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 ARGUMENT 
 
 BEFORE 
 
 U. S._SENATE COMMITTEE ON BANKING AND 
 CURRENCY IN SUPPORT OF SENATE 
 BILL No. 3895 TO REGULATE THE 
 USE OF THE MAILS, TELE- 
 GRAPH AND TELEPHONE 
 BY STOCK EXCHANGES 
 
 March I6th. 1914. 
 
 By 
 
 Samuel Untcrmycr 
 
 ol New Yak 
 
^ 
 
 G. 
 
 
 U 
 
Mr. Chairman and Genti^emex oi-' tub Cummittee: 
 
 The learned Counsel lor the New York Stock Kxcliange 
 has argued before you and has presented an elaborate brief 
 agaiFist the eonstitutionality of this liill. A similar argu- 
 ment was ])n'sented by him to the Pujo Committee. 
 
 If in the ligiit of recent adjudications, the legal proposi- 
 tions for which he has assumed responsibility had been ad- 
 vanced l)y one h»ss experienced and distinguished one would 
 l)e (lisposed to cliaraoterize them as trivial but I feel that any 
 pioposition a<i\ anceil by iiim is entitled to serious and respect- 
 ful consideration. They are fully diseusse<l an<l 1 think con- 
 clusively answered by the argument and citations that 
 will be found at pp. 1 19-1124 of the Report of the Pujo 
 Committee and Ity a supi)lemental memorandum which is 
 herewith subniitt<'d. 1 take issue with the assertion that 
 the proposed JUU contains provisions that are intended by in- 
 iiirection toTegulate the internal alTairs of the Exchange and 
 of the corporations whose shares are listed. There is not a 
 re(|uirement of this Bill that is not necessary to and does 
 not bear directly ujion safeguarding the mails against lu'ing 
 used as an agency for the distribution of manipulated quota- 
 tions of ])rices of securities and other fraudulent purposes. 
 
 The l>ill carefully refrains from intruding into the in- 
 ternal management or atTairs of the Exchange or from writ- 
 ing into its charter anything that does not strictly concern 
 the integrity of the transactions that are to be carried tlirough 
 the mails. All else is left to the juristliction of the States, 
 where it rightfully belongs. 
 
 The purpose and effect of this T.ill have been grossly mis- 
 represented and misunderstood, as will hereafter appear. It 
 has been said that it involv(>s a censorsliip of the i)ress 
 and that it interferes with the liixM-ty of the press. It 
 has about the same relation to the liberties or censorship 
 of the press as chalk has to cheese. Tt is a purely con- 
 structive measure. Tt does not sock to punish for the mis- 
 deeds of the past but to prevent and punish their recurrenc? 
 in the future. It is framed on the theory that the Stock Ex- 
 change is an integral and perhaps the most important ])art 
 of our National and International financial system and that 
 if the abuses such as the manipulation of prices that now 
 characterize its operations can bo eliminated its usefulness 
 may be greatly enlarged and it may be made the great public 
 security market of the world to which investors will resort 
 
with a sense of security m the integrity of the transactions 
 there conducted. 
 
 It is believed that by requiring full publicity of the facts 
 concerning corporations in the securities of which it is per- 
 mitted to deal and by banishing and rendering hereafter im- 
 possible the illegitimate transactions that now disgrace it 
 and that have destroyed confidence, the investing public will 
 be attracted and a vast amount of legitimate investment busi- 
 ness mil result which will mean for it the dawn of a new era 
 of prosperity. 
 
 Whilst the ex-parte statements and the arguments of 
 Counsel before your Committee have served only to empha- 
 size the weight of the sworn evidence on which the House 
 sub-Committee of the Committee on Banking and Currency 
 (the Pujo Committee) acted in recommending the Bill that is 
 now before you, the discussion has been valuable in clarifying 
 and simplifying the issues with which you are called upon to 
 deal. 
 
 As the result of this discussion we are confirmed in the view 
 that Federal supervision of the quotations that are listed and 
 dealt in on our Stock Exchanges is essential to the public 
 protection. The only open question is as to how that protec- 
 tion is to be best accomplished. 
 
 The champions of the Bill insist that it can be effectively 
 done only through excluding from the use of the mails, tele- 
 phone and telegraph all quotations on public markets of se- 
 curities that are not subjected to suitable State supervision 
 through incorporation and under charter and by-laws that in 
 the judg-ment of Congress will prevent the mails and the 
 agencies of interstate commerce from being used as mediums 
 for the distribution of fraudulent and manipulated quotations. 
 To that end and only for that purpose we insist that the Post- 
 master-General should be given the power — not to pass up- 
 on the sufficiency of the State charter or by-laws of the 
 Exchange, as the opponents of the Bill would have you be- 
 lieve, for there is no such pro^asion — but (1) to perform 
 the formal duty of determining whether the charter and 
 by-laws contain the safeguards that are prescribed by the 
 Bill against the abuse of the use of the mails, telegraph and 
 telephone, (2) to ascertain whether these statutory require- 
 ments are being enforced and (3) to examine the books of the 
 members containing entries of their transactions on the Ex- 
 
chanp^c (not tlu'ir otlior business) as the only possible means 
 of cU'tectini,' such misuse, so that if sucli violations exist they 
 may be dealt with by tiie Courts upon the comphiint of the 
 nepartiiieiit of Justice. 
 
 It is only where a public security market is not incorpo- 
 rated or where if incorjxjrated its charter does not contain 
 the prescrilx'd ])ri)visi()ns or where the provisions are not 
 beiuLC enforced that the Postmaster-tleneral can deny the use 
 of the mails to any letter or publication containing its quota- 
 tions. His are ministerial acts in these respects and should 
 be made subject to review by the Courts. 
 
 So, too, in his examination of the books of the members of 
 the Kxchanixc, if as the result of such examination he fin<ls 
 that there have been quotations of "wash sales," "matched 
 orders" or fictitious or manipulated transactions foisted upon 
 the public as jj:enuine transactions, he cannot stop their trans- 
 mission or inti-rfere with the oj^erations of the Kxchan.c^e on 
 that account or punish anyone concerned in the fraud if the 
 requirements of the Statute are bein^ met by the F^xchanjje. 
 All he can do in that event is to furnish the evidence thus 
 secured as a basis for prosecutinc: the cruilty parties. The 
 f^xchancre is not thereby interfered with in its ric^ht to con- 
 tinue the use of the mails for its quotations. So long as its 
 charter is in proper form and its charter provisions are be- 
 ing observed its use of the mails is secure. The guilty ]>arty 
 alone is reached and his punishment made possible. 
 
 r.y what stretch of construction such a scheme of regu- 
 lation of the use of the mails can be contorted into a censor- 
 ship of the press or an interference with the freedom of the 
 press or as "Hussianizing the press," it is difficult to under- 
 stand. And yet the cry has been ingeniously raised and 
 thoughtlessly repeat«'d throughout the lentrth and breadth of 
 the land by a press that is at the moment hyper-sensitive of 
 its privileges, that in some way as yet unexplained tliis Hill 
 would furnish an entering wedge for curtailing the liberties 
 of the press. 
 
 Hefore disposing once and for all of this baseless con- 
 tention, which is cleverly put forward by the Kxcliange as 
 a bid for the support of the press in defeating this Hill, per- 
 mit me to say by way of parenthesis that the power and 
 momentum of the press are increasing at such a rate that 
 the danger is not so much that Congress will ever "Russian- 
 
ize the press" as that the press may ''Eussianize" the 
 people. 
 
 The liberties of the press are in no peril in this press- 
 ridden, press-governed country of ours, where we have no 
 libel laws worthy of the name and where public officials are 
 terrorized, reputations are slaughtered without redress and 
 governmental policies are dictated by the newspapers. Not- 
 withstanding these excesses — which will doubtless be cor- 
 rected or will correct themselves in time — the liberty of our 
 press is one of our priceless possessions which no patriotic 
 citizen would care to see abridged, even though it is permitted 
 under our lax administration of the law at times to lapse 
 into unrestrained license and to become a serious handicap 
 to the administration of justice. These temporary evils are 
 negligible as compared with the peril of the loss of a free 
 press. 
 
 This Bill has no possible relation to the press or its lib- 
 erties. True, no publication that contains the quotations of 
 the securities of an unincorporated Stock Exchange can have 
 the use of the mails; all that means is that the newspapers 
 shall carry the quotations of only such public security mar- 
 kets as conform to the requirements that Congress considers 
 essential to prevent the dissemination of fictitious or manip- 
 ulated transactions by which the public will be misled. The 
 press does not and cannot assume any such obligation. It 
 knows nothing of the genuineness of the quotations that it 
 receives from the Western Union Telegraph Company and 
 which the latter in turn takes from the officials of the Ex- 
 change. The newspapers are quite as much interested as any 
 other part of the community in the stability of the news and 
 in preventing the dissemination of frauds of the character 
 sought to be reached by this Bill. The same prohibition ap- 
 plies to the use of the telegraph and the telephone and to the 
 dissemination of the information through letters or by any 
 other agency of interstate commerce. 
 
 It might as well be said that the exclusion of pictures or 
 literature contained in newspapers that the Postmaster be- 
 lieves to be obscene, or of offers of fraudulent stocks by ad- 
 vertisements or of other enterprises of doubtful legitimacy is 
 an interference with the liberty of the press, for in those cases 
 the Postmaster-General has absolute authority to determine 
 whether the picture or literature or advertisement is proper. 
 
II«'r«> lie lias no siicli power. If the Kxcliau^o has l)r<'n inoor- 
 poiatf.l aii.l its cliArtor contains tlic rrciuirmicnts tliat Con- 
 gress considers necessary to assnre tin' inte^^'rity of the ([no- 
 tations he cannot exchule them nnh'ss th«» re<jnireinents are 
 beinir viohited, and his action shonid be made snhject to 
 revii'W, which is not true of any of the existinir rc;^nhitions 
 which 1 liave instancetl. 
 
 If a newspaper pu])lishes paid matter in tiie form of 
 **news" and fails so to label it, the Postmaster (ieneral may 
 refuse the use of the mails to the paper as second class mat- 
 ter, wliidi he cannot do under this liill, even if ho knows the 
 quotations to be fictitious or manipnlat«Ml. If a deceptive ad- 
 vertisement is contained in a newspap<'r the Postmaster- 
 General may likewise prohiltit it the use of the mails, lb- 
 may absolutely exclude from the mails matter though not 
 fraudulent and not rehitini^ to .u'and)lin;^ or unlawful trans- 
 actions which he believes not to constitute le«^itimate enter- 
 prise, as was held in 
 
 Public Clearintf House v. Coyne, 194 U. S. 497. 
 
 In all these cases and in a variety of others that are cited 
 in tlie .liscussion of this liill at pp. 1 IIML'S of the Pujo Iie|)ort 
 he is the sole jutlpe. Un«ler this Bill he has none of these 
 powers. 
 
 Another usefnl purpose that in- (•••en accomplished by 
 the discussion before your CNunmittee luis been to fon-e the 
 virtual admission by the opponents of this Pdll of the neces- 
 sity for some sort of Federal rei»-ulation. 'I'ln-y object, how- 
 ever, to the result beinp accomplished throuirh State incor- 
 poration or throutrh the supervision of the Postmaster-Qen 
 oral, but fail to point out any effective alternative. Coun- 
 sel, speakin;^ for the Xew York Stock Kxchanjre, sup'ifests 
 that a Hill similar to that under which lotteries were 
 suppressed, that would deny the use of the mails and tele- 
 graph for the distribution of fictitions and nnlawfid trans- 
 aetions wonid answi-r the purpose. To me it is manifest that 
 it wonId be about as valuable as a blank piece of paper. Any- 
 body can dett*ct n lottery ticket but counsel fails to ex- 
 plain how fraudulent or fictitious or manipulated quotation.«j 
 are to be detected unless some machinery is to \w supplied 
 for the purpose of safeguarding the mails against being used 
 
for their dissemination. The Boston Chamber of Commerce 
 acting, as I understand, with the Boston Stock Exchange pre- 
 sents a Bill which will hereafter be more fully discussed, 
 proposing Federal supervision but without incorporation and 
 which would perpetuate the chief evil sought to he abated by 
 this Bill. 
 
 By the terms of this Bill Congress will be satisfied to have 
 the States in which these Exchanges are located place them 
 under State supervision, provided their charters con- 
 tain certain prescribed provisions safeguarding against 
 fraud and manipulation the quotations that require the use 
 of the mails and telegraph and anything else that the State 
 may see fit to write into them and which Congress does not 
 undertake to dictate or suggest. In response to this mod- 
 erate proposal it is said that it is an attempt on the part of 
 Congress to dictate the form of the State charter, which is 
 precisely what the Bill painstakingly refrains from doing ex- 
 cept in the single particular in which the Federal Govern- 
 ment is directly concerned. When it is suggested that the only 
 possible means of ascertaining Avhether quotations are ficti- 
 tious or being manipulated is to give to the Postmaster 
 the right to inspect the books of the members for that pur- 
 pose, we are told that no responsible broker will tolerate 
 any such inquisitorial procedure and that none but clerks 
 would thereafter be members of the Exchange if that neces- 
 sary and only means of discovering violations of the law 
 were adopted. The opponents of the Bill significantly re- 
 frain from enlightening us as to how there could ever be any 
 effective regulation without this privilege. 
 
 The right to secrecy from their point of view is not invaded 
 when the Bo^rd of Governors of the Exchange, consisting 
 of forty of the competitors of a member are entitled and 
 are constantly accorded the right to investigate these trans- 
 actions ; but it is intolerable when for the purpose of discover- 
 ing fraud a Government official is to be entrusted with a 
 like power as a condition of allowing a member to use the 
 Government facilities. 
 
 The members, besides using these public facilities, have 
 their private telegraph and telephone wires between New 
 York City and the principal Cities of the United States, 
 through which orders to purchase and sell securities com© 
 to them from all parts of the country, based on the quotations 
 
tliat arc caniril tliroui^'li tlio mails an<l over the telephone and 
 tek'Krapli. They rciiuiit' ih. -sr facilities. They niv a.lniitted- 
 ly essential to the coii.luet of tin- l)usiiu'ss iA' its nu-nilnTs l)ut 
 thev resent the proposal that the (ioverninent shouM have 
 any way of ascertaining whetiier they arc hciiii,' use.l to mis- 
 lead the pnhlic. 
 
 Wiiilst tlu' lv\chan,L,'e is suK^'''>tin.i,- a law similar to th«' anti- 
 Lottery I'.ill as the limit of Federal rci^nlation, other oppo- 
 nents an»l many well meaning' hnt nninformed friends of 
 regulation arc nrgin.i,' that tin' llnrean of Corporations 
 or the Department of Commerce or the i)roposed new Tra<le 
 Commission he entrusted with the duty of regulating Stock 
 Excluinges as though this were a Hill to reirulate tlie internal 
 alTairs of Stock Kxchanges, which it is not. Its <udy ].urposo 
 is to preseril)e the conditions on which such Kxchanges may 
 use the mails and telegraph for the distrilmtion of tlnnr (pm- 
 tations beyond State lines. So long as they do not rcMuire 
 these privileges the P>ill does not a])ply to them. ^Vlly the 
 Secretary of Commerce or the Commissioner of Corporations 
 would be as well adapted or more acceptable than the Post- 
 niaster-(ien<"ral for the carrying out of the declared objects 
 is not exi)lained excei)t by the fact that the Exchange is seek- 
 ing to take a.lvantage of a prejudice against delegating any 
 additional powers to the Postmaster-General. That preju- 
 dice is in some respects well-foundcil for he lias nwiny ar- 
 bitrary despotic ])owers, none of which are subject to judi- 
 cial review. Hut it has no appli<ation to this case where the 
 regulation lias to do .listinctly with the use of the mails and tiio 
 Postmaster-Cieneral is accordingly manifestly the only logi«'al 
 and leiritimate oflicial in whom the aut!!'"'fv s),.,nld be vest- 
 ed anil it shoul.l be stibject to revi<'W. 
 
 The position of the Stock Kx«'ljango is inconsi.stent. It 
 insists and has submitted an elaborate arirum.'ut to prove 
 that the distribution of quotations is not interstate c«mi- 
 ,i,(.rce— to which, by the way. we do not a^rei-— and yet 
 suggests as a remedy legislation on the lines of the Anti- 
 T.ottery Pills. The Kxchanir«'. as before statitl, sells its 
 quotations for distribution throughout the country and in 
 foreign countries to the Western Union Telegraph Com- 
 pany, but by the contract between the Kxchango and the 
 Teletrraph Company they continue under the cont*-'! ,.r fl,.. 
 Exchange wh.rcv»r they jro. 
 
8 
 
 If, as the Supreme Court has held, a lottery ticket and the 
 letters of a correspondence school and a variety of kindred 
 subjects constitute interstate commerce, it is difficult to un- 
 derstand why these quotations do not come plainly within 
 the decisions. This phase of the subject is also fully dis- 
 cussed on pages 119-128 of the Report of the Pujo Committee^ 
 where the conclusion is reached that Congress has the power 
 to control the business of these Exchanges and of their mem- 
 bers as being engaged in interstate commerce. But this Bill 
 is not framed on that theory for the reason that the control 
 over the quotations is more legitimately dealt with through 
 control over the use of the mails. 
 
 Beyond these considerations there is however the further 
 unanswerable reason why the Federal regulation of these 
 quotations, which seems at last to be recognized as 
 essential, cannot be accomplished through the Depart- 
 ment of Commerce, the Bureau of Corporations or the 
 proposed Trade Commission, that the quotations are not 
 in all instances those of corporations engaged in in- 
 terstate business. Many of the most important of 
 the securities dealt in on the New York Stock Ex- 
 change and on other Exchanges are those of intra- 
 state public service corporations and other intrastate com- 
 panies. Among the securities of that character listed on the 
 New York Exchange there occur to one at the moment 
 such as the Interborough-Metropolitan Company and Brook- 
 lyn Eapid Transit Company, which together control the Sub- 
 way, Elevated and surface lines of Greater New York and 
 will have approximately $500,000,000 of securities listed; the 
 Consolidated Gas Company, which controls the gas and elec- 
 tric lighting systems of Greater New York and is represented 
 by a vast amount of securities; the telephone companies in 
 the various states whose securities are dealt in all over the 
 country; innumerable railroads that are within the bound- 
 aries of the different States; mining corporations with hun- 
 dreds of millions of listed capital that operate within the 
 States where their mines are located and sell their product 
 at the mines so that they do no interstate business and an 
 infinite variety of other great intra-state corporate enterprises. 
 There are billions of dollars of securities of intrastate cor- 
 porations the securities of which have a broad international 
 market over whose operations this Federal Trade Commis- 
 
sion (wliicli, Ity tlir way, has not yot Ihhmi croattMl) woiil.l 
 liavo no coiitrol. 
 
 W Im'II \vt' cuinc ti> analyze tln'so various proposltii-ii- li 
 seoms inconirnxms that in oiiactini^ hiws to protect tlu* piil>lic 
 against being victimizotl hy tlir circuhition tlirougli tho mails 
 of fictitious and nianipuhitcd (juotations of prii'cs of sofuri- 
 tit'S, ('on.irn»ss siiould i.i,Mion» the ncpartnimt tlirougii whicii 
 such jn'otcction can Itc best acconiplisl.ccl and should consi<lcr 
 entrusting tho duty to aiiotlirr department having no loi^ical 
 rchition to the suhjcct, mri-rly to satisfy a prcjudii'c against 
 vntrustiiiir to that Dfpartnu'nt the duties for uliidi if ua> 
 organized ant! which it is best equipped to perform, 
 
 Tlie very astute and ri'sourceful gentlemen who are try- 
 ing to defeat this legislation by the familiar <levice of suggest- 
 ing ways of not doing the things that this Bill is intended to 
 accomi)lish, <'harge tliat this is an elTort l»y indirection and 
 through the me«lium of the Post OlVice l)e|)artnient to secure 
 publicity ami uniform regulation of the adairs of corporations. 
 In proof of that claim they refer to subsections (a) (b) and (i) 
 of Section 1 of the l>i!l jirescribing tlie requirements of the 
 cliarters of Stock lOxchanges as to the disclosures tliat must be 
 made by corporations wiiose securities are to be listed. 
 
 They jirofess to applaud that purpose but say that every- 
 thing attempted in tliat direction <'an l»e more legitinuitc- 
 ly accom|)lished by requiring these disclosures to be 
 made to the Bureau of Corporations or the Interstate Com- 
 merce Comnnssion c»r the new Trade ('ommissi«)n. In pre- 
 senting that argument they entirely overlook the facts to which 
 we have adverted (1) that these conditions are imposed as 
 necessary to secure tlie integrity of the rpiotations for the dis- 
 tribution of which the mail facilities are sought and for no 
 other |)urpose; ('2) that none of these l)e])artnu'nls has juris- 
 diction over the use of the mails or is in any way responsible 
 for tho abuse of that privilege, and (3) that the quotations 
 that are to be distributed may be, unb'ss regulated, employed 
 to mislead tlu' public. 
 
 The prevention aH'l tni>ti>}i>>ii nf nf tninnDuIiifinU iirr flir 
 
 chief aims of the Hill. 
 
 No matter how complete may be the di,««cIosure8 
 made of the affairs of a corporation the public may 
 
10 
 
 be preyed upon if every unscrupulous stock operator 
 or combination of speculators and every pool or syndicate 
 may freely manipulate the securities of that corporation and 
 exploit the public through the unrestrained use of the mails 
 and telegraph. The public must be protected at the crucial 
 point at which the securities are being marketed if there is 
 to be any protection anywhere. The argument now advanced 
 that the protection should be applied in the issue of the secur- 
 ities by the corporation is a clever effort to obscure and shift 
 the required regulation from that of safeguarding against the 
 manipulation of prices of securities that are already protect- 
 ed by the requirement of publicity to that of the control of 
 bond and stock issues. 
 
 It is rarely if ever that the corporation manipulates or 
 deals in its own securities or that it is done on behalf of 
 the corporation. The operation is frequently conducted with- 
 out its knowledge or connivance, generally by or in conjunc- 
 tion with insiders but often by outsiders. 
 
 The wholesome requirements for publicity contained in 
 this Bill furnish one of the two conditions necessary to insure 
 the integrity of dealings in the stock. The other condition 
 of equal importance is that the market for the stock shall be 
 open and honest, free from manipulated prices. Neither con- 
 dition can be met by any of the makeshifts that have been 
 proposed or by any means other than that outlined in the 
 Bill. None has yet been suggested. 
 
 The proposed Bill submitted as the result of collaboration 
 between the Boston Chamber of Commerce and the Boston 
 Stock Exchange lacks every essential of effective control and 
 would leave the situation worse than it is at present. It rep- 
 resents an attempt to appease the public demand whilst ac- 
 complishing nothing. It significantly omits to condemn 
 manipulation, which' is the chief evil to be reached, by cover- 
 ing only manipulation by means of "fictitious purchases and 
 sales," ''wash sales" or "matched orders." Manipulation is 
 not accomplished by any of these means as will be hereafter 
 shown. The only penalty prescribed is expulsion fram the 
 Exchange. It should be made a crime. No means are pro- 
 vided for discovering violations. It is the most transparent 
 ''make believe." Par better no legislation on the subject 
 until something really effective can be secured. Even in the 
 requirements for listing the most important safeguards are 
 
11 
 
 omitted, such as the exclusion fidni listinir <>l' the securities 
 of corporations whose ollicrrs and directors an* jn)t i)rohil)it- 
 ed from secretly speculatiiiLT in its securities. Tliere is not 
 a jirovision in tlic proposiMJ lioston liill tliat is not now em- 
 bodied in tlie ruk»s of the Kxchani^es in wliicli tliere now exist 
 the evils that an? sought to be corrected. It is a '*l)lind" 
 under cover of wliicli to defeat effective re^-ulation. 
 
 The followinir are some of the chief contril)utions in the 
 way of irresponsibh' assertion without proof tliat liave been 
 ailded to tlie testimony adthiced liy tlie Pujo Committee, dur- 
 ing the course of tlie discussion before your Committee: 
 
 (a) The illuminatinir ari^'ument of Mr. Ildward D. Paj^'e, 
 who was one of the members of the Iluirlies Commission of 
 lli(»l> on whose Iveport the Stock Hxchan;.ce strangely relies 
 and of which we will hereafter have more to say, in which 
 Mr. Page learnedly descants upon and champions the virtues 
 of "watered stock" as a positive boon to th«' investing ])ublic 
 and in which he depre<'ates the ignorant prejudice against it 
 that seems to have taken possession of the ill-infonued legis- 
 lative mind. 
 
 (b) Mr. \'an Antwerp's surprising Hon-scquitcr that the 
 effect of any legislation by Congress safeiruarding the peo|)le 
 against the frauds that are being jiracticed upon tlu-m 
 through manipulated transactions will be to transfer the 
 business to the bucket-shops (p. 133). 
 
 We hail not supposed and do not believe tliat of late 
 years at least there is any such cIo.se relation between the 
 chara<'ter of the leiritimate business of tiie stock broker and 
 the dishonest occuj)ation of the bucket-shop. Mr. \'an Ant- 
 werp's "argument'* is an insult to the Exchange. It implies 
 tiiat its dealings are largely gaml)ling and tliat they involve 
 nothing more than a settlement of ditTerencos. 
 
 (c) Mr. \'an Antwerp's further nonsniuitrr tliat such reg- 
 ulation would transfer tlie business of buying and selling 
 securities from the public market of the Kxchango to the 
 private bankers. 
 
 Tlie two methods of dealing in securities are as far apart 
 as the poles. They always have and always will co-exist and 
 complement one another, just as real property will always 
 be sol 1 j^rivately and at public auction, one beinc regulated 
 by private barter and the otlier by public competition. 
 
12 
 
 (d) Another instructive point of view advanced by Mr. 
 Van Antwerp as to the effect of protecting the integrity of 
 quotations through regulation is that the speculative business 
 would go to the London, Montreal and Toronto Stock Ex- 
 changes. As this Bill does not interfere with speculation we 
 have here another argument apropos of nothing. If Mr. Van 
 Antwerp means that the speculation that is induced by 
 manipulated prices would go to foreign exchanges I can only 
 say that the sooner that form of activity is transferred to 
 foreign shores the better it will be for our people. 
 
 Some Continental countries still maintain Government lot- 
 teries. Unlike sales of stock that are induced by the excite- 
 ment and apparent activity induced by manipulation, these 
 lotteries are doubtless honestly conducted. They are not 
 accompanied by false rumors of impending ''deals," new dis- 
 coveries, increased dividends and the many other devices that 
 have become so familiar but the source of which can never 
 be traced. It is possible that many of our citizens patronize 
 those lotteries because they are unable to buy lottery tickets 
 in this country but that furnishes no reason why our Govern- 
 ment should reopen the business of allowing lottery tickets 
 to be sold through the use of the mails, 
 
 Mr. Van Antwerp in his excess of zeal to perpetuate 
 the practice of manipulation on the threat that unless the 
 Federal Government continues to lend its aid through 
 the use of the mails it ^vill be conducted through foreign ex- 
 changes, fails to take into account the fact that the quota- 
 tions of those Exchanges may be equally barred from the 
 mails as the lottery tickets of foreign Governments are now 
 barred unless they conform to the requirements that are 
 imposed upon our own Exchanges. 
 
 I venture to say that your Committee has rarely had 
 submitted to it anything quite so unsubstantial in the way of 
 ''argument" as is this plea of Mr. Van Antwerp. 
 
 The purpose of this Bill is to assure and protect the hon- 
 esty of the public market against the frauds that now char- 
 acterize it in the form of manipulation which the Stock Ex- 
 change still seeks by all manner of specious arguments to de- 
 fend. Mr. Van Antwerp calls the form of mock auction 
 known as manipulation "stabilizing the market" (p. 121). 
 Other defenders of the system refer to it as "creating a 
 market" or "creating activity". Mr. Milburn apparently is 
 
13 
 
 luiciTtain wliothor to drffnil or <'oii(lcnin it. At one point lio 
 ar.i::ius that tlicro is very littlr of it ami tluit tlio FiXclian>;c 
 set'ks to prevent it. whilst at aisother ho insists that it is per- 
 missible and should not l)e forhidden, as when he seeks to 
 justify such uiipaitlonaii!*' transactions as the I locking? pool. 
 
 His clients have however no douht ot' the entire legiti- 
 macy of the practi<'e. Mr. Sturi^is said that payin;c com- 
 missions to nuuiipulate a niarkrt was lik«' spending so much 
 money for advertisini^ the security. He was quite ol)livious 
 of the fact that a man who in tin* ordinary coursi* of business 
 shouM sell stock by advertisini^ that so many thousand shares 
 Were actually brini; boui^^ht an<l sold day by day at a i,'iv»'n 
 price, and who was actually **^oin.i^ throui^h the motions'* 
 and payintr coimnissions on both sides of the transaction for 
 the sole purpose of <leceivi!ii^ would-be ])urchas«'rs whom lie 
 was thereby seekiuLT to attract into the belief that such pur- 
 chases and sales were irenuine, would clearly be iruilty of lar- 
 ceny. Vet that is precisely tlu' intent and etTeet of these 
 manipulated transactions that form so lari^e a part of the 
 business of the Kxchanire and it is passing strange that the 
 members are so obscessed by self-interest that they cannot ap- 
 preciate the perfect anahcj-N- in priiicijilf between the two 
 transactions. 
 
 Anyone wlio is interested in oreatinir an active market in 
 a eriven security shoidd liereafter be re«|uired to frankly set 
 forth his purpose over his own si^rnature, advising its ]mr- 
 ehase, for which someone can be held responsible, instead of 
 continuing the present un<lerhand methods of false nimors 
 of impending <levelopments, "melons" to be cut, jJividends 
 to be increased, large I'arnings, great market activity (manu- 
 factured for the purpose of misleading), etc., that are the ac- 
 companiments of ''creating activity", *'slimidating spiM'ula- 
 tion" and of the various «)ther fonns of manipulation. 
 
 Successful manipulation of established sej'urities fre- 
 quently depends on these methoils. In order to get the 
 speculative public interested in the stock tlwre must be 
 *'something doing" in it. They must l>e nmde to believe that 
 they are getting advance infonnation of what is "doing". 
 The whole performance when thus conducted is essentially 
 in the nature of a "confidence game'*. 
 
 The most amazing development of the di.scussion before 
 your Committee and of the testimony of the officials of the 
 
14 
 
 Exchange before the Pujo Committee was the bliud persist- 
 ency of the Exchange in defending this practice and strug- 
 gling to retain it, apparently because of the large proportion 
 of the dealings that it represents. They can no more be per- 
 mitted to continue such practices than they could retain 
 "wash sales" and "matched orders" that until recent years 
 were also regarded as legitimate; nor than they could con- 
 tinue on the list their so-called "Unlisted Department" of 
 blind pools, such stocks as Amalgamated Copper and Ameri- 
 can Sugar Eefining Company, which refused to disclose their 
 affairs and were yet among the most active stocks. 
 
 Every important reform looking to the abatement of abuses 
 that were the source of profit has been fairly dragged from 
 the Exchange under threat of subjecting it to regulation. 
 
 If I remember rightly, the assertion was made before 
 you that manipulation represented only a small proportion 
 of the daily transactions on the Exchange. There is no proof 
 to support that statement. It is contrary to the facts to be 
 fairly deduced from the mass of statistical and other evi- 
 dence before the Pujo Committee. 
 
 No 'one can read those statistics of fabulous transactions 
 in connection with the oral testimony and remain for a mo- 
 ment in doubt as to the gigantic scale on which manipulation 
 has been conducted nor as to the hundreds of millions that 
 have been annually taken from the public, and dishonestly 
 taken, by that practice. I refer now to the manipulation in 
 active and established securities and not to that practiced 
 to create an appearance of activity in a new security, which 
 though little less justifiable is not resorted to from the same 
 sordid motives. 
 
 The Exchange has presented no facts or figures that at- 
 tempt to challenge the proofs before you. It contents itself 
 with vague assertion, which by the way, is characteristic of 
 its entire argument before you. An analysis of these state- 
 ments, not made under oath and not subjected to the test of 
 methodical cross-examination by anyone familiar with the 
 facts, contrasted with the results accomplished through an in- 
 quiry conducted under the forms of law with the aid of coun- 
 sel, must satisfy you of the unsubstantial and unreliable 
 character of the information secured by the former method. 
 These assertions by the Exchange are further contradicted 
 by the findings of the Hughes Commission of 1909, on which 
 
15 
 
 the Stock Kxchaiiire ii'lirs, lor rt'asons to us unacrouiitable; 
 notwitlistamlin^' tlio sliortooinin^'s ol* tiiat iiiiollicial invrsti^'a- 
 tion it constitutes a severe arraiKniumt ot* the Kxehan^e. 
 
 Anioui^' other things that Coiiiiiiissioii lia*I tlic following; 
 to say under the heading "Liiaracter of Transactions": 
 
 It is uiKiuestioiiahlo that only n small part of the truns- 
 aetiuns upon the Kxclianj;!' is of an iiivrstnuMit I'liaracti-r. 
 A suhstantial ]»art may ho rharat-trri/id as virfu.il ram- 
 hliiig. 
 
 It liad the rolloNvinu' anionic' other tliinirs to sav under 
 the lieading "I'atrons of tlie I'^xclianire" : 
 
 The patrons of the Kxehange may ho tlividi d into tlie 
 followui;; irroups: 
 
 (1) Invostoi-s, who personally examine the faets relntini; 
 to the value of seeurities or aet on tiie adviro of reputahle 
 and experienced finaneiers, and pay in full for what they 
 buy. 
 
 (2) Manipulators, whose connection with corporations is- 
 suinjr or ooiitrollinLr particular se«'urilies enahh's them under 
 certain circumstances to move the prices up or ilown, and 
 who are thus in some dei^rce protected from dangers en- 
 countered hy other speculators. 
 
 (3) Floor traders, who keenly study the markets and the 
 pencral conditions of husiiu»ss and acquire early information 
 concerninpr the djantres which alTeet the values of securities. 
 From their familiarity with the teclinique «)f tlealini,'s on 
 the Kxohanu'e, and ahility to act in ooneert with others, and 
 thus manipulate vahn-s. they are supposed to have special 
 advantages over other traders. 
 
 (4) Outside operators having capital, experience an«l 
 knowledge of the general ct>nilitions of the business. Testi- 
 mony Is clear as to the result whieh, in the long niu. at- 
 tends their oi>erations: c" ms and intiTest 
 constitute a faetor always w ...linxt th<'iM. Si- 
 
 luek and had Im-k allernatr in tiiiic, \\\r ,itc 
 
 th«'se men to laru'er ventures, and the\ , till 
 
 a serioi^H or ruinous loss fon-es tliem out of the "Street". 
 
 !.'>) Ine.xpfrienerd persons, who act on inten>ste<l advice, 
 "tips," advertis«'ments in newspain-rs. or ein*ulars sent by 
 mail, or "take tlyers" in a' ' and with blind 
 
 contidenee in their luck. exception they 
 
 eventually lose. 
 
 Under the head of "Manipulation of Prices** it bad the 
 following to say: 
 
 .\ suhjert to • dfVoted mu«"h tinw and 
 
 is that of the ; of prie«*s l)y Ian.'** i^ 
 
 Tills falls into two eerieral eln.ss«^: 
 
 (1) That whieh is resorted to for the pnr"<»^'- 'f n, illuc 
 a market for issues of dcw socurities. 
 
16 
 
 (2) That which is designed to serve merely speculative 
 purposes in the endeavor to make a profit as the result of 
 fluctuations which have been planned in advance. 
 
 The first 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 cor- 
 porations, 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 or directly to the ultimate 
 investor, whose confidence 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 middlemen 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 of- 
 fers bona fide, open to all sellers and buyers the operation 
 is harmless. It is merely a method of bringing new invest- 
 ments into public notice. 
 
 The second kind of manipulation mentioned is undoubt- 
 edly open to serious criticism. It has for its object either 
 the creation of high prices for particular stocks, in order 
 to draw in the public as buyers and to unload upon them 
 the holdings of the operators, or to depress the prices and 
 induce the public to sell. There have been instances of 
 gross and unjustifiable manipulation of securities, as in the 
 case of American Ice stock. While we have been unable to 
 discover any complete remedy short of abolishing the Stock 
 Exchange itself, we are convinced that the Exchange can 
 prevent the worst forms of this evil by exercising its in- 
 fluence and authority over the members to prevent them. 
 When continued manipulation exists it is patent to expe- 
 rienced observers. 
 
 This argument in favor of certain classes cf manipulation 
 was repeated before your Committee by Mr. Horace White 
 and Mr. Edward D. Page, members of the Commission. It 
 was also defended by representative members of the Ex- 
 change before the Pujo Committee but was unqualifiedly con- 
 demned in the Report. 
 
 Counsel now tell ns that "it used to be" considered quite 
 legitimate but that there is now a division of opinion on the 
 subject and hence the Exchange has recently (since the ex- 
 posures of the Pujo Committee) enacted rules to prevent it. 
 On examining those rules you wall find that they accomplish 
 
17 V *" 
 
 uo sucli result. riuItT pretense of .sii^h ni!«*s ii nix 
 
 to perpetiiato tli«- pra''tiic. Besul* as 
 
 Counsel and incmlnTs of tlw Kxfllniim r^.n;mue [o iu^.i^,l bo- 
 fori' you \n oral stati'UU'iits and in tlu-ir briefs, why pn'vent 
 it? Can anyone tell us now after these days of discussion 
 where the Exeluuijtfe really stands on this crucial question T 
 I confess 1 cannot, hut I can plainly see what it seeks to ac- 
 complish here by its tortuous attitude. It wants to make 
 it appear here that inani|>ulation is forbidden in order to de- 
 feat legislation and still to be able to insist hereafter when 
 that peril has passed that what it is d«»inir is not manij)U- 
 
 lation I'lif is Miiiift hiiiu"" lli.it if Ii:i-> ;il\\.i\- il.-iirmil flic iML'-lif 
 
 to do. 
 
 The fact is that numipulatiun as now practiced on the Kx- 
 chauire and as permitted under their amended rules is dis- 
 honest whether resorfff] to for the purpose nf intm 
 ducin^ a new secur! :or any other purfX' 
 
 it is five years since llic Hni^hes Connnission made its 
 report and there were many thing's then tolerate«l iu corpo- 
 rate manai^ement and in the linancial worM ircuerally that 
 would not dare be attempted today, thanks to the exposure 
 of corporate abuses by the much-*!- "reformers" and 
 
 to the improvements in moral stand. u. n.;...-^ r. .. u;,;,i. 
 
 their unwelcome activities are respon 
 
 inconceivable that even in 19()9 a body of Now York jjenlle- 
 men as ilistii I as were f 
 
 Ju,u ^li.injd 1:;. DUie so pen 
 
 e of the financial world in whicl 1 as to 
 
 Iwive been le<l into putting in an official document it< 
 
 ment that manipulation 
 
 w^ ■ " nmiKfl lur 
 
 iv- 
 
 or that 
 
 It i< .•>.. iifi.il to f!i.« or-raiii/jitiiui and onrryinir throiuh 
 of iiii; 
 
 It is not!) istinctly disreputable and 
 
 the Excli. 
 
 Is it to be wondered at that no lef^islation looking to 
 
18 
 
 the correction of the abuses that were pointed out by this 
 Commission followed its report and that nothing was done in 
 that direction until July, 1913, following the public exposure 
 by the Pujo Committee of the same conditions that this Com- 
 mission privately investigated! Is there any occasion for 
 surprise that there was no abatement of the practice of man- 
 ipulation in view of the quasi-encouragement lent to it by 
 this Eeport? It is no exaggeration to say that the bulk of 
 the securities on the list has been at one time or another 
 manipulated — not for the purpose of creating a market or 
 an appearance of activity in a new security, but, as stated in 
 the Hughes Report, either 
 
 to create high prices for particular stocks in order to draw 
 in the public as buj'ers or to unload upon them the holdings 
 of the operators or to depress the prices and induce the 
 public to sell. 
 
 The few instances of manipulation that were discussed 
 at the hearings before your Committee were not the most 
 aggravated cases. That of the California Petroleum Com- 
 pany which was so mu(?li discussed was among the least ob- 
 jectionable in form and purpose. It was selected for com- 
 ment in the Eeport of the Pujo Committee mainly because it 
 was happening during the taking of testimony. 
 
 A case more characteristic of the general purposes and 
 methods of manipulation by reason of its daring and 
 magnitude and of the extent to which the public was 
 victimized is that of the Amalgamated Copper Company. It 
 is a long story that was only partially told before the Ptijo 
 Committee because many of the facts were rendered unprove- 
 able through the death of Mr. Henry H. Rogers and others 
 that were expected to be established by his partner in the 
 enterprise, Mr. William Rockefeller, were unobtainable be- 
 cause of what was claimed to be the then desperate condition 
 of Mr. Rockefeller's health. It is as stirring as any tale of 
 pirating on the high seas that you have ever read and was 
 practiced by the same insiders over and over again, but 
 there is not time to tell it here. You can read the outlines be- 
 tween the lines of the testimony and statistics that are before 
 you. Time and again the prices were juggled by them 
 up and down from $10 to $50 or more per share to 
 the tune of dealings ranging from twenty to forty millions 
 
11) 
 
 of ^lians \n-v \y"i\v, cit'|ti'iiiit'ni on wliotlior tht*y wanted to 
 shako out weak lioKlers so as to buy cheaply or put up the 
 prk'o preparatory to uiiloacHng tlio stocks tlius "accumuhit 
 ed." lliirh finance would be a comparatively unprolilahl.- 
 in(lu>try without the use of tin* nuieiiinrry of tin* Stork Iv\ 
 chan.u:»'. 
 
 The Kxrhanire was a party to it j'aeh tinu' in tin- lat 
 
 it lent its facilities to wiiat was neither nu)re nor l<-- id.m a 
 "Mind pool" by pennittinc; vast dealin/i^s witliont ri-'inirimr 
 information of its asx'ts or earninjfs or any of .n- 
 
 cerniiiij: it which the Ivxehanije was timiliy forced l»> exact, 
 after the harvest had been reaped from the public. Happily, 
 some of those methods are part of tlie history of the pM>^t. 
 but history has the habit of repeating? itself. IVrhap 
 is no such dan.Lrer under the present ah-rt ailministra 
 the Exchanife, but it iuis such a past to live down i ...; .■ 
 should be patient with those who seek to aid in makinu: im 
 possible the repetition of the past misdeeds. 
 
 At the monn-nt tln» |)u))lie is wary, and the Excl on 
 
 its ^'ood behavior except as to a certain amount u , .pu- 
 
 lation, which it seems unwilling to prevent and seeks to jus- 
 tify. Recent exposures of financial and Stock Exchange 
 methods have made the public timid. Husin- * 
 
 all seems serene. It is no time for creatii^ 
 citement. The old masters of the game of •'rigging markets** 
 like Keene and Gates are gone. The times are not propitious 
 to develop the new ones who will take their places. ^ 
 the "industry" itself is stopped, who can tell wlior 
 will arise to take the places of those who hav' ! away 
 
 or are in temporary retirement waiting for nn to 
 
 blow over and who will need their Keenes' ::• ' ' > 
 
 anybody doubt that tln'y will be on hand ui.; 
 hand of the law has meantime steppe*! in to protect the ever- 
 gullible public? 
 
 The Exchange should \Vi>|i-iiiiH> f)i.. miiiitrf nnif v- f.-> 1... I.I-.. 
 
 tected against itself. 
 
 T'nie.ss I wlmllv misapprehend the oi)erations of our finan- 
 cial system ti lation by law of the Stock Exchange is 
 an indispensabji- condition pre«'edent to the -ion of 
 the control of creat financial cre<lits by a few rii- n "t to any 
 effective corjiorate reform in this country. Tt i«« by theillejriti- 
 
20 
 
 mate use of the facilities of this, the world's greatest security 
 market, that the vast predatory fortunes have been filched 
 from the public. The relation and importance of the Ex- 
 change to corporate independence of banking domination are 
 little understood. We shall accomplish nothing substantial 
 in the direction of the coveted goal of financial emancipation 
 toward which we are striving until this factor is appreciated 
 and dealt with as an essential part if not the most essential 
 factor in the general scheme of reform. 
 
 This discussion before you has been conducted on the part 
 of the Exchange as though there were no official data to guide 
 us in d»etermining the extent of the existing abuses and on 
 the assumption that the field of irresponsible assertion is 
 wide open. And so we have been regaled with state- 
 ments unsupported by proof as to the character ex- 
 tent and methods ' of dealings on the Exchange that 
 are challenged at almost every point by statistics and by the 
 testimony of the officials of the Exchange, made at a time 
 when they were under the wholesome restraint of having 
 their assertions analyzed by the test of a methodical examina- 
 tion. 
 
 The opponents of this legislation seem also to have lost 
 sight of the fact that after months of exhaustive investigation 
 in which the Exchange was represented by Counsel and was 
 afforded the fullest opportunity to present its case this Bill 
 was favorably reported by a Committee of the House of Eep- 
 resentatives of the Sixty-second Congress by the unanimous 
 action of the seven Democratic members of that Committee, 
 based upon a voluminous record of sworn testimony support- 
 ed by documents and statistics. 
 
 I quote from their Report on this subject as follows : 
 
 The general public, which has grown to look upon the 
 exchange with distrust because of the practices that have 
 been permitted, will be given new confidence in it when it 
 is under legal supervision. 
 
 Notwithstanding these facts it 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 subject to legislative or judicial control 
 or supervision, and that it is not amenable to Federal regu- 
 lation in its use of the mails and of the telegraph and tele- 
 phone in interstate commerce and in the dealings of its mem- 
 bers with foreign countries. 
 
 To this contention your committee is unable to agree. It 
 
21 
 
 is iiiL'oiii,'ru()Us tliut siu-li an iustituli"»n wifl'i '■: power 
 
 aiul e<iuii»i)etl to pel form such usul'ul and i . t lunc- 
 
 tions ill our ecouomic system should be uiieontrollcd by law. 
 Uu the other hand, your eoiiiiiiittee believes that ■• - 
 poration and reguhitiou would banish from the i 
 
 transact ions which nov 
 
 it, brii. 
 
 :!• I'lU'JC 
 
 a m-ealer volume of bi, 
 wise lejjilimate characti-r, r 
 
 ! MM in. 
 n\\i tlii- 
 
 : other- 
 a new 
 
 era of prosperilN \'<>r its in 
 public. 
 
 • • • 
 
 ml of 1. 
 
 • • 
 
 to the 
 
 in otiiLr words, the facilities of the N 
 chanjje are employed larjjcly for Inn. 
 moral and economic waste and corru|>tiuji ; and to 
 
 assume that in lesser au'i \:i! . ini; degree this is i: . . aay 
 come to be true of otlu ; ions throughout the country 
 
 similarly oi •• ' • • ■ m. iid, 
 
 Vour CO therefore, that Conarreas has 
 
 power unc(jiul. ;u prohil)it the mails, tli' 
 
 teleprnph ami i . the national banks, ai 
 
 instrumcn»alitir.s under its control, from beinj; 
 cuting, ne^'otiating, promoting, increasing or ot: 
 ing transactions on such stock exchanges. 
 
 (P. 116.) 
 
 It seems also to have been overlooked that three of the 
 four Republican members of that Committee joined in the 
 
 rocomin<'ii<lati(in of tlio 'y on this su])joct in their 
 
 Minoritv I'^iHiif J cui t'lc Minoilf \- T?iiMii-f ;i> ful 
 
 lows: 
 
 Many abuses are disclosed by th' l)o- 
 
 fore th' ■" ' - '■ • to 
 
 the pii ir with 
 
 .triug-boua« 
 
 ti" 
 
 fn; 
 
 coi 
 
 St 
 
 to 
 
 m> 
 
 th. 
 
 pl 
 
 of ' 
 
 "I 
 
 such rvtftrictive aiid n-v'tila' aiiuti ua may be Ueces* 
 
99 
 
 sary. This duty arises from the fact that these evils are not 
 such as affect only the local communities in which they exist, 
 but their results are as broad as the business interests of 
 the country, and affect in their most intimate and important 
 business relations all the people thereof. 
 
 While agreeing substantially with the majority upon many 
 of the abuses to be corrected in the financial system, the 
 stock exchanges and the clearing-house associations, the 
 undersigned have doubts as to the wisdom of some of the 
 remedies proposed by the majority to correct these abuses. 
 
 (The last clause refers to other subjects discussed in the 
 Report — not to stock exchanges.) 
 
 The opponents of the Bill also ignore the circumstance 
 that the investigation disclosed that the manipulation of 
 prices was regarded and defended by the Exchange as a part 
 of its legitimate business, and that the Committee found the 
 existence of an incredibly deplorable state of affairs which de- 
 mands prompt and drastic correction for the public protec- 
 tion and w^hich can be corrected in no way other than that 
 proposed by this Bill. 
 
 The following language of Chief Justice White in Lewis 
 Publishing Co. vs. Morgan, decided by the Supreme Court in 
 June 1913, in w^hich the right of Congress w^as sustained to 
 exclude from the second class privileges of the mail news- 
 papers that did not make certain disclosures, is peculiarly 
 applicable here : 
 
 Under that six-word grant of power {referring to the 
 Post Eoads Clause of the Constitution) the great postal 
 system pf this country has been built up, involving * * * * 
 the suppression of lotteries and a most efficient suppression 
 of fraudulent and criminal schemes impossible to be reached 
 in any other ivay. 
 
 The manipulation of prices of stocks is another of the 
 ''fraudulent schemes impossible to be reached in any other 
 way. ' ' 
 
 The operations of the Stock Exchanges was only one of the 
 many topics bearing on the concentration of the control of 
 credits with which the Committee had to deal. It constitutes 
 only one of the 27 separate Eecommendations of the Keport. 
 
 It Avas accordingly impossible for the Committee within the 
 limited time at its disposal to go further in the taking of testi- 
 mony on that subject than to present selected instances by way 
 of illustrating the character of the abuses that were being 
 
2'A 
 
 I'l-i jM-i ialt'»l ujMiii iiii' rniiiiiiuM ii_\ , Hill iMf iii~i'iii-ur«'.s made 
 were sudi as to sliock ainl amaze the eountrv and to .IiukuuI 
 redress. 
 
 On the subjirt of tlie uiaiiipulation of prices tlie CoiuiiiiU 
 tee presented a dozen or more eases, some of tliem oxtondinff 
 over a series of years, hut they were seh-cteil merely hy way 
 of ilhistratina: a general praetic > thing could bet- 
 
 ter show the perils to a hi,'islative body of relying np- 
 on loose assertions mad*- in the course of an informal 
 hearing conducted as were the proceedings before this Com- 
 mittee, where no one is prepared with the uniterial with which 
 to challenge inaceurate statements, than an analysis of 
 a few of the assertions that are made with respect to these 
 ollicial statistics. You are told that they were "se- 
 lected cases of the most speculative stocks grouped to create 
 dramatic effect" and that "if tables had been prepared to 
 show normal conditions a ditVerent showing wouKi have been 
 made." But no such tables are presented, and it is not 
 pointed out wherein these tables are inaccurate. It was with- 
 in the power of the Exchange to have presented other tables 
 brfore the l*u.jo Connnitti'e as it was within its power before 
 this Committee to have challenged these detailed figures by 
 facts. Instead of doing so it again contents itself with vague 
 generalities and unsupporteil assertions. 
 
 The Pujo Committee could not have presented statistics 
 of the deahngs covering the entire I.')00 or more securities 
 dealt in on the Kxchange, ilay by day nntl month hy month 
 over a period of from 2 to 10 years as they did in these dozen 
 or more selected cases. It would have re<pured years and 
 would have cost hnndre<ls of thousands of dollars in fees of 
 experts. It naturally sch'ctcd aetive sf ' 'of 
 
 manipulation to establish the existence u: _ the 
 
 extent of the practice. Now we are told that if there had 
 been others they would have dis rent state 
 
 of facts as to the ' ! that tl nld not be 
 
 therefore treated . > of t^i- "o. 
 
 The Pujo Committee wa.- tr>'ing a lawsuit. 
 
 It was in\ icr the eharg** that there was a 
 
 concentration . .,.«• control of cr- '■♦ •'! ihh coun- 
 tr>*. The methorls of the Stock FiXchan: inquired into 
 
 because of their relation to the g<MU'ral question. It was one 
 of many subjects bearing on tliat control. The practice of 
 
24 
 
 manipulating stocks constituted one of those methods. There 
 were others equally involved in the general subject of inquiry. 
 Banking control, interlocking directors^ holding companies, 
 life insurance control, railroad and industrial organizations, 
 Clearing Houses and a vast number of other topics consti- 
 tuted essential features of the inquiry. It is now ar- 
 gued that in order to show the extent of manipulation the 
 Committee should have traced all the hundreds of millions of 
 transactions affecting every security on the list over a series 
 of years. The statistics presented do in fact trace every trans- 
 action in 13 active securities day by day and month by month 
 over a term of years involving as to such securities alone 
 many hundreds of millions of shares, and the. results are be- 
 fore you. The answer and the only answer to this mass of 
 statistics is — not other statistics, not facts — but the bald un- 
 supported assertion that if the dealings in other securities 
 had been taken their dealings would have shoAvn normal 
 transactions. In other words that there might have been 
 found some companies whose securities were not manipulated. 
 Ergo : There is no such thing as manipulation? 
 
 So reckless was the action of the members that the Com- 
 mittee was able to establish (again merely by way of il- 
 lustrating the extent of the abuse and the persistent unwill 
 ingness of the Exchange authorities to interfere with these 
 vicious practices) an operation that was actually being con- 
 ducted in the manipulation of a newly-listed security day by 
 day on an enormous scale by prominent members with two 
 leading banking houses as allies and associates, ivhilst the 
 Inquiry was in progress. 
 
 The details of this particular transaction, which is typical 
 of the method of ''making a market" in the securities of a 
 new company but which as above stated is far less aggravated 
 than others that were proven with respect to the manipulation 
 of the securities of established companies, are summarized at 
 pages 50-52 of the Report in the following language: 
 
 The California Petroleum Co. flotation. — A typical in- 
 stance of manipulation for the purpose of stimulating specu- 
 lation in a neAV security is the operation in the stock of the 
 California Petroleum Co. begun in October last whilst this 
 investigation was in progress and the subject of manipula- 
 tion of securities on the stock exchange was under active 
 discussion. 
 
25 
 
 Tlii.s < UU.J..I.. » >...^ .-■ •• '"'•' ',vith an 
 
 authori/.»*d capital of $.;. "land 
 
 $ir).()(KI.()tK) ccMiinioii — ol uliicli r 1 !,■•:-'• .'-'-i pi md 
 
 $13,ol;>.0hl cuinmon wjis j;iveu in paymtui for i. of 
 
 two California oil-producing' companies. ( licnrv, li., l-ol- 
 1253.) Simultaneously, and jw part of tin- pl.m. William 
 Salomon & Co., baukei's of New York, and . . name- 
 
 ly : Ilallgnrten »& Co. ami Lewisohn Bros., of N- >> i >'ik, and a 
 fourth not nanietl. for $8.2ir).(it32 in ciusli. purclia.setl from 
 the vendors $ 1 ' 7 : ', of 
 
 the common .^t uy, 
 
 which the latter iuid accepted in payment lor of 
 
 the two producing companies, William Salomon c. . • . lU- 
 {,'arten & Co., and Lewisohn Hros. each taking 29 1/6 j>er 
 
 cent and the unuameil associate 121^2 per ' " 
 
 R. 1253, 1255. 1270; E.xs. 140153, R. 1261-1 
 
 Thereup" inkers, as we shall ' 
 
 formed a -. in N''w York to ui 
 
 of the preferred and '0 of the c<»nnnon sto*'k ul 
 
 the price of $5,000,UUU i to a London ^\n.!i.ale the 
 
 same amount at the su leaving th> at this 
 
 point with a profit of .7>'.<"» '^ in cash anu t-. •<-.S45 io 
 common stock, which latter they sold at 40 and 45. (Henry, 
 R. 1271, 1285.) 
 
 The hankers also joined the Now York syndicate, in which 
 altogether there were 104 i im-linling— 
 
 (.11 Tlu-ee cor{)oratii»ns i witJj ualion.il l.-inks — 
 
 t\\ I in New York, hich had a i ion 
 
 of >• ,'""' ati ' *' 'her !f.^^'^•^'^', and one oui.mui- »ith a 
 
 participation <> '; 
 
 ;.^i company in New York with a participa- 
 ti<> and 
 
 i.c; Twenty-four ofVieers of hanks, 'TI 
 
 of four national li«f I ^ \u V.w Vm-; lu ..n.» 
 
 in Detn)it, wl 
 
 •'•r 
 •ol- 
 
 nr!vnnf-. 'KX) 
 
 it 
 ore 
 the 
 
 luuuvy 
 
 the lar ' 
 of a \ 
 la' 
 
 
 1 
 above the pnc 
 
 e at 
 
 wn.s d»'llv..r. .1 
 
 til • 
 
 anv at 
 
 ofr' 
 
 
 ill 
 
 
 ni; 
 
 
 or 
 
 Mr. Henry, 
 
 , 
 
 in reganl ♦■• * 
 names of • 
 ti.- 
 IT 
 
 n 
 
 
 a?. 
 
 
 opinion that the iotormation sought from Mr. Henry is 
 
26 
 
 germane to the question, AVhether national bank officers are 
 being influenced by any form of reward to lend the money 
 of their banks on newly-listed and unseasoned stocks ? It was 
 impossible for the Committee without knowing the identity 
 of the banks and officers to determine whether these partici- 
 pations to officers were given for the purpose of inducing 
 the banks they served to accept these new securities as col- 
 lateral for loans or whether they were so accepted. 
 
 The stock of the California Petroleum Co. was listed on 
 the New York Stock Exchange on October 5, after the por- 
 tion underwritten by the syndicate and the separate hold- 
 ings of the bankers had all been sold. (Henry, R. 1281.) 
 
 Thereafter an operation in the stock was conducted (prin- 
 cipally in the common) on the New York Stock Exchange 
 by Lewisohn Bros, for the joint account of the bankers, for 
 the purpose, as described, of "making a market." (Henry, 
 R. 1282, 1283.) Under the general direction of Salomon & 
 Co., Lewisohn Bros, would put in separate orders to dif- 
 ferent brokers on the morning of every day to sell on a 
 scale up and to buy on a scale down, so adjusted that at 
 the end of the day they would have bought and sold, so far 
 as market conditions permitted, substantially the same num- 
 . ber of shares. (Plenry, R. 1282, 1284.) There is in the 
 record a table showing the purchases and sales by Lewisohn 
 Bros, and the prices day by day from October 5. when the 
 stock was listed, through the end of that month, from Avhich 
 it appears that during that period of about 21 business 
 days 163,000 shares were purchased and 172,900 sold by 
 Lewisohn Bros, for account of themselves and associates. 
 (Ex. 134 1/2, R. 1186.) 
 
 Under the influence of this operation the price of the com- 
 mon stock, starting at about 62 1/2, quickly rose to 72 ; it 
 had fallen to 50 by December. (Henry, R. 1285-1286.) Mr. 
 Henry, of Salomon & Co., stated that he supposed the public 
 bought largely on the rise. (R. 1286.) 
 
 The total purchases and sales on the exchange during 
 these 21 days were 362.270 shares, which was equal to over 
 three and one-half times the total outstanding common 
 stock. ■ 
 
 It may be remarked in passing that this stock, which was 
 thus manipulated to $72 per share and distributed to the pub- 
 lic has since sold as low as $16 and is now selling at $25. 
 
 The Exchange insists that this is a legitimate transac- 
 tion 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 tbere 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 
 
inaiia.irt'rs ami the l)aiiktTs were also member iiipu- 
 
 latioii was ooiuliictoil by tlw s«Tond symlioat. , Vt 
 
 KkJ^OOO sharos and soM ITJ/.MX) shares .lu 1 
 
 • lays- of its operations. In the sani- 
 Were nf)2,270 sliares sold on the Kxchan^e and an »-»|ual 
 number of course purchased. What about the dear public 
 that was "landed" with the 199,270 shares that were not 
 represented by the Syndicate dealings, at prices railing be 
 twcen $no and $72.r)0 per share that subsequently declined 
 to $10, and are now sellin.i? at $25? 
 
 The only comment that would* appear necessary in nn 
 swer to the claim of the Exchange that the discipliuinp 
 members should be left exclusively in its hands without iiiUi- 
 ference or review by the Courts is to refer to the fact that 
 neitiier in this nor in the many other instances of Tfijn'iT>M'H- 
 tion uncovered by the Committee was there an} 
 to discipline the ofTenders, except where the operain a 
 
 in insolvency. Tiie transactions were on tlie «onlrar\ : lo 
 
 be justified. Both Mr. Milburn and Mr. Van Antwerp asrain 
 defended the California Petroleum manipulation bi-for* 
 Committee as a means of '*stabilizinir the mark«'t." i m- 
 criticism is not bas^d on the mere fact that the price of the 
 stock has decline<l. That is a risk incident to all business. 
 Xor is it suggested that this is not a nicritorious security. 
 The reputable banking houses that issued the .sor'-- ••■ would 
 never hav<' olTere<l them if they had not beli« th^jr 
 
 merit. The complaint is of the devices by wlr 
 was maintained and the public interested. 
 
 To my mind these transactions are ind**r..ii«il 
 they can be resorted to for one purpose then- 
 why tliey should not be justifiable for any other pnr it 
 it is permissible to create a false appearance of activii'. and 
 of rising prices in a new security in order to attract people 
 to buy, why is not the same fraudulent device defensible in 
 onler to get rid of old securities that have been held or 
 accumulated to be unloarled on the jmblic? Or t'> i. '.»-.>.<s 
 prices in order to buy cheaply a security that on** to 
 acquire which, by the way, are the usual forms 
 tion and the pi; 'r which it is n ••rall\ 
 
 All such traii .. ; .-> amount in > .. ; lo a n •' 
 
 tion, with the public as the victims. They arc Vji 
 dangerous and far-reaching than the familiar form of mock 
 
28 
 
 auction because conducted under the cloak of an honorable 
 calling. The following from the testimony of Mr. Frank K. 
 Sturgis, a then Governor and former President of the Ex- 
 change is instructive on this point: 
 
 Q. Very well; that is an answer. How do you justify as 
 legitimate the transactions of a pool or sj^ndicate in giving 
 out buying and selling orders to brokers for the purpose of 
 . lifting the price of the stock or of depressing it? 
 
 A. Those are the acts of individuals. I cannot be re- 
 sponsible for what thousands of people throughout this 
 country do. 
 
 Q. Do you seek to justify it? 
 
 A. It depends entirely upon circumstances. I have already 
 said that under certain conditions, orders given out, com- 
 missions paid, no collusion whatsoever, the broker who buys 
 not having the slightest idea where the order comes from 
 that the broker executes to sell — I say it is not an illegitimate 
 transaction. 
 
 Q. * * * Will you be good enough to answer that 
 question? Is not the operation, at times, resorted to to de- 
 press prices, and at other times to lift prices? 
 
 A. Yes; I can consistently answer that. 
 
 w tF ^ ^f? 
 
 Q. You approve of those transactions, do you? 
 
 A. I approve of transactions that pay their proper com- 
 missions and are properly transacted. You are asking me 
 a moral question, and I am answering you a stock-exchange 
 question. 
 
 Q. What is the difference? 
 
 A. They are very different things. 
 
 Q. I thought so. There is no relation between a moral 
 question, then, and a stock-exchange question? 
 
 A. Sometimes. 
 
 Another witness (Mr. Morse at p. 719) described the 
 mechanism of manipulation as practiced on the Exchange as 
 follows : 
 
 He is the gentleman who manipulates the stock, giving the 
 buying and selling orders. (Morse, E. 710.) 
 
 If he merely wishes to make a stock appear active, he gives 
 buying and selling orders in about equal volume ; if he wishes 
 to put up the price, he gives an excess of buying orders; 
 if he Avishes to depress, he gives an excess of selling orders. 
 (Morse, R. 710, 711.) 
 
 There is not time to rehearse here the innumerable ways 
 in which the machinery of the Exchange is shown by the testi- 
 mony to have been used with impunity over a long series of 
 
29 ' "" 
 
 years aiul u}) to the conclusion of the Iiiquirv for tlie practice 
 of (.lecfption upon the j)ultli('. 
 
 Tho casi'S of the Coluinbus iV: Hocking' Coal &. Iron pool, 
 litx k Lslaiul an«l California Petroleum Co., describ<'(l at pa^es 
 47 anil 50 of th«' lieport, are furtlu'r illustrations of one of the 
 many ]»hasi's of the evil to whieh 1 refer. 
 
 Sullicc it to say that tlu-rr is nvrrwhrlminff evith'iitt' to 
 support the fiiulini,'8 of the Connnittee. The testimony comes, 
 not from hearsay nor from nmckrakers or enemies, but from 
 the lips and the n'ronls of tiir im'ml)«'rs themselves. The 
 Plxchanijre was represented licforo the Committee hy the same 
 eminent Counsel who appeannl before you, as astute and re- 
 sourceful as any in tiie land, who submitted a lenirthy printed 
 arurmnont dealiuL'- with every phaso of the law an<l facts. The 
 ^«'itnesses who testified to its general metlio«ls and practices 
 were selected by the Exchange at the invitation of the Com 
 mittee and they were afTor«l<'d the most ample opportunity 
 for explainin;^ ami suppiemciitiuLr their testimony. 
 
 There is no basis for the impression that tiie Exchange, 
 throuLjh its press bureau, has industriously sought to create, 
 in order to excuse the exposure of its methods that came from 
 the lips of its own oflicials who were selected by it for the 
 purpose of presenting its defense, that there was anything 
 unfair or one-side<| about the nmnner of the Inrpiiry. Here 
 airain it is intimated that the Kxchange did not ha- •' op- 
 portunity to present its ca.se and that the Committ- i.hI 
 the witnesses. This is not a ju.st or accurate statement, as 
 will be apparent from an examination of the nn-ord. 
 
 Xever was an investigation conducted with greater i;iir 
 ness or generosity to those concerne*! nor with so strict an 
 adherence to the rules of evidence that would be applied in a 
 court of law. Every witness wliom the E^ ' ' "d to have 
 
 examineil was calh'cl, it was invited to s:. v.r .lu.s. 
 
 tions it desired to Imve asked and all such n 
 and ever>' witness was given the opportunity to examine and 
 correct his testimony and to mako •■ ' - ' '-'ions, explanations 
 and statements as lie chose at t' ii of his evidence. 
 
 All the nrgmnents that hav- presented to you by the 
 
 Exchange in defence of its pra. ti.es will be found in one 
 form or another in the record of those proceedings. Nothing 
 timt Counsel for the Exchange asked to have read into the 
 record or asked of the witnesses (who wore their own officials, 
 
30 
 
 selected by tliem) was omitted. Availing himself of that 
 permission, Mr. Sturgis delivered a carefully prepared 
 Address, which will be found at the end of his testi- 
 mony. I do not deem it necessary or appropriate to enter 
 upon a defense of the fairness of an Inquiry by a Com- 
 mittee of the House of Representatives against the irre- 
 sponsible and unfounded attacks that were inspired in the 
 public prints. The record and the unanimity of the conclu- 
 sions reached by the Committee regardless of partisan lines 
 speak for themselves. The Exchange had to say something 
 by way of apology for the amazing exhibition that it made 
 and this w^as all it had to offer. 
 
 In the face of the record accompanying the Report of the 
 Pujo Committee it is worse than idle to assert that the Ex- 
 change will ever be able to bring about its own reformation. 
 Its unaccountable insistence upon continuing the practice of 
 manipulating prices of securities leaves no room for argu- 
 ment. The practice amounts to a continuing inducement to 
 the public to buy and sell under false representations. 
 
 The amazing figures presented by the diagrams at pages 
 1120-1178 of the Report indicate that manipulation is the 
 rule rather than the exception, that-aiothing short of legal 
 regulation and restraint will ever be effective and that there 
 must be adequate legal machinery for uncovering the offenses. 
 
 A few further quotations from the testimony of Mr. 
 Sturgis w^ill give a fair idea of the prospect for reform in 
 that direction: 
 
 Q. We are speaking of transactions that are made by 
 members of your exchange in the way of short selling. 
 Would not their books show whether or not they were selling 
 short 1 
 
 A. If the broker is operating for his own account, yes. 
 
 Q. And you say from a quarter to a half of the trans- 
 actions on the exchange are for the broker's own account? 
 
 A. We agreed upon a third, I think. 
 
 Another of the notorious instances of manipulation 
 in the recent history of the Exchanges was that of the 
 Hocking pool in 1909, of which the late James R. Keene 
 was manager, the operations of which \vill be found described 
 on pages 47-49 of the Report. Ten Stock Exchange firms par- 
 ticipated in it. The stock which was earning only one-half 
 of one per cent was forced up from $24 to $92.50 per share. 
 
:n 
 
 Tlie entire niiiuber of shares li^led ua.^ <jJ,.jU1. la u .single 
 month (March) when the pool operations be^uu 143,4UU shares 
 were traded in. L'pon the termination of tlie pool tho sto^k 
 deelincd to $2 per sliare and then tlisapiMjared. 
 
 More reniarkal)h' even than the ' ' ' of tin- aiii;i"iiU' .-s 
 of tlie exehanire to stop this operati" t!:. v knew it was 
 
 going on, was the theory on wiiich they inlliet lishment" 
 
 after the pool collaipsed. Of the 10 i ''d in the 
 
 pool, only the tliree that failed were pum-M. •■ - • 
 
 pelled from the exchange. The others wer- 
 
 nor suspended, but merely "eensurwl". Tin; 
 
 ment was inflicted, not for the character of thv . uo, 
 
 since all were e(iually eulpable in that regard, i)ut m 
 
 ing insolvent in consequence of dealing beyond oti. .;js. 
 
 This was admitted by Mr. Sturgis (H. ~ 
 
 Q. I should like to know why you should expel two mem- 
 bers of a pool out of seven stock exchaiu;** tiriiis for doinj; 
 the same thing that the other live did simply liecuuse tho«»o 
 two happened to fail at it. 
 
 A. Because they wont away beyond tlieir means. 
 
 Mr. Sturgis further stated that the members of this pool 
 who did not fail were not punishable under the constitution 
 of the Exchange for the character of operations in which they 
 
 •Migatjred and that he did not think t!"^ ..M..;,i i,. i... i^f.,!..;, 
 H., 84G, 847) : 
 
 Q. Do you niffin to sny that th^ thinfni tht-se seven firms 
 di<l were not p 'onstitution T 
 
 A. No: they 
 
 Q. Do you not f 
 
 A. We have not • 
 
 Q. Do you not t' 
 
 A. I do not think ixo, u" 
 
 l here ' * ' " oi 
 
 and object. ... : .. .: ... 'v. 
 
 on moral and oconomie grounds. I do not 
 upon that dis< .it this time. 
 
 / to pmi >n. 
 
 i nai (m,i;i;i 
 
 rn- 
 
 ment by indirection t the t with 
 
 ample Constitutional warrant baswl upon j prece- 
 
 dents. But this Bill attempts nothing by imiu ^ 
 
32 
 
 seeks only to prevent the use of the mails, telegraph and tele- 
 phone in aid of fictitious transactions and dishonest specu- 
 lation. It does not attempt to prohibit short-selling. Inso- 
 far as its effect is to limit short-selling the result is brought 
 about incidentally and indirectly through prohibiting prac- 
 tices that bear directly upon the integrity of the quotations 
 that are to be distributed through the mails. 
 
 The following extract from Mr. Sturgis's testimony fair- 
 ly represents the Stock Exchange view of short selling and 
 the arguments that are advanced to support it, (Sturgis, R. 
 830, 831, 832, 833) : 
 
 Q. Certainly. What is the purpose of short selling? 
 
 A. Generally speaking, to make a profit, 
 
 Q. To make a profit by what process? 
 
 A, By repurchasing the short sale at a declining price. 
 
 Q. That is, by selling a security that you have not got 
 and gambling on the proposition that you can get it cheaper 
 and deliver the thing that is sold? Is not that it? 
 
 A. That is the usual process — selling when you think the 
 price is too high and repurchasing w^hen you think it has 
 reached the proper level. 
 
 Q. But is it, or not, the process of selling a thing you 
 have not got ? 
 
 A. It is. 
 
 Q, And is it, or not, with the idea that it will go lower, 
 or can be depressed lower, and bought cheaper and delivered ? 
 
 A, Truly. 
 
 Q. Do I understand that you regard that as legitimate and 
 defensible 1 
 
 A. Do you wish my personal expression of opinion? 
 
 Q. Yes. 
 
 A. I think it depends entirely upon circumstances. 
 
 Q. Under what circumstances would you regard that sort 
 of short selling as legitimate and proper? 
 
 A. I would regara it so if there was a panic raging over 
 the country and it was desirable to protect interests which 
 could not be sold. I think it would be a perfectly legitimate 
 thing to do. 
 
 Q. Let us see about that. If there was a panic raging 
 over the country and a man sohl stocks short, would not that 
 simply add to the panic? 
 
 A. It might. Self-preservation is the first law of nature. 
 
 Q. But, as I understand it, if there is a panic raging over 
 the country, you think it is defensible for a man to depress 
 stocks by selling stocks he has not got, with the idea of adding 
 to the panic? 
 
 A. My. Untermyer, if a person has property which is 
 absolutely unsalable and he can, so to speak, protect his 
 
H3 
 
 niarki't 
 
 Q. That lie lius not goti 
 
 A. (, Continuing;). I do not consitler it wrong. 
 
 Q. Mr. Stur^'is, La us just unaly/.e that. Ix-i-ause I do not 
 think 1 uuiler>t.iii,i mhi ^■(ll| iL. n.ii u ,ni t.. l,.. ii.ivi!i.,l..i-- 
 stood, do you ? 
 
 A. It is not iiij* \'. 1^11 
 
 i^. Antl I do not want you to hp inisundr>rsto<vl. Do you 
 mean to say that it' there is a p. Me 
 
 thin^ for a n;an, under any eir^ nut 
 
 he has not jrot, with the idea of getting; it back chcaport 
 
 A. 1 do think it ix .Iifenaible. 1 certainly thi.ii ;t ;, <l.. 
 fensible. 
 
 Q. P^or what luiiKNts does he do that e.\-<i>i !• 
 make money 7 
 
 A. To try to save his eredit, perhaps. 
 
 Q. How does he save his eredit in a panic by selling; stocks 
 that he has not p:ot, with the idea of adding to tho panic 
 and tret ting them eheaper? 
 
 A. Be»'ause if he can niake a profit on that sale it may 
 repair the losses that he has made on stm-ks he cannot sell. 
 
 Q. I see. You know that that woulil simply aeeeuluate 
 the tiereeness of the panic, do you not! 
 
 A. It eonid not be otherwise. 
 
 Q. Certainly. And his only purpose in «loing a thing of 
 that kind in time of pani.- uiml.l ]„- to mi!..- m.ni..^ vv,.nl,] 
 it not? 
 
 A. To protect himseli. 
 
 Q. It would be to make money, would it not? 
 
 A. Yes; and that woidd him. 
 
 Q. Of course it always i i man to make money, 
 
 no matter how he makes it, docs it not f 
 
 A. Yes, sir. 
 
 Q. An(i that, you think, is justifiable * 
 
 A, I think under those cin'umstaneos it is. 
 
 Q. You do not want to make any further explanation of 
 that proposition, do you? 
 
 A. I do not. 
 
 Q. Is it any more jii for a man to sell short in « 
 
 panic than in a normal 
 
 A. It depends very r n his financial i 
 
 Q. Do you regard it ' ' ■ — ' 
 
 a man to sell a thing hi 
 
 ing prieiHi jn ordrr to bir. m li 
 
 A. I think it Is a question 1 >\vn 
 
 conscience. 
 
 Q. I am n^?.irM' for your judgment. You have b«»n many 
 years in t! :;je. and you are a careful obsen-er, and 
 
 I would lii\«- i • uii.w your ; ' - ■ *. 
 
 A. I think a great many i-precate it. Others ap^ 
 
 prove it. 
 
 Q. Do you approve of itt 
 
34 
 
 A. You ask me personally? 
 
 Q. Yes. 
 
 A. I never sold a share of stock short in my life. 
 
 Q. Then j^ou do not approve of it, do you? 
 
 A. I just happen not to have done it. My private busi- 
 ness, if you please, I beg you to omit. 
 
 Q. I have not asked you your private business. 
 
 A. Yes; you asked me what I did myself. 
 
 Q. I did not ask you that, sir; I asked you what you 
 thought about it. 
 
 Q. Do you approve of short selling in others? 
 
 A. Under what conditions? 
 
 Q. Under any conditions. 
 
 A. Yes; under some conditions. 
 
 Q. Do you approve of short selling in a normal market? 
 
 A. I will answer that question by saying it is a moral 
 question with the individual himself. It is not up to me to 
 express my opinion upon it. 
 
 C^. Do you personally approve of short selling in a normal 
 market ? 
 
 A, Not I, personally; no. 
 
 Q. You do not. And is it or not the fact that the bulk 
 of the short selling is done in a normal market? 
 
 A. I should say no; more often on an excited market. 
 
 Q. It is done every day, is it not? 
 
 A. Oh, yes; to some extent. 
 
 Q. And it is done in large volume, is it not? 
 
 A. At times. 
 
 Q. The stock exchange does not discourage it, does it? 
 
 A. The stock exchange does not enter into it at all. 
 
 Q. The stock exchange does not discourage short selling, 
 does it? 
 
 A. The stock exchange takes no position in the matter 
 at all. 
 
 Q. Has the stock exchange any rule or regulation against 
 short selling? 
 
 A. None. 
 
 Q. Why is it not just as simple a matter for them to have 
 a regulation against short selling as to have a regulation 
 against a broker splitting his commissions? 
 
 A. There is no regulation against short selling; that is 
 all I can say to you about it. 
 
 My reason for declining to enter npon the discussion of the 
 relative evils and alleged compensating advantages of specu- 
 lation and short-selling is that they have only a remote relation 
 to the purposes of this Bill and I am anxious that the real 
 issues shall not be obscured. Judging by the prominence that 
 the representatives of the Exchange have given to the dis- 
 cussion of those purely collateral and largeh" academic ques- 
 
35 
 
 tions, it looks as thoujrh tliey are anxious to cjvat*» a faUe 
 issue by setting up a wooden man an«l procceiliiiir to knoek 
 liiiu down. 1 deolint' to Tollow tlifui upon tliMt .pi.'-t. l»ow. 
 ever tempting may be the inducement^. 
 
 This I5ili is aimed at dishottrjit speculaliuu thioim'li ma 
 nipulation whether for the long or short nceount. It is em- 
 ployed equally to raise and to depress priecs. Tlio inothods 
 in both operations are eiiually dcfeptive. 
 
 1 may however be permitted to say in pa>.-iu.i,' u ai iii« 
 champions of short-stdling studiously ignore the ni:iii. n /n 
 meut againt its legitimacy. They insist that it i 
 valve against undue inflation and depression, in that it tend» 
 to cheek an undue rising and falling nuirket in a security. 
 
 It is said that the short-seller sells when in his judgm«'nt a 
 stock is too high and is compelled to cover his sale by buying 
 when it has reached what he believes to be its real value. 
 That sounds well in theory. In practice short-sellitv/ •- ■ 
 dangerous factor in times of depression. It is a dii 
 centive toward creating and accentuating panics in th» 
 ity market. 
 
 Hut above and beyond thi>, li .- ..■.; ... fact to any 
 employed, as is claimeil, as a test of the value of a given secur- 
 ity, and does not in practical operation perform any such 
 useful function, except in rare cases. Speculati lin 
 
 featuH' of the stock market. The bulk of its ti ire 
 
 in the nature of gambling, the brokers being t ind 
 
 for their own account the chief speculators and the caslomers 
 who trade through them buying an' " ' from day to day 
 making up the remainiii" -"• 'ulatix agent, 
 
 A "short-.^elling" n t is not ordinarily directeil 
 
 asrainst a particular .security on its n In order to be 
 
 su ■ on a subst ■ ' * " -ntire market. 
 
 Ti. .., iator sells, r of the most 
 
 active securities on the list without regard to their merits or 
 whether thev are intrinsically worth more or 
 
 tl. ■• ' • ''" ■ '■ ' '-• • 
 
 ni'. ..■..- - 
 
 stoi'ks all along the line. The market prices move up ami 
 
 down by sjTnpathy. That 
 
 fine-spun thr • • - to th« i. ; ■ 
 
 fixir? and st- . ' the value of a given s« 
 
36 
 
 The demand of these gentlemen that they be further en- 
 trusted with the task of self-reformation, is an unthinkable 
 proposition. If the practices they are struggling to retain, 
 such as manipulation of prices, are to be hereafter prohibited 
 as unlawful, the suggestion that the machinery for uncover- 
 ing the offense and the punishment therefor be left exclusive- 
 ly in their hands to deal out justice to one another is certainly 
 unique, to say the least. The absurdity of the contention is 
 emphasized by the tenacity with which they cling to the de- 
 lusion that manipulating prices is legitimate business. Not 
 more so, however, than the further argument of the Exchange 
 that it is now mending its ways and that there should there- 
 fore be no means provided by the law for discovering or pun- 
 ishing future offenses. Truly a most remarkable process of 
 reasoning! 
 
 If a member divides any part of his commissions with 
 his customer or with any one through whom he secures 
 business, expulsion and ruin are the immediate results. 
 
 "Splitting commissions is the most heinous offense a mem- 
 ber can commit," 
 
 says Mr. Sturgis — far more heinous than "wash sales" or 
 fraud. One would imagine that these gentlemen would have 
 sufficient sense of humor to pause in their denunciation of 
 the motives of those who have dared suggest that, they have 
 not quite demonstrated the justice of their demand that they 
 be permitted to continue free from the legal regulation and 
 restraints that pertain to other occupations affecting the 
 public. It is difficult to imagine what motives there could be 
 for the performance of this unpleasant duty other than the 
 public interest and to promote the eventual usefulness of this 
 great financial agency. 
 
 The extreme gravity and importance to the public of the 
 transactions conducted on the Exchange are little understood 
 outside the very restricted circle that has to do with large cor- 
 porate business. Even to the latter the mechanism of the Stock 
 Exchange and the way in which prices are made are largely a 
 closed book. They are technical and complicated in the ex- 
 treme, which accounts for the endless opportunities for mis- 
 representing the issues and misleading the public. 
 
 Incorporation and rigid regulation of the Exchange have 
 becom.e essential to the public protection. Thev will vast- 
 
37 
 
 ly a<l(l to tlic valiii' and .stahility of nuTitorions M-fur- 
 itios and to tlu' usut'ulnoss of i\u> Kxchan^o as a l.-^iti- 
 mati' and necessary part of our financial Hysteni and tlicy 
 furnisli tlie only means of preventing deception in the cpiotu- 
 tion, i)iirchas(' and saK« of securities on i)uMic Kxchan^'«'s. I 
 claim that there can be uo elTective rei^^dation without in- 
 corporation, nor without the accompanying all important 
 power to inspect the books of members of the Exchange inso- 
 far as concerns the transactions on the Kxchanir**. In mak- 
 ing this claim it is not necessary to impugn thr purpo-.-, ..f 
 the general body of membership of the Excliange. N 
 I unmindful of the efl'orts that the Exchange, under the >pur 
 of the criticism arouse«l by these exposures, has recently bet'u 
 making to correct existing defects in its management in cer- 
 tain directions nor the inherent diflieulty in bringing about 
 refnniis, but the chief abuses renuiin and so it will continue 
 until tiie law renders them impossible by making them punish- 
 able as crimes and providing means for their discovery. 
 
 My contention is that without tlie aid of incorporation 
 the Exchange will be unable to put an en«l to il' de 
 
 practices and tlmt iho best element in its membersL., . . .se 
 business doo lepend upon these practices, should 
 
 welcome the proposed legislation instead of short-sight- 
 edly arraying itself with the other element against public 
 sentiment and opposing every measure that is inteiuli'd to 
 restore and maintain i>ublic confidence, on the mistaken theory 
 that the Exchange must be pennitted to continue tn iw 
 
 unto itself. 
 
 This contention is supported by the judgment of 90 eminont 
 an authority as Mr. (Jeorge W. Perkins, w 
 years a partner in the finn of J. P. Morgan v' liu- 
 
 following is from the testinu^ny of Mr. !'• ^ <'di- 
 
 ject before the Pujo Committee (pp. 1' 
 
 Q. Have you. as a rcnult of your iny opinion 
 
 (^. WV ' is vniir vu-vr n^ tn that, and what . 
 
 sons f- 
 
 .\ T ■' «iiii«'v »>. I ii!i- of 
 
 til. ne 
 
 br< i'^- 
 
 fit re 
 
 and W" 111 :\'. " fi'- I'Mt'ii- \\ iMi .ir<' trw^ i»iiy« 
 
38 
 
 ers, and for the members of the exchange who are conduct- 
 ing this business. 
 
 Q. You favor the incorporation of the stock exchange, do 
 you? 
 
 A. I would; yes. 
 
 Q. And under what laws do you favor its incorporation? 
 
 A. I know that the feeling among some people with whom 
 I have talked is that it should be incorporated under the 
 laws of the State of New York. The New York Stock Ex- 
 change was organized a great manj^ j^ears ago as a New 
 York enterprise, but personally I think it has largely out- 
 grown that function. It is a national institution now. In 
 fact, it is more than that. It is an international institution. 
 
 Q. It is an international institution? 
 
 A. Yes; and people are trading in its securities who are 
 many thousands of miles aAvay, and they should be given 
 all the protection in that trading that it is possible to throw 
 around it. I believe a very vast sum of money would come 
 as an investment in American securities, if some of the con- 
 ditions in regard to the manner in which tliej" are traded 
 in could be changed and perhaps improved to the benefit 
 at once of the exchange and to purchasers. 
 
 Q. Is it your judgment, then, that it should be incorporat- 
 ed under a Federal law? 
 
 A. That would be my judgment, if it could be so ar- 
 ranged. In fact, I am a nationalist on almost all of these 
 questions, not a State rights man. 
 
 Q. Does the stock exchange perform any important func- 
 tion in national finance? 
 
 A. I think it does, very ; and a most useful function. 
 
 Mr. John Aspegren, President of the Produce Exchange, 
 testified as follows before the Pujo Committee (pp. 929-930) : 
 
 Q. Your exchange is incorporated under the laws of the 
 State of New York, is it not? 
 
 A, Yes, sir. 
 
 Q. Do you find any difficulty in doing business as an in- 
 corporated exchange? 
 _ A. No; we do not. 
 
 Q. Do you find it handicaps you in any of your legitimate 
 operations ? 
 
 A. That depends on what you mean by "legitimate" op- 
 erations. 
 
 Q. I assume your operations are all legitimate. 
 
 A. That is why I asked the question. 
 
 Q. It does not hamper you in the pursuit of any of the 
 legitimate operations of the exchange, does it? 
 
 A. It may bring out lawsuits. I think we have had some. 
 
 Q. You mean it gives a remedy to people who claim they 
 are injured by your acts? 
 
 A. That is exactly it. 
 
 A comprehensive understanding of the complex ma- 
 chinery by which prices are controlled is necessary to form 
 
81> 
 
 a .jutlLriiH'iit Dii tln' (|iu'.sti(iii. 'riiis kiH»uI«tiuc is oi" lar greater 
 iiMj)oitaiu-e to i\w inassrs ami in more ways tlinn is j^enerully 
 appreciated. Those wlio have never boiiglit or sold or owned 
 a bond or share of stock, and never will, are as deeply eon- 
 corned in the riirid rcijniation of this vast instrumentality 
 of linance as are those who deal in the securities that are 
 listed on the Kxehani^'e. Their interest will be found not 
 only in the close relation between fictitious values of seeuritiis 
 and the prices of the commodities of the Companies repre- 
 sented l)y these securities but in nmny public aspects of the 
 subject connected with its quotations of securities. 
 
 But for the incentives and opportunities offered by the 
 
 Stock Kxchani^e most of the ■■•••!• Triists would have ' • 
 
 impossible. 
 
 The attraction to the vendors of the projierties lay larcrely 
 in the opportunity ottered of sellincr the securities received 
 in payment for their properties to the public. This was 
 made possible only through the medium of the Exchange. 
 To those who continued to hold their securities, inflated 
 prices for the comiin»ditiev njeant higher dividends, thus 
 I'urther increasing the market values of their securities; 
 the control of the nunket for a given product with the ac- 
 companying power to levy tribute on the public is capitalized 
 at all that the trafllc will bear ami the securities representing 
 no ai'tual property and nothing but this artificial control, find 
 a ready market on that basis. In order to support the ficti 
 tious values thus created that control must at all hazards he 
 maintainetl. 
 
 The merits of the controversy over this question of 
 whether the Stock Exchange should bo required to incorpor- 
 ate and be subject to regulation have, with few exceptions, 
 been urirecogni'/able from the nc • • • 
 
 Tin- Kxi'hange maintains a ; 
 the euphonious title of the **Librai In 
 
 the course of the lu-n' fore your ' 
 
 distribut<'d f?-oni W.. _..»n anil pi; 
 
 count FA' a canard to the effect that the V 
 ed his disapproval of the Bill now under discu^ 
 sistent and circui' r that ii 'ic 
 
 nial from the AVhi; -..Im.I •■> pre- 
 
 vent the discroditing of the 
 
 Such methods are most unfortunate. Tiiey are bound 
 
40 
 
 sooner or later to react against the Exchange and thus ob- 
 scure the merits of the controversy, which the champions of 
 this measure are anxious to have impartially and imperson- 
 ally discussed. 
 
 In answer to the question: Why should the Stock Ex- 
 change be incorporated? We might with far greater justice 
 ask: AA^iy should it not? It is today the most powerful and 
 far-reaching of all the instrumentalities of National and In- 
 ternational finance. Its records, whether genuine or fictiti- 
 ous, honest or juggled, are the guides by which transactions 
 are conducted and values fixed by millions of people here and 
 abroad. Its vast and delicate machinery, with its endless 
 opportunities for the perpetration of fraud and pillage (un- 
 fortunately too often accomplished in the past) should not 
 be in the uncontrolled, unregulated and irresponsible power 
 of any body of men, however unselfish and altruistic may be 
 their aims. 
 
 Without yielding here to the temptation to rehearse the 
 history of the past fifteen years ot the Exchange as the 
 instrumentality by which vast fortunes have been filched 
 from the public through the absence of control over its oper- 
 ations, it is sufficient to remind you at this point that the plea 
 for incorporation and regai'lation involves no reflection upon 
 the Exchange or its membership. 
 
 WTiy should any public utility or instrumentality be sub- 
 jected to control? Why should banks, trust companies, life 
 and fire insurance companies, casualty, accident, burglary, 
 insurance and other industries that might equally well be con- 
 ducted by individuals be required to be incorporated? Why 
 should not you 'or I have the right to insure lives or property 
 if we are considered sufficiently responsible and othermse ac- 
 ceptable by those who are concerned? There was a time 
 when this was permitted. It is no reflection upon your hon- 
 esty or mine that these things are no longer tolerated in 
 any civilized country. 
 
 Why should auctioneers who buy and sell any kind of 
 personal property, except securities, require licenses and 
 have their books of account and all their transactions sub- 
 ject to public inspection, whilst the brokers who deal in se- 
 curities are free from such inspection? Is not such a bro- 
 ker an auctioneer in the largest and broadest sense? How 
 does a manipulated stock transaction differ from any other 
 
kind ol mock iiut'tion.' \ On iiiianiiu? tliat you nro purchasing 
 in an open competition in wliicli true values are fixed wIhh in 
 fact the cards liave been stacked against you. 
 
 Why are tlie books of employment agencies, hotels, 
 Itoardinu: houses, etc., now reipiired by law to be subject to 
 public inspection f Why are barbers, plumbers, pharmacists, 
 liquor dealers, warehousemen, steamship ticket agents, pub- 
 lic accountants and innumerable other occupations required 
 to be licensed and regulated? 
 
 I mean, no <lisr('sp(><'t to the calling of the stock broker 
 and suggest no comparison except in the principle involved 
 in asking why the pawnbrokers should be open to the insp<«c- 
 tion of the public authftriti«'s if, as is now claimed, there is 
 no power to compel the transactions of brokers on an open 
 board to be subjected to examination by State or Federal au- 
 thority. There is no argument in support of the Conslitu- 
 <!<"'nl power in the one case that does not apply to the other, 
 riiey are all conducting legitimate business, but the 
 rigiit to regulate them like that of dozens of other industries 
 that niight ho named, is recognize(l. Their occu])ations may 
 be more humble than that of the stock l)roker in the «-•"-•• 
 that the transactions may not be of such niagnitu<le, but 
 are quite as legitimate. 
 
 It was - '>•(] on till' ii<'aring liiat as ever\ 
 
 in business le mails the argument in favor oi : 
 
 quiring the Stock Exchange to incorporate under a fonn of 
 charter to be dictated by Congress might i)e urged with equal 
 '■ ■ again-* ■■" ' • . thus int«M'f(»ring - ■*' * 
 
 ;y of til irrnn'ing of chart' 
 
 rection transferring tliis p< lie ?Vderal Oo 
 
 The this suggtfllion may be suminaiizcd as 
 
 fon..M - ■ 
 
 nil' T^il! IIS iH-fnit' sf.ifi-.l iTi>i'«< imf r>ri-siM 'Til- flu 
 
 •le proper 
 
 11 
 
 2. ' «r fit to go much 
 
 fiirfli. .;.. • ' '•' ' 
 
 erni fhart'T or li- 
 
42, 
 
 purposes of such far-reaching importance and involving 
 such potentialities of national injury. The Stock Exchanges 
 of New York, Boston and Chicago are institutions of Na- 
 I tional rather than of State concern. Congress has by this 
 ) Bill left their government to the State when it might justly 
 have itself assumed control. 
 
 3. If the necessity for regulation that is here shown to 
 exist, could be established with respect to any other business 
 it would be not only the right but the duty of Congress like- 
 wise to protect the mails from being made the agency for 
 the perpetration of fraud. The provision of the Sherman 
 Law for the seizure and confiscation of the goods of an un- 
 lawful combination in interstate transit is an. instance of 
 the exercise of that power. The Pure Food Law is another. 
 Whether it' is advisable for Congress to exercise its author- 
 ity in a given case is a question for it to determine but 
 the existence of the power to exclude from the mails mat- 
 ter that is not safeguarded in the manner that Congress may 
 deem necessary, cannot be open to question. It may say 
 tomorrow that the results of horse races shall not in any 
 event be carried by the mails or over the telegraph or that 
 they shall be carried only where the races are run under 
 the control of corporations expressly chartered by the State 
 and where gambling is not permitted. 
 
 The Federal Government is not bound to permit its 
 agencies and facilities to be used for purposes that Congress 
 believes to be immoral or fraudulent. So long as every State 
 and every citizen receives equal treatment there is no ground 
 for complaint. 
 
 4. There is no way of enforcing uniformity of regulation 
 with respect to the conditions on which the mails and tele- 
 graph shall be used by the Exchanges for the distribution 
 of quotations except by Federal law which shall prescribe 
 in that respect in their charters the conditions under which 
 securities are to be listed, quoted and dealt in. The alter- 
 native is as between State and Federal incorporation of the 
 Exchange. To require Federal incorporation would involve 
 placing the internal management of the Exchanges under 
 Federal control, which is neither necessary nor advisable. 
 To attempt regulation without incorporation would impose 
 upon the Federal Government the unwelcome and unwise 
 task of supervising the listing applications of intra-state as 
 well as inter-state corporations the quotation of the 
 securities of which are being distributed through the mails, 
 all of which is avoided and properly left to the jurisdiction 
 of the State under this Bill. 
 
 The reasons in favor of regulation and control of the Ex- 
 change are vastly more weighty than those appertaining to 
 any of the above-enumerated occupations that are now regu- 
 lated and controlled. The Exchange is in no sense a private 
 or local enterprise. It is grossly misleading to say, as has 
 been argued by the defenders of its present irresponsible 
 
4:: 
 
 form of association, that it is not (Miiraj^'od in business and 
 tluit its only function is to |)roviilc a nu'ctini?- place wlicii 't 
 nuMnlu'is nuiy deal with one another under prescribed ru • 
 
 The Exchange ks engaged in business and of a highly 
 importai listinctly National character. It on\tis the 
 
 entire sIulk of the Xew York <' ' ' '' . which 
 
 for a speeilied rental, sup]>lies n ^ south 
 
 of t'hainbers Street, Xew \'oik ('it>, with a ticker service 
 that registers, impartially and without ear-marks, every 
 genuine and manipulatetl transaction that takes place on 
 the tloor of the Kxcliange. For $UH),UU() a year, under con- 
 tract terminable upon one day's notice, it sells these quota- 
 tions to a subsidiary of the Western I'nion, the Gold & Stock 
 Telegraph Co., which also maintains a like ticker service. The 
 latter, however, can supply the quotations to such persons 
 only as the Exchange approves, and under no circumstances 
 to members' offices soutli of riiand)ers Street or to any com- 
 peting Exchange in Xew York City. The quotations arc gath- 
 ered upon the tloor of the Exchange by its employees and 
 transmitted by its own operators to the officers of the Xew 
 York Quotation Co., and the Gold & Stock Co. and thence dis- 
 tril»uted throughout tiie United States, l)ut the Exchange re- 
 tains the right to determine absolutely who shall and who shall 
 not receive these quotations. There is no other method by 
 which quotations of transactions on tlie Exchange are obtain- 
 able. 
 
 It is the market place of the entire country and of foreign 
 countries for securities and the oidy public inarket in the 
 T*. itod States where money is loaned and borrowed. 
 
 The business transacted by its members has.uo relation 
 to State line-. It comes to them from almost every corner 
 of the civili/rd wt)rl«l. It is not only nation-wide, but inter- 
 national in scope. Its members maintain private wires to all 
 tlie principal Cities of the United States and the transactions 
 conducted on this open Board are for the account of customers 
 from al' * "f the eountry ' * ' ' ' dries. 
 
 Its rk as to the lt' ite of in- 
 
 ter* >t in a corporation pn verywhere and it is 
 
 ri-TMtly supervised with jealuu.s lare iuid at considerable ex- 
 pei,<p to the corporations concerned. 
 
 It undertakes to prescribe the form and conditions of 
 everj* corporate security in which it authorizes dealings and 
 
44 
 
 its determination is final through its control over the listing 
 of such securities. It reserves the right to exact the minutest 
 details of the business and 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; all this -very properly on the 
 ground that it is performing a public function national in its 
 scope. 
 
 It jealously controls 'the reports of every transaction on 
 its floor, issues and distributes the records of every purchase 
 and sale, or offer of purchase and sale, which it thereby im- 
 pliedly represents as an honest and genuine transaction. 
 Courts of Justice, Trustees, financial institutions, tax officials, 
 State Superintendents of Banks, Trust Companies and Life 
 Insurance Companies and other corporations that are subject 
 to supervision in the several States throughout the country, 
 and the Comptroller of the Currency in fixing the value of 
 securities of National Banks, and the public the world over, 
 act on this information. It exacts compensation for the serv- 
 ice of listing securities, sells the quotations to interstate and 
 international telegraph companies for large sums of money 
 and scatters them broadcast through the newspapers, over the 
 telephone and telegraph, but always under its control. 
 
 In the face of this array of undisputed facts, this stupen- 
 dously powerful National and International agency of finance 
 contends that it would not be a reasonable or legitimate exer- 
 cise of the power of Congress to prevent the use of the mails, 
 telephone and telegraph in interstate business as a means of 
 perpetrating frauds upon the public. Congress not only has the 
 unquestioned power — it has become an imperative duty. It is 
 a necessity of modern finance from which there is no escape. 
 It is far more important than the power now exercised by the 
 Post Office Department over letters and prospectuses that are 
 circulated through the mails, under which there have of recent 
 years been so many wholesome convictions for fraudulent use 
 of the mails. 
 
 Regulation through incorporation is not only needed as a 
 preventive of fraud. It will accomplish still greater results 
 as a constructive measure. 
 
 Great and much-needed reforms in the organization and 
 methods of our corporations may be legitimately worked out 
 
4rj 
 
 throui;:li tin* pu\v«'r wicliiLMl by the Slork Hxcliani?*' over the 
 listing ol* securities. Muoli of the confusion and many of the 
 defects in corporate rcirulation due to the diversity of State 
 laws and to the biddintc of the Stales a.Lrainst one another in 
 laxity of adniinistration in onler to attraet corporations with- 
 in their borders may be corrected and uniformity of methods 
 introduced throuj^h the Listing? Department of tlie Exchange. 
 
 Thus complete p\il)licity as to all the alTairs of a corpora- 
 tion may be uniforndy eidorced. It nuiy and should reipiiro 
 as a condition of listing a security tliat all the intermediate 
 profits and conmiissions of bankers, brokers and mid<lleu)en 
 shall be fully disclosed, thus throwing about the investor tiie 
 protection alVorded by the "Companies Act" of Great Britain 
 and of other civilized countries. Every new security should 
 be required to be ])ul)licly issued and offered to the public 
 through the publication of a prospectus so as to eliminate the 
 secret profits of the nuddlcman as far as possible. It is the 
 only way to create confidence in and to poi)ularize investments 
 in corporate securities. 
 
 Detailed annual statements should be exacted from all cor- 
 porations whose securities are listed, disclosing all payments 
 made or profits or emoluments received, directly or in<lirectly, 
 by officers, directors, bankers and brokers from the corpora- 
 tion, so that every security holder may know whetlier and to 
 what extent his Company is being exploited. 
 
 The scandalous practices of officers and directors in spec- 
 ulatinir ujion insi<le and advance information on the action of 
 their corporations nuiy be curtailed, if not stopped, by re- 
 quiring that the officers shall make full disclosure of all their 
 transactions in buying an<l selling securities of their Com 
 T ri' ies. The Act incorporating the Exchange .should provide 
 t 1 all statements required to be made by corporations shall 
 be under oath and that false swearing shall constitute perjury. 
 At present tlu'y are extra-judicial. 
 
 of " 
 
 pra in be refer 
 
 broad j)owers. Tn-^tead ol llie inv- "i i.' '• 
 
 countn- abandoninff the Exchange a.~ as l>een to 
 
 an extent the case for some time past, it will become neces- 
 sary to the reputation and saleability of a security that it 
 should be listed by reason of the protection thereby afT • ' ' 
 
46 
 
 the investor. The general pubUc, which has grown to look 
 upon the Exchange with distrust because of the practices 
 that have been tolerated in the past, will be given new confi- 
 dence in it when it is under legal supervision. 
 
 The argument as to the effect of this legislation in en- 
 larging the usefulness of the Excliange has been 
 referred to as an admission that the ultimate pur- 
 pose is to secure publicity and uniformity in cor- 
 porate transactions and general corporate reform through 
 the use of the Post Office Department. It is noth- 
 ing of the kind, although it would not be a misfortune if it 
 should indirectly lead to uniformity in requiring publicity 
 of the affairs of corporations and to restricting the bidding of 
 the States against one another in laxity of administration. 
 If it incidentally reduces the incentives for the organiaztion 
 of ''carpet-bag" and "wild-cat" corporations it will hardly 
 be objectionable on that ground if it is otherwise a legitimate 
 exercise of power. 
 
 It is as essential to protect the mails against being used 
 as an agency for facilitating the perpetration of fraud to re- 
 quire that the public market whose quotations are to be car- 
 ried by the mails shall be restricted to the listing of securi- 
 ties that conform to given requirements of publicity of their 
 affairs as it is that the quotations of those securities shall 
 represent only actual and not fictitious or manipulated trans- 
 actions. 
 
 There is no ulterior purpose in the first requirement, even 
 though it may serve another useful purpose. The intended 
 protection of the public cannot be secured without compliance 
 with both requirements. 
 
 The principal objection urged by the Exchange against 
 incorporation is that it will interfere with its power of disci- 
 pHne over its members and thus lower the existing standard 
 which it is claimed can only be maintained by reposing un- 
 questioned and summary final authority in the Board of 
 Governors. 
 
 No such interference in the internal affairs of the Ex- 
 change is involved. As before stated, this Bill does not un- 
 dertake to deal with the forai of charter or conditions of mem- 
 bership. The State will preserve the present power of dis- 
 cipline if in its wisdom that is deemed to be for the general 
 interest. So it will, if it sees fit, permit the Exchange to re- 
 
tain its jjii'sciit limit of iiu'inlx-isliip and its ri^jlit to re(|uire 
 that its mcnibcrs cliar.i!:!' a uiiifonn rat*' of coniinissioii. 
 These, among other things, are matters witli which Congress 
 has no concern. I liavc lu-vcr hccn al)h' to pcisuado mys»'lf 
 ot' the sincerity of this ph'a against incorporation. Tlicre 
 is no (litTerence between the power of discipline that may be 
 enforced over the menil)crs of an incorjiorated and nnincor- 
 porated boily. It all depends upon tiie form of the cliarter. 
 There are incorporated clubs in all the States that have the 
 power of discipline now enjoyed by the Exchange. Is it not 
 more likely that the fear of incorporation is based upon 
 the ])ossible interference hereafter by the State witii the limi- 
 tation of niembershii^ or with the maintenance of the present 
 enforced rate of connnission? It cannot be based on Con- 
 gressional action since Congress does not assume to deal with 
 that question. 
 
 In connection with the much-discussed necessity of abso- 
 lute ami unreviewable control of the Exchange over the dis- 
 cipline of members it may however be said here ])arenthetical- 
 ly that the discipline maintained under freedom from gov- 
 ernmental supervision has not been of such character as to 
 constitute a very convincing argument in favor of the contin- 
 uance of such des]iotic and unreviewal>le power. An exam- 
 ination of the record of j)unishments intiicted wiiich will be 
 found among the Exhibits accompanying the Report of the 
 Pujo Committee furnishes forcible reasons in favor of the 
 wisdom and necessity of judicial review. The otTense most 
 severely punished is the s|)Iitting of commissions or any in- 
 fraction of the uniform commission rule Framlulent and 
 fictitious transactions by which the public has been grossly 
 swindled on an enormous scale and which have brought the 
 Exchange into world-wide disrepute have been treated as 
 mere venal offenses beside the crime of allowing a customer 
 part of the commission. 
 
 Manipulation is considered legitimate provided commis- 
 sions are paid at both ends of the manipulated transaction. 
 
 Xotwithstan<ling these peculiar views of the duty of the 
 Ex<'hangc to the public it r- - *lio importance of its unre- 
 stricted control over tli«* < i- of its members as the 
 sole reason why it should not be forced to incorporate. Some 
 would reirarfl it as an added reason in favor of incorporation. 
 
 It '- " "♦ apj)arent why «•• ' • ..i« :. ♦» ,. ^-j^y p,f fj^p ^^jg. 
 
48 
 
 rnption of discipline as have been suggested by tbe Exchange 
 should follow from giving an accused .member whose repu- 
 tation and entire business career and means of livelihood de- 
 pend on the action of his co-members and competitors, the or- 
 dinary measure of justice of a right to review by an im- 
 partial authority. There is no danger that the Courts will 
 deal less severely or less effectually than has the Exchange 
 with the frauds practiced upon the public which it is the 
 purpose of incorporation and regulation to prevent and pun- 
 ish. That would be difficult. Nor are they likely to regard 
 manipulation with any less disfavor than the spokesmen of 
 the ^flxchange, who have steadily insisted on attempting to de- 
 fend and justify such practices by arguments that are sur- 
 prising for their speciousness and lack of understanding of 
 the public aspects of the business of the Exchange, These 
 are however as before stated matters for the State to de- 
 termine. 
 
 It is next suggested that if there is to be incorporation it 
 should be left entirely to State authority and that the Federal 
 government should not exact it or have anything to do with it. 
 Yet when the former was attempted it was opposed w^ith equal 
 bitterness, apart from the fact that efforts at State legislation 
 have proven a farce, as will be hereafter seen. There can be 
 no efficient relief from that direction. 
 
 It ivould he manifestly unjust to have one set of conditions 
 on ivhich the New York Stock Exchange could use the mails 
 and another or none for the Boston, Chicago, Denver or San 
 Francisco Exchange. Uniformity of regidation is essential. 
 
 Boston and Chicago should no more than New York be per- 
 mitted to prey upon the country because their respective 
 States do not see fit to restrict them. That seems to me in 
 and of itself a conclusive answer to the suggestion that each 
 State should be left to determine whether the public market 
 whose quotations are to have the use of the mails shall be 
 subject to or free from supervision. The Federal Govern- 
 ment is vitally interested in. that question. 
 
 The two fundamental reasons in addition to a number 
 of subsidiary ones, for requiring the incorporation of the 
 Stock Exchange, may be recapitulated as follows: 
 
 1. To prevent, detect and punish the practice of frauds 
 upon the public through manipulation, matched orders, wash 
 
4: 1 
 
 sales aiul liko i'n'titittus traii>attitms, hy iiicaiis of which ap- 
 paroiit values are t'reat«'(l for securities iu the world's mar 
 kets. 
 
 Tills can only bo acconiplishetl throui^'li iiicoi-jjoration ami 
 the acL'onipauylniJ^ deleiratioii to puMic authority of the rij^ht 
 to examine the books of members, throui^li |Avhich alone these 
 transactions are discovoraltlo. 
 
 The State and the Nation have each, sei»arately and 
 independently, the uncpiestioned ri^ht to safeguard the public 
 against imposition on a subject that so nearly alTects the in- 
 terests of all its citizens. Neither is bound to permit an in- 
 stitution so i)re-eniinently public in its character and so 
 vitally atTecting the tinancial interests of the entire country 
 and of other countries to remain uncontrolled. Such regula- 
 tion involves no attempt to interfere with the individual in 
 buying and selling securities except in a public market. Its 
 purpose is to secure fair dealing in such a market. No one 
 need become a member of such a corporation; but if as a con- 
 dition of membership the law retjuires that his books shall be 
 subject to inspection, none of his Constitutional rights are 
 violated nor is it an interference with such rights to prohibit 
 the individuals engaged in that calling from combining for 
 tlie creation and operation of such a i)ublic nuirket except 
 through incoijMiratioii and under sucli regulations as tlie 
 State or Nation may prescribe. 
 
 At tlie 1013 session of the Legislature of the State of New- 
 York, following the disclosures of the Pujo inquiry, a 
 number of r.ills, were passe<l that were supposed to bo in 
 tended to meet some, but by no moans all, of the existing 
 evils. The extent of the power of the Kxchange may b^ 
 faintly gathered from the fact that never in its entire history 
 and notwitlistanding the scandals of all the past years in its 
 management was there any attempt to leijislato on the sub- 
 ject until the exposure of its methods brought the people face 
 to face with the conditions that had been so long tolerated. 
 
 The Stock Kxchange points to these belated Hills as «lem 
 onstrating that incorporation is not now necessary in order 
 to recnilate the Kxchange. 
 
 I consider none of them as of any value. Only the bills 
 to which the Kxchanire consented wore passed. None of them 
 meets or even attempts to deal with the worst evils under the 
 present system. A Hill to require incorporation was defeated. 
 as it desened to be. I opposed it as a mere "blind," as are 
 
50 
 
 those that were passed. The only relatively important Bill 
 passed is that which purports to prevent manipulation — but 
 it does no such thing. It will serve only to legalize and per- 
 petuate the existing abuse by excluding it from the definition 
 which should include it. 
 
 The Bill reads as follows: 
 
 Manipulation of securities. Any person who inflates, de- 
 presses, or causes fluctuation in, or attempts to inflate, de- 
 press or cause fluctuations in, or combines or conspires with 
 any other person or persons to inflate, depress or cause 
 fluctuations in, the market prices of the stocks, bonds or 
 other evidences of debt of a corporation, company or asso- 
 ciation, or of an issue or any part of an issue of the stock, 
 bonds or evidences of debt of a corporation, company or as- 
 sociation, b}' means of pretended purchases and sales thereof, 
 or by any other fictitious transactions or devices, for or on 
 account of such person or of any other person, or for or on 
 account of the persons so combining or conspiring-, where- 
 by, either in whole or in part, a simultaneous change of 
 ownersJiip of or interest in such stocks, bonds or evidences 
 of debt, or of such issue or part of an issue thereof, is not 
 effected, is guilty of a felon}-, punishable by a fine of not 
 more than five thousand dollars or by imprisonment for not 
 more than two years, or by both. 
 
 A pretended purchase or sale of any such stocks, bonds 
 or other evidences of debt whereby, in whole, or in part, no 
 simultaneous change of ownership or interest therein is ef- 
 fected, shall be prima facie evidence of the violation of this 
 section by the person or persons taking part in the transac- 
 tion of such pretended purchase or sale. 
 
 {The italics are ours.) 
 
 This Bill stands in the way of effective legislation to pre- 
 vent manipulation and that is precisely what it was intended 
 to do. 
 
 Manipulation of securities is not accomplished to any 
 appreciable extent by fictitious transactions. As now prac- 
 ticed upon the Exchange it does result in a change of own- 
 ership, so that the most widespread forms of manipulation 
 practiced on the Exchange are not reached by this Bill. 
 
 "\Mien a banker or a broker wants to create a fictitious 
 appearance of activity in a given security for the purpose of 
 stimulating dealings in it or to advance or depress the market 
 price, he no longer does it through matched orders or washed 
 sales. He gives at the same time to a number of different 
 brokers orders day by day — and sometimes hour by hour — 
 to sell the security on a scale either up or down, dependent 
 on whether he wants to advance or depress the price; and 
 
51 
 
 ho fjivcs at the same time and as part of tlie same operation to 
 another set of brokers orders to sell on a scale. These brokers 
 are not supposed to know — and oftiMi do not know — of the 
 counter-orders tiiat have been <:;iven. The elTect of these 
 transactions is, however, to create ;i nominal rliaiii,'*' of owner- 
 sliip accompanyins^ every transaction and yet at the md of 
 the day the operator has proi)ai)ly neither boui^ht nor sold the 
 stock on general balance altiiouirh the records and (piotations 
 of the transactions as ])ublished and scattered throui^diout the 
 country will sliow great apparent activity and heavy dealings 
 and rising or falling prices when there have been in fact no 
 deahngs other than those of this operator on both sides of 
 tile market, except the purcliases and sales of such victims 
 and the gambling transactions of such "room tradt-rs" as 
 have been attracted to tiie stock by this false ap|)earanc»' of 
 activity. 
 
 TJje violent l)rotest that was made before you of tiie delini- 
 tion of "manipulation" contained in sui)section (a) of Sec- 
 tion 7) of this liiil is easily undfrstandablc in tlie light of tiiis 
 explanation. Your especial att<'iition is invited to that defini- 
 tion. Is there anytlung in it that would apply to an honest 
 transa«'tion ? Or to which tiiere would or could be objection 
 if the members of the Kxchange were not determine(l to cling 
 to these illegitinuite methods just as they clung to the dis- 
 graceful i)racti<'(? of permittiuiT dealinirs in "blind pools" 
 under the guise of their "I'nlisted" Department until HMO? 
 
 This provision forbids only transactions that are made 
 for the purpose of giving a fdlsr appraran*'*- of activity or 
 of artificiullif influencing the market in order to buy or sell 
 or to attract public afteiillon ><> as to iiidui'c pnrrliasi's and 
 sales by others. 
 
 Why should there be sucii a storm of opposition to I'or- 
 bidding such practices? 
 
 No law will nacli these transactions unless tlie Kxchango 
 is subjected to legislative control through incorporation, with 
 the right to some public authority to examine the books of its 
 virmhrrs. The mere existence of such authority will i« and 
 of itself he a powerful rleterrent. In view of the cont'ession 
 that at least one-third of all the transactions are those of 
 members themselves for their own account and of the statistics 
 showing that upwards of SO'^r are purely speculative there 
 would appear to be urgent need of every deterrent that can 
 be lawfully applied. If yon want almost ocular demonstra- 
 
52 
 
 tion of the processes and baneful results of manipulation 
 to the extent of hundreds of millions of dollars within a 
 few months look at the sheets and diagrams showing the 
 trend, character and extent of the dealings in Amalgamated 
 Copper Company during the period between December, 1906, 
 and October, 19'07, to which reference has elsewhere been 
 made. 
 
 In those eleven months there were over thirty-two million 
 shares dealt in of a Company that had only one and one half 
 million shares. Stated in dollars the dealings in that eleven 
 months in that one security amounted to over three billion 
 dollars. Look also at the range of prices. On a single day 
 (March 15th, ]907) there were 2,147,005 shares sold — ^which 
 was one and one half times the entire capital. Or still more 
 instructive, look at its record between June, 1901, and No- 
 vember, 1903, when the price went from $130 to $35 per share 
 and again the capital was bought and sold many times over 
 and over again each year. 
 
 An examination of the charts and statistics of other Com- 
 panies, such as Eeading and U. S. Steel, tell the same story. 
 The same old game is repeated over and over again by "in- 
 siders" operating through pools and syndicates in the man- 
 ipulation of vast blocks of securities, either forcing the prices 
 up and unloading them on the public or forcing them doA\Ti 
 to shake out the public preparatory to another raid. 
 
 It is a notorious fact that James E. Keene, who managed 
 the ill-fated Hocking pool, was employed to manage and that 
 he in fact conducted pool operations in Amalgamated Copper 
 and U. S. Steel stocks through market manipulations. 
 
 If the average human mind that has not been steeped in 
 the intricacies of high finance can realize the magnitude of 
 these transactions your attention is directed to that end to 
 the figures showing the dealings in the securities of these two 
 companies. 
 
 In 1906 and 1907 there were in all 1,400,000 shares of 
 Eeading Common stock listed. There were over eighty-one 
 million shares sold in that time, starting at $164 per share 
 and ending at $90. Those transactions represented over 
 eleven billion dollars in money in sales and the same amount 
 in purchases. 
 
 In U. S. Steel with 5,084,000 shares of common stock out- 
 standing there were 74 million shares sold and the same num- 
 
53 
 
 IxT bought in IIXII) an<l I'.tlii. In a s'wv^lv mouth (.laimary, 
 11)10) tlioro wcif (ivcr (I iiiilliou shares sold. 
 
 It. will 1)0 said that this lari^tdy roproscnts sixTulatioii. 
 But is it lionrst speculation or specnlativc oxcitcnicnt hrou.irht 
 about by pool manipulation .' ^^'hat part of it is purr manijiu- 
 lation? 
 
 Here airain there have l)eon selected by way of objeet les- 
 son only a few of the instanoes that mi.t;ht be multiplied but 
 prominent cases have Imm'P. taken to illustrate the j)oint. I'n- 
 less these practii-es aie made discoviTablc and ]>unishable 
 there is no reason wiiy they shoidd not b( repeatetl when con- 
 ditions are airnin favorable. 
 
 Many of our i^reat fortunes have been amassed by these 
 methods. AVho first knew when ('. S. Steel connnon stock 
 was to be ]nit upon a dividend basis.' Or when Vnion Pacific 
 was to incr(Mse its dividend to lor; ? Or when Ajnali^MUiated 
 Copper would recluco or pass its divi<lend .' ()r when and on 
 what basis it would resume dividends.' The (htri-miiiatioii 
 of these questions Lcen<'rally rests with one or at most a few 
 men in eaeh Company. It was natural that they should make 
 use of their advance knowledire so b>nir as there was no law 
 or public sentiment to restrain them. I*ut the temptation 
 to force divideiitls and to suspeutl dividends anil otherwise 
 to use their vast ]K)Wer are too i^reat. 'i'hey must be removed 
 if we are ever to have honest corporate manai^ement. 
 
 Tt may be that uuib-r the new oriler of thinirs we shall 
 not have the same class of men in our boards of Directors. 
 That is probably true. 'J'he inc«'ntives will no lonper be 
 there. They were dislionest incentives but strani^e to say it 
 was not considered dishonest for a Trustee to exploit his 
 shareholders. Tt was C(»nsidered rather clever even to tlie 
 j)oint of sellinij the stock of hi> own ( 'oninnnv 'Vslnnf" and 
 shakinif out his shareholders. 
 
 It should be nnide impossible for the men who are in con- 
 trol of these vast enterprises to ffo on fler-einir the ])ublic. It 
 is hiirli time that they were brouifht to realize that they arc 
 Tnistees for their shareholders. 
 
 In no other country are such practices tolerated. 
 
 Subsection (i) of Section 1 of the Hill is intended to put 
 a stop to the use by directors of inside infonnation as a 
 basis for speculation. There is no reason why a director 
 should secretly trade in the securities of his Company nor 
 
54 
 
 should it be possible further to use the mails to promote such 
 exploitation. 
 
 As illustrating the insincerity of the proposed Bill re- 
 quiring incorporation to which I have referred as having 
 been defeated in the last New York Legislature, I call atten- 
 tion to the fact that the Bill empowered the Superintendent 
 of Banks to examine the books of the Exchange, but not the 
 books of its members. As the Exchange claims that it con- 
 ducts no business and keeps no books, that was rather an 
 emi)ty formality. What is needed is the power to examine 
 the books of the members. Without that power no law 
 against manipulation is of the slightest avail. 
 
 The Governors of the Stock Exchange now have that 
 power and exercise it summarily. Are public officials 
 less entitled to be trusted? Few brokers would dare take 
 the risk of conviction if their books were made subject to 
 inspection. The law against railroad rebates would be a 
 dead letter unless the Commission had power to examine 
 the books of the railroad companies. The same is true as to 
 the members of the Exchange to discover manipulation. 
 Nothing short of that will ever do so. As matters now stand 
 there is not the shghtest peril in such transactions. 
 
 Another of the many abuses exposed by the inquiry of the 
 Pujo Committee, which the Exchange claims has been cor- 
 rected by the New York State legislation of 1913 is that of 
 the hypothecation by brokers of the securities belonging to 
 their customers for loans to the brokers in excess of the 
 amount owing by the customer to the broker. As the result 
 of this practice, whenever the broker became insolvent the 
 customer lost his stock through its sale by the creditor of 
 the broker. The customer may owe 50% of the value and 
 the broker may have borrowed 80% or 90% of such value. 
 The law of 1913 pretends to, but does not correct this flagrant- 
 ly dishonest practice which the Exchange has permitted to go 
 unchecked all these years. 
 
 In other States where there has been no attempt at legis- 
 lation following these exposures the Stock Exchanges continue 
 to tolerate this form of fraud without even the modification 
 that has been introduced in the New York Exchange. 
 
 The New York broker now goes through the formality of 
 requiring from his customer at the inception of their dealings 
 
00 
 
 an omnibus consent applicabU- to all transat'lions to tlio nso of 
 his (the cnstonu'i-'s) securitii's for an amount i^rcatcr than is 
 owin^ the broker l)y the customer. Tliis luis littU» h'ss justifica- 
 tion than tlie otlicr. Why should llir broker be permittetl to ex 
 act the riirht to do business on the capital of his customers? Is 
 it any wonder that one-third of all the transactions on the Kx- 
 chan^e are for the broker's own account? One of the most 
 elTective means of clieckinj? the worst fonn of speculation is 
 to ])rohibit this practice. 
 
 Still anotluM" reiut-dy will l)e to require every i)ur- 
 chase ami sale to be dcli\-ereil or "cleare*!'' throu-li 
 the Stock Mxciiani4:e Clearini,' llous«', as checks are now 
 cleared in the various C'learin.i,' House Associations instead 
 of i)enuittin«j: a mere delivery of ])alances as is now the 
 nde in the Stock Exchanufe Clearini,^ House. Still another 
 remedy will l)e to require that at the time of purchase the 
 broker be paid '2i)[( of the tiien purchase price. It would not 
 be necessary to keep ^ood any such mariifin. Its requirement 
 at the be.cfinnincf would be a wholesome deterrent against the 
 worst fonn of gambling — by those who can least afford it 
 and who ar«* always the surest victims. 
 
 The Kxchange takes unto itself cre<lit for the recent rule 
 forbidding its mend)ers to accept the accounts of clerks of 
 banks and trust comj)anies but it does not extend the rule 
 to the ollicers of thos<' institutions. Tiie detalcatioim from 
 st«)ck gam))ling by clerks arc negligible compareil with tlio>c 
 of the oflicers of corporations. 
 
 Still another rule of the Exchange cpiite as reprehensilile 
 as any that were exposed an<l quite as repugnant to the sense 
 (d* justice is that which assures to all the meml)ers of the llx 
 chap.ge a i>r»'ference against the estate of a bankrupt mem- 
 l)er for all debts owing such member to the full extent of the 
 value of the membership seat over the claims of tlie vic- 
 timized customers of such bankrupt. It often happens in 
 such cases that the "seat," which is worth from $40,000 to 
 $ll)0,(MM) — depen«ient on the activity of specidation — is the 
 only valuable asset of the liankrtipt. Kvery dollar of that 
 money is applied toward paying the creditor-members in full 
 to the exclusion of the outsirle creditors. If the broker has 
 re hypothecated your soeurities for twice what you owe him 
 and they have been swept away yon get nothing except your 
 share of what is left after the members of the Exchange have 
 been fully paid. 
 
56 
 
 Such a condition would not be permitted to survive in- 
 corporation and regulation. 
 
 This rule is defended as essential to the present system 
 under which the members accept one anothers' obligations for 
 large sums. The defense appears to me most inadequate. 
 What becomes of the much-prized code of honor of which the 
 members are so proud if it must be fortified by a preference 
 over other creditors! There is a fine spirit of commercial 
 honor among the members that is unique and. that makes it 
 possible for them to conduct large transactions in the heat 
 of excitement by mere word of mouth with amazing smooth- 
 ness ap.d freedom from repudiation or controversy and which 
 should render this injustice to their customers unnecessary. 
 It should be made impossible. 
 
 To leave the disciplining of members for manipula- 
 tion in the hands of the Stock Exchange Governors, with- 
 out the right of judicial review would be like relegating to the 
 Association of Railway Presidents the punishment of one an- 
 other for granting rebates. Or to an Association of the 
 Presidents of the Trusts the power to determine violations of 
 the Anti-Trust Law and to inflict punishment. In what other 
 department of the administration of justice is the punishment 
 of crimes left with the colleagues of those who are charged 
 with the commission of such crimes? Yet it is now seriously 
 proposed that whilst the evidences of these crimes shall be 
 available to the Governors of the Exchange (as it now is under 
 its rules), so that they may inflict punishment, such evidence 
 shall not be made available to the public authorities ! 
 
 2. The second important result to be gained by incorpo- 
 ration will be to secure complete pul^licity of the profits of 
 bankers, brokers and intermediaries in the flotation of Com- 
 panies and the exposure of all the salaries, commissions and 
 other profits of officers and Directors, through the control of 
 the Department of the Exchange for the listing of securities, 
 to enforce the listing of proper securities, and to prevent 
 those that have once been listed from being stricken from the 
 list without notice and the right of review. 
 
 Bonds of the City of New York were recentlj" refused a 
 listing because they were engraved by a company that was in 
 litigation with the Exchange over the refusal to list securities 
 ongraved by that Company. 
 
 Listing on the New York Stock Exchange gives to a se- 
 curity a public market and a definite current value, rendering 
 
'Oi 
 
 it MilaliK' and avaihiMf as ••t)llatt'ral, Sc»'iiriti«'s arc nt»t k*'"- 
 erally a\aiIal»N' as collateral for Stock-Hxcliani^o loans uiilcss 
 they are listed. 
 
 The Constitution of the New York l^xelian,L,'o provides 
 that tlu' CoMiniittcc on Sto<-k I/ist 
 
 shall have power to direct that any suth securities or tem- 
 porary receipts he takin from the Ust ami further dealings 
 therein prohihited; 
 
 and that the (lovcrning Committee 
 
 may suspend dealings in tin- st'curities of any corporation 
 previously admitted to ([notation upon the Exchan<:e, or it 
 mav summarilv remove aiiv sreuritics from the list. 
 
 A regulation dated March 'J.tli, !">!)."), further i)rovides 
 
 tiiat 
 
 Wlienever it shall appear to the Committee on Stock List 
 that the outstandiiiir amount of any security upon the Stock 
 Exchautre has hecome so reduced as to make iiuidvisahle fur- 
 ther tlealintrs therein upon the Exchange, the said Commit- 
 tee may direct that such security shall he taken from the 
 list an<I further dcalinirs therein prohiI)ited. 
 
 Acting under this authority, the Governing Comnuttee 
 and the Committee on Stock List have frequently removed 
 securities fnun tlu' list. Stocks have heeii so remove"! .m 
 the ground of an insutlicient amount outstanding, sim])ly be- 
 cause a large proportion of the issue has been absorbed by 
 some other corporation. 
 
 Taking a security from the list is a serious injury to the 
 holders by depriving them in larire part of a market and mak- 
 ing borrowing upon such security dilTicnlt if not iin|xi>*ible. 
 
 Obviously, therefore, the effect of probiiiiting further 
 dealings in the stock of a corporation when the great bulk of 
 it has been ac(|uirr'd by one j)erson, group or corporation is, 
 whether intentionally or not, to coerce small stockholders into 
 sellincr out to the majority holders. It destroys their mark«'t 
 
 StrikiniT illustrations of the operation of this regulation 
 are not lackinij. Thus, on tlio reorirani/.ation of the Siuithern 
 Kailway Company by .1. 1'. Morgan & Company a majority 
 of its stock was placed in a Voting Trust, which deprived the 
 stockholders of all representation and votinir powers and vest- 
 ed tlie absolute ccHitrol of the ( 'ompany in the Trustees — .J. V. 
 ^^organ, George F. Raker and Cliarles Lanier, who, upon the 
 transfer of the stock into their names, issued the usual Trust 
 
58 
 
 Certificates, which were listed and traded in on the Exchange 
 instead of the stock certificates. When this Voting Trust 
 expired in September, 1902, the Trustees, through J. P. 
 Morgan & Co., requested certificate-holders to extend the 
 Trust. New Trust Certificates were issued to those assenting 
 to the extension and these were listed on the Exchange. In 
 March, 1903, the old Trust Certificates were removed from 
 the list, although there were at that time, which was six months 
 after Messrs. Morgan had requested the extension of the 
 Voting Trust, certificates representing 183,938 shares whose 
 holders were apparently unwilling to further resign their 
 voting powers. The result was that those not assenting to 
 the extension of the Trust, and hence not taking new Trust 
 Certificates, found themselves with a security not listed on the 
 Exchange, and therefore without a ready market and not 
 available as collateral. The listing of the extended Certifi- 
 cates and the removal from the list of the old ones, whether so 
 intended or not, operated as a means of coercing the holders 
 of these 183,938 shares into exchanging their old certificates, 
 in order to get a listed security which could be sold or made 
 available for borrowing purposes. It is now nineteen 
 years since that Voting Trust was created, and it has not yet 
 been dissolved. 
 
 Again, in the development of the Tobacco Trust, a few 
 men who were in control of the management organized a new 
 Company known as the Consolidated Tobacco Company, to 
 the stock of which they alone were permitted to subscribe. 
 The then outstanding stocks of the American Tobacco Co. 
 and the Continental Tobacco Co. were earning such large 
 dividends and the prospects were so alluring that the insid- 
 ers conceived the scheme of taking the equities in these com- 
 panies unto themselves by the organization of this new 
 Company which was to acquire the outstanding stocks by 
 issuing in payment for them 4% bonds of the new company 
 charged upon the stocks thus acquired at the rate of 200 in 
 bonds for each $100. share of American Co. stock and par 
 for par for each Continental Co. share. The insiders thus 
 acquired the vast equities in these companies without pay- 
 ing any cash except that they nominally paid in 25 per cent, 
 of the $30,000,000 capital (which they shortly thereafter re- 
 paid themselves in the form of a dividend). The bonds had no 
 security behind them other than the stock that was being re- 
 
coivod in oxchaii.i^c, and the subscriptions to the stock of the 
 Consolidated Company. 
 
 It was one of the most remarkable coups ever consummat- 
 4'il in the world of \\\'j;\\ linance and is said lo lia\i' ih-ttt'd 
 many millions to the inventors td' the sclienu' imt at 
 the I'xpense of the shareholders. 'J'he exchan^^e of the 
 old stocks for the new bonds liavini,^ procooded until the Con- 
 solidated Company had a('(|uired all biil ll,:!.')? shares of the 
 common stock of tlu> old American Tobacco Company, the 
 Tobacco stock was removed from the list and in its place the 
 new convertible bonds of the Consolidated Co. were listed 
 without notice to the holders of the outstanding: ll,;>rj7 shares 
 of the Tobacco Co. 
 
 It is admitted by the Governors of the Exchange that the 
 efTect of this action might be to further the schemes of the 
 promoters of this enterprise to take from the stockholders 
 their equity and transfer that equity into the pockets of the 
 promoters. When that stock was stricken from the list it 
 ceased to be readily available as collateral, as it had lost its 
 market quotation. Its best market thereafter was manifestly 
 among the insiders, who understood its intrinsic value. 
 
 One of tlie most striking instances of the oppression of 
 minority stockholders from the ojicralion of this rule eanie 
 to light through the (juestions put by a nu'inber of tin' Com- 
 nuttee. It was in connection with the striking froju the list 
 of the stock of the Kanawha & Michigan Railway Company 
 of Ohio, which occurred in lOlO but whi<-h I had erroneonsly 
 ]daeed from memory as havinir occurred some years «>arlier. 
 Although concerned in the transaction the details had entire- 
 ly escaped my recollection. 
 
 It appears that the road ha<l at one time been a pros- 
 J'crous, indepeinlent property but had. contrary to the Anti- 
 Trust Law, come under the control of the Hocking \'alley, 
 which was a parallel and competing line, when* it remained 
 for many years. This control was represented by a bar^ 
 majority of less than 51% or $4,r)10,000 of the then outstand- 
 ing capital of $0,000,000. 
 
 During all the years that it was under such control it 
 oked out a precarious existence, whilst the controlling road 
 developed great prosperity and earned large <lividends at 
 its expense. The stock had been selling around .$40. per 
 share. The minority l>egan agitating for a change in this in- 
 tolerable condition and in IPOO tlio TTocking interests, under 
 
60 
 
 pressure from the minority, made an offer of $72. per share 
 for the outstanding stock. What amount, if any, had been 
 meantime acquired by the controlling interests in the market 
 at lower prices does not appear. 
 
 Most of the minority holders, worn out by the delays and 
 disappointments of years and unwilling to incur the expense 
 and uncertainty of litigation to protect their rights, accepted 
 the offer. 
 
 Others, controlling about 3300 (not 6800 as I supposed) 
 shares, some of whom had owned the stock for 15 or 20 years 
 and whom it had cost with interest between $200 and $300 
 per share, refused to be driven into accepting the Hocking 
 terms. A Protective Committee was formed and suits were 
 begun in the Ohio Courts to compel the Hocking to release 
 its illegal and destructive grip on the road and to account 
 to the Comapny for the lossess sustained during the many 
 years of control by the Hocking. 
 
 Whilst this litigation was pending the stock, which had 
 been for 20 years a listed security, was stricken from the 
 list, without notice or warning, under the statement, as after- 
 wards appeared, that there were in all only 2,000 or 2,200 
 shares outstanding. 
 
 The undoubted purpose of that action was to discourage 
 the litigants by destroying the market for their stock and 
 rendering it unavailable as collateral. 
 
 After costly litigation the stock represented by the Com- 
 mittee was sold to the controlling interests at $165. per 
 share. With an operating mileage of over 187. miles in the 
 heart of one of the richest parts of the country, an exception- 
 ally strategic position, a bonded debt of only $l-,969,000 or 
 at the rate of less than $30,000 per mile, a capital of only 
 $9,000,000 or at the rate of only $50,000 per mile, and admitted 
 earnings as shown below, the price paid does not by any 
 means represent the intrinsic value of the stock, but the 
 prospects of endless lawsuits against these powerful inter- 
 ests, with the endless delays and enormous expenditures 
 involved, were not alluring. 
 
 Fortunately the Government almost immediately took up 
 the fight and the control was changed. 
 
 Now mark what happened: I quote from Moody's Man- 
 ual of Eailroads and Corporation Securities, which is recog- 
 nized as the standard work on railroads, for 1914, (pp. 
 600-602) : 
 
('1 
 
 The Lake Shore ^: Miiliijraii SouthiTii \iy. ami the Chesu- 
 ])t'al«' & Oliio Hy. Compaiiii's early in HMO aiM|iiire»| $4.- 
 r)10,(HU) of tliis e()iii|)any 's stoeU and up to June :{(>. r.H.i. hatl 
 purchased :{.'),4S4 a«l(litioiial shares from the minority s!i>ek- 
 lioUh'rs. makini: a t.-tal of .^Sjl^s.-pK) of the stock hehl hy tlie 
 Lake Shore and Cliesapeake «S: Ohio companies, as of that 
 date. 
 
 (p. GOO.) 
 
 Accoi-diii^- to this statement there af<' still !'.H(; shares 
 oiitstaiidiiiir. And yet tlie stock was stricken from tlie list 
 on the nnsni)i)orted assertion that tliere wcm'c then only L'.fHiO 
 or '2,'2()0 shari's olltstalnlin,l,^ 
 
 Note further what ImppcNcd to the stock that had not paid 
 a dividend dnrinu: all the years of the Tlockinir control, after 
 this $3.r)48,4(K) of minority stock was seqneezed ont of the 
 liands of its owners at the price the majority interests chose 
 to i)nt upon it (Moody's Manual p. 000) : 
 
 Dividends.— 1m\'\n\ dividend of 4^^ ]iaid Juno :10. IDll: 
 2t/.7o each pai.l Dec. iW. PJll, June 'M, VJU and Uo^'. :?0. 
 1912; 21/, 7c and Kv extra June 30, 1913; Sept. 30. 1913. 
 V/i%; D"ec. 29. 1913. 1'/,^^. Dividends payal)le (piarterly 
 M. J. S. D. 30 at J. P. Moriran & Co., New York. 
 
 (p. 600.) 
 
 For the fiscal year ended June 30, 1913. the total net in- 
 come available for dividends on the stock, after payinent of 
 all fixed ehartres, amounted to ahout $r),172 per mile and 
 the present dividend «)f $r).00 per share on ll>e stock re- 
 quires $2. ');■)(] per mile. Therefore ahoiit $11.1«) per share 
 was earned witli whicii to i>ay the ')•;; dividcntls on the 
 
 stock. 
 
 (p. G02.) 
 
 Moody's report also contains this statement : 
 
 The increase in train load tons tells the story and n i*^ 
 my opinion that earniiiL's are heinp concealed and that some 
 dav will suddenlv hecome evident. 
 
 ^p. n03.) 
 
 It will he ohserved that almost immediately after the Hock- 
 ing took its irrip otT the property and after the insiders iiad 
 houjrlit out the min«irity interest of over 48?^ , tiie road bepan 
 to show larije earninirs ami is now showinc over 1 Kr per 
 year, besides tiie conceale«l earnings referred to in Moody's. 
 
 In Moody's of 1011, its financial railroad expert includes 
 the following statement in his report of May 8th, 1011 : 
 
 The marked chanee in net earninirs for 1910 compared 
 with the previous year is a ver>- trood illustration of how 
 the earnings of .such controlled roads are subject to manipu- 
 
62 
 
 lation by the arbitrary diverting of traffic to or from the 
 property. This is one reason why I do not recommend the 
 purchase of minority stocks, although the possibility of prof- 
 it is sometimes great. 
 
 In the face of this state of facts it was intimated by the 
 questions put at the hearing that in selling the stock repre^ 
 sented by them at $165. per share the Protective Committee 
 had practically ''held up" the confiding and unprotected ma- 
 jority interests in the Kanawha, knowing that the latter was 
 required by some law or rule or for some purpose, that was 
 not stated or suggested, to acquire all the outstanding stock. 
 That there was no basis for this assumption is evident (1) 
 from the fact that the Protective Committee did not control 
 all the outstanding stock and that there are 9,416 shares of 
 it apparently still outstanding and (2) that the Protective 
 Committee's charges of oppression on the part of the major- 
 ity are amply justified by the present disclosed earnings of 
 over 11% besides the supposedly concealed earnings. In 
 view of these disclosures it would be interesting to know where 
 in the judgment of your Committee the "hold up" occurred. 
 Was it on the part of tlie minority stockholders who had 
 been kept out of the fruits of their investment and who finally 
 accepted a fraction of the value of their stock! Or was it on 
 the part of the insiders who forced and kept down the value 
 of the stock and had it stricken from the list until they suc- 
 ceeded in ''gathering in" over 80% of the outstanding mi- 
 nority interest on their own terms? 
 
 The holders of this stock, as did the holders of Southern 
 Railway securities and of a number of others that have been 
 stricken from the list, presumably made their purchases while 
 the securities were listed. They did nothing to forfeit their 
 right to have them remain on the list and thereby keep the 
 market they bad when they acquired their holdings. Yet 
 without reason or notice the holders find themselves confront- 
 ed with the alternative of selling at a price fixed by the pur- 
 chaser or having their market destroyed. 
 
 The rule authorizing the removal of a stock from the 
 list is defended on the ground that where all but a small 
 proportion of an issue is held in a single control it is easier 
 to manipulate the price of it and create a corner in it. This 
 contention when analyzed amounts to the assertion that an 
 investor who bought his stock relying upon its being a listed 
 security must be penalized in order to protect a speculatoj: 
 
G3 
 
 who may soil stock that he does not own and is nii-ablo to' buy 
 it to make delivery. No one who owns wiiat lie is soiling is 
 in danir'T of a "corner." 
 
 W hy should not the St(K'k Exchanp^e bo prevented from 
 lendinij: itself to such schemes? Why should there not 
 be supervision and the riijlit of review of those publie 
 functions of listing stocks and removing them from the list? 
 AVliat argument can be advanced for permitting this auto- 
 cratic, irresponsible and unreviewable ])ower, so long abused 
 and matle the creature and football of high (iiiance, to con- 
 tinue? Judicial review can never work injustice. If the ac- 
 tion is supported by reason or by so nnn-h as a decent pre- 
 text it will be sustained. If not it should be and will be over- 
 ruled. 
 
 There is much more that can and should be said in favor 
 of the necessity of this P>ill as a reformatory and constructive 
 measure but I have ali<'ady trespassed too long upon your 
 j)atience. I again ask you in conclusion to study the Kejjort of 
 the Pujo C'onnnittee on this subject and the diagrams and sta- 
 tistics on wliich it is l)asod if you want fully to realize some- 
 thing of the extent to which the masters of high finance 
 have preyed upon the people through tiie nuichinery of the 
 Sto<'k Kxchange and how the rules of the game have boon so 
 framed and tlie delicate mechanism so adjusted as to play, 
 often unconsciously, into tiieir hands. 
 
 Through the incorporation of the Stock Kxchange there 
 is od'erod an opportunity to end this carnival of exploita- 
 tion. The Kxciiang(» shouhl 1)0 made the most pow<'rful 
 weapon for enforced puitlicity of 'corporate alTairs and its 
 business should be aucrmented many times over whilst at the 
 same timi- it wonh] b.* pi-rforniing the highest order of public 
 sen'ice. 
 
 The fact that this incongnious form of irresponsible gov- 
 ornmont of tho greatest of our national agencies of finance has 
 l)ecn tolerated all tiicse years furnisiies no reason why it 
 should longer continue. It demonstrates the <langerous power 
 timt the financial interests have wielded over governmental 
 agencies. We have not yot ])eLmn to understand tho potency 
 of this unrestrained power an<l have therefore been con- 
 tent to be led by specious arguments to leave undone 
 some of the most important functions of government. It is 
 
■^a 
 
 64 
 
 Lio-'d time that v^e direct our attention to this and like import- 
 ant branches of regulation. 
 
 Pray do not misunderstand me. I have not intended in 
 anything I have said to reflect upon the integrity of the mem- 
 bership of the New York Stock Exchange, taken in its en- 
 tirety. 
 
 Judged by the standards of the past I venture to assert 
 that there is no body of men in the country with a greater 
 respect for their obligations. But happily our standards 
 are ' improving. Methods that were considered legitimate 
 ten years ago and that are still practiced in many quar- 
 ters of the financial world are now seen to be intolerable. 
 Others, such as the dealings of officers and directors with 
 their corporations that are still permitted, will soon be defined 
 as crimes, as they are in other countries. It will not, for in- 
 stance, be long before bank officers and directors will be 
 prohibited from exploiting their banks and other corporate 
 officers will be jDrevented from withholding information and 
 speculating on advance knowledge. 
 
 In judging, however, the point of view of the members 
 of the Exchange we must remember how difficult it is 
 for one to adjust his perspective to changed conditions and 
 .public sentiment that conflict with self-interest and long con- 
 tinued license. All of our judgments are apt to be warped 
 where self-interest obstructs our vision. But the strange part 
 of it all is that these gentlemen are not only blind to the 
 possibility of infirmity in their judgments as to the necessity 
 for Governmental control, but are not even wilhng to accord 
 to the critics of their methods the common justice of good 
 faith and honest public-spirited motives in maintaining a 
 different point of view. They simply cannot understand that 
 point of view. 
 
 I am convinced that the time will come, and before long, 
 after incorporation and regulation have been enforced when 
 those who are now bitterly assailing the champions of this 
 legislation in the vain hope of thereby diverting the issue 
 will find that it has marked the dawn of a new era of useful- 
 ness and prosperity for them and the Exchange and will feel 
 grateful to those who have jDointed the way. 
 
 Eespectfully submitted, 
 
 Samuel Untermyee, 
 in support of Bill. 
 
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