 
 
 used of late that it should haye a definite meaning and appli- 
 cation ; but that is far from the truth. It has, for instance, 
 been applied argumentatively before this Committee to trans- 
 actions to which it does not at all apply. It is also 
 improperly confused with speculation. It is not easy to 
 say what the meaning commonly attributed to it is, be- 
 cause it is generally used as a term of vituperation 
 rather than as description of a definite class of transac- 
 tions. Perhaps as accurate a definition as can be given of it 
 is, the giving by the same man or group of men of contem- 
 poraneous, or practically contemporaneous, orders to various 
 brokers to buy, and to other brokers to sell the same security 
 at the market price whatever it may be, from time to time, for 
 the purpose of realizing a speculative profit, in some cases 
 from an expected or intended rise in the price and in other 
 cases from an expected or intended fall in the price, the vice 
 of such a system of orders being that their execution may not 
 involve a change of ownership. 
 
 Let us now analyze various classes of transactions to de- 
 termine whether or not they are manipulation within this 
 definition. 
 
 (a) Contemporaneous orders may be given to different 
 brokers, emanating from the same man or group of men, for the 
 sale of a stock at a fixed price and on a scale up, and for the 
 purchase of the same stock at a lowar fixed price and on a scale 
 down. It is clear that the brokers with such orders to sell on 
 the one hand and to buy on the other can never treat or deal 
 with each other under these orders, because under these cir- 
 cumstances the sales by the brokers having the orders to sell 
 must be to outsiders and the sales to the men with orders to 
 buy must be made by outsiders. There may be various ob- 
 jects or purposes for such a system of orders ; for instance 
 to steady the market in times of excitement when the 
 bankers behind an issue of stock feel a responsi- 
 bility with respect to its going unwarrantably high 
 
16 
 
 or unwarrantably low to the injury of investors ; or to steady 
 the market price of a new issue ; or to furnish a market to 
 anyone who has acquired the stock and desires to sell or to 
 any one who desires to buy. It is for those purposes a per- 
 fectly legitimate operation and not manipulation in any sense. 
 This is clearly shown by the testimony of Mr. Henry in 
 the case of the California Petroleum Company, who, notwith- 
 standing strenuous efiforts of counsel to show that such a pro- 
 ceeding was manipulation, conclusively established that it 
 was not. (Pujo E., pp. 1282-1287). Transactions of this 
 character are not therefore manipulation. 
 
 {h) Another class of transactions consisted of contempora- 
 neous orders given by the same man or group of men to 
 various brokers to buy a stock "at the market", and to 
 another set of brokers to sell " at the market." The two 
 sets of brokers being on the floor at the same time the 
 result might be that they would trade with each other, and if 
 they did no real change of ownership occurred, though the 
 transactions between the|brokers were actual transactions, and 
 the brokers themselves were ignorant that the same principals 
 were behind all of iihem. By the transactions being actual in 
 such cases we mean that in every case there was a purchase 
 and sale consummated, as distinguished from a mere matching 
 of orders or " washing " of transactions. 
 
 A resort to such transactions in good faith to draw atten- 
 tion to a new stock on the basis of its real value was approved 
 by the Hughes Commission, which said, with reference to it, 
 that this 
 
 "kind of manipulation has certain advantages, and 
 when not accompanied by * matched orders' is unob- 
 jectionable per se. It is essential to the organization 
 and carrying through of important enterprises, such as 
 large corporations, that the organizers should be able 
 to raise the money necessary to complete them. This 
 can be done only by the sale of securities. Large blocks 
 of securities, such as are frequently issued by railroad 
 and other companies, cannot be sold over the counter 
 
17 
 
 or directly to tlie ultimate investor, whose confidetice 
 in them can, as a rule, be only gradually established. 
 They must, therefore, if sold at all, be disposed of to 
 some syndicate, who will in turn pass them on to middle- 
 men or speculators, until, in the course of time, they 
 find their way into the boxes of investors. But prudent 
 investors are not likely to be induced to buy securities 
 which are not regularly quoted on some exchange, and 
 which they cannot sell, or on which they cannot borrow 
 money at their pleasure. If the securities are really 
 good and bids and offers bona fide, open to all sellers 
 and buyers, the operation is harmless. It is merely a 
 method of bringing new investments into public notice." 
 
 Whether this is a sound view or not, it was at any rate the 
 view generally accepted as sound and correct not only on the 
 Exchange, but outside of it ; and, indeed, it is only recently 
 that it has been questioned. But as such transactions might 
 be resorted to for purely speculative purposes, they have pre- 
 sented a difficult problem. The attitude of the Exchange 
 formerly was, that if the transactions were actual, in every 
 case being consummated by payment and delivery, and free 
 from collusion, they were legitimate. This is the 
 purport of the testimony of Mr. Sturgis before the 
 Pujo Committee, which is so severely criticised in its re- 
 port (pp. 46-47). Mr. Sturgis was simply defining 
 what the attitude of the Exchange had been. The 
 suggestion that he laid stress in his testimony on the 
 payment of the commission of the brokers, as if that were the 
 sole interest of the Exchange, is quite unwarranted because it 
 is clear that he only mentioned the payment of the commission 
 because it was evidence bearing on the actuality of the trans- 
 actions. In recent times there has arisen a conflict of opinion 
 on this subject, and the Governors of the Exchange have taken 
 advanced ground by prohibiting such transactions altogether. 
 The resolution of February 5th, 1913, hereinafter set forth, is 
 explicit on this point in prohibiting all transactions that do 
 not involve a change of ownership. 
 
 But there remains the question, what substantial evidence 
 
18 
 
 is there that there was ever, any considerable body of transac- 
 tions on the Exchange of that character. We may be sure that 
 if there was any such body of transactions they would have 
 been elaborately and exhaustively exploited by counsel before 
 the Pujo Committee. With his large practice, extending back 
 many years, and the knowledge that it must have given him of 
 what was taking place in the world of enterprise, business and 
 finance, and his wide acquaintance with men prominent and 
 active in affairs, it is reasonable to assume that no past oper- 
 ations in securities on a large scale calculated to attract atten- 
 tion by their character and results escaped his knowledge or 
 were not ascertainable by him. It is fair to say that the 
 instances he did bring forward are all that he could produce, 
 with all the sources of information at his command, with 
 any show of establishing his case against the Exchange. 
 Had the Exchange been the scene for years and years of pred- 
 atory movements in stocks on a large or small scale, the 
 record of the Money Trust investigation would show the fact 
 conclusively ; and it is no escape from the meagerness of the 
 record in this regard to say that the instances given were 
 " typical." It is too favorite a device of the advocate seeking 
 to establish a general condition to insist that the particular 
 instances he produces are " typical " to accept such a state- 
 ment as a substitute for actual evidence. These particular 
 instances must therefore be treated as the only transactions 
 that could be produced with sufficient definiteness to consti- 
 tute proof or evidence. 
 
 (2) These instances are the Columbus and Hocking Coal 
 and Iron pools, the Rock Island " episode " of December 27, 
 1909, and the California Petroleum Company matter, which 
 are discussed on pages 47-52 of the Pujo Report. We will 
 take them up in their order : 
 
 faj The Columbus and Hockmg Goal and Iron Company 
 Pooh. 
 
19 
 
 Tlie Columbus and Hocking Coal and Iron Company owned 
 property consisting of over 13,000 acres of land in Athens, 
 Hocking, Perry and Vinton Counties, Ohio ; 250 acres of 
 mineral leaseholds ; 4 blast furnaces with a capacity of 70,000 
 tens annually ; 14 active coal mines with an annual capacity 
 of 2,000,000 tons ; and various town lots, stores and dwelling 
 houses. It had also valuable clay deposits on its lands and 
 did a thriving business in bricks and paving blocks. Not long 
 prior to March, 1909, oil in paying quantities had been dis- 
 covered on the property (Poor's Manual, 1909). There were 
 about 70,000 shares of its common stock listed on the Ex- 
 change (Pnjo Test., p. 701). The company had a bonded debt 
 of $1,260,000, $500,000 preferred stock and $7,000,000 com- 
 mon stock. In March, 1909, a so-called pool was formed to 
 acquire 20,000 shares of the stock. Later another pool was 
 formed to buy 20,000 additional shares. Lathrop, Haskins & 
 Co. and James K. Keene were the principal holders in both 
 pools, and associated with them were various banking and 
 brokerage houses. 
 
 A pool in and of itself is simply a joint venture of vari- 
 ous individuals, managed by some individual or firm se- 
 lected for that purpose. It has always been asserted by the 
 members of these pools that they were formed in the belief 
 that the enterprise was bound to be successful in a degree that 
 would make its stock very valuable. At the time the first 
 pool was formed the stock was inactive and selling at about 
 20. Through the transactions on behalf of these pools in the 
 acquisition of the stock it rose in price until in the first week 
 of May, 1909, it was selling at 65J. It rose to 90 by November 
 13th, 1909, and remained in that vicinity until the third week 
 of January, 1910. On January 19th, 1910, through a large 
 amount of stock being unexpectedly thrown on the market, and 
 the inability of the active men in the pools to provide suffici- 
 ent capital to sustain the market, the stock collapsed ; the price 
 fell rapidly from 88 to 25 ; and three of the participating firms 
 failed. 
 
4 
 
 20 
 
 The transactions of tlie pools in acquiring their holdings 
 consisted of buying and selling orders at prices fixed by their 
 manager and the brokerage house in direct charge of the mat- 
 ter for him, given to a large number of brokers, among wbom 
 there was no collusion, each transaction being actually carried 
 out. These transactions were resorted to because the pools 
 being the buyers in the market their purchases would have 
 rapidly carried the stock to an inordinate price unless there 
 had been also selling orders. The testimony of Mr. Popper 
 shows that these buying and selling orders were given at 
 specific and limited prices (Pujo Test., p. 906). In the case of 
 Mr. Criss, who is what is called a specialist and as such was 
 the only broker who had both orders to buy and sell, it appears 
 that his orders were to sell on a scale up and to buy on a 
 scale down (Idem^ 911). That is, in outline, the transaction. 
 
 The report of the Pujo Committee is very severe in its 
 animadversions on the Exchange respecting this matter. On 
 page 49 it said : 
 
 " That the authorities of the exchange were aware of 
 this operation while it was in progress is shown by the 
 fact that the firm most prominently engaged in it on the 
 floor of the exchange was * twice cautioned ' by the 
 president at the request of the law committee (Sturgis, 
 K., 845). Having this knowledge it would have been 
 an easy matter for the law committee and the govern- 
 ing committee under their power to inquire into the 
 dealings of members and to make examinations of their 
 books (Const., Art. XI., subd. 9; Art. XVII., sec. 7), to 
 . discover all those engaged in the operation and stop 
 it. The accountant for the receiver in bankruptcy of 
 one of the failed firms, with more limited facilities for 
 examination, was able to uncover the * wash sales ' and 
 other manipulative transactions and the brokers who 
 executed them (Morse, R., 714-716). More remarkable 
 even than the neglect of the authorities of the exchange 
 to stop this operation when they knew it was going on 
 was the theory on which they inflicted punishment after 
 the pool collapsed. Of the 9 or 10 firms engaged in 
 the pool, only the ones that failed were punished. They 
 were expelled from the exchange. The others were 
 neither expelled nor suspended, but merely ' censured.' 
 
21 
 
 Thus the punishment was inflicted, not for the character 
 of the operations, since all were equally culpable in 
 that regard, but for becoming insolvent in consequence 
 of dealing beyond one's means." 
 
 Mr. Sturgis did say in his testimony that the firm most 
 prominently engaged, which was the firm of Lathrop, Haskins 
 & Company, had been twice cautioned by the president of the 
 Stock Exchange, Mr. E. H. Thomas. Had Mr. Thomas been 
 called as a witness, it would have appeared that as early as 
 May 10th, 1909, he, together with Mr. Ely, the Secretary of the 
 Exchange, had inquired into the matter ; and that they had 
 Mr. Haskins before them, who expressed a firm belief in the 
 future of the Company, and informed them that they had been 
 large holders of the stock for some years ; that all stories of a 
 " corner " or of a large short interest wore absolutely untrue ; 
 that there was no large buying demand ; that part of the hold- 
 ings of 13,000 acres of the Company had been leased to an oil 
 operating company whose wells were all producing, some as 
 high as 250 barrels a day ; that developments in the adjoining 
 lands made it appear certain that the Company's lands would 
 produce large quantities of high grade crude petroleum oil ; 
 that they were amply able by well-secured time loans to care 
 for the situation, especially in case any of the stockholders were 
 anxious to sell, giving the name of their bankers to verify that 
 fact ; that the market was perfectly legitimate ; and that 
 he and his associates were going to hold their stock because 
 of what they believed to be its real value. It is moreover the 
 fact that in October, 1909, the property was visited by a party 
 of engineers and bankers who were most favorably impressed 
 with it, and whose opinion became known to members of the 
 Law Committee of the Exchange. 
 
 The volume of transactions in the stock on the Exchange 
 for six months prior to January 19th, 1910, had been light, 
 averaging about 800 shares per day. The rise in price from 
 20 to 65 between March, 1909, and the first week in August, 
 
1909, and the subsequent rise from Q^ at that time to 90 in 
 November, was due to the purchases on behalf of the pools. 
 During this time it was the outsiders who sold their stock to 
 the pools (Horace White, E., p. 291 ; Sturgis, Pujo Test., p. 
 848). 
 
 The statement in the Pujo report that the accountant for 
 the receiver in bankruptcy was able to uncover the *' wash 
 sales and other manipulative transactions " is entirely un- 
 founded. The accountant referred to was Mr. Morse. What 
 Mr. Morse said is shown by the following quotation from his 
 testimony : 
 
 " Mr. Untermyer : Will you look at your state- 
 ments there and see whether you found any wash trans- 
 actions ? 
 
 Mr. Morse : It is impossible to pick those out, Mr. 
 Untermyer, from these statements. As I stated before, 
 this work jvas done with the end in view of finding out 
 who was selling the stock short, and not with the end 
 in view of finding out what is known as wash transac- 
 tions." (Morse, E., 713). 
 
 It was a pure assumption on the part of the counsel 
 of the Committee that there were " wash transactions ", as is 
 evident from the testimony on pages 713 and 714. Mr. Morse 
 is an accountant by profession, not an expert in stock ex- 
 change transactions ; he had no personal knowledge of the 
 transactions ; and all that he could state was that the books 
 he had examined showed that there had been buying and 
 selling orders executed, and the volume of them. Yet he is 
 cited in the report as the authority for the existence of 
 manipulation. What actually took place is shown in the 
 following testimony of Mr. Popper, whose firm gave out most 
 of the orders, to which there is no allusion in the report 
 (.Idem., 906) : 
 
 " Mr. Untermyer : Among how many brokers did 
 you scatter these buying and selling orders ? Mr. 
 Popper : Twenty-five ; that is, 25 different brokers. Mr. 
 Uktermyer : Did the buying brokers know who re- 
 
23 
 
 ceived the selling orders ? Mr. Popper : No, sir. Mr. 
 Untermyer : Nor the selling brokers know who re- 
 ceived the buying orders? Mr. Popper: No, sir. Mr. 
 Untermyer : Were your orders to buy and sell on a 
 scale or at the market ? Mr. Popper : No, sir ; as a 
 rule, the order came to buy, as the orders were executed, 
 at a limited price, generally speaking. Mr. Untermyer : 
 Was it on a scale ? Mr. Popper : No, sir. Mr. Unter- 
 myer : The selling orders were not on a scale ? Mr. 
 Popper : No, sir. Mr. Untermyer : Then the price 
 was named ? Mr. Popper : The price was always 
 named." 
 
 Mr. Popper did not even know that there was a pool 
 {Idem, 908). Mr. Criss testified as follows {Idem, 911) : 
 
 ** Mr. Untermyer : What were your orders as to 
 buying and selling everyday? Mr. Criss : The 19th 
 of "January, which is typical, I had orders to buy 200 at 
 87J and 200 each quarter down. Mr. Untermyer: 
 How about selling ? Mr. Criss : To sell at 90 and 
 every quarter up, 200. Mr. Untermyer : Let me see 
 if I understand. This is a typical case of each day's 
 proceedings that you would get an order in the morn- 
 ing to buy how many shares ? Mr. Criss : Two hun- 
 dred ; beginning at any figure, to buy 200 ; and then 
 each quarter down, 200. Mr. Untermyer: And then 
 to sell ? Mr. Criss : Oh, say a couple of points higher, 
 200 ; and every quarter up, 200. Mr. Untermyer : I 
 think you said these orders all came from Haskins ? 
 Mr. Criss : Practically all came from Haskins." 
 
 So far as the disciplinary action of the Exchange is con- 
 cerned, which is commented upon so adversely, the fact is 
 that it was perfectly proper for a number of men to asso- 
 ciate themselves together to purchase a large block of stock ; 
 that in doing so they at that time, violated no rule of 
 the Exchange in giving out orders to one set of brokers to 
 sell at a fixed price and to another set of brokers to buy at a 
 fixed price, there being no collusion or possibility of collusion 
 between the brokers, no broker having a knowledge of any 
 order given to another broker, the orders all being exe- 
 cuted in the open market, and the transactions all actually 
 carried out and completed ; nor was it a violation of any rule 
 
24 
 
 of the Exchange to give selling orders on a scale up and buy- 
 ing orders on a scale down. There was no basis, therefore, 
 for the punishment of anybody in connection with those 
 transactions as they were carried on. But these men had 
 engaged in a transaction involving the acquisition of a 
 large amount of stock which would necessarily raise its price, 
 and they could only properly engage in such a transaction 
 if they had suflScient and adequate means to sustain the 
 market as stock was offered for sale, and thereby prevent a 
 disastrous drop in price. It was a separate question as to 
 each individual concerned as to whether he had the means 
 to meet, and had met, all of his obligations connected with 
 his participation in the enterprise. That was true in some 
 cases and it was not true in others ; and those who had not 
 the means were punished by expulsion because they were 
 guilty of reckless dealing in trading beyond their means. 
 Others who had the means and met their obligations at con- 
 siderable loss to themselves, were censured because of certain 
 circumstances of relatively minor importance connected with 
 their participation in the pools (Sturgis, K., 845-857). We 
 submit that this statement of the actual fact shows that the 
 attack on the authorities of the Exchange with regard to this 
 transaction is entirely unwarranted. 
 
 (h) The Rock Island " episode " of December 27, 1909, 
 How this can be called an instance of manipulation is quite 
 beyond our comprehension. It appears that a firm of brokers, 
 by direction of a man of large means and prominent in the 
 financial world, gave orders to twenty brokers, each to buy at 
 the opening of the market two thousand shares of the common 
 stock of the Eock Island Company " at the market ". The pur- 
 chases were made and the price of the stock rose thirty points. 
 When they stopped the stock naturally fell to its normal price. 
 That is all there was to the transaction. The result of it was 
 that the parties who sold realized $640,000 more than their 
 stock was worth at that time, and the man who bought simply 
 
25 
 
 lost tliat amount. It was to all appearances a senseless trans- 
 action, but one absolutely free from manipulation (Horace 
 White, K., p. 291). Until the Pujo report appeared there had 
 never been a suggestion by anybody that the transaction involved) 
 manipulation, whatever the explanation of it may have been ; and 
 its finding that it was manipulation is one unsupported by any 
 testimony and entirely baseless. The firm of brokers was not 
 disciplined on any charge of manipulation. The finding of the 
 Board of Governors against them was, that it was an act 
 of bad judgment to give out such a mass of orders to 
 twenty different brokers, who would all go into the market 
 to buy at the same time, as they should have known that it 
 would create a state of temporary confusion, excitement and 
 demoralization. Taking into account the high standing of 
 the firm the penalty imposed was a very severe one for an act 
 that at the outside could only be condemned as careless or 
 inadvertent. 
 
 (c) The California Petroleum Company matter. 
 
 There has been so much said on this subject that we shall 
 confine ourselves to a correction of erroneous impressions 
 concerning it conveyed by the Pujo report and by what was 
 said about it to this Committee. With the transactions prior 
 to the listing of the stock the Exchange had nothing what- 
 soever to do. The purchase of the stock by a group of 
 bankers, the taking over of a portion of it by a syndicate, 
 and the sale of what was so taken on behalf of the mem- 
 bers of the Syndicate, were all matters prior to the listing 
 and with which the Exchange had no connection. The stock 
 was not listed to make a market for it whereby it could 
 be sold on behalf of the syndicate to the public ; nor, as 
 is stated in the Pujo report ; (p. 52), *'' to create an appearance 
 of activity in the stock that would enable those to whom it had 
 been sold to resell it to the general public at a profit." The 
 comment in the report that " no action appears to have been 
 taken by the Exchange as the result of this operation, in which 
 
26 
 
 important banking houses, members of the Exchange, were 
 involved," is a reflection both on the Exchange and the banking 
 houses. 
 
 The fact is that the stock which was taken by the syndicate 
 of a hundred or more members formed by Salomon & Co., 
 Hallgarten & Co. and Lewisohn Brothers, composing the group 
 of bankers who had originally acquired the stock, was all sold 
 before the stock was listed on the Exchange. Mr. Henry tes- 
 tified that " every share of the stock had been sold before the 
 stock was listed " (Pujo Test., p. 1282). Mr. Lewisohn testi- 
 fied (Idem, p. 923) : " Mr. Untermyer : Did you or not 
 operate for that syndicate after selling it? Mr. Lewisohn: 
 No sir. We sold the preferred and common 
 and cleaned up the syndicate before it went on the Stock Ex- 
 change. Mr. Untermyer : Then you transferred it to another 
 syndicate ? Mr. Lewisohn : No, we did not transfer it. We 
 sold it to individual investors." The stock was dealt in on 
 the Curb before it was listed on the Exchange, and the first 
 price at which it sold on the Curb was about 50 (id.j p. 946). 
 
 The stock was listed on the 5th day of October, 1912, on 
 an elaborate application that justified its listing. The appli- 
 cation has been filed with this Committee. There w^as great 
 eagerness to buy the stock, amounting to a state of excite- 
 ment (id.j p. 925). Thereupon the transactions took place 
 which are criticized. The group of bankers who had brought 
 the stock out deemed it wise and proper, under the circum- 
 stances, to steady the market. Though they had disposed of 
 all their holdings they felt a responsibility in connection with 
 the stock because they had brought it out, which is the 
 usual attitude of bankers who bring out issues of stock 
 or bonds. The stock opened on the Exchange at 
 66. What the bankers did was to give to difi'erent 
 brokers selling orders on a scale up and buying orders on a 
 scale down. The Pujo report (p. 51) says that this was done 
 " for the purpose, as described, of * making a market,' " citing 
 
27 
 
 Henry, K., 1282, 1283. What Mr. Henry meant by this ex- 
 pression is shown by the next question and answer, which are : 
 *' Me. Untermyer : Do you moan that it was done in order to 
 make an apparent activity in it ? Mr. Henry : Not in order 
 to make an apparent activity in it, but to have somebody there 
 always to buy if anybody wanted to sell it and somebody 
 there always to sell if anybody wanted to buy it " {Id., p. 
 1282). The real object of these transactions is made clear by 
 the extract from Mr. Henry's testimony which follows (pp. 
 1282, 1283) : 
 
 " Mr. Untermyer . Do you not know, Mr. Henry, 
 that the market operator, Lewisohn Brothers, were 
 doing the buying and selling themselves every day ? 
 Mr. Henry : Surely. Mr. Untermyer : In other 
 words, they were putting in orders to buy and orders 
 to sell ? Mr. Henry : Certainly. Mr. Untermyer : 
 Every morning? Mr. Henry: Certainl^^ Mr. Un- 
 termyer : And you were a party to that ? Mr. Henry : 
 They were acting under our general direction. Mr. 
 Untermyer : Every morning they would give orders to 
 certain brokers to buy and orders to certain brokers to 
 sell ? Mr. Henry : They would put in selling orders 
 on a scale up and buying orders on a scale down. Mr. 
 Untermyer : Yes. Mr. Henry : That is done to steady 
 the price of the stock. Mr. Untermyer : You think so ? 
 It is done to tnake an appearance of activity in the 
 stock, is it not ? Mr. Henry : No sir ; it is done to 
 steady the price of the stock. Mr. Untermyer : Why 
 should you, for instance, give orders to half a dozen 
 brokers or more to buy a given amount of stock and 
 orders at the same time to sell stock, with the 
 idea that you would not at the end of the 
 day have any stock either bought or sold ? 
 Mr. Henry : Will you let me answer that in my own 
 way ? Mr. Untermyer : Yes. Mr. Henry : When a 
 new stock is put on the exchange, on any great ex- 
 change like the New York Stock Exchange, there is one 
 thing that is very necessary, and that is that its price 
 shall be steady. When you have no active market in a 
 stock, when you are building up an active market in a 
 new stock, the first thing a banking house does, what it 
 wants to do, and what it must do, whether it makes a 
 profit or loss out of it, is to steady the price of the 
 stock. If people come in to buy six or seven thousand 
 
28 
 
 shares of stock, and there is not much around, if they 
 do not sell the stock it will be bid away up and have a 
 big advance. On the other hand, if somebody comes in 
 to sell six or seven thousand shares and there are 
 no large buying orders in there the price of the 
 stock is going to be a great deal lower than it 
 would be otherwise. If you put in buying orders 
 on a scale down and selling orders on a scale up 
 the effect of that is to steady the price of the stock. Its 
 fluctuation is not as violent or as wide as it would be 
 otherwise. Mr. Untermyer : You are a believer then 
 in manipulation, Mr. Henry ? Mr. Henry : I do not 
 know anything about manipulation. Mr. Untermyer : 
 Is not the process you have just described a process 
 of manipulation ? Mr. Henry : I do not think so. 
 Mr. Untermyer : You say you do not know anything 
 about it ? Mr. Henry : I do not think the process I 
 have just described is what is usually termed manipula- 
 tion. Mr. Untermyer : If a banking house wants to 
 protect a new^ stock, why does it not simply buy that 
 stock from outsiders who offer it instead of trading in 
 it by buying and selling itself ? Mr. Henry : Because 
 you cannot make only one side of a market. You have 
 to make both sides of the market. Mr. Untermyer : 
 And why can it not buy that stock and sell it, when it 
 is acquired, instead of putting in orders every day — 
 buying orders on a scale and selling orders on a scale — 
 for the purpose of creating an apparent activity 
 in that stock that does not exist ? Mr. Henry : It 
 does not do anything of the kind, Mr. Untermyer. Mr. 
 Untermyer : Do you not know, Mr. Henry, that when 
 you are trying to make a market for a stock in that 
 way, by putting in buying and selling orders by different 
 brokers for the same house, that you are creating a 
 fictitious appearance of activity? Mr. Henry: You 
 would be if they were at the same price. Mr. Unter- 
 myer : But even if there is a difference of one- eighth 
 in the price ? Mr. Henry : Not an eighth. If you put 
 in a scale of selling orders above a price and a scale of 
 buying orders below a price, I see no manipulation 
 about that. Mr. Untermyer : You see no manipulation 
 in that at all ? Mr. Henry : No, sir. Mr. Untermyer : 
 What do you understand manipulation to be ? What 
 is your idea of manipulation ? Mr. Henry : I suppose 
 it might be defined as matching orders. Mr. Unter- 
 myer : Do you not understand, Mr. Henry, that match- 
 ing orders and .manipulation are different things ? Mr. 
 Henry : I know very little about manipulation. I have 
 no personal experience, Mr. Untermyer. Mr. Unter- 
 
29 
 
 MYER ; But that is because you do not think this is 
 manipulation that you have been doing ? Mr. Henry : 
 I do not know what term you want to use. What we 
 have been doing is to steady the price. It is not 
 manipulation. * * * Mr. Untermyer: Do you 
 know whether you made any money in this market 
 operation ? Mr. Henry : I think we lost money 
 in it. Mr. Untermyer: You think you lost? Mr. 
 Henry : Yes. Mr. Untermyer : You expected to lose 
 money, did you not? Mr. Henry: We did. Mr. 
 Untermyer: You were in it to lose money? 
 Mr. Henry: Yes. Mr. Untermyer: And you were 
 willing to lose money in order to make this ap- 
 pearance of activity in the market? Mr. Henry: 
 Not to make any fictitious appearance of ac- 
 tivity. Mr. Untermyer: Y^ou think it was real? Mr. 
 Henry : We were willing to lose money to give the 
 stock a real market. That is what we have done. Mr. 
 Untermyer : What is the difference between a real 
 market and a fictitious market? Mr. Henry: A great 
 deal of difference. Mr. Untermyer : Explain it. Mr. 
 Henry : A real market means that if a man has stock 
 to sell he can go and sell it and find a buyer who will 
 buy it and pay money for it, that if h© wants to buy 
 he can go and buy it and find a sellei* who will sell it 
 and deliver it to him, and he will be able to give a 
 check and become the owner of it. That is what I 
 mean by a real market. That is what has existed in 
 California Petroleum ever since it has been on the 
 board." 
 
 In this discussion Mr. Henry was clearly in the right. ^ 
 This is confirmed by the statements made to this Committee 
 by Mr. Van Antwerp (R., 118-120) and Mr. Noble (R., 172, 
 173). 
 
 That the stock has gone down in price since, for whatever 
 the reason may be, is no evidence that there was manipulation 
 any more than it will be evidence of manipulation if the enter- 
 prise fulfils the hopes of its promoters and the price goes up 
 again. Many other well known and established stocks have 
 fallen more points during the same period of time than the 
 stock of the California Petroleum Company, with no sugges- 
 tion or thought on the part of anybody of manipulation. 
 
 These being the facts, there was no occasion for punitive 
 
30 
 
 action on the part of the Exchange. What was done was not 
 a violation of any rule of the Exchange. The transactions on 
 the Exchange were perfectly legitimate, and to adopt a rule 
 preventing them would be not only unwise and impolitic, 
 but a great injury to the investing public. 
 
 (3) We have now gone over all the instances constituting 
 the case made to show widespread manipulation vitiating the 
 quotations of the exchange to such an extent as to require 
 radical legislation for the purification of the mails ; and on which 
 the indictment of the Exchange by the Pujo committee on 
 this charge is based. None of them involves manipula- 
 tion properly defined. There is no evidence anywhere i^ 
 the Pujo record showing definite instances of manipula- 
 tion. It is not necessary for us to argue that in past 
 times there has not been manipulation consisting of contem- 
 poraneous buying and selling orders to bring about a higher 
 level, or a lower level, of prices, or fictitious activity for purely 
 speculative purposes. But it was always sporadic in its nature. 
 It has practically died out with changing conditions and 
 standards reflected in the rules of the Exchange. The trans- 
 actions of the Exchange from day to day are free from it in 
 any degree, and its quotations express the results of actual and 
 legitimate transactions and market conditions. 
 
 IV. 
 
 The rules adopted by tlie Ilxchange to prevent 
 manipulation and improper speculation. 
 
 (1) Kules bearing on manipulation. 
 • (a) The constitution, which was adopted more than fifty 
 years ago, contains these three provisions : 
 
 " The Governing Committee may, by a vote of a 
 majority of all its existing members, suspend from the 
 
31 
 
 Exchange for a period not exceeding one year, any 
 member who may be adjudged guilty of any act which 
 may be determined by said Committee to be detri- 
 mental to the interests or welfare of tlie Exchange " 
 (Art. 17, § 8). 
 
 " A member who shall have been adjudged, by 
 a majority vote of all the existing members of the 
 Governing Committee, guilty of ^ * * any con- 
 duct or proceeding inconsistent with just and equitable 
 principles of trade, may be suspended or expelled as 
 the said Committee may determine, unless some other 
 peualty is expressly provided for such ofifense " (Art. 
 17, § 6). 
 
 " Fictitious transactions are forbidden. Any member 
 violating this rule shall be liable to suspension for a 
 period not exceeding twelve months " (Art. 23, § 8). 
 
 This provision relating to fictitious transactions has always 
 been construed to prohibit " matched orders ", " washed 
 sales ", and all other devices the result of which is that 
 there is an apparent but not a real transaction. There 
 never has been a time when two men could meet on 
 the floor of the Exchange and go through forms which 
 were really the mere pretense of an actual trans- 
 action. The other provisions constitute the sweeping 
 powers of the Exchange to punish any act which either im- 
 pairs the reputation of the Exchange and its transactions or 
 conflicts with absolute fair dealing. Under these provisions 
 no member can do an act, or pursue a course of conduct, of an 
 injurious character towards the public or a fellow member 
 without bringing himself within the disciplinary power of the 
 Governors, regardless of whether it is an act violative of legal 
 rights or not. 
 
 (5) On December 14, 1898, the following resolution was 
 adopted by the Board of Governors : 
 
 *' That where parties have orders to buy and orders 
 to sell the same security, said parties must offer said 
 security, whether it be stocks or bonds, at one-eighth 
 per cent, higher than their bid before making transac- 
 tions with themselves." 
 
v/ 
 
 32 
 
 This rule prevents a broker who has both orders to sell and 
 orders to buy from dealing with himself for both of his princi- 
 pals without any public oflfering in requiring him to first make 
 public the price at which he is willing to buy and the price 
 at which he is willing to sell, with an eighth difiference be- 
 tween them, so that anyone may accept either. The effect of 
 this is that a man cannot record as transactions dealings of 
 his own for two principals without the opportunity to every 
 broker desiring to buy or to sell to deal with him. 
 
 (c) On March 30, 1910, the following rules were adopted 
 which, as amended May 12, 1911, read : 
 
 " 1. That the recognized quotation on stocks shall 
 be public bids and offers on lots of 100 shares. 
 
 " 2. All bids and offers on larger lots shall be con- 
 sidered to be for any part thereof in lots of 100 shares 
 or of multiples thereof, whether so stated in the bid or 
 offer or not. 
 
 " 3. If a bid is made for a larger lot of stock above 
 the price at which smaller lots are offered, or if a trans- 
 action is made in a larger lot above the price at which 
 smaller lots are offered, such bidder or buyer shall be 
 compelled to buy any or all of the smaller lots which 
 were publicly offered at the time, at the lower price, up 
 to the amount of the bid for the larger lot. If the bid 
 for the larger lot is accepted, and the buyer is unwilling 
 to buy more, the seller must give up to the members 
 who were publicly offering to sell at the lower price, 
 such amounts as they were publicly offering to sell at 
 the lower price, if such claim is made immediately. 
 
 " 4. If an offer is made to sell a larger lot of stock 
 below the price which is bid for smaller lots, or if a 
 transaction is made in a larger lot below the price 
 which is bid for smaller lots, such member offering to 
 sell, or the seller, shall be compelled to sell any or all 
 of the smaller lots which were publicly bid for at the 
 time, at the higher price, up to the amount of the offer 
 of the larger lot. If the offer of the larger lot is ac- 
 cepted, and the seller is unwilling to sell more, the 
 buyer must give up to the members who are publicly 
 bidding the higher price, such amounts as they were 
 publicly bidding fox, at the higher price, if such claim 
 is made immediately. 
 
 *'5. A member may sell on offer the largest amount 
 bid for without regard to priority of bids. Should the 
 
33 
 
 offer be of an amount larger than the largest bid, the 
 balance shall go to the next largest bidder in sequence ; 
 bids for equal amounts being on a par. 
 
 " A member may buy on bids under the same rule. 
 ** 6. Attention is directed to the resolution of the 
 Governing Committee adopted October 26, 1892, which 
 reads as follows : 
 
 * When a purchase or sale is claimed by a party 
 who states that he had on the floor a prior or bet- 
 ter bid or offer such claim shall not be sustained 
 if the bid or offer was not made with the publicity 
 and frequency necessary to make the existence of 
 such bid or offer generally known at the time of 
 the transaction.' 
 " 7. Disputes arising from a question as to priority 
 of bid or offer, if not settled by agreement between the 
 members interested, shall be settled by vote of the 
 members knowing of the transaction in question. 
 
 " Disputes as to the application of rules relating to 
 the transaction in question, if not settled by agreement 
 between the members interested, shall be settled by any 
 member of the Committee of Arrangements. 
 
 " 8. The above rules shall not apply to lots of less 
 than 100 shares, nor to active openings when bids and 
 offers are simultaneous." 
 
 A short explanation is necessary to make this group of rules 
 clear. Before they were adopted it was possible for a broker 
 to offer to buy a large quantity of shares, say ten thousand, at 
 a price named by him, say 61, all or none, and there might be 
 no broker having such a block of shares to sell, or only a 
 broker there by prearrangement. But there might be a number 
 of brokers present who were willing to sell smaller lots at that 
 price or, say 60J or 60. The effect of these rules is to require 
 the man who made the bid for ten thousand shares to take 
 any or all of the smaller offerings up to the amount of his bid, 
 thus not only preventing any prearranged plan being carried 
 out but furnishing a market for all the smaller lots offered. 
 The rules have precisely the same effect with respect to a man 
 offering to sell a large block of stock. They have proved to be 
 most efficacious in establishing a broad and open market and 
 preventing collusive trading. 
 
34 
 
 (d) On February 5th, 1913, the following rule was adopted : 
 
 " That no Stock Exchange member, or member of a 
 Stock Exchange firm, shall give, or with knowledge ex- 
 ecute, orders for the purchase or sale of securities 
 which would involve no change of ownership. 
 
 *' The punishment for this offense shall be as pre- 
 scribed in Section 8 of Article XXIII of the Constitu- 
 tion regarding fictitious transactions." 
 
 (e) On February 13, 1913, another rule was adopted, which 
 reads as follows : 
 
 ** That reckless or unbusinesslike dealing is contrary 
 to just and equitable principles of trade, and the offend- 
 ing member shall be subject to the penalties provided 
 in Section 6 of Article XVII of the Constitution, in 
 every case in which the offense does not come within 
 the provisions of Section 5 of Article XVI thereof." 
 
 (f) On March 5, 1913, the following amendment to the 
 Constitution was adopted : 
 
 ** A Committee on Business Conduct, to consist of 
 y five members. 
 
 " It shall be the duty of this Committee to consider 
 matters relating to the business conduct of members 
 with respeet to customers' accounts. 
 
 " It shall also be the duty of this Committee to 
 keep in touch with the course of prices of securities 
 listed on the Exchange, with the view of determining 
 when improper transactions are being resorted to. 
 
 " It shall have power to examine into the dealings 
 of any members, with respect to the above subjects, and 
 report its findings to the Governing Committee." 
 
 It has always been a standing rule of the Stock List Com- 
 mittee, as a measure preventive of manipulation, to decline to 
 list a stock unless it appeared that a sufficient quantity of it 
 was owned by the public. 
 
 Another measure of the same kind is the rule empowering 
 the Committee on Stock List to strike a security from the 
 list whenever the amount outstanding has become so reduced 
 as to make further dealings in it upon the Exchange inadvis- 
 able, and the provision of the Constitution authorizing the 
 
35 
 
 Board of Governors to take similar action (Art. XXXIIL, 
 Sec. 4). 
 
 A distinct evolution is traceable in these rules which 
 we have grouped together. From the beginning simulated 
 transactions of all kinds have been prohibited. In 1898 this 
 prohibition was broadened out to prevent the same broker 
 having orders to buy and sell from dealing with himself as the 
 representative of both principals without any public offering. 
 Behind these special rules were the general provisions denounc- 
 ing acts or conduct contrary to fair dealing or detrimental to 
 the interests of the Exchange. These rules taken together 
 compelled real transactions, but did not prohibit simultaneous 
 orders to buy and sell, emanating from the same man or group 
 of men if in their execution every transaction was real and 
 free from collusion, and otherwise conformed to the rules, un- 
 less they involved a scheme of fraud denounced by the article 
 of the constitution in relation to fraudulent transactions, 
 which reads : 
 
 " A member who shall be adjudged, by a two- thirds 
 vote or all of the existing members of the Governing 
 Committee, to be guilty of fraud or of fraudulent acts, 
 shall be expelled and the President shall so declare ; 
 public announcement of the expulsion shall be made to 
 the exchange and the membership shall be forthwith 
 disposed of by the Committee on Admissions " (Article 
 XVII., Section 2). 
 
 This was the situation down to 1910 ; and under the opera- 
 tion of these rules, the action of the authorities of the Ex- 
 change in enforcing them, and the changing conditions and 
 standards of the time, manipulation consisting of con- 
 certed contemporaneous orders to raise or depress the 
 price of a stock for speculative purposes gradually dis- 
 appeared. The rules of 1910, adopted as a result of the dis- 
 cussion of the recommendations of the Hughes Commission, 
 broadening the market to protect all small ofifers and bids in 
 connection with an ofifer or bid of a large lot, were a prevent- 
 ive step in the same direction. Kesponding to the sentiment 
 
36 
 
 that nothing shall be left undone to prevent such manipulation 
 in the future the rule of February, 1913, has been adopted, 
 assuring an actual change of ownership in every case, thereby 
 preventing transactions of sale and transactions of purchase 
 from being completed with shares owned by the same man or 
 group of men. The appointment of a Committee pursuant to 
 the rule of March 5, 1913, to watch day by day the proceedings 
 on the Exchange and at once detect and arrest any improper 
 practices, with power to examine into the dealings of members 
 to ascertain their true character, is another most important step 
 in the same direction. The preventive efficiency of this Com- 
 mittee cannot be exaggerated. It practically destroys the 
 opportunity of improper practices and assures the integrity of 
 the entire body of transactions on the Exchange. No ex- 
 change here or abroad has provided such complete and eflS- 
 cient machinery for that purpose. 
 
 (2) Rules bearing on speculative accounts. 
 
 Until recent years this subject was covered by the general 
 rule, to which we have already referred, prohibiting acts 
 detrimental to the interests or welfare of the Exchange. That 
 rule had always been regarded as sufficiently comprehensive 
 to reach the taking of an improper account by a member, or 
 the carrying of it under improper conditions. In later years 
 various specific rules have been adopted on this subject to 
 more particularly emphasize the attitude of the Exchange. 
 They are : 
 
 (a) On February 9, 1898, the following rule was adopted : 
 
 " That in future the publication of an advertisement 
 of other than a strictly legitimate business character, 
 by a member of the Exchange, shall be deemed an act 
 detrimental to the interest and welfare of the Ex- 
 change." 
 
 The object of this rule was to prevent advertisements by 
 N . members calculated to attract the attention of tbe general 
 public and have the effect of soliciting business. 
 
§7 
 
 Along the same line is the provision of the Constitution 
 prohibiting the employment of agents for the solicitation of 
 business (Art. XXXV., Section 6) and a rule adopted January 
 23, 1901, declaring— 
 
 " That the employment of a clerk or clerks in a 
 nominal position because of the business obtained by 
 such clerk or clerks for their employer, is a violation of 
 the rules." 
 
 {h) On May 9, 1900, the following rules were adopted : 
 
 *' First. That hereafter no member of the Stock Ex- 
 change and no firm of which such member is a partner, 
 shall establish telephonic or telegraphic wire connection 
 between the office of such member or firm and the office 
 of any firm or individual not a member of the Stock 
 Exchange transacting a banking or brokerage business, 
 unless application therefor shall first be made to the 
 Committee of Arrangements, and shall have been ap- 
 proved by them. 
 
 " Second. Every such telephonic or telegraphic wire 
 connection which shall be so authorized by the Com- 
 mittee of Arrangements, as well as all existing tele- 
 phonic or telegraphic wire connections of the same 
 character, shall be registered with the Committee of 
 Arrangements, who shall make such regulations govern- 
 ing the matter as they deem necessary. 
 
 " Third. That the Committee of Arrangements shall 
 have power, at any time, in their discretion, to order 
 any connection of the character described in these reso- 
 lutions to be discontinued." 
 
 These rules vest the control of the wire connections of a 
 member's office in the Committee of Arrangements, made up of 
 members of the Board of Governors, to prevent improper con- 
 nections of every kind ^nd description. They have been 
 criticised as conferring an unjust and arbitrary power on the 
 Governors, but it is quite plain that it is a proper and neces- 
 sary power. Through its means the authorities of the Ex- 
 change know of every wire connection with a member's office, 
 and whether or not it is an undesirable connection with 
 
38 
 
 reference to the nature of the business that it would originate 
 and bring on to the floor of the Exchange. If it is they can 
 direct its discontinuance. 
 
 (c) On May 19, 1909, the following rule was adopted : 
 
 " That any member of this Exchange who is inter- 
 ested in, or associated in business with, or whose oflSce 
 is connected directly or indirectly by public or private 
 wire or other contrivance with, or who transacts any 
 business directly or indirectly with or for any organiza- 
 tion, firm or individual engaged in the business of deal- 
 ing in differences or quotations (commonly called a 
 ** bucket shop") shall, on conviction thereof, be deemed 
 to have committed an act or acts detrimental to the in- 
 terests and welfare of this Exchange." 
 
 k/ 
 
 This rule specifically prevents any association of any kind 
 between a member or his firm and others which might result 
 in business being drawn to the Exchange from any person or 
 concern engaged in transactions such as are carried on in 
 " bucket shops." 
 
 {d) On March 30, 1910, the following rule was adopted : 
 
 " That the taking or carrying of a speculative 
 account, or the making of a speculative transaction in 
 which a clerk of the Exchange or of a member of the 
 Exchange or of a bank, trust company, banker, or in- 
 surance company is directly or indirectly interested, 
 unless the written consent of the employer has been first 
 obtained, shall be deemed an act detrimental to the in- 
 terest and welfare of the Exchange." 
 
 This rule is self-explanatory. 
 
 {e) On February 13, 1913, the following rule was adopted : 
 
 *' That the acceptance and carrying of an account 
 for a customer, either a member or a non-member, 
 without proper and adequate margin may constitute an 
 act detrimental to the interest and welfare of the Ex- 
 change, and the offending member may be proceeded 
 against under Section 8 of Article XVII. of the Con- 
 stitution." 
 
39 
 
 This rule is reinforced by the duty imposed upon the 
 Committee on Business Conduct created by the resolution of 
 March 5, 1913 " to consider matters relating to the business 
 conduct of members with respect to customers' accounts." 
 
 The requirement of a proper and adequate margin in con- 
 nection with the accounts of customers strikes us as much 
 more desirable than an effort to prescribe the amount of the 
 margin. The Hughes Commission said in its report that " the 
 amount of margin which a broker requires from a speculative 
 buyer of stocks depends in each case on the credit of the 
 buyer ; and the amount of credit which one person may ex- 
 tend to another is a dangerous subject on which to legislate." 
 Every case stands on its circumstances ; on the personality of 
 the customer, his position,his credit and financial responsibility ; 
 and it seems to us that a general rule requiring under the cir- 
 cumstances of each case a proper and adequate margin is 
 wiser and more effective than a rule simply prescribing a 
 definite minimum amount in all cases. 
 
 This body of rules respecting speculative accounts meets 
 every situation that experience has developed. It is certainly 
 comprehensive as it brings within its sweep advertising, solicit- 
 ing for business, wire connections, the prohibition of dealings 
 with classes of individuals because of the nature of their employ- 
 ment, and the margining of accounts of customers. There 
 has been no suggestion of any conditions that are not covered 
 by these rules in the Pujo Report or elsewhere. If any need 
 for additional rules is developed the Board of Governors may 
 be depended upon to put them in operation. There is no 
 basis for any reasonable criticism of the attitude or regula- 
 tions of the Exchange respecting speculative accounts. 
 
 (3) Section 9 of Article XI of the Constitution provides 
 that the Law Committee " is authorized and empowered, 
 whenever the Committee shall deem it to be for the interest of 
 
40 
 
 the Exchange to examine into the dealings of any member of 
 the Exchange." 
 
 Section 7 of Article XVII. provides as follows : 
 
 *' The Governing Committee may, by a two-thirds 
 vote of its members present, require that a member of 
 the Exchange shall submit to the Governing Committee 
 or any Standing or Special Committee, for examination, 
 such portion of his books or papers as are material and 
 / relevant to any matter under investigation by said Com- 
 
 mittee or by any Standing or Special Committee. Any 
 member who shall refuse or neglect to comply with 
 such requirement, or shall willfully destroy any such 
 required evidence, or who, being duly summoned, shall 
 refuse or neglect to appear before the Governing Com- 
 mittee or any Standing or Special Committee, as a wit- 
 ness, or refuse to testify before any such Committee, 
 may be adjudged guilty of an act detrimental to the in- 
 terest or welfare of the Exchange." 
 
 We have already called attention to the provision of the reso- 
 lution of March 5, 1913, creating a Committee on Business 
 Conduct which empowers it " to examine into the dealings 
 of any members " with respect to any subjects referred to 
 in the resolutions. This power is an effective agency 
 in safeguarding the transactions on the Exchange and 
 the rights of customers. If transactions occur which 
 arouse suspicion complete information respecting them 
 can at once be obtained. If a customer complains to 
 the authorities of the Exchange of his treatment by a 
 member they provide a summary mode of inquiry into the 
 complaint. This power is constantly exercised for these and 
 other purposes. There has been criticism of its exercise, or 
 rather the lack of its exercise, in connection with cases of in- 
 solvency ; but the power was not conferred to enable the 
 authorities to keep track from day to day of the sol- 
 vency of the hundreds of members who are dealing on the 
 Exchange. It is obvious that without a corps of accountants 
 almost as large as the active membership of the Exchange 
 
41 
 
 itself it would be impossible to exercise that function, 
 and particularly in view of the fact that the conditions that 
 determine the solvency of an active member are fluctuating 
 from day to day and, what is more important, the main factor 
 is almost invariably one developed in a time of crisis. There 
 are but few cases of insolvency, considering the large active 
 membership of the Exchange, and the records show that they 
 are almost entirely confined to times of abnormal conditions. 
 There has, for instance, been only one failure in the last 
 twenty-one months, which was not at all due to Stock Ex- 
 change transactions, but entirely to unfortunate outside in- 
 vestments and enterprises. 
 
 (4) We submit that this body of rules establishes care, vigi- 
 lance and efficiency on the part of the governing authorities in 
 safeguarding transactions on the Exchange. In their enforce- 
 ment the disciplinary power of the Board of Governors has 
 been rigidly exercised. There are intimations of criticism 
 with respect to the penalties imposed in some cases, but with- 
 out any presentation of the records in those cases on which the 
 Governors acted. Having an extensive knowledge of this 
 subject we can say without any qualification that this power 
 has been uniformly exercised with ability, fairness and justice. 
 
 V. 
 
 The alleged diversion of bank funds and of 
 capital from, productive industry to loans in aid 
 of speculation on the Stock Exchange. 
 
 The substance of what is said on this subject in the Pujo 
 Beport is (p. 45) that excessive and indiscriminate speculation 
 
 \^ 
 
42 
 
 in stocks on the Exchange " withdraws from productive in- 
 dustry vast quantities of capital ; " that statements compiled 
 by accountants for the Committee, based on data obtained 
 from 32 banks and trust companies in New York City, showed 
 that on November 1, 1912, those institutions for themselves 
 and their out-of-town correspondents had outstanding loans 
 on Stock Exchange collateral amounting to $766,795,000 ; 
 that of this sum $240,480,000 was loaned for the account of out- 
 of-town banks ; that though this sum of $766,795,000 repre- 
 sents " a substantial part of the sum required to carry stocks 
 bought on margin on the New York Stock Exchange,'' it was 
 not the whole amount, as it did not include amounts loaned 
 by international banking houses and other institutions ; and 
 that at that time " money was needed for crop moving and 
 other legitimate commercial purposes." 
 
 This presentation of the matter is not only grossly ex- 
 aggerated, but in essential particulars is without any support 
 of fact. 
 
 1. Let us first examine the statement that the sum of 
 $766,795,000 was on November 1st, 1912, a '' substantial part 
 of the sum required to carry stocks bought on margin on the 
 New York Stock Exchange." Was there any such sum so 
 loaned ? Whatever the true amount was, was it all loaned 
 " to carry stocks bought on margin on the New York Stock 
 Exchange ? " Neither is the fact. 
 
 (a) Deducting from the total of $766,795,000 the sum of 
 $240,480,000, being the amount given as loaned directly for 
 account of out-of-town banks, the balance of $526,315,000 
 represents according to this statement the amount advanced 
 by those New York banks and trust companies on their 
 own account. We have from the 32 banks and trust 
 companies referred to in the Pujo report statements show- 
 ing the amounts actually loaned by them on their own account 
 to stock brokers in New York City, whether members of the 
 
43 
 
 Exchange or not, on the date mentioned, which show that the 
 actual amount so loaned was $296,800,101. This shows that 
 the sum of $766,795,000 given in the Pujo report as sub- 
 stantially " the sum required to carry stocks bought on margin 
 on the New York Stock Exchange " is at any rate exaggerated 
 to the extent of $229,514,899. 
 
 We have no means of ascertaining what proportion of the 
 $240,480,000 loaned directly for the account of out-of-town 
 banks was loaned to stock brokers, but the probabilities are 
 that if the facts could be ascertained that sum would also be 
 materially reduced. 
 
 No doubt this error amounting to $229,514,899 is due to the 
 fact that the Pujo report is not a correct representation of the 
 statements furnished by the banks and trust companies to the 
 Committee. What the banks and trust companies were required 
 to furnish was their loans made " on Stock Exchange and other 
 kindred securities." Pujo Test., p. 1192. In the report these 
 become loans " to carry stocks bought on margin on the 
 New York Stock Exchange." We shall show before we get 
 through that there is a great difference between the two. 
 
 On the date mentioned, November 1, 1912, the 63 banks and 
 trust companies belonging to the New York Clearing House 
 Association reported total loans of all kinds of $1,923,374,000. 
 As it is customary for the New York banks to carry " securities 
 owned " by them as loans in the weekly Bank Statement, at 
 least $400,000,000 must be deducted from this figure, leaving 
 $1,523,374,000 as the net amount actually loaned by these in- 
 stitutions to all classes of borrowers in New York and else- 
 where. As most of the banks and trust companies in this list 
 outside of the 32 referred to in the Pujo report do not engage 
 in the business of making loans to stockbrokers, the sum of 
 $296,800,101 shown above to have been loaned by the 32 New 
 York banks and trust companies on their own account to 
 stockbrokers on that day may fairly be taken as substantially 
 the whole amount so loaned to them. Thus out of total loans 
 
44 
 
 on November 1, 1912, of $1,523,374,000 tlie sum of $296,- 
 800,101 was loaned to stockbrokers, and $1,226,573,899 was 
 loaned to all other classes of borrowers. Loans to stock- 
 brokers, therefore, constituted but 19 J per cent, of the total. 
 
 Put in another way, more than $1,200,000,000 was loaned 
 to supply the needs of the country at large as against 
 $290,000,000 loaned to stockbrokers. That this is the 
 normal relation of the two classes of loans is shown by an- 
 other computation made as of September 24, 1913. On that 
 date the total loans of the same 63 banks and trust companies 
 for their own account amounted to $1,226,974,500. Of this 
 amount the total loans to stockbrokers, according to figures 
 supplied by the banks, were $264,383,800. The geographical 
 distribution of the remaining loans was as follows : 
 
 Eastern States (east of the Ohio) $617,830,800 
 
 Southern States 174,140,500 
 
 Western States... ._ 167,720,600 
 
 Foreign (Canada, etc.) 2,898,800 
 
 Our information is that this is a fairly representative state- 
 ment of the amount and distribution of the loans of the New 
 York banks and trust companies at any corresponding time 
 within the last five years. The crop moving period begins 
 early in September and extends to the end of the year, but the 
 largest demand on New York for money for that purpose 
 occurs in the early period. 
 
 There is additional light to be thrown on this subject from 
 still another quarter. The Comptroller's call for November 
 26th, 1912, shows that the total loans of the national banks of 
 the country on that day were $6,059,982,029. This is the 
 call nearest to the date given in the Pujo report, 
 namely, November 1, 1912. Assuming the loans to 
 stockbrokers in the City of New York to have been 
 substantially the same on November 26th, 1912, as 
 they were on November 1, 1912, we have a total of 
 
45 
 
 such loans by the New York banks and trust companies on 
 their own account and made by them directly for out-of-town 
 banks of $537,280,101. Thus the total loans to stockbrokers 
 in New York City on that date were about 8.8 per cent, of the 
 total loans of all the national banks of the country. 
 
 (b) But these loans made to stockbrokers are not to a con- 
 siderable extent made " to carry stocks bought on margin on 
 the New York Stock Exchange." Loans are being constantly 
 made to brokers upon the security of State, municipal and 
 railroad bonds and short-term notes, most of which are not 
 traded in at all on the Stock Exchange. Issues of State, 
 county and municipal bonds from all over the country, in- 
 cluding very large issues of New York State and City bonds, 
 are bought by New York brokers who borrow a large part 
 of the purchase price to carry them during the interval 
 that they are disposing of them to their customers. 
 These dealings continually reach to a very large sum, be- 
 cause New York is the most important market for such secur- 
 ities. There are to-day such bonds to the par value of many 
 millions of dollars in the hands of brokers that are being sold 
 to their customers daily and which they are carrying by means 
 of such loans. 
 
 Loans are also constantly made to brokerage houses to 
 carry underwriting syndicates in the interval between the 
 bringing out of the new securities and their purchase by in- 
 vestors. These are favorite loans with the banks, because 
 they are shdrt time loans and exceptionally secured. 
 
 These are merely instances of loans made on " Stock Ex- 
 change and other kindred securities " that are not loans made 
 " to carry stocks bought on margin on the New York Stock 
 Exchange." 
 
 Moreover the New York banks loan large sums of money 
 to individuals, firms and corporations for their business pur- 
 poses upon the security of " Stock Exchange and other kin- 
 dred securities." Loans of this character have been very com- 
 
46 
 
 mon during the last few years, and are an important factor 
 during periods of financial stringency when merchants find it 
 difficult to market their paper. A large number of more im- 
 portant mercantile borrowers have come to regard their bond 
 holdings as a sort of secondary reserve for use when their 
 paper is moving slowly, and the same is true of interior banks. 
 It is also the fact that loans of this character to a large 
 extent are made for the purpose of investment. In confirma- 
 tion we quote from the " Keport on the Finances " by the 
 Director of the Mint, bearing date of January, 1914, where 
 it is said (p. 362) : 
 
 " The great supply of dividend-paying stocks and 
 bonds now in the possession of the public afifords a 
 most convenient facility by means of which loans may 
 be obtained. No doubt there is a great deal more bor- 
 rowing for miscellaneous investments upon the securi- 
 ties of a corporation whose issues are widely distributed 
 than there was upon the credit of the same business 
 before it was incorporated or while the ownership was 
 in a few hands. Perhaps it is not too much to say that 
 in times of prosperity,* when the spirit of money-making 
 is infectious, it is difficult for the average man to keep 
 good collateral in his own box while many inviting 
 opportunities for investment pass by." 
 
 If the figures could be obtained whereby it could be ascer- 
 tained what part of the $766,795,000 mentioned in the Pujo 
 report consisted of loans " to carry stocks bought on margin 
 on the New York Stock Exchange " and what part consisted of 
 loans made on " Stock Exchange and other kindred securities " 
 for all these other purposes we have mentioned, we have no 
 doubt that a vastly lower figure would represent the former. 
 There is no justification whatsoever for the assumption upon 
 which this portion of the Pujo report is based that loans 
 made upon " Stock Exchange and other kindred securities " 
 by the New York banks and trust companies are made " to 
 carry stocks bought on margin on the New York Stock 
 Exchange." 
 
47 
 
 2. It is not the fact that the loans made by the New York 
 banks and trust companies on " Stock Exchange and other 
 kindred securities " divert funds from " crop moving and 
 other legitimate commercial purposes," nor do they withdraw 
 from '* productive industry vast quantities of capital." There 
 is no better illustration of the true situation with regard to 
 the alleged diversion of funds when high money rates prevail 
 for call loans in New York City than during the period of 
 financial stringency in 1907, when those rates were at their 
 highest. The figures compiled by the United States Treasury 
 showing the movement of money during that period are most 
 instructive on this point. They are as follows : 
 
 Keduction in cash in National Banks, August 22 
 
 to December 3 __ $40,838,786 
 
 Net imports of gold, November 1 to December 31 106,403,770 
 
 Increase in deposits of public funds, August 22 
 
 to December 3 . _ 79,834,689 
 
 Increase in bank circulation, August 22 to De- 
 cember 3 _. _ 49,856,524 
 
 Decrease in cash in State Banks and Trust Com- 
 panies of New York City, August 22 to Decem- 
 ber 19 _. 19,191,700 
 
 Total - , $296,125,469 
 
 In speaking of this remarkable absorption of cash Secre- 
 tary of the Treasury Cortelyou in his annual report for 1907 
 said : 
 
 *' Of this great absorption of currency, amounting 
 substantially to one-tenth of the entire estimated money 
 in circulation in the United States, more than two-thirds 
 of the burden fell upon New York. This was almost 
 inevitable from the fact that New York is the financial 
 distributing center of all the country. The figures show 
 that more than the entire net loss in National Bank re- 
 serves fell upon the National Banks of New York City. 
 The National Banks outside of New York City, in 
 spite of heavy demands upon them, were able by the 
 aid of New York to maintain an amount of cash actu- 
 ally larger by a small amount on December 3 than 
 they held at the date of the previous report to the 
 Comptroller on August 22, when conditions were 
 
48 
 
 still relatively tranquil. The National Banks of 
 New York City not only met the demand for currency 
 until their reserves were reduced $54,103,600 below the 
 legal limit, but, in addition, thev imported and dis- 
 tributed $95,000,000 in gokl, and distributed also in 
 order to meet the demands of their depositors and 
 banking correspondents, all of the money of the 
 Government deposited with them. The result was that 
 of the $296,000,000 currency absorbed throughout the 
 country, $218,275,804 was provided by the banks of 
 New York City." 
 
 This would appear to be a sufficient answer to the argu- 
 ment that money can be kept in New York, or drawn to 
 New York, by high rates for call loans when it is needed 
 in other parts of the country for productive industry, 
 crop moving or any other purpose ; and the subject can 
 be pursued further. If the fact is that in periods 
 of unusual demand for money for crop moving 
 or other purposes, the outflow of funds from 
 New York vastly exceeds the inflow, the assumption of 
 the Pujo report to the contrary fails. The year 1906 was 
 a period of exceptional demand for money owing to the busi- 
 ness and commercial conditions which had existed for some 
 time, and during thai period call money rates touched 40 per 
 cent, per annum in September, 9 per cent, in October, 27 per 
 cent, in November and 36 per cent, in December. These high 
 rates offered such an inducement to foreign institutions to lend 
 money in New York that approximately $400,000,000 were 
 advanced in 1906 by London, Paris and other foreign centres 
 to New York borrowers. This money went far to take the 
 place of the large withdrawals of money from New York by 
 the interior banks of the country. Between August 4, 1906, when 
 the outflow of currency from the New York banks to the interior 
 banks began, and November 9 when the movement ended, 
 $41,710,000 more currency was sent to the interior banks than 
 was received from them in New York City, taking no account 
 of the heavy payments to the Sub-Treasury for account of 
 
49 
 
 interior institutions. Thus, instead of a flow of money to New 
 York attracted by high rates, the fact is that the flow was 
 from New York to the interior banks that they might meet the 
 local demands upon them. 
 
 During a similar period in the year 1905, when there 
 was a great demand for money, the flow of currency 
 between August 12 and December 18 shows that 
 $21,749,000 more was sent to the interior banks by the New 
 York banks than was received from them, in addition to the 
 very large payments made by the New York banks to the Sub- 
 Treasury for the account of interior banks. 
 . During the same period in the year 1901 — which was 
 another time of great demand for money — the shipments of 
 currency by the New York banks to the interior banks ex- 
 ceeded by $18,500,000 the shipments received from the in- 
 terior banks, and this also was in addition to large transfers 
 of cash to the interior banks through the Sub-Treasury. 
 
 The fact is that in all times of urgent demand for money 
 the high rates for call money in New York draw money from 
 abroad, and more money goes to the interior from New York 
 than comes from the interior to New York, through currency 
 shipments and transfers at tlie Sub-Treasury to meet the 
 demands of the country at large ; and there is therefore no 
 basis for the assumption of the Pujo report of the diversion 
 of funds needed for crop moving and other legitimate pur- 
 poses to speculation on the stock market and of the with- 
 drawal from productive industry of large amounts of capital. 
 To this we need only add that the use of capital or bank 
 funds in connection with speculation is just as legitimate as 
 the other uses to which they are put, because, as has been 
 shown to this Committee by ample authority of the highest 
 kind, which has not been disputed by any one, speculation is 
 necessary and essential to the development of the industries 
 of the country and its commercial expansion. 
 
50 
 
 VI. 
 
 The Bill. 
 
 If we have succeeded in establishing, as we believe we 
 have, in the foregoing sub-divisions of this brief, that there is 
 no volume of transactions on the Exchange, subject to con- 
 demnation as fraudulent or improper, it follows that there 
 is no occasion for legislation under the power of Congress 
 to regulate the mails, and this brief might stop here. But 
 because it is claimed that there has been manipulation 
 or so-called unwholesome speculation to some extent, we 
 propose, under this head, to examine the bill as a remedial 
 measure with reference to its purpose, operation and prac- 
 ticability. 
 
 The bill is entitled " A bill to prevent the use of the mails 
 and of the telegraph and telephone in furtherance of fraudulent 
 and harmful transactions on stock exchanges." Thus, according 
 to its title, its object is limited to excluding ** fraudulent and 
 harmful transactions on stock exchanges " from the mails, 
 telegraph and telephone. It consists of five sections. 
 
 Section 1 provides that no letter, package, circular, 
 pamphlet, post-card or newspaper containing any informa- 
 tion or quotations of prices concerning transactions in secur- 
 ities on any stock exchange, nor any papers of any kind re- 
 lating to such transactions, shall be deposited in the mails, 
 unless the exchange is incorporated and its charter or by-laws 
 embody the requirements and prohibitions therein prescribed. 
 Section 2 confers power upon the Postmaster General to ex- 
 clude from the mails, any letter, package, circular, pamphlet, 
 post-card or newspaper containing information or quotations of 
 prices respecting transactions in securities on an exchange 
 which shall not "upon evidence satisfactory to him," have 
 conformed to the requirements specified in Section 1 or which 
 shall " have failed to enforce " such requirements. Section 3 
 
81 
 
 provides that any person who shall knowingly deposit in the 
 mails any letter, package, circular, pamphlet, post-card or 
 newspaper in violation of Section 1 shall be deemed guilty of 
 a misdemeanor, and on conviction shall be fined $1,000 or im- 
 prisoned not more than two years, or both, for the first 
 ofi'ense, and not more than five years for any subsequent 
 offense. Section 4 provides that if any telegraph or tele- 
 phone company shall knowingly transmit any order, quota- 
 tions of prices or other information concerning transactions 
 in securities on exchanges which shall not have conformed to 
 the requirements specified in Section 1 or that shall have 
 failed to conform to any order issued by the Postmaster 
 General pursuant to Section 2, shall be guilty of a misdemeanor. 
 Section 5 defines various terms used in the bill, such as 
 " stock exchange," " securities," " manipulation of securities," 
 " matched orders," and " washed sales." 
 
 An analysis of Section 1 shows that the requirements im- 
 posed upon the exchanges, in addition to incorporation, may 
 be grouped under various heads according to the purposes 
 they are designed to subserve. 
 
 Paragraphs 1 and 2 of subdivision (a) and subdivisions (h) 
 and (i) are primarily regulations of corporations, and of the re- 
 lations of oflScers and directors to their corporations, and their 
 purpose is to accomplish certain corporate regulation or re- 
 forms through the medium of stock exchanges. Subdivision (e)^ 
 {f) and {h) are regulations of the relations of members of an 
 exchange to their customers. Subdivision {g) is a regulation 
 affecting members of an exchange as individuals, and sub- 
 division (c) is a regulation of the exchange itself concerning 
 the removal of securities from its list. Subdivision (d) pro- 
 hibits the manipulation of securities and is the only provision 
 directly relating to transactions on an exchange. We propose 
 to discuss these requirements according to this grouping to 
 avoid repetitions. 
 
52 
 
 (1) Incorporation. 
 
 This subject has been so much discussed that ifc is not 
 necessary to treat it in a detailed way. It was before the 
 Legislature of the State of New York in the spring of 1913, 
 and was thoroughly discussed at that time at two hearings, 
 one before the Judiciary Committee of the Senate and the 
 Codes Committee of the Assembly sitting together, and the 
 other before the Judiciary Committee of the Senate with 
 members of the Codes Committee of the Assembly present. 
 The arguments made on those occasions by the counsel for 
 the New York Stock Exchange will be submitted to the Com- 
 mittee with this biief. The subject is discussed in the brief 
 of the same counsel submitted to the Pujo Committee, a 
 copy of which has been made a part of these proceedings 
 (Exhibit B, Appendix). It has been elaborately argued 
 before this Committee, and the argument on behalf of the 
 New York Stock Exchange is found in the record at pages 
 347-363. The Judiciary Committee of the Senate of the Leg- 
 islature of the State of New York made a report against incor- 
 poration which was sustained by the Senate by a vote of 34 
 to 5. The Hughes Commission was adverse to incorporation 
 as appears from the following quotation from its report : 
 
 " We have been strongly urged to recommend that 
 the Exchange be incorporated in order to bring it 
 more completely under the authority and supervision 
 of the State and the process of the courts. Under 
 existing conditions, being a voluntary organization, 
 it has almost unlimited power over the conduct of 
 its members and it can subject them to instant 
 discipline for wrongdoing, which it could not ex- 
 ercise in a summary manner if ifc were an incorpo- 
 rated body. We think that such power residing in 
 a properly chosen Committee is distinctly advantageous. 
 The submission of such questions to the courts would 
 involve delays and technical obstacles which would 
 impair discipline without securing any greater measure 
 of substantial justice. While this Committee is not 
 entirely in accord on this point, no member is yet pre- 
 pared to advocate the incorporation of the Exchange 
 
53 
 
 and a majority of us advise against it upon the ground 
 that the advantages to be gained by incorporation may 
 be accomplished by rules of the Exchange and by 
 statutes aimed directly at the evils which need correc- 
 tion." 
 
 With all this material before the Committee it would seem 
 to be suflScient in this place to confine ourselves to a summary 
 of the points involved. 
 
 (a) Incorporation is not necessary to regulation. 
 
 We think it was fairly demonstrated on the oral argument 
 that incorporation is not necessary to regulation, either State 
 or national, within constitutional limitations. 
 
 It is said in the Pujo Eeport (p. 115) : 
 
 " Notwithstanding these facts, it (the Exchange) 
 contends that it should be permitted to continue its 
 voluntary organization with the privileges and freedom 
 of action of a private club and should not be made sub- 
 ject to legislative or judicial control or supervision and 
 that it is not amenable to Federal regulation in its use 
 of the mails and of the telegraph and telephone in inter- 
 state commerce and in the dealings of its members with 
 foreign countries. To this contention your Committee 
 is unable to agree. It is incongruous that such an 
 institution, wdelding such power and equipped to per- 
 form such useful and important functions in our 
 economic system, should be uncontrolled by law." 
 
 This is a gross exaggeration of any position ever taken by 
 the authorities of the Exchange. It has never claimed to be 
 on the footing of a private club. It would be absurd to make 
 such a claim in view of the fact that it is a market place where 
 the members deal with each other on behalf of the public as 
 well as on their own account. To speak of it as " uncontrolled 
 by law " is equally absurd, considering the wide scope of the 
 legislative power with respect to transactions on the Exchange, 
 and the relations of the Exchange and its members to the 
 public. The bills enacted by the Legislature of the State of 
 New York in the Session of 1913 show the exercise of that 
 power with respect to manipulation, false representations 
 
54 
 
 concerning securities, reporting or publishing fictitious 
 transactions, discriminations by exchanges or members 
 thereof, transactions by brokers after insolvency, hy- 
 pothecation of customers' securities, trading by brokers 
 against customers' orders, and delivery of memoranda of trans- 
 actions (N. Y. Laws of 1913, Chapters 253, 475, 476, 477, 500, 
 692, 693). Other bills are pending before the present session 
 of the Legislature, and the same is true in Massachusetts. 
 Like legislation of other States was considered in Booth vs. 
 Illinois, 184 U. S., 425 ; Otis vs. Parker, 187 U. S., 606 ; Gale- 
 wood vs. North Carolina, 203 U. S., 551 ; Broadnak vs. Missouri, 
 219 U. S., 285. This legislative power is limited only by its 
 constitutional limitations, and it operates with equal force 
 upon the transactions of an exchange and the relations of its 
 members to the public whether it is incorporated or a volun- 
 tary association. If it were ever deemed wise to place the 
 transactions on an exchange under the direct supervision of 
 some public authority the power to do so would be just the 
 same with respect to an unincorporated as to an incorporated 
 exchange. This is really a self-evident proposition. There is 
 therefore nothing to be gained in the way of legal control 
 or governmental regulation and supervision by incorporation ; 
 and that being true the argument for incorporation falls to the 
 ground, because it is founded on the proposition that incor- 
 poration is necessary to those ends. 
 
 (h) Though nothing would be gained by incorporation it 
 would involve serious consequences of a detrimental char- 
 acter. Under a legislative charter the terms of member- 
 ship, and the relations of the members to the governing 
 body of the Exchange would be subject to legislative con- 
 trol, whereas they are now a matter of contract. The pres- 
 ent disciplinary power of the governing body is based on 
 this contractual relationship. Under the contract fixing the 
 terms of membership every member agrees to observe 
 the rules of the Exchange and submits himself to 
 
55 
 
 the jurisdiction of the Board of Governors to punish any 
 violation of the rules by fine, suspension or expulsion, 
 as the case may be. The most effective of these rules are 
 couched in the broadest language to bring within their sweep, 
 not only acts that are wrongful from a legal point of view, 
 but acts that are inconsistent with fair dealing and in any 
 way detrimental to the Exchange as a great market for securi- 
 ties. Under this contract a member charged with a violation 
 of a rule is tried before the Board of Governors, the selected 
 representatives of the whole membership of the Exchange, and 
 because of this contract between the members the courts will 
 not interfere with any exercise of the punitive powers of the 
 Board if it appears that the written charge made against 
 the member concerns a violation of some rule ; that the mem- 
 ber has been heard in his defense ; that there is evidence to 
 support the decision of the Governors ; and that the Governors 
 have acted in good faith. There are numerous cases to that 
 effect. If it were permitted to a member who has been 
 suspended or expelled to take his case into court, for a judicial 
 determination on the evidence of the question whether he 
 should have been punished, the delays, and the possible con- 
 flicts between the courts, looking at the matter from a strictly 
 legal point of view and with the legal habit of mind, and the 
 Governors looking at it from the point of view of practical men 
 of great experience in the actual transactions of the Exchange, 
 would inevitably impair the eflSciency of the disciplinary 
 power and debase the morale of the Exchange audits member- 
 ship. This proposition would seem to be fairly self-evident 
 too. 
 
 (c) Another objection to incorporation is that there would 
 follow from it constant appeals to the legislature to amend / vj 
 the charter of the Exchange, to correct imaginary grievances 
 plausibly presented and supported by personal sympathy in 
 case of apparent hardship, requiring continual activity on its 
 part in legislative matters to preserve the integrity and 
 
56 
 
 standing of its membership. To-day its responsibility for the 
 conduct of its members in the transaction of business on the 
 exchange is unqualified, and public opinion can and does hold 
 it accountable for whatever takes place. Interference by the 
 State under a legislative charter in the province of the rela- 
 tions of the members to each other and to the governing body 
 of the Exchange — which does not at all touch the relation of 
 the Exchange or its members to the public— will divide that 
 responsibility and fatally impair and weaken it. 
 
 It was these ari^aments that convinced the Legislature of 
 the State of New York that it would be unwise for it to com- 
 pel incorporation ; and we believe them to be unanswerable. 
 
 (2) The group of regulations of which corporate regulation 
 is the purpose. 
 
 Paragraphs 1 and 2 of subdivision (a), subdivision (h) and 
 subdivision (i) of Section 1 require corporations having secu- 
 rities listed on an exchange to file with the Secretary of the 
 Exchange (1) a sworn statement of the nature, amount and value 
 of the tangible and other property, assets and effects of the 
 corporation, its actual and contingent liabilities and obliga- 
 tions, the volume of its business and net earnings year by 
 year for at least three years ; and a like statement with respect 
 to every subsidiary or controlled corporation in which it is 
 interested ; and (2) a copy of every contract in writing, and a 
 description of every parol contract, affecting the authoriza- 
 tion, issue, sale or disposition of its securities 
 listed on the Exchange, accompanied by a full disclosure of 
 all fees, profits, charges, commissions or compensation paid or 
 agreed to be paid or reserved to bankers, brokers, middlemen 
 or others in connection therewith, and of the net amount 
 realized or to be realized therefor. 
 
 Subd. (h) requires every such corporation to file at least 
 once in each year with the Postmaster-General and the Secre- 
 tary of the Exchange a detailed statement of its gross receipts 
 
57 
 
 and expenses, and its net earnings ; and a particular statement 
 of any and all agreements between it and any of its oflScers or 
 directors, or witli any partnership, association or corpora- 
 tion in which any oflScer or director is interested, and of 
 the profits, emoluments, salaries, commissions or other 
 compensation or benefits to accrue therefrom to such officers 
 or directors or any partnership, association or corporation in 
 which such officer or director is interested. 
 
 Subdivision (2) provides that every such corporation shall be 
 required to amend its charter or by-laws to expressly pro- 
 hibit sales and purchases of its stock or securities by its offi- 
 cers and directors unless they give previous written notice of 
 such intended action to the directors for entry upon the min- 
 utes of the meeting of the board, and unless such transactions are 
 reported to the secretary of the company within five days 
 after they are made that they may be entered upon the min- 
 utes of the next succeeding meeting of the board. 
 
 Some of these requirements are no doubt proper and de- 
 sirable but they should be provided for in legislation directly 
 operating upon the corporation. They are measures of regula- 
 tion framed under the theory that the Stock Exchange should 
 be made an agency of corporate regulation to correct the short 
 comings of State legislation. That does 'not seem to us to be 
 the province of an exchange, and no stock exchange anywhere 
 in the world that we know is utilized by the State to perform 
 such a function. It appears from the Pujo report that this 
 is the avowed purpose of these provisions of the bill. Can it 
 be seriously argued that legislation with that avowed purpose 
 is authorized under the power of Congress to regulate the 
 mails ? If Congress has any power to legislate with respect to 
 the inventories and statements that corporations must make ; 
 the disclosure they must make respecting their issues 
 of securities, and the profits and commissions payable in con- 
 nection therewith ; the disclosure they must make of con- 
 tracts in which their officers and directors are directly or in- 
 
58 
 
 directly interested ; and the dealings of officers and directors 
 in the securities of their corporations, it must be under the 
 power to regulate such corporations because engaged in inter- 
 state commerce ; and it would naturally be legislation directly 
 operating upon corporations of that character. To attempt to 
 legislate on those subjects under the power to regulate the use 
 of the mails is incongruous to the last degree. 
 
 Another fatal objection to these provisions is that they 
 have no direct relation to the use of the mails, and are not 
 germane to a bill to prevent the use of the mails " in further- 
 ance of fraudulent and harmful transactions on stock exchanges." 
 There is no such relation between these requirements and the 
 character of the transactions on an exchange as to warrant 
 legislation with respect to them under the power to regulate 
 the mails. If there is any relation at all between them it is 
 altogether too remote as a pretext for such legislation under 
 that power. 
 
 Another objection, of a practical rather than a legal nature, 
 is that the Exchange has no power to enforce these requirements. 
 /AH it could do would be to strike the securities of a non-com- 
 ^ plying corporation from the list so that there could be no deal- 
 ings in them on the Exchange. The result of that course would 
 be to transfer the dealings to the unregulated markets outside, 
 because there are such markets in which dealings in securities 
 now take place to a large extent ; and the quotations of prices 
 that would then go through the mails would emanate from 
 news gatherers. If there are to be such requirements they 
 should be compulsory; and they can only be compulsory 
 when they are imposed by legislation directly operating upon 
 the corporations themselves. 
 y No criticism has been heard of the listing requirements of 
 
 the Exchange. They are very elaborate, and there has to be 
 strict compliance with them, passed upon and approved by a 
 Committee composed of experts, subject to ratification by the 
 Board of Governors. The Pujo report says (p. 115) that the 
 
59 
 
 Exchange " undertakes to prescribe the form and conditions 
 of every corporate security in which it authorizes dealings and 
 its determination is final through, its control over the listing of 
 such securities. It reserves the right to exact minutest de- 
 tails of the affairs of the issuing corporation, to impose 
 its will in the matter of the procedure by which such 
 corporation shall declare and pay interest and dividends, 
 and in the matter of the transfer agents and registrar, 
 and as regards endless other details," and adds that it 
 is very proper for it to do so. No evil existing in the method 
 of listing securities on the Exchange, legislation regarding it 
 would scarcely seem to be necessary even if the power to legis- 
 late existed. 
 
 (3) The group of regulations affecting the relations of 
 members of an exchange to their customers. 
 
 Subd. (e) requires the prohibition of the hypothecating by 
 a member of any security belonging to his customer for any 
 amount in excess of the sum at the time owing such member 
 thereon, and of any arrangement or agreement with his cus- 
 tomer for such use. Subd. (/*) requires the prohibition of the 
 lending of the securities of a customer pledged with a member, 
 and of the making of any agreement with his cus- 
 tomer with respect thereto. Subd. (h) requires that no 
 order of a customer to purchase securities shall be executed 
 unless the member shall have received from the customer a 
 partial payment in cash of not less than twenty per cent, of 
 the market price of the security on the day of purchase. 
 
 The avowed purpose of these requirements is to restrain 
 speculation. They raise the question whether Congress has 
 the power to regulate the relations between a member of an 
 exchange and his customer ; and whether the limitation of the 
 right of individuals to contract with each other with respect 
 to the hypothecation of securities, the lending of securities and 
 the amount for which credit may be extended by one to the 
 
60 
 
 other is not a violation of tlie Fifth Amendment of the Con- 
 stitution. Hypothecation, lending securities and extending 
 credit are matters subject to the law of the State where they 
 occur. There is for instance a law of the State of New York 
 which regulates the hypothecation of a customer s securities 
 which impliedly recognizes that the securities may be used by 
 a broker with the consent of the customer in a manner pro- 
 hibited by this bill. Surely the law of the State is the para- 
 mount law on those subjects ; and as Congress may not di- 
 rectly legislate with regard to them, it is clear that it may not 
 do so indirectly by imposing a requirement upon stock ex- 
 changes, which in turn it can only indirectly reach through 
 the power to regulate the use of the mails. 
 
 Passing the legal aspects of these particular requirements, 
 there is the grave question whether it is wise to endeavor to 
 restrain speculation by legislation. We do not propose to go 
 into that question, because it was so thoroughly covered on 
 the hearings before this Committee. The legislation of Ger- 
 many in 1896 warns us that legislative interference with specu- 
 lation on stock exchanges is fraught with danger, and apt to 
 produce just the opposite to the intended effects ; and con- 
 firmatory of that experience is the experience of Congress 
 in enacting the law of 1864 against speculation in gold which 
 had to be repealed after it had been in force just fifteen 
 days. 
 
 But these requirements would serve no useful purpose in 
 any event. If the course of a stream is dammed it will overflow 
 the surrounding country or find another channel. Orders could 
 be executed on the Exchange by floor brokers for non-member 
 brokers, followed by transactions off the Exchange between 
 the latter and their customers. The present course of business 
 relating to the hypothecation of securities, the lending of 
 securities and the amount of the margin is supported by long 
 established practice, and is necessary to the carrying on of 
 the business ; and it can be continued even if prohibited by 
 
61 
 
 the rules of the Exchange by membership of the Exchange 
 being confined to floor brokers as it would be. 
 
 (4) The requirements bearing on the Exchange itself and 
 its membership. 
 
 (a) Subd. (g) provides that the members of the Exchange 
 shall be required to keep full and accurate books of account 
 of all their Exchange transactions, containing all the actual 
 names and transactions of their customers and the serial number 
 of all securities or certificates that have been purchased or 
 sold by them ; and that such books and all the records of the 
 members shall be at all times open to the inspection of the 
 Postmaster General and such persons as he may from time to 
 time designate to make such examinations. 
 
 The unconstitutionality of this provision was sufficiently 
 presented on the oral argument made on behalf of the Ex- 
 change (R., pp. 374-378). 
 
 We suppose that its main purpose is to enable the Post- 
 master General through a corps of special agents to ascertain 
 from the books and papers of members whether or not there 
 are grounds for the exercise of the arbitrary power conferred 
 upon him by Section 2 of the bill. But the investing of the 
 Postmaster General with such a power is no sufficient reason 
 for the invasion of the privacy of the individual books of the 
 members of the Exchange containing their transactions with 
 their customers. If the power cannot be effectively exercised 
 without the invasion of that privacy ifc may be a good reason 
 for not conferring ifc ; but it is no reason for such a wholesale 
 sacrifice of individual rights or such wholesale publicity of the 
 private affairs of the public. 
 
 The grave practical objection to this requirement is that it 
 would drive the public to the offices of non-members and 
 cause substantially every responsible house to retire from the 
 Exchange. The Exchange would become nothing more than a 
 body of floor brokers executing orders for non-member houses 
 and receiving payment in cash. The business now done on 
 
62 
 
 the Exchange would, without regulation, be carried on through 
 non-member houses, the names of which alone would appear 
 upon the books of the floor broker ; and the names of those 
 houses would be of no service to the Postmaster General because 
 their books would not be accessible to public examination. The 
 extent to which these non-member houses would continue to 
 avail themselves through the floor brokers of the facilities of 
 the Exchange is even doubtful. Those facilities would be 
 so greatly curtailed that direct dealings between houses 
 would to a large extent, and probably to an ever increasing 
 extent, take the place of the present open trading on the floor 
 of the Exchange. As the provisions of subdivisions (a), (b) 
 and (i) would probably cause the removal from the Exchange 
 of many of the securities now listed there because of non-com- 
 pliance with them by many corporations ; and the provisions 
 of subdivisions (e), ( /*) and (A) would take many transactions 
 off the Exchange because an obstruction to the natural and 
 necessary course of business ; and this subdivision (g) would 
 remove the bulk of the present membership from the Exchange 
 through the exposure of their private books containing their 
 transactions with their customers, the probabilities are that 
 the Exchange would cease to be a market of any importance 
 whatever. The effect of the bill would, therefore, be to seri- 
 ously impair the institution as to which the Pujo report says 
 (p. lU) : 
 
 "The stock exchanges in our principal cities, and 
 especially those in New York, Chicago, Pittsburg and 
 n/ Boston, are essential instrumentalities in the conduct of 
 
 modern business and finance." 
 
 (h) Subd. (c) prohibits the striking of a security from the 
 list so long as any part of the issue originally listed is out- 
 standing, except after due notice to all security holders 
 affected by the proposed action, and subject to review by any 
 court of competent jurisdiction. 
 
63 
 
 It should be enough to say of this provision that by no 
 ingenuity can any connection be traced between striking a 
 security from the list and the transmission of quotations through 
 the mails. The effect of striking a security from the list is to 
 prevent all dealings in it on the Exchange, and therefore there 
 can be no quotations of any kind respecting it on the Exchange. 
 But passing this obvious objection, the provision is certainly in 
 strange contrast with other provisions of the bill because the 
 removal of securities from the list is only done when in the 
 opinion of the Exchange it is necessary to prevent fraud or 
 manipulation. 
 
 During the Pujo investigation the Exchange, at the request 
 of the counsel for the Committee, furnished to the Committee 
 a complete list of all the securities which over a long period 
 of years had been removed from the list. The reasons for the 
 removal were shown in each instance, and in every case in 
 which it was called upon to do so the Exchange furnished the 
 documents upon which its action was founded. Counsel did 
 not put this statement in evidence before the Committee. 
 Out of all the removals only two were brought to the attention 
 of that Committee or adversely commented upon before 
 this Committee. "We feel that Mr. Pomroy's explanation of 
 both of those cases must have satisfied the Committee that 
 the action of the Exchange was proper. (See also the re- 
 marks of counsel for the New York Stock Exchange on this 
 subject, K, pp. 371-372). 
 
 (5) Regulations affecting transactions on the Exchange. 
 
 Subd. {d) prescribes that the manipulations of securities 
 and of the prices and transactions therein, and all fictitious 
 purchases and sales of securities, and what are known as 
 " matched orders " and " washed sales," and all other deal- 
 ings or transactions that are intended, or the effect of which 
 is, to deceive or mislead the public shall be prohibited by 
 regulations of the Exchange to be approved by the Post- 
 master General. In connection with this subdivision there 
 
64 
 
 has to be taken subdivisions 3 and 4 of Section 5 which define 
 " manipulations," " matched orders " and " washed sales." 
 
 These are the only provisions of the bill that have any 
 relation at all to transactions on the Exchange with respect to 
 which the mails, telegraph and telephone may be used. It 
 stands alone in a sort of solitary pertinency to the subject- 
 matter of the bill. If a bill were drawn to prohibit the trans- 
 mission of quotations emanating from manipulated trans- 
 actions through the mails or by telegraph or telephone it 
 would be proper to define what manipulated transactions were. 
 As an eflfort in that direction these provisions of the bill are so 
 extreme as to be impracticable. 
 
 Nothing need be said regarding these provisions in so far as 
 they relate to fictitious transactions, " matched orders " and 
 " washed sales " because they have been prohibited for fifty 
 years and are unknown on the floor of the Exchange. The 
 definition of " manipulation " is covered by two subdivisions 
 (3 and 4 of Sec. 5). Sub. 3 defines it as actual sales or pur- 
 chases of securities by an individual alone or in combination 
 with others for the purpose of creating a false or misleading 
 appearance of activity, or artificially depressing or inflating the 
 market price of a security, or attracting public attention to the 
 security to induce its purchase or sale by others. Hence an 
 actual purchase of stocks, received into the possession of the 
 buyer and paid for, may be denounced as manipulation if the 
 Postmaster General or the Board of Governors or some other 
 authority, penetrating the mental operations of the party, dis- 
 covers, or thinks there is evidence of one of the condemned 
 purposes. This is true whether the transactions are those of a 
 single individual or a group of men. This may be an interest- 
 ing view of the matter as a psychological problem, but from a 
 business point of view it is utterly impracticable. Motive, 
 purpose and intent may, of course, be inferred from the acta of 
 parties. But when those acts aro consummated transactions 
 consisting of the sale or purchase cf securities, nnd t!ie buyer 
 
65 
 
 or seller insists that he bought or sold them because he desired 
 to own them in the one case or to own them no longer in the 
 other, how is it practical for the Postmaster General or the 
 Board of Governors to impute some hidden improper motive 
 or purpose to the transactions. The legitimacy of business 
 on an exchange cannot be made to depend upon such con- 
 siderations if there is to be that free movement of transac- 
 tions which is the essence of its usefulness as a market. 
 
 By the other definition (subd. 4, § 5) manipulation con- 
 sists in giving or causing to be given, or knowingly executing 
 or causing to be executed, upon any exchange, directly or 
 indirectly, any order for the simultaneous, or substantially 
 simultaneous, purchase or sale of any security by or for or on 
 behalf of the same persons or interests, whether accom- 
 plished by means of genuine or fictitious purchases or 
 sales. This comes nearer to a proper definition of 
 manipulation because it involves simultaneous orders to buy 
 and sell for the same man or group of men ; but it is too 
 broad because it covers transactions of that character which 
 are perfectly legitimate. We refer to what we have said in 
 the discussion of manipulation under Point III. of this brief, 
 and insist that the definition there given, and the definition 
 which is involved in the prohibitions of the rule of the Ex- 
 change adopted February 5, 1913, and the Act of the 
 Legislature of the State of New York (Laws of 1913, Ch. 
 253) are the only practical definitions because they avoid 
 the trammeling of legitimate and proper transactions and 
 the unnecessary curtailment of the function and usefulness 
 of the Exchange as a market. We reiterate that there is no 
 existing manipulation, or existing evils due to manipulation, 
 to call for or warrant any legislation on the subject. 
 
 (6) The only remaining provision of the bill to which we 
 deem it necessary to refer is Section 2, conferring upon the 
 Postmaster General the extraordinary power of closing the 
 
66 
 
 mails to any letter, newspaper or other written or printed 
 statements, containing reports or quotations of prices concern- 
 ing stock exchange transactions if, upon evidence satisfactory 
 to himself obtained as he sees fit, he shall conclude that the 
 exchange has failed to enforce the requirements prescribed 
 by the bill. A more far-reaching power of an arbitrary nature 
 could not be conferred upon a public oflScial. We do not 
 care who that official is, or how high he may be in the 
 hierarchy of the public service, it is hostile to the 
 principles of a free government. To quote the language of 
 Mr. Justice Bkadley in the case of Boyd against the United 
 States, 116 U. S., 632, — " It may suit the purposes of despotic 
 power ; but it cannot abide the pure atmosphere of political 
 liberty and personal freedom." That is all we care to say on 
 this subject. 
 
 We feel that this survey and analysis of the bill warrant 
 the conclusion that many of its provisions are not regulations 
 of the mails, telegraph or telephone at all, and that as a 
 whole it would be an impracticable and harmful measure. 
 
 Conclusion. 
 
 There are some matters concerning the Exchange briefly 
 treated in the Pujo Eeport which we should like to dis- 
 cuss that the case of the Exchange might be fairly pre- 
 sented ; but they are not germane to this bill, and we 
 do not therefore feel warranted in doing so. We have 
 strictly confined our attention to the bill and the ques- 
 tions it raises, and have gone into them somewhat fully 
 because they radically affect the vitals of the Exchange. 1/ 
 this bill were to become law or any bill drawn along the same 
 
67 
 
 general lines there can be no doubt that the effect upon the 
 Exchange would be revolutionary, both with regard to the 
 character of its membership and its scope as a market. The 
 tendency of one set of restrictions would be to eliminate in the 
 main from its membership the brokerage houses that serve the 
 public ; and the tendency of another set would be to curtail 
 the scope of the market through closing its list to many future 
 issues of securities and the probable elimination of many 
 now on the list. These are serious considerations which 
 may not be ignored in framing any legislation affecting the 
 Exchange, which is a delicate piece of mechanism that can 
 oasily be thrown out of gear. It is " an essential instrumen- 
 tality in the conduct of modern business and finance " ; and 
 to derange it is to derange business and finance to a degree 
 and in ways beyond the anticipation of any man. It is the 
 scene of vast transactions which are carried out under its 
 rules with an extraordinary absence of friction, obstruction 
 and loss. It was never more alert than it is now to conform 
 its operations to the highest principles of conduct ; and to 
 protect and safeguard the public interests. There is no occa- 
 sion, in our judgment, for any legislation affecting its organi- 
 zation, rules or methods ; and to throw it into confusion will 
 be an irremedial public injury. That inevitable consequence 
 we have tried to make clear, actuated only by a sense of duty, 
 
 John G. Milburn, 
 Walter F. Taylor, 
 Of Counsel for the New York Stock Exchange. 
 
BEFORE THE 
 
 Committee on Banking and Currency 
 
 OF THE UNITED STATES SENATE. 
 
 IN THE MATTER OF SENATE BILL No. 3895. 
 
 REPLYING BRIEF ON BEHALF OF THE 
 NEW^ YORK STOCK EXCHANGE. 
 
n 
 
 BEFORE THE 
 COMMITTEE ON BANKING AND CURRENCY 
 
 OF THE UNITED STATES SENATE. 
 
 IN THE MATTER OF SENATE BILL NO. 3895. 
 
 REPLYING BRIEF ON BEHALF OF THE 
 NEW YORK STOCK EXCHANGE. 
 
 At the close of the hearing before the Committee on the 
 12th day of February, 1914, it was understood that briefs 
 could be submitted. Subsequently the time fixed for their 
 filing "was March 4th ; and on that day our, main brief was sent 
 to Washington, followed the next day by a memorandum 
 on the constitutionality of the bill and another on the 
 New York Bank Note Company matter. The final print of 
 Mr. Untermyer's brief came into my hands on the 24th 
 day of March, 1914. In the mean time he had appeared 
 before the Committee and made an additional argument 
 (Record, pp. 457-520). As the argument made by him 
 on March 10, and his brief fill more than 100 pages 
 of the Eecord it is impossible to compress this reply 
 into a few pages as I had hoped. But I shall endeavor 
 to confine it within reasonable limits, though to do so 
 will involve passing over many matters which invite discus- 
 sion and correction. The truth is that there is little in either 
 
argument or brief in the way of statement of fact or argu- 
 ment that is unassailable. 
 
 One general observation I cannot refrain from making at 
 the outset. I protest against the vituperation of the Exchange 
 and its members that runs all through the brief. It is full of 
 such phrases as " the illegitimate transactions that now dis- 
 grace it " (the Exchange) ; " the dissemination of frauds " ; " to 
 protect the public against being victimized " ; " protect the 
 honesty of the public market against the frauds that now 
 characterize it " ; " foisted upon the public " ; " confidence 
 game " ; ** blind pools " ; " hundreds of millions that had been 
 annually taken from the public and dishonestly taken " ; 
 " tortuous attitude " ; " pirating on the high seas " ; 
 " filched from the public " ; " incredibly deplorable state 
 of affairs " ; " abuses that were being perpetrated upon 
 the community " ; " deception of the public " ; " misrep- 
 resenting the issues and misleading the public"; 
 "juggled'*; "fraud and pillage"; "cards that have been 
 stacked against you " ; " fraudulent and fictitious transac- 
 tions by which the public has been grossly swindled on an 
 enormous scale " ; " prey upon the country " ; " the scandals 
 of all the past years in its management " ; " the same old 
 game " ; " another raid " ; " flagrantly dishonest practice " ; 
 " worst form of gambling " ; " carnival of exploitation " ; 
 long continued license ". All this is mere abuse to create 
 popular prejudice, because such a mode of treating an im- 
 portant subject and one of the oldest institutions in the 
 country could scarcely have been expected to influence men of 
 the character, experience and intellectual power that compose 
 this Committee. It is not the phraseology of sincerity ; 
 nor of candid and dispassionate analysis or criticism ; 
 nor is it entitled to any persuasive power. On the con- 
 trary it reveals a passionate, vindictive and personal 
 antagonism. Though so much abuse is poured on the Ex- 
 change it is asserted at the end of the brief that the 
 
73 
 
 author has not intended in anything he has said " to reflect 
 upon the integrity of the memher ship of the New York Stock 
 Exchange taken in its entirety " (R., p. 651). But the Exchange 
 is indistinguishable from its members ; its acts are their acts ; 
 its offenses are their offenses ; and its management is com- 
 posed of their representatives selected bj the membership in 
 its entirety. To say that the vituperation of the Exchange is 
 not intended to reflect on the integrity of the membership as 
 an entirety is to confess that it is a sham. 
 
 The function of the Postmaster General. 
 
 Mr. Untermyer, in his argument of March 10th, said that 
 the bill imposes upon the Postmaster General two duties, the 
 first of which is that he shall " examine the charter and by- 
 laws of every incorporated stock exchange whose quotations 
 are sent through the mails." He added : 
 
 " If the Postmaster General, upon looking at that 
 charter, finds those regulations in it, that is the end of 
 his duty. It is not for him to determine whether or not 
 the Exchange is' obeying or whether it is violating the 
 provisions of that charter. That manifestly is nothing 
 but a plain ministerial duty " (R., p. 458). 
 
 He then proceeds : 
 
 " The second duty and right of the Postmaster Gen- 
 eral is to examine the books of the members for the 
 purpose of determining whether or not any member is 
 engaged in manipulating the quotations that are being 
 carried through the mails. If he finds there has been 
 manipulation he has no further duty with reference to 
 it. He cannot even cancel the charter ; he cannot then 
 deny the use of the mails to the Exchange. All he can 
 do is to get the information and pass it along to where 
 it belongs— to the Department of Justice " (R., p. 458), 
 
That is contrary to the view I had expressed, which was 
 that " if the Postmaster General shall as the result of an 
 investigation conducted in his own way decide that 
 the Exchange, although it has incorporated and adopted this 
 medley of requirements, is not enforcing those reqidrementSy 
 he may issue an order suspending the transmission through 
 the mails of any letter, package, circular, pamphlet, post-card 
 or newspaper containing an order or statement or quotation of 
 prices, or any advices, report or information concerning trans- 
 actions in securities on the Exchange" (K., p. 377). Mr. 
 Untermyer has evidently, since his argument, given Section 2 
 of the bill more careful study, because in his brief he changes 
 his position and admits that the Postmaster General is em- 
 powered to determine whether the Exchange is enforcing the 
 statutory requirements (E.., p. 610). But he still insists that 
 the act of the Postmaster-General in this regard is purely 
 ministerial ; and that if as a result of the examination of the 
 books of the members of the Exchange he finds fictitious and 
 manipulated transactions he cannot stop the transmission 
 of the quotations through the mails, or interfere with 
 the operations of the Exchange, or do more than "furnish 
 the evidence thus secured as a basis for prosecuting 
 the guilty parties " ; and further, that " the Exchange is 
 not thereby interfered with in its right to continue the 
 use of the mails for its quotations " (R., p. 610). This is 
 just as unfounded as his first position. By Section 2 the 
 Postmaster General is empowered, in the event of his determine 
 ing, upon evidence satisfactory to himself, that an exchange 
 has failed to enforce the requirements of the bill which it 
 has adopted in conformity with the bill, to prohibit the use 
 of the mails. There is nothing ministerial in the nature ox 
 character of that act or determination. It is a discretionary 
 act of the widest latitude. The Postmaster General may send 
 his special agents to examine the books of members, and treat 
 their reports as sufficient evidence that the statutory require- 
 
76 
 
 ttients have nofc been enforced by the Exchange, and 
 thereupon arbitrarily close the mails to all letters and 
 newpapers referring to transactions or quotations on the 
 Exchange. The effect of such action on his part is 
 to shut the Exchange up, to stop the circulation of news- 
 papers through the mails if they publish the quotations of 
 the premier security market in the country, and to demoralize 
 a vital branch of the financial business of the country. That 
 I have characterized as a " tremendous power " ; and though 
 Mr. XJntermyer belittles it as purely " ministerial ", he 
 seems to appreciate its real character, without admitting it, 
 by suggesting an amendment on his argument that the Ex- 
 change should be entitled to a hearing (E., p. 459), and in his 
 brief that there should be a judicial review of the action of 
 the Postmaster General (R., p. 610). The only tenable posi- 
 tion is that it is not a power that should be conferred upon 
 any official. 
 
 XL 
 
 The Pogition of tlie Exchange Respecting; Federal 
 
 Regnlation. 
 
 Mr. Untermyer says that the discussion before your Com- 
 mittee has forced " the virtual admission by the opponents 
 of this bill of the necessity for some sort of a Federal 
 regulation"; that counsel for the Exchange has 
 suggested that a bill similar to the bill respecting 
 lottery tickets would answer the purpose ; that the sug- 
 gestion of the " substitution of the Secretary of Commerce 
 or the Commissioner of Corporations for the Postmaster 
 General is not explained except by the fact that the Exchange 
 IS seeking to take advantage of a prejudice against delegating 
 
76 
 
 any additional powers to the Postmaster General " ; tliat the 
 position of the Exchange is inconsistent in that it has ** sub- 
 mitted an elaborate argument to prove that the distribution of 
 quotations is not interstate commerce " and yet " suggests as a 
 remedy legislation on the lines of the anti-lottery bills " (E., 
 pp. 612, 613). The Exchange has not admitted that there is 
 any necessity for any Federal regulation of the Exchange. On 
 the contrary its position is and has been all through not only 
 that there is no occasion for such regulation, but that it is not 
 subject to Federal regulation. All that its counsel said was 
 that the only bill that would be a legitimate exercise of the 
 power to regulate the use of the mails with respect to the 
 transmission of manipulated transactions or quotations would 
 be a bill based on the lottery ticket legislation as a 
 precedent (E., pp. 345, 882). He did not propose such a 
 bill on behalf of the Exchange as necessary to reach any ex- 
 isting conditions ; nor would such a bill be a regulation of 
 the Exchange in any sense. 
 
 The Exchange approves, and always has approved, any 
 legislation. State or National, regulating the issue of secur- 
 ities by corporations, and requiring publicity as to promotion 
 profits or any other corporate operations or transactions 
 which affect the interests of the public. National regulations 
 of that character would necessarily be under the jurisdiction 
 of the Interstate Commerce Commission as to railroad cor- 
 porations, and the Secretary of Commerce or the Commis- 
 sioner of Corporations as to industrial corporations. That is 
 the only connection in which those authorities were men- 
 tioned by anyone that I recall. No one has suggested any dele- 
 gation of power to them in lieu of the Postmaster General 
 with respect to the mails " to take advantage of a prejudice " 
 or at all. 
 
 There is no inconsistency in the position taken by the Ex- 
 change. It has not insisted or argued that the interstate 
 transmission of quotations is not interstate commerce. 
 
77 
 
 The Exchange is not in any way engaged in such, transmission. 
 It collects the quotations at its own expense and sells 
 them in the City of New York to the Western Union Tele- 
 graph Company which transmits them all over the country. 
 Not being engaged in the interstate transmission of its quota- 
 tions it is immaterial to it whether that transmission is inter- 
 state commerce or not. What was argued on its behalf was 
 that the transactions of purchase and sale on the Exchange, 
 which is the business that is done there, are not interstate 
 commerce ; and for that position there is the explicit authority 
 of the United States Supreme Court (People ex rel. Hatch vs. 
 Reardon, 204 U. S., 152). Hence those transactions are not 
 subject to regulation under the commerce clause of the Con- 
 stitution. But that position is quite consistent with the posi- 
 tion that it may be within the power of Congress to enact 
 legislation respecting the interstate transmission of false or 
 fictitious quotations similar to the legislation respecting the 
 transmission of lottery tickets. 
 
 III. 
 
 Tlie proposed bill of the Boston Chamber of 
 Commerce. 
 
 I gather from the record that the gentlemen who appeared 
 before the Committee for the Boston Chamber of Commerce 
 were requested to embody in a bill their idea as to what would 
 be proper regulation and submit it to the Committee. That 
 the Boston Chamber of Commerce has done. I understand 
 that it is a body composed of representative merchants and 
 business men of the City of Boston. It is fair to assume that 
 they undertook to comply with the request of the Committee 
 in good faith, and that the bill they submitted embodies their 
 
78 
 
 sincere convictions. But Mr. Untermyer loads it with abuse 
 and imputes to them dishonorable motives. He says, " It is 
 the most transparent ' make-believe ' ", and " a * blind ' under 
 cover of which to defeat eflfective regulation " (K., p. 615). 
 Thus a body of gentlemen of high standing and position, 
 complying with a request of this Committee, is publicly 
 charged with deception, because it would surely be deception 
 to submit to you a bill which was a " make-believe " and a 
 " blind " with the real purpose of defeating effective regu- 
 lation. But that seems to be Mr. Untermyer's 
 way. He describes the New York legislation of 
 1913 as a "blind" (E., pp. 641, 642) "intended to 
 stand in the way of effective legislation." Referring to the 
 rules enacted in February and March, 1913, by the Exchange 
 to prevent manipulation, ho says that the Exchange " under 
 pretense of such rules is attempting to perpetuate the prac- 
 tice " ; that he " can plainly see what it seeks to accomplish 
 here by its tortuous attitude " ; and that " it wants to make it 
 appear here that manipulation is forbidden in order to defeat 
 legislation and still to be able to insist hereafter when that 
 peril has passed that what it is doing is not manipulation but 
 something that it has always claimed the right to do" (Il.,p. 
 619). Thus whether it is the Boston Chamber of Commerce 
 or the New York Stock Exchange his method is to impute 
 base motives. 
 
 Begarding the bill proposed by the Boston Chamber cf 
 Commerce the attitude of the New York Exchange is one of 
 opposition to its provisions on the same grounds that it has 
 urged with respect to similar provisions contained in the bill 
 before the Committee. 
 
79 
 
 IV. 
 
 / Theeacamination of the books of membera of 
 the Hxehange by the Postmaster General and 
 snch persons as he may from time to time desig- 
 nate. 
 
 The purposes of this provision of (lie bill are more clearly 
 revealed in Mr. Untermyer's brief than they have been before. 
 Though the bill is drawn under the postal clause of the Con- 
 stitution, and it is asserted that it " attempts nothing by indi- 
 rection " (p. C29), it is now boldly asserted that " the prevention 
 and punishment of manipulation are the chief aims of the hill " 
 (E., 615). It is in that aspect of the bill as one to prevent and 
 punish manipulation that the provision respecting the exam- 
 ination of the books of members of the Exchange is seen in 
 its true light. The Postmaster General is to perform the 
 function of a detective agency. He is to provide himself with 
 a staff of special agents to search the books of members of ex- 
 changes for evidence of manipulation to be used in criminal 
 prosecutions. It is explicitly said that the.Postmaster General 
 is given the power " to examine the books of the members 
 containing entries of their transactions on the Exchange (not 
 their other business) as the only possible means of detecting 
 such misuse, so that if such violations exist they may be dealt 
 with by the courts upon the complaint of the Department of 
 Justice "; and further, that if in his examination of the books 
 of members he finds that there has been manipulation " all he 
 can do in that event is to furnish the evidence thus secured as 
 a basis for prosecuting the guilty parties " (R., p. 610). This 
 is, then, according to Mr. Untermyer, the purpose and object 
 of this inquisitorial provision. 
 
 That being the object and purpose of the provision there 
 is no doubt about its unconstitutionality. People ex rel. 
 
80 
 
 Eeardon vs. Ferguson, 197 N. T., 236, is an explicit authority 
 on that point. But, disregarding its illegality, it is indefensible 
 as a matter of policy, because it is not within the proper 
 province of the Postmaster General to act as a specially desig- 
 nated appendage of the Department of Justice to gather evi- 
 dence for its purposes. 
 
 But Mr. Untermyer insists over and over again that the 
 provision is a necessary one if manipulation is to be detected 
 and punished. If that were a valid argument there is scarcely 
 any limit to its scope, because it would apply to every offense 
 the most accessible evidence of which is to be found 
 in the books and papers of individuals. I do not 
 think that even the most radical opponent of private 
 rights and individual liberty is willing to go to that extent. 
 Moreover, such an examination is not necessary to the de- 
 tection and punishment of manipulation. Manipulation is 
 to-day a penal offense, and legislation may redefine and 
 extend it from time to time. Transactions on the Exchange 
 take place under the eyes of men and have an unusual pub- 
 licity. If the offence be committed the District Attorney, 
 with the aid of a Grand Jury, will have no difficulty in getting 
 proof to obtain a conviction without resorting to the books 
 and papers of the accused party or parties. It is idle to say 
 that they cannot reach offenses unless they have access to the 
 books of the accused party. 
 
 This is one of the most indefensible provisions of the bill, 
 and if enacted could only have baleful consequences (R., pp. 
 376, 377, 561, 562). 
 
81 
 
 V. 
 
 The " Publicity Bepartment " of the Ex- 
 change. 
 
 Mr. Untermyer says in lils brief (K., p. 634) : 
 
 " The Exchange maintains a publicity department 
 under the euphonious title of the • Library Committee.* 
 In the course of the hearings before your Committee 
 there was distributed from Washington and published 
 all over the country a canard to the effect that the 
 President had expressed his disapproval of the Bill 
 now under discussion. So persistent and circumstan- 
 tial was the rumor that an explicit denial from the 
 White House was considered advisable to prevent the 
 discrediting of the legislation. 
 
 ** Such methods are most unfortunate. They are 
 bound sooner or later to react against the Exchange 
 and thus obscure the merits of the controversy, which 
 the champions of this measure are anxious to have tm- 
 pariially and impersonally discussed" (Italics ours). 
 
 The only construction of which this statement is suscep- 
 tible is that the Exchange through its Library Committee in- 
 vented and circulated a canard misrepresenting the position of 
 the President. 
 
 Mr. Untermyer made this same statement in the brief 
 which he left with the Committee on February 5th^ 1914 (K., 
 p. 97). 
 
 Mr. Yan Antwerp, in his address to the Committee, said 
 respecting it : 
 
 ** I am a member of the Library Committee of the 
 New York Stock Exchange referred to. No member of 
 that Committee directly or indirectly (nor anyone acting 
 for them or representing them) at any time has caused 
 to be circulated in any way, shape or form such a 
 canard or rumor as the one here described" (B., 
 p. 112). 
 
82 
 After a colloquy with Mr. Untermyer he further said : 
 
 *• I should like, in view of the statement I have just 
 made to you, Mr. Chairman, to ask Mr. Untermyer to 
 withdraw from the record the paragraph under discus- 
 sion " (K., p. 113). 
 
 Then this followed (K., pp. 113-114) : 
 
 " Mr. Untermyer : I should first like to make this 
 statement : The fact is, is it not, that a circumstantial 
 account did appear in the newspapers all over the 
 country shortly prior to the day fixed for this hearing 
 to the effect that the President disapproved of this leg- 
 islation ? I happened to reach Washington the morn- 
 ing that it appeared in the papers and saw it in the 
 papers. I did not believe it was true so I called 
 up the White House, as I felt it would have 
 an injurious effect and would prejudge this 
 legislation. The statement was corrected from 
 the White House. It was stated the President had not 
 said any such thing or intended that any such thing 
 should be said. What he had said was that only those 
 measures were strictly administration measures which 
 were specifically mentioned in the platform, such as 
 interlocking directors, holding companies, and that the 
 Stock Exchange measure had not been specially men- 
 tioned in the platform and therefore it was not an 
 administration measure; but he had not expressed 
 nor implied any disapproval of the matter. Then I 
 learned that Mr. Yan Antwerp, whom I knew had been 
 concerned in the publicity end of the Stock Exchange 
 business, had reached Washington that afternoon, and 
 I also learned from some newspaper men — or at least 
 I was told he had seen some newspaper men or they 
 had seen him — I knew Mr. Yan Antwerp had been very 
 active in the library department of the Stock Exchange 
 for quite a long time. I do not mean to say im- 
 properly active. I do not imply anything of the kind. 
 But he had been before he became a Governor of the 
 Exchange, which was very recently, quite active in the 
 publicity department of the Exchange. That is the 
 only basis I had for the statement, and in view of Mr. 
 Yan Antwerp's statement now made I would like to 
 withdraw it, except to the extent which I have stated." 
 
 The repetition of the statement in the brief recently filed is 
 under these circumstances inexcusable. Any newspaper cor- 
 
83 
 
 respondent in Washington can inform the Committee of the 
 circumstances concerning the publication of this so-called 
 canard, and he will confirm that the Exchange had nothing 
 whatsoever to do with it. 
 
 Every allusion in the brief to the Library Committee of the 
 Exchange, or its so-called " Press Bureau '* or ** Publicity De- 
 partment" is just as baseless. The Library Committee is 
 composed of leading and representative members of the Ex- 
 change, and they are ready at any time to give an account of 
 what they have done to counteract the campaign of misrepre- 
 sentation aud abuse of the Exchange which Mr. XJntermyer 
 has conducted for the past two years. 
 
 VI. 
 
 The California Petrolenm Company. 
 
 The history of the California Petroleum Company and the 
 transactions in its stock on the Exchange is again set forth in 
 Mr. Untermyer's brief (R., p. 625), and this is the third time 
 it appears in the Record (R., pp. 16 et seq., 92, 93). After re- 
 peating this history, the brief proceeds (R., p. 626) : 
 
 " The Exchange insists that this is a legitimate 
 transaction because it was resorted to for the purpose 
 of * introducing a new security.' They say the bankers 
 had sold their stock before this was done and there was 
 no profit for them in this operation. The facts as 
 proven do not sustain them. True the first bankers' 
 syndicate had sold its stock. But to whom ? To the 
 second syndicate of which Messrs. Lewisohn were the 
 managers and the bankers were also members. The 
 manipulation was conducted by the second syndicate, 
 which bought 163,000 shares and sold 172,900 shares 
 during the 21 days of its operations. In the same period 
 there were 362,370 shares sold on the Exchange and an 
 equal number of course purchased. What about the 
 
84 
 
 dear public that was * landed ' with the 199,270 shares 
 that were not represented by the syndicate dealings, at 
 prices ranging between $60 and $72.50 per share that 
 subsequently declined to $16 and are now selling at 
 $25 ? " 
 
 It is wearisome to have again to correct the misstatements 
 contained in this paragraph. The Exchange has not insisted 
 that the transaction was legitimate because it was resorted 
 to for the purpose of " introducing a new security." 
 The transactions on the Exchange were not conducted by 
 the second syndicate because all the stock of the second 
 syndicate had been sold to individual investors before the 
 stock was listed on the Exchange. The transactions were 
 conducted by the banking houses that had acquired the stock 
 and sold it to the second syndicate, not for the purpose of gain 
 to themselves, nor for the purpose of " introducing a new 
 security," nor for the purpose of creating an " artificial activity " 
 in the market, nor for the purpose of marketing the stock owned 
 by the second syndicate, but to steady the market by selling 
 orders on a scale up and buying orders on a scale down, 
 thereby furnishing a real market, because any man who 
 wished to sell would find a buyer and any man who 
 wished to buy would find a seller. To repeat and repeat that 
 the transactions on the Exchange were carried on to enable 
 the second syndicate to unload its stock on the public right 
 in the teeth of the testimony which Mr. Untermyer himself 
 elicited before the Pujo Committee is intolerable. The actual 
 facts as revealed by that testimony are fully set forth in our 
 brief, with references to the Pujo Eecord (R., pp. 540-o4:3), 
 
85 
 
 vn. 
 
 The Kanaivha and Michigan Railway Com- 
 pany matter. 
 
 In his speech of March 10th, Mr. Untermyer said, regarding 
 this raih'oad : 
 
 " The control had been acquired by the Toledo & 
 Ohio, which was in turn controlled by the Hocking 
 Valley, a parallel and competing line. * -J*- * Prior 
 to its subjugation and while it was an independent 
 property it was successful and of great promise^ but 
 under this oppression it was fast losing its value. I 
 acted for a protective committee of stockholders of 
 representative men who decided to appeal to the courts 
 to liberate the road from this intolerable and ruinous 
 thralldom. Some of my clients had owned their stock 
 fifteen or twenty years. They had bought it when it 
 was a promising independent pro'perty and 'paying divi- 
 dendsy which stopped shortly after it came under con- 
 trol. * * ^ My clients, some of them, had paid 
 over par for that stock over twenty years ago. Mr. 
 Gould, I think, was the name of one of them, who told 
 me at that time that this stock had cost him, with in- 
 terest on his investment, about $300 a share " (E., p. 
 472). (Italics ours.) 
 
 His last revised statement is in his brief, where it is said 
 that " it appears that the road had at one time been a pros- 
 perous independent property, but had, contrary to the anti- 
 trust law, come under the control of the Hocking Valley, which 
 was a parallel and competing line, where it remained for many 
 years " (R., p. 648). 
 
 What are the facts ? This is the history of the road as it 
 appears in the Company's application to list its stock on the 
 Exchange, dated November 5th, 1890 : 
 
 " The River Division of the Ohio Central Railroad 
 was sold under foreclosure October 22nd, 1885. The 
 purchaser organized the Ohio & Kanawha Railroad 
 
86 
 
 Company in Ohio and the Kanawha &, Ohio Railroad 
 Company in West Virginia, and consolidated them 
 Tinder the name of the latter April 17th, 1886. The 
 Kanawha & Ohio Railroad went into the hands of a 
 receiver February 19th, 1889 ; was sold under fore- 
 closure March Idth, 1890, by a decree of the Circuit 
 Court of the United States for the Southern District of 
 Ohio, Eastern Division. Sale was duly confirmed by 
 said Court April 7th, 1890, and the property turned 
 over to the purchasers April 24th, 1890. The pur- 
 chasers organized the Kanawha & Michigan Railway 
 Company.'* 
 
 These purchasers were the old bond and stockholders 
 (Poor's Manual, 1C90, p. 1000). In February, 1891, the Rail- 
 road was leased to the Toledo & Ohio Central (Poor's Manual, 
 1891, p. 730), which bought a large amount of the stock at $15 
 a share and guaranteed the principal and interest of the bonds. 
 
 The statement that a road which had been foreclosed late 
 in 1885, and was again in the hands of a receiver early in 
 1889 and sold under foreclosure in 1890, was a prosperous 
 independent property prior to its lease to the Toledo & Ohio 
 Central in 1891 would seem to require further revision. 
 
 A reference to Poor's Manual from 1890 to 1910 shows that 
 no dividends were paid on its stock during that period of 
 twenty years ; and the history of the road prior to that time, 
 with its foreclosures and receiverships, would indicate that no 
 dividends had been paid prior to 1890. 
 
 The stock of the Company was listed on the Exchange on 
 November 26th, 1890. The following are the high and low 
 prices of the stock from 1891 to 1907 inclusive, taken from the 
 Financial Chronicle : 
 
87 
 
 Bigii. Low. 
 
 1891 16J 10 
 
 1892 _ .._. 14 lOf 
 
 1893 _ HJ 9 
 
 1894. — 9f 7J 
 
 1895 9f 7i 
 
 1896 __. _ 8 6J 
 
 1897 9i 4 
 
 1898 . 8 5} 
 
 1899 15 7} 
 
 1900 25 10 
 
 1901 __ _ _. 40 21 
 
 1902 50i 33| 
 
 1903 47i 25J 
 
 1904 _. 38 22i 
 
 1905.__ 58f 29i 
 
 1906 76 62 
 
 1907.-. 50 30 
 
 It is difficult to see from these figures liow the stock of Mr. 
 Gould or any of the other clients of Mr. Untermyer, acquired 
 " fifteen or twenty years " before 1910, could have cost them, 
 with interest on their investment, " about $300 a share " (K., 
 p. 472), or "nearly $300 " (R., p. 476), or " between $200 and 
 $300 " (E., p. 648). 
 
 In 1906 or thereabouts a Committee, of which Mr. George 
 D. Mackay was Chairman, was formed to protect the interests 
 of the minority holders of the stock of this Company, the 
 majority being then owned by the Hocking Valley Railroad 
 Company. The stockholders who desired to be represented 
 by the Committee deposited their stock with J. P. Morgan & 
 Co. who issued to them their certificates in lieu thereof. On 
 March 21st, 1910, the Committee issued to the minority share- 
 holders a circular of which the following is a copy : 
 
88 
 
 MINORITY STOCKHOLDERS' COMMITTEE 
 
 Kanawha & Michigan Railway 
 
 G. D. Mackay, 16 Nassau Street 
 
 Chairman, New Yobk City, March 21, 1910. 
 
 W. H. Goadby, 
 I. L. Ellwood. 
 
 To THE Minority Shareholders 
 
 OF the Kanawha & Michigan Railroad. 
 
 Dear Serb : 
 
 The Hocking Valley Railroad has been sold to the Chesapeake 
 & Ohio Railroad, and the Kanawha & Michigan Railroad to the 
 Lake Shore and the Chesapeake & Ohio jointly. 
 
 The price paid was 120 for Hocking Valley stock and 72 for 
 Kanawha & Michigan stock. Your Committee has been in confer- 
 ence with the purchasers of the Kanawha & Michigan for a fort- 
 night past to effect a price at which a possible sale of the Minority 
 stock of the Kanawha & Michigan Railroad might be made if the 
 stockholders desired and thus end the friction which has for four 
 years past made a distressing situation for all concerned in the 
 Hocking Valley and Kanawha and Michigan merger. 
 
 On Saturday last the officials representing the purchasers made 
 an offer to your Committee of $72 per share for a minimum of 
 30,000 shares of the 44,000 Kanawha & Michigan Minority stock, the 
 eame price as was paid to the Hocking Valley Railroad for the Ma- 
 jority stock. This price was not as high as your Committee endeav- 
 ored to get, but we are in duty bound to communicate the offer to 
 the stockholders that we represent. This price will be less 1^% to 
 the Committee to repay them for services and expenses during the 
 period of four years of the Minority Stockholders' effort to establish 
 their claims, and the money will be paid whenever the 30,000 mini- 
 mum shares are authorized to be delivered. The alternative to this 
 offer is for any dissatisfied stockholder to continue as a minority 
 shareholder and trust to the future to produce revenues enough from 
 the contributions of the new owners to the business of the Railroad 
 which will justify payments of the dividends desired. 
 
 The plans of the purchasers contemplate improvements to cost 
 one and a half million dollars in the next two years. That this will 
 drain the Kanawha & Michigan surplus during that time goes with- 
 out saying. There is also to be considered the Railway Bill in Con- 
 gress that may have a clause to prevent majority owners buying the 
 minority stock after the Bill is signed, and there may be a continua- 
 tion of the litigation in the State of Ohio. 
 
 Your Committee will continue to represent your interests so 
 long as the stockholders representing the minority shares desired. 
 
 Tou are requested to make an immediate reply to this letter 
 
89 
 
 giving authority to the Committee to dispose of your shares and also 
 naming the amount of shares held by you. 
 
 Very truly yours, 
 
 George D. Maokat, Chairman, 
 
 W. H. GOADBT, 
 
 I. L. Ellwood. 
 
 Under date of May 11th, 1910, Mr. Goadby, one of the 
 members of the Committee, wrote the following letter in 
 response to a request for information as to the situation of 
 this stock : 
 
 Copy. 
 
 OFFICE OF W. 11. GOADBY & CO. 
 
 New York, May 11, 1910. 
 
 Mb. W. W. Heaton, 
 
 Chairman of the Committee on Stock List, 
 
 New York Stock Exchange, New York. 
 
 Dear Sir : 
 
 Referring to the nine millions of Kanawha & Michigan Rail- 
 way Stock listed on the New York Stock Exchange, I herewith sub- 
 mit to you a statement which, to my knowledge and belief is correct. 
 Of this issue, 80,492 shares are held in the Treasury of the Lake 
 Shore and Chesapeake <& Ohio Railroads. Of this amount 35,393 of 
 J. P. Morgan & Co.'s Kanawha & Michigan receipts were delivered 
 through them (J. P. M. & Co.) to the above mentioned parties by the 
 Committee of which I am a member. 1970 shares have been pledged 
 to us. 2800 shares are owned by Mr. John U. Brookman. Mr. Brook- 
 man is so ill that his physician forbid business of any kind being 
 submitted to him, and while therefore Mrs. Brookman and Mr. 
 Maloney his Secretary were willing to deliver their receipts to this 
 Company, they were, owing to Mr. Brookman's illness, unable to do 
 so. 
 
 We understand that the Untermyer Committee are the holders 
 of 2100 of these receipts. This would make a total of 87362 shares 
 accounted for out of the 90,000 share issue, leaving a balance, ap- 
 parently, of 2638 shares outstanding and unaccounted for, all of 
 which is respectfully submitted. 
 
 Very truly, 
 (signed) W. H. GOADBY, 
 
 Member of Com. 
 (Enc) 
 
90 
 
 1?he statement annexed to the letter gave at tte end the 
 following summary : 
 
 Amount of Kanawha & Michigan stock 
 
 outstanding $9,000,000 
 
 Held by L. S. & C. & O. Co. '8.80,492 shares 
 
 Morgan receipts pledged to 
 
 Committee 1,970 " 
 
 Held by Mr. Brookman 2,800 
 
 In Hands of Untermyer Com- 
 mittee 2,100 
 
 (( 
 
 (( 
 
 87,362 shares 
 Not accounted for 2,638 " 
 
 Minority stockholders who were dissatisfied with the terms 
 offered in the above circular organized a Protective Committee 
 represented by Mr. Untermyer as counsel, which is the Com- 
 mittee referred to in the above summary as the " Untermyer 
 Committee." Litigation was begun by that Committee as 
 stated in his brief (E., p. 648). 
 
 This was the situation when Mr. Goadby's letter of May 
 11th, 1910, was received, and on the showing made by that 
 letter and the accompanying statement the Committee on 
 Stock List struck the stock from the list. Mr. Untermyer 
 says that " the undoubted purpose of that action was to dis- 
 courage the litigants by destroying the market for their stock 
 and rendering it unavailable as collateral " (K., p. 648). This 
 is unqualifiedly denied. It appears from Mr. Goadby's letter 
 and statement that were before the Committee on Stock List 
 that at the time that action was taken 80,492 of the 90^000 
 shares were owned by the Lake Shore and C. & O. Eailroad 
 Companies ; that 1,970 shares were pledged to the Mackay 
 Committee ; that 2,800 shares were owned by Mr. John 
 Brookman, who was then too ill to deliver them ; and that 
 about 2,100 shares were represented by Mr. Untermyer 
 This accounted for all but 2,638 shares of the 90,000 shares 
 listed. That state of affairs justified the action of the Com- 
 
91 
 
 fiQittee as it conclusively appeared that there was no longer 
 a suflScient amount of free stock outstanding in the hands of 
 individual owners for trading in the stock on the Exchange 
 under proper conditions. The sole purpose of striking the 
 stock from the list was the customary precaution of the Ex- 
 change to protect the public and the Exchange from the 
 dangers incident to so small an amount of outstanding stock. 
 
 It is singular that Mr. TJntermyer is the only person who 
 has made objection to this prudent practice of the Exchange 
 in striking stocks from the list. It has been done for many 
 years ; a great many securities have been so stricken oflf ; and 
 the practice has been universally approved. If it was the 
 hardship that Mr. TJntermyer maintains ; if many people had 
 been deprived of their market and had their loans on securities 
 so stricken from the list called, the Exchange would cer- 
 tainly have heard of it. So far as the present generation of 
 the oflacials of the Exchange is aware no such complaint has 
 ever been received from any one save Mr. TJntermyer. 
 
 I do not see that there is any relevancy in the results of the 
 operation of the Eailroad since the Lake Shore and C. & O. 
 succeeded to its ownership in 1910 upon which Mr. TJnter- 
 myer dwells (K., p. 649). With those great railroad systems 
 as feeders of traflSc entirely new conditions came into existence, 
 which sufficiently account for its increased earning capacity. 
 
 A regrettable mistake was made by the clerical force of the 
 Exchange in the statement that it furnished for the Pujo Com- 
 mittee showing that only 2,100 or 2,200 shares of stock were \/ 
 outstanding when the stock were stricken from the list. At 
 the time the statement was prepared for the Committee many 
 demands were being made upon it for statements concerning 
 many different matters, and the clerical force of the Exchange 
 was overworked in preparing them. The clerk who had the 
 matter in charge evidently furnished, through some misunder- 
 
92 
 
 standing or inadvertence, the amount at that time in the 
 hands of the so-called " Untermyer Committee " as shown 
 by the statement annexed to Mr. Goad by 's letter. 
 
 vni. 
 
 Fluctuations in the stock of the Reading 
 Company from September, 1906, to November, 
 1907. 
 
 In his argument on March 10th, Mr. Untermyer endeavored 
 to show manipulation from the price fluctuations of the Read- 
 ing stock (R., pp. 487, 488, 489), stating that " in 1906 
 and 1907, the years in which there were 6,533,000 
 shares dealt in, the stock reached the high point 
 of 156 ; " that within the next year it dropped 
 to 90 ; that in September, 1906, it reached 156f and in No- 
 vember, 1907, fell to 90 ; and that the other active stocks 
 on the Exchange did not during that time fluctuate to " that 
 extent or anything like that " (R., p. 489). 
 
 The fact is that there were several active stocks on the 
 list which fluctuated as much or more. For instance between 
 the high points of 1906 and the low of 1907, Union Pacific 
 ranged from 195f to 100, a fluctuation of 95f points ; Cana- 
 dian Pacific from 201J- to 138, a fluctuation of 63^ points ; New 
 York Central from 156 J to 89, a fluctuation of 67J points ; 
 Brooklyn Rapid Transit from 94 J to 26f, a fluctuation of 67f 
 points ; and Missouri Pacific from 106f to 44^, a range of 62f 
 points. The fluctuations in all these and other cases were due 
 to the fact that 1906 was a year of great expansion and 
 activity and 1907 the year of a severe panic. 
 
93 
 
 IX. 
 
 Amalgamated Copper Company. 
 
 Mr. Untermyer brought forward for the first time in his 
 argument on March 10th, the history of the Amalgamated 
 Copper Company as ** probably the most striking illustration 
 of manipulation in the history of the Exchange " (R, pp. 
 507-511 ; see also Brief, R, pp. 620, 621). This belated in- 
 troduction of that Company in connection with manipulation 
 prevents any adequate treatment of the subject in this reply. 
 He gives a history of the Company, its capitalization 
 and increases of capital and the incidents connected there- 
 with, and the marketing of the stock increases by various 
 individuals, which I have not the time to verify to distinguish 
 what is fact from what is mere assertion. He winds up with 
 , the statement that an elaborate scheme of manipulation was 
 'accomplished in 1906 and 1907 through certain operations of 
 j the United Metals Selling Company in first holding back the 
 sale of copper, thereby laising the price of copper and of the 
 stocks of copper companies, and then later flooding the market 
 with copper so as to depress its price and correspondingly 
 the price of copper company stocks, including those of the 
 Amalgamated Company (K., 508-510). The Exchange has no 
 information on this subject of which I can avail myself ; but 
 the testimony of Mr. Wolfson, the Yice-President of the United 
 Metals Selling Company, given before the Pujo Committee 
 does not seem to bear out Mr. Untermyer's charge. To be 
 able to speak more definitely Mr. Wolfson has been asked for 
 his comments on this charge. and this is his reply. 
 
 Comments on Mr. Untermyer's Statement Before the 
 Senate Committee. 
 
 Mr. Untermyer advances the theory that there was a desire on 
 the part of somebody to "boost" the stock market by means of 
 holding back the sale of copper. He says : " Then a plan was de- 
 
9^ 
 
 Tised by those gentlemen to hold back production through the sell- 
 ing company ; instead of selling it normally, to hold back the copper 
 and lend upon it to the owners of the mines, thus creating a scarcity 
 of copper, so that copper went up from about 13 to about 25 cents 
 per pound." He then begins to prove it by means of figures fur- 
 nished before the Pujo Investigating Committee. 
 
 Mr. Untermyer would have us believe that the price was ad- 
 vanced from 13 cents to 25 cents during the years 1906 and 1907. As 
 a matter of fact, copper sold at 13 cents in October, 1904, and had a 
 steady rise from that time until on January 1, 1906, it was selliog at 
 18^ cents per pound, and, as everybody knows, that year was the 
 year of the greatest expansion this country has ever witnessed and 
 prices of all commodities rose quite naturally. 
 
 Now, let us see how Mr. Untermyer proves that copper was 
 held back. He tells you that in July 15,000,000 pounds of copper 
 were sold at around 18 cents. In August copper was held back by 
 our selling 83,000,000 pounds at over 18 cents (this is equal to about 
 three months' production). In September copper was held back by 
 selling about 42,000,000 pounds at 19 cents or over a month's pro- 
 duction. He tells you that in November, when the price rose to 22 
 cents, we held our copper back by selling over 40,000,000 pounds. 
 It seems to me that to carry out Mr. Untermyer's idea we should 
 have at those prices sold very little copper and waited until it was 
 25 cents to unload. The fact, however, as shown by these sales, is 
 that we attempted to stem the tide of rising prices by offering copper 
 as freely as the market would take it ; and we deviated from our 
 usual custom of only selling three months in advance by selling 
 copper five and six months in advance. However, even these figures 
 that Mr. Untermyer quotes are not correct, as he only gives you the 
 figures of part of our sales. The sales as shown hy the statement 
 presented to the Pujo Committee were as follows : 
 
 May, 1906 63,000,000 pounds @ about 18.63c. 
 
 June, 
 
 (( 
 
 23,000,000 
 
 ' @ 
 
 
 18.60 
 
 July, 
 
 (( 
 
 20,000,000 
 
 ' @ 
 
 
 18.52 
 
 August, 
 
 <( 
 
 103,000,000 ' 
 
 ' @ 
 
 
 18.55 
 
 September, 
 
 li 
 
 59,000,000 ' 
 
 ' @ 
 
 
 19.17 
 
 October, 
 
 <( 
 
 42,000,000 * 
 
 ' @ 
 
 
 20.85 
 
 November, 
 
 (i 
 
 52,000,000 ' 
 
 ' @ 
 
 
 22.05 
 
 December, 
 
 (( 
 
 52,000,000 * 
 
 ' @ 
 
 
 23.03 
 
 January, 
 
 1907 
 
 17,000,000 
 
 ' @ 
 
 
 24.27 
 
 February, 
 
 n 
 
 29,000,000 
 
 * @ 
 
 
 25.03 
 
 March, 
 
 it 
 
 17,000,000 " @ 
 
 
 25.48 
 
 11 Months. 
 
 477,000,000 pou 
 
 nds. 
 
 
 Mr. Untermyer only gives the figures of the sales of electrolytic 
 copper, which comprises the major portion of our sales. 
 
 In my testimony I told Mr. Untermyer that the average pro- 
 duction of our companies was between 30,000,000 and 40,000,000 
 pounds a month; say an average of 35,000,000 pounds, which 
 
95 
 
 would give the total for that period of 385,000,000 pounds, and, 
 according to Mr. Untermyer, we attempted to hold back sales of 
 copper by selling 477,000,000 pounds, or 90,000,000 pounds more 
 than our companies produced in the period. 
 
 Mr. Untermyer further makes the point that after March, be- 
 tween the months of March, 1907, and October, 1907, there was very 
 little copper sold. He attempts to prove by that that the copper was 
 held back for some nefarious reason. He omits, however, to state 
 the conditions that existed then. On the 14th of March there was 
 a violent panic in Wall Street, and buying of all kinds stopped. 
 The condition of the United Metals Selling Company at that time 
 was that not only had we no stock on hand, but we had commit- 
 ments for delivery of copper that carried us way into June and July. 
 Our unfilled contracts on the 1st of April were 96,000,000 pounds of 
 copper, all at prices ranging from 20 to 25 cents. The whole indus- 
 trial and financial world after that date stood aghast, and there was 
 no demand for copper or any other commodity (See my testimony 
 on that point on pages 731-3). 
 
 Mr. Untermyer fails to point out that if we had attempted to 
 force the sales of copper on unwilling buyers we would have, in the 
 course of a few weeks, tumbled the market down to perhaps 13 cents 
 per pound, and the people who had contracts with us to take nearly 
 100,000,000 pounds of copper, would have stood to lose about $10,- 
 000,000, and as we guaranteed the contracts to the mining companies 
 we not only would have bankrupted many of our customers, but also 
 the United Metals Selling Co. Besides, there was no occasion to do 
 it as the mining companies we represented had sold their production 
 for the next four months and could very comfortably sit still and 
 deliver the copper that they had sold. After that was done, the 
 United Metals Selling Company attempted to find a market, first at 
 one level, then at another, until finally, in October, 1907, when all 
 the metal that had been sold earlier in the year had been consumed, 
 the buyers were encouraged to go into the market again at about 13 
 cents per pound. The wisdom of this was proven by the fact that, 
 although the country passed through the most violent panic and 
 unsettled conditions in its history, there were no failures among the 
 copper consumers (See my testimony, pages Nos. 737 and 738). 
 
 Mr. Untermyer further makes the statement as follows ; ** They 
 were simply selling agents, and the record shows that they were 
 loaning on 40,000,000 pounds month by month to the mining com- 
 panies on that copper in order to hold it back from the market." I 
 defy Mr. Untermyer to prove that from the record. The record 
 merely shows how much money was paid to the mining companies, 
 but that was merely money paid to the mining companies out of 
 cash collected for their account. In my testimony on page No. 728 
 Mr. Untermyer asks : ** In April, May, June and July, in these four 
 months alone you advanced over $42 000,000, did you not ? " My 
 answer to that was : " That we paid out that much money." Then 
 Mr. Untermyer says : '* During those four months you were not 
 selling copper, were you ? " M7 answer to that waa that we were 
 
96 
 
 not making any new contracts, but were delivering. Mr. Unter- 
 myer evidently, in all his question, seemed to think that selling 
 copper was like selling stock certificates, that the next day you de- 
 livered the copper and got your money, so that I had to explain to 
 him that the copper was sold for future delivery and the money kept 
 coming in all the time. 
 
 One of the statements required by Mr. Untermyer before the 
 Pujo Committee was to show the amount of money the United 
 Metals Selling Company borrowed during 1907. A statement was 
 made up, which Mr. Untermyer declined to spread on the record, 
 but is referred to in my testimony on page No. 739. This statement 
 completely disproves Mr. Untermyer's contention that money was 
 being borrowed by the mining companies against copper and held 
 back from the market for some ulterior motive. The statement 
 shows that borrowing did not begin until September, 1907, and the 
 total borrowings of the United Metals Selling Company to the end of 
 the year were only about $10,000,000, and that on a business of over 
 $100,000,000 for the year 1907. This covered a period of great 
 financial stringency and the money was needed to keep mines and 
 smelters in operation and not throw all the labor out of employment. 
 Any impartial person examining the record could not but draw a 
 conclusion opposite to Mr. Untermyer. 
 
 Resume. 
 
 When copper was around 18 cents, and showed a tendency to 
 rise, the United Metals Selling Company, representing the largest 
 producers in the United States and Mexico, did all it possibly could, 
 by selling as much copper as the people would take, to stem the 
 rise, and then when the panic broke it did all it possibly could to 
 prevent utter disaster among the customers who had bought our 
 copper for future delivery. Further, that neither the mining com- 
 panies nor the United Metals Selling Company were borrowers of 
 money in order to keep up the price of copper ; that there was no 
 necessity for borrowing money until the Fall of 1907, when condi- 
 tions were so bad that it became necessary to curtail production at 
 the mines, and the total amount of money borrowed was less than 
 10 per cent, of the year's business. 
 
 This statement of Mr. Wolf son's demonstrates that Mr. 
 Untermyer's charge that the Amalgamated Copper Company's 
 stock was manipulated in 1906 and 1907 through the operg,- 
 tions of the United Metals Selling Company is utterly baseless. 
 
97 
 
 XI. 
 
 Manipulation. 
 
 Mr. Untermyer's tirade against tlie Exchange is based on 
 his assertion (1) that manipulation is and always has been 
 rampant on the Exchange ; and (2) that in the view of the Ex- 
 change there is no manipulation if the brokers' commissions 
 are paid, and that it treats and defends manipulation as legiti- 
 mate. These are pure assertions, without any support in the 
 facts, or anything whatsoever to sustain them either in the 
 testimony and evidence submitted to the Pujo Committee or 
 the information presented to this Committee. 
 
 (1) Mr. Untermyer mainly relied on three instances to 
 establish manipulation before the Pujo Committee. They 
 were the Columbus & Hocking Coal & Iron Pool, the Eock 
 Island episode of December 27th, 1909, and the California 
 Petroleum Company matter. It is true that he called them 
 " typical " ; but that is a mere subterfuge. The presumption 
 is that with all his industry and information they were the 
 only concrete transactions he could bring forward. Realizing 
 that the case he sought to make by those instances had been 
 destroyed by a correct version of them he now shifts his posi- 
 tion. He says that the Pujo Committee presented " on the 
 subject of the manipulation of prices " a dozen or more cases 
 (E., p. 623), " some of them extending over a series of years " ; 
 and that they "indicate that manipulation is the rule 
 rather than the exception " (E., p. 628). When he 
 says this, he is referring to the tables and charts 
 prepared for that Committee showing the dealings on the 
 Exchange in the shares of various corporations month by 
 month since 1906, which corporations were the United States 
 Steel Corporation, The Eeading Company, the Erie Eailroad 
 Company, the Rock Island Company, the Consolidated Gas 
 
98 
 
 Company, the Union Pacific Kailroad Company, the Columbus 
 and Hocking Coal and Iron Company, the American Can Com- 
 pany, the American Smelting and Eefining Company, the 
 Amalgamated Copper Company, the Colorado Fuel and Iron 
 Company, the Brooklyn Kapid Transit Company, the California 
 Petroleum Company and the Mexican Petroleum Company. If 
 we turn to the Pujo Keport we see that those charts and tables 
 were produced not to show manipulation but to show what is 
 called " unwholesome " speculation (Pujo K., pp. 42, 43, 44), 
 Section 14 of that report is headed " Unwholesome specula- 
 tion " : it is in that section that the tables and charts are 
 brought forward and explained ; and the conclusion drawn 
 from them is that they show an •'* excessive and indiscriminate 
 speculation." ' In the whole of that sub-division of the report 
 there is not a word said about manipulation (Pujo R., pp. 
 42-46). Section 15 of the Report is headed *' Manipulation," 
 and is the one that deals with that subject, and 
 the instances there referred to are those which 
 have been mentioned — the Columbus and Hocking 
 Coal and Iron Pool, the Rock Island episode, and 
 the California Petroleum Company matter (Pujo R., pp. 46- 
 62). This shifting of his position at the last moment does not 
 help his case as it is so clearly an effort to bolster it up by 
 bringing to its support charts, tables and transactions that do 
 not at all bear upon manipulation. The same is true of his 
 bringing in the dealings in the stock of the Amalga- 
 mated Copper Company shown in one of the tables and 
 charts, and now amplified by the charge that the price of cop- 
 per metal in 1906 and 1907 was manipulated by the United 
 Metals Selling Company in aid of the manipulation of the stock 
 of the Company which Mr. Wolfson's statement shows to be 
 entirely without substance. As we have shown (R., pp. 532-534) 
 these charts and tables and the transactions in the stocks of 
 the companies mentioned to which they refer show specula- 
 tion and nothing else ; not " unwholesome " speculation, but 
 
99 
 
 speculation in its ordinary and accepted sense ; and Mr, Unter- 
 myer distinctly says in his brief that " this hill is not intended 
 to prohibit speculation " (E., p. 629). All that Mr. TJntermyer 
 says in his argument and brief about the prevalence of 
 manipulation on the Exchange is untrue with respect to recent 
 times, and grossly exaggerated as to any time. 
 
 (2) Mr. Untermyer says in his brief of the attitude of the 
 Exchange towards manipulation (E., p. 640) : 
 
 " Manipulation is considered legitimate provided 
 commissions are paid at both ends of the manipulated 
 transaction." 
 
 No statement could be more unfounded. That is not and 
 never has been the attitude of the Exchange. It is no more 
 true to say that it has been than to say, as he does, that 
 " wash sales " and " matched orders " have been regarded as 
 " legitimate until recent years " (E., p. 618), when the fact 
 is that they have been prohibited by the constitution of the 
 Exchange for over fifty years. 
 
 The true attitude of the Exchange towards manipulation is 
 set forth in our brief (E., pp. 534-537), and need not be re- 
 peated here. For Mr. Untermyer to say that the persistent atti- 
 tude of the Exchange has been to defend, retain and encourage 
 manipulation is disproved by the measures taken to prevent it, 
 also set forth in detail in our brief (E., pp. 544-547), down to 
 the last rules denouncing every transaction that does not in- 
 volve an actual change of ownership of the securities bought 
 and sold, and which provide for a Committee to watch the 
 daily transactions of the Exchange to detect irregular, im- 
 proper or manipulated transactions. 
 
100 
 
 XIII. 
 
 Incorporation. 
 
 Mr. Untermyer devotes a great deal of space to what pur- 
 ports to be a discussion of the necessity of the incorporation 
 of the Exchange, but which is really a discussion of all sorts 
 of matters that have no relation whatsoever to the sub- 
 ject. The one fundamental point for him to meet he 
 avoids. That point is, that every requirement of this bill 
 and every mode of regulation that has been suggested 
 by him or any one can be applied to an unincorporated ex- 
 change as well as to one that is incorporated, and therefore 
 incorporation is not essential to any form of regulation. 
 This is the point that we urged and elaborated before the 
 Legislature of the State of New York when incorporation was 
 sought there and denied, and which has been urged and elab- 
 orated before this Committee, and Mr. Untermyer does not 
 venture to answer it. Failing to do so his whole case for 
 incorporation falls to the ground. 
 
 XIV. 
 
 Conclasion. 
 
 There are many other points in the argument and brief of 
 Mr. Untermyer that I am tempted to answer, but to do so 
 would unduly extend this reply. They are just as vulnerable 
 as those that have been noticed. The purpose of this reply 
 has not been one of antagonism, but to induce careful scrutiny 
 of Mr. Untermyer's criticisms and denunciations of the Ex- 
 change. That scrutiny the Exchange asks, and it is content 
 to be judged by its results. 
 
 John G. Milburn, 
 Counsel for the New York Stock Exchange. 
 
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